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Taxes and the Liveaboard

20K views 45 replies 19 participants last post by  petegingras 
#1 ·
I know this is dependant on region and state, but as we come upon the tax season soon, I''d like to know how to take advantage of the deductions we can get for making our boats our homes. I''m in Washington State, so hearing from anyone here would be a plus.
 
#3 ·
Save Tax Money

:D OK Sailors, I feel the need to resurect this old thread because I want to know more.

It makes sense that the interest on a boat loan is deductable on Sched-A. I would like to know if anyone out there is filing Sched-C deductions against their maintenance costs and marina fees?? (Business use of the home?)

If a portion of the boat is used for business purposes, that should also make the appropriate portion (%) of all fees and expenses deductable as well. If one is a writer or runs an online business from one's liveaboard, there are income deductions that may apply. A V-berth (second cabin) on a fair sized vessel can constitute over 10% of the boat area. Even more if one figures the area against total "living space."

Even if 10% space can be attributed to one's profession, this can be applied to costs such as slip fees, liveaboard fees, pump-out, hull maintenance, registration, and insurance. Sailors spend a lot on some of these things. My math shows that 10% of "a lot" equals "pretty good."

It would be great to hear from some of those "techies" out there that do online work from their boats or from writers/authors of all those sailing magazines/books to chime in with their tax saving experiences.

Thanks!!
 
#4 ·
I have an accountant looking into this issue for me. I intend to purchase a boat for around $125,000 and use it as housing and transportation for a photography business as I sail around the world slowly. My contention is that I should be able to deduct the total cost just as if it were my car used for business on land. I'll let you know what I learn. It will be awhile before I here back from her. She has a client that is going through an audit and she is going to ask the auditors some anonymous questions on my behalf.

Jeff
 
#5 ·
Floating Studio

Not bad. I'm interested in what you find out. The hardest part will showing that 100% use is dedicated to professional purposes in order to dedcut all the expenses. You may have to show the intent to make a pofit, and not just be a guy with hobby. Hobbies don't count. I've heard about failed audits becasue the IRS decided the craft whatever it is was not legitimate.

You may ask her about incorporating under an LLC or S-Corp. It may be cost prohibitive for you now, but the generally this concept would benefit you in the long run. As a corporation you can deduct all your expenses from your income and only pay taxes on the net (true profits). The only draw back is that somewhere you have to show a profit (5 years?) in order to show that your not just playing games with the IRS.

My wife runs a home based business and we're moving to a bigger boat with the intent of outfitting a cabin as a small studio for her.

Good luck!
 
#6 ·
I've had a home office for my business for over 20 years. My accountant told me I qualify for the type of deduction you are asking about. One room is only used for my business. But, he then told me that there is a check box on your tax return you need to check if you are claiming the home office deduction. That check box becomes a red flag for the IRS computers and your chance of audit goes way up. I didn't want the hassle of an audit, even tho I'm clean, so I didn't take the deduction.
If you take the deduction be fully prepared for an audit of your books.
 
#7 ·
Home Office vs Business Use of Home

XORT,
I wonder if there is a differentiation between a "home office" and "biz use of home". The difference benig a "shop" or "studio room" that is dedciated to a craft or active production of some sort. I'd have to review my 1040's, but I don't think that we have ever checked such a box.

I would reasonably assume that someone owning a desk, phone and computer could be tempted to abused and stretch the tax code. We, however, have a shop set-up for production, and have no concerns about audits as we use the existing code conservatively.

Moving her craft operations aboard a boat will be a little tricky, but it's not too space intensive. A cabin with a work surface, tools, materials is all she needs right now. I just ran some numbers and the annual deduction on just slip and liveaboard fees looks equivalent to almost two months of those fees.

We're also not raking in the dough, and based on that I don't think that we look like a very lucartive target for some auditor's portfolio.:D
 
#13 ·
I wonder if there is a differentiation between a "home office" and "biz use of home". The difference benig a "shop" or "studio room" that is dedciated to a craft or active production of some sort. I'd have to review my 1040's, but I don't think that we have ever checked such a box.
This has got me wondering, as well. I do underwater video and the boat is sometimes used to get to sites. Not really an office in that case, more like transportation.
 
#8 ·
... speaking of auditors. I often run into experts on forums like these. They come out of the wood work at drop of hat whenever one brings ups issue with boats, politics, food, ad whatever.

