XAVIER’S POISON REVIEWER1. Taxation a. Is the power by which the sovereign through its law-making body, raises revenue to defray the necessary expenses of the government. 2. Taxes a. Are the enforced proportional contributions from persons and property levied by the law-making body of the state by virtue of its sovereignty for the support of government and for public needs. b. Characteristics of Taxes: i. A tax is a forced charge, imposition or contribution and as such it operates in invitum. They are not contracts. ii. It is a pecuniary burden payable in money. iii. It is levied by the legislative body of the State. iv. It is assessed in accordance with some reasonable rule of apportionment. v. It is levied for public purpose. 3. Do regressive tax es go against the constitutional mandate? a. The constitution does not really prohibit the impositi on of indirect taxes which are regressive. What it simply provides is that Congress shall evolve a progressive system of taxation. Resort to indirect tax should be minimized but not avoided entirely because it is difficult, if not impossible, to avoid them by imposing such taxes according to th e taxpayer‟s ability to pay. 4. Taxes are important because they are the lifeblood of the Government and so should be calculated without unnecessary hindrance. 5. Taxes are personal to the taxpayer. a. A corporation‟s tax delinque ncy cannot be enforced against its stockholder not only because this would run counter to the principle that taxes are personal. A corporation is an entity with a distinct and separate personality from those persons composing it. i. Stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the corporate assets have passed into their hands. 6. Nature of the Taxing Power a. The power to tax is an attribute of sovereignty. It is inherent in the State. b. It is a power emanating from necessity. c. It is not granted in the Constitution. 7. Characteristics / Elements o f Taxation a. It is the exercise of the high act of sovereignty. b. It is a legislative prerogative c. It is unlimited, that is, the power to tax extends to everything over which the sovereign power extends but not to anything beyond its sovereign power. d. It can only be exercised w ithin the territory or jurisdiction of the Philippines. 8. Purposes and Objectives of Taxation a. Revenue –To provide funds or property with which the state promotes the general welfare and protection of its citizens. b. Regulation–It also has a regulatory purpose as in the case of taxes levied on excises or privileges. c. Promotion of G eneral Welfare d. Reduction of Social In equality –To prevent undue concentration of wealth in the hands of a few individuals. e. Encourage Economic Growth f. Protectionism 9. Theory and Basis of Taxation a. Necessity Theory–The existence of government is a necessity, that it cannot continue without the means to pay its expenses. b. The Benefits Protection Theory –In exchange of for the protection that the State gives to its citizens, taxes must be correspondingly paid to it. (CIR v. Algue).
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iv. Passive Income - income in which the taxpayer merely
waits for the amount to come in, which includes, but not
limited to interest income, royalty income, dividend
income, prizes and winnings.
v. Gains from Dealings in Property – It includes all income
derived from the disposition of property whether real,
personal or mixed.
;or
d. General (part of gross income, subject to 5-32%)e. Compensation Incomef. Income from Businessg. Income from Exercise of Profession
4. Compensation Income
a. All remuneration for services performed by an employee for hisemployer, including the cash value of all remuneration paid in
any medium other than cash. It includes all remuneration for
services rendered by an employee for his employer unless
specifically excluded under the NIRC.
b. Forms of Compensation
i. Money
ii. in kind
c. Requisites for taxability
i. There must be an employer-employee relationship
ii. There must be payment of compensation or wages
d. Basis/Test
i. Existence of Employer-Employee relationship
1. Indicia or indication of or characteristic of
Employer-Employee relationship:
a. SEPADICO
5. FRINGE BENEFIT
a. Fringe benefit means any good, service or other benefitfurnished or granted in cash or in kind by an employer to anindividual employee, except rank and file employees, such but not limited to, the following:
i. Housing;
ii. Expense account;iii. Vehicle of any kind;iv. Household personnel, such as maid, driver and othev. Interest on loan at less than market rate to the exten
the difference between the market rate and actual ragranted;
vi. Membership fees, dues and other expenses borne bemployer for the employee in social and athletic clubother similar organizations;
vii. Expenses for foreign travel;viii. Holiday and vacation expenses;ix. Educational assistance to the employee or his
dependents; andx. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the lallows.
b. Fringe Benefits Tax is a final withholding tax imposed o
grossed-up monetary value of fringe benefits furnished, gr
or paid by the employer to an employee. The Fringe bene
shall be treated as final tax of income of the employees.
