PART IX Allowable Deductions From Gross Income

8/12/2019 PART IX Allowable Deductions From Gross Income

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PART IXALLOWABLE DEDUCTIONS FROM GROSS INCOME

1. Basic Principlesa. Strict Construction Against the Taxpayer

The taxpayer must point to some specificprovisions of the statute authorizing the

deduction; and

He must be able to prove that he is entitledto the deduction authorized or allowed

If a taxpayer fails to deduct certainexpenses for the taxable year, he cannot

deduct them from the income of the next

or any succeeding year

b. The Cohan Rule Principle If there is showing that expenses have

been incurred but the exact amount

thereof cannot be ascertained due to the

absence of documentary evidence, it is

the duty of the BIR to make an estimate of

deduction that may be allowed in

computing the taxpayers taxable income

bearing heavily against the taxpayerwhose inexactitude is of his own making.

A disallowance of 50% of the taxpayers

claimed deduction is valid

c. Deductions as distinguished from exclusionsDeductions Exclusions

Amounts declared from

gross income to arrive at net

income

Amounts/items exempt from

tax by virtue of the tax code or

special law

d.

Deductions as distinguished from PersonalExemptions

Deductions Exemptions

Business expenses represent

cost of doing business

Personal expenses cover

personal, living or family

expenses

These are actual business or

professional expenses

incurred in the pursuit of

trade, business or profession

These are arbitrary amounts

representing personal daily

living expenses allowed as a

deduction by law to qualified

individual taxpayers

Both individual and

corporate taxpayers may

claim

Only individual is entitled

Deductions must be

supported by receipt

No need for supporting

receipt

They are allowed deductions

to enable the taxpayer to

recoup his cost of doing

business

They are allowed to cover

personal, family and living

expenses

e. Deductions as distinguished from Tax CreditDeductions Tax Credit

Deductible from gross

income before tax is

computed

Deductible from Philippine

income tax due

It reduces the taxpayers

liability dollar for dollar

It reduces the taxable income

upon which the tax liability is

calculated

Sources: deductible taxes

such as: business tac, excise

tax, percentage tax and

other business connected

taxes

Sources: Foreign income tax,

war-profits and excess profit

tax and estate tax

2. Deductions, definedThese are amounts orexpenses allowed by law to be subtracted from

gross income to arrive at the taxable income

3. Kinds of Deductionsa. Itemized Deductions

Who may claimAvailable to all kinds of taxpayers engaged in trade or business or

practice of profession in the Philippines,

such as Corporation, General Professional

Partnerships, individuals engaged in trade,

business or profession, estate and trust

engaged in trade or business

Partnership exempt from income tax canalso claim itemized deductions in computing

its net income

Partners in GPP have the tax status of self-employed individuals engaged in the

practice of their profession in thepartnership formed. As such, they may claim

the itemized deductions or elected the OSD

No limit as to amount of deduction providedthe Substantiation Rule has been complied

with

If the taxpayer failed to elect the kind ofdeduction in his income tax, he shall be

considered as having availed himself the

itemized deduction

b. Optimized Standard Deductions (OSD) Under RA 8424, only individual taxpayers

who are citizens and resident aliens

derviving income from business, trade or

profession, capital gains and passive

incomes NOT subject to final tax, or other

income may elect OSD in lieu of the itemized

deductions. It is 40% of the gross income of

the tax payer and corporations DC and RC

may now claim OSD under RA 9504

This is optional. Thus, unless the taxpayersignifies in his return his intention to elect


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(2) Cash and/or Property Dividends from a Domestic

Corporation or Joint Stock Company, or Insurance or Mutual

Fund Company or Regional Operating Headquarters or

Multinational Company, or Share in the Distributable Net

Income of a Partnership (Except a General Professional

Partnership), Joint Account, Joint Venture Taxable as a

Corporation or Association., Interests, Royalties, Prizes, and

Other Winnings. - Cash and/or property dividends from a

domestic corporation, or from a joint stock company, or from

an insurance or mutual fund company or from a regional

operating headquarters of multinational company, or the

share of a nonresident alien individual in the distributable

net income after tax of a partnership (except a general

professional partnership) of which he is a partner, or the

share of a nonresident alien individual in the net income

after tax of an association, a joint account, or a joint venture

taxable as a corporation of which he is a member or a co-

venturer; interests; royalties (in any form); and prizes (except

prizes amounting to Ten thousand pesos (P10,000) or less

which shall be subject to tax under Subsection (B)(1) of

Section 24) and other winnings (except Philippine Charity

Sweepstakes and Lotto winnings); shall be subject to anincome tax of twenty percent (20%) on the total amount

thereof: Provided, however, that royalties on books as well as

other literary works, and royalties on musical compositions

shall be subject to a final tax of ten percent (10%) on the

total amount thereof: Provided, further, That

cinematographic films and similar works shall be subject to

the tax provided under Section 28 of this Code: Provided,

furthermore, That interest income from long-term deposit or

investment in the form of savings, common

or individual trust funds, deposit substitutes, investment

management accounts and other investments evidenced by

certificates in such form prescribed by the Bangko Sentral ng

Pilipinas (BSP) shall be exempt from the tax imposed under

this Subsection: Provided, finally, that should the holder of

the certificate pre-terminate the deposit or investment

before the fifth (5th) year, a final tax shall be imposed on the

entire income and shall be deducted and withheld by the

depository bank from the proceeds of the long-term deposit

or investment certificate based on the remaining maturity

thereof:

Four (4) years to less than five (5) years - 5%;Three (3) yearsto less than four (4) years - 12%; and Less than three (3)

years - 20%.

(3) Capital Gains. - Capital gains realized from sale, barter or

exchange of shares of stock in domestic corporations not

traded through the local stock exchange, and real properties

shall be subject to the tax prescribed under Subsections (C)

and (D) of Section 24.

e. Partners in General Professional PartnershipSEC. 26. Tax Liability of Members of General Professional

Partnerships. - A general professional partnership as such

shall not be subject to the income tax imposed under this

Chapter. Persons engaging in business as partners in a

general professional partnership shall be liable for income

tax only in their separate and individual capacities.

For purposes of computing the distributive share of the

partners, the net income of the partnership shall be

computed in the same manner as a corporation.

Each partner shall report as gross income his distributive

share, actually or constructively received, in the net income

of the partnership.

f. Domestic CorporationsSEC. 27. Rates of Income tax on Domestic Corporations. -

(A) In General. - Except as otherwise provided in this Code,

an income tax of thirty-five percent (35%) is hereby imposed

upon the taxable income derived during each taxable year

from all sources within and without the Philippines by every

corporation, as defined in Section 22(B) of this Code and

taxable under this Title as a corporation, organized in, or

existing under the laws of the Philippines: Provided, That

effective January 1, 1998, the rate of income tax shall be

thirty-four percent (34%); effective January 1, 1999, the rate

shall be thirty-three percent (33%); and effective January 1,

2000 and thereafter, the rate shall be thirty-two percent

(32%).

In the case of corporations adopting the fiscal-year

accounting period, the taxable income shall be computed

without regard to the specific date when specific sales,

purchases and other transactions occur. Their income and

expenses for the fiscal year shall be deemed to have been

earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on

the amount computed by multiplying the number of months

covered by the new rates within the fiscal year by the taxable

income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the

recommendation of the Secretary of Finance, may effective

January 1, 2000, allow corporations the option to be taxed at

fifteen percent (15%) of gross income as defined herein,

after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross

National Product (GNP); (2) A ratio of forty percent (40%) of

income tax collection to total tax revenues; (3) A VAT tax


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effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public

Sector Financial Position

(CPSFP) to GNP.The option to be taxed based on grossincome shall be available only to firms whose ratio of cost of

sales to gross sales or receipts from all sources does not

exceed fifty-five percent (55%).

The election of the gross income tax option by the

corporation shall be irrevocable for three (3) consecutive

taxable years during which the corporation is qualified under

the scheme.

For purposes of this Section, the term 'gross income' derived

from business shall be equivalent to gross sales less sales

returns, discounts and allowances and cost of goods sold.

