CHAPTER 13- B: Special Allowable

Itemized Deductions & Net Operating

Loss Carry-Over (NOLCO)
Mary Jane Asenjo
Gwyneth Inso
Michael Jacomilla
Special Allowable Itemized Deductions

Deductions which may or may not partake

the nature of an expense, but are
allowed by NIRC or by special laws as
deductions.
Special Allowable Deductions

A. Special expenses under the NIRC and special laws

A.1. Income from taxable estate or trust
A.2. Transfer to reserve funds and payments of insurance
company.
A.3. REIT
A.4. Transfer to reserve funds of taxable cooperatives
A.5. Discounts to Senior Citizen
A 6. Discounts to PWD
Special Allowable Deductions

B. Deduction incentives under special laws

B 1. Additional compensation expense for senior citizen

employees
B.2. Additional compensation expense for PWDs
B.3. Cost of facilities improvements for PWDs
B.4. Additional training expense under Jewelry Industry
Development.
Special Allowable Deductions

B.5. Additional contribution expense under the Adopt-a

school program
B.6. Additional deductions for compliance to rooming-in and
breast-feeding practices
B.7. Additonal free legal assistance expense
B.8. Additional productivity incentive bonus expense
A.1 Illustration.

Given:
Rent income on the lot. 1 200 000
Leasing expenses. (200 000)
Rental Net income. 1 000 000
Dividend income net of final tax. 36 000
Trust Net Income. 1 036 000
Computation:
Gross Rent income. 1 200 000
Less: Regular allowable deduct. (200 000)
Special allowable deduct. (600 000)
Net Income 400 000
Illustrations

A.2
Under Insurance code, non-life insurance companies are required to maintain a
reserve equivalent to 40℅ of their gross premium,less return and cancellations
for risks expiring within one year.
A.3
It is legally mandated to distribute 90℅ of its distributable income as dividends
to the shareholders.
Treated as special deductions agains gross income.
A.4
The amount transferred by the cooperative to the reserve fund out of the net
surplus from unrelated activities is an item of deductions in the computation of
the taxable net income of the cooperative
Illustrations

A.5
Under RA 9257, a senior citizen is entitled to 20℅ in certain establishments such
as hotels and similar lodging establishments, restaurants, recreational centers
and other places of culture, leisure and amusment, hospitals ,drugstores and
services such as medical, dental, domestic air, sea and land transport and
funeral services.
However, there are certain conditions for deductibilty of sales discounts to
senior citizen.
A.6
Under RA 7277, similar to senior citizen still 20℅ discount entitled to PWDs on
the certain establishments that have been stated in A.5
Illustrations
B.1
Under 9257, private establishments employing senior citizens shall be entitled to
additional deductions from gross income equivalent to 15℅ of the total amount paid
as salaries and wages.
Conditions for deductions: (1) employment shall have to continue for at least six
months (2) annual taxable income does exceed the poverty level determined by NEDA.
B.2
Private entities that employ disabled person shall be entitled an addi'l deductions
from their gross income equivalent to 25℅ of the total amount paid as salaries and
wages.
Requisites for deductions; (1) entity present proof as certified by DOLE that disabled
persons are under the employee (2) PWD is accredited by DOLE and DOH as to his
disabilities, skills and qualifications .
Illustrations

B.3
Under Ra 7277, private entities entitled to an additional deductions from
income equivalent to 50℅ of the direct costs of the improvemnts or
modifications.
B.4
Under RA 8502,a qualified jewelry enterprise duly registered and accredited
with the BOI is entitled to an additonal deductions from taxable income of
50℅ of the expenses incurred in training schemes approved by TESDA.
Conditions of Deductions: (1) a qualified jewelry enterprise must submit to
the BIR a certified true copy of its certificate of accreditation issued by BOI
(2) training scheme must be approved and certified by TESDA.
Illustrations

B.5
The adopting private entity which maybe an individual in business or practice of
profession, a partnership, pr a corporation shall team up with the DepEd, CHED
or TESDA, toward providing much needed assistance and services to public
schools.
Qualifications of Adopting Private Entity.
1. Must have a credible track record
2. Must have been in existence for at least one year
3. Must not have been prosecuted and found guilty of engaging in illegal
activities such as money laudering and the likes.
Tax deduction incentive: 50℅ of the contribution of the adopting entity for the
Adopt-a school program.
Illustrations

Conditions: (1) deductions shall be availed in the taxable year when the
expense is paid (2) expense is substantiated with sufficient evidences such as
official receipts
Procedures for availment:
1. Memorandum of agreement
2. Supporting Evidence
3. Apply for Certificateof Tax incentive and Tax Exemption.
Valuation of Deductions:(1) cash asistance shall be based on actual amount
(2)assistance other than money such as personal property, consumable goods,
services , and real property.
Illustrations

