TAXATION LAW

ALLOWABLE DEDUCTIONS a. No withholding of creditable or final tax was made but

FROM GROSS INCOME the payee reported the income and withholding
agent/taxpayer pays during the original audit and
DEDUCTIONS – items or amounts authorized by law to be investigation the surcharges, interest and penalties
subtracted from the pertinent items of gross income to arrive incident to the failure to withhold the tax.
at taxable income b. No withholding of creditable or final tax was made and
the recipient-payee failed to report the income on due
CONCEPT AND NATURE date thereof, but the withholding agent pays during the
The items or amounts allowed as deductions original audit and investigation the amount supposed to
represent the expenses of the taxpayer, other than personal have been withheld, inclusive of surcharges, interest and
expenses and capital expenditures, in earning the income penalties incident to his failure to withhold.
subject to tax as well as reasonable living expenses. c. The withholding agent erroneously underwithheld the tax
The deductions partake of the nature of tax but pays during the original audit and investigation the
exemptions and are to be construed strictissimi juris against difference in the amount supposed to have been
the taxpayer. withheld, inclusive of surcharges, interest and penalties
incident to such error.
Reason: Lifeblood Theory
TAXPAYER HAS BURDEN OF PROVING
REQUISITES BEFORE DEDUCTIONS ARE ENTITLEMENT
ALLOWED [SREWWA]  Consistent with the rule that tax exemptions must be
strictly construed against the taxpayer and liberally
1. There must be a specific provision of law allowing the in favor of the State.
deductions, since deductions do not exist by implication.
2. The requirements of deductibility must be met. DEDUCTIONS EXCLUSIONS
3. There must be proof of entitlement to the deductions. Amounts deducted from Amounts or items exempt
4. The deductions must not have been waived (Sec. 76, gross income to arrive at net from tax by virtue of the Tax
Revenue Regulations No. 2) income Code or special law
5. The withholding and payment of the tax required must
be shown. DEDUCTIONS PERSONAL
6. Any amount paid or payable which is otherwise EXEMPTIONS
deductible from, or taken into account in computing Both individual and Only individual is entitled
gross income or for which depreciation or amortization corporate taxpayers may
may be allowed under this Section, shall be allowed as a claim
deduction ONLY if it is shown that the tax required to be A deduction is a subtraction Immunity or privilege, a
deducted and withheld therefrom has been paid to the freedom from a charge or
BIR in accordance with this Section, Sections 58 and 81 burden to which others are
of this Code (Sec. 34 [k]). subjected
Not receipts but are generally Generally receipts which are
THE COHAN RULE PRINCIPLE: If there is showing that expenditures which are excluded from taxable
expenses have been incurred but the exact amount thereof permitted to be subtracted income
cannot be ascertained due to the absence of documentary from income to determine the
evidence, it is the duty of the BIR to make an estimate of amount subject to tax
deduction that may be allowed in computing the taxpayer’s Reductions of wealth which Theoretical personal, family
taxable income bearing heavily against the taxpayer whose help earn the income subject and living expenses of an
inexactitude of his own making. A disallowance of 50% of to tax individual
the taxpayer’s claimed deduction is valid (Rev. Memo
Circular No. 23-2000). WHO MAY AVAIL OF DEDUCTIONS

