Op-Ed: Key tax incentives for small businesses in Puerto Rico
The pandemic devasted small- and medium-sized businesses across the United States, and those in Puerto Rico were no exception. For instance, the Puerto Rican restaurant industry alone lost $398 million in sales during 2020.
Even with lockdowns and restrictions now lifting, many businesses are still feeling the financial ripple effects of closures and diminished revenues, and new COVID-19 relief funds are nowhere to be found.
However, SMBs in Puerto Rico still have a lifeline for capital in the form of impactful tax incentives. According to guidance from the Internal Revenue Service, US territories qualify for a range of federal credits for keeping existing employees on staff, adopting new technologies and championing environmentally friendly infrastructure.
Unfortunately, education around these credits is lacking, and Puerto Rican SMBs consistently overlook and underclaim the benefits they’re entitled to under US tax law. This tax season, here are three incentives Puerto Rican business owners should evaluate closely:
The Employee Retention Credit
As part of the initial COVID-relief legislation, Congress passed the Employee Retention Tax Credit (ERC) – a key deduction that rewards businesses for keeping their existing employees on staff, allowing them to claim thousands of dollars in credits per employee with qualified wages. Under the original guidance, business owners that claimed funds through the Paycheck Protection Program (PPP) were barred from also taking advantage of the ERC, but Congress later removed this restriction and expanded access through the Consolidated Appropriations Act of 2021 (CAA).
While the $1.2 trillion infrastructure bill put an early end to the ERC starting in Q4 2021, businesses in Puerto Rico can still retroactively claim the funds they were eligible for during 2020 and the first three quarters of 2021 on this year’s returns. Even businesses that were deemed “essential” or saw an increase in revenue during the pandemic can qualify, so make sure to work closely with a tax representative that understands your unique business situation. Qualifying events include:
- Full or partial shutdowns
- Interrupted operations
- Supply chain disruptions
- Inability to access equipment
- Limited capacity to operate
- Inability to work with your vendors
- Reduction in services or goods offered to your customers
- Decrease in your hours of operation
- Shifting hours to increase sanitation of your facility
For example, a family-owned barber shop that kept all their employees on payroll while adapting their operations in accordance with local mandates could qualify for thousands of dollars in credits per employee.
The Research & Development Tax Credit
One of the most lucrative incentives available to Puerto Rican businesses today is the Research & Development Tax Credit (R&D). This incentive was originally introduced in 1981 to boost domestic innovation, but it became a permanent fixture of the U.S. tax code in 2015 for all industries from manufacturing and technology to agriculture, hospitality and more.
Contrary to popular belief, businesses don’t have to operate a research lab to qualify for the R&D credit. In fact, any company that develops, designs, or enhances new products or processes is eligible for substantial returns. For instance, a restaurant that adopted new technology to automate their ordering and delivery processes can qualify, as well as an SMB that made improvements to their remote collaboration software.
As long as Puerto Rican businesses work closely with their accountant to document qualifying activities, they will be able to claim the R&D credit and bring in crucial capital to fund their future innovation efforts.
The 179D Tax Deduction on Energy Efficient Buildings
Finally, to incentivize sustainable development, Congress passed the 179D deduction for engineers, architects, and designers who pursue energy-efficient building projects. Building owners or design firms working on government-owned infrastructure in Puerto Rico can qualify for the deduction by constructing or improving existing buildings under the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards, such as:
- Building envelope improvements to walls, doors, floors, fenestrations, and rooks
- Pursuing eco-friendly HVAC improvements
- Installing energy-efficient interior lighting solutions
Many construction and design businesses are already spearheading the transition to green infrastructure, and this incentive can significantly eliminate the financial burden associated with these initiatives. In addition to claiming these funds for work done in 2021, businesses have the option to claim the deduction retroactively for any projects started as far back as 2018.
Claim your fair share today
For decades, companies in US territories have incorrectly disqualified themselves from federal tax incentives, claiming them at much lower rates than businesses located in the states. But in the initial aftermath of a pandemic that devasted the economy and forced many SMBs to close their doors, business owners in Puerto Rico must tap into these financial benefits to rebuild and thrive in the years to come. Don’t let another tax season come and go without claiming your fair share.