a chapter 13-B - Special Allowable Itemized Deductions and NOLCO cHAPTER 13-B spECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET P| OPERATING LOSS CARRY-OVER (NOLCO) pter Overview and Objectives: chal this chapter covers special itemized deductions and the net operating loss carry over. After this chapter, readers are expected to demonstrate mastery of the following: 1, Additional deduction incentives granted by special laws 2. Special deductions allowed under the NIRC and special laws 3, Requisites and deduction rules of the allowable special deductions 4, Measurement and carry-over rules of Net Operating Loss Carry-Over (NOLCO) SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS 4. Deduction incentives Additional compensation expense for senior citizen employees Additional compensation expense for persons with disability (PWD) . Additional deduction for facilities improvements made for PWDs Additional training expense under the Jewelry Industry Development Act Additional labor training expense under the CREATE Law . Additional contribution expense under the Adopt-a-School program Additional deductions under the Expanded Breastfeeding Promotion Act Additional deductions for free legal assistance Additional productivity incentive bonus expense 2 Special deductions under the NIRC and special laws Income distribution from a taxable estate or trust Dividend distribution of a Real Estate Investment Trust (REIT) Transfer to reserves funds of taxable cooperatives | Discounts to senior citizens Discounts to persons with disability POIANSweNHE = VePwene Deduction incentives are additional or bonus deductions with no actual cash outlay 8iven by law as rewards for taxpayers who comply with certain policies or Support certain government programs. eee deductions are not actual expenses and may or may not involve cash outlay ie are mandated by law as deductible against gross income as a matter of tax agent These should be classified under “special allowable itemized ‘Uction” in the absence of an express regulatory guidance classifying them as 533 cboy d Deductions and NOL¢ ial Allowable Itemize Chapter 13-B - Special ry ial deduction that is expres. ions, So far, the only special aaa eter is that allowed to insurance companies, as an ort DEDUCTION INCENTIVES UNDER SPECIAL LAWS ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR Cm EMPLOYEES jl an i loying senior citizens Shall be eny, 9257, private establishments employi a ea ‘deduction from gross income equivalent to 15% of the total ang paid as salaries and wages to senior citizens. sly Classy, Conditions for deductibility of additional compensation: 1, Employment shall have to continue for at least 6 months 2. The annual taxable income of the senior citizen does not exceed the Pover level as determined by the NEDA The poverty line or poverty threshold pertains to the amount of income Suffic, to meet basic food and non-food needs such as clothing, housing, transportatia and health among others. The senior citizen shall submit to his employer a sioy certification that his annual taxable income does not exceed the Poverty level, | Illustration Assume a taxpayer employs both regular and senior citizen em ployees and paid th, following compensation during the year: | Regular employees P 200,000 | Senior citizen employees with salary grades above poverty level 50,000 Senior citizen employees with salary grades below poverty level —40,000 Total compensation expense P.290,000 The total deductible compensation expense shall be: Regular employees P 200,000 Senior citizen employees 90,000 | Regular salaries expense 2.290.000 | Additional compensation expense under RA 9257 (P40,000 x 15%) P__6,000 The 15% additional deduction is definitely not an actual expense, but is allowed law merely as an incentive. for employers who consider senior citizens # oe The regular salaries will be Presented as part of ordinary allow itemized deductions. The 159% additional deduct nted as SP allowable itemized deduction ation shall be prese 534eee 3-B - Special Allowable Itemized Deductions and NOLCO 1. papter i jtizens who are above the poverty level may avail of incentives under the ‘ord en ‘wage law if they qualify as minimum wage earners. ;ni0NAL CLAIMABLE COMPENSATION EXPENSE FOR PERSONS WITH pseBilTY ant to RA 7277, as amended by RA 9442, private entities that employ pled persons who meet the required skills or qualifications, either as regular ist yees, apprentices or learners, shall be entitled to an additional deduction, plover gross income, equivalent to twenty-five percent (25%) of the total a : p fowint paid as salaries and wages to disabled persons. uisites for deductibilit phe entity present proof as certified by the Department of Labor and Employment that disabled persons are under their employ. b, The disabled employee is accredited with the Department of Labor and : Employment and the Department of Health as to his disability, skills, and qualifications. ‘the actual salaries shall be presented as part of ordinary expense while the 25% additional salaries expense shall be presented as special itemized allowable deductions. COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS Under RA 7277, private entities that improve or modify their physical facilities in order to provide reasonable accommodation for disabled persons shall also be aatitled to an additional deduction from their income equivalent to fifty percent (60%) of the direct costs of the improvements or modifications. ADDITIONAL TRAINING EXPENSE UNDER THE JEWELRY INDUSTRY DEVELOPMENT ACT OF 1998 Under RA 8502 and its implementing rules and regulations, a qualified jewelry taterprise duly registered and accredited with the Board of Investments (BOI) is ‘titled to an additional deduction from taxable income of 50% of the expenses incurred in training schemes approved by Technical Education and Skills Development Authority (TESDA). The same shall be deductible during the year the penses were incurred. Conditions for deductibility: '. A qualified jewelry enterprise must submit to the BIR a certified true copy of : its Certificate of Accreditation issued by the BOI. The training scheme must be approved and certified by TESDA. 535 | aey _ ON Chapter 13-8 - Special Allowable Itemized Deductions and NOL gg ADDITIONAL LABOR TRAINING EXPENSE UNDER THE CREA TE Law Under RA 11534, 50% of the value of labor training expenses incurred 5 development of enterprise-based trainees enrolled in public senior high tS, public higher education institutions, or public technical and Vocational ingne shall be claimed as additional deduction against gross income, Conditions of deductibility: : 1. Apprenticeship agreement between the enterprise (taxpayer) an, the y pursuant to the Labor Code of the Philippines Tait 2. Certification from Dep-Ed, TESDA, or CHED secured by 3. The amount of deductions shall not exceed 10% of y the enterprise irect labor Wage, Mlustration Texas Instrument (TI) established an apprenticeship program in trainin Priv, Public school senior high students. The program was dul ate ay 0 ly accredited During the year, TI incurred a total of P1,800,000 apprentice training cae Public students and another P1,000,000 for private students on COP Of the folloyi, payroll expenses; iy Factory personnel payroll P 8,000,000 Support departments personnel payroll 500,000 Administrative personnel payroll 1,500,000 Total P.10,000,000 The additional deduction shall be computed as follows: Apprenticeship training expense P 1,800,000 Multiply by: Incentive percentage S0% Possible deduction Pb. 900,000 Deduction limit (PEM direct labor x 10%) P__g00,000 The deductible amount shall be the lower P800,000. The same shall be classified unde special allowable deduction. Th #¢ P1,800,000 training expense shall be claimable unie ordinary allowable deduction. ADOPT-A-SCHOOL ACT OF 1998 (RA 8525) Under the Adopt-a-Schoo! Program, private entities are allowed to assist a pull school in particular as ects of their educational program within an agreed peti! of time. The adopting private entity which may be an individual in business or packs Profession, a partnership, or a corporation shall team up with the DepED, a or TESDA toward providing much needed assistance and services to pil! j schools. The assistance may be an aid, contri wt] bution or donation in cash or in kind but limited to infrastructure, physical fa : Hi i cilities, real estate property, training ands®”, 536- Skil oy and DA for yor 13-B - Special Allowable Itemized Deductions and NOLCO hae i yelopments learning support, reading materials, computer and science de “tories, health and nutrition packages, and assistive learning devices for verentS with special needs. n of participating schools ‘t school in all levels may participate in the program. Priorities ‘ome fication y governmen An) Be given to schools located in the poorest provinces, low inc a dpalties. and other local government units experiencing severe classroom pote: insufficient budget, or having numerous poor but high performing Jearner- alifications of Adopting Private Entity st have a credible track record. + iemust have been in existence for at least one year. 3, It must not have been prosecuted and found guilty of engaging in illegal activities such as money laundering and other similar circumstances. taxdeduction incentive Contributions to the government in priority activities are deductible in full while those made in non-priority activities are deductible subject to limit. from the usual regular deductible contribution expense, an adopting entity dditional deduction from gross income equivalent to 50% of he adopting entity for the "Adopt-A-School Program.” 