1. Disguised dividends refer to excessive payments made to individuals who are stockholders of a corporation. Such payments would be considered dividends and taxed accordingly. However, excessive payments made to non-stockholders would not be considered disguised dividends, but would still be taxable as income.
2. Liquidating dividends are assets distributed to stockholders when a corporation dissolves, liquidates, and winds up business operations. Stockholders receiving liquidating dividends may realize capital gains or losses depending on whether the amount received is greater or less than their original investment. Any capital gains would be taxable.
3. Corporations are allowed to claim itemized deductions for business expenses, but not
1. Disguised dividends refer to excessive payments made to individuals who are stockholders of a corporation. Such payments would be considered dividends and taxed accordingly. However, excessive payments made to non-stockholders would not be considered disguised dividends, but would still be taxable as income.
2. Liquidating dividends are assets distributed to stockholders when a corporation dissolves, liquidates, and winds up business operations. Stockholders receiving liquidating dividends may realize capital gains or losses depending on whether the amount received is greater or less than their original investment. Any capital gains would be taxable.
3. Corporations are allowed to claim itemized deductions for business expenses, but not
1. Disguised dividends refer to excessive payments made to individuals who are stockholders of a corporation. Such payments would be considered dividends and taxed accordingly. However, excessive payments made to non-stockholders would not be considered disguised dividends, but would still be taxable as income.
2. Liquidating dividends are assets distributed to stockholders when a corporation dissolves, liquidates, and winds up business operations. Stockholders receiving liquidating dividends may realize capital gains or losses depending on whether the amount received is greater or less than their original investment. Any capital gains would be taxable.
3. Corporations are allowed to claim itemized deductions for business expenses, but not
DISGUISED DIVIDENDS - Disguised dividends may be considered as distributed to an individual who is not a stockholder. gree or disagree! o Disagree. Dividends are only given to stockholders o" a cor#oration. o $hus% whenever an e&cessive #ayment o" honorarium '() a month* is given to a +resident o" the ,om#any% who is not a stockholder% it will not be treated as disguised dividends. -ut what will ha##en to the #ayment! $a&able still! It will be ta&able on the #art o" the +resident but not as dividends. .hatever income will be derived by an individual% it will be ta&able. In what way! It de#ends on what is the treatment given by the $a& ,ode. In case e&cessive #ayment is made to an individual who is a stockholder% it will be treated as disguised dividends and sub/ect to the usual rates o" (01 "or 2,% N2, and 2% 301 "or N2-E$-% and 341 "or N2-NE$-. -ut i" it so ha##ens that the individual who received e&cessive #ayouts or #ayments is not a stockholder% it will not be considered as disguised dividends. No dividends shall be given to a non-stockholder. -ut still% being an income or an in5ow o" wealth in the hands o" such individual% it will be ta&able sub/ect to the ordinary rates to be withheld% i" he6s an em#loyee% o" the 4-731 income ta& according to the withholding ta& on wages table. 8I9UID$ING DIVIDENDS - .henever a cor#oration dissolves% li:uidates and winds u# its business o#erations% it may ha##en that assets will be le"t a"ter #aying all the creditors and these assets will be distributed to the stockholders in accordance with the #ro#ortion o" ownershi# that they have in the business and it6s called li:uidating dividends. It6s ta&able. o 8i:uidating dividends given% like cash% #ro#erties or other remaining assets a"ter #aying out all the creditors o" the cor#oration% i" distributed to the stockholders% will it be sub/ect to ;.$ (01% 301 or 341 de#ending on the classi<cation o" the ta&#ayer or the cor#oration! N=. Do you think a stockholder will e&#erience loss in receiving a li:uidating dividend! >ES. E&am#le? @A) as invested by @A #eo#le "or () each (0 years ago and 0 liability. Net worth% there"ore% is @A). ,a#ital stock o" <rst day o" o#eration is @A) and #ro<ts is 0. (0 years a"ter% assets grew to (00)% liabilities to A0). Net worth% there"ore% is @0). I" you dissolve and wind u# the aBairs o" the cor#oration% you distribute the @0) a"ter you #ayout the liabilities to the creditors. .ould the stockholders be receiving the same amount that they invested o" () each! N=. $he stockholders will receive less than (). Is there a gain sub/ect to ta&! N=% since there is a loss. ,an we consider the less than () recei#t o" cash% #ro#erty or assets as li:uidating dividend! >ES. .ould such li:uidating dividend be ta&able! N=% it will be deductible. So i" it will ha##en that your recei#t o" li:uidating dividend is less than what you have invested in the cor#oration% you actually suBered a loss "rom the investment. .hatever you received% considered as li:uidating dividend% is not sub/ect to ta&. -ut i" it6s the other way around% there is a gain or you receive more than what you have invested. nd whatever you have invested is the cost o" your investment. ny diBerence o" what you receive as li:uidating dividend "rom such cost will be considered as ta&able income sub/ect to the rate o" 4-731. So whenever you receive a li:uidating dividend% /ust treat it as a ca#ital income. ,om#ute your ta& liability together with all your other income. It6s never sub/ect to ;.