TAXATION LAW

ALLOWABLE DEDUCTIONS FROM GROSS INCOME
DEDUCTIONS ² items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income CONCEPT AND NATURE The items or amounts allowed as deductions represent the expenses of the taxpayer, other than personal expenses and capital expenditures, in earning the income subject to tax as well as reasonable living expenses. The deductions partake of the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. Reason: Lifeblood Theory REQUISITES ALLOWED 1. BEFORE DEDUCTIONS [SREWWA] ARE

INSTANCES WHEN PRESENTATION OF WITHHOLDING TAX DISPENSED WITH An amount claimed as deduction on which a tax is supposed to have been withheld under NIRC shall be allowed if in the course of the audit and/or investigation, the examiner discovers that: a. No withholding of creditable or final tax was made but the payee reported the income and withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure to withhold the tax. No withholding of creditable or final tax was made and the recipient-payee failed to report the income on due date thereof, but the withholding agent pays during the original audit and investigation the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to his failure to withhold. The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation the difference in the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to such error.

b.

c. There must be a specific provision of law allowing the deductions, since deductions do not exist by implication. The requirements of deductibility must be met. There must be proof of entitlement to the deductions. The deductions must not have been waived (Sec. 76, Revenue Regulations No. 2) The withholding and payment of the tax required must be shown. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, 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 in accordance with this Section, Sections 58 and 81 of this Code (Sec. 34 [k]).

2. 3. 4. 5. 6.

TAXPAYER HAS BURDEN OF PROVING ENTITLEMENT  Consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the State. DEDUCTIONS Amounts deducted from gross income to arrive at net income EXCLUSIONS Amounts or items exempt from tax by virtue of the Tax Code or special law PERSONAL EXEMPTIONS Only individual is entitled Immunity or privilege, a freedom from a charge or burden to which others are subjected Generally receipts which are excluded from taxable income

DEDUCTIONS Both individual and corporate taxpayers may claim A deduction is a subtraction

THE COHAN RULE PRINCIPLE: If there is showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowed in computing the taxpayer·s taxable income bearing heavily against the taxpayer whose inexactitude of his own making. A disallowance of 50% of the taxpayer·s claimed deduction is valid (Rev. Memo Circular No. 23-2000).

Not receipts but are generally expenditures which are permitted to be subtracted from income to determine

1

Individuals 1. and Personal and additional exemptions and in the case of NRAs only subject to reciprocity Deductions allowed similar to individuals except with respect to the exemption allowed which is not categorized as personal and additional exemptions. On compensation of NRCs and RAs derived from sources within the Phil. WHO CANNOT AVAIL OF DEDUCTIONS FROM GROSS INCOME 1. Estates or trusts 3.  Premium payments on health and/or hospital insurance (if requisites are complied with)  Personal and additional exemption Corporations  Itemized deductions Estates and Trusts  Section 62 of the NIRC RCs. Proprietary educational institutions and hospitals 4. Individuals with gross income from employeeemployer relationship ONLY [gross income only] 2.  Optional Standard deduction OR itemized deductions  OSD ² 10% of the gross income. NRANETB in the Phil 3. family and living expenses of an individual SUMMARY OF DEDUCTIONS ALLOWED DIFFERENT KINDS OF TAXPAYERS On compensation income of RCs. 4. NRCs and NRAs engaged in trade. This is in lieu of the itemized deductions.TAXATION LAW the amount subject to tax Reductions of wealth which help earn the income subject to tax Theoretical personal. NRFC ALLOWABLE DEDUCTIONS FROM GROSS INCOME BASED ON CLASSES OF TAXPAYER 1. NRA doing business in the Philippines 4. Domestic Corp. Citizens and RAs whose income is purely compensation income (except for premium payments on health and/or hospitalization insurance) 2. Member of GPP Corporations 1.000 Itemized deductions only Itemized deductions only 2 . on incomes (other than compensation income) derived from sources within and without the Phil. derived from sources within or without the Phil. and Personal and additional exemptions II. and Personal and additional exemptions Itemized deductions. Domestic corporations on their income derived from sources within or without the Phil RFCs on their income derived from sources within the Phil. GOCCs Deductions for premium payments on health and/or hospitalization insurance Personal and additional exemptions Deductions for premium payments on health and/or hospitalization insurance Personal and additional exemptions OSD or Itemized deductions. Individuals with gross income from business or practice of profession. May be availed only by individuals (except NRAs) who are not purely compensation income earners. Citizen 2. Resident alien 3. TO WHO MAY AVAIL OF DEDUCTIONS I. subject to the scheduler tax on income RAs from their income (other than compensation income) derived from sources within the Phil. business or profession in the Phil from their income derived from sources within the Phil. but referred to only as exemption in the amount of P20. 2. OSD or Itemized deductions. 3. RF Corp.

