RIT: ITEMIZED DEDUCTIONS

Items of Deduction

1. Interest

2. Taxes

3. Losses

4. Bad Debts

5. Depreciation

6. Depletion

7. Charitable and Other Contributions

8. Contributions to Pension Fund

9. Research and Development Cost

10. Expenses, in general

11. SAID

12. NOLCO

RAID with Limit

LIPTEC

• Losses

• Interest

• Pension

• Taxes

• EAR

• Contribution Expense / Donation

Items of Deduction: Interest

Requisites:

1. There should be a valid indebtedness

2. There must be legal liability to pay interest

3. The indebtedness must have been incurred in connection with the taxpayer's trade, profession or business

4. For interest incurred abroad by taxpayers who are subject to income tax only on income earned within the Philippines, the indebtedness must have been actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines (ginamit sa Philippine operation or taxable globally)

5. The deductible amount of interest shall be reduced by an amount equal to 20% of interest income subject to 20% final tax starting July 1, 2020. ( Hindi buong interest expense ang pwedeng ibawas. Iyong Interest Expense babawasan pa muna siya ng 20% ng Gross Amount ng Income subject to FT) (Arbitrage capped)

• This arbitrage limit does not apply to MSME domestic corporations qualified to the 20% corporate income tax. (Hindi applicable sa corp na 20% ang RCIT)

• This arbitrage always applies to individual taxpayers regardless of the level of their income.

Non-deductible interest

1. Interest paid in advance through discount on indebtedness incurred by an individual taxpayer reporting income under the cash basis. If the discounted liability is payable in installment, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year.

   • If the borrower is a corporation, pre-deducted interest could be claimed as deduction in the year of granting of the loan

2. Interest payments with related parties

3. If the indebtedness is incurred to finance petroleum operations

At the option of the taxpayer, interest incurred to acquire property used in trade, business or profession may be allowed as a capital expenditure even though the property does not qualify as qualifying asset (T/F)

True (PAS 23 is not followed for taxation purpose)

Special Cases (Interest):

1. Interest on preferred stock

2. Interest on scrip dividends

3. Interest on tax delinquency

1. Interest on preferred stock - these are dividends, hence, not deductible on interest

2. Interest on scrip dividends - since there is an evidence of indebtedness, these are deductible interest (dividends na promisory note)

3. Interest on tax delinquency - pwedeng i-deduct as interest expense

Interest Expense Formula:

Interest Expense	xx
20% x Gross Interest Income - FIT (arbitrage capped)	(xx)
Deductive Interest Expense	xx

Applicability of Arbitrage Capped:

Individual	Corporation
all	DC - 25%	RFC -
	DC - 20%

Individual	Corporation
all ✔	DC - 25%✔	RFC - ✔
	DC - 20% ❌

ABC Corp transformed its earning of 100K, net Rental Income to Interest Income subject to FIT, by applying for loan that has an interest expense of 100K, that is also earning 100K interest income subject to FIT. How much is the Deductible Interest Expense.

If there is no transformation of income:

Rental income	100K
RCIT (25%)	(25K)
NIAT	75K

If there is transformation of income:

Rental income	100K
Interest expense	(100K)
Net Income Before Tax	0
RCIT (25%)	(0)
NIAT	0

Interest Income - FIT	100K
20% FIT	(20K)
NIAT	80K

Arbitrage Limit:

Interest Expense	100K
20% x Gross Interest Income - FIT (100K ii x 20%)	(20K)
Deductible Interest Expense	80K

Rental income	100K
Interest expense (arbitrage limit)	(80K)
Net Income Before Tax	20K
RCIT (25%)	(5K)
Summarize:
Rental income	100K
Interest expense	(100K)
RCIT (25%)	(5K)
Interest Income - FIT	100K
20% FIT	(20K)
NIAT	75K

The following relates to a taxpayer:

Interest expense on bank loans offset by P 12,000 net interest income from the temporary deposit of the borrowed amount in the same bank	295,000
Interest income from FCDU	17,000
Interest income - bonds	80,000

Required: Compute the deductible interest expense assuming the year is:

	Individual	MSME Corp	Large Corp
2020
2023

2020: RCIT - Large Corp = 30% (Individual & Large Corp)

Arbitrage Limit = [[[(30% - 20%) / 30%] x 6]] + [[(25% - 20%) / 25%] x 6]]] / 12

= [(33% x 6) + (20% x 6)] / 12 = 26.50%

2020: RCIT - MSME = 30% but 0% on the next half

Arbitrage Limit = [[[(30% - 20%) / 30%] x 6]] + [[(20% - 20%) / 25%] x 6]]] / 12

= [(33% x 6) + 0] / 12 = 16.50%

2020:

	Individual	MSME	Large
Interest Expense (295 +12)	307,000	307,000	307,000
FIT	(3,975) (12K / 80%) x 26.50% __________	(2,475) (12K / 80%) x 16.50% __________	(3,975) (12K / 80%) x 26.50% __________
Deductible IE	303,025	304,525	303,025

2023:

	Individual	MSME	Large
Interest Expense (295 +12)	307,000	307,000	307,000
FIT	(3,000) (12K / 80%) x 20% __________	(—————) (12K / 80%) x 0% __________	(3,000) (12K / 80%) x 20% __________
Deductible IE	304,000	307,000	304,000

Tinio Corporation had the following interest expense during the period:

Interest on borrowings from Ayala Corp, a sister company	12,000
Interest paid to preferred shareholders	40,000
Interest on tax delinquencies	40,000
Interest on borrowing on a machinery which is currently depreciated at its acquisition cost	18,000

Compute the deductible interest expense.

Interest on borrowings from Ayala Corp, a sister company	12,000 - related party
Interest paid to preferred shareholders	40,000 - dividend
Interest on tax delinquencies	40,000 - IE
Interest on borrowing on a machinery which is currently depreciated at its acquisition cost	18,000 - Expense option

40K + 18K = 58K

Itemized Deductions: Taxes

• National Tax (PDIVES) - Not Deductible, except:

  • DST

  • Percentage Tax

  • FBT

• Local Tax (Community Tax, RPT, Local Business Tax) - Deductible, except

  • Sales Tax - Title Transfer Tax

  • Special Assessment

Foreign Income Tax can be claimed as:

1. Tax Credit, or

2. Deduction from income

Limit of Foreign Income Tax Credit:

1. Actual Paid vs [(TI-Abroad ÷ TI-World) x Philippine Income Tax Due], whichever is lower (per country)

2. Actual Paid vs [(TI-Abroad ÷ TI-World) x Philippine Income Tax Due], whichever is lower (all TI-abroad)

Whichever is lower, but limit 2 never occur

X, RC had the following data related to his income:

	Phil	Canada	USA
Taxable Income	150K	90K	60K
Income Tax paid	-	8,600	300

How much is the Income Tax Payable if Philippine Income Tax Due is 3,000?

	Based on Proportion (a)	Actual Paid (b)	Allowed Credit (Lower between a and b)
Canada	= Canada/Global x Income Tax Due = 90K/300K x 3K = 900	8,600	900
USA	= USA/Global x Income Tax Due = 60k/300K x 3K = 600	300	300
Total			1,200

Limit B

	Based on Proportion (a)	Actual Paid (b)	Allowed Credit (Lower between a and b)
Canada, USA	= Foreign/Global x Income Tax Due = 150K/300K x 3K = 1,500	8,600 + 300 = 8,900	1,500
Total			1,500

Income Tax Due Foreign Tax Credit (lower between limits A and B) Income Tax Payable

3,000 (1,200) 1,800

ABC Company paid for the following during the year:

Mayor’s permit	120,000
Real property tax	20,000
Value added tax	200,000
Documentary stamp tax	34,000
Donor's tax	200,000
Fringe benefits tax	80,000
Motor vehicle registration tax	8,000
Estimated quarterly income tax	400,000
Surcharge on real property tax	5,000
Interest penalty on real property tax	2,000
Income taxes paid in Hongkong to be deducted against tax due	200,000

Compute the total deductions for taxes and licenses.

