The Value of Depreciation

Commercial fishermen have financial landscapes containing both unique challenges and opportunities. From seasonal cash flow & large, unpredictable boat expenses to corporate tax structures & small business ownership, our financial situations are far from the norm. The following tips have been compiled by a skipper, for skippers. Creating wealth as a fisherman takes skill. Preserving and advancing that wealth takes wisdom. I hope that the below gets your gears turning on how you can achieve the best financial future for your operation, your family and yourself.

“Depreciating an asset means deducting the cost of something you bought for your business, like a vessel, a permit or large machinery purchases. ”

What does it mean?

Depreciation is an often misunderstood topic, but extremely valuable to commercial fishermen. We have many opportunities to use this financial planning tool. In fact, it’s more like deducting or expensing, which is a topic that brings a smile to every business owner. Depreciating an asset means deducting the cost of something you bought for your business, like a vessel, a permit or large machinery purchases. Particularly relevant to fisherman is Section 179 of the tax code which allows for accelerated depreciation/expensing of up to $250,000 of an asset in a single year. Also of direct relevance, is the ability to depreciate fishing permits or quota. These are classified as intangible assets and can only be depreciated (via amortization) over a 15 year period. We will go over these figures in a case study below.

Why does this matter?

The first and primary benefit is a direct reduction in taxable income for the years you depreciate, and thus a direct reduction in your tax burden for that year. The second reason to depreciate is because money has a time value. Money now is always more valuable than the same amount of money in the future. Depreciation means you have more capital at your disposal now, which means you can invest and reap returns in your operation, or in more traditional investments like stocks, bonds or real estate. The flip side to depreciation is that the cost basis of the asset is also reduced by how much you depreciate it, meaning that upon sale of said asset, your capital gain will be higher. Again, even though you have to pay later, the fact that you were able to use this capital sooner is extremely valuable.

Case Study:

To start his operation, Tom buys a boat for $250,000 and a permit for $150,000 in 2020. During his first season, his net income (after expensing and deducting smaller business items and paying crew) is $200,000. On his 2020 tax return, Tom can use Section 179 to accelerate depreciation on the boat for the dollar amount of $185,000, and amortize his permit for $15,000. This brings his taxable income down to zero. In future years, he still has $65,000 of boat value to depreciate (which could all be utilized in 2021 if desired) and can depreciate his permit $15,000 each year for the next fourteen years. Reducing his season’s net income of $200,000 down to zero saved Tom approximately $50,000 this year (if taxed at 25%).

Overall, having more money in the near term allows you to invest in your operation and continue to strengthen the Alaska economy. Perhaps the refrigeration system you can now afford also contributes to a higher market price for your product, thus improving the wider economic system.