DEDUCTIONS FROM

GROSS INCOME
PART 2
Losses
Casualty Losses
can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual
event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty doesn't include
normal wear and tear or progressive deterioration.

Requisites for Deductibility:

1. The loss arises from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement.
2. The property lost is connected with the trade, business or practice of profession.
3. Actually sustained during the taxable year
4. Not compensated for by insurance or other forms of indemnity
5. Incurred in trade, profession or business
6. Reported with the BIR within forty five days from the time of loss
7. Not claimed as deduction for estate tax purposes
Note: Casualties from robbery, theft or embezzlement are only deductible if:
1. A declaration of loss is submitted within 45 days from the date of discovery of the loss
2. The said loss have not been claimed as deductions for estate tax purposes.
Measurement of Loss
1. In a total loss due to casualty, the measure of loss is the book value of the asset
reduced by any form of indemnity

2. In a partial loss due to casualty, the measure of loss is the book value of property or
the cost to restore the property to its normal operating condition, whichever is lower,
reduced by any form of indemnity.
Sira Company had demolished an old warehouse the following is available:
Original Cost 1,200,000
Book Value 200,000
Demolition Cost 25,000
Scrap were sold for 10,000

How much is the deductible loss for taxation purposes?

Book Value 200,000

Demolition Cost 25,000
Scrap were sold for (10,000)
Deductible Loss 215,000
On July 1, 2015 a taxpayer purchases for 500,000 an automobile which will be used
exclusively for his practice. He deducted annual depreciation on the basis of an estimated
useful life of 5 years. On July 1, 2018, the automobile was partially damaged in an accidental
collision with another vehicle. The cost of repairs amounted to 100,000. The taxpayer
received insurance proceeds of 70,000 to cover the loss. How much is the deductible loss?

Compute for Book Value

500,000 x 2/5 = 200,000
Book Value= 200,000
Cost to restore= 100,000

Allowed(Lower) 100,000
Proceeds from insurance (70,000)
Deductible Loss 30,000
Wagering Losses
Losses from wagering transactions shall be allowed only to the extent of the
gain from such transaction

Dong a gambling addict won 90,000 from cockfighting during the year.
However he also suffered losses from other gambling activities amounting to
200,00 How much is the deductible loss?

Ans. 90,000

Gambling losses are deductible only up to the extent of gambling winnings.

Securities becoming worthless
Requisites for deductibility
1. Securities are ascertained to be worthless
2. The same is charged off within the taxable year
3. It must be a capital asset

SNJ Inc. purchased shares of stock of Valde Corp. for 60,000 and of Boba Co. for 30,000. At the end of the
taxable year, it was ascertained that is Valde Corp. stock was worthless because of the complete insolvency of
the Corporation and its Boba Co. shares value had declined to 28,000.
How much is the deductible loss of SNJ Inc.?

Ans. 60,000

Note*
Worthless Securities= deductible Loss
Loss on shrinkage in the value of securities= non-deductible
Net operating Loss Carry-Over
Net operating loss means the excess of allowable deduction over gross income of the business in a taxable
year

Shall be carried over as a deduction from gross income for the next three consecutive taxable year.
Requisites for deductibility:
1. At the time of incurring net loss, the taxpayer must not be exempt from income tax
2. There is no substantial change in the ownership of the business or enterprise in that:
A. Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a
corporation, is held by or on behalf of the same person
B. Not less than 75% of the paid up capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same person
NOLCO for Mines other than Oil & Gas Wells
NOLCO in any of the first ten years of operation may be carried over for the next 5 years.
Question
Which of the following instances will NOLCO can still be claimed as deduction?
A. Transfer of ownership involves change from direct ownership to indirect ownership or
vice versa.
B. Merger of the subsidiary into the parent company
C. Either A or B
C. Neither A nor B

Ans. C
Loss from Wash sales of Stock or Securities
Wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before
or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so
In case of loss claimed to have been sustained but sustained from any sale or other disposition of
shares of stock or securities shall not be deductible if:

1. The seller is NOT a dealer in securites

2. Within a period of 30 days before the sale, ending 30 days after the sale, the seller either:
a. Acquired (by purchase of exchange) stock or securities identical to the stock or securities sold or
b. Has entered into a contract or option to acquire stock or securities identical to the stock or securities sold.
On December 1, 2018, Ana purchased 100 shares of common stock of Jessie Company for
10,000. On December 15, 2018 she purchased 100 additional shares for 9,000. On January 2,
2019, she sold the 100 shares purchased on December 1, 2018 for 9,000

How much is the deductible loss?

