A law enacted earlier this summer has created a significant opportunity for yacht owners, through a 100 percent bonus depreciation provision. It allows businesses to deduct the entire cost of a qualifying property in the year it’s placed in service, versus depreciating it over its useful life. This substantial financial advantage therefore could influence superyacht owners’ and buyers’ purchase decisions through the remainder of the year.
Depreciation isn’t a new concept in the tax code. Traditionally, it allows deducting significant portions of an asset’s cost over its useful life. Those assets can be machinery, for instance, but also real estate, a corporate jet, or a boat. For yachts, the period is often around 10 years. Therefore, owners usually deduct about 10 percent of the yacht’s value annually. The 100 percent bonus depreciation provision accelerates the deduction into a single tax year, specifically the first year of a yacht’s use. It significantly reduces adjusted gross income and potentially results in substantial tax savings.
In this episode of The Yacht Law Podcast, we explain the specific requirements for qualifying for this tax benefit. For instance, the yacht needs to be purchased through a pass-through entity. Equally important, the owning entity must be an American taxpayer, though not necessarily a U.S. resident. Additionally, the yacht usage needs to be predominantly in U.S. waters. This includes territories and possessions like the U.S. Virgin Islands as well as Puerto Rico. Yet another requirement, yacht operations need to be for a legitimate charter business. Perhaps most significantly, personal use during this qualifying year is generally off-limits. In subsequent years, however, personal use restrictions follow traditional business-asset tax rules.
Pay particular attention to the charter requirement. Yacht owners must have bona fide charter business. Yacht-management companies with charter divisions can provide ready-made assistance, including marketing and operational support. All charters need to be at market rates, and for true charter guests. Self-chartering or discounted family use generally doesn’t pass IRS scrutiny.
As with all significant tax matters, consult qualified tax advisors familiar with both maritime and taxation regulations. Where megayacht operations and tax law meet varies from individual to individual. That said, if you’re eligible for 100 percent bonus depreciation, you’d be wise to leverage it.
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The Yacht Law Podcast theyachtlawpodcast.buzzsprout.com