Cruisers Forum
 


Reply
  This discussion is proudly sponsored by:
Please support our sponsors and let them know you heard about their products on Cruisers Forums. Advertise Here
 
Thread Tools Search this Thread Rate Thread Display Modes
Old 12-05-2018, 16:49   #1
Registered User

Join Date: Oct 2015
Location: San Francisco, CA
Boat: Lagoon 450S
Posts: 182
Pros and Cons of buying a boat in US Charter

I have read a ton of posts in CF regarding boats in charter but can’t seem to get a few specific questions answered. Here is the set up to my questions.

Considering the purchase of a 45’ Cat that is one year old
The boat has been been in charter by the dealer for that year, day charters only and all professionally skippered
Proven charter income
Would like to keep the boat in charter for the next 1 1/5 years and take 100% depreciation in the first year.
Then would like to go cruising off and on for a few years.

Here are my questions:
1. Based on your experience, how likely is an IRS audit in this scenario? Assume that we will do all that is required by the IRS in terms of a business plan and reporting.
2. What is the best way to protect ourselves from liability?
3. When we do take off to go cruising and pull the boat out of the dealers charter management program, will we be able to continue with the business despite the significant drop in income and not get audited by the IRS.
4. What if we never turn a profit during the term of the business, will this likely result in an audit?

Hoping to hear from other owners who have had their “boats as a business” in the US and who have kept the business going when they went cruising. Thanks

Gary
iliohale is offline   Reply With Quote
Old 12-05-2018, 19:58   #2
Registered User
 
NCGunDude's Avatar

Join Date: Jun 2017
Location: Wrightsville Beach, NC
Boat: Com-Pac Eclipse
Posts: 70
Re: Pros and Cons of buying a boat in US Charter

1. Consult a tax attorney, it's unlikely you can deduct 100%
2. Form an LLC
3. Yes, you can. Refer to 1.
4. No, if you're only claiming passive losses.

Individuals who own profitable businesses right off expenses all the time. However, most people aren't able to take advantage of this, and you can't write off expenses against your regular income. At least that's my experience owning rental property.

Best advice is don't take legal or tax advice from a public forum.
NCGunDude is offline   Reply With Quote
Old 12-05-2018, 20:20   #3
Registered User

Join Date: Oct 2015
Posts: 2,007
Re: Pros and Cons of buying a boat in US Charter

Quote:
Originally Posted by iliohale View Post
1. Based on your experience, how likely is an IRS audit in this scenario? Assume that we will do all that is required by the IRS in terms of a business plan and reporting.
2. What is the best way to protect ourselves from liability?
3. When we do take off to go cruising and pull the boat out of the dealers charter management program, will we be able to continue with the business despite the significant drop in income and not get audited by the IRS.
4. What if we never turn a profit during the term of the business, will this likely result in an audit?
If you are doing "all that is required" by the IRS why are you so concerned about an audit?

I certainly understand that it can be a hassle, but it makes more sense to do what makes the most financial sense, and let the rather remote chances of an audit fall where they may. Unless you have things you really don't want audited...

And as has already been said... this is REALLY advice you need to pay a qualified professional for. What you get here, let's just say it will be worth what you pay for it. Somebody will say "Yes" somebody else will say "No" and you can pick the answer you like best...

"On the internet nobody knows you are a dog..."
billknny is offline   Reply With Quote
Old 12-05-2018, 22:40   #4
Registered User

Join Date: Apr 2013
Posts: 11,002
Re: Pros and Cons of buying a boat in US Charter

Free advice so pay for a professional opinion. I'm not taking responsibility if the IRS audits you or you leave money on the table.

Quote:
Originally Posted by iliohale View Post
Considering the purchase of a 45’ Cat that is one year old
The boat has been been in charter by the dealer for that year, day charters only and all professionally skippered Doesn't mean squat. What is the actual condition relative to the price? Capt. Ron was technically a "professional skipper".
Proven charter income Pay to have your accountant verify the records before you believe this. It's common at boat shows for the charter salesmen to make it sound like buying a charter boat is cash in the bank but if you can get it to offset a percentage of your annual expenses while using the boat a couple times a year, you are doing good.
Would like to keep the boat in charter for the next 1 1/5 years and take 100% depreciation in the first year.
Then would like to go cruising off and on for a few years.

