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1. Deductions from Gross Income - taxpayer's taxable income

In general, deductions are bearing heavily against the
expenses and losses incurred in taxpayer whose inexactitude is of
connection with the realization of his own making. A disallowance
gross income, which tile law of 50% of the taxpayer's claimed
allows to be deducted from such deduction is valid (Rev. Memo.
income to arrive at net income Circular No. 23-2000).
subject to tax.
1. 5. Deductions against Exclusions
1.1. The purpose of deductions from
gross income is to provide the Deductions Exclusions
taxpayer a just and reasonable Amounts Amounts/items
taxable amount as the basis of deducted from exempt from tax by
tax. Generally, personal expenses gross income to virtue of the Tax
are not allowed as a deduction arrive at net Code or special law.
from compensation, profession, income.
trade or business income.
1.6 Deductions against Personal
1.2. If a taxpayer fails to deduct Exemptions
certain expenses for the taxable
year, he cannot deduct them from Deductions Personal
the income of tile next or any Exemptions
succeeding year (Section 76, Rev, Business Personal expenses
Reg. No.2) expenses cover personal,
represent cost of living or family
1. 3. Not allowed to claim deductions doing expenses
(Tax base: Gross Income) : Both individual Only individual is
and corporate entitle
1.3.1 NRA-NETB taxpayers may
1.3.2 NRFC
2. Requisites of allowable
1.4. The Cohan Rule Principle deductions

1.4.1 If there is showing that expenses 2.1. The expense must be ordinary
have been incurred but the exact and necessary.
amount thereof cannot be
ascertained due to the absence of 2.1.1 Expenses are considered
documentary evidence, it is the "ordinary and necessary" if they
duty of the BIR to make an are directly attributable to
estimate of deduction that may development, management,
be allowed in computing the operation, and or conduct of the

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trade or business of the taxpayer, not incurred in connection with
or in the exercise of the taxpayer's the trade or business of the
profession. company.

2.1.2. Ordinary, when it is normal 2.2.2. Fees paid by tile taxpayer to

(common or usual) in relation to recover its lost assets occasioned
the business of the taxpayer and by the war and to rehabilitate its
the surrounding circumstances. business - business connected
Need not be recurring. expenses.

2.1.3. It is called ordinary in most cases 2.2.3. Mere holding of investments

to distinguish it from a capital cannot be considered engaging in
expenditure. business so that the expenses in
managing the investments .are
2.1.4. Recapitalization and not considered ordinary and
reorganization expenses are necessary in the pursuit of a trade
capital expenditure as well as or business.
cost of obtaining stock
subscription and promotion 2.2.4. Margin fees paid to the Bangko
expenses. Sentral ng Pilipinas of a foreign
corporation doing business in the
2.1.5. Ransom money paid to secure the Philippines; on its profit
return of an individual is not remittances to head office are not
deductible as it has nothing to do ordinary and necessary expenses.
with profit making. REASON: The fees were paid not in
the production of income, but in the
2.1.6. Payment of the debts of bankrupt disposition of said income after it had
company to which the taxpayer already been earned. Hence, it is an
was an officer to establish his expense properly attributable to
credit is, according to U.s. the head office and not in the
Supreme Court not ordinary. carrying on of its trade or
business in the Philippines.
2.2. The expenses must be incurred
in trade or business carried on 2.3. The expenses must be
by the taxpayer. This means that substantiated by proof.
the same is not incurred in the
trade or business of another. 2.3.1. It is incumbent upon the taxpayer
to establish proximate relation
2.2.1. Stockholder's expense in between the expense and the
connection with the acquisition of taxpayer's.
additional stock in order to sell it
to certain company executives in 2.3.2. Receipts are the best proof.
furtherance of a management Burden of proof lies upon the
Incentive plan of the company – taxpayer. In certain cases, this

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rule is relaxed. Even if no 2.6.3. Even though the defense is
records/receipts are available, unsuccessful - as long a5 it is
the oral testimony of a CPA, if business connected - deductible.
not contradicted by the
government is sufficient. 2.6.4. Entertainment expenses incurred
by officer of a corporation to
2.4. The expenses must be reasonable entertain certain government
officials to discuss
2.5. Paid or incurred during the transactions/dealings at Manila
taxable year Hotel - against public policy.

