~ chapter 13-B - Special Allowable Itemized Deductions and NOLCO

cffAPTER 13-B ._. _ · Chapter 13-8 - Special Allowable Itemized Deductions and NOLCO
SPECIAL A~LOWABLE ITEMIZED IJ£0UCTIONS & NET 4. Additional training expense under RA 8502 - Jewelry Industry
Development Act of 1998
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£~PE=RA= 5. Additional labor training expense under the RA 11534 - CREATE law
6. Additional contribution expense under the Adopt-a-School program under
chaPter Overview a~.d Objectives: ..· ' I
RA8525
------------------------~---------------------------------~--------------------------------------------- 7. Additional deductions for compliance to rooming-in and breast-feeding
This chapt~r covers special itemfzed deductlo_ns
,, '
at\µ t~e net operating loss carry
1• , r
practices under RA 7600, as amendeq by RA 10028
over. 8. Additional free legal assistan~e expen~e under RA 9999 .
After this chapter, readers are expected to demonstrate .m astery of the following: 9. Additional productivity incentive bonus expense under RA 6971
1. Special deductions allowed under the NIRC and special laws
2. Requisites and deduction :rules of.the allowable special expenses SPECIAL EXPENSES UNDER THE NIRC QR SPECIAL LAWS
3. Additional deduction "incentiV;es granted by spefial laws . .,
4. Measurement and carry-over rules of Net Operating Loss Carry-Over (NOLCO) INCOME DISTRIBUTION MADE BY TAXABLE ESTATES·OR TRUSTS
Income distribution made by the administrator of a taxable estate in favor of the
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS heirs or by a trust~~ of a taxable trust in _favor of the ;beneficia~ of 't he trust.is a
special deduction against the gross income of the estate or trust. The income
Special deductions are other items of deductions which may or may not partake
distribution shall be included by the recipient heir or beneficiary in his gross
the nature of an expense, but are allowed by the NIRC or by specjal laws as
income.
qedu~ons. Special deductions include deducti.o n incentives to taxpayers in
assisting and in complying with certain legal requirements. Illustration
Don Mariano transferred a commercial lot and a PlM stock investment in irrevocable
Special Allowable Deductions trust in favor of his son, Ritchie. The trust earned the followinglncome in 2021:
A. Special expenses under the NIRC and special laws
Rent income on the lot I p 1,200,000 1 '
1. Income distribution from a taxable estate or trust ·· Less: Leasing expenses - 200,000
2. Transfer to reserve fund and payments to policies and annuity contracts Rental net income '. p 1,0·0 0,000
of insurance companies Dividend income, net of final tax , ·. 36,000 '·
'3. Dividend distribution of a Real Estate Investment Trust (REIT) under RA Trust net income · · · P 1,036.000
9856
4. Transfer to reserves funds of taxable cooperatives In accordance with the trust indenture, the trustee distribut,e d half of the gross rentals
and the entire dividends to Ritchie: , _
5. Discounts to senior citizens under RA 9.25 7
6. Discounts to persons with disability under RA 9442 Special deduction _
7~ Additional expenses on apprenticeship agreement The special deduction is P600;000, the half of the gross rentals given to Ritchie. The
distribution of the P36,000 dividend to .Ritchie shall not be deductible as this is not
B. Deduction incentives under 'the NIRC and special laws included in the gross income of the trust for purposes of the regular income tax.
1. Additional compensation expense for senior citizen employees under RA
The net income of the trust shall b~ computed as follows:
9257 .
2. Additional c-0mpensation expense for persons with disability under RA Gross rent income P 1,200,000
7277, as amended by RA 9442 . . . .· . Less:
3. Cost of facilities :improvements for persons with d1sab1hty in accordance Regular allowable deductions P 200,000
with RA 727-7, as amended by RA 9442. Special allowable deductions
Income distribution to beneficiary 600.000 800,000 ,
Net income p 400,000
. 537

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chapter 13-8 - Special Allowable Itemized Deductions and NOLCO
Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
NET TRANSFER TO RESERVE FUND AND PAYMENTS TO POLICIES AND ANNUITY
CONTRACTS OF INSURANCE COMPANIES The net-income of the insurance company shall,be computed as follows:

Under the Insurance Code, non-life insurance companies are required to maintain 2020 2021 · 2° 200
a reserve equivalent to 40% of their gross premium, less returns and cancellations Premium revenue P 2,100,000 P 3,000.000 P2,~o~, o~o0
for risks expiring within one year. For marine cargo risks, the reserve is Less: premiums ceded 420.000 600,000! . O ·1;0-
equivalent to the amount of premium on insurance during the last two months of 0 p 2 400,000 P 2,000, · 0
Net premiums ·p 1)68 0,o 0 _ ' . *160,000
the calendar year. Release from reserve .
Gross income p 1,6B0,000 p 2,400,000 P2,16O;OOO '
The net additions, if any, required by law to be made within the year to the Less:
reserve funds and the sums, other than dividends, paid within the year on policy Rego ar allowable deductions · ' f

Cta·tn-s.e1Qi)en.s e :
1
. · P · 20 0,,ooo P.: aoo,ooo p;1,ooo,000:
and annuity contracts may be deducted from the gross income of insurance 100,000 · 300,000 , 25-0,000
GtHDmissi0n eKpemse.
companies. 300,000 350,000 . 340.0.0 0
Administrative expense
Total p 600,000 P 1,450,000 P 1,590,000
Under current regulations, the transfer to the reserve fund shall be deductible in Special .a llowable dedlllction ' '·.'

the year it was actually paid and not in the year it was- determined. Also in .PQyment to reserve 672.000·.
f, ·288.000 - - - -
consonance with the tax benefit rule, the release of the reserve is treated as an Total deductions p 1,272,000 . P 1,738.000 P 1,590,000
income in the year of release. Net income P 408.000 P 662.000 P 570,000

Illustration Note: The rielease of reserve from the reserve fund is included in gross income. . .
The following relates to the performance of an insurance cpmpany: . ,
DIVIDEND DISTRIBUTION OF A REAL ESTATEINVESTMENT TRUST (REIT).
2020 2021 2022 A REIT is a publidy listed corporation established principally for the. purpose of
Premium revenue P 2,100,000 P 3,000,000 P 2,500,000 owning income-generating real estate assets. A REIT is legally mandated to
Premiums ceded 420,000 6Q0,000 500,000 distribute 90% of its distributable income as dividends to sharehoiders.,
Claims expense 200,000 800,000 1,000,000
Commission expense 100,000 300,000 250,000 Under RA 9856, the dividend distributions of REITs are treated as special
Administrative expenses 300,000 350,000 340,000 deductions against gross income.
_Required legal reserves . 672,000 960,000 800,000 For purposes of computing the taxable net income of REITs, dividends distributed
by them from their distributable income after the close of a tax.able year an!.l on or
Required: Determine the special deductions and the net income assuming that the before the last day Qf the fifth month following the close of the taxable year ,$hall
required transfers to the reserve funds were made in the same year. be considered as paid on the last day of such taxable year.

Solution: TRANSFER TO RESERVE FUND OF COQPBRA TIVES

The net amount which will be paid to or released from the reserve fund is computed I .

as follows:
Required reserves
Less: prior year-reserve
Amount payable (receivable)
Under RA 9520, cooperatives are required to maintain reserves for their
protection and St!)bility. Cooperatives <1re exempt from income tax, but are subject
2020 2021 2022 to tax on their income from unr l~t~d activitl~s. The amount transferred by the
P 672,000 P 960,000 P 800,000 cooperative to the reserve fund ou\ of the net surplus from 1,mret~ted activities is
0 672,000 960,000 an item of deduction in the computation of tile taxable n~t income of the ·
P 672,000 P 288,000 (P 160,000) cooperative.

To simplify our illustration, let us assume that the contributions to the reserve were
Paid in the same year they were determined.

