Gross Income and Deductions

Computation
of Taxable
Income
Taxable Income
Gross Income
Less: Deductions
_______________
Taxable Income
Gross Income
Section 32 (A) of the NIRC
All income derived from whatever source, including (but not limited to) the
following items:
Compensation for services in whatever form paid including, but not limited to, fees, salaries,
wages, commissions, and similar items
Gross income derived from the conduct of trade or business or the exercise of a profession
Gains derived from dealings in property
Interests
Rents
Royalties
Dividends
Annuities
Prizes and winnings
Partners distributive share from the net income of general professional partnership
Taxability of Deposits/Advances for Expenses
Received by Taxpayers other than GPPs
RMC No. 16-2013
When cash deposits or advances are received by taxpayers other than GPPs
covered by RMC No. 89-2012 from the client/customer, the same shall be
recorded as income and shall form part of the Gross Receipts
As such, all client/customer shall, upon payment deposits/advances, withhold

tax at the rate prescribed in RR No. 2-98, as amended
Income Derived from Whatever Source
The words used in the law disclose a legislative policy to include all
income not expressly exempted within the class of taxable income
under our laws, irrespective of the voluntary or involuntary action of
the taxpayer in producing the gains. (Gutierrez v. Collector, CTA Case
No. 65, August 31, 1965)
Whether derived from legal or illegal sources

Interest Income - Imputation of Interest
Income
Filinvest Case Case GR Nos. 163653 and 167689, July 19, 2011
Issue: Whether Company F is liable for income tax on theoretical

interest income imputed on the advances extended to its affiliates.
Held: No. The SC ruled that income tax cannot be assessed on a mere
imputation of interest income on a loan extended to an affiliate if
there was no actual payment of interest or if there was no interest
stipulated in the loan agreement.
Income
Held: While it has been ruled that the phrase from whatever source
derived indicates a legislative policy to include all income not
expressly exempted within the class of taxable income under our
laws, the term income has been variously interpreted to mean
cash received or its equivalent, the amount of money coming to a
person within a specific time or something distinct from principal or
capital.
There must be proof of the actual or, at the very least, probably
receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
Income
Held: The SC further cited Article 1956 of the Civil Code of the Philippines
that no interest shall be due unless it has been expressly stipulated in
writing.
The decision also noted that, while the Commissioner has the power to
allocate income and deductions between and among controlled taxpayers,
that power does not include the power to impute theoretical interests.
Meanwhile, the SC upholds that intercompany loans and advances covered
by mere office memo, instructional letter and/or cash journal vouchers
qualify as loan agreements are subject to DST under Sec. 180 of the NIRC.
Rental Income Taxes Paid by Tenant
Section 74, RR No. 2
Taxes paid by a tenant to or for a landlord for business property are additional
rent and constitute a deductible item to the tenant and taxable income to the
landlord, the amount of the tax being deductible by the latter.
Rental Income When recognized as income
BIR Ruling DA 509 06, August 25, 2006
Rental income actually earned should be reported as income regardless of its
accounting method
Advance rentals actually received should be reported as income regardless of
taxpayers accounting method
Security deposits should be reported as income upon conversion or
application as rental
Taxability of Deposits/Advances for Expenses
Received by Taxpayers other than GPPs
RMC No. 16-2013
When cash deposits or advances are received by taxpayers other than GPPs
covered by RMC No. 89-2012 from the client/customer, the same shall be
recorded as income and shall form part of the Gross Receipts.
As such, all clients/customer shall, upon payment of deposits/advances,

withhold tax at the rate prescribed in RR 2-98, as amended.
An OR shall be issued for every deposit and advances pursuant to Section 113
of the NIRC. The OR shall cover the entire amount which the client/customer
pays.
Royalties
General Rule:
If the royalties are received in active pursuit of business, it is subject to 30%
RCIT
If royalties are considered as passive income, these are subject to 20% FWT
Royalties
CTA Case No. 8607, August 14, 2015
Issue: Whether the royalty income received by Company I is
considered as an active income subject to 30% RCIT
Held:
Yes. Royalty payments received by Company I are generated from the
purpose of its business, part of which is owning, purchasing, licensing,
acquiring trademarks and other intellectual property rights, necessary for its
business.
In Chamber of Real Estate v. Romulo, the SC held that if the income is

generated in the active pursuit and performance of the corporations primary
purpose, the same is not passive income
Royalties
CTA Case No. 8607, August 14, 2015
Held:
Passive incomes are incomes generated from the taxpayers asset (e.g. rental
income, dividend income, interest income)
In this case, the CTA found that Company I has (1) no operating expenses incurred for
its alleged main trade or business of manufacturing, buying, selling (on wholesale)
and dealing in alcoholic and non-alcoholic beverages; (2) no other sources of income
other than royalty and interest; and (c) cash flows from its operating activities
consisting only of royalty and interest income.
Hence, the royalties it received shall be considered earned from the active pursuit of
business and shall be subject to normal corporate income tax rate.
Income Tax Treatment of Agency Fees/Gross
Receipts of Security Agencies
RMC No. 39-2007
For income tax purposes, all sellers of services, as well as sellers of goods or properties,
may adopt either the cash basis or accrual basis as their accounting method for reporting
income. This means accounting method employed by the taxpayer.
The issue is whether or not the security guards salaries, which form part of the contract
price of the security services rendered by the Security Agency, can be treated as gross
income of the Security Agency, whether actually or constructively received.
The Security Agency has no control or dominion over that portion of the payment
received from its client which is intended or earmarked as salaries of the security guards.
RMC No. 39-2007
Under Section 6 of RA No. 6727 (The Wage Rationalization Act), the

