Federal Authorities Approve U.S. Capital Tax Relief Zones

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Secretary of the Treasury Steven Mnuchin (US Treasury Department photo)

The U.S. Treasury announced Monday that it had approved 14 neighborhoods in St. Thomas and St. Croix as qualifying opportunity areas eligible for U.S. tax breaks under the massive tax law passed by Congress last December.

A Treasury statement quotes US Treasury Secretary Steven Mnuchin as saying that President Donald Trump’s administration “will continue to work with states and the private sector to encourage investment and development in areas of opportunity and the like. economically disadvantaged areas and stimulate economic growth and job creation “.

Governor Kenneth Mapp (I-VI) welcomed the news, saying it would be good for the economy of the VI.

“These new incentives can help us attract new investment in hotel development, retail and industry to our most underserved communities and can also help those looking to rebuild after hurricanes,” Mapp said. in a Government House press release.

Mapp commended Senator Tim Scott (R-SC) for his leadership in developing the Opportunity Zones legislation and his leadership through the congressional process. The original proposal did not include the Virgin Islands or other US territories.

According to Mapp, Scott agreed to expand the scope of eligible areas to include low-income communities in the territories after the two met and discussed.

Qualified Opportunity Zones retain this designation for 10 years. Investors can defer tax on prior gains until the end of 2026, provided the gain is reinvested in a qualifying opportunity fund, an investment vehicle organized to make investments in areas of opportunity. qualified. If the investor holds the investment in the fund for at least 10 years, he would be eligible for an increase in its base equal to the fair market value of the investment on the date of its sale. according to the Treasury.

By law, these tax relief zones are limited to designated “low-income communities” in states and territories that meet certain criteria. Mapp named Christiansted and the entire western end of St. Croix, as well as most of the southern half of St. Thomas.

An earlier Government House statement gave the following example of how these new tax breaks work:

Take an American company that invested $ 10 million in a stock and sells that stock in 2018 for $ 20 million. Normally, the $ 10 million gain would be subject to federal capital gains tax in 2018. If, however, within 180 days of selling the stock, the company invests the $ 20 million in a tax relief zone, it obtains three important advantages.

First, it defers paying federal capital gains tax on the $ 10 million gain until the date it sells its investment in the tax-exempt zone or December 31, 2026.

Second, he enjoys a 10% reduction in federal capital gains tax if he holds the investment in the tax relief zone for at least five years, and an additional 5% reduction. if it holds the investment for at least seven years.

Third, it completely avoids the federal capital gains tax on any further appreciation of its investment in the tax relief zone.

That is, if the company ultimately sells its investment in the tax relief zone for $ 35 million after seven years – a gain of $ 25 million – it will defer capital gains tax on the original gain of $ 10 million. million dollars until the date of sale, reduce the amount of that capital gain by 15% and pay no capital gains tax on the appreciated gain of $ 15 million.

Congress has long encouraged territories to try to spur development with tax breaks. These new tax breaks are in addition to the 90-100% relief on corporate tax, gross revenue tax, property tax and excise duties that the territory grants through the Commission. University of the Virgin Islands Economic Development and Research and Technology Park.

In 2016, Mapp proposed a five-year economic stimulus plan, which relied heavily on hopes of massive growth in the number of entities benefiting from the territory’s tax relief programs.

The U.S. Virgin Islands were among 18 states and territories approved in what the Treasury Department called the “first round” of approved tax relief zones. The others were: American Samoa; Arizona; California; Colorado; Georgia; Idaho; Kentucky; Michigan; Mississippi; Nebraska; New Jersey; Oklahoma; Porto Rico; Caroline from the south; South Dakota; Vermont; and Wisconsin.

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