'
1
540
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 chapter 13-B - Special Allowable Itemized Deductions and NOLCO
ntustratlon Chapter 13-B - Special Allowable It mized Deduction and NOL 0
Lowland Coop summarized the following income and expenses from its exempt Conditions for deductibility of sales discounts to senior citizen
related activities and taxable unrelated activities: 1. Only that portion of the gross sa1 s exdusively us d, on urned, or enjoyed by th
senior citizen shall be e1igible for the deductible ales dis.c ount.
Related Unrelated 2. The gross sel1ing price and the sale discount must be separately indicated in the
Activities Activities IQtal official receipt or sales invoice issued by th establi hment for the sale of goods or
Sales p 2,000,000 p
1,000,000 p 3,000,000 services to the senior citizen.
cost of sales l ." Hl.QQQ 6QQ.QQQ l.BQQ.QQQ 3. Only the actual amount of the discount granted or sales di_scount not exceeding
Gross income l> 800,000 p 400,000 p 1,200,000 20% of the gross selling price can be deducted from gross mcome, net of VAT, if
Operating expenses SOQ.QQQ lSQ.Q_QQ 6SQ.QQQ applicable.
Net income p 300.QQQ p 250.QQQ e 550.QQQ 4. The discount can only be allowed as deduction from gross income for the same
taxable year that the discount is granted.
In compliance with t~e Co.o perative Development Act, Lowland Coop appropriates S. The business establishment giving sales discount to qualified senior citizens is.
10% of profit to the reserve fund, plus additional 40% to other required and optional required to keep a separate and accurate record of sales which shall include the
fu~~ ! name, TIN, ID, gross sales/receipts, discounts granted, date of transaction, and
J I
invoice number for every sale transaction to senior citizens.
The amount of special deduction and the taxable net income of the cooperative shall
be computed as: :Ulustration l
Medhub Drugstore Inc. recorded a Pl,200,000 total deductible expense and the
Gross sales from unrelated activities P 1,000,000 following sales:
Cost of sales 600.000
Customers
Gross income from unrelated activities P _400,000
Regular Senior citizens
Less: Regular itemized deductions 150.000 Gross sales P 5,000,000 P 1,200,000
Net income before statutory reserves P 250,000 Cost of sales 3,000,000 800,000
Less: Special itemized deduction
Appropriation to reserve fund (P250K x 10%) 25.000
Medhub adopts a policy of giving senior citizens a 25% discount. Consequently, it
Taxable net income P . 225.000 . granted P300,000 total senior citizens' discounts during the period.
Note: Only the appropriation for the reserve fund is deductible as a special expense, The 40%
The taxable net income of Medhub shall be computed as:
appropriations for other cooperative funds are not deductible.
Gross sales (PSM + Pl.2M) P 6,2 00JLOOO
THE EXPANDED SENIOR CITIZEN'S ACT OF 2003 (RA 9257) Cost of sales (P3M + PO.SM) 3,800.000
Gross income from operations
Senior Citizen or Elderly Less: - P 2.400,00Q
Senior citizen or elderly refers to any resident Filipino citizen ag.e d 60 years old ''
Regular itemized deductions P 1,200,000
and above.
Special itemized deductions
Senior citizens' discount
Under RA 9257, a senior citizen or elderly is entitled to 20% discount in certain
{P1.2M x 20%)
establishments such as hotels and similar lodging establishments, restaurants, Taxable net income
;4:Q,OQQ 1.!f40.QOQ
recreational centers, and other places of culture, leisure and amusements, P 960,000
hospitals, drugstores, and services such as medical, dental, domestic air, sea and · Note:
land transport, and funeral or burial service providers. 1. The gross sales to senior cit' . ·
' .
while the di t. izens mu st bij, reported 8fOS~ of the ~enior citizens' discount
. scoun is presented as a separate expense.
The discounts granted to senior citizens by covered establishments and service 2. The cla1mable senior citizen di h .
•r H h . scount s a1I not exce,ed 20% of the gross sales from senior
Providers are allowed as special deductions against gross income. c1 izens. ence, t e deductible amount is P240,000 not P300,000. .
. ·~

541
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Chapter 13-B - pecial Allowabl ltemiz d ducti n and N LCO Chapter 13-B - Specia1 Allowable Itemized Deductions and NOLCO
ntustratl·on 2 DEDUCTION INCENTIVES UNDER SPECIAL LAWS
Ta t:y ReS t aurant Corporation provide a 20% discount to senior citizen . It recorded
the following receipts during the year: ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR CITIZEN
EMPLOYEES .
. '

Under RA 9257, private establishments emplpying senior citizens shall be entitled

Total
Receipts P 500,000 P 4,500,000 to additional deduction from gross income equivalent to 15% of the total amount
Cost of services .2,800,000 paid as salaries and wages to senior citizens.
Other deductible expenses 1,100,000
Conditions for deductibility of additional compensation:
The special deduction fo senior citizens' discount and the net Income of Tasty 1. Employment shall have to continue for at least 6 months
Restaurant snan
be·computed as: 2.. Tbe ann.ual taxable income of the senior citizen does not exceed the poverty
Gross receipts [P4M + (PS00K/80%)] P 4,625,000 level as determined by the NEDA
Less: Cost of se1rvices 2,800.000
Gross income P 1,825,000 The poverty line or poverty threshold pertains to the amount of income sufficie.nt
Less: to me-et basic food and non-food needs such as clothing, housing, transportation,
Regular itemized deductions P 1,100,000 and health.among others. The senior citizen shall submit to his employer a sworn
Special itemized deductions certUkation that his annual taxable income does not exceed the poverty level.
Senior citizens' discount
(PS00K/8O%) x 20% 125.000 1,225.000 mustration
Taxable net income P 600,000 Assume a taxpayer employs bQth -regular and senior' citizen ·employees and paid the
following compensation during the year:
Note:
1. Receipts pertain to cash collections which are inherently net of any discount provided. Regular employees P 200,000
Hence, the receipts from senior citizens must first be grossed-up. Senior citizen employees with salary grades
2. The discounts must not be deducted out of net receipts. above poverty level 50,000
Senior dtizen employees with salary grades
DISCOUNTS TO DISABLED PERSONS (RA 7277) below poverty level 40.000
A person with disability pertains to an individual suffering from restriction or Total compensation expense P 290.000
different abilities as a result of mental, physical, or sensory impairm nt to
perform an activity in a manner or within the range considered normal for human The total deductible compensation expense shall be:
beings. Regular employees P 200,000
Disability pertains to physical or mental impairment that substantially imits one Senior citizen employees 90.QOO
or more psychological, physiological, or anatomical functions of an individual or Regular salaries expense P 290.000
activities of such individuals. Additional compensation expense
under RA 9257 (P40,000 x 15%) P 6.000
Discount to persons with disability , , .
Similar to senior citizens, persons with disability are entitled to a 20% discount The 15% additional deduction is definitely not an ,actual expense, but is allowed by
from certain establishments such ilS hotels and similar lodging establishments, law merely as an incentive for employers who consider senior citizens for
restaurants, sports and recreation centers, .places of ~ulture, leisure and employment. The regular salaries will be presented as part of regular allowable
amusement, drugstores on the purchase of medicine, medical and dental services itemized deductions. The 15% additional deduction shall be presented as special
in private facilities, and domestjc air, sea, and land transpo~. allowable itemized deduction. . 1

The discounts to persons with disability shall be allowed as a special deduction Senior citizens who are above the poverty level may avail of incentives under the
under the same terms and conditions as those for senior citizens. Minimum Wage law if they qualify as minim~m wage earners. . ·
... u .
- 543
544
 Chapter 13-B - 5 iaf All w · 1 It miz "-''LL.11< . H ti n an N
Chapter 13-8 - Special Allowable Itemized Deductions and NOLCO
ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR PER90NS WITH
DISABILITY pu-bl·IC
· h'lgher education
. institutions, or
. public
. technical
_. and vocational institutions
.
shall be claimed as additional deduction agamst gross mcome.
Pri ate e~tities ~hat employ dis bl d p rson who m et the required skills or
qu~Hfications, ei th e:. as r gular mploy , appr ntice or learners, shall be Conditions of deductibility: . . .
entitled to an addtti?nal d -du tion, from h ir gros in ome, equivalent to 1. Apprenticeship agreement between ~e e~terprtse (taxpayer) and the trainees
twenty-five percent (2S%) of h total amoun paid as afarie and wages to pursuant to the Labor Code of the Pl'uhppmes . ·
disabled persons. 2. Certification from Dep-Ed, TESDA, or CHED secured ?Y
the enterprise
3. The amount of deductions shall not exceed 10% of direct labor wage.
Requisites for deductibility:
. '

a. The entity present proof as certified by the Department of Labor and Illustration · . . . .
Texas lnstru~ent (TI) established ~n apprenticesqip program m trai~mg private and
Employment that disabled persons are under their employ. public school senior high stu~ents. The program was ~uly a~c~ed1ted ~y TESDA.
b. The disabled employ·e e is accredited with the Department of Labor and During the year, TI incurred a total of Pl,800,000 apprentice trammg expense on top
·E mployment and the Department of Health as to his disability, skills,, and of the following payroll expenses: ·
qualifications.
Factory personnel payroll P 8,000,000
The actual ·s alaries shall ·b e presented as part of regular expense while the 25o/ri Support departments personnel payroll 500,000
Administrative personnel payroll 1,500.000
additional salaries expense shall be presented as special itemized al owable
deductions. Total P 10,000,000

The additional deduction shall be computed as follows:

COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS
Under RA 7277, private entities that improve or modify their _p hysical facilities in Apprenticeship training expense P 1,800,000
order to provide reasonable accommodation for disabled persons shall also be Multiply by: Incentive percentage 50°/o
entitled to an additional deduction from their income equivalent to fifty percent Possible deduction P 900,000
(50%) of the direct costs of the improvements or modifications. Deduction limit (PBM direct labor x 10%) P 800,000

