Summary and Requisites of Allowable Deductions
EXPENSES (2) Substantiated by adequate proof documented by
Section 34 (A) Expenses. -
"(1) Ordinary and Necessary Trade, Business or Professional
Expenses. -
"(a) In General. - There shall be allowed as deduction from gross
income all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession, including:
"(i) A reasonable allowance for salaries, wages, and other
forms of compensation for personal services actually rendered, including
the grossed-up monetary value of fringe benefit furnished or granted by the
employer to the employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;
"(ii) A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade, business or
profession;
"(iii) A reasonable allowance for rentals and/or other
payments which are required as a condition for the continued use or
possession, for purposes of the trade, business or profession, of property to
which the taxpayer has not taken or is not taking title or in which he has no
equity other than that of a lessee, user or possessor;
"(iv) A reasonable allowance for entertainment,
amusement and recreation expenses during the taxable year, that are
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 of his or its trade, business or exercise of a
profession not to exceed such ceilings as the Secretary of Finance may, by
rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the special
circumstances, nature and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense incurred for
entertainment, amusement or recreation that is contrary to law, morals,
public policy or public order shall in no case be allowed as a deduction.
"(b) Substantiation Requirements. - No deduction from gross income
shall be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being deducted, and (ii) 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.
"(c) Bribes, Kickbacks and Other Similar Payments. - No deduction
from gross income shall be allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an official or employee of the
national government, or to an official or employee of any local government
unit, or to an official or employee of a government-owned or -controlled
corporation, or to an official or employee or representative of a foreign
government, or to a private corporation, general professional partnership,
or a similar entity, if the payment constitutes a bribe or kickback.
"(2) Expenses Allowable to Private Educational Institutions. - In
addition to the expenses allowable as deductions under this Chapter, a
private educational institution, referred to under Section 27(B) of this Code,
may at its option elect either: (a) to deduct expenditures otherwise
considered as capital outlays of depreciable assets incurred during the
taxable year for the expansion of school facilities, or (b) to deduct allowance
for depreciation thereof under Subsection (F) hereof.
Business expenses deductible from gross income including the ordinary and
necessary expenditures directly connected with or pertaining to the
taxpayers trade or business.
REQUISITES FOR DEDUCTIBILITY OF BUSINESS
EXPENSES (O-T-D-S-L-W-R)
(a) Ordinary AND necessary;
(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;
1 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
official receipts or adequate records);
(3) Legitimately paid (not a BRIBE, kickback, or
otherwise contrary: 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) Reasonable Amount.
Nota Bene: Nonresident alien or a foreign corporation only
such expenses incurred in carrying on any business or trade
conducted within the Philippines exclusively. [Sec. 77 RR 2)
Substantiation requirement Sec. 34(A)(1)(b),
NIRC: No deduction unless 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 of expense to
development, management, operation and/or conduct
of the trade, business or profession of the taxpayer.
COHAN RULE
A common law rule whereby taxpayers, when unable
to produce records of actual expenditures, may rely on
reasonable estimates provided there is some factual
basis for it.
ALL-EVENTS-TEST
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 (S-T-C-R-R-L-P-E-P-T-O)
(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
(2) Travelling expenses
(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 and Wages
Given for personal services must be actually
rendered and reasonable.
 Summary and Requisites of Allowable Deductions
To be allowed deduction withholding tax must
have been paid [RR No. 12-2013].
Bonuses (Deductible) (G-A-P)
(a) made in good faith
(b) given as additional compensation for personal
services actually rendered
(c) payments, when added to the stipulated
salaries, do not exceed a reasonable compensation for
the services rendered
Traveling expenses (R-I-T-I)
Include transportation expenses and meals and lodging
[Sections 65 and 66, Rev. Reg. No. 2]
(1) Reasonable and necessary.
(2) Incurred or paid while away from home
(3) Tax home is principal place of business (away from
home)
(4) Incurred or paid in conduct of trade or business.
Nota Bene: Taxpayer: Manila-Office-Customers place of
business-Allowed Employee (residence)-office and back- Not
Allowed (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: (R-P-T)
(1) Required as a condition for continued use or
possession of property.
(2) 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.
Nota Bene:
Accrual basis- deductible -liability is incurred during the
period of use.
Cash basis- deductible when it is incurred and paid.
Prepaid rental- taxable income to the lessor in the year
when it was received.
Advance payment -not deductible-lessee until the
period is used.
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
2 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
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.
(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]
Nota Bene: All maintenance expenses on account of
nondepreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses under lease agreements (deductible)
(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)
Year the professional services rendered, (not year they
are billed, provided 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.
Nota Bene:
Not necessary liability/income known absolutely.
Reasonable accuracy which implies something less
than an exact or completely accurate amount.
[Commissioner v. Isabela Cultural Corporation, GR.
172231, Feb. 12, 2007]
A professional (claim deductions)
1) the cost of supplies used by him in the practice
of his profession
2) expenses paid in the operation and repair of
transportation equipment used in making
professional calls
3) dues to professional societies
4) subscriptions to professional journals.
[Mamalateo]
 Summary and Requisites of Allowable Deductions
Entertainment/Representation expenses
Entertainment, amusement and recreation (EAR)
expenses incurred or paid during the year-directly
connected to development, management and
operation of the trade, business or profession of
taxpayer.
Requisites for deductibility:
(a) Reasonable in amount.
(b) Paid or incurred during the taxable period.
(c) 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. (d) Not to
exceed such ceiling as the Secretary of Finance
prescribe (not 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)
(e) Not incurred for purposes contrary to law, morals,
public policy or public order.
(f) Must be substantiated with sufficient evidence such
as receipts and/or adequate records.
Exclusions from EAR expenses:
(1) Expenses which are treated as compensation or
fringe benefits for services rendered under an
employeremployee 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 are
NOT deductible either as business expenses or as
contribution [CTA Case No. 695, April 30, 1969, citing
Mertens]
Training expenses
3 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
Under Section 30 of the Tax Code, as implemented by
Sec. 20 of the Revenue Regulations No. 2, organization
and preoperating 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. [BIR Ruling 102-97, Sept. 29, 1997] 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:
a) To deduct expenditures otherwise considered
as capital outlays or depreciable assets
incurred during the taxable year for the
expansion of school facilities, OR
b) (b) 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 taxpayers brand
franchise which is analogous to the maintenance of
goodwill or title to ones 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]
INTEREST
Section 34 (B) Interest. -
"(1) In General. - The amount of interest paid or incurred within a
taxable year on indebtedness in connection with the taxpayer's profession,
trade or business shall be allowed as deduction from gross income:
Provided, however, That the taxpayer's otherwise allowable deduction for
 Summary and Requisites of Allowable Deductions EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS

interest expense shall be reduced by an amount equal to the following corresponds to the amount of the principal amortized
percentages of the interest income subjected to final tax:
or paid during the year shall be allowed as deduction in
"Forty-one percent (41%) beginning January 1, 1998; such taxable year.
"Thirty-nine percent (39%) beginning January 1, 1999; and
(c) Interest payments made between related taxpayers.
"Thirty-eight percent (38%) beginning January 1, 2000.
(d) Interest on indebtedness incurred to finance
"(2) Exceptions. - No deduction shall be allowed in respect of interest petroleum exploration.
under the succeeding subparagraphs:
"(a) If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an indebtedness on which an CASES WHEN NO DEDUCTION IS ALLOWED BETWEEN
interest is paid in advance through discount or otherwise: Provided, That RELATED TAXPAYERS
such interest shall be allowed as a deduction in the year the indebtedness is
paid: Provided, further, That if the indebtedness is payable in periodic
(1) Between members of the family (brother,
amortizations, the amount of interest which corresponds to the amount of sister, ascendant, descendant, lineal
the principal amortized or paid during the year shall be allowed as deduction
descendant)
in such taxable year;
"(b) If both the taxpayer and the person to whom the (2) Between an individual and a corporation-
payment has been made or is to be made are persons specified under where the individual paid interest on a loan
Section 36(B); or
granted by the corporation more than 50% of
"(c) If the indebtedness is incurred to finance petroleum
exploration. the capital stock of which is owned by the
individual
"(3) Optional Treatment of Interest Expense. - At the option of the
taxpayer, interest incurred to acquire property used in trade, business or
(3) Between two corporations- where one
exercise of a profession may be allowed as a deduction or treated as a corporation owns more than 50% of the other
capital expenditure.
(4) Between a grantor and fiduciary of a trust
(5) Between the fiduciary of a trust and the
REQUISITES FOR DEDUCTIBILITY fiduciary of another trust with the same
(1) There is an indebtedness. grantor
(2) The indebtedness is that of the taxpayer (6) Between a fiduciary of a trust and a beneficiary
(3) The indebtedness is connected with the taxpayers of such trust.
trade, profession, or business.
(4) The interest must be legally due.
(5) The interest must be stipulated in writing. INTEREST SUBJECT TO SPECIAL RULES
(6) The taxpayer is LIABLE to pay interest on the Interest paid in advance
indebtedness. a. No deduction shall be allowed if within the
(7) The indebtedness must have been paid or accrued taxable year an individual taxpayer
during the taxable year. reporting income on cash basis incurs an
(8) The interest payment arrangement must not be indebtedness on which an interest is paid
between related taxpayers in advance through discount or otherwise.
(9) The interest must not be incurred to finance b. But the deduction shall be allowed in the
petroleum operations. year the indebtedness is paid
(10) In case of interest incurred to acquire property
used in trade, business or exercise of profession, the Interest periodically amortized
same was not treated as a capital expenditure If the interest is payable in periodic
amortizations, the amount of interest
Note: The taxpayers allowable deduction for interest which corresponds to the amount of the
expense have been reduced by an amount equal to principal amortized or paid during the year
33% of the interest income subjected to final tax. shall be allowed as deduction in such
(Effective January 1, 2009) taxable year

