TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
TAXATION 2020
DEDUCTIONS ON THE GROSS INCOME
Deductions from the gross income applies to individuals and corporations engaged
in trade or business; and to individuals in the exercise of profession.
Deductions are amounts allowed by the Tax Code and other special laws to be
deducted against the gross income to arrive at the taxable income for purposes of
computing the income tax liability.
As a rule, if the taxpayer does not within any year deduct his expenses, losses,
interests, taxes or other charges, the taxpayer can no longer deduct them from the
income of any succeeding year.
General Requisites for an item to be Deductible (ON LAWS)
1. Ordinary in the conduct of trade/business or profession
2. Necessary in the conduct of trade/business or profession
3. Legitimate/Legal in nature
4. Actually paid (cash basis) or incurred (accrual basis)
5. Withholding required was made, if applicable (See RR 11-2018 Sec. 1 and 2)
6. Substantiated or documented by valid documents such as receipts or invoices
Non-deductible Expenses:
a. Personal living and family expenses;
b. Amount paid out of new buildings or for permanent improvements or
betterments made to increase the value of any property or estate;
c. Amount expended in restoring property or in making good exhaustion
thereof for which an allowance is or has been made; or
d. Premiums paid on any life insurance policy covering the life of an officer or
employees, or of any person financially interested in trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
SOURCES: INCOME TAXATION, BANGGAWAN, INCOME TAXATION, BALLADA; CPA REVIEWER IN TAXATION, AMPONGAN, NIRC, Special Laws and RRs
I. Regular Itemized Deductions
A. Business Expenses- expenses in carrying the conduct of trade, business or
exercise of profession. It includes compensation payments and fringe
benefits, travel expenses, utilities, rentals, repair and maintenance, etc.
Special rule for Entertainment, Amusement and Recreation Expenses (EAR) -
deductible, provided it must not exceed ½ % of net sales or 1% of net revenue for
taxpayers engaged in sale of goods or properties, or sale of services, respectively.
B. Interest- shall refer to the payment for the use or forbearance or detention
of money, regardless of the name it is called or denominated. It includes the
amount paid for the borrower’s use of money during the term of the loan,
as well as for his detention of money after the due date for its repayment.
Interests are deductible provided:
a. There must be an indebtedness, must be that of the taxpayer
b. Must be legally due, interest must be stipulated, must be made in writing
c. Interest payment must not be between related taxpayers
d. Must not be incurred to finance petroleum operations
e. Must not be treated as a capital expenditure or capitalized borrowing
cost.
Other considerations for interest:
 If within the taxable year, an individual taxpayer reporting income on the
cash basis incurs indebtedness on which an interest is paid in advance
through discount or otherwise, such interest shall be allowed as a deduction
in the year the indebtedness is paid.
 But if the indebtedness is payable in periodic amortization, the amount of
the principal amortized or paid during the year shall be allowed as
deduction in such taxable year.
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TAXATION 2020
Interest Expense subject to tax arbitrage limit:
 In case the taxpayer earns interest income which had been subjected to
final withholding tax, the interest expense paid or incurred shall be reduced by
an amount equal to a percentage of interest income earned (interest expense
arbitrage limit) computed as follows:
Rate= (Corporate Income Tax rate – Final Tax rate on interest income)
Corporate Income Tax Rate
 Interest expense arbitrage limits is applicable to all taxpayers (including
individuals) subject to regular income tax.
Interest incurred in financing the acquisition of property, used in trade or business
may at the option of the taxpayer, be claimed as:
 Outright deduction from gross income
 Capitalize expenditure claimable through depreciation
Interest on delinquent taxes
 Interest incurred or paid by the taxpayer on all unpaid business-related
taxes shall be fully deductible from gross income and shall not be subjected
to the limitations on deduction.
 Interest on delinquent taxes are presented in the line item as “interest” on
indebtedness and not under “taxes and licenses”.
