DEDUCTION FROM GROSS INCOME

Q: Define Deductions

Answer: Deductions are item or amounts authorized by law to be subtracted from the pertinent items of gross income
to arrive at taxable income (NIRC, Sec. 34).

Q: What are the general rules to be observed regarding deductions?

Answer:

1. Matching Concept for Deductibility

- Deductions must match the income; deductions, must be paid or incurred in connections with the taxpayer’s
trade, business or profession (2 DOMONDON, Taxation, supra at 522).

2. Substantiation Rule

- Deductions must be supported by adequate receipts or invoices. The taxpayer has the burden of proving
entitlement to a claimed deductions of refund (Paper Industries Corp. of the PHL v Court of Appeals, G.R. Nos.
106949-50, December 1, 1995

3. Subject to limitation

- The taxpayer is mandated to deduct amounts only within the limits allowed by law. He could choose to avail
only of a lesser amount or even non at all (Commissioner of Internal Revenue v. Phoenix Assurance CO., Ltd.,
G.R. No. L-19727, May 20, 1965).

4. Additional requirement relating to withholding

- 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, shall be allowed as deduction only if it shown
that the tax required to be deducted and withheld therefrom has been paid to the BIR (NIRC, Sec. 34, par. (K) R.R
No.12-2013; R.M.C No. 63-2013).

CONCEPT AS RETURN OF CAPITAL

Q: Discuss the concept of return of capital (cost of sales or services) in relation to deductions.

Answer: Income tax is levied by law only on income, which may be gross income or net income; hence, the
amount representing return of capital should be deducted from the proceeds from sales of assets and should
not be subject to income tax (R.R. No. 02-40, Sec. 65)

ITEMIZED DEDUCTION VS OPTIONAL STANDARD DEDUCTIONS

Q: Distinguish Itemized Deductions from Optional Standard Deduction.

 The following are the itemized deductions under the NIRC:

1. Ordinary and necessary trade, business, or professional expenses;
2. Interest;
3. Taxes
4. Losses;
5. Bad Debts;
6. Depreciation,
7 Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Research and development;
10. Pension trust (NIRC, as amended by TRAIN LAW, Sec. 34)

Q: In Absence of an Express selection, is a taxpayer considered to have availed of itemized deduction?

Answer: Yes. These taxpayers shall be considered as having availed of the itemized deduction, unless they signify
in their income tax return the intention to elect the OSD. Such elections of the option, when made in the return,
shall be irrevocable for the taxable year for which the return is made (R.R. No. 8-2018, Sec. 8). However,
taxpayers earning purely compensation income arising from personal services rendered under an employer-
employee relationship cannot avail of this itemized deduction (NIRC, as amended by TRAIN Law. Sec. 34).

EXPENSES

Q: What are the requisites for deductibility of expenses in general?

Answer: The requisites for deductibility of expenses are: ( D-STROWN)
1. It must be paid or incurred During the taxable year;
2. It must be Substantiated with adequate proof showing;
3. It must be paid or incurred in connection with the conduct of Trade or business or the exercise of
profession by the taxpayer, or attributable to the development, management or operation of the trade;
business, or profession;
4. It must be Reasonable (not lavish, extravagant or excessive under the circumstances);
5. It must be both Ordinary and necessary
6. If subject to Withholding taxes, the taxes have been properly withheld and remitted to the BIR; and
7. It must Not be contrary to law, public policy or morals (NIRC, as amended by TRAIN Law Sec. 34)

Q: Are expenses which constitute bribe, kickback and other similar payment deductible from gross income?
Answer: No
Deductions from gross income shall be allowed for any payment made, directly or indirectly, to an official or
employee of any local government unit, or to an official or employee of a GOCC, or to an official or employee or
representative of a foreign government, or to a private corporation, GPP, or a similar entity if the payment
constitutes a bribe or kickback. While illegal income will form part of gross income of taxpayer (within the
concept of “income from whatever source”), expenses which constitute bribe, kickback and other similar
payment being against law and public policy are not deductible from gross income.

Q: Are Payments made in exchange for the revelation of a competitor’s trade secrets deductible?
Answer: Payments made in exchange for the revelation of a competitor’s trade secrets is considered as an
expense which is against law, morals, good customs or public policy which is not deductible (3M Philippines, Inc.
v. CIR, September 26, 1988)

Q: Are Payments made in exchange for the revelation of a competitor’s trade secrets deductible?

