Summary of What This Blog Covers
- Source income accurately to determine proper U.S. or Puerto Rico tax treatment.
- Use QBI deductions for eligible U.S.-taxable income only.
- Structure your business smartly to avoid double taxation.
- Always file U.S. returns and FBARs, even as a Puerto Rico resident.
A Clearer Path to Smarter Tax Planning
Entrepreneurs with income flowing between the mainland United States and Puerto Rico are in a unique position—one filled with remarkable opportunities, but also layered with tax complexities that few truly understand.
From the outside, it can look daunting: two tax codes, distinct residency rules, competing filing obligations, and seemingly contradictory advice. But at Insogna, we see it differently. When approached with a well-designed strategy, cross-border taxation becomes less about rules and more about results.
Based in Austin, Texas, our team of certified public accountants and enrolled agents helps business owners confidently navigate both IRS and Puerto Rico Department of Treasury requirements. We simplify the complicated and structure the ambiguous, all while positioning your business to benefit from every available advantage.
If your income crosses the sea, this guide is for you. Let’s walk through the four essential tax strategies that empower cross-border entrepreneurs to grow with clarity, avoid pitfalls, and make every dollar count.
1. Correctly Source Your Income: Foundations for Tax Clarity
The Principle
In tax planning, few concepts carry more weight than income sourcing. The IRS and Puerto Rico’s Hacienda (Department of Treasury) both apply income tax based not only on where you live, but where your income originates.
So what does that mean for entrepreneurs? It means your physical location when services are performed (not where your client is based) plays a critical role in determining where that income is taxed.
Key Differences to Understand
- Puerto Rico-sourced income may be exempt from U.S. tax under Section 933 if you qualify as a bona fide resident.
- S.-sourced income, even when managed from Puerto Rico, is generally taxable by the IRS.
- The nature of work, travel days, and contract terms can all influence how the income is classified.
For example, if you’re a consultant providing services to a New York client but conducting all work while living in San Juan, the income could be considered Puerto Rico-sourced. But if you fly to New York for a series of in-person meetings or perform a portion of your services stateside, part of your income could be reclassified as U.S.-sourced and taxed accordingly.
Our Strategic Support
At Insogna, we take the guesswork out of income sourcing. We help clients:
- Implement contract language that reflects where services are performed
- Track work activity with location-based time logs
- Maintain travel documentation for audit readiness
- Understand how income classification affects both Act 60 benefits and U.S. tax obligations
Sourcing mistakes are among the most common triggers for IRS and Hacienda inquiries. But with the right systems in place, income sourcing transforms from a risk to a revenue-alignment tool that works in your favor.
2. Maximize the Qualified Business Income (QBI) Deduction: Smart Savings for Service-Based Entrepreneurs
Understanding QBI
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, allows eligible business owners to deduct up to 20% of qualified income from their taxable income. It was introduced to help level the playing field between pass-through businesses and corporations after the 2017 tax reform.
QBI can offer significant federal tax savings but its interaction with Puerto Rico-sourced income is often misunderstood.
Challenges and Opportunities
- Puerto Rico income that’s excluded from federal tax under Section 933 is not eligible for the QBI deduction.
- Only U.S.-taxable income from a qualified trade or business may qualify.
- Entity structure and ownership percentages influence how QBI is calculated.
This means if you’ve shifted all operations to Puerto Rico and structured income to be exempt under Act 60, you may lose access to QBI. But if you maintain U.S. operations or U.S.-source revenue, you could still benefit if it’s structured correctly.
What We Do
At Insogna, we take a precision-based approach to QBI by:
- Assessing your S. vs. Puerto Rico income mix
- Advising on entity restructuring to retain QBI eligibility
- Applying wage and basis limitations for higher-income earners
- Coordinating your federal and Puerto Rico filings for accuracy and consistency
Many entrepreneurs underutilize this deduction simply because they don’t have a tax professional who understands how cross-jurisdiction income flows affect it. Our role is to bridge the knowledge gap and capture every lawful deduction available.
3. Structure Cross-Border Entities: Design Your Business to Optimize Tax Treatment
The Importance of Structure
The business entity you operate under—whether a sole proprietorship, LLC, S Corporation, or Puerto Rico Export Services Entity—serves as the foundation for your tax treatment. In cross-border scenarios, that structure also determines how income is reported, how deductions are taken, and which benefits you can access.
