Friday, June 27, 2014

Requisites for Valid Deduction of Bad Debts from Gross Income

Bad debts are deductible from gross income if the following requisites are met:

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business or practice of profession;
3. The same must not be sustained in transaction entered into between related parties;
4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;
5. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;

* Debt s charged-off within the taxable year. Partial writing-off is not allowed, it must be charged-off in full or not at all. (Fernandez Hermanos, Inc. vs. Comm.2DCRA552)


Wednesday, June 25, 2014

Loss which are Not Allowed by Law to be Deducted from Gross Income

For taxation purposes, we have to consider loss which are not allowed by law to be deducted from Gross Income as follows:

1. Loss on voluntary removal of building on land with the view to erecting another building;

2. Wagering losses not covered by wagering gains;

3. Capital losses not covered by capital gains

4. Losses from exchanged of property in corporate readjustment;

5. Losses from illegal transactions;


Requirement for the Substantiation of a Loss

The taxpayer bears the burden of proving and substantiating his claim for deduction for loss and should comply with the following substantiation requirements:

1. A sworn declaration of loss must be filed within the period prescribed; and

2. Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss.


Requisites for the Deductibility of a Loss

Losses are deductible for Income Tax purposes if the following requisites are met:

1. The loss must be incurred in trade, profession, or business of the taxpayer, or any transaction entered into for profit;

2. It must be actually sustained within the taxable year;

3. It must be evidenced by a closed and completed transaction;

4. It must not be compensated for by insurance or other form of indemnity; and

5. The taxpayer has filed a sworn declaration of loss within 45 days after the date of the occurrence of casualty or robbery, theft, or embezzlement.

NOTE: No loss shall be allowed as a deduction if a the time of the filing of the return, if such loss has been claimed as a deduction for estate tax in the return.


Tuesday, June 24, 2014

Taxes that are Not Deductible for Taxation Purposes

All taxes are deductible except:

1. Income Tax
2. Estate Tax
3. Energy Tax
4. Special Assessment Tax
5. Value Added Tax
6. 10% penalty tax on undue accumulation of profit
7. Amnesty tax
8. Penalty 25% surcharge; 50% surcharge & compromise payment.


Requisites for Deductability of Interest Expense

For taxation purposes, interest expense is deductible if it is met with the following requisites: 

1. These must be a valid and existing indebtedness;
2. There should be an interest expense paid or incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;
5. The interest expense must have been paid or incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not between related taxpayers;
9. The interest must not be incurred to finance petroleum operations;
10. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure.
11. The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B) (2) (b), in relation to Section 36(B), of the NIRC.
12. Is not expressly disallowed by law to be deduced from the taxpayer's gross income (e.g interest on indebtedness to finance petroleum operations); and
13. Shall be reduced by an amount equal to the 33% of the interest income subjected to final tax of 20%, earned during the same period. [Sec. 34(B)(1), NIRC].

Generally, the amount of interest paid or incurred within the taxable year on indebtedness in connection with the taxpayer profession, trade or business shall be allowable deduction from gross income: Provided, however, that the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax:

Thirty three percent (33%) beginning January 1, 2009

Assuming that a taxpayer incurred in 2013, interest expense amounting to P100,000. This is "Otherwise Allowable Deduction for Interest Expense" but it will be reduced by an amount equal to the prescribed percentage of interest income subjected to the final tax.

Thus, if in 2013, the taxpayer received P60,000 net interest income on which the final tax was withheld and remitted to the BIR by the payor of such income, then the deductible amount of interest will be computed as follows:

Total Interest Expense                                     P100,000
Less: 33% of P60,000/.80                                    24,750
AMOUNT DEDUCTIBLE                             P  75,250

References: RMC 13-2009; RR No. 13-2000.




Sunday, June 22, 2014

Ceiling on Entertainment, Amusement, and Recreation Expense

The bureau has issued the Revenue Regulations No. 10-2002 authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational Expense".

