2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1006 - Accounting Periods and Methods of Accounting (§§ 30171 — 30182) › § 30181 - Method of flexible depreciation

(a) Flexible depreciation deduction. —
(1) General rule. — In the case of flexibly depreciable property with respect to which the option provided in subsection (b) is effective for the taxable year, a taxpayer, in computing his/her net income for said taxable year, may deduct the whole, or any part, or no part, of the flexibly adjusted basis of said property, except that the amount of the deduction under this subsection shall not exceed the net benefit (determined without taking into consideration the deduction provided herein, but after taking into consideration the deduction provided in § 30127 of this title) of said business or commercial activity in which the flexibly depreciable property is used.
(2) In the case of flexibly depreciable property acquired after December 31, 1972, and before January 1, 1985, the total amount of said deduction shall not exceed fifty percent (50%) of the net benefit (determined without taking into consideration the deduction provided herein) of said business or commercial activity.
(3) The taxpayer who elects to take the deduction provided in this subsection cannot reduce his/her net benefit (determined by taking into consideration such deduction) to less than zero.
(4) This deduction shall be in lieu of the deduction under § 30127 of this title for current depreciation of the property for the taxable year, but it shall be subject in all other respects to the requirements of said section.
(5) The property acquired and used by a taxpayer enjoying tax exemption nor the property leased to an exempt business and/or deemed as exempt because of its being property engaged in industrial development as said term is defined §§ 10641 et seq. of this title, known as the “Economic Incentive Act for the Development of Puerto Rico”, or any other previous or subsequent similar law, may not be flexibly depreciated during the tax exemption period. Once the exemption period has expired, the taxpayer may claim the flexible depreciation.
(6) [Requirements of books, registers and separate accounts]. — [The taxpayer shall be obligated to maintain separate books, registers and accounts that reflect the net income of commercial business or activity in which the flexible depreciable property is used. A taxpayer that does not comply with this requirement will not have a right to claim a flexible depreciation deduction in this subsection.]
(b) Option to claim flexible depreciation. — The option to claim flexible depreciation shall be exercised according to regulations prescribed by the Secretary.
(c) Transfer of flexibly depreciable property. —
(1) Treatment of gain or loss in the transfer. —
(A) In addition to any amount of gain or loss prescribed in § 30143 of this title, the amount by which the adjusted basis to determine gain provided in § 30144(b) of this title exceeds the flexibly adjusted basis to determine gain shall be realized and recognized as a gain in the transfer of flexibly depreciable property.
(B) In addition to any amount of gain or loss prescribed in § 30143 of this title, the amount by which the flexibly adjusted basis to determine loss exceeds the adjusted basis to determine loss provided in § 30142(b) of this title shall be realized and recognized as a loss in the transfer of flexibly depreciable property.
(C) Any gain or loss thus determined shall not be treated as gain or loss in the sale or exchange of a capital asset. However, the tax attributable to any gain thus determined which is in excess of any loss prescribed in § 30143 of this title, includable in the gross income in the taxable year, shall not exceed the aggregate amount of taxes which would have been attributable to gain had such gain been ratably included in the taxable year and the two (2) preceding taxable years, or the period during which the property is owned, whichever is less.
(2) Notice of transfer. — A taxpayer who transfers any flexibly depreciable property in respect of which the option provided in subsection (b) of this section has been effective for any taxable year shall file a notice of transfer according to regulations prescribed by the Secretary.
(3) Limitation. — The limitation for assessment in respect of any deficiency involving the transfer of flexibly depreciable property with respect to which the option provided in subsection (b) has been effective for any taxable year shall not begin to run before the date of the filing of the notice of transfer corresponding to said property.
(d) Definitions. —
(1) Flexibly depreciable property. — For purposes of this section the term “flexibly depreciable property” means any property acquired before the first taxable year beginning after June 30, 1995, which, in the absence of the option provided in subsection (b), would be subject to the current depreciation provided in § 30127 of this title and is exclusively used in one of the following businesses:
(A) A bona fide agricultural business;
(B) a construction business;
(C) a land development business;
(D) a business for the substantial rehabilitation of structures or buildings;
(E) a business for the sale or lease of structures or buildings;
(F) a manufacturing business;
(G) a hotel or tourism business;
(H) a business to export products or services to foreign countries, or
(I) a shipping business.
(2) The business must be operated by the taxpayer in Puerto Rico, and the property with respect to which the election under subsection (b) is made must be used therein and have been acquired after December 31, 1954 and before the first day of the first taxable year begun after June 30, 1995.
(3) In the case of flexibly depreciable property acquired to be used exclusively in a business devoted to land development, the substantial rehabilitation of buildings or structures, sale or lease of buildings or structures, tourism, or exporting of products or services to foreign countries, the property with respect to which the election is made must have been acquired after December 31, 1984 and before the first day of the first taxable year begun after June 30, 1995.
(4) In the case of a taxpayer, or of property devoted to industrial development, or property leased to a shipping business, which has totally exhausted the tax exemption period to which subsection (a) refers, the term “flexibly depreciable property” also means any real property (excluding land) acquired by the taxpayer after February 14, 1949, and used originally in a manufacturing, hotel or shipping business operated by the taxpayer, and real property (excluding land) acquired by the taxpayer after February 14, 1949, to be owned for the production of income and leased originally to a manufacturing, hotel or shipping business operated by the lessee.
