EXCLUSIONS FROM

GROSS INCOME
Income earned or received but is not
included in the determination of gross
income

EXCLUSIONS
Despite their non-inclusion from
gross income, such items may be
subject to taxes other than the
income tax
Constitution
Laws
Treaties

SOURCES OF EXCLUSIONS
 Proceeds of life insurance policy
 Amount received by the insured as return of premium
 Gift, bequest and devices
 Compensation for injuries or sickness
 Income exempt under treaty
 Retirement benefits, pensions, gratuities, etc.
 Miscellaneous items

EXAMPLES OF EXCLUSIONS
Lifeis regarded as a capital
item with infinite value. Hence
the proceeds of life insurance is
a return of capital.

PROCEEDS FROM LIFE INSURANCE

The amount received by the insured
as a return of premium on any
insurance contract is a return of
capital; hence, it is excluded from
the gross income

AMOUNT RECEIVED BY INSURED AS A

RETURN OF PREMIUM
 The value of property acquired by gift,
bequest and devises: Provided, however that
the income from such property as well as gifts,
bequest, devise, or descent of income from
any property, in case of transfer of dividend
interest, shall be included in gross income

GIFTS, BEQUESTS, AND DEVISES OR

DESCENT
Amounts received through accident or
health insurance or under Workmen’s
Compensation Acts as a compensation
for personal injuries or sickness plus any
damage received, whether by suit or
agreement, on account of such injuries
or sickness.

COMPENSATION FOR INJURIES AND

SICKNESS
Income items that are excluded by the
international agreement to which the
Philippine government is a signatory are
excluded from income tax.

INCOME EXEMPT UNDER TREATY

 Retirement Benefits under RA 7641
 Separation or Termination
 Social Security Benefits, Retirement Gratuities, and Other similar
benefits from foreign government agencies and other institution,
private of public received by RC, NRC or aliens who come to
settle permanently in the Philippines
 United States Veterans Administration(USVA)-administered
benefits
 SSS/GSIS

RETIREMENT BENEFIT, PENSIONS,

GRATUITIES AND OTHER BENEFITS
MISCELLANEOUS
DEDUCTIONS FROM
GROSS INCOME
 Deductions = Expense
 Exclusion = Income exempt from taxation
 Areamounts allowed by the Tax Code to be
deducted from Gross Income to arrive at the
taxable income for the purpose of computing
income tax liability.
 Only for
 Individualsor corporation engaged in
trade/business
 Individuals in exercise of profession

DEDUCTIONS
 Deductions are a matter of legislative grace. A taxpayer
can deduct an item or amount from gross income only if
there is a law authorizing such deductions. In absence of a
law, the expense of the taxpayer, whether business-related,
reasonable, or equitable, cannot be deducted from gross
income.
 The tax payer can deduct:
 The full amount of the deduction allowed
 The lesser amount
 Not to claim any deduction at all

CONCEPT OF DEDUCTIONS
Itemized Deductions
Optional Standard Deduction

KINDS OF DEDUCTIONS
Itis necessary, ordinary, actual and
legitimate.
Depends upon the taxpayer’s residence,
citizenship and his/her source of income
There is a law authorizing the deductions

GENERAL RULE IN CLAIMING

DEDUCTIONS
 1. Ordinary and necessary expenses (trade, business or professional expenses
 2. Taxes
 3. Interest
 4. Losses
 5. Bad debts
 6. Depreciation
 7. Depletion of oil and gas wells and mines
 8. Charitable and other contributions
 9. Research and development
 10. Pension trusts
 11. Premium payments on health and/or hospitalization insurance of an individual taxpayer

ITEMIZED DEDUCTIONS
For these items to be deducted, the taxpayer should follow
the SUBSTANTIATION REQUIREMENTS, meaning, no expenses
shall be allowed (to be deducted) unless the taxpayer shall
substantiate with sufficient evidence such as official receipts,
invoices, vouchers, bank statements or other adequate
records:
 The amount of the expense being deducted; and,

 The direct connection or relation of the expense being deducted to the

development, management, operation and/or conduct of the trade,
business or profession of the taxpayer
In addition, deductions should not be "contrary
to public policy, morals or order". While illegal
income forms part of the gross income of a
taxpayer, on the other hand, bribe, kickback, and
other similar payment, being against law and
public policy are not deductible from gross
income.
 Ordinary expenses - expenses which are normal or
usual in relation to the taxpayer's business and the
surrounding circumstances; expenses which are
appropriate and helpful in the
 Necessary expenses development of taxpayer's
business and are intended to minimize losses or to
increase profits. These are day to day expenses.

