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SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NOLCO

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I am here because I love to give presentations.

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Overview and Objectives : This chapter cover special itemized deductions and the net operating loss carry over. After this chapter, readers are expected to demonstrate  mastery of the following:

Special deductions allowed under the NIRC  and special laws Requisites and deduction rules of the allowable special expenses  Additional deduction incentives granted by special laws Measurement and carry- over rules of Net operating loss- carry- over(NOLCO)

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these refer to other items of deductions which may or may not partake the nature of an expense, but are allowed by the NIRC or by special laws as deductions.  these include deduction incentives to taxpayers in assisting and in complying with certain legal requirements.

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A. Special expenses under the NIRC and special laws Income distribution from a taxable estate or trust  Transfer to reserve fund and payments to policies and annuity contracts of insurance companies Dividend distribution of a REIT under RA 9856 Transfer to reserves funds of taxable cooperatives Discounts to senior citizens under RA 9257 Discounts to persons with disability under RA 9442 B. Deductions incentives under special laws  Additional compensation expense for senior citizen employees under RA 9257  Additional compensation expense for persons with disability under RA 7277, as amended by RA 9442 Cost of facilities improvement for persons with disability in accordance with RA 7277, as amended by RA 9442. Additional training expense under the RA 8502- jewelry industry Development Act of 1998 Additional contribution expense under the Adopt-a school program under RA 8525 Additional deductions for compliance to rooming in and breast-feeding practices under RA 7600, as amended by RA 10028 Additional free legal assistance expense under RA 9999 Additional productivity incentive bonus expense under RA 6971

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SPECIAL EXPENSES UNDER THE NIRC OR SPECIAL LAWS

INCOME DISTRIBUTION MADE BY TAXABLE ESTATE  OR TRUSTS Income distribution made by the administrator of a taxable estate in favor of the heirs or by a trustee of a taxable trust in favor of the beneficiary of the trust is a special deduction against the gross income of the estate or trust. NET TRANSFER TO RESERVE FUND AND PAYMENTS TO POLICIES AND ANNUITY CONTRACTS OF INSURANCE COMPANIES.  Non- life insurance companies are required to maintain a reserve equivalent to 40% of their gross  premium, less returns and cancellations for risks expiring within one year.

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DIVIDEND DISTRIBUTION OF A REAL ESTATE INVESTMENT TRUST (REIT) It is publicly listed corporation established principally for the purpose of owning income- generating real estate assets. A REIT is legally mandated to distribute 90% of its distributable income as dividends to shareholders.  Under RA 9856, the dividend distributions of REITS  are treated as special deductions against gross income TRANSFER TO RESERVE FUND OF COOPERATIVES.  Under RA 9520, cooperatives are required to maintain reserves for their protection and stability  Exempt from income tax but are subject to tax on their income from unrelated activities

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THE EXPANDED SENIOR CITIZEN’S ACT OF 2003(RA 9257) Refers to any resident Filipino aged 60 years old and above. Under RA 9257 , they are entitled to 20 % discount in certain establishments such as hotels and similar lodging establishments, restaurants, recreational centers and other places of cultures, drugstores, and services such as medical , dental , domestic air , sea and land transport  , etc. The discount granted are allowed as special deductions against gross income. DISCOUNTS TO DISABLED PERSONS (RA 7277) Pertains to individual suffering from restrictions or different abilities as a result of mental, physical or sensory impairment to perform an activity . Similar to senior citizens, persons with disability are entitled to a 20% discount from certain establishments such as hotels and similar lodging establishments, restaurants, sports and recreation centers, places of culture, leisure and amusement  and etc.

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ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR CITIZEN EMPLOYEES Under RA 9257, private establishments employing senior citizens shall be entitled to additional deduction from gross income equivalents to 15 % of the total amount paid as salaries and wages to senior citizens. The 15% additional deduction is definitely not an actual expense, but is allowed by law merely as an incentive for employers who consider senior citizens for employment. ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR PERSONS WITH DISABILITY  Private entities that employ disabled persons who meet the required skills or qualifications, either as regular employees, apprentices or learners, shall be entitled to an additional deduction, from their gross income, equivalent to 25% of the total amount paid as salaries and wages to disabled persons.

