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Old 10-24-2008, 11:32 AM   #1
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Now that I have put in my order for my boat, I need to get my financial side in order. We intend to Cruise outside of the USA for the most part and will be in semi retirement, other than the occasional computer contract which would be in Hawaii (A tough job but someone has to do it). We will be keeping our house in Florida but will use it as a rental and use the yacht as our primary residence both while cruising and while in the USA.

After speaking with my tax person I am told that I need to be really careful as to how I set this up and how I document my income, rental expenses and such as the IRS views yachts as a red flag and are being scrutinized, and she openly admits that this venture is outside of her tax realm.

Those of you that are going this, how did you set this all up and how are you taxes being handled, how is the 1st home issue being dealt with vs the holiday home and is there a recommendation as to a CPA that knows this stuff. My wife has a computer corporation.

I have spoken to a CPA in Texas briefly but am looking for ideas, and suggestions from those that have been there and done that. Folks like JeanneP who have been cruising for decades and have dealt with most if not all of the US tax issues and LLC and or Corporate law.

Even though I currently live in Florida and may be moving to North Carolina shortly, it has been suggested that I setup an LLC for the boat in Delaware as a starting point and then keep all my boating activities separate from the Computer Corp. This is all well and good, but the Computer Corp has no expenses and is generating a fair about of income and I would like to use the yacht as a means to reduce that income and create some legitimate expenditure

As this is going to be a long term venture I need to set this up correctly, I do not like the idea of doing this for a year or two only to find that I have not set everything up correctly and am subject to monstrous taxes, back taxes and penalties.

Thought ideas, suggestions and experiences are MOST welcome ...
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Old 10-24-2008, 03:16 PM   #2
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Sounds like you need an accountant who specialises in this area..............

I should ask around for a recommendation
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Old 10-24-2008, 04:18 PM   #3
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I would think if she is working from the boat. That there would be a partial deduction on the boat. Same as you use a room in the house to run your business out of. That would be my question to the accountant. Well, at least one of the questions.......i2f
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Old 10-24-2008, 04:33 PM   #4
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I would think if she is working from the boat. That there would be a partial deduction on the boat. Same as you use a room in the house to run your business out of. That would be my question to the accountant. Well, at least one of the questions.......i2f
From what I have gleaned the tax law regarding yachts and using them for business / tax deductions are rather complicated and the IRS scrutinizes yacht deductions.

I am looking for a CPA and certainly need one, however guidance and pointers from those that have been there done that is always a great source of information.

I am looking at using accelerated depreciation as an option and certainly from reading the tax law it appears that the yacht can be used as a primary home as long as it has a galley, a head and sleeping quarters. That is what it looks like, from what I have been told though, it is not that cut an dried.
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Old 10-24-2008, 04:40 PM   #5
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All of the below is just my opinion. I have had both a Delaware C Corp and Delaware S Corp, btw. For several years, we had three businesses going at once: the C-corp, S-corp, and were operating our primary residence as a guest house (similar to B& so we've had some "interesting" tax returns. Our practice has always been to follow the law, highlight things that could be considered "issues," and explain anything looking strange with an attachment (letter) with the tax return.

Delaware is a great place to set up an S-corp. Also, S-corps show income on a schedule K which doesn't excite the IRS as much as sole proprietorships. S-corp income (loss) can directly offset earned income--which is also a nice thing. You'll have to register as a "foreign corporation" in any state that you're doing business in, though, and usually pay taxes in that state unless you can show that you're doing the business in your company's "home" state of DE.

If you know you're not going to "cover" expenses and make money...you're on thin ice with the IRS. Startup costs for businesses are typically amortized (see your accountant about that) and you won't be able to write off the big startup costs at the beginning of any business right away.

The yacht won't raise red flags unless you're trying to write of costs associated with it. If its your home and not a business, you're unlikely to excite the IRS about anything. You used to be able to exclude up to 75K of income earned while outside the USA as long as you weren't in the US or its possessions/territories/district for more than a certain amount of time each year...you might check into that. Of course, you'll end up paying taxes in the place that you were while doing business--and those foreign taxes paid are something that you can deduct from your other income if you itemize. A tax accountant familiar with ex-pats could help you on this.

