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Taxmap/pubs/p595-004.htm#TXMP4c6d5a7a What Is the Capital Construction Fund?

CCF Accounts

The Capital Construction Fund (CCF) is a special investment program administered by the National Marine Fisheries Service (NMFS) and the Internal Revenue Service (IRS). This program allows fishermen to defer paying income tax on certain income they invest in a CCF account and later use to acquire, build, or rebuild fishing vessels.

The following sections discuss CCF accounts and the types of bookkeeping accounts you must maintain when you invest in a CCF account. They also discuss the income tax treatment of CCF deposits, earnings, and withdrawals.

Taxmap/pubs/p595-004.htm#TXMP70574ca3 CCF Accounts

CCF Accounts

This section explains who can open a CCF account and how to use the account to defer income tax.

Taxmap/pubs/p595-004.htm#TXMP32e7796f Opening a CCF account.

If you are a U.S. citizen and you own or lease one or more eligible vessels (defined later), you can open a CCF account. However, before you open your CCF account, you must enter into an agreement with the Secretary of Commerce through the NMFS. This agreement will establish the following.

• Agreement vessels. Eligible vessels named in the agreement that will be the basis for the deferral of income tax.
• Planned use of withdrawals. Use of CCF funds to acquire, build, or rebuild a vessel.
• CCF depository. Where your CCF funds will be held.

You can request an application kit or get additional information from NMFS at the following address.   NOAA/NMFS, Financial Services Division, F/CS2   Capital Construction Fund Program   1315 East-West Highway   Silver Spring, MD 20910–3282

You can obtain information on the Capital Construction Fund Program at the following website: www.nmfs.noaa.gov/ocs/financial_services/ccf.htm.

You can call NMFS to request an application kit or get additional information at (301) 713–2393. Their fax number is (301) 713–1306.

Taxmap/pubs/p595-004.htm#TXMP2bc03ed5 Eligible vessels.

There are two types of vessels that may be considered eligible, those weighing 5 tons or more and those weighing less than 5 tons. For each type, certain requirements must be met.

Taxmap/pubs/p595-004.htm#TXMP1b5c7406 Vessel weighing 5 tons or more.

To be considered eligible, the vessel must meet all the following requirements.

• Be built or rebuilt in the United States.
• Be documented under the laws of the United States.
• Be used commercially in the fisheries of the United States.
• Be operated in the foreign or domestic commerce of the United States.

Taxmap/pubs/p595-004.htm#TXMP2f0d06a1 Vessel weighing less than 5 tons.

A small vessel, weighing at least 2 net tons but less than 5 net tons, must meet all the following requirements to be considered eligible.

• Be built or rebuilt in the United States.
• Be owned by a U.S. citizen.
• Have a home port in the United States.
• Be used commercially in the fisheries of the United States.

Taxmap/pubs/p595-004.htm#TXMP2b3de7ca Deferring tax on CCF deposits and earnings.

You can use a CCF account to defer income tax by taking the following actions.

• Making deposits to your CCF account from taxable income.
• Excluding from income deposits assigned to certain accounts (discussed later).
• Making withdrawals from your CCF account when you acquire, build, or rebuild fishing vessels.
• Reducing the basis of fishing vessels you acquire, build, or rebuild to recapture amounts previously excluded from tax.

Reporting requirements. Beginning with the tax year in which you establish your agreement, you must report annual deposit and withdrawal activity to the NMFS on NOAA Form 34-82. This form is due within 30 days after you file your federal income tax return even if no deposits or withdrawals are made. For more information, contact the NMFS at the address or phone number given earlier.

Taxmap/pubs/p595-004.htm#TXMP4cc6153b Types of Accounts You Must Maintain Within a CCF

CCF Accounts

This section discusses the three types of bookkeeping accounts you must maintain when you invest in a CCF account. Your total CCF deposits and earnings for any given year are limited to the amount attributed to these three accounts for that year.

Taxmap/pubs/p595-004.htm#TXMP64a4c234 Capital account.

The capital account consists primarily of amounts attributable to the following items.