INSTANCES WHEN PRESENTATION OF I. Individuals

WITHHOLDING TAX DISPENSED WITH 1. Citizen
An amount claimed as deduction on which a tax is 2. Resident alien
supposed to have been withheld under NIRC shall be allowed 3. NRA doing business in the Philippines
if in the course of the audit and/or investigation, the examiner 4. Member of GPP
discovers that: II. Corporations
1. Domestic Corp.
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2. RF Corp. income
3. Proprietary educational institutions and hospitals RAs from their income (other OSD or
4. GOCCs than compensation income) Itemized deductions, and
derived from sources within Personal and additional
WHO CANNOT AVAIL OF DEDUCTIONS FROM the Phil. exemptions
GROSS INCOME NRCs and NRAs engaged in Itemized deductions, and
1. Citizens and RAs whose income is purely compensation trade, business or profession Personal and additional
income (except for premium payments on health and/or in the Phil from their income exemptions and in the case of
hospitalization insurance) derived from sources within NRAs only subject to
2. NRANETB in the Phil the Phil. reciprocity
3. NRFC Estates or trusts Deductions allowed similar
to individuals except with
ALLOWABLE DEDUCTIONS FROM GROSS INCOME respect to the exemption
BASED ON CLASSES OF TAXPAYER allowed which is not
1. Individuals with gross income from employee-employer categorized as personal and
relationship ONLY [gross income only] additional exemptions, but
referred to only as exemption
2. Individuals with gross income from business or practice in the amount of P20,000
of profession; Domestic corporations on Itemized deductions only
 Optional Standard deduction OR itemized their income derived from
deductions sources within or without the
 OSD – 10% of the gross income. May be availed Phil
only by individuals (except NRAs) who are not RFCs on their income Itemized deductions only
purely compensation income earners. This is in lieu derived from sources within
of the itemized deductions. the Phil.
 Premium payments on health and/or hospital NRA-NETB in the Phil from Subject to tax on their gross
insurance (if requisites are complied with) their income derived from income, hence no deductions
 Personal and additional exemption sources within the Phil. or exemptions allowed
(whether compensation or
3. Corporations other income)
 Itemized deductions NRFCs on their income No deductions allowed as
derived from sources within they are taxed on gross
4. Estates and Trusts the Phil income
 Section 62 of the NIRC

SUMMARY OF DEDUCTIONS ALLOWED TO DEDUCTIONS ALLOWED UNDER THE NIRC

DIFFERENT KINDS OF TAXPAYERS
1. Itemized Deductions [Sec. 34 (a) to (k)]
On compensation income of Deductions for premium a. Business expenses
RCs, derived from sources payments on health and/or b. Interest
within or without the Phil. hospitalization insurance c. Taxes
d. Losses
Personal and additional e. Bad debts
exemptions f. Depreciation
On compensation of NRCs Deductions for premium g. Depletion
and RAs derived from payments on health and/or h. Charitable and other contributions
sources within the Phil. hospitalization insurance i. Research and development expenditure
j. Pension trust contribution
Personal and additional
exemptions 2. Optional Standard Deduction [Sec. 34 (l)]
RCs, on incomes (other than OSD or
compensation income) Itemized deductions, and 3. Personal and additional exemptions [Sec. 35]
derived from sources within Personal and additional
and without the Phil, subject exemptions 4. Extraordinary deductions
to the scheduler tax on a. Those allowed to insurance companies (Sec. 37)
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b. Deductions allowed to estates and trusts availing of Before business or professional expenses are
itemized deductions of income currently distributed allowed as deductions from gross income, the taxpayer shall
to beneficiaries (Sec. 61) substantiate the expense being deducted with sufficient
c. Losses from wash sales of stocks or securities (Sec. evidence, such as official receipts or other adequate records
38) by showing:
d. Certain capital losses but only from capital gains
(Sec. 39) a. The amount of the expense being deducted; and
b. The direct connection or relation of the expense
being deducted to the development, management,
operation and/or conduct of the trade, business or
A. BUSINESS EXPENSES [SEC. 34 (A)] profession of the taxpayer
 All ordinary and necessary expenses paid or incurred
during the taxable year in carrying on or which are 4. The expenses must be reasonable
directly attributable to the development, management,
operation and/or conduct of the trade, business or 5. Paid or incurred during the taxable year
exercise of a profession.
5.1. Cash Basis Method – deducts expenses in the year
Requisites For Deductibility [OISRPNP] in which they are paid
5.2. Accrual Basis Method – deducts expenses when
1. The expense must be ordinary and necessary the taxpayer becomes liable for them, whether or
 Depends upon particular facts: type of business, not they are paid in the same year
intention of the taxpayer, time, place and prevailing
circumstances  The propriety of an accrual must be judged by the facts
that a taxpayer knew, or could reasonably be expected to
ORDINARY EXPENSES – expenses which are common to have known, at the closing of its books for the taxable
incur in the trade or business of the taxpayer as distinguished year.
from capital expenditures  All-events test requires the liability be fixed, and the
 Usually incurred during taxable year and benefits amount of such liability be determined with reasonable
such taxable year; need not be recurring accuracy (something less than an exact or complete
 Capital expenditure – incurred to improve assets accurate amount).
and benefits for more than one taxable year
6. Expenses must not be against public policy, public moral
NECESSARY EXPENSES – expenses which are or law
appropriate and helpful in the development of the taxpayer’s
business. 7. If subject to withholding tax, proof of payment to BIR
 Intended to realize a profit or to minimize a loss must be shown
 Professional expenses – 10%
2. The expenses must be incurred in trade or business  Rent expense – 10%
carried on by the taxpayer
KINDS OF BUSINESS EXPENSES – A reasonable
3. The expenses must be substantiated by proof allowance for: [STR_EAR]
 Establish proximate relation (logical link or nexus)
between the expense and the taxpayer’s business 1. Salaries, wages and other forms of compensation for
 Receipts are the best proof personal services actually rendered, including the
 Even if no records/receipts are available, the oral grossed-up monetary value of fringe benefit furnished or
testimony of a CPA, if not contradicted by the granted by the employer to the employee
government, is sufficient
 Receipts/adequate records; amount of expense; date What are included in compensation for services which are
and place of expense; purpose of expense; allowed as deductions from gross income?
professional or business relationship of expense;
must support each claimed business or professional a. Wages, salaries, etc.
expense b. Bonuses in good faith
c. Commissions, professional fees, vacation-leave pay,
SUBSTANTIATION RULE [Sec. 34 (1B)] retirement pay
d. Management expenses

