Bad debts

X and Y borrowed from C respectively, P100,000 plus interest of 10%. X and Y failed to pay C. Hindi nakabayad si X and Y. Is there a possibility of deduction on the part of Y? Never. On the part of X, can X claim as deduction the interest? No, because of missing requirement number 1 (actually paid or incurred). Ano ba naman eh. Tatlo lang ang requirement. Bakit hindi pwede i-deduct ni X ang 10% interest? Ay, hindi naman siya nagbayad. Ay, anong pag-uusapan pa? Kung walang ginastos, bawal magdeduct. On the part of C, what is the tax consequence? C will now be able to claim “B”, BAD DEBTS. That’s what you call bad debts. Masamang utang. Hindi nababayaran. That is bad debt on the part of C. The utang of Y which was not paid to C is considered as bad debt on the part of C. C can claim P100,000 utang ni Y. Likewise C can claim P110,000 utang of X as bad debt. So C, when X and Y failed to pay him, is allowed to claim P220,000 as

bad debts, provided that the financial status of X and Y shows incapacity to pay the obligation to C, which means that the debts are completely written off or charged off. ‘Yan ang technical term.

Written-off or charged-off

Anong ibig sabihin ng “written off” or “charged off?” Hindi binubura, literally. Metaphorically, sa libro ni C binubura. Bakit? Paano ba mag write off? Literal. Binubura. ‘Yan. Anong ibig sabihin ng written off or charged off? Pag may utang ang ibang tao at hindi nakakabayad. Paano mo sasabihin na hindi ka nababayaran? Ikaw ay naniningil, nag exert ka ng effort na maningil at kahit anong effort mo ng paniningil, walang maibayad. ‘Yan ang sinasabing written off. Without effort extended to make singil, you cannot say the loan is written off. X and Y are incapable of paying the loan. Kailangan na singilin mo. There is effort to collect and despite the effort exerted, for a long period of time of exerting the effort, X and Y did not pay. So, ‘yun ang sinasabing written off. Hindi pwede basta na lang, ‘yung due date ng utang ay December 25. Eh January 1 na ngayon i-write off na lang natin. Ay, hindi pe-pwede. Kailangan mo muna ipakita na ikaw ay naningil. Eh wala ka naman yata paniningil na ginawa. Sa batas nga, kung hindi ka nagdedemand, walang delay hindi ba? So kailangn maningil ka. Naningil ka ba? Hindi. Ay hindi pwedeng mag-claim si C ng bad debt. Requirement kasi ito. Kailanan ba ng insolvency proceedings against X and Y para masabi ni C na pwede na siya mag-claim ng bad debt? Hindi. Ang sinasabi lang ng batas ay kailangan nag exert ka ng effort and despite the effort, hindi nagbabayad at ayaw magbayad dahil ang kanyang financial status ay nagpapakita na walang pambayad. ‘Yon. Now that’s the time that he can claim the bad debt as deduction from the gross income of Mr. C. Kapag nagbayad naman si X and Y, ang 10% interest on loan ay pwede i-deduct ni X; declared naman siya as income ni C. Nakikita naman ang point of view from A? Nag-iiba ‘yan. Now, pwede nating gawing buhay. Buhay si debtor, buhay si creditor. By the way, ‘yung Section 36 (B), ‘yung mga tao doon are also applicable to bad debts. Interest on loans and bad debts. Kapag yan ang nag-utangnan, hindi pwede i-claim as bad debts at interest on loans.

Tax benefit rule

Paano kung X and Y failed to pay C and C claimed bad debts as deductions? 5 years later, here comes X and Y at nagbayad ng utang kay C. What is the effect of the subsequent payment of a bad debt which has been previously claimed by the creditor as a deduction from the gross income? Tax benefit rule