An ordinary expense is that is normal or usual in relation to the taxpayer’s business and the surrounding
circumstances. In order to be deductible as a business expense, three conditions must concur [Business test]: (1)
the expense must be ordinary and necessary; (2)it must be paid or incurred within the taxable year; and (3) it
 must be paid or incurred in carrying on a trade or business. Additionally, the taxpayer must substantially prove
by evidence or records the deductions claimed under the law (Atlas Consolidated Mining & Devt. Corp. v.
Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 2981

Q: What is a necessary expense?

 It is one which is appropriate and helpful in the development of the taxpayer’s business and is intended to
minimize losses or to increase profits (General Electric [P.I.] Inc. v. Collector of Internal Revenue, CTA Case No.
1117, July 14, 1963).

Q: What are the distinction between an ordinary

Q:Is media advertising expenses paid and incurred constitute ordinary and necessary expenses fully deductible
under the NIRC?

 Advertising is generally of two kinds namely:

1. Advertising to stimulate the current sale of merchandise or use of services; and
2. Advertising designed to stimulate future sale of merchandise or use of services.

Q: What is the Cohan Principle?

Under this 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 in exactitude is
of his own making ( Cohan v. Commissioner of Internal Revenue, 39 F. 2d 540 (2d Cir. 1930 [as cited in Pilmicu-Mauri
Foods Corp., v Commissioner of Internal Revenue, C.T.A. EB No. 97, August 29, 2006]).

Q: In general, what are the ordinary and necessary expenses deductible from gross income incurred in the conduct of
trade, business or profession?

 Sec. 34 (A)(1) of the NIRC provides the following ordinary and necessary Trade, Business or Professional
Expenses:
1. Salaries, wages and other forms of compensation for personal services actually rendered including Grossed-up
monetary value (GMV) of fringe benefit;
 2. Travel or transportation expenses (here and abroad);
3. Rentals and/or other payments for the continued use or possession of property;
4. Entertainment, amusement and recreation expenses.

SALARIES, WAGES AND OTHER FORMS OF COMPENSATION FOR PERSONAL SERVICES ACTUALLY RENDERED
Q: What does compensation for personal services rendered include?
 It Includes:
1. Salaries, wages, commissions, professional fees, vacation-leave pay, retirement pay, and other
compensation.
2. Bonuses in good faith;
3. Pension and compensation for Injuries, if not compensated for by insurance or otherwise; and
4. GMV of fringe benefit provided for as long as the final tax imposed has been paid.
Q: What are the general requisites for deductibility of compensation for personal services actually rendered?
 The Requisites are the following (OPT-SPR)
1. The expense must be both Ordinary and necessary;
2. The salaries must be Paid or incurred within the taxable year;
3. The salaries must be incurred in carrying on Trade or business;
4. The expense must in fact be Salaries or other compensation;
5. The salaries must be for Personal services actually rendered; and
6. The salaries must be Reasonable in amount (MAMALATEO, Income Tax, supra at 187).

TRAVEL/TRANSPORTATION EXPENSES
Q: What are the requisites for deductibility of travel or transportation expenses?
 The requisites are the following:
1. It must be paid or incurred while away from home;
2. It was made in the pursuit

Q: What are the general requisites for deductibility of compensation for personal services actually rendered?
 The requisites are the following:
1. It must be paid or incurred while away from home;
2. It was made in the pursuit of trade or business; and
3. It must be reasonable and necessary (NIRC, Sec. 34(A)(1)(a)(ii)).

Q: What are travelling expenses?

 Traveling expenses as ordinarily understood, include transportation expenses and meals and lodging. If the trip
is undertaken for other than business purposes, the transportation expenses are personal expenses, and the
means and lodging are living expenses, and therefore, not deductible( R.R. No. 02-40, Sec. 66).

RENTALS AND/OR OTHER PAYMENTS FOR USE OR POSSESION OF PROPERTY

Q: What are the requisites for deductibility of rental expenses?
 The requisites are the following: (CUTTT)
1. It must be made as a condition to the Continued Use or Possession of property;
2. Taxpayer has not taken or is not taking Title to the property or has no equity other than that of a lessee
use or possessor;
3. Property must be used in Trade or business; and
4. Subjected to withholding Tax of 5% (R.R. No. 02-98, Secs. 2.57.2(B) and (C)).
Q: What is the composition of rental expenses?

