2016 TAXATION 2 REVIEWER: TAX ON INCOME -- ALLOWABLE DEDUCTIONS

dTAXATION LAW 2
CHAPTER 7: Allowable Deductions
SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services
rendered under an employer-employee relationship where no deductions shall be allowed other than under subsection (M;
Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer) , in computing taxable income
subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following
deductions from gross income;
A. Expenses. 1. Ordinary and Necessary Trade, Business or Professional Expenses. –
a. GR:. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which
are directly attributable to, the development, management, operation and/or conduct of the trade, business or
exercise of a profession, including:
i. A reasonable allowance for salaries, wages, and other forms of compensation for personal services
actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by
the employer to the employee: Provided, FBT has been paid
ii. A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of
trade, business or profession
iii. A reasonable allowance for rentals and/or other payments which are required as a condition for the
continued use or possession
iv. A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year,
that are directly connected to the development, management and operation of the trade, business or
profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its
trade, business or exercise of a profession not to exceed such ceilings as SEC of FINANCE may, by rules
and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as
well as the special circumstances, nature and character of the industry, trade, business, or profession of
the taxpayer:
1. Any expense incurred for entertainment, amusement or recreation that is contrary to law, morals
public policy or public order shall in no case be allowed as a deduction.
b.

Substantiation Requirements. - No deduction from gross income shall be allowed unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other adequate records:
i. Amount of the expense being deducted
ii. Direct connection or relation of the expense being deducted to the development, management,
operation and/or conduct of the trade, business or profession of the taxpayer.

c. Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under

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2016 TAXATION 2 REVIEWER: TAX ON INCOME -- ALLOWABLE DEDUCTIONS
SUBSEC (A) for any payment made, directly or indirectly, to an official or employee of the national
government, or to an official or employee of any local government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official or employee or representative of a foreign
government, or to a private corporation, general professional partnership, or a similar entity, if the payment
constitutes a bribe or kickback.
2. Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions under
this Chapter, a private educational institution, may at its option elect either:
a. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities (or)
b. To deduct allowance for depreciation thereof under SUBSEC (F; depreciation of property).
B. Interest.
1. GR: - Amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as deduction from gross income:
a. LIMITATION: Allowable deduction for interest expense shall be reduced by an amount of the interest income
subjected to final tax: 33%
2. Exceptions. - No deduction shall be allowed in respect of interest:
a. If taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance
through discount or otherwise
i. Such interest shall be allowed a deduction in the year the indebtedness is paid
ii. If the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to
the amount of the principal amortized or paid during the year shall be allowed as deduction in such
taxable year
b. If both the taxpayer and the person to whom the payment has been made or is to be made are persons
specified under SEC 36(B)
i. 36(b): losses from sales or exchanges of property:
1. Between members of family
2. Between individual and corporation more than 50% in value of OCS owned by such individual
3. Between 2 corporationsmore than 50% OCS is owned by either one
4. Between grantor and fiduciary in trust
5. Between fiduciary in trust and another fiduciary in trust if grantor is the same person
6. Between fiduciary of trust and beneficiary of such trust.
c. If the indebtedness is incurred to finance petroleum exploration.
3. Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in
trade business or exercise of a profession may be allowed as:
a. Deduction

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2016 TAXATION 2 REVIEWER: TAX ON INCOME -- ALLOWABLE DEDUCTIONS
b. Capital expenditure.
C. Taxes. –
1. GR: Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or
business, shall be allowed as deduction
2. EXCEPTIONS:
a. Income tax provided for under this Title
b. Income taxes imposed by authority of any foreign country
i. This deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire
to have to any extent the benefits of PAR (3) of this subsection (relating to credits for taxes of
foreign countries)
c. Estate and donor's taxes
d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
3. Taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the
year of receipt to the extent of the income tax benefit of said deduction.
4. Limitations on Deductions. - NRA engaged in trade or business in the Philippines and RFC, the deductions for
taxes shall be allowed only if and to the extent that they are connected with income from sources within the
Philippines.
5. Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this Title shall be credited with:
a. Citizen and Domestic Corporation. - amount of income taxes paid or incurred during the taxable year to any
foreign country
b. Partnerships and Estates. - In the case of any such individual who is a member of GPP or a beneficiary of an
estate or trust, his proportionate share of such taxes of GPP or the estate or trust paid or incurred during
the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is
reported for taxation under this Title.
i. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the
taxes of foreign countries allowed under this paragraph.
6. Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following
limitations:
a. Amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources
within such country bears to his entire taxable income for the same taxable year

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however. or other casualties. c.Credits may. Total amount of income derived from sources without the Philippines b. Proof of Credits. who shall redetermine the amount of the tax for the year or years affected ii. 7. shipwreck. KIM APPLE |MARTINEZ. 9. to the conditions prescribed in SUBSEC (5) of this Section. Of property connected with the trade. or the amount of tax overpaid. Amount of income derived from each country. subject. – 1. If any tax paid is refunded in whole or in part i. Year in Which Credit Taken.Credits hall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: a. MARA| MENDOZA. profession or business b. D. If incurred in trade. If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer b. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued. SF is hereby authorized to promulgate rules and regulations prescribing time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery. theft or CARVAJAL. the tax paid or incurred to which is claimed as a credit under said paragraph. such amount to be determined under rules and regulations prescribed by the Secretary of Finance. . i.ALLOWABLE DEDUCTIONS b. a. GR: Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: a. the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. – a. . Taxpayer shall notify CIR. be taken in the year which the taxes of the foreign country were incurred. Total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken. business or profession c. conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. Amount of tax due upon such redetermination shall be paid by the taxpayer upon notice and demand by CIR. shall be credited or refunded to the taxpayer. Losses. and c. In the case of such a tax incurred but not paid. If the loss arises from fires. All other information necessary for the verification and computation of such credits. LEE ANNE Page 4 . if any. at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books. storms. CIR as a condition precedent to the allowance of tax credit may require the taxpayer to give a bond with sureties. ALEX | TAMAYO. JAI | YABUT. Adjustments on Payment of Incurred Taxes. theft or embezzlement. or from robbery. which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. 8. LAUREN| PARUNGO.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.

.In the case of NRA or FC. LAUREN| PARUNGO. is held by or on behalf of the same persons. CARVAJAL. a net operating loss without the benefit of incentives in Omnibus Investments Code. Time limit shall not be less than 30 days nor more than 90 days from the date of discovery of the casualty or robbery. if the business is in the name of a corporation. Not less than 75% in nominal value of outstanding issued shares. JAI | YABUT. incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the 5 years immediately following the year of such loss. theft or embezzlement giving rise to the loss. d. theft or embezzlement during the taxable year ii. EXCEPTION: i.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. NOLCO shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that : 1. KIM APPLE |MARTINEZ. Not less 75% of the paid up capital of the corporation. ALEX | TAMAYO. the losses deductible shall be those actually sustained during the year incurred in business. MARA| MENDOZA. or 2. GR: Net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year. 2. No loss shall be allowed as a deduction if at the time of the filing of the return. Mines other than oil and gas wells. such loss has been claimed as a deduction for estate tax purposes in the estate tax return. Proof of Loss. Time limit shall not be less than 30 days nor more than 90 days from the date of discovery of the casualty or robbery. is held by or on behalf of the same persons.ALLOWABLE DEDUCTIONS embezzlement during the taxable year ii. NET OPERATING LOSS: excess of allowable deduction over gross income of the business in a taxable year. theft or embezzlement giving rise to the loss. if the business is in the name of a corporation. 3. when such losses are not compensated for by insurance or other forms of indemnity. which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss: b. i. trade or exercise of a profession conducted within the Philippines. – a. Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection ii. Net Operating Loss Carry-Over. SF is hereby authorized to promulgate rules and regulations prescribing time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery. LEE ANNE Page 5 .

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. substantially identical stock or securities. a. . Securities Becoming Worthless. then the particular shares of stock or securities. the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law). MARA| MENDOZA. In case a producing well is subsequently abandoned. for purposes of this Title. shall be allowed as a deduction in the year such well. be considered as a loss from the sale or exchange. then no deduction for the loss shall be allowed under SEC 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. LAUREN| PARUNGO. KIM APPLE |MARTINEZ. Capital Losses. Abandonment Losses. Limitation. . equipment or facility is CARVAJAL. the loss resulting therefrom shall. the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining 4 years.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. – a.ALLOWABLE DEDUCTIONS Entire amount of the loss shall be carried over to the first of the 5 taxable years following the loss. b. or has entered into a contact or option so to acquire.If securities as defined in SEC 22 (T) become worthless during the taxable year and are capital assets. on the last day of such taxable year. Losses From Wash Sales of Stock or Securities. Wagering Losses. as well as undepreciated costs of equipment directly used. 7. a. If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the nondeductibility of the loss 6. JAI | YABUT. In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned. . all accumulated exploration and development expenditures shall be allowed as a deduction: b. i. In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities. of capital assets. ALEX | TAMAYO. If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of. SEC 39 (Capital gains and losses) b. unamortized costs. the loss form the sale or other disposition of which is not deductible c. and any portion of such loss which exceeds. SEC 22 (T): Shares of stock in a corporation and rights to receive such shares 5. . LEE ANNE Page 6 . 4.Losses from "wash sales" of stock or securities as provided in SEC 38.Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in SEC 39 i.

Between grantor and fiduciary in trust 5. of capital assets. 1. 3. Between fiduciary in trust and another fiduciary in trust if grantor is the same person 6. Between individual and corporation more than 50% in value of OCS owned by such individual 3. if such abandoned well is reentered and production is resumed. ALEX | TAMAYO. trade or business b. Between 2 corporationsmore than 50% OCS is owned by either one 4. a. the deduction shall be computed as if the life tenant were the absolute owner of the property. a. wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. GR: There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion. 36(b): losses from sales or exchanges of property: 1. allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with instrument creating the trust. b. EXCEPTION: a. – REASONABLE ALLOWANCE: shall includean allowance computed by the CARVAJAL. KIM APPLE |MARTINEZ. c. In the case of property held in trust. GR: Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year 2.If securities are ascertained to be worthless and charged off within the taxable year and are capital assets. Between members of family 2. MARA| MENDOZA. Those sustained in a transaction entered into between parties mentioned under Section 36 (B) i. JAI | YABUT. Use of Certain Methods and Rates. 2. the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated. In the case of a taxpayer other than a bank or trust company incorporated under Philippines a substantial part of whose business is the receipt of deposits F. the loss shall be considered as a loss from the sale or exchange.ALLOWABLE DEDUCTIONS abandoned by the contractor i. on trust income allowable to each.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. on the last day of such taxable year. Depreciation. 1. Those not connected with profession. LAUREN| PARUNGO. Securities Becoming Worthless. Bad Debts. LEE ANNE Page 7 . or if such equipment or facility is restored into service. In the case of property held by one person for life with remainder to another person. or in the absence of such provisions. E. Between fiduciary of trust and beneficiary of such trust. . Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

2016 TAXATION 2 REVIEWER: TAX ON INCOME -. without any written objection on CIR. An allowance for depreciation shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. Declining-balance method. JAI | YABUT. ii. KIM APPLE |MARTINEZ. Allowance for depreciation in respect of all properties used in mining operations other than petroleum operations. taxpayer and CIR have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property.ALLOWABLE DEDUCTIONS Secretary of Finance. Depreciation of Properties Used in Mining Operations. Any change in the agreed rate and useful life of the depreciable property shall not be effective for taxable years prior to the taxable year in which notice is served by the party initiating such change to the other party to the agreement i. iii. ALEX | TAMAYO. Useful life of properties used in or related to production of petroleum shall be 10 years of such shorter life as may be permitted by the Commissioner. Responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. rate so agreed upon shall be binding on both the taxpayer and the national Government b. i. using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in SUBSEC (F)(1) (depreciation) c. under any of the following methods: a. Where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income. Any other method which may be prescribed by SF. LEE ANNE Page 8 . Depreciated over any number of years between 5 years and the expected life if the latter is more CARVAJAL. – a. it may at any subsequent date. Agreement as to Useful Life on Which Depreciation Rate is Based. MARA| MENDOZA. At the normal rate of depreciation if the expected life is 10 years or less ii. LAUREN| PARUNGO. – a. Sum-of-the-years-digit method d. the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. shift to the straight-line method. Properties not used directly in the production of petroleum shall be depreciated under the straightline method on the basis of an estimated useful life of 5 years. c. 4. 3. 5. – a. Where under rules and regulations prescribed by SF. Depreciation of Properties Used in Petroleum Operations. If the service contractor initially elects the declining-balance method. Straight-line method b. shall be computed as follows: i.

Taxpayer may at his option: i. ALEX | TAMAYO. Election to Deduct Exploration and Development Expenditures. Depletion of Oil and Gas Wells and Mines. Election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years CARVAJAL. c. When the allowance for depletion shall equal the capital invested no further allowance shall be granted b. a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted a. KIM APPLE |MARTINEZ. d. INTANGIBLE COSTS IN PETROLEUM OPERATIONS: cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum  It shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible. Shall be deductible in full in the year paid or incurred or at the election of the taxpayer. and the depreciation thereon allowed as deduction from taxable income 6. Deduct exploration and development expenditures paid or incurred during the taxable year b. JAI | YABUT. drilling and development expenses allowed as a deduction in computing taxable income shall not be taken into consideration in computing the adjusted cost basis for computing allowable cost depletion. a reasonable allowance for the deterioration of Property shall be permitted only when such property is located in the Philippines. GR: In the case of oil and gas wells or mines. certain intangible exploration and development drilling costs: i.ALLOWABLE DEDUCTIONS than 10 years. 2. LEE ANNE Page 9 .  Any intangible exploration. 1. LAUREN| PARUNGO. MARA| MENDOZA. In the case of a NRA engaged in trade or business or RFC. Shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines. or ii. After production in commercial quantities has commenced. Actual exploration and development expenditures minus 25% of the net income from mining shall be carried forward to the succeeding years until fully deducted. G. Deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of ii. Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. Amount deductible for exploration and development expenditures shall not exceed 25% of the net income from mining operations computed without the benefit of any tax incentives. – a.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area.

KIM APPLE |MARTINEZ. location. cultural or educational purposes or for the rehabilitation of veterans c. youth and sports development. ALEX | TAMAYO. EXPLORATION EXPENDITURES: expenditures paid or incurred for the purpose of ascertaining the existence. GR:. e. No part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of: 1. or to non-government organizations i.ALLOWABLE DEDUCTIONS NET INCOME FROM MINING OPERATIONS: gross income from operations less "allowable deductions" which are necessary or related to mining operations. Amounts paid or incurred for the exploration and development of oil and gas. 3. Development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. MARA| MENDOZA. allowance for depletion shall be authorized only in respect to oil and gas wells or mines located within the Philippines. extent or quality of any deposit of ore or other mineral. . Social welfare institutions. Accredited domestic corporation or associations organized and operated exclusively for religious. LAUREN| PARUNGO. This paragraph shall not apply to: i.In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation. CARVAJAL. business or profession as computed without the benefit of this and the following subparagraphs. milling and marketing expenses. and depreciation of properties directly used in the mining operations.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. –Contributions or gifts actually paid or made within the taxable year to: a. ii. ALLOWABLE DEDUCTIONS: mining. charitable. 5% in the case of a corporation. DEVELOPMENT EXPENDITURES: expenditures paid or incurred during the development stage of the mine or other natural deposits. Charitable and Other Contributions 1. LEE ANNE Page 10 . H. and paid or incurred before the beginning of the development stage of the mine or deposit. Use of the Government of the Philippines or any of its agencies or any political subdivision exclusively for public purposes b. Depletion of Oil and Gas Wells and Mines Deductible by a NRA or FC. of the taxpayer's taxable income derived from trade. scientific. Expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation. 10% in the case of an individual 2. JAI | YABUT.

. Organized and operated exclusively for scientific. or to the state for public purpose. CARVAJAL. unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated. to provide for. or to be used in undertaking priority activities in education. cultural or charitable purposes. Donations to the Government. or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated. iv.Donations to foreign institutions or international organizations which are fully c. – NONGOVERNMENT OPERATION: a non profit domestic corporation: i. LAUREN| PARUNGO.ALLOWABLE DEDUCTIONS 2.Donations to the Government of the Philippines or to any of its agencies or political subdivisions. no part of the net income of which inures to the benefit of any private individual ii. KIM APPLE |MARTINEZ.Notwithstanding the provisions of the preceding subparagraph. Assets of which. Which. donations to the following institutions or entities shall be deductible in full a. Donations to Accredited Nongovernment Organizations. would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes. not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received. upon recommendation of the Commissioner iii. research. Level of administrative expense of which shall. health. health. JAI | YABUT. human settlements. LEE ANNE Page 11 . social welfare. including fully-owned government corporations. character-building and youth and sports development. . in the even of dissolution. or a combination thereof. exclusively to finance. ALEX | TAMAYO. . MARA| MENDOZA. Contributions Deductible in Full. Donations to Certain Foreign Institutions or International Organizations.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in PAR (1) of this Subsection b. youth and sports development. and in economic development according to a National Priority Plan determined by NEDA i. educational. on an annual basis but in no case to exceed thirty percent (30%) of the total expenses. science and culture.

and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds 3. LEE ANNE Page 12 .chanrobles virtual law library . 4. Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. . upon recommendation of the Commissioner. Paid or incurred by the taxpayer in connection with his trade.Following research and development expenditures may be treated as deferred expenses: a. Research and Development. Valuation . Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized.Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance. LAUREN| PARUNGO. Amortization of Certain Research and Development Expenditures. ALEX | TAMAYO. UTILIZATION: 1. GR: . I. Proof of Deductions. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization. MARA| MENDOZA. such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than 60 months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits CARVAJAL. 3. In computing taxable income. JAI | YABUT. the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed by the Secretary of Finance.The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. upon recommendation of the Commissioner. business or profession b.Research or development expenditures paid or incurred by him during the taxable year which are not chargeable to capital account shall be allowed as deduction during the taxable year when paid or incurred.ALLOWABLE DEDUCTIONS v. – 1. Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. but only if at the time such amount is set aside. Not treated as expenses under capital account c. 2. KIM APPLE |MARTINEZ. 2. but not to exceed 5 years.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.

Pension Trusts . but only if such amount: a. JAI | YABUT. 3. Limitations on Deduction. extent. Additional Requirements for Deductibility of Certain Payments. . Method so elected.This Subsection shall not apply to a. a change to a different method is authorized with respect to a part or all of such expenditures. other than a nonresident alien. This may be made not later than the time prescribed by law for filing the return for such taxable year. ALEX | TAMAYO. he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. . or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion b. or quality of any deposit of ore or other mineral. Except when the Commissioner otherwise permits. LEE ANNE Page 13 . KIM APPLE |MARTINEZ. allowed as a deduction) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions. Apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. LAUREN| PARUNGO. the said individual shall keep such records pertaining to his gross income during the taxable year. L. Election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. location.Any amount paid or payable which is otherwise deductible from. Any expenditure for the acquisition or improvement of land. shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to BIR. MARA| MENDOZA. . and the period selected by the taxpayer. a. An individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements i. shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner. i. b. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction. or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section. may elect a standard deduction in an amount not exceeding 10% of his gross income.An individual subject to tax under Section 24. This when made in the return shall be irrevocable for the taxable year for which the return is made b.ALLOWABLE DEDUCTIONS from such expenditures).2016 TAXATION 2 REVIEWER: TAX ON INCOME -. K. as may be required by the rules and regulations promulgated CARVAJAL.An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year. Any expenditure paid or incurred for the purpose of ascertaining the existence. J. Not theretofore been allowed as a deduction. including oil or gas. Optional Standard Deduction.

This is generally used by taxpayers who do not have deductions which exceed the standard deduction assigned to them. Amount of premiums not to exceed P2. only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Adequacy of the prescribed limits on the actual expenditure requirements of each particular industry. Expenses Allowable deductions In computing taxable income allowable deductions are subtracted from gross income to measure the tax base.000 for the taxable year b. may prescribe by rules and regulations. Itemized deductions Expenses which are allowed form adjusted gross income itemized in detail under their appropriate captions and subtracted to arrive at income subject to tax. JAI | YABUT.400 per family or P200 a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself. M. including his family. – a. Effects of inflation on expenditure levels: Provided. In the case of married taxpayers. and 2. the Secretary of Finance shall consider the following factors: 1. LEE ANNE Page 14 . CARVAJAL.ALLOWABLE DEDUCTIONS by the SF. SF after a public hearing shall have been held for this purpose. LAUREN| PARUNGO. ALEX | TAMAYO. These include ordinary and necessary expenses interest taxes losses bad debts depreciation depletion of oil and gas wells and mines charitable and other contributions research and development expenditures and pension trust contributions. further. shall be allowed as a deduction from his gross income i. That no ceilings shall further be imposed on items of expense already subject to ceilings under present law. Said family has a gross income of not more than P250. MARA| MENDOZA. KIM APPLE |MARTINEZ. Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. Standard deductions Option available to taxpayers whereby they can deduct a specified amount from adjusted gross income instead of itemizing the deductions. limitations or ceilings for any of the itemized deductions under SUBSEC (A) to (J) of this Section: For purposes of determining such ceilings or limitations.

Exemption and Exclusion Deduction Exemption Subtraction from gross income to Immunity or privilege from a arrive at taxable income. Not included in income tax return unless information is required therein. The more dependents (maximum of 4) the lower the taxable income. ALEX | TAMAYO. These are usually deductible if undertaking is done to make profit. Conditions for deductibility of business expenses  Ordinary and necessary  Paid or incurred during taxable year CARVAJAL. Expenses in General DEDUCTIBLE EXPENSES: cost of carrying on a trade or business or in the exercise of profession. JAI | YABUT. LEE ANNE Page 15 . burden. Any person can claim a personal exemption for himself unless he is another’s dependent. Lowers tax liability by allowing the subtraction of an equal amount for each person a taxpayer claims as dependent—in addition to himself or his spouse. LAUREN| PARUNGO. KIM APPLE |MARTINEZ. Illustration:  Employers’ contributions to retirement savings plans are not considered income on part of employees o Employees’ contributions are subtracted from their taxable income  Amounts that employers pay for employee’s health life and accident insurance as well as housing loans are not considered taxable income for employees thus subsidizing the purchase of employment-based benefits.ALLOWABLE DEDUCTIONS 1. Deduction vs. In general the greater the qualified expenses the lower the taxable income.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. 2. May be a grant of immunity to particular persons or corporations of a particular class from a tax which others generally are obliged to pay. Some are excluded because of difficulty to measure them. MARA| MENDOZA. Exclusion Income received or earned but is not taxable as income because it is exempted by law or by treaty (or a non-recognition rule) effectively providing a subsidy for excluded amount. Refers to actual expenses paid during the tax year. Relates to filing status and to number of dependents.

7th condition—any income payment which is otherwise deductible under NIRC shall be allowed as deduction from the payor’s gross income only if it is shown that the income tax required to be withheld has been paid. NO deduction will be allowed notwithstanding payments of withholding tax at time of audit investigation or reinvestigation in cases where withholding of tax was made. What is prohibited is claiming a deduction beyond the amount authorized. ALEX | TAMAYO. However when there are certain overlapping items in income and deduction so long as these overlapping items do not distort the income they may be included in year in which taxpayer pursuant to a consisting policy takes them into his accounts.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. When charges are deductible/overlapping Expenses liabilities or deficit of 1 year cannot be used to reduce the income of a subsequent year. MARA| MENDOZA. 6th condition—taxpayer is free to deduct a lesser amount or not to claim any deduction at all. where expenses were not related to the generated income said expenses must not be allowed as deductible. 4th condition—mere allegation that an item of expense is ordinary and necessary does not justify its deductions. LAUREN| PARUNGO.  SEC 6 NIRC—any return statement of declaration filed in any office authorized to receive the same same may be modified changed or amended within 3 years from date of such filing. KIM APPLE |MARTINEZ. JAI | YABUT. Judicial adjudications on account of damages for patent infringement personal injuries or other causes are deductible from gross income when claim is so adjudicated or paid unless take under other methods of accounting which clearly reflect the correct deduction less any amount of such damages as may have been compensated for by insurance or otherwise. If subsequent to its occurrence a taxpayer first ascertains he amount of a loss sustained during a prior taxable year which has not been deducted from gross income he may render an amended return for such preceding taxable year including such amount of loss in the CARVAJAL. a. Considered waived—a taxpayer who is authorized to deduct expenses and other allowable deductions but failed to do so.ALLOWABLE DEDUCTIONS      Paid or incurred in carrying on a trade or business or exercise of profession Taxpayer must prove by evidence or records the deductions claimed under law Must not be contrary to law public policy or morals Reasonable and/or within the ceiling set by law or regulations If covered by the withholding tax system/rules appropriate amount of withholding tax on expense has been withheld and remitted to BIR BUSINESS TEST: first 3 conditions  In connection with 2nd and 3rd condition there must be proper matching of income and expense wherein expenses incurred in a given period are matched with the revenue earned in the same period o MATCHING PRINCIPLE: matching of revenue and expenses. LEE ANNE Page 16 .

