Allowable Deductions

SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in this
Chapter, the value of the net estate shall be determined:

(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a

citizen or resident of the Philippines, by deducting from the value of the gross estate -

(1) Expenses, Losses, Indebtedness, and Taxes. - Such amounts -

(a) For actual funeral expenses or in an amount equal to five percent (5%) of
the gross estate, whichever is lower, but in no case to exceed Two hundred
thousand pesos (P200,000);

(b) For judicial expenses of the testamentary or intestate proceedings;

(c) For claims against the estate: Provided, That at the time the indebtedness
was incurred the debt instrument was duly notarized and, if the loan was
contracted within three (3) years before the death of the decedent, the
administrator or executor shall submit a statement showing the disposition of
the proceeds of the loan;

(d) For claims of the deceased against insolvent persons where the value of
decedent's interest therein is included in the value of the gross estate; and

(e) For unpaid mortgages upon, or any indebtedness in respect to, property
where the value of decedent's interest therein, undiminished by such
mortgage or indebtedness, is included in the value of the gross estate, but not
including any income tax upon income received after the death of the
decedent, or property taxes not accrued before his death, or any estate tax.
The deduction herein allowed in the case of claims against the estate, unpaid
mortgages or any indebtedness shall, when founded upon a promise or
agreement, be limited to the extent that they were contracted bona fide and
for an adequate and full consideration in money or money's worth.

In case unpaid mortgage payable is being claimed by the estate,

verification must be made as to who was the beneficiary of the loan
proceeds. If the loan is found to be merely an accommodation loan where
the loan proceeds went to another person, the value of the unpaid loan must
be included as a receivable of the estate. If there is a legal impediment to
recognize the same as receivable of the estate, said unpaid
obligation/mortgage payable shall not be allowed as a deduction from the
gross estate. In all instances, the mortgaged property, TO THE EXTENT

OF THE DECEDENT’S INTEREST THEREIN, should always form part of

the gross taxable estate
 Unpaid taxes
Taxes which have accrued as of the death of the decedent which were unpaid
as of the time of death. This deduction will not include income tax upon
income received after death, or property taxes not accrued before his death,
or the estate tax due from the transmission of his estate.

Payment of Tax

The income tax is payable at the time the return is filed. When the income
tax due exceeds PhP2,000, it may be paid in two equal installments: the
first, at the time the return is filed; and second, on or before the 15th day of
July following the close of the calendar year.

Penalties

In general, the non-filing of income tax returns and/or nonpayment of

income tax shall result in the following:

A. imposition of fine and/or imprisonment;

B. imposition of surcharge of

(1) 50% of the tax or deficiency tax, in case of willful neglect to file the
return within the period prescribed by the Code, or in case of false or
fraudulent return willfully made, to be added to the tax or deficiency61 tax;
and

(2) 25% of the amount due, to be imposed in any of the following cases:

(a) failure to file the income tax return and pay the tax due thereon on the
date prescribed by law; or

(b) filing a return with an internal revenue officer other than those with
whom the return is required to be filed; or

(c) failure to pay the deficiency tax within the time prescribed for its
payment; or

(d) failure to pay full or part of the amount of tax shown in the return
required to be filed, or full amount of tax due for which no return is required
to be filed, on or before the date prescribed for its payment.

C. Imposition of interest on any unpaid amount of tax at 20% annually or

such higher rate of interest as may be required.62
 (1) In case of a tax shown in the return as due but unpaid, the interest shall
be 20% a year from due date until paid.

(2) If the period for filing return is extended, there is also a 20% a year
interest to be paid from due date up to the date of payment.

 Losses. -

There shall be deducted losses incurred during the settlement of the estate
arising from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement, when such losses are not compensated for by
insurance or otherwise, and if at the time of the filing of the return such
losses have not been claimed as a deduction for income tax purposes in an
income tax return, and provided that such losses were incurred not later than
the last day for the payment of the estate tax as prescribed in Subsections
(A) and (B) of Section 91.

(1) In General. - 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, profession or business;

(b) Of property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement.

The Secretary of Finance, upon recommendation of the Commissioner, is

hereby authorized to promulgate rules and regulations prescribing, among
other things, the time and manner by which the taxpayer shall submit a
declaration of loss sustained from casualty or from robbery, theft or
embezzlemet during the taxable year: Provided, however, 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, theft or embezzlement giving rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the

time of the filing of the return, such loss has been claimed as a deduction for
estate tax purposes in the estate tax return.

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign

corporation, the losses deductible shall be those actually sustained during the
year incurred in business, trade or exercise of a profession conducted within the
Philippines, when such losses are not compensated for by insurance or other
forms of indemnity. The secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, 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,
theft or embezzlement giving rise to the loss; and

(3) Net Operating Loss Carry-Over. - The net operating loss of the business or
enterprise for any taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three (3) consecutive
taxable years immediately following the year of such loss: Provided, 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 under this
Subsection: Provided, further, 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 seventy-five percent (75%) in nominal value of outstanding
issued shares., if the business is in the name of a corporation, is held by or
on behalf of the same persons; or

(ii) Not less than seventy-five percent (75%) of the paid up capital of the
corporation, if the business is in the name of a corporation, is held by or on
behalf of the same persons.

For purposes of this subsection, the term 'net operating loss' shall mean the
excess of allowable deduction over gross income of the business in a taxable
year.

Provided, That for mines other than oil and gas wells, a net operating loss
without the benefit of incentives provided for under Executive Order No. 226, as
amended, otherwise known as the Omnibus Investments Code of 1987, incurred
in any of the first ten (10) years of operation may be carried over as a deduction
from taxable income for the next five (5) years immediately following the year of
such loss. The entire amount of the loss shall be carried over to the first of the
five (5) taxable years following the loss, and any portion of such loss which
exceeds the taxable income of such first year shall be deducted in like manner
form the taxable income of the next remaining four (4) years.

(4) Capital Losses. -

(a) Limitations. - Loss from sales or Exchanges of capital assets shall be

allowed only to the extent provided in Section 39.

(b) Securities Becoming Worthless. - If securities as defined in Section 22

(T) become worthless during the taxable year and are capital assets, the loss
resulting therefrom shall, for purposes of this Title, be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital
assets.
 (5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales'
of stock or securities as provided in Section 38.

(6) Wagering Losses. - Losses from wagering transactions shall be allowed only
to the extent of the gains from such transactions.

(7) Abandonment Losses. -

(a) In the event a contract area where petroleum operations are undertaken is
partially or wholly abandoned, all accumulated exploration and development
expenditures pertaining thereto shall be allowed as a deduction: Provided,
That accumulated expenditures incurred in that area prior to January 1, 1979
shall be allowed as a deduction only from any income derived from the same
contract area. In all cases, notices of abandonment shall be filed with the
Commissioner.

(b) In case a producing well is subsequently abandoned, the un-amortized

costs thereof, as well as the un-depreciated costs of equipment directly used
therein , shall be allowed as a deduction in the year such well, equipment or
facility is abandoned by the contractor: Provided, That if such abandoned
well is re-entered and production is resumed, or if such equipment or facility
is restored into service, the said costs shall be included as part of gross
income in the year of resumption or restoration and shall be amortized or
depreciated, as the case may be.

 Transfers for Public Use. - The amount of all the bequests, legacies, devises or
transfers to or for the use of the Government of the Republic of the Philippines,
or any political subdivision thereof, for exclusively public purposes.