IRS updates Regs for Fishing Businesses

[chumbucket]

Federal Taxes Weekly Alert, 07/24/2008, Volume 54, No. 30

Regs updated to reflect income averaging option for fishing businesses
T.D. 9417, 07/21/2008 ; Reg. § 1.1301-1T ; Preamble to Prop Reg 07/21/2008
For tax years beginning after 2003, the American Jobs Creation Act of 2004 (Jobs Act) extended the option of income averaging, which under pre-Jobs Act law was available to farmers, to individuals engaged in the trade or business of fishing. IRS has just issued temporary, final and proposed regs reflecting and fleshing out the Jobs Act changes for fishing businesses.

RIA observation: The Jobs Act also coordinated income averaging with the alternative minimum tax (AMT) so that use of averaging does not increase AMT. The new regs do not reflect the AMT change, just the fishing changes.
Background. Under pre-Jobs Act law, Code Sec. 1301 provided that individual taxpayers engaged in a farming business could elect to compute their Code Sec. 1 income tax liability by treating all or a portion of their taxable income from the trade or business of farming as if one-third of it had been earned in each of the prior three tax years. Section 314(b) of the Jobs Act amended Code Sec. 1301 to permit fishermen to make a farm income averaging election. Code Sec. 1301(b)(1)(A) now provides that the income eligible for averaging includes income attributable to a fishing business. Code Sec. 1301(b)(4) defines fishing business as the conduct of commercial fishing as defined in section 3 of the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson- Stevens Act), 16 USCS 1802 .

Section 314(a) of the Jobs Act amended Code Sec. 55(c) to provide that the farm income averaging election is disregarded in computing the regular tax liability for purposes of calculating the alternative minimum tax (AMT). As a result, the reduction in regular tax liability resulting from a farm income averaging election will not be offset by a corresponding increase in the AMT.

Fishing defined. The definition of fishing business in the temporary regs follows the definitions in the Magnuson-Stevens Act and the regs under that Act. Thus, fishing includes catching, taking, or harvesting activities that result in the killing of fish or the bringing of live fish on board a vessel, but does not include the processing of fish. ( Reg. § 1.1301-1T(b)(1) )

Amount eligible for averaging. The temporary regs clarify that the maximum amount of income that an individual may elect to average is the total of the individual's farm and fishing income and gains, reduced by any farm and fishing deductions or losses allowed as a deduction in computing taxable income. Therefore, a taxpayer engaged in both a farming business and a fishing business must combine income, gains, deductions, and losses from both the farming business and the fishing business to determine the maximum amount of income that is eligible for averaging. ( Reg. § 1.1301-1T(e)(2) )

Lessor of vessel. Under the temporary regs, a lessor of a vessel is engaged in a fishing business if the payment due to the lessor under the lease is based on a share of the lessee's catch (or a share of the proceeds from the sale of the catch) and the lease is a written agreement entered into before the lessee begins significant fishing activities resulting in the shared catch. A fixed lease payment is not eligible for income averaging. ( Reg. § 1.1301-1T(b)(3) , T.D. 9417, 07/21/2008 )

Crewmembers. Under the temporary regs, crewmembers are engaged in a fishing business, whether or not they are treated as employees for employment tax purposes. ( Reg. § 1.1301-1T(e)(1) )

Deposits into Merchant Marine Capital Construction Fund. Under Code Sec. 7518(c)(1)(A) , certain deposits into a Merchant Marine Capital Construction Fund (CCF) reduce taxable income for purposes of the Code (the CCF reduction). The temporary regs provide that, for purposes of income averaging computations, the CCF reduction also reduces taxable income. In addition, except to the extent that the amount of the CCF deposit is determined by reference to income from maritime operations other than fishing, the CCF reduction also reduces the amount of income that is eligible for income averaging. ( Reg. § 1.1301-1T(d)(4) )

Effective date. The temporary regs apply for tax years beginning after July 22, 2008. However, taxpayers may apply them in tax years beginning after Dec. 31, 2003, but before July 23, 2008, if all provisions are consistently applied in each tax year. ( Reg. § 1.1301-1T(g) )

References: For income averaging, see FTC 2d/FIN ¶ N-1500 ; United States Tax Reporter ¶ 13,014 ; TaxDesk ¶ 119,001 ; TG ¶ 20041 .

[flatbottom]

In order to survive you need to be creative. The IRS is sooooo creative.

thanks for the update