Bad Debt Expense

A bad debt is claim that becomes a worthless or uncollectible arising from money lent or from goods sold
or services included.

A charge to bad debt expense due to estimated uncollectible receivable does not constitute deductibility
from business gross income unless the claim be ascertained worthless and the corresponding receivable
should have been written off within the taxable year.

When is Claim Ascertained to be Worthless?

1. Insolvency of the debtor,

2. Death of the debtor without sufficient properties to cover his debts, or
3. Disappearance of the debtor

A bad debt account cannot be ascertained worthless when supported by a guarantor or surety.

Requisites for Deductibility of Bad Debts

1. There must be a valid and subsisting claim;

2. The claim must be connected with the profession, trade or business;
3. The claim must not be between related parties enumerated in Section 36(B) of the Tax Code;
4. The claim must actually be ascertained to be worthless and uncollectible as of the end of the
taxable year; and
5. The claim must be written off within the taxable.

Nondeductible Bad Debts

1. Not connected with profession, trade or business;

2. Arising from unpaid wages, salaries, rents and similar item of taxable income which were not
included as income for the year in which the deduction as bad debts is sought to be made, or in a
previous year; and
3. Contract entered into between related taxpayers or members of the family.

Valuation of Bad Debts

Following rules in determining the value of deductible bad debts:

1. Actual amount paid. Accounts receivable acquired by purchase which becomes uncollectible can
be deducted from gross income at the actual amount paid and not at the face value of receivable.
2. Original amount. Receivables acquired through sale of goods or services, the original amount of
receivable is deductible, but the related interest thereof, not reported as income, is not
deductible.
3. Proportionate amount. Receivable becomes uncollectible due to debtor’s bankruptcy; the allowed
deduction is the proportionate amount uncollectible over the total claims of ordinary debtor’s
creditors.
Accounting for Worthless Accounts

The only acceptable method to record bad debts for tax purposes:

1. Direct
2. Actual method

Bad Debts of Cash Basis Taxpayer

A cash basis taxpayer generally reports income of principal business activities upon collection.
Consequently, such taxpayer cannot deduct worthless accounts from his gross receipts because income
is reported only when collected.

Depreciation Expense

It refers to the periodic reduction of the value of a tangible permanent asset.

It is allowed as a deduction from gross income to enable taxpayers to recover the acquisition cost of the
property used in the practice of profession, business or trade.

Reduction of the useful value of an intangible asset is called “amortization”

Requisites for Deductibility of Depreciation

1. It must be reasonable.
2. It must be charged off during the year.
3. The asset must be used in profession, trade or business,
4. The asset must have a limited useful life.
5. The depreciable asset must be located in the Philippines if the taxpayer is a nonresident alien or
a foreign corporation.

Methods of Depreciation

1. Straight-line method;
2. Declining balance method;
3. Sum of the years digit method; and
4. Any other method which may be prescribed by the Secretary of Finance upon the
recommendation of the Commissioner.

Depreciation and other related expenses of vehicles

Revenue Regulations No. 12-2012 mandates that only one (1) vehicle for land transport is allowed for the
use of an official or employee and the value of the vehicle involved should not exceed P2.4 million.

If the value of the vehicle purchased breaches the P2.4 amount, the following consequence shall be
imposed:

1. The taxpayer shall be totally barred from claiming any depreciation expense and all maintenance
expenses of such vehicle; and
2. The input taxes on the purchases of non-depreciation vehicles and all input taxes on maintenance
expense incurred thereon are likewise disallowed for taxation purposes.
Depreciation of Properties Used in Petroleum Operations

1. Initially placed properties

2. Change of depreciation method
3. Estimated useful life

Depreciation of Properties Used in Mining Operations

1. At normal rate of depreciation if the expected life is ten years or less

2. Depreciated over any number of years between 5 years and the expected life if the latter is more
than 10 years;
3. The depreciation thereon as deduction from taxable income

Depletion Expense

Depletion is the exhaustion of natural resources like mines, oil and gas wells due to production.

Exploration and Development Expenditure

Exploration expenditures means expenses paid/incurred before the development stage of the mine
intended to ascertain the existence, location extend or quality of any deposit of ore or other mineral.

