Chapter 12

Allowable Deductions
For Individuals and Corporations
Engaged in Business / Individuals
in the Exercise of Profession

What are Allowable Deductions

Amounts allowed by the Tax Code to
be deducted from gross income to
arrive at the taxable income for
purposes of computing the income tax
liability.
Any deductions not availed within the
year can no longer be deducted from
the income of the succeeding year.

For individuals on cash basis of accounting: OSD to be based on Gross Receipts Note: Cost of Sales or Cost of Services are not allowed to be deducted for purposes of determining basis of OSD .Two Types of Allowable Deductions Optional Standard Deduction in lieu of itemized deductions and is a standard deduction in an amount not exceeding 40% of gross sales or gross receipts .For individuals on accrual basis of accounting: OSD to be based on Gross Sales .

any expenses that may be specifically identified related to business. trade or practice of profession that may be deducted from gross income to arrive at taxable income .Two Types of Allowable Deductions Itemized Deductions .

Expenses allowable to private institutions . kickbacks and others of similar nature may not be allowed as deduction . business or professional expenses .all ordinary and necessary trade.Bribes. operation and or conduct of trade or business . management.Directly attributable to the development.Itemized Deductions 1) Expenses .

Expenses Compensation Cost of materials payments and supplies Fringe Benefits Cost of expenses Travel Expenses of a regular Rentals banking unit Additional Entertainment. deduction to a Amusement and private educational Recreation institution Expenses .

Expenses Rentals – payments required to be made as a condition to the continued use or possession for the purpose of trade. Amusement and Recreation – representation expenses or rental relating to entertainment facilities . to which the taxpayer has not taken title to + any taxes paid by lessee Entertainment.

including concerts. seminars.Not Considered as EAR Fringe benefits Expenses for charitable or fund raising events Expenses for bonafide meetings of stockholders or directors Expenses for sponsoring an employee to a business league or professional organization Expenses for events organized for promotion. workshops . marketing and advertising. conferences.

public policy of public order . good customs. management and operation of the trade. business or profession It must not be contrary to law. morals.Requisites for Deductibility of EAR It must be paid or incurred within the year It must be directly connected to the development.

OR. should have been withheld therefrom and paid to the BIR . kickback or other similar payment Substantiated by appropriate proof.Requisites for Deductibility of EAR It must not be paid directly of indirectly to a government employee or official as a bribe. bills or statements of accounts The appropriate amount of withholding tax. if applicable.

Ceiling of EAR Equivalent to actual EAR but not to exceed 0.50% of net sales (gross sales less sales returns and allowances) – for taxpayers engaged in sale of goods and properties 1% of net revenues (gross revenues less discounts) – for taxpayers engaged in sale of services .

debited to corresponding allowance for depreciation .capitalized repairs – material replacement of parts involving large sums of money that extend the life of the asset .Expenses Repairs – are expenditures to restore assets to good operating condition upon breakdown by replacing broken parts .

Actual consumption .if no record of consumption is kept or no physical inventories is taken .if physical inventory is taken at year-end .Expenses Cost of materials and supplies – maybe deducted based on: .Total purchases .

FCDU expenses are not allowed as a deduction .Expenses Cost of expenses of a regular banking unit (RBU) .only costs and expenses attributable to the operation of the RBU .

business expenses allowable as a deductions .capital outlays of depreciable assets incurred during the taxable year for the expansion of facilities .Expenses Additional deduction to a private educational institution .

cost of ordinary tools of short life or small cost .Expenses Corporations engaged in farming . repairs and upkeep of transportation equipment .Cost of feeding and raising livestock representing actual outlay but not including the value of farm products grown upon the farm .Cost of gasoline or fuel.

Cost of gasoline.Expenses not deductible from gross income of farmers Treated as capital expenditures and may be subject to depreciation: . breeding or work animals . fuel or repairs and upkeep of transportation equipment used for pleasure or convenience of the farmer and his family .cost of farm machinery and equipment .Amounts expended in purchasing work.

such as: -Medicines -Professional fees of attending physicians in private hospitals / and licensed health workers .equivalent to 20% for purchase of goods and services for the exclusive use and enjoyment or availment of the senior citizen.Expenses Deductions under the Expanded Senior Citizen’s Act of 2010 . dental. etc .Actual fare for transportation in PUJs / taxis.Medical. diagnostic and lab fees .Actual fare for domestic or air transport services and shipping vessels .

Deductions under the Expanded Senior Citizen’s Act of 2010 .Admission fees charged by theaters. restaurants and recreation centers .funeral and burial services for senior citizens the above discounts granted as tax deductions from gross income for the same taxable year that the discount is granted private establishments employing senior citizens are entitled to additional deduction from their gross income of 15% of total amount of salaries and wages paid to senior citizens . cinema houses.Services in hotels and similar lodging establishments. concert halls .

physical or sensory impairment to perform an activity in a manner or within the range considered normal for human being .Expenses Deductions under the Magna Carta for persons with disability under RA 9442 .refers to individuals suffering from restriction or different abilities as a result of mental.

Prohibition on the Availment of Discount if the person with disability claims a higher discount as may be granted by the commercial establishment If it is given in combination with other discount programs .a person with disability can claim only for one discount of 20% even if he is also a senior citizen .

amount paid for the borrower’s use of money Requisites: there must be an indebtedness there must be an interest expense paid must be that of the taxpayer connected with the taxpayer’s trade or business incurred during the year.2. in writing and legally due interest must not be for petroleum operation not treated as a capital expenditure .Interest Payment for the forbearance or detention of money.

Interest Interest on unpaid taxes shall be fully deductible. considered as interest on indebtedness At the option of the taxpayer interest expense on capital expenditure may be allowed in full in the year incurred or may be amortized over a certain period Any reversal shall be subject to the “tax benefit rule” .

Philippine income tax .Taxes assessed against local benefits to increase the value of the property assessed . Taxes General rule: all taxes. local and national in connection with the taxpayer’s trade or business are deductible from gross income.3. except: .Income taxes imposed by authority of a foreign country .Estate and donor’s taxes .

Taxes When refunded or credited. it shall be included as part of gross income of the year of receipt to the extent of the income tax benefit of said deduction Non-resident alien individual or a resident foreign corporation shall be allowed the deduction only if they are connected with income from sources within the Philippines .

robbery or theft incurred in connection with trade . storms.4. Losses Any losses arising from fire. shipwreck. shall be allowed as deductions With declaration of loss during the taxable year in not less than 30 days or not more than 90 days from discovery of such loss . business or profession actually sustained during the taxable year and not compensated by insurance.

reduced by insurance claims .Deductibility of losses actually used in the business enterprise that were damaged and reported as losses in the appropriate declaration form Said properties may have been properly reported as part of the taxpayer’s assets Amount of loss covered by insurance claim shall not be reported as a loss Deduction of assets as capital losses must be properly recorded in accounting reports Net book value shall be used.

maybe carried over as a deduction for the next 3 consecutive years .NOLCO The excess of allowable deduction deductions over gross income (net operating loss) of the business or enterprise for any taxable year which has not been previously offset as a deduction from gross income.