2.5.1. Cash basis method - deducts 2.6.5. The purchase price of political
expenses in the year in which influence to obtain or hold public
they are paid. contracts; dollar allocations from
the Central Bank; import control
2.5.2. Accrual basis method - licenses; payments in excess of
recognizes expenses in the year the maximum amount authorized
they accrue. by law - against public policy.
Reason: To permit a violator to
2.5.3. Paid or incurred within the gain a tax advantage through
taxable year. deductions would in effect lessen
the degree of punishment - If the taxpayer keeps his intended, or would frustrate the
books on the cash basis, expenses purpose and effectiveness of the
are deductible in the year they public policy that has been
are paid. violated. - If the taxpayer keeps 2.6.6. Bribe to obtain protection from

his books on the accrual expenses arrest or prosecution against
are deductible in the year they public policy.
are incurred, whether paid or not.
2.7. If subject to withholding tax,
2.6. Expenses must not be against proof of payment to BIR must
public policy, public moral or be shown
2.7.1. Professional expenses- 10%
2.6.1. Fines and penalties - against
public policy. 2.7.2. Rent expense - 5%

2.6.2. Attorney's fee 'incurred in 3. Items not allowed as deduction

defending civil action based on from gross income
illegal act - deductible provided it
is business connected.

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3.1. Personal, living or amily of any officer or employee, or of
expenses. Reason: Non-business any person financially interested
expenses. in any trade or business carried
on by the taxpayer, individual or
3.2. Amounts paid out for new corporate, when the taxpayer is
buildings or for permanent directly or indirectly beneficiary
improvements, or betterment under such policy.
made to increase the value of any
property or estate. 3.4.1. Premiums paid by a family
corporation of the life insurance
3.2.1. Exception: Intangible drilling and policy covering the life of its
development cost incurred in president where the wife is the
petroleum operations. beneficiary is not
deductible/corporation being
3.3. Capital Expenditures (Rev. Reg. indirectly beneficiary under the
No.2): policy (BIR Ruling, 10 November
3.3.1. Cost of defending or perfecting
title to property; 3.4.2. Premiums paid by a corporation
on life insurance policies
3.3.2. Architects fee – part of the cost of covering the lives of two
building; executives naming each other
beneficiary' is deductible i
3.3.3. Commissions paid in selling because the corporation is not
securities - part of the cost; directly and indirectly the
beneficiary of the policies (BIR
3.3.4. Expenses of the administrator of Ruling, 27 May 1953).
the estate Attorney's fee and
Executor's commission – charge 3.5. Losses from sales or exchanges
to the corpus of the estate; of property between related
3.3.5. Corporate expenses for
reorganization such as 3.5.1 Members of the same family – to
incorporation fees, attorney's fee prevent avoidance of income tax
and accountant charge (subject to by means of purported or
amortization). simulated sale or exchange.

3.3.6. Amount expended in restoring 3.5.2. Losses from wash sales except
property or in making good the that of a dealer in stock and
exhaustion thereof for which an securities and in respect to a
allowance has been made. transaction made in the ordinary
course of the business of such
3.4. Premiums paid on a life dealer.
insurance policy covering the life

