Charter ownership
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Another possible tax strategy is placing your boat into charter service to defray ownership costs. Doing so converts your boat from a personal asset to a business asset, allowing you to qualify for business tax deductions that would not be available if the boat was used strictly for pleasure. It’s certainly not for everyone, but it can generate significant tax savings in some cases, such as writing off dock fees, insurance, maintenance and loan payments.
the break-even point (although excess passive losses can be carried forward to offset passive income from future years). Unused passive losses can be claimed in full in the year the taxpayer disposes of his or her entire interest in the activity (selling the boat, for example). If you have passive income, passive losses aren’t a problem; if, however, you don’t have passive income, you need to “materially participate” in the business in order to create active business losses, which can be used to offset active income.
Turns out your boat may generate substantial tax savings, but only for owners who do their homework and follow the rules concerning boat-related tax deductions. Operating your boat as a business also allows you to take advantage of the Section 179 election, which allows taxpayers to deduct the cost of owning a boat on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. A key point is understanding the difference between passive and active income and losses. Lease or rental activity is considered a passive activity, meaning it neither produces active income or active losses—no matter how much an owner participates. If you sign a contract with a charter company that guarantees revenue, then you likely have a lease—meaning you won’t be able to claim the vessel as a business activity. Passive losses can’t be deducted against active income (i.e. money earned on a job) and can only be deducted up to
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Any lease or rental activity is passive, regardless of whether the taxpayer materially participates; however, if one of six exceptions is met, the activity is not termed a lease or rental for purposes of the passive loss rules. One of these exceptions is when the average period of customer use is seven days or less—the typical length of most charters. Another is when the business/taxpayer offers personal services along with the charter, such as provisioning, outfitting, boat use instructions, transportation services—all of which can be subcontracted out by the owner, if desired. Both of these tax “safe harbors” are typically met when a boat is managed by a charter service; however, be forewarned that all fall within a quasi-gray area of the tax laws and are open to audit challenges.
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