Boat as a Business vs Conventional Ownership

[WindYwager]

I'm new to the forum but a long time lurker. I'm getting to the time in my life where I can see things slowing down. We are thinking about either purchasing a boat as a business and placing it in charter in the Anappolis MD. area and using it on long weekends and an occasioonal week. Possibly taking the boat to the Ft. Lauderdale area for and exteneded season. Another option might be a SailTime type of purchase. I still work full time and we live in the midwest (Kansas) flights are reasonable to the coast. We charter regularly in the BVI, but the idea of a boat vs. a second home is appealing. I'll take any and all
advice. We're just starting to explore the idea. looking at retiring in 7 yrs.

Thanks in advance

WindJeager

[Teknav]

Hiya Windy! It is NOT a good business decision to buy a boat, then placing it with a charter company. You will not make any money out of this business model. If it was a money maker, charter companies would have bought a fleet of boats, cutting out the "middleman". Charter companies do not own any boats, and for a good reason. If you read typical charter contractual obligations, you'll realize that the ONLY winner out of the ordeal is the charter company.

There are several business models; none of them favors the owner. Besides a five-year of heavy/abusive usage by neophyte sailors, a boat does NOT appreciate in value hence the weakest link in this business model. At the end of the deal, you'll be stuck with a hefty repair/upgrading tab that will cost you more than the boat is worth. Take care!

Mauritz
The devil's in the details.

[djmarchand]

In addition to Mauritz' sage comments, a seven year old boat will be worth half of what its new sibling will cost.

Save your money, charter other people's boats until you retire, then consider boat ownership.

But consider this: A condo or house usually appreciates (once we get out of this bear real estate market), a boat ALWAYS depreciates. You buy a boat because you love to sail or cruise on it, not to make money.

David

[fstbttms]

Originally Posted by Teknav

Charter companies do not own any boats....

Completely untrue, of course.

[GordMay]

Greetings and welcome aboard the CF, WindJeager.

[denverd0n]

Originally Posted by Teknav

If it was a money maker, charter companies would have bought a fleet of boats, cutting out the "middleman".

There are a variety of business, accounting, and tax reasons that explain why charter companies do not own the boats that they rent out.

For another example, consider that there are a whole bunch of companies out there that manage real estate rentals (I used to work for one). They do not own the properties that they rent out, but they make a nice profit managing the rentals. Would you say that this proves that you cannot possibly make money owning real estate and renting it out, because if you could all of these companies would own their own real estate? No, of course not. That would be an idiotic thing to say.

On the other hand, to the OP, it is true that you cannot expect to get rich owning a boat that is managed by a charter company. At best, you can get several weeks of owners time each year, and come out well ahead of where you would be if you were paying full price for that time. If you cannot make full use of your owner's time each year, then you would most likely be ahead of the game to simply pay the charter fee.

In addition, you should be aware that any numbers that the charter company gives you--about what you can expect to sell your boat for in five or seven years--are nothing more than a wild guess. They have no more of a crystal ball than you do, and they do not know if the market for used boats is going to sky-rocket, stay level, or tank, over the next few years.

Good luck.

[Sand crab]

The way I understand it:
You need to have a US built boat to legally charter it or you will have to get a MARAD waiver but it can be done. The easiest/cheapest is a bare boat charter which means you can't be on the boat at all with paying customers. If you do crewed charters then there are more regs to comply with.

[rw58ph]

A large % of the large boats/yachts are written off for business and/or tax write offs.

At the time we bought the Eagle we were children and dirt house poor. So we originally bought the Eagle to be a dock condo on Lake Union in the middle of Seattle as we wanted a bigger boat and where looking at land condos. Being a second home we have written off the interest. My wife and I already had a small business license, so bought the Eagle as a charter, which we never did actually charter. Got a MARAD required for the 6 pack, and I took a course for the captains license, but I did not have the experience required at the time.

Buying a boat to be a charter to actually charter and make money is tough. However there are other reason that can save you thousand of dollars. Having a business license and buying the boats as a charter did a couple of things: 1) No sales tax had to be paid at time of purchase as items purchased for business/income pay USE tax on the income 2) having a Business license and being commercial gave us commercial discounts, so we did not have to pay the higher Retail price and 3) the most important to us is commercial boats have preference over pleasure at all government locks and bridges.

