Index
Sections

• Introduction

• Accelerated Depreciation for Property on Indian Reservations

• Indian Employment Credit

Tables

• Accelerated Depreciation Schedules for Property on Indian Reservations

• Financial Effect on Investing Business of the Accelerated Depreciation Schedules for Property on Indian Reservations

• Sample Tax Liability for a Company That Is Eligible for Indian Tax Incentives

Attachments

• Attachments Attachment A: Classes of Property Defined in the Tax Code

• Attachment B: Depreciation and Amortization: IRS Form 4562

• Attachment C: Indian Employment Credit: IRS Form 8845

• Attachment D: Text of 1993 Tax Provisions Authorizing Incentives for Business Investment on Reservations

BUSINESS OPERATIONS AND NATIVE AMERICAN TAX INCENTIVES

The Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), signed into law on August 10, 1993, contains two features that provide specific assistance to enterprises investing in and conducting business on Indian Reservations. The Act authorizes Accelerated Depreciation for Property on Indian Reservations and the Indian Employment Credit. The tax incentives benefit both the capital and the operational side of a business.

• The accelerated depreciation for property on Indian reservations allows business to depreciate their capital expenses more rapidly, which can reduce a business's tax liability earlier and in turn improve the present value of its after-tax income.

• The tax credit for Indian employees allows businesses to use a portion of the wages paid and health insurance benefits provided to Indian employees to directly reduce their tax liability and in turn increase after-tax income.

The financial benefit of this Act for businesses locating on Indian Reservations and employing Native Americans varies depending on the nature of each business and the types and levels of expenses that a business has. This analysis was prepared in order to provide companies that are already located on Indian Reservations and those considering locating on Indian reservations a broad perspective on the financial benefits from these tax incentives.

Of course, each enterprise has unique tax circumstances. While this analysis is comprehensive, it has simplified many of the intricacies of the law as it applies and, thus, is not intended to be used as a precise replication of any particular business s tax return. It should not be viewed as an exact calculation of bottom- line benefits.

A brief look at the structure of a Corporate tax return gives information needed to analyze how the (1) Accelerated Depreciation for Property on Indian Reservations and (2) the Indian Employment Credit affect the financial returns of a reservation- based company hiring Native American employees. The accounting basics are as follows: (Depreciation and General tax credits have been placed in bold type to illustrate where the Indian tax incentives would apply.)

 

These federal tax incentives will only benefit businesses that have a federal tax liability. Businesses that do not have to pay federal income tax include:

• Non-profits as designated by section 501(c)(3) of the tax code

• Federally recognized Indian tribes conducting an unincorporated commercial business

• Businesses subject to federal income tax that are not profitable and have no tax liability.

Property that firms purchase and will use in their operations for more than one year are, for accounting purposes, considered as investments in the business and are classified as "capital expenses." Such costs are distinct from operating expenses in that capital expenses must be accounted for over their useful life to reflect that they are consumed over time. By contrast, companies deduct operating expenses in a single year-- generally, the year in which they are incurred.

The three categories of capital expenses are:

• Going Into Business-- Cost of getting started before beginning business operations.

• Business Assets-- Cost of any asset that a business will use for more than one year.

• Improvements-- Cost of improving a business asset.

Capital Expenses are "recovered" in the tax system as a cost of doing business by (1) depreciation, (2) amortization (of property financed by debt), or (3) depletion (of natural resources). The tax incentives in this Act pertain to capital expenses recovered by depreciation.

Depreciable property (See Attachment A) is defined as property that is used to produce income, that has a useful life of greater than one year, and that wears out (is eventually totally consumed). The types of depreciable proerty are as follows:

Tangible: Property that can be seen or touched, including

• Personal: Property such as Machinery or Equipment

• Real: Land or anything that is erected on, growing on, or attached to land

Intangible: Property that cannot be seen or touched; (i.e., copyright, patent, or franchise).

The tax code sets criteria for the number of years over which any depreciable property must be depreciated. This period is called the recovery period." Accelerated Depreciation for Property on Indian Reservations allows those eligible for the incentive to recover the costs of the depreciable property over a shorter recovery period than other businesses. This improves the present value of a company's earnings and may ultimately help it finance more rapid turnover of productive capital. In the case of Accelerated Depreciation for Property on Indian Reservations, the revised schedules apply only to tangible property that is:

• Located on a reservation (as broadly defined by section 168(j)(6) to include certain trust lands) and used to operate a business on a reservation.