CARVAJAL. MARA| MENDOZA. LAUREN| PARUNGO. JAI | YABUT. 3. ALEX | TAMAYO. Existence of law authorizing deduction: He must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. LEE ANNE Page 17 .2016 TAXATION 2 REVIEWER: TAX ON INCOME -. KIM APPLE |MARTINEZ. 4. Strict construction Tax exemptions are construed against the taxpayer. 5. A loss from theft or embezzlement occurring in 1 year and discovered in another is deductible for year it which sustained. Substantiation rules No deduction from income shall be allowed unless taxpayer shall substantiate with sufficient evidence such as OR or other adequate records:  Amount of expenses being deducted  Direct connection or relation of expense being deducted to development management operation and/or conduct of trade business or profession of taxpayer RR 17-2013: receipts and papers supporting the expenses need be kept by taxpayer for 10 years from last entry.        Taxpayers entitled to deductions Resident citizen nonresident citizen and resident alien deriving income from sources other than compensation Nonresident alien engaged in trade or business Members of GPP Domestic corporations Proprietary educational institutions and hospitals GOCC agencies and instrumentalities Resident foreign corporations Following cannot avail deductions:  Resident citizen non-resident citizen and resident alien whose income is purely compensation income except for: o Basic personal exemption o Additional exemption for dependents o Premium payments on health and/or hospitalization insurance  Nonresident alien engaged in trade or business in Philippines is entitled to itemized deductions but not to optional standard deductions  Nonresident alien not engaged in trade or business in Philippines since gross income from sources within is subject to 25% final tax  Nonresident foreign corporation since gross income from sources within is subject to final tax of 30% 6.ALLOWABLE DEDUCTIONS deduction from gross income and may in proper cases file a claim for refund of the excess tax paid for failure to deduct such loss in the original return.

ISSUE: WON Board refusal was justified HELD: Board should make as close an approximation as it can. Board refused to allow him any part of this on ground that it was impossible to tell how much he had in fact spent in absence of any items or details. If there was basis for some allowance and it was wrong to refuse any it is not fatal that result will inevitably be speculative. MARA| MENDOZA. May he deduct as deduction ½ of car and driver expenses? o YES. ALEX | TAMAYO. KIM APPLE |MARTINEZ. NIRC does not prescribe an accounting method it allows the taxpayer to adopt a standard method as long as it can properly reflect his income and his deductions and that it is used by him with consistency.ALLOWABLE DEDUCTIONS If at the time of investigation said 10 years had lapsed taxpayer’s expenses even if not properly substantiated may be sustained. These expenses amounted to substantial sums but he kept no account and could not have done so. LAUREN| PARUNGO. He has to travel much.  COHAN vs.g. COMMISSIONER—US Tax Court allowed claimed deduction for being a deductible expense even without any sufficient evidence. However the law recognizes principal accounting methods such as cash basis and accrual basis methods. However in order for the Court to estimate the amount of an expense there must be some basis upon which an estimate may be made. Accounting methods Except where final taxes on certain transactions are imposed liability of taxpayers from income tax is determined on basis of taxable year calendar or fiscal covering 12-month period. CARVAJAL. Illustration  H used his car and driver both for personal and business purposes.” EXCEPTIONS TO COHAN PRINCIPLE:  When taxpayer has access to substantiating evidence but fails to produce it. It is reasonable. COHAN PRINCIPLE GR: if record provides sufficient evidence that taxpayer has incurred a deductible expense but taxpayer is unable to adequately substantiate the amount of deduction to which he is otherwise entitled Court may estimate the amount of such expense and allow a deduction to that extent.  When insufficient evidence exists in support of deduction  Subject to 50% limitation on deduction or any other percentage set by law or regulations (e.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. At the trial before the Board he estimated that he had spent $55000 in all. a. limit on entertainment amusement and recreation). “Cohan was obliged to be free-handed in entertaining actors employees and dramatic critics. LEE ANNE Page 18 . Without such basis any allowance would amount to unguided largesse. JAI | YABUT. There was no clear showing that car was more devoted for business than for his personal and business needs. 7.

MARA| MENDOZA. LEE ANNE Page 19 . Cash method Practice of recording of income and expense only when cash is received or paid out. Amount of liability does not have to be determined exactly but with reasonable accuracy.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. It is system of accounting which treats as income only cash which is actually received and as expense only cash which is actually paid out in contrast to accrual basis which records income when due though not received and expense when incurred though noy yet paid. Cash method Accrual method Method of keeping accounts which shows expenses incurred and income earned for a give period although such expenses and income may not have been actually paid or received. a. In case of death of taxpayer there shall be allowed as deductions for taxable period in which falls the date of his death amounts accrued up to date of his death if not otherwise properly allowable in respect of such period or prior period. LAUREN| PARUNGO. Follows ALL-EVENTS TEST:  Right to income is fixed (in case of income) or all events have occurred which established fact of liability (in case of deduction)  Amount can be determined with reasonable accuracy. Obligations payable to or by taxpayer are treated as if discharged when incurred. Ordinary and necessary trade business or professional expenses  Reasonable allowance for salaries wages and other forms of compensation for personal services actually rendered including grossedup monetary value of fringe benefit furnished or granted by employer to employee provided that fringe benefit tax has been paid. Right to receive and not actual receipt determines inclusion of amount in gross income. Accrual method vs. When right to receive an amount becomes fixed right accrues. ALEX | TAMAYO. b. It is satisfied where computation remains uncertain if its basis is unchangeable—where computation may be unknown but is not as much as unknowable within the taxable year. ALL EVENTS TEST and Propriety of Accrual ALL-EVENTS TEST: right to income or liability be fixed and determined with reasonable accuracy. This test does not demand that amount of income be known absolutely only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. KIM APPLE |MARTINEZ. CARVAJAL.ALLOWABLE DEDUCTIONS SEC 45 NIRC—deductions shall be taken for the taxable year in which “paid or accrued” or “paid or incurred” dependent upon the method of accounting the basis of which net income is computed unless in order to clearly reflect the income deductions should be taken as of a different period. JAI | YABUT. It reflects deductions as paid and income as received in any one tax year.

JAI | YABUT. Ordinary expense may be fully deducted during taxable year.  Ordinary and necessary expenditures directly connected with or pertain to taxpayer’s trade or business. Ordinary: One that is common and accepted to incur in the trade or business of taxpayer. However not all are under circumstances allowed as deduction in an unlimited amount.  Management expenses  Commissions  Labor  Supplies  Incidental repairs  Operating expenses of transportation  Equipment used in trade or business  Travelling expenses while away from home solely for the pursuit of trade or business  Advertising and other selling expenses  Insurance premiums against fire storm theft accident or other similar losses in case of a business and rental for use of business property 1.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LEE ANNE Page 20 . o Cost of goods purchased for resale with property adjustment for opening and closing inventories is deducted from gross sales in computing gross income. PRINCIPAL FUNCTION: to distinguish a deductible expense from one that is capital. It must be in reasonable amount. ALEX | TAMAYO. a. Expenditure may be capitalized for which depreciation allowance may be claimed over a period of time and not outright. MARA| MENDOZA. Deduction claimed must be justified as reasonable in nature and amount.ALLOWABLE DEDUCTIONS  Reasonable allowance for travel expenses local and abroad while away from home in the pursuit of trade business or profession  Reasonable allowance for rentals and/or other payments which are required as a condition for continued use or possession for purposes of trade business or profession of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee user or possessor  Reasonable allowance for entertainment amusement and recreation expenses during the taxable year that are directly connected to development management and operation of trade business or profession of the taxpayer or that are directly related to or in furtherance of conduct of his or its trade business or exercise of a profession not to exceed set ceilings. LAUREN| PARUNGO. KIM APPLE |MARTINEZ. Definitions of ordinary and necessary It is mandatory that all expenses be both ordinary and necessary. If expense is extraordinary it will not be disallowed permanently. CARVAJAL.

LAUREN| PARUNGO. ALEX | TAMAYO. Expense cannot be considered necessary if allowance of deduction would frustrate national policies proscribing particular conduct evidence by some government declaration. In order to re-establish his relations with customers whom he had known when acting for W CORP and to solidify his credit and standing he decided to pay the debts of W CORP as he was able. Expense does not have to be indispensable to be considered necessary. Fines by penal statutes are enacted to protect highways from damage and to insure safety of persons using them. Following not considered ordinary expenses:  Payments by the taxpayer for repair of fire damage such payments being distinguished from those for wear and tear  Counsel fees incurred by taxpayer president of a corporation in prosecuting a slander suit to protect his reputation and that of his business  Gratuitous payments to stockholders in settlement of disputes between them or to assume the expense of a lawsuit in which they had been made defendants  Payments in settlement of a lawsuit against a member of partnership effect being to enable him to devote his undivided efforts to the partnership business and also to protect his credit. During tax year 2001 X CORP paid P41000 o fines and costs for violations. MARA| MENDOZA. LEE ANNE Page 21 .2016 TAXATION 2 REVIEWER: TAX ON INCOME -. May deduction of that amount be allowed? o NO. Thereafter X made a contract with K CORP to purchase grain for it on commission. Some restricted truckers to 45000 pounds while others allowed 60000 pounds. b. It is distinguished from personal expenditure or from one not pertinent to business of taxpayer. KIM APPLE |MARTINEZ. Illustrations  X CORP owns a fleet of tank trucks which it leases to motor carriers for transportation of bulk liquids. CARVAJAL. Necessary: One that is helpful and appropriate for trade or business or occupation. JAI | YABUT. In 2001 some cities imposed maximum weight limits for motor vehicles on highways. It does not mean that payments must be habitual for them to be ordinary. This refers to business day-to-day expenses. Payment is not ordinary.  X was the secretary of W CORP engaged in grain business.ALLOWABLE DEDUCTIONS Capital expenditure must be depreciated over the life of the asset with which expenditure is associated or where no specific asset or useful life can be ascertained it is deducted upon dissolution of enterprise. Company was adjudged an involuntary bankrupt and had a discharge from its debts. Expense is ordinary because from experience that payments for such a purpose whether amount is large or small are the common and accepted means of defense against attack. X CORP deliberately operated its trucks overweight in hope at calculated risk of escaping the police. It is also necessary if intended to minimize losses or to increase its profits. In fulfillment of that resolve he made payments during 5 successive years. Are payments deductible from income as ordinary and necessary expenses? o Men do at times pay debts of others without legal obligation or lighter obligation imposed by usages of trade or by neighborly amenities but they do not do so ordinarily even to heighten their reputation for generosity.

Even though expense may be considered ordinary and necessary taxpayer may still not be allowed to deduct the expense in the year he paid or incurred (cost of goods sold and capital expenditures). It earned interests and dividends from its investments. Interests and dividends by A CORP were merely incidental income to its main activity which is the operation of its hospital and nursing schools hence its activities never went beyond of passive investor which do not come within purview of carrying on any trade or business. 2. Plan for self-insurance will be funded through creation of a sinking fund to be managed by an independent trustee bank.  P CORP intends to self-insure its real and personal properties instead of insuring the same with insurance companies. Is the deduction proper? o NO. Are expenses deductible by branch? o A branch which assumed payment attributable to its head office cannot claim the same as ordinary and necessary for its own trade or business. ALEX | TAMAYO. KIM APPLE |MARTINEZ. These are not deductible in taxable income. No deductions are allowed. MARA| MENDOZA.ALLOWABLE DEDUCTIONS  A non-resident foreign corporation incurred expenses paid by its branch in the Philippines. Fund will be segregated and will no longer form part of assets of P CORP and will answer for catastrophic losses which may be suffered by it. CAPITAL EXPENDITURE: outlay of funds for acquisition or improvement of a fixed asset which extends the life or increases the productivity of asset. Taxpayer cannot merely presume that all corporate expenses are necessary and appropriate in the absence of showing that they are illegal or ultra vires. JAI | YABUT. In some cases taxpayer may not be allowed to deduct expense at all (personal expense). 3 types of costs are capitalized:  Organization/pre-operating costs CARVAJAL. However although taxpayer generally cannot take a current deduction for a capital expense he may be able to recover the amount he used through depreciation amortization or depletion.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Ordinary expense connotes payment normal in relation to the business of the taxpayer and the surrounding circumstances. They have the burden of justifying the allowance of any deduction claimed. Expenditure for asset should be capitalized and depreciated over estimated life of the asset. LAUREN| PARUNGO. LEE ANNE Page 22 . Is the amount paid to the sinking fund deductible? o While regular premium payment to an insurance company is a deductible expense because it is ordinary amount paid to a sinking fund as a form of self-insurance will not qualify as an ordinary expense because self-insurance is not an ordinary means of insuring business assets. Passive income is subject to final tax imposed on gross amount. To lower its tax liability it deducted administrative expenses to its interests and dividends income.  Z CORP is an entity operating a hospital and a nursing school. P CORP will contribute annually to the sinking fund and that the amount to be contributed will be based on prior years’ insurance premium payments.

To qualify for amortization expenditure must be paid and incurred in connection with creating or investigating the creation or acquisition of an active trade or business entered into by taxpayer. This occurs after charter or AOI is issued. A corporation is considered to begin business when it commences the activities for which it was organized. MARA| MENDOZA. Investigatory expenses before signing merger/consolidation agreement are deductible in the year incurred. Therefore taxpayers who pay or incur business start-up expenditures and subsequently enter trade or business to which expenditures relate can elect to amortize these expenditures over a period of not less than 60 months.  Interest or financing cost should be treated as expense during which credit was extended and should be amortized over credit period. Investigatory expenses incurred by taxpayer after singing the merger/consolidation agreement are capital expenditures and not eligible for deduction.  Interest paid on loan obtained for purchase of land should neither be treated as pre-operating expense in period when incurred. ALEX | TAMAYO. START-UP EXPENDITURES include: amounts paid or incurred before and in anticipation of the start of business in an activity for profit or production of income. Expenses in Mergers and Acquisitions Salaries paid to corporate officers who provided services for capital acquisition are deductible as ordinary business expenses.  Interest expense should not be classified as deferred charges in form of pre-operating expense. i. LAUREN| PARUNGO. JAI | YABUT. CARVAJAL. ii.ALLOWABLE DEDUCTIONS   Business assets Improvements a. KIM APPLE |MARTINEZ. Amortization period commences with the month in which the business begins. Organization and pre-operating costs It may be treated as deferred expenses and deducted for a period not less than 60 days beginning from first month the corporation is active in business.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LEE ANNE Page 23 . o Pre-operating expenses include only organizational cost research and development cost and other expenses relative to organization of company. o Registration fees documentary stamps and transfer fees should form part of cost of land acquired. Pre-operational costs of real estate developer In case of a newly established real estate company:  When land is acquired on installment plan or credit financing interest element or carrying charge should be charged as interest expense and not as part of cost of asset.

KIM APPLE |MARTINEZ.  Promotional items of softdrinks company (electric coolers and ice coolers) to be distributed to dealers-retailers of softdrinks are considered ordinary and necessary expenses deductible in the net income. Land is not depreciated because it is assumed to last indefinitely. Business assets benefit the taxpayer for more than 1 year. Examples:  New electric wiring  New roof  New floor  New plumbing  Bricking up windows to strengthen a wall  Lighting improvements However a taxpayer can currently deduct repairs that keep the property in a normal efficient operating condition.ALLOWABLE DEDUCTIONS b. Improvements are generally major expenditures. LEE ANNE Page 24 . a. Taxpayer must depreciate the asset by deducting portion of cost over several years. Tools These are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. i. 3. Bribes kickbacks and similar payments (illegal payments) These are taxable income on part of recipient. MARA| MENDOZA. ALEX | TAMAYO. However it is not deductible on part of payer. LAUREN| PARUNGO. Business expense to replace parts of a machine that only keep it in a normal operating condition is treated as ordinary repairs and therefore deductible. Legal expenses deductible from illegal income CARVAJAL. There are assets which may have a useful life exceeding 1 year but cannot be capital expenditure. Business assets GR: Costs of acquiring equipment machinery fixtures or other items having a useful life beyond the taxable year are considered capital expenditures.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Improvements These are capital expenses if improvements add to the value of the asset appreciably lengthen the time it can be used or adapt it to a different use. ii. JAI | YABUT.

2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Legal expenses connected to an illegal income or any excess may not be deducted from legal income and vice-versa. In case of illegal business deductibility of expense depends on whether the expense is legal or illegal. If expense is legal it may be deducted from illegal income on which it is incurred unless there is a law prohibiting the deduction. KIM APPLE |MARTINEZ. That is enough to permit the deduction unless it is clear that allowance is a device to avoid consequence of violation of law or otherwise contravenes state’s policy expressed in a statute or regulation. May the amounts be deducted from gross income since those were for expenditures in connection of an illegal act? o In absence of law to the contrary fact that expenditure bears a remote relation to an illegal act does not make it nondeductible. If expense is legal it may be deducted regardless of legality or illegality of income. This rule applies if expense is contrary to morals or public policy or order. He is however entitled to a deduction of that portion of his expenses in connection to car use related to his profession. LAUREN| PARUNGO. CARVAJAL. 4. ALEX | TAMAYO. If a taxpayer uses his car partly for personal use and partly for profession he is not entitled to claim a deduction for his car use from home to office and back. Personal expenses It is not included to allowable deductions. TEST: whether compensation payments are reasonable and are payments purely for service. Former is not incurred to earn the latter. JAI | YABUT. MARA| MENDOZA. Business portion may be deducted while personal portion is not deductible. If a taxpayer has an expense for something used partly for business and partly for personal purposes total cost shall be divided between business and personal portions.ALLOWABLE DEDUCTIONS Illegal income is includable in computation of gross income but illegal expenses are not deductible from gross income even if from a legal source. It is possible to incur legal expenses in conduct of an illegal business. LEE ANNE Page 25 . Illustration  X received income from conduct of illegal enterprise and incurred salary expenses: for services performed by employees and payment of rent for use of premises for an illegal enterprise. Compensation for personal services GR: a business can claim a tax deduction for salary wages commissions bonuses and other compensation (holiday hazard OT and night shift differential) it pays to its employees. Amounts paid as wages to employees and to landlord as rent are ordinary and necessary expenses.

Factors considered in determining reasonableness of compensation If a pay is excessive excess pay is disallowed as deduction. MARA| MENDOZA. o Circumstances to be taken into consideration are those existing at the date when contract for services was made not those existing at the date when contract is questioned.  In any event the allowance for compensation paid may not exceed what is reasonable in all circumstances. JAI | YABUT. o Ostensible salary paid by a corporation may be a distribution of dividend on stock. LEE ANNE Page 26 . Following is a non-exclusive list of factors that may be considered in determining whether compensation of an employee manager or 3rd party is reasonable:  Arm’s length negotiation o However lack of arm’s length negotiation does not make the compensation unreasonable as a matter of law.  Form or method of fixing compensation is not decisive as to deductibility. This occurs when corporation has few shareholders all of whom draw salaries.  It may be found that salaries of former partners are not merely for services but in part as payment for transfer of business.  Comparable services from a 3rd party  Nature of duties  Background and experience  Salary history  Contribution to organization’s success  Time devoted in performing services to the organization  Size of organization CARVAJAL. ALEX | TAMAYO. o If contingent compensation is paid pursuant to a free bargain between the employer and the individual made before services are rendered not influenced by any consideration on part of employer other than that of securing on fair and advantageous terms the services of the individual it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.  If in such case salaries are in excess of those ordinarily paid for similar services and excessive payment bear a close relationship to stockholdings of officers or employees it would seem that salaries are not paid wholly for services rendered but more of distributions of earnings upon stock. LAUREN| PARUNGO.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. o Ostensible salary may be in part payment of property.ALLOWABLE DEDUCTIONS Illustrations  Any amount paid in the form of compensation but not in fact as purchase price of services is not deductible.  This occurs when partnership sells out to a corporation the former partners agreeing to continue in the service of the corporation. 1. KIM APPLE |MARTINEZ.

May C CORP deduct payments of A? o Payments were inordinately large and could not be accorded the treatment of ordinary and necessary expenses allowed as deductible items within purview of NIRC. b. Economic conditions a. If a taxpayer-employer’s rate of return on investments remain at a level that would satisfy an independent investor there is a strong indication that management is providing compensable services and that profits are not being siphoned out of company disguised as salary. If such payments constitute payment for property they should be treated by payer as a capital expenditure and by the recipient as part of purchase price. Independent investor approach It relies on measure of performance based on corporation’s return on equity (ROE). JAI | YABUT.6% of total authorized capital stock of C CORP. MARA| MENDOZA.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Treatment of excessive compensation GR: excess compensation—portion of compensation beyond what is reasonable—is not deductible. A owns 99. ALEX | TAMAYO. Here are suggested tests: Payment made in GF Character of taxpayer’s business Volume and amount of its net earnings Locality Type and extent of services rendered Salary policy of corporation Size of particular business CARVAJAL. 2. KIM APPLE |MARTINEZ. LEE ANNE Page 27 . A was the chairman of BOD and salesman-broker for company. LAUREN| PARUNGO. Income tax liability of recipient in respect of an amount of ostensibly paid to him as compensation but not allowed to be deducted as such by the payer will depend upon circumstances of each case. Illustration  C CORP was founded by A. He received 50% share of sales commissions earned by C CORP aside from his monthly salary plus free use of company car and receipt of other similar allowances and benefits which was double the reported net income of C CORP. In the case of excessive payments by corporations if such payments correspond or bear a close relationship to stockholdings and are found to be distribution of earnings or profits excessive payments will be treated as dividend. There        Bonuses is no fixed test for determining the reasonableness of a given bonus as compensation.ALLOWABLE DEDUCTIONS    Amount of employer’s income Policy of employer o Policy or scheme adopted by employer in its compensation packages may gauge whether salaries it provides are reasonable or not.

Value of fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually claimed as depreciation expense by employer. LAUREN| PARUNGO. Illustration  A CORP sold properties through broker and paid latter commission. MARA| MENDOZA. If credit is made at time of employment or in pursuance of board of BOD such bonuses/shared profits are deductible in the year of accrual. Fringe and de minimis benefits GR: amount of taxable fringe benefit and fringe benefit tax shall be allowable deductions from gross income of employer. Profit sharing Profit sharing benefit like bonuses based upon a fixed plan such as percentage of profits are deductible despite the condition that such bonuses/benefit should be based on net income after income tax has been imposed and even though amount cannot be determined until after end of year when books are closed and profits determined. Paid in property CARVAJAL. On the other hand any amount given by employer as benefits to its employees as “de minimis” benefits shall constitute as deductible expense upon such employer. Absence of service rendered by officers (since there was a broker) which could be the basis of grant to them of a bonus out of the profit derived from sale payment of a bonus out of gain realized from sale cannot be considered as selling expense. c. However if basis for computation of fringe tax is depreciation value zonal value or fair market value only actual fringe benefits tax shall constitute as deductible expense. KIM APPLE |MARTINEZ. Thereafter it distributed bonuses taken from the proceeds to its officers. b. LEE ANNE Page 28 .ALLOWABLE DEDUCTIONS   Employee’s qualifications and contributions to the business venture General economic conditions a. ALEX | TAMAYO. JAI | YABUT. i.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Is payment of bonuses deductible? o NO. However if zonal value or fair market value is greater that cost subject to depreciation excess amount shall be allowed as deduction from employer’s gross income as fringe benefit expense. Limitations Deductions from gross income of additional compensation in bonuses granted to officers and employees is subject to 3 limitations:  Payment of bonuses is in fact compensation  It must be for personal services actually rendered  Bonuses when added to salaries are reasonable when measured by amount and qualify of services performed with relation to business of particular taxpayer.

Home development mutual fund—housing benefits iv. SSS/GSIS ECSIF and Pag-ibig Contributions: under law employer is mandated to contribute— i.reimbursement for traveling expenses = travel expenses deductible Salary on commission basis – expense allowance = travel expenses deductible Salary + travel expenses = repaid travel expenses not deductible Salary + travel allowance = not deductible 2. 1. Expenses must be incurred in pursuit of trade or business Transportation expenses from main office to branch or client or from branch to main office are deductible. Expenses must be reasonable and necessary traveling expenses as that term is generally understood b. Travel expenses include transportation expenses and meals and lodging. REQUISITES for deductibility a. KIM APPLE |MARTINEZ.     Salary and travel expenses Salary as full compensation -. National health insurance act—benefits for non-work related illnesses or injuries iii. If trip is undertaken for other than business purposes transportation expenses are personal and not deductible. e. LEE ANNE Page 29 . Commute from home to work and back are nondeductible personal expenses. LAUREN| PARUNGO.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Employee’s compensation and state insurance fund (for work-related illnesses or injuries) ii. Travelling expenses “AWAY FROM HOME”: limited to travel from post or station or place of employment to points where business transactions are made. CARVAJAL.ALLOWABLE DEDUCTIONS Where compensation is paid in property other than money employer shall make necessary arrangements to ensure that amount of tax required to be withheld is available for payment to BIR. Contributions to SSS GSIS NHIA/PHIC (PhilHealth) and HDMF (Pag-Ibig) are allowable deductions. d. Seminars Expenses and costs of attending seminars are deductible as ordinary and necessary expense. MARA| MENDOZA. Expenses must be incurred while away from home c. Social security—comprehensive benefits (sickness disability retirement and funeral benefits) Except for ECIF both employer and employee contribute to common fund from which benefits are sources. ALEX | TAMAYO. Payment for use of sample room at a hotel for display of goods is a business expense and hence deductible. Contributions are based on compensation of employee. JAI | YABUT. Expenses from office to home or home to office are not deductible.

