DEDUCTIONS

FROM GROSS
INCOME
OLD NIRC AND
TRAIN
Updated March 2019
DEDUCTIONS DEFINED
Items or amounts which the law allows to be
deducted from gross income in order to arrive at the
taxable income.
BASIC PRINCIPLES
GOVERNING DEDUCTIONS
a. The taxpayer seeking a deduction must point to
some specific provisions of the statute authorizing
the deduction; and
b. He must be able to prove that he is entitled to the
deduction authorized or allowed. (Atlas
Consolidated Mining & Dev. Corp. vs.
Commissioner, GR No. L-26911, January 21,
1981)
BASIC PRINCIPLES
GOVERNING DEDUCTIONS
c. Any amount paid or payable which is otherwise
deductible from, or taken into account in computing
gross income or for which depreciation or
amortization may be allowed, shall be allowed as
deduction only if it is shown that the tax required to
be deducted and withheld therefrom has been paid to
the BIR. [Sec. 34(K), NIRC]
TAXPAYERS WHO CANNOT
AVAIL OF DEDUCTIONS FROM
GROSS INCOME
1. Citizens and resident aliens whose income is purely compensation
income (except for premium payments on health and/or
hospitalization insurance);
2. Non-resident aliens not engaged in trade or business in the
Philippines (NRANETB); and
3. Non-resident foreign corporation (NFRC)
CLASSES OF DEDUCTIONS
1. Individuals
a. With gross compensation income from
employer-employee relationship only
(1)premium payments on health and/or
hospitalization insurance
(2) personal and additional personal exemptions
CLASSES OF DEDUCTIONS
b. Gross income from business or practice of profession
(1) Optional Standard Deduction (OSD)
(2) Itemized deductions (Ordinary ID: BITE DeDe Loss
CPR)
(3) Premium Payments on Health and/or Hospitalization
Insurance, provided family gross income is not more
than P250,000(No longer applicable in TRAIN)
(4) Personal and additional personal exemptions (No
longer applicable in TRAIN)
CLASSES OF DEDUCTIONS
2. CORPORATIONS
Itemized Deductions
OSD
KINDS OF DEDUCTIONS
1. Optional standard deduction (OSD) [As
amended by R.A. 9504 which took effect July 6,
2008]
(a) An individual, other than a nonresident alien, may
elect a standard deduction of 40% of his gross sales
or gross receipts. (prior to RA 9504, rate is 10% of
gross income)
KINDS OF DEDUCTIONS
b. In the case of a corporation, it may elect s
standard deduction of 40% of its gross income as
defined in Section 32 of the Tax Code. (prior to RA
9504, no OSD benefit for corporation)
( Gross income = Gross sales – COGS)
KINDS OF DEDUCTIONS
2. Personal and Additional Exemption (No longer
applicable in TRAIN)
(a) Basic Personal Exemption
Pursuant to amendments under RA No. 9504, there
shall be allowed personal exemptions amounting to
P50,000 for each individual taxpayer regardless of
whether he is single, head of the family or married.
KINDS OF DEDUCTIONS
(b) Additional Exemptions for Taxpayers with
Dependents (No longer applicable in TRAIN)
There shall also be allowed an additional exemption
of P25,000 for each “dependent” not exceeding
four.
KINDS OF DEDUCTIONS
A “dependent” means:
 A legitimate, illegitimate or legally adopted child
Chiefly dependent upon and living with the taxpayer
Not married, not gainfully employed, not more than
21 years of age
Except: If such dependent, regardless of age, is
incapable of self-support because of mental or
physical defect.
KINDS OF DEDUCTIONS
A “dependent” also includes:
a. foster child (temporary substitute parental care by
a duly licensed by DSWD)
b. PWD ( within 4th degree of consanguinity or
affinity to the taxpayer, regardless of age, not
gainfully employed and dependent upon the
taxpayer)
IMPORTANT NOTES
1. In case of married individuals, the additional exemption
shall be claimed by only one of the spouses.
2. The proper claimant of the exemption would be generally
be the husband, EXCEPT if the husband is (1)
unemployed (2) working abroad like an OFW or seaman
(3) husband waived his right to the exemption
IMPORTANT NOTES
3. For legally separated spouses, the additional exemption
may be claimed only by the spouse who has custody of the
child