ADDITIONAL TRAINING EXPENSE UNDER THE JEWEL.RY. INDl:ISTRY 1 The deductible amount shall be the lower PB00,000. The same shall be classified under
DEVELOPMENT ACT OF 1998 · special allowable deduction. The Pl,800,000 training expense shall be claimable under
regular allowable deduction.
Under RA 8502 and its implementing rules and regulations, a qualified jewelry
enterprise duly registered and accredited with the Board of Investments- fBOI) is JIDOPT~A-SCHOOLACT OF 1998 (RA 8525)
entitled to an additional deduction from taxable income of 500/o, of the ~p_
enses
Under the Adopt-a-School Program, private entities are allowed to assist a public
incurred in training schemes approved by Techni~al Educat,on and· Skills
school in particular aspects of their educational program within an agreed period
Development Authority (TESDA). The same shall be deductible during tbe,. year the
' oftime.
expenses were incurred.
The adopting private entity which may be an individual in business or practice of
...
Condidons ' for ·deductibility:, I profession, a partnership, or a corporation shall team up with the DepED, CHED,
'

1. A qualified jewelry enterprise must submit to the BIR a certified tr\le ~o.py of or TESDA toward providing much rieeded assistance and services to public
schools.
,i ts Certificate of Accreditation issued,by the 801. , - , , .
. ! • 1 :/ , ~ ,. ' ' '• : • • , 'f i, .,
The assistance may be an aid, contribution or donation in cash or in kind but not
I

. 2. The traii;iing sc_h~me must be qppr,Qved pncl c,~~tlfled RY T.ESPt\~; ,

'. ' .. ♦ .
limited to infrastructure, physical facilities, real estate property, training and skills
ADDJTiONAL LAi:JOR T~INJNG:EXPENSE UNl>Ea wE CREJ\TE LA w. . . development, learning support, reading materials, computer and science
laboratories, health and nutrition ·packages, and assistive learning devices for
Under RA 11534, SO% of the value of labor training expen.ses incurred for skills
development of ·e nterprise-based trainees enrolled in public senior high schools, students with special needs.
545
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 Chapter 13 -B - Special Allowable Itemized Deductions and NOLCO Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
Qualification of participating schools : · 2. Supporting evidence
Any govern_ment school in all levels may participate i.n the program. Priorities The adopting entity must maintain sufficient evidence of the amount of
shall_ ~e .~ven to schools located in the poorest provinces, low income ass~s~nce i~c~rr~d, ~stablish the connectio~ of the expense to the adopting
mumcipah~es, an~ other local government units experiencing severe classroom entity s participation m the program, and mamtaln proof of acknowledgement
shortages, insufficient b~9get, or .having. numerous poor but high performing of receipt by the public school recipient of the donation.
learners. · ·
' 3. Apply for Certificate of Tax Incentive and Tax Exemption
Qualifi-cations of Adopting Private Entity , The adopting entity shall apply for a Certificate of Tax Incentive or Tax
1. It must have a credible tr;-ackrecord ·· ' l . ,
Exemption and submit the following documents to the Secretariat:
2. It must have been in existence for at least one year. . · ' a. Duly authorized or approved MOA
3. It must not have been prosecuted and found guilty of engaging in illegal b. Duly notarized deed of donation
c. Official receipts and other documents showing the actual value of the
activities such as money laundering and other similar ci~cumstances
contribution or d<;mation
Tax deduction incentive d. Certificate of Title and Tax Declaration, if the donation is in the form of
Contributions to the government in ·priority activities are deductible in full while property ~-
those made in non-priority activitie~ are deductible subject to limi~. e. Other adequate records showing direct connection or correlation of the
expense being claimed as deduction to the adopting- entity's participation
Aside from the usual regular deductible contribution (expense, an adopting. entity in the program
shall be allowed an additional deduction from gross income equivalent to 50% o.f . ·i ....

the contribution of the adopting entity for the "Adopt-A-School Program." Illustration
In 2021, Robotics Inc. entered into a memorandum of agreement with two schools to
Conditions for deductibility: adopt them as part of its corporate social responsibility:
a. The deduction shall be availed of in the taxabl~ year in which the expense is
paid or incurred. Name Nature Assistance granted
b. The expense is substantiated with sufficient evidence such as ~fficial receipts, Balakbak High School A public secondary school -
delivery receipts and other adequate . records which shall set . forth the · P 1,500,000
following: Divine World College A non-profit accredited
a. The amount of expenses being claimed as deductions donee institution P 1,000,000
b. Direct connection or relation of the expenses to the adopting private
entity's participation in the Adopt-a-School Program Adopt-A-School program was designated by the NEDA as a priority program in the·
c. Proof or acknowledgement of receipt of the contributed or donated 2021 National Prior
property by the recipient public school I '

c. The application together with the approved MOA endorsed by the National Robotics Inc. shall claim the following contributions expense as part -of regular '
Secretariat shall be filed with the RDO having jurisdiction over the place of itemized allowable deductions:
business of the adopting private entity, copy furnished the RDO having Contribution to accredited donee NGO P 1,000,000
jurisdiction over the property, if the contribution is in the form of real Contribution expense under RA 8525 1,500.000
property. L• 1 Regular deductible contribution expense P 2.500.000
Robotics Inc. shall likewise claim the following additional contribution expense as
Procedures for availment , special itemized allowable deductions:
' I l • ,'
1. Memorandum of Agreement
An adopting private entity shall enter into a Memorandum of Agreement Contribution expense under }¼ 8525 . P 1,500,000
Multiply by: 50%>
(MOA) with the head of the public sch_o~l. rrhe MOA shall specify t~e de~ils of
Special additional COIJtribution expense P 750.000
the adoption which must be f?r ~ m~mmum of _2 years pre-terminable only
when the adopting private entity 1s dissolved pri?r to _the end of such period Note: Only donations to public schools are allowed the additional deduction.
or when terminated for failure to possess the qualification as such. . .
548
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 Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
Chapter 13-B - Sp i I All wabl It miz d D du i n an NO 0
The following relates to tbe value of the lot and the bus:
valuation of deductions (RRtO 2003)
Appraisal value of lot P 5,000,000
1. Cash assistance, contribution or donation hall b ba d on the actual 3,600,000
zonal value of the lot
amount appearing in the official r c ipt issued by the donee. 2,500,000
Assessed value of the lot
z. Assistance other than mon y Acquisition cost of the lot 3,000,000
a. Personal property - acquisiti n o t of asst tance or contribution Acquisition cost of the bus 2,400,000
b. Consumable goods - acquisition co t or value a date of donation Depreciated cost of the bus 1,500,000
whichever is lower Depreciated appraised cost of bus 2,000,000
c. Services - the value of services rendered by the donor and the service The contribution expense deductible as part of regular itemized allowable deductions
provider and the public school as fixed in the MOA or the act al expense
shall be computed as follows:
incurred by the donor, whichever is lower Contribution
d. Real property - fair value (higher of zonal value or assessed value) at the Expense
time of contribution or the depreciated cost of the property whichever is Zonal value P 3,600,000
lower Assessed value 2,500.000
Fair value of the lot (higher) P 3,600,000
Olustration 1 Cost of the lot (LOWER) P 3,000.000 P 3,000,000
In 202 l, Danao Realty Corporation participated in the ''Adopt-a-School Program" by Depreciated cost of bus 1,500.000
contributing its services to a public school in La Trinidad, Benguet. The agreed value Regular itemized contribution expense P 4,500.000
fixed in the MOA for the construction of the public school building was P1,000,000.
J

