TAXATION
MACMOD, CPA
Deductions from Gross Income
Allowable deductions refer to amounts representing
different expenses authorized by law to be deducted from
the gross income of certain income taxpayers in computing
for their taxable income.
A. Kinds of deductions under the Tax Code:
1. Itemized Deductions
2. Optional Standard Deductions for Individual and
Corporate Taxpayers
3. Special Deductions allowed in special cases.
B. Requisites of Allowable Deductions
1. The expenses must be both ordinary and
necessary.
2. The expenses must be paid or incurred during the
taxable year.
3. The expenses must be sustained with sufficient,
competent, and evidential matter.
4. The expenses must be reasonable and not contrary
to law.
C. Itemized Deductions for Corporation & Individuals
a. Ordinary and necessary business expenses in
general
b. Interest
c. Taxes
d. Losses
e. Bad debts
f. Depreciation / Depletion
g. Charitable Contribution
h. Contributions to Pension Trust
i. Personal exemptions and health / hospitalisation
insurance premiums paid for individuals only
D. Optional Standard Deductions
For individual tax payers – 40% of gross sales if
merchandising concern; 40% of gross receipts in sale
of services and not granted to NRAs. For corporations
– 40% of their gross income..
E. Special Deductions
a. For non-life insurance companies (net additions to
reserve funds)
b. For private educational institutions
c. For estate and trusts
F. Items not allowed as deduction from gross income
1. Personal, living or family expenses
2. Any amounts paid out for new building or for
permanent improvements, or betterments made to
increase the value of any property or state.
3. Any amounts expended in restoring property or in
making good the exhaustion thereof for which an
allowance is has been made
4. Premiums paid on any life insurance policy -
When not deductible: If it covers the life of any
officer or employee or of any person financially
interested in any trade or business carried on by
the taxpayer, individual or corporate, when the tax
payer is directly or indirectly a beneficiary under
such policy.
5. Losses from sales or exchanges or property
interest expense and bad debts written-off
between related taxpayers under Sec. 30 of the
Tax Code.
When not deductible:
a) If between members of a family (brother,
sister, whether by the whole or half blood),
spouse, ancestors, and lineal descendants.
ATTY.
b) If between an individual and a corporation,
more than 50% in value of the outstanding
stocks of which is owned directly or indirectly
by or such individual, except in distribution in
liquidation.
c) If between two corporations, more than 50%
in value of the outstanding stock of each is
owned.
6. Bribes, Kickbacks and Other Similar Payments.
7. Other expenses not allowed by law as deductions
from gross income
Specific Requisites of each Allowable Deduction:
1. Business expenses, in general
A. Compensation for personal services
Requisites:
(1) Compensation is for services rendered
(2) Services were actually rendered
(3) Compensation must be reasonable
B. Travelling expenses
Requisites:
(1) Must be reasonable and necessary
(2) Must be paid or incurred in connection with the
trade or business
(3) Must be paid or incurred while away from
home
(4) Supported by adequate records
C. Rentals
Requisites:
(1) Property rented must be used in trade or
business of the lessee
(2) Rental expense must be paid or incurred
during the taxable year
(3) Rental expense is a condition for the use of the
property
(4) If exceeding P500, must have been subjected
to 5% withholding tax
1 Repairs and improvements by the lessee:
Cost of Improvement Deductible expenses
__________________= (amortization/depreciation)
Term of lease / Est.; useful life of
Improvement (whichever is shorter)
D. Entertainment expenses
Requisites:
(1) Must be directly related to the business or
trade of the taxpayer.
(2) Must be paid or incurred during the taxable
year.
(3) Must be reasonable and not contrary to law,
morals, public policy.
(4) Supported by adequate records.
E. Cost of Materials and Supplies
Requisites
(1) Used in trade or business
(2) Paid or incurred during the taxable year
(3) Must be reasonable
Methods used may be actual consumption or direct
purchase
F. Repairs
EXCEL PROFESSIONAL SERVICES, INC.
