H.

Deductions from Gross Income

1. Expenses
A. Sec. 34(A) of the NIRC
(1) Ordinary and Necessary Trade, Business or Professional Expenses. -
(a) In General. - There shall be allowed as deduction from gross income
all the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession, including:
(i) A reasonable allowance for salaries, wages, and other forms of
compensation for personal services actually rendered, including
the grossed-up monetary value of fringe benefit furnished or
granted by the employer to the employee: Provided, That the final
tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad,
while away from home in the pursuit of trade, business or
profession;
(iii) A reasonable allowance for rentals and/or other payments
which are required as a condition for the continued use or
possession, for purposes of the trade, business or profession, of
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;
(iv) A reasonable allowance for entertainment, amusement and
recreation expenses during the taxable year, that are directly
connected to the development, management and operation of
the trade, business or profession of the taxpayer, or that are
directly related to or in furtherance of the conduct of his or its
trade, business or exercise of a profession not to exceed such
ceilings as the Secretary of Finance may, by rules and regulations
prescribe, upon recommendation of the Commissioner, taking
into account the needs as well as the special circumstances,
nature and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense incurred
for entertainment, amusement or recreation that is contrary to
law, morals public policy or public order shall in no case be
allowed as a deduction.

(b) Substantiation Requirements. - No deduction from gross income shall

be allowed under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other
adequate records: (i) the amount of the expense being deducted, and (ii)
the direct connection or relation of the expense being deducted to the
development, management, operation and/or conduct of the trade,
business or profession of the taxpayer.

(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from

gross income shall be allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an official or employee of the
national government, or to an official or employee of any local
 government unit, or to an official or employee of a government-owned or
-controlled corporation, or to an official or employee or representative of
a foreign government, or to a private corporation, general professional
partnership, or a similar entity, if the payment constitutes a bribe or
kickback.

(2) Expenses Allowable to Private Educational Institutions. - In addition to the

expenses allowable as deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this Code, may at its option elect
either: (a) to deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the expansion of school
facilities or (b) to deduct allowance for depreciation thereof under Subsection (F)
hereof.

B. RR No. 10-02 dated July 10, 2002

imposes a ceiling on the amount of entertainment, amusement and
recreational expenses claimed by the following taxpayers:
1) individuals engaged in business, including taxable estates and
trusts;
2) individuals engaged in practice of profession;
3) domestic corporations;
4) resident foreign corporations; and
5) general professional partnerships, including its members.

The term “entertainment, amusement and recreation expenses” includes

representation expenses and/or depreciation or rental expense relating
to entertainment facilities, as described in the Regulations.

The following expenses are not considered entertainment, amusement

and recreational expenses:
1) expenses treated as compensation or fringe benefits for
services rendered under an employer-employee relationship;
2) expenses for charitable or fundraising events;
3) expenses for bonafide business meeting of stockholders,
partners or directors;
4) expenses for attending or sponsoring an employee to a
business league or professional organization meeting;
5) expenses for events organized for promotion, marketing and
advertising; and
6) other expenses of similar nature.

The requisites for the deductibility of said expenses, subject to the ceiling
prescribed, are specified in the Regulations.

There shall be allowed a deduction from gross income an amount

equivalent to the actual entertainment, amusement and recreation
expense paid or incurred within the taxable year by the taxpayer, but in
no case shall such deduction exceed 0.50 % of net sales for taxpayers
engaged in sale of goods or properties; or 1% of net revenue for
taxpayers engaged in sale of services, including exercise of profession and
use or lease of properties.
If a taxpayer derives income from both sale of goods/properties and
services, the allowable entertainment, amusement and recreation
expense shall in all cases be determined based on an apportionment
formula, taking into consideration the percentage of the net sales/net
revenue to the total net sales/net revenue, but which in no case shall
exceed the maximum percentage ceiling provided in the Regulations.

The claimed expense shall be subject to verification and audit for

purposes of determining its deductibility as well as compliance with the
substantiation requirements, as provided in the Regulations. If after
verification, a taxpayer is found to have shifted the amount of the
entertainment, amusement and recreation expense to any other expense
in order to avoid being subjected to the prescribed ceiling, the amount
shifted shall be disallowed in its totality, without prejudice to such
penalties as may be imposed by the Tax Code of 1997.

The ceiling provided on the Regulations shall apply only to

entertainment, amusement and recreation expenses paid or incurred
beginning September 1, 2002, regardless of the taxpayer’s accounting
period.