Puerto Rico

Corporate - Deductions

Last reviewed - 10 November 2023

All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business are deductible by corporations operating in Puerto Rico.


A reasonable depreciation allowance is deductible for the exhaustion, wear and tear, and obsolescence of property used in business. The most common depreciation method used by corporations is the straight-line method. Nevertheless, any other consistent method may be used in lieu of the straight-line method as long as it is in accordance with the recognised trade practice. In addition, a corporation (other than one that is exempt under an Industrial Incentives Act) can elect an accelerated depreciation method for new or used tangible property acquired by purchase in taxable years commencing after 30 June 1995.

For property acquired after 31 December 2009, when using the straight-line depreciation method, the useful life has to be determined based on the same rules of accelerated depreciation.

Assets Useful life (years)
3 year property (e.g. computers, electronic equipment) 3
5 year property (e.g. automobiles, transportation equipment) 5
7 year property (e.g. certain furniture and fixtures, air transportation equipment) 7
10 year property (e.g. furniture and fixtures, printing equipment, other machinery and equipment) 10
15 year property (e.g. certain air transportation equipment, natural gas plants) 15
20 year property (e.g. vessels, land improvements) 20
Real property leased for residential purposes 30
Other real property 35

For intangibles (other than goodwill) acquired or created after 1 September 2010, the deduction is calculated using the straight-line method over the lower of a useful life of 15 years or the intangible’s useful life.


The cost of goodwill is generally capitalised and amortised ratably over 15 years.

Start-up expenses

Generally, start-up expenditures may be deducted in the tax year in which the trade or business begins or they may be ratably amortised over five years.

Interest expenses

In general, interest expense is deductible without limitation. However, interest expenses related to exempt income are not deductible. If interest is paid to a non-Puerto Rico resident related party, a 29% withholding at source applies. If the 29% withholding is not withheld, no deduction is available.

Bad debt

Bad debt resulting from a trade or business may be deducted in the year the debt becomes worthless (i.e. uncollectible). The reserve method is not admissible for Puerto Rico purposes.

Charitable contributions

Deductions for allowed charitable contributions are limited to 10% of net income, computed regardless of the contributions. These deductions are allowed to the extent they are made to charitable organisations organised under the laws of Puerto Rico, the United States, or any US possession that are qualified by the Secretary of the PRTD and provide services to residents of Puerto Rico.

Rent expense

Corporations are entitled to a rent expense deduction if the rented property is used in the business.

Employee remuneration

Corporations may deduct payments of reasonable salaries or other compensation for services actually rendered.

Insurance premiums

Insurance premiums paid or accrued on risks related to a trade or business are deductible, as well as premiums on group life policies covering employees where the beneficiary is not the corporation. No deduction is allowed for premiums paid to an insurance company not authorised to provide insurance in Puerto Rico or through an agent or broker not authorised to operate in Puerto Rico.

Meals and entertainment

Meals and entertainment expenses are deductible, subject to a 75% limitation. Travelling expenses would be subject to a 50% limitation.

Automobiles expenses

A corporation is allowed to depreciate non-cargo automobiles used in a trade or business over a five-year useful life (three years in the case of sales persons) up to a maximum base of USD 30,000 for a maximum annual depreciation of USD 6,000.

On the other hand, for non-cargo automobile maintenance expenses (e.g. gas, repairs, insurance), a deduction based on USD 0.60 per mile is allowed. For taxable years commenced after 31 December 2018, the actual maintenance expense of a vehicle would be allowed in lieu of the mileage.

Fines and penalties

Penalty payments, such as with respect to Commonwealth taxes, whether on account of negligence, delinquency, or fraud, are not deductible from gross income.


A corporation is allowed a deduction for taxes paid (except for Puerto Rico CIT), including income tax paid to the United States, its other possessions, and any foreign country. The deduction is in lieu of claiming a foreign tax credit.

Other significant items

The cost of incidental repairs (not adding value to the property) is deductible as a business expense.

Subject to certain limitations, savings and retirement plans for the benefit of employees are deductible if qualified by the Secretary of the Treasury.

Net operating losses (NOLs)

All corporations are generally entitled to the NOL deduction in computing their tax. NOLs created from taxable years beginning prior to 31 December 2012 (and after 31 December 2004) may be carried forward for 12 taxable years (there are no carryback provisions). For taxable years beginning after 31 December 2012, the NOL carryforward period is ten years. The use of the NOL deduction is limited to 80% of the taxable income for the year. The NOL to be carried forward should exclude the deductible portion of the expenses or payments to foreign affiliates.

For taxable years commenced after 31 December 2018, the NOL deduction limitation is increased to 90% of net taxable income before NOLs as opposed to the 80% NOL limitation applicable for taxable years commenced after 31 December 2014 and ending before 1 January 2019. In addition, for taxable years commenced after 31 December 2018, corporate partners that own 50% or more of a partnership are not allowed to use their current year standalone NOLs as well as standalone NOL carryforwards to offset their distributive share of partnership income.

Losses from sales or exchanges of capital assets are allowed only to the extent of gains from such sales or exchanges. The carryforward period in this instance, however, is seven years. The use of capital losses is limited to 80% of the capital gains for the taxable year. However, for taxable years commenced after 31 December 2018, the capital loss limitation is increased to 90% of net capital gain before capital loss.

NOLs realised during the 2020 taxable year are allowed a two-year carryback, first against the 2018 taxable year and any remaining amounts against the 2019 taxable year. There is a maximum carryback of USD 200,000, and taxpayers may receive a refund of up to USD 50,000. The carryback is not available for taxpayers that generate more than USD 10 million in gross revenues nor for large taxpayers.

Payments to foreign affiliates

51% of expenses attributable to payments made to a related party that is not engaged in a trade or business in Puerto Rico or to the home office located outside of Puerto Rico (i.e. foreign affiliate) will not be deductible for purposes of computing the net taxable income, as long as these payments are not subject to income taxes in Puerto Rico.

The Secretary of the Treasury has the authority to grant a 100% deduction for the expenses paid or incurred with related parties not engaged in a trade or business in Puerto Rico via the waiver mechanism. However, the deduction is limited to 60% of the expenses that qualify for the waiver.

Expenses paid or incurred with related parties not engaged in a trade or business in Puerto Rico for which a waiver from the Secretary of the Treasury is not obtained do not generate NOL carryforward (i.e. the expenses are added back to the NOL). In other words, the non-disallowed portion of the payments to foreign affiliates/branches will not be allowed if this particular portion causes an NOL.

For taxable years commenced after 31 December 2018, the 51% disallowance with respect to expenses paid or incurred with a related person that is not engaged in trade or business in Puerto Rico may not apply if the taxpayer submits a transfer pricing study prepared pursuant to the provision of Section 482 of the US Internal Revenue Code of 1986, as amended. Furthermore, for taxable years commenced after 31 December 2018, the related party expense deduction will be allowed as deduction, even if such deduction causes an NOL.