Internal Revenue Circular Letter No. 19-14 establishes the procedures for a taxpayer to submit a report of “agreed upon procedures” (AUP) or “compliance attestation” (AU) in order to deduct what otherwise would be limited expenses for ABT or AMT purposes.

If the taxpayer chooses to take into account all such expenses in order to determine its net income, it must submit together with its income tax return, an AUP prepared by a certified public accountant (CPA) who is licensed to practice in Puerto Rico.

The circular letter establishes the type of report, its content, and the procedures that the CPA must follow in the preparation of the report. 

Flow-through entities will be required to submit the AUP at the level of the flow-through entity. Once submitted, the owners can claim their distributive share of the expenses to determine the net income subject to ABT and AMT, as applicable, for their own returns.

Legislation (Act 257) enacted in October 2018 overhauled the ABT and AMT computations for individuals and corporations, respectively. As a result of these changes, certain expenses are not deductible for purposes of these computations unless they are subject to certain AUPs.

The changes are effective for tax years beginning after December 31, 2018. Therefore, 2019 is the first year that these provisions would apply for calendar year taxpayers.

To comply with the measures of the Puerto Rico Internal Revenue Code (2011), an AUP is required in order to deduct certain expenses (listed below). The language the CPA will use in the report and the scope of the procedures to be performed must be according to the professional standards of attestation.

Expenses subject to the AUP report:

• Automobile expenses
• Other motor vehicle expenses
• Repairs and maintenance
• Travel expenses
• Meals and entertainment
• Office supplies
• Materials used directly in the industry or business
• Stamps, vouchers and customs
• Shipping and postage
• Uniforms
• Parking and tolls
• Office expenses
• Bank charges
• Contributions to educational contribution accounts for employee’s beneficiaries
• Expenses incurred or paid to stockholders, persons or related entities
• Losses from fires, storm, other casualties or theft
• Bad debts
• Administration charges, not included in an information return
• Expenses on properties leased to the Puerto Rico Industrial Development Company or warehouse of the Puerto Rico Trade and Export Company
• Subscription and membership expenses
• Expenses related to licenses and computer programs that cannot be capitalized
• Charitable contributions
• Deductions under Act 185-2014
• Any other expenses that are not subject to be included in an information return

Expenses deductible to determine the net income to tax without the need of an AUP:

• Interest on business debts
• Taxes, patents and licenses, including municipal taxes, sales and use tax, excise taxes and the State Insurance Fund policy
• Depreciation and amortization of property used in the business
• Contributions to qualified pension plans
• Deduction to employers who employ disable persons

Expenses deductible to determine the regular tax, ABT, and AMT, as applicable, provided that those expenses were duly informed in the withholding statement or the corresponding information return:

• Wages paid to employees, including officers and directors
• Employer portion of Social Security (FICA and Medicare)
• State and federal unemployment insurance
• Services provided
• Subcontracted services
• Commissions paid to other businesses or merchants
• Rental expenses paid including rental of personal and real property
• Insurance premiums paid for health or accident insurance, and property, contingency, public liability and surety insurances
• Telecommunication services including internet and cable or satellite television services used in industry or business
• Water and electric power services
• Ads and advertising services
• Royalties
• Special contribution for professional and advisory services under Act 48-2013
• Interest paid on mortgage loans and car finance leases
• Tuition fees paid to benefit employees
• Maintenance fees paid to residents or condominium associations
• Seminars, trainings and continuing education expenses for employees

The AUP, prepared according to the circular letter, must be submitted together with the filing of the 2019 and subsequent income tax returns in order to be eligible for the deductions. The taxpayer and the CPA can agree on which categories of expenses will be subject to the AUP. However, the CPA must inform in its report which categories were subject to the AUP. Those expenses that were not considered for the AUP, will not be allowed when determining the net income subject to ABT or AMT, as applicable.

Corporations with a volume of business equal to or greater than $3 million during a tax year must submit financial statements accompanied by an auditor's report issued by a CPA licensed to practice in Puerto Rico. However, audited financial statements may be voluntarily submitted by any taxpayer regardless of the volume of business generated. The auditor report must indicate that the financial statements have been prepared according to U.S. GAAP. 

If audited financial statements are submitted with the return, it is not necessary to submit the AUP in order to deduct any expense.

Act 257 amended the Puerto Rico Internal Revenue Code to require an information return for payments related to advertising, insurance premiums, telecommunication, internet access, and cable or satellite television services. Administrative Determination 19-08 was issued to notify the person responsible to file the Form 480.7E with Puerto Rico’s Treasury Department for tax year 2019.

The Puerto Rico Internal Revenue Code established that the responsible person is the one to which the payment is made (service providers). However, for calendar year 2019, the person responsible for preparing and filing Form 480.7E will not be the person or entity that receives the payment, but the one paying for the services during the year.

This determination is made as an exception only for the 2019 calendar year, with the purpose of giving insurance, telecommunication, and advertising companies additional time to program their systems and to obtain the necessary data to comply with the provisions of the Puerto Rico Internal Revenue Code.

Taxpayers will be unable to claim such payments as deductible expenses for ABT or AMT if they fail to file Form 480.7E.

Forms 480.7E must be filed no later than Friday, February 28, 2020. In addition, it can only be filed electronically through SURI (the Spanish acronym for the “Internal Revenue unified system”).

Any natural or legal person receiving payments for advertising, insurance premiums, telecommunication, internet access, and cable or satellite television services must provide each of their customers the following information no later than January 30, 2019.

• Full name (including the two surnames if it is a natural person or legal name if a legal entity)
• Physical address and postal address
• Social security number or employer identification number.

For payments received after December 31, 2019, the entities receiving payments for the above-listed services will be required to file an annual information return with any commercial or residential client. The original copy of the declaration must be provided to the payer no later than February 28 following the calendar year for which the copy of the declaration must be filed with the Secretary.

For more information, contact a KPMG tax professional in Puerto Rico: 

Rolando Lopez | +1 (787) 622-5340 | rlopez@kpmg.com

Carlos Molina | +1 (787) 622-5311 | cmolina@kpmg.com