Instructions for Form 5735

Instructions for Form 5735

(Rev. January 2013)

Department of the Treasury

Internal Revenue Service

American Samoa Economic Development Credit

Section references are to the Internal Revenue Code unless

otherwise noted.

What's New

Section 330 of the American Taxpayer Relief Act of 2012 has

modified and expanded the American Samoa economic

development credit for tax years beginning after December 31,

2011. This revision reflects those changes. For information on

the credit for tax years beginning before January 1, 2012, see

the March 2007 revision of Form 5735 and the separate

instructions.

General Instructions

Purpose of Form

Form 5735 is used to figure the American Samoa economic

development credit under section 30A. The credit is generally

allowed against income tax imposed by Chapter 1 (see

Restrictions below for exceptions).

Who Must File

A domestic corporation (other than an S corporation) must

complete Form 5735 for each year the American Samoa

economic development credit election is in effect.

Where To File

Attach Form 5735 to the corporation's income tax return and file

the return with the Internal Revenue Service, P.O. Box 409101,

Ogden, UT 84409.

Qualifying for the Credit

To qualify for the American Samoa economic development

credit, a corporation must meet the qualified production activities

income (QPAI) requirement. A corporation meets this

requirement if it has qualified production activities income

(defined below).

Alternative Minimum Tax

Income eligible for the American Samoa economic development

credit is not taxed under the alternative minimum tax rules. See

Form 4626, Alternative Minimum Tax—Corporations.

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

American Samoa. Amounts received in American Samoa may

be considered sourced outside American Samoa if they are from

sources outside American Samoa and received from an

unrelated person in the active conduct of a trade or business.

See section 936(b).

Qualified Production

Activities Income (QPAI)

Note. For tax years beginning in 2012, the corporation does not

report its QPAI on Form 5735. However, the corporation must

have positive QPAI in order to qualify for the American Samoa

economic development credit. For tax years beginning in 2012,

corporations should calculate their QPAI and keep it for their

records in order to prove to the IRS (in the case of an audit) that

they qualify for the credit.

Figuring QPAI. QPAI is the excess (if any) of:

1. Domestic production gross receipts (DPGR), over

2. The sum of:

a. Cost of goods sold allocable to DPGR, and

b. Other expenses, losses, or deductions which are properly

allocable to DPGR.

The credit is not allowed against the following taxes:

1. Tax on accumulated earnings (section 531).

2. Personal holding company tax (section 541).

3. Additional tax for recovery of foreign expropriation losses

(section 1351).

4. Recapture of investment credit (section 50).

5. Recapture of low-income housing credit

(section 42(j)(4)(D)).

6. Recapture of Indian employment credit

(section 45A).

Oil-related qualified production activities income.

Oil-related qualified production activities income is QPAI

attributable to the production, refining, processing,

transportation, or distribution of oil or gas, or any primary product

from oil or gas (section 927(a)(2)(C), as in effect before its

repeal).

Primary products from oil. Primary products from oil are

crude oil and all products derived from the destructive distillation

of crude oil, including volatile products, light oils such as motor

fuel and kerosene, distillates such as naphtha, lubricating oils,

greases and waxes, and residues such as fuel oil.

A product or commodity derived from shale oil, which would

be a primary product from oil if derived from crude oil, is

considered a primary product from oil.

Primary products from gas. Primary products from gas are

all gas and associated hydrocarbon components from gas or oil

wells, whether recovered at the lease or upon further

processing, including natural gas, condensates, liquefied

petroleum gases such as ethane, propane, and butane, and

liquid products such as natural gasoline.

See Temporary Regulations section 1.927(a)-1T(g)(2) for

additional information.

IC-DISC or FSC

Domestic Production Gross Receipts (DPGR)

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CAUTION

The corporation does not qualify for the American

Samoa economic development credit unless it has a

positive QPAI.

Restrictions

A corporation cannot take the American Samoa economic

development 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)).

Jan 23, 2013

Generally, your gross receipts (defined later) derived from the

following activities are DPGR.

1. Construction of real property you perform in American

Samoa in your construction trade or business.

Cat. No. 20920T

than natural gas), chemical, and similar property, such as steam,

oxygen, hydrogen, or nitrogen.