Here are my questions:
1. Based on your experience, how likely is an IRS audit in this scenario? Assume that we will do all that is required by the IRS in terms of a business plan and reporting. I believe on durable goods, you need follow a depreciation schedule and I've not heard of 100% in a single year.
2. What is the best way to protect ourselves from liability?LLC and good commercial insurance. Don't forget the boat. Make sure you understand the difference between market value and agreed value and how your policy will pay out.
3. When we do take off to go cruising and pull the boat out of the dealers charter management program, will we be able to continue with the business despite the significant drop in income and not get audited by the IRS. This is a big audit flag unless you really run it as a business first and you document the personal use. The IRS has rules for how you treat the personal benefit. A tax professional can help you document it correctly. Do it wrong and it could get ugly in an audit.
4. What if we never turn a profit during the term of the business, will this likely result in an audit? Look up IRS Hobby Rules. Basically they consider it a hobby unless you make profits 3 out of the last 5yrs. There are exceptions but if the IRS feels you never intended it as a business, they can disallow it as a business. Based on your description, it sounds like you are trying to create a tax deduction not run a business and I suspect the IRS would feel the same.

Hoping to hear from other owners who have had their “boats as a business” in the US and who have kept the business going when they went cruising. Thanks

Gary
Another question: What is the income you would be offsetting by taking 100% depreciation in the first year? A 1 yr old 45' cat is likely going to be north of $300-500k (maybe more). If you only had an income of $100k that year, any deduction beyond $100k gets you nothing because it implies you had no income tax due. There may be carry over rules but again, this is best asked of your tax professional.

My guess is once you run all the numbers with a tax professional, it's not going to sound nearly as great of an idea...but maybe there is info you haven't shared.
valhalla360 is offline   Reply With Quote
Old 13-05-2018, 04:32   #5
Registered User

Join Date: Mar 2014
Location: Oz
Posts: 1,042
Re: Pros and Cons of buying a boat in US Charter

I think the OP is re the attached
New Tax Law Means Substantial Savings Opportunities for Boat Buyers | Bluewater Yacht Sales
Bean Counter is offline   Reply With Quote
Old 13-05-2018, 06:32   #6
Registered User

Join Date: Sep 2007
Location: Delray Beach, Fl
Boat: 1998 Rosborough 246 LSV
Posts: 563
Re: Pros and Cons of buying a boat in US Charter

Some years ago I purchased the boat operator exactly as you described. Prior to the purchase I retrained a tax attorney in the Annapolis area where this type of thing is common.

The tax attorney describe to me the exact box that I must keep, the former records I must take keep the advertising and other promotional activities I must undertake either myself or through broker to establish the boat is a legitimate business, and the cost would be recaptured at the end of the time when I sold the boat.

I received an extensive three day audit from the IRS two years later. Every record that a tax attorney suggested that I keep was examined by the IRS insignificant detail.

At the end of the three days they found that one of my bills had been transcribed incorrectly To the spreadsheet that I used as an index into the three binders of bills and records I accumulated.

The resolution is they found me in “substantial compliance.” The one error they did find was found to be insignificant and no recovery was required.

I completed the balance of the five years on the originally filed depreciation schedule, and remove the boat from charter. Upon sale some years later, I file the necessary cost recovery papers since the sale price is considered income if it is blows appreciated Price.

I like others who commented I’m a sailor not an attorney. I would suggest if you do not have a tax attorney, you retain one familiar with this type of business. It’s worth the cost and worth the freedom of fear when you do get audited.

Good luck, it’s a great way to finance your sailing. In the process I are in my skippers license, got to run a small business, and met many nice people on the water.
__________________
Capt. Stuart Bell
Rosborough 246 LSV Shearwater V
stu@shearwater-sailing.com
captstu is offline   Reply With Quote
Old 13-05-2018, 08:50   #7
Registered User

Join Date: Mar 2015
Posts: 3
Re: Pros and Cons of buying a boat in US Charter

Hi, I'm an enrolled agent (tax rep). You have two different activities here, the charter business and the termination of it. You can buy the boat, offset the rental income with depreciation or whatever expense. It has to be profitable at least some years, or you'll be deemed a not-for-profit, and losses will not offset other income (see below from the IRS site). When you terminate the charter business and distribute the assets of the business to yourself, you have to claim recapture on the fair market value of the boat and value to which you have depreciated it as income. No, you can't rent it from your business; you're a disqualified person. The recapture is taxable as ordinary income. If I understand your timeline, all you will have done is move the income from Y1 to Y3 of Y4.

