Advances to firms

THE Bureau of Internal Revenue issued Revenue Memorandum Circular No. 89-2012 clarifying the tax implications and recording of deposits/advances made by clients of general professional partnerships for

expenses.

It is common business practice for General professional partnerships (herein referred to as ‘Firm’), such as accounting firms or law firms: (1) to require their clients (hereinafter referred to as ‘Client’) to deposit a sum of money to them to be used to cover necessary expenses; and/or (2) to pay in advance the necessary expenses on behalf of their Client. The deposits shall thereafter be liquidated by the Firm, while the advances made by Firm shall thereafter be paid by the client. When the Firm bills the Client for the professional fees, such deposits is taken into account in the computation.

However, since the Official Receipts/Invoices covering these expenses incurred on behalf of the Client are issued by the third party establishments in the name of the Firm, instances occur with these expenses are claimed as deductions to gross income by both the Firm and the Client. As a result, the same expense is twice claimed as deductions contrary to the provisions of the Tax Code. Accordingly, Revenue Memorandum Circular No. 89-2012 seeks to provide guidelines to address this matter.

When the Firm receives cash deposits or advances from the Client, the Firm shall issue a corresponding Official Receipt. This amount received shall be booked as income of the Firm. They shall form part of the Firm’s Gross Receipts and subject to Value-added Tax (VAT), if applicable.

The Firm shall record the expenses it incurred and paid on behalf of the Client as its own expenses for income tax purposes if the official receipt/invoice issued by the third-party establishments in the name of the Firm.

Accordingly, all these expenses, supported by Official Receipts/Invoices issued by third-party establishments in the name of the Firm, may be claimed by the latter as deductions from its gross income. Conversely, these expenses may not be claimed as deductions from the gross income of the Client.

On the other hand, all payments made by the Client to the Firm shall be allowed as deduction from its gross income as professional fee/s provided that they are duly substantiated by Official Receipts.

The Firm and Client, however, are not precluded from availing of the Optional Standard Deduction provided under the existing tax laws, rules and regulations.

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