 However, the total amount of additional exemption that

may be claimed by both shall not exceed 4.
IMPORTANT NOTES
 Non-resident aliens engaged in trade or business
(NRAETB) MAY be entitled to personal exemptions (but
not additional exemption) subject to reciprocity such that :
i. The country from which he is a citizen has an income tax
law;
ii. The income tax law of his country allows personal
exemption to citizens of the Philippines not residing
therein but deriving income therefrom and not to exceed
the amount allowed in NIRC.
IMPORTANT NOTES
The personal exemption shall be equal to that allowed by
the income tax law of the country to a citizen of the
Philippines not residing therein, or the amount provided in
the NIRC, whichever is LOWER.
eg.
Allowed personal exemption in Canada: P 60, 000
Allowed by NIRC: P 50, 000 per dependent
Deductible personal exemption is P 50, 000 (lower)
IMPORTANT NOTES
 Non-resident aliens not engaged in trade or business
(NRANETB) cannot claim any personal or additional
exemption. –Because their income is subject to Final Tax.
KINDS OF DEDUCTIONS
(c) Individuals NOT entitled to personal and additional
exemptions:
i. Non-resident alien NOT engaged in trade or business
ii. Alien individual employed by Regional or Area
Headquarters of Multinational Companies
iii. Alien Individual employed by Offshore Banking Units
iv. Alien Individual employed by Petroleum Service
Contractor and Subcontractor
KINDS OF DEDUCTIONS
(d) Status-at-the-end-of-the-year-rule
i. If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the
taxpayer may claim the corresponding personal or
additional exemption, as the case may be, in full for such
year. 
ii. If the taxpayer dies during the taxable year, his estate may
still claim the personal and additional exemptions for
himself and his dependent(s) as if he died at the close of
such year. 
KINDS OF DEDUCTIONS
iii. If the spouse or any of the dependents dies or if any of
such dependents marries, becomes twenty-one (21) years
old or becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if the
spouse or any of the dependents died, or as if such
dependents married, became twenty-one (21) years old or
became employed at the close of such year.
GENERAL RULE
ITEMIZED
DEDUCTIONS
These are deductions that are related to Trade or business or the Practice of a
Profession.
These DO NOT apply to Taxpayers earning Compensation Income
ITEMIZED DEDUCTIONS
To be deductible:
(a) The expense must be ordinary and necessary,
(b) It must be paid or incurred within the taxable year, and
(c) It must be paid or incurred in carrying on a trade or business.
(d) The expense must be substantially proved by evidence or records the deductions
claimed under the law, otherwise, the same will be disallowed. Esso Standard Eastern,
Inc. v. Commissioner of Internal Revenue, [G.R. Nos. L-28508-9, July 7, 1989]
ITEMIZED DEDUCTIONS
ORDINARY ITEMIZED DEDUCTIONS SPECIAL ITEMIZED DEDUCTION

 Ordinary Business Expenses  SPECIAL EXPENSES under the NIRC

and SPECIAL LAWS
 BITE DeDe Loss CPR
ORDINARY ITEMIZED
DEDUCTIONS

BITE DeDe Loss CPR

ITEMIZED DEDUCTIONS
B- Bad Debts Loss
I- Interest C- Charitable and
T- Taxes other contribution
E- Expenses P- Pension Trust
De- Depreciation R- Research and
De- Depletion Development
BAD DEBTS
 Debts due to the taxpayer actually ascertained to be worthless
and charged off during the year may be claimed as deduction.
 “Actually ascertained to be worthless”
Worthlessness is not determined by an inflexible formula or slide
rule calculation but upon the exercise of sound business judgment.
 The determination of worthlessness must depend upon the
particular facts and circumstances of the case. It must be
uncollectible even in the future.
BAD DEBTS (REQUISITES FOR DEDUCTIBILITY)

 [1] Existing indebtedness due to the taxpayer which must be valid

and legally demandable,
 [2] Connected with the taxpayer’s trade, business or practice of
profession,
 [3] Must not be sustained in a transaction entered into between
related parties,
 [4] Actually ascertained to be worthless and uncollectible as of the
end of the taxable year, and
 [5] Actually charged off in the books of accounts of the taxpayer as
of the end of the taxable year.
BAD DEBTS: TAX BENEFIT RULE