0
The Loss is considered a wash sale
Bobby had the following stock transactions:
• On September 21, 2017, purchased 100 shares of the common stock of Jay-R Inc. for 5,000
• On December 21, 2017, he purchased 50 shares of substantially identical stock for 2,750
• On December 26, 2017, he purchased 25 additional shares of such stock for 1,125
• On January 2, 2018, he sold for 4,000 the 100 shares purchased on September 21, 2017.
How much is the deductible loss?
Selling Price 4,000
Cost (5,000)
Loss (1,000)

Non-deductible Loss (75 shares out of 100 shares)

1,000 x 75/100= 750

Deductible Loss (25 shares out of 100 shares)

1,000 x 25/100= 250

Abandonment Losses

1. In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned,
all accumulated exploration and development expenditures pertaining thereto shall be allowed as deduction.
2. In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the
undepreciated costs of equipment directly used therein, shall be allowed as deduction.

Effect if abandoned well is re-entered and production is resumed or equipment is restores into service.
1. The amount previously claimed as deduction shall be recognized as income
2. Such amount shall also be capitalized and amortized or depreciated as the case may be.
Bad Debts
Requisites for Deductibility:
1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable.
2. The same must be connected with the taxpayer’s trade, business or practice of profession.
3. The same must not be sustained in a transaction between related taxpayers.
4. The same must be actually charged off in the books of accounts of the taxpayer as of the end of the taxable
year, and
5. The same must be actually ascertained to be worthless and uncollectible
Question
When shall bad debts be allowed as deduction from gross income?
A. Upon setting up allowance for doubtful accounts
B. Upon write-off in the books
C. At option of the taxpayer
D. At option of the government

Ans. B
Depreciation
Requisites for deductibility:
1. The property subject to depreciation is used in the trade, business or practice of profession
2. The allowance for depreciation must be sustained by the person who owns or who has capital investment
in the property.
3. The allowance for depreciation must be reasonable.
4. The allowance for deprecation should not exceed the cost of the property.
5. The schedule of the allowance must be attached to the return.
Properties held in Trust
In the case of property held in trust, the allowable deduction shall be apportioned between the income
beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the
trust or in the absence of such provisions, on the basis of the trust income allowable to each.

Problem
Don Pedro set up an irrevocable trust by transferring a commercial building in favor of his daughters, Ana
and Karena. Don Pedro 10% of the rent income of the building to be given to Ana for her studies while 20%
shall be given to Karena for her family support. The building earned 2,000,000 rentals and reported
depreciation of 400,000.
How should the depreciation be treated?

The depreciation shall be allocated based on the provision of the trust as follows: 40,000 to Ana, 80,000 to
Karena and 280,000 to the Trust.
Methods of Computing Depreciation in General:
1. Straight-Line method
2. Declining-balance method - Provided that the rate should not exceed twice the rate in straight line method
3. Sum of the years digit method
4. Any other method which my be prescribed by the Secretary of Finance

Computing Depreciation in Petroleum Operations:

Properties Directly related to production 1. Straight Line

2. Declining-balance method
Note- useful life to be used is shorter between:
10 years vs Useful life

Properties NOT Directly related to production Only straight line method is allowed
Useful life is always presume to be 5 years.
Computing Depreciation in Mining Operations:
If expected life of property is General rule will apply( depreciate over useful life)
ten years or less

If expected life of property is Depreciated over any number of years between five and the
more than ten years expected life.

