Qualifying for tax deductions on a yacht or other luxury boat requires tax knowledge. First, more than 50 percent of your use of the yacht must be for business transportation.
Once you meet the “more than 50 percent” test, your potential tax deductions include:
- fuel costs,
- insurance,
- repairs,
- dock or slip fees,
- caretakers’ salaries,
- hurricane storage, and
- depreciation (including IRC Section 179 deductions).
All of which are limited by tax rules on luxury water transportation.
Second, the yacht is an entertainment facility. Tax law treats entertainment facilities harshly, so you need to seriously consider providing no business entertainment on this yacht. This should be easy to do because business entertainment is no longer deductible, thanks to the Tax Cuts and Jobs Act.
Use Your Yacht More Than 50 Percent for Business Travel
Tax law gives you two reasons to use your yacht more than 50 percent for business travel:
- Possible escape from the entertainment facility rules
- Escape from the penalties that apply to listed property
Tax law classifies yachts and other pleasure boats as “listed property.” Therefore, you must use your yacht more than 50 percent for business purposes in order to:
- Qualify for accelerated depreciation
- Qualify for bonus depreciation
- Avoid depreciation recapture in later years
- Qualify for Section 179 expensing and avoid recapture in later years
Tax Deductions for the Business Transportation Yacht
The entertainment facility “punishment” does not apply to a yacht used solely for business travel. Obviously, if the yacht is used solely for business travel, you don’t have any entertainment that triggers the entertainment facility rules.
For example, you could have a business office on an island and a business office on the mainland—say, in the Seattle, Washington, area—that would require water transportation for you to get to or from the island. You could do this on a yacht.
Strategy
Recommendation—Plan A. Use the yacht only for business transportation and personal use. Do not use it for business entertainment. (The TCJA gives you the incentive to not use the yacht for business entertainment since you receive no deduction.)
Recommendation—Plan B. If Plan A is impossible and entertainment is part of the mix, hope that the IRS or a court will read the legislative history in a light favorable to your mixed-use.
Tip for Plan B. When you have business and entertainment activities on the same day, try to ensure that the business part lasts longer than the entertainment part, so the day is obviously a business day. Alternatively, if entertainment time exceeds business time but the business time is a matter of consequence—for example, a contract signing—that day could be a business day. In short, try to arrange your activities so the law treats all days as business days.
Luxury Water Transportation Limits
Now that you have gone to the trouble to qualify your yacht for the deduction, you face one final hurdle. The tax law places a daily limit on deductions for business transportation by water. The luxury water limit is double the highest per diem for federal employees traveling in the United States.
The luxury water limits can change monthly. During 2020, the lowest luxury water travel limit was $760 a day and the highest was $988. Say that your yacht expenses exceed the daily limits and that you used your yacht 45 days for business transportation. At the lowest limit, your yacht deductions would be $34,200 (45 x $760). Not a bad payoff for a little tax knowledge.
Takeaways
If you are looking to deduct your yacht, make sure that you use it more than 50 percent for transportation and don’t use it for business entertainment.
Since the TCJA does not allow a deduction for business entertainment, your incentive is to not use your yacht for this purpose.
Once you qualify your yacht as a mode of business transportation, you next need to consider how the luxury water travel rules will limit your deduction.
If you would like to discuss your possible yacht or luxury boat deductions, please call me on my direct line at 509-543-7600 or send a request HERE.
July 2021
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