Income Tax - Deductions Flashcards
Which interest expense are nondeductible?
- Incurred to finance petroleum operations
- Personal loans
- Related parties
- Discounts or pre-deducted interest
- Interest on redeemable preference shares
- Imputed interest
Which taxes are nondeductible?
- Stock transaction tax & IPO Tax
- FIT, CGT, RIT, Donor’s Tax and Estate Tax
- Special Assessment
- Surcharge and penalty
Requisites for losses to be deductible
- Declared within 45 days from discovery
- Not compensated by insurance
- Not claimed as deduction in the estate
- Loss of capital dapat
Nondeductible Bad Debts
- Securities becoming worthless (other banks)
- Loss on capital investments in Partnerships, JV / Corp
- Personal bad debts
Allowable depreciation for vehicles:
-Only one per official & employee, not exceeding P2,400,000
For Petroleum Companies:
-UL of not more than 10 yrs if directly related
-UL of 5 years if not directly related
How are intangible depletion costs acctd/deducted if incurred before commercial production?
Capitalized as cost of wasting asset
How are intangible depletion costs acctd/deducted if incurred after commercial production?
1) Dry Holes - deducted in the period paid, not exceeding 25% of NI from MINING OPERATIONS
2) Successful Wells:
A) Capitalized & Amortized using the cost-depletion method
OR
B) Deducted in year incurred - IRREVOCABLE applied on a per contract area basis
Requisite to deduct charitable & other contributions
1) Donee must be a domestic institution, xep if under treaty/intl agr.
2) Income of donee does not inure to benefit of any private stockholder/individual
3) Contribution - valued at TAX BASIS of property donated
4) TP is engaged in trade/bsns
5) Donee is issued a Certificate of Donation BIR Form 2322, including thhe donor’s statement of values
Fully deductible and partially deductible charitable and other contributions
Fully deductible: 1) Government, priority activities (CHEESY)
2) Accredited DOMESTIC Non government organizations (w cert from DSWD,DOST,PSC,NCCA,CHED); or (IBP,IRRI,DAP,UP+SC, CulturalCenterPH,ArtesianWellFund,RamonMagsaysay, TaskForce onHumanSettlements,NationalMuseum…)
3) Treaties, Special laws/corps, donations to FOREIGN inst….
Partially deductible: (10% of Taxable income from trade/bsns/profession if Individual, 5% if corp)
1) Govnt, nonpriority activities, but for PUBLIC PURPOSE
2) Non-accredited NGOs but DOMESTIC: (REYSCCR)
Deduction rules of service cost under defined benefit plan
Current service cost is fully deductible
Past service cost must be amortized over 10 years
Any under funding should be charged from any excess in succeeding years
Cash basis deductions
Cash Expenses \+Amortization of prepayments \+Depreciation --------------------------------------------- Cash Basis Deductions ===========================
Requisites for deductibility of donation to NGOs
- Org excl for such purpose
- use the contribution not later than the 15th day of the 3rd mo after the close of its taxable period
- Admin exp <30% of total expenses
- BOT members do not receive remuneration
- If liquidated, NGO’s assets will be distributed to another nonprofit domestic corp/
- Donation must be valued at acq cost
Bad debt loss for securities becoming worthless for banks and trust companies are deductible
YES, TRUE
How to compute OSD
For INDIVIDUALS, the OSD is 40% of GROSS OPERATING RECEIPTS (item 36-net of returns allowances and discounts), NOT including NONOPERATING income. Yup, yung pinakataas lang, di kasama COS ha.
For corporations, the OSD is 40% of TOTAL GROSS INCOME AFTER COS. This includes nonoperating income.
EAR Expense Rules
Ceiling of:
0.5% of Net Sales
and 1% of Net Revenues.
If TP has both, then Actual EAR x Prop%/Total
Prorated EAR for Sales VS 0.5% CEILING
Prorated EAR for Revenus VS 1% CEILING
R & D Costs if recorded as a deferred expense shall be amortized..
Shall be amortized over a period of AT LEAST 60 months (or 5 years)
Pre-operating expenses must be amortized over a period of..
