News

What's Wrong with Fronting Expenses for the Owner?

20 January 2011 By Tom Andrews

UGGGHH…as an accountant I hate this scenario: I’m reconciling a client’s bank statements and I notice that the amount of deposits to the client’s bank account far exceeds their salary. I ask them why they have so much money deposited to their account. (Before the client says anything, I know the answer because it’s such a common occurrence.) The client tells me, “I’ve deposited so much money because sometimes I pay for boat expenses personally and those deposits represent the reimbursements from the other.”

The reimbursed expenses often include dockage, fuel and other provisions. The biggest concern with such an arrangement is more often than not the captain does not make copies of those receipts to keep for him/herself before turning them over for reimbursement. It’s very important for the captain to keep all receipts just in case s/he is ever audited by the Internal Revenue Service in the U.S., or the captain’s home country's tax agency. If audited, an overzealous auditor may include the income from reimbursements, but deny the expenses associated with that reimbursement because the captain did not keep the supporting documentation to justify those expenses. To make matters more complicated, it’s common for yachts to travel to remote locations where only cash is accepted. In those cases, the captain must make every effort to ensure they receive a receipt for expenditures.

Many captains express to their accountants, with confidence, that in the event of an audit they will simply request copies of the receipts from the owner’s office. It’s important to remember that if an audit occurs, the audit probably will take place several years after the tax return has been filed. The captain may not work for the same vessel and certainly will not want to contact a previous employer, who s/he may or may not be on good terms with, to beg for receipts.

The best case scenario for a captain would be to urge the owner to open up a cash account in the name of the yacht and to give the captain a debit card or credit card to cover these operational expenses. By keeping the bank account in the name of the yacht rather than the captain, the captain can keep him/herself insulated.

Unfortunately, not all owners are willing to open an account in the name of the vessel and oftentimes the captain already has agreed to a reimbursed system for expenses. If the captain has no choice but to go out of pocket for expenses, I recommend that the captain have a separate credit card and bank account to process those expenses. This will help keep the yacht’s expenses separate from the captain’s 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. Ultimately, it is the owner’s responsibility to assist the captain in the event of an audit.

I urge the captain not to pay day labor or crew salaries unless s/he is aware of payroll tax and withholds tax responsibilities to the federal government. This is an entirely separate issue and has a plethora of unintended consequences if not properly considered.

The yachting industry is changing and the informal way of doing business is slowly disappearing. As compliance and regulation continue to take hold of this industry, it is important that captains be proactive to protect themselves.

Tom Andrews is a CPA and a principal Avmar Accounting Services +1 954 764 0404; www.avmarinternational.com