Publication 595 (09/2018), Capital Construction Fund for Commercial Fishermen

Revised: September 2018


Publication 595 - Introductory Material

Future Developments

For the latest information about developments related to Pub. 595, such as legislation enacted after it was published, go to IRS.gov/Pub595.

Introduction

This publication discusses the Capital Construction Fund (CCF). The 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.

This publication does not discuss all the tax rules that may apply to your fishing trade or business. For general information about the federal tax laws that apply to individuals, including commercial fishermen, who file Schedule C or C-EZ, see Pub. 334, Tax Guide for Small Business. If your trade or business is a partnership or corporation, see Pub. 541, Partnerships, or Pub. 542, Corporations.

Comments and suggestions.

We welcome your comments about this publication and your suggestions for future editions.

You can send us comments through IRS.gov/ FormComments. Or you can write to:

 


Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224

 

Although we can’t respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax forms, instructions, and publications.

Ordering forms and publications.

Visit IRS.gov/ FormsPubs to download forms and publications. Otherwise, you can go to IRS.gov/OrderForms to order current and prior-year forms and instructions. Your order should arrive within 10 business days.

Tax questions.

If you have a tax question not answered by this publication, check IRS.gov and How To Get Tax Help at the end of this publication.

Important Reminder

Photographs of missing children. The IRS is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Publication 595 - Main Content

Capital Construction Fund

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.

CCF Accounts

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

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.

 

This is an Image: envelope.gif

 

You can request an application kit or get additional information from NMFS at the following address.


NOAA/NMFS, Financial Services Division, F/MB5
Capital Construction Fund Program
1315 East-West Highway
Silver Spring, MD 20910-3282

 

This is an Image: compute.gif

 

You can obtain information on the Capital Construction Fund Program at the following website: www.fisheries.noaa.gov/national/funding-and-financial-services/capital-construction-fund-program.

This is an Image: phone.gif

 

You can call NMFS to request an application kit or get additional information at 301-427-8784. Their fax number is 301-713-1939.

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.

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.

 

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.

 

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.

 

This is an Image: taxtip.gif

 

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.

Types of Accounts You Must Maintain Within a CCF

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.

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.

 

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.

 

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.

 

Tax Treatment of CCF Deposits

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

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.

 

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.

 

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 Form 1040, line 10 (for 2018). Next to line 10, write "CCF" and the amount of the deposits. Do not deduct these CCF deposits on Schedule C or C-EZ (Form 1040).

This is an Image: caution.gif

 

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 or worksheet instructs you to refigure the amount from Form 1040, line 10 (for 2018) when line 10 is zero, do not forget to subtract the CCF write-in amount when you figure the negative amount that would go on line 10 if taxable income could be negative.

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.

This is an Image: taxtip.gif

 

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 13d, and allocated to the partners on Schedule K-1 (Form 1065), box 13 (for 2018).

The deduction for S corporation earnings deposited into a CCF account is separately stated on Schedule K (Form 1120S), line 12d, and allocated to the shareholders on Schedule K-1 (Form 1120S), box 12 (for 2018).

Tax Treatment of CCF Earnings

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.

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."

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 (for 2018) and identify them as "CCF earnings." Then, subtract the same amounts from the list and identify them as "CCF deposits."

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 Form 1040, line 2a (for 2018).

Tax Treatment of CCF Withdrawals

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

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.

 

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.

 

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.

 

Excluding qualified withdrawals from tax.

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

This is an Image: caution.gif

 

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.

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.

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 the 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.

 

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.

 

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, for taxpayers who are not corporations, nonqualified withdrawals treated as made from the capital gain account are taxed at a rate that cannot exceed 20%.

This is an Image: taxtip.gif

 

Partnerships and S corporations. Taxable nonqualified 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 (for 2018). Taxable nonqualified 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), box 17 (for 2018).

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.

This is an Image: phone.gif

 

You also can call NMFS at 301-427-8784 to get the current interest rate.

 

Interest deduction.

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

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 Schedule 4 (Form 1040), line 64 (for 2018). To the left of line 64, write in the amount of tax and interest and "CCF."

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.

