Entertainment, Amusement, and Representation (EAR) Expense Requisites for deductibility Accrual and Cash basis = Lessee can expense the whole payment on January, claim input VAT worth 12 months on 1st quarter and the lessee must pay EWT (expanded withholding tax) worth 12 months in February.Cash = Lessee can expense the 3 months, claim input VAT on the 3 months paid and withhold only for the 3 months paid.Ĭase 2: Lessee paid in advance worth 12 months at the start of the year.However, the lessee can only claim input VAT on 3 months paid. They also need to pay the BIR the withholding tax on the claimed expense. Accrual = Lessee can claim expenses every month for the whole year provided he can substantiate it with official receipts.If there are advance payments and the payee is not a general professional partnership, the whole amount is deductible and consequently subject to VAT and Withholding Tax.Ĭase 1: Lessee paid 3 out of 12 months of the taxable year.Depends on the accounting method used (cash basis vs.These expenses shall be claimed as deductions from gross income provided these are duly substantiated by Official Receipts/Invoices issued by third-party establishments 3. Receipts incurred, paid for and issued in the name of the taxpayer shall be recorded as its own expenses for income tax purposes. Rental ExpenseĪ reasonable allowance for rentals and/or other payments which are required as a continued use or possession, for purposes of the trade, business or profession, or property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor. Different Expenses and Their Specific Requirements 1. The taxes required to be withheld (if applicable) have been properly withheld and remitted on time 2.Not contrary to law, morals, public policy or order (e.g., bribes, kickbacks or similar payments).Substantiated by Adequate Proof – documented by official receipts or adequate records which reflect the: (a) amount being deducted and (b) connection or relation of expense to business/trade.Should be ordinary and necessary expenses paid/incurred during the taxable year for the development, management, operation and/or conduct of the trade, business or profession such as salaries and other remuneration, travel expenses, rentals, and entertainment, amusement and recreation expenses directly related to or in furtherance of trade (see succeeding sections for more information about these expenses and their specific requirements).The following are the general requirements in order to claim deductions 1: Go back to the main article: How to Compute Your Income Tax Using the New BIR Tax Rate Table General Requirements in Claiming Deductions This article discusses itemized deductions that are commonly mistreated by taxpayers.ĭisclaimer: This article is for general information only and is not substitute for professional advice. Itemized deductions are by definition the expenses that you’re eligible to claim to decrease your taxable income. Contrary to popular belief, not all business expenses can be claimed as deductions for income tax purposes.Īs a business owner, you should know the limits, exceptions and additional requirements of certain expenses to properly claim itemized deductions.
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