$. .hat ha##ens i" the stockholder receiving the li:uidating dividend is a cor#oration! o E&am#le? ,or#oration C>D is owned by -; and EF8 ,or#oration. I" C>D ,or#oration li:uidates and distributes the remaining assets to all A individual stockholders and a cor#orate stockholder. Is such cor#orate stockholder sub/ect to ta&! .hatever the ta&ability% on a normal basis% i" the stockholder% whether he is sub/ected to 4-731 or 341 because he is a N2-NE$-% or the stockholder is a cor#oration sub/ect to 701% then use those rates in com#uting the ta& due on the diBerence between your li:uidating dividend and the initial investment or the cost o" the investment that you #ut into the cor#oration. "ter all% it6s the income that matters. >ou shall not be ta&ed on the cost o" the investment you #ut into unlike cash and #ro#erty dividend% you get it out "ree "rom the cost as yet because the cor#oration is not winding u#. Still whenever you receive cash and #ro#erty dividends% your ca#ital is intact in the cor#oration. -ut in li:uidating dividends% it6s the end o" the cor#oration and the end o" your investment. ny income is ta&able. ny loss is deductible. N=$E? 8osses "rom investment or income "rom investment% such as li:uidating dividends% are ca#ital losses and ca#ital income% res#ectively. $hey6re only ta&able as ca#ital income and deductible against ca#ital income i" a loss is e&#erienced.
DEDU,$I=NS - re cor#orations allowed deductions! >ES. $he same as the available deductions "or individual ta&#ayers! N=. o .hat ty#es o" deductions andGor e&em#tions are available to individual ta&#ayers! (. +ersonal and additional e&em#tions 3. +remiums on health and hos#italiHation insurance 7. ItemiHed deductions% or in lieu o" such% o#tional standard deductions Iowever% not all these three are available to all ty#es o" individuals. I" an individual is #urely a com#ensation income earner% only ( and 3 would be deductible. -ut i" the individual is into business already% whether together with E2-EE relationshi#% he can also claim any o" the itemiHed deductions or o#tional standard deductions because itemiHed deductions is "or business e&#enses. -ut then% all three would not be available to an individual who is classi<ed as a N2- NE$-. In so "ar as the cor#oration is concerned% which o" the 7 deductions are available to a cor#oration! o ItemiHed deductions% or in lieu o" such% o#tional standard deductions o 2ES=N? ,or#orations venture into an activity which is "or #ro<t. $here"ore% it is "or business and with it comes the incurrence o" business e&#enses. $hat6s why as a rule% cor#orations doing business in the +hili##ines% in "act% all cor#orations engaged in trade or business in the +hili##ines can deduct itemiHed deductions or o#tional standard deduction i" it so chooses. -ut e&em#tions are not available because it covers "or #ersonal and "amily living e&#enses and cor#orations are not natural #ersons. nd #remiums on health and hos#italiHation insurance are not as well considered as deductions. - .hat are the underlying #rinci#les that need to be "ollowed be"ore a cor#oration can deduct itemiHed deductions! o i. $he ta&#ayer must #rove that there is a law authoriHing deductions o ii. $he ta&#ayer must #rove that he is entitled to deductions o iii. I" the law #rovides "or re:uirement that the amount or the e&#ense #ayment needs to be withheld o" ta&% a ta& should have been withheld% otherwise% the deduction is not allowed o iv. lways% we construe it strictly against the ta&#ayer - -ut what about =SD! ,an cor#orations really claim =SD! o >ES% e&ce#t N2;,. 2ES=N "or e&ce#tion? Such cor#oration% its ta& base is at gross. nd the mere "act that a N2;, is construed as a cor#oration NE$-% there is no deductions allowed "rom their income. .hatever they earn in the +hil. is sub/ect to 701 income ta& e&ce#t those ca#ital gains "rom the sale o" shares o" stocks in a domestic cor#oration. - ,an =SD be allowed as a deduction i" the cor#oration is not allowed to claim itemiHed deductions! o N=% =SD is in lieu o" itemiHed deductions. So i" a cor#oration or any ta&#ayer is not allowed to claim itemiHed deductions% there is no =SD allowed. -ut there are cases or e&ce#tions when itemiHed deduction is allowed but =SD is not allowed% such as when the ta&#ayer is a N2-E$- since =SD can be claimed by any individual e&ce#t N2 but N2-E$- can claim itemiHed deductions because they are sub/ect to ta& on net income. o =SD e&am#le? I" your gross