Section 179 tax deduction questions:

[ol1970]

Sorry if this has been discussed elsewhere before, but I did a search and could not find anything.

So after I retired a few years back I started a consulting gig for fun that has blossomed nicely from a financial standpoint. To that point, while we are doing our window shopping for boat, and have a sizable business income, I'm wondering about how to go about the purchase in the fiscally prudent manner. I get the basics behind the Section 179 Tax law allowing for businesses to purchase assets and write them off in the same calendar year up to $2M I believe in 2019, but I'm wondering in the boating world how are people applying it:

Is the only way to take advantage of this is by placing the boat into a charter program (or creating your own program)?

How does the depreciation recapture work at the end of the chartering period? Boat purchased for $500k, 100% is written off at the time of purchase, actively work towards chartering for 5 years, then say its worth $250k at the end, but you want to keep the boat. Do you just keep the LLC going while you take off on the boat to go cruising, then just worry about it when you sell it 10 years down the road?

Is this what YouTuber's like Zatara are doing when they file their U.S. taxes for income against their vlog? If not why couldn't they?

Just trying to see if there are others out there who are doing this or have done this where you can legally and ethically take use the tax laws to your advantage when making a significant purchase. Our thought would not be along the lines of going into a DYC type situation, but purchasing a new catamaran while I've got this high income stream from my side gig, maybe putting into more of a boutique charter type arrangement, captain only no bareboat, and high end. Not worrying so much about money side of that charter business earning us an income that we are trying to live off of.

Anyway, thanks for any input you might have, I'm discussing with my CPA later this month when we meet but this isn't his particular area of expertise.

[Shrew]

I might be worth clarifying that Section 179 is a US tax law (since this is an international site).

Section 179 pertains to deducting the full amount as opposed to depreciating over the life of the item.

"The Section 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business"

How are you justifying the boat as a capital expense for your consulting business?

[Shrew]

Originally Posted by ol1970

How does the depreciation recapture work at the end of the chartering period? Boat purchased for $500k, 100% is written off at the time of purchase, actively work towards chartering for 5 years, then say its worth $250k at the end, but you want to keep the boat. Do you just keep the LLC going while you take off on the boat to go cruising, then just worry about it when you sell it 10 years down the road?

Are you saying that you want to establish the boat as a charter, but not actually run any charters? Use the boat while 'building' (but not booking) your charter business over a number of years, then retire and abandon the charter business and keep the business asset for continued personal use?

I would think you're opening an issue with licensing, insurance and potentially limiting yourself from marinas that don't lease to businesses and charter boats. Do you plan on reporting the boat as a charter business, but not maintain a USCG licensed captain or commercial insurance??

This whole thing seems very sketchy. Why would you start a thread asking an anonymous internet forum how to circumvent the law??

[TrentePieds]

"I'm discussing with my CPA later this month when we meet but this isn't his particular area of expertise. "

Why would you employ a CPA with no expertise in a tax matter so simple and ubiquitous as Capital Cost Allowance and Recapture? If he doesn't have it at his fingertips, you should probably change accountants and business consultants.

Quote: "Just trying to see if there are others out there who are doing this or have done this where you can legally and ethically take use the tax laws to your advantage when making a significant purchase. "

Being Canadian I've had very little to do with US tax law, but I should be very surprised if the US Infernal Revenue Service lags behind Canada Revenue Agency in any respect. It is half a century ago that CRA plugged this particular loophole, because it was so flagrantly obvious, and having left it open till then caused red faces all over Ottawa.

Here, if you put a boat in charter via a Corporation, its operations get taxed under the provisions for Corporate Tax. If the corporation is "closely held", you get dinged taxwise as if the business were operated by a sole proprietor (you!) because CRA can simple "deem" that to be the case. You have no say in that. If you operate straight up as a sole proprietor the boat gets treated in isolation on your own Personal Tax Return, income from that "business" therefore gets taxed at your personal marginal tax rate. You also have to declare your OWN USE of it as income at the rates you charter it for. Thus you get taxed on your own pleasure at your own marginal tax rate. There's a winner!! You can take CCA, of course, to reduce income in a given year. However, in the year you cease chartering (via sale or otherwise) you have to take recapture of CCA into your INCOME in the year of cessation. Thus the entire recapture gets taxed as income at your marginal tax rate in the year of cessation.

Do go talk to a competent CPA! We in this forum are laymen. Find a professional you can hold responsible if he blows it. And as the legal beagles say: "He who retains his own council has a fool for a client!"

TrentePieds

[ol1970]

Originally Posted by Shrew

Are you saying that you want to establish the boat as a charter, but not actually run any charters? Use the boat while 'building' (but not booking) your charter business over a number of years, then retire and abandon the charter business and keep the business asset for continued personal use?

I would think you're opening an issue with licensing, insurance and potentially limiting yourself from marinas that don't lease to businesses and charter boats. Do you plan on reporting the boat as a charter business, but not maintain a USCG licensed captain or commercial insurance??

This whole thing seems very sketchy. Why would you start a thread asking an anonymous internet forum how to circumvent the law??

