Has anyone forgotten Hurricane María? What about some of the benefits approved by the Government to assist employees in Disaster Areas? Well, the Government is on it again.
On January 7, 2020, the Governor of Puerto Rico issued Executive Order Num. OE-2020-1 declaring a state of emergency due to the seismic activity that has been taking place in the Southern and Central Areas of Puerto Rico. On January 16, 2020, the President of the United States signed a Disaster Declaration for the following municipalities: Guánica, Guayanilla, Peñuelas, Ponce, Utuado and Yauco. Subsequently, the following additional municipalities were included in the Disaster Declaration: Adjuntas, Cabo Rojo, Corozal, Jayuya, Lajas, Lares, Maricao, San Germán, San Sebastián and Villalba.
Based on the Disaster Declaration and Section 1031.01(b)(16) of the Puerto Rico Internal Revenue Code of 2011 ("Code"), on February 19, 2020, the Puerto Rico Treasury Department ("PRTD") issued Internal Revenue Circular Letter Num. 20-08 ("CC 20-08") to establish the requirements to exclude certain qualified payments from employees' gross income and for employers to deduct said payments from their income tax returns.
Section 1031.01(b)(16) of the Code provides that any Qualified Disaster Assistance Payment ("Qualified Payments") made by any person to an individual with whom an employer-employee relationship exists, or who has rendered services as an independent contractor to provide assistance and support in the process of repairing, mitigating, or indemnifying any damage or loss suffered by such individual as a consequence of a declared disaster, shall be excluded from gross income.
In a nutshell, CC 20-08 provides that any Qualified Payment as defined by Section 1031.01(b)(16) of the Code, shall meet ALL the following additional requirements to be considered excluded for purposes of being exempt from income tax purposes:
- Payments must be made to the individual during the period between February 1, 2020 and April 30, 2020 ("Eligible Period");
- The total amount paid shall be in addition to the ordinary compensation received by the employee;
- The employer cannot discriminate in favor of highly compensated employees, as such term is defined by Section 1081.01(d)(3)(E)(iii) of the Code;
- Payments made are limited to:
o $2,000 monthly for each employee or independent contractor, and
o cannot be attributable in any way, or related to the position or salary received by the employee,
- The total amount of Qualified Payments by employee or independent contractor made during the Eligible Period shall not exceed $4,000.
All Qualified Payments made by an Employer in compliance with CC 20-08 shall be deductible from the employer's income in his/her tax return. In addition, all Qualified Payments made to employees shall be reported as exempt salary in Form 499R-2/W-2PR provided by the PRTD for year 2020. If the Qualified Payment is made to an independent contractor, it should be reported in Form 480.6D for year 2020.
Lastly, CC 20-08 provides that any employer who offers an interest-free loan to its employees or independent contractors during the Eligible Period shall not have to recognize income for purposes of such loan, as long as the total loan or loans issued during the Eligible Period does not exceed $20,000. Employers can provide loans in addition to the Qualified Payments.