applies. It should be declared, the entire amount paid should be declared as income by C in the year of the recovery to the extent of the income tax benefit received when he was allowed to claim bad debts as deductions and now satisfied by X and Y. That is tax benefit rule. Sa madaling sabi, kung hindi nakabayad si X and Y at dineduct ni C as bad debts, after madeduct ni C, nagzero out na yung utang, nagkaroon siya ng benefit kasi nabawasan ang kanyang gross income kasi deduction yun. Zero-out. Ngayon, si X and Y nagbabayad. Tatangappain ba niya? Oo, tanggapin niya. Anong gagawin? Bayad si utang pero nagkaroon siya ng benepisyo as far as tax is concerned, because he was previously allowed to claim the same as deduction. Ngayon meron siyang “Other Income”. Now, is that income? Yes. Subject to Tax? Yes. What kind of tax? NIT. ‘Yung buong utang na binayaran will be treated as other income kasi si X and Y hindi nabayaran ‘yung P110,000 each. So si C, anong pwede kay C na deduction? P220,000 bad debts. Tama? 5 years later, dumating si X and Y nagbabayad ng P220,000. Anong magiging treatment sa P220,000 na binayad? Under the tax benefit rule, this will be treated as Other Income. Subject to tax? Yes. What kind of tax on the part of C? NIT. ‘Yan kapag buhay.

Bad debts in case of death of debtor

Patayin natin. Si Y nangutang kay C ng P100,000, interest is 10%, total of P110,000. X borrowed from C same amount with 10% interest. Hindi nakabayad si X and Y kay C. Namatay si X and Y. X and Y died without paying P110,000 each to C. What are the tax consequences of the debts of X and Y from income tax and estate tax purposes? That’s the question. Huwag malilito. One at a time. Isa- isahin. Namatay si Y hindi nabayaran si C. May income si C? Wala. Hindi nabayaran. So walang income tax consequence. Can the estate of Y claim the same as deduction, interest on loans? Hindi. Bakit? Hindi nagbayad, eh. Can C claim bad debt, the unpaid loan of Y? Yes. That is bad debt. How much? P110,000. From the point of view of estate tax, can the estate of Y claim P110,000 as claims against the estate? Section 86. Claims against the estate. Kapag namatay si Y na hindi nababayaran, saan maniningil si C? Sa estate ni Y. Tama? ‘Yan ang proseso, Special Procedure. Hindi ba? Hindi naman pwede mag-extra judicial settlement of estate ang kay Y dahil may utang siya na naiwan. Anong gagawin ni C? Doon sa judicial settlement of estate magpa-file ng claim as a creditor. ‘Yan ang Special Procedure side. Sa estate tax side, anong gagawin sa estate ni Y? Ang estate ni Y ay pwedeng mag-deduct ng claims against the estate. How much? P110,000 ang claims against the estate. Naiintindihan? Isa-isa. Simpleng problema, ha? Namatay si Y. May utang. Hindi nabayaran si C. Anu-ano ang titingnang mga angulo? ‘Yung bang estate ni Y ay pwedeng magdeduct ng 10% interest on loan? No, because unang-una hindi nga nabayaran. Pangalawa,

because Y is a compensation income earner and he is not entitled sa interest on loan.

Sa point of view ni C, ano naman ang income tax consequence? That is bad debt on the part of C. And C is entitled to claim how much? P110,000 as bad debt. Special Procedure side, ano ang gagawin ni C? Si C ay magpa-file ng claim as a creditor doon sa judicial proceedings sa estate ni Y. Bakit hindi pwede mag- extra judicial settlement si Y? Kasi si Y namatay na may utang. Estate tax point of view. Namatay si Y, hindi nakabayad ng utang. Ano ang mangyayari doon sa namatay? Pwede bang mag-claim ang estate ni Y ng claims against the estate? Nakasulat sa Section 86. Magkano? P110,000 kasi ‘yun ang hindi nabayaran.

Balik tayo kay X naman. Si X namatay. Ganun din, hindi nabayaran si C na pinagkautangan. Una, income ba? Can X claim the amount borrowed as a deduction? No, kasi X did not incur any expense. On the part of C, bad debt. Magkano? P110,000. Special Procedure side. C filed a claim against the estate of X. The estate of X will now be entitled to claim as deduction the claim against the estate. Section 86. Deductions from the gross estate.

After the judicial settlement of the estate, the estates of X and Y pay C. What is the effect of the subsequent payment of the estates of X and Y to C? Tax benefit rule applies. C will now have to declare the same as part of his gross income in the year of recovery to the extent of the income tax benefit he received when he was allowed to claim bad debt as a deduction. But never will there be an instance that C will be allowed to claim bad debt whether X and Y are dead or alive if C and X, and C and Y are related to each other according to Section 36 (B).

