3.

Not be compensated by insurance

4. From
casualty,
robbery,
or
embezzlement, must be reported to BIR
from 30 90 days from discovery date.

CHAPTER 9 LOSSES
Losses reductions of resources due to
unintended destruction.

Losses not allowed by law as deductions

Allowed as deductions from gross

income if related to business. Actually
sustained during taxable year and not
compensated by insurance.

1. Voluntary removal of bldg.

2. Gambling losses not covered by
gambling gains
3. Capital loss not covered by capital gains
4. From corporate readjustments
5. Illegal transactions
6. Exchange of property where property
received is not substantially different
from property disposed
7. Not incurred in trade
8. Sales bet. Related taxpayers

Kinds of losses:
1. Ordinary losses incurred in relation
to trade. Generally DEDUCTIBLE from
gross income.
2. Capital losses in relation to capital
asset transactions. Capital losses only
DEDUCTIBLE TO CAPITAL GAINS.

Classification of deductible losses

Examples:

1. Business losses
2. Casualty losses (due to storms, fires,
shipwreck)
3. Due to theft, robbery, embezzlement
4. NOLCO

Losses from sale of capital assets

Losses from short sales of property
Losses from securities becoming
worthless, not ordinary assets
Losses due to exercise option to buy or
sell property

Partial loss
-

3. Special kings of losses losses not

related to ordinary business and capital
asset transactions

The deductible loss is the lower amount

of replacement cost or book value of
assets damaged portion.

Loss w/ insurance recovery

Examples:
Losses from sales of property bet.
Related taxpayers
Wagering losses
Losses due to voluntary removal
Change in business conditions
Abandonment
Requisites for deductibility of ordinary losses:
(deductible from gross business income)

A loss recovery from insurance shall

reduce the deductible loss
deductible loss
(insurance recovery )
net deductible loss

Insurance proceeds > book value of

asset destroyed, and then it is a
TAXABLE GAIN.

Net operating loss the excess of allowable

deduction over gross income

1. Sustained in a close and completed

transaction
2. Incurred in trade
1

***estimated losses or expenses NOT

ALLOWED FOR TAXATION PURPOSES***

Business combination change in business

ownership

Net operating loss carry over (NOLCO)

-

1. Merger absorption of a corp. by

another corp. (A+B=B)
2. Consolidation extinguishment of 2 or
more corps. Resulting to creation of a
new corp. (A+B=C)

Excess of allowable deductions over

business income in taxable year.
NOLCO shall be carried over as special
deduction from gross income for the
next 3 consecutive taxable years.
Taxpayer who claims 40% OSD shall
NOT simultaneously claim NOLCO.
DC and RFC taxed with MCIT cannot
enjoy NOLCO.

Rules for NOLCO shall be applied whenever

there is business combination
1. NOLCO shall be allowed only if theres
been no substantial change in
ownership (75% of paid up capital
retained by same persons)
2. NOLCO shall be allowed as deduction
of the same taxpayer who sustained and
accumulated the NOL regardless of
change in ownership
3. Unless otherwise provided, NOLCO
shall not e transferred or assigned to
another person, directly or indirectly

Taxpayers entitled to deduct NOLCO (from

business gross income)
1. Individual taxpayers ETB
2. DC and RFC subj. to normal income tax
3. Special Corp. subj. to preferential tax
rates
***prior to Jan. 1, 1998, not qualify for
NOLCO***

NOLCO of mines other than wells

Persons not entitled to deduct NOLCO

1. Any person, natural or judicial enjoying

exemption from income tax shall NOT
BE entitled to deduct NOLCO.
Entities not allowed of NOLCO

NOLCO incurred in any of the 1 st 10

years of operation may be carried over
as deduction for the next 5 years
immediately ff the year of such loss.

NOLCO in the tax return and unused

NOLCO

1. OBU and FCDU (foreign currency

deposit unit)
2. Registered w/ Board of investments,
enjoying income tax holiday
3. Registered w/ PEZA (Phil. Economic
zone Authority)
4. Registered under bases conversion and
development act
5. FC engaged in international shipping or
air carriage in Phil.