i. It is determined by:
1. Valuation of the benefits granted
2. Determination of the proportion or percenta
the benefit which is subject to the FBT.
c. Benefits not subject to FBT
i. Fringe benefits which are authorized and exempted
Not over P100,000………………………......… 5% On any amount in excess of P100,000……. 10% (d) Intercorporate Dividends. - Dividends received by a resident foreigncorporation from a domestic corporation liable to tax under this Code shall notbe subject to tax under this Title.
c. Non-Resident Foreign Corporationi. Special Non-Resident Foreign Corporation
1. GR: - Under Section 28(B), a foreign corporationnot engaged in trade or business in the Philippinesshall pay a tax equal to thirty-five percent (35%) ofthe gross income received during each taxableyear from all sources within the Philippines, suchas interests, dividends, rents, royalties, salaries,premiums (except reinsurance premiums),annuities, emoluments or other fixed ordeterminable annual, periodic or casual gains,profits and income, and capital gains, exceptcapital gains subject to tax
a. Non-Resident Lessor of CinematographicFilm
i. A cinematographic film owner,lessor, or distributor shall pay a taxof twenty-five percent (25%) of itsgross income from all sources withinthe Philippines.
b. Non-Resident Lessor of vessels charteredby Philippine Nationals
i. A nonresident owner or lessor ofvessels shall be subject to a tax offour and one-half percent (4 1/2%) ofgross rentals, lease or charter feesfrom leases or charters to Filipinocitizens or corporations, as approvedby the Maritime Industry Authority.
c. Non-Resident Lessor of Aircraft, Machineryand Equipment
i. Rentals, charters and other derived by a nonresident lessaircraft, machineries and equipment shall be subject to of seven and one-half perce1/2%) of gross rentals or fees.
3. Minimum Corporate Income Tax (MCIT)a. A tax at the rate of 2% based on gross income impos
domestic and resident foreign corporations not covered special income tax system, beginning the 4 th taxable yewhich such corporation commenced its business operatiois imposed whenever such corporation has (a) zero or negnet taxable income; or (b) the amount of minimum corpincome tax is greater than the normal income tax due fromcorporation.
b. Rationale of MCITi. This is designed to prevent corporations from esc
being taxed by including frivolous expenses in statement of income (Ex. Over statement of deprecexpense)
c. Nature of MCITd. MCIT is not an additional tax to the regular or normal income. Coverage of MCIT
i. Domestic Corp, Resident Foreign Corporation.f. When does a corporation start to be covered by the MCIT?
i. (When to begin or apply MCIT?) Beginning on thtaxable year immediately following the year in whichcorporation commenced its business operation
1. (Commencement of Business Operation: Issuance of BIR Certificate of Registration)
g. Suspension of the payment of MCITi. The Secretary of Finance is hereby authorize
suspend the imposition of the minimum corporate intax on any corporation which suffers losses on accoprolonged labor dispute, or because of force majeubecause of legitimate business reverses.
ii. The Secretary of Finance is hereby authorized topromulgate, upon recommendation of the Commissioner,the necessary rules and regulation that shall define theterms and conditions under which he may suspend theimposition of the minimum corporate income tax in ameritorious case.
h. How is MCIT computed?i. MCIT Rate = 2% of gross income (GI)
1. Example: for 2006 calendar yearGI = P500,000 2% of GI =
P10,000TI = P27,000 35% of TI =
P9,4502006 IT = P10,000
i. When is MCIT reported and paid? j. Can the company claim the MCIT it paid as a deduction from
gross income?i. Yes
1. If regular income tax (35% of taxable income) isgreater than MCIT (2% of GI) Pay Regular IncomeTax.
a. You can deduct MCIT Carry Forward only ifRegular Income Tax is greater than MCITY
2. If regular income tax is less than MCIT.k. What is the carry forward provision under the MCIT?
i. Under Section (E) (2) of the NIRC, Any excess of theminimum corporate income tax over the normal incometax shall be carried forward and credited against thenormal income tax payable for the next three yearsimmediately succeeding the taxable year in which the
minimum corporate income tax was paid. (3 succeedingyears).
4. Improperly Accumulated Earnings Tax (IAET)a. The term 'improperly accumulated taxable income' means
taxable income' adjusted by:
i. Income exempt from tax;ii. Income excluded from gross income;iii. Income subject to final tax; andiv. The amount of net operating loss carry-over deducte
And reduced by the sum of:(1) Dividends actually or constructively paid; and(2) Income tax paid for the taxable year.