C. Taxes and Licenses. Deductible taxes on national taxes includes percentage
taxes, excise taxes after capitalizing and selling the excisable articles,
documentary stamp tax, fringe benefits tax. Deductible taxes on local
includes taxes fees and charges (business permit), professional tax,
community taxes, real property tax, motor vehicle registrations, etc.
 Taxes do not include surcharges and compromise penalties (not deductible)
SOURCES: INCOME TAXATION, BANGGAWAN, INCOME TAXATION, BALLADA; CPA REVIEWER IN TAXATION, AMPONGAN, NIRC, Special Laws and RRs
 Tax paid on foreign countries can be claimed as:
a. Tax credit, deductible against tax due for resident citizens and domestic
corporations subject to limitations.
b. A deduction against the gross income.
D. Losses- taxpayer shall submit a declaration of loss sustained from casualty,
robbery, theft of embezzlement during the taxable within 45 days from the
date of discovery of such loss.
Losses claimed a deduction for estate tax purposes are not deductible from the
gross income. Losses suffered by related parties are not deductible.
Losses includes loss on sales, exchange and other disposition of ordinary assets.
Deductible Fire Loss- If not totally destroyed is the lower between the cost to
restore the property back to its normal operating condition and the book value less
the salvage value or recovery from insurance.
Shrinkage Loss in the Value of Stock- allowed to be deducted only if the stocks
suffered loss upon its disposal, except if proven that stocks are worthless (i.e, upon
bankruptcy).
Loss from Wash Sales- no deductions are allowed for the loss on wash sales, except
if it is made by a dealer in stock or securities and with respect to a transaction made
in the ordinary course of business.
Wagering Losses- these are transactions where outcome is dependent upon chance.
Losses from wagering transactions shall be allowed only to the extent of gains from
such transactions.
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TAXATION 2020
Abandonment Loss- in case of abandoned producing well, the unamortized cost
thereof as well as the undepreciated costs of equipment directly used therein shall
be allowed as a deduction in such year of abandonment. However if such
abandoned well is reentered and production is resumed, the said cost shall be
included as part of gross income in the year of resumption.
Net Operating Loss Carry-Over (NOLCO) - is the excess of allowable deductions over
gross income that can be carried over as a deduction from gross income for the next
three consecutive taxable years immediately following the year of such loss.
For the years 2020 and 2021, NOLCO can be carried over for five consecutive
taxable years immediately following the year of such loss (Bayanihan to Recover as
One Law)
E. Bad Debts- are deductible provided it is:
a. Valid and subsisting
b. Debt is ascertained to be worthless and uncollectible
c. Charged off (written off) during the year
d. Not between family members or related parties
Tax benefit rule- bad debts previously written off allowed as deduction shall be
included in the gross income in the year it was recovered.
F. Depreciation- portion of the cost of the property is allocated or charged as
expense for a specific period. Acceptable methods includes straight line,
declining balance method, Sum-of-the-years digit method and any other
acceptable method as recommended by the Commissioner.
Rules on Special Vehicles
 Only one vehicle for land transport is allowed for an official or employee
and the value of which shall not exceed P2, 400, 000.
SOURCES: INCOME TAXATION, BANGGAWAN, INCOME TAXATION, BALLADA; CPA REVIEWER IN TAXATION, AMPONGAN, NIRC, Special Laws and RRs
 No depreciation shall be allowed for yachts, helicopters, airplanes or
aircrafts and land vehicle which exceeded the threshold unless the main line
of business is transport operations as ordinary operations. These assets will
be considered as capital assets and not ordinary assets.
Private Educational Institutions which incurs cost for expansion of school facilities
may at its option:
a. Capitalize and claim the annual depreciation as deduction; or
b. Deduct as expenditures entirely during the taxable year.
G. Depletion- allocation of the cost or other basis of a wasting asset over the
period of natural resource is extracted or produced.
 Tangible Development Cost for Petroleum Operations:
i. Properties used in petroleum operations are amortized using
straight-line or double declining balance method using 10 years
useful life or such shorter as maybe permitted by the CIR.
ii. Properties not used in petroleum operations are amortized using
straight line method using 5 years useful life.
