IRS – Foreign Vessel Owners Face U.S. Income Tax Under The Jones Act Waiver

Vessel owners relying on the March 17, 2026, Jones Act waiver should take note: the IRS announced on Aug. 11 that income earned on waiver voyages must be reported as U.S. source income.

The “Jones Act” is the popular name for a set of laws that reserve U.S. domestic trade to qualified U.S.-flag vessels. The U.S. Department of Homeland Security, at the request of the U.S. Department of War, waived the Jones Act for listed products on March 17. DHS extended the waiver a second time for a 90-day period commencing on Aug. 17 and ending on Nov. 15. The U.S. Maritime Administration reports that 217 voyages were undertaken in reliance on the waiver as of Aug. 12. This is the longest and broadest Jones Act waiver ever issued outside of a world war or major conflict like the Korean War.

Since foreign vessels ordinarily cannot engage lawfully in U.S. interstate commerce, the application of U.S. federal income tax to such vessel owners and their crews usually does not arise and has not received much IRS attention. One analogous situation is the employment of foreign vessels on the U.S. outer continental shelf engaged in the exploration, development, or production of resources such as oil and gas. The Jones Act permits certain activities in U.S. waters such as laying pipe or electrical cable. The IRS indicated in 2009 and 2011 Directives that such foreign vessels were subject to U.S. federal income tax for services provided on the U.S. OCS, as were the employees on board those vessels, which meant that the vessel owners had to make proper tax withholding of wages.

Foreign vessels engaged in U.S. foreign commerce are otherwise potentially subject to a gross tax applicable to their international income, which is subject to certain exclusions and treaty exemptions. U.S. interstate income, however, is ordinarily subject to U.S. federal income tax even if earned by a foreign person. Deductions are available only if the income is reported.

The IRS notice states that “income of a foreign corporation from the operation of vessels transporting cargo between U.S. ports under the Jones Act waiver is not derived from the international operation of ships.” Therefore, the IRS indicates that such foreign corporations must report such U.S. interstate income on Form 1120-F, “U.S. Income Tax Return of a Foreign Corporation,” and cannot take advantage of any exclusion or treaty benefit application of “the operation of ships in international traffic.”