On February 20, 2020, the Puerto Rico Treasury Department (PR Treasury) issued Internal Revenue Circular Letter No. 20-08 (CC RI 20-08) granting employers temporary income tax exemptions over payments and certain benefits made to their employees and/or independent contractors for relief due to the recent and continued earthquakes that have affected the Island since January 6, 2020. These employer-provided payments must be considered "Qualified Payments Made for Disaster Assistance" and meet certain other requirements to be tax-exempt.
Pursuant to CC RI 20-08, a "Qualified Payment Made for Disaster Assistance" means any amount paid to, or for the benefit of, an employee:
- To supply, reimburse or pay necessary and reasonable expenses (such as food, medicine, gasoline, lodging, medical expenses, child care expenses, dependent care expenses, purchase of power generators, expenses incurred for potable water for the home and funeral expenses) to individuals or their family members incurred as a result of the earthquakes.
- To reimburse or 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 movable property in the residence, to the extent the need for the replacement, repair, or rehabilitation is due to damage caused by the earthquakes 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 the earthquakes.
- Payments made by the federal, state or local government or any government agency or instrumentality as a result of damages or losses caused by the recent earthquakes, 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 from February 1, 2020 through April 30, 2020 (Eligible Period);
- 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);
- Payments must be limited to a maximum of $2,000 per month, and cannot be attributable, or related, to the position occupied by the employee or the salary that the employee receives; and
- The total amount of "qualified payment" made to employees or independent contractors during the eligible period may not exceed $4,000 per worker.
Loans to Employees without Interest
In addition to the payments described above, employer-provided interest-free loans to employees or independent contractors to cover reasonable and necessary expenses for themselves or their families, and expenses for the construction or repair of the employee's or independent contractor's principal residence incurred as a consequence of the recent earthquakes, will not be considered taxable income if: (i) they are provided from February 1 through April 30, 2020; and (ii) the amount of the loan does not exceed $20,000 per worker. 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 Qualified Payments Made for Disaster Assistance.
Any Qualified Payments Made for Disaster Assistance made by employers for their employees and/or independent contractors must comply with the reporting requirements set forth by the PR Treasury.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.