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Go Back   SailNet Community > Out There > Cruising & Liveaboard Forum > Living Aboard
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  #21  
Old 08-12-2007
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Vacation Home

Oh yeah! Vacation Home. Shucks! That's what I meant to say. Silly me. What kind of freek would want to actually live on a boat anyway?
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  #22  
Old 08-12-2007
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Here is the alternative solution I've been looking at. My CPA advised the same as someone else on this thread that declaring part of your home a business dedections significantly raises your chances of audit.

What can easily be done is setting up an S-Corp or LLC and placing the boat as an asset of the company. Then, as long as the vessel does any work related activites all expenses associated with the upkeep/upgrade of teh vessel can be deducted against the business.

The details are best sorted out by a qualified CPA, but this is the best solution I've found.

For the original poster in WA there some great tax advantages to living aboard without doing a thing. I Live in TX, which like WA has no state income tax. That means that by owning the boat we can completely skip the outrageous property taxes that the states charge to make up for the lack of state income. No fuss on that one.
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  #23  
Old 08-12-2007
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Quote:
Originally Posted by LWinters View Post
What can easily be done is setting up an S-Corp or LLC and placing the boat as an asset of the company.
This is a great option for some, but it can depend on how big the the business is. The fees for incorporating (even in DE or NV) can still be excessive if the buisness deductions plus income are small. Incorporating as a point of economic diminishing returns at the small business level. Sole Prop may still be the way to go unless liability protection is needed. (Protecting yourself behind the corporate veil.)
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Old 08-12-2007
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So how do you get around the catch-22? You can't say "live-aboard", but you need mortgage forms. You said "up front". Are these forms available after the fact? As far as using and deducting as an office, are you saying that if I use it for a day sail, it disqualifies it as an office? Also, taking deductions for a home office requires a percentage of the home to be used as the office, IIRC.
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Old 08-13-2007
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Quote:
Originally Posted by LWinters View Post
Here is the alternative solution I've been looking at. My CPA advised the same as someone else on this thread that declaring part of your home a business dedections significantly raises your chances of audit.

What can easily be done is setting up an S-Corp or LLC and placing the boat as an asset of the company. Then, as long as the vessel does any work related activites all expenses associated with the upkeep/upgrade of teh vessel can be deducted against the business.
I find it really difficult to believe that setting up and properly maintaining an S-Corp or LLC would be less work than getting audited (if that even happened). Getting audited is only a big problem if you can't back up your numbers and claims. Also, "significantly raises your chance of an audit" means going from a statistically insignificant chance to a small but measurable percentage chance. Here is an article that quotes some actual statistics:
http://www.wwwebtax.com/audits/audit_avoiding.htm
That is for individuals; for businesses, the chance of an audit is greater. Guess what an S-Corp or LLC is?
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Old 08-13-2007
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The LLC is not the end all of getting around the tax man. Unless this is your main sourse of income ( and that would mean some profit to take the income from) the deductions are not deductible. Unless you have other passive income to offset, in which case it can be.

So, create the LLC, own the boat in the LLC, and maybe not be able to deduct ANY of the expenses, including the mortgage, until you sell the business. There is an expectation from the IRS, and a bank, that the business will show a profit over time. If it does not, and is just a tax shelter, you will be called upon to write a check. Be careful that your savings in taxes are worth the effort you are putting forth to dodge them.

Example: You want a boat and want to offset your expenses and find a place to dock her. A charter service company could be an answer. You create a LLC, buy the boat in the LLC, and put the boat in a charter fleet. End of the first year you have $8K of revenue and $16K in expenses including a mortgage,depreciation, dock fees, equipment, repair, etc. You have a loss. No deduction unless you have other passive income (other LLC's maybe making money) to offset. At the end of 2,3,4,5 years just do the multiplication and you get a number. No deductions!

At the end of 5 years you decide that this is not working ( DUH!) and sell the boat. ALL of those expenses are now deductible. The IRS is going to want to see your books, but it is legal. However, at the end of the day would it have been more advantageous to just take the mortgage deduction and get on with it. Depends on what the cost of money was during that time frame. Depends on what your original intention was. Depends on whether your lender was OK with it.

Oh, and putting the boat in charter increases every one of those expensives. Especially insurance! And a home business is a entity to sue, so you will have to have additional liability insurance to cover that outcome.

Bottom line, a home business in a boat less than 60' is probably not the way to go. Just pay the few extra dollars in taxes.
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Old 08-13-2007
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LWinters-
"What can easily be done is setting up an S-Corp or LLC and placing the boat as an asset of the company. Then, as long as the vessel does any work related activites all expenses associated with the upkeep/upgrade of teh vessel can be deducted against the business."
Boy oh boy, if you asked your CPA and he said "business use" could increase your odds of being audited, make sure he is sitting down before you run this one by him.
Playing games with LLCs and other corporate shells that do not demonstrate a bona fide business purpose and actions, is a great way to have the IRS declare them null and void. They can and DO do that, and then they hit you for tax fraud and you are guaranteed a detailed audit--not just an examination, like the "business use of home" might trigger.

