Allowable Deductions-Part 2

LEARNING OBJECTIVES
At the end of this module you are
expected to:
1. What are the Allowable Deductions both for the individual and corporate
taxpayers?
2. What is the difference between itemized deductions and optional standard
deduction?
3. Are all expenses incurred by a taxpayer deductible?
4. What expenses are fully and partly deductible?

Allowable Deductions
for

Individual and Corporate Taxpayers

- These are the amounts that are deducted from the gross income to arrive at the taxable income.
- These group of expenses are deductible if allowed by NIRC or by Revenue Regulations issued by
Secretary of Finance, otherwise those expenses will not be allowed as deductions .

DEDUCTIONS FROM GROSS INCOME

Ordinary Deduction Special Deduction

1. Health/Hospitalization insurance premium
Choose between:
2. Special deductions allowed to:
Itemized Deduction Optional Standard Deduction insurance companies
1. Business Expenses 1. Individual Taxpayers - 40% of Gross Sales Receipts mutual insurance companies
2. Interest Expenses 2. Corporation - 40% of Gross Income mutual marine companies
3. Taxes
4. Losses
5. Bad Debts Expense
6. Depreciation and Depletion
7. Charibtable Contributions
8. Research and Development Costs
9. Pension Trust

Course Module
 Continuation.........
6. Depreciation and Depletion
- Reasonable allowance for wear, tear and obsolescence of property used in trade or business
- Amount deductible is the same amount recognized for accounting purposes

7. Charitable and Other Contributions

- Contributions or gifts actually paid or made within the taxable year to, or for the use of:
 Government of the Philippines
 Agencies or any political subdivisions of the Philippine government
- Requisites to be deductible:
a. There must be an actual contributions made
b. The taxpayer giving charitable donations must be engaged in business, trade or exercise
of profession
c. The entity receiving the donations is among those specified by law
d. The net income of the institution must not inure to the benefit of any individ ual or
private stockholder
e. Must be exclusively for public purpose
Classification of Charitable Contributions

Deductible Charitable Contributions Nondeductible Charitable Contributions

Those contributions made to

FULLY Deductible PARTLY Deductible institutions which are not expressly
covered by taxation law

- Fully Deductible:
Donations made to the following institutions are deductible in full:
1. Government of the Philippines or to any of its agencies or political subdivisions,
including fully-owned government corporations exclusively to finance, to provide
for or to be used in undertaking priority activities in:
a. Education
b. Health
c. Youth and sports development
d. Human settlement
e. Science and culture
f. Economic development

2. Donations for economic development shall be in accordance with the National

Priority Plan determined by the National Economic Development Authority (NEDA)

3. Foreign institutions or international organizations in compliance with

i. Agreement
ii. Treaties
 iii. Commitments entered into by the:
 government
 foreign institution
 international organizations

4. Accredited non-government organizations organized and operated exclusively for

a. Scientific
b. Research
c. Educational
d. Character-building
e. Youth and sport development
f. Health, social welfare and cultural charitable purposes

Provided the following conditions or requirements are fully complied with:

i. The donations or contributions i.) utilized directly for the active conduct
for which it was organized
ii.) utilized not later than the 15 th day of
the 3rd month after the close of the
taxable year
ii. The amount of administrative expenses shall in no case exceeds 30% of the
total expenses
iii. In case of dissolution, the assets would be transferred to another non -profit
domestic corporation organized for the similar purpose

5. Accredited non-profit organizations recognized by the government:

a. Cultural Center of the Philippines (CCP)
b. Ramon Magsaysay Award Foundation (RMAF)
c. Boy Scout of the Philippines (BSP)
d. Girl Scout of the Philippines (GSP)
e. Integrated Bar of the Philippines (IBP)
f. Roxas Educational and Welfare Committee
g. National Social Action Council (NASAC)
h. International Rice Research Foundation
i. Development Academy of the Philippines
j. State Colleges and Universities
k. School of Deaf and Blind
l. Philippine Amateur Athletic Association
m. Artesian Well Fund
n. National Museum, Library and Archives

Course Module
- Partly Deductible:
I. Donations made to the following institutions are subject to limitations; hence amount
donated or contributed cannot be deducted totally:
1. Government of the Philippines or to any of its agencies or political subdivisions
exclusively for public purpose
2. Domestic corporations, associations or institutions organized and are
operating exclusively for the following purposes:
 Religious
 Charitable
 Scientific
 Youth and sports development
 Cultural or educational
 Rehabilitations of veterans
3. Social welfare institutions
4. Non-governmental organizations (NGOs)
II. Amount of Deductibility:

10% of gross taxable income before contribution if the donor is an individual taxpayer
5% of gross taxable income before contribution if the donor is a corporation

Whichever is LOWER
or

ACTUAL CONTRIBUTION

ILLUSTRATION
During the current taxable year, Mr. Juan Dela Cruz presented the following data
related to the operation of his merchandising business:
Sales P3,250,000
Cost of Sales 1,970,000
Allowable business expenses, excluding contributions 950,000
Charitable and other contributions
To the national government for educational purpose 370,000
To the provincial government for general purpose 105,000
To an organization which will go on strike 20,000
Required: Compute the deduction for charitable contribution in the following
cases:
1. The donor is an individual taxpayer
2. The donor is a corporation
 Answer #1:

Deductible Charitable and other contributions

To the national government for educational purposeP 370,000
To the provincial government for general purpose 105,000
Total P 475,000

Actual Contribution P 105,000

Limitation (P1,280,000*10%) 128,000
Partially deductible P 105,000

Fully Deductible P 370,000

Partially Deductible 105,000
Allowable deductions for Charitable and other contributions P 475,000

Answer #2:

Deductible Charitable and other contributions

To the national government for educational purposeP 370,000
To the provincial government for general purpose 105,000
Total P 475,000

Actual Contribution P 105,000

Limitation (P1,280,000*5%) 64,000
Partially deductible P 64,000

Fully Deductible P 370,000

Partially Deductible 64,000
Allowable deductions for Charitable and other contributions P 434,000

Course Module
 8. Research and Development Costs
- Refer to expenses incurred by taxpayers relative to
o Scientific or technical evaluation
o Findings of improving, formulating, and testing products or processes prior to full-scale
commercial production

9. Pension Trust
- Established by employer to provide for payment of reasonable pensions to his/her employees.

End of Module 8

Links to Supplemental Readings

1. http://www.chanrobles.com/legal6nircmain.htm#.WW14qRUrLIU
2. https://www.bir.gov.ph/index.php/tax-code.html#title1
3. https://www.bir.gov.ph/index.php/tax-code.html#title2

Links to Other Video Lectures

1. https://www.youtube.com/watch?v=mjvKbx8HBcA
2. https://www.youtube.com/watch?v=nEkSZtKuRjQ
3. https://www.youtube.com/watch?v=6ORA5dIdhlQ

References
National Internal Revenue Code of 1997 . (n.d.). Retrieved from
https://www.bir.gov.ph/index.php/tax-code.html.
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition
ed.). Quezon City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing .
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City: Valencia Educational
Supply .