Connections for Success

 

03.16.11

If It’s Flushable, It May Be Deductible
Michael Kovacs

Because spring is in the air,  this week our real estate blog is not only addressing a bit of personal property, but also a question we get frequently from clients and friends.

A place to get away with the kids… a place to get away from the kids… a place to splash in the water… a place to go fast over the water…. HOME on the water… the boat you’ve dreamed of owning for a long, long time…

Boats certainly aren’t cheap.  The old saying remains true, boat stands for:

Break
Out
Another
Thousand

But it helps when Uncle Sam contributes.  We are frequently asked by clients if they can deduct the costs of their recreational boat… and the answer is… maybe some of the costs!

First, the IRS specifically denies deductions for the cost of “entertainment facilities” which includes boats.  So the cost of the boat itself, maintenance, and operating costs aren’t deductible even when used for business entertaining, but the interest paid on a ship’s mortgage (a loan secured by the boat itself) and the cost of the entertainment on board may be deductible.  That means food and drinks purchased and used on the boat in bona-fide business entertaining are deductible, subject to their own limitations.

In order for the interest cost to be deductible, the boat must qualify as a “second residence”.  To meet that test the boat must have:

  • Sleeping quarters (berth)
  • Cooking facilities (galley)
  • A head (toilet for you landlubbers)
  • In addition, the boat must be used as a residence.  So if it is rented or chartered out at any time during the year, it must be used as a residence at least 15 days, or 10% of the days rented.

If the boat meets these tests, the interest may be deductible as a second residence.  Remember, a taxpayer is only permitted one second residence and interest is not deductible on total principal in excess of $1 million.

There is one other catch.  While the interest paid is deductible for regular tax purposes, interest paid on a boat loan is not allowable for Alternative Minimum Tax (AMT).  This may be Uncle Sam’s fish that got away story as more and more taxpayers are subject to AMT.  If you expect to be subject to AMT you may want to finance the boat with a traditional home equity loan secured by your principle residence instead.

A boat can be a great place to close a business deal or it can be a great place to relax away from work.  As you decide to purchase a boat, relax, go cruising, and leave the taxation headaches to us.  We’re always here to help.

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