What comes to your mind when you hear...

Interest Income? ...final tax

Gross Income? ...from whatever source
Exemption? ...strict
Interest Expense? ...33% of Interest Income
NOLCO? ... 3-year prescription
Casualty Losses? ...insurance/damage recovery
Donations? ...5% and 10% limitations
Research & Development? ...60 months
Depreciation? ...accounting like
Sale of Real Properties? ...capital gains tax
Final Tax? ...tax paid already
Creditable Tax? ...tax credit
Tax Credit? ...advance tax payment
Representation? ...1% & .5% limitations
Capital Losses? ...extent of capital gains only
Net Capital Gain? ...part of gross income
Bad Debts? ...written-of
Salaries? ...reasonable amount
Tax Refund? ...tax benefit rule
Recovery of Bad Debts? ...tax benefit rule
Related Party Transactions? ...no deductions
Tax? ...burden/blood-life
Business Expenses? ...general and specific rules
Dindo? ...tall dark and!!!
AYOS BA...

Taxation SHORT-CUTS:
ITR-refers to the annual income tax return;
QITR-refers to quarterly income tax returns;
CWT-stands for creditable withholding tax;
FWT-stands for final withholding tax;
CGT-stands for capital gains tax, a final tax;
FBT-stands for fringe benefits tax, a final tax;
CIEs-refers to compensation income earners;
MWEs-refers to minimum wage earners, a CIE;
R&D-research and development;
R&E-representation and entertainment;
NOLCO-net operating loss carry over;
NOL-net operating loss;
CL-capital loss;
CG-capital gain;
NCL/G-net capital loss/gain;
NCLCO-net capital loss carry over;
AND MORE....

GROSS INCOME is actually somehow Gross Profit PLUS Other Taxable Income.
It is 'somehow' Gross Profit because it is not actually Gross Profit which is
included. Kasama din ung ibang ORDINARY INCOME na somehow related sa
trade ni taxpayer like ung gain sa sale ng equipment o ibang ordinary assets.
Un namang 'Other Taxable Income' pertains to taxable income na hindi
related sa trade or sa kahit anong ordinary asset. Other Taxable Income
usually are related to sale of capital assets na subject naman sa rules ng
Capital Gains and Losses.
Of course, ung mga sale ng capital assets na subject sa Capital Gains Tax
(which is a Final Tax) e hindi na din kasali sa usapan kasi nga TAX PAID na sya
and hindi na kasali sa periodic computation ng Income Tax Due na subject to
5%-32% for individuals and 30% naman for non-individuals.

BASIC Net Taxable Income FORMATS:

For INDIVIDUALS ENGAGE IN BUSINESSGross Income
-Allowable Deductions for Business Expenses
NTI from business (or NTI before Personal Exemption)
-Personal Exemptions
=NTI
For NON-INDIVIDUALSGross Income
-Allowable Deductions for Business Expenses
=NTI

CAPITAL GAINS AND LOSSESKapag pinag-usapan ang Capital Gains and Losses, and topic is GROSS
INCOME.
On SALE (only) of capital assets which are not subject to Capital Gains Tax (a
Final Tax), the GAINS/LOSSES shall be recognized as part of the Gross Income
as follows:
A Capital Gain alone is always part of Gross Income (isang transaction lang
ng sale).
A Capital Loss alone e walang efect for Income Tax purposes kasi hindi sya
pwedeng i-deduct sa Gross Income.
On at least two (2) transactions of sale of capital assets and at least isa don
resulted income a gain, ung losses on other sale of capital asset will be
recognized as a REDUCTION to the gain. the efect is liliit ung Gross Income
kasi ung supposed gain na part ni Gross Income e idi-DECREASED nung loss
or mga losses. Actually to the point na exhausted ung gain pwede, hanggang
don lang. Kapag mas malaki ung loss or losses kesa sa gain or gains, WALA
NANG USE ung excess and hindi naman sya pwedeng i-claim na deduction for
business expense as a loss kasi hindi sya related sa business.

ADDITIONAL RULES AFFECTING CAPITAL GAINS AND LOSSESFor NON-INDIVIDUALS, always recognise the Gains/Losses at 100%. For
INDIVIDUALS, if the property was held for not more than 12 months e we
recognise 100% of the Gains/Losses. On the other hand, if held for more than
12 months e 50% lang.
HOLDING PERIOD means kung gaano katagal mo HAWAK ung property. Or it is
as easy as the period from the time you acquired it hanggang sa time na idispose mo na sya.

SPECIAL BENEFIT ON CAPITAL LOSSESFor INDIVIDUALS only, when there is a Net Capital Loss during the year,
meaning mas malaki ung capital loss/es than capital gain/s, for the year e
wala nang use ung excess ng loss/es over tha gain/s PERO for the next
immediately succeeding year, pwede syang i-CARRY-OVER. AS IF nagbenta ka
the following year ng capital asset which resulted into a loss in the amount of
the CARRY-OVER.
So, kung sa immediately succeeding year e meron kang capital gain, pwede
sya i-REDUCE nung Net Capital Loss Carry-Over from the previous year.
LIMITATION OF NCLCO:
In relation to the above, ung amount daw na pwedeng i-CARRY-OVER shall not
exceed o hindi lalampas sa Net Taxable Income nung taon when you had the
Net Capital Loss.

Also related to Gross Income is this principle:

Income "from whatever source" is taxable income.
In line with the above principle is the "blood-life principle". Ung 2 related
principles generally means na EVERYTHING falling under the basic definition
of "income" is taxable NOT UNLESS there is a specific provision of the law na
nagsasabi na EXEMPT o EXCLUDED o hindi subject ung income sa tax.
The BASIC CONCEPT OF INCOME:
It is a fruit of labor or industry, capital, or combined.