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COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS Under RA 7277,private entities that improve or modify their physical facilities in order to provide reasonable accommodation for disabled persons shall also be entitled to an additional deduction from their income equivalent to 50% of the direct costs of the improvements or modifications . ADDITIONAL TRAINING EXPENSE UNDER THE JEWELRY INDUSTRY DEVELOPMENT ACT OF 1998.   Under RA 8502 and its implementing rules and regulations, a qualified jewelry enterprise duly registered and accredited with the Board of Investments (BOI) is entitled to an additional deduction from taxable income of 50 % of the expenses incurred in training schemes approved by TESDA.

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ADOPT-A-SCHOOL ACT OF 1998 (RA 8525) Under the Adopt-a- School Program, private entities are allowed to assist a public school in particular aspects of their educational program within an agreed period of time.

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EXPANDED BREASTFEEDING PROMOTION ACT OF 2009(RA 10028) The purpose is to encourage, protect and support the practice of breast-feeding which is believed to provide distinct benefits to the mother and the infant aside from saving the country’s valuable foreign exchange that may otherwise be used for milk importation. TAX DEDUCTION INCENTIVES The expenses incurred by a private health institution in complying with the rooming-in and breast- feeding practices shall be deductible  expenses for income tax purposes up to twice the actual amount incurred.

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FREE LEGAL ASSISTANCE (RA 9999) Lawyers or professional partnerships providing pro –bono legal services are given deduction incentives for their free legal services.  TAX DEDUCTION INCENTIVES The practicing lawyer or professional partnership shall be entitled to an allowable deduction from gross income equivalent to the amount that could have been  collected for the actual performance of the actual free services rendered or up to 10% of gross income derived from the actual performance of the legal profession whichever is lower.

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ADDITIONAL PRODUCTIVITY INCENTIVE BONUS EXPENSE  Under the productivity incentive act of 1990(RA 6971), a business enterprise which adopts a productivity incentive program is entitled to a special additional deduction equivalent to 50% of the total productivity bonuses given to employees under the program.  NOTE:  The incentive on special studies covers rank and file employees only.  The cost of the special studies will not be subject to regular tax or fringe benefit tax as they are granted for the convenience of the employer.

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Net operating loss (NOL) pertains to the excess of allowable deductions over the gross income from business or exercise of a profession during a taxable year. Net operating loss carry over (NOLCO) pertains to the amount of net operating  loss that is allowed by the law to be carried over as deduction against available net income in the following three years.

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Who can claim NOLCO ? All taxpayers subject to tax on taxable income whether at the regular income tax or at preferential tax rate can deduct NOLCO. Taxpayers who are exempt, enjoying tax holiday, subject to tax on gross income, or those subject to final income tax, cannot deduct NOLCO. Rational of the Disallowance Of Carry-over of Net Operating Loss Deductions are of no benefit to the taxpayer in an exempt year. Hence, the net operating loss from an exempt year should not be given value by carry- over as this would cause undue enrichment o the taxpayer. NOTE:  NOLCO carry over is allowed in 2019 since there is no substantial change in ownership but not allowed in 2020 since there is change in at least 75% in the ownership of the business. Rationale of the Rule on Substantial Change in Ownership  NOLCO is granted as an incentive to the taxpayers to enable them to recoup their losses before they become fully subject to income tax. Without this incentive, income tax would become a tax on capital.

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Total gross revenue				   ₱  345,000 Multiply: Senior citizens’ discount  under RA 9257 				           20% Special itemized deduction for Senior citizens’ discounts   			  ₱   69,000

A fitness gym catering to senior citizens recorded a total gross revenue of  ₱ 345,000 from senior citizens. The gym provides 24% discount in excess of the legal requirements. What is the deductible amount of senior citizen’s discount?

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Senior citizen employee with salary 			 ₱  182,000 grade within the poverty level Multiply: Special allowable itemized deduction		           15% Additional compensation expense under RA 9257 		 ₱   27,300

Germania Inc. employs three seniors citizens as regular employees. Two of them are receiving the minimum wage which is within the poverty level. Total minimum wages paid to these senior citizen employees during the year were  ₱  182,000. One of the senior citizen employees is a director of the compony who was paid  ₱   780,000 compensation during the year. Compute the deductible additional compensation expense.

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An employer hied two senior citizens during the year as temporary replacements for its two staffs who were on leave. Both senior citizens were paid salaries not in excess of the poetry level.  Mang   Pandoy , substituted for an employee who went on one year sabbatical leave.  Mang   Pandoy  received a total of   ₱ 144,000 during the year.  Aling  Maria substituted for an employee who filed for maternity leave for 3 months.  Aling  Maria received a total of    ₱ 28,000 during the year. Compute the total deductible additional compensation expense.

