DIMENSIONAMIENTO DE CILINDROS HIDRÁULICOS

Research and development. Si Y nagpa-feasibility study kung pwede siyang lumipat ng bahay from Muntinlupa to Quezon City. Nagbayad kay E ng limang libong piso. Income sa part ni E? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT. Can the amount paid to E be claimed as deductible expense? No, because Y is not entitled to that. Deduction of Y is limited to personal exemption, additional exemption, and premium for health and hospitalization insurance.

X paid E the same amount of P5,000 for feasibility study on whether he can put up a branch of his parlor in Quezon City. Income on the part of E? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT. On the part of X, can X claim the research and development as a deduction? Yes, because that is actually paid or incurred in relation to the trade or business of Mr. X.

X commissioned E to make a feasibility study of whether or not he can put up Taho business. Binayaran niya si E. Can X claim research and development as deduction from income from the parlor? No, because that is not related to his trade or business that he is engaged in.

Items that may NOT be allowed as deduction from gross income

Now, what are the items that can never be allowed as deduction at all times? Section 36 (A).

1. Personal, family and living expenses. Hindi pwede i-claim as deduction. Pambili ng damit, sapatos, gasoline, sariling kotse, kuryente sa bahay, pambili ng pagkain, alahas, relo, sapatos, pang tuition ng mga anak. Hindi pwede i- claim as deduction. Bakit? You are already entitled to personal exemption of P50,000, additional exemption of P25,000 per child, maximum of 4.

2. Expenses for minor repairs.

3. Making good an existing asset. Bakit? Because these are in the nature of capital expenditures. How do we distinguish major from minor repairs? Let’s look at this room. We don’t like the color of this room. We change it to red. That’s major repair. But when, ano bang mga dumi na ‘yan, pinastahan lang natin ng kapiraso, pininturahan. It is minor repair. Nasira si bombilya- minor repair. Ayaw ko ng ilaw na ganyan. Pinalitan lahat ng bombilya ginawang bilog- major repair. Table. I don’t like this table anymore. This is so small. Change all tables- major kasi capital expenditure. Nabali doon. Pinukpok,

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang

pininturahan- minor repair. Deductible kapag minor repair. Major repair ay hindi deductible because major repairs and the application of assets are capital expenditures. Because you are not allowed as deduction for the capital expenditure, you will be entitled to depreciation of the asset, or the application of the asset, or the cost of the major repair. ‘Yun ang kapalit nya.

4. And lastly, of course, which we discussed yesterday, Premium on life insurance taken by the employer on the life of his employee when the beneficiary, directly or indirectly, is the business of the employer or himself. Let us give an example. Y insures his life paying P5,000. Premium proceeds: 10% interest, P1M, and return of premium (ROP), designating as beneficiary the wife and children. X insured his life same amount, insuring his life, 10% interest, P1M, and ROP, designating his wife and children as beneficiary paying P5,000 as premium. While X and Y are alive, can X and Y claim deduction from their gross income? Y cannot because he is only entitled to personal exemption, additional exemption, and premium for health and hospitalization insurance. What about X? X cannot also claim P5,000 as deduction from gross income because it is not related to his trade or business. When X and Y die, the proceeds go to their respective wife and children. Income? Pagdating kay Y, P1M is income, but excluded. That’s an item of exclusion number 1. The 10% interest is income that is taxable. What kind of tax? NIT. ROP is not income. On the part of X, ganun din. The 10% interest is income taxable. P1M is income but excluded and not subject to tax. ROP is not even income. Clear? X insured the life of Y. Proceeds of 10% interest, P1M, and ROP to designated beneficiary X. Y dies. What is the effect of the death of Y, in so far as income taxation is concerned from the point of view of X? While paying the premium, X cannot claim as deduction from the gross income the P5,000. That’s Section 36, paragraph A, number 4. When Y dies, 10% interest goes to X and a taxable income. P1M goes to X. Income, but excluded. ROP is not even an income because that’s return of capital. On the part of Y, there is no tax consequence, whether from income or estate tax point of view because his only participation is to live and die. Open and close the eyes for X.