"Cost of goods sold" shall include all business expenses

directly incurred to produce the merchandise to bring them

to their present location and use.

For a trading or merchandising concern, "cost of goods" sold

shall include the invoice cost of the goods sold, 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 a manufacturing concern, "cost of goods manufactured

and sold" shall include all costs of production of 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.

In the case of taxpayers engaged in the sale of service, 'gross

income' means gross receipts less sales returns, allowances

and discounts.

(B) Proprietary Educational Institutions and Hospitals. -

Proprietary educational institutions and hospitals which are

nonprofit shall pay a tax of ten percent (10%) on their

taxable income except those covered by Subsection (D)

hereof: Provided, that if the gross income from unrelated

trade, business or other activity exceeds fifty percent (50%)

of the total gross income derived by such educational

institutions or hospitals from all sources, the tax prescribedin Subsection (A) hereof shall be imposed on the entire

taxable income. For purposes of this Subsection, the term

'unrelated trade, business or other activity' means any trade,

business or other activity, the conduct of which is not

substantially related to the exercise or performance by such

educational institution or hospital of its primary purpose or

function. A "Proprietary educational institution" is any

private school maintained and administered by private

individuals or groups with an issued permit to operate from

the Department of Education, Culture and Sports (DECS), or

the Commission on Higher Education (CHED), or the

Technical Education and Skills Development Authority

(TESDA), as the case may be, in accordance with existing laws

and regulations.

(C) Government-owned or Controlled-Corporations, Agencies

or Instrumentalities. - The provisions of existing special or

general laws to the contrary notwithstanding, all

corporations, agencies, or instrumentalities owned or

controlled by the Government, except the Government

Service Insurance System (GSIS), the Social Security System

(SSS), the Philippine Health Insurance Corporation (PHIC), the

Philippine Charity Sweepstakes Office (PCSO) and the

Philippine Amusement and Gaming Corporation (PAGCOR),

shall pay such rate of tax upon their taxable income as are

imposed by this Section upon corporations or associations

engaged in s similar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary

Benefit from Deposit Substitutes and from Trust Funds andSimilar Arrangements, and Royalties. - A final tax at the rate

of twenty percent (20%) is hereby imposed upon the amount

of interest on currency bank deposit and yield or any other

monetary benefit from deposit substitutes and from trust

funds and similar arrangements received by domestic

corporations, and royalties, derived from sources within the

Philippines: Provided, however, That interest income derived

by a domestic corporation from a depository bank under the

expanded foreign currency deposit system shall be subject to

a final income tax at the rate of seven and one-half percent

(7 1/2%) of such interest income. (2) Capital Gains from the

Sale of Shares of Stock Not Traded in the Stock Exchange. - A

final tax at the rates prescribed below shall be imposed onnet capital gains realized during the taxable year from the

sale, exchange or other disposition of shares of stock in a

domestic corporation except shares sold or disposed of

through the stock exchange:

Not over P100,000................................... 5%

Amount in excess of P100,000................. 10%(3) Tax onIncome Derived under the Expanded Foreign Currency

Deposit System. - Income derived by a depository bank under

the expanded foreign currency deposit system from foreign

currency transactions with local commercial banks, includingbranches of foreign banks that may be authorized by the

Bangko Sentral ng Pilipinas (BSP) to transact business with

foreign currency depository system units and other

depository banks under the expanded foreign currency

deposit system, including interest income from foreign

currency loans granted by such depository banks under said

expanded foreign currency deposit system to residents, shall

be subject to a final income tax at the rate of ten percent

(10%) of such income.Any income of nonresidents, whether


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individuals or corporations, from transactions with

depository banks under the expanded system shall be

exempt from income tax. (4) Intercorporate Dividends. -

Dividends received by a domestic corporation from another

domestic corporation shall not be subject to tax.

(5) Capital Gains Realized from the Sale, Exchange or

Disposition of Lands and/or Buildings. - A final tax of six

percent (6%) is hereby imposed on the gain presumed to

have been realized on the sale, exchange or disposition of

lands and/or buildings which are not actually used in the

business of a corporation and are treated as capital assets,

based on the gross selling price of fair market value as

determined in accordance with Section 6(E) of this Code,

whichever is higher, of such lands and/or buildings.

(E) Minimum Corporate Income Tax on Domestic

Corporations. -(1) Imposition of Tax. - A minimum corporateincome tax of two percent (2%0 of the gross income as of the

end of the taxable year, as defined herein, is hereby imposed

on a corporation taxable under this Title, beginning on the

fourth taxable year immediately following the year in whichsuch corporation commenced its business operations, when

the minimum income tax is greater than the tax computed

under Subsection (A) of this Section for the taxable year.(2)Carry Forward of Excess Minimum Tax. - Any excess of the

minimum corporate income tax over the normal income tax

as computed under Subsection (A) of this Section shall be

carried forward and credited against the normal income tax

for the three (3) immediately succeeding taxable years.(3)Relief from the Minimum Corporate Income Tax Under

Certain Conditions. - The Secretary of Finance is hereby

authorized to suspend the imposition of the minimum

corporate income tax on any corporation which suffers

losses on account of prolonged

labor dispute, or because of force majeure, or because of

legitimate business reverses. The Secretary of Finance is

hereby authorized to promulgate, upon recommendation of

the Commissioner, the necessary rules and regulation that

shall define the terms and conditions under which he may

suspend the imposition of the minimum corporate income

tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the

minimum corporate income tax provided under Subsection

(E) hereof, the term 'gross income' shall mean gross salesless sales returns, discounts and allowances and cost of

goods sold. "Cost of goods sold' shall include all business

expenses directly incurred to produce the merchandise to

bring them to their present location and use.

For a trading or merchandising concern, "cost of goods sold'

shall include the invoice cost of the goods sold, 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 a manufacturing concern, cost of

"goods manufactured and sold" shall include all costs of

production of 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.

In the case of taxpayers engaged in the sale of service, 'gross

income' means gross receipts less sales returns, allowances,

discounts and cost of services. "Cost of services" shall mean

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: Provided, however, That in the case of banks, "cost

of services" shall include interest expense.

g. Proprietary Educational Institutions andHospital which are nonProfit

SEC. 27. Rates of Income tax on Domestic Corporations.

(B) Proprietary Educational Institutions and Hospitals. -

Proprietary educational institutions and hospitals which are

nonprofit shall pay a tax of ten percent (10%) on their

taxable income except those covered by Subsection (D)

hereof: Provided, that if the gross income from unrelated

trade, business or other activity exceeds fifty percent (50%)

of the total gross income derived by such educational

institutions or hospitals from all sources, the tax prescribed

in Subsection (A) hereof shall be imposed on the entire

taxable income. For purposes of this Subsection, the term'unrelated trade, business or other activity' means any trade,

business or other activity, the conduct of which is not

substantially related to the exercise or performance by such

educational institution or hospital of its primary purpose or

function. A "Proprietary educational institution" is any

private school maintained and administered by private

individuals or groups with an issued permit to operate from

the Department of Education, Culture and Sports (DECS), or

the Commission on Higher Education (CHED), or the

Technical Education and Skills Development Authority

(TESDA), as the case may be, in accordance with existing laws

and regulations.

h. Government Owned or Controlled corporationsagencies or instrumentalities which are non-

exempt

SEC. 27. Rates of Income tax on Domestic Corporations. -

(C) Government-owned or Controlled-Corporations, Agencies

or Instrumentalities. - The provisions of existing special or


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general laws to the contrary notwithstanding, all

corporations, agencies, or instrumentalities owned or

controlled by the Government, except the Government

Service Insurance System (GSIS), the Social Security System

(SSS), the Philippine Health Insurance Corporation (PHIC), the

Philippine Charity Sweepstakes Office (PCSO) and the

Philippine Amusement and Gaming Corporation (PAGCOR),

shall pay such rate of tax upon their taxable income as are

imposed by this Section upon corporations or associations

engaged in s similar business, industry, or activity.

