TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
TAXATION 2022 REVISED
DEDUCTIONS ON THE GROSS INCOME I. REGULAR ITEMIZED DEDUCTIONS
Deductions from the gross income applies to individuals and corporations engaged in trade A. BUSINESS EXPENSES – expenses in carrying the conduct of trade, business or exercise
or business; and to individuals in the exercise of profession. of profession. It includes compensation payments and fringe benefits, travel
Deductions are amounts allowed by the Tax Code and other special laws to be deducted expenses, utilities, rentals, repair and maintenance, etc.
against the gross income to arrive at the taxable income for purposes of computing the Special rule for Entertainment, Amusement and Recreation Expenses (EAR) -
income tax liability. deductible, provided it must not exceed ½ % of net sales or 1% of net revenue for
As a rule, if the taxpayer does not within any year deduct his expenses, losses, interests, taxes taxpayers engaged in sale of goods or properties, or sale of services, respectively.
or other charges, the taxpayer can no longer deduct them from the income of any succeeding
year. B. INTEREST – shall refer to the payment for the use or forbearance or detention of
money, regardless of the name it is called or denominated. It includes the amount
General Requisites for an item to be Deductible (ON LAWS) paid for the borrower’s use of money during the term of the loan, as well as for his
detention of money after the due date for its repayment.
1. Ordinary in the conduct of trade/business or profession
2. Necessary in the conduct of trade/business or profession Interests are deductible provided:
3. Legitimate/Legal in nature a. There must be an indebtedness, must be that of the taxpayer
4. Actually paid (cash basis) or incurred (accrual basis) b. Must be legally due, interest must be stipulated, must be made in writing
5. Withholding required was made, if applicable (See RR 11-2018 Sec. 1 and 2) c. Interest payment must not be between related taxpayers
6. Substantiated or documented by valid documents such as receipts or invoices d. Must not be incurred to finance petroleum operations
e. Must not be treated as a capital expenditure or capitalized borrowing cost.
Non-deductible Expenses: Other considerations for interest:
a. Personal living and family expenses;
b. Amount paid out of new buildings or for permanent improvements or betterments ✓ If within the taxable year, an individual taxpayer reporting income on the cash
made to increase the value of any property or estate; basis incurs indebtedness on which an interest is paid in advance through discount
c. Amount expended in restoring property or in making good exhaustion thereof for or otherwise, such interest shall be allowed as a deduction in the year the
which an allowance is or has been made; or indebtedness is paid.
d. Premiums paid on any life insurance policy covering the life of an officer or employees, ✓ But if the indebtedness is payable in periodic amortization, the amount of the
or of any person financially interested in trade or business carried on by the taxpayer, principal amortized or paid during the year shall be allowed as deduction in such
individual or corporate, when the taxpayer is directly or indirectly a beneficiary under taxable year.
such policy.
Interest Expense subject to tax arbitrage limit:
✓ In case the taxpayer earns interest income which had been subjected to final
withholding tax, the interest expense paid or incurred shall be reduced by an
amount equal to a percentage of interest income earned (interest expense
arbitrage limit) computed as follows:
Sources: Philippine Tax Code (RA 8424 NIRC, as amended by RA 10963 TRAIN Law and RA 11534 CREATE Law; Income Taxation, Banggawan; CPA Reviewer in Taxation, Tabag; CPA Reviewer in
Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer; CRC-ACE Reviewer; RESA Reviewer
TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
TAXATION 2022 REVISED
Rate = (Corporate Income Tax rate – Final Tax rate on interest income) Losses claimed a deduction for estate tax purposes are not deductible from the gross
Corporate Income Tax Rate income. Losses suffered by related parties are not deductible.
✓ Interest expense arbitrage limits is applicable to all taxpayers (including Losses includes loss on sales, exchange and other disposition of ordinary assets.
individuals) subject to regular income tax.
Deductible Fire Loss – If not totally destroyed is the lower between the cost to restore the
✓ Under CREATE Law: tax arbitrage rate is 20% except for MSMEs which is 0%
property back to its normal operating condition and the book value less the salvage value
or recovery from insurance.
Interest incurred in financing the acquisition of property, used in trade or business may
at the option of the taxpayer, be claimed as:
Shrinkage Loss in the Value of Stock – allowed to be deducted only if the stocks suffered
✓ Outright deduction from gross income loss upon its disposal, except if proven that stocks are worthless (i.e, upon bankruptcy).