NOT MORE THAN 60 months
Special Allowable Itemized Deductions (6)
- Income distributed to taxable estates and trusts
- Insurance companies: Transfers to reserve fund and payments to policies & annuity contracts
- Taxable Cooperatives: Transfers to reserve fund
- REIT: Dividends distributed (RA9856)
- Discounts to PWD (RA9442)
- Discounts to SC (RA9257)
Deduction Incentives (8)
- Additional compensation expense for SC employees RA9257
- Additional compensation expense for PWD employees RA 9442
- Cost of facilities improvements for PWDs RA7277 or RA9442
- Additional training expense RA8502 Jewelry Industry Devpt Act
- Additional contribution expense Adopt-A-School Program 8525
- Breast-feeding practices RA7600 / RA10028
- Free legal assistance expense RA 9999
- Productivity Incentive bonus expense RA6971
For taxable estates and trusts, which income distributed to heirs / beneficiaries are deductible?
Those subj to RIT only
Non-life insurance companies are required to maintain a reserve equivalent to ______________.
Equivalent to 40% of Gross Premiums less Returns & Cancellations for risks expiring within 1 year.
For MARINE Cargo Risks, the reserve should be the amount of premium insurance during the last two months of the calendar year.
For insurance companies, the allowable special deduction for reserve fund payments is..
Required Reserve
(Less Prior Year Reserve)
————————————-
Additional Required Payment to Reserve Fund
========================
OR
If the required reserve is less than the prior year, the EXCESS shall be released and added to GROSS INCOME.
==========================================
Special Deduction for REIT:
A REIT is legally mandated to distribute 90% of its distributable income as dividends.
The dividends are distributed AFTER close of the taxable year and on/before the last day of the fifth month following the close of the taxable year.
A taxable cooperative’s transfer to its reserve fund is a special allowable deduction. How is its Taxable Net Income computed?
Gross Income from Unrelated Activities (Regular Itemized Deductions) --------------------------------------------------------- Net Income before Statutory Reserves (Appropriation to reserve fund) ---------------------------------------------------------- Taxable Net Income ===================================
From the Net Surplus:
10% for General Reserve Fund (for the first 5 years, this must not be less than 50% of the net surplus)
Up to 10% for Education and Training Fund
Up to 7% for Optional Fund
At least 3% for Community Development Fund
The remaining net surplus shall be made available to members in the form of: 1) Interest on share capital and 2) Patronage Refund
How much is the discount under RA9257?
20% discount in hotels, lodging, restaurants, recreational centers, culture, leisure, amusement, hospitals, drugstores, medical, dental, domestic air, sea and land transport, funeral or burial service providers.
How much is the discount under RA9442?
20% on…..
Deduction Incentives — Additional Claimable Compensation Expense for Senior Citizens
15% of the salary paid to Senior Citizens
- Employment continues for at least 6 months
- The SC’s annual taxable income ≤ poverty level
Deduction Incentives — Additional Claimable Compensation Expense for PWDs
25% of the salary paid to PWD
*proof DOLE, accredited DOLE & DOH
Deduction Incentives — Facilities Improvement for PWDs
50% of direct costs of the improvements
Deduction Incentives — Additional Training Expense - Jewelry Devp Act 1998
50% of the expenses incurred in training schemes approved by TESDA
Deduction Incentives — Adopt-A-School Act 1998
50% of the contribution
Deduction Incentives — Expanded Breastfeeding Promotion Act RA10028
200% of the actual amount incurred
Free Legal Assistance RA9999
Lower of: 10% GI derived from actual performance of he legal profession
OR
Amount collectible for actual performance
Deduction Incentives — Productivity Incentive Bonus Expense
Productivity Incentive Act of 1990 RA 6971
50% of the total productivity bonuses given to employees
+50% of Training and Special Studies to R&F Employees
*not allowed if accrued during pendency of a strike..from violation thereof..
NOLCO - what are the requisites for deductibility of NOLCO?
- Must not be exempt from income tax when the NOLCO was incurred
- There has been NO substantial change in ownership of the business –Any NOLCO before substantial change in ownership cannot be carried over –Deductible against business/professional income ONLY
Who can claim NOLCO?
Taxpayers subject to tax on taxable income, whether regular or preferential tax rate
Who cannot claim NOLCO?
- Those who are tax-exempt
- Those under income tax holidays
- Those taxed on gross income
- Those whose sole income is subject to final income tax
- You can’t claim NOLCO if you use OSD
Acquirer’s NOLCO continues
Acquired entity’s NOLCO discontinues
Duh :)
Who are not allowed to use the OSD? (5)
- NRAET
- NRANET
- Those mandated to use itemized deductions (because OSD is exclusive to OSD! :)
- Those subject to preferential rates
- NIRC-exempt individuals with no other taxable income
