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Op-Ed: What is the new alternate basic tax for individuals?

This is the time of the year in which individuals receive financial information to prepare their individual income tax return.

Understanding what changes were enacted through new legislation, and how each affects each particular situation, is not an easy task. Therefore, be aware of relevant changes applicable to tax years beginning after Dec. 31, 2018, for the computation of the alternate basic tax (“ABT”) applicable to individuals.

Generally speaking, an individual income tax liability for a tax year is determined by their income minus exemptions and deductions that result in their net taxable income. Such net taxable income shall be computed twice, once under the rules of the regular income tax and once under the ABT rules; the higher of the two computations will be the individual’s tax liability for the year.

On Dec. 10, 2018, the Governor of Puerto Rico signed into law, Act 257 of 2018 (“Act 257”), which amended various Sections of the Puerto Rico Internal Revenue Code (“PR Code”), to, among other things, change the computation of the ABT.

One of the fundamental aspects of the amendments to the PR Code enacted under Act 257, was that the Secretary of Treasury will use greater controls on the deductions that taxpayers could claim on their income tax returns, specifically, through the computation of the ABT.

For the tax years beginning after Dec. 31, 2018, the deductibility of expenses for ABT purposes will be subject to certain terms and conditions, such as the compliance by taxpayers in reporting expenses incurred in the informative statement or the submission of reliable evidence as proof that the expenses were related to the trade or business activity. In addition, new thresholds are established for ABT purposes, including new tax rates that will fluctuate from 1% to 24%.

The group of taxpayers that will be significantly affected by such provisions will be the “self-employed” individuals. Therefore, please contact your Certified Public Accountant for any additional information regarding the ABT or any other tax issue.

Author Omar Mues, CPA, is a tax committee member of the Puerto Rico Society of CPAs.

Also click on thislink to access the 2018 Taxpayer’s Manual.

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