Tax Exemption on Income from Qualified Payments and Loans to Employees or Independent Contractors Made to Aid and Overcome the Emergency Declaration due to COVID-19

By: Rebecca Cuevas-Fontán, Esq.

April 01, 2020

On February 19, 2020, the Puerto Rico Treasury Department (“PRTD”) issued Internal Revenue Circular Letter 20-08 (“CL 20-08”) to establish the rules on Qualified Disaster Assistance Payment (“Qualified Payments”) allowed under the Puerto Rico Internal Revenue Code (the “Code”) due to the emergency caused by the seismic activity that has been taking place in the Southern and Central Areas of the main island of Puerto Rico . On March 29, 2020, the PRTD issued Internal Revenue Circular Letter 20-22 (“CL 20-22”) to extend the provisions of CL 20-08 to Qualified Payments made as a consequence of the state of emergency declared by the Governor of Puerto Rico due to the effects of the Coronavirus (COVID-19) pandemic.

As such, for purposes of the Qualified Payments established in CL 20-08, the PRTD decided to include payments made to an employee or independent contractor as a result of the state of emergency declared by the Governor related to COVID-19. Qualified Payments will also include those payments made by a private sector employer to its nonexempt employees who have not worked during the mandatory lockdown period and that, despite said employee not having been able to work, the employer offers them a payment or remuneration, at its absolute discretion, for the sake of assisting them during the emergency.

As explained in our previous Client Alert issued on February 21, 2020, CL 20-08 provides that any Qualified Payment as defined by Section 1031.01(b)(16) of the Code, shall meet ALL the following additional requirements to be considered excluded for purposes of being exempt from income tax purposes:

• Payments must be made to the individual during the period between February 1, 2020 and April 30, 2020 (“Eligible Period”);
• The total amount paid shall be in addition to the ordinary compensation received by the employee;
• The employer cannot discriminate in favor of highly compensated employees, as such term is defined by Section 1081.01(d)(3)(E)(iii) of the Code;
• Payments made are limited to:

• $2,000 monthly for each employee or independent contractor, and

• cannot be attributable in any way, or related to the position or salary received by the employee,

• The total amount of Qualified Payments by employee or independent contractor made during the Eligible Period shall not exceed $4,000.

Likewise, CL 20-22 further extends the provisions of CL 20-08 related to the interest-free loans granted by the employer to its employees or independent contractors, to loans made by reason of the state of emergency due to COVID-19. The employer may grant more than one loan of this type to the extent that the total amount of all the loans granted during the Eligible Period does not exceed $20,000.

Do not hesitate to contact us should you need assistance in tailoring your business’ response to this crisis. Our Firm will continue to remain available to all our clients. Our attorneys are monitoring actions by the U.S. Government, the Commonwealth of Puerto Rico, and local municipalities as additional measures are put into place to mitigate and lessen the extent of this crisis. At Goldman Antonetti & Cordova LLC, we look forward to providing client-focused assistance on how to respond to current events to minimize negative effects on your business.

Goldman Antonetti & Córdova, LLC stands ready to assist you and your business to adjust to Puerto Rico’s regulatory and legal changes. If you need further assistance in this area, please contact any of the following members of our Tax Department (note that during this emergency, it will be easier for you to communicate with us through electronic mail, as provided below):

Disclaimer: 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.