#PRseLevanta – After Maria: Hurricane Maria’s Impact on Residency Status, Tax Exemption Applications and Tax Return Filings

By Jeanelle Alemar-Escabí* [originally published here]

Hurricane Maria’s effects on Puerto Rico are still being felt since it made landfall on September 20, 2017. More than 80% of the island remains without electricity and roughly 65.43% have water service, according to status.pr. This is the website set up by the Government of Puerto Rico to let residents keep track of Puerto Rico’s infrastructure. Many new residents who participate in the Act 22 tax incentives program have asked me about the traveling restrictions due to this hurricane and how the hurricane’s effects could affect their residency status and their tax planning. Also because of the lack of communications lately, I would like to mention other announcements by other government agencies that affect future tax exemption applicants and businesses that are currently operating in Puerto Rico.

IRS – Extension of Absence Period Due to a Major Disaster

The IRS has recently issued Notice 2017-56 and IR-2017-168 which provides disaster relief to individuals who would have otherwise lose their bona fide residency status if they are unable to comply with the presence test requirement because of the terrible effects caused by Hurricane Maria.

In normal circumstances, Reg. §1.937-1 provides that there is a 14-day period that can be counted as part of the days of presence in Puerto Rico when a major disaster occurs in the island. While FEMA issued the disaster declaration FEMA-4340-DR on September 20, 2017, Notice 2017-56 extends the 14-day period to 117 days. The IRS also issued IR-2017-168 to clarify that the 117 days counted in the absence period caused by Hurricane Maria begins on September 6, 2017, and ends on December 31, 2017. In other words, the days outside of Puerto Rico within the absence period can be counted to meet the presence test for the 2017 tax year for residents of Puerto Rico.

The Office of Industrial Tax Exemption at the Department of Economic Development and Commerce

The OITE has been partially operating at a command center that has been set up at the Puerto Rico Convention Center in San Juan. Although they are not fully operational, the OITE has issued one administrative order (“AO-2017-01”) and two informative bulletins (“IB-2017-01” and “IB-2017-02”) since September 20, 2017.

AO-2017-01 – Temporary Procedure to Apply to Act 14-2017

The AO-2017-01 establishes a temporary procedure to apply to Act No. 14-2017, the Incentives Act for the Retention and Return of Medical Professionals. Medical professionals are the individuals qualified to apply for this incentive law, such as surgeons, podiatrist, dentist, and resident physicians. Due to the island-wide power outages and the aftermath of Hurricane Maria, the OITE has developed a procedure to apply for this incentives act without the use of its online platform. It must be noted that the OITE has not developed a temporary procedure for the other incentives acts, such as Act 22-2012 and Act 20-2012.

IB-2017-01 and IB-2017-02 – Recent IRS Notices, Postponement of Incentive Applications, and Term Extensions

IB-2017-01 is to inform Act 22-2012 grantees and petitioners about the IRS’s Notice 2017-56 concerning the extended absence period of 117 days due to a major disaster, as explained earlier. IB-2017-02 is to inform about the postponement of tax incentive applications for the Economic Incentives Act (Act 73-2008), the Green Energy Incentives Act (Act 83-2010), the Export Services Act (Act 20-2012), the Individual Investors Act (Act 22-2012), and International Financial Entities Act (Act 273-2012) until further notice. As of October 17, 217, the Online Platform is back online and I expect that the OITE will announce soon that it will accept applications for these incentive laws.

The Puerto Rico Treasury Department

Since Hurricane Maria, the Treasury Department has issued a series of actions to implement tax and administrative relief. For example, Administrative Determination 17-21 (AD-17-21) establishes a temporary exclusion from taxable gross income for payments classified as “qualified disaster relief” made to an individual by his or her employer to help compensate for the damages caused by the hurricane.

Qualified Disaster Relief Payments and Interest-free Loans

AD-17-21 defines “qualified disaster relief payments” as (a) payments made directly to suppliers of goods and services for necessary and reasonable expenses of the individual or his/her family members, such as food, medicine, gas, housing, medical expenses, child or dependent care, power generators and funeral expenses incurred as a result of the hurricane; (b) payments made directly to suppliers of goods and services for expenses incurred for the repair or rehabilitation of a principal residence, or for repairs, to the extent that the need for the repairs, rehabilitation or replacement is attributable to the hurricane; (c) payments made directly to the employee to help cover the costs of damages suffered as a result of the hurricane; (d) payments made to an individual by the federal, state or local government or any agency or instrumentality for damages suffered as a result of the hurricane that are not covered by an insurance policy. Please note that payments that discriminate in favor of highly compensated employees or that take into account an employee’s position or salary will not be considered qualified disaster relief payments.

