Deductions from Gross Income
Who may claim IDs?
Optional Standard Deduction (OSD)
Percentages of OSD
Individuals 40% of gross sales/receipts
- OSD is in lieu of COGS + IDs
- only for RC, NRC, RA,
estates & trusts
- NRA-ETB cannot claim OSD
- not required to submit F/S
with AITR
Corporations 40% of gross income
- OSD is in lieu of IDs only
- only for DCs and RFCs
- NRFC cannot claim OSD
- required to submit F/S with
AITR
Gross Income = Sales/Receipts (net of returns,
allowances, and discounts) LESS COGS
Taxpayers - Mandatory Itemized Deductions
1. tax exempt with no taxable income
2. subject to special/preferential tax rates
3. subject to mixed tax rates
Election of OSD
★ made in the 1st Quarterly ITR
★ when made, irrevocable for the entire year
★ failure to file 1st Quarterly ITR = avail IDs for
the entire year
OSD and GPPs
- GPP net income shall be determined in
the same manner as a corporation
- GPP OSD is 40% of gross income
- Partners can no longer claim expense
against their share from GPP net income
Note: 2020 and 2021 NOLCO will be carried over
a period of 5 years
Itemized Deductions (ID)
a. DCs, including partnerships and GOCCs
b. RFCs
c. individuals engaged in trade, business,
or profession
d. estates and trusts
2
Items of IDs (BaD TRIP LEC)
1. Bad Debts
2. Depreciation
3. Depletion (oil & gas wells)
4. Taxes (deductible)
5. Research & Development expenses
6. Interest Expenses
7. Pension Trust Contributions
8. Losses
9. Expenses (business)
10. Charitable Contributions
Ordinary Itemized Deductions (ID)
BAD DEBTS
Requisites:
a. valid & subsisting debt owed by taxpayer
b. connected with trade/business/profession
c. ascertained to be worthless/uncollectible
d. charged off w/in the taxable year
Non-deductible Debts:
1. not connected
2. between related parties
3. mortgage foreclosed & collateral is bought
by the mortgagee in foreclosure sale
diff. between loan amount & purchase
price = NOT allowed as deduction
➔ loss is deferred until property is
eventually sold by mortgagee
DEPRECIATION/DEPLETION
➔ includes amortization of intangible assets
➔ limited to cost or amount invested in the
asset/property
➔ depletion (for oil & gas wells): exhaustion of
natural resources
Requisites:
a. asset must be used in trade, business, or
profession of taxpayer
b. asset has limited useful life
c. reasonable allowance
d. charged off w/in the taxable year
Methods of Depreciation Allowed- Sec 34(F)(1)
1. Straight Line Method
2. Declining Balance Method
3. Sum of the Years Digits (SYD) Method
4. Units of Production/Hours of Use
5. any reasonable method of measuring
obsolescence approved by Secretary of
Finance
Depreciation in Petroleum Operations TAXES (Deductible)
Requisites:
DIRECTLY used in 10 years or shorter life
a. paid/incurred within the taxable year
production: permitted by CIR
b. must be connected with profession, trade,
NOT directly used or business of taxpayer
5 years c. directly imposed on taxpayer
in production
Deductible Taxes (Examples):
Favorable Dep’n Rate (Mining Operations) 1. Import Duties
EXPECTED LIFE DEPRECIATION OF COST 2. Business taxes (like other OPT)
3. Local business taxes
more than 10 over any # of years 4. Community tax
years (between 5 & expected asset UL) 5. Occupation tax
6. Privilege & License taxes
not more than normal rate of 7. Excise taxes
10 years depreciation 8. DST
9. Automobile registration fees
Irrevocable Election to DEDUCT Exploration & 10. Real Property Tax
Development Expenditures in Mining Ops. 11. Fringe Benefits Tax
➔ shall not exceed 25% of net income 12. Foreign Tax (paid abroad & not claimed
from mining ops. w/o the benefit of any as tax credit)
tax incentives
➔ actual expenditures minus 25% of NI Non-Deductible Taxes:
shall be carried forward to succeeding 1. Special assessment
years until fully deducted 2. Income tax
3. Income tax (paid abroad & claimed as
Intangible Exploration & Drilling Costs (for tax credit)
both mines & wells) 4. Donor’s tax
➔ AFTER production in commercial qty. 5. Estate tax
has commenced, certain intangible 6. Foreign Income Tax paid by DC to
exploration and development drilling exempt foreign-sourced dividends
costs shall be: 7. VAT
a. deductible in the year incurred 8. Final taxes
(non-producing wells and/or 9. Stock Transaction Tax
mines expenditures) 10. Capital Gains Tax
b. deductible in full in the year paid
or incurred, or capitalized & ★ VAT: NOT deductible, except input VAT
amortized (expenditures for allocated to exempt sales (which is
