Prelims FBT

College of Accountancy and Business Management
First Semester, A.Y. 2020-2021

MODULE 3
Fringe Benefits Tax (FBT)
Introduction
This module entitled Fringe Benefit Tax is a tax in any goods, service, or benefit other than regular
salary and allowances received by an employee and which may be furnished or granted in cash or
in kind by an employer to an individual employee.
Time allotment
Oct.1,5 and 7
I. Objectives
At the end of the end of this module, students should be able to:
1. Discuss tax treatment, scope and characteristics of fringe benefits and fringe benefits tax
2. Explain items that shall be exempt in fringe benefits tax
3. Computation of fringe benefits and its tax
4. Explain the threshold that shall be followed in accordance with the Tax Law
5. Explain “gross-up rate”
6. Accounting entries in recording the fringe benefits and fringe benefits tax
II. Lecture
By: Atty. C. Llamado
Fringe Benefit Subject to Fringe Benefit Tax (“FBT”)
The term “fringe benefit” means any goods, service, or benefit other than regular salary and allowances
received by an employee and which may be furnished or granted in cash or in kind by an employer to an
individual employee.
Coverage
Fringe benefit subject to FBT are those benefits given or furnished to managerial or supervisory
employees, and not rank and file.
General Rules in the Valuation of Fringe Benefits

a. If the fringe benefit is granted in money, or is directly paid for by the employer, then the value is
the amount granted or paid for.
b. If the fringe benefit is granted or furnished by the employer in property or ownership is

transferred to the employee, then the value of the fringe benefit shall be equal to the fair market
value of the property.
Note: The FMV of the real property determined by the BIR Commissioner or the FMV
determined by the Provincial City Assessor, whichever is higher.
c. If the fringe benefit is granted or furnished by the employer in property but the ownership is not
transferred to the employee(i.e. only the “usufruct” or the right to use the property is transferred),
the value of the fringe benefit is equal to the depreciation value of the property. If the property is
not owned by the employer but being leased out to the employer, the value of the fringe benefit is
equal to the rental or lease payment of the employer.
Rate of Tax and Tax Base
Tax rate = Final Tax of 35%*1
Tax Base = Gross-up Monetary Value (GUMV) of the Fringe Benefit
GUMV = Monetary Value (MV) of the fringe benefit + 65% *2
*1 before January 1, 2018, FBT rate is 32%

*2 before January 1, 2018, GUMV = MV/68%
NOTE:
a. The final tax is imposed whether the employer is an individual, partnership or corporations, regardless
whether the employee is taxable or not, or the government and its instrumentalities.
b. The fringe benefit tax is tax on the employee. It is a tax on the income or benefit received by the
employee. However, for convenience, the tax is imposed on the employer. The employer is required by law
to pay the tax for and in behalf of the employee.
Filing of Return and Payment of Tax
The fringe benefit tax is a final income tax on the employee to be withheld by the employer. The employer
shall file the Quarterly Remittance Return of Final Income Taxes Withheld on Fringe Benefits Paid to
Employees Other Than Rank and File(BIR Form No. 1603Q) and pay the tax withheld on or before
the last day of the month following the close of the calendar quarter during which “withholding” was made.
With respect to employers enrolled with the Electronic Filing and Payment System, the deadline for e-filing
the BIR Form No. 1603Q and e-paying the tax due thereon shall be 5 days later than the deadline for
manual filing*3.
Note: No actual withholding of the tax can take place because the payments are generally made to
persons/entities(ex. School, store, club, etc) who are not the taxpayer subject to the fringe Benefit tax.
Taxable FBs and Specific Valuation Guidelines
The guidelines for valuation of specific types of fringe benefits and the determination of the monetary value of the
fringe benefit are as follows--
*3 Despite the provisions of the Tax Code mandating the Quarterly Payment of Fringe Benefit Tax, the BIR has obligated the
withholding agents/employers to remit the FBT monthly by filing the BIR Form 0619F every 10 th day of the following month when the
withholding was made, regardless of the amount withheld. For employers using eFPS facilities, the due date is on the 15 th day of the
following month. Employers with zero remittance is still required to use and file the same form.
Employers shall thus pay the FBT monthly by filing form 0619F for the first 2 months of the quarter.
The quarterly FBT remittance return(BIR Form No. 1603Q) shall reflect therein the total fringe benefits paid/given during the quarter and
the resulting FBT due for the quarter. Whatever FBTs were previously paid in the first 2 months shall be available as tax credit against
the FBT due for the quarter. The resulting amount payable shall be the FBT payable for the last month of the quarter.
A) Housing Privilege
Case 1- The employer leases(as lessee) residential property for the use of the employee--
Value of the benefit = rental paid by the employer under the lease
contract
Monetary value of the benefit = 50% of the value of the benefit
Case 2 - The employer owns residential property which was assigned to an officer to his use as
residence,
Annual Value of the benefit = 5% of FMV of the land and improvements as

determined by the BIR Commissioner or the
Assessor, whichever is higher.

Case 3 - The employer purchase residential property on installment basis and allows the
employee to use the same as his residence.
Annual value of the benefit = 5% of the acquisition cost exclusive of interest
Case 4 - The employer purchases residential property and transfers ownership thereof in the
name of the employee.
Value of the benefit = employer’s acquisition cost or FMV, whichever is

higher. The FMV is the higher between the
BIR Commissioner’s value and the Assessor’s
value.
Monetary Value = entire value of the benefit
Case 5 - The employer purchases residential property and transfers ownership thereof to his
employee for the latter’s residential use at a price less than the employer’s acquisition cost.
Value of the benefit = The difference between the FMV of the BIR
Commissioner or the FMV of the Assessor,
whichever is higher, and the cost of
the employee.
Monetary value of the benefit = entire value of the benefit
Case 6 - Housing Benefits which are not taxable - The following housing benefits provided by
the employer to its employees are not considered as taxable fringe benefits---
a. Housing privilege of military officials and Armed Forces of the Philippines consisting of officials
of the Philippine Army, Philippine Navy, and Philippine Air Force.
b. A housing unit which is situated inside or adjacent to the premises of the business or factory. A
housing unit is considered adjacent to the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the business premises.(witnin)
c. Temporary housing for an employee who stays in a housing unit for 3 months or less.
B) Expense Accounts
1. Expenses incurred by the employee which is paid by his employer. In this case, the employee
receives an entertainment or representation allowance which is subject to liquidation.
2. Expenses paid for by the employee but reimbursed by his employer. In this case, the employer
pays for the expense and gets reimbursement from the employer.
Notes: The above expenses shall not be taxable provided ---
a. The expenditure are fully receipted for and in the name of the employer, and
b. The expenditure are connected with the trade or business of the taxpayer, that is, they are
not personal expenses attributable to the employee.
3. Personal expenses of the employee (like purchases of groceries for the personal consumption of
the employee and his family) paid for or reimbursed by the employer to the employee shall be treated
as taxable fringe benefits of the employee whether or not the same duly receipted for in the name of
the employer.
Note: representation and transportation allowances which are fixed in amounts and are regularly
received by the employees as part of their monthly compensation income shall not be treated as
taxable fringe benefits.
Such allowances are taxable as compensation income subject to regular tax rates.
C) Motor Vehicle of Any Kind
Case 1 - The employer purchases the motor vehicle in the name of the employee.
Value of the benefit = acquisition cost
Case 2 - The employer provides the employee with cash for the purchase of the motor vehicle
in the name of the employee.
Value of the benefit = amount of cash received by the employee
Case 3 - The employer shoulders a portion of the amount of the purchase price of a motor
vehicle in the name of the employee.
Value of the benefit = amount shouldered by the employer
Case 4 - The employer purchase the car on installment in the name of the employee.
Value of the benefit = acquisition cost (exclusive of interest)

divided by five years
Monetary value of the benefit = entire value value of the benefit
Note: In cases 1 to 4, the monetary value of the fringe benefit shall be the entire value of the
benefit, regardless of whether the motor vehicle is used by the employee partly for personal
purposes and partly for the benefit for the benefit of the employer
Case 5- The employer owns and maintains a fleet of motor vehicles for the use of the business
and the employees.
Value of the benefit = acquisition cost of all motor vehicle not

normally used for business
purposes divided by 5 years
Case 6 - The employer leases and maintains a fleet of motor vehicles for te use of the
business and the employees.
Value of the benefit = amount of the rental payments for motor

vehicles not normally used for
business purposes
Case 7
a. The use of aircrafts or helicopters owned and maintained by the employer shall not be
subject to the fringe benefits tax. The use shall be treated as business use.
b. The use of yacht, whether owned or maintained or leased by employer shall be

measured based on the depreciation of the yacht at an estimated useful life of 20 years.
D) Household Expenses
The following personal expenses of the employee which are borne by the employer shall be treated as
taxable fringe benefits---
1. Salaries of household help, personal driver of the employee, or other.
2. Similar expenses like payment for homeowners’ association dues, garbage dues, etc.
E) Interest on Loans at Less than Market Base
1. If the employer lends money to his employee free of interest or at a rate lower than 12% such
interest forgone by the employer (the difference of the interest assumed by the employee and the
rate of 12%) shall be treated as a taxable fringe benefit.
2. The benchmark rate of 12% shall remain in effect until revised by the subsequent regulation.
F) Social and Athletic Club Fees
Membership fees, dues and other expenses borne by the employer for his employee, in social and athletic
clubs or other similar organizations shall be treated as tangible fringe benefits of the employee in full.
G) Expenses for Foreign Travel
Not subject to FBT- reasonable expenses of the Subject to FBT

employee paid by the employer for the purpose of
attending business meeting or foreign conventions:
a. Inland travel expenses such as expenses for food, a. 30% of the cost of first class airplane tickets;
beverages, and local transportation
b. Lodging cost in a hotel or similar establishment in
b. The cost of lodging in a hotel or similar establishment excess of 300 US dollar per day;
amounting to an average of US dollar of 300 or less per
day; c. Travelling expenses paid by the employer for the
travel of the family members of the employee;
c. The cost of economy and business class airplane
tickets; d. When there is no documentary evidence showing
that the employee’s travel abroad was in connection
d. 70% of the cost of first class airplane tickets with business meetings or conventions, the entire cost
of the ticket, including the cost of the hotel
accommodations and other expenses incident thereto
shouldered by the employer, shall be treated as taxable
fringe benefits.
H) Holiday and Vacation Expenses
Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe
benefits.
I) Educational Assistance
Subject to FBT NOT Subject to FBT

Cost of education assistance to the employee which is If:
borne by the employer. a. The education or study involved is directly connected
with the employer’s trade, business or profession.
Cost of educational assistance extended by an
employer to the dependents of an employee b. There is a written contract that the employee is under
obligation to remain in the employ if the employer for
the period of time mutually agreed upon.
When the assistance is provided through a competitive

scheme under a scholarship program of the company
J) Cost of Insurance
Subject to FBT NOT Subject to FBT