2016 TAXATION 2 REVIEWER: TAX ON INCOME -. If one regularly works in more than 1 place his tax home is where his main place of business or work is located. LEE ANNE Page 30 . Travel expenses for conventions are deductible if it can be shown the attendance is for trade business or profession. Common automobile expenses include cost of gasoline oil repairs batteries insurance depreciation interest to purchase the car taxes registration fees car washes garage rent parking fees and toll fees. 3. 4. Travelling away from home and tax home TRAVELLING AWAY FROM HOME: if his duties require him to be away from the general area of his “tax home” for a period longer than an ordinary day’s work and he needs to get sleep or rest to meet the demands of his work while away. MARA| MENDOZA. LAUREN| PARUNGO. a. IN determining main place of business here are the conditions:  Length of time normally required to spend at each location for business purposes  Degrees of business activity in each area  Relative significance of financial return from each area The most important consideration is the length of time spent at each location.ALLOWABLE DEDUCTIONS If a company car is utilized by employee both for business and personal use deduction is in proportion. Deductible expenses Travel expenses in connection with a temporary work assignment away from home is deductible. ALEX | TAMAYO. Plane ticket/airway bill Passenger coupon of plane ticket/airway bill which reflects the CAB (Civil Aeronautics Board) rate shall not be used as basis for claim of expense. Location of tax home must first be determined. TAX HOME: place of employment station or post of duty regardless of where the family home is maintained. Amount expense shall be the actual cost incurred for purchase of ticket/bill which is the net amount of the fare deducting the fare/freight adjustments. If indefinite work assignment not deductible. Substantiation Taxpayer must attach to his return a statement showing: a. There is no deduction because it becomes a personal choice to just move there. JAI | YABUT. KIM APPLE |MARTINEZ. Any work assignment in excess of 1 year is considered indefinite. In case of plane tickets if said tickets are purchased from travel agents/travel expenses as claimed by passengers shall be validated on basis of sales invoice/OR issued by travel agent representing the actual cost of ticket and reasonable margin added by travel agent as payment for services. CARVAJAL.

No one is exempt. KIM APPLE |MARTINEZ. LEE ANNE Page 31 . LAUREN| PARUNGO. Both travel tax and terminal fee are deductible expenses. Travel tax and terminal fee TRAVEL TAX: levy imposed by government on persons who are leaving the country regardless of country where the air ticket is issued an the form or place of payment It must be paid by:  Citizens of Philippines  Foreigners holding a permanent resident visa  Foreign tourists or expatriates who have stayed in the Philippines for more than 1 year Those who do not pay Travel Tax:  Foreign temporary visitors (tourists and business persons)  Filipino balikbayans Both staying for less than 1 year. ALEX | TAMAYO. CARVAJAL. Applicable rates: 1st class Full rate Standard reduced rate Privileged reduced rate for OFW dependents Economy class 2700 1350 400 1620 810 300 Aside from travel tax separate Airport Terminal Fee is levied on all travelers. JAI | YABUT.ALLOWABLE DEDUCTIONS Deductible travel expenses while away from work include but are not limited to:  Airplane train bus or car between tax home and business destination o If ride is a result of a frequent traveler or similar program cost is zero  Use of car while on business destination o Actual expenses or standard mileage rate and tolls and parking fees may be deducted) o In case of rented car only business-use of portion of expenses may be deducted  Fares for taxis or other types of transportation between airport/train station and hotel from one customer to another one place of business to another  Meals and lodging  Tips paid  Dry cleaning and laundry  Business calls  Other ordinary and necessary expenses b.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. MARA| MENDOZA.

Travel expenses for another individual Travel expenses for conventions are deductible if it can be shown that attendance benefits trade or business or profession. LEE ANNE Page 32 . Rent is not unreasonable just because it is figured as a percentage of gross sales. REQUISITES:  Rental property must be used in trade business or exercise of profession  Rental expense is a consideration or condition for continued use or possession of property  Payment is reasonable  Rental payment has been subjected to withholding tax Lessee may deduct the amount of rent paid or accrued including all expenses which under the terms of agreement the lessee is required to pay to or for account of the lessor. If taxpayer rents his home and use part of it as his place of business he may be able to deduct the rent he pays for that part.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LAUREN| PARUNGO. Rent paid to a related person is reasonable if it is the same amount a lessee would pay to a stranger for use of same property. Rent paid in advance GR: It is deductible in year paid or accrued. If spouse dependent or other individual goes with taxpayer on business trip or convention their travel expenses may not be deducted. 1. a. KIM APPLE |MARTINEZ. MARA| MENDOZA. Unreasonable rent/home rental GR: cash or fair market value of property paid for use of real estate or personal property is deductible from gross income. BUSINESS ASSOCIATE: someone with whom one could expect to actively conduct business. JAI | YABUT. GR: rent can be deducted as an expense only if it is for property used in trade business or exercise of profession. CARVAJAL. ALEX | TAMAYO. Incidental services such as typing notes or assisting in entertaining customers are not deductible. However travel expenses of someone who goes with taxpayer may be deducted if that person:  Employee  Has a bona fide business purpose for travel  Would be allowed to deduct travel expenses If a business associate meets the conditions 2 and 3 travel expenses may be deducted. If taxpayer has or will receive equity in or title to property rent is not deductible. Rental expenses RENT: consideration paid for use or occupation of property (taxpayer does not own).ALLOWABLE DEDUCTIONS 5. BONA FIDE BUSINESS PURPOSE: if real business purpose can be proved for individual’s presence.

If the lessee gets an existing lease on property or equipment for his business he must amortize any amount he pays to get that lease over the remaining term of the lease. When a lessee gets an existing lease from another lessee he pays the previous lessee money to get the lease besides paying the rent.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Amounts paid to cancel a lease and expenses paid by a tenant If lessee pays the lessor to cancel a lease money is rental expense and is deducted in year incurred. JAI | YABUT. LEE ANNE Page 33 . amount of tax being deductible by the latter. If it is used as lessee’s final month’s rent lessor should deduct the money as expense when it is applied to last month’s rent. LAUREN| PARUNGO. If lessor keeps security deposit because lessee damaged the property it is deductible. In computing term of lease all options shall be taken in consideration if there is a reasonable expectation that such options will be exercised. b. Leasehold for a specified sum and cost of buildings and improvements LEASEHOLD: asset representing the right of lessee to use lease property. MARA| MENDOZA. c. Cost for erecting buildings or making permanent improvements of which he is lessee is a capital investment and not deductible as a business expense.ALLOWABLE DEDUCTIONS If payments constitute as advance rentals such shall be duly apportioned over the lease term. If lessee deducts the security deposit lessor returns it at termination of contract and lessee will benefit twice from security deposit. KIM APPLE |MARTINEZ. ALEX | TAMAYO. Where a leasehold is acquired for business purposes for a specified sum purchaser may take as a deduction in his return an adequate part of such sum each year based on number of years lease has to run. But if lessor keeps part or all it is deductible from gross income. In order to return to taxpayer his investment of capital annual deduction may be made from gross income of an amount equal to cost of such improvements divided by number of years remaining in the lease period under depreciation. If lessee pays any of the lessor’s expenses those payments are rental expense. Security deposit It is not deductible if lessor may be required to return it to the lessee at the end of the lease. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord. If remainder of lease period is greater than probable life of buildings/improvements erected deductions shall still be in form of depreciation. 3. Cost of getting a lease Taxpayer may either entire into a new lease with lessor of property or get an existing lease from another lessee. 2. By its nature security deposit is a refundable amount unless lessee damages the property does not pay rent or violates the contract. Illustration CARVAJAL.

MARA| MENDOZA. JAI | YABUT. Lease good will represents value of location over its ordinary cost.ALLOWABLE DEDUCTIONS  If A pays P100000 to get a lease and there are 10 years remaining with no option to renew. o He can deduct P10000 each year. KIM APPLE |MARTINEZ. ALEX | TAMAYO. Are they deductible? o YES as necessary expenditures. a. Non-deductible expenses of lessor The following are not deductible business expenses but should be integrated into cost of capital assets to be depreciated yearly:  Expenses in watching over laborers in construction work (part of construction cost) CARVAJAL. Example: gasoline station on a business intersection or a business located in a tourist spot. LAUREN| PARUNGO. Lease goodwill LEASE GOODWILL: intangible asset that reflects the value of lease location to a business. Lessor              Deductible expenses of lessor may deduct all ordinary and necessary expenses attributable to earning of income: Interest on mortgage or other loans or credits Repairs and maintenance Utilities Insurance Wages and salaries of employees Fees for services of independent contractor Legal and professional fees Advertising commissions Property taxes and other expenses related to rental activity In case of condominiums or buildings association dues or maintenance fees Properties subject to operating lease Tangible personal properties subject to finance lease during primary lease period but not less than 60% of depreciable life of property Litigation expenses defrayed by taxpayer to collect apartment rentals and to eject delinquent tenants Illustration:  Electrical supplies paint lumber plumbing cement tiles gravel masonry and labor used to repair taxpayer’s rental apartments did not increase the value of such apartments or prolong their life.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Ordinary good will reflects on good name and reputation of business. 4. 5. LEE ANNE Page 34 . Goodwill is not deductible but deductions may be made if premiums are paid for the goodwill of leased property.

GUEST: persons or entities with which taxpayer has direct business relations to clients/customers or prospective clients/customers. It shall not include employees officers partners directors stockholders or trustees.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LEE ANNE Page 35 . KIM APPLE |MARTINEZ. LAUREN| PARUNGO. included in property’s purchase price) Iron bars venetian blind and water pump augmented the value of apartments where they were installed (not maintenance hence not deductible) Expenses for relocation survey and registration of property tend to strengthen title over property (considered addition to costs of property) Set of Comments on Rules of Court purchased by lessor having a life span of more than 1 year Representation (entertainment amusement and recreation) expenses REPRESENTATION EXPENSES: expenses incurred in entertaining providing amusement and recreation to or meeting with guests at a dining place place of amusement country club theater concert play sporting event and similar events or places. These are deductible as expenditures incurred in carrying on a business or trade provided they are reasonable in amount ordinary and necessary and in connection with taxpayer’s business. ALEX | TAMAYO. JAI | YABUT. Different from employee’s representation allowance Representation expenses are different from fixed representation allowances subject to withholding tax on wages. MARA| MENDOZA.ALLOWABLE DEDUCTIONS     Real estate tax which remained unpaid by former owner of taxpayer’s rental property but which the latter paid (additional cost to acquire property. CARVAJAL. Only following taxpayers may deduct representation expenses:  Individuals engaged in business including taxable estates and trusts  Individuals engaged in practice of profession  Domestic corporations  Resident foreign corporations  GPPs including its members Those    not entitled to deduction: Those earning purely compensation income Nonresident alien not engaged in trade or business Nonresident foreign corporation not entitled to this deduction 1.

All input taxes (VAT) to the said disallowed expenses are not allowed. Entertainment facilities These refer to:  Yacht vacation home or condominium  Any similar item of real or personal property used by taxpayer for entertainment amusement or recreation of guests or employees. KIM APPLE |MARTINEZ. a. For proving that said expense is a representation expense taxpayer should maintain receipts and records that indicate:  Amount of expense  Date and place of expense  Purpose of expense  Professional or business relationship of expense  Name of person and company entertained with contact details 2. JAI | YABUT. LEE ANNE Page 36 . Exclusions (expenses not considered entertainment amusement and recreation) Following are not considered entertainment amusement and recreation expenses:  Those treated as compensation or fringe benefits for services rendered under employer-employee relationship  For charitable or fund raising events  For bona fide business meeting of stockholders partners or directors  For attending or sponsoring an employee to a business league or professional organization meeting CARVAJAL.4MILLION unless taxpayer’s main line of business is transport operations or lease of transportation equipment and vehicles purchased are used in said operations. ALEX | TAMAYO. Yacht is considered an entertainment facility if its use is not restricted to specified officers or employees or positions in such a manner as to make the same a fringe benefit. MARA| MENDOZA. LAUREN| PARUNGO. Threshold amount for depreciation RR 12-2012: no depreciation shall be allowed for yachts helicopters airplanes and/or aircrafts and land vehicles which exceed P2. To be considered an entertainment facility such yacht vacation home or condominium or item of real or personal property must be owned or form part of taxpayer’s trade business or profession or rented by such taxpayer for which taxpayer claims a depreciation and rental expense. b.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.ALLOWABLE DEDUCTIONS In case of country golf sports club or any other similar club where employee or officer of taxpayer is a registered member and expenses incurred are paid by the taxpayer it is presumed that such are fringe benefits subject to fringe benefit tax unless taxpayer can prove that these are actually representation expenses. All expenses related to non-depreciable vehicles such as but not limited to repairs and maintenance oil and lubricants gasoline spare parts tires and accessories premium paid for insurance covering said vehicles and registration fees shall not be allowed as a deduction in its entirety.

ALEX | TAMAYO. Requisites for deductibility a. Net sales/net revenue EAR expenses based on Maximum percentage Allowable amount to be CARVAJAL. LAUREN| PARUNGO. 4.50% net sales (gross less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties  1% of net revenue (gross revenue less discounts) for taxpayers engaged in sale of services including exercise of profession and use or lease of properties  If taxpayer is deriving income from both sale of goods/ properties and services allowable EAR (entertainment amusement and recreation) expenses shall be determined based on apportionment formula: o Net sales/net revenue x Actual expenses Total Net sales and Net Revenue Illustration  E CORP is engaged in sale of goods and services with net sales/net revenue of P200000 and P100000 respectively.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Must be duly substantiated by adequate proof—OR/invoices bills or statements of accounts should be in the name of the taxpayer claiming the deduction f. Ceiling GR: actual entertainment amusement and recreation expense is allowed as a deduction from gross income. CEILING: in no case shall deduction exceed:  . It must be paid or incurred during taxable year b. Must not have been paid to an official or employee of national government or any LGU or GOCC or of a foreign government or to a private individual or corporation or GPP or a similar entity if it constitutes as a bribe kickback or other similar payment e. Actual entertainment amusement and recreation expenses for 2nd semester 2012 totaled to P3000. Illegal immoral contrary to public policy and order These are not allowed for deduction. JAI | YABUT. 3. However recipient is taxable. Directly connected to development management and operation of trade business or profession of taxpayer ii. It must be: i. MARA| MENDOZA. Must not be contrary to law morals good customs public policy or public order d. Directly related to or in furtherance of conduct of his or its trade business or exercise of a profession c. KIM APPLE |MARTINEZ.ALLOWABLE DEDUCTIONS   For events organized for promotion marketing and advertising including concerts conferences seminars workshops conventions and other similar events Other expenses of a similar nature i. LEE ANNE Page 37 . Appropriate amount of withholding tax if applicable should have been withheld and paid to BIR.

50%) x x 1%) Based on computation table E CORP can only claim a total of P2000 as EAR expense. If the useful life of an item is significantly greater than 1 year it must be depreciated and not expense outright.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. CARVAJAL. KIM APPLE |MARTINEZ. Notwithstanding ceiling imposed on such expense claimed expense shall be subject to verification and audit for determining deductibility and compliance of requirements. LEE ANNE Page 38 . LAUREN| PARUNGO. However such expense should be reported in ITR as separate expense item. Cost of materials/supplies NIRC allows for deduction of business supply expenses. ALEX | TAMAYO. Reporting In its financial statements and income tax returns taxpayer is required to use:  The name “Entertainment amusement and recreation expense”  Disclose note to financial statements the amount corresponding when recording expenses paid or incurred of the nature. MARA| MENDOZA.ALLOWABLE DEDUCTIONS apportionment formula 1 Sale of goods Sale of services Total 200000 100000 300000 Apportionment formula: Sale of goods (200000/300000) x Sale of services (100000/300000) Maximum ceiling: Sale of goods: (200000 x Sale of services (100000 o 2 ceiling of EAR expense 3 2000 1000 3000 1000 1000 2000 claimed as EAR (whichever is lower of columns 2 and 3) 4 1000 1000 2000 3000 x 3000 . If after verification a taxpayer is found to have shifted EAR to any other expense to avoid being subjected to the ceiling amount shifted shall be disallowed in its totality without prejudice to penalities. However taxpayers should be careful to avoid deducting expenses as materials when they are in fact capital assets. 5. JAI | YABUT.

a. But if permanent in character non-deductible.ALLOWABLE DEDUCTIONS Materials on hand should include charges for materials and supplies only to the amount these are actually consumed and used in operation for the year for which return is made provided that cost of such materials and supplies has not been deducted in determining net income for any previous year. KIM APPLE |MARTINEZ. LEGAL SERVICES TO BE PERFORMED BY LAWYER: any activity which requires application of law legal procedure knowledge training and experiences which shall include legal advice and counsel preparation of instruments and contracts appearances before administrative and quasi-judicial tribunals handling cases in court and other similar services defined by SC. Supplies used in exercise of profession These may be deductible:  Expenses for operation and repair of transportation equipment in making professional calls  Dues to professional societies and subscription to professional journals  Rent for office rooms  Expenses for fuel light water telephone  Hire of office assistance  Books furniture  Professional instruments and equipment If useful life of such is short it may be deducted. paper clips paper pens scissors ink and business cards. Office expenses and supplies These are the most common business trade or exercise of profession expenses. LAUREN| PARUNGO. MARA| MENDOZA. Office expenses Office supplies Computer software postage telephone internet and any office Small tangible items used within business or trade premises such as equipment costs. 1.  taxpayer cannot just buy a large quantity of supplies at year end and considered it an expense for that year. ALEX | TAMAYO. If taxpayer carries incidental materials on hand for which no record of consumption is kept or of which physical inventories at beginning and end of year are not taken it will be permissible for taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which return is made provided net income is clearly reflected by this method. 2. Pro-bono legal services Lawyer or professional partnership rendering actual free legal services is entitled to allowable deduction from gross income either amount which could have been collected for actual free legal services rendered or up to 10% of gross income derived from actual performance of legal profession whichever is lower. To be entitled to deduction: CARVAJAL. JAI | YABUT.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LEE ANNE Page 39 .

o Amount received shall be booked as income and shall form part of gross receipts and subject to VAT or Percentage Tax (Gross Receipts Tax) if applicable o It shall be deductible as an expense by client/customer provided it is substantiated by OR. b. Deposits/advances received by taxpayers other than GPPs Guidelines in accounting and recording deposits/advances for payment of expenses received by taxpayers other than GPPs:  Deposits/advances part of gross receipts o When deposits or advances are received by taxpayers other than GPP from client/customer OR shall be issued. LAUREN| PARUNGO.  Claim for deduction of expenses o GPP shall record its expenses for income tax purposes if OR/invoice issued by 3 rd party establishment is in the name of GPP. Guidelines:  Service Income of GPPs o When GPP receives cash deposits or advances it shall issue an OR. ALEX | TAMAYO. However since OR/invoices covering expenses incurred on behalf of client are issued by 3 rd party establishments in the name of GPP instances occur when these expenses are claimed as deductions to gross income by both GPP and client. JAI | YABUT.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. o On the other hand all expenses made by client to GPP shall be allowed as deduction provided that they are substantiated by OR GPP and client are not precluded from availing Optional Standard Deduction. CARVAJAL. Deposits/advances by clients of general professional partnerships for expenses It is common business practice for GPP such as accounting firms or law firms:  To require their clients to deposit a sum for necessary expenses  To pay in advance necessary expenses Deposits shall be liquidated by GPP while advances shall be paid by client. c. As a result same expense is twice claimed as deductions contrary to provisions of NIRC. Certification shall be submitted to BIR for availing tax deductions and to DOJ for monitoring. MARA| MENDOZA. KIM APPLE |MARTINEZ. For purpose of determining number of hours actually provided association or organization accredited by SC shall issue a certification that legal services were actually undertaken.  Claim for deduction of expenses o Receipts incurred paid for and issued in name of taxpayer shall be recorded as its own expenses for income tax purposes.ALLOWABLE DEDUCTIONS    Lawyer shall secure a certification from PAO DOJ or accredited association of SC indicated that services are within services defined by SC and that agencies cannot provide the legal services of a private counsel. LEE ANNE Page 40 . This will be booked as income of GPP and shall form part of gross receipts and subject to VAT if applicable. All these may be claimed by GPP as deductions from its gross income.

Expenses of farmers He is entitled to deduct all necessary expenses for business of farming  Ordinary tools of short life or small costs  Cost of feeding and raising livestock insofar as such represents actual outlay but not including value of farm produce grown upon the farm or labor of taxpayer  Cost of gasoline or fuel repairs and upkeep of transportation equipment if used wholly in business purposes  Cost of gasoline or fuel repairs and upkeep of transportation equipment if used partly for pleasure or convenience of taxpayer or his family such cost may be apportioned to the extent of business use and personal use and only a proportion of such cost attributable to business purposes is deductible as necessary expense When farmer takes more than a year from time of planting to process of gathering and disposal expenses deducted may be determined upon crop basis and deductions may be taken in the year in which gross income from crop has been realized. 3. LEE ANNE Page 41 . KIM APPLE |MARTINEZ. MARA| MENDOZA.  Issuing OR for deposit and advances o OR shall be issued for every deposit and advances o OR shall cover entire amount client/customer pays.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. o For VAT taxpayers VAT OR will constitute the Output Tax for taxpayers other than GPP and in turn the input tax of its client/customer. LAUREN| PARUNGO. JAI | YABUT.  Income payments are subject to appropriate withholding taxes o All clients/customers shall upon payment of deposit/advances withhold tax which shall be remitted/paid on or before 10th day of following month using except for taxes withheld for month of December of each year which shall be filed on or before JAN 15 of following year. CARVAJAL. Cost of farm machinery equipment and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Expenses considered as capital and not deductible:  Amounts expended in development of farms orchards and ranches prior to time when productive state is reached  Amounts in purchasing work breading or dairy animals unless such animals are included in an inventory  Purchase price of transportation of equipment even when wholly used in carrying on farm operations If farm is operated for recreation and not commercial and if expenses is in connection with the farm are in excess of receipt entire receipts from sale of products may be ignored in the return of income. Personal expenses will not constitute allowable deduction. ALEX | TAMAYO.ALLOWABLE DEDUCTIONS o These shall be claimed as deductions from gross income provided substantiated by OR issued by 3 rd party establishments.

Substantially prolong useful life of property 5. GR: deductible if they are incidental in nature and does not materially add to the value of property nor prolong its useful life. Common advertising expenses include printing of business cards yellow pages ads newspaper advertisements TV and radio ad costs costs for business website for promotion activities etc. If amount incurred is minimal it may be deducted (concept of de minimis expensing) for practical reason. Giveaway items pens coffee mugs shirts refrigerator magnets calendars bags and key changes are also deductible.ALLOWABLE DEDUCTIONS Repairs and maintenance GR: repairs and maintenance incidental in carrying out trade or business or exercise of profession are deductible. Replacements to the extent that they arrest deterioration and prolong life of property should be charged against depreciation reserves if such property is kept. Incurred as permanent improvements or betterments that increase value or prolong useful life of property 3. Made to adapt the property to a new or different use They are not expense outright because of material amount involved and fact that benefit is for more than the year they are incurred. JAI | YABUT. KIM APPLE |MARTINEZ. Cost of incidental repairs which neither material add to value of property or prolong its useful life are deductible provided that plaint or property account is not increase by amount of such expenditure. Advertising expenses These are expenses incurred for the use of spoken or written word in printed matter movies radio and TV to acquaint the public with taxpayer’s merchandise or services. Restore value or use of property or make good the exhaustion 4. Expensing vs. They are treated as current period expense because of nominal amount involved and of fact that main benefit incurred. LEE ANNE Page 42 . Capitalizing REPAIRS AND MAINTENANCE: costs of up-keeping furniture machinery equipment building or other property including rental properties for use in business operations. LAUREN| PARUNGO. MARA| MENDOZA. Minor or ordinary repairs are deductible from gross income because they keep the assets in their working condition. ALEX | TAMAYO. It represents expenses associated with promoting an industry entity brand product name or specified products or services in order to stimulate a desire to buy the entity’s products or services for a certain period.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Rules on their deductibility:  Advertising to stimulate current sale of merchandise or use of services (deductible)  Advertising to stimulate future sale or merchandise or use of services (not deductible but are to be spread over period of time irrespective whether taxpayer is on cash or accrual basis) CARVAJAL. Expenses which must be capitalized and not deducted are: 2. 1.

