PRINCIPLES OF DEDUCTIONS DEDUCTIONS FROM Gross INCOME expenses of déing business or exercting a profession X personal living expenses V period expenditures X cayital expenditeres PRINCIPLES LOAN “Legal ~ not contrary te laws pubic policy. or morais wa retult of vivlagon plec of RLEGAL expemsec (not deductible) t x bribes ° ] disallowance of deduction X kickbacks 40 government officialt a X facilitation fee N= reduction of amount x protection fee = normal expente in Yelation t0 Fhe businecs of the taxpayer = hormally incurred by other taxpayers under the Same line OF business ¥ ordinary bwinecs expence may stil be allowed by BIR if unnecessary Achat ith a cost Hhat is forgone forcuer (outflow of recources) = Hf Wit paid or resulted io an incurrence of an Obligation 40 the toypayer = ino Cored and completed transaction Examplet of nomdeduchible tYpente under ‘his ru X Decrease in vale of propertiec or investment such as # Stumrities such as checks or bonds * forcign wurruncies or foreign currency-denowinated receivables + machinories, equipment. and building brought by obsolescence X ectimated fthwre lowes such at + on bad debts or uncolechible receivables + on lawsuit not yet confirmed by final judgment X Loss on properties covered by inturance or Indewnity contracts = reconabieness of amount PTMAICHING PriviciPLE ny expenses of generating income subject to Pir it deductible apne <— tempt Income OL AIT ] Non-deductibe, cor RIT — Deduetibne Examples of non-dcduehible expenses under this cule X Expentes on 6cempt income X Expenses on income subjeet to a special tax regime, X Business txpenset of taxpayer subject to FIT X Expenses and taxes on income cubjdl te final tax or COT X Forcign bwiiness expenses 6{ taxpayers faxale only On PH income, X Loss ‘of income not yet recognized in gras incomePORELATED Prary RULE — gains realized between related parties are taxable — [nctes. interuit, and bad debts between related parties are Wondedwctible” WHO APE RELATED Parnes os Members of a family + Teast relationship = siblings (hatt-bieod / {ull-bloed ) Vv Grantor and Fiduciary oF any trust = spouie “¥ Fiduciany of taste wl she same qrantor ~ Tineal ascendants and descendants V Fiduciony of 0 tmct and the beneficiary ot such twist FawiernTiveie wasting ye Js) Fics oo re ae eat 4 Fidudavies oh 2 and 3 oe lated 2 ea se ged to Feary oh Binet to eda Wn ana 3 epi te Beep shop ave: memoer fare raater dircck or indirect Contoting individual of a corporation Corporations under direct oF indirect common conta! by or for the Same individual Control - ownership of oft cart 51° Of the voting stacks of a corporation xoN: In liquidation, a chareholders, related or unreiateds may realize aehal fosses on theie aves! mente Hence, Viquidation lotset incurred from a relaled party are deductible L WITHHOLDING RULE = no withholding = no deduction ‘ypés DF wiTHoupiNe Tayes ‘@) Withholding Tax on compensation - creditable b) Final withholding 4 © Expanded withholding tax - creditable i withnelding fax 8 Saies of goods 2 Sales services ( (xPH) a) Renate b) Professional services Individais * Gross receiptc £ 3m/yr- sy + Grass receipte > 3m/ yr. oy Corporations + Gress invame £ F0k/ye 107 + Geiss income > 720K/yr. 187: General prfsionat partnershipSPECAL CONSIDERATIONS WITH DEDUCTIONS 1) fects of VAT on deductions = VAT paid by non-VAT faypayers are part oF UAstE ond expences while VAT paid by VAT taxpayers are, rot Supplier. Withholding agent | buyer VAT taxpayer ¥ VAT Tacpayer Rental tee P 100,000 Input VAT [2.000 Output VAT 12,000 Rental Expense: 100,000 > deanctible. expente Bilt T0008 Withholding tox payabie (1ooK¥ sy.) — £.000 Aceounte Payable /Cash 103,000 -€ Non-VAT tavpayer Rental Expense Nit,000——> deauektie upence Withholding tax payable (love x 57) $,000 Accounts payable | Cath 103,000 + Wore VAT taxpayer Rental Fee F100.000 Rental exper Withholding tax payable (look ¥ 34) Accounts payable | Cath F VAT or Non-var taxpayer aie 100,000 ———> deauekve txpence 5,000 4y.000 2) Effects of mccounting methods Accmal taxpayer | cash baie taxpayer Accmed expences deductivole ‘Non-Aeductivle Prepayments Non-Atductible Non-Aeduetivle 3) Effect of extent of faxation_ Taxpayer Taxable only in fH | Taxable Globally Philippine expences deductible deduttibne Global expenses non-deduchihe deductible MODES OF CLAIMING DEDUCTION 1) Hemized dedwetions 2) Optional Gandard deductions + Go7- of gras Sates or receipts for individinal taxpayers + Yor. of qruss income far corporations CLASCIFICATION OF ITEMIZED DEDUCTIONS 5 = direct cost = actual outflow D indirect costs: + administrative expente + selling expense + finance vst = ackwal outflow 3) Special Atowable Hemized Deduction (S410) ~ plurpercentage deduction = allowed by WiRC or by cpecial awe = in the form of incentive deduction ~ for the year onty 0 = exces of deduction over gross income = in the form of intentive deductionALLOCATION OF coMMON DEDUCTIONS 1) Common expences between a taxable and non-taxable operations or bwten operations subjed te Teqular tax and am operation Subject 10 Cpecial 4ax regime must be allocated on dhe bait of gris income 2) Expenses of non-traceable income 3) Power of OR 0 astign or allocate, expences EXAMPLES DF NOW-DEDUCTIBLE EXPENTES X pertonal, fiving, or family expentes X any amount paid out for new touildings sr for permanent imprvementr, oF betterment made te increart ‘he value of any property or citate (this mle doesn't app fo intanginic dviting and devtltpment cartr ‘incurred in petroleum ) X any amount expended in cettering property or in making qu altewance is or haw been made, er X premiums paid on any life incwrance policy Covering tne THE of any Officer or employer, or vf any pUrson Financially interested in any trade or business carried on by the trwpayer, individwal #r cerporate, when the faxpayer i directly or indirect a bencficiary under such palioy X Totes fam Soles or exchanges of prperty directly or indirecHy beeen related parties the Ochauction thereef for which an