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 1005 - Computation of Taxable Income (§§ 30101 — 30157) › Subchapter C - Deductions (§§ 30121 — 30140) › § 30137 - Non-deductible items

(a) General rule.— In computing the net income, in no case shall deductions be allowed with respect to:
(1) Personal expenses, of subsistence, of family or those related to the exercise of a profession or occupation as an employee, except those expenses deductible according to the provisions of § 30135 of this title.
(2) Any amount paid out for new buildings or for capital improvements made to increase the value of any property or estate.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.
(5) Any amount otherwise allowable as a deduction (except interest expenses of financial institutions subject to the proportional allocation of subsection (f)) that is attributable to one or more types of income wholly exempt from the taxes imposed by this part, whether or not any income of that class or classes is received or accrued.
(6) Any amount paid or accrued on indebtedness incurred or continued to purchase a single premium life insurance or endowment contract. For purposes of this clause, if substantially all the premiums on a life insurance or endowment contract are paid within a period of four (4) years from the date on which such contract is purchased, such contract shall be considered a single premium life insurance or endowment contract.
(7) Amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to a property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.
(8) Premiums on insurance policies against any risk, paid to any insurer not authorized to contract insurance in Puerto Rico and/or through an agent or broker not authorized to transact insurance in Puerto Rico according to the provisions of the Insurance Code of Puerto Rico.
(9) Any amount paid as interest on which no information return has been filed under §§ 30292 and 30296 of this title, pursuant to the requirements provided in said sections, or that having been filed, the Secretary should determine that the financial business failed to comply with the provisions of said sections and the regulations implementing them.
(10) Interest paid or accrued on indebtedness incurred or continued to purchase or carry obligations the interest upon which is wholly exempt from the taxes imposed by this part.
(11) Expenses related to the ownership, use and maintenance, and depreciation of boats, except:
(A) Boats of all kinds which constitute fishermen’s working instruments and fishing boats used exclusively for fishing as part of an industrial unit or tourist attraction, or of any entity engaged in fishing and to the exclusive transportation of fish for purposes of industrial elaboration in Puerto Rico; or
(B) vessels used exclusively in the transportation of passengers or freight, and tugboats and ships used for bunkering, which have been duly authorized to engage in this type of business in Puerto Rico.
(C) Expenses incurred by entities engaged in leasing boats.
(D) To be entitled to this deduction for the use of ships, the businesses described in paragraphs (A), (B), and (C) of this clause shall derive more than eighty percent (80%) of their total income from fishing or passenger or freight transportation, or from leasing of ships, whichever applies.
(12) Amounts, other than interest, paid or accrued by a corporation that are directly or indirectly related with the redemption of its stock.
(13) Expenses related to the ownership, use, maintenance and depreciation of airplanes, helicopters or any other kind of aircraft, except for:
(A) Airplanes, helicopters, or aircraft of all kinds which constitute working instruments of business exclusively engaged in the transportation of passengers or freight, duly authorized to carry out this kind of business in Puerto Rico, or
(B) expenses incurred by entities engaged in leasing aircraft.
(C) To be entitled to this deduction for the use of airplanes, helicopters, or other aircraft, said businesses shall derive more than eighty percent (80%) of their total income from the transportation of passengers or freight or the leasing of airplanes, helicopters, or other aircraft, whichever applies;
(14) Expenses related to the use, maintenance, and depreciation of residential property located outside of Puerto Rico, except in the case of business exclusively engaged in leasing properties to unrelated parties. To be entitled to this deduction for the use of residential property located outside of Puerto Rico, said businesses shall derive more than eighty percent (80%) of their total income from the leasing activity, except for income derived from leasing property to related parties. For purposes of this clause, the term “related party” shall have the meaning provided in § 30045 of this title.
(15) Except as provided in § 30127(a)(3)(A) of this title, expenses related to the ownership, use, maintenance, and depreciation of automobiles.
(16) In the case of entities filing under §§ 30321 et seq. or §§ 30551-30578 or §§ 30581-30590 of this title, for purposes of determining the item specified in:
(A) Section 30332(a)(10) of this title.
(B) Section 30556(a)(10) of this title.
(C) Section 30584(b)(10) of this title, no deduction shall be allowed with respect to expenses incurred or paid to a partner, stockholder or member who owns fifty percent (50%) or more of partnership interest, corporate stock, or membership units in a limited liability company, if such payment is not subject to income taxes or withholding at the source under this Code during the taxable year in which they are incurred or paid.