income is ()% you can automatically deduct =SD o" @00F. +ay ta& as a cor#oration on the A00F. ItemiHed deduction is only 700F% go "or =SD. >ou don6t need to substantiate it with recei#ts. >ou don6t even have to incur such e&#ense. -ut i" your itemiHed deduction is J00F% "orget about =SD. ,laim such itemiHed deduction as an e&#ense. $he only #roblem is that your books will be audited to determine whether you really have incurred J00F in total e&#enses and whether it is substantiated with oKcial recei#ts% or invoices or in contracts. - .ho are not allowed to claim itemiHed deductions! o (. Individuals% whoever that individual is% i" he is #urely earning income "rom E2- EE relationshi#% "orget about itemiHed deduction because itemiHed deduction is only in business% trade% or #ro"ession. o 3. I" the individual is a N2-NE$-% no itemiHed deduction. o 7. N2;, are never allowed itemiHed deduction or =SD. - ItemiHed deduction becomes the de"ault o" every businesses. Every business% whether individual ta&#ayer or a cor#oration% is re:uired to re#ort on a :uarterly basis the income ta& liability o" that business. o I" the ta&#ayer "orgets to choose which o#tion is it taking% whether it is itemiHed deduction 'ID* or =SD% automatically% the de"ault is ID. -ut once in the <rst :uarter% the ta&#ayer has already chosen =SD% you can no longer shi"t back to or revert back to ID "or the entire year. So that means% =SD% as an o#tion% is irrevocable "or the year at issue. o ,an the ta&#ayer choose ID the "ollowing year! >ES because irrevocability o" an =SD is only "or the current year. It6s on a year-to-year basis. o I" a G++% who is not ta&able% elects to re#ort its ta&able income choosing =SD% then the #artners who have to re#ort their ta& liability and #aid will also be liable under =SD. I" the G++ elects ID% the #artners don6t have any other choice but to go "or ID. So G++s and the individual #artners are taken as a single entity "or ta& #ur#oses. Not one o" the ta&#ayers% G++ or the #artners% can choose the other and the other one go "or the other o#tion. EC+ENSES - .hat are ordinary and necessary e&#enses! o =rdinary e&#enses '=E* L re"ers to the e&#enses which are normal% usual or common to the business% trade or #ro"ession o" the ta&#ayer. o Necessary e&#enses 'NE* L one which is use"ul and a##ro#riate in the conduct o" the ta&#ayer6s trade or #ro"ession. - ,an a NE o" one business be a NE o" another business! =r is it always the case that i" the e&#ense is necessary in this business% it is always necessary e&#ense "or another! o N=. o E&am#le? I" you6re into banking business and your "riend is into siomai business. .hat e&#ense is necessary "or your business but is not necessary "or your "riend6s business! -anking business has to hire security guards and rent armored car "or its business as a NE% which is not a NE in a siomai business. o So what is necessary% use"ul and a##ro#riate "or one ty#e o" business may not be use"ul and a##ro#riate "or another kind o" business. So there is no standard rule "or what ty#e o" e&#enses may be deductible "or this cor#oration or another cor#oration. >ou can name more than a hundred e&#ense accounts in your business% but may not be "ound in another ty#e o" business. -ut so long as the classi<cation o" that business is that it6s necessary% use"ul% a##ro#riate and it6s ordinarily incurred in the business o#erations% "or those who are similarly situated% then it is classi<ed as a deductible business e&#ense. o Is a ca#ital e&#ense deductible! >ES. .hat are ca#ital e&#enses ',E*! $hey are e&#enditures "or the e&traordinary re#airs which are ca#italiHed and sub/ect to de#reciation. $hese are e&traordinary e&#enses which tend to increase the value or #rolong the li"e o" the ta&#ayer6s #ro#erty. .hat im#ortant re:uisite "or the deductibility o" an e&#ense is not com#lied with by a ca#ital e&#enditure making it non-deductible on the year o" incurrence! ,a#ital e&#enditures are e&traordinary e&#enses which #rolong the li"e o" an asset that has been re#aired. It either increases the value or increases the li"e or #rolongs the li"e o" the asset such that it violates the rule "or an e&#ense to be deductible% it must be #aid or incurred during the ta&able year. .hen you say M#aidN% it is e&#ense but it must also #ertain to the year "or which that e&#ense is related to the income generated by the business. I" it6s incurred during the year% i" the ,E would #rolong the li"e o" an asset over which the asset would be use"ul "or (0 years% then the e&#ense o" the ,E should be distributed over (0 years as well to bene<t the com#any. It6s the matching #rinci#le wherein you only deduct the e&#enses which is related to the business activity. I" it6s only (G(0 every year% then only (G(0 o" the e&#ense is deductible. $he reason why it is deductible but not in the year o" #ayment or not in the year when the year it was constructed% #urchased% re#aired% etcO. - .hat are the common re:uisites to make an ordinary or necessary e&#ense deductible! o i. $he e&#enses must be ordinary and necessary It6s ordinary when it6s normal% usual