These payments must also meet these requirements: (1) the payments must be made between September 21, 2017 through December 31, 2017; (2) the payments made directly to an individual must be in lieu of lost wages and as a result of the hurricane, and may not exceed a total of one thousand dollars ($1,000) per month; and (3) the payment must be in addition to other compensation paid by the employer to the employee on account of employment.

Interest-free loans offered by employers to their employees from September 21, 2017 to June 30, 2018 will not be considered taxable gross income if the loan’s purpose is to provide assistance to the employee for reasonable and necessary expenses and construction and repair expenses of an employee’s primary residence. The total amount of the loan cannot exceed $20,000.

Extended Due Dates for Certain Tax Filing and Payments

In the month of September, the Treasury Department extended the due dates that were previously extended as a result of Hurricane Irma. According to Informative Bulletin 17-18 (BI-RI-17-18), the due date of September 20, 2017 for the filing of the monthly SUT Tax Return corresponding to August 2017 was extended to September 27, 2017. Additionally, payments that were due on September 22, 2017, as established on Circular Letter 17-13 (CC-RI-17-13) and Informative Bulletin 17-17 (BI-RI-17-17) were extended to September 27, 2017. All other due dates that were extended on Circular Letter 17-13 (CC-RI-17-13) and Informative Bulleting 17-17 (BI-RI-17-17) remained in effect.

At the end of September, the Treasury Department extended deadlines with Informative Bulletin 17-21 (BI-RI-17-21) for tax returns filings and tax payments that were due within the period both hurricanes affected the island. The following extended due dates do not apply to “large taxpayers” as defined in the Puerto Rico Internal Revenue Code:

Returns or declarations due, including extensions, within the September 19 and October 20, 2017, were extended 20 calendar days. Payments or deposits within the period of September 19 and October 20, 2017, were extended 20 calendar days as well. Any other returns, payments or declarations that were extended by CC-RI-17-13, BI-RI-17-17, and BI-RI-17-18 (which extended dates because of Hurricane Maria) were automatically postponed for 20 additional calendar days from the dates indicated in the letters and bulletins.

Finally, the Treasury Department issued Informative Bulletin 17-22 (BI-RI-17-22) to clarify that the taxpayers who comply with BI-RI-17-21​will not be subject to penalties, fines, interest, and surcharges. If the Treasury Department’s system imposes any sanctions, the Treasury Department will correct the error once their operations return to normal. If the Treasury Department does not correct the error, the taxpayer must rectify the error with the Treasury Department.

Moving Forward

The past few weeks have been a huge challenge to residents of Puerto Rico and the Government of Puerto Rico. Many of us who are lucky enough to be able to work after the hurricane’s aftermath are the people who are tasked to rebuilding a better Puerto Rico. The storm is causing the island to reflect on the foundation it has been built on and we have a chance to leap to better technologies and infrastructure taking into consideration the island’s limitations. For example, new ways of producing and distributing energy, food, and water must be evaluated. I believe we must take this as an opportunity to grow and rebuild for a better future.

The author wants to thank Jan Albino for his contribution to this post. This is a personal blog. The content of this communication has been prepared for educational purposes. Its intention is not, and it does not constitute, legal advice. It is recommended to everyone who reads this communication to seek advice from his/her lawyer and/or financial advisor before carrying out any transaction described here. Taxpayers are urged to consult their tax advisers regarding specific questions as to U.S. federal or Puerto Rico taxes or as to the consequences of doing business in Puerto Rico and the application of these laws to their particular circumstances. Circular 230: This communication was not written to be used, is not intended to be used and cannot be used by any taxpayer for purposes of avoiding United States federal income tax penalties that may be imposed. This material is written not to support the promotion or marketing of any transaction. We are providing the foregoing disclaimer to satisfy obligations we have under Circular 230, governing standards of practice before the IRS.

* Ms. Alemar-Escabí is the managing member of the DBPR group (Doing Business Puerto Rico). Before starting DBPR, she founded JAE Legal Services LLC. She also worked as part of the tax practice group of the law firm Pietrantoni, Mendez & Alvarez LLC from 2005 to 2015. Also, Jeanelle served as tax advisor for the Secretary of the Puerto Rico Treasury Department from 2001 to 2004. Jeanelle’s practice includes advising clients on federal and state income tax issues, corporate taxation, and the design and implementation of corporate reorganizations. Also, she advises clients as to local taxation issues such as property, municipal license, excise, and sales and use taxes. She has experience negotiating tax exemption grants and tax credits under the Export Service Act (Act 20), the Resident Investors Act (Act 22) , Puerto Rico Tax Incentives Act (Act 73) and the Puerto Rico Tourism Development Act (Act 74), among others. In addition, Jeanelle has participated in the design, execution and amendment of tax qualified and non-qualified benefits plans, and has assisted clients in complying with the filing requirements established by the Puerto Rico and Federal governmental agencies. Jeanelle is also a Certified Public Accountant and a Notary Public.

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