Compilation Taxreporting

Income Taxation
Optional
Standard
Deduction
—GROUP REPORTING—
OBJECTIVES
Define Optional Standard Deduction
Percentage of Optional Standard Deduction
Define individual and corporate osd
Rules in determination of OSD for individual taxpayers
Rules in determination of OSD for corporate taxpayers
Optional Standard Deduction and NOLCO
Optional Standard Deduction and Net Capital Loss Carry
Over
Page 3
Optional Standard
Deduction
in lieu of the itemized deductions including NOLCO
allowable under the NIRC and special laws
Under OSD, the allowable deduction of the taxpayer is
simply presumed as a percentage of gross sales or
receipt for individuals and gross income for corporation
However, does not relieved the taxpayers of the
responsibility to deduct withholding tax on certain
income payments as required by NIRC
Who can claim OSD?
General rule: all taxpayers subject to tax on taxable net
income
Except: NRA-ETB and those mandated to use itemized
deductions
Page 4
Mandatory Itemized
Deductions ( RR2-2014)
1 2
Corporation Individual
Excempt GOCCs and non stock, non- Excempt individuals under the NIRC and
profit corporation with no taxable income special laws with no other taxable income
Those with income but subject to special/ Those with income but subject to
preferential tax rates special/preferential tax rates
Those with income but subject to regular Those with income subject to regular income
corporate income tax and tax and special /preferential income tax
special/preferential tax
Page 5
Individual Taxpayers
— 40% of total sales/revenues/receipts/ fees
Percentage of a. Those selling goods under the accrual

basis — 40% of gross sales
Optional b. Those selling services under the cash

basis — 40% of gross receipts
Standard
c. Those selling services under the accrual
basis — 40% of revenue
Deductions Corporate Taxpayers
— 40% of gross income

Page 6
Key points:
Individual OSD Corporate OSD

— deemed to replace all items of — deemed to replace all items of
deductions against gross receipts or gross deductions from gross income im
sales in computing net income . computing net income
— Individual using OSD shall use BIR Form — the option to use OSD for the taxable
1701A in filling their annual return year must be indicated in the first quarter
return and shall be applied to all
—OSD can be indicated only in the annual
subsequent quarters and in the annual
income tax return return
Page 7
Rules in determination of OSD

for Individual Taxpayers
Gross Sales
Includes only sales contributory to income subject to regular tax
The tax concept of "gross sales" is the accounting concept of
"net sales".
Gross Receipts
Amounts actually or constructively received during the taxable
year
For sellers of services employing the accrual basis of accounting
, the term "gross receipts" shall mean the amounts earned as
gross revenue during the taxable year
OSD for indvidual taxpayer is computed as:
Other taxable income from operations not subject to final tax

— Revenues or receipts arising from incidental or secondary activities of
the business or profession are added as part of sales/ revenues/ receipts/
fees.
Illustration 1:
Page 11
Rules in determination of OSD

for Corporate Taxpayers
Gross Income
Gross sales - sales returns and allowances - cost of sales
Gross receipts - sales returns, discounts and allowances - cost
of services
All gross income are subjected to RIT

no distinction between gross income from operations and gross
income from the non-operating sources
Page 11
Corporate OSD is computed as:

Illustration 2: Corporate sellers of Goods
Page 14
OSD for General Professional

Partnership (GPP)
Determination of Net Income of a GPP
Computed in the same manner as a corporation
Can choose either itemized deduction or optional standard deduction
allowable deduction for GPP electing to deduct OSD shall be 40% of gross income similar
to the OSD allowed for corporation
Deduction against partner's share in net income from GPP

Partners in GPP cannot claim OSD against their share in net income
Page 14
OSD for General Professional

Partnership (GPP)
No more allowed deduction against share in the net income of
GPP
Under RR8-2018 a partner can no longer claim deductions from their share in GPP net
income
Share in the net income vs Actual Profit distribution

Share in net income is computed from the net income of the GPP as determined by tax
rules
Actual profit distribution is computed from net income as determined by GAAP. Actual
amount of profit that will be transferred to the capital of each partner
Illustration 3: Comprehensive Illustration
Illustration 3: The GPP using itemized deductions
Illustration 4: The GPP using optional standard deductions
Page 20
Additional info:
Optional Standard Deduction and
NOLCO
NOLCO is an item of deduction
OSD isna proxy for all itemized deduction
NOLCO is deemed included in the claimable OSD
Optional Standard Deductions and

Net Capital Loss Carry Over
— OSD does not replace NCL-Carry Over
— NCL- Carry Over used in measurement of net capital gain
which is an item of gross income, not a deduction
Thank You
To God be the glory!
INCOME TAXATION 1
General Rules on the

Deductibility of Business
Expenses
Presented by:
CONICONDE, JOSAN VALERIE
SANTILLAN, OLEANDER MAE
Business Expense
• Ordinary and necessary expenses paid or incurred during the taxable year
in carrying on or which are directly attributable to the development,
management, operation, and/or conduct of the trade, business, or the
exercise of a profession.
1 Salaries and Wages Expense
Items 2 Supplies Expense
included in
3 Utility expenses
4 Selling expenses
Business 5 Rent
Expense
6 Local Taxes and Permits
7 Travel Expense
Accounting Methods on Deductions
1 2
Cash Basis Accrual Basis

Deductions Deductions
Requisites for Deduction of
Business Expense
• The expense must be ordinary and necessary
• It must be paid or incurred during the taxable year
• It must be connected with the trade, profession, or business
• It must be reasonable
• The amount paid shall be allowed as a deduction only if it is shown that the tax
required to be deducted and withheld therefrom has been paid to the BIR
Substantiation
Requirements
"No deductions shall be allowed unless
the taxpayer shall substantiate with
sufficient evidence such as official
receipts or other adequate records."
Example Problem:
Block 19 Corporation had the following items of expenses in 2022:
Purchase of Equipment P 100,000

Salaries expenses paid during this period 70,000
Supplies were bought and a half was used 20,000
Commissions paid to agents 50,000
Travel expenses 25,000
2022 expenses, not paid this period (accrued expense) 5,000
Required:
How much is the total deductible expense?
• Cash basis of accounting

• Accrual basis of accounting
Solution:
Cash Basis Deduction:
Salaries Expense P 70,000

Supplies Expense 10,000
Commissions Expense 50,000
Travel Expense 25,000
Total deductible expenses: P 155,000

Solution:
Accrual Basis Deduction:
Salaries Expense P 70,000

Supplies Expense 10,000
Commissions Expense 50,000
Travel Expense 25,000
Accrued Expenses 5,000
Total deductible expenses: P 160,000

TAX 1 _ 3051
JOSAN VALERIE CONICONDE OLEANDER MAE SANTILLAN

Group 3
May 02, 2022
SALARIES,
T R AV E L A N D
RENT STR expenses
EX P EN S ES
are included in
Business
Expenses. Either
one of the items
or other
deduct ible
expenses.
Expenses, SALARY TRAVEL RENT
in G e n e r a l
other legal, ordinary, actual, and necessary expenses

of business can be claimed by the taxpayers as long
as these are substantiated with official receipts or
other pertinent records
Salaries, Travel and Rent Expenses

Salaries Expenses
SALARIES
EX P EN S ES
DEFINITION SALARY TRAVEL RENT
Fixed pay earned by employees

Represents the cost of non-hourly labor for a
business
T H E C O M P E N S A T I O N M U S T BE
1 Ordinary and Necessary,
2 Reasonable in amount,
3 Paid for services actually provided and,
4 Actually paid or incurred in the year for which you claim the deduction.
A c c r ua l
Cash
Method
M e t hod
Accrual method taxpayers claim the deduction for the
year in which the obligation to pay is established and
Cash method taxpayers must claim the deduction for
when the services are performed, even if the actual
the salary, wage, or benefit payment in the year it's paid
paycheck is distributed later.
to the employee.
Example: I f the employee's pay period ended on
December 31 and your paychecks are issued a week
Example: Vacation pay or last paycheck later, you could deduct the amount for that last pay
period of the year.
Salaries Expenses
E X C E P T I O N T O T H E RULES:
I f your employee is your spouse, child,

brother or sister, parent or grandparent, you
may only deduct the payment in the year in
which the employee reports the payment
as income.
Travel Expenses
T R AV E L
EX P EN S ES
Travel expenses are costs associated with

traveling for the purpose of conducting
business-related activities.
Travel Expenses
The expense must be ordinary

1 and necessary.
R e q u is it e s 2
I t must be paid or incurred
during the taxable year.
of the 3
I t must be connect ed w it h
trade, profession or business.
D e d u c t ib ilit y
4 I t must be reasonable.
The amount paid shall be allow ed as
5
deduction only if it is shown that the tax
required to be deducted and withheld
therefrom has been paid to tha BIR.
LIMITS/RULES SALARY TRAVEL RENT
Travel expenses do not include regular

commuting fees.
You can deduct travel expenses paid or
incurred in connection with a temporary work
assignment away from home.
Examples SALARY TRAVEL RENT
The company paid the following expenses on behalf of its manager

in 2022:
Airfare to manila for a seminar where the company is benefited,
P 20,000
Travel allowance for meals and accommodation, P 30,000
Travel to Singapore, a treat to the manager for a job well-done,
P 50,000
Rent Expenses
RENT
EX P EN S ES
Generally, your company can claim a tax

deduction on rental expenses incurred
on premises occupied for business
purposes.
Rent Income Taxable when cash receives
Taxable when incurred

Rent Expense
regardless of payment made
For income tax purposes, your company should claim tax

deduction on the rental expense based on the contractual rental
payments incurred rather than its accounting treatment.
I f only a part of the premises is used for business purposes, the

corresponding proportion of the rental expense can be claimed as a tax
deduction.
Example: Company A leases land for 1 year for 100,000, half

of it is for his business, and the other half is for his vacation
house. How much is the rent expense subject to deduction?
Group 3
Tha nk Have a great

day ahead.
you!

Members:
Hurboda, Aaliyah Kaye
Ramoneda, Lhogimae
Villamor, Princess April

REFERENCES
https://www.wolterskluwer.com/en/expert-insights/understanding-the-tax-
consequences-of-compensation
https://www.accountingtools.com/articles/salaries-
expense#:~:text=Salaries%20expense%20is%20the%20fixed,Salaries%20ex
pense%20%2D%20accounting%20department
https://www.investopedia.com/terms/t/travelexpenses.asp
https://www.irs.gov/taxtopics/tc511
h ttps://www.iras.gov.sg/taxes/corporate-income-tax/income-deductions-
f or-companies/business-expenses/tax-treatment-of-business-
expenses- (m-r)
Hello, This
is Group 4!
Taneo, Bael, Polestico,

Stephanie Marie Angel Gwen John Angelo
Manila Elementary School
Entertainment,
Amusement, and
Recreation (EAR)
Expense
Professor: Dr. Cedric Val R. Naranjo
COVERAGE of Entertainment,
Amusement, and Recreation (EAR) Expense
a. Individuals engaged in business, including

taxable estates and trusts
b. Individuals engaged in the practice of
profession
c. Domestic corporations
d. Resident foreign corporations
e. General professional partnerships, including
its members
Entertainment,
Amusement, and
Recreation (EAR)
Expense
EAR expense includes
representation expense and/or
depreciation or rental expense
relating to entertainment facilities

Representation expense
- are expenses incurred by a taxpayer in the conduct of
his trade, business, or exercise of profession in
entertaining, or meeting with, guests at a dining place,
country club, theater, concert, play or other similar places.
Entertainment facilities
- refer to yacht, vacation home or condominium, and any
similar item of real property used by the taxpayer
primarily for the entertainment of guests or employees.
EXCLUSIONS
a. Expenses treated as compensation or fringe benefits for
services rendered under an employer-employee relationship
b. Expenses for charitable or fund raising events
c. Expenses for bonafide business meeting of stockholders,
partners or directors
d. Expenses for sponsoring an employee to a business league
e. Expenses for events organized for promotion, marketing and
advertising
f. Other expenses of similar nature.