Thanks for the reply. No I'm definitely not trying to or wanting to do anything sketchy. I would/could put a high end boat into a private charter for hire situation until such time that we decide we are ready to go sailing full time. I've just read some articles online about how there is a way to lesson your overall tax burden if you have other business entities. I mean you can charter the boats by the week that line the harbor in Monaco for $400k/week, that's not one of the choices at DYC website, and I suspect most of those boats are owned through LLC's/offshore companies and being written off as tax deductions.

One quote from another website (selling boats of course):

"Additionally, the write-off is not limited to the taxable income buyer's business entity. If structured the right way, the buyer may be able to generate a deductible loss from their flow-through charter business that can be used to offset their regular taxable income as long as it's done in the same year as the purchase."

This is what I'm curious if anybody here has any experience with as I sit here on my computer before I head out to go surfing for the day. This in no way will impact my ability to purchase a boat (paying cash) nor they type or cost of the boat we end up going with...but if through some careful planning and a little bit of work I can save up to $500,000 in taxes that will just go poof as I write the check to the Department of Treasury if I don't bother exploring the options.

I will be consulting both my attorney and CPA as well, but sometimes there is a little grain of wisdom that can be garnered from randomly on the internet from those who have done it before. The answer very well might be, don't do it, too much of a hassle and that is fine too.

[ol1970]

Originally Posted by TrentePieds

"I'm discussing with my CPA later this month when we meet but this isn't his particular area of expertise. "

Why would you employ a CPA with no expertise in a tax matter so simple and ubiquitous as Capital Cost Allowance and Recapture? If he doesn't have it at his fingertips, you should probably change accountants and business consultants.

Quote: "Just trying to see if there are others out there who are doing this or have done this where you can legally and ethically take use the tax laws to your advantage when making a significant purchase. "

Being Canadian I've had very little to do with US tax law, but I should be very surprised if the US Infernal Revenue Service lags behind Canada Revenue Agency in any respect. It is half a century ago that CRA plugged this particular loophole, because it was so flagrantly obvious, and having left it open till then caused red faces all over Ottawa.

Here, if you put a boat in charter via a Corporation, its operations get taxed under the provisions for Corporate Tax. If the corporation is "closely held", you get dinged taxwise as if the business were operated by a sole proprietor (you!) because CRA can simple "deem" that to be the case. You have no say in that. If you operate straight up as a sole proprietor the boat gets treated in isolation on your own Personal Tax Return, income from that "business" therefore gets taxed at your personal marginal tax rate. You also have to declare your OWN USE of it as income at the rates you charter it for. Thus you get taxed on your own pleasure at your own marginal tax rate. There's a winner!! You can take CCA, of course, to reduce income in a given year. However, in the year you cease chartering (via sale or otherwise) you have to take recapture of CCA into your INCOME in the year of cessation. Thus the entire recapture gets taxed as income at your marginal tax rate in the year of cessation.

Do go talk to a competent CPA! We in this forum are laymen. Find a professional you can hold responsible if he blows it. And as the legal beagles say: "He who retains his own council has a fool for a client!"

TrentePieds

Thanks for the response! The CPA I'm discussing this with is a long time friend I've used for my consulting business, and the reason I said it is not his area of expertise is this isn't an area where a lot of people are purchasing seven figure sailboats that go into charter or are used for business purposes. I'm definitely not the sharpest knife in the drawer so I'll be sure to consult the professionals, life is to short to have too many hassles!

[redneckrob]

You need a CPA that specializes in this specifically. In the mean time, I'd take a look at the case law and private letter rulings on hobby losses and passive losses and what they can offset. At the very least, unless you have a bunch of passive gains what you propose would be passive losses you couldn't use. And this is all before you start talking about turning it into a personal use asset in several years. This is a pretty fraught area of tax law, you absolutely don't want to depend on advice from an internet forum. Even someone honestly trying to help can badly garble something they experienced but understood poorly to begin with. It's also not really something many CPAs understand, as there's a lot of case law and IRS interpretation behind it that they wouldn't be familiar with if it wasn't their area of expertise. And the absolute worst source of information is a charter company, I've been told I was fine to do things that I knew to be flat out illegal by charter companies trying to sell me on their charter concept.

[dfelsent]

I’d get advice about the likelihood of a audit being triggered by yacht deductions. I’ve read and been told by a CPA that this is an area that was heavily abused in the past, so the IRS is often interested.
That is an additional cost of course,as you need to pay your CPA to help there.

But, don’t forget your yacht may qualify as a second home. Deductions there for sure. Again, hire an experienced CPA with yachts.

[leboyd]

I'm a financial advisor, not a CPA. I've worked a lot with high income folks and their CPAs. Some CPAs lean more to pushing the envelope and others lean more to never-have-an-audit.

With this in mind, I can't think of any of the CPAs that would recommend depreciating your boat as an expense for your consulting business, whether that's using the Section 179 or not.

If you're opening a real boat chartering company that will own the boat, market it for chartering and keeping totally separate books, then I think all of them would accept the idea of a Section 179. However, they would remind you that you have to pay the fair market value every time you use it, just as any customer would. They would also remind you that the far market value of the boat when you sell it would be taxable income to the boat chartering company because the book value of the boat is $0.