✓ Capitalize expenditure claimable through depreciation
Interest on delinquent taxes Loss from Wash Sales – no deductions are allowed for the loss on wash sales, except if it
is made by a dealer in stock or securities and with respect to a transaction made in the
✓ Interest incurred or paid by the taxpayer on all unpaid business-related taxes ordinary course of business.
shall be fully deductible from gross income and shall not be subjected to the
limitations on deduction. Wagering Losses – these are transactions where outcome is dependent upon chance.
✓ Interest on delinquent taxes are presented in the line item as “interest” on Losses from wagering transactions shall be allowed only to the extent of gains from such
indebtedness and not under “taxes and licenses”. transactions.
C. TAXES AND LICENSES – deductible taxes on national taxes includes percentage taxes, Abandonment Loss – in case of abandoned producing well, the unamortized cost thereof
excise taxes after capitalizing and selling the excisable articles, documentary stamp tax, as well as the undepreciated costs of equipment directly used therein shall be allowed as a
fringe benefits tax. Deductible taxes on local includes taxes fees and charges (business deduction in such year of abandonment. However, if such abandoned well is reentered and
permit), professional tax, community taxes, real property tax, motor vehicle production is resumed, the said cost shall be included as part of gross income in the year
registrations, etc. of resumption.
✓ Taxes do not include surcharges and compromise penalties (not deductible) Net Operating Loss Carry-Over (NOLCO) - is the excess of allowable deductions over gross
✓ Tax paid on foreign countries can be claimed as: income that can be carried over as a deduction from gross income for the next three
a. Tax credit, deductible against tax due for resident citizens and domestic consecutive taxable years immediately following the year of such loss.
corporations subject to limitations. For the years 2020 and 2021, NOLCO can be carried over for five consecutive taxable years
b. A deduction against the gross income. immediately following the year of such loss (Bayanihan to Recover as One Law)
D. LOSSES – taxpayer shall submit a declaration of loss sustained from casualty, robbery,
theft of embezzlement during the taxable within 45 days from the date of discovery
of such loss.
Sources: Philippine Tax Code (RA 8424 NIRC, as amended by RA 10963 TRAIN Law and RA 11534 CREATE Law; Income Taxation, Banggawan; CPA Reviewer in Taxation, Tabag; CPA Reviewer in
Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer; CRC-ACE Reviewer; RESA Reviewer
TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
TAXATION 2022 REVISED
E. BAD DEBTS – are deductible provided it is: Tangible development cost for Mining Operations:
a. Valid and subsisting ✓ If the expected life of the property used in mining is 10 years or less, the taxpayer
b. Debt is ascertained to be worthless and uncollectible can use the normal rate of depreciation.
c. Charged off (written off) during the year ✓ If expected life is more than ten years, the property can be depreciated over any
d. Not between family members or related parties number of years between 5 years and 10 years.
Tax benefit rule – bad debts previously written off allowed as deduction shall be
included in the gross income in the year it was recovered Intangible exploration and development costs
✓ If incurred before commercial production, capitalized as cost of wasting asset.
F. DEPRECIATION – portion of the cost of the property is allocated or charged as expense ✓ Producing wells or mines are either: capitalized and amortized using cost-
for a specific period. Acceptable methods include straight line, declining balance depletion method or deducted in the year paid or incurred.
method, Sum-of-the-years digit method and any other acceptable method as
recommended by the Commissioner. H. CHARITABLE AND OTHER CONTRIBUTIONS
Rules on Special Vehicles Contribution deductible in full:
a. Donations to the Philippine Government or to any agencies or political
✓ Only one vehicle for land transport is allowed for an official or employee and the
subdivision, including GOCC, exclusively to finance priority activities in
value of which shall not exceed P2, 400, 000.
education, health, youth and sports development, human settlement, science
✓ No depreciation shall be allowed for yachts, helicopters, airplanes or aircrafts and and culture and in economic development.
land vehicle which exceeded the threshold unless the main line of business is b. Donations to certain foreign government institution or international
transport operations as ordinary operations. These assets will be considered as organizations in compliance with the agreements, treaties entered into by the
capital assets and not ordinary assets. Philippine Government or special laws.