liability of the security agencies for the prescribed increases in the
wage rates of workers are explicitly required to be borne by the
principals or clients of the service contractors, with the latter being
made jointly and severally liable for the same, but only in the event
that the principal or client fails to pay the prescribed wage rates.
RMC No. 39-2007
Section 1, Rule XIV of the 1994 Revised Rules and Regulations Implementing RA
No. 5487 (Organization and Operation of Private Security Agencies and Company
Security Forces throughout the Philippines) - the Security Agency does not own
the funds such that it cannot use it for any other purpose.
In view of the clear language of the law and its implementing regulations placing
the primary obligation on the Client to pay the salaries of the security guards
coupled with the requirement that the monies received by the Security Agency
representing salary shall be earmarked and segregated for the guards, the
amount paid by the Client representing the salaries shall not form part of the
Security Agencys gross income, and neither will it form part of its taxable gross
receipts when actually or constructively received.
This applies only to Security Agencies.
RMC No. 39-2007
If the Contract does not provide for a breakdown of the amount payable to
the Security Agency, the entire amount representing the Contract Price will
be taxed as income to the Agency, which must form part of its gross
receipts, whether actually or constructively received.
To comply with the requirement for deductibility under Section 34(K), in
relation to Sections 58 and 81, NIRC, the Security Agency must furnish it
client, on or before January 31 of the year following the year of
withholding, a Notarized Certification indicating the names of the guards
employed by the client, their respective TINs, the amount of their salaries
and the amount of tax withheld from each.
Deficiency Income Tax Due to Undeclared
Sales and Failure to Withhold
CTA EB No. 1117, September 21, 2015
Issue: Whether Company L is liable for deficiency income tax due to
undeclared sales and failure to withhold on expenses claimed as
deduction
Held:
Yes. Company L failed to convincingly explain the finding of undeclared sales
to Company P which was determined by comparing the Companys Summary
Alphalist of Wihtholding Taxes and Summary List of Sales.
Moreover, since portion of the income payments to suppliers and employees
were not subjected to withholding tax, the related expense must be
disallowed as deductions from Company Ls gross income pursuant to Section
34(K), NIRC.
Underdeclaration of taxpayers purchases not
subject to income tax
CTA EB No. 1054, January 13, 2015
Issue: Whether Company A is liable for deficiency income tax due to
underdeclaration of purchases
Held:
No. A finding of underdeclaration of purchase does not by itself result in the
imposition of income.
The 3 elements for the imposition of income tax are: (a) there must be gain or
profit; (b) that the gain or profit is realized or received, actually or
constructively, and (c) it is not exempted by law or treaty from income tax.
Income tax is assessed on income received from any property, activity or
service.
Underdeclaration of taxpayers purchases not
subject to income tax
CTA EB No. 1054, January 13, 2015
Held:
Thus, underdeclared purchase in not an element in the imposition or
assessment of income tax, but rather, when there is income and such income
was received or realized by the taxpayer.
Moreover, it must be emphasized that for income tax purposes, a taxpayer is
free to deduct from its gross income a lesser amount, or not claim any
deduction at all. What is prohibited by the income tax law is to claim a
deduction beyond the amount authorized therein.
Allowable Deductions
Optional Standard Deduction
Itemized Deductions
Regular Deductions
Special Deductions
OSD
RR No. 16-08
Implements Sec. 34 of RA No. 8424, as amended by Sec. 3 of RA No.
9504 (July 6, 2008)
Comparison of OSD Rates
RA No. 8424 RA No. 9504
Individuals (except NRAs) 10% of gross income 40% of gross sales/gross

receipts
Domestic and Resident OSD is not allowed 40% of gross income
Foreign Corporation
Entities not entitled to avail of the OSD
RR No. 2-2104
Corporations, partnerships and other non-individual are mandated to
use the itemized deductions in the following cases:
Those exempt under the Tax Code and other special laws, with no other
taxable income
Those with income subject to special/preferential tax rates; and
Those with income subject to income tax rate under Sections 27(A) and
28(A)(1) and also with income subject to special/preferential tax rates.
This is not based on law.

Entities not entitled to avail of the OSD
RR No. 2-2104
Juridical entities whose taxable base is the gross revenue or receipts
(e.g. non-resident foreign international carriers) are not entitled to
the itemized deductions nor to the OSD under Section 34(L) of the Tax
Code.
Individual taxpayers who are not entitled to avail of the OSD and thus
use only the itemized deduction method are as follows:
Those exempt under the Tax Code and other special laws;
Those with income subject to special/preferential tax rates; and
Those with income subject to income tax rate under Section 24 of the Tax
Code and also with income subject to special/preferential tax rates
OSD
RR No. 16-08
Gross Income gross sales less returns, discounts and allowances
and COGS.
Gross Sales includes only sales contributory to income taxable
under Section 27(A)
COGS- includes the purchase price or cost to produce the
merchandise and all expenses directly incurred to bring them to their
present location and use.
OSD
RR No. 16-08
For trading or merchandising concern, COGS means the invoice COGS,
plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the
goods are in transit.
For manufacturing concern, COGS means all costs incurred in the
production of the finished goods such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the factory or
warehouse.
OSD
RR No. 16-08
In the case of sellers of services, the term gross income means the
gross receipts less sales returns, allowances, discounts, and cost of
services.
Cost services means all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients
including (a) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service, and (b) cost of facilities
directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies.
OSD
RR No. 16-08
Gross receipts means amounts actually or constructively received
during the taxable year. However, for taxpayers engaged as sellers of
services but employing the accrual basis of accounting, the term gross
receipts shall mean amounts earned as gross revenue during the
taxable year.
The items of gross income which are required to be declared in the
ITR of the taxpayer for the taxable year are part of the gross income
against which the OSD may be deducted.
OSD
RR No. 16-08
Passive incomes which have been subjected to a final tax at source
shall not form part of the gross income for purposes of computing the
40% OSD.
The election to claim either the OSD or the itemized deduction for the
taxable year must be signified by checking the appropriate box on the
ITR filed for the first quarter of the taxable year.
Once the election to avail of the OSD or itemized deduction is
signified in the return, it shall be irrevocable for the taxable year for
which the return is made.
OSD
RR No. 2-10
Any taxpayer who is required but fails to file the quarterly ITR for the
first quarter shall be considered as having availed of the itemized
deduction for the taxable year.
Itemized Deductions
Regular
Expenses
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion
Charitable and other contributions
Research and Development
Pension Trusts
Itemized Deductions
Special
Ratable portion of HO Overhead (for RFC Branches)
Deductions under Special Laws
Sales Discounts for PWDs
Income or Expense resulting from the difference of actual and standard input VAT in
sales to government
Seniors Citizen Discount
Expenses Incurred by a Private Health Institution with Rooming-In and Breast Feeding
Practices
Time for Availing Deductions
A taxpayer has the right to deduct all authorized allowances for the
taxable year. As a rule, if he does not within any year deduct certain
of his expenses, losses, interest, taxes or other charges, he cannot
deduct them from the income of the next or any succeeding year.
(Section 76, Income Tax Regulations)
Regular Itemized Deductions - Expenses
General Requirements
Should be ordinary and necessary expenses paid/incurred during the taxable
year for the development, management, operation and/or conduct of the
trade, business or profession, such as:
Salaries and other remuneration
Travel expenses
Rentals
Entertainment, Amusement and Recreation expenses directly related to or in
furtherance of trade
Regular Itemized Deductions - Expenses
General Requirements
Substantiated by Adequate Proof documented by ORs or adequate records
which reflect the amount being deducted and connection or relation of the
expense to the business or trade of the taxpayer
Not contrary to law, morals, public policy or order
The taxes required to be withheld have been properly withheld and remitted
on time
Regular Itemized Deductions Expenses
Ordinary and Necessary
G.R. No. L-26924, January 27, 1981
The SC defines the phrase ordinary and necessary expense to be as

