INCOME TAXATION l REQUISITES FOR DEDUCTIBILITY MARQUEZ, CAMILLE ANNE D.

3-B

I. EXPENSE
a) Must be ordinary AND necessary trade, business or professional expenses;
b) Must be paid or incurred during the taxable year;
c) Must be paid or incurred in carrying on or which are directly attributable to, the
development, management, operation and or conduct of the trade, business or
exercise of a profession.
d) It must be supported by adequate invoices or receipts;
e) It is not contrary to law, public policy or morals; and
f) The tax required to be withheld on the expense paid or payable is shown to
have been remitted to the BIR.
i. Salaries
a. Services actually rendered;
b. Compensation is for such services rendered;
c. Reasonable
ii. Travelling Expenses
a. Reasonable and necessary expenses;
b. Incurred or paid while away from home; and
c. In pursuit of trade or business.
iii. Rental Expenses
a. Rental must be ordinary and necessary;
b. It must have been paid or incurred during the taxable year;
c. It must be paid or incurred in carrying trade or business of the taxpayer or
practice of profession;
d. It must be supported by official receipts, records or other pertinent papers;
e. It is required as a condition for the continued use or possession of the
property being leased;
f. The taxpayer has not taken or is not taking title to the property or has no
equity of the property being leased; and
g. Rentals should be subject to the expanded withholding tax of 5% of the
rental charge, net of VAT, if any.
iv. Entertainment
a. It must be paid or incurred during the taxable year;
b. The amount must be reasonable;
c. It must be directly connected to the development, management and
operation of the trade, business or profession of the taxpayer or directly
related to or in furtherance of the conduct of his or its trade, business or
exercise of a profession;
d. It must not be contrary to law, morals, good customs, public policy, or
public order;
e. It must not have been paid, directly or indirectly, to an official or employee
of the national government, or any local government unit, or of any GOCC,
or of a foreign government, or to a private individual, or corporation, or
general professional partnership, or similar entity, if it constitutes a bribe,
kickback or other similar payment;
INCOME TAXATION l REQUISITES FOR DEDUCTIBILITY MARQUEZ, CAMILLE ANNE D. 3-B

f. It must not exceed the ceiling of 0.05% of net sales for sellers of goods or
properties or 1% of net revenues for sellers of services;
g. It must be duly substantiated by adequate proof. The official receipts, or
invoices, or bills of statements of accounts should be in the name of the
taxpayer claiming the deduction; and
h. The appropriate amount of withholding tax, if applicable should have been
withheld therefrom and paid to the BIR.
II. INTEREST
a. There must be an indebtedness;
b. There should be an interest expense paid or incurred upon such indebtedness;
c. Indebtedness must be that of the taxpayer;
d. Indebtedness must be connected with the taxpayer’s trade, business or
exercise of profession;
e. Interest expense must have been paid or incurred during the taxable year;
f. Interest must have been stipulated in writing;
g. Interest must be legally due;
h. Interest payment arrangement must not be between related taxpayers;
i. Interest must not be incurred to finance petroleum operations;
j. In case of interest incurred to acquire property used in trade, business or
exercise of profession, the same was not treated as a capital expenditure;
k. The interest is not expressly disallowed by law to be deducted from gross
income of the taxpayer.
III. TAXES
a. It must be paid or incurred within the taxable year;
b. It must be paid or incurred in connection with the taxpayer’s trade, profession
or business;
c. It must be imposed directly on the taxpayer;
d. It must not be specifically excluded by law from being deducted from the
taxpayer’s gross income.
IV. LOSSES
a. Loss must be of the taxpayer;
b. Actually sustained during the taxable year;
c. Not compensated for by insurance or other forms of indemnity;
d. Incurred in trade, business or profession OR property connected w/ trade,
business or profession lost through fires, storm, shipwreck, or other casualties
OR from robbery, theft or embezzlement;
e. Evidenced by a completed transaction;
f. Not claimed as a deduction for estate tax purposes;
g. Notice of loss must be filed with the BIR within 45 days from the date of
discovery of the casualty or robbery, theft or embezzlement.
INCOME TAXATION l REQUISITES FOR DEDUCTIBILITY MARQUEZ, CAMILLE ANNE D. 3-B

i. Net Operating Loss Carry-Over (NOLCO)

1. The taxpayer was not exempt from income tax in the year of such
net operating loss;
2. The loss was not incurred in a taxable year during which the
taxpayer was exempt from income tax, and
3. There has been no substantial change in the ownership of the
business or enterprise.
V. BAD DEBTS
a. The debts are uncollectible despite diligent effort exerted by the taxpayer;
b. Existing indebtedness subsisting due to the taxpayer which must be valid
and legally demandable;
c. Connected with the taxpayer’s trade, business or practice of profession;
d. Actually charged off in the books of accounts of the taxpayer as of the end
of the taxable year;
e. Actually ascertained to be worthless and uncollectible as of the end of the
taxable year;
f. Must not be sustained in a transaction entered into between related
parties.
VI. DEPRECIATION
a. The allowance for depreciation must be reasonable;
b. It must be for property used for employment in trade or business or out of its
not being used temporarily during the year;
c. The allowance must be charged off;
d. Schedule on the allowance must be attached to the return.
VII. Charitable and Other Contributions
a. The contribution or gift must be actually paid;
b. It must be paid within the taxable year;
c. It must be given to the organization specified by law;
d. It must be evidenced by adequate receipts or records; and
e. The amount of charitable contribution of property other than money shall be
based on the acquisition cost of said property.
VIII. Research and Development
a. Paid or incurred during the taxable year;
b. Ordinary and necessary expenses in connection with trade business or
profession;
c. Not chargeable to capital account.
IX. Pension Trust Contributions (Past Service Cost)
a. The employer must have established a pension or retirement plan to
provide for the payment of reasonable pensions to his employees;
b. The pension plan is reasonable and actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must be no longer subject to the control and
INCOME TAXATION l REQUISITES FOR DEDUCTIBILITY MARQUEZ, CAMILLE ANNE D. 3-B

disposition of the employer;

e. The payment has not yet been allowed as a deduction; and
f. The deduction is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer of payment is made.
X. Premium payments on health and/or hospitalization insurance
a. Insurance must have actually been taken;
b. The amount of premium deductible from gross income does not exceed
P2,400 per family or P200 per month during the taxable year;
c. That said family had a gross income of not more than P250,000 for the
taxable year;
d. In case of married individuals, only the spouse claiming additional
exemption shall be entitled to this deduction.