Amortization

The Revenue Reconciliation Act of 1993 (P.L. 103-66) added section 197, which allows an amortization deduction with respect to the capitalized costs of certain intangible property that is acquired by a taxpayer and that is held by the taxpayer in connection with the conduct of a trade or business or an activity engaged in for the production of income. The amount of the deduction is determined by amortizing the adjusted basis (for purposes of determining gain) of the intangible ratably over a 15-year period that begins with the month that the intangible is acquired.

The term “section 197 intangible” is defined to include “any license, permit, or other right granted by a governmental unit or any agency or instrumentality thereof.” Thus, for example, the capitalized cost of acquiring from any person a liquor license, a regulated airline route, or a television or radio broadcasting license is to be amortized over a 15-year period. Consequently, the definition of an amortizable intangible can be interpreted to include a limited entry fishing permit.

This provision generally applies to property acquired after the date of enactment of the 1993 bill. However, a taxpayer may elect to apply the bill to all property acquired after July 25, 1991. “Anti-churning” rules prevent taxpayers from converting an existing IRC section 197 intangible for which depreciation or amortization would not have been allowable under present law into amortizable property to which the bill applies.

Depreciable Life of a Fishing Vessel

Water transportation equipment such as barges, tugs, and similar water transportation equipment have a class life of 18 years and a MACRS recovery period of 10 years. Fish tender vessels and fish processing vessels are considered water transportation equipment and should also be depreciated over a period of 10 years. Fishing boats, however, used in one's fishing trade or business is generally depreciated over 7 years.

You can generally depreciate a net, pot, or trap in your fishing trade or business as 7 year property. However, if based on your own experience you determine that any of these items will not be used for more than one year in your business, you may be able to deduct the cost as a business expense.

Depreciating Fishing Nets

Fishing Nets are expected to last longer than the year they are placed into service; therefore, they are capital assets and require depreciation treatment. See Depreciating Fishing Nets

Fish Processing Equipment

Fish processing equipment includes items such as belts and screws, conveyors, bins, holding tanks, washes, climate control devices, screens, separators, automatic deheaders and filleters, waste product recovery systems, refiners, plate freezers, packaging equipment, and a large number of standard motors and power transmission systems.

It has been the long standing position of the Internal Revenue Service that fish processing equipment falls under the Asset Class 20.4 as food production and manufacturing equipment and should be depreciated over 7 years. Some taxpayers are erroneously treating these assets as "special handling devices," as described in Asset Class 20.5, and are depreciating them over 3 years.

A taxpayer's reliance on the economic life of the assets corresponding to the 3-year recovery period is unsupported since recovery periods are statutorily defined by class lives and do not correspond to economic lives. The fact that a taxpayer's fish processing equipment is species specific does not justify a shorter recovery period.

Special handling devices such as returnable pallets, palletized containers, boxes, baskets, carts and flaking trays used in a taxpayer's fish processing facility may be classified under Asset Class 20.5 and be depreciated over 3 years.

References/Related Topics

Since fishing nets’ useful life extends beyond the tax year they are placed in service, fishing nets are capital assets and require depreciation treatment. When an asset is depreciated, the cost of the asset is recovered through depreciation deductions over the "life" of the asset. This is different than the treatment of assets having a useful life of less than one year, which may be deducted entirely in the year of acquisition.

The "life" over which depreciation deductions must be taken is the asset’s class life. All personal property assets with no designated class life are assigned a 7 year class life under the General Depreciation System. Since fishing nets have no designated class life, they are depreciated over 7 years using the appropriate convention and method. See Publication 946, How to Depreciate Property, for further details and depreciation tables. Note: If a taxpayer elects to use the Alternative Depreciation System, the class life for fishing nets is 12 years.

The total cost that you can deduct each year for Section 179 purposes is limited to the taxable income from the active conduct of all trade or businesses for the tax year. You can carry over the cost of any Section 179 property you elected to expense but were unable to because of the taxable income limit. You use the amount you carry over to determine your Section 179 deduction in the next year. There are also situations in which part of the Section 179 deduction must be recaptured (i.e., added back to income). For additional information, refer to Publication 946, How to Depreciate Property.

In the year of disposition, you may claim the remaining cost (the portion of the total cost that hasn’t already been deducted as depreciation in the current and prior years) on Form 4797, Sales of Business Property (PDF).

Throughout a taxpayer's fishing business, complete new nets or replacement nets may be purchased/constructed. Whenever this occurs, the complete cost must again be capitalized and depreciated.