However, Danao Realty was able to complete the same at a total cost of PB00,000. The term "acquisition cost" is understood to refer to "depreciated cost" if the movable
property donated is a depreciable ordinary asset. A portion of the cost is already charged
The "Adopt-a-School Program" is a priority program in 2021. Dana . Realty against gross income of prior years through depreciation expense so we could not expense
Corporation shall be allowed to deduct the following: it again through contribution expense.
Regular itemized contribution expense P 800,000 The contribution expense deductible as part of special itemized allowable de~uction
Special itemized contribution expense (P800K x 50%>) P 400,000 shall be computed as follows:
Note: The lower of the actual cost of services and the agreed value shall be considered..
Total value of donation P 4,500,000
Assume that the _"Adopt-a-School Program" is no longer a priority program in 2021, Multiply by: 50%
and Danao Realty has P9,0_90,000 net income before the contribution. Da,nao Realty Special additional contribution expense P 2,250.000
shall be allowed to deduct t~e following:
Contribution expense subject to limit P 800,000 EXPANDED BREASTFEEDING PROMOTION ACT OF 2009 (RA 10028)
Contribution limit: 5% x P9,000,000 450,000 The purpose of RA10028 is to encourage, protect, and support the practice of
breast-feeding which is believed to provide distinct benefits to the mother and the
Regular itemized contribution expense P 450.009 infant aside from saving the country's valuable foreign exchange that may
Special itemized contribution expense (PB0OK x 50%) P 4QQ.OOO otherwise be used for milk importation.
Note:
1. For corporations, contributions to the government in' non .. priority aetivitie:s -a re·subject to a Req,uirem,ents to all Establishments
limit of 5% of the net income before the contribution. Lactation station
2. The basis of the ,additional inc~nt;ve is the actual donation as valued under RRl0-2003, not
the amount of the regular allowable itemized contribution exp'ense. · All health and non-health facilities, establishments, and institutions whether
. I
operating for profit or non-profit which employ in any workplace nursing
Illustration 2 employees are required to establish a lactation station. Exemptions may be
Victory Bus Line contribute~ a lot and a bus to its adopted public school. The lot shall granted when the establishment of a lactation station is not necessary due to the
~e used by the publi(: school for puilding e,<;pansion and the bus as a school bus. The
circumstance of the workplace taking into consideration among others the
Adopt-a-School Program" is a national priority program during the year.
549 550
Chapter 13 - 8 - Special Allowable Itemized Deductions and NOLCO Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
number of em~~oyees, physical size of establishments, and the average number of i'nability to pay the fees shall not be a reason for -non .. avaihtrent of the milk t
women who v1s1t
patient in need. These milk banks must have their own permaneht, dediatted 8; ;
Due su~ stanti~tion shall be made by the employer to support the application for or personnel who are trained in human milk banking and lactation management. f
exemption. Pnvate sectors may secure exemption from the Department of Labor Tax deduction incentives ,·
and. Employment f°.n ti). P\lbU sectors may apply for exemption from the
1
The expenses incurred by a private health institution in complying With th
Chairperson of the ~•Vil Service Commission. The certificate of xemption is valid rooming-in and breast-feeding practices sh~ll be deducti~le expenses for incorn:
for two (2) years. tax purposes up to twice the actual amount mcurred.
,Lactation pe.~iod Conditions for deductibility
Nursing employees shall be wanted break intervals of not less than 40 minutes for 1. The .deduction shall app'.ly ,for the taxable period when the expenses were
every 8-hour working period in addition to the regular time-off for meals to incurred. ,
breastfeed Or express milk. This interval shall include the time it takes the 2. All health or non-health facilitjes, establishments ·a nd institupons $hall comply
employee to get to and from the workplace and the lactation station. The required with the IRR of RA 10028 within 6 months after ,ts approvpl. • .
additional breaks are compehsable hours. 3. The facility, establishment or institution shall secur-e a .:'Wo,:kiny Mother-Baby-
Friendly Certificate" from the Department of Health to be filed with the BIR.
Access to Breastfeeding Information
Employers shall ensure that staff and employees shall be made aware of the Illustration 1 . . . ~ ·· -, .
Breastfeeding Act and its Implementing Regulations. Henson Electronic employs primarily women. HenSOl): installed -~ -lactation- statioin for
its nursing employees at the following costs:
Requirements to Health Institutions Remodeling of a space for the lactation station · ·p so,oob
Tables and comfortable chairs 40,000
Rooming-in policy Refrigerator 12,000 ·
The law requires newborn infants and the mother to be roomed-in immediately Manual and electric breast pumps ro,ooo
after birth for a certain length of time. In case the mother and baby are sepaFated Supplies (sterile milk containers, soap, etc.) · ·~ ~- ;· . ·s,ooo •
and direct breastfeeding is not possible, there should be facilities for milk Total :.p .i-50,000 ' C
expression and milk storage.
The PlS0,000 cost of compliance shall be claimed as pcirt ~f regular'nerrii~ed deductions.
Mille Storage Facility An additional expense for the same amount shall be claimed . unde·r special itemiied
All health institutions adopting rooming-in and breastfeeding shall p.rovide- milk allowable deductions. ·· '1 ,,
· , M

storage facilities. A milk storage facility is a private, clean, sanitary, and well- Illustration 2
ventilated area or space for the purpose of collecting and storing. milk among I. I , '

Ba~~io Medica! Center (BMG), .a p·riva~e hosp\t~l, P.r evip~sly set . up a milk storage
mothers separated from ·t heir babies due to medical reasons, This is different from
fac1hty and a milk bank. The total ~nnual .c osts of the_~o facilities _-w ere: . .
a milk bank and a lactation station. There must be dedicated and trained
personnel who supervise and assist the mothers who will use the facility, and the Storage Milk
facility should fully comply with Executive Order 51. F~cility . aank. 'I '
·' IQ·t al
Supplies p 100,000 . p 120,00·0 p 220,000
Milk banks Staff salaries 210,000 90,000
Mille banks can be used as teniporary sol\l:tlons when the mother and baby are 300,000
Maintenance 50,000
separated It may also be a sQurce of breast milk for infants that are vi<;tiqis during 70,QOO . l2Q,OOO
Total p 360,00Q
1

t · 280,000 e ~~0.000
an emergency and/or disaster.. Less: Fees collected from patients '
120,000 < ' . '

Medical centers and regional hospitals among others are encouraged to set-up .Excess expense E , 20,000
milk banks which should be operated on a non-profit basis, but a minimal
processing fee may be charged to · cover for the screening, processing, and The ~ii~ bank was op~r~ted as an integral par~ ~f the hospital,. b,ut i~ oper.~t.e d as ,non- .
administrative costs. profit. BMC charges mmor fees and subsidizes the facility excess expense. .
, 551
552
 Special Allowable Itemized Deductions and NOLCO
Chapter 1 . . s .. Spe 1· I Allowabl It miz d D ductions and NOLCO Chapter 13 - B -

BMC ~ay claim th e following expens as part of regular itemized allowable For th e P
urpose of this incentive, the free legal services must. be exclusive of
deductions: _hour mandatory free 1ega1 assistance. . d.1gent clients the
ren dere d t o 1n
Total operating costs of storage facility
60
mandatorily required under the Rule on Mandatory Legal Aid Services r~!
Excess Milk bank expense subsidized by BMC Practicing Lawyers .
Total Illustration 1
I
A general professional partnership of lawyers had the following data during the Year:
BMC s~all ~lso cl?im an additional deduction for the same amount as special itemized
allowable deductions. Gross receipts P 4,000,000
Interest on client notes 200,000
Illustration Interest on deposits 36,000
Tabuk Provincial Hospital, a state hospital, s·e t up a milk storage· facflity at a total costs V~lue of pro-bono services, exclusive of indigent clients 240,000
of Pl,120,000 .. Direct cost of services 1,700,000
Administrative costs 1,2.00,000
Required: Determine the allowable special deduction.
The special deduction for free legal services shall be determined as follows:
Answer: Gross·receipts P 4,000,000
Nil. Tabuk Provincial Hospital cannot claim deductions since it is non-taxable. Direct cost of services 1.700.000
However~ government facilities, establishments, and institutioDs . wiU receive Gross income from operations P 2,300,000
additional appropriation equivalent to the savings they may derive as a result o.f Multiply by: ,. '. . . 10°/o
complying with RA 10028.
Deduction limit P 230,000
These savings may come from reduced costs due to absenteeism, increased Actual free services provided P 240,000
productivity, reduced illness of babies, arid reduced cost of procurement, sterilization, Speci·~ I "free legal service expense" (LOWER) P 230,QfJO
and management of infant formula paraphernalia.
Note: The interest income on notes is an item of gross in~ome subject to regular income tax, but
FREE LEGAL ASSISTANCE (RA 9999) is excluded as it is not derived from the actual performanc.e of the legal profession.
. . . .:J. ' ,' . ••. l

