RR No. 25-2002: Amends RR No. 5-99 relative to the requirements for deductibility of bad debts from gross income

Key points

1. Who is covered. It covers corporations, including banks and insurance companies, and individuals, estates and trusts engaged in trade or business. Professionals in the practice of their profession are also covered.
2. Five requisites. The debt must be valid, legally demandable and due to the taxpayer, and connected with the taxpayer’s trade, business or practice of profession. It must not arise from a transaction between related parties listed in Sec. 36(B) of the Tax Code of 1997, and it must be actually charged off the books and actually ascertained to be worthless and uncollectible, both as of the end of the taxable year.
3. Proof of uncollectibility. Before charging off and deducting a debt, the taxpayer must ascertain and show with reasonable certainty that it is uncollectible. The CIR considers all pertinent evidence securing the debt and the debtor’s financial condition, or assignment of the case to an independent collection lawyer not employed by the taxpayer who issues a sworn statement on the propriety of the deductions.
4. Banks. Without prejudice to the CIR’s determination, a bank submits the written approval of the Bangko Sentral ng Pilipinas/Monetary Board for writing off the debt from its books at the end of the taxable year.
5. Insurance or surety receivables. A receivable from an insurance or surety company cannot be written off and claimed as bad debt unless the Insurance Commissioner has declared that company closed due to insolvency or a similar reason.

Who is affected

• Corporations, including banks and insurance companies
• Individuals, estates and trusts engaged in trade or business
• Professionals in the practice of their profession

Deadlines and effectivity

• Charge-off and worthlessness tested as of the end of the taxable year