Allowable Deductions Notes

DEDUCTIONS FROM GROSS INCOME Gross Income XXX
Deductions are amounts allowed by the Tax Code to be Deductions (XXX) deducted
from Gross Income to arrive at the taxable income for Taxable Income XXX purposes
of computing the income tax liability under Sec. 24(A). 25(A), 26(A.c)
and 28 (a)(1) Tax Due/ liability XXX
*individuals and corporation engaged in the trade/business
*individuals in the exercise of profession
Concept of Deductions
Deductions are matter of legislative grace. A taxpayer can deduct an item or amount from gross income only if
there is a law authorizing such deductions. In the absence of a law, the expense of the taxpayer, whether business-
related, reasonable, or equitable, cannot, be deducted from gross income.
The taxpayer can deduct:
a. The full amount of the deduction allowed
b. The lesser amount
c. Not to claim any deduction at all
Kinds of deduction
1. Itemized Deductions
 Regular
 Special
2. Optional Standard Deductions
General Rule in Claiming Deductions
1. It is legitimate, ordinary, actual and necessary. (LOAN)
2. The Matching Principle
3. The Related Party Rule
4. The Withholding Rule
“no withholding, no deduction”
Summary of Expanded withholding tax rates:

A. Payments to suppliers of goods, in general – 1%
B. Payments to suppliers of services, in general – 2%
1. Rentals of properties or films and toll fees to refineries – 5%
2. Professional Sevices to:
1. Individual professionals, brokers, agents, entertainer – 5% or 10%
3. Embalmers by funerals companies – 1%
4. Additional payments to government personnel from importers, shipping and airline companies or
their agents for OVERTIME SERVICES- 15%
C. Income distribution by
1. Estates and trusts to heirs or beneficiaries – 15%
2. GPP to partners – 10%
D. Payments made by credit card companies – ½ of 1%
NON- DEDUCTIBLE EXPENSES

1. Personal, living, or family expenses
2. Amount paid out for new buildings or for permanent, or betterments made to increase the value of any
property or estate.
3. Any amount expended in restoring property or in making good the exhaustion thereof
4. Premiums paid on any life insurance policy covering the life of any officer or employee…
Exclusion vs Deduction
Exclusion – income exempt from taxation
Deduction – expense
Capital Expenditure vs Revenue Expenditure

Capital Expenditure – Non-recuring, large monetary amount and typically benefit more than one accounting period
Revenue Expenditure – recurring and typically benefit one accounting period.
ITEMIZED DEDUCTIONS
-specific expenses and other items that are deductible from gross income. Under Sec. 34 of the Tax Code, it
consists of the following items:
A. Expenses
Other legal, ordinary, actual, and necessary expenses of business can be claimed by the taxpayers as long as these
are substantiated with official receipts or other pertinent records.
*Items included in business expenses

1. Management expenses
2. Commissions
3. Labor
4. Supplies
5. Incidental repairs
6. Operating expenses of transportation equipment used in trade, profession or business
7. Rental for the use of business property
8. Advertising and other selling expenses
9. Travelling expenses while away from home solely in the pursuit of trade profession or business.
10. Insurance premiums against fire, storm, theft, accident, or other similar losses in trade or business.
Requisites for deduction of business expenses

1. The expense must be ordinary and necessary
2. It must be paid or incurred during the taxable year
3. It must be connected with the trade, profession, or business
4. It must be reasonable
5. The mount paid shall be allowed as deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the BIR
Substantiation Requirements
“No deduction shall be allowed unless the taxpayer shall substantiate with sufficient evidence such as official
receipts or other adequate records”
Entertainment, Amusement, and Recreation Expenses(EAR)

- It includes representation and/or depreciation or rental expenses relating to entertainment facilities
REQUISITES of EAR:
-paid and incurred w/in the taxable year
-Direct to the operation or development of the business
-not contrary to law, morals, GC, PP or PO.
-it must not constitute to a bribe, kickback or other similar payment
-have duly adequate proof
-the appropriate amount of withholding tax should have been withheld therefrom and paid to the BIR.
Ceilings of EAR expenses

Sales of goods/properties – .5% of net sales
Sale of services – 1% of net revenues
If both sale of goods and sale of services:

