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(c) "What is the tax treatment (income tax) on the part of the lessor
and on the lessee if we vary the above facts such that the advance rental
payment is stipulated to be applied or credited as rentals for the last two years of
the lease contract, that is, as rentals for October 1, 2006 to September 30,
2007?"
In reply, please be informed that in BIR Ruling No. 69-011 dated October 3,
1969, this Office citing US precedents, held that if the advance payment is, in fact,
prepaid rental, then such payment is taxable to the lessor in the year when received,
even though the lessor is on the accrual or cash method of accounting. On the part of
the lessee, such prepaid rental is to be treated as capital expenditure and he cannot
deduct in the year of payment the full amount of the prepaid rent as business expense
but must spread them over the entire remaining term of the lease.
Accordingly, and in line with the said BIR ruling which is still being enforced
by this Office to date, Mr. A (lessor) is required to declare the entire amount of
P24,000.00 as his taxable income for the year 1997 when he received the same. On
the other hand, X company (lessee) cannot deduct the entire amount of P24,000.00 as
deductible expense in its income tax return for the year 1997 but must amortize the
same over the entire period of the lease.
ITCHSa
For the same reason, the advance rental payment is reportable as income in the
year of receipt even if there is a stipulation that same is to be applied or credited as
rentals for the last two years of the contract, i.e., for October 1, 2006 to September 30,
2007.
Case II
"On September 1, 1997, Mr. B (lessor) leased an office unit to ABC
company (lessee) for a period of three (3) years at a monthly rent of P5,000.00.
Bills for electricity, telephone and water shall be paid by Lessee ABC
Company. The written lease contract requires that lessee ABC Company to
make SECURITY DEPOSIT in cash in the amount of FIFTEEN THOUSAND
PESOS. This cash security deposit will be held by the lessor Mr. B, to answer
for whatever unpaid rentals, unpaid electrical, telephone and water bills, and
damages to the leased premises, and the balance to be refunded without interest
to lessee ABC Company at the end of the lease contract. ABC Company
deposited the required security deposit of P15,000.00."
Questions
(d) "For income tax purposes, is said security deposit of P15,000.00 to
be declared as income on the part of Lessor B and correspondingly as
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deductible expense on the part of lessee ABC Company in the taxable year
1997? (Note: It is possible that the entire security deposit will be refunded to
lessee ABC Company at the end of the period of lease). For income tax
purposes, does it matter if the security deposit is mixed with the funds of lessor
Mr. B, that is, he can use it for business purposes but always subject to the
purpose for which it was provided in the contract of lease."
(c) "Is BIR Ruling No. 69-011 dated March 3, 1969 still valid and
applicable? Or has the same been rescinded or amended?"
And finally, as aforestated, BIR Ruling No. 069-11 dated March 3, 1969 is still
valid and being enforced by this Office.
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