5. Itemized Deductions from Gross Incomea) ExpensesAll the ordinary and necessary

expenses paid or incurred during the taxable

year in carrying on or which are directly

attributable to, the development, management,

operation and/or conduct of the trade, business

or the exercise of a profession.

b) InterestIt is the amount of interest paid orincurred within the taxable year on

indebtedness incurred in connection with thetaxpayers trade, business, or profession

c) Taxestaxes means taxes proper andtherefore, no deductible are allowed for

amounts representing: 1)interest 2)surcharges

3) fines or penalties incident to delinquency

d) LossesThe term implies an unintentionalparting with something of value. It is used in

the income tax law in a very broad sense to

comprehend all losses which are not in general

or natural to the ordinary course of business

and are not covered under some other heading

such as bad debts, inventory losses,

depreciations, etc.

e) Bad DebtsBad debts are debts due to thetaxpayer which are actually ascertained to be

worthless and charged off within the taxable

year

f) DepreciationIs the gradual diminution in theuseful value of tangible property used in trade,

business, or profession resulting from

exhaustion, wear and tear, and obsolescence.

The term is also applied to amortization of the

value of intangible assets, the use of which on

trade or business is definitely limited in

durationg) Depletion of Oil and Gas Wells and Mines

depletion is the exhaustion of natural resources

like mines and oil and gas wells as a result of

production or severance from suchh mines or

wells

h) Charitable and other contributionsi) Research and DevelopmentA taxpayer may

treat research or development expenditures

which are paid or incurred by him during the

taxable year in connection with his trade,

business or profession as ordinary and

necessary expense which are not chargeable to

capital account. The expenditures so treated

shall be allowed as deduction during the

taxable year when paid or incurred

j) Pension Trustk) Optional Standard Deductionsl) Premium payments on health and/or

hospitalization insurance of an individual

taxpayer

6. On Business Expensesa) Nature and ScopeThey are ordinary and

necessary expenses directly incurred or paid

during the taxable year in carrying on the

taxpayers trade, business or profession or

which are directly related to the development,

management, opearation and/or conduct of the

business, trade or profession

b) Requisitesi. Ordinary ExpenseThose payments

which are normal (need not be habitual)in relation to the business of the

taxpayer, or one generally incurred also

by taxpayers in the same or similar line

of business or trade.

ii. Necessary ExpenseThose that willminimize loss and maximize profit or

those that are appropriate and helpful to

the taxpayers business. Expenses that

are useful and reasonable such as

salaries and other compensation for

personal service actually rendered to the

taxpayer, cost of supplies, transportation

expense, reasonable and legitimate

representation and ordinary repair and

maintenance due to wear and tear

iii. Paid and Incurred within the yearPaidif the taxpayer keeps his

books on the cash receipts basis

expenses are deductible in the year they

are paid

IncurredIf the taxpayer keeps

his books on the accrual basis, expenses

are deductible in the year they are

incurred, whether paid or not

iv. It must be directly connected withtaxpayers trade, business or profession

v. The tax required to be within on theexpense paid or payable is shows to have

been remitted to the BIR

vi. It must be reasonable and substantiatedby adequate proofs

vii. It must not be against morals, publicpolicy, and public order


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c) Kinds of Business Expensesi. Compensation for personal services (1)

actually rendered (2) reasonable

There must exist an employer-employee relationship between the

person who renders the services and

the person to who such services are

performed

The basis upon which thecompensation is paid is immaterial

Bonuses id paid in good faith asadditional compensation for services

rendered

Fringe benefit tax paid by theemployer on the fringe benefit paid

or furnished to its supervisory or

managerial employees

If corporations require its officers tobe members of social or athletic

clubsto promote is businesses and

the club dues are paid by the

corporation, such dues are ordinaryand necessary expenses

deductible

ii. Travelling expensesnot only fortransportation fare but includes meals

and lodging in connection with the trade,

business or profession of the taxpayer,

whether local or foreign

Requisites:

1. Incurred while away fromhome

2. In the pursuit of the businessor trade

3. Must be reasonable andnecessary

iii. Rentalsaa. Requisites

1. Made as a condition to thecontinued use of, or possession

of property

2. Taxpayer has not taken or is nottaking title to the property or hasnot equity other than that of a

lessee, user or possessor

3. Property is used in trade,business or profession

4. It is subjected to 5% expandedwithholding tax on rent

otherwise it is disallowed

bb. Items deductible under rental

expense:

1. If a leasehold is acquired forbusiness purposes for a specified

sum, the purchaser may take

deduction for a aliquot part of

such sum each year based on the

number of years the lease will

cover

2. Taxes of the lessor paid by thelessee under the contract of

lease is added to the monthly

rental and claimed as a rent

expense by the lessee. Whereas,

to the lessor the taxes assumed

by the lessee is income to him

3. Obligations of the lessor as tothird persons assumed or paid by

the lessee constitute additional

rent

4. Cost of erecting a building ormaking permanent

improvements borne by a lessee

is a capital investment and NOTdeductible as a business expense

5. Rights or goodwill do not qualifyas rental deduction because they

are in the nature of capital

advance to secure the lease of

the premises

6. If the property rented is ownedby the taxpayer himself, he can

either a) depreciate its value b)

include the rental value as

income for his personal return

and declare the same value as

expense for the companys

return

7. If the taxpayer has acquiredequity or title over the property,

he can start depreciating, even if

he has not fully paid the same.

Thus, if taxpayer has no such

equity or title, he can declare the

rentals as ordinary expense

8. It the taxpayer is renting anoffice/business space he ust

withhold the tax due on the rent,

otherwise, he would not beallowed to deduct the same from

his income, even if it is a

legitimate expense

9. The lessee deducts cost ofimprovements introduced by him

under depreciation allowance

and the lessor reports value of

improvements as his income

earned.


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iv. Entertainment, amusement and recreationexpenses

aa. Requisites:

1. Must be directly connected to thedevelopment, management and

operation of trade, business or

profession of the taxpayer, or

incurred to promote the business

of the taxpayer

2. Must be reasonable3. Must not be contrary to laws,

morals, and public policy or public

order

4. Must be substantiated withsufficient evidences such as or

other adequate records

5. Persons or guests entertained arethose with whom the taxpayer has

direct business relations, such as

but not limited to current or

potential clients or customers.

bb. Expenses not treated asentertainment, amusement and

representation expenses

1. Expenses for charitable and fundraising event

2. Expenses for bonfire business,meetings of stockholders, partners

and/or directors

3. Expenses for events organized forpromotion, marketing, advertising,

conference, seminars, workshops,

conventions and other similar events

4. Other expenses of similar naturecc. Illegal expenses

1. Expenses that are illegal2. Any payment made to official or

employee of the national

government, local government units,

GOCCs, or to representatives of

foreign government, private

corporation, GPP or any similar

entity if it constitutes a bribe or

kickback

3. Expenses to obtain contracts withprivate firms or individuals are

deductible of ot os not contrary tolaw, public policy, and morals

4. Payments to secure politicalinfluence to obtain favorable public

contracts are non-deductible

5. Police protectionv. Cost of Materials and Suppliesdedutible

only to the full amount actually consumes

or used in operation during the year. Cost

of goods purchased for resale with proper

adjustment for opening and closing

inventories is deductible from gross sales in

comuting gross income

vi. Equipment used in trade or businessexpenses on repairs, maintenance and

operation are deductible

vii. Operating Expenses on Transportationviii. Maintenance and Incidental Repairs

1. Expenses on minor or ordinary repairare deductible from gross income

because it keeps the assets in its

ordinary and efficient working

condition. They do not materially add

to the value of the property nor

prolong its life

2. Expenses on major or extraordinaryrepairs are NOT deductible because it

is capitalized and subject to

depreciation expense. Major expense

tends to prolong life of the asset

ix. Advertising and other Selling ExpensesAdvertising expenses incurred to takeadvantage of the holidays or special

occasions are ordinary expenses deductible

in full. Whereas, those that will stimulate

future sales or to create favorable

company image are considered capital

expenditures

x. Insurance Premiumsagainst fire, storm,theft, accident, or other similar losses in

the case of a business or trade

xi. Expenses to farmersthose incurred in theoperation of a farm for profit or

commercial basis and not merely for

recreation or pleasure

1. Cost of ordinary tolls of short-life orsmall cost for hand tools, shovel, rakes

and the like

2. Cost for feeding and raising livestock,except farm produce grown on the

farm or through the labor of the

farmer

3. Cost of gasoline or fuel, repair andupkeep of transportation equipment

used wholly in farming or only a

portion of such expense if the

equipment is used partly for pleasureor convenience of the farmer

4. Cost of fertilizers, seeds and seedlingsaa. Non-deductible expense to farmers

1. cost of farm machinery, equipmentand farm buildings

2. amounts spent in the development offarms, orchards and ranches, prior to

the time when the productive state is

reached


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xii. Other business Expense

1. Pre-operating expensesare deferredexpenses and deducted from gross

income for not more than 60 months.

