I am trying to figure out how to handle my taxes this year and requested some information from my accountant. Here is what he sent me, we will be having a phone conversation about this in a couple days so he clarify what all this means to me. I’ll let you know if I found out any relevant tax information for US citizens that now live in Puerto Rico.

    U.S. Federal Income Tax Consequences (Individual)

  • If a U.S. citizen is a “bona fide resident” of Puerto Rico during the “entire taxable year,” income derived from Puerto Rico sources shall not be included as gross income and therefore exempt from US Federal Income Tax. However, no deductions or credits may be taken if such deductions and credits are properly allocable or chargeable against amounts excluded from gross income (See IRC Sec. 933(1)).
  • To establish “bona fide residency” in a US Possession (including Puerto Rico), a U.S. citizen must satisfy the presence test by: (i) being present in the relevant possession for at least 183 days during the taxable year; (ii) present in the U.S. for no more than 90 days during the taxable year; (iii) during the taxable year had earned income in U.S. not exceeding $3,000 and was present for more days in the relevant possession than in the U.S.; or (iv) had no significant connection to the US during the taxable year (See Treas. Reg. 1.937-1(c)).
  • In addition to satisfying the presence test, in the year of a move to a U.S. possession, the individual must: (i) for each of the 3 taxable years immediately preceding the taxable year of the change of residence, the individual is not a bona fide resident of the relevant possession; (ii) For each of the last 183 days of the taxable year of the change in residence, the individual does not have a tax home outside the relevant possession or a closer connection to the US or a foreign country other than to the relevant possession; and, (iii) for each of the 3 taxable years immediately following the taxable year of the change in residence, the individual is a bona fide resident of the relevant possession (See Treas. Reg. 1.937-1(f)).
  • If the requirements above are met, then the individual will be considered a bona fide resident of the relevant possession (Puerto Rico) for the entire year (See example 8 to Treas. Reg. Sec. 1.937-1(g)).
  • However, if these requirements are not met, the individual may not be considered a bona fide resident of the relevant possession for the entire year and thus all worldwide income would be subject to U.S. Federal Income Tax laws (See Bergersen v. Commissioner, 109 F.3d 56 (1st Circ., 1997); John Motion v. Commissioner, TC Memo 1975-43).

    Benefits for Establishing Operations in Puerto Rico;

  • Puerto Rico offers significant tax benefits and incentives to certain qualified businesses that relocate to Puerto Rico.
  • A majority of these benefits and incentives must be obtained by submitting an application to the relevant Puerto Rico tax authorities and/or designated agencies.
  • One of the benefits includes a total current expense deduction in the purchase, acquisition, or construction of buildings, structures, machinery, and equipment used in the rendering of certain qualified services.
  • Generally, if the corporation is in the service sector, it must meet the following requirements: (i) the service rendered must be on a commercial scale; (ii) the service must be rendered for the benefit of markets outside Puerto Rico; (iii) at least 80% of the employees of the service unit must be residents of Puerto Rico; (iv) the service must be a designated service; and (v) the qualifying service unit must employ a minimum of 5 persons in its eligible service operations.