162 ‘are deductible, provide NG sae uss TAX saneuaen nt CODALS AND CASES such payments, when added to 4 Sxceed a reasonable Compensation pe inated a 32 serv 1-18840, May 29, 1969) ° rporate officers out of the sale of corporate Baigent ec oa ce pre the absence id sale, The taxpayer must show that persona, fect si S. Te mre Noe a ea Ses tn we oe No. L-29790, February 25, 1982) i .x purposes, the employer cannot legally claim fori ar te ening emote in be reasonable. The conditions precedent to the deduction of + Te must be for personal services actually rendered; ang ‘The bonuses, when added to the salaries, are reasonabe when measured by the amount and quality of the services performed with relation the business of the taxpayer (CM. Hoskins &Co,, Inc. v. CIR, G.R. L+24059, Noverber 28, 1969) For cost of materials, taxpayers carrying materials and supplies ‘on hand should include in expenses the charges of materials and supplies only to the amount that they are actually consumed ané used in operation during the year for the return is made, provided that the cost of such materials and supplies has not een deducted in determining the net income for any previous year. © If a taxpayer carries incidental materials or supplies °° hand for which no record of consumption is kept or of whic! Dhysical inventories atthe beginning and end of the year at not taken it will be permissible for the taxpayer to incl in is expenses and deduct from gross income the total ot such supplies and materials as were purchased during he Yr for which the retun is made, provided the net income’ Clearly reflected by this method. (Section 67, R.R. 2) 2d eat the ost of incidental repairs which neither Mm Dut keep it an ote Property nor appreciably prolong its It, deducted ae enecrenatlly efficient operating condition, may Tot increased peers Provided the plant or property accourt! ' the amount of such expenditure. 2 INCOME Tax Py 0 Reparsin the nature of replacement tothe exten tat they arent detention an aoecany pros Se ane ; raed apa lon reser Hsueh accounts ent. (Secon 68, Rik eee oe For lease agreement expenses, th deductions (Section 74, 2.8.2): eit lowing are allowed © 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; the amount. of the tax being deductible by the latter. © The cost of leasehold improvements are NOT considered business expenses since they are capital investments. In order to return to such taxpayer his investment of ‘capital, an annual deduction may be made from ross income of an amount equal to the cost of such improvements divided by the number of years rer of the term of the lease, and such deduction sI Of the term of lease is greater of the building erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. For professional expenses, the following are allowed deductions (Section 69, R.R. 2) © Cost of supplies ‘0 Expenses paid in the operation and repair of transportation ‘equipment used in making professional class © Due to professional societies and subscriptions to professional journals + So bar review tuition fees and bar examination fees are not deductible © Rent paid for offices © Expenses for hiring of office assistantsFe ss TAX MAD! “wREVIEWER WITF hemes pursuant to the Jey, is9@ — additional 50% of azxa! school based on the oF actual amount ney x Ta {te legal profession, whichevees lower. (R.A. 9999) 2 domestic corporation engaged in the Froeny, Corporat, yen cream, made payments fo an officer manufac 200 2 crmpettar in the ee creBM Busines, In OF eters revettin of Frosty Corporations rede Secret ay Freesy Corporation cism the payment to the ofcer as deduction ftom ts goss ome? explain. (2014 Bar Exam) ‘Suggested answer: No, It may not, thank you very much. The fate corporation to reveal trade secrets Gustto clarity though, the codal does not list ‘payments to an official ‘or employee of @ private corporation’ as a possible bribe; it does lise ‘payments to pevate corperations’ though. But I humbly submit that payments to officals or employees of a private corporation be ‘treated in the same manner.) Sales of Golden Dragon Realty gon). A group of five (5) foreign for possible investment in the fnterinment exper Explain. (2016 Bor Bram oe OY Golden Dragon are deductible INCOME Tax ickbacks, ot be Slowed 95 deductions. they werent subsea race either—which is obvious, given the shady nature Jr Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) Of Sta. Portia Realty Corporation (SPRC). He invited the Regional Director of the Housing and Land Use Regulatory Board (HLURB) to lunch at the Sulo Hotel in Quezon City to discuss the approval (of SPRC'S application for a development permit in connection with Its subdivision development project in Pasig City. At breakfast the following day, Calvin met a prospective client interested to enter Into a joint venture with SPRC for the construction of @ residential condominium unit in Cainta, Rizal. Calvin incurred expenses for the lunch and breakfast meetings he Of his expenses, and SPRC gra 8) Can SPRC claim an allowable deduction forthe expenses incurred by Calvin? Explain your answer. b) Is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer. (2017 Bar Exam) Suggest : 2) The expense for the lunch meeting Is not alowed, as this is 3 ” Troe uch the Tax Cove states are not allowed as deductions, whether the bribe is direct or indirect. The expense for the 167taxis TAX NADE LED ALS AND CASES ‘REVIEWER W! as this iS arguably a ca, rot atiowed, 36 play breakfast 15 ab? expenditure by me reimtursement >Y CY siowance of employees de ‘Borsertaton and WOrSPOUS" tr tpese are reimbursements general taxable. Th ee inary and Necessary pursue for expenses incu wes are Nt Ordinary mines. AS the expen: end of trade of DAES were ineuTed 25 @ bribe and capt necessary (3 porns exception does Not BPpIY. Hence, the taxpayer's otherwise allowable ibe reduced by 42% of the interest me subject to final tax: Provided, That effective January 1, 2009, percentage shall be 33%. (2) Exceptions. — No deduction shall be allowed in respect of Interest under the succeeding subparagraphs: {b) If both the taxpayer and the person to whom the payment has een mode or & to be made are persons specified under Section incurre to finance petroteurn exploration of Interest Expense. — At the option terest incurred to acquire property used in trade treated os cope ee reesson may be alowed as a deduction oF i Inert Bid on debs are alowed as deductions Dut profession 4 02 licurred in connection with the taxpayer’ ion, trade or business “ IN (COME TAX 169 © The allowable deducti income subject to fi Teduced by 33% of the interest Xx. (more on this below) 'Y Of interest expense (R.R. 13-2000): 1, There must be an indebtedness Requisites for deductit 2. There should be an interest expense paid or incurred upon the indebtedness (incurres Seaneraeeseeness (incurred meaning that it was due and 3. The indebtedness must be that of the taxpayer 4, Tt must be connected with the taxpayer's profession ‘payer's trade, business or 5. The interest expense must have been pad or incurred dur the taxable year Se 6. The interest must have been stipulated in writing 7. The interest must be ally due interest payment arrangement must not be between 1d taxpayers rest must not be incurred to finance petroleum fed to acquire property used it was not treated as capital de, business or professic ‘expenditure. a. In cases like this, the taxpayer has the option to treat the Interest expenses as either Interest expense deductible in full or ji, As a capital expenditure and claim as deduction only the periodic amortization/depreciation. ‘0 But he can only choose one, or else that's double ‘deduction and that ain't ‘he law effectively canceled out the tax arbitrage advantage. Corpeostions before woul borrow maney and use the interest they Corporations te loan asa deouction, even if they reinvested the na Pay One ad go terest income from ter Ivestment. © For example, Capitan Ri, # Businessman who buys and sels For ee TBhis Borrowed ieney from his favorite ical bank, Banko ng mga Gwope. Te Mad 2 He then deposited the money He then pos ir an interest Income on K of P9000,Less TAXING: TAX MADE FCODALS AND CASES ‘AREVIEWER WITH by the bank, had been withheld «Hoy the ral 0 of we erst exDense? much is his deduct Interest expense, unadjusted Less: Adjustment for interest Income subject to final tax (33% of P9,000) ze Adjusted balance, deduction for interest expense to business i id or accrued on taxes related i cx rs a Se cnt this rule on downward adjustment). there is interest expense Incurred and interes, We ee tax), the limitation shall apply regardless of: 0 whether or not a tax arbitrage scheme was entered into by the taxpayer; oF othe date when the investment was made. ‘The limitation will only