The amortization period commences

with the month in which the business

begins. Such as expenses incurred

before and I anticipation of the start of

the business in an activity for profit or

the production of income.

2. Organization costs are amortized overthe life of the corporation

3. Cost of defending a civil suit affectingthe business is deductible, irrespective

of the outcome of the defense

4. Judgement or other bindingadjudication on account of damages

for patent infringement, personal

injuries or other causes, are deductible

when the claim is adjudicated and paid

5. Promotion expenses6. Overhead expenses incurred by foreignhead office related to the production

of the Philippine-derived income or to

Philippine operations of the branch are

deductible expenses of the local

branch without apportionment.

7. On Interest Expensea. InterestThe amount paid by a debtor to his

creditor for the use or forbearance of maney,

goods or credit.

b. Requisites:i. There is an indebtedness

ii. The indebtedness must be that of thetaxpayer

iii. In connection with taxpayers profession,trade or business

iv. There is liability to pay interest on the debtv. The interest must have been paid or

incurred within the year

vi. It must be legally die and stipulated inwriting

vii. It must not be expressly disallowed by lawto be deducted from taxpayers gross

incomeviii. It must be within the limit set by law

ix. The interest payment must not be madebetween related parties

c. Interest expense as amended by RA 9337Effective November 1, 2006The Tax Code

provides that the taxpayers otherwise

allowable deduction as interest expense shall

be reduced by 42% (previously 38% under RA

8428) of the interest income subjected to final

tax. Provided that effective January 1, 2009 the

percentage shall be 33%

d. Tax arbitrageThe simultaneous payment oftaxes and income earnings on he same loan

proceeds in order to profit from such price

discrepancies. This is a method of borrowing

without entering into a debtor-creditor

relationship to resolve financing and exchange

control problem. Oftentimes, it is used to

circumvent the law and has the effect of

lowering the taxes due the government

e. Deductible Interest Expensei. Interest on taxes paid on deficiency or

delinquency, provided the tax is a deductible

tax, except on income tax. But, fines and

penalties on account of taxes are not

deductible. Surcharge for late payment is

also non-deductible from income tax

ii. Interest on scrip dividends paid by acorporation

iii. Interest on deposits paid by banks or trustcompanies to depositors: if it is shows thatthe tax on such interest was withheld and

paid

iv. Interest paid by a corporate taxpayer who isliable on mortgage upon real property of

which the said corporation is the legal or

equitable owner, even though it is not

directly liable for the indebtedness

f. Non-deductible Interest Expensei. An individual taxpayer reporting income on

a cash basis incurs and indebtedness where

advance interest was paid. Such interest

may be deducted only when principal

likewise paid.

ii. Interest paid on indebtedness betweenrelated relatives

iii. Interest paid on indebtedness incurred orcontinued to purchase or carry obligations

the interest on which is exempt from tax

iv. Interest on indebtedness incurred to financepetroleum exploration

v. Interest on unpaid salaries and bonusesvi. Interest paid where no stipulation for such

payment was agreed

vii. Interest paid on unenforceable obligationviii. Interest paid on preferred shares of stocksix. Interest on preferred stocks which is reality

is dividend thereon. Preferred shares are

considered capital regardless of the

conditions under which such shares are

issued and consequently, dividends or

interest paid thereon shall not be allowed

as a deduction from gross income of the

corporation


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x. Advances given without any expectation ofrepayment do not give rise to valid and

subsisting debts. Interest incurred thereon is

non-deductible

xi. Interest on indebtedness for purely personalreasons

xii. Interest calculated for cost-keeping or otherpurposes on account of capital or surplus

invested in the business which does not

represent a charge arising under an interest-

bearing obligation

xiii. Interest paid abroad by a non-residentparent/holding company in respect of which

no deduction is allowable to its branch on

the Philippines unless the indebtedness was

incurred to provide funds for investment in

the said resident branch, the income from

which is taxable and provided the branch

submits as authenticated copy of the

investment agreement and such other

information required.

g. Related partiesi. Between family embersincludingtaxpayers brother or sisters, whether full or

half blood, spouse, ancestors and lineal

descendants

ii. Between an individual and a corporation where more than 50% in value of the

outstanding stock of which is owned,

directly or indirectly by or for such a

taxpayer. Except, in the case of distributions

in liquidation

iii. Between two corporationsexcept in thecase of distribution of liquidations, 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 loan (sale or exchange) was, under

the law applicable to such taxable year, a

personal holding company or a foreign

personal holding company

iv. Between the fiduciary of a trust andfiduciary of another trust if the same person

is a grantor with respect to each trustv. Between the grantor and a fiduciary of any

trust

8. On Taxesa. In generalAll taxes (main), whether national

or local, paid or incurred within the taxable year,

in connection with the taxpayers profession,

trade or business excluding surcharge, penalties

and fines incident to delinquency

b. Exclusionssurcharge, penalties, and finesincident to delinquency

c. Requisites for deductibilityi. Paid or incurred within the taxable year

ii. Must not be specifically excluded by lawfrom being deducted from taxpayers gross

income

iii. Deductible only by the person(s) uponwhom the tax is imposed by law

iv. Connected with taxpayers profession, tradeor business

(1) ExceptionsTaxes of shareholder uponhis interest as such and paid by the

corporation without reimbursement

from him can be claimed as a deduction

by the corporation.

However, a corporation paying the

tax for the holder of its bonds or other

obligations, containing a tax-free covenant

clause cannot claim deduction for such taxes

paid by it pursuant to such covenant

d. taxpayers allowed to claim taxes as deductions(1) Resident citizen(2) Non-resident citizen, OCW and seaman(3) Resident alien(4) Non-resident alien engaged on trade or

business in the Philippines

(5) Members of a general professionalpartnership

(6) Domestic corporation(7) Resident foreign corporation

e. Deductible taxes: Examplesi. Import duties

ii. Business occupation, license, privilege,excise and permit

iii. Percentage tax and tax on gross receiptspaid or accrue

iv. Privilege or occupation taxesv. Fringe benefit taxes under certain conditions

vi. Automobile registration fees (taxes innature)

vii. Documentary stamp taxesviii. Income, war-profits and excess-profits taxes

imposed by the authority of any foreign

country only if the taxpayer does not signify

in his return his desire to have any extent

the benefits of the provisions of lawallowing credits against the tax for taxes of

foreign countries

ix. Any other taxes of every amount and naturepaid directly to the government or any

political subdivision

f. Non deductible taxes, examplesi. Income Tax (Philippine or foreign)

ii. Value added taxiii. Estate and Donors taxes


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iv. Special assessment or levies on propertiesv. Energy tax (BP 36)

vi. Taxes not related with the trade, business orprofession of the taxpayer

vii. Taxes which are final in natureviii. Stock transfer tax on shares that are listed

or traded in the exchanges which are final in

character

ix. Taxes assessed against local benefits of akind tending to increase the value of the

property assessed

x. War profit taxxi. Foreign income taxes imposed by authority

of a foreign country

EXCEPTION: This shall be allowed in the case

of a taxpayer who does not signify in his

return his intention to avail of the benefits

of tax credit for taxes paid to foreign

countries

g. Limitations on Deductions od Resident Citizenand NRAETB

a. Limited to the extent that such taxesare connected with income realizedform sources within the Philippines

b. Tax on interest of shareholder paid bycorporation without reimbursement is

not deductible from gross income but

also not treated as income of the

shareholder

c. In case of corporate bonds or otherobligations containing a tax-free

covenant clause, the corporation

paying a tax or any part of it for

someone else pursuant to an

agreement is NOT entitled to deduct

such payment from gross income on

any ground

d. In the case of a resident alien whoseincome from sources within such

foreign country is NOT taxable, then

only that portion of the taxes paid to

such foreign country which

corresponds to his net income taxable

shall be allowed as deduction

e. An alien individual and a foreigncorporation shall NOT be allowed the

credits against the tax for the taxes offoreign contries allowed in Sec 34 (c)

