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) › § 30122 - Expenses not related to the principal trade or business

(a) In the case of an individual:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income, or in the conduct of one or more trades or businesses other than the principal trade or business shall be allowed as deductions up to the amount of the gross income derived from said activity, trade, or business
(2) The deductions of an activity in excess of the gross income from such activity shall be treated as deductions allowed against the gross income from such activity in subsequent years.
(3) If an individual recognizes gain in the sale or exchange of a property used in a trade or business, and said gain is not excluded from gross income under § 30082 of this title, the gain so recognized shall constitute gross income from the activity where the property sold or exchanged was being used.
(4) If the taxpayer has more than one activity or trade or business, other than his/her principal trade or business, the determination of the deductible expenses shall be made separately with respect to each activity or trade or business.
(5) The deduction allowed for traveling, meals, lodging and entertainment shall be subject to the limit established in § 30137(e) of this title.
(6) The Secretary shall establish by regulations the rules and criteria to be followed in determining whether, in the application of this clause, an activity or trade or business constitutes by itself a separate activity or trade or business, or whether it should be grouped with another activity or trade or business.
(b) If during the taxable year, a taxpayer disposes of all of his/her interest or of the properties used in an activity other than his/her principal trade or business, the following rules shall apply:
(1) Fully taxable transaction.—
(A) General rule.— If the total gain or loss is recognized in the transaction, any excess deductions of previous years shall be granted as a deduction against the income of said activity generated during the taxable year. The excess deductions, if any, may be claimed against any capital gain recognized in the provision. Any excess deductions for any capital gains recognized in the transaction, shall be considered as a capital loss subject to the provisions of § 30141 of this title.
(B) Transactions between related parties.— If the taxpayer and the person who acquires the interest or the property are related parties within the meaning of § 30137(b)(2) of this title, paragraph (A) shall not apply until the taxable year in which said interest or property is acquired (in a transaction described in paragraph (A)) by a party not related to the taxpayer.
(2) Installment sale of the total interest.— In the event of a sale of the total interest in the activity or of the property used in it with respect to which the taxpayer chooses to apply § 30175 of this title, clause (1) shall apply to said portion of the excess expenses for each taxable year in the same proportion to the total of the excess expenses that the gain recognized in the sale during the taxable year bears with the total gross gain made, or to be made upon completion of the total payment.
(3) Provision by gift or death.— If the total of the interest or the property used in an activity that does not constitute the principal trade or business of the taxpayer is transferred by gift or in case of the death of the taxpayer:
(A) The adjusted base of said interest immediately before the transfer (as provided in § 30142(a)(5) of this title) shall be increased by the amount of the excess of expenses not allowed as [a] deduction due to the limitations of this subsection, and
(B) such excess shall not be allowed as a deduction in any taxable year.
(c) Expenses related to the rendering of services as an employee.—
(1) General rule.— The compensation received by a taxpayer from the rendering of services as an employee, as said term is defined in § 30271(a)(3) of this title, and the pensions received by reason of said services, do not constitute a trade or business for purposes of § 30121 of this title, nor an activity described § 30122 of this title. Any excess of expenses over income under §§ 30121 and 30122 of this title, shall not reduce the compensation received from the rendering services as an employee or the pension by reason of services rendered, except:
(A) The loss incurred from the sale or exchange of preferred stock of a special employee-owned corporation;
(B) the loss incurred by an regular member of a special employee-owned corporation with respect to his/her private capital account balance at the time of his/her disassociation from the special corporation, or
(C) the distributive share of a regular or special member in the operating loss of a special employee-owned corporation.
(2) The deductible expenses related to the rendering of services as an employee are expenses for traveling, meals, lodging, while away from home, entertainment (other than amounts which are lavish or extravagant under the circumstances), and other expenses related to the employment which are paid or incurred by the taxpayer in relation to the rendering of his/her services as an employee, up to the amount of the reimbursement received from the employer.
(3) Exception.— The limitation contained in clause (1) shall not be applicable to the taxable year in which the taxpayer begins an activity which constitutes his/her principal trade or business, other than the rendering of services as an employee, and to the two (2) succeeding taxable years. This exception shall apply to the taxpayer only once.
(4) Salespersons on commission.— As a general rule, salespersons on commission are regarded as employees subject to the limitation provided in clause (1) of this subsection.
(d) Loss of a corporation of individuals.—
(1) General rule.— A shareholder’s pro-rata share in the losses of a corporation of individuals described in clauses (9) and (10) of subsection (b) of § 30584 of this title (as recognized under § 30584(a) of this title) incurred during a taxable year ending within the taxable year of the shareholder, shall be allowed in the following order, subject to the limitations established in § 30584(g) of this title, only to the extent of the pro-rata share in:
(A) the income of other corporations of individuals whose taxable year ends within the shareholder’s taxable year;
(B) the income of partnerships or special partnerships whose taxable year ends within the shareholder’s taxable year;
(C) the income attributable to such corporation of individuals for taxable years ending within the subsequent taxable years of the shareholder;
(D) the income of other corporations of individuals, for taxable years ending within the subsequent taxable years of the shareholder; and
(E) the income of partnerships or special partnerships in taxable years ending within the subsequent taxable years of the shareholder.
