Instructions for Form 5735 |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Form 5735 is used to figure the possessions corporation tax credit under section 936 (or section 30A, if applicable). The
credit is generally
allowed against income tax imposed by Chapter 1 (see page 2 for exceptions) and is figured separately for each possession.
For purposes of the credit,
U.S. possessions include Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the U.S.
Virgin Islands. Special
rules apply to existing credit claimants (defined below) from Puerto Rico, Guam, American Samoa, and the Commonwealth of the
Northern Mariana Islands
(see below).
A domestic corporation (other than an S corporation) that is an existing credit claimant (defined below) must complete Form
5735 for each year the
possessions credit election is in effect.
Attach Form 5735 to the corporation's income tax return and file the return with the Internal Revenue Service Center, Philadelphia,
PA 19255.
A corporation is an existing credit claimant with respect to a possession if the corporation:
-
Was engaged in the active conduct of a trade or business within the possession on October 13, 1995 and
-
Elected the benefits of the possessions credit, effective for its taxable year that includes October 13, 1995.
The determination of whether a taxpayer is an existing credit claimant is made separately for each possession. A corporation
that acquires all of
the assets of a trade or business of an existing credit claimant will qualify as an existing credit claimant.
Binding contract exception.
For purposes of these rules, a corporation is treated as engaged in the active conduct of a trade or business within
a possession on October 13,
1995, if the corporation had in effect on that date, and at all times thereafter, a binding contract for the acquisition of
assets to be used in, or
the sale of property to be produced from, that trade or business.
Substantial new line of business.
A corporation that adds a substantial new line of business or that has a new line of business that becomes substantial,
ceases to be an existing
credit claimant at the beginning of the tax year in which (a) it added the new line of business or (b) the new line of business
becomes substantial. For details, see Regulations section 1.936-11.
Special Rules for Certain Possessions
An existing credit claimant with respect to Puerto Rico that is using the economic activity limitation figures its credit
for income from Puerto
Rico separately under section 30A. Generally, the provisions of section 936 apply for purposes of figuring the credit under
section 30A. See section
30A(e) for more information.
Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands
For tax years beginning before January 1, 2006, the amendments made by the Small Business Job Protection Act of 1996 do not
apply to existing
credit claimants with respect to Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands. Existing credit
claimants may figure the
credit with respect to those possessions (including the credit for qualified possession source investment income (QPSII)),
using section 936 (as in
effect before the 1996 Act). See section 936(j)(8).
Qualifying for the Credit
To qualify for the possessions corporation tax credit, a corporation must meet all three of the following requirements:
-
The corporation must have filed a valid Form 5712, Election to Be Treated as a Possessions Corporation Under Section 936, by the
due date (including extensions) of the first return to which the election applies. In addition, the corporation must qualify
as an existing credit
claimant (see definition above).
-
The corporation must have derived 80% or more of its gross income from sources in a U.S. possession during the applicable
period (defined in
the instructions for Part I) immediately before the tax year ended.
-
The corporation must have derived 75% or more of its gross income from the active conduct of a trade or business in a U.S.
possession during
the applicable period immediately before the tax year ended.
The credit is not allowed against the following taxes:
-
Tax on accumulated earnings (section 531).
-
Personal holding company tax (section 541).
-
Additional tax for recovery of foreign expropriation losses (section 1351).
-
Recapture of investment credit (section 50).
-
Recapture of low-income housing credit (section 42(j)(4)(D)).
-
Recapture of Indian employment credit (section 45A).
A corporation cannot take the possessions corporation tax credit for any tax year it is an IC-DISC or former IC-DISC, or for
any tax year in which
it owns stock in an IC-DISC or FSC, or former IC-DISC or former FSC (section 936(f)).
Income eligible for the possessions corporation tax credit is not taxed under the alternative minimum tax rules. See Form 4626,
Alternative Minimum Tax—Corporations.
Foreign Tax Credit/Deduction
Generally, the corporation cannot take a deduction (however, see the instructions for Part V) or foreign tax credit for taxes
it paid or accrued to
a foreign country or U.S. possession if any of the income on which those taxes were paid or accrued is used in computing the
possessions corporation
tax credit.
Other Forms and Schedules That May Be Required
Form 5712-A.
Use Form 5712-A, Election and Verification of the Cost Sharing or Profit Split Method Under Section 936(h)(5), to show that the
corporation has a significant business presence in the U.S. possession for the tax year, and to elect either the cost sharing
or profit split method
of computing taxable income from certain possession products. Attach Form 5712-A to Form 5735.
Schedule P (Form 5735).
If the corporation elects to use either the cost sharing or profit split method, it must complete and attach Schedule P (Form 5735),
Allocation of Income and Expenses Under Section 936(h)(5), to Form 5735. Attach a separate Schedule P for each product to
which the cost sharing
or profit split method applies.
Source of Gross Income, etc.
See sections 638, 861-864, and 936 to determine if the source of gross income, deductions, and taxable income is in or outside
the United States or
in a U.S. possession. Amounts received in the United States may be considered sourced outside the United States if they are
from sources outside the
United States and received from an unrelated person in the active conduct of a trade or business (section 936(b)).
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