Bad debt in case of death of creditor

Baliktarin natin. Ang namatay ay si C. Buhay si X and Y na hindi makabayad kay C. What are the tax consequences? Isa-isa. Income tax. Hindi mabayaran si C. May income consequence kay Y? Wala ngang nilabas na pera, eh. Eh, si C na namatay, anong mangyayari? Meron sa income tax. The estate of C is an income taxpayer. Agree? Therefore, bad debts will be allowed as a deduction. ‘Di ba sinasabi ko sa inyo? Nasaan ba ‘yan? Nandito ah. Estate. Now, anong mangyayari sa estate tax? Si C namatay at hindi nabayaran ang utang. Claims against insolvent persons

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang

Eto, ha? This are claims against insolvent persons. Claims against insolvent persons. Section 86. Anong mangyayari dyan? ‘Yung estate ni C ay magdadagdag muna ng P110,000 from Y at P110,000 from X, so P220,000. Add to the gross estate and claim as deduction claims against insolvent persons. Nabasa n’yo ‘yan? Add first to the gross estate. How much? P110,000 from Y and P110,000 from X. The estate will now be allowed to claim P220,000 as a deduction. Add first before you deduct. Add before deduction because gross estate is defined as the value of all the properties whether real or personal, tangible or intangible. Credit is an intangible personal property, therefore part of the gross estate of Mr. C. Naintinidian? Hindi ba pag nag-settle ng estate si Mr. C naka-enumerate naman kung sinu-sino ang mga may utang? So sa estate proceedings, maniningil na ngayon ng utang. After the settlement proceedings, nagbayad ngyon si X at si Y sa estate ni Mr. C. What is the effect of the subsequent payment of X and Y to the estate of Mr. C.? Tax benefit rule applies. The estate will have to declare it as part of its gross income. No longer Mr. C because he is already dead, 6 feet under the ground. The estate will now realize other income. And that is income on the part of the estate subject to income tax. Paano kung settled na ang estate? Fully settled na at saka nagbayad. What happens to the payment of X and Y? It will be divided proportionately among the heirs and the heirs will now have to shoulder the income tax. Kung na-settle na, andun na sa heirs. ‘Yung P220,000 i-divide mo sa heirs. Who will shoulder? The heirs in proportion to the amount of the income they realized. ‘Eto yung mga konsepto na wala sa codal.

IV. Taxes

Now let’s continue. We are through with E, I, B. Now let’s talk about T. TAXES. What are the requisites for taxes to be deductible?

1. Actually paid or inccured;

2. Necessary in carrying on the trade or business; and 3. Reasonable in amount.

Wala namang pinagbago eh. Balikan natin ang example. A is the owner of the house leased out to Y. Agreement: Y shoulders the Real Property Tax (RPT). X rents from A the parlor. Agreement is X shoulders the RPT for the parlor. When Y pays A, Y pays the RPT to whom? Local government Unit (LGU). When Y pays the LGU RPT for the property owned by A, income on the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can A claim as

deduction the RPT? No, because even though it is related to his trade or business leasing, he was not the one who incurred the expense. Can Y claim the RPT shouldered by him on behalf of A? No, because Y, as a purely compensation income earner, is not entitled to any deductions of taxes. His deductions are limited to personal exemption, additional exemption, and premium for health and hospitalization insurance.

Let’s go to X. When X pays the LGU RPT, is there income on the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can X claim the RPT he paid as a deductible expense? Yes or no? No, because even though he was the one who incurred it, he is not supposed to pay for it. Therefore, X is not allowed to claim the RPT as a deduction.

Now, Y imported gunting para gamitin sa bahay niya. Si X nag-import ng gunting, ginagamit sa parlor. Nagbayad ng P10,000 for the gunting. Upon importation, nagbayad ng tariff and customs duties na P200 si Y. When Y buys the gunting and imports the gunting, can Y claim P10,000 as deductible expense? No, because Y is not entitled to that. Y is only entitled to personal exemption, additional exemption, and premium for health and hospitalization insurance.

X, same scenario. Can X claim the P10,000 as business expense? No, because it is a capital expenditure. Can X claim depreciation of the gunting as a deductible expense? Yes, because X is engaged in trade or business. Can X claim the tariff and customs duties of P100 paid for the gunting used in trade or business? Yes, because the tax is actually paid or incurred in connection with his trade or business. After payment, X and Y realized that they overpaid the tariff and customs duties by P50. They filed a claim for refund. In 2016, the refund was approved, returned 50 pesos to Y and to X 50 pesos.

Effect of subsequent refund of tax previously paid

What is the effect of the subsequent refund of a tax which has been previously claimed as a deduction from the gross income?

