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A. INTEREST
1. There must be an indebtedness;
2. There should be an interest expense paid or incurred upon such indebtedness during the
taxable year;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer's trade, business or exercise of
profession;
5. The indebtedness must be connected with the taxpayer’s trade, business or exercise of
profession;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest arrangement must not be between related taxpayers;
9. The interest must not be incurred to finance petroleum operations; and
10. In case of interest incurred to acquire property used in trade, business or exercise of
profession, the same, was not treated as a capital expenditure.
11. The interest is not expressly disallowed by law to be deducted from gross income of the
taxpayer.
B. TAXES
1. Taxes must be paid or incurred in connection with the taxpayer’s trade or business or
exercise of profession;
2. Tax must be imposed by law on, and payable by taxpayer (direct tax);
3. Paid or incurred during the taxable year.
4. Taxes must be duly substantiated by Official Receipts.
D. LOSSES
1. Actually sustained during the taxable year
2. Connected with the trade, business or profession
3. Evidenced by a close and completed transaction
4. Not compensated for by insurance or other form of indemnity
5. Not claimed as a deduction for estate tax purposes
6. Notice of loss must be filed with the Bureau of Internal Revenue within 45 days from the
date of discovery of the casualty or robbery, theft or embezzlement.
E. BAD DEBTS
1. Existing indebtedness due to the taxpayer which must be valid and legally demandable;
2. Connected with the taxpayer's trade, business or practice of profession;
3. Must not be sustained in a transaction entered into between related parties;
4. Actually ascertained to be worthless and uncollectible as of the end of the taxable year.;
and
5. Actually charged off in the books of accounts of the taxpayer as of the end of the taxable
year.
F. DEPRECIATION
1. The allowance for depreciation must be reasonable.
2. It must be for property use or employment in trade or business or out of its not being used
temporarily during the year.
3. The allowance must be charged off within the taxable, year.
4. Schedule on the allowance must be attached to the return.