03 Feb Maritime Taxes: Saving Money On The Water
The siren call of boat ownership is easy to understand, here in South Florida. On a hot summer day, or even a crisp winter afternoon, getting out on the water for some sailing, fishing, snorkeling or water skiing can seem like the perfect reason to take the plunge.
Florida, and in particular the Greater Fort Lauderdale area where I live and work, is a major center for the motor yacht and boating industry. In South Florida, about 136,000 people currently work in the industry. According to industry figures for 2014, 19 percent of the over 30,000 boats sold in the U.S. that year were sold in Florida.
If you are ready to invest in a boat of your own, whether a modest fishing boat or a high-end yacht, it is worthwhile to pause and consider the tax implications, wherever you may live. Depending on the ways in which you intend to use your new watercraft, that impact could be minimal, or it could significantly change your overall financial picture.
Taxing Boat Sales
As with any big-ticket purchase, you should keep sales tax in mind when you are ready to buy your vessel of choice. There is no federal vessel tax, and federal luxury tax was repealed in the 1990s, so Uncle Sam does not take any particular interest in whether or not you choose to buy a boat. The states, however, want their cut. Every state is different, so be sure to take the time to understand any particular quirks in state law before you buy.
In Florida, for instance, boats are subject to the state sales tax rate of 6 percent, in addition to any local taxes. However, as of 2010 Florida has capped this tax, limiting it to the first $300,000 of a boat’s purchase price. Thus, under current law, Florida will not collect more than $18,000 in sales tax on your new vessel. In addition, many Florida counties impose a discretionary sales surtax, which can apply to the first $5,000 of the purchase price. These sales tax caps make buying a high-end boat more attractive in Florida.
The Florida Legislature’s revenue estimating committee projected in 2010 that the tax cap would cost the state as much as $1.4 million in the first year. Instead, tax collections on yacht sales in the state rose more than $13 million in that time. Buyers who previously spent large sums to form offshore companies in order to skirt the state tax found it cheaper and easier to simply pay the Florida tax outright. So before you buy a boat, consider whether you can get a better deal by buying and berthing it in another state.
The cap on boat sales tax was so powerful that other states are competing by passing caps of their own. Recently, Maryland, New Jersey and New York all passed or are considering passing laws to cap the tax on boat sales. Depending on your politics, you may consider this an unnecessary tax break for the wealthy boat-buying class, but based on the increase in tax revenue after Florida’s cap went into effect, you can also see how lowering taxes and state competition can sometimes lead to long-term economic benefits. More boat sales in Florida lead to more employment and growth in marine-related industries in the region.
For whatever sales tax you do pay on your boat purchase, you may be able to realize some benefit when filing your federal income taxes. Assuming you itemize your deductions, you can deduct local sales tax in lieu of claiming state and local income taxes. Especially in states – like Florida – that do not levy a personal income tax, this can represent a significant deduction. The main calculation of the general sales tax deduction is based on your adjusted gross income, but you can add sales tax paid specifically on a car or boat purchase to that amount.
Make sure you also understand how a state’s use tax may impact you. For the typical recreational vessel, use tax will not matter, because sales and use tax are mutually exclusive – if you pay sales tax on a transaction, you cannot also owe use tax. That said, if you plan to use a watercraft primarily in a different state than the one where it was purchased, it is worth taking the time to make sure you understand your home state’s rules and that your documentation is in order so you do not end up a target for overzealous state tax authorities.
You should also educate yourself on state and local taxes related to a watercraft which may apply on an annual or ongoing basis. Certain states and local authorities levy personal property taxes annually on boats docked within their jurisdictions.
On the other hand, some states offer particular tax breaks to boat owners. For example, last year Florida passed a law limiting the sales tax on boat repairs to no more than $60,000, or the first $1 million of repair costs. Like the sales tax cap on boat purchases, the law is intended to allow Florida to maintain its status as a leader in the marine industry. The hope is that the cap on boat repair sales tax will attract and retain repair and refit business for luxury yachts and other high-end boats in the state, thereby increasing revenue and employment, bolstering the local economy. If you own a yacht in a high-tax state, it could make sense to cruise it down to Florida for major repair work to save on taxes. Some states even offer a tax credit on fuel used for recreational boating. Yes, even the boating industry has a strong lobby group to push state legislators for tax breaks.
Living On Your Boat
While it makes sense to think of your vessel in the same way you might think of a car or recreational vehicle, there is another way to characterize it. In some cases, a boat can plausibly serve as a second home, meaning it can offer deductible home loan interest. In order to qualify, the vessel must include cooking, sleeping and toilet facilities; do not try to convince the Internal Revenue Service that you live on your jet ski.
