TAXATION LAW
ALLOWABLE DEDUCTIONS DEDUCTIONS FROM GROSS INCOME DEDUCTIONS ² items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income CONCEPT AND NATURE The items or amounts allowed as deductions represent the expenses of the taxpayer, other than personal expenses and capital expenditures, in earning the income subject to tax as well as reasonable living expenses. The deductions partake of the nature of tax exemptions and are to be construed strictissimi juris against juris against the taxpayer.
INSTANCES WHEN PRESENTATION OF WITHHOLDING TAX DISPENSED WITH An amount claimed as deduction on which a tax is supposed to have been withheld under NIRC shall be allowed if in the course of the audit and/or investigation, the examiner discovers that: a.
b.
Reason: Lifeblood Theory REQUISITES ALLOWED
BEFORE DEDUCTIONS [SREWWA]
ARE c.
1.
2. 3. 4. 5. 6.
There must be a specific provision of law allowing the deductions, since deductions do not exist by implication. The requirements of deductibility must be met. There must be proof of entitlement to the deductions. The deductions must not have been waived (Sec. 76, Revenue Regulations No. 2) The withholding and payment of the tax required must be shown. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction ON LY if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with this Section, Sections 58 and 81 of this Code (Sec. 34 [k]).
THE COHAN RULE PRINCIPLE: If there is showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that may be allowed in computing the taxpayer·s taxable income bearing heavily against the taxpayer whose inexactitude of his own making. A disallowance of 50% of the taxpayer·s claimed deduction is valid (Rev. Memo Circular No. 23-2000).
No withholding of creditable or final tax was made but the payee reported the income and withholding agent/taxpayer pays during the original audit and investigation the surcharges, interest and penalties incident to the failure to withhold the tax. No withholding of creditable or final tax was made and the recipient-payee failed to report the income on due date thereof, but the withholding agent pays during the original audit and investigation the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to his failure to withhold. The withholding agent erroneously underwithheld the tax but pays during the original audit and investigation the difference in the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to such error.
TAXPAYER HAS BURDEN OF PROVING ENTITLEMENT Consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the State. DEDUCTIONS Amounts deducted from gross income to arrive at net income
DEDUCTIONS Both individual and corporate taxpayers may claim A deduction is a subtraction
Not receipts but are generally expenditures which are permitted to be subtracted from income to determine
EXCLUSIONS Amounts or items exempt from tax by virtue of the Tax Code or special law PERSONAL EXEMPTIONS Only individual is entitled Immunity or privilege, a freedom from a charge or burden to which others are subjected Generally receipts which are excluded from taxable income
1
TAXATION LAW
the amount subject to tax Reductions of wealth which help earn the income subject to tax
Theoretical personal, family and living expenses of an individual
WHO MAY AVAIL OF DEDUCTIONS I.
II.
Individuals 1. Citizen 2. Resident alien 3. NRA doing business in the Philippines 4. Member of GPP Corporations Domestic Corp. 1. 2. RF Corp. 3. Proprietary educational institutions and hospitals 4. GOCCs
WHO CANNOT AVAIL OF DEDUCTIONS FROM GROSS INCOME Citizens and RAs whose income is purely 1. compensation income (except for premium payments on health and/or hospitalization insurance) 2. NRANETB in the Phil 3. NRFC ALLOWABLE DEDUCTIONS FROM GROSS INCOME BASED ON CLASSES OF TAXPAYER Individuals with gross income from employee1. employer relationship ON LY [gross income only] 2.
Individuals with gross income from business or practice of profession; Optional Standard deduction OR itemized deductions OSD ² 10% of the gross income. May be availed only by individuals (except NRAs) who are not purely compensation income earners. This is in lieu of the itemized deductions. Premium payments on health and/or hospital insurance (if requisites are complied with) Personal and additional exemption
3.
Corporations Itemized deductions
4.
Estates and Trusts Section 62 of the NIRC
SUMMARY OF DEDUCTIONS ALLOWED DIFFERENT KINDS OF TAXPAYERS On compensation income of RCs, derived from sources within or without the Phil.
On compensation of NRCs and RAs derived from sources within the Phil.