producing wells and/or mines in deductible)
same contract area) ★ Fines & Penalties imposed due to late
payment of tax: NOT deductible; Interest
Dep’n/Depletion by NRA-ETB and RFCs imposed due to the same is DEDUCTIBLE
➔ only if property/mine/well is located ★ OPTs, except Stock Transaction Tax are
WITHIN PH DEDUCTIBLE
★ Tax Benefit Rule applies to refund of
NO Depreciation for Certain Transportation deductible taxes
Vehicles (HAY-L) RESEARCH & DEVELOPMENT
1. Helicopters
2. Airplanes and/or aircraft not chargeable to claim as outright
3. Yachts capital account expense
4. Land vehicles (more than 2.4 million)
chargeable to at the option of taxpayer:
★ does not apply if: capital acct, but
- main line of business: transpo or not chargeable to OPTION 1- claim as
lease of transpo eqpt property subject outright expense
- purchased for use in said operations to depreciation or OPTION 2- amortize over
depletion 60 mos. (5 yrs)
★ maintenance expenses of
non-depreciable vehicles: NOT allowed
chargeable to capitalize
as deductions
property
Limitations on Deduction ➔ taxpayer — brothers/sisters, spouse,
NOT DEDUCTIBLE if: ancestors, and lineal descendants;
a. for the acquisition of land or property ➔ corporation — individual owning
improvement subject to depreciation or (directly or indirectly) more than
depletion 50% in value of the outstanding
b. for the purpose of ascertaining existence stock of such corporation (except in
of location, extent, quality of deposit ore cases of distributions in corporate
or other mineral, such as oil and gas liquidation)
➔ 2 corporations, more than 50% in
INTEREST EXPENSE
value of outstanding capital stock of
Requisites:
each corporation is owned (directly
a. indebtedness must of the taxpayer
or indirectly) by same individual
b. stipulated in writing
(except in cases of distributions in
c. legally due
corporate liquidation)
d. must not between related taxpayers
e. not incurred to finance petroleum ➔ grantor — fiduciary (trustee) of a
operations trust
f. not treated as “capital expenditure”, if ➔ fiduciaries of 2 trusts having the
incurred in acquiring property used in same grantor
trade/business/profession of taxpayer ➔ fiduciary — beneficiary of trust.
★ Interest on home mortgage is not allowed 3. debt is incurred to finance petroleum
as deduction exploration
4. attributable to income w/o PH of alien
Reduction of Allowable Deduction for or FC
Interest Expense by: 5. interest on preferred stock which is
beg. Jan 1, 2009 33% of interest income actually a dividend
subject to FWT 6. interest on debt incurred to purchase
tax-exempt security
beg. Jul 1, 2020 20% of interest income
7. interest, not stipulated in writing
subject to FT for corpo
with 25% RCIT PENSION TRUST CONTRIBUTIONS

0% of interest income
subject to FT for MSMEs

EXCEPTIONS: Where Interest Expense is Fully

Deductible
1. taxpayer has no interest income subject
to FWT LOSSES
2. interest on all unpaid business-related Ordinary Losses
taxes 1. Casualty Losses
3. interest payments of an occupant of a
socialized housing project incurred for Requisites
the construction or purchase of the a. involve ordinary properties;
house b. actually sustained;
4. taxpayer is a DC, and the RCIT is 20% c. not claimed as deduction for estate tax
(MSMEs) purpose
d. not compensated by insurance or other
Optional Treatment of Interest Incurred to
forms of indemnity;
Acquire Property Used in Trade or Business
e. reported to BIR w/in 45 days from date
a. immediately expensed
of loss
b. capitalized as part of cost of property
loss is TOTAL: deductible amount = BV
Non-Deductible Interest minus insurance proceeds or compensation
1. interest paid in advance (thru discount) received
by a cash-basis taxpayer loss is PARTIAL: deductible amount =
2. interest paid between fam members or Replacement Cost or Book Value (whichever
related taxpayers under Sec 36(B): is lower)
RC > BV : excess = capitalized & depreciated
2. Business Losses
a. losses from sale of ordinary assets
b. partner’s share in the losses of a GPP
c. denied VAT refund claim = valid loss,
may be properly deducted from GI
d. destruction or disposal of
inventories/machineries/equipment
which have been declared as waste or
obsolete due to:
➔ spoilage
➔ deterioration
➔ obsolescence
➔ expiration, or
➔ other causes rendering the same
unfit for sale/for use in production
3. Net Operating Loss Carry-Over (NOLCO)
- excess of allowable deductions (excl.