 NOTE: Tax Benefit Rule - Recovery of bad debts previously

allowed as deduction in the preceding yrs shall be included as part
of gross income in the yr. of recovery to the extent of the income
tax benefit of such deduction
INTEREST EXPENSE

The cost of money incurred within a taxable year on

indebtedness in connection with the taxpayer’s profession,
trade or business.
INTEREST EXPENSE (REQUISITES FOR DEDUCTIBILITY)

1. There must be an indebtedness stipulated in writing

2. The indebtedness must be that of the taxpayer
3.The indebtedness must be that of the taxpayer in
connection with the trade, business or profession
3. The interest must have been paid and incurred during the
taxable year (meaning due and demandable)
4. The interest payment must not be in favor of a relative
NONDEDUCTIBLE INTEREST
EXPENSE
The following income are NOT allowed as deduction from business/professional
income:
1. If the Individual is on the CASH basis of Accounting, and the Interest is paid
in advance, through discount or otherwise
2. Interest payment on indebtedness NOT business related
3. Interest payment in favor of a RELATIVE (related debtor and creditor)
4. Interest to purchase or carry tax-exempt transactions
5. Interest paid on indebtedness to finance petroleum operations; and
6. Interest on unclaimed salary is not deductible from gross income
RELATED DEBTOR AND
CREDITOR
Members of the family, which includes WIFE, BROTHERS, SISTERS,
1.
ANCESTORS, and other lineal descendants/ascendants
2. An individual and corporation where more than 50% of the outstanding
shares of the Corporation is owned by the Individual
3. Two corporations where the same individual owns more than 50 % of the
outstanding stock of each Corporation
4. Between grantor and fiduciary of any trust
5. Between fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
6. Between fiduciary of a trust and the beneficiary
INTEREST EXPENSE –
DEDUCTIBLE
DEDUCTIBLE IN FULL PARTIAL DEDUCTION

1. The business has no interest income
subject to FTx; or
2. The interest expense is paid in favor of
the government.
NB: Interest on delinquent taxes is deductible
because taxes are considered legal debt when
due
(Fines and penalties are NOT deductible)
 If the taxpayer has interest income
SUBJECT TO final tax,
AND
 At the same time, incurred an interest
expense during the taxable year
THUS, the interest expense shall be reduced
BY 33% of the Interest Income Subject to
Final Tax. (Regardless of the date when the
Investment was made)
INTEREST EXPENSE DEDUCTIBLE SUBJECT TO LIMIT
(DOWNWARD ADJUSTMENT)

e.g.
Interest expense P100, 000 ; Interest income subject to FTx
P30, 000

Interest Expense P100,000

Less: Tax differential (30, 000 * .33) 9, 900
Deductible Interest Expense P90, 100
PREPAID INTEREST BY A
CASH BASIS INDIVIDUAL
TAXPAYER
1. Interest payment by a cash individual taxpayer shall be deductible
in the year that the principal is fully paid.
Eg. On December 31, 2015, Mr. A acquired a loan of P 100, 000
for business purposes. He received P 90, 000 as proceed of loan, net
of interest. The principal is to be paid in 2016.
The interest expense is deductible in 2016, upon the full payment
of the principal.
PREPAID INTEREST BY A
CASH BASIS INDIVIDUAL
TAXPAYER
2. Proportionate to principal amortization
If indebtedness is payable in PERIODIC amortization, the
amount of the interest which corresponds to the amount of the
principal amortized or paid during the year

