Chapter 10 Deductions from the Gross Income Our income tax system allows deductions for various items, especially expenses incurred necessary to produce the income. This is to provide taxpayers with a more equitable tax base and true measure of income. Specifically, Section 30 of the tax code allows ordinary and necessary business expenses paid or incurred during the taxable year as deductions from the gross income in order to arrive at the taxable income. In addition, Section 31 of the tax code defines “taxable income” as the pertinent items of gross income specified less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the tax code or other special laws. In general, all taxpayers can avail of deductions from the gross income, except for taxpayers earning purely compensation income arising from employer-employee relationship, Deductions in General |. For Individuals eaming purely compensation income. > Upon effectivity of RA 10963-TRAIN Law (beginning Jan. 1, 2018) + No more deduction is allowed Il. For individuals with gross income from business, trade or practice of profession or mixed income . > Itemized deductions or Optional Standard Deductions (OSD) ul. rations and taxable Partnerships 7 ze " toro Deductions or Optional Standard Deductions (OSD) b. Special Deductions for + Insurance companies Mutual insurance companies Mutual marine insurance companies Assessment insurance companies IV. Estates and Trusts ‘Same deductions with individual taxpayers 441Deectitas from the Gross Income FPXCLUSIONS VS_ DEDUCTIONS rexchstane rom gross income reer 1.0 on of weal 1 IN L2xDaye tna reese tar part of gone reo, fr purposes of computing fe tEapayers tenable income, due 10 the following 4) ‘tis exempted bythe fundamental law or statute such as: 1 Bemnimis bene, Employers share in S$, 1 fetereat income fom longterm aves + Intercorporte cidends SIS, Pag-ibig and Phithealth iments derived by individuals 2) des not come win the deton of nome suchas ? + Proceeds of life insurance upon the death of the insured 1 Stk dvdend Febery rcrease inthe fa markt value of debt and equity Deductions, on the other hand, afe the amounts, which the law allows to bbe deducted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deductions pertain to the ‘computation of net income. Exclusions are Something received or eamed by the taxpayer that do not form part of gross income while deductions are ‘something spent or paid in eaming gross income. CAPITAL EXPENDITURE VS. REVENUE EXPENDITURE. Expenditures are classified as capital expenditure and revenue expenditure. The distinctions betwaen the two types of expenditures are as follows ; Cer sy CLs Gavaoua us Nalerial in amaunis + Smal amounts, indvicualy * Increase useful ie, capac Helps curent oparation ‘and efciency i a ee ‘Non-recuring Benefits flure periods (curent ‘and longer) ‘Allocated throughout te pei Alecated roughot the pefods * Ordinarily recurring * Benefits current period only (short-term) Charged to operations 442, Deductions from the Gross Incone DEDUCTION VS. TAX CREDIT Although the term is not specifically defined in our Tax Code, tax cre generally fer 10 sn aroun at sss recy fa Soe tax habilly.” fs an “allowance against the tax itsel” or °a deduction from what is owed” by a taxpayer tothe government. In CIR v. Central Luzon Orug Corp., (GR No. 159647, 15 Apri 2005) the Supreme Court ruled that A tax credit reduces the tax due, including, whenever applicable, the Income tax that is determined after applying the corresponding tax rates to taxable income. A deduction, on the other hand, reduces the come that subject 10 tax in order to arrive at taxable income, A tax credit is used only after the tax has been computed while a deduction is applied before the computation of the applicable tax. A more detailed discussion on Tax Credit is presented in Chapter 10. E Tax Credit, Deductions Tacome Tax Due Pac | | Gross income Pax Less: Tax Credit ix) | | Less: Alowable Deductons —_(x) Income Tax Payable, Pax |_| Net Taxable Income Pax Perens ees (Sec. 34, Tax Code) Except for taxpayers earning purely compensation income arising from personal services rendered under an employer-omployee relationship where ‘no deductions shall be allowed in computing taxable income subject to basic tax (Section 24A), there shall be allowed the following deductions from gross income on all ordinary and necessary trade and business expenses paid or incurred during the taxable year In carrying on or which are directly attributable to the development, management, operation andlor conduct of the trade and business which include the following: = Section 34(A to KY ofthe Tax Codo Itemized Deductions 1. Section 4(A) - Expnses (1) Ordinary and Necessoy (2) Expenses Alowa 2. Sexton 4(8)-nerst 3. Section 24(C)- Taxes 4. _ Section 34(0) -Losses___———— 443 Trade, Business or Professional Expenses. bie to Private Educational InsionsGress Micone 4 scion frm th 5 Seton 4) -Bat Debs See Soy cin yebin ukes 8 Secton 3H) -Chartble nd Oer Contotons 8. Seaton 3) - Research and Development (a) in General - There shall be alowed as deduction from gross income 40, Sosion 34) Penson Trusts» all the ordinary and necessary expenses paid incurred during: ne ‘1 Sacion 34k) Adtonl Recurements fr Deductions of Cetin Parents taxable year inv carying on of which are dreclly attributable tor the development, management, operation and! or conduct of the lade, + Section 34. ofthe Tx Code = Optional Standard Deduction (OSD) business or exercise of a profession neuding: i. A reasonable allowance for salaries, wages, and other forms of Revenue regulations 2-98 and Section 34 of the Tax Code, as amended, Compensation for personal senices:actually rendered, Including the provide that the aforementioned deductible tems shall be allowed. a¢ grossed. up monetary value offing benefit furnished or granted by eductions only it itis shown that the taxes required to be deducted and the employer to the employee: Provided, That the final tax imposed ‘withheld therefrom have been pad tothe BIR. Under Section 33 ofthe Tax Gode of has been pad: jl. A reasonable allowance for travel expenses, here and abroad, while ‘The rule that exclusions from income are sticly construed agains! aay from home in the pursuit of rade, business or profession, taxpayers should tkewise apply to deductions claimed against the gross li. Areasonabie allowance for rentals andlor other payments which are income. Hence, the burden of proof lies upon the taxpayers, Meaning, one required as a condition for the continued use or possession, for seeking a deduction must point to some specific provisions of the statute or purposes of the trade. business or profession, of propery to wich law in which that deduction is authorized and must be able to prove thet he the taxpayer has net taken or isnot taking tile or in which he has no nile to the deduction which the law allo, equity other than that ofa lessee, user or possessor, iv. Arreasoneble allowance for enteteinment, amusement and recreation “Substantiation’ requirements should also be complied with which means expenses during the taxable year, that are dell connected to the {hat no expenses shall be allowed unless the taxpayer shall substantiate with development, management and operation of the lrade, business or sufficient evidence such as official receipts, invoices, vouchers, bark profession of the taxpayer, or that are direclly related to or in Stataments or other adequate records furtherance ofthe conduit of his ois rade, business or exercise of a profession not to exceed such celings as the Secretary of Finance 4) The amount ofthe expense being deducted: and nay, by rules and regulations preseibe, upon recommendation ofthe Commissioner, taking into account the needs as well as the special ) The eet connection or relation af the expense being deducted Circumstances, nature and character ofthe industy, rade, business, {o the development, management, operation andlor conduct of or profession of the taxpayer: Provided, Thal any expense incurred the trade, business or profession of the taxpayer for entertainment, amusement or recreation that is contrary t0 law, tmorals, publfe policy or pubic order shal in no case be allowed as a {n addtton. deductions claimed should “not be contrary to public policy. deduction. ‘morals or order”. While legal income form: laxpayer as dusted in Chapter 7'and 8 deacons oe ea : Upon ate of CREATE law, on which constitute bribe, Kickback, and other siler parmrert rao to ottcal GRREEMEactor fom lxaie inca of oneal (1/2) ofthe $eing soa! ow an pbc age eh goverment or sinter ens seae Coy