• Not acquired from a taxpayer who is related to the taxpayer using the property.

• Not property used in any way for Class I, II, or III gaming.

• Infrastructure (roads, power lines, water systems, railroads, communications facilities, eTD.) which benefits a firm operating on reservation, even if the investment is not on the reservation.

• Put into service in the business's operations between January 1, 1994, and December 31, 2003.

A shorter recovery period allows a business to depreciate costs associated with the property earlier. For accounting purposes, this increases expenses and reduces Taxable Income in these early years. Reducing Taxable Income cuts a company's tax bill and increases its after-tax profit for these same years. These tax savings offer several benefits. They enhance a firm's present-value earnings and its worth during the year in which the capital investment decision must be made. They also provide a revenue source more quickly. This enables the business to augment or replace existing capital.

The following chart illustrates the benefits of the Accelerated Depreciation Schedule that can be used by eligible businesses operation on Indian Reservations.

For 5-Year Property

For 10-Year Property

For 20-Year Property

For 39-Year Property (Nonresidential Real Property)

This chart of the financial effects of the Accelerated Depreciation Schedules for Property on Indian Reservations quantifies the tax benefit. It compares the reduction in tax liability for the various classes of property under the three different depreciation methods:

• Straight Line Method,

• General Depreciation System (GDS) applied to the standard recovery period (The GDS is part of the Modified Accelerated Cost Recovery System that allows businesses to depreciate their property in a more rapid manner than the straight line method.), and

• General Depreciation System applied to the Accelerated recovery period for property on Indian Reservations.

The chart also assumes that the depreciable asset, for all the different classes of property, is valued at $1 million dollars. Four different marginal corporate tax rates (15%, 25%, 34%, and 39%) are evaluated in order to represent the potential spectrum scenarios that a business may encounter.

The benefits of the accelerated depreciation are determined using the following steps:

1. To determine the annual depreciation expense stream associated with the $1 million capital expense: Multiply the value of the property ($1 million) by the various depreciation schedules.

2. To determine the reduction in corporate tax liability for each year: Multiply the annual depreciation expense by the corporate tax rate. Corporate tax liability is determined by the following Tax Rate Schedule:

 

3. To determine the present value of the reduction in corporate tax liability for each year. Perform a net present value calculation using an assumed discount rate (7% in this case) on the stream of annual figures for reduction in corporate tax liability.

4. To determine the difference between the net present value of the various depreciation methods. Subtract the net present value of reduced tax liability for straight line depreciation from the net present value of reduced tax liability for the Indian Accelerated Depreciation. Subtract the net present value of reduced tax liability for the General Depreciation System from the net present value of reduced tax liability for the Indian Accelerated Depreciation.

5. To determine the net present value benefit of the Indian Accelerate Depreciation. Divide the net present value benefit by the initial cost of the property.

Conclusions:

• The accelerated depreciation will have a more beneficial effect as the marginal tax rate of the business increases.

• The accelerated schedule for property classes with longer recovery periods produces a greater benefit than the shorter recovery periods.

• Comparing the Indian Accelerated Depreciation to the Straight Line Depreciation method shows that the net present value benefit ranges from between 0.87% of the cost of the property to 7.4% of the cost of the property.

• Comparing the Indian Accelerated Depreciation to the General Depreciation System method shows that the net present value benefit ranges from between 0.40% of the cost of the property to 5.9% of the cost of the property.

The following chart shows the impact of the Indian Accelerated Depreciation Schedule on the tax liability of businesses investing in various classes of property.

FINANCIAL EFFECT ON INVESTING BUSINESSES OF THE ACCELERATED DEPRECIATION SCHEDULES FOR PROPERTY ON INDIAN RESERVATIONS

For 5-Year Property

For 10-Year Property

For 20-Year Property

For 39-Year Property (Nonresidential Real Property)

Business credits reduce, dollar-for-dollar, a business's income tax liability (the amount a business must pay to the federal government). Business credits are given for a variety of activities that the federal government encourages through tax incentives. These include investment credits, jobs credit, alcohol fuels credit, research credit, low-income housing credit, disabled access credit, renewable electricity production credit, empowerment zone credit, credit for employer Social Security and Medicare taxes paid on certain employee tips, credit for contributions to selected community development corporations, and the Indian employment credit. To claim the Indian Employment Credit, a business must file form 8845-The Indian Employment Credit with the IRS. This credit is available to businesses:

• That employ an employee who is an enrolled member of an Indian tribe or the spouse of an enrolled member,

• Who is working on an Indian reservation,

• Who lives on or near an Indian reservation, and

• Whose wages are less than $30,000 a year.