Eg. Page 469 of your book

OPTIONAL TREATMENT OF
INTEREST EXPENSE
At the option of the taxpayer, interest incurred to acquire
property used in trade or business may be allowed as a
deduction(outright deduction) or treated as capital
expenditure( capitalized as part of the cost of equipment).
TAXES
GR: taxes are allowed as deduction when paid or incurred
within the taxable year in connection with the taxpayer’s
profession, trade or business.
TAXES (REQUISITES FOR
DEDUCTIBILITY)
 must be in connection with taxpayer’s business;
 tax must be imposed by law on, and payable by taxpayer;
and
 paid or incurred during the taxable year.
NON DEDUCTIBLE TAXES
1. Philippine Income tax
2. Estate tax and donor’s taxes
3. Foreign income tax, if claimed as a tax credit
4. Percentage tax on stock transaction
5. Value added tax
6. Taxes not related to business, trade, or profession
7. Other items related to tax such as surcharges, Special
assessment, and compromise
GENERAL BUSINESS EXPENSES
These expenses are directly attributable to the development,
management, operation and or conduct of the trade,
business or exercise of profession.
GENERAL BUSINESS EXPENSES
a. Salaries, wages, management expenses, commissions
and labor
b. Supplies, repairs and maintenance, and other incidental
expenses
c. Operating expenses of transportation equipment and
used in the trade, profession or business
d. Rental for the use of business property
e. Advertising and other selling expenses
And the like ..
EXPENSES ( REQUISITES FOR
DEDUCTIBILITY)
a. Ordinary and necessary for the conduct of business or
exercise of profession
b. Substantiated with official receipts or any other adequate
records
c. Reasonable amount
d. Withheld with tax and paid to the BIR, if required such as
salary expense or income payment
e. Not contrary to law, morals, public policy, or public order
f. Incurred or paid and deducted within the taxable year
SALARIES AND WAGES
Salary expense are allowed as deductions from gross
business income only if the corresponding withholding tax
has been deducted and remitted to the BIR.
COMPENSATION FOR
INJURIES AND PENSIONS
Compensation for injuries and pensions are deductible
expenses.
Even the amount of the salary of an employee paid for a
limited period of time after his death to his widow or heirs,
in recognition for the services, rendered may be deducted
AS LONG AS IT IS BUSINESS RELATED,
DEDUCTIBLE.
MATERIALS AND SUPPLIES
Beginning inventory xx
Add: Net Purchases xx
Total available for use xx
Less: Ending Inventory xx
Deductible Supplies Expense xx
TRAVELING EXPENSE
These are expenses incurred within and outside the country
while away from home in the pursuit of trade, business or
profession
RENT EXPENSE
Rentals paid for the property used in business, whether the
property is real or personal are deductible as business
expense

**Deductible when incurred (even if not paid) in relation to

trade, business and profession and the corresponding
creditable withholding tax has been made.
LEASEHOLD IMPROVEMENT
When a lessee constructed an improvement on the leased
property, the cost of such improvement shall be
depreciated over the life of the improvement, or the term
of the lease contract, whichever is shorter.
Eg. Lease term 10 years
Life of the LI 15 years
The LI will be depreciated over 10 years (shorter)
REPRESENTATION EXPENSE
These are Entertainment, Amusement, and Recreation (EAR)
expenses incurred and paid during the taxable year that are directly
connected to the development of, management and operation of the
trade, business or profession of the taxpayer

SUBJECT TO CEILING
A. ½ % of NET SALES (sales- actual returns) = taxpayer= sale of
goods
B. 1 % of NET RECEIPTS (Gross receipts- returns)= Sale of
services
REPRESENTATION EXPENSE
 If both servicing and trading, then
Step 1. prorate, i.e. Net sales/ Total revenue and Net receipts/ Total
Revenue
Step 2. Compare with the Statutory limit ( ½% for Net sales, 1%
for Net receipts)
Step 3. Choose whichever is lower.
DEPRECIATION
Periodic reduction of the value of tangible permanent assets due to
passage of time, wear and tear and obsolescence.
For intangible assets, such as patents, copyrights, it is called
Amortization
METHODS OF DEPRECIATION
The following are methods of depreciation;
1. Straight-line method
2. Declining method
3. Sum of the years digit
4. Any other methods (DD, 150% Declining)

NOTE: if the problem is silent, use Straight line method

METHODS OF DEPRECIATION
DEPRECIATION AND OTHER RELATED EXPENSES OF
VEHICLES
Only one vehicle for land transport is allowed for the use of an
official or employee (1 car per employee or official), and the value
should not exceed P 2, 400, 000.

