DEDUCTIONS case may be

These refer to items or amounts authorized by law to be Items not deductible

subtracted from pertinent items of gross income to arrive
at the taxable income. In computing net income, no deduction shall in any case be
allowed in respect to:
Requisites before deductions are allowed:
1. Personal, living or family expenses
1. There must be specific provision of law
allowing the deductions, since deductions do – These are personal expenses and not related to
not exist by implication. the conduct of trade or business.

2. The requirements of deductibility must be met. 2. Any amount paid out for new buildings of for
3. There must be proof of entitlement to the permanent improvements, or betterments made
deductions. The burden of proof to establish to increase the value of any property or estate
the validity of claimed deductions is on the – These are capital expenditures added to the cost
taxpayer. of the property and the periodic depreciation is
the amount that is considered as deductible
4. The deductions must not have been waived. expense.
5. The withholding and payment of tax required
must be shown. 3. Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made (Major Repairs)
ITEMIZED DEDUCTION OPTIONAL STANDARD DEDUCTION
4. Premiums paid on any life insurance policy
Except for taxpayers OSD is a fixed percentage covering the life of any officer or employee, or of
earning compensation deduction which is allowed to any person financially interested in any trade or
income arising from certain taxpayers without regard business carried on by the taxpayer, individual or
personal services rendered to any expenditure. This is in lieu
under an employer of the itemized deduction. The
corporate, when the taxpayer is directly or
employee relationship optional standard deduction is an indirectly a beneficiary under such policy (Sec. 36
where no deductions shall amount not exceeding: [A], NIRC)
be allowed other than
premium payments on 1. 40% of the gross sales or 5. Interest expense, bad debts, and losses from sales
health and/or gross receipts of a of property between related parties
hospitalization insurance, in qualified individual
computing taxable income taxpayer; or
subject to income tax there 6. Bribes, kickbacks and other similar payments
shall be allowed the 2. 40% of the gross income
following deductions from of a qualified 7. Items where the requisites for deductibility are
gross income: corporation not met
1. Expenses for trade,
business or profession
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable and other
contributions
9. Research and
Development
10. Pension trust

It must be substantiated by It requires no proof of expenses

receipts. incurred because the allowable
deduction is a percentage not
exceeding 40% of gross sales or
receipts or gross income as the
Itemized deduction Expenses allowable to PRIVATE educational institution:

Trade, Business, or Professional Expenses It may at its option elect either:

Requisites for deductibility: 1. By way of outright deduction –

1. It must be Ordinary and Necessary. To deduct expenditures otherwise considered as

capital outlays of depreciable assets incurred
An expense is ordinary when it is normal and usual during the taxable year for the expansion of school
in relation to the business of the taxpayer and the facilities, or
surrounding circumstances.
2. By way of depreciation –
An expenses is necessary when it is reasonable and
essential to the development, management,
To deduct allowance for depreciation
operation or conduct of the business or profession of
the taxpayer.

2. It must be Paid or Incurred DURING the taxable

year.

3. It must be paid or incurred IN Carrying on, OR

is Directly Attributable to the development,
management, operation or conduct of the
business or profession of the taxpayer

4. It must be substantiated by sufficient evidence

5. It must not be contrary to law

6. Tax required to be withheld on the expense

paid or payable must be shown to have been
remitted to the BIR.

(i) A reasonable allowance for salaries, wages, and other forms of

compensation for personal services actually rendered, including the
grossed-up monetary value of fringe benefit furnished or granted by the
employer to the employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;

(ii) A reasonable allowance for travel expenses, here and abroad, while
away from home in the pursuit of trade, business or profession;

(iii) A reasonable allowance for rentals and/or other payments which are
required as a condition for the continued use or possession, for purposes
of the trade, business or profession, of property to which the taxpayer
has not taken or is not taking title or in which he has no equity other
than that of a lessee, user or possessor;