(5) In the case of real property:
(A) Any property acquired prior to December 31, 1954, but used originally by the taxpayer after December 31, 1954, in a bona fide agricultural, construction, manufacturing or shipping business shall, for this purpose, be deemed as acquired after December 31, 1954, and
(B) any property acquired prior to February 14, 1949, but used originally after February 14, 1949, in a manufacturing, hotel or shipping business operated by a taxpayer to whom subsection (a) refers, or any property acquired prior to February 14, 1949, devoted to industrial development, which has exhausted said tax-exemption period, but was originally leased after February 14, 1949, to a manufacturing, hotel or shipping business operated by the lessee shall be deemed for these purposes as acquired after February 14, 1949.
(6) Any property excluded from the term “flexibly depreciable property” under this clause, but in respect to which there has been in effect a flexible depreciation option in any taxable year for which the property qualified as “flexibly depreciable property” shall continue to be deemed as “flexibly depreciable property” only for purposes of the provisions on transfers contained in subsection (c).
(7) Flexibly adjusted basis. — “Flexibly adjusted basis” of property shall be the adjusted basis of property provided in § 30142(b) of this title:
(A) Reduced in the amount by which the flexible depreciation allowed exceeds the amount of current depreciation used for determining the adjusted basis during the period in which the flexible depreciation option provided in subsection (b) has been effective, or
(B) increased in the amount by which the current depreciation used for determining the adjusted basis, during the period in which the option provided in subsection (b) has been effective, exceeds the flexible depreciation allowed.
(8) Transfer. — “Transfer”, for purposes of this section, includes:
(A) Any sale or other disposition of property, or any transfer of title or ownership of property, but shall not include a transfer in the course of an exchange as described in § 30144(b)(5) or (6) of this title or of a reorganization as described in § 30144(g)(1)(A), (E) or (F) of this title unless the effect of the transfer is to make applicable any other paragraph of this clause;
(B) the discontinuance for a period of more than six (6) months of the use of the property in an agricultural, construction, manufacturing, hotel or shipping business operated by the taxpayer; it being understood that this shall not apply in the case of property held for the production of income and leased to a manufacturing, hotel or shipping business operated by the lessee when the same becomes vacant; provided that the property is continued to be offered on the market exclusively for lease for such businesses;
(C) the physical removal of the property outside Puerto Rico;
(D) in the case of a foreign corporation or partnership, or of a nonresident individual the discontinuance of the business thereof in Puerto Rico;
(E) in the case of property under construction, a stoppage of the construction for a period of more than six (6) months or failure to complete construction within three (3) years after it was started, and
(F) any other act or situation classified as a transfer in regulations prescribed by the Secretary.
The Secretary may, according to regulations, upon just cause shown, grant an extension of time for or an exemption from classifying as a transfer in respect of any act or situation specified in the foregoing paragraphs if he/she is satisfied that treatment as a transfer would not be appropriate under all circumstances.
(9) Bona fide agricultural business. — For purposes of this section the term “bona fide agricultural business” means:
(A) The farming or cultivation of the land for the production of fruits, vegetables, spices for condiments and all kinds of foods for human beings or animals; the raising of animals for the production of meat, milk or eggs; the raising of thoroughbred racehorses; those operations involved in packing, canning or classifying fresh agricultural products which form part of the same agricultural business; mariculture and aquaculture; the commercial production of flowers and ornamental plants both for the local market and for exporting; the cultivation of vegetables by hydroponic methods, the sheds and other equipment utilized for these purposes, by a bona fide farmer.
(B) The determination of what constitutes a bona fide agricultural business shall be made taking into account such factors as lucrative purposes; the policies issued by the State Insurance Fund; the returns filed with the Federal Social Security Administration; the government programs for farmers, and the agricultural loans which the taxpayer may have taken out and any other factors which, in the opinion of the Secretary, in consultation with the Secretary of Agriculture may be essential to qualify the taxpayer as engaged in a bona fide agricultural business.
(10) Shipping business. — For the definition of the term “shipping business” see § 30141(a)(25) of this title.
(e) Regulations. — The provisions of this section shall be applied according to the regulations prescribed by the Secretary. The regulations shall include:
(1) The procedure to be followed in exercising the option provided in subsection (b);
(2) the procedure to be followed in filing the notice of transfer prescribed in subsection (c);
(3) rules applicable in determining if the property was acquired before the first taxable year commencing after June 30, 1995;
(4) rules applicable to determine if a taxpayer is operating an agricultural, construction, land development, substantial rehabilitation of buildings or structures, sale or lease of buildings or structures, manufacturing, hotel, tourism, exporting of products or services to foreign countries, or shipping, and if the flexibly depreciable property is being used in said business, and
(5) rules applicable for the computation of the tax provided in subsection (c)(1).
History —Jan. 31, 2011, No. 1, § 1040.11, retroactive to Jan. 1, 2011.