Employers Helping Employees—Are Disaster Relief Payments and Loans Exempt From Puerto Rico Income Tax?
With the havoc wrought by Hurricane Maria in Puerto Rico, employers are exploring options to provide emergency relief to those employees who have encountered financial hardship to meet their necessities and repair their homes in the wake of the disaster. Occasionally, aid from employers to employees comes in the form of disaster-relief monetary payments and interest-free loans. In light of the state of emergency in Puerto Rico declared by local authorities, on October 4, 2017, the Puerto Rico Department of Treasury released Administrative Determination No. 17-21 (AD 17-21), which provides necessary and well-timed guidance on the taxation of this type of assistance.
Qualified Disaster Assistance Payments
Disaster assistance payments, which meet the requirements of AD 17-21, are not includable in an employee’s taxable income and, thus, are exempt from Puerto Rico income tax. Under AD 17-21, any payment made by an employer to an employee, or directly to a provider of goods and/or services, will be considered “qualified” and not treated as taxable compensation provided that:
payments are made in lieu of wages lost by the employee while he or she is not able to work due to the disaster;
payments are made to (a) cover necessary and reasonable expenditures of the employee or the employee’s relatives for food, medications, gas, lodging, medical expenses, the care of children or dependents, power generators, funeral services, and/or the repair of destruction to the employee’s principal residence incurred as a result of Hurricane Maria, as long as the payment is made directly to the provider of goods and/or services; (b) to the employee himself or herself and to mitigate damages or losses resulting from Hurricane Maria, subject to a monthly cap of 1,000; and/or (c) for other purposes, as recognized by AD 17-21;
payments are received by the employee (or the provider of goods and/or services, as appropriate) at any time between September 21, 2017, and December 31, 2017; and
payments are in no way attributable or related to the level of the employee’s position or salary.
Employers that make qualified disaster assistance payments must report such payments no later than January 31, 2018, by submitting a sworn statement to the Puerto Rico treasury stating the names and social security numbers of the employees who received qualified payments and the total amount of the payments. Qualified disaster assistance payments made in compliance with AD 17-21 are tax-deductible for the employer.
Interest-free loans of up to $20,000 (either individually or in the aggregate) granted by an employer to an employee, from September 21, 2017, through June 30, 2018, to cover necessary and reasonable expenses of the employee or the employee’s family and expenditures for the construction or repair of the employee’s principal residence due to damage from Hurricane Maria are exempt from Puerto Rico income tax.
Employers may grant interest-free loans to employees in addition to qualified disaster assistance payments.