Deductions Flashcards
Deductions from Gross Income
- must be business expenses (✘ personal expenses)
- must be period expenses (✘ CAPEX)
Yes
General Principles of Deduction (LOANS)
- Legal → illegal expenses = ✘ deductible
- Ordinary
- Actual → estimates = ✘ deductible
- Necessary → unreasonable = ✘ deductible
- Substantiated
What is the result if in LOAN
- LOA is violated
- N is violated
- disallowance of deduction
- reduction of amount (since dapat necessary)
Related Party Rule
- Gains from RP are taxable. True or False?
- Losses from RP are deductible. True or False?
Gains = Taxable
Losses = ✘ deductible
- since related party, baka dayain yung losses
Only those expenses related to RIT are deductible
- related to Exempt, FWT, CGR → not deductible
Yes
Prepaid Expenses are not deductible whether accrual basis or cash basis.
aakalain mo deductible siya pag cash basis (since cash basis), pero ang rule is prepaid expenses → not deductible
Sales less COGS = Gross Income
Gross Income less Deductions = Taxable Income
Deductions can be
- itemized
- OSD
Every individual and corporations can claim deductions. True or False?
Somehow true
- Purely Compensation → cannot claim deductions because they do not have “business” expenses
Itemized Deductions (PREDICTABLE)
Pensions
- must be maintained and established by employer
- actuarial assumptions → must be sound & reasonable
- fund assets → must be independent and not subject to control of employer
Current Service Cost are 100% deductible. True or False?
Past Service Cost are not deductible. True or False?
- True
- False (amortized for 10 years)
Itemized Deductions (PREDICTABLE)
R&D Expenses
- if ✘ chargeable to capital account → outright expense
- what if ✔chargeable to PPE?
- what if ✔ chargeable to others?
- PPE → capitalize
- Others → outright expense or amortized for 5 years
Itemized Deductions (PREDICTABLE)
NOT R&D Expenses
- for improvement of land
- for ascertaining location or quality of deposit …
Yes
Itemized Deductions (PREDICTABLE)
EAR Expenses
- the amount of deductible EAR expenses is the lower of actual expenses vs limit. (lower since deduction)
- what is the limit for sale of services?
- what is the limit for sale of goods?
- Services - 1% of Net Revenue
- Goods - 0.5% of Net Sales
1 S = 0.5%
Itemized Deductions (PREDICTABLE)
EAR Expenses
- if sale of both services and goods, just prorate. How?
Net Sales / Total Sales
x Actual EAR
Itemized Deductions (PREDICTABLE)
Depreciation Methods
- SL method
- Declining balance method
- SYD
- other method prescribed by DOF secretary
Yes
Itemized Deductions (PREDICTABLE)
Depreciation (Petroleum Operation)
Identify if used in production or not used in production.
- SL method only
- Useful life is 5 years
Not Used in Production
Used in Production
- SL method or DB method
- UL = shorter of 10 years vs actual life
Itemized Deductions (PREDICTABLE)
Depreciation (Mining)
Identify what is the useful life to use.
- useful life is 11 years
- useful life is 10 years
- actual UL
- between 5 years and actual UL
NOTE : For NRA ETB and RFC → property should be in PH
Itemized Deductions (PREDICTABLE)
Depreciation (Proprietary Educational Institution)
can claim as deductions the following:
- Capital outlays for expansion
- Allowance for depreciation
Yes
Itemized Deductions (PREDICTABLE)
Depletion
- cost-depletion method
- limit of allowance for depletion → capital invested
Stages of Wasting Assets
- Explore → Develop → Commercial Production
Yes
Itemized Deductions (PREDICTABLE)
Depletion (Intangible Drilling and Development Costs)
- after commercial production
What is the treatment if ✔ producing mines?
What is the treatment if ✘ producing mines?
- either outright expense or amortize
- outright expense
NOTE : For NRA ETB and RFC → property should be in PH
Itemized Deductions (PREDICTABLE)
Interest
- must be in writing
- must be legally due
- ✘ finance petroleum operations
- Related to Property, can choose either
(1) Outright Expense
(2) Capitalize
How to compute the amount of deductible interest expense?
Interest Expense
Less : Gross Interest Income (FWT) x 20%
= Deductible Interest Expense
Itemized Deductions (PREDICTABLE)
Charitable Contributions
- can be fully deductible
- can be with limit
Fully Deductible
- made to government (priority activities), accredited NGOs
With Limit
- made to government (not priority activites), non accredited NGOs
Yes
Itemized Deductions (PREDICTABLE)
Charitable Contributions (Fully Deductible)
- what are the priority activites? (CHEESY)
Culture
Human Settlements
Education
Economic Development
Science and Health
Youth and Sports Development
Itemized Deductions (PREDICTABLE)
Charitable Contributions (Fully Deductible)
Accredited NGOs (Angat Org)
- Assets (in case of liquidation) → will go to another NGO with same purpose
- Net Income → not for a private individual
- Gamit / Utilization of Contributions → not later than 15th day, 3rd month after close of taxable year
- Administrative Expenses → max 30% of expenses
- Organized and operated for
Itemized Deductions (PREDICTABLE)
Charitable Contributions (With Limit)
- the amount of deductible charitable contributions is the lower of actual contributions vs limit (lower since deduction)
- what is the base?