Senior citizen employee with salary grade not in excess of the poverty level		   ₱      144,000 Multiply: Special allowable itemized deduction                      15% Additional compensation expense  under RA 9257			 		   ₱     21,600

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Total deduction allowable to the trust for the income distribution 		 		 ₱           0

Mr.  Bakilan  irrevocably designated in trust his investment portfolio consisting of domestic stocks and bonds. The dividend income from the stocks shall be distributed to the beneficiary while the interest on the bonds shall be accumulated. During the year, the portfolio earned  ₱  200,000 interest and  ₱ 135,000 dividends, net of final tax.   Compute the deduction allowable to the trust for the income distribution.

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A  grantor irrevocably designated in trust a real property in favor of a beneficiary. Under the trust indenture, 20% of the trust gross income shall be distributed to the beneficiary. The trustee shall be paid 5% of the gross income as management fee. During the year, the trust collected ₱ 810,000 rent income, net of 10% creditable withholding taxes. The trust recorded ₱ 350,000 in expenses.

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TO COMPUTE FOR THE DEDUCTIBLE AMOUNT OF INCOME DISTRIBUTION TO FUND:

Rent Income, net					               ₱   810,000 Divide: Percentage of legally mandated distributable income under RA 9856			           90% Gross income			 			   900,000 Less: Trust recorded expenses				   350,000           Management fee (900,000x5%)		                     45,000 Total Gross Income					   505,000 Multiply: Percentage under the trust indenture	                         20% Deductible amount of income distribution to the fund         ₱   101,000

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The required reserved for an insurance company was    ₱ 3,200,000 as of December 31, 2013 and    ₱ 3,500,000 as of December 31,2014. What is the deductible amount of transfer to the reserve fund.

Required reserve (2014) ₱  3,500,000 Less: Required reserve (2013) 3,200,000 Deductible amount of transfer to reserve fund ₱     300,000

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A  real estate investment trust (REIT) earned ₱4,100,000 from property rentals. Total business expenses were ₱2,100,000. assuming the REIT declared the mandatorily required dividend distribution, what is the amount of deductible dividend against gross income?

Earned REIT ₱  4,100,000 Less: Total business expenses 2,100,000 Gross Income 2,000,000   Multiply by: Mandatory Divided Distribution 90%  Deductible dividend against gross income   ₱  1,800,000

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A cooperative transacting business only with its members is on its third year of operation. It reserves 50% of its operating income in compliance with the new CDA regulation. During the year, it reported a total operating income of ₱ 3,00,000 inclusive of ₱2,400,000 income from related activities. Compute the deductible amount of transfers to reserve against gross income.

Operating income ₱  3,000,000 Less: Income from related activities 2,400,000 Net Income 600,000 Multiply by: Reserves from operating income                                                                                    50% Deductible amount   ₱     300,000

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An establishment granting senior citizens 25% discounts recorded the following sales during the period.

COMPUTE FOR DEDUCTIBLE SENIOR CITIZEN DISCOUNT:

Gross sales (senior citizen) ₱  800,000 Multiply by: Senior citizen discount rate 20% Deductible senior citizen’s discount ₱  160,000

Regular  Senior Citizen Gross Sales 8,000,000 800.000 Cost of sales 5,000,000 400.000

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A restaurant granted 25% discounts to senior citizens in excess of the 20% mandatory requirement. During the year, the restaurant reported receipts of ₱ 93, 750 from senior citizen customers.  Compute the deduction of senior citizens’ discount.

Reported receipts ₱  93,750 Divided by: 75% Total receipts 125,000 Multiply by: Senior citizen discount rate 20% Deductible senior citizen’s discount ₱  25,000

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An employer embarked on a socio-economic  program named “ A World Empowered by Persons with Disability.” Under the ambitious program, the employer established a business which is fully manned by persons with disability. The employer incurred P300,000 in workplace improvements specially designed for its disabled employees. The business venture turned very profitable due to overwhelming public sympathy. During the year, the employer paid P2,100,000 in compensation expense. Compute the additional deductible compensation expense.

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Compensation  expense Multiplied by  Additional deductible compensation  ₱ 2,100,000             25% ₱  525,000

TO COMPUTE FOR ADDITIONAL DEDUCTIBLE COMPENSATION EXPENSE :

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In the immediately preceding problem, what is the deductible additional expense for the improvements made for the employees with disability?

