As previously discussed, on October 4, 2017, the Puerto Rico Department of the Treasury (the “PR Treasury”) issued Administrative Determination No. 17-21 (“AD 17-21”) granting temporary income tax exemption for payments considered “Qualified Payments made for Disaster Assistance” related to the recent hurricane. To clarify various aspects of AD 17-21, the PR Treasury issued a series of questions and answers (Q&As). The following is a summary of the clarification provided in the Q&As.
Qualified Payments Made for Disaster Assistance (“Qualified Payments”)
- PR Treasury clarifies that Qualified Payments are excluded from the definition of “gross income.”
- Although independent contractors were not specifically included as being allowed to receive Qualified Payments under AD 17-21, the PR Treasury is allowing independent contractors to receive Qualified Payments from merchants, even when there is no employee-employer relationship, as previously required under AD 17-21. Payments made by merchants that do not have any employee or independent contractor relationship with the individual will not be covered by the provisions of AD 17-21, but instead, by the gift tax provisions under the Puerto Rico Internal Revenue Code of 2011, as amended (“PR Code”).
- Qualified Payments made to employees must be reported as exempt income on PR Treasury Form 499R-2/W-2PR, Box 16 or 16A. Qualified payments made to independent contractors must be reported as exempt income on PR Treasury form 480.6D – Informative Return for Exempt Income.
- The PR Treasury clarifies that Qualified Payments will be tax deductible for the employer, regardless if they exceed the $1,000 monthly limitation. However, such excess must be reported as taxable income to the employee/independent contractor on PR Treasury form 499R-2/W-2PR, for payments made to employees, or on PR Treasury form 480.6B, for payments made by independent contractors.
- The PR Treasury clarifies that the $1,000 monthly limitation only applies to Qualified Payments made in cash directly to the employee. Qualified Payments made directly to a provider of goods or services for the benefit of an employee or independent contractor will not be subject to the $1,000 limitation, and thus, such amounts will be excluded from the gross income of the employee/independent contractor.
- Qualified Payments made by an employer to its employees to cover necessary and reasonable expenses such as meal expenses, medicines and medical expenses or for the purchase of a power generator are considered Qualified Payments subject to the $1,000 monthly limitation.
- The PR Treasury clarifies the tax treatment of payments made by employers during the time employees could not work due to the passing of Hurricane María. The PR Treasury clarifies that payments made by an employer to its employees while they were unable to work due to the passing of Hurricane María are considered Qualified Payments, subject to the $1,000 monthly limitation. However, to the extent such payments are made for vacation or sick leave, they will not be considered Qualified Payments.
- The PR Treasury clarifies that payments made by an entity to an individual who is an employee or an independent contractor of an affiliated entity are not considered Qualified Payments. Thus, benefits paid by affiliated entities, even if they are charitable organizations sponsored by the employer, will not be considered Qualified Payments under AD 17-21.
- The PR Treasury clarifies that the $20,000 limitation on interest-free loans applies to each employee or independent contractor individually and not in the aggregate.
- The PR Treasury clarifies the tax consequence of the interest-free loans under AD 17-21. Employers will not have to recognize as taxable income the interest they would otherwise have received, to the extent the loan complies with the requirements under AD 17-21. On the other hand, employees will not have to include as taxable income the amount of interest that otherwise would have been paid for such loan, to the extent the loan complies with the requirements under AD 17-21. Also, the amount of the loan will not be considered income for the employee to the extent the total amount of the loan is repaid to the employer.
Employers must keep in mind that they have until December 31, 2017 to make Qualified Payments to employees or independent contractors. Employers must also keep in mind that they must report such payments with the PR Treasury on or before January 31, 2018. Further guidance is expected in connection with such reporting.