- what is the limit for individuals?
- what is the limit for corporations?
Individuals → 10%
Corporations → 5%
Base → Net Income before Charitable Contributions
Itemized Deductions (PREDICTABLE)
Taxes
- generally deductible
Non Deductible Taxes (FITS-VSS)
NON DEDUCTIBLE TAXES (FITS-VSS)
- Foreign Income Tax - claimed as credit
- Income Tax
- Transfer Tax
- Stock Transaction Tax
- VAT
- Special Assessment Tax
- Surcharge and Penalty
NOTE: FBT (even though an income tax) → deductible
FOREIGN INCOME TAX CREDIT
- same solving as estate tax
- Basis → Taxable Income
- Estate Tax = R or C (taxed globally)
- Foreign IT = RC and DC only (taxed globally)
Yes
Itemized Deductions (PREDICTABLE)
Advertising Expense
Yes
Itemized Deductions (PREDICTABLE)
Bad Debts Expense
- must be ascertained to be worthless and uncollectible
- must be legally due
- actually charged off in the books
Yes
Itemized Deductions (PREDICTABLE)
Losses
1. Casualty Losses
2. Loss on Wash Sales and Capital Loss
3. NOLCO
4. Abandonment Losses
Casualty Losses (same in estate tax)
- not compensated by insurance (SHIFTERS)
- not claimed as deduction in estate tax
- reported to BIR within ? from date of loss
45 days
Itemized Deductions (PREDICTABLE)
Losses
Loss on wash sales are generally deductible. True or False?
False (generally not deductible)
- refer to Dealings in Property
Itemized Deductions (PREDICTABLE)
Losses
ABANDONMENT LOSSES
- Petroleum Operation → Deductible = accumulated exploration and development expenditures
- Producing Wells → Deductible = unamortized cost + undepreciated costs of equipment directly used
- If resumed → amount shall be reversed anot now included in gross income
Yes
Itemized Deductions (PREDICTABLE)
Losses
NOLCO
- AD > GI
- taxpayer must not be exempt from income tax
- no substantial change in ownership → at least 75% of nominal value or paid-up capital = held by / on behalf of same persons
- carried over for?
3 years
- XPN : 5 years (incurred in 2020 - 2021)
- XPN : 5 years (from first 10 years - if mines)
Itemized Deductions (PREDICTABLE)
Losses
NOLCO
- can also be availed by Special DC and Special RFC
- First In, First Out
- if that year is MCIT → cannot avail NOLCO
however, counting of 3 years will continue
Yes
NOLCO vs NCLCO
- 3 years
- can be availed by individuals and corporations
- deducted to taxable income
NOLCO
NCLCO
- 1 year
- for individuals only
- deducted to capital gains
refer to Dealings in Property
Itemized Deductions (PREDICTABLE)
Expenses (Labor Training)
- students enrolled in public schools (OJT has apprenticeship agreement)
- company must be certified by DEPED, TESDA..
What is the rate?
What is the limit?
Rate → ½ of Labor Training Expenses
Limit → 10% of Direct Labor
Special Itemized Deductions
FREE LEGAL ASSISTANCE ACT
- lower of
- amount that could have been collected
- 10% of Gross Income derived
Special Itemized Deductions
SENIOR CITIZEN AND PWD
- what is the amount for SC?
- what is the amount for PWD?
SC → additional 15% of salaries of SC
PWD → additional 25% of salaries of PWD
Special Itemized Deductions
- FACILITY IMPROVEMENTS FOR PWD
- PRODUCTIVITY INCENTIVES
- ADOPT-A-SCHOOL ACT
What is the amount?
- additional 50% of costs of improvements
- additional 50% of bonuses given
- additional 50% of contribution
Special Itemized Deductions
- ROOMING-IN AND BREASTFEEDING ACT
What is the amount?
additional 100% of expense (twice)
All individuals can avail of OSD. True or False?
All corporations can avail of OSD True or False?
OSD must be signified in 1st quarter (irrevocable)
- like 8%
- False (X NRA)
- False (X NRFC)
OSD is 40%
- what is the base if individual?
- what is the base if corporation?
Individual - 40% of Gross Sales
Corporation - 40% of Gross Income (Sales less COGS)