• Employees who are greater than 5% owners; work in a Class I, II, II gaming facility; or are related to the owner are not eligible for the credit.

In addition to these delineations of eligible wages," only $20,000 of an eligible employee's income can be considered in determining the credit.

The credit is equal to 20% of the difference between the eligible employee's wages and health insurance costs during the current year and the same employee's wages and benefits paid in 1993. The credit is available between January 1, 1994 and December 31, 2003.

The maximum credit a business can take in any one year is equal to the larger of the business's tentative minimum tax or 25% of its regular tax liability that is over $25,000. The federal government placed an alternative minimum tax in the tax code so businesses that benefit from some of the tax advantages granted by the federal government will still have to pay at least a minimum tax.

Thus, two considerations are fundamental to the Indian Employment tax credit calculation. The most important is the level of 1993 eligible wages. This is the total of all eligible wages (as defined above) and benefits paid in the 1993 tax year. A second important factor is that only $20,000 of wages are eligible to be counted. Further, if an employee earns over $30,000 a year, none of that employee s wages can be considered for the credit.

Hypothetical examples of the bottom line benefits of the Indian Employment Credit are provided below:

Reduction in Tax Liability for an Existing Business

Reduction in Tax Liability for a New Business

Conclusion
As can be seen, the bottom-line value of accelerated depreciation and the Indian Employment Tax Credit to a business with gross receipts of $1 million in 1994 and an individual business will differ from business to business depending upon the earnings of the company, the nature of employment and the nature of capital investment that the company must make. For example, if there were:

• a business with gross receipts of $1 million in 1994 and

• costs of production (non-wage) equal to $250,000 that

• employed 12 people

• with total wages of $330,000 and

• wages that are eligible for the Indian Employment Tax Credit equal to $85,000 and

• capital expenses of $25, $50, $10 and $25 thousand of 3, 5, 7, and 10 year property, respectively,

Then, the savings in tax liability that the firm would enjoy over a firm that would not qualify would be equal to $15,834 in the 1994 taxable year and $17.919 in the 1995 taxable year. These amounts are equal to a 6.0 percent savings (eligible compared to non-eligible) in 1994 and 6.1 percent in 1995. The savings would diminish somewhat as the capital items are fully depreciated so that by 2003 the savings are only 3.2 percent.

Note that the employment tax credit is of much greater bottom line benefit to the company than is accelerated depreciation. However, accelerated depreciation would provide a source of funds to finance roll-over of new capital and is more robust the longer the useful life of the capital that is employed.

The results of this sample simulation of tax incentives is provided in the table below (numbers relating to wages and income are escalated in out years).

SAMPLE TAX LIABILITY FOR A COMPANY THAT IS ELIGIBLE FOR INDIAN TAX INCENTIVES

SAMPLE TAX LIABILITY FOR A COMPANY THAT IS NOT ELIGIBLE FOR INDIAN TAX INCENTIVES

COMPARISON: AFTER TAX INCOME WITH AND WITHOUT TAX INCENTIVES

Attachment A

The Classes of Property contained in the tax code are defined below. The year figure refers to the period of time that the costs of the property can be recovered (years in which the property will be depreciated). Also included is the number of years in the recovery period under the accelerated schedule contained in the act.

• Property that otherwise would be depreciated over 3 years is recovered in 2 years. This class includes tractor units for use over the road, any race horse over 2 years old when placed in service and any other horse over 12 years old when placed in service.

• Property that otherwise would be depreciated over 5 years is recovered in 3 years. This class includes automobiles, buses, trucks, computers and peripheral equipment, office machinery (typewriters, calculators, copiers, eTD.) and any property used in research and experimentation.

