Module 13 A– RIT: ITEMIZED DEDUCTIONS

ITEMS OF DEDUCTIONS
A. Interest
1. There should be a valid indebtedness
2. There must be legal liability to pay interest
3. The indebtedness must have been incurred in connection with business, trade or profession
4. Deductible amount of interest shall be reduced by an amount equal to 33% of interest
income

Loan PNB – P1M @12%/annum IE 120,000

Deposit BDO – P500k @10%/annum Int. Inc (50k x 33%) 20,625 62,500 (/80%x20%)
Deduction Int. Exp. 99,375

Non-deductible interest:
1. Interest paid in advance through discount in indebtedness for TP under cash basis; if TP is
corporation, pre-deducted interest could be claimed in the year of granting a loan
2. Interest payment with related parties
3. If incurred to finance petroleum operations:
Capitalization of interest – at the option of the TP, interest incurred to acquire property
used in trade, business or profession
Special cases:
1. Interest on Preferred stock – dividends, not deductible as interest
2. Interest on scrip dividends – deductible interest

B. Taxes
1. Must be paid or accrued within the taxable year
2. Must be incurred in connection with the TP’s trade, profession or business
Non-deductible taxes:
1. Philippine income tax, except FBT
2. Estate or donor’s tax
3. Special assessment
4. Income tax imposed by a foreign country if the TP opted to claim them as deduction rather
than as tax credit
5. Stock transaction tax - PSE
6. Value-added tax on business – However, the Percentage tax is deductible expense.