 Tangible development cost for Mining Operations:
i. If the expected life of the property used in mining is 10 years or
less, the taxpayer can use the normal rate of depreciation.
ii. If expected life is more than ten years, the property can be
depreciated over any number of years between 5 years and 10
years.
 Intangible exploration and development costs
i. If incurred before commercial production, capitalized as cost of
wasting asset.
ii. Producing wells or mines are either: capitalized and amortized using
cost-depletion method or deducted in the year paid or incurred.
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TAXATION 2020
H. Charitable and Other Contributions
 Contribution deductible in full:
a. Donations to the Philippine Government or to any agencies or political
subdivision, including GOCC, exclusively to finance priority activities in
education, health, youth and sports development, human settlement,
science and culture and in economic development.
b. Donations to certain foreign government institution or international
organizations in compliance with the agreements, treaties entered into by
the Philippine Government or special laws.
c. Donations to accredited NGO for priority activities as enumerated in letter a.
d. Donations fully deductible under special laws.
 Contributions subject to limit:
a. Donations to the Philippine government or political subdivision exclusively
for public purpose not in accordance with priority activities.
b. Donations to non-accredited non-government organizations organized
exclusively for the purpose of: religious, charitable, scientific, youth and
sports development, cultural, educational, rehabilitation of veterans and
social welfare.
A and B above if made within the taxable year shall be allowed limited
deductibility in an amount not in excess of 10% for an individual donor, and
5% for a corporate donor, of the donor’s income derived from trade,
business or profession as computed before the deduction for charitable
contributions.
I. Research and Development- costs and expenses incurred to generate new
knowledge and produce new products or new technologies for product
development.
SOURCES: INCOME TAXATION, BANGGAWAN, INCOME TAXATION, BALLADA; CPA REVIEWER IN TAXATION, AMPONGAN, NIRC, Special Laws and RRs
Methods of Deduction for R&D expenses:
a. Treat as ordinary and necessary expenses- deduction from gross
income in the year paid or incurred.
b. Treat as deferred expenses- deduction ratably distributed over a
period of not less than 60 months when the benefits of research
and development received.
J. Pension Trust
 For defined contribution plan, the deductible expense is simply the
amount of agreed contributions or funding made to the plan.
 For defined benefit plan, contributions for current service cost is fully
deductible, while contributions for past service cost is amortized over a
period of 10 years. Overfunding is not deductible for the current period
but treated as prepaid pension expense deductible for future current
service costs.
II. Special Allowable Itemized Deductions
A. Special deductions under NIRC and special laws
1. Any amount of discount granted to senior citizens under RR 7-2010 and
to PWDs under RR 5-2017 shall be a tax deductible expense on the part of
the company granting such discount.
2. Income distribution from a taxable estate and trust are deductible on the
part of the estate and trust but an item of gross income on the part of the
beneficiary.
3. Transfer to reserve fund and payments to policies and annuity contracts
of insurance companies.
4. Transfers to mandated reserves funds of taxable cooperatives.
5. Dividend distribution of Real Estate Investment Trust.
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B. Deduction incentives under special laws
1. Additional compensation expense for senior citizen employees. (RA 9257)
-additional deduction from gross income equivalent to 15% of the total
amount paid as salaries and wages to senior citizens as long as:
i. Employment shall have to continue for at least 6 months, and
ii. The annual taxable income of the senior citizen does not exceed
the poverty level as determined by the NEDA.
2. Additional compensation expense for persons with disabilities. (RA 9442)
-additional deduction from the gross income equivalent to 25% of the
total amount paid as salaries and wages to disabled persons provided:
i. The entity present proof as certified by the Department of
Labor and Employment that disables persons are employed.
ii. The disabled employee is accredited with the DOLE and DOH as
to his disability, skills and qualifications.
3. Cost of facilities improvements for persons with disability. (RA 7277)
-additional deduction equivalent to 50% of the direct costs of the
improvement or modifications.
