Have you heard these statements about Puerto Rico taxes and benefits?
- You don’t have to pay federal taxes when living in Puerto Rico.
- Act 20/22 gives businesses excellent tax breaks if moving to (or starting in) Puerto Rico.
- Puerto Rico is the next tax haven for Americans.
So, have we! In fact, we’d been naïve enough to believe them without doing thorough research. Before we moved here, we talked to our accountant and she honestly told us that she didn’t know anything about taxes in Puerto Rico. So, we went on blind faith, hoping that we’d learn more about the Puerto Rico taxes once we got here. And learn we did.
This year, was the first time we considered moving our business here, so we embarked on a closer look at the amazing tax benefits we heard Puerto Rico offers.
We already knew that sales taxes here were ridiculously high – they went up from 7.5% to 11.5% since we’ve been here. And the talks of taxes going up to 16% (which was once approved), will probably resume now that elections are over. So, we were hoping that these other promised benefits would offset the high sales taxes.
Boy, were we ever in for a shock of our lives!
But, let me start from the beginning…
We own an online business and this year we thought it would be a good idea to move it to Puerto Rico (you know, since we want to be residents here long term). So, we hired a local accountant to learn about the following regarding Puerto Rico taxes:
- Federal tax breaks
- Local income taxes
- Incentives for new business (or moving existing business) – Act 20
- Ease of running a business in Puerto Rico
First, in summary, here is what we learned. [Note that this is our own experience, and if you’re in the process of contemplating the same, please seek the advice of your own accountant.]
Summary Of Puerto Rico Taxes Findings
- You do have to pay federal taxes. You may not have to pay federal income tax (this is not true of everyone, depending on your employer). But you DO HAVE TO pay Federal Social Security and Medicare taxes, which if you are self-employed = 15.5%. This is the same as running a business in the mainland States.
- Local income taxes are ridiculously high!!!! Higher than any in the States. Anyone making over $9,000/year has to pay between 7%-33%. I will explain the formula down below, so bear with me.
- Incentives under Act 20 are mostly for big business and only for certain types of business. They promise 4% corporate taxes for 20 years. We do not qualify, as this is clearly structured for the very rich. And even if we did, the tax break only gives you what most of the States already do and these breaks only apply to corporate taxes; so, you still must pay the Puerto Rico income taxes from point #2.
- The number of permits and fees that come with running a business is mind-boggling!!!!! Everyone wants their cut! Some businesses have to obtain as many as 20+ permits!!!!!
- Import taxes on any items coming into the island (whether sold here or not) are 11.5% + whatever the federal import tax is (this depends on what you’re importing).
- The tax rules keep changing, as do the permit requirements. And, of course, they are never in your favor. So, it is very difficult to stay in compliance. And if you don’t, penalties are very harsh; in some cases, they include shutting your business down and confiscating the inventory – WHAT?!
- We’ve not found anyone here that understands internet business, not even the accountant we hired. Consequently, they seem to want to tax EVERYTHING. As if it were a brick and mortar shop.
- It is far more expensive for us to try to run our LLC from here than it would be from anywhere else in the States. I am not exaggerating. We have decided that it is not worth it and will be incorporating in the mainland instead. I just don’t know how small businesses make money here. It seems impossible.
OK, that’s the gist, now let me fill in the details. I will show you how things are calculated and I will compare it to the mainland States. At the end, you will see why we decided not to run our business from Puerto Rico.
OK, let’s get started…
Federal Income Tax Exemption
It is true that if you are an official resident here, you may not be required to pay federal income taxes. This may sound like a huge savings, but is it really? As I mentioned already, if you make money, you are still required pay Medicare and Social Security federal taxes. Also, the federal income taxes, allow you personal exemptions and a bunch of other deductions, that local taxes here don’t. So, you may actually be taxed on a smaller percentage on the federal income taxes, than on the Puerto Rico taxes.
And, if you spend more than 6 months on the island, you will need to file a PR tax return anyway. In addition, just because you are retired in Puerto Rico and collecting a pension and/or Social Security, does not mean that you are exempt from federal taxes either. My understanding is, that you get some sort of a tax credit on your federal taxes, but this didn’t apply to us, so I didn’t look into it that much. Also, some, like military or federal retirees, must pay federal taxes anyway. So, if in doubt, best thing to do is to consult an accountant.
Puerto Rico taxes
Here are the facts about Puerto Rico Income taxes. They are usually NOT lower than the federal income taxes. And, there are no personal exemptions on island’s taxes. The average taxes on a $100K income (I picked it to easily show the numbers) are much higher than ANY USA STATE!
Puerto Rico Tax Rates:
|Income||Puerto Rico Taxes|
|$0 – $9,000||0%|
|$9,000 – $25,000||7% above $9K|
|$25,000 – $41,500||14% above $25K|
|$41,500 – $61,500||25% above $41.5K|
|$61,500 – up||33% above $61.5K|
Source: Hacienda PR
The Puerto Rico tax is cumulative, so below is an example how an income of $100,000 is taxed.