Requisites of deductibility
of EAR Expense
04 It must NOT constitute bribe,

01 It must be paid or incurred
kickback, or other similar
payents.
02 It must be (1) directly 05 It must have been duly

connected to the development, substantiated with adequate
management, and operation of proof. The official receipt,
or (2) directly related to or in invoices, bills or statements of
furtherance of the conduct of accounts should be in the
his or its trade, business, or name of the taxpayer claiming
exercise of a profession. the deductions.
03 It must NOT be contrary to law, 06 The appropriate amount of

morals, good customs, public withholding tax should have
policy, or public order. been withheld therefrom and
paid to the BIR.
Expenses Expenses
incurred for for political
police
protection.
campaign.
Non-Deductable
EAR Expense Expenses to Cost of
attend the admission
funeral of tickets to
friends. operas.
CEILING ON WHY?
DEDUCTION
SALES OF GOODS OR
SALES OF SERVICES
PROPERTIES
0.5% of Net Sales 1% of Net Revenues
NET SALES NET REVENUE
Gross Sales less Sales returns,

Gross Revenue less Discounts
allowances and sales discounts
BOTH GOODS/PROPERTIES AND SERVICES
Net Sales/Net Revenue Actual

X
Total net sales and net revenue EAR
In no case shall the deductible EAR exceed the maximum
percentage ceiling for the sales of goods and sales of services.

ILLUSTRATION 1
Mr. Aragon, a seller of goods, had net sales of P
200,000 and expenses for entertainment,
amusement and recreation of P 1,400 in 2020.
Computed as:
(0.5% x P 200,000)= P 1,000
The deductible EAR shall be the lower of 1,400 and
1,000; hence, P 1,000.

ILLUSTRATION 2
Mr. Esperson is a service provider with a net
revenue of P 300,000. He incurred P 2,500 in EAR
expenses during the year.
Computed as:
(1% x P 300,000)= P 3,000
The deductible EAR shall be the lower of 3,000 and
2,500; hence, P 2,500.

ILLUSTRATION 3
Mrs. Beronia is engaged in both sales of goods and
sales of services. She incurred a total of P9,000
entertainment, amusement, and recreation
expenses in 2020. She reported P300,000 in net
sales and P700,000 in net revenues.
The deductible EAR shall be computed as follows:

In no case shall the deductible EAR exceed the maximum
percentage ceiling for the sales of goods and sales of services.
Allocation Ceiling DA
Sales of goods 300,000 2,700 1,500 1,500
Sales of services 700,000 6,300 7,000 6,300
Total P 1,000,000 P 9,000 P 8,500 P 7,800

Thank You and God
bless!
ADELANTE!
Interest Expense
GARCIA, JONARD JOHN
LIMOS, PATRICIA
LUMANGTAD, AINA
Interest
is the compensation in money

stipulated by the parties or fixed by
law for a loan, use or forbearance of
money or credits.
Requisites on the deductibility of
interest
There must be a valid indebtedness.
The indebtedness must be that of the taxpayer.
The indebtedness must be connected with the taxpayer’s trade, business,
exercise of profession.
Interest expense must have been paid or incurred during the taxable year.
Interest must have been stipulated in writing and must be legally due.
Interest payments must not be between related taxpayers.
Interest must not be incurred to finance petroleum operations.
In case of interest incurred in the acquisition of property, used in trade, business
or profession, the same is not treated as a capital expenditure.
The interest is not expressly disallowed by law to be deducted from gross income
of the taxpayer.
Covered
Sub-topics:
Rationale of the Arbitrage Limit

Illustration for the Arbitrage Scheme
- Without an interest deduction limit
Determination of the Arbitrage Limit
Effect of Arbitrage Limit
MSMEs qualified to 20% corporate tax.
Rationale of the
Arbitrage Limit
The limit is intended to recover
the tax savings of taxpayers who
take advantage of higher regular
tax savings created from interest
expense deduction and a lower
final tax on deposit interest
income.
The Interest
Arbitrage Scheme
A corporate taxpayer which is subject to 25% regular corporate income tax
borrowed P 1,000,000 from the bank which charges 6% interest and invested
the same proceeds to a 6% time deposit in the same bank.

The following summarizes the effect of the interest arbitrage within a year:
Bank Loan P 1,000,000
Interest Expense (1,000,000 x .06) 60,000
Bank Deposits P 1,000,000

Interest Income (1,000,000 x .06) 60,000
WITHOUT AN INTEREST EXPENSE
deduction limit, the financial
effect of this scheme can be
analyzed as follows:
Net Interest Income P 60,000 x (100% - 20% final tax) P 48,000
Payment of interest expense to the bank (60,000)
Tax savings on interest expense (P 60,000 x 25%) 15,000
Financial Tax savings from arbitrage P 3,000
This will motivate taxpayers to enter into unnecessary loan-

and-deposit transactions to save from total income.
Determination of the
Arbitrage Limit
To eliminate the arbitrage savings, a deduction cap was set

which was mathematically computed as:
(Corporate income tax rate - final tax on interest income)

Corporate Income Tax Rate
Effect of Arbitrage
Limit
Under the current corporate income tax rate,
the arbitrage limit is: (25-20)/25 or 20%
The deductible interest expense with the
arbitrage limit can be computed as follows:

The deductible interest expense with the arbitrage limit can be
computed as follows:
Gross interest expense 60,000

Less: 20% x P60,000 interest income 12,000
Deductible interest expense 48,000
Multiply by: regular corporate tax rate 25%
Tax savings from allowable interest expense 12,000
Look at the net savings of the
arbitrage with the arbitrage
limit:
Net interest income [P60,000x (100%-20%)] 48,000
Overall net tax savings 0
The arbitrage limit is an indirect application of the matching rule.

The same result would have been achieved if the law simply
provided that only interest expense connected with gross
income subject to regular tax is deductible.
Without Interest Expense
Deduction
Net Interest Income P 60,000 x (100% - 20% final tax) P 48,000
Tax savings on interest expense (P 60,000 x 25%) 15,000
Financial Tax savings from arbitrage P 3,000
With Interest Expense
Deduction
Net interest income [P60,000 x (100%-20%)] P 48,000
Overall net tax savings 0
It must be emphasized also that the basis of the arbitrage limit is
the interest income subject to final tax because no arbitrage
limit will arise on the interest income not subject to final tax. The
net interest income must be grossed-up first by the percentage
net of the final tax (100% - 20%) before computing the arbitrage.
MSMEs qualified to 20%
corporate tax.
- NO arbitrage for qualified MSMEs subject to 20%
corporate tax.
- It would be computed as (20-20)/20 = 0%
- MSMEs can deduct the full amount of interest expense
without deduction of arbitrage limit.
ARBITRAGE LIMIT UNDER CREATE
TRANSITION
RR5-2021 PRESCRIBES A PRO-RATA TREATMENT IN

DETERMINING THE ARBITRAGE LIMIT.
KEEP IN MIND
ARBITRAGE IS DEEMED APPLICABLE TO ANY
TAXYPAYER SUBJECT TO REGULAR TAX.

33% ARBITRAGE LIMIT WILL APPLY BEFORE THE
EFFECTIVITY OF CREATE (JULY 1, 2020).

20% ARBITRAGE LIMIT WILL APPLY AFTER.
THRIFT BANKS ARE EXEMPTED FROM THE COVERAGE
OF ARBITRAGE LIMIT.
TABLE OF TRANSITIONAL
ARBITRAGE LIMIT
Illustration (Computing for Arbitrage Limit)

A domestic corporation which is reporting on a fiscal year starting April 1 ending

every March 31 qualifies as a large enterprise subject to 25% corporate tax under
Create.

33%= Before CREATE (April 1 to June 30,2020)

20%= (July 1 to March 31, 2021)

Arbitrage Limit is computed for fiscal year ending March 2021 as:
33% x 3/12 plus 20% x 9/12= 24.25%
Deductibility of discount or
pre-deducted interest
Discount or pre-deducted interest is a
prepayment. Hence, it is NOT DEDUCTIBLE upon
release of the loan but upon PAYMENT of the
same or as it accrues as expense. If the loan is
due on installments, the interest pertaining to
each installment shall be deductible.
Other Deductible Interest Expense
Interest from tax delinquency
Interest from scrip dividends

Examples of Non-Deductible Interest

Interest on personal loans
Interest incurred with a related party
Discount or pre-deducted interest applicable to future periods for
individual tax-payers
Interest expense incurred to finance petroleum operations
Interest on redeemable preferred shares
Imputed interest
REFERENCE:
Banggawan, R. (2021). Income Taxation: Laws, Principles and

Applications. Real Excellence Publishing.
T A X E S
Presented by:
PAJAGANAS, CARA PATRICE
JIMENEZ, MARY GRACE G.

