06 October 2016 Puerto Rico Treasury Department issues guidance on the application of the AMT to 2015 and 2016 following adverse ruling from the First Circuit The Puerto Rico Treasury Department (PRTD) has issued guidance (Administrative Determination (AD) 16-11) on the application of the alternative minimum tax (AMT) to tax years 2015 and 2016. Section 1022.03(a) of Puerto Rico's Internal Revenue Code of 2011 (PR Code) imposes a corporate AMT equal to the excess, if any, of the minimum tentative tax over the regular tax for the tax year. In March 2016, the US District Court for the District of Puerto Rico ruled that a portion of the AMT violates: (1) the dormant Commerce Clause; (2) the Equal Protection Clause; and (3) the Federal Relations Act. The District Court also granted an injunction barring the enforcement of the AMT. The First Circuit Court of Appeals affirmed the District Court's decision in August 2016 and ruled that a portion of Puerto Rico's corporate AMT, as amended in 2015, violates the dormant Commerce Clause of the US Constitution. As a result, the Court continued the injunction against the collection of the AMT. The PRTD determined that taxpayers subject to the AMT will not have to calculate the sum of their related-party expenses and personal property under Section 1022.03(b)(2) of the PR Code (Second Measure) to determine the minimum tentative tax for the 2016 tax year. The PRTD also determined that, for tax years beginning on January 1, 2016, taxpayers subject to the AMT under Section 1022.03(a) of the PR Code should determine their minimum tentative tax by calculating 30% of the amount by which their alternative minimum net income for the tax year exceeds the exempt amount, reduced by the alternative minimum credit for taxes paid abroad for the tax year (30% Rule). In accordance with the First Circuit decision, the PRTD plans to modify Corporation Schedule A, "Alternative Minimum Tax," and states taxpayers should not use the schedule for tax years before the 2016 tax year. Under AD 16-11, taxpayers do not have to calculate the sum of their related-party expenses and personal property under the Second Measure to compute their estimated tax. If a taxpayer paid the estimated tax and it was attributable to the Second Measure, the taxpayer may apply that amount to the income tax for the tax year. To determine the estimated tax for tax years beginning January 1, 2016, taxpayers should determine the minimum tentative tax by calculating the sum of the items set forth in Section 1022.03(b)(1) of the PR Code under the 30% Rule. Taxpayers who made estimated tax installments that are equal to or greater than the estimated tax amount (excluding the Second Measure's calculation) will not have to pay the remaining estimated tax installments for the tax year. The PRTD determined that taxpayers that were subject to the AMT under Section 1022.03(a) of the PR Code by reason of the Second Measure for the 2015 tax year will be able to recalculate the AMT without taking into consideration Section 1022.03(b)(2). The taxpayer should recalculate the AMT by calculating the minimum tentative tax only under the 30% Rule. Once the minimum tentative tax is calculated, the taxpayer must determine whether it overpaid taxes by computing the difference, if any, between the minimum tentative tax and the regular tax. If the amount of the AMT paid on the original return filed for the 2015 tax year exceeds the recalculated AMT, taxpayers may claim a credit for the overpaid taxes. Taxpayers that have a credit for overpaid AMT may opt to use the excess as a: (1) credit of AMT in subsequent years, subject to the limitations in Section 1051.02 of the PR Code; or (2) payment of estimated tax for the 2016 tax year. Taxpayers that opt to treat the overpaid AMT as an estimated tax payment for the 2016 tax year should file an amended income tax return for the 2015 tax year with new Form 483.3, "Corporation Schedule A — Part V 2015 Tax Year." The new form is available here under Returns, Forms and Schedules. Taxpayers may not claim a refund on the amended return for the amount of overpaid AMT. Taxpayers that have not filed an income tax return for the 2015 tax year should file a return with the new Form 483.3. The PRTD noted that the district court and First Circuit's decisions only affected the AMT calculation, not the 51% related party deduction disallowance under Section 1033.17(a)(17) of the PR Code. In the weeks after the First Circuit decision, there was speculation about the tax years that would be affected by the adverse ruling. AD 16-11 clarifies the PRTD's position, by providing recourse for taxpayers that made AMT payments under the Second Measure for years 2015 and 2016. Companies that paid the unconstitutional portion of the AMT for any of these years are advised to take remedial action. In the case of overpaid AMT for year 2015, amounts can either be used as a credit of AMT in subsequent years or against the payment of estimated tax for the year 2016; this overpayment cannot be claimed as a refund. However, since the AMT credit has a 25% limitation per year, it would probably be more beneficial to use the overpaid AMT as a payment against estimated taxes. Companies that elect to credit the overpayment against estimated taxes for year 2016 must file an amended income tax return for year 2015 along with the newly issued Form 483.3. For year 2016, companies that have made estimated tax payments attributable to the Second Measure may apply that amount against the estimated tax installments under the 30% Rule or the regular income tax payable for the tax year. Companies that paid the unconstitutional portion of the AMT should evaluate the effect of AD 16-11 in order to determine the best course of action moving forward and to take advantage of this favorable appellate court ruling. Companies should also evaluate the effect of the PRTD's position as issued through AD 16-11 when accounting for their provision of income taxes.
Document ID: 2016-1705 | |||||||||||