• Property that otherwise would be depreciated over 7 years is recovered in 4 years. This class includes office furniture and fixtures (desks, files, eTD.). Any property that does not have a class life, and that has not been designated by law as being in any other class is also a 7-year property.

• Property that otherwise would be depreciated over 10 years is recovered in 6 years. This class includes vessels, barges, tugs, and similar water transportation equipment, and any single purpose agricultural or horticultural structure, and any tree or vine bearing fruit or nuts.

• Property that otherwise would be depreciated over 15 years is recovered in 9 years. This class include certain depreciable improvements made directly to land or added to it, such as shrubbery, fences, roads, and bridges.

• Property that otherwise would be depreciated over 20 years is recovered in 12 years. This class includes farm buildings (other than agricultural or horticultural structures) and any municipal sewers.

• Nonresidential real property that otherwise would be depreciated over 39 years is recovered in 22 years. This class generally includes anything that is erected on or attached to land.

Attachment B

Depreciation and Amortization: IRS Form 4562

Businesses depreciate tangible and intangible property to correspond with the loss in value due to obsolescence and wear and tear of the property. A variety of methods are used to calculate the reduction in gross income due to depreciation. Generally the method is one described by the Internal Revenue Service (IRS) as Modified Accelerated Cost Recovery System (MACRS). The choice depends upon the nature of the business and the nature of the property. Accelerated depreciation, as distinct from MACRS and as described in the text of this paper, allows for more rapid write-off of the costs than simple depreciation and, therefore, increases the return attributable to the property and more readily allows for the accumulation of cash to purchase replacement property.

IRS publication 534 describes the eligibility of various types of property and methods of calculation of depreciation and refers (on page 16 in the taxable year 1994 edition) to the "Shorter Recovery Period for Property Used on Indian Reservations." The actual form that is used in the business tax return for both MACRS and accelerated depreciation is IRS Form 4562, "Depreciation and Amortization." The form requires (1) a valuation and listing of newly purchased property (depreciation of prior years purchases continue through their eligible periods), (2) classification of the property (including the duration of the recovery period--which is accelerated in the case of property used on Indian reservations) and (3) election of a method for depreciation.

Following is a sample copy of Form 4562.

Attachment C

Indian Employment Credit: IRS Form 8845

Following is a sample copy of the form businesses operating on Indian reservation are to use a access the Indian Employment Credit.

Attachment D

1993 TAX PROVISIONS AUTHORIZING INCENTIVES FOR BUSINESS INVESTMENT ON RESERVATIONS

Title 26 U.S.C.
Part III--Investment in Indian Reservations
SEC. 13321. ACCELERATED DEPRECIATION FOR PROPERTY ON INDIAN RESERVATIONS.
(a) IN GENERAL.--Section 168 is amended by adding at the end of the following new subsection:
"(j) PROPERTY ON INDIAN RESERVATIONS.--
"(1) IN GENERAL.--For purposes of subsection (a), the applicable recovery period for qualified Indian reservation property shall be determined in accordance with the table contained in paragraph (2) in lieu of the table contained in subsection (c).
"(2) APPLICABLE RECOVERY PERIOD FOR INDIAN RESERVATION PROPERTY.--For purposes of paragraph (1)--

The applicable "In the case of: recovery period is: 3-year property . . . . . . . . . . . . . . . . . . . . . . . .2 years 5-year property . . . . . . . . . . . . . . . . . . . . . . . .3 years 7-year property . . . . . . . . . . . . . . . . . . . . . . . .4 years 10-year property. . . . . . . . . . . . . . . . . . . . . . . .6 years 15-year property. . . . . . . . . . . . . . . . . . . . . . . .9 years 20-year property. . . . . . . . . . . . . . . . . . . . . . . 12 years Nonresidential real property. . . . . . . . . . . . . . . . .22 years.

"(3) DEDUCTION ALLOWED IN COMPUTING MINIMUM TAX.--For purposes of determining alternative minimum taxable income under section 55, the deduction under subsection (a) for property to which paragraph (1) applies shall be determined under this section without regard to any adjustment under section 56.

