TAX BENEFITS FOR BOAT OWNERS Marina Sailing, Inc. provides a unique opportunity for boat owners to defray the cost of owning and maintaining a boat and benefit from substantial tax savings. A brief summary of the applicable tax laws and their applications to a working relationship with Marina Sailing is outlined below. We would be happy to discuss the application of these rules in greater detail at your convenience, and will gladly provide you a free consultation on your specific circumstances. The Section 179 Election Boats are depreciated under MACRS over a ten-year period when they are placed in service in a trade or business. An election called the “Section 179” election allows taxpayers (sole proprietorships, corporations, or partnerships) to deduct the entire cost of an asset up to $125,000 for tax years beginning in 2007 through 2010. Estates, trusts, and specified non-corporate lessors are not allowed the Section 179 election. This election is available for tangible personal property (not real property) if such property is purchased for the use in trade or business. It cannot be made on property purchased from a related party. The election cannot exceed the income from the business. The unused portion of the election is carried forward to offset income in future years. The election amount is reduced dollar for dollar when the cost of qualifying assets purchased during the year exceeds $500,000 in tax years 2007 through 2010. The alternative minimum tax does not apply to the Section 179 election. California state taxpayers, however, are allowed the Section 179 election up to $25,000. The Marina Sailing Advantage For a taxpayer to take advantage of the Section 179 election and to be able to deduct the expenses of owning a boat (docking, insurance, maintenance, etc.), it must be operated as a trade or business. Placing the boat with Marina Sailing achieves this goal. This enables you to not only benefit from a huge deduction in the year you purchase your boat, but covers the expenses of owning the boat while allowing you to use the boat for your own personal enjoyment. If you purchase a boat for $102,000 in 2007, and you have an effective federal tax rate of 30%, your federal tax savings from placing the boat in service with Marina Sailing and electing a $102,000 Section 179 deduction (and complying with the other trade or business requirements outlined below) would equal $30,600 in the current year alone! Passive Loss Rules Generally, losses from passive activities may not be deducted against
non-passive income. Passive losses in excess of passive income is disallowed
and carried forward to offset passive income from future years. Unused
passive losses are allowed in full in the year the taxpayer disposes
of his entire interest in the activity in a fully taxable transaction. Any rental activity is a passive activity whether or not the taxpayer materially participates. However, if one of six exceptions in met, the activity is not termed a rental activity for purposes of the passive loss rules. One of these exceptions is when the average period of customer use of the property is seven days or less. This would be the exception applicable to you when working with Marina Sailing. Once we have avoided the application of the rental activity classification, we need to create “material participation” in the activity to avoid having it classified as a passive activity resulting in passive losses. The taxpayer has to satisfy one of seven tests in order to be considered as materially participating in a given year. One of these tests is to participate in more than 500 hours per year. A spouse’s participation is combined with the taxpayers in achieving the 500 hours. Visiting the business site, inspecting the boat, supervising repairs, maintenance, taking the boat out to insure it operates correctly and safely, bookkeeping, tax planning, etc., all would be activities which would count towards the 500 hour requirement. In Summary The Marina Sailing business opportunity provides a unique ability not only to defray the expense of owning a boat, but it allows for an enormous tax savings via the Section 179 deduction as well. As with any business or tax matter, you should confer with a tax professional. Happy Sailing! Brent and Lorenza Robbins have a diverse client base in Orange and Los Angeles Counties. Brent has a Masters Degree in Taxation and 19 years of high-level experience in tax and financial planning. Lorenza V. Robbins is an accomplished sailor having completed twelve Ensenada races and an eight-month sailing adventure in the South Pacific. Robbins & Company provides a wide-array of tax, financial, and business consulting services to individuals, businesses, and all types of entities. |