Income-Taxation Compress

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER
(NOLCO)
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS

Special deductions are 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 . Special deductions
include deduction incentives to taxpayers in assisting and in complying with certain legal
requirements.
Special Allowable Deductions

A. Special expenses under the NIRC and special laws
1. Income distribution from a taxable estate or trust
2. Transfer to reserve fund and payments to policies and annuity contract of insurance
companies
3. Dividend Distribution of a Real State Investment Trust ( REIT ) under RA 9856
4. Transfer to reserve funds of taxable cooperatives
5. Discounts to Senior citizens under RA 9257
6. Discounts to persons with disability under RA 9442
B. Deductions Incentives under special laws
1. Additional compensation expense for senior citizen employees under RA 9257
2. Additional compensation expense for persons with disability under RA 7277 , as
amended by RA 9442
3. Cost of facilities improvements for persons with disability in accordance with RA
7277, as amended by RA 9442
4. Additional training expense under the RA 8502 – Jewelry Industry Development Act
1998
5. Additional contribution expense under the Adopt-a-School program under RA 8525
6. Additional deductions for compliance to rooming-in and breast-feeding practices under
RA 7600 , as amended by RA 10028
7. Additional free legal assistance expense under RA 9999
8. Additional productivity incentive bonus expense under RA 6971
SPECIAL EXPENSES UNDER THE NIRCOR SPECIAL LAWS

INCOME DISTRIBUTION MADE BY TAXABLE ESTATES OR TRUST
Income distribution made by the administrator of a taxable estate in favor of the heirs or by
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. The income distribution shall be included by the
recipient heir or beneficiary in his gross income.
Illustration
Don Mariano transferred a commercial lot and a P1M stock investment in irrevocable trust in
favor of his son, Ritchie. The trust earned the following income in 2020:
(NOLCO)
Rent income on the lot P 1,200,000

Less: Leasing Expenses 200,000
Rental net income P 1,000,000
Dividend Income, net of final tax 36,000
Trust net income P 1,036,000
In accordance with the trust indenture, the trustee distributed half of the gross rentals and
the entire dividends to Ritchie.
Special deductions
The special deductions is P600,000 , the half of the gross rentals given to Ritchie . The
distribution of the P36,000 dividend to Ritchie shall not be deductible as this is not
included in the gross income of the trust for purposes of the regular income tax.
The net income of the trust be computed as follows:
Gross rent income P 1,200,000

Less:
Regular allowable deductions P 200,000
Special allowable deductions
Income Distribution to beneficiary 600,000 800,000
Net income 400,000
NET TRANSFER TO RESERVE FUND AND PAYMENTS TO POLICIES AND

ANNUITY CONTRACTS OF INSURANCE COMPANIES
Under the Insurance Code, 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. For marine cargo risks, the reserve so equivalent to the amount of premium
on insurance during the last two months of the calendar year.
The net addition, if any, required by law to be made within the year to the reserve funds and
the sums, other than dividends, paid within the year on policy and annuity contracts may be
deducted from the gross income of insurance companies.
Under current regulations, the transfer to the reserve fund shall be deductible in the year it
was actually paid and not in the year it was determined . Also, in consonance with the tax
benefit rule, the release of the reserve is treated as an income in the year of release
Illustration
The following relates to the performance of an insurance company:

(NOLCO)
2018 2019 2020

Premium Revenue P 2,100,000 P 3,000,000 P 2,500,000
Premiums ceded 420,000 600,000 500,000
Claims expense 200,000 800,000 1,000,000
Commission expense 100,000 300,000 250,000
Administrative expenses 300,000 350,000 340,000
Required legal reserves 672,000 960,000 800,000
Required: Determine the special deductions and the net income assuming that the required
transfers to the reserve funds were made in the same year.
Solution: The net amount which will be paid to or released from the reserve fund is
computed as follows:
2018 2019 2020

Required reserves P 672,000 P 960,000 P 800,000
Less: prior year-reserve 0 672,000 960,000
Amount payable (receivable) P 672,000 P 288,000 (P 160,000)
To simply our illustration, let us assume that the contribution to the reserve were paid in the
same year they were determined.
The net income of the insurance company shall be computed as follows:
2018 2019 2020

Premium revenue P 2,100,000 P 3,000,000 P 2,500,000
Less: premiums ceded 420,000 600,000 500,000
Net premiums P 1,680,000 P 2,400,000 P 2,000,000
Release from reserve - - *160,000
Gross income P 1,680,000 P 2,400,000 P 2,160,000
Less:
Regular allowable deductions
Claims expense P 200,000 P 800,000 P 1,000,000
Commission Expense 100,000 300,000 250,000
Administrative expense 300,000 350,000 340,000
Total P 600,000 P 1,450,000 P 1,590,000
(NOLCO)
Special allowable deduction

Payment to reserve 672,000 288,000 -
Total deductions P 1,272,000 P 1,738,000 P 1,590,000
Net income P 408,000 P 662,000 P 570,000
Note: The release of reserve from the reserve fund is included in gross income.
DIVIDEND DISTRIBUTION OF A REAL ESTATE INVESTMENT TRUST (REIT)

A REIT is a 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.
For purposes of computing the taxable net income of RETs, dividends distributed by them from
their distributable income after the close of taxable year and on or before the last day of the fifth
month following the close of the taxable year shall be considered as paid on the last day such
taxable year.
TRANSFER TO RESERVE FUND OF COOPERATIVES