Concept of gains and losses

So we are going to teach you the concept of ordinary loss, ordinary gain, capital loss, capital gain, net capital loss carry over, net operating loss carry over, which is technically under Section 34, pero hindi ko pa talaga diniscuss para maintindihan natin because this is of different treatment. When we talk about loss

and gains, we are talking of assets. Meron tayong binibiling assets. Wala namang business na walang assets eh. Hindi ba? If you are not engaged in trade or business, lahat ng assets mo capital. At kapag ikaw ay hindi engaged in trade or business, ‘yung assets mo na capital, kapag nagbenta ka ng real property na capital asset located in the Philippines ang katapat mo agad ay Final Withholding Tax (FWT) or Capital Gains Tax (CGT) na 6%. Anu-ano yung mga assets mo, ha? Real property, tangible personal property, intangible personal property, right? Habang binibili mo ‘yung asset mo, walang effect sa income tax. Walang epekto. Ang effect ay sa net worth mo which has nothing to do with taxation. ‘Yung net worth mo, ‘yung assets minus liabilities, kung gusto mong malaman kung gaano ka kayaman, doon importante siya. Pero kung gusto mo malaman kung magkano ang babayaran mong buwis, hindi magma-matter yung assets. Bakit? Kasi the time you realize gains or income or loss is when you move the asset.

Movement of assets

When we say you “move,” it is a technical term. “Movement of asset” is the transfer of ownership. Transfer of ownership, hindi physical movement. You move the asset in such a way that there is transfer of ownership. That’s the only time that you’ll realize gains or losses. Now, what will be the basis of the gains or the loss if you are not a business income earner? It is always the fair market value at the time of sale, at the time of the transaction. What could be the movement? It is not donation, certainly. There is transfer of ownership and there is consideration because if you donate something, you do not realize gain. You do not realize loss. Right? You do not consider gain or loss, because you gave it. Now, if you move the asset and there is consideration because there is transfer of ownership, that’s the time that you will realize gain or loss.

Ordinary gains

So, kayo nagtatrabaho lang, walang business. Relo. Kapag binenta mo ang relo na binili mo ng P20,000 na ngayon ay P5,000 na lang, kapag benenta ko ng P6,000 kikita ka. Yes? Magkano? Isang libo. What happens to the P1,000? Remember the items of inclusion: C-G-R-D-Y-R-A. Ang isang ‘G’ diyan ay, “gains derived from dealings with property.” So you classify the P1,000 as gains derived from dealings with property. Right? But since it is a capital asset but not real property, it does not fall under letter B right? It does not fall under letter C, it does not fall under letter D. Therefore, it falls under letter A. The P1,000 is gross income, but subject to tax (NIT).

If you incur a loss, P5,000 ang Fair Market Value (FMV) and I sold it at P10. I lost. How much? P4990. ‘Yung P4990 isasama ko sa letter F, losses. Hind ba? At ike-claim ko as deduction? No. In the first place, that ‘L’ is not part of the personal exemption, additional exemption, and premium for health and hospitalization insurance. I am not affected by F, by the loss, because I am not engaged in trade or business.

‘Yung bang loss ko na P4990 may effect sa income ko? Wala. May effect ba sa tax due? Wala. Bakit? Hindi kasi siya pwede i-claim as a deduction. Bakit? Unang-una, hindi ako engaged in trade or business and because I am not engaged in trade or business, and losses is not one of the three. So what happens to the loss? Nothing. It will not affect my income tax. It has nothing to do with income taxation. But since there is no income tax due, the government losses, and when the government losses, it will have to recover the loss. How? Section 100. Transfer for Less than Adequate and Full Consideration.

Capital Gains Tax

Lumbera is a purely compensation income earner. I have a house worth, I purchased it for P3M. I sold it in 2005, now the FMV is P4M and I sold it for P7M. What kind of asset? Capital. Located in the Philippines, right? When I sold it at P7M, is there a tax consequence? Yes, because it is letter B. Capital Gains from Sale of Real Property located in the Philippines.

I am Lumbera, resident citizen, the tax due is 6% of the FMV or the gross selling price, whichever is higher. Now, what if I have a house worth P4M and I sold it for P50,000. May income ako? Wala. What is the nature of the asset? Real property. Capital. Is there tax consequence, income tax? Yes, because according to the law, gains from sale of real property is 6% of the fair market value, P4M or the gross selling price, P50,000, whichever is higher.

Gains in sale of real property not located in Philippines

I have a house located in the USA. The same, P4M ‘yung FMV now. I sold it at P7M. I have gains of P3M. How do you call the gains? Capital gains. But the property is located outside of the Philippines. Is there income? Yes. What happens to the income of P3M? Ibabato mo siya sa gross income. That will form part of gross income and the gross income together with the P3M gains will be subjected to NIT after taking the deductions of personal exemption, additional exemption, and premium for health and hospitalization insurance. Why are we not collecting 6% CGT? Because the 6% is allowed only if the property is located in the Philippines.

