With the enactment of Act 40-2020, the requirements of submitting financial statements with the income tax returns for the years ending after December 31, 2019 have significantly changed. By increasing the volume of business threshold to $10,000,000, many businesses face the question to audit or not to audit.

Companies are presently considering the impact, if any, of the recent change in rules for accompanying financial statements with the income tax return. Act 40-2020 adopts a new rule that provides that in cases in which an entity earns a business volume equal to or greater than $3 million, but less than $10 million, the entity may choose to submit an Agreed Upon Procedures Report (AUP) or a Compliance Attestation Report (CA) in lieu of audited financial statements (AFS) with its income tax return. This option is not available for entities that earn a volume of business equal to or greater than $10 million, which can only accompany their income tax returns with AFS. In the case of a group of related entities (“the Group”), if the aggregate volume of business of the Group is equal to, or more than $10 million, it is required to submit consolidated or combined AFS.  However, a member of the Group that earns $1 million or more of volume of business may submit AFS for its operations alone, including a note to the financials with a list of related entities which are part of the Group.  Nevertheless, if AFS are not submitted, entities within the group that earned less than $1 million of volume of business are required to submit an AUP or a CA. Refer to Table 1 for a summary of these rules.

This is a significant change for entities with a volume of business within the $3 million and $10 million range. Due to the economic downturn caused by the COVID-19 pandemic, additional businesses may fall short of the $10 million threshold, and find themselves with this alternative. However, the decision to audit or not to audit is far from simple.

First, the Puerto Rico Treasury Department has not published the scope of the AUPs. Therefore, businesses are in uncertain waters regarding what will be the scope of the AUPs. The scope will impact both the complexity of the process, and the cost. Certainly, no single factor proves to be determinative to all businesses. For instance, assuming an AUP will have a lower cost that an audit, a business that anticipates the need to access financing during 2021 should still opt for AFS. As expected by the industry, AUPs may require detailed revision of deductions, even more than those covered under AFS. This may have a higher administrative burden for companies that are already facing other challenges and may result in significant audit fees as well.

Additionally, if the volume of business of the taxpayer is less than $10 million, when evaluating whether the business will opt for AFS, AUPs or CA, particular attention must be placed on the limitations imposed to the alternative minimum net income deductions. Taxpayers subject to the alternative minimum tax will want to claim the same deductions to calculate the net income subject to regular tax to determine the net income subject alternative minimum tax. These deductions include trade or business expenses, expenses other than from the principal trade or business, interest, taxes, losses, bad debts, depreciation and amortization, and charitable contributions, among others. Said deductions for alternative minimum tax purposes will be allowed only if AFS, an AUP or a CA is filed with the return.

Taxpayers must also consider the compliance documents that are required to be filed for municipal tax purposes. The recently enacted Puerto Rico Municipal Code states that for purposes of the Volume of Business Declaration, as well as for the Municipal Property Tax Return, taxpayers with an annual business volume of more than $3 million are required to submit AFS with said tax returns. In the alternative, the Puerto Rico Municipal Code provides an option for said taxpayers to submit the CAs or the AUP Report in lieu of the AFS in accordance with the terms established in the PR Internal Revenue Code.

Table 1: Documentation requirements that must be filed with the taxpayer’s income tax return according to their volume of business:

Volume of Business


Less than $1 million

AFS are not required. The business
will need to attach an Agreed Upon Procedures (“AUP”) to claim certain expenses and deductions for purposes
of computing the alternative minimum tax (“AMT”)

$1 million or more and member of a group of related entities with combined volume of business of $10 million or more

AFS prepared by a Certified Public Accountant (CPA) with valid license in Puerto Rico must be submitted with their income tax return

$3 million or more but less than $10 million

AFS prepared by an auditor with valid CPA license in Puerto Rico are required to be submitted with the income tax return; AUP or CA Report may be submitted in lieu thereof

Equal or greater than $10 million

AFS prepared by an auditor with valid CPA license in Puerto Rico are required to be submitted with the income tax return

New Agreed Upon Procedures
New Agreed Upon Procedures
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We are committed to keeping you up to date with all tax-related developments. Please contact our Tax Department should additional information be required regarding this or any other tax issue. We will be glad to assist you.


Caroline López

Tax Manager

Samira Yassin

Tax Senior

Collaborated in the preparation of this article.