1. Allowable depreciation deductions for agreement vessels.
2. Any nontaxable return of capital from either (a) or (b), below.
   1. The sale or other disposition of agreement vessels.
   2. Insurance or indemnity proceeds attributable to agreement vessels.
3. Any tax-exempt interest earned on state or local bonds in your CCF account.

Taxmap/pubs/p595-004.htm#TXMP4d7e538d Capital gain account.

The capital gain account consists of amounts attributable to the following items reduced by any capital losses from assets held in your CCF account for more than 6 months.

1. Any capital gain from either of the following sources.
   1. The sale or other disposition of agreement vessels held for more than 6 months.
   2. Insurance or indemnity proceeds attributable to agreement vessels held for more than 6 months.
2. Any capital gain from assets held in your CCF account for more than 6 months.

Taxmap/pubs/p595-004.htm#TXMP4c249abf Ordinary income account.

The ordinary income account consists of amounts attributable to the following items.

1. Any earnings (without regard to the carryback of any net operating or net capital loss) from the operation of agreement vessels in the fisheries of the United States or in the foreign or domestic commerce of the United States.
2. Any capital gain from the following sources reduced by any capital losses from assets held in your CCF account for 6 months or less.
   1. The sale or other disposition of agreement vessels held for 6 months or less.
   2. Insurance or indemnity proceeds attributable to agreement vessels held for 6 months or less.
   3. Any capital gain from assets held in your CCF account for 6 months or less.
3. Any ordinary income (such as depreciation recapture) from either of the following sources.
   1. The sale or other disposition of agreement vessels.
   2. Insurance or indemnity proceeds attributable to agreement vessels.
4. Any interest (not including tax-exempt interest from state and local bonds), most dividends, and other ordinary income earned on the assets in your CCF account.

Taxmap/pubs/p595-004.htm#TXMP429ddfb4 Tax Treatment of CCF Deposits

CCF Accounts

This section explains the tax treatment of income used as the basis for CCF deposits.

Taxmap/pubs/p595-004.htm#TXMP6cf8879b Capital gains.

Do not report any transaction that produces a capital gain if you deposit the net proceeds into your CCF account. This treatment applies to either of the following transactions.

• The sale or other disposition of an agreement vessel.
• The receipt of insurance or indemnity proceeds attributable to an agreement vessel.

Taxmap/pubs/p595-004.htm#TXMP62f0ca60 Depreciation recapture.

Do not report any transaction that produces depreciation recapture if you deposit the net proceeds into your CCF account. This treatment applies to either of the following transactions.

• The sale or other disposition of an agreement vessel.
• The receipt of insurance or indemnity proceeds attributable to an agreement vessel.

Taxmap/pubs/p595-004.htm#TXMP4dd2c2be Earnings from operations.

Report earnings from the operation of agreement vessels on your Schedule C or C–EZ (Form 1040) even if you deposit part of these earnings into your CCF account. You subtract any part of the earnings you deposited into your CCF account from the amount you would otherwise enter as taxable income on line 40 (Form 1040). Next to line 40, write "CCF" and the amount of the deposits. Do not deduct these CCF deposits on Schedule C or C–EZ (Form 1040).

If you deposit earnings from operations into your CCF account and you must complete other forms such as Form 6251, Alternative Minimum Tax (Individuals), or a worksheet for Schedule D (Form 1040), you will need to make an extra computation. When the other form instructs you to use the amount from line 38, Form 1040, do not use that amount. Instead, add lines 39 and 40, Form 1040, and use that amount.

Taxmap/pubs/p595-004.htm#TXMP6503a69f Self-employment tax.

You must use your net profit or loss from your fishing business to figure your self-employment tax. Do not reduce your net profit or loss by any earnings from operations you deposit into your CCF account.

Partnerships and S corporations. The deduction for partnership earnings from operations deposited into a CCF account is separately stated on Schedule K (Form 1065), line 11, and allocated to the partners on Schedule K–1 (Form 1065), line 11. The deduction for S corporation earnings deposited into a CCF account is separately stated on Schedule K (Form 1120S), line 10, and allocated to the shareholders on Schedule K–1 (Form 1120S), line 10.