 It includes that following:

1. Aliquot part of the amount used to acquire leasehold over the number of years the lease will run;
2. Taxes and other obligations of the lessor paid by the lessee; and
3. Annual depreciation of the cost of leasehold improvements introduced by the lessee over the remaining
term of the lease, OR over the life of the improvements whichever period shorter (R.R. No. 02-40 Sec.
74).

Repairs and Maintenance

Q: Discuss the deductibility of repairs expenses.
 This cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong
its life, but keep it in an ordinarily efficient operating condition, may be deducted as expenses, provided the
plant or property account is not increased by the amount of such expenditure (R.R. No. 02-40, Sec. 68).

Expenses under Lease Agreement

Q: What are the allowable deductions by a lessor?
 Since the rentals are considered as income of the lessor, such lessor may deduct all ordinary and necessary
expenses paid or incurred during the taxable year which are attributable to the earning of the income. It
includes cost of repairs and maintenance, salaries and wages of employees attendant to such lease, interest
payment, property taxes, etc. (R.R. No. 19-86, Sec. 2.01).

Q: What are the allowable deductions by a lessee?

 The lessee may deduct the amount of rent paid or accrued including all expenses which under the terms of the
agreement the lessee is required to pay to or for the account of the lessor. If the payments are so arranged as to
constituted advance rentals, such payment will be duly apportioned over the lease term (R.R. No. 19-86, Sec.
3.01).

Expenses for Professionals

Q: What are the allowable deductions for professionals?
 A professional may claim as deductions the following:
1. The cost of supplies used by him in the practice of his profession;
2. Expenses paid in the operation and repair of transportation equipment used in making professional call;
3. Dues to professional societies and subscriptions to professional journals;
4. The rent paid for office rooms;
5. The expenses of the fuel, light, water, telephone, etc., used in such offices; and
6. The hire of office assistants.

Entertainment/Amusement/ Representation Expenses (EAR)

Q: What is representation expense
 It refers to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise or
profession in entertaining providing amusement and recreation to or meeting with guest/s at a dining place,
place of amusement, country club, theatre, concert, play, sporting event and similar events or places (R.R. No.
10-02, Sec. 2)
Q: Who are guest?
  Persons or entities with which the taxpayer has direct business relations, such as but not limited to
clients/customers or prospective clients customers. The term shall not include employees, officers, partners,
directors, stockholders or trustees of the taxpayer (R.R. No. 10-02, Sec. 2).

Q: What are the requisites for deductibility of EAR expenses?

 The Requisites for deductibility are the following (DR-LE-SPWE)
1. Directly connected to the development, management, and operation of the trade, business or
profession of the taxpayer; or directly related to or in furtherance of the conduct of trade, business, or
profession (R.R. No. 10-02, Sec. 4(B));
2. Is Reasonable;
3. Not contrary to Laws, morals, policy or public order (R.R. No. 10-02, Sec. 4(C));
4. Does not constitute as a Bribe, kickback or other similar payments (R.R. No. 10-02, Sec. 4 (D)):
5. Substantiated with adequate proof. The official receipt, or invoices, or invoices, or bills or statement of
accounts should be in the name of the taxpayer claiming the deduction(R.R. No. 10-02, Sec. 4 (E));
6. Must be Paid or incurred during the taxable year(R.R. No. 10-02, Sec. 4(A));
7. The appropriate amount of Withholding tax, if applicable, should have been withheld therefrom and
paid to BIR (R.R. No. 10-02, Sec. (F)); and
8. Does not Exceed:
 For taxpayers engaged in sale of goods/properties – one half of one percent
(.50%) of net sales;
 For taxpayers engaged in sale of services – one percent (1%) of net revenues;
and
 For taxpayers engaged in both sale of goods/properties and services –
determined using an apportionment formula, taking into consideration the
percentage ceiling prescribed above (i.e., Net Sales (or Revenues) / Total Sales
and Revenues x EAR) (R.R. No. 10-02, Sec. 5).
Q: What expenses are not considered EAR expenses?
 The following expenses are not considered EAR expenses:
1. Expenses treated as compensation or fringe benefits;
2. Expenses for charitable or fund-raising activities;
3. Expenses for bona fide business meeting of stockholders, partners or directors;
4. Expenses for attending or sponsoring an employee to a business league or professional organization;
5. Expenses for events organized for promotion, marketing and advertising including concerts,
conferences, seminars, workshops, conventions and other similar events; and
6. Other expenses of similar nature;