Cost of life or health insurance and other non-life a. Contribution of the employer for the benefit of the
insurance premiums borne by the employer for his employee pursuant to the provisions of existing laws,
employee. such as contributions to the Social Security System, the
Government Service Insurance System, and similar
contributions under the law provisions of any other
existing law.
b. The cost of premiums borne by the employer for the

group insurance of his employees.
K) Stock Options
Stock options granted by an employer to its employee(s) involving the employer’s own shares or the shares
of another corporation are considered compensation. The amount of such compensation shall be the FMV
of the stock options at the time the services were rendered.
If the grantee exercises the option in the future, additional income may be recognized by the grantee which
shall give rise to the following tax consequences*4:
When the option is granted by the employer(involving it own shares of stocks or shares of another
corporation) to its rank and file employee, and the latter actually exercises the option by paying the exercise
price, additional taxable compensation shall be recognized by the employee and shall be subjected
to the creditable withholding tax on compensation. Such additional compensation shall be equivalent to
the difference of the higher of the book value of FMV of the underlying shares at the time of the
exercise of the options, and the exercise price.
However, if the employee exercising the option is supervisory or managerial employee, such additional
compensation shall be treated as fringe benefit subject to the fringe benefit tax.
*4 It goes without saying that the exercise of the option will result to additional income only if the stock is worth more than the exercise
price on the date the option is exercised. Otherwise, the option will not even be exercised and no additional income will be realized.
Tax Accounting for FB Expense and Fringe Tax
a. The “fringe benefit expense” and “fringe benefit tax” shall constitute allowable deductions from gross
income of the employer.
Ex. The fringe benefit Expense of 35,000 and fringe benefit tax of 18,846 are deductible from gross income
of the employer, and shall be taken up in the employer’s books of accounts as follows:
Fringe Benefit Expense 35,000

Fringe Benefit tax expense 18,846
Cash 53,846
b. If the basis for the computation of the fringe benefits(FB) tax is the depreciation value of the property, only
the FBT shall constitute a deductible expense of the employer.
Provided, however, if the zonal value or FMV of the said property is greater than its cost subject to
depreciation, the excess amount shall be allowed as a deduction from the employer’s gross income as
fringe benefit expense.
Other Fringe Benefits Not Subject to Fringe Benefits Tax
a. Fringe benefits which are authorized and exempted from income tax and Tax code or under Special law;
b. Contribution of the employer for the benefit of the employee to retirement, insurance, and hospitalization
benefit plans;
c. Benefits given to the rank and file, whether granted under collective bargaining agreement or not;
d. If the grant of fringe benefits to the employees is required by the nature of, or necessary to the trade,
business or profession of the employer;
e. If the grant of fringe benefit is for the convenience or advantage of the employer.
1. In the case of meals, they can be furnished on the business premises of the employer.
2. In case of lodging, the lodging must be furnished on the business premises of the employer and
the employee must be required to accept such lodging as a condition of his employment in order
for the employee to properly perform the duties of his employment.
F) “De minimis” Benefits
“De minimis” benefits which are exempt from the income tax on compensation as well as from the FBT shall be
limited to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value
and are offered or furnished by the employer merely as a means of promoting health, goodwill, contentment, or
efficiency of his employees, such as the following:
a. Monetized unused vacation leave credits of employees (in the private sector) not exceeding 10 days
during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and employees;
c. Medical cash allowance to dependents of employees not exceeding 1,500 per semester, or 250 per
month (or 3,000 per year)
d. Rice subsidy of 2,000 or one (1) sack of 50 kg. Of rice per month amounting to not more than 2,000,
(or 24,000 per year)
e. Uniform and clothing allowance not exceeding 6,000 per annum;
f. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/ executive check-up, maternity assistance, and routine consultations, not exceeding 10,000
per annum;
g. Laundry allowance of 300 per month (3,600 per year)
h. Employee achievement awards, e.g. for length of service, loyalty, safety achievement, etc. To be
exempt---
1. The award must be in the form of tangible personal property other than cash gift
certificates;
2. The annual monetary value must not exceed 10,000; and
3. The award must n=be given under an established written plan which does not discriminate in
favour of highly paid employees.
i. Gifts given during Christmas and major anniversary celebrations not exceeding 5,000 per
employee per annum;
j. Daily meal allowance fro overtime work and night/graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis;
k. Benefits received by an employee by virtue of a collective bargaining agreement (“CBA”) and

productivity incentive schemes. Provided, the total annual monetary value received both the CBA and
productivity incentives schemes combined, do not exceed 10,000 per employee per taxable year.
Note:
a. The abovementioned eleven (11) items are not only exempt from fringe benefits tax but also
from the withholding tax on compensation income of managerial, supervisory and rank and file
employees.
b. The amount of “de minimis” benefits conforming to the abovementioned prescribed ceilings shall
be considered in determining the 90,000 ceiling of “13th month pay and other benefits” excluded
from gross income.
Provided that, the excess of the “de minimis” benefits over their respective ceilings shall be
considered part of the “13th month pay and other benefit” and the employee receiving it will
subject to tax only on the excess over the 90,000 ceiling.
c. Minimum wage earners receiving “13th month pay and other benefits” exceeding 90,000 limit
shall be taxable on the excess benefits over 90,000
Taxation of Fringe Benefits of NRANETB
A non-resident alien not engaged in trade or business in the Philippines who receives a fringe benefits
subject to FBT as follows:
Rate = 25%
Tax base = the grossed-up monetary value of the fringe benefit computed by
dividing the monetary value of the fringe benefit by 75%.
IV. Assessment
Due date: October 15, 2020
1. As means of promoting the health, goodwill, contentment, and efficiency of his employees, employer A gave rank
and file employee B of the following fringe benefits in 2018:
A. Monetized unused vacation leave of 15 days 24,000

B. Rice subsidy 36,000
C. Uniform and clothing allowance 12,000
D. Achievement award for length of service in the form of tangible personal property 20,000
E. Gifts given during christmas and major anniversary celebrations 15,000
F. Medical benefits 20,000
G. Laundry allowance 12,000
H. 13th month pay 30,000
I. Mid year bonus 30,000
J. Productivity bonus 15,000
Determine the amount of:

a. Deductible expense of A =214,000
b. Taxable benefits of B =49,400
2. The following data belong to A Corp. For the year 2018:

a. Educational assistance to supervisors and their children 100,000
b. Employer’s contribution for the benefit of the employees to retirement,
Insurance and hospitalization benefits plan 80,000
c. Year’s rental for an apartment paid by the corporation for the use of its controller 120,000
The fringe benefit tax due on 2018 is:=86,154
3. A corp., a regional operating headquarter of a MNC in the Philippines provided its employees such and non-cash
fringe benefits in 2017 and 2018 as follows:
Total amount of fringe benefits 1,000,000

60% of said amount was given to rank and file employees
a. To resident citizens(taxed at regular rates) 45%
b. To non-resident aliens not engaged in business in
Philippines 35%
c. To special aliens and Filipino employees 20%
The fringe benefits tax due in 2017 and 2018 are?
4. B Co. Owns a condominium unit which is being used by the President of the Corp. It has a fair market value per
Real Property Tax declaration of 2,100,000 and zonal value of 3,000,000. Determine the taxes due in 2017 and
2018.
5. Mr. A is a mining engineer employed by B. Co, a mining firm. The company’s mine is in Mindanao. Mr. A was
provided by the company with living quarters at the mine site. The fair rental value of the living quarters is 15,000 a
month. Determine the fringe benefit taxes of 2017 and 2018.
6. In addition to the fringe benefits in 2018, Mr. B, a chief accountant, availed of the car plan of his employer, C
Company. Under the plan, Mr. B shouldered only (50%) of the cost of the car, with the company shouldering the
other 50%. Mr, B paid 340,000 for the car. The car was registered in the name of Mr. B.
Determine:
a. The fringe benefit tax due
b. The deductible expense of the employer
7. In 2018, A company purchased a second hand car for its Chief Accountant as fringe benefit. The cash purchase
price of the car was 120,000. The company paid 30,000 as down payment plus four equal annual installment of
30,000(120,000 plus 30,000 interest). The ownership was transferred to the Chief Accountant. Determine the fringe
benefit tax due in 2018.
8. In 2018, A, the sales manager, purchased a brand new car amounting to 500,000 of which 200,000 was
contributed by the company as his fringe benefit. Determine the fringe benefit tax due.
9. In 2018, ABC Corp., hired Miss A as sales manager for cosmetics. She was given the following compensation and
fringe benefits:
Salary 200,000/month
Three maids 4,000/per maid/month
Personal drivers 8,000/ month
Home owner’s association dues 1,200/year
Determine the annual fringe benefit tax due.
10. In 2018, A the owner of Victory Supermarket lent 100,000 to B, the supermarket manager. It was stipulated in
their the the amount should be paid in one year with annual interest of 3% . Determine the Fringe Benefit tax due.
11. in 2018, Mr. A, the Vice President for Finance of X Corporation incurred the following expenses in attending a
three day foreign business convention:
Amount in dollars:
Plane tickets(USA Travel)
First class 1,000
Economy 500
Hotel accommodation(USA) 2,700
Inland Travel 600
Assume 1 dollar = 50 Pesos
Determine the fringe benefit tax due assuming that the business convention was
a. With documentary evidence
b. Without documentary evidence
12. In 2018 ABC Corporation paid for annual rental of a residential house used by its general manager amounting to
136,000. The entry to record the benefit is:
MODULE 4
Gross Income(EXCLUSIONS)
Introduction
This module entitled Introduction to Income Taxation is about certain types of income as non-
taxable. There are many types of income that qualify under this rule, such as life insurance death
benefit proceeds, child support, and welfare.
Time allotment
III. Objectives
1. Explain the different types of income excluded from gross income.

2. Discuss the concept behind these exclusions.
3. Analyze the excluded in the gross income and its connection to accounting such exclusions.
II. Lecture
Gross Income (EXCLUSIONS)
EXCLUSIONS FROM GROSS INCOME
What are Exclusions?

