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    Les On Deductibility of Expenses.04.04.08

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    Christine Bobis
    BDB Law's weekly "Tax Law for Business" column discusses rules on deducting expenses from gross income for tax purposes. Generally, expenses must be ordinary and necessary for business, incurred in the tax year, paid or accrued during business operations, and properly documented. Specific types of deductible expenses include: rental payments, employer-provided childcare costs, interest stipulated in writing, taxes paid, denied input VAT refund claims, and inventory losses with proper documentation. However, representation expenses are limited to 50% of net sales for goods or 1% for services, and foreign currency losses must be from closed transactions to qualify as deductions.

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    Les On Deductibility of Expenses.04.04.08

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    Christine Bobis
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    BDB Law's weekly "Tax Law for Business" column discusses rules on deducting expenses from gross income for tax purposes. Generally, expenses must be ordinary and necessary for business, incurred in the tax year, paid or accrued during business operations, and properly documented. Specific types of deductible expenses include: rental payments, employer-provided childcare costs, interest stipulated in writing, taxes paid, denied input VAT refund claims, and inventory losses with proper documentation. However, representation expenses are limited to 50% of net sales for goods or 1% for services, and foreign currency losses must be from closed transactions to qualify as deductions.

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    32.BM.rules on Deductibility of Expenses.04.04.08

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    BDB Law's weekly "Tax Law for Business" column discusses rules on deducting expenses from gross income for tax purposes. Generally, expenses must be ordinary and necessary for business, incurred in the tax year, paid or accrued during business operations, and properly documented. Specific types of deductible expenses include: rental payments, employer-provided childcare costs, interest stipulated in writing, taxes paid, denied input VAT refund claims, and inventory losses with proper documentation. However, representation expenses are limited to 50% of net sales for goods or 1% for services, and foreign currency losses must be from closed transactions to qualify as deductions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    51 views3 pages

    Les On Deductibility of Expenses.04.04.08

    Uploaded by

    Christine Bobis
    BDB Law's weekly "Tax Law for Business" column discusses rules on deducting expenses from gross income for tax purposes. Generally, expenses must be ordinary and necessary for business, incurred in the tax year, paid or accrued during business operations, and properly documented. Specific types of deductible expenses include: rental payments, employer-provided childcare costs, interest stipulated in writing, taxes paid, denied input VAT refund claims, and inventory losses with proper documentation. However, representation expenses are limited to 50% of net sales for goods or 1% for services, and foreign currency losses must be from closed transactions to qualify as deductions.

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    © All Rights Reserved
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    BDB Laws Tax Law For Business appears in the opinion section of BusinessMirror every

    Thursday. BDB Law is an affiliate of Punongbayan & Araullo (P&A).

    Rules on deductibility of expenses


    During any BIR examination, the issue of the deductibility of a certain expense from
    gross income often arises. Considering that valid business expenses have the effect of
    reducing a taxpayers taxable income, it is highly appropriate for finance managers and
    chief financial officers to get acquainted with the rules on the deductibility of expenses. A
    lot of headaches can be avoided with a working knowledge of the rules on the
    deductibility of expenses.
    As a general rule, the requisites for the deductibility of an expense are: (a) the expense
    must be ordinary and necessary; (b) it must have been paid or incurred during the
    taxable year; (c) it must have been paid or incurred during the conduct of the trade or
    business of the taxpayer; and (d) it must be supported by receipts, records or other
    pertinent papers. An additional requirement is that the withholding tax on the amount
    paid as expense must have been withheld and remitted to the Bureau of Internal
    Revenue.
    For the accrual of expenses, a deduction can be made when the liability of the expense
    becomes fixed, rather than contingent or estimated, and the amount of the liability can
    be determined with reasonable accuracy. The propriety of an accrual must be judged by
    the fact that a taxpayer knew, or can reasonably be expected to have known, at the
    closing of its books for the taxable year, the amount of expenses to be accrued. The
    accrual method of accounting largely presents a question of fact such that the taxpayer
    bears the burden of proof of establishing the accrual of an item of income or deduction.
    (Commissioner of Internal Revenue v. Isabela Cultural Corp., G.R. No. 172231.
    February 12, 2007)

    Of particular concern to many taxpayers is the deductibility of representation expenses.


    The term representation expenses refers to expenses incurred by a taxpayer in
    connection with the conduct of his trade, business or exercise of profession in
    entertaining, providing amusement and recreation to or meeting with a guest or guests at
    a dining place, place of amusement, country club, theater, concert, play, sporting event
    and similar events or places.
    Although the following expenses are not considered representation expenses, these
    may qualify as items for deduction under Section 34 of the Tax Code of 1997, subject to
    conditions for deductibility stated therein:
    a. Expenses which are treated as compensation (like fixed representation allowances) or
    fringe benefits for services rendered under an employer-employee relationship, pursuant
    to Revenue Regulations 2-98, 3-98 and amendments thereto;
    b. Expenses for charitable or fund raising events;
    c. Expenses for a bonafide business meeting of stockholders, partners or directors;
    d. Expenses for attending or sponsoring an employee to a business league or
    professional organization meeting; and
    e. Expenses for events organized for promotion, marketing and advertising, including
    concerts, conferences, seminars, workshops, conventions and other similar events.
    To prevent its abuse, the law has imposed a ceiling on representation expenses (for
    sellers of goods or properties, it should not exceed 50 percent of net sales, while for
    sellers of services, the ceiling is 1 percent of net revenue). An apportionment formula
    taking into consideration the percentage of the net sales/net revenue to the total net
    sales/net revenue should be applied in case a taxpayer sells both goods and services.
    For rental expenses, the lessee may deduct the amount of rent paid or legally payable
    during the year.
    Operating costs are incurred by employers in supporting workplace-based and related
    early childhood care and development programs as long as the employer does not
    charge employees user fees, whether monetary or nonmonetary.
    For interest expenses, among the other requisites, the interest must have been
    stipulated in writing. Otherwise, the taxpayers allowable deduction for interest expense
    is reduced by an amount equal to 42 percent of the interest income subject to final tax.
    Taxes such as percentage taxes (except VAT), excise taxes, documentary stamp taxes,
    local taxes and import dues are also deductible. However, taxes previously claimed as
    deductions, when refunded or credited, must be included as part of the taxpayers gross
    income in the year of receipt (but only to the extent of the income-tax benefit of such
    deduction).

    Input VAT applied for refund can also be claimed as deduction from gross income as
    loss of property in the year such loss was sustained (i.e., year when claim was denied).
    To be deductible as a loss, the claim for refund must have been denied based on the
    following grounds: a) deficient invoices/ORs; b) out-of-period claims; or c) violation of
    invoicing requirements for export sales.
    Foreign-currency loss is deductible only if the loss was actually sustained in a closed
    and completed transaction. The mere recognition of loss that has not been realized is
    not deductible.
    For inventory losses, a certification from the BIR of the actual destruction of the obsolete
    inventories is not necessary, but there must be competent documentary evidence to
    substantiate the inventory that was written off.
    These are just some of the rules on the deductibility of expenses. Is it still a surprise why
    taxpayers are having a difficult time complying with the rules on the deductibility of
    expenses? Taxpayers must keep these rules in mind for them to steer clear of a
    potentially huge deficiency assessment on income tax.

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