LOSSES - RULES:

o If taxpayer reports income using

- If sustained during the taxable year and accrual basis, business losses from
not compensated by insurance or other unpaid debts are deductible from
indemnity shall be allowed as deductions if the gross taxable income
incurred in the pursuit of TBP o Cash basis method & income has
REQUISITIES FOR LOSSES TO BE DEDUCTIBLE not been reported, business losses
are non-deductible
- Must be sustained in a closed and
completed transaction NET OPERATING LOSS CARRY-OVER (NOLCO)
- loss must be that of the taxpayer and - NET OPERATING LOSS: excess of the
incurred in the pursuit of TBP allowable deduction over the GTI in a
- must not be compensated by insurance or particular taxable year
any other form of indemnity - The NET OPERATING LOSS of the business
- loss must be reported to the BIR within the for any taxable year preceding the current
period of 30 days up to 90 days from the taxable year, if not yet offset as a
date of discovery of the loss deduction from the gross income shall be
CLASSIFICATION OF LOSSES CARRIED OVER as a deduction from the
gross income for the next 3 consecutive
1. DEDUCTIBLE LOSSES taxable year following the year of such
- Business losses & losses from theft, robbery loss.
and embezzlement
- Casualty loss arising from storm, fire or LIMITATION OF NOLCO
shipwreck - Operating loss had not been previously
- Net-operating loss carry over (NOLCO) offset as a deduction from the gross
- Others income
2. NON-DEDUCTIBLE LOSSES: those losses - Any net loss incurred during the taxable
arising from sale or exchange of properties year that the taxpayer was exempt from
under the following cases are not income tax should not be allowed as a
deductible deduction
- Those incurred between family members - NOLCO shall be allowed only if there has
(brother/sister [whole/half-blood], spouse, been no substantial change in the
ancestors and lineal descendants ownership of the business
- Those arising between and individual and a o Not less than 75% of the nominal
corporation where more than 50% of the value of the outstanding issued
stock is owned directly or indirectly by the shares if business is in the name of
individual, except in case of liquidation a corporation, held by or on behalf
- Losses on sale or exchange between two of the same persons
corporation (50%) o Not less than 75% of the paid-up
- Between grantor and a fiduciary of any capital of the corporation
trust NOMINAL VALUE OF OUTSTANDING
- Between a fiduciary of a trust & the ISSUED SHARES – stated value of the shares
fiduciary if another trust, if the same of stock issued and in the possession of the
person is a grantor with respect to each stockholders of the corporation
trust - NOL can be carried over only for the next 3
- Those incurred between the fiduciary and consecutive taxable years immediately
the beneficiary of a trust following the year of the incurrence of the
MEASUREMENT OF THE AMOUNT OF LOSS loss
- For mines other than oils and gas wells,
- TOTAL LOSS: deductible amount is equal to NOL incurred during the first 10 years of
the book value of the lost asset. (BOOK operation may be carried over as a
VALUE: accumulated depreciation – deduction from taxable income for the
acquisition cost) next 5 years immediately following the
- PARTIAL LOSS: deductible loss is equal to year of such loss.
the book value of the asset at the time of
the loss/replacement cost, whichever is TAXPAYERS ENTITLED TO NOLCO
lower - Self-employed individual taxpayers
- BUSINESS LOSSES may be deductible or not.
 - Estates and trusts the GTI and NET WAGERING LOSS
- Domestic and resident corporations shall be non-deductible
covered by normal basic tax
- Domestic and resident foreign corporations
subject to preferential tax rate BAD DEBTS
THOSE NOT ENTITLED - Worthless or uncollectible amounts, in
- Individual taxpayers earning income purely whole or in part which is due to a taxpayer
from compensation by others arising from money lent or
- Offshore banking units of foreign banks services rendered.
duly authorized by the BSP - Bad debts are deductible provided they are
- Foreign currency deposit units of both incurred in pursuit of TBP
domestic and foreign banks REQUISITES
- Those exempt by law form income taxation
- There must be an existing debt which is
OTHER TYPES valid, subsisting and demandable
- CAPITAL LOSSES: deductible only from - Existing debts must be ascertained to be
capital gain worthless
o Holding period is taken into account - Debts must be charged-off within the
in the computation taxable year (charged off: receivable
o 100% if capital assets are held one account shall be removed from the books
year or less and 50% if assets were of accounts of the business entity)
held for more than one year - Existing indebtedness must be connected
o NOLCO is allowed if: with TBP
o Amount of net capital loss to be - Debt must not be incurred between related
applied does not exceed the net parties
income before exemption on the CLASSIFICATION
year when capital loss was incurred
o Taxpayer is an individual taxpayer - DEDUCTIBLE: those uncollectible accounts
o Holding period is not more than 12 that have met the requirements set by the
months tax law
- LOSSES FROM WASH SALES OF STOCKS OR - NON DEDUCTIBLE: refer to worthless
SECURITIES accounts and have not met the condition
- 61 days will cover the 30 days before the required by the tax law
sale and 30 days after the sale o Those incurred not related to TBP
o Losses on securities sold which are o Arising from related party
matched with securities acquired transaction
within the 61-day period are non- o Those sustained from unpaid wages,
deductible salaries, rents and other similar
o Losses on securities sold, bartered, items
exchanged which cannot be
matched with securities acquired DEPRECIATION
within the 61-day period are
- The reduction in the value of intangible
deductible losses
assets brought about by wear, tear, and
o When the securities sold within the
obsolescence. Otherwise stated, it shall be
61-day period are more than or less
the allocated costs of the intangible assets
than the securities acquired, the
used in trade or business over its useful life
securities sold will be matched with
- DEPRECIATION is applicable when the
an equal number of securities
assets are tangible. But if the assets are
acquired in accordance with the
intangible, the appropriate term to denote
order of acquisition
reduction is AMORTIZATION (franchise,
- WAGE LOSSES: earnings or losses derived
patents, trademarks, goodwill or
from gambling whether legal or illegal
copyrights).
o Wagering gain: included in GTI
o Wagering loss: non-deductible item REQUISITES
o BOTH: Wagering loss is deducted
from wagering gain and NET - Assets must be connected with TBP
WAGERING GAIN shall be included in
 - Amount of allowance to be provided shall 1. A reasonable allowance for depletion
be reasonable (those allowances computed computed in accordance with the cost-
in accordance with the rules and depletion method shall be allowed as a
regulations prescribed by the Secretary of deductible item.
Finance)
- Amount of depreciation should be charged METHODS OF DETERMINING DEPLETION
off during the year - Cost-depletion method: based on the cost
METHODS of producing mineral or other natural
resources
- STRAIGHT-LINE METHOD: allocates the - Percentage depletion method: a certain
depreciable amount of the asset equally percentage of the gross income earned
over the estimated life from mining operation, but the amount
- Depreciable amount = acquisition cost - provided for depletion allowance shall not
residual/scrap value of the asset at the exceed the net income from operation
end of its useful life - Discovery depletion method: computed
- Residual/scrap value: estimated based on the prevailing market value of
realizable amount at the end of the life of the mineral resources
the asset 2. When the allowance for depletion is equal
- Estimated useful life: period when the to the capital invested, NO further
asset is productively used in the operation allowance shall be granted
of business 3. After production in commercial quantities
has commenced, certain intangible
exploration and drilling costs:
a. Shall be deducted in the year
incurred if such expenditures are
incurred for non-producing wells
and/mines or
b. Shall be deductible in full in the
year paid and maybe capitalized or
- DECLINING BALANCE METHOD: it would
amortized if such expenditures
double the annual depreciation rate under
incurred are for producing wells
the straight line method
and/or mines in the same contract
o Residual/scrap value is disregarded
area.
o A uniform rate is applied (straight
4. Any intangible exploration, drilling or
line depreciation rate x 2)
development expenses:
o At the end of the asset’s life, any
a. If incurred for non-producing wells
scrap value may simply be deducted
or mines, expenditures are
from the remaining book value
deductible in the year incurred
- SUM-OF-THE-YEARS DIGIT METHOD: the
b. If incurred for producing wells or
depreciable cost of the asset is multiplied
mines, expenditures are deductible
by a certain fraction; NUMERATOR = life of
in full in the year incurred or may
the asset and the DENOMINATOR = sum of
be capitalized and amortized
the remaining useful life of the asset
- Formula to compute the denominator: GUIDELINES IN DEDUCTING EXPLORATION &
DEVELOPMENT EXPENDITURES