(2) In the case of losses incurred by two or more corporations of individuals, the deduction allowed under clause (1) of this subsection shall be attributable to each corporation of individuals in an amount which bears same ratio to the total loss incurred by all corporations of individuals within the taxable year of the shareholder. The Secretary shall prescribe through regulations, circular letter, informational bulletin, or general administrative determination, the form and manner in which such losses shall be distributed.
(e) Losses of a partnership or special partnership.— The distributive share of a partner in the loss of a partnership or special partnership incurred during a taxable year ending within the taxable year of a partner shall be allowed as a deduction to such partner in the following order, subject to the limitations established in this subsection and in §§ 30324 and 30565 of this title.
(1) General rule.— For purposes of this subsection, the amount of the loss allowable as a deduction attributable to the distributive share of a partner in the net loss of one or more special partnerships shall be determined as follows:
(A) The distributive share of a partner in the loss described in clauses (9) and (10) of subsection (a) of § 30332 of this title and clauses (9) and (10) of subsection (a) of § 30556 of this title shall be limited to the adjusted basis of the partner in the partnership or special partnership that sustained the loss. Once the loss in each of the partnerships and special partnerships is determined, the same shall be grouped to determine the amount of the net loss;
(B) The distributive share of a partner in the net income described in clauses (9) and (10) of subsection (a) of § 30332 of this title and clauses (9) and (10) of subsection (a) of § 30556 of this title of other partnerships or special partnerships shall be added to the net income of other partnerships or special partnerships which taxable year ends with the taxable year of the partner.
(C) The total of the net loss determined in paragraph (A) may be claimed as a deduction against the income of other partnerships or special partnerships, as determined in paragraph (B). The excess of the net loss, if any, may be claimed as a deduction against the income of corporations of individuals.
(2) Basis of the partner’s interest.— Except as provided in §§ 30372 and 30572 of this title, the adjusted basis of any of the partner’s interest in the partnership or special partnership shall not include debts of the partnership or special partnership.
(3) Carryover loss.— If, for any taxable year the distributive share of a partner in the net loss of a partnership or special partnership under clauses (9) and (10) of subsection (a) of § 30332 of this title and clauses (9) and (10) of subsection (a) of § 30556 of this title exceeds the amount allowable as a deduction under clause (1), then:
(A) Such excess shall be allowed first as a deduction against the partner’s distributive share in the net income of the partnership or special partnership in the subsequent taxable year;
(B) the amount allowed as a deduction under paragraph (A), shall reduce the basis of the partner’s interest in the partnership or special partnership (but not to less than zero), and
(C) the amount not allowed as a deduction under paragraph (A) shall be considered as a distributive share of a partner in a net loss under clauses (9) and (10) of subsection (a) of § 30332 of this title or clauses (9) and (10) of subsection (a) of § 30556 of this title of said partnership or special partnership for such taxable year for purposes of clause (1)(A) of this subsection.
(4) Special rules in the case of tourist businesses.—
(A) Application of clause (1).— For purposes of the application of paragraphs (A), (B), and (C) of clause (1) a partnership or special partnership that has in effect a resolution or grant as provided by the “Tourist Development Act of 1993”, §§ 6001 et seq. of Title 23, or any previous or subsequent similar law and that for a taxable year it incurs a loss in any of the items described in clauses (9) and (10) of subsection (a) of § 30332 of this title and clauses (9) and (10) of subsection (a) of § 30556 of this title and at the same time derives net income in the other item, such loss and net income shall be treated as if incurred or earned by different partnerships or special partnerships. For purposes of clause (1)(A), in applying this rule, the partner’s adjusted basis for purposes of the loss limitation shall be such partner’s adjusted basis in the partnership disregarding the net income derived in the other item.
(B) A loss or net income generated by such partnership or special partnership in a year in which it has in effect a flexible exemption election under such statutes, shall be considered as one of the items described in § 30332(a)(10) or § 30556(a)(10) of this title), as the case may be.
(C) Application of clause (3).— The Secretary shall adopt regulations related to the application of paragraphs (A), (B), and (C) of clause (3) in the case of persons having in effect a resolution or grant provided under the “Tourist Incentive Act of 1983”, §§ 693 et seq. of Title 23, or the “Tourism Development Act of 1993”, §§ 6001 et seq. of Title 23.
History —Jan. 31, 2011, No. 1, § 1033.02, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 26.