Industry Insights

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

August 2015
Author:  Bill Finnecy

Bill Finnecy



Construction & Real Estate
Manufacturing & Distribution
Private Client Services

2402 W. 8th Street
Erie, PA 16505-4444


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 and purchase capital assets, such as vessel acquisition, construction or reconstruction, with the money. By saving before-tax dollars instead of after-tax dollars, owners can more quickly accumulate money. 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 don’t 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 industry companies including:

  • Liner companies operating container ships and other specialized vessels from the U.S. West Coast to points in the Far East and Hawaii and from Gulf and East Coast ports to Europe, South America and Africa
  • Tanker operators delivering crude oil from the North Slope of Alaska to the U.S. mainland
  • Bulk vessel operators moving ore on the Great Lakes
  • Companies specializing in offshore towing and supply operations that serve oil drilling and production rigs off the coasts of the U.S. and in foreign waters
  • Operators serving Caribbean and Central American ports
  • Tug and barge operators providing service between Pacific ports and points in Alaska, on the river system in Alaska and in the Gulf of Alaska
  • Cruise vessels and tug-barge operators providing interisland service in the Hawaiian Islands
  • Operators providing ferry and passenger service on the Great Lakes
  • Operators moving containers and roll-on/roll-off cargo in short sea shipping trades

Two types of vessels may apply for the program:  those weighing 5 tons or more and fishing vessels weighing 5 tons or less. Vessels weighing more than 5 tons must be built or rebuilt in the U.S., documented under U.S. laws and operated in the foreign or domestic commerce of the U.S. or in U.S. fisheries. Vessels weighing less than 5 tons must be built or rebuilt in the U.S., 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 & 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 U.S., 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 U.S. and operated in the 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 a “qualified agreement vessel.” 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 primarily will be used on that type of vessel and ordinarily carried from port to port and used in conjunction with cargo loading or unloading. This also is applicable for 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:

  • A point in the U.S. and a point in a foreign country
  • 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
  • A round-trip voyage from the U.S. Atlantic Coast to the Orient that includes intercoastal ports on the U.S. West Coast
  • 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 this operating flexibility is necessary to compete with foreign flag vessels in its operation or to compete for charters
  • 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 schedule applies to commerce between the following:

  • The 48 contiguous states on one hand and Alaska, Hawaii, Puerto Rico and all other U.S. territories and possessions on the other hand
  • Any point in Alaska, Hawaii, Puerto Rico and the insular territories and possessions of the U.S., and any other point in Alaska, Hawaii, Puerto Rico and such possessions and territories; platforms or rigs attached to the seabed of the Continental Shelf (beyond the 3-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 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, 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 keeps 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. Other than annuities and repurchase agreements, which are prohibited, these may include:

  • 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, and any income the fund produces also is tax-deferred 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
  • The amount of depreciation taken as a deduction on the vessel
  • Net proceeds from the sale or other disposition of an agreement vessel (with the total amount of proceeds received required to be deposited)
  • The earnings from investment or reinvestment of amounts deposited in the CCF

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.

For fishing vessels, a taxpayer generally must contribute at least an amount equal to 2 percent annually of the cost of a vessel or—if that 2 percent is more than 50 percent of a taxpayer’s Schedule A taxable income in that year—50 percent of a taxpayer’s taxable income in that year. In addition to this 2 percent rule, there are a few more obscure rules where a taxpayer may spread the minimum deposit over the length of the vessel’s construction. For other vessels, the minimum deposit amount is determined by the maritime administrator.

Three Required Accounts

Each CCF must maintain three accounts covering capital, capital gains and ordinary income:

  • 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; deposits into this account DO NOT generate a CCF deduction although the income generated by these deposits do receive tax deferral
  • Capital Gain 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
  • 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

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. Qualified withdrawals from the ordinary income and capital gain accounts will reduce the basis of the agreement vessel for which the withdrawal is made. Withdrawals in excess of the agreement vessel’s basis (Schedule B) then reduce the basis of other vessels.

  • A Further Word on Schedule B Tax Basis Consideration - 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. With respect to the ordinary income account, the tax rate will be the highest marginal rate applicable for individuals and corporations. The applicable capital gains tax rates in effect will apply to both individuals and corporations—currently no higher than 23.8 percent for individuals and 34 percent for corporations.
  • Any amount not withdrawn from a CCF within 25 years of deposit will be taxed as a nonqualified withdrawal.


The CCF essentially allows taxpayers to segregate funds tax-free for the purchase of capital assets, and taxpayers can more rapidly accumulate those funds by saving before-tax dollars. The deferral of the tax due is comparable to an interest-free government loan and is designed to level the competitive playing field for owners of U.S. vessels.

For more information, contact your BKD advisor.

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