RR No. 05-99: Implements Section 34(E) of the Tax Code of 1997 relative to the requirements for deductibility of bad debts from gross income

Summary

RR No. 05-99 implements Section 34(E) of the Tax Code of 1997 on the requirements for deducting bad debts from the gross income of a corporation, an individual in trade or business, or a professional.

Key points

1. Valid and connected debt. There must be an existing indebtedness due to the taxpayer that is valid and legally demandable. It must be connected with the taxpayer’s trade, business or practice of profession.
2. No related party transaction. The debt must not arise from a transaction between related parties listed in Section 36(B) of the Tax Code of 1997.
3. Charged off and worthless. The debt must be actually charged off the books of accounts as of the end of the taxable year. It must also be actually ascertained to be worthless and uncollectible as of the end of the taxable year.
4. Recovery of bad debts. Recovery of bad debts deducted in the preceding year or years is included in gross income in the year of recovery, to the extent of the income tax benefit of the deduction.

Who is affected

• Corporations
• Individuals engaged in trade or business
• Professionals engaged in the practice of their profession

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.