I have never noticed anyone pop in and say, "Well funny you should ask. I'm and auditor and I say ..."

Come to think of it I've never met anyone who admited that they an IRS auditor! :D
 
#11 ·
The boat loan is considered a mortgage just like a home loan by the IRS IF the boat has cooking, sleeping & toilet accomodations. If you bought the dockage as a part of the boat loan then you might be able to deduct the interest.

Remember, it's the interest you deduct from taxable income.

6string...haven't heard back from you yet...any news from your accountant?
 
#12 ·
The www.irs.gov web site pretty much answers all these questions very clearly, including the critiera for "home office" deductions. If your numbers are valid, it should not be an audit flag any more than filing a Schedule-C is an audit flag. After all, even the IRS knows that the "postage" you buy for your own business is usually going to be used to send out personal mail as well.<G> Some things they let go as trivial.

On the home office deduction, they are fairly strict about "exclusive use" and "separation". If you have a home office, but sometimes the grandkids sleep over....Ooops, not in that room. At least, not in any way that is documented.

I've known a few IRS auditors, and enrolled agents. Most of them really don't care about the little things, they assume everyone cheats a little and they really don't care to waste their time on it. On the other hand--if they think are being conned, they become bulldogs.

One fellow audited (full audit, not just an examination) a "fruit and vegetable" store. Cash business where cheating is rampant, like many food and entertainment businesses. He couldn't find a thing wrong with the shoeboxes of receipts they brought him. Several years later, same location new owners (all resident aliens coming and going, not that US citizens do much differently) and he's going over a shoebox of receipts again. He sees a receipt for a cooler that just looks familiar.
So he pulls the COPIES that were filed during the audit of the previous business at that location, and finds they even passed on the same boxes of receipts--with just the dates altered. Ooopsie, he took the entire box and said "ALL DEDUCTIONS DENIED." Then they went to the tax court--and the cleaners.

Office on a boat? No problem, just make Real Damn Sure you can document it. If you get pulled for a tax examination (which is nowhere near what an audit is) they will simply ask for documentation, and if that is in order, that's all.

But if they stop by the boat, and find your "office" is also being used to stow something, or has the nav desk in it...Off to the cleaners you go.

Incidentally, the boat loan is NOT considered a home mortgage unless the proper paperwork has been filed for it. I don't know the form number--but there is a "mortgage loan" form that has to be filed, up front, by the lender, to make it qualify.
 
#16 ·
Deductable interest on a boat loan?

Incidentally, the boat loan is NOT considered a home mortgage unless the proper paperwork has been filed for it. I don't know the form number--but there is a "mortgage loan" form that has to be filed, up front, by the lender, to make it qualify.
HS- Proper paperwork? This is interesting. Would this make a lender less apt to approve a boat loan for a "live-aboard?":confused:
 
#14 ·
One thing that the IRS requires for the boat to be considered a second residence is a permanently installed marine head and a permanently installed stove. A porta-potty and camping stove don't cut it regardless of how expensive the boat is.
 
#15 ·
Max, if you are self-employed your "transportation costs" to perform your work would be covered the same way, whether it was by car or boat. It's still a personal vehicle being used for business, although I'd bet that if you asked the IRS what the "business mileage rate" for boats was, you'd get transferred a few times before someone broke down in tears--or gave you an answer.<G>

OTOH if you chartered someone else's boat--the whole charter cost becomes a business expense. But if your boat is your home...you haven't left home at all, have you?

If you don't have a CPA or EA doing your taxes, you can always write to the IRS and ask for an "advisory opinion" on what would be proper. That might not be binding on them (even though they issue it) but it would ensure that you at least weren't penalized for doing it that way afterwards. (They might disallow the deduction, but normally that's all--no vegence fee.)
 
#17 ·
Shack-
I don't think it has anything to do with the lender being more or less willing, but rather whether the lender knows what they are doing.
In case you haven't heard there is this stock market "adjustment" and failure of some mortgage markets going on right now, because so many big lenders had no idea who they were lending money to.
Same same for boat lenders. A marine lending company, a credit union, a savings bank, a mortgage loan company, maybe your local loan shark?<G>...All may be giving out "boat" loans and sometimes all they know is that it is a secured loan, with no concept that you want to take mortgage deductions for living on it.
From what the IRS said, if the lender doesn't give you the right form--then all you have is a secured loan, not a mortgage, and you can't take the mortgage deductions without having the right form on file for the IRS.