NON-DEDUCTIBLE INTEREST EXPENSES Interest expense incurred to acquire property

(a) Interest paid in advance by the taxpayer who for use in trade, business or profession
reports income on cash basis shall only be allowed as At the option of the taxpayer, interest
deduction in the year the indebtedness is paid. expense on a capital expenditure may be
(b) If the indebtedness is payable in periodic allowed as:
amortizations, only the amount of interest which
4 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
 Summary and Requisites of Allowable Deductions
(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 withholding
tax.
TAXES
Section 34-(C) Taxes. -
"(1) In General. - Taxes paid or incurred within the taxable year in
connection with the taxpayer's profession, trade or business, shall be
allowed as deduction, except:
(a) The income tax provided for under this Title;
"(b) Income taxes imposed by authority of any foreign
country; but this deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any extent the benefits of
paragraph (3) of this Subsection (relating to credits for taxes of foreign
countries);
"(c) Estate and donor's taxes; and
"(d) Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed.
"Provided, That taxes allowed under this Subsection, when refunded or
credited, shall be included as part of gross income in the year of receipt to
the extent of the income tax benefit of said deduction.
"(2) Limitations on Deductions. - In the case of a nonresident alien
individual engaged in trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes provided in paragraph (1) of
5 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
this Subsection (C) shall be allowed only if and to the extent that they are
connected with income from sources within the Philippines.
"(3) Credit Against Tax for Taxes of Foreign Countries. - If the
taxpayer signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall be credited with:
"(a) Citizen and Domestic Corporation. - In the case of a
citizen of the Philippines and of a domestic corporation, the amount of
income taxes paid or incurred during the taxable year to any foreign country;
and
"(b) Partnerships and Estates. - In the case of any such
individual who is a member of a general professional partnership or a
beneficiary of an estate or trust, his proportionate share of such taxes of the
general professional partnership or the estate or trust paid or incurred
during the taxable year to a foreign country, if his distributive share of the
income of such partnership or trust is reported for taxation under this Title.
"An alien individual and a foreign corporation shall not be allowed the
credits against the tax for the taxes of foreign countries allowed under this
paragraph.
"(4) Limitations on Credit. - The amount of the credit taken under
this Section shall be subject to each of the following limitations:
"(a) The amount of the credit in respect to the tax paid or
incurred to any country shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from
sources within such country under this Title bears to his entire taxable
income for the same taxable year; and
"(b) The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is taken, which the
taxpayer's taxable income from sources without the Philippines taxable
under this Title bears to his entire taxable income for the same taxable year.
"(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes
when paid differ from the amounts claimed as credits by the taxpayer, or if
any tax paid is refunded in whole or in part, the taxpayer shall notify the
Commissioner, who shall redetermine the amount of the tax for the year or
years affected, and the amount of tax due upon such redetermination, if
any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or
refunded to the taxpayer. In the case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the allowance of this credit may
require the taxpayer to give a bond with sureties satisfactory to and to be
approved by the Commissioner in such sum as he may require, conditioned
upon the payment by the taxpayer of any amount of tax found due upon
any such redetermination. The bond herein prescribed shall contain such
further conditions as the Commissioner may require.
"(6) Year in Which Credit Taken. - The credits provided for in
Subsection (C)(3) of this Section may, at the option of the taxpayer and
irrespective of the method of accounting employed in keeping his books, be
taken in the year in which the taxes of the foreign country were incurred,
subject, however, to the conditions prescribed in Subsection (C)(5) of this
Section. If the taxpayer elects to take such credits in the year in which the
taxes of the foreign country accrued, the credits for all subsequent years
shall be taken upon the same basis, and no portion of any such taxes shall
be allowed as a deduction in the same or any succeeding year.
"(7) Proof of Credits. - The credits provided in Subsection (C)(3)
hereof shall be allowed only if the taxpayer establishes to the satisfaction of
the Commissioner the following:
"(a) The total amount of income derived from sources
without the Philippines;
"(b) The amount of income derived from each country,
the tax paid or incurred to which is claimed as a credit under said paragraph,
such amount to be determined under rules and regulations prescribed by
the Secretary of Finance; and
"(c) All other information necessary for the verification
and computation of such credits.
 Summary and Requisites of Allowable Deductions EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS

Taxes paid or incurred within the taxable year in These are made for the purpose of maintenance or
connection with the taxpayer's profession, trade or repair of local benefits, if the payment of such
business are allowed as deductions. assessment is ordinary and necessary in the conduct of
trade, business or profession.
REQUISITES FOR DEDUCTIBILITY
1. Paid or incurred within the taxable year; Non-Deductible as taxes when
2. Paid or incurred in connection with the taxpayers The assessments are made for the purpose of
trade, profession or business; constructing local benefits tending to increase the
3. Imposed directly on the taxpayer; and value of the property assessed, the payments are in the
4. Not specifically excluded by law from being nature of capital expenditures that are not deductible.
deducted from the taxpayers gross income.
C. Tax credit vis--vis deduction
DEDUCTIBLES (Sec. 80, RR No. 2)
Documentary Stamp Tax; Distinctions
Occupation Tax; TAX CREDIT TAX DEDUCTION
Privilege and License fees; Deducted from tax Deducted from income
Excise Taxes; due before tax
Import Duties; Reduces income tax Reduces taxable
Local Business Tax; liability income upon which tax
Community Tax; liability is computed
Municipal Tax Source: only foreign Source: deductible
Local government taxes; and income taxes paid taxes
Other similar impositions
A credit differs from deduction to the extent that the
Exceptions
former is subtracted from the tax while the latter is
Taxes not allowed as deduction from gross income to
subtracted from income before the tax is computed.
arrive at taxable income.
[CIR v. Bicolandia Drug Corp. G.R. No. 148083, July 21,
2006]
NON-DEDUCTIBLES (Sec. 81, RR No. 2; Sec 34 C (1) a to
d, NIRC)
Tax Credit
Income tax provided under the NIRC;
Tax credit is the amount allowed by law to reduce the
Income taxes imposed by authority of any foreign
Philippine income tax due, subject to limitations, on
country;
account of taxes paid or accrued to a foreign country.
Estate tax and donors taxes;
Taxes assessed against local benefits of a kind
This is to avoid the rigors of indirect double taxation,
tending to increase the value of property
although not prohibited by the Constitution for being
assessed;
violative of the due process, results to a tax being paid
Taxes on sale, barter, exchange of shares of stock
twice on the same subject matter or transaction.
listed and traded through the local stock exchange
or through initial public offering;
Taxes paid in foreign countries
Final taxes;
The taxpayer may either claim it as:
Presumed capital gains tax
1. Foreign tax credits against Philippine income tax
due of citizens and domestic corporations;
A. Treatments of surcharges/ interests/ fines for
2. A deduction from gross income of citizens and
delinquency
domestic corporations.
These are not considered as taxes, hence they are not
The following are entitled to tax credit:
allowed as deductions. However, interests on
Resident citizens;
delinquent taxes are deductible as they considered as
Domestic corporations, which include all
interest on indebtedness and not as taxes. (CIR v.
partnerships except general professional
Palanca, Jr. 18 SCRA 496)
partnerships (Sec. 34 C [3] a, NIRC);
Members of a General Professional Partnership;
Although interest payment for delinquent taxes is not
and
deductible as tax, the taxpayer is not precluded thereby
Beneficiary of an estate or trust (Sec. 34 C [3] b,
from claiming said interest payment as deduction as
NIRC)
such. [CIR v. Vda. de Prieto, 1960]
The following are NOT entitled to tax credit:
B. Treatment of Special Assessment
Aliens, whether resident or non-resident;
Deductible as taxes when
6 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
 Summary and Requisites of Allowable Deductions EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS

Foreign corporations, whether resident or non- 3. Net Operating Loss Carry-Over

resident; and 4. Capital Losses
Non-resident citizens including overseas 5. Losses from Washed Sales of Stocks or
contracted workers and seamen;
Securities
Note: Tax credits for foreign taxes are allowed only for 6. Wagering Losses
income derived from sources outside the Philippines. 7. Abandonment loss
The above taxpayers are not entitled to tax credit; they
are taxable only on income derived from Philippine Under this provision, you have two kinds of losses:
sources. 1. Ordinary losses losses which you incur in
your business, trade or profession
Limitations on Tax Credit
2. Casualty losses still considered an ordinary
1. Per Country Limit
The amount of tax credit shall not exceed the same loss because it is related to your business but it is by
proportion of the tax against which such credit is reason of casualties (fires, storms, shipwreck, including
taken, which the taxpayer's taxable income from theft, embezzlement, etc.)
sources within such country bears to his entire taxable
income for the same taxable year (Sec. 34 C (4)a, ORDINARY LOSSES
NIRC); and
REQUISITES OF DEDUCTIBILITY OF ORDINARY LOSSES
2. Worldwide Limit
The total amount of the credit shall not exceed the a. The losses are that of the taxpayer.
same proportion of the tax against which such credit Situation: Supposing you are engaged in a buy and sell
is taken, which the taxpayer's taxable income from business and you have a very loyal customer. However,
sources without the Philippines taxable bears to his that customer became bankrupt and he can no longer
entire taxable income for the same taxable year (Sec. buy anything from you. Your sales decreased and you
34 C (4)b, NIRC).
lost some profit. Can you claim such as part of your
Note: Worldwide Limit applies where taxes are paid to business loss (ordinary loss)?
two or more foreign countries. Allowable tax credit is I cannot claim such loss because it was
the lower between the tax credit computed under Per not me who sustained such loss but the
Country limit and that computed under Worldwide customer. As a requisite of deductibility, it
Limit. must be the taxpayer who has incurred such
loss.