TAXES
Taxes paid or incurred within a taxable
year in connection with the taxpayer’s
trade, business, or exercise of profession
shall be allowed as deduction, except
those expressly not allowed by the Tax
Code, as amended.
PAGE 01
REQUISITES FOR DEDUCTIBILITY DEDUCTIBLE TAXES
1. It must be paid or incurred during 1. Percentage tax
the taxable year. 2. Excise tax
3. Documentary stamp tax
2. It must be paid or incurred in 4. Occupational tax
connection with the taxpayer’s trade, 5. License tax
business or profession. 6. Fringe Benefits Tax
7. Community tax
3. It must be imposed directly upon 8. Municipal tax
the taxpayer. 9. Local taxes, except special assessment
10. Foreign income tax if not claimed
PAGE 02
PAGE 03
as tax credit
NON - DEDUCTIBLE TAXES LIMITATIONS ON TAXES AS
1. Income tax provided under the DEDUCTION
NIRC (Philippine Income Tax) 1. For NRA-ETB & RFC, the
except FBT deductible amount is limited to

2. Foreign income tax, if claimed as the extent of income from
tax credit within the Philippines
3. Estate and donor's tax 2. For RA, only that portion of the
4. Special assessment taxes paid outside, which
5. Stock transaction tax
corresponds to his/her net
6. Value-Added tax
income subject to PH income
PAGE 05
PAGE 04
tax, shall be allowed as a

deduction.
LIMITATIONS ON TAXES AS
DEDUCTION
4. Tax treatment of refunds or credit
3. Treatments of Surcharges / of taxes. The refund or credit of
Interests / Fines for delinquency. deductible taxes must be reverted
They are nondeductible. back to gross income in the year of
However, interest for late payment receipt to the extent of their gross
of tax is deductible, but as interest benefit.
expense not as tax expense. If taxes paid are deductible from gross
income, refund is taxable.
If taxes are nondeductible, refund is
PAGE 07
PAGE 06
nontaxable.
LIMITATIONS ON TAXES AS Tax Credit vs. Tax Deduction
DEDUCTION
Tax Credit Tax
Deduction
5. Foreign income tax
Subtracted Tax Due Income
Income taxes paid in a foreign from before tax
Reduces The Taxpayer’s Income upon
country can either be claimed as tax ability which tax
1. Deduction peso for peso liability is
composed
2. Tax credit
Query: Who can claim tax credit or
deduction for foreign taxes paid?
Answer: Only taxpayers taxable on world

income such as DC and RC can claim
PAGE 08
PAGE 09
deduction or tax credit for foreign taxes
paid.
DETERMINATION OF FOREIGN TAX DETERMINATION OF FOREIGN TAX
CREDIT: ONE FOREIGN COUNTRY CREDIT: WITH MULTIPLE FOREIGN
COUNTRIES
Foreign taxable
income ( 1 country) Total Foreign taxable income
X Tax Due X Tax Due
World taxable income World taxable income
The final Foreign tax credit shall be

The Foreign tax credit shall be
lower of the total of the tax credit
lower of the actual foreign income
allowable per country and the
tax paid.
world income tax credit limit.
PAGE 08
PAGE 09
Example: During 2021, a self-employed individual
incurred and paid the following taxes and licences: Answer: The total amount of deductible taxes are
computed as follows
Required: Compute the total amount of deductible taxes.
Documentary stamp tax used in
Value-added tax paid to the BIR P180,000 business operation 300
Documentary stamp tax used in Fringe benefits tax 8,000
business operation 300 Community tax 2,000
Real estate tax on principal residence 5,000 Real estate tax on business property 6,000
Income tax paid for taxable year 2021 120,000 On importation of machinery for business use
Interest for late payment of tax 4,000 Custom duties 3,000
Surcharge for late payment of income tax 30,000 On car registration
Special assessment for business purposes 1,500
Fringe benefits tax 8,000 For business use 4,000
Community tax 2,000 Municipal licenses 3,000
Real estate tax on business property 6,000 Total deductible taxes 26,300
On importation of machinery for business use
Custom duties 3,000
Value-added tax 6,000
On car registration
For business use 4,000
PAGE 11
For personal use 4,500
PAGE 10
Donor’s tax 3,000

Municipal licenses 3,000
VIDEO #24 - LEYSON, PACIBLE, ABARQUEZ
LOSSES
income taxation
CONTENT
definition on losses types of losses requisites
rules/limitations loss of value assets loss on insured asset
abandonment loss wagering losses matching rule

SEC. 34. DEDUCTIONS FROM GROSS INCOME
Except for taxpayers earning compensation income arising from personal services
rendered under an employer-employee relationship where no deductions shall be
allowed under this Section, in computing taxable income subject to income tax
under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and 28(A)(1), there shall be
allowed the following deductions from gross income:
expenses interest taxes losses
www.reallygreatsite.com
LOSSES RECOGNIZED UNDER THE TAX CODE
arises from due to the
loss incurred
the sales or destruction of
in trade,
exchange of property
profession, or
capital caused by an
business
assets event
ordinary loss capital loss casualty loss
REQUISITES:
They must be related to trade, business, or
profession.
REQUISITES:
Pertain to property connected with the trade,
business or profession, if the loss arises from
fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement.
REQUISITES:
The loss must not be compensated by
insurance or indemnity contract.
REQUISITES:
Declaration of loss must have been filed by
the taxpayer within 45 days from the date of
discovery of the casualty or robbery, theft or
embezzlement giving rise of the loss.
REQUISITES:
Loss must not have been claimed as a
deduction for estate tax purposes in the
estate tax return.
Rules on restoration or replacement of destroyed properties
TOTAL DESTRUCTION PARTIAL DESTRUCTION

If the restoration involves partial
the tax basis of the old property shall replacement, the restoration cost shall
be claimed as a loss while the be expense as to the extent of the tax
replacement cost is subject to basis of the property immediately
allowance for depreciation. before the casualty. Any excess is
capitalized subject to allowance for
depreciation.
EXAMPLE:
An uninsured building had a
book value of P1,000,000 when
a fire broke out. It was later
restored at a total cost of
P1,200,000.
TOTAL DESTRUCTION PARTIAL DESTRUCTION
1,000,000 1,000,000
deductible as fire loss expensed as fire loss
1,200,000 200,000
capitalized as cost of capitalized as part of
the new building the cost of the building
LOSS OF VALUE OF ASSETS
The loss of value of assets, as a rule, is not deductible due

to their temporary and reversible nature. However,
impairment losses that became actually sustained can
be deducted.
EXAMPLE:
Fast Corporation maintains a fleet of high-speed passenger jets.
These jets had been eight years in service and have an aggregate
book value of 200,000,000. Due to the increasing incidence of aircraft
accident, Congress passed a law shortening the service life of high-
speed passenger jets to five years. This resulted in mandatory
retirement of the jets. The jets have current fair value totaling
P90,000,000.
-The P110,000,000 impairment loss is deductible, but only upon

disposal of the passenger jets when it becomes actually sustained.
EXAMPLE:
DC Company uses a certain preservative in its food products.DC
Company had P600,000 of the preservative in stocks. Congress
passed a law prohibiting the use of the substance and required their
submission to authorities for immediate destruction.
-The P600,000 total impairment in value will be deductible upon

confiscation or submission of the preservatives to authorities.
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.
ABANDONMENT LOSSES
In the event a contract area where petroleum operations

are undertaken is abandoned, the accumulated
exploration and development expeditures pertaining
thereto, including the adjusted tax basis of equipment
directly used in the abandoned contract area,shall be
allowed as a deduction.Notice of abandonment must be
filed with the Commisioner of Internal Revenue.
ABANDONMENT LOSSES
When the abandoned well is reentered and production is

resumed or if such equipment or facility is restored into
service, the amount of abandonment loss previously
claimed shall be reversed and included in gross income
in the year of resumption or restoration and shall also be
amortized or depreciated as the case may be.
WAGERING OR
PASSIVE ACTIVITES
LOSSES
WAGERING LOSS
Losses from wagering transactions such as

gambling or passive activities, shall be allowed only
to the extent of the gains from such transactions.
WAGERING LOSS
The Internal Revenue Service (IRS) views gambling wins as income, and
therefore requires people to pay tax on the winnings.
It allows people to deduct their gambling losses if they itemize their

deductions.
Winnings or losses can be from the following gambling activities: lotteries,

raffles, dog races, horse races, casino games, poker games and sports
events.
taxpayer notes
CONTENT
The taxpayer notes must include the following information:
the date and type of the amounts won and

gambling lost

the name and address the people that the

of the gambling taxpayer gambled
venue with if applicable

APPLICATION OF
MATCHING RULE
LOSSES
application of matching rule
This rule means that taxpayers
MATCHING taxable on global income can

deduct losses on properties
RULE wherever situated but

taxpayers taxable on the
Philippine Income can only
deduct losses on properties
situated in the Philippines.
THEFT OR EMBEZZLEMENT
ILLUSTRATION
Assume that Krazy Corporation employs a treasurer, Mr. Kaw
Atan, with a cash bond of P300,000. In 2022, Krazy Corporation
lost P300,000 from its treasury. How much loss would be
deductible in 2022 if P300,000 was:
a. Stolen by a theft?
b. Embezzled by the Mr. Kaw?
ANSWER
a. If the P300,000 was stolen by a theft to the Krazy
Corporation, the entire P300,000 may be deducted as a loss of
2022.
b. If Mr. Kaw Atan was proven to have a stolen the entire

P300,000 may be deducted as a loss in 2022.
ILLUSTRATION
Assume that Mr. Kaw Atan abandoned his job in 2023, and
despite the reasonable effort of the company and policemen
to find him he cannot be found anymore.
ANSWER
In this case, Krazy Corporation can now deduct a loss from
embezzlement reduced by cash bond or insurance recovery.
Receivable from the treasurer P300,000

Less: Cash bond recovery 30,000
Deductible loss in 2023 P270,000
NET OPERATING LOSS
CARRY-OVER (NOLCO)
- pertains to the excess of expense deduction
over gross income during a taxable year which is
allowed by the law to be deducted against the
net income of the following three years.
Technically, NOLCO is not an expense. It is a

special deduction incentive allowed by law.
Technically, deduction incentives are deductible
only in the year they are availed of but NOLCO is
exceptionally allowed to be carried over three
years.
WHAT ARE SPECIAL
ALLOWABLE ITEMIZED
DEDUCTIONS?
Special deductions are other items of deductions which may or may
not partake the nature of an expense, but are allowed by the NIRC or
by special laws as deductions. Special deductions include deduction
incentives to taxpayers in assisting and in complying with certain legal
requirements.

