2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 15 - Puerto Rico Industrial Incentives Generally (§§ 10001 — 10855) › PART II - Tax Incentives Act of 1998 (§§ 10101 — 10117) › Chapter 905 - Tax Incentives Act of 1998 (§§ 10101 — 10117) › § 10103 - Special deductions

(a) Payroll deduction. —
(1) In addition to any other deduction provided by law, all exempted businesses holding a decree granted under this part which are engaged in manufacture and generate a net income from their exempted operations computed without taking into account the benefit of special deductions provided in this section of less than thirty thousand dollars ($30,000) per production job, shall be granted a special payroll deduction equal to fifteen percent (15%) of the exempted business production payroll, up to fifty percent (50%) of their industrial development income, computed without the benefit of the special deduction provided in this clause but with the benefit of the other special deductions provided in this section.
For the purposes of this clause, “production payroll” shall include the salary of the personnel directly related to the manufacture of the exempted product, excluding the salaries of executives and any payment for personal services rendered to the exempted business by contracted independent firms. The net income for production jobs shall be obtained by dividing the net industrial development income derived from the exempted operation, computed without the benefit of the special deductions provided in this section, by the number of production jobs that the production payroll reflects.
(2) Any exempted business engaged in manufacture which holds a decree granted under this part and whose industrial development income, computed without the benefit of the special deductions provided under this section, is less than five hundred thousand dollars ($500,000.00) in any taxable year, and which has maintained an average number of fifteen (15) or more employees during said taxable year, may deduct the first one hundred thousand dollars ($100,000.00) from said income so that these may be fully exempted from the payment of the fixed industrial development income tax rate provided in § 10102(a) of this title. Any exempted business that avails itself of this provision may not enjoy the deduction provided in clause (1) of this subsection.
Exempted businesses controlled in more than fifty percent (50%) by stockholders or corporations in common, may decide, with the consent of the Secretary of the Treasury, the manner in which all or part of the above one hundred thousand dollars ($100,000.00) deduction shall be apportioned between one or more of the exempted businesses they control. The sum of the amounts apportioned to the exempted businesses that belong to controlled groups shall not exceed one hundred thousand dollars ($100,000.00).
The deduction granted under this clause shall not exceed the industrial development income of the taxable year of the exempted business, computed without the benefit of the special deduction provided by this clause, but with the benefit of the other special deductions provided in this section.
The deductions provided in this subsection shall be used solely in the taxable year in which the industrial development income is generated from which the deduction is made. The special deductions in excess of the maximum allowed under this subsection may not be carried over to subsequent taxable years.
(b) Deduction for expenses for training and improvement of human resources. — Every exempted business that holds a decree granted under this part or under preceding tax incentive laws shall be granted, in addition to any other deduction provided by law, a special deduction equal to the amount of the expenses for training to improve productivity and quality control, promote total quality management, and improve the communication skills of the employees, incurred in excess of the annual average of said expenses incurred during the three (3) taxable years that ended before the effective date of this act. Said special deduction shall not exceed the industrial development income of the taxable year of the exempted business, computed without the benefit of the special deduction provided by this subsection, but with the benefit of the other special deductions provided in this section. The special deduction in excess of the maximum allowed under this subsection may not be carried over to subsequent taxable years.
(c) Deduction for research and development expenses. —
(1) Every exempted business that holds a decree granted under this part shall be granted any other deduction provided by law or by preceding tax incentives laws, a special deduction, in addition to any other deduction provided by law, equal to the amount of the expenses incurred for the research, testing and development of new products or industrial processes, or the improvement thereof, which can be deducted in the taxable year under §§ 8401 et seq. of this title, excluding any amount received as a donation, subsidy or incentive from the Government of Puerto Rico for these purposes and also excluding any investment in property, plant facilities and equipment that enjoy the deduction provided in subsection (e) of this section. Said special deduction may not exceed the industrial development income for the taxable year of the exempted business that holds a decree granted under this part, computed without the benefit of the special deduction provided in this subsection, but with the benefit of the other special deductions provided in this section. However, any special deduction that is not allowed because of the above limitation may be carried over indefinitely to be used as a deduction against the industrial development income of the exempted business that holds a decree granted under this part or under preceding acts until said excess is exhausted. Provided, That any special deduction not allowed because of the above limitation which is available on the expiration date of the income tax exemption period for the decree of the exempted business that holds a decree granted under this part, or under preceding tax incentives laws, shall not be used against taxable operations income.