Personal expenses Not deductible even though they may have some advertising or business or trade promotion value If corporation’s president threw a birthday party and invited some of corporation’s big clients expenses of party are not deductible. o These constitute part of cost of property. c. Permanent metal or plastic sign that has a useful life of more than 1 year must be capitalized and depreciated. Requirements for deductibility It should not only be necessary but ordinary. LEE ANNE Page 43 . Litigation expenses in defense of title of property  Judgments or other binding judicial adjudication on account of damages for patent infringement personal injuries or other cause are deductible o Unless taken under other methods of accounting which reflect correct deduction less any amount of such damages as may have been compensated for by insurance or otherwise.  Litigation expenses in defense or protection of title are capital in nature and not deductible. a. Permanent ads Advertisements or signs that have a useful life of less than 1 year are deductible as operating expenses in the year they are incurred (flyers and cardboard signs). 1. KIM APPLE |MARTINEZ. Other operating expenses: not exclusive and only provides a guideline on what are typical deductible business operating expenses. MARA| MENDOZA. a. Creating favorable image Not deductible as a business expense Efforts to establish reputation are akin to acquisition of capital assets and therefore not related to business expense but capital expense. Protection of brand franchise is analogous to maintenance of good will or title of one’s property. Costs are not deductible as “advertising”. CONDITIONS to be considered ordinary:  Reasonableness of amount incurred  Amount must not be a capital outlay to create goodwill for product and/or the business Although an expense for advertisement of a single product is necessary it cannot be an ordinary expense if it is inordinately large. ALEX | TAMAYO. b. JAI | YABUT.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.ALLOWABLE DEDUCTIONS  Advertising to promote sales of shares of stocks or to create a favorable image (not deductible) 1. It is capital expenditure. ORIGIN OF CLAIM DOCTRINE CARVAJAL. LAUREN| PARUNGO.

Illustration:  Legal fees incurred incident to annulment and property settlement which involved the taxpayer’s business may not be deducted. They are expenses incurred in disposition of said incomes expenses for remittance of funds after they have already been earned by a branch in the Philippines for the disposal of Head Office in abroad which is already another distinct and separate income taxpayer. Since margin fees are incurred for remittance of funds to Head Office abroad it can never be said that margin fees are appropriate and helpful in the development of business in the Philippines exclusively or are incurred for purposes property to the conduct of affairs of Philippine branch exclusively or for purpose of realizing a profit of minimizing a loss in the Philippines exclusively.  Expenses for salaries and wages (originating from employer-employee relationship) and in connection with day-to-day business but indirectly related to acquisition of another business may be expensed and not capitalized cost of the acquired business. MARA| MENDOZA. o Focus is not on the consequences if the taxpayer failed to defeat the claim on the business but rather on the original of initial claim. Political campaign expenses To be considered exempt from income tax it must be utilized to cover candidate’s expenditures for his or her electoral campaign Unutilized/excess campaign funds shall be subject to income tax and must be included in candidate’s taxable income in his Income Tax Return (ITR). JAI | YABUT. LEE ANNE Page 44 . Margin Fees These are not expenses in connection with production of earning of income. LAUREN| PARUNGO. Direct/indirect test If expense is directly related to capital transaction (therefore a long term benefit) it should be capitalized. KIM APPLE |MARTINEZ. ALEX | TAMAYO. c. Any settlement or judgment payments should be treated for tax purposes as if economic damages which is subject of the suit had not occurred. o If expenditure arose in a business or profit making activity it is deductible.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. If only an indirect relation between expense and capital transaction same may be expensed outright. Campaign expenses are deductible from taxable unutilized campaign funds. 3. CARVAJAL. b. Legal and litigation expenses of foreclosure Legal expenses by banks in the course of foreclosing acquired assets are deductible from their gross income. 2. These are expenses incurred in carrying on of a trade or busienss.ALLOWABLE DEDUCTIONS Any recovery should be taxed in the same manner as the item for which it is intended to substitute. o If it arose out of personal activity it is a non-deductible personal expense.

His membership and activities in connection were solely to enhance his business. Options of private educational institutions  Private institution is allowed to claim from its gross income.In addition to the expenses allowable as deductions under this Chapter. ii. Contributions not deductible i.  Cost of furniture given by taxpayer as commission is deductible. allowable deductions just like any ordinary taxpayer. LAUREN| PARUNGO. Membership and other fees to enhance the taxpayer’s business are deductible. He was also the president of Homeowner’s Association organized for those engaged in real estate trade. (2) Expenses Allowable to Private Educational Institutions. 5. JAI | YABUT.ALLOWABLE DEDUCTIONS Any candidate who fails to file with COMELEC the Statement of Expenditures under Omnibus Election Code shall be automatically precluded from claiming such expenditures as deductions from his campaign contributions. Political campaign contributions are not deductible from gross income since they do not held earn income from which they are to be deducted. 4. MARA| MENDOZA. .  It has the option to elect either: CARVAJAL.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Are expenses deductible? o YES. a. 1. Illustration:  G was an officer of Junior Chamber of Commerce which sponsored the National Convention of Filipino Businessmen. a private educational institution. referred to under Section 27 (B) of this Code. KIM APPLE |MARTINEZ. Entire amount of campaign contributions shall be subject to income tax. Single payment to the stock exchange will be disallowed as a deduction if the expenditure does not meet the statutory test to be paid only once and the benefit to be acquired continues indefinitely. may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof. Listing fee Fee which is paid to the stock exchange which is annual and recurring for having its stock listed is an ordinary and necessary business expense. He incurred expenses in attending the Convention and the luncheon meeting and cruise to Corregidor of Homeowner’s Association which were shown to be for pursuit of his business. Expenses paid or incurred to take part in any political campaign. ALEX | TAMAYO. LEE ANNE Page 45 . Commissions These are deductible as consideration for bringing about a profitable transaction and therefore part of business cost.

Thirty-nine percent (39%) beginning January 1. library facilities. or (c)If the indebtedness is incurred to finance petroleum exploration. the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. (2) Exceptions. (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B). and Thirty-eight percent (38%) beginning January 1. 2000. LEE ANNE Page 46 . interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.ALLOWABLE DEDUCTIONS   1) Deduct expenditures otherwise considered as capital outlays of depreciable asets incurred during the taxable year for the expansion of school facilities  2) Deduct allowance for depreciation thereof Capital expenditures which are normally capitalized and deprecated may be expensed outright in the year incurred 1. That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1. KIM APPLE |MARTINEZ. .. MARA| MENDOZA. ALEX | TAMAYO. LAUREN| PARUNGO.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided. further. however. equipment and instruments including their cost of installations provided such facilities shall be used solely to pursue the expansion activities of the school  Expansion of school facilities refers to acquisition. . machineries. development or improvement of school facilities 2. Requisites for deductibility of interest expense 1.At the option of the taxpayer. trade or business shall be allowed as deduction from gross income: Provided.The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession. 1998. That if the indebtedness is payable in periodic amortizations.No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided. (3) Optional Treatment of Interest Expense. 1999.1 Expansion of school facilities  School facilities refer to land.1 Bona fide debt  A bona fide debt is one which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money CARVAJAL.(1) In General. buildings and other civil work or improvements. Faculty Development  The expenses incurred by an educational institution in its Faculty Development Program are directly connected with or pertaining to its business and are appropriate and helpful in the development of its teaching personnel and therefore deductible (B) Interest. JAI | YABUT. .

which has a deposit account with B Bank. MARA| MENDOZA.  If there is no stipulated interest.  Interest due shall accrue at the time is t is judicially demanded 2. For the year 2009.000.000. which interest income had been subjected to final withholding tax.  This rule shall be observed irrespective of the currency the loan was contracted and/or in whatever currency the investments or deposits were made. obtained a loan from X Financing Corp in connection with the operation of its business. LEE ANNE Page 47 . KIM APPLE |MARTINEZ. The taxable income and the income tax payable of Company A are computed as follows: 2009 Net income before interest expense Php 1. business or exercise of profession shall be reduced by an amount equal to 33% of the interest income earned which had been subjected to final withholding tax  The limitation applies regardless of whether or not a tax arbitrage scheme was entered into by the taxpayer or regardless of the date when the interest bearing loan and the date when the investment was made for as long as. 400 Deductible Income -------Php 90. A’s net income for 2009 before deduction of the interest was Php 1. 000 on which a final tax of Php 36.2 Unconditional obligation  The basic test of the existence of debtor-creditor relationship is whether the debtor is under an unconditional obligation to repay the creditor  It must also be legally enforceable obligation for the payment of money  Interest paid on a prescribed. there is an interest expense incurred on one side and an interest income earned on the other side. ALEX | TAMAYO.000 Less: Interest expense Php 150.000.000 had been withheld. business or exercise of profession shall be allowed as a deduction from the taxpayer’s gross income  The amount o interest expense paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s trade.000 Less: 33% of interest income from deposit (33% x 180.  Law does not provide that there is a need for tax arbitrage in order that the limitation on deduction of the interest expense can be applied Illustration: A Corp.000. RULES ON THE DEDUCTIBILITY OF INTEREST EXPENSE  The amount o interest expense paid or incurred within a taxable year on indebtedness in connection with the taxpayer’s trade. during the taxable year. the interest income derived from the said deposit with B Bank amounted to Php 180. JAI | YABUT.000) Php 59. LAUREN| PARUNGO. there can be legal interest pursuant to Art 2209 of NCC.ALLOWABLE DEDUCTIONS 1. Its interest expense on the loan obtained from X Financing Corp during the same year amounted to Php 150. void or unenforceable obligation may not be deducted.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. 600 CARVAJAL.

Based on this and without applying the tax arbitrage limitation.000 loan from a Phil bank at a 10% interest per annum. Interest expense shall be reduced by 33% to the extent of the interest income subjected to final tax.400 Income tax due for taxable year 2009 (30%) ------------Php 272. D Corp will be subjected to 20% final tax (Sec 27D NIRC) on its passive income of 100K (10% of 1M) or a tax liability of 20K. if D Corp loaned 1M to E Corp at 10% interest per annum (not subj to final tax) there is no advantage since the tax benefit of the interest expense and the tax on the interest income would be the same in terms of amount (30.000 (30% of the 100. Upon receipt of the loan proceeds.000 (30% tax on interest income of 100.33% 2. business or exercise of profession is higher than the tax rate on passive interest income Illustration: In 2012.000) 3.1 Tax Arbitrage  It refers to a situation where a taxpayer profits from the differences in how income or gains are taxed. D Corp deposited the same in its special savings account which earned 10% interest per annum. On the other hand. JAI | YABUT.20%) 30% =33. D Corporation may deduct the interest expense of 100.    The purpose of the tax arbitrage is to equalize the tax liability of the taxpayer on his interest income and tax benefit on his interest expense. D Corp obtained a Php 1.2 Not applicable if the Interest Income is not subject to Final Tax  If the interest income of the taxpayer is subject to the regular rate and none has been subjected to final tax.  It is a scheme wherein the proceeds of a taxpayer’s loan obtained in connection with the operations of his trade. MARA| MENDOZA. LEE ANNE Page 48 . business or exercise of profession is deposited or invested  Without the tax arbitrage rule. earned the net amount if 10K in the scheme.0000 (30% corporate income tax of 100K) by lowering the due by the same amount. the interest expense will result to a net profit since the tax rate on income from trade. D Corp. 33% is roughly the ratio of the difference between the final tax and the regular tax (30% .000. provided that the maximum interest income to be considered for this purpose shall not be higher than the interest expense. ALEX | TAMAYO.000 (10% of the 1M) from its gross income resulting to a tax benefit of 30.ALLOWABLE DEDUCTIONS Taxable Income ----------Php 909.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. KIM APPLE |MARTINEZ. 820 2. then the interest expense may be deducted in full  There is no diff on the tax effect between the interest income and interest expense since the applicable tax rates are the same  In the illustration above.000 interest expense) and 30. Interest on Unpaid Taxes CARVAJAL. As a result. LAUREN| PARUNGO.

Non-deductible Interest Expense  No interest expense shall be allowed as deduction from gross income in any of the ff cases: 1) Within the taxable year. LEE ANNE Page 49 . 1998 in the amount of 300.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. the deduction should be taken as of a diff period  A self-employed individual is allowed to deduct from his gross income the entire amount of interest expense actually paid during the taxable year. ALEX | TAMAYO. C.ALLOWABLE DEDUCTIONS     Interests on taxes should be considered as interests on indebtedness within the meaning of the NIRC. the amount of interest w/c corresponds to the amount of the principal amortized or paid during the year shal be allowed as deduction in such taxable year Illustration:  Mr. 1998 he received from the bank the proceeds of his loan in the sum of 700.  Interest paid in advance and on a cash-basis method shall only be allowed as deduction in the year when he has fully paid his liability  If said debtor has fully paid his loan as of the end of the taxable year 1999.000 net of interest paid in advance in the amount of 300. his interest expense paid in advance on January 1. KIM APPLE |MARTINEZ.  The interest expense shall be taken for the taxable year in which paid or incurred or paid or accrued depending upon the method of accounting upon the basis of which the next income is computed. consistently employs the cash-basis accounting method in keeping his books of accounts. JAI | YABUT. unless in order to clearly reflect the income. an individual taxpayer reporting income on the case basis incurs and indebtedness on which interest is paid in advance through discount or otherwise o Provided: a) Interest shall be allowed as a deduction in the year the indebtedness is paid o B) Interest shall be allowed as a deduction in the year the indebtedness is paid o C) Indebtedness is payable in periodic amortization. the amount of interest expense which corresponds to the amount of the principal amortized or paid during the respective years 1998 and 1999 shall be allowed as deduction in such respective taxable years 2) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec 36(B) of the NIRC CARVAJAL. a self-employed individual. Such interest paid shall not be diminished by the percentage of interest income earned which had been subjected to final withholding tax 4. On Jan 1. LAUREN| PARUNGO.000. Although taxes already due are not the same as debts they are however.000 shall only be allowed as deduction from his gross income in the taxable year 1999 EXC: Even if the interest is paid in advance but the indebtedness is payable in periodic amortization. obligations that may be considered as such Interests incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully deductible from gross income and shall not be subject to the limitation on deduction mentioned above (tax arbitrage). MARA| MENDOZA.

CARVAJAL. The non-deductible interest expense to pertain to interest or other consideration paid or incurred by a Service Contractor engaged in the discovery and production of indigenous petroleum in the PH in respect to financing of its operations. 4) Interest calculated for cost-keeping or other purposes on amount of capital or surplus invested in the business which does not represent a charge arising under an interest-bearing obligation is not allowable deduction from gross income 4. or e) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust. directly.ALLOWABLE DEDUCTIONS a) Between members of the family which includes his brothers and sisters (whole or half). spouse. The former’s president is the latter’s Chairman of the Board. B paid A interest amounting to 50.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. MARA| MENDOZA.  It will form part of the cost which will be used in determining gain or loss upon disposition of the securities  Interest on preferred stock (which is in reality a dividend) cannot be deducted in computing net income 4.1 Acquisition of Securities  Interest paid on indebtedness used to purchase securities by one who is not a dealer in securities is NOT Deductible.2 Interest on Mortgage  Banks and loan or trust companies: Interest paid w/in the year on deposits or on moneys received from investment and secured by interest bearing certificate indebted issued by such bank or loan/trust company may be deducted from gross income. LAUREN| PARUNGO. The fact that he is the concurrent president and the chairman of the Board of another Corp does not mean or may it in any way be deduced that he has controlling ownership of such corporation in the absence of facts clearly and undeniably establishing ownership composition of the two corps. or f) Between a fiduciary of a trust and a beneficiary of such trust Illustration:  1) A lent 1M to his son B for his business. by or for such individual c) Between two corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly by or for the same individual or d) Between the grantor and a fiduciary of any trust. ALEX | TAMAYO. indirectly.000 during the taxable year. Is the interest charged by A Corp deductible? YES. ancestors and lineal descendants b) Between individual and a corporation more than 50% in value of the outstanding stock of which is owned. KIM APPLE |MARTINEZ. 3) If the indebtedness on which the interest expense is paid is incurred to finance petroleum exploration in the PH. LEE ANNE Page 50 . JAI | YABUT. B cannot claim deduction for the interest expense as they are related parties  2) A Corp extended a loan to B Corp.

interest income on a capital expenditure incurred to acquire property used in trade. In the first option. in the case of similar transactions with unrelated parties to remain outstanding for a longer period w/o charging interest  The earliest balance outstanding must be applied 6. Determination of Taxable Income on Inter-Company Loans or Advances  Sec 50. business. The law does not prohibit the deduction of interest capital expenditure.000.  Tax payer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge. KIM APPLE |MARTINEZ. or businesses. unless the taxpayer has also previously capitalized the same interest payments and thereby adjusted the cost basis of such assets. Optional Treatment of Interest Expense on Capital Expenditure  At the option of the tax payer. the depreciable value of the asset is 515.2 Applicability  The foregoing applies to all forms of bona fide indebtedness and includes: 1) Loans and advances of money or other consideration (whether or not evidence by written instrument) 2) Indebtedness arising in the ordinary course of business out of sales.1 Interest Period  It shall commence at the date the indebtedness arises except that with respect to the indebtedness arising in the ordinary course of business our of sales. NIRC in any case of two or more organizations. or allocate gross income or deductions between or among such organizations. apportion.ALLOWABLE DEDUCTIONS  Mortgage upon real estate which the taxpayer is the legal or equitable owner and even though he is not directly liable upon the bond or not secured by such mortgage may be deducted as interest on his indebtedness 5. LEE ANNE Page 51 . LAUREN| PARUNGO. ALEX | TAMAYO.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.000 from his gross income for the taxable year or it may be added to the cost of the asset. leases. trades or businesses (whether incorporated and whether or not organized in the PH) owned or controlled directly or indirectly by the same interest the CIR is authorized to distribute. Illustration:  Taxpayer purchased a capital asset for 500.000  6. or any other similar extension 3) Does not apply to alleged indebtedness which was in fact a contribution of capital or a distribution by a corp w/ respect to its shares CARVAJAL. or exercise of a profession may be allowed as deduction in full in the year when incurred. JAI | YABUT. 6. the depreciable value of the asset is 500. MARA| MENDOZA. or the rendition of services by or between members of the group. In the second option. leases or supply of goods and services which are generally considered as trade accounts receivables or payables  The interest period shall not commence if the taxpayer is able to establish that the normal trade practice in a given industry is to allow balances.000 and incurred interest expense of 15. trades.

(1) In General. when refunded or credited. license. LEE ANNE Page 52 . privilege. trade or business. (2) Limitations on Deductions. . except (a) The income tax provided for under this Title.1 Limited to taxes proper  It is limited to the taxes proper and has never included interest on delinquent taxes.1 Interests are deductible  Interest on taxes is interest on indebtedness and is deductible CARVAJAL.. . (c) Estate and donor's taxes.In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation. surcharge or penalties incident to delinquency  Deductions from gross income are matters of legislative grace what is not expressly granted by Congress is withheld. LAUREN| PARUNGO. MARA| MENDOZA. ALEX | TAMAYO.3 Theoretical Interest  Sec 50 of the NIRC does not include the power to impute “theoretical interests” to controlled taxpayer’s transactions  There must be proof of the actual or. business. (b) Income taxes imposed by authority of any foreign country. . penalties and surcharges.Taxes paid or incurred within the taxable year in connection with the taxpayer's profession. JAI | YABUT. shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. That taxes allowed under this Subsection. 1. Deductible taxes  GR: Taxes are deductible  EXC: Those with respect to which the law does not permit deduction  Non-resident alien individual and a foreign corp. Provided.1. at the very least. occupation. and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed. KIM APPLE |MARTINEZ.  Art 1956 of the NCC. “No interest shall be due unless it has been expressly stipulated in writing” (C) Taxes.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. 1.ALLOWABLE DEDUCTIONS 6. excise and stamp taxes and any other taxes of every name or nature paid directly to the Gov’t of the PH or to any political subdivision thereof are deductible  Postage and automobile registration fees are considered taxes and deductible 1. the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. shall be allowed as deduction. but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries). deduction is allowed only if and to the extent that the taxes for which deduction is claimed are connected with income from sources within the PH  Import duties paid to proper customs officers. apportioned or allocated by the CIR.  Taxes means deduction therefrom should be allowed for amounts representing interest.

 Corporate bonds or other obligations containing a tax-free covenant clause the corp paying is not entitled to deduct such payment from G.2 Imposed on and payable by taxpayer  Merchants’ sales tax imposed by law upon sales is not deductible by he individual purchaser even though the tax may be billed to him as a separate item  VAT is likewise not deductible from the gross income of the owner  Contractor’s tax may not be deducted  Individual: no deduction is allowed for the taxes imposed upon his interest as shareholder of bank or corp.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.4Connected with trade business or profession  Only those taxes which are related to the taxpayer’s trade or business or profession are deductible from gross income  The ff taxes are deductible from the GROSS INCOME  1. Excise taxes  3. Import duties CARVAJAL.ALLOWABLE DEDUCTIONS      Rule applies even though the tax is nondeductible Interest on taxes us not deductible as taxes Interests on deficiency taxes are deductible not as taxes but as interest Interest payment for delinquent taxes is not deductible as tax under Sec 34C of the NIRC It is therefore subject to 33% deduction rule on interest expense because such rule is applicable even if there is no tax arbitrafe 1. KIM APPLE |MARTINEZ. JAI | YABUT. Percentage taxes  2. ALEX | TAMAYO.1 Deferred income tax  It is recognized when a revenue or expense item is reported on the income tax return in a year that is different from the year the item appears on the taxpayer’s books or financial statements due to timing differences between the accounting standards and the tax laws 1. Documentary stamp taxes  4. Real property tax  6.I 1. LEE ANNE Page 53 . Local gov’t taxes  5.3 Paid or incurred during the year it is claimed as deduction  The tax must have been paid or incurred during the taxable year it is being claimed as a deduction  Taxes to be paid in the near future are not deductible but reported as a current liability imstead  Obligation to deduct arises only when the tax is finally determined  Overpaid taxes are reported on the books as a current asset 1. MARA| MENDOZA. LAUREN| PARUNGO.3.

1. aside from the amount of taxable fringe benefit. MARA| MENDOZA. Cannot be charged by Public Utility to its customers  Income tax should be borne by the public utility alone as they are payments made in exchange for benefits received by it from the State. shall constitute allowable deductions from GI of the employer 1. it follows that it cant be deducted.1. LAUREN| PARUNGO. 1.ALLOWABLE DEDUCTIONS   7.5.1 Not an operating expense  Income tax payments are not expenses which contribute to or are incurred in connection with the production of profit.  Allowed as deductions ONLY IF the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries.  If it cant be claimed as tax credit. he is precluded from deducting the foreign income taxes from his gross income.2. Income taxes imposed by authority of any foreign country if tax credit is claimed  Taxpayer can take it either as a deduction or a tax credit for freeing income taxes imposed on him by a foreign country.5.  Income tax is inconsistent with the nature of operating expenses  It is paid after a business cycle not during the conduct of business 1.5. ALEX | TAMAYO.2.5. Registration fees of vehicles used in business 1. CARVAJAL.  Note: the wording of Sec 34(C)(1)(b) shows the law’s intent that the right to deduct income taxes paid to foreign government from the taxpayers gross income is given only as an alternative to his right to claim a tax credit so that unless the alien resident has a right to claim such tax credit.1.  RULE: the taxpayer must be entitled to a tax credit. no benefit is derived by the customers from such payment of taxes by the public utility. KIM APPLE |MARTINEZ.2.5.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. JAI | YABUT. BIR registration fees 8.5 Must not be excluded  There are taxes which by express provision of the law or by their very nature are not deductible from the gross income 1. LEE ANNE Page 54 . Can be claimed as Tax Credit  Deductibility of a tax imposed by a foreign country BUT NOT claimed as tax credit presupposes that the same may be claimed as a tax credit.1. or the option to deduct from gross income disappears altogether.1 Philippine income tax  Law does not permit the deduction of the income tax paid to or accrued in favor of the government of the PH and in no case may the taxpayer avail of such deduction  Fringe benefits tax.

