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    Lesson-9 (1)

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    atashaya
    Income tax

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    Lesson-9 (1)

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    atashaya
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    Income tax

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    Income tax

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1 views2 pages

    Lesson-9 (1)

    Uploaded by

    atashaya
    Income tax

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Lesson 9

    Deductions from Gross Income


    Deductions from Gross Income
     Pertains to expenses of doing business or expenses of exercising a
    profession
     Pertain to period expenditures rather than capital expenditures.
     Do not include personal living expenses. The TRAIN law provides for
    P250,000 annual income tax exemption to individual taxpayers in lieu
    of personal, living expenses of individual taxpayers.

    Principles of Deductions
    1. LOAN
     The deductions are legal, ordinary, actual and necessary expenses
    of business or profession.
    2. Matching Principle
     Only expenses of generating income subject to regular tax is
    deductible.
    3. Related party rule
     All incomes between related parties are taxable but losses,
    interest and bad debts are non-deductible.
    4. Withholding rule
     No withholding, no deduction. Withholding taxes includes final
    taxes, withholding tax on compensation and expanded withholding
    taxes.

    Related parties
    1. Members of a family
    2. Except in cases of distribution in liquidation, and the direct or
    indirect controlling individual
    3. Except in cases of distribution in liquidation, corporations under
    direct or indirect common control by or for the same individual
    4. Grantor and fiduciary of any trust
    5. Fiduciaries of trusts with the same grantor
    6. Fiduciary of a trust and beneficiary of such trust

    Creditable withholding taxes


     As a rule, remember the following for CWTs:
    1. Sales of goods – 1%
    2. Sales of services – 2%, except for:
    a. Rentals – 5%
    b. Professional services
     Individuals
    o Gross receipts ≤ P3M – 5%
    o Gross receipts > P3M – 10%
     General professional partnership – 0%
     Corporation
    o Gross income ≤ P720,000/year – 10%
    o Gross income > P720,000/year – 15%
    Note: Remember that the final withholding tax rates applies if the income
    is subject to final income tax.

    Special considerations with deductions


    1. Effects of VAT on deductions
    o VAT paid by non-VAT taxpayers are part of costs and expenses while
    VAT paid by VAT taxpayers are not.
    2. Effects of accounting methods
    o Accrued expenses would be deductible for accrual taxpayers but not
    for cash basis taxpayers. Regardless of the method used,
    prepayments are non-deductible.

    3. Effect of extent of taxation


    1
    Lesson 9
    Deductions from Gross Income
    o Taxpayers taxable globally could deduct global expenses while those
    taxable only in the Philippines could deduct Philippine expenses.

    Modes of Claiming Deduction


    1. Itemized deductions
    2. Optional standard deductions
    a. 40% of gross sales or receipts for individual taxpayers
    b. 40% of gross income for corporations

    Classification of Itemized Deductions


    1. Cost of sales or cost of services
    2. Regular allowable itemized deductions
    3. Special allowable itemized deductions
    4. Net operating loss carry-over

    Allocation of Common Deductions


    1. Common expenses between a taxable and non-taxable operations or
    between operations subject to regular tax and an operation subject to
    special tax regime must be allocated based on gross income.
    2. Expenses of non-traceable income
    3. Power of CIR to assign or allocate expenses

    Examples of non-deductible expenses


    1. personal, living, or family expenses
    2. any amount paid out for new buildings or for permanent improvements,
    or betterments made to increase the value of any property or estate
    (this rule don’t apply to intangible drilling and development costs
    incurred in petroleum operations)
    3. any amount expended in restoring property or in making good the
    exhaustion thereof for which an allowance is or has been made; or
    4. premiums 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 corporate,
    when the taxpayer is directly or indirectly a beneficiary under such
    policy
    5. losses from sales or exchanges of property directly or indirectly
    between related parties.

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