Mayor’s permit	120,000
Real property tax	20,000
Documentary stamp tax	34,000
Motor vehicle registration tax	8,000
Total	182,000

Value added tax	National Tax
Donor's tax	National Tax
Fringe benefits tax	Different Deduction Classification
Estimated quarterly income tax	Tax Credit
Surcharge on real property tax	Penalties
Interest penalty on real property tax	Interest Deduction not Taxes and Licenses
Income taxes paid in Hongkong to be deducted against tax due	Tax Credit

An individual taxpayer had the following results of operations during the period:

	PH	JPN	USA
Gross Income	1,000K	1,500K	2,500K
Deductions	400K	600K	1,000K
Net Income	600K	900K	1,500K
Income Taxes Paid	150K	200K	500K

Determine the tax payable or overpayment if:

The foreign income tax is claimed as	Resident Citizen	Resident Alien
Tax Expense
Tax Credit

The foreign income tax is claimed as	Resident Citizen	Resident Alien
Tax Expense
Tax Credit

TAX EXPENSE:

	Resident Citizen	Resident Alien
Gross Income	5,000K	1,000K
Deductions	(2,000K)	(400K)
Tax Expense	(700K)	(———)
Taxable Income	2,300K	600K
Income Tax Due (Tax Table)	492,500	62,500
Tax Credit: PH Abroad	(150,000)	(150,00)
Income Tax Payable/Refund	342,500	(87,500)

TAX CREDIT:

	Resident Citizen	Resident Alien
Gross Income	5,000K	1,000K
Deductions	(2,000K)	(400K)
Tax Expense	(———-)	(———)
Taxable Income	3,000K	600K
Income Tax Due	702,500	62,500
Tax Credit: PH Abroad	(150,000) (551,250)	(150,00)
Income Tax Payable/Refund	1,250	(87,500)

Limit 1:

	Based on Proportion (a) (TNI Country / TNI Global)	Actual Paid (b)	Allowed Credit (Lower between a and b)
JPN	= JNP/Global x Income Tax Due = 0.9M/3M x 702,500 = 210,750	200,000	200,000
USA	= USA/Global x Income Tax Due = 1.5M/3M x 702,500 = 351,250	500,000	351,250
Total			551,250

Limit B

	Based on Proportion (a)	Actual Paid (b)	Allowed Credit (Lower between a and b)
JPN, USA	= Foreign/Global x Income Tax Due = 2.4M/3M x 702,500 = 562,000	700,000	562,000
Total			562,000

Itemized Deductions: Losses

1. Ordinary Loss - Outright deductions (full deduction)

2. Capital Loss - Deductible to extent of Capital Gains. NCL could be carry-over for 1 year, if individual

Requisites of Ordinary Loss:

1. Loss must be actually sustained during the taxable year

2. Not compensated for by insurance or other forms of indemnity

3. It must be sustained in a close and completed transaction

4. The loss must be that of the taxpayer

5. The loss must be reported to the BIR within 45 days from the date of loss or discovery

6. Not claimed as a deduction in the estate tax return for individual income tax payer only

   • In estate taxation, losses incurred during the settlement of the estate such as theft of property or results of calamity may be claimed as deduction in determining the net taxable estate.

Deductible Losses:

1. Loss incurred in trade, profession or business

2. Loss due to fire, storm shipwreck or other casualty of property connected with trade, profession or business

3. Loss due to theft, robbery, or embezzlement if the property is connected with trade, profession or business

Itemized Deductions: Bad Debts

• Loss of income

• GR: Deductible of taxpayer under accrual basis

	Accrual Basis	Cash Basis
Loss of Income (GR)	✔	❌
Loss of Capital	✔	✔

• Under EOPT, bad debt expense for VAT taxpayers shall not include the output VAT components because this will be deducted against output VAT

Requisites of Research and Development Cost

Requisites:

1. It must be paid or incurred during the taxable year

2. It must be connected with trade, profession or business of the taxpayer

3. It is not chargeable to capital accounts (capitalizable expenditure)

Amortization of Capitalizable Research and Development Cost that are not chargeable to a property of a kind that is subject to depreciation or depletion:

1. The taxpayer should treat the expenditure as a deferred charge

2. Amortized over a period of not less than 60 months starting from the month in which the taxpayer first derived benefits from such deferred expense

Non-deductible Research and Development Cost

1. Expenditure for the acquisition of improvement of land (in connection with research projects)

2. Any expenditure for the improvement of property to be used in connection with research and development of a kind which is subject to depreciation and depletion (capitalizable then charged off to depreciation)

3. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil and gas (exploration costs are non-deductible, only development costs)

RC, loaned to his friend DEF 1M with 10% interest. At the end of the year, DEF did not pay his debt, how much can RC claim as bad debts deduction, assuming RC is using:

	Accrual Basis	Cash Basis

	Accrual Basis	Cash Basis
Principal (capital)	1,000,000	1,000,000
Interest (income)	100,000	————-
Total	1,100,000	1,000,000

Private Schools is allowed to expense the capital expenditure (T/F)

True

A resident alien sustained the following losses during the year.

