Profit-sharing Extended by Company to Employees Tax Deductible Expense

December 28, 1993 BIR RULING NO. 538-93 PROFIT-SHARING EXTENDED BY COMPANY TO EMPLOYEES TAX DEDUCTIBLE EXPENSE 29 000-00 538-93 Hi-Eles Industrial Corporation 2643-P Taft Avenue Pasay City, Metro Manila Attention: Mr . Donato Del Rosario This refers to your letter dated June 23, 1993 in relation to BIR Ruling No. 268-93, requesting further clarification as to whether the profit-sharing incentive paid to your employees and recorded as expense by the company in December may be allowed (as deduction) for corporate income tax purposes for said year. In reply, please be informed that profit-sharing benefit like bonuses, based upon a fixed plan, such as a certain percentage of the profits, if not in excess of the reasonable compensation for the services actually rendered are deductible despite the condition that such bonuses/benefit should be based on the net income after income tax has been imposed, and even though the amount thereof cannot be determined until after the end of the year when the books are closed and the profits determined (Uncasville Mfg., Co. vs. Comm. 55 F/2d) 8-93, cert. deN. 284 U.S. 545, Montgomery's Federal Taxes, vol. 1, 1946-47 p. 1018). Deduction from gross income of additional compensation in bonuses granted to officers and employees of a corporation is subject to the three limitations, namely: (1) payment of bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3) the bonuses, when added to the salaries are reasonable when measured by the amount and quality of the services performed with relation to the business of the particular taxpayer. If the credit is made at the time of employment or in pursuance of the resolution of the Board of Directors duly communicated to the employees before the close of the year, such bonuses/shared profits are deductible in the year of accrual (Willoughby Camera Stores, Inc. vs. Comm. 125F [2d] 607). aisadc In view of the foregoing, your query above is answered in the affirmative. LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue