What Is a Capital Construction Fund and How Does It Work?

A Capital Construction Fund (CCF) is a tax-deferred savings program from the U.S. government that helps owners and operators of U.S.-flagged vessels accumulate capital to build, acquire, or reconstruct vessels. Authorized by the Merchant Marine Act of 1936, the program allows participants to defer federal income taxes on specific deposits. This tax deferral accelerates savings for vessel projects, supporting the modernization of the U.S. merchant marine and fishing fleets.

Eligibility for a Capital Construction Fund

To participate in the Capital Construction Fund program, an applicant must meet several requirements. The first is U.S. citizenship, which applies to individuals and business entities like corporations and partnerships. An applicant must also own or lease at least one “eligible vessel” that serves as the basis for making tax-deferred deposits into the fund.

An eligible vessel is U.S.-built and documented for operation in the commerce of the United States. This category includes vessels such as commercial fishing boats of at least two net tons, cargo ships, tankers, tugs, barges, and passenger ferries. The National Defense Authorization Act for Fiscal Year 2023 expanded eligibility to nearly all U.S.-built vessels in domestic or foreign commerce, removing previous geographic trade limitations.

Finally, an applicant must have an acceptable “program objective,” which is a clear plan for the acquisition, construction, or reconstruction of a “qualified vessel.” A qualified vessel is one that will be built in the United States and used in the nation’s commerce. The government agencies overseeing the program review this objective to ensure it aligns with the program’s intent.

Allowable Deposits into the Fund

The ability to defer taxes through a CCF is tied to the types of deposits made into the account, which are linked to designated “agreement vessels.” These deposits must be made by the due date, including extensions, for filing the federal tax return for the year the deduction is claimed.

One source of deposits is the taxable income from the operation of these agreement vessels. A fund holder can deposit up to 100 percent of the taxable income from their designated vessels. For example, if a fishing company earns $200,000 in taxable income from its fleet, it can deposit that entire amount into its fund and deduct it from its taxable income for that year.

Another category of allowable deposits comes from the net proceeds of selling an agreement vessel or from insurance payouts due to a vessel’s loss. To defer the tax on any gain from such a transaction, the full net proceeds must be deposited into the CCF. A partial deposit of the proceeds will not qualify for a partial tax deferral.

The third source for deposits is the depreciation allowance for an agreement vessel. A participant can deposit an amount equal to the annual depreciation deduction claimed for a vessel in the agreement. Additionally, earnings from the investment of funds held within the CCF account can also be deposited.

Qualified Withdrawals and Basis Adjustments

A “qualified withdrawal” is a distribution from the fund used to pay for the acquisition, construction, or reconstruction of a qualified vessel as outlined in the CCF agreement. These withdrawals are not taxed as income at the time they are taken.

A consequence of a qualified withdrawal is the corresponding adjustment to the new or reconstructed vessel’s tax basis. The basis of the vessel is reduced by the amount of the qualified withdrawal that comes from the fund’s ordinary income and capital gain accounts. For instance, if a new vessel costs $1 million and is paid for with a $400,000 qualified withdrawal, the vessel’s initial tax basis becomes $600,000.

This basis reduction is how the government recaptures the deferred taxes. A lower basis means smaller annual depreciation deductions over the life of the vessel and a larger taxable gain if the vessel is sold later. This mechanism transforms the upfront tax deferral into an interest-free loan from the government.

Conversely, a “non-qualified withdrawal” is any distribution used for a purpose other than the approved vessel project. These withdrawals are taxed as ordinary income in the year they are taken, at the highest marginal rate. The IRS also charges simple interest on the tax liability, calculated from the year the withdrawn funds were originally deposited.

Required Information for the CCF Agreement

To establish a Capital Construction Fund, an applicant must enter into a formal agreement with the U.S. government. This is done by submitting an application package, often called an application kit, which includes the agreement itself and several supporting schedules.

The application requires detailed information, including:

• Proof of U.S. citizenship for individuals, partnerships, or corporations.
• A complete description of current vessels designated as “Schedule A” or “eligible vessels,” including the vessel’s name, official number, and tonnage.
• A “Schedule B” outlining the “program objective,” which is the plan for acquiring, constructing, or reconstructing a qualified vessel, including estimated costs and timelines.
• Financial information to demonstrate the capability to carry out the proposed program.
• Designation of a depository where the CCF funds will be held in a separate, segregated account.

Filing the Application and Annual Maintenance

The completed application package must be submitted to the correct agency. The National Marine Fisheries Service (NMFS) handles applications for fishing vessels, while the Maritime Administration (MARAD) oversees other commercial vessels. For the CCF agreement to be effective for a given tax year, it must be executed on or before the due date, including extensions, for filing that year’s federal income tax return.

After the CCF agreement is approved, maintaining the fund requires ongoing compliance. The fund holder must file an annual report of all deposit and withdrawal activity with the governing agency. For those with NMFS, this is done using NOAA Form 34-82, which must be attached to a complete copy of the filer’s federal tax return and submitted within 30 days of the tax filing deadline. This reporting is mandatory every year, even if no transactions occurred.

Fund holders are also required to keep the agency informed of any changes, such as updates to the vessels in the agreement or modifications to the project plan. Failure to meet these annual maintenance and reporting duties can result in penalties, including the potential termination of the agreement.