apply if there is interest income subject to final tax. If none, then you can deduct in full. Interest is not deductible if: © Both the taxpayer and the person to whom interest was paid are related taxpayers, meaning: Members of a family; ‘An individual and a corporation where more than 50% of the outstanding stock of the corporation is owned by the individual; ‘Two corporations where more than 50% of the outstanding stock of each is owned by the other or by the same individual; 5,030 Between grantor and fiduciary of any trust; “Between fiduciary of a trust and the fiduciary of another e same person F wit each trust} or isa grantor with respect to Between fiduciary of a trust and the beneficiary. © Ths Indebtedness is incurred to finance petroleum operations INCOME Tax 0 If an individual is on t interest is paid in advance, through discount or errerae + If So, the interest ¢ ‘hot in the year that in the year that the the interest was indebtedness was paid, But ifthe indebtedness is payable in periodic amort the amount of the interest’ whict Be ma terest which corresponds shall be allowed as deduction in such taxable year, Late payment of tx s considered a debt, and the on taxes is interest on indebtedness ond thus Seca ve v. Vda. de Prieto, G.R. No. L-13912, September 30, 1960) (© But surcharges or penalties are NOT deductibie. Taxes Sec. 34. (C) Taxes. — (4) In General, — Taxes paid or incurred within the taxable year in ‘connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (2) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign ‘country; but this deduction shall be allowed in the ese of @ to any extent the benefits of paragraph (3) (relating to credits for taxes of foreign countries); (©) Estate and donor’ taxes; and (d) Taxes assessed against local benefts of a kind tending to Increase the value of the property assessed. income tax benefit of sald deduction. 2) Lumteations on Deductions. — n he ca of 9 ravesient Si2n inant engaged in trace or business n the Philppines a 2 escent foreign verpoaton, the deduction for taxes provided In arograph (1) ofthis Subsectcn (6 shallbe alowed only and tothe Bot they are connected th icome rom sources within the nes. '3) Credit Against Tax for Taxes of Forelgn Countries. — If the Sere eet Tat cen hs delet rete beneto ofs paragyoph ane tox mmposed by th Tle shall be created wt he cash basis of accounting and the pense shall be allowed as deduction in advance, but Principal amortized or paid during the yearING: x MADE LESS TATA CASES a never WITH CO «corporation. — In the case oy presi of 2 domestic COrpOration the Philippines 200 curred during the taxable year partners to te cate of a7 ‘a mer of 2 9276" ny su wallet ment Nene he beneficiary of 2 eS fessional partnership or the estate metab gre coe a e's 3 Fae ers te Istana Teepe as tn lt ores ten nil 2 ge et tex or BES Spares = me omount ofthe (4) Limitations on Cred rte flowin onan nae once ep oth frp wean tee ete se nn woman a he cat wie sent aay we Se se Rm reese cae a ‘Te tt amount of the cet shal not exc operon ofthe ax against which su istaken, oe ‘income from sources without the Pt (5) Adjustments on Payment of Incurred Taxes. — If accrued Gres wer pid afer frm te amounts calmed os credits by the taegoyer or any tox pal efunded in whole ar np, te taxpayer thal ty the Commeloner who shal predetermine the amount of thetoxtortheyeorer years affected, andthe amount of tax due upon Steh redetermination any, shal be pad bythe taxpayer upon notice deny ne anne othe rout tox overpaid, ‘such @ tax incurred but not pe eet easement Salata ear secre inhaler tea pccae ee ©) Year ), Near In Which Credit Taken. — The credits provided for It Subsection and breene ae s Section may, ot the option of the taxpayer ones eens the counting employed in keeping is wee Year which the taxes of the foreign county however, to the conditi ‘ 1e conditions prescribed 17 Section. If the taxpayer elects to take such INCOME Tax 173 aris end no portion of ony such tncesshalloe snowed se jin the same or any succeeding year. ea @ @ sath Proof of Cradits. — the credits prov proof of Credits. ~ The cedts provided in Subsection (C) in which the taxes of the fore 5 ofthe foreign country accrued, ‘subsequent years shall be taken upon the same The amount of income derived from each country, [paid or incurred to which is claimed as a credit under , Such amount to be determined under rules and ions prescribed by the Secretary of Finance; and other information necessary for the verification and jon of such ered. LR Seton Ite tanpayer elect to take su | ‘Taxes paid or accrued within the taxable year in connection with the taxpayer's trade or business or exercise of a profession are deductible from gross income. © EXCEPT: (Sections 82-83, R.R. 2) Philippine income tax (but the grossed-up monetary value of the fringe benefit tax can be deducted) Estate tax Donor's tax Special assessments, Income tax imposed by a foreign country for income ‘sourced outside the Philippines (but it shall be allowed if the taxpayer does not signify his desire to enjoy ‘any benefits of the tax credit for taxes paid to foreign ‘countries) Stock transaction tax vat Income, war-profits, and excess-profits taxes Imposed by the authority of a foreign country (including the United States and possessions thereof) are allowed as deductions only if the taxpayer does not signify in his, feturn his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes Br foreign countries. (Section 82, R.R. 2-1940)Less TAXING: TAX MAO FCODALS AND CASES «stares 2 BORE rete ony ones a sessteaes e ee ers of the GPP and beneficiaries Of estates/trusts cay . _ also avail of tax credits . ‘9 Alen individuals and foreign corporations are not allowed i, Nel ae cet When a taxpayer is qualified for a credit, he has the option gy 9 Dedueting the foreign income tax from his gross income, o, 2 Ching the tax ea ‘do we determine the amount of tax to be credited? Just Fatow the formulas below, and choose which of them is lower, 1. Net income from foreign country x Tax Due (Total) Net income worldwide 2. Foreign income tax paid = Example: credit corporation have to pay the Philippine government after the tax credt ‘would have been computed? le income before tax credit, Korea 100,000 ‘Taxable income before tax credit, Phil, P300,000 ‘Taxable income, worldwide pago,000 Corporate income tax of 30% 120,000 Less: Tax credit for foreign tax = P40,000 lower! Allowed tax credit p.30,000 ne income tax stil due P 90,000 Choose Phi INCOME Tax 175 ‘What would Seri's Choice, eee Inc. bring home if they chose to do Taxable income, worldwide 400,000 in the Philippines P120,000 after credit P.90,000 Income after tax (what Ser’s 310,000, Choice takes home) If Seri’s Choice, Inc. chose to deduct, this is what would have happened: Taxable income worldwide 400,000 Deduction for foreign income tax paid 40,000 Taxable income 360,000 Income tax at 30% 108,000 Income after tax (what Seri's Choice 252,000 takes home) Itis preferred that you should go for 2 tax credit. You end up with more cash at the end of the day. For tax you get 100% benefit, as compared to deductions where all expenses benefit to the extent only of 30% (for corporations). Tax credit? That's the right choice. That's Ser’s Choice. ‘Can you deduct fines and penalties paid to the BIR because of late payment of taxes? No. These are not taxes but penalties. In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted (0 Caruso Is subject to U.S. withholding tax with respect to @ non- resident alien ike Caruso. 2) What will be your advice to Caruso in order to lessen the impact °F possible double taxation on the same income? ) Would your answer in A. be the same if Caruso became a Us. immigrant in 2008 and had become 2 non-resident Fiipino Citizen? Explain the difference in treatment for Phillapine income tax ‘purposes. (2010 Bair Exer) Suppested ance: 2) In order to lesen te pat of posable double tation onthe de etme nbs Caruso tat he can eter Cah heANG: aoe FEDS AND CASES 176 [AREVIEWER WITH sas deauton fom Pls oss Income o- cnn epee Se eae tes an aim it 3 7 ‘to be deducted or cl *S 2 tax faves pad 0 2 Ore, nay to Fean aval oF either. 7 een a youd be aerent Decause 25 2 NON-TeSiDENt Cen, 1) My answer woul rar can only t@x INCOM SOUS with, 2 Meggett use Pe thepnippnes toured net WOrTy abOUt any ps: 7 «ofthe Philpines, 18 @ professional Me A 8 ten 2 onng match held In 2013, he won pie ‘money in United States (US) dollars: ‘equivalent to P300,000,000. 