Ordinary and Necessary Expenses Paid or Incurred During the Taxable Year in Carrying on Any Trade or Business

December 1, 1959 BIR RULING NO. 602-59 Stewart, Cunanan & Co. Certified Public Accountants Port Area, Manila Gentlemen : With reference to your letter dated July 28, 1959, I have the honor to inform you as follows: casia All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered are allowable as deductions in computing net income. (Sec. 30 (a)(1), Tax Code) Pursuant to section 72 of Revenue Regulations No. 2, implementing the aforesaid section of the Tax Code, 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 that such payments when added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered. The reasonableness of any given compensation is basically factual and thus no one element may be considered to the exclusion of others. In essence therefore, there is no definite formula by which the question of reasonableness of the compensation in any particular case can be determined; the entire situation must be considered as a whole. Among the factors which are to be considered, but not necessarily with equal importance, are the type and extent of services rendered by the employees; the scarcity of qualified employees for the particular position; the qualifications and prior earning capacity of the employee; the contributions of the employee to the business venture; the compensation policy of the taxpayer; the volume and amount of the taxpayer's net earnings; the location and character of the taxpayer's business, including its special or peculiar characteristics, if any; the ratio of the particular compensation and aggregate compensation to the taxpayer's gross income; the prevailing compensation paid to employees performing similar services in other comparable enterprises; and the general economic conditions. (Mertens, Law of Federal Income Taxation, Vol. 4, Section 25.69, p. 166). In effect, therefore, the "reasonable or unreasonable amounts claimed as compensation is a question of fact, to be determined without any fixed standard or yardstick, and in the light of all the surrounding circumstances." (47 C. J. S. p. 415). In view of all the foregoing, this Office is not in a position to establish a definite formula or fixed standard within which to determine the question of reasonableness of the amount or percentage of bonus that may be given by your client to its key officers and employees for purposes of section 30 (a)(1) of the Tax Code. cdll Very truly yours, (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue