Tax Incentives for Business on Indian Reservations

The Omnibus Budget Reconciliation Act (OBRA) of 1993 contained two tax-incentives for businesses on Indian reservations to encourage employment and investment: 1) an Indian employment credit; and 2) accelerated depreciation for capital improvements within the Reservation boundaries.

As is the case with all tax incentives, these incentives will not benefit businesses or organizations that are not subject to federal income taxes (e.g., a charitable organization that is not subject to tax pursuant to section 501(c)(3) of the Internal Revenue Code or a federally recognized Indian Tribe conducting an unincorporated commercial business (see Revenue Ruling 94-16, 1994-12 IRB 4).

Accelerated Depreciation
(Selection 168 (j) of the Internal Revenue Code)

Increased rates of accelerated depreciation are available for property which is:

  • used by the taxpayer predominantly in the active conduct of a trade or business within,
  • an Indian reservation (the rental of real property is treated as trade or business for this purpose),
  • not used or located outside the reservation on a regular basis, and
  • not acquired directly or indirectly by the taxpayer from a related party.
In addition, certain infrastructure property located outside the reservation is eligible for this preferential treatment if the purpose of such property is to connect with "qualified infrastructure property" located within the Indian reservation.

Qualified infrastructure property is property which benefits the tribal infrastructure, is available to the general public, and is placed in service in connection with the taxpayer’s active conduct of a trade or business within an Indian reservation (such as roads, power lines, water systems, railroad spurs, and communication facilities).

Property used in conducting gaming activities is not eligible for this incentive. However, the rental of real property located within an Indian reservation to others is treated as an active conduct of a trade or business within an Indian reservation.

The shorter depreciation periods are described below:

In the case of:
  • 3-year property 2 years
  • 5-year property 3 years
  • 7-year property 4 years
  • 10-year property 6 years
  • 15-year property 9 years
  • 20-year property 12 years
  • Nonresidential real property 22 years
Shortened recovery period is:
  • 2 years
  • 3 years
  • 4 years
  • 6 years
  • 9 years
  • 12 years
  • 22 years