2 Me Ain the us ste prize money paid to and received by debi nthe Pipenes? Why? sieady imposed and withheld income taxes from Mr Bn Us ate rnay HAs or apply the Income toxes he AS prize monty vey tne Us when he computes Ms Income tar Fane Pppne for 20137 (2015 Bar xem) ‘Suggested answer: 2) Yes, the prize money paid to and received by Mr. A in the US is taxable in the Pilppines. Asa resident citizen, he is taxable for his Income worldwide. b)_ Mr. A has the option of either deducting the tax he paid in the US or claiming it as a tax credit. Resident citizens, such as Mr. A, are alowed to either deduct the taxes he paid abroad from his gross Income or claim them as tax credits. in General. ~ Losses actually sustained during the taxable yea! usta ot Compensated for by insurance r nity ‘or other forms of inde Incurred in trade, profession or business; INCOME Tax 7 rere tants rote nthtes agea les and regh ‘than thirty (30) days nor more than ninety (90) cays from the date of discovery of the casualty or robbery, theft ar embezzlement giving Fise to the loss; and Losses actually sustained during the taxable year and not compensated by insurance or other form of indemnity are deductible from gross income: ‘© If incurred in trade, business or profession; © Of property connected with trade, business or profession, if ipwreck or other casualty, loss is needed within 45 days from time of loss ayer fails to submit a Sworn Declaration of Loss, t be allowed. The SDL conduct its own inv loss. (H. Tambunting Pawnshop v. CIR, G.R. No. 173373, July 29, 2013) + Ifa team blows a 3-28 lead with two minutes left in the a wearer of tne Super Bom, does I ned bet 35? No need, the internet , Falcons, Superbowl LI3. MADE LESS TAXIN 178 sn nevneWeR WITH CODALS AND CASES INCOME Tax a : ign corporations, the to t individuals and fore! 8565, + In determining th «For nonresident sustained during the taxal on be made, howere, the loss, adjustment must Ehould be those actualy those “usiness or profession conducted Within tyg the salvage valu duction for esta ady been claimed 2s de fal 1 te ess topo auc rm goss income, SY partial destruction of propery + aty men i era Sete, enna 3 loss has alt rent, some sudden invasion by hostile agency, ccid keves enol oes progressive deterioration through steadiy, excludes pi ‘operating cause. “Theft means the criminal appropriation of another's property for the use of the taker. + Embezzlement is the frat property by a person to whol hands it has lawfully come. ‘The taxpayer bears the burden of proof. Special rules on losses: (© Voluntary removal of buildings (Section 97, R.R. 2-40): + Loss due to the voluntary removal or demo! appropriation o} 3s been entrusted or into whose 12-1977) ‘abandoned or permanently devoted different use, and to machinery only this permanently abandoned. Any exception must be charged off in the books and fully explained in returns. of income. ‘Ais a travelling salesman working ful time for Nu Skin Products, reasons if satety). tte receives « monthly salary plus 3% commission on hi sales n @ Souther province wnere hei based. He reguory uses is own car + When a taxpayer buys real estate upon which is located tomaximize his visits even to fori areas. One ine doy 2 group of militants seized his car. He was notied the following day by the police that the marines and the miltants had a bloody encounter and ‘is car was completely destroyed after a grenade hit it. ‘A wants to fle a claim for casualty loss. Explain the legal basis of ‘your tax advice. (2010 Bar Exam) ‘Suggested answer: A will ot 1 building, which he proceé © LOSS of useful value of as : he works Tor a Skin Products, he isa taxpayer earning mates ssets (Section 98, RR. 2-40): Compensation income under on emiployer-employee relationship. fen through some change in business conditions, the Heonee, he wil not be allowed to caim the foss for deductions. There Usefulness in the business of some or all of the capttl ‘wil be mo need to hee claim for casualty loss. assets is suddenly terminated, iscontin, |, so that the taxpayer oy business or dlscards such asset such busines im deduction the setuat go Suh business, he may i6: aoe ESS TAXI a anew CobaLs AND CASES et operating Loss Carry over (NOLCO) vagina yar Say ec deduction from gross INCOME PH O3) consecutive taxable years any nets neuen ‘exempt from income tax ting | i stan rurther, That a net operating loss carry this Subsection Pag only I there has een no substantial change in se in that — ‘ver shal be allowed only {he ownership of the business oF enterPri than seventy-five percent (75%) 19 nominal value Mae eet tne business Is in the name ot 3 ina su en behalf ofthe same persons; OF Not less than seventy-five percent (75%) ofthe pald up capital oss tan, fehe business inte nate Of @ corporation, i Fed by or on Bel of he same persons for purposes of tis subsection, the term *not operating [oss” shal teaan the excess of alowablededicton over gross income ofthe Bisness ina tole Yeo. provided, Tatfor mines other than ll and gas wells, @ net operating (ass out the beneft of incentives provided for under Executive for the next five (5) years Immediately following the year of such loss. The entire amount ofthe loss shall be carried over to the first of the five (5) taxable years folowing the loss, and any portion of ‘+ Net operating lass is the excess of allowable deduction over gross income of the business in a taxable year. + NOLCO: The net operating loss of the business which has not been previously offset as deduction shall be carried over 2 deduction from gross income for the next three consecutive years ly following the year of such loss. This Is allowed i there has eh Ownership of te bus, aS Beth PO substantia chang © Where not less than 75% of ‘outstanding shares in the business is in the nam e Ramee be 'e of @ corporation held by the 53"™ INCOME Tax iat corn Shea alga to me wot ee tenet of Invests Cota may “ett, operating loss for by the Omnibus. Cartied over as deduction for the next wing the year of loss. Incase the transfer or assignment of NOLCO arises from am consolidation, or combination wth another person, the wanstoree or assignee shall not be entitled to claim the same as deduction. (© EXCEPT when as a result of the said merger, consolidation, ‘or combination, the shareholders of the transferor/assignot gains control of at least 75% or more of the outstanding issued shares or paid up capital of the transferee/assignee, or 75% or more interest in the business of the transferee/ assignee. (R.R. 14-2001) lual who claims the 40% optional standard deduction deduction of NOLCO simultaneously. Even if the NOLCO was not claimed, the three-year period shall continue to run. (RR. 14-2001) © If the taxpayer paid its income tax under the MCIT ‘computation, the three-year period stil runs. (R.R. 14-2001) NOLCO shall be availed of on a “frst-in, first-out” basis. (RR. 14- 2001) Who are not qualified to NOLCO? 1. OBUs for a foreign banking corporation and FCDU of & domestic banking corporations 2. Enterprise registered with the BOT enjoying the Income Tax Holiday Incentive 3. PEZA-registered enterprise 4, SBMA-registered enterprise 5. Foreign corporations engeg carriage business in the Phil 6. Any person, natural or juridical, enjoying exemption from Income tax (R.R. 14-2001) international shipping or airae sentRetRBE SESS Mo CSes , addi 1s 2017-2018 20192029 oe a nate a F a ae (4) Capital Losses. — Pao ntation,~ Lose ftom sales or Exchanges of capital assets tits the exert provided in Section 39. b) Secures Becoming Worthless. — If secures a8 defined in Secures ear gonties tring the tavable year and are crear scoae the os resuting teretrom sal fr purposes ofthis See ciated os ogstom the sale or exchange, onthe lst ayo uch taxa year of apa asets. ‘= See discussion on Section 39. Losses from Wash Sales of Stocks or Securities (5) Losses From Wash Sales of Stock or Securities. — Losses from “wash salas" of stock or securities as provided in Section 38 ‘Sec. 38. Losses from Wash Sales of Stock or Securities. — (A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date ‘of such sale or asposiion and ending tury (50) Gove aftr Sich dot, the txoayer has seuied are or by exchange pon which the etre smoun of gin ols was ecagniced by low or har enter INCOME Tax (8) If the amount of stock or secu contract oF option to acqui Securities sold or otherwise diaposee stock or securites, the loss form the salon {S not deductible,’ shall be determined i prescribed by the Secretary of Finance Gommissioner, " ‘other disposition of which Wer rules and regulations On recommendation ofthe ‘acquired (or covered by the uted in the non-deductbility lunder rules and regulations Ie, upon recommendation of the of the lo prescribed Commissioner. ‘Secretary of Fina Losses are not allowed tobe climedin sales of stock or secures ‘© Within a period of 30 days before the sal yi a pid of 0 the sale, and 30 days after 0 The taxpayer acquires or enters into an option to purchase substantially the same/identical stocks or securities. Losses