mes eed Ste devon (Section 3H AK Ne Paneer ictible from gross income ‘ed trainees enrolled in public senior hi [Section S4(AKA}e), NRG) PONY NOt deductible trom gross incom ones a ere rate, of poled wast é 7 ‘stitutions and duly covered by an apprenticeship agreement under isto oy CG" er fo, Later Cte of he Philippines, as amended, shall be granted fo enlerprises: rovded, : further, that for the additional deduction for enterpri 444 445Daations fom the Gress Income of students fom publ edcatina instiaions, the enterprise shay of students tom pul oom tw DEED, TESDA, or CHED: secire proper cafe guucton shall not exceed Ten percent os) aret or wage (RR 52021) (©) Substantiation Requirements REQUISITES FOR DEDUCTIBILITY IN GENERAL: © Must be ordinary and necessary; Paid or incurred during the taxable year: Connected with rade, business or practice of profession; ‘Supported by sufficient evidence: and Not against the law, morals, public policy or public order; Itmust have been subjected to withholding tax, if applicable, MINOR 08 ORDINARY REPAIRS & MAINTENANCE KIND.OF REPAIR Repairs that mater ada tothe vale ofthe property Repar tat appesadl prong the life ofthe property Repair that keep the ropery in fs ordinary efficent operating Outight Expense ‘ndton (©) Bribes, Kickbacks and Other Similar Payments No deduction from gross income shall be allowed under ‘Subsection (A) hereof for any payment made, directly or indirect, to {an official or employee of the National government, oF to an official or employee of any local government unit, or to an oficial or employee of a government owned of-controlled corporation, or to an offical or ‘employee or representative of a foreign government, or to a private ‘corporation, general professional partnership, or a simi ently, if the payment constitutes a bribe or kickback. (1) Expenses Allowable to Private Educational Institutions Expenses: Allowable to Private Educational Institutions. — In ‘addition to the expenses allowable as deductions under this Chapter, 2 Drea edatenal ata eared tance Secon 278) fe To Code, as amended, may at its option elect either: fa a. To deduct expenditures otherwise considered 6 of depreciable assets in Juring am ieae torte ast eure ung he nae year re oan b, To deduct allowance for depreciation thereof. 446 Dede frm the Gove hsine ORDINARY AND NECESSARY ExpENSes” in general, there shall be allowed a8 deduction rom the ordinary and necessary expenses paid o sng to tonal yoar act a ac entero aay dior conduct ofthe trade, Business or exerca ofa prolscion "Ae eras Sino can ob dns tty an reenes get ecion rade Or bushes epee a ae : Expenses, Wing o: family expenses are ol daduait: diene coeeece Sie oxpenaesvtich are noma ors osion ote Geers oars nd te sutounding cumetarcn Into cao of Dap Se Bo Pot S08 Uf 400 [4040 tho cout hl tal te om ern aed te cone Bev nts cmon apitcans and thas ecto eee vsual or customany. On no oer fond. acess’ epares sre parees ten a6 aprons and tap me deoprent ef aepayers bocess she ore endedtominmize ees ot inceare puts Tose oe He Sy. ey apeee ‘Examples of Ordinary and, Ex a) SALARIES, WAGES, ALLOWANCES and other forms of COMPENSATION, no matter how called, for personal services actually rendered, including the giossed-up monetary value of fringe benefit furnished or granted by the employer to the employee, employer's share ‘on SSS, PHIC, HOMF and the lik. Requisites: + Employer-employee relationship + Reasonable + Personal services actully rendered = Withholding tax imposed has been paid RA 9904 - EXPANDED SENIOR CITIZENS AGT OF 2010; (RR7-2010) ADDITIONAL COMPENSATION EXPENSE cv ishmenis employing‘seniorctizens shal be ened to aaa tal sabes AEP goss income equivalent (0 15% of the total amount paid as salaries and wages: to senior citizens provided: 2 Te employment sha have o conus fr 8 period oat ast (8) income of the senior citizen(s) does not exceed The anqual taxable income of he ser the poverty level as may “ar» ° Dalton frm the Gress Income sons (PWDs) RA 7277 - Magna Carta for Disabled Persons ( ADDITIONAL COMPENSATION EXPENSE Private entities that employ disabled persons who meet the requireg skils or qualifcations, either as regular employee, apprentice or learner, ‘shall be ented to an additonal deduction from their gross income equivalent fo 25% of the total amount paid as salaries and wages fg sisabled persons ‘TRAVEL EXPENSES in the pursuit of trade, business or profession; REQUISITES: + Reasonable * Incurred or paid while away from home (business home), within and without the country + Incurred or pai inthe pursuit of trade, business, profession EXCLUDED: ersanai ravels sponsored by the employer subject to fringe benefit tax (FET). RENTALS andlor other payments, Expencitures incued forthe contrued use or possession ofp ed use or possession of property to whieh the txpayer has net taken ors nt taking ile orin wevch he hag no ay cher than that ofa esee, user or possessor connection wih wade, business or profession. ‘The propety may be real oF persona under operating lease. Pees eee REQUISITES. +, Reasonabie and for the purpose af trade, business or profession. Taxpayar has not taken or is not taking i or Is not taking tite fo or in which he has no ‘equity other than that ofthe lessee, user, or possessor, LEASE AGREEMENTS In aston tothe peioae payments eae ayments made by the lessee to the lessor ease ee laters property, a lessee may have some other ecasaroly Gy (ase bonus), fr which deductions may be taken, Where purchaser" may ee, business purposes for a specified sum, the pucnaser may tske @ deduction in his retum for an alkuot pat or yours ta, 2re-ata) of such sum each year, based on the number recbeared 2 (0282 wil Tun. Cost of leasehold’ improvement may. bo Tiara be lesten ove: na rman amo Re oso one whichever is shorter. The taxes paid by the lessee 10 or for the less lessor under a lease contra it edt rent expense te nie 2 1288 contract constitute ado 448 Dedhctons from the Gross come 4) Entertainment, amusement and recreation expenses ar AD evrseaien epenss Theresa i cinng epensee rarer ed arcanaté 8 Woviéeg on enernmant. amusemet and ee fr meeieg recreation. Entainment, amusement wit W pla, pace ef and receaton expenses ae lied 0 ‘emosement, country dub, het onet, 4, 4 fet sales fr sellers of goods Flay, sporting events end similar 1% of ne evenue for selerprovider of éstablishments, sends, For ‘sellers of both goods or properties and services, an apportionment formula is used in determining the “ceiling” on such expenses based on the following apportionment formula: Net SalosRevenue x Acual Expense Total Net Sales Revenue REQUISITES: ‘2) Must be paid or incurred during the year ) Must be directly connected to trade, business or profession or that are directly related to oF in furtherance of the conduct of is oF is trade, business or exercise ofa profession. ©) Must not be contrary to aw, moras pubic paicy or public order 4) It must not have Been paid, decty or Indirect, to an official or ‘employee, iit constitutes bribe, kickback, or other similar payments ©) Itmust be duiy substantiated by adequate proof 4) The appropriate withholding tax, i opplicble, should have been withheld therefrom and paid to the Bureau of Intomal Rovenue ILLUSTRATION { ~ Representation expenses: CASE A Tinh Conoco is npge in te se of pots wh ets f P3000. The Nau Siemans Seconer an oceton opts he lbe aut totaled P50, 000. Question: For income tax purposes, how much is the deductible entertainment, ‘amusement and recreation expenses? > Answer: P15,000 pease =n 15.000 tina Panto) 449Dedection son the Gross Income Rast ae CASE son i ngge ints of dh asin i a ks ang sn 1 ea. Te acl eeamne ear enone rete ete PIS. cuesion Fa ioe wx oes hw meh hl edt entearme, Renna nonsn epost Answer: P80,000 “cua Sal of Goods (prsotd x82) bie Pos. 003 lowed ‘cua Sale of Sone: (pasqooo 212) Lint Pato ‘Aone Tas deduce 109000 000 0000 000 of the Tax Code, as amended by RA 11534 (CREATE Act) Interest Expense 1) INGENERAL. ‘The amount of interest paid or incurred within a taxable year on Indebtodness in connection withthe ta shall #'s profession, trade or business be allowed as deduction from gross income, of profession. Fete fonetac— tat the taxpayers othenvse_alowable ‘ 3 percent (20%) of the interest income ‘Subjected to final tax: Bivens aly an tatea re see a a {ulure, the interest expense reducion rate: shall be asusted accordingly based on the presctibed standard formula as defined in the rules and reguatons tobe promulgated bythe secretary of finance, upon the recommendation of the Commissioner of Internal Revenue (CIR). in the