SPECIAL ALLOWABLE
DEDUCTIONS
Special Allowable Deductions
A. Special expenses under the NIRC and special laws.
1. Income distribution from a taxable estate or trust
2. Transfer to reserve funds and payments to policies and annuity contracts of insurance companies.
3. DIvidend distribution of a Real Estate Investment Trust (REIT) under RA 9856
4. Transfer to reserves funds of taxable cooperatives
5. Discounts to senior citizens under RA 9257
6. Discounts to persons with a disability under RA 9442
7. Additional expenses on apprenticeship agreement
B. Deduction incentives under the NIRC and special laws

1. .Additional compensation expense for senior citizen employees under RA 9257
2. Additional compensation expense for persons with disability under RA 7277, as amended by RA
9442
3. Cost of facilities improvements for persons with disability in accordance with RA 7277, as
amended by RA 9442
4. Additional training expense under RA 8502 - Jewelry Industry Development Act of 1998
5. Additional labor training expense under the RA 11534 - CREATE law
6. Additional contribution expense under the Adopt-a-School program under RA 8525
7. Additional deductions for compliance to rooming-in and breast-feeding practices under RA 7600,
as amended by RA 10028
8. Additional free legal assistance expense under RA 9999
9. Additional Productivity incentive bonus expense under RA 6971
NET OPERATING LOSS (NOL)
Pertains to the excess of allowable
deductions over the gross income of the
business or exercise of a profession
NOL VS. NOLCO
It must be noted that a net
operating loss is technically
different with a NOLCO. A net
operating loss may occur, but may
not be carried over; hence, no
NOLCO. However, a NOLCO cannot
exist without a prior year net
operating loss.
THE RATIONALE OF NOLCO
NOLCO is intended to allow the
taxpayer to recoup his losses
before taxation go full swing.
Without NOLCO, income taxation
would result in taxation of
recoveries of lost capital.
WHO CAN CLAIM NOLCO?
All taxpayers subject to tax on taxable
income whether at the regular income tax or
at preferential tax rate can deduct NOLCO.
Taxpayers who are exempt, enjoying a tax
holiday, subject to tax on gross income, or
those subject to final income tax, cannot
deduct NOLCO.
TAXPAYER ENTITLED TO
DEDUCT NOLCO
1. Individuals engaged in trade or business or in the exercise of the
profession.
2. Estates and trusts (treated as if individuals, if the property of the
deceased is engaged in a business, NOLCO can be claimed
cause they are treated as individuals, same goes through with
trusts)
3. Domestic and resident foreign corporations subject to normal
income tax
4. Special corporations subject to preferential tax rates such as
private educational institutions, hospitals, and regional
operating headquarters
5. Tourism enterprises registered with the tourism infrastructure
and enterprise zone authority.
HOW TO COMPUTE NOLCO?
NOLCO is computed as follows:
Gross Income subject to regular tax XXX
LESS:
Total Deductions excluding NOLCO from prior

years and deduction incentives under special (XXX)
laws
NET OPERATING LOSS-CARRY OVER (NOLCO) (P xxx,xxx)
**Deduction incentives are not actual operating expenses. They are not
actual costs. Hence, they must be excluded in the amount of net
operating loss carry over.**
GENERAL PRINCIPLES
AND POLICIES
GENERAL PRINCIPLES AND POLICIES
[NOLCO OF THE ACQUIRER] In general, NOLCO shall be allowed as
a deduction of the same taxpayer regardless of the change in its
ownership.
1. Under the RR14-2001, the NOLCO of the acquirer which it incurred

before the merger or consolidation continues to be deductible even
after merger or consolidation so long as there is no substantial
change in its ownership.
[NOLCO OF THE ACQUIREE] However, NOLCO shall be allowed only

if there is no substantial change in ownership of the business: it
should be held by or on behalf of the same persons which is 75% in
nominal value of outstanding share and 75% of the paid up capital.
HistorIcally, the BIR consistently ruled that NOLCO is transferable to the
surviving corporation since it is viewed as part of the rights, privileges,
properties, and/or interests that will be transferred to and vested in the
surviving corporation upon merger or consolidation.
However, under BIR Ruling 214-2012, the BIR ruled that NOLCO is not one of
the assets of the absorbed corporation that can be transferred and absorbed
by the surviving corporation, nothing that it is a privilege or deduction that
can availed only by the absorbed corporation.
REQUISITES OF DEDUCTIBILITY
1. The taxpayer must not be exempt from income tax during the taxable
year when the NOLCO incurred.
2. There has been no substantial change in ownership of the business or
enterprise.
[RATIONALE OF THE RULE ON SUBSTANTIAL CHANGE IN OWNERSHIP]
NOLCO shall not be transferred or assigned to another person
a. Under Sec. 34(D)(3) of the NIRC, NOLCO is not allowed as a deduction
when there is a substantial change in the ownership of the business.
It is clear that the privilege for NOLCO deduction is reserved by the
law only to the group of owners who subsequently acquired a
substantial interest in the business. NOLCO is not a transferable right,
privilege, or interest.
NOLCO shall be allowed as a deduction in computing the taxpayer's
quarterly income tax returns and annual final adjustment income tax
return
(when can we deduct NOLCO? If a quarterly return and annual return
has been filed.)
RULES IN CARRY-OVER OF NOLCO
1. NOLCO is claimable in a first-in first-out (FIFO) fashion.
For example, in 2021, your company is at loss and in year 2022, you
are still suffering losses, if you carry over the next year, you will first
offset the loss in year 2021.
2. NOLCO can be claimed only up to the extent of the business net

income in the next three years. Prior year NOLCO could not be deducted
against a subsequent year net operating loss.
[NOLCO AND NET CAPITAL LOSS CARRY OVER] NOLCO is deductible against
available net income in the next three years of the operation. Net capital loss
carryover is deductible only up to the extent of the net capital gain in the
immediately following year.
Net Capital loss carry-over cannot be claimed simultaneously with NOLCO. In

accordance with the income tax benefit rule, no capital loss carry-over is allowed
in the year's operation resulted in a net operating loss.
(NOLCO deduction is not permanent or for life, it is only allowed for 3 years)
(if OSD[optional standard deductions], no NOLCO because they are arising
from allowable deduction)
if MCIT [minimum corporate income tax] > NIT [normal income tax- no
NOLCO)
3. Any NOLCO which remains unused at the end of the three-year prescriptive
period will expire.
·NOLCO shall be presented as a separate line item of deductions. It shall not

be included as part of other itemized deductions. It must be shown in the
RECONCILIATION SECTIONof the tax return Nolco is part of the discussion
regarding losses but it shall not be mixed with your other losses.
[Treatment of NOLCO]
Net operating loss carry-over (NOLCO) is treated as a separate item of deduction
in the next three (3) consecutive taxable years to the extent of the available net
income before NOLCO deduction in those periods.
To aid taxpayers during the pandemic, the CREATE law

allowed NOLCO incurred during taxable years 2020 and 2021
to be carried over a period of five (5) years. For taxpayers on a
fiscal year basis, NOLCO for fiscal year ending on or before
June 30,2021 and June 30,2022 will be carried over 5 years.
Note that NOLCO incurred after this two-year period will
revert back to the original 3-year carry-over period.
PROBLEMS
PROBLEM 1
In 2021, Mr. Reales started the “CocoLoco” manufacturing plant with less than
P3,000,000 capitalization and was registered as a Barangay Micro Business
Enterprise (BMBE).
At the start of 2022, Mr. Reales’ certificate of authority to operate as BMBE

was revoked when he upscaled his business operations.

2021 2022 2023
Gross Business Income P600,000 P800,000 P1,800,000
LESS: Business
950,000 1,000,000 1,300,000
Expenses
Net Income
(P350,000) (P200,000) P500,000
(NOLCO)
Required: Compute the taxable net income in 2023

PROBLEM 1
SOLUTION:

2021 2022 2023
Net Income
(P350,000) (P200,000) P500,000
(NOLCO)
2021 NOLCO
200,000 (200,000)
application
Net Income P P300,000

PROBLEM 2
A mixed income earner who commenced a business in 2019, had the
following records for tax purposes:
PROBLEM 2
EDROSO, REALES, BACULE
NET OPERATING LOSS CARRY-OVER (NOLCO) - pertains to the excess of expense deduction over gross
income during a taxable year which is allowed by the law to be deducted against the net income of the
following three years.
Technically, NOLCO is not an expense. It is a special deduction incentive allowed by law. Technically,
deduction incentives are deductible only in the year they are availed of but NOLCO is exceptionally
allowed to be carried over three years.
WHAT ARE SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS?
Special deductions are other items of deductions which may or may not partake the nature of an expense,
but are allowed by the NIRC or by special laws as deductions. Special deductions include deduction
incentives to taxpayers in assisting and in complying with certain legal requirements.
Special Allowable Deductions
A. Special expenses under the NIRC and special laws1.

1. Income distribution from a taxable estate or trust
2. Transfer to reserve fund and payments to policies and annuity contracts of insurance
companies.
3. DIvidend distribution of a Real Estate Investment Trust (REIT) under RA 9856
4. Transfer to reserves funds of taxable cooperatives
5. Discounts to senior citizens under RA 9257
6. Discounts to persons with disability under RA 9442
7. Additional expenses on apprenticeship agreement
B. Deduction incentives under the NIRC and special laws
1. Additional compensation expense for senior citizen employees under RA 9257
2. Additional compensation expense for persons with disability under RA 7277, as amended
by RA 9442
3. Cost of facilities improvements for persons with disability in accordance with RA 7277, as
amended by RA 9442
4. Additional training expense under RA 8502 - Jewelry Industry Development Act of 1998
5. Additional labor training expense under the RA 11534 - CREATE law
6. Additional contribution expense under the Adopt-a-School program under RA 8525
7. Additional deductions for compliance to rooming-in and breast-feeding practices under
RA 7600, as amended by RA 10028
8. Additional free legal assistance expense under RA 9999
9. Additional Productivity incentive bonus expense under RA 6971
Net Operating Loss (NOL) - pertains to the excess of allowable deductions over the gross income of the
business or exercise of a profession during the taxable year.
NOL vs. NOLCO

It must be noted that a net operating loss is technically different with a NOLCO. A net operating loss may
occur, but may not be carried over; hence, no NOLCO. However, a NOLCO cannot exist without a prior
year net operating loss.
The Rationale of NOLCO
NOLCO is intended to allow the taxpayer to recoup his losses before taxation go full swing. Without
NOLCO, income taxation would result in taxation of recoveries of lost capital.
[The government wants to help new businesses that is why NOLCO is allowed as a deduction. Not all
businesses prosper immediately, and it is discouraging to think that while you are still starting your
operations, you will have to pay tax already. That is why expenses are allowed even before. Operating loss
will then become a deduction once the business starts to generate income.]
Who can claim NOLCO?
All taxpayers subject to tax on taxable income whether at the regular income tax or at preferential tax
rate can deduct NOLCO. Taxpayers who are exempt, enjoying a tax holiday, subject to tax on gross income,
or those subject to final income tax, cannot deduct NOLCO.
Taxpayer Entitled to Deduct NOLCO

1. Individuals engaged in trade or business or in the exercise of profession
2. Estates and trusts (treated as if individuals, if the property of the deceased is engaged in a
business, NOLCO can be caimed cause they are treated as individuals, same goes through with
trusts)
3. Domestic and resident foreign corporations subject to normal income tax
4. Special corporations subject to preferential tax rates such as private educational institutions,
hospitals, and regional operating headquarters
5. Tourism enterprises registered with the tourism infrastructure and enterprise zone authority.
How to compute NOLCO?
NOLCO is computed as follows:
Gross income subject to regular tax xxx

