3.
Taxes
GR: All taxes, national/local, paid/incurred connected trade/business are deductible
Exception:
- Philippine income tax, except the Fringe Benefit Tax
- Estate and Donors taxes - VAT
- Special Assessments - Fines & Penalties due to late payment of tax
- Final taxes - Capital Gains Tax
REQUISITES: (TEDY)
- It must be incurred within the TAXABLE YEAR
- It must be paid in connection w/ taxpayers TRADE/profession/business
- It must be imposed DIRECTLY on taxpayer
- It must not be specifically EXCLUDED by law from being deducted
EXAMPLES: deductibles
- import duties - excise taxes
- business taxes - documentary stamp taxes
- occupation taxes - automobile registration fees
- privilege and license taxes - real property taxes
LIMITATION: In the case of a non-resident alien individual engaged in trade or business
(NRAETB) and a resident foreign corporation (RFC), the deductions for taxes shall be
allowed only if and to the extent that they are connected with income from sources
within the Philippines.
*Special Treatment of Foreign Income Tax:
A taxpayer qualified to take tax credits for foreign income taxes paid or incurred may
alternatively claim them as deductions from gross income.
4. Losses
REQUISITES: (CATT DID)
- The loss must be of that TAXPAYER
- The loss must be ACTUALLY sustained and charged off w/in the taxable year
- The loss is evidenced by a CLOSED and completed transaction – identifiable
- The loss is not claimed as DEDUCTION for estate tax
- The loss must be compensated by INSURANCE
- The loss must be connected w/ taxpayers TRADE/profession/business
- Sworn DECLARATION of loss – must be filed w/n 45days from occurrence of casualty
Obsolescence and Worthlessness; when deductible
§ Obsolescence: when the property has to be discarded
permanently because its usefulness is suddenly terminated.
§ Worthlessness: when it can be satisfactorily shown that the
property had indeed become valueless.
Other Type of Losses Recognized by Tax Code
a. Shrinkage in Value Stocks – not deductible
b. Wagering Loss- deductible to the extent of wagering gains/winnings
c. Loss from Wash Sales of Stock/Securities (not dealer) – not deductible
INCOME TAX RULE:
On the shares sold at a loss with covering acquisitions,
NO LOSS shall be recognized. On the shares sold at a
loss with no covering acquisitions, CAPITAL LOSS shall be
recognized. The loss not recognized shall be adjusted into
(i.e., added to) the basis of the shares acquired within the
sixty-one day period.
d. Corporate Readjustment: Merger or Consolidation …
e. Corporate Readjustment: Transfer to Controlled Corporation …
f. Capital Losses …
g. Abandonment Losses in Petroleum Operations – all accumulated exploration and
development expenditures, as well as unamortized cost, undepreciated cost of
equipment directly used can be deducted
h. Net Operating Loss Carry-Over (NOLCO) - The net operating loss [is the excess of
allowable deductions over gross income] of the business for any taxable year immediately
preceding the current taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for the next
three (3) consecutive taxable years immediately following the year of such loss.
DEDUCTIONS
Amounts allowed to be subtracted from Gross Income to arrive at Taxable Income
KINDS OF DEDUCTIONS
1. Itemized Deductions (ID)
- business (or professional) expenses which are ordinary and necessary in the
conduct of business (or in the exercise of profession).
2. Optional Standard Deduction (OSD)
- may be taken by an individual, in lieu of itemized deductions
Requisites:
a. Available only to citizens and resident aliens
b. Optional
c. Irrevocable for the year in w/c made; can change to succeeding year
d. Proof of records
Who can avail Deductions?
GR: All taxpayer
Exception: Those earning compensation income
1. For Individuals w/ GI from business/practice of profession
Amount of OSD
= 40% of Gross sales(40% of Gross receipts) + other taxable income not subject to FT
*OSD is in lieu of COGS(COS) + itemized deductions
2. For Corporations: Only domestic and Resident foreign corp.
Amount of OSD = 40% of Gross income
/GI/= (Gross sales – sales returns – sales allow. – discounts – COGS) + o.TInc.ns to FT
*OSD is in lieu of itemized deductions only
Kinds Itemized Deductions (BELT DID CPR)
1. Expenses 6. Depreciation
2. Interest 7. Depletion
3. Taxes 8. Charitable & Other contributions
4. Losses 9. Research &Development
5. Bad debts 10. Pension Trust
1. Expenses
REQUISITES: (OY DR SNP)
- ORDINARY and necessary for business
- Incurred/paid during taxable YEAR
- DIRECTLY/Connected w/ the trade, profession, or business of taxpayer
- REASONABLE expense of business
- SUBSTANTIATED w/ sufficient evidence by official receipts/records
- NOT contrary to law, public policy or morals
- The tax required to be withheld must has been PAID/remitted to BIR
EXAMPLES: (CERT)
a. Compensation
b. Travel expenses
c. Rentals
d. Entertainment, Amusement, and Recreational expense (EAR)
ceilings: taxpayer engaged in sale of:
- goods and properties – .005% of net sales
- services/leasing of properties – 1% of net revenue
*Bribes and Kickbacks and other similar payments are not allowed as deduction
*Special Cases: Expenses allowable to Private Educational Institutions
2. Interests
REQUISITES: (WITTY CRep DL)
- There is an INDEBTEDNESS
- The indebtedness is that of TAXPAYER
- The indebtedness is connected w/ TRADE/profession/business of taxpayer
- The interest must be legally DUE
- Stipulated in WRITING
- The taxpayer is Liable to pay interests
- The indebtedness must been accrued/paid during TAXABLE YEAR
- The interest payment must not been RELATED to taxpayer
- The interest must not be incurred to finance PETROLEUM operations
- Must not treated as a CAPITAL expenditure
LIMITATION: Interest expense allowable deduction
33% of interest income subject to FT
*Optional Treatment of Interests expense:
- allowed as deduction
- treated as capital expenditure
