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Capital Construction Funds

The United States Department of Transportation Maritime Administration, or MARAD, states on its website that “[t]he Capital Construction Fund (CCF) program was created to assist owners and operators of United States-flag vessels in accumulating the large amounts of capital necessary for the modernization and expansion of the U.S. merchant marine. The program encourages construction, reconstruction, or acquisition of vessels through the deferment of Federal income taxes on certain deposits of money or other property placed into a CCF.

In other words, the CCF program permits eligible persons to set up a fund and defer income tax on deposits in that fund and on the earnings on deposits in that fund provided that the fund is utilized to construct or reconstruct vessels (including fishing vessels) in the United States. The purpose of the CCF program is to incentivize the building and construction of U.S. commercial boats. Note that the CCF does not provide benefits for recreational boating, so constructing a $20 million yacht is not tax advantageous under the CCF program.

Administering the CCF

MARAD and the Internal Revenue Service, or IRS, jointly administer the CCF. When applicable to small fishing vessels,  the National Oceanic and Atmospheric Administration, or NOAA, jointly administers the CCF program with the IRS. A 1996 decision of the Office of Legal Counsel of the U.S. Department of Justice confirmed that MARAD and NOAA have primary authority to determine program eligibility, to establish rules regarding eligibility for CCF, and fund deposits and withdrawals and to administer those rules.

Qualifications and Eligibility for a CCF Program

To qualify for the CCF program, the party applying must be a U.S. citizen who own or charters at least one “eligible” vessel. An eligible vessel is one that:

  • Weighs at least five net tons;
  • Was built or rebuilt in the United States;
  • Is U.S.-registered;
  • Is used in commercial U.S. fishing or operated in the U.S.-foreign or domestic commerce.

In addition, an eligible vessel can also be a vessel weighing between two net tons and five net tons if:

  • It was built or rebuilt in the United States;
  • Is owned by a U.S. citizen,;
  • Has its home port in the United States; and
  • Is used commercially in the U.S. fisheries.

Practical Use of a CCF

As mentioned, depositing funds into a CCF account provides the depositor with tax breaks to construct or reconstruct maritime vessels. Depositors are entitled to an income tax deduction for corresponding funds into such accounts. When starting a CCF account, there must be three separate accounts: an ordinary account, a capital account, and a capital gains account. A deposit that would have otherwise been taxable as ordinary income goes into the ordinary account; taxable as capital gains goes in the capital gains account; and income that would not have been otherwise taxable, e.g. depreciation, goes into the capital account. These three accounts must be segregated to enjoy the tax benefits.

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(image courtesy of Jens Rademacher)

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