NOLCO & any item of incentive
deduction that does not involve any
cash outlay) over gross income in a
taxable year
a. can be availed of by:
➔ individual taxpayers engaged in
trade/business/profession
➔ estates & trusts
➔ DC and RFC subject to RCIT
➔ special corporations subject to
preferential tax rates (hospital
corps, proprietary educ corps, and
ROHQ of MNCs)
Taxpayers NOT ENTITLED to NOLCO:
1. OBUs (before Apr 11, 2021) and
FCDUs of domestic or foreign
banking corporations
2. PEZA, SBMA, CDA - registered
enterprises w/ respect to their
registered businesses
3. FCs engaged in international
shipping or air carriage business
in PH
b. no NOLCO = net operating loss
incurred in a year during which
taxpayer was tax-exempt
★ loss in one line of business
(tax-exempt)— not permitted as
deduction in another line which is
taxable
c. net operating loss can be carried over
and deducted from GI for the next 3
consecutive taxable yrs
Note: for taxable years 2020 & 2021—
carried over as deduction from GI for
the next 5 consecutive taxable yrs
immediately following year of loss.
d. corporation cannot enjoy benefit of
NOLCO— if subject to MCIT in any
taxable year
e. NOLCO allowed only if there has been
no substantial change in the
ownership of the business
No substantial change: ≥ 75% in value
of outstanding shares or ≥ 75% of
paid-up capital of a corp, is held by or
on behalf of same persons
f. Mines (other than oil & gas wells):
NOL incurred w/o benefit of incentives
provided under Omnibus Investment
Code, in any of the 1st 10 yrs of
operations— can be carried over as
deductions for the next 5 yrs following
year of loss
Registered Tourism Enterprise
(registered w/ Tourism Infrastructure and Enterprise
Zone Authority, but taxed under the regular rates):
next 6 consecutive taxable yrs
following year of loss
2 2
Special Losses (VUW A D)
1. loss due to voluntary removal of old
bldgs/machinery
2. loss of useful value
3. wagering losses
4. securities, shares of stock (ordinary assets)
becoming worthless
5. loss of income (previously reported under
accrual method)
6. abandonment losses in petroleum
operations
7. losses from sale of shares of stock (seller =
dealer in securities)
For #1 and #2:
Loss = Acq. Cost – Accu Dep’n – Salvage Value
Non-Deductible Losses
1. exchanges solely in kind pursuant to
mergers/consolidations [Sec 40(C)(2)]
2. losses from sales/exchanges between
related taxpayers [Sec 36(B)]
3. losses from wash sales (seller = NOT a
dealer in securities)
EXPENSES
Requisites:
a. ordinary & necessary for business
b. incurred or paid during taxable year
c. connected
d. reasonable
e. substantiated by official receipts/records
f. must have been subjected to
withholding tax, if applicable
 ★ Bribes & kickbacks (local & foreign)— Valuation (other than money)— net book
NOT allowed as deductions value of property as reflected in donor’s F/S
★ NRC, RA, NRA-ETB and RFCs’ deductible FULLY Deductible
business expenses— constitute 1. donations to PH gov’t or fully-owned
expenses paid/incurred in carrying out GOCCs for priority activities:
business in PH
SH2E YES
1. compensation expenses (of employer) ● Science and culture
for personal services actually rendered ● Health
➔ addt’l deduction: ½ of labor training ● Human Settlements
expenses ● Economic development
● for skills development of enterprise-based ● Youth
trainees enrolled in public SHS, HEIs, TechVoc
● duly covered by apprenticeship agreement ● Education
● shall secure certification from DepEd, TESDA, ● Sports development
and CHEd
● shall not exceed 10% of direct labor wage 2. Donations to foreign institutions or
international orgs— fully deductible in
2. traveling expenses
pursuance of:
3. entertainment, amusement, and CATS
recreational Expense (EAR) ● Commitments
4. materials & supplies actually consumed ● Agreements
in business ● Treaties
● Special Laws
5. maintenance & repairs which DO NOT
ADD value of property nor appreciably 3. Donations to Accredited NGOs
prolong its life a. organized & operated exclusively for:
6. rental expense (of lessee) of property 4CHERYSS
used in business ● Character building
● Cultural
7. advertising & other selling expenses
● Charitable purposes
8. OpEx of transpo eqpt used in ● Combination thereof
trade/profession/business ● Health
9. insurance premiums against fortuitous ● Educational
events or other similar losses in ● Research
trade/business ● Youth & Sports Development
● Scientific
10. special expense allowed to private educ
