by Tom Andrews, CPA
As we approach the end of the year many yacht crewmembers are contemplating how much income they should be putting aside for taxes. In past years tax payers could reasonably rely on their recent history to determine how their tax calculation might play out. Tax planning for 2018 is a bit different and the recent passing of the Tax Cuts & Jobs Act of 2017 will impact many individuals whose source of income is dependent on the yachting industry. One particular change to the tax code is the Section 199A Deduction otherwise known as the “pass-through deduction”. The following individuals may benefit from this tax deduction if they are doing business as follows:
- Sole Proprietorship
- Single Member LLC
- S Corporation
There are a few other entities that qualify under the section 199A deduction, however yachting professionals typically make up the three entities mentioned above. If you are doing business as one of these entities and you have qualified business income you might receive a 20% deduction on calculated business income. For example if your qualified business income is $50,000 and you are eligible this deduction would be $10,000 (20% x $50,000), if you are in a 25% tax bracket the net tax savings would be $2,500.It should be noted that the section 199A deduction does have a few limitations. In order to qualify one must not be engaged in a “specified service trade or business”. Typically a specified trade or business includes any activity in which the principal business asset is on the reputation or skill of the owner. In the case of a yachting professional I would maintain that they are engaged in a specified trade or business as the owner of the vessel is not necessarily hiring the business, they are hiring the crewmember and the reputation that has followed them. This restriction might not matter if their income falls below a certain amount. While the deduction generally does not apply to specified trades and businesses this restriction will not apply if the tax payer has income under $157,500 (phased out at $207,500) as a single individual and $315,000 as a married individual (phased out at $415,000).
There have also been discussions as to whether the section 199A deduction would apply to income generated outside of the United States. While this is a consideration our preliminary analysis has concluded that a business engaged to provide yacht crew services on a foreign flagged vessel should still be eligible for this tax benefit.
I would recommend that any crewmember looking to take advantage of the section 199A deduction consult with a tax attorney or CPA so that a thorough analysis may be applied to his or her individual situation.