Puerto Rico Treasury Department Changes Tax Reporting On Act 80 Payments Made During Tax Year 2018

Author:Ms Elizabeth Pérez-Lleras and Ana María Bigas-Kennerley
Profession:Littler Mendelson
 
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On October 22, 2018, the Puerto Rico Department of the Treasury (the "PR Treasury") issued Publication 18-03, which makes tax reporting and tax deadline changes for certain severance payments.

By way of background, Puerto Rico's Unjust Dismissal Act (Act 80) provides a list of reasons for "just cause" employment dismissals. An employee who is terminated without just cause is entitled to compensation set by the Act 80. Act No. 4 of January 26, 2017, known as the Labor Transformation and Flexibility Act (Act 4), amended the Puerto Rico Internal Revenue Code to exclude from an individual's gross income "compensations or severance pay received by an employee by reason of dismissal, without the need to determine just cause thereof, up to a maximum amount equal to the severance pay that the employee may receive pursuant to Act. No. 80 (Act 80 payments)." Note that the tax exemption granted through Act 4 includes any severance pay received by an employee, up to the maximum amount that an employee could receive pursuant to Act 80. Due to the change in the Puerto Rico income tax treatment of Act 80 payments brought by Ac 4, the PR Treasury revised form 480.6D for the tax year 2017 to include Act 80 payments as exempt income. Therefore, Act 80 payments made during tax year 2017 needed to be reported as wages on form 499R-2/W-2PR ("W2PR") for purposes of FICA (Social Security and Medicare), and as exempt income on form 480.6D for purposes of Puerto Rico income taxes.

Pursuant to Publication 18-03, which provides electronic transfer filing instructions for form W2PR, for tax year 2018, Act 80 payments will no longer be reported as exempt income on form 480.6D, but instead...

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