UNIT 12

TAXATION
Session 10

Requirement
Explain how income tax deductions are to be dealt with

Topics Review of Last session Test of baseline knowledge Income Tax Deductions Treatment of losses

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Review of Last session

Test of baseline knowledge

Income Tax Deductions

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Deductions from Tax

Business expenses Cost of goods sold/ Sales Trading or ordinary and necessary business expenses Accounting methods

Some Business Expenses

Employee wages and most employee benefits Rent or lease payments Interest on business loans Real estate taxes on business property Local and foreign income taxes assessed to your business Business insurance Advertising and promotion costs Employee education and training Education to maintain or improve your own required business skills Legal and professional fees Utilities Telephone costs

Cost of Goods Sold/ Sales

Parts, raw materials and supplies used, Labor, including associated costs such as payroll taxes and benefits, and Overhead of the business allocable to production

Trading or ordinary and necessary business expenses

Deals with what expenses are appropriate to the nature of the business, whether the expenses are of the sort expected to help produce income and promote the business, and whether the expenses are not lavish and extravagant.

Accounting Method
Cash Method Accrual Method - include income when it - Include income when they is received, and claim are earned and claim deductions when expenses deductions when expenses are paid are incurred.

Treatment of losses

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Current Losses from Transactions

Recorded in the accounting books Deducted from income as:  losses from trade or losses from extraordinary transaction Reported in the Audited Financial Statements Finally, reported to the BIR tax form

Net Operating Losses Carry Over (NOLCO)

BIR Revenue Regulation 14-2001 August 14, 2001

Treatment of NOLCO
Loss of the past three years can be deducted to the current Income of the year it has income. Loss of the past ten years can be deducted to the income to the next five years that the company has income The treatment of NOLCO shall be on a first-in, first-out basis. NOLCO shall have a separate section and not included in ordinary losses.

Exclusions from NOLCO benefit

BOI exempted companies PEZA exempted companies

Capital Losses
term 'net capital loss' means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.

Percentage Taken into Account

1. One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and 2. Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

Basis of Computation
Stocks : Selling Price less Purchase Price Realty: Excess of the basis or adjusted basis for determining loss over the amount realized.

Basis of Real Property Disposal

1) The cost thereof in the case of property acquired 2) The fair market price or value as of the date of acquisition 3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor 4) If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property

Topics for Research

Incidence of Capital Gains Chargeable assets and disposals Basis of Assessment Treatment of Deductions

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Required
Identify chargeable assets and disposals for an individual or company

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