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e. Premiums and compensation for injuries if not  The excess over the cost of a business plane ticket
compensated for by insurance or otherwise or its equivalent, whether paid directly by the
f. Contribution to pension trust created for the benefit employer to the airline company or reimbursed to
of the employees, including contribution under SSS the employee shall not be deductible by the
Act employer from its taxable income
g. Other forms of compensation for services actually  Allowances which are pre-computed by the
rendered employer on a daily basis, or reimbursement for
cost of meals and lodging enroute to one’s foreign
Factors/tests which determine whether compensation paid destination in pursuit of employer’s trade or
for services rendered is deductible or not business and during the duration of the stay thereat
 To the extent that they do not exceed US$150.00
a. Any amount paid in the form of compensation which per day for trips to the US, AUS, Canada, Europe,
does not partake of the purchase price of services is not ME and Japan, and US$100.00 for other places,
deductible shall not be considered taxable compensation to the
employee.
b. Bonuses are deductible under the following conditions:  Any excess shall not be deductible to the employer
 Paid in good faith as additional compensation for even if substantiated
services rendered  Note: Maybe taxable as a fringe benefit under Sec.
 Reasonable amount. To hold otherwise would lead to tax 33
evasion.
 Not to exceed reasonable compensation when added to 3. Rentals and/or other payments
stipulated salaries.
 Business property – at least P500 – 5%
Suggested Tests: (Consider the date when the contract  Non-business/residential property – at least P10,000
for services was made, not at the date when the contract – 5%
is questioned)
 Good faith 4. Entertainment, amusement and recreation expenses
 Character of business during the taxable year
 Salary policy of the corporation
 Type and extent of services  Subject to the rule of substantiation
 Employee’s qualification and contribution  Dues paid to social, athletic, or sporting club or
 General economic conditions organization per officer; to professional or business
organization
c. If no services rendered, not deductible as reasonable and
necessary expenses OTHER BUSINESS EXPENSES

d. It is immaterial whether bonuses are paid in cash or in 1. Advertising and promotional expenses
kind or partly in cash and partly in kind  Must be substantiated
 All payments for the purchase of promotional give-
e. Other forms of compensation: aways, contest prizes or similar material must be
 Housing and meals properly receipted
 Courtesy discounts  All payments for services such as radio and TV time,
 Entertainment and gifts to company officers during print ads, advertising expertise must be subjected to
Christmas and major anniversary, sports tournament withholding tax
and company picnics
 Legitimate expenses (salaries and miscellaneous 2. Cost of material and supplies
expenses) of an illegitimate business are deductible  Deductible only to the amount actually consumed or
based on the theory that the income tax is not a tax used in operation
on gross income even if such income is earned from
an illegal business Methods utilized to determine materials used:
a. Actual consumption method (inventory method)
2. Travel expenses b. Direct purchase method