Under RA 9520, cooperatives are required to maintain reserves for their protection and stability.
Cooperatives are exempt from income tax, but are subject to tax on their income from unrelated
activities. The amount transferred by the cooperative to the reserve fund out of the net surplus
from unrelated activities is an item of deduction in the computation of the taxable net income of
the cooperative.
Illustration
Lowland Coop summarized the following income and expenses from its exempt related activities
and taxable unrelated activities:
Related Act. Unrelated Act. Total
Sales P 2,000,000 P 1,000,000 P 3,000,000

Cost of sales 1,200,000 600 ,000 1,800,000
Gross income P 800,000 P 400,000 P 1,200,000
Operating expenses P 500,000 P 150,000 P 650,000
Net income P 300,000 P 250,000 P 550,000
In compliance with the Cooperative Development Act, Lowland Coop appropriates 10% of profit
to the reserve fund, plus additional 40% to other required and optional funds.
(NOLCO)
The amount of special deduction and the taxable net income of the cooperatives shall be
computed as:
Gross sales from unrelated activities P 1,000,000

Cost of sales 600,000
Gross income from unrelated activities P 400,000
Less: Regular itemized deductions 150,000
Net income before statutory reserves P 250,000
Less: Special itemized deductions
Appropriation to reserve fund ( P250K x 10% ) 25,000
Taxable net income P 225,000
Note: Only the appropriation for the reserve fund is deductible as a special expense. The 40%
appropriations for other cooperatives funds are not deductible.
THE EXPANDED SENIOR CITIZENS ACT OF 2003 (RA 9257)
Senior Citizen or Elderly

Senior citizen or elderly refers to any resident Filipino citizen aged 60 years old and above.
Under RA 9257, A senior citizen or elderly is entitled to 20% discount in certain

establishments such as hotels and similar lodging establishments, restaurants, recreational centers
and other places of culture, leisure and amusements, hospitals, drugstores, and services such as
medical, dental, domestic air, sea and land transport, and funeral or burial service providers.
The discounts granted to senior citizens by covered establishments and service providers are
allowed as special deductions against gross income.
Conditions for deductibility of sales discount to senior citizens

1. Only that portion of the gross sales exclusively used, consumed, or enjoyed by the senior
citizen shall be eligible for the deductible sales discount.
2. The gross selling price and the sales discount must be separately indicated in the official
receipt or sales invoice issued by the establishment for the sale of goods or services to the senior
citizen.
3. Only the actual amount of the granted or sales discount not exceeding 20% of the gross selling
price can be deducted from gross income, net of VAT , if applicable.
4. The discount can only be allowed as deduction from gross income for the same taxable year
that the discount is granted.
5. The business establishment giving sales discount to qualified senior citizen is required to keep
(NOLCO)
a separate and accurate record of sales which shall include the name, TIN, ID, gross
sales/receipts, discount granted, date of transaction, and invoice number for every sale
transaction to senior citizens.
Illustration 1
Goodhealth Drugstore Inc. recorded a P1,200,000 total deductible expense and the following
sales :
Customerss sssssss ssssss ss
Regular Senior Citizens

Gross sales P 5,000,000 P 1,200,000
Cost of sales 3,000,000 800,000
Goodhealth adopts a policy of giving senior citizens a 25% discount. Consequently, it granted
P300,000 total senior citizens’ discounts during the period.
The taxable net income of good health shall be computed as:

Gross sales (P5M + P1.2M) P 6,200,000
Cost of sales (P3M + P0.8M) 3,800,000
Gross Income from operations P 2,400,000
Less:
Regular itemized deductions P 1,200,000
Special itemized deductions
Senior citizens’ discount
(P1.2M x 20%) 240,000 1,440,000
NOTE:
1. The gross sales to senior citizens must be reported gross of the senior citizens' discount while
the discount is presented as a separate expense
2. The claimable senior citizen discount shall not exceed 20% of the gross sales from senior
citizens. Hence, the deductible amount is P240,00 not P300,000
Illustration
Tasty Restaurants Corporation provides a 20% discount to senior citizens. It recorded the
following receipts during the year:
Customers s
(NOLCO)
Regular Senior citizens Total s
Receipts P 4,000,0000 P 500,000 P 4,500,000

Cost of service 2,800,000
Other deductible expenses 1,100,000
The special deduction for senior citizens’ discount and the net income of tasty Restaurant shall
be computed as :
Gross receipts [P4M + (P500K/80%)] P 4,625,000

Less: Cost of services 2,800,000
Gross income P 1,825,000
Less:
Senior Citizens’ discount
(P500K/80%) 125,000 1,225,000
Notes:
1. Receipts pertain to cash collection which are inherently net of any discount provided. Hence,
the receipts from senior citizens must first be grossed-up
2. The discount must not be deducted out of net receipts.
DISCOUNTS TO DISABLED PERSONS (RA 7277)

A person with disability pertains to an individual suffering from restriction or different abilities
as a result of mental, physical, or sensory impairment to perform an activity in a manner or
within range considered normal for human beings.
Disability pertains to physical or mental impairment that substantially limits one or more
psychological, or anatomical function of an individual or activities of such individuals.
Discount to persons with disability
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 amusements, drugstores on the purchase of
medicine, medical and dental services in private facilities , and domestic air, sea and land
transport.
The discount to persons with disability shall be allowed as a special deduction under the same
terms and conditions as those for senior citizens.
DEDUCTION INCENTIVES UNDER SPECIAL LAWS
(NOLCO)
ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR CITIZEN

EMPLOYEES
Under RA 9257, private establishments employing senior citizens shall be entitled to additional
deductions from gross income equivalent to 15% of total amount paid as salaries and wages to
senior citizens.
Conditions for deductibility of additional compensation:

1. Employment shall have to continue for at least 6 months
2. The annual taxable income of the senior citizen does not exceed the poverty level as
determined by the NEDA
The poverty line or poverty threshold pertains to the amount of income sufficient to meet basic
food and non food needs such as clothing, housing, transportation, and health among others. The
senior citizen shall submit to his employer a sworn certification that his annual taxable income
does not exceed the poverty level.
Illustration
Assume a taxpayer employs both regular and senior citizen employees and paid the following
compensation during the year:
Regular employees P 200,000
Senior citizen employees with salary grades
above poverty level 50,000
Senior citizen employees with salary grades
below poverty level 40,000
Total compensation expense P 290,000
The total deductible compensation expense shall be:
Regular employees P 200,000
Senior citizen employees 90,000
Regular salaries expense P 290,000
Additional compensation expense
under RA 9257 (P40,000 x 15%) P 6,000
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. The regular salaries
will be presented as part of regular allowable itemized deductions. The 15% additional deduction
shall be presented as special allowable itemized deduction.
Senior citizens who are above the poverty level may avail of incentives under the minimum
wage law of they qualify as minimum wage earners.
(NOLCO)
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 ab additional deduction,
from their gross income, equivalent to twenty-five percent (25%) of the total amount paid as
salaries and wages to disabled person.
Requisites for deductibility:

A. The entity present proof as certified by the Department of Labor and Employment that
disabled persons are under their employ.
B. B. The disabled employee is accredited with the Department of Labor and Employment
and the Department of Health as to his disability, skills, and qualifications.
The actual salaries shall be presented as part of regular expense shall be presented as special
itemized allowable deduction.
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 person shall also be entitled to an additional
deduction from their income equivalent to fifty percent (50%) of the direct cost 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 Investment (BOI) is entitled to an additional
deduction from taxable income of 50% of the expenses incurred in training schemes
approved by Technical Education and Skills Development Authority (TESDA). The same
shall be deductible during the year the expenses were incurred.
Conditions for deductibility:

1. A qualified jewelry enterprise must submit to the BIR a certified true copy of its
Certificate of Accredited issued by the BOI.
2. The training scheme must be approved and certified by TEDSA.
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.
(NOLCO)
The adopting private entity which may be an individual in businesses or practice of

profession, or asl corporation shall team up with the DepEd, CHED, or TESDA toward
providing much needed assistance and services to public schools.
The assistance may be an aid, contribution or donation in cash or in kind but not limited to
infrastructure, physical facilities, real estate property, training and skills development,
learning support, reading materials, computer and science laboratories, health and nutrition
packages, and assistive learning devices for students with special needs.
Qualifications of participating schools

Any government school in all levels may participate in the program. Priorities shall be given
to schools located in the poorest provinces, low income municipalities, and other local
government units experiencing severe classroom shortages, insufficient budget, or having
numerous poor but high performing learners.
Qualifications of Adopting Private Entity
1. It must have a credible track record. 2. It must have been in existence for at least one year.
3. It must mot have been prosecuted and found guilty of engaging in illegal activities such as
money laundering and others similar circumstances.
Tax deduction incentive
Contributions to the government in priority activities are deductible in full while those made
in non-priority activities are deductible subject to limit.
Aside from the usual regular deductible contribution expense, an Adopting entity shall be
allowed an additional deduction from gross income equivalent to 50% of the contribution
of the Adopting entity for the "Adopt-a-School Program".
Contributions for deductibility:

A. The deduction shall be availed for in the taxable year in which the expense is paid or
incurred.
B. The expense is substantiated with sufficient evidence such as official receipts, delivery
receipts and other adequate records with shall set forth the following:
a. The amount of expenses being claimed as deductions
b. Direct connection or relation of the expenses to the Adopting Private Entity's
participation in the Adopt-a-School Program
c. Proof or acknowledgement of receipt of the contributed or donated property by the
recipient public school
(NOLCO)
C. The application together with the approved MOA endorsed by the National Secretariat
shall be filled with the RDO having jurisdiction over the place of business of the adopting
private entity, copy furnished the RDO having jurisdiction over the property, if the
contribution is in the form of real property.
Procedures for availment

1. Memorandum of Agreement An adopting private entity shall enter into a Memorandum of
Agreement (MOA) with the head of the public school. The MOA shall specify the details of the
adoption which must be for a minimum of 2 years pre- terminable only when the Adopting
Private Entity is dissolved prior to the end of such period or when terminated for failure to
possess the qualification as such
2. Supporting Evidence The adopting entity must maintain sufficient evidence of the amount of
assistance incurred, establish the connection of the expense to the adopting entity's participation
in the program, and maintain proof of acknowledgement of receipt by the public school recipient
of the donation
3. Apply for Certificate of Tax Incentive and Tax Exemption
The adopting entity shall apply for a Certificate of Tax Incentive or Tax Exemption and submit
the following documents to the Secretariat:
a. Duly authorized or approved MOA
b. Duly notarized deed of donation
c. Official receipts and other documents showing the actual value of the contribution or
donation
d. Certificate of Title and Tax Declaration, if the donation is in the form of property e.
Other adequate records showing direct connection or correlation of the expense being claimed as
deduction to the adopting entity's participation in the program
Illustration
In 2019, Robotics Inc. entered into a memorandum of agreement with two schools to adopt them
as part of its corporate social responsibility:
Name Nature Assistance granted

Balakbak High School A public secondary school P 1,500,000
Divine World College A non-profit accredited done P 1,000,000
institution
Adopt-A-School program was designed by the NEDA as a priority program in the 2019 National
Priority Plan.
Robotics Inc. shall claim the following contributions expense as part of regular itemized
allowable deductions:
(NOLCO)
Contribution to accredited done NGO P 1,000,000