What are Allowable Deductions for Business Expenses--

Parang Accounting lang, lahat ng Business Expenses e allowable deductions

for Income Tax purposes PERO SUBJECT TO QUALIFICATIONS.
In general, lahat daw must be:
a. Ordinary and necessary to the trade or business;
b. Paid or incurred during the taxable year;
c. Substantiated or with proof or evidence;
d. If subject to the Withholding Tax System, ung tax must have been withheld
and dapat na-remit sa BIR.

Basically, ano ba ang DIFFERENCE BETWEEN INDIVIDUAL & NON-INDIVIDUAL

Taxpayers for Income Tax purposes?
A. In terms of Computation FORMAT ng NTI, ang pinaka-diference lang is
allowed si Individual ng deduction for Personal Exemptions.
B. In terms of GROSS INCOME, the same lang.
C. In terms of allowable deductions for BUSINESS EXPENSES, the same lang
din except for very minor diferences in terms of limitations on certain
business expenses.
D. In terms of IINCOME TAX RATE, ditto magkaiba na talaga kasi is Nonindividual e subject sa 30% while si Individual e subject sa Graduated Income
Tax Table na meron naman 5%-32%.
E. In addition sa income tax rate, si Non-individual e merong MCIT and IAET.
Other than herein mentioned, parang wala na.

What are the kinds of Income na hindi kasama or NOT REQUIRED TO BE

INCLUDED in the the Quarterly & Annual Income Tax Returns?
A. If the Income does not fall under the DEFINITION of Income;
B. If the Income, though may be defined as Income. PERO EXEMPT or
EXCLUDED naman sa Income Tax under any provision of the law;
C. If the Income is subject to a Final Withholding Tax and the tax therein have
been withheld and remitted to the Bureau of Internal Revenue.
ALL OTHERS are taxable income required to be reported in the Quarterly &
Annual ITRs.

Is there a DIFFERENCE BETWEEN INDIVIDUALS & NON-INDIVIDUALS when it

comes to the provisions on FINAL WITHHOLDING TAX?
The basic concept is the same for both pag-dating sa Final Withholding Tax or
even sa Creditable Withholding Tax. The DIFFERENCE is exactly on the
NATURE OF INCOME and the APPLICABLE RATES depending on the provisions
of the law.
Kahit naman AMONG INDIVIDUAL TAXPAYERS & AMONG NON-INDIVIDUAL
TAXPAYERS, iba-iba ang provisions as to the NATURE OF INCOME subject to
the Withholding Tax System and ung APPLICABLE RATES.
So see the provisions on particular NATURE OF INCOME.

With or without my 75 LIKES, let me just proceed with ALLOWABLE

DEDUCTIONS for BUSINESS EXPENSES.
Before anything else, ulitin ko lang, in general, dapat lahat ng Business
Expenses which we are to calim as DEDUCTIONS for Income Tax purposes
must QUALIFY FIRST to the following:
A. Ordinary & necessary to the Trade or Business;
B. Substantiated with proof or evidence;
C. Paid or incurred during the taxable year; and,
D. if subject to the Withholding Tax System, whether Final or Creditable ung
nature, the tax must have been withheld and remitted to the BIR.
Form here on, the posts will discuss the SPECIFIC RULES on PARTICULAR
Business Expenses aside from the afore-mentioned GENERAL
QUALIFICATIONS.

SPECIALS on DEPRECIATIONAny method for as long as generally accepted e pwedeng gamitin. Of course
limited yan sa kung ano ang best method that would reflect the proper net
taxable income ni taxpayer.
On the matter of USEFUL LIFE, syempre common practice will dictate it.

Very ACCOUNTING naman halos lahat nung mga Allowable Deductions for
Business Expenses ALTHOUGH merong mga ADDITIONAL or SPECIAL RULES
as qualifications for Income Tax purposes.

Ang hindi lang mala-Accounting dyan e ung NOLCO and ung tinatawag na
PENSION COST which i will be discussing in class.
The same lang ang rules ng mga Business Expenses fir Individuals and Nonindividuals EXCEPT sa Donations & Contributions na SUBJECT TO LIMITATIONS.
Si Individual kase e limited sa rate na 10% while si Non-individual naman e sa
rate na 5%, both of their Net Taxable Income from Business BEFORE
DONATIONS & CONTRIBUTIONS.

SPECIAL on BAD DEBT RECOVERY & TAX REFUND-Just remember the principle of TAX BENEFIT RULE

Other issues afecting GROSS INCOME:

RECOGNITION-the taxpayer has the OPTION to use ACCRUAL or CASH
METHOD or any other methods as accepted generally. PERO for special nature
of businesses e merong PRESCRIBED METHOD at SPECIFIC RULES on
recognition as follows:
For LONG-TERM contracts o if the nature of the project for a client e would
exceed more than 1 taxable year, recognition shall be by using the
PERCENTAGE OF COMPLETION.
For LEASE or RENTAL BUSINESS naman daw, option pa din kung ACCRUAL or
CASH METHOD pero may special treatment si ADVANCE RENTALS as follows:
A. Kung WALANG RESTRICTION sa advance rentals, kahit 100 years ang iadvance eh ire-recognise na sya na income in the year when received;
B. Kung ung advance is intended as a DEPOSIT for faithful compliance to the
terms and conditions ng Lease Agreement, hindi sya income UNLESS
FORFEITED in favor of the Lessor kapag may breach of contract si Lessee;

C. Kung meron naman agreement na ung deposit e pwedeng i-apply as

TERMINAL RENTAL, income shall be recognised kapag ina-apply na si deposit
as actual rental.

PARTNERSHIP TAXATIONA parnership shall be treated as a corporation for tax purposes EXCEPT a
General Professional Partnership (GPP) which is not subject or exempt from
Income Tax.
Why? Because unlike a regular partnership na binuo for the benefit of profit
sharing, si GPP e binuo for the exercise of a profession.
So, parang nagsama-sama lang ung mga professional partners para mag
practice ng common profession kaya ang subject lang sa Income Tax e silang
mga partners and hindi si GPP.