case of corporations, since the income tax rates changed efectve uly 1, 2020.1 flows that {he deduction trom the interest exponso of 20% shall be effecive also on the said date, "Prior to CREATE wor under th TRAN Law, the reduction nthe alowable Inert expense was 33% ol icone subjected fal tax ‘The reduction of interest expense by @ percentage of income ‘Subjected to final withholding tax is known as the “tax arbitrage” ‘ule, illustrated as follows: CREATE ACT. RCIT — 25% FWT - 20% Tax Arbitrage: Interest expense was defined under related revenue regulations as the Payment for the use or forbearance or detention of money, regardless of the Name it is called or denominated. It includes the amount paid for the borrower's use of money during the term of the loan, as well as for his Difference = 25% -20% =5% For MSWEE, the deduction i 8 sins teris po fleece nthe income ‘detention of money afte the due date of ts repayment. REQUISITES FOR DEDUCTIBILITY under RR §-2024 jin relation to EM ‘The indebledness must be that ofthe taxpaye tax rate onthe taxable irc (20) wi tele rale apd on he intrest Income subjected to falar (20). Tus there isn intrest arbitrage The ‘tina eet expense hal be be sane wi the acta interest reured + The interest must have been spuiated in wing; TRAILAW=39% + The nierest must be legally due. RCIT = 30% * The interest payment arrangement must not be between related FWT ~ 20% \axpayers as mandated in Sec, 34(8}(2)() in relation to Sec. 36(8) of Te A erence = 30% 20% =10% the Tax Code, as amended (Refer to Page 458), ‘The interest must not be incurred to finance petroleum operations: and 450 ee ‘Acbtrage = 10%30% = 33% 451Deletion fom the Grtss Income ee) cing wt wins ae wes wee ' ‘ 1 RHR on an ar AB eto ect tn gon Ce oaciotem ee sxc aay oe tn hea eS a aca ee cp nln Le ee ee eccneoenet aa compurarrow: Interest Expense (from boronings) Pon es: Reducton reeest come subject to FUT Pro uty by ater: TRAIN ta 2% CREATE law (excesR SMES) _20% (om) Deductible Interest Proc 2) EXCEPTIONS The Tax Code, undar Section 34(8)(2) provides that NO DEDUCTION shall be allowed in respect of interest under the succeeding ‘subparagraphs: 2) If within the taxable year an inlvidual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ‘advance through discount or otherwise: Provided, That such intrest ‘shal be alowed as a deduction in the year the indebtedness is pad: Provided, further, That if the indebtedness is payable in periodic ‘amortzations, the amount of interest which corresponds to the ‘amount of the principal amortized or pald during the year shall be allowed as deduction in such taxable year; ') If both the taxpayer and the person to whom the payment has been ‘made or is to be made are related persons specified under Section 36 (8) presented in Page 458; or ©) Ifthe indebtedness is incurred to finance petroleum exploration. Based on the foregoing paragraphs, “prepaid intrest” of 20 Indnaua unr cash beste desusile ht hte year thet lnterest was pad in advance but inthe year that the Indabledn@ss ‘was fully paid. However, if the indebtedness is payable in periodic amortization, the amount of interest which corresponds tothe aMOU"" of the principal amortized or paid during the year shall be allowed 25 452 Deductions fom the Gross Income “at the time of payment” Services using cash basis of 3) OPTIONAL TREATMENT OF INTER: Interest related to acquisition of a ata profesion may. a he oplon of tee 1, Claimed as outright expense: or . 2. Caples nd can dope, NON-DEDUCTIBLE INTEREST 1 Inerest pid to persons cased as related tnxpayers under Section SE) of Ra B14 Tar Cough ns MP 2. ifthe indebiedness i incured to france peteum exploration [Sec.34(8)(2)(b)} EERE ae 3. Interest on preferred stock IELUSTRATION2 PREPAID INTEREST by an ind esi ss ‘Sec. 34B)2Va) I. 2021, Eat obtained a Pt, 000000 ian fom a bank for business use (using ‘cash basis of accountng). The proceeds ofthe loan amounted to P900,000, net ‘of P100,000 interest deducted in advance. Ear pid tha loan in ulin 2022. Question f How much may Ear csi as inerest expense in 20217 Answer: PO The iteest xprce may bec as a ded Font grass inca ely ipen poet oe a, Question 2 How much may Ea ci silt expense in 20222 © Answer: F100 000 CASE 2: PREPAID INTEREST -Instalinen esime he same data cse A exon tat te ppl amount of the loan Wer pin or) a satel 250.00» yar stain 202 ‘Question 1: Haw muchoy Eat am sees expense 2021 ‘Answer: PD atc ase exes 21207 Question 2 Yo ea sit (000 060) eee aeeeeeeleine iano eee ee 453,Dalit frm the Gross Income ee eto sore On nay 2 tion's using aooal basis of accour 1, 2021,4 ane exon eco! cope i we nashg Geman of fame. The equipment was aoquied at a cast of 10,000,000 and was estimated to have a usetl fe of ten (10) years. The, equipment was fnanceg trough @ benk foan at an annual rate of 12%. Inerest of P1,200000 wag <éscaunied in ful by the bark. Cir business related interests amounting to 300,000 were also pald during the yeer. In addition, interest income of 200,000 (gross of 20% fal tx) fom ts various bank deposis were credited ig the account of Mabuhay during the cunt year. ‘Question f Assume Mabuhay opted to recognized the intrest elated to the ‘cquiston of equipment as an cutight expense, how much was the deductible interes ofthe company in 2018? Answer: 1,460,000 Inlerst incur in 2oquifing he equipment 1.200000, Reduction: (20% x P200 000) (40,000) ther business rlatod interest 300,000 ‘Alowabl interest expense for 2021 ‘Question 2 Assume the company opted to capitalize the interest elated tothe ‘aoquisiton of equipment, how much was the deductible interes of Mabuhay for 2021? “Answer: P300,000, Only the “Other business related interes shall be considered as intrest expense, ‘Question 3 Assume that Mabuhay oped to capitalize the interest elated tothe ‘acquisition of equipment, how much would be the cost of he equipment? Answer: P11,200,000 ‘Acquisition cost 10,000,000 Interest incured in acquiring the equipment 4,200,000 Captaiaed cost ofthe equipment 1 200,000 LIMITATION OW INTEREST EXPENSE: ‘As dlsased in Page 451, Secon 348) of he Tax Cade, as amended by CREATE Ae ond FR $2021 prove ta the eount cfs paid or ncared win a acaba ot Indbfess i cmncten win th taxpyesprlessen ade or business alowed 8 esucten tom goss ice. Hore. te apa oPienise abowable ddubon KZ Ines expanse shod bo educod by 20% (Jpn efecy of CREATE Act) ofthe st ‘ace sujet ax. Te eguatn spec prodes hal elit Sl 7 fa org a, ue able yor eres an erent expense raed n ne 3 8 nls cone ear on ears, whch irs neon had been seed {Watolig tx. a pre nares neblednos anders expense canocd wih ‘ade busines dng he able yar and al he same tine alo eared terest fcT® ad bea subject al witokig fa, he ameunt of rest expense stl ‘iettothe afromentoned lation (he eduton pao GREATE ht Was 308) 454 Sales vt Interest income et. 000 Costofsaleg 17 frat 24.000 ‘Sates nd wapes sono Interest expense ‘zn.o00 Rent expense om Adverisin expense Interest on unpaid taxes oe ‘Question: How much the alowable deducton fom the gross income? Answer: P214,000 oem e000 EEIEMELIGG) of the Tax Code, as amended TAXES Taxes paid or cured within the taxable yar in connection withthe taxpayer's profession, trade or business, shall be allowed as deductions from gross income, n ihe cage of @norvsiint allen inviduol engaged in wade Gr business in" the. Phippines and resident foreign corporation the Allowable deductions fer taxes provided In tx code shall be alowed only I and to the extent at hoy are connaced with income om Sourees within the Philippines. REQuISITES: ) It must be paid or incurred within the taxable year. ) Itimust be each orincumed in connection withthe taxpayer's profession trade or business. ) The tax must be imposed direct upon the taxpayer: 455Delton fom the Gross Income Income tax pai abroad, claimed Pitppne income tax except 7 ere ace See an oe ers ee moe eee Local business taxes 127, olhenwise known as sock Satie iy wea our pea otherase known as stock “Taxes not related to business, ae ee ee os Te trey rome, es it a hoot Bee sate Rae aera oye anes tO the Deduction fom gssincme; or siecle oe Coricoer he Ta at SPAS out anasto vcore ed Ho ones wat Be Se 0) Tarot of teams dad user rad ta Te eee as ae anon (red stent ies Spent ati, Tdendiowmecteryts Spl Vay ce ast orice att os fe tgentay eerste Sutin sa INTEREST FOR UNPAID TAXES Interest pald or accrued on taxes related to business or practice of brofesen such a tose pad for datieency or delquency (lnce taxes 27 ‘considered indebtedness) are deductible as interest expense: Provided, that the tax is a deductible tax. Such interest shall