Contribution expense under RA 8525 P 1,500,000
Regular deductible contribution expense P 2,500,000
Robotics Inc. shall likewise claim the following additional contribution expense as part of
regular itemized allowable deductions:
Contribution expense under RA 8525 P 1,500,000
Multiply by: 50%
Special additional contribution expense P 750,000
Note: Only donations to public schools are allowed the additional deductions.
Regular itemized contribution expense P 800,000

Special itemized contribution expense (P800K x 50%) P 400,000
Note: The lower of the actual cost of services and the agreed value shall be considered.
Assume that the “Adopt-A-School’ is no longer a priority program in 2019, and Banawe Realty
has P9,000,000 net income before the contribution. Banawe Realty shall be allowed to deduct the
following:
Contribution expense subject to limit P 800,000
Contribution limit: 5% x P 9,000,000 450,000
Regular itemized contribution expense P 450,000
Special itemized contribution expense (P800K x 50%) P 400,000
Note:
1. For corporations, contributions to the government in non-priority activities are subject to a limit of 5% of the net income
before the contribution.
2. The basis of the additional incentives is the actual donation as valued under RR10-2003, not the amount of the regular
allowable itemized contribution expense.
Illustration 2
Victory Bus Line contributed a lot and a bus to its adopted public school. The lot shall be used
by the public school for building expansion and the bus as a school bus. The “Adopt-a-School
Program” is a national priority during the year.
The following relates to the value of the lot and the bus:
Appraisal value of lot P 5,000,000
Zonal value of the lot 3,600,000
Assessed value of the lot 2,500,000
Acquisition cost of the lot 3,000,000
Acquisition cost of the bus 2,400,000
(NOLCO)
Depreciated cost of the bus 1,500,000

Depreciated appraised cost of bus 2,000,000
The contribution expense deductible as part of regular itemized allowable deductions shall be
computed as follows
Contribution
Expense s
Zonal value P 3,600,000

Assessed value 2,500,000
Fair value of the lot (higher) P 3,600,000
Cost of the lot (LOWER) P 3,000,000 P 3,000,000
Depreciated cost of bus 1,500,000
Regular itemized contribution expense P 4,500,000
The contribution expense deductible as part of special itemized allowable deduction shall be
computed as follows:
Total value of donation P 4,500,000
Multiply by: 50%
Special additional contribution expense P 2,250,000
EXPANDED BREASTFEEDING PROMOTION ACT OF 2009 (RA 10028)

The purpose of RA 10028 is to encourage, protect , and support the practice of breastfeeding
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.
Requirements to all Establishment
Lactation station
All health and non-health facilities, establishments and institutions whether operating for profit
or non-profit which employ in any workplace nursing employees bare required to establish a
lactation station. Exemption may be granted when the establishment of a lactation station is not
necessary due to the circumstance of the workplace taking into consideration among others the
number of employees, physical size of establishments, and the average number of women who
visit.
Due substantiation shall be made by the employer to support the application for Exemption.
Private sectors may secure exemption from the Department of Labor and Employment (DOLE).
Public sectors may apply for Exemption from the chairperson of the Civil Service Commission.
The certificate is valid for two (2) years.
Lactation period
Nursing employees shall be granted break intervals of not less than 40 minutes for every 8-hour
working period in addition to the regular time-off meals to breastfeed or express milk. This
(NOLCO)
interval shall include the time it takes the employee to get to and from the workplace and the
lactation station. The required additional breaks are compensable hours.
Access to Breastfeeding Information
Employers shall ensure that staff and employees shall be made aware of the Breastfeeding Act
and its Implementing Regulations.
Requirements to Health Institutions
Rooming-in policy
The law requires newborn infants and the mother to be roomed-in immediately after birth for a
certain length of time. In case the mother and baby are separated and direct breastfeeding is not
possible, there should be facilities for milk expression and milk storage.
Milk Storage Facility
All health institutions adopting rooming-in and breastfeeding shall provide milk storage
Facilities. A milk storage facility is a private, clean, sanitary, and well-ventilated area or space
for the purpose of collecting and storing milk among mothers separated from their babies due to
medical reasons. This is different from a milk bank and a lactation station. There must be
dedicated and trained personnel who supervise and assist the mothers who will use the facility,
and the facility should fully comply with executive order 51.
Milk banks
Milk banks can be used as temporary solutions when the mother and baby are separated. It may
also be a source of breast milk for infants that are victims during an emergency and/or disaster.
Medical centers and regional hospitals among others are encouraged to set-up milk banks which
should be operated on an non-profit basis, but a minimal processing fee mat be charged to cover
for the screening, processing, and administrative costs
Inability to pay the fees shall not be a reason for non-availment of the milk for patient in need.
These milk banks must have their own permanent, dedicated staff or personnel who are trained in
human milk banking and lactation management.
Tax deduction Incentive
The expenses incurred by a private health institution in complying with the rooming-in ang
breastfeeding practices shall be deductible expenses for income tax purposes up to twice the
actual amount incurred.
Conditions for deductibility
1. The deduction shall apply for the taxable period when the expenses were incurred.
2. All health or non-health facilities, establishments and institutions shall comply with the IRR of
RA 10028 within 6 months after its approval.
3. The facility, establishment or institution shall secure a "Working Mother-Baby-Friendly
Certificate" from the Department of Health to be filed with the BIR.
(NOLCO)
Illustration 1
Henson Electronic employs primarily women. Henson installed a lactation station for its nursing
employees at the following costs:
Remodeling of a space for the lactation station P 80,000
Tables and comfortable chairs 40,000
Refrigerator 12,000
Manual and electric breast pumps 10,000
Supplies( sterile milk containers, soap etc.) 8,000
Total P 150,000
The P150,000 cost of compliance shall be claimed as part of regular itemized deductions. An
additional expense for the same amount shall be claimed under special itemized allowable
deductions.
Illustration 2
Baguio Medical Center (BMC), A private hospital, previously set up a milk storage facility and a
milk bank. The total annual costs of the two facilities were:
Storage Milk
Facility Bank Total as
Supplies P 100,000 P 120,000 P 220,000

