Deductions from Gross Income

September 23, 2021

 Two types of Deductions
1. Optional Standard Deduction (40% of Gross
Income)
1. Must be elected at the 1st Quarterly Return
2. Irrevocable for the entire year
2. Itemized Deduction
 Itemized Deductions
• Business Expenses
– Ordinary and necessary for the business
– Incurred or paid during the taxable year
– Connected with the trade, profession or business
of the taxpayer
– Reasonable expenses of the business
– Substantiated by official receipts/records
– The applicable withholding taxes have been
withheld and remitted to the BIR
 Itemized Deductions
• Interest expense
– Connected with the trade, profession or business of the
taxpayer
– There must be liability to pay interest.
– Must be paid or incurred during the taxable year
– Interest expense must be the obligation of the taxpayer
– Interest payment must be not be between related
taxpayers
• Reduction of allowable deduction for interest expense by
33% of interest income subject to final tax
 Itemized Deductions
• Alternative treatment of interest on loan
related to qualifying asset
– Immediately expense; or
– Capitalized as part of the cost of qualifying asset
 Itemized Deductions
• Deductible Taxes
– Import duties, business taxes (OPT), local business
tax, community tax, professional tax, privilege and
license tax, excise tax, DST, automobile registration
fees, real property tax, fringe benefit tax
• Nondeductible Taxes
– Income tax, capital gains tax, stock transaction tax,
donor’s tax, estate tax, special assessment, VAT,
final withholding taxes
 Itemized Deductions
• Ordinary losses
– Must involve ordinary properties
– Actually sustained
– Not claimed as deduction for estate tax purposes
– Not compensated by insurance or other form of
indemnity
– Must be reported to BIR within 45 days from the
date of loss
 Itemized Deductions
• Net Operating Loss Carryover (NOLCO)
– It can be carried over and deducted from the gross
income for the next 3 consecutive taxable years
 Itemized Deductions
• Bad Debts Expense
– Valid and existing debt
– Connected with the trade, business or profession
of the taxpayer
– Must be ascertained to be worthless
– Must be written off within the taxable year
 Itemized Deductions
• Depreciation expense
 Itemized Deductions
• Pension Trust Contributions
– Present service contributions
• Deductible in full
– Past service cost contributions
• Prorated over 10 years
 Itemized Deductions
• Charitable contributions
– Deductible in Full
– Subject to limitation
• 5% of taxable income before donation (corporation)
• 10% of taxable income before donation (individual)
 Itemized Deductions
• Research and development expenditures
– Outright expense; or
– Amortized over a maximum period of 60 months
 Itemized Deductions
• Entertainment, Amusement and Recreational
Expenses
– Ceiling
• Seller of goods/properties (1/2 of the net sales)
• Seller of services/Lease of properties (1/2 of net
revenues)
 Itemized Deductions
• Optional treatment of capital expenditures in
a Proprietary Educational Institutions
– Outright expense; or
– Depreciated over the useful life