professional or business relationship of expense. if not contradicted by the government. such as official receipts or other adequate records by showing: a. Depreciation g. Taxes d. Research and development expenditure j. Business expenses b. operation and/or conduct of the trade. SUBSTANTIATION RULE [Sec. 34 (A)]  All ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development.  Intended to realize a profit or to minimize a loss 2. Those allowed to insurance companies (Sec. 61) c. BUSINESS EXPENSES [SEC. the taxpayer shall substantiate the expense being deducted with sufficient evidence. 34 (l)] Personal and additional exemptions [Sec. Certain capital losses but only from capital gains (Sec. management. amount of expense. 3. need not be recurring  Capital expenditure ² incurred to improve assets and benefits for more than one taxable year NECESSARY EXPENSES ² expenses which are appropriate and helpful in the development of the taxpayer·s business. place and prevailing circumstances No deductions allowed as they are taxed on gross income DEDUCTIONS ALLOWED UNDER THE NIRC 1. 34 (1B)] Before business or professional expenses are allowed as deductions from gross income. 2. 38) d. hence no deductions or exemptions allowed  Depends upon particular facts: type of business. time. Losses from wash sales of stocks or securities (Sec. The amount of the expense being deducted. The expense must be ordinary and necessary 3 . must support each claimed business or professional expense 3. Interest c. 4. purpose of expense. 37) b. Charitable and other contributions i. 39) ORDINARY EXPENSES ² expenses which are common to incur in the trade or business of the taxpayer as distinguished from capital expenditures  Usually incurred during taxable year and benefits such taxable year. business or profession of the taxpayer Requisites For Deductibility [OISRPNP] 1. operation and/or conduct of the trade. 34 (a) to (k)] a. Bad debts f. A. b.TAXATION LAW NRA-NETB in the Phil from their income derived from sources within the Phil. is sufficient  Receipts/adequate records. and The direct connection or relation of the expense being deducted to the development. intention of the taxpayer. (whether compensation or other income) NRFCs on their income derived from sources within the Phil Subject to tax on their gross income. business or exercise of a profession. Depletion h. the oral testimony of a CPA. Pension trust contribution Optional Standard Deduction [Sec. The expenses must be incurred in trade or business carried on by the taxpayer The expenses must be substantiated by proof  Establish proximate relation (logical link or nexus) between the expense and the taxpayer·s business  Receipts are the best proof  Even if no records/receipts are available. 35] Extraordinary deductions a. Losses e. Deductions allowed to estates and trusts availing of itemized deductions of income currently distributed to beneficiaries (Sec. management. date and place of expense. Itemized Deductions [Sec.

vacationleave pay. Factors/tests which determine whether compensation paid for services rendered is deductible or not a. or could reasonably be expected to have known. Salaries. whether paid b. 6. Cash Basis Method ² deducts expenses in the year in which they are paid 5. at the closing of its books for the taxable year. salaries. d. wages and other forms of compensation for personal services actually rendered. retirement pay Management expenses Premiums and compensation for injuries if not compensated for by insurance or otherwise Contribution to pension trust created for the benefit of the employees. Expenses must not be against public policy. including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee d. g. e. including contribution under SSS Act Other forms of compensation for services actually rendered f. What are included in compensation for services which are allowed as deductions from gross income? a. The expenses must be reasonable Paid or incurred during the taxable year 5. 5. All-events test requires the liability be fixed. e.TAXATION LAW 4. Accrual Basis Method ² deducts expenses when the taxpayer becomes liable for them. KINDS OF BUSINESS EXPENSES ² A reasonable allowance for: [STR_EAR] 1. To hold otherwise would lead to tax evasion. c. Suggested Tests: (Consider the date when the contract for services was made. whether or not they are paid in the same year  The propriety of an accrual must be judged by the facts that a taxpayer knew. proof of payment to BIR must be shown  Professional expenses ² 10%  Rent expense ² 10% c. etc. public moral or law If subject to withholding tax. Any amount paid in the form of compensation which does not partake of the purchase price of services is not deductible  Bonuses are deductible under the following conditions:  Paid in good faith as additional compensation for services rendered  Reasonable amount. Bonuses in good faith Commissions.1. Wages. b. 7. professional fees. not at the date when the contract is questioned)  Good faith  Character of business  Salary policy of the corporation  Type and extent of services  Employee·s qualification and contribution  General economic conditions If no services rendered.2. 4 . and the amount of such liability be determined with reasonable accuracy (something less than an exact or complete accurate amount).  Not to exceed reasonable compensation when added to stipulated salaries. not deductible as reasonable and necessary expenses It is immaterial whether bonuses are paid in cash or in kind or partly in cash and partly in kind Other forms of compensation:  Housing and meals  Courtesy discounts  Entertainment and gifts to company officers during Christmas and major anniversary. 2. sports tournament and company picnics  Legitimate expenses (salaries and miscellaneous expenses) of an illegitimate business are deductible based on the theory that the income tax is not a tax on gross income even if such income is earned from an illegal business Travel expenses   Include transportation expenses and meals and lodging The excess over the cost of a business plane ticket or its equivalent.