Staff salaries 210,000 90,000 300,000
Maintenance 50,000 70,000 120,000
Total P 360,000 P 280,000 P 120,000
Less: Fees collected from patients 190,000 P 640,000
Excess expense P 90,000
The milk bank was operated as an integral part of the hospital, but is operated as non-profit.
BMC charges minor fees and subsidizes the facility excess expense.
BMC may claim the following expense as part of regular itemized allowable deductions:
Total operating costs of storage facility P 360,000
Excess Milk bank expense subsidized by BMC. 90,000
Total P 450,000
BMC shall also claim an additional deduction for the same amount as special itemized allowable
deductions.
Illustration 3
Tabuk Provincial Hospital, a state hospital, set up milk storage facility at a total costs of P
1,120,000.
Required: determine the allowable special deduction.
(NOLCO)
Answer:
Nil. Tabuk Provincial Hospital cannot claim deductions since it is non-taxable. However,
government facilities, establishments, and institutions will receive additional appropriation
equivalent to the savings they may as a result of complying with RA 10028.
These savings may come from reduced costs due to absenteeism, increased productivity, reduced
illness of babies, and reduced cost of procurement, sterilization, and management of infant
paraphernalia.
FREE LEGAL ASSISTANCE (RA 9999)

Lawyers or professional partnerships providing pro-bono legal services are given deduction
Incentives for their free legal services.
Requirements for availment

Lawyers or professional partnerships rendering actual free legal services shall secure a
certification from the Public Attorney's Office (PAO). the Department of Justice (DOJ), or
association accredited by the Supreme Court indicating that the said legal services to be provided
are within the services defined by the Supreme Court and that the agencies cannot provide the
legal services to be provided by the legal counsel.
The association and/or organic duly accredited by the Supreme Court shall issue the necessary
certification for the number of hours actually provided by the lawyers or partnership.
Tax Deduction Incentive
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 ghe 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.
To this incentive, the free legal services must be exclusive of the 60-hour mandatory free legal
assistance rendered to indigent clients as mandatory required under the Rule on Mandatory Legal
Aid Services for Practicing Lawyers.
Illustration 1
A general professional partnership of lawyers had the following data during the year:
Gross receipts. P 4,000,000

Interest on client notes 200,000
Interest on deposit 36,000
Value of pro-bono services, exclusive of indigent clients 240,000
Direct cost of services 1,700,000
Administrative costs 1,200,000
The special Deduction for free legal services shall be determined as follows:
(NOLCO)
Gross receipt P 4,000,000

Gross income from operations P 2,300,000
Multiply by: 10%
Deduction limit P 230,000
Actual free services provided P 240,000
Special "free legal service expense" (LOWER) P 230,000
Note: the interest income on noted is an item of gross income subject to regular income tax, but is excluded as it is
not derived from the actual performance of the legal profession.
The net income of the general professional partnership shall be computed as follows:
Gross receipts P 4,000,000

Other gross income 200,000
Total gross income P 2,500,000
Less:
Free legal services expense 230,000 1,430,000
Net income P 1,070,000
Illustration 2
Atty. Sabado rendered the following services during the year:
Gross receipts from legal fees P 5,000,000
Value of 60-hour assistance to indigent clients 200,000
Value of other pro-bono services 450,000
Other deductible expense 1,500,000
Atty. Sabado shall be entitled to an additional deduction computed as follows:
Actual value of pro-bono services P 450,000
Limit of incentive:
Gross receipts P 5,000,000
Multiply by: limit rate 10%
Deduction limit P 320,000
Special free legal services expense (LOWER) P 320,000
(NOLCO)
The net income of Atty. Sabado shall be computed as follows:

Gross receipts from legal fees P 5,000,000
Less: Direct cost of services 1,800,000
Less:
Regular itemized allowable Deductions P 1,500,000
Special itemized allowable deduction
Free legal services expense 320,000 1,820,000
Net income P 1,380,000
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.
In addition, business enterprises providing manpower training and special studies to rank-and-
file employ as accredited by the Technical Education and Skills Development Authority are also
entitled to 50% additional deduction of the total grant for local trainings and special studies.
However, the deduction incentive will not be allowed on bonuses accruing during the pendency
of a strike or lockout arising from any violation of the Productivity incentives program.
Illustration
To improve productivity, cogon company negotiate with its factory employees a productivity
Incentive program wherein the employees shall receive a productivity bonus equivalent to 40%
of production cost savings which shall be measured by an independent expert.
Cogon Company also required employees to undergo studies though an "employee advance
study program" with the TESDA. All employees who finished their special studies were required
to remain at the employer's business for a period not less than one year.
The following were determined during the year:.

