"Business Yacht Ownership"

Looking at yachts this spring, we were told about a program called Business Yacht Ownership that purports to pay for a new boat using mainly taxes -paying off the boat as if it were a business. Does anyone have feedback on the idea? Too good to be true? The agent was saying that our boat could be chartered for sunset cruises with a captain aboard -that no one would even be using the beds. That'd be light carter duty!
Thanks

I view it as cheating.

Nomad Willy said:

I view it as cheating.

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But does the IRS? If not, give it a try........

You are under a popular misconception: that taxes will pay off the boat in that situation. Not so.

You have to have enough income from chartering to cover slip, maintenance, fuel, the captain, insurance (a big bill because it has to be commercial insurance) and finally the monthly payment on the boat. That is a big nut and casual sunset cruises is not likely to do it.

The above equation has nothing to do with taxes. Taxes only come into play when income > expenses. In my experience the only way to pay off a boat is putting it in a full time charter program in an area where charters are prevalent: the PNW, BVI, etc. In that case the income will often cover expenses and loan payment and you can usually use it for free for a week or two each year.

David

It would probably work if you were in a 100% or higher tax bracket.

I would suggest asking the dealer to put it in writing and agree to cover any shortcoming each yr.
I bet I know what their response will be.
Yoy are correct... too good to be true

You didn't mention your location and what the tourist demand is for day cruises.
How do you spell marketing study and business plan???

Sorry for the cold water. ...

Drake said:

It would probably work if you were in a 100% or higher tax bracket.

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Unless income > expenses, it doesn't matter what tax bracket you are in.


I realize that you were probably trying to be funny. Unfortunately my business sense outweighs my sense of humor .


David

Hmm it’s findable as a concept via google- Atlantic-cruising.com

Conceptually it might work, but I’d ask to see proof of returns from past and a vast quantity of actual cases

A salesman lie about something? Or at the very least grossly mislead?

NO! Say it ain't so!

To have sufficient business to make it profitable there'd have to be someone or something driving the business. It ain't gonna magically charter itself. Those efforts will have costs. It all adds up. Will there be enough profit to make it "free"? That's rarely true, I'd daresay never.

Ask your accountant. I would not want my boat being chartered. It would drive me nuts having someone else running my boat without me onboard. You better have really good insurance because one slip and fall and you could be in real trouble.

Comodave said:

Ask your accountant. I would not want my boat being chartered. It would drive me nuts having someone else running my boat without me onboard. You better have really good insurance because one slip and fall and you could be in real trouble.

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Different ways to skin this, but I completely agree with you. Personally, I wouldn't do it.

The business may be profitable enough to pay for the boat, but if the thought is that the business losses (presumably including depreciation, a non-cash expense, so you may be cash flow positive and still produce tax losses) will reduce your tax on other income enough to pay for the boat, you will have an uphill battle, which the IRS has fought and won many times. It's called "hobby loss". Your position will be much better if you NEVER use the boat for pleasure. Also popular among racing horse owners. Gamblers have tried with (almost) zero success.

I looked at leasing our boat out to a Beach Wedding company for doing harbor cruises after the vows were taken, kind of an intimate start to the honeymoon. After talking to the guy who was holding the current contract, and learning about some of the conditions he had to clean up after the cruise, I decided against it. “Try cleaning that off the overhead hatch screen”, he says.

Dubnuh said:

Looking at yachts this spring, we were told about a program called Business Yacht Ownership that purports to pay for a new boat using mainly taxes -paying off the boat as if it were a business. Does anyone have feedback on the idea? Too good to be true? The agent was saying that our boat could be chartered for sunset cruises with a captain aboard -that no one would even be using the beds. That'd be light carter duty!
Thanks

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The agent was filling the airwaves with total bullsh.t trying to sell a fool (in his mind you were a potential fool, I'm not calling you a fool) on a concept that could lead to nothing but trouble.

A few boats are profitable as charter boats, but in general all it does is offset some costs. The idea you're going to pay for a new boat on tax savings is not feasible in any legal way. After you get your losses all rejected and reversed and your boat reclassified as a hobby, why don't you next try raising horses for your children to ride and writing them off.