(3) of the Tax Code

Examples of local taxes that is

deductible: Community development

tax, percentage tax on business, real

property tax on property used in

business and license or permit for the

conduct of the business

h. Taxes that can be claimed as Tax Credit(1) Tax Credit defined- This is a taxpayers right

to deduct from the income tax due the

amount of the tax he has paid to a foreign

country subject to specified limitations

(2) Purpose of tax creditto lessen the effectsof international double taxation or multiple

taxations

(3) Taxpayers entitled to claim tax creditsi. Citizens of the Philippinesii. Members of the general professional

partnership

iii. Beneficiaries of an estate or trustiv. Resident aliens under the Principle of

Reciprocity

(4) Tax payers not entitled to claim tax crediti. Non-resident citizensii. Non-resident aliens

iii. Resident aliens deriving income solelyfrom the Philippines

iv. Foreign corporations(5) Taxes that can be claimed as tax crediti. War profit taxesthese are income

taxes by reason or on occasion of war in

order to raise funds to prosecute the

war and reach income of war

millionaires

ii. Excess profit taxesThese are incometaxes imposed upon excessive earnings

occurring during garrison economic life

in times of undeclared war.

iii. Taxes paid by authority of a foreigngovernment

NOTE: a taxpayer who has signified in

his tax return his desire to claim a tax

credit of foreign taxes paid shall be

considered to have applied said taxes

paid to all foreign countries and no

portion there of shall be allowed as a

deduction from gross income.

a. Country Limitation Rule: only oneforeign tax was paid

b. Computation:Tax Credit =

Taxable income from foreign countryx Philippine Income

Tax

Taxable income from all sources

(6) When Tax Credit is appliedThe taxpayerat his option and irrespective of the

accounting method employed in keeping

his books should take such credit for taxes

in the year in which the taxes for the


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foreign country accrued. An election thus

made by him must be followed in the tax

returns for all subsequent years. No

portion of any such tax credit may be

allowed as a deduction from gross income.

On Losses- The term implies an unintentional parting with

something of value. It is used in the income tax law in a very

broad sense to comprehend all losses which are not general

or natural to the ordinary course of business.

a. Losses coveredlosses which do not come under thecategory of bad debts, inventory losses, depreciation

and the like and which arise in taxpayers profession,

trade or business.

b. Requisites for Deductibility:(1) loss must be that of the taxpayer(2) actually sustained during the taxable year(3) connected with the business, trade or profession of

the taxpayer

(4) not compensated by insurance or other form ofindemnity

(5) evidenced by a closed and completed transaction(6) not claimed as a deduction for estate tax purposes(7) if it is a casualty loss, must be reported to the

concerned authorities within prescribed time (45

days)

The Marcelo Doctrineif one business istaxable and the other is exempt. The loss in the

exempt business is not deductible from the

profits of the former. [Marcelo Steel Corp. vs.

Collector, 109 Phil 921]

c. Allowed Deductible losses to non-resident ForeignCorporations:

1.) Losses sustained in business or trade in the country2.) Casualty losses in such business or trade conducted

within the Philippines arising from fire, storms,

shipwreck, TRECUSO (theft, robbery, embezzlement,

calamity, and unexpected sudden occurrences)

3.) Losses actually sustained in transactions enteredinto for profit in the Philippines, although not

connected with their trade or business in the

Philippines

d. Amount deductible on losses sustained from propertyconnected with business, trade or profession:

(1) In case of total destructionthe net bookvalue (cost less accumulated depreciation)

immediately preceding the casualty to be

reduced by any amount of insurance or

compensation received.

(2) In case of partial destructionthe replacementcost to restore the property to its normal

operating condition, but in no case shall be

deductible loss be more than the net book

value of the property as a whole. The excess

over the net book value immediately before the

casualty should be capitalized, subject to

depreciation over the remaining useful life of

the property.

e. Types of Losses, defined, distinguished(1) Ordinary losses By individuallosses actually sustained during

the taxable year, not compensated for by

insurance, incurred in connection with trade,

business or profession or arising from fire,

storm, shipwreck, or other casualties, or from

robbery, theft or embezzlement.

By non-resident aliens and foreign corporationslosses actually sustained in business, trade or

profession conducted within Philippines, when

such losses are not compensated for by

insurance or other forms of indemnity.

By domestic corporationsall losses actuallysustained and charged off within taxable years

and not compensated for by insurance.

(2) Capital Losses[Sec. 39 (3), NIRC]excess of thelosses from sales or exchanges of capital assets

over the gains from such sales or exchanges.

aa. Examples:

(a) Losses from sale or exchange of capitalasset

(b) Losses resulting from securitiesbecoming worthless and which are

capital assets

(c) Losses from short sales of property(d) Losses due to failure to exercise

privilege or option to buy or sell

property

(3) Special Lossesaa. Kinds:

(a) Wagering Lossdeductible only to theextent of gain or winnings

(b) Losses on Wash Sales of Stocksnotdeductible because these are considered as

artificial loss

(c) Abandonment Losses in Petroleumoperation and producing well


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(d) Losses due to voluntary removal buildingincident to renewal or replacements -

deductible

aaa. Exception: when the building was

never intended to be used when the asset

was acquired.

(e) Loss of useful value of capital asset due tochanges in business conditions

(f) Losses from sales or exchange or propertybetween related taxpayers.

aaa. Related Taxpayers

1. Between members of a family (which

shall include only his brothers and sisters,

spouse, ancestors and lineal descendants)

2. Between an individual and a corporation

more than 50% in value of the outstanding

stock of which is owned, directly or

indirectly, by or for such individualexcept

in the case of distributions in liquidation

3. Between two corporations more than

50% in value of the outstanding stock ofeach of which is owned, directly or

indirectly by or for the same individual

4. Between the grantor and the fiduciary of

a trust

5. Between the fiduciary of a trust and the

fiduciary of another trust if the same

person is a grantor with respect to each

trust

6. Between the fiduciary of a trust and a

beneficiary of such trust [Section 36(B),

NIRC]

(g) Losses of Farmersf. Losses which are not Deductible

1.) Loss from sale or exchange of property is notallowed except in case of distribution of liquidating

dividends.

2.) Losses between corporations if more than 50% invalue of the outstanding stock in both is owned,

directly or indirectly, by the same individual and

only if either one of the corporation were a

personal holding company for the taxable year

preceding the date of the sale.

3.) Also deductible: Decline in market value of securities Capital losses to the extent not covered by capital

gains

Loss on exchange property where the propertyreceived is not essentially different from the

property disposed of

Loss on wash sale of stock or securities

Loss due to shrinkage in value of stocks, lossallowed only when actualized.

Loss in pursuance of a merger or consolidation Loss in pursuance of a transfer to a controlled

corporation

Loss upon demolition of building acquired withland, when the building was never intended to be

used in business

Loss from illegal transactiong. Net Operating Loss Carry-Over (NOLCO)excess of

allowable deduction over gross income. It can be

carried over as a deduction from gross income for the

next 3 consecutive years immediately following the

year of such loss.

(1) Requisites for Deductibility:1.1)The net loss had not been previously offset

as deduction from gross income

1.2)The taxpayer was not exempt from incometax in the year of such net operating loss(Marcelo Doctrine)

1.3)No substantial change in the ownership ofthe business enterprise

(2) Substantial change in the ownership of theBusiness or Enterprisethis refers to the

change in the ownership of the business or

enterprise as a result of or arising from its

merger or consolidation or combination with

another person in a manner provided by law.

