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This bill would change federal tax rules for people and businesses connected to U.S. territories and possessions, including Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. Its main goal is to make it easier for these areas to support economic growth and recovery by adjusting how tax residence is decided and how certain income is treated for tax purposes. In simple terms, it updates the rules that decide whether someone counts as a resident of a territory and when income is treated as coming from inside or outside the United States.
- It changes the test for being a “bona fide resident” of a U.S. possession. The new rule uses a different substantial-presence standard, which may affect who qualifies as a resident for tax purposes.
- It rewrites parts of the rules that determine where income comes from. This matters because the source of income can affect whether it is taxed by the United States or by a territory.
- It says that some income from outside a possession will be treated differently when it is tied to a business in that possession. It also says that certain U.S. activities that are only preparatory or supporting work should not be treated as regular U.S. business income for these rules.
- It also updates a rule involving sales of personal property and says these changes will start applying to tax years beginning after December 31, 2024.
Official Summaries
Territorial Tax Equity and Economic Growth Act of 2025
This bill lowers the residency requirements and modifies the income sourcing rules related to taxation of income from U.S. territories.
Currently, bona fide residents of a U.S. territory may exclude income sourced to the territory in calculating U.S. federal income tax. A bona fide resident of a territory is a person that, in part, is present in the territory for at least 183 days in a tax year. Income is sourced to a U.S. territory if it is not U.S.-sourced income or effectively connected with a U.S. trade or business.
This bill
- reduces the presence requirement to 122 days,
- specifies that income is U.S.-sourced income or effectively connected to a U.S. trade or business only if attributable to an office or fixed place of business in the United States, and
- specifies that income from U.S.-based activities that are preparatory or auxiliary may not be considered U.S.-sourced income.
Currently, income from certain personal property sales from a fixed place of business in a U.S. territory by a U.S. resident may be U.S.-sourced income unless an income tax of at least 10% is paid to the U.S. territory. The Internal Revenue Service (IRS) may limit the 10% tax payment requirement related to income from personal property sales in Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico. This bill expands the IRS’s authority to include limiting the tax requirement for personal property sales in the Virgin Islands.
Current Full Text
[Congressional Bills 119th Congress]
[From the U.S. Government Publishing Office]
[H.R. 364 Introduced in House (IH)]
<DOC>
119th CONGRESS
1st Session
H. R. 364
To amend the Internal Revenue Code of 1986 to modify the residence and
source rules to provide for economic recovery in the possessions of the
United States.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
January 13, 2025
Ms. Plaskett introduced the following bill; which was referred to the
Committee on Ways and Means
_______________________________________________________________________
A BILL
To amend the Internal Revenue Code of 1986 to modify the residence and
source rules to provide for economic recovery in the possessions of the
United States.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Territorial Tax Equity and Economic
Growth Act of 2025''.
SEC. 2. MODIFICATION TO RESIDENCE AND SOURCE RULES INVOLVING
POSSESSIONS.
(a) Bona Fide Resident.--Section 937(a) of the Internal Revenue
Code of 1986 is amended--
(1) by striking the last sentence, and
(2) by amending paragraph (1) to read as follows:
``(1) who has a substantial presence (determined under the
principles of section 7701(b)(3)(A) (applied by substituting
`122 days' for `31 days' in clause (i) thereof) without regard
to sections 7701(b)(3)(B), (C), and (D)) during the taxable
year in Guam, American Samoa, the Northern Mariana Islands,
Puerto Rico, or the Virgin Islands, as the case may be, and''.
(b) Source Rules.--Section 937(b) of such Code is amended--
(1) in paragraph (1), by striking ``and'' at the end,
(2) in paragraph (2), by striking the period at the end and
inserting ``, but only to the extent such income is
attributable to an office or fixed place of business within the
United States (determined under the rules of section
864(c)(5)),'', and
(3) by adding at the end the following new paragraphs:
``(3) for purposes of paragraph (1), the principles of
section 864(c)(2), rather than rules similar to the rules in
section 864(c)(4), shall apply for purposes of determining
whether income from sources without a possession specified in
subsection (a)(1) is effectively connected with the conduct of
a trade or business within such possession, and
``(4) for purposes of paragraph (2), income from activities
within the United States which are of a preparatory or
auxiliary character shall not be treated as income from sources
within the United States or as effectively connected with the
conduct of a trade or business within the United States.''.
(c) Source Rules for Personal Property Sales.--Section 865(j)(3) of
such Code is amended by inserting ``, 932,'' after ``931''.
(d) Effective Date.--The amendments made by this section shall
apply to taxable years beginning after December 31, 2024.
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