So there are pluses IF you can buying a boat as a business/commercial beside chartering.

[tbodine88]

I asked my Tax accountant about this and she said we'd actually have to have some income, even if the total was a loss, for us to take the tax write off.

My former Tax accountant said I could write off the boat as a second home, since it had a head and a kitchen sink. Unfortunately he died.

[djmarchand]

The concept of "write offs" is grossly misunderstood.

For property used in a business to make money, it can be depreciated. That is, you can deduct from your income a fraction of the boat's value each year. Don't know the rules for boats, but I would suspect something like 10% each year. In addition you can deduct any interest paid on your boat loan. You cannot deduct your entire boat payment as that includes principle repayment as well as interest.

If the boat is used for personal, recreational use, you can deduct boat loan interest as long as the boat has a head, sink and sleeping accomodations just like a second house. You cannot deduct depreciation or the part of your payment that represents principle. You can deduct property tax just like a second house.

If you already have a second house then you cannot deduct interest but you can deduct property tax.

Chartering is better than recreational ownership as a second home because you can deduct depreciation, interest, property tax, maintenance, slip fees, etc.

David

[denverd0n]

Originally Posted by djmarchand

Chartering is better than recreational ownership as a second home because you can deduct depreciation, interest, property tax, maintenance, slip fees, etc.

True, but only if the IRS accepts it as a business. If you lose money every year, year after year, eventually the IRS is probably going to conclude that it is a "hobby" and not a "business," and then they are going to disallow all of these deductions.

[gonesail]

if you have a boat loan you will be required to carry comprehensive insurance which can be expensive. plus having it in florida in hurricane season can be a problem. like the op said you will loose money on a boat .. maybe a little maybe a lot. but if you can afford a second home then i guess you can afford to throw money at a boat

[GreyBeardVA]

If you purchase a boat as a business entity as rw58ph discussed then you may use accelerated depreciation to deduct 50% of the purchase price the first year. Then there are the business expenses; i.e. slips, maintenance, upgrades, etc. as mentioned that can also be deducted from business income. So, the obvious issue is what income can you deduct from if you are a new charter business struggling against a crowded market and more experienced companies? The solution only applies to those of us who already operate profitable businesses; the "charter boat" is simply a new line of business. The IRS will cry foul if it is evident that the boat is not for charter; however, if you advertise on the Internet (i.e. have a charter website for the boat), actually have the proper licenses or access to someone to hire that does (i.e. have resumes for captains willing to work a charter), and actually appear to be "in the business" then there is little probability that the charter boat line items on the corporate taxes will be investigated. That's a lot of ifs-ands, but it is being done everyday by the 1%. Tiger Woods' yacht is not owned by Tiger Woods it is owned by a corporation that "rents" the yacht out; same with Paul Allen's mega yacht, the late Steve Jobs' yacht, etc.

I read a book in my twenties when books were still printed on paper that suggested that anyone who does not incorporate themselves is not taking advantage of the tax laws as written. I investigated, confirmed the hypothesis, and for nearly 15 years instead of being an employee for someone else's company I contract my services through a corporation which provides for amazing tax advantages. There is no suggestion to cheat the IRS simply to understand and comply with the rules; rules that are written to benefit corporations NOT the individual. Ever wonder why Apple, Google, Walmart, Microsoft, GE, etc. do not pay income tax on the billions in profits they make?

End of diatribe. Sorry, just saying that an individual can purchase a yacht as a business assuming that the business has income against which to deduct the expenses of the yacht.

[maytrix]

What are your long term plans in 7 years?

We have a boat in the Moorings program and will be taking possession of it when the contract is up and moving aboard. If you would make use of the boat during the time its in the contract, plus take possession at the end, then something like this might make sense for you. We not only get our benefit from using our boat, but from upgrading to other boats as well. PM me if you have any questions, happy to talk about it.

The big picture is that having it in charter is not making us any money. But given the value we get and amount that will be paid off under the program, it makes sense for us.

[FSMike]

Sigh.
Back when I was doing tax accounting I was constantly having to explain to some of my clients that it was to their advantage to make a profit and pay taxes rather than to take a loss and have a write off.