On the part of Y, what is the effect of the refund of P50? Income? No. That is a return of the expense. Tama? May income ba siya? Wala. Binalik lang sa kanya yung P50 eh.

On the part of X, what is the effect? Tax benefit rule applies. P50 will be considered a part of the gross income in the year of the refund. Why? Because the amount of tax of P200 he claimed as a deduction is refunded, he will have to

declare the amount refunded as part of his gross income in the year money is received.

But from Y, no income. Bakit? Sinauli lang sa kanya ang pera niya. Wala namang benefit sa kanya noong binayaran nya ang tax due, hindi ba? Wala. So sinauli lang sa kanya. That’s just a return of his capital. Clear?

Distinction between tax as deduction from gross income and tax as deduction from gross estate

Now, what is the distinction between tax as a deduction from the gross income and tax as a deduction from the gross estate? Section 86. ‘Yang para isang bagsakan tayo. Makikita niyo diyan sa Section 86. Taxes. So makikita niyo diyan taxes as deduction din sa gross estate. ‘Yung ‘T’ sa gross income ay ‘tax’. So what is the distinction? When is the tax deductible for income tax purposes and estate tax purposes?

1. Sa income tax, dapat ang tax ay paid. Sa estate tax, ang tax ay hindi paid. Unpaid and due sa estate tax.

2. Sa income tax, paid and incurred in connection with trade and business. In estate tax, unpaid whether the tax is due in connection with trade or business or not yet.

‘Yun ang disitinctions. Pag namatay ang isang tao, hindi tinatanong, “Oh, ‘yan bang tax na yan related sa business or not? Walang ganun. Ang ating lang qualification sa tax for estate tax purposes is not paid and due and whether or not related to trade or business. Sa income tax, mas particular ang requirement. The tax must be paid and in relation to trade or business para maging deductible. V. Casualty loss

From the provisions of Section 34, there are many kinds of losses. We have wagering losses, loss from wash sales, capital losses, ordinary losses, casualty loss. There are many kinds. For the purpose of our discussion now, I will only discuss casualty loss. I will discuss capital loss, ordinary loss, wagering losses, loss from wash sales separately later para hindi kayo nalilito. So, dito muna tayo sa casualty loss.

Y bought gunting worth P10,000. Imported. Ninakaw ang gunting ni B. X bought gunting for P10,000. B stole the gunting of X. When B stole the gunting, income on the part of B? Yes. Within or without? Within. Subject to tax? Yes. What

kind of tax? NIT. Is Y entitled to claim casualty loss as deduction from gross income? No, because Y is not engaged in trade or business and he is allowed only personal exemption, additional exemption, and premium for health and hospitalization insurance as deductions. After nakaw, B returned the gunting to Y. Return of the income. The value of the gunting 3 years after is P2,000. When B returned the P2,000 worth of kalawagnin na gunting na ninakaw niya kay Y, income on the part of Y? No. That’s just a return of the gunting.

When B steals the gunting from X, may income on the part of B? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT. What is the effect of pagnanakaw ni B ng gunting kay X? X can now claim casualty loss as a deduction from his gross income. 3 years after, B returns the gunting, kalawangin. The value of the gunting at the time of the return is P2,000. What is the effect of the subsequent return of the property which has been previously claimed as a casualty loss? Tax benefit rule again applies. And X will declare P2,000 the value of the recovered property as part of his gross income subject to NIT. Tax benefit rule applies.

Requisites for deductibility of casualty loss What are the requisites for casualty loss?

1. The asset must be used in trade or business;

2. The loss must have arisen out of theft, robbery, embezzlement, fire, storm, earthquake or any other natural calamity, provided, the same is not compensated by insurance. If partly compensated by insurance, the only amount that can be claimed is that portion not compensated by the insurance;

3. It must be determined by B as unrecoverable at the time that the loss is claimed. Dapat may proof ka na unrecoverable. Hindi pwede na basta ka na lang magsasabi na nawala ni Mr. B. Anong mga possibleng proof? Police report na nananakaw si gunting. Pag walang police report, paano ka magke-claim?

Distinction between casualty loss as deduction from gross income and as deduction from gross estate

Now, you look at Section 86. Estate tax. Casualty loss is again another form of deduction from the estate. What is the distinction between the two? So you will see there casualty loss. The same requisites. The loss must have arisen out of theft, robbery, embezzlement, or from fire, shipwreck, natural or any other natural