Any CPA's here? Deduction question

[ADOPO]

My CPA says you cannnot deduct the cost of ownership, period. I know you have an intrest deduction if you finance, but one would think that if the boat was used for business, say a floating office and to entertain agents and customers, it would be possible. Any feedback on this? I don't want to go to jail, or be audited. However I have this crazy idea that I will move a boat up and down the coast, recruite and train agents, charter, etc. Sounds foolish dosent it? I think this is a delayed reaction to divorce.

 

[whaler23]

My Dad uses his six-pack license in FL to do a few charters a year and writes off a lot of the expenses, insurance, etc... He's retired though and not sure how this relates to your situation, and he's never turned a profit either, I think that's the key to the write-offs.

 

[thoward]

We were told we could writeoff interest as a 2nd home or you could write off dockage as an office. For full writeoffs you would need to charter it.

 

[Genesis]

Ok, I'm not a CPA, but I paid for a LOT of that advice over the years, and my Dad IS a CPA. Here's the basics (but situations make for exceptions, SO TALK TO A CPA AND PAY THEM!)

1. If you are engaged in a business pursuit, that which you spend in pursuit of profit is deductable from income earned from that pursuit.

2. To be "engaged in a business pursuit" you must either: (1) make a profit for three out of five years, or (2) make an honest effort even if you suffer a loss. Beware on #2 - you WILL get audited if you declare losses for three straight years, and the IRS looks very dimly at "sham" business ventures (just intended to give you a way to write off the cost of your fun!) Expect "the exam" (you know where) if you try that.

3. T&E (travel and entertainment) expenses are strictly limited. You CAN write off (some of) the expense of entertaining clients, for example. However, you better be able to prove exactly how much you spent and the amount you can deduct is subject to limits.

4. If you mix business and personal use of a thing and try to write off the business portion you better keep very good records. This is a near-perfect audit trigger - people usually get tripped up trying to claim the "home office" deductions, although anything that you have split use claimed on will do it if there's enough skin on the table. There are all sorts of "ifs, ands buts and wherefores" if you were to try doing something like writing off some of the carrying costs of a yacht which was titled in your personal name and used for personal pleasure, but sometimes used to entertain clients. Writing off the fuel and catered food for specific outings under the T&E rules probably will get by. Trying to write off 20% of your slip and maintenance expenses because you claim 20% business use is an entirely different matter. I can think of about a half-dozen ways they can try to disallow that, and have no idea how it would shake out. IMHO that sort of gambit ain't worth attempting.

I don't pay one nickel more of tax than I owe, but I also don't bend the rules. The hassle involved once you get flagged for what is perceived by the IRS as abusive exploitation of the tax system is WAY beyond the benefits you'll receive in nearly all cases (unless you're REALLY trying to pull something and get away with it!)

I hate stroking the checks, but disallowed deductions as the consequence of an audit aloing with penalties and interest suck even more.

It sounds like you're trying to set up a situation where you can have your cake and eat it too. That almost never works. If you've got a CPA that says what you're trying to do - in your specific instance - won't fly, he's probably right.

 

[Boss Lady]

I don't know about write offs for boats, but personal use of corporate aircraft creates the situation where you are assessed an amount that is equal to commercial airlines for each passenger and it is charged to the individual as income for tax purposes. This means that you get a double bang tax if you own the company. This is some more hate the rich envy stuff, the friggin communists in the government want all of us to be equal and have to take the bus. You better have a CPA that knows his stuff. Playing with the IRS is a game you cannot win.

 

[ADOPO]

Thanks folks, this is my second day on this site, and I really appreciate everyone sharing their knowledge. It's great to get this type of feedback.

 

[Boss Lady]

The only legitimate way I know to do this is to actually run a business, fishing charters, sight seeing tours, whale watching or something, but you had better put a good effort into it or uncle sam will be calling. You might try a PM to RICKSA, he has a 45C on charter, maybe he can give you some pointers.

 

[Passages]

My brother is an IRS field agent. Does a couple 'wall to wall" audits every week.

What's amazing is the amount of discretionary lattitude given the to agents regarding allowed deductions.

I don't have the answers to your specific question but as a service to forum readers, I'll share a few unwritten IRS rules of thumb:

- Agents smell fear, which raises suspicion. Take a valium if you need to prior to the audit. On the flip side, arrogance will also draw more scrutiny.

-Agents assume everyone cheats until documentation proves otherwise.

- Don't think you can overwhelm that agent with boxes of unsorted receipts. He'll take as much time as needed, even if he needs to come back.

- If you make under $90k/yr and have mostly employee wages, you probably will never see an auditor.

- Chartitable deductions don't raise a flag until you hit 15-20% Gross income.

-Home equity lines of credit don't raise flags if less than $100k.

-small businesses, especially cash business get lots of audits. Pizza joints and laundramats are a favorite target.

-Schedule your audit on a Friday if possible.