follows:
Ordinarily, an expense will be considered necessary where the expenditure

is appropriate and helpful in the development of the taxpayers business. It is
ordinary when it connotes a payment which is normal in relation to the
business of the taxpayer and the surrounding circumstances. The term
ordinary does not require that the payments be habitual or normal in the
sense that the same taxpayer will have to make them often; the payment may
be unique or non-recurring to the particular taxpayer affected.
Substantiation Requirements
Section 34(A)(1)(b), NIRC
No deduction from gross income shall be allowed unless the taxpayer

shall substantiate with sufficient evidence, such as official receipts or
other adequate records: (a) the amount of the expense being
deducted; and (b) the direct connection or relation of the expense
being deducted to the development, management, operation and/or
conduct of the trade, business or profession of the taxpayer.
Deficiency income tax arising from unsupported
expenses
CTA Case No. 8668, May 20, 2016
Issue: Whether Company V is liable for deficiency income tax arising from
unsupported expenses
Held: Yes. Company V is liable for deficiency income tax for failure to
substantiate impairment losses, rental/tolling fees and salaries and wages
Section 34(A)(b), NIRC, provide that no deduction from gross income shall
be allowed unless the taxpayer shall substantiate with sufficient evidence,
such as ORs or other adequate records: (a) the amount of expense being
deducted; and (b) the direct connection or relation of the expense being
deducted to the development, management, operation and/or conduct of
the trade, business or profession of the taxpayer.
Preservation of Books of Accounts and Other
Accounting Records
Section 235, NIRC
All the books of accounts, including the subsidiary books and other accounting
records of corporations, partnerships or persons shall be preserved by them for a
period beginning from the last entry in each book until the last day prescribed by
Section 203 of the NIRC within which the Commissioner is authorized to make an
assessment.
Section 237, NIRC
The original of each receipt or invoice shall be issued to the purchaser, customer
or client at the time the transaction is effected, who, if engaged in business or in
the exercise of profession, shall keep and preserve the same in his place of
business for a period of 3 years from the close of the taxable year in which such
invoice or receipt was issued, while the duplicate shall be kept and preserved by
the issuer, also in his place of business, for a like period.
Accounting Records
RR No. 5-2014, amending RR No. 17-2013
Within the first 5 years of the 10-year retention period, the taxpayer shall
retain the hard copies of the books of accounts, including subsidiary books
and other accounting records
After the 5-year period to retain hard copies, the taxpayer may retain only
an electronic copy of the hard copy in an electronic storage system, which
complies with the requirements of these regulations.
The independent CPA who audited the records and certified the financial
statements of the taxpayer shall also maintain and preserve electronic
copies of the audited and certified financial statements, including the audit
working papers, for a period of 10 years from the due date of filing the ITR
or the actual date of filing thereof, whichever comes later.
Accounting Records
If the taxpayer has any pending protest or claim for tax credit/refund
of taxes and the pertinent books and records are material to the case,
the taxpayer is required to preserve his/its books of accounts and
other accounting records until the case is finally resolved.
When the obligation to withhold arises
Section 2.57.4 of RR 2-98, as amended by Sec. 4, RR 12-2001
The obligation of the payor to deduct and withhold the tax arises at
the time an income payment is:
Paid, or
Payable, or
Accrued or recorded as an expense or asset, whichever is applicable, in the
payors books
Whichever comes first

When the obligation to withhold arises
Section 2.57.4 of RR 2-98, as amended by Sec. 4, RR 12-2001
Payable refers to the date the obligation becomes due, demandable
or legally enforceable.
When an income is not yet paid or payable, but the same has been
recorded as an expense or asset, whichever is applicable, in the
payors books, the obligation to withhold shall arise in the last month
of the return period in which the same is claimed as an expense or
amortized for tax purposes.
When accrued
Under US jurisprudence, accrual of expense is understood in terms of
the all-events test. The all-events test states that under the accrual
method of accounting, expenses are deductible in the taxable year in
which
All events have occurred which determine the liability; and
The amount of liability can be determined with reasonable accuracy.
In addition, the taxpayer must show that the economic performance has been
met, i.e., activities giving rise to the taxpayers obligations are actually
performed or when property is provided
When accrued
All events have occurred which determine the liability
A taxpayer may deduct an expense once the liability to pay becomes fixed in
nature. Once the amount of a liability is ascertainable and is imposed in the
current year although not actually payable until the following year, a
deduction is allowed.
A taxpayer may not deduct an estimate of an anticipated expense, regardless
of its statistical certainty, if it is based on events that have not occurred by the
close of the taxable year
Knowledge of a future liability even though it will not be contingent once it
does arise, is insufficient to support a deduction. A taxpayers knowledge that
some expenditure, even though determinable in amount will have to be paid
or incurred in the following year if its operations are continued, is not
sufficient to justify a deduction in the earlier year.
When accrued
The amount of liability can be determined with reasonably accuracy
This does not demand that the amount of income or liability be known
absolutely, only that a taxpayer has at his disposal the information necessary
to compute the amount, with reasonable accuracy.
The all-events test is satisfied where computation remains uncertain, if its
basis is unchangeable; the test is satisfied where a computation may be
unknown, but is not as much as unknowable, within the taxable year.
When accrued
The taxpayer must show that the economic performance test has
been met
If the expense is for property or service provided to the taxpayer, or for use of
property by him, economic performance occurs as the property or services
are provided, or as the property is used.
Deductibility
RR 2-98, as amended by RR 12-2013
Any income payment which is otherwise deductible under the Tax Code shall
be allowed as a deduction from the payers gross income only if it is shown
that the income tax required to be withheld has been paid to the BIR.
No deduction will also be allowed notwithstanding payments of withholding
tax at the time of the audit investigation or reinvestigation/reconsideration in
cases where no withholding of tax was made in accordance with Sections 57
and 58 of the NIRC
Deductibility
CTA EB Case No. 1223, January 4, 2016
Issue: Whether Company A is liable for deficiency income tax for

