October 9, 2017
IRS extends time residents of Puerto Rico and US Virgin Islands who evacuated for recent hurricanes can be absent and still meet presence test for residency
The IRS has extended (Notice 2017-56) the amount of time that residents of Puerto Rico and the US Virgin Islands (Effected Territories) who evacuated or could not return home due to Hurricane Irma or Hurricane Maria may be away and still satisfy the presence test for residency under the tax rules. The relief extends the usual absence period from 14 days to 117 days (beginning September 6 — December 31, 2017).
Under Section 937(a), an individual is a bona fide resident of a US territory if the individual meets: (1) a presence test; (2) a tax home test; and (3) a closer connection test. To satisfy the presence test, an individual must be present in the US territory for at least 183 days during the tax year (183-day rule), unless otherwise provided in regulations.
Treas. Reg. Section 1.937-1(c)(3)(i)(C)(1) includes a 14-day unusual absence exception for individuals in a US territory located in a major disaster area as notified by the Federal Emergency Management Agency (FEMA) in response to a Presidential declaration.
Due to the unprecedented devastation caused by Hurricane Irma and Hurricane Maria, Notice 2017-56 extends the unusual absence exception from 14 days to 117 days. Residents of the effected territories will not lose their status as a "bona fide resident" if they leave or are absent during the period beginning September 6 and through December 31, 2017.
Ernst & Young LLP insights
Based on the time extension, an individual who is absent from either Puerto Rico or the US Virgin Islands on any day during the 117-day period will be treated on those days as leaving or being unable to return to the relevant US territory as a result of Hurricane Irma and Hurricane Maria. Individuals who intend to qualify as bona fide residents of these territories should consider the time extension when determining whether they meet the presence test.
While the time extension for determining bona fide residence of Puerto Rico and US Virgin Island is a welcome relief for individuals who are residents of these territories, employers operating in Puerto Rico are faced with many payroll-related questions. In addition, some employers have temporarily moved their workforce from Puerto Rico to the US mainland, raising more payroll questions. These include whether:
— Any payments from the employer for lodging in the US may qualify as disaster relief payments excluded from federal taxable income.
— Employee expenses for travel, meals, and temporary housing on the US mainland qualify as away-from-home business expenses that can be excluded from federal taxable wages.
— US federal income tax (and state income tax, if applicable) should be withheld from wages of employees who have been moved from Puerto Rico to the US mainland to work, and/or whether Puerto Rican income tax should continue to be withheld on those wages.
— Any additional state unemployment insurance tax will be due.
At this time, the tax authorities in Puerto Rico have not provided guidance on these questions. The US federal tax rules may provide some administrative relief, but in some cases the answers are not clear. Sorting through the payroll withholding and reporting rules that some employers are now facing is an added challenge in the aftermath of these hurricane disasters.