4, Itmu Aside shall be allowed an a‘ the contribution of t Conditions for deductibility: a. The deduction shall be avail paid or incurred. . The expense is sul delivery receipts following: a. The amount of expenses being claimed as deductions b. Direct connection or relation of the expenses to the adopting private entity's participation in the Adopt-a-School Program c. Proof or acknowledgement of receipt of the contributed or donated property by the recipient public school The application together with the approved MOA endorsed by the National Secretariat shall be filed with the RDO having jurisdiction over the place of business of the adopting private entity, copy furnished the RDO having jurisdiction over the property, if the contribution is in the form of real property. led of in the taxable year in which the expense is bstantiated with sufficient evidence such as official receipts, and other adequate records which shall set forth the Procedures for availment | Memorandum of Agreement An adopting private entity shall enter into a Memorandum of Agreement (MOA) with the head of the public school. The MOA shall specify the details of S37¥ Chapter 13-B - Special Allowable Itemized Deductions and NOL¢g i i f 2 years pre. the adoption which must be for a minimum of ; Pre-tern when the adopting private entity is dissolved prior to the end of ie le t or when terminated for failure to possess the qualification as suey, Uh oe 2, Supporting evidence : : Saad g entity must maintain sufficient evidence of the assistance incurred, establish the connection of the expense to the og entity's participation in the program, and maintain proof of ackngwi of receipt by the public school recipient of the donation. tent 3. Apply for Certificate of Tax Incentive and Tax Exemption ‘The adopting entity shall apply for a Certificate of Tax incen Exemption and submit the following documents to the Secretariat: a. Duly authorized or approved MOA b. Duly notarized deed of donation c. Official receipts and other documents showing the actual val, tive or w contribution or donation Ue of th, 4. Certificate of Title and Tax Declaration, if the donation is in the fo Property my e. Other adequate records showing direct connection or correlation of expense being claimed as deduction to the adopting entity's participa in the program Mustration In 2023, Robotics Inc. entered into a memorandum of agreement with two schoo adopt them as part of its corporate social responsibility: Name Nature Grant Balakbak High School | A public secondary school P,500,000~ Divine World College | A non-profit accredited donee institution | P 1,000,000 Adopt-A-School program was designated by the NEDA as a priority program for 2023 Robotics Inc. shall claim the following contributions expense as part of ordinay itemized allowable deductions: Contribution to accredited donee NGO P 1,000,000 Contribution expense under RA 8525 1.500.000 Regular deductible contribution expense P_2,500,000 Contribution expense under RA 8525 P 1,500,000 Multiply by: 50% Special additional contribution expense P_750,000 Note: Only donations to public schools are allowed the additional deduction. 538 Robotics Inc. shall likewise claim the following additional contribution expense #| special itemized allowable deductions:- oe 43-B - Special Allowable Itemized Deductions and NOLCO ‘ sion of deductions (RR10-2003) van assistance, contributions or donations shall be based on the actual 1 amount appearing in the official receipt issued by the donee. assistance other than money 1. personal property - acquisition cost of assistance or contribution consumable goods - acquisition cost or value at date of donation whichever is lower _ services = the value of services rendered by the donor and the service provider and the public school as fixed in the MOA or the actual expense incurred by the donor, whichever is lower Real property - fair value (higher of zonal value or assessed value) at the a. time of contribution or the depreciated cost of the property whichever is lower b pets iyic i : n 2024, Danao Realty Corporation participated in the “Adopt-a-School Program” by I ibiting its services toa public school in La Trinidad, Benguet. The agreed value mein the MOA for the construction of the public school building was P1,000,000. siowever, Danao Realty was able to complete the same at a total cost of P800,000. tadopt-a-School Program” is a priority program in 2024, Danao Realty 1 the’ imation shall be allowed to deduct the following: Corpor uinary itemized contribution expense 200,000 spec itemized contribution expense (PB0OK x 50%) P_400,000 fate The ower of the actual cost of services and the agreed value shall be considered. Assume that the "Adopt-a-School Program” is no longer a priority program in 2024, ind Danao Realty has P9,000,000 net income before the contribution. Danao Realty tall be allowed to deduct the following: Contribution expense subject to limit P 800,000 Contribution limit: 5% x P9,000,000 __450,000 (rdinary itemized contribution expense P_450,000 Ggecia itemized contribution expense (P800K x 50%) P_400,000 Note: 1. Forcorporations, contributions to the government in non-priority activities are subject toa limit of 5% of the net income before the contribution. 2. The basis of the additional incentive is the actual donation as valued under RR10-2003, not the amount of the ordinary allowable itemized contribution expense. Austration 2 \itory Bus Line contributed a lot and a bus to its adopted public school. The lot shall te sed by the public school for building expansion and the bus as a school bus. The ‘Mdopt-a-School Program” is a national priority program during the year. 539Chapter 13-B - Special Allowable Itemized Deductions and NOLGg ‘The following relates to the value of the lot and the bus: X Appraisal value of lot 2? aed 7 Tonal value of the lot 3.600.000 7 Assessed value of the lot 3,000,000 * Acquisition cost of the lot 3.000.000 X Acquisition cost of the bus 2,400,000 + Depreciated cost of the bus 1500,000 Depreciated appraised cost of bus 2,000,000 ‘The contribution expense deductible as part of ordinary itemizeg i al deductions shall be computed as follows: ; lon, Contribution Zonal value P 3,600,000 Assessed value —2500,000 + Fair value of the lot (higher) P 3,600,000 » Cost of the lot (LOWER) P. 3,000,000 P 3,000,000 j Depreciated cost of bus —1500,000 Ordinary itemized contribution expense P.4,500,000 The term “acquisition cost” is understood to refer to “depreciated cost” if the mop property donated is a depreciable ordinary asset. A portion of the costis already against gross income of prior years through depreciation expense so we could nate it again through contribution expense. The contribution expense deductible as part of special itemized allowable dedusy shall be computed as follows: ' Total value of donation P 4,500,000 Multiply by: oe Special additional contribution expense B.2.250,000 EXPANDED BREASTFEEDING PROMOTION ACT OF 2009 (RA 10028) The purpose of RA10028 is to encourage, protect, and support the practiced breast-feeding which is believed to provide distinct benefits to the mother andi: infant aside from saving the country’s valuable foreign exchange that m otherwise be used for milk importation, Requirements to all Establishments Lactation station All health and non-health facilities, establishments, and