failure to withhold on expenses claimed as deduction
Held: Yes. Company A failed to present and/or even offer sufficient
documentary evidence to substantiate its claims of undue
disallowance of its legitimate expenses, erroneous assessment for
EWT, and the correct computation of its deficiency taxes.
Deductibility
Moreover, with regard to the contention of Company A who questioned that

there was allegedly direct double taxation imposed by the CIR because the
company was assessed for deficiency income tax by disallowing the expenses that
were not subjected to EWT and at the same time assessing the Company for
deficiency EWT on the basis of the same expenses, the Court ruled that income
tax and withholding tax are different kids of taxes. An income tax is a national tax
imposed on the net or the gross income realized in a taxable year for which
petitioner is liable to pay in its personality as a taxpayer while withholding tax is
imposed on the petitioner as a withholding agent who is required to deduct
and withhold any tax. The Tax Code only makes the agent personally liable for
the tax arising from the breach of its legal duty to withhold as distinguished from
its duty to pay tax.
Deductibility
On the other hand, Section 2.58.5 of RR 2-98, as amended, provided
that a deduction will also be allowed where no withholding of tax was
made if the withholding agent erroneously underwithheld the tax but
pays the difference between the correct amount and the amount of
tax withheld, including the interest, incident to such error, and
surcharges, if applicable, at the time of the audit/investigation or
reinvestigation/reconsideration.
Deductibility
From the foregoing provision, in order to cancel the corresponding
disallowance of expenses despite non-withholding of taxes, the
payment of the deficiency withholding taxes, including interest and
surcharges, should have been made at the time of the
audit/investigation or reinvestigation/reconsideration. Since
Company A has not yet paid the deficiency withholding taxes, the
related disallowed expenses cannot likewise be cancelled. Even if
Company A will pay for deficiency withholding taxes at this time, still,
it will not have the the effect of cancelling the disallowed expenses,
because, obviously, the time of audit/investigation or
reinvestigation/reconsideration had already passed.
Deductibility
ING Case, GR NO. 167679, July 22, 2015
Issue: Whether Company I is liable for deficiency withholding tax on
compensation on accrued bonuses claimed as deductions.
Held: Yes. It is true that the law and IRR require the employer to
deduct and pay the income tax on compensation paid to its
employees, either actually or constructively.
On the other hand, it is also true that, as a condition for deductibility
of an expense, the tax required to be withheld on the amount paid or
payable is shown to have been remitted to the BIR.
Deductibility
CTA Case No. 8372, March 31, 2016
Issue: Whether Company A is allowed to claim as deduction in the
current year (2005) expenses incurred in prior year (2004).
Held: No. The fact that Company A had accrued in its books of
accounts for 2004 the bonuses due to its employees, it had
recognized as of the end of 2004 a fixed liability to pay such amount.
Accordingly, for income tax purposes, Company A should have
deducted the amount from its taxable income in 2004 and not in
2005.
Deductibility
CTA Case No. 8372, March 31, 2016
Section 45 of the NIRC provides that the deductions shall be taken for
the taxable year in which paid or accrued or paid or incurred,
dependent upon the basis of which the net income is computed,
unless in order to clearly reflect the income, the deductions should be
taken off as of a different period.
Deductibility
GR No. 172231, February 12, 2007
Issue: Whether Company Is expenses in 1984 or 1985 can be claimed as
deduction in 1986
Held: Section 45 of the NIRC provides that the deductions shall be taken for
the taxable year in which paid or accrued or paid or incurred, dependent
upon the basis of which the net income is computed.
Since Company I used the accrual method of accounting, RAMO No. 1-2000
provides that under the accrual method, expenses not being claimed as
deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year.
Thus, a taxpayer who is authorized to deduct certain expenses and other
allowable deductions for the current year but failed to do so cannot deduct
the same for the next year.
Deductibility
GR No. 172231, February 12, 2007
The accrual method relies upon the taxpayers right to receive amounts or
its obligation to pay them, in opposition to actual receipt or payment (cash
method of accounting). Amounts of income accrue where the right to
receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment..
Using the accrual method, the determinative question in recognizing
income or expense is when the all-events test has been met. This test
requires: (a) fixing of a right to income or liability; and (b) the availability of
the reasonable accurate determination of such income or liability.
Deductibility
GR No. 172231, February 12, 2007
The all-events test requires the right to income or liability to be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy.
Accordingly, the term reasonable accuracy implies something less than an exact
or completely accurate amount.
Since the amount of expense can already be determined with reasonable
accuracy, even in the absence of billing statements during the year, Company I
should have claimed the said expense as deduction upon incurrence and not
upon receipt of bill.
Based on the foregoing, the expenses for professional services cannot be validly
claimed as deduction from Company Is gross income in 1986.
Deductibility
GR No. 172231, February 12, 2007
The all-events test requires the right to income or liability to be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy.
Accordingly, the term reasonable accuracy implies something less than an exact
or completely accurate amount.
Since the amount of expense can already be determined with reasonable
accuracy, even in the absence of billing statements during the year, Company I
should have claimed the said expense as deduction upon incurrence and not
upon receipt of bill.
Based on the foregoing, the expenses for professional services cannot be validly
claimed as deduction from Company Is gross income in 1986.
EAR Expenses
RR No. 10-2002 Ceiling on EAR Expenses
Covers:
Individuals engaged in business, including taxable estates and trusts
Individuals engaged in the practice of profession
Domestic corporations
RFCs
GPPs, including its members
EAR Expenses
EAR representation expenses and/or depreciation or rental expense
relating to entertainment facilities
Representation expenses incurred by a taxpayer in connection with the
conduct of his trade, business or exercise of his profession, in entertaining,
providing amusement and recreation to, or meeting with, a guest or guests
at a dining place, place of amusement, country club, theater, concert, play,
sporting event, and similar events or places
Does NOT refer to fixed representation allowances that are subject to
withholding tax on wages.
In the case of clubs where the officer or employee of the taxpayer is the
registered member and the expenses incurred in relation thereto are paid
by the taxpayer, there shall be a presumption that such expenses are fringe
benefits unless proven that these are actually representation expenses.
EAR Expenses
Substantiation requirements
Amount expense
Date and place of expense
Purpose
Professional or business relationship of expense
Name of person and company entertained with contact details
EAR Expenses
Entertainment Facilities
A yacht, vacation home or condominium; and
Any similar item of real or personal property used by the taxpayer primarily
for the entertainment, amusement or recreation of guests or employees.
Owned or form part of the taxpayers trade, business or profession, or rented
by such taxpayer
EAR Expenses
Guests persons or entities with which the taxpayer has direct
business relations.
Exclude employees, officers, partners, directors, stockholders or trustees
EAR Expenses
Exclusions
Expenses which are treated as compensation or fringe benefits for services
rendered under an employer-employee relationship
Expenses for charitable or fund raising events
Expenses for bonafide business meeting of stockholders, partners, or
directors
Expenses for attending or sponsoring an employee to a business league or
professional organizational meeting
Expenses for events organized for promotion, marketing and advertising
including concerts, conferences, etc.
Other similar expenses.
EAR Expenses
Requisites for deductibility
Paid or incurred during the taxable year
It must be: directly connected to the development, management and
operation of the trade, business or profession of the taxpayer; or directly
related to or in furtherance of his or its trade or business or exercise of a
profession
Not contrary to law, morals, good customs, public policy or public order
Must be duly substantiated by adequate proof.
Appropriate amount of withholding tax should have been withheld
EAR Expenses
Ceiling
Sale of goods/properties 0.5% of net sales