Political Campaign Expense

Q: What is the income tax treatment of campaign contributions
 Only contributions spent and utilized during the campaign period are exempt from tax. Any political
contributions or donations spent before or after the campaign period set by the Commission on Elections are
subject to both donor’s tax and income tax. Any unspent political contributions from part of the taxable income
and are subject to income tax. Income payments made by political parties and candidates of local and national
elections are subject to 5% creditable withholding tax (RMC 30-2016 dated March 14, 2016, emphasizing RR No.
07-2011);
Expenses allowed to private educational institutions
Q: What are the expenses allowed to private educational institutions?
 In addition to the expenses allowable as deductions under the NIRC, a private educational institution may at its
option elect either:
1. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during
the taxable year for the expansion of school facilities; or
2. To deduct allowance for depreciation (Sec. 34(A)(2), NIRC).

Interest

Q: What are the requisites?

 Section 3 of RR. 13-2000 provides for the following requirements for deductibility of interest expenses: (TID-
CROWD-TA)
1. The indebtedness must be that of the Taxpayer;
2. Interest expense must have been paid or Incurred during the taxable year;
3. There must be an indebtedness Incurred by the taxpayer based on a bona fide Debtor-creditor relationship;
4. The indebtedness must be Connected with the taxpayer’s trade, business, or exercise of profession;
5. The interest must NOT be between Related taxpayers;
6. The interest must NOT be incurred to finance petroleum Operations;
7. The interest must be stipulated in Writing;
8. The interest must be legally Due;
9. In case of interest incurred to acquire property used in Trade, business or exercise of profession, the same was
NOT treated as capital expenditure (NIRC, Sec. 34, par. (B)); and
10. Interest expense is subject to interest Arbitrage rule. (Commissioner of Internal Revenue vs Ludo & Luym
Corporation, CTA EB No. 1559, June 8, 2018

Q: What is the Interest Arbitrage Rule?

 The taxpayer’s otherwise allowable deduction for interest expense shall be reduced by 33% of the interest
income which have been subjected to final withholding tax. Thus, the amount of interest expense equivalent to
33% of interest income subjected to final tax will be non-deductible, and only the remaining portion of the
interest expense can be claimed as expense-in-the income tax computation(R.R. No. 13-2000).
Q: Are interest paid on delinquent taxes subject to the Interest Arbitrage Rule?
 No. Interest paid or incurred 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. Thus, such interest expense paid or
incurred shall not be diminished by the percentage of interest income earned which had been subjected to final
withholding tax ( R.R. No. 13-2000, Sec. 4. par. (c)).

Q: What interest expenses are non- deductible?

 The following are non-deductible interest expense: (APDC-SSSR)
1. Interest paid in Advance by an individual taxpayer through discount or otherwise who is reporting
income on cash basis. The interest may only be deductible:
a. In the year the indebtedness is paid; and
b. If the indebtedness is payable in periodic amortization, the amortized amount of interest paid
during the year shall be allowed as deduction in such taxable year (NIRC, Sec. 34, par. (B)(2)(a));
 2. If the indebtedness is incurred to finance Petroleum exploration, the interest incurred is capitalized as “deferred
exploration cost” (NIRC, Sec. 34, par. (B)(2)(c) in relation to Sec. 34(G));
3. Interest in the form of Dividends paid to preferred shareholders (R.R. No. 02-40, Sec. 78; R.M.C. No. 17-71);
4. Interest for Cost keeping on account of capital or surplus invested in business which does not represent charges
arising under interest bearing obligations ( R.R. No 02-40, Sec. 79);
5. Interest paid when there is no Stipulation for the payment thereof or where there is no indebtedness as when
the obligation is unenforceable (Commissioner of Internal Revenue v. Prieto, G.R. No. L-13912,
September 30, 1960);
6. Interest paid on earned and unclaimed Salary (Kuenzle & Streiff, Inc. v. Collector of Internal Revenue, G.R. Nos.
L-12010 % L-12113, October 20, 1959);
7. Interest paid on indebtedness used to purchase Securities by one who is not a dealer in securities, because such
interest is part of the acquisition of a capital asset(NIRC, Sec. 34, par (B)(2)(b)); and
8. Interest paid on indebtedness between Related taxpayers (NIRC, Sec. 36(B)).