institutions whet operating for profit or non-profit which employ in any workplace nurs employees are required to establish a lactation station. Exemptions may granted when the establishment of a lactation station is not necessary due tol! circumstance of the workplace taking into consideration among others 540Qa ptt 13-8 - Special Allowable Itemized Deductions and NOLCO nber of employees, physical size of establishments, and the average number of “ en who visit. pe substantianio’ shall be made by the employer to support the application for eption- Priv OIE ay secure exemption from the Department of Labor a 10} a a ). Public sectors may apply for exemption from the ‘erson of the Civil Service Commission. The certificate of exemption is valid eyo (2) yeas octation period ah jus employees shall be granted break intervals of not less than 40 minutes for ery SchOUE orking period in addition to the regular time-off for meals to feed or express milk. This interval shall include the time it takes the employee to get to and from the workplace and the lactation station. The required aaitional breaks are compensable hours. ess (0 Breastfeeding Information joyers shall ensure that staff and employees shall be made aware of the Employ’ " i preastfeeding Act and its Implementing Regulations. sb Requirements to Health Institutions 3 jpoming-in policy The law requires newbs ster birth for a certain in pd direct breastfeeding is not possible, tapression and milk storage. orn infants and the mother to be roomed-in immediately length of time. In case the mother and baby are separated there should be facilities for milk Milk Storage Facility Al health institutions a‘ storage facilities. A milk stora; ventilated area or space for the pu! nothers separated from their babies amilk bank and a lactation station. personnel who supervise and assist the mothers wh: falty should fully comply with Executive Order 51. dopting rooming-in and breastfeeding shall provide milk ge facility is a private, clean, sanitary, and well- pose of collecting and storing milk among due to medical reasons. This is different from There must be dedicated and trained 10 will use the facility, and the of wy Milk banks ik banks can be used as temporary solutions when the mother and baby are separated, It may also be a source of breast milk for infants that are victims during anemergency and/or disaster. ing te Medical centers and regional hospitals a ‘ht alk banks which should be operated it DMoeessing fee may be charged to cover ‘dninistrative costs. mong others are encouraged to set-up on a non-profit basis, but a minimal for the screening, processing, and 541Chapter 13-B - Special Allowable Itemized Deductions and NoLog for non-availm t the fees shall not be a reason f ent 0} au ae These milk banks must have their own permanent, ded a J if i eg or personnel who are trained in human milk banking and lactation mana ti mig! Tax deduction incentives ; eo The expenses incurred by a private health institution in complying on Fooming-in and breast-feeding practices shall be deductible expenses for ne & tax purposes up to twice the actual amount incurred. ea Conditions for deductibility : 1. The deduction shall apply for the taxable period when the expenses incurred. ' - ey 2. All health or non-health facilities, establishments and institutions shall with the IRR of RA 10028 within 6 months after its approval, omy 3. The facility, establishment or institution shall secure a “Workin NG Mother, Friendly Certcae” from the Department of Health tobe filed wane = Mustration 1 : Henson Electronic employs primarily women. Henson installed a lactation Station its nursing employees at the following costs: fa Remodeling of a space for the lactation station P 80,000 Tables and comfortable chairs 40,000 Refrigerator 12,000 Manual and electric breast pumps 10,000 Supplies (sterile milk containers, soap, etc) 8,000 Total 2.150.000 The P150,000 cost of compliance shall be claimed @s part of ordinary itemin: deductions. An additional expense for the same amount shall be claimed under specid itemized allowable deductions, Mlustration 2 Baguio Medical Center (BMC), a private hospital, Previously set up a milk store facility and a milk bank. The total annual costs ofthe two facilities were: Storage Milk Supplies P 100,000 P 120,000 P 220,000 Staff salaries 210,000 90,000 300,000 Maintenance z 120.000 Total 280,000 P 640,000 Less: Fees collected from patients " Excess expense pmeere ‘000 The milk bank was operated as an integral Part of the hospital, but is operated as" profit. BMC charges minor fees and subsidizes the facility excess expense. 542~ cat 13-B - Special Allowable Itemized Deductions and NOLCO may claim the following expense as part of ordinary itemized deductions: bh ly : ‘ rating costs of storage facility 3 yo! Pt bank expense subsidized by BMC P snono 450,000 ty hall also claim an additional deduction for the same amount as s| ecial itemized MC iP Mowable deductions. foal rosration 3 uk Provincial Hospital, a state hospital, set up a milk storage facility at a total costs eM 120,000. 4) gequirede Determine the allowable special deduction, aswert Ay Tabuk Provincial Hospital ca However government facilities, ‘etional appropriation equivalent to the savings they may complying with RA 10028. ings may come from , reduced illness of babies, ment of infant formula paraphernalia. nnot claim deductions since it is non-taxable. establishments, and institutions will receive derive as a result of reduced costs due to absenteeism, increased hese savi it and reduced cost of procurement, sterilization, | productivi and manage! IRE LEGAL ASSISTANCE (RA 9999) roviding pro-bono legal services are given Lawyers Or professional partnerships p! deduction incentives for their free legal services. Requirement for availment Lawyers or professional partnerships rendering actual free legal services shall secure a certification from the Public Attorney's Office (PAO), the Department of Court indicating that the justice (DOJ), or association accredited by the Supreme said legal services to be provided are within the services defined by the Supreme Court and that the agencies cannot provide the legal services to be provided by the legal counsel. duly accredited by the Supreme Court shall The association and/or organization issue the necessary certification for the number of hours actually provided by the wyer or partnership. Tax Deduction Incentive Tee practicing lawyer or partnership shall be entitled to an allowable deduction uialent te the amount that could have been collected for the actual feformance of the actual free services rendered or up to 10% of gross income rived from the actual performance of the legal profession whichever is lower. 543| | | | sosnte, § Chapter 13-B - Special Allowable Itemized Deductions and NOLco The free legal services must be exclusive of the 60-hour Mandatory assistance rendered to indigent clients as mandatorily require fey d under thet! Mandatory Legal Aid Services for Practicing Lawyers. le wa Mlustration 1 | A general professional partership of lawyers had the following data during te Gross receipts P 4,000,000 Interest on client notes 200,000 Interest on deposits . . 36,000 Value of pro-bono services, exclusive of indigent clients 240,000 - Direct cost of services 1,700,000 Administrative costs 1,200,000 The special deduction for free legal services shall be determined as follows: Gross receipts P 4,000,000 Direct cost of services Gross income from operations P 2,300,000 | Multiply by: 10% Deduction limit B_230,009 Actual free services provided P_240,000 Special “free legal service expense” (LOWER) 2.230.000 Note: The interest income on notes is an item of gross income subj ject to regular income ty is excluded as itis not derived from the actual performance of the legal profession, The net income of the general professional partnership shall be computed as follon: Gross receipts Direct cost of services Gross income from operations Other gross income Total gross income Less: Ordinary itemized deductions P 1,200,000 Special itemized deductions Free legal services expense 230.000 __1,430,000 Net income P_4,070,000 Mlustration 2 Atty. Sabado rendered the followin Gross receipts from legal fees P 4,000,000 —1200,000 P 2,300,000 ——200,000 P 2,500,000 i Services during the year: P 5,000,000 Value of 60-hour assistance to indigent clients 200,000 Value of other pro-bono services 450,000 Direct cost of services 1,800,000 Other deductible expense 1,500,000rr - Special