Question & AnswerQ&A (BIR REVENUE REGULATIONS NO. 5-99)
It implements Section 34(E) of the Tax Code of 1997 on the requirements for the deductibility of bad debts from the gross income of a corporation or individual engaged in trade, business, or profession.
Bad debts refer to debts arising from the worthlessness or uncollectibility, in whole or part, of amounts due to the taxpayer by others, from money lent or from uncollectible income from goods sold or services rendered.
Securities mean shares of stock and rights to subscribe or receive such shares, including bonds, debentures, notes, or other evidence of indebtedness issued by corporations or governments.
A debt must be demonstrably worthless based on sound business judgment and particular facts, not merely doubtful or difficult to collect; there must be no reasonable expectation of recovery.
The debt must have been recorded and then cancelled or written off from the taxpayer’s books of account as worthless at the end of the taxable year; estimated uncollectible accounts are not sufficient.
1) Existing valid indebtedness, 2) Connected to trade/business/profession, 3) Not sustained between related parties under Sec. 36(B), 4) Actually charged off at year's end, 5) Actually ascertained to be worthless and uncollectible at year's end.
No; the Bangko Sentral ng Pilipinas (BSP), through its Monetary Board, must ascertain the worthlessness and uncollectibility and approve the write-off, although banks must still comply with requisites 1-4.
The recovery must be included as part of gross income to the extent of the previous income tax benefit obtained from the deduction in the year of recovery.
If the securities held as capital assets are worthless and charged off within the taxable year, the loss is considered a capital loss from sale or exchange on the last day of that year, proven by clear and convincing evidence.
They may only be written off and claimed as bad debt deduction if the company has been declared closed due to insolvency or similar reasons by the Insurance Commissioner.