CHAPTER 13 – PRINCIPLES OF DEDUCTIONS

What is a business?

- Business means habitual engagement in a commercial activity involving

regular sale of goods and services to customer or clients

- In taxation, the term business is generally used to include the exercise

of a profession.

- Self- employment is a business but employment is not a business.

Business expense vs. Personal expense

- Business Expense are cost of doing trade, business or professional such

as:

o Employee Salaries

o Office Utilities

o Supplies

o Rent

o Taxes

o Losses

o Bad debts

o Depreciation on business properties

o Research development, and the like.

- Personal Expense

o Living and family expense of individual taxpayers such as Family

food, personal recreation, and transportation, medication, home
rentals, tuition fees of dependents, and other similar expenses.

- Only business expense is deductible.

- 250,000 annual income exemption in the tax taxable for individuals is

deemed in lieu of all personal expenses of individual taxpayers.

- Personal Expense are non-deductible.

Business Expense versus Business Capital Expenditure

- Business expense benefit ONLY the current accounting period.

- These are cost of generating income or gains for the current period.

- These are deductible against gross income:

o Salaries and wages expense

o Utilities expense such as electricity, telephone, interest, gas and

water

o Selling expense such as delivery and commission expense

o Rent

o Local taxes and permits

- Capital Expenditure – benefit future accounting periods.

o Initially recorded as assets upon acquisition then later deducted

against future gross income when used in the trade, business, or
profession of the taxpayers

- Examples of capital expenditures:

o Items of PPE

o Inventory

o Investment

o Prepayments

o Acquisition of intangible assets such as patent or franchise,

including cost of defending the same in court

o Expense to promote goodwill

o Rentals on capital lease or finance lease that transfers ownership