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Improvement cost  Multiplied by  Deductible additional expense   ₱ 300,000          50% ₱  150,000

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In 2016, Bernard  Bakilan , a practicing lawyer, adopted a public elementary school and contributed P500,000 for the acquisition of computer equipment and software. Bernard had an operating income of P900,000 before this contribution expense. Assuming the “Adopt-a-School Program” is an investment priority program of the government in 2016, compute Bernard’s additional contribution expense and net income respectively.

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Acquisition Cost Multiplied by  Additional contribution  ₱  500,000             50% ₱  250,000

COMPUTATION FOR ADDITIONAL CONTRIBUTION EXPENSE AND NET INCOME RESPECTIVELY :

Operating  Income Less Acquisition cost  Additional contribution Net Income  ₱  900,000 500,000    250,000 ₱   150,000

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In the preceding problem, compute Bernard’s additional contribution expense and  net income, respectively, if the “Adopt-a-School Program” is no longer a government priority program in 2016.

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Operating  Income Less (900,000 x 10%) Additional contribution Net Income  ₱  900,000 90,000    250,000 ₱   560,000

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Binondo   Jewellery  is a qualified jewelry enterprise registered with the Board of Investments. In order to modernize its jewelry making business, it instituted an in-house training program and hired external experts to train its employees. The program was duly approved by TESDA. The program cost P300,000 during the year. What is the deductible amount of additional training expense?

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Program Cost Multiplied by  Deductible Amount ₱  300,000             50% ₱  150,000

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Girl Power Corporation employs purely women. It installed a lactation station at a total cost of P350,000 and secured a “Working Mother-Baby-Friendly Certificate” from the Department of Health. Compute the additional deduction under the Rooming-in and Breastfeeding Practices Act.

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Total Cost Multiplied by  Additional deduction  ₱  350,000             100% ₱  350,000

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A government provincial hospital established a milk bank at a cost of ₱ 1,000,00. Determine the additional deduction incentive it is allowed under the Rooming-in and Breastfeeding Practices Act.

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In the immediately preceding problem, what would be the additional deduction assuming the hospital is a proprietary medical center?

Additional Deduction: Cost of establishing milk bank (1,000,000 x 100%)   			 ₱ 1,000,000

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Atty.  Midsayaf  is a practicing lawyer in the remote provinces of Mindanao. During the year, he provided 180 actual hours for pro-bono services inclusive of 60-hour mandatory legal and aid services to indigent clients. These services would have been billed ₱ 1,000 per hour if rendered to paying clients. Atty  Midsayaf  has a ₱ 1,400,000 gross income during the year exclusive of ₱ 20,000 interest on his savings deposit. Compute the special deduction for the free legal services.

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To compute for special deduction for the free legal services:

Gross Income 1,400,000 Multiply by: Limit rate         10% Deductible limit ₱  140,000 Add: Payment of services           Payment per hour   1,000         Multiply by: Actual hrs.-Mandatory hrs.           (180 actual hrs. - 60 mandatory hrs.) 120 hrs.                                       ₱  120,000 Special “free legal service expense” (lower) ₱  120,000

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Curaratnit ,  Bolalatsing  & Associates, a law firm, earned an operating income of ₱ 8,000,000, net of ₱ 6,000,000 administrative expenses and ₱ 12,000,000 direct cost of services. During the year it represented selected clients under its free legal assistance program. The value of these services would have been ₱ 1,500,000. It also represented indigent clients for free, the value of which would have been ₱ 400,000. Compute the special deduction for free legal services.

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Actual value of pro-bono services ₱  1,500,000     Operating income 8,000,000 Add: Administrative expense 6,000,000 Gross income from operation 14,000,000 Multiply by: Limit rate             10% Deduction Limit ₱  1,400,000 Special “free legal service expense” (lower) ₱  1,400,000

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An employer paid a total of   ₱ 800,000 productivity incentive bonus to its production workers. What is the additional productivity incentive bonus expense?

Total productivity ₱  800,000 Multiply by: Productivity incentive rate 50% Additional productivity bonus expense ₱  400,000

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An employer provides manpower training and special studies to its rank and file employees at a total cost of ₱200,000. The in-house program was accredited by TESDA. What is the deductible additional productivity incentive bonus expense?

Total cost of training and special studies ₱    200,000 Multiply by:  50% Additional expense on employees training and studies ₱    100,000

To compute for deductible additional productivity incentive bonus expense:

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NOLCO

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