Generalidades sobre grupos

Deductions are items or amounts which the law allows to be deducted from the gross of income of a taxpayer in order to arrive at taxable income.

In general, deductions or allowable deductions are business expenses and losses incurred which the law allows to reduce gross business income to arrive at net income subject to tax. (Sec. 65, Rev. Reg. No. 2) Deductions are in the nature of an exemption from taxation; they are strictly construed against the claimant, who must point to a specific provision allowing them and who has the burden of proving that they falls within the purview of such provision. Thus, all deductions must be substantiated, except when the law dispenses with the records, documents or receipts to support the deductions.

If the exemption is not expressly stated in the law, the taxpayer must at least be within the purview of the exemption by clear legislative intent (Commissioner of Customs v. Philippine Acetylene Co.) However, if there is an express mention in the law or if the taxpayer falls within the purview of the exemption by clear legislative intent, the rule on strict construction will not apply. (Commissioner v. AnoldusCaprentry Shop)

The purpose of deductions from gross income is to provide the taxpayer a just and reasonable tax amount as the basis of income tax. It is because many taxpayers spend adequate expenditures in order to obtain a legitimate income.

Types of deductions

There are three (3) types of deductions from gross income:

(a) itemized deductions in Section 34(A) to (J) and (M) available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines;

(b) optional standard deduction in Section 34(L) available only to individual taxpayers deriving

business, professional, capital gains and passive income not subject to final tax, or other income; and

(c) thespecial deductions in Sections 37 and 38 of the NIRC, and in special laws like the BOI law (E.O. 226).

General rules

(a) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession

(b) Deductions must be supported by adequate receipts or invoices (except standard deduction) (c) Additional requirement relating to withholding Return of capital (cost of sales or services)

Income tax is levied by law only on income; hence, the amount representing return of capital should be deducted from proceeds from sales of assets and should notbe subject to income tax.

Costs of goods purchased for resale, with proper adjustment for opening and closing inventories, are deducted from gross sales in computing gross income (Sec. 65, Rev. Regs. 2)

(a) Sale of inventory of goods by manufacturers and dealers of properties:

In sales of goods representing inventory, the amount received by the seller consists of return of capital and gain from sale of goods or properties. That portion of the receipt representing return of capital is not subject to income tax. Accordingly, cost of goods manufactured and sold (in the case of manufacturers) and cost of sales (in the case of dealers) is deducted from gross sales and is reflected above the gross income line in a profit and loss statement.

(b) Sale of stock in trade by a real estate dealer and dealer in securities:

Real estate dealers and dealers in securities are ordinarily not allowed to compute the amount representing return of capital through cost of sales. Rather they are required to deduct the total cost specifically identifiable to the real property or shares of stock sold or exchanged.

(c) Sale of services:

Their entire gross receipts are treated as part of gross income.

Itemized deductions

These are enumerated in Section 34 of the NIRC. Additional deductions are granted to insurance

companies in Section 37, while losses from wash sales of stock or securities by a dealer in securities are provided for in Section 38 of the NIRC. Other itemized deductions could be granted under general or special laws, e.g. additional training expenses are allowed to enterprises registered with PEZA, BOI, and SBMA.

Timing of Claiming Deductions:

A taxpayer has the right to deduct all authorized allowances for the taxable year. As a rule, if he does not within any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them from the income of the next of any succeeding year. (Sec. 76, Income Tax Regulations). Expenses

Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income.

Includes:

(a) Salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefits furnished or granted by the employer to the employee

(b) Travel expenses (c) Rentals

(d) Entertainment, recreation and amusement expenses

(e) Other expenses such as repairs or those incurred by farmers and other persons in agribusiness Requisites for deductibility of business expenses.— (a) Ordinary AND necessary;

ORDINARY - normal and usual in relation to the taxpayer's business and surrounding circumstances; need not be recurring

NECESSARY - appropriate and helpful in the development of taxpayer's business or are proper for the purpose of realizing a profit or minimizing a loss

(b) Paid or incurred during the taxable year; (c) Others: (not in the SC syllabus)

(1) Paid or incurred in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession; (2) Substantiated by adequate proof –

documented by official receipts or adequate records, which reflect the amount of expense deducted and the connection or relation of the

expense to the business/trade of the taxpayer);

(3) Legitimately paid (not a BRIBE, kickback, or otherwise contrary to law, morals, public policy);

(4) If subject to withholding tax, the tax required to be withheld on the expense paid or payable is shown to have been properly withheld and remitted to the BIR on time;

(5) Amount must be reasonable.

