ASC 995: Journal Entries for Steamship Fund Deferred Tax TransactionsPosted In | ASC Education | Gridlex Academy
The Capital Construction Fund (CCF) program, established under the Merchant Marine Act of 1936, is a significant financial tool for U.S. Steamship Entities. It encourages the construction, reconstruction, or acquisition of new vessels through tax deferral mechanisms. ASC 995, which specifically focuses on U.S. Steamship Entities, provides guidance on accounting for deferred tax liabilities in connection with the CCF program. This article aims to explain the deferred tax liability for capital construction fund transactions with illustrative journal entries.
Understanding Capital Construction Fund (CCF) Transactions
The CCF program allows U.S. Steamship Entities to defer taxes on income generated from vessel operations by depositing this income into a CCF account. The funds in the CCF account are to be used for the construction, acquisition, or reconstruction of qualified vessels. As long as the funds are not withdrawn for non-qualifying purposes, the deferred taxes remain as a liability on the company's financial statements.
Deferred Tax Liability for CCF Transactions
When a U.S. Steamship Entity deposits income into a CCF account, it does not recognize the income as taxable for the current period. Instead, it recognizes a deferred tax liability on its balance sheet, representing the future tax obligation that will arise when the funds are withdrawn for non-qualifying purposes or when the CCF agreement terminates.
Journal Entries for Deferred Tax Liability
To illustrate the journal entries for deferred tax liability in connection with a CCF transaction, let's assume that a U.S. Steamship Entity generated $1,000,000 in income from vessel operations and has a corporate tax rate of 25%. The company decides to deposit the entire income into a CCF account. The journal entries would be as follows:
1. Record the income from vessel operations:
Dr. Cash (or Accounts Receivable) $1,000,000
Cr. Revenue from Vessel Operations $1,000,000
2. Record the deposit into the CCF account:
Dr. Revenue from Vessel Operations $1,000,000
Cr. CCF Account $1,000,000
3. Record the deferred tax liability:
Dr. Income Tax Expense $250,000
Cr. Deferred Tax Liability $250,000
The deferred tax liability of $250,000 represents the future tax obligation that will arise if the funds are withdrawn for non-qualifying purposes or when the CCF agreement terminates.
Withdrawal of Funds from the CCF Account
When the U.S. Steamship Entity withdraws funds from the CCF account for qualifying purposes, there is no impact on the deferred tax liability. However, if the funds are withdrawn for non-qualifying purposes, the deferred tax liability must be recognized as a current tax expense.
The journal entries for a non-qualifying withdrawal of $200,000 would be as follows:
1. Record the withdrawal from the CCF account:
Dr. CCF Account $200,000
Cr. Cash $200,000
2. Record the tax expense on the non-qualifying withdrawal:
Dr. Deferred Tax Liability $50,000 (25% of $200,000)
Cr. Income Tax Expense $50,000
ASC 995 provides guidance on accounting for deferred tax liabilities in connection with CCF transactions for U.S. Steamship Entities. These entities can defer taxes on income generated from vessel operations by depositing the income into a CCF account. Understanding the journal entries for recording and withdrawing funds from the CCF account is crucial for accurately reflecting a company's financial position and tax obligations.