Yachts and yacht-related businesses are frequently audited--and these businesses are frequently not set up primarily as a business but instead as a "write off" for the person who wishes to own a yacht. Be careful. Don't end up looking (to the IRS) like just another person trying to shield income or reduce their taxes illegally.

If there isn't a real reason for your computer business to own a yacht and use it as a write off or if you don't have a bona fide business plan well documented with cash flow projections showing that you can/will make money with your yacht business AND you don't follow through with getting everything in place and trying to do business as soon as you get the yacht (e.g. advertising, getting proper CG licenses, inspected vessel, business insurance, etc) but instead it pretty clearly looks like you're primarily using your yacht as as a private yacht for you and your family...and the business is secondary...then don't be surprised when the IRS doesn't consider your yacht a business but instead a tax shelter. When you take the yacht and make it your HOME you'll also be very likely to run into "usage" rules for the yacht that end up precluding you from counting part or all of the cost of the acquisition and maintenance of the yacht against your taxable income from the yacht....shaky, shaky ground again. We have many friends and family in Florida--and many of them automatically tell us "set up your boat as a business" to shield income. Seems to be a Florida thing. If you find a way to make your boat "work" for you, great! Else, in my view, be glad of your good fortune in your computer business and beware the taxman should you try to shield income

I'm glad to hear that your computer business is doing well and that you'll have rental income to help out while you're voyaging. You should have an enjoyable time w/less stress about finances than many folks
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Old 10-24-2008, 05:17 PM   #6
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Thanks Redbopeep, appreciate the informative post, I want to do this legally and correctly, do not like the idea of crossing the IRS, not really smart IMO.

My wife's computer business does not make that much money, just does not have expenses and we are having a hard time creating expenses without doing it fictitiously which I have no interest in doing. She travels a lot but all the travel expenses are paid by the companies that she contracts to, as well as the food, per-Diem and most of the entertainment.

My wife and I have no more than 5 years in the computer business as it is becoming increasingly difficult to keep up with the changes in the industry, in 5 years I will be 59 and my wife will be 55 (she is going to kill me for that) and I have had my nose buried in computer industry books most everyday just to keep up with the kids and the continual changes. At 54 I am back at college just so that I can remain competitive. Look at the advancements in computer and data security technology in the last 5 years and then try and imagine where we will be in the next 5 years. I already have my mind filled with garbage and have to do a "Write Erase" anytime I need to jam something else into my melon.

Some of the rental income on the house will have to be used to pay the mortgage, so we will still have concerns, but I do want something to come back to if it all goes wrong, we grow old and tired of cruising etc...

Using the yacht as a primary residence is appealing as we can then pick what contracts we will take, (assuming there continues to be a demand for our service) and sail our "house" over to where the contract is and live there for 3 to 21 months, which to me is REALLY appealing. This seems to be the best of both worlds until we can cast off and follow our dreams. Well its dreams for my wife and a bucket list for me...

There is a serious side to me somewhere, and Yoda has it right ...
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Old 10-24-2008, 06:03 PM   #7
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Before I started doing family/trust/sole proprietorship taxes (for the family), our accountant told me that I shouldn't get excited about paying taxes because it meant I was earning money. (We hadn't had much income in earlier years!) So that's how I look at it. When I had it, I paid taxes. Now that we're in retirement, I may be back to owing very little--but that will be because the income has taken a sharp nose dive. (And that's okay. It's gorgeous out here!)

If your wife's computer business makes some money, then rejoice. If you don't have a lot of write-offs, then that means you don't have a lot of expenses against that income. Rejoice!

A home is going to cost you, whether it's on land or on water. On land, you might be able to have a large enough house that one room can be dedicated to the business. On your boat that's not likely to happen. And as far as the IRS is concerned, if you use the space for anything other than exclusively for the business, it's not a deductible space (or percentage of house cost). As Brenda said, deductions of living space or boats need to be clearly documented and clearly delineated or the IRS sees you out there waving that red flag.

If you're renting your house, you can deduct a lot of things associated with that rental, such as depreciation on the home, maintenance, travel to inspect it, taxes, insurance, all on a Schedule E, which will help with your taxes. But I just don't think your boat can qualify as a business expense unless you put it into charter or some other boat-related, money-garnering activity--with, as Brenda mentioned, the attendant licenses, certificates, and usage.

Render unto Caesar and enjoy the rest. If you make too much money, you can always find a charity some place that needs help and that you believe in. So far, that's still tax deductible if you have enough other expenses for a Schedule A.