(D) This provision shall not apply to entities operating under the provisions of §§ 10641 et seq. of this title, known as the “Economic Incentives Act for the Development of Puerto Rico,” or any previous or subsequent similar law, or under the provisions of §§ 6341 et seq. of Title 23, known as the “Puerto Rico Tourism Development Act of 2010”; §§ 10421 et seq. of this title and §§ 10831 et seq. of this title, or any previous or subsequent similar law or any other special law granting a tax exemption with respect to income derived from operations, covered under a tax exemption decree, resolution, or grant conferred under said laws.
(E) The Secretary may evaluate, under the rules and regulations he/she promulgates, at the request of the entity, which shall be submitted within the first taxable year included in the request, the nature of the expenses or costs paid to a partnership, stockholder, or member described in paragraph (C) of this clause, in order to determine if any of such expenses or costs shall be excluded from the provisions of this clause; Provided, That such exclusion shall apply only for a maximum of three (3) taxable years; however, the taxpayer shall be entitled to submit a request for subsequent terms after such term has expired, and that, for taxable years beginning after December 31, 2014, the total expenses that may be excluded from the provisions of this subparagraph shall not exceed sixty percent (60%) of the total expenses described in said paragraph for taxable years beginning after December 31, 2014, except in the case of entities subject to the provisions of §§ 1 et seq. of Title 7, known as the “Banking Law” or entities organized or authorized under the National Bank Act doing business in Puerto Rico, which may exclude up to one hundred percent (100%) of the expenses described in paragraph (C) of this clause as determined by the Secretary.
(17) Fifty-one percent (51%) of the expenses incurred by a taxpayer and paid or to be paid to:
(A) A related party (as such term is defined in § 30045(b) of this title) that does not conduct business in Puerto Rico, if such payment is not subject to income taxes or withholding at the source under this Code during the taxable year in which they were incurred or paid, or
(B) A home office located outside of Puerto Rico, by a foreign corporation engaged in trade or business in Puerto Rico through a branch.
(C) This provision shall not apply to a person operating under the provisions of §§ 10641 et seq. of this title, known as the “Economic Incentives Act for the Development of Puerto Rico,” or any previous or subsequent similar law, or under the provisions of §§ 6341 et seq. of this title, known as the “Puerto Rico Tourism Development Act of 2010”; §§ 10421 et seq. of this title, and §§ 10831 et seq. of this title, or any previous or subsequent similar law or any other special law granting a tax exemption with respect to income derived from operations, covered under a tax exemption decree, resolution, or grant conferred under said laws.
(D) The Secretary may evaluate, under the rules and regulations he/she promulgates, at the request of the taxpayer, which shall be submitted within the first taxable year included in the request, the nature of the expenses or costs paid to a related party or home office in order to determine if any of such expenses or costs shall be excluded from the provisions of this clause; Provided, That such exclusion shall apply only for a maximum of three (3) taxable years; however, the taxpayer shall be entitled to submit a request for subsequent terms after such term has expired, and that, for taxable years beginning after December 31, 2014, the total expenses that may be excluded from the provisions of this paragraph shall not exceed sixty percent (60%) of the total expenses described in this subparagraph for taxable years beginning after December 31, 2014, except in the case of entities subject to the provisions of §§ 1 et seq. of Title 7, known as the “Banking Law” or entities organized or authorized under the National Bank Act doing business in Puerto Rico, which may exclude up to one hundred percent (100%) of the expenses described in this paragraph as determined by the Secretary.
(18) The special tax on gross income imposed under this Code.
(19) Expenses incurred or paid for services rendered by a nonresident individual if the taxpayer has not paid the sales and use tax imposed under §§ 32001 et seq. of this title and the value-added tax imposed under §§ 32201 et seq. of this title, as appropriate, on such services. This clause shall not apply if the services are subject to an exclusion or exemption from the payment of the sales and use tax or the value-added tax, as applicable.
(20) The cost or depreciation of any taxable good or item, as defined in §§ 32001 et seq. or §§ 32201 et seq. of this title, as applicable, even when the same is considered or is part of a regular and necessary expense of the business, if the taxpayer has not paid the sales and use tax or the value-added tax on said item imposed under §§ 32001 et seq. or §§ 32201 et seq. of this title, as applicable. This clause shall not apply if the taxable good or item, as defined in §§ 32001 et seq. or §§ 32201 et seq. of this title, as the case may be, is subject to an exclusion or exemption from the payment of the sales and use tax or the value-added tax, as applicable.