2 intention of the law Sec 34 (C) Taxes. Provided. the amount of income taxes paid or incurred during the taxable year to any foreign country.3. JAI | YABUT. LAUREN| PARUNGO. sidewalks. . . the taxpayer may deduct assessments paid as an expense incurred in business.In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust. 1. MARA| MENDOZA. shall be allowed as deduction.In the case of a citizen of the Philippines and of a domestic corporation.If the taxpayer signifies in his return his desire to have the benefits of this paragraph. LEE ANNE Page 55 . .5. (b) Income taxes imposed by authority of any foreign country.(1) In General. 1. and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. and (b) Partnerships and Estates. PAG BUSINESS lang. except (a) The income tax provided for under this Title.  Basta point here is that taxpayer can avail of deduction or claim a tax credit for foreign income taxes. if his distributive share of the income of such partnership or trust is reported for taxation under this Title. KIM APPLE |MARTINEZ. but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries). Special assessments for benefits  Taxes for local benefits like streets. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. CARVAJAL.ALLOWABLE DEDUCTIONS  Note again: the deduction shall be allowed in the case of a taxpayer who DOES NOT SIGNIFY in his return his desire to have any of the benefits relating to credits for taxes paid to foreign countries. when refunded or credited. (3) Credit Against Tax for Taxes of Foreign Countries. the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. NOT deductible. If its capital expenditures. (c) Estate and donor's taxes. and other improvements because of some indirect benefit. trade or business. shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.5. That taxes allowed under this Subsection. . ALEX | TAMAYO. BUT the taxpayer may also signify his desire to claim a tax credit and waive the deductions. DO NOT constitute an allowable deduction from gross income. So baliktad lang. his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country.  When assessments are made for the purpose of maintenance or repair of local benefits.Taxes paid or incurred within the taxable year in connection with the taxpayer's profession.2.

or practice of profession – personal expenses to.ALLOWABLE DEDUCTIONS 1. the whole amount of P500 should be included in his taxable income for 2005 because it was the amount he benefitted in 2004. – If the taxpayer signifies in his return his desire to have the benefits of this paragraph. o Electric energy consumption tax o Final taxes on passive income o Tax deducted and withheld at source on compensation o Tax amnesty payments o Payment of under-withheld income taxes by a withholding agent who failed to withhold. . MARA| MENDOZA. refer to the book p. the amount of income taxes paid or incurred during the taxable year to any foreign country CARVAJAL. Tax refund for P500 was given in 2005. 734. LAUREN| PARUNGO.In the case of a citizen of the Philippines and of a domestic corporation. subsequent tax refund or credit should not be included as part of gross income of the taxable year the same was granted. But if the deduction of the tax did not benefit the taxpayer. he must reduce his current year expense by the amount of the recovery.000 after deducting a tax of P500. the tax imposed by this Title shall be credited with: (a) Citizen and Domestic Corporation. JAI | YABUT. ALEX | TAMAYO. LEE ANNE Page 56 .4. KIM APPLE |MARTINEZ. this shall be included in gross income for the year of the receipt to the extent of the income tax benefit of said deduction. Others  NOT deductible: o Estate and gift taxes o VAT o Surcharge and compromise on tax penalties o Interest on unpaid taxes o Taxes that are not related to trade. o EXCEPTION: Tax Benefit Rule o Tax Benefit Rule – if a taxpayer recovers part of an expense in the same tax year in which he would have claimed a deduction.  Illustration: o Operation of taxpayer in 2004 resulted in income of P1. In this case. business. o (for more illustrations. 2.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. its kinda clear though right?) (3) Credit Against Tax for Taxes of Foreign Countries. Treatment of Refunded and Credited Taxes  When taxes are refunded or credited.5.

If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued. shall be credited or refunded to the taxpayer. All other information necessary for the verification and computation of such credits. the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. ALEX | TAMAYO. MARA| MENDOZA. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. . which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. however. or the amount of tax overpaid. JAI | YABUT. KIM APPLE |MARTINEZ. the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require. b. at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books. to the conditions prescribed in Subsection (C)(5) of this Section. (7) Proof of satisfaction a. . the taxpayer shall notify the Commissioner. his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.The credits provided for in Subsection (C)(3) of this Section may. the tax paid or incurred to which is claimed as a credit under said paragraph.In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust. if any. LEE ANNE Page 57 . The bond herein prescribed shall contain such further conditions as the Commissioner may require. or if any tax paid is refunded in whole or in part. such amount to be determined under rules and regulations prescribed by the Secretary of Finance c. CARVAJAL.ALLOWABLE DEDUCTIONS (b) Partnerships and Estates. .The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken. (4) Limitations on Credit. (6) Year in Which Credit Taken. who shall redetermine the amount of the tax for the year or years affected.The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the of the Commissioner the following: The total amount of income derived from sources without the Philippines The amount of income derived from each country. LAUREN| PARUNGO. In the case of such a tax incurred but not paid.If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer. if his distributive share of the income of such partnership or trust is reported for taxation under this Title. which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year. if any. . subject. (5) Adjustments on Payment of Incurred Taxes. and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken. . Credits. shall be paid by the taxpayer upon notice and demand by the Commissioner. and the amount of tax due upon such redetermination. be taken in the year which the taxes of the foreign country were incurred. conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination.

his intention to avail of the tax credit.  Purpose of the Foreign Tax Credit (FTC) is to provide relief from double taxation. the credit for foreign taxes includes the income taxes deemed to have been paid determined by taking the same proportion of any income taxes paid or accrued by such controlled foreign corporation to any foreign country. JAI | YABUT. The amount of taxes deemed to have been paid is limited to an amount of the tax against which the credit for foreign taxes is taken. 2.  If the converse is true. 1. Domestic corporation owning a majority of the stock of foreign corporation DC receives dividends from FC. the taxpayer may be able to claim some of these taxes as a deduction as a tax credit against the Philippine income. Tax treaty relief CARVAJAL.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Taxpayers who are allowed credit—if the taxpayer signifies in return his desire to have the benefits of credit against tax for taxes of foreign countries. otherwise deduction na siya. compared to a deduction which reduces taxable income – upon which the tax liability is calculated. the income tax shall be credited with:  Citizen and Domestic Corporation – the amount of income taxes paid or incurred during the taxable year to any foreign country  Partnerships and estates – proportionate share of each partner in the taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country a. Foreign tax credit  If a citizen or resident incurs or pays income taxes to foreign country on income subject to tax.ALLOWABLE DEDUCTIONS Tax Credit It is the amount subtracted from an individual’s or entity’s tax liability to arrive at the total tax liability. If there are dividends from more than 1 FC. LAUREN| PARUNGO. ALEX | TAMAYO.  This is true even if the foreign government taxes the Philippine-sourced income resulting to indirect duplicate taxation. KIM APPLE |MARTINEZ. it will place the taxpayer who is taxable on domestic sources of income in a better position than one who is taxable on both domestic and foreign sources. which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which the dividends are included. where the tax credits are allowed to aliens and FCs. MARA| MENDOZA. LEE ANNE Page 58 . Must signify in return NIRC requires the taxpayer to indicate in the return. compute them separately. Nonresident Citizens aliens and foreign corporations not entitled  Because they are only taxed on INCOME FROM SOURCES WITHIN. It reduces the taxpayer’s liability peso for peso. NOTE: double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental entity 1.

 The total amount of the credit shall not exceed the same proportion of the tax against which such credit is take. JAI | YABUT. MARA| MENDOZA. ALEX | TAMAYO.  If the tax is incurred but not yet paid. Amount of tax credit shall be: o Per country limitation:  COUNTRY A—  100000/300000 x 105000 = P35000  Tax credit (lower than 35000 limit) = P10000  COUNTRY B—  100000/300000 x 105000 = P35000   Tax credit (lower than actual 50000) = P35000  Total: P45000 o All foreign limitation:  200000/300000 x 105000 =  Allowable tax credit (lower between per country and all foreign limitation) P70000 P45000 Redetermination of tax  If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer. then tax the mofo upon notice and demand. LEE ANNE Page 59 .ALLOWABLE DEDUCTIONS Aliens and FCs may avail of existing tax treaty reliefs to reduce their Phil tax liability. the taxpayer shall notify the Com. These treaties are not uniform and each has its own rules Limitations  Amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken. LAUREN| PARUNGO. or if any tax is refunded in whole or in part. KIM APPLE |MARTINEZ. When credit of taxes may be taken  Taken in the return for the year in which the taxes were paid  Taken in the year in which the taxes of the foreign country were incurred or accrued (determined by the CIR) CARVAJAL. which the taxpayer’s taxable income from sources without the Philippines bears to his entire taxable income for the same taxable year. Total income tax paid in Philippines for all the income was P105000.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Of Internal Revenue. He paid taxes of 100000 (COUNTRY A) 50000 (COUNTRY B). the commissionah will require the taxpayer to give a bond before giving him the allowance of the credit. Then the commisionah will determine the amount of the tax for the year or years affected. Illustration:  A DOMESTIC CORP earned income of P100000 in COUNTRY A P100000 in COUNTRY B and P150000 in PHILIPPINES.

the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery. (c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return. upon recommendation of the Commissioner. is hereby authorized to promulgate rules and CARVAJAL. That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery. Proof of credits: credits shall be allowed only if the taxpayer establishes to the CIR:  Total amount of income derived from sources without the Philippines  The amount of income derived from each country. KIM APPLE |MARTINEZ. such loss has been claimed as a deduction for estate tax purposes in the estate tax return.In the case of a nonresident alien individual or foreign corporation. or certified copy. (2) Proof of Loss. storms. The Secretary of Finance. profession or business (b) Of property connected with the trade. among other things. is hereby authorized to promulgate rules and regulations prescribing. must have attached to it the receipt for each tax payment.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. trade or exercise of a profession conducted within the Philippines. business or profession.  If the credit is sought tax accrued but not paid. 1. LAUREN| PARUNGO. translated. and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. shipwreck. the form may be filed at a later date but a credit cannot be allowed for such taxes unless the taxpayer signifies in his return his desire to have any benefits of the tax credit.  If the taxpayer wants to claim as a credit and not as a deduction. the CIR may require a bond. or from robbery. theft or embezzlement during the taxable year: Provided. however. when such losses are not compensated for by insurance or other forms of indemnity. the tax paid or incurred to which is claimed as a credit. theft or embezzlement giving rise to the loss. JAI | YABUT. The Secretary of Finance. the credits for all subsequent years shall be taken upon the same basis. ALEX | TAMAYO.  If the credit is sought for taxes already paid.Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred in trade. the losses deductible shall be those actually sustained during the year incurred in business. upon recommendation of the Commissioner. LEE ANNE Page 60 . (D) Losses— (1) In General. it must be accompanied by the appropriate form prescribed by the CIR. Must be an original. theft or embezzlement. .ALLOWABLE DEDUCTIONS NOTE: taxpayer elects to take such credits in the year of the foreign country accrued. Conditions for allowance of credits  If he wants to claim credit for income taxes. or other casualties. MARA| MENDOZA. if the loss arises from fires. and if in a foreign language. .

Example-. among other things. These are incurred in the conduct of trade or business or exercise of profession. Ordinary losses Losses sustained by taxpayer during its normal operations. Distinctions Both of them above are qualified as allowable deductions from gross income. MARA| MENDOZA. Casualty losses Complete or partial destruction of property resulting from an identifiable event of a sudden unexpected or unusual nature. Must be evidenced by closed and completed transactions. 1. and for depreciation.ALLOWABLE DEDUCTIONS regulations prescribing. o Set-off – deduction of loss against other income in the year in which the loss was incurred NOTE: some tax jurisdictions adopt the Negative Income Tax where taxpayers incurring losses receive assistance from the state instead of paying taxes to the latter.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. theft or embezzlement giving rise to the loss. Kinds of losses GR: LOSSES DEDUCTIBLE are losses in the taxpayer’s trade or business. amortization or depletion. CARVAJAL. It denotes accident or sudden invasion by hostile agency and excludes progressive deterioration.  Income tax provides for reliefs from losses incurred which may be one or a combination of the following methods: o Carry-back – the carrying over of the loss to offset it against profits in prior years. and Losses  Deficiency of the amount received as opposed to the amount invested in a transaction. obsolescence. LEE ANNE Page 61 . the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery. LAUREN| PARUNGO. o Carry-forward – Carrying over to offset it in the future years.fire storm shipwreck robbery theft or embezzlement. That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery. the issue to be resolved is not whether the expense was supported by the required certification but whether said inventory losses were incurred in the normal business operations of the taxpayer.  Adjustment must be made in each case for expenditures or items of loss properly chargeable to capital account. Casualty loss is claimed in the year incurred while losses from theft or embezzlement is claimed in year discovered. losses in profit-seeking transactions and casualty losses. a. distinction lies in the additional requirement for deductibility in the case of casualty losses In determining whether a loss is an ordinary loss or a casualty loss. KIM APPLE |MARTINEZ. Reduced further in the amount of any insurance or other compensation received. It may refer to a financial loss resulting from a sudden and unexpected event. theft or embezzlement during the taxable year: Provided. SUDDEN EVENT: swift not gradual or unanticipated. ALEX | TAMAYO. JAI | YABUT.

Loss sustained in one line of business cannot be claimed as deduction in another line of business iii. that is. Increase in value can only be taxed when a disposition of the property occurred. Summary:  Loss must be that of a taxpayer  Must be actually sustained and charged off within the taxable year  Must be evidenced by a closed and completed transaction  Must not be compensated for by insurance or other form of indemnity  Casualty or loss: sworn declaration of loss filed within 45 days after date of occurrence of casualty or robbery. Illustration: Obsolescence (functional depreciation) for plants is not allowed if it has not functionally depreciated but was merely needlessly acquired in a voluntary business consolidation. CARVAJAL. business or profession of the taxpayer  Loss not previously claimed as deduction for estate tax purposes in the estate tax return ii. deductions are only allowable once they are realized. JAI | YABUT. LAUREN| PARUNGO. If loss not reported in book of account or income tax return: proof that alleged loss had not been suffered. Loss of predecessor not deductible by a successor unless they are technically and legally the same entity d. Illustration: Fluctuations in market value are never to be accounted for in the computation of income until the gain or loss becomes an accomplished fact. i. which was of such a nature as to constitute a realization of such gain. Requisites of deductibility: The taxpayer seeking deduction must (1) point to some specific provision of the statute authorizing the deduction and (2) prove that he is entitled to the deduction claimed by him i.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Loss in one class of income not offset against income of another class c. a severance of the gain from the original capital invested in the property. In terms of losses. Loss of subsidiary may not be deducted by the parent corporation and vice versa (exc: parent corporation can show that losses are not and cannot be taken into account in the State residence of the subsidiary) e. Loss of one taxpayer may not be transferred to and used by another b. 3rd requisite: “closed and completed transaction” is one sufficiently final to ascertain that a loss has occurred. 1st requisite a. 2nd requisite: loss deductible only from the year it was actually sustained (or when the loss occurred. Loss of branch deductible from gross income of head office (single entity concept) f.ALLOWABLE DEDUCTIONS b. evidenced by a closed and completed transaction and fixed by identifiable events occurring that year. LEE ANNE Page 62 . theft or embezzlement  Taxpayer must prove elements of the loss claimed (actual nature and occurrence of event and amount of loss)  Loss connected with trade. MARA| MENDOZA. ALEX | TAMAYO. It is a taxable event which has been consummated. KIM APPLE |MARTINEZ.

If insurance proceeds exceed the net book value of the damaged assets. Basis here was merely: fear that the mountain might attack their homes next. since the indemnification is not an actual sale of goods by the insured company to the insurance company. excess shall be subject to regular income tax but not to VAT. storms. net book value immediately preceding natural disaster should be used as basis in claiming casualty losses and shall be reduced by the amount of insurance proceeds received. Amount of loss that shall be compensated by insurance coverage should not be claimed as a deductible loss. such losses have not been claimed as a deduction for the income tax purposes in an income tax return. MARA| MENDOZA. or into money which is forthwith in good faith. Restoration of damaged property or acquisition of the new property to replace it must be property recorded and recognized as either repairs expense or capitalized asset. iv. may not be deducted from gross income and neither may losses from investment or trade be deducted from compensation income. as to the 7th requisite.ALLOWABLE DEDUCTIONS Illustration: Taxpayers cannot take a deduction for an “other casualty loss” where there was no physical damage to the property of the taxpayer and a nearby landslide ruined neighboring homes. KIM APPLE |MARTINEZ. Loss of assets not used in the course of business and/or are personal in nature shall not be allowed. value of amounts involved and other factors. embezzlement (when not compensated by insurance or otherwise) and if at the time of the filing of the return. 1. ALEX | TAMAYO. Governed by tax accounting rules. taking into account nature of the transaction. Involuntary conversion of property doctrine – used in determining whether or not a gain from the involuntary conversion of property may be recognized as realized income subject to income tax to the recipient. no gain or loss shall be recognized. other casualties. such claim is not allowed. robbery. 8th requisite – settlement of estate losses: deduction incurred from fires. theft. no gain is recognized. Other requisites: Loss of personal property. its expropriation or condemnation or the threat or imminence thereof Property compulsorily or involuntarily converted into property similar or related in service or use to the property so converted.  Treatment of excess (insurance proceeds excess over net book value of the insured assets) – not taxable income if the same have been used in restoring the lost assets. Otherwise. and provided such losses were incurred not later than the last day for the payment of the estate tax as prescribed in section 91. LEE ANNE Page 63 . Where insurance proceeds are actually reinvested in similar property. In the event of total loss/destruction of properties used in business enterprise. Casualty losses must have been reported as part of taxpayer’s assets in the accounting records and financial statements in the year immediately preceding the occurrence of loss with cost of acquisition clearly established and recorded. No loss is sustained by the transfer of property by gift or death. CARVAJAL. LAUREN| PARUNGO. theft or seizure. shipwreck.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. JAI | YABUT. Guidelines for deduction: taxpayer engaged in trade or business may be entitled to claim casualty losses incurred for the properties actually in the business enterprise that were damaged and reported as losses in the appropriate declaration filed with the BIR. Any part of the money not so expended in gain shall be recognized but in an amount not in excess of the money so expended.

LEE ANNE Page 64 . ALEX | TAMAYO. The excess shall be considered an additional capital expenditure from which depreciation play be claimed. v. machinery or equipment not held primarily for the sale to customers or held for lease in the ordinary course of trade or business. the sale of the same is not subject to VAT pursuant to the above-mentioned provision and its implementing rules and regulations. 105. transferee or lessee of the goods. Incurred in any transaction entered into for profits CARVAJAL. 105 of the Tax Code of 1997 SEC.Any person who. leases goods or properties. . are fully deductible (except by non-resident aliens) 1. in the course of trade or business. sells barters. "in the course of trade or business": regular conduct or pursuit of a commercial or an economic activity. Indemnification is not an actual sale of goods by the insured company to the insurance company: where it arises out of a fortuitous event and the sale is not in the regular or ordinary course of business. KIM APPLE |MARTINEZ. The proceeds derived from the destructed of its insured assets shall not form part of its gross sales for VAT purposes. nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests). rehabilitation. LAUREN| PARUNGO. Not subject to VAT: Sec. BIR ruling 429-88: excess of the total costs of reconstruction. VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer. by any person regardless of whether or not the person engaged therein is a nonstock. 2. properties or services. MARA| MENDOZA. “in the course of trade or business”: the building. restoration and replacement of the insured assets over the total acquisition cost or adjusted basis is not a deductible loss. including transactions incidental thereto.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. the excess is not recognized as realized income and not subject to income tax. or government entity. JAI | YABUT. If incurred in a taxpayer’s trade 2. renders services. properties or services at the time of the effectivity of RA 7716. exchanges. Excess of the total replacement cost over the net book value of the damaged assets immediately before the casualty will not be a deductible loss but may be capitalized subject to depreciation (based on the adjusted basis of the assets after rehabilitation) Revenue regulations 12-77: deductible loss sustained from casualty shall be the excess of the net book value of the ordinary assets that were totally destroyed over any proceeds from insurance and other forms of indemnity or compensation received. and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. Taxpayers allowed to deduct losses  Losses by individuals – sustained by individuals during the year not compensated for by insurance or otherwise.ALLOWABLE DEDUCTIONS If the taxpayer uses all insurance proceeds in rehabilitating destroyed assets. Excess immediately before the casualty shall be capitalized subject to depreciation over the remaining useful life of the property. This rule shall likewise apply to existing contracts of sale or lease of goods. Persons Liable.

shipwreck…etc. Failure to attach a copy of declaration will result in disallowance of the loss in the pre-audit of his income tax return. LEE ANNE Page 65 . Proof of loss (POL) i. No loss allwed as deduction if at the time of the filing of the return.ALLOWABLE DEDUCTIONS  3. MARA| MENDOZA. Evidence to support claims should be furnished if available 3. Substantiation requirements: taxpayer bears burden of proving and substantiating his claim for deduction for losses and should comply with the ff: a. otherwise failure will result in the disallowance of the casualty loss claimed in the taxpayer’s income tax return. Items needed to compute loss or other basis of property. a taxpayer who sustained loss therefrom and who intends to claim the loss as a deduction for the taxable year in which the loss was sustained shall file a sworn declaration of loss with the nearest Revenue District Officer (RDO). Taxpayer should be prepared with other documentary proof (cancelled checks. DOL subject to verification and does not constitute sufficient proof of the loss that will justify its deductibility for income tax purposes. in determining the value of the property after. Casualty loss – photographs of the property before it was damaged will be helpful in showing the condition and value of the property prior to casualty (same principle applies to photographs after the damage. DOL must be attached to his return. depreciation allowed or allowable if any. Mere filing does not entitle taxpayer to deduct the alleged loss from gross income. 1. Amount of insurance or other compensation received or receiveable 2. KIM APPLE |MARTINEZ. Property connected with the trade or business arising from fires. LAUREN| PARUNGO. Losses by corporations 1. ALEX | TAMAYO. Information contained: a. Taxpayer should file a declaration loss and be prepared to support and substantiate the information within the period prescribed. theft or embezzlement b. and those sustained in transactions entered into for profit in the Philippines not compensated by insurance or otherwise. cost of repair d. Nature of the event giving rise to the loss and time of occurrence b. storm. Proof of loss—actual nature and occurrence of the event and amount of the loss Declaration of Loss (DOL) – Within 45 days of the occurrence. storms. photographs after repair). Declaration of loss—filed with the CIR or his deputees within a certain period prescribed in these regulations after the occurrence of the casualty. CARVAJAL. 2. without prejudice to the said loss being taken up upon investigation of the return. Foreign (applies to non-resident aliens) – allowed only losses sustained in business or trade connected within the Philippines and those arising from fires. robbery. shipwreck…etc.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Description of damaged property and location c. value of property before and after event. For pre-audit purposes. such loss has been claimed as deduction for estate and inheritance tax purposes in the estate or inheritance tax return. JAI | YABUT. Domestic – deduct losses actually sustained and charged off within the year and not compensated by insurance or otherwise 2.

but in no case more than the net book value of the property as a whole immediately before the casualty.000 Accumulated depreciation 5.000 5. Illustrations: o Total destruction of property used in business – the net value immediately preceding the casualty should be used as the basis in claiming losses also to be reduced by any amount of insurance or compensation  Assume that: Acquisition cost of property 10. theft and embezzlement losses – credible evidence to prove amount of loss and proper year of deduction.000 2.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LEE ANNE Page 66 . reduced by any insurance or other compensation received. ALEX | TAMAYO. LAUREN| PARUNGO. JAI | YABUT. iii.  Fair market value – immediately before and after casualty for determining amount of casualty loss deductible ascertained by impartial but competent appraisal (recognizing effects of general market decline which may occur simultaneously with the casualty in order that any deduction shall be limited to actual loss resulting from damage to property  Cost of repairs – acceptable as evidence of loss of value if also shown that the repairs are necessary.000 Insurance covered 2.000 5.500 Partial Destruction of property used in business – replacement cost to restore property back to its normal operating condition should be used for purposes of computing deductible losses. ii. MARA| MENDOZA. All evidence subject to verification by concerned Bureau office. All should be kept as part of tax records and made available to revenue examiner upon audit of his tax return and DOL. police report (failure to report may be factor against taxpayer – but not conclusive proof).500 2.500   Amount deductible is computed as follows: Acquisition cost Less: Accumulated Depreciation Amount of loss suffered Less: amount recovered through insurance AMOUNT DEDUCTIBLE 10. Robbery. and should be kept as part of the tax records available to the revenue officers upon audit Determination of amount deductible in general: amount is limited to difference between value of property immediately preceding the casualty and its value immediately thereafter but shall not exceed an amount equal to the cost or other adjusted basis of the property or depreciated cost in the case property used in business. receipts.ALLOWABLE DEDUCTIONS vouchers. and that the value of the property after repairs does not exceed the value of the property immediately before casualty. that the amount spent is not excessive. Excess should be capitalized subject to depreciation over the remaining useful if of the property CARVAJAL. that they do not cover more than the damage suffered. insurance policy. the insurance policy and other evidence of cost). KIM APPLE |MARTINEZ.