Lawyers or professional partnerships providing pro-bono legal services are given

The net inc0me of the general professional partnership shall be computed as follows:
deduction incentives for their free legal services.
Gross receipts P 4,000,000
Requirement for availment Direct cost of services 1,700.000
Lawyers or professional partnerships rendering actual free legal services shall ·Gross income fyom operations . P 2.300,000_
secure a certification from the Public Attorney's Office (PAO) . the D'epartment of Other gross income · 200,0QO
Justice (DOJ), or association accredited by the Supreme Court indicating. that the Total gross incom~ P 2,500.000
said legal services to be provided are within the services defined by the Supreme Less:
Court and that the agencies cannot provide the legal services to be provided by the Regular itemized deductions P 1,~00,.000
legal counsel. · Special itemized deductions
The association and/ or organization duly accredited by the Supreme Court shall Free legal services expense 230,000 1,430,000
Net income P 1,070,000
issue the necessary certification for the number of hours actually proyided by the
lawyer or partnership. · Illustration 2
Atty. Sabado rendered the following services during the year:
Tax Deduction Incentiv~ . . · · , . ,
The practicing laW}'er or profession~l partnership shall be entitled to an allowable Gross receipts from legal fees P 5,000,000
deduction from gross income eqmvalent to the amou,nt ._th~t could have been Value of 60-hour assistance to indigent dients 200,000
collected for the actual performance of the act~al free services rendered or up to Value of other pro-bono services 450,000
10%, of gross income derived from the actual performance of .the le9ql profession Direct cost of services 1,800 ,·ooo
whichever is lower. Other deductible expense _1,500,000
553
· 554
 Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
Cl)apter 13-B - Special Allowable Itemized Deductions and NOLCO Cogon Company also required employees to undergo studies though an ''empl
advancement study program" with the TESDA. All employees who :finished ~Je.e
Atty. Sabado shall be entitled to an additional deduction computed as follows:
special studies were required to remain at the employer's business for a period ;~r
Actual value of pro-bono services e 450.000 less than one year. t
Limit o( incentive:
Gross receipts
The following were determined during the year:
P 5,000,000
Direct cost of services 1.soo.000 Total distributable productivity bonus P 1,000,000
Gross income from operations P 3,200,000 Cost of special studies
Multiply by: limit rate 10% Supervisory employees P 300,000
Deduction limit P 320,000 Rank and file employees 1,700.000 2,000.000
Total P3.000.000
Special free legal services eKpense (LOWER) e 320."ooo"
The net income of Atty. Sabado shall be computed as follows: Aside from deducting the above employee benefit expenses, the employer shall be
entitled to the following special deduction incentives:
Gross receipts from legal fees P 5,000,000
Less: Direct cost of services Additional productivity bonus expense (PlM x 50%) P 500,000
1.800.000
Gross income P 3,200,000
Additional expense on employee studies (Pl. 7M x 50%) 850,000
Less: Total productivity incentive expense P1.3so.ooo
Regular itemized allowable deductions P 1,500,000 Note:
Special itemized allowable deduction 1. The incentive on special studies covers rank and file employees only.
Free legal services expense 320.000 1.820,000 2. The costs of the special studies will not be subject to regular tax or fringe benefit tax as they
Net income P 1,380.000 are granted for the convenience of the employer.
Note to readers
ADDITIONAL PRODUCTIVITY INCENTIVE BONUS EXPENSE
The deduction incentives discussed in the foregoing section are some of the more
Under the Productivity Incentive Act of 1990 (RA 6971), a business enterprise
common incentives to taxpayers. There are other deduction incentives granted by
which adopts a productivity incentive program is entitled to a special additional
special laws to various taxpayers across different industries. The list shown in this
deduction equivalent to 50% of the total productivity bonuses given to
chapter is merely intended as illustrative to show the practical application of
employees under the program.
deduction incentives in income taxation.
In addition, business enterprises providing manpower training and special studies
to rank-and-file employees as accredited by the Technical Education and Skills NET OPERATING LOSS CARRY-OVER
Development Authority are also entitled to 50% additional deduction of'the total
Net operating loss (NOL) pertains to the excess of allowable deductions over the
grant for local trainings and special studies.
gross income from business or exercise of a profession during a taxabl~ year.
However, the deduction incentive will not be allowed on bonuses accruing during Net operating loss carry-over (NOLCO) pertains to the amount of net ope~ating
the pendency of a strike or lockout arising from any violation of th,e pr,oductivity loss that is allowed by the law to be carried over as deduction against available~
incentive program. -, . · ) income in the following three years.
Illustration
NOL vs. NOLCO . . ,
To improve productivity, Cogon Com~any negotiated with · its :f~ctory ~TTIP;lo¥ees a
' productivity incentive pro~ram _whe~e•n the em~loyees!.sti~U recetve ~·a p~o~hliGtivity It must be noted that a net operating loss is technically different with a NOLCO. A
bonus equivalent to 40% pf prod"ct1on cost savings which sha.ll ·~ _n;leasured ,by an net operating loss may occur, but may not be carried over; hence, rto NOLCO,
independent·expert. __ ;,·
1 1 •
, '. i. 'f , .~ , 1 '': , , _ :·;,, , . •• However, a NOLCO cannot exist without a prior year net operating loss.
1

556
 Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
rhe Rationale ofNOLCO , A positive bottom line from the forgoing procedure ts a taxable n t
whereas a negative bottom line is NOLCO. e lncorn
NOLCO is int~nded to allow the taxpayer to recoup his losses before taxation _go
full swing. Without NOLCO, income taxation would result in taxation of recovenes
Illustration
of lost capital.
Nexus Corporation reported a net loss during the year:
mustrati on:
Gross income Pt,500,000
Assume the following operating (losses) or profits of the taxpayer:
Less:
Year 1 Year 2 Year 3 Year4 Regular itemized deductions P 1,200,000
P. 400,000 P300,000 P200,00() P 20,000 Special deductions under the NIRC 700,000
t, Deduction incentives under special laws 300,000 2,200,000
There is no tax from Y~ar 1 to Year 3 because there is a loss. However, to tax the minimal Net loss (P 700.000)
profit of Year 4 would be unfair to taxpayers since this profit is merely a recovery of lost
capital in the pr-iory~ars. Inqom.e ta~ i$ Q tax on realiz.ation of inco.me and is not a tax on Based on the foregoing, the NOLCO shall be recomputed as follows:
returns of capital. NOLCO is allowed for taxpayer to recoup his losses of capital before
Gross income Pl,500,000
being fully taxed. That recoupment however is limited by the Jaw for only threeyea1;.
Less:
Who can claim NOLCO? ~ , Regular itemized deductions P 1,200,000
All taxpayers subject to tax on taxable incom·e whether at the regular in~ome tax 1 Sp,ecial deductions under the NIRC 700,000 1,900,000
or at preferential tax rate can deduct NOLCO. Taxpayers who are exempt, enjoying Net Operating Loss Carry-Over (P 400,000)
a tax holiday, subject to tax on gross income, or those subject to final income tax,
cannot deduct NOLCO. - TreabnentofNOLCO
Net operating loss carry-over (NOLCO) is treated as a separate item of deduction
How to compute -NOLCO? .....- ·.
. J . in the next three (3) consecutive taxable years to the extent of the available net
NOLCO is computed as follows:_ •• j income before NOLCO deduction in those periods.
Gross income subject to regular tax p xxx,xxx
Less: ··. :i< To aid taxpayers during the pandemic, the CREATE law allowed NOLCO incurred
rotal deductions excluding ·NOLCO from prior years during taxable years 2020 and 2021 to be carried over a period of five (5) years.
and deduction incentives under special Jaws '( xxx,m) For taxpayers on a fiscal year basis, NOLCO for fiscal year ending on or before June
Net operating loss carry-over (NOLCO) (P xxx,xxx) . 30, 2021 and June 30, 2022 will be carried over 5 years. Note that NOLCO incurred
after this two-year period will revert back to the original 3-year carry-over period.
Deduction incentives are not actual operating expenses. They are not actual costs.
Hence, they must be excluded in the amount of net @erating IQ~s. car~ over.
Illustration
That is why ded~ction incentives are leg~lly allow~d only as deduction in the
A corporate taxpayer reported the following net income and loss from business:
period they are availed of. The carry-over of deduction incentives is not legally
warranted. Prior year NOLCO, which is a.lso a deduction incentive, cannot be 2020 2Q21 ,2022 2023
deducted in the measurement of the curr~nt year NOLCO to avoid breachiQ.g the Gross income P 400,000 P 500,000 P 720,000 P 9001000
three-year carry ove_r rule. ,, tess: Deductions 600.000 450.000 610.000 650,000
' '. ' ' j
Net income (NOLCO) (P200.000) P 50.000 P 110.000 P 250.000
To emphasize the rules in the measurement of taxable net income or NOLCO:
1. Cost of sales or cost of services and regular allowable itemized deductions are Required: Compute the taxable net income from 2021 to 2023.
fully deductible against gq>ss inco~e. . _
2~ s·p eciaf incentive deductions are deductible only- to.~he extent of net income The 2021 net income is PS0,000 but the taxable net income is zero. The NOLCO
before special incentive deductions · · ·· . •, appHcation and the 2020 NOLCO balance as of December 31, 2021 are as follows:
3. NOLCO prior years are deductible only to the extent of net income after special
incentive deductions but before NOLCO
!_ : 557
558
 Chapter 13-8 - Sp i I AU wabl It miz d D - u tion and NOL 0 ; I All w I It miz d u ti n nd NOLCO
Chapter 13-B -
2023 Required: omput th x bl n t incom in 202 •
Net in o.m·e '(NOLCO) (P 2 , --a.LW..t.MJil..W.. , 00 P 250,000
NOLCO deduction Solution: 2 23
NO.LCO balance
Net income (NOLCO)
(P 250,000) (P 100,000) P 500,000
The 2022 net income is Pl 10,000 but th taxabl net In om i likewise zero. The 2021 NOLCO application ___.~~O. ♦ (_.-...i~--.J
NOLCO applitation and the 2020 NOLCO balanc a of Oecemb r 31, 2022 are as p
Net income
follows:
Note:
2020 2021 2022 2023 l. The PZSO,OOO net o,pe~ Ung loss occurred in a year when the taxpayer was tax exempt. This
Net income (NOLCO) (P 150,000) P Pt 10,000 P 250,000 operating loss can.hot be carried over as NOLCO. . . .
NOLCO deduction l 10.000 - - - - - ► (110,000) 2. The Pl 00,000 net operating loss occurred in a ye~r _when. the taxpayderd wa~ ~xable. This
NOLCO balance f P 40.0001 P o operating loss can be carri ed over as NOLCO. Hence, this ts carried over as e uct10n m 2023.
1