Sale of services 1% of net revenues
Both - apportionment
Regular Itemized Deductions Interest
Interest payment for the use or forbearance of money, regardless of
the name by which it is called. It includes the amount paid for the
borrowers use of money during the term of the loan, as well as for
his detention of money after the due date for its repayment.
Requisites for Deductibility
An indebtedness exists
The interest has been paid or incurred
The indebtedness must be that of the taxpayer
The indebtedness is connected with the taxpayers trade, business or exercise of
profession
The interest was paid or incurred during the taxable year
The interest is stipulated in writing
The interest is legally due
The indebtedness is not between related taxpayers, as defined in Section 36(B), NIRC
The interest was not incurred to finance petroleum explorations
If incurred on an indebtedness to acquire property, the interest was not treated as a
capital expenditure.
Limitations on Deductibility
The amount of deductible interest shall be reduced by an amount
equal to 33%
The limitation applies whether or not a tax arbitrage scheme was
entered into by the taxpayer, or regardless of the date of the interest-
bearing loan and the date the investment was made for as long as,
during the taxable year, an interest expense was incurred on one side
and an interest earned on the other side, which income was
subjected to final tax.
Computation of 33%
RCIT Rate 30%
Less: Final Tax on Interest Income 20%
Difference 10%
Divided by RCIT Rate of 30%
You will get 33%
Net income before interest expenses Php1M
Interest Income from bank Php180K
Final tax on interest income Php36K
Interest Expense Php150K
NI Php1,000,000
Less: Interest Expense Php150,000
Less 33% of interest income Php59,400
Deductible interest expense 90,600
Taxable Income Php 909,400
When Fully Deductible
Interest incurred or paid on all unpaid business-related taxes shall be
fully deductible from gross income and shall not be subject to the
limitation on deduction.
When Not Deductible
Paid in advance through discount or otherwise by a cash basis
individual taxpayer but such interest shall be allowed as a deduction
in year indebtedness was paid
Paid on loans between related taxpayers
Paid on indebtedness incurred to finance petroleum exploration
When Not Deductible
Related Taxpayers Section 36
Between members of a family - brothers and sisters, spouse, ancestors and lineal
descendants
Between the grantor and a fiduciary of any trust
Between the fiduciary of a tryst and the fiduciary of another trust if the same person
is a grantor with respect to each trust
Between a fiduciary of a trust and beneficiary of such trust
Between an individual and a corporation more than 50% in value of the outstanding
stock of which is owned, directly or indirectly by such individual
Between 2 corporations more than 50% in value of the outstanding stock of each of
which is owned, directly or indirectly, by or for the same individual, if either one of
such corporations, with respect to the taxable year of the corporation preceding the
date of the sale or exchange was, under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company.
Between two corporations more than 50% in value of the outstanding stock of each
of which is owned, directly or indirectly, by or for the same individual.
Regular Itemized Deductions - Taxes
Taxes paid or incurred within the taxable year in connection with the
taxpayers trade or business, except:
Philippine income tax
Foreign income tax, if taxpayer avails of the Foreign Tax Credit (FTC)
Estate and donors tax
VAT
Taxes assessed against local benefits of a kind that tends to increase the value
of the property assessed
Regular Itemized Deductions Taxes
Income Taxes Imposed by a Foreign Country
Options:
Claim as deduction from gross income of resident citizens and domestic
corporations
Claim as FTC against Philippine income tax due of resident citizens and
domestic corporations
Regular Itemized Deductions Taxes FTC
Who are entitled?
Resident citizens
Domestic corporations
Members of GPPs
Beneficiaries of estates and trusts
Who are not entitled?
Non-resident citizens
Aliens, whether residents or non-residents
Foreign corporations, whether residents or non-residents
Reason: FTC is allowed for income derived from sources outside the
Philippines, which are taxable in the Philippines. These taxpayers are subject
to Philippine income tax only on income derived from sources within the
Philippines
Proof of FTC
The total amount of income derived from foreign sources
The amount of income derived from each country, the foreign tax paid or
incurred, which is claimed as a credit
All other information necessary for the verification and computation of such
credit
Computation of FTC
Limitation # 1
(Taxable income from foreign country/Taxable income from all sources) x Philippine
income tax = limit on amount of tax credit
Allowable tax credit is the lower between the actual tax paid in the foreign country and
the limitation above
Limitation #2
(Taxable income from outside sources/Taxable income from all sources) x Philippine
Allowable tax credit is the lower between the tax credit computed under limit # 1 and
that computed under limit # 2
FTC Limitations Lowest of the 3:
Actual FTC
For taxes paid to 1 foreign country
(Taxable income from foreign country/Taxable income from all sources) x Philippine
Allowable tax credit is the lower between the actual tax paid in the foreign country and
the limitation above
For taxes paid to 2 or more foreign countries
(Taxable income from outside sources/Taxable income from all sources) x Philippine
Allowable tax credit is the lower between the tax credit computed under limit # 1 and
that computed under limit # 2
FTC Limitations
Step 1: Lower of the actual FTC and limitation #1, on a per country basis
Step 2: Lower of the sum of the lower figures in Step 1 (aggregate of all
countries and limitation #2
Regular Itemized Deductions Losses
Ordinary Losses
Losses incurred in trade, business or profession
Losses of property connected with trade, business or profession, if due to
casualty, etc.
Capital Losses
Losses from sales or exchanges of capital assets (allowable only to the extent
of capital gains)
Losses resulting from securities becoming worthless and which are capital
assets (considered loss from sale or exchange) on last day of the taxable year
Losses from short sales of property
Losses due to failure to exercise privileges or options to buy or sell property
Special Losses
Losses from wash sales of stocks or securities
Wagering losses
Abandonment losses in petroleum operations
Losses due to voluntary removal of buildings, machinery
Losses of the useful value of capital assets due to some change in business
conditions
Actually sustained and charged-off during the taxable year and not
compensated for by insurance or other forms of indemnity
Incurred in trade, profession or business
Of property connected with the trade, business or profession, if the
loss arises from fires, storms, shipwreck or other casualties or from
robbery, theft or embezzlement
Sustained in a closed and completed transaction
Write-off of Inventories
Unnumbered BIR Ruling dated November 21, 1996
A BIR certification should be obtained to support deductions for inventory write-offs
Section 98 of RR No. 2
Loss of useful value As an exception to the rule requiring a sale or other disposition
of property in order to establish a loss requires proof of some unforeseen cause by
reason of which the property has been prematurely discarded, as, for example,
where an increase in the cost or change in the manufacture of any product makes it
necessary to abandon such manufacture, to which special machinery is exclusively
devoted, or where new legislation directly or indirectly makes the continued
profitable use of the property impossible.
Note: Exception applies only to buildings only when they are permanently
abandoned or permanently devoted to a radically different use, and to machinery
only when its use as such is permanently abandoned
RMO 6-2012, April 2, 2012
Prescribing the policies and guidelines for the inspection and supervision over the
destruction/disposal of inventories, machineries or equipment or verification of
casualty losses in relation to the determination of deductible expenses
No destruction or disposal of any inventory, machinery or equipment shall be made without
the presence and supervision of the authorized BIR representative from either the RDO
where the principal business is registered or from the RDO where the inventory is located.
The authorized BIR representative from the RDO who conducted the supervision on the
physical destruction/disposal of the inventories/equipment shall make a report on the result
of supervision of disposal/destruction/verification of casualty loss.
The said report together with the supporting documents shall be transmitted to the
concerned LT or RDO where the taxpayer earlier filed its application, for processing,
evaluation and preparation of the Certificate of Deductibility of Inventory or Asset
Destroyed/Disposed/Lost
Possible counter-argument
CTA Case No. 6577, September 25, 2006
BIR disallowed petitioners claimed inventories written-off in the amount of

