Subject to the following ceilings:

1. For taxpayers engaged in the sale of goods and properties: ½ of 1% of net sales
2. For taxpayers engaged in the sale of services/leasing of properties: 1% of net revenues.

Example:
Sales …………………………… P2,000,000
Allowable (Maximum) ……….. 10,000

Gross Receipts ………………… P 3,000,000

Allowable (max) …………….. 30,000
(1) Special Expense Allowed to Private Educational Institutions under Sec. 27(B)

Capital outlays for expansion of school facilities can either be:

a) Expensed immediately; or
b) Capitalized and depreciated.

School Bldg ……………………….. P50M

(1) Reduction of Allowable Deduction for Interest Expense By:

33% of interest income subject to Final Tax beginning January 2009

Example:

Interest income …………………………. 20,000

Interest Expense ……………………… 300,000

Allowable Interest Expense:

Interest Expense ………………………… 300,000
Less (20,000 x 33%) …………………….. 6,600
Allowable Interest Expense …………….. 293,400

Exceptions: Where Interest Expense is Deductible in Full

A) BAD DEBTS

Requisites: a) There must be a valid and subsisting debt owed the taxpayer;
b) The debt must be connected with the trade, business, or profession of the
taxpayer;
c) The debt must be ascertained to be worthless or uncollectible;
d) The debt must be charged off within the taxable year.

Note: Recovery of bad debts previously allowed as a deduction is governed by the Tax Benefit
Rule. The recovery of a bad debt is included in gross income if its deduction in a previous
year resulted in an income tax benefit to the taxpayer (i.e., a decrease in tax)

Example: Allow. For B/D is 3% of Sales and Sales is = to P5M

B/D …………………. 150,00

 Allow for B/D …………… 150,000

(Direct write-off) Write Off: P50,000 of A/R shall be written-off

B/D ……… 50,000

A.R ……………………….. 50,000

B) CHARITABLE CONTRIBUTIONS

Requisites:
1) Contributions or gifts are actually paid;
2) Given to entities specified by law;
3) Net income of the recipient does not inure to benefit of any stockholder or individual
owner;
4) Taxpayer making the charitable contribution must be engaged in trade, business, or
profession.

Valuation: The amount of any charitable contribution of property other than money shall be
based on the net book value of the said property as reflected in the financial
statements of the donor.

NOT SUBJECT TO LIMIT – deductible in FULL

(1) Donations to the government or to GOCCs for PRIORITY ACTIVITIES in education,

health, youth and sports development, human settlements, science and culture, or economic
development as determined by the NEDA;

(2) Donations to foreign institutions and organizations pursuant to treaties or agreements

entered into by the Philippine government;

(3) Donations to entities pursuant to special law;

Examples: State colleges and universities; CCP; National Commission for Culture and the
Arts, Integrated Bar of the Philippines, IRRI; Philippine Red Cross (RA 10072); Any child-
caring or child-placing institutions accredited by the DSWD (RA 10165).

(4) Donations to accredited NGOs

“NGOs” refers to a non-profit corporation:

(a) Organized and operated exclusively for scientific, research, educational, character-
building, youth and sports development, heath, social welfare, cultural, or
charitable purposes;
(b) No part of the net income of such NGO inures to the benefit of any private
individual;
(c) Uses the donation not later than the 15 th day of the 3rd month after the close of its
taxable year;
(d) It administrative expenses ≤ 30% of total expenses;
(e) Its assets, upon dissolution, shall be given or distributed to another NGO organized
for a similar purpose, or to the state for a public purpose.
 SUBJECT TO LIMIT

(1) Donations to the government or GOCCs exclusively for public purpose, but not for
PRIORITY activities;

(2) Donations to accredited domestic corporations or associations organized and operated

exclusively for religious, charitable, scientific, youth and sports development, cultural,
educational, or the rehabilitation of veterans;

(3) Donations to social welfare institutions;

(4) Donations to non-governmental organizations (“NGOs”)

Limit of Contributions

Corporations: 5% of income before donation

Individuals: 10%

Of taxable income derived from trade, profession, or business without the benefit of
the charitable deductions (both subject and not subject to the limit)
Note: Taxable income from trade, profession, or business does not include non-business
income (example, capital gains derived from assets not used in business)

Net Income (Before donation) ………………………… P5M

Individual taxpayer (Maximum) P500,000

Corporate taxpayer (Maximum) P250,000

NON-DEDUCTIBLE ITEMS

1) Personal, living, and family expenses

2) Expenditures which are capitalized, except intangible drilling and development costs incurred in
petroleum operations which may be deducted in full

3) Premiums paid by an employer:

a) Covering life of an employee; and
b) The beneficiary is the employer.
Note: IF the employee is the beneficiary or family , the premiums paid by the employer are
deductible, and are fringe benefits to the employee.

