IRS Instruction 5735 – The American Samoa Economic Development Credit offers tax incentives to qualifying domestic corporations operating in American Samoa, aimed at boosting economic activity in the territory. This credit, calculated using IRS Form 5735, can reduce a corporation’s federal income tax liability under section 30A of the Internal Revenue Code. However, it’s important to note that the credit was generally available for the first 10 taxable years beginning after December 31, 2006, and before January 1, 2022. As of February 2026, legislation (H.R. 399 in the 119th Congress) has been introduced to permanently extend the credit retroactively for taxable years beginning after December 31, 2021, but it remains pending in the House Committee on Ways and Means without further action. Taxpayers should check the latest IRS updates or consult a tax professional for current availability, especially for 2025 or 2026 tax years.
What Is the American Samoa Economic Development Credit?
The credit is designed to encourage economic development in American Samoa by providing a tax benefit to corporations with qualified production activities in the territory. It replaces earlier tax provisions that phased out and helps bridge gaps in local revenue for business operations. The credit amount is based on factors like qualified wages, employee fringe benefits, and depreciation on tangible property used in American Samoa. It’s claimed against income tax imposed by Chapter 1 but not against certain other taxes, such as accumulated earnings tax or personal holding company tax.
Key restrictions include that the credit cannot be claimed by IC-DISCs, former IC-DISCs, or corporations owning stock in such entities. Additionally, income eligible for this credit is exempt from alternative minimum tax rules.
Who Qualifies for the Credit?
To be eligible, a domestic corporation (excluding S corporations) must have qualified production activities income (QPAI) from activities in American Samoa, and the QPAI must be positive. QPAI is defined as the excess of domestic production gross receipts (DPGR) over the sum of cost of goods sold allocable to DPGR and other properly allocable expenses, losses, or deductions.
DPGR includes gross receipts from:
- Construction of real property in American Samoa.
- Engineering or architectural services for such construction.
- Lease, rental, license, sale, or disposition of qualifying production property manufactured, produced, grown, or extracted significantly in American Samoa.
- Production of qualified films, electricity, natural gas, or potable water in the territory.
Exclusions apply to activities like retail food sales, certain transmissions, or non-trade/business operations. Oil-related QPAI has specific definitions and allocation rules.
How to Compute the American Samoa Economic Development Credit?
The credit is calculated as 60% of the sum of qualified wages and allocable employee fringe benefit expenses. Qualified wages are those paid for services performed in American Samoa, limited to 85% of the Old Age, Survivors, and Disability Insurance (OASDI) wage base (e.g., $110,100 for 2012, $113,700 for 2013—note that bases increase annually; check current IRS figures for later years).
Fringe benefits include deductible contributions to pension plans, health coverage, and insurance, capped at 15% of qualified wages. These cannot be double-counted with other credits, like the research credit under section 41.
Allocation methods for costs and wages include:
- Small Business Simplified Overall Method: For businesses with average annual gross receipts of $5 million or less.
- Simplified Deduction Method: For those with assets of $10 million or less or gross receipts of $100 million or less.
- Section 861 Method: For others, using apportionment rules.
Form W-2 wages are allocated using methods like the unmodified box method or tracking wages method.
Step-by-Step Instructions for Completing Form 5735
Form 5735 must be attached to the corporation’s income tax return (e.g., Form 1120) and filed with the IRS at P.O. Box 409101, Ogden, UT 84409. Here’s a high-level overview of the lines:
- Line 1: Enter 60% of qualified wages plus allocable fringe benefits.
- Lines 2–4: Report depreciation on qualified tangible property, categorized by recovery periods (short-life: 3/5-year; medium-life: 7/10-year; long-life: other).
- Line 7: Total credit; report on the income tax return (e.g., Form 1120 Schedule J, line 5b) and related forms like Form 3800.
For tax years before 2012, refer to earlier revisions of the instructions. Maintain records of QPAI calculations for audits, as they are not reported directly on the form.
Recordkeeping and Compliance Requirements
Corporations must retain books and records related to the credit as long as they may be relevant for IRS administration. Estimated time for compliance includes about 7 hours and 53 minutes for recordkeeping, 2 hours and 17 minutes for learning the form, and 2 hours and 32 minutes for preparation and filing. All information is confidential under section 6103.
Related Forms and Resources
- Form 1120: U.S. Corporation Income Tax Return.
- Form 3800: General Business Credit.
- Publication 946: How to Depreciate Property.
- Revenue Procedures 2006-42 and 2006-47 for allocation guidance.
For the most current information, visit the IRS website or track the status of extension legislation.
FAQs About IRS Form 5735 and the American Samoa Economic Development Credit
Is the American Samoa Economic Development Credit available for 2025 tax returns?
As of now, the credit expired for taxable years beginning after December 31, 2021, but pending bill H.R. 399 could extend it retroactively if passed.
What if my corporation has oil-related activities in American Samoa?
Special rules apply for allocating QPAI from oil or gas production, refining, or distribution.
Can S corporations claim this credit?
No, only domestic corporations other than S corporations qualify.
How do I source income for this credit?
Use sections 638, 861-864, and 936 to determine sources, with specific rules for amounts received in American Samoa.
This guide is based on the January 2013 revision of the instructions, which remains listed on the IRS site. Always verify with official IRS sources for updates.