Allowable Itemized Deductions and NOLCO canter 13-8 all be entitled to an additional deduction computed as follows: Me oc an k value of pro-bono services P__450,000 & MF eofincentive: Lim ross receipts P 5,000,000 ‘rect cost of services fm, Gross income from operations P 3,200,000 uteiply by: limit rate duction limit P_320,000 gc free legal services expense (LOWER) P_320,000 srenet income of Atty. Sabado shall be computed as follows: Gqass receipts from legal fees P 5,000,000 [ess: Direct cost of services 1.800.000 Goss income P 3,200,000 Ss: edinary itemized allowable deductions P 1,500,000 special itemized allowable deduction Free legal services expense 320,000 __ 1,820,000 Netincome P_1,380,000 ADDITIONAL PRODUCTIVITY INCENTIVE BONUS EXPENSE Incentive Act of 1990 (RA 6971), a business enterprise bender the Productivity which adopts a productivity incentive program is entitled to a special additional deduction equivalent to 50% of the total productivity bonuses given to employees under the program. Inaddition, business enterprises providing manpower training and special studies as accredited by the Technical Education and Skills to rank-and-file emy ditional deduction of the total Development Authority are also entitled to 50% ad grant for local trainings and special studies. e will not be allowed on bonuses accruing during However, the deduction incentive from any violation of the productivity the pendency of a strike or lockout arising incentive program. IMustration To improve productivity, productivity incentive program whi bonus equivalent to 40% of production cost savings which sh ‘ndependent expert. Cogon Company negotiated with its factory employees a erein the employees shall receive a productivity all be measured by an Cogon Company also required employees to undergo studies though an “employee Mancement study program” with the TESDA. All employees who finished their ecial studies were required to remain at the employer's business for a period not “ssthan one year. 545 behem, Chapter 13-B - Special Allowable Itemized Deductions and NOL¢g | The following were determined during the year: Total distributable productivity bonus P1,000,000 Cost of special studies i 300,000 Supervisory employees P , Rank and file employees 1.200.000 _2,000,.000 Total 23.000.000 Aside from deducting the above employee benefit expenses, entitled to the following special deduction incentives: the employer shat, | Additional productivity bonus expense (P1M x 50%) P 500,000 Additional expense on employee studies (P1.7M x 50%) __@50.000 Total productivity incentive expense 21,350,000 | Note: 1. The incentive on special studies covers rank and fle employees only | 2. The costs of the specal studies will not be subject to regular tax or fringe benefit tax sti | are granted for the convenience of the employer. they Note to readers The deduction incentives discussed in the foregoing section are some of the incentives to taxpayers. There are other deduction incentives granted by various taxpayers across different industries. The list shown in this intended to illustrate the practical application of deduction incentives in in ‘more commen Y special laws t chapter is mer | come taxation, Summary of Deduction Incentives Limit] Compensation expense | 15% of compensation to senior None for senior citizen citizen below poverty level | Compensation expense | 25% of compensation to PWDs None | for PWDs below poverty level PWD facility 50% of improvement cost None | improvement Jewelry training expense 50% of training expense None. Apprenticeship labor 50% of labor training expense 10% of direct labor training expense wage Adopt-a-School 50% of actual contribui tions contribution 1 Breastfeeding promotion | 100% of expense incurred _— Free legal assistance Value of actual free legal service | 10% of gross income from legal professiov- Productivity bonus 50% of productivity bonuses None | Manpower training or 50% of grant to rank-and-file None | special studies | employees 546> a oot chapter 13-B - Special Allowable Itemized Deductions and NOLCO yncoME. cero MADE BY TAXABLE ESTATES OR TRUSTS distribution i weome a " cL administrator of a taxable estate in favor of the es a aera eatcn ta aa i" avon ot the beneficiary of the trust is a ei : e of the estate or trust. i distribution I all be included by the recipient heir or ery ees income. iiustration Don aeag eaneteredl 3 commercial lot and a P1M stock investment in irrevocable rst , Ritchie. The trust earned the following income in 2024: ent income on the lot Less: Leasing expenses . P 1,200,000 i ——200,000 Rental net income PET G00000 pividend income, net of final tax 1000, P.1,036,000 Trust net income Inaccordance with the trust indenture, the trustee distributed half of the gross rentals and the entire dividends to Ritchie. Special deduction 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 included in the gross income of the trust for purposes of the regular income tax. The net income of the trust shall be computed as follows: Gross rent income P 1,200,000 Less: Ordinary allowable deductions P 200,000 Special allowable deductions fciary 600,000 __800,000 P__400,000 Income distribution to benefit Net income ‘TATE INVESTMENT TRUST (REIT) DIVIDEND DISTRIBUTION OF A REAL ES: ME AREIT is a publicly listed corporation established principally for the purpose of owning income-generating real_estate_assets. A REIT is legally mandated to distribute 90% of its distributable income as dividends to shareholders. lend distributions of REITs are treated as special Under RA 9856, the divid deductions against gross income. he taxable nel ble income al REITs, dividends distributed t income of ble year and on or For pur ing tl Purp OSes Or Ca eae fter the close of a taxal by them from their distributal 547eo NN Chapter 13-B - Special Allowable Itemized Deductions and NOLCg before the last day of the fifth month following the close of the taxa bl ble year, be considered as paid on the last day of such taxable year. " TRANSFER TO RESERVE FUND OF COOPERATIVES Under RA 9520, cooperatives are required fe maintain reserves fo, ty protection and stability. Cooperatives are exempt from income tax, but are Subj to tax on their income from unrelated activities. The amount transfereq Y te cooperative to the reserve fund out of the net surplus rom unrelated Activities, an item of deduction in the computation of the taxable net incom © OF thy cooperative. Mlustration a ; | Lowland Coop summarized the following income and expenses from its xen ‘elated actviies and taxable elated ated activi ies: fi Related Unrelated i Soe r Sales P 2,000,000 P 1,000,000 P 3,000,000 Cost of sales 200,000 ___ 600,000 __1,800,000 Gross income P 800,000 P 400,000 P 1,200,000 Operating expenses 500.000 __150.000 __ 650.000 Net income P—300.000 250,000 550.000 in compliance with the Cooperative Development Act, Lowland Coop appropriates | 10% of profit to the reserve fund, plus additional 40% to other required and option | funds. The amount of special deduction and the taxable net income of the cooperative shall be computed as; Gross sales from unrelated activities P 1,000,000 Cost of sales 600,000 Gross income from unrelated activities P 400,000 Less: Ordinary itemized deductions 150,000 Net income before statutory reserves P 250,000 Less: Special itemized deduiction Appropriation to reserve fund (P250K x 10%) 25,000 Taxable net income P_225,000 Note: Only the appropriation for the reserve fund ig deductible as a special deduction. The 40" appropriations for other cooperative funds are not deductible, THE EXPANDED SENIOR CITIZEN'S ACT OF 2003 (RA 925; 7) Senior Citizen or Elderly Senior citizen or elderly refers to any resident Filipino citizen aged 60 years and above. 