be deductible in full, It shall not be reduced by 20% (under CREATE Act) of inlorest income subject 1 fal ‘ex "However, nes, penaltes, and surchargos on account of taxes 8° 456 TST ‘ABC Company incued the foloning ates dung 2021: eee a ee ee iral nige Income | in favr of key ffcers a fingo bene. 600 Income taxes poidin favor ofan 8 he enone S benefit “ aie 2400 et cutsenlpanecn aetna a endian a0 Municipal tax 2000 ‘Community tax 1500 ocr _ eae om Te emetateiaies th oi es a as hee ea ae ‘Question Whats the corect amount of taxes tha can be deducted fom gross income? ‘Answer: P9,500 computed as folows: —— ns ree pee = es 48 + Inereat on auchargs i deduct om gros incom bla “reste ro io it oerof ty fee ep eh is nf ‘ong ass elt one FE sf at ore, head erro a re ae be ni es oe, in ee ea a a cnr ere or aS a open anki ee a tal Sin Se atte et tn 2 eee L____Parnincne pyr det aces —__} 457Dedatices om the Gross lncone Dedectio i fom the Gross hoe ND LOSSES (RELATED TAXPAYERS) JEDUCTIBLE INTEREST A Sree ‘Sec, 36(8) of th Tax Code, as amended é aasualty a The bss is of Interest expenses as well as losses are not allowed 38 a deduction from 1a Sy yg OPE” any esa tse Interest expanses af goth tne taxpayer and the person 10 Whom the conned win nether or?” Sen payment has been made ori to bo made are shipwreck or other casualy, or damedsn aioe sy oer or ofthe fei. 8 Betco om al shal nude ‘only his brothers ang fom Sty iat or sisters (Whether by the whole or halt-blood), Spouse, ancestors, declaration of loss was filed with Stained deacondents ot fhe BIR wit @S cops teen poke pen eda ‘ax purposes in the este tax ‘oun. b. Except in case of afsnbutions in iquidation, between an individual a eorporation more than fifty percent (50%) in value of the In the case of a nonresident vidual oF or attending sleek ofwhih is owned, recy or indirectly, by or losses ceductbe shal bo those acualy sated Soren yo Sch individual incurred in business, rade or exercise ols protesion coneed wins the Philppines, when such losses re not ‘sompenslad or . Except in case of dlstibutions in liquidation, between two insurance or thar forms of indemnity eae Gomporaons. more than ty porcent (50%) in value of the tuBtancing stock ef wnich is owned, dec or indirect. by ofr MEASUREMENT OF CASUALTY pal us shl bv vets the same idivival it ether one of such corporations, wth respect Loss: ty ance eee any to the taxable year of the corporation preceding the, date of the form of indemnity. — Any. ale of exchange Was under the law applicable to such taxable + Total Loss: Actual ss is the” Guest amtiomion oe year, 2 personal holding company or a foreign personal holding took value ofthe asset fe tok ate al Be company + Partial Loss: Book value or cost pte fo restore the ascot tos normal 4. Between the grantor and a fiduciary of any trust ‘operating condition, whichever is @. Botwoon the Roucary ofa trust andthe Rduciary of another trust iower. the same person is @ grantor with respect to each trust. 4 Between a fiduciary of a trust and beneficiary of such trust. ILLUSTRATIONS: Case A: On duly 1, 2018, a lawyer purchased for PS00,000 an autometile which wil be of the Tax Code, as amended sed exclusively for hs practice of profession. He deducted annual depreciation on corer the bacis of an estimated usefil lie of five (9) years. On duly 1, 2021, the automobile was paialy damaged in an acientalcolson wih another vehi. yosses may be offset against al income and capital gains in the, same The fa mara aot to vet before hcl equal he canyog va at tax year. However, losses are deductible from gross income only on the Ponti ah he clon be fa vale vas deere at PA0D00, The bietecachasy taxpayer received insurance proceeds of 70,00 to cover the ss. ‘Question 1: How muchis te deduct os? a) aaa lesies arth from losses incurred in trade, business, or Answer POOH saat tuding net operating loss carry-over, Canara 00729 az b) Casually losses raaon0 oweranasnt ess: Posed fom irae Alewabl codon, 458 459Deco fom the Gross Income ‘Question 2 How muchs te deduce fs ifthe automobile was totaly destroyed? dV mpd as flows: ‘© Answer: P190,00 comp eae {ee ccs fom san — faa ‘Alors sean Ea CQuestton 3: Assume cost to restore was P250,000 (gnore fait market values How much s the deductible oss? Answer: P190,000 ‘Cann valve P50, 000x 28) ‘pre0c00 Costes 250000 Lower amount Preaco0 as: Proceeds nuance 0009 ‘Alonal eetucton PF soon- ‘Question : Assume the same data in question #3, what isthe new cost basis of ‘he automobile for depreciation purposes? Answer: P250,000 Book va P2eo000 ‘i: Exoos of est ror over BV Cos Bass P250,000 T OPERATING LOSS CARRY-OVER (NOLCO) “Net Operating Loss’ means the excess of allowable deduction over ‘gross income of the business in a taxable year. ‘The net operating loss of the business or enterprise for any taxable ‘year 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. However, under RA 11494, also known as the Bayanihan Aet Il, the NOLCO of the business or enterprise for ee Years 2020 and 2024 shall be carried over as a deduction 085 Income for the next five (5) cons a immediately folowing the year ofa “nmecutv® ‘arable Yo a + NOLCO beginning 2022-3 consecutive yoars 460 Deda the Gros Iecome geQuisiTES FOR DEDUCTILITY enterprise in that a) Not less than sevenyive¢ issued shares, fe bstes gn te tane pee eee by or on behalf of the same persons; or ee ) Not less than seventve (59) of the paitup cop corporation, the business is nthe ame of crpeaion had Oy ‘or on behalf of the same persons. A NOT applicable against MCIT: Applied on a Firstin, Firs-Out (FIFO) basis (RR 14.2001); and Not applicable under Optional Standard Deduction ADDITIONAL REQUIREMENTS for NOLCO incurred in 2020 and 2021 under Bayanihan Act iL and RR 25-2020; 1. NOLCO shall be separately shown inthe taxpayers income tax roturn for taxable year 2020 and in the Reconcliaton portion ofthe Tax Return; 2 Unused NOLCO shall be presented in the Notes to the 2020 Financial ‘Statements (with datals of year sustained and amount claimed): 3. NOLCO for taxable year 2020 shall be presented in the Notes to the Financial Statements separately ffom the NOLCO for other taxable years. RR 25-2020, SECTION 4. Five (6) Year Period of Enitement to Dedet Not Operating Loss Incurred for Taxable Years 2020 and 2021. - Uns ahenise qualified fom airing the deduction, he business oenlerpse which cred net operating loss for taxable years 2020 and 221 shal be alowed fo cary over the same 2s 2 ecicton fom ts goss nanne he fest fre) cnsciie abl years Inmatl flow th Jer fs. Th cigs sad ab years may be carla over asa dedton oven atte ex 8. Provided he same ar dined win te next five (5) corseouve axable Years immediatly olowig te year ol sales of ve tree (3) year reslementary period on the cary-over vance etn, ela tt Re NOLCO (except those tending te fect thal the corporation pai is Re” case the: Ménkmarn Compras income Tax: OAGTT) ccompulation. 481Dethtious from the Gress Jrcone Delectons rom the Gress Income Held Z citoaton's NOLCO shud be relied and vanseed to Y poration. Pir fo the merger X corporation aeadyindrec owned 2 Catered er the merger, X now dicey ows. Z corporation {absorbed corporation) which continues o exit n V corporation, ui corinterest described above shall only apply tp ae roe i ca tne taxpayer's nat cperatingIOSSe5 25 2 resut of sing trom the sald taxpayer's merger or consodation Or business combi er in case the tran rod ‘combination with another person. 0 nae assent of ee onoolidaton or combint SFr enti fo cae some os sean fem does core TAXPAYERS NOT ALLOWED TO CLAIM NOLCO (RR 14-2061) Gness ag a resul ofthe said merger, consolida ee unless ea franferoassiger, or the Wansferor (in case of oer i Tbeoefbibahe Se allie pene tas to ararenelter nations) gain contral of at least 75% or more in nominal value NIRC or special law(s) a! the time the nel ope sting enwonce ora Of he outstanding issued shares or paid up capital of the transferee/assignes b. Offshore Banking Units of a foreign banking ‘pl een Oncaea the tangtereefacsgnee i & corpralon) oF 75% or more interest in teres, ganar ts 9, en arr cpacton and Foren {fo Stsiness of the tenctoreslassignee in case the lrensfereelassignee Ie aren Depost Unt ola dnesi ren baking area . Entities enjoying Income Tax Holiday with respect to net operating losses coher than a corporation (RR 14-2001). incurred or sustained during the period of such Income Tax Holiday, such Individuals (ncluding estates and trusts) engaged in trade or a those registered by the BOI and PEZA business, oF exercise of profession, domestic corporations, resident ;lerprises registored under RA 7227 (Bases welopment corporations, and special corporations such as. proprietary educational ee OES er RST lon Garrenion aveopesent institutions, hospitals and regional operating headquarters of multinational ed In Intemational shipping or air carriage in aticgsbowptelt snd inaina peretr.hpedeieps of uu 6 Foreign corperations engaged in intematonal shiping or ar caring Byor on behalf of the same persons yor rahe fa ern eb tt eta wr apean nee OT NET OPERATING LOSS FOR MINES OTHER THAN OIL AND GAS WELLS ‘Ownership daspte change 26 when: : Faststategertt tel 2). NO actual change In the ownership i involved in case the transler For mines'other than oil and gas wel, a net operating loss incurred involves change from direct ownership to indirect ownership, or vee in any ofthe fst 10 years of operation may be cared over as a deduction versa. 