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 exemptions for payments and certain benefits provided by employers to their employees for relief due to the passing of Hurricane Maria through Puerto Rico, provided such payments are considered “Qualified Payments Made for Disaster Assistance” and certain requirements are met.
Pursuant to AD 17-21, a “Qualified Payment Made for Disaster Assistance” means any amount paid to, or for the benefit of, an employee:
- To supply or pay necessary and reasonable expenses to the individual or his/her family (such as food, medicine, gasoline, lodging, medical expenses, child care expenses, dependent care expenses, purchase of power generators and funeral expenses) incurred as a result of Hurricane Maria, to the extent that such payment is made directly to the provider of the service or the goods.
- To pay necessary and reasonable expenses incurred in the repair or rehabilitation of the individual’s principal residence, or replacement or repair of the individual’s principal residence, to the extent the need for the replacement, repair, or rehabilitation is due to damage caused by Hurricane Maria and the payment is made directly to the provider of the service or the goods.
- Payments made directly to the individual for monetary assistance to cover any damages or losses due to Hurricane Maria.
- Payments made by the federal, state or local government or any government agency or instrumentality as a result of damages or losses caused by Hurricane Maria, to promote the general wellbeing (only to the extent the damage or loss has not been compensated by an insurance policy or otherwise).
For the above-referenced payments to be deemed “qualified payments made for disaster assistance,” and therefore subject to tax-free treatment, they must comply with the following requirements:
- Payments must be provided to the individual during the period of September 21 through December 31, 2017;
- Payments received by an individual must be in lieu of his/her salary not earned during the period in which the individual could not work due to the disaster;
- As it relates to payments made directly to employees –
- The total amount paid must be in addition to the compensation ordinarily received by the employee;
- Employers cannot discriminate in favor of “highly compensated employees” (as such term is defined in Section 1032.06(d)(2) of the Puerto Rico Internal Revenue Code of 2011, as amended); and
- Payments made directly to the employee must be limited to a maximum $1,000 per month, and cannot be attributable, or related, to the position occupied or salary that the employee receives.
Employers making Qualified Payments Made for Disaster Assistance must comply with certain reporting requirements due by January 31, 2018.
Loans to Employees without Interest
In addition to the payments described above, interest-free loans provided by employers to their employees to cover reasonable and necessary expenses for the employees or their families, and expenses for the construction or repair of the employee’s principal residence incurred as a consequence of Hurricane Maria, will not be considered taxable income to the extent that: (i) they are provided during the period of September 21, 2017 through December 31, 2018; and (ii) the amount of the loan does not exceed $20,000. The employer may provide more than one loan for these purposes, provided the total amount of the loans does not exceed $20,000. The employer may offer this type of loan in addition to the Qualified Payment Made for Disaster Assistance.