Total distributable productivity bonus P 1,000,000
Cost of special studies
Supervisory employees P 300,000
Rank and file employees 1,700,000 2,000,000
Total P 3,000,000
Aside from deducting the above employee benefit expenses, the employer shall be entitled to the
following special deduction incentives:
(NOLCO)
Additional productivity bonus expense (P1M x 50%) P 500,000

Additional expense on employee studies (P1.7M x 50%) 850,000
Total productivity incentives expense. /p;.l
Note:
1. The incentive on special studies covers rank and file employees only.
2. The costs 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.
Note to readers
The deductions Incentive discussed in the foregoing section are some of the more common
incentives to taxpayers across different industries. The list shown in this chapter is merely
intended as illustrative to show the practical application of deduction incentives in income
Taxation.
NET OPERATING LOSS CARRY-OVER
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.
NOL vs NOLCO
It must be noted that a net operating loss is technically different with a NOLCO. A net operating
loss may occur, but may not be over, hence, no NOLCO. However, a NOLCO cannot exist
without a prior year net operating loss.
The Rationale of NOLCO

NOLCO is intended to allow the taxpayer to recoup his losses before taxation go full swing,
Without NOLCO, income taxation would result in taxation of recoveries of lost capital.
Illustration:
Assume the following operating (losses) or profits of the taxpayer:
Year 1 Year 2 Year 3 Year 4

Operating loss (Profit) (P 400,000) (P 300,000) (P 200,000) P 20,000
There is no tax from Year 1 to Year 3 because there is a loss. However, to tax the minimal profit
of Year 4 would be unfair to taxpayers since this profit is merely a recovery of lost capital in the
prior years. Income tax id a tax in realization of income and is not a tax on returns of capital.
(NOLCO)
NOLCO is allowes for taxpayer to recoup his losses of capital before being fully taxed. That
recoupment however is limited by the law for only three years.
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 a tax holiday,
subject to tax in gross income, or those subject to final income tax, cannot deduct NOLCO.
How to compute NOLCO?

NOLCO is computed as follows:
Gross income subject to regular tax P xxx,xxx
Less:
Total deductions excluding NOLCO from prior year
and deduction incentives under special laws (xxx,xxx)
Net operating loss carry-over (NOLCO) (P xxx,xxx)
Deductions incentives are not actual operating expenses. They are actual costs. Hence, they must
be excluded in the amount of net operating loss carry over. That is why deduction Incentives are
legally allowed only as deductions in the period they are availed of. The carry-over of deduction
incentives is not legally warranted. Prior year NOLCO, which is also a deduction incentive,
cannot be deducted in the measurement of the current year NOLCO to avoid breaching the three-
year carry over rule.
To emphasize the rules in the measurement of taxable net income or NOLCO:
1. Cost of sales or cost of Services and regular allowable itemized deductions are fully deductible
against gross income.
2. Special Incentive deductions are deductible only to the extent of net income before special
incentive deductions
3. NOLCO prior years are deductible only to the extent of net income after special incentive
deductions but before NOLCO
A positive bottom line from the forgoing procedure is a taxable net income whereas a negative
bottom line is NOLCO.
Illustration
Nexus Corporation reported a net loss during the year:
Less:
Special Deductions under the NIRC 700,000
Deductions incentives under special laws 300,000 2,200,000
Net loss (P 700,000)
Based on the foregoing the NOLCO shall be recomputed as follows:
(NOLCO)

Less:
Special deductions under the NIRC 700,000 1,900,000
Net operating Loss Carry-Over (P 400,000)
Treatment of NOLCO
Net operating loss carry-over (NOLCO) is treated as a separate item of deduction in the next
three(3) consecutive taxable years to the extent of the available net income before NOLCO
deduction in those periods
Illustration
A corporate taxpayer reported the following net income and loss from business:
2017 2018 2019 2020 s
Gross income P 400,000 P 500,000 P 720,000 P 900,000

Less: Deductions 600,000 450,000 610,000 650,000
Net income (NOLCO) (P 200,000) P 50,000 P 110,000 P 250,000
Required: Compute the taxable net income from 2018 to 2020.
The 2018 net income is P50,000 but the taxable net income is zero. The NOLCO application and
the 2017 NOLCO balance as of December 31, 2018 are as follows:
2017 2018 2019 2020 s
Net income (NOLCO) (P 200,000) P 50,000 P 110,000 P 250,000

NOLCO deduction 50,000 ( 50,000)
NOLCO balance (P 150,000) P 0
The 2019 net income is P 110,000 but the taxable net income is zero. The NOLCO application
and the 2017 NOLCO balance as of December 31, 2019 are as follows:
2017 2018 2019 2020 s
Net income (NOLCO) (P 150,000) P - P 110,000 P 250,000

NOLCO balance ( P 40,000) P 0
The 2020 net income is P250,000 but the taxable net income is be P210,000 computed as
follows:
2017 2018 2019 2020 s
Net income (NOLCO) (P 40,000) P - P - P 250,000

P - Adjusted net income P 210,000
(NOLCO)
Note: any unused NOLCO after the three-year prescriptive period will expire and will not be creditable in future periods. Loss
recoupment is legally allowed only over three years.
Requisites for the deductibility of NOLCO:

1. The taxpayer must not be exempt from income tax during the taxable year when the NOLCO
was incurred.
2. There has been no substantial change in the ownership of the business or enterprise.
A change of at least 75% of either the paid up capital or nominal value of the outstanding shares
of a corporation is deemed aa substantial change in business ownership.
Illustration: NOLCO from exempt years

In 2018, Mr. Tan started a " Hot Siopao" manufacturing plant with less than P3M capitalization
and was registered as a Barangay Micro Business Enterprise (BMBE). At the start of 2019, Mr.
Tan's certificate of authority to operate as BMBE was revoked when he upscaled his business
operations.
Mr. Tan's business gross income and business expense were as follows:
2018 2019 2020 s
Gross business income P 400,000 P 700,000 P 1,500,000

Less: Business expenses 650,000 800,000 1,000,000
Net income (NOLCO) (P 250,000) (P 100,000) P 500,000
Required: Compute the taxable net income in 2020.
Solution:
2018 2019 2020 s

