April 20, 2021
Top Tax Tips for the Commercial Fishing Industry
Top Tax Tips for the Commercial Fishing Industry
The following article discusses some general principles and tax tips for those in the commercial fishing industry.
Self-Employed Status
A fisherman is considered self-employed (and not an employee) and required to pay SE tax if he/she meets the following conditions:
- Receives a share of the catch or proceeds from the catch.
- The share depends on the amount of the catch.
- Receives a share from a boat with an operating crew of normally fewer than 10 individuals.
- Generally, does not receive money from work other than a share of catch or proceeds.
Consequently, there are no withholdings from your clients’ crew share for federal and state taxes. It is your responsibility to file tax returns and pay the taxes owed.
Under the Tax Cuts and Jobs Act, beginning in 2018, there is a new 20 percent qualified business income deduction available to small business owners and self-employed folks.
Gross Income
Gross income from fishing includes amounts received from catching, taking, harvesting, cultivating, or farming fish, shellfish, crustacean, sponges, seaweeds, or other aquatic forms of animal or vegetable life.
A crewmember or sternman may be given a share of the catch to sell and could receive a Form 1099-MISC from the boat owner and another one from the buyer of the catch for cash (and for different amounts). Consider doing one or both of the following to prevent or respond to inquiries from the IRS: 1) have the boat captain sell the entire catch and give you your share, and 2) receive a check as payment from the buyer of the catch (instead of cash).
Income Averaging
Income averaging was a tax break that assisted people with large income deviations up until 1986. After the 1986 Tax Reform Act, income averaging was eliminated for everyone except fishermen and farmers.
How does income averaging work? Suppose a taxpayer earned $100,000 and paid $20,000 in taxes in year one, then the taxpayer made $300,000 and paid $80,000 in year two, but then lost $100,000 in year three. Without income averaging, in year three the taxpayer would pay no taxes since there is no income. But with income averaging, the taxpayer would be able to average his income for all three years, resulting in an average of $100,000 per year. How do I get $100,000 per year average? The taxpayer earned $100,000 in year one, plus $300,000 in year two, minus $100,000 in year 3, divided by 3 years equals an average of $100,000 per year.
How much tax would the taxpayer pay under income averaging? Under income averaging, the taxpayer would be permitted to recalculate the taxes owed in year one, year two, and year three based on an average income of $100,000 per year. Since we know that the tax on $100,000 is $20,000, the taxpayer would need to pay $20,000 in taxes for year 1, plus another $20,000 for year 2, and another $20,000 for year 3. A total of $60,000 in taxes is owed over the three years based on the income average of $100,000 for each year. However, the taxpayer already paid $20,000 in year one, and $80,000 in year two for a total of $100,000. Therefore, in year 3, the taxpayer would receive a refund of $40,000, the difference between the $100,000 paid in taxes and the $60,000 owed due to income averaging, because he overpaid his income taxes using income averaging.
Deductible Expenses
Many expenses incurred while fishing are deductible, reducing your taxable income and the taxes owed. Deductible expenses include:
- Gear and supplies, including rain gear, gloves and boots.
- Licenses.
- Business telephone.
- Airfare and travel expense to and from port
- Out of port lodging and meals
- Boat expenses such as galley provisions, fuel and unloading fees.
A tax credit is allowed for the fuel used by vessels used in commercial fishing.
Expenses While Away from Home
Fishermen typically incur large expenses for subsistence while away from home. Meals are deductible when you are away from your tax home in pursuit of your trade, AND your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Depending on the facts, your main place of business or work may be a port, a vessel (Tax Home) or the location of the business conducted during non-fishing months (Business Use of Home). This distinction is very important to the deduction of travel costs.
When meals can be deducted, you calculate them based on actual cost or the standard meal allowance. The latter is the federal rate for meals and incidentals, which will vary by area and when you travel. Meal expenses under either method must be reduced by 50 percent before being deducted. For lodging expenses, only the actual cost is allowed.
Depreciation
Fish tender vessels and fish processing vessels are classified as water transportation equipment and are depreciated over 10 years. Fishing boats, nets, pots or traps used in a fishing trade or business are depreciated over seven years. You may be able to deduct expenditures in the current year if you can establish that the items will not be used for more than a year. Under the new tax reform law, bonus depreciation has been increased from 50 percent to 100 percent and the Sec. 179 limit has been increased from $500,000 to $1 million.
Capital Construction Fund
It may be smart to take advantage of the Capital Construction Fund (CCF), which was created to assist fishermen. The program allows fishermen to defer taxable income by making contributions to an approved depository and eventually using the funds to buy or improve a fishing vessel.
The purpose of the Capital Construction Fund Program is to improve the fishing fleet by allowing fishermen to accelerate their accumulation of funds with which to replace or improve their fishing vessels. Created by the Merchant Marine Act of 1936 as amended (46 U.S.C. 1177), the program enables fishermen to construct, reconstruct, or, under limited circumstances, acquire fishing vessels with before-tax dollars. Under the program, the amount accumulated by deferring tax on fishing income, when used to help pay for a vessel project, represents the time value of deferred taxes on operating profit. The taxes are recovered by the U.S. Government by reducing the depreciable cost of the vessel.
Any U.S. citizen is eligible who owns or leases a U.S.-built fishing vessel of at least 2 net tons and has an acceptable program for constructing, reconstructing, or acquiring a fishing vessel of at least 2 net tons. The term "fishing vessel" includes vessels used commercially in the fisheries of the United States for catching, transporting, and processing fish. Also included are commercial passenger-carrying vessels used for fishing parties. Applications are accepted at any time. However, to be applicable to any given tax year, a Capital Construction Fund agreement must be executed and entered on or before the due date (with extensions) for filing your federal tax return for that tax year.
Estimated Taxes
Small business owners need to pay estimated taxes on time to avoid paying a penalty and there is a special rule for fishermen. If at least two-thirds of your gross income is from fishing, you can choose either of the two options and avoid the estimated tax penalty: 1) pay all of your estimated tax by Jan. 15 and file your individual return by April 15, OR file your individual return by March 1 and pay all the tax due.
Recordkeeping
For most small business owners or self-employed folks, a business checking account or Accounting software is the main source for tracking income and expenses. Supporting documentation or receipts must be maintained, such as fish tickets, paid bills, invoices, receipts and cancelled checks. It’s wise to organize these records well and store them in a safe place in case of an IRS or State Audit. Note: Receipts will fade away after a period of time, it is best to scan them into a permanent record.
Hopefully, we have been able to enlighten you about some general principles and tax tips that pertain to the commercial fishing industry.
Editor’s note: Parts of this article were originally published in CPA Practice Advisor.
Getting Tax Advice
If you are unfamiliar with tax filing and deductible expenses for the commercial fishing industry, get advice from an accountant or tax preparer who is familiar with the fishing industry. Your coworkers or the boat owner may be able to help you locate competent tax advice.
Do not wait until it’s time to file to seek tax advice. As soon as you know you will have income from fishing, talk with a tax advisor. Find out what records to keep, the date taxes are due, and whether you are required to make estimated tax payments.
If in past years you have had taxable income and have not filed tax returns, find an accountant familiar with the tax issues of fishermen and begin dealing with the issue. Ignoring or denying tax issues will compound your problems.
For more information, see Tax Highlights for Commercial Fishermen, IRS publication 595. To order, call the IRS at 1-800-829-3676. Or if you have access to a computer and modem, you can visit the IRS’s Web site to obtain forms at http:/www.irs.ustreas.gov.
If you plan to prepare the taxes yourself, you should become very familiar with the IRS Fishing Audit Technique Guide
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