Luxury Yacht Charter Business for Senators
John Kerry, (D-Massachusetts) has been criticized for avoiding Massachusetts sales tax of about $500,000 and luxury tax of $70,000 per year by docking his yacht in Rhode Island. He claims it is docked there for maintenance and chartering purposes. If we assumed that is the truth, an even bigger scam is afoot.
A yacht owner may enter the charter as simply as finding someone to act as a chartering agent and agreeing to pay the agent a commission based on a percentage of charter revenues. This establish an intent which is acceptable to the IRS.
Now follow this part closely. Every so often you invite your friends to go sailing and they accept. Who wouldn't it's a beautiful yacht. At year-end youn report enough charter revenue to equal your out-of pocket cash expenses, whether you actually collected any revenues or not. Why would you pay taxes on non-existent revenues. The reason is that so long as your cash receipts are equal or greater than your cash expenditures, the charter business will not be viewed as "hobby" but rather an actual business. At this point being in the charter business has had zero effect on your taxes. Ah but, here's the real deal, you are now able to deduct the depreciation on the boat as a legitimate business expense and offset it against your other income. In the case of John Kerry's $7,000,000 yacht, it amounts to a $1,400,000 deduction per year for five years. an approximate savings of $628,000 per year. In addition, Kerry will save the sales tax of 6.25% or $437,500 up front. He will, however, have to pay sales on the revenue he claimed as though he had collected from the people he charters to. The amounts would be relatively minor when compared to $437,500 he would have had to pay up front.
And now the best part. After he shelters a lot of the income from the "charter" operation simply exits the charter business and operates the yacht for personal purposes. Since he hasn't sold the yacht he won't realize any gain from having depreciated the boat to zero. At some time in the distance future the piper may have to be paid but more than likely he will pass the yacht on to his children or a family trust and avoid the piper.
One would ask how do I surmise this scenario. Well, I answer is I did the exact same thing back in the 1980's. I was even audited by the IRS for several of those years and it passed muster. The State of Ohio on the other hand called it a sham and the laws were such that I was required to pay the full sales tax but was not required to pay any state income taxes.
Isn't this a great country. Yachtsmen can get the taxpayers of the US to pay for a portion of their yachts by operating shams such as this. Messrs. Kerry and Rangel are only the tip of the iceberg. The differences is they are hypocritical saying they have done nothing wrong. I admit to using the laws and rules for my benefit.