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get the estimated value of the building at the end of the lease term
whatever is the estimated value of the building at the end of the lease term
will be spread out during th term of the lease
(9) Under the old OSD, for individuals it is 10% of the gross income only
Now, it has been tremendously increased to 40%, and even based on gross sale
40% of 1M = 400k
Income is 0, no liability for taxes
Corporate taxpayer
(11) If the taxpayer claims the OSD, that means that he is waiving to claim the itemized
7. If the taxpayer does not want the OSD, then he can claim the itemized, for as long as the
taxpayer is entitled to a deduction
Only taxpayers who are engaged in trade or business or practice of profession, are the ones
allowed to claim a deduction
8. ITEMIZED DEDUCTION (Sec 34)
9. Expenses
(2) Ordinary those that are reasonably incurred in connection with business
(3) Necessary those that have the tendency of reducing cost or expenses or increasing
profits
(4) Ordinary
1)salaries and wages of employees
2)water
3)administrative expense
Capital expenditures are those extraordinary expenses where the benefit of the
taxpayer will be felt for more than 1 year
2)Construction of a building
3)Permanent improvements
4)Purchasing of machineries
5)Equipments, furniture, fixtures
6)Delivery trucks
Capital expenditures are not business expense. These are considered as assets of the
taxpayer
What to do with them is that, if they are depreciable, then subject them to depreciation
expenses
They can declare as outright business expense their capital expenditure if the capital
expenditure is for the purpose of school expansion
If the capital expenditure is for the purpose of school expansion, then the capital
expenditure may be treated as business expense of a proprietary educational institution
(6) Advertising expenses
Kraft said that advertising tends to increase profit, and therefore should be treated as
business expense
10. Interest
it is not just something that is estimated to be worthless, but it must be something that
is proven to be worthless
12. Taxes
(1) it is deductible if the taxes is in connection with the taxpayers trade or business or the
practice of profession
1)income tax
2)estate or donors tax
3)special assessment
No
Under the old Senior Citizens Law, the discount was granted as a tax credit
Under the new Senior Citizens law, the discount now is a tax deduction
GI AD = NI
NI x TR% = TD
TD TC = NIT
If one does not have income, then tax credit will be useless
But if it is tax as a deduction, what will be affected will be the determination of the net
income
If GI is 10M and the allowable deduction is 15M, and tax as a deduction amounts to 5M.
So the total allowable deduction is 20M. the effect is that there will be net loss
amounting to 10M pesos
But because there is a net loss, one can avail of the principle of the net operation loss
carry over
This is the big difference between tax as a deduction, and tax as a credit
13. Depreciation
(1) it is the estimated amount of the normal wear and tear of an asset
(3) If one has an asset, and one is using it, its value is diminishing by reason of its use
(4) Lands do not diminish in value by reason of its use. So, one does not depreciate land
14. Depletion
(2) wasting asset corporations are those engaged in extraction or utilization or exploitation
of natural resources
So whenever one extracts oil, his deposit of oil in a particular place is depleted. And that
is the reason for the deduction
15. Losses
1)Ordinary loss
2)Capital loss
(2) Ordinary loss is a loss arising from a dealing with an ordinary asset
(3) Capital loss is a loss arising from a dealing with a capital asset
1) stocks in trade
(5) Those in the warehouse intended for sale are ordinary assets
(7) It is not true that a if a property arises by being in a business, it is already ordinary
They are capital because they will not fall under any of the items mentioned
The 5M loss, because it is a loss arising from business, is called operating loss
If one has a delivery truck, and it is worth 1M, and it was sold for 800k, there was a loss
of 200K, that is an ordinary loss, and that will form part of the AD
But the accumulated AD in excess of the Gross income, is classified as the operating loss
If the taxpayer has an operating loss, the taxpayer is not normally liable for tax, because
anyway taxpayer suffered loss
The operating loss of 5M, may lead to a possible claim for a net operating loss carry over
The net operating loss of a taxpayer may be carried over as a deduction from the gross
income for the next 3 succeeding taxable years
(9) The 5M operating loss can be claimed as a deduction in the succeeding years
2)losses during the year a tax payer is exempt, cannot be removed from gains
during that year when the tax payer is taxable
Because if the loss was incurred during the year a tax payer is exempt, that
cannot be claimed as a deduction during the year when he became taxable
Can X claim the NOLCO rule, because that is a right of the dissolving corporation
which by reason of the merger was transferred to X corporation?
