As a business owner and taxpayer, you understand the importance of maximizing deductions to ensure your company's or clients' financial well-being. In the Philippines, the Bureau of Internal Revenue (BIR) provides guidelines on itemized deductions, allowing taxpayers to optimize their financial strategies. In this blog post, we'll delve into key categories of itemized deductions, exploring legal sources from the BIR for clarity and compliance.
1. Bad Debts:
Bad debts are debts due to the taxpayer actually ascertained to be worthless and charged off during the year may be claimed as a deduction.
Requisites for deductibility:
There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
It must be connected with the taxpayer’s trade, business or practice of profession;
It must not be sustained in a transaction entered into between related parties;
It must actually be charged off in the books of accounts of the taxpayer as of the end of the taxable year;
It must actually be ascertained to be worthless and uncollectible as of the end of the taxable year (Rev. Regs. 05-99, as amended by Rev. Regs. 25-02)
The bad debt must not be one contracted with a related party
Bad debts arising from transactions between related parties are NOT deductible:
Between members of a family (includes only brothers & sisters, spouse, ancestors, & lineal descendants)
Between an individual & a corporation, more than 50% in value of outstanding stock is owned by such individual (except in case of distributions in liquidation)
Between 2 corporations more than 50% in value of outstanding stock owned by same individual, if either one is a personal holding company or a foreign holding company during the taxable year preceding the date of sale/exchange
Between grantor & fiduciary of any trust
Between fiduciary of a trust & the fiduciary of another if same person is a grantor to each trust
Between fiduciary & a beneficiary of a trust
2. Business Expenses:
Business expenses are crucial for the day-to-day operations of any enterprise. From rent to utilities, understanding and documenting these expenses can significantly reduce your taxable income. The Supreme Court provides requisites in order for a business expense be a deductible business expenses.
Requisites for deductibility
Must be ordinary and necessary.
Must have been paid or incurred during the taxable year.
Must have been paid or incurred in carrying on the trade or business of the taxpayer.
Must be supported by receipts, records or other pertinent papers. (CIR v. General Foods Phils. G.R. No. 143672, 2003)
3. Losses:
Losses, whether from a natural disaster or business downturn, can be financially devastating. The BIR allows taxpayers to deduct losses subject to the requisites below. Properly reporting and substantiating losses in your tax filings can help mitigate their impact on your overall financial standing.
Requisites for deductibility of ordinary loss:
Must be of the taxpayer;
Actually sustained during the taxable year;
Not compensated for by insurance or other forms of indemnity;
Incurred in trade, business or profession OR property connected with trade, business or profession lost through fires, storm, shipwreck, other casualties, robbery, theft or embezzlement;
Evidenced by a completed transaction;
Not claimed as a deduction for estate tax purposes; and
Notice of loss must be filed with the BIR within 30 days but not more than 45 days from the date of discovery of the casualty or robbery, theft or embezzlement
4. Taxes:
The term “taxes” refers to national and local taxes. All taxes, national or local, paid or incurred during the taxable year in connection with the taxpayer’s profession, trade or business, are deductible from gross income.
Requisites for deductibility:
It must be paid or incurred within the taxable year;
It must be paid or incurred in connection with the taxpayer’s trade, profession or business;
It must be imposed directly on the taxpayer; and
It must not be specifically excluded by law from being deducted from the taxpayer’s gross income.
Non-Deductible Taxes:
Philippine income tax
Income taxes imposed by authority of any foreign country except when the taxpayer does not signify in his return his desire to claim it as tax credit;
Estate and donor’s taxes
Special assessments, i.e., taxes assessed against local benefits of a kind tending to increase the value of the property assessed
VAT
5. Depreciation:
For businesses with significant assets, depreciation is a valuable deduction. BIR guidelines specify the allowable methods and rates for depreciating assets. Properly calculating and documenting depreciation can result in substantial tax savings.