are allowed only if the taxpayer is a stockbroker and the sale/purchase was made in the regular course of business. The important thing to remember is the 61-day period. (Section 131, RR. 2) 0 Example: Laseng Gera Ajumma buys shares in Ser'’s Choice, Inc. She sells the shares at a loss. Twenty days from the sale, ‘she buys shares in Seri’s Choice, Inc. again. The loss will not be allowed as a deduction. Wagering Losses ‘See. 34. (D) (6) Wagering Losses. — Losses from wagering transoctions shall be allowed only tothe extent of the gain from such transactions. Abandonment Losses Wagering losses are allowed only to the extent of gains from such transactions. (7) Abandonment Losses. ~ (2) Im the event a contract area were, etleum operons are Undertaken 1s partialy oF wholly abandoned, all accu exploration sed evelopment expenatures pertaining thereto shall eee_R=“_a eee cases i AREVIEWER W! INCOME Tax 185 5 Tat accumulated expenditures among ga stun eed, TH oral be alowed vir Pegmed in that area pri0r Rarived from the same contract eatin nt 00,21 income germent shall be fled With the Sen a ese a ducing well 1s subsequent” abandoned, the woh ene a pega wl, SMe mated ts ae is restored nto service nt of Porgrase income inthe Year of the sai cots sl a ands be aarti OF SEPrECAG, as the case may aay ig eee ccemam pein rity ly saa po agen pet a ge a allowed as a deduction Forex losses = When foreign currency is acquired in connection with the tinctar course of business, ordinary gain oF Toss results trom Te reactions, such loss is deductible only in the year that i ie sustained, But ifthe loans have not vet actually been paid, the losses therefrom have not yet been realized and are not deductibie yet. (BIR Ruling 206-20) Foreign exchange losses sustained as a result of devaluation ofthe peso but which remittance of scheduled amortization consisting OF principal and interests payments on a foreign loan has rot actually been made are not deductible because the increase has fot yet been realized (no closed and completed transaction yet) (BIR Ruling 144-85) Bad debts Sec. 34, (E) Bad Debts. — (2) In General. — Debts due to the taxpayer actually ascertained to less and charged of within the taxable year except those not connected with profession, trade or business and those sustained in 2 transection entered to between parties mentioned under Sect on 3e(G) ofthis Code: provse, Tat recovery of baa ete srevous (@) Securities Becoming Worth jon 22(7), are ascertained tote wart Se tanable year and are copa Sfatiin the case ofa tavpeyes incorporated under the lan of tre trhose business fe the receye cry Ite, be considered as a fst from Ses Gay of such taxable yar, of capa assets If securities, as defined 5 a8 defined in hless and charged off within sa tse" tte wen hve ‘These receivabl omens receuvapes may come from money actualy extended 25,5 canoe unealectble poyments of goods sold oF Bad debts are deductible provided that: 0 There is an existing indebtedness due to the tax whichis valé nd legally demandable (and nat losses trom in 28 Philer Mining CA i 4 Investments, a in Phex ing Corporation vi CIR RM © They are connected with trade, busin They ae 138 or profession of the ©. They are actually ascertained to be worthless, uncallectible, and ‘charged off within the taxable year © The taxpayer must show that i ts uncolletble even in the future (Phil. Refining Company v. CTA, G.R. No. 118794, May 8, 1996); © They are not sustained between related parties; and © Ifthey are recovered, they should be included as part of gross income in the year of recovery (tis s the tax benef rule). Losses or bad debts must be ascertained to beso and writen off Goring the taxable year. They are therefore deductible in fll or fot a al, There's no partial deductions. (Hermanos v. CIR, GR. Ino. L-21551, September 30, 1969) Its worthlessness depends on te particular facts ofeach case. It Cant be condered worthless just because ofits doubtful vaive ‘or liiculty to collect. “o prove worthlessness, the taxpayer must prove that he exerted ligent efforts to collect, Such 38: © Sending of statement of accounts; (© Sending of collection letters;1: LESS TAXING: a nen BEL TH CBBALE AND CASES lection; to_a lawyer for co Giving the account ° neo ‘collection case. (Phil. refining COMBanY V. CTA, Gp ° ion 110794, May 8, 1996) d debts «tustration of te tax benefit rule for ac i 100, 2019 taxable income before bad debts ria ea Bad debts in 2020: F170. Bad debts recovered In 2019: report in 2020 as gross INCOME, /-€., ROW much How much do 1 rded as a deduction in 2019) wo rhe ee 2 re ee tam oe 3am Prqowe mats hw mat et a cs e .) So, I have to include taxable income before bad debts.) So. oe ‘Smount in the computation in the gross income. ‘What happens to the P30,000? (Uh-oh. Recit question.) «Incase of banks, the BSP will ascertain the worthlessness ang I ate ot Perot bad debts and it shall approve the wring. frat the sal ooks of accounts atthe ens off of the said debt from the b Of the taxable year. (RR. 5-1999) ‘sor an insurance or surety company, a receivable may be written ‘off from the taxpayer's books of accounts and claimed as bad debt only if such company has been closed due to insolvency or for any such similar reason by the Insurance Commissioner. (RR. ‘amounts were included in the ITR as INCOME for the year when ‘such bad debt was sought, or the previous year. Rakham operates the lending company that made a loan to Alfonso in the amount of P20,000.00 subject of @ promissory note which is due ‘within one (1) year from the note's issuance. Three years after the Joan became due and upon information that Alfonso Is nowhere 10 'be found, Rakham asks you for advice on how to treat the obligation 125 "bad debt." Discuss the requ x a Gore tar amy requisites for deductibility of a "bad debt ‘Suggested answer: For bad debts to be ee aoe Fs to be considered deductible, the ‘+ There is an existing det Tere ting debe due tothe taxpayer whichis val and INCOME Tax The debts are connectea the taxpayer; + They are actually ascertained to charged off within the taxabie yess; MS: uncolectible and {0 the trade, business or profession of +The taxpayer must show 2 that itis uncollectibie even in the +The debts are not between related parties; and + Ifever these are recovered, Sen they should be included in the year » Securities becoming worthless are consider pasate Segui ering, noes ar cnr tb a nt for a bank or trust company. sail «Feelings becoming worthless are considered to be. ns 2 toss that ma for may not be recovered fom onthe ost dy of he Savas Your, Depreciation ‘Sec. 34. (F) Depreciation, — (2) General Rule. — There shall be alowed as a deprecation deduction a reasonable allowance ae the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. — The term " allowance” as used in the preceding paragraph shall land regulations prescribed by the Secretary of Finan recommendation of the Commissioner, under any of the following method, using a rate not exceeding ld have been used had the annual ‘puted uncer the method described In1: es AND CASES Tax MADE 188 ‘apeviewer WITH 2 esi ioe Pamala rts me et oe td Posada. where unde” ner andation ofthe Commission ce upon recom entered into an agreer (@) The surwott (4) any_ott Soveraeration during the adoption, fof establishing the existence es ee taped mao egstered thane tothe oe pare 0 ere the txpayer has adopted suh at tot ny depreciable and calmed te ram is gross income, iniating st Proved, however, T rate so adopted by the texpayer {halt be considered binding for purposes of this Subsection. (4) Depreciation of Properties Used in Petroleum Operations. an allowance for deprecation in respect of properties directly ‘The useful life of properties used in or related to production of petroleum shalt be ten (10) years of such shorter life as may be permitted by the Commissior production of petroleum shall ‘method on the basis of an estimated useful Ife of five (5) years. (5) Depreciation of Properties Used in Mining Operations. — An allowance for depreciation in respect of all properties used in mining erations otner than petroleum operations, shall be computed 2 (a) At the normal rate of depreci xf We ls ‘ten (10) years or less; or di incsibinacaiaia Le INCOME Tax trom taxable income: Hovioea The a ‘Commissi the begins oop depreciation rate allowed by this Secton wiki eee (6) Depreciation Deductible by Nonres tn Trade or Business or Realient Foreign Conan aeee Depreciation is the gradual dimin tangible property resulting from obsolescence. ‘A reasonable allowance for depreciation is deductible. Some methods to determine reasonable allowance are seen in the codal. © If the taxpayer and the CIR come to an agreement of the Useful life on which depreciation will be based, this