548ON shay hei, 's a chapter 13-B - Special Allowable Itemized Deductions and NOLCO ni RA 9257, a senior citi und shments such as cae aay is entitled to 20% discount in certain jonal centers, imilar lodging estab! als, drugstores, ere Places of culture, lltnee aed amraroments, port, and funeral or bay ect 28 Medical, dental, do i yand transP eral or burial service rea . |, domestic air, sea and , r i mre discounts granted to senior citizens by covered establishments and service providers are allowed as special deductions against gross income. coats a Seaacablity of sales discounts to senior citizens 4. Only that] le gross sales exclusit ‘ sir citizen shall be eligible for the deductbie aiesdissaune ee re eros ere Be ou the sales discount must be separately indicated in the of Woice issued b is nee ig the senior doors y the establishment for the sale of goods or Only the actual amount of the discount granted or sales discount not exceeding 20% of the gross selling price can be deducted from gross income, net of VAT, if applicable. " i. The discount can only be allowed as deduction from gross ii om th taxable year that the discount is granted. eee The business establishment giving sales discount to qualified senior citizens is required to keep a separate and accurate record of sales which shall include the name, TIN, ID, gross sales/receipts, discounts granted, date of transaction, and invoice number for every sale transaction to senior citizens. Ilustration 1 Medhub Drugstore Inc. recorded a P1,200,000 total deductible expense and the following sales: _—_—__—_Customers ____ Senior citizens Regular __ Seni Gross sales P 5,000,000 P 1,200,000 3,000,000 800,000 Cost of sales nior citizens a 25% discount. Consequently, it Medhub adopts a policy of giving se 1 ranted P300,000 total senior citizens’ discounts during the period. all be computed as: The taxable net income of Medhub sh: Gross sales (PSM + P1.2M) P 6,200,000 Cost of sales (P3M + PO.8M) ohone from operations P 2,400,000 = Ordinary itemized deductions P 1,200,000 Special itemized deductions Senior citizens’ discount | (PL2Mx20%) 240,000 1.440.000 ‘aable net income p_960,000 549Chapter 13-B - Special Allowable Itemized Deductions and NOLCo Note: 1. The gross sales to senior citizens must be reported gross of the senior ¢ while the discount is presented as a separate expense. Nene’ di, 2. The claimable senior citizen discount shall not exceed 20% of the gross sa citizens. Hence, the deductible amount is P240,000 not P300,000. °S from se Mlustration 2 Tasty Restaurant Corporation provides a 20% discount to senior citizens, jp re | * Teco the following receipts during the year: —Regular__ Seniorcitizens __Total _ P 4,000,000 P 500,000 P 4,500,000 2,800,000 1,100,000 Receipts Cost of services Other deductible expenses The special deduction for senior citizens’ discount and the net income shall be: Gross receipts [P4M + (PS00K/80%)] P 4,625,000 Less: Cost of services 2.800.000 Gross income P 1,825,000 Less: Ordinary itemized deductions —P-_ 1,100,000 Special itemized deductions | Senior citizens’ discount (P500K/80%) x 20% ——125,000 __1,225,000 P__600,000 Taxable net income Note: 1. Receipts pertain to cash collections which are inherently net of any discount provided Hence, the receipts from senior citizens must first be grossed-up. 2. The discounts must not be deducted out of net receipts. DISCOUNTS TO DISABLED PERSONS (RA 7277) 3 A person with disability pertains to an ‘individual suffering from restriction 0 different abilities as a result of mental, physical, or sensory impairment | perform an activity in a manner or within the range considered normal for humat beings. Disability pertains to physical or mental impairment that substantially limits if | or more psychological, physiological, or anatomical functions of an individual activities of such individuals. Discount to persons with disability isco Similar to senior citizens, persons'with disability are entitled to a 20% mers from certain establishments such as hotels and similar lodging coat al restaurants, sports and recreation centers, places of culture, Ve ser amusement, drugstores on the purchase of medicine, medical and dem! in private facilities, and domestic air, sea, and land transport. 550ey ter 13-B - Special Allowable Itemized Deductions and NOLCO iscounts to persons with disability shall be allowed as a special deduction rd mere same terms and conditions as those for senior citizens. Cy, iH er oPERATING LOSS CARRY-OVER oy peoperating loss (NOL) pertains to the excess of allowable deductions over the os ‘income from business or exercise of a profession during a taxable year. "deg erating loss carry-over (NOLCO) pertains to the amount of net operating Jossthat is allowed by the law to be carried over as deduction against available net in the following three years. yoLvs.NOLCO must be noted ee operating loss may occur, but may not be carried over; hence, However, & NOLCO cannot exist without a prior year net operating loss. that a net operating loss is technically different with a NOLCO. A no NOLCO. the Rationale of NOLCO {orc is intended to allow the taxpayer to recoup his losses before taxation go jul swing. Without NOLCO, income taxation would result in taxation of recoveries oflost capital. illustration: Assume the following operating (losses) or profits of the taxpayer: Year 2 Year 3 Year 4 [ Year 1 { [tperatingloss (profit) | (P 400,000) | (P300,000) | There is no tax from Year 1 to Year 3 because there is a loss. However, to tax the minimal oftof Year 4 would be unfair to taxpayers since this profit is merely a recovery of lost tax is a tax on realization of income and is not a tax on capital in the prior years. Income returns of capital. NOLCO is allowed for taxpayer to recoup his losses of capital before being fully taxed. That recoupment howeyer is limited by the law for only three years. muti (ONES - S Upha [_ (P200,000 P 20,000 Who can claim NOLCO? ll taxpayers subject to tax on taxable income whether at the regular income tax orat preferential tax rate can deduct NOLCO. Taxpayers who are exempt, enjoying tax holiday, subject to tax on gross income, or those subject to final income tax, | ‘annot deduct NOLCO. tow to compute NOLCO? [msincome subject to regular tax P_ XXX,Xxx et, Ordinary allowable itemized deductions (207. xxx) perating loss carry-over (NOLCO) (B.xxx,xxx) 551 aChapter 13-8 - Special Allowable Itemized Deductions and NOLCo Deduction incentives are not actual costs or expenses oe why they Canney . i i over. Prior year No included in the amount of net operating loss carry deduction incentive) cannot be deducted in the measurement Of the cur, ents NOLCO to avoid breaching the three-year carry over rule, Moreover, the benef? deductions cannot be amplified beyond what the law or regulations TOVide why special deductions, with the exceptions of those of insurance compan? cannot be carried over through NOLCO. les Deduction rules in the measurement of taxable net income or NOLco 1m Cost of sales / cost of services None, fully deductible 2nd Ordinary allowable deductions _| None, full deductible 30 | Special allowable deductions | Up to net income before Sap ae Net operating loss carry over Up to net income after NOLCo A Positive bottom line from the forgoing procedure is whereas a negative bottom line is NOLCO, Mlustration In 2024, Nexus Corporation reported sales of 4,500,000, rental inco) Me of P50,099 and interest income on deposit of P30,000 with the following deductions: a taxable net income Cost of sales P3,000,000 Ordinary itemized deductions P1,700,000 Discounts to senior citizens 200,000 Deduction incentives 300,000 NOLCO- 2023 150,000 Based on the foregoing, the NOLCO shall be Tecomputed as follows: Sales P 4,500,000 Less: Cost of sales 3.000.000 Gross income from operations P 1,500,000 Rental income Total gross income subject to regular tax P 1,550,000 Less: Ordinary itemized deductions 1.200.000 Net income (Net Operating Loss Carry-Over) (2.150.000) Treatment of NOLCO Net operating loss carry-over (NOLCO’ in the next three (3) consecutive tax: income before NOLCO deduction in t) ) is treated as a separate item of deduction able years to the extent of the available ne hose periods, To aid taxpayers during the Pandemic, the CREATE law allowed NOLCO incurred during taxable years to be carried over a period of five (5) years For taxpayers on a fiscal year basis, NOLCO for fiscal year ending on or before Ju" 552ae 1p 13-8 - Special Allowable Itemized Deductions and NOLCO te that NOLCO incurred hae ry-over period. 