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3.5.3. Losses actually sustained during taken by an individual taxpayer
taxable year and hot (single, head of the family or
compensated for by insurance or married) for himself or for his
other forms indemnify, if such family is, allowed as deduction at
loss has been claimed as a an amount not exceeding P2,400
deduction for estate tax purposes per family provided that, said
in the estate tax return; family has a gross income of not
more than P250,000. In case of
3.5.4. Bribes, kickbacks and other married taxpayers, only the
similar payments; spouse claiming the additional
exemption for the dependent
3.5.5. Net capital losses or capital shall be entitled to his deduction.
losses if not covered by existing
capital gains from sale of capital 4.2. Optional deductions - is a
assets; deduction from gross income
allowed to' be taken in lieu of the
3.5.6. Net wagering losses if not itemized deductions. It can be
covered by existing wagering claimed only by an Individual.
gains; But it cannot be claimed by a
non-resident alien. The taxpayer
3.5.7. Bad debts resulting to a shall, signify in the income tax
transaction between related return his intention to elect the
taxpayer Optional Standard Deduction, or
else he shall be considered as
3.5.8. Other expenses not allowed by having availed of the itemized
law as deductions from gross deductions. And once elected is
income. irrevocable for the taxable year
which the choice is made.
4. Kinds of deductions under the
Tax Code 4.2.1. The Optional Standard
Deduction is an amount equal to
4.1. Special Deductions - are neither 40% of the gross sales or receipts
personal nor itemized during the taxable year for
c1eductionsbut specifically individual taxpayer (Resident
permitted by the law to reduce Citizen, Non-Resident Citizen,
the taxable income of an resident Alien & Taxable Estates
individual taxpayer. and Trusts) and 40% of gross
income for corporate taxpayer
4.1.1. Premium payments, for, Domestic Corporation & Resident
Health/Hospitalization Foreign Corporation).
Insurance (Sec. 34M, NIRC).
NIRC provides the actual 4.2.2. It is not available against
premium payments for health compensation income arising out
and/or hospitalization insurance

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of an employer-employee 5. Composition of Itemized
relationship. Deductions

4.2.3. An individuals or corporations 5.1. General Business Expenses

who are entitled to, and who
claimed, the, Optional Standard 5.1.1. Compensation for personal
services - inclusive of wages and
Deduction is not required to other forms of compensation for
submit with his income tax personal services actually
return any financial statement, rendered, salaries, wages, fees for
but he should keep records professional services,
pertaining to his gross income commissions, management
expense bonuses, vacation and
4.3. Itemized deductions - are retirement pay, pensions, and
specific expenses permitted by compensation for injuries and
the tax code to be deducted from gross-up monetary value of
the gross income provided that fringe, provided the
supporting documents are corresponding related
available, they may represent withholding tax has been
payments of liabilities, realized deducted and remitted.
losses or reductions in value or
interest of property used in for deductibility of
business. Income subject to compensation payments. They
itemized deductions are reasonable; and they are, in
fact, payments purely for service.
4.3.1. Business and professional income
derived within and outside the 5.1.2. Traveling Expenses - incurred
Philippines by a resident citizen within and outside the country
taxpayer (domestic corporation), while away from home in the
within the Philippines only by a pursuit of trade, business or
non-resident alien (foreign profession. Deductible traveling
corporation); expenses includes transportation
expenses' and meals and lodging
4.3.2. Business and professional income as long as they are incurred
of a general co-partnership; solely for carrying on the trade,
business or profession.
4.3.3. And business income of
proprietary educational the trip is undertaken for
institution and non-profit purposes other than business the
hospitals, proprietary transportation' expenses are
government-owned or controlled personal expenses and the meals
corporation. and lodging are living expenses;
and, therefore, not deductible.

Page 6 of 18 the trip is solely on business, permanents improvements on the
the reasonable and necessary ground of which he is the lessee
travel expenses, including is held to be a capital investment
transportation expenses, meals and not deductible as a business
and lodging become business expense. In order to return such
instead of personal expenses. (see taxpayer his investment of
par. I, Sec. 66, Regs.) capital, an annual deduction may
be made from gross income of for deductibility of capital, an amount equal to the
travel. They are: (1) The expenses cost of such improvements
must be reasonable and divided by the number of years
necessary; (2) They must be remaining of the term of lease,
incurred or paid "while away and such deduction shall be in
from home"; and (3) They must lieu of a deduction for
be paid or incurred in the depreciation. If the remainder of
conduct of trade or business. the term of lease is greater than
the: probable life of the buildings
5.1.3. Rent Expenses - are expense erected or of the improvements
incurred for the continued use or made, this deduction take the
possession, for purposes of trade, form of an allowance for
business or profession, of depreciation. Expressed in
property to which the taxpayer formula:
has not taken or is not taking title
to or in which he has no equity Cost of improvement = Deductible amortization
Term or lease
other than that of a lessee, user or or
possessor. Cost of improvement =
Estimated useful life
Deductible depreciation (1) Property rented The rule, therefore, is: Divide the
must be used in trade or business cost of the improvement by the
of the lessee; (2) Rental expense estimated useful life of the
must be paid or incurred during improvement or by the term of
the taxable year; (3) Rental tile lease, whichever is shorter.
expense is a condition for the use
of the property; (4) If exceeding ; 5.1.4. Representation and Recreation
P500, must have been subjected Expenses - incurred during the
to 5% withholding tax. year which are directly connected
to the development, management Rent Expenses includes: (1) and operation of the trade,
Leasehold (2) Taxes paid by business or profession of the
lessee considered as additional taxpayer, or that are directly
rent (3) Repairs and related to or in furtherance of the
improvements made by the conduct of his trade, business .or
lessee. The cost borne by a lessee exercise of a profession not to
in erecting buildings or making exceed such ceilings as the

