DEDUCTIONS FROM

GROSS INCOME
 ALLOWABLE DEDUCTIONS VS EXCLUSIONS
Deductions are the amounts, which the law allows to be deducted
from gross income in order to arrive at net income.
On other hand “Exclusions” are something received or earned by
the taxpayer that do not form part of gross income
 Allowable deductions vs Exclusions

Deductions are something spent or paid in earning the gross income,

And in pertains to the computation of net income.

Exclusions pertains to the computation of gross income.

Kinds of Deductions

1. Itemized Deductions
2. Optional Standard Deduction
3. Special Deductions allowed in special cases.
Question
Which of the following is not a characteristic of a deduction?

A. Its is a reduction of wealth that helped earn the income subject to tax.
B. An immunity of privilege, a freedom from a charge or burden to which
others are subjected
C. It is not a receipt
D. It is a subtraction to arrive at income subject to tax

Ans. B
Question
Political campaign contributions are not deductible from gross income

A. If they are not reported to the Commission on elections.

B. If the candidate supported wins the election because of possible corruption
C. Since they do not help earn the income from which they are to be deducted.
D. Since such amounts are not considered as income of the candidate to whom
given

Ans. C
 Question
Lester bought an equipment under a two year installment basis to be used in his
office in the practice of his profession. Lester will pay 50,000 monthly for a period
of 12 months. For income tax purposes, the 50,000 monthly payment shall be:

A. Treated as business rental, hence deductible

B. Treated as capital expenditure, hence not deductible
C. Treated as depreciation expense, hence deductible
D. Treated as ordinary business expense.

Ans. B
 Question
This is not a requisite for business expense to be deductible:

A. It must be reasonable
B. It must be paid during the taxable year
C. The withholding tax otherwise required have been deducted and
remitted to the BIR
D. It Must be ordinary and necessary

Ans. B
 ITEMIZED DEDUCTIONS

Ordinary and Necessary Trade, Business or Professional Expenses

1. Salaries, wages and other forms of compensation for personal services actually rendered,
including the grossed-up monetary value of fringe benefit granted by the employer to the
employee.
2. Travel expenses
3. Rentals
4. Entertainment, amusement and Recreation expense
5. Other necessary business expenses.
Requisites for Deductibility in General:
1. Must be ordinary and necessary
2. Paid or incurred during the taxable year
3. Connected with trade, business or practice of profession
4. Supported by sufficient evidence
5.. Not against the law, morals, public policy or public order
6. It must have been subjected to withholding tax, if applicable
Entertainment, Amusement and Recreation expenses

Amount Deductible- Lower amount between:

Actual vs Limit

Limit=
Sale of Goods or Properties Net Sales x ½ of 1%
Sale of Services Net Revenue x 1%
RRO Corporation is engaged in the sale of goods and services with net sales of
3,000,000 and net revenue of 2,000,000. The actual entertainment, amusement and
recreational expense for the taxable year totaled 30,000. How much is the deductible
EAR expense?
Sale of Goods Allowed (Lower)
Actual= (30,000 x 3M/5M) 18,000
Limit= 3M x 1/2% 15,000 15,000

Sale of Services
Actual= (30,000 x 2M/5M) 12,000
Limit= 2M x 1% 20,000 12,000
27,000
Minor or Ordinary Repairs & Maintenance

Kind of Repair Treatment

1. Repairs that materially add to the Capitalize

value of the property
2. Repair that appreciably prolong the Capitalize
life of the property
3. Repair the keep the property in its Outright expense
ordinarily efficient operating condition
Question

Which of the following is allowable expenses of an employer?

A. Tax withheld by a corporation from its employees salary
B. Kickback payment to a government official
C. Distribution of profits to partners
D. None of the above
Ans. D
Question

Which of the following expenses of a professional practitioner is not allowed to

be deducted from the gross income?
A. Professional expenses incurred outside the Philippines by a Nonresident
Alien engaged in business in the PH.
B. Income tax paid by a resident citizen to a foreign country
C. Entire amount incurred for meals, lodging and travel in connection with own
business
D. None of the Above

Ans. A
Interest Expense
Requisites for deductibility:
1. There must be an indebtedness
2. The indebtedness must be that of the taxpayer
3. The indebtedness is connected with the taxpayer’s trade or business
4. There must be legal liability to pay interest
5. It must be paid or incurred during the taxable year.
Tax Arbitrage
If the interest expense arises from LOANS, the deductible amount shall be:
Interest Expense (from loans) XX
Less: (Interest Income subject to final tax x 33%) (XX)
Deductible Interest XX