Now, you may never get audited or checked, but let me assure you that if you are audited and are claiming a business loss on a boat, that will be checked and questioned. Nothing auditors like less than tax deductions on hobbies.

Oh, and as to his comments on support by CPA and CFP. Well, all the greatest tax shelter schemes have been promoted by CPA's and investment counselors. Most big accounting firms have been involved. Once one major client got audited and their savings reversed, they then went after every client invested in that program. When something is sold as a shelter, then ultimately it runs a tremendous risk. Keep in mind that the IRS always has one basic tax rule to pull out to disallow it. Any action that lacks a true business purpose and is simply a means to try to reduce taxes can be disallowed.

I noticed two testimonials on their website, both from one year owners. It's never the first year that gets you busted and costs you big time. It's when you report losses the first three years, that they'll decide it was not a business at all.

Clearly I strongly dislike such schemes as this and dislike the entire sales pitch based on your buying a boat and getting it somehow paid for by taxpayers. One question to ask all these charter operators who make such outlandish claims as this one. If it's so very profitable, why don't you own the boats?

Thanks for the insights, BandB, I think you've nailed it/them.
-Dubnuh

I'm "lazy" about calculating taxes (going through gyrations to minimize taxes). If I'm ever audited, I expect to get a refund.

I think it can be legitimate, but you do have to create an LLC and actually use the boat as a commercial vessel generating income for the LLC. Seems geared towards people who get paid in large bonus/incentives each year. The commercial equipment acquisition can be deducted against that bonus check. Again, it has to be an actual commercial operation. Strangers will be using the vessel. Income and expense deductions cut into the cost of operation including any loans but would rarely cover or exceed. That's a big lie. Think of it this way: every year a new model gets introduced that renters will want to use instead of your aging vessel. After 3-5 years the vessel will get harder to rent out (or have to be offered at a lower rate). Couple this with increasing maintenance costs over time. Also, if you want to split personal/business use then you can only deduct the % of time the vessel is used for business.

However, I do view this as a scheme by sales guys who are obviously drumming up new ways to move product. Some builders are definitely on board and are potentially building boats for the sole purpose of fractional use. That's pretty scary actually, because they will have little regard (even less than they already do) for their products outside of the initial warranty. They may be building 3-5 year boats that disintegrate after the clock runs out.

Here's the final scam: taking your LLC property out of service and leaving it out for 3 years to avoid scrutiny when selling it. This more applies to real estate as boats are a depreciating asset anyway. Depreciating your real estate down over decades then keeping the profit from a later sale (real estate usually increases in value) is gaming the system.

djmarchand said:

Unless income > expenses, it doesn't matter what tax bracket you are in.

David

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Not true. If you have other income, like a W2 from a regular job, a properly setup boat business can run at a loss and those losses serve to reduce your taxes from the other income. People do this with airplanes as well. I won’t agree that it would ever pay for itself, but it can provide a great deal of help. It worked for me, and has for many others.

David Hughes said:

Not true. If you have other income, like a W2 from a regular job, a properly setup boat business can run at a loss and those losses serve to reduce your taxes from the other income. People do this with airplanes as well. I won’t agree that it would ever pay for itself, but it can provide a great deal of help. It worked for me, and has for many others.

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No, no, no and no. You can't legally use losses from hobbies to offset losses from earnings and businesses and if the boat business is shown not to be a true business, but a hobby, then all benefits will be lost and prior taken reversed. That's the risk. You might get by with it. Now if it's a legitimate business, which I would think yours was, then you can use the losses to offset. And, it can be a legitimate business and lose money every year if you can prove it's sole purpose is to make money.

If a boat business always loses money and you use the boat yourself much of the time, then that's a hobby. The purpose of the enterprise isn't to make money, it's to support your boating hobby. Same as airplanes. Gambling was mentioned earlier but it's got even more rigid rules. Losses from gambling can only be used to offset profits from gambling.

Now, there's an added danger on a scheme such as the entity "Business Yacht Ownership." That is once it comes tumbling down on one boater, it will on all 800 participating. Ask Ernst and Young about the tax shelters they were promoting in the late 90's. As KPMG about their shelters in the 2000's.

