Still on an Act 22 Decree? The Presence Test You Must Meet Each Year

Do Act 22 decree holders still have to pass the presence test?

Yes. If you moved to Puerto Rico under an Act 22 decree, you still have to pass the federal presence test for every tax year in which you claim to be a bona fide resident. The decree is a Puerto Rico incentive grant. It does not decide your federal residency, and it does not carry a passing year forward into the next one.

This guide is for people who received a decree under Act 22 and now hold it under Puerto Rico's Incentives Code (Act 60). It covers what federal law asks of you each year, the five ways to pass the presence test, how days are counted, what the IRS has said it is looking at, and what kind of record holds up.

Does an Act 22 decree make you a bona fide resident?

No. Bona fide residency is a federal status, and it is decided under section 937 of the Internal Revenue Code for each taxable year. A bona fide resident of Puerto Rico is a person who meets the presence test, the tax home test and the closer connection test for the year, as set out in 26 CFR 1.937-1(b).

Your decree sits outside that framework; Puerto Rico granted it under Puerto Rico law. The IRS has been plain about this: in its webinar on residency in a US territory, the presenters note that Act 22 decree recipients may still have federal income tax filing obligations, and that you do not become a resident of a territory by meeting one of the three tests, or even two of them.

Puerto Rico also has its own residency standard, and it is not the federal one. Meeting it tells you nothing about section 937. If you want the overview of how the federal tests fit together, read the three tests of bona fide residency.

What are the five ways to pass the presence test?

The presence test is the federal rule that measures whether you were physically in Puerto Rico enough during the tax year. Under 26 CFR 1.937-1(c)(1), a US citizen or resident passes it for a tax year by meeting any one of five conditions:

1. 183 days in Puerto Rico during the tax year. This is the headline figure explained in the 183 day rule.
2. 549 days in Puerto Rico over three years: the current tax year and the two before it, with at least 60 days in Puerto Rico in each of those years. See the 549 day test.
3. No more than 90 days in the United States during the tax year.
4. Limited US earned income: US source earned income at or below the threshold in the regulation (the IRS webinar gives it as $3,000), and more days in Puerto Rico than in the United States.
5. No significant connection to the United States during the tax year.

Four of these five ways are counted in days. The fifth is about ties, not days. Under 1.937-1(c)(5), a significant connection includes a permanent home in the United States, current voter registration in a US state or locality, or a minor child or spouse whose principal home is in the United States, with narrow exceptions.

You need only one. Which one can change from year to year: a person who passed on 183 days last year may pass on the 90 day US limit this year. What matters is being able to show which one you met.

Which days count toward the test?

A day counts as a Puerto Rico day if you were physically in Puerto Rico at any time that day. A day counts as a US day on the same basis, with exceptions. The counting rules are in 26 CFR 1.937-1(c)(3).

Three rules do most of the work for a person who travels:

• Mixed days go to Puerto Rico. A day on which you are present in both Puerto Rico and the United States counts as a Puerto Rico day. A morning flight from San Juan to Miami is a Puerto Rico day.
• Short US transit is not a US day. Time in the United States while travelling between two points outside the United States does not count as a US day if you are there for fewer than 24 hours.
• Some days away count as Puerto Rico days. Days outside Puerto Rico receiving qualified medical treatment, or accompanying a parent, spouse or child full time while they receive it, count as Puerto Rico days. So do days you cannot return because of a declared major disaster or a mandatory evacuation. Qualified medical treatment means inpatient care that requires an overnight stay, and the regulation requires you to keep records, including a physician's certification, and produce them within 30 days of a request.

The regulation also excludes certain US days for students and for elected representatives or full time officials of the territory. For the full set of day rules, read what counts as a day in Puerto Rico.

Do the tax home and closer connection tests still apply?

Yes, every year. The presence test is only one of three requirements.

The tax home test asks where your regular or principal place of business is. Under 26 CFR 1.937-1(d), you must not have a tax home outside Puerto Rico during any part of the year. If you have no regular place of business, your tax home is your regular place of abode.

The closer connection test asks where your life is centered. Under 1.937-1(e), you must not have a closer connection to the United States or to a foreign country than to Puerto Rico during any part of the year. Your home, family, belongings, organizations, bank accounts and the address you put on forms are all weighed.

Picture a decree holder who spends most of the year in Puerto Rico but runs a business from an office in another state, or keeps the family home there. That person can pass the presence test and still fail one of the other two.

What is the IRS Act 22 campaign looking at?

The IRS runs a compliance campaign named for Act 22. Its Large Business and International active campaigns page describes it as addressing taxpayers who claimed Act 22 benefits but did not meet the requirements of section 937.

The same campaign covers people who did meet section 937 but may be reporting US source income as Puerto Rico source income. The IRS lists examinations, outreach and soft letters as the ways it works the campaign.

For a decree holder, the practical point is simple: residency comes first. An examiner will want to see that you met the presence test, the tax home test and the closer connection test for each year in question, and the evidence has to come from you.

What record should an Act 22 decree holder keep?

The burden of proving where you were is on you. In the same IRS webinar, the presenters said it is better to keep presence records as you go than to rebuild them later. They named flight and boat records, debit and credit card statements that show where you were, and cell carrier location data as useful evidence, and noted that card charges should be on a card used only by you.

A record that holds up has three qualities:

• It is made at the time. A note written on the day carries more weight than a spreadsheet assembled in March of the following year.
• It covers every day. Gaps invite the examiner to fill them in, and not in your favor.
• It ties each day to evidence. A day marked "Puerto Rico" should point to something: a boarding pass, a receipt, a calendar entry.

One83 builds this kind of day-by-day record from the calendar on your phone and tracks the four ways to pass that are counted in days. The record stays on the device.

Keep the underlying documents too. For what to keep, and how examiners ask for it, see documenting presence for an audit.

Bottom line

An Act 22 decree does not answer the federal residency question. Section 937 asks it again every tax year, and the presence test is the part you can measure as you go. There are five ways to pass, four of them counted in days. Know which one you rely on, count your days by the regulation's rules, and keep a record made at the time.

Frequently Asked Questions

Does an Act 22 decree count as proof of bona fide residency?

No. The decree is a Puerto Rico incentive grant. Federal bona fide residency is decided under section 937 and 26 CFR 1.937-1, which require the presence test, the tax home test and the closer connection test for each taxable year.

Do I have to pass the presence test every year I hold an Act 22 decree?

Yes. Section 937 tests bona fide residency for each taxable year. Passing last year does not carry into this year.

Is spending no more than 90 days in the US enough on its own?

It satisfies the presence test, because it is one of the five ways to pass. You still need to meet the tax home test and the closer connection test for the same year.

Does a day I fly from San Juan to Miami count as a Puerto Rico day?

Yes. Under 26 CFR 1.937-1(c)(3), a day you are present in both Puerto Rico and the United States counts as a Puerto Rico day for the presence test.

One83 is a tracking tool, not tax advice. Consult a licensed tax professional about your situation.