Rentals and/or other payments   Business property ² at least P500 ² 5% Non-business/residential property ² least P10. advertising expertise must be subjected to withholding tax Cost of material and supplies Deductible only to the amount consumed or used in operation EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL INSTITUTIONS ² A PIS. or sporting club or organization per officer. contest prizes or similar material must be properly receipted All payments for services such as radio and TV time. Actual consumption method (inventory method) b. c. Repairs  Rules on deductibility a. 34 (F)  b. Extraordinary repairs ² not deductible ² they are capital expenditures 4. or similar entity 4. 27(B). Any excess shall not be deductible to the employer even if substantiated Note: Maybe taxable as a fringe benefit under Sec. 2. Direct purchase method 5 . athletic. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities. AUS. 34 (A) (1c)] at Any payment made. or To deduct allowance for depreciation thereof under Sec. 33   Taxpayer purchases materials but has no record of consumption ² deductible provided the net income is clearly reflected by this method. to ² a. Official/employee of the national govt Official/employee of the LGU Official/employee of a GOCC Official/employee/representative of a foreign govt Private corporation. d. ME and Japan. referred to under Sec. may at its option elect either: a. Europe. INTEREST [SEC. KICKBACKS AND PAYMENTS [Sec. 34 (B)] Amount which one has contracted to pay for the use of borrowed money or amount of compensation paid for the use of money or forbearance from such use.   Advertising and promotional expenses Must be substantiated All payments for the purchase of promotional give-aways. Incidental or ordinary repairs ² keeps the asset in its ordinary working condition (does not add material value to the property or prolong its life as distinguished from extra-ordinary repairs) b.  actually B.000 ² 5% BRIBES.00 per day for trips to the US. Methods utilized to determine materials used: a.00 for other places. e. Entertainment.TAXATION LAW directly by the employer to the airline company or reimbursed to the employee shall not be deductible by the employer from its taxable income Allowances which are pre-computed by the employer on a daily basis. 33 Must be supported by official receipts OTHER SIMILAR   3. 3. print ads. shall not be considered taxable compensation to the employee. amusement and expenses during the taxable year   recreation Subject to the rule of substantiation Dues paid to social.   Representation expenses Note: Maybe taxable as a fringe benefit under Sec. GPP. b. or reimbursement for cost of meals and lodging enroute to one·s foreign destination in pursuit of employer·s trade or business and during the duration of the stay thereat To the extent that they do not exceed US$150. to professional or business organization OTHER BUSINESS EXPENSES 1. and US$100. Canada. directly or indirectly.

