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ALZONA - OE Financing Decisions
ALZONA - OE Financing Decisions
Tax Consideration
Internal Financing- control the timing
Understanding the concept of tax benefit
Gross Income - Allowable Deductions = Taxable Net Income
Gross Income = proportional with taxable net income and tax sue
There are benefits in the deduction in gross income = less tax due
Allowable deduction inversely proportionate with taxable net income and
less tax due
Net Operating Loss
If the allowable deductions are greater than the gross income
MCIT shall be applied on the gross income if there is net loss = 1%
Example:
An entity intends to purchase a property with a cost of 1,000,000 and an estimated
useful life of five years. Tax rate for Years 1 and 2 is 30%, Years 3 and 4 is 25%, and
Year 5 onwards is 20%. What is the net benefit/cost of delaying the purchase to (a)
Year 3? (b) Year 5?
External Financial
Debt- short-term or long-term borrowings, depending on when the obligation
will be settled
Cost of debt- interest payment, which is deductible from gross income,
resulting in the recognition of tax benefits
Equity- ordinary or preference share or interests in partnerships, in exchange for
cash or non-cash contributions from shareholders or partners.
Cost of equity- dividend payment, which is NOT deductible from gross
income, hence, no tax benefit can be derived.
PART 2
An ordinary loss is fully deductible to offset income thereby reducing the tax
owed by a taxpayer. Capital losses occur when capital assets are sold for less
than their cost
Net operating loss of the business or enterprise for any taxable year
immediately preceding the current taxable year, which had not been previously
offset as deduction from gross income shall be carried over as a deduction from
gross income for the next three consecutive taxable years immediately following
the year of such loss.