Net Sales∨Net Revenue
x Actual Expenses
Total Sales∧net revenue
B. Interest Expenses
Requisites :
1. There must be valid indebtedness
2. The indebtedness must be that id the taxpayer
3. The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession.
4. Interest expense must have been paid or incurred during the taxable year
5. Interest must have been stipulated in writing
6. Interest must be legally due
7. Interest payment must not be between related taxpayers.
8. Interest must not be incurred to finance petroleum operations.
9. In case of interest incurred in the acquisition of property, used in trade, business, or 0profession, the
same is not treated as a capital expense
10. The interest is not expressly disallowed by law to be deducted from gross income of the taxpayer.
Reduction of Allowable Deduction for Interest Expense

The taxpayer’s otherwise allowable deduction for interest expense shall be reduced by an amount equal to 33% of
interest income subject to final tax. This limitation has been imposed primarily to nullify the tax arbitrage schemes.
Gross of interest expense 50k
Less: Interest income subj to final tax (50k*33%) (16.5k)
Deductible Interest expense 83.5k
MSME – can deduct the full amount of interest expense without deducting arbitrage limit.
C. Taxes
-amount of money usually a percentage of one’s income or of the value of property owned, that one must pay to
help support the government.
Requisites for deduction of Taxes

1. It must be paid or incurred withing the taxable year
2. It must be paid or incurred in connection with the taxpayer’s profession, trade or business
3. The tax must be imposed directly upon the taxpayer.
Deductible Taxes
1. Import duties paid to the proper customs offices
2. Business taxes, like percentage taxes, except tax on sale, barter, or exchange of shares of stock listed and
traded through the local exchange or through initial public offerings.
3. Local business
4. Community tax
5. Municipal Tax
6. Occupation Taxes
7. Privilege and license taxes
8. Excise Tax
9. Documentary stamp taxes
10. Automobile registration fees
Non- Deductible Taxes

1. Philippine Income tax
2. Foreign income tax, if claimed as a tax credit
3. Estate and Donor’s taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of property assessed (Special
ASSESSMENT)
5. Electrical energy consumption tax
6. Final taxes on passive income
7. Capital gains taxes on capital gains
8. Value-added tax (VAT)
D. Losses
-implies an unintended destruction or deprivation of, or separation from property or something of valuenot in the
ordinary course of things
Kinds of Losses
1. Ordinary Losses
2. Capital Losses
3. Special Losses
4. Non-deductible Losses
Ordinary Loss
1. Loss incurred in trade, profession or business
2. Loss due to fire, storms, shipwreck, or other casualties of property connected with trade, business or
professions
3. Loss due to robbery, theft, or embezzlement of property connected with a trade, business or profession
4. Net operating loss carry-over
Requisites for deduction of casualty losses

1. The loss must be actually sustained
2. The loss must involve ordinary properties
3. It must be sustained in a dose and completed transaction
4. The loss must be that of the taxpayer
5. The loss must not have been claimed as a deduction for estate tax purposes
6. The loss must not be compensated by insurance or other forms of indemnity
7. The loss must be reported to the BIR within 45 days from the date of the loss.
E. Bad Debts
-debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer by
others, arising from money lent or uncollectible amounts of income from goods sold or services rendered.
Requisites for Deductions of Bad Debts

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable
2. The debt must be connected with the profession, trade or business of the taxpayer.
3. The debt must not be sustained in a transaction entered into between related parties enumerated under SEC
36(B) of the tax code.
4. The debt must actually be ascertained to be worthless and uncollectible as of the end of the taxable year.
5. The debt must be actually charged off the books of accounts of the taxpayer as off the end of the taxable year.
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DEDUCTIONS FROM GROSS INCOME Gross Income XXX

Summary of Expanded withholding tax rates:

NON- DEDUCTIBLE EXPENSES

Capital Expenditure vs Revenue Expenditure

*Items included in business expenses

Requisites for deduction of business expenses

Entertainment, Amusement, and Recreation Expenses(EAR)

Ceilings of EAR expenses

If both sale of goods and sale of services:

Reduction of Allowable Deduction for Interest Expense

Requisites for deduction of Taxes

Non- Deductible Taxes

Requisites for deduction of casualty losses

Requisites for Deductions of Bad Debts

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