That such interest shall be allowed as a deduction in the year the indebtedness is paid: Provided. Grantor and fiduciary (trustee) of any trust 2. 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 Theoretical interest ² not deductible as it is merely computed or calculated. Individual and corporation ² individual owns directly or indirectly more than 50% of the outstanding stock 6 . 36 A (2) and (3) to the contrary notwithstanding. 4. spouse. Incurred in connection with taxpayer·s trade or business Indebtedness must be that of the taxpayer The interest must have been stipulated in writing in consonance with Art. 36(B) Interest between related taxpayers: 2. further. There must be an indebtedness 2.1. Interest on taxes. Interest on preferred stock which is considered interest on capital 2.4. the provisions of Sec. Interest on capital for cost keeping 4.TAXATION LAW Requisites For Deductibility [IITSP] 1. Reason: Taxes for this purpose are indebtedness. Capital Expenditure ² for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure Arbitrage rule on deductible interest The percentage by which the taxpayer·s otherwise allowable deduction for interest expense shall be reduced to 33%. 1956 NCC which provides that no interest shall be due unless it has been expressly stipulated in writing Paid or accrued within the taxable year  Cash basis ² deductible in the year it is actually paid  Accrual basis ² deductible in the year it is accrued even if not actually paid 5. If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. Exceptions: 1. 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. Fiduciary and beneficiary or such trust 3. Between corporations ² more than 50% of the outstanding stock both owned directly or indirectly by the same individual 2. Optional treatment of interest expense on capital expenditure ² At the option of the taxpayer. penalties and surcharges on taxes are NOT deductible 2. ancestors and lineal descendants 2. Fines. It does not arise from interest bearing obligation. That if the indebtedness is payable in periodic amortizations. interest expense on a capital expenditure incurred to acquire property used in TBEP may be allowed as: 1.5. Interest on deposits paid by authorized bank of the Central Bank 4.3. Interest paid by corporation on scrip dividends 3. Members of a family ² brothers and sisters (full or half). Interest paid by legal or equitable owner on mortgage of real property Non-deductible Interest Expenses 1. Deduction ² in full in the year when incurred. or treated as a 2. Interest on undrawn salaries and bonuses 3. 3. Interest paid where parties provide no stipulation to pay interest in writing What are included in the term ¶indebtedness· interest of which is deductible?  Gifts when proven to be bonafide loans  Taxes  Obligations of joint obligor  Discount on notes issued to bank for loan 2.2. If the indebtedness is incurred to finance petroleum exploration Deductible Interest Expenses 1.  2.

TAXATION LAW C.  c. 3. TAXES [SEC. Requisites For Deductibility 1. in the case of contingent tax liability. or 2. Limitations on Credit [Sec. it is no longer deductible from gross income. the tax imposed by this Title shall be credited with: a. and excess profit taxes) 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 Par. 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. paid or accrued to a foreign country  Only domestic corporations are entitled to avail of the tax credit When may deduction for taxes be claimed? Year paid or incurred in general. However. the deductions for taxes provided in Sec. if his distributive share of the income of such partnership or trust is reported for taxation under this Title  An alien and a FC shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph a. Tax credit against the Phil income tax  If claimed as tax credit. 34-C (1) shall be allowed only if and to the extent 7 . TAX CREDIT ² amount allowed by law to reduce the Phil income tax due on account of income. b. 34-C (3)] If the taxpayer signifies in his return his desire to have the benefits of this paragraph. (Deductible only by the person upon whom the tax is imposed by law [VAT is deductible only by seller] shall be allowed as deduction Exception: Credit Against Tax for Taxes of Foreign Countries [Sec. barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering (Sec. f. the allowable tax credit is subject to the ff limitations: a. (2) surcharges. no deductions are allowed for amounts representing: (1) interest. which the taxpayer·s taxable income from sources within Limitations on the Deduction of Taxes from Gross Income [Sec. Income tax provided for under this Title Income taxes imposed by authority of any foreign country (income. the obligation to deduct arises only when the liability is finally determined. and Partnerships and Estates ² the individuals proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable year to a foreign country. excess profit tax. 127-D) b. whether national or local that they are connected with income from sources within the Phil. Foreign income taxes paid as deduction from gross income. in connection with the taxpayer·s PTB. 34-C (2)] In the case of a NRAETB in the Philippines and RFC. war profit. therefore. d. Taxes paid or incurred within the taxable year 2. 34-C (4)] If claimed as tax credit. and (3) fines or penalties incident to delinquency Scope: All taxes. 3 of this Subsection Estate and donor·s taxes Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessment tax) Taxes paid for commodity not connected with the taxpayer·s business: Taxes on sale. Citizen and Domestic Corporation ² the amount of income taxes paid or incurred during the taxable year to any foreign country. 34 (C)] Means taxes proper and. warprofit tax. e.  Discount granted to senior citizens shall be allowed as tax deduction from gross income for the same taxable year that the discount is granted Reason/Purpose: To lessen the harshness of taxation in cases where an income is subject to both foreign tax and Philippine income tax  The taxpayer has the option either to claim: 1.