Php5,530,136 for being unsubstantiated, there being no prior BIR approval nor
the presence of the representative from the BIR.
While a certification from the BIR of the actual destruction of the claimed
obsolete inventories is not necessary in order that the cost thereof may be
written-off and claimed as deduction, petitioner should have presented
competent documentary evidence to establish that the amount of
Php5,530,156 actually pertained to destroyed obsolete inventories.
For failure of the petitioner to substantiate the inventory written off, the CTA
sustained the disallowance of the same.
Casualty Losses
RMO No. 031-09
For purposes of filing claims for casualty loss, a Sworn Declaration of Loss should
be filed within forty-five (45) days after the date of the event that gave rise to the
casualty, stating the following:
Nature of the event and the time of its occurrence;
Description and location of the damaged property(ies);
Items needed to compute the loss(es) such as: (a) cost or other basis of the
property(ies); (b) depreciation allowed, if any; (c) value of the property(ies) before
and after the event; (d) cost of repair.
Amount of insurance or other compensation received or receivable.
Proof of the elements of the loss(es) claimed
Photographs (before and after)
Documentary evidence for determining the cost or valuation vouchers, cancelled checks,
receipts
Insurance policy
Police report
Casualty Losses
RMO No. 031-09
Failure to report a theft or robber to the police can be held against the
taxpayer.
However, a mere report of an alleged theft or robbery to the police
authorities is not considered as conclusive proof of the loss arising
therefrom.
A taxpayer engaged in trade or business may be entitled to claim, as
business deductions, casualty losses incurred for properties actually used
in the business enterprise that were damaged and reported as losses in
the appropriate declaration filed with the BIR. The loss of assets not used
in the course of business and/or are personal in nature shall therefore not
be allowed.
Casualty Losses
RMO No. 031-09
Properties that shall be reported as casualty losses must have been
properly reported as part of the taxpayers assets in the taxpayers
accounting records and financial statements in the year immediately
preceding the occurrence of the loss, with the costs of acquisition
clearly established and recorded. Otherwise, the claim of deduction
shall not be allowed.
The amount of loss that shall be compensated by insurance coverage
should not be claimed as a deductible loss.
If the insurance proceeds exceed the net book value of the damaged assets,
such excess shall be subject to the regular income tax.
Regular Itemized Deductions Bad Debts
Bad Debts debts resulting from the worthlessness or uncollectibility,
in whole or in part, of the amounts due to the taxpayer by others
arising from money lent or from uncollectible amounts of income
from goods sold or services rendered.
RR No. 5-99, as amended by RR No. 25-2002
There must be an existing indebtedness due to the taxpayer which must be valid
and legally demandable;
The same must not be sustained in a transaction entered into between related
parties:
Between members of a family, spouse, ancestors, and lineal descendants;
Except in cases of distribution in liquidation, between an individual and a corporation more
than fifty percent (50%) in value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual
Except in case of distribution in liquidation, between two corporations more than 50% in
value of the outstanding stock of each od which is owned, directly or indirectly, by or for the
same individual
Between the grantor and a fiduciary of any trust
Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust
Between a fiduciary of a trust and a beneficiary of such trust
The same must be connected with the taxpayers trade, business or
practice of profession
The same must be actually charged off the books of accounts of the
taxpayer as of the end of the taxable year
The same must be actually ascertained to be worthless and uncollectible as
of the end of the taxable year, EXCEPT FOR BANKS where the BSP shall the
BSP shall ascertain the worthlessness and uncollectibility of the bad debts
and shall approve the writing-off of said debts and INSURANCE OR SURETY
COMPANY where the Insurance Commission shall declare such company
closed due to insolvency or for any similar reason
CTA Case No. 6356, June 9, 2009
The CTA outlined the following steps that should be followed in order to
prove that the taxpayer exerted diligent efforts to collect the debt and
consequently, establish worthlessness and uncollectibility of the related
receivables for tax purposes:
Sending of statements of account;
Sending of collection letters;
Giving the account to a lawyer for collection; and
Filing a collection case in court.
However, where the facts indicate that legal action would only result in
additional expense and in all probability will not result in the satisfaction of
a judgment once obtained as when the debtor is insolvent, the bad debt is
deductible without the taxpayer having to go to court.
CTA Case No. 8541, April 20, 2015
failure to meet the substantiation requirements of bad debt expense
related to its receivables from Company S and Company N
Held: Yes. In the absence of supporting documentary evidence,
Company As allegation and the testimony of its witness are too weak
and unconvincing to establish that Company A exerted diligent efforts
to collect and that its receivables are worthless.
failure to meet the substantiation requirements of bad debt expense
related to its receivables from Company S and Company N
Held: Yes. In the absence of supporting documentary evidence,
Company As allegation and the testimony of its witness are too weak
and unconvincing to establish that Company A exerted diligent efforts
to collect and that its receivables are worthless.
Held: In the case at bar, Company A failed to show compliance with the
outlined steps in collecting debts from Company S and Company N
regarding the statement of accounts and collection letters, giving/assigning
of the account to a lawyer for collection and the filing of a collection case
in court.
In particular, while Company A alleged that it sent statements of account to
Company S, the same is unsubstantiated by evidence. Similarly, the
testimony of its accountant that Company As agents and President made
several follow-ups to Company S to demand payment and that it sent
Company N statement of account which the latter refused to sign is simply
self-serving evidence sans probative value.
Tax Benefit Rule on Recovery of Bad Debts
A debt which was previously found to be worthless and written-off in
a prior year and subsequently collected does not render the
deduction unallowable or illegal (CTA Case No. 367, January 30, 1961)
RR No. 5-99
The recovery of bad debts previously allowed as deduction in the preceding
