US Tax benefits for having a boat in charter

[letsgetsailing3]

Originally Posted by Hoosierdoc

It's by no means beer money when you include value of "free" charter that you would have purchased. On a leopard 50 through moorings a half share of the boat (if I split it with someone) would allow me to take $375k off my AGI year one, assuming IRS was fine with it. That's a lot of $$. Tax savings on future year depreciation would pay for plane tickets down to the boat. I see it as a 17% annual rate of return on the $121k DP, assuming I could count the deductions/depreciation, and I saved $20k of charter fees I would have spent annually. That also takes into account the $45k or so loss in principal from down payment to equity at end of term.

If you were really intending to charter that boat in that location every year, I can see it.

The rub is usually in the financing, mgmt fees, and the wear and tear on a depreciating asset, and in the obligation to charter from that company.

These things can work, but I've also known people to regret the obligation they've set up for themselves with these types of arrangements.

[Hoosierdoc]

Montanan, I'm using moorings data for revenue in the program and expenses in the program. The weeks given are factored in already, not additional costs. Have you looked at their pro forma document? It's a quick email download when you select which boat you want to see.

The 17% mainly comes from the tax deduction and free charter. Buying half of a $1m boat in their program would yield a loss of $358,000 first year, on a DP of $121k. If I pay 25% tax, that's a savings of $89,500 in taxes year one. Essentially the down payment just became $31,500.

You're speaking in generalities, I'm using actual numbers.

[Hoosierdoc]

Originally Posted by letsgetsailing3

If you were really intending to charter that boat in that location every year, I can see it.

The rub is usually in the financing, mgmt fees, and the wear and tear on a depreciating asset, and in the obligation to charter from that company.

These things can work, but I've also known people to regret the obligation they've set up for themselves with these types of arrangements.

Yeah, that's what I'm trying to sort out. The management companies let you take a boat out of any of their bases, not just the one your boat is in.

The wear/tear on the boat certainly is a concern, but there's supposed to be an exit survey where damage is corrected, obviously that could be a huge problem if disagreements happen or something is missed. For the purpose of my calculations I assumed a 35% decrease in value of the boat after five years.

Also, you can sub-lease your "free weeks" to private people if you have your own captain, which can further improve the financials and make it more of an actual business.

[AndyEss]

I suspect you might be off on having any depreciation tax benefit at all in the years after Year 1 if some sort of accelerated depreciation was used in Year 1. Your first post states, as I understand it, fully expensing the purchase price in Year 1.
If this was allowable under the new tax law, you would have zero value to depreciate for the rest of the time you owned the boat.
Depreciation is an accounting scheme to allocate the deductibility of the purchase price of a business asset that has a long term value over a series of years. If you could deduct the purchase price of an asset at 100% in the first year, there is nothing to depreciate in subsequent years.
Even the IRS doesn’t believe in perpetual motion machines.

[Hoosierdoc]

What I saw was 50% of purchase price year 1, with a bonus 50% of the remaining balance year 1 also. I saw that as 75%, though I'm not sure. I saw my half-share basis as around $121k in year 2, so only $12,100 depreciated that year.

Tax savings year 2-5 went down to about $1300 in my estimate, as there should be about $6k in "income", the difference between mortgage and charter revenue. the tax savings used to be about $5k until I saw the bonus depreciation year one, that front-loaded it a bit more and reduced future depreciation amounts.

I guess you can play with it depending on how much AGI you have to offset

[Montanan]

Originally Posted by Hoosierdoc

Montanan, I'm using moorings data for revenue in the program and expenses in the program. The weeks given are factored in already, not additional costs. Have you looked at their pro forma document? It's a quick email download when you select which boat you want to see.

The 17% mainly comes from the tax deduction and free charter. Buying half of a $1m boat in their program would yield a loss of $358,000 first year, on a DP of $121k. If I pay 25% tax, that's a savings of $89,500 in taxes year one. Essentially the down payment just became $31,500.

You're speaking in generalities, I'm using actual numbers.

As to the taxation obligations, generalities are real, the numbers are relative.

Taking your year one assumption: Approximate, present value of reduction in your income taxation - $89,500 X 3% = $2,685 i.e., the time value of accelerating your year one tax shelter, assuming you can take the USA depreciation deduction and other deductions such as interest on your loan to buy the USA boat. Jurisdiction is key for Federal, State and Foreign taxation.

Note: Your year two present value will be negative due to the fact that you have no additional depreciation to shelter your charter income and you will owe significant additional tax at that year's effective marginal income tax, in that year and in subsequent years because you accelerated the depreciation and hence don't receive the benefit of such sheltered income in subsequent years. The acceleration of depreciation just changes when you pay the tax is doesn't ultimately change how much you pay, again just a time value of your money factor. You will just pay taxes in year two and going forward, so don't go spending that $89,500 in year one tax reduction as you will need those funds to pay taxes in following years.