- Total amount deductible for exploration &

development shall not exceed 25% of the
DEPLETION OF OIL, GAS WELLS AND MINES net income from mining operations
computed without the benefit of any tax
- DEPLETION: synonymous with depreciation incentives
& amortization, it connoted reduction in - Actual exploration and development
the carrying value of the asset. Used to expenditures minus 25% of the net income
refer to wasting assets from mining shall be carried forward to the
- WASTING ASSETS refer to natural assets succeeding years until fully deducted
physically consumed and not replaceable - The election by the taxpayer to deduct the
exploration and development expenditure
GUIDELINES
is irrevocable and shall be binding in the
succeeding taxable years
CHARITABLE AND OTHER CONTRIBUTIONS - Tax required to be deducted has been paid
to the BIR
- Contributions or gifts actually paid within - Pension trust must be established and
the taxable year for the use of the maintained by the employer
government of the Philippines or any of its
agencies exclusively for public purpose
shall be deductible from the gross taxable
income of the taxpayer.

REQUISITES

- There must be an actual contribution made

- The taxpayer giving charitable donations
must be engaged in TBP
- The entity receiving the donations is
among those specified by law
- The net income of the institution must not
inure to the benefit of any individual or
private stockholder

BASIC PROCEDURES IN COMPUTING THE

DEDUCTIBLE AMOUNT

1. Determine whether the contributions are

deductible or non-deductible.
2. If it is deductible, determine whether
donation is deductible in full of subject to
limitation
3. If subject to limitation, compute taxable
income before personal exemptions
a. Taxable income is computed by
subtracting allowable deductions
from GTI
4. Multiply taxable income before
contribution by the ff:
a. 5% donor is corporation
b. 10% donor is individual taxpayer
5. Compare contributions and use the lower
amount as deductible contribution

RESEARCH AND DEVELOPMENT

- Expenses incurred by taxpayers relative to

scientific or technical evaluation and
findings of improving, formulating and
testing products or processes prior to full-
scale commercial production

REQUISITES

- They must be paid or incurred by the

taxpayer in connection with his TBP
- Must not be treated as expenses
- Costs are chargeable to capital account
- Must be ordinary and necessary

PENSION TRUSTS REQUISITES

- Must be ordinary and necessary

- Contributions must be reasonable
- Amount is intended for the payment of
pensions