Exclusions are income or receipts which are excluded from gross income, ie. These are not included
in the determination of a taxpayer’s gross income.
Hence, these incomes or receipts are not subject to income tax. However, despite their non-inclusion
from gross income, such income items may be subject to taxes other than the income tax.
Exclusions under the Tax Code

The following items shall not be included in gross income and shall be exempt from the income tax:
1. Proceeds of Life Insurance Upon Death of the Insured
The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured
shall be exempt from income tax. The proceeds of life insurance are treated more as an indemnity for
the life lost instead of as gain, profit, or income.
Note: Interest payments made by the insurer constitutes income to the recipient.
2. Amount Received by Insured as Return Of Premium
The amount received by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contacts, either during the term, or at the maturity of the term mentioned in the
contract, or upon surrender of the contract.
Notes:
a. The excess of the proceed received over the premiums paid is included in gross income.
b. Participating dividends distributed to life insurance policy holders are actually a return overpaid
premiums. They are therefore excluded from gross income of the insured.
3. Gifts, Bequests and Devices
The value of property acquired by gift, bequests, devise or descent are exempt from income
taxation.
Note: The income from the lease, sale, exchange, investment, or other disposition of such property
shall be subject to income tax.
4. Compensation for Injury or Sickness

a. Amounts received, through accident or health insurance, or under Workmen’s Compensation Acts,
as compensation for personal injuries or sickness: plus
b. The amounts of any damages received, whether by suit or agreement, on account of such injuries
or sickness
c. Damages representing compensation for personal injuries arising from libel, defamation, slanderm
breach of promise to marry, or alienation of affection.
- Includes moral damages. Moral damaged include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury.
-Includes exemplary or corrective damages. These are imposed by way of example or correction
for public good.
5. Income Exempt Under Treaties
Income of any kind, to the extent required by any treaty obligation or international agreement to be
exempt from taxation by the Republic of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, Separation Pay which are Exempt From Income Tax
As a general rule, retirement benefits, pensions, separation pay are all taxable.
As exceptions, the following benefits and payments are exempt from income tax:
a. Retirement benefits and/ or pensions which are exempt from income tax:
Under R.A. No. 7641(“Retirement Pay Law”). In Under the Tax Code, retirement benefits and/ or
the absence of a retirement plan for employees, pension amounts received by officials and
employers are required to pay a retirement employees of private firms, whether individual or
benefit equal to at least 1/2 month salary for corporate, shall be exempt from income tax
every year of service. when the requisites for exemption in the Tax
Code are complied with
Requisites for exemption: Requisites for exemption:

i. The employee has reached the age of 60 or 1) There must be reasonable private benefit
more, but not beyond 65; plan maintained by the employer;
And
ii. The employee has served for at least 5 years 2) The retiring official or employee has been in
in the same establishment the service of the same employer for at least 10
years;
3) The retiring official or employee is not less

than 50 years of age at the time of retirement;
4) The benefits of exemption granted shall be
availed of by an official or employee only once.
b. Separation Pay Due to A cause Beyond the Control of the Employee
Any amount received by an official or employee, or by his heirs, from the employer as a consequence of
separation of such official or employee from the service of the employer due to:
a. Death;
b. Sickness;
c. Other physical disability; or
d. For any cause beyond the control of the said official or employee (Sec. 32(B)(6)(b), NIRC).
c. Social Security benefits, retirement gratuities, pensions and other similar benefits received by resident or
non-resident citizens of the Philippines, or aliens who come to reside in the Philippines, from foreign
agencies and other institutions private or public.
d. Payment of benefits due or to become due to any person residing in the Philippines under the laws of the
United States Veteran Administration.
e. Benefits received from or enjoyed under Social Security System(SSS) in accordance with the provisions
of Republic Act 8282.
f. Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
the Government officials and Employees (Sec 32(B), (6)(f), NIRC).
g. Maternity benefits advanced by the employer to the employee
7. Miscellaneous Items
a. Income derived by foreign governments, financing institutions owned or controlled by foreign
governments, and international or regional financial institutions established by foreign governments from
investments or deposits in the Philippines.
b. Income derived by the Philippine Government or its Political Subdivisions
c. Prizes and award primarily in recognition of religious, charitable, scientific, educational, artistic, literary,
or civic achievement but only if:
1. The recipient was selected without any action on his part to enter the contest or proceeding; and
2. The recipient is not required to render substantial future services as a condition to receiving the
prize or award.
d. Prizes and awards granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national sports association.
e. 13th month pay and other benefits received by officials and employees of private and public entities as
“13th month pay and other benefits” which shall include:
1. The 13th month pay, and other incentives such as productivity incentives and Christmas Bonus
and
2. The excess of the “de minimis” fringe benefits over their respective ceilings.
Provided, however, that the total exclusion shall not exceed Ninety Thousand Pesos (90,000)
f. Compulsary or mandatory contributions of employees to GSIS, SSS, Medicare(PHIC), and PAG-IBIG and
union dues of individuals.
- These are actually deductions , but are labelled as exclusions in the Tax Code.
Notes: Contributions in excess of the mandatory contributions are not deductible from gross
income.
Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited Optional Insurance,
and GSIS Memorial Plan premiums shall not be deductible.
g. Gains from sale, exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity
of more than 5 years.
h. Gains from Redemption of Shares in Mutual Fund

i. Income of non-residents from transactions with domestic Depositary Banks and OBUs Under the Expanded
Foreign Currency Deposit System
j. Personal Equity and Retirement Account(“PERA”)

PERA refers to the voluntary retirement account of an individual (called a ‘Contributor’) established from his
own Qualified PERA Contributions and/ or Qualified Employer Contributions, for the purpose of being
invested solely in qualified or eligible PERA investment products.
1. The Qualified Employer’s Contribution shall be excluded from the employee’s taxable gross
Income.
2. Investment income of a Contributor earned from the investments of his PERA assets shall be exempt
from income taxes, provided:
a. That each specific investment product is approved by the concerned regulatory authority; and
b. That non-income taxes, if applicable, relating to the investment income, shall be imposed. Such
taxes shall include a) percentage taxes; b) VAT; c) stock transaction tax under tax under Section 27(A)
and (B) of the tax code; and (d) documentary stamp tax (Sec. 9, Rev. Reg. No. 17-2011).
3. Qualified PERA Distributions shall be excluded from gross income if:

a. After the Contributor and/or his employer has made the qualified PERA Contributions and/ or
Qualified Employer’s Contributions for at least 5 years(which need not be conclusively made ), and
after the Contributor reaches the age of Fifty-Five (55); or
b. Upon the death of the Contributor, irrespective of the Contributor’s age or the number or yearly
contributions made at the time of his death.
4. Early withdrawals in the following circumstances shall be excluded from the gross income:
a. Withdrawal of PERA Assets from the administrator by reason of the suspension or revocation of
the accreditation of the Administrator, provided that the entire PERA Assets are transferred to
another Administrator within two(2) working days from receipt of the Contributors advice on the
chosen Administrator;
b. For payment of accident or illness-related hospitalization in excess of thirty(30) days; or
c. For payment to a Contributor who has been subsequently rendered permanently and totally
disabled as defined under the Employees Compensation Law or Social Security System Law.
k. Representation and transportation allowances (“RATA”) granted under Section 34 of the General
Appropriation Act to certain official and employees of the government from the rank of Department Secretaries to
Division Chiefs are not subject to income tax and to the withholding tax.
l. Personnel Economic Relief Allowance (“PERA”) granted to all employees of the National Government, Local
Government Units, including government owned and controlled corporations, is considered remuneration/
compensation for services performed by the employees in the performance of official duties, hence, not taxable
income.
m. Capital Contributions to corporations/ partnership are not income of the corporation/ partnership, and hence not
subject to income tax.
n. Project-related income from the development of socialized housing sites. The private sector sector (ex.
Contractors) shall be exempt from payments of project-related income taxes(including CGT) on a per project basis on
income realized from the development of socialized housing sites.
o. Income from commercialization of technlogies developed by local investors ir researchers under R.A. No. 7459
during the first ten (10) years from the date of the first sale.
p. Proceeds which constitute a fund held in trust by the taxpayer, and which do not redound to the benefit of the
taxpayer.
q. Income from sale of gold pursuant to R.A. No. 7076( the People’s Small- Scale Mining Act of 1991)
1. Income from the sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale miners and
accredited traders, and
2. Income from sale of gold by registered small-scale miners to accredited traders fro eventual sale to the
Bangko Sentral ng Pilipinas.
Small scale miners refer to Filipino citizens individually or in the company of other Filipino citizens, voluntary from a
cooperative duly licensed by the Department of Environment and Natural Resources to engage, under the terms and
conditions of a contract, in the extraction or removal of mineral or ore-bearing material from the gound.
All gold to the BSP by accredited traders shall be presumed to have been purchased by said traders from small-scale miners.

MODULE 3
Gross Income
Introduction
This module entitled Gross Income is about individuals total pay from an employer before taxes or
other deductions. This includes income from all sources and is not limited to income received in
cash; it also includes properties or services received.
Time allotment
I. Objectives
1. Knowing the items included in the total gross income.

2. Explain the concept pf items included in the gross income
3. Analyze the computation of gross income
II. Lecture
Gross Income
Concept Of Gross Income
Gross income means the total income of a taxpayer subject to tax. It includes the gains, profits, and income
derived from whether source, whether legal or illegal.
It does not include excluded by law, or which are exempt from income tax (Sec. 32(B), NORC).
Gross Income Defined
Gross income means all income derived from whatever source, including (but not limited to) the following
items:
1) Compensation for services;

- Including pensions and retiring allowances (except those exempt by law)
2) Gross income derived from the conduct of trade or business or the exercise of a profession;
3) Partner’s distributive share from the net income of a general professional partnership;
4) Rents;
5) Annuities(excess over premium paid);
6) Gains derived from dealings in property
7) Interest income;
8) Royalties
9) Dividends;
10) Prizes and Winnings
Items of Gross Income
1. Compensation for Services
Compensation for services, of whatever kind and in whatever form paid, forms part of gross income. The name by
which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria,
allowances, commissions(e.g. transportation, representation, entertainment and the like); fees, including director’s
fees, if the director is, at the same time, an employee of the employer/ corporation; taxable bonuses and fringe
benefits,except thsoe which are subject to the fringe benefits tax under Section 33 of the Tax Code; taxable pensions
and retirement pay; and other income of a similar nature constitute compensation income.
A) Compensation Income which may be in the following forms;

a. Cash;
b. Allowances
c. Property - the FMV of the following thing taken in payment is the amount of compensation.
d. Employer’s Stock - the FMV of the shares at the time the services were rendered.
e. Promissory notes - the fair discounted value of the note as of the time of receipt. The employee shall also
record additional income upon the recovery of the discount.
f. Forgiveness of debt for services rendered to a creditor
Note: Where the debtor is a stockholder of the corporation condoning the debt, the condonation of the debt
amounts to an indirect payments of dividend.
g. Income tax of the employee assumed or rapid by the employer, in consideration of the latter’s services.
h. Pensions and retiring allowances- except those exempt by law
i. Stock options - the FMV of the stock option at the time of services were rendered by the employee.
B) Stock Options
1. The amount of compensation shall be the FMV of the stock options at the time the services were
rendered.
2. When the employee exercises the option by paying the exercise price (equity-settlement option), it results
in additional income. Such additional income shall equal the higher of the book value or FMV of the shares,
less the exercise price.
A. If the employee is a rank-and-file employee, the additional income shall be recognized by the
employee as taxable compensation and shall be subject to the CWT on Compensation.
B. If the employee is a supervisory or managerial employee, the additional income shall be treated
as a fringe benefit subject to the Final FBT.
3. When the grantor, (the corporation) simply pays the difference between the FMV of the shares and the
exercise price (cash-settlement option), the same rules in (2) shall apply.
C) Fringe Benefit which may be in a form of 1) meals furnished or subsidized by the employer; 2) living quarters; 3)
life insurance premiums paid by the employer where the insured employee is the beneficiary; 4) facilities or privileges
provided by the employer; or 5) allowances.
Fringe benefits are classified under the following categories, namely;
Those subject to the fringe benefits tax (“FBT”)