30,202) oftet thi 1 and June 30, 2022 will be carried over 5 2022 v years. Not .s two-year period will revert back to the original 3-year car! i stration eerparate taxpayer reported the following net income and loss from business: 2020 __2021_ __2022_ 2023 come P 400,000 P 500,000 P 720,000 P 900,000 650.000 oss incor Deductions 600.000 _ 450,000 __610,000 etincome (NOLCO) — (2200,000) p_50,000 2.110.000 2.250.000 pequired: Compute the taxable net income from 2021 to 2023. - 2021 net income is id the 2020 NOLCO balance as of Dec PS0,000 but the taxable net income is zero. The NOLCO ember 31, 2021 are as follows: application an 2020 __2021_ __2022_ _2023— yetincome (NOLCO) {P200,000) P 50,000 P 110,000 P 250,000 NOLCO deduction (50,000) NoL.CO balance ‘the 2022 net income i 010 application and the 2020 taxable net income is likewise zero. The is P110,000 but the ance as of December 31, 2022 are as NOLCO bal follows: 2022 2023 — ‘Net income (NOLCO) (P150,000) P = P110,000 P 250,000 110.000 -----~ mC NoLCO deduction NOLCO balance (240.000) the 2023 net income is P250,000 but the computed as follows: __2020 __2021 — _2022 2023 _ - P250,000 Netincome(NOLCO) (P_ 40,000) P -P sjecmeus2! sens come NOLCO deduction P ~ Adjusted net taxable net income is be P210,000, tive period will expire and will not be lowed only over three years. but with a longer 5-year carry- Note: 1. Any unused NOLCO al creditable in future perio 2. For NOLCO sustained during pandemic, over period. Requisites for the deductibility of NOLCO: 1. The taxpayer must not be exempt from income tax during the taxable year when the NOLCO was incurred. | 2 There has been no substantial change in the ownership of the business or enterprise. fter the three-year prescrip ds. Loss recoupment is legally all apply the same rules 553Chapter 13-B - Special Allowable Itemized Deductions and NOLCQ id up capital or nominal A change of at least 75% of either the pai -Rominal valye Gaakaing shares of a corporation is deemed a substantial change in, buy the Ines, ownership. Mlustration: NOLCO from exempt years ' tn 2021, Mr. Tan started a “Hot Siopao” manufacturing plant with less thay : ji: icro Business Enterpri 3h, capitalization and was registered as a Barangay Micro erprise (Ba ee start of 2022, Mr. Tan’s certificate of authority to operate as BMBE was rend when he upscaled his business operations. ed Mr. Tan’s business gross income and business expense were as follows: —72021__ 2022 ___ __2023 Gross business income P 400,000 P 700,000 P 1,500,000 Less: Business expenses —650.000 __800,000 __1.000.000 (2.250.000) (2.100.000) P__500,000 Net income (NOLCO) Required: Compute the taxable net income in 2023. Solution: —2021__ __2022 _ __2023 Net income (NOLCO) (P 250,000) (P 100,000) P 500,000 2021 NOLCO application ——— —100,000->(_100,000) Net income P - B.400,000 Note: 1. The P250,000 net operating loss occurred in a operating loss cannot be carried over as NOLCO. 2. The P100,000 net operating loss occurred in a year when the taxpayer was taxable. ‘This ‘operating loss can be carried over as NOLCO. Hence, this is carried over ‘as deduction in 2023. year when the taxpayer was tax exempt. Ths Rationale of the Disallowance of Carry-Over of Net Operating Loss Deductions are of no benefit to the taxpayer in an exempt year. Hence, the net Operating loss (ie, excess deduction) from an exempt year should not be given value by carry-over as this would cause undue enrichment to the taxpayer. Mlustration 1: Substantial change in ownership atest 45°), abe Mr. See owns 80% of Trinoma Corp. In 2020, Mr. See disposed of his 80% interest to Mr. Yuchen. The net income and (loss) of Trinoma Corporation since 2018 were: " —2018__ __2019_ 2020 Net income (NOLCO) (P 250,000) P 150,000 P 500,000 Required: Compute the 2019 and 2020 taxable net income of Trinoma Corp. Solution: —2018 _ __2019 __2020 Net income (NOLCO) (P 250,000) P 150,000 P 500,000 2018 NOLCO application 150.000->( 150,000) (100,000) ---~----», 0) Taxable net income Be 554B - Special Allowable Itemized Deductions and NOLCO we nol Bee in 2019 since there is no substantial change in ownership ot ale ‘ere is change in at least 75% in the ownership of the business. | ponte 23-1 tion 2: Substantial change in ownersh postr aa'bost n ership started a business in 2022. Disheart. (Ta ened by heavy losses, he sold the business yi cr, songat the start of 2023. The net income or (loss) of the business were: —2022_____2023 __2024 __ yerincome (NOLCO) (P 800,000) (P 300,000) P 500,000 gequted: Compute the taxable net income ofthe business in 2024. solution: —2022__ __2023 _ __2024 __ ctincome (NOLCO) (P 800,000) (P 300,000) P 500,000 ' —300,000--» 300,000 4973 NOLCO Application taxable net income yote:The 2022 NOL cannot be carried over since there isa substantial change in ownership in 2023. jationale of the Rule on Substantial Change in Ownership NOLCO is granted as an incentive to taxpayers to enable them to recoup their Josses before they become fully subject to income tax. Without this incentive, income tax would become a tax on capital. hen there is a substantial change in the ownership of the business, NOLCO is no yecause the owners for whom the loss recoupment is intended are business. NOLCO is a privilege that is not transferable. \t must s in prior years does not longer allowed be no longer in the be emphasized again that a net operating los: automatically mean NOLCO. Rules in Carry-Over of NOLCO 1, NOLCO is claimable in a first-in first-out (FIFO) fashion. 2. NOLCO can be claimed only up to the extent of the business net income in the nextsthree years. Prior year NOLCO cannot be deducted against a subsequent year‘net operating loss. 3, Any NOLCO which remains unused at the end of the three-year prescriptive period will expire. | | Mlustration 1 Acorporate taxpayer reported the following from 2019 through 2023: 2021 _2022_ _2023_ Sross income P 400P 320P 480P 400P 500 ‘ss:Deductions 500 __ 450 __450 __340 __340 | Netincome (NOLCO) (100) (2130) P30 P__60 P_160 555Chapter 13-B - Special Allowable Itemized Deductions and NOLco In 2020 " ; The taxable net income is nil. No deduction can be made against a sul i‘ ibs operating loss since this will roll over the NOLCO through integration UE ty operating loss ofthe following year breaching the three-year prescripun© ar en Ue In2021 - The taxable net income is nil. The 2019 NOLCO application and the Femaining y Prior year balances as of December 31, 2021 are: Oey Net income (NOLCO) (P 100) (P 130) P30 2019 NOLCO application —30 ===> (__39) Netincome (NOLCO balance) (P__70) (B_130) P__o Note: Deduction for NOLCO can be made only up to the extent of available net income i three following years. nthe In 2022 The taxable net income is nil. The 2019 NOLCO application and the ending Noxcg Prior year balances as of December 31, 2022 are: —2019_ _2020_ _2021 Net income (NOLCO) (P 70) (P 130)P OP 60 2019 NOLCO application teen naa ee ——60 <===> (__60) Net income (NOLCO. balance) (R_10) (2.130) R_HoPp__o Note: 1. The P10 excess 2019 NOLCO balance already expired because this is the third year. The Same can no longer be used as an item of deduction in future years, 2. ‘The P130 pandemic NOLCO is good for 5 years, In 2023 The taxable income is P30, —2020_ _ 2021 _ 2022 2023 Net income (NOLCO) ( 130.)P OP OP 160 2020 NOLCO application — 190 Ett rinaeo me __ 130) Net income (NOLCO) POP OP OP 30 Ilustration 2 A domestic corporation reported the following results of operations from years 2020 through 2025: ~2020_ _2021_ _ 2022 _ —2023_ _ 2024 _2025_ Gross income P 410 P 300 P 500 P 400 P 600 P 900 Less: Deductions _500 __s00 __459 340 __450 __500 NIMNOLCO) (P_20) (2.200) P50 P69 P_150 P__400 556id NOLCO 13-B - Special Allowable Itemized Deductions an 2025 shall be ter rae ; je net income of the corporation from years 2020 throughout i A tated as fOllOWS: ol 2021 —2023_ _2024— yorouc?) (P 90) (P 200)P 50 P 60 P 150 P 400 N 50 -===- > (__50) cobalance (P 40) (P 200) = nol 40 = yoLco balance Net income .0 FOR INDIVIDUAL TAXPAYERS refers to an operating loss from business or exercise of a profession. For individuals who are mixed income earners, NOLCO is measured by separating compensation income from business or professional income following the income tussfication and globalization rule. noLct NOLO Iiustration dnindvidual taxpayer compiled the following income and expenses: _2022 __2023 2024 _ _2025_ Compensation income P 20,000 P 220,000 P 80,000 P 75,000 Business gross income 470,000 400,000 500,000 500,000 500,000 420,000 420,000 340,000 Deductions Required: Determine the annual taxable income. \ Solution: 2022 __2023 _ __2024 _ _2025 Tarable compensation P__20,000 P.220,000 P 80,000 P_75,000 Business gross income =P 470,000 P 400,000 P 500,000 P 500,000 | Less: Deductions 500,000 420,000 Netincome (NOLCO) (1 a P 80,000 P 160,000 | (_30.000) _____. | Taxable Income p_20,000 P220,000 P110,000 P235,000 Note: ‘8 a rule, the taxable compensation income and the net income are simply combined in computing the taxable income of individual taxpayers. net operating loss from business or exercise of profession is not deductible from taxable | Compensation income, but is carried over as NOLCO. | 1 557Chapter 13-B - Special Allowable Itemized