Private Educational Institutions which incur cost for expansion of school facilities may c. Donations to accredited NGO for priority activities as enumerated in letter a.
at its option: d. Donations fully deductible under special laws.
a. Capitalize and claim the annual depreciation as deduction; or Contributions subject to limit:
b. Deduct as expenditures entirely during the taxable year. a. Donations to the Philippine government or political subdivision exclusively for
public purpose not in accordance with priority activities.
G. DEPLETION – allocation of the cost or other basis of a wasting asset over the period b. Donations to non-accredited non-government organizations organized
of natural resource is extracted or produced. exclusively for the purpose of: religious, charitable, scientific, youth and sports
development, cultural, educational, rehabilitation of veterans and social
Tangible Development Cost for Petroleum Operations: welfare.
✓ Properties used in petroleum operations are amortized using straight-line or Contributions subject to limit, if made within the taxable year shall be allowed limited
double declining balance method using 10 years useful life or such shorter as
deductibility in an amount not in excess of 10% for an individual donor, and 5% for a
maybe permitted by the CIR.
corporate donor, of the donor’s income derived from trade, business or profession as
✓ Properties not used in petroleum operations are amortized using straight line computed before the deduction for charitable contributions.
method using 5 years useful life.
Sources: Philippine Tax Code (RA 8424 NIRC, as amended by RA 10963 TRAIN Law and RA 11534 CREATE Law; Income Taxation, Banggawan; CPA Reviewer in Taxation, Tabag; CPA Reviewer in
Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer; CRC-ACE Reviewer; RESA Reviewer
TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
TAXATION 2022 REVISED
I. RESEARCH AND DEVELOPMENT – costs and expenses incurred to generate new B. DEDUCTION INCENTIVES UNDER SPECIAL LAWS
knowledge and produce new products or new technologies for product development.
1. Additional compensation expense for senior citizen employees. (RA 9257)
Methods of Deduction for R&D expenses: additional deduction from gross income equivalent to 15% of the total amount
paid as salaries and wages to senior citizens as long as:
a. Treat as ordinary and necessary expenses – deduction from gross income in the
✓ Employment shall have to continue for at least 6 months, and
year paid or incurred.
✓ The annual taxable income of the senior citizen does not exceed the
b. Treat as deferred expenses – deduction ratably distributed over a period of not poverty level as determined by the NEDA.
less than 60 months when the benefits of research and development received.
2. Additional compensation expense for persons with disabilities. (RA 9442)
additional deduction from the gross income equivalent to 25% of the total
J. PENSION TRUST amount paid as salaries and wages to disabled persons provided:
a. For defined contribution plan, the deductible expense is simply the number of ✓ The entity present proof as certified by the Department of Labor and
agreed contributions or funding made to the plan. Employment that disables persons are employed.
✓ The disabled employee is accredited with the DOLE and DOH as to his
b. For defined benefit plan, contributions for current service cost is fully
disability, skills and qualifications.
deductible, while contributions for past service cost is amortized over a period
of 10 years. Overfunding is not deductible for the current period but treated as 3. Cost of facilities improvements for persons with disability. (RA 7277)
prepaid pension expense deductible for future current service costs. additional deduction equivalent to 50% of the direct costs of the improvement
or modifications.
4. Additional training expense under Jewelry Industry Development Act. (RA
8525) additional deduction equal to 50% of the expenses incurred in training
II. SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS schemes approved by TESDA provided the business submitted to the BIR a
certified true copy of its Certificate of Accreditation issued by BOI.
A. SPECIAL DEDUCTIONS UNDER NIRC AND SPECIAL LAWS
1. Any amount of discount granted to senior citizens under RR 7-2010 and to 5. Additional contribution under the Adopt-a-School Project. (RA 8525)
PWDs under RR 5-2017 shall be a tax-deductible expense on the part of the additional deduction equivalent to 50% of the contribution of the adopting
company granting such discount. entity for the “Adopt a School Program”
2. Income distribution from a taxable estate and trust are deductible on the part 6. Additional deduction for compliance to rooming-in and breastfeeding
of the estate and trust but an item of gross income on the part of the practices. (RA 7600, as amended by RA 10028)
beneficiary. the expenses incurred in complying with the rooming-in and breast- feeding
3. Transfer to reserve fund and payments to policies and annuity contracts of practices shall be deductible up to twice the actual amount.
insurance companies.
