Publication 595
Tax Highlights for Commercial Fishermen

For use in preparing 2002 Returns

Introduction

This publication highlights some special tax rules that may apply to you if you have your own fishing trade or business. The following persons have their own fishing trade or business.

• Fishing boat owners or operators who use their boats to fish for profit.
• Certain fishermen who work for a share of the catch.
• Other individuals who receive gross income from fishing.

Generally, you report your profit or loss from fishing on Schedule C or Schedule C-EZ of Form 1040. An example with a filled-in Schedule C, shown later, provides details on how to complete this form.

This publication does not contain all the tax rules that may apply to your fishing trade or business. For general information about the federal tax laws that apply to individuals who file Schedule C or C-EZ, see Publication 334, Tax Guide for Small Business. If your trade or business is a partnership or corporation, see Publication 541, Partnerships, or Publication 542, Corporations.

If you are just starting out in a fishing business or you need information on keeping books and records, see Publication 583, Starting a Business and Keeping Records.

Please note that this publication uses the term fisherman because it is the commonly accepted term in the fishing industry. In the following discussions it represents both men and women.

Comments and suggestions.   We welcome your comments about this publication and your suggestions for future editions.

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Internal Revenue Service
Tax Forms and Publications
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Important Changes
for 2002

Additional depreciation.   You can claim a special depreciation allowance for qualified property placed in service after September 10, 2001, and before September 11, 2004. See Publication 946, How To Depreciate Property, for more information.

Electronic Form 1099.   For tax years ending after March 9, 2002, Form 1099 can be issued electronically if the recipient consents to receive it that way.

Important Reminder

Photographs of missing children.   The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Important Dates
for 2003

This section highlights important due dates for the 2003 calendar year. For other important dates, see Publication 509, Tax Calendars for 2003.

January 15

Fishermen.   If at least two-thirds of your 2001 or 2002 gross income was from fishing, you may want to pay at least two-thirds of your 2002 tax by this date, using Form 1040-ES, to meet your estimated tax requirement for 2002. This will allow you to wait until April 15 to file your Form 1040 and pay any remaining tax without penalty. See March 3, later, if you do not pay two-thirds of your tax by this date.

If less than two-thirds of your gross income is from fishing, you generally must make quarterly estimated tax payments. See Due Dates for Nonqualified Fishermen, later.

January 31

Fishing boat operators.   Fishing boat operators must give a 2002 Form 1099-MISC, Miscellaneous Income, to certain crew members who were self-employed.

February 28

Fishing boat operators.   Use Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to send Copy A of Forms 1099-MISC to IRS.

March 3

Fishermen.   If at least two-thirds of your 2001 or 2002 gross income was from fishing, you can file your 2002 Form 1040 by this date and pay your tax in full without penalty.

April 15

Fishermen.   If you have not filed your Form 1040, you should file it by April 15 and pay your tax in full. If you need more time to file, you can request an extension of time to file with Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, or you can get an extension by Internet or phone.

More information.   For more information on important dates, see Due Dates for Qualified Fishermen and Due Dates for Nonqualified Fishermen, later.

Useful Items

You may want to see:

Publication

• 15   Circular E, Employer's Tax Guide
• 15-A   Employer's Supplemental Tax Guide
• 15-B   Employer's Tax Guide to Fringe Benefits
• 334   Tax Guide for Small Business
• 378   Fuel Tax Credits and Refunds
• 463   Travel, Entertainment, Gift, and Car Expenses
• 505   Tax Withholding and Estimated Tax
• 533   Self-Employment Tax
• 535   Business Expenses
• 583   Starting a Business and Keeping Records
• 946   How To Depreciate Property

Form (and Instructions)

• Schedule C (Form 1040)   Profit or Loss From Business
• Schedule C-EZ (Form 1040)   Net Profit From Business
• 1040-ES   Estimated Tax for Individuals
• 1099-MISC   Miscellaneous Income
• 2210-F   Underpayment of Estimated Tax by Farmers and Fishermen
• 4136   Credit for Federal Tax Paid on Fuels
• 8849   Claim for Refund of Excise Taxes

See How To Get Tax Help near the end of this publication for information about getting publications and forms.

What Is Gross Income From Fishing?

Gross income from fishing includes amounts you receive from catching, taking, harvesting, cultivating, or farming any of the following aquatic resources.

• Fish.
• Shellfish (such as clams and mussels).
• Crustacea (such as lobsters, crabs, and shrimp).
• Sponges.
• Seaweeds.
• Other aquatic forms of animal or vegetable life.