- Fringe benefits given to employees holding managerial or supervisory positions and which are listed in RR
No. 3098, as amended.
Those included in the gross income in the ITR

- Fringe Benefits given to rank and file employees
- Fringe benefits given to employees holding managerial or supervisory employees and which are listed in
RR No. 3-98, as amended
Those which are not taxable

- Fringe benefits given to employees for the convenience of the employer, or if incurred by the employee in
the pursuit of trade, business or profession of the employer and is liquidated and accounted for by the
employee.
D) Salaries and Allowances During Leaves of Absence
E) Separation Pay NOT due to a Cause Beyond the Control of the Employee
General Rule: Separation Pay is included in gross income of separated employee.
Exception: if separation is caused by something not of the employee’s making. For example, if separation is
due to cessation of the business, or as a consequence of death, sickness, other physical disability,
or for any cause beyond his control, the separation pay shall be exempt from tax.
F) Fees
Fees received by an employee for the performance of a service for the employer, including director’s
fees( including per diems and allowances), are regarded as compensation income.
Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions
received by a clergyman, evangelist, or religious worker for services rendered are considered
compensation.
Exception: Authorized fees paid to public officials, such as notaries public, clerks of court, sheriffs, etc., for
services rendered in the performance of their official duties, are not considered wages.
G) Dismissal Payment
Any payment made by an employer to an employee on account of dismissal, that is, involuntary separation from the
service of the employer, constitutes wages, regardless of whether the employer is legally bound by contract, statute,
or otherwise to make such payment.
H) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not accounted for by the
employee to the employer are considered taxable income, but not subject to withholding tax.
2. Gross Income From Business

1) In general “ gross income” means total sale less COGS, plus any income from investment and
from any incidental or outside operations or sources.
Formula:
Gross Sales xxxx

Less: Cost of Good Sold xxxx
Gross Profit From Sales xxxx
Add:Other Income
Income from Investment xxxx
Income from incidental or outside
Operations or sources xxxx xxxx
Gross income xxxx
2) Income from Long-term Contracts
The term “long-term contracts” refers to construction, installation, or building contracts requiring a period
longer than one (1)year for completion.
Income therefrom is reported under the percentage of completion basis.
3) Gross income from Farming
The income tax regulations prescribe three(3) methods of reporting the gross income from farming, namely
A) Cash Basis, or receipts and disbursements basis. Under this method, no inventory is used to determine
profits.
Formula:
Cash from sales of livestock and other products raised in the farm
+ Value of property received from sales
+ Profits/ Gains from sale of livestock or other items purchased
+ Gross income from all other sources
TOTAL GROSS INCOME
B) Accrual Basis. Under this method, inventory is used to determine profits.
Formula:
Sales xxxx
Ending Inventory xxxx
Less beginning inventory (xxx)
Less purchases (xxx) (xxxx)
Gross Income xxxx
C) Crop Basis. This method of reporting income may be used by a farmer engaged in producing crops
which may take more than (1) year from the time of planting to the time of gathering and disposing
of the crop.
In such cases, the entire cost of producing the crop must be taken as a deduction in the year in which the
gross income from the crop is realized.
4) Gross Income From Petroleum Operations

Gross income from petroleum operations means its total entitlement of the gross proceeds from the sale at
market price, during the taxable year, of petroleum produced under the service contract, and such other
income incidental to and arising from any one or more of the petroleum operations of the contractor.
Provided, the amount of Filipino participation incentive allowance received by a Philippine Corporation
pursuant to an operating agreement under a petroleum service contract between a service contractor and
the Government under P.D. No. 87 shall not be included in the gross income of the Philippine Corporation.
3. Payments Made by a GPP to a Partner and the Distributive Share of Partners in the Net Income of GPP.
4. Rent of Lease Income
Reporting of Income by a Lessor
Rent paid by the lessee for the use or lease of property is taxable income to the lessor.
Rent income may be in following forms:

1. Cash, at the stipulated price;
2. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract
of lease. An example is the real state tax on the property leased assumed by the lessee.
3. Advance payment which must be pre-paid rentals and not a) loan to lessor, or b) option money for the
property, or, c) security deposit for the faithful performance of the lessee’s obligations.
However, a security deposit that is applied to rentals is taxable income to the lessor.
4. Leasehold Improvement
The contract of lease may provide that the lessee may make permanent improvements on the leased
property and said improvements will belong to the lessor upon termination of the lease.
Income and Deduction from Leasehold Improvement
a. Income of Lessor
The lessor, in such a case, may, at his option, report income under ant of the following methods:
Outright method - lessor reports as income the FMV of the improvement in the year of completion.
Spread-out Method - The lessor shall spread over the remaining term of the lease the estimated
depreciated (book) value of such buildings or improvement at the termination of the lease, and report as
income for each remaining term of the lease an aliquot part thereof.
Formula:
Cost of leasehold improvement xxxx

Less:Depreciation for remaining term of lease (xxx)
Book value, end of lease xxxx
Books Value end of lease = income Per Year xxxx

Remaining Term of Lease
b. Deduction of Lessee (Depreciation Expense)

The lessee may claim depreciation of the improvements over the remaining term of the lease or the life
improvements, whichever is shorter.
c. Computation of income from Leasehold Improvement Arising from the Pretermination of Lease Contract
The lessor receives additional income for the year in which the lease is so terminated to the extent that the value of
such building when he became entitled to such possession exceeds the amount already reported as income on
account if the erection of such building.
Formula:
BV Of Leasehold Improvement at termination of Lease xxxx
Less: Amounts of Income previously recognized (xxxx)
Additional Income in year of termination xxxx
d. Loss of Lessor if Leasehold Improvement is Destroyed Before Termination of Lease
If the building or other leasehold improvement is destroyed before the expiration of the lease,the lessor is entitled to
deduct as a loss for the year when such destruction takes place, the amount previously reported as income because
of the erection of the improvement, less any salvage value, to the extent that such loss was not compensated by
insurance.
Income on leasehold improvement already reported xxxx

Less: Salvage Value (xxxx)
Total Loss xxxx
Less: Compensation Received:
A. From insurance xxxx
B. Others xxxx xxxx
Loss on destruction of leasehold improvement xxxx
5. Annuities and Life Insurance Policies
a) Annuities - annuities paid under an annuity contract in excess of the consideration paid are includible in
gross income.
b) Life Insurance Policies - where insured outlives the term of the policy, amount received by an insured in
excess of the premiums paid are included in gross income.
Note: Distributions on paid-up policies, which are made out of earnings of the insurance company subject to
tax, are in nature of corporate dividends and should be taxed accordingly.
6. Gains Derived from dealing in Property
Sale of 3 types of property which may give to taxable events:
Ordinary asset - 100% of the gain or loss shall be recognized in the ITR.
Capital Asset - subject to final taxes ( capital gains tax)
Other capital asset - holding period of the asset shall be taken into consideration if the
seller is an individual, and only the net capital gain shall be included in the ITR.
1) Sale of Tangible Assets
2) Sale of Intangible Assets (ex. Patents, copyrights and goodwill)
3) Corporate sinking Fund
4) Sale of Real Property

Gain from the sale of real properties classified as ordinary assets shall be included in
gross income in the ITR of the taxpayer.
Note: Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the real
estate business for purposes of determining the applicable rate of creditable withholding
tax imposed under Sec. 2,57.2 of Rev Reg. No. 2-98, as amended(Rev. Reg. No. 7-2003)
7. Interest Income
Interest Income, as a rule, is taxable income included in the ITR.
EXCLUDED
1. Interest income from bank deposits or deposit substitute in the Philippines subject to FT(passive
Income);
2.Interest Income which is exempt from tax:
i. Interest Income from long-term deposits or investment in the form of savings, trust funds,
deposits substitutes, investment management accounts;
ii. Interest Income earned from passive investments of Foreign governments, financing institutions
owned by foreign governments, and international financial institutions established by foreign .
governments.
8. Royalties
Royalties derived from sources within the Philippines are subject to final tax of 20% except royalties on
books, other literary works, and musical compositions which shall be subject to final tax of 10%.
Royalties received by resident citizens and domestic corporations from sources without the Philippines shall
be included in the ITR.
9. Dividends
Dividends subject to FT: Cash or property dividends received by individuals and NRFCs from domestic
corporations.
Dividends included in gross income in the ITR:
1. Generally, Cash and/ or property dividends received by a resident citizen domestic corporation
from a foreign corporation.
2. Liquidating Dividend
Liquidating Dividends represent distribution of all the property or assets of a corporation in

complete liquidation or dissolution.
The difference between the cost or other basis of the stock and the amount received in liquidation
of the stock is a capital gain or a capital loss. Where property is distributed in liquidation, the
amount received is the fair market value of such property.
Liquidating Dividend xxxx

Less: Cost of stock investment or other basis xxxx
Capital gain or capital loss xxxx
If the shareholder is a corporation, the capital gain is taxable in full.
If the shareholder is an individual and the stocks were held for more than 12 months, the capital
gain is taxable only to the extent of 50% thereof(Sec. 39(B), NIRC.)
Dividends not subject to income tax

1. Intercorporate dividends from a domestic corporation to another domestic corporation or
a RFC.
2. Generally, stock dividends.
10. Prizes and Winnings

Subject to FT: 1) Prizes over 10,000 and winnings derived within the Philippines.
2) Prizes received by NRANETB and by a NRFC within the Philippines.
Included in the ITR:

1. Prizes amounting to 10,000 or less received by a citizen, resident alien, or NRAETB.
2. Prizes received by domestic corporations
3. Prizes received by RFCs within the Philippines.
4. Prizes and winnings received by resident citizens from sources without the Philippines.
11. Income From Other Sources
1. Recovery of damages representing compensation for loss of profits or income are

includible in gross income.
Note: Recoveries that are to compensate for damage to property, injury to person, or loss of life are
not taxable.
Included in the Gross Income Not taxable

1. Damages for lost profits 1. Damages to compensate for damage or injury to the
2. Damages fro lost income person or his property
3. Exemplary damages 2. Damages for lost capital
4. Punitive damages 3. Moral damages
2. Recovery of Bad Debt previously deducted

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.
A. Rules in Bad Debt Recovery