and common. lthough sometimes it does not necessarily need to be incurred day-in% day-out but so long as it6s usual in the ty#e o" business or the industry to which that business is in then it can be considered as =E% not unusual. It6s NE when it6s use"ul and a##ro#riate "or the business activities. o ii. It must be #aid or incurred during the ta&able year 'whether calendar or <scal year* E&ce#tion? net o#erating loss carry-over I" the e&#ense that you6re claiming as a deductible item this year is an e&#ense "or the o#eration o" the #revious year% it is not deductible e&#ense. So your e&#ense claims must be #aid this year or i" not #aid this year% it must have been incurred. .hat6s the diBerence between #aying an e&#ense and incurring an e&#ense! In the +hil.% we do not usually "ollow the cash method in determining whether your income is already ta&able or not. .e "ollow the accrual method o" accounting. ,ash method o" accounting% whatever you receive in cash is considered as sales and whatever you have #aid "or in your e&#ense% is deductible and the diBerence is ta&able under the cash accounting method. -ut the accrual method% whatever you have sold% so long as you have com#leted the transaction% whether it has been #aid by your customer or not% is re#orted as sales already and whatever you have #aid as an e&#ense including those e&#enses "or which you have eBected already the transaction% the services have already been #er"ormed in your "avor% and it6s #ayable% meaning% the other #arty% your su##lier% has already the legal right to demand #ayment "rom you but not as yet. +robably% there is a #eriod within which you can #ay. It6s already deductible. It sim#ly "ollows the Mall-events testN. >ou have all the events to com#lete the transaction% then the sale has been #er"ected% whether #aid or not% ta&able. E&#ense% whether #aid or not% so long as service has been #er"ormed% goods have been delivered% it6s deductible. So in the e&#ense% so long as it has been #aid this year or has been incurred and it #ertains to this year6s o#erations% the e&#ense is deductible. I" you6re claiming an e&#ense which is "or the "uture% advance rental #ayments% is it deductible! o Under the accrual method% it would be deductible. Is the e&#ense #ertaining to last year6s activity deductible! o N=. ll the e&#enses must be #aid or incurred during the year e&ce#t net o#erating loss carry-over. o NE$ =+E2$ING 8=SS ,22>-=VE2 'N=8,=* I" the business incurs a loss% it6s deductible. -ut once a business incurs N=8% meaning% the bottomline <gure "or the entire year6s o#erations is a loss% there is an o#tion "or the business to carry it over to the ne&t 7 years. So% it means to say i" it6s carried over to the ne&t 7 years% in the ne&t 7 years% it6s not the e&#ense during those years. It #ertains to the #revious years. -ut since it is mandated by law to be deductible% it6s an e&ce#tion to the rule that it does not really have to #ertain "or this year6s o#erations. o iii. It must be #aid or incurred in connection with the trade% business or #ro"ession o" the ta&#ayer E&am#le? In you6re in 7 businesses. =ne manu"acturing cor#oration. =ne real estate business. nd the other is a siomai business. >ou don6t mi& the e&#enses. >ou cannot claim the e&#enses o" this business to that business. It should necessarily be connected with the business that you6re in. o iv. It must be reasonable in amountP I" you are the #resident o" the cor#oration earning (00F a month% it may be reasonable in so "ar as that business is concerned but your (00F will be unreasonable in another ty#e o" cor#oration. So there is no <& amount within which we can determine whether this ty#e o" e&#ense claimed is reasonable or not. No <& amount but you have to consider it in so "ar as the o#eration is concerned. -ut there is one ty#e o" e&#ense that is regulated by the ta& authorities and that e&#ense is Entertainment% musement and 2ecreation e&#ense 'E2 e&#ense*. .hy! -ecause this ty#e o" e&#ense as a deduction has been abused. )any businesses claim re#resentation e&#ense L bringing clients to clubs. nd the amount is unreasonable. Instead o" distributing as dividends% they claim it as re#resentation e&#ense L they re:uire stockholder or em#loyee to bring in recei#ts and thy can even ask recei#ts "rom you and have it reimbursed% such as medical re#resentatives. E2 e&#ense has been abused. $here is already a regulation that sets a :uota "or such e&#ense. .hat is the ceiling set by the Secretary o" ;inance! o E2 e&#ense L to the e&tent only o" (1 o" the net sales i" the cor#oration is engaged in services. nd 0.41 o" the net sales i" the cor#oration is into the sale o" goods or #ro#erties. o 2ES=N "or the diBerence? -ecause those engage in services usually needs re#resentation e&#ense to entertain their clients or treat them over meetings% lunch meetings% etc. -ut i" it is goods or #ro#erties% so long as you have the #roduct% you can sell it. o .hat ha##ens i" you are both engaged in the sale o" service or in the sale o" goods! .hich will you "ollow! >ou still have to "ollow the "ormula L (1 "or the