LOSSES [SEC. 34 (D)] Implies an unintentional parting with something of value. when such losses are not compensated for by insurance or other forms of indemnity Treatment of losses depends upon: a. depreciation. 2. storms. etc.if at the time of the filling of the return. Income tax Reduces the taxpayer·s liability Sources: Foreign income. If incurred in TPB Of property connected with the TPB. 2. The loss claimed as deduction must be that of a taxpayer  Losses sustained in the tax-exempt operation cannot be deducted from income of the taxable industry  Loss sustained in one line of business cannot be claimed as a deduction or be offset from the income of its other line of businesses  If credit is sought for taxes already paid. 34-C (7)] The taxpayer shall establish to the satisfaction of the Commissioner the ff: 1. receipt for payment must be attached Proof of Credits [Sec. D. carefully filled up and contained information required Embezzlement ² fraudulent appropriation of another·s property by a person to whom it has been entrusted or into whose hands it has lawfully come LOSS NOT ALLOWED AS DEDUCTION . such loss has been claimed as a deduction for estate tax purposes in the estate tax return PROOF OF LOSS ² In the case of NRA or FC. shipwreck. Taxpayer must signify in his income tax return his desire to claim tax credit. and The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken. signed and sworn. inventory losses. Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: 1. of Finance. and All other information necessary for the verification and computation of such credits 3. Used in income tax law to comprehend all 8 . Return must be accompanied by the appropriate form prescribed by the BIR Commissioner. or unusual nature Theft ² criminal appropriation property to the use of the taker of another·s Administrative conditions for allowance of credit for foreign taxes: 1. TAX CREDIT Deductible from Phil. theft or embezzlement b. or other casualties. Class of taxpayers b. excise tax. the tax paid or incurred to which is claimed as a credit under said paragraph. percentage tax and other business ² connected taxes Casualty ² complete or partial destruction of property resulting from an identifiable even of a sudden unexpected. TAX DEDUCTION Deductible from GI Reduces taxable income Sources: Deductible taxes such as business tax. the losses deductible shall be those actually sustained during the year incurred in BTEP conducted within the Phil. war-profits and excess profit tax losses which are not general or natural to the ordinary courses of business and are not covered under some other heading as bad debts.TAXATION LAW such country bears to his entire taxable income for the same taxable year. or from robbery. Nature of losses Requisites For Deductibility 1. such amount to be determined under rules and regulations prescribed by the Sec. if the loss arises from fires. Total amount of income derived from sources without the Phil Amount of income derived from each country. 2. which the taxpayer·s taxable income from sources without the Phil bears to his entire taxable income for the same taxable year.

If the well is reentered and production resumed. torts or crime KINDS OF LOSSES: a. condition or value of the property after it was repaired. notices of abandonment shall be filed with the BIR. Ordinary business losses ² incurred in trade or b. quasi-contract.Losses from sale or exchange of capital assets  Losses resulting from securities becoming worthless during the taxable year and which are capital assets Losses from short sale of property Losses due to failure to exercise privilege or option to buy or sell property ABANDONMENT LOSSES [Sec. shipwreck. or other casualties or from robbery. The loss must have been sustained during the taxable year Loss evidenced by a closed and completed transaction e. if the loss arises from fire. Those incurred in any transaction entered for profit though not connected with the TB Casualty losses ² incurred by property connected with the TB.  Provided. SPECIAL KINDS OF LOSSES: a. under the surrounding facts and circumstances. such as the actual nature and occurrence of the event and the amount of the loss  Casualty loss ² documentary proof of costs. being presumably equal to the purchase price of the land and building plus the cost of removing the useless building Requisites for Deductibility 1. 34-D (6)] ² deductible only to the extent of the gains or winning from such transactions Losses due to voluntary removal of building incident to renewal or replacement  Deductibility of losses sustained if building. In all cases. the cost to build another building and the cost of removal of the old building is not deductible  Value of the real estate. as the case may be 2. exclusive of old improvements. 3. Filed through the nearest RDO within 45 days after the date of the occurrence 3. Loss not otherwise compensated by insurance or g. and the demotion or scrapping thereof is made incident to removals or replacements When a taxpayer buys a real estate upon which a building is built. namely: law. WAGERING LOSSES [Sec. restored or replaced  Robbery. the basis of an immediate recoupment is not present 4. contract. 39)  Limitation . CAPITAL LOSSES [Sec. photograph showing extent of damage. Proof of the elements of the loss claimed. Police report is necessary although not conclusive proof of the loss arising therefrom. 34-D (4)] ² deductible only to the extent of capital gains (Sec. Otherwise ² compensation due under a title analogous or similar to insurance inasmuch as the latter is a contract establishing a legal obligation. 34-D (7)]  All accumulated exploration and development expenditures pertaining to partially or fully abandoned petroleum operations shall be allowed as deduction.  Subsequently abandoned producing well ² the unamortized costs and undepreciated costs of equipment directly used shall be allowed as deduction. theft or embezzlement losses ² amount of loss. theft or embezzlement c. f.TAXATION LAW  Taxpayer cannot offset its net loss from farming against its manufacturing income d. Closed and completed transaction ² loss is fixed by an identifiable event occurring in the taxable year in which.  9 . machinery or equipment is old. Sworn declaration of loss must be filed with the BIR 2. or if such equipment or facility is restored into service ² the costs shall be included as part of the gross income and shall be amortized or depreciated. storm. b.

