Tax relief for losses and public school donations under Bayanihan II

Republic Act No. 11494, otherwise known as the Bayanihan to Recover as One Act (Bayanihan II), was signed by President Rodrigo R. Duterte on 11 September. It contains the government’s second wave of relief measures to address the health and economic crises stemming from the COVID-19 outbreak. Such measures include tax relief or provisions to ease the burden on taxpayers, two of which I will be discussing below.

Extended Net Operating Loss Carry-Over (NOLCO)

Net operating loss (NOL) refers to the excess of deductible expenses over gross income resulting in a loss position in a given taxable year. Under normal circumstances, a business or enterprise having operating losses may carry it forward to the three succeeding taxable years and claim it as a deduction against gross income for income tax purposes. In other words, NOL incurred in the preceding three years may be claimed as a deduction from the current year’s gross income, thus reducing the company’s income tax liability for the current year.

With Bayanihan II, the NOL incurred by a business for the taxable years 2020 and 2021 can be carried over as a deduction from gross income for the next five consecutive taxable years following the year of such loss, i.e., from 2021 through 2026.

Under Revenue Regulations (RR) No. 25-2020, a taxable year means the calendar year, or the fiscal year ending during such a calendar year, upon the basis of which the net income is computed. RR 25-2020 further clarifies that the fiscal years 2020 and 2021 shall include fiscal years ending on or before 30 June 2021, and 30 June 2022, respectively. The extended NOLCO should therefore cover operating losses incurred by taxpayers using the calendar years 2020, and 2021, and all those corporations with fiscal years ending on or before 30 June 2021 and 2022.

Applying current reporting guidelines, the NOLCO (applied or unused) for 2020 and 2021 needs to be shown in detail in the income tax return and in the notes to financial statements. Further, under RR 25-2020, they must be presented separately in the notes to financial statements apart from the NOLCO from other taxable years. Failure to comply with the reporting requirement will disqualify the taxpayer from claiming the NOLCO.

This two-year extension of the NOLCO is needed given that the adverse impact of COVID-19 on businesses and the economy is expected to continue until a definite cure is found. Its inclusion in Bayanihan II is a lifeline to struggling businesses given that the CREATE (Corporate Recovery and Tax Incentives for Enterprises) bill, where this extended NOLCO is also proposed, is still being discussed in Congress. The extension will help businesses recoup the losses incurred and may continue to incur during these two years.

Tax incentives for donations to public schools

Another tax relief provided by Bayanihan II is the tax exemption of personal computers, laptops, tablets, or similar equipment appropriate for use in schools that are donated for distribution to public schools during the implementation of Bayanihan II from 15 September until 19 December.

As defined in RR No. 26-2020, a public school refers to a government school, including State Universities and Colleges (SUCs) and vocational institutions under the Technical Education and Skill Development Authority (TESDA), regardless of school level.

The following tax incentives are available to the donor:

1. Applying Section 34(H) of the Tax Code, the contribution/donation may be claimed as a deduction against income tax. In addition to the current limitations, conditions, and rules, donors must also indicate in their deeds of donation the types and quantities of donated items and their total value by submitting sales invoices and delivery receipts on top of proof or acknowledgment of receipt by the beneficiary-schools.
2. The donation is exempt from donor’s tax.
3. Imports are exempt from value-added tax (VAT) provided that the donor secure a Deed of Donation duly accepted by the Department of Education (DepEd), the Commission on Higher Education (CHED), or TESDA. In case of imports by the aforementioned agencies, the transactions are likewise exempt from VAT.
   
   The imported goods may be released by the Bureau of Customs (BoC) without the need for an Authority to Release Imported Goods (ATRIG). The Bureau of Internal Revenue (BIR) may, however, conduct a post-investigation audit on the imports released by the BoC without ATRIG pursuant to RR 26-2020.
4. In case of local donation of items originally intended for sale or for use in the business of the donor, the donation will not be treated as a transaction deemed sale subject to output VAT. Further, any input VAT attributable to the purchase of donated items not previously claimed as input VAT remains creditable against any output VAT liability of the donor.

The value of the donation will be based on the acquisition cost of the items donated. If the items are second-hand, the value of the donations shall be the carrying amount after deducting accumulated depreciation.

With the benevolence of donors in helping the education sector adjust to blended learning and online classes, it is but equitable not to respond to their generosity with a tax burden. Through tax relief, continuing education is possible in a pandemic and fiscal stimulus for ailing businesses and the economy is underway.