  1. The part that did not reduce your tax liability for any year prior to the withdrawal year is not taxed.

  2. That part is allowed as a net operating loss deduction.

 

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. 53503).

  • 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.fisheries.noaa.gov/national/funding-and-financial-services/capital-construction-fund-program.

How To Get Tax Help

If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to IRS.gov and find resources that can help you right away.

Preparing and filing your tax return.

Find free options to prepare and file your return on IRS.gov or in your local community if you qualify.

The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities, and limited-English-speaking taxpayers who need help preparing their own tax returns. The Tax Counseling for the Elderly (TCE) program offers free tax help for all taxpayers, particularly those who are 60 years of age and older. TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors.

You can go to IRS.gov to see your options for preparing and filing your return which include the following.

 

  • Free File. Go to IRS.gov/FreeFile. See if you qualify to use brand-name software to prepare and e-file your federal tax return for free.

  • VITA. Go to IRS.gov/VITA, download the free IRS2Go app, or call 1-800-906-9887 to find the nearest VITA location for free tax preparation.

  • TCE. Go to IRS.gov/TCE, download the free IRS2Go app, or call 1-888-227-7669 to find the nearest TCE location for free tax preparation.

 

This is an Image: compute.gif

 

Getting answers to your tax questions. On IRS.gov, get answers to your tax questions anytime, anywhere.

  • Go to IRS.gov/Help or IRS.gov/LetUsHelp for a variety of tools that will help you get answers to some of the most common tax questions.

  • Go to IRS.gov/ITA for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers. You can print the entire interview and the final response for your records.

  • Go to IRS.gov/Pub17 to get Pub. 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, tax changes, and thousands of interactive links to help you find answers to your questions. View it online in HTML, as a PDF, or download it to your mobile device as an eBook.

  • You may also be able to access tax law information in your electronic filing software.

 

Getting tax forms and publications.

Go to IRS.gov/Forms to view, download, or print all of the forms and publications you may need. You can also download and view popular tax publications and instructions (including the 1040 instructions) on mobile devices as an eBook at no charge. Or, you can go to IRS.gov/OrderForms to place an order and have forms mailed to you within 10 business days.

Access your online account (Individual taxpayers only).

Go to IRS.gov/Account to securely access information about your federal tax account.

  • View the amount you owe, pay online, or set up an online payment agreement.

  • Access your tax records online.

  • Review the past 18 months of your payment history.

  • Go to IRS.gov/SecureAccess to review the required identity authentication process.

 

Using direct deposit.

The fastest way to receive a tax refund is to combine direct deposit and IRS e-file. Direct deposit securely and electronically transfers your refund directly into your financial account. Eight in 10 taxpayers use direct deposit to receive their refund. The IRS issues more than 90% of refunds in less than 21 days.

Delayed refund for returns claiming certain credits.

Due to changes in the law, the IRS can’t issue refunds before mid-February, for returns that properly claimed the earned income credit (EIC) or the additional child tax credit (ACTC). This applies to the entire refund, not just the portion associated with these credits.

Getting a transcript or copy of a return.

The quickest way to get a copy of your tax transcript is to go to IRS.gov/Transcripts. Click on either "Get Transcript Online" or "Get Transcript by Mail" to order a copy of your transcript. If you prefer, you can:

  • Order your transcript by calling 1-800-908-9946.

  • Mail Form 4506-T or Form 4506T-EZ (both available on IRS.gov).

 

Using online tools to help prepare your return.

Go to IRS.gov/Tools for the following.

 

Resolving tax-related identity theft issues.

 

  • The IRS doesn’t initiate contact with taxpayers by email or telephone to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

  • Go to IRS.gov/IDProtection for information and videos.

  • If your SSN has been lost or stolen or you suspect you’re a victim of tax-related identity theft, visit IRS.gov/ID to learn what steps you should take.

 

Checking on the status of your refund.

 

  • Go to IRS.gov/Refunds.

  • Due to changes in the law, the IRS can’t issue refunds before mid-February, for returns that properly claimed the EIC or the ACTC. This applies to the entire refund, not just the portion associated with these credits.

  • Download the official IRS2Go app to your mobile device to check your refund status.

  • Call the automated refund hotline at 1-800-829-1954.

