IRS Form 8902

From AIM Financial — Business Tax Preparation and Tax Information

Businesses involved in international shipping may face specialized federal tax rules that do not apply to most other companies. Certain corporations operating qualifying vessels in U.S. foreign trade may be eligible to elect an alternative method of calculating federal income tax on qualifying shipping activities.

The IRS uses Form 8902, Alternative Tax on Qualifying Shipping Activities, to administer this election and calculate the alternative tax. Although this form applies to a relatively narrow group of businesses, understanding its requirements is important for eligible vessel operators, corporate tax departments, and professionals responsible for business tax compliance.

AIM Financial helps individuals and businesses understand federal tax forms and prepare accurate tax returns. This guide explains Form 8902 in plain English and highlights the eligibility requirements, filing procedures, and important limitations.

What Is IRS Form 8902?

IRS Form 8902 is used by qualifying vessel operators that are making an election under Internal Revenue Code Section 1354 or already have a valid election in effect. The form is also used to report the termination of an election and calculate the alternative tax on qualifying shipping activities. <Cite refs={[“turn857504search0″,”turn857504search20”]}/>

In simple terms, the form allows an eligible corporation to calculate tax under a special method for certain qualifying shipping income instead of treating all of that income under the corporation’s ordinary income tax calculation.

Form 8902 does not apply to every company that ships products overseas. A manufacturer that exports goods, a trucking company transporting freight to a port, or a logistics business arranging shipments does not qualify solely because it participates in international trade.

The corporation must meet the specific vessel, activity, ownership, and other statutory requirements.

Which Businesses May Qualify?

The IRS instructions define a qualifying vessel operator as a corporation that operates one or more qualifying vessels and satisfies the shipping activity requirement.

A qualifying vessel generally must be a self-propelled vessel, or a qualifying combination vessel, flying the U.S. flag, with a capacity of at least 6,000 deadweight tons, and used exclusively in U.S. foreign trade during the period the election applies. Additional statutory requirements must also be satisfied. <Cite refs={[“turn857504search0″,”turn857504search20”]}/>

The rules also contain a shipping activity requirement involving vessel ownership and charter arrangements during the two preceding tax years. Under the published instructions, the corporation generally must have had an average of at least 25% of the aggregate tonnage of its qualifying vessels owned by it or chartered to it on bareboat charter terms.

Certain Class II and Class III railroad companies, freight brokers, domestic trucking businesses, and ordinary freight forwarders will not qualify merely because they are involved in shipping-related activities.

Because the requirements are technical, a corporation should confirm its eligibility before making an election.

What Activities and Income Are Covered?

Form 8902 distinguishes between different categories of shipping-related income.

Core qualifying activities generally involve operating qualifying vessels in U.S. foreign trade.

Qualifying secondary activities can include certain vessel management activities, cargo-related services, terminal services, container operations, and inland transportation connected to qualifying shipping operations. However, the published instructions limit the amount of secondary-activity gross income that can qualify to 20% of gross income from core qualifying activities.

Qualifying incidental activities are subject to a separate, much smaller limit. Under the published instructions, eligible incidental-activity gross income generally cannot exceed 0.1% of gross income from core qualifying activities to qualify under that category. <Cite refs={[“turn857504search0″,”turn857504search20”]}/>

For example, a qualifying vessel operator may earn income from operating vessels and also provide certain related terminal or cargo services. The corporation must determine which income belongs in each category and apply the applicable limitations.

Income exceeding the relevant secondary or incidental activity limits generally does not receive the same alternative tax treatment and must be handled under the applicable regular tax rules.

How Is the Alternative Tax Calculated?

Form 8902 contains multiple parts that help an eligible corporation calculate the tax.

Step 1: Make or report the election.

The corporation identifies whether it is making an election, reporting an existing election, or terminating an election.

Step 2: Report qualifying activities.

The corporation reports gross income from core qualifying activities, qualifying secondary activities, and qualifying incidental activities. Supporting schedules may be necessary to explain the calculations.

Step 3: Provide vessel information.

The form requests details about each qualifying vessel, including ownership or lease arrangements and how the vessel is used.

Step 4: Calculate notional shipping income.

The form uses the applicable statutory rules to calculate notional shipping income for qualifying vessels and activities. This is a specialized tax calculation and is not simply the company’s ordinary accounting profit.

Step 5: Calculate the alternative tax.

The corporation completes the alternative tax calculation using the applicable rules for its tax year.

The IRS’s April 2018 instructions describe a 21% corporate tax rate for tax years beginning after December 31, 2017, while also addressing special blended-rate calculations for certain fiscal years spanning the 2017 tax rate change. Taxpayers must use the law applicable to the tax year being reported rather than assuming every historical instruction remains current. <Cite refs={[“turn857504search0″,”turn857504search20”]}/>

When Must Form 8902 Be Filed?

Under the published instructions, the corporation makes its election by filing Form 8902 with its Form 1120 or Form 1120-F by the due date, including extensions, for the income tax return for the year of the election.

The form must also be filed by a qualifying vessel operator that reports the termination of an election or has an existing valid election requiring annual reporting. Certain controlled-group rules may affect the election and its application to related corporations.

An election can have long-term consequences. The published instructions state that after an election is revoked or terminated, the corporation and certain successor operators generally cannot make another election for a specified period unless the IRS consents. The exact consequences should be reviewed before changing an existing election. <Cite refs={[“turn857504search0”]}/>

Important: The IRS’s published Form 8902 instructions are dated April 2018. Before filing, taxpayers should check the IRS Form 8902 page for any later developments, changes in law, or updated filing guidance.

Common Mistakes to Avoid

Businesses should avoid these common errors:

• Assuming all international shipping businesses qualify.
• Failing to verify the vessel’s flag, capacity, use, and ownership or charter arrangements.
• Misclassifying secondary or incidental income.
• Overlooking controlled-group requirements.
• Making an election without understanding its future consequences.
• Using an outdated tax rate or relying on old instructions without checking for changes.

Because Form 8902 is highly specialized, businesses should maintain detailed vessel records, charter agreements, revenue schedules, and supporting tax calculations.

How AIM Financial Can Help With Business Tax Preparation

Specialized corporate tax rules can be difficult to navigate without careful review. Businesses may need assistance identifying applicable filing requirements, organizing supporting documentation, and determining whether a tax election is appropriate.

AIM Financial provides tax preparation assistance for individuals and businesses in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan. Although Form 8902 applies to a narrow group of corporations, understanding specialized tax forms can help businesses recognize when additional professional analysis is needed.

Contact AIM Financial for help with your business tax preparation needs. If your company has complex corporate tax reporting requirements, bring your financial statements, prior tax returns, and supporting agreements so your tax preparation needs can be evaluated.

Final Thoughts

IRS Form 8902 is designed for certain corporations operating qualifying vessels in U.S. foreign trade. The form covers the alternative tax election, qualifying shipping income, vessel information, and the calculation of the alternative tax.

Eligibility is limited, and the published instructions are dated. Always review the latest IRS guidance and applicable tax law before making an election or filing Form 8902.