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“TAX INCREASE PREVENTION ACT OF 2014”

Dear Editor,

 

Today’s article (December 18, 2014) in the Samoa News titled “U.S. Senate passes measure which includes tax break for canneries” needs some further explanation in order to quantify how Section 141 of the Tax Increase Prevention Act of 2014 benefits the canneries in American Samoa.

 

The below is a simple explanation of the formula to calculate the tax credit to be taken on the U.S. Corporate Income Tax Return of the canneries operating in American Samoa. 

 

The tax credit to the canneries is the sum of the following;

 

1.  60% of the sum of (a) the aggregate amount of the qualified domestic corporation’s qualified possession wages for such taxable year [this means wages paid to the workers in American Samoa], plus (b) the value of the fringe benefits for these same employees.

 

2.  The sum of (a) 15% of the depreciation allowances for the taxable year with respect to short-life qualified tangible property, plus (b) 40% of the depreciation allowances for the taxable year with respect to medium-life qualified tangible property, and (c) 65% of the depreciation allowance for the taxable year with respect to long-life qualified tangible property.

 

How the Credit Benefits

 

The benefit to the recipient of the U.S. IRC §30A credit benefits by being able to deduct a credit on the U.S. income tax return in an amount greater than was actually paid to the American Samoa Government for income taxes. This is known as a “legal fiction”.

 

It works like this:

 

Assume the cannery paid income taxes to the American Samoa Government at year end in the amount of $2 million pursuant to the partial income tax exemption certificate applicable to the cannery.

 

Further assume the cannery calculates its U.S. income tax credit pursuant to IRC §30A for the same year using the above formula, and that the credit calculation results in a credit to be taken on the U.S. income tax return of the cannery in the amount of $3 million.

 

The net effect is that the cannery would benefit by lowering its U.S. income taxes by $1 million (that it didn’t actually pay to the American Samoa Government).

 

This is a simple explanation of Section 119 of the 2006 Act that was extended by the Tax Increase Prevention Act of 2014, and not meant to be tax advice to any reader. 

 

(Disclaimer: “This area of tax law is complex and readers should contact their CPA or Attorney if they desire tax advice in this area of tax law”.)

 

Yours very truly,

MARK D. HUNSAKER, CPA/ABV/CFF, CBA, CVA

BOWEN HUNSAKER CONSULTING, INC.