Fire loss on his uninsured residence in Manila	2,000,000
Damage sustained by an insured vehicle in a collision	400,000
Various uncollectible customers account	80,000
Loss on the sale of domestic bonds	50,000
Loss on sale of obsolete equipment and supplies	120,000
Impairment loss on unsold inventories	30,000
Value of uninsured machineries robbed in a Thailand branch	300,000

Determine the total amount of reportable losses in the income tax return.

Fire loss on his uninsured residence in Manila	Personal Exp
Damage sustained by an insured vehicle in a collision	Insured
Various uncollectible customers account	Bad Debts
Loss on the sale of domestic bonds	CGT
Loss on sale of obsolete equipment and supplies	120,000
Impairment loss on unsold inventories	Not Actual
Value of uninsured machineries robbed in a Thailand branch	Foreign Loss

Andrew, a sales executive, had the following equipment during the year:

Pick-up used for his daily transport to office and clients (life =10 years)	1,200,000
Laptop he bought to monitor group sales (life = 5 years)	200,000
Personal i-Phone used for sales communication (5 = years)	80,000
Newly built residential house (life = 40 years)	2,000,000

Required: Compute the deductible depreciation expense assuming Andrew is a

a. Sales executive

b. Independent sales agent

	Executive	Independent
Pick-up	———-	120,000
Laptop	———-	40,000
Personal Phone	———-	16,000
Newly built residential house	———-	———-
Total	———-	176,000

RE University had the following major capital expenditures during the year:

a. RE paid the P10M contract price of a building which was completed in the middle of the year. The building is expected to be used for 50 years with P1M residual value. RE expensed the entire amount.

b. RE spent P1,200,000 repair which was completed at the end of the first quarter on another building. At the start of the year, the building had a book value of P12,000,000 and a remaining useful life of 40 years. After the repair, the building was appraised at P15,000,000.

c. RE paid P1,000,000 for a license to use a computer software intended for learning management for 10 years.

Required: Compute the deductible depreciation expense.

a. expensed

b. 12M / 40 = 300K

1.2M / 40 × ¾ = 22,500

c. Amortization (100K)

Itemized Deductions: Charitable Contributions

Requisites:

1. The contribution or gift must be actually paid

2. The contribution of property must be measured based on acquisition cost

3. It must be given to an organization specified by law (Domestic Gov’t or NGO)

4. Net income of the specified institution must not inure to the benefit of any private stockholder or individual

5. The person making the contribution must be engaged in trade, business or profession

Note: If the taxpayer is not engaged in trade, business or profession, Donor’s taxation applies. Similar gifts are usually exempt under the donor’s taxation provided that not more than 30% of the donation is used for administrative purposes by such done non-profit entity

Itemized Deductions: Fully Deductible Contributions:

PTA

1. Donation to Gov’t used exclusively in undertaking Priority Activities in:

   1. Education (Adopt a school Program)

   2. Health

   3. Youth and Sport Development

   4. Human settlements

   5. Culture and sports

   6. Economic developments

2. Donation to foreign institution or international organization in compliance with agreement or Treaties

3. Donations to Accredited Domestic NGO, exclusively for:

   1. Scientific

   2. Research

   3. Educational

   4. Character Building

   5. Youth and sports development

   6. Health

   7. Social welfare

   8. Cultural

   9. Charitable

   10. Any combination

Contributions subject to limit

1. Donations to the Government of the Philippines or political subdivisions exclusively for public purposes (non-priority activities)

2. Donations to NGO organization or to domestic corporation organized exclusively for the following purposes:

   1. Religious

   2. Charitable

   3. Scientific

   4. Youth and sports development

   5. Cultural

   6. Educational

   7. Rehabilitation of veterans

   8. Social welfare

Contributions subject to limit: Limit to Deduction

Based on the taxable income derived from business or profession prior to the deduction of contributions

1. 10% for Individual

2. 5% for Corporations

VS Actual Contribution, whichever is lower

Itemized Deductions: Contributions to Pension Fund

• Current Service Cost - actually computed value (100K per year. 1M / 10 years)

• Past Service Cost - para sa mga employees na andoon na before magkaroon ng fund (400K past service cost, 100K Current. 100K x 4 years bago magkaroon ng fund)

Example: 1M Pension Fund, actuarial report of normal cost - 400K.