I had a client that did something similar: software company, bought a large power yacht, wrote off the depreciation, got audited, spent a fortune to defend and spent more than the defense for the tax, penalties and interest.

But you REALLY need to talk to a competent business CPA. Your friend is not a competent (s/he may be great for personal tax work and advice) business CPA. EVERY competent business CPA will know asset depreciation (including Section 179) by heart. It's one of the most important parts of tax preparation and advice for a business CPA. It *is* possible to do it right, but not easy.

[Heliades]

I use this CPA for my boat charter LLC. He specializes in these things.
Glenn H Gopman, CPA, PFS, CGMA | MiamiCPA LLC
Office : 16855 NE 2nd Ave. Suite 303, North Miami Beach, FL 33162
PH : 305-466-9772 | Fax : 305-651-0611
Email : glenn@miamicpa.com Website : https://MiamiCpa.com

I am now in my 3rd year with Section 179 deduction. Took 50% first year, carry forward +15% additional depreciation per year. So far so good.

He told me that if I run the business 4-5 years min the IRS would unlikely be interested in the "recovery" of the actually value against the IRS depreciated value. I will need to do some more research when I wind the boat out of charter. I plan to do a soft transition out of charter with managing some of my own charters or a small boutique. So that should help as well reducing IRS scrutiny.

You clearly have to separate business from owners pleasure use. I think Zatara and other bloggers might have some difficulty separating their "lifestyle" with their vlog business but maybe they can.

You can IM or email me if you want more information on how I have done with my LLC

[Shrew]

Originally Posted by Shrew

How are you justifying the boat as a capital expense for your consulting business?

Originally Posted by Shrew

Are you saying that you want to establish the boat as a charter, but not actually run any charters?

I'm coming back to these two points. Some of the examples that followed are of boats that appear to be legitimate charter boats.

[Augi]

Originally Posted by ol1970

Sorry if this has been discussed elsewhere before, but I did a search and could not find anything.

So after I retired a few years back I started a consulting gig for fun that has blossomed nicely from a financial standpoint. To that point, while we are doing our window shopping for boat, and have a sizable business income, I'm wondering about how to go about the purchase in the fiscally prudent manner. I get the basics behind the Section 179 Tax law allowing for businesses to purchase assets and write them off in the same calendar year up to $2M I believe in 2019, but I'm wondering in the boating world how are people applying it:

Is the only way to take advantage of this is by placing the boat into a charter program (or creating your own program)?

How does the depreciation recapture work at the end of the chartering period? Boat purchased for $500k, 100% is written off at the time of purchase, actively work towards chartering for 5 years, then say its worth $250k at the end, but you want to keep the boat. Do you just keep the LLC going while you take off on the boat to go cruising, then just worry about it when you sell it 10 years down the road?

Is this what YouTuber's like Zatara are doing when they file their U.S. taxes for income against their vlog? If not why couldn't they?

Just trying to see if there are others out there who are doing this or have done this where you can legally and ethically take use the tax laws to your advantage when making a significant purchase. Our thought would not be along the lines of going into a DYC type situation, but purchasing a new catamaran while I've got this high income stream from my side gig, maybe putting into more of a boutique charter type arrangement, captain only no bareboat, and high end. Not worrying so much about money side of that charter business earning us an income that we are trying to live off of.

Anyway, thanks for any input you might have, I'm discussing with my CPA later this month when we meet but this isn't his particular area of expertise.

Contact Patrick Wehrly at Wehrly Group

https://pjwoffice.com

Patrick is a sailor. I believe he owns more than one Moorings Guaranteed Income Boat. He can provide all the info you need and if you want he can do your tax returns, or just do the part of the tax return involving the boat. He won't push you towards Moorings or any specific way of chartering or managing your boat your boat. But you will get the straight not sketchy scoop. He can advise how to do a Moorings type Guaranteed Income program and legitimately have you actively involved in the business so you maximize the tax write off, legally that goes hand in hand with doing what you can so Moorings or whichever charter company maintains your boat properly. He is knowledgeable about boat maintenance and the challenges therein especially when a charter company is doing the maintenance. He has a lot of first had experience with that. He will do an introductory call for free. After that he will charge you. I had an introductory call with him but have not worked with him. My impression was very positive but he is not going to be the least expensive CPA you can find.

Other than to get referred to the a good CPA for boats, this forum cannot really help for what you are asking. Other posters here might know of other CPA's good for boat owners.

[Cadence]

I would have my input but hiring a tax consultant or CPA would be far better.

[Larry Florida]

Never heard of section 179. Have heard any deduction involving a boat is cause for a closer look and likely an audit. Many better tax reductions are available.

[jmschmidt]

You mentioned an LLC. A commercially operated vessel owned by an LLC has different tax treatment from one a boat owned personally where the business activity is reported on Schedule C on your personal tax returns. Both can use Sec. 179 but taking a personal deduction on your Form 1040 for an LLC owned boat is more complicated. PM me and we can chat about it.