Machinery, printing presses, transportation and office

equipment, refrigerators, grocery counters, testing equipment,

display racks and shelves, and neon and other signs that are

contained in or attached to a building constitute tangible

personal property.

2. Engineering or architectural services you perform in

American Samoa in your engineering or architectural services

trade or business for the construction of real property in

American Samoa.

3. Any lease, rental, license, sale, exchange, or other

disposition of the following.

a. Qualifying production property you manufacture, produce,

grow or extract in whole or in significant part in American

Samoa. See Qualifying Production Property and Manufacturing,

Producing, Growing, or Extracting, below, for details.

b. Any qualified film you produce.

c. Electricity, natural gas, or potable water you produce in

American Samoa.

Note. Local law does not control whether property is tangible

personal property.

See Regulations section 1.199-3(j)(2) for more information.

Computer software. In general, computer software includes

the following:

Any program, routine, or sequence of machine-readable code

that is designed to cause a computer to perform a desired

function or set of functions, and the documentation required to

describe or maintain that program or routine. An electronic book

online or for download does not constitute computer software.

Machine-readable code for (a) video games or similar

programs, (b) equipment that is an integral part of other property,

and (c) typewriters, calculators, adding and accounting

machines, copiers, duplicating equipment, and similar

equipment, even if the program is not designed to operate on a

computer as defined in section 168(i)(2)(B).

Computer programs including, but not limited to, operating

systems, executive systems, monitors, compilers and

translators, assembly routines, utility programs, and application

programs.

Any incidental and ancillary rights that are necessary for the

acquisition of the title to, the ownership of, or the right to use

computer software, and that are used only in connection with

that specific software. These incidental and ancillary rights are

not included in the definition of a trademark or trade name under

Regulations section 1.197-2(b)(10)(i).

Exception. Computer software does not include any data or

information base unless the data or information base is in the

public domain and is incidental to a computer program.

Example. If a word processing program includes a dictionary

feature that may be used to spell-check a document, then the

entire program (including the dictionary feature) is a computer

software program regardless of the form in which the dictionary

feature is maintained or stored.

See Regulations section 1.199-3(j)(3) for more information.

In general, gross receipts derived from the following activities

are not DPGR.

Activities not attributable to the actual conduct of a trade or

business.

The sale of food and beverages you prepare at a retail

establishment.

The lease, rental, or license of property between certain

persons treated as a single employer.

The lease, rental, license, sale, exchange, or other disposition

of land.

The transmission or distribution of electricity, natural gas, or

potable water.

Advertising and product-placement; however, see

Regulations section 1.199-3(i)(5)(ii) for exceptions.

Customer and technical support, telephone and other

telecommunications services, online services (including Internet

access services, online banking services, providing access to

online electronic books, newspapers, and journals) and other

similar services; however, see Regulations section 1.199-3(i)(6)

(iii) for exceptions.

Gross receipts. Gross receipts include the following amounts

from your trade or business activities.

Total sales (net of returns and allowances).

Amounts received for services, not including wages received

as an employee.

Income from incidental or outside sources (including sales of

business property).

Gross receipts are generally not reduced by the:

Cost of goods sold, or

Adjusted basis of property (other than capital assets) sold or

otherwise disposed of, if such property is described in section

1221(a)(1) through (5).

Sound Recordings. Sound recordings include any works that

result from the fixation of a series of musical, spoken, or other

sounds. The definition of sound recordings is limited to the

master copy of the recordings (or other copy from which the

holder is licensed to make and produce copies), and if the

medium (such as compact discs, tapes, or other

phonorecordings) in which the sounds may be embodied is

tangible, then the medium is considered tangible personal

property.

Exception. Sound recordings do not include the creation of

copy-righted material in a form other than a sound recording,

such as lyrics or music composition.

See Regulations section 1.199-3(j)(4) for more information.

Allocation of gross receipts. You generally must allocate your

gross receipts between DPGR and non-DPGR. Allocate gross

receipts using a reasonable method that accurately identifies

gross receipts that are DPGR. However, if less than 5% of your

gross receipts are non-DPGR, you can treat all of your gross

receipts as DPGR. Also, if less than 5% of your gross receipts

are DPGR, you can treat all of your gross receipts as non-DPGR.