There could be recapture in future years due to accelerating your depreciation when your charter arrangement ends. Keep that in mind as it can be an unexpected adverse surprise.

Calculate the total PV using realistic values and applying your specific tax situation.

Other questions to ask yourself: Where in the USA do you wish to charter your boat and to spend your two weeks. USA tax benefits apply to USA based businesses, so foreign charter arrangements likely do not provide for USA tax benefits, instead they would presumably invoke foreign income exposures.


Businesses can immediately expense more under the new law
A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million. For taxable years beginning after 2018, these amounts of $1 million and $2.5 million will be adjusted for inflation.

Temporary 100 percent expensing for certain business assets (first-year bonus depreciation)
The new law increases the bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023. The bonus depreciation percentage for qualified property that a taxpayer acquired before Sept. 28, 2017, and placed in service before Jan. 1, 2018, remains at 50 percent.

The definition of property eligible for 100 percent bonus depreciation was expanded to include used qualified property acquired and placed in service after Sept. 27, 2017, if all the following factors apply:

The taxpayer or its predecessor didn’t use the property at any time before acquiring it.
The taxpayer didn’t acquire the property from a related party.
The taxpayer didn’t acquire the property from a component member of a controlled group of corporations.
The taxpayer’s basis of the used property is not figured in whole or in part by reference to the adjusted basis of the property in the hands of the seller or transferor.
The taxpayer’s basis of the used property is not figured under the provision for deciding basis of property acquired from a decedent.
Also, the cost of the used property eligible for bonus depreciation doesn’t include the basis of property determined by reference to the basis of other property held at any time by the taxpayer (for example, in a like-kind exchange or involuntary conversion).

Of additional issue is that the charter arrangement likely means that you are not actively participating in the business, that is to say, it is a passive income arrangement. You are not handling the bookings, maintenance, operation, etc. as the charterer is the active participant, hence you will likely to subject to passive loss limitations.

"The yacht owner must be able to demonstrate that the yacht is engaged in trade or business.
The yacht owner must be actively participating in that business.

Point number one seems not to cause many issues. After all, the yacht is being placed in a situation where it is being used in a business. Point number two is where essentially all existing (apart from individuals who own and run their yacht entirely themselves, including booking the charters) outlets for business yacht ownership seem to fall short.

This is because most yacht owners are not actively participating in the business, that is their yacht. They are placing their yacht into a fractional ownership program or a charter operation and allowing these businesses to manage the bookings, maintenance, and other aspects of running the ‘yachts business."

[Montanan]

If your charter business participation is passive, the excess passive losses you realize for example, year one due to potentially deriving accelerated depreciation deduction of "qualified property" can be carried forward to be applied to subsequent years in which you have passive income.

As a general rule, one does not receive current year benefits from passive losses unless you have other passive income to offset with the passive loss deriving investment. Again it depends on your personal tax situation. Passive losses can not be offsets against your ordinary income. I am trying to recall but I don't think you can carryback passive losses against prior year passive incomes.

Do expect the boat to be highly depreciated in value and in condition at the end of the charter, if the boat was actively chartered. I suspect that your 35% market value depreciation after five years is optimistic given the boat is a charter layout and not an owner layout. It will be returned in "sea-worthy" condition after the end of charter survey and repairs but it sure as heck won't be like new. Expect a lot of refit to bring her back into a boat you would like to use extensively.

[wathey]

I would actually say most boats sold through a couple of reputable dealers on the East Coast go through this type of program. I don't want to suggest one over the other but any google search of boat as a business will turn them up or flip to the back of Sail mag and see who sells new production charter boats. I have looked into this thoroughly and have confirmed with both accountants who work for my company and my tax attorney that an actively managed (charter business) enterprise (Delaware LLC is least complicated) with an asset (Yacht) is eligible for depreciation and losses/gains are an acceptable offset to personal income. The charter company like BVI YC or Vacances Sous Voiles is actually a contractor for you that supplies services like marketing, booking, cleaning and maint. Losses/Gains flow through to your personal income b/c the IRS will consider this an actively managed business if you spend a certain amount of weeks engaged in it. There are clear requirements and you must document everything. Remember when you sell the boat there is a claw back of sales price if greater than depreciated value but that is a good deferral strategy. The most important advice I can give is hire an expert and document religiously as per the tax requirements. The people who have the most experience in my opinion are new boat dealers who specialize in this type of structure. They will also pair you with a charter company in a seamless experience. I'm just a sailor, not a paid advertiser nor am I a tax attorney but my independent verifications held that this is a justifiable tax structure.

[Montanan]

Where will your chartered boat be used? This is key to defining whether if qualifies for depreciation deduction in the USA.

Excepted Property / Non-qualifying tangible property.

You cannot elect the section 179 deduction for the following property.

Certain property you lease to others (if you are a noncorporate lessor).

Property used predominantly outside the United States, except property described in section 168(g)(4) of the Internal Revenue Code - Reference 1689g0(4) below

Property used by certain tax-exempt organizations, except property used in connection with the production of income subject to the tax on unrelated trade or business income.