QUESTION: Kapag ba nagke-claim ng Interest Expense e STRICT ba talaga sa

issue na 'it must be expressed or written'?
ANSWER: Yes as a matter of SUBSTANTIATION. Pero sa case ng CREDIT CARD
USE, kahit na hindi pre-written ung Interest e allowed naman kasi it is a
'common practice'.
FOLLOW-UP QUESTION: Lahat ba na ginagawa na 'common practice' e
exemption sa rule?
ANSWER: No! Not because most are doing a thing it does not make that thing
right. Nagkataon lang na 'common practice' ung sa Credit Card and ina-allow
naman sya na deduction for Interest Expense IN PRACTICE.

On CASUALTY LOSSES, there is a formal requisite na dapat ung event of the

casualty na nag-result sa loss e MUST BE REPORTED to the BIR within a
period of 45 days from such event.
STRICTLY SPEAKING, kapag hindi nai-report ni taxpayer e hindi ia-allow si
Casualty Loss.

There is one Rev. Regs. issued and still standing na ang sabe e when it cones
to MOTOR VEHICLE, the maximum reasonable amount for a single employee
shall be P2.4M.
This has an efect on expenses claimed in relation to MOTOR VEHICLES, the
likes of Depreciation and Repairs & Maintenance.
Included in this Rev. Regs., sabi din na for Tax purposes e hindi pwedeng
mag-claim ng kahit anong deduction related to yachts, helicopters, and other
luxurious personal properties EXCEPT it is related to the trade or business
(e.g. transportation business, cruise business, ect.)

Kapag pinagusapan ang BAD DEBTS e we are talking something related sa

TRADE RECEIVABLES. Agree right.
Accounting-wise, kapag sinabing Trade Receivables it means receivables from
sale of goods or services ordinarily for sale in the business.
Sa Tax naman, when we say Trade Receivables na source ng Bad Debts, we
refer to receivables from or related to trade. Not necessarily a sale on

account just like in Accounting.

MCIT vs. RCIT (or Normal Tax)-Some have been asking about this topic. Since you crave for it, ganito kasimple itong topic na to:
Starting on the 4th year, or after a grace-period of 3 years of operation from
registration date (SEC), si CORPORATION daw e liable na sa MCIT.
Does it mean ALWAYS APPLICABLE na ang MCIT. The answer is YES for as long
as mas mataas sya than the RCIT.
How much is MCIT? It is 2% of Gross Income.
So, TAX DUE shall be the higher between MCIT and RCIT. Bear in mind,
ALWAYS, si RCIT ang nire-recognize na TAX EXPENSE for recording purposes.
Kapag ang Tax Due e si MCIT, ang Tax Expense e si RCIT pa din pag dating sa
recording. Ngaun, we have to account for the EXCESS OF MCIT OVER RCIT
kasi it will be recognized as an ASSET ACCOUNT (see booking below).
RCIT(10,000) > MCIT(8,000)-DR Tax Expense. 10,000
CR Cash/Tax Payable. 10,000
MCIT(13,000) > RCIT(10,000)-DR Tax Expense. 10,000
DR Excess MCIT over RCIT. 3,000
CR Cash/Tax Payable. 13,000
Ano mangyayare sa EXCESS MCIT OVER RCIT? It is actually a SPECIAL KIND
OF TAX CREDIT. Bakit SPECIAL, unlike ordinary Tax Credits na pwedeng
gamitin ANYTIME against Income Tax Due, si Excess MCIT pwede lang gamitin
against an Income Tax Due na RCIT or Normal Tax.
One thing more, si Excess MCIT over RCIT e meron lang na 3-year

PRESCRIPTIVE PERIOD. So, kapag nag-prescribe na e you have to remove that

portion sa asset account by debiting Tax Expense and crediting your Asset
Account.
So, kapag na-prescribe pala e merong efect sa Income Tax? Actually NONE.
Although merong adjusting entry on Tax Expense (actually derecho na sa
Retained Earnings), walang epekto kasi hindi naman deductible expense si
Tax Expense for Income Tax purposes di ba.

Wag na kayong mag-palito sa issue ng MCIT guys. Basta nasa 4th year
onwards na ng operation si corporation, WEH na tayo sa MCIT and RCIT.
Kapag merong EXCESS MCIT, Tax Credit sya with 3-year prescription PERO
against RCIT lang.
Tapos... Wala nang kuskos-balungos...

SPECIALS on PARTNERSHIPSVery important for partnerships is the so-called DISTRIBUTIVE INCOME.

For partnerships, aside for the Tax consequence of the partnership itself, the
rule is equally strict on the PARTNERS' INCOME concerning the following:
For REGULAR PARTNERSHIPS:
Ung share daw ng partners sa Net Distributive Income shall be subject to a
FINAL TAX of 10%. Remember DIVIDENDS, parang ganoon lang ang
treatment.
For GPPs:
Ung share daw ng partners sa Net Distributive Income shall be subject to
CREDITABLE WITHHOLDING TAX at the rate of 10% or 15%. Remember CWT

for professionals, parang ganoon lang ang treatment.

Net Distributive Income shall mean:
Gross Income
-Business Expenses
=Net Taxable Income
-Income Tax
=Net Distributive Share
Since hindi subject si GPP sa Income Tax, ung Net Distributive Income e
parang ung Net Taxable Income.
Mag-declare man o hindi, mag-disrtibute man o hindi, SUBJECT TO TAX na sila
partners sa share nila sa Net Distributable Income ng partnership.

