Tax Deductions Flashcards
What is a Optional Standard Deduction?
It is a lieu of the allowable itemized deductions including “NOLCO”
Under OSD a taxpayer’s deduction is simply presumed as a percentage of gross sales and receipts in the case of individuals and gross income in cases of corporations
-Allows taxpayers to deduct a fixed percentage of their gross income/sales instead of itemizing actual business expenses basically simplifying the filing process
-The tax payers must elect to use it and in doing so is irrevocable for the entire tax year
-Simplifies the formula to (Income-COGS) x 40% = OSD
Who are the people that can claim OSD?
All taxpayers subject to tax can claim deductions
Except:
NRAETB
Those mandated to use itemized deductions such as exempt tax payers with no income, and those with income that is solely subject to special or preferential tax rates
How much is the fixed deduction from OSD?
40% of gross sales/receipts for Individual Taxpayers
40% of gross income for Corporate Taxpayers
Can a General Professional Partnership opt for OSD?
No since they’re non taxable entities
They’re merely viewed as a “Pass through entity” where income is ultimately taxed to the taxpayers
Instead, the net income of a GPP is computed, and each partner is then taxed on their share of the partnership’s income, regardless of whether they actually receive it.
The TRAIN law provides that either the GPP or the partner may avail for
What are the rules for an expense to be deductable?
- Ordinary and necessary: An ordinary expense is common and accepted in your trade or industry, while a necessary expense is helpful and appropriate for conducting business.
- Substantiated with receipts: No documentation, no deduction
- Paid or Incurred Within the Same Taxable Year: The expense should be recognized in the same tax year in which the income is earned.
How much can you deduct from entertainment expenses?
Entertainment expenses are only deductible up to 0.5% for Gross Sales/Receipts (selling and service business)
or 5% for manufacturing or merchandising businesses
What type of losses are deductible?
Losses that are actually sustained during the taxable year and not compensated by insurance or other indemnities (basically must be permanently sustained, its not that the insurance gives you money, its that the money given by insurance makes the loss illusory)
This refers to the financial harm a business or individual experiences when assets or property is destroyed, stolen, or lost due to unexpected events?
Losses
What does NOLCO mean?
Net Operating Loss Carry Over
This is basically
If a business has expenses/losses that are bigger than their income, it results in NOLCO, and the excess loss can be applied to future years to reduce taxable income, reducing the burden of tax as the business recovers
What are Ordinary Losses?
- Loss incurred in the trade profession or business
- Loss due to fire, storms, shipwreck or other casualties (Casualty loss)
- Loss due to robbery, theft, or embezzlement of property connected with trade, business, or profession (Casualty loss)
- NOLCO
What are the Requisites of Loss to be considered deductible?
- Must be tied to your business (Business loss, not personal loss)
- Not compensated by insurance or indemnity (If either cover a portion, then you can only deduct the portion not covered)
- Declaration of loss must have been filed within 45 days of discovery of the casualty/robbery that gave rise to the loss
- Documented
Rule of thumb, you cannot double deduct, if you file a loss deduction on your income tax, you cannot file the same loss on other taxes like estate tax.
This is a sudden and unexpected event, like a fire or flood, that causes damage or loss to a business property.
Casualty
This includes the amount paid for the borrower’s use of money during the term of the loan, as well as for his detention of money after the due date of its repayment.
It is also defined under related revenue regulations as the payment for the use of forbearance or detention of money, regardless of the name it is called or denominated
Interest Expense
Small Summary on how bad debt deduction works
To deduct bad debts:
If it’s a bilateral obligation, both parties’ debts need to be assessed. If one party defaults and it results in a loss for the other, that loss may be deductible.
If it’s a unilateral obligation, A (the lender) can only claim a deduction for the amount that C (the borrower) failed to repay if A can prove that the debt is uncollectible.
What are the requisites on the deductibility of interest?
- There must be valid indebtedness
- The Debt must arise from legitimate obligation, and the taxpayer must have a valid and enforceable reason for owing the amount - The indebtedness must be that of the taxpayer.
- The taxpayer claiming the deduction must be the one who is obligated to remain a loan - The indebtedness must be concerned with the taxpayer’s trade, business, or exercise of profession
- Must have been paid or incurred during the taxable year
- Interest must have been stipulated in writing and must be legally due
- Interest Payments must not be between related taxpayers
- This is cause if it were the case, it could be use to manipulate tax liabilities - Interest must not be incurred to finance petroleum operations
- In case of interest incurred in the in acquisition of property used for business, it can not be treated as a capital expenditure
- The interest is not disallowed by the low to be deducted
