DEDUCTIONS FROM GROSS INCOME : ITEMIZED DEDUCTIONS REGULAR ALLOWABLE JTEMIZED DEDUCTIONS FROM GROSS INCOME Towers exremseC ee (Requisites| on deductibility: (Re s-2021) V indebtedness must be that of the taxpayer ¥ interest must have been cipulated in writing ¥ intered must be legally due ¥ inferedd payment arrangement musi NOT be between related taxpayere v interest must por be incurred 4 finance petviicum operations V interest must Not be dreated ax capital expenditure Deductibie amount: “Tox arbitrage: * (Arbitrage limit / Arbitrage cap) Interest expense, Xe Prive 4o CREATE Law = 33"/- ‘Less: Reduction CREATE Law = 20 ‘J. Gross Interest income subject fo FIT xX Multiply by: ax arbitrage)” oy. (xx) L, computed ac: Deductible Interest expense XX (Corpo. income tax rate- Final tax on int- inc.) = Corpo. income tac rate | Osher deductive interest Gepense: = Applicable to any taxpayer (indi-/corpo.) Interest from fax deling wency Sulpject fo RIT Interest from Scrip dividends Inferect on personal loanc \ eons eetelauniamerense Interest incuveed w/a related party RED Discount or pre-deducted interest appitcable jo future periods for individual toxpaye re Interest expense invurred te finance pelvaleum operations Inferect on tedeewable preferred charec Ammputed Interest Oplional treatment of interest expeme incurve in financing the acquicifion oF prperty wed in trade or busines. + outright deduction frvm gress income or * Capital expenditare claimable through depriciation CL iaxest bbb bbb rrr bre pb rrr r ee prer V in connection w/ +he taxpayer’ trade, business, OF exercise of profession 7 National tax GR: NoT deductible XPAE « vot + Percentage tax | deductibie + FBT baat GR: Deductible XPM: + Sales tax 4 non-deductible + special assessment Deductitote?) Batic tax due — vat tax expence Surcharge x Interest Vas interect expenreExamples of deductible and Nondeductile taxec DepwcriBue NOW: DEDUCTIBLE Income tax paid avroad, Philippine income tax Claimed as epurating expense except Fringe Benefit tax © Documentary clamp tavec “Income tax paid abroad, © Occupational taxes claimed as tax credit Excise taxes Estate, Tox Import duties Donor’s Tax © boul business taxes > Stock Transaction Taxex (*}: tax) Percentage taxes under the Tax Code ialue Rede Tax except Stock Tansaction Taxed © Toxes not related te business. © Giense tax, Community ton, Municipal tox jrade, or profession Special Asseccmment FOREIGN INCOME TAX Tox archar ge = tan be claimed as: : oR + daw credit - a cable to Rt and Dc 1 One forciqn country Tow credit =[toweR of? atiowavre “| UUER °F Actwal fordgn ys, Th-Aennad , Global Tnoome tax atid Ti=word ” yax die Mulfple foreign Countries Final foreign Lower OF tax credit alana TOTAL of tac credit vs. World invome tax allowable PER COUNTRY, credit limit = com puted as oka Ti=Abead y GIOVAT LL never produce I= world Jax de wer ammount | _Tawpavert who are taxabie on. Philippine Mncome Only Foreign taxes paid © ‘Qualified ** Seri ete 2 0c) Foreign _icome jax paid Deductible / Creditable | Nondeducibte / Nenereditabe | Deduetiole. Dect ble Non-dedwonbie. Nondeductibie | Rules on Income Taxes Pai Philippine faxes paid * _ Philippine income tax paid + Other than fe nondeductive ince above fe deduchie 4ee eent Mey are. Eonntcted wi) income from sources in PH only (ée. $4.0 @), IRE)Oss CII “ORIDINARY LOSS ———? deductible in full Deductible lnecer : V incurred in trade, business, or profession V arises from fires, storms, shipwreck, or ther carualtier, oF fom Mobbuy, fheft, OF emberriement Requicites for deductivivity Vv noF compensated for by insurance | other forme of indemnity ¥ muct be reported fe the BIR wlin QSdays fom the date of lus or discovery v not claimed as a deduction for etate tax purpores Examples of Deductible Odinany Loses: '9) Loss on digpocal or detteaction of any ordinayy asset b) Los due te voluntary removal of building incident te renewal or replacement © Pumanent or icrevertivle loss im value of aucele due to changer in buciness conditions, Only te the extent actualy realized 4) Abandonment toce Aon restoration or repl of destroyed iet ¥) Total destmction of properies = Involves total replacement ¥ 40x basic / book value of old prperty —> deductible lors * replacement cart (100 7) ———* capitalized as coct of the replacement properly 2) Partial destmction of Propervies ~ involves parhal replacement € Lower of replacement tact of damaged portion or the BY of asset —————> deductible loce + wees ——> capitalived Noles the asset muct ve written-off before a less can be claimed at deduction Abandonment Lace | Peroieum Dpevation = accumulated exploration and development expenditures ——+ deduenible Le Provided, notice of abandonment mutt be filed w/ CIR W Produding weils = unamortired/ undepreciaied costs of equipment directly wed —+ deductible Ls If abandoned well ic re-entered / resumed, the amount claimed at deduction chal be averted and included in the grass income Clake mie the rules on Dealings in Properties )ben te sC IIT TTT V The debt muct have been ascertained to be wortnlecs ¥ It must be Charged Off wlin the taxable year Recovery of bad debte: Bad debts may be: Example: Acemal basis Cash Basic ‘ew: LOSE Of capital Loan Principal 1” 1M Deductible 44 Dedwcfivle Ge: Les of income Aeumed tnt ing. _200K ook Dedvichlae _-& Nowaeductibie Deductible amount ¥ For domestic banks and tact companies Suvstantial part of where business 14 the teceiphs of depute Ls bod debt expense (deductible) # For Other taxpayers where such decurity is @ capital aicet Le apply rates on capital lees and deductible subject ty limit Oorrecwten eee Depreciation Methods “D Straight-line method 2) Declining; balance meted 3) Sum-of-the-year-digit method 4) Any other methed prestsived by dhe Setvetany o{ finance upon recommendation of $e CR Basis of peprecian FAIR VALUE at the fime of acquisition + the taxpayer and Ci shall agree in writing about the useful life and raie of depreciation + Any change shall operate prospectively + In defamit of such agreement, tne adoption of the taxpayer wlout the objection of CIR] repre tentative Shall be Comider binding PEIRDLEVIM OPERATION ‘Option of the conta chor: ~ declining: balance method Straight-line. metinod Wied inJrelated te the production of peholeum | 10 yrt. or shorter as maybe permitiea by tne UR Tot Used in]related te the pweduction of petwlenm | S yr under straight-line method MINING OPERATIONS: 40 years_or less ‘Ay normal rate oF depreciation Deprecated oror any number *F year buwten 5 and the cipctted We: 0 oa Provided, the taxpayer notifier the OF at the beginning ot the deprecianon pried SPEOAL OPTION FOR PRIVATE EDUCATIONAL INGTITUMON: + Charged eff as capital Outlays of depreciavle asses in the year oF acqnic © deduct allowance for depreciation2D pepterien COO eee eee = awailaiole only for Oil and gas well and mines STAGES OF wasting Asser Achwines $4 _______,, —______,, Exploretion period Development period | Ghmercial preduction Common rules for voth mining and oll operation Classification of expenditures: 4) tott of acquisition or imprwement vf TANGIBLE Propertics (Previous page ~ Depreciation) 4) IMANGIBLE exploration, dviling and development cote th Petwleumn Operations = any inddental and necessavy cols of drilling / preparing wells for petmieum production = NO salvage value 0 ont Set tamed Anilling, tunneling + other improvements wot cubject te allowance for depreciation Tae Treatment Before Commercial pyoduetion Capitalized as tort of the wasting asset Ator "Won posing deductible in the year incerta nen = semasas aai,. [PRa ae medic chol + deduction in full in 4he year imeurre i + Capitained sing tne _COMT-DERLETION METHOD 4 Tax basis of Unit extracted Note: Hf claimed as deductions Wasting astets ‘Total Estimated Units * Le not added to the adjusted cour 5 4 Total Fimatea , wilt exeactea estimated remanin Basis st cout atb bed nite * fer the year ‘ani | Invevora We Alternative Deduetion (wi Operation Only * Option fo deduct explovafion and development expenditwrer accumulated as uxt or adjusted bails for Cost dwpletion as of date OF prospenting, as well as exploration and development eypenditure paid or incurred during the taxable year La umire shat not exceed 26% of taxable income, Wlout she benefit #F any fax incentives Once Clected—» binding and irrevocable in Succetding taxable ycour GMB cuaeasic coNTRUSat yn s CAAA A a = made to goveenmend or NGOs Requicites V No income of the donee imust inure te the benifit of any