Taxes On $100K Income
|Income||Tax Amount||Actual Tax Rate (top range)|
|$0 – $9,000||$0||0%|
|$9,000 – $25,000||$1,120||4.48%|
|$25,000 – $41,500||$2,310||8.27%|
|$41,500 – $61,500||$5,000||13.7%|
|$61,500 – $100,000||$12,705||21.14%|
You add all the taxes together to get the total tax paid for $100,000 to be $21,135, which is an actual tax rate of 21.14%. In the table above, you can see the income tax for each tier of income. If you make somewhere in the middle, your tax will be somewhere between the tiers.
To add to all this is the fact that as of 2016, Puerto Rico requires that if you live on the island for 6 months or more (or claim residency), you will be required to file a Puerto Rico Tax return. It does not matter if your income was solely earned in the States and not on the island. Puerto Rico taxes world income, i.e. all income.
So, for us, we estimated that we would pay an additional $9,000 in taxes, if we filed in Puerto Rico, and that’s with not paying federal income taxes. Simply put Puerto Rico taxes are more expensive for us than paying federal income and state income taxes elsewhere. WOW!
Now check out the income taxes for your state below:
Source: Tax Foundation
As I said in the summary. We were told that we would be required to pay an “additional” 11.5% import tax on the value of items we import to the island. I say “additional” because the feds want their cut too. For our products, it would be 3.5-4% federal import and 11.5% Puerto Rico’s import tax. Total up to 15.5%!
In addition, we could not get a clear answer on whether the “value” of the goods was the actual price we pay or some arbitrary “value” assigned by the government (as was the case with the import of our car).
We were also told that we would be required to pay a sales tax on the island for all items brought in here, another 11.5%, and this would be the case, even though, we sell the items online. WOW! Oh, and don’t forget that sales tax may go up to 16% next year.
As a comparison, the highest sales tax in the states is currently in Tennessee at 9.45%.
Check it all out below and see how it compares to other State’s sales taxes. And, by the way, don’t forget that many of the States with high sales tax, like Texas, have a small or no state income tax.
Source: Tax Foundation
Act 20 Tax Breaks
Here is what it’s good for:
“The Act provides benefits for services provided from Puerto Rico to outside markets. Eligible activities to receive
benefits under the Act are services in the following areas:
- Research and development;
- Advertising and public relations;
- Economic, scientific, environmental, technological, managerial, marketing, human resources, engineering,
information systems, auditing and consulting services;
- Consulting services for any trade or business;
- Commercial art and graphic services;
- Production of engineering and architectural plans and designs, and related services;
- Professional services such as legal, tax and accounting services;
- Centralized managerial services, including, but not limited to, strategic direction, planning and budgeting,
provided by regional headquarters or a headquarters company engaged in the business of providing such services;
- Services performed by electronic data processing centers;
- Development of licensee computer software;
- Telecommunications voice and data between persons located outside of Puerto Rico;
- Call centers;
- Shared service centers;
- Medical, hospital and laboratories services;
- Investment banking and other financial services, including but not limited to asset management, management
of investment alternatives, management of activities related to private capital investment, management of
coverage funds or high risk funds, management of pools of capital, trust management that serves to convert
different groups of assets into securities, and escrow accounts management services; and…
- Any other service designated by the Secretary of the Department of Economic Development and Commerce
of Puerto Rico.”
And, our Business?
Simply put, we do not qualify under that list. If approved, it presumably reduces your corporate income taxes to 4% for a period of 20 years. Normally the corporate taxes in Puerto Rico range from 5% – 19%, depending on the income of your business.
However, compare the corporate taxes to the States below. As you can see, many of the states are already in the 4-6% range, so even if we qualified for the Act 20 incentive, the savings aren’t huge and they are time limited. Perhaps if you’re a big business, incorporating in PR and avoiding federal income taxes, then Puerto Rico’s deal sounds good…
Source: Tax Foundation
Ease Of Running A Business In Puerto Rico
From our research, it seems impossibly difficult. The biggest concern to us is the constant changes that occur in this area and the penalties, if you’re unaware. But, of course, the number and cost of all the permits is also very worrisome.
Furthermore, the increasing cost of utilities and services is also a bit scary, as is the lack of understanding of online business. After sharing these findings with some of our friends, we learned that this is the reason for the huge underground economy on the island. Residents don’t feel that the government is here to help them, so they find ways to cheat, but for us, this is not an option.
So, we gave up and we’ve decided not to go down this road.
We’ve already begun the process of moving our LLC to another State, instead of to PR. I think you can probably see why. For our type of business, it is simply cost prohibitive and energy/effort prohibitive to incorporate here. Don’t get me wrong, I’m a firm believer that you need to worry about making money first and then deal with the taxes, but in this case, when profits would literally be pennies on a dollar?.. What would be the point?
It’s really too bad but, I guess, we live and we learn.