Transfer for insufficient consideration

If I sell at a loss at P50,000, may income ako? Wala. May income tax consequence? Wala. Loss, eh. May tax due? Oo. Section 100 again.

Ordinary gains in sale of personal property

Kotse. Car. I purchased at P1M. Now the FMV is P500,000. I sell it at P800,000. May income? Yes. Magkano? P300,000. Anong gagawin ko sa P300,000? Ibato mo sa gross income, because you are not engaged in trade or business, at wala kang ibang gagawin kundi ‘yung P300,000 ay ibato sa gross income. Subject to deductions? Yes. What kind of deductions? Personal exemption, additional exemption, and premium for health and hospitalization insurance because you are not engaged in trade or business.

Ordinary loss in sale of personal property

How about a loss? P50,000. May income ako? Wala. Wala akong ibabato sa gross income kasi at a loss. Magkano loss ko? P450,000. What is the effect of the loss of P450,000 and I am not engaged in trade in business? Simple. Nothing when it comes to income taxation. But is there tax consequence? Yes. Section 100 applies.

Depreciation of real and personal properties

Now let’s change the scenario. Lumbera is engaged in trade or business. Situation number 2 is that Lumbera is engaged in trade or business. Same assets and you are engaged in trade or business. Bumili ka ng parlor. Purchase price is P2M. Can I claim as deduction the purchase price of P2M? Yes or no? No. Why? Because this is capital expenditure. When I bought this parlor, what do I do with the books of asset? Real property bought in 2011 for P2M. Depreciation period? I presume that this is bagong-bago, the economic use is 20 years. So magkano ang bawas sa isang taon sa P2M? P100,000. So 2012: P1.9M; 2013: P1.8M; 2014: P1.7M and then 2015: P1.6M; 2014: P1.5M; 2015: P1.4M and so on and so forth, hanggang maubos, hanggang maging zero book value. Kung tangible personal property, car, iba naman. Iba’t ibang date yan eh. Alangan naman sa isang taon bibilhin mo lahat. In 2012, bumili ng kotse worth P1M. Depreciation period? 5 years (P1,000,000/5= P200,000. So P800,000; P600,000; P400,000; P200,000; P0 book value by 2017. Ano pa? Intangible personal property. Ano kaya? Shares of stocks. Magkano bili natin? P1M. 2014, nag-invest. Shares of stocks. Capital in character, eh. Ginagamit sa trade or business. P200,000 ang depreciation. Nagdedepreciate din ‘yan. IIang taon? Limang taon. Bawal i-deduct ang business

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang

expense? Yes, pero allowed mag-depreciate. So kapag tinanong kayo nandito sa 2014, magkano ang deduction in the form of depreciation ng 2014? P100,000, plus P100,000, plus P40,000, equals P240,000 ang depreciation expense as of 2014 as a deduction. Pagdating ng 2015, ganun din ‘yan. Depende kung ano ang binili mo kung paano ito dinedepreciate. Let’s say 2012: P20,000. Depreciation magkano? 16-12-8-4-0. Ok. In 2013, mahal ang gunting na panggupit (binili ng P10,000). 8-6-4-2-0. Isususlat mo lahat ‘yan. Nung 2014, si aircon na nabili ko naging obsolete. Nag issue ng regulation ang DENR: “All aircons of this size destroy the environment.” Mahal. P80,000. Na-phase out. So the asset na nabili ko at ginagamit at that time was ordinary. Na phase-out. Ano ang gagawin ko doon? Illagay ko sa stock room. Bumili ngayon ako ng bagong aircon na ganyang klase. Aircon 2 noong 2014. Magkano? P50,000. 40-30-20-10-0 book value. Ganyan ako magdepreciate. Si gunting, hindi na uso o hindi kaya nasira na. Inilagay nanaman sa bodega. Gunting 2. Bumili nanaman ako noong 2015. Binili ko ng P15,000, nasira si gunting. Magkano? P20,000. 16-12-8-4-0 book value. Habang hawak ko si asset, ang effect sa akin ay depreciation lang. ‘Yun lang ang pwede mong gawin. I-dedepreciate yung asset and claim depreciation as deduction. When I purchase the asset, no deduction will be allowed, but depreciation will be allowed. That will already have an effect on the tax due because depreciation is a form of deduction for the gross income.

