Since fishing nets’ useful life extends beyond the tax year they are placed in service, fishing nets are capital assets and require depreciation treatment. When an asset is depreciated, the cost of the asset is recovered through depreciation deductions over the "life" of the asset. This is different than the treatment of assets having a useful life of less than one year, which may be deducted entirely in the year of acquisition.
The "life" over which depreciation deductions must be taken is the asset’s class life. All personal property assets with no designated class life are assigned a 7 year class life under the General Depreciation System. Since fishing nets have no designated class life, they are depreciated over 7 years using the appropriate convention and method. See Publication 946, How to Depreciate Property, for further details and depreciation tables. Note: If a taxpayer elects to use the Alternative Depreciation System, the class life for fishing nets is 12 years.
The total cost that you can deduct each year for Section 179 purposes is limited to the taxable income from the active conduct of all trade or businesses for the tax year. You can carry over the cost of any Section 179 property you elected to expense but were unable to because of the taxable income limit. You use the amount you carry over to determine your Section 179 deduction in the next year. There are also situations in which part of the Section 179 deduction must be recaptured (i.e., added back to income). For additional information, refer to Publication 946, How to Depreciate Property.
In the year of disposition, you may claim the remaining cost (the portion of the total cost that hasn’t already been deducted as depreciation in the current and prior years) on Form 4797, Sales of Business Property (PDF).
Throughout a taxpayer's fishing business, complete new nets or replacement nets may be purchased/constructed. Whenever this occurs, the complete cost must again be capitalized and depreciated.
See Tangible Property Regulations - Frequently Asked Questions to elect simplifying provisions for tangible personal property if eligible.
Section 179 Depreciation
As an alternative, it may be possible to elect a Section 179 deduction for a portion, or all, of the cost of fishing nets. See Chapter 2 of Publication 946, How to Depreciate Property, for more information on Section 179 depreciation.
The election to claim the Section 179 deduction is made by taking the deduction on Form 4562, Depreciation and Amortization (PDF). This form is attached to,
Your original tax return filed for the year the nets were placed in service (whether or not you file it timely) or
An amended return filed by the due date (including extensions) for your return for the year the property was placed in service.
You cannot make an election for the Section 179 deduction on an amended return filed after the due date (including extensions). However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within six months of the due date of the return (excluding extensions). Attach the election to the amended return and write "Filed pursuant to section 301.9100-2" on the election statement. File the amended return at the same address you filed the original return. Once you elect a Section 179 expense deduction, you cannot change your election or revoke your election without IRS approval. The IRS will grant approval only in extraordinary circumstances.
Ordinary repairs to fishing nets made during the fishing season are deductible when they do not increase the value of property, make it more useful, or lengthen its life. If the repair or replacement does increase the value of your property, makes it more useful, or lengthens its life, the repair or replacement must be capitalized and depreciated.
Whether an asset must be capitalized and depreciated depends upon whether the asset is expected to last more than one year. In other words, it must have a useful life that extends substantially beyond the year it is placed in service. Both gill and seine nets are types of net that are expected to last substantially beyond the year they are placed in service and must be capitalized and depreciated. Generally all nets, pots, and traps actually last substantially beyond the year they are placed in service. Therefore, they are expected to last substantially beyond the year they are placed in service.
When a taxpayer initially begins fishing, complete nets (for example, webbing, cork, buoys, lead lines, etc) are acquired either by:
- Outright purchase
- Contractual construction
The entire cost of the net must be capitalized and depreciated over 7 years. The individual components of the net (the webbing, cork, buoys, lead lines, etc.) are not separately identified and depreciated. The composite total cost of all of these items are capitalized and depreciated simply as the cost of the net. The amount to depreciate is obvious when a complete net is purchased; the costs of the individual components of nets that are constructed must be accumulated to determine the amount to depreciate.
After initial purchase of nets, net repairs may be performed each year. The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as an expense. Gillnet fishermen will initially purchase new gear and then often re-hang new webbing each year on the same cork and lead lines. When the new net is initially purchased, the entire cost will be depreciated over 7 years. The entire cost includes the entire purchase price if purchased, or the cost of all of the components, as discussed above, if self-constructed. If the webbing is replaced each year, the cost of the replacement webbing is a deductible expense each year. However, the initial cost of the complete net, which includes the initial webbing, will continue to be depreciated over 7 years. Only when the entire net system (webbing, cork, buoys, lead lines, etc.) is discarded will the remaining undeprecited cost of the net be deductible in the year of disposition.
If you experience that all pots purchased in a year are discarded at the end of the fishing season, and new pots are purchased at the start of the next fishing season, and this occurs yearly, then the cost of the pots would be deductible in the year placed in service. If only some of the pots are discarded and some are retained for use in the next fishing season, then pots in general are not deductible in the current year. They must be depreciated, however, the cost of the actual pots that are discarded in the same year they are placed in service will be deductible in that year. The same will apply to traps and nets and other fishing gear.