Q: What is the optional treatment of interest expense incurred to acquire property used in trade, business profession?
 At the option of the taxpayer, the interest incurred may be allowed as:
1. Interest expense deductible from gross income: or
2. Treated as capital expenditure wherein the amount of interest is added to the cost of the property(i.e.,
capitalize the interest as part of the acquisition cost of the property and subsequently avail of the
deduction from business income in the form of depreciation) (NIRC, Sec. 34, par. (B)(3)).
Taxes
Q: Who are entitled to deduct taxes from gross income?
 The taxpayer upon whom the taxes are imposed (i.e., those liable for direct taxes) are the ones entitled to
deduct taxes from gross income (R.R., No. 02-40, Sec. 80).

Q: What are the requisites for deductibility of taxes?

 The Requisites are the following: (TPT-LL)\
1. Payments must be for Taxes;
2. It must be Paid or incurred within the taxable year;
3. It must be incurred in connection with the taxpayer’s Trade, business or profession;
4. Tax must be imposed by Law on and payable by the taxpayer (indirect taxes are not included); and
5. Taxes are not specifically excluded by Law from being deducted from the taxpayer’s gross income.

Q: What are the taxes allowed as deductions from gross income?

 In general, all taxes paid or incurred within the taxable year, in connection with taxpayer’s trade, business or
profession shall be allowed as deduction (NIRC, Sec.34(C)(1)(a)).
Q: What are the taxes which are not allowed deduction from gross income?
 The income tax provided for under the NIRC (Sec. 34(C)(1)(a));
1. The income tax provided for under the NIRC (Sec. 34 (C)(1)(a));
2. Special assessment and taxes assessed against local benefits of a kind that tends to increase the value of
the property assed (NIRC, Sec. 34 (C)(1)(d));
3. Estate and donor’s taxes (NIRC, Sec 34 (C) (1)(c));
 Final taxes, being in the nature of income tax;
 Taxes on Sales barter or exchange or through initial public offering (NIRC, 127(D)), and
 Taxes paid on Capital assets that are subject to a final tax, such as real property, the disposition of which is
subject to the presumed capital gains tax (2-B DOMDON, taxation, supra at 827).
Tax credit vis-a-vis- Deduction
Q: Distinguish Tax Credit from Tax Deduction

Q: When is foreign tax credit allowed?

 When a taxpayer has paid income taxes to a foreign country on income for which he may also be liable for
Philippine income tax, he may claim such income taxes paid to a foreign country either as:
1. Tax credit against the Philippine income tax due; or
2. Deduction from gross income.
3.
Q: What are the limitations in claiming foreign tax credit?
 The rules are:
1. The amount of the credit in respect to 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 and
2. The total amount of the credit shall not exceed the same proportion of the tax against which such credit
is taken, which Title II of the NIRC (Tax on Income) bears to his entire taxable income for the same
taxable year (NIRC, Sec. 34, par. (C)(4)).

Treatments of Surcharges, Interest and Fines for Delinquency

Q: Are surcharges, interest, and Fines for Delinquency
 No. Surcharges, interest and fines are not deductible(R.R. No. 02-40, Sec. 80). To allow them to be deducted
defeats the prescribed punishment (Gutierrez v. Collector of Internal Revenue, G.P. No. L-10537 May 20, 1965).

Losses
Q: What are considered losses in relation to deductions from gross income?
 Losses actually sustained during the taxable year and not compensated for by insurance or other forms of
indemnity (NIRC Sec. 34, par. (D)(1)).

Q: What are the requisites for deductibility of losses? (TA-CDC)

 The requisites are following:

1. Loss must be that of the Taxpayer Loss is personal and not transferable to another;
2. Loss Actually sustained and charged off during the taxable year;
3. Evidenced by a Closed and completed transaction;
4. Not claimed as a Deduction for estate tax purposes (for individuals);
5. Not Compensated for by insurance or other forms of indemnity;
 Loss must be connected with his trade, business, or profession or incurred in any transaction entered into for
profit though not connected with his trade, business, or profession; and
  For casualty losses, notice of loss must be filed with the BIR (i.e within forty five (45) days) from date of
occurrence or discovery of the casualty or robbery, theft, or embezzlement (RR No. 12-77, Sec 4(b)).

Q: What are the other types of losses?