 Include transportation expenses and meals and

lodging

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 Taxpayer purchases materials but has no record of  Taxes

consumption – deductible provided the net income  Obligations of joint obligor
is clearly reflected by this method.  Discount on notes issued to bank for loan

3. Repairs 2. Incurred in connection with taxpayer’s trade or business

3. Indebtedness must be that of the taxpayer
Rules on deductibility 4. The interest must have been stipulated in writing in
a. Incidental or ordinary repairs – keeps the asset in consonance with Art. 1956 NCC which provides that no
its ordinary working condition (does not add interest shall be due unless it has been expressly
material value to the property or prolong its life as stipulated in writing
distinguished from extra-ordinary repairs) 5. Paid or accrued within the taxable year
b. Extraordinary repairs – not deductible – they are  Cash basis – deductible in the year it is
capital expenditures actually paid
 Accrual basis – deductible in the year it is
4. Representation expenses accrued even if not actually paid
 Note: Maybe taxable as a fringe benefit under Sec. 33
 Must be supported by official receipts Exceptions:
1. If within the taxable year an individual taxpayer
BRIBES, KICKBACKS AND OTHER SIMILAR reporting income on the cash basis incurs an indebtedness on
PAYMENTS [Sec. 34 (A) (1c)] which an interest is paid in advance through discount or
otherwise:
Any payment made, directly or indirectly, to –
 Provided, That such interest shall be allowed as a
a. Official/employee of the national govt deduction in the year the indebtedness is paid:
b. Official/employee of the LGU  Provided, further, That if the indebtedness is
c. Official/employee of a GOCC payable in periodic amortizations, the amount of
d. Official/employee/representative of a foreign govt interest which corresponds to the amount of the
e. Private corporation, GPP, or similar entity principal amortized or paid during the year shall be
allowed as deduction in such taxable year
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTIONS – A PIS, referred to 2. If both the taxpayer and the person to whom the
under Sec. 27(B), may at its option elect either: payment has been made or is to be made are persons specified
under Sec. 36(B)
a. To deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during Interest between related taxpayers:
the taxable year for the expansion of school
facilities, or 2.1. Members of a family – brothers and sisters (full or
b. To deduct allowance for depreciation thereof under half), spouse, ancestors and lineal descendants
Sec. 34 (F) 2.2. Individual and corporation – individual owns
directly or indirectly more than 50% of the
outstanding stock
2.3. Between corporations – more than 50% of the
B. INTEREST [SEC. 34 (B)] outstanding stock both owned directly or indirectly
by the same individual
Amount which one has contracted to pay for the use of 2.4. Grantor and fiduciary (trustee) of any trust
borrowed money or amount of compensation paid for the use 2.5. Fiduciary and beneficiary or such trust
of money or forbearance from such use.
3. If the indebtedness is incurred to finance petroleum
Requisites For Deductibility [IITSP] exploration

1. There must be an indebtedness Deductible Interest Non-deductible Interest

Expenses Expenses
What are included in the term ‘indebtedness’ interest of 1. Interest on taxes. 1. Interest on preferred
which is deductible? Reason: Taxes for this stock which is considered
 Gifts when proven to be bonafide loans purpose are indebtedness. interest on capital