Deductions and NOLco i NOLCO for Mining Companies a Tee loss sustained by mining companies without the ene incentives under the Omnibus Investment Code of 1987 in any of their ; tk q years of operation is allowed to be carried over a period of § years followin ty year the net operating loss was sustained. at NOLCO and Net Capital Loss Carry Over © NOLCO is deductible against available net income in the next three yen. | operation. Net capital loss carry-over is deductible only up to the extent of the ¢ capital gain in the immediately following year. et Net Capital Loss Carry-Over cannot be claimed simultaneously with No} ; accordance with the income tax benefit rule, no capital loss carry-over jg Alloves when the year’s operation resulted in a net. operating loss (i.e, Limit lis 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 busine « » a SS. The acquired business is referred to as the “assignor” or transferor” and the Purchaser as the “transferee” or “assignee.” In accounting, the ssignor is calej the “acquiree” while the purchaser is called the “acquirer.” NOLCO and Merger or Consolidation NOLCO of the Acquirer Under RR14-2001, the NOLCO of the acquirer which it incurred before the merger or consolidation continues to be deductible even after merger or consolidation so long as there is no substantial change in its ownership. NOLCO of the Acquiree Historically, the BIR consistently ruled that NOLCO is transferrable to a surviving forporation since it is viewed as part of the rights, Privileges, properties, and/ar interests that will be transferred to and vested in the surviving corporation upon merger or consolidation, However, under BIR Ruling 214-2012, the BIR ruled that NOLCO is not one of the assets of the absorbed corporation that can be transferred and absorbed by the surviving corporation, noting that it is Privilege or deduction that can be availed only by the absorbed corporation, Under Sec. 34(D)(3) of the NIRC, NOLCO is Not allowed as deduction when there! a substantial change in the ownership of the business, Itis clear that the privet for NOLCO deduction is reserved by the law only to the group of owners when A loss was incurred while denying it to the new group of owners who subsequen/ acquired substantial interest in the business, NOLCO is not a transferrable rig! 558r 13-B - Special Allowable Itemized Deductions and NOLCO hate ; peter 13-B: SELF-TEST EXERCISES ission Questions istinguish an actual expense from a deduction 1 * luction incentive. 1 inumerate be eee een allowed by the NIRC and special laws. 2 Fqumerate the deduction incentives allowed by special Iw , {Demonstrate how NOLCO is measured. . What are the conditions for the deductibili ? 5 plain the rules in the carry-over of ROC a § |gnOLCO transferrable? Explain. : or False \ Deidends are non-deductible by any taxpayer except real estate investment «The employers are allowed additional deduction of 15% on the compensation id to persons with disability. fa An adopting private entity of a public school is entitled to a deduction incentive equivalent to double the amount donated to a public school. v4, Taxpayers who installed improvements in their facilities to accommodate persons with disability are allowed an additional 50% deduction incentive based on the value of such improvement. +. The distribution of the corpus of a taxable esta deduction against the gross income of the estate or trust. |. Thetransfer to the reserve fund of insurance companies is a special deduction, the elease from the reserve fund is an item of gross income. >, The transfers to all reserve funds of the cooperative including mandatory and diserctionary funds are deductible from the gross income of cooperatives. +4 Persons with disability are mandatorily allowed a discount of 20% from all ___ establishments. fq Senior citizens are man establishments. £10. The employer of senio 50% of the compensation poverty li “11, Expenses incurre Act are allowed an a incurred. ‘12, Attorneys are entitled to the value of their pro-bono services to indigent clients as deduction from gross income. “18. The allowable incentives to lav the gross income from the actual “M4. Employers are entitled to an _ incentive bonus paid to their emplo 18. The amount of NOLLCO shall not incl allowed by law. te or trust is an item of special but datorily allowed a discount of 25% from certain nal deductions equivalent to + citizens can claim additio who have income below the paid to senior citizens ement of the Expanded Breastfeeding ‘valent to the amount of the expense d to comply with the requir dditional incentive equi yyers for pro-bono services shall not exceed 10% of | performance ofthe legal profession. Pritional deduction of 50% of the productivity ees. Jude the amount of deduction incentives 559¥ 16. A small business was merged to a larger business. Even after th AS Chapter 13-B - Special Allowable Itemized Deductions and NoLcg apter 13- a © mer, NOLCO of the small business is deductible by the larger business. Be 7 is valid for 3 years. : 18, NOLCD always existwhen there is ane operating loss. ies) Net capital loss carry over cannot be carried over together with NOLco, 4 env Sarit ees Combination sustained a net operating Ioce before : a yeas fn business combination. The acquirer is allowed to carry-over its neq operating in prior years. Multiple Choice - Problems 1 i i P3,200,000 as of p, The required reserve for an insurance company was 2 cen : 31,2018 and P3,500,000 as of December 31, 2021. What is the deductible amon, of transfer to the reserve fund? a PO . P3,200,000 ® _ P300,000 d. P3,500,000 2. A fitness gym catering to senior citizens recorded a total P345,000 from senior citizens. The gym provides 24% discoui legal requirements. What is the deductible amount of senior citi a PO . P82,800 © 69,000 2.P90,789 BrOSS revenue yy nt in excess of ty zen’s discount? 3. Germania Inc. employs three senior citizens as regular employees. Two of then mini seiving the minimum wage which is within. the Poverty level. Tota Compute the deductible additional compensation expense. a PO ©. P91,000 8 27,300 4. P144,300 * An employer hired two senior citizens durin, for its two staffs who were on leave. Both s excess of the poverty level, ig the year as temporary replacements *enior citizens were paid salaries notin Mang Pandoy, substituted for an Mang Pandoy received a total of P14, for an employee who filed for maternity total of P28,000 during compensation expense. a PO ® 21,600 the year. Compute the total deductible additional ©. P25,800 d. P43,000 560the he ps8 Special Allowable temized Deductions and NOLCO g of It 00! , ; om pernard irrevocably designated in trust his investment portfolio consistin e stocks shall be «, mnBeh stocks and bonds. The divid mest A ividend income from th ‘ee ed to the beneficiary while the interest on the bonds shall be Seumlated. During the year, the portfolio earned P200,000 interest and #3000 dividends, net of final tax. | deduction allowable to the trust for the inc patisthe total c. P135,000 d, P150,000 ome distribution? gr ¥ 715,000 rantor irrevocably desi the trust indenture, the trustee shall be paid 5% of the gross incol ar, the trust collected P810,000 rent income, xes. The trust recorded P350,000 in expenses. to the beneficiary. ignated in trust a real property in favor of a beneficiary- 20% of the trust net income shall be distributed to the me as management fee. 6 net of 10% creditable under peneficiary- Tl puring the ye vathhotding t2 compute the deductible amount of income distribution .P110,000 P a 0 101,000 d. P180,000 ned P4,100,000 from property rentals. ‘Assuming the REIT declared the state investment trust (REIT) eal what is the amount of deductible fatal business expenses were P2,100,000. fundatorily required dividend distribution, tividend against gross income? c. P1,890,000 d. P3,690,000 1, Areal e 2 PO @ P1,800,000 rative transacting business only with its members is on its third year of + 50% of its operating income in compliance with the new a total operating income of CDA regulation. During the year, it reported 7 p2,400,000 income from related activities. Compute the 73,000,000 inclusive o| deductible amount of transfers to reserve against Bross income. a PO c, P240,000 b. 60,000 : P300,000 «An establishment granting senior citizens 25% discounts recorded the following sales during the period: ___Customers __— senior Gross sales P 8,000,000 P 800,000 Cost of sales 5,000,000 400,000 & Acoope operation. It reserves What is the deductible