For details, see Regulations section 1.199-1(d).

Qualifying Production Property

Qualified film. A qualified film is any motion picture film, video

tape, or live or delayed television programming, for which 50%

or more of the total compensation required to produce the film is

paid for services performed by actors, production personnel,

directors, and producers in American Samoa.

A qualified film includes the copyrights, trademarks, or other

intangibles related to the film. Also, QPAI includes gross receipts

from the production of a qualified film regardless of the methods

and means by which the film is distributed.

The following are qualifying production property.

Tangible personal property.

Computer software.

Sound recordings.

Tangible personal property. Tangible personal property

includes any tangible property other than land, buildings

(including structural components), computer software, sound

recordings, qualified films, electricity, natural gas, or potable

water. Tangible personal property also includes any gas (other

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See section 199(c)(6) and Regulations section 1.199-3(k) for

more information.

You are engaged in the trade or business of farming and are

not required to use the accrual method of accounting (see

section 447).

Your average annual gross receipts (defined below) are $5

million or less.

You are eligible to use the cash method of accounting under

Rev. Proc. 2002-28. You can find Rev. Proc. 2002-28 on

page 815 of I.R.B. 2002-18 at www.irs.gov/pub/irs-irbs/

irb02-18.pdf.

Manufacturing, Producing, Growing, or Extracting

Manufacturing, producing, growing, and extracting (MPGE)

generally include the following trade or business activities.

Activities related to manufacturing, producing, growing,

extracting, installing, developing, improving, and creating

qualifying production property.

Making qualifying production property out of scrap, salvage,

or junk material, or from new or raw material by processing,

manipulating, refining, or changing the form of an article, or by

combining or assembling two or more articles.

Cultivating soil, raising livestock, fishing, and mining minerals.

Storage, handling, or other processing activities (other than

transportation activities) in American Samoa related to the sale,

exchange, or other disposition of agricultural products, provided

the products are consumed in connection with, or incorporated

into, manufacturing, producing, growing, or extracting qualifying

production property whether or not by the taxpayer.

Under the small business simplified overall method, your total

cost of goods sold and other deductions, expenses, and losses

are ratably apportioned between DPGR and non-DPGR based

on relative gross receipts.

Example. Your total cost of goods sold and other trade or

business deductions, expenses, or losses are $400 and do not

include a net operating loss deduction. You have $1,000 total

gross receipts and $750 DPGR. Your DPGR equal 75% of your

total gross receipts. Under the small business simplified overall

method, you subtract $300 ($400 × .75) of your total cost of

goods sold and other trade or business deductions, expenses,

or losses from your DPGR to figure your QPAI, which is $450

($750 minus $300).

For details, see Regulations section 1.199-3(e).

Cost of Goods Sold

Average annual gross receipts. For this purpose, your

average annual gross receipts are your average annual gross

receipts for the preceding 3 tax years. If your business has not

been in existence for 3 tax years, base your average on the

period it has existed. Include any short tax years by annualizing

the short tax year's gross receipts by (a) multiplying the gross

receipts for the short period by 12 and (b) dividing the result by

the number of months in the short period.

Cost of goods sold is a component of QPAI and it includes the:

Cost of goods sold to customers, and

Adjusted basis of non-inventory property you sold or

otherwise disposed of in your trade or business.

Allocation of cost of goods sold. Generally, you must

allocate your cost of goods sold between DPGR and non-DPGR

using a reasonable method. If you use a method to allocate

gross receipts between DPGR and non-DPGR, the use of a

different method to allocate cost of goods sold will not be

considered reasonable, unless it is more accurate. However, if

you qualify to use the small business simplified overall method,

you can use it to apportion both cost of goods sold and other

deductions, expenses, and losses between DPGR and

non-DPGR.

For details, see Regulations section 1.199-4.

Oil-related production activities. If you have oil-related

qualified production activities income and you choose to use the

small business simplified overall method, you must allocate part

of these costs to DPGR from oil-related production activities to

determine oil-related QPAI.

Simplified Deduction Method

You generally can use the simplified deduction method to

apportion other deductions, expenses, and losses (but not cost

of goods sold) between DPGR and non-DPGR if you meet either

of the following tests.