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Secretary of Finance may, by are two methods that may
rules and regulations prescribed. be used in deducting material
Must not contrary to law, morals, and supply expenses. (1) Actual
public policy and supported by consumption. - This is computed
adequate records. by the inventory method. If the
taxpayer keeps a record of, amusement and consumption of materials and
recreation expenses to be supplies or takes physical
deductible lay down by the law inventories at the beginning and
for the allowance of ordinary and end of the year, he should
necessary expenses. include as expense the cost of
materials and supplies actually (1) It must be shown consumed and during the year.
that the expenditures are directly Actual consumption is also
attributable to the development, arrived at if the taxpayer has
management, operation and/or records of consumption such as
conduct of the trade, business or stock cards. Actual materials and
exercise of a profession. In other supplies used could be taken by
words, they were made to just adding up all the stock cards.
promote business of the taxpayer. (2) Total purchase. -If. a taxpayer
Thus, entertainment expenses to carries incidental materials or
obtain contracts with private supplies on hand for which no
firms or individuals are record of consumption is kept or
deductible; but those spent for of which no physical inventories
government officials to procure are taken, it is permissible for
government contracts are not him to include in his expenses
deductible for being contrary to and deduct from gross income,
public policy. (2) In the total of such supplies and
substantiating expenses for materials purchased during the
entertainment and year, provided the net income is
representation, receipts or chits clearly reflected in this method.
issued by the entities to which
payments had been made should 5.1.6. Repairs - must be incurred in
be produced. connection with the trade or
business, be paid or incurred
5.1.5. Cost of Materials and Supplies - during the taxable year,
used in the trade or business, reasonable and not materially
paid or incurred during the add to the value of the property
taxable year and must be or extends its life (Repairs that
reasonable (Method used may be prolong the life of the property
actual consumption or direct distinguished from incidental
purchase). repairs and maintenance are
capital expenditures subject to

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including shovels, rakes, etc.; (b) Expenses for repairs are Cost of gasoline or fuel, repairs
deductible if such repairs are and upkeep of the transportation
incidental or ordinary, that is, equipment; and (c) Cost of
made to keep the property used feeding and raising livestock in
in the trade or business of the so far as it represents actual
taxpayer in an ordinarily efficient outlay but not including the
operating condition. They do not value of farm produce grown
materially add to the value of the upon the farm.
property nor appreciably prolong
its life. Thus, the expenses 5.2. Interest Expense - the cost of
incurred for repair of walls or money paid or incurred within a
roof of a building to prevent taxable year on indebtedness in
leaking are deductible. (2) connection with the taxpayer's
Repairs in the nature of professions, trade or business.
replacement to the extent that Requisites for interest expense to
they arrest deterioration and be allowed as deduction from
prolong the life of the property business/professional income:
are capital expenditures (as
distinguished from maintenance 5.2.1. (1) There must be an indebtedness
and incidental repairs) and stipulated in writing; (2). The
should be debited against the indebtedness must be that of the
corresponding allowance for taxpayer in connection with trade,
depreciation. Thus, the cost of the business or profession; and (3). The
construction of a hallow block interest must have been paid or
fence with iron grills around the accrued during the taxable year; (4)
compound of the taxpayers was must be reasonable and not contrary
properly disallowed because it to law; (5) the taxpayer's allowable
involved an addition which deduction for interest shall be
prolonged the life of the property reduced by an amount equal to the
and materially increased its following percentages of interest
value. income subjected to final tax: (1)
Beg. Jan. 1, 2000 - 38% (for
5.1.7. Expenses of Farmers - incurred in individual) (2) Beg. Jan. 1, 2009 -
the operation of a farm for 33% (for corporation)
project, reasonable and
supported by adequate records, 5.2.2. The reason for this limitation, is
and incurred or paid within the based on the principle that there
taxable year. is a differential tax of 12% with
respect 'to ·the tax rate applied, to
5.1. 7.1.The following are deductible interest expense (32% tax
from gross income: (a) Cost of reduction) and interest income
ordinary tools of short life or (20% tax payment) of the same
small cost such as hand tools, year. In order that the difference