priate Charitable 4g: Rehabilitation of veterans c) Stentfic te Social welfare Thitiwhone 4) Youth and Sports development is NGO ) Culwrat usin Taxpayer” Rate Base Individual 10"fe Taxable income from trade, business oY practice of Corporahon Ss"). Profession BEFORE Charitable Conivibutions Iustration: Grass compencation invome Fre NOL \ntwmne before tonthioution Exempt benefits (ed) / Wuttiply by: limit percentage Taxable compensation income, me//Dednesion limit Grass tnvome from businece Dedwotibre expenses bee Fully deductible conti bution Boxe Net Income before tantibution Dedwlibie conbibution (LOWER) Conbibution expence (xe: Partially deductible conhi bution Nai Income Litwit on partially deductible cont bution ~ xy Taxable Invome, x Tojal deductible contrioution expence,= fully deductible - cath tical [needed hearth care supply. relief goods , and use of atte = Mo need fe submit notice Bootes eto 1 Pension trusts A TyRes Of Employee Pention Plans = Employer does wok quaranice the amount °F benctite to the employees = employer guarantees the amovnt of benehite fe the employees = amount of funding #he employer Makes = amount fo be received by the €mplny cer Shall be dependent upon tne Shall be dependent upon the i ante sion fauna investment performante of she pension fund = Aetmarial_camputation WK necearany = Aefwatial computation i net neceatang =_WOT- of tontribuhion W deduchole ‘Note: portion paid by the employees 7 Employers funding it either / both: are not deduct ble 1) Funding oF CHBRENT Service cout 2) Funding of PRIOR/PAST service. cout Rules in computing the deductible pension expence hiwstvaten: Coniitmtion fo 4he penciow fund — 1,000, 900 Current service cost 400, 000 Past Sevvice east 600, 000 Solution: Pention Contribution 1,000,000 Ta eal a «der Current condce batt (400.009) + Faooi000 “ens n fu Excess funding of past service tact 600.000, Divide by: Amorfization pew 710 yeaa _ 0.000 Deductible Pension twpence T F regaraess of Ane aed vain Posnd of covered onployeet Requisites of deductivitity v Umployer must have, establiched A pention)retirement fund ¥ actuarial assumptions wed by the fund must be Sound and rearonable J the fund asser must be independent fom and not swoject fo the contval or disporal of the employer GGMBBRESEARCH AUD veveLoPMENT EXPENSE: W not chargeable to capital account | Claim a1 outnignt expense chargeable te capital account but | Option not chargeable to property swbjud te | 9) claim as outdgnt expente depreciation or depiction b) amortiae over Go montis if chargeable to capital account capitalize then charged off depreciation subject" deprecation or depletion Non-deductible R2D exeendi Meer eypenditire for the acquisition of improvement of land amy expenditure paid or incurred for tne purpose of Micertaining tne exictence s Incation, estent, oe quality +f amy Atpesir of ore or other mineml, including oil and garG@MBenrersammenr. AMucEMENT, AND RECREATION (EAR) Ex pence itil Requicites: v reasonable V Amount paid chat be allowed as deduction ony if i ix chown that the tax required fr be deducted and witthad Heretm has been paid > the BIR Ceitin Dedwetic A. Omount Deduchble = LOWER amouni between aval and lini Libr cin 1) [Sale of Goods or Proporhes | Net Sata fp & 1's or 0.8 Sale of fervices Ne Revenve % t » [Net Saies or Net Revenue, Achwal (a lal Nek sales and met vevenue FAR Mustratior | Net Sales = 4.000.000 Net Receipts = 4,000,000 \ Sale of Sevvice Sale % Goods otal ‘Achat 72, 000 22,000 100,000, N Limit 40. 000 30,000 uMT 1: lower Yo, 000 ae, 2 Umer 2: = 4:900:000 10 = 200.002 took i amaun OK > gine une = 40.000 * 0.000 Lawer tf 40,000 + 28,000 = f.000 Limit 1 and 2 SPECIAL ALLOWABLE DEDUCTIONS A. Special expenses under the NIRC and special laws 1) Income distribution from a taxable estate or trast 2) Transfer te reserve fund and payments fo policies and annuity contract: of incurance companies 3) Dividend dittribution of Real Estate Inveciment Trust (REIT) under RA ABSY 4) Transfer to recervec funds or taxable cooperatives 8 Discounts fo Senior cifinens under RA 4257 ©) Diseounte fo persons with disability under RA 44D B. Deduction incentives under special tame 1) Additional compensation expense. for senior citixen employees under