NOLCO separately shown in ITR

Unused NOLCO presented in the notes
to financial statements
Failure: will disqualify for NOLCO

Special rules on losses

NOLCO for business combination

The Marcelo steel doctrine on losses

2

A loss in one line of business is not

permitted as allowable deduction from
gain in another line of business.

Losses bet. Related taxpayers

-

Losses of useful value due to:

Rule: gains bet. Related taxpayers are

TAXABLE, but losses are NOT
DEDUCTIBLE.

1. Technological changes
2. New legislation
- NOT DEDUCTIBLE, except when asset
involves bldg. and machineries that are
permanently abandoned.

Gambling losses
-

Only to be deducted from gambling

gains

Abandonment of petroleum operation

Rules:

Losses from theft or embezzlement

-

1. All
accumulated
exploration
and
development
exp.
Allowed
as
DEDUCTION
2. Incurred prior to Jan. 1, 1979, deduction
only from any income derived from
same contract area.
3. Notice of abandonment filed w/ BIR
Commissioner
Unamortized cost allowed as
deduction
If reentered, costs included as
part of gross income in year of
restoration.

Not
compensated
by
insurance
occurring in a year but discovered
another year are DEDUCTIBLE for year
in w/c these were sustained.
Not determined: year of discovery
Embezzled: year when right of recovery
becomes worthless

Mortgage losses
-

Difference of purchase price and unpaid

indebtedness is NOT ALLOWABLE
DEDUCTION from bad debts. It is
deferred until property foreclosed has
been disposed of.

Losses due
property

to

voluntary

NOT A DEDUCTIBLE LOSS, to be

deductible, loss must e suffered when
stock is disposed of.

removal

Losses from farming deductible from GI

Nondeductible loss

of

1. Shrinkage in weight or physical value

2. Total casualty losses
3. Value of animals that perish

1. As
incidents
to
renewal
and
replacements, DEDUCTIBLE FROM
GROSS INCOME
2. As cost to remove useless structure in
the real property acquired, added as
part of cost of the acquired land

Deductible loss
1. Farm not for recreation
2. Dies from disease, injury, killed by order
of authorities
3. Actual cost of property destroyed by
OOA

Losses due to shrinkage in value of stocks

CHAPTER 10
PATTERNS
3

BASIC

INCOME

TAX

Income tax system

2. OSD 40%
Individual: gross sales / gross
receipts
Corp.: gross income

1. Global income tax system

2. Gross income tax system
3. Scheduler tax system

Personal exemptions

Global income tax system combination of

gross compensation income and/or net income
from business

1. Basic exemption: P50,000 for each

individual taxpayer. (S/M/HF)
2. Additional of P25,000 for each
dependent child max. of 4

Examples:
1.
2.
3.
4.

Compensation income
Net income from business
Passive income (not subj. to final tax)
Capital gains (not subj. to CGT)

SEE ATTACHED PAPER: COLLECTION

POINTS OF INCOME TAX P. 530
SEE ATTACHED PAPER: BASIC MATRIX OF
INCOME TAX P.531

Gross income tax system tax is fixed or

computed based on gross income.

SEE ATTACHED PAPER: TAXPAYERS.

RETURNABLE INCOME AND APPLICABLE
TAX P. 533

Examples:
1.
2.
3.
4.

FBT
Passive income subj. to final tax
CGT on real property
MCIT

Scheduler tax system

Examples:
1. Annual ITR (for global income tax)
2. CGT return (sale or real property as
capital asset and sale of stocks not
traded in stock market)
SEE ATTACHED PAPER: BASIC SUMMARY
OF PHIL. INCOME TAX P. 528
SEE ATTACHED PAPER: SUMMARY OF
GROUPS INCOME P. 529

CHAPTER 11
INDIVIDUALS

Deductions from business income

1. Itemized allowable deductions (business
exp.)
4

INCOME

TAX

OF