RCs, on incomes (other than compensation income) derived from sources within and without the Phil, subject to the scheduler tax on income RAs from their income (other than compensation income) derived from sources within the Phil. NRCs and NRAs engaged in trade, business or profession in the Phil from their income derived from sources within the Phil. Estates or trusts
Domestic corporations on their income derived from sources within or without the Phil RFCs on their income derived from sources within the Phil.
TO
Deductions for premium payments on health and/or hospitalization insurance Personal and additional exemptions Deductions for premium payments on health and/or hospitalization insurance Personal and additional exemptions OSD or Itemized deductions, and Personal and additional exemptions
OSD or Itemized deductions, and Personal and additional exemptions Itemized deductions, and Personal and additional exemptions and in the case of NRAs only subject to reciprocity Deductions allowed similar to individuals except with respect to the exemption allowed which is not categorized as personal and additional exemptions, but referred to only as exemption in the amount of P20,000 Itemized deductions only
Itemized deductions only 2
TAXATION LAW
NRA-NETB in the Phil from their income derived from sources within the Phil. (whether compensation or other income) NRFCs on their income derived from sources within the Phil
Subject to tax on their gross income, hence no deductions or exemptions allowed
No deductions allowed as they are taxed on gross income
DEDUCTIONS ALLOWED UNDER THE NIRC 1.
Itemized Deductions [Sec. 34 (a) to (k)] a. Business expenses b. Interest c. Taxes d. Losses e. Bad debts f. Depreciation g. Depletion h. Charitable and other contributions i. Research and development expenditure j. Pension trust contribution
ORDINARY EXPENSES ² expenses which are common to incur in the trade or business of the taxpayer as distinguished from capital expenditures Usually incurred during taxable year and benefits such taxable year; need not be recurring C apital expenditure ² incurred to improve assets and benefits for more than one taxable year NECESSARY EXPENSES ² expenses which are appropriate and helpful in the development of the taxpayer·s business. Intended to realize a profit or to minimize a loss 2.
3. 2.
Optional Standard Deduction [Sec. 34 (l)]
3.
Personal and additional exemptions [Sec. 35]
4.
Extraordinary deductions a. Those allowed to insurance companies (Sec. 37) b. Deductions allowed to estates and trusts availing of itemized deductions of income currently distributed to beneficiaries (Sec. 61) c. Losses from wash sales of stocks or securities (Sec. 38) d. Certain capital losses but only f rom capital gains (Sec. 39)
A. BUSINESS EXPENSES [SEC. 34 (A)]
All ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession.
Requisites For D eductibility [OISRPNP] 1.
The expense must be ordinary and necessary
Depends upon particular facts: type of business, intention of the taxpayer, time, place and prevailing circumstances
The expenses must be incurred in trade or business carried on by the taxpayer The expenses must be substantiated by proof Establish proximate relation (logical link or nexus) between the expense and the taxpayer·s business Receipts are the best proof Even if no records/receipts are available, the oral testimony of a CPA, if not contradicted by the government, is sufficient Receipts/adequate records; amount of expense; date and place of expense; purpose of expense; professional or business relationship of expense; must support each claimed business or professional expense
SUBSTANTIATION RULE [Sec. 34 (1B)] Before business or professional expenses are allowed as deductions from gross income, the taxpayer shall substantiate the expense being deducted with sufficient evidence, such as official receipts or other adequate records by showing: a. b.
The amount of the expense being deducted; and The direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer 3
TAXATION LAW
4.
The expenses must be reasonable
5.
Paid or incurred during the taxable year 5.1. Cash Basis M ethod ² deducts expenses in the year in which they are paid 5.2. Accrual Basis M ethod ² deducts expenses when the taxpayer becomes liable for them, whether or not they are paid in the same year
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year. All-events test requires the liability be fixed, and the amount of such liability be determined with reasonable accuracy (something less than an exact or complete accurate amount).
6.
Expenses must not be against public policy, public moral or law
7.
If subject to withholding tax, proof of payment to BIR must be shown Professional expenses ² 10% Rent expense ² 10%
Factors/tests which det ermine whether compensation paid for services rendered is deductible or not a.
Any amount paid in the form of compensation which does not partake of the purchase price of services is not deductible
b.
