LOSSES
o If taxpayer reports income using
- If sustained during the taxable year and
not compensated by insurance or other
indemnity shall be allowed as deductions if
incurred in the pursuit of TBP
REQUISITIES FOR LOSSES TO BE DEDUCTIBLE
- Must be sustained in a closed and
completed transaction
- loss must be that of the taxpayer and
incurred in the pursuit of TBP
- must not be compensated by insurance or
any other form of indemnity
- loss must be reported to the BIR within the
period of 30 days up to 90 days from the
date of discovery of the loss
CLASSIFICATION OF LOSSES
1. DEDUCTIBLE LOSSES
- Business losses & losses from theft, robbery
and embezzlement
- Casualty loss arising from storm, fire or
shipwreck
- Net-operating loss carry over (NOLCO)
- Others
2. NON-DEDUCTIBLE LOSSES: those losses
arising from sale or exchange of properties
under the following cases are not
deductible
- Those incurred between family members
(brother/sister [whole/half-blood], spouse,
ancestors and lineal descendants
- Those arising between and individual and a
corporation where more than 50% of the
stock is owned directly or indirectly by the
individual, except in case of liquidation
- Losses on sale or exchange between two
corporation (50%)
- Between grantor and a fiduciary of any
trust
- Between a fiduciary of a trust & the
fiduciary if another trust, if the same
person is a grantor with respect to each
trust
- Those incurred between the fiduciary and
the beneficiary of a trust
MEASUREMENT OF THE AMOUNT OF LOSS
- TOTAL LOSS: deductible amount is equal to
the book value of the lost asset. (BOOK
VALUE: accumulated depreciation – deduction from taxable income for the
acquisition cost)
- PARTIAL LOSS: deductible loss is equal to
the book value of the asset at the time of
the loss/replacement cost, whichever is
lower
- BUSINESS LOSSES may be deductible or not.
- RULES:
accrual basis, business losses from
unpaid debts are deductible from
the gross taxable income
o Cash basis method & income has
not been reported, business losses
are non-deductible
NET OPERATING LOSS CARRY-OVER (NOLCO)
- NET OPERATING LOSS: excess of the
allowable deduction over the GTI in a
particular taxable year
- The NET OPERATING LOSS of the business
for any taxable year preceding the current
taxable year, if not yet offset as a
deduction from the gross income shall be
CARRIED OVER as a deduction from the
gross income for the next 3 consecutive
taxable year following the year of such
loss.
LIMITATION OF NOLCO
- Operating loss had not been previously
offset as a deduction from the gross
income
- Any net loss incurred during the taxable
year that the taxpayer was exempt from
income tax should not be allowed as a
deduction
- NOLCO shall be allowed only if there has
been no substantial change in the
ownership of the business
o Not less than 75% of the nominal
value of the outstanding issued
shares if business is in the name of
a corporation, held by or on behalf
of the same persons
o Not less than 75% of the paid-up
capital of the corporation
NOMINAL VALUE OF OUTSTANDING
ISSUED SHARES – stated value of the shares
of stock issued and in the possession of the
stockholders of the corporation
- NOL can be carried over only for the next 3
consecutive taxable years immediately
following the year of the incurrence of the
loss
- For mines other than oils and gas wells,
NOL incurred during the first 10 years of
operation may be carried over as a
next 5 years immediately following the
year of such loss.
TAXPAYERS ENTITLED TO NOLCO
- Self-employed individual taxpayers
 - Estates and trusts
- Domestic and resident corporations
covered by normal basic tax
- Domestic and resident foreign corporations
subject to preferential tax rate
THOSE NOT ENTITLED
- Individual taxpayers earning income purely
from compensation
- Offshore banking units of foreign banks
duly authorized by the BSP
- Foreign currency deposit units of both
domestic and foreign banks
- Those exempt by law form income taxation
OTHER TYPES
- CAPITAL LOSSES: deductible only from
capital gain
o Holding period is taken into account
in the computation
o 100% if capital assets are held one
year or less and 50% if assets were
held for more than one year
o NOLCO is allowed if:
o Amount of net capital loss to be
applied does not exceed the net
income before exemption on the
year when capital loss was incurred
o Taxpayer is an individual taxpayer
o Holding period is not more than 12
months
- LOSSES FROM WASH SALES OF STOCKS OR
SECURITIES
- 61 days will cover the 30 days before the
sale and 30 days after the sale
o Losses on securities sold which are
matched with securities acquired
within the 61-day period are non-
deductible
o Losses on securities sold, bartered,
exchanged which cannot be
matched with securities acquired
within the 61-day period are
deductible losses
o When the securities sold within the
61-day period are more than or less
than the securities acquired, the
securities sold will be matched with
an equal number of securities
acquired in accordance with the
order of acquisition
- WAGE LOSSES: earnings or losses derived
from gambling whether legal or illegal
o Wagering gain: included in GTI
o Wagering loss: non-deductible item
o BOTH: Wagering loss is deducted
from wagering gain and NET
WAGERING GAIN shall be included in
the GTI and NET WAGERING LOSS
shall be non-deductible
BAD DEBTS
- Worthless or uncollectible amounts, in
whole or in part which is due to a taxpayer
by others arising from money lent or
services rendered.
- Bad debts are deductible provided they are
incurred in pursuit of TBP
REQUISITES
- There must be an existing debt which is
valid, subsisting and demandable
- Existing debts must be ascertained to be
worthless
- Debts must be charged-off within the
taxable year (charged off: receivable
account shall be removed from the books
of accounts of the business entity)
- Existing indebtedness must be connected
with TBP
- Debt must not be incurred between related
parties
CLASSIFICATION
- DEDUCTIBLE: those uncollectible accounts
that have met the requirements set by the
tax law
- NON DEDUCTIBLE: refer to worthless
accounts and have not met the condition
required by the tax law
o Those incurred not related to TBP
o Arising from related party
transaction
o Those sustained from unpaid wages,
salaries, rents and other similar
items
DEPRECIATION
- The reduction in the value of intangible
assets brought about by wear, tear, and
obsolescence. Otherwise stated, it shall be
the allocated costs of the intangible assets
used in trade or business over its useful life
- DEPRECIATION is applicable when the
assets are tangible. But if the assets are
intangible, the appropriate term to denote
reduction is AMORTIZATION (franchise,
patents, trademarks, goodwill or
copyrights).
REQUISITES
- Assets must be connected with TBP
 - Amount of allowance to be provided shall
be reasonable (those allowances computed
in accordance with the rules and
regulations prescribed by the Secretary of
Finance)
- Amount of depreciation should be charged
off during the year
METHODS
- STRAIGHT-LINE METHOD: allocates the
depreciable amount of the asset equally
over the estimated life
- Depreciable amount = acquisition cost -
residual/scrap value of the asset at the
end of its useful life
- Residual/scrap value: estimated
realizable amount at the end of the life of
the asset
- Estimated useful life: period when the
asset is productively used in the operation
of business
- DECLINING BALANCE METHOD: it would
double the annual depreciation rate under
the straight line method
o Residual/scrap value is disregarded
o A uniform rate is applied (straight
line depreciation rate x 2)
o At the end of the asset’s life, any
scrap value may simply be deducted
from the remaining book value
- SUM-OF-THE-YEARS DIGIT METHOD: the
depreciable cost of the asset is multiplied
by a certain fraction; NUMERATOR = life of
the asset and the DENOMINATOR = sum of
the remaining useful life of the asset
- Formula to compute the denominator:
DEPLETION OF OIL, GAS WELLS AND MINES
- DEPLETION: synonymous with depreciation
& amortization, it connoted reduction in
the carrying value of the asset. Used to
refer to wasting assets
- WASTING ASSETS refer to natural assets
physically consumed and not replaceable
GUIDELINES
1. A reasonable allowance for depletion
computed in accordance with the cost-
depletion method shall be allowed as a
deductible item.
METHODS OF DETERMINING DEPLETION
- Cost-depletion method: based on the cost
of producing mineral or other natural
resources
- Percentage depletion method: a certain
percentage of the gross income earned
from mining operation, but the amount
provided for depletion allowance shall not
exceed the net income from operation
- Discovery depletion method: computed
based on the prevailing market value of
the mineral resources
2. When the allowance for depletion is equal
to the capital invested, NO further
allowance shall be granted
3. After production in commercial quantities
has commenced, certain intangible
exploration and drilling costs:
a. Shall be deducted in the year
incurred if such expenditures are
incurred for non-producing wells
and/mines or
b. Shall be deductible in full in the
year paid and maybe capitalized or
amortized if such expenditures
incurred are for producing wells
and/or mines in the same contract
area.
4. Any intangible exploration, drilling or
development expenses:
a. If incurred for non-producing wells
or mines, expenditures are
deductible in the year incurred
b. If incurred for producing wells or
mines, expenditures are deductible
in full in the year incurred or may
be capitalized and amortized
GUIDELINES IN DEDUCTING EXPLORATION &
DEVELOPMENT EXPENDITURES
- Total amount deductible for exploration &
development shall not exceed 25% of the
net income from mining operations
computed without the benefit of any tax
incentives
- Actual exploration and development
expenditures minus 25% of the net income
from mining shall be carried forward to the
succeeding years until fully deducted
- The election by the taxpayer to deduct the
exploration and development expenditure
is irrevocable and shall be binding in the
succeeding taxable years
CHARITABLE AND OTHER CONTRIBUTIONS - Tax required to be deducted has been paid
to the BIR
- Contributions or gifts actually paid within - Pension trust must be established and
the taxable year for the use of the maintained by the employer
government of the Philippines or any of its
agencies exclusively for public purpose
shall be deductible from the gross taxable
income of the taxpayer.