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be offset against another, the amount of interest which
allowable interest expense shall corresponds to the amount of the
reduced by 38% or 12/32% of the principal amortized or paid
interest income of the same year. during the year shall be allowed
as deduction in such taxable year;
5.2.3. If individual is on the cash of
accounting, interest paid in the option of the taxpayer,
advance, through discount or interest incurred to acquire
otherwise, shall be allowed as property used in business or
deduction not in the year that the exercise of a profession if treated
interest was paid in advance, but as a capital expenditure.
in the year that the indebtedness
was paid. However, if the 5.2.5. Interest for tax delinquency,
indebtedness is payable in although taxes are not considered
periodic amortization, the debts, interest paid for tax
amount of the!' interest which delinquency is deductible. It is
corresponds to the amount of the well-settled that taxes constitute
principal amortized or paid indebtedness for purpose of
during the year shall be allowed deduction from gross income of
as deduction in such taxable year. the amount of interest paid on
5.2.4. Optional treatment of interest
expense – at the option of the 5.2.6. Non-deductible interest, the
taxpayer, interest incurred to following interest cannot be
acquired property used in trade, deductible from income:
business or exercise of a
profession may be allowed as a paid or incurred abroad
deduction from gross income or by a non-resident lending
treated as a capital expenditure. institution in respect of which no
Interest expense is nondeductible deduction is allowable to its
under the following situations: branch in the Philippines unless
the indebtedness was incurred to, within taxable year an provide funds, for investment in
individual taxpayer reporting, the said resident branch, the
income on the cash basis incurs income from which is taxable,
an indebtedness on which an and provided there is an
interest is paid in advanced authenticated copy of the
through discount or otherwise: investment agreement and such
Provided, that such interest shall other information as may be
be allowed as a deduction in the required.
year the indebtedness is paid;
Provided further that if the on preferred stocks
indebtedness is payable in which in reality is dividend
periodic amortization, the thereon;

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paid on account of delinquency calculated for cost- in the payment of taxes, a tax
keeping or other purposes on obligation being considered an
capital surplus invested in the indebtedness favor of the
business which does not government.
represent a charge arising under
an interest-bearing; 5.2.7. Deductibility of interest paid in
advance through discount, if on loans between related within the taxable year an
taxpayers; individual taxpayer reporting
income on the cash basis incurs paid on earned but an indebtedness on which an
unclaimed salary interest is paid in advance
through discount, or otherwise, on indebtedness incurred such interest is not deductible.
to finance petroleum explorations However, such interest shall be
and allowed as a deduction in the
year the indebtedness is paid. on indebtedness for
purely personal reasons; 5.2.8. Interest on indebtedness
periodically amortized, in the on loans between related case of indebtedness which is'
taxpayers, interest on loans are payable in periodic
not deductible if such loans' are amortizations, the amount of
between related taxpayers, that interest which corresponds to the
is, if both the taxpayer and the amount of the principal
person to whom the payment has amortized or paid during the
been made or is to be made are year shall be allowed as
persons specified within anyone deduction in such taxable year.
of those mentioned in Section
36(B) of the Tax. 5.3. Taxes Expense - taxes, local or
international, paid or incurred interest, the following within the taxable year in
interests are allowable connection with the taxpayer's
deductions from gross income: profession, trade or business,
(1) Interest paid by a corporation shall be allowed as a deduction
on scrip dividends; (2) III the case from gross income.
of banks and loan or trust
companies, interest deposits or 5.3.1. Non deductible Taxes
on savings received for
investment and secured by and corporate income
interest bearing certificates of tax;
indebtedness issued by such
bank or company and (3) Interest

