Dent SLR] ty October 2016 DEDUCTIONS By: Atty.C. Llamado DEDUCTIONS Kinds of Deduction: Amounts allowed to be subtracted from Gross Income to arrive at taxable income in the ITR. - Taxpayers may choose NOT TO AVAIL of the deduction, - If deductions are claimed, the burden of proving the legality and correctness of the deductions rests upon the taxpayer. The taxpayer has the obligation to substantiate with receipts and other evidences every item of deduction when required. 1) Personal and Additional Exemptions(for individuals, and estates in year of decedent's death) 2) Income distributed to heirs/benefieiries (for estates and trusts) 3) 720,000 special exemption (for estates after year of decedent's death, and for trusts) 4) Health and/or Hospitalization Insurance Premium (*H/H premium”) under Section 34 (M) of the Tax Code. 5) Hemized Deductions (“ID”) Or Optional Standard (“OSD”) Notes: a) Indivicwals engaged in trade or bueiness, or profession ean select the ID or the OSD, plus the H/H premium; b) Individuals earning purely compensation income are allowed only the H/H premium but only if they comply with the requirements of Section 34 (M) of the Tax Code; ©) Estates and trusts can claim the ID ot the OSD; @) Domestic corporations, resident foreign corporations, and partnerships can claim ID or OSD Summary of Allowable Deductions Deduction Individuals Estates Trusts | Corps, | Partnerships EE] Self- : employed | _Devedent Died Win] Atleast | taxable | 1 year é I year! ago 1) Dor OSD © e | e ® @ ® 2) Hi o| oe | 3) Income distributed to heirs/beneficiaries 7 cs Ge 4) Personal/Additional T Exemptions a ete © I 3) £20,000 special ] exemption is . =October 2016 osD OSD is the deduction which can be taken in lieu of IDs (both ordinary and special Ds). Who may claim the OSD? di 1) Fo iduals: a) Citizens; b) Resident aliens J ©) Estates and trusts Amount of OSD = 40% of gross sales, net of returns, allowances, and discounts (accrual besis) + Other taxable income from operations not subject to FTs or 40% of gross receipts, net of returns, allowances, and discounts(cash . basis)+Other taxable income from operations not subject to FT's OSD isin lieu of COGS (or COS) + the itemized deductions 2) Corporations: Only domestic and resident foreign corporations Amount of OSD = 40% of Gross Income (Gi) GI = (Gross Sales ~ Sales Returns ~ Sales Allowances ~ Discounts ~ COGS) + other taxable income not subject to FTs os) in lieu of the itemized deductions only. Election of the OSD - Made in the 1* Quarterly Return. Failure by taxpayer to indicate OSD election in the 1* Quarterly Return means that taxpayer is claiming IDs; - When made, it is irrevocable for the entire year; ~ Failure to file the 1 Quarterly Return is equivalent to availing [Ds for the year.October 2016 “ITEMIZED DEDUCTIONS (IDs) When a taxpayer claims IDs, the taxpayer is specifying the particular expenses to be deducted from gross income. Who may claim IDs? 2) Domestic corporations including partnerships and GOCCs b) Resident foreign corporations ¢) Individuals engaged in trade, business, profession ) Estates and trusts Items of IDs: Business expenses Depletion of oi! and gas wells Interest expense Charitable and other contributions Deductible taxes Research and development expenses Losses Pension trust contributions Bad Debts HUH premium payments (Sec. 34(M)) Depreciation ORDINARY ITEMIZED DEDUCTIONS A) BUSINESS EXPENSES Requisites for deductibility: ) 2) 3) 4) 5) 8) Ordinary(@ng)necessary for the busiress; Incurred OF paid during the taxable year; Connected with the trade, profession, or business of the taxpayer; Reasonable expenses of the business, Substantiated by official receipts/records; The withholding tax required to be withheld has been withheld and remitted to the BIR. Notes: a) Bribes and kickbacks (to both local and foreign officials) are not allowed as deductions. b) Deductible business expenses of non-resident citizens, resident aliens, NRAETB, and RFC — expenses paid or incurred in carrying out its business in the Philippines, (1) Compensation expenses (of employer) for personal services actually rendered (2) Includes salaries and other forms of compensation, including bonuses, and the Grossed-up Monetary Value of fringe benefits subject to FT. (b) Includes management and labor expenses, commissions, and pension payments, (©) Incudes compensation for injuries paid ‘by the employer less any insurance proceeds, (4) Includes premiums on life insurance of the employee where the beneficiary is not the employer. (©) Includes salaries paid after death of the employee, but does not include donations for coffin and wake expenses. @) Travelling Expenses ~ Includes transportation expenses, meals, and lodging