UNIQUE FUNDING OPPORTUNITIES FOR MARINE FLEET OWNERS & OPERATORS - - PDF document

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UNIQUE FUNDING OPPORTUNITIES FOR MARINE FLEET OWNERS & OPERATORS

October 4, 2017 Bill Finnecy Partner wfinnecy@bkd.com Tim Goldsmith Managing Director tgoldsmith@bkd.com Marne Babich Senior Manager mbabich@bkd.com

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15 business days of live webinar

TO RECEIVE CPE CREDIT

I. CRF II. CCF

• III. Program Compliance
• IV. Comparison of CRF/CCF

V. Q & A

INTRODUCTION

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Introduction

Vessel owners & operators utilizing the benefits of a CRF/CCF span a wide range of the U.S. Maritime industry. They all enjoy the benefit of lowering their effective cost of a new vessel acquisition, construction, reconstruction or modernization by saving before tax dollars accumulate capital expenditure funds more quickly

INTRODUCTION I

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Types of U.S. vessel fleet owners/operators benefitting from the utilization of the CRF/CCF program include

• Container ship liner companies operating from points on the west coast, gulf coast

& East Coast to points in Hawaii, Europe & the other continents

• Oil tank supply vessels delivering oil from Alaska to the lower 48 U.S. states
• Offshore towing & supply vessels servicing oil rigs off the coast of the United

States & in foreign waters

• Vessels servicing ports in Central America & the Caribbean
• Tug & barge operators servicing points in Alaska to points in the lower 48 U.S.

states

• Hawaiian cruise vessel operators providing inter-island service
• Great Lakes freight/ferry service operators

INTRODUCTION II

• The Construction Reserve Fund (CRF) seeks to promote

construction, reconstruction, reconditioning or acquisition of merchant vessels essential for national defense & development

• f U.S. commerce through the deferral of federal income taxes
• The CRF program was created by the Merchant Marine Act of

1936, as amended, (46 U.S.C. 533) & is administered by the U.S. Department of Transportation Maritime Administration (MARAD)

• I. A. CRF – TAX DEFERRAL BENEFITS

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• The CFR permits eligible parties to defer the tax on gains from

the sale or exchange of U.S. flagged vessels, as long as the proceeds are then reinvested in new vessels within approximately a three-year period

• Deposits into the CRF must be made within 60 days after receipt

by the taxpayer of amounts representing proceeds of the sale or indemnification for loss of a vessel

• I. A. CRF – TAX DEFERRAL BENEFITS
• A CRF may be established by any citizen of the United States who
• wns, in whole or in part, a vessel or vessels operation in the foreign
• r domestic commerce of the United States
• The foreign commerce of the United States includes trade between the

United States, its territories & possessions & a foreign country

• The domestic commerce of the United States includes trade between

ports of the United States, its territories & possessions embraced within the coastwise laws, on the Great Lakes & on inland rivers

• I. B. CRF VESSEL GEOGRAPHIC TRADING RESTRICTIONS

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Eligibility Requirements Overview

• The nonrecognition of gain applies only when money deposited

in the CRF is allocated toward construction, reconstruction or acquisition of a new vessel or vessels

• New vessels must be constructed or reconstructed in the U.S. &

documented under U.S. laws

• I. C. CRF COMPLIANCE MATTERS

Eligibility Requirements Overview

• Ordinarily, a vessel to be acquired with expenditures for the CRF

would not be considered suitable to carry out the purposes of the Act if constructed more than five years prior to acquisition

• Within three years from the date of any deposit in a CRF, money

deposited must be obligated under a contract for construction or acquisition of a new vessel

• I. C. CRF COMPLIANCE MATTERS

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• The CCF program was created by the Merchant Marine Act of 1936, as

amended, (46 U.S.C. 1177) & is administered by the U.S. Department

• f Transportation Maritime Administration (MARAD)
• Program Objectives
• Two distinct agreement vessel categories accomplish this objective

A.

Schedule A (eligible vessels)

B.

Schedule B (qualified vessels)

• II. A. CCF – TAX DEFERRAL BENEFITS

Four allowable funding subceilings A. Taxable income from agreement vessel operation B. Depreciation taken on an agreement vessel C. Net proceeds from the sale or other disposition of an agreement vessel D. The earnings from investment or reinvestment of amounts deposited in a CCF account

• II. A. CCF – TAX DEFERRAL BENEFITS

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• Timing of deposits
• Over deposits
• II. A. CCF – TAX DEFERRAL BENEFITS
• CCF Account
• A CCF account is a separate bank account established & maintained by

the fund holder & is not a joint account between MARAD & the fund holder

• II. A. CCF – TAX DEFERRAL BENEFITS

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Three required bookkeeping accounts

A.