Provided, however , That for corporations using the calendar
basis, the accumulated earnings under tax shall not appimproperly accumulated income as of December 31, 1997. In theof corporations adopting the fiscal year accounting periodimproperly accumulated income not subject to this tax, shareckoned, as of the end of the month comprising the twelve (12)-mperiod of fiscal year 1997-1998.
b. Rationalei. If the earnings and profits were distributed
shareholders would then be liable for income tax; distribution were not made to them, they would inctax in respect to the undistributed earnings and pro
the corporation. It is a tax in the nature of a penalty corporation for the improper accumulation of its earand a deterrent to the avoidance of tax shareholders who are supposed to pay dividends.
c. What is the touchstone of liability?i. Section 29 of the NIRC provides that, There is im
for each taxable year, in addition to other taxes, equal to 10% of the improperly accumulated taincome of domestic and closely-held corporations
1. Only domestic and closely-held corporationliable for IAET.
d. Determination of reasonable needs of the businessi. The reasonable needs of the business is determined
1. Immediacy Testa. It states that the “reasonable needs
the business; and 2) reasonably anticipatedneeds (Ex.Expansion)
2. How to prove the “reasonable needs of thebusiness” : The corporation should prove that thereis 1) an immediate need for the accumulation ofthe earnings and profits; or 2) a direct correlationof anticipated needs to such accumulation ofprofits.
e. What constitute accumulation of earnings for the reasonableneeds of the business?
i. The following constitute accumulation of earnings for thereasonable needs of the business:
1. Allowance for the increase in the accumulation ofearnings up to 100% of the paid-up capital of thecorporation as of Balance Sheet date, inclusive ofaccumulations taken from other years;
2. Earnings reserved for definite corporate expansionprojects or programs requiring considerable capitalexpenditure as approved by the Board of Directorsor equivalent body;
3. Earnings reserved for building, plants orequipment acquisition as approved by the Boardof Directors or equivalent body;
4. Earnings reserved for compliance with any loancovenant or pre-existing obligation establishedunder a legitimate business agreement;
5. Earnings required by law or applicable regulationsto be retained by the corporation or in respect ofwhich there is legal prohibition against itsdistribution;
6. In the case of subsidiaries of foreign corporationsin the Philippines, all undistributed earningsintended or reserved for investments within thePhilippines as can be proven by corporate recordsand/or relevant documentary evidence.
f. Coverage of IAET
i. The improperly accumulated earnings tax shall apevery corporation formed or availed for the purpoavoiding the income tax with respect to shareholdethe shareholders of any other corporation, by permearnings and profits to accumulate instead of divided or distributed. (E.g Holding Company)
1. Closely-held corporations are those:a. at least 50% in value of the outsta
capital stock; orb. at least 50% of the total combined
power of all classes of stock entitled tois owned directly or indirectly by or fomore than 20 individuals. Domcorporations not falling under the afodefinition are, therefore, publiclycorporations.
g. Corporations not subject to IAETi. The IAET shall not apply to the following corporation
1. Banks and other non-bank financial intermed2. Insurance companies
3. Publicly-held corporations4. Taxable partnerships;5. General professional partnerships6. Non- taxable joint ventures7. Enterprises that are registered:
a. With the Philippine Economic Authority (PEZA) under R.A. 7916
b. Pursuant to the Bases ConversionDevelopment Act of 1992 under R.A. 7
c. Under special economic zones declarlaw which enjoy payment of special taon their registered operations or activitlieu of other taxes, national or local.
h. Prima facie instances of accumulation of profits beyonreasonable needs of a business and indicative of purpoavoid income tax upon shareholders.
i. Investment of substantial earnings and profits of thecorporation in unrelated business or in stock or securitiesof unrelated business;
ii. Investment in bonds and other long-term securities; andiii. Accumulation of earnings in excess of 100% of paid-up
capital, not otherwise intended for the reasonable needsof the business. The controlling intention of the taxpayeris that which is manifested at the time of accumulation. A
speculative and indefinite purpose will not suffice. Themere recognition of a future problem or the discussion ofpossible and alternative solutions is not sufficient.Definiteness of plan/s coupled with action/s takentowards its consummation is essential.
5. Partnerships Taxed as Corporationsa. Partnership
i. Partnership is a contract whereby two or more personsbind themselves to contribute money, property, orindustry to a common fund with the intention of dividingthe profits among themselves.
b. Taxable Partnership
i. An ordinary business partnership is considered as acorporation and is thus subject to tax as such. Partnersare considered stockholders and, therefore, profitsdistributed to them by the partnership are considered asdividends.
ii. GR: Partnerships, no matter how created or organized,including joint ventures or consortiums, are taxable.