* Taxable- if the deductible of the bad debt in prior year resulted in an income tax benefit to the
taxpayer, the bad debt recovered is taxable income in the year of recovery.
** Not taxable - if the deduction of the bad debt did not result in an income tax benefit to the
taxpayer (I.e. where the result of the business operation was a net loss even without the bad debt
deduction), the bad debt recovered is not taxable income but is treated as a mere recovery or
return of capital.
Except PCSO and Lotto winnings of 10,000 or less of an individual citizen or resident alien and PCSO and Lotto
winnings of a NRAETB regardless of amount, which are exempt
*** Income from Bad debt recovery - The recovered amount of the previously deducted bad debt
which resulted in an income tax benefit.
3. Refund of Deductible Tax
The tax benefit doctrine also applies with respect to refund or credit of taxes which were claim and
deductible in a previous year.
Rules on Refund of Taxes Previously Deducted:
* Taxable - if the tax paid is a deductible tax. The refund or credit thereof is taxable in the year of
receipt.
** Non-taxable - if the tax paid is not deductible tax. The refund or credit thereof is not taxable.
*** Income from tax refund - the refunded amount of the tax which was previously deducted and
which resulted to an income tax benefit.
Examples of deductible taxes are: percentage taxes(Except VAT and percentage tax under Sec
127 of the Tax Code,)
Examples of non-deductible taxes are income tax, donor’s tax, estate tax, VAT, Stock transaction
tax under Section 27 of the Tax Code.)
4. Tournament Prizes
Included in the ITR: Cash prizes won by local players/ participants in tournaments are not passive
income inasmuch as participating in such tournaments is their profession and/ or occupation.
Subject to FT: Cash prizes of foreign players/ participants,shall be subject to final tax of 25%.
Exempt from Income Tax: prizes and awards granted to athletes in local and international sportd
competitions and tournaments whether held in the Philippines or abroad and sanctioned by their
national sports associations.
5. Forgiveness of Indebtedness
Included in the ITR: When a creditor cancels a debt as part of a business transaction, or in
consideration of personal services of the debtor, the condoned debt is taxable income to the
debtor.
Tax as a Dividend: But where the debtor is a stockholder of the corporation which condoned the
debt, the condonation is considered an indirect payment of dividend.
Subject to Donor’s Tax: if the creditor merely desires to benefit a debtor, and without any
consideration therefore cancels the debt, the amount of the debt is a gift from the creditor to the
debtor.
6. Income from Illegal sources

ALL unlawful gains are taxable and includible in the ITR. However, actual repayment of such illegal
gains will give rise to deduction.
7. Unutilized/Excess Campaign Funds
Unutilized/ Excess campaign funds, that is, campaign contributions net of the candidate’s
campaign expenditures, shall be considered as subject to income tax. As such, the same must be
included in the candidate’s gross income as stated in his Income Tax Return for the subject taxable
year.
Any candidate who fails to file in the COMELEC the Appropriate Statement of Expenditures
required under the Omnibus Election Code, shall be automatically precluded from claiming such
expenditures as deductions from his campaign contributions. As such, the entire amount of his
campaign contributions shall be considered as directly subject to income tax.
8. Early Withdrawals from a Personal Equity and Retirement Account (PERA) which do not
quality for exclusion from taxable gross income.
9. Gain in Sale or Retirement by a Corporation of its Bonds
If bonds are initially issued at their If the bonds are issued by a If the bonds are issued by a
face value corporation at a premium, the net corporation at a discount, the net
amount of such premium is gain or amount of such discount is
income which is prorated or deductible, and is amortized over
amortized over the life of the bonds the life of the bonds.
If thereafter, the bonds is purchased If thereafter, the corporation If thereafter, the corporation
at a price less than the face value of purchases and retires any such purchases and retires any such
the bond bonds at a price less than the face bonds at a price less than the face
value plus any amount of premiums value minus any amount of discount
not yet returned as income, not yet deducted,
Face value of the bond Face value of the bond plus Face value of bond minus discount
Less: Purchase Price premiums not yet returned as not yet deducted
Gain or Income income Less: Purchase Price
Less:Purchase Price Gain or Income
Gain or income
10. Stock options granted to a supplier for goods and services.
IV. ASSESSMENT
1. A, resident citizen, single had the following during the yeaR
Gross compensation income 480,000

Deduction from Compensation Income:
SSS Contributions 3,600
Pag-ibig Contribution 1,200
Philhealth Contribution 1,800
Union dues 2,400
Premium payments on health insurance (250/ month) 3,000
Other income:
Prizes and awards received as best athlete in the Plarong Pambansa 10,000
Prizes and rewards received for the silver medal in the South East Asian
Games 25,000
Prize won in a Supermarket raffle 10,000
Prize won as a Lucky Home Viwer 20,000
13th month pay 40,000
Christmas cash gift 10,000
Mid-year bonus 40,000
Interest on bank(net of 20% WT) 16,000
Interest on Foreign Currency deposit(net of 15% WT) 10,000
Determine the income tax due
2. D, a resident citizen, married, had the following:

Professional fees 400,000
Gross income from rental of conjugal properties 600,000
Expenses connected with profession 180,000
Expenses connected with rental properties 200,000
Tax withheld on professional fees 40,000
Tax withheld on rental properties 30,0000
Determine the income tax due:

MODULE 3
Gross Income(DEDUCTIONS)
Introduction
This module entitled Introduction to Income Taxation is about the expenses that can be subtracted
or deducted from individual gross income to reduce the total subject to tax.
Time allotment
Aug. 27 (1 ho:ur)
I. Objectives
1. Explain and discuss that are included in regular allowable itemized deductions: interest expense; taxes;
tax credit; losses; bad debts; depreciation expense; amortization expense; depletion expense; charitable
contributions; contribution to pension; research and development and general expenses; entertaining and
amusement expenses;
2. Discuss and explain taxpayers mandatory required to use OSD and Itemized deductions;
3. Explain the concept of OSD.
II. Lecture
DEDUCTIONS
Deductions
- 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 deduction 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.
Kind of Deductions:
Before TRAIN After TRAIN

1. Personal Exemption (Basic and Additional) (For
individuals, and estate’s in year of decedent;s death
2. Income distributed to heirs/ beneficiaries(for estates Income distributed to heirs/beneficiaries (for estate and
and trusts) trusts)
3. P20,000 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. Itemized Deductions(“ID”) or Optional Standard Itemized Deductions(“ID”) OR Optional Standard
(“OSD”) (“OSD”)
NOTES(#4 AND #5)

a. IndividualsE engaged in trade or business, or profession can select the ID or the OSD, if they
are being taxed under the graduated rates. If they are taxed under the 8% tax regime, no deductions
shall be available in computing their tax bases.
b. Individuals earning purely compensation income are not allowed any deduction from their
compensation income.
c. Estate and Trust can claim the ID or OSD, only if they are taxed under the graduated rates.
d. Domestic Corporations, resident Foreign Corporations, and Partnership can claim ID or OSD.
Summary of Allowable Deductions (AFTER TRAIN)

Deduction Individuals Estates Trust Corps. Partnership
EE Self-employed
taxed under
graduated rates
1. ID and OSD :) :) :) :) :)
2. Income
distributed to :) :)
heirs/beneficiarie
s
Optional Standard Deduction (OSD)

OSD is the deduction which can be taken in lieu of Itemized Deduction (both ordinary and special IDs)
Who may claim the OSD?

1. For Individuals:
a. Citizens
b. Resident aliens Who compute their income tax under the graduated rates
c. Estates and trusts
Amount of OSD = 40% (Gross Sales, net of returns, allowances and discount(accrual basis) + 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 FTs)
For individuals, OSD is in lieu of GOCC (+COS)+ the Itemized Deductions
2. Corporation: Only domestic corporation and Subject to 30% of net taxable income
resident foreign corporation
Election of the OSD

- Made in the 1st Quarter Return, Failure by taxpayer to indicate OSD election in the 1st Quarterly Return
means that the taxpayer is claiming IDs;
- When made, it is irrevocable for the entire year;
- Failure to file the 1st Quarterly Return is equivalent to availing IDs for the year.
GI = Gross Sales - Sales Returns - Sales Allowances - Discounts - COGS
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?

1. Domestic corporations including partnership and GOCCs
2. Resident Foreign Corporation
3. Individuals engaged in trade or business, profession
4. Estate and Trust
Items of IDs: Business Expenses Depletion of oil and gas wells

Interest Expense Charitable and other contributions
Deductible Taxes Research and development expenses
Losses Pension trust contributions
Bad Debts
Depreciation
I. ORDINARY ITEMIZED DEDUCTIONS(under the Tax Code)
A. Business Expenses
Requisites for deductibility:

1. Ordinary and necessary for the business;
2. Incurred or paid during the taxable year;
3. Connected with the trade, profession, or business of the taxpayer;
4. Reasonable expenses of the business;
5. Substantiated by official receipts/records;
6. 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 citizen, resident aliens, NRAETBs, and RFCs
constitute expenses paid or incurred in carrying out its business in the Philippines.
1) Compensation expenses(of employer) for personal services actually rendered:

a. Includes salaries and other forms of compensation, including bonuses, and Grossed-up monetary
value of fringe benefits subject to FT.
b. Includes management and labor expenses, commissions and pension payments.
c. Includes compensation for injuries paid by the employer less any insurance proceeds.
d. Includes premiums on life insurance of the employee where the beneficiary is not the employer, but
the employee.
e. Includes salaries paid after death of the employee, but does not include donations for coffin and
wake expenses.
Under RR 6-2018- a deduction shall be allowed even if not withholding tax was made if the withholding tax+ surcharges are paid
at the time of the audit investigation or reconsideration/reinvestigation .
2) Travel Expenses:
- Includes transportation expenses, meals and lodging
Additional requisites of deductibility:

- Must be incurred while away from home(tax home). Tax home refers to the place of work, business or
employment.
3) Entertainment, Amusement, and Recreation Expense(EAR);