Ordinary income account

B.

Capital gains account

C.

Capital account

These separately tracked bookkeeping accounts required by MARAD will be discussed in more detail later in the presentation

• II. A. CCF – TAX DEFERRAL BENEFITS

Qualified withdrawals

A.

Qualified withdrawals ordering rules – capital account, capital gains account, ordinary income account

B.

Agreement vessel basis reduction

• II. A. CCF – TAX DEFERRAL BENEFITS

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Nonqualified withdrawals

A.

Tax implication

B.

Nonqualified withdrawals ordering rules

C.

25 years withdrawal requirement

• II. A. CCF – TAX DEFERRAL BENEFITS

A.

Schedule A (Eligible Vessels)

B.

Schedule B (Qualified Vessel)

• II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS

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A. Schedule A (Eligible Vessels)

• Vessels that produce income to be deposited into the CCF
• These vessels must be constructed or reconstructed in the United

States, operated in foreign or domestic U.S. commerce, & primarily engaged in carrying people, materials, goods or wares over water

• II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS
• B. Schedule B (Qualified Vessel)
• Vessels built or reconstructed utilizing CCF withdrawals
• 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 United States & operated in the U.S. foreign, Great Lakes

• r noncontiguous domestic trade. They also must be engaged primarily in the

waterborne carriage of people, materials, good or wares & designated in the agreement as “qualified agreement vessels”. 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

• II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS

10/4/2017 12 Schedule B (Qualified Vessel) Areas of “U.S. Foreign Trade”

Applies to commerce between the following 1.

A point in the U.S. & a point in a foreign country

2.

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

3.

A roundtrip voyage from the U.S. Atlantic Coast to Asia that includes intercoastal ports on the U.S. West Coast

4.

Two points in the same foreign country or in two different foreign countries, in the case of liquid

• r bulk cargo-carrying services, if the party can substantiate that this operating flexibility is

necessary to compete with foreign flag vessels in its operation or to compete for charters

5.

From foreign ports in the North Sea area to drilling & production rigs in North Sea waters

• II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS

Schedule B (Qualified Vessel) Areas of Great Lakes Trade Applies to commerce between points on the Great Lakes & their connecting waterways in the immediate evirons of the Great Lakes

• II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS

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Schedule B (Qualified Vessel) Areas of “Noncontiguous Domestic” Trade

1.

The 48 contiguous states on one hand & Alaska, Hawaii, Puerto Rico & all other U.S. territories & possessions on the other hand

2.

Any point in Alaska, Hawaii, Puerto Rico & the insular territories & possessions of the United States & any other point in Alaska, Hawaii, Puerto Rico, & those possessions & territories; platforms or rigs attached to the seabed of the continental shelf (beyond the three-mile limit) are included in the definition of insular U.S. territories & possessions

• II. B. VESSEL GEOGRAPHIC TRADING RESTRICTIONS

MARAD CCF Application Guidelines & Compliance

• Eligibility requirements

A.

U.S. citizen owning or leasing a Schedule A (eligible vessel)

B.

Vessel plan that is acceptable to MARAD

C.

Demonstrate the financial means

• Unacceptable programs
• II. C. COMPLIANCE MATTERS

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Agreement parameters

1.

Identify which vessels will be eligible for deferral of taxable income to deposit into the CCF (Schedule A vessels)

2.

Determine which kind of new vessel(s) are to be acquired, constructed, reconstructed or modernized using CCF account funds (Schedule B Vessels)

3.

Establishment of a separate CCF depository account to pay for CCF eligible expenditures

4.

Selection of which income to tax defer & the three accounts to maintain depending on the character of the tax deferred income

5.

Complete the CCF application agreement & make the required deposits by the due date for filing the entity’s tax return for that year

6.

