Alternative Taxation of Income from Qualifying Shipping Activities

From TaxAlmanac

For tax years beginning after October 22, 2004, a corporation may elect to be taxed on qualifying shipping activities (IRC Sec. 1356) using an alternative method.

Tax on Notional Shipping Income

If the election is made, the tax (IRC Sec. 1352) is the sum of:

a) The tax imposed by IRC Sec. 11, after the application of IRC Subchapter R (according to the Form 1120 instructions, report this tax on Form 1120, Sch. J, line 3), and

b) The tax equal to the maximum corporate tax rate, multiplied by the notional shipping income (IRC sec. 1353) for the taxable year (according to the Form 1120 instructions, report this tax on Form 1120, Sch. J, line 10, check the “Other” box and attach a schedule that shows the computation of this part of the tax).

Taxable notional shipping income as defined by IRC Sec. 1353(b)(1):

a) Daily notional shipping income, multiplied by

b) The number of days in the taxable year that the electing corporation operated qualifying vessel(s) (IRC Sec. 1355(a)(4)) in U.S. foreign trade.

Daily notional shipping income as defined by IRC Sec. 1353(c):

a) 40 cents for each 100 tons, up to 25,000 net tons, and

b) 20 cents for each 100 tons that exceeds 25,000 net tons

For qualifying vessels that otherwise qualify for exclusion of income from gross income under IRC Sec. 883, or otherwise, the rules of IRC Sec. 1353(b)(2) do not jeopardize the exclusion status. In other words, corporations that elect the alternative tax computation method of Subchapter R will maintain the exclusion benefits of IRC Sec. 883.

In the case where a qualifying vessel is operated by two or more persons, notional shipping income will be allocated among the operators on the basis of their respective ownership or charter interests, or a method prescribed by regulations. (IRC Sec. 1353(d))

Election, Revocation, and Termination

Once the election is made to compute the alternative tax under Subchapter R, the election will be effective for the current tax year (if made before the due date of the return, including extensions) and all succeeding taxable years. If an election is made after the due date of the return, the election will be effective on the first day of the following tax year. (IRC Sec. 1354(b))

If an election is made by a member of a controlled group, the election will apply to all qualifying vessel operators (IRC Sec. 1355(a)(3)) of the controlled group. (IRC Sec. 1354(c))

An election may be revoked at any time. If the revocation is made prior to the 15th day of the third month of the tax year, the revocation is effective on the first day of the current tax year. If the revocation is made after the 15th day of the third month, the revocation is effective on the first day of the following tax year. If the revocation specifies a date of revocation, the revocation will be effective for tax years beginning on or after the date specified. (IRC Sec. 1354(d)(1))

Should a qualifying vessel operator cease to be a qualifying vessel operator, the election will terminate on the day the corporation ceases to be a qualifying vessel operator. In such an instance, income will be annualized based on a method prescribed by the Secretary. (IRC Sec. 1354(d)(2))

Once an election has been terminated by a qualifying vessel operator, such operator will not be eligible to make another election under IRC Sec. 1354(a) before the fifth year after the first tax year that the termination was effective. (IRC Sec. 1354(e))

See IRC Sec. 1355 and 1356 for definitions, special rules, and qualifying shipping activities.