TAX CHANGES FOR THE 2019 INCOME TAX ALTERNATIVE BASIC TAX

 

Act No. 257 of December 10, 2018, better known as the “Tax Reform” will bring changes to the Income Tax Return of individuals and corporations, effective from the year 2019 onwards.

One of the most significant changes is the Alternate Basic Tax (CBA) in the case of individuals and the Alternative Minimum Tax (ATM) in Corporations excluding those who operate under a Grant. Allowable expenses are limited to those that match an Informative Return or are subject to an Agreed Upon Procedures Report (AUP). The ordinary net income is recalculated by eliminating disallowed deductions.

Final tax liability will be the greater of the regular tax rates or the tax computed as per the CBA or ATM tax rate. Corporations have a minimum tax of $500, even if it is dormant or has a net loss.

 

Individuals- Alternative Basic Tax (CBA for its acronym in Spanish)

The CBA recalculated net income  will be subject to an alternate basic tax with a rate of 1% up to 24% for income in excess of $25,000.

 

Net Income Subject to Alternate Basic Tax

Tax Rates:

  In excess of $25,000 but not more than $50,000  1% 
  In excess of $50,000 but not more than $75,000  3% 
  In excess of $75,000 but not more than $150,000  5% 
  In excess of $150,000 but not more than $250,000  10% 
  In excess of $250,000   24% 

 

The tax liability payable will be determined based on what is greater among the Regular Tax calculated according to the ordinary or preferential rates, or the tax calculation of the CBA.

 

Alternative Minimum Tax (AMT) (Corporations)

In the case of Corporations, there is an additional tax known as the Alternative Minimum Tax (AMT). It is the equivalent of the CBA of individuals. Allowable expenses are limited to those that match an Informative Return or are subject to an Agreed Upon Procedures Report (AUP). The ordinary net income is recalculated by eliminating disallowed deductions.

If the AMT recalculated net income exceeds an exempt amount of $50,000, plus 25% of salary expenses, an Alternative Minimum Tax is computed at an 18.5% rate (23% for corporations with volume greater than $ 3 million) over said net income.

The tax liability payable is determined based on what is greater between the regular tax, according to the ordinary or preferential rates, or the calculation of the AMT with a minimum tax of $500. This means that every corporation will be required to pay a minimum contribution of $500 even if the corporation has losses.

 

Agreed Upon Procedures Report (AUP)

 

In order to claim as deductibles the expenses that do not require an Informative Return in the calculation of the CBA or AMT, it is required to present with the return an AUP prepared by a CPA licensed in PR, in which it is validated that the expenses claimed in the Tax Return are ordinary and necessary business expenses. The taxpayer must pay the higher between the regular tax or the CBA for individuals (AMT for corporations). There is a bill in the Legislature on this issue, so we will be updating it once it becomes Law.

Minimum Tax Recalculating Net Income

In order for the expenses to be claimed as allowable in the computation of CBA, it is required that they match an Informative Return detailed below:

  • Wages
  • Services Provided
  • Travel Expenses
  • Health Plans
  • Property Insurance Expenses
  • Telecommunications Services
  • Internet Services
  • Electricity Services (A.E.E)
  • Water Services (A.A.A)
  • Advertising Expenses
  • Homeowners Association Fees Paid
  • Professional Associations Fees Paid to Benefit the Employees
  • Continuing Education for Professions and Trades of Employees

The following expenses do NOT require an Informative Return, so they are considered non-deductible for the calculation of CBA unless the taxpayer includes with his return an Agreed Upon Procedures Reports (AUP):

  • Car Expenses
  • Repair and Maintenance
  • Travel Expenses
  • Meals and Entertainment Expenses
  • Office Supplies and Effects
  • Materials used Directly in the Provision of the Service
  • Stamps and Vouchers
  • Shipping and Postage Charges
  • Uniforms
  • Parking and Tolls
  • Office Expenses
  • Bank Charges
  • Bad Debts Expenses

 

Informative on behalf of Taxpayer

It is essential to mention that the Informative Return (480.6A, 480.6SP) must be in the name of the Taxpayer; otherwise, they will NOT be able to claim the expense in the computation of the CBA or AMT which could result in a greater tax to be paid.

This could happen to an incorporated taxpayer if expenses are made in the personal name of the owner instead of the taxpayer entity since they do not receive a Form 480 in the name of the corporation.

 

Annual payments to providers under $500

Although the requirement of the Law is to present all amounts greater than $500 as part of the Informative Return, or Form 480, if the Taxpayers have many disbursements below $500, they must verify whether it is convenient to file an Informative Return to claim these expenses to take them as deductions in the computation of CBA or AMT.

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