- Expenses in entertaining or meeting with guest, or clients(called representation expenses)
- Includes depreciation or rental expenses relating to entertainment facilities.
Subject to the following ceilings:

a. For taxpayers engaged in the sale of goods and properties: 1/2 of 1% of net sales;
b. For taxpayers engaged in the sale of services/leasing or properties: 1% of net revenues
4) Materials and supply actually consumed in business;
5) Maintenance and repairs which do not add to the value or the value of the property nor appreciably
prolong its life;
6) Rental expense (of the lessee) of property used in business;
Notes:
a. Advance or prepaid rentals are not allowed to be deducted in year of payment. Instead,
advance rentals shall be appointed over the term of the lease.
b. Taxes and other obligations of the lessor which are paid by the lessee, are allowed as
deductions;
c. Depreciation of leasehold improvement is available as deduction to the lessee.
7) Advertisement and other selling expenses;
8) Operating expenses of transportation equipment used in trade, profession, or business;
9) Insurance premiums against fire, storm, theft, accident or other similar losses in the trade or
business;
10) Miscellaneous expenses.
a. Amortization of pre-operating expenses, which are treated as deferred expenses, for not more
than 60 months;
b. Costs of suits are allowed as deductions;
c. Judgements against the taxpayer less any amount compensated for by insurance or otherwise;
d. Amortization of the discount upon issuance of a corporation’s bonds;
e. Loss upon a corporation’s retirement of its own bonds.
11) Special expense Allowed to Private Educational Institutions Under Sec. 27 (B)
Capital outlays for expenses of school facilities can either be:
a. Expensed immediately; or
b. Capitalized and depreciated
B. INTEREST EXPENSE
1. Requisites:
a. Must be connected with the trade or business of the taxpayer;
Note: interest on home mortgage is not allowed as deduction.
b. There must be liability to pay interest. The obligation to pay the interest must be stipulated
in writing and must be legally due.
c. Must be paid or accrued within the taxable year.
d. Interest expense must be the obligation of the taxpayer.
e. Interest payment must not be between related taxpayers described in Sec. 36(B) of IRC.
2. Reduction of Allowable Deduction for Interest Expense by:
33% of interest income subject to FT beginning January 1, 2009.
Exceptions: Where Interest Expense is Deductible in Full

a. If taxpayer has no interest income subject to FT;
b. Interest on all unpaid business-related taxes;
c. Interest payment of an occupant of a socialized housing project incurred for the construction
or purchase of the house.
3. Optional Treatment of Interest Incurred to Acquire Property Used in Trade or Business

a. Immediately expensed; or
b. Capitalized as part of the cost of the property.
4. Non-Deductible Interest (Sec. 34 (B)(2))
a. Interest paid in advance (thru discounts) by cash-basis taxpayer. The interest expense
is not allowed to be deducted in the year the cash-basis taxpayer takes out the loan.
The interest expense will be deducted only in the year the debt is paid.
b. Interest paid between members of a Family or Related Taxpayers under Section 36(B);
1. Between the taxpayer and his brothers/sisters, spouse, ancestors, and lineal
descendants
2. Between a corporation and an individual who owns, directly or indirectly, more
than 50% in value of the outstanding stock of such corporation (except in cases
of distribution in corporate liquidation)
3. Between two corporations where more than 505 in value of the outstanding
capital stock of each corporation is owned, directly and indirectly, by the same
individual(except in cases of distributions in corporate liquidation);
4. Between a grantor and fiduciary(trustee)of a trust
5. Between the fiduciaries of 2 trusts having the same grantor;
6. Between the fiduciary and a beneficiary of a trust.
c. If debt is incurred to finance petroleum exploration
d. Interest expense attributable to income without the Philippines of an alien or foreign
individuals
e. Interest on preferred stock which is actually a dividend;
f. Interest on debt incurred to purchase a tax-exempt security;
g. Interest which is not stipulated in writing.
C. DEDUCTIBLE TAXES
Requisites:
1. Paid or incurred within the taxable year;
2. Must be connected with the profession, trade, or business of the taxpayer; and
3. Is directly imposed on the taxpayer.
Examples of deductible taxes: import duties, business taxes(like percentage tax); local business taxes;
community tax; occupation tax; privilege and license taxes; excise taxes;DST; automobile registration fees;
real property tax; fringe benefits tax(FBT)
Examples of Non-Deductible taxes: Income tax; foreign income tax if claimed as a tax credit; estate tax;
donor’s tax; special assessment; VAT; final taxes; stock transaction tax; capital gains tax.
Notes:
a. VAT is non-deductible except input VAT allocated to exempt sales (is deductible)
b. Fines and penalties imposed due to late payment of tax are not deductible. But interest imposed
due to the same is deductible.
c. Tax benefit rule applies to refund of deductible taxes.
D. LOSSES
ORDINARY LOSSES
1. Casualty Losses due to mishap, accident, fortuitous event, robbery, theft, embezzlement or
property used in the trade, profession or business of the taxpayer.
Requisites:
a. Must involve ordinary properties;
b. Actually sustained;
c. Not claimed as a deduction for estate tax purposes;
d. Not compensated for by insurance or by other forms of indemnity;
e. Must be reported to the BIR within 45 days from the date of loss;
If loss is total, the deductible amount is the book value of the asset less any amount of insurance
proceeds or compensation received.
If losses is partial, the deductible amount is the replacement cost or book value of the asset,
whichever is lower. If replacement cost is greater than the book value, the excess shall be
capitalized and depreciated over the remaining useful life of the property.
2. Business losses - losses incurred in the trade, profession, or business of the taxpayer.
a. Losses from sale of ordinary assets;
b. Partner’s share in the losses of GPP.
3. Net Operating Loss Carry-Over(NOLCO) - excess of allowable deductions (excludes NOLCO

and any item of incentive deduction under special laws that does not involve any cash
outlay) over gross income in a taxable year;
a. Can be availed of by individual taxpayers engaged in trade, business, or a profession,
estate and trusts, domestic and resident foreign corporations subject to the normal income
tax, and special corporations subject to preferential tax rates(hospital corporations,
proprietary educational corporations, and regional operating headquarters of MNCs)
Taxpayers not entitled to NOLCO;

1. OBUs and FCDUs of domestic or foreign banking corporations;
2. PEZA, SMBA, CDA, etc. Registered enterprises with respect to their registered
business;
3. Foreign corporation engaged in international shipping or air carriage business in the
Philippines.
b. No NOLCO id net operating loss was incurred in a year during which taxpayer was exempt
from income tax.
EX: Corporation enjoying income tax holiday incentives from the BOI or PEZA are not
entitled to NOLCO’s
A loss in one line of business which is tax-exempt is not permitted as a deduction in

another line of business which is taxable.
EX: Foreign corporations are allowed only losses sustained in business in the
Philippines or losses of property within the Philippines because foreign corporations are
taxable only on income within the Philippines.
c. Net operating loss can be carried over and deducted from gross income for the next 3
consecutive taxable years.
d. NOLCO shall be allowed only if there has been no substantial change in the ownership of
the business.
“No substantial change” means that less than or equal to 75% value of the outstanding
shares or less than or equal of the paid-up capital of a corporation, is held by or on behalf
of the same person.
e. For mines, other than oil or gas wells, NOL incurred without the benefit of incentives
provided under the Omnibus Investment Code, in any of the first 10 years of operations, can
be carried over as deductions for the next 5 years following the year of loss.
The net operating loss of a Registered Tourism Enterprise(registered with the tourism
infrastructure and enterprise zone authority but taxed under the regular rates) fro any
taxable year maybe carried over as a deduction from gross income for the next 6
consecutive years immediately following the year of loss.
II. SPECIAL LOSSES:

a. Loss of income which was previously reported under the accrual method.
b. Wagering Loss - deductible only to the extent of gains and winnings.

Note: Cost of Lotto or Sweepstakes ticket will not be deductible from lotto or sweepstakes winnings if such
winnings are exempt from tax (not more than 10,000 if won by a citizen or RA or regardless of
amount if won by a NRAETB)
c. Loss due to the voluntary removal of old buildings or old machinery
However, No deduction: Where a taxpayer buys land on which structures are erected, and then such
taxpayer proceeds to remove the structures. It is presumed that the price of the land already
includes the cost of such removal.
d. Loss of Useful Value - loss of usefulness of an asset or property used in business due to changes in
business conditions. Loss must be charged off the books.
in c and d
Amount of loss = Acquisition Cost - Accumulated Depreciation - Salvage Value
e. Securities, shares of stock (classified as ordinary asset) becoming worthless

- becoming worthless means value is close to zero; Mere shrinkage in value was not deductible.
- Amount of Loss = cost or basis of the shares of stock
Note: if shares of stock is held as a capital asset, and have become worthless during the taxable year,
such loss shall be treated as capital losses which can be deducted only against “ other capital
gains” in the ITR.
f. Abandonment losses in Petroleum Operations

when petroleum operations are abandoned, all accumulated exploration and development expenditures, as
well as unamortized costs and undepreciated costs of equipment can be deducted;
g. Losses From Sale of Shares of stock where the seller is a dealer in securities
NON- DEDUCTIBLE LOSSES

a. Exchanges solely in kind pursuant to mergers/ consolidations
b. Losses from sales/exchanges between related taxpayers
c. Losses from wash sales where the seller is not a dealer in securities.
E. BAD DEBTS
REQUISITES:
a. There must be a valid and subsisting debt owed the taxpayers;
b. The debt must be connected with the trade, profession, or business 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 Tax Benefit Rule.
The recovery of the bad debt is included in the gross in the gross income if its deduction from the
previous year resulted in an income tax benefit to the taxpayer(I.e. a decrease in tax).
Non- deductible Debts:

a. Bad debts not connected in trade, profession or business of the taxpayer;
b. Bad debts between related parties;
c. When mortgage is foreclosed and the collateral is bought by the mortgagee in the foreclosure
share, the difference between the amount of the loan and the purchase price of the
collateral is not allowed as a bad debt deduction. Any loss is deferred until the property is
eventually sold by the mortgagee.
Wash sale is the sale of security if, within a period of 30 days before the date of sale and ending 30 days after such sale, the
taxpayer purchased the same identical shares.
F. DEPRECIATION/ DEPLETION
- Gradual decrease in the useful value of an asset/property from wear or tear, or obsolescence
- Also includes amortization of intangible assets (patents, copyrights,etc)
-Limited to the cost or amount invested in the asset/property
-Depletion(for oil and gas wells) refers to the exhaustion of natural resources
Requisites:
1. Asset must be use in trade, profession, or business of the taxpayer;
2. Asset has limited useful life;
3. Allowance for depreciation must be reasonable;
4. Allowance for depreciation must be charged off during the taxable year.
Methods of Depreciation Allowed Under Section 34(F)(1)

1. Straight line method;
2. Declining balance method;
3. Sum of the years digits method;
4. Units of production/hours of use method;
5. Any reasonable method of measuring obsolescence approved by the Secretary of Finance.
Depreciation in petroleum operations

Properties used directly in the production of petroleum shall be depreciated over 10 years of such
shorter life as may be permitted by the CIR.
Properties not directly used in the production of petroleum (such as cars, office equipment) shall be
depreciated over 5 years
Favorable depreciation rate for mining operations

If the property used in mining has an expected life of more than 10 years, the cost can be
depreciated over any number of years between 5 years and the expected life of the asset.
If the property has an expected life of not more than 10 years, the cost shall be depreciated at the
normal rate of depreciation.
Irrevocable election to deduct exploration and development expenditures in mining operations

Provided, the total amount deductible for exploration and development expenditures shall not
exceed 25% of the net income from mining operations computed without the benefit of any tax
under existing laws.
The actual exploration and development expenditures minus 25% of the net income from mining
shall be carried forward to the succeeding years until fully deducted.
Intangible exploration and drilling costs(for both mines and wells)

After production in commercial quantities has commenced, certain intangible exploration and
development drilling costs:
a. Shall be deductible in the year incurred if such expenditures are incurred for non-producing wells
and/or mines, or
b. Shall be deductible in full in the year paid or incurred or, at the election of the taxpayer, may be
capitalized and amortized if such expenditures incurred are for producing wells and or mines in the
same contract area.
Depreciation/Depletion by NRAETB and RFCs

- Only if the property/mine/well is located within the Philippines.
No Depreciation for Certain Transportation Vehicles

