By Harvey Bezozi
If your client purchases a yacht or jet that will be used to conduct business ventures, the acquisition should be structured so that the ownership of the vehicle clearly falls to the company, not your client personally. Most often, the appropriate business structure is a limited liability company, called an LLC, which offers both the liability limits of a corporation and the “pass-through” taxation for the tax filing of a sole proprietorship, partnership or S corporation.
Even if your client is acquiring a new vehicle with no immediate use for it within the context of his existing businesses, he may want to consider starting a new LLC under which to make the purchase. Ownership of any vehicle that could potentially result in liability claims—from a sleek jet to a sturdy fishing boat or a third luxury car to a simple golf cart—can put all of your clients’ personal assets at risk if a tragedy occurs.
The Big Benefit: Liability Limitation
The most important benefit of LLC formation for vehicle ownership is embedded in the abbreviation itself: limited liability in the event that injury or property damage results from your use of the vehicle. A single, fluke incident in which the parking brake on your golf cart fails and the vehicle rolls down a hill, striking another golfer, could be financially devastating if the cart is under your personal ownership. However, if the cart is under the ownership of your LLC, a lawsuit related to such an unfortunate event is subject to the same limitations as any other legal action against a corporation. Your personal assets will be protected if the LLC is formed and structured properly.
Bear in mind that this protection is not absolute. If the court deems that there is no meaningful distinction between you and the LLC—that is, that the LLC is in fact an empty shell that exists solely to disguise the private nature of the vehicle ownership—the usual protections may be waived, granting the litigant the right to sue you directly. Therefore, in order to realize the benefits of LLC formation, it is necessary to take all the steps normally required to operate a business—hiring a competent business attorney, staff or contractors, revenue and expense tracking and so on.
Tax Benefits Are Elusive
When considering the benefits of owning a vehicle as a business asset, many people are quick to land on potential tax advantages. However, those advantages are not as easily realized as many would like to think.
Deducting Ongoing Expenses Related to Vehicle Ownership
In order to deduct expenses related to a vehicle, such as repairs and upkeep, it is necessary to maintain thorough, detailed records and to file appropriate business income/loss forms with your clients’ taxes. It is also important to remember that a business is, by IRS definition, an organization or activity that exists for the purpose of attaining profit. If your client plans to keep the vehicle for the long haul, it will be necessary for the LLC to somehow generate revenue in order to continue deducting expenses.
Furthermore, your client will need to demonstrate that the expenses are in fact related to business use of the vehicle. For a jet employed for business travel, such a claim is easy to defend. Setting up an office on a yacht where your client regularly conducts business might also fly (or rather float) with the Internal Revenue Service.
If you set up the LLC for ownership of a golf cart or fourth luxury SUV, deducting operating expenses may well be difficult to justify and unwise to attempt. There is, however, a different tax benefit that can be readily attained for any vehicle owned under an LLC.
Sales Tax Savings
The most easily attained tax advantage of starting an LLC for a golf cart, boat or other vehicle is actually the benefit for the buyer when your client sells the craft. Rather than simply selling the vehicle to another party, your client sells them the LLC itself, with the vehicle included as a company asset—thus exempting the transaction from sales tax. Although this exemption ostensibly benefits only the purchaser, it pays dividends for the seller as well, in the form of a higher ceiling for the selling price of the vehicle.
To execute the tax-exempt sale of a vehicle, it is critical that the transaction be structured and understood as the sale of the business from the beginning. If an agreement for the purchase of the vehicle is reached separately, any subsequent attempt to “throw in” the LLC as part of the deal amounts to the purchaser buying a company with no assets. As noted in my article on valuing artwork for tax purposes, both federal and state tax agencies are quick to flag transactions that appear to have been completed solely to attain a tax benefit.
Properly Insuring the Asset
Finally, if your client does choose to establish an LLC, make certain to insure the vehicle in the name of the LLC, not under a personal insurance policy. Otherwise, you will find yourself either uninsured or unprotected from liability or both.
Harvey Bezozi is a CPA and CFP. You can read more of his writing at YourFinancialWizard.com.