Note: The expenses allowable to a non-resident alien or a foreign corporation consist of only such expenses as are incurred in carrying on any business or trade conducted within the Philippines exclusively. (Sec. 77 RR 2)

COHAN Rule: This relief will apply if the taxpayer has shown that it is usual and necessary in the trade to entertain and to incur similar kinds of expenditures, there being evidence to show the amounts spent and the persons entertained, though not itemized. In such a situation, deduction of a portion of the expenses incurred might be allowed even if there are no receipts or vouchers. Absence of invoices, receipts or vouchers, particularly lack of proof of the items constituting the expense is fatal to the allowance of the deduction (Gancayco v. Collector,1 SCRA 980).

Substantiation requirement

Sec. 34(A)(1)(b), NIRC: No deduction from gross income shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (1) the AMOUNT of the expense being deducted, and (2) 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.

When to ACCRUE expenses: “all –events test” states that under the accrual method of accounting, expenses are deductible in the taxable year in which: (1) all events have occurred which determine the liability; and (2) the amount of liability can be determined with reasonable accuracy.

Kinds of business expenses.— These are:

(1) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid (Compensation for

(3) Cost of materials

(4) Rentals and/or other payments for use or possession of property

(5) Repairs and maintenance

(6) Expenses under lease agreements (7) Expenses for professionals (8) Entertainment expenses (9) Political campaign expenses (10) Training expenses

(11) Others

Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid (Compensation for personal services actually rendered)

(1) Given for personal services actually rendered (2) Amount is reasonable

Bonuses are deductible when: (a) made in good faith

(b) given as additional compensation for personal services actually rendered

(c) such payments, when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered

Travelling expenses

This include transportation expenses and meals and lodging (Sections 65 and 66, Rev. Reg. No. 2)

(1) Expenses must be reasonable and necessary. (2) Must be incurred or paid “while away from home”

Tax home is the principal place of business, when referring to “away from home”

(3) Incurred or paid in the conduct of trade or business.

Note: However, necessary transportation expenses of the taxpayer (which are different from the transportation expenses included in the term “travel expenses”) in its “tax home” are deductible. Thus, a taxpayer operating its business in Manila is allowed transportation expenses from its office to its customers’ place of business and back. But the transportation expenses of an employee from his residence to its office and back are not deductible as they are considered personal expenses.

Cost of materials

Deductible only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that their cost has

not been deducted in determining the net income for any previous year.

Rentals and/or other payments for use or possession of property

(1) Required as a condition for continued use or possession of property.

(2) For purposes of trade business or profession. (3) Taxpayer has not taken or is not taking title to the

property or has no equity other than that of lessee, user, or possessor.

Repairs and maintenance

(a) Incidental or ordinary repairs are deductible Repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient working condition, may be deducted as expenses, provided the plant or property account is not increased by the amount of such expenditure. The life of the asset referred to is the probable, normal, useful life for the purpose of the allowance for the return of the capital investment – not what the life that would have been if no repairs had been made after the property was damaged by a casualty. Since the repairs prolonged the lives of the said vessels of petitioners, the disallowance must be sustained. (Visayan Transportation Co. v. CTA, CTA Case No. 1119, Sept. 30, 1964).

(b) Extraordinary repairs are not deductible – they are capital expenditures

(1) Repairs which add material value to the property or appreciably prolong its life (2) Repairs in the nature of replacement, to the

extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserves if such account is kept. (Sec. 68, Rev. Regs. 2).

Expenses under lease agreements Requisites for deductibility:

(1) Required as a condition for continued use or possession;

(2) For purposes of the trade, business or possession; (3) Taxpayer has not taken or is not taking title to the property or has no equity other than that of lessee, user, or possessor.

Expenses for professionals

Deductible in the year the professional services are rendered, not in the year they are billed, provided that the “all events” is present.

“All events test”requires:

(a) Fixing a right to income or liability to pay; and (b) The availability of reasonably accurate

determination of such income or liability.

The “all-events test” does not demand that the amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount. (Commissioner v. Isabela Cultural Corporation, GR. 172231, Feb. 12, 2007) check citation

A professional may claim as deductions the cost of supplies used by him in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals. (Mamalateo) Entertainment expenses

Requisites for deductibility: (1) Reasonable in amount.

(2) Paid or incurred during the taxable period. (3) Directly connected to the development,

management, and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct thereof.

(4) Not to exceed such ceiling as the Secretary of Finance prescribe (under RR 10-02, in no case to exceed 0.50% of net sales for sellers of goods or properties or 1% of net revenues for sellers of services, including taxpayers engaged in the exercise of profession and use or lease of properties)

(5) Not incurred for purposes contrary to law, morals, public policy or public order.

