On September 29, 2018, the Disaster Tax Relief and Airport Extension Act of 2017, as amended (the “Act”), was adopted to, among other goals, provide tax relief to those affected by Hurricanes Irma and Maria. The Act includes an employee retention benefit (the “Benefit”) available to eligible employers.
The Act provides that the Benefit for employers in Puerto Rico will be available if the government of Puerto Rico establishes a plan, approved by the U.S. Department of the Treasury (the “U.S. Treasury”), to promptly distribute each payment to its residents. In addition, the U.S. Treasury must determine the Benefit applicable to eligible employers in Puerto Rico, taking into consideration the tax particularities of Puerto Rico employers.
The Puerto Rico Treasury, in conjunction with the U.S. Treasury, has already established the plan, and the U.S. Treasury has recently determined the Benefit applicable to eligible employers in Puerto Rico. As a result, on June 8, 2018, the Puerto Rico Department of the Treasury (the “PR Treasury”) issued Internal Revenue Circular Letter No. 18-11 (“CL 18-11”), establishing the eligibility requirements and the procedure to request the Benefit. In addition to CL 18-11, the PR Treasury has issued further guidance in the format of Q&As. The following summarizes the most important aspects of CL 18-11 and the Q&As:
- Who is an Eligible Employer? An eligible employer is an employer that: (i) on September 16, 2017 (or September 4, 2017 for Hurricane Irma) was engaged in trade or business in Puerto Rico; (ii) whose business became inoperable on any day after such date and before January 1, 2018, due to damage caused by Hurricanes Irma or Maria; and (iii) continued to pay wages to its eligible employees (as defined below) during the period in which the business was inoperable. Non-profit organizations are not considered eligible employers.
- Who is an Eligible Employee? An eligible employee is an employee of an eligible employer, whose principal place of employment as of September 16, 2017 was in Puerto Rico, and who received wages reported on Form 499R-2/W-2PR. In case of Hurricane Irma, the principal place of employment as of September 4, 2017 should have been located in any of the following municipalities: Canóvanas, Cataño, Culebra, Dorado, Fajardo, Loiza, Toa Baja, Vega Baja or Vieques. Only employees on the eligible employer’s payroll as of September 16, 2017 (or September 4 for Hurricane Irma) qualify as eligible employees. An independent contractor will not be considered an eligible employee.
- What are Qualified Wages? Qualified wages are those wages accrued or paid during the period beginning on the first day that the business became inoperable in the eligible employee's principal place of employment after September 16, 2017 (or September 4, 2017 for Hurricane Irma in the municipalities identified previously), and ending on the day that the business significantly resumed its business operations or before January 1, 2018, whichever occurred first. The wages that may be considered for purposes of computing the Benefit are limited to $6,000.00 for each eligible employee. For purposes of the Benefit, wages mean wages paid that were subject to unemployment insurance tax.
- What does the phrase “Significantly resumed the business operations” mean? – The determination as to when the business significantly resumed its operations is a determination that each eligible employer must make, based on its particular facts and circumstances, taking into consideration the nature of its business. Therefore, and pursuant to the PR Treasury guidance, each eligible employer must make a reasonable and a good-faith interpretation on when its business significantly resumed. Notwithstanding the above, the PR Treasury has determined that “significantly resumed a business operation” means it resumed at least 80% or more of the activities that the business was carrying out before the hurricanes.
- What is an “Inoperable Business”? – A business became inoperable if it could not carry out its operations after the passage of Hurricanes Irma or Maria. For purposes of the Benefit, a business is considered inoperable if it satisfies one or more of the following factors and such factors do not allow the resuming of the significant operations of the business:
- The business operated in an unstable manner;
- The operations were reduced due to the lack of power or water supply;
- The operations were reduced due to the instability or lack of telecommunication services;
- The business suffered structural damage where it carries out its operations as a result of the hurricane;
- The business was not physically accessible to its employees or clients as a result of the hurricane; or
- The business could not receive raw material or inventory to operate.
