Allowable Deductions

Question 1

Itemized deductions from gross income

Answer 1

1. Business expense
2. Interest expense
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable and other contributions
9. Contributions to pensions and trusts
10. Research and development cost
11. Other ordinary and necessary expenses

Question 2

Requisites on deductibility of interest expense

Answer 2

1. Valid indebtedness
2. Must be taxpayer’s
3. Connected with the taxpayer’s trade, business, profession
4. Paid or incurred during the taxable year
5. Stipulated in writing
6. Legally due
7. Not between related taxpayers
8. Not incurred to finance petroleum operations
9. Not treated as capital expenditure
10. Not expressly disallowed by law

Question 3

Other deductible interest expense

Answer 3

1. Interest from tax delinquency

2. Interest from scrip dividends

Question 4

Examples of non-deductible interest expense

Answer 4

1. Interest on personal loans
2. Interest incurred with a related party
3. Discount on pre-deducted interest applicable to future periods

Question 5

Taxes

Answer 5

Taxes paid and incurred within the taxable year in connection with the taxpayer’s trade, business, or profession

Question 6

Non-deductible taxes

Answer 6

1. PH income taxes except fringe benefit tax
   a. FIT
   b. RIT
   c. CGT
2. Foreign income tax, if claimed as credit
3. Estate tax and donor’s tax
4. Special assessment

Question 7

Other non-deductible taxes

Answer 7

1. Business taxes, particularly VAT

2. Surcharges or penalties on tax delinquency

Question 8

Example of deductible taxes

Answer 8

1. Percentage tax
2. Excise tax
3. Documentary stamp tax
4. Occupational tax
5. License tax
6. Fringe benefit tax
7. Local taxes except special assessment
8. Community tax
9. Municipal tax
10. Foreign income tax if claimed as deduction

Question 9

Who can claim tax credit or deduction for foreign income taxes paid?

Answer 9

Only domestic corporations and resident citizens

Question 10

Losses

Answer 10

Losses actually sustained and not compensated by insurance or other indemnity shall be allowed as deductions

Question 11

Requisites on deduction of losses

Answer 11

1. Must be business loss
2. Must be ordinary loss
3. Loss actually sustained
4. Declaration within 45 days
5. Double deduction is not allowed

Question 12

Rules on replacement of destroyed properties

Answer 12

1. Total destruction - tax basis of the old property shall be claimed as loss
2. Partial destruction - restoration cost shall be expensed up to the tax basis of the old property, any excess is capitalized subject to allowance fore depreciation

Question 13

Bad debts

Answer 13

Debts due to the taxpayer which were actually ascertained to be worthless and charged off within the taxable year

Question 14

Requisites for the deduction of bad debts

Answer 14

1. Ascertained to be worthless
2. Charged off within the taxable year
3. Connected with the taxpayer’s trade, business or profession
4. Under accrual basis of accounting
5. Not incurred from a related party

Question 15

Depreciation of a revalued asset must be premised on

Answer 15

its acquisition cost and not on its reappraised value

Question 16

Are impairment losses deductible?

Answer 16

They are not deductible, they will only be deductible when sustained through disposal or retirement.

Question 17

Are intangible assets that do not lose their value throughout time amortized?

Answer 17

No. Only intangible assets with definite useful life are amortized.