Summary of What This Blog Covers
- S. citizens in Puerto Rico may still owe federal taxes.
- Act 60 offers big savings but only with full compliance.
- IRS audits are common; residency must be well-documented.
- FBAR filing is required for Puerto Rico bank accounts.
A Sunshine Strategy That Requires Savvy Navigation
Puerto Rico isn’t just a tropical escape, it’s a beacon for entrepreneurs seeking both lifestyle enhancement and financial transformation. With Act 60 incentives and an entrepreneurial culture on the rise, business owners are choosing Puerto Rico not simply as a residence, but as a strategic base. However, like any sound investment, it requires diligence, planning, and a thorough understanding of the fine print.
What makes Puerto Rico so attractive from a tax perspective? A blend of territorial tax policy, generous incentive programs, and a supportive business environment. But before you celebrate with a beachside laptop session, it’s essential to understand this truth: tax compliance doesn’t stop at the shoreline.
At Insogna, we serve as both lighthouse and anchor. We illuminate the complexities of cross-border tax rules while grounding our clients in proactive, penalty-free practices. From our headquarters in Austin, Texas, we guide entrepreneurs across the U.S. and Puerto Rico with precision and optimism.
Let’s break down what you need to know, with the clarity and encouragement that transforms “compliance” into a confident business advantage.
Understanding the U.S.–Puerto Rico Tax Relationship
Puerto Rico is a U.S. territory, but for federal tax purposes, it is treated as a foreign jurisdiction in many contexts. This creates a unique intersection between domestic and international tax regulations. U.S. citizens and resident aliens are generally subject to U.S. income tax on worldwide income unless they qualify for an exception through bona fide residency in Puerto Rico and have properly sourced their income.
Think of it like this: Puerto Rico has its own tax system under the Hacienda (Department of Treasury), and the U.S. has the IRS. If you reside and earn income solely in Puerto Rico and meet all residency tests, you may owe taxes only to Puerto Rico. However, if you maintain ties or income from the mainland, federal taxes often still apply.
This dual-track system can feel overwhelming, which is why clients often search for a CPA near you or tax advisor in Austin who can seamlessly coordinate filings across both jurisdictions. At Insogna, we don’t just understand the rules. We help you leverage them strategically.
The Power and Precision of Act 60
Act 60 (also known as the Puerto Rico Incentives Code) was enacted to consolidate and modernize previous tax incentive laws namely, Act 20 and Act 22. It was designed to attract new residents and businesses to the island, driving economic growth through innovation, investment, and professional services.
Here’s what Act 60 offers:
For Export Services Businesses:
- A flat 4% corporate tax rate on eligible service income
- 100% exemption on Puerto Rico-sourced dividend distributions
- Eligibility to exclude some income from U.S. taxation under certain conditions
For Individual Investors:
- 0% capital gains tax on appreciation earned after becoming a Puerto Rico resident
- No federal capital gains tax on Puerto Rico-source income
- Long-term estate planning advantages for families and founders
But here’s where many fall short: these benefits only apply if the structure, timing, and residency requirements are met. For example, capital gains must be accrued after the official move date, and businesses must provide services to clients outside Puerto Rico to qualify as an “export service” under the statute.
With our concierge-style tax preparation services near you, Insogna helps you plan these transitions in advance. We’ll determine eligibility, restructure your business if needed, and document every qualifying factor to make the most of this opportunity while keeping both IRS and Hacienda satisfied.
The Residency Puzzle: Passing the Bona Fide Test
The IRS doesn’t simply accept a change-of-address form as proof of Puerto Rico residency. It applies the bona fide residency test, which includes:
1. Physical Presence
You must spend at least 183 days in Puerto Rico during the calendar year. There are additional rules for leap years and allowable travel, but 183 is the golden threshold. Partial year moves often require even more time on-island.
2. Tax Home
Your main place of business or employment must be located in Puerto Rico not a satellite office or temporary setup. That means your economic center must shift with you.
3. Closer Connection
This qualitative test looks at where you keep your driver’s license, vote, have your primary residence, open bank accounts, attend social events, and even where your family resides. It’s about creating genuine economic and lifestyle roots in Puerto Rico.
