Tax Benefits of Emergency Payments and Loans to Employees
October 6, 2017
On October 4, 2017 the Department of the Treasury issued Administrative Determination No. 17-21 (“AD 17-21”) establishing a temporary tax exemption on payments made by an employer to its employees to help repair or compensate for damages and losses suffered as a consequence of Hurricane Maria.
Generally, any payment made by an employer to an employee is considered “salary” under Puerto Rico’s Internal Revenue Code. However, AD 17-21 provides that all “Qualified Payments for Disaster Assistance” (“QPDA”), will be excluded from the gross income of the individual receiving the aid, making it exempt from taxation.
The QPDA includes any payment made to an individual to:
- Cover for expenses needed to buy food, medicine, fuel, shelter, electric generators, medical expenses, child and dependants’ care expenses, and funeral expenses incurred as a result of the damages caused by Hurricane Maria, as long as the payment is made directly to the supplier of the good or service;
- Cover for expenses incurred for the repair or rehabilitation of a principal residence, as long as the payment is made directly to the supplier of the good or service;
- Payments made directly to an individual as monetary assistance to cover expenses for any damage or loss suffered as a result of the damages caused by Hurricane Maria; or
- Payments made by the federal, state or local government, or agency or instrumentality thereof, as a result of damages caused by Hurricane Maria to promote general welfare not covered by insurance.
In order for the amount received by the affected individual to qualify as a QPDA, and therefore considered exempt from income tax, it should comply with the following requirements:
- The payments should be made to the individuals during the period covered between September 21, 2017 to December 31, 2017;
- The payments received by the individuals should be in substitution of the salary not received during the period in which they were out of employment due to such disaster; and
- In the case of payments made by employers to their employees:
- The total amount paid shall be in addition to the regular compensation that the employee receives;
- The employer cannot discriminate in favor of “Highly Compensated Employees”, as such term is defined by Section 1032.06(d)(2); and
- The payments that are made directly to the employee shall be limited to:
– $1,000 per month; and
– It cannot be attributable or related in any form to the position or salary received by the employee.
If all of these requirements are not met, then the payment will be considered “salary” and in consequence will not be exempt from income tax.
Every employer that makes a QPDA shall, no later than January 31, 2018, provide an affidavit stating the name and social security number of each employee to whom the QPDA was made and the total amount paid. The Department of the Treasury will inform how to electronically submit the documents and information requested.
Also, the employer shall include the QDPA as exempt income in the 2017 employee’s withholding statement (Form 499 R-2/W-2PR).
Payments made by an employer in compliance with the AD 17-21 can be deducted from the employer’s taxable income for purposes of determining its net taxable income.
In addition, the AD 17-21 also provides that employers may grant interest-free loans to their employees between September 21, 2017 and June 30, 2018, to cover the necessary and reasonable expenses for the construction or repairs to their principal residence, resulting from damages caused by Hurricane Maria. Said loan will not be considered as income, provided that the total amount of the loan or loans granted during said period does not exceed twenty thousand dollars ($20,000). These loans may be granted by employers in addition to any QPDA.
We at Goldman Antonetti remain committed in assisting you and your business to adjust to these changes in the Law. If you need further assistance in this area, please feel free to contact the following members of our Tax Department:
Rebecca Cuevas-Fontán, Esq., CPA
Fernando J. Bruno Ramírez de Arellano, Esq.
Roberto Montalvo-Carbia, Esq.
Although the information included in this document may concern legal issues, it is not a legal opinion or professional advice and clients shall not use it as such. We assume no responsibility or liability of any kind for any information contained herein, and we expressly disclaim all liability for any claim for damages arising from the use, reference to, or reliance on, such information. If legal or other expert assistance is required, the services of a competent professional should be sought.
IRS Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.