2018 NOLCO application 100,000 ( 100,000)
Net income P - P 400,000
Note:
1. The P250,000 net operating loss occurred in a year when the taxpayer was tax exempt this operating loss cannot be carried
over as NOLCO.
2. The P100,000 net operating loss occurred in a year when the taxpayer was taxable. This operating loss can be carried over as
NOLCO. Hence, this is carried over as deduction in 2020.
Rationale 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(
i.e., excess deduction) from an exempt year should not be given value by Carry-over as this
would cause undue enrichment to the taxpayer.
(NOLCO)
Illustration 1: Substantial change in ownership

Mr. See owns 80% of Trinoma Corp. In 2020, Mr. See disposed of his 80% interest to Mr.
Yuchen. The net income and (loss) of Trinoma Corporation since 2018 were:
2018 2019 2020 s
Net income (NOLCO) (P 250,0000) P 150,000 P 500,000

Required: compute the 2019 and 2020 taxable net income of trinoma Corp.
Solution:
2018 2019 2020 s
Net income (NOLCO) (P 250,000) P 150,000 P 500,000

2018 NOLCO application 150,000 ( 150,000)
( 100,000) ( 0)
Taxable net income P 0 P 500,000
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 atleast 75% in the ownership of the business.
Illustration 2: Substantial change in ownership

Mr. Tan started a business in 2018. Disheartened by heavy losses, he sold the business to Mr.
Song at the start of 2019. The net income or (loss) of the business were:
2018 2019 2020 s

Required: Compute the taxable net income of the business in 2020.
Solution:
2018 2019 2020 s

2019 NOLCO application 300,000 300,000
( 0)
Note: The 2018 NOL cannot be carried over since there is a substantial change in ownership in 2019.
Rationale of the Rule on Substantial Change in Ownership

NOLCO is granted as an incentive to taxpayers to enable them to recoup their losses before they
become fully subject to income tax. Without this incentive, income tx would become a tax on
capital.
(NOLCO)
When there is a substantial change in the ownership of the business, NOLCO is no longer
allowed because the owners for whom the loss recoupment is intended bare no longer in the
business. In other words, NOLCO is a privilege that is not transferable.
Due to the foregoing rules, it must be emphasized again that the occurrence of a net operating
loss in prior years does not automatically mean that there is a NOLCO.
Rules in Carry-Over of NOLCO
1. NOLCO is claimable in a first-in first-out (FIFO) fashion.
2. NOLCO can be claimed only up to the extent of the business net income in the next three
years. Prior year NOLCO cannot be deducted against a subsequent year net operating loss
3. Any NOLCO which remains unused at the end of the three-year prescriptive period will
expire.
Illustration 1
A corporate taxpayer reported the following from 2016 through 2020:
2016 2017 2018 2019 2020 S
Gross income P 400 P 320 P 480 P 400 P 500

Less: Deductions 500 450 450 340 340
Net income (NOLCO) (P 100) (P 130) P 30 P 60 P 160
In 2017
The taxable net income is nil. No deduction can be made against a subsequent net operating loss
since this will roll over the NOLCO through integration in the net operating loss of the following
year. This will effectively breach the three-year prescriptive period rule.
In 2018 The taxable net income is nil. The 2016 NOLCO application and the remaining NOLCO
prior year balance as of December 31, 2018 are:
2016 2017 2018 B
Net income (NOLCO) (P 100) (P 130) P 30

2016 NOLCO application 30 ( 30)
Net income (NOLCO balance) (P 10) (P 130) P 0
Note: Deduction for NOLCO can be made only up the extent of available net income in the three following years.
In 2019
The taxable net income is nil. The 2016 NOLCO application and the ending NOLCO prior year
balances as of December 31, 2019 are:
2016 2017 2018 2019
(NOLCO)
Net income (NOLCO) (P 70) (P 130) P 0 P 60

Net income (NOLCO balance) (P 10) (P 130) P 0 P 0
Note: The P10 excess 2016 NOLCO balance already expired because this is the third year. The same can no longer be used as an
item of deduction in future years.
In 2020
The taxable income is P30.
2017 2018 2019 2020
Net income (NOLCO) (P 130) P 0 P 0 P 160
Net income (NOLCO balance) (P 0) P 0 P 0 P 30
Illustration 2
A domestic corporation reported the following results of operations from years 2015 through
2020:
2015 2016 2017 2018 2019 2020
Gross income P 410 P 300 P 500 P 400 P 600 P 900
Less: Deductions 500 500 450 340 450 500
NI/(NOLCO) (P 90) (P 200) P 50 P 60 P 150 P 400
The taxable net income of the corporation from years 2015 throughout 2020 shall be computed
as follows:
2015 2016 2017 2018 2019 2020
NI/(NOLCO) (P 90) (P 200) P 50 P 60 P 150 P 400
50 ( 50)
NOLCO balance (P 40) (P 200) -
40 ( 40)
(P 200) P 20
20 ( 20)
NOLCO BALANCE (P 180) -
150 ( 150)
P 30 Expired ( 0)
Net income P - P - P - P - P - P -
(NOLCO)
NOLCO FOR INDIVIDUAL TAXPAYERS

NOLCO refers to an operating loss from business or exercise of a profession. For individuals
who are mixed income earners, NOLCO is measured by separating compensation income from
business or professional income following the income classification ang globalization rule.
Illustration
An individual taxpayers complied the following income and expenses:
2017 2018 2019 2020
Compensation income P 20,000 P 220,000 P 80,000 P 75,000

Business gross income 470,000 400,000 500,000 500,000
Deductions 500,000 420,000 420,000 340,000
Required: Determine the annual taxable income.