 

Making a tax payment.

The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure. You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app. Paying electronically is quick, easy, and faster than mailing in a check or money order. Go to IRS.gov/Payments to make a payment using any of the following options.

  • IRS Direct Pay: Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you.

  • Debit or credit card: Choose an approved payment processor to pay online, by phone, and by mobile device.

  • Electronic Funds Withdrawal: Offered only when filing your federal taxes using tax preparation software or through a tax professional.

  • Electronic Federal Tax Payment System: Best option for businesses. Enrollment is required.

  • Check or money order: Mail your payment to the address listed on the notice or instructions.

  • Cash: You may be able to pay your taxes with cash at a participating retail store.

 

What if I can’t pay now?

Go to IRS.gov/Payments for more information about your options.

  • Apply for an online payment agreement (IRS.gov/OPA) to meet your tax obligation in monthly installments if you can’t pay your taxes in full today. Once you complete the online process, you will receive immediate notification of whether your agreement has been approved.

  • Use the Offer in Compromise Pre-Qualifier (IRS.gov/OIC) to see if you can settle your tax debt for less than the full amount you owe.

 

Checking the status of an amended return.

Go to IRS.gov/WMAR to track the status of Form 1040X amended returns. Please note that it can take up to 3 weeks from the date you mailed your amended return for it to show up in our system and processing it can take up to 16 weeks.

Understanding an IRS notice or letter.

Go to IRS.gov/Notices to find additional information about responding to an IRS notice or letter.

Contacting your local IRS office.

Keep in mind, many questions can be answered on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”

Watching IRS videos.

The IRS Video portal (IRSvideos.gov) contains video and audio presentations for individuals, small businesses, and tax professionals.

Getting tax information in other languages.

For taxpayers whose native language isn’t English, we have the following resources available. Taxpayers can find information on IRS.gov in the following languages.

 

The IRS TACs provide over-the-phone interpreter service in over 170 languages, and the service is available free to taxpayers.

The Taxpayer Advocate Service Is Here To Help You

What is the Taxpayer Advocate Service?

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Our job is to ensure that every taxpayer is treated fairly and that you know and understand your rights under the Taxpayer Bill of Rights.

What Can the Taxpayer Advocate Service Do For You?

We can help you resolve problems that you can’t resolve with the IRS. And our service is free. If you qualify for our assistance, you will be assigned to one advocate who will work with you throughout the process and will do everything possible to resolve your issue. TAS can help you if:

  • Your problem is causing financial difficulty for you, your family, or your business;

  • You face (or your business is facing) an immediate threat of adverse action; or

  • You’ve tried repeatedly to contact the IRS but no one has responded, or the IRS hasn’t responded by the date promised.

 

How Can You Reach Us?

We have offices in every state, the District of Columbia, and Puerto Rico. Your local advocate’s number is in your local directory and at TaxpayerAdvocate.IRS.gov/Contact-Us. You can also call us at 1-877-777-4778.

How Can You Learn About Your Taxpayer Rights?

The Taxpayer Bill of Rights describes 10 basic rights that all taxpayers have when dealing with the IRS. Our Tax Toolkit at TaxpayerAdvocate.IRS.gov can help you understand what these rights mean to you and how they apply. These are your rights. Know them. Use them.

How Else Does the Taxpayer Advocate Service Help Taxpayers?

TAS works to resolve large-scale problems that affect many taxpayers. If you know of one of these broad issues, please report it to us at IRS.gov/SAMS.

Low Income Taxpayer Clinics

Low Income Taxpayer Clinics (LITCs) are independent from the IRS. LITCs represent individuals whose income is below a certain level and need to resolve tax problems with the IRS, such as audits, appeals, and tax collection disputes. In addition, clinics can provide information about taxpayer rights and responsibilities in different languages for individuals who speak English as a second language. Services are offered for free or a small fee. To find a clinic near you, visit TaxpayerAdvocate.IRS.gov/LITCmap or see IRS Pub. 4134, Low Income Taxpayer Clinic List.

Index

A

Assistance (see Tax help)

C

Capital construction fund, Capital Construction Fund

P

Publications (see Tax help)

T

Tax help, How To Get Tax Help