- February 2, 2018
Business owners like tax deductions. They especially like the idea that maybe the cost of the new boat that caught their eye at the boat show could be a tax deduction for their business.
After all, they would be using it for business, entertaining referral sources and potential new clients, so it should be a legitimate business deduction, right? But before opening up the corporate checkbook, you need to know the special rules surrounding ownership and operation of boats, planes and automobiles to avoid an unpleasant surprise when it is time to file your taxes.
We are surrounded by beautiful water in Southwest Florida, and boats can provide a way to entertain potential customers. To deduct the cost of a boat, you must have a trade of business that requires the use of that boat, such as a charter boat or fishing business. If you use your boat for entertainment purposes, it falls under the entertainment facility rules, and no ownership costs are deductible.
You can deduct direct entertainment costs such as fuel, food, and transient mooring fees, but regular maintenance, storage and other costs are not deductible. You will also be unable to write-off the cost of the boat through depreciation deductions. Entertainment costs are subject to a 50% limitation and adequate documentation describing business purpose, date, and names of people entertained should be maintained to support the deduction.
If owned personally, a boat can be a second home if it has sleeping, cooking and toilet facilities. Interest paid on a boat loan can be taken as a mortgage interest deduction on an individual Form 1040, subject to limitations.
Maybe the sky is more to your liking and having your own airplane is what you desire. Well, to deduct a plane you must prove that the airplane is being used for business purposes and that the expenses are “ordinary and necessary.”
Courts have found that expenses are ordinary and necessary if they are an accepted business practice. The courts have ruled that it is an accepted business practice for corporate executives to travel by private jet. But if your business is not a Fortune 500 company, your bar to establish ordinary and necessary is a little higher. You must prove that your aircraft was needed and had advantages over commercial carriers. Generally, you must show how using your own aircraft provided you with direct access to customers or saved substantial time.
For many business owners, deducting a vehicle and all related expenses is viewed as an unalienable right given to them by the Constitution of the United States. I'm afraid this interpretation is not valid. To deduct vehicle expenses, you must have business use of your vehicle. If all you do is commute from your home to your office, you have no business use. Furthermore, if audited by the IRS, you will need to substantiate the business mileage through documentation, such as mileage logs.
For example, if you have a retail store and commute from home to the store, make daily trips to the bank, pick up supplies, and attend a couple of networking events during the month, your business mileage will be limited to the trips to the bank, supply runs, and networking events. The commuting mileage is deemed a personal expense. Depending on how far you live from your store, the commuting mileage could be the largest portion of the total mileage thereby limiting your auto deduction.
If the thought of keeping a mileage log is daunting, the IRS does accept sampling as proof of mileage. You need to keep odometer readings from the beginning of the year and the end of the year to establish total yearly miles. Then keep a mileage log for a couple of representative months and establish a business use percentage for these months. This percentage can be applied to the entire year to determine the yearly deduction.
And finally, if a corporation owns a vehicle, the corporation can deduct 100% of the auto expenses as long as the value of the personal use of the vehicle is reported as income on the employee's W-2. You will need to support the business use of the vehicle with a contemporaneous auto log.
Deductions for planes, boats, and automobiles are closely scrutinized by the IRS because of the potential for abuse. The rules are complex, not taxpayer friendly, and frequently the source of IRS adjustments in exam. You can deduct certain expenses, but if you are planning on making an expenditure in hopes of creating a large tax deduction, make sure you know the rules.
Pamela Schuneman, C.P.A., is a practicing tax accountant in Sarasota. She has 33 years of experience helping her clients navigate the vast federal tax system and has worked with businesses as varied as Fortune 500 companies to small sole-proprietors. Contact her at [email protected]