Bonuses are deductible under the following conditions: Paid in good faith as additional compensation for services rendered Reasonable amount. To hold otherwise would lead to tax evasion. Not to exceed reasonable compensation when added to stipulated salaries. Suggested T ests: (Consider the date when the contract for services was made, not at the date when the contract is questioned) Good faith Character of business Salary policy of the corporation Type and extent of services Employee·s qualification and contribution General economic conditions
KINDS OF BUSINESS EXPENSES ² A reasonable allowance for: [STR_EAR]
c.
If no services rendered, not deductible as reasonable and necessary expenses
wages and other forms of Salaries, compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee
d.
It is immaterial whether bonuses are paid in cash or in kind or partly in cash and partly in kind
e.
Other forms of compensation: Housing and meals Courtesy discounts Entertainment and gifts to company officers during Christmas and major anniversary, sports tournament and company picnics Legitimate expenses (salaries and miscellaneous expenses) of an illegitimate business are deductible based on the theory that the income tax is not a tax on gross income even if such income is earned from an illegal business
2.
Travel expenses
1.
What are included in compensation for services which are allowed as deductions from gross income? a. b. c. d. e.
f.
g.
Wages,
salaries, etc. Bonuses in good faith Commissions, professional fees, vacationleave pay, retirement pay Management expenses Premiums and compensation for injuries if not compensated for by insurance or otherwise Contribution to pension trust created for the benefit of the employees, including contribution under SSS Act Other forms of compensation for services actually rendered
Include transportation expenses and meals and lodging The excess over the cost of a business plane ticket or its equivalent, whether paid 4
TAXATION LAW
3.
Rentals and/or other payments
4.
directly by the employer to the airline company or reimbursed to the employee shall not be deductible by the employer from its taxable income Allowances which are pre-computed by the employer on a daily basis, or reimbursement for cost of meals and lodging enroute to one·s foreign destination in pursuit of employer·s trade or business and during the duration of the stay thereat To the extent that they do not exceed US$150.00 per day for trips to the US, AUS, Canada, Europe, ME and Japan, and US$100.00 for other places, shall not be considered taxable compensation to the employee. Any excess shall not be deductible to the employer even if substantiated Note: Maybe taxable as a fringe benefit under Sec. 33
at
recreation
Subject to the rule of substantiation Dues paid to social, athletic, or sporting club or organization per officer; to professional or business organization
OTHER BUSINESS EXPENSES 1.
2.
Advertising and promotional expenses Must be substantiated All payments for the purchase of promotional give-aways, contest prizes or similar material must be properly receipted All payments for services such as radio and TV time, print ads, advertising expertise must be subjected to withholding tax Cost of mat erial and suppli es Deductible only to the amount consumed or used in operation
3.
Taxpayer purchases materials but has no record of consumption ² deductible provided the net income is clearly reflected by this method.
Repairs
Rules on deductibility a. Incidental or ordinary repairs ² keeps the asset in its ordinary working condition (does not add material value to the property or prolong its life as distinguished from extra-ordinary repairs) b. Extraordinary repairs ² not deductible ² they are capital expenditures 4.
Representation expenses Note: Maybe taxable as a fringe benefit under Sec. 33 Must be supported by official receipts
BRIBES, KICKBACKS AND PAYMENTS [Sec. 34 (A) (1c)]
Business property ² at least P500 ² 5% Non-business/residential property ² least P10,000 ² 5%
Entertainment, amusement and expenses during the taxable year
actually
Methods utilized to det ermine materials used: a. Actual consumption method (inventory method) b. Direct purchase method
OTHER
SIMILAR
Any payment made, directly or indirectly, to ² a. b. c. d. e.
Official/employee of the national govt Official/employee of the LGU Official/employee of a GOCC Official/employee/representative of a foreign govt Private corporation, GPP, or similar entity
EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL INSTITUTIONS ² A PIS, referred to under Sec. 27(B), may at its option elect either: a.
b.
To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities, or To deduct allowance for depreciation thereof under Sec. 34 (F)
B. INTEREST [SEC. 34 (B)] Amount which one has contracted to pay for the use of borrowed money or amount of compensation paid for the use of money or forbearance from such use. 5
TAXATION LAW
Requisites For D eductibility [IITSP] 1.
There must be an indebtedness
What are included in the term ¶indebtedness· interest of which is deductible? Gifts when proven to be bonafide loans Taxes Obligations of joint obligor Discount on notes issued to bank for loan 2.
