Section 179 deduction & Boats

Discussion in 'Tax' started by Mike Kennedy, Sep 23, 2003.

  1. Mike Kennedy

    Mike Kennedy Guest

    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.
     
    Mike Kennedy, Sep 23, 2003
    #1
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  2. 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
     
    Michael T Wing CPA, Sep 25, 2003
    #2
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  3. Mike Kennedy

    FF Guest

    I am a real estate agent who lists and sells lakefront
    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.
     
    FF, Sep 28, 2003
    #3
  4. 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.
     
    Ed Zollars, CPA, Sep 29, 2003
    #4
  5. 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
     
    Michael T Wing CPA, Sep 30, 2003
    #5
  6. Mike Kennedy

    Wayne88

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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?
     
    Wayne88, Jun 13, 2015
    #6
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