Failing any one of these three tests puts you back under full U.S. federal tax liability. That’s why our clients don’t gamble with residency. They engage our certified public accountants in Austin, Texas, who offer customized guidance and meticulous compliance checklists that document your residency with confidence.
IRS Scrutiny and Compliance Expectations
Due to the popularity of Act 60, the IRS has increased enforcement activity for individuals claiming Puerto Rico residency. They are particularly focused on high-income individuals and businesses that might misuse the incentives without properly relocating.
This scrutiny includes:
- Requests for proof of day-count (travel logs, flight records)
- Closer connection inquiries (evidence of banking, housing, memberships)
- Reviews of source income classification
- Examination of business operations and client geography
Our clients benefit from our forward-thinking compliance systems. As a small business CPA in Austin, we set up your calendar, documentation folders, and even travel logs to proactively answer every IRS question before it’s asked. We don’t just react. We prepare, organize, and educate you on every compliance expectation.
FBAR, Foreign Accounts, and Treasury Compliance
It may surprise many new residents to learn that Puerto Rican bank accounts are considered foreign accounts under federal law. If at any point during the year you hold over $10,000 in total across foreign financial institutions including banks in Puerto Rico, you must file an FBAR (Foreign Bank Account Report).
This filing is due each April 15th, with an automatic extension to October. It’s submitted to the U.S. Treasury, not the IRS, and failing to file can trigger penalties of up to $10,000 for non-willful violations and even higher for willful ones.
We’ve seen well-meaning entrepreneurs miss this requirement simply because no one told them. At Insogna, we integrate FBAR filing into your compliance calendar and handle the entire process. You won’t need to worry about overlooked accounts or inconsistent balances, we take care of the details so you can focus on your vision.
Real-World Scenarios: Common Pitfalls and How to Avoid Them
Let’s explore a few situations we’ve encountered and resolved with clients:
Scenario 1: The Bi-Coastal Consultant
A digital marketing consultant moves to Puerto Rico, incorporates under Act 60, and claims 4% tax benefits. However, she continues to spend half her time traveling to mainland clients. Without adjusting her calendar and contracts, her income risks being classified as U.S.-sourced.
Our Solution: We helped revise her service agreements, updated time-tracking systems, and established a Puerto Rico-based subcontractor for mainland support—bringing her back into compliance.
Scenario 2: The Late-Year Mover
An investor moves to Puerto Rico in October and begins claiming tax exemption immediately. However, they didn’t meet the 183-day rule and failed to establish local ties.
Our Solution: We restructured their timeline to begin benefits the following year, created a relocation plan that met IRS standards, and documented every detail for future audit protection.
How Insogna Elevates the Experience
At Insogna, we believe financial strategy should feel as refined and reassuring as the services of a premium brand. That’s why our approach blends:
- Expertise: Decades of experience in U.S. and territorial taxation, including high-complexity and cross-border filings.
- Personalized Coaching: Year-round communication with proactive insights and customized planning.
- Modern Tools: Cloud-based reporting, secure document sharing, and automation that reduces manual work for clients.
- Concierge-Level Service: Our clients never wonder what’s next. We guide, educate, and support through every step.
Whether you’re searching for a tax accountant near you, a CPA in Austin, or a trusted long-term partner for Puerto Rico compliance, Insogna delivers clarity, confidence, and a measurable financial edge.
Take the Next Step with Confidence
Moving to Puerto Rico can be a game-changing financial decision but only if done right. The rules are detailed, the expectations are high, and the rewards are real.
Don’t go it alone.
Work with a team of certified public accountants, enrolled agents, and experienced strategists who not only understand the fine print but know how to apply it for your unique situation. At Insogna, we go beyond tax preparation. We offer strategic alignment between your goals and your compliance.
Let’s Navigate Puerto Rico Tax Together
Contact us today for a discovery call. Whether you’re planning a move, adjusting your tax strategy, or already living on the island, we’re here to help you achieve tax clarity with world-class support.