Capital Construction Funds Program Offers Unique Funding Opportunity for Marine Fleet Owners

By William G. Finnecy, CPA, BKD LLP, Erie, Pa., not affiliated with CPAmerica

Editor: Michael D. Koppel, CPA/PFS/CITP, MSA, MBA

The Capital Construction Funds (CCF) program helps owners and operators of U.S. flag vessels accumulate capital to modernize and expand the U.S. merchant marine.

The CCF allows owners and operators to segregate funds tax-free under Sec. 7518 and use those amounts for future purchase of capital assets such as vessel acquisition, construction, or reconstruction. By saving before-tax dollars instead of after-tax dollars, owners can accumulate money more quickly. The tax deferral essentially is an interest-free government loan intended to put U.S. vessel owners on more equal footing with competitors registered in countries that do not tax shipping income. The CCF program supports vessel modernization and expansion for use in the noncontiguous domestic and Great Lakes trade, benefiting a wide range of shipping industry companies.

Two types of vessels may apply for the program: those weighing five tons or more and fishing vessels weighing more than two tons but not more than five tons. Vessels weighing more than five tons must be built or rebuilt in the United States, documented under U.S. laws, and operated in the foreign or domestic commerce of the United States or in U.S. fisheries. Vessels weighing less than five tons must be built or rebuilt in the United States, owned by a U.S. citizen, and used commercially in U.S. fisheries.

The program was created by the Merchant Marine Act of 1936, as amended (46 U.S.C. §1177), and is administered by the U.S. Department of Transportation Maritime Administration (MARAD).

Two Distinct Vessel Categories: Schedule A and Schedule B

Under MARAD's definition, Schedule A vessels produce income that may be deposited into a CCF; Schedule B vessels are new, rebuilt, or acquired and paid for with withdrawals from the CCF.

Schedule A vessels have a great deal of freedom as to how they may operate in domestic or foreign commerce, while Schedule B vessels are subject to geographic trading restrictions on how and where they may be used. Other restrictions are based on citizenship, financial capability, minimum deposits, and acceptable programs.

Schedule A: These vessels must be constructed or reconstructed in the United States, operated in foreign or domestic U.S. commerce, and primarily engaged in carrying people, materials, goods, or wares over water. Also eligible are towing supply vessels operating in the noncontiguous domestic trade serving the offshore marine industry. For example, both a lighter aboard ship (LASH) vessel and the lighters carried aboard are included.

Schedule B: These vessels must be constructed, reconstructed, or acquired with the aid of funds from qualified CCF withdrawals. They must be constructed or reconstructed in the United States and operated in U.S. foreign, Great Lakes, or noncontiguous domestic trade. They also must be engaged primarily in the waterborne carriage of people, materials, goods, or wares and designated in the agreement as "qualified agreement vessels." However, they cannot be used in domestic trades on inland waterways or in coastwise domestic trade between the 48 contiguous states, except in the Great Lakes.

This category applies to cargo-handling equipment that MARAD determines will be used primarily on that type of vessel and ordinarily carried from port to port and used in conjunction with cargo loading or unloading. This also applies to certain towing vessels or barges used in ocean-going or Great Lakes operations. A vessel's containers, trailers, or barges also apply, under certain limits.

Schedule B areas of "U.S. foreign trade": This schedule applies to commerce between the following:

1. A point in the United States and a point in a foreign country.

2. A round-the-world voyage or a voyage from the U.S. West Coast to a European port(s) that includes intercoastal ports on the U.S. East Coast.

3. A round-trip voyage from the U.S. Atlantic Coast to Asia that includes intercoastal ports on the U.S. West Coast.

4. Two points in the same foreign country or in two different foreign countries, in the case of liquid or bulk cargo-carrying services, if the party can substantiate that this operating flexibility is necessary to compete with foreign flag vessels in its operation or to compete for charters.

5. From foreign ports in the North Sea area to drilling and production rigs in North Sea waters.

Schedule B areas of "Great Lakes" trade: This schedule applies to commerce between points on the Great Lakes and their connecting waterways in the immediate environs of the Great Lakes.

Schedule B areas of "noncontiguous domestic" trade: This scheduleapplies to commerce between the following:

1. The 48 contiguous states on one hand and Alaska, Hawaii, Puerto Rico, and all other U.S. territories and possessions on the other hand.

2. Any point in Alaska, Hawaii, Puerto Rico, and the insular territories and possessions of the United States and any other point in Alaska, Hawaii, Puerto Rico, and those possessions and territories; platforms or rigs attached to the seabed of the continental shelf (beyond the three-mile limit) are included in the definition of insular U.S. territories and possessions.

MARAD's CCF Application Guidelines

For fishing vessels, a taxpayer must enter into a CCF agreement with the secretary of Commerce through the National Oceanic and Atmospheric Administration or National Marine Fisheries Service. For other vessels, CCF agreements are administered by MARAD. A taxpayer may apply at any time, but for it to apply to any given tax year, a CCF agreement must be executed and entered into on or before the due date (with extensions) for filing the taxpayer's federal tax return for that tax year.

