By: Tom Andrews, CPA
It is inevitable… every captain at some point in their career will pay for a vessel expense out of their own pocket only to be reimbursed by the owner at a later date. Some captains prefer to do business this way as they can pad the reward points on their credit card and other captains will only do this as a last resort. Examples of vessel expenses include paying the dock master, paying for provisions or something as minor as fueling up the crew car. Regardless of the reason it is important that the captain/crewmember keep copies of all supporting documentation to prove the business purpose of the expense, in addition the Captain should include a provision in their contract that specifically details the reimbursement policy of the vessel. While the odds of an IRS audit are remote the consequences of not having the proper documentation can be significant.
During an audit an IRS agent will typically ask for copies of the taxpayer’s bank statements, the auditor will then compare total deposits on these bank statements to the income recorded on the taxpayers tax return. If the Captain has already returned all of the receipts to the owner it will be the taxpayer’s responsibility to contact the owner in an effort to recover those receipts, since most audits occur two to three years after the tax return has been filed the captain may or may not still be working for that vessels owner and as many captains are aware not all owner/captain relationships end on good terms.
Ideally a vessel should have its own operating account to be used for miscellaneous vessel expenses, unfortunately not all owners are willing to open up an account in the name of the vessel. If the Captain has no choice and must go out of pocket for vessel expenses, I recommend that the Captain have a separate bank account in the Captains name to process those expenses, this will help keep the yacht expenses separate from the Captains personal expenses and make a paper trail much easier to follow in the event of an audit. I also would recommend that the Captain have a written agreement with the owner stating the nature of expenses to be reimbursed and that it is ultimately the owner’s responsibility to assist the Captain in the event of an audit.
When it comes to paying day labor or yacht crew salaries on behalf of a vessel I urge the Captain not to enter such an agreement unless that Captain is fully aware of the payroll tax and withhold tax responsibilities to the federal government and how those responsibilities affect the yacht crew payroll. Paying day labor and crew is a whole separate topic that can create a whole host of unintended consequences if not thoroughly thought out.