Employment income includes gains, profits, and income derived from salaries, wages, or compensation for rendered services, and received in any form of payment (i.e. cash or in kind), unless specifically excluded. Typically, taxable compensation includes salaries, wages, Christmas bonus, incentive compensation, benefits in kind, etc.
Reimbursement of expenses incurred by the employee to carry out their duties or responsibilities may be considered business expenses. For example, if an employee must travel for business meetings to another location where they must stay overnight, the expenses incurred for travel and lodging in such a case are generally considered business expenses incurred on behalf of the employer. The reimbursement of these expenses may be excluded from compensation if certain requirements are met.
Capital gains and investment income
All capital gains and investment income of a Puerto Rican resident are taxable for Puerto Rican purposes.
The holding period to qualify as long-term capital gain will depend on the date of sale or exchange. Long-term tax treatment will apply to those capital assets held for more than one year.
Long-term capital gains are subject to a special tax rate of 15%. Short-term capital gains are subject to the regular gradual rates.
In the case of long-term capital gains, Puerto Rican non-resident foreign nationals are subject to a flat withholding rate of 25%. Puerto Rican non-resident US citizens are only subject to a flat withholding rate of 10% on long-term capital gains.
Investment income is subject to regular gradual rates unless specific requirements are met. For example, interest may be subject to a flat rate of 10% or 17% and dividends to a flat rate of 10%.
In the case of Puerto Rican non-resident foreign nationals, investment income, such as rent, interest, and dividend income, is subject to a flat rate of 29% (or a lower flat rate in certain cases).
For taxable years after 31 December 2018, the following payments were included in the exclusions from gross income
- Compensation for mental distress.
- Qualified payments made for assistance to overcome a disaster.
- Interest-free loans made by employers to employees or independent contractors to overcome a disaster. Loans should not exceed USD 20,000 per employee/independent contractor.
- Distributions from an Employee Trust or Individual Retirement Account due to a disaster.
- Earned income credit payment received by a taxpayer.
- Interest income exemption for deposit accounts from institutions located in Puerto Rico was reduced from USD 2,000 to USD 100 per individual (from USD 4,000 to USD 200 for married taxpayers filing a joint tax return).
- The Pension Exclusion (USD 11,000 or USD 15,000) was extended to life annuity payments received by beneficiaries.
- For purposes of the pension income exclusion, the definition of 'periodic payments' was amended as follows: “(i) payments made during a fixed period of at least five years in substantially similar amounts; or (ii) minimum payments required under the United States Internal Revenue Code of 1986, as amended, or any legal disposition thereafter (Minimum Required Distributions)".
Interest from mortgages of residential property located in Puerto Rico was eliminated from the exclusions of gross income.