Less:
Total deductions excluding
NOLCO from prior years
and deduction incentives
under special laws (xxx xxx)
Net operating loss carry-over (NOLCO) (P xxx xxx)
**Deduction incentives are not actual operating expenses. They are not actual costs. Hence, they must
be excluded in the amount of net operating loss carry over.**
• [NOLCO OF THE ACQUIRER] In general, NOLCO shall be allowed as a deduction of the same
taxpayer regardless of the change in its ownership.
Under the RR14-2001, the NOLCO of the acquirer which it incurred before the merger or
consolidation continues to be deductible even after merger or consolidation so long as there is no
substantial change in its ownership.
• [NOLCO OF THE ACQUIREE] However, NOLCO shall be allowed only if there is no substantial
change in ownership of the business: it should be held by or on behalf of the same persons which
is 75% in nominal value of outstanding share and 75% of the paid up capital.
HistorIcally, the BIR consistently ruled that NOLCO is transferable to surviving corporation since it
is viewed as part of the rights, privileges, properties, and/or interests that will be transferred to
and vested in the surviving corporation upon merger or consolidation.
However, under BIR Ruling 214-2012, the BIR ruled that NOLCO is not one of the assets of the
absorbed corporation that can be transferred and absorbed by the surviving corporation, nothing
that it is a privilege or deduction that can availed only by the absorbed corporation.
REQUISITES OF DEDUCTIBILITY
1) The taxpayer must not be exempt from income tax during the taxable year when the
NOLCO incurred.
2) There has been no substantial change in ownership of the business or enterprise.
• [RATIONALE OF THE RULE ON SUBSTANTIAL CHANGE IN OWNERSHIP] NOLCO shall not be

transferred or assigned to another person
Under Sec. 34(D)(3) of the NIRC, NOLCO is not allowed as deduction when there is a substantial
change in the ownership of the business. It is clear that the privilege for NOLCO deduction is
reserved by the law only to the group of owners who subsequently acquired substantial interest
in the business. NOLCO is not a transferable right, privilege, or interet.
• NOLCO shall be allowed as a deduction in computing the taxpayer's quarterly income tax returns
and annual final adjustment income tax return
o (when can we deduct NOLCO? If a quarterly return and annual return has been filed.)
[NOLCO FOR INDIVDUAL TAXPAYERS]
For individuals who are mixed income earners, NOLCO is measured by separating
compensation income from business or professional income following the income
classification and globalization rule.
• RULES IN CARRY-OVER OF NOLCO

1) NOLCO is claimable in a first-in first-out (FIFO) fashion. [For example, in 2021, your
company is at loss and in year 2022, you are still suffering losses, if you carry over the
next year, you will first offset the loss in year 2021.]
2) NOLCO can be claimed only up to the extent of the business net income in the next three
years. Prior year NOLCO could not be deducted against a subsequent year net operating
loss.
[NOLCO AND NET CAPITAL LOSS CARRY OVER] NOLCO is deductible against available
net income in the next three years of the operation. Net capital loss carryover is
deductible only up to the extent of the net capital gain in the immediately following year.
Net Capital loss carry-over cannot be claimed simultaneously with NOLCO. In accordance
with the income tax benefit rule, no capital loss carry-over is allowed in the year's
operation resulted in a net operating loss.
o (NOLCO deduction is not permanent or for life, it is only allowed for 3 years)
o (if OSD[optional standard deductions], no NOLCO because they are arising from
allowable deduction)
o (if MCIT [minimum corporate income tax] > NIT [normal income tax- no NOLCO)
3) Any NOLCO which remains unused at the end of the three-year prescriptive period will
expire.
• NOLCO shall be presented as a separate line item of deductions. It shall not be included as part of
other itemized deductions. It must be shown in the RECONCILIATION SECTION of the tax return
Nolco is part of the discussion regarding losses but it shall not be mixed with your other losses.
[Treatment of NOLCO]
Net operating loss carry-over (NOLCO) is treated as a separate item of deduction in the next three
(3) consecutive taxable years to the extent of the available net income before NOLCO deduction
in those periods.
To aid taxpayers during the pandemic, the CREATE law allowed NOLCO incurred during taxable
years 2020 and 2021 to be carried over a period of five (5) years. For taxpayers on a fiscal year
basis, NOLCO for fiscal year ending on or before June 30,2021 and June 30,2022 will be carried
over 5 years. Note that NOLCO incurred after this two-year period will revert back to the original
3-year carry-over period.
EXAMPLES:
● PROBLEM 1 (p559-560)
In 2021, Mr. Reales started the “ Apple glow’ (e change lng nya gud ang name sa company karl
haha) manufacturing plant with less than P3,000,000 capitalization and was registered as a
Barangay Micro Business Enterprise (BMBE). At the start of 022, Mr. Tan’s certificate of
authority to operate as BMBE was revoked when he upscaled his business operations.
Mr. Reales’ business gross income and business expense were as follows:
2021 2022 2023
Gross Business 600,000 800,000 1,800,000

Income
Less: Business 950,000 1,000,000 1,300,000

expenses
Net Income (P350,000) (P200,000) P500,000

(NOLCO)
Required: Compute the taxable net income in 2023.
Solution:
2021 2022 2023
Net income (P350,000) (P200,000) P500,000

(NOLCO)
2021 NOLCO 200,000 (200,000)

application
Net Income P - P300,000
As you can see, the P350,000 net operating loss incurred in a year when the taxpayer was tax
exempt. This operating loss cannot be carried over as NOLCO. The P200,000 net operating
loss occurred in a year when the taxpayer was taxable. This operating loss can be carried over
as NOLCO. Hence, this is carried over as deduction in 2023.
● PROBLEM 2
A mixed income earner who commenced a business in 2019, had the following records for tax
purposes:
2019 2020 2021 2022
Compensation 300,000 300,000 300,000 300,000

Income
Gross Service 500,000 520,000 490,000 500,000

Revenue
Allowed 600,000 460,000 470,000 440,000

Deductions
Net Income/ (100,000) 60,000 20,000 60,000
NOLCO
(60,000) (20,000) (20,000)
Taxable —------- —----------- 40,000

business
income
Total taxable 300,000 300,000 340,000

income
An individual taxpayer who is a mixed income earner had the following records. For the purpose
of computing NOLCO for an individual, we need to separate his income from business and
compensation. In 2019, 100,000 loss from the business operation shall be the NOLCO. In 2020,
there was net income of 60,000, from this amount, NOLCO of 60,000 will be deducted. Observe
that the deduction shall only be up to the extent of the net income, thus only the compensation
income shall be taxable in 2020. So because a portion of NOLCO was used, there still remains
40,000, which in the following year, 20,000 was used again as a deduction. Finally, on 2022,
there still remains 20,000 from the NOLCO and can still be deducted from the net income of
2022.
Now, to modify the illustration, assuming the taxpayer is a corporation. There would be no
compensation income, but our computation with regards to business income and NOLCO shall
be the same.
2019 2020 2021 2022
Gross income 500,000 520,000 490,000 500,000
Allowed 600,000 460,000 — 440,000

Deductions
Net Income (100,000) 60,000 20,000 60,000

/(NOLCO)
(60,000) (20,000) (20,000)
Taxable Income — — — 40,000

ALLOWABLE
ITEMIZED
DEDUCTIONS
BAD DEBTS
BAD DEBTS
-Debts resulting from the worthlessness or uncollectibility, in whole or in

part, of amounts due the taxpayer by others, arising from money lent or
uncollectible amounts of income from goods sold or services rendered.
REQUISITES
1. There must be an existing indebtedness
due to the taxpayer which must be valid
and legally demandable.
2. The debt must be connected with the
profession, trade, or business of the
taxpayer.
3. The debt must not be sustained in a
transaction entered into between
related parties enumerated under Sec.
36(B) of the tax code.
4. The debt must actually be ascertained
to be worthless and uncollectible as of
the end of the taxable year.
5. The debt must be actually charged off
the books of account of the taxpayer as
of the end of the taxable year.
ILLUSTRATION
Ms. Sarmiento, a lending investor, loaned a corporation

P1,000,000. After three taxable periods, the
corporation became bankrupt. The entire principal and
accrued interest of P240,000 became worthless.
THANK
YOU!
Charitable and
Other Contributions
Charitable and
Other Contributions
FULLY DEDUCTIBLE CONTRIBUTIONS
Charitable and
Other Contributions
FULLY DEDUCTIBLE CONTRIBUTIONS
CONTRIBUTIONS SUBJECT TO LIMIT
CHARITABLE AND OTHER CONTRIBUTIONS
Contributions or gifts made to the government or

non-government organizations (NGOs) that may be
deducted against gross income of the donor.
03 Donor’s taxable income

and tax due is reduced
Donor donates
in cash or in kind DONOR
01 02
Value of donation
becomes deductible
GOV’T and NGOs uses
03 funds for general welfare
or in accordance with the
organization’s cause
GOV’T institutions
and NGOs receives GOV’T
donation
01 02 GOV’T and NGOs
obtain additional funds
or assets for their cause
Requisites
REQUISITES
VINCED
REQUISITES
Valued at the tax basis of the property donated

REQUISITES

Income of the done must not inure to the benefit of any private
stockholder or individual
REQUISITES

Notice of Donation filed by donor to the RDO (30 days; P50,000)
REQUISITES

Certificate of Donation (BIR Form 2322) issued by donee
REQUISITES

Taxpayer must be Engaged in trade or business
REQUISITES

Taxpayer must be Engaged in trade or business
Donee must be Domestic institution
REQUISITES
Those that fail to qualify to any of the requisites

are non-deductible.
A. Fully Deductible Contributions

B. Contributions Subject to Limit

Contributions are deductible in full under the following conditions:
1. Donations to the Government of the Philippines or any of its agencies or
political subdivisions including fully owned government corporations,
exclusively to be used in undertaking priority activities in the National
Economic Development Authority's (NEDA) Annual Priority Plan:
a. Education
b. Health
c. Youth and Sports Development
d. Human Settlements
e. Science and Culture
f. Economic Development
2. Donations to foreign institutions or international
organizations in pursuance or in compliance with
agreements, treaties or special laws.
Note that this is an exception to the rule that the donee institutions
must be a domestic organization.
a. Department of Social Welfare and
Development - for charitable and/or social
welfare organizations, foundations and
associations
b. Department of Science and Technology -

for research and scientific activities
c. Philippine Sports Commission - for sports