Requisites:
(1) Must be incurred in connection with the trade
or business
(2) Must be paid or incurred during the taxable
year
(3) Must be reasonable
(4) They do not materially add to the value of the
property or extends its life
2 Repairs that prolong the life of the property
distinguished from incidental repairs and
maintenance are capital expenditures subject to
depreciation.
G. Expenses of farmers
Requisites:
(1) Incurred in the operation of a farm for project
(2) Reasonable and supported by adequate
records
(3) Incurred or paid within the taxable year
2. Interest
Requisites:
(4) Existence of indebtedness
(5) Indebtedness must be in carrying on the trade
or business
(6) Interest must have been paid or incurred
during the taxable year
(7) The interest must be in writing
(8) It must be reasonable and not contrary to law
(9) The taxpayer’s allowable deduction for interest
shall be reduced by an amount equal to the
following percentages of Interest Income
subjected to final tax:
Beg. Jan 2009 – 33%
3 Interest expense may be treated by the taxpayer
in 2 ways:
1. As an expense deductible from gross income
2. As a capital expenditure or part of the cost of
the property.
4 The following are non-deductible interest
1. Those paid in advance by cash basis taxpayer
2. Between members of a family or related
taxpayers
3. Those used to finance petroleum exploration
3. Taxes
Requisites:
(1) Must be in connection with the trade or
business of the taxpayer.
(2) Must have been paid or incurred during the
taxable year.
(3) Must not be excluded by law.
4. Losses
Requisites:
(4) Must be actually sustained during the taxable
year.
(5) Must be incurred in trade, profession or
business.
(6) Must arise from fires, storms, shipwreck or
other casualties or from robbery, theft or from
embezzlement.
(7) Not compensated for by insurance or
otherwise.
(8) Must be reasonable and allowed by law.
(9) Must be reported within 30 to 90 days from
date of loss with Sworn Declaration of loss.
5. Bad debts:
Requisites:
(10) Validity and existence of debt
(11) Actually ascertained to be uncollectible
during the taxable year
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(12) Must arise from business or trade
(13) Written of during the taxable year
(14) Other formal requisites
6. Depreciation - the gradual diminution in the useful
value of a property used in trade or business due
to exhaustion, wear and tear, including the
reasonable allowance for obsolescence.
Requisites:
(15) Must arise from the use of the property in
connection with trade or business
(16) Must be incurred during the taxable year
(17) Depreciation method is allowed by law
(18) Must be reasonable
(19) Other formal requisites
Depreciation may be under any of the following
methods:
(1) Straight - line method
(2) Declining balance method
(3) Sum-of-the-years-digit method
(4) Any other method which may be prescribed by
the Secretary of Finance upon recommendation
of the Commissioner of Internal Revenue.
5 Depreciation of Properties used in petroleum
operations
(a) Directly related to production - Straight-line
method or double declining balance at the
option of service contractor may be used but
useful life of the property shall only up to 10
years or shorter.
(b) Not directly related to production - Straight-
line method shall be used on the basis of an
estimated useful life of five years.
 Non-resident aliens or foreign corporation
7. Depletion - the exhaustion of natural resources like
mines and gas well as a result of production of
severance from such mines or wells. (1995 CCh
Federal Tax Course)
1 Basis - Adjusted cost basis of the
property
Accumulated exploration and
development expenses………. Pxxx
Less: Accumulated cost of
depreciation ……………………. xxx
Adjusted Cost Basis (ACB) …………………… P xxx
8. Charitable and Other Contributions
d. The gift or contribution must be actually paid to an
entity or institution specified by law.
e. The institution must be non-stock-non profit.
f. The donor must be engaged in business D-5 or
practices of profession.
g. It is subjected to limitation (unless deductible in
full as provided by law) Corporation-5 % Individual
- 10% of taxable Income from business or
profession without the benefit of deduction or
contributions.
2 The following donations are deductible
in full:
a. Donations to the government or
political subdivisions including fully
owned government corporations
exclusively for undertaking priority
activities in:
a. Education
b. Health
c. Youth and Sports Development
TAX.1003
EXCEL PROFESSIONAL SERVICES, INC.