Incurred in connection with taxpayer·s trade or business 3. Indebtedness must be that of the taxpayer 4. The interest must have been stipulated in writing in consonance with Art. 1956 NCC which provides that no interest shall be due unless it has been expressly stipulated in writing 5. Paid or accrued within the taxable year Cash basis ² deductible in the year it is actually paid Accrual basis ² deductible in the year it is accrued even if not actually paid Exceptions: If within the taxable year an individual 1. taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise:
That such interest shall be allowed as a deduction in the year the indebtedness is paid: P rovided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year P rovided,
2. If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. 36(B) I nterest
between related taxpayers:
2.1. M embers of a family ² brothers and sisters (full or half), spouse, ancestors and lineal descendants 2.2. I ndividual and corporation ² individual owns directly or indirectly more than 50% of the outstanding stock
2.3. B etween corporations ² more than 50% of the outstanding stock both owned directly or indirectly by the same individual 2.4. G rantor and fiduciary (trustee) of any trust 2.5. F iduciary and beneficiary or such trust 3. If the indebtedness is incurred to finance petroleum exploration Deductible Interest Expenses Interest on taxes. 1. Reason: Taxes for this purpose are indebtedness. Fines, penalties and surcharges on taxes are NOT deductible 2. Interest paid by corporation on scrip dividends 3. Interest on deposits paid by authorized bank of the Central Bank 4. Interest paid by legal or equitable owner on mortgage of real property
Non-deductible Interest Expenses Interest on 1. preferred stock which is considered interest on capital 2. Interest on undrawn salaries and bonuses 3. Interest on capital for cost keeping 4. Interest paid where parties provide no stipulation to pay interest in writing
Theoretical interest ² not deductible as it is merely computed or calculated. It does not arise from interest bearing obligation. Optional treatment of interest expense on capital expenditure ² At the option of the taxpayer, interest expense on a capital expenditure incurred to acquire property used in TBEP may be allowed as: Deduction ² in full in the year when 1. incurred, the provisions of Sec. 36 A (2) and (3) to the contrary notwithstanding; or treated as a 2. Capital Expenditure ² for which the taxpayer may claim only as a deduction the periodic amortization of such expenditure Arbitrage rule on deductible interest The percentage by which the taxpayer·s otherwise allowable deduction for interest expense shall be reduced to 33%.
6
TAXATION LAW
C. TAXES [SEC. 34 (C)] Means taxes proper and, therefore, no deductions are allowed for amounts representing: ( 1) interest; (2) surcharges; and (3) fines or penalties incident to delinquency
that they are connected with income from sources within the Phil. TAX CREDIT ² amount allowed by law to reduce the Phil income tax due on account of income, warprofit tax, excess profit tax, paid or accrued to a foreign country
Scope: All taxes, whether national or local
When may deduction for taxes be claimed? Year paid or incurred in general. However, in the case of contingent tax liability, the obligation to deduct arises only when the liability is finally determined.
Discount granted to senior citizens shall be allowed as tax deduction from gross income for the same taxable year that the discount is granted
Requisites For D eductibility Taxes paid or incurred within the taxable year 1. 2. in connection with the taxpayer·s PTB, 3. (Deductible only by the person upon whom the tax is imposed by law [VAT is deductible only by seller] shall be allowed as deduction
Only domestic corporations are entitled to avail of the tax credit
Reason/Purpose: To lessen the harshness of taxation in cases where an income is subject to both foreign tax and Philippine income tax
The taxpayer has the option either to claim: 1. Foreign income taxes paid as deduction from gross income; or 2. Tax credit against the Phil income tax
I f
claimed as tax credit, it is no longer deductible from gross income.
Credit Against Tax for Taxes of For eign Countries [Sec. 34-C (3)] If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:
Exception: a. a. b.
c. d.
e. f.
Income tax provided for under this Title Income taxes imposed by authority of any foreign country (income, war profit, and excess profit taxes) But this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of Par. 3 of this Subsection Estate and donor·s taxes Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessment tax) Taxes paid for commodity not connected with the taxpayer·s business: Taxes on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public offering (Sec. 127-D)
Limitations on the Deduction of Taxes from Gross Income [Sec. 34-C (2)] In the case of a NRAETB in the Philippines and RFC, the deductions for taxes provided in Sec. 34-C (1) shall be allowed only if and to the extent
b.
