Section 179 deduction & Boats


M

Mike Kennedy

I am a real estate agent who lists and sells lakefront
properties. I currenty show property to prospective buyers
with a 1996 pleasure boat. I was thinking about purchasing a
new boat after reading about the new 179 deduction that
allows you to deduct up to $100K on new equipment purchases.
I have read that this new tax law applies to SUV's over 6000
lbs but I can't find any info if the full deduction will
apply to pleasure boats around 3000 lbs. Any help will be
appreciated.
 
M

Michael T Wing CPA

Mike Kennedy said:
I am a real estate agent who lists and sells lakefront
properties. I currently show property to prospective buyers
with a 1996 pleasure boat. I was thinking about purchasing a
new boat after reading about the new 179 deduction that
allows you to deduct up to $100K on new equipment purchases.
You should probably take a look at IRC 274(a)(1)(B) which
generally disallows all deductions related to "facilities"
used for "entertainment, amusement or recreation." Based on
anecdotal reports, the IRS interpretation in this area seems
to follow the "duck test," ie: if it ~looks~ like an
entertainment facility, it IS an entertainment facility,
never mind the fact that your particular usage isn't
entertainment per se.

So, I would be ~very careful~ if you proceed in this
direction. At a minimum, you would need absolutely
meticulous records of every second of usage of the boat,
such as a log book where the lookie-loos sign in, etc.

MTW
 
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F

FF

I am a real estate agent who lists and sells lakefront
You should probably take a look at IRC 274(a)(1)(B) which
generally disallows all deductions related to "facilities"
used for "entertainment, amusement or recreation." Based on
anecdotal reports, the IRS interpretation in this area seems
to follow the "duck test," ie: if it ~looks~ like an
entertainment facility, it IS an entertainment facility,
never mind the fact that your particular usage isn't
entertainment per se.

So, I would be ~very careful~ if you proceed in this
direction. At a minimum, you would need absolutely
meticulous records of every second of usage of the boat,
such as a log book where the lookie-loos sign in, etc.
Excellent analysis, but I'd like to add that IRC 274 means
nothing if the item is not allowable under IRC 162 as
ordinary/necessary biz expense. Aircraft are entertainment
facilities also, but they can also be used for
transportation as you imply. If these properties are
accessible only by boat, it shouldn't be a problem.

However, if accessible by land and any prospects are into
boating already, it will difficult to argue that yet another
ride, though they might enjoy it, has any demonstrable
impact on a buying decision. For nonboaters, one may like
it enough to decide to buy a property and take up boating,
which is a potential IRC 162 argument for deduction. Or some
think it's cool but don't want a boat, in which case it has
the odor of an nondeductible entertainment facility under
IRC 274 if even they do buy a property. And overall, if
there are many lookers and only a few annual sales, the
implied t/p argument will be were it not for the boat, the
sales would not have been made. IRS may view that as
contrary to common sense. Also if there are homes on these
properties, it seems the most important buyer decision
concerns the condition of the structure and what's inside,
and a view a bit further out from the water verses from land
becomes a rather narrow argument as to its usefulness.

Fred F.
 
E

Ed Zollars, CPA

FF said:
Excellent analysis, but I'd like to add that IRC 274 means
nothing if the item is not allowable under IRC 162 as
ordinary/necessary biz expense.
Actually, as was pointed out to me at a meeting at which I
spoke, that's not technically true in this case. As the
question involved a depreciable asset, Section 162 doesn't
come into play if you check out the mechanics of the IRC.
Rather, it appears the expenditure is first "captured" by
the capitalization provisions of Section 263 (which grabs
all capital expenditures), and then Section 167 and/or
Section 179 would allow the deduction (essentially
overriding Section 263), as limited by Section 274.

So, in reality, the "ordinary and necessary" test would
apply to the operating expenses, but technically the
depreciation would be subjected to the more general issue
of being used in the business.

Section 274 served to impose a "broader" disallowance rule
for this type of asset than the normal test for expenses
(under 162) or depreciable assets (under Section 167). That
said, if the asset gets around the Section 274 trap, I doubt
that the IRS could succeed with an "ordinary and necessary"
attack, since the courts have routinely ruled that such a
finding does not require the business to use the least
expensive option available. There can be a business purpose
in "impressing" the client.

But, that said, in this case the fact you mention would
argue more that this truly was an "entertainment" facility
as opposed to merely a transportation device.
 
M

Michael T Wing CPA

Ed Zollars said:
So, in reality, the "ordinary and necessary" test would
apply to the operating expenses, but technically the
depreciation would be subjected to the more general issue
of being used in the business.
Would it be safe to say that IRC 162 (and 212) are
"catch-all" categories that encompass deductions NOT covered
by other specific code sections. For example, interest,
taxes and depreciation (as well as a few other things, no
doubt) have their own specific code sections (sometimes
referred to as "statutory deductions"). So, those sections
will govern first, if applicable. The remaining stuff that
has no where else to go can try to qualify under 162 or 212.

MTW
 
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Are boats purchased by a boat club and used exclusively in the business by the boat club company entitled to Section 179 depreciation by the boat club entity?
 

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