• Current Service Cost - 400K

• Past Service Cost - 600K / 10 years (fixed by law)

• Defined Benefit Plan - formula

• Defined Contribution Plan - Contribution = Expense

In the current period, X Company contributed P1,000,000 to the pension plan out of which P300,000 shall be for prior service costs. In the last 5 years, X Company made a funding of P4,000,000 for annual current service costs and P2,000,000 for prior service costs.

Required: Compute the deductible pension expense.

• Current Service Cost - 700K

• Past Service Cost - 300K / 10 years

• Prior year: PSC - 2M / 10 years

• Total Deductible Pension Expense = 930K

DL, Inc. maintains a defined contribution plan. It contributed P500,000 and P700,000 in 2019 and 2020. 20% of these amounts pertains to employee share pre-deducted from their bonuses.

Required: Compute the deductible pension expense in 2020.

700K x 80% = 560K

Itemized Deductions: Reseach and Development Cost

• CapEx = Capitalized

• Not CapEx = Expense, or amortized (≥ 60 mos starting from the month in which the taxpayer first derived benefits from such deferred expense, whichever is longer)

Itemized Deductions: Entertainment, Amusement or Recreation Expenses (EAR)

(Binibigay sa mga customers and/or suppliers, for example bibisita, papakainin)

Requisites:

1. It must be directly related to the furtherance of the conduct of trade, profession or business

2. It must not be contrary to law, morals, good customs, public policy or public order

3. It must not have been paid directly or indirectly to an official or employee of the Government (local or national, including government-owned and controlled corporations) or of a foreign government, or to a private individual, corporation, General Professional Partnership or a similar entity, if it constitute bribe, kickback or other similar payments

4. The official receipts, invoices, bills or statement of accounts should be in the name of the taxpayer claiming the deduction

Limit of Deductible Amount for EAR:

• Sale of Goods - 0.5% of Net Sales (sales - sales returns, allowances, and discounts) VS actual EAR; w/c is lower

• Sale of Services - 1% of Net Revenue (gross revenue - discounts) VS actual EAR; w/c is lower

• Both

  • Limit 1: Above

  • Limit 2:

    1. (Net Sales ÷ Total Net Sales and Revenue) x Actual total EAR for sales and service

    2. (Net Revenue ÷ Total Net Sales and Revenue) x Actual total EAR for sales and service

TK Company had the following summary of its operation:

Sales of Service:

Gross Receipts	4,000,000
Direct costs of services	2,500,000
Other deductible expenses	1,000,000
Net income before entertainment	500,000

Entertainment expenses incurred for clients:

Duly receipted under TK	72,000
Various receipts with no name	20,000

Sales of Goods:

Net Sales	6,000,000
COGS	3,000,000
Other deductible expenses	1,500,000
Net income before entertainment	1,500,000

Entertainment expenses for suppliers/customers:

Duly receipted under TK	28,000
Various receipts with no name	30,000

Compute the deductible entertainment, amusement and recreation expenses/

	Limit 1:	Actual	Limit 2:
Sales of Service	4M x 1% = 40K	72K	(4M / 10M) x (72K + 28K) = 40K
Sales of Goods	6M x 0.05% = 30K	28K	(6M / 10M) x (72K + 28K) = 60K

Lowest: 40K + 28K = 68K

Identify whether the following is a direct cost (DC) or an ordinary deduction (OD):

1. Salary of office clerks

2. Salaries of factory production workers

3. Supervision costs of factory workers

4. Office utilities

5. Security or maintenance agency fees

6. Freight cost of purchased

7. Ordinary loss

8. Depreciation of computer laptops issued to audit staffs

9. Salary of audit staffs of a professional practice

10. Printing costs of working papers on an engagement

11. Depreciation of ATM machines of banks

12. Interest expense on bank borrowings

13. Interest expense on deposits of banks

14. Income tax expense

1. OD

2. DC

3. DC

4. OD

5. OD

6. DC

7. OD

8. DC

9. DC

10. DC

11. DC

12. OD

13. DC

14. OD

Mr. Paco reported the following income and expenses in 2023:

Gross compensation income	600,000
Gross professional fees	800,000
Dividend income	10,000
Interest income from deposit	15,000
Cash donation to the government for public purpose	60,000
Fair value of property donation to accredited non-profit institutions (Property book value is P80,000)	120,000
Interest on borrowings	24,000
Personal and family expenses	200,000
Entertainment and recreation expense	8,000
Other operating expenses of practice	120,000
Mandatory payroll deductions	20,000
Exempt benefits	40,000

Required: Compute the following

a. Deductible contribution expense

b. Taxable compensation income

c. Net income

d. Taxable income

Gross compensation income	600,000
Mandatory payroll deductions	(20,000)
Exempt benefits	(40,000)
Taxable Compensation Income	540,000 (b)

Gross professional fees	800,000
Other operating expenses of practice	(120,000)
Interest on borrowings [24K - (15K x 20%)]	(21,000)
Entertainment and recreation expense (800K x 1%) vs Actual	(8,000) _______
Net Income Before Contribution	651,000
Contribution Expense Cash (651K x 10%) vs Actual = 60K 80K	(140,000) (a) ________
Net Income	511,000 (c)

Taxable Compensation Income	540,000
Net Income	511,000
Total Taxable Income	1,051,000 (d)

Types of Special Allowable Itemized Deductions

1. Special expense under the NIRC and special laws - with outflows

2. Deduction incentives under special laws - no outflows (GR)

Special Expenses:

1. Income distribution of taxable estate (judicially settled) and trust (irrevocable)

2. Dividend distribution of REITs (Real Estate Investment Trusts) (90%)

3. Transfers to reserve funds of cooperatives

4. Discounts to senior citizens and PWDs*

5. Transfers to reserve fund and payments to policies and annuity contracts of insurance companies*

*Reclassified under regular / ordinary allowable itemized deductions under current rules

Deduction Incentives:

1. Additional compensation expense for SCs and PWDs

2. Cost of facility improvements for PWDs (+50%)

3. Additional training expense on jewelry industry (+50%)

4. Additional contribution expense on Adopt-a-School program (+50%)

5. Additional deductions on rooming-in and breastfeeding program

6. Additional free legal assistance expense

7. Additional productivity incentive bonus expense

8. Additional apprenticeship expense

Required disclosures:

1. Description of the special deduction

2. Legal basis

3. Amount

Rate:

GR: 50%

Salary to PWD: +25%

Salary to SC: +15% (Example: Salary Paid to SC - 100K. Total Deduction will be 115K)

Breastfeeding: +100%

The following data relates to ABC Laboratories, a medicine manufacturer and drug retailer:

Net sales (20% sold to SCs and PWDs net of discounts)	3,840,000
Less: Cost of sales	1,500,000
Gross profit from operations	2,340,000
Interest income - bank deposit, net	20,000
Less:
Salaries to PWD employees	200,000
Salaries to SC employees	100,000
Salaries to regular employees	300,000
Fringe benefits to managerial employee	39,000
Productivity incentive bonus	100,000
Contributions to an adopted public school	200,000
Other operating expenses	300,000
Net income	1,121,000

Required: Compute the following

1. Ordinary allowable itemized deductions

2. Special allowable itemized deductions

Net sales (3,840K x 80%) + (3,840K x 20% ÷ 80%)	4,032,000
Less: Cost of sales	1,500,000
Gross profit from operations	2,532,000
Less: RAID	1,452,000
SAID	215,000
Net income	865,000

RAID:

Salaries to PWD employees	200,000
Salaries to SC employees	100,000
Salaries to regular employees	300,000
Fringe Benefits Expense	39,000
Fringe Benefits Tax Expense (39 / 65%) x 35%	21,000
Productivity incentive bonus	100,000
Other operating expenses	300,000
Contributions to an adopted public school	200,000
SC & PWD Discount (960K x 20%)	192,000
Total	1,452,000

SAID:

Salaries to PWD employees (200K x 25%)	50,000
Salaries to SC employees (100K x 15%)	15,000
Productivity incentive bonus (100K x 50%)	50,000
Contributions to an adopted public school (200K x 50%)	100,000
Total	215,000

A real estate investment trust (REIT) had the following income during the year:

Rentals	2,000,000
Less: Cost of services	500,000
Gross profit from operations	1,500,000
Less: Operating expenses	600,000
Net income	900,000

