Zaragoza: More than 100,000 businesses to benefit from proposed cuts to individual income tax rates

Former Treasury Secretary Juan Zaragoza Gómez (Facebook via Juan Zaragoza)

By THE STAR STAFF

More than 100,000 small and midsize businesses in Puerto Rico -- many of them operating as “doing business as” entities (DBAs) or under pass‑through corporate structures -- would directly benefit from the government’s proposed reductions in individual income tax rates, former Treasury Secretary Juan Zaragoza Gómez said.

In a recent interview with the Jay Fonseca program on YouTube, Zaragoza, a certified public accountant and former Popular Democratic Party (PDP) senator, noted that a large share of Puerto Rico’s businesses are not organized as traditional corporations. Many operate as DBAs, where there is no legal separation between the owner and the business, while others use “pass‑through” or “conduit” structures in which the entity itself does not pay income taxes. Instead, any profits or losses are reported directly on the owner’s personal income tax return.

Responding to questions about why the government’s proposal focuses on individuals rather than on the corporate sector, Zaragoza, a former PDP primary candidate for governor, argued that the individual tax cuts effectively reach more than 100,000 businesses operating in these “pass through” formats. He described such firms -- including DBAs and pass‑through entities -- as “the most fragile sector” of Puerto Rico’s business community.

As an example, he recalled visiting a meeting of pharmacy owners and finding that “half were not incorporated [as corporations or businesses] … They were DBA.”

Zaragoza said the pattern is common across professional and service sectors, where many individuals operate under “doing‑business‑as” registrations rather than corporate entities.

He added that Puerto Rico has also refined the use of “conduit” or pass‑through entities over the years, allowing owners of LLCs and other structures to elect for business income to flow directly to their personal tax return. In these cases, the business entity files only an informational return, and its income is taxed entirely at the individual level.

Zaragoza noted that this tax arrangement is widely used among small and midsize firms on the island, which means they would be affected not by corporate tax changes, but by adjustments to individual rates.

“There is a significant percentage of small and medium‑sized companies in Puerto Rico that operate with that structure and benefit from this,” he said.

Zaragoza also pointed to his own case, noting that he operates through Zaragoza LLC, a registered entity whose income is taxed on his personal return. He said that under the proposed reform he, like other pass‑through owners, would use the new individual brackets rather than any corporate rate structure.

The ex-treasury chief said many professionals fall under these pass-through corporate structures, including doctors, lawyers and service providers who run their own practices. He said most clients he has spoken with respond positively when they understand how the reform applies to them.

“This benefits you,” he tells them, noting that he has not encountered significant opposition from taxpayers who would be affected by the individual‑rate reductions.

The review of the proposed tax reform, which changes tax rates for individuals, will continue this week. The debate among lawmakers centers on how to finance the proposed cuts, which will cost the government an estimated $550 million. The government has proposed repealing some tax exemptions, including the ones enjoyed by solar panels and hybrid cars.

House Treasury Committee Chairman Eddie Charbonier Chinea already announced Saturday that the House will not approve the repeal of the tax exemptions for solar panels and for hybrid or electric vehicles, which currently do not pay the 11.5% tax.

The Solar and Energy Storage Association (SESA), meanwhile, cautioned that eliminating the current sales tax (IVU by its acronym in Spanish) exemption on solar systems would strike a blow to an industry that has already injected over $6 billion in private investment into the local economy.

Javier Rúa, SESA’s director of public policy, told the House Treasury Committee that adding more than $3,000 to the cost of an average solar‑and‑battery system, and raising monthly solar‑lease payments for lower‑income families, would wipe out any tax relief the reform aims to provide.

Rúa argued that solar‑plus‑battery systems have become an essential good amid the state of Puerto Rico’s electrical grid, noting that some 200,000 households now generate 1,400 megawatts of distributed solar power.

“Solar energy in Puerto Rico saves lives and household economies,” he said, adding that the families “have literally been rebuilding the grid for everyone’s benefit.”

SESA estimated that if the solar tax were approved, the price of a typical system could rise from $30,000 to more than $33,400. For the 74% of customers who use solar leasing, a typical $200 monthly payment would jump by roughly $23 -- amounting to an additional $276 per year and over $5,500 more across a 20‑year contract.

Charbonier Chinea also reiterated that his committee intends to deliver its report on the tax reform before Feb. 1. However, he emphasized the urgency of receiving fiscal data from agency heads -- information that was due to the Treasury Committee on Jan. 22. If the documents are not provided by today, he said he is prepared to go to court to enforce the order. The legislation, he added, requires identifying the aforementioned $550 million in offsets to fund the proposed tax cuts and secure approval from the Financial Oversight and Management Board.

Treasury Secretary Ángel Pantoja Rodríguez estimated that removing the solar IVU exemption would generate $18 million in revenue, but the Puerto Rico Manufacturers Association said the government could “easily” find that amount within the $13 billion General Fund. The group warned that imposing the tax would increase investment costs, discourage the adoption of energy‑saving technologies, and hurt competitiveness. The Puerto Rico Builders Association similarly urged lawmakers to address the burdensome system of construction excise taxes in the next phase of reforms.