MARA| MENDOZA.000/5 years = Php 4. If inventories are taken from trade or business of farming.000 10. Farm operated as business enterprise: losses are deductible from gross income.000  In the example. Loss of the value of animals for famers engaged in raising livestock is not entitled to claim as a loss the value of those that perish from among those raised on a farm (EXC: reflected in inventory if used).2016 TAXATION 2 REVIEWER: TAX ON INCOME -.000  Consequently. LAUREN| PARUNGO.000  Yearly depreciation: 20. Total loss by storm. o Other farm losses – ground prepared and planted or stocked and its value is completely destroyed by the overflow or seepage of water from natural resources. the loss deductible for tax purposes would be limited to P10. JAI | YABUT. no deduction on account of shrinkage in weight or physical value or by deterioration in storage shall be allowed except as such may be reflected in an inventory if used to determine profits.000 Replacement cost 20. floor or fire of prospective crop is not a deductible loss in computing net income. CARVAJAL.000 Excess of replacement cost to be capitalized 10.000 5 years 20. Farm losses o Loss of livestock – that sustained in the death of livestock allowed as a deduction to the extent of the acquisition cost only if no inventories are taken into account in determining the income from the business of farming. a. the cost of the preparation and planting shall be deductible loss in the year which it is incurred.ALLOWABLE DEDUCTIONS  Assume that: Acquisition cost Accumulated depreciation Net book value Estimated remaining useful life Replacement cost of damaged portion 100.000 90.000 which is equal to the net book value of the whole property: Net book value 10. 1913 for any purpose and afterwards. KIM APPLE |MARTINEZ.000 1.000: Net book value before casualty 10. If livestock purchased after March 1. If held for favorable markets. ALEX | TAMAYO. the new cost basis subject to depreciation charges over the remaining useful life of the property which is five years would be P20. no deduction allowed to the extent that such losses are reflected in the inventory on hand at the close of the taxable year.000 Add: excess of replacement cost over book value 10.000 New cost basis 20. dies. LEE ANNE Page 67 .

2016 TAXATION 2 REVIEWER: TAX ON INCOME -. but no deduction can be made for livestock or products lost during that year. Cost of feed. 30. Treatment of excess of replacement/reconstruction cost or insurance proceeds: for income tax purposes the deductible loss shall be the excess of the net book value (NBV) of ordinary assets totally destroyed over any proceeds from insurance and other forms of indemnity or compensation received. If an individual owns and operates a farm in addition to being engaged in another trade. pasturage. Nov. 2010. LAUREN| PARUNGO. and also any insurance or indemnity recovered. and sustains a loss from each operation on the farm. Robbery theft and embezzlement losses: amount deductible shall be determined consistently with the manner prescribed for determining amount of casualty loss allowable. rehabilitation. KIM APPLE |MARTINEZ. Illustration:  Mr. LEE ANNE Page 68 . Does not apply to losses reflected in inventories of taxpayer. ALEX | TAMAYO. Excess of total costs of reconstruction. No deduction costs for 2010 or 2011 but amount of deduction allowable in 2012 is 15 o Value of property immediately before theft Less: value of property after Loss to be taken into account Less: insurance received Deduction allowable 35k 0 35k 20k 15k 2.ALLOWABLE DEDUCTIONS the actual purchase price of such stock less any depreciation allowable as a deduction in computing net income with respect to such perished livestock. may be deducted as a loss Actual cost of property destroyed by order of authorities may be claimed as a loss unless reimbursement is made (which shall be reported as income for the year in which it was made). care deducted as an expense of operation shall not be include as part of the cost of the stock for purpose of ascertaining the amount of a deductible loss. B purchased equipment costing 40k. Mr. the deductible loss shall not exceed NBV of assets immediately before their partial destruction. In 2011. B had reasonable prospect of recovery of FMV of equipment. Fair market value of the property immediately after the theft shall be considered as ZERO. JAI | YABUT. and Mr. B received 20k from insurance company. If partially destroyed. amount of loss may be deducted from gross income received from all sources provided the farm is not merely for recreation or pleasure 2. it had a book value of 35k. Insurance company had controversy over liability. restoration and replacement of insured assets over total acquisition cost or adjusted basis is not deductible loss. Controversy settled on March 2012. Equipment was insured against theft. Gross income ascertained by inventories – such losses will be reflected in inventory by reducing the amount of livestock or products on hand at the close of the year. MARA| MENDOZA. and it was stolen. Excess shall be considered an additional capital expenditure from which CARVAJAL.

b. Year of deduction: casualty occurring resulting in a loss and in the same year. When a taxpayer claims that the taxable year in which loss is sustained is fixed by his abandonment of the claim for reimbursement. 1. Taxpayer must exhaust his remedies first to recover or reduce loss. Any money not so expended. Excess of insurance proceeds over NBV of insured assets is not taxable income to the taxpayer if used in restoring lost assets. b. Summary: FE rates are taxable gains and/or deductible expenses when: i. there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery. EXC: if it is compensable by insurance or otherwise. Exchange rate (ER) at the time of receipt of advance payments on contracts is different from the rate at the time income is earned and debited against advance payments ii.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Foreign exchange losses: ordinary gain or loss results from fluctuations in transactions disposing foreign currency acquired. Where there is reasonable ground for reimbursement. deduction is postponed to subsequent year (year where it appears that no compensation can be had) a. LEE ANNE Page 69 . a. LAUREN| PARUNGO. a. Loss ascertained and realized during the taxable period and not compensated by insurance or otherwise is deductible from gross income albeit it may relate to transaction of prior years. taxpayer can claim depreciation of insured property plus any additional capital outlay incurred in restoring property if any. For depreciation. he must be able to produce objective evidence of his having abandoned the claim such as execution of release. the gain if any shall be recognized but in an amount not in excess of the money so expended.ALLOWABLE DEDUCTIONS depreciation may be claimed. ALEX | TAMAYO. Apply involuntary conversion doctrine – no gain or loss to be recognized in the event of property compulsorily or involuntarily converted into similar property. taxpayer must seek redress and may not secure loss deduction until he establishes that no recovery may be had. Taxpayer may not deduct casualty and theft losses covered by insurance unless he files a timely claim and reduces loss by amount of reimbursement 2. ER at the time advance payments made to subcontractors different from rate at the time expenses on the sub-contract are incurred/recorded CARVAJAL. Rule: where insurance proceeds are actually reinvested in similar property. Loss is deductible only for the year it is actually sustained (year loss occurs as evidenced by complete transaction and fixed by identifiable (I THINK THIS IS A TYPO) occurring that year. no gain recognized. Loss deduction will be denied if there is measurable right to compensation for the loss with ultimate collection reasonably clear. JAI | YABUT. KIM APPLE |MARTINEZ. MARA| MENDOZA. Exhaustion of remedies: loss deductible only in year that it is sustained. no portion of the loss with respect to which reimbursement may be received is sustained until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. ER at time of recording accounts receivables different from rate at the time of actual collection iii. Whether a reasonable prospect of recovery exists with respect to a claim for a reimbursement of a loss is a question of fact to be determined upon examination of facts.

CARVAJAL. It may be deducted in the year the loss was sustained (year of denial of claim). c. Recovery is ordinary income and not capital gain. LAUREN| PARUNGO. In case claim denied for failure to submit invoices/receipts there is no deductible loss. ER at the time of recording/recognizing accounts payables is different from rate at the time accounts payables are paid v. Maturity of payment: the currency increasing or decreasing is equivalent to taxpayer profit or loss on exchange but cost of goods is not affected iii. Remedy is to amend income tax return if still available Recovery of losses: Under TAX BENEFIT RULE taxpayer must include in income the recovery of any amount deducted in a prior taxable year to the extent the prior year’s deduction reduced the taxpayer’s tax liability for that year (or created a net operating loss carryover or carryback). taxpayer loses the value of his asset. Failure to show evidence that the input taxes sought to be refunded were not carried over nad applied against any output VAT in the succeeding periods iii. Flied out of time Input tax by its nature is an asset bringing benefits to taxpayer.  If 2010 loss exceeds that 2010 taxable income and creates a net operating loss carryover or carryback (in some tax systems) a recovery of P100000 received in 2012 is includible in full in the taxpayer’s income in 2012. ER at the time down payments for construction materials are made different from the rate at the time of full payment/settlement of balance on the purchase price of materials. o If no carryover is created the amount includible is limited to the amount of taxable income. KIM APPLE |MARTINEZ. 3. ii. FE losses resulting from devaluation of peso vis-à-vis foreign currency and vice versa but remittance of scheduled amortization consisting of principal and interests payment on a foreign loan not actually made are not deductible from gross income for income tax purposes. Difference between dollar value of borrowed and higher amount expended in purchase to repay loan = losses. ALEX | TAMAYO. Purchaser buys on credit (investment in foreign exchange). Effect: VAT passed on by supplier will form part of the expense of items purchased. Failure to comply with sales invoicing requirements ii. Property purchased with borrowed British pounds. LEE ANNE Page 70 . Illustration  If a taxpayer properly deducts a P100000 loss in 2010 and deduction reduces the taxpayer’s 2010 income tax liability a recovery of P100000 received in 2012 is includible in full in the taxpayer’s income in 2012.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Denial of input VAT refund: unutilized input VAT related to zero-rated sales may be claimed as deduction from gross income if the taxpayer’s claim for refund/credit of the same has been denied on the ff grounds: i. In case of denial of claim for refund/credit. JAI | YABUT. Illustrations: i.ALLOWABLE DEDUCTIONS iv. MARA| MENDOZA.

as amended. is held by or on behalf of the same persons.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year.ALLOWABLE DEDUCTIONS  If taxpayer properly claimed a loss deduction and in a later year recovers a portion of amounts lost taxpayer may not amend the prior year’s income tax return to reduce the loss deduction by the amount of the recovery. or (ii) Not less than 75% of the paid up capital of the corporation. For purposes of this subsection. Provided. 226. CARVAJAL. That for mines other than oil and gas wells. LAUREN| PARUNGO. MARA| MENDOZA. This also applies in case of merger where taxpayer is the surviving entity. ALEX | TAMAYO. incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the next 5 years immediately following the year of such loss. That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided. . if the business is in the name of a corporation. The entire amount of the loss shall be carried over to the first of the 5 taxable years following the loss. if the business is in the name of a corporation. a net operating loss without the benefit of incentives provided for under Executive Order No. JAI | YABUT. however. is held by or on behalf of the same persons. KIM APPLE |MARTINEZ. and any portion of such loss which exceeds. Individual (including estate or trust) or domestic or resident foreign corporation may be allowed to claim deduction corresponding to NOLCO but he who claims 40% optional standard deduction shall not simultaneously claim NOLCO deduction. otherwise known as the Omnibus Investments Code of 1987. Instead recovery is includible as tax benefit income in the year received. which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss: Provided. (3) Net Operating Loss Carry-Over. That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that – (i) Not less than 75% in nominal value of outstanding issued shares. the term "not operating loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. Net Operating Loss Carry Over General principles and policies NOLCO shall be allowed as deduction from gross income of same taxpayer who sustained and accumulated net operating losses regardless of change of ownership. further. LEE ANNE Page 71 . the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining 4 years.

LAUREN| PARUNGO. Prior to the merger. o In this case Q CORP’s NOLCO is retained because Q CORP’s shares are held by R CORP on behalf of P CORP. a.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. ALEX | TAMAYO. NOLCO shall be availed of on first-in. CARVAJAL. o In this case. 1. consolidation or business combination. P CORP transfers Q CORP’s shares to R CORP in exchange for 100% of R CORP shares. Substantial change NOLCO shall not be transferred or assigned to another person such as transfer or assignment through merger. KIM APPLE |MARTINEZ. · · “By or on behalf to the same person”—this refers to maintenance of ownership despite change as when: i. consolidation or consolidation with another person. No actual change in ownership is involved as in the case of merger of subsidiary into parent company. Illustration for (ii) X CORP owns 100% of Y CORP. JAI | YABUT. Net operating loss incurred in the year where there is substantial change in ownership shall not be affected by such change of ownership. This period on the carry-over of NOLCO will also continue to run even if corporation paid its income tax under MCIT computation. Z CORP is merged into Y CORP. 75% equity. Illustration for (i) P CORP owns Q CORP that has NOLCO.ALLOWABLE DEDUCTIONS 3-year reglementary period shall continue to run notwithstanding the fact that taxpayer availed of 40% optional standard deduction in the said period. ii. Z CORP’s NOLCO should be retained and transferred to Y CORP. X now directly owns Z CORP (absorbed corporation) which continues to exist in Y CORP. transferee or assignee shall not be entitled to claim the same as deduction from gross income unless shareholders of transferor/assignor gains control of at least 75% or more in nominal value of the outstanding issued shares or paid up capital of the transferee/assignee (in case transferee/assignee is a corporation) or 75% or more interest in business of the transferee/assignee (if it is other than a corporation). first-out basis. In case transfer or assignment of taxpayer’s net operating losses arises from such merger. original owner. Z CORP has NOLCO. MARA| MENDOZA. No actual change in ownership is involved in case the transfer involves change from direct ownership to indirect ownership or vice-versa. NOLCO shall be allowed if there has been no substantial change in the ownership of business in that not less than 75% nominal value of outstanding issued shares or not less than 75% paid-up capital is held by or on behalf of the same persons. ownership or interest rule only applies to transfer or assignment of taxpayer’s net operating losses as result of or arising from said merger. LEE ANNE Page 72 . After the merger. Y CORP owns 100% of Z CORP. X CORP already indirectly owned Z CORP. consolidation or any other form of business combination of such taxpayer to another person.

· · Determination of substantial change in the ownership of business Rules in determining changes of ownership Time of determination of substantial change in ownership shall be determined as of end of taxable year as NOLCO is to be claimed as deduction. Foreign corporations engaged in international shipping or air carriage in the Philippines Any person. “75% or more in interest” and other similar terms shall be construed within its context. CARVAJAL. o No substantial change in ownership if stockholders of transferor gains control of at least 75% or more in nominal value of outstanding issued shares or paid-up capital of transferee or 75% or more interest in business of transferee assignee (if transferee is not a corporation). whole series of transactions shall be treated as single unit. LAUREN| PARUNGO. ALEX | TAMAYO. MARA| MENDOZA. In determining whether there is actual change in ownership. NOLCO may be deducted.ALLOWABLE DEDUCTIONS Reference to 75% equity. JAI | YABUT. KIM APPLE |MARTINEZ. ownership or interest rule. Taxpayers entitled to deduct NOLCO from gross income Any individual subject to normal income tax or preferential tax rates on their taxable income shall be entitled to deduct from his gross income for the current year his accumulated net operating losses for immediately preceding 3 consecutive years. Privilege of deducting NOLCO can be availed of only by the absorbed corporation. 2. “75% or more in nominal value”. enjoying exemption from income tax with respect to its operation during period where exemption is applicable. LEE ANNE Page 73 . Enterprise registered with PEZA with respect to its PEZA-registered activity. Enterprise registered with Bases Conversion and Development Act with respect to registered business activity. So long as there is no substantial change in ownership. o Substantial change in ownership occurs if stockholders of transferor gains control of transferee only to extent of less than 75%. Change in ownership of business occurs when person who sustained net operating losses enters into a merger. This ruling has gone astray and contradictory to previous rulings. BIR RULING 214-2012—NOLCO is not one of the assets that can be transferred and absorbed by surviving corporation.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. · · · · · · EXCEPTIONS (not entitled to NOLCO deduction: Offshore Banking Units and Foreign Currency Deposit Unit Enterprise registered with Board of Investments with respect to BOI-registered activity enjoying the Income Tax Holiday incentive. consolidation or combination with another person resulting to transfer of the said net operating losses. natural or juridical.

000.000 2002 100. Net loss of 50.0000 in 2002.000 and P120.000 Observe: o o o o Net loss to be carried over cannot exceed net income of subsequent year. MARA| MENDOZA. and any portion of such loss which exceeds taxable income of the first year shall be deducted in like manner from taxable income of next remaining 4 years.000) 2001 120.000 incurred in 2000 cannot be carried over beyond 2003. JAI | YABUT. EXCEPTION: mines (other than oil and gas well). Entire amount of loss shall be carried over to first of 5 taxable years.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Illustration Taxpayer incurred losses of P50.000 (30.000) (10. 2003 and 2004. P10.000 10.000 in 2001.000 in 200 and P100. KIM APPLE |MARTINEZ. ALEX | TAMAYO. No carry over if subsequent year resulted in a loss.000 2000 2003 2004 30.000 (100. LAUREN| PARUNGO. net operating loss without benefit of incentives (under Omnibus Investments Code) incurred in any of the first 10 years of operation may be carried over as deduction from taxable income for next 5 years immediately following the year of such loss. Net loss in 2001 is not carried over until net loss in 2000 has been consumed.ALLOWABLE DEDUCTIONS · · Entitlement to Net Operating Loss Carry Over (NOLCO) GR: only net operating losses incurred beginning JAN 1 1998 may be carried over to next 3 years immediately succeeding taxable years following the year of such loss for purposes of NOLCO deduction. Losses may be carried over as follows: 2000 Net income/loss NOLCO 2001 50. He obtained income of P30.000) Taxable income 0 0 0 0 20. LEE ANNE Page 74 . CARVAJAL.

Presentation of NOLCO in tax return and unused NOLCO in income statement NOLCO shall be separately shown in taxpayer’s income tax return (also known as Reconciliation Section of Tax Return) while unused NOLCO shall be presented in Notes to Financial Statements showing the taxable year in which net operating loss was sustained or incurred and any amount claimed as NOLCO deduction within 3 years. MARA| MENDOZA. LAUREN| PARUNGO. NOLCO in relation to MCIT Such corporation cannot enjoy benefit of NOLCO for as long as it is subject to MCIT in any taxable year. in its income tax return. Quarterly and annual availment of NOLCO NOLCO shall be allowed as deduction in computing taxpayer’s income taxes per quarter and annual final adjustment income tax returns. LEE ANNE Page 75 . 4. If per taxpayer’s final annual adjustment income tax return. like under “losses” in general. Transitory apportionment of NOLCO. or enjoying preferential tax treatment under special laws. 2. such may be claimed as NOLCO deduction in the immediately succeeding taxable year. a. NOLCO may be claimed as deduction only within 3 consecutive years immediately following the year of the net operating loss. KIM APPLE |MARTINEZ. JAI | YABUT.ALLOWABLE DEDUCTIONS NOLCO is one of the rate exceptions to principle that expenses incurred are matched with income earned for same taxable year. entire operations for the year resulted to a net operating loss. NOLCO deduction allows taxpayer to offset previous year’s losses against subsequent year’s income. 1. net operating losses shall not be allowed as NOLCO deduction from its gross income derived from unregistered business activities. as a party of taxpayer’s other itemized deductions. ALEX | TAMAYO. as a separate item of deduction. In no case may NOLCO be claimed. running of 3-year period for expiry of NOLCO is not interrupted by fact that corporation is subject to MCIT. However. Where taxpayer is exempt. or partly exempt from income tax. in case of corporation using the fiscal year accounting period In the case of corporation using fiscal year accounting period. allowable NOLCO for succeeding fiscal years shall be determined: NOLCO for entire fiscal year x Ratio of: # of months 12 months covering fiscal year NOLCO to be carried over to next 3 years.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. 3. In order that the 3-year period may be monitored. CARVAJAL. Failure to comply with this requirement will disqualify the taxpayer from claiming NOLCO. taxpayer shall show its NOLCO deduction.

KIM APPLE |MARTINEZ. LAUREN| PARUNGO. be considered as a loss from the sale or exchange. Note that sale of shares of stock and real properties held as capital assets are governed by rules on Capital Gains Tax. all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided. (a) (b) (7) Abandonment Losses. CARVAJAL.Losses from "wash sales" of stock or securities as provided in Section 38. (5) Losses From Wash Sales of Stock or Securities.Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions. of a character subject to allowance for depreciation. That accumulated expenditures incurred in that area prior to January 1. of capital assets. MARA| MENDOZA. b. Limitation. That if such abandoned well is reentered and production is resumed. or property held by taxpayer primarily for sale to customers in ordinary course of business. shall be allowed as a deduction in the year such well. or real property used in trade or business. – In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned. In all cases. the unamortized costs thereof.If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets. In case a producing well is subsequently abandoned. 1979 shall be allowed as a deduction only from any income derived from the same contract area. on the last day of such taxable year. . the loss resulting therefrom shall. for purposes of this Title. .Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39. Capital asset CAPITAL GAIN/LOSS results if taxpayer sells or exchanges a capital asset.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. . Securities Becoming Worthless. It is every owned and used for personal purposes. notices of abandonment shall be filed with the Commissioner. as the case may be. (6) Wagering Losses. LEE ANNE Page 76 . equipment or facility is abandoned by the contractor: Provided. . JAI | YABUT. CAPITAL ASSET: property held by taxpayer (whether or not connected to his business) but does not include stock in trade or other property which would be included in the inventory of taxpayer if on hand at close of taxable year.ALLOWABLE DEDUCTIONS a. as well as the undepreciated costs of equipment directly used therein. or if such equipment or facility is restored into service. ALEX | TAMAYO. pleasure or investment. the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated. (4) Capital Losses.

inventory and other property held mainly for sale to customers in trade or business Accounts or notes receivable acquired in ordinary course of trade or business for services rendered or from sale of any properties. real property or property held for sale (such as inventory or stock in trade). assets must be classified as capital assets. 3. any loss resulting from such sale shall not be subject to foregoing limitation and shall not be included in determining applicability of such limitation. Capital loss CAPITAL LOSSES: if proceeds from sale. LAUREN| PARUNGO. debenture. Instead. KIM APPLE |MARTINEZ. Sale of capital assets results in capital gain or loss. a. LEE ANNE Page 77 . 2. all assets of business are sold. Sale of a business THEORY OF FRAGMENTATION: sale of business is not a sale of one asset. · · · · · · Noncapital assets Noncapital asset is property that is not a capital asset: Stock in trade or other property included in the inventory if on hand at close of taxable year. ALEX | TAMAYO. depreciable property.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. JAI | YABUT. This treatment does not apply to property used to produce rental income. even if fully depreciated.ALLOWABLE DEDUCTIONS 1. exchange or any other disposition of capital asset are less than purchase price or consideration received. o EXCEPTION: If bank or trust company. note or certificate or other evidence of indebtedness issued by any corporation with interest coupons or in registered form. · Limitations: These are allowed to be deducted only to extent of capital gains (gains derived from sale or exchange of capital assets) and not from any other income of taxpayer. Loss is not deductible from gross income. MARA| MENDOZA. sells any bond. a substantial part of whose business is receipt of deposits. Personal-use property Gain from its sale or exchange is a capital gain. Real property (other than land) used in trade or business or as rental property. Land used in business. When sold. CARVAJAL. Each asset is treated as being sold separately for determining the treatment of gain or loss. Depreciable property used in trade or business or as rental property (including intangibles) even if property is not fully depreciated (or amortized). Investment property (such as stocks and bonds) Gain or loss from its sale or exchange is a capital gain or loss. Stock in trade. Sale of inventory results in ordinary income or loss.

JAI | YABUT. preferred stock and collaterized securities Loss sustained is to be treated as capital loss as if incurred from sale or exchange transaction. LEE ANNE Page 78 . This includes government and corporate bonds. asset of investor. gains control of corporation. It is a financial instrument that represents: Ownership position in a publicly-traded corporation (stock) Creditor relationship with government body or corporation (bond) Rights to ownership as represented by an option Debt security Equity investment Type of security that represents money that is borrowed that must be repaid. ALEX | TAMAYO. net capital loss and net income: 100% if capital asset has been held for not more than 12 months 50% if capital asset has been held for more than 12 months · · · Securities SECURITIES: shares of stock in a corporation and rights to subscribe for or to receive such shares. how resulting gain might be taxed or whether or not loss would be deductible are matters dealt with in other sections of NIRC. alone or together with others not exceeding four. interest rate and maturity/renewal date.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Capital. with terms that define the amount borrowed.ALLOWABLE DEDUCTIONS GR: A capital loss can be deducted only from capital gains under SEC 39 Entire amount of gain or loss upon sale or exchange of property shall be recognized. CARVAJAL. if as a result of an exchange of property for stocks. · · Holding period In case of individual taxpayer (other than corporation). Check SEC 39 and 40 for discussion on capital gain and losses. No recognition shall be made if sale or exchange is made in pursuance of a plan of corporate merger or consolidation or. the sale or exchange of which results in either a capital gain or capital loss. not ordinary. certificates of deposit. MARA| MENDOZA. KIM APPLE |MARTINEZ. LAUREN| PARUNGO. only these percentages of gain or loss recognized upon sale or exchange of capital asset shall be taken into account in computing net capital gain. 1. exchanger. Then.

Investors. dealers and traders Investors Dealers Traders They buy and sell securities and expect income from dividends. They may charge services fees from clients. REQUISITES: He must seek to profit from daily market movements in price of securities and not from dividends. MARA| MENDOZA. Activity must be substantial He must carry on activity with continuity and regularity. They are not conducting a trade or business. Merchant of stocks or securities with an established place of business.ALLOWABLE DEDUCTIONS 1. interest or capital appreciation for personal investment. LEE ANNE Page 79 . interests or capital appreciation. ALEX | TAMAYO. regularly engaged in business of securities and resale of it to customers. This is considered business even though he has no inventory or clients. LAUREN| PARUNGO. One engaged in business of buying and selling stocks for his own account. KIM APPLE |MARTINEZ. Sales of securities result in capital gains and losses.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Gains and losses are classified as ordinary gains and losses. JAI | YABUT. Following facts and circumstances should be considered in determining if activity is security trading business: Typical holding periods for securities bought and sold Frequency and amount of CARVAJAL.