"(4) QUALIFIED INDIAN RESERVATION PROPERTY DEFINED.--For purposes of this subsection--

"(A) IN GENERAL.--The term 'qualified Indian reservation property' means property which is property described in the table in paragraph (2) and which is-- "(i) used by the taxpayer predominantly in the active conduct of a trade or business within an Indian reservation. "(ii) not used or located outside the Indian reservation on a regular basis. "(iii) not acquired (directly or indirectly) by the taxpayer from a person who is related to the taxpayer (within the meaning of section 465(b)(3)(C)), and "(iv) not property (or any portion thereof) placed in service for purposes of conducting or housing class I, II, or III gaming (as defined) in section 4 of the Indian Regulatory Act (25 U.S.C. 2703)).

"(B) EXCEPTION FOR ALTERNATIVE DEPRECIATION PROPERTY.-- The term 'qualified Indian reservation property" does not include any property to which the alternative depreciation system under subsection (g) applies, determined-- "(i) without regard to subsection (g)(7) (relating to election to use alternative depreciation system), and "(ii) after the application of section 280F(b)(relating to listed property with limited business use).

"(C) SPECIAL RULE FOR RESERVATION INFRASTRUCTURE INVESTMENT.-- "(i) IN GENERAL.--Subparagraph (A)(ii) shall not apply to qualified infrastructure property located outside of the Indian reservation if the purpose of such property is to connect with qualified infrastructure property located within the Indian reservation. "(ii) QUALIFIED INFRASTRUCTURE PROPERTY.--For purposes of this subparagraph, the term 'qualified infrastructure property' means qualified Indian reservation property (determined without regard to subparagraph (A)(ii)) which-- "(I) benefits the tribal infrastructure. "(II) is available to the general public, and "(III) is placed in service in connection with the taxpayer's active conduct of a trade or business within an Indian reservation. Such term includes, but is not limited to, roads, power lines, water systems, railroad spurs, and communications facilities. "(5) REAL ESTATE RENTALS.--For purposes of this subsection, the rental to others of real property located within an Indian reservation shall be treated as the active conduct of a trade or business within an Indian reservation. "(6) INDIAN RESERVATION DEFINED.--For purposes of this subsection, the term 'Indian reservation' means a reservation, as defined in-- "(A) section 3(d) of the Indian Financing Act of 1974 (25 U.S.C. 1452(d)), or "(B) section 4(10) of the Indian Child Welfare Act of 1978(25 U.S.C.1903(10)). "(7) COORDINATION WITH NONREVENUE LAWS.--Any reference in this subsection to a provision not contained in this title shall be treated for purposes of this subsection as a reference to such provision as in effect on the date of the enactment of this paragraph. "(8) TERMINATION.--This subsection shall not apply to property placed in service after December 31, 2003." (b) EFFECTIVE DATE.--The amendment made by this section shall apply to property placed in service after December 31, 1993. SEC. 13322. INDIAN EMPLOYMENT CREDIT. (a) ALLOWANCE OF INDIAN EMPLOYMENT CREDIT.--Section 38(b) (relating to general business credits) is amended by striking "plus" at the end of paragraph (8), by striking the period at the end of paragraph (9) and inserting "plus", and by adding after paragraph (9) the following new paragraph: "(10) the Indian employment credit is determined under section 45A(a)." (b) AMOUNT OF INDIAN EMPLOYMENT CREDIT.--Subpart D of part IV of subchapter A of chapter 1 (relating to business related credits) is amended by adding at the end thereof the following new section: "SEC. 45A. INDIAN EMPLOYMENT CREDIT. "(a) AMOUNT OF CREDIT.--For purposes of section 38, determined under this section with respect to any employer for any taxable year is an amount equal to 20 percent of the excess (if any) of-- "(1) the sum of-- "(A) the qualified wages paid or incurred during such taxable year, plus "(B) qualified employee health insurance costs paid or incurred during such taxable year, over "(2) the sum of the qualified wages and qualified employee health insurance costs (determined as if this section were in effect) which were paid or incurred by the employer (or any predecessor) during calendar year 1993. "(b) QUALIFIED WAGES: QUALIFIED EMPLOYEE HEALTH INSURANCE COSTS.--For purposes of this section-- "(1) QUALIFIED WAGES.-- "(A) IN GENERAL.--The term 'qualified wages' means any wages paid or incurred by an employer for services performed by an employee while such employee is a qualified employee. "(B) COORDINATION WITH TARGETED JOBS CREDIT.