LOSSES b. They are actually sustained during the

taxable year.
Section 34 (D) Losses.
(1) In General. - Losses actually sustained during the taxable year
and not compensated for by insurance or other forms of indemnity shall be Situation: Supposing you are a real estate dealer and
allowed as deductions:
you bought a certain property as part of your inventory,
(a) If incurred in trade, profession or business;
but you realize that it is a fault line. So the value of that
(b) Of property connected with the trade, business or profession, property decreased. Can you recognize that loss?
if the loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
You still cannot recognize it as a loss.
As a requisite of deductibility, there must be a
The Secretary of Finance, upon recommendation of the completed and closed transaction, an actual
Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the exchange. The requisite missing is that the
taxpayer shall submit a declaration of loss sustained from casualty or from losses must be actually sustained. Mere
robbery, theft or embezzlement during the taxable year: Provided, however,
increase in the value of the property is not
That the time limit to be so prescribed in the rules and regulations shall not
be less than thirty (30) days nor more than ninety (90) days from the date of automatically a taxable income. In the same
discovery of the casualty or robbery, theft or embezzlement giving rise to way, mere decrease of the value of a property
the loss.
Xxx
is not automatically a deductible loss. This is
because of the requirement that the loss must
actually be sustained by the taxpayer.
What are the kinds of losses in general?
1. Ordinary Losses
2. Casualty Losses
7 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
 Summary and Requisites of Allowable Deductions
c. They are incurred in business or directly
related to your trade, business or profession.
d. It must not be compensated by insurance or
other forms of indemnity.
e. It must not be made as part of your
deductions for estate tax purposes.
(You have to compute for your gross estate and there
will be deductions. Part of the deductions from gross
estate are losses which are incurred in business. So if
you are claiming for purposes of estate taxation, you
cannot claim it anymore as part of your deduction for
income tax purposes.)
CASUALTY LOSSES
REQUISITES FOR DEDUCTIBILITY OF CASUALTY LOSSES
a. The losses are that of the taxpayer.
b. They are actually sustained by the taxpayer
during the taxable year when he/she is claiming it.
ASCERTAINMENT OF THE LOSSES
Meaning, the losses are determined in what tax year.
Let us say the losses occur in 2013, but it was only in
the following year where they were able to determine
the extent of the loss, then the loss will be claimed as a
deduction in 2014. It was only in 2014 where the losses
were actually sustained and determined.
c. They are incurred in relation to business or
directly related to your trade, business or profession.
d. The taxpayer who incurred such casualty
loss must submit with the BIR in a prescribed form
within 45 days from discovery of the casualty.
Codal: shall not be less than thirty (30) days nor more
than ninety (90) days from the date of discovery of the
casualty
BIR Revenue Regulations: 45 days from the date of
occurrence
e. It must not be compensated by any
insurance.
TOTAL INDEMNIFICATION If the losses are
totally indemnified, then you cannot claim the
deduction.
PARTIAL INDENIFICATION But if there is only
partial indemnity, then you can claim a deduction for
the unindemnified portion.
f. The taxpayer must not claim these losses as
part of or for estate tax purposes.
8 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
g. You must be able to substantiate the
casualty loss that you have incurred; you need to
submit proof of such loss.
In the case of Casualty losses, you have an additional
requirement that the losses must be reported to the
BIR for purposes of allowing them to be claimed as a
deduction, on top of the requirements that they are
related to the trade, business and profession, and to
the ascertainment of the losses.
NET OPERATING LOSS CARRY-OVER (NOLCO)
(3) Net Operating Loss Carry-Over. - The net operating loss of the business
or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross income for the next
three (3) consecutive taxable years immediately following the year of such
loss: Provided, however, That any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax shall not be allowed as a
deduction under this Subsection: Provided, further, That a net operating loss
carry-over shall be allowed only if there has been no substantial change in
the ownership of the business or enterprise in that
(i) Not less than seventy-five percent (75%) in nominal value of outstanding
issued shares., if the business is in the name of a corporation, is held by or
on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the
corporation, if the business is in the name of a corporation, is held by or on
behalf of the same persons.
For purposes of this subsection, the term 'net operating loss' shall mean the
excess of allowable deduction over gross income of the business in a taxable
year.
Xxx
Net operating loss means the excess of allowable
deduction over gross income of the business in a
taxable year.
Net operating loss is the total loss that you
have incurred during a taxable year. It is the entire
result of your business but your expenses exceeded
your income, which resulted to a loss.
Situation: You are a self-employed individual, purely
engaged in business then you suffer a net operating
loss during the taxable year, should you still pay your
income tax?
What is being taxed by the government? Your income.
If you are in a loss, there is no taxable income.
If you come to think about it, you will realize that
individuals are mandated to pay their estimated
quarterly income taxes. In the end, if after the taxable
year, after the computation for the yearly income, you
 Summary and Requisites of Allowable Deductions EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS

will incur a loss, technically you do not pay any taxes Where do you base the 2% MCIT? From the GROSS
anymore, but you can claim for a tax refund. INCOME.
Where do you deduct the NOLCO? From your NET
Taxpayers who are entitled to the deduct NOLCO from INCOME; it is part of your allowable deductions.
gross income:
a. Any individual engaged in trade or business or in the b. The running of the 3-year period for NOLCO
exercise of his profession expiration is not interrupted by the fact that the
b. Domestic and resident foreign corporations subject corporation is subject to MCIT.
to normal corporate income tax
Limitations; when you cannot claim NOLCO:
What is peculiar about this NOLCO? 1. If the taxpayer was tax exempt during that time
GR: For business expenses or deductions, it must be that the taxpayer incurred the loss.
incurred during the taxable year. 2. NOLCO is allowed only if there is a substantial
An exception: NOLCO change in the ownership of the business or enterprise.