(3) Who may avail of NOLCO? Individual taxpayer (including estate and

trust) engaged in business or trade

Individual taxpayers engaged in theexercise of profession

Domestic corporation Resident corporation

NOTE:An individual who opted to

claim OSD of 40% shall not

simultaneously claim deduction of the

NOLCO.

(4) Who may not claim NOLCO? Offshore Banking Unit (OBU) of a foreign

banking institution/corporation

Foreign currency deposit unit (FCDU) of adomestic or foreign banking corporation,

duly authorized by the BSP

Enterprises registered with the BOIenjoying tax holiday

Enterprises registered with PEZA enjoyingtax holiday


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Enterprises registered with SBMA enjoyingtax holiday

Foreign corporations engaged ininternational shipping or air carriage

business in the Philippines

Any person, entity enjoying tax exemptionfrom income tax pursuant to the Tax Code

and other Special Law.

(5) Relationship of NOLCO to MCIT Corporations covered by an MCIT cannot

enjoy the benefit of NOLCO for as long as it

is subject to MCIT in any taxable year. The

running of the three-year period for the

expiry of the NOLCO is not interrupted by

the fact that such corporation is subject to

MCIT in any taxable year during

reglamentary period of 3 years.

(6) Net Operating Loss for Miners Other than Oiland Gas Wells

Those entities not covered by EO 226 losses incurred in the first 10-year

operation maybe carried over as a

deduction for the next 5 years immediately

following the year of loss.

The entire amount of loss shall be carriedover to the first of the 5 taxable years

following the loss.

Any excess portion of loss in the first yearcan be deducted in like manner from the

income of the next remaining 4 years.

On Bad Debts

a. Bad debtsdebts due to the taxpayer actuallyascertained to be worthless and charged off

within the taxable year.

b. Requisites for Deductibility:1.) Debts due to the taxpayer was actually

ascertained to be worthless

2.) Debts must be charged off within thetaxable year

3.) It must be connected with profession,trade or business

4.) The debt must be valid, legally demandableand subsisting

5.) Debt must not be sustained in a transactionentered into between related parties

c. Who can avail of bad debts deduction?

Resident citizens and domesticcorporationsin connection with

business connected within or without

the Philippines.

RC, NRC, RA and NRAETBthosearising in the course of trade or

business conducted in the Philippines.

d. How much is deductible?The entire amountof the bad debt.

Exceptions:

1.) Where corporate taxpayer computesincome on the basis of valuing notes or

accounts receivable on their FMV when

received, which may be less than their face

value, the amount deductible is limited to

such original valuation.

2.) Only the difference between the amountreceived by a creditor of a decedent in the

distribution of assets of the decedents

estate and the amount of the claim is

deductible.

3.) Only difference between the amountreceived in distribution of the assets of a

bankrupt and the amount of the claim is

deductible.

4.) A debt partially secured by a mortgage isdeductible to the extent not covered by the

mortgage.

5.) Where compromise agreement was arrivedat between debtor and creditorthe

amount deductible is the amount absolved

if the debtor is insolvent. (Ex. A debt of

P150K was compromised for P100K, the

P50K is deductible as bad debt)

6.) A purchaser of accounts receivable whichcannot be collected and are consequently

charged off in the books as bad debts is

entitled to deduct them, the amount of

deduction to be based on the purchase

price and not on their face value.

7.)

No amount of bad debt is allowed ifmortgage is foreclosed and creditor buys

the mortgaged property and credits the

debt with the purchase price even if such

price is less than the indebtedness, the

security taking the place of the debt.

Voluntary cancellation or forgivenessof a debt does not give rise to a

deductible loss.


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Where mortgagee forecloses themortgaged property because the

mortgagor could not pay, and the

purchase price is different from the

indebtedness of the mortgagor, the

difference if less is not a deductible

bad debt.

No partial write-off of bad debts ifsuch debtor is still in business or in

operation.

Bad debts written off but subsequentlypaid are subject to income tax

(Equitable Tax Benefit Rule also known

as Recapture Rule).

NRFC are not allowed to deduct debts-they are taxed on gross.

e. The Tax Benefit Rule- This doctrine holds thata recovery of bad debt previously deducted

from gross income constitutes taxable income ifin the year that account was written off, the

deduction resulted in a tax benefit, that is, in

the reduction of taxable income of the taxpayer.

On Depreciation Expense :

Depreciation - This refers to the gradual diminution

or deterioration in the economic potential of property used

in trade or business including the useful value of tangible

property resulting from wear and tear, exhaustion and

normal obsolescence. Likewise the terms applies to the

omortization of the value of intangible assets, the use ofwhich in trade or business is definitely limited in duration.

Capital expenditures are subject to depreciation allowance :

These are :

a) Amounts paid out for new buildings, orb) For permanent improvements, orc) Betterments made to increase the value of the

taxpayers property, or

d) For any amount expended in restoring property ore) In making good the exhaustion thereof

Requisites :

a) The allowance of depreciation must be reasonable( determined by the taxpayer)

b) It must be for property use or employment in tradeor business or out of its not being used temporarily

during the year;

c) The allowance must be charged off within thetaxable year;

d) Schedule on the allowance must be attached tothe return

Person entitled to claim :Person who owns the

property and has a capital investment in the

property, such as :

a) Resident citizensb) Resident aliensc) Non-resident aliens engaged in trade or

business

d) Domestic corporationse) Resident foreign corporations

Kinds of properties subject to depreciation allowance :

1. Tangible property susceptible to wear and tear, todecay or decline from natural causes, to exhaustion

and to obsolescence due to the normal process of the

art or due to inadequacy of the property to meet

growing needs of the business. Examplemachines

and equipment that must be replaced by a new

invention.

2. Intangible property, the use of which in trade orbusiness is of limited duration like patents,copyrights, royalties and franchises.

Estimated life:

Patents - 17 years ( RA 165 )

Copyrights - lifetime of creator + 50 years

without renewal ( PD 49 )

Process - 25 years

Franchises - as provided in the grant

This allowance applies to amortization of intangible

assets, the use of which in trade or business is of limited

duration.

3. Amounts paid for an agreement not to compete ina trade or businesses, where the taxpayer can

prove the existence of such an agreement, are

capital expenditures subject to depreciation

allowance ratably spread over the period agreed

upon.

4. Properties kept in repair5. Properties and customes used exclusively in

business in theatrical, stage circuses and the like.

6. Window display or dressing, drawing patterns,models or work of an experimental nature, with

limited period of usefulness determinable from

experience can be subject to depreciation.

Properties NOT subject depreciation :

1. Inventories in stock2. Land, apart from the improvements or physical

development added to it;


16/21

3. Bodies of minerals which through the process ofremoval suffer depletionthey are subject to

depletion allowance;

4. Motor vehicle and and other transportationequipment used solely by taxpayer for his own

pleasure

5. Building used solely for residential purposes bytaxpayer

6. Furniture for furnishing used in taxpayersresidence

7. Personal effects or clothing except properties orcostumes used exclusively in business such as

theatrical, circus and the like

8. Intangibles, the use of which in business or trade isnot of limited duration such as goodwill,

trademarks , trade names and trade brands

because they are not subject to exhaustion.

9. Formulas but if after acquisition, it is found to beworthless, its cost may be deducted in full as a loss

for the year in which the formula is abandoned as

being worthless.

10. Incidental repairs that neither materially add tothe value of the property nor appreciably prolong

its life, but keep it in an ordinary efficient

operating condition.

Basis of sum recoverable by depreciation :

The sum to be replaced by depreciation

allowance is the cost, or other basis of the

property with respect to which the allowance ismade. The amount of any defimite loss or

damaged sustained by the property through

casualty, as differentiated from the gradual

exhaustion of its utility which is the basis of

depreciation allowance may be added to the

depreciation allowance.

No depreciation deduction will be allowed in

the case of property that has been amortized to its

scrap value and is no longer in use in trade or

business.

When to deduct depreciation allowance?