(b) Losses from the sale or exchange of property.—
(1) Losses disallowed.— In computing net income no deduction shall be allowed in any case with respect to losses from sales or exchanges of property, directly or indirectly:
(A) Between family members, as defined in clause (2)(C) of this subsection;
(B) except in the case of distributions in liquidation, between an individual and a corporation or partnership, more than fifty percent (50%) in value of the issued stock or capital of which is owned, directly or indirectly, by or for such individual;
(C) except in the case of distribution in liquidation, between two (2) corporations, or between two (2) partnerships, or between a corporation and a partnership, more than fifty percent (50%) in value of the issued stock or capital of which is owned, directly or indirectly, by or for the same individual;
(D) between a grantor and a fiduciary of any trust;
(E) between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust, or
(F) between a fiduciary of a trust and a beneficiary of such trust.
(2) Stock ownership, family and partnership rule.— For purposes of determining, in applying clause (1), the ownership of stock or the interest in partnership capital:
(A) Stock or interest in partnership capital owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;
(B) an individual shall be considered as owning the stock or interest in partnership capital owned, directly or indirectly, by or for his/her family;
(C) the family of an individual shall include only his/her brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants, and
(D) Constructive ownership as actually owned.— the stocks, or the interest in partnership capital, constructively owned by a person by reason of the application of paragraph (A) shall, for the purpose of applying paragraph (A) or (B), be treated as actually owned by such person; but stock or interest in partnership capital constructively owned by a person by reason of the application of paragraph (B) shall not be treated as owned by him/her, for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock or interest in partnership capital.
(3) Losses disallowed from the sale or other disposition of certain automobiles.— Notwithstanding the provisions in § 30125(a) and (b) of this title, in the case of any automobile, as defined in § 30127(a)(3)(B), no deduction whatsoever shall be allowed with respect to losses from the sale or other disposition thereof.
(c) Unpaid expenses and interest.— In computing net income, no deduction shall be allowed under § 30121 of this title, relating to expenses incurred, or under § 30123 and § 30135(a)(2)(A) and (B) of this title, relating to interest accrued:
(1) If such expenses or interest are not paid within the taxable year or within two and one-half (21/2) months after the close thereof; and
(2) if, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, allowed in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends, and
(3) if, at the close of the taxable year of the taxpayer or at any time within two and one-half months (21/2) thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom the losses would be disallowed under subsection (b).
(d) Holders of life or terminable interest.— Amounts paid under the laws of the Government of Puerto Rico, any state, territory, the District of Columbia, or a possession of the United States, or a foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this part, except for deductions provided in § 30127 of this title, for the purpose of computing the net income of an estate or trust, but not allowed under the laws of the Government of Puerto Rico, or of such state, territory, the District of Columbia, possession of the United States, or foreign country for the purpose of computing the amount to which such holder is entitled.
(e) Food and entertainment expenses and expenses for conventions held outside of Puerto Rico and the United States.—
(1) Food and entertainment expenses.—
(A) General rule.— There shall be no deduction for food and entertainment expenses in excess of fifty percent (50%) of the amount actually paid or incurred up to the limit of twenty-five percent (25%) of the gross income for the taxable year, without considering as part of said expenses the items that otherwise would not constitute ordinary and necessary expenses of a trade or business or of an activity for the production or collection of income, or for the administration, conservation or maintenance of property held for the production of income.
(B) For purposes of this clause, personal expenses for “entertainment, amusement, or recreation” shall be considered as all those expenses related to an activity which is generally considered a family, entertainment, amusement, or recreation activity, unless the taxpayer establishes that the activity was mainly and directly related to, or, in the case of an activity preceding or following a substantial and bona fide business discussion, that such activity was associated with the active conduct of the taxpayer's trade or business.
(C) “Food expenses” under this clause shall refer to those expenses incurred in food and beverages provided to any person under circumstances which, taking into account the surroundings in which provided; the taxpayer’s trade or business, or income-producing activity; and the relationship to such trade, business or activity of the persons to whom the food and beverages were provided, would be of a type generally considered to be of such a nature or leading to an active discussion of business.
(2) Expenses for conventions held outside of Puerto Rico and the United States.—
(A) General rule.— Except as provided further and the provisions of § 30122(c)(1) of this title, transportation, food, lodging, and registration expenses and any other expense attributable to the attendance of an individual to a convention or similar meeting to be held outside of Puerto Rico and the United States shall not be allowed as a deduction when computing the net income for such individual.
(B) Definitions.—
(i) Outside of Puerto Rico and the United States.— For purposes of this clause, the term “outside of Puerto Rico and the United States” means any convention or similar meeting held outside of the territorial limits of the Government of Puerto Rico, the United States of America, including its territories and possessions, or on a vessel which at any time during the length of the convention or similar meeting docks outside the territorial waters of the United States of America.