agreement will be considered binding. the useful value of nd tear and normal Depreciation is allowed on tangible property and intangible property. ‘A company has the claim depreciation, but the law does not allow depre bevand its acquisition cost. (Basilan Estates, Inc. v. Cll ‘No, L-22492, September 5, 1967) For vehicles, only one vehicle for land transport is the use of an official or employee, the value of whi ‘not exceed P2,400,000. No deduction shall be allowed unless the taxpayer substantiates the purchase with sufficient evidence. (RR. 12-2012) © No depreciation shall be allowed for yachts, helicopters, airplanes and/or ich exceed the threshold amount, UNLESS the taxpayer's line of business is transport operations or lease of transportation equipment and the vehicles purchased are use in said operations. (R.R. 12-2012) Amortization of Intangibles is the periodic process of allocating ight of lease, patent, trademark,ess TANG wenger coDAts AND CASES : : Giese eee TTTPSTISTT I lspci leer Sere eee sot Explor Cartan cases of deprecsst _____ | ration ana Deve fon | 20 years (strlght-ine/decining {2Xable income from mining: oserstene, Properties used directly Im proc method) of petroleun ght-line) Properties used intrecly in production 5 years (straight-line) 190 ption, deduct of petroleum |____________| ee —_———_ Tr expected life 1s. 10 years op essa niargoromtons | H gael Me, J yon If expected life is more than 19 {rom mining shal be caried Yong years, notify the CIR fully deducted. torwend the succeeding years until T auens engaged in| A reasonable rate is. allowed ‘The election by the taxpayerto deduct the exploration and development For nonresident aliens. engaé Expenditures revocable tnd shel es Patident | only on properties located in the p inding in succeeding taxable trade, or business ere, oF Pritepnes year. — Liepeli this Subsection, nek ann os reble deucton J‘ ors. sAlowatie Depletion sedctions pester A we ‘Ine porgroph shi ot spi ee meee Mines. — i 3 Not apply to expenditures for the acquisition ‘Sec. 34, (G) Depletion of Oil and Gas land: ‘or improveme Property of a character which is subject to the (4) In Gonaral, ~ In the case of ol and ga5 well oF eines, a Slowance for ceprecaton, (2 An ererononce tor depevon ot amorizaton computed in reves tutawiaeunicciet eeesge ait the cos-depton method shall be granted under Ino cae sal ths paragraph apy wh expec to amounts pad or Sir ond reguladons to be presorbed by the Secretary of france, opment oh and gs cies te rendaten of the Commasoner: Provided, Tat when a tRe'stowanc or deicion shall equa the capital invested no further ‘allowance shell be grented: Provided, further, That after production in ‘ore or other mineral, and pal Certain intangible exploration before the beginning ofthe development stage of the mi ‘The term “development expenditures” means expenditure: Incurred during the development stage of the mine or ather natural time when deposits of ore or other minerals are sufficient commercial quantity and quality and shall tend upon commencement of actual commercial extraction. (3) Depletion of oil and Gas Wells and Mines Deductible by 2 shall not pertain to. the m cn a ‘shall not pertain to the acquisition or improvement of of 2 character subject to the allowance for depreciation except that the allowances for depreciation on such prof the allowances f Ch property shall be deductible le exploration, driling and development expenses allowed in computing taxable income during the year shall not sideration in computing the adjusted cost basis for + Oll and gas wells or mines are allowed a reasonable allowance for depletion or amortization computed using the cost-depletion ‘computing allowable cost depletion. mothe Pere EE EEEaoe 155 TING ” ramen CODALS AND CASES ce for depletion equals the capital Investeg hall be granted. 1 quantities has started, ¢ ral cui 36 SU cea ted for non-producing wells ¢° ized and amortized if Such were ines in same contract area, a resident foreign corporation, ited to oll wells and mines in tn, = When the allowant a further allowance sl ‘© After production in comme: intangible exploration and 4r ‘year incurred if such were fines, or these may be caPi incurred for producing wells 0 + If it was a nonresident the allowance for depleti Philippines. i ine. pro ‘The formula for rate of depletion is (cost of mi pertyy (estimated ore deposit) (Consolidated Mines, Inc. v. CTA, GR, No, L-18843, August 29, 1974) Buzeword: cost of a WASTING ASSET Charitable and Other Contributions (14) Charitable and Other Contributions. — (4) Jn General, — Contributions or gifts actually paid or made \tithin the taxable year to, oF for the use of the Government of the 3F any political subdivision thereot ively for pubic purpo for associations organized and operated exclusively for religious, Chantable, scientife, youth and sports development, cultural or dua and Five percent (5%) in the case of corporation, Of te acorn income dived om trade, uses of (sslon ae computed without the Beneft of this a ts breesin and the folowing (2) Contributions Deductible in Full — Notwinstand 2) Cont L aenstanding the Provision ofthe preceding subpareeraph, donations to the folowing Institutions or entities shall be deductible in full INCOME Tax settee never oe Gonation which is made to the cover" or political subavisions notin secoreance plan shall be subject tothe limtations creat iracnte ta (b) Donations 2 Certain Foregn Sroantzations. “° Donotans 'aeR, Inttutons or tnemaional In institutions or inter. deductible in parse sea (€)_ Donations to Accredited No term “nongovernment organiza corporation: AgoVernment Organizations. — The ton" means a non profit domestic rules and regulations to be promulgated, ‘upon recommendation of the Commissioner; mot {he Commissioner, but n no cata to exceed try perce of the total expenses; and eae (4) The assets of which, in the even of dissolution, would be 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. ‘Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term “utiization” means: kind (Including administrative 193AXING Sts AND CASES “ax Hane LES sit REVIEWER WITH CO coe eee ee ean wy wh lee ee nich comes within one an ameue se se 1365 I at rein hy more purposes ‘ragaton, but ony fat the Une Se at Seemed aration canned esnips erento rete ce promulgated by Ca pe better accomplished by Year and ee a tan by mmeote payment of fds erctlan The ameurt of any chartable contribution of (2) valuation gy sat be based on the BUIION cost of seid propery. eee ra) Proof of Deductions. conoution o ts sha (2) broot of Deduction ned under the res an regulators eduction, 2 aay of Finance, upon recommendation ofthe Ecmmisonee ‘= Donations to the following are partially deductible: 1. To the government, exclusively for public purpose: + Contributions to a government entity is deductible when used exclusively for public purposes. Hence, the contributions to the Christmas funds of the various city police were held not to be deductible because the ‘Christmas funds were not spent for public purposes but {3s Christmas gifts to the families of the members of the different police, (Roxas v. CTA, G.R, No. L-25043, Apr 26, 1968) 2. To accredited domestic corporations or associ organized and operated exclusively for religious, charitable, scientific, youth and sports developr ‘cultural or educational purposes, or for the rehabilitation of veterans, part of the net income of which inures to the benefit of ant Drivate stockholder or individual 3. To social welfare institutions 4, To non-accredited NGOs jons which are © The amount that can be deducted should not exceed: 10% (individuals), or INCOME Tax, 5% (corporations) + of the tax trade, b for cont ayers taxable income den income derived trom oF rfesion bear the deduct ms and donations. ra So, look at two things: 1. your ioe oF 59 (os the case may be) af your ats eee al then see what is lower. You're allowed t fee That amount wnat youre allow to Donations to the following are fully deductible: 4, To the government, exclusively to finance activities education, youth, heath, sports” development human Sertlements, science “and “culture, and” in. ecanomie jevelopmentt according to the NEDA’ Pian {in other seecoprar an (in other words, 2. To certain foreign institutions or international organizations (treaty-based, ete.) Tere 3, To accredited NGOs 4, Via special laws NGOs are non-profit domestic corporations organized and operated exclusively for scientific research, educational, character-building and youth and sports development, etc., where 10 part of the ‘net income inures to the beneft of any private individual or stockholder (© Their level of admin expenses cannot exceed 30% of the total expenses, and they must utilize contributions not later than 