With the summer months upon us, you may be dreaming about a boat or a mountain condo. Your company has performed really well the past year, you are flush with cash assets, and ready to lay out some of those hard-earned profits on a vacation property, yacht, or private airplane. Would the new boat be considered a business asset?
If you are thinking these luxury items will be a great write-off for next year, consider again. These items can’t be considered business assets, unless, you tie these items directly to your business. Otherwise, the IRS will categorize them as entertainment items.
Anyone can know their numbers and feel great about these large purchases and the impact it has on your business finances. We have set up the perfect program that includes all the systems and is fully supported by a CPA. Want to learn more about that? If so, snag a call with a member of our team below then read up on these hot topics!
When Is a Business Asset, Not a Business Expense?
Let me explain what I mean when I say these items must be directly tied to your business. If one of the primary things your business does is boat tours around Gitche Gumee, then you can probably claim your boat as a business asset, or if you run an air taxi service between DFW airport and Waco, then the IRS will accept your claim that your new twin engine Cessna is an asset tied to your business.
However, even if you use your Aspen cabin as the venue for an annual company retreat or you regularly host clients for a weekend business conference, your Aspen cabin can only be deducted at the entertainment rate of 50%.
Asset or Compensation?
Also if you did purchase a boat for the business and you decide to take your family to a small Caribbean island for the weekend, you would have to claim the expenses for your weekend as compensation and report this as personal income. The IRS no longer allows companies to purchase these items for your personal pleasure and write off the costs as business expenses. They can’t be depreciated as assets, nor can you deduct your Hawaiian vacation as a business junket unless there is a legitimate business reason for going.
If you buy a boat for your personal use and end up entertaining clients on it, then you still can claim an entertainment deduction for the expenses of that event. You can claim 50% of the cost of food, of the gas used, and so on.
Looking for Loopholes
If you do purchase one of these luxury items as a business asset. It is imperative that you keep detailed documentation about how the asset is used and you must carefully carve out any personal use as compensation and record it as personal income.
Let me address something you may be considering to skirt the strict interpretation of the tax code on this subject. You can’t just buy a boat and declare, “Boat charters have now suddenly become a valid part of my business.” If this is your intention, the IRS will want you to show what you have earned and how you made a profit from the “boat charter” aspect of your business. If you don’t have clear documentation showing the legitimacy of your boat charter service, the IRS will call this a hobby and not a business. You will still be liable for the taxes on this part of your income.
The Bottom Line
Claiming luxury items for personal use as legitimate business assets will only draw the attention of auditors and cast a disparaging eye on your integrity and honesty. If you have legitimate business reasons for purchasing these items, by all means, do. However, if you are just looking for a tax loophole, this is one that will easily be disallowed.
***2018 Tax Reform Changes- There is 0% deduction for entertainment expense in 2018. Always verify deductions with your personal tax professional due to yearly updates***