Rationa e of the Disallowance of Carry-Over of Net Operating,Loss

~

The 2023 net income is P250,000 but the taxable net income is be P210,000,
co.mputed as follows: D ctions are of no benefit to the taxpayer in an exempt year. Hence, the net
2020 2021 202.2 . - 2023 o, erating loss (Le., excess deduction) from ~n exempt year should not be given
Net income (NOLCO) (P 40,000) l> -P - P250,000 va ue by carry-over as this would cause undue e_n richment to the taxpayer.
NOLCO deduction 40.000 - · - · - · - · - · - · - · - · + ( 40,000)
P - Adjusted net income P210.000 mustration 1: Substantial change in ownership
Mr. See owns 80% of Trinoma Corp. In 2020, Mr. See disposed of his 80% interest to
Note:
1. Any unused NOLCO after the three-year prescriptive period will expire and will not be Mr. Yuchen. The net income and (loss) of Trinoma Corporation since 2018 were:
creditable in future periods. Loss recoupment is legally allowed only over three years. 2018 2019 2020
- 2. For NOLCO sustained during pandemic, apply the same rules but with a longer 5-year carry- Net i.ncome (NOLCO) (P 250,000) P 150,000 P 500,000
over period.
Required: Compute the 2019 and 2020 taxable net income of Trinoma Corp.
Requisites for the deductibility of NOLCO:
1. The taxpayer must not be exempt from income tax during the taxable year Solution:
when the NOLCO was incurred. 2018 2019 2020
Net income (NOLCO) (P 250,000) P 150,000 P SOOAOOO
2. There has been no substantial change in the ownership of the business or
2018 NOLCO application 150,000 +( 150,000)
enterprise.
( 100,000) - ►( OJ
A change of at least 75% of either the paid up capital or nominal value of the Taxable net income P 0 P 500,000
outstanding shares of a corporation is deemed a substantial change in business
ownership. Note: NOLCO ca_rry-over _is allowed in 2019 since there is no substantial change in ownership
but not allowed m 2020 smce there is change in at least 7 5% in the ownership of the b~si~ess.
mustrati,on: NOLCO from exempt years mustration 2: Substantial change in ownership
In 2021, Mr. Tan started a "Hot Siopao" manufacturing plant with \"s tha P3M Mr. Tan started a business in 2018. Disheartened by heavy losses, he sold the business
capitalization and was registered as a Barangay Micro Business Enterprise {BM.BE). At to Mr. Song at the start of 2019. The net income or (loss) of the business were:
the .start of 2022, Mr. Tan's certificate of authority to operate ~s Bt-ilBB was revo-ked
2018 2019 2020
1

when he upscaled his business operations. . ,. i 1

Net income (NOLCO) (P 800,000) (P 300,000) p 500,000

Mr. Tan's business gross income and business expense were as follows:
Required: Compute the taxable net income of the business in 2020.
2Q21 ~022 2023 ·, Solution:
Gross business income P 400;000 P 700,000 P 1,S00,000 ,016 _ ~019 2020
Less: Business expenses · 65Q.OOO aoo,ooo 1,000,000 Net income (NOLCO) (P 800,000) '(P 300,000) p 500,000
~
Net income (NOLCO) fP 250.000) (P 100.0001 P 500.000 2019 NOLCO Application I
300,000- - ►
l
l
I 300,000
~I
!.- ♦ ( 0)
559 Taxable net income e 200!000 ~
560
chapter 13-B - Chapt r 1 --8 - ti n n
It mi d N
Note: Th nn b n · I h, n n own r hip in In 201
01 .
Th II n n n Ing 01
R tion I Rul on pri
ntl I·
L O is gr nt d n in V p m p h tr·
I es before they b co11 OU lncentiv ,
inc m ta would b 01n n pt l.
)
When there is a sub tanti l · h ·n · in th own r hp·of h , ·n . no e~te:ss O O b lanc air ady 1
hl I hir y r.
longer allowed b cause th own rs for whom th I · r upmen i i · are u d s an i m of d du tion I
no longer in the business. In other words, NOLCO Is a prtvllese that I, · not
ttYJnsfemble. I 2020
Th bl income is P30.
Due to the foregoing rules, it must be emphasized again tha · he occurrence of a 2017 2018 2019 2020
net operating loss in prior years does not automatically mean that the·r e is a · e income (NOLCO) (P 13 0) P 0 P OP 160
NOLCO. 2 7 OLCO application _ __.1......3.,&.0 - - - - - - - - - - + ( 130.}
, et income (NOLCO) P 0 P 0 P 0 P 30
Rules in Carry-Over of NOLCO
1. NOLCO is claimable in a first-in first-out {FIFO) fashion. ustration 2
2. NOLCO can be claimed only up to the extent of the business net ·nco · the domestic corporation reported the following results of operations from y ars 2.0
next three years. Prior year NOLCO cannot be deducted against a su1D:i~~Q rough 2020:
year net operating loss. 2Q1S 2016 2017 2018 2019 20ZQ
Gross income p 410 p 300 p 500 P 400 P 600 P 90
3. Any NOLCO which remains unused at the end of the three-year prescriptive
period will expire. Less: O.eductions SQQ 500 1:50 34Q 1SQ soo
Wustration 1
· 1/(NOLCO) ce ~OJ 200J e SQ e 60 ece ~00 1so e
Acorporate taxpayer reported the following from 2016 through 2020: The taxable net income of the corporation from years 2015 throughout 2020 shall e
computed as follows:
2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
Gross income P 400 P 320 P 480 P 400 P 500 Nl/(NOLCO) (P 90) (P 200) P SO P 60 P 150 P 4 0
Less: Deductions 500 450 450 340 340 __5_0 - - - - - ♦ ( 50}
et income (NOLCO) (P 100) (P 130) P 30 P 60 P 160 NOLCO balance (P 40) (P 200)
In 2017
_ ___.4.....,..0 - - - - - - - - - - ► ( 40}
The taxable net income is nil. No deduction can be made against a subsequent net (P 200) P 20
operating loss since this will roll over the NOLCO through integration in the net _2_0 "" ...... .. ( 20)
NOLCO balance (P 180)
operating loss of the following year. This will effectively breach the three-year
prescriptive period rule. _ 1so - - - - - - .. - + ( l SO)
P 30 Expired ... • ► ( OJ
In 2018
The taxable net income is nil. The 2016 NOLCO application and the re,m aining NOLCO Net income p 400
prior year balances as of December 31, 2018 are:
2Ql6 ~012 ,Ql8 NOLCO FOR INDIVIDUAL TAXPAYER
Net income (NOLCO) (P 100) (__P_ ...1~) P 30 NOLCO refers to an operati gloss from business or exercise of a profession. for
2016 NOLCO application · >t'JQ · · .......
·
l :OJ·
~-- individuals who are mixed income earners, NOLCO is measured by separating
Net income (NOLCO balance) (P 70) (P 13 0) P O compensation income from business or professional income following the income
Note: Deduction for NOLCO can be made only up to the extent of available net income in the
classification and globalization rule.
three following years.
562
561
 Chapter 13-8 - p ial Allowabl It mized Deductions and NOLCO
chapter 13-B - Special Allowable Itemized Deductions and NOLCO
pur haser as the "transferee" or "assignee.'' In accounting, the assignor is called
luustradon the "acquiree" while the purchaser is called the '~acquirer.''
An in d1.v1·dual taxpayer compil ed th e "10llowing income and expenses:
2017 20 10 2019 2020 NOLCO and Merger or Consolidation
compensation i_ncome p 20,000 P 220,000 P 80,000 P 75,oo·o .
ausiness gross mcome 4 ?0,000 400,000 500,000 500,000 NOLCO of the Acqulrer · ·
peductions 500,000 420,000 420,000 340,000 Under RR14-2O01, the NOLC:O of the acquiret which it incurred before the merger
or consolidation continues to be deductible even after merger or consolidation so
Required: Determine the annual t~xable income. '
long as there is no substantial change in Its ownership .
solution:
2017 2018 2019 2020 . NOf..CO of the Acquiree ' ' · . ,
Taxable compensation P 20.000 r 220.oqo e so.ooo e zs.ooo Historically, the BIR consistently ruled that NOLCO is transferrable to a surviving
corporation since it is viewed,a~ part of the rights, privileges, properties, and/or
Business gross income P 470,000 P 400,000 P 500,000 P 500,000 interests th~t will be tq1nsferred to and vested ,in the surviving corporation ·u pan
Less: Deductions 500.000 ( 420,000) 420,000 340,000 merger or consolidation~ . ·
Net income (NOL CO) (P3~000J (P2f 00'!_) P ao,ooo P 160,doo
___...___,.► ( 50,000) - - - ' . '
However, under BIR Ru.Ung 214-2012, the BIR ruled that NOLCO is not one of the
p 30.000 e160.000 assets of the a~sorbed corporation that can be transferred and absorbed by the
Taxable Income P 20,000 p220.ooo p110,ooo ez~s.ooo surviving corporation, noting that it is privilege or deduction that can be availed
Note: only by the absorbed corporation.
1. As a rule, the taxable compensation income and the net income are simply combined in
computing the taxable income of individual taxpayers. Under Sec. 34(0)(3) of the NIRC, NOLCO is not allowed as deduction when there is
2. A net operating loss from business or exercise of profession is not deductible from taxable a substantial change in the ownership of the business. It is clear that the privilege
compensation inco~e, but is carried over as NOLCO. ', for NOLCO deduction is reserved by the law only to the group of owners when the
loss was incurred while denying it to the .new group of owners who ~ubsequently
Special Rule on NOLCO for Mining Companies ··
acquired substantial interest in the business. NOLCO is not a transferra-b le n9ht,
The net operating loss sustained by mining companies without the benefit of privilege, or interest.
incentives under the Omnibus Investment Code of 1987 in any of their first 10
years of operation is allowed to be carried over a period of S years following the
year the net operating loss was sustained. Note that this S•year carry. . over period
Will continue to remain as is even after the pandemic.

