Your Business’ Deductions According to the 2018 Tax Reform

September 12, 2019
Mature restaurant owner calculating finance and bills of new business  – Entrepreneur online using tablet and calculator to work and calculate financial expenses of small coffee shop business start-up; Shutterstock ID 1451408156; Job: NL Q3 Comercial; Client/Licensee: Banco Popular; Other: Comercial

This article is a collaboration of the Puerto Rico Society of Certified Public Accountants

By CPA Cecilia C. Colón Ouslán, CGMA, Esq.
Past Chairman of the Board of Directors – Puerto Rico Society of Certified Public Accountants

Act 257-2018, better known as the 2018 Tax Reform, comes with a series of changes that will have an effect on the income tax paid by all businesses in Puerto Rico. Here is information on some of those changes.

Regardless if yours is an individual business or a corporation, in order to have the right to deduct certain expenses you will now have to report:

  • Payments made to employees
  • Payments made to service suppliers you use, such as: professional services, rent, cleaning services and maintenance fees, among others

How to report payments

According to the Puerto Rico Society of Certified Public Accountants, payments made to employees must be reported using Form W2-PR. Meanwhile, payments paid to certain suppliers must be reported using Form 480.6A or Form 480.6B if you withheld any income tax at the time when payment was made. Payments made for services received must be reported using the new Form 480.6SP, regardless of whether you withheld taxes or not when making the payment. Finally, if you paid a person who provided services and who is located outside Puerto Rico, you will report it using Form 480.6C.

In order to complete the informative forms at the end of the year and be entitled to the deduction on your tax return, it is very important that you have full information of all your service providers:

  • Name
  • Address
  • Social Security number or employer identification number

And what about expenses for ads, insurance premiums, telecommunications services, Internet and cable TV? Those can be deducted as long as your service provider or whoever receives payment for the ads or insurance premiums reports the amount they received on a new Informative Declaration Form 480.7E. Therefore, you will not be responsible for preparing or filing a form for this type of expense. It will be the obligation of the entity that received the payment.

Look at these other important changes for the 2019 Tax Return:

  • You may only deduct 25% of meals and entertainment expenses paid during the year. That is: only 25 cents for each dollar you spent
  • On travel expenses, including lodging, you can deduct only 50%

In the case of SMEs (companies with an annual business volume that does not exceed $3,000) you can:

  • Deduct the total cost of technological equipment acquired during the year
  • Assign a useful life of two years to depreciate machinery, equipment, furniture and/or any other fixed asset. But beware: this does not include real estate and/or cars

To sum up: most of the expenses you can deduct are those that you report on the Withholding Statement or Information Return or those in which your supplier reports the amount paid by means of an Information Return.

What hasn’t changed

Expenses to purchase materials, inventory, motor vehicle expenses, etc., did not change and continue to be deductible.

Finally, take note of an important additional deduction opportunity. If you hire a college student for a minimum of nine months (800 hours) during the year and pay them a salary of $10 or more per hour, you will be entitled to a deduction of 150% of the amount you pay.

For more information, read these tax-related articles: Explore the New Optional Tax for services rendered in Puerto Rico and Do you make payments to suppliers? Here are the Informative Declaration’s new requirements.

Banco Popular de Puerto Rico (Popular) has no affiliation or relationship with the Puerto Rico Society of Certified Public Accountants. This article is informative in nature and does not represent an endorsement or an accuracy guarantee thereof. Popular or any of its affiliates, subsidiaries or related parties are and will not be liable for any special damages, direct or indirect, incidental or as a result, including, but not limited to, profit losses arising from or related to communications, articles or counseling provided by the Puerto Rico Society of Certified Public Accountants or that may arise from the information contained in this article. Popular focuses on providing banking services, and therefore does not engage (directly or indirectly) on providing any type of tax, accounting, human resources, training or marketing services. If you require any of these services, you should consult a competent professional of your choice. Popular is in no way liable for the outcome of any related endeavor if you decide to voluntarily communicate with the Puerto Rico Society of Certified Public Accountants.

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