IRS Tax Code - Section 179 deduction
James Neocleous of Jaffa & Co., on an emergent tax benefit that may be of interest to US superyacht clients…
This briefing note explores a tax benefit available in the USA for owners of new and used yachts. This tax benefit may assist existing members of the superyacht and aviation industries and may well entice those who are yet to enter the market.
Businesses in the USA may be able to benefit from Section 179 of the of the Internal Revenue Code and deduct the full purchase price of certain qualifying equipment from their gross income.
The Tax Benefit
Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year (the “Section 179 Deduction”). That means that if you buy (or lease) a yacht or aircraft, you may be able to deduct the full purchase price from your gross income for the year.
The deduction limit for 2020 is $1,040,000.
The spending cap for 2020 is $2,590,000. The deduction begins to ‘phase out’ on a dollar-for-dollar basis after $2,590,000 is spent by a given business. The entire deduction will cease to be available if a business reaches $3,630,000 in purchases.
These limits may increase for the year 2021, in line with inflation, although we understand clients are keen to utilise the exemption before the forthcoming change in Presidential administration.
It is clear that the Section 179 Deduction is aimed at benefitting small to medium sized businesses and assets, given the price limitations.
In order to utilise the Section 179 Deduction, certain criteria must be met, including the following:
1. The buyer, and registered owner, must be an entity such as a corporation, partnership, or LLC.
2. The yacht must be used for a legitimate business purpose, such as chartering.
3. The yacht can be new or used; the important point is that it must be “new to you”.
4. The yacht must be acquired in an “arms-length” transaction or financed with certain qualified leases and loans.
5. The yacht must be put into service in the same year that it was purchased.
Further, the asset must be used for business purposes at least 50% of the time. The depreciation limits will be reduced by an amount corresponding to the % of time that the vehicle is not used for business use.
The Section 179 Deduction will also cover the purchase of upgrades and improvements to the asset. This includes, for example, upgrades to avionics, the addition of gyro stabilisers or replacing paintwork. The caveat is that this must all be undertaken in the same calendar year as the purchase.
If the requirements are met and the purchase or lease is structured in the correct way, owners may be able to write off the entire purchase price of their newly purchased yacht against their trading profits.
In order to ensure that you can take advantage of the Section 179 Deduction, we recommend that legal advice is obtained before entering into any sales agreement. We also suggest that owners obtain a local tax opinion.
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