Now, interestingly, a few companies like Compaq and UPS have won major tax shelter cases against the IRS and proved there were other benefits to their shelters, not just taxes. However, most people do not have the resources to fight the IRS to the Supreme Court as they both did, nor the arguments they had.

I never referred to a Hobby. Hobbies don’t qualify. I said a “properly setup boat business”. It’s very difficult to follow the rules as a legitimate profit-motivated business, but it can be done. But I will stress also again, that no one should expect a low-cost boat ownership, or anything near that. The tax advantage can help, but it’s no free ride. And for 3 years in charter I never laid my head on my pillow, even one night, when I wasn’t worrying about the boat...

David Hughes said:

But I will stress also again, that no one should expect a low-cost boat ownership, or anything near that. The tax advantage can help, but it’s no free ride.

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What tax advantage? If you make money, you pay tax. That is a disadvantage. And there is no advantage in losing money.

David Hughes said:

I never referred to a Hobby.

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Of course you didn't, no astute taxpayer would. That is a word the IRS uses. And then you will lose more sleep than when you ran a charter boat.

David Hughes said:

I never referred to a Hobby. Hobbies don’t qualify. I said a “properly setup boat business”. It’s very difficult to follow the rules as a legitimate profit-motivated business, but it can be done. But I will stress also again, that no one should expect a low-cost boat ownership, or anything near that. The tax advantage can help, but it’s no free ride. And for 3 years in charter I never laid my head on my pillow, even one night, when I wasn’t worrying about the boat...

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Did you report losses all three years?

BandB said:

Did you report losses all three years?

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Yes, but Year 4 will be a gain because of depreciation recapture. The money saved by the large Section 179 depreciation in year 1, less the amount due for recapture (at new, lower tax rates, thanks to The Donald) is the true net gain from doing the deal the way I did. I saved $123,000 in year 1 but will owe back $72,000 next year in recapture. So I saved about $51,000 on a $230,000 purchase. Again, not a free lunch but helped me in the year I had a large bonus payment.

Great to hear that he was able you to help you out.

My wife and I operate a charter business in the Caribbean and I've been a professional captain/Yachtmaster for most of my adult life. Most personal "charter" boats can carry 6 passengers w/o going through USCG 'certification' a very expensive and time-consuming operation. You aren't even going to cover your fuel, advertising and maintenance costs on an uninspected power vessel (USCG term) doing sunset cruises for 6, or even 10 passengers.
If you go the route of turning your boat into a business, the IRS has very specific regulations about how much you can use your boat versus charters and lose over a 5 year period. It used to be you had to make a verifiable profit 2 out of 5 years to take a loss on those 3, but that may have changed.
Not the least of your concerns should be 6 or more intoxicated people and a captain who is an employee on your boat, doing whatever damage they will.
That broker is a con man and I wouldn't buy a rowboat from him. Go find an honest yacht broker; there are some out there.

I had a trawler in charter service. Charter income kept me from having any out of pocket. If you manage the charters yourself (I didnt) you could easily turn a profit...but then mine was the only trawler available for charter from NC to north FL.

foreverunderway said:

My wife and I operate a charter business in the Caribbean and I've been a professional captain/Yachtmaster for most of my adult life. Most personal "charter" boats can carry 6 passengers w/o going through USCG 'certification' a very expensive and time-consuming operation. You aren't even going to cover your fuel, advertising and maintenance costs on an uninspected power vessel (USCG term) doing sunset cruises for 6, or even 10 passengers.
If you go the route of turning your boat into a business, the IRS has very specific regulations about how much you can use your boat versus charters and lose over a 5 year period. It used to be you had to make a verifiable profit 2 out of 5 years to take a loss on those 3, but that may have changed.
Not the least of your concerns should be 6 or more intoxicated people and a captain who is an employee on your boat, doing whatever damage they will.
That broker is a con man and I wouldn't buy a rowboat from him. Go find an honest yacht broker; there are some out there.