1. ORDINARY AND NECESSARY

EXPENSES
 Salaries, wages, allowances and other forms of compensation, for
personal services actually rendered, including the grossed-up
monetary value of fringe benefit furnished or granted by the
employer, employer's share on SSS, PHIC, HDMF and the like;
 Travel expenses in the pursuit of trade, business or profession;
 Rentals and other payments;
 Entertainment, amusement and recreation expenses;

Common Requisite:
 Reasonable and incurred or paid in the pursuit of trade, business or profession.

EXAMPLES OF ORDINARY &

NECESSARY EXPENSES
These are taxes paid or incurred within the taxable year in connection with the taxpayer's
profession, trade or business

The following are deductible taxes

 Income tax paid abroad, claimed as operating expense;
 Documentary stamp taxes;
 Occupational taxes;
 Excise taxes;
 Import duties;
 Local business taxes;
 Percentage taxes under the Tax Code except Section 127(A) and (B), otherwise known
as stock transaction taxes.

2. TAX EXPENSES
It includes the amount 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 of its repayment.

Requisites of deductibility:
 It must be on indebtedness which is connected with trade, business, or practice of
profession. Interest payments not related to trade/business are not deductible from
the gross income;
 The indebtedness must be that of the taxpayer;
 The interest must be in writing and legally due;
 Interest is paid or incurred upon such indebtedness within the taxable year.

3. INTEREST EXPENSE
Losses may be offset against all income and capital gains in the
same tax year. However, losses are deductible from gross income
only on the following grounds:
 Ordinary losses arising from losses incurred in trade, business, or
profession including net operating loss carry over (NOLCO);
 Casualty losses (property connected with trade, business or
profession lost from fire, calamity, robbery, etc. and for which a
declaration of loss with the BIR within 45 days from the date the
loss was incurred)

4. LOSSES
 In general, these are debts due to the actually ascertained to be worthless and
charged off within the taxable year EXCEPT those NOT connected with profession,
trade or business and those sustained in a transaction between "related parties".
 "Worthlessness" determination:
 Determined upon the exercise of sound business judgment based on the particular facts
and circumstances of the case;
 To be considered as worthless, it must be uncollectible even in the future

5. BAD DEBTS
 Depreciation expense as a deduction from the gross income
refer to a reasonable allowance for the exhaustion, wear and
tear and normal obsolescence of tangible property used in the
trade or business.
 The term is also applied to amortization of intangible assets used
in the conduct of trade or business.
 Some Requisites for Deductibility:
 Reasonable
 Used in trade or business

6. DEPRECIATION
 In the case of oil and gas wells or mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion method shall be
granted.
Intangible exploration and development drilling costs may be for:
 Non-producing wells and mines
 Deducted in the year the costs were incurred
 Producing wells and mines
 Deduct in full or capitalize and amortize

7. DEPLETION OF OIL AND GAS WELLS

AND MINES
 Contributions deductible from gross income may be deductible in full or subject to
limitation depending upon the organization to which the donation is given.
 Requisites for Deductibility:
 The contribution or gift must be actually paid;
 It must be given to organization specified by law;
 It must be within the taxable year;
 The net income of the institution must not inure to the benefit of any private individual or
shareholder;
 The taxpayer claiming the deduction must be engaged io trade, practice of profession or
business.

8. CHARITABLE AND OTHER

CONTRIBUTIONS
A taxpayer may treat research or
development expenditures which are paid or
incurred by him during the taxable year in
connection with his trade, business or
profession as ordinary and necessary expenses
which are not chargeable to capital account.
The expenditures so treated shall be allowed
as deduction during the taxable year when
paid or incurred.

