DEDUCTION

FROM

GROSS INCOME
LOSSES
Losses represent reductions of resources due to
unintended destruction or deprivation of things.

Generally, these losses shall be allowed as deductions

from gross income if related to business, actually
sustained during the taxable year and not compensated
for by insurance or other forms of indemnity.
LOSSES REQUISITES FOR DEDUCTIBILITY
OF ORDINARY LOSSES

1. The loss must be actually sustained in a closed and

completed transaction;
2. The loss must be that of the taxpayer and incurred in
trade, profession or business;
3. The loss must not be compensated by insurance or
other forms of indemnity; and
4. If a loss results from casualty, the loss must be
reported to the BIR within 45 days from the date of its
discovery.
LOSSES Casualty Loss
Loss that has occurred in an identifiable
event that was:

Sudden
Unexpected
Unusual
LOSSES Total Destruction
Basis in claiming losses:

Net Book Value

- Insurance/Compensation
Deductible Loss
LOSSES Illustration:
Swan Enterprises incurred the following losses for the year 2016:
a. Building razed by fire, costing P5,000,000; accumulated
depreciation P3,000,000, insurance payment received P1,600,000,
salvage value P250,000.
b. Loss of P50,000 due to cash shortage embezzled by the cashier
who absconded.
c. Loss on robbery of computers costing P70,000; accumulated
depreciation, P25,000, insurance recovered P25,000.
LOSSES Solution
LOSSES Partial Destruction
If the loss is partial, the deductible loss is
the lower amount of the replacement
cost or the book value of the asset's
damaged portion.
LOSSES Illustration:

Lesly Inc. sustained fire loss on its machine in 2017. The machine,
however, is 40% partially damaged. Lesley spent P90,000 for major
repair. Prior to fire, documents reveal that the machine had an
acquisition cost of P300,000 and accumulated depreciation of
P60,000.
LOSSES Solution
 Nondeductible Loss/Excess of
LOSSES Replacement Cost

The nondeductible loss on partial loss shall

be treated as additional cost in
determining the new cost basis subject
to depreciation.
LOSSES Illustration:
Using the same data in the previous illustration (Lesley Inc.), new
cost basis subject to depreciation would be:
LOSSES Loss with Insurance Recovery

Any amount received as loss recovery from

insurance company shall reduce the
deductible loss.

When the insurance proceeds are greater

than book value of assets destroyed, then
that will be a taxable gain.
LOSSES Illustration:
Based on the previous illustration, assume that Lesley received
P50,000 as insurance recovery, the deductible loss would be only
P40,000, computed as follows:
LOSSES Illustration:
On the other hand, if Lesley received P50,000 as insurance and
P50,000 as loss compensation from its employee who is culpable
for the fire incident, there would be no loss to be reported but
taxable gain.Thus,
 Net Operating Loss Carry - Over
LOSSES (NOLCO)

Net operating loss shall mean the excess of

allowable deduction over gross income of
the business in a taxable year.
The NOLCO of the business shall be carried
over as a special deduction from gross income
for the next three consecutive taxable years
immediately following the year of such loss.
LOSSES Illustration:
Assume the following expenses of Coloma Enterprises:

Service revenue 400,000

Gain from life insurance 300,000
Salary expenses, tax withheld and paid 240,000
Estimated warranty expense 50,000
Insurance expense of employee - beneficiary is employer 100,000
Rent expense 120,000
Depreciation expense 60,000
Bad debts (of which 30% written off) 30,000
LOSSES Solution
 Net Operating Loss Carry - Over
LOSSES (NOLCO)
1. Any net loss incurred in the taxable year during which the
taxpayer was exempt from income tax shall not be allowed as a
deduction.

2. A taxpayer who claims the 40% OSD shall not simultaneously

claim deduction of the NOLCO. The three-year reglementary
period shall continue to run notwithstanding the fact that the
aforesaid taxpayer availed of the OSD during the said period.

3. Domestic and foreign corporation taxed during the taxable year

with MCIT cannot enjoy the benefit of NOLCO. Nevertheless,
the running of the three-year period for the expiry of the
NOLCO is not interrupted by the fact that such corporation is
subject to MCIT.
 Taxpayers Entitled to Deduct
LOSSES NOLCO
 Taxpayers Not Entitled to Deduct
LOSSES NOLCO
 Losses due to Voluntary Removal
LOSSES of Property
The following rules should be observed when it comes to losses
incurred due to voluntary removal of property:
1. As incidents to renewal and replacements. Losses due to voluntary
removal of property such as building, machinery, and other
similar assets, incident to renewals and replacements, will be
deductible from gross income.
2. As cost to remove useless structure in the real property acquired.
When a taxpayer buys a real estate upon which a building is
located which he proceeds to raze with a view to erecting
thereon another building, the cost of removing the structure is
not a deductible expense from gross income, instead, such cost
will be added as part of the cost of the acquired land.
LOSSES Illustration:
Solo Mona is engaged in water delivery business. He has a second hand delivery
truck which he purchased for P60,000. He estimated the truck's useful life to
be five years. After three years, however, due to inefficiency and constant
repairs, he sold the truck for P20,000 to replace it with a better one.
LOSSES Illustration:
Wina Walis acquired house and lot for P900,00 lump sum price.
The acquisition of the property is intended to make the lot
available for the construction of a factory building. Wala incurred
P100,000 in demolishing the house to give way to the
construction of the factory building.

The P100,000 cost of demolition is not allowed as deduction from

Wala's business gross income. Such loss shall be charged to the
cost of the land. Accordingly, the cost of the land would be
P1,000,000.
LOSSES Loss of Useful Value
Generally, assets may lose their value due to:

1. Technological changes which make operation more expensive

and the assets impractical to use.
2. New legislation which makes the continued profitable use of
the property impossible.

Losses of value of assets are not deductible from gross income

except when the asset involves building and machineries are
permanently abandoned. Any loss to be deductible under this
exception must be charged off in the books and fully explained
in returns of income.
LOSSES Illustration:
Acer Company uses a computer with an acquisition cost of
P100,000. The estimated life of the computer is 5 years with a
salvage value of P10,000. After a year, Acer updated the computer
to improve its performance spending a capital outlay of P20,000.
In the third year, Acer decided to permanently abandon the use of
such computer due to technological changes. How much is the
deductible loss?
LOSSES Solution
 Loss Due to Shrinkage in
LOSSES Value Of Stocks

Decline in value through market value fluctuation of

investments in stocks of a corporation is not deductible
loss. To be deductible, the loss must be actually suffered
when the stock is disposed of.
LOSSES Illustration:
Lomi Liit invested in A Corporation's common
stocks for P100,000. At balance sheet date.
Liit's investment had market value of P75,000.

The P25,000 shrinkage in value of stocks is not a deductible

loss, unless the common shares were actually sold for
P75,000 in which case, the loss is deductible only against
capital gains.