Page 11 of 18 tax paid to any foreign government or any political
country, only if the taxpayer subdivision.
availed of the tax credit option;
5.3.3. Taxes of shareholder paid by a and donor's tax; corporation, where tile taxes
imposed upon the shareholder of assessed against local the corporation upon his interest
benefits of a kind tending to as shareholder are paid by the
increase the value of the property ration without reimbursement
assessed (special assessment tax). from the shareholder, the
deduction for the taxes paid is transaction tax (a allowed to the corporation. I case,
percentage tax) the shareholder shall not be
allowed deductions for the Added Tax; amount of such taxes. (interest on 5.4. Losses - actually sustained

delinquent taxes, although not during the taxable year and not
deductible as tax, can be compensated by insurance or
deducted as interest expense. other form of indemnity are
deductible from gross income (a). penalty If incurred in trade, business or
profession; (b) of property
5.3.2. Taxes that are deductible, all connected with trade, business or
taxes, national or local, paid or profession, if tile loss arises from
accrued within the taxable year, fire, storm, shipwreck, or other
in connection with the taxpayer's casualty, or from robbery, theft or
trade, business or profession is embezzlement.
deductible from gross income.
5.4.1. In case of nonresident duties paid to customs individuals and foreign
officers, if the importation or the corporations, the losses
articles is in connection with the deductible shall be those actually
trade or business of the taxpayer; sustained during the taxable
year, incurred in trade, business taxes, i.e, other or profession conducted within
percentage taxes, and excise the Philippines, where such
taxes; losses were not: compensated by taxes; insurance or other form of Privilege taxes; Documentary indemnity
stamp taxes; and Any other taxes of every amount 5.4.2. The taxpayer should submit a
and nature paid directly to the declaration of loss sustained from
casualty or from robbery, theft or

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embezzlement during the taxable in value of stocks, the
year, which shall be (by provision cost or other basis may be
of law: not less than 30 days nor deducted, provided a satisfactory
more than 90 days from the date 5howing of its worthlessness is
of discovery of the casualty or made (not included the loss on
robbery, theft or embezzlement; account of shrinkage through
to be fixed by revenue regulation) fluctuation of the market).
within 45 days from the date of
discovery of loss. from wash sale, not
deductible except on the shares·
5.4.3. Net operating loss carry-over sold at a loss with no covering
(NOLCO), is the excess of acquisitions, a period beginning
allowable deductions from gross 30 days before and ending 30
income of the business for any days after the date of sale or
taxable year, which had been disposition (the sixty one day
previously offset as deduction period).
from gross income, shall be
carried over as a deduction from 5.5. Bad Debts - A bad debt results
gross income for the next three from the worthlessness or
(3) consecutive taxable years uncollectibility (must be
immediately following the year ascertained with a reasonable
of such loss. It can not be degree of certainty that the
deducted against compensation amount is uncollectible and there
income (employer-employee must be no likelihood of recovery
relationship). at any time in the future), in
whole or in part, of amounts due
5.4.4. Special rules on losses to the taxpayer by others arising
from money lent or from losses, deductible to uncollectible amounts of income
the extent of wagering gains; from goods sold or services
rendered. removal of building,
losses due to voluntary removal 5.5.1. Requisites for Deduction of Bad
or demolition of the old Debts
buildings, the scrapping of old
machinery, equipment, etc., must be a valid and
incident to renewal or subsisting claim;
replacement will be deductible
from gross income. claim must be connected
with the profession, trade or of useful value, actual loss business;
sustained claim must actually be
ascertained to be worthless; and