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Fines, penalties and 2. Interest on undrawn 3. (Deductible only by the person upon whom the tax is
surcharges on taxes are NOT salaries and bonuses imposed by law [VAT is deductible only by seller]
deductible 3. Interest on capital for shall be allowed as deduction
2. Interest paid by cost keeping
corporation on scrip 4. Interest paid where Exception:
dividends parties provide no stipulation
3. Interest on deposits paid to pay interest in writing a. Income tax provided for under this Title
by authorized bank of the b. Income taxes imposed by authority of any foreign
Central Bank country (income, war profit, and excess profit taxes)
4. Interest paid by legal or  But this deduction shall be allowed in the case of a
equitable owner on mortgage taxpayer who does not signify in his return his desire to
of real property have to any extent the benefits of Par. 3 of this
Subsection
Theoretical interest – not deductible as it is merely c. Estate and donor’s taxes
computed or calculated. It does not arise from interest bearing d. Taxes assessed against local benefits of a kind tending to
obligation. increase the value of the property assessed (Special
assessment tax)
Optional treatment of interest expense on capital e. Taxes paid for commodity not connected with the
expenditure – At the option of the taxpayer, interest expense taxpayer’s business:
on a capital expenditure incurred to acquire property used in f. Taxes on sale, barter or exchange of shares of stock
TBEP may be allowed as: listed and traded through the local stock exchange or
1. Deduction – in full in the year when incurred, the through initial public offering (Sec. 127-D)
provisions of Sec. 36 A (2) and (3) to the contrary
notwithstanding; or treated as a Limitations on the Deduction of Taxes from Gross Income
2. Capital Expenditure – for which the taxpayer may [Sec. 34-C (2)]
claim only as a deduction the periodic amortization In the case of a NRAETB in the Philippines and
of such expenditure RFC, the deductions for taxes provided in Sec. 34-C (1) shall
be allowed only if and to the extent that they are connected
Arbitrage rule on deductible interest with income from sources within the Phil.
The percentage by which the taxpayer’s otherwise
allowable deduction for interest expense shall be reduced to TAX CREDIT – amount allowed by law to reduce the Phil
33%. income tax due on account of income, war-profit tax, excess
profit tax, paid or accrued to a foreign country

 Only domestic corporations are entitled to avail of

C. TAXES [SEC. 34 (C)] the tax credit

Means taxes proper and, therefore, no deductions are allowed Reason/Purpose: To lessen the harshness of taxation in cases
for amounts representing: (1) interest; (2) surcharges; and (3) where an income is subject to both foreign tax and Philippine
fines or penalties incident to delinquency income tax

Scope: All taxes, whether national or local  The taxpayer has the option either to claim:
1. Foreign income taxes paid as deduction from gross
When may deduction for taxes be claimed? income; or
Year paid or incurred in general. However, in the 2. Tax credit against the Phil income tax
case of contingent tax liability, the obligation to deduct arises
only when the liability is finally determined.  If claimed as tax credit, it is no longer deductible
from gross income.
 Discount granted to senior citizens shall be allowed as
tax deduction from gross income for the same taxable Credit Against Tax for Taxes of Foreign Countries [Sec.
year that the discount is granted 34-C (3)]
If the taxpayer signifies in his return his desire to
Requisites For Deductibility have the benefits of this paragraph, the tax imposed by this
1. Taxes paid or incurred within the taxable year Title shall be credited with:
2. in connection with the taxpayer’s PTB,

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TAXATION LAW

a. Citizen and Domestic Corporation – the amount of The taxpayer shall establish to the satisfaction of the
income taxes paid or incurred during the taxable year to Commissioner the ff:
any foreign country; and
b. Partnerships and Estates – the individuals 1. Total amount of income derived from sources without
proportionate share of such taxes of the GPP or the estate the Phil
or trust paid or incurred during the taxable year to a 2. Amount of income derived from each country, the tax
foreign country, if his distributive share of the income of paid or incurred to which is claimed as a credit under
such partnership or trust is reported for taxation under said paragraph, such amount to be determined under
this Title rules and regulations prescribed by the Sec. of Finance;
and
 An alien and a FC shall not be allowed the credits 3. All other information necessary for the verification and
against the tax for the taxes of foreign countries computation of such credits
allowed under this paragraph

Limitations on Credit [Sec. 34-C (4)]