4) Losses from sales/exchanges of property between related parties under Sec. 36 (B)
5) Interest expense between related parties under Sec. 36 (B)
6) Bed debts between related parties under Sec. 36 (B)
7) Fines and penalties due to late payments of tax
Example 1: A corporation reported:

Gross Profit from merchandising business …………………….. P 1,200,000

Other income/(loss) are as follows:

Interest Income (peso deposit) ………………… P25,000 FT

Net capital loss …………………………………( 15,000) (can not be deducted fr.

ordinary gain)

Gain on sale of old machines ………………….. 30,000

Dividends ………………………………………. 50,000 FT

Gross Income is : P1,230,000

Gross Profit ………………… 1,200,000

Add: Other Income ……….. 30,000

Gross Income …………….. 1,230,000

Example 2:

A Bookkeeper of presented and Income Statement as follows:

Mariposa Trading Corporation

Income Statement

December 31, 2018

Sale
s 3,600,000

Cost of Sales 1,254,000

Gross Income 2,346,000

Less: Expenses

Salaries and Wages 850,000

 Repair and Maintenance 210,000

Rent (not subjected to withholding) 120,000

Depreciation 245,000

Bad Debts (2% of Receivables) 25,000

* Taxes and Licenses 100,000

Donation (subject to limitation) 500,000

Representation Expenses 35,000

Interest Expense (from bank loan) 120,000

Miscellaneous (not supported with documents) 25,000

  Total Expenses 2,230,000

Net Income from Operation 116,000

Add: Interest Income (on peso deposit) 25,000

NET INCOME 141,000

* Included in the taxes and licenses account was P75,000 payment

for penalties and surcharge for late-payment of prior year's tax.

Donation: NI before donation …………………………… P 616,000

Allowed ……………………………………………………30,800

Taxes and Licenses: Allowed (100,000-75,000) = 25,000

Representation: Allowed (3,600,000 x 1% x ½) = 18,000

Interest Expense ……………………………………. 120,000

 Less (33% x 25,000) …………………………….. 8,250

Allowed ……………………………………………….. 111,750

Net Taxable Income is P______________________

Gross Income 2346000

Less expenses (adjusted) 1459750

Net income adjusted before donation 886250

Donation 44313

Net taxable income 841938

Example 3: A taxpayer reported Net income before donation of P3,000,000. The taxpayer made
donation (subject to limitation) of P250,000.

a. Taxable Income if taxpayer is an individual is (3,000,000 – 250,000) =

P2,750,000
b. Taxable Income if taxpayer is a corporation is (3,000,000 – 150,000) = P
2,850,000

Creditable Withholding Tax:

1. Withholding tax on compensation – taxes withheld during payment of salaries.

2. Withholding tax at source – taxes withheld on payments to suppliers.

Example 1: The company paid salaries to employees …………………………… 730,000

Computed withholding tax ………….. 25,000

Entry:

Payroll
 Salaries and Wages …………………………… P730,000

Withholding Tax Payable – Wages ……………..P 25,000

Cash …………………………………………….. 705,000

Pays BIR

Withholding Tax Payable – Wages …………P 25,000

Cash ………………………………………………. 25,000

Example 2: The company paid office rent of P20,000/month. The required withholding tax is 5%

Entry: (upon payment of rent per month)

Rent Expense………………………….. 20,000

Withholding Tax Payable - at source ……… 1,000

Cash …………………………………….. 19,000

Annual Rent ………………………… 240,000

Total Withholding ………………… 12,000 (Creditable withholding)

Assume Lessor (corporation) has taxable income of P100,000 during the year.

LESSOR ………….. Net Taxable Income ……………………… P100,000

Income Tax …………………………(30%) 30,000

Less: Creditable withholding ……………. 12,000

Income tax still payable ………………… 18,000