The CCF agreement will establish certain parameters, and the owner must complete the following steps:

  • Identify which vessels will be eligible for deferral of taxable income (Schedule A).
  • Determine what kind of vessel or vessels are to be constructed, reconstructed, or acquired with the money in the CCF account (Schedule B).
  • Establish where the tax-deferred income will be kept to pay for the Schedule B vessels; the taxpayer must keep the money in a CCF depository, and the account is referred to as a CCF account.

In general, the vessel owner decides which income will be segregated into the CCF account for the tax year and must deposit this money into the account on or before the due date, with extensions. This provision allows a taxpayer to make a CCF election after tax year end for vessels already under construction but only in the first year of eligibility. From this point on, the taxpayer will have funds available to help pay for Schedule B vessels.

The CCF account must be registered in the taxpayer's name and be separate from any other checking, savings, or money market account. The Merchant Marine Act of 1936 specifies the types of investments the taxpayer may make with the funds (46 U.S.C. §53506). Other than annuities and repurchase agreements, which are prohibited, these may include the following:

  • Interest-bearing securities, e.g., federal, state, and local government bonds and domestic corporate bonds.
  • Common and preferred stocks of domestic companies.
  • Options, mutual funds, and money market funds, subject to additional complex rules.

Deposits into a CCF reduce taxable income (Sec. 7518(c)(1)(A)), and any income the fund produces also is tax-deferred (Sec. 7518(c)(1)(C)) unless the owner withdraws the income in the year earned, in which case it is currently taxable.

Deposit Ceilings: Amounts Allowed to Be Deposited Into a CCF Account

A taxpayer may deposit during any tax year the sum of the following ceilings for each vessel designated in the CCF agreement:

  • Taxable income from agreement vessel operation (Sec. 7518(a)(1)(A));
  • The amount of depreciation taken as a deduction on the vessel (Sec. 7518(a)(1)(B));
  • Net proceeds from the sale or other disposition of an agreement vessel (with the total amount of proceeds received required to be deposited) (Sec. 7518(a)(1)(C)); and
  • The earnings from investment or reinvestment of amounts deposited in the CCF (Sec. 7518(a)(1)(D)).

If a taxpayer deposits more than the allowed ceiling into the CCF account for a year, the excess may be withdrawn as if never deposited or be credited toward the next tax year's ceiling if all past ceilings were filled (Regs. Sec. 3.2(a)(2)).

For fishing vessels, a taxpayer generally must contribute an amount at least equal to 2% annually of the cost of a vessel or, if that 2% is more than 50% of a taxpayer's Schedule A taxable income in that year, 50% of a taxpayer's taxable income in that year (50 C.F.R. §259.34). In addition to this 2% rule, a few more obscure rules permit a taxpayer to spread the minimum deposit over the length of the construction of the vessel. For other vessels, the minimum deposit amount is determined by the maritime administrator (46 C.F.R. §390.7(d)).

Three Required Accounts

Each CCF must maintain three accounts, covering capital, capital gains, and ordinary income (Sec. 7518(d)(1)):

  • Capital account: This account contains deposits attributable to the depositor's depreciation deduction for agreement vessels and net proceeds from the sale of agreement vessels, among other items; deposits into this account do not generate a CCF deduction although the income generated by these deposits does receive tax deferral (Sec. 7518(d)(2)).
  • Capital gain account: This account contains capital gains from the sale or other disposition of an agreement vessel including long-term capital gains from the investment amounts held in the fund (Sec. 7518(d)(3)).
  • Ordinary income account: This account contains deposits attributable to agreement vessel operations, short-term capital gains, and ordinary income from the sale or disposition of agreement vessels, taxable interest, and other ordinary income (Sec. 7518(d)(4)).

Qualified withdrawals from the CCF are treated as being made first from the capital account, second from the capital gain account, and third from the ordinary income account (Sec. 7518(f)(1)). Qualified withdrawals from the ordinary income and capital gain accounts will reduce the basis of the agreement vessel for which the withdrawal is made (Sec. 7518(f)(3)). Withdrawals in excess of the agreement vessel's basis (Schedule B) then reduce the basis of other vessels (Regs. Sec. 3.6(c)(3)).

A Further Word on Schedule B Tax Basis Considerations

The tax basis of the Schedule B asset purchased is reduced by the amount placed in the CCF, allowing the government to recapture the taxes avoided when the CCF funds were deposited. The newly constructed, reconstructed, or acquired Schedule B asset therefore will have a lower depreciation deduction throughout its life to compensate for taxes the taxpayer deferred under the CCF agreement. Nonqualified withdrawals from a CCF will be taxed. For the ordinary income account, the tax rate will be the highest marginal rate applicable to individuals and corporations (Sec. 7518(g)(6)). For the capital gain account, the maximum applicable capital gains tax rates in effect will apply to both individuals and corporations—currently no higher than 20% for individuals and 34% for corporations.

Any amount not withdrawn from a CCF within 25 years of deposit will be taxed as a nonqualified withdrawal (Sec. 7518(g)(5)).

A version of this item appeared on the BKD LLP website.


Michael Koppel is with Gray, Gray & Gray LLP in Canton, Mass.

For additional information about these items, contact Mr. Koppel at 781-407-0300 or

Unless otherwise noted, contributors are members of or associated with CPAmerica International.

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