Alam mo na ba kung ano ibig sabihin at para saan ang mga PRINCIPLES na to:
life blood
tax as a burden
evidenced by a completed transaction
tax benefit rule
convenience of the employer rule
from whatever source
sound taxation system
GARDENIA PRINCIPLE (very important)
These are the principles, strong enough to back-up an intelligent
presumption.
Of course, presumptions will always be behind or unpopular as against a
provision of the law. Pero kapag naguluhan ka na ang nagkarambol-rambol na

ang mga minemorize mo na provisions, to the point na na block-out ka

mentally, these principles may be your only chance.
PRINCIPLE+ANALYSIS=PROBABLY RIGHT
PRINCIPLES alone=BOOKISH\THEORETICAL
ANALYSIS alone=FEELING MAGALING

When MCIT is > than RCIT, di ba we recognize an Asset Account, a Tax Credit
known as EXCESS MCIT OVER RCIT. Well, as a rule e magkakaroon lang ng
ganitong recognition in the ANNUAL ITR.
While ang TAX DUE in the QITR is MCIT or RCIT pa din WEH, NO RECOGNITION
of Excess MCIT Over RCIT in the QITRs.

Lahat ba ng Income ni Taxpayer na subject to CREDITABLE W/holding Tax e

MANDATORILY na nasa-subject sa Withholding System?
ANSWER. No, unless lahat ng Income ni Taxpayer e galing sa isang
Withholding Tax Agent.
Take the case of a Lawyer or a Doctor: if magre-render sila ng service sa
isang individual or entity na engage sa business, malamang na ung
Professional Income nila e mai-subject sa 10%/15% na CWT kasi yung mga
clients nila e ike-CLAIM na Deduction for Business Expense ung ibabayad na
Professional Fee tama.
Pero let's say na nag-render aila ng service to a person not in business and
hindi magke-claim ng Deduction for Business Expense, hindi isa-subject nung
tao na un ung Professional Fee sa Withholding.
IN OTHER WORDS, not just because ang isang particular na Income e subject

sa Withholding Tax e ok na, dapat din na si Income-PAYOR is a DESIGNATED

WITHHOLDING TAX AGENT para makumpketo ung requirement under the
Withholding Tax System.
OBVIOUSLY, kapag engage sa business e malamang na Designated
Withholding Tax Agent kasi on his part, General Qualification ung withholding
para maka-claim sya ng deduction.

Over Payment of Income Tax versus Excess MCIT Over RCITThe two items are actually both TAX CREDITS. The rule is, both will only be
recognized in the ANNUAL INCOME TAX RETURN.
It is possible na sa mga QITR e merong Over Payments OR mas malaki si
MCIT. In such cases e we just present them that way pero hindi sila TAX
CREDITS.
SO WHAT DOES IT MEAN?
Let's talk first about Over Payments- kapag sa QITR e merong Over Payment,
it only means na wala tayong babayaran for that QITR pero ung amount over
paid is NOT A TAX CREDIT nor can it be REFUNDED.
Sa annual ITR, ung amount ng Excess Payment e may OPTION si TP kung ikeclaim nya for REFUND, ia-apply nya as TAX CREDIT sa mga susunod nantax
periods, or papa-issue sya ng TAX CREDIT CERTIFICATE.

TAX CREDIT versus TAX CREDIT CERTIFICATEWhen we say TAX CREDIT e advance payment sya ng tax. Kapag Income Tax
Credit e advance payment ng Income Tax. Meron din namang VAT Tax Credit
na ibig naman sabihin e advance payment ng VAT.
Kapag Income Tax Credit e pwede lang sya against Income Tax. Kapag VAT
Tax Credit e pang VAT lang. In other words, NO CROSS-OVER.

Si Tax Credit Certificate (TCC) naman e medyo kakaiba kasi pwede sya
against kahit anong Tax liability EXCEPT Withholding Tax.
So mas malupet si TCC kasi pwede kahit saan. Problem is, medyo may
proseso paga-apply ng TCC kasi nga para syang TAX COUPON.
So in practice, the more popular na recourse kapag may over payment is to
apply it as TAX CREDIT in the succeeding periods para magamit mo agad kasi
nga wala naman syang masyadong proseso.
As against REFUND, parang TCC din ang process kaya hindi din masyadong
ina-avail. Anyway, since periodic naman at continuous ang filing and payment
ng mga tax liabilities, mas praktikal talaga na gamitin na lang na TAX CREDIT.
OKS BA....

Excess MCIT Over RCITSa QITRs, kapag MCIT is > than RCIT, ang Tax Due e si MCIT. Pero wala pa
tayong actually ire-recognize na FINAL na EXCESS MCIT.
As a rule nga, we are to recognize Excess MCIT sa annual ITR. Ung amount ng
excess is also a kind of TAX CREDIT. Hindi sya pwedeng i-REFUND nor applied
for a TCC. Talagang Tax Credit lang ang classification nya.
Special kind of Tax Credit sya kasi hindi sya pwedeng gamitin against all
types of Income Tax liability. Pwede lang sya kapag ang Income Tax Due is
ung RCIT or the Normal Tax ng isang corporation.
One thing more na special sa kanya is that merong sya PRESCRIPTIVE PERIOD
na 3 years. So, kapag lumampas na sa 3 year period e wala na tayong Tax
Credit coming from Excess MCIT.

GROSS INCOME TAXATION for CORPORATIONAs provided for under the National Internal Revenue Code (NIRC), at this very
moment, corporations MAY BE ALLOWED to have their Income Tax liability on
the basis of their Gross Income at the rate of fifteen percent (15%) PROVIDED
the following:
A. The President will issue an order that this provision may apply. In other
words, kapag sa tinging ni PNOY na pwede at mag-issue sya ng Executive
Order e tsaka pa lang pwede;
FURTHER-B. Only corporations with a ratio of cost to sales of not exeeding 55% ang
pwedeng mag-avail; and
C. Irrevocable ung OPTION na to for three (3) consecutive years.
Hahahahaha.... Joke joke joke...

Does MCIT applys to PARTNERSHIPS and other SPECIAL CORPORATIONS?