(ii) Convention or similar meeting.— For purposes of this clause, the term “convention” or “similar meeting” means any meeting of a large number of persons organized and called for any purpose, except:
(I) A seminar programmed officially for the discussion of a topic directly related to the trade or business of a taxpayer, sponsored by a professional or business organization and which includes work activities scheduled to be shared by teachers and pupils with the purpose of training the latter in the research of a specific discipline, or
(II) expenses incurred by a teacher to pursue higher or additional studies, when such studies are of beneficial to the institution where the teacher works because of the improvement of his/her better academic education, when the teacher has been authorized to pursue his/her studies and when the studies have been pursued, not with the purpose of obtaining a pay raise, but to maintain his/her professional skill and improve his/her capacity to teach the subject matter assigned to him/her.
(C) This clause shall not apply in the case of an employer or other person who pays the expenses incurred by an individual for his/her attendance to a seminar described in paragraph (B)(ii)(II) of this clause, provided that such expenses are ordinary and necessary and such individual may be required to include the amount of these expenses as part of his/her gross income or such employer or person may be required to report, on an information return or on the individual’s withholding statement, the amount of the expenses paid on this account.
(D) In the case of a self-employed individual, the amounts actually paid for food and entertainment incurred because of his/her attendance to a seminar, otherwise deductible under § 30121 of this title, shall be deductible for the individual subject to the provisions of clause (1).
(E) In those cases where, in the activity to be held outside of Puerto Rico or the United States, activities which are properly attributed to a convention or similar meeting are combined with educational activities, to which the attendance of the taxpayer is indispensable and, if it were not for this provision, the expenses would be deductible as trade or business expenses or income production expenses, a deduction shall be allowed for that portion of the expenses which represent the cost of such seminar.
(f) Pro rata allocation of interest expense of financial institutions to tax exempt interest.—
(1) In general.— In the case of a financial institution, no deduction whatsoever shall be allowed for that portion of interest expenses which may be attributable to exempt interest on exempt obligations acquired after December 31, 1987.
(2) Allocation.— For purposes of clause (1), the portion of the taxpayer’s interest expense that shall be attributable to exempt interests shall be that amount which bears the same ratio to such interest expense as the taxpayer’s daily average adjusted basis of the exempt obligations, in accordance with § 30142 of this title, bears with the daily average adjusted basis for all assets of the taxpayer. In the case of alien individuals, to determine the allocation of the expense, only the property related to the active conduct of a trade or business in Puerto Rico shall be taken into account.
(3) Definitions.— For purposes of this subsection:
(A) Interest expense.— The term “interest expense” means the aggregate amount allowable to the taxpayer as an interest deduction for the taxable year (determined without regard to this subsection). For purposes of the preceding sentence, the term “interest” includes amounts (whether or not designated as interest) paid with respect to deposits, investment certificates, and redeemable shares or repurchase agreements.
(B) Exempt obligation.— The term “exempt obligation” means any obligation the interest on which is wholly exempt from taxes imposed by this part. Such term includes shares of stock of registered investment companies which during the taxable year of the holder thereof distributes dividends from exempt interest.
(4) Financial institution.— For purposes of this subsection, the term “financial institution” means any person doing business in Puerto Rico that is:
(A) A commercial bank or trust company.
(B) A private bank.
(C) A savings and loan association or a building and loan association.
(D) An insured institution, as defined in Section 401 of the “National Housing Act”.
(E) A savings bank, industrial bank or other institution of savings or economy.
(F) A securities firm or brokerage house.
(G) Institutions involved in mortgage loans, commonly known as mortgage banks or mortgage brokers.
(H) Any other entity organized or authorized to operate under the banking or financing laws of the Government of Puerto Rico, the United States of America, any State of the Union or a foreign country.
(5) Special rule.— If any interest expense on indebtedness is disallowed under subsection (a) with respect to any exempt obligation:
(A) Such interest disallowed as a deduction shall not be taken into account for purposes of applying this subsection, and
(B) for purposes of applying clause (2), the adjusted basis of such exempt obligation shall be reduced (but not below zero) by the amount of such indebtedness.
(g) Loss on wash sales of stock or securities.— The loss from the sales of stock or securities when within thirty (30) days before or after the date of the sale the taxpayer has acquired substantially identical property. The disallowance of this loss deduction shall be as provided in § 30147 of this title.
History —Jan. 31, 2011, No. 1, § 1033.17, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 36; June 30, 2013, No. 40, § 19; Sept. 30, 2015, No. 159, § 4.