year or years shall be included as part of the taxpayers gross income in the
year of such recovery to the extent of the income tax benefit of said
deduction.
Regular Itemized Deductions Depreciation
Depreciation includes:
The gradual diminution in the service of useful value of tangible property due
from exhaustion, wear and tear and normal obsolescence.
The systematic allocation of the depreciable amount of an asset over its
useful life
Amortization of the value of intangible assets the use of which in the trade or
business is definitely limited in duration (Basilan Estates, Inc. v. CIR, 21 SCRA
17)
Regular Itemized Deductions Depreciation -
Must be reasonable
Must be for property used or employed in the business, or
temporarily not in use
Must be charged off during the taxable year
Must be supported by a statement submitted together with the tax
return
Methods of Computing Depreciation
Straight-line depreciation
Declining-balance method
Sum-of-the years digit method
Any other method which may be prescribed by the Secretary of
Finance upon recommendation of the BIR
Limits on Deductibility
RR No. 12-2012
No deduction for depreciation shall be allowed for vehicles unless the
taxpayer substantiates the purchase with sufficient evidence, such ORs or
other adequate records which contain the following, among others:
Specific Motor Vehicle Identification Number, Chassis Number, or other registrable
identification numbers of the vehicle;
The total price of the specific vehicle subject to depreciation; and
The direct connection or relation of the vehicle to the development, management,
operation, and/or conduct of the trade or business or profession of the taxpayer
Only one vehicle for land transport is allowed for the use of an official or
employee, the value of which should not exceed Php2.4M.
Limits on Deductibility
RR No. 12-2012
No depreciation shall be allowed for yachts, helicopters, airplanes and/or
aircrafts, and land vehicles which exceed Php2.4M, unless the taxpayers
main line of business is transport operations or lease of transportation
equipment and the vehicles purchased are used in said operations
All maintenance expenses on account of non-depreciable vehicles for
taxation purposes are not allowed in its entirety. For VAT purposes, all
input taxes corresponding to the disallowed expenses are likewise not
allowed.
Any loss that will be incurred as a result of a sale of the non-depreciable
vehicles shall likewise not be allowed as a deduction from gross income.
Intangibles (Amortization)
RR No. 2, Section 107
Intangibles, the use of which in business is definitely limited in
duration, may be the subject of a depreciation allowance (e.g.
patents, copyrights, franchises)
Regular Itemized Deductions Depletion
Depletion is the exhaustion of natural resources as a result of
production or severance
A reasonable allowance for depletion shall be allowed as deduction
For entities engaged in oil and gas wells or mines
Under a cost depletion method
Not permitted if depletion allowance has equaled the invested capital
Regular Itemized Deductions Charitable and
Other Contributions Requisites for Deductibility
For donation worth over Php50,000, notice to the RDO within 30 days
is required and Certificated of Donation/OR (from an accredited
donee institution) must be attached
Other Contributions Donations Deductible in Full
Special Laws
IBP (PD No. 181)
Development Academy of the Philippines (PD No. 205)
Aquaculture Department of SEA Fisheries and Development Center
(SEAFDEC) (PD No. 292)
UP and other State Colleges and Universities (Various Chapters)
CCP
National Commission for Culture and Arts
International Rice Research Institute
Department of Science and Technology
Donations to the Philippine Government or to any of its agencies or
political subdivisions, including fully owned government corporations
exclusively to finance, to provide for, or to be used in undertaking priority
activities in education, health, youth and sports development, human
settlements, in science and culture, and in economic development
according to a national priority plan to be determined by the NEDA, in
consultation with appropriate government agencies, including its regional
development councils, and private philanthropic persons and institutions
Donations to foreign institutions or international organizations to whom
the Philippine Government has treaties or commitments with or covered
by special laws
Donations to accredited NGOs, subject to conditions set forth in RR No. 13-
98
Donations of prizes and awards to athletes (RA 7549, Sec. 1)
Donations actually paid or made to accredited NGOs shall be allowed
full deductibility, subject to the following conditions: (RR 13-98)
The accredited NGO shall make utilization directly for the active conduct of
the activities constituting the purpose or function for which it is organized
and operated, not later than the 15th day of the third month after close of the
accredited NGOs taxable year in which contributions are received, unless an
extended period is granted by the Secretary of Finance, upon
recommendation of the the CIR
The amount of any charitable contribution of property other than money
shall be based on the acquisition cost of said property
All members of the Board of Trustees of the non-stock, non-profit
corporation, organization or NGO do not receive compensation or
remuneration for their service to the NGO
Donations actually paid or made to accredited NGOs shall be allowed
full deductibility, subject to the following conditions:
The level of administrative expenses of the accredited NGO, shall, on an
annual basis, not exceed thirty percent (30%) of the total expenses for the
taxable year
In the event of dissolution, the assets of the accredited NGO, would be
distributed to another accredited NGO organized for similar purpose or
purposes, or to the State for public purpose, or would be distributed by a
competent court of justice to another accredited NGO to be used in such
manner as in the judgment of said court shall best be accomplished the
general purpose for which the dissolved organization was organized.
Other Contributions Limited Deductibility
Donations to accredited non-stock, non-profit corporations shall be
allowed LIMITED deductibility as follows:
Individual donor not in excess of 10% of the donors income derived from
trade, business or profession computed before the donation;
Corporate donor not in excess of 5% of the donors income derived from
trade, business or profession computed before the donation
Other Contributions
ABC made charitable contributions/donations to the following
organizations in 2015
DOST Php25,500 supported by OR
Philippine Sports Commission Php45,000 supported by OR
National Council for Culture and Arts Php65,000 supported by Notice to
RDO No. 82 and Ors
Bantay Kalikasan Php60,000 supported by Certificate of Donation
How much is the deductible donation in 2015?