If claimed as tax credit, the allowable tax credit is D. LOSSES [SEC. 34 (D)]
subject to the ff limitations:
Implies an unintentional parting with something of value.
a. The amount of the credit in respect to the tax paid or Used in income tax law to comprehend all losses which are
incurred to any country shall not exceed the same not general or natural to the ordinary courses of business and
proportion of the tax against which such credit is taken, are not covered under some other heading as bad debts,
which the taxpayer’s taxable income from sources within inventory losses, depreciation, etc.
such country bears to his entire taxable income for the
same taxable year; and Losses actually sustained during the taxable year
b. The total amount of the credit shall not exceed the same and not compensated for by insurance or other forms of
proportion of the tax against which such credit is taken, indemnity shall be allowed as deductions:
which the taxpayer’s taxable income from sources
without the Phil bears to his entire taxable income for the 1. If incurred in TPB
same taxable year. 2. Of property connected with the TPB, if the loss arises
from fires, storms, shipwreck, or other casualties, or
TAX DEDUCTION TAX CREDIT from robbery, theft or embezzlement
Deductible from GI Deductible from Phil.
Income tax Casualty – complete or partial destruction of property
Reduces taxable income Reduces the taxpayer’s resulting from an identifiable even of a sudden unexpected, or
liability unusual nature
Sources: Deductible taxes Sources: Foreign income,
such as business tax, excise war-profits and excess profit Theft – criminal appropriation of another’s property to the use
tax, percentage tax and other tax of the taker
business – connected taxes
Embezzlement – fraudulent appropriation of another’s
Administrative conditions for allowance of credit for property by a person to whom it has been entrusted or into
foreign taxes: whose hands it has lawfully come

1. Taxpayer must signify in his income tax return his LOSS NOT ALLOWED AS DEDUCTION - if at the time
desire to claim tax credit; of the filling of the return, such loss has been claimed as a
2. Return must be accompanied by the appropriate deduction for estate tax purposes in the estate tax return
form prescribed by the BIR Commissioner, signed
and sworn, carefully filled up and contained PROOF OF LOSS – In the case of NRA or FC, the losses
information required deductible shall be those actually sustained during the year
incurred in BTEP conducted within the Phil, when such losses
 If credit is sought for taxes already paid, receipt for are not compensated for by insurance or other forms of
payment must be attached indemnity

Proof of Credits [Sec. 34-C (7)] Treatment of losses depends upon:

a. Class of taxpayers

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TAXATION LAW

b. Nature of losses although not conclusive proof of the loss

arising therefrom.
Requisites For Deductibility
d. CAPITAL LOSSES [Sec. 34-D (4)] – deductible only
1. The loss claimed as deduction must be that of a taxpayer to the extent of capital gains (Sec. 39)
 Losses sustained in the tax-exempt operation cannot  Limitation - Losses from sale or exchange of
be deducted from income of the taxable industry capital assets
 Loss sustained in one line of business cannot be  Losses resulting from securities becoming
claimed as a deduction or be offset from the income worthless during the taxable year and which are
of its other line of businesses capital assets
 Taxpayer cannot offset its net loss from farming
against its manufacturing income e. Losses from short sale of property

2. The loss must have been sustained during the taxable f. Losses due to failure to exercise privilege or option to
year buy or sell property
3. Loss evidenced by a closed and completed transaction
g. ABANDONMENT LOSSES [Sec. 34-D (7)]
Closed and completed transaction – loss is fixed by an  All accumulated exploration and development
identifiable event occurring in the taxable year in which, expenditures pertaining to partially or fully
under the surrounding facts and circumstances, the basis of an abandoned petroleum operations shall be allowed as
immediate recoupment is not present deduction. In all cases, notices of abandonment
shall be filed with the BIR.
4. Loss not compensated by insurance or otherwise  Subsequently abandoned producing well – the
unamortized costs and undepreciated costs of
Otherwise – compensation due under a title analogous or equipment directly used shall be allowed as
similar to insurance inasmuch as the latter is a contract deduction.
establishing a legal obligation, namely: law, contract, quasi-  Provided, If the well is reentered and
contract, torts or crime production resumed, or if such equipment or
facility is restored into service – the costs shall
KINDS OF LOSSES: be included as part of the gross income and
shall be amortized or depreciated, as the case
a. Ordinary losses – incurred in trade or business may be

