NOTE: This headliner is current through the publication date. Since changes may have occurred, no guarantees are made concerning the technical accuracy after the publication date.
Headliner Volume 242
August 15, 2008
The American Jobs Creation Act of 2004 amended Internal Revenue Code section 1301 to permit fishermen to average their income over three years, similar to taxpayers involved in a farming trade or business. Recently released Regulations 1.1301 provide guidance on this change.
Background Information
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For taxable years beginning after Dec. 31, 1997, IRC section 1301 provides that individual taxpayers engaged in a farming business may elect to compute their income tax liability by treating all or a portion of their taxable income from farming as if one-third of it had been earned in each of the prior three years. Making the election may give taxpayers a lower tax liability for the current year if their farming income is high in the current year and their taxable income was low in the three prior years.
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Section 314(b) of the American Jobs Creation Act of 2004 amended IRC section 1301 to permit fishermen to average their current income over the prior three years, similar to taxpayers involved in a farming business.
Definition of Fishing Business
“Fishing business” means the conduct of commercial fishing, which is defined by cross-reference to the Magnuson-Stevens Fishery Conservation and Management Act. The Magnuson-Stevens Act defines “commercial fishing” as fishing in which the fish harvested are intended to or do enter commerce through sale, barter, or trade. More specifically:
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“Fishing” is defined as the catching, taking, or harvesting (activities that result in the killing of fish or the bringing of live fish on board a vessel) of fish (finfish, mollusks, crustaceans, and all other forms of marine animal and plant life, other than marine mammals and birds); the attempted catching, taking, or harvesting of fish; activities that reasonably can be expected to result in the catching, taking, or harvesting of fish; or operations at sea in support of or in preparation for the catching, taking, or harvesting of fish.
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“Fishing” does not include any scientific research activity conducted by a scientific research vessel.
Section 1301 Farmer and Fisherman Income Averaging Provisions
An individual engaged in a farming or fishing business may make an income averaging election to compute their current year income tax liability by averaging, over the prior three-year period (base years), all or a portion of their current year eligible income. The amount a farmer or fisherman may elect to average (referred to as Electable Farm Income):
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Is the amount of income attributable to farming and fishing;
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Does not include gain from the sale or other disposition of land; and
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Cannot be more than taxable income, and any EFI from a net capital gain attributable to farming or fishing business cannot be more than total net capital gain.
A taxpayer engaged in both a farming and fishing business must combine the income, gains, deductions, and losses from the businesses to determine the maximum amount of income that is eligible for averaging.
The fishing income averaging election applies to crewmembers, whether employees or not, for employment tax purposes. It also applies to a lessor of a vessel 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 the fishing activities resulting in the shared catch.
The AJCA also provided 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 an income averaging election will not be offset by a corresponding increase in the AMT.
And finally, certain deposits into a Merchant Marine Capital Construction Fund (CCF) reduce taxable income and affect the amount of income that is eligible for income averaging.
More information about income averaging for farmers and fishermen, including the affect of CCF deposits, are available in recently released Regulations 1.1301.
How to Elect
Schedule J (Form 1040) is used to make the income averaging election. An income averaging election also can be made on a late or amended return if the period of limitations on filing a claim for credit or refund has not expired. Similarly, a taxpayer may change or revoke the amount of the election if the period of limitations has not expired. A claim for refund generally must be filed within three years from the filing date of the original return or two years from the date you paid the tax, whichever is later.
References/Related Topics
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