service and 0.41 "or the goods and #ro#erties. E&am#le? So it means to say that i" the cor#oration% net sales is () and it is engaged in the sale o" service and goods% the ma&imum E2 e&#ense "or services is only (0F while "or goods or #ro#erties% it6s only 4F. I" the cor#oration has 40F e&#ense% automatically% @4F is not deductible "or goods or #ro#erties since only 4F is the ma&imum deductible amount. In so "ar as salaries are concerned or bonuses o" directors% it6s #rovided under the ,or#oration ,ode that -oard o" Directors% as honorarium% should not e&ceed (01 o" the net income o" the cor#oration because i" it e&ceeds% it will be considered already as disguised dividends. o E&am#le? I" the net income is only ()% only (00F should be given to the -oard o" Directors "or the entire year L "or all o" them. ny e&cess will be considered as unreasonable. o v. It must be substantiated by suKcient evidence such as oKcial recei#ts and other oKcial recordsP and =Kcial recei#ts de:uate records mount o" e&#ense being deducted Date and #lace where such e&#ense is #aid or incurred Nature o" e&#ense L direct connection or relation o" the e&#ense being deducted to the develo#ment% management% o#eration andGor conduct o" the trade% business% or #ro"ession o" the ta&#ayer $he evidence must be recogniHed or #roduced by the third #arty. I" the evidence solely comes "rom the com#any L you made it% you dra"ted it% no signature "rom the other #arty% it is sel"-serving so it is not suKcient evidence. E&am#le? >ou6re in the business o" manu"acturing wooden toys "or e&#ort in Euro#e. nd "or cost-cutting #ur#oses% you don6t have a large #ool o" em#loyees so that you sub-contract the raw materials to the diBerent homeworkers. nd those homeworkers are actually not registered in the business. $hey /ust do what they6re re:uired to do and when they bring it back to you% you #ay them. Iomeworkers% not being registered with the ta& authorities because they6re not really into business% cannot #roduce an =.2. nor an invoice. .hat #roo" will you #resent to the ta& authorities in order to claim the #ayments you made to these homeworkers! o contract or an acknowledgment recei#t will do. $hey can surely sign. It6s not always in all cases that you can re:uire your su##lier to #roduce an =.2. In one o" the ma/or cases that we have in the +hili##ines is those in the business o" manu"acturing Mcara/inanN. >ou #urchase it "rom diBerent su##liers to grow such but they are not registered in the business o" su##lying. $hey cannot #roduce an =.2. $he #roblem is that i" they do not #roduce an =.2.% what #roo" do you #resent to the government that indeed that you6ve made #ayments "or these when it cost millions! So in one o" the com#anies here% the only thing that they can #roduce is the #roo" that it had been weighed by a re#utable weighing com#any% the de#osit that they made in millions to an individual in )indanao. -ut i" you really want them to #roduce an =.2.% they can show you their guns. So as a business man% you don6t "orce them to issue an =.2. So how to #rove to the -I2 that these are valid and legitimate e&#enses! $here6s already a S, actually "ollowing the ,ohan 2ule in the U.S. that some e&#enses need not be su##orted by =.2. but so long as it can be substantiated with other ade:uate records #roving that in "act it has been #urchased by the com#any and the goods received by the com#any which were actually converted to the #roduct sold% can be #roo" enough that e&#enses have been #aid or incurred. -ut not in all instances. In this ty#e o" re:uisite% is it necessary when you want to claim =SD! o N=% because the law in =SD says Mwhether or not you have incurred actual e&#ensesN. So this re:uisite a##lies only in so "ar as ID is concerned. o vi. It must not be against law% morals% #ublic #olicy or #ublic order E&am#le? -ribes and kickbacks given to government #ersonnel >ou have an assessment o" (0) in un#aid ta&es or delin:uent ta&es. >ou come into a com#romise or common grounds. >ou will only #ay 4) and you will be issued a ta& clearance. nd "or the 4) that you will #ay% only 3.4) will be recei#ted as received by the government. .herever the other 3.4) will go% we do not know. Iow much is deductible "rom your business o#erations! (0)% 4)% 3.4) or none o" the above! o N=NE o" the above. .hatever #ayments you made to the government% as kickbacks or bribes% even to the members o" the -=, or -I2 or D=;% so long as it6s not a legitimate #ayment o" an e&#ense% it is not deductible. o Iow about #ayments to rebels as revolutionary ta&es! $elecommunications towers% so that it will not be blown u#% you have to #ay a certain amount. Is that deductible! N=. ll ta&es% as a rule% are deductible% e&ce#t income ta& #aid to the +hil. government% income ta& #aid to the "oreign government% estate ta&% donor6s ta& and V$. ll the other ta&es are deductible. Iowever% even i" they call it as a "ormal ta& that is #aid to the rebels% it doesn6t go to the government% there"ore% however media will try to make it legal in the news% it6s still a non-deductible e&#ense because it6s contrary to