BIR Ruling No. 130-65

December 3, 1965 BIR RULING NO. 130-65 Mr. Eduardo P. Gosiengfiao Attorney-at-Law Suite 609 Pacific Bldg. 460 Rosario St., Manila S i r : This refers to your letter dated September 9, 1965, stating the following: "I have the honor to request enlightenment as to what amount of bonus in relation to salary is allowed an employee with respect to internal revenue regulations. cdtech The following hypothetical case is submitted as an example: The Manager, Treasurer, and President of a business corporation receive salaries at the rate of P9,000.00, P6,000.00, and P4,000.00 a year, respectively. As incentive, the board of directors of the corporation, decided to give the officers a yearly bonus at the rate of 20%, 10% and 5%, respectively, of the net profits. This was done in order to give equitable compensation to the officers and at the same time save the corporation from being obligated to pay a big bonus even if the firm does not earn any profit during the year. If the corporation failed to earn any profit, the officers do not receive any bonus; but if it realizes a net profit of P100,000.00 in the year, it follows that the income of the officers for that year will be: SALARY BONUS President P4,000.00 P5,000.00 Treasurer P6,000.00 P10,000.00 Manager P9,000.00 P20,000.00 In the above illustration the bonus of the officers are much larger than their salary. Is this allowable the same being equitable bonus based on net profits? Please furnish me with a copy of any ruling on the point." In reply thereto, I have the honor to inform you as follows: Bonuses to employees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries do not exceed a reasonable compensation for the services rendered (Sec. 72, Rev. Reg. No. 2). Whether or not a particular salary or compensation is reasonable or unreasonable will depend upon the circumstances of each case. Thus, the amount and quality of the services performed with relation to the business, the character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type and extent of the service rendered, the salary policy of the corporation, the size of the particular business, the employees' qualifications and contributions to the business venture and general economic condition are among the several factors that should be taken into account in determining the reasonableness of the particular salary or compensation (Mertens, Law of Federal Income Taxation, Vol. 4, pp. 407-412). Moreover, bonuses based upon a fixed plan, such as a certain percentage of the profits, are allowable deductions provided said bonuses are not in excess of the reasonable compensation for the services actually rendered (C.B. 111-1, 126), and provided further, that said bonuses do not have a close bearing with the stockholdings of the recipient (Sec. 71, Rev. Reg. No. 2). casia Very truly yours, (SGD.) MISAEL P. VERA Acting Commissioner of Internal Revenue