--The term 'qualified wages' shall not include wages attributable to services rendered during the 1-year period beginning with the day the individual begins work for the employer if any portion of such wages is taken into account in determining the credit under section 51. "(2) QUALIFIED EMPLOYEE HEALTH INSURANCE COSTS.-- "(A) IN GENERAL.--The term "qualified employee health insurance costs' means any amount paid or incurred by an employer for health insurance to the extent such amount is attributable to coverage provided to any employee while such employee is a qualified employee. "(B) EXCEPTION FOR AMOUNTS PAID UNDER SALARY REDUCTION ARRANGEMENTS.--No amount paid or incurred for health insurance pursuant to a salary reduction arrangement shall be taken into account under subparagraph (A). "(3) LIMITATION.--The aggregate amount of qualified wages and qualified employee health insurance costs taken into account with respect to any employee for any taxable year (and for the base period under subsection (a)(2)) shall not exceed $20,000. "(c) QUALIFIED EMPLOYEE.--For purposes of this section-- "(1) IN GENERAL.--Except as otherwise provided in this subsection, the term 'qualified employee' means, with respect to any period, any employee of an employer if-- "(A) the employee is an enrolled member of an Indian tribe or the spouse of an enrolled member of an Indian tribe. "(B) substantially all of the services performed during such period by such employee for such employer are performed within an Indian reservation, and "(C) the principal place of abode of such employee while performing such services is on or near the reservation in which the services are performed. "(2) INDIVIDUALS RECEIVING WAGES IN EXCESS OF $30,000 NOT ELIGIBLE.--An employee shall not be treated as a qualified employee for any taxable year of the employer if the total amount of the wages paid or incurred by such employer to such employee during such taxable year (whether or not for services within an Indian reservation) exceeds the amount determined at an annual rate of $30,000. "(3) INFLATION ADJUSTMENT.--The Secretary shall adjust the $30,000 amount under paragraph (2) for years beginning after 1994 at the same time and in the same manner as under section 415(d). "(4) EMPLOYMENT MUST BE TRADE OR BUSINESS EMPLOYMENT.--An employee shall be treated as a qualified employee for any taxable year of the employer only if more than 50 percent of the wages paid or incurred by the employer to such employee during such taxable year are for services performed in a trade or business of the employer. Any determination as to whether the preceding sentence applies with respect to any employee for any taxable year shall be made without regard to subsection (e)(2). "(5) CERTAIN EMPLOYERS NOT ELIGIBLE.--The term 'qualified employee' shall not include-- "(A) any individual described in subparagraph (A), (B), or (C) of section 51(i)(1), "(B) any 5-percent owner (as defined in section 416(i)(1)(B)), and "(C) any individual if the services performed by such individual for the employers involve the conduct of class I, II, or III gaming as defined in section 4 of the Indian Gaming Regulatory Act (25 U.S.C. 2703), or are performed n a building housing such gaming activity. "(6) INDIAN TRIBE DEFINED.--The term 'Indian tribe' means any Indian tribe, band, nation, pueblo, or other organized group or community, including any Alaska Native village, or regional or village corporation, as defined in, or established pursuant to, the Alaska Native Claims Settlement Act (43 U.S.C. et seq.) which is recognized as eligible for the special programs and services provided by the United States to Indians because of their status as Indians. "(7) INDIAN RESERVATION DEFINED.--The term 'Indian reservation' has the meaning given such term by section 168(j)(6). "(d) EARLY TERMINATION OF EMPLOYMENT BY EMPLOYER.-- "(1) IN GENERAL.--If the employment of any employee is terminated by the taxpayer before the day 1 year after the day on which such employee began work for the employer-- "(A) no wages (or qualified employee health insurance costs) with respect to such employee shall be taken into account under subsection (a) for the taxable year in which such employment is terminated, and "(B) the tax under this chapter for the taxable year in which such employment is terminated shall be increased by the aggregated credits (if any) allowed under section 38(a) for prior taxable years by reason of wages (or qualified employee health insurance costs) taken into account with respect to such employee. "(2) CARRYBACKS AND CARRYOVERS ADJUSTED.--In the case of any termination of employment to which paragraph (1) applies, the carrybacks and carryovers under section 39 shall be properly adjusted. "(3) SUBSECTION NOT TO APPLY IN CERTAIN CASES.-- "(A) IN GENERAL.