9. RESEARCH AND DEVELOPMENT

 Pension trust contributions pertain to
deductions applicable only to the employer
on account of its contributions to a private
pension plan for the benefit of its employees.
This deduction is purely business in character,
established or maintained by employer to
provide for the payment of reasonable
pensions to his employees.

10. PENSION TRUSTS

Premium payment on life insurance of
employees taken out by the employer
may be allowed as deduction from the
latter's gross income provided the
designated beneficiary is the employee
or his/her heirs/beneficiaries.
11. PREMIUM PAYMENTS ON HEALTH
AND/OR HOSPITALIZATION INSURANCE OF
AN INDIVIDUAL TAXPAYER
 In lieu of the itemized deductions, an individual subject to tax (other than a non-
resident alien), may elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales/receipts*, as the case may be.
 Once the election to avail of the OSD (or itemized deduction) is signified in the
return, it shall be irrevocable for the taxable year for which the return is made.
 NOTE - Taxpayer is using:
 Accrual basis of accounting - 40% of gross sales
 Cash basis of accounting - 40% of gross receipts

OPTIONAL STANDARD DEDUCTIONS

ILLUSTRATION 1
OPTIONAL STANDARD DEDUCTION

 Suppose a retailer of goods, whose accounting method is under

the accrual basis, has a gross sale of Php 1 million with a cost of
sales of Php 800,000.
Compute for the OSD

Solution Solution
Gross Sales 1000000 Gross Sales 1000000
Less Cost of Sales IGNORE Less: Cost of Sales IGNORE
Basis of OSD 1000000 Gross Income 1000000
OSD Rate 40% Less: OSD 400000
OSD Amount 400000 Net Income 600000
ILLUSTRATION 2
OPTIONAL STANDARD DEDUCTION

 The following data were provided by a resident citizen:

Solution
Gross Sales 10,500,000.00
Gross sales, Php 10.5 million;
Sales Return and Allowances (300,000.00)
Sales returns and allowances, Php 300,000; Sales Discount (200,000.00)
Less:Cost of Sales IGNORE
Sales discounts, Php 200,000; Gross Income 10,000,000.00
Less: OSD(40% of gross income) 4,000,000.00
Cost of sales, Php 5 million Net Income 6,000,000.00
Determine the OSD and the taxable income.
INCLUSIONS FROM
GROSS INCOME
 Compensation Income
 Gross income derived from conduct of trade or business or exercise of profession
 Gains derived from dealings in property
 Interest
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partner's distributive share from the net income of the general professional partnership

INCLUSIONS FROM GROSS INCOME

 Includes personal and real properties(excluding capital assets)
 Sale of copyrights and patents
 Sale of Goodwill
 Corporate sinking fund

GAINS DERIVED FROM DEALINGS IN

PROPERTY
 Interest received arising from indebtedness,
whether business or non business, legal or
illegal – Regular tax

 Interest
income on deposits made in banks or
a deposit substitutes – Final tax

INTEREST INCOME
 Rental income received by the lessor (the one who gives the
space to someone in exchange for a fee) from the lessee (the
receiving party of the leased property) for the use of property.

RENTAL INCOME
 Royalty refers to the share of earnings paid to the inventor, writer,
book author, etc.
 Royalties derived by resident citizens (and domestic corporations)
from sources OUTSIDE the Philippines.
 Royalties on books, other literary works and musical compositions
from sources WITHIN the Philippines
 Royalties derives from sources WITHIN the Philippines other than
royalties subject to 10% final tax.

ROYALTY INCOME
 Dividend is the portion of corporate profits paid by a corporation
to its shareholders.
 Dividends received from foreign corporation
 Share in the net income of a GPP

DIVIDEND INCOME
 These refers to annuity policy sold by insurance companies,
which provide installment payment for life, or for a guaranteed
fixed period of time whichever is longer or for life and
guaranteed fixed payment
 Is a series of payments made at equal intervals

ANNUITY
 Prizes and winnings from the Philippines below 10k
 Prizes and winnings from outside the Philippines

PRIZES AND OTHER WINNINGS

PENSIONS