Your total trade or business assets at the end of your tax year

are $10 million or less.

Your average annual gross receipts (defined above) are $100

million or less.

Form W-2 wages. To determine the amount of Form W-2

wages to include in cost of goods sold, see Wage expense

included in cost of goods sold, later.

Other Deductions, Expenses, or Losses

Other deductions, expenses, or losses include all deductions,

expenses, or losses (other than cost of goods sold and

employee business expenses) from a trade or business.

Under the simplified deduction method, your other trade or

business deductions, expenses, or losses are ratably

apportioned between DPGR and non-DPGR based on relative

gross receipts.

Allocation and apportionment of other deductions, expenses, or losses. You can generally use one of the following

three methods to allocate and apportion other trade or business

deductions, expenses, or losses between DPGR and

non-DPGR.

Small business simplified overall method.

Simplified deduction method.

Section 861 method.

However, do not allocate and apportion a net operating loss

deduction or deductions not attributable to the conduct of a trade

or business to DPGR under any of the methods.

Example. Your total other trade or business deductions,

expenses, or losses are $400 and do not include a net operating

loss. You have $240 of cost of goods sold allocable to DPGR.

You have $1,000 total gross receipts and $600 DPGR. Your

DPGR equal 60% of your total gross receipts. Under the

simplified deduction method, you subtract $240 ($400 × .60) of

your total other trade or business deductions, expenses, or

losses from your DPGR to figure your QPAI, which is $120 ($600

minus $240 minus $240).

Small Business Simplified Overall Method

Oil-related production activities. If you have oil-related

qualified production activities income and you choose to use the

simplified deduction method, you must allocate part of these

costs to DPGR from oil-related production activities to determine

oil-related QPAI.

You generally can use the small business simplified overall

method to apportion cost of goods sold and other deductions,

expenses, and losses between DPGR and non-DPGR if you

meet any of the following tests.

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b. Supplemental unemployment compensation benefits.

c. Sick pay or annuity payments from which the recipient

requested federal income tax withholding.

3. Subtract (2) from (1).

4. Add together any amounts reported in box 12 of the

relevant Forms W-2 that are properly coded D, E, F, G, or S.

5. Add (3) and (4).

Section 861 Method

You do not have to meet any tests to use the section 861

method. Under the section 861 method, you generally must

apply the rules of the section 861 regulations to allocate and

apportion other trade or business deductions, expenses, or

losses between DPGR and non-DPGR. Section 199 is treated

as an “operative section” described in Regulations section

1.861-8(f).

Tracking wages method. Under the tracking wages method,

Form W-2 wages are figured as follows.

1. Add the amounts reported in box 1 of the relevant Forms

W-2 that are also wages for federal income tax withholding

purposes.

2. Add any amounts reported in box 1 of the relevant Forms

W-2 that are both:

a. Wages for federal income tax withholding purposes, and

b. Supplemental unemployment compensation benefits.

3. Subtract (2) from (1).

4. Add together any amounts reported in box 12 of the

relevant Forms W-2 that are properly coded D, E, F, G, or S.

5. Add (3) and (4).

For details, see Regulations section 1.199-4(d).

For guidance on automatic approval to change certain

elections relating to the apportionment of interest expense and

research and experimentation expenditures, see Rev. Proc.

2006-42. You can find Rev. Proc. 2006-42 on page 931 of I.R.B.

2006-47 at www.irs.gov/pub/irs-irbs/irb06-47.pdf.

Oil-related production activities. If you have oil-related

qualified production activities income, apply the rules of section

861 to determine the amount of other trade or business

deductions, expenses, or losses to deduct for purposes of

determining oil-related QPAI.

Figuring Form W-2 Wages

You figure Form W-2 wages in two steps. First, you must

determine the amount of wages to classify as Form W-2 wages

under Regulations section 1.199-2(e)(1). Second, you must

figure Form W-2 wages that are properly allocable to DPGR.

Form W-2 wages paid to produce a qualified film. Form W-2

wages include compensation for services performed in

American Samoa by actors, production personnel, directors, and

producers to produce a qualified film. See Qualified film, earlier,

for more information.