Eligibility Requirements – An employer in Puerto Rico is eligible to receive the benefit if it complies with the following:
- Is an eligible employer.
- Paid qualified wages to its eligible employees during the eligible periods.
- Filed electronically all the following returns for taxable year 2017: (i) Withholding Statement (Form 499R-2/W-2PR); (ii) Quarterly Returns for Income Tax Withheld (Form 499 R-1B); (iii) Quarterly Returns for Unemployment and Disability Insurance Tax (Form PR-SD-10); and (iv) Employee’s Quarterly Federal Tax Returns (Form 941-PR). Employers that have not yet electronically filed these forms may still perform late filings and qualify for the Benefit.
- Is registered with the Merchant’s Registry of the Internal Revenue Unified System at the PR Treasury (SURY System).
Amount of the Benefit
- Employer’s Category 1 – Eligible employers with a net taxable income over $10 million for taxable year of 2017 may have a Benefit of 26% of the first $6,000.00 of qualified wages paid or incurred for each eligible employee. Therefore, the maximum Benefit for each eligible employee will be $1,560.00 ($6,000.00 x 26%).
- Employee Category 2 – Employers with a net taxable income less than $10 million for taxable year 2017 may have a Benefit of 32% of the first $6,000.00 of qualified wages paid or incurred for each eligible employee. Therefore, the maximum Benefit for each eligible employee will be $1,920 ($6,000.00 x 32%).
In the case of regular corporations, the net taxable income will be taken from the amount reported on Part II, Line 35 of Form 480.2 (Corporation Income Tax Return) for taxable year 2017. In the case of passing-through entities, the amount will be taken from the amount reported on Part VIII, Line 34 of Form 480.2(EC) (Informative Income Tax Return Pass-Through Entity) for taxable year 2017. Eligible employers that have not filed their income tax returns at the time they request the Benefit (because they have requested automatic extensions through Form SC 2644) must estimate the net taxable income that they will be reporting in their income tax returns, in order to determine which category of eligible employer will be applicable.
Procedure to Request the Benefit
The Benefit may be requested only in electronic form through the digital platform designed by the PR Treasury, which eligible employers use to file the Employer’s Quarterly Return of Income Tax Withheld (Form 499R-1B). The PR Treasury will not accept or process any request on paper. The platform to request the Benefit will be available until Monday December 31, 2018. The request form can be accessed through the PR Treasury’s internet address: www.hacienda.pr.gov, under “Hacienda Virtual,” in the Employer’s Section.
Before requesting the Benefit, eligible employers must ensure that the information included in the request is correct, updated and matches with the information included in the Unemployment and Disability Insurance Tax Quarterly Returns (Form PR-SD-10) filed with the PR Department of Labor and Human Resources, for the quarters ended on September 30, 2017 and December 31, 2017; and the Withholding Statements (Form 499R-2/W-2PR) of year 2017, filed electronically before the PR Treasury.
Once the eligible employer completes and electronically files the request, the PR Treasury will process it and the Benefit will be paid through direct deposit to the bank account indicated by the employer in the request.
For purposes of the income tax return, the Benefit request will not affect the employer’s right to claim a deduction on wages paid and the amount of the Benefit will not be treated as taxable income.
Please note that the system will limit the qualified wages to $6,000 and will automatically compute the amount of the Benefit up to a maximum of $1,560 or $1,920, whichever is applicable, depending on the category of the eligible employer.
The request must be signed electronically, under penalty of perjury, that to the best of the applicant’s knowledge, the request is true, correct and complete. Both the PR Treasury and the U.S. Internal Revenue Service may use any method available to collect any Benefit paid incorrectly, due to incorrect, incomplete or fraudulent information provided. Any incorrect payment will be considered a deficiency under Section 6110.01 of the Puerto Rico Internal Revenue Code of 2011, as amended, subject to interest and surcharges.