Gov. Kenneth Mapp has nominated 14 neighborhoods on St. Thomas and St. Croix as Qualified Opportunity Zones, eligible for U.S. tax breaks under the massive tax bill passed by Congress last December, Government House announced.
The nominated capital gains tax break zones, which are considered 14 “low income census tracts,” are subject to the approval of the U.S. Department of the Treasury. The tax cuts predominantly benefit the country’s wealthiest in the first years, with very small cuts to lower income levels. They include a new incentive to encourage investment in low-income communities by allowing investors who reinvest the proceeds of capital gains in qualifying property or businesses located in designated tax break zones to defer and reduce their capital gains taxes.
Under the new tax law, U.S. investors who invest in qualified property in a tax break zone may defer U.S. capital gains tax on the new investment for up to seven years; reduce the amount of those capital gains by as much as 15 percent; and pay zero federal capital gains tax on any appreciation in value of that new investment.
“These new federal tax incentives will strengthen and complement the incentives available to companies and individuals under our Economic Development Commission program,” Mapp said in a statement.
“I am hopeful that these new federal tax incentives can attract new investments in hotel development, retail businesses, and industry in our most underserved communities. They will also be a valuable incentive for businesses looking to rebuild after the hurricanes,” Mapp said.
By statute, these tax break zones are limited to designated “low-income communities” in states and territories which meet certain criteria. Mapp nominated Christiansted and all of the western end of St. Croix, as well as most of the southern half of St. Thomas.
Mapp also commended Sen. Tim Scott (R-SC) for helping to include the territories in this part of the legislation. Earlier versions of the bill did not include the territories, according to Mapp.
A statement from Government House gives the following example of how these new tax breaks work:
Take a U.S. company that invested $10 million in a stock and sells that stock in 2018 for $20 million. Ordinarily, 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 break zone it obtains three significant benefits.
First, it defers payment of federal capital gains tax on the $10 million gain until the earlier of the date it sells its investment in the tax-break zone or Dec. 31, 2026.
Second, it receives a 10 percent reduction in federal capital gains tax if it holds the investment in the tax break zone for at least five years, and an additional five percent reduction if it holds the investment for at least seven years.
Third, it avoids federal capital gains tax altogether on any further appreciation in its investment in the tax break zone.
That is, if the company ultimately sells its investment in the tax break zone for $35 million after seven years – a gain of $25 million – it will defer capital gains tax on the original $10 million gain until the date of the sale, reduce the amount of that capital gain by 15 percent, and pay no capital gains tax at all on the $15 million appreciated gain.
There is a long history of Congress encouraging the territories to try to spur development with tax breaks. If approved, these new tax breaks would join the 90 to 100 percent breaks on corporate income tax, gross receipts tax, property tax and excise tax the territory gives through the Economic Development Commission and through the University of the Virgin Islands Research and Technology Park.
In 2016, Mapp proposed a plan to boost the economy over five years, which relied heavily on hopes of massive growth in the number of entities taking advantage of the territory’s tax break programs.