A Special Partnership is a partnership or corporation, that meets certain requirements and on December 31, 2010 had in effect an election to be treated as a pass-through entity. A special partnership is not subject to income taxes but, instead, the partners pay the tax on their distributable share of the special partnership’s items of income, even though the corresponding income is not distributed. Although the eligibility of a partnership for special treatment depends on the nature of the partnership’s income, it is the partner who is taxed on the ratable portion of the income as if he/she had carried on the business activity.
A special partnership computes its gross income and deductions, to arrive at taxable income, in the same manner a regular partnership or corporation would, with certain exceptions. One exception is that special partnerships are not allowed a deduction for carryover net operating losses. This is so because every year the partners pick up their share of income or loss in their income tax returns. The use of the special partnership's losses is limited by the partner’s basis in the special partnership's equity interest and can only be used against the distributable share of other special partnerships' income or the prorate share of corporations of individuals’ income.
To qualify for pass-through treatment, the special partnership must meet the following requirements:
- Derive during each taxable year at least 70% of its gross income from sources within Puerto Rico, except for entities engaged in the production of feature films.
- Derive at least 70% of its gross income from one of the following business activities:
- Land development
- The substantial rehabilitation of buildings and structures
- Sale or rental of buildings or structures
- Manufacturing which generates substantial employment
- Exporting products or services to foreign countries
- The production of feature films
- A business for the construction, operation or maintenance of public roads and its attached facilities
- Production of green energy
The determination as to whether the partnership meets the requirements of a special partnership is made as of the close of the partnership’s taxable year for which the election would be in effect.
With the enactment of the 2011 Puerto Rico Internal Revenue Code, this election is no longer available.