B.6
Under RA 1002 is to encourage,protect and support the practice of
breast-feeding which is believe to provide distinct benefits to the
mother and the infant aside from saving the country's valuable
foreign exchange that may otherwise be used for milk importation.
Requirement to all establishment
1. Lactation Station
2. Lactation period
3. Access to Breastfeeding Information.
Illustrations

Requirements to health institutions:

1. Rooming-in policy
2. Milk Sotrage Facility
3. Milk banks
Tax deduction incentives is equal to up to twice the actual
amount incurred.
Conditions: (1) deductions shall apply for taxable period when the
expense were incurred (2) shall comply with the IRR of RA 10028
within six months after its approval (3) shall secure a "Working
Mother-Baby-Friendly Certificate" from DOH to be filed with BIRR.
Illustrations

B.7
Under RA 9999, lawyers or professional partnership providing pro-
bono legal services are given deduction incentives for their free
legal services.
Requirement: (1) shall secure a certification from PAO, DOJ or
accredited to Supreme Court (2) shall issue necessary certification
for the number of hours actually provided by the lawyer or
partnership.
Tax deduction incentive is equal to 10℅ of gross income derived
from actual performance of the legal profession whichever is lower.
Illustrations

B.8
Under RA 6971, a business enterprise which adopts a productivity
incentive program is entitled to a special additional deduction
equivalent to 50℅ of the total productivity bonuses given to
employees under the program.
In business enterprises providing manpower training and special
studies to rank-and-file employees as accredited by TESDA is
entitled to also 50℅ additional deduction of the total grant.
What is NOLCO?

• Net operating loss carry-over

- amount of net operating loss that is allowed
by the law to be carried over a the
deduction against available net income in
the following three years.
NOL (Net Operating Loss)

• Net Operating Loss

-excess of allowable deductions over the gross
income from the business or exercise of profession
during taxable year
Rationale of NOLCO

- intended to allow the taxpayer to group

his losses before taxation go full swing.

Without NOLCO, income taxation

would result in taxation of recoveries of
loss capital.
Who can claim NOLCO?

• All taxpayers subject to tax on taxable

income whether at the regular income tax
or at preferential tax rate .
How to compute NOLCO?

Gross income subject to regular tax

(Total deductions excluding NOLCO from

prior years and deduction incentives under
special laws)
Treatment of NOLCO

Treated as separate item of deduction in the next three

consecutive taxable years to the extent of the available
net income before NOLCO deductions on those periods.

Requisites: (1) taxpayer must not be exempt from income

tax during the taxable year when the NOLCO was incurred
(2) there has been no substantial change in the ownership
of the business.
Rationale of the Disallowance of Carry
Over of Net Operating Loss

Deductions are of no benefit to the taxpayer in an

exempt year. Hence, the net operating loss from
an exempt year should not be given value by
cross over as this would cause and due
enrichment to the taxpayer.
Rationale of the Rule on Substantial
Change in Ownership
When there is a substantial change in ownership
of the business, NOLCO is no longer allowed
because the owners for whom the loss recoup is
intended are no longer in the business.

NOLCO is a privilege that is not transferable.

Rules in Carry-Over of NOLCO

• Claimable in FIFO fashion

• Can be claimed only up to the extent of business
net income in the next three years. Prior year
NOLCO cannot be deducted
• Any NOLCO which remains unused at the end of
the three year perspective period will expire.
NOLCO for INDIVIDUAL TAXPAYERS

Those who are mixed income earners, NOLCO is

measured by separating compensation income
from business or professional income following the
income classification and globalization rule.
Special rule on NOLCO ON MINING
COMPANIES

Any of their first 10 years of operation is allowed

to be carried over a period of five years following
the year the net operating loss was sustained.
NOLCO vs. Net Capital Loss-Carry Over

NOLCO is deductible against available net

income in the next three years of operations
while NCLCO is deductible only to the extent of
net capital gain in the immediate following year.
MERGER vs CONSOLIDATION

Merger occurs when one business is merged with

another business while consolidation occurs
when several business merge to form a large
business
MERGER vs CONSOLIDATION

• NOLCO of the Acquirer : Under RR14-2001, the NOLCO of

the acquirer which it incurred before the merger or
consolidation continue to be deductible even after
merger or consolidation as long as no substantial change
in ownership.

• NOLCO of the Acquiree: Under NIRC, NOLCO is not

allowed as deduction when there is a substantial change
in the ownership of the business.
END