1. The term "corporation" shall include partnerships,no matter how created or organized, joint-stockcompanies, joint accounts (cuentas enparticipacion), association, or insurancecompanies, but does not include generalprofessional partnerships and a joint venture orconsortium formed for the purpose of undertakingconstruction projects or engaging in petroleum,coal, geothermal and other energy operations
pursuant to an operating consortium agreeunder a service contract with the Governmen
c. Exempt Partnershipi. GPP
1. General professional partnerships are not tabut partners are taxed on their sharpartnership profits actually or constructivelyduring the year. (Not subject to income tax)
a. Taxable as an entity - ordinary corpincome tax.
b. For purposes of computing distributive share of the partners, thincome of the GPP shall be computthe same manner as a corporation.
d. Elements constitutive of taxable partnershipi. The essential elements of a partnership are: (
agreement to contribute money, property, or industrcommon fund; and (2) an intent to divide the pamong the contracting parties.
e. Example of unregistered partnership taxable as corporation
i. Gatchalian v. Collector, 102 Phil 1401. Plaintiffs contributed money to buy a sweeps
ticket which subsequently won. The SupCourt held that they formed an unregispartnership. Plaintiffs formed a partnershipcivil nature since each of them contributed mto a common fund for the sole purpose of divequally the prize which they win.
f. Rules on Co-Ownershipi. If the activities of co-owners are limited to
preservation of the property and the collection oincome therefrom, in which case, each co-owner is individually on his distributive share in the income co-ownership.
ii. If the co-owners invest the income in business for they would be constituting themselves into a partnetaxable as a corporation.
g. General Professional Partnership v. General/OrdinaryPartnership
GPP GPGeneral professional partnerships arepartnerships formed by persons forthe sole purpose of exercising theircommon profession, no part of theincome of which is derived from
engaging in any trade or business.[Section 22(B), NIRC]
All other partnerships no matter howcreatedor organized.
Persons engaging in business aspartners in a general professionalpartnership shall be liable for incometax only in their separate andindividual capacities. [Section 26,NIRC]
Taxable as an entity - ordinarycorporateincome tax.
Each partner shall report as grossincome his distributive share, actuallyor constructively received, in the netincome of the partnership. [Section26, NIRC]
Partners are considered stockholdersand, therefore, profits distributed tothem by the partnership areconsidered as dividends.
h. Joint Venturei. A joint venture is created when two corporations, while
registered and operating separately, were placed underone sole management which operated the businessaffairs of said companies as though they constituted asingle entity thereby obtaining substantial economy andprofits in the operation.
ii. A joint venture is not taxed as a corporation, just like ageneral professional partnership.1. Joint ventures are not taxable as corporations
when its purpose if a) undertaking constructionprojects; b) engaged in petroleum, coal and other
energy operation under a service contract wigovernment.
i. Other Corporate Tax Ratesi. Rates on sale of shares of stocks
1. Capital gains from sale of shares of stoctraded in the stock exchange (Whether RC, RA, NRAETB, NRANETB, DC, RFC, NRFC)
a. Not over P100,000 – 5% of the net c
gains realized during the taxable yearb. Over P100,000 – 10%
2. Gross Income Taxa. The term 'gross income' derived
business shall be equivalent to gross less sales returns, discounts allowances and cost of goods sold.
b. An income tax of thirty-five percent (35hereby imposed upon the taxable inderived during each taxable year frosources within and without the Philipby every corporation, as defined in S
22(B) of this Code and taxable undeTitle as a corporation, organized existing under the laws of the PhilipProvided , That effective January 1, the rate of income tax shall be thirtpercent (34%); effective January 1, the rate shall be thirty-three percent (and effective January 1, 2000 thereafter, the rate shall be thirpercent (32%).
c. In the case of corporations adoptinfiscal-year accounting period, the ta
income shall be computed without regthe specific date when specific spurchases and other transactions oTheir income and expenses for the year shall be deemed to have been e
3. Branch Profit Remittance Taxa. Shall be imposed on any profit remitted by
a branch to its head office.b. Branch will be subjected to ordinary
corporate tax as a resident foreigncorporation (35%). Afterwards, the profits
for remittance shall then be subject to 15%BPRT.