You can figure Form W-2 wages that are properly allocable to

DPGR using one of the safe harbor methods discussed under

Form W-2 Wages Allocable to DPGR, below. Also, you can use

any reasonable method based on all the facts and

circumstances.

Form W-2 Wages

Allocable to DPGR

After you calculate Form W-2 wages, as discussed above, you

must figure Form W-2 wages that are properly allocable to

DPGR.

You can use one of the following three methods to determine

the amount of wages to classify as Form W-2 wages under

Regulations section 1.199-2(e)(1).

Unmodified box method.

Modified box 1 method.

Tracking wages method.

You can figure Form W-2 wages that are properly allocable to

DPGR under one of the following methods.

Small business simplified overall method safe harbor.

Wage expense safe harbor.

Any other reasonable method based on all the facts and

circumstances.

Relevant Forms W-2. To figure your Form W-2 wages,

generally use the sum of the amounts you properly report for

each employee on Form W-2, Wage and Tax Statement, for the

calendar year ending with or within your tax year. However, do

not use any amounts reported on a Form W-2 filed with the

Social Security Administration more than 60 days after its due

date (including extensions).

Small business simplified overall method safe harbor. If

you use the small business simplified overall method to allocate

costs between DPGR and non-DPGR (see Small Business

Simplified Overall Method, earlier), you can use the small

business simplified overall method safe harbor to determine the

amount of Form W-2 wages allocable to DPGR. Under this safe

harbor method, the amount of Form W-2 wages that is properly

allocable to DPGR equals the proportion of DPGR to total gross

receipts.

Non-duplication rule. Amounts that are treated as Form W-2

wages for a tax year under any method cannot be treated as

Form W-2 wages for any other tax year. Also, an amount cannot

be treated as Form W-2 wages by more than one taxpayer.

Unmodified box method. Under the unmodified box method,

Form W-2 wages are the smaller of:

1. The sum of the amounts reported in box 1 of the relevant

Forms W-2, or

2. The sum of the amounts reported in box 5 of the relevant

Forms W-2.

Wage expense safe harbor. If you are using either the section

861 method of cost allocation under Regulations section

1.199-4(d) or the simplified deduction method under Regulations

section 1.199-4(e), you determine the amount of wages properly

allocable to DPGR by multiplying the amount of wages for the

tax year by the ratio of your wage expense included in

calculating QPAI for the tax year to your total wage expense

used in calculating your taxable income (or adjusted gross

income) for the tax year without regard to any wage expenses

disallowed by sections 465, 469, 704(d), or 1366(d).

If you use the section 861 method or the simplified deduction

method, you must use the same expense allocation and

apportionment methods that you use to determine QPAI to

allocate and apportion wage expense for purposes of the safe

harbor.

Modified box 1 method. Under the modified box 1 method,

Form W-2 wages are figured as follows.

1. Add the amounts reported in box 1 of the relevant Forms

W-2.

2. Add all the amounts described below and included in

box 1 of the relevant Forms W-2.

a. Amounts not considered wages for federal income tax

withholding purposes.

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Wage expense included in cost of goods sold. After you

determine the amount of wages under the wage expense safe

harbor, discussed earlier, you can allocate a portion of those

wages to cost of goods sold by any reasonable method based

on the facts and circumstances. For example, you can include

wage expense in cost of goods sold in proportion to (a) the

amount of direct labor included in cost of goods sold, or (b)

section 263A labor costs (as defined in Regulations section

1.263A-1(h) (4)(ii)) included in cost of goods sold. See

Regulations section 1.199-2(e)(2)(ii)(B) for more information.

The amount of allocable employee fringe benefit expenses

for a tax year is equal to the total amount of employee fringe

benefit expenses (defined above) multiplied by a fraction. The

fraction consists of the corporation's qualified wages (defined

above) for the tax year, divided by the aggregate amount of

wages paid or incurred by the corporation during the tax year.

The allocable employee fringe benefit expenses cannot

exceed 15% of the corporation's qualified wages for the tax year.

For more information, see section 936(i)(2).

More information. For more information on figuring your Form

W-2 wages, see Regulations section 1.199-2 and Rev. Proc.