3. Donations to accredited Non-Government development
Organizations organized and operated exclusively
for: d. National Council for Culture and Arts -
for cultural activities
Pursuant to EO 671, the NGO must be an accredited
donee institution with certifications issued by the
following designated accrediting entities: e.Commission on Higher Education - for

educational activities
Requisites for full
deductibility of contributions
to accredited NGOs
1 .The NGO must be organized and operated exclusively for the aforementioned
purposes, and no income inures to the benefit of the individuals.
2. The non-profit organization makes utilization of the contribution not later than
15th day of the third month after the close of its taxable period.
3. The administrative expenses of the NGO do not exceed 30% of its total expenses.
4. Members of the Board of Trustees must not receive remunerations
5. In the event of liquidation, the asset of the NGO will be distributed to another non-
profit domestic corporation organized for similar purposes.
6. The amount of contribution of property other than money must be valued at
acquisition cost.
Contributions
Subject to Limit
Contributions subject to Limit
❑ Contributions are deductible subject to limitations
under the following conditions:
❑ Donations to the Government of the Philippines or any

of its agencies or political subdivisions including fully
owned government corporations, to be used in a non
priority activities, but exclusively for public purpose.
Contributions are deductible subject to limitations under
the following conditions:
For Corporations For individuals
□ the limit is 5% of the taxable □ the limit is 10% of the taxable
income from trade or practice of income from trade or practice of
profession before the deduction profession before the deduction
for charitable contributions. for charitable contributions.
3
Gross Income Pxxx Gross Income Pxxx
Deductions before Contributions ( xxx) Deductions before Contributions ( xxx)
Net Income before Contributions xxx Net Income before Contributions xxx
Multiplied: Limit 10% Multiplied: Limit 5%
Threshold xxx Threshold xxx
Compare with Actual Amount xxx Compare with Actual Amount xxx
(Choose whichever is lower.) (Choose whichever is lower.)
4
ILLUSTRATION - Corporate Taxpayer
• YG Corporation had a gross income from business of
P 1,000,000, business expenses of P 400,000, and
contributions deductible but subject to limitation to JYP
Association of P 10,000 and SM Association of P 40,000.
.
• Compute the taxable income of YG Corporation.
5
ILLUSTRATION - Corporate Taxpayer
Solution:
Gross Income
“
Less: Business Expenses excluding Contributions
P 1,000,000
( 400,000)
Net Taxable Income Before Contributions 600,000
Less: Charitable Contributions Claimed
Actual Amount:
To JYP Association P 10,000
To SM Association 40,000
Total P 50,000
LIMIT (P 600,000 x 5%) 30,000 ( 30,000)
Net Taxable Income P 570,000
6
ILLUSTRATION - Individual Taxpayer
• Mark Ocampo, married, had a gross income from business of
P 800,000 and business expenses of P 600,000. He made
contributions to the City Government of Cebu for Youth and Sports
Development amounting to P 12,000, and to his barangay for road
widening P 25,000.
• Compute the taxable income of Mark Ocampo.
7
ILLUSTRATION - Individual Taxpayer
Solution:
Gross Income P 800,000
Less: Business Expenses excluding Contributions ( 600, 000)
Net Taxable Income Before Contributions 200,000
Less: Charitable Contributions Claimed
Deductible in full P 12,000
Subject to Limit (Actual) P 25,000
LIMIT (P 200,000 x 10%) 20,000 20,000 ( 32,000)
Net Taxable Income P 168,000
8
Research and development costs are costs that result from research and development
activities. Research activities aim to discover new knowledge while development
activities have for their goal the determination of the application of research knowledge
which enable the business to generate income and to reap more benefits. These
improvements of processes and formulas as well as the development of improved or
new products involve expenditures which are called research and development costs.
There are two types of research and development cost. These are:
1.) Costs for acquisition or improvements of property subject to depreciation or
depletion used in research and development.
This is the first cost that the taxpayer would likely to incur or spend on. This may
result from the construction of a facility, an establishment, or a laboratory intended to be
used for research purposes. These properties or facilities used for research are subject
to depreciation. They are capitalized as part of the cost of the property and deducted
through depreciation expense. Hence, the rules of depreciation applies and not those of
research.
2.) Other research and development costs not related to capital accounts
These may include salaries of the researcher, any feasibility studies, and any
other costs for research and development. But these do not include costs of facilities,
buildings, laboratories used for research and development.
“other research and development costs” not related to capital accounts.
(1) In General. - A taxpayer may treat research or development expenditures which are
paid or incurred by him during the taxable year in connection with his trade, business or
profession as ordinary and necessary expenses which are not chargeable to capital
account.
• This is because if the research and development cost is a property or chargeable
to capital account then it is subject to the rules of depreciation.
The expenditures so treated shall be allowed as deduction during the taxable year when
paid or incurred.
• It is always necessary that these expenses are ordinary for the taxpayers’
business or practice of profession. And these expenditures are related to the
taxpayer’s rate and are paid or incurred in the taxable year before it could be
deducted from the taxpayer’s gross income.
(2) Amortization of certain research and development expenditures
• Note: Let us remember that these do not include those research and
development costs that are spent to properties which are subject to depreciation.
At the election of the taxpayer, the following research and development expenditures
may be treated as deferred expenses:
a) Those paid or incurred by the taxpayer in connection with his trade, business or
profession
b) Those which are not treated as expenses
c) Those chargeable to capital account but not chargeable to property of a character
which is subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be allowed as deduction

ratably distributed over a period of not less than 60 months as may be elected by the
taxpayer (beginning with the month in which the taxpayer first realizes benefits from
such expenditures).
SUMMARY OF RULES
Costs for acquisition of property or Other research and development costs
improvement for research purposes
1.) capitalize the cost, and At the option of the taxpayer:
2.) include the cost in computing OPTION 1- claim as outright expense; full
depreciation or depletion, whichever is expenditure in the year of incurrence of
applicable incurrence or payment
OPTION 2- amortized not less than sixty

(60) months
Description of table:
Let us start with the costs for acquisition of property or improvement for
research purposes which, again, refer to costs for properties, facilities, or
improvements and are costs chargeable to the property. With this, we capitalize the cost
as part of the cost of the property and we include the cost in computing depreciation or
depletion, whichever is applicable. Hence, it can be said that the rules on depreciation
and depletion applies when the research and development is related to a property.
Then second, we have other research and development costs or those costs that
are not related to capital accounts. Again, these may pertain to salary of researchers,
feasibility studies, or consultants. With this, the taxpayer has two options. (1) Taxpayer
can claim the costs as an outright expense which means these are fully deductible from
gross income in the year paid or incurred if such expenditure may be treated as ordinary
and necessary expenses. (2) The taxpayer can defer and allow the costs as a deduction
which are to be amortized over a period of no less than 60 months and it must be noted
that the amortization will only start the moment the taxpayer realize benefits from the
research and development expenditures.
ILLUSTRATION:
A manufacturer of food seasoning is continuously conducting research and
development on its product lines.
In 2018, it extended its research and development building at a cost of ₱1,000,000

which is estimated to be used for 20 years, and incurred an aggregate amount of
₱1,800,000 for other research and development costs that will immediately benefit the
company. How are these costs treated for income tax purposes?
Now let us try to analyze the problem. The one million cost is used for the extension of a
property used for research, hence, it will be subject to the rules of depreciation. On the
other hand, the ₱1,800,000 could be amortized or could be deducted in full. It is up to
the taxpayer as to what option he will be taking.
In this problem, we can say that the ₱1,000,000 shall be capitalized and will be
depreciated since such costs were incurred for building the extension. This will be
considered as a building improvement and be treated as an asset subject to
depreciation. While the ₱1,800,000, at the option of the taxpayer, may either be:
• Deducted in full in the year 2018, or
• Amortized over 60 months beginning the date where the taxpayer benefits from
such research and development expenditures
However, it was mentioned in the problem that the ₱1,800,000 had immediately
benefited the taxpayer. So the building will be depreciated as follows using the straight-
line method.
𝐶𝑜𝑠𝑡 − 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
₱1,000,000 − ₱0
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
20 𝑦𝑒𝑎𝑟𝑠
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = ₱50,000 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟

Assuming the taxpayer opted to amortize the “Other Research and Development
Costs”, the amortization will be computed as follows:
𝑅𝑒𝑠𝑒𝑎𝑟𝑐ℎ 𝑎𝑛𝑑 𝐷𝑒𝑣𝑒𝑙𝑜𝑝𝑚𝑒𝑛𝑡 𝐶𝑜𝑠𝑡𝑠
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
60 𝑚𝑜𝑛𝑡ℎ𝑠 (𝑜𝑟 5 𝑦𝑒𝑎𝑟𝑠)
₱1,800,000
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 =
60 𝑚𝑜𝑛𝑡ℎ𝑠 (𝑜𝑟 5 𝑦𝑒𝑎𝑟𝑠)
𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = ₱360,000 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 → the amount of research and development

cost to be deducted from the gross income for the year 2018
Again, it must be noted that the taxpayer can only amortize these costs when
there is already a realized benefit. So without the realized benefit, then the
taxpayer cannot deduct the research and development cost as a deduction from
gross income.
IF you may ask, what will happen if the taxpayer would not realize any benefit from this
research such that it did not succeed? In this case, the taxpayer will deduct the entire
Other Research and Development Cost as a deduction from his gross income in full
amount.
INCOME TAXATION 1
Pension
Trust
Presented by Kylan Kym Carreon & Angel Mycha Yllah
Quinaging
MAIN TOPICS
POINTS TO TALK ABOUT
Definition
Requisites
Rules
Sample Problems
DEFINED CONTRIBUTION PLAN
post-employment benefit plan under which an

entity pays fixed contributions into a separate
entity known as the fund.
The contribution is definite, while the benefit is

indefinite.
The benefit is dependent upon the performance

of the fund.
The employee assumes the risk of loss.

Defined Benefit Plan
The employer guarantees the number of benefits

to the employees and makes contributions
depending on the fund’s performance.
The benefit is definite, while the contribution is
indefinite.
The employer assumes the risk of loss or failure to
satisfy benefit.
DEDUCTIBLE EXPENSE =
AMOUNT OF
CONTRIBUTION OR
FUNDING

* EMPLOYEE PERSONAL CONTRIBUTIONS ARE
NONDEDUCTIBLE
CURRENT SERVICE COST

refers to the pension expense of the employer accruing under the term of the
pension plan for services rendered by the employee during the year
PAST SERVICE COST

refers to the pension expense of the employer accruing in prior years for services
rendered by the employee before the establishment of the pension fund and
additional pension expenses accruing in years arising from improvements of the
benefits offering of the plan
*Excess Contributions of Current Service Cost is presumed funding of past

service cost.
REQUISITES OF
DEDUCTIBILITY OF
PENSION EXPENSE
1. Maintains a reasonable pension plan
2. Sound and reasonable actuarial assumptions—this
applies to defined benefit plan for the reason that
contributions are not definite
3. The employer actually funds the fund.

4. The fund assets must be independent from and not
subject to the control or disposal of the employer.
5. Contribution for current service cost is deductible in full.

6. Contribution for past service cost is amortized over a
period of 10 years.
Rules in Computing
the Deductible Pension Expense
RULE #1
RULE #2
The contribution to
Excess of
the fund is first
contribution over
attributed to current
current service cost
service cost. Hence,
is funding to
contributions are
unfunded past
deductible up to the
service cost and is
extent of current
amortized over a
service cost.
period of 10 years.
SAMPLE PROBLEMS
PROBLEM 1
In case your employer maintains a pension trust fund for its
employees and made the following contributions as provided by
the actuary:
The deductible pension contributions for the year 2020 and 2021 can be
computed as follows:
2020:
Current Service Cost P200,000
Past Service Cost Amortization in 2020 9,000
Deductible Pension Expense P209,000
Note:
1. Contributions are deductible up to the extent of current service cost,
hence recognized in full.
2. The amount of P90,000 past service cost is amortized over a period of
10 years. Past service cost is only P9,000 each year until 2029.
3. The sum of current and past service costs is the deductible pension
expense to be recognized by the employer.
4. Contributions by employees are nondeductible.

2021:
Current Service Cost P200,000
Past Service Cost Amortization from 2020 9,000
Past Service Cost Amortization in 2021 5,000
Deductible Pension Expense P214,000

.
Note:
Contributions are deductible up to the extent of the current
service cost, hence recognized in full.
The amount of P50,000 past service cost is amortized over a
period of 10 years. Past service cost is only P5,000 each year
until 2030.
The sum of current and past service costs is the deductible
pension expense to be recognized by the employer.
Contributions by employees are nondeductible.