RA 4257 2) Additional compensation expense for percons with disability 3) Cost of facilities improvements for PWDS @ Additional training expence under dhe RA 8602 - Jewelry Industry Development Act 8) Additional contibution expence under the Adopt-a-Sehoo! prgram under RA SOS © Additional deductions for compliance to rovming-In and breast-feeding practives 2) Additional fret legal acsicianee expence ©) Additional productvity imtenfive bonus tepence #) Additional apprenticeship expence‘Special expenses winder the Nike ond special laws 1) Income distribution from a taxable estate Or trast Income distribution made by the administrator of a taxable estate in favor of the heirs or boy a trustee of a taxable tract in favor of the beneficiary of the tact ~ The income distribubon chall be included by the vecipiem We] beaeticiany jin his grocs income 2) Net transfer fe reserve fund and payments ty policies and annuity contracts of insurance companies | = deductible in the year it war achially paid ~ he feleace of the recerve from the reverve fund is included in grate income 4 ALD (ueder ceEATE) a» Of distributable income a: dividends te charenolders REIT ~ publicly Ticted corporation ectabuiched principally for the purpoee of owning income generaking eal ectate assets 4) Transfer to recervec funds or taxable cooperatives amount transferred by the cooperative fo the recerve fund out of Me net surpmwr from wnvelaicd ackvitier + for the firtk 3 yeart = 40]> + after 3 years = 10°}. 5) Discounts 40 Senior citizens and persons with disability diccount granted to cenior cifaenc by: hotel and similar lodging ectabichmentt fectaurantr recreational centers ond omer placer of culture. leisure, and amucements hocritais. drugcinres, and cervices cach as medical, dental domestic air, sea, and land trancport funcral or burial cervice providers Deduction incentives under special awe 9 ~ For So — IS of the total amount Paid as salaries / wages to cenior cifizenr = For Pwor—> 25]. of the total amount paid as salaries / wages te disabled person 2) Cost of facilities improvements for PDs = $0 of the direct cocks of the improvemente or modification = $0'f- of Hae eypemiec incurred in training schemer approved by TesDA = SO}. of the contritutic 9 > twice the actval amount incurred Of 4he adopting entity Lactation period ~ break intervalt ef not lee than 40 minutes for every @-he Working period ~ compensavle hours © Additional free legal astictanee expence = LOWER of: ‘amount not charged that could have been collected; oF + 40% of gies income derived fmm the acwal performance of the legal profession = free legat erage Must be exclucive of the lo-hr. mandatory free Itgal autistance tendered to indigent clienta) = S07 of the total productivity bonuser given to employees 8) Additional apprenticeship expence = Applicable only if the taxpayer prvide labor draining t student of public schools = SOT. Of expense incurred V Apprenticechip agreciment between the enterprie and trainees V Cefification fam Dep-td, 16:08, or CHED seeured by the enterprice V Amount of deductions chall not exceed 107 of direct labor wage Required disclosurec: Description of the Special deduction Lagat oasis 3) Amount NET OPERATING LOSS CARRY OVER noveo GR} 3 Consecutive yeare immediateN following he year of Inss “wen: S years + NOLCO incurred in 2020 and 2021 (Bayanihan Act 11) + Taxpayers in extractive industries such as mining oc vil companies Sales / Gross Receipte ax Sales] Gress Receipts Px Coos / cos (x) Vv | Coos / cas (x), RAD Cw) |v | Raw (ee) sat * SAID ~ Special expense — (XK) sai if not categorised, concider it Special expense Ce) |v) Now it) clas eseiects aa Incentive deduction Coy Nouco (we) | x wells oxableIsiore xx ° Beat at ome efor ‘ness entae death Za noi pine yar ave dedete iy the extent Enel income Uther Freud anunse “deducNen'Qel vtore tea icenve deacon ano when Reqwisites for tne deduchbility The taxpayer muct ROH be exempt fram income tax during the taxable year whem the NOL is Sustained “V No Swostamtial change in lbusinesr ownership Tisea eer me pit capita hominai waive of fe oultanding charee oa corporat a Pure in busines] | Mixed tnuome Earner] prtextion ‘Toms / Ectate Hemined (Gr) Ter 1301 0) Tro Tor 7 Commuted tax TOA, ia