● Social welfare
institutions under Sec 27(B)
b. no part of NI of which inures to the
11. miscellaneous expenses benefit of any private individual
➔ amortization of pre-operating c. uses donation not later than the 15th
expenses (deferred expenses) for not day of the 3rd month after the close
more than 60 months or 5 yrs of its taxable year
➔ litigation costs: allowed as deduction d. administrative expenses ≤ 30% of
➔ judgments against taxpayer LESS total expenses
amount compensated for by e. assets, upon dissolution, shall be
insurance/otherwise given or distributed to another NGO
➔ amortization of discount upon organized for similar purpose, or to
issuance of corp bonds state for public purpose
➔ loss on retirement of corp’s own
Per Special Laws, Donations made to the
bonds
following are DEDUCTIBLE in FULL:
CHARITABLE CONTRIBUTIONS 1. Integrated Bar of the Philippines
Requisites: 2. International Rice Research Institute
a. actually delivered 3. Development Academy of the Philippines
b. given to entities specified by law 4. UP and other state colleges
c. NI does not inure to benefit of any 5. Cultural Center of the Philippines
stockholder/individual owner 6. Artesian Well Fund
d. taxpayer making charitable contribution 7. Ramon Magsaysay Award Foundation
= engaged in trade/business/profession 8. Task Force on Human Settlement
9. Donations to National Museum, Library,
and Archives
 10. National Commission on Culture
11. Humanitarian Science Foundation Enhanced Deduction Description
12. National Social Action Council
13. Philippine Red Cross Depreciation ● buildings — 10%
14. DSWD child-caring or child-placing Allowance of ● machineries & eqpt —
10% 20%
institution Qualified
15. donations made during state of national Expenditure
emergency (began March 16, 2020)
- apply only to those directly
Subject to Limit related registered
project/activity
a. Donations to the government or GOCCs
Labor - shall not include salaries,
exclusively for public purposes, but not for 50% expense wages, benefits, and other
priority activities; incurred personnel costs incurred
b. Donations to accredited domestic for managerial,
corporations or associations organized and administrative, indirect
labor, and support services
operated exclusively for religious,
charitable, scientific, youth & sports - apply only to those directly
development, cultural, educational, or the related registered
rehabilitation of veterans. project/activity
c. Donations to social welfare institutions; - limited to local
Research & expenditures incurred for
d. Donations to NGOs 100%
Development salaries of Filipino
employees, and
Limit of Contributions consumables and
payments to local R&D
orgs

- apply to trainings
approved by concerned
FOREIGN INCOME TAXES PAID, TAKEN AS Investment Promotion
Agency based on
DEDUCTIONS BY RCs OR DCs Training Strategic Investment
No deduction shall be allowed for any taxes of 100%
Expense Priority Plan
foreign countries paid or incurred by domestic - given to Filipino employees
corporations in relation to exempt foreign-sourced engaged directly in the
dividends. production of goods &
services of the RBE
ENHANCED DEDUCTIONS Domestic
● Who can avail? DCs & RFCs Input
- apply only to those directly
● When? upon effectivity of RA 11534 (CREATE) Expense
related registered
on April 11, 2021 project/activity
Power
Requirements (Sec 304, Tax Code) Expense
- engaged in a project/activity included in the
- manufacturing RBE
Strategic Investment Priority Plan; 50% reinvests its undistributed
- meet target performance metrics after agreed profit/surplus in any of the
time period; projects/activities listed in
- install adequate accounting system; or Reinvestment Strategic Investment
Allowance Priority Plan
establish separate corp. for each registered - deduction from taxable
project income within 5-year
- comply with e-receipting & e-sales period from time of such
reinvestment
requirements (Sec 237, Tax Code)
- submit annual reports of beneficial ownership Net Operating Loss during
of organization & related parties first 3 yrs from start of
commercial operations (not
previously deducted from GI)
PERIOD OF AVAILMENT OF ITH, 5% SCIT, AND THE Enhanced - may be carried over as
ENHANCED DEDUCTIONS (EDs) -
NOLCO deduction within the
next 5 consecutive
Exporter’s 5% SCIT or taxable years
afterwards
Activities EDs (10 yrs) immediately following
ITH
year of such loss
(4-7
Domestic
years)
Market afterwards EDs (5 yrs)
Activities