(iv) A reasonable allowance for entertainment, amusement and

recreation expenses during the taxable year, that are directly connected
to the development, management and operation of the trade, business
or profession of the taxpayer, or that are directly related to or in
furtherance of the conduct of his or its trade, business or exercise of a
profession not to exceed such ceilings as the Secretary of Finance may,
by rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the special
circumstances, nature and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense incurred for
entertainment, amusement or recreation that is contrary to law, morals
public policy or public order shall in no case be allowed as a deduction.
Interest
Note: Interest expense between the following related
Requisites for deductibility: taxpayers is not deductible

1. It must be stipulated in writing. 1. Between members of family.

2. The interest expense must be paid (if a cash-  Family of individual includes only his
basis taxpayer) or incurred (if an accrual basis brother and sister,
taxpayer) during the taxable year.  Spouse
 Ancestors
3. The indebtedness must be RELATED TO the  Lineal descendants
taxpayer’s trade, business or exercise of
profession. 2. Between an individual stockholder and
corporation
4. INTEREST PAYMENT ARRANGEMENT must NOT  where the individual owns MORE THAN
be between related taxpayers. 50% in value of the outstanding stock of
the corporation.

3. Between corporations where 1 corporation owns

XPNS– No deductions shall be allowed in respect of more than 50% of the other corporation
interest:
4. Between the grantor and fiduciary of a trust
1. If the indebtedness is incurred to finance
petroleum exploration 5. Between the fiduciary of a trust and the fiduciary
of another trust if the same person is a grantor
2. If both taxpayer and the person to whom the with respect to each trust
payment has been made or is to be made are
related 6. Between the fiduciary and the beneficiary of the
trust
3. If within the taxable year,
 an individual taxpayer reporting income on
the cash basis
 incurs an indebtedness
 on which an interest is paid in advance
through discount

Optional Treatment of Interest Expense

At the option of the taxpayer, interest incurred to acquire

property used in trade, business or exercise of profession
may be allowed as a:
1. deduction or
2. capital expenditure.

Interest Arbitrage

It is the process of reducing the deductible interest

expense by 20% of interest income
 TO EQUALIZE the tax benefit derived from the
deductible interest expense to the tax burden
arising from the final withholding tax on interest
income.
Taxes

In General. - Taxes paid or incurred within the taxable year

in connection with the taxpayer's profession, trade or
business, shall be allowed as deduction, except:

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign

country; but this deduction shall be allowed in the case of
a taxpayer who does not signify in his return his desire to
have to any extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of foreign
countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending

to increase the value of the property assessed.

Provided, That taxes allowed under this Subsection, when

refunded or credited, shall be included as part of gross
income in the year of receipt to the extent of the income
tax benefit of said deduction.

Limitations on Deductions. –

In the case of a nonresident alien individual engaged in

trade or business in the Philippines and a resident foreign
corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed only if
and to the extent that they are connected with income
from sources within the Philippines.

EXAMPLE.

You are a non-resident citizen, but you have a client

abroad. Then that client abroad pays for your services
which are performed in PH and at the same time, you
need to meet abroad because you need to discuss
something. You went on a business trip to meet that
client to discuss your business in the PH where his
project is the subject. That expense is travelling expense
incurred abroad.

Is this deductible even if you are a non-resident citizen

and taxable only on your income in PH?

Yes, because whatever expense you incurred in relation

to your business in the Philippines where you are
taxable, even if that expense is incurred abroad, then
that expense is deductible.

Example: business travel expense. That is deductible.

Losses Securities becoming worthless

In General. - Losses actually sustained during the taxable Securities are treated as capital assets. If they become
year and not compensated for by insurance or other forms worthless, they are treated as capital losses.
of indemnity shall be allowed as deductions:
XPN, if the securities are in the hands of a tax
(a) If incurred in trade, profession or business; trader/broker or a securities trader/broker. They are
treated as ordinary losses and the losses will be treated as
(b) Of property connected with the trade, bad debts.
business or profession,
 if the loss arises from fires, storms, Net Operating Loss Carry-Over (NOLCO)
shipwreck, or other casualties, or from
robbery, theft or embezzlement. It is a loss from the operations of the business.