however 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 NOLCO WHEN ALLOWED ² Only if there has been no substantial change in the ownership of the business or enterprise in that ²  Not less than 75% in nominal value of outstanding issued shares. Losses of useful value of capital asset due to changes in business condition  When the taxpayer discontinues the business or discards such assets permanently from use in such business. 38]   Taxpayer must have bought or sold stocks or securities Substantially identical stock or securities are acquired within a period beginning 30 days before the date of sale and ending 30 days after such date There must have been sale or disposition of stocks or securities a. LOSSES FROM WASH SALES OF STOCK OR SECURITIES (61-day sale) [Sec. Losses in dealings between related taxpayers (except in case of distribution in liquidation) 2. 34-D (5) in re: Sec.TAXATION LAW  If the removal of the building was required by the authorities because the building was a fire hazard. Loss due to removal of building if purchased (not existing and not incident to renewal) NET OPERATING LOSS ² excess of allowable deduction over gross income ob the business in a taxable year NET OPERATING LOSS CARRY-OVER AS A DEDUCTION FROM GROSS INCOME   Applies to individual and corporate Taxpayer is not exempt from income tax   NON-DEDUCTIBLE LOSSES 1. he may claim as deduction the actual loss sustained  To determine amount of loss. 3. is held by or on behalf of the same persons   10 . Hence. For the next 3 consecutive taxable years immediately following the year of such loss f. Shall be carried over as a deduction from gross income e. c. adjustment must be made for improvements. The net operating loss of the business or enterprise b. is held by or on behalf of the same persons. It also applies to acquisition through a taxable exchange and the making of an option contract The seller is not dealer in securities  c. if the business is in the name of a corporation. depreciation and salvage value of the property (exception to the rule requiring a sale or other disposition of property in order to establish a loss) Proof required to establish loss of useful value (Unforeseen causes):  Increase in the cost or change in the manufacture of any product  New legislation directly makes the continued profitable use of the property impossible Non-deductible loss due to loss of useful value:  Useful life of property terminates solely as a result of those gradual processes for which depreciation is authorized  Inventories Reason for non-deductibility of loss from wash sale:  Prevent deduction of losses on sales of stock or securities that were replaced by substantially identical stocks or securities  Loss is added to the cost of the subsequently acquired securities/stock. the value of the building and the cost of its removal will be deductible as losses  Not limited to situations where the replacement is acquired by purchase. Provided. For any taxable year immediately preceding the current taxable year. a mere artificial loss. Which had not been previously offset as deduction from gross income d. if the business is in the name of the corporation. or Not less than 75% of the paid up capital of the corporation.

That for mines other than oil and gas wells. BAD DEBTS [SEC. CHARITABLE AND OTHER CONTRIBUTIONS [SEC. and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining 4 years E. 36(B) Requisites For Deductibility 1. DEPRECIATION [SEC. DEPLETION OF OIL AND GAS WELLS AND MINES [SEC. a net operating loss without the benefit of incentives incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the next 5 taxable years following the loss.TAXATION LAW  Provided. Existence of a valid debt and subsisting debt (legal and factual) F. 34 (H)] 11 . 34 (F)] G. 34 (G)] H. 34 (E)] Debts due to the taxpayer which are actually ascertained to be worthless and charged off within the taxable year except those not connected with PTB and those sustained in a transaction entered into between parties mentioned under Sec.

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