Understanding 179 Depreciation Rules

[sea2ocean]

Does anyone have a clear idea of section 179 IRS depreciation rules? I'm looking at buying a boat and put it into a charter pool mostly to get the deprecation savings.

From what I understand, you can write off 100% of the boat cost. My question is what happens when you sell? It seems like the regular depreciation schedule applies accelerated for 7 years. If i sell the asset after that time is it still taxable income?

For improvements made to a boat, are they treated as a straight cost or do I just get the depreciation from them as well. I plan to ultimately talk to a CPA, but I'm trying to get a general idea of how this works.

[scarlet]

I know nothing about rule 179.. however, I do know something about buying a boat and putting it into charter. In my opinion, totally bad idea. the reason the charter companies are so gung ho on this is because it is an "all win" situation for them. you spend a fortune on a new boat... they get to use it and claim they maintain it. But, if you want to see how well they are maintained.. go look at used charter boats for sale. The boats depreciate substantially in that time, and if you are lucky, you break even.

Our friends bought a brand new FP Helia. $750,000 to start.. then another $50,000 to commission and add features. (it was NOT loaded at all) They kept it in charter a year, and it was so damaged, they took it out of charter and are now living aboard it, trying to get her back to good condition.

At the time they bought their boat.. we showed them a 4 year old Helia, that was impeccably maintained by professionals... one owner in pristine shape, loaded for $450,000. Now.. you do the math...

The charter company has everything to gain, and the owner has everything to lose... not a good choice in my mind...

[Iaangus]

Originally Posted by scarlet

Our friends bought a brand new FP Helia. $750,000 to start.. then another $50,000 to commission and add features. (it was NOT loaded at all) They kept it in charter a year, and it was so damaged, they took it out of charter and are now living aboard it, trying to get her back to good condition.



...

$800,000 seem excessively high for a modestly equipped Helia. Did that include delivery? Am I wrong?

[Snore]

There are charter companies and there are charter companies.

If you want to place your boat with company X, have your friend (not you) book a charter for four with them. Then go down as a customer and check out the operation.

[sea2ocean]

Everyone,

I'm looking for information on deprecation rules. I'm not looking for feedback on this whole idea. I appreciate that you have opinions on the topic, but again, I[m looking for depreciation information.

[14murs14]

Originally Posted by sea2ocean

Does anyone have a clear idea of section 179 IRS depreciation rules? I'm looking at buying a boat and put it into a charter pool mostly to get the deprecation savings.

From what I understand, you can write off 100% of the boat cost. My question is what happens when you sell? It seems like the regular depreciation schedule applies accelerated for 7 years. If i sell the asset after that time is it still taxable income?

For improvements made to a boat, are they treated as a straight cost or do I just get the depreciation from them as well. I plan to ultimately talk to a CPA, but I'm trying to get a general idea of how this works.

You really need to talk to an accountant who has no potential conflicts of interest with a charter company. This isn't a section 179 question, it's just a basic understanding of depreciation question. Basic business tax law is that you always pay tax on anything you sell for more than the current depreciated value, regardless of depreciation schedule which is really irrelevant to that point. So if you were on a schedule and had depreciated a $1M boat to $500K then sell it for $600K, that extra $100K is taxable. On the other hand, if you sell it for $400K you can take the extra $100K as a loss at the time of sale. There's no "statute of limitations" on income, this is business tax law. You sell something for more than it's current depreciated value it's income, no matter if it's 5 or 50 years after you bought it.
Not trying to be a jerk here, but this is a pretty fundamental aspect of business taxes, so you might want to ask yourself if you're really in a position, knowledge-wise, to start a business, which is what you're contemplating doing. What else do you not even realize you don't know?

[denverd0n]

First off, I have to say that you really should be talking to a tax professional about this. I know you said that you intend to talk to a CPA, but I would have started there, not on an internet forum. That said...

Originally Posted by sea2ocean

If i sell the asset after that time is it still taxable income?

It is a capital gain, and you will have to pay capital gains taxes on it. This is the same as for any asset that you depreciate, and then sell for more than it's depreciated value.

Originally Posted by sea2ocean

For improvements made to a boat, are they treated as a straight cost or do I just get the depreciation from them as well.

Capital improvements made to any asset reduce your capital gain on that asset.

[sea2ocean]

Originally Posted by denverd0n

First off, I have to say that you really should be talking to a tax professional about this. I know you said that you intend to talk to a CPA

I said I intend to talk to a CPA. I don't get why you would bring that up. I specifically said that so I wouldn't have someone say, "First off....".

