Act 60 Pitfalls: The High Cost of DIY Decree Applications and Tax Planning

Common Mistakes When Requesting Your Decree

The application process is the foundation of your new tax structure. Flaws at this stage can be difficult, if not impossible, to correct later.

• Mistake #1: Misunderstanding Eligibility. Act 60 is not a one-size-fits-all program. The eligibility criteria for an Export Services business are vastly different from those for an Individual Resident Investor or a manufacturing enterprise. A common error is failing to prove that your business activity qualifies. For example, an online consultant might believe they qualify for Export Services benefits, only to be denied because their work has an unforeseen "Nexus with Puerto Rico". An expert ensures you apply under the correct chapter with an airtight case for eligibility from day one.
• Mistake #2: Failing the Bona Fide Resident Tests. Becoming a bona fide resident of Puerto Rico is about much more than simply being on the island for 183 days a year. The IRS uses multiple criteria, including the "Tax Home Test" and the "Closer Connection Test," which scrutinize your ties to the mainland. Selling your primary U.S. home, moving your family, and shifting your personal financial life are all factors. A DIY applicant might overlook these nuances, only to find the IRS challenges their residency status years later, nullifying their benefits.
• Mistake #3: Submitting an Incomplete or Flawed Application. The decree application process is precise. If your application is missing any required information, the Incentives Office will grant you a short period—often just ten days—to provide it before the case is closed. A simple oversight can force you to start the entire process over, wasting valuable time and resources.

The Hidden Dangers of Post-Decree Tax Planning

Receiving your decree is not the end of the process. It is a contract that requires ongoing diligence.

• Risk #1: Accidental Non-Compliance. Your Act 60 decree comes with annual obligations. This includes filing a detailed annual report, making a $10,000 annual contribution to certified Puerto Rican non-profits, and purchasing a primary residence within two years. Forgetting even one of these requirements can lead to the suspension or, even worse, the mandatory revocation of your decree. A Certified Professional acts as your compliance officer, managing these deadlines so you never fall out of status.
• Risk #2: Improper Sourcing of Income. This is one of the most significant and costly mistakes. The 0% and 4% tax rates apply only to income properly sourced to Puerto Rico. It is dangerously easy to mistakenly classify income from U.S.-based clients, investments, or business activities as Puerto Rico-sourced. The IRS actively scrutinizes this, and a misstep can result in audits, back taxes, and severe penalties on the income you thought was exempt. Professional tax structuring is essential to create a clear and defensible separation of your income sources.
• Risk #3: Triggering an Unwanted Audit. The IRS is well aware of the Act 60 program. Inconsistent reporting between your U.S. (Form 1040) and Puerto Rico (Formulario Contribución sobre Ingresos) returns, improper income sourcing, or flawed residency qualifications are major red flags. A team of certified professionals ensures your filings are harmonized, accurate, and defensible, significantly minimizing your audit risk.

The path to financial freedom in Puerto Rico is clear, but it is not a path to be walked alone. The potential savings from Act 60 are immense, but the financial damage from a single mistake can be devastating. Investing in professional guidance is not an expense—it is the insurance that protects your tax-free future.

Don't leave your financial future to chance. Schedule a free consultation with our team of Certified Professionals and ensure your move to paradise is done right.