7 , from the taxable income for the rae Yor Naat RW inevenr of ) No actual change in the oumarshp is involved in the case of merger such foss, The entire amount ofthe carted over to the first ofthe subsidy tothe parent company sali taxable years following the loss, and any porion of such loss wich exceeds the taxable income of such fist year shel be deducted In ike manner from the taxable income of the next remaining 4 years. ICO (addtional iustrations): ILLUSTRATION 6 - NOLCO (based on RR 14-2001) CASE A: Change from direct ownership to Indirect ownership TCLUSTRATION 7 - NOt P corporation owns Q corporation that has NOLCO. P coporaen ha uct Inc transfers Q corporations shares to corporation in exchan of CASE A: (Entire NOLCO were calmed z Repeat abree, coProe In enchonge fr 107% Tho folowing are ess rah Caney SHE : ‘ 300000 2640,000 pret Held: '@ corporation's NOLCO is retained because Q corpraioa'’s beh 2aon000 1200000 350,000 ‘an00 > “a0 ‘hares are held by R corporation “on behalf’of P corporation, the orginal omer Dividend rom resident fron ‘corporation (foraiga-sourced Interest income on notes 28000 16400 =. - 3000 18.500 Capital loss oO CASE B: Morger ofthe subsidiary into the Parent compa X carporaon owns 100 of Yexpatin, Y exmoraten owns 100% o!Z Answer: P8000. (*"30/100x20,000) Dede ry fom apa gas. any, ‘Since erly 70 sats were aoqured win he pohtied prod e.dy hi) tens tibet remaring 30 shares shoul note teted Sebssonvassale ‘Question 3 How much was te cost of shares purchased on June 30? Answer: P64.000_ computed as flows: 14,000 ‘Question # How much was the capital gan on sale of shares on October 15? Answer: P11,000 ° 75.00 Cost 64.000 ‘Ganon Sao Pr 00 No scustion or posal ware made iin th 6. coy pond pee. Hence, anys inured lpoig te shares shal ot bo casilod “os an nah sa ‘Short Sales {Sec 38F)} ‘Sale of stocks which the salle does nt own (he merely borrows the stock crate trough or fom Ns sek brs) ers euboequety BE Goleee tats Glock to complete the transaction, thereby postponing the Wvery to a later date, Thus, a short sale represents an obligalion Pie ot the eco orcs, Seller merely speculates that on this day te care one eacuity ot share wil increase I the price decreases. Ne cams a copa othér hand, ithe price increases, he incurs 470 Dedactions fom the Gross Iecome Gain: ‘Treated as capital SHOR se me [ted [Faeonn 'Non-deductbe aria Treated as capital loss which Form partofthecostot | ‘canbe deducted rom capital ‘) L*stbsotuertsequsions | gainisjony TLLUSTRATION Lester speculated that the far aves of San Mig shares wi in ek ue an ates bases reed y San Cio eas ofthe situation, was lured by Leste to buy San Mig shares at P120 per share for later delivery. It the fir value ofthe shares increase to PIZ5 por shar atthe time ‘Lester acquires San Mig shares for deliver o Cfo, Lesa ncurs a capil loss Cf PS per share. On the oer hand, i the fi value othe shares becomes P110 per share as Lester anticipated, he shoul recognize a capital gan on short sale at P10 per share, ‘Securities Becoming Worthless; Shrinkage in the value of Stocks Ihe stocks of the corporation become worthless, the cos or other basis may be deducted by the onner nthe arabe year in whch the stocks became worthless. these woes sects re capil sets, the owner is considered to have cued a capt lee a8 of he lata of the taxable ear ond, thereore, deavcie oo exon capa fain, This, deducton, however, not alowed to 9 bank oF ust oman [Secon S4(E\2), NRG). K's nether a wach sale nora short Salo, Tho two (2) requstas or deduct ar as flows Thoseatee se mcnamdtoDe miss +The taxpayer claiming he capital os shou ora trust compat ncrprated under Prilpinos an, ‘On the other hand, any amount claimed a8 a loss on account of shrinkage in value of the stack through fluctuation in the market or otherwise cannot be deducted fom grass income, for tax purposes, because the loss is not realized. Wagering Losses Losses from wagering transactions shall be allowed only tothe extent of the gains from such transactions. anDe sitions frm the Gress icone fe eee Se lads cipeee dioeoay y solely for security OF ston, no loss i recount (ca yn alr Ina merg for stock, or security solely ILLUSTRATION 10: Francs Company was merged into Vilanin Company, and only Vitamin ‘conte to exist Poul a sharehlder of Francis Company was asked to surender his 100 shares of Francs Company that he acquired for P90,000 and revsived under the merger 100 shares of Villain Company wilh fair market value of 180,000 and cash of P30,000 and a property valued at PY0,000. Villain shares were subsequent sold at 110,000. ‘Question How much should Paul recognize 2s gain from the merger? Answer: P40,000 Ft vle osha reosied s.000 40.000 790,000 soon) Pion. P4000 * Gsintobe recognized ited i he amount of cash and properly received. Question 2 Whats the adjusted cost basis of Vilamin shares received? Answer: P90,000 oat shares sured Franc 000 {ous Cah ape ead a oa ‘bt: ain ecogntzt ‘Ast cost bas of share recived Geeaton 3 How much shoud Paul recognize as gain from sale of Viarin Answer: P20,000 Seog ct i tres PHO ass: Cste Vian shes (Gainon slo Vian shares a 472 Dadectioa fem the Gross Income CASEB: ‘Assume the same datain Case A e 8 P00. Aosue bree sgh ce tate a abe ct iain shares was paooat Vila shares were subserveily soldat Question 1: How much shoud Pau 2098 ios tom he tan How uch sous renie suns tom eras? Fobvabe tons ene nid fa et 900. ‘aon Chatto redone a ee = ‘Question 2 Whats te adjusted cost bass of Vilamin shares received? Answer: PS0,000, Cost shares sured Fan) Peno00 ‘ess: Cash and pepryrecied 00 ta 3.0 ‘i: Gain recogntnd ° ‘Adjsed cos basse stars reese ea Question & How much should Paul recognize as gain om sale of Vilamin shares? Answer: P30,000 Selig pre of Vai shares aa.oo ss: Cost of tania tres 01) (Gain on see of Vilamin shares 20,000 OTHER TYPES OF LOSSES Losses due lo voluntary removal of building incident to renewal ‘oF replacements - deductible expense from gross income lose of useful value of capital assets due to charges in business ‘conditions deductible expense only to the extent of actual loss Sustained (after adjustment for improvement, depreciation, and ‘salvage value) ‘Abandonment losses in petroleum operations Losses arising from a falure to exercise an “Option” money to buy @ copial propery shall be teated by the buyer as a capital loss. Likewise, the seller shall consider the same as capital gain NONDEDUCTIBLE LOSSES Lecce not incurred in trade, profession or business or in any tension eran fo pro con or or exchanges of property ened ito betwaen Losses rom 9 gducile as proved under Secon 26 of he ‘Fax Code, but the gains are taxable). 