Capital Construction Funds Program

By William Finnecy, CPA, and Kurt V. Crytzer, CPA, Malin, Bergquist & Company, LLP, Erie, PA

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

Special Industries

Created by the Merchant Marine Act of 1936, 46 App. U.S.C. §1177, the Capital Construction Funds (CCF) program (46 U.S.C. §§53501–53517) helps owners and operators of U.S.-flag vessels accumulate capital to modernize and expand the U.S. merchant marine. The program encourages construction, reconstruction, or acquisition of vessels by allowing owners or operators to defer federal income taxes under Sec. 7518 on certain money or other property placed into a CCF. This tax-deferred income, when used to help pay for a vessel project, is in effect an interest-free loan from the government.

Eligibility Requirements

Two types of vessels may be considered eligible: those weighing five tons or more and fishing vessels weighing five tons or less. For each type, certain requirements must be met. Vessels weighing more than five tons must be built or rebuilt in the United States, be documented under U.S. laws, and be operated in the foreign or domestic commerce of the United States or in U.S. fisheries. Eligible vessels under five tons must be built or rebuilt in the United States, be owned by a U.S. citizen, and be used commercially in U.S. fisheries.

The U.S. Department of Transportation’s Maritime Administration gives examples of eligible vessels that include a broad cross section of the U.S. maritime industry, such as:

  • Bulk vessel operators moving ore on the Great Lakes;
  • Tug and barge operators that provide service between Pacific Coast ports and points in Alaska;
  • Cruise vessels and tug-barge operators providing inter-island service in the Hawaiian Islands; and
  • Operators moving containers and roll-on/roll-off cargo in short sea shipping trades.
Application Guidelines and Establishing a CCF

For fishing vessels, a taxpayer must enter into a CCF agreement with the Secretary of Commerce through the National Oceanic and Atmospheric Administration (NOAA)/National Marine Fisheries Service (NMFS). For other vessels, CCF agreements are administered by the Maritime Administration. A taxpayer may apply at any time, but to be applicable to any given tax year a CCF agreement must be executed and entered 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 of the taxpayer’s plans. First, the taxpayer must identify which vessels will be eligible for deferral of taxable income (on Schedule A of the form). Next, the taxpayer must determine what kind of vessel or vessels he or she will construct, reconstruct, or acquire with the money in the taxpayer’s CCF account (listed on Schedule B of the form). Finally, the taxpayer must establish where he or she will keep the tax-deferred income that will be used to pay for the Schedule B vessels. The taxpayer keeps the money in the CCF depository, and the account is referred to as the CCF account.

In general, the taxpayer decides which Schedule A vessel income he or she will segregate into the CCF account for the tax year and must deposit this money into the account on or before the due date, with extensions, for filing the taxpayer’s income tax return for the tax year to which the deposit relates. This provision allows a taxpayer to make a CCF election after a tax year end for vessels already in 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 checking, savings, or money market account already established by the taxpayer. The Merchant Marine Act specifies the types of investments the taxpayer may make with the funds (46 U.S.C. §53506). Generally, these are interest-bearing securities (federal, state, and local government bonds and domestic corporate bonds), common and preferred stocks of domestic companies (up to 60% of the value of the CCF), and, with additional complex rules, options, mutual funds, and money market funds. Annuities and repurchase agreements are prohibited (see NOAA/NMFS, Capital Construction Fund (CCF) Program Investment Guide).

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

Amount Allowed to Be Deposited in a CCF

A taxpayer can deposit during any tax year the sum of the following ceilings for each Schedule A 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 (Sec. 7518(a)(1)(C)). The total amount of proceeds received must be deposited.
  • The earnings from investment or reinvestment of amounts deposited in the CCF (Sec. 7518(a)(1)(D)).

For fishing vessels, a taxpayer must generally contribute at least an amount equal to 2% annually of the cost of a Schedule B 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, there are a few more obscure rules where a taxpayer may spread the minimum deposit over the length of the construction of the Schedule B vessel. For other vessels, the minimum deposit amount is determined by the Maritime Administrator (46 C.F.R. §390.7(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)).

Accounts Within a CCF

Each CCF must maintain three accounts: a capital account, a capital gain account, and an ordinary income account (Sec. 7518(d)(1)). The capital 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 (Sec. 7518(d)(2)).

The capital gain account contains capital gains and assets on CCF assets held for more than six months (Sec. 7518(d)(3)). The ordinary income account contains deposits attributable to agreement vessel operations, short-term capital gains and ordinary income from 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 then reduce the basis of other vessels, as specified in Regs. Sec. 3.6(c)(3).

Nonqualified withdrawals from a CCF are taxed. With respect to the ordinary income account, the tax rate will be the highest marginal rate applicable for individuals and corporations (Sec. 7518(g)). As for the capital gain account, the tax rate will be no higher than 15% 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.


Essentially, the CCF allows taxpayers to segregate funds tax free for the future purchase of capital assets. By saving before-tax dollars instead of after-tax dollars, taxpayers can accumulate money more quickly. The deferral of the tax due is essentially an interest-free loan from the government and is designed to put owners of U.S. vessels on a more equal footing with owners of vessels registered in countries that do not tax shipping income.


Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.

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

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