You generally figure your gross income from fishing in Part I of Schedule C (Form 1040). For more information on Schedule C, see What Forms Must You File, later.

Wages.   Wages you receive as an employee in a fishing business are not gross income from fishing.

If you work on a boat with an operating crew that is normally made up of fewer than 10 individuals, you may be considered a self-employed individual instead of an employee. As a self-employed individual you may receive gross income from fishing. For more information, see Which fishermen are considered self-employed? under Form 1099-MISC, later.

Patronage dividends.   Patronage dividends you receive from your fishing business activities are generally included in your gross income from fishing. However, do not include in gross income amounts you receive from a cooperative association relating to the purchase of capital assets or depreciable property used in your fishing business. Reduce the basis of these assets by the dividends received.

Fuel tax credits and refunds.   You may have to include fuel tax credits and refunds you receive from your fishing business activities in your gross income from fishing. For more information, see Including the Credit or Refund in Income under How Do You Claim Fuel Tax Credits and Refunds, later.

Which Fishing Expenses Can
You Deduct?

You generally can deduct ordinary and necessary fishing expenses as business expenses in Part II of Schedule C (Form 1040). An ordinary fishing expense is one that is common and accepted in a fishing trade or business. A necessary fishing expense is one that is helpful and appropriate for a fishing trade or business. An expense does not have to be indispensable to be considered necessary.

The following discussions give a brief overview of three types of business expenses that are of special interest to fishermen: depreciation, travel, and transportation expenses. The most common business expenses for small businesses are listed in Part II of Schedule C. For more information on business expenses, see Publication 535. There is also information on specific business expenses in Publication 334.

Depreciation

If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year. This method of deducting the cost of business property is called depreciation. Use Form 4562, Depreciation and Amortization, to report depreciation.

Publication 946 contains the rules you need to depreciate certain property. The following list highlights items of special interest to fishermen.

• Fishing boats. You generally can depreciate a fishing boat used in your fishing trade or business as 7-year property using the Modified Accelerated Cost Recovery System (MACRS) depreciation.
• Nets, pots, and traps. You generally can depreciate a net, pot, or trap used in your fishing trade or business as 7-year property using MACRS depreciation. 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 in the current year.
• Repair or improvement. If a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, it is an improvement. You must depreciate the cost of improvements. If the repair or replacement does not increase the value of your property, make it more useful, or lengthen its life, it is a repair. You deduct the cost of repairs as a business expense.

Section 179 deduction.   Instead of depreciating property, you can choose to deduct a limited amount of the cost of certain depreciable property in the year you place it in service in your business. This deduction is known as the section 179 deduction. For more information, see Publication 946.

Special depreciation allowance   You can take a special depreciation allowance for qualified property you place in service. It is an additional 30% deduction you can take before you figure MACRS depreciation for the year you place the property in service. For more information, see Publication 946.

Travel and Transportation

This section briefly explains some of the rules for deducting travel and transportation expenses. For more information about travel and transportation expenses, see Publication 463. That publication also explains what records to keep.

Local transportation expenses.   Local transportation expenses include the ordinary and necessary costs of getting from one workplace to another in the course of your business when you are traveling within the city or general area that is your tax home.

Tax home.   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business is located.

Commuting expenses. You cannot deduct the costs of traveling between your home and your main or regular place of business. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is from your regular place of business. You cannot deduct commuting expenses even if you work during the trip.

Travel expenses.   For tax purposes, travel expenses are the ordinary and necessary costs of traveling away from home for your business, profession, or job. You are traveling away from home if you meet the following requirements.

• Your duties require you to be away from the general area of your tax home (defined earlier) substantially longer than an ordinary day's work.
• You need to get sleep or rest to meet the demands of your work while away from home.

Limited deduction for meals.   You generally can deduct only 50% of the costs of the following meals.

• Meals you provide to either employees or self-employed individuals who provide services to your fishing trade or business.
• Your own meals while you are traveling away from home for business.

Exceptions to limit.   You can deduct the full costs of the following meals.

• Meals that qualify as a de minimis fringe benefit as discussed in section 2 of Publication 15-B. This generally includes meals you provide to employees at your place of business if more than half of these employees are provided the meals for your convenience.
• Meals whose value you include in an employee's wages.
• Meals whose value you include in the income of a self-employed individual who performs services for your business. You must generally include the value of meals you furnish to that individual in his or her income. To deduct 100% of these meals, you must report their value on any Form 1099-MISC you file to report your payments for services.
• Meals you are required by federal law to furnish to crew members of certain commercial vessels (or would be required to provide if the vessels were operated at sea).

