Yacht Owners Enjoying a Huge Perk -- Tax Breaks

By ERIC NALDER
SEATTLE POST-INTELLIGENCER INVESTIGATIVE REPORTER

One grateful local yacht owner calls it a federal subsidy: Several tax dodges, ranging from perfectly legal to dubious, are helping wealthy owners keep their big pleasure boats on the water, in Puget Sound and across the country. Some ultra-rich yacht buyers are expecting to deduct millions from their income tax next year by depreciating their pleasure craft under the provisions of the Bush administration's tax-relief program passed by Congress in 2003. About 500,000 boat owners nationwide can decrease their income-tax bill every year by declaring their vessels a second home. Some others collect healthy deductions from putting their boats into charter arrangements that may skirt the provisions of the tax code. And some corporations take deductions on yachts that seem to stretch the definition of a business resource.

Several yacht sellers gathered at the floating boat show on South Lake Union last month said most of the big pleasure boats on the water are supported by tax incentives.

 

"I would imagine that most of the people with boats over 50 or 60 feet are probably working some kind of tax dodge," agreed Jimmy James, a semiretired certified public accountant from Kingston who has advised many boat owners. "People with enough money to buy those boats got there by having tax dodges."

 

 

Four tax loopholes underwriting pleasure boats from Key West to Puget Sound were investigated by the Seattle Post-Intelligencer through an examination of licensing records and tax laws as well as interviews with boat owners, yacht sellers, charter companies, lawyers, regulators, accountants and lawmakers.
The tax deduction methods:


• BARE-BOAT CHARTER (bare meaning without a crew): More than 600 big-boat owners in this state annually deduct all their expenses -- from moorage costs to the purchase price of on-board plasma-screen televisions -- because they let others use their boats for a price. Thousands of other big-boat owners do so nationwide. Most hire management companies to charter their boats, and nearly all chronically lose money, at least on paper. But as one Kirkland couple found out, those who have declared losses at tax time may be out of bounds.

• ACCELERATED DEPRECIATION: A local businessman expects to save $3 million on his taxes next year by depreciating half the purchase price of a 130-foot yacht under a provision of the Bush administration's tax-relief laws. A yacht dealer in Annapolis, Md., said 10 of his customers are doing the same. The measure expires at the end of the year.

• CORPORATE YACHTS: The region's largest real-estate company and a small electrical contractor in Poulsbo both have a showy asset -- a corporate yacht -- and both write off the expenses at tax time. Other companies that own yachts, including Paccar, wouldn't discuss whether they claim deductions related to their boats. Some companies say a yacht isn't a business expense, while others defend the deductions.

• SECOND HOME: A small sleeping platform, a propane camp stove, a port-a-potty and a tiny sink with a water supply are all you need to qualify your boat as a second home. The law says you have to stay on the boat 14 days a year, but boat owners say nobody checks. A Tacoma yacht owner says the second-home deduction helped lower his tax bracket, while boat manufacturers say they install the necessary amenities on small boats with cuddy cabins so buyers can qualify for the tax break.

Each of these tax breaks is examined in detail in this series. Today, separate articles cover the depreciation and corporate-yacht deductions. Tomorrow's coverage will include stories on the second-home and bare-boat charter deductions.

IRS officials said they don't keep track of how much money the government could collect if these deductions were eliminated. Conservatively, the annual total could approach $1 billion.

To many, tax fairness is a major issue with the nation facing a $475 billion federal deficit this year. Others say stimulating the economy is equally important. Members of the congressional committee that writes tax laws sharply disagree on yacht subsidies.

"When you start to see this kind of stuff, you see how unfair the tax structure is," said Rep. Jim McDermott, D-Seattle, of the House Ways and Means Committee. "These specifics are just, in my view, atrocious."

Republican Ways and Means Committee member Wally Herger of Northern California disagreed, focusing in an e-mail response on the jobs created by such tax incentives.
"With almost any tax law change, there will be attempts by some to abuse the system and Congress will work with the Treasury Department and IRS to ensure closed tax loopholes stay closed," Herger said.

Republicans aren't the only supporters of boating tax breaks. Rep. Patrick Kennedy, D-R.I., introduced bills in 1998 and 1999 that would have given yacht buyers a credit on their taxes of 20 percent of the purchase price, up to a limit of $2 million.

Rhode Island has eight yacht-building companies. To Tom Rich, co-owner of New England Boatworks, the Kennedy bill "would have been a real home run, not only for the boat builders but also for the taxpayers."

Some wealthy yacht owners said they don't believe in taking the tax breaks.
"I'm enjoying life, and there is no reason to do the tax garbage," said Jules Harrison, 64, a retired car dealer from Twin Falls, Idaho. "It's not necessary. I never ran my businesses that way, and I don't run my private life that way."

