A FIRE broke out in the early morning of Jan. 8, 2022 at the famous Starmall Alabang located in Barangay Alabang, Muntinlupa City. It was around 12:21 in the afternoon of Jan. 9, 2022, or 33 hours after the fire reached the first alarm, that it was declared under control. At least four firefighters and one volunteer were injured in the blaze and the damage was estimated at P100 million, according to the Bureau of Fire Protection (BFP).
Speaking of damages, the estimate of P100 million reported by the BFP suffered by the mall owner and the tenants can be declared as deductible loss for income tax purposes under Revenue Memorandum Order (RMO) 31-2009 and Revenue Regulation 12–77. Any loss arising from fires, storms or other casualties, and robbery, theft or embezzlement, is an allowable deduction under Section 30 (d) of the National Internal Revenue Code for the taxable year in which the loss is sustained. In this case, the fire loss happened in January 2022 and the deductibility of the loss can be recognized for 2022. It must be made and filed with the Commissioner of Internal Revenue within 45 days after the occurrence of the fire loss.
Failure to file the declaration of loss together with the required attachments within the prescribed period of days may result in the disallowance of the loss claimed.
In some cases, pursuing the deductibility of such loss may put the company at risk once the Bureau of Internal Revenue (BIR) examines the accounting records through the issuance of a letter of authority.
As defined under Revenue Regulations 12-77, the casualty is the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected or unusual nature. Before a taxpayer is allowed to claim casualty losses in his/her income tax return, he/she must support it with a declaration of loss and proof of loss.
Under the RMO 31- 2009, the declaration of loss should contain the following:
1. The nature of the event gives rise to the loss and the time of its occurrence.
2. The description and location of the damaged property.
3. Items needed to compute the loss(es), such as:
(a) cost or another basis of the property.
(b) depreciation allowed or allowable if any
(c) value of the property before and after the event,
(d) cost of repair.
4. Amount of insurance received or receivable.
The proof of loss should contain at least the photographs of the property before and after the casualty. In that way, it will help BIR establish its condition and value from these respective times. Photographs of the property after it was repaired, restored, or replaced may also be helpful.
Furthermore, since the valuation of the property is extremely important in determining the amount of loss sustained, the taxpayer shall prepare other documentary proofs such as canceled checks, vouchers, receipts and other evidence of cost.
Once the documents submitted are already verified and evaluated by the BIR. The question that remains now is the determination of the amount deductible for income tax purposes. Below are the guidelines:
1. The amount of loss deductible is limited to the difference between the value of the property before the casualty and its value, thereafter, reduced by any insurance received.
2. However, such amount shall not exceed an amount equal to its cost or other adjusted initial bases of the property or its depreciated cost. The amount of loss compensated by insurance cannot be claimed as a deductible loss.
3. In case of losses arising from the destruction of property used in business (ordinary asset), the net book value (cost less accumulated depreciation) immediately preceding the casualty should be used as the basis in claiming losses reduced by any amount of insurance received, if any.
4. While in the case of losses arising from partial damages of property used in business, the replacement cost to restore the property to its normal operating condition should be used for purposes of computing deductible losses.
After verification, the BIR will issue the Certificate of Deductibility of Loss within five days from the date of submission of the complete documents.
With the help of this, let us hope that those businessmen who suffered from casualties can recover easily and return on their track. We expect government agencies to provide other benefits, assistance and tax payment holidays to those who massively suffered from any kind of casualty losses. This would help them regain their morale to continue doing business. As the popular saying goes: "This too shall pass."
Ken John Asadon, CPA, CTT, is the tax partner of Paguio, Dumayas and Associates, CPAs (PrimeGlobal Philippines), an institutional member of the Association of CPAs in Public Practice (Acpapp). The opinion of the writer does not reflect in any way the opinion of these institutions.