On December 10, 2018 the governor of Puerto Rico signed into law the 2018 Tax Reform Act (the “Tax Reform”), which introduced several amendments to the Puerto Rico Internal Revenue Code of 2011 (the “PR-IRC”). One of the most important amendments is related to the rules that allows taxpayers to deduct business expenses in the income tax return. On September 4, 2019, the Puerto Rico Department of Treasury issued Circular Letter 19-14 (“IR 19-14”) to establish the specific rules for this amendments. IR 19-14 establishes the requirements for taxpayers to be able to deduct business expenses as follows:

I. An informative return (Click for a table of Forms 480), W2 or any other form required by law, must be submitted in order to deduct the following expenses:

  • Wages paid to employees, including officers and directors;
  • Employer portion of Federal Social Security (FICA and Medicare);
  • State and federal unemployment insurance;
  • Services provided;
  • Outsourced services;
  • Commissions paid to other businesses or merchants;
  • Rental or rental expenses paid including rental of personal and real estate property
  • Insurance premiums paid for health or accident medical plans, and property, contingency, public liability and surety insurance1;
  • Telecommunications services including internet and cable or satellite television services used in industry or business1;
  • Water and electric power services1;
  • Ads and advertising services1;
  • Royalties;
  • Special contribution for professional and advisory services under Law 48-2013;
  • Interest paid on mortgage loans and car finance leases;
  • Tuition fees paid to benefit employees;
  • Maintenance fees paid to residents or condominium associations;
  • Continuing education expenses for employees
1Only applicable to the taxable year 2019. After 2019, the service provider must prepare and send the informative return to the taxpayer. See discussion of Administrative Determination 19-08 below.

II. Businesses whose annual gross revenues are less than $3 million will be required to submit with the income tax return an agree upon procedures report (“AUP”) or audited financial statements issued by a CPA licensed in Puerto Rico in order to deduct the following expenses:

  • Car expenses
  • Expenses of other motor vehicles
  • Repairs and Maintenance
  • Travel expenses
  • Food and entertainment expenses
  • Office supplies and effects
  • Materials used directly in the industry or business
  • Seals, vouchers and tariffs
  • Shipping and postage charges
  • Uniforms
  • Parking lots and tolls
  • Office expenses
  • Bank charges
  • Contributions to educational contribution accounts for employee beneficiaries
  • Expenses incurred or paid to shareholders, persons or related entities
  • Losses caused by fire, hurricane, other accidents or theft
  • Uncollectible receivables
  • Administration charges, which are not included in an informative
  • Expenses on properties leased to the Puerto Rico Industrial Development Company or warehouse of the Commerce and Export Company
  • Subscription and membership expenses
  • Expenses related to licenses and non-capitalizable computer programs
  • Donations
  • Deductions under Law 185-2014
  • Any other expenses that are not subject to be included in an informative return

III. The following expenses are not subject to the AUP/Audited financial statement requirement, or to be informed in an informative return, or any other applicable form, in order to be deducted:

  • Interest on business debts;
  • Contributions, patents and licenses, including municipal contributions, sales and use tax, taxes and the State Insurance Fund insurance policy;
  • Depreciation and amortization of property used in the business;
  • Contributions to qualified pension plans;
  • Deduction to employers who employ disabled people

The amendments introduced in the Tax Reform related to informative returns and the agreed upon procedures report are applicable to taxable years commencing after December 31, 2018. There are no extensions to file the informative returns. The late filing penalty is $500 per return.

Additional requirement applicable to taxable year 2019

The Puerto Rico Department of Treasury issued Administrative Determination 19-08 (“AD 19-08”) to establish special rules for the deduction of the following expenses in the income tax return of taxable year 2019:

  • Ads and advertisement services
  • Insurance premiums
  • Telecommunications services,
  • Internet access services and
  • Cable or satellite television services

AD 19-08 provides that taxpayers must prepare informative returns for the abovementioned expenses in order to deduct it. Nevertheless, for taxable year 2020 onwards, the service provider, instead of the taxpayer, must prepare the informative return and send it to its customer. The service providers must send the business information (Legal name, FEIN and physical and postal address) to their clients on or before January 30, 2020.