(c) No loss shall be allowed as a deduction under When a taxpayer’s business ends up with a net operating
this Subsection loss, the taxpayer is allowed to claim a deduction:
 if at the time of the filing of the return,
such loss has been claimed as a  a NOLCO deductible against gross income
deduction for estate tax purposes in the  within 3 consecutive tax years
estate tax return.
 provided there is NO substantial change
Requisites: in the ownership of the business.
in that -
1. The loss must be actual, not anticipated.
(i) Not less than seventy-five percent (75%) in nominal value of
outstanding issued shares., if the business is in the name of a
2. The loss must be sustained in a closed and
corporation, is held by or on behalf of the same persons; or
completed transaction.
(ii) Not less than seventy-five percent (75%) of the paid up capital
3. The loss must not be compensated for by of the corporation, if the business is in the name of a
insurance or other forms of indemnity. corporation, is held by or on behalf of the same persons.

4. The loss must be liquidated and charged off For purposes of this subsection, the term 'net operating
during the tax year. loss' shall mean the excess of allowable deduction over
gross income of the business in a taxable year.
5. The loss must be incurred or related to the
business, trade or profession of the taxpayer.
Wagering Losses

These are gambling losses. They are not deductible against

gross income. They are deductible only when there is
gambling gains or wagering gains.
Capital losses

It pertains to capital asset transactions. These are Losses from wash sales of stocks or securities
properties of the taxpayer not used in business.
They are not deductible.
Limitation of deductibility
Abandonment losses
Only the losses which are related to trade, business or
profession are deductible against gross income. They are deductible from gross income as they arise from
exploration and development expenditures on the
Losses arising from capital asset transactions are not extractive industry.
deductible against gross income, as they are deductible
only when there is capital gain. Capital gains are gains It can be claimed when:
derived from the sale of capital assets. 1. you decided to abandon the extractive activity;
 2. you still have unrecovered exploration and
development expenses.
Bad Debts Depreciation of Properties Used in Mining Operations. –

Requisites: An allowance for depreciation in respect of all properties

used in mining operations other than petroleum
1. there is a valid and subsisting debt operations, shall be computed as follows:

2. the debt is connected with the trade, business (a) At the normal rate of depreciation if the
or profession, and not between related expected life is ten (10) years or less; or
taxpayers
(b) Depreciated over any number of years between
3. the debt is ascertained to be worthless and five (5) years and the expected life if the latter is
could no longer be collected more than ten (10) years, and the depreciation
thereon allowed as deduction from taxable
4. the debt is charged off during the tax year income: Provided, That the contractor notifies
the Commissioner at the beginning of the
depreciation period which depreciation rate
allowed by this Section will be used.
Depreciation

There shall be allowed as a depreciation deduction: Depletion

 a reasonable allowance Same concept with depreciation but applicable to those
 for the exhaustion, wear and tear engaged in oil gas and mining companies.
 of property used in trade or business
Depletion is a cost recovery method to recover exploration
and development expenditures.
Methods of determining and recognizing depreciation

1. straight line method

2. declining balance method
3. sum of the years digit
4. any other method which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner

Example.