15th day of the 3rd month after the close of the taxable year when the donati © It is the Philippine Council for NGO Certification which accredits NGOs. to the Revenue District Office (RDO) which has jurisdiction over his place of business within ry (30) days after receipt of the duly issued Certificate of Donation, which shall be attached to the said Notice of Donation, stating that not more than thirty percent (30%) of the said donation/ ‘lfts for the taxable year shall be used by such accredited non- Stock, non-profit corporatior/NGO institution (qualified-donee institution) for administration purposes. (R.R. 12-2018)‘TAX MADE Less TA = - AREVIEWER "WITH CODALS "AND CASE! riversity of the Philippines sha re cements eae Seaver wp rhe value of the donati 9500} tbr tote Nave Contributions foe, an the same shall Be exempt fot to 150% ofthe value of the donat! Donations to fester child agencies are allowed 25 deductions tp Der attant of the amount donated. (R.A. 10165) wi ns fn ge eo Una gy in es ee i en eater Fe nr ae UY eas el et ay ee te Sue Seige ct a Se mr ae toy ee fr tebe rs Dstt Ronee ie tentauaghe Searle esate St Baro tear eats sain De tases arloee pec nt aa Bar Exam) ‘Suggested answer: No, the good doctor may not use the donation as ‘deduction. A charitable donation to a domestic corporation can be Used as # deduction trom gross income if the domestic corporation is ‘organized and operated exclusively for educational purposes and 10 at oft net income ines tthe bene of any private stockholder 2 Indl In hls case, the donee grants yearly dividends to ts olders. Hence, donations to it are not allowable deductions. (Congratulations to him though for being a successful cardiologist!) Yeors ago, Kisant bought» pace of land in Muncy RPGS He coated te lord ton san, Karns 7906 wreh the property had @ fair property had @ fr market value of PhP75,000, and pald the Kornelo, in tun, so Kernel, in tro, cold the property in 2000 to Katrina for PhP 6.5 Fancee %4 Ped te cepa! gains tax, documentary stamp ta, loa! fate 2h ord ater fees and charges. Katrina, in tur, dented School last August 30,2017 tobe used asthe ste ¢ donation was even eg es pal, because Katina ‘e =xempt from taxation. At the time £5 donation to Kleret Scho}, the ond had 9 te market vale of INCOME Tax, vot BO din fa pe eS a SO are mar Kats co aise Sete an es Bat ne val oe anton esearch and Development (R&D) ‘Sec. 34. (1) Research and Development. — (4) In General. ~ a ta expenditures which are p incurred by the taxpayer in connection with his trade, F profession; (©) Chargeable to capital acco character which is subject to In computing taxable income, such deferred expenses. shall be tably distributed over a period of not less may be elected by the taxpayer (beginning he taxpayer ist realizes benefits from such ot apply to any exper expenditures. The elector Eesane cena Tor which the taxpayer makes the Incurred during any taxat electionANG: “Tax MADE LESS TREND CASES iad ‘a REVIEWER WITH CO™ INCOME tax. nis Subsection shall not appiy Deduction. 1e employer who estabii (2) eimitations on * Donen can deauer but, Nt PENN rstforhis employee's forthe acquistion or improvement as San a rape Oe go 2 ald tothe trust is reasonable ae opment of» craacer whic 0 It must not have been previously alowed for (double deduction) 1" deduction a es eeaie (anyway rst mueeer @ Must be apportioned in e consecutive years, payment is made. 7 RAD can be treated as ordinary and necessan, + When an employer makes a Personal Equity and Retirement Account (PERA), the employer + Expenses f0 . ‘expenses provided that: is incurred during the taxable year; and qual parts over a period of 10 beginning with the year in which the Contribution to his employee's : ur only to te et lovers contribution that woul complete the mses © Itis incurred in connection with his trade or business, allowable PERA contribution of an employee (R.A. 2011-17, with RA. 951 , «+The taxpayer can elther fully deduct it or amortize the deduction, ‘+ This is not applicable to the expenses: ‘Additional requirements for deductibility ‘0 for the acquisition or improvement of land or property to be rm hese are subject to depreci (K) Additional Requirements for Deductibity of Certain usedin cr econ th AD ese are subj Preciation Q pat ysuicements for Dedectibty of Certain. pletion) ‘deductible from, oF taken inte account in computing gross Income ‘© incurred for the purpose of ascertaining the existence, ‘oF for which depr location, extent or quality of any deposit of minerals and ol, required to be deducted and withheld therefrom has been paid to the ‘Bureau of Internal Revenue in accordance with this Sections S@ and Pension trusts | Bi of this Code, Taxpayers who clai of which are subject to withholding deductions were in fact subjected to prog (2) Pension Trusts. — An employer establishing or maintaining a | © Ifo | not be lowed. Js ring the taxable year In excess Such amount (3) has not therettore | + For example, Dosan, Been alowed ase deduct, and (2) apportioned i eaual pars vera period ten (10) connective years begining wih he Year since broke’ Tees are subject to withnoling tax, Dosan ‘hie tetra or payments mage, anne wen eves” | | broker's fees. ‘* Two kinds of deduction for employer: | : © Under Subsect the pension © Under this Section: reasonable if Ces of such conibutons TNE Pal tothe wed in a few exceptional cases: 1): contributions to such trust to cover investigation or reinvestigation/ reconsideration, deductions for expenses, the amounts holding was made, then the claimed deductions will 2 real estate lessor, can claim the broker's fees he paid to Mr. Han as a deduction. However, ‘must show that he previously withheld the taxes on the if no withholding was made, the deductions may still be uring tr | » The fee reported the income and pays the tax due ee The payee epee the interest and surcharges at the time ‘of the auditynoe LESS TAKING = en Ra EEBAIS AND CASES A payee filed t0 report the income o +The reciente tholding agent te dat, Oat Us and surearges) at Eh ayo ronvestiaton/Fec aia ying agent erroneously und ; +The witholing 2Fereqce between the Correct amu tax but paount of tax withheld ne aOrae the time of the, au surerarges reconsideration. (RR: Henry, 0 US, naturalized COVE fr ga 9225, His mother le Face Phippine Zener a pe wants t make use oft a tot and pulling ress. considering that he needs money forthe 2 make use ofthe (you a8 a tax lawyer for advice. rn what tox beets, any, canbe obtained By Henry and the Ca ee lepebac Wansaclo? (2016 Bar Exam) ‘suggested anwar: Henry can use the rental expense on Schon I be ment» diferent route and got 3 the property would aso give him less cash, as banks normally loan out Up to 70% ofthe value of the mortgaged property. With the sale Teaseback, he gets more money for his business (the consideration ‘minus capital gains tax which is just 6%) with the added bonus of having a higher amount to deduct. ‘Te buyer wil have a higher return in leasing the property to Henry than offering him a loan. Instead of interest payments on the Ioan (which is subject to restrictions on conscianability), he gets the full ‘amount of rent as income. He can also deduct depreciation expense {2 he would now own the property, Optional Standard Deduction Sec. 34, (1) Optional Standard Deduction (05). — deauctns alone under the preceding Subsections, Sublet to tx uncer Secon 24, other than a nonresident ale, eduction in an amount not exceeding forty percett INCOME tax _ fu pide ar (40%) of. gross sales or gross recaps records pertaining this Code during the taxable year, as may ‘and regulations promulgated by the Secretary of Finance, upon Facommendation of the Commissioner (As amended by TRAIN) lard Corporations, except nonresident foreign corporations, can elect a stand deduction not exceeding 40% of its gross income. ‘The OSD may be availed of by: © Acitizen, whether resident or nonresident © Resident alien, © Domestic corporation, (© Resident foreign corporation, (R.R. 16-08) © Partnerships, and (© Taxable estate and trust. and nonresident foreign corporations + Nonresid The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or gross receipts during the taxable year. © Ifone uses the accrual basis of accounting for his income and ‘deductions, the OSD shall be based on the grass sales during the taxable year. 0 If one uses the cash basis, the OSD shall be based on his ‘gross recelats during the taxable year.202 rAXING: x MADE LESS Tf cASES. snore that for individual taxpayers the b 0 The law 's speci te ithe the 40% 05D s he "cost of sales” ani lc ed fo be deducted for Purposes of the basis of the OSD- vidual taxpayers alowed BY law to repo vidual eNeeions under @ different ”“methog a orips sales oF GF055 Feces shal be the