Without a cohesive strategy, business owners may find themselves double-taxed, underprotected, or misaligned with local regulations.
Act 60 and Puerto Rico Entity Formation
Entrepreneurs relocating to Puerto Rico often establish a local Export Services Entity to take advantage of Act 60’s favorable tax treatment:
- A flat 4% corporate tax rate on eligible export services
- 100% exemption from Puerto Rico withholding tax on dividends
- Potential capital gains exemptions for eligible investors
But these benefits only apply when the business is structured and operated properly.
Real-World Structuring
Let’s consider an entrepreneur offering remote executive coaching to U.S. clients:
- She moves to Puerto Rico, forms an LLC taxed as a Puerto Rico corporation under Act 60
- She retains a U.S.-based LLC for legacy operations and mainland sourcing
- Intercompany agreements govern services, profit allocation, and administrative support
With our guidance, she avoids double taxation, retains QBI deductions on U.S. income, and keeps Puerto Rico compliance pristine.
This level of planning isn’t one-size-fits-all. It requires deep understanding of federal and territorial tax law, strategic document design, and ongoing collaboration between client and accountant. That’s where Insogna stands out as a proactive partner, not just a preparer.
4. File Your Federal Taxes. No Exceptions: Maintain Compliance with Confidence.
The Myth
Many new Puerto Rico residents believe they no longer need to file with the IRS. Unfortunately, this is rarely true.
Unless you’re not a U.S. citizen or resident alien, or you’ve ceased to be one, you must file a U.S. federal return even if all your income is Puerto Rico-sourced and excluded.
This is true even for those who fully qualify for Act 60 and exclude income under Section 933.
Filing Requirements and FBAR Obligations
Federal compliance includes:
- Filing Form 1040 annually
- Reporting self-employment income, interest, and dividends
- Completing Schedule C or K-1s for pass-through businesses
- Disclosing foreign accounts via FBAR (FinCEN Form 114) when balances exceed $10,000
Yes, Puerto Rican bank accounts are considered “foreign” for FBAR purposes, even though the island is a U.S. territory.
Missing an FBAR can result in:
- Penalties up to $10,000 per non-willful violation
- Higher fines or criminal exposure for willful noncompliance
Our Concierge Approach
Insogna manages this seamlessly. We coordinate:
- Your U.S. federal filings
- Your Puerto Rico returns
- FBAR and international disclosures
- Backup documentation for source income, travel, and entity structure
When the IRS or Hacienda sends a letter, our clients don’t panic. They forward it to us knowing we’ve anticipated the questions, documented the decisions, and protected every strategic move.
Partnering with Insogna: Why Expertise and Experience Matter
In a world of automated tax software and generic advice, Insogna offers something different: thoughtful, hands-on, white-glove service that transforms tax compliance into a strategic business advantage.
Here’s what clients get when they work with us:
- Advanced Technical Guidance: Our CPAs and enrolled agents specialize in multi-jurisdictional filings, Act 60, FBAR, QBI, and cross-border structuring.
- Strategic Foresight: We don’t wait for tax season. We offer year-round insights, entity reviews, and planning calls that help you move faster and smarter.
- Proactive Service: You’ll never wonder what’s due, what’s next, or what could go wrong. We handle the details and keep you informed before deadlines arrive.
- Client-Centered Communication: We explain tax concepts in plain English, offer visual summaries where helpful, and treat your questions with care and urgency.
Whether you’re searching for a CPA in Austin, a tax professional near you, or a certified accountant who understands both U.S. and Puerto Rico rules, Insogna is your elevated alternative to ordinary accounting firms.
Ready to Transform Your Tax Experience?
If your business income crosses borders, don’t settle for outdated advice, confusing software, or reactive service. Choose a partner who anticipates your needs, aligns your financial goals with tax strategy, and delivers every solution with clarity and integrity.
Schedule your tailored strategy session today with Insogna. Let’s structure your business, protect your advantages, and empower your growth with unmatched attention to detail and unparalleled peace of mind.
At Insogna, we don’t just prepare taxes. We prepare entrepreneurs for long-term success.