 The other types of losses are the following:

1. Capital losses – deductible only to the extent of capital gains;

2. Losses resulting from securities becoming worthless.
3. Special Losses – losses from wash sales, wagering losses, and abandonment losses
4. Net Operating loss carry over (NOLCO)
5. Casualty Losses (NIRC, Sec. 34, par. (D)).
Q: What are the requisites for deductibility of securities becoming worthless?
 The requisites are the following:
1. Ascertained to be worthless and charged off within the taxable year;
2. Security is held as capital asset (NIRC, Sec 34. par (D)(4) (b);
3. Loss was incurred by a taxpayer, OTHER THAN a bank of business is the receipt
incorporated under Philippine laws, substantial part of business is the receipt of deposit
(NIRC, Sec 39, par. (c)) Provisions as citeo in China Banking Corporation v. CA, G.R. No.
125508, July 19, 2000.
 Note: In the case of China Banking Corp. v. C.A., G.R., No. 125508, July 19, 2000, The Court upheld the CIR denial
of the deduction from gross income of “securities becoming worthless” claimed by CBC. Shares of stocks would
be ordinary assets only to a dealer in securities or a person engaged. In the hands however of another who holds
the shares of stock by way of an investment, the shares to him would be capital assets. When the shares held by
such investor become worthless, the loss is deemed to be a loss from the sale or exchange of capital assets. The
loss sustained by the said holder of the securities, which are capital assets (to him) is to be treated as a capital
loss as if incurred from a sale or exchange transaction. Capital losses are allowed to be deducted only to the
extent of capital gains, i.e., gains derived from the sale or exchange of capital assets, and not from any other
income of the taxpayer.

Q: Define Wash Sales.

 It is a sale of stocks or securities where substantially identical securities are acquired or purchased with sixty-one
(61) day period, beginning thirty (30) days before the sale and ending thirty (30) days after the sale (NIRC, Sec.
38).

Note: The term “substantially identical” means that the stock must be of the same class, or in the case of bonds, the
terms thereof must be the same. It is necessary that there must be similarities on all important particulars (ABELLA,
Taxation Law (20017)) [hereinafter ABELLA, Taxation].

Q: What are the requirements to constitute loss from wash sale?

 The following are the requirements:

1. The sale or other disposition of the stock resulted to a loss;
2. It appears that within a period beginning thirty (30) days before the date of such sale or disposition and
ending thirty (30) days after such date, the taxpayer has identical stock or securities; and
3. The seller is not a dealer in securities (NIRC, Sec. 38 (A)).
Note: Losses on wash sales are not deductible as losses from sales or exchanges of property.
 Q: What is the rationale of the rules on wash sale?
 To prevent taxpayers from claiming pretended losses. The law is designed to prevent a situation where the
alleged seller may try to give the impression of a loss in such wash sale when the “loss” is actually negated by
the effects of his saving bought or acquired “substantially identical stocks or securities” within a period very
close to the occurrence of the sale of his shares of stocks (BELLA, Taxation Law (2017)).

Q: What are the instances on which the provisions on wash sales are not applicable?
 The wash sale provisions do not apply to the following:
1. Individuals or corporations acting as dealer in stock such as stock brokers and bans and trust companies. If the
sale or other disposition is made in the ordinary course of trade or business;
2. Short sales transaction; and
3. Gains in wash sales as such gains are taxable (NRC. Sec. 38).

Q: Are wash sales of stocks or securities deductible?

 Yes, but they are deductible only to the extent of the gain from such transactions (NIRC, Sec. 34 (D)(6)).

Note: R.A. No. 1169 (An Act Providing for Charity Sweepstakes, Horse Races, and Lotteries) exempts
sweepstakes winnings from taxation. It follows that no losses incurred therefrom can be allowed as deductions
from gross income.

Q: What is meant by “net operation loss”?

 It is the excess of allowable deductions over gross income of the business in a taxable year (NIRC, Sec. 34, par.
(D)(3)).

Q: What are the requisites for deductibility of Net Operating Loss Carry Over (NOLCO)

 The following are the requirements for deductibility: (NOCES)

1. It is from the Net operating loss of the business for any taxable year immediately preceding the current taxable
year;
2. It has not been previously Offset as deduction from gross income;
3. It 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 only;
4. The taxpayer was not Exempt from income tax in the year the loss was incurred; and
5. There has been no Substantial change in the ownership of the business or enterprise.
Note:
In the case of oil and gas well, losses incurred in any of the first ten (10) years of years following such loss (NIRC, Sec.
34 (D)(3)).

Q: In case of merger, consolidation, or combination is the transferee or assignee entitled to claim the NOLCO of the
transferor?
 The transferee or signee shall not be entitled to claim the same as deduction from gross income except when as
a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor or the
transferor gains control of:
1. At least 75% or more in nominal value of the outstanding issued shares or paid up capital of the
transferee/assignee, if a corporation; or
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