PROBLEM 2
DATA FROM THE ACTUARY SHOWS THAT THE EMPLOYER MADE THE
FOLLOWING CONTRIBUTIONS, AND

OTHER PERTINENT INFORMATION
AS A RESULT OF THE ESTABLISHMENT OF A PENSION PLAN FOR ITS
EMPLOYEES.
THE 2021 DEDUCTIBLE PENSION EXPENSE SHALL BE
PENSION CONTRIBUTION P500,000
FUNDING OF CURRENT SERVICE COST 200,000 P200,000
EXCESS- FUNDING OF PAST SERVICE COST P300,000
DIVIDE BY: AMORTIZATION PERIOD 10 30,000
DEDUCTIBLE PENSION EXPENSE P230,000

NOTE:
THE EXCESS OF PENSION CONTRIBUTIONS OVER CURRENT
SERVICE COST SHALL BE ATTRIBUTED AS FUNDING OF
PRIOR SERVICE COST.
THE FUNDING OF PAST SERVICE COSTS SHALL BE
AMORTIZED OVER A PERIOD OF 10 YEARS. THE ANNUAL
AMORTIZATION SHALL BE 30,000 AND WILL END BY 2031.
ONLY THE CONTRIBUTIONS ATTRIBUTED TO CURRENT
SERVICE COST AND ANNUAL AMORTIZATION OF PAST
SERVICE COST SHALL FORM PART OF THE DEDUCTIBLE
PENSION EXPENSE.
I N C O M E
T A X A T I O N
Special
Deductions
Arellano, Mary Rose
Azucenas, RJ Cartin
Liu, Aleah Jacynth
Subtopics
Net transfer to reserve fund and
payments to policies and annuity
contracts of Insurance Companies
Dividend distribution of REIT under
RA No. 9856
Transfer to reserve fund of
Cooperatives
N E T T R A N S F E R T O
R E S E R V E F U N D S A N D
P A Y M E N T S T O
P O L I C I E S A N D
A N N U I T Y C O N T R A C T
O F I N S U R A N C E
C O M P A N I E S
Azucenas, RJ Cartin
Net transfer to reserve funds and
Under the insurance code, non-life insurance companies
are required to maintain a reserve equivalent of 40%
of their gross premium, less returns and cancelation for
risk expiring between one year.
For the marine cargo risks, the

the reserve is equivalent to
amount of premium on insurance
during the last two months of the
calendar year.
The net additions, if any,
required by law to be made
within a year to be reserve funds
and the sums, other than
dividends, paid within the year
on policy and annuity contracts
maybe deducted from gross
income of insurance companies.
Under the current regulation, the
transfer to the reserve fund shall
be deductible in the year it was
actually paid and not the year it
was actually determined. Also in
consonance with the tax benefit
rule, the release of the reserve is
treated as an income in the year
of lease.
lllustration 1. The following relates to the performance of an insurance company:
Related Activities Unrelated Activities TOTAL

Premium Revenue P 2,100,000 P 3,000,000 P 2,500,000
Premium Ceded 420,000 600,000 500,000
Claim Expense 200,000 800,000 1,000,000
Commission Expense 100,000 300,000 250,000
Administrative Expense 300,000 350,000 340,000
Required Legal Reserves 672,000 960,000 800,000
Requirement: Determine the special deductions and the net income assuming
that the required treansfer to the reserve funds were made in the same year.
SOLUTIONS
2020 2021 2022
PRequired Reserves P 672,000 P 960,000 P 800,000
Less: Prior Year-Expense 0 672,000 960,000
Amount Payable (Receivable) P 672,000 P 288,000 P(160,000)
THE NET INCOME OF INSURANCE COMPANY SHALL BE
COMPUTED AS FOLLOWS:
2020 2021 2022

Premium Revenue P 2,100,000 P 3,000,000 P 2,500,000
(Premium Ceded) 420,000 600,000 500,000
Net Premium 1,680,000 2,400,000 2,000,000
Release from Reserve - - 160,000
Gross Income 1,680,000 2,400,000 2,160,000
Less:

Regular Allowable Deductions

Claim Expense P 200,000 P 800,000 P 1,000,000

Commission Expense 100,000 300,000 250,000
Administrative Expense 300,000 350,000 340,000
TOTAL 600,000 1,450,000 1,590,000
Special Allowable Deduction

payment to reserve 672,000 266,000 -

Total Deductions P 1,272,000 P 1,738,000 P 1,590,000
NET INCOME P 408,000 P 622,000 P 570,000

D I V I D E N D
D I S T R I B U T I O N O F A
R E A L E S T A T E
I N V E S T M E N T T R U S T
Liu, Aleah Jacynth

Dividends Distribution of REIT
under RA9856
Real Estate Investment Trust also known as REIT, is a publicly
listed corporation established principally for the purpose of owning
income-generating real estate assets, It is legally mandates to
distribute 90% of its distributable income as dividends to
shareholders.

And under the RA 9856 Dividend Distribution of REIT are treated

as special deduction against gross income

REIT is subject to the following tax incentives

VAT, but no longer to be subject to, as amended
Dividend paid by REITs
- Deductible dividend
50% of the DST on the trasnfer of real property to REITs
others exemption on the transfer of real property to REITs
- capital gains tax, income tax, and creditable
withholding tax
Income distribute to stockholders subject to 10% of
Final Withholding Tax EXCEPT dividends distribute to
- NRA and NRFC
- Domestic and Resident Foreign Corporation
- overseas Filipino investors are exempt from income tax
for seven (7) years from the effectivity of RR No. 13-
2011
Illustration. On October 1, 2021, BPI Trade credited to a
client account, cash dividends of BSA2 Company with
the following details.
Cash Dividends P 0.112
Cut-off Date 09/`10/2021
No. of shares on cut-off date 23,000
Net Income credited P 2,318.40
How much is the Final Tax on the Cash Dividends?
# of shares entitled 23,000.00

Cash Dividends per share P 0.112
Total Cash Dividend 2,576.00
Net Amount Credited 2,318.40
Final Tax on Cash Dividend 257.60
T R A N S F E R T O
R E S E R V E F U N D O F
C O O P E R A T I V E S
Arellano, Mary Rose P.

RA 9520
"Philippine Cooperative Code of 2008"
SEC. 10, ART. 86 (1)
(a) The reserve fund shall be

used for the stability of the
cooperative and to meet net
losses in its operations. The
general assembly may decrease
the amount allocated to the
reserve fund when the reserve
fund already exceeds the share
capital.
Transfer to Reserve Fund
at least 10% is appropriated
derived from income on unrelated

activities
Example
A cooperative has the following information of their
unrelated activities:
Sales 1,000,000 Net Income 250,000
Cost of Sales Appropriated Percentage 10%
600,000
Amount 25,000
Operating Expenses 150,000
They appropriate 10% of profit to
the reserve fund.
Solution :
Sales 1,000,000
Cost of Sales 600,000
Gross Income 400,000
Less: Operating Expenses (150,000)
Net Income 250,000
Less: Reserve Fund
Appropriation (25,000)
Net Taxable Income 225,000
T H A N K Y O U !
Special Allowable
Deductions
DISCOUNTS TO SENIOR CITIZENS & PERSONS WITH DISABILITY;
ADDITIONAL COMPENSATION EXPENSE FOR SENIOR CITIZENS & PWD;
COST OF FACILITIES IMPROVEMENTS FOR PWD
Presented by:
Rebleza, Sherry Ann
Pagador, Jona Marie
Monteras, Mae Kayla
Discounts to Senior Citizens &
Persons With Disability
Additional Compensation Expense for

Senior Citizens & PWDs
Cost of Facilities
Improvements for PWDs
Deduction Incentives
Under Special Laws
Discounts to Senior
Citizens &
Persons With Disability
Discount to Senior Citizens
(RA 9257)
THE EXPANDED SENIOR CITIZENS’ ACT OF 2003
Senior Citizen or Elderly
refers to any resident Filipino citizen

aged 60 years and above
Discount to Disabled Person (RA 9442)
Person with Disability
pertains to an individual suffering from
restriction or different abilities as a result of
mental, physical, or sensory impairment to
perform an activity in a manner or within the
range considered normal for human beings.
(RA 9257)
Under RA 9257, a senior citizen or
elderly is entitled to 20% discount in
certain establishments such as hotels
and similar lodging establishments,
restaurants, recreational centers, and
other places of culture, leisure and
amusements, hospitals, drugstores, and
services such as medical, dental,
domestic air, sea and land transport, and
funeral or burial service providers.
Similar to senior citizens, person with
disability are entitled to a 20% discount
from certain establishment such as hotels and
similar lodging establishments, restaurant,
sports and recreation centers, places of
culture, leisure and amusement, drugstores on
the purchase of medicine, medical and dental
services in private facilities, and domestic air,
sea, and land transport.
(RA 9257)
The discounts granted to senior
citizens by covered establishments
and service providers are allowed as
special deductions against gross
income.
The discount to persons with disability shall
be allowed as a special deduction under the
same terms and conditions as those for senior
citizens.
Conditions for deductibility
of sales discounts to
Senior Citizens and PWDs
Only that portion of the gross sales
exclusively used, consumed, or
enjoyed by the senior citizens and
PWDs shall be eligible for deductible
sales discount. The discount can only be allowed as
deduction from gross income for the
The gross selling price and the sales same taxable year that the discount is
discount must be separately indicated granted.
in the official receipt or sales invoice
issued by the establishment for the The business establishment giving
sale of goods or services to the senior sales discount to qualified senior
citizens and PWDs. citizens and PWDs is required to keep
separate and accurate record of sales
Only the actual amount of the discount which shall include the name, TIN, ID,
granted or sales discount not gross sales/receipt, discount granted,
exceeding 20% of the gross selling date of transaction, and invoice
price can be deducted from gross number for every sale transaction to
income, net of VAT, if applicable. senior citizens and PWDs.
Illustration 1 (Discount for Senior Citizens):
Katiguwangan Inc. recorded a P1,000,000 total deductible expense
and the following sales:
Katiguwangan adopts a policy of giving senior citizens a 25% discount. Consequently, it

granted P225,000 total senior citizens’ discount during the period.
1. The Senior Citizens’ Discount of Dawter Inc. shall be computed as…
2. The taxable net income of Dawter Inc. shall be computed as…
Illustration 1 (Discount for Senior Citizens):
1.The Senior Citizens’ Discount of Dawter Inc. shall be computed as…
2.The taxable net income of Dawter Inc. shall be computed as…

Take Note!
The Gross Sales to Senior Citizens must be

reported gross of the Senior Citizens'
discount while the discount is presented as a
separate expense.
Illustration 1 (Discount for PWDs):
David's Restaurant granted 25% discounts to PWDs in excess of the 20% mandatory
requirement. During the year the restaurant reported receipts of P 93,750 from PWD
customers
Compute the deduction for PWDs' discounts
Receipts P 93,750
Multiply by Mandatory PWD Discount 20%
Divided by 75%
Total deduction for PWDs' Discount P 25,000