6. Tax-Sparing Credit Rulea. Tax reduced by the Philippines should be fully applied or
credited to the tax on dividend income received by the non-resident foreign corporation imposed by the country of itsdomicile. This serves as an incentive by reducing their taxliability in the Philippines and in their residence countries.
i. Ex. Domestic corporation paid cash dividend to non-resident foreign corporation (NRFC) organized in Brazil.This shall form part of NRFC‟s income therefore taxablealso in Brazil. The dividend received shall only be taxed
at 15% in the Phils (instead of 35%) if Brazil willreduce/credit at least 20% of the tax imposed in the Phils.from its tax imposed in Brazil. [See Section 28(5)(b)]
ii. If Brazil will credit/reduce less than 20% or will not creditany amount, then the Phils will tax the dividend at 35%(ordinary income tax).
iii. Phils. cannot give more than 15% tax credit because thelaw only allows such.
7. Tax-Exempt Corporations under the NIRCa. General Professional Partnershipsb. Joint ventures under a service contract with the governmentc. Government owned or controlled corporations
i. Government Service Insurance System (GSIS)ii. Social Security System (SSS)iii. Philippine Health Insurance Corporation (PHIC)iv. Philippine Charity Sweepstakes Office (PCSO)
v. Philippine Amusement and Gaming Corpo(PAGCOR)
d. Under Section 30 of the NIRC:i. Exemptions from Tax on Corporations.
1. Labor, agricultural or horticultural organizatioorganized principally for profit;
2. Mutual savings bank not having a capital represented by shares, and cooperative
without capital stock organized and operatemutual purposes and without profit;
3. A beneficiary society, order or associoperating fort the exclusive benefit of the memsuch as a fraternal organization operating the lodge system, or mutual aid associationnonstock corporation organized by emploproviding for the payment of life, sickaccident, or other benefits exclusively tomembers of such society, order, or associatinonstock corporation or their dependents;
4. Cemetery company owned and ope
exclusively for the benefit of its members;5. Nonstock corporation or association orga
and operated exclusively for religious, charscientific, athletic, or cultural purposes, or forehabilitation of veterans, no part of its net inor asset shall belong to or inures to the benany member, organizer, officer or any spperson;
6. Business league chamber of commerce, or of trade, not organized for profit and no part net income of which inures to the benefit oprivate stock-holder, or individual;
7. Civic league or organization not organizeprofit but operated exclusively for the promotsocial welfare;
8. A nonstock and nonprofit educational instituti9. Government educational institution;
10. Farmers' or other mutual typhoon or fire insurancecompany, mutual ditch or irrigation company,mutual or cooperative telephone company, or likeorganization of a purely local character, theincome of which consists solely of assessments,dues, and fees collected from members for thesole purpose of meeting its expenses; and
11. Farmers', fruit growers', or like association
organized and operated as a sales agent for thepurpose of marketing the products of its membersand turning back to them the proceeds of sales,less the necessary selling expenses on the basisof the quantity of produce finished by them;
12. Notwithstanding the provisions in the precedingparagraphs, the income of whatever kind andcharacter of the foregoing organizations from anyof their properties, real or personal, or from any oftheir activities conducted for profit regardless ofthe disposition made of such income, shall besubject to tax imposed under this Code.
ALLOWABLE DEDUCTIONS FROM GROSS INCOME
1. Basic Principles
a. Deductions from gross income refer to items or amounts
authorized by law to be subtracted from pertinent items of gross
income to arrive at the taxable income.
b. The following are the conditions in order the taxpayer can claim
deductions:
i. Point to some specific provisions of the statute
authorizing the deduction
ii. Able to prove that he is entitled to the deductionauthorized or allowed;
iii. Any amount paid or payable which is otherwise
deductible from, or taken into account in computing gross
income or for which depreciation/amortization ma
allowed, shall be allowed as deduction only if it is s
that the tax required to be deducted and wit
therefrom has been paid to the BIR; (Sec. 34, NIRC
iv. Deductions for income tax purposes partake of the n
of tax exemptions hence, if tax exemptions are
strictly construed, then it follows that deductions
also be strictly construed.c. The following are the rules in claiming deductions:
i. Deductions must be paid or incurred in connection
the taxpayer‟s trade, business or profession
ii. Deductions must be supported by adequate recei
invoices (except standard deduction)
d. The following are not allowed to claim deductions:
i. NRA-ETB and NRFC since their tax base is
income.
ii. A RC, NRC, and RA whose income is p
compensation income are also not entitled to deduction except to premium payments on health a
hospitalization insurance.