Allow adequate time for the application approval process by MARAD, generally 60 days

• II. C. CCF APPLICATION GUIDELINES
• Opinion by independent certified public accountant
• Certify exhibits are prepared in accordance with all published
• rders, rules, regulations & instructions issued or adopted by the

MARAD

• Certify withdrawals from CCF qualified for the program
• II. D. A & A

CERTIFICATIONS REQUIRED FOR THE CCF

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• II. D. – A&A

EXHIBIT A – SUMMARY OF CASH, SECURITIES & STOCK ON DEPOSIT & NET ACCRUED DEPOSITS & ACCRUED WITHDRAWALS FROM THE CCF

• II. D. A & A

EXHIBIT B – TRANSCRIPT OF TRANSACTIONS IN THE CCF FOR THE PERIOD

Date Description of Transaction Detail

Debit Credit Debit Credit

1/1/2016 Balances Brought Forward

• $
• $

1/20/2016 Deposit

• 1/25/2016

Withdrawal

• 2/4/2016

Bank Fee

• 5/2/2016

Withdrawal

• 6/30/2016

Balances Carried Forward

• $
• $

Cash Securities and Stock (at Adjusted Basis)

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• II. D. A & A

EXHIBIT C – SUMMARY OF TOTAL TRANSACTIONS AFFECTING THE TAX ACCOUNT BALANCES IN THE CCF FOR THE PERIOD

Ordinary Capital Income Gain Capital Total Balance, January 1, 2016

• $
• $
• $
• $

Deposits

• Earnings, net
• Total
• Withdrawals, non-qualified
• Withdrawals, qualified
• Balance, June 30, 2016
• $
• $
• $
• $
• II. D. A & A

EXHIBIT D – SUMMARY BY VESSEL OF QUALIFIED WITHDRAWALS FROM INCEPTION OF THE FUND THROUGH THE END OF THE PERIOD

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• II. D. A & A

EXHIBIT D Issues with noncompliance

• Utilization of qualified expenditures
• Timely set-up of bank account
• Filing of semiannual report to MARAD (CCF)
• 10-day reporting requirement to notify MARAD of sale of

schedule A vessel (CCF)

• 60-day deposit requirement of net proceeds (CRF)
• III. PROGRAM COMPLIANCE

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Other Certification Considerations

• Certification submission dates
• Types of property which may be deposited into the CCF
• Maximum/minimum levels of deposits into the program
• III. PROGRAM COMPLIANCE

Withdrawals from the Fund

• Qualified withdrawals
• Limitations on qualified withdrawals
• Permissible nonqualified withdrawals
• III. PROGRAM COMPLIANCE

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Other recordkeeping/administration considerations

• Spending strategy
• Budget program/project expenditures
• Tracking taxable income
• 120-day reimbursement
• Tracking expenditures
• III. PROGRAM COMPLIANCE

A. Tax Deferral Benefits: CRF vs. CCF

1.

CRF allows for only the gain on sale or disposition of an agreement vessel to qualify for the tax deferral, as long as proceeds are generally reinvested within three years

2.

No other tax deferral opportunities provided under CRF

3.

CCF allows for the tax deferral of ordinary income from the operation of an agreement vessel; in addition to the gain on sale of an agreement vessel where proceeds have up to 25 years to be reinvested

• IV. A. WRAP-UP/COMPARISON OF CRF/CCF

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• B. Vessel Geographic Trading Restrictions: CRF vs. CCF

1.

CRF does not have agreement vessel geographic trading restrictions; domestic trade is allowed, including the inland waterways and coastal domestic trade between the 48 contiguous states.

2.

CCF has significant agreement vessel geographic trading restrictions; must be operated in U.S. foreign, Great Lakes, or noncontiguous domestic trade. Domestic trade is disallowed

• ther than on the Great Lakes. This includes domestic trade on the inland waterways and

coastal domestic trade between the 48 contiguous states.

• IV. A. WRAP-UP/COMPARISON OF CRF/CCF

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The information contained in these slides is presented by professionals for your information only and is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. BKD, LLP is registered with the National Association of State Boards

• f Accountancy (NASBA) as a sponsor of continuing professional

education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

• CPE credit may be awarded upon verification of participant

attendance

• For questions, concerns or comments regarding CPE credit,

please email the BKD Learning & Development Department at training@bkd.com

CPE CREDIT

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• Remember BKD Marine, your CRF/CCF Implementation

Specialists DON’T BE LEFT BEHIND …

Bill Finnecy // wfinnecy@bkd.com Tim Goldsmith // tgoldsmith@bkd.com Marne Babich // mbabich@bkd.com

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