Citizen and Domestic Corporation ² the amount of income taxes paid or incurred during the taxable year to any foreign country; and Partnerships and Estat es ² the individuals proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title
An alien and a FC shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph
Limitations on Credit [Sec. 34-C (4)] If claimed as tax credit, the allowable tax credit is subject to the ff limitations: a.
The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer·s taxable income from sources within 7
TAXATION LAW
such country bears to his entire taxable income for the same taxable year; and b. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer·s taxable income from sources without the Phil bears to his entire taxable income for the same taxable year. TAX DEDUCTION Deductible from GI Reduces taxable income Sources: Deductible taxes such as business tax, excise tax, percentage tax and other business ² connected taxes
TAX CREDIT Deductible from Phil. Income tax Reduces the taxpayer·s liability Sources: Foreign income, war-profits and excess profit tax
losses which are not general or natural to the ordinary courses of business and are not covered under some other heading as bad debts, inventory losses, depreciation, etc. Losses
actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: 1.
2.
If incurred in TPB Of property connected with the TPB, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement
² complete or partial destruction of property resulting from an identifiable even of a sudden unexpected, or unusual nature C asualty
² criminal appropriation property to the use of the taker Theft
Administrativ e conditions for allowance of credit for foreign taxes: 1.
2.
Taxpayer must signify in his income tax return his desire to claim tax credit; Return must be accompanied by the appropriate form prescribed by the BIR Commissioner, signed and sworn, carefully filled up and contained information required
of
another·s
Embezzlement ² fraudulent appropriation of another·s property by a person to whom it has been entrusted or into whose hands it has lawfully come LOSS NOT ALLOWED AS DEDUCTION - if at the time of the filling of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return
I f credit is sought for taxes already paid, receipt
for payment must be attached Proof of Credits [Sec. 34-C (7)] The taxpayer shall establish to the satisfaction of the Commissioner the ff: 1.
Total amount of income derived from sources without the Phil 2. Amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Sec. of Finance; and 3. All other information necessary for the verification and computation of such credits
D. LOSSES [SEC. 34 (D)] Implies an unintentional parting with something of value. Used in income tax law to comprehend all
PROOF OF LOSS ² In the case of NRA or FC, the losses deductible shall be those actually sustained during the year incurred in BTEP conducted within the Phil, when such losses are not compensated for by insurance or other forms of indemnity Treatment of losses depends upon: a. Class of taxpayers b. Nature of losses Requisites For D eductibility 1.
The loss claimed as deduction must be that of a taxpayer sustained in the tax-exempt Losses operation cannot be deducted from income of the taxable industry Loss sustained in one line of business cannot be claimed as a deduction or be offset from the income of its other line of businesses 8
TAXATION LAW
2. 3.
Taxpayer cannot offset its net loss from farming against its manufacturing income
CAPITAL LOSSES [S ec. 34-D (4)] ² deductible only to the extent of capital gains (Sec. 39) Limitation - Losses from sale or exchange of capital assets Losses resulting from securities becoming worthless during the taxable year and which are capital assets
e.
Losses
f.
Losses
g.
ABANDONMENT LOSSES [Sec. 34-D (7)] All accumulated exploration and development expenditures pertaining to partially or fully abandoned petroleum operations shall be allowed as deduction. In all cases, notices of abandonment shall be filed with the BIR. Subsequently abandoned producing well ² the unamortized costs and undepreciated costs of equipment directly used shall be allowed as deduction. Provided, If the well is reentered and production resumed, or if such equipment or facility is restored into service ² the costs shall be included as part of the gross income and shall be amortized or depreciated, as the case may be
The loss must have been sustained during the taxable year Loss evidenced by a closed and completed transaction
and completed transaction ² loss is fixed by an identifiable event occurring in the taxable year in which, under the surrounding facts and circumstances, the basis of an immediate recoupment is not present C losed
4.
d.
Loss
not otherwise
compensated
by
insurance
or
² compensation due under a title analogous or similar to insurance inasmuch as the latter is a contract establishing a legal obligation, namely: law, contract, quasi-contract, torts or crime erwise O th
KINDS OF LOSSES: a.
Ordinary business
losses
²
incurred
in
trade
or
b.
Those incurred in any transaction entered for profit though not connected with the TB
c.
