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If you like big boats and you cannot lie.
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The post-punk philosopher and M&Ms enthusiast David Lee Roth once said, “Money can’t buy you happiness, but it can buy you a yacht big enough to pull up right alongside it.” So, if you like big boats and you cannot lie, this week’s discussion will put a salty smile on your face.

Summer is here, which means yachting and yacht sales are in full swing. (Most experts define a “yacht” as any pleasure boat longer than 10 meters, although if you have a friend named Chip, he may disagree.) The National Marine Manufacturers Association reports boat sales hit a 13-year record in 2020, despite (or perhaps because of) the pandemic. That included 341 superyachts reaching 24 meters or more. A year later, new boat inventories are still tight after manufacturers, especially the ones who make the really sexy Italian models, shut down in some cases for months.

You wouldn’t think that people who can afford to spend millions on a toy need any help from the IRS. The U.S. Superyacht Association says that a 180-foot yacht costs about $4.75 million/year to operate, including $1.4 million for crew salaries, $1 million for maintenance and repairs, $400,000 for fuel, $350,000 for dockage, and $240,000 for insurance. But yacht owners have always enjoyed a few tax breaks to help subsidize their expensive hobby. Here’s a quick rundown of the good, the bad, and the ugly:

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  • The Good: If your vessel has a kitchen, a bed, and a bathroom (sorry, a “galley,” a “berth,” and a “head”), you can deduct interest you pay to finance it as a second home. You can also deduct your sales tax if that’s more than your state and local income tax for the year.
  • The Bad: The Tax Cuts and Jobs Act of 2017 sharply limited both of those deductions. Previously, you could deduct interest on up to $1 million of “acquisition indebtedness” for your primary residence plus one additional home. The TCJA cuts that limit to $750,000. The TCJA also capped your total state and local tax deduction at $10,000, even if you just dropped $100,000 in sales tax on a million-dollar boat.
  • The Ugly: As for the cost of the boat itself, code section 274 denies deductions for any facility used in connection with any “entertainment, amusement, or recreation.” This includes your yacht, your hunting lodge, and your fishing camp, too. You can still deduct the cost of meals and drinks you serve onboard, as well as the bazillion gallons of fuel you burn. There’s just no break for buying the boat when you use it for entertainment. (This is usually called “the entertainment facility rule,” but we’re going to call it “a buzzkill.”)Having said all that, the TCJA did some buyers a favor. Many owners charter their boats when they’re not using them to generate extra income to cover operating expenses. The TCJA boosted the 50% bonus depreciation allowance for that use to 100%, meaning you can write off up to your entire purchase price for both new or used yachts. Boat owners typically compare owning a boat to standing in a cold shower tearing up $100 bills. But hey, if that sounds like a promising business model, go knock yourself out!Yachters are used to hearing amber alerts go off as their money disappears into their 1,000 gallon gas tanks. But that doesn’t mean Uncle Sam has to join you for your cruise. (He likes drinks and snacks, too, especially those little cucumber sandwiches with no crusts the steward serves with mimosas.) So call us before you christen your new money pit — we’ll see if we can make the most of a spendy situation!

Tax Beat is a weekly column with a unique angle: making taxes entertaining. Every week Ed explores the humorous aspects of taxes and current events. 

Edward Lyon

Edward Lyon

Edward A. Lyon is CEO of the Tax Master Network, where he's coached tax professionals to add planning and financial services to their business since 2005. Go here to join the network. Go here to upgrade your membership or discuss opportunities in financial services.
Edward Lyon

Edward Lyon

Edward A. Lyon is CEO of the Tax Master Network, where he's coached tax professionals to add planning and financial services to their business since 2005. Go here to join the network. Go here to upgrade your membership or discuss opportunities in financial services.

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