b. Those incurred in any transaction entered for profit SPECIAL KINDS OF LOSSES:
though not connected with the TB
a. WAGERING LOSSES [Sec. 34-D (6)] – deductible
c. Casualty losses – incurred by property connected with only to the extent of the gains or winning from such
the TB, if the loss arises from fire, storm, shipwreck, or transactions
other casualties or from robbery, theft or embezzlement
b. Losses due to voluntary removal of building incident
Requisites for Deductibility to renewal or replacement
1. Sworn declaration of loss must be filed with the
BIR  Deductibility of losses sustained if building,
2. Filed through the nearest RDO within 45 days after machinery or equipment is old, and the demotion or
the date of the occurrence scrapping thereof is made incident to removals or
3. Proof of the elements of the loss claimed, such as replacements
the actual nature and occurrence of the event and  When a taxpayer buys a real estate upon which a
the amount of the loss building is built, the cost to build another building
 Casualty loss – documentary proof of costs, and the cost of removal of the old building is not
photograph showing extent of damage, deductible
condition or value of the property after it was  Value of the real estate, exclusive of old
repaired, restored or replaced improvements, being presumably equal to the
 Robbery, theft or embezzlement losses – purchase price of the land and building plus the
amount of loss. Police report is necessary cost of removing the useless building

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TAXATION LAW

 If the removal of the building was required by the  Loss is added to the cost of the subsequently
authorities because the building was a fire hazard, acquired securities/stock. Hence, a mere artificial
the value of the building and the cost of its removal loss.
will be deductible as losses
3. Loss due to removal of building if purchased (not existing
c. Losses of useful value of capital asset due to changes and not incident to renewal)
in business condition
NET OPERATING LOSS – excess of allowable deduction
 When the taxpayer discontinues the business or over gross income ob the business in a taxable year
discards such assets permanently from use in such
business, he may claim as deduction the actual loss NET OPERATING LOSS CARRY-OVER AS A
sustained DEDUCTION FROM GROSS INCOME
 To determine amount of loss, adjustment must
be made for improvements, depreciation and  Applies to individual and corporate
salvage value of the property (exception to the  Taxpayer is not exempt from income tax
rule requiring a sale or other disposition of
property in order to establish a loss) a. The net operating loss of the business or enterprise
b. For any taxable year immediately preceding the current
 Proof required to establish loss of useful value taxable year,
(Unforeseen causes): c. Which had not been previously offset as deduction from
 Increase in the cost or change in the gross income
manufacture of any product d. Shall be carried over as a deduction from gross income
 New legislation directly makes the continued e. For the next 3 consecutive taxable years immediately
profitable use of the property impossible following the year of such loss
f. Provided, however That any net loss incurred in a taxable
 Non-deductible loss due to loss of useful value: year during which the taxpayer was exempt from income tax
 Useful life of property terminates solely as a shall not be allowed as a deduction
result of those gradual processes for which
depreciation is authorized NOLCO WHEN ALLOWED – Only if there has been no
 Inventories substantial change in the ownership of the business or
enterprise in that –
NON-DEDUCTIBLE LOSSES
 Not less than 75% in nominal value of outstanding
1. Losses in dealings between related taxpayers (except in issued shares, if the business is in the name of a
case of distribution in liquidation) corporation, is held by or on behalf of the same
persons; or
2. LOSSES FROM WASH SALES OF STOCK OR  Not less than 75% of the paid up capital of the
SECURITIES (61-day sale) [Sec. 34-D (5) in re: Sec. 38] corporation, if the business is in the name of the
corporation, is held by or on behalf of the same
 Taxpayer must have bought or sold stocks or securities persons
 Substantially identical stock or securities are acquired
within a period beginning 30 days before the date of sale  Provided, That for mines other than oil and gas wells, a
and ending 30 days after such date net operating loss without the benefit of incentives
 There must have been sale or disposition of stocks or incurred in any of the first 10 years of operation may be
securities carried over as a deduction from taxable income for the
 Not limited to situations where the replacement is next 5 taxable years following the loss, and any portion
acquired by purchase. It also applies to acquisition of such loss which exceeds the taxable income of such
through a taxable exchange and the making of an option first year shall be deducted in like manner from the
contract taxable income of the next remaining 4 years
 The seller is not dealer in securities

Reason for non-deductibility of loss from wash sale: E. BAD DEBTS [SEC. 34 (E)]
 Prevent deduction of losses on sales of stock or
securities that were replaced by substantially Debts due to the taxpayer which are actually ascertained to be
identical stocks or securities worthless and charged off within the taxable year except

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TAXATION LAW

those not connected with PTB and those sustained in a

transaction entered into between parties mentioned under Sec.
36(B)

Requisites For Deductibility

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)]

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