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Requirements on deductibility of casualty losses

Requirements on deductibility of casualty losses

The BIR has issued the guidelines governing the declaration of casualty losses.  These apply in general on all casualty losses, not only those sustained as a result of the recent typhoons.

    A.  Filing the claim.  The taxpayer should submit the following to the    BIR:  

    1. Sworn Declaration of Loss which shall be filed within 45 days after the event, stating the following: 

        a. Nature of the event that gave rise to the loss and time of its occurrence
        b.  Description and location of the damaged properties.
        c.  Items needed to compute the losses such as: (1) cost or other basis of the properties; (2) depreciation, if any; (3) value of the properties before and after the event; and (4) cost of repair; 
        d.  Amount of insurance or other compensation received or receivable. 

    2.  Attachments to the sworn declaration

       a.  financial statement for the year immediately preceding the event
       b.  copies of the insurance policy, if any, for the concerned properties.

    3.   Proof of the elements of losses.  These should also be retained by the taxpayer within the prescribed retention period for purposes of audit. These may also be subject to BIR verification.

        a.  Photographs of the property before and after the typhoon showing the extent of the damage sustained
        b.  Documentary evidence for determining the cost of valuation of the damaged properties such as cancelled checks, vouchers, receipts and other evidence of costs
         c.  Insurance policy for insured properties
         d. Police report, in case of robbery/theft during the typhoon and/or as a consequence of looting

B. Prerequisites for deductibility of losses

    1.  Taxpayer must be engaged in trade or business.
    2.  The properties must be actually used in the business and are reported in the appropriate declaration filed with the BIR.
    3.  Damaged properties should be properly reported as part of the assets in the accounting records and financial statements in the year immediately preceding the loss, with the cost of acquisition clearly established and recorded.
    4.  Amount of loss compensated by insurance cannot be claimed as a deductible loss.  Recovery of casualty through insurance claims shall be governed by RR 12-77.
     5. The deduction of assets as capital losses must be properly recorded in the accounting reports.

For more details, please see attached copy of Revenue Memorandum Order No. 31-09, including the annexes.

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