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.