Recognition of gains and losses in sale of ordinary assets

But what happens when you move these assets? So kanina, si Lumbera ay purely compensation income earner and I moved the asset. I should know that gains and losses affect income tax. Now, I am engaged in trade or business. What are the effects of the recognition of the gains and losses on ordinary and capital assets? The rule is: all gains and losses are recognized. The term is recognition of gains and losses. How do you recognize gains and losses? Very simple. Let’s take the case of aircon 1 and aircon 2 and gunting 1 and gunting 2. Ordinary asset. When aircon 1 in the year 2014 has book value of P12,000 and still being used in trade or business, the asset is ordinary. When aircon 1 in 2014 became obsolete and you transferred it to the bodega, the asset is converted from ordinary to capital. When gunting 1 is being used in trade or business, ordinary asset. But when gunting 1 became kalawangin at hindi mo na ginagamit, it can be converted into capital asset. The only time that an asset is not converted from ordinary to capital is, if the business is real estate development and it involves land. When lands are in a taxpayer who is engaged in real estate and development and sale of real property, all lands are treated forever as ordinary asset even if the land become idle land. It doesn’t change its classification from ordinary to capital, or from ordinary to capital, depending on the current use of the taxpayer at any

particular time. So let us look at aircon 2 because it was bought in the year 2014. In the year 2016, aircon 2 is an ordinary asset. Let’s look at 2016. Assuming that we are now in 2016. Aircon 2 is an ordinary asset. Now (after 2 years), what is the book value of aircon 2? P30,000 (depreciation is P10,000 each year). Sabi ko, book value of P30,000. Nabenta ng P35,000. What do I realize? P5,000 ordinary gain. Ang income na ordinary gain na ‘yan, ay ibabato mo dito para maging part of the gross income? Hindi. You recognize the gain but only to the extent of the losses. How does it work? So for aircon 2, ‘yung ordinary gain is P5,000. Ito (P5,000), hindi isasaksak doon (Letter A) katulad ni Lumbera na hindi engaged in trade or business. I call this, personal terminology ko ‘to, “side stepping”. The “sidestepping” refers to the recognition of gains up to extent of the losses. We recognize gains up to the extent of the losses. That’s under Section 39 (C) of the Tax Code. So here you gain P5,000 for the same year of 2016. Gunting 2. Magkano ang book value? P16,000. Ibenenta mo si gunting 2, ordinary asset. Nabenta mo ng P10,000. Lugi. Loss. Magkano? P6,000. How do you call that? Ordinary loss. For the year 2016, assuming these are the two transactions involving movements of assets. Then for the year 2016, year end, I have ordinary gains of P5,000 and ordinary loss of P6,000. Therefore, what I arrived at the end of the year is net ordinary loss of P1,000. What happens to the loss? Ito ba isasama mo sa allowable decoctions para lumiit ‘yung gross income mo? No! According to Section 39, you only recognize gains up to the extent of the losses. You are allowed 1 benefit. Your gain of P5,000, which could have been easily added to your gross income, and if added will of course increase your tax due. But because of recognition of gains versus losses, the loss has the effect of reducing your gains and therefore you don’t have anything to add here. Therefore, the effect to you is reduced tax as well. But when you arrive at the end of the year at an ordinary loss, wala nang mangyayari because the net ordinary loss is not the “L” here. Tapos na ang usapan. Now, kasi take note: lugi naman ako kasi loss sa dulo. Hindi ka lugi kahit loss sa dulo kasi nagbenefit ka naman ng isang beses. Ano? Noong nag-gain ka ng P5,000 at nabawasan ng P6,000. Ang effect noon ay sa halip na maglagay ka ng gross income na limang libo, wala kang sinama sa gross income kaya ka nagbenefit ng isang beses.

Now, when at the end of the year you realize net ordinary gains, pwede mangyari ‘yun. Baliktarin natin. Ang gunting ay nabenta mo ng P8,000. So P8,000 versus loss, na 6K. Ang mangyayari sa ‘iyo ay may ordinary gain na P2,000. Ano ang gagawin mo diyan? Eto ibabato mo dun (gross income). In which case, lalaki ang tax due mo. Pero, lugi ka pa ba? Hindi. Bakit? Nagbenepisyo ka na. Ano?