- Determine the boat’s primary business use, such as an office or entertainment uses.
- Decide if you should incorporate the boat for tax purposes and liability protections.
- Calculate all the monthly costs, including the loan and ongoing payments, to determine ROI.
If your business isn’t maritime-related, however, but you’re considering a boat for business purposes – such as a floating office or entertainment events – there are a host of questions to consider before you shop. There are some tax advantages, but there are also costs and potential liabilities of owning a boat. Here are some questions to ask before committing to a purchase or loan on a boat for business purposes. As always, check with your tax advisor for specifics to you and your business.
What am I using it for?
Before buying a boat for your business, think about its purpose. Will it serve as a full-time or part-time office? Will you entertain clients there? And will you use it for personal reasons, such as family outings?
For tax purposes, the Internal Revenue Service (IRS) classifies boats as entertainment facilities, similar to airplanes, cars and vacation homes. If you own or rent a boat for business purposes, you can claim up to 50 percent of allowable expenses under IRS tax exemptions. Allowable expenses include the specific costs of entertainment, such as food and beverages, gasoline and third-party services such as catering or wait staff. However, you cannot deduct the long-term costs of using the boat, including loan or rental payments, moorage fees, insurance premiums, utilities or maintenance.
Is it a business asset?
In order to classify your boat as a business asset and be eligible for larger tax advantages such as depreciation deductions, you’ll have to maintain detailed documentation. This includes the dates you’ve used the boat, the names of business associates who came aboard and the nature of the business. To qualify as a depreciable business asset, the boat must be used for business purposes more than 50 percent of the time.
You may not live on the boat or rent any portion of it to your business or employer if you’re self-employed. The boat must be in the water — not in a dry-dock or storage facility — so in locations where seasonal storage is necessary, you may only claim deductions for a portion of the year.
Boats that are business assets may be used by the owner for personal benefits, but there are tax ramifications. Again, documentation is key to establishing usage. And unless the boat is consistently used for business purposes, it may be more effective to purchase it as a personal asset and simply deduct entertainment-related expenses. Any usage that does not meet the definition of a legitimate business purpose is classified as a hobby and is taxed as income by the IRS.
Should I incorporate?
Some boat owners shelter their assets under a limited liability company (LLC) or S corporation designation. This allows the owner to claim the boat’s profits and losses through personal-tax filings, and it may also protect personal assets. For example, if someone were injured on board, they could sue the corporation but not the owner. However, if your business is classified as a sole proprietorship with no employees or separate personal and business bank accounts, you might not avoid personal liability this way.
You should be aware of the implications of buying a boat as a personal asset and then transferring it to an LLC. If you have an outstanding loan balance, your lender may have the right to require immediate payment in full. Also, they are unlikely to approve a title transfer to an LLC because it limits their recourse if you default on the loan. Check with your legal advisors.
How much loan can I get?
Differing loan products may be available for smaller and larger boats. For example, a lender may finance a vessel worth as much as $4 million for up to 20 years if it’s at least 25 feet long and is documented with the U.S. Coast Guard. For smaller boats valued at $100,000 and less, your boat loan may resemble an auto loan, with slightly lower interest rates and terms ranging from two to seven years.
Some lenders tout their ability to finance a boat for less than a car payment, around $250 a month. Down payments are often in the 10 percent to 20 percent range, but some lenders partner with manufacturers to reduce or eliminate these requirements. You may be able to finance additional equipment, electronics, warranties and insurance into these loans.
Use a boat-loan calculator to determine your total monthly payment. For example, if you take out a $200,000 loan with no down payment for 15 years at 4.5 percent interest, your monthly payment would be about $1,530. You would wind up paying more than $75,000 in interest over 15 years. However, if you made an extra $100 a month in principal payments, you’d wind up saving nearly $7,000 in interest and pay off the loan more than a year in advance.