Tax tips after a catastrophe

By Catherine T. Manahan, 08 October 2009 (BusinessWorld)

The recent storms that wreaked havoc in the country took the lives of our unguarded, unsuspecting kababayans and caused heavy damage to their properties. Families with houses reduced to rubbles, children rendered orphans and parents left childless, are still reeling from the losses inflicted on them by the killer tropical storm Ondoy. Equally devastated business establishments and various companies have been left with water-damaged inventory, destroyed office buildings and equipment, and immobilized motor vehicles, among others. 

In the storm’s aftermath, here are some timely tax reminders:

Losses

Under Sec. 34(D) of the National Internal Revenue Code (NIRC) as amended, losses actually sustained during the taxable year and are not compensated for by insurance and other forms of indemnity shall be allowed as deductions from the gross income of a taxpayer if incurred in trade, profession or business and it involves properties connected with such trade, profession or business. The loss deduction must comply with the substantiation requirements provided for under Revenue Regulations (RR) No. 12-77 as amended by RR 10-79.

Basically, a sworn declaration of loss must be filed with the nearest revenue district officer (RDO) of the Bureau of Internal Revenue (BIR) within 45 days after the date of the casualty. The sworn declaration must contain the following information: (1) nature of the event giving rise to the loss and the time of its occurrence; (2) a description of the damaged property and its location; (3) the items needed to compute the loss such as cost or other basis of the property; depreciation allowed or allowable, if any; value of property before and after the event; cost of repair; and (4) the amount of insurance or compensation received or receivable. The sworn declaration must be further supported by photographs as well as documents like cancelled checks, vouchers, receipts and other evidence of cost showing the condition and value of the damaged property prior to the casualty.

The deductible loss shall be limited to the difference between the value of the property immediately preceding the casualty and its value immediately thereafter, but not to exceed an amount equal to the cost or other adjusted basis of the property or depreciated cost in the case of property used in business, reduced by any insurance or other compensation received. (Section 5, RR). Valuation of the property’s fair market value immediately before and immediately after the casualty to ascertain the amount of actual loss due to property damage shall be determined by an independent and competent appraiser.

Cost of repairs may be included in the loss provided it can be shown through proper documentation that the repairs are necessary to restore the property to its pre-casualty condition; the amount spent for such repairs is not excessive; the repairs do not cover more than the damage suffered; and that the property value after repair does not exceed pre-casualty rate.

Also related to valuation is the tax treatment of insurance proceeds on the damaged assets. A number of BIR rulings have been issued confirming that the excess of the insurance proceeds over the net book value of the damaged properties actually reinvested to rehabilitate/replace the destroyed assets is not taxable income, following the Involuntary Conversion of Property Doctrine (BIR Ruling Nos. DA 202-07, DA 084-07 and DA 429-88). Furthermore, the excess of the total costs of reconstruction, rehabilitation, restoration and replacement of insured assets over the total acquisition cost or adjusted basis shall not be treated as deductible loss but as an additional capital expenditure on which depreciation may be claimed.

Donations

Another important tax issue is that of a storm relief donation subject to donor’s tax under Section 98 of the Tax Code. Under this provision, donations in excess of P100,000 are subject to donor’s tax at graduated rates of 2% to 15% of the net gift. If the donee is a stranger, the donor’s tax rate is 30%. A stranger refers to a person who is not a (1) brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or (2) relative by consanguinity in the collateral line within the fourth degree of relationship.

However, donations made to certain accredited institutions and agencies are donor tax-exempt. Such exempted entities include the national government or any of its political subdivisions or local government units; or accredited donee-institutions such as educational and/or charitable, religious, cultural or social welfare institutions, nongovernmental organization (NGO), trust or philanthropic organization or research institution or organization.

Generally, based on these provisions, donations made by private citizens or corporations, whether in cash or in kind, to the victims of Ondoy in excess of P100,000 are subject to 30% donor’s tax. Hence, to avoid the tax exposure, it may be advisable for taxpayers to course their donations either to the national or local governments or qualified donee institutions and NGOs.

Another tax advantage is the eligibility of the donations as deductions from the taxpayer’s gross income. Under Section 34(H) of the Tax Code, if the donations are made to non-accredited institutions or agencies, only partial deduction shall be allowed to the extent of 5% (for individuals) or 10% (for corporations) of the taxable income of the donors without the benefit of this deduction. However, donations made to the national or local governments or agencies or qualified donee institutions (e.g., NGOs) are entitled to full deduction.

Finally, financial assistance given by employers to their affected employees in amounts far exceeding the de minimis ceiling under the NIRC is also a deductible expense to the employer. However, whether the financial assistance is taxable to the employee is still a gray issue. In my view, the financial assistance, which in the first place, is not strictly a fringe benefit, should not be considered taxable to the employee provided it can be shown that the same is directly for the benefit of the employer whose business will be severely affected by the prolonged absence of his/her employee/s.