Puerto Rico legislators have recently introduced a proposed bill that contains individual income tax rate reductions and several other amendments through Senate Bill 912 and House Bill 1014 (A-087) (the “Proposed Tax Bill”). The proposal’s stated goal is focused on reducing the individual income tax burden, while offsetting the projected revenue impact through the elimination of certain tax exemptions and the expansion of information reporting requirements. The Proposed Tax Bill arrives after the approval of several other laws enacted during 2025, that are meant to be part of Phase one of the Tax Reform proposed by the government. The government has communicated that Phase two of the Tax Reform will contain changes that affect income taxes applicable to corporations as well as the personal property tax over inventories. 

If enacted, most provisions contained in the Proposed Tax Bill will apply to taxable years beginning after December 31, 2024, although certain measures will take effect at later dates. Following a summary of the most relevant provisions:

Revised Individual Income Tax Brackets

The proposal revises the marginal income tax rate structure applicable to individuals. The Proposed Tax Bills amends the Puerto Rico Internal Revenue Code of 2011 (the “Code”) to adopt the following tax rates:

  • 0% on net taxable income up to $12,500
  • 6% on income over $12,500 up to $25,000
  • $750 plus12% on income over $25,000 up to $50,000
  • $3,750 plus 24% on income over $50,000 up to $100,000
  • $15,750 plus 29% on income over $100,000 up to $150,000
  • $30,250 plus 33% on income over $150,000

In addition, income thresholds will be subject to inflation adjustments beginning after December 31, 2025, guided by mirroring inflation adjustments established by the U.S. Internal Revenue Service (“IRS”).

Increased Dependent Exemption

For tax years beginning after December 31, 2024, the exemption per dependent will increase from $2,500 to $5,000. The legislation also provides for inflation indexing of the personal and dependent exemption amounts beginning after December 31, 2025.

RSM Comment

Individuals should look closely at the development of this legislation, which is expected to be evaluated by the House and Senate at an accelerated pace. As soon as the bill is approved, individuals should review their tax estimates to avoid any excessive overpayment for the year 2026, since the year 2025 may generate a credit due to the enactment of this bill. 

Also, individuals that own disregarded or passthrough entities should consider the impact of the change in rates since the income generated by their entities is taxed at the individual tax rates.

Alternative Minimum Tax (“AMT”) changes

The Proposed Tax Bill eliminates the imposition of the AMT to income subject to preferential tax rates. 

RSM Comment

In our opinion, this is one of the most favorable changes this bill brings. Income received by an individual from dividends, interest or capital gains that enjoy a reduced tax rate as currently enacted under the Puerto Rico Internal Revenue Code will be taxed at such reduced tax rates, without the potential imposition of additional tax due to the AMT dispositions. Individuals should look to review if they receive any of these types of income categories that are now subject solely to the special reduced tax rate because this may provide an additional reduction in their tax liability. 

Business and Entity-Level Provisions

The proposed bill includes additional language to the definition of single-member limited liability companies to clarify that natural or judicial persons are allowed to elect disregarded entity treatment. 

Optional Tax Election

Self-employed individuals and certain service corporations will be permitted to elect the optional tax regime even if a balance is due, provided the tax is paid by the return due date, including extensions.

RSM Comment

This change will allow more flexibility for taxpayers so they can choose the optional tax or the regular tax rates which will open opportunities for taxpayers to enjoy reduced tax rates even though there is still a balance due to the return. 

Repeal of Certain Sales and Use Tax (“SUT”) Exemptions

The Proposed Tax Bill repeal SUT exemptions related to promotional materials and giveaways, and solar electric equipment.

Phase-out of Alternative-Energy Vehicle Excise Tax Refund

The excise tax refund applicable to vehicles powered by alternative or combined energy sources is eliminated for sales occurring after June 30, 2026.

RSM Comment

Since any changes in our Puerto Rico Internal Revenue Code must be tax neutral, the elimination of these two exceptions is meant to be used as part of the “pay for” requirement to decrease the individual tax rates. Taxpayers in the solar equipment and car dealer industry must follow closely the legislation process to plan accordingly.

Expanded Informative Reporting Requirements

The legislation expands informative return requirements related to certain banking charges, payment processing, and financial services, and clarify penalty rules applicable to late or zero-activity filings.

Next Steps

It is important to emphasize that the Proposed Tax Bill remains subject to further legislative action and potential amendment. Taxpayers should monitor developments and evaluate the potential impact of these changes and other separate bills related to a broader tax reform on their tax positions. Given the scope and complexity of the proposal, professional assistance may be appropriate to assess planning opportunities, compliance considerations, and transition issues.

At RSM Puerto Rico, we are available to help you in evaluating how these proposed changes may affect your individual or business tax position. For additional information or assistance, consider reaching out to RSM Puerto Rico’s Tax Advisory team at (787) 751-6164 | [email protected].

 

This article was written by our Tax Advisory Associate Edsel Mejías, Esq.