Depreciation begins with the acquisition of

the property. The period of depreciation starts

when the asset is placed in service . (a) New

building = upon completion and capable to being

used, (b) if the property was initially acquired for

personal use and subsequently converted into

business or investment use = upon conversion.

Depreciation cannot go beyond acquisitioncost of the property and cannot be based on

appraisal value. ( Basilan Estates vs. Collector,

21 SCRA 17 )

It is allowed on properties that are not beingused temporarily during the year(Connell Bros

Co. vs. Collector, CTA Case)

It applies also to copyright and otherintellectual properties.

If the taxpayer decides to deduct interestpayments against its income, he cannot at the

same time capitalize such interest and claim

depreciation on the undepreciated cost which

incudes the interest. (PICOP vs. CIR, December

1, 1995)

The capital sum to be replaced by depreciatonallowances is the cost or other basis of theproperty in respect of which the allowance is

made. To this amount is added the cost of

improvement.

No depreciation deduction is allowed in thecase of properties which has been amortized to

its scrap value and is no longer use.

In case the lease is terminated prior to theexpiration of the lease contract or before the

improvements have been fully depreciated, theunclaimed balance and of the cost of the

improvements may be deducted in the year of

termination of the lease. ( De Vera vs. Collector,

CTA Case No. 167 March 23, 1959)

Depreciation allowance of NRA or RC : Thisallowance is allowed only on properties located

in the Philippines and arising out

of its use or employment or non-use in busines

trade or profession.

Property held by one person for life with theremainder to another personThe allowance

should be computed as if the life tenant was

the absolute owner of the said property and as

such the expense shall accrue to him.

Property held in trust -The allowance shall beapportioned between the income of

beneficiaries and the trustees in accordance

with the pertinent provisions of the instrument


17/21

creating the trust, or in the absence of such

provisions, on the basis of the trust income

allowable to each.

Different kinds or methods of computing the depreciation

allowance :

a) Straight line method This method spreads thetotal depreciation over the useful life of the assets.

b) Declining balanced method This method uses arate ( usually 1.5 or 2 times the straightline rate )

to the declining book value of the assets.

c) Working hours method The total working andhours of the machine until its retirement is

estimated and a charge per hour is determined.

d) Unit of production method The estimated service

life is stated in units of products instead of working

hours.

e) Sum-of-the-years-digit method This is a method of

depreciation where bigger depreciation expenses are

provided during the early years of the fixed assets which

gradually diminish until the total depreciation is equal

the cost of the assets. ( This is synonymous to the

declining method of of depreciation ).

f) Any other method which may be prescribed by the

Department of Finance upon recommended of the CIR :

Adjustment of allowance In case the useful life of the

property turns out to be longer or shorter than that

originally estimated an adjustment should be made

accordingly.

Depreciation of allowance of farmers Farm buildings

(except dwelling used by farmers ) farm machinery and

other physical properties, livestock acquired for work orfor breeding or dairy purposes, unless included in an

inventory to determine profits are deductible.

On Depletion Expense :

Deduction arising from the exhaustion of natural

resources as in mines, oil and gas wells. The

amortization is computed in accordance with the cost-

depletion method under the prescribed rules and

regulations. When the allowance for depletion shall

equal the capital invested, no further allowance shall be

granted.

Who may claim? Only mining entities owning economic

interest in mineral deposits.

Economic interest - The interests in minerals in place

acquired by investment therein or secured by operating

or contract agreement for which income is derived, and

return of capital expected, from the extraction of mineral.

More economic or pecuniary advantage to be derived by

production by one who has no capital investment in the

mineral deposit does not amount to economic interest.

How applied?

Intangible exploration and development drilling cost in

petroleum shall be treated either as revenue expenditure or

capital expenditures at the option of the taxpayer.

The total amount deductible for exploration and

development expenditures shall not exceed 25% of net

income from mining operation. The excess shall be carried

forward to the succeeding year until fully deducted.

Exploration expenditures - The amount paid or incurred for

the purpose of ascertaining the existence, location, extent

or quality of any deposit of ore or other mineral before the

beginning of the development stage of the mine or other

natural deposit.

Development expenditures - The amount paid or incurred

during the development stage of the mine or other natura

deposit.

Development stage - As used in mining industry begins at

the time when deposits of ore or other minerals areshown to exist in sufficient commercial quantity and quality

and ends upon the commencement of actual commercia

extraction.

Amount recoverable Adjusted cost of the

property being mined plus allowable capital additions.

13.SEC 34

(H) Charitable and Other Contributions. -

(1) In General. - Contributions or gifts actuallypaid or made within the taxable year to, or for

the use of the Government of the Philippines or

any of its agencies or any political subdivisionthereof exclusively for public purposes, or to

accredited domestic corporation or associations

organized and operated exclusively for religiouscharitable, scientific, youth and sportsdevelopment, cultural or educational purposes or

for the rehabilitation of veterans, or to socia

welfare institutions, or to non-governmentorganizations, in accordance with rules and

regulations promulgated by the Secretary of

finance, upon recommendation of theCommissioner, no part of the net income ofwhich inures to the benefit of any private

stockholder or individual in an amount not inexcess of ten percent (10%) in the case of anindividual, and five percent (5%) in the case of acorporation, of the taxpayer's taxable income

derived from trade, business or profession ascomputed without the benefit of this and thefollowing subparagraphs.


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> Charitable and other contributions aredeductible whether business related or not.

A. REQUSITES:

a.)The contribution or gift must be actuallypaid

b.)It must be given to the organizationspecified in the Tax Code (NationalGovernment, its political subdivisions,accredited civic organizations amongothers) Valuation- acquisition cost of

property contributed.

c.) It must not exceed 10% of theindividuals taxable income and 5% of the

corporations taxable income before

deducting the contribution,

d.)It must be evidenced by adequate recordsor receipts and

e.)The net income of the done/recipientinstitution must not inure to the benefit of

any private stockholder or individual.

B. Non-Stock Non-Profit (NS-NP)corporations or organization- refers to an

entity created or organized under the Philippinelaws exclusively for one or more of the followingpurposes:

a.) religious b.) charitable c.) scientific d.)

athletic e.) cultural f.) rehabilitation veterans and

g.) social welfare, no part of the net income orasset of which shall belong to or inure to the

benefit of any member, organizer, officer or anyspecific person.

C. Non-Government Organization (NGO)-

refers to a NS-NP domestic corporation ororganization formed and operated exclusively forscientific, research, educational, character-

building and youth and sports development,health, social, welfare, cultural or charitablepurposes or a combination thereof, no part of thenet income of which inures to the benefit of any

private individual.

D. 2 KINDS OF CHARITABLECONTRIBUTIONS:

1. Ordinary- those that are subject tolimitations (10% or 5%) as to the amountdeductible from gross income;

2. Special- those which are deductible in fullfrom gross income.

E. LIMITATIONS IN AMOUNT

Individual- 10% of the taxable income from

trade or profession before contribution

Corporation- 5% of the taxable income fromtrade or business before contribution

Contribution of property shall be based inacquisition cost of said property donated. Donations in favor of accredited NS-NP

corporations or NGO shall be exempt fromdonors tax provided not morethan 30%of the said donation is used for

administration purposes.

Donations made to a chapel owned by aprivate university that distributes

dividends to its stockholders are notdeductible.

F. CONTRIBUTIONS DEDUCTIBLE IN

FULL (not subject to the limitation)

1. Donations to the government or politicasubdivisions including fully owned GOCC tobe used exclusively in undertaking priority

activities in

Education, health, youth and sports

development, human settlement, scienceculture and economic development. Providedhowever, that any donation to the

government NOT in accordance with the

priority plan shall be subject to thelimitations of 5% or 10%.

2. Donations of foreign institutions orinternational organizations in compliance with

agreements, treaties or commitments.

3. Donations to accredited NGOs (non-profit

Domestic Corporation) that are organizedexclusively for

a. Educational, health, youth and sports

development, scientific, research, characterbuilding, social welfare, cultural, charitableand combination thereof.

b. the donation must be utilized not later

than the 15thday of the 3rdmonth followingthe close of its taxable year

c. the administrative expense must notexceed 30% of total expenses


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d. upon dissolution, assets must bedistributed to another non-profit domesticcorporation or to the state.

