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if 100% loss:
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Cost
Less: Accumulated Depreciation
Insurance
Salvage Value
DEDUCTIBLE LOSS
If partial loss [Whichever is Lower, Replacement cost or Book Value]
[USE THIS Lower of R/B to mean this idea!!!!]
Nondeductible losses/Excess of Replacement cost
The new cost of the property damaged, will be the percentage of book value
undamaged plus replacement cost plus nondeductible loss (whichever is higher
minus lower; of replacement cost and book value)
Undamaged book value
Add: Replacement cost
Non-deductible loss
NEW COST
Any amount received as a loss recovery from insurance company shall reduce
deductible losses.
But when the proceeds from loss recovery exceed the Lower of R/B, then it
is TAXABLE GAIN.
For short any premium of insurance is gain.
Net Operating Loss
Net operating loss means excess of allowable deduction over gross income.
Include only operating expenses and losses that are actual.
Not allowed are estimated losses or expenses.
NOLCO
Same meaning of NOL
NOLCO and any item of incentive deduction allowable under any special law are not
part of itemized deductions.
NOLCO is carried over as a special deduction. Immediately over 3 years after the
loss was incurred.
No NOLCO deduction for OSD taxpayers.
But the 3 yr period is still available. (For example; Loss on the first year, then
He claim for OSD for the second year, he can then only claim the 2 nd and 3rd year of
NOLCO on third year and fourth year withstanding he elect regular itemized
deduction)
Domestic or Foreign Corp (MCIT) cannot enjoy NOLCO.
NOLCO is FIFO basis
NOLCO cannot be deducted from compensation income.
Can only be deducted from Business or Professional Income
Taxpayers entitled to NOLCO:
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a. t/b/p
b. Foreign corporations subject to normal tax
c. Special corporations subject to preferential tax rates. Like regional
operating headquarter.
Effectivity of NOLCO January 1, 1998
Person not entitled to NOLCO Tax exempt person or entity (The same year the
loss was incurred and the tax exemption, there will be no NOLCO)
Entities not allowed of NOLCO:
a. Foreign corps OBU and FCDU. (Offshore Banking Unit and Foreign Currency
Deposit Unit)
b. Bureau of Investment registered enterpirse
c. PEZA Phil. Economic Zone
d. Enterprises under Base Conversion and Development Act of 1992
e. Carriage business (Phil based or International Shipping corp)
NOLCO for Business Combination
NOLCO is allowed when:
No substantial change (75% of paid-up capital are retained by the same person
after the business is combined.{it means the one stockholder retains 75% of
stock}or{Many stockholder retains its stock which they all are 75% of the
outstanding issued shares})
The taxpayer is the same person who sustained the NOL regardless of change of
ownership.
NOLCO is not transferrable, otherwise provided by Revenue Regulation.
NOLCO for Mines other than wells 5 year period only is difference.
NOLCO shall be reported in ITR.
Unused NOLCO be presented in Notes to FS
Used NOLCO be presented in Notes to FS
Failure to comply will disqualify from claiming NOLCO
SPECIAL RULES ON LOSSES
Marcelo Steel Doctrine on losses
A loss in one line of business is not permitted as allowable deduction from
gain in another line of business, if one of the two lines is tax exempt.
Ex. The net loss from business outside the Phil is not deductible.
Losses incurred between members of the family are not deductible.
Gambling losses can only be deducted from gambling winnings.
Not from Business income, Compensation income, or Capital Gains.
Losses from theft or embezzlement
Deductible
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On
the
year
the
loss
is
Mortgage losses
When the mortgagee keeps the property
Receivable from the debtor (the amount given)
Less: Purchase price
Net loss cost of property
When the mortgage is disposed
Receivable from the debtor
Less: Realized amount
Net loss deductible
Losses due to voluntary removal of property
Deductible:
When loss is incurred due to voluntary removal of property, incident to
renewal and replacements
Depreciated value
Less: Sales Proceed
Net loss deductible
Nondeductible:
As cost to remove useless structure (demolish) in the real property
acquired
Demolition cost = Capitalize cost
Loss due to shrinkage in Value of Stock
Deductible loss only when the stock is disposed.
Not deductible when mere shrinkage in value from stock exchange
Losses of Useful Value
1. Technological changes operation more expensive; the asset is impractical
to use.
2. New legislation profitable use is impossible.
Acquisition cost of the machine
Less: Depreciation
Total Depreciable Value
Add: Cost of improvements
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