Tax Traps and How to Avoid Them
Published on January 22, 2026
The One Big Beautiful Bill Act (OBBBA) extended the statute of limitations for many tax provisions, making it more important than ever for marina and boatyard owners and managers to be aware of the many “traps” among the tax rules, new and old.
Employee or Independent Contractor
Misclassifying employees as independent contractors continues to be a trap for unwary marine-related businesses. If the business hires workers, it’s essential to know the difference between employees who are subject to payroll taxes and benefits and independent contractors who are not.
Misclassification not only makes the operation a prime target for audits, but it can trigger back payroll tax liabilities, penalties and interest. Using the IRS’s common-law test and its updated “gig” economy factors is one way of avoiding this trap.
Keeping contracts, scope-of-work documents and evidence about financial and other controls and detailed information about an independent contractor’s other clients or customers, his or her licenses, etc. may support the independent contractor label. When in doubt, treat the worker as an employee or seek legal consultation.
Correct and Economical Business Entity Traps
The structure used to conduct business is already in place, but is it the entity that will produce the lowest tax bills and most liability protection for its owners? Choosing the original business structure, e.g., sole proprietorship, LLC, S or regular corporation, may have been done without considering all of the tax implications. The ever-changing tax rules may make switching entities today worthwhile.
Tripping over the S corporation limits on the number of owners is another potential trap, as is ignoring the so-called LLC “loophole” where the marina or boatyard is treated as a pass-through entity. Both can be expensive if not avoided.
Unpaid Payroll Taxes
Unpaid payroll taxes have long been an expensive trap. All employers are required to deposit all taxes withheld from an employee’s wages, as well as the operation’s share of those taxes.
As businesses collect these taxes throughout the year, the law requires them to forward them to the IRS on a quarterly, monthly or biweekly basis.
If an employer collects payroll taxes from its employees and fails to remit the funds to the IRS on time and in full, it is vulnerable to harsh penalties and even possible jail time.
What’s worse, it is not only the business that can be held responsible for unpaid payroll taxes. Everyone from the operation’s bookkeeper to shareholders can be potentially responsible.
The OBBA and the QBI
The OBBBA (One Big Beautiful Bill Act) made the deduction for Qualified Business Income (QBI) permanent, allowing a 20% deduction from the income of small businesses such as sole proprietorships, parnterships and S corporations.
While making the 20% deduction for QBI permanent, the new law also added new restrictions, such as a $5 million gross receipts cap. Failure to follow the complex wage and property limits could cause the deduction to be lost. Working with a tax professional to ensure all eligibility requirements are met for the QBI deduction is a good way to avoid this tax trap and reap the financial rewards.
Ignored Deductions
Quite a few businesses go overboard when searching for tax deductions. Unfortunately, finding too many, or making tax deductions up by artificially enhancing existing write-offs to inflate deductions or expenses, is increasing as the IRS’s audit figures go down.
Naturally, not every cost can be claimed as a business expense. Nondeductible expenses include personal or private expenses unrelated to the business, fines or penalties, including traffic or parking fines. Bottom-line, all deductions must be “ordinary and necessary” and related to the business. Otherwise, if the IRS catches the business claiming false deductions, penalties could be:
20% of the disallowed amount for filing false claims
$2,500 if the IRS determines a frivolous tax return was involved
Remember, there is no statute of limitations for fraudulent tax returns.
Personal or Business
Mixing personal and business finances is an all-too-common error. Using a single bank account or credit card for all expenses makes it difficult to distinguish legitimate business costs from personal expenses. This can cause errors in claiming deductions and raise audit red flags.
Mixing personal and business expenses, or claiming deductions that aren’t allowed, blurs the line between personal expenses, which are not deductible, invites scrutiny and may make it more difficult to plan for the future.
Don’t Overlook State and Local Tax Traps
State and local taxes, including sales and use taxes, transfer taxes, gross receipt taxes, and more are often overlooked. Failure to register, collect and remit sales tax in a state where the boatyard or marina has nexus can lead to back taxes, penalties and interest.
Forgetting sales tax nuances and nexus rules is common. However, state and local taxes are also often overlooked during transactions, creating risk for both buyers and sellers. Ignoring the sales tax that might be due on the sale of a business is common, as are the state-specific requirements for equipment sales and other buy-and-sell transactions.
Understanding economic nexus thresholds for volume or number of transactions when selling in more than one taxing jurisdiction is a good way to avoid potential state or local sales tax traps, but, regardless of location, professional guidance may be required when buying or selling a business or its assets.
For dealing with those state and local taxes, objectives include:
Understanding their importance in buy-or-sell side transactions
Evaluating state and local tax considerations for both asset and equity transactions
Understanding the best practices for state and local tax issues on every transaction and how to best take advantage of them
Remembering that an increasing number of state and local sales tax rules apply to services.
Tariffs, Taxes and Trade
Tariffs, real, proposed or eventually ruled illegal, are currently creating a host of challenges. When, for example, a business imports inventory or materials, the tariffs paid on those imports are not immediately deductible. Under the IRS’s uniform capitalization (UNICAP) rules, those costs must be capitalized as part of the inventory’s total value.
If a business immediately expenses tariffs, they could end up underreporting inventory values and overstating the cost of goods sold (COGS), resulting in an unexpected tax adjustment. To ensure compliance, it is important to track and allocate tariff-related costs properly.
Pricing pressures are a more common consideration for marinas and boatyards. When hit with tariffs, the operation must decide whether to pass the expense on to their customers or absorb it. Obviously, every decision will impact profitability, revenue recognition and the timing of income for tax purposes.
A Cunningly Vigilant IRS
The IRS continues to target many tax errors, which are likely to increase after the recent law changes. In fact, the IRS is increasing audits of businesses and high-income individuals. Inaccurate or inconsistant reporting, especially for those with income over $400,000, can act as a red flag for an audit.
Maintaining good records, using professional accounting software or seeking professional guidance and reconciling the marina or boatyard operation’s books on a reular basis will help avoid potential tax traps.
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