Property used by governmental units or foreign persons or entities, except property used under a lease with a term of less than 6 months.



(4) Exception for certain property used outside United StatesSubparagraph (A) of paragraph (1) shall not apply to—
(A) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;
(B) rolling stock which is used within and without the United States and which is—
(i) of a rail carrier subject to part A of subtitle IV of title 49, or
(ii) of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period;
(C) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;
(D) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States;
(E) any container of a United States person which is used in the transportation of property to and from the United States;
(F) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (43 U.S.C. 1331));
(G) any property which is owned by a domestic corporation or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;
(H) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3)), or any interest therein, of a United States person;
(I) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;
(J) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;
(K) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and
(L) any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.
For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America

[Hoosierdoc]

I've read it must be owned by an entity, or corporation. Does G count as the exclusion if it's owned by a US corporation? The "predominantly used" may get tricky.

[Montanan]

Originally Posted by Hoosierdoc

I've read it must be owned by an entity, or corporation. Does G count as the exclusion if it's owned by a US corporation? The "predominantly used" may get tricky.

Predominantly - mainly, for the most part.

Use - synonyms: utilize, make use of, avail oneself of, employ, work, operate, wield, ply, apply, maneuver, manipulate, put to use, put into service.

The ownership does not change the qualification, the property characteristics define the qualification.

If the boat is chartered outside the USA it will be subject to foreign taxation under the laws of that jurisdiction. Your passive income, if any, derived from the foreign income will be taxed by the USA since you are apparently an American citizen or resident.

I hope things are becoming more clear to you as to the prospect of charter arrangements.

[Montanan]

Note: If you opt to sale your vessel at the end of its charter period you will become subject to depreciation recapture, assuming of course that you could depreciate your vessel for US tax purposes, meaning it was chartered in the USA.

Depreciation recapture is the gain received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the sale price of an asset exceeds the tax basis or adjusted cost basis. The difference between these figures is thus "recaptured" by reporting it as income.

Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through depreciation. In other words, because the IRS allows a taxpayer to deduct the depreciation of an asset from the taxpayer's ordinary income, the taxpayer has to report any gain from the disposal of the asset (up to the recomputed basis) as ordinary income, not as a capital gain.

Depreciation recapture in the USA is governed by sections 1245 and 1250 of the Internal Revenue Code (IRC). Any gain over the recomputed basis will be taxed as a capital gain in accordance with section 1231 of the IRC.

In your instance, IF your chartered vessel was to qualify for USA depreciation and IF you deducted it full basis under the accelerated scheme of Section 179 property and the "Bonus Depreciation" then your tax basis could be zero, meaning all of your sale value would be taxable income to you at the end of the charter which would realize a sizeable marginal tax liability. Again all that accelerated depreciation accomplishes is change the timing of the tax you owe, deferring it to later year and since the time period of a charter arrangement is short in number of years and because the time value of money is presently modest the benefit of accelerated depreciation is likewise modest.

Taxation is technical. Add in a potential foreign source income by chartering in a foreign country adds twice or more the technical issues, because you have the foreign jurisdiction and your native country [USA] jurisdictions to deal with.

Obtain expert financial guidance as to your boat value expectations at end of charter and also as to the taxation / cash flow issues, including the deductibility of your loan, at risk and passive income matters.

By way of example, a survey will be done on your boat at end of charter to determine if any unusual wear and tear or unseaworthy issues need to remediated. But realize the vessel will have seen considerable use under charter, e.g., the engines and transmissions and generator will have many hours on them, the house battery bank will be nearing its end of useful life expectancy, sails will be heavily used, rigging will likely be in need of timely replacement, but those are considered ordinary wear and tear. But if they are functional then they will be transferred back to you "as is" just like any used boat transaction.

[sailingchiro]

If you want a charter boat, buy one. But there are easier ways to show loss. I purchased an older boat that depreciates in 10 years. Offset by doing a few charters a year, we are able to pay for the boat and upgrades each year.
We looked at buying new and chartering, I just couldn't get over spending a half of millions dollars for a writeoff. Didn't make sense to me. But I am not that smarts. Sorry.

[markpierce]

To avoid IRS hassles, I don't take any special deductions. With the recent tax changes, I only take the standard deduction since state and local tax deductions are limited to $10,000 on federal returns (since I'm single).

[valhalla360]

Originally Posted by Hoosierdoc

I was hoping to talk to customers of CPAs who own charter boats

I believe the saying is something along the lines of...free advice is worth what you paid for it.

You are describing a complicated tax plan that if you get it wrong could cost you tens of thousands of dollars in taxes and penalties.

But as mentioned, if charter boats really did return 17%, they wouldn't bother with buyers, they would just buy the boats directly.

Where this kind of tax plan makes sense is if you are buying the boat and putting it in charter anyway. Then you may as well take the deductions.