rose withthe said acceptable method of 16-2008) + No need to substantiate with receipts: all be a maximum of “The OSD allowed to corporate taxpayers s ‘0% ofthe gross income during the taxable year less sales retu © Gross income shall mean the gross sales sms, discounts, and allowances and cost of goods sold. + Cost of goods sold includes the purchase price to produce the merchandise and all expenses incorred in bringing them to their present location and use. © In case of sellers of services, gross income means gross, receipts less sales returns, allowances, discounts and cost of Cost of services include all direct costs and expenses Tecessarlly Incurred to provide the services required by ‘customers and clients, (R.R, 16-2008) ‘The following are not allowed to use OSD and must use item! deductions: © For corporations, partnerships, and othe + Those exempt under the Tax Code Special laws, with no other taxable income; + Those with income subject to special ial tax oe bf special/preferential subject to income tax under Sections ‘and also with income subject to under the Tax Code and other speci er taxable income (like Barangay Mi INCOME Tax. 203 + Those with income aa Subject to special/preferential tax z Bled sig to income tax under Section tax rates (287 20ssr SUPE to special/referental = Example: Seoet ee Soe pee rascal Sina nea erage gross sales of P1M with a cost of sales ‘amounting to P rss eM eh et fs amoung ae lows, Less: CoGS Basis of the OSD x OSD Rate (max) (OSD Amount. 400,000 rk opts to use the OSD in lieu of the itemized deductions ywed under Section 34 of the Tax Code, his net taxable income all be as follows: Gross Sales Less: CoGS Gross Sales/Gross Income Less: OSD (max) Taxable Income Dractice. At the end of 2012, Dr. K found professional income in the amount of PI, 5 Incurred expenses amounting to PS60,000.00 constituting mosty of fis office space rent, utilities, and miscellaneous expenses related to his medical practice, However, to Dr. k's dismay, only P320,000.00 Of his expenses were duly covered by receipts. What are the options available for Dr. K so he could maximize the deductions from his ‘ress Income? (2015 Bar Exam) ‘Suggested answer: Dr. K can just opt to use the optional standard deduction of 40%. The Tax Code allows individual taxpayers to ‘deduct up fo 40% of their gross sales or gross receipts. He will be ‘allowed fo deduct P400,000.00 from his gross receipts, which is ‘more than his substantiated and documented expensessax nace 65 7% | A REVIEWER WITH “CODALS AND CASES: Special Rule on GPPs and te choice of deductions (™emized oF OSp) partnership (ike 2 12W firm) and the ch parnersip may only Use OSD once, bartner cor aa orthe partners comprising the partnership stn ott 5, a a OSD. (R.R. 8-2018) =A general professional partners comprising Imposition of Ceilings by the Secretary of Finance crwtneanding the provision ofthe preceding Subsections, the Nan we pon recommendation ofthe Commissioner, Torts purpose, may ‘The Secretary of Finance can impose ceilings on the deductions after a public hearing (© The ceiling won't apply to OSD since it is under (L). Non-deductible expenses Sec. 36. Items Not Deductible, — (A) General Rute. — in computing net income, no deduction shal in ‘any case be allowed in respect to — (2) Personal, living or family expenses; (2) Any amount palé out for new b improvements, or betterments made to property or estat ings or for permanent ase the value of any ‘Tis Subsection sal not apply to tangible driing and development ‘costs incur Petroleum ope 4 "ore educa onde br Sectan Se of xpended in rest ‘exhaustion thereof for which an all 19 property oF in making good lowance is or has been made; OF INCOME tax 205 ee Tosses from sales or exchanges of property dvscan For purposes ofthis para use any his brothers ond Sars od), suse, ances, ane In the case of distributions i idual and corporat (3) Except in the case of distributions i two corporations more than ffty percent personal holding company or a foreign personal holding company; (4) Between the grantor ané a Advciary of any trust; oF (8) Between the fiduciary of and the fiduciary of a trust and the ‘Aduciary of another trust Ifthe same person isa grantor with respect ‘to each trust; or (6) Between a fiduciary ofa trust and beneficiary of such trust. ‘The following are not deductible: 7 1, Personal, living or family expenses £2. Any amount paid for new buildings or for permanent improvements made to increase the value of any property or estate 3. Any amount spent in restoring property or in making good the exhaustion thereof for which an allowance has been made insurance policy covering the 4. Premi jid on amy freer the taxpayer is directly or ir any officer, or employee 2 beneficiary under the pol * No deductions shall be allowed for: or exchanges of property (Section 122, 1. Losses from sales RAR, 21940); or206 ke also affect the taxable inc rules on recognizing inco of capital assets has sp. the NG aoe Less 7% ane int ARTH CODALS AND CASES 2. Interest expense: OF 3, Bad debts : 0 Where the transaction (ether of 1, 2 OF 3) iS betwee, related taxpayers. The following are not deductible either: lowing personal expenses 1. Insurance paid on 2 dwelling owned and Occupied by thy taxpayer 2. Premiums paid for ife insurance; professional man rents a property for residentig por of the rent is allowable as business expense; (But ithe izes part of his house as an office, that portion is considereq business expense, thus deductible) 4. Allowance given by daddy to kids; 5. Alimony or allowance paid under a separation agreement, (Section 119, RR. 2-1940) The following capital expenses are not deductible: 1. New buildings, permanent improvements, or any amount spent in restoring property; 2. Cost of defending or perfecting title to property; 3. Architect's services; 4. Expense for administration of estate, court costs, attorneys fees and executor's commissions; 5. Amount assessed and paid under an agreement between bondholders and shareholders of a corporation, to be used in the reorganization of the corporation. (Section 120, RR. 2-1940) Premiums for life insurance of employees or of any person financially interested in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such polcy are not deductible, (Section 121, R.R. 2-1940) ‘Capital Gains and Losses (Sale or Exchange of Property) Capital gains and tosses from the sale or exchange of property come of the taxpayer. Unlike the normal Me and deductions, the sale or exchange ecial rules (/.e., holding period, losses only t2 extent of gains, net capital loss carry-over) which will determine INCOME Tax 207 tris important to know that capital gains andy Note that these rules on capital gains and market, 2nd il) real property held as capital assets; the sacs ‘Srenange of either is subject to final tax, - Imed by the taxpayer, losses from the sale or capital gins and losses 1+ Net capital gain is the excess of the gains from such sales or exchanges of capital assets over the losses fom sec sais Oe exchanges: loss is the opposite, shall be reported in the taxpayer’s income tax return and shall be subject to the graduated income tax rates in addition to the net income from other sources. EXCEPT: + Capital gains from the sale of real property held as capital assets (subject to final tax); Capital gains from sale of shares of stock that are nat traded at the stock exchange (subject to final tax); and Percentage tax on the sale or exchange of shares of stock Sec. 39. Capital Gains and Losses. — (A) Defnitions, — As used in th (4) Capital Assets. — The term or property held by the taxpayer primar e the ordinary course of his trade or business, of property used in the \yade or business, ofa character which is subject to the allowance {depreciation provided In Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. - nthe ase of taxpayer, B) Percentage Taken Into Account. — 10 the case 7 Sher than’ eSrpraton, ony te aorng percentages ote gl ‘r loss recognized upon the sale or © bbe taken into account In computing net and net income: ‘asset shal,AXING: “TAX MADE LESS 7 CASES. [AREVIEWER WITH CODALS AND {22 sSetae then bel (12) ons Coy pene ak the capital ase hae BEEN ed fr mae Saofe 2) mons ) Limitation on Capt Srenes ef copra sss shal ins from such sales oF exc ered una tne ows of he PDD epost, : ee gence, of Indebtedness Issued py dsued by 2 government or poiticy pans avin relstered fo, ny Shall not be subject to the foregcing determining the applcabiny a = Losses. from sales or fed only to the extent of ios resulting imitation and sol nt be seh maton to ote ss. CCopitel Loss Carry-over.