senior citizens’ discount? c a PO 200,000 ® P160,000 d. P266,667 561r Chapter 13-8 - Special Allowable Itemized Deductions and NOLog 10. A restaurant granted 25% discounts to senior citizens in excg, Mandatory requirement. During the year, the restaurant rep, crea % P93,750 from senior citizen customers. ok Compute the deduction for senior citizens’ discount. a PO c.P23,437.50 b. P7,250 @P25,000 11. An employer embarked on a_ socio-economic Program name, Empowered by Persons with Disability.” Under the ambitic, employer established a business which is fully manned by person The employer incurred 300,000 in workplace improvement: c i ect designed for its disabled employees. The business venture turned very ofa! due to overwhelming public sympathy. During the year, the employer _ 2,100,000 in compensation expense. Compute the additional deductible compensation expense. a PO ¢.P315,000 b. P210,000 @P525,000 12. In the immediately preceding problem, what is the deductible ad for the improvements made for the employees with disability? a PO . P75,000 b. P45,000 @P150,000 13. In 2021, Frank Abon, a practicing lawyer, contributed P500,000 for the acquisition of com Abon had an operating income of P900,000 before Assuming the “Adopt-a-School Prog government in 2016, compute Bei income respectively. 250,000; P150,000 ©. P125,000; P275,000 250,000; P 650,000 . P125,000; P775,000 this contribution expense, 14. In the preceding problem, compute Al net income, respectively, if the “A government priority Program in 20167 a. PO; P810,000 250,000; P650,000 b. PO; P400,000 250,000; P560,000 15. Benguet Jewelery is a qualified j Investments. In order to modernize in-house training program and hired Program was duly approved 562 ‘A US rogran/O Ss with disaht ditional expeny , adopted a public elementary schoo! and puter equipment and softwar. gram" is an investment priority program of th "mard’s additional contribution expense and nt bon's additional contribution expense and dopt-a-School Program” is no longer 4 o " 1 1 jewelry enterprise registered with the Boat its jewelry making business, it institute 3 external experts to train its employees. by TESDA. The program cost P300,000 during year.Qa awww ee ter 13-B - Special Allowable Itemized Deductions and NOLCO ce the deductible amount of additional training expense? at is 30,000 ¢ P75,000 * 45,000 @P 150,000 6 oie! Pe coe a Purely women. It installed a lactation station at 2 tal €0 ; secured a “Working Mother-Baby-Friendly Certificate” fram the Department of Health. ute the additional deduction under the Rooming-in and Breastfeeding practices Act. a PO (&P350,000 b. P175,000 ‘d, P700,000 yA ae ae province hospi established a milk bank at a cost of P1,000,000. petermine the additional deduction incentive it is allowed are and Breastfeeding Practices Act. is allowed under the Rooming-in @ Po c. P500,0000 ‘y. p250,000 d.P1,000,000 mediately preceding problem, what would be the additional deduction 18, In the imi jesumning the hospital is a proprietary medical center? a Po (€P1,000,000 b. 500,000 d. P2,000,000 e remote provinces of Mindanao. During the year, he provided 180 actual hours for pro-bono services inclusive of the 60- nus mandatory legal aid services to indigent clients. These services would have heen billed P1,000 per hour if rendered to paying clients Atty. Abdulhas a 71,400,000 gross income during the year exclusive ‘of P20,000 interest on his 19, Atty, Abdul is a practicing lawyer in thé savings deposit. Compute the special deduction for the free legal services. a. 60,000 cc. P140,000 @® 120,000 d. P142,000 ned an operating income of jates, a law firm, eal ministrative expenses and P12,000,000 direct represented selected clients under its free legal assistance program. The value of these services would have been P1,500,000, It also represented indigent clients for free, the value ‘of which would have been P400,000. Compute the special deduction for free legal services. & 1,200,000 ¢, P1,500,000 (® 1,400,000 d. P1,900,000 2. An employer paid a total of 800,000 productivity incentive bonus to its additional productivity incentive bonus expense? production workers. What is the a PO cc, P200,000 b. Pg0,000 @ P400,000 563 20, Curaratnit, Bolalatsing & Associ P8,000,000, net of 6,000,000 a cost of services. During the year, itme Chapter 13-8 - Special Allowable Itemized Deductions and NOLCo i training and special studies to ; 22. An employer provides manpower n its p. eriplayeee at a total cost of P200,000. The in-house Program w, ack TESDA. What is the deductible additional productivity incentive bonus emt a. PO ©P100,000 en b. P20,000 4. P200,000 Multiple Choice - Problems 2 f Berkshire 4, { 1. In 2016, Warren Buffet purchased the net assets of Berks aie business which posted, a cumulative P10,000,000 loss in the Past thr by Buffet’s charismatic leadership led the business to turn P4,000,000 pr 2016. What is the allowable NOLCO deduction for 2016? fis Po ©. P5,000,000 4,000,000 4. P10,000,000 2. A taxpayer had the following results of operations: —2023__ Gross income P 1,200,000 Passa Itemized deductions 1,400,000 1,000,009 Deduction incentives 200,000 300,000 What is the net income in 2024? a. P-800,000 c.P1,100,000 ® 1,000,000 d. P1,200,000 3. An enterprise registered with the BOI had a consistent Profitable operation js before graduating from its BOI tax holiday incentives in 2023, it sustained : £800,000 operating loss due to an employee strike in 2023, The settlement jhe deadlock in 2024 enable the enterprise to post a P2,400,000 operate income. What isthe allowable NOLCO deduction in 2024? PO c.P1,800,000 b. P900,000 4. P2,400,000 4 Acorporate taxpayer incurred an operating loss in 2024: Sales Less: Cost of sales Gross income Less: Deductions Ordinary itemized deduction P1,200,000 Special itemized deductions 800,000 Deduction incentives —400,000 __2,400,000 P_600,000 Net operating loss P 3,000,000 —1.200,000 P 1,800,000 (b, P200,000 4. P600,000 564ing ary, iy ser 13-B- Special Allowable itemized Deductions and NOLCO individual taxpayer reported the following in 2024: i P 1,500,000 oss income ssi a LSS 4ministrative expenses a Selling expenses I rating income sagan Less: Personal expenses , eess of personal expenses over income faery whats the NOLCO to be carried over in the next three years? @ Fe ©. P100,000 50,000 4.P150,000 n2021, a taxpayer finally posted a P1,000,000 operating profit after four years of Geo continuous losses. The results of operations in prior years were: (P 800,000) 2016 2017 (400,000) 2018 (200,000) 2019 (100,000) Compute the deductible NOLCO in 2021. c. P1,000,000 Po a ® 700,000 d. P1,500,000 ‘Ataxpayer has the following historical results of operations: (P 600,000) 2016 2017 (700,000) 2018 400,000 219 (- 200,000) 2020 100,000 What is the total outstanding NOLCO at the end of 2020 which can be carried over in future years? a PO c. P600,000 d. P800,000 ) P200,000 Ataxpayer reported the following items of gross income and deductions in 2020: Rent income P 400,000 | Service fees 200,000 Interest income from bank deposits 50,000 Deductible expenses 800,000 100,000 Non-deductible expenses Compute the NOLCO to be carried over in the next three years. % 300,000 c5P200,000 4 P250,000 4. P150,000 i 565idl Chapter 13-B - Special Allowable Itemized Deductions and NOLeg 9. The carry-over of NOLCO is allowed when a. the net operating loss is sustained from an exempt year, : ._ there isa change for atleast 75% ofthe paid-up capital or nomyn 1 the outstanding shares of a corporation. al Valuey c._ the business is acquired by another taxpayer. ©) there isa change in the controlling shareholder Tepresenting 514 nen, TY-OVer (No} € Deduction #5 year hey , 10. Which is incorrect with regard to the net operating loss car @) NOLCO can be claimed together with Optional Standar: . NOLCO cannot be claimed if the net operating loss aris, taxpayer is exempt from income tax. ©. NOLCO can be carried over toa period of three years, 4, NOLCO cannot be claimed by non-resident foreign corporation, 11. The following pertains to the salaries paid by the taxpayer during the Fa Salaries to regular employees P 400,000 Salaries to senior citizens (above poverty line) 30,000 Salaries to senior citizens (below poverty line) 50,000 * Salaries to persons with disability 200,000 Compute the total deductible salaries expen: se under ordinary allowable it deductions and the total special deduction. one) a. P680,000;P 0 ¢. P 742,500; PO b = P680,000; P57,500 @p 680,000; P62,500 566