BIR Ruling No. 138-83

August 1, 1983 BIR RULING NO. 138-83 S i r : This refers to your letter dated July 18, 1983 requesting a ruling on the following queries: cdt "1. Whether organizational and pre-operating expenses are capital expenditures, but may be amortized; "a. In the case of a non-BOI registered firm, over a minimum period of five years; "b. In the case of BOI-registered enterprise over a period of not more than ten years. "2. Whether the "organizational expenses" under the National Internal Revenue Code that could be capitalized and amortized, as discussed above, include "pre-operating expenses", as understood under the Omnibus Investments Code." In reply, I have the honor to inform you that under Section 31 of the Tax Code as implemented by Section 120 of Revenue Regulations No. 2, organization and pre-operating expenses of a corporation are considered as capital expenditures and are, therefore, not deductible in the year they are paid or incurred. However, as a matter of accounting practice, for non-BOI registered enterprise, said expenses may be treated as deferred expenses and deducted for over a period of not less than sixty (60) months beginning with the first month the corporation is actively in business. For this purpose, a corporation is considered to begin when it commences the activities for which it was organized. Generally, this occurs after the charter or articles of incorporation is issued. (see par. 6163-6164, p. 386, Vol. 34 Am. Jur. 2d, 1976 Ed.) On the other hand, pursuant to Article 45, Chapter I, Title IV of Presidential Decree No. 1789 otherwise known as the Omnibus Investments Code as amended by Batas Pambansa Blg. 391, all capitalized organizational and pre-operating expenses attributable to the establishment of a BOI-registered enterprise may be deducted from its taxable income over a period of not more than ten (10) years beginning with the month the enterprise begins operations, provided that the taxpayer indicates the desired amortization period at the time of the filing of income tax returns for the first taxable year. For this purpose, organizational and pre-operating expenses shall include expenses for pre-investment studies, start-up costs, costs of initial recruitment and training and similar expenses. Finally, Section 120 of Revenue Regulations No. 2 implementing Section 31 of the Tax Code as amended provides that in the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and accountants' charges, are ordinarily capital expenditures, but when such expenditures are limited to purely incidental expenses, a taxpayer may charge such items against income in the year in which they are incurred. Hence, organizational expenses that could be capitalized and amortized under the National Internal Revenue Code include only such pre-operating expenses as understood under the Omnibus Investments Code which fall within the category of expenses of corporate organization as envisaged by Section 120 of Revenue Regulations No. 2 implementing Section 31 of the Tax Code. cdti Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner Bureau of Internal Revenue