No depreciation shall be allowed for yachts, airplanes and or aircraft, and land vehicles which have
a value of more than 2,400,000. However, this provision does not apply if the taxpayer’s main line
of business is transportation or the lease of transport equipment, and the vehicles purchased are
used in said operations.
Maintenance expenses of non-depreciable vehicles are not allowed as deductions.
G. PENSION TRUST CONTRIBUTIONS

- To provide reasonable pensions to employees
Payment Deductibility
Present service cost contributions - paid to cover In FULL
current pension liabilities accruing during the taxable
year.
Past service cost contributions - contributions in excess Prorated over 10 years beginning with the year in which
of the present service cost contribution in a taxable the payment is made.
year
H. 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 the 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 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:
Exs. State colleges and universities, CCP; National Commission for Culture and the Arts;
Integrated Bar of the Philippines; IRRI; Philippine Red Cross; Any child-caring or child placing
institution accredited by the DSWD.
4. Donations to accredited NGOs
NGO refers to a non-profit corporation:
a. Organized and operated exclusively for scientific, research, educational, character-building,
youth and sports development, health and social welfare, cultural or charitable
purposes;
b. No part of the net income of such NGO inures to the benefit of a private individual
c. Uses the donations not later than the 15th day of the 3rd month after the close of its taxable
year.
d. Its administrative expenses is less than or equal to 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 purposes, 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 NGOs.
Limit of Contributions
Corporations: 5%
Of taxable income derived from trade, profession, or

business without the benefit of the charitable
deductions (both subject and not subject to the limit)
Individual: 10%
The BIR has ruled that the donations to accredited NGOs must also be for PRIORITY ACTIVITIES for the same to be fully
deductible, and not subject to limit.
Note: Taxable income from trade, profession or business

does not include non-business income(ex. Net capital
gains derived from assets not used in business)
I. RESEARCH AND DEVELOPMENT EXPENDITURES
- Must be connected with the trade, business or profession of the taxpayer.
Options of taxpayer:
1. Deduct as ordinary and necessary expenses. However, the taxpayer cannot use this option if the
expenditure is:
a. For the acquisition of land or improvement for property which is subject to depreciation or
depletion; or
b. For the purpose of ascertaining the existence of location, extent, quality of a deposit ore or
other mineral, such as oil and gas.
Or
2. Treat as deferred expense and amortize over a period less than or equal to 60 months beginning in
the month that benefits are first realized from the expenditure.
J. FOREIGN INCOME TXES PAID AND TAKEN AS DEDUCTIONS BY RESIDENT CITIZEN OR DOMESTIC
CORPORATIONS
III. SPECIAL ITEMIZED DEDUCTIONS

K. SPECIAL DEDUCTIONS FROM INSURANCE COMPANIES
1. The net additions, if any, required by law to be made within the year to reserve funds. Provided
“released reserves” are treated as income in the year of release.
2. The sums paid within the year on policy and annuity contracts including matured endowments,
payments on installment policies and surrender values actually paid.
L. SPECIAL DEDUCTION OF REAL ESTATE INVESTMENT TRUSTS(REITs)
Dividends paid by a REIT shall be deductible.
Requirements:
1. The REITs must be a corporation whose shares are traded in the stock exchange.
2. The REIT must maintain a minimum public ownership of 40% for its first 2 years, and 67% on or before 3rd
year and thereafter
3. The REIT must distribute at least 90% of its distributable income.
M. DEDUCTIONS OF ESTABLISHMENTS GRANTING SALES DISCOUNTS TO PERSONS WITH

DISABILITY (PWDs)
- Such establishments shall be entitled to deduct the said sales discount from their gross income for income
tax purposes, subject to the following conditions:
1. The total amount of the claim tax deduction, net of vat if applicable, shall be included in gross sales
receipts;
2. The sales discount shall be deducted from gross income after deducting the cost of goods sold or the cost
of services;
3. Only the actual amount of sales discount granted or a sales discount not exceeding 20% of the gross
selling price or gross receipts can be deducted from gross income, Net of VAT.
4. Only that portion of the gross sales exclusively used, consumed, or enjoyed by the persons with disability
shall be eligible for the deductible sales discounts;
5. PWDs shall be entitled to at least a 20% discounts on payments for the following sales of goods and
services for their exclusive use and enjoyment or availment:
a. On the fees or charges relative to the utilization of all services in hotels and similar lodging
establishments, restaurants, and recreation centers;
b. On admission fees charges on theaters, cinema houses, concert halls, circuses, carnivals, and
other similar places of culture, leisure and amusement;
c. On the purchase of medicines in all drugstores;
d. On medical and dental services including diagnostic and laboratory fees as such, but not limited
to x-rays, computerized tomography scans and blood tests, and professional fees for
attending doctors in all government and private hospitals and medical facilities subject to
guidelines to be issued by the DOH, in coordination with the PHIC.
e. On fares on domestic and sea travels except promotional fees;
f. On actual fares for land transportation travel such as, but not limited to 1. public utility buses or
jeepneys; 2. taxis; 3. Asian Utility Vehicles; 4. Shuttle services; 5. Public railways including
the Light Rail Transit, Metro Rail transit; and Philippine National Railways; 6. Transportation
Network Vehicle services such as Grab, Uber, and the like, and 7. such other similar infrastructure
that will be constructed, established, and operated by the public and private entity;
g. On funeral and burial services for the death of PWD.

PWD must be a Filipino or dual citizen.
In cases where PWD is also a senior citizen entitled for 20% discount under a valid Senior Citizen
ID, the PWD shall use either his PWD ID card or his Senior Citizen ID to avail of the 20% discount.
Thus, a PWD who is also a senior citizen can only claim one 20% discount on a particular sales
transaction.
N. TAX INCENTIVES FOR EMPLOYERS OF DISABLED PERSONS
1. Private entities that employs disabled persons either as a regular employee, apprentice, or
learner shall be entitled to an additional deduction from gross income, equivalent to 25% of the
total amount paid as salaries and wages to disabled person;
2. Private entities that improved or modify their physical facilities in order to provide reasonable
accommodation for disabled persons shall be entitled to an additional deduction from their net
taxable income, equivalent to 50% of the direct costs of the improvement or modifications.
Note: the above provisions does not apply to improvements or modifications of facilities required
under “ An Act to Enhance The Mobility of Disabled Persons By requiring Certain Buildings,
Institutions, Establishments, and Public Utilities to Install Facilities and Other Devices.”
O. TAX INCENTIVES FOR ESTABLISHMENTS GRANTING SALES DISCOUNTS TO SENIOR CITIZENS
All establishments supplying any of the goods or services below may claim the discounts granted to Senior
Citizens as a tax deductions.
a. The following sales to Senior Citizens shall be given a Senior Citizens’ discount of 20%: 1.
Medicines, medical supplies, and medical equipment; 2. professional fees of physicians and
licensed professional health workers; 3. medical and dental diagnostic and laboratory services; 4.
actual fares for land transportation in public utility buses, jeepneys, taxis, asian utility vehicles.
LRT, MRT, PNR(except toll fees); 5, actual fares for domestic air transport and sea vessels; 6. services
and other amenities in hotels and similar lodging establishments, restaurants and recreation
centers; 7. admission to theaters, concert halls, services and similar places of culture, leisure and
entertainment; and 8. funeral and burial services.
Public utilities supplying water and electricity to senior citizens shall grant 5% discount on their
monthly bill.
Public utilities supplying water, electricity or telephone services to Senior Citizen Centers and care
or group homes run by the government or non-profit organization shall grant to 50% discount.
b. The total amount of the claimed tax deduction, net of VAT, is applicable, shall be included in the
establishment’s gross sales receipts fro tax purposes. Thus, means that for the discount to be
allowed as a deduction, the amount of sales that must be reported for tax purposes by the
establishment is the undiscounted selling price.
c. The income statement of the seller must reflect the discount not as reduction of sales to arrive at
net sales, but as a deduction from its gross income (sales less cots of sales).
d. Only that portion of the gross sales exclusively used, consumed, or enjoyed by the Senior
Citizen shall be eligible for the deductible sales discounts.
The following sales are not subject to the Senior Citizen discount: Bulk orders; set orders for
children; “pasalubong” food items; non-consumable items sold in restaurants; cigars and
cigarettes, delivery fees which are bailed separately.
e. The actual amount of the discount granted or the statutory rate based on the gross selling prize
(the 20% discount, the 5% discount on water and electric consumption by Senior Citizens, or the
50% discount on electricity, water and telephone consumption by a Senior Citizens Center) can be
deducted from gross income.
Note: Senior Citizens like PWDs shall also follow the “No Double Discount Rule” in availing of
discounts.
P. ADDITIONAL DEDUCTION FROM GROSS INCOME OF PRIVARE ESTABLISHMENTS FOR

COMPENSATION PAID TO SENIOR CITIZEN
Private establishments employing Senior Citizen shall be entitled to an additional deduction from their gross
income equivalent to 15% of the total amount paid as salaries and wages to Senior Senior Citizen subject to
the following conditions:
1. The employment shall have to continue for a period of at least 6 months;
2. The annual taxable income of the Senior Citizen does not exceed the poverty level as may be determined
by the National and Economic Development Authority (NtEDA) thru the National Statistical Coordinating
Board (NSCB)
Q. TAX INCENTIVES FOR EXTABLISHMENTS AND INSTITUTIONS WITH ROOMING-IN BREASFEEDING
PRACTICES
Expenses incurred by a private health or non-health facility, establishment of institution in:

a. The provision for facilities fro rooming-in and breastfeeding, including equipment, facilities and
supplies for breastmilk collection, storage, and utilization, or
b. The provision for lactation stations including the necessary equipment and facilities such as
lavatory nearby, refrigeration or appropriate cooling facilities fro strong expresses breastmilk,
electrical outlets for breast pumps, a small table, comfortable seats, and other items,
shall be deductible expenses for income tax purposes up to twice the actual amount incurred. Provided,
such facilities, establishments, or institutions shall secure a “Working Mother-Baby-Friendly Certificate” from
DOH to be filed with the BIR.
R. TAX INCENTIVES FOR LAWYERS OR GPPs RENDING LEGAL SERVICES
A lawyer or professional partnership rendering actual free legal services shall be entitled to an allowable
deduction from gross income equivalent to the lower of a) the amount that could have been collected for
actual free legal services, or b) 10% of the gross income derived from the provision of legal services.
1. The actual free legal services mentioned above shall not include minimum 60 hour mandatory legal
aid services rendered to indigent litigants as required under the Rule on Mandatory Legal Aid Service
for Practicing Lawyers, Bar Matter, issued by the Supreme Court, and
2. The lawyer of professional partnership shall secure a certification from Legal Attorney’s Office, the
Department of Justice, or any accredited association of the Supreme Court, indicating that the
aforementioned agencies cannot provide the legal services to be provided by the legal council.
S. TAX INCENTIVES FOR ESTABLISHMENTS PARTICIPATING IN THE DUAL TRAINING SYSTEM

