How To Setup Yacht Ownership As a Business
Sailing Yacht Business Ownership
Offsetting the costs of sailing yacht ownership with charter income and tax advantages makes sense for most buyers. Whether you plan to charter your monohull or catamaran and go cruising after a few years, or want to own a yacht and need someone to manage it in your absence. It makes sense to make your asset pay for at least some of its carrying costs.
We found that most yacht owners use our yacht management program as an avenue to acquire the cruising monohull or catamaran of their dreams for retirement at a huge discount. Others use the yacht charter revenue together with the business tax deductions to reduce the costs of owning a very nice yacht to enjoy right after purchase. Whatever your reason, Charisma Sailing’s team of experts can set up your yacht business in compliance with tax authorities to suit your individual financial and personal goals. We have not only advocated it to our clients, but have personally benefitted from this program.
What is a Yacht or Boat Business?
A yacht or boat business is a fairly simple concept and is structured much like any other for-profit business. By placing a yacht into a corporation (usually an LLC) and operating it actively for profit, either directly or through a third party management company, the owner is able to generate substantial tax advantages that further offset the cost of ownership. For U.S. buyers who are in high income tax brackets, this is definitely an option of ownership that should be explored.
The tax benefits must be carefully planned and documented to make sure that the business activity can withstand scrutiny. There are very specific rules and requirements that need to be complied with in order to meet the standard of actively operating a business for profit and taking tax advantages.
The goal is to structure your boat business in such a way that you have the intent and ability to make a profit. What you CANNOT do, is structure this business with a flawed business plan of “limited charter” and purposely run it at a loss to avoid wear and tear on your boat while offsetting the cost of ownership with business tax deductions. You CANNOT “pretend” to be in business! However this program, when done correctly, offers the least expensive alternative to own a boat.
How to Set up a Boat as a Business
Here is a very basic overview of how to set up a boat business and qualify for tax advantages. Before you make the decision to purchase a yacht, consult with us to figure out if this scenario will be suitable for your situation. There are many things to consider. We can discuss all scenarios with you and tailor the Yacht Management program for your personal situation.
Figure out the size, type, and configuration of boat you plan on buying.
Decide on the destination or location you want to operate from.
Establish a business purpose – sailing school/education, charter, dive and adventure charters, exclusive luxury charter etc.
Figure out what your expected revenue and expenses will be.
Create a business plan.
Create a business entity like an LLC or other pass-through entity for your business.
Plan your tax strategy. The business tax advantages should directly offset the income from your boat business activity as well as the taxable income from any other active source including your regular job (W2 income). Our business plan highlights the tax advantages available to you through the yacht as a business plan. That way you can adjust your withholding and use the tax advantages to offset cash flow immediately.
Consider your ultimate goals and exit strategy and plan for it.
Create a marketing plan for your business – website, social media, introduce your boat to charter brokers, attend boat shows.
Charter management – It is best to team up with a management company to help manage your boat and establish a clientele.
You can purchase your yacht to your specifications (including the popular owner version layout), set the yacht up as a business, operate it with the help of a charter company, and have your yacht at least partially or fully paid off at the end of the contract period, by applying business revenues and tax advantages.
But do not be fooled. You cannot dump your yacht in a charter fleet for 5 years while collecting a guaranteed monthly income. This is deemed “passive income” and does not qualify you for the section 179 rule and tax advantages. Once your “Yacht As A Business” is set up correctly, you stand to benefit greatly from this concept, but it does require work on your part.
Understanding Business Tax Deduction for a Boat Business
What Is Section 179 Business Tax Deduction?
People seem to think that the Section 179 deduction is some complicated tax code, but really it is not. Essentially, Section 179 of the IRS tax code allows businesses to deduct operating expenses and depreciate the qualifying equipment purchased or financed during the tax year. Typically, when a business buys new equipment, the purchase price can be depreciated using the MACRS scale which is an accelerated depreciation schedule.
The original target of this legislation was much needed tax relief for small businesses – and millions of them are actually taking action and getting real benefits. So, if you are in the market for a new yacht, the Section 179 rule should definitely be a part of your yacht-buying strategy.
According to this law, when used as part of a business, you can legitimately divert some of the taxes that you’re already paying into the sailing vessel. This in turn, creates equity in your new yacht. Therefore, buying a new yacht and placing it in charter service as a business, makes total sense to reduce cost of ownership and turn tax advantages into an investment. It is vitally important the business is set up correctly and the operation is structured to qualify for the tax benefits and remain in compliance going forward.
Understanding Section 179 Business Tax Deduction
*The U.S. Congress has halted the Section 179 roller coaster of the past recent years by making the Tax Deduction limit permanent. The limit was raised to $1,160,000. This is good news for yacht businesses, as the owners and their tax advisers now know early in the year that the deduction will be there for them and they can plan accordingly.
Section 179 Tax Deduction Limits for year 2023
Deduction Limit: The maximum deduction for equipment purchased/financed and placed in service by 12/31/2023 is $1,160,000. Businesses can deduct the full cost of equipment as an expense.
Limit On Equipment Purchases: Business owners may spend up to $4,050,000 on equipment, new or used, and claim the full Section 179 deduction. Beyond that amount, the deduction is reduced dollar-for-dollar. This stipulation is to ensure that small businesses, not large corporations benefit from the deduction. For 2022, this spending cap for equipment is $2,700,000.
Example Of Section 179 At Work
To take advantage of the 2023 deductions, you must purchase or finance the equipment and place into service by 12/31/2023. IRS Form 4562 covers this deduction.
Equipment Purchases:
$1,200,000
First Year Write-Off: ($1,160,00 max 2023)
$1,160,000
80% Bonus Depreciation Deduction:
$32,000
Normal First Year Depreciation: (20% in each of 5 yrs on remaining amount)
$0
Total First Year Deduction: ($1,160,000 + $32,000 + 0)
$1192,000
Cash Savings: ($1,192,000 x 35% tax rate)
$417,200
Lowered Cost Of Equipment After Tax Savings
$782,800
*The above information is an overall, “simplified” view of the Section 179 Deduction. For more details on limits and qualifying equipment, please contact us directly to help you evaluate your individual goals and situation.
Bonus Depreciation From 2023
Bonus depreciation comes into play if the Section 179 limit has been reached. The 100-percent depreciation will stay in effect until January 1, 2023, when the first-year bonus depreciation deduction will decrease as follows:
80% for property placed in service during 2023
60% for property placed in service during 2024
40% for property placed in service during 2025
20% for property placed in service during 2026
Crewed Yacht Charter Opportunities
Recover taxes paid in past years to offset the cost of the yacht purchase. Learn more about Yacht as a Business & Tax Advantages.
Cover all the costs of ownership including the mortgage payments with income and tax advantages – the boat pays for itself!
Enhance your lifestyle with owner use of the vessel and enjoy the pride of ownership.
All models available in this program.
Sail in tropical locations.
For more detailed information about Business Tax Deduction for a Boat Business, visit the excellent resource guides at https://catamaranguru.com/charter-management/yacht-as-a-business-program/.
Interested In Reducing The Costs Of Yacht Ownership?
With all this information you may be interested to find a way that works for you to substantially reduce the cost of yacht ownership. We caution everyone to do their due diligence, plan their exit strategy, and consult with experts in the field.