2. The COHAN Rule Principle
a. Under this principle, taxpayers may use estimates when
can show that there is some factual foundation on which to
a reasonable approximation of the expense, they can prov
they had made a deductible expenditure but just cannot
how much that expenditure was. (Cohan v. Commissioner
(2d) 540)
i. It is the use of estimates or approximations of the am
of cash and other assets where the taxpayer
adequate records.
ii. If there is showing that expenses have been incurre
50% in value of outstanding stock is owned bysuch individual (except in case of distributionsin liquidation).
3. Between 2 corps. more than 50% in value ofoutstanding stock owned by same individual, ifeither one is a personal holding co. or a foreignholding co. during the taxable yr. preceding thedate of sale/exchange.
4. Between grantor & fiduciary of any trust.5. Between Fiduciary of a trust & the fiduciary of
another if same person is a grantor to eachtrust.
6. Between Fiduciary & a beneficiary of a trust.7. Indebtedness is incurred by a service
contractor to finance petroleum corp.8. Interest on preferred stock which in reality is
dividend.9. Interest on unpaid salaries and bonuses.10. Interest calculated for cost keeping on account
of capital or surplus invested in business whichdoes not represent charges arising underinterest-bearing obligation.
11. Interest paid when there is no stipulat ion forthe payment thereof
8. TAXESa. Nature and Scope
i. The word „taxes‟ means taxes proper and nodeduction should be allowed for amounts representing
interest, surcharge, or penalties incident to delinqu(Sec. 80, RR-2)
ii. The term “taxes” refers to national and local taxesmeans TAXES PROPER, hence, no deductionallowed for:
1. Interests2. Surcharges3. Penalties or fines incident to delinquency (se
Rev. Reg. 2)b. Requisites for deductibility:
i. It must be paid or incurred within the taxable year.ii. It must be paid or incurred in connection wi
taxpayer‟s trade, profession or business. iii. It must be imposed directly on the taxpayer.iv. It must not be specifically excluded by law
being deducted from the taxpayer‟s gross income.
c. Tax Deduction v. Tax Crediti. In Tax Deduction, the tax is deducted from gross in
while in Tax Credit, the tax is deducted from PhilIncome Tax.
ii. In Tax Deduction, only foreign income taxes maclaimed as credits; In Tax Credit, all taxes are allowbe deducted with the exception of the taxes expexcluded.
9. LOSSESa. Losses actually sustained during the taxable year an
compensated for by insurance or other forms of indemnity.b. Requisites for deductibility:
i. Loss belongs to the Taxpayer;ii. Actually sustained and charged off during the ta
year;iii. Evidenced by a closed and completed transaction;iv. Not compensated by Insurance or other form
v. Not claimed as a deduction for Estate tax purposes incase of individual taxpayers; and
vi. If it is Casualty loss, it is evidenced by a declaration ofloss file within 45 days with the BIR.
c. Kinds of Lossesi. Ordinary Losses
1. Incurred in trade or business, or practice ofprofession;
2. Of property connected with trade, business orprofession, if the loss arises from storms,shipwreck, fires or other casualties, or fromrobbery, theft or embezzlement. (Casualty loss)
a. Total Destruction – the basis of the loss isthe net book value immediately precedingthe casualty to be reduced by the amount ofinsurance or compensation received;
b. Partial Destruction – the replacement costto restore the property to its normaloperating condition, but in no case shall thedeductible loss be more than the net book
value of the property as a whole,immediately before casualty. The excessover the net book value immediately beforethe casualty should be capitalized, subjectto depreciation over the remaining usefullife of the property.
ii. Net Operating Loss Carry-Over1. It is the excess of allowable deductions over gross
income of business for any taxable year which hadnot been previously offset as deduction from grossincome.
