Tax Reform Implications for Alaska Native Corporations

February 2018

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The enactment of tax reform in December 2017 introduced the most significant legislative change to the tax system since the Reagan administration. It is a major overhaul of the Internal Revenue Code that will affect every taxpayer in the United States. For Alaska residents in particular, the Alaska Native Corporations (ANC) and Alaska Native Settlement Trusts (ANST) are greatly affected. We’ve outlined the major changes and benefits below, and your BDO Anchorage team is ready to help you navigate through the reforms.
 

ANCs and ANSTs

New rules regarding ANC deductions for contributions to ANSTs.
 
Previous Restrictions
  • ANC contributions were not deductible to the corporation.
  • Contributions by ANCs of appreciated property were taxable to the ANC.
Important Changes
  • ANCs may annually deduct contributions to the ANST.
  • ANC cash contributions to an ANST will result in a deduction equal to the amount of cash contributed to the ANC.
  • ANC non-cash property contributions will result in a deduction equal to the lesser of its adjusted basis in the property or its fair market value.
  • The ANC will not recognize gain or loss on such contributions.
  • Deductions are limited to taxable income, and any excess may be carried forward for 15 years.
  • ANCs’ earnings and profits for the taxable year are reduced by the amount of any deduction.
Benefits to You
  • Contributions to an ANST will provide a permanent tax benefit to the ANC.
  • No corporate-level tax for contributions to ANSTs.


ANST Recognition of Income for Contributions From ANCs

ANSTs must recognize income in the amount equal to the deduction claimed by the ANC for contributions to the ANST.
 
Important Changes
  • The ANST will have a tax basis in non-cash property contributed by an ANC equal to the lesser of the tax basis held by the ANC or its fair market value at the time of contribution.
  • ANSTs may elect to defer the recognition of income of non-cash property until such property is sold.
  • When the deferral election is made, the income that would have been recognized if the election were not made is to be taxed as ordinary income. Any excess will be treated in the same manner had the election not been made.
  • Property contributed for deferred income election may not be disposed or sold before the end of the first taxable year subsequent to the year of contribution. If the property is sold prior to this, then the election is not valid, and the ANST must pay tax attributable to the sale of such property, plus a penalty of 10 percent on the tax assessed.
Benefits to You
  • ANST can receive appreciated property, and defer tax to future years. This will help get income-generating assets into the ANST to benefit the shareholder beneficiaries.


Administrative Requirements

New administrative reporting requirements apply for tax years beginning after December 31, 2016.
 
Important Changes
  • ANCs must provide to the ANST a statement describing:
  • the total amount of contributions;
  • whether such property is cash;
  • whether such property is non-cash, the date acquired by the ANC, and the adjusted basis of the property;
  • the date each contribution was made to the ANST; and
  • any information deemed necessary by the Secretary to ensure accurate reporting of income on contributions.
  • Provisions related to ANC contributions and ANST income recognition is effective for ANC tax years for which the refund statute of limitations period has not expired.


Assignment of Payments

Changes to Village Corporations under Alaska Native Claims Settlement Act (ANCSA) are effective for tax years beginning after December 31, 2016.
 
Previous Restrictions
  • Payments made from the sharing of natural resource revenue were paid directly to the ANC, and taxed at the corporate level. There was no mechanism to assign these payments to an ANST.
Important Changes
  • Village Corporations may now assign 7(j) payments to ANSTs without recognizing these payments in gross income.
  • Assignment of these payments must be in writing, and the ANC may not have received such payment prior to the assignment.
  • The ANST must include assigned payments in gross income when they are received.
Benefits to You
  • Payments may be assigned to the ANST directly at a reduced tax rate.