Regular Itemized Deductions Research and
Development
R&D - All costs incident to the development of an experimental or
pilot model, a plant process, a product, a formula or invention or
similar property, and the improvement of already existing property of
the type mentioned
Allowed as deduction
If incurred in connection with the trade, business or profession of the
taxpayer; and
If not charged to capital account
Development
At the option of the taxpayer, the R&D expenditures may be treated
as deferred expenses:
If paid or incurred in connection with trade, business or profession
If not treated as expense; and
If chargeable to capital account not subject to depreciation
If treated as deferred expense, the R&D shall be amortized over a
period of not less than 60 months
Development
Expenses not considered as R&D:
Expenditures for acquisition or improvement of land, or for the improvement
of property to be used in connection with R&D of a character which is subject
to depreciation and depletion; and
Expenditures paid or incurred for the purpose of ascertaining the existence,
location, extent, or quantity of any deposit of ore or other mineral, including
oil or gas
Regular Itemized Deductions Pension Trusts
Contributions made to a pension trust may be claimed as deduction
in the following manner:
Amount contributed for the normal service cost 100% deductible
Amount contributed for the past service cost 1/10 of the amount
contributed is deductible in the year the contribution is made, the remaining
balance will be amortized equally over nine consecutive years
There must be a pension or retirement plan established to provide for
the payment of reasonable pensions to employees
The pension plan is reasonable and actuarially sound
It must be funded by the employer
The amount contributed must no longer be subject to the employers
control or disposition
The payment has not theretofore been allowed before as a deduction
Reasonable private benefit plan a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of
some or all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or both, for
the purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and wherein it is
provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said officials and employees (sec.
32(B), (6), (a), Tax Code)
Tax Exemption Certificate
Special Itemized Deductions Ratable Portion
of HO Overhead (for RFC-Branches)
Sec. 42(E), Tax Code
Where items of gross income are separately allocated to sources
within the Philippines, there shall be deducted (for the purpose of
computing the taxable income therefrom) the expenses, losses, and
other deductions properly apportioned or allocated thereto and a
ratable part of other expenses, losses or other deductions which
cannot definitely be allocated to some items or classes of gross
income
Special Itemized Deductions Income or Expense
Resulting from the Difference of Actual and
Standard Input VAT on Sales to Government
The government or any of its political subdivisions, instrumentalities
including GOCCs shall before making payment on account of each
purchase of goods and/or services taxed at 12% VAT pursuant to
Sections 106 and 108 of the 1997 Tax Code, deduct and withhold a
final VAT due at the rate of 5% of the gross payment thereof
The 5% final VAT withholding rate shall represent the net VAT payable
of the seller. The remaining 7% effectively accounts for the standard
input VAT for sales of goods or services to government or any of its
political subdivisions, instrumentalities or agencies including GOCCs in
lieu of the actual input VAT directly attributable or ratably
apportioned to such sales.
Special Itemized Deductions Income or Expense
Resulting from the Difference of Actual and
Standard Input VAT on Sales to Government
Should the actual input VAT attributable to government exceed 7% of
gross payments, the excess may form part of the sellers expense or
cost
On the other hand, if actual input VAT attributable to sale to
government is less than 7% of gross payment, the difference must be
closed to income
Items Not Deductible
General Rule No deduction shall be allowed for:
Personal, living or family expenses
Payment for new buildings or for permanent improvement, or betterment made to
increase the value of any property or estate (not applicable to intangible drilling and
development costs incurred in petroleum operations)
Expenses in restoring property in making good the exhaustion thereof for which an
allowance is or has been made
Premium paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried on
by the taxpayer, individual or corporation, when the taxpayer is directly or indirectly
a beneficiary under such policy
Losses from sales or exchanges of property between related parties
RMC No. 98-2010
Purchases made from an unlocated taxpayer whose registration has been
recommended for cancellation
Deductions under Special Laws Senior
Citizens and PWD Discount
The cost of the discount shall be allowed as a deduction from gross
income, not as a reduction of sales to arrive at net sales, for the
taxable year that the discount is granted, provided that the amount of
sales that must be reported for tax purposes is the undiscounted
selling price and not the amount of sales net of the discount.
Can only be claimed if the taxpayer does not opt for the OSD

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Gross Income and Deductions

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Computation

As such, all client/customer shall, upon payment deposits/advances, withhold

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Whichever comes first

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BIR disallowed petitioners claimed inventories written-off in the amount of

How much is the deductible donation in 2015?

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