For instance, in theory I could charge an older cheaper boat to the foolishly large line of credit on my credit card. And then, immediately transfer that balance due to a new credit card which is offering me "zero percent APR for life on all balance transfers made in the first 90 days". Effectively, I could get the boat loan for ZERO PERCENT INTEREST. But since it would be a "credit card retail purchase"...there's no IRS form, no one at the cc company has any idea what form I need, and the IRS probably would argue about the deduction.

I honestly did get a "zero percent for life" invitation in the mail today....and there's a devil on my shoulder saying gee, this could be interesting.
 
#18 ·
Gotcha!

HS -
Okay, that makes sense. Now, on a slight change of tack - why then would I hear people talk about avoiding mentioning "live-aboard" when securing a boat loan? If one plans to move aboard after purchase or even somewhere in the future ... why is that such a negative thing? How would live-aboard status negatively affect the boat loan process? It seems counterintuitive if one wants to use mortgage deduction?

That devil on your shoulder probobly has a tattoo under his arm with legal fine print that commits you to something- somewhere. :rolleyes: Can't get something for nothing.
 
#19 ·
"why then would I hear people talk about avoiding mentioning "live-aboard" when securing a boat loan?"
Probably because the moneylenders get nervous when you tell them "I'm going to take your assets and pretty much cut all my local ties and obligations and, haha, put lots of use on the asset and possibly take it to places where yo can't find it much less repossess it."

International repossession can be a costly business, especially if the vessel is occupied. Conventional lenders like conventional risks and conventional people. And except for a rare few cultures that sure aren't in the US, "boat people" are unconventional. Which makes them risky business.

Got a house? Don't pay your boat bills? OK, I can take action against the house and other assets. Only asset is you boat? Gee, first I have to FIND it. So, better to say "I'm going to take a deduction for a vacation home, I need those papers" and not say a thing about moving aboard and cutting the lines.

At least, that's how I've heard it explained, and it makes sense to me.
 
#22 ·
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.
 
#23 ·
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.):)
 
#24 ·
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.
 
#31 ·
Interest Deduction

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?
Bestfriend & Hellosailor
I did a little research ... here's the bottom line up front from what I understand.
-A properly equiped boat can qualify as either your "Main" or "Second" home.
-A loan on such an residence does not require a Form 1098.
-The interets paid is decuctable.

My lender mentioned that they knew nothing about any "up front" requirements for claiming mortgage deductions. Here's what the IRS says:

Pub 936 Home Mortgage Interest Deduction,
Page 2, Qualified Home

Qualified home "... boat, or similar property that has sleeping, cookin, and toilet facilities."
Main Home - "You can have only one ... ordinariliy live most of the time."
Second Home -"a home that you treat as your second home."

Page 7, Mortgage Interest Statement
"... you generally will recieve a Form 1098 Mortgage Interest Statement, or similar statement from the mortgage holder."

Instructions Form 1099,1098 ...
Page 1098-1, Mortgage Defined
(pp. 22 on the .pdf)
"If property that secures the loan is not real property, you are not required to file Form 1098. However, the borrower may be entitled to a dedcution for qualified residence interest, such as may be the case for a boat, which has sleeping space and cooking and toilet facilities, that the borrower uses as a home."

BUT WAIT THERE IS MORE!!! :D

Qualified residence interest is defined in § 163(h)(3) as any interest that is paid or accrued during the taxable year on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer.

Section 163(h)(3)(B) defines acquisition indebtedness as any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence.

The term "qualified residence" is defined in § 163(h)(4)(A) as the principal residence (within the meaning of § 121) of the taxpayer and one other residence of the taxpayer that is selected by the taxpayer for the taxable year and that is used by the taxpayer as a residence (within the meaning of § 280A(d)(1)).

WHEW!! :p
Pass "Go" and collect $200 ... or whatever it makes you.

Disclaimer - I'm just a guy with internet access and time to kill. I'm not tax lawyer. So don't cheat on your taxes because it buys my ammo and fuel.
 
#26 ·
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.
 
#27 ·
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.
 
#28 ·
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.
 
#29 · (Edited)
ar-
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.<G> 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.<G>

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.<G> 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!
 
#30 ·
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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