Understanding the Shipping Activity Requirement: A Legal Overview

Q: How is the 25 percent requirement calculated?

The requirement is based on the average tonnage of qualifying vessels owned or chartered by the corporation during the taxable year.

Q: What happens if a corporation does not meet the requirement?

If the requirement is not met, the corporation may lose eligibility for specific tax benefits.

Q: Can a corporation apply for the shipping activity requirement in its first year?

Yes, but it must meet the requirement based on the preceding taxable year only.

Q: Is this requirement the same in all states?

No, the application of the shipping activity requirement is governed by federal law, but state laws may vary in related tax matters.

Definition & Meaning

The shipping activity requirement refers to specific criteria that a corporation must meet to qualify for certain tax benefits under U.S. law, particularly related to international shipping activities. To satisfy this requirement, a corporation must demonstrate that, on average, at least 25 percent of the total tonnage of its qualifying vessels were either owned or chartered on bareboat terms during the taxable year. This assessment is based on the corporation's activity over the previous two years, ensuring that the corporation maintains a consistent level of shipping operations.

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Legal Use & context

This term is primarily used in the context of corporate tax law, specifically within the Internal Revenue Code. It applies to corporations engaged in international shipping and is relevant for tax planning and compliance. Understanding the shipping activity requirement is essential for corporations that wish to elect for tax benefits related to shipping activities, as it affects their eligibility for reduced tax rates on income derived from these operations.

Key legal elements

The corporation must meet the shipping activity requirement for each of the two preceding taxable years.
For the first year of election, the requirement must be met for the preceding year only.
If part of a controlled group, all group members are treated as one entity for determining compliance.
At least 25 percent of the aggregate tonnage of qualifying vessels must be owned or chartered on bareboat terms by the corporation.

Real-world examples

Here are a couple of examples of abatement:

(Hypothetical example) A shipping company, XYZ Corp, operates multiple vessels for international trade. In the current taxable year, they own 30 percent of the tonnage of their vessels and charter the remaining 70 percent on bareboat terms. In the previous two years, they met the 25 percent requirement. Therefore, XYZ Corp qualifies for the shipping activity requirement and can take advantage of specific tax benefits.

Relevant laws & statutes

The primary statute governing the shipping activity requirement is found in 26 USCS § 1355, which is part of the Internal Revenue Code. This section outlines the criteria for corporations to qualify for tax benefits related to international shipping.

Comparison with related terms

Term	Definition	Difference
Shipping Activity Requirement	Criteria for corporations to qualify for tax benefits based on shipping activities.	Focuses on ownership and chartering of vessels for tax qualification.
International Shipping Tax Benefit	Tax incentives available to corporations engaged in international shipping.	Broader category that includes various tax reductions, not limited to ownership percentages.

Common misunderstandings

What to do if this term applies to you

If this term applies to your corporation, ensure that you maintain accurate records of your vessel ownership and chartering agreements. Review your compliance with the shipping activity requirement over the past two years. If you are uncertain about your eligibility or need help with tax filings, consider consulting a legal professional or using US Legal Forms' templates to assist with the necessary documentation.

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Quick facts

Minimum ownership/charter requirement: 25 percent of qualifying vessels
Timeframe for compliance: Current year and two preceding years
Applies to: Corporations engaged in international shipping
Legal reference: 26 USCS § 1355

Key takeaways

Frequently asked questions

What is the shipping activity requirement?

It is a tax criterion that corporations must meet to qualify for certain tax benefits related to international shipping.