Requisites for deductibility:
The allowance for depreciation must be reasonable;
It must be for property used for employment in trade or business or out of its not being used temporarily during the year;
The allowance must be charged off; and
Schedule on the allowance must be attached to the return.
6. Interest:
Interest expenses can be substantial for businesses and individuals alike. The BIR provides guidance on deductible interest expenses cited below. Staying informed about these regulations ensures you don't miss out on potential deductions.
Requisites for deductibility:
There must be an Indebtedness;
There should be an interest expense paid or Incurred upon such indebtedness;
Indebtedness must be that of the Taxpayer;
Indebtedness must be Connected with the taxpayer’s trade, business or exercise of profession;
Interest expense must have been paid or Incurred during the taxable year;
Interest must have been stipulated in Writing;
Interest must be legally Due;
Interest payment arrangement must not be between Related taxpayers;
Interest must not be incurred to finance Petroleum operations;
In case of interest incurred to acquire property used in Trade, business or exercise of profession, the same was NOT treated as a capital expenditure; and
The interest is not expressly disallowed by Law to be deducted from gross income of the taxpayer (Rev. Regs. No. 13-00)
7. Depletion of Oil & Gas Wells & Mines:
For businesses in extractive industries, depletion deductions are crucial. The BIR outlines specific rules for the depletion of oil & gas wells and mines [mention relevant regulation]. Understanding and applying these rules can lead to significant tax savings.
8. Charitable & Other Contributions:
Contributing to charitable causes not only benefits society but can also result in valuable deductions. The authority provides guidance on the deductibility of charitable contributions as shown below. Ensuring compliance allows you to support causes you believe in while maximizing your deductions.
Requisites for Deductibility (contributions subject to limitations):
Contributions or gifts must be actually paid or made within the taxable year;
To or for the use of the government or its agencies or any political subdivision, exclusively for public purpose; or
To accredited domestic corporations or associations organized and operated exclusively for:
Religious
Charitable
Scientific
Youth & sports development
Cultural or educational purposes
Rehabilitation of veterans
Social welfare institutions
NGOs
9. Pension Trusts:
Pension Trust Contributions is a deduction applicable only to the employer on account of his contributions to a private pension plan for the benefit of his employees; purely business in character.
Normal Cost - the contributions during the taxable year to cover the pension liability accruing during such taxable year; allowed as a deduction under Sec. 34(A)(1) of the NIRC as “expenses in general.”
Past Service Cost – amount in excess of the above contribution (covering pension liability pertaining to old employees which accrued during the years previous to the establishment of the pension trust); allowed as deduction only if all of the requisites below concur.
Requisites for deductibility of past service cost:
The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to his employees;
The pension plan is reasonable and actuarially sound;
The pension plan must be funded by the employer;
The amount contributed must no longer be subject to the control and disposition of the employer;
The payment has not yet been allowed as a deduction; and
The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer of payment is made.
10. Research & Development:
Innovation is the lifeblood of progress, and the BIR recognizes the importance of research and development (R&D). Leveraging these deductions can encourage investment in innovation while reducing tax liabilities.
Navigating the intricacies of itemized deductions demands a keen understanding of BIR regulations. As a business owner and a taxpayer, you can guide your clients through this complex landscape, helping them optimize their deductions while ensuring compliance with the law. Stay informed, document meticulously, and make the most of the available deductions to achieve financial success.
For personalized advice tailored to your unique situation, you may consult with a CPA Lawyer to navigate the specifics of your tax planning.
As a seasoned CPA lawyer with a deep understanding of tax intricacies, Atty. Aureada bring expertise honed through a decade of navigating complex legal landscapes. For personalized and comprehensive legal guidance tailored to your needs, reach out to Atty. Yasser Aureada, CPA at yaureada@aureadacpalawfirm.com or contact him at 09359071258.
Disclaimer: This article offers general conceptual guidance and does not replace expert advice. Consult a tax or legal professional for specific details relevant to your situation.
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