law and #ublic order. DVE2$ISING ND +2=)=$I=N8 EC+ENSE '+E* - s a rule% +E are deductible unless it borders to creation o" goodwill "or the com#any or creating a name "or the com#any% "uture recall% etcO o E&am#le? DandruB sham#oos L we have Guard% Iead and Shoulders. .e6ve been through that "or years already. .hen ,lear came in% almost all actors and actresses became endorsers "or it. Iow much did they have as a budget "or that! It6s (-. Is it deductible as +E in the year it was incurred! N=. It6s e&cessive and the #ur#ose o" actually o" ,lear is not to make it as an e&#ense in the year o" entry but rather its #ur#ose was to give a brand and give a name recall "or the customers and it6s e&#ected to bene<t a number o" years "or the com#any% there"ore% whatever e&#ense it had #aid during the year o" entry will be amortiHed over "uture years. 8et6s say% "or 4 years. $2VE8 EC+ENSES '$E* - $E are deductible even i" it6s not recei#ted because they6re $E that we incur without having a recei#t "rom the carriers% etcO =+$I=N $= +2IV$E EDU,$I=N8 INS$I$U$I=N '=+EI* - +EIs have the o#tion to deduct ca#ital e&#enditures in the year it was #aid or incurred or the other o#tion is to de#reciate the e&#ense over the use"ul li"e o" the asset. o E&am#le? US, would #urchase a (00) value building. It can o#t to deduct entirely the (00) in the year o" #urchase or amortiHed the (00) over its use"ul li"e. In any case% whatever the o#tion chosen by US,% since it6s not sub/ect to ta&% it won6t have any eBect. It doesn6t need to match the e&#ense incurred today against the income "or today or year-to-year basis. IN$E2ES$S EC+ENSE 'IE* - .hat is interest! o It6s the amount #aid "or the use or "orbearance o" money. E&am#le? I" you have a business and you obtained a loan "or the working ca#ital o" your o#eration and you are to #ay (0F monthly as interest. Is the (30F "or the entire year be deductible as a business e&#ense i" it6s related to the business! >ES. s a rule% IE incurred by a business% cor#oration% com#any or ++ is deductible so long as the common re:uisites are com#lied with? o (. $he interest must be ordinary and necessary. So i" you obtained a loan to use it as a working ca#ital o" your o#erations% the interest #aid is deductible. o 3. It must be reasonable. 2easonableness would de#end on the siHe o" the business o#eration. o 7. It must be #aid or incurred during the ta&able year o @. It must be #aid or incurred in connection with the business o 4. It must be substantiated by the contract itsel" and #ayment vouchers% etc. o A. It must not be contrary to law o =ther additional re:uisites to make IE deductible? i. $here must be an obligation which is valid and subsisting ii. $here must be an agreement in writing to #ay interest =therwise% not in writing% no IE deduction% whether or not you have actually #aid an interest iii. $his must observe the limitation under the arbitrage rule iv. $his must not be between related ta&#ayers - IE which are non-deductible? 'See outline* o ,or#oration to cor#oration where only one individual is maintaining the controlling interest% the interest is not deductible. E&am#le? ,o. '#arent com#any* and ,o. - 'subsidiary com#any*. Usually the #arent com#any grants a loan to a subsidiary com#any "or o#erational #ur#oses. I" the agreement is stated that interest shall be #aid in writing% is the individual% according to the grand"ather ruleO I" ,o. is owning ,o. - (001 and the loan is granted to the subsidiary com#any where interest is sti#ulated to be #aid% is the interest #ayments made by the subsidiary to the #arent com#any deductible! N=. Iere% ,o. is a holding com#any o" ,o. -. .hen one is a holding com#any o" the other and e&tends loans% the IE becomes a non-deductible e&#ense. $he 401-rule 'controlling interest rule* is only a##licable to non-e&isting holding com#anies. o Interest e&#ense on #re"erred stock E&am#le? com#any declares dividends. Dividends comes out "rom your shareholdings and shareholdings% usually% shares that you have can be classi<ed as common shares or #re"erred shares. .henever you organiHe a cor#oration% you may say that this grou# has common shares% this grou# will have #re"erred shares. $he term #re"erred shares% you will have a #re"erence in the distribution o" dividends% as a rule. I" there comes a #oint in time that the business% in a certain year% cannot declare a dividend% some dividend would accrue to them but not totally #aid out% nothing would accrue to you. )eaning% they have a collectible. In the "ollowing year% when distribution ha##ens% they will get their #rior-year accrual dividends #lus interest% you will receive yours "or the year. .ill the interest on the #re"erred shares be considered as deductible IE! $he conce#t o" #aying interest and interest as a deducible e&#ense item is it must be #ayment "or the use o" someone else6s money L the "orbearance o" money. >ou tem#orarily borrow money% use it and "or the use% you are to #ay interest in addition to the #rinci#al #ayments that you will make. -ut dividend declaration is not an obligation o" the cor#oration. In "act% under