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    Special Itemized Deductions, NOLCO & OSD

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    dianne caballero
    The document discusses special allowable itemized deductions under Philippine tax law, including deductions for income distributions from trusts, transfers to insurance company reserves, REIT dividend distributions, and discounts for senior citizens and persons with disabilities. It also covers deduction incentives for additional compensation expenses and other qualifying expenses. The summary explains the rules for net operating loss carryovers (NOLCO), including requisites, carryover periods, and who can claim NOLCO. It provides an example to illustrate NOLCO and concludes with a brief overview of the optional standard deduction (OSD) and who can claim OSD.

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    Special Itemized Deductions, NOLCO & OSD

    Uploaded by

    dianne caballero
    1K views13 pages
    The document discusses special allowable itemized deductions under Philippine tax law, including deductions for income distributions from trusts, transfers to insurance company reserves, REIT dividend distributions, and discounts for senior citizens and persons with disabilities. It also covers deduction incentives for additional compensation expenses and other qualifying expenses. The summary explains the rules for net operating loss carryovers (NOLCO), including requisites, carryover periods, and who can claim NOLCO. It provides an example to illustrate NOLCO and concludes with a brief overview of the optional standard deduction (OSD) and who can claim OSD.

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    The document discusses special allowable itemized deductions under Philippine tax law, including deductions for income distributions from trusts, transfers to insurance company reserves, REIT dividend distributions, and discounts for senior citizens and persons with disabilities. It also covers deduction incentives for additional compensation expenses and other qualifying expenses. The summary explains the rules for net operating loss carryovers (NOLCO), including requisites, carryover periods, and who can claim NOLCO. It provides an example to illustrate NOLCO and concludes with a brief overview of the optional standard deduction (OSD) and who can claim OSD.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    1K views13 pages

    Special Itemized Deductions, NOLCO & OSD

    Uploaded by

    dianne caballero
    The document discusses special allowable itemized deductions under Philippine tax law, including deductions for income distributions from trusts, transfers to insurance company reserves, REIT dividend distributions, and discounts for senior citizens and persons with disabilities. It also covers deduction incentives for additional compensation expenses and other qualifying expenses. The summary explains the rules for net operating loss carryovers (NOLCO), including requisites, carryover periods, and who can claim NOLCO. It provides an example to illustrate NOLCO and concludes with a brief overview of the optional standard deduction (OSD) and who can claim OSD.

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    SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS

    A. Special expenses under NIRC and special laws


    1. Income distribution from a taxable estate or trust

    2. Transfer to reserve fund and payments to policies and annuity contracts


    of insurance companies

    3. Dividend distribution of a REIT under RA 9856

    4. Transfer to reserves funds of taxable cooperatives

    5. Discounts to senior citizens under RA 9257

    6. Discounts to PWDs under RA 9442

    B. Deduction incentives under special laws


    1. Additional compensation expense for SC employees

    2. Additional compensation expense for PWD employees


    3. Cost of facilities & improvements for persons with disability
    4. Additional training expense under Jewelry Industry Development Act
    5. Additional contribution expense under Adopt-a-School program

    6. Additional deductions for compliance to rooming-in and breast-feeding


    practices

    7. Additional free legal assistance bonus expense

    8. Additional productivity incentive bonus expense under RA 6971

    C. Net-operating loss carry over (NOLCO)


    – arises when Allowable deductions exceeds Gross income;
    Requisites for deductibility of NOLCO
    * Carried over for the next 3 immediately succeeding years;
    *  Forms part of deductions as a special allowable deduction upon
    application;
    *  Applied on first-in first-out basis (FIFO);
    *  Not applicable under OSD;
    *  Not applicable against MCIT;
    *  Not transferable except in merger and consolidation where NOLCO
    of absorbed is transferred to the surviving corporation.

    Who can cIaim NOLCO?


    All except exempt taxpayers.

    Net operating loss (NOL) - Excess of allowable deduction over gross income
    of the business in a taxable year.
    Net operating loss carry over (NOLCO) - Pertains to net operating loss of
    the business or enterprise for any taxable year immediately preceding the
    current taxable year.

    (1) The operating loss had not been previously offset as deduction from
    gross income;
    (2) There has been no substantial change in the ownership of the
    business or enterprise in that:
    (a) not less than 75% in nominal value of outstanding issued shares, if
    the business is in the name of a corporation, is held by or on behalf of the
    same persons;
    (b) not less than 75% of the paid up capital of the corporation, if the
    business is in the name of a corporation, is held by or on behalf of the same
    persons.
    Carry over period - The net operating loss shall be carried over as a
    deduction from gross income for the next 3 succeeding taxable years
    immediately following the year of such loss.
    Net operating loss for mines other than oil and gas wells
    (1) For mines other than oil and gas wells, a net operating loss incurred in
    any of the first 10 years of operation may be carried over as a deduction
    from the taxable income for the next 5 years immediately following the
    year of such loss.

    (2) The entire amount of the loss shall be carried over to the first 5
    taxable years following the loss, and any portion of such loss which exceeds
    the taxable income of such first year shall be deducted in like manner from
    the taxable income of the next remaining 4 years.
    Requisites

    The amount of distribution is in accordance with the trust indenture


    Provided, the income is included in gross income subject to regular income tax
    Income subject to final tax are non-deductible

    40% of gross premium net of returns and cancellations for risks

    The mandated dividend distributions of 90% of distributable income

    10% of profit from unrelated activities

    20% of gross selling price, net of VAT


    20% of gross receipts grossed up for any discounts provided.

