For Act 60 decree holders who earn compensation for personal services—whether as employees, consultants, or business owners—the sourcing of that income depends on a single, concrete question: where were the services physically performed?

This rule, grounded in IRC §§861(a)(3) and 862(a)(3) and implemented through Treas. Reg. §1.861-4, applies with mechanical precision. It does not consider where the client is located, where the contract was signed, where payment is received, or where the employer is headquartered. The only relevant factor is the physical location of the person performing the work on each working day.

How the Allocation Works

When a bona fide Puerto Rico resident performs services partly in Puerto Rico and partly in the mainland United States, the resulting income must be allocated between Puerto Rico-source and U.S.-source. The standard method is a time-based allocation:

Puerto Rico-source income may be excluded under IRC §933 (and may qualify for Act 60 benefits). U.S.-source income is fully taxable under federal income tax. There is no exception, credit, or workaround for the U.S.-source portion.

What Counts as a Working Day in the United States

Any day during which you perform services while physically present in the mainland United States is a U.S. working day. This includes attending meetings, making client calls, participating in conferences, conducting negotiations, reviewing documents, and performing any other activity that constitutes the rendering of services. It does not matter that the activity takes only part of the day. If you perform services in the U.S. on a given day, that day is a U.S. working day for allocation purposes.

Business travel to the mainland is the most common source of this issue. A decree holder who spends two weeks in New York meeting with clients, attending a conference, or managing a business transition will generate U.S.-source income for each of those working days—income that falls entirely outside Act 60 benefits.

Why This Matters More Than Many Decree Holders Realize

Consider a simplified example. An Act 60 decree holder earns $1,000,000 in total compensation for a taxable year and works 250 days. Of those, 220 days are worked in Puerto Rico and 30 days are worked on the mainland United States.

The $120,000 in U.S.-source income is subject to federal income tax at ordinary rates. No Act 60 provision changes this result. The only way to reduce this exposure is to reduce the number of days services are performed on the mainland.

Implications for Remote Workers and Consultants

A common misunderstanding among Act 60 applicants is the belief that working remotely for a mainland employer or client is sufficient to generate Puerto Rico-source income. That is correct only if the remote work is performed while the individual is physically in Puerto Rico. The location of the client is irrelevant. What matters is where you are sitting when you do the work.

A consultant based in Puerto Rico who serves mainland clients exclusively from Puerto Rico generates 100% Puerto Rico-source services income. The same consultant who flies to the mainland for 40 working days a year to meet with those same clients must allocate income to the U.S. for each of those days.

Interaction with the Export Services Act (Chapter 3)

For Chapter 3 decree holders, the working-days allocation has a dual impact. Services performed in Puerto Rico for clients outside Puerto Rico generate Puerto Rico-source export service income eligible for the 4% fixed tax rate. But if employees or principals of the export service entity perform services while physically present on the mainland, the income attributable to those U.S. working days may be treated as U.S.-source effectively connected income, subject to regular federal income tax at full rates.

This means that the 4% rate applies only to the portion of income attributable to services actually rendered from Puerto Rico. The entity’s structure, employee work patterns, and travel schedules must be managed with this in mind.

Record-Keeping Requirements

Given the mechanical nature of the allocation, detailed records of where work is performed on each day are essential. At minimum, decree holders should maintain:

• A daily calendar showing work location (Puerto Rico, mainland U.S., or foreign country) for each working day
• Travel records corroborating the calendar (boarding passes, hotel receipts, passport stamps)
• Project logs or time entries that reflect the location of service delivery
• Meeting schedules and itineraries for mainland business travel

These records should be created contemporaneously. In an IRS examination, the burden is on the taxpayer to demonstrate that services income was properly sourced. Reconstructed calendars and after-the-fact estimates are far less persuasive than real-time documentation.

Planning Considerations

The working-days allocation is one of the most concrete areas where planning produces measurable results. Reducing mainland working days directly reduces U.S.-source income exposure. Practical steps include conducting meetings by videoconference when possible, scheduling mainland travel in blocks to minimize the number of affected days, and structuring engagements so that service delivery occurs from Puerto Rico.

These are not aggressive tax positions. They are the straightforward result of applying the sourcing rules to the facts as structured. The key is that the facts must be genuine—services must actually be performed from Puerto Rico, not merely invoiced from there.

This article is for educational purposes only and does not constitute legal or tax advice. Individual circumstances vary. Consult a qualified tax attorney before making decisions based on this information.

Riefkohl Law advises Act 60 decree holders on income sourcing compliance, working-days allocation analysis, and structuring to maximize Puerto Rico-source income. Schedule a consultation to discuss your specific situation.