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Very well written. Not the first yacht broker I've seen do that. I saw one recently trying to hard to talk someone into more boat than was in their price range with the lure of chartering. Even gave him some profit and loss numbers which he forwarded to me. After adding in all the expenses left out and adjusting revenues to the going rates, it was a much different picture.

I had an acquaintance get sold on the afternoon and evening charters in Fort Lauderdale and he bought a power Catamaran. Spent all the money getting set up. Ran a few charters, put boat up for sale.

For you, it's a business, you're a professional, and you've spent many long, hard years getting to where you are. Chartering can be a profitable business but it's not one that you just jump into and make easy money. I've chartered many times, many different ways before we had ours. Now, I still regularly do both fishing and sailing charters in different locations. These are hard working individuals with knowledge and skills and make decent livings.

Chartering your boat, if it's not your primary business, can help cover some of your expenses, but it won't make you money.

Right, only fools pay taxes and major fools think taxes will buy them a boat in stead of a war in Afghanistan. Boy, that would be nice, wouldn't it?

I do this professionally. Just for starters, with an LLC or not, to get any tax write-off against your personal income you have to PROVE that you spend 750 hours a year exclusively on this business. PROVE means "document on your take return" which means if you are audited and you fibbed you have just perjured yourself. Otherwise, it is a passive activity loss that you must carry over until you terminate the activity.

You must depreciate your investment in the boat. This is where the broker thinks you can get the write-off to pay for your boat.

Let's see...commercial mooring, insurance, and utilities $1500 a month on my 47 power cat. Also must be US built and documented vessel to operate commercially.

And... oh....you can only use your boat two weeks a year for personal use or you will have to prorate your personal use and business use and only get deductions for the business use prorations.

PM me if you are serious. I have some info, but like they say, if it were easy lawyers would do it.

Jack

You can "deduct" a "hobby" under specific circumstance. Before boats, I raced sports cars with SCCA for 30 years. I had a private practice of dentistry & had my name & practice name on the car (allowed by SCCA amateur racing). I had "team uniforms" with logos & a rack of brochures & cards on the side of the trailer. I survived one very aggressive random audit. My accountant, considering other marketing costs the practice incurred, expensed the cost of racing as practice business marketing expenses with the total expense being within a range the IRS considered "reasonable" marketing costs for the gross income produced. I bumped it up a bit also by "sponsoring" Kids in Need of Dentistry & using the car to promote that non-profit service. That DID involve logos on the car, hauling the car around to events, lifting kids in & out of the car with their smiling parents in the background & taking pictures for documentation AND a lot of hard work organizing a charity benefit race series. Good community service was the true purpose but it also was another legitimate BUSINESS deduction. Did it pay for an aggressive schedule of quite serious racing at the national championship level? Not even close but a nickle is a nickle. Same with Break Out Another Thousand toys. Only way I see to make any "tax scheme" work for boats is as a legit business expense. I know of a chap who owns a dental lab & uses his yacht (not a "boat") cruising around the state to entertain dentist clients all over Florida but I'm sure that doesn't "pay for" that 85 foot toy. Some marketing expense is deductible if a hobby is used to promote a legitimate & reasonably associated business & charitable donations can be personally deducted within reason as determined by the IRS. Otherwise, a real chartering business must be established, your business plan better show a reasonable expectation of profitability within three years & usual rules limit personal use to two weeks a year. Hardly a reason to buy a boat for personal pleasure & "pay for it" by chartering . Might be able to deduct some expense of a personally owned boat as a charitable donation if the vessel is used to promote an accepted charity but there are notable liability & licensing issues unless maybe a cocktail event dockside but then one better have good slip & fall coverage, a paid & experienced bartender responsible for monitoring alcohol consumption & be prepared to demonstrate to the IRS the good will & hard expense you are writing off produced demonstrable tangible benefit to the charity. It can be done but one must play by the IRS rules, not some scheme devised by a boat sales department. Just buy the damn boat & go have fun.

Yes rick there are "professions" which are, or should be, positions of public trust, where a practitioner can get filthy rich off of the backs of the people they have sworn to help and protect. I know about doctors and lawyers but dentists too? Shame.