----------------

*"An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

"If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations."
dharaway is offline   Reply With Quote
Old 13-05-2018, 10:57   #8
Registered User

Join Date: Mar 2015
Posts: 3
Re: Pros and Cons of buying a boat in US Charter

Quote:
Originally Posted by dharaway View Post
Hi, I'm an enrolled agent (tax rep). You have two different activities here, the charter business and the termination of it. You can buy the boat, offset the rental income with depreciation or whatever expense. It has to be profitable at least some years, or you'll be deemed a not-for-profit, and losses will not offset other income (see below from the IRS site). When you terminate the charter business and distribute the assets of the business to yourself, you have to claim recapture on [the difference between] the fair market value of the boat and value to which you have depreciated it as income. No, you can't rent it from your business; you're a disqualified person. The recapture is taxable as ordinary income. If I understand your timeline, all you will have done is move the income from Y1 to Y3 of Y4.


----------------

*"An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

"If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations."
I see a typo here, sorry. I added added "the difference between" in the paragraph above.
dharaway is offline   Reply With Quote
Old 13-05-2018, 11:13   #9
Registered User

Join Date: Sep 2007
Location: Delray Beach, Fl
Boat: 1998 Rosborough 246 LSV
Posts: 563
Re: Pros and Cons of buying a boat in US Charter

If an activity makes a profit for three out of five years it is presumed to be a business.

In my case I never made a profit and had no real hope of ever making a profit yet Irs allowed me to take the deductions as outlined in the previous note.

This was all perfectly legal because I operated as a business with proper records proper attempt to market in proper facilities to deliver what it was I was marketing.

When I finished the audit the IRS agent the conducting the audit pointed out that United States steel has never made a profit on the last major steel plant they built and it was all perfectly legal.
__________________
Capt. Stuart Bell
Rosborough 246 LSV Shearwater V
stu@shearwater-sailing.com
captstu is offline   Reply With Quote
Old 13-05-2018, 15:10   #10
Marine Service Provider

Join Date: Dec 2011
Posts: 1,538
Re: Pros and Cons of buying a boat in US Charter

Your questions are”

1. Based on your experience, how likely is an IRS audit in this scenario? Assume that we will do all that is required by the IRS in terms of a business plan and reporting.

Well, why do you care if you are going to comply with all IRS tax code requirements?

2. What is the best way to protect ourselves from liability?

Insurance and lots of it. Contrary to myths often repeated on this forum, LLCs and corporations will not protect you from personal liability if you were the operator, owner or master of a vessel that causes death or injury to persons (on or off your boat) or caused property damage.

3. When we do take off to go cruising and pull the boat out of the dealer’s charter management program, will we be able to continue with the business despite the significant drop in income and not get audited by the IRS.

“Off cruising” is generally not a business activity unless you have paying guests on board continuously. Your business was terminated at that point. You would have to have appropriate licenses for yourself and the boat to conduct such a business. Obviously you could change any charter management arrangements subject to the terms of the existing agreements.

4. What if we never turn a profit during the term of the business, will this likely result in an audit?

The IRS only says that you must have entered into a business with a reasonable expectation of making a profit. Informally they consider that if you haven’t booked a profit within three to five years you run the risk of having your “business” declared a “hobby farm.”

But you also said.

Would like to keep the boat in charter for the next 1 1/5 years and take 100% depreciation in the first year.

This is an option but just screams “hobby farm.”

Then would like to go cruising off and on for a few years.

This, as mentioned above, would most likely terminate your business and the benefits thereof. You may also have to recapture all the accelerated depreciation and if you used this as a loss to offset your personal income tax liability you may have to refile your tax returns and pay tax on everything you wrote off.

This pretty much screams of “hobby farm, hobby farm.” Your chances of an audit has now gone to 99%.

Also you may not be aware that if you have a boat in a legitimate charter business you may only use it for personal use 14 days total per year or pay the rack rate like any other charter customer, just like a mountain or beach cabin that you rent out. Otherwise you will have to apportion your commercial use and personal use and only get business benefits and deductions for the percentage of time spent in charter.

Be smart.

See TAX GUIDE FOR BUSINES YACHTSMEN by Mike Kimball, CPA. Available on Amazon the last time I checked.
jmschmidt is offline   Reply With Quote
Old 13-05-2018, 22:55   #11
Registered User

Join Date: Jun 2013
Location: Bellingham, WA
Boat: Bruce Roberts 44' Steel Mauritius
Posts: 919
Re: Pros and Cons of buying a boat in US Charter

Depends on the state. Washington State is very strict on amount of owner usage. Nobody can answer the tax audit question Stay clean and you have little chance but it[s always a crap shoot. Lots of unforeseen complications.
Mithril Bham is offline   Reply With Quote
Old 14-05-2018, 00:21   #12
Registered User

Join Date: Apr 2013
Posts: 11,002
Re: Pros and Cons of buying a boat in US Charter

Lots of caviots with the 3 out of 5 yr hobby rule and the IRS has a fair degree of latitude if they believe you were not intending to run it as a for-profit business.