REQUISITES

- There must be an actual contribution made

- The taxpayer giving charitable donations
must be engaged in TBP
- The entity receiving the donations is
among those specified by law
- The net income of the institution must not
inure to the benefit of any individual or
private stockholder

BASIC PROCEDURES IN COMPUTING THE

DEDUCTIBLE AMOUNT

1. Determine whether the contributions are

deductible or non-deductible.
2. If it is deductible, determine whether
donation is deductible in full of subject to
limitation
3. If subject to limitation, compute taxable
income before personal exemptions
a. Taxable income is computed by
subtracting allowable deductions
from GTI
4. Multiply taxable income before
contribution by the ff:
a. 5% donor is corporation
b. 10% donor is individual taxpayer
5. Compare contributions and use the lower
amount as deductible contribution

RESEARCH AND DEVELOPMENT

- Expenses incurred by taxpayers relative to

scientific or technical evaluation and
findings of improving, formulating and
testing products or processes prior to full-
scale commercial production

REQUISITES

- They must be paid or incurred by the

taxpayer in connection with his TBP
- Must not be treated as expenses
- Costs are chargeable to capital account
- Must be ordinary and necessary

PENSION TRUSTS REQUISITES

- Must be ordinary and necessary

- Contributions must be reasonable
- Amount is intended for the payment of
pensions