15. Fringe benefits not subject to fringe benefit tax ................. 86 16. Scope of de minimis benefits ................................................ 87 17. Excess of benefits over P90,000 ceiling ............................... 88 18. Tax accounting for fringe benefit and tax due thereon............................................................ 89
Chapter V. — Deductions from Gross Income
A. Preliminary Topics
1. Definition of deductions ........................................................ 93 2. Time for availing deductions................................................ 93 3. Basic principles governing deductions ................................ 93 4. Taxpayer may claim lesser deduction than that allowed by law ..................................................... 94 5. Kinds of deductions............................................................... 94 6. Category or type of deductions ............................................ 95 7. Ceilings on itemized deductions........................................... 95 8. Taxpayers entitled/not entitled to avail of deductions ...... 96 9. Additional requirements for deductibility of certain payments..................................................... 96 10. Allowance of deductions of certain payments not withheld or remitted............................................. 98
THE LAW ON INCOME TAXATION
E. Tax Credit
B. Business Expenses
1. Definition of tax credit .......................................................... 137 2. Persons entitled to tax credit ............................................... 137 3. Persons not entitled to tax credit......................................... 137 4. Distinction between tax deduction and tax credit .............. 138 5. Meaning of terms .................................................................. 138 6. Basis of credit for foreign taxes............................................ 138 7. Limitations on tax credit ...................................................... 139 8. Foreign income taxes taken as a deduction ........................ 141 9. Year in which credit may be claimed................................... 141 10. Proof of tax credits ................................................................ 142 11. Conditions for allowance of tax credit ................................. 142 12. Redetermination or adjustment of tax when credit proves incorrect ........................................................... 142
1. In general .............................................................................. 98 2. Requisites for deductibility of business expenses ............... 99 3. When expense is ordinary and necessary............................ 100 4. Paid or incurred within the taxable year ............................ 102 5. Paid or incurred in carrying on trade or business .............. 102 6. Supported by proof................................................................ 103 7. Expenses against public policy or public order ................... 105 8. Entertainment, amusement, and recreation expenses ...................................................................... 105 9. Requisites in deductibility of expenses ............................... 107 10. Substantiation of expenses .................................................. 108 11. Maximum percentage ceiling for expense ......................... 109
12. Requisites for deductibility of compensation
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payments ..................................................................... 110 13. Test and its practical application......................................... 111 14. Factors that may be considered ........................................... 113 15. Bonuses to employees ........................................................... 114 16. Pensions and compensations for injuries ............................ 114 17. Travel expenses in general................................................... 115 18. Requisites for deductibility of travel expenses.................... 115 19. Meaning of “while away from home” ................................... 115 20. Proof of deductibility of travel expenses.............................. 116 21. Cost of materials and supplies ............................................. 116 22. Expenses for repairs ............................................................. 117 23. Rentals................................................................................... 118 24. Expenses of farmers.............................................................. 120 25. Advertising expenses ............................................................ 121 26. Expenses allowable to private educational institutions .................................................................. 122
F. Losses
1. Definition of losses ................................................................ 143 2. Classification of losses .......................................................... 143 3. Losses deductible ................................................................. 144 4. Requisites for deductibility of loss ....................................... 145 5. Year to claim deductions for losses ...................................... 145 6. Closed and completed transaction ....................................... 146 7. Where loss compensated for by insurance or other forms of indemnity ........................................ 147 8. Where there is reasonable expectation of recovery.................................................................... 148 9. Declaration of casualty loss.................................................. 148 10. Proof of casualty loss ............................................................ 149 11. Determination of amount deductible................................... 151 12. Adjustment of losses ............................................................. 154 13. Voluntary removal of buildings............................................ 155 14. Loss of useful value............................................................... 156 15. Shrinkage in value of securities........................................... 157 16. Securities becoming worthless ............................................. 158 17. Wagering losses ................................................................... 159 18. Abandonment losses in petroleum operations .................... 160 19. Losses in farming operations ............................................... 160 20. Net operating loss carry-over ............................................... 161 21. Taxpayers entitled to deduct NOLCO ................................. 164 22. Taxpayers not entitled to deduct NOLCO........................... 164 23. Quarterly and annual availment of NOLCO....................... 165 24. NOLCO in relation to the minimum corporate income tax (MCIT) ...................................................... 165 25. NOLCO in relation to the Optional Standard Deduction (OSD) ........................................................ 166
C. Interest Expense
1. In general .............................................................................. 122 2. Requisites for deductibility .................................................. 123 3. Existence of indebtedness .................................................... 123 4. Interest for tax delinquency ................................................. 124 5. Stipulation of interest in writing ......................................... 124 6. Non-deductible interest ........................................................ 124 7. Interest on loans between related taxpayers ...................... 125 8. Deductible interest ............................................................... 127 9. Tax arbitrage scheme ........................................................... 127 10. Deductibility of interest paid in advance through discount ......................................................... 130 11. Interest on indebtedness periodically amortized ................ 131 12. Interest on unpaid taxes....................................................... 132 13. Optional treatment of interest expense............................... 132
ix G. Bad Debts
D. Taxes
1. Definition of bad debts .......................................................... 166 2. Requisites for deductibility of bad debts ............................. 166 3. Existence of valid and subsisting debt ................................ 167 4. Ascertainment of worthlessness .......................................... 167 5. Circumstances affecting worthlessness............................... 169 6. Year in which charge off must be made .............................. 170 7. Amount of debt deductible ................................................... 170 8. Deduction by foreign corporations ....................................... 173 9. Securities becoming worthless ............................................. 173 10. Losses from theft or embezzlement ..................................... 174 11. Recovery of bad debt previously written-off ........................ 174 12. Tax-benefit rule ..................................................................... 175 13. Condonation of indebtedness .............................................. 176
1. In general .............................................................................. 133 2. Taxes that are deductible ..................................................... 133 3. Taxes that are not deductible............................................... 133 4. Requisites for deductibility ................................................. 134 5. Income tax refund or credit .................................................. 135 6. Income taxes imposed by a foreign country ........................ 135 7. Taxes assessed against local benefits .................................. 135 8. Rules on deductibility of special assessments..................... 136 9. Limitations on deductions for foreign income taxes paid ........................................................ 136
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H. Depreciation
66
1. Definition of depreciation ..................................................... 177 2. Necessity and theory of depreciation allowance ................. 177 3. Persons entitled to claim depreciation allowance ............... 177 4. Requisites for deductibility .................................................. 179
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