To special corporations, no. Simply because MCIT is compared to RCIT or
Normal Tax. Sa case ng special corporations e kaya nga sila tinawag na
'special' kasi hindi 'regular' ang Tax Rates nila.
Sa case naman ni partnership, yes except for GPPs kasi nga EXEMPT sila sa
Income Tax.

One issue of diferences in opinion is the issue on NET CAPITAL LOSS CARRY
OVER.
On the issue on limitation to the extent of taxable income-

Some Authors would say that 'taxable income' is 'net income' while some say
it's 'net taxable income'.
I tend to agree that it really is NET TAXABLE INCOME using thw reversed
principle of 'tax benefit rule' takung into account the side of the state.
Kasi nga naman, di ba related ang NCLCO sa previous year, supposedly hindi
nga sya allowed na to diminish the taxable income kasi nga sabi sa rule:
'to the extent of capital gains'
lang ung capital losses. Given the oppurtunity to allow it to the inmediately
succeeding year with a limitation, i would seem logical na i-allow sya to that
extent kung hanggang saan nag-benefit si State. And in that case, hanggang
sa NTI and not to the extent of Net Income.

Still related to NCLCO, some would say (including VDReyes) that each year
has its own Net Capital Loss which can be forwarded OR carried over kapag
ung succeeding year e merong Net Capital Gain.
I wish to agree to my Professor and some Tax Scholars on this matter PERO
parang hindi naman ako makapayag.
Under the provision on NCLCO, there is this phrase na ang sabi e ganito:
'the Net Capital Loss Carried Over shall be considered in the immediatley
succeeding year as a loss on sale of a capital asset hels for not more than 12
months'
Via this phrase, NCLCO shall be treated as a loss on sale of a capital asset in
the succeeding year, e di malinaw na pwede sya ibangga against a capital
gain di ba.
That is why i made GARDENIA PRINCIPLE to apply.
AGAIN, we are not interpreting but we are just trying to apply the provisions
of the Tax Laws. In the absence of any REGULATIONS or COURT DECISIONS or
OPINION of the Authority, we have to have a DISPOSITION in every matter of
concern.
So please be guided accordingly.

Thanks brothers and sisters.

ETO NA ANG MABIGAT NA TANONGPaano kung may lumabas ung ganyang tanong sa actual CPA boar exams?
Hahahahahaha... Wag kayo magalala, hindi lalabas yan hahahahaha...
For the record, on matters na hindi settled, 99% e hindi tinatanong sa board
exams.
If ever naman na itanong, multiple choice naman un and it is to your
advantage na alam mo ung mga opinion ng ibat-ibang Authors and Tax
Scholars so that you try every possible ways and malaman natin kung
merong lalabas sa choices. Hahahahaha, yes, trial and error OR process of
elimination ang laban natin.
Again, better to be equipped di ba. Kesa ANALYSIS lang or PRINCIPLE lang, the
best pa din ung BOTH.

PENSION COSTFor ALL CIEs working within Philippine territory, MANDATED under the law na
magung memeber the SSS/GSIS.
SSS or Social Security System is for those in the private sector while GSIS or
Government Insurance Service System is for those employed in the
government.
Actually, sila ang mga national PENSION Companies taking care of the needs
of EMOLOYEES from the basic health care to loans up to retirement benefits.
BUT FOR SOME PRIVATE COMPANIES, they want to give their employees more
than what a national social security can give. And because of this reason,

nage-establish pa ng additional pension trust in partnership with a private

pension trust company.
So, aside sa monthly contributions ni employee and ni employer sa SSS or
GSIS, magkakaroon din ng monthly or periodic contribution for the other
private pension trust company.

Consider this illustrative presentation related to EXCESS MCITYEAR 5:

RCIT. 10,000
MCIT. 35,000
IT DUE. 35,000
Excess MCIT:
This year. 25,000
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
YEAR 6:
RCIT. 18,000
MCIT. 20,000
IT DUE. 20,000
Excess MCIT:
Year 5. 25,000
This year. 2,000
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
YEAR 7:
RCIT. 18,000

MCIT. 17,000
IT DUE. 18,000
Less Tax Credit. 18,000
IT PAYABLE. 0
Excess MCIT:
Year 5. 7,000
Year 6. 2,000
AND SO ON AND FORTH....

QUESTION. What if MCIT and RCIT are equal?

ANSWER. Therefore MCIT is not greater than RCIT. Therefore RCIT is not less
than MCIT.
However you take it, RCIT is the Tax Due right?

GROSS INCOME
(this is the part where Capital Losses are found)
-BUSINESS EXPENSES
(this is that part where allowable deductions for Business Expenses are
found)
=NTI
TAX DUE

-TAX CREDITS
(this is the part where Advance Payment of Income Tax are found like
Creditable Withholding Tax, Excess MCIT, Quarterly IT Payments, Excess IT
Payments from previous years)
=TAX PAYABLE
If Tax Credit is > than Income Tax Due, NO INCOME TAX PAYABLE, instead, we
have a case of EXCESS INCOME TAX PAYMENT.
The EXCESS can be opted by the taxpayer to be REFUNDED or apply it as a
TAX CREDIT or apply for a TAX CREDIT CERTIFICATE.
The most common or in the absence of signifying an option, it shall be
presumed to be applied as a Tax Credit.

TAX CREDITCreditable Withholding Tax-they are advance payment of Income Tax via the
Withholding Tax System. Certain types of Income are subject to the Expanded
Withhilding Tax like Professional Fees, Rentals, Contracted Services, payment
for goods and services by a top 20,000 taxpayer of a Revenue District Office,
and others more. The amount withheld on these transactions are TAX
CREDITS which are available against Income Tax liability at any time. Ni
prescription as to use.
Quarterly Income Tax Payments-they are advance payments on Income Tax
for the year which are available as TAX CREDITS for the succeeding quarters
and the year's Income Tax Due.
Year's Excess Income Tax Payments-when the sum of all Tax Credits is
GREATER THAN the Income Tax Due for the year, the amount of excess may
be OPTED as follows:
A. Tax Refund;
B. Tax Credit; or
C. To be issued a TCC.

