by Tom Andrews, CPA
Yacht Crewmembers frequently ask me about the “home office deduction” and how they may benefit from its application. Before we discuss the significance of the home office deduction in the luxury yacht industry it is first important to define this deduction. Section 280A(c) ( this is the section of internal revenue code that allows the home office deduction) permits self-employed individuals and employees who work out of their home to deduct business expenses related to the part of their home that is exclusively used on a regular basis to carry on trade or business.
Upon reviewing the above definition you can see how this deduction contradicts the normal yachting career. The definition clearly states that the home office must be used on a regular basis to carry on trade or business. Many yacht crewmembers are not regularly home, their “office” is on the vessel itself while the vessel is traveling the world, this in itself may result in an IRS auditor from disallowing the deduction. That being said it should be noted that there are crewmembers and captains that work on or manage yachts that are local to their home. In these cases these crewmembers might satisfy the definition as they may manage the vessel in part from their home office.
There are two ways to qualify for the home office deduction:
- Actual Cost Method- this method requires complex calculations and allocations that some taxpayers find burdensome.
- Simplified Method- this method is allows a flat $5 per square foot deduction not to exceed 300 square feet for one’s home office, the deduction is limited to $1,500.
While both methods may provide a tax saving deduction it is important for the taxpayer to review both options with their accountant, the “Actual Cost Method” will generally generate a higher deduction but the complexity of the calculations may result in higher accounting fees that will offset that tax savings, in these cases the “simplified method” may be the preferred choice.
It should also be noted that the space used as an office must be used “exclusively” for that home office and not be a “mixed use” room. For example if you are claiming that the dining room is your home office it will likely be rejected as the dining room is a mixed use room used both for dining and the home office. Even if you have an ironing board in your home office the deduction may be disallowed as the IRS may view the activity of ironing clothes a violation of the “exclusivity” rule that is clearly defined in section 280A of the internal revenue code.
Before claiming the home office deduction I recommend that crewmembers carefully review the IRS rules governing this deduction or speak with an accountant, the application of this deduction is complex and we are unable to cover all caveats within the confines of this column.