Taxmap/pubs/p595-004.htm#TXMP51d4936e Tax Treatment of CCF Earnings

CCF Accounts

This section explains the tax treatment of the earnings from the assets in your CCF account when the earnings are redeposited or left in your account. However, if you choose to withdraw the earnings in the year earned, you must generally pay income tax on them.

Taxmap/pubs/p595-004.htm#TXMP019e3b77 Capital gains.

Do not report any capital gains from the sale of capital assets held in your CCF account. This includes capital gain distributions reported to you on Form 1099–DIV or a substitute statement. However, you should attach a statement to your tax return to list the payers and the amounts and to identify the capital gains as "CCF account earnings."

Taxmap/pubs/p595-004.htm#TXMP09e47040 Interest and dividends.

Do not report any ordinary income (such as interest and dividends) you earn on the assets in your CCF account. However, you should attach a statement to your return to list the payers and the amounts and to identify them as "CCF account earnings."

If you are required to file Schedule B (Form 1040), you can add these earnings to the list of payers and amounts on line 1 or line 5 and identify them as "CCF earnings." Then, subtract the same amounts from the list and identify them as "CCF deposits."

Taxmap/pubs/p595-004.htm#TXMP569c2ead Tax-exempt interest.

Do not report tax-exempt interest from state or local bonds you held in your CCF account. You are not required to report this interest on line 8b of Form 1040.

Taxmap/pubs/p595-004.htm#TXMP6a52d963 Tax Treatment of CCF Withdrawals

CCF Accounts

This section discusses the tax treatment of amounts you withdraw from your CCF account during the year.

Taxmap/pubs/p595-004.htm#TXMP5810b3ce Qualified Withdrawals

A qualified withdrawal from a CCF account is one that is approved by NMFS for either of the following uses.

• Acquiring, building, or rebuilding qualified vessels (defined next).
• Making principal payments on the mortgage of a qualified vessel.
• NMFS will not approve amounts withdrawn to purchase nets not continuously attached to the vessel, such as seine nets, gill set-nets, and gill drift-nets.
• NMFS will approve amounts withdrawn to purchase trawl nets.

Taxmap/pubs/p595-004.htm#TXMP5daddd43 Qualified vessel.

This is any vessel that meets all of the following requirements.

• The vessel was built or rebuilt in the United States.
• The vessel is documented under the laws of the United States.
• The person maintaining the CCF account agrees with the Secretary of Commerce that the vessel will be operated in United States foreign trade, Great Lakes trade, noncontiguous domestic trade, or the fisheries of the United States.

Taxmap/pubs/p595-004.htm#TXMP08fc0c16 How to determine the source of qualified withdrawals.

When you make a qualified withdrawal, the amount is treated as being withdrawn in the following order from the accounts listed below.

1. The capital account.
2. The capital gain account.
3. The ordinary income account.

Taxmap/pubs/p595-004.htm#TXMP046dd4ce Excluding qualified withdrawals from tax.

Do not report on your income tax return any qualified withdrawals from your CCF account.

Reduce the depreciable basis of fishing vessels you acquire, build, or rebuild when you make a qualified withdrawal from either the capital gain or the ordinary income account.

Taxmap/pubs/p595-004.htm#TXMP35597b04 Nonqualified Withdrawals

A nonqualified withdrawal from a CCF account is generally any withdrawal that is not a qualified withdrawal. Qualified withdrawals are defined under Qualified Withdrawals, earlier.

Taxmap/pubs/p595-004.htm#TXMP6201e283 Examples.

Examples of nonqualified withdrawals include the following amounts from either the ordinary income account or the capital gain account.