Usually, letter 'B' is opted because of sumplicity and convenience. When

applied to be a Tax Credit, it can be against Income Tax liability of succeeding
periods even in the QITRs. No prescription as to use.
Excess MCIT over RCIT-when MCIT is GREATER THAN RCIT, the Tax Due will be
MCIT but the Tax Expense is ALWAYS the RCIT. The excess MCIT is a Tax Credit
against RCIT even in the QITRs BUT WHEN WE SAY EXCESS MCIT we are
referring to excess for the year. No Excess MCIT shall be recognized in the
QITRs. As a Tax Credit, Excess MCIT prescribes is 3 years.
Foreign Income Tax Payment-for Resident Citizens and Donestic Corporations
ONLY, usually, incomes from OUTSIDE of the Philippines are liable to Income
Tax in such foreign countries. BUT, such incomes are also paying Income Tax
in the Philippines. The amount of Income Tax due and paid outside of the
Philippines may be OPTED as:
A. Allowable deductuon for Business Expense under the caption Taxes; or
B. As a Tax Credit subject to limitations under exsisting rules.

How about SHARE from a PARTNERSHIP (not GPP)A partnership shall be treated as a corporation for tax purposes. So, ganon pa
din, from the gross income we deduct allowable business expenses or
optional standard deduction to arrive at the NTI which is the basis of the 30%
Income Tax.
The PARTNERS will then be sharing in the NET DISTRIBUTABLE INCOME of the
partnership. Such share is subject to a FINAL TAX of 10%, parang DIVIDENDS
INCOME.
QUESTION. Is the NDI of a GPP and a regular partnership computed in the
same way?
ANSWER. Almost but with 1 diference. Si regular partnership kasi e after ng
NTI e we still have to deduct the amount of tax due. Unlike kay GPP, ung NTI
is = to NDI kasi nga exempt from Income Tax.

SHARE of a PARTNER from a GENERAL PROFESSIONAL PARTNERSHIPA GPP is a Tax Exempt entity BUT the share of a partner from the income of a
GPP is taxable income to the partners
Such share is somehow a PROFESSIONAL FEE by the partner.
QUESTION. If GPPs are not subject to Income Tax, e bakit we are still allowing
deductions for business expenses or optional standard deduction for GPPs?
ANSWER. The allowing of deductions for GPPs is for the purpose of
COMPUTING THE NET DISTRIBUTIVE INCOME of the GPP. The NDI is what is
being shared or divided among partners of the GPP which is treated as
receipt of PROFESSIONAL FEE.
This is also the reason why such share is subject to Creditable Withholding
Tax of 10% or 15% whichever is applicable. As in parang professional fee.
Under existing Revenue Regulations, kung si GPP opted itemized deduction in
computing NDI, sila partners e itemized deduction na din sa kanilang
individual declaration.
Since ang mare-receive nila partners from the GPP in NET already, wala na
dapat na i-claim na deduction si partner related sa share nya sa income ni
GPP kapag nag-declare si partner ng sarili nyang ITR.

To sum it all up, here are the diferences on tax treatment between a
REGULAR PARTNERSHIP and a GPPSi GPP is exempt from Income Tax while subject naman sa rules on
corporation si regular partnership;
PARTNERS in a GPP will share in the GPP's Net Distributable Income and such
share shall be subject to CWT of 10% or 15% just like a Professional Fee. On
the other hand, PARTNERS in a regular partnership will also share in the Net
Distributable Income of the partnerahip and auch share shall be subject to
FWT of 10% just like Dividends Income;

The NDI of a GPP is actually the SUPPOSED NTI. On the other hand, the NDI of
a regular partneship is the NTI less Income Tax;
Both can use itemized or optional standard deduction in computing for
NDI/NTI. Provided, that for PARTNERS of GPPs, whatever is opted by the GPP
shall apply to the PARTNERS' personal income;
Obviously, share is the NDI of a regular partnership NEED NOT BE INCLUDED
in the Partners' individual ITRs if subjected to FWT.

IMPROPERLY ACCUMULATED EARNINGS TAXQUESTION. Why is there a Tax like this?

ANSWER. Because if the law will permit accumulation of profit by a
CORPORATION beyond its needs, the State is lossing Tax Revenue which
should have been collected if DIVIDENDS are to be declared.
That is why the rate of IAET is 10%, the same rate of Final Tax on Dividends
when generally received.
QUESTION. Are PARTNERSHIPS subject to the rules on IAET?
ANSWER. Yes but actually NO. Since the rule on IAET is applicable to
corporation, and the partnership is treated like a corporation for Tax
purposes, then the rule on IEAT apply also to a partnerahip.
No, on the other hand, because partnerahips will never have an improperly
accumulated earnings for any given period because at the end of the year,
what is being distributed to partners is the Net Distributable Income of the
partnership. Meaning, whether with or without declaration of sharing, a
partner's share is mandated to be taxed via Final Withholding Tax. So, walang
naa-accumulate.

Under the rules, there is no deductions allowed on purchase or acquisition of

CAPITAL ASSETS. This is actually very accounting because we all know that
the expense item is DEPRECIATION.
Ganon din ang treatment sa iba pang mga kina-capitalize na mga
expenditures like in the case of major repairs and kung maaalala nyo ung sa
case ng special assessment tax.
EXEMPTION-for educational institutions, acquisition of capital assets are
allowed to be claimed as a deduction in the period of acquisition.

When we say acquisition of 'capital asset' and we are talking of depreciation,

we are referring to CAPITAL ASSETS used in business and not that CAPITAL
ASSETS na subject sa rules ng capital gains and losses.
Again, terminologies of diferent meanings.
The law actually used the word CAPITAL EXPENDITURES rather than CAPITAL
ASSETS.
Pero in accounting, fixed assets are synonymous to capital asset right. So, be
careful in discerning the term 'capital asset' for tax purposes.
If the capital asset is being subjected to depreciation, it must be referring to
an ORDINARY ASSET.
A plain description in taxation of 'capital asset' would mean NOT AN
ORDINARY ASSET.

