Puerto Rico: New Rules on Using Tax Credits

A resolution outlining new guidance on the use of tax credits in Puerto Rico was released Thursday. The ruling applies to tax credits granted as of March 7, 2017, for tax year 2017 and thereafter.

Taxpayers can use tax credits to offset up to 25% of their income tax liability for 2017 and the three years after, for a total of four tax years. The credit holders, however, may submit a request with the Authorization Committee for Disbursements and Tax Credits (the “Committee”) to extend the period for using the credits an additional three years. Taxpayers must submit the request 90 days before the four-year period ends. The Committee will grant the request if it is compatible with the Puerto Rico’s Certified Fiscal Plan and the Liquidity Plan of the General Fund. The Resolution allows credit holders to sell or assign the tax credits if permitted by the particular statute, and the buyer or assignee will be subject to the limitations of this Resolution. Any unused credits at the end of the four-year period or three-year extension will expire.  To claim tax credits, taxpayers must have reported the credits by May 2017 on Form 480.71, “Information Return on Tax Credits Held.”

For tax credits available to be used for the first time in 2017, however, the 25% limit will not apply until 2018. Those newly available tax credits can be used toward 2017 income taxes without limitation. Beginning in tax year 2018 and for the subsequent two years after, those credits will be impacted by the 25% cap. Taxpayers may sell or assign the tax credits if permitted by the particular statute, and the buyer or assignee will be subject to the provisions of the Resolution.

Implications from fiscal distress in Puerto Rico

The ruling hopes to normalize cashflow and spending in Puerto Rico’s economy, which has struggled through a decade-long depression and owes billions in debt. The three-year extension is contingent on the uncertain future health of the country’s finances. Because of this, affected taxpayers need to be aware of any developments that may occur. Anyone with questions on how to use tax credits in Puerto Rico should monitor the island’s fiscal situation and the availability of the extensions.

The decision on tax credit usage in Puerto Rico does not address how credits requested prior to March 7, 2017 may be approved or utilized. Guidelines on that issue are anticipated to be released soon.

The resolution does not apply to certain tax credits, including waivers approved by the Authorization Committee for Disbursements and Tax Credits and any credits granted through agreements signed prior to March 7, 2017 under Section 6051.07 of Puerto Rico’s code. Alternative minimum tax credits and foreign tax credits granted under Sections 1051.01, 1051.02 and 1051.03 of the Puerto Rico code and tax credits against the 4% excise tax under Act 154-2010 are not subject to the resolution.

To learn how this can impact you, contact a Caroprese tax expert.

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