The Capital Construction Fund (“CCF”) program is designed to encourage owners of U.S. flagged vessels to accumulate sufficient capital to acquire additional U.S. flagged vessels by offering tax incentives to do so. The CCF program works like a combination of an IRA and a Roth IRA in the sense that, like a regular IRA, an income tax deduction is available when funds are set aside and deposited into a CCF account and, like a withdrawal from a Roth IRA, withdrawals for approved vessel expenditures are tax free. Earnings on deposit in a CCF account also grow tax free.
On December 16, 2022, Congress passed the National Defense Authorization Act of 2023 which contains a material expansion of the United States Maritime Administration’s Capital Construction Fund Program. Specifically, Section 3544 of the Act expands the definition of “Qualified Agreement Vessels” to include all vessels engaged in the foreign or domestic trade of the United States.
By way of background, originally, only vessels operating in the United States foreign, Great Lakes, noncontiguous domestic, or in the fisheries of the United States could be constructed or improved under the program. Several years ago, the definition of Qualified Agreement Vessels was expanded to include the short sea transportation trade. These older definitions of Qualified Agreement Vessels excluded many vessels like dredges, tugboats, inland jack-ups, and barges that worked on the inland waters of the United States or between two points in the continental United States as well as vessels like certain survey vessels which work offshore but did not transport men or materials.
This expansion opens up the program to a host of vessel operators whose fleets never qualified in the past and is likely to result in increased participation in the program and hopefully an increase in the construction of Jones Act eligible vessels.
Under the CCF program, a vessel owner may obtain an income tax deduction and tax deferral not just for the sales proceeds of an older vessel, but also for all net operating profit attributable to eligible vessels and for earnings on funds deposited in a CCF account. Further, CCF deposits can be used both for the acquisition of new vessels and for the acquisition and reconstruction of used vessels and for the payment of acquisition indebtedness on such vessels. Deposits in a CCF may be held for up to 25 years. Withdrawals are tax free if used as set forth herein. Depreciation deductions are not available for amounts expended from a CCF fund on new vessels. A CCF application must be filed and approved by the due date of the taxpayer’s income tax return for the year in which the initial tax benefits are sought.
The CCF program is not a “tax shelter” but a government sponsored program by which a vessel owner signs an agreement with the United States Maritime Administration (“MARAD”) which offers significant, legal, tax deferral opportunities. The professionals at MARAD do a spectacular job administering this and other programs, such as the Title XI ship finance program. The purpose of the program is twofold – first to be sure that there is an active fleet of U.S. Flagged vessels available for requisition in times of war or other national emergency and second to be sure that there are shipyards that are operating in the United States in case there is a need to construct additional vessels in time of war or national emergency.
Several years ago, this program declined in popularity because of the availability of bonus depreciation. With recent changes in the ability to use and carry losses forward, the program has been attracting more attention. The expanded definition of Qualified Agreement Vessels together with recent tax law changes should make this program attractive to any domestic vessel operator who intends to stay in the business long term.
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