Solution:
2017 2018 2019 2020
Taxable compensation P 20,000 P 220,000 P 80,000 P 75,000
Business gross income P 470,000 P 400,000 P 500,000 P 500,000

Less: Deductions 500,000 ( 420,000) 420,000 340,000
Net income (NOLCO) (P 30,000) (P 20,000) P 80,000 P 160,000
( 50,000) M
P 30,000 P 160,000
Taxable Income P 20,000 P 220,000 P 110,000 P 235,000
Note:
1. As a rule, the taxable compensation income and the net income are simply combined in computing the taxable income of
individual taxpayers.
2. A net operating loss from business or exercise of profession is not deductible from taxable compensation income but is carried
over as NOLCO.
Special Rule on NOLCO for Mining Companies

The net operating loss sustained by mining companies without the benefits of Incentive under the
Omnibus Investment Code of 1987 in any of their first 10 years of operation is allowed to be
carried over a period of 5 years following the year the net operating loss was sustained.
NOLCO and Net Capital Loss Carry Over

NOLCO is deductible against available net income in the next three years of operation. Net
capital loss carry-over is deductible only up to the extent of the net capital gain in the
immediately following year.
(NOLCO)
Net Capital Loss Carry-Over cannot be claimed simultaneously with NOLCO. In accordance
with the income tax benefit rule, no capital loss carry-over is allowed when the year's operation
resulted in a net operating loss (i.e., Limit 1 is zero).
Merger and Consolidation
Merger occurs when one business is merged with another business. Consolidation occurs when
several businesses merge to form a new larger business. The acquired business is referred to as
the "assignor" or "transferor" and the purchaser as the "transferee" or "assignee". In Accounting,
the assignor is called the "acquiree" while the purchaser is called the "acquirer".
NOLCO and Merger or Consolidation
NOLCO of the Acquirer

Under RR14-2001, the NOLCO of the Acquirer which it incurred before the merger or
consolidation continues to be deductible even after merger or Consolidation so long as there is
no substantial change in its ownership.
NOLCO of the acquiree
Historically, the BIR consistently ruled that NOLCO is transferrable to a surviving corporation
since it is viewed as part of the rights, privileges, properties, and/or interests that will be
transferred to and vested in the surviving corporation upon merger or consolidation.
However, under BIR Ruling 214-2012, the BIR ruled that NOLCO is not one of the assets of the
absorbed corporation that can be transferred and absorbed by the surviving corporation, noting
that it is privilege or deduction that can be availed only by the absorbed corporation.
Under Sec. 34(D)(3) of the NIRC, NOLCO is not allowed as deduction when there is a
substantial change in the ownership of the business. It is clear that the privilege for NOLCO
deduction is reserved by the law only to the group of owners when the loss was incurred while
denying it to the new group of owners who subsequently acquired substantial interest in the
business. NOLCO is not a transferrable right, privilege, or interest.
Sources:
- Income Taxation Laws, Principles and Applications 2019 OBE EDITION by Rex B. Banggawan, CPA,MBA
- Tax Code, Philippine Constitution

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SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS

Special Allowable Deductions

SPECIAL EXPENSES UNDER THE NIRCOR SPECIAL LAWS

Rent income on the lot P 1,200,000

Gross rent income P 1,200,000

NET TRANSFER TO RESERVE FUND AND PAYMENTS TO POLICIES AND

The following relates to the performance of an insurance company:

2018 2019 2020

2018 2019 2020

The net income of the insurance company shall be computed as follows:

2018 2019 2020

Special allowable deduction

DIVIDEND DISTRIBUTION OF A REAL ESTATE INVESTMENT TRUST (REIT)

TRANSFER TO RESERVE FUND OF COOPERATIVES

Related Act. Unrelated Act. Total

Sales P 2,000,000 P 1,000,000 P 3,000,000

Gross sales from unrelated activities P 1,000,000

THE EXPANDED SENIOR CITIZENS ACT OF 2003 (RA 9257)

Senior Citizen or Elderly

Under RA 9257, A senior citizen or elderly is entitled to 20% discount in certain

Conditions for deductibility of sales discount to senior citizens

Regular Senior Citizens

The taxable net income of good health shall be computed as:

Regular Senior citizens Total s

Receipts P 4,000,0000 P 500,000 P 4,500,000

Gross receipts [P4M + (P500K/80%)] P 4,625,000

DISCOUNTS TO DISABLED PERSONS (RA 7277)

ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR CITIZEN

Conditions for deductibility of additional compensation:

ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR PERSONS WITH

Requisites for deductibility:

COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS

Conditions for deductibility:

The adopting private entity which may be an individual in businesses or practice of

Qualifications of participating schools

Qualifications of Adopting Private Entity

Contributions for deductibility:

Procedures for availment

Name Nature Assistance granted

Contribution to accredited done NGO P 1,000,000

Regular itemized contribution expense P 800,000

Depreciated cost of the bus 1,500,000

Zonal value P 3,600,000

EXPANDED BREASTFEEDING PROMOTION ACT OF 2009 (RA 10028)

Supplies P 100,000 P 120,000 P 220,000

FREE LEGAL ASSISTANCE (RA 9999)

Requirements for availment

Gross receipts. P 4,000,000

Gross receipt P 4,000,000

Gross receipts P 4,000,000

Atty. Sabado shall be entitled to an additional deduction computed as follows:

Actual value of pro-bono services P 450,000

The net income of Atty. Sabado shall be computed as follows:

ADDITIONAL PRODUCTIVITY INCENTIVE BONUS EXPENSE

The following were determined during the year:.

Additional productivity bonus expense (P1M x 50%) P 500,000

The Rationale of NOLCO