Estimated Useful Life= 5 years

METHODS OF DEPRECIATION
Depreciation of Properties used in Petroleum
1. EUL
a. Used DIRECLY in relation to production= 10 years or shorter as
may be permitted by BIR Com
b. NOT used directly in production = 5 years
DEPLETION
Exhaustion of natural resources like mines, oil and gas wells due to
production.
The purpose is to recover the invested capital in the property
DEPLETION
Cost of property XX
Less: Salvage Value (scrap value) XX
Depletion base XX
Divide by; Estimated tons TO BE extracted XX
Depletion per ton XX
Multiplied by: Number of TON EXTRACTED during the year XX
Depletion expense during the year XX
LOSSES
LOSSES – refer to such losses which do not come under the
category of bad debts, inventory losses, depreciation, etc., and which
arise in taxpayer's profession, trade or business.
CATEGORY AND TYPES OF
LOSSES
1. ORDINARY LOSSES
 Incurred in trade or business, or practice of profession
 Net operating loss carry-over (NOLCO)
Refers to the excess of allowable deductions over gross income of
the business for any taxable year, which had not been previously
offset as deduction from gross income.

Can be carried over as a deduction from gross income for the next 3
consecutive years immediately following the year of such loss.
CATEGORY AND TYPES OF
LOSSES
2. CAPITAL LOSSES (LOSSES ARE DEDUCTIBLE ONLY TO
THE EXTENT OF CAPITAL GAINS)
3. SPECIAL KINDS OF LOSSES
CHARITABLE AND OTHER
CONTRIBUTIONS
- It is non-operating expense, but the law allows some contribution
or gifts within the taxable year as deduction from gross income
CONTRIBUTIONS
DEDUCTIBLE IN FULL
1. Donation to GOVERNMENT OF THE PHILIPPINES, or any of
its instrumentalities, exclusively to finance (HEYSHE)
a. Education
b. Health
c. Youth and sports development
d. Human settlements
e. Science and Culture
f. Economic development
CONTRIBUTIONS
DEDUCTIBLE IN FULL
2. Donations to international organizations entered into by the
Philippine government and foreign institutions
3. Donations to Accredited Non-Government Organizations,
provided
a. Not more than 30% of which should be used for admin
purposes
CONTRIBUTIONS SUBJECT TO
LIMIT
=These contributions are not deductible in full as specified by the law
or such deduction has not met the requisites to be deducted in full.
A. Donations to Govt of the Philippines NOT IN ACCORDANCE
WITH PRIORITY PROJECTS
B. Donation to NON-ACCREDITED NGOs or DOMESTIC
CORPORATION ORGANIZED EXCLUSIVELY FOR:
a. Religious b. Charitable c. Scientific d. Youth and Sports
Development e. Cultural f. Educational g. Rehabilitation of veterans h.
Social welfare
CONTRIBUTIONS SUBJECT TO
LIMIT
These contributions are not deductible in full as specified by the law
or such deduction has not met the requisites to be deducted in full.
Limitation:
a. Individuals: 10 % of the taxable income FROM TRADE, BUS,
OR PROF BEFORE actual contribution, OR actual contribution,
whichever is LOWER
b. Corporation: 5% of the taxable income FROM TRADE, BUS,
OR PROF BEFORE actual contribution, OR actual contribution,
whichever is LOWER
PENSION TRUST
PENSION TRUST CONTRIBUTIONS – a deduction applicable
only to the employer on account of its contribution to a private
pension plan for the benefit of its employee. This deduction is purely
business in character.
PENSION TRUST

Defined contribution Everything that the

plan employer shouldered
is deductible in full

Defined Benefit plan Current Service Cost Deductible in full

Past service cost Amortized for 10

years
RESEARCH AND
DEVELOPMENT
Taxpayer has the option to consider R & D as:
a. Ordinary expense = deductible from GI in the year the expense is
incurred
b. Deferred expenses subject to amortization over a period of not
less than 60 months beginning the month in which the taxpayer
first realizes benefits from such expenditures.
PREMIUM PAYMENTS FOR
HEALTH/HOSPITALIZATION INSURANCE (PPHHI)
(DELETED IN TRAIN)
It is an amount of premium on health and/or hospitalization paid by
an individual taxpayer (head of family or married), for himself and
members of his family during the taxable year.
Who are allowed to deduct?
All individual taxpayer subject to progressive tax EXCEPT
NRAETB.
REQUISITES FOR
DEDUCTIBILITY
 Insurance must have actually been taken
 The amount of premium deductible does not exceed P2,400 per
family or P200 per month during the taxable ear.
 That said family has a gross income of not more than P250,000 for
the taxable year.
 In case of married individual, only the spouse claiming additional
exemption shall be entitled to this ­deduction.
 THAN
K
YOU!

Summarized notes from various sources

jmc_Mar2019