-The IRS is like the Mafia. They don't want to kill (incarerate) you, just skim their share off the top. Criminal proceeding are usually reserved for either celebrities or big dollar cheaters. The majority will pay tax due plus interest. Some will be pay a penalty but odds are if you are nice to the auditor, thepenalty will be waived.


PM me if you have burnig questions you'd like an agents perspective on. My brothers territory is NJ & NY.

 

[Freebird]

My CPA says you cannnot deduct the cost of ownership, period. I know you have an intrest deduction if you finance, but one would think that if the boat was used for business, say a floating office and to entertain agents and customers, it would be possible. Any feedback on this? I don't want to go to jail, or be audited. However I have this crazy idea that I will move a boat up and down the coast, recruite and train agents, charter, etc. Sounds foolish dosent it? I think this is a delayed reaction to divorce.

ADOPO (Audits Don't Often Pay Off).

I'm no CPA, maybe a CPITA, but I do know a thing or two about this subject being a small business owner. Karl and Jim covered things very well. The only thing I would add is DO NOT try to work an office scenario into the deal. It is a sure fire trigger for a land based home office deduction. I can't imagine trying it with a boat!

As for the chances of a small business being audited, I do seven figures in gross sales, and I've never been audited. Knock on wood, but I'm not one to mess around with taking chances. I did have a sales tax audit a couple of years ago, and the only thing they found was where I forget to pay sales/use tax on a set of tires I had purchased out of state.

Now that I know pizza places get audited a lot, I suppose I'll scratch the idea of installing a pizza oven for when the safe business is too slow.

 

[Boatsb]

My $.02 ( 2 cents worth for the southern boys) is from my accountant.

He tells me to leave the home office and other triggers out and deduct items that I use for business.

My second phone line is for business, My high speed modem is too. Computers (not personal ones for the wife and kid) office machines and supplies.

I deduct actual business expenses too as in customer meals, travel and hotel but leave my personal stuff seperate. I have a work vehicle that is deducted along with its expenses and I do not mix the repair and maintenance bills with my personal cars.

My business structure may be differant but the guidelines seem to make sense although I cant figure out how to claim the boat Ido have pictures of me taking customers out on it for demos (one of my largest customers produces fishing shows) and will see what he feels is correct and defendable.

 

[Passages]

If you take out clients, you can deduct the actual costs of the outing. Fuel, food, bait etc.

The Coast Guard has lightened up on it's definition of a Charter. If you go out fishing with your buddies, it's now OK to share costs of the trip. You just can not make a profit.

 

[Bill Allen]

I have two boats, one I run as a dive boat and one my boat. I never use the dive boat for my own use. Deduct all expenses on it. Mine I pay all the bills, we set it up this way as my accountant at the time felt boats always raise a flag as there is so much cheatting attempted by tax payers. I hear all the time how people are getting their ticket so they can deduct there boat. Way to much record keeping for me. Bill

 

[Genesis]

Yep. Trying to deduct boat expenses (beyond direct fuel costs for an outing and perhaps catered food) is asking for it. If I regularly took clients out fishing (not as a charter, but as a person) as a means to "grease" a business deal you can bet I'd deduct the fuel under the T&E line item though - that's a VERY defensible deduction provided that ALL the people on the boat (other than you!) were clients.

I'll take the risk of an audit on that one, given how much money is typically involved, but I don't believe you'd get hit there. Just keep your documentation in order and DON'T stretch it, because you very well may end up getting audited. Likely you'd get hit with a correspondance audit on that one if it was fuel related only, and a copy of your receipts with a notarized statement to the effect that the fuel expended is (1) ALL you're claiming, and (2) those trip(s) on which the fuel was consumed were EXCLUSIVELY for business purposes would probably put an end to it.

Maybe.

Now if you tried to do the "apportionment" thing with a boat that wasn't EXCLUSIVELY for business I suspect you'd get nailed immediately and they'd likely, in the end, disallow ALL maintenance and slip costs - basically everything EXCEPT the direct costs of the voyages used for client enticement.

Their argument is going to be that you'd eat those expenses even if you never used the boat for business at all.

And they'd be right.

One thing that my CPA told me years ago - don't even THINK about trying to claim the home office deduction, although since I sold my ISP I absolutely have a defensible claim to it. Its a nearly sure-fire audit trigger and unless you're willing to defend it every year its not worth it. Since the total I could deduct is relatively modest anyway I don't bother trying it.

 

[SKYCHENEY]

Yes, and then there is the alternative minimum. That rule is going to disallow most of your deductions anyway. So, why bother. They have it figured out so that you pay one way or another.

 

[CARL GUZMAN]

I think as realtor you may have more leverage because you can show homes on the water with the boat. our percentage of waterfront sales is like 10% of gross sales but I do take out client almost once a month and show off Naples water front homes , and I do deduct expenses on those trips only...

Now I just need some one from the CDR get together to say we talked real-estate on that trip that was a bunch of fuel......