2. It shall be carried over as deduction from gross
income for the next 3 consecutive years followingthe year of such loss. Provided that:
a. The taxpayer was not exempt from incometax in the year of such net operating loss;and
b. There has been no substantial chanthe ownership of the business or enter
iii. Capital Losses – losses from sale or exchange of cassets. Deductible to the extent of capital gains only
d. Special Kinds of Lossesi. Wagering losses – deductible only to the extent of g
winnings deemed to only apply to individuals (Sec.[6], NIRC)
ii. Losses on wash sales of stocks – not deductible these are considered as artificial lossiii. Abandonment losses in petroleum operation
accumulated exploration and development expendpertaining thereto shall be allowed as a deduction
iv. Abandonment losses in producing well – the unamocost thereof, as well as the undepreciated coequipment directly used therein, shall be allowededuction in the year the well, equipment or faciabandoned
v. Losses due to voluntary removal of building incidrenewal or replacements – deductible expense
gross incomevi. Losses from sales or exchanges of property be
related taxpayers – losses are not deductible but are taxable.
vii. Losses of farmers – If incurred in the operation ofbusiness, it is deductible
viii. Loss in shrinkage in value of stock – If the stock corporation becomes worthless (not mere mfluctuations,) the cost or other basis may be deductthe owner in the taxable year in which the stock becworthless.
e. Non-deductible losses
i. Loss:1. In dealings between related taxpayers.2. From wash sales of stocks.3. Due to removal of buildings purchased
10. BAD DEBTSa. Bad debts refer to debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amount due to the taxpayerby others, arising from money lent or from uncollectible amountsof income from goods sold or services rendered. (Sec. 2, RR 5-99.
b. These are debts due to the taxpayer actually ascertained to beworthless and charged off in the books of the taxpayer within
the taxable year except those:i. Not connected with trade, business or profession; andii. Between related taxpayers
c. Requisites for deductibility:i. The debts are Uncollectible despite diligent effort exerted
by the taxpayer;ii. Existing indebtedness Subsisting due to the taxpayer
which must be valid and legally demandable;iii. Connected with the taxpayer‟s Trade, business or
practice of profession;iv. Actually Charged off in the books of accounts of the
taxpayer as of the end of the taxable year;
v. Actually Ascertained to be worthless and uncollectible asof the end of the taxable year; and
vi. Must not be sustained in a transaction entered intobetween Related parties.
d. Measure of Bad Debts deductiblei. The debtor has no property nor visible income;ii. The debtor has been adjudged bankrupt or insolvent;iii. There are numerous debtors with small amounts of debts
and further action on the accounts would entail expensesexceeding the amounts sought to be collected;
iv. The debt can no longer be collected even in the future;and
v. Collateral shares have become worthless.11. DEPRECIATION
a. Depreciation is the gradual diminution in the useful (service)value of tangible property used in trade, profession or businessresulting from exhaustion, wear and tear and obsolescence.
b. Requisites for deductibility:i. Reasonable;ii. Property Used in trade, business, or exercise
profession;iii. The allowance must be Charged off within the ta
year; andiv. Schedule on the allowance must be attached t
return.
12. DEPLETION OF OIL, GAS, WELLS AND MINESa. It is the exhaustion of natural resources like mines and ogas wells as a result of production or severance from mines or wells.
b. Theory and purpose of depletion allowancec. Who are entitled?
i. Annual depletion deductions are allowed only to mentities which own an economic interest in mdeposits. (Sec. 3, RR 5-76)
13. CHARITABLE AND OTHER CONTRIBUTIONSa. Requisites for deductibility
i. The contribution or gift must be Actually paid;
ii. It must be paid Within the taxable year;iii. It must be given to the organization Specified by lawiv. It must be Evidenced by adequate receipts or rec
andv. The amount of charitable contribution of property
than money shall be based on the Acquisition cost oproperty.
b. Kindsi. Ordinary or those which are subject to limitations
the amount deductible from gross income.ii. Special or those which are deductible in full from
income.
c. Donations/Contributions deductible in fulli. Donations to the Philippine government or to any of
political subdivisions according to a national priority determined by NEDA.
XAVIER’S POISON REV
ii Donations to foreign institutions or international i Revenue Expenditure it will be wholly deducte
ii. Donations to foreign institutions or internationalorganizations which are fully deductible in pursuance ofor in compliance with agreements, treaties orcommitments entered into by the Philippines or inpursuance of special laws.
iii. Donation to accredited non-governmental organization.iv. Donations of prizes and awards to Athletes (Sec. 1, RA
7549)
d. Contributions subject to limitationi. Donations that are not in accordance with the priority
plan.ii. Donations whose conditions are not complied with.iii. Donations to the Government of the Philippines or
political subdivision exclusive for public purposes.iv. Donations to domestic corporations organized
5. Religious6. Rehabilitation of veteran7. Social Welfare
e. Deductible under special laws (in full)i. Donations of prizes and awards to Athletes (Sec. 1, RA
7549) 14. RESEARCH AND DEVELOPMENT EXPENDITURES
a. A taxpayer may treat research or development expenditureswhich are paid or incurred by him during the taxable year inconnection with his trade, business or profession as ordinaryand necessary expenses which are not chargeable to capitalaccount. The expenditures so treated shall be allowed asdeduction during the taxable year when paid or incurred.