No
They merged
D owns 15 percent
E owns 15 percent
F owns 5 percent
G owns 5 percent
There is no compliance.
The new X corporation cannot claim the application of the NOLCO rule
Rules
1) 6% of the selling price of FMV whichever is higher
3) Apply only the first 2 rules if the property is a real property or a share of
stock
If they are not real property or share of stock, then apply the following
special rules:
4) Special rules
1) loss limitation rule
2) holding period rule
3) net capital loss carry over rule
Selling price is 1M
Cost to him is 1.5 million
There is a loss
The loss is 500k, it is a capital loss
Allowable deduction 9m
Can the capital loss in the ring cannot affect the net income of 1M
If the asset has been held for short term holding period, any gain or loss shall
be recognized at the extent of 100%
But if it is for a long term period, any gain or loss will be recognized only to the
extent of 50%
Capital transactions:
Short term CG 3M
Long term CL 5M
NCLCO
Under this rule, whatever is the net capital loss of the taxpayer during the
year, which cannot be removed from his ordinary income, by reason of the
loss limitation rule, may be carried over as a deduction from the capital gains
during the next succeeding taxable year (1 year only), in an amount not to
exceed the taxable income during the year the loss was sustained
2011
GI 10M
AD 9M
NI 1M
Capital transactions:
Short term capital gain 2M
Long term capital loss 8M
Short term capital gain will be recognized to the extent of 100%, so that is 2M
Long term capital loss will be recognized to the extent of 50%, so that is 4M
Will this net capital loss affect the liability of tax with respect to the income of
1M?
The liability during year loss was incurred will still be based on 1M net income
CT:
STCG 2M
LTCL - 0
NCG = 1M (because the 1M LTCL from previous year was deducted)
So the net capital loss carry over shall be limited only to 1M pesos
Net capital gain of 1M will be added to the gross net income of 15M
If it is a corporate tax payer, only the loss limitation rule will apply
The holding period rule, and the net capital loss carry over rule is not
applicable to corporate taxpayer
9) X bought a house and lot in LA. He bought it in year 2000 in the amount of
10M. In 2010, the property he sold it for 20M.
What is the effect of this in connection with the tax liability of X during this
year?
It is still a gain
Individual taxpayer:
After the NI, there is need to reduce tax base of a taxpayer by reason of his personal exemptions
A basic personal exemption is the amount equivalent to the basic subsistence of a person
Meaning, with that amount one can survive a minimum or basic subsistence
For spouses, it is the husband who can claim the additional exemption
Except, if the husband waives, or if he is not earning anything, or the husband is earning those
amounts that is already excluded by taxation
Then under those circumstances, then it is the wife who can claim the additional exemption
But it cannot be both the husband and the wife. Only one will be able to claim
For those who are not married, if one has a qualified dependent child, then he can claim an
additional exemption
4) not married
5) not gainfully employed
6) not over 21 years of age
Those who are over 21 are no longer qualified, unless the child is physically and mentally
unable of rendering self support
If a child was born almost at the end of the year, is he qualified to be a dependent for the
entire year?
Yes
Yes
Those changes that are favorable to the taxpayer will immediately be considered.
But those changes that are not favorable to the taxpayer will not yet be considered on that year
that it has taken place. It will be considered the following year
Whatever is the status at the end of the year, shall be determinative of the qualification
If X and Y are not married, and their child is A, and at the beginning of the year, A is residing with
A. But there was an agreement that A will permanently reside now with Y
We did not apply the rule that favorable changes are considered and unfavorable changes are
not yet considered (Sec 35c)
This is because it is a situation not found in 35c (that the taxpayer marries, or should have
additional dependents)
From NI PE = TI
From TI, apply the rates in the tax code
Corporate taxpayer
If the corporation is an ordinary taxpayer, subject to the normal tax rate, multiply it with 30%
and that is the tax liability of the corporation
part 4 Barlis
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