413Deletion fm the Gress Income ropery in a corporate readjustment (refer + Lossos tom exchanges of property na corporis Racitnen to discussion on fsses afsng : legal transactions Losses from llega Yori of building on land purchased with a view ir a er ple Ca raw bulding to be erected ERIETETG or tne Tax Code, as amended BAD DEBTS: moral debts duet the taxpayer actualy ascertained tobe worthless and shaped of itn te faxable Yea exzeot to88 Not connected with ree ate or business and those sstaned in a transaction enared into between ‘related parties" mentioned under Section 36 (8) of the Tax Clee and as tacuseed In he foregoing topics are deductible.» Provided fenton that recovery of bad debls previously alowed as deduction inthe receding yeors sha be included as part of the gross income inthe year of {eeove to he extant of te income tax benefit of aid deduction, Charging off of en account should be made Greria_in determining “worthlessness” of, receivables 41. Taxpayer didn fect ascertain tha the debt by removing the worthless accounts from the ‘books of accounts in the year that the debt is ascertained to be worthless. Hence, “reserved Or provision for bad debis" are not allowed a3 deduction from gross income because the ‘mere seting up of reserves ull nol give rsa to. | 'swortlss in he any. deduction under ‘Seaton 34(E) of the | Yea" for which the Code. Hence, only the “direct method” or deduction was sought “wit-off method of accountng for bad debt is | and atin so cong, allowed for tax purposes. he acted in goed fai “Wortlessness" is determined upon the | 2. The account is not exercise of sound business judgment based on supported by @ the particular facts and circumstances of the case. To be considered worthless it must be Luncollectible even in the future (Collector v. Goodrich Intemational Rubber Co, 21 SCRA 1336 December 22, 1967). guarantor or suey. REQUISITES: 41. The debt must be valid and subsisting 2. ‘The debtis connected withthe tax Sit us Time comets payer's trade or business, and is n 3. Theveis an actual ascerta 4. The debt is charged-of with iment that the debt is worthless; and in the taxable year. 478 Hi re Deductions from the Gross Income of the Tax c mended ORECIATION. 8° GENERAL RULE (Seo. 34(F(1)) There shal be allowed Depreciation expense as @ deduction from the gross income refer to @ reasonable allowance for the exhaustion, wear and tear and normal ‘obsolescence of tangible property used in the trade or business. it pertains to the gradual diminution in the useful value of tangble property resting from ordinary wear and tear and from normal obsolescence. The term is aiso applied fo amortization of the value of intangible assets the use of which in the trade or business is definitely limited in duration. REQUISITES FOR DEDUCTIBILITY 1. The allowance for depreciation must be reasonable 2. It must be for property used for employment in rade or business oF ‘ut ofits not being used temporarily during the year. 3. The allowance must be charged off. The reasonable allowance may be either deducted direct from the book value ofthe asset or Credited to an accumulated depreciation account 4. Schedule on the allowance must be attached to the return METHODS AND RATES ‘Te term Yeasorale allowance” as usedin the preceding paragraph shall cide, but not ied to, 9n allowance computed in aecordance Sun os ara eptaionsprestrbea bythe Secretary of France, upon ee eton’et the Commestner, under any of the Tolowng mmatoos J Silane Oecemathd, usng arate not exceeding vie tne Decining alas vo Docn oad nad ihe aval allowance Deen Computed usa agit ine eed novyearsgt melt Suma the year wc may be prescribed by the Secretary of fay ote meee encaton ofthe Commission, 415Delton from the Gress Income VEHICLES (RR 12-2002) seuod on October 12,2012 preschibes tHe Tes on te ed 2012 ese or eran a eaten to UCase of Vehicles an Set of prt and rputares alowed teetr, 1 wi ote: expenses related nego or deprecation shal be alowed unas "the taxpayer substantiates the purchase with sufficient evidence, such as tha tanner usar foquate records which contain the follwing, aa >t rv mee hn = ete ee Sa eae Pee eet arctan or business or profession of the taxpayers. . 2. Only one vehicle for land transport is allowed for the use of an official or employee, the value of which should not exceed Two Million Four Hundred Thousand Pesos (Php 2,400,000.00); 3. No depreciation shall be allowed for yachts, helicopters, airplanes andlor aierafis and land vehicles which exceed the above threshold amount, Unless the taxpayer's main line of business is transport operations of lease of transportation equipment and the vehicles purchased are used in ‘said operations; 4. All maintenance expenses on account of non-depreciable vehicles for taxation purposes are disallowed in its entirety; ‘5. The input taxes on the purchase of non-depreciable vehicles and all input {axes on maintenance expenses incurred thereon are likewise disallowed {or taxation purpose. DEPRECIATION OF MOTO! DEPRECIATION OF PROPERTIES USED IN PETROLEUM OPERATIONS [Sec. 34(F)(4)) {An allowance for depreciation in respect of all properties directly felated to production of petroleum initally placed in service in a taxable yeat shall be allowed under the straightline or decining-balance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may at any ‘subsequent date, shift to the straightline method. ° ‘The useful life of properties used in or related to ot i in or related to production petroleum shall be ten (10) years or such shorter life as may be permitted BY BG on eee ee tne Airectiy in the production of petrcieu shal the me i - estimated uot eof fv (5) years, S"® ™ethed on the basis 0 476 Dedections s from the Gross hucome DEPRECIATION OF MINING OPERATIONS [oec. 4/5) ‘An allowance for depreciation hg ee in respect of all properties used in ining Petroleum operations, shall be compuled as 2) At the normal rate of - years or less; of ” “ePresaion if the expected iif is ten (10) b)_Depreciated over any Bedi te dope a commons a Aled by ie Sciontoe sere? Me? SAMEEREN rate DEPRECIATION DEDUCTIBLE BY NONRESIDENT ALIEN TRADE OR BUSINESS OR RESIDENT FOREIGN CONPORATION [Sec. 34(F)(6)] In the case of @ non-resident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of property arising out ofits use or employment or its non-use the business, trade or profession shall be permitted only when such property| {is located in the Philppines. of the Tax Code, as amended DEPLETION OF OIL AND GAS WELLS AND MINES IN GENERAL (See. 34(6)1)) In the case of ol and gas wes or mies, a easoate alowencs for depletion or ‘amortization computed in accordance wih the cost depletion melod shal be granted Linder rules ond requtons 10 be presrbed by fo Secrlay of Fnac, upon ‘econmendaton of he Conmissne, Pred, Tha wien the allowance for depeon ‘Shall qual tho copied router aloware shal be aan: Provide, tthe, That ater produntan in cone! quaniies has conmanced, cern intangie explaton bd developer cling cos: (sal be deductible the year nce Sch erpendres ae eure for nonprucng wel aedor mines, oF () skal be deductelen tin the yea ai ot cured, lhe leon ofthe taxpayer, may be capitazed and anarized such exes inured are for peduong wels andor mines in the same contract ae ting ant dagen! oxerses sloned a3 0 ny nang ore come. rg he ya" sal re bo taken Ito consideration in computing te aqustd co bass antDolson fo the Gross Icons DEPLETION Deplton pains to extauston of natal resources due 10 production that is allowed ‘as deduction to recover cost of the property a ca or wasting asset, Explosion expndtres aro Yasar tas those incured for the PUPOSE eater aiehrfron, ‘of ascertaining the existence, location, Soperaton oly i ‘extent. oF quality of any deposit of orefother a ates nines and ald or incured before the - pelstrmnes tesey ny Boginning of the development stage of the the Phlophen, mine or depost. On the other hand, Develoment expenditures are those paid or Incurred during development stage of the mine or ther natural deposits. Intangible costs in petroleum operations refers to any cost incurred In petroleum operations which in itself has no salvage value and \which is incidental to and necessary forthe driling of wells and preparation of Walls for the production of petroleum: Provided, That said costs shall not ‘pertain to the acquistion or improvement of property of a character subject to {he allowance for depreciation except thatthe allowances for depreciation of such property shal be deductible under Sec. 34(G)(1).. ELECTION TO DEDUCT EXPLORATION AND DEVELOPMENT EXPENDITURES [Sec, 34(6)2)] |i computing taxable income from mining operations, the taxpayer ‘may, at his option, deduct exploration and development’ expenditures ‘accumulated as cost or adjusted basis for cost depletion as of date of prospecting, @s well as exploration end development expenditures paid or Incurred during the taxable year: Provided, That the amount deductible for ‘exploration and development expenditures shall not exceed twenty-ve Percent (2596) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and evelopment expenditures minus twenty-five percent (25%) of the net income from mining shall be cared forward to the succeeding years unti fly deducted. The lection by the taxpayer to deduct the exploration and Govslosment ‘expenditures is irrevocable and shall be binding in succeeding tahoe tn tg pars nn gor ei perations less allowable deductions which are necessary or rela _ necessary or related to mining oer tte een ar tee Serna Ing expenses, and depreciation of properties directly used in the 478 The tem exploration expenltures inoured for the purpose of ascertaring te ona ual of any dopost