May bago na pa lang ibig sabihin ang MCIT...

Minimum Charge to Individuals for Tax!!!!
Kaya pala pati individual taxpayers e liable na sa MCIT...

OK...

SPECIALS on SALARIES & WAGESNothing so special actually. Basta't reasonable ung amount na binabayad
natin sa kahit sinong employee or officer e ok naman.
Usually, ginagawan ng INDUSTRY COMPARISON kung mukhang sobra-sobra
ung amount na kine-claim as Salaries & Wages.
Reasonableness depends on the industry plus the capacity of the company to
pay. Medyo debatable ng konti kasi nga meron human factors which may be
considered in giving salaries katulad ng good values attitude and may be the
umpact of the emoloyee to the company.

SPECIALS on RESEARCH & DEVELOPMENTExpenses related to product research and/or development are allowable
deductions for Income Tax purposes.
OPTION ni taxpayer on how he shall claim the deduction whether:
A. Claim the expense OUTRIGHT when incurred; OR,
B. Defer the expenses and AMORTIZE it over a period of 60 months starting
from the period na meron na tayong economic benefit na nare-receive out of
the research and development costs.

SPECIALS on LOSSES:
Losses in relation to trade or business are allowable deductions basta hindi
covered by an INSURANCE or ANY OTHER FORMS OF INDEMNIFICATION.
Kasama dito ung kung tawagin e CASUALTY LOSSES or ung mga losses
sustained because of earth-quake, ship-wreck, robbery, theft, and others as
provided under the law.
VERY IMPORTANT: The principle of EVIDENCED BY A COMPLETED
TRANSACTION na ang meaning e dapat lahat ng dapat mangyare e mangyare
muna wherein we can ascertain the loss before we can claim deduction for
losses. This is typical kapag merong involve na Insurance or otherwise
wherein dapat sigurado na tayo sa make-claim natin para malaman natin
kung magkano talaga ung loss.
Remember, walang deduction for damages, meronlang for losses. Kung
walang insurance or otherwise, ung damage e un na din ung amount ng loss.
Pero kung merong insurance or otherwise, ung loss is actually ung damage
less damage recovery.

SPECIALS on NOLCONOLCO stands for Net Capital Loss Carry Over. Ang special kay NOLCO e sya
mismo kasi hindi naman sya Business Expense paid/ incurred during the year.
As a matter of fact, related sya sa previous year or years kaya nga CARRYOVER eh.
When we say Net Operating Loss for Tax purposes, it means the total
Allowable Deductions for Business Expenses IS GREATER THAN the Gross
Income. And under the rules, pwede nating i-claim as deduction for Business
Expense ung Net Operating Loss na un in the next immediately succeding 3
taxable years.
VERY IMPORTANTMakaka-claim lang tayo ng NOLCO in a year kapag mas malaki ung Gross
Income kesa sa Allowable Deductions.

ALSO, may PRESCRIPTIVE PERIOD ang bawat Net Operating Loss ng particular
year/s which is 3 YEARS. So don't forget our benevolent GARDENIA
PRINCIPLE.

SPECIALS on TAXES:
Wala namang anything special talaga when it comes to allowable deductions
for TAXES. Basta under the rules, the following are TAXES NOT ALLOWED AS
DEDUCTIONS for Income Tax purposes:
A. Income Tax;
B. Estate Tax;
C. Donor's Tax;
D. Value-added Tax;
E. Stock Transaction Tax;
F. Special Assessment Tax.
So, all other taxes paid or incurred during the taxable year, whether sa Local
Government or sa National Government, whether it be a tax or a license fee,
e allowable deduction na for Income Tax purposes.
VERY IMPORTANT: Kung sakali lang na ma-LATE tayo sa pagbabayad the
taxes, the allowed deduction will be the BASIC TAX ONLY at hindi kasama ung
PENALTIES. However, ung INTEREST component nung penalties are allowable
deduction IN FULL sa caption ng INTEREST EXPENSE and not under TAXES.
IN FULL means hindi sya ide-deminish ng 33% ng Interest Income subjected
to Final Withholding Tax unlike Interest Expense in general (see post on
INTEREST EXPENSE).

SPECIALS on INTEREST EXPENSE:

It must refer to Interest on indebtedness the proceeds of which is clear to
have been used in the business. Kasama din dito ung interest on acquisition
of properties to be used in trade or business.
In relation to acquisition of properties, OPTION ni taxpayer if ike-claim nya as
deduction si interest OR ika-capitalize nya si interest and form part of the
acquired property.
As a rule, ung interest expense na allowed na deduction SHALL BE
DECREASED ng 33% of INTEREST INCOME na nai-SUBJECT sa Final
Withholding Tax. Why? Because the law says so!
VERY IMPORTANT QUALIFICATION: Interest expense, to be allowed as a
deduction, and as a matter of SUBSTANTIATION, cannot be assumed kaya
dapat in writing or in a document in form.
Equally important is the NON-ALLOWANCE as a deduction for interest paid or
due to RELATED PARTY. Remember ARM'S-LENGTH TRANSACTIONS?

SPECIALS for Bad Debts, Losses, and Interest ExpenseNOT ALLOWABLE DEDUCTIONS if between related parties or the so called
ARM'S-LENGTH-TRANSACTIONS.
These are between family members ( brother and sisters whether whole of
half blood, spouse, ancestors or lineal descendants); between an individual
and a corporation wherein the individuals owns at least 50% of the shares of
the corporation, directly or indirectly; between a trustor and his trust, or the
trust and the beneficiary, and vice versa.
napaka-simple naman nitong special provision na to, kapag related party
transaction e di walang deductions to be allowed for the items herein stated.
The reason for this, self-serving and substantiation and source ng over claim
of deductions. no more nor less.

