Puerto Rico's Treasury Department (PRTD) has announced (Administrative Determination (AD) 17-21) that qualified disaster assistance payments made from September 21, 2017 to December 31, 2017, and interest-free loans made from September 21, 2017 to June 30, 2018 will be exempt from income tax.

Qualified disaster assistance payments

Under AD 17-21, qualified disaster assistance payments paid to an individual to assist with the repair of, or to compensate for, damage or loss suffered as a result of Hurricane Maria will not be subject to income tax. The term "qualified disaster assistance payment" means any amount paid to or for the benefit of an individual:

— To supply or pay for necessary and reasonable expenses, such as food, medicine, gasoline, accommodations, medical expenses, expenses for the care of children or other dependents, generators for electricity, and funeral expenses, incurred as a result of Hurricane Maria

— To pay for necessary and reasonable expenses incurred for the repair or rehabilitation of a primary residence or the repair and replacement of items inside the primary residence to the extent the damage is attributable to Hurricane Maria

— To provide monetary assistance directly to an individual to cover the costs of any damages or losses suffered as a result of Hurricane Maria

Qualified disaster assistance payments also include payments made by the federal, state or local government or any agencies or instrumentalities thereof to individuals to promote general welfare, to the extent the expense compensated is not covered by insurance or other means.

For amounts to qualify as disaster assistance payments, the payments must meet the following requirements:

— Must be made from September 21, 2017 to December 31, 2017

— Must be a substitute for an individual's salary during the time in which the individual is out of work due to Hurricane Maria

If the amounts are paid from an employer to its employees, in order to be eligible as "qualified disaster assistance payments," those amounts need to be compensation that is in addition to the amount usually received by the employees and the employer cannot favor highly compensated employees over others. The amounts paid directly to the employees will be limited to $1,000 per month and cannot be attributable to or related to an employee's position or salary.

Reporting requirements

All employers that make qualified disaster assistance payments must submit no later than January 31, 2018, a sworn statement that includes the name and social security number of each employee who received a qualified disaster assistance payment and the total amount paid from September 21, 2017 to December 31, 2017. The PRTD will issue a circular letter with further guidance on the electronic mechanism that will be put in place for submitting the required documents and information. The employer also must include on the Form 499R-2/W-2PR the amount paid to the employee as exempt income. Additionally, the amount paid by the employer under AD 17-21 will be deductible in determining the employer's net income subject to income tax.

Loans to employees without the payment of interest

Interest-free loans offered by employers to their employees from September 21, 2017 to June 30, 2018, to provide employee assistance for reasonable and necessary expenses and construction and repair expenses of an employee's primary residence will not be considered income. The total amount of the loan cannot exceed $20,000. The employer, however, can authorize more than one interest-free loan, provided the total amount of all of the loans does not exceed $20,000. An employer can offer the loans in addition to the qualified disaster assistance payments.

Implications

The widespread destruction left by Hurricane Maria across Puerto Rico has affected the lives of countless individuals throughout the island. Disaster assistance payments and interest-free loans serve as much a humanitarian objective as a means for facilitating resources to a workforce facing basic infrastructure necessities.

At first glance, the scope of AD 17-21 seems limited to disaster assistance payments made by an employer to its employees. In fact, AD 17-21 states that its objective is to provide a temporary exemption from the payment of income tax to those qualifying payments made by employers to its employees as result of the effects of Hurricane Maria. However, portions of AD 17-21 cover, within the definition of disaster assistance payments, any amount paid for the benefit of individuals, including payments made by governmental entities to individuals, which fall outside the employer-employee relationship. In the context of payments made outside the employer-employee relationship, taxpayers should evaluate whether the payments may be treated as exempt under the gift provisions of Puerto Rico's Internal Revenue Code.

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