06/12/2019
Changes in Act 257 “2018 Income Tax Reform”
Impacting Informative returns preparation for the year ended December 31, 2019
The enactment of Act 257-2018 approved on December 10, 2018 (the 2018 income tax reform) amended several section of the Puerto Rico internal Revenue Code. This reform caused significant changes in requirements related to annual informative returns, among others. At this stage we want to highlight the provisions that impact Informative returns requirements and the deduction of certain ordinary and necessary expenses corresponding to the 2019 taxable year.
Following is a summary of the most significant provisions impacting the preparation of the informative returns for taxable year 2019:
1. All taxpayers are required to file informative returns for the following category of expenses, in order to be able to claim their deductibility for the calculation of the alternative basic tax (ABT), in the case of individuals or alternative minimum tax (AMT) in the case of corporations (Form 480.6A):
• Professional services
• Commissions
• Rent of real and/or personal property
• Electricity (AEE)
• Water (AAA)
• Royalties
• Professional associations fees
• Homeowners associations fees
• Professional Continuing education
2. Taxpayers following the accrual bases of accounting and / or with an economic year different than December 31st, must present a reconciliation statement between the expenses reflected on books and the informative returns.
3. Annual informative returns related to the following concepts of expenses must be issued by the providers to their customers (New Form 480.7E):
• Property, contingency, public liability insurance and bonds
• Contributions to health and or accident plans
• Telecommunications
• Advertising
• Internet and cable or satellite television
4. All payments made for services, regardless of the amount, must be reported on an informative return even if they are less than $500, in order to be allowable as a deduction for purposes of determining taxable income subject to alternative basic tax in the case of individuals or alternative minimum tax in the case of corporations.
5. For purposes of determining the Alternative Basic Tax in the case of individuals or the Alternative Minimum Tax in the case of corporations:
• Ordinary and necessary expenses which are not required to be informed in an annual informative return to be allowable for a deduction, taxpayer must accompany their income tax return with one of the following reports as applicable:
a) Taxpayers with gross revenues less than $3MM – Agreed Upon Procedures Report (AUP) prepared by an independent Certified Public Accountant (CPA) authorized to practice in PR or Audited Financial Statements along with the Supplementary information.
b) Taxpayers with gross revenues above $3MM - Audited Financial Statements along with the supplementary information prepared by an independent Certified Public Accountant (CPA) authorized to practice in Puerto Rico, as previously required.
6. The following ordinary and necessary expenses must be supported either by an Agreed Upon Procedures report or Audited Financial Statements, as applicable, in order to be allowable as a deduction for Alternative Basic Tax or Alternative Minimum tax calculations:
- Automobile Expenses -Contributions towards and educational contribution account for the benefit of employees
- Repairs and maintenance -Expenses incurred or paid to shareholders, persons or related entities outside of PR
-Travel Expenses
-Bank Charges
-Meal and Entertainment expenses -Expenses incurred or paid to shareholders, persons or related entities
-Office supplies and effects -Losses due to fire, hurricane, other accidents, or theft
-Stamps, vouchers and tariffs
-Bad Debts
-Shipping and postage expenses
-Administration charges
-Uniforms
-Subscriptions and memberships
-Parking and tolls -Non capitalizable licenses and computer programs
-Office expenses