LEE ANNE Page 80 . KIM APPLE |MARTINEZ. LAUREN| PARUNGO. Under an investor. Shrinkage in value of stocks Person cannot deduct loss from shrinkage of value of stocks (through fluctuation of market) from his gross income. · · GR: Capital gain or loss normally requires concurrence of 2 conditions for it to result: There is sale or exchange Thing sold or exchanged is a capital asset. JAI | YABUT. EXCEPTION: if worthlessness is satisfactorily shown as in case of bad debts. Loss allowable to be deducted is when stock is disposed of. 2. taxpayer is considered an investor and not a trader. it is capital assets. · · · EXCEPTIONS (loss as if from sale exchange of capital assets) Worthless securities Retired certificates of indebtedness with interest coupons or in registered form Short sales and option to buy or sell property where no sale or exchange strictly exists a. ALEX | TAMAYO.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.ALLOWABLE DEDUCTIONS trades during the year Extent to which taxpayer pursues the activity to produce income for a livelihood Amount of time he devotes for activity If nature of trading does not qualify as business. Shares of stock become worthless CARVAJAL. MARA| MENDOZA. Ordinary or capital Securities are ordinary assets only to dealer. b.

Short sales CARVAJAL. It is also triggered if a taxpayer sells securities at a loss and his spouse or corporation that he controls acquires the same securities within wash sale time frame. However. LEE ANNE Page 81 . Illustration A has stocks in X CORP. exchange or other forms of disposition of shares during taxable year. Thus. JAI | YABUT. MARA| MENDOZA. exchange and other disposition. barter. · 1.ALLOWABLE DEDUCTIONS Losses from shares of stock held as capital asset shall be treated as capital loss at the end of the year that it become worthless.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. there must be actual disposition of shares of stock held as capital asset and capital loss must be derived from sale. Price of shares is down from when he purchased them. KIM APPLE |MARTINEZ. loss is allowed when replacement property is subsequently sold by taxpayer. o If there is no wash sale rule. A will get a tax deduction and still hold stocks of X CORP. he: Buys substantially identical stock or securities Acquires substantially identical stock or securities in a fully taxable trade Enters in a contract or option to acquire substantially identical stock or securities Acquires substantially identical stock or securities for his individual retirement arrangement. barter. this loss is not deductible against capital gains realized from sale. For 5% and 10% net capital gains tax (CGT) to apply. Thus. 61-DAY RULE: calendar days and not trading days. There is suspension of loss since the taxpayer did not really give up the loss property. but must be claimed against other capital gains to the extent provided in SEC 34. ALEX | TAMAYO. He wants to deduct losses on his tax return so he sells the stock and then buys stock in X CORP at a lower price. Taxpayer cannot deduct losses from wash sales unless loss was incurred in ordinary course of his business as a dealer of stock/securities. · · Securities referred in this section (recognized as becoming worthless): Equity securities such as shares of stock Debt securities such as bonds · · · · Wash sale WASH SHALE: when a taxpayer sells or otherwise disposes stock or securities (including a contract or option to acquire or sell stock or securities) at a loss within 30 days before or after sale or disposition (the 61-day rule). However. loss is added to basis of replacement property. LAUREN| PARUNGO. holidays and weekends are included.

At a later date.ALLOWABLE DEDUCTIONS SHORT SALE: contract to sell property a taxpayer borrowed for delivery to a buyer.000 to C. he either buys an identical property and delivers it to the lender or deliver property he held but did not want to transfer at the time of the sale. o This transaction is a short sale. Amount of losses he deducts cannot be more than amount of gambling income he reports on his return.000 and delivers them to his broker Z COMPANY to close the short sale.000-80. gain when closing a short sale is short term if taxpayer: Held substantially identical property for 1 year or less on date of short sale Acquired property substantially identical to the property sold short after short sale but on or before the date he closes the short sale. any loss on the short sale is a long-term capital loss. \ losses in illegal bets and numbers game are not deductible losses. Subsequently. LAUREN| PARUNGO. Taxpayer may deduct gambling losses only if he itemizes deductions. same may not be deducted from other sources of income To be eligible for offset. B buys 100 shares for P80. Illustration CARVAJAL.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Although NIRC is silent. Wagering losses GR: losses resulting from gambling or wagering transactions are deductible becomes gambling or wagering is an income-producing activity. wagering gains must occur in the same year as losses. Taxpayer is subject to tax on his net income from gambling for the year.0000) HOLDING PERIOD: amount of time a taxpayer actually held the property eventually delivered to the lender to close the short sale. · · · RULE: amount of wagering losses deductible from gross income is limited only to amount of wagering gains. ALEX | TAMAYO. He borrows 100 shares from his broker Z COMPANY and sell them for P100. LEE ANNE Page 82 . In case of net loss. However. MARA| MENDOZA. legality or illegality of gambling or wagering activity affects deductibility. If a taxpayer held the substantially identical property for more than 1 year on date of short sale. even if the property used to close the short sale was held 1 year or less.000 (100. KIM APPLE |MARTINEZ. o Taxable gain of B is P20. · · · · Illustration B thinks that value of his stocks in Y CORP will drop. JAI | YABUT.

\ Wagering losses that may be deducted are those incurred abroad. ABANDONMENT: when he voluntarily and permanently gives up possession and use of property with intention of ending his ownership but without passing it on to anyone else. E lost 100. GR: it is not treated as sale or exchange.ALLOWABLE DEDUCTIONS · 2012.00 from his losses which is also the amount of gains. · · · REQUISITES: There must be a prize Element of chance Taxpayer must give some consideration GAMBLING INCOME: includes winnings from lotteries. ALEX | TAMAYO. It may not be offset from gambling or wagering gains pertaining to subsequent years. Wagering transaction WAGER: contract by which 2 or more parties agree that a certain sum of money or other thing shall be paid or delivered to one of them or that they shall gain or lose on the happening of an uncertain event or upon ascertainment of a fact in dispute. 1.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. raffles. LAUREN| PARUNGO. horse races and casinos. it is a loss. Wagering is synonymous to betting and gambling. Such losses may be deducted only from wagering gains from sources abroad. o E may deduct 50. LEE ANNE Page 83 . where parties have no interest in the event except that arising from possibility of such gain or loss. KIM APPLE |MARTINEZ.000 (from loss) may not be deducted from income from other sources and simply disregarded.000 and won 50. Otherwise. he has a gain. CARVAJAL. Remaining balance of 50.000 in various trips to Las Vegas. If amount taxpayer realizes (if any) is more than his adjusted basis. NOTE: winnings from sources within Philippines are subject to 20% final tax. JAI | YABUT. MARA| MENDOZA. Abandonment losses Abandonment of property is disposition of property. winnings other than those from sources within Philippines.

the loss resulting therefrom shall. 1. In case of producing well. all accumulated exploration and development expenditures shall be allowed as a deduction only rom income derived from same contract area. Abandonment of petroleum operations and producing well Rules regarding losses resulting from abandonment of petroleum operations and producing wells: In event a contract area where petroleum operations are undertaken is partially or wholly abandoned. Bad debts and securities 1. · · 2.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. for the purpose of this Title. That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. MARA| MENDOZA. 3. Audit procedures and techniques (E) Bad Debts. trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided.If securities. o If such well is re-entered and production is resumed or equipment is restored. Voluntary removal of buildings Loss of useful value of an asset 4. JAI | YABUT. on the last day of such taxable year. – In General. 2. as defined in Section 22 (T). LAUREN| PARUNGO.Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession. 1. Creditor of decedent CARVAJAL. . costs shall be included as part of gross income and shall be amortized or depreciated. . of capital assets. unamortized costs and undepreciated costs of equipment directly used shall be allowed as a deduction in the year of abandonment. in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits. ALEX | TAMAYO.ALLOWABLE DEDUCTIONS Loss from abandonment of business or investment property is deductible as a loss. KIM APPLE |MARTINEZ. This rule applies also to leasehold improvements the lessor made for lessee that were abandoned. are ascertained to be worthless and charged off within the taxable year and are capital assets. This is not an ordinary loss. Actually ascertained to be worthless a. Securities Becoming Worthless. LEE ANNE Page 84 . be considered as a loss from the sale or exchange.

Bankruptcy ii. the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. Guidelines a. Use of Certain Methods and Rates. JAI | YABUT. upon recommendation of the Commissioner.There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion. Factors indicating worthlessness i. under any of the following methods: a. . LEE ANNE Page 85 . an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance. MARA| MENDOZA. In the case of property held by one person for life with remainder to another person. . on the basis of the trust income allowable to each.The term "reasonable allowance" as used in the preceding paragraph shall include. wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. LAUREN| PARUNGO. Banks and insurance companies Tax Benefit Rule Securities becoming worthless Non-deductible bad debts 1. KIM APPLE |MARTINEZ. but not limited to. Assignment of credit Actually charged off from taxpayer’s books of accounts Requisites for deductibility 1. the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust. (F) Depreciation. Valid debt a.ALLOWABLE DEDUCTIONS 2. 2. or in the absence of such provisions. – General Rule.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. b. Foreclosure of mortgage 3. The straight-line method CARVAJAL. In the case of property held in trust. ALEX | TAMAYO. Determining whether advances are contributions to capital or loans 2.

The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. LAUREN| PARUNGO. shift to the straight-line method. without any written objection on the part of the Commissioner or his duly authorized representatives. However. that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income.ALLOWABLE DEDUCTIONS b. ALEX | TAMAYO. The sum-of-the-years-digit method. 3. using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F) (1) c. . Any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. and d. the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. MARA| MENDOZA. Agreement as to Useful Life on Which Depreciation Rate is Based. LEE ANNE Page 86 . Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided. the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. however.Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner. The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. CARVAJAL. Declining-balance method. the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years.An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. JAI | YABUT. it may at any subsequent date. 4. KIM APPLE |MARTINEZ. if the service contractor initially elects the declining-balance method. Depreciation of Properties Used in Petroleum Operations.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. .

Concept of depreciation 1. Incidents of ownership c. Cost recovery 2. MARA| MENDOZA. a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. and the depreciation thereon allowed as deduction from taxable income: Provided. JAI | YABUT. Property lasting more than 1 year 1. Statement to be attached to the return Requirements to be depreciable and deductible Must be owned by taxpayer a.an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations. LAUREN| PARUNGO. Depreciable property 1. Life tenant 2. Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years. . . Charging off depreciations 3. Leased property b. Depreciation of Properties Used in Mining Operations. ALEX | TAMAYO. 6.In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation. Property having a determinable useful life 4. LEE ANNE Page 87 . Depreciation of intangibles a. KIM APPLE |MARTINEZ. Depreciation of patent or copyright CARVAJAL. shall be computed as follows: a. or b. Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations . That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used. Business use a. Partial business or investment use 3.ALLOWABLE DEDUCTIONS 5. At the normal rate of depreciation if the expected life is ten (10) years or less.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.

2016 TAXATION 2 REVIEWER: TAX ON INCOME -- ALLOWABLE DEDUCTIONS
b.

Depreciation of drawings and models
i.
When there are expenditures in his business for designs, drawings,
patters, models, or work of an experimental nature for the improvement of his facilities or product, and if
the period of usefulness of any such asset may be estimated from experience with reasonable accuracy, it
may be subject of depreciation allowances spread over such estimated period of usefulness.

c.

Depreciation in the case of farmers
i.
Reasonable allowance for depreciation may be claimed on farm
buildings (excluding the dwelling of the farmer), machinery, and other physical property. Included also are
livestock acquired for work unless included in inventory.
ii.
Depreciation shall be based on the cost or other basis and the
estimated life of the livestock.
iii.
If the livestock is included in an inventory no depreciation will be
allowed, as the corresponding reduction in value will be reflected in the inventory.

2.

Property which cannot be depreciated – inventories, stock in trade, land apart from the improvements or physical
development added to it, minerals, and others discussed below.
a.
Inventory/stock in trade
i.
Typical business asset that is not subject to depreciation.
ii.
Reason: when inventory/stock is sold or consumed, its cost basis is
subtracted from the sales as a deduction for the cost of goods sold or deducted as ordinary expense.
b.
Land
i.
Excluded because land does not wear out, become obsolete, or get
used up.
ii.
Although he cant depreciate the land, he can depreciate certain
land preparation costs, such as landscaping, in preparing the land for business use.
1.
Illustration: X constructed a new building and paid for clearing, seeding, planting. Some of the
bushes were planted near the building. If he would have to destroy the building when he is going to
replace it, he would have to destroy the bushes, so the same have a determinable useful life and
therefore he can depreciate them.
c.
Excepted property
i.
Property placed in service and disposed of in the same year

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2016 TAXATION 2 REVIEWER: TAX ON INCOME -- ALLOWABLE DEDUCTIONS
ii.
Equipment for capital improvements. Taxpayer must add otherwise
allowable depreciation on the equipment during the period of construction to the basis of his
improvements.
iii.
Intangibles subject to amortization:
1.
Leasehold costs
2.
Goodwill cannot be amortized if its for an indefinite period of time
3.
Research and development expenditures may either be capitalized or treated as outright
deductible expense.
4.
Patents sold with the exclusive right to make, use, and sell and article constitutes ordinary
income.
5.
Organization expenses are subject to amortization and are not deductible in full on the year
incurred.

Start and end of depreciation – depreciation commences with the acquisition of the property and its owner is not bound to see
his property gradually waste without making provision for its replacement. In the case of companies, it is the duty of the
company to its bond and its stockholders to make such provision. Thus depreciation begins when a taxpayer places property
in service for use in a trade or business for the production of income.
1.

Placed in service – considered as such when it is ready and available for a specific use, whether for a business activity,
income-producing activity, tax exempt activity, or a personal activity. EVEN IF the taxpayer is not using the property
Illustration: X bought a machine for his business. However, it was not installed until the next year. In this case, the machines
is considered placed in service in the year it was installed.
a.
a.
Conversion to business use
i.
If property is in service in a personal activity, cannot claim
depreciation.
ii.
But if the property’s use is changed to a business or income
producing activity, then he can begin to depreciate it at the time of the change.
1.
Illustration: X bought a home and used it as his personal home for several years before he
converted it into a rental property. He began to claim the depreciation in the year he converted it
into a rental property and this is correct. X is smart. X knows the law.
iii.
NOTE: if the property is used for BOTH business and personal use,
only the business or investment use portion may be depreciated.

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2016 TAXATION 2 REVIEWER: TAX ON INCOME -- ALLOWABLE DEDUCTIONS
b.

2.

1.

Idle property

i.
Taxpayer must continue to claim deduction for depreciation on
property used in his business or for the production of income even if it is temporarily idle. Meaning he can
still depreciate the property even if it is idle.
Cost or other basis fully recovered – no depreciation will be allowed in the case of property which has been amortized to its
scrap value and is no longer in use or when he has fully recovered its basis or cost. He has recovered his basis
when allowable depreciation deductions equal his cost or investment in the property. Kung pinayagan beyond the
cost or investment, edi kikita na siya. Bawal yan boy.
a.
Retired from service
i.
Stop depreciation when you retire the thing from service, even if
you haven’t fully recovered cost or other basis. Retirement means when you withdraw it from use in trade
or business or from use in the production of income because of any of the following:
1.
Sells or exchanges property
2.
Converts it to personal use
3.
Abandons the property
4.
Transfers the property to a supplies or scrap account
5.
Property is destroyed.

Basis of depreciation – reasonable allowance for the exhaustion or wear and tear may be deducted from gross
income is based on the amount which should be set aside for the taxable year in accordance with a reasonable
plan where the value of the amount set aside plus the salvage value will equal the basis of the property. Must be
on the basis of actual fact. Basta gradual exhaustion of the utility of the property is the basis of the depreciation
allowance.
So: Value of amount set aside + salvage value = basis of the property.
Cost as basis
This is cost plus amounts he has paid for items such as sales tax, freight charges, and installation and testing fees.
Cost includes the amount he pays in cash, obligations, other property, or services.
For land:
FMV or Zonal value of land/ FMV or Zonal value of the land AND building x Total acquisition cost = cost of
land
Total acquisition cost of land and building – cost of land per above computation = cost of building

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deducted in the same way as any other business expense. a. Property changed from personal use i. Legal and recording fees Survey charges Insurance Amounts the seller owes that the taxpayer agrees to pay such as back taxes 2.ALLOWABLE DEDUCTIONS a. iv. CARVAJAL. JAI | YABUT. Improvements to rented property i. and other items that reduced basis. LAUREN| PARUNGO. KIM APPLE |MARTINEZ. Increased by the cost of any permanent improvements or additions and other costs that must be added to basis. On the part of the lessor.this is when the taxpayer buys property already subject to an existing mortgage or other debt on the property i. 4. TAKE NOTE improvements lang. Assumed debt . 2. Other basis – this is determined by the way the taxpayer receives the property a. If the modification is for repair lang. ii. No allowable depreciation on a building until it is completed or on a machine until it is installed 3. Decreased by any deductions. Depreciable basis is the FMV of the property on the date of the change in use ii. MARA| MENDOZA. Treatment of repairs and improvements – if the taxpayer makes improvements on a depreciable property.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. The amount includes the amount he pays for the property plus the amount of the assumed debt. ALEX | TAMAYO. ii. Lessee can depreciate permanent improvements he makes to business property he rents from someone else. the capital sum to be replaced by depreciation allowance is the same as though NO IMPROVEMENTS have been made. Settlement costs i. LEE ANNE Page 91 . where the lessee makes permanent improvements. losses. b. Original cost or other basis adjusted as follows: 1. Property constructed or built – capitalize all costs to determine the basis of the property. he must treat the improvements as a separate depreciable property. iii.

PROCESS: · Determine the basis of the property. Salvage value This is the estimated residual value of a depreciable asset or property at the end of its economical or useful life In all methods of determining depreciation. a. When the cost of an asset less its accumulated depreciation equals the salvage value. Depreciation accounting – used to further the integrity of periodic income statements by making meaningful allocation of the cost entailed in the used of the asset. Then the amount is written off in equal amounts over the period of the estimated useful life of the asset. plus the salvage value will equal the basis of the property. ALEX | TAMAYO. b. and estimated useful life CARVAJAL. 2. The cost of the asset less the estimated salvage value is determined first. Straight line method – method that involves subtraction of the scrap value from the cost of a depreciable asset and division of the resultant figure by the anticipated number of periods of useful life of the asset. LEE ANNE Page 92 . Lets the taxpayer deduct the same amount of depreciation each year. JAI | YABUT.ALLOWABLE DEDUCTIONS Methods of computing depreciation allowance – whatever plan or method of apportionment adopted must be reasonable and must have due regard to operating conditions during the taxable period. SALVAGE VALUE IS ALWAYS DEDUCTED FROM THE ASSET’S PURCHASE PRICE. salvage value. Accumulated depreciation – total depreciation recorded on an asset to date. KIM APPLE |MARTINEZ. MARA| MENDOZA. no more depreciation (reiteration of the rule above) Estimate the period the asset will be held in the business and the price that will be received for it on retirement. LAUREN| PARUNGO. Pwede dito ang konting error in the estimation. 1. c. Also the period over which asset may be reasonable expected to be useful to the taxpayer in his business or trade. Estimate is made AT THE TIME WHEN THE PROPERTY IS FIRST PUT TO USE. The proper allowance for depreciation of any property used in the trade or business is that amount which should be set aside for the taxable year in accordance with a reasonable consistent plan whereby the aggregate of the amount so set aside.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. On the balance sheet accumulated depreciation reflects the book value of an asset. Useful life This is the period of time for which an asset is capable of being used for the production of income.

PROCESS: · Divide the number 1 by the useful life of the property to get straight line rate. If in the first year the taxpayer used the property for less than a full year. the depreciation deduction for the 1st year is 2k (10k/20%). BUT THIS CANNOT BE MORE THAN DOUBLE THE STRAIGHT LINE METHOD. ALEX | TAMAYO. basis for the amount of depreciation must be adjusted by the depreciation deducted in the first year. Balance is the total amount of depreciation a taxpayer can take over the useful life of the property Divide the balance by number of years remaining in the useful life. ILLUSTRATION: X adjusted basis at the beginning of the 1st year is 10k and declining balance rate is 20%. useful life of 10 years. This amount will stay the same throughout the year unless there is a big change in the basis. MARA| MENDOZA. (useful life is 5 years. To get the depreciation deduction in the 2 nd year. This is the amount of the deduction · Salvage value is not subtracted in figuring the yearly depreciation deductions. This gives the amount of yearly depreciation deduction. In this case. Previous years depreciation deducted from the CARVAJAL. multiply the adjusted basis of the property by it. KIM APPLE |MARTINEZ. Declining balance method – Method of calculating periodic depreciation that involves the determining at regular intervlas throughout the expected life of an asset of equal percentage amounts of a cost balance which is progressively decreased by subtraction of each prior increment of depreciation from the original cost of the asset. The next year. a. LEE ANNE Page 93 . Accelerated depreciation – various methods that yield larger deductions in the earlier years of the life of an asset than the straight line method. ILLUSTRATION: in 2012 X bought equipment for 560k. full 50k na 3. basis is: 560k-60k= 500k/10 years = 50k (full year). divide it by 2 kasi prorated nga so 25k lang.ALLOWABLE DEDUCTIONS · · · Subtract salvage value from basis. he must prorate the depreciation deduction for the number of months in use. This is computed by multiplying undepreciated cost of the asset each year by uniform rate up to double the straight line rate (150%).2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LAUREN| PARUNGO. JAI | YABUT. If in 2012 he only used it for 6 months. Salvage value of 60k. 1/5 or 20% is the straight line rate · Multiply this by a number that is more than 1 but not more than 2 to get declining balance rate · After determining the rate of depreciation.

c. LAUREN| PARUNGO. Sum of years’ digits method – annual depreciation allowance computed by multiplying the depreciable cost basis by a constantly decreasing fraction Numerator of the fraction represents the remaining years of useful life of the asset. The depreciation deduction for the 2nd year is 1. CARVAJAL. Other method a. and the depreciation is computed based on tactual physical use. Denominator is always the sum of the year’s digits of useful life at the time of acquisition ILLUSTRATION: asset has estimated useful life of 5 years.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Cost of the asset is divided by the estimated total number of units to be produced. Company vehicle worth 600k with salvage value of 100k and estimated to go 100k kilometers in lifetime. etc. The per-km depreciation is 600k – 100k/ 100k kilometers = 5 pesos per kilometer.600. X rate will be 40% instead of 20%. Units of production depreciation/unit method – Asset is written off in direct relation to the productivity of the asset. second year is 4/15. Denominator is: 5+4+3+2+1 = 15. Same example above. life is estimated in terms of level of activity ie. such as a natural resource. First year is 5/15.ALLOWABLE DEDUCTIONS basis (10k-2k=8k) and this amount is multiplied by the rate of depreciation (8k x 20% = 1. Activity depreciation – not based on time but on level of activity When asset is acquired. JAI | YABUT. ALEX | TAMAYO. This is used when the value to depreciate is based on the asset. MARA| MENDOZA.600). This unit cost is multiplied by the number of units sold during the year resulting in the depreciation or amortization expense for the year. KIM APPLE |MARTINEZ. Double declining balance method – here there is spreading of the initial cost of a capital asset over time by deducting in each period DOUBLE THE PERCENTAGE RECOGNIZED BY STRAIGHT LINE method and applying double percentage to the undepreciated balance existing at the start of each period. i. NO SALVAGE VALUE IS USED IN THE CALCULATION. 4. Each digit is used as the numerator to determine the percentage by which the asset should be depreciated each year ie. c. LEE ANNE Page 94 .