There are a few other caveats. The deduction is on mortgage interest secured by the residence, so the deduction will not affect you if you bought your boat outright or used some personal line of credit, such as a credit card. Also, if you are already deducting interest on a second home, you cannot deduct both it and the boat loan interest in the same year, though you may switch between them from year to year if you wish.
A boat may even be your primary residence. Technically, as long as it meets the bed, bathroom and kitchen (or rather galley) test, you can declare your boat to be your main home. Note that if you use your boat for business, as I’ll discuss in the next section, you must divide your home between the part that is your primary residence and the part that is used to generate income. If your boat is your primary residence and it does not dock in the same port regularly, you may face a tricky tax domicile situation too.
Your Boat As A Business
Many boat owners use their boats to earn income, either on the side or as their main business. Depending on your situation, you may decide to use your vessel as a fishing charter, to run scuba or snorkeling tours, or to serve as a private ferry. As with a land-bound venture, you will need to take care to steer clear of the IRS’ hobby-loss rules by proving your genuine intention to make a profit, rather than just cover the costs of your time out on the water.
The benefit of establishing your activities as a genuine business is the ability to write off the boat’s depreciation, maintenance, equipment and fuel costs. You may not want to devote your boat exclusively to chartering; if not, you will need to keep track of the time and costs spent on private and business pursuits. Either way, you should always keep good business records and institute an accounting system to track your business activity.
As with other forms of self-employment, you will be responsible for income taxes and self-employment taxes. Remember that you may be subject to estimated income tax, which is due quarterly. Many boat owners choose to transfer their boat ownership to a limited liability company (LLC) for liability protection, but since this is a pass-through entity for tax purposes, it will not generally make much difference to your personal tax situation. If you are not used to running your own business, it may make sense to consult a tax professional or a Certified Financial Planner™ to make certain you keep up with your personal and business tax responsibilities.
If your boat business involves crossing state lines, you may need to be particularly careful about documenting the way income is sourced. Many people run up against the complications of conducting business in multiple states, and the water adds another complication. However, under a specific federal law (Chapter 46, U.S.C. Sec 11108(b)), working on navigable waters in the jurisdiction of more than one state is not sufficient to subject you to the states’ income tax rules. For example, if you live in Florida but work as a crewman on a vessel that operates in or passes through waterways of other states, only Florida – your state of residency – can impose its income tax laws (or lack thereof, since Florida has no state personal income tax). This law is particularly important for crewmembers on dredging vessels, which may operate in multiple states’ waterways (up the Mississippi river, for instance).
If you intend to find yourself operating in more than one state regularly, it may be best to consult a tax professional at the outset to understand what factors could affect your taxes. Where and how often a vessel docks and how much work is conducted on or connected to land can make a difference.
Some boat owners have no interest in running a small business, but would still like to offset the cost of owning a watercraft. An alternative strategy is to place the boat in charter with a reputable charter company. In such an arrangement, you typically retain ownership of the vessel, while the company assists you in managing what is essentially a rental business. Before you go this route, you will want to perform thorough due diligence and make sure your state’s business laws support such an arrangement, and you should understand your potential liability exposure.
What if your boat is also your office? The rules will be the same as for a home office ashore. The IRS primarily will consider whether you use your boat office exclusively and regularly for business purposes. For a boat-based office, the tricky requirement is usually the exclusive use test, because boats often have multi-purpose rooms. The IRS wants to see that you maintain a separate room or dedicated workspace that you use exclusively for business purposes.
If you are an employee and you use a part of your boat for business purposes, you may qualify for a deduction for its business use, but in addition to the exclusive and regular use tests, the boat office must also be for the convenience of your employer. You also must not rent any part of your boat to your employer and use the rented portion to perform services as an employee for that employer. If the use of the boat office is merely appropriate and helpful, you cannot deduct expenses for the business use of your boat office.
In many geographic regions it is only practical to use boats seasonally; note that an office aboard a vessel qualifies only for deductions during the time of use. IRS rules prohibit deducting office expenses aboard the boat during the period when you are not using the boat office for business purposes, or when the boat is in dry dock or storage.
A boat of your own can serve as a fun way to enjoy time on the water, a secondary or primary source of income, or even an unconventional place to call home. But besides the high costs of buying and maintaining a vessel, don’t overlook the tax considerations when deciding whether to answer the call of the open water.