Compute the following

1. Special allowable itemized deduction

2. Taxable income and the corporate income tax

Rentals	2,000,000
Less: Cost of services	500,000
Gross profit from operations	1,500,000
Less: RAID	600,000
SAID (900 × 90%)	810,000
Net income	90,000
Income Tax (90K x 25%)	22,500

No MCIT

Net Operating Loss Carry Over (NOLCO)

Measurement:

Requisites:

Measurement: Exclude NOLCO prior year and deduction incentives in the current year

Requisites:

1. Taxpayer must not be exempt from income tax during the taxable year the NOL was incurred.

2. There must be no substantial change in ownership of the business enterprise (owners did not change for more than 25%)

• NOLCO is deductible over 3 years except taxpayers in the extractive industries such as mining or oil companies where the carry over period is 5 years. Furthermore, NOLCO sustained in 2020 and 2021 shall be carried over 5 years. For taxpayers under the fiscal year basis, this shall apply for those fiscal years ending on or before June 30, 2021 and June 30, 2022.

A certain taxpayer who suffered losses in prior years had the following details of operations:

	2023	2024	2025
Sales	2,000,000	2,500,000	4,000,000
Cost of sales	1,000,000	1,200,000	1,500,000
Ordinary deductions	750,000	1,250,000	1,200,000
Special deductions	300,000	0	200,000
Unused NOLCO - 2021	100,000
Unused NOLCO - 2020	100,000
Unused NOLCO - 2019	150,000

Compute the NOLCO and the taxable income in each year.

		2023	2024	2025
Sales		2,000,000	2,500,000	4,000,000
Cost of sales		(1,000,000)	(1,200,000)	(1,500,000)
Ordinary deductions		(750,000)	(1,250,000)	(1,200,000)
Net Operating Income (Loss)		350,000	50,000	1,300,000
Special deductions	300,000	(300,000)	(0)	(200,000)
NI After SAID		50,000	50,000	1,100,000
		(50,000) NOLCO - 2020	(50,000) NOLCO - 2020	(100,000) NOLCO - 2021
TNI		0	0	1,000,000
Unused NOLCO - 2021 - 2026	100,000	100,000	100,000
Unused NOLCO - 2020 - 2025	100,000	50,000	0
Unused NOLCO - 2019 - 2022	150,000	0	0

The following relates to a proprietorship business which started in 2018:

	2018	2019	2020
Sales	2,000,000	2,500,000	4,000,000
Cost of sales	1,200,000	1,400,000	1,500,000
Ordinary deductions	1,200,000	1,200,000	1,200,000

Compute the NOLCO and the taxable income in each year assuming:

1. The business was sold to another proprietor at the start of 2019

2. The business was BOI-registered with graduated in its ITH at the end of 2018

	2018	2019	2020
Sales	2,000,000	2,500,000	4,000,000
Cost of sales	(1,200,000)	(1,400,000)	(1,500,000)
Ordinary deductions	(1,200,000)	(1,200,000)	(1,200,000)
Net Operating Income (Loss)	(400,000)	(100,000)	1,300,000
NOLCO	—————	Not transferrable	(100,000)
TNI	0	0	1,200,000
NOLCO -	400,000	0 100,000

	2018	2019	2020
Sales	2,000,000	2,500,000	4,000,000
Cost of sales	(1,200,000)	(1,400,000)	(1,500,000)
Ordinary deductions	(1,200,000)	(1,200,000)	(1,200,000)
Net Operating Income (Loss)	(400,000)	(100,000)	1,300,000
NOLCO	—————	—————	(100,000)
TNI	0	0	1,200,000
NOLCO -	0 ITH	0 100,000

An individual taxpayer reported a net operating income of P280,000 after the following:

Net Operating Loss Carry Over - last year	250,000
Net capital loss - current	80,000
Net capital loss - last year	70,000
Ordinary loss	50,000
Special deductions	40,000

Compute the NOLCO deduction in the current taxable year.

Gross Income (250K + 80K + 70K + 50K + 40K)	770,000
Ordinary loss	(50,000)
Net Income Before SAID	720,000
SAID	(40,000)
Net Income After SAID	680,000
Net Operating Loss Carry Over - last year	(250,000)
Taxable Net Income	430,000

NCLCO - deductible only to the extent of capital gain (Net Loss CY)