— I any taxpayer, other than 2 Co arctntactalnen any taxable year 2 net capt los, such ls in oxens of te net income for such Year) sha seated in he socccsing taxable Yer as.2 oss fom the Zale fr oxehange of capital asset held for not more than twelve (12) mont (E) Retirement of Bonds, Etc. — For purposes of this Title, amounts. fecewed by the hole upon the retirement of bonds, debentures, notes or cecicates or other evidences of Indebeegness Issued by ny corporation (inuding those issued by 2 government or pol uboiwidon thereat) wit terest coupon orn registered frm, ie considered as amounts received in exchange ere (P) Gains or Losses From Short Seles, Ete. — For purposes ofthis (2) Gains or losses from short sales of property shall be considered 2 gains or losses from sales or exchanges of capital assets; and (2) Gains or losses attributable to the fallure to exercise privileges or jeptions to buy or sell propety shal be considered as capital gans oF ‘+ What is a sale or exchange? © There is a sale or exchange of property when there is a0 effeive nd actual transter of ownership of the prope) to another as would divest the transferors of the benef accruing from the ownershi iuable Sauna from nership of the property for a valuabl © What is important is wh i Consummatee wares, hen the sale or exchange Thus, it includes: INCOME Tax. 209 © Forced sales + Distribution in complet iguidaton 0. The following ae not considered sales or eehanges +The conveyance of a trust property is treated asa cs title, not an exchange or s: (BIR Ruling 329-12) + Conveyance of the common areas of it eas of 8 condom from the developer to the condeminiom coon (Since no consideration and concern management ofthe common areas) “= Tere” or te a beneficiary of trust wation and confirmation of capital Assets Itis important to know whether the asset sold or exchanged was hheld as ordinary asset or capital asset because of the different rules which apply to each. ‘So, what are capital assets? Well, we know what they AREN'T. The codal enumerates assets which are nat considered capital assets. ‘The codal enumerates what ordinary assets are. All assets other than ordinary assets are capital assets. it is considered an ordinary asset? ordinary asset, then the rules on capital assets ing period, losses only to the extent of gains, loss carry-over) will not apply Capital assets are property held by the taxpayer (whether or not connected with his trade or business) but does NOT include: 1. Stock in trade of the taxpayer; 2. Other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the year; 3. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; 4, Property used in trade or business of a character which is subject to allowance for depreciation; and 5. Real property used in trade or business. Examples of properties classified as capital assets: © Personal property not used in trade or business+ Property initially classified 5 capil ‘an ordinary asset and vice vel ° ° Shares of stock would be ordinary assets only to a dealer securities or a person engaged ‘an active trader in, securities. (China Banking Corporation v. TAXING: TAX MADE LESS TF = [AREVIEWER WITH CODALS AND CAS residence, vehicles, appliances Movable properties fire of a zombie, SECUTties held by furniture, jewelry, sculpture one by way of investment Real property not used in trade or business Residential house and lot, idle land not used In business ‘operations. ital asset may later become Calasanz Vv. CIR, G.R. No herited land was develope pital to ordinary asset; ang 1248, July 31, 1974) the purchase and sale of, G.R. No, L-125508, July 19, 2000) ° 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. Let's have some guidelines in determining whether real property Is a capital or ordinary asset: (R.R. 7-2003) ° ° For those engaged in real estate business, the following are ordinary assets: All real properties acquired by the real estate dealer; al properties acquired by the real estate developer developed or undeveloped; All real properties held for sale or lease in the ordinary € of business or which would be properly be included In the inventory; All real properties acquired for lease/rent; Al real properties acqui business by a taxpayer habit real estate. the ordinary course 0 lly engaged in the sale o Can the nature of the inary © Sonar Property change from ordinary ‘Changing from real estat 1 state toe ee fe business to a non-real es ‘Ceasing operations of the real estate business: NO ° INCOME Tax, aun The properties ac abandoned: NO + The properties ac become idle: NO ‘wired by the real estate business are uired by the real estate business Real estate business trans person: YES ers the property to an ordinary The nature of the property the buyer/transferee. Hen, real e ordinary) 1 OM change in he nods of Peo buys 2 lot rom a te dealer, the et becomes a ‘the hands of Pedro. oe In case of involuntary transfer (Ike ike expropriation or foreclosure), the Involuntary nature shall hve NO ettect on the classification nthe hands ofthe mvoontay selen, For those NOT engaged in the real estate business, real property being used or have been used in the trade or business are considered ordinary assets. Can the nature of these change into capital assets? + YES, provided they show proof that the same have not been used in business for more than two years (prior to the taxable transaction). For EXEMPT corporations, real property used in exempt transactions shall not be considered for business purposes, and thus are CAPITAL assets. ‘Rules on capital gains and losses ‘+ The rules on capital gains and losses are the following 1 First, determine if the asset is a capital asset or an ordinary asset. ‘a. Ifitis an ordinary asset, then the rules below don't apply. Whatever gain or loss enters the taxpayer's income, without benefit of the rules. - Second, keep in mind that these rules do not apply to: a. Real property with a capital gain tax, and b. Shares of stock of a domestic corpor the stock exchange with 2 capital assets have thelr own rates. ins tax? The whole 6%, ‘Any capital gain subject to the capital ee aa ‘be included in the computation of gains tax shall notraxin ax nane cee ‘A REVIEWER WITH CODALS AND CASES 1 income tax at the end taxable income and incom te epeause these are Subject to nal tax aleagy fe transaction on the capital asset should be a sag, : a taxpayer other than a corporation (fy, nthe ase one following percentages of the inviguas ony) tnt eccount in computing net ap loss shal and net income (percentage into acco cr 00% of the garvoss, the asset has been held otmore tan 12 months; be SoM ofthe gatvoss, i the asset has been hed fy * pore than 12 month ©. For corporations, co Considered a 100%. Losses from sales or exchanges of capital assets sh 5 iowa only to the extent of the gains from such aro ce limitation on capital loss) (see example bel ©. rte taxpayer incurs et capital loss, such loss cannathe deduced rom Ns ordinary income becouse the loss Be deducted onl to the extent of capital gains, © Note tat the limitation on capital loss does not aply 2 bank or trust company Incorporated under the fs yains and losses are always ‘any corporation (including one issued by a government or political subdivision thereof), with interest coupons or registered form. 6. If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss, in an amount n ‘months (meaning, 100% of the loss). This is what yOu cl ‘et. capital oss carry over, © Corporations don’t have net capital loss carry-over. (BU. that’s ok, because corporations don’t have feelings.) Example: Sung Bo-ra Cay is in the business of graphic design. She Mae ‘ordinary income of 25,000, ca 7 F25,000, capital gains of P6,000 (from the s# of her collection of vintage baskett ‘cards, which sh held for fo INCOME Tax. 213 years), and capital losses of P4000 (rom encrusted rice cooker, which she held tor twe nang fe diamond: two years). ordinary net income Gains from sale of capital asset p6,000 But held forfour years, s0 S05 Loss from sale of capital asset But held fortwo years, so sou Net taxable gain Taxable Income ae és 26,000 Same facts, but Sung Bo-ra Cay had and capital os2es of Pa ee C2Y had capital gains ofP3,000, Ordinary net income Gains from sale of capital asset 3,000 25,000 3,000 4,000 2,000 25,000 50% only! 1,500 Loss from sale of capital asset 10,000 530% only! Net capi 5,000 loss (P3.500) Taxable income 25,000 You cannot deduct the capital loss of P3,500, Because you can only deduct to the extent of your capital gains, + Note that for corporations, the following are not applicable: © Holding period (so itis always 100%); and © Net capital loss carry-over. Ordinary income ‘Sec. 22, (2) The term “ordinary income" includes any gain from the Sale or exchange of property which isnot 2 capital asset or property described in Section 39(A)(1). Any gaia from the sale or exchenge of Jered, under other provisions of thi