• Amounts remaining in a CCF account upon termination of your agreement with NMFS.
• Amounts you withdraw and use to make principal payments on the mortgage of a vessel if the basis of that vessel and the bases of other vessels you own have already been reduced to zero.
• Amounts determined by IRS to cause your CCF account balance to exceed the amount appropriate to meet your planned use of withdrawals. (You will generally be given 3 years to revise your plans to cover this excess balance.)
• Amounts you leave in your account for more than 25 years. (There is a graduated schedule under which the percentage applied to determine the amount of the nonqualified withdrawal increases from 20% in the 26th year to 100% in the 30th year.)

Taxmap/pubs/p595-004.htm#TXMP4874901a How to determine the source of nonqualified withdrawals.

When you make a nonqualified withdrawal from your CCF account, the amount is treated as being withdrawn in the following order from the accounts listed below.

1. The ordinary income account.
2. The capital gain account.
3. The capital account.

Taxmap/pubs/p595-004.htm#TXMP1cac7feb Paying tax on nonqualified withdrawals.

In general, nonqualified withdrawals are taxed separately from your other gross income and at the highest marginal tax rate in effect for the year of withdrawal. However, nonqualified withdrawals treated as made from the capital gain account are taxed at a rate that cannot exceed 15% for individuals and 34% for corporations.

Partnerships and S corporations. Taxable nonqualified partnership withdrawals are separately stated on Schedule K (Form 1065), line 24, and allocated to the partners on Schedule K–1 (Form 1065), line 25. Taxable nonqualified withdrawals by an S corporation are separately stated on Schedule K (Form 1120S), line 21, and allocated to the shareholders on Schedule K–1 (Form 1120S), line 23.

Taxmap/pubs/p595-004.htm#TXMP4889b22e Interest.

You must pay interest on the additional tax due to nonqualified withdrawals that are treated as made from either the ordinary income or the capital gain account. The interest period begins on the last date for paying tax for the year for which you deposited the amount you withdrew from your CCF account. The period ends on the last date for paying tax for the year in which you make the nonqualified withdrawal. The interest rate on the nonqualified withdrawal is simple interest. The rate is subject to change annually and is published in the Federal Register.

You also can call NMFS at 301– 713–2393 to get the current interest rate.

Taxmap/pubs/p595-004.htm#TXMP395c4842 Interest deduction.

You can deduct the interest you pay on a nonqualified withdrawal as a trade or business expense.

Taxmap/pubs/p595-004.htm#TXMP3e1c9f6e Reporting the additional tax and interest.

Attach a statement to your income tax return showing your computation of the tax and the interest on a nonqualified withdrawal. Include the tax and interest on line 60 of Form 1040. To the left of line 60, write in the amount of tax and interest and "CCF."

Taxmap/pubs/p595-004.htm#TXMP6d1358e8 Tax benefit rule.

If any portion of your nonqualified withdrawal is properly attributable to contributions (not earnings on the contributions) you made to the CCF account that did not reduce your tax liability for any tax year prior to the withdrawal year, the following tax treatment applies.

• The part that did not reduce your tax liability for any year prior to the withdrawal year is not taxed.
• That part is allowed as a net operating loss deduction.

Taxmap/pubs/p595-004.htm#TXMP4bde555e More Information

This section briefly discussed the CCF program. For more detailed information, see the following legislative authorities.

• Section 607 of the Merchant Marine Act of 1936, as amended (46 U.S.C. 1177).
• Chapter 2, Part 259 of title 50 of the Code of Federal Regulations (50 C.F.R., Part 259).
• Subchapter A, Part 3 of title 26 of the Code of Federal Regulations (26 C.F.R., Part 3).
• Section 7518 of the Internal Revenue Code (IRC 7518).

The application kit you can obtain from NMFS at the address or phone number given earlier may contain copies of some of these sources of additional information. Also, see their web page at www.nmfs.noaa.gov/ocs/financial_services/ccf.htm.

Previous Page:  Publication 595 - Tax Highlights for Commercial Fishermen - When Do Fishermen Pay Estimated Tax and File Tax Returns? Next Page:  Publication 595 - Tax Highlights for Commercial Fishermen - How Do You Claim Fuel Tax Credits and Refunds? Use     to find additional instances of index items.