NOLCO and Net Capital Loss Carry Over

N0LC0 is deductible against available net income in the next three years of
operation. Net capital loss carry-over is deductible only up to the extent of the net
capital gain in the immediately following year.

Net Capital Loss Carry-Over cannot be claimed simultaneously with NOLCO. In J_ I

accordance with the income tax benefit rule, no capital loss carry-over is allowed
When the year's operation resulted in a net operating loss (i.e., Limit 1 is zero).

Merger and Consolidation ·

Merger occurs when one business is merged with another business. Consolidation
occurs when several businesses merge to form a new larger business. The
acquired business is referred to as the "assignor" or "transferor" and the
563 564
Chapter 13-B - Spe i I Allowabl It miz d D du ti n n N LCO Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
CHAPTER 13-8: SELF-TEST EXERCISES 16. A small business was merged to a larger business. Even. after the merger, th
NOLCO of the small business is deductible by the larger busmess. e
Discussion Questions 17. NOLCO is valid for 3 years.
1. Distinguish an actual exp n from a d du ti n in ntiv . 18. NOLCO always exist when there is a net operating loss.
2. Enumerate the special expens · allow d by th NIR nd p ial law . 19. Net capital loss carry over cannot be carried over together with NOLCO.
20. An acquirer in a business combination sustained a net operating loss before th
3. Enumerate the deduction incentive llowed by p cl -I laws.
business combination. The acquirer is allowed to carry-over its net operating los:
4. Demonstrate how NOLCO is measured.
s. What are the conditions for the deductibility of NOLCO? in prior years.
6. Explain the rules in the carry-over of NOLCO.
7. Is NOLCO transferrable? Explain. Exercise Drills
For each of the following special deduction incentive, indicate the percentage of
rrue or False incentive and the limit, if applicable:
1. Dividends are non-deductible by any taxpayer except real estate investment
trusts. Deduction Incentive
Ex enditure incentive limit
2. The employers are allowed additional deduction of 15% on the compensation
paid to persons with disability. 1. Salaries paid to senior citizen
3. An adopting private entity of a public school is entitled to a deduction incentive em lo ees
equivalent to double the amount donated to a public school. 2. Salaries paid to persons with
4. Taxpayers who installed improvements in their facilities to accommodate persons disabili
with disability are allowed an additional 50% deduction incentive based on the 3. Training expense under the
value of such improvement. ewel Indust ment Act
5. The distribution of the corpus of a taxable estate or trust is an item of special 4. Cost of facility improvement for
deduction against the gross income of the estate or trust. em lo ees with disabili
6. The transfer to the reserve fund of insurance companies is a special deduction, but 5. Contribution under the "Adopt-a-
the release from the reserve fund is an item of gross income. School Pro ram"
7. The transfers to all reserve funds of the cooperative including mandatory and 6. Cost of compliance with the
discretionary funds are deductible from the gross income of cooperatives. "Rooming-in and Breastfeeding
8. Persons with disability are mandatorily allowed a discount of 20% from all Practices Act"
establishments.
9. Senior citizens are mandatorily allowed a discount of 25% from certain 8. Productivity incentive bonus and
establishments. em lo ee trainin
10. The employer of senior citizens can claim additional deductions equivalent to
50% of the compensation paid to senior citizens who have income below the
poverty line. Multiple Choice - Problems 1
11. Expenses incurred to comply with the requirement of the Expanded Breastfeeding 1. The required reserve for an insurance company was P3,200,000 as of December
Act are allowed an additional incentive equivalent to the amount of the expense 31, 2013 and P3,500,000 as of December 31, 2021. What is the deductible amount
incurred. of transfer to the reserve fund?
12. Attorneys are entitled to the value of their pro-bono services to indigent clients as a. PO c. P3,200,000
deduction from gross income. b. P300,000 d. P3,500,000
13. The allowable incentives to lawyers for pro-bono service~ shall not exceed 10%> of
the gross income from the actual performance of the legal profession.
14. Employers are entitled to an additional deduction of 50% of the productivity 2. A fitness gym catering to senior citizens recorded a total gross revenue of
incentive bonus paid to their employees. P345,000 from senior citizens. The gym provides 24% discount in excess of th e
15. The amount of NOLCO shall not include the amount of deduction incentives legal requirements. What is the deductible amm,int of senior citizen's discount?
allowed by law. a. P O c. P82,800
b. P 69,000 d. P90,789
565

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chapter 13-B - Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
rni ni In . 8. A co.operative transacting business only with its members is on its third ye ·
3. i in, operation. It reserves 50% of its operating income in compliance with the: of
CDA regulation. During the year, it reported a total operating income ew
P3,OOO,OOO inclusive of PZ,4OO,OOO income ~rom relat~d activities. Compute ti!
deductible amount of transfers to reserve agamst gross mcome.
a. P O c. P24O,OOO
b. P6O,OOO d. P3OO,OOO
mpu th n n n .
a. 0 9. An establishment granting senior citizens 25% discounts recorded the followin
b. P27,3 0 sales during the period: g
Customers
4. Sf!!!'~!,rJr 1 i z n
11
during the year a Regular Senior.citizen
stalts w eon le v . ,Both s nfor citiz n Gross sales P 8,000,000 P 800,000
p verty leve . Cost of sales 5,000,000 400,000
a doy, substituted for an employee who went on one year abbatical eav What is the deductible senior citizens' discount?
andoy received a total of P144,000 during the year. ·ng aria · ,e a. PO c. P2OO,OOO
a employee who filed for maternity leave for 3 months. Aling aria r ceived b. P16O,OOO d. P266,667
otal of P28,000 during the year. Compute the total ded ctible a di ·,o al
compensation expense. 10. A restaurant granted 25% discounts to senior citizens in excess of the 20%
mandatory requirement. During the year, the restaurant reported receipts of
a. P O c. P25,800
P93,75O from senior citizen customers.
b. P21,600 d. P43,000
Compute the deduction for senior citizens' discount.
5. Mr. Bernard irrevocably designated in trust his investment portfolio cons· go a. PO c. P23,437.5O
domestic stocks and bonds. The dividend income from the stocks h 1 be b. P7,25O d. P25,OOO
distributed to the beneficiary while the interest on the bonds hall be
accumulated. During the year, the portfolio earned P200,000 interest an 11. An employer embarked on a socio-economic program named "A World
P135,000 dividends, net of final tax. Empowered by Persons with Disability." Under the ambitious program, the
employer established a business which is fully manned by persons with disability.
What is the total deduction allowable to the trust for the income distribution?
The employer incurred P3OO,OOO in workplace improvements specifically
a PO c. P135,000 designed for its disabled employees. The business venture turned very profitable
b. PlS,000 d. PlS0,000
due to overwhelming public sympathy. During the year, the employer paid
6. A grantor irrevocably designated in trust a real property in avor of eneficiary. P2,10O,OOO in compensation expense. Compute the additional deductible
Under the trust indenture, 20% of the trust net income h U be distributed to the compensation expense.
beneficiary. The trustee shall be paid 5% of the gro in me s an gement fee. a. P 0 c. P315,OOO
During the year, the trust collected P810,000 rent income, net of 0% creditable b. P21O,OOO d. PS25,OOO
withholding taxes. The trust recorded P350,000 in expense .
12. In the immediately preceding problem, what is the deductible additional expense
Co pute the de ductible amount of income di tri ution t t en ci ry. for the improvements made for the employees with disability?
a. PO c. P110,000 a. PO c. P75,OOO
b. Pl O1,000 d. Pl 0,000 b. P45,OOO d. P15O,OOO
d
7. A real estate investment trust (REIT) earned P4J OO,OOO from property rentals. 13. In 2021, Frank Abon, a practicing lawyer, adopted a public elementary school ao
Total business expenses were P2,100,000. Assuming the REIT declared the contributed PS00,000 for the acquisition of computer equipment and softWare,
mandatorily required dividend distribution, what is the amount of deductible Abon had an operating income of P900,000 before this contribution expense.
dividend against gross income?
a. p O - c. Pl,890,000
b. Pl,800,000 d. P3,690,000
567
568
 l~a
chapter 13-B - Special Allowable Itemized Deductions and NOLCO h 1 - - i I All w I It mi, d
Assuming the "Adopt-a-School Program" is an investment priority program of the m h p I Id du i n fo h f vt
government in 2016, compute Bernard's additional contribution expense and net . ,p , 0 . P140,000
income respectively. . p 0,000 d. P142,000
a. P250,000; PlS0,000 C. P125,000; P275,000 ~I