4. Additional training expense under Jewelry Industry Development Act. (RA
8525)
-additional deduction equal to 50% of the expenses incurred in training
schemes approved by TESDA provided the business submitted to the
BIR a certified true copy of its Certificate of Accreditation issued by BOI.
5. Additional contribution under the Adopt-a-School Project. (RA 8525)
-additional deduction equivalent to 50% of the contribution of the
adopting entity for the “Adopt a School Program”
SOURCES: INCOME TAXATION, BANGGAWAN, INCOME TAXATION, BALLADA; CPA REVIEWER IN TAXATION, AMPONGAN, NIRC, Special Laws and RRs
6. Additional deduction for compliance to rooming-in and breastfeeding
practices. (RA 7600, as amended by RA 10028)
-the expenses incurred in complying with the rooming-in and breast-
feeding practices shall be deductible up to twice the actual amount.
7. Additional free legal assistance expense (RA 9999)
-allowable deduction equivalent to the amount that could have been
collected for the actual performance of the actual free services
rendered or up to 10% of the gross income derived from the actual
performance of the legal profession whichever is lower. The free legal
assistance is exclusive of the 60 hours mandatory free legal assistance
rendered to indigent clients as mandatory requirement for practicing
lawyers.
8. Additional productivity incentive bonus expense. (RA 6971)
-additional deduction equivalent to 50% of the total productivity
bonuses given to employees under the program.
9. Additional special deduction from the taxable income equivalent to 50%
of the total expense for skills training and research/development
expenses under RA 10771 also known as “Philippine Green Job Act of
2016” .
10. Special deductions allowed under the Bayanihan to Heal as One (RA
11469) and Bayanihan to Recover as One Law (RA 11494)
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III. Optional Standard Deduction (OSD)
For individual taxpayers (resident citizens, non-resident citizens, resident aliens
and taxable estates and trusts only:
 In place of the cost of sales or cost of services; regular itemized deductions,
and special itemized deductions, taxpayers may deduct a standard
deduction in an amount not exceeding:
a. 40% of their gross sales if the individual is under the accrual basis, or
b. 40% gross receipt if the individual is under the cash basis.
 Note that cost of sales or cost of services in case of individual sellers or
goods and services, are not allowed to be deducted for determining the
basis of the OSD.
 Non-operating income are not included in the basis of computing the 40%
OSD for individuals.
For domestic corporations and resident foreign corporations:
 Corporations may elect a 40% OSD of its gross income (income after
deducting cost of sales or cost of services) in lieu of regular itemized and
special itemized deductions.
 The 40% OSD is based on all gross income subject to regular income tax
regardless if operating or non-operating or other income.
 The corporation must signify in the first quarterly income tax return its
intention to elect optional standard deduction as method of deduction,
otherwise, the taxpayer deemed opted to use itemized deductions. Such
election shall be irrevocable for the whole taxable year for which the return
was made.
SOURCES: INCOME TAXATION, BANGGAWAN, INCOME TAXATION, BALLADA; CPA REVIEWER IN TAXATION, AMPONGAN, NIRC, Special Laws and RRs
For all taxpayers claiming for Optional Standard Deductions:
 The taxpayer who is entitled to and claimed for the OSD shall not be
required to submit with his tax return such financial statements otherwise
required under the Tax Code.
 The taxpayer is not relieved from the responsibility of withholding taxes as a
withholding agent of the government on certain income payments made as
required by regulations.
 Individuals and corporations mandated to use itemized deductions are not
allowed to opt for OSD which includes exempt corporations, exempt
individuals and taxpayers subject to special or preferential tax rates.
Other special cases of considerations for OSD:
 The partner’s share in the distributive net income of a general professional
partnership (GPP) cannot claim for OSD anymore since the share is already
net of the allowable deductions of the GPP.
 In case the partner has separate business other than the GPP, the business
can claim OSD to compute for the taxable income related to the conduct
of business.
 Compensation income earners are not allowed to claim OSD.
 For Mixed income earners, only those related to trade/business or
profession can be subjected to OSD.
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