(6) Must be substantiated with sufficient evidence such as receipts and/or adequate records. Exclusions from Entertainment, Amusement and Recreation (EAR) expenses:

(1) Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee relationship

(2) Expenses for charitable or fund raising events (3) Expenses for bona fide business meeting of

stockholders, partners or directors

(4) Expenses for attending or sponsoring an employee to a business league or professional organization meeting

(5) Expenses for events organized for promotion marketing and advertising, including concerts, conferences, seminars, workshops, conventions and other similar events; and

(6) Other expenses of a similar nature. Political campaign expenses

Amount expended for political campaign purposes or payments to campaign funds are not deductible either as business expenses or as contribution (CTA Case No. 695, April 30, 1969, citing Mertens)

Training expenses

BIR Ruling 102-97 (Sept. 29, 1997):

Under Section 30 of the Tax Code, as implemented by Sec. 20 of the Revenue Regulations No. 2, organization and pre-operating expenses of a corporation (including training expenses) are considered as capital expenditures and are therefore, not deductible in the year they are paid or incurred. But taxpayers who incur these expenses and subsequently enter the trade or business to which the expenditures relate can elect to amortize these expenditures over a period not less than sixty (60) months.

This rule, however, does not apply to a situation where an existing corporation incurs these same expenditures for the purpose of expanding its business in a new line of trade, venture or activity. Others

(a) Expenses Allowable to Private Educational Institutions:

(b) In addition to the expenses allowable as deductions under the NIRC, a private proprietary educational institution may at its OPTION, elect either:

(1) To deduct expenditures otherwise considered as capital outlays or depreciable assets incurred during the taxable year for the expansion of school facilities, OR

(2) To deduct allowances for depreciation thereof. Thus, where the expansion expense has been claimed as a deduction, no further claims for yearly depreciation of the school facilities are allowed. Advertising Expenses

The media advertising expenses which were found to be inordinately large and thus, not ordinary, and which were incurred in order to protect the taxpayer’s brand franchise which is analogous to the maintenance of goodwill or title to one’s property, are not ordinary and necessary expenses but are capital expenditures, which should be spread out over a reasonable period of time. (CIR v. General Foods (Phils.)Inc, GR No. 143672, April 24, 2003) rtens)

Requisites for deductibility.— (1) There is an indebtedness.

(2) The indebtedness is that of the taxpayer

(3) The indebtedness is connected with the taxpayer‘s trade, profession, or business. (4) The interest must be legally due.

(5) The interest must be stipulated in writing. (6) The taxpayer is LIABLE to pay interest on the

indebtedness.

(7) The indebtedness must have been paid or accrued during the taxable year.

(8) The interest payment arrangement must not be 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 nottreated as a capital expenditure,

Limitation: The taxpayer's allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax (see chapter on taxation of passive income for interest income); effective January 1, 2009.

Non-deductible interest expense.—

(a) Interest paid in advance by the taxpayer who reports income on cash basis shall only be allowed as deduction in the year the indebtedness is paid.

(b) If the indebtedness is payable in periodic amortizations, only 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.

(c) Interest payments made between related taxpayers.

(d) Interest on indebtedness incurred to finance petroleum exploration.

Related Taxpayers

(a) Between members of the family, i.e. brothers and sisters (whether by the whole or half-blood), spouse, ancestor, and lineal descendants; or (b) Except in case of distributions in liquidation,

between an individual and a corporation, where the individual owns directly or indirectly more than 50% of the outstanding stock of the corporation

(c) Except in the case of distributions in liquidation, between two corporations where:

(1) Either one is a personal holding company of a foreign personal holding company with respect to the taxable year preceding the date of the sale of exchange; and

(2) More than 50% of the outstanding stock of each is owned, directly or indirectly, by or for the same individual; or

(d) Between parties to a trust- (1) Grantorand Fiduciary; or

(2) Fiduciary of a trust and fiduciary of another trust if the same person is a grantor with respect to each trust; or

(3) Fiduciaryand Beneficiary Interest subject to special rules.— Interest paid in advance

(a) No deduction shall be allowed if within the taxable year an individual taxpayer reporting income on cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise.

(b) But the deduction shall be allowed in the year the indebtedness is paid

Interest periodically amortized

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

Interest expense incurred to acquire property for use in trade/business/profession

At the option of the taxpayer, interest expense on a capital expenditure may be allowed as:

(1) A deduction in full in the year when incurred; (2) A capital expenditure for which the taxpayer may

claim only as a deduction the periodic amortization of such expenditure.

Should the taxpayer elect to deduct the interest payments against its gross income, the taxpayer cannot at the same time capitalize the interest payments. In other words, the taxpayer is not entitled to both the deduction from gross income and the adjusted (increased) basis for determining gain or loss and the allowable depreciation charge.( Paper Industries Corp. v. Commissioner, 250 SCRA 434) Reduction of interest expense/interest arbitrage The taxpayer's allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income subjected to final tax; effective January 1, 2009. (RA 9337)

This limitation is apparently intended to counter the tax arbitrage scheme where a taxpayer obtains an interest-bearing loan and places the proceeds of such loan in investments that yield interest income

subject to preferential tax rate of 20% final

In document Introducción a la Teoría de Grupos (página 20-34)