REGULAR ALLOWABLE

ITEMIZED DEDUCTIONS
1. INTEREST EXPENSE

Requisites on deductibility:
a. There must be a valid indebtedness.
b. The indebtedness must be that of the TP.
c. The indebtedness must be connected with the TP’s trade, business or
profession.
d. Interest expense must have been paid or incurred during the taxable
year.
e. Interest must have been stipulated in writing.
f. Interest must be legally due.
g. Interest payments must not be between related parties.
h. Interest must not be incurred to finance petroleum operations.
i. In case of interest incurred in the acquisition of property, used in trade,
business or profession, the same is not treated as Capex.
j. The interest is not expressly disallowed by law to be deducted from gross
income of the TP.
Interest Expense

Deductible amount of interest expense (arbitrage

limit)
Gross interest expense xxx
Less: Arbitrage limit* xxx
Deductible interest expense xxx

*Arbitrage limit = interest income, subj to FT x 33%

January 1, 2009 – 33% or 1/3

2. TAXES
- paid or incurred in connection with the TP trade,
business or profession
- only the basic tax is allowed as deduction

Foreign income tax

a. Deduction
b. Tax credit
3. LOSSES
- those actually sustained during the taxable year and
not compensated by insurance or other indemnity

Requisites for deduction:

a. Incurred by the business
b. Pertain to property of the business
c. Not compensated by insurance or indemnity contract
d. A declaration of loss must have been filed by the TP
within 45 days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise
to the loss
e. Not claimed as deduction for estate tax purposes
Types of Losses
1. Ordinary loss – deductible in full
2. Capital loss – deductible up to the extent of capital
gains
Rules on restoration of destroyed property

1. Total destruction of properties

- if the restoration involves total replacement of the
previous property, the tax basis of the old property
shall be claimed as a loss while the entire replacement
cost is capitalized subject to allowance for
depreciation.
2. Partial destruction of properties
- the restoration shall be expensed up to the extent
of the tax basis of the property immediately before the
casualty. Any excess is capitalized subject to allowance
for depreciation.
Loss on Insured Property

- The excess of the tax basis of the property over the

insurance reimbursement is a deductible loss in the
year of insurance settlement.
4. BAD DEBTS

- debts due to the TP which were actually

ascertained to be worthless and were charged off
within the taxable year.

Requisites of claim for deduction

a. Ascertained to be worthless
b. Charged off within the taxable year
c. Connected with the TP’s trade or business
d. The TP is under the accrual basis of accounting
e. Not incurred from a related party
Subsequent recovery of bad debts

- The recovery of bad debts previously allowed as a

deduction in the preceding years shall be included as
part of the gross income in the year of recovery to the
extent of the income tax benefit of said deduction.
5. DEPRECIATION

⚫ Reasonable allowance for the exhaustion and wear

and tear of property used in the trade or business.
AMORTIZATION OF INTANGIBLE ASSETS

- Exhaustion of intangible assets with definite useful

life.
- Intangible assets that do not lose their value
throughout time should not be amortized.
6. DEPLETION

- Provision for the periodic return of capital

investments in wasting assets such as minerals, gas
and oil.
7. CHARITABLE AND OTHER CONTRIBUTIONS

- Contributions or gifts made to the government or nongovernment

organizations (NGO’s) may be deducted against gross income.

Requisites of claim for deduction

a. The donee institution must be a domestic institution.
b. No income of the donee institution must inure to the benefit of
any private stockholder or individual.
c. The contribution must be valued at the tax basis of the property
donated.
d. The TP must be engaged in trade or business.
e. The donee must issue a Certificate of Donation (BIR Form 2322)
which includes a donor’s statement of values.
f. If the amount of donation is at least P50,000 the donor shall file a
Notice of Donation to the RDO where he is registered within 30
days upon receipt of the Certificate of Donation.
Fully deductible contributions

1. Donations to the government or political

subdivisions to be used exclusively for priority
activities
2. Donation to foreign institution or international
organization
3. Donations to accredited domestic non-government
organizations (NGOs)
Requisites for full deductibility of
contributions to accredited NGOs

a. The NGO must be organized and operated exclusively for the

above purposes, and no income inures to the benefit of any private
individuals.
b. The non-profit organization makes utilization of the contribution
not later than the 15th day of the third month after the close of its
taxable period.
c. The administrative expense of the NGO do not exceed 30% of its
total expenses.
d. Members of the Board of Trustees must not receive
remunerations.
e. In the event of liquidation, the asset of the NGO will be distributed
to another nonprofit domestic corporation organized for similar
purpose.
f. The amount of contribution of property other than money must be
valued at acquisition cost.
Contributions subject to limit

1. Donations to the government or political

subdivisions to be used exclusively for public
purposes not in accordance with priority activities
2. Donation to non-accredited non-government
organizations
Limit of deduction for contributions

⚫ 10% for individuals

⚫ 5% for corporations

Based on the taxable income derived from trade or

business (i.e., net income) before the deduction of any
contributions
8. CONTRIBUTIONS TO PENSION TRUSTS

Requisites of deductibility
a. The employer must have established a pension or
retirement fund to provide for payment of reasonable
pensions to employees.
b. The actuarial assumptions used by the fund must be
sound and reasonable.
c. The fund must be actually funded by the employer.
d. The fund assets must be independent from and not
subject to the control of disposal of the employer.
e. Contribution for current service cost is deductible in
full.
f. Contribution for past service cost is amortized over
period of 10 years.
Rules in computing the deductible pension
expense

a. The contribution to the fund is first attributed to

current service cost. The funding of current service
cost is deductible in full.
b. The excess funding is attributed to any unfunded
past service cost. The funding of past service cost is
amortized over 10 years regardless of the actual
vesting period of covered employees.
c. Overfunding of the fund is a prepaid pension
expense deductible in the future as funding of
future current service cost.
9. RESEARCH & DEVELOPMENT COST

- R&D costs related to capital accounts such as

property used in business are capitalized as part of
the cost of the property and deducted through
depreciation expense.
- R&D costs not related to capital accounts are treated
as follows at the option of the taxpayer:
a. Outright expense
b. Deferred expense amortized over a period not less
than 60 months beginning from the month the
taxpayer realize benefits from the R&D
expenditures
 10. OTHER EXPENSES

⚫ As long as it is substantiated with official receipts or other pertinent records

1. Salaries and allowances
2. Fringe benefits
3. SSS, GSIS, Philhealth, HDMF and other contributions
4. Commissions
5. Outside services
6. Advertising
7. Rental
8. Insurance
9. Royalties
10. Repairs and maintenance
11. Entertainment, amusement and recreation expenses*
12. Transportation and travel
13. Fuel and oil
14. Communication, light and water
15. Supplies
16. Miscellaneous expense
*Requisites of deductibility of EAR
1. Paid or incurred during the taxable year
2. Directly connected to the development, management, and
operation of the business of the TP or directly related to or
in furtherance of the conduct of his or its business.
3. Not contrary to law, morals, good customs, public policy or
public order
4. Not have been paid, directly or indirectly, to an official or
employee of the government
5. Duly substantiated with adequate proof. The documents
should be in the name of the TP
6. Appropriate amount of withholding tax should have been
withheld therefrom and paid to the BIR
Ceiling on deductibility of EAR
TP engaged in the sales of goods 0.5% of net sales
or properties

TP engaged in the sales of services 1% of net revenues

TP engaged in the sales of both goods or Net sales/Net revenue

properties and services Total net sales and x Actual EAR
net revenue