Optional Treatment of Interest

Interest related to acquisition of property used in trade, business or profession may, at the
option of the taxpayer, be:
1. Claimed as outright expense
2. Capitalize and claim depreciation
Non-Deductible Interest

1. Interest paid to persons classified as related taxpayers

2. If the indebtedness is incurred to finance petroleum exploration
3. Interest on preferred stock
Who are considered as related parties

1. Family members (Shall only include brothers, sisters, spouse, ancestor and lineal
descendants)
2. Between an individual and a corporation if the Individual owns more than 50% of the
corporation.
3. Between two corporations where one of the corporations owns more than 50% of the other
corporation.
4. Between the grantor and a fiduciary of any trust
5. Between the fiduciary and a fiduciary of another trust if the same person is the grantor with
respect to each trust
6. Between a fiduciary of a trust and beneficiary of such trust.
Question
Roy borrowed money from the bank amounting to 1,000,000 at an annual interest rate of 7%.
He invested the money in deposit substitute earning annual interest income of 8%. How much
is the deductible interest?

Actual Interest (1,000,000 x 7%) 70,000

Less: Reduction (1,000,000 x 8% x 33%) (26,400)

Allowable Interest Expense 43,600

An individual shows the following data during the taxable year:
Interest paid, business loan 100,000
Interest paid, loan to finance personal car 500,000
Interest Income, BDO (net) 24,000

How much is the deductible interest expense?

Interest paid, business loan 100,000

Reduction (33% x 30,000) (9,900)
Allowable deductions 90,100
TAXES
The term “taxes” means proper and no deductions should be allowed for amounts
representing interest, surcharge or penalties incident to delinquency.

General Rule- taxes paid or incurred within the taxable year in connection with the
taxpayer’s profession, trade or business, shall be allowed as deduction.
Exception- the following taxes are not deductible:
1. Income Tax
2. Income tax paid abroad if claimed as tax credit
3. Estate Tax
4. Donor’s Tax
5. Special Assessment
Question
Which of the following is not a requisite for taxes to be deductible?
A. Must have been paid or incurred within the taxable year?
B. Deductible only by the person/s upon whom the tax is imposed by law
C. Must be in connection with the taxpayers trade or business
D. Must be imposed by the national government

Ans. D
Mapanlinlang Corporation was assessed by the BIR due to underpayment of Percentage taxes, The assessment notice
disclosed the following:
OPT due 1,000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
It also generated interest income from bank deposits amounting to 100,000. How much is the deductible tax?
1.Ans. 1,000,000

How much is the deductible interest?

1.Ans. 200,000
Note= If the tax paid is allowable expense under the Tax code, the related interest is also classified as
deductions from gross income.
However, penalties and surcharges are non-deductible expenses regardless of the classification of tax paid
Rental Expenses

Question
A lessee paid the real estate tax on the property he leased. For income tax purposes, the
amount paid was:
A. Deductible as part of lease expenses
B. Deductible as tax expense
C. Deductible as an interest expense
D. Non-deductible expense

Ans. A
The cost of leasehold improvement shall be deductible by the lessee by
spreading the cost of the improvement over the:
Life of the improvement Or Remaining term of the Lease
Whichever is shorter
On January 1, 2018. Mr. V leased his vacant lot 1. How much can Mr. J claim as deduction for 2018?
for a period of 12 years to Mr. J at annual rate of Rentals for 2018 2,400,000
2,400,000. It was also agreed that Mr. J will pay
Annual real property tax 30,000
the following:
•4,800,000 representing rental payments for 2,430,000
2018 and 2019
•Security Deposit of 2,400,000 1. How much can Mr. J claim as deduction for 2020?
•Annual Real property tax of 30,000
Rentals for 2020 2,400,000
The lease contract provides among others that Annual real property tax 30,000
the lessee will construct a building for parking Depreciation Expense, LI
purposes at a cost of 9,500,000. Ownership of
9,500,000 X 6/12
the building shall belong to the lessor upon the 9.5 500,000
expiration of the contract. 2,930,000

The building was completed on July 1, 2020

with estimated useful life of 15 years.