You did not incur the loss this year but you incurred it When is there a substantial change?
last year. But the law allows you to carry-over the net (i) Not less than seventy-five percent (75%) in nominal
loss incurred in the previous taxable years. value of outstanding issued shares, if the business is in
the name of a corporation, is held by or on behalf of the
How long can you avail of this NOLCO? You can carry same persons
this over for the next 3 consecutive taxable years. (ii) Not less than seventy-five percent (75%) of the paid
up capital of the corporation, if the business is in the
Situation: You have a loss this year. Next year you also name of a corporation, is held by or on behalf of the
have a loss. The following year, you gain income. How same persons.
do you deal with it? How do you make the application
of the NOLCO? We can just call this as the 75% equity rule.
You apply the first in first out (FIFO) basis. There is no substantial change of ownership if at least
75% of the equity, ownership or interests, if the
GR: The operating loss that you have incurred for this business is in the name of the corporation, is held by or
taxable year, you can carry it over for the next 3 taxable on behalf of the same persons
years.
Exception: You are allowed up to 5 years if you are Taxpayers not entitled to pay NOLCO as deductions:
engaged in mining, other than oil and gas wells. 1. Offshore Banking Units (OBUs)
xxx 2. Enterprises registered with the BOI with
Provided, That for mines other than oil and gas wells, a net operating loss
without the benefit of incentives provided for under Executive Order No.
respect to BOI-registered activities; such as enjoyment
226, as amended, otherwise known as the Omnibus Investments Code of of income tax holiday incentives
1987, incurred in any of the first ten (10) years of operation may be carried
3. Enterprises registered under the PEZA
over as a deduction from taxable income for the next five (5) years
immediately following the year of such loss. The entire amount of the loss 4. Enterprises registered under the Bases
shall be carried over to the first of the five (5) taxable years following the Conversion and Development Act
loss, and any portion of such loss which exceeds the taxable income of such
5. Corporations engaged in international shipping
first year shall be deducted in like manner form the taxable income of the
next remaining four (4) years. or air carriers
6. Persons claiming the OptionalStandard
Does it matter if the taxpayer is subjected to MCIT? Deduction
It does not really matter because what happens is that 7. Any person enjoying exemption from income
in the previous year you suffered a NOLCO. tax during the period they are exempt from income tax

There are implications if the corporation is subject to CAPITAL LOSS

MCIT during the taxable year. There are at least 2:
a. The corporation cannot enjoy the NOLCO if it is Let us review the concept of capital gains. Remember,
subjected to the MCIT. there are three types of properties:
Why? What is the reason behind that? 1. Domestic stocks

9 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO

 Summary and Requisites of Allowable Deductions
For shares of stocks, you distinguish if it is sold in the
local stock exchange or there is direct selling. There will
be tax implications.
2. Real properties found in the Philippines
Normally it is 6% capital gains tax. There are also those
which are exempted and those transferred to the
government.
3. Other properties those which are not
domestic stocks or real properties located in the
Philippines
If there is any capital gain, of course that capital gain
will form part of the gross income. How about if there
is a loss?
(4) Capital Losses. -
(a) Limitations. - Loss from sales or Exchanges of capital assets shall be
allowed only to the extent provided in Section 39.
(b) Securities Becoming Worthless. - If securities as defined in Section 22 (T)
become worthless during the taxable year and are capital assets, the loss
resulting therefrom shall, for purposes of this Title, be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital
assets.
SEC. 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - The term 'capital assets' means property held by the
taxpayer (whether or not connected with his trade or business), but does
not include stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand at
the close of the taxable year or property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or business, or property
used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the excess of the
gains from sales or exchanges of capital assets over the losses from such
sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the excess of the
losses from sales or exchanges of capital assets over the gains from such
sales or exchanges.
Principles/rules when you deal with losses:
1. Ordinary losses can be charged against
ordinary gains.
2. Ordinary losses can be charged against the
capital gains.
3. Capital losses can be charged against capital
gains.
4. Capital losses can never be charged against
ordinary gains.
Charged Ordinary gain Capital gain
against:
Ordinary
loss
Capital loss
10 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
What is the reason behind the last rule?
You do not deduct the capital loss because it is not
related to your business. As a principle in deductions,
only those which are related in trade or business are
part of your deductible expenses. This is found under:
(C) Limitation on Capital losses. - Losses from sales or
exchange capital assets shall be allowed only to the
extent of the gains from such sales or exchanges. If a
bank or trust company incorporated under the laws of
the Philippines, a substantial part of whose business is
the receipt of deposits, sells any bond, debenture,
note, or certificate or other evidence of indebtedness
issued by any corporation (including one issued by a
government or political subdivision thereof), with
interest coupons or in registered form, any loss
resulting from such sale shall not be subject to the
foregoing limitation and shall not be included in
determining the applicability of such limitation to other
losses.
Exception: Bank or trust company incorporated under
the laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one
issued by a government or political subdivision
thereof), with interest coupons or in registered form
(B) Percentage Taken into Account - In the case of a
taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the
sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss,
and net income.
(1) One hundred percent (100%) if the capital asset
has been held for not more than twelve (12) months;
and
(2) Fifty percent (50%) if the capital asset has been
held for more than twelve (12) months;
This is what we call as holding period.
Things to remember:
1. The holding period may either be short term or
long term:
a. Short term: Not more than 12 months
b. Long term: More than 12 months
2. This holding period applies only to individuals.
It will never apply to corporations.
 Summary and Requisites of Allowable Deductions EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS

Corporations will always recognize either 100% of the So basically the seller here is a mere speculator. He
capital gains or 100% of the capital loss. would sell stocks but the stocks are not yet in his
possession, and he does not own the stocks yet. The
(D) Net Capital Loss Carry-Over shares of stocks will be delivered to him at a later
(D) Net Capital Loss Carry-Over. - If any taxpayer, period. Now if the stocks will become cheaper by the
other than a corporation, sustains in any taxable year a time he sells it, he will have a gain. But at the time of
net capital loss, such loss (in an amount not in excess of selling, or at the time he is already obliged to transfer
the net income for such year) shall be treated in the the stocks to the buyer if the stocks prices will go up
succeeding taxable year as a loss from the sale or high, he will incur a loss.
exchange of a capital asset held for not more than
twelve (12) months. What is the tax treatment of these gains or losses?
They are treated as if they are capital transactions. This
This is different from NOLCO. NCLCO just deals with is pretty much the same with the failure to exercise
capital loss. privileges or options to buy a certain property. Capital
The net capital loss that you incurred in this current gains or capital losses will be recognized accordingly.
year can be carried over in the following year. It is just
for 1 year, not 3 years. SECURITIES BECOMING WORTHLESS
SEC 34(D)(b) Securities Becoming worthless. If securities as defined in
Section 22 (T) become worthless during the taxable year and are capital
Requirements for the application of NCLCO: assets, the loss resulting therefrom shall, for purposes of this Title, be
1. The taxpayer must be an individual. considered as a loss from the sale or exchange, on the last day of such
taxable year, of capital assets.
Corporations cannot claim NCLCO.
2. The taxpayer carries a net capital loss. Securities becoming worthless are to be
treated as a capital loss if incurred from a sale or an
3. The net capital loss can be carried over on the
exchange of transaction. Thats a given because the
succeeding taxable year. If you are not able to carry this
moment that there will be an exchange or sale, it does
over, you are barred.
not mean that it is totally worthless, but definitely
4. The amount carried over should not exceed the
there will be a loss. You can treat that loss as part of
net income for the year the carry-over is to be applied.
your capital loss.
NOLCO NCLCO
Securities becoming totally worthless, you can
Pertains to operating Pertains to capital losses
write it off from your book of accounts. Meaning, you
losses
can immediately treat it as part of your losses. This is
The period of carry-over Only for one year or the
one of the exceptions to the rule that there must be an
is 3 years succeeding taxable year
actual exchange or transaction.
Applies to both Applies only to individuals
individuals and
China Banking Corporation vs CA (July 19, 2000)
corporations
When the securities become worthless, there is clearly
There is no holding There is a holding period
no sale or exchange but the law deems the loss anyway
period
to be a loss from the sale or exchange of capital assets.