Casualty losses ² incurred by property connected with the TB, if the loss arises from fire, storm, shipwreck, or other casualties or from robbery, theft or embezzlement
Requisites for Deductibility 1. Sworn declaration of loss must be filed with the BIR 2. Filed through the nearest RDO within 45 days after the date of the occurrence 3. Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss Casualty loss ² documentary proof of costs, photograph showing extent of damage, condition or value of the property after it was repaired, restored or replaced Robbery, theft or embezzlement losses ² amount of loss. Police report is necessary alt houg h not conclusive proof of t he loss arising t herefrom.
from short sale of property
due to failure to exercise privilege or option to buy or sell property
SPECIAL KINDS OF LOSSES: a.
WAGERING LOSSES [S ec. 34-D (6)] ² deductible only to the extent of the gains or winning from such transactions
b.
Losses du e to voluntary removal of building incident to renewal or replacement
Deductibility of losses sustained if building, machinery or equipment is old, and the demotion or scrapping thereof is made incident to removals or replacements When a taxpayer buys a real estate upon which a building is built, the cost to build another building and the cost of removal of the old building is not deductible Value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building 9
TAXATION LAW
c.
If the removal of the building was required by the authorities because the building was a fire hazard, the value of the building and the cost of its removal will be deductible as losses
Losses of useful value of capital asset due to changes in business condition
When
the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as deduction the actual loss sustained To determine amount of loss, adjustment must be made for improvements, depreciation and salvage value of the property ( exception to the rule requiring a sale or other disposition of property in order to establish a loss) Proof required to establish loss of useful value (Unforeseen causes): Increase in the cost or change in the manufacture of any product New legislation directly makes the continued profitable use of the property impossible
Not limited to situations where the replacement is acquired by purchase. It also applies to acquisition through a taxable exchange and the making of an option contract The seller is not dealer in securities
Reason for non-deductibility of loss from was h sale: Prevent deduction of losses on sales of stock or securities that were replaced by substantially identical stocks or securities is added to the cost of the Loss subsequently acquired securities/stock. Hence, a mere artificial loss. 3. Loss due to removal of building if purchased (not existing and not incident to renewal) NET OPERATING LOSS ² excess of allowable deduction over gross income ob the business in a taxable year NET OPERATING LOSS CARRY-OVER DEDUCTION FROM GROSS INCOME
AS
A
Applies to individual and corporate Taxpayer is not exempt from income tax
in dealings between related taxpayers (except in case of distribution in liquidation)
a. The net operating loss of the business or enterprise b. For any taxable year immediately preceding the current taxable year, c. Which had not been previously offset as deduction from gross income d. Shall be carried over as a deduction from gross income e. For the next 3 consecutive taxable years immediately following the year of such loss f. Provided, however That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction
2. LOSSES FROM WASH SALES OF STOCK OR SECURITIES (61-day sale) [Sec. 34-D (5) in re: Sec. 38]
NOLCO WHEN ALLOWED ² Only if there has been no substantial change in the ownership of the business or enterprise in that ²
Non-deductible loss due to loss of useful value: Useful life of property terminates solely as a result of those gradual processes for which depreciation is authorized Inventories
NON-DEDUCTIBLE LOSSES 1. Losses
Taxpayer must have bought or sold stocks or securities Substantially identical stock or securities are acquired within a period beginning 30 days before the date of sale and ending 30 days after such date There must have been sale or disposition of stocks or securities
Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or Not less than 75% of the paid up capital of the corporation, if the business is in the name of the corporation, is held by or on behalf of the same persons 10
TAXATION LAW
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives incurred in any of the first 10 years of operation may be carried over as a deduction from taxable income for the next 5 taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be deducted in like manner from the taxable income of the next remaining 4 years
E. BAD DEBTS [SEC. 34 (E)] Debts due to the taxpayer which are actually ascertained to be worthless and charged off within the taxable year except those not connected with PTB and those sustained in a transaction entered into between parties mentioned under Sec. 36(B) Requisites For D eductibility 1.
Existence of a valid debt and subsisting debt (legal and factual)
F. DEPRECIATION [SEC. 34 (F)] G. DEPLETION OF OIL AND GAS WELLS AND MINES [SEC. 34 (G)] H. CHARITABLE AND OTHER CONTRIBUTIONS [SEC. 34 (H)]
11