Harrison bought his 54-foot yacht Miss Treva this year for $960,000, records show.
Boating doesn't cost the government as much as roads for automobiles, but hundreds of millions are spent annually on the services of the Coast Guard and on dredging, drawbridges, locks and navigation aids.

Keith Ashdown, vice president of Taxpayers for Common Sense, a non-profit organization that promotes tax fairness, said he particularly dislikes the way yacht owners classify their floating palaces as business expenses.

"I can't think of any worse provision in the tax code in that it is benefiting people who don't need a dime of help -- rich businessmen," Ashdown said.

Larger vessels eligible for tax breaks are a minority of the 264,000 boats in Washington state, said Michael Campbell, president of the Northwest Marine Trade Association. Boats longer than 27 feet are 4.5 percent of the total, though their dollar value would be a much larger percentage.

"The issue that we face in boating is the perception of the cost of boating as being incredibly expensive and the activity being elitist," said Campbell, whose organization represents 850 boat builders, retailers, marinas, suppliers, insurers and lenders.

"Boating happens amongst people who own 15- to 18-foot boats, which is 30 percent of the market."
But James, the Kingston CPA, urges sympathy for people who have the hobby. He advises anyone considering the plunge into boat ownership to first take a shower in their best clothing while tearing up hundred-dollar bills to see if they'll enjoy it.

DODGING TAXES

Using tax dodges that range from perfectly legal to dubious, wealthy boat owners are enlisting in the aid of the federal government to keep their luxury yachts on the water.

ACCELERATED DEPRECIATION

WHAT IT IS
In 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act. Designed to stimulate jobs and business, the law encourages business owners to purchase new equipment by allowing them to declare a loss on half of the purchased equipment value in the first year, rather than waiting the normal seven years or more for depreciation. Mainly intended for manufacturing equipment, some are using the Tax Relief Act to save on luxury boat purchases.

HOW THE LOOPHOLE WORKS
• A person purchases a yacht through a sole-proprietorship company created for that purpose, or their own company.
• They establish a "business use" for the boat, by chartering it or using it for company lodging, entertainment or office space.

ADVANTAGE
Owners are able to declare half of the purchase price of the boat a loss under Bush's Tax Relief Act. The loss the business sustains can be deducted from company income or in some cases the owner's personal income because the owner is the sole proprietor of the business.

DISADVANTAGE
If the boat is sold for more than the depreciated value, the government will heavily tax the difference. However, you can get around that by trading the boat for another vessel and passing on the depreciation to the new boat.
However, the IRS might not accept the stated "business use" of the boat.

CORPORATE YACHTS

WHAT IT IS
Companies purchase a yacht and claim it as a business expense.

HOW THE LOOPHOLE WORKS
• A corporation buys a yacht.
• They must prove to the federal government that the yacht is used for business purposes.

ADVANTAGE
Owners are able to write off all expenses related to the yacht.

BARE-BOAT CHARTER

WHAT IT IS
Big-boat owners are able to avoid paying state sales tax and deduct boating expenses from their federal taxes because they charter their boats as businesses

.
HOW THE LOOPHOLE WORKS
• A person purchases a boat for chartering purposes.
• They avoid paying state sales tax because the boat becomes a business. Customers instead pay sales tax when they charter the boat.
• Owners have two options:
1) They can run the charter business themselves as an active business. Charter businesses rarely make a profit and all losses the business sustains can be deducted from the owner's other income.
2) They can go into the charter business through a local charter agent. Their business becomes passive and losses cannot be deducted from other active job income.

ADVANTAGE

Most local charter boats do not make a profit and some owners are able to deduct the loss from their personal income and further save on taxes.
Owners are able to use the boat 14 days a year for personal use, or in some cases charter it themselves.

DISADVANTAGE
The majority of the time, someone else is using your boat. Some owners have deducted loss from their income when it isn't allowed. The IRS might not accept the stated "business use" of the boat.

SECOND HOME

WHAT IT IS
By financing the purchase of a boat and outfitting it with necessary living accommodations, owners are able to deduct the loan interest from their taxes as they would a second home mortgage.

HOW THE LOOPHOLE WORKS
• A person purchases a small boat.
• They install a small sleeping platform, camp stove, portable toilet and sink with pressurized water.
• They stay on the boat at least 14 days a year.

ADVANTAGE
Owners save on taxes by qualifying the boat as a second home.
(Source: P-I reporting)
P-I investigative reporter Eric Nalder can be reached at 206-448-8011 or ericnalder@seattlepi.com P-I investigative reporter Phuong Cat Le contributed to this report.