Boat Taxes and Deductions for Boaters
Boating and tax deductions are two sweet concepts and the two can go together under certain circumstances. There are several ways you can legally write off some of the costs of boating, thereby reducing your tax burden. Let's go over the following boat tax deduction scenarios:
- Donating Boats for Tax Deduction
- Boat as a Second Home
- Boat as a Business
- Charter Boat Deductions
- Boat for Transportation
Donating Boats for Tax Deduction
Donating your boat to charity can prove more lucrative than selling it. You can only deduct its “fair market value” and for that you’ll need an appraisal in the form of a survey. The charity to which you donate it must be a non-profit organization. The benefit of donation is that most of these charities can manage the paperwork for you and the boat is disposed of quickly without needing to find a buyer.
If the charity sells your vessel, you can claim a tax deduction for the amount the boat sold for (not the appraised value if it’s higher) or at least $500. If the charity uses the boat for its mission, you can deduct the full fair market value instead. The charity should give you a Form 1098-C for your accountant.
Boat as a Second Home Tax Deduction
You can take the home mortgage interest deduction for one second home in addition to your primary home but you must itemize deductions. A boat is considered a second home for federal tax purposes if it has a head (bathroom) a bed (sleeping berth) and a galley (kitchen). You’ll need IRS Form 1098 to deduct the interest and also any points paid to secure a loan.
Boat as a Business
If you work from your boat, you can take a home office deduction although that may raise a flag quickly. Additionally, if you use your boat to entertain clients, you may qualify for a deduction as an entertainment expense. You must have a reasonable expectation of gaining future revenue as a result of this entertainment during which you must conduct at least some business discussions.
Thorough documentation of entertaining clients is necessary for each expense including date of use, location, reason for the use and the occupations of the persons aboard. The limit of the deduction is 50 percent of the costs associated with this outing (as with any other travel or entertainment expenses). You can include costs specifically related to that outing: fuel, food, drinks transient mooring or entry fees (such as for a fishing tournament).
Charter Boat Tax Deductions
You can charter your boat (acting as the captain) but you need to show genuine effort at making a profit. You’ll need a U.S. Coast Guard license to take out six paying passengers and you may need to increase your boat insurance if you use it for commercial purposes. You can write off depreciation (for example a straight-line 7 years), maintenance, boat equipment purchases, fuel and mooring costs. Detailed records of every expense as well as the amount of income will be necessary. To avoid extra attention from the IRS, you’ll need to make a profit in at least three out of every five years. You can only deduct the percentage of overall expenses that you use the boat for business. You cannot write off expenses when you’re pleasure boating. You’ll be paying income taxes on the revenue you earn so do the numbers before deciding on this course of action.
Boat for Transportation
If you use your boat to commute (at least 50% of the time for business transportation) you can deduct fuel costs, insurance, repairs, dock or slip fees, crew salaries, hurricane storage, and depreciation. You cannot use the boat to entertain clients or that will nullify the boat transport deduction.
Taxes are Inevitable, But Can Be Managed
As the saying goes, “there’s no escaping death and the taxman,” so discuss the nuances of the above situations with an accountant or maritime attorney. There are many exceptions as well as frequent tax law changes so the issues are difficult to keep up with and the penalties can be high. Consult with a tax expert before settling on any course of action.
Frequently Asked Questions
How to avoid sales tax on a boat?
This is a tricky one in that technically, there are only two ways to avoid paying the sales tax on a boat purchase: 1) buying and using the boat in a state without sales tax (Montana, New Hampshire, Delaware and Oregon—and to some degree Alaska) or 2) using the boat in a state with sales tax for only short periods of time. If you avoid the sales tax in one state but boat in another state that has sales tax, you’ll eventually be assessed a “use tax.”
In some states like California, you can take offshore delivery (sign the ownership transfer papers) off the coast outside the state’s territorial waters and then use the boat somewhere outside of the state for a minimum of one year before bringing it back to California. Florida has a similar exception and caps the amount of taxes due on a boat purchase to $18,000. California has no limit. Every jurisdiction has different regulations. Proof of the offshore location where you took possession of the vessel may be required.
Is there a property tax on a boat?
Property taxes are assessed on boats in most states. Some marinas may also assess a tax on the slip (or the square footage of water in your slip if you keep your boat in the water). Other than removing the vessel from that marina and the state, there’s no way to avoid property taxes.
How do I get a fuel tax refund for my boat?
If you boat in a state with a fuel tax, you may be eligible for a refund. The “highway use tax” is earmarked for repair to damaged highways, roads and bridges caused by cars. Because boats don’t use roads (unless they’re trailered), some states (about a dozen) recognize this isn’t fair and provide a refund if owners save their fuel receipts and complete online forms.
Want to learn more about boat ownership? Read...
- Costs of Boat Ownership
- Boat Financing: Helpful Information for Boat Buyers
- Insuring Your Boat
- How to Register a Boat
- Boat Maintenance