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How damaged assets can reduce your income tax

MANILA, Philippines – Just recently we saw a lot of business establishments being flooded due to intense rain brought about by Tropical Storm Karding (Yagi) and the southwest monsoon or habagat. As a result, some taxpayers may have sustained losses in the form of damage to their equipment, machinery, or merchandise. 

Fortunately, our tax laws recognize this problem by allowing casualty losses to be claimed as deduction for income tax purposes. However, there are specific guidelines on the time and manner by which the taxpayers should claim casualty losses. Noncompliance with these guidelines may result in the disallowance or rejection of the deduction during the audit examination of the Bureau of Internal Revenue (BIR).

To avoid the disallowance, it is important to know and comply with the deadline for reporting, the facts to be established, and the documentary requirements for claiming casualty losses.

Definition 

Casualty loss refers to the complete or partial destruction of property resulting from an identifiable event of sudden, unexpected, or unusual nature, such as those arising from storm, fire, shipwreck, or other casualty, or from theft or robbery (Revenue Regulation 12-77).

Requisites for deductibility

Under BIR Revenue Memorandum Order Number 31-2009, the taxpayer claiming casualty losses must comply with the following requisites:

1. The losses were incurred for properties actually used in the business of the taxpayer. The loss of assets not used in business and/or are personal in nature shall not be allowed.

2.  The concerned properties must have been reported as part of the taxpayer's assets based on accounting records and financial statements in the preceding year.

3. The amount of loss compensated by insurance cannot not be claimed as deductible loss.

4. The deduction of assets as capital losses must be properly recorded in the accounting reports (with the adjustment of the applicable accounts).

Documentary requirements

To establish the requisites, the following documents must be submitted to the BIR:

1. Sworn declaration of loss filed within 45 days after the date of the event causing the loss, stating the following:

a. nature of the event that gave rise to such loss and the time of its occurrence;

b. description and location of the damaged properties;

c. items needed to compute the losses (cost or other basis of the properties; depreciation allowed, if any; value of the property before and after the event; and cost of repair);

d. amount of insurance or other compensation received;

2. The Financial Statement for the year immediately preceding the event; 

3. Proof of the elements of the losses claimed:

a. photographs of the properties before and after the typhoon to show the extent of the damage.

b. documentary evidence for determining the cost or valuation of the damaged properties (canceled checks, vouchers, receipts, and other evidence of costs);

c. insurance policy, in the event that there is an insurance coverage for the properties; and

d. police report, in cases of robbery/theft during the typhoon and/or as a consequence of looting

Failure to report a theft or robbery to the police can be held against the taxpayer. However, a mere report of an alleged theft or robbery to the police authorities is not considered as conclusive proof of the loss.

All documents and other evidence submitted to prove the losses shall be subject to verification by the concerned BIR office, and should be kept by the taxpayer as part of his tax records, and be made available to the duly-authorized Revenue Officer/s, upon audit of his Income Tax Return and the declaration of loss.

Weather advisories, like rainfall alerts from NDRRMC, are effective tools to save lives and avoid damage to properties. Yet loss is sometimes inevitable. For this reason, deduction for casualty loss is allowed in the computation of income tax provided that the taxpayer claiming it strictly complies with the requirements set by law and the BIR. – Rappler.com

This article is for general information only. If you have any question or comment regarding this article, you may email the author at egialogo.gdlaw@gmail.com.

Lawyer Edward G. Gialogo is the managing partner of Gialogo Dela Fuente & Associates. He is also a tax speaker in Philippine Institute of Certified Public Accountants. He was an associate director in the Tax Services of SyCip Gorres Velayo & Co.