NOTE: If the above 4 conditions are not met,the contribution shall be deducted subject to

limitations.

G. CONTRIBUTIONS SUBJECT TOLIMITATIONS: (5% OR 10%)

Donations that are traditional exemptees,to accredited domestic corporations orassociations organized and operated exclusivelyfor the following purposes

Religious, charitable, scientific, youth and

sports development, cultural, educational,rehabilitation of veterans, social welfareinstitution and other non-government

organization.

H. VALUATION- The amount of any charitable

contribution of property other than money shallbe based on the acquisition cost of said property.

I. PROOF OF DEDUCTION- Contributions orgifts shall be allowable as deductions only if

verified under the rules and regulations

prescribed by the Secretary of Finance, uponrecommendation of the Commissioner.

14. ON RESEARCH AND DEVELOPMENT

EXPENSES

SEC.34 (I) Research and Development.-

In General.- a taxpayer may treat research or

development expenditures which are paid orincurred by him during the taxable year inconnection with his trade, business or profession

as ordinary and necessary expenses which are

not chargeable to capital account. The

expenditures so treated shall be allowed asdeduction during the taxable year when paid or

incurred.

A.AMOUNT DEDUCTIBLE- Amount ratably

distributed over a period of 60 months beginningthe month, taxpayer realized benefits from suchexpenditures.

B. KINDS OF TAX EXPENDITURES

1.revenue expenditures

REQUISITES:

1. Paid or incurred during the taxable year2. Ordinary and necessary expenses in

connection with trade, business orprofession;

3. Not chargeable to capital account

2. at the option of the businessmanresearch and development expense may betreated as deferred expense (pre-operatingexpense)

REQUISITES:

1. Paid or incurred in connection with trade,business or profession

2. Not treated as expense3. Chargeable to capital account but not

chargeable to property subject to

depreciation or depletion.

NON-DEDUCTIBLE EXPENSES UNDER THISCATEGORY:

a) Any expenditure for acquisition orimprovement of land or for theimprovement of property to be used in

connection with research and

development subject to depreciation anddeception allowances;

b) Any expenditure paid or incurred for thepurpose of ascertaining the existence,

location, extent or quality of any depositof ore or other minerals including oil orgas.

C. LIMITATIONS ON DEDUCTION WITH

RESPECT TO RESEARCH AND DEVELOPMENTEXPENSE

Sec34 (3) Limitations on deduction.- ThisSubsection shall not apply to:

(a) Any expenditure for the acquisition orimprovement of land, or for the improvement of

property to be used in connection with researchand development of a character which is subjectto depreciation and depletion; and

(b) Any expenditure paid or incurred for thepurpose of ascertaining the existence, location,

extent, or quality of any deposit of ore or othermineral, including oil or gas.


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15. PENSION TRUST

SEC 34 (J) Pension Trusts.- An employer

establishing or maintaining a pension trust toprovide for the payment of reasonable pensionsto his employees shall be allowed as a deduction

(in addition to the contributions to such trustduring the taxable year to cover the pensionliability accruing during the year, allowed as a

deduction under Subsection (A) (1) of this

Section ) a reasonable amount transferred orpaid into such trust during the taxable year inexcess of such contributions, but only if such

amount (1)has not theretofore been allowed as a

deduction, and (2) is apportioned in equal partsover a period of ten (10) consecutive years

beginning with the year in which the transfer orpayment is made.

A.CONTIBUTIONS TO PENSION TRUST- Anemployer who adopts or has adopted a

reasonable pension plan, actually sound and whoestablishes and maintains a pension trust for the

payment of reasonable pensions to hisemployees shall be allowed to deduct from his/its

gross income reasonable amounts paid to suchtrust.

DEDUCTIBLE PAYMENTS- payments toemployees pension trust which are deductible

are:

1.amounts contributed by the employer during

the taxable year to cover the pension liabilityaccruing during the year; and

2.1/10 of the reasonable amount paid by the

employer to cover pension liability applicable tothe year prior to the taxable year, or so paid toplace the trust in a sound financial basis (sec118

regs no,2) Payments under No. (1) areconsidered as ordinary and necessary businessexpenses deductible as such.

B.REQUISITES:

a. employer must have established a pension orretirement plan for the benefit of his/its

employees

b. the pension plan is reasonable and actually

sound

c. it must be funded by the employer

d. the employer has no control over the amountcontributed

e. the payment has not yet been allowed as adeduction for income tax purposes, and

f. the deduction is apportioned in equal partsover a period of 10 consecutive years beginning

the year the payment was made by theemployer.

16. PREMIUM PAYMENTS ON HEALTHAND/OR HOSPIYALIZATION INSURANCE OFAN INDIVIDUAL TAXPAYER

(M) Premium Payments on Health and/orHospitalization Insurance of an Individual

Taxpayer. - the amount of premiums not toexceed Two thousand four hundred pesos(P2,400) per family or Two hundred pesos

(P200) a month paid during the taxable year for

health and/or hospitalization insurance taken bythe taxpayer for himself, including his family,shall be allowed as a deduction from his gross

income: Provided, That said family has a grossincome of not more than Two hundred fiftythousand pesos (P250,000) for the taxable year:

Provided, finally, That in the case of married

taxpayers, only the spouse claiming theadditional exemption for dependents shall beentitled to this deduction.

Notwithstanding the provision of the preceding

Subsections, The Secretary of Finance, uponrecommendation of the Commissioner, after apublic hearing shall have been held for thispurpose, may prescribe by rules and regulations,

limitations or ceilings for any of the itemizeddeductions under Subsections (A) to (J) of thisSection: Provided, That for purposes of

determining such ceilings or limitations, theSecretary of Finance shall consider the followingfactors: (1) adequacy of the prescribed limits onthe actual expenditure requirements of each

particular industry; and (2)effects of inflation onexpenditure levels: Provided, further, That no

ceilings shall further be imposed on items ofexpense already subject to ceilings underpresent law.

PREMIUM PAYMENTS- The limitations are asfollows:

1) the payment are for health and/orhospitalization insurance;


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2) the amount of premium does not exceedof P2,400 per family or P200 a monthduring the taxable year;

3) the insurance is taken by the taxpayer forhimself including his family; and

4) the family has a gross income of not morethan P250,000

*if all the requisites are present, only the spouse

claiming the additional exemption for dependentsis entitled to this deduction.

17. OPTIONAL STANDARD DEDUCTION

L) Optional Standard Deduction.- In lieu of

the deductions allowed under the precedingSubsections, an individual subject to tax under

Section 24, other than a nonresident alien, may

elect a standard deduction in an amount notexceeding ten percent (10%) of his grossincome. Unless the taxpayer signifies in his

return his intention to elect the optional standarddeduction, he shall be considered as havingavailed himself of the deductions allowed in thepreceding Subsections. Such election when made

in the return shall be irrevocable for the taxableyear for which the return is made: Provided,That an individual who is entitled to and claimed

for the optional standard deduction shall not be

required to submit with his tax return suchfinancial statements otherwise required under

this Code: Provided, further, That except when

the Commissioner otherwise permits, the said

individual shall keep such records pertaining tohis gross income during the taxable year, as may

be required by the rules and regulations

promulgated by the Secretary of Finance, uponrecommendation of the Commissioner.

TAXPAYERS ENTITLED TO CLAIM OPTIONALSTANDARD DEDUCTION

PERSONS COVERED- The following may beallowed to claim optional standard deduction

(OSD) in lieu of the itemized deductions(ie.,items of ordinary and necessary expenses

allowed under Sec34 A-J and M, Sec37 and otherspecial laws, if applicable):

1. INDIVIDUALSA. Resident citizenB. Non-resident citizenC. Resident alien; andD. Taxable estate and trust

2.2. CORPPORATIONS

A. Domestic corpB. Resident foreign corporation

460-468deleon

PART IX Allowable Deductions From Gross Income

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