Sail that boat to Hawaii and enjoy yourselves! Or to North Carolina (my home state)--a great place to live and sail, except we have more sandbars there than they do out here in the Pacific.
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Old 10-24-2008, 08:33 PM   #8
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Quote:
Originally Posted by gslabbert5119 View Post
Look at the advancements in computer and data security technology in the last 5 years and then try and imagine where we will be in the next 5 years. I already have my mind filled with garbage and have to do a "Write Erase" anytime I need to jam something else into my melon.
My husband and I have a technology business that is "mostly" computer programming. We have discussed this same issue--it takes SOOO much to keep up with the leading/bleeding edge of technologies important to us as well as the computer technologies that we've relied upon. While lots of it can be done on the boat (which is great), just keeping up with the professional journals and online reading is, well, alot.

Best of luck in your business activities that will support your voyaging lifestyle
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Old 10-27-2008, 04:17 AM   #9
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Exactly what are you trying to do? Unless you are planning to buy a mega-million dollar yacht - there are not tax advantages to setting up the boat as a business or ownership via a corporation or LLC. If you are planning to base the boat in Florida - you will pay the 6% tax on the value or purchase price of the yacht - one way or the other - either as a purchase sales tax or as a "use tax". You cannot avoid that if you plan on keeping the boat in Florida waters for more than 90 days. Almost all the other states have reciprocal agreements about sales or "use" taxes and you will have to pay somewhere or the other.

If you live in a state where there is an annual personal property tax, then registering the boat in a state like Delaware or Florida or some other of the internal states without personal property taxes is advisable. However you must have a land-based address somewhere in the USA if you are living on the boat. There are several services that specialize in setting up a "land" address for Federal, state, and other tax purposes and licenses. You cannot use a floating vessel as an "address" as the post office frowns on having to swim out to the vessel to deliver the mail, tax forms, etc.

Using the boat as a deduction for business expenses is horribly complicated and monitored by the IRS in their eternal quest to squeeze the last penny out of taxpayers. Unless the boat is a mega-million dollar vessel it is unlikely that you will save enough to offset the cost of tax attorneys and accountants.

Registering the ownership to a corporation or business or LLC introduces more hassles and complications when you want to use the boat to visit other countries. Additional documentation is necessary for the operator/captain of the vessel and if the boat is not "private" then there are some rather steep fees and restrictions on taking the vessel into the waters of other countries.

For vessels under a million dollars all these hassles are really not worth it. Poney up the tax/fee in the state where you plan on keeping the boat or a "non-property annual tax" state and be done with all the record keeping and tax hassles involved in the ownership of the vessel. The idea is to enjoy and relax while using your boat, not having to spend your time documenting and dodging various tax collectors.

Florida is one of the best where you only have to poney up the 6% once and thereafter you only have a minor annual renewal fee for your "sticker" which is usually under a hundred bucks year.
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Old 10-27-2008, 01:03 PM   #10
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Florida is one of the best where you only have to poney up the 6% once and thereafter you only have a minor annual renewal fee for your "sticker" which is usually under a hundred bucks year.
Thanks all for the insight everyone, I am going to have to take this to a Tax guy as this is far more complicated than 1st thought. So many opinions and so much insight, which is why I think this forum is fabulous.

The boat will not be registered in Florida nor will it be kept in Florida as I will not be a Floridian for more than a few more months, and though Florida may be one of the best deals at 6%, 6% of a boat in the $350,000 - $400,000 range is a significant amount of money ($21,000 - $24,000). A lot of boat spares and cruising can be done on that money. My wife and I can comfortably live on $12,000 per year on land, and I have been told from a number of sources that $24,000 can cover the costs of a year or two of cruising.

The plan (before the current recession / depression) was to pay for the boat and head out within 90 days of the purchase into the Caribbean for a year or so, re-hone our sailing skills, see how much consulting we can truly do from the boat,then make a decision on whether we would stay in the Caribbean, sail elsewhere or return to a land based operation. The time lines are somewhat vague and open ended to accommodate what life on or off the seas will through at us.

Unfortunately as the saying goes, "The best-laid plans of mice and men often go awry" so the plan has changed, or should I say evolved, to what I do not know yet, fortunately (or unfortunately) I have about a year to work through all of this.
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