Depreciation deductible by non-resident aliens engaged in trade or business or resident

foreign corporation
In the case of NRA-ETB or RFC, depreciation shall be allowed only if the property located is in the
Philippines.
Amortization of Intangible Assets
The rules for depreciation shall apply for Amortization of intangible assets.

However, intangible assets that do not lose their value throughout time should not
be amortized.
 Depletion of Oil and Gas Wells and Mines
In case of Oil and Gas wells or mines, capital invested may be amortized using cost-depletion method, provided:
1. When allowance for depletion shall equal capital invested, no further allowance shall be granted.
2. After production in commercial quantities has commenced, intangible exploration and development drilling
cost shall be treated as follows.

Intangible exploration and development drilling costs

Kinds Treatment
Incurred for non-producing wells and/or mines Deductible in the year incurred

Incurred for producing wells and/or mines At the option of the taxpayer
Option 1- Deductible in the year incurred
Option 2- Capitalize and amortize
Question:
Which of the following is deductible from gross income even if the payment is not
connected with the business?
A. Contribution of the employer to the pension
B. Charitable contributions
C. Income tax paid In foreign country
D. Travelling expenses.

Ans. B
Which of the following charitable contributions is not fully deductible?
A. Donation of the Government of the Philippines to finance priority projects by NEDA
B. Donation to the Municipality in the province of Masbate for the repair of the
Municipal Hall
C. Donation to International Organizations
D. Donation to accredited Non-government Organizations.

Ans. B
The following donations are non-deductible, except?
A. Donations given directly to Yolanda Survivors
B. Alms given to beggars
C. Political contributions
D. Donations to International Organizations

Ans. D
The following contributions and donations were made by a taxpayer
To Christ the King Catholic Church 250,000
To Bukas Palad, non-profit domestic corp 300,000
To the fire victims of Recto 200,000
To the gospel church of Taiwan 350,000

How much is the total deductible charitable contribution?

To Christ the King Catholic Church 250,000

To Bukas Palad, non-profit domestic corp 300,000
Total 550,000
A domestic corp had the following data on income and expenses
Gross business income 6,200,000
Deductions including SSS and Philhealth
contributions of 150,000 2,500,000
Contributions to the Govt for priority projects in education 100,000
Contribution to foreign private foundation 100,000
Contribution to domestic charitable organization 190,000

How much is the deductible charitable and other contributions?

Deductible in full: Priority Project 100,000
Deductible subject to limit:
Actual= 190,000
Limit= (Net income before contributions x 5%)
= (6,200,000-2,500,000)x 5%= 185,000 185,000
Total 285,000
Research and Development Expense
If not chargeable to capital account Claim as outright expense

If chargeable to capital account but At the option of the taxpayer

not chargeable to property subject to
depreciation or depletion Option 1= Claim as outright expense
Option 2= Amortize over 60 months

If chargeable to property subject to Capitalize

depreciation or depletion
Limitations on Deduction
The following Research and Development expenditures are not deductible:
1. Any expenditure for the acquisition or improvement of LAND or for the improvement of property to be
used in connection with research and development of a character which is subject to depreciation and
depletion
2. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extend or quality
of deposits of ore other mineral including oil or gas.
 Phases of Research and Development Cost
According to PAS 38 paragraph 52

Research Phase Development Phase

Definition Undertaken to discover new Application of research

knowledge that will be useful findings or other knowledge
in developing a new product obtained from research phase

Treatment of Always treated as Expense General Rule= Expense

Expenditure But if it satisfies the criteria for
recognition as an intangible asset
Capitalize
Question
Research and Development expenses treated as deferred expenses shall be allowed as deduction ratably
distributed over a period of:

A. Not more than 60 months beginning with the months with the month in which the taxpayer first realize
benefits from such expenditure.
B. Not less than 60 months beginning with the months with the month in which the taxpayer first realize
benefits from such expenditure.
C. Not more than 30 months beginning with the months with the month in which the taxpayer first realize
benefits from such expenditure.
D.Not more than 6 months beginning with the months with the month in which the taxpayer first realize
benefits from such expenditure.