Coverage:

1. Individuals engaged in business, including taxable estates and trust;
2. Individuals engaged in the practice of profession;
3. Domestic corporations;
4. Resident foreign corporations;
5. General professional partnerships, including its members

Actual entertainment, amusement and recreation (EAR) expenses paid or incurred with the taxable year by the taxpayer, but in no case shall such deduction exceed 1/2 of 1% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1% of net revenue (i. e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.

APPOINTMENT FORMULA:

NET SALES/NET REVENUE                         X ACTUAL EXPENSE
TOTAL NET SALES AND NET REVENUE

ILLUSTRATION: EAR Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000, respectively. The actual entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000.

Appointment Formula:
Sales of Goods (P200,000 / P300,000  x P3,000) = P2,000
Sale of Services (P100,000 / P300,000 x P3,000) = P1,000

Maximum Percentage Ceilings:
Sales of Goods (P200,000 x .50%) = P1,000
Sales of Services (P100,000 x 1%) = P1,000

Allowable amount to be claimed as Entertainment, Amusement, and Recreation (EAR) Expense (Whichever is lower of Appointment Formula and Maximum Percentage Ceilings):

Sales of Goods = P1,000
Sales of Services = P1,000

However, if after verification a taxpayer is found to have shifted the amount of the entertainment of the entertainment, amusement and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed, the amount shifted shall be disallowed in its totality.


Optional Standard Deduction (OSD) Allowed to Individuals and Corporations in Computing their Taxable Income

The Revenue Regulations No. 16-2008, as amended was issued by the bureau to determine the Optional Standard Deduction (OSD) allowed to Individuals and Corporations in computing their Taxable Income.

Persons covered are as follows:

1. Individuals: Residents Citizen; Non-resident Citizen; Resident Alien; Taxable Estates and Trusts

2. Corporations: Domestic Corporation and Resident Foreign Corporation

The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. if the individual is on the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year. In the other hand, if the individual employs the cash basis of accounting for his income and deductions, the OSD shall be based on his gross receipts during the taxable year.

                                              If Individual                       If Corporation

Gross Sales                            P100,000                                 P100,000
Less: Cost of Goods Sold                                                           80,000 
Basis of the OSD                      100,000                                     20,000

X OSD Rate (maximum)                  .40                                            .40

OSD Amount                        P 40,000                                    P 8,000 


Gross Sales                            P100,000                                 P100,000
Less: Cost of sales                         -                                            80,000
Gross Sales                              100,000                                      20,000
Less: OSD (maximum)                40,000                                        8,000
Net Income                                60,000                                       12,000
Less: Personal Exemption           50,000                                          -
         Additional Exemption        25,000                                                -
Taxable Income                     P(15,000)                                   P 12,000








IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

Revenue Regulations No. 2-2001 was issued by the bureau to determine the Improperly Accumulated Earnings Tax on corporations.

Improperly Accumulated Earnings Tax (IAET) is imposed for each taxable year, a tax equal to 10% of the improperly accumulated taxable income of corporations.

The following corporations shall not apply of the Improperly Accumulated Earnings (IAET):

1. Banks and other non-bank financial intermediaries;

2. Insurance companies;

3. Publicly-held corporations;

4. Taxable partnerships;

5. General professional partnerships;

6. Non-taxable joint ventures;

7. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R. A. #7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under RA# 7227.


Minimum Corporate Income Tax on Domestic Corporations

The Revenue Regulations 12-2007 was issued by the bureau as amended with regards to Minimum Corporate Income Tax on Domestic Corporations: 

1. Imposition of Tax - A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, beginning of the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than normal income tax.

2. Carry Forward of Excess Minimum Tax - any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal income tax four the three (3) immediately succeeding taxable years.

But the minimum corporate income tax shall not be imposed upon any of the following:

1. Domestic corporations operating as proprietory educational institutions subject to tax at ten percent (10%) on their taxable income; or

2. Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten (10%) on their taxable income; and

3. Corporations engaged in business as depository banks under expanded foreign currency deposits system, otherwise known as Foreign Currency Deposit Units

4. Firms that are taxed under a special income tax regime

Please refer ftp://ftp.bir.gov.ph/webadmin1/pdf/37123rr%20no.%2012-2007.pdf of the full text of Revenue Regulations 12-2007.