(2) It is further provided that any person affiliated to a business exempted under this part or under previous tax incentives laws may claim, in addition to any other deduction granted by law, a special deduction equal to the amount of expenses incurred in Puerto Rico in research, testing, medical research, health research, clinical research and basic scientific research leading to the development of new products, new uses or indications for said products, the improvement of said products, or the study of illnesses, in excess of the annual average of such expenses incurred during the three (3) taxable years ending prior to January 1, 2004, or the parts of such period that are applicable and deductible in the taxable year under Subtitle A of the Puerto Rico Internal Revenue Code. To claim the special deduction provided herein, the entity shall incur not less than forty percent (40%) of said expense in higher education entities and/or schools of medicine duly accredited by the educational authorities of Puerto Rico and the United States and that are in strict compliance with the practices required by state and federal rules and regulations and/or institutions of the Government of the Commonwealth of Puerto Rico and/or of the United States of America in Puerto Rico. Provided, however, That in the event that said higher education institutions, schools of medicine and/or institutions refuse to carry out any eligible research and development activity pursuant to this clause, such eligible activity shall be taken into consideration regarding their compliance with the forty percent (40%) requirement set forth in the preceding sentence.
(3) For the purposes of the provisions of clause (2) of this subsection, an “affiliated person” means any legal entity that:
(A) Is controlled, directly or indirectly, by fifty percent (50%) or more of the total value of its shares or participations by a corporation or partnership, and
(B) in turn, said corporation or partnership owns, directly or indirectly, fifty percent (50%) or more of the total value of the shares or participations of an exempt business.
(d) Deduction and carry-over of net operating losses. —
(1) Deduction for current losses in activities not covered by an exemption decree. — If an exempted business which holds a decree granted under this part incurs a net operating loss other than that of the operation which has been declared exempted, said loss shall be deductible and may only be used against income not covered by an exemption decree and shall be governed by the provisions of the Puerto Rico Internal Revenue Code. The share in losses of special partnerships that own or operate tourist businesses that are exempted under §§ 6001 et seq. of Title 23, known as the “1993 Puerto Rico Tourist Development Act”, may be used against income covered by a tax exemption decree issued under this part or preceding laws.
(2) Deduction for current losses incurred in the operation of an exempted business. — If an exempted business that holds a decree granted under this part incurs a net loss, computed without the benefit of the special deductions provided in this part and in the operation declared as exempted under this part, said loss may be deducted from the industrial development income of the operation that incurred the loss, or of operations covered by other exemption decrees under this part or preceding laws.
(3) Deduction for carried-over losses from previous years. — A deduction for carry-over of losses incurred in previous years, shall be granted as provided below:
(A) The excess of those losses that are deductible under clause (2) of this subsection may be carried over against the industrial development income of subsequent taxable years. Said losses shall be carried over in the order they were incurred.
(B) Any net loss incurred in a year in which the option of § 10105(f) of this title is in effect, may be carried over solely against the industrial development income generated by the exempted business under the decree whereby the option of § 10105(f) of this title was exercised. Said losses shall be carried over in the order they were incurred.
(C) Once the income tax exemption period has expired, the net losses incurred for the operation declared as exempted under this part, as well as any amount in excess of the deductions allowed under subsection (e) of this section, which the exempted business is carrying over as of the expiration date of said period, may be deducted from any taxable income in Puerto Rico subject to the limitations provided in Subtitle A of the Puerto Rico Internal Revenue Code. Said losses shall be deemed as incurred for the last taxable year in which the exempted business enjoyed income tax exemption under the decree. The above notwithstanding, the special deduction granted under subsection (c) of this section carried over by the exempted business, may not be deducted from the income of the operations not covered by the decree.
(4) The amount of the net operating loss to be carried over shall be computed pursuant to the provisions of Section 1124 of the Puerto Rico Internal Revenue Code, except that in addition to the exceptions, additions and limitations provided in said section, the loss shall be adjusted by the income from eligible activities under § 10101(j) of this title.
(5) Deduction of losses for capital investments in an exempted business. — When an individual suffers losses for capital investments in an exempted business whose operations have been financed or secured by the Economic Development Bank for Puerto Rico, or in which it has invested funds, said losses shall be allowed as a deduction under the Puerto Rico Internal Revenue Code, within the taxable year they occur, provided the investment had been authorized by the Economic Development Bank for Puerto Rico, as the latter may provide by regulations. The Economic Development Bank for Puerto Rico shall determine when said investment is lost.
Said deduction may not exceed fifty percent (50%) of the net income of the taxpayer for the taxable year he/she claims the same. The amount of the loss not deducted because of the above limitation may be claimed as a deduction in subsequent taxable years until it is exhausted.
