A non-qualified withdrawal from a CCF account is any withdrawal that is not used for acquiring, building, rebuilding a qualified fishing vessel, or making principal payments on the mortgage of a qualified fishing vessel.
Attach a statement to your income tax return to show computation of both tax and interest on a non-qualified withdrawal. Include tax and interest on the non-qualified withdrawal on Form 1040, line 43 and write (to the left of line 43) the amount of tax, interest and “CCF.” Publication 595, Capital Construction Fund for Commercial Fishermen, has more information on CCF accounts.
When you make a non-qualified withdrawal from your CCF account, the amount you withdraw is treated as being made from your accounts in the following order
- Ordinary income account
- Capital gain account then
- The capital account
The general rule is that anything that is not a qualified withdrawal is a non-qualified withdrawal. The following examples fall under the category as non-qualified withdrawals:
- Payment of expenses that qualify for tax deductions in the current year (operating expenses), including but not limited to expenses for labor, materials, supplies, fuel, bait, auto expenses, legal and professional fees, supplies. Machinery and equipment that are not considered an integral part of the vessel.
- Fishing Permits and licenses.
- Fishing rights, including but not limited to set-net sites and vessel moratorium rights.
- Shore based capital assets, including but not limited to docks, real property, machinery, and vehicles.
- Other capital assets, including but not limited to set-net site survey and moorings.
- Payments for repairs
- Payments of interest expense
- Acquisition or reconstruction of fishing gear, including nets, pots, traps, and long lines
- Payments relating to personal living expenses
- Amounts in fund after termination (voluntary or involuntary)
- Amounts withdrawn to pay vessel mortgage indebtedness that are in excess of vessel tax basis
- Amounts not withdrawn after 25 years
- Amounts in accumulation determined by the Internal Revenue Service that exceeds the plan objectives
- Annual over-deposit in fund, not cured by either withdrawal or carry-over provisions
- The purchase of nets not continuously attached to the vessel, such as seine nets, till next, and gill drift-nets (trawl nets generally will be approved)
Paying Tax on Non-qualified Withdrawals
In general, non-qualified withdrawals are taxed separately from your other gross income and at the highest marginal tax rate in effect for the year of withdrawal. However, non-qualified withdrawals treated as made for the capital gain account are taxed at a rate that cannot exceed 15% for individuals and 34% for corporations.
For Partnerships and S corporations, taxable non-qualified partnership withdrawals are separately stated on Schedule K (Form 1065), line 20c, and allocated to the partners on Schedule K-1 (Form 1065), Box 20, Code S. Taxable non-qualified withdrawals by an S corporation are separately stated on Schedule K (Form 1120S), line 17d, and allocated to the shareholders on Schedule K-1 (Form 1120S). See the instructions for the form for the appropriate line to report the income and the related code.
Interest must be paid on additional tax due to a non-qualified withdrawal. The interest period begins on the last date for paying tax for the tax 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 tax year in which you make the non-qualified withdrawal.
The interest rate on the non-qualified withdrawal is simple interest and subject to change annually. The rate is updated annually on the TreasuryDirect website. Select the year and see Table 7 Merchant Marine Act.
Reporting Additional Tax and Interest
Attach a statement to your income tax return to show computation of both tax and interest on a non-qualified withdrawal. Include tax and interest on the non-qualified withdrawal on Form 1040, line 43 and write (to the left of line 43) the amount of tax, interest and “CCF.”
Tax Benefit Rule
If any portion of your non-qualified withdrawal is properly attributable to contributions (not earnings on the contributions) you made to the fund that did not reduce your tax liability for any tax year prior to the withdrawal year; the following tax treatment applies:
- The portion that did not reduce your tax liability for any year prior to the withdrawal year is not taxed.
- An amount equal to that portion is allowed as a net operating loss deduction.
You can deduct the interest you pay on a non-qualified withdrawal as a trade or business expense.