Example: Generally, they will consider it as being a real business if you meet the 3 out of 5 test but if it's 3yrs where you profit $500 and 2 yrs where you lose $500,000...you better have a good business plan that makes sense or they can label it a hobby even though you meet the 3 out 5 test.

Keep in mind, for the dollars we are talking about, the IRS is assumed to be right and takes the money first until you take them to court and for the dollars we are talking about, it's a losing game to pay lawyers to take them to court.

Here's a good test: If you weren't trying to obtain a boat to go cruising would you still be investing in this business? If the answer is no, you are probably not meeting the "spirit of the the law", so you better be very careful if you are playing the "letter of the law".
valhalla360 is offline   Reply With Quote
Old 14-05-2018, 09:42   #13
Registered User
 
denverd0n's Avatar

Join Date: Jun 2008
Location: Tampa, FL
Posts: 5,009
Images: 6
Re: Pros and Cons of buying a boat in US Charter

Quote:
Originally Posted by billknny View Post
If you are doing "all that is required" by the IRS why are you so concerned about an audit?
This ^^^^^^

Audits happen. You can do everything right and STILL get audited. Nothing and no one can guarantee that you will never get audited.

If, however, you have been following all of the rules, and paying all the taxes that you owe, then an audit is just an annoyance, Usually not that big of a one at that. The IRS does EXTREMELY few audits where they really dig into all of your records. Most of the time they ask for some documentation, you provide it, you're done. Easy-peasy. (Unless, of course, you've been cheating!)

This is coming from someone who has gotten one of "those" letters from the IRS on more than one occasion, and helped my dad with some of his paperwork when he got a full audit. If you're not cheating, it's just not that big of a deal.
denverd0n is offline   Reply With Quote
Old 14-05-2018, 11:46   #14
Registered User

Join Date: Apr 2007
Location: New England/FL
Boat: Hanse 348
Posts: 1,062
Re: Pros and Cons of buying a boat in US Charter

Yes, you can take a 100% depreciation, it is called a section 179 accel dep IF you are ACTIVELY involved in the charterering. This means that you are doing the work, not just putting the boat in charter, which it sounds like.

So if you advertise, if you review the applications, if you check out the charterers, if you prepare the boat, clean the boat, etc., then you are active.

Note: when you sell the boat to another person, or from your Company (you need to set up an incorp company for the charters) to yourself, the difference between the sale price and the depreciation will be income and will be taxed. So if you were able to deprec 100% in year 1, so you now have 0 cost basis, in 5 years if you sell the boat from your company say to yourself, your company will realize a profit of that and pay tax on it.

If you live say in a different place than the boat, and just collect the difference between the income and the bills, you are not active, and then no, you cannot depreciate 100% in the first year, you fall under the other 'standard' depreciation schedules.
jbinbi is offline   Reply With Quote
Old 21-05-2018, 14:30   #15
Registered User

Join Date: Oct 2015
Location: San Francisco, CA
Boat: Lagoon 450S
Posts: 182
Re: Pros and Cons of buying a boat in US Charter

All, sincerely appreciate all the great feedback. We have retained a CPA that specializes in yacht charters. Should we decide to move forward, we will do so with our eyes wide open and fully understanding the law. Thank you all for this great information.

Gary
iliohale is offline   Reply With Quote
Reply

Tags
boat, buying, charter

Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes Rate This Thread
Rate This Thread:

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Buying a used charter boat ,pros and cons norules General Sailing Forum 19 07-03-2015 07:47
Charter Vacation - Italy vs Greece vs Croatia - Pros and Cons ? danedee Europe & Mediterranean 55 11-11-2014 03:44
Pros/Cons of Buying a Boat in the Great Lakes Ellen Bumblebee Monohull Sailboats 14 31-10-2013 17:18
Pros and Cons of Buying an Ex-Charter Boat ? darkdog64 Monohull Sailboats 16 05-11-2010 10:01

Advertise Here


All times are GMT -7. The time now is 23:31.


Google+
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.
Social Knowledge Networks
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2024, vBulletin Solutions, Inc.

ShowCase vBulletin Plugins by Drive Thru Online, Inc.