There's follow up questions I'd have to your post, but I'll go post them on another site.

[Jammer]

Originally Posted by sea2ocean

I'm looking for information on deprecation rules. I'm not looking for feedback on this whole idea. I appreciate that you have opinions on the topic, but again, I[m looking for depreciation information.

I will break with longstanding Cruisers Forum tradition and actually answer your question to the best of my ability.


I am not an accountant and this is not tax advice.


I believe you will find that there are section 179 recapture provisions. If you write off a capital purchase under section 179, and later sell or dispose of it before its depreciation schedule would have run out (e.g. 7 years for a 7 year asset), or convert it to personal use, you are liable for taxes that are computed to be more or less equivalent to the difference between the accelerated section 179 depreciation taxes you paid and what you would have paid with MACARS declining balance.


I don't know the details. Turbotax and similar programs will figure it automatically.

[sea2ocean]

Originally Posted by Jammer

I will break with longstanding Cruisers Forum tradition and actually answer your question to the best of my ability.

Thank you. I really appreciate it. Have a great week.

[scarlet]

Originally Posted by Iaangus

$800,000 seem excessively high for a modestly equipped Helia. Did that include delivery? Am I wrong?

It was $750,000 and it did include delivery from france. We, at the time, also looked into buying new, and once you had a few extra features (some of them necessary that aren't included on the base model) it adds up quickly. I believe the Base price is around $550,000-$600,000... so you add delivery, etc... and it gets there very fast.

[14murs14]

Originally Posted by Jammer

I will break with longstanding Cruisers Forum tradition and actually answer your question to the best of my ability.


I am not an accountant and this is not tax advice.


I believe you will find that there are section 179 recapture provisions. If you write off a capital purchase under section 179, and later sell or dispose of it before its depreciation schedule would have run out (e.g. 7 years for a 7 year asset), or convert it to personal use, you are liable for taxes that are computed to be more or less equivalent to the difference between the accelerated section 179 depreciation taxes you paid and what you would have paid with MACARS declining balance.


I don't know the details. Turbotax and similar programs will figure it automatically.

It has nothing to do with the depreciation schedule! If you sell an asset at any time for more than it's current depreciated value, you have capital gains on that asset. Period, end of story, regardless of depreciation schedule or expensing or section of the tax code you're working under or what someone on the internet or at a charter company told you.

And if you're planning on setting up something like this and using Turbotax to keep you out of trouble....seriously! This is a relatively complex business transaction, if you haven't run a business before and prepared taxes for the business then believe me, what you don't know you don't know has a high chance of coming back to bite you.

[scarlet]

Sorry, Seaocean... didn't mean to hijack your thread.. I'm just insanely fiscally responsible...trying to save you money. But, I don't know when to keep my mouth shut.. Please forgive.

[flee27]

Not funny but funny. This thread is like so many. Someone asks a specific question and then lots feel the need to post answers to unsolicited questions. Normally disparaging the OP in the process.

None of us know anything about a subject until we do. We all start down a unknown path somewhat ignorantly. And no matter how much you know hopefully you understand that someone always knows more and should be open minded to learn from them. At the same time those that hold the greater knowledge need to be conscientious and responsible to those who know less. Because someone is asking a basic business question does not mean they are incapable of learning and becoming proficient. The OP obviously has some business knowledge and is smart enough to ask questions and learn. Its a shame some feel the need to to belittle others so they can appear smarter---Blowing out someone else's candle doesn't make yours burn brighter.

I still like the forum and find it very informative, thanks to the few that give concise and relative answers.

My 2cents

Foster

[Jammer]

Originally Posted by 14murs14

It has nothing to do with the depreciation schedule! If you sell an asset at any time for more than it's current depreciated value, you have capital gains on that asset. Period, end of story, regardless of depreciation schedule or expensing or section of the tax code you're working under or what someone on the internet or at a charter company told you.

I think you will find that there is quite a bit more to the story.


When an captial asset is written off in the year of purchase under section 179, it produces an immediate loss that can be deducted from regular business income. Absent the recapture provisions, it would be possible to sell it immediately (next day, next tax year, doesn't matter) for close to the purchase price, producing a capital gain. This would allow an asset that served no real business purpose to be used solely as a vehicle for converting regular taxable income into a capital gain so that it could be taxed at a lower rate.


This was anticipated by the tax rules, so there is a recapture provision that closes the loophole by retroactively changing the tax treatment back to that of an ordinary capital asset, which must be amortized over the life of the asset.


I don't actually know anything about taxes, but that is my understanding.