UNDER THE REPUBLIC ACT N0. 7686(“DUAL TRAINING SYSTEM ACT OF 1994”)
The participating agricultural, industrial or business establishment shall be allowed to deduct form its taxable
income the amount of 50% of the system expenses paid to the accredited educational institutions for its
trainees. Provided, that such expense shall not exceed to 5% of the establishments direct labor expenses,
but in no case shall it exceed 25,000,000 a year.
T. TAX INCENTIVES FOR ENTERPRISES ADOPTING PRODUCTIVITY INCENTIVE PROGRAMS UNDER

REPUBLIC ACT NO. 6971 (“AN ACT TO ENCOURAGE PRODUCTIVITY AND MAINTAIN INDUSTRIAL
PEACE BT PROVIDING INCENTIVES TO BOTH LABOR AND CPAITAL”)
Tax Incentives in Adopting a Productivity Incentives Programs
a. A business enterprise which adopts a productivity incentives program, duly and mutually agreed
upon by the parties by the labor-management committee, shall be granted a special deduction from
gross income equivalent to 50% of the total productivity bonuses given to employees under the
program under the program over and above the total allowable ordinary and necessary business
deduction for said bonuses.
b. Grants for managing training and social studies gives to rank-and-file employee pursuant to a
program prepared by the labor-management committee of the enterprise for the development of
skills identified as necessary by the appropriate government agencies shall be entitle to business
enterprise to special deduction from gross income equivalent to 50% of the total grants
over and above the allowable ordinary and necessary business deductions for said grants.
U. DONATIONS TO PUBLIC SCHOOLS
Under R.A. 8525 and Rev. Reg. No. 10-2003, the amount of assistance, contribution, or donation to public
schools(elementary, secondary, or tertiary) made by private entities, that were actually, directly and
exclusively incurred for the program in team up with the Department of Education, Commission on Higher
Education, or with TESDA, may be deducted from gross income.
If the program is a priority project, the actual amount of the donation, contribution, or assistance plus 50% of
said donation shall be available for deduction.
Note: if the program is not a priority project, the lower of 5% of the net income of the proportion (10% if an
individual) before charitable contributions, or the actual contribution, plus 50% of said amount shall be
available for deduction.
V. QULAIFIED EMPLOYER’S CONTRIBUTION TO EMPLOYEE’S PERSONAL EQUITY AND RETIREMENT

ACCOUNT(PERA)
An employer can claim as deduction the actual amount of its contribution that would complete the maximum
allowable PERA contribution of an employee.
The maximum allowable PERA contribution shall not exceed 200,000 per year for an overseas Filipino, or
100,000 per year for non-Overseas Filipino.
For example, an Overseas Filipino employee made PERA contributions amounting to 110,000 for the year.
His employer decides to make matching contribution of 110,000 for the same period. In such a case, the
employer can only claim 90,000 as deduction.
W. TAKING INCENTIVES GRANTED TO REGISTERED TOURISM ENTERPRISES (“RTEs”) IN TOURISM

ENTERPRISE ZONES (“TEZs”) UNDER REPUBLIC ACT NO. 9593 (“TOURISM ACT OF 2009”)
Tourism Enterprise registered with the Tourism Infrastructure and Enterprise Zone (“TIEZA”) and which within
the Tourism Enterprise Zone (“TEZs”) shall be entitled to a tax deduction pf up to 50% cost of:
a. Environmental protection activities in the surrounding areas of the enterprise of TEZ as certified
by the Department of Environment and Natural Resources(“DENR”).
b. Cultural heritage presentation activities in the surrounding areas of the enterprise or TEZ,
conducted pursuant RA No. 10066, a certified by the appropriate cultural agency and the
Local Culture and Arts Council in the Local Government unit where the RTI is located, and
c. Sustainable livelihood programs for local companies in the surrounding areas of the enterprise or
the TEZ which may be chosen from the list of activities identified by the National Anti-Poverty
Commission (“NAPC”)
X. TAX INCENTIVES GRANTED TO QULAIFIED JEWELRY ENTERPRISE(“QJEs”) UNDER R.A. NO.

8502(“JEWELRY INDUSTRY DEVELOPMENT ACT OF 1998”)
A Qualified Jewelry Enterprise is an natural or juridical entity, either a single proprietorship, cooperative,
partnership, or corporation, organized and existing under Philippine laws which is issued a Board of
Investments accreditation under RA NO. 8502 and its Implementing Rules and Regulations
A QJE providing training to its employees may avail of the additional deduction equivalent to fifty
percent(50%) of the expenses incurred in the training schemes for the purpose of computing the
net taxable income.
Y. TAX DEDUCTION FOR HOSPITALS OR MEDICAL CLINICS UNDER RA NO. 10932 (AN ACT
STRENTHENING THE ANTI-HOSPITAL DEPOSIT LAW)
Republic Act . NO. 10932 amended Section 1 of B.P. No. 702 otherwise known as “An Act Prohibiting
The Demand of Deposits or Advance Payments for the Confinement or Treatment of Patients in Hospitals
and Medical Clinics in Certain Cases”.
Section 7 of B.P. No. 702 now provides that Philhealth shall reimburse the cost of basic emergency care
and transportation services incurred by the hospital or medical clinic for the emergency services given to
poor and indigent patients.
Tax Deduction
Under Section 8 of the same amended law, expenses incurred by the hospital or medical clinic in
providing basic emergency care in poor and indigent patients which are not reimbursed by the Philhealth,
shall be deductible.
Z. DEDUCTION OF PRIVATE FILIPINO SEED PRODUCER UNDER RA NO. 7308 (the “Seed Industry Act
Development Act of 1992”)
Private Filipino seed products shall enjoy a 200% deduction for expenses on seed research, development
and extension for the 5 years of operations.
AA. Deduction of Business Enterprise that Generate and Sustain Green Jobs
Business enterprise which generate and sustain green jobs as certified by the climate change commission shall enjoy
a special deduction equivalent to 50% of the total expenses for skills, training and research development expenses
which is over and above the allowable ordinary and necessary business deduction for said expenses under the Tax
Code.
NON-DEDUCTIBLE ITEMS
1. Personal, Living and Family Expenses;
2. Expenditure 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 the life of the employee; and
b. The beneficiary is the employer;
Note: if the employee is the beneficiary, the premium paid by the employer are deductible and are fringe
benefits to the employee.
4. Losses from sale, exchange of property between related parties
5. Interest expense between related parties under Sec 36(B)
6. Bad debts between related parties;
7. Fines and penalties due to late payment of tax.
Green jobs refer to employment that contributes to preserving or restoring the quality of the environment, be it in the agriculture,
industry or services sector. Specially, but not exclusively, these include jobs that help to protect ecosystem and biodiversity,
reduce energy, materials and water consumption through high efficiency strategies, decarbonize the economy, and minimize or
altogether avoid generation of all forms of waste and pollution.
FOREIGN INCOME TAX CREDIT

Amount of Tax Credit
The tax credit allowed is equivalent to the amount of income tax paid or incurred to any foreign country during the
taxable year but not to exceed the limitations presented by law.
Limitations of Tax Credit
A. 1st Limitation
Taxable Income (per foreign country) X Philippine Income Tax = Limit

Total Taxable Income
B. 2nd Limitation
Taxable Income (all foreign country)X Philippine Income Tax = Limit

Total Taxable Income
Tax credit is the amount of income tax paid or incurred to the foreign country but not to exceed to the limit. In other
words, tax credit is in the income tax paid to the foreign country or the limit, whichever is lower.
Rules in the a application of Limits Formula

1. If there is one foreign country involved, use only formula for the first limitation
2. If there are two or more foreign country involved, use both formulas.
3. In case both formulas are used, two tax credit will be computed. One based on the first limit and the other based
on the second limit.
The final tax credit is whichever is the lower between two amounts.
To be written at the final

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Prelims FBT

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Prelims FBT

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College of Accountancy and Business Management

First Semester, A.Y. 2020-2021

2. Explain items that shall be exempt in fringe benefits tax

3. Computation of fringe benefits and its tax

5. Explain “gross-up rate”

Fringe Benefit Subject to Fringe Benefit Tax (“FBT”)

General Rules in the Valuation of Fringe Benefits

b. If the fringe benefit is granted or furnished by the employer in property or ownership is

Tax rate = Final Tax of 35%*1

Tax Base = Gross-up Monetary Value (GUMV) of the Fringe Benefit

GUMV = Monetary Value (MV) of the fringe benefit + 65% *2

*1 before January 1, 2018, FBT rate is 32%

Filing of Return and Payment of Tax

Taxable FBs and Specific Valuation Guidelines

Monetary value of the benefit = 50% of the value of the benefit

Annual Value of the benefit = 5% of FMV of the land and improvements as

Monetary value of the benefit = 50% of the value of the benefit

Annual value of the benefit = 5% of the acquisition cost exclusive of interest

Monetary value of the benefit = 50% of the value of the benefit

Value of the benefit = employer’s acquisition cost or FMV, whichever is

Monetary Value = entire value of the benefit

Monetary value of the benefit = entire value of the benefit

Notes: The above expenses shall not be taxable provided ---

Value of the benefit = acquisition cost

Monetary value of the benefit = entire value of the benefit

Value of the benefit = amount of cash received by the employee

Monetary value of the benefit = entire value of the benefit

Value of the benefit = amount shouldered by the employer

Monetary value of the benefit = entire value of the benefit

Value of the benefit = acquisition cost (exclusive of interest)

Monetary value of the benefit = entire value value of the benefit

Value of the benefit = acquisition cost of all motor vehicle not

Monetary value of the benefit = 50% of the value of the benefit

Value of the benefit = amount of the rental payments for motor

Monetary value of the benefit = 50% of the value of the benefit

b. The use of yacht, whether owned or maintained or leased by employer shall be

E) Interest on Loans at Less than Market Base

F) Social and Athletic Club Fees

G) Expenses for Foreign Travel

Not subject to FBT- reasonable expenses of the Subject to FBT

H) Holiday and Vacation Expenses

Subject to FBT NOT Subject to FBT

When the assistance is provided through a competitive

Subject to FBT NOT Subject to FBT

b. The cost of premiums borne by the employer for the

Tax Accounting for FB Expense and Fringe Tax

Fringe Benefit Expense 35,000

Other Fringe Benefits Not Subject to Fringe Benefits Tax

F) “De minimis” Benefits

e. Uniform and clothing allowance not exceeding 6,000 per annum;

g. Laundry allowance of 300 per month (3,600 per year)

2. The annual monetary value must not exceed 10,000; and

k. Benefits received by an employee by virtue of a collective bargaining agreement (“CBA”) and

Taxation of Fringe Benefits of NRANETB

A. Monetized unused vacation leave of 15 days 24,000

Determine the amount of:

2. The following data belong to A Corp. For the year 2018:

The fringe benefit tax due on 2018 is:=86,154

Total amount of fringe benefits 1,000,000

The fringe benefits tax due in 2017 and 2018 are?

Assume 1 dollar = 50 Pesos

1. Explain the different types of income excluded from gross income.

EXCLUSIONS FROM GROSS INCOME