SPECIALS on DONATIONS & CONTRIBUTIONSSa totoo lang, para namang walang relationship in any way ang kahit anong
donation or contribution sa isang trade or business. However, to promote
SOCIAL RESPONSIBILITY, the rules allow them to be a deductible expense for
Income Tax purposes PERO SUBJECT to specific rules.
Hindi lahat ng items e pwedeng i-claim. Ang qualified lang e ung mga
donations & contributions sa Philippine Government, sa accredited non-profit
organizations, or sa isang international organization na covered ng isang
international treaty.
Kapag DIRECTLY sa isang tao ka nag donate or let's say DIRECTLY sa isang
lugar tulad nung mga afected ng calamities, hindi allowed na deduction yun.
IT IS CLEAR na dapat sa gobyerno lang are accredited NGOs or sa isang
international organization.
Aside sa limitation as to the recipient ng dination, meron pa ding ADDITIONAL
RULE whether ung donation & contribution e deductible in FULL or SUBJECT
TO LIMITATION as a percentage of Net Taxable Income from Business.

The burden for Income Tax is really a one-year afair. Ibig sabihin lang na we
are being taxed for an entire one year.
The very reason for the QITRs is just to make it less burdensome to taxpayers
in business na instwad of paying Income Tax liability one time, nai-spread or
na-split somehow into four installments. Pero ang talagang liability is for the
entire whole year.
This also the reason kung bakit walang REFUND or walang recognition ng
mga EXCESS PAYMENTS sa QITRs kasi nga malalaman mo lang ung talagang
EXCESS kapag natapos na ang buong taon.

While pwedeng magkaroon ng Excess Payment sa QITR, hindi pa talaga sya

excess as in excess na pwede nating i-carry over or i-apply ng refund kasi nga
INSTALLMENT BASE lang si QITR.

SPECIAL CORPORATIONS are not subject to MCIT ha. Again, MCIT is compared
to RCIT, since hindi REGULAR ang Income Tax Rate nila Special Corporation e
obvious na wala kang RCIT na ico-compare di ba.
But the reality is that SPECIAL CORPORATIONS are not subject to MCIT
because the law says so.
An example of a Special Corporation is a PROPRIETARY EDUCATIONAL
INSTITUTION. It is subject to an tax of 10% which is lower than the regular
30%. MCIT is not applicable for these kinds of taxpayers.
Of course merong mga QUALIFICATIONS para maging Special Corporation.
Obvious naman under the principle ng BLOOD-LIFE na since mas mababa ang
rate e medyo strict sa qualifications. Like for example sa Educational
Institution, dapat accredited ng DECS or CHED or TESDA.
PREDOMINANCE TEST--this is a principle applicable to Education Institution na
ang sabe e kapag daw more than 50% ng source ng income ni Education
Institution comes from UNRELATED SOURCES, aba e hindi na maga-apply ung
10%, subject na daw sa Regular rate na 30%.

SPECIALS on REPRESENTATION & ENTERTAINMENTThe only special on this issue e yung limitation ng amount to be claimed. As
provided under the rules e ganito daw:
A. If engage in the sale of goods, maximum allowable deduction shall be .5%
OR 1/2 of 1% of NET SALES;

B. Kapag naman service oriented, 1% ng NET REVENUE.

Wala namang masyadong issue dito. It's just the ceiling on how much is
allowable under the rules.

FOREIGN TAX CREDIT-(Applicable ONLY to Resident Citizens and Domestic Corporations WITH
INCOME OUTSIDE of the Philippines)
INCOME TAX PAID to foreign countries may be opted as TAX CREDIT or as an
allowable deduction for BUSINESS EXPENSE.
When opted as a TAX CREDIT, the rules provide the guidlines for such claim
and the 'heart' of it is the LIMITATION.
If with only 1 foreign country, the allowed Tax Credit shall be WEL between:
A. Actual Income Tax Paid OR
B. Proportionate share in Philippine Income Tax of the Net Income-Foreign
Country OVER Net Income-World.
If with more than 1 foreign countries, let the previously stated be LIMITATION
A which will be compared to LIMITATION B (again, WEL) to wit:
Net Income-Total of Foreign Countris OVER Net Income-World, in proportion to
Philippine Income Tax.

OPTIONAL STANDARD DEDUCTIONFor NON-INDIVIDUALS, in lieu of Allowable Deductions for Business Expenses,
or sa Tagalog kesa mag deduct tayo sa Gross Income ng mga Business
Expenses, we are allowed to claim INSTEAD the so called Optional Standard

Deduction (OSD).
The amount that Non-individuals can claim as OSD shall be 40% of Gross
Income.
For INDIVIDUALS naman, in lieu of Costs and Allowable Deductions for
Business Expenses, allowed tayo INSTEAD ng OSD in the amount of 40% of
Gross Sales.

CONCEPT of DEDUCTIONS, EXEMPTIONS and CREDITS---IN GENERAL, whenever there is an item that would decrease liability for taxes
OR an income that is not subject to tax OR anything that would tend to lower
tax payable, THEY ARE MOST PROBABLY LEGISLATIVE GRACES or privileges
granted under a provision of the law (can also be Constitutional graces).
As always, there are QUALIFICATIONS and LIMITATIONS on these issues which
are actually the RULE for them to be claimed or allowed or taken.
What is important and allowed by the rules is that THERE SHOULD BE NOT
EXCEEDING THE LIMITS. If you want less, that is fine, BUT NOT MORE THAN
THE LIMITS set-forth.
Kaya if you can notice, on the provision for Optional Standard Deduction, ang
sabi e IN THE AMOUNT NOT EXCEEDING 40%. This only means you can claim
less, no problem. But if you are to claim more, that is a problem because the
law will not permit it.