Under Special Laws
Additional Claimable
Compensation Expense for
Senior Citizen Employees
Additional Claimable Compensation
Expense for Senior Citizen Employees
Definition
Under RA 9257, private
establishments employing senior
citizens shall be entitled to
additional deduction from gross
income equivalent to 15% of the
total amount paid as salaries and
wages to senior citizens.
Expense for Senior Citizen Employees
Conditions
1. Employment shall have to continue for at least 6
months
2. The annual taxable income of the senior citizen
does not exceed the poverty level as determined
by the NEDA (National Economic Development
Authority

Poverty line / Poverty Threshold - amount of income so

sufficient to meet basic food and non-food needs such as
clothing, housing, transportation, and health among others.
Illustration
Go Foods employs both regular and senior citizen employees and paid the
following compensation during the year:
Regular employees P 200,000

Senior Citizen employees with
salary grade above poverty level P 50,000
Senior Citizen employees with
salary grade below poverty level P 40,000
Total compensation expense P 290,000
Illustration
The total deductible compensation expense shall be:
Senior Citizen employees with salary grade below poverty level P 40,000
Multiply by Rate of additional deduction under RA 9257 15%
Total deductible compensation expense P 6,000

take note !
The regular salaries will be
presented as part of regular
allowable itemized
deductions.
The 15% additional deduction
shall be presented as a special
allowable itemized deduction.
Under Special Laws
Additional Claimable
Compensation Expense for
Persons with Disability
Expense for Persons with Disability

RA 7277: Magna Carta for Disabled Persons

Private entities that employ disabled persons
who meet very required skills or qualifications,
either as regular employees, apprentices or
learners, shall be entitled to an additional
deduction, from their gross income, equivalent
to twenty-five percent (25%) of the total
paid as salaries and wages to disabled
persons. (Section 8-B, Incentives for
Employer)
Requisites for Deductibility
The entity present proof as The disabled employee is

certified by the Department accredited with the
of Labor and Employment Department of Labor and
(DOLE) that disabled Employment (DOLE) and
persons are under their the Department of Health
employ. (DOH) as to his disability,
skills, and qualifications.
NOTE
Actual salaries:
regular expense

25% additional salaries

expense :
special itemized
allowable deductions.
An employer named Kang Tae Moo embarked on a
socio-economic program named “A World Empowered
by Persons with Disability.” Under the ambitious program,
the employer established a business which is fully
manned by persons with disability. During the year, the
employer paid P2,100,000 in compensation expenses.
Compute the additional deductible compensation
expense.
ILLUSTRATION
Compensation expense P 2,100,000
Multiply by: Rate of additional deduction 25%
Additional deductible compensation expanse 525,000
Cost of Facilities Improvements
for Disabled Persons
RA 7277: Magna Carta for Disabled Persons
Private entities that improve or modify their
physical facilities in order to provide reasonable
accommodation for disabled persons shall also be
entitled to an additional deduction from their income
equivalent to fifty percent (50%) of the direct
costs of the improvements or modifications.
(Section 8-C, Incentives for Employer).
ILLUSTRATION
Dr. Jill’s private hospital, Victorino Medical
Center, wants to improve their physical facilities
to provide better accommodation for disabled
persons. Assume that their income is
P10,000,000 and the direct costs for the
improved facilities is P1,000,000.
Compute for the following:

1. Special allowable deduction for the cost of
facilities improvement for disabled presons
2. Taxable income after special deductions
REQUIREMENT A
Direct costs of the improved facilities P 1,000,000
Multiply by: Deduction rate 50%
Special allowable deduction 500,000
REQUIREMENT B
Gross Income P 10,000,000
Less: Special allowable deduction 5,000,000
Taxable income 9,500,000
Thank you for
listening!
Claire O. Macalinao
S cho o l A ct
allowing private entities to assist a
public school, whether elementary,
secondary, or tertiary, preferably
located in any of the twenty (20)
poorest provinces identified by the
Presidential Council for Countryside
Development or any other government
agency tasked with identifying the
poorest provinces
1 It must have a credible track record
Qualification of 2 Existence of at least one year
Adopting Private
Entity
not have been prosecuted and found
3 guilty of engaging in illegalactivities
Schools located in the poorest
1 provinces
Qualification of 2 Low Income municipalities
participating
schools
Other LGU experiencing sever classroom
3 shortages, insufficient budget or having
numerous poor but high performing learners
Tax Deduction
Incentive
expenses incurred by the adopting entity
for the "Adopt-A-School Program" shall
be allowed an additional deduction from
the gross income equivalent to fifty
percent (50%) of such expenses.
priority activities are deductible in full

while those made in non-priority
activities are deductible subject to limit
Valuation of deductions R R 1 0 - 2 0 0 3
c. Services
2. Other than money:
1. Cash assistance, value of services
contributions or a. Personal property rendered by the donor &
donations shall the service provider and
the public school asfixed
be based on the acquisition cost
in MOA or actual
actual amount of assistance or
expense incurred by
contribution donor (lower)
appearing in the
b. Real Property
official receipt
b. Consumable goods FV ( higher of Zonal or
issued by the Assessed Value) at the
donee. acquisition cost/ value time of contribution or
at date of donation the depreciated cost
(lower) of the property (lower)
Exercise
In 2017, Aboitiz Corporation participated in the "Adopt-a-School Program" by contributing its services to a publish school in
Ermita Property, Cebu City. The agreed value fixed in the MOA for the construction of the public school building was P
2,500,000. Thus, Aboitiz Corporation was able to complete the construction at a total cost of P 1,800,000.
The Adopt-a-School Program is a priority program, Aboitiz Corporation shall be allowed to deduct the following:
Regular itemized contribution expense P 1,800,000

Special itemized contribution expense ( P 1,800,000 x 50% ) P 900, 0 0 0
Assuming that the Adopt-a-School Program is no longer a priority program in 2017, and Aboitiz Corporation has P
6,000,000 net income before the contribution. Aboitiz Corporation shall be allowed to deduct the following:
Contribution expense subject to limit P 1,800,000

Contribution limit: 5% x P6,000,000 300,000
Regular itemized contribution expense P 30 0 ,0 0 0

Special itemized contribution expense ( P 1,800,000 x 50% ) P900,000
Jona Fe Luna
RA 1 0 0 2 8
To encourage, protect, and support the practice of
breast-feeding which is believed to provide distinct
benefits to the mother and the infant aside from
saving the country's valuable foreign exchange that
may otherwise be used for milk importation.
All health and non-health facilities,
establishments, and institutions
whether operating for profit or non-
Requirements profit which employ in any workplace
nursing employees are required to
establish a lactationstation.
t o all
Est a b lishme nt s Lactation Period
Nursing employees shall be granted break intervals

of not less than 40 minutes for every 8-hourworking
period in addition to the regular time-off for meals
to breastfeed or expressmilk.
Access to Breastfeeding Information
Employers shall ensure that staff and employees shall

be made aware of the Breastfeeding Act and its
Implementing Regulations.
1 2
The law requires newborn
infants and the mother to
be roomed-in immediately All health institutions
after birth for a certain adopting rooming-in and
R equir ement s length of time. breastfeeding shall
provide milk storage
t o Health facilities. It is a private,
Institutions clean, sanitary, and well-
ventilated area or space
3 Milk Banks
for the purpose of
It is used as a temporary collecting and storing milk
solutions and can be a among mothers
source of breast milk for separated from their
infants that are victims babies due to medical
during an emergency or reasons.
disaster.
Tax Deduction
Incentives
The expenses incurred by a
private health institution in
complying with the rooming-in
and breast-feeding practices
shall be deductible expenses for
income tax purposes up to twice
the actual amount incurred.
Conditions f o r deductibility
1 The deduction shall apply for the taxable period when

the expenses were incurred.
All health or non-health facilities, establishments and

2 institutions shall comply with the IRR of RA 10028
within 6 months after its approval.
3
3 The facility, establishment or institution shall secure a

"Working Mother-Baby-Friendly Certificate" from the
Department of Health to be filed with the BIR.
3
Illustration problem
Henson Electronic employs primarily women. Henson installed a

lactation station for its nursing employees at the following
costs:
Remodeling of a space for the lactation station P 80,000

Tables and comfortable chairs 40,000
Refrigerator 12,000
Manual and electric breast pumps 10,000
Supplies( sterile milk containers, soap, etc.) 8,000
Total P 150,000
The P 150,000 cost of compliance shall be claimed as part of regular itemized

deductions. An additional expense for the same amount shall be claimed under
special itemized allowable deductions.
Lawphil
project
References
Income
Taxation
Banggawan
:2021

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Income Taxation

Percentage of a. Those selling goods under the accrual

Optional b. Those selling services under the cash

Deductions Corporate Taxpayers

— 40% of gross income

Individual OSD Corporate OSD

Rules in determination of OSD

Other taxable income from operations not subject to final tax

Rules in determination of OSD

All gross income are subjected to RIT

Corporate OSD is computed as:

OSD for General Professional

Deduction against partner's share in net income from GPP

OSD for General Professional

Share in the net income vs Actual Profit distribution

Optional Standard Deductions and

General Rules on the

Items 2 Supplies Expense

Cash Basis Accrual Basis

Purchase of Equipment P 100,000

How much is the total deductible expense?

• Cash basis of accounting

Salaries Expense P 70,000

Total deductible expenses: P 155,000

Salaries Expense P 70,000

Total deductible expenses: P 160,000

JOSAN VALERIE CONICONDE OLEANDER MAE SANTILLAN

other legal, ordinary, actual, and necessary expenses

Salaries, Travel and Rent Expenses

Fixed pay earned by employees

1 Ordinary and Necessary,

3 Paid for services actually provided and,

I f your employee is your spouse, child,

Travel expenses are costs associated with

The expense must be ordinary

Travel expenses do not include regular

The company paid the following expenses on behalf of its manager

Generally, your company can claim a tax

Rent Income Taxable when cash receives

Taxable when incurred

For income tax purposes, your company should claim tax

I f only a part of the premises is used for business purposes, the

Example: Company A leases land for 1 year for 100,000, half

Tha nk Have a great

Salaries, Travel and Rent Expenses

Villamor, Princess April

Taneo, Bael, Polestico,

a. Individuals engaged in business, including

EAR expense includes

representation expense and/or

depreciation or rental expense

relating to entertainment facilities

services rendered under an employer-employee relationship

b. Expenses for charitable or fund raising events

c. Expenses for bonafide business meeting of stockholders,

d. Expenses for sponsoring an employee to a business league

e. Expenses for events organized for promotion, marketing and

f. Other expenses of similar nature.

04 It must NOT constitute bribe,

02 It must be (1) directly 05 It must have been duly

03 It must NOT be contrary to law, 06 The appropriate amount of

0.5% of Net Sales 1% of Net Revenues

NET SALES NET REVENUE