    20% of gross selling price, net of VAT


    20% of gross receipts grossed up for any discounts provided.

    Deduction incentive
    15% of salaries to senior citizen
    Requisites: Available only to Senior Citizens with salaries below the poverty level
    25% of salaries paid to PWDs
    50% of the cost of improvement
    50% of training expense
    50% of the contribution
    Requisites:
    Must be a public school
    Basis:
    For cash - the actual cost of cash assistance, contributions or donations
    For PP - acquisition cost
    For RP - lower of FV and depreciated cost
    Consumables - lower of acquisition cost and value at date of donation

    100% of the compliance expense


    Provided, the facility claiming such is not exempt from tax.
    Net of fees collected from patients
    Value of pro-bono services
    *Exclusive of the 60-hour mandatory free legal assistance
    50% of total productivity incentive bonus
    50% on local training and special studies of rank-and-file employees
    Deduction limit
    None

    None
    None
    None
    None

    None

    10% of gross income

    None
    NOLCO (NET OPERATING LOSS CARRY OVER)
    Illustration:

    A taxpayer had the following:


    Year 1 Year2 Year 3 Year 4
    Gross income 450,000 360,000 440,000 420,000
    Allowable Deductions 530,000 430,000 410,000 360,000
    Net income -80,000 -70,000 30,000 60,000

    The income to be reported in year 2 is


    The income to be reported in year 5 is
    The income to be reported in year 6 is
    If the taxpayer is an exempt entity when it started business in year 1, the NOLCO in year 3 is
    Y OVER)

    Year 5 Year 6
    490,000 410,000
    410,000 380,000
    80,000 30,000

    O in year 3 is
    OSD (OPTIONAL STANDARD DEDUCTION)
    Persons covered
    The following may be allowed to claim OSD in lieu of the
    itemized deductions

    Summary rules

    1) Basis

    2) Rate
    3) Cost of sales/Cost of services
    4) Choice of OSD (irrevocable)
    5) Submission of financial statements

    6) Keeping of records

    7) Hybrid method (partly itemized deductions partly OSD)

    8) Computation of taxable net income using OSD


    INDIVIDUALS CORPORATIONS

    (1) Resident citizen (1) Domestic corporation


    (2) Non-resident citizen (2) Resident foreign corporation
    (3) Resident alien (3) Resident alien
    (4) Taxable estates and trusts

    Corporation General Prof. Partnership

    Gross income Gross income

    40% 40%
    Deducted Deducted
    To be signified in the return To be signified in the return
    Required Required

    Required pertaining to gross income Required pertaining to gross income

    Not allowed Not allowed


    GS/GR xxx GS/GR xxx
    Less: Ret and allow xxx Less: Ret and allow xxx
    Discounts xxx xxx Discounts xxx xxx
    Net sales xxx Net sales xxx
    Less: COS xxx Less: COS xxx
    Gross income xxx Gross income xxx
    Other income xxx Other income xxx
    Total xxx Total xxx
    Less: OSD xxx Less: OSD xxx
    Taxable net income xxx Taxable net income xxx
    NOT ALLOWED

    (1) NRA-ETB
    (2) Taxpayers mandated to use RAID &SAID

    Individuals
    Gross sales/Gross receipts/Gross
    revenue for those selling services under
    accrual basis
    40%
    Not deducted
    To be signified in the return
    Not required
    Required pertaining to gross
    sales/receipts
    Not allowed
    GS/GR xxx
    Less: Ret and allow xxx
    Discounts xxx xxx
    Net sales xxx
    Other income xxx
    Total xxx
    Less: OSD xxx
    BPE xxx
    AE xxx xxx
    Taxable net income xxx
    A, a retailer of goods uses the accrual method in reporting his income and expenses. His 2020 transactions

    Jan. 1 - June 30 Jul 1 - Sept. 30


    Gross Sales P1,000,000 P700,000
    Cost of Sales 600,000 200,000
    Business expenses 100,000 50,000

    For the period January 1 to June 30, 2010, he used the itemized deduction but decided to use the optional

    A.    P1,560,000 C. P1,020,000


    B.    P 900,000 D. P1,320,000

    RLG Corporation, a retailer of goods uses the accrual method of accounting in reporting its
    income and expenses under the calendar year basis. From January 1 to June 30, 2020, it used the itemized d

    Jan. 1 - June 30 Jul 1 - Sept. 30

    Gross Sales P1,000,000 P700,000


    Cost of Sales 600,000 300,000
    Business expenses 100,000 50,000

    The net income of RDG is


    A.    P1,560,000 C. P800,000
    B.    P 660,000 D. P720,000
    expenses. His 2020 transactions show:

    Oct.1 - Dec 31
    P900,000
    300,000
    70,000

    n but decided to use the optional standard deduction beginning July 1. B’s annual income tax return using the optional standar

    ne 30, 2020, it used the itemized deduction but decided to use the optional standard deduction method when it filed its annua

    Oct.1 - Dec 31

    P900,000
    600,000
    150,000
    ncome tax return using the optional standard deduction will show a net income before exemptions of

    d deduction method when it filed its annual income tax return. Its 2010 transactions show:

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