The only legitimate way to play with a boat that way, is to start a real business which owns the boat, advertises the boat, markets the boat and charters out the boat TO THE GENERAL PUBLIC. And then, you get income back if the business succeeds. When you want to use the boat, you charter it just like the general public does, at the same rates. That's a common way folks pay for their own aircraft as well--but the IRS wants to see an "arms length" separation of you and it, which means hiring a captain or office manager or booking agency, whatever it takes to make the business run as a business, and you just another client.

Dummy corporations? Uh-uh, the tax men know all about them, and there are very few ways to get the entire wasps' nest dumped down your pants than to have the tax men suspect you're running a dummy corporation.
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Old 08-13-2007
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HelloSailor,

You are dead on there; if they think that you owe more because you tried to write off something that you weren't entitled to on your individual return, you will get a letter about that specific item with an adjustment made that you can just pay, or you can challenge by returning documentation. If you do the latter, you will get another letter indicating that they either accept that or detailing steps you have to take to continue fighting their assessment, which usually entails visiting their offices to go over that specific item. However, if they suspect more general trickery, it will be an inquisition from the word go. For some reason, the myth of the IRS boogey man and the oppressive audit persists. I only know two people personally who have been audited and one took less than half a day, the other less than two days. If you search around looking for audit horror stories you will find the vast majority of them are for small corporations (like S-Corps and LLCs) not individuals.
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I think there's a lot of confusion between "examination" and "audit". Apparently, if something in your returns changes and gets someone to say "Hey, this doesn't look right" they ask you for an examination. baic supporting documents like your checking account and bank statements, some questions about lifestyle...How come you've bought two Ferraris if you only show twenty grand in employment income. Then someone takes a statement, fills out some computer forms, and if there's a logical explanation for it (I got the Ferraris at Walmart on a two-fer sale, here's the registration and title, honestly only $1000 each, they were last year's color) that's that.

Versus an audit, where they will ask you to submit substantiation of every penny for every item claimed, and then start comparing it to others that are "baselined" for your business. Like if you own a deli, they know that each sandwich you report sold--on the average--contains so may slices of meat, two slices of bread, so many slices of lettuce and tomato and onion and pickle spears or chips, and a paper bag and napkin and a slice of wax paper...and they literally will send someone in to buy sandwiches every day for a week to see what you put in them. Then, if your receipts show you paid for everything....except, you didn't buy enough bread...They'll presume you DID buy the rest of the bread, using cash from under the table. They really do examine and tally the minutiae, and "forensic accounting" can be a powerful tool.
Got a gas station? Do some repairs for cash? Better make sure those parts you used were also paid for in cash. And even then--they know what percent of the business will be paid for in cash. You can cheat on it, some, but if you say "I only have 5% cash customers" and they know other shops report 20%...yeah, that's audit time. How many rolls of paper did you buy for the cash register? They'll count the lines and figure out how many transactions are missing.

then of course there's also a "field audit"(?) where they don't just ask you to come in--but they come to you place of business and start looking around. Home office? They'd better not see the dog's bed in there, unless the dog is on the payroll.

The taxmen aren't the NSA...but they're pretty darn relentless once they get PO'd. They don't care if you're dumb--they know that no one understands the tax code. It's when they smell a "moi? cheat vous?" coming on that they start to show teeth.

But if you do show them that WalMart receipt for the two Ferraris--they're STILL going to call the local WalMart store and confirm that WalMart actually sold 'em to you. And if you bring bank statements, they're still going to order up copies from the bank. Heaven help you if they don't match.

Still doesn't mean I like the way the whole thing is run. I keep trying to figure out a patent for "self taxing currency" where every time a dollar changes hands, ten percent of it just melts away and can't ever be used again, so the "tax" just has to be accounted for and as the "money" wears out, they can safely just assume the rest can be treated as taxes paid. (Like, you get down to the last tenth of the dollar, give it back to the bank, and the bank hands you back a dime and tells the IRS "there's another 90 cents in your account now".

It's the form filling, the paper stacking, the intentional waste of time and energy that I mind. If Caeser wants me to keep rendering unto him, he could at least make th job easier!

Last edited by hellosailor; 08-13-2007 at 09:57 PM.
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Old 08-13-2007
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You are talking about business return audits, which is what can happen if you go the S-Corp or LLC route; you are claiming that you have a business and they can tell you that they are going to come and watch you do business. On an individual return, they can ask you for the documentation to back up the entries on the forms and maybe deny or refute some of those entries. If you are truly in business for yourself and handling transactions, then it can turn just as ugly. But if you are a regular employee, or a 1099 employee or bill your services to a limited set of clients then it is fairly cut and dry unless they can prove some other source of unreported income.

I like your self taxing currency idea except that it might let the rich pay nothing until they spend so they would just horde. I kind of like flat tax, but it gets us back in the boat of figuring out what income is and special cases would keep popping up and the next thing you know it is just like the current code.
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