Development Expenditure means expenditures paid or incurred during the development stage of the mine
or other natural deposits.

Tax Treatment

At the option of the taxpayer, exploration and development expenditures paid or incurred during the
taxable year may be treated as:

1. Part of adjusted basis for depletion cost, or

2. Deduction to compute taxable income from mining operations.

Limitations of option two (2):

1. The total amount deductible expenditure shall not exceed 25% of the net income from mining
operations
2. The actual expenditure minus 25% of the net income from mining shall be carried forward the
succeeding years until fully deducted.

Capital Expenses of a Private Educational Institution

1. Deduct immediately as expenditures,

2. Deduct as allowances for depreciation.

Deductible Pension Trusts

Two general types of pensions that may be adopted by an employer

1. Defined benefit plan.

2. Defined contribution plan.
Requirements of Plan by BIR:

1. The plan must be reasonable and actuarially sound (actuarial valuation)

2. The plan must be approved by the BIR.

Tax Code Section 34 (j) provides that the allowable deduction as pension trust is equal to the provision for
the payment of reasonable pensions to employees or actual contribution to the plan whichever is lower,
and the excess of actual contribution over the actuarial valuation is to be amortized over the period of 10
years.

The amount if tax deduction should be based on actuarial valuation for funding.

Charitable and Other Contributions

The law allows some contributions or gifts given within the taxable year as deductions from gross income.
The amount shall be based in the acquisition cost of said property.

Requisites for Deductibility of Contributions (Deductions from gross income)

1. The taxpayer making the charitable contribution must be engaged in a profession, trade or
business;
2. There must be an actual payment of contribution or gift;
3. The recipient must be an entity or institution specified by law;
4. The net income of the institution must not inure to the benefit of any individual or private
stockholder

Contribution Deductible in Full (Deductible in full amount)

1. Donation to the Government of the Philippines, or to any of its agencies, or political subdivisions,
including fully owned government corporations exclusively to finance, to provide for, or to be
used in undertaking specific priority activities in
a. Education;
b. Health
c. Youth and sports development;
d. Human settlements;
e. Science and culture; and
f. Economic development.
2. Donations to international organizations in compliance with agreements, treaties, or
commitments entered into by the Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws.
3. Donations to Accredited Non-Government Organizations subject to the requisites to be
deductible in full.

Contributions Subject to Limit (Not deductible in full)

1. If the donor is an individual taxpayer, the limit is 10% of the taxable income derived from
business, trade or profession (before contribution) or the actual contribution, whichever is
lower.
 2. If the donor is a corporation, the limit is 5% of the taxable income derived from trade or
business (before contribution) or the actual contribution, whichever is lower.

Donations to Political Parties or Candidates

Contributions to political parties registered with COMELEC are not deductible from gross income. Since
campaign expenditures and contributions are neither business-related expenses nor deductible donations
similar to those given to accredited non-government or charitable organizations as provided in Sec. 34 (H)
of the Tax Code.

Research and Development

1. Ordinary and necessary expenses deductible from the business gross income in the year the
expenses are paid or incurred.
2. Deferred expenses chargeable to the capital account but not chargeable to property to
depreciation or depletion

Premium Payments for Health/Hospitalization Insurance (PPHHI)

Allowable deduction at an amount not exceeding P2,400 per family or P200 a month whichever is lower
during the year provided that their family total gross income does not exceed P250,000 for the calendar
year.

Special Allowable Itemized Deduction (SAID)

1. Adopt-a-School Program under RA 8525;

2. Fifteen percent (15%) additional deduction of salaries/wages paid to the senior citizen;
3. Senior Citizen Discount under RA 9257;
4. Discounts to Person with Disability under RA 9442;
5. Rooming-in and Breast-feeding Practices under RA 7600;
6. Free Legal Assistance under RA 9999;
7. Qualified Productivity Bonuses under RA 6971;
8. Income currently distributed to beneficiaries under estates and trusts but such amount shall be
taxable to the letter;
9. Net Operating Loss Carry-Over (NOLCO);
10. Special deduction allowed to insurance companies.