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On tax deductions

On tax deductions by Senen Quizon

In a rush to beat the tax-filing deadline, you might be tempted to claim some expenses that you are unsure would qualify as deductions for tax purposes.

You should think twice about claiming these deductions since they could dramatically increase your tax bill. If you claim deductions that are later disallowed by the Bureau of Internal Revenue (BIR), you must pay for the basic deficiency tax plus 20% interest.

To avoid a potential payback nightmare, you should take time to learn the types of expenses that you can claim against your income. An understanding of the rules on tax deductible expenses is a key part of reducing your tax risks.

The many rules and limitations pertaining to deductions are often complex and confusing. Let us look at some of the rules you should be aware of as you prepare your tax return:

As a general rule, you should claim an expense as a deduction only if it meets the following criteria: (a) it is ordinary and necessary; (b) it is paid or incurred during the taxable year; (c) it has been paid or incurred as part of the trade or business operations of the taxpayer; and (d) it is supported by receipts, records or other pertinent papers. (e) it is not contrary to law, public policy or morals; and (f) the appropriate amount of withholding tax on the expense has been withheld ,and remitted to the BIR.

An expense is considered "ordinary and necessary" if it is directly connected with, and proximately resulting from business operations, and it is shown to be appropriate and helpful in developing the taxpayers’ business through the acquisition of income or profit. Examples are: (a) salaries, ages and other forms of compensation for personal services including fringe benefits; (b) rentals and/or other payments for use or possession of property; (c) travel expenses incurred while away from home in pursuit of trade, business and profession; and (d) entertainment, amusement and recreational expenses.

An important basic requirement: you should be able to substantiate your expenses with official receipts or adequate records. Generally, the BIR only accepts the original copy of receipt/s, which a taxpayer presents to substantiate a deductible expense. However, in the absence of original receipts or records, a taxpayer can still prove that the claimed deduction was really paid or incurred by providing other evidence. Alternative modes of substantiating deductions may include certified true copies of the official receipts in case of loss, payment vouchers and checks.

Another basic requirement is that the expense must not be contrary to law, public policy or morals. If you make illicit payments to facilitate contracts, the bribe (being contrary to law and morals — will not be considered a tax-deductible business expense even if you record it under a different account title, such as "facilitation fee."

In addition to the basic requisites for deductibility of expenses, special rules apply to certain types of deductions. For example, a ceiling is imposed on the amount of amusement, entertainment, and recreational expenses that a taxpayer can deduct from his gross income under Revenue Regulations (RR) 10-02. For sellers of goods or properties, it should not exceed 0.5% of net sales, while for sellers of services, the ceiling is 1%of net revenue. Taxpayers selling both goods and services should apply an apportionment formula that uses the percentages of total net sales/net revenue earned from each one.

When taking an interest expense deduction, you should also be aware of the specific rules on deductibility of interest expense. Section 34(B) of the Tax Code of 1997 as implemented by RR 13-00, among others, requires that interest payments arise from an actual indebtedness and be stipulated in writing to be deductible.

Moreover, a cap is applied to interest income that is subject to final tax during the same taxable year you incurred the expense. For 2008, the amount of interes t expense that you can deduct should be reduced by an amount equal to 42% of interest income subjected to final tax.

When taking a deduction for taxes, the most important thing to remember is that not all types of taxes are deductible. Examples of what you can claim are percentage taxes, excise taxes, documentary stamp taxes, local taxes and import dues. Non-deductible are VAT, Philippine income tax, estate and gift taxes, and other taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

Also, if you availed of the tax amnesty under RA 9480 in 2008, you should not claim any deduction for your tax amnesty payments, since these are not allowed as deductible expenses under RMC 69-07.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Senen.Quizon@ph.gt.com.  For other tax concerns, please check out our other tax services.