b. Taxpayer may either treat it as:
i. Revenue Expenditure – it will be wholly deducteordinary and necessary expense in the year it is pincurred
ii. Deferred Expense – allowed as deduction rdistributed over a period of at least 60 months stfrom the month benefits are received from expenditure. (Sec. 34 I [1 and 2], NIRC)
c. Requisites for taxability:i. Paid or incurred during the taxable yearii. Ordinary and necessary expenses in connection
trade business or professioniii. Not chargeable to capital account
d. Limitations on Deductioni. Not applicable to, EXCLUSIONS:
1. Any expenditure for the acquisitionimprovement of land, or for the important of to be used in connection w/ R&D of a chasubject to depreciation & depletion
2. Any expenditure paid/ incurred for the purpo
ascertaining the existence, location, extenquality of any deposit of ore or other miincluding oil or gas (exploration exp.)
15. PENSION TRUST CONTRIBUTIONa. Pension Trust Contributions – a deduction applicable only
employer on account of its contribution to a private pensionfor the benefit of its employee. This deduction is purely busin character.
b. Requisites for deductibility:i. The employer must have established a pensio
retirement plan to provide for the payment of reasopensions to his employees;
ii. The pension plan is reasonable and actuarially souniii. It must be funded by the employer;iv. The amount contributed must be no longer subject
control and disposition of the employer;
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v The payment has not yet been allowed as a deduction; 2 Report income received from all other so
v. The payment has not yet been allowed as a deduction;and
vi. The deduction is apportioned in equal parts over a periodof 10 consecutive years beginning with the year in whichthe transfer of payment is made.
c. Treatment of Income from Pension Plan & Deductible paymentto Pension Trust
i. Summary rules on Retirement Benefits Plan/ Pension
Trust1. EXEMPT FROM INCOME TAX – employees‟ trustunder Sec. 60(B)
2. EXCLUSION FROM GROSS INCOME – amountreceived by the employee from the fund uponcompliance of certain conditions under Sec.32(B)(6)
3. DEDUCTION FROM GROSS INCOME – a. amounts contributed by the employer
during the taxable year into the pensionplan to cover the pension liability accruingduring the year – considered as ordinary
and necessary expenses under Sec.34(A)(1).b. 1/10 of the reasonable amount paid by the
employer to cover pension liabilityapplicable to the years prior to the taxableyear, or so paid to place the trust in a soundfinancial basis – deductible under Sec. 34(J).
d. Special Deduction allowed to Insurance Companiesi. Special deductions: net additions required by law to
reserve funds & the sums other than dividends paid w/inthe yr. on policy & annuity contracts; released reserve
treated as income for the yr. of release.ii. Mutual Insurance Companies
1. Shall not report as income premium depositsreturned to policyholder
2. Report income received from all other soplus such portion of premium deposits retainthe companies for purposes other than paymlosses & expenses & reinsurance reserves.
iii. Mutual Marine Insurance Companies 1. Include in gross income, gross premiums col
& received by them less amounts paireinsurance; include as deductions am
repaid to policyholders on account of prempreviously paid by them & interest paid upon amounts between the ascertainment & paythereof.
16. ITEMS NOT DEDUCTIBLEa. In computing net income, no deduction shall in any ca
allowed in respect to:i. Personal, living or family expenses – these are per
expenses and not related to the conduct of tradbusiness
ii. Any amount paid out for new buildings of for permimprovements, or betterments made to increas
value of any property or estate – these are cexpenditures added to the cost of the property anperiodic depreciation is the amount that is considerdeductible expense
1. Note: Shall not apply to intangible drillingdevelopment costs incurred in petrooperations which are deductible under Subse(G) (1) of Sec. 34 of the NIRC
iii. Any amount expended in restoring property or in mgood the exhaustion thereof for which an allowancehas been made
iv. Premiums paid on any life insurance policy coverin
life of any officer or employee, or of any pfinancially interested in any trade or business carriby the taxpayer, individual or corporate, whentaxpayer is directly or indirectly a beneficiary underpolicy (Sec. 36 [A], NIRC)
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v Losses from sales or exchanges of property between iii Distribution to the heirs during the taxable year of