d. Human Settlement 1. Premium on life insurance for the year:

e. Science and Culture - For the V. Pres. With son as beneficiary 60,000
f. Economic Development - For the Pres. With the company as
beneficiary 75,000
b. Donations to certain foreign
institutions or international
2. Premiums on fire insurance for the
organization by virtue of treaties or
building for one year paid on June 1, CY 120,000
Executive Agreements.
c. Donations to certain private
3. Rent Expenses:
foundations or accredited non-
a. Rent office building, 150,000
government organizations under the
b. For residential house of the
following requisite:
company’s executives 340,000
1. Organized exclusively for scientific, research,
educational, character-building and youth and
4. Office equipment bought on July 1, CY,
sports development, health, social welfare,
estimated useful life is 10 years. 1,500,000
cultural or charitable purposes.
2. Donations must be utilized not later than 15th
day of the third month after the close of the 5. Interest expense on the office equipment
accredited NGO’s taxable year. bought (1 yr. Expense starting
3. The administrative expense shall not exceed July 1, CY) 200,000
30% of the total expenses.
4. The assets of which, must be distributed to 6. Other interests:
another non-profit domestic corporation of a. On Deficiency Income Tax 10,000
the state, in the event of dissolution. b. On a note payable contracted
12 yrs. ago 15,000
Per special laws, donations made to the following c. On a money borrowed from a
are deductible in full: subsidiary Co. (60% owned by XYZ) 25,000
1. Integrated Bar of the Philippines (P.D.181) d. Interest paid on a money borrowed
2. International Rice Research Institute (R.A. from the mother of the company’s
2707) President (President owns 1% the
3. Development Academy of the Philippines company’s shares) 40,000
(P.D. 205)
4. The University of the Philippines & other state 7. Surcharges & Penalties paid to BIR 130,000
colleges
5. Cultural Center of the Philippines 8. Real Estate Taxes Paid:
6. Artesian Well Fund (R.A. 1977) a. Building it is renting 10,000
7. Ramon Magsaysay Award Foundation
8. Task Force on Human Settlement 9. Taxes Paid:
9. Donations to the National Museum, Library a. Customs Duties 15,000
and Archives (P.D. 373) b. Car Registration fees & other LTO
10. National Commission on Culture charges 12,500
11. Humanitarian Science Foundation
12. National Social Action Council 10. Losses:
a. Due to theft, reported 50 days after, 150,000
9. Pension Trust
b. Due to fire; acquisition cost of
Requisites:
vehicle was P200,000 with estimated
5. The employer must have established a pension trust
useful life of 8 years. Destroyed end of
or pension plan to provide for the payment of
the 3rd year, insurance recovery was
reasonable pensions to his employee.
P20,000 & P10,000 scrap value
6. The pension plan must be reasonable and actually
materials recovered; reported 30 days after.
sound.
7. It must be funded by the employer.
11. Capital Losses (Long Term) 150,000
8. Amount contributed must no longer be subjected to
the employer’s control or disposition.
12. Bribes, kickbacks paid to certain
9. The payment has not been allowed as a deduction.
government employees 250,000
10. Net Operating Loss carry Over excess of A.D. from
G.I. deduction from G.I. for the next time three 13. Charitable contributions:
immediately (3) consecutive taxable years a. To the University of the Philippines 150,000
b. To a charitable foundation 250,000
Summary Problem on Deductions:
A domestic corporation BSM Corporation engaged in 14. Salaries & wages 500,000
brokerage and other services provided the following data for
15. L. W. Telephone 125,000
taxable year CY.
Commission income from brokerage 16. Office Supplies 10,000
(Gross of VAT) P4,480,000
Other income: REQUIRED:
Dividend Income a. Total Deductible Expenses
From Domestic Corporation 200,000 b. TNI of the Corporation
Interest Income from Bank Deposit 50,000 c. TNI if the business above is a single proprietorship
Capital Gains (short term) 100,000 business
Rental Income (net of 5% tax) 190,000 owned by Mr. De Lima married with 4 minor children
d. What if under Letter C, Mr. De Lima opted to claim
Expenses claimed: the 40% OSD.

If you have inner peace, anything is possible,since your real power is from within. - From the movie Kung fu Panda

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