the ,or#oration ,ode% a dividend can only be declared i" there is enough unrestricted retained earnings or cor#orate #ro<ts that a cor#oration has. I" it is not de#endent u#on cor#orate #ro<ts on the #re"erred shares% it is deductible. I" it is de#endent u#on cor#orate #ro<ts% as a rule% it is not deductible e&#ense. 2ES=N? $he cor#oration did not really loan any money coming "rom the stockholders. $he cor#oration is obligated to #ay out dividends once it has #ro<ts. - .hat is the rbitrage 2ule! o $he ta&#ayer6s allowable deduction "or IE shall be reduced by an amount e:ual to 771 o" the interest income earned by him which has been sub/ected to <nal ta&. o $he arbitrage rule automatically limits the deductibility o" the IE by reducing 771 o" the interest income sub/ect to <nal ta&% whether or not engaged in back-to- back loan transactions. E&am#le? 8et6s say that the com#any has an IE o" A00F but it has no interest income% is the IE deductible "ully! >ES. Say "or e&am#le% ,o. 'earning interest income o" (00F sub/ect to 301 <nal ta&*% ,o. - 'earning (00F interest income "rom loans to em#loyees* and ,o. , 'no interest income*. ll o" them obtained the () loan running "or (0 years wherein they would be liable each "or A00F annually as IE. .hich o" the 7 cor#orations can claim the "ull A00F as e&#ense and which cannot! ,o. cannot claim "ully the A00F as a deductible IE but only 4AQF 'A00F L R771 & (00FS*. $he arbitrage rule a##lies since ,o. is earning interest income sub/ected to <nal ta&. I" none% the arbitrage does not a##ly% automatically "ull interest #ayment can be deductible. ,o. - can "ully claim the A00F as a deductible IE since its interest income is not sub/ected to <nal ta&. Interest income sub/ected to <nal ta& is only those coming "rom the banking institutions. ,o. , can "ully claim the A00F as a deductible IE since it is not earning interest income. o $he #rinci#le why such rule e&ists? $o discourage -ack-to--ack loan transactions L obtaining loan "rom one bank and invest it to another bank in order to bene<t the diBerence between the ta& due on interest income and the ta& bene<t "rom the IE. o I" the IE is (00F% interest income sub/ect to <nal ta& is (00F% do you have a deductible IE! >ES. >ou have a deductible IE o" AQF '(00F L R771 & (00FS*. o I" the interest income is 400F sub/ect to <nal ta&% IE is (00F% do you have a deductible IE! N=. 771 o" 400F is (A4F. So the (A4F will be deducted to (00F% which results to no deductible IE. - .hat is theoretical interest! Is it deductible! o It6s an interest which is com#uted or calculated% not #aid or incurred% "or the #ur#ose o" determining the o##ortunity cost o" investing in a business. It6s not real. $here6s no #ayment at all. $hus% it6s not deductible nor ta&able. - .hat is im#uted interest! Is it deductible! Is it an actual e&#ense! o Sec. 40 o" the ta& code L llocation o" Income and Deductions L In the case o" 3 or more organiHations% trades or businesses 'whether or not incor#orated and whether or not organiHed in the +hili##ines* owned or controlled directly or indirectly by the same interests% the ,ommissioner is authoriHed to distribute% a##ortion% or allocate gross income or deductions between or among such organiHation% trade or business% i" he determines that such distribution% a##ortionment% or allocation is necessary in order to #revent evasion o" ta&es or clearly to re5ect the income o" any such organiHations% trades or businesses. o Such #rovision is #ower"ul in the sense that the -I2 can do anything with it so long as it sees relationshi#s between cor#orations. E&am#le? I" ,o. is related to ,o. - as the controlling or "ully owning the other cor#oration% any e&#ense loan 'let6s say ()* to ,o. -% which is interest-"ree% so ,o. did not earn any interest income. ,an ,o. - deduct IE! utomatically% no IE because IE must be sti#ulated in writing and there is no interest #ayment made. -ut the -I2 can im#ute an interest based on the legal rate o" (31 and sub/ect such interest income on the #art o" ,o. to ta&. -ut ,o. - is absolutely not allowed to claim the IE "or no interest has been #aid and there is no sti#ulation in writing. - ,an #ayment o" interest "or delin:uent ta&es be deductible! o >ES. .henever a ta&#ayer% cor#orate or individual% is assessed o" delin:uent ta&es% that ta&#ayer is not only liable to #ay the basic ta& but also has to #ay surcharges o" 341 and 401 i" it is "ound to be "raudulent #lus interest o" 301 #a and additional com#romise #enalties. So whether or not these #ayments are deductible% is interest deductible! >ES% because it6s an indebtedness to the government. >ou tem#orarily withheld the #ayment o" ta&es to the government "or the use o" money during the time which you have not #aid #ro#erly your ta&es. -ut in so "ar as #enalties% surcharges and com#romise #enalties are concerned% on to# o" the ta& % these are not deductible. $he ta&#ayer cannot bene<t "rom a violation that he committed against the government. It is only the interest that is deductible. - =#tional treatment o" IE '=$IE* o t the o#tion o" the ta&#ayer% interest incurred