RR No. 10-2002: Authorizes the imposition of a ceiling on entertainment, amusement and recreational expenses

Key points

1. Taxpayers covered. These are individuals engaged in business, including taxable estates and trusts; individuals practicing a profession; domestic corporations; resident foreign corporations; and general professional partnerships, including their members.
2. What counts as the expense. The term includes representation expenses and/or depreciation or rental expense for entertainment facilities, as described in the Regulations.
3. Expenses outside the term. Not included are expenses treated as compensation or fringe benefits under an employer-employee relationship; charitable or fund-raising events; bonafide business meetings of stockholders, partners or directors; attending or sponsoring an employee to a business league or professional organization meeting; events for promotion, marketing and advertising; and other similar expenses.
4. The ceiling. The deduction equals actual expense paid or incurred in the taxable year, but never more than 0.50 % of net sales for sellers of goods or properties, or 1% of net revenue for sellers of services, including exercise of profession and use or lease of properties. A taxpayer with both kinds of income uses an apportionment formula based on the share of net sales/net revenue to the total, within the maximum ceiling in the Regulations.
5. Audit and shifting. Claimed expenses are subject to verification and audit for deductibility and substantiation. If a taxpayer shifted the expense to another expense to avoid the ceiling, the amount shifted is disallowed in its totality, without prejudice to penalties under the Tax Code of 1997.
6. Start of the ceiling. The ceiling applies only to expenses paid or incurred beginning September 1, 2002, regardless of the taxpayer’s accounting period.

Who is affected

• Individuals engaged in business, including taxable estates and trusts
• Individuals engaged in practice of profession
• Domestic corporations
• Resident foreign corporations
• General professional partnerships, including its members

Deadlines and effectivity

• Ceiling applies to expenses paid or incurred beginning September 1, 2002