Navigate Complex Depreciation Rules, Including Yacht Chartering Specifics

Understanding when business property is considered “placed in service” is crucial for accurate tax planning and claiming depreciation deductions. This timing can be particularly nuanced in unique business scenarios, such as the yacht chartering industry. Accounting professionals need a firm grasp of these rules to help clients optimize tax savings and avoid disputes with the IRS.

Depreciation allows businesses to recover the cost of eligible property used in their operations. The Modified Accelerated Cost Recovery System (MACRS) is the primary method for depreciating most assets over their useful lives.

However, the tax code also offers valuable tools for accelerating cost recovery:

1. Section 179 Deduction: For 2025, businesses can deduct up to $1.25 million for qualified property placed in service during the year, subject to certain limitations.
2. Bonus Depreciation: In 2025, businesses can deduct 40% of the cost of qualifying new property upfront. This percentage is scheduled to decrease annually, phasing out entirely by 2027 unless Congress extends it.

Crucially, to qualify for MACRS, Section 179, or bonus depreciation, the property must be considered “placed in service” during the tax year.

Defining “Placed in Service”

The IRS defines “placed in service” as the date when the property is both ready and available for its intended use, regardless of whether it is actively being used at that moment. This definition can often lead to interpretation challenges, especially for specialized property or equipment.

For instance, if a new piece of manufacturing machinery is fully installed and operational in December, it is considered placed in service in that year, even if actual production using the machine doesn’t commence until January of the following year.

However, the determination of when an asset is truly “ready and available” can be less clear-cut, leading to disagreements with the IRS.

Case Study: Yacht Charter Business

The U.S. Tax Court case of Lentine v. Commissioner (TC Docket No. 12443-21, March 25, 2025) highlights the complexities of determining the placed-in-service date. The case involved a dispute between a yacht chartering business and the IRS regarding the $2.65 million trade-in for a newer yacht.

Here’s a breakdown of the situation:

1. In December 2016, the business traded an older yacht for a new one.
2. The new yacht was delivered and was physically ready for use before the end of 2016.
3. The yacht’s crew began the process of cleaning, testing its various systems, and preparing it for charter service.
4. However, the first chartered customer trip on the new yacht did not occur until early 2017.

The IRS argued that the yacht was not “placed in service” until its first actual business use in 2017. Conversely, the chartering business contended that the yacht was fully functional and available for chartering to customers in December 2016.

The Tax Court acknowledged that the issue was not immediately clear and deferred a final ruling until a full trial, emphasizing that whether the yacht was in its completed form and ready to perform its intended function (chartering) in 2016 was a factual question that needed further examination.

Why the “Placed in Service” Date Matters

This case underscores the significant impact of the placed-in-service date. Its determination directly affects a business’s eligibility for:

1. Bonus depreciation
2. Section 179 expensing
3. The commencement of MACRS depreciation schedules

If an asset is deemed to be placed in service in a later tax year, the ability to claim these potentially significant deductions may be delayed or even reduced, particularly with the ongoing phase-out of bonus depreciation.

Practical Guidance for Accounting Professionals

To help clients navigate these complex rules, minimize the risk of IRS scrutiny, and maximize potential tax deductions, accounting professionals should consider the following practical tips:

1. Thoroughly Document Readiness: Maintain comprehensive records that clearly demonstrate when a property was fully installed, rigorously tested, and definitively made available for its intended business use. This documentation is crucial for substantiating the placed-in-service date.
2. Avoid Automatic Assumptions Based on Usage: It’s vital to understand that actual business use does not have to coincide with the placed-in-service date. The key criterion is that the asset is fully prepared and capable of performing its designated function.
3. Exercise Caution with Incidental Personal Use: If an asset is used for personal purposes before being placed in service for business, it may jeopardize its eligibility for depreciation deductions. Understand the nuances of this rule.
4. Maintain Clear Communication with Clients: Ensure clients understand that depreciation rules hinge on the timing of an asset being ready and functional for its intended purpose, not solely on the date of purchase or delivery. This proactive communication can prevent misunderstandings and ensure proper tax planning.

Final Thoughts

The distinction between when a business asset is merely “delivered” and when it is truly “placed in service” can often be a blurred line, especially when dealing with complex or highly customized business property. For accounting and tax professionals, staying ahead of the curve requires a deep understanding of where that line lies and, more importantly, how to document it clearly and effectively.

A strong grasp of the placed-in-service rules is essential to ensure that clients can rightfully claim depreciation deductions at the optimal time, all while significantly reducing the potential for an IRS audit or a protracted legal challenge.

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