WASH SALES
SHORT SALE SEC. 38. Losses from Wash Sales of Stock orSecurities.
(A)In the case of any loss claimed to have been sustained from any sale or
SEC 39 (F) Gains or losses from Short Sales, Etc. For purposes of this Title - other disposition of shares of stock or securities where it appears that within
(1) Gains or losses from short sales of property shall be considered a period beginning thirty (30) days before the date of such sale or disposition
as gains or losses from sales or exchanges of capital assets; and and ending thirty (30) days after such date, the taxpayer has acquired (by
(2) Gains or losses attributable to the failure to exercise privileges purchase or by exchange upon which the entire amount of gain or loss was
or options to buy or sell property shall be considered as capital recognized by law), or has entered into a contact or option so to acquire,
gains or losses. substantially identical stock or securities, then no deduction for the loss shall
be allowed under Section 34 unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in the ordinary course of
In 39F, short selling pertains to selling something
the business of such dealer.
which you do not own yet at the time of the sale. The
losses from short sales shall be considered as sale or A wash sale is, in general, a purchase and a sale
exchange of capital assets. of substantially identical stocks or securities within a
period provided by law.
11 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
 Summary and Requisites of Allowable Deductions
What are the REQUISITES so that a particular
transaction of a share of stock can be considered as a
wash sale?
1. There must be a sale or disposition of shares of
stock. You have to sell or dispose something.
2. The time element. When will the sale or
disposition happen? It will happen either 30
days before the sale or 30 days after the
acquisition of the shares of stock. 30 days prior
or 30 days after, you purchase shares of stocks,
or a total of 61 days.
3. The purchases here are of the same or
substantially the same shares of stocks or
securities.
What is the EFFECT when there is a wash sale?
If the sale is at a gain, there will be a recognizable gain.
Its part of your gross income already. But what if there
is a loss? The general rule is that if there is a gain, it is a
taxable gain and part of the gross income. But if there
is a loss, there is no deductible loss.
Exception: If the taxpayer involved here is a dealer in
securities. If the taxpayer is a dealer in securities, then
he may claim that loss or the wash sale as part of his
allowable deductions.
WAGERING LOSSES
"(6) Wagering Losses. - Losses from wagering
transactions shall be allowed only to the extent of the
gains from such transactions.
What is the rule?
Losses from wagering transactions shall be allowed
only to the extent of gains from such transaction. So
gambling gains are part of your gross income. If there is
a loss, you can deduct that loss only up to the extent of
your gambling gains. So if you did not gain anything, or
that you always suffer a loss, it is not deductible. Why?
Because gambling gains do not arise from your
business. So it is not an allowable deduction.
ABANDONMENT LOSSES
(7) Abandonment Losses.
a. In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated exploration
and development expenditures pertaining thereto shall be allowed as a
deduction xxx
b. In case a producing well is subsequently abandoned, the
unamortized costs thereof, as well as the undepreciated costs of equipment
directly used therein shall be allowed as a deduction xxx
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These are peculiar to those in the extractive
industries like mining. Abandonment losses are the
losses which you sustain by reason that you decided to
abandon the project. Like, before you go in to the
mining production, you would incur exploration and
development expenses. The exploration expenses
would involve the testing on how much minerals that
would possibly be taken, should there be viable results,
you would now put up facilities for the mining, thus you
will have development expenses.
The exploration and development expenses
are not deductible at once. You would recover them by
way of a deduction through what we call as the process
of Depletion (discussed under Section 34 G).
If in the course of the commercial production
when you are already mining, you discovered 3 years
later that your estimates on how much minerals that
can be obtained were erroneous. And you have spent
let us say, 100 Million, and you recovered only 60
Million, may 40 million which you have yet to recover.
Since you found out that there is nothing more that can
be extracted from the land, what will you do? You
abandon the project. You have 40Million unrecovered
expense, then that is what you call as abandonment
losses. Because you decided to abandon the project
that 40 Million by way of abandonment losses, is a
deductible loss. So for purposes of the treatment of the
abandonment losses, they are allowed to be claimed as
a deduction in the year you decided to abandon.
Note: In all these types of deductions, take note of the
requirements for their deductibility. So far, the
commonality is that they are all related to the trade,
business or profession of the tax payer.
BAD DEBTS
(E) Bad Debts. -
"(1) In General. - Debts due to the taxpayer actually ascertained to
be worthless and charged off within the taxable year except those not
connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Section 36(B) of
this Code: Provided, That recovery of bad debts previously allowed as
deduction in the preceding years shall be included as part of the gross
income in the year of recovery to the extent of the income tax benefit of
said deduction.
"(2) Securities Becoming Worthless. - If securities, as defined in
Section 22(T), are ascertained to be worthless and charged off within the
taxable year and are capital assets, the loss resulting therefrom shall, in the
case of a taxpayer other than a bank or trust company incorporated under
the laws of the Philippines a substantial part of whose business is the receipt
of deposits, for the purpose of this Title, be considered as a loss from the
sale or exchange, on the last day of such taxable year, of capital assets.
 Summary and Requisites of Allowable Deductions
Bad debts are debts resulting from the worthlessness
or uncollectibility, in whole or in part, of amounts due
the taxpayer actually ascertained to be worthless and
the corresponding receivable should have been written
off or charged off within the taxable year.
REQUISITES FOR A BAD DEBT TO BE DEDUCTIBLE: (V-
C-R-A)
(1) There must be a valid and legally demandable debt
due to the taxpayer
(2) The debt is connected with the taxpayer's trade,
business or practice of profession;
(3) The debt was not sustained in a transaction entered
into between related parties;
(4) The debt is actually ascertained to be worthless
and uncollectible as of the end of the taxable year
(taxpayer had determined with reasonably degree of
certainty that the claim could not be collected despite
the fact that the creditor took reasonable steps to
collect); and
(5) The debt is actually charged off the books of
accounts of the taxpayer as of the end of the taxable
year
The Debt Is Uncollectible:
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt.
Exceptions:
(1) Banks as creditors It is the BSP Monetary Board
that shall ascertain the worthlessness and
uncollectibility of the debt and shall approve the
writing off
(2) Insurance or surety companies - Receivables from
an insurance or surety company (as debtor) may be
written off as bad debts only when such company is
declared closed due to insolvency or similar reason
The Debt is Uncollectible Despite the Efforts of the
Taxpayer
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove that he
exerted diligent efforts to collect through the following
means:
(1) Sending of statement of accounts
(2) Collection letters
(3) Giving the account to a lawyer for collection
13 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO
EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS
(4) Filing the case in court
Note: The filing of a case in court is not absolutely
required in order to ascertain a debt as uncollectible,
such as when court action shall be more costly to the
taxpayer.
Good Faith Not Sufficient
In the case of CIR vs Goodrich International Rubber Co.
(G.R. No. L-22265, December 22,1967), the Supreme
Court ruled that:
In ascertaining the debt to be worthless, it is
not enough that the taxpayer acted in good
faith. He must show that he has reasonably
investigated the relevant facts from which it
became evident, in the exercise of sound,
objective business judgment, that there
remained no practical, but only a vague
prospect that the debt would be paid.
When Is a Debt Ascertained To Be Worthless?
As provided for in Rev. Reg. No. 5-1999:
Actually ascertained to be worthless
(1) Determination of worthlessness must depend upon
the particular facts and circumstances of the case. A
taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or
because of a continuance of
attempts to collect, where there is no showing that the
surrounding circumstances differ from those relating to
other notes which were charged off in a prior year;
(2) Accounts receivable may be written off as bad
debts even without conclusive evidence that they had
definitely become worthless when:
(a) the amount is insignificant; and
(b) collection through court action may be more costly
to the taxpayer;
Charged Off From the Taxpayers Book of Accounts
A receivable which has actually become worthless at
the end of the taxable year has been cancelled and
written off. A mere recording in the books of account
of estimated uncollectible accounts does not constitute
 Summary and Requisites of Allowable Deductions EXPENSES, INTERESTS, TAXES, LOSSES, BAD DEBTS

a write-off.

What If the Bad Debt Is Subsequently Recovered?

Tax Benefit Rule on Bad Debts or the Equitable

Doctrine of Tax Benefit:
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be included as
part of the taxpayers gross income in the year of such
recovery the extent of the income tax benefit of said
deduction. This is also called as the equitable doctrine
of tax benefit.

14 ARNAEZ, EMBODO, DE LOS SANTOS, MANGADLAO, ROMERO