The changes to The Tax Cuts and Jobs Act are in effect until 2022, therefore it’s vital for yacht owners (and potential owners) to take advantage of these benefits while they can. The potential change in the US Government means expected higher income tax rates for both ordinary income and capital gains, plus a potential increase in corporate tax rates.
There are three areas where TCJA can be most beneficial to yacht owners. If the owner of the yacht uses the vessel for “legitimate business purposes” and is registered as an entity (e.g. a corporation, a partnership or an LLC), the IRS considers the yacht as “listed property” and a business asset. The changes can provide prospective owners with more disposable income through reduced marginal rates, and are well worth considering when entering the charter market. Some of these benefits may also apply to foreign-flagged vessels, please speak to your tax advisor to find out more.
The Act increased the bonus depreciation from 50% to 100%, with no dollar limit, for both new and used yachts operating in the charter business. This means that all applicable property and assets could potentially be written off in the year of purchase.
The nature of the US taxation systems means that you may be able to deduct state (or local) sales tax from the purchase of a vessel, as opposed to income tax. This varies as a result of the owner’s place of residence.
If owners classed their yachts as a second home (to qualify it must have a sleeping berth, a galley, and a head), it may be possible to deduct the interest on the loan. The portion of the code allows homeowners to deduct interest on loans for their first and second homes. This deduction has a maximum of $750,000.
If you charter out your yacht for more than 50% of its usage (so that it qualifies as business-related), you are able to deduct 50% of the expenses associated with the vessel, including fuel, maintenance, mooring fees, insurance, storage and repairs.
If you are looking to purchase a vessel or would like to explore chartering as an option to offset the cost of your yacht, please reach out to the expert IYC team.