• What are Depreciable Assets?

o A ballpen may be used for more than a year, but it is not a Depreciable asset; it is a CONSUMABLE ASSET

o A lessor and the lessee (hypo)….

§ Remember, the one claiming Depreciation ass Deduction, must OWN the property

o What is the requirement for deductibility of depreciation?

1. It is connected with the trade and business of the tax payer;
2. (KNOW THE REQUISITES)

o What is the Straight Line Method?

§ Cost less...
§ Hypo:
§ Let’s say a building worth 100M, and the lifespan of the building is 50 Years.
§ The depreciation value is 1M a year
§ For example, on the 10th year, you are visited by the City Engineers Office, and he said that the building
is in the fault line, so he said that you need to improve the building.
§ Then you spent 25M for improvement of the building.
§ Now, what happens to this 25M?
§ So 100M - 10M + 25M = 115M is the value of the building

o What is Depletion?
§ How do you determine how long depletion is?
§ Answer is:
§
§ For example, Malampaya, it is a natural gas, so that is subject to Depletion.
§ How do you determine its value from the start?
§ How do you determine the 100%
§ For example a mineral sharing agreement, before it is entered into there is an exploration
permit,

o What is Salvageable Value

o Helicopter Hypo (double check)

§ The maximum deductible expenses for Helicopter
§ Can I use the full value of the vat?

o If I am a donor, and I am an individual, what is the maximum that I can donate and have that still deductible?
§ 10% of what?
§ So how do you determine 10% if your not done deducting it?
§ Is charitable contribution, an allowable deduction?
o For corporation what is the maximum?
o If I bought a piece of land from the government, I bought it for Php500k in 1988 ,and I bought it now for Php250M.
§ If I donated it to Deped (or the government), am I still bound to the limitation of 5%or 10%?
§ There is no limit if you donate it to the government
§ But if you donate it to private persons, then limitation applies

o Do you have a credit card? How much is the interest rate of a credit card?
§ If it isIt is 3% per month in unsecured credit
§ Unsecured credit means, there is a collateral
§ It is cumulative interest
§ Let’s say shoe was bought for 4k using a credit card.
§ And you plan to pay it for 12 months.
§ So 4k divided by 12 = 333
§ But, apply first the 3%, so 4000 times 3% = 4120
§ Then, 4120 - 3787
§ (Di ko po gets huhuhu)

• Research and Development

o Hypo:
§ For example, I am the owner of the biggest club in bgc
§ I went to other countries to check other clubs
§ Can I claim the expense as research and development?
§ As long as it does not fall or classified under 34(A)
§ Cause you could have argued that it is a Travel expense
Tax Midterm Notes (5th Meeting)
 § You can only claim either Travel Expense, or Research and Development
o Hypo:
§ Dogs, not as COGS, but as Research and Development
§ Dog Shampoo business for long haired dogs
§ So if you bought long haired dogs
§ This is an example of Research and Development
• Charitable Institutions
o Are contributions to any kind of charity, allowed as a deduction to gross income?
§ Or are there any kind?
§ Yes, it must be a non-profit institution engaged for public purposes operated exclusively for religious,
charitable, scientific, youth and development, cultural or educational..
o Hypo:
§ I am running an orphanage
§ My cost for salaries to my workers exceed 30%
§ Is that still qualified?
§ It depends what kind of worker
§ Now, salaries and wages, are these deductible?
§ Like the salary to the president of the orphanage, is that an administrative expense?
§ It is an administrative expense, as they are not directly involved with the institutions run
§ Like the salary to a social worker
§ Not an administrative expense
§ Example of an administrative expense that is not a salary:
§ Cars for the use of the employees;
§ But cars for the use of orphans, then it is a direct cause for the orphanage
o Hypo:
§ I am running an accounting firm.
§ My company renders accounting services
§ Now, which is deductible? Which is an administrative expense?
§ The first accountant, does accounting services for clients;
§
§ The second, does accounting services for the company
§
§ Administrative Expense lecture (43 Min)

o Pension Trust
§ How are Pension Trust Funded? How are they capitalised? From the employer, or from the contribution of the
employee?
§ It is the employer
§ Otherwise, the employer has no business to claim it as a deduction, as it is not an expense
§ What is the purpose of a Pension Trust? Is it an insurance?
§ Generate income, in order to pay reasonable to employees who are no longer with he company
§ It is not an insurance as there is no insurable interest

• Additional Requirements for Deductibility of Certain Payments

o Hypo:
§ From you’re in national bookstore, you bought a pen for the use of cashiers
§ In order for the pen be deduction, creditable withholding tax needs to be paid first...
• Kinds of Deduction:
1. Itemized Deductions;
§ Those allowed by the NIRC to be deducted from the GI before the income is subjected to tax
§ In the absence of an EXPRESS Selection, a tax payer is considered to have availed of this, over OSD
2. Special Deductions;
3. Optional Standard Deductions
§ It is a fixed percentage deduction without regard to any actual expenditure, in lieu of the itemized deduction.
§ It is merely a privilege that may be enjoyed by certain taxpayers
§ Who can avail:
§ An individual, other than a NRA, may elect a standard deduction in an amount not exceeding 40% of his
Gross Sales or Gross Receipts, as the case may be
§ In the case of a corporation, subject to 30% tax, it may elect a Standard Deduction in an amount not
exceeding 40% of its GI

Tax Midterm Notes (5th Meeting)

• OSD
o Example:
§ A owns a company which sells guitars
§ A did not avail of itemized deductions, and instead availed of OSD
§ The gross sales is 1M, and 40% of that is 400k
§ 600k is taxable
o What is the tax rate
§ Corporation
§ 30%
§ Individual
§ 0 to 35%
• REVIEW
o Principles of Income Taxation

o What is the basis of FMV

§ It is the zonal value, as determined by the city assessor

o Inclusions of the Gross income

§ Bribes and kickbacks are included in the computation of GI
§ All sources of income whether legal or illegal

o Graduated scale, refers to

o Bad Debts
§ In relation to income taxation, bad debts are what, source of income, or deduction?
§ Deduction
§ It is an allowable deduction
§ What if you claimed it this year, then the next year the client pays you. What happens to the payment? Is it offset?
§ It forms part of the income payment

o Improperly Accumulated Income Tax

§ Are publicly held corporations, banks, and other financial intermediaries
§ How do you determine if earnings are subject to IAIT
§ If
§ If

o Joint-Venture
§ An unincorporated joint-venture is taxable individualy based on the income of each joint-venturer
§ An incorporated jv is taxable for that particular venture
o Ordinary and Necessary Expense of Bus BUsiness
§ RENT - Accounting office, hr office,
§ NOT - salary, repairs.. as they are COS
o Fringe Benefit
§ Give me an example of Fringe Benefit
§ housing
§ What is the test whether it is a Fringe Benefit?
§ Convenience of the Employer Test

o CWT vs FWT

o Can NOLCO and MCIT exist at the same time?

§

o When does MCIT apply?

§

o Allowable deduction include nolco

o You can only claim 33% of the interest paid as allowable deduction (julrey discuss)

o Julrey discuss the computation in the board

Tax Midterm Notes (5th Meeting)