Hacienda and the IRS: two fronts

Two systems with their own rules

Puerto Rico has its own Internal Revenue Code and its own Treasury Department, which administers the local income tax, IVU and other taxes. At the same time the Island is a US territory, and the federal Internal Revenue Code continues to apply to US citizens and certain entities. The result is that one business can have obligations before both administrations.

For bona fide residents of Puerto Rico, Puerto Rico-source income is generally excluded from federal income tax under section 933 of the federal Code, and is taxed on the Island. Income from sources outside Puerto Rico, by contrast, may be taxed by the IRS. And the federal Social Security and Medicare taxes, including self-employment tax, remain federal.

This is a general description. Each case has nuances: the type of entity, whether there are partners in the states, the specific source of each income item and any incentive decrees. That is why the conversation with the CPA needs the data on the table.

What bona fide residency means

Bona fide residency in Puerto Rico for federal purposes is judged by tests that look at presence on the Island, where your tax home is and with which place you have the closest connections. It is not obtained by merely changing the address on a license: it is shown with facts, and a change of residence at the start or end of a year is reported to the IRS on the corresponding form.

An example: a consultant moves to San Juan in February and travels 90 days in the year. Her CPA needs her entry and exit dates, the housing contract, where her family lives and where she keeps her accounts, doctors and licenses. Those documents are collected during the year, not when a notice arrives.

The burden of proof is on the taxpayer. If your situation includes frequent travel, entities in other states or an incentives decree, advance planning with a CPA experienced in Puerto Rico is indispensable.

Separating income by source

Source of income is the concept that decides where tax is paid. For services, the general rule is that the source is where they are performed; for sales of goods, special rules apply; for interest and dividends, it depends on who pays them. Each category has exceptions, and applying them to your case is the CPA’s job.

What you can do is build books that allow that separation. An income account per service line, another per client type and notes on invoices about where the work was done turn an abstract conversation into an analysis of figures. The ecosystem keeps what you write; it does not classify income or tag jurisdictions on its own.

Review the account structure at the start of the year, not at its end. If in January you decide that income from a new US client goes in a separate account, December’s close will be simple.

Returns, dates and coordination

Puerto Rico returns and federal returns have different forms, dates and extensions, and estimated tax payments also follow their own calendars. An entity with partners in several states may add state returns. A single calendar, prepared by your CPA at the start of the year, keeps one obligation from colliding with another.

Among the things that must be coordinated are credits for taxes paid to other jurisdictions, the treatment of estimated payments and the adjustments that result from incentive decrees. Each requires specific data from your books, and an error on one side carries over to the other.

Ask your CPA for a one-page summary of each return, its date, the information needed from you and who delivers it. With that summary, year-end conversations become routine.

Keep a log of questions for your CPA throughout the year instead of sending them one by one. A shared document where you note, with dates, every unusual transaction, every client that moved and every large purchase turns the year-end meeting into a review of a list, not an interview from memory.

One yearly file that serves both fronts

At the start of each year, set up a shared folder with your CPA where, over the twelve months, the pieces both administrations ask for will go: bank statements, reconciliations, invoices issued and received by client, contracts, the owner’s travel log, the asset list and the payroll summary. A file built during the year is delivered in hours; one assembled in March is delivered in weeks.

An example: an architect who resides in Dorado bills clients in Puerto Rico, Florida and New York. Her folder separates invoices by client location and by where the service was performed. She notes in a sheet the 24 days of the year she worked off the Island. With that, her CPA can state with backing which part of the income is local-source and which is not.

Close the year with a short meeting to review changes of residence, new clients off the Island, asset purchases and next year’s plans. Many tax decisions can still be taken before December 31, not after.

What the ERP contributes and what it does not

4softerp keeps the books in dollars for one or several companies, with accounts, entries and a document archive. It serves as an orderly source for your CPA. It does not file returns, does not connect to Hacienda, SURI or the IRS and does not decide residency, the source of an income item or which return applies.

If you change CPA, well-kept books are the first thing the new one wants to see. A business with current reconciliations and organized documents is easier to advise and cheaper to review.

Agree also on who owns each task: who records, who reconciles, who files and who answers a notice. When responsibility is written down, an authority’s letter reaches the right person on the first day, not the fifth.

It depends on the form of the entity, who owns it and the source of its income. Some businesses and individuals file only in Puerto Rico, others only with the IRS and others in both places. There is no general answer; your CPA must analyze your case with the data from your books and with the facts about residency.

It is the provision that, for bona fide residents of Puerto Rico, excludes Puerto Rico-source income from federal income tax, with certain exceptions. It does not eliminate other federal obligations, such as Social Security and Medicare. To know whether it applies to you, you need to prove your residency and the source of each income item with your CPA.

You can create separate income accounts, note each invoice’s state and country and keep your contracts and invoices in an orderly archive. With that data, your CPA classifies the income. The software does not determine source or jurisdiction on its own; it only keeps what you record, so the quality of the data you enter matters more than the tool itself.

Consult a CPA before the change, not after. The move date, the tax year and the treatment of income before and after can change your obligations, and there are specific forms for reporting the start or end of residency. Keep all documentation of the move from the first day, including the lease, utility bills and travel records.

Books for your CPA

Your CPA decides; the ERP holds your USD books.