Ans. B
Pension Trusts
Amount Deductible
Actual Contribution to the extend of pension liability XX
Amortization of Past Service Cost XX
Total XX

Pension Liability is equivalent to Normal Cost

Past Service Cost
is the excess of actual contributions over the normal cost. It shall be amortized over ten years
An employer maintains pension trusts for its employees. The following contributions are made:
2016 2017 2018
Current Service Cost 1,000,000 1,000,000 1,000,000
Past Service Cost 800,000 600,000

How much is the deductible pension contributions each year?

Solution
2016 2017 2018
Current Service Cost 1,000,000 1,000,000 1,000,000
Past Service Cost
2016 80,000 80,000 80,000
2017 60,000 60,000
2018
Total 1,080,000 1,140,000 1,140,000
DLC Corp contributed 4,000,000 to its pension plan during the year 2018. The normal cost
appearing on the Actuarial Valuation Report is only 3,000,000. How much can DLC Corp
claim as deduction?
Solution

Current Service Cost 3,000,000

Past Service Cost
Excess Contribution over normal cost
=1,000,000 /10 100,000
3,100,000
Premium payment on Life Insurance
All of the following, except one are not deductible from gross income
A. Tuition fees and other expenses of the taxpayer’s children
B. Replacement of the roof of the office building
C. Premiums paid in insuring the life of the Corporate president, appointing the
corporation as the beneficiary
D. Premiums paid in insuring the life of a rank and file employee with the latter's children
as the appointed beneficiary

Ans. D
Optional Standard Deduction
Can be claimed in lieu of itemized deductions
Amount Deductible
Individuals/Estate/Trusts Gross Sales/Receipts x 40%
Corporations/Partnerships Gross Income x 40%
The following may be allowed to claim OSD:
1. Individuals 2. Corporations
a. Resident Citizens a. Domestic Corporations
b. Non- Resident Citizens b. Resident Foreign Corporations
c. Resident Aliens
d. Taxable estates and trusts
Note= The taxpayer should signify his option for OSD in the income tax return for the
first quarter of the taxable year
One of the following is correct. A choice by an individual of the optional
standard deduction means that:

A. His income tax return need not be accompanied by financial statements

B. He need not keep books of accounts
C. He need not have records of gross income
D. His choice can still be changed by filling an amended return
Ans. A
A resident Citizen has the following data on income
and expenses in 2018:

Gross compensation Income 200,000

Gross Sales 900,000
Cost of Sales 500,000
Business expenses 200,000

He avails of the OSD, How much is his taxable income?

Solution
Gross compensation Income 200,000
Gross Sales 900,000
Less: OPEX (OSD)
(900,000 x 40%) (360,000) 540,000
740,000
 Net Sales 9,000,000
Interest income, note receivable 150,000
Other Income 50,000
A domestic corp has the following data for 2018:
Net Sales 9,000,000 Less: Cost of Sales (3,000,000)
Interest income on trade notes receivable 150,000 Gross Income 6,200,000
Other Income 50,000
Less:
Cost of Sales 3,000,000
OPEX with Vouchers and Receipt (4,000,000)
OPEX with Vouchers and Receipt 4,000,000
OPEX without Vouchers and Receipt 500,000 Taxable Income 2,200,000
Interest Income from savings deposit 80,000
Interest Income from deposit under FCDS 125,000
Royalty Income 100,000

How much is the taxable income using itemized deduction?

 Net Sales 9,000,000
Interest income, note receivable 150,000
Other Income 50,000
A domestic corp has the following data for 2018:
Net Sales 9,000,000 Less: Cost of Sales (3,000,000)
Interest income on trade notes receivable 150,000 Gross Income 6,200,000
Other Income 50,000
Less:
Cost of Sales 3,000,000
OPEX (OSD) (6,200,000 x 40%) (2,480,000)
OPEX with Vouchers and Receipt 4,000,000
OPEX without Vouchers and Receipt 500,000 Taxable Income 3,720,000
Interest Income from savings deposit 80,000
Interest Income from deposit under FCDS 125,000
Royalty Income 100,000

How much is the taxable income using OSD?

END OF DEDUCTIONS FROM GROSS INCOME