Casualty loss

JUST recently, we saw a lot of business establishments being flooded due to intense rains brought about by tropical storm Karding and the habagat (south-west monsoon). As a result, some taxpayers may have sustained losses in the form of damage to their equipment, machinery or merchandise.
Fortunately, our tax laws take cognizance of this predicament 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. Non-compliance with these guidelines may result in the disallowance of deduction during BIR’s audit examination.
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 No. 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; and
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 within45 days after the date of the event causing the loss, stating the following:
   • Nature of the event that gave rise to such loss and the time of its occurrence;
   • Description and location of the damaged properties;
   • 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);
   • Amount of insurance or other compensation received;
2. The Financial Statement for the year immediately preceding the event; and
3. Proof of the elements of the losses claimed:
   • Photographs of the properties before and after the typhoon to show the extent of the damage.
   • Documentary evidence for determining the cost or valuation of the damaged properties (cancelled checks, vouchers, receipts, and other evidence of costs);
   • Insurance policy, in the event that there is an insurance coverage for the properties; and
   • 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 alert 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.

source:  Daily Guardian Column By: Atty. Edward G. Gialogo