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depreciation allowance shall claim must be written off spread over the remaining useful
within the taxable year, life of the property, as re-
estimated in the light of
5.6. Depreciation - the gradual subsequent facts, and
diminution in the useful value of depreciation deduction taken
a property used (or temporarily accordingly.
not used) in trade or: business
due to exhaustion, wear and tear, 5.6.4. Depreciation may be under any
including the reasonable of the following methods:
allowance for the obsolescence. method;
5.6.1. Requisites for deductibility.
They are: (1) The allowance for balance method;
depredation must be reasonable;
(2) It must be for property arising method;
out of its use or employment in
the business or trade, or out of its other method which may be
not being used temporarily prescribed by the Secretary of
during the year; (3) It must be Finance upon recommendation of
charged-off during the taxable the Commissioner of BIR.
year; and (4) A statement on the
allowance must be attached to 5.6.5. Depreciation of properties used
the return. in petroleum operations

5.6.2. In case of a nonresident alien or a related to production -

foreign corporation, a reasonable straight-line method or double
allowance for the deterioration of declining balance at the option of
property arising out of its use or service contractor may be used
employment, in trade or but useful life of the property
business, shall be permitted only shall only be up to 10 years or
when such property is located shorter
within the Philippines. directly related to production
5.6.3. Depreciation shall be allowed on - straight line method shall be
tangible property, intangible used on the basis of an estimated
property (amortization). If it useful life of five years.
develops that the useful life of
the depreciable property will be 5.7. Depletion - is peculiar to mining,
longer or shorter than the useful the natural resources are called
life as originally estimated under "wasting assets"; as the physical
all the then known facts, the units representing such resources
portion of the cost of the property are extracted and sold, such
not already provided for, through assets move towards exhaustion.

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(1) When the deduction for to its employees shall be allowed
depletion shall equal the capital as a deduction from gross
invested, no further deduction income:
shall be allowed. (2) In the case of
foreign corporations, depletion 5.8.1. Contributions to such trusts
shall be allowed only if the during the taxable year to cover
mining property is located in the the pension liability accruing
Philippines during the year; and

5.7.1. Allowable cost depletion 5.8.2. A reasonable amount transferred

allowance. Depletion allowance or paid into such trust the taxable
shall be in accordance with the year in excess of the contributions
following rules: (i) In the case of but only if such amount (a) has
oil and' gas wells or mines, a not theretofore been allowed as a
reasonable allowance for deduction; and (b) is apportioned
depletion 'or amortization in equal, parts over a period of
computed in accordance with the ten (10) consecutive years
cost depletion method shall be beginning with the year in which
granted under rules an the transfer or payment is made.
regulations prescribed by the
Secretary of Finance. (2) When 5.8.3. Requisites for deductibility of
the allowances shall equal the payments to pension trusts.
capital invested, no further They are; (1) The employer must
allowance shall be granted, (3) have established a pension or
After production In commercial retirement plan to provide for the
quantities has commenced, payment of reasonable pensions
certain intangible exploration and to its employees; (2) The pension
development drilling cost (a) plan is reasonable and actuarially
shall be deductible in the ,year sound; (3) It must be funded by
incurred if such expenditures are the employer, i.e., the employer
incurred for non-producing wells contributes cash to the plan; (4)
and/or mines or (b) shall be The amount contributed must no
deductible in full in the year paid longer be subject to its control or
or incurred, or at the election of disposition; and (5) The payment
the taxpayer, may be capitalized has not theretofore been allowed
and amortized if such as a deduction.
expenditures incurred are for
producing wells and/or mines in 5.8.4. Payments deductible. The
the same contract area. payments to employees' pension
trusts which are deductible are:
5.8. Pension Trust - An employer (1) Amounts contributed by the
establishing or maintaining a employer during the taxable year
pension trust to provide for the into the pension plan to cover the
payment of reasonable pensions pension liability accruing during

Page 15 of 18
the year; and (2) One-tenth (1/10) 5.9.4. Donations to certain accredited
of the reasonable amount paid by non-government organizations
the employer to cover pension (no-profit domestic corporations)
liability applicable to the years organized and operated
prior to the taxable year; or so exclusively for:
paid to place the trust in a sound
financial basis.;

