Tax-Deferred Funding Opportunity for U.S. Flag Vessel Fleet Owners & Operators
A significant Capital Construction Fund (CCF) statute was amended on December 23, 2022, allowing more U.S. flag vessel owners and operators to potentially benefit from this unique tax deferral program.
U.S. flag carrying vessel owners and operators can defer tax on vessel operating profits as well as capital gains tax from the sale of vessels if these amounts are timely deposited in a CCF agreement account established with the Maritime Administration (MARAD) commercial vessels and National Marine Fisheries Service (NMFS/NOAA) commercial fishing vessels.
Previously, the statute was worded to restrict the use of these tax-deferred CCF funds to “qualified vessels” operating in “United States foreign, Great Lakes, non-contiguous domestic, or short sea Transportation trade.” The James M. Inhofe National Defense Authorization Act for Fiscal Year 2023 (the Act) eliminated these “qualified vessel” geographic trading restrictions, allowing many more U.S. flag vessels owner/operators to access this tax savings program and expand and modernize their U.S. flag merchant marine fleets.
What Was Amended & Why It Matters
Specifically, the Act amended Section 53501(5)(A)(iii) of Title 46, United States Code by striking out “United States foreign, Great Lakes, noncontiguous domestic, or short sea transportation trade” and replacing it with “foreign or domestic trade of the United States.”
By amending the definition of a “qualified vessel” in this manner, the Act eliminated the significant limiting geographic trading requirements for vessels constructed or reconstructed with the use of these tax deferred CCF funds. This “qualified vessel” definition change significantly opens the door for the use of the CCF program by virtually all U.S. flag vessel owners/operators. For more in-depth details of CCF, refer to the 2015 article written by Bill Finnecy in The Tax Adviser.
As a result, U.S. flag vessel owners/operators should assess their fleet modernization and upgrade plans, schedule out projected capex cash flow funding, work with U.S. shipyards to schedule vessel newbuild construction, or reconstruction, and consider the tax benefits of establishing a CCF account with MARAD or NMFS/NOAA.
U.S. shipyards may see an increase in demand for this CCF vessel construction, and reconstruction, so it is important to act timely to potentially take advantage of this change in law.
MARAD/NMFS/NOAA amended regulations to comply with this recent law change are forthcoming.
Other CCF restrictions were not modified by the Act, including requiring these tax deferred funds be used for vessels constructed or reconstructed in the U.S., operated in foreign or domestic U.S. commerce, and primarily engaged in waterborne carriage of people, materials, goods, or wares. U.S. ownership, agreement terms, and vessel restrictions apply.
For more information about how your marine operations can potentially utilize these tax saving benefits, submit the Contact Us form below and specify that your question is about this topic.