Calvin Dela Pisa was a Permits and Licensing Officer (rank-and-file) of Sta. Portia Realty Corporation (SPRC). He invited the Regional Director of the Housing and Land Use Regulatory Board (HLURB) to lunch at the Sulo Hotel in Quezon City to discuss the approval of SPRC’s application for a development permit in connection with its subdivision development project in Pasig City. At breakfast the following day, Calvin met a prospective client interested to enter into a joint venture with SPRC for the construction of a residential condominium unit in Cainta, Rizal.
Calvin incurred expenses for the lunch and breakfast meetings he had with the Regional Director of HLURB and the prospective client, respectively. The expenses were duly supported by official receipts issued in his name. At month’s end, he requested the reimbursement of his expenses, and SPRC granted his request.
(a) Can SPRC claim an allowable deduction for the expenses incurred by Calvin? Explain your answer. (2.5%)
(b) Is the reimbursement received by Calvin from SPRC subject to tax? Explain your answer. (2.5%)
Suggested answer only. Not an official answer and not legal advice.
**Answer:** (a) SPRC can **partially claim** a deduction, allowed only for the client breakfast, but not the HLURB lunch. (b) No, Calvin's reimbursement is **not subject to tax**. **Legal Basis:** Under **Section 34(A)(1)(c)**
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Quick check
Under Section 34(A)(1)(c) of the Tax Code, are meal expenses incurred for a government official deductible as business representation?
Section 34(A)(1)(c) explicitly prohibits the deduction of direct or indirect payments made to government officials.
Are ordinary representation expenses incurred during meals with prospective private clients deductible by a corporation?
Ordinary and necessary representation expenses incurred for prospective private clients are deductible if properly substantiated.
How is a substantiated business expense reimbursement received by an employee treated for income tax purposes?
Business expense reimbursements properly accounting for employer expenditures do not constitute taxable income to the employee.
Which requirement must be satisfied for an employee's meal reimbursement to be exempt from withholding tax?
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If a company reimburses an employee for both an illegal government meal and a valid client meal, which portion is deductible by the company?
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Learn more about these topics
1. Illegal Payments Non-Deductibility
Under Section 34(A)(1)(c) of the National Internal Revenue Code, no deduction from gross income is allowed for any payment made directly or indirectly to an official or employee of the government if the payment constitutes a bribe or illegal kickback. Entertainment, meal, or representation expenses incurred for public officials in connection with securing permits or regulatory approvals are strictly non-deductible. Even if supported by official receipts, funds spent on government officers to facilitate official business cannot be claimed as ordinary and necessary corporate expenses.
2. Representation Expense Deductibility
Under Section 34(A)(1)(a) of the Tax Code and relevant revenue regulations, ordinary and necessary representation and entertainment expenses incurred in developing business or entertaining prospective private clients are deductible from corporate gross income. To be deductible, these expenses must be directly connected to or follow a substantial and bona fide business discussion, reasonable in amount, and supported by adequate receipts. Expenses incurred during meals with prospective private joint venture partners qualify as legitimate representation expenses.
3. Employee Expense Reimbursements
Under Revenue Regulations No. 2-98, advances or reimbursements received by an employee for ordinary and necessary representation expenses paid or incurred on behalf of the employer are not subject to income tax or withholding tax. For reimbursement to be tax-exempt to the employee, the employee must be required to account and substantiate the expenses with official receipts issued in the name of the employee or employer, and the expenses must be incurred strictly in the pursuit of the employer's business.