|
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 taxpayer’s 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 taxpayer’s 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 taxpayer’s 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.
The author is an associate of BDB Law. If you have
comments or questions concerning the article, you can
e-mail the author at rolando.t.devesa@bdblaw.com.ph or
call 8562952. |