The federal law that generally requires meals to be furnished to crew members of commercial vessels does not apply to fishing vessels.

What Forms Must
You File?

If you have a fishing trade or business, you may need to file the following forms.

Schedule C (Form 1040)

Use Schedule C (Form 1040) to figure your net profit or loss from a fishing business you operate or a trade you practice as a self-employed individual. To figure your net profit or loss, subtract your deductible fishing expenses from your gross income from fishing. File Schedule C with your Form 1040.

You may be able to use the simpler Schedule C-EZ (Form 1040), instead of Schedule C, if you made a profit and had fishing expenses of $2,500 or less. For more information, see Part I of Schedule C-EZ.

Who is self-employed?   You are self-employed if you own an unincorporated business or practice a trade by yourself. You do not have to carry on regular full-time business activities to be self-employed. Your trade or business may consist of part-time work, including work you do in addition to your regular job.

If you work on a fishing boat with an operating crew normally made up of fewer than 10 individuals, you may be considered self-employed. For more information, see Which fishermen are considered self-employed? under Form 1099-MISC, later.

What is a trade or business?   A trade or business is generally an activity that is your livelihood or that you do in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. Regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

Husband and wife partners.   You and your spouse may operate a fishing business together. If you and your spouse join together in the conduct of a business and share in the profits and losses, you have created a partnership. You and your spouse must report the business income and expenses on Form 1065, U.S. Return of Partnership Income. The income should not be reported on a Schedule C. For more information, see Publication 541, Partnerships.

Not-for-profit fishing. You must fish to make a profit in order to report your fishing income and expenses on Schedule C. You do not need to actually make a profit as long as you are making a good faith effort. If you are not fishing for profit, report your fishing income and expenses as explained under Not-for-Profit Activities in chapter 1 of Publication 535.

More information.   For specific information on completing Schedule C, see Schedule C Example and the filled-in Schedule C, later.

Schedule SE (Form 1040)

Use Schedule SE (Form 1040) to figure and report your self-employment tax. See Self-employment tax (SE tax), later. Most fishermen can use Section A - Short Schedule SE to figure their self-employment tax. You must file Schedule SE with your Form 1040 if you were self-employed and your net earnings from self-employment were $400 or more.

Even if you do not have to file Schedule SE, it may be to your benefit to file it and use an optional method in Part II of Long Schedule SE (Section B). For more information, see Optional methods, later.

Self-employment tax (SE tax).   The SE tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of wage earners.

Social security coverage.   Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Social security benefits are available to self-employed persons just as they are to wage earners.

You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage).

Earning credits in 2002 and 2003.   You can earn a maximum of four credits per year. For 2002, you earn one credit for each $870 ($890 for 2003) of income subject to social security taxes. You need $3,480 ($870 x 4) of self-employment income and wages to earn four credits in 2002. For 2003, you will need $3,560 ($890 x 4) of self-employment income and wages to earn four credits.

For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, contact your nearest Social Security Administration (SSA) office.

Optional methods.   You may want to use one of the optional methods in Part II of Long Schedule SE (Section B) when you have a loss or a small net profit and any of the following apply.

• You want to receive credit for social security benefit coverage.
• You incurred child or dependent care expenses for which you could claim a credit. (This method may increase your earned income, which could increase your credit for these expenses.)
• You are entitled to the earned income credit. (This method may increase your earned income, which could increase your earned income credit.)

Using the optional methods will increase your SE tax.

Estimated tax.   You may have to pay estimated tax. This depends on how much income and SE taxes you expect for the year and how much of your income will be subject to withholding. The SE tax is treated and collected as part of the income tax. For more information, see When Do Fishermen Pay Estimated Tax and File Tax Returns, later.

Reporting self-employment tax.   Figure your SE tax on Schedule SE. Then, report the tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. If you file a joint return and you both have SE income, each of you must complete a separate Schedule SE.

Husband-wife partnership.   If you and your spouse operate a fishing business as a partnership, each of you should include your respective share of SE income on a separate Schedule SE.

However, if your spouse is not your partner, but your employee, you must pay employment taxes for him or her. For more information, see Employment Tax Forms, later.

Self-employment tax deduction.   You can deduct one-half of your SE tax as a business expense in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.

To deduct the tax, enter on Form 1040, line 29, the amount shown on the Deduction for one-half of self-employment tax line of the Schedule SE.

More information.   For more information on self-employment tax, see Publication 533.

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