When you buy a machinery used in your business,

assuming you are engaged in legal services in
individuals. You bought a photocopier. Gradually, the
value of the photocopier deteriorate. The amount of
“deterioration” which is depreciation as a technical
term, will be deducted as an expense.
Charitable and other contributions (c) Donations to Accredited Nongovernment
Organizations.
In General. – Contributions or gifts actually paid or made Research and Development
 within the taxable year to, or for the use of the
Government of the Philippines or any of its A taxpayer may treat research or development
agencies or any political subdivision thereof expenditures which are paid or incurred by him during the
 exclusively for public purposes, taxable year in connection with his trade, business or
profession
 to accredited domestic corporation or  as ordinary and necessary expenses which are
associations organized and operated exclusively not chargeable to capital account.
 The expenditures so treated shall be allowed as
 for religious, charitable, scientific, youth and deduction during the taxable year when paid or
sports development, cultural or educational incurred.
purposes or for the rehabilitation of veterans,
Limitations on Deduction. - This shall not apply to:
 to social welfare institutions,
 to non-government organizations, (a) Any expenditure for the acquisition or improvement of
land, or for the improvement of property to be used in
 in accordance with rules and regulations connection with research and development of a character
promulgated by the Secretary of finance, which is subject to depreciation and depletion; and
upon recommendation of the Commissioner,
(b) Any expenditure paid or incurred for the purpose of
 no part of the net income of which inures to ascertaining the existence, location, extent, or quality of
the benefit of any private stockholder or any deposit of ore or other mineral, including oil or gas.
individual in an amount not in excess of 10%
in the case of an individual, and 5% in the
case of a corporation, of the taxpayer's Pension Trusts
taxable income derived from trade, business
or profession as computed without the An employer
benefit of this and the following  establishing or maintaining a pension trust
subparagraphs.  to provide for the payment of reasonable
pensions to his employees
 shall be allowed as a deduction (in addition to
Contributions Deductible in Full: the contributions to such trust during the taxable
year to cover the pension liability accruing
(a) Donations to the Government. - Donations to the during the year, allowed as a deduction)
Government of the Philippines or to any of its agencies  a reasonable amount transferred or paid into
or political subdivisions, including fully-owned such trust during the taxable year in excess of
government corporations, exclusively to finance, to such contributions,
provide for, or to be used in undertaking priority  but only if such amount
activities in education, health, youth and sports
(1) has not theretofore been allowed as a
development, human settlements, science and culture,
and in economic development according to a National deduction, and
Priority Plan determined by the National Economic and (2) is apportioned in equal parts over a
Development Authority (NEDA), In consultation with period of 10 consecutive years
appropriate government agencies, including its regional beginning with the year in which the
development councils and private philanthropic persons transfer or payment is made.
and institutions: Provided, That any donation which is
made to the Government or to any of its agencies or
political subdivisions not in accordance with the said
annual priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or

International Organizations.
Optional Standard Deductions

An INDIVIDUAL subject to tax, OTHER THAN A

NONRESIDENT ALIEN, may elect a standard deduction in
an amount not exceeding 40% of his gross sales or gross
receipts.

In the case of CORPORATION subject to tax, it may elect a

standard deduction in an amount not exceeding 40% of
its gross income.

OSD of individual other 40% of gross sales or gross

than a nonresident alien receipts

OSD of corporation 40% of gross income

Note:

If you have failed to avail of the OSD, you are deemed to

have availed of the itemized. Once the OSD is availed, it is
deemed irrevocable for the tax year.

Partnerships

General profession partnership (GPP) and the partners may

avail of the OSD only once, either by the partnership itself
or the partners.

If the GPP availed the itemized or the OSD in determining

its distributable net income, the partners can no longer
claim further deduction from their partner’s distributive
share in the net income.

Partners in the GPP are also not allowed to avail of the 8%

income tax rate portion. They are subject to the regular
graduated rates.

If the partner has other income from trade or business or

profession and distinct from the share of the GPP, the
other income can avail either the itemized or the OSD.
Capital Asset vs. Ordinary Asset

Capital Asset Ordinary Asset

Properties of taxpayer Properties of taxpayer

NOT used in trade or USED in trade or business.
business.

*CAN
*OAU

Net capital gain

It is the excess of the gains from sales or exchange of

capital assets over the losses from such sales or exchanges.

Net capital loss

It is the excess of the loss from sales or exchange of capital

assets over the gains from such sales or exchanges.

SALE OF SHARES OF STOCK NOT TRADED

(CAPITAL ASSETS)

Individuals and 15% net capital gains tax

domestic
corporations

Foreign 5% and 10% net capital gains tax

corporations

If traded, then you have 6/10 of 1% on the gross value in

money on the sale, barter, or exchange of shares of stocks
traded.

RECOGNITION OF GAIN/LOSS IN CAPITAL ASSETS

(INDIVIDUALS ONLY)

Capital asset held for 100% of the gain/loss will

1 year or less be recognized

Capital asset held for 50%

more than 1 year

TSN, page 51 (for illustration)