to ac:uire #ro#erty used in trade% business or e&ercise o" a #ro"ession may be allowed as a deduction or treated as a ca#ital e&#enditure. E&am#le? ,o. obtained a loan "or working ca#ital #ur#oses. ,o. - obtained a loan "or construction o" a building. -oth o" them #aid () in interest. () in IE and no interest income sub/ect to <nal ta&. $hus% the IE not limited with the arbitrage rule. Does ,o. or ,o. - have an o#tion in treating the IE% whether deductible now or deductible in the "uture! ,o. % the incurrence o" e&#ense is "or working ca#ital #ur#oses% day-in day-out o#erations% the IE incurred% i" it6s not sub/ected to arbitrage rule% would be "ully deductible as an e&#ense "or the year o" incurrence. -ut since ,o. - obtained a loan to construct a #ro#erty that is a ca#ital e&#enditure% the IE can also be considered as a ca#ital e&#enditure. .here the #rinci#al cost goes% the accessory interest e&#ense can also /oin the #rinci#al cost. So i" the building has an estimated li"e o" (0 years or 30 years% the IE can be considered as ca#ital added to the cost o" the building and it will be considered as an e&#ense over the estimated li"e o" the asset that was ac:uired using the loan amount. $CES - G2? ll ta&es% national or local% #aid or incurred within the ta&able year in connection with the ta&#ayer6s trade% business or #ro"ession are deductible "rom gross income. o E? i. S#ecial assessment L ta& im#osed on the im#rovement o" a #arcel o" land ii. Income ta& L includes "oreign income ta& +hili##ine income ta& L absolute rule? totally not deductible ;oreign income ta& o +aid by domestic cor#orations and resident citiHens 'ta&able within and without* L may be claimed as a deduction i" it o#ts "or ta& deduction% otherwise% it becomes non-deductible i" it uses the "oreign ta& #aid as ta& credits. I" the "oreign ta& is claimed as a ta& credit% you cannot claim it as a ta& e&#ense. -ut i" you claim it as a ta& e&#ense% you cannot claim it as a ta& credit. ,laiming it as a ta& credit% you can claim the "ull bene<t o" the ta& #aid abroad since ta& credit is a deduction "rom +hili##ine income ta&. -ut i" you claim it as an e&#ense% only to the e&tent o" 701 o" that "oreign ta& will it reduce the ta& due since ta& deduction% as an e&#ense% is a deduction "rom gross income in com#uting the net income. $hus% ta& credit is more bene<cial. iii. $a&es which are not connected with the trade% business or #ro"ession o" the ta&#ayer .hatever ty#e o" ta& that is% since it6s not connected with the trade% business or #ro"ession o" the ta&#ayer% automatically% it6s not deductible. iv. Estate ta&% donor6s ta& v. V$ - Is the real #ro#erty ta& 'local ta&* #ayment made by the cor#oration on its real #ro#erty used in trade or business a deductible e&#ense "or #ur#oses o" com#uting income ta& liability% not real #ro#erty ta& liability! o >ES. 2eal #ro#erty ta&es are deductible so long as? (. It is ordinary and necessary 3. 2easonable in amount 7. It has been #aid or incurred during the ta&able @. It has been #aid or incurred in connection with trade% business or #ro"ession 4. Substantiated with =.2s A. It6s not contrary to law% #ublic #olicy or morals - E&am#le o" national ta& that is deductible? ,ustoms duties when the cor#oration is engaged in im#ortation o" goods. - ll ta&es% whether national or local ta&% will be considered as deductible "rom gross income in com#uting the net ta&able income so long as it "ollows the re:uisites o" being #aid or incurred during the ta&able year in connection with the trade% business or #ro"ession o" the ta&#ayer sub/ect to the e&ce#tions. - .hat ty#e o" ta&#ayer can oBset the "oreign ta&es directly by (001 against the +hili##ine ta& due! o i. 2esident ,itiHens L since liable o" income within and without to avoid double ta&ation N2, L not included because liable o" income within only L no double ta&ation o ii. Domestic cor#orations L since liable o" income within and without to avoid double ta&ation o iii. )embers o" G++s o iv. -ene<ciaries o" estates and trusts - I" the ta& #aid in ,hina is (0) and the ta& due on your entire income here in the +hili##ines is 70)% can ,o. - 'which o#erates T01 in the +hili##ines and 301 in ,hina with (00) total income. $hus% 30) "rom ,hina and T0) "rom the +hili##ines*% can ,o. - "ully deduct the (0) against the 70)! o N=% since the "oreign income ta& #aid to the "oreign country is not always the amount that may be claimed as ta& credit because under the limitation #rovided under the ta& code% it must not be more than the ratio o" "oreign income to the total or global income multi#lied by the +hil. income ta& due. o $hus% 30) '"oreign income*G(00) 'global income* U 301 & 70) '+hil. income ta&* due U A) limit. $here"ore% only A) can only be claimed as a ta& credit. o Iad it been the other way around% i" the limit is higher than the actual ta& #ayment abroad% you claim whichever is lower in "avor o" the government.
Unabridged Articles of the Ike Jackson Report :the Future of Hip Hop Business 2020-2050: Unabridged articles of the Ike Jackson Report :The Future of Hip Hop Business 2020-2050, #2