JAI | YABUT. CARVAJAL. Edi kasi lahat na sila eto na gagawin. If in a year the machine makes 100k cups. Replacement cost method and sinking fund method – amortization or depreciation of asset in which the value is fixed in terms of replacement cost. if the expected life is more than 10 years and the depreciation is allowed as a deduction from taxable income. LEE ANNE Page 95 . a reasonable allowance for the deterioration of property arising out of its use or employment or nonuse in the business. Depreciation in petroleum operations For all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight line method or declining balance method. Depreciation by nonresident aliens engaged in trade or business and resident foreign corporations NRA engaged in trade. in addition to depreciation may be allowed in accordance with the facts. Based on facts dapat. · · Depreciation in mining operations Properties directly used in mining operations other than petroleum operations o Normal rate of depreciation if the expected life is 10 years or less o Depreciated over a number of years between 5 and the expected life. unit of production rate is determined by: 450k (which is 500k cost – 50k salvage value) / 1million. Cost of the machine is 500k and has salvage value of 50k.ALLOWABLE DEDUCTIONS ILLUSTRATION: X bought coffee machine which can produce 1million cups of coffee in its lifetime. MARA| MENDOZA. Properties not used directly in the production of petroleum shall be depreciated under the straight line method on the basis of an estimated useful life of 5 years. LAUREN| PARUNGO. Which is Php 0.45. Useful life of properties used in or related to production of petroleum shall be TEN YEARS or such shorter life as may be permitted by the Commissioner. a reasonable deduction for obsolescence. KIM APPLE |MARTINEZ. d. Units of time depreciation – similar to units of production. but used when the amount of the asset is not the same year to year. Contractor must notify Commish.45. depreciation expense is 100k x 0. NOT BASED ON OPINION OF THE TAXPAYER. so that depreciation is not enough to return the cost.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. trade or profession shall be permitted ONLY when the property is in the Philippines. c. ALEX | TAMAYO. Obsolescence With respect to physical property which is clearly shown by the taxpayer as affected by economic conditions what will result in its being abandoned at a future date prior to the end of its normal useful life.

or b. – In General.ALLOWABLE DEDUCTIONS · · · (1) Limitation on depreciation of vehicles Cannot be presumed that the purchase of a vehicle is purchase of property used in business and in order that for the deduction for depreciation for said purchase. may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided. a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance.4 million pesos. airplanes. 12-2012. Pursuant to Revenue Reg.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Provided. LEE ANNE Page 96 . ALEX | TAMAYO. certain intangible exploration and development drilling costs: a. KIM APPLE |MARTINEZ. JAI | YABUT. In case the non-depreciable vehicles are sold. . any loss as a result of the sale will not be allowed as deduction from gross income. LAUREN| PARUNGO. and land vehicles exceeding the 2. MARA| MENDOZA. the rules here must be complied with. upon recommendation of the Commissioner. § Total price subject to depreciation § Direct connection of the vehicle to the business or profession of the taxpayer. helicopters. these are the guidelines: o No deduction from gross income for depreciation shall be allowed unless taxpayer supports the purchase with evidence such as receipts which contain: § Motor vehicle identification number or other registrable identification numbers of the vehicle. That after production in commercial quantities has commenced. · Maintenance expenses on account of non-depreciable vehicles for taxation purposes are disallowed · Input taxes on purchase of non-depreciable vehicles and all input taxes on maintenance expenses are disallowed for taxation. · Only 1 vehicle for land transport is allowed for the use of an official or employee.4 million amount. · No depreciation shall be allowed for yachts. (G) Depletion of Oil and Gas Wells and Mines. value of which should not exceed 2.In the case of oil and gas wells or mines. "Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has CARVAJAL. unless the taxpayers business is transport. Shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines. Shall be deductible in full in the year paid or incurred or at the election of the taxpayer. or aircrafts. further.

and paid or incurred before the beginning of the development stage of the mine or deposit. ALEX | TAMAYO. The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining the existence. Any intangible exploration. JAI | YABUT. "Allowable deductions" shall include mining. as well as exploration and development expenditures paid or incurred during the taxable year: Provided. (2) Election to Deduct Exploration and Development Expenditures. the taxpayer may at his option. extent or quality of any deposit of ore or other mineral.ALLOWABLE DEDUCTIONS no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided. and depreciation of properties directly used in the mining operations. . milling and marketing expenses. CARVAJAL. "Net income from mining operations".In computing taxable income from mining operations. drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation. LAUREN| PARUNGO. MARA| MENDOZA.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. location. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. That the amount deductible for exploration and development expenditures shall not exceed 25% of the net income from mining operations computed without the benefit of any tax incentives under existing laws. KIM APPLE |MARTINEZ. as used in this Subsection. Election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. LEE ANNE Page 97 . deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting. shall mean gross income from operations less "allowable deductions" which are necessary or related to mining operations.

Percentage method – tax law provides special percentage factor for different types of minerals and other natural resources. c. JAI | YABUT. Distinctions among depreciation. 1. LAUREN| PARUNGO. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. Depreciation is prorating the cost of a tangible asset over that tangible’s life. drilling. c. a gas and oil mine operator. b. acquired oil rights from Y Corp. Determined by dividing the cost or other basis by the total units expected to be recovered. depletion and amortization a. Also defined as reduction during taxable year of oil. Depletion deduction for 2012 is 450k computed as follows: CARVAJAL. LEE ANNE Page 98 . Depletion allowance a. ii. not otherwise subject to depreciation. over that intangible’s useful life.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. gas. 1. Cost method – each unit of production sold is assigned a portion of the cost or other basis of interest. KIM APPLE |MARTINEZ. mineral. Depletion deduction allows an owner or operator to account for the reduction of a product’s reserves. quarrying etc. allowance for depletion of oil and gas wells or mines under PAR 1 of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines. X employs cost method. MARA| MENDOZA. This is multiplied by the gross income from the interest to arrive at the depreciation allowance. Deposit contains estimated 700k barrels of usable crude oil.In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation.ALLOWABLE DEDUCTIONS "Development expenditures" means expenditures paid or incurred during the development stage of the mine or other natural deposits. Depletion is based on percentage of estimated gross income to be earned during the period from a natural resource without reference to the cost of the resource. Depletion is the allocation of the cost of wasting assets/natural resources over time 2.1million pesos. Concept and nature of depletion – the using up of the natural resources by mining. . for 2. ALEX | TAMAYO. ILLUSTRATION: X corporation. In 2012 200k barrels were produced and 150k barrels were sold. timber resources as such are exhausted. Amortization is the allocation of the cost of an intangible asset. This is allowed to miners of oil. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. 2 ways of determining: i. b. gas or other mineral deposits as a result of production.

LEE ANNE Page 99 . MARA| MENDOZA. donations to the following institutions or entities shall be deductible in full a. or to be used in undertaking priority activities in education. youth and sports development. to provide for. . including fully-owned government corporations. or to nongovernment organizations. and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA). of the taxpayer's taxable income derived from trade. including its regional development councils and private philantrophic persons and institutions: Provided.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.Notwithstanding the provisions of the preceding subparagraph. or to accredited domestic corporation or associations organized and operated exclusively for religious. business or profession as computed without the benefit of this and the following subparagraphs. health. or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes.1million/700k x 150k = 450k Entitlement to deduct depletion Cost method for oil and gas wells and mines Option of taxpayer to deduct and carry forward Depletion deductible by non-resident aliens or foreign corporations (H) Charitable and Other Contributions. science and culture. human settlements. and five percent (%) in the case of a corporation. no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual. . youth and sports development.ALLOWABLE DEDUCTIONS i. exclusively to finance. In consultation with appropriate government agencies. JAI | YABUT. 2. ALEX | TAMAYO.Donations to the Government of the Philippines or to any of its agencies or political subdivisions. – (1) In General. scientific. or to social welfare institutions. KIM APPLE |MARTINEZ. in accordance with rules and regulations promulgated by the Secretary of finance. upon recommendation of the Commissioner. cultural or educational purposes or for the rehabilitation of veterans.Contributions or gifts actually paid or made within the taxable year to. LAUREN| PARUNGO. Donations to the Government. That any donation which is made to the Government or to any of its agencies or political subdivisions CARVAJAL. (2) Contributions Deductible in Full. charitable. .

. unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated. or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws c. upon recommendation of the Commissioner. Level of administrative expense of which shall. health. JAI | YABUT. not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received. or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. treaties. Donations to Certain Foreign Institutions or International Organizations. or to the state for public purpose. Which. the term "utilization" means: CARVAJAL. on an annual basis.Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements. social welfare. iii.ALLOWABLE DEDUCTIONS not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection. educational. would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated. in the even of dissolution. KIM APPLE |MARTINEZ. but in no case to exceed thirty percent (30%) of the total expenses. research. or a combination thereof. b. LAUREN| PARUNGO.The term "nongovernment organization" means a non profit domestic corporation: i. character-building and youth and sports development. upon recommendation of the Commissioner. Assets of which. LEE ANNE Page 100 . and iv. Organized and operated exclusively for scientific. MARA| MENDOZA. Donations to Accredited Nongovernment Organizations. cultural or charitable purposes. conform with the rules and regulations to be prescribed by the Secretary of Finance. no part of the net income of which inures to the benefit of any private individual ii. . d. ALEX | TAMAYO. Subject to such terms and conditions as may be prescribed by the Secretary of Finance.

LAUREN| PARUNGO. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. but not to exceed five (5) years. Notice of donations ii. KIM APPLE |MARTINEZ. Certificate of donations i. Accreditation of non-stock. .The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. Charitable contributions Contribution of property Contributions from abroad Limitation of deductibility Contributions deductible in full 1. Utilization requirements d. non-profit corporation or organization a. non-profit corporations/NGOs c. 2. non-profit corporations/NGOs by accrediting entity b.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. ALEX | TAMAYO. (3) Valuation. ii. . LEE ANNE Page 101 .Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance. 1. Date and place of filing returns CARVAJAL. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization. and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. Tax benefits of donations to accredited non-stock. MARA| MENDOZA. but only if at the time such amount is set aside. Non-stock. the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance.ALLOWABLE DEDUCTIONS i. upon recommendation of the Commissioner. upon recommendation of the Commissioner. JAI | YABUT. (4) Proof of Deductions.

if any. ● Expenses incurred by the adopting entity shall be allowed an additional deduction from the gross income equivalent to 50% of such expenses. MARA| MENDOZA. copy furnished the RDO having jurisdiction over the property. or TESDA. a. being the consignee or the importer thereof. if the contribution/ donation is in the form of real property. shall be entitled to the following tax incentives: (i) Deduction from the gross income of the amount of contribution/ donation that were actually. KIM APPLE |MARTINEZ. shall be filed with the Revenue District Office (RDO) having jurisdiction over the place of business of the donor/ adopting private entity. as the case may be. except in cases where the importation is exempt from VAT under Section 109 of the NIRC CARVAJAL. which enters into an agreement with a public school. such as official receipts or delivery receipt and other adequate records. subject to limitations. or CHED. together with the approved Agreement endorsed by the National Secretariat. preferably located in any of the 20 poorest provinces identified by the Presidential Council for Countryside Development or any other government agency tasked with identifying the poorest province. (b) That the taxpayer can substantiate the deduction with sufficient evidence. JAI | YABUT. Susbtantiation requirements Prohibited transactions Withdrawal of certificate of accreditation and revocation of certificate of registration Deductible contributions under special laws 1. Tax incentives to the adopting private entity A pre-qualified adopting private entity. Other tax consequences of assistance to the public school ● Foreign donation – the VAT and excise tax . on the importation of goods shall be assumed by the DepEd.ALLOWABLE DEDUCTIONS iii.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. LEE ANNE Page 102 . (ii) Exemption of the assistance made by the donor from payment of the donor’s tax pursuant to Sections 101(A)(2) and (B)(1) of the NIRC. Adopt-A-School program ● Allows private entities to assist a public school. plus an additional amount equivalent to 50% of such contribution/ donation subject to the following conditions: (a) That the deduction shall be availed of in the taxable year in which the expenses have been paid or incurred. (c) That the application. LAUREN| PARUNGO. directly and exclusively incurred for the Program. 1. b. conditions and rules set forth in Section 34(H) of the NIRC. Valuation of assistance other than money shall be based on the acquisition cost of the property. ALEX | TAMAYO.

(2) Amortization of Certain Research and Development Expenditures. whichever is lower ● Services – amount shall be based on the value of the services rendered as agreed upon by the donor and the service provider and the public school as fixed in the MOA. . LAUREN| PARUNGO. or the actual expenses incurred by the donor. – (1) In General. the following research and development expenditures may be treated as deferred expenses: a. MARA| MENDOZA. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. Not treated as expenses under PAR 1 hereof. business or profession b. LEE ANNE Page 103 . Valuation of assistance/contribution or donation ● Personal property – amount shall be based on the acquisition cost of the said assistance or contribution o If said property had already been used. the amount shall be based on the acquisition cost by the donor or the actual cost thereof at the time of the donation. ALEX | TAMAYO. upon recommendation of the Commissioner.ALLOWABLE DEDUCTIONS ● Local donation – the same shall be subject to VAT on the transfer of the said goods or properties under Section 106(B)(1) of the NIRC. whichever is lower ● Real property – amount shall be the fair market value of the property at the time of the contribution/ donation. and therefore.At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance. JAI | YABUT. whichever is lower (I) Research and Development. Paid or incurred by the taxpayer in connection with his trade. as determined pursuant to Section 6(E) of the NIRC or the book value/ depreciated value of the property. KIM APPLE |MARTINEZ. then such valuation shall take into consideration the depreciated value of the property o If the assistance is in the form of consumable goods. . the donee-public school shall be deemed as the final consumer/ end-user. business or profession as ordinary and necessary expenses which are not chargeable to capital account.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade. Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. CARVAJAL. and c. not entitled to any input VAT c.

LEE ANNE Page 104 . or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion. such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than 60 months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). LAUREN| PARUNGO. in which they are paid or incurred. Any expenditure paid or incurred for the purpose of ascertaining the existence. 1. but only if made not later than the time prescribed by law for filing the return for such taxable year. ALEX | TAMAYO. extent. (3) Limitations on Deduction.This Subsection shall not apply to: a.ALLOWABLE DEDUCTIONS In computing taxable income. the amount of an expenditure for research or experimental activities is reasonable if the amount would ordinarily be paid for like activities by like enterprises under like circumstances. a change to a different method is authorized with respect to a part or all of such expenditures. location. and b. a formula. . shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner. The method so elected. or CARVAJAL. Options of taxpayer The taxpayer may use one of the two following methods of accounting for R&D expenditures: (i) Deduct R&D expenditures in the tax year. The election provided by PAR (2) hereof may be made for any taxable year beginning after the effectivity of this Code. and the period selected by the taxpayer. a product. Any expenditure for the acquisition or improvement of land. a plant process. or quality of any deposit of ore or other mineral.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. or similar property. In general. Concept of Research and development Research and Development (R&D) – refers to expenditures incurred in connection with the taxpayer’s trade or business which represent research and development costs in the experimental or laboratory sense. and the improvement of already existing property of the type mentioned. generally including all such costs incident to the development of an experimental or pilot model. JAI | YABUT. an invention. MARA| MENDOZA. Reasonable amount The deductibility of research or experimental expenditure refers only to the extent that the amount of the expenditure is reasonable under the circumstances. including oil or gas. KIM APPLE |MARTINEZ.

Current-year deduction of R&D expenditures The cost of research and experimentation are generally capital expenses. The taxpayer must charge to a capital account any R&D expenditures that he does not or cannot deduct currently. However. ALEX | TAMAYO. 2. a. but only if such amount CARVAJAL. MARA| MENDOZA. 3. JAI | YABUT. (ii) Not treated as ordinary or necessary expenses. Amortization of R&D expenditures A taxpayer can amortize his R&D expenditures chargeable to a capital account. but only if made not later than the time prescribed by law for filing the return for such taxable year.ALLOWABLE DEDUCTIONS (ii) Amortize such expenditures over a period of not less than 60 months.An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year. and (iii) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. KIM APPLE |MARTINEZ. . allowed as a deduction under SUBSEC (A) (1) of this SEC a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions. or quality of any deposit of ore or other mineral. if he meets the following conditions: (i) Paid or incurred by the taxpayer in connection with his trade. Election to amortize The election to amortize research and development may be made for any taxable year beginning after 1998. extent. not defer and amortize. business or profession. The election to deduct these costs is binding for the year it is made and for all later years unless the taxpayer gets approval from the CIR to make a change. including oil or gas. or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion. (J) Pension Trusts. the taxpayer can elect to deduct these costs as a current ordinary and necessary business expense.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Limitation Deduction of R&D shall not apply to expenditure for: (i) acquisition or improvement of land. LAUREN| PARUNGO. 1. location. and (ii) ascertaining the existence. LEE ANNE Page 105 .

Kinds of private retirement benefit plans (i) Trusteed plan ● An employer’s past service contributions to its employees’ retirement pension plan are deductible only when such contributions are made or accrue to a trust (ii) Non-trusteed plan ● An insured plan established and maintained by an employer under a “Deposit Administration Contract” executed by and between the employer as the insured or policyholder and an insurance company as the insurer CARVAJAL. Payments to employee’s pension trusts An employer who adopts or has adopted a reasonable pension plan. and Is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made. in accordance with the pension plan (including any reasonable amendment thereof). shall be allowed as a deduction for the taxable year and for each of the nine succeeding taxable years.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. (i) Plan does not contemplate the payment to the trust. as follows: (i) Plan contemplates the payment to the trust. in advance of the time when pensions are granted. of amounts to provide for future pensions (a) Reasonable amounts paid to the trust during the taxable year representing the pension liability applicable to such year. shall be allowed as a deduction for the taxable years and for each of the nine succeeding taxable years. and maintains a pension trust for the payment of reasonable pensions to his employees shall be allowed to deduct from gross income reasonable amounts paid to such trust. shall be allowed as an ordinary and necessary business expense. MARA| MENDOZA. of amounts to provide for future payments (a) Reasonable amounts paid to the trust during the taxable year representing the present value of the expected future payments in respect of pensions granted to employees retired during the taxable year shall be allowed as a deduction for such year as an ordinary and necessary business expense. determined in accordance with the plan. and who establishes. and (b) One-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions granted to employees retired prior to the taxable year. and (b) One-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year.ALLOWABLE DEDUCTIONS · · Has not theretofore been allowed as a deduction. or so transferred or paid to place the trust on a sound financial basis. actuarially sound. LEE ANNE Page 106 . or has established. KIM APPLE |MARTINEZ. or so transferred or paid to place the trust on a sound financial basis. ALEX | TAMAYO. JAI | YABUT. LAUREN| PARUNGO. in advance of the time when pensions are granted.

further. an individual subject to tax under Section 24. That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided. shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this SEC 58 and 81 of this Code. upon recommendation of the Commissioner. An expense shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR whether the same is paid or payable. as may be required by the rules and regulations promulgated by the Secretary of Finance.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. the same cannot be considered as a valid deduction from his/its gross income. or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section. may elect a standard deduction in an amount not exceeding 10% of his gross income. (L) Optional Standard Deduction. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction. the said individual shall keep such records pertaining to his gross income during the taxable year. MARA| MENDOZA. In case of taxpayer’s failure to prove that he/it withheld income tax. income payments which were not subjected to the expanded withholding tax. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided.Any amount paid or payable which is otherwise deductible from.In lieu of the deductions allowed under the preceding Subsections. he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. KIM APPLE |MARTINEZ.ALLOWABLE DEDUCTIONS ● Employer is not entitled to a deduction for past service liability contribution made to an insured or non-trusteed plan (K) Additional Requirements for Deductibility of Certain Payments. . . LAUREN| PARUNGO. Optional Standard Deduction Concept CARVAJAL. ALEX | TAMAYO. That except when the Commissioner otherwise permits. other than a nonresident alien. JAI | YABUT. LEE ANNE Page 107 . Additional requirements for deductibility of certain payments Section 34(K) of the NIRC disallows as deductible expenses.

in lieu of itemizing deductible personal expenses. OSD is defined as a fixed amount that a taxpayer is allowed to deduct from his or her adjusted gross income.ALLOWABLE DEDUCTIONS Under the NIRC. MARA| MENDOZA. LAUREN| PARUNGO. taxpayers can choose to either take the Optional Standard Deduction (OSD) or to itemize deductions. KIM APPLE |MARTINEZ. JAI | YABUT. the taxpayer can usually benefit by itemizing.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. Whether to itemize deductions on the return depends on the circumstances of the taxpayer. when filing an income tax return. OSD is the better option. If the total amount actually spent on expenses is more than the standard deduction rate. LEE ANNE Page 108 . ALEX | TAMAYO. Persons covered Determination of amount of optional standard deduction for individuals Determination of amount of optional standard deduction for corporations Persons Covered Determination of the Amount of OSD (i) Individuals (a) Resident citizen (b) Non-resident citizen ● (c) Resident alien (d) Taxable estates and ● trusts Maximum of 40% of gross sales or gross receipts during the taxable year Individual is on the accrual basis of accounting for his income and deductions – OSD shall be based on the gross sales during the taxable year Individual employs the cash basis of accounting for his income and deductions – OSD shall be based on his gross receipts during the taxable year (ii) Corporations (a) Domestic corporation (b) Resident foreign corporation The OSD allowed shall be in an amount not exceeding 40% of their gross income CARVAJAL. Otherwise.

000.000.00 Gross Sales/ Gross Income Less: OSD (maximum) Php1. LAUREN| PARUNGO. his/its net taxable income shall be as follows: If Individual If Corporation Gross Sales Less: Cost of Goods Sold Php1. MARA| MENDOZA.000.00.000.000.00 40% OSD Amount Php 400.00 400.000.000.000.000.000.000.00 80.000. JAI | YABUT. The computation of the OSD for the individuals and corporations shall be determined as follows: If Individual If Corporation Gross Sales Less: Cost of Goods Sold Php1.00 Php 80.00 40% Php200.000.000.000.00 Php 120.00 800.00 with a cost of sales amounting to Php800.000.000.00 Php1. LEE ANNE Page 109 .000. whose accounting method is under the accrual basis.00 If the taxpayer opts to use the OSD in lieu of the itemized deduction allowed.000.00 Php1.00 Net Income Php 600.00 Basis of the OSD x OSD Rate (maximum) Php1.000. ALEX | TAMAYO.000.000.00 Determination of optional standard deduction for GPPs and partners of GPPs CARVAJAL.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.00 Php200. KIM APPLE |MARTINEZ.ALLOWABLE DEDUCTIONS Illustrative examples in determining the basis of 40% OSD for individuals and corporations Suppose a retailer of goods.000.00 800.000.000. has a gross sales of Php1.

he/it shall be considered as having availed himself of the itemized deduction. However. The net income determined by either claiming the itemized deduction or OSD from the GPP’s gross income is the distributable net income from which the share of each partner is to be determined. The following rules shall govern the claim of the partners of deductions from their share in the net income of the partnership: (a) If the GPP availed of the itemized deduction in computing its net income. Otherwise. the partners comprising it can no longer claim further deduction from their share in the said net income. business or practice of profession apart and distinct from his share in the net income of GPP. it shall be irrevocable for the taxable year for which the return is made. Section 26 likewise provides that – “For purposes of computing the distributive share of the partners. LAUREN| PARUNGO. including his family. . it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross income. However. Once election to avail of the OSD or itemized deduction is signified in the return. since the taxable income is in the hands of the partner. KIM APPLE |MARTINEZ. (c) Since one-layer of income tax is imposed on the income of the GPP and the individual partners where the law had placed the statutory incidence of the tax in the hands of the latter. in claiming itemized deductions. Other implications of OSD In electing to avail of the OSD. the partners shall be liable to pay income tax on their separate and individual capabilities for their respective distributive share in the net income of the GPP.ALLOWABLE DEDUCTIONS Pursuant to Section 26. a GPP may claim either the itemized deductions allowed under Section 34(A) to (J) or in lieu thereof. LEE ANNE Page 110 . the individual partner can still claim deductions incurred or paid by him that contributed to the earning of the income taxable to him. the net income of the GPP shall be computed in the same manner as a corporation.” As such. the partners may still claim itemized deductions from said share. (d) If the partner also derives other gross income from trade. the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income as explained in the foregoing rules. such intention shall be signified in the individual taxpayer or corporation’s return. the type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners.The amount of premiums not to exceed P2.2016 TAXATION 2 REVIEWER: TAX ON INCOME -. (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. JAI | YABUT. MARA| MENDOZA.400 per family or P200 a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself. a GPP is not subject to income tax. That said CARVAJAL. the partner is precluded from claiming the same expenses already claimed by the GPP. (b) If the GPP avails of OSD in computing its net income. shall be allowed as a deduction from his gross income: Provided. provided that. ALEX | TAMAYO. as a rule apart from the expenses claimed by the GPP in determining its net income.

further. Also. may prescribe by rules and regulations. are not deductible from gross income of the employee. LAUREN| PARUNGO. JAI | YABUT. educational. limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided. only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. after a public hearing shall have been held for this purpose. Health and/or Hospitalization Premium payments in health and/or hospitalization insurance during the taxable year by the taxpayer for himself. Certificate of Compensation Payment/ Tax Withheld for the current year or Certificate of Gross Income for the Current Year issued by the employer/s of the nuclear family. The Secretary of Finance.400. Person to claim The spouse CARVAJAL. KIM APPLE |MARTINEZ. for purposes of determining the aggregate family income. Individual taxpayers are allowed to amount of premiums not to exceed Php2.ALLOWABLE DEDUCTIONS family has a gross income of not more than P250. the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry. pension. are allowed as deduction from the gross income.2016 TAXATION 2 REVIEWER: TAX ON INCOME -.000 for the taxable year: Provided. That in the case of married taxpayers. and (2) effects of inflation on expenditure levels: Provided. including his family. Documentary requirements For purposes of substantiating the claim of insurance expense. the policy contract shall be presented to the employer together with the original official receipt of the premium payment. ALEX | TAMAYO. LEE ANNE Page 111 . That no ceilings shall further be imposed on items of expense already subject to ceilings under present law. etc. MARA| MENDOZA. Riders not allowed Life insurance premiums with health insurance rider from private insurance firms and other pre-need plans from private pre-need firms like memorial. 1. finally. That for purposes of determining such ceilings or limitations.00 a month paid during the taxable year for health and/or hospitalization insurance taken by himself including his family.00 per family or Php200. Notwithstanding the provision of the preceding Subsections. upon recommendation of the Commissioner.