Interest to Finance

Petroleum Exploration
Interest paid on indebtedness to
finance petroleum exploration is
nondeductible because this is exempt
from income tax.
Illustration:

Driller Inc. borrowed P10,000,000

for its petroleum exploration
activity in Palawan. During the
year, P1,200,000 interest was paid
with supporting receipts.
 Optional Treatment of
Interest Expense
At the option of the taxpayer, interest
incurred to acquire property used in trade
or business or exercise of profession may
be allowed as either outright deduction
from business gross income, or treated as
a capital expenditure.
 Taxes

In general, taxes are allowed as

deduction when paid or incurred
within the taxable year in connection
with the taxpayers profession, trade
or business.
Requisites for Deductibility of Taxes

o It must be paid or incurred within the taxable

year;

o It must be paid or incurred in connection

with the taxpayers profession, trade or
business; and

o The tax must be imposed directly upon the

tax payer.
 Taxes Deductible from Gross Income

As a general rule, taxes are deductible, except

for those to which the law does not permit
deduction.

Documentary stamp taxes;

Occupational taxes;
Privilege and License taxes;
Exercise taxes;
Import duties;
Taxes Not Deductible from Gross Income

The law does not permit the deduction of income tax

paid or accrued in favor of the National Government
of the Philippines, and in no case may the taxpayer
avail of such deduction.

Philippine income tax;

Estate and donors taxes;
Foreign income tax, if claimed as a tax credit;
Percentage tax on stock transaction;
Value-added tax;
Illustration:

X Corporation paid in 200B the following taxes which were

incurred in connection with the business: Community tax, basic
amount of P1,000 and surcharge of P250 plus interest of P125.
Real property tax of P5,000 plus surcharge of P1,250 and
interest of P500. Income tax, P100,000, plus surcharge of
P25,000 and interest of P10,000.

The amount deductible of taxes and interest from business

gross income of the X Corporation for 200B would be
Basic community tax 1,000
Real property tax 5,000
Total deductible taxes 6,000
Add: Interest expenses on:
Community tax 125
Real property 500
Income tax 10,000 10,625
Total deductible taxes
and interest expenses 16,625
 Bad Debts Expense
A bad debt is claim that becomes worthless or
uncollectible arising from money lent from goods
sold or services rendered.

A charge to bad debts expense due to estimated

uncollectible receivable does not constitute
deductibility from business gross income.

To be deductible, the claim must be ascertained

worthless and the corresponding receivable should
have been written off within the taxable year.
When is a Claim Ascertained to be Worthless?

The worthlessness of an account may be

due to the following factors:

o Insolvency of the Debtor,

o Death of the debtor without sufficient

properties to cover his debts, or

o Disappearance of the debtor.

Requisites for Deductibility of Bad Debts

There must be a valid and subsisting claim;

The claim must be connected with the

profession, trade or business;

The claim must be written off within the

taxable year.