2006-47. You can find Rev. Proc. 2006-47 on page 869 of I.R.B.

2006-45 at www.irs.gov/pub/irs-irbs/irb06-45.pdf.

For more information on figuring Form W-2 wages properly

allocable to DPGR, see Regulations section 1.199-2(e)(2).

Lines 2–4

Qualified tangible property means any tangible property used

by the corporation in the active conduct of a trade or business

within American Samoa.

Short-life qualified tangible property is qualified tangible

property that is 3-year or 5-year property under section 168.

Specific Instructions

Medium-life qualified tangible property is qualified tangible

property that is 7-year or 10-year property under section 168.

Note. Any wages or other expenses taken into account in

determining the American Samoa economic development credit

may not be taken into account in determining the research credit

under section 41.

Long-life qualified tangible property is qualified tangible

property that is not short-life or medium-life qualified tangible

property.

For more information, see section 936(i)(4).

Line 1

Note. In the case of any qualified tangible property to which

section 168 (as in effect before the date of enactment of the Tax

Reform Act of 1986) applies, any references above to section

168 are to that Code section as then in effect.

Enter 60% of the sum of:

The aggregate amount of the corporation's qualified wages for

the tax year and

The allocable employee fringe benefit expenses of the

corporation for the tax year.

For more information on depreciation, see the Instructions for

Form 4562 and Publication 946.

Qualified wages. Qualified wages are wages paid or incurred

by the corporation during the tax year in connection with the

active conduct of a trade or business in American Samoa to an

employee for services performed in American Samoa, but only if

the services are performed while the employee's principal place

of employment is in American Samoa.

The term “wages” generally means wages as defined in

section 3306(b), but without regard to any dollar limitation

contained in that section. For this purpose, section 3306(b) is

applied as if the term “United States” includes American Samoa.

See section 936(i)(1)(D)(ii) for a special rule for agricultural labor

and railway labor.

The wages that are taken into account for the tax year for any

employee are limited to 85% of the old-age, survivors, and

disability insurance (OASDI) contribution and benefit base for

the calendar year in which that tax year begins. The OASDI

contribution and benefit base for 2012 is $110,100 and for 2013

is $113,700.

Special rules apply to part-time employees and employees

whose principal place of employment with the corporation is not

within American Samoa at all times during the tax year.

For more information, see section 936(i)(1).

Line 7

Include the line 7 credit on your income tax return on the same

line on which the qualified electric vehicle (QEV) credit is

reported. Enter “Form 5735” and the amount next to the entry

space for that line. On the 2012 Form 1120, the QEV is reported

on Schedule J, line 5b. The credit must also be included on the

QEV line of the following forms as applicable: Form 3800, Form

6478, Form 8835, Form 8860, Form 8910, Form 8911, and Form

8912.

Paperwork Reduction Act Notice. We ask for the information

on this form to carry out the Internal Revenue laws of the United

States. You are required to give us the information. We need it to

ensure that you are complying with these laws and to allow us to

figure and collect the right amount of tax.

You are not required to provide the information requested on

a form that is subject to the Paperwork Reduction Act unless the

form displays a valid OMB control number. Books or records

relating to a form or its instructions must be retained as long as

their contents may become material in the administration of any

Internal Revenue law. Generally, tax returns are confidential, as

required by section 6103.

Allocable employee fringe benefit expenses. The total

amount of employee fringe benefit expenses taken into account

in figuring the economic-activity limitation is the amount

deductible by the corporation in the tax year for:

Employer contributions to stock bonus, pensions,

profit-sharing, or annuity plans,

Employer-provided health or accident plan coverage for the

employees, and

The cost of life or disability insurance provided to employees.

The time needed to complete and file this form will vary

depending on individual circumstances. The estimated average

time is: Recordkeeping, 7 hr., 53 min.; Learning about the

law or the form, 2 hr., 17 min.; and Preparing, copying,

assembling, and sending the form to the IRS, 2 hr., 32 min.

If you have comments concerning the accuracy of these time

estimates or suggestions for making this form simpler, we would

be happy to hear from you. See the instructions for the tax return

with which this form is filed.

Note. Any amount treated as qualified wages may not be

treated as an employee fringe benefit expense.

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