# Understanding the Territorial Tax Parity Act of 2021

This bill makes changes to how the federal government taxes income earned in U.S. territories like Puerto Rico, the U.S. Virgin Islands, and Guam. Right now, people who live in these territories can exclude certain types of income from their federal taxes, but the current rules create some confusion about what income actually qualifies for this break. This bill clarifies and expands those rules to make the tax treatment more consistent and favorable for people and businesses operating in these territories.

The main change involves how the government determines whether income is "sourced" to a U.S. territory (meaning it was earned there) or to the mainland United States. Under current law, some types of business income earned by territory residents get taxed differently depending on where the business operates. This bill says that if you have a business office or workplace in the U.S. territory, the income from that business should be treated as territory income and qualify for the tax exclusion, rather than being taxed as U.S. income. The bill also adds another type of income—gains from selling personal property—to the list of income that can qualify for these territory tax benefits.

For people living in U.S. territories, this could mean lower federal taxes on their business income and investment gains. For businesses considering relocating to or expanding in these territories, it makes the tax incentives clearer and more attractive. The changes apply to tax years starting after December 31, 2020, so they're meant to help with economic recovery in these island communities. However, this bill primarily affects territory residents and businesses with significant operations there—most mainland Americans won't see any direct impact.

Territorial Tax Parity Act of 2021

Plaskett, Stacey E.

Territorial Tax Parity Act of 2021 This bill modifies the income source rules involving U.S. possessions, including Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, and the Virgin Islands. Under current law, income is not considered to be possession source income if it is treated as income (1) from sources within the United States, or (2) effectively connected with the conduct of a trade or business within the United States. The bill amends this rule to specify that it applies to the extent that the income is attributable to an office or fixed place of business within the United States. The bill also modifies the income source rules that apply to certain personal property sales in the Virgin Islands.