b. P250,000; P 650,000 d. P125,000; P775,000 20. ur r tn it, Bol lat in

A o t t , I w ft rm, n n op r ng tn orn of
PB,000,000, n t of P ,000,000 dminf tr ttv xp n. nd P12,000,000 dlr
14. In the preceding problem, compute Abon's additional contribution expense and o rvi . During th y ar, It r pr nt d . I t II n und r I fr I g
1
net income, respectively, if the "Adopt-a-School program" is no longer a assl n pro ram. Th valu of thes servic s would h v b n Pl, 00,0oo. 1
government pr,i ority program in 2016? al o r pr e,n ted indigent clients for free, the value f whl h would v b n
a. PO; P810,000 · c. P250,000; P650,000 P400,000. Compute the special dedu ction for free legal ervtc .
b. PO; P400,000 d. P250,000; PS60,000 a. Pl,200,000 c. Pl,500,000
b. Pl,400,000 d. Pl,900,000
15. 8-enguet Jewelery is a qualified jewelry enterprise registered with the Board of
Investments. In order to moderniz~ its jewelry making business, it instituted an 21. n employer paid a total of PB00,000 productivity incentive bonus to its
in-house training program and hired external experts to train its ~:ptployees. The production workers. What is the additional productivity incentive bonus expense?
program was duly approved by•. TESDA. The program cost P300,000 during the a. PO c. P200,000
year. b. PS0,000 d. P400,000

What is the deductible amount of additional training ~xpense? 22. An employer provides manpower training and special studies to its rank and file
" '• . {
'....
a. P30,000 c. P75,000 .. . I '
employees at a total cost of P200,000. The in-house program was accredited by 5.
b. P45,000 d. ~150,000 1•
TESDA. What is the deductible additional productivity incentive bonus expense?
,,· . I
a. PO c. Pl00,000
16. Girl Power Corporation employs purely women. Itinstalled a lactation station at a b. P20,000 d. P200,000
total cost of P350,000 and secured a "Working Mother-Baby-Friendly Certificate"
from the Department of Health. Multiple Choice - Problems 2
Compute the additional deduction under the Ro.oming-fo and Breastfeeding 1. In 2016, Warren Buffet purchased the net assets of Berkshire Hathaway, a losing
Practices Act. business which posted a cumulative Pl0,000,000 loss in the past three years.
a. PO c. P350,000 Buffet's charismatic leadership led the business to turn P4,000,000 profits in
b. P175,000 d. P700,000 2016. What is the allowable NOLCO deduction for 2016?
a. PO c. PS,000,000
17. A government provincial hospital established a milk bank at a cost of Pl,000,000.
b. P4,000,0O0 d. Pl0,000,000
Determine the additional deduction incentive it is allowed under the Rooming-in
and Breastfeeding Practices Act. 2. A taxpayer had the following results of operations:
a. PO c. PS00,0000
b. P250,000 d. Pl,000,000
2019 202p
Gross income P 1,200,000 P 2,500,000
18. In the immediately preceding problem, what would be the additional deduction Itemized deductions 1,400,000 1,000,000
assuming the hospital i~ a proprietary medical center? Deduction incentives 200,000 300,000
a. p o c. Pl,000,000 , . , . 1,. ,
1
What is the net income in 2020?
b. PSOO 000 d. P2,000,000
' . a. P 800,000 c. Pl,100,000
19. Atty. Abdul is a practicing lawyer in the remote provinces of Mindanao. During b. Pl,000,000 d. Pl,200,000
. the year, he provided ~O ar;tua\ hours for RfO-\)Qn<;> services inclusive of the 60- 5t
hour ·ma.p datory legal aid tse.rvicr·s to indig~nt client~. these services would have 3. An enterprise registered with the BO I had a consistent profitable operation. Ju
b_een billed Pl,000 per hour if ren~ered to payirtg clients. Atty. Abdul has a before graduating from its B01 tax holiday incentives in 2019, it sustained ~
Pl,400,000 gross income durin~ t)le y~ar e~~lusive of P20,000 interest on his Pl,800,000 operating loss due to an employee strike in 2019. The settlemen~:
savings deposit the deadlock in 2020 enable the enterprise to post a P2,400,000 operati g
.. 569 income.

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 Chapter 13-8 - Special Allowable Itemized Deductions and NOLCO
Chapter 13-B - Special Allowable Itemized Deductions and NOLCO
2018 400,000
What is the allowable NOLCO deduction in 2020? 2019 ( 200,000)
a. p 0 c. Pl,800,000 2020 100,000
b. P900,000 d. P2,400,000
What is the total outstanding NOLCO at the end of 2020. which can be carried aver 1

in future years?
4. A corporate taxpayer incurred an operating loss in 2021: a. PO c. P600,000
b. P200,000 d. PB00,000
Sales P 3,000,000
Less: Cost of sales 1,200.000 8. A taxpayer reported the following items of gross income and deductions in 2020:
Gross income , I p 1,800,000
J Rent income P 400,000
Less: Deductions
Service fees 200,000
Regular itemized deduction Pl,200,000 Interest income from bank deposits S0)00Q
Special itemized deductions 800,000 Deductible expenses 800,000
Deduction incentives , · 4od:ooo 2.400.000 Non-deductible expenses 100,000
Net operating loss P 600.000 ,
•
{'
' I
Compute the NOLCO to be carried over in _the next three years.
What is the amount of NOLCO to be carried over in th~ n~~t. three years? a. P300,000 c. P200,000
a. PO c. P400,000 , · b. P250,000 d. PlS0,000
b. P200,000 d. P600,000 . .
9. The carry-over of NOLCO is allowed when
5. An individual taxpayer reported the following in 2021: , a. the net operating loss is sustained from an exempt year.
b. th.ere is a change for at least 75% of the paid-up capital or nominal value of
Gross income P 1,500,000 the outstanding shares of a corporation.
Less: c. the business is acquired by another taxpayer.
Administrative expenses P 800,000 d. there is a change in the controlling shareholder representing 51 % ownership.
Selling expenses 650,000 1,450.000
Operating income P 50,000 10. Which is incorrect with regard to the net operating loss carry-over (NOLCO)?
Less: Personal expenses 150,000 a NOLCO can be claimed together with Optional Standard Deductions.
Excess of personal expenses over income P 100,000 b. NOLCO cannot be claimed if the net ·o perating loss arises in a year where the
taxpayer is exempt from income tax.
What is the NO LCO to be carried over in the next three years?
c. NOLCO can be carried over to a period of three years.
a. PO c. Pl00,000
d,. NOLCO c~nnot be claimed by non-resident foreign corporation.
b. PS0,000 d. PlS0,000
6. In 2021, a taxpayer finally posted a P1,000,000 operating profit after four years of 11. The following pertains to the salaries paid by the taxpayer during the year~
continuous losses. The results of operations in prior years were: Salaries to regular employees p 400,000
2016 (P 800,000) Salaries to senior citizens (above poverty line) 30,000
2017 ( 400,000) Salaries to senior citizens (below poverty line) 50,000
2018 ( 200,000) Salaries to persons with disability 200,,0 00
2019 ( 100,000)
Compute the total deductible salaries expense under regular allowable itemized
Compute the deductible NOLCp in 2021. deductions and the total special deduction,
a. P 0 c. P1,000,000 • I a. P680,000; PO c. P 742,500; PO
b. P700,000 d. Pl,500,000 b. P680,000; P57,500 d. P 680,000; P62,500

7. A taxpayer has the following historical results of operations:

2016 (P 600,000)
2017 ( 700,000)
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