--Paragraph (1) shall not apply to-- "(i) a termination of employment of an employee who voluntarily leaves the employment of the taxpayer. "(ii) a termination of employment of an individual who before the close of the period referred to in paragraph (1) becomes disabled to perform the services of such employment unless such disability is removed before the close of such period and the taxpayer fails to offer reemployment to such individual, or "(iii) a termination of employment of an individual if it is determined under the applicable State unemployment compensation law that the termination was due to the misconduct of such individual. "(B) CHANGES IN FORM OF BUSINESS.--For purposes of paragraph (1), the employment relationship between the taxpayer and an employee shall not be treated as terminated-- "(i) by a transaction to which section 381(a) applies if the employee continues to be employed by the acquiring corporation, or "(ii) by reason of a mere change in the form of conducting the trade or business of the taxpayer if the employee continues to be employed in such trade or business and the taxpayer retains a substantial interest in such trade or business. "(4) SPECIAL RULE.--Any increase in tax under paragraph (1) shall not be treated as a tax imposed by this chapter for purposes of-- "(A) determining the amount of the tax imposed by section 55. "(e) OTHER DEFINITIONS AND SPECIAL RULES.--For purposes of this section-- "(1) WAGES.--The term 'wages' has the same meaning given to such term in section 51. "(2) CONTROLLED GROUPS.-- "(A) All employers treated as a single employer under section (a) or (b) of section 52 shall be treated as a single employer for purposes of this section. "(B) The credit (if any) determined under this section wit respect to each such employer shall be its proportionate share of the wages and qualified employee health insurance costs giving rise to such credit. "(3) CERTAIN OTHER RULES MADE APPLICABLE.--rules similar to the rules of section 51(k) and subsections (c), (d), and (e) of section 52 shall apply. "(4) COORDINATION WITH NONREVENUE LAWS.--Any reference in this section to a provision not contained in this title shall be treated for purposes of this section as a reference to such provision as in effect on the date of the enactment of this paragraph. "(5) SPECIAL RULE FOR SHORT TAXABLE YEARS.--For any taxable year having less than 12 months, the amount determined under subsection (a)(2) shall be multiplied by a fraction, the numerator of which is the number of days in the taxable year and the denominator of which is 365. "(f) TERMINATION.--This section shall not apply to taxable years beginning after December 31, 2003." "(c) DENIAL OF DEDUCTION FOR PORTION OF WAGES EQUAL TO INDIAN EMPLOYMENT CREDIT.-- (1) Subsection (a) of section 280C (relating to rule for targeted jobs credit) is amended by striking "51(a)" and inserting "45A(a), 51(a), and". (2) Subsection (c) of section 196 (relating to deduction for certain unused business credits) is amended by striking"and" at the end of paragraph (5), by striking the period at the end of paragraph (6) and inserting ", and", and by adding at the end the following new paragraph. "(7) the Indian employment credit determined under section 45A(a)." (d) DENIAL OF CARRYBACKS TO PREENACTMENT YEARS.-- Subsection (d) of section 39 is amended by adding at the end thereof the following new paragraph. "(5) NO CARRYBACK OF SECTION 45 CREDIT BEFORE ENACTMENT.--No portion of the unused business credit for any taxable year which is attributable to the Indian employment credit determined under section 45A may be carried to a taxable year ending before the date of the enactment of section 45A." (e) CLERICAL AMENDMENT.--The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end thereof the following: "Sec. 45A. Indian employment credit." (f) EFFECTIVE DATE.--The amendments made by this section shall apply to wages paid or incurred after December 31, 1993.

NTDA Offers Analysis of Tax Benefits for Reservation Investment

The following draft analysis of the two tax benefits that were authorized for Indian Country in the Omnibus Budget Reconciliation Act of 1993 offers an example of the informational services available to member tribes through the National Tribal Development Association.

This document is designed to serve two primary functions: First, it should help tribes market themselves to potential private-sector investors and employers by highlighting the advantages companies have when they locate on reservations. Second, it offers a breakdown of the specific tax benefits and scenarios illustrating how the incentives would work in real situations.

This analysis will be available soon both in a published version and on-line through the Association's Information Clearinghouse.

This page, and all contents, are Copyright (C) 1994 by NTDA

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