(e) Special deduction for investments in buildings, structures, machinery and equipment. — Any exempted business that holds a decree granted under this part or under preceding tax exemption laws shall be granted the option of deducting its total expenses incurred after the effective date of this act, for the purchase, acquisition or construction of buildings, structures, machinery and equipment, in lieu of any capitalization of expenses required by the Puerto Rico Internal Revenue Code, provided that these buildings, structures, machinery and equipment (i) have not depreciated or been previously used by any other business or person in Puerto Rico, and (ii) are being used to manufacture the products or render the services for which the benefits provided under this chapter were granted. The deduction provided under this subsection shall not be granted in addition to any other deduction provided by law, but shall merely be an acceleration of the deduction of the expenses described above. Provided, That in the case of machinery and equipment previously used outside of Puerto Rico, but that has not previously depreciated or been used in Puerto Rico, the investment in said machinery and equipment shall qualify for the special deduction provided in this subsection (e) only if as of the date of the acquisition thereof by the exempted business, said machinery and equipment still have at least fifty percent (50%) of their useful life, as determined pursuant to the Puerto Rico Internal Revenue Code. The exempted business that holds a decree granted under this chapter or under preceding tax incentives laws, may deduct all expenses incurred after the effective date of [t]his act in remodeling or repairing buildings, structures, machinery and equipment, in the taxable year they are incurred, in lieu of any capitalization of expenses required by the Puerto Rico Internal Revenue Code, whether said buildings, structures, machinery and equipment have been acquired or constructed before or after the effective date of this act, and whether they have or have not depreciated or been used by another business or person prior to being acquired by the exempted business that holds a decree granted under this part or under preceding tax incentives laws. The amount of the investment eligible for the special deduction provided in this subsection, in excess of the net industrial development income of the exempted business that holds a decree granted under this part or under preceding tax incentive laws in the year of the investment, may be claimed as a deduction in subsequent tax years until said excess is exhausted. No deduction shall be granted under this subsection with regard to the investment in buildings, structures, machinery and equipment, covered by the special deduction provided in subsection (c) of this section.
Provided, That the special deduction provided in this subsection, may also be claimed by the exempted business in any year it chooses to select the flexible tax exemption benefit already provided in § 10105(f) or § 10040(f) of this title, as amended.
(f) Deduction for purchases of products made in Puerto Rico. — Any business exempted under this part or under preceding tax incentives acts shall be granted, as an alternative, a deduction for purchasing products made in Puerto Rico in an amount equal to fifteen percent (15%) of the purchase of said products, reduced by the average of purchases of said products made for the year 2000. This deduction is granted only for purchases of products made by businesses not related to the exempt business. For purposes of the preceding calculation, said purchases from unrelated businesses shall be excluded from the total purchases of products made in Puerto Rico made by the exempt business.
The deduction provided for in this subsection shall be used only in the taxable year in which the industrial development income against which the deduction is being taken is generated. This deduction may not be carried over to subsequent taxable years.
The exempt business that avails itself of this provision during a specific taxable year may not enjoy simultaneously the credit provided for in § 10104(b) of this title.
(g) Special rules. —
(1) In those cases in which an expense item qualifies for benefits under one or more of the above subsections, the exempted business may choose under which subsection it shall avail itself of the benefit.
(2) In those cases in which an exempted business is entitled to claim more than one of the special deductions provided in subsections (a), (b), (c) and (e) of this section, the sum of which, after determining the amount which said exempted business would be entitled to before taking into account the limitation based on industrial development income, exceeds the industrial development income for said specific year, or results in preventing said exempted business from taking the total benefit thereof for the same year, said exempted business shall determine the limit (based on its industrial development income) to be deducted from each of the special expense items in the following order:
(A) It shall first determine the special deduction under subsection (a) without taking into account the benefits of that or other special deductions provided in this section;
(B) it shall then determine the special deduction under subsection (b) without taking into account the benefits of that deduction, but taking into consideration the benefits of the special deduction provided in subsection (a);
(C) it shall then determine the special deduction under subsection (c) without taking into account the benefits of that deduction but taking into consideration the benefits of the special deductions provided in subsections (a) and (b), and
(D) finally, it shall determine the special deduction under subsection (e) without taking into account the benefits of that deduction but taking into consideration the benefits of the special deductions provided in subsections (a), (b), and (c). The sum of the special deductions thus determined shall by no means exceed the industrial development income for the specific year of said computation.
(3) In the case of businesses exempted under preceding laws that have availed themselves of the benefits of the renegotiation provided in § 10107(a) of this title, the deductions provided in this section shall be applied in their entirety to the industrial development income in excess of the base period income subject to the fixed industrial development income tax rate provided in § 10102(a) of this title, subject to the conditions and limitations imposed for the deduction thereof in the respective subsections.
History —Dec. 2, 1997, No. 135, § 4; Aug. 17, 2001, No. 112, § 1; Aug. 17, 2001, No. 113, § 1; Dec. 28, 2003, No. 322, § 1; Sept. 16, 2004, No. 367, §§ 1, 2; Sept. 30, 2004, No. 543, § 1.