7. Additional free legal assistance expense (RA 9999)
4. Transfers to mandated reserves funds of taxable cooperatives.
allowable deduction equivalent to the amount that could have been collected
5. Dividend distribution of Real Estate Investment Trust.
for the actual performance of the actual free services rendered or up to 10% of
the gross income derived from the actual performance of the legal profession
Sources: Philippine Tax Code (RA 8424 NIRC, as amended by RA 10963 TRAIN Law and RA 11534 CREATE Law; Income Taxation, Banggawan; CPA Reviewer in Taxation, Tabag; CPA Reviewer in
Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer; CRC-ACE Reviewer; RESA Reviewer
TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
TAXATION 2022 REVISED
whichever is lower. The free legal assistance is exclusive of the 60 hours B. For domestic corporations and resident foreign corporations:
mandatory free legal assistance rendered to indigent clients as mandatory
✓ Corporations may elect a 40% OSD of its gross income (income after deducting cost
requirement for practicing lawyers.
of sales or cost of services, in lieu of regular itemized and special itemized
8. Additional productivity incentive bonus expense. (RA 6971) deductions.
additional deduction equivalent to 50% of the total productivity bonuses given
✓ The 40% OSD is based on all gross income subject to regular income regardless if
to employees under the program.
operating or non-operating or other income.
9. “Philippine Green Job Act of 2016” (RA 10771)
✓ The corporation must signify in the first quarterly income tax return its intention to
additional special deduction from the taxable income equivalent to 50% of the
elect optional standard deduction as method of deduction, otherwise, the taxpayer
total expense for skills training and research/development expenses.
deemed opted to use itemized deductions. Such election shall be irrevocable for the
10. Special deductions allowed under the Bayanihan to Heal as One (RA 11469) whole taxable year for which the return was made.
and Bayanihan to Recover as One Law (RA 11494)
C. For domestic corporations and resident foreign corporations:
11. Additional labor training expenses (CREATE Law)
additional 50% of the value of labor training expenses incurred for skills ✓ The taxpayer who is entitled to and claimed for the OSD shall not be required to
development of enterprise-based trainees enrolled in public senior high schools, submit with his tax return such financial statements otherwise required under the
public higher education, or public technical vocational institutions and duly Tax Code.
covered by an apprenticeship agreement under the Labor Code of the ✓ The taxpayer is not relieved from the responsibility of withholding taxes as a
Philippines. Provided that the enterprise shall secure proper. withholding agent of the government on certain income payments made as
required by regulations.
✓ Individuals and corporations mandated to use itemized deductions are not
III. OPTIONAL STANDARD DEDUCTION (OSD)
A. FOR INDIVIDUAL TAXPAYERS (resident citizens, non-resident citizens, resident aliens D. Other special cases of considerations for OSD:
and taxable estates and trusts only): ✓ The partner’s share in the distributive net income of a general professional
✓ In place of the cost of sales or cost of services; regular itemized deductions, and partnership (GPP) cannot claim for OSD anymore since the share is already net of
special itemized deductions, taxpayers may deduct a standard deduction in an the allowable deductions of the GPP.
amount not exceeding: ✓ In case the partner has separate business other than the GPP, the business can
a. 40% of their gross sales if the individual is under the accrual basis, or claim OSD to compute for the taxable income related to the conduct of business.
b. 40% gross receipt if the individual is under the cash basis.
✓ Compensation income earners are not allowed to claim OSD.
✓ Note that cost of sales or cost of services in case of individual sellers or goods and
✓ For Mixed income earners, only those related to trade/business or profession can
services, are not allowed to be deducted for determining the basis of the OSD.
be subjected to OSD.
✓ Non-operating income are not included in the basis of computing the 40% OSD for
individuals.
Sources: Philippine Tax Code (RA 8424 NIRC, as amended by RA 10963 TRAIN Law and RA 11534 CREATE Law; Income Taxation, Banggawan; CPA Reviewer in Taxation, Tabag; CPA Reviewer in
Taxation, Ampongan; Income Taxation, Ballada; 1987 Philippine Constitution; CPAR Reviewer; CRC-ACE Reviewer; RESA Reviewer
