How to Turn Your Boat Into a Tax Write-off

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Now that tax season has officially ended — and you’ve made that giant payment to Uncle Sam — you’re probably thinking about ways to pay less next year. After all, while not paying your taxes at all is against the law, there’s nothing at all wrong with reducing your overall bill.

The average taxpayer, though, misses a number of deductions that they are entitled to take. Often, these missed deductions stem from a lack of knowledge about the tax code (not unusual, considering the code spans thousands of pages) and assumptions about what does and does not constitute a valid deduction. For example, few people write off expenses related to their boats. Granted, an average boat owner who only uses a vessel for weekend trips to the lake may not see any tax advantages, but depending on the size of your boat and how you use it, you could potentially qualify for significant deductions.

Charitable Donations

Perhaps the biggest tax deduction you can take when it comes to your boat is the one you get if you donate your old boat to a qualified charity. While in the past, you could deduct the entire fair market value of the boat, current tax laws only allow donors to deduct the amount that the charity sells the boat for. For example, if you have a boat with a market value of $10,000, but the charity sells it for $7,500, you can only claim a $7,500 charitable contribution. The advantage to donating instead of selling, though, is that you don’t have to go through the extra inconvenience of actually trying to sell the boat, you don’t have to spend money fixing it, and you support a worthy charity, all while lowering your tax burden. If you have a boat that needs a lot of work, this could end up being a bigger boon to your finances than selling it outright.

Business Boating

If you are thinking of buying a boat and calling it a business expense because you take clients out for a cruise every now and again, you might want to think twice. The IRS is very clear about what qualifies as a business expense, and unfortunately, a boat in and of itself is not a qualified expense (unless, of course, you run a business like a charter tour service that actually requires a boat.)

That doesn’t mean that you cannot deduct any expenses related to your boat, though. Going back to the notion of taking clients out for a cruise, you can deduct your out-of-pocket expenses for the trip as a business expense. In other words, the food, drink, fishing bait, and fuel you use on the trip may qualify as a deduction, as long as you can prove the trip was for legitimate business purposes (and yes, wooing new clients or saying “thank you” is legitimate) and have the receipts to prove your costs. You cannot, however, deduct the cost of the boat, depreciation, mooring fees, or maintenance.

Home Use

If you own a second or vacation home, you undoubtedly deduct the mortgage interest that you pay on that home. However, you might not realize that your boat can actually qualify as a second home — and you can deduct the interest you pay on the loan you took out to pay for the boat.

In order to qualify as a home, your boat must have sleeping, cooking, and toileting facilities (even if the toilet is just a portable one). The loan you took out to purchase the boat must be secured by the boat, as well. The only exception is if you took out a home equity loan to purchase the boat. In that case, you can deduct the interest on the boat regardless of whether it qualifies as a home, since home equity loan interest is always tax deductible.

Tax Payments

If you pay taxes on your boat, you may have another deduction. In states where there isn’t any sales tax — or if you paid more in sales tax throughout the year than you did for your annual state income tax bill — you can deduct the sales tax you pay on a boat from your federal return. You can also deduct state and local taxes that were assessed on your boat, as long as they are less than the value of the boat and you pay annually.

Of course, before you take any sort of tax deduction, talk with a qualified tax professional to confirm that you are in fact entitled to the write-off, since tax laws change every year. Taking a deduction illegally or exploiting a loophole could land you in hot water with the IRS, when you’d rather be on the water in your boat.