foe or ther mineral and pid orcad betes Ne Desinring of the development stage of tes mine or depout, The tn development expenditures mean expendtyes pul of neared ding he evelopment slag ofthe mine or oer natural Gepost, The development slage ofa mine or other naira depos sa bein tthe ime when depo of oe ater minerals ae shown toe in suflet commorcal quart fed aly and Shaler ven carmeroanert ef acl cnet ontacton mean expenditures paid or DEPLETION OF OIL AND GAS WELLS AND MINES DEDUCTIBLE BY A NON-RESIDENT ALIEN INDIVIDUAL OR FOREIGN CORPORATION [Sec. 34(6)(3)) In the case of 2 non-resident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of ol and gas walls or mines shall be authorized only in respect to oll and gas wells or mines located within the Philippines. COIL AND GAS WELLS AND MINES CONVERTED INTO INVENTORIES ‘There shall be no reduction of cost or value of natural resources such as ‘il and gas wells, and mines as the resources are converted into inventories. No further allowance is granted ifthe allowance for depletion is equal to the capital invested. Intangible exploration end development driling costs may be: «+ Fornomprediin wos and mies ~ Deduct in th yer the costs + Ae mcUTa es and mines - Godu n fll or cape and amortize. AMORTIZATION OF GOODWILL. J deducion fom gross income ‘Amentizaton for goodnil srt alowed as deduction Vr aan eave alowed tobe amoried, ts only allowed o Bose We tangible maybe inser Fae desi teited In draton, @asilan Estates, Inc. v, CIR. 21 ‘SCRA 17). Such is not the case with ‘Goodwil, 479Deductions from the Gross Jacome ABANDONMENT LOSSES conract areg_ where “petroleum operalions are undertaken pari an sone, al secumiated exploration and developmen, aay wy aoa cont area shal be alowed as a deduction. coon er reoqueny abandoned he unamorized costs, 2 Wel ag Fe su we sed cont of gaupment recy used, shall be allowed ag dloauclon ne oar such wel, equipment or facts abandoned SEREREMIO) of tho Tax Code, as amended CHARITABLE AND OTHER CONTRIBUTIONS RAL (SEC. 4H Corian pt ost) lor made tn het yar tof te a of the Govemment of the Philippines or any of ts agencies or any poltical suedvsn he! exsil o ubic pues, or Yo ecoeded dona Cerporatons_ or asseealons organaed and operted excisvey fr rls, Charibl scion, youth and spas developer, cutura or edueaonlpuposes a forthe rehabiaton of veterans, or 10 sacl well instulon, or 10 ‘ongovereert rganizators, in acadanoe wh rubs ena equaon promt bythe Seca of Fnnce, upon recormendeton ofthe Commissioner, no pa of tena icame of whch nes othe bene of any private stockade or ind Jinan amount atin exces of on percent (10%) inthe case ofan individu, ard ve prcet (54) inthe cas of capaatin of te laxpayer taxable neo deed ‘tom wate, business or profession as computed without the bone ofthis and te folowing subparagraphs. Contributions deductible from gross income may be deductible in full oF Subject to limitation depending upon the organization to which the donation is siven (Retr to Table 9-4 provided below). The amount of any contribution of Property other than monay shell be based on the acquisition cost of said property [Sec 34 (H) Tax Code}, REQUISITES FoR DeDucTiaLITY 4) The contbuon og must be actualy paid 2) musi be given to organization apecttog oe la 3) must bo within the able yoor °° 4} The net nome ofthe ston must notin ene ofa Private individual or shareholder. Src nearent 5) Tho taxpayer liming tre Seon m inte Practice of profession or business, Sareea 480 ro EXCESS a eee eee DEDUCTILE NFU. | —__,bemweraLew ru suBiecrou 1 Bee SVGKAl Dratosio be oommariy —— ees os | Se Phipares, ary ofisagoces ramen ‘ePhlpnesepoltca subdivisions o fly med goverment Subse fr once comoratonstobeusedexcushalymunteang unas vere (ee actrities Te pose ol be “ae Soran tro + ten fetomnod by NEDA Economic development. The Proity Plan must be delemined by the_ National Econom Development Athy (NEDA), in consutatin wih zppoprate goverment agencies, indudng is regen development ccuncs ard pine phlanvepc persons. and insittns. Hero, conrbutore made tothe grantees above which vere not made in accordance withthe seid annual potty len shall be subject oitatons. 2 Donations to domestic 2. [Sec. 34(H)(2N] Donations to cet aig caxporalions or associations institutions or inteationa organization in ganized and operated ‘compliance wih agreements, teas special ‘exclusively forthe following laws. purposes: = Youthand sors velopment Cultural ‘Educational purpose = Rehabiltaion of veterans + Socal were instutons 481DEDUCTIBLE IN FULL 2. ee. 2424s Ae Ne ome Gomes 08 mh 8 le i leet cra ed = + Scenireseech Eaucatona Character buldng ‘out and parts development Heath Social wore Cull Chars purposes: or + Cambinaenherest Provided: +7” Nagar ole netincome of above acreded NGOs must nue othe Bonet of any pate india + The donation mise vad not tr than tho 15% day oft 3# nen folowing cso oft aaa year. +The adinsatve expense must contr wih thors and eit be prescibod by tho Saclay of inane, pen ‘exanmendaion th Connistonr,but in 10 case io exceed 30% ofthe tal oxpenses. + Theassels of which nth event of dissin, wou be dbl i 1. Antier domeste oxpraton ganized for senlar puposa x puposes or i The sll for puble purposes; o Wi Arathor organization to be Used i such manera in the Judgement of the cout shal best accomplish the. general urpse fr hich he dsoed SUBJECT TO LIMTATIONS eames feu se tn LUMIT OR ALLOWABLE DEDUCTION: ‘deducting the conten Corporate taxpayer- S| faxade income dered from ade, business « profession afore deducting the contiion L_____ayanoatonvasogonzeds ILLUSTRATION: A Corporate T Fest cape Gas POON Na He cewrg deta on ince and expenses [paces Progra Operating expenses exclu 4,000,000 | goverment arate rtang 3.000000 | sto Goverment a | Sekbietecoeneetirremyonteaer ann | Conibuton io donate raat onetee ‘0000 | Conrbuon'oa poprsay canss ‘0000 | __ Contin 3 Paty Ut cae zoo | REQUIRED: Detornine te taxpayers table 000 | Answer: P2.650,000 computed as: Catesaes Prasonom ome tana etree cing ae Coren 0G rey pcs mae conte ast wane fet Proce ints ae 000 Ase Lone oe) sons arabe reore aon “* Conmant > Ghee egret pt ase 2 Const nae crn ree 4 Treatise a pit oaralthon ata Pary Lit crests Tenmaccie come CASE B: individual ‘Assume the same data in Case A except thatthe taxpayer is a resident citizen. ‘REQUIRED: Deteice a mpage ale brome ee ane 2 Coattsabe ‘won, £000,009 eee ir contre Paar sein fet py pts na cantar desta te 200 teat Lienert xb one a3Dedactions from the Gress Iicome BIR VERIFICATION (RR 13-98 as amended under RMC 86-2014): ‘ 1 cnibons 10 socteding Donors claiming donations nd on onions Sinn CortonNGO. as. dedUtons om: te norstock, non culd submit evidences OF Proofs to the Hee eves ne Geriates) of donation and indicating therein ot Letolowe sin by the eccredted_non-stock, nant Ae ee Me donation er eontbuton andthe dal of tect bart + The smount of the charitable donation or contribution, ifn cash; if Ferrer oa or perma the acquston cost of the sald property. ‘The information required under the regulations shall be in a CCentficate of Donation (BIR Form 2322) consisting of two parts, a donee certification and a donors statement of values. The values declared by the donor in the Statement shall stil be subject to further confirmation by the Bureau as to its correctness and accuracy. The donor's statement must be signed by the donor or authorize representative. Finally, the books of accounts and other pertinent records of tax exempt organizations or grantees of tax incentives shall be subject to the examination by the Bureau for purposes of ‘ascertaining compliance with the conditions under which they have been granted exemptions or tax incentives, and theit tax labilty, if any. of the Tax Code, as amended RESEARCH AND DEVELOPMENT A taxpayer may teat research or development expenditures whieh are paid or inured by him dung te taxable year I connection wt = trade, business or profession as ordi is allowed as deduction during tho taxable year when alder incaed Research and Development shal ot apply ta : + Any expenditure forthe acquiston or improvement of land, or for the doraemon Property to be used in connection with research and lopment of @ character which i subject to deprecielon a Sees ich is subject to depreciati and = alee at Pree oe ‘the purpose of ascertaining the sence, locaton, extent, or qualiy of ay aon rir et eeR oF aly of any depos of ore or one Deacons fon the Gross Income JORTIZATION OF CERTAIN RESEARCH ap EXPENDITURES 3EARCH AND DEVELOPMENT i oes rant pen st wh sa recommendation of ‘the Commissioner, the olowiny ioasetn “Boy rmarmeraten