5.9. Contributions and Donations -;

Contributions to the Government
of the Philippines, or to any of its;
agencies or political subdivisions,
inc1uding fully owned building and youth
government corporations, and sports development;
exclusively to finance, to provide
for, or to be used in undertaking;
priority activities in : welfare;
5.9.1. Science; Education; Culture;
Health; Economic development;;
Human settlement; Youth and
sports development.; or any combination of
the above, purposes, satisfying
5.9.2. The priority plan is determined certain requirements, no part of
by the National Economic and the net income of which inures to
Development Authority (NEDA) the benefit of any private
in consultation with appropriate stockholder or individual.
government agencies, including
the regional development the accredited non-
councils and private government organization:
philanthropic persons and
institutions; later than the fifteenth day
after the close of the year in
5.9.3. Donations to foreign institutions which the contribution is
or international organizations, :';n received, makes utilization
compliance with' agreements, directly for the active conduct of
treaties or commitments entered the activities consisting of the
into by the Government of the purposes or functions for which
Philippines and foreign it is organized and operated;
institutions or international
organizations, or in pursuance of expenses do not
special laws; exceed the level prescribed by the
Secretary of Finance and not

Page 16 of 18
exceeding thirty percent (30%) of Ten percent (10%), In case
the total expenses; of an individual; and assets, in the event of Five percent (5%), in case

dissolution, would be distributed of a corporation;
to another non-profit domestic
corporation organized for similar Of the taxpayer's tax
purposes, or to the State for taxable income derived from
public use, or to be distributed by trade business or profession
a court to another organization to before the deduction for
be used in such manner that will contributions and donations;
accomplish the general purposes
of the dissolved corporation. In case of contributions of
property, the measure of actual subject to contributions is the acquisition
limitation: The recipient of the cost of such property.
contribution or gift is any of: The following donations government of the are deductible in full:
Philippines or any of its agencies
or any political subdivision Donation to government
thereof, for exclusively public or political subdivisions
purposes (not included in the including fully owned
priority activities); or government corporations and to
certain private foundations or accredited accredited non-government
domestic corporations or organizations donation must be
associations which are domestic utilized not latter than 15th day
and organized and operated of the third month after the close
exclusively for: of the accredited NGO's taxable
year and exclusively for; Educational; undertaking priority activities in:
Cultural; Youth and Sports (1) Educational; Health; Youth
Development; Charitable; Social and Sports Development; Human
Welfare; religious; or Settlement; Science and Cultural;
Rehabilitation of Veterans. Economic Development; (2) The
administrative expense shall not part of the net income of exceed 30% of the total expenses.
which inures to be benefit of any
private stockholder or individual; Donation to certain foreign
institutions or international The amount should not organizations by virtue of treaties
exceed: or Executive Agreements.

Page 17 of 18 The assets of which, must be depreciation or depletion used in
distributed to another non-profit research and development
domestic corporation or the state, (becomes part of the cost of the
in the event of dissolution. asset, and deduction from it is by
way of depreciation, or Per special laws, donations depletion);
made to the following are
deductible in full: 5.10.2. Other research and development
costs (maybe treated as (a). an Integrated Bar of the outright deduction/full
Philippines (PD 181) expenditure in the year that the International Rice expense was paid or incurred;
Research Institute (RA2707) (b), as a deferred expense/to be Development Academy of spread and recognized as
the Philippines (PD 205) deduction over a period of not The Universities of the less than sixty (60) months from
Philippines & either state colleges the date of acquisition of benefit Cultural Center of the from the expenditure.
Philippines Artesian Well Fund (RA
1977) Ramon Magsaysay Award
Foundation Task Force on Human
Settlement Donations to the National
Museum, Library and Archives National Commission on
Culture and the Arts Humanitarian Science
Foundation National Social Action

5.10. Research and Development Cost

- are for improvements of
processes and formulas as well as
the development of improved or
new products. Research and
development cost may be

5.10.1. For acquisition or improvements

of property subject to

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