te Gren, ay 4)” Pald or noted bythe tapeyer ncovinene: cae business or profession; isnt eee eae 2). Not eated as expenses here and 3} Chargeable to capt account ut ot chargeable to property ofa charecer whichis subject to depreciatono dopo In computing taxable income, such deferred expanses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months ‘as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election may ‘be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for fling the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years Unless with the approval of the Commissioner, a change toa cifferent method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure pad or incurred during any taxable year for Which the taxpayer makes the election. of the Tax Code, as amended PENSION TRUSTS CONTRIBUTIONS Pension trust contributions pertain to deductions applicable only to the employer on account ofits contributions to a private pension plan for the benefit of its employees. This deduction is purely business in character, established or maintained by employer to provide for the payment of ‘easonable pensions to his employees. Reauisies 1) Thee rust have established a pension or rtirement plan to provide ore payment of reasonable pension this employees, 2). The pansion plan is reasonable and actuarially sound, 3) It must be funded by the employer. 3) retake une mustoe no orer ube fe contol and Sispositon of the employer 5) Faecal ben lowed aba costa 485Dadacioa fom the Gross Income ioned in equal parts over a period of ten (10) 8) The deductions *teciring withthe year in which te tranafer of ‘consecutive years beginning payment is made, Present Service Cost (or Normal Cost) and Past Service Cost CContibution during the taxable year to cover the pension liabitty accruing dag the toatl Yar Is Known a5 present service Cost or nomad ost. Such contribution is alowed as a deduction under Seo. 34(A)1) as ‘expenses in genera”. On the other hand, past service cost pertains to an amount. paid in excess of present service cost (covering pension liability Pertaining to old employees that accrued during the years previous fo the establishment of the pension trust). it''s allowed as deduction and apportioned in equal pars over 10 consecutive years beginning with the year in whicn te transterpayment is made (Sec. 34{)) TELUSTRATION 7: ‘An employers person st fori employees. The folowing contrbution ae ade 2019 2000 zat (cunertsericn costs sooo 500,000 Ps00000 Past serie ents 600000 700000 50,000 equ: Ceerin he deductive pension contbutons fr 2019, 2020 and 202% ‘Answer: 5 213 m9 mat Curent serie nats Psooo0 — ‘Pe00}000 © P800000, 2019 (60,0000) 60,00 60,000, e000 2020 (Pr0000010) 70000 a0 202 (P5000) Deductible expense Pas0000 Penn Premium Payment on Life nsuranco of Employees Tal employer/corporation: ar Premium payment on Life Insurance of employees taken cut by the ‘employericorporation may be allowed as deduction from the latter's gr0ss income provided the designated is the jee or his/her eons pr fgnated beneficiary is the employee or PREMIUM PAYMENTIPROCEEDS FROM LIFE INSURANCE * Benefciay is the employeemeirs = deductible expense of the ployee. The proceeds 10 be 486 Deductions from the Gross hicone (OTHER ALLOWABLE DEDUCTIONS UNDER SPECIAL LAWS 9904 (Magna Ca lor BA 004 (Magna Carta for Senior Citzens) and RA 7277 (Magna Discounts Granted to PWDs and Senior Citizens ($C) The law also lows the extabison to dm the discounts destin based onthe net cost of goods sad sete ceed Te cost of the dscouts shal be alowed asa dusion ton sey income forthe same taxable year ht te dscaun & gore ee ictal amount ofthe claimed tak deducion nat of VAT. Hepes sta be Included in thelr res sales vecopis for lx pupeses are ata Subject to proper documenzton and te the proves of ts Hemaea intemal Revenue Code (HIG), Further, the sales records of the establishments claiming tax deductions must contain the name of the PWDISC, hisiher PWDISC ID ‘number, and if applicable, his her Tax Identification Number (TIN). Failure fon the part of such establishments to include such datalls in thei records ill result in the disallowance of the sales discount claimed as deduction “These rules shall apply to the 20% discount on sale of certain goods ‘and services as well asthe 5% discount on basic and prime commedities granted to senior clizens and PWDs. Likewise, the input tax attrbutable to the VAT-exempt sale, if any, may be clalmed by the seller as cost or ‘expense, RA 8525 — Adopt A School Program (RR 10-2003) Deduction fom the gross. income of the amount _ of conirbution/donation that wore actualy, decty ard exclusively incured for the Program, subject to Hiitaion, condtons and rules st forth in Section (fH) of tho Tax Code, lus an addiional amount equtvaent to fity percent (50%) of such contrbutoniseraion ov Private Health RA 7600 ~ An Act Providing Incentives {0 ALL Inedichons ute Rocmingir& breastfeeding Practices by a pate heath and non-eath fact, plying with the provisions of this Act, fe tax purposes up to twice the The expenses incured establishment or institution, in cor Shall be deductible expenses for incom ‘actual amount incurred: 487where there are deductions which Income (unallocated deductions), Deductions from cA Gross Income SPECIAL DEDUCTIONS under Section 37 ofthe Tax Code nc Pg yon te win YH 1 ex st ane tne than dividends paid within the year on policy and annuity contracts. NOTE: The released reserve be eated as income for the year of release. insurance conparies a Go roma deposts retured to their policyholders, In tho case of mutual fre and mutual employers’ liability and mutual \workmen's compensation and mutual casualty insurance companies requiing their members to make premium deposits to provide for losses and expenses, Said Companies shall not retum 2s income any portion of the premium ‘oposite returned to thelr polcyholders, but shall return as taxable income all income received by them from all other sources plus such portion of the premium depostts as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves. Mutual marine insurance companios ‘= Amounts paid for reinsurance = Amounts repaid to policyholders on account of premiums previously pad by them and interest paid upon those amounts between the ‘ascertainment and payment thereof. “Mutual marino insurance companies shall include in thelr return of gross income, gross premiums collected and received by them less amounts paid for reinsurance, but shail be entiled to include in the deductions from gross income amounts repaid to policyholders on account of premiums previously aid by thom and interest paid upon those amounts between the ascertainment and payment thereof . Assessment insurance companies - Actual deposit of sums with the offers Of the Government of the Philppines pursuant to law, as addilons 10 {uarantee or reserve fund. . DEDUCTIONS FOR MIXED INCOME Deductions should be identified withthe income to which they pertain, but ‘cannot be clearly identified with any source of ‘allocation shall be made as follows: Phi. Gross Income x Unallocated ne Deduction Gross income, world Deductions sae 488 BE PR p10. BLES: ‘The following data were provided by corporation other than MSME) for 2021 Taxes and licenses Alpha Corporation (domestic Documentary stamp taxes “too Other Percentage taxes 120,000 Refund of local business taxes paid in 2019 40,000 Jneom cA due for 2021 300,000, Ref of income tax for 2020 5 Interest income oo From trade nots receivable 100,000 From peso bank deposis 400,000, From bank deposits abroad 20.000 Interest expense on bank oan 150,000 “Tax assessment on underpayment Percentage taxes 75,000 ‘Surcharges on tax assessments 25.000 Interest expense on lax assessments 12.500, DETERMINE THE FOLLOWING 4. Deductible interest expense in 2021 2. Deductible taxes in 2021 3. Taxable tax refunds in 2021 10.2. (On January 1, 2021, Mike leased his vacant lat fora period of 12 years to Leomar at’an annual rate of P2,400,000. It was also agreed that Leomar will py the following: =" 4,800,000 representing rental payment for year 2021 and 2022. + Security deposit of 2,400,000. ‘= Annual real property tax of 90,000. ‘The lease contract provides, among others thatthe lessee will construct fa S-storey building for parking purposes at @ cost of 9,500,000. ‘Ownership of the building shal belong to the lessor upon the expiration Or termination of the lease contract. The buiding was completed on July 1, 2023 with an estimated useful life of 15 years. ay LOWING TERYINE cdvetioeonparses of Leman 2021 1 Geta cuperces Leman 2022 F Bate erpeaes ofLeomarin 489