ALLOWABLE DEDUCTIONS Situs of Deductions

Deductions
Deductions are items or amounts authorized by Kinds of Taxpayer
law to be subtracted from gross income to arrive Within Without
at taxable income.
➢​ Only tax taxpayers subject to regular Resident Citizen ✔ ✔
income tax can claim allowable
Non-resident citizen ✔ -
deductions.
➢​ Taxpayers earning compensation Resident and ✔ -
income are not eligible to claim Non-resident Alien
deductions.
Domestic Corporation ✔ ✔
Taxable Income are the pertinent items of gross
Foreign Corporation ✔ -
income less deductions. (Tax Code)

Inclusion: Timing of Deductions

➢​ Gross Income: All income subject to ➢​ Taxpayers have the right to deduct all
regular income tax authorized allowances for the taxable
➢​ Less: Deductions: Itemized or optional year.
standard deduction. ➢​ If he does not within any year deduct
➢​ Taxable Income is subjected to the ff. certain of his expenses, losses, interest,
Taxes: taxes or other changes, he cannot
1.​ Regular individuals income tax deduct them from the income of the next
at graduated tax rates of 0-25% succeeding year.
2.​ Regular corporate income tax at
25% or 20% Kinds of Deductions
3.​ Preferential income tax for ➢​ Itemized expenses
proprietary educational ➢​ Optional Standard Deduction (OSD)
institutions and non-profit
hospitals at 10% NOTE: An individual taxpayer engaged in
Exclusion business or profession file quarterly and annual
➢​ Gross Income: The following are not income tax returns.
reported as part of gross income: ➢​ The taxpayer must choose between
1.​ Exempt income itemized deductions or OSD for
2.​ Exclusions calculating their taxable net income.
3.​ Compensation income, subject ➢​ in the absence of an express selection:
to fringe benefits tax itemized deductions
4.​ Income subject to final tax
5.​ Income subject to capital gains
tax. Itemized Deductions
➢​ Less: Deductions: Those not Itemized deductions are those
specifically allowed by law or beyond enumerated in Section 24 of the NIRC:
the limit set by law. 1.​ Expenses
2.​ Interests
Burden of Proof on Deductions 3.​ Taxes
➢​ Taxpayers may choose not to avail of 4.​ Losses
5.​ Bad debts
the deductions.
6.​ Depreciation
➢​ If deductions are claimed, the burden of 7.​ Depletion of oil and gas wells
proving the legality and correctness of and mines
the deductions is upon the taxpayer. 8.​ Charitable and other
contributions
9.​ Research and development
10.​ Pension trust
 ➢​ Must be substantiated with adequate to the employee is deductible as
proof. compensation.
○​ Mandatory contributions and
NOTE: To be deductible, expenses should not fringe benefits tax are
only be necessary but also ordinary. deductible.

Requisites for Deductibility ➢​ Travel Expenses include transportation

1.​ an ordinary and necessary trade, expenses, meals and lodging incurred
business or professional expense. here and abroad, while away from home
2.​ paid or incurred during the taxable year. in the pursuit of trade, business and
3.​ tax required to be withheld has been profession.
deducted and paid.
4.​ substantiated with official receipts or ➢​ Rental
adequate records. (Substantiation ○​ Operating Lease - deduct the
Requirements) amount of rent accrued,
5.​ direct connection to the development, including all expenses under the
management, operation of or direct terms of agreement. (e.g.
relation to or in furtherance of the Short-term Leases and Lease of
conduct of trade, business or profession Low-Value Assets)
of the taxpayer.
6.​ expenses incurred must not be contrary ○​ Finance Lease - payment over
to law, morals, public policy or public an obligatory period (less than
order. 730 days and shall not be less
7.​ amount must be reasonable than 60% of the depreciable life
8.​ taxpayers must be duly registered of the property.)
before the BIR. ■​ Residual value shall not
be less than 5%
Ease of Paying Tax Act (EOPT)
➢​ Expenses subject to withholding tax ○​ Advance Rental is not outright
shall be allowed as deductions from deductible but shall be
gross income. apportioned over the lease term.

Creditable Tax Withheld (BIR Form 2307) ○​ Leasehold Improvement - the

➢​ or Expanded Withholding Tax is allowed deduction is the
imposed and prescribed on the items of depreciation expense which is
income payable to natural or juridical depreciated over the lease term
persons, residing in the Philippines. or useful life of improvement
○​ 5% - if the gross income for the (whichever is shorter)
current year did not exceed
P3,000,000 ○​ Withholding Tax Implications
○​ 10% - if gross income is more of Lease only the actual rental
than P3,000,000 or VAT accrued shall be subject to 5%
registered regardless of amount. expanded withholding tax.

Compensation Expense ➢​ Entertainment, Amusement, and

➢​ Salaries, Wages, and Other Forms of Recreation Expenses (EAR)
Compensation for personal services ○​ ½ of 1% - selling goods and
rendered are deductible from the gross properties
income of the employer. ○​ 1% - selling services or leasing
○​ 13th month pay and other properties.
benefits not exceeding P90,000
are not taxable on the part of Expenses that are excluded from EAR
the employee. expenses:
1.​ Compensation or fringe benefits for
➢​ Grossed-up Monetary Value of the services rendered under an
Fringe Benefit granted by the employer employer-employee relationship
 2.​ Charitable or fundraising events 7.​ on unpaid salaries and bonuses.
3.​ Bona fide business meetings 8.​ calculated for cost keeping on account
4.​ Attending or sponsoring an employee to of capital.
a business league 9.​ paid when there is no stipulation for the
5.​ Events organized for promotion payment thereof.
marketing and advertising.
Interest Paid in Advance
Labor Training Expenses (50% deduction) if: ➢​ It is not deductible simply because the
1.​ Incurred for the skills development of interest or any part of the principal loan
enterprise-based trainees. has not been paid yet.
2.​ Enrolled
3.​ Training is covered by an apprenticeship Optional Treatment of Interest Expense
agreement ➢​ interest incurred to acquire property
4.​ Enterprise-based training of students used in trade business or exercise of a
from public educational institutions. profession may be allowed as:
5.​ Shall not exceed 10% of direct labor 1.​ Expense (outright deduction)
wage. 2.​ Capital expenditure (subject to
amortization/depreciation)
Interests are deductible if:
1.​ Valid and existing indebtedness Taxes that are deductible from gross income:
2.​ Indebtedness is that of the taxpayer 1.​ Fringe benefits tax
3.​ Indebtedness is connected with the 2.​ Import duties
taxpayer’s trade, profession or business. 3.​ Percentage tax
4.​ Must be legally due. 4.​ Professional tax
5.​ Must be stipulated in writing. 5.​ Documentary stamp tax
6.​ Taxpayer is liable to pay interest on the 6.​ Motor vehicle registration fees
indebtedness 7.​ Real property tax
7.​ Indebtedness must have been paid or 8.​ Electric energy consumption tax
accrued during the taxable year. 9.​ Interest on delinquent taxes
8.​ Payment arrangement must not be
between related taxpayers. Non-deductible Taxes
9.​ Must not be incurred to finance 1.​ Income tax, except fringe benefits tax
petroleum operations. 2.​ Income taxes paid to a foreign country
10.​ Incurred to acquire property used in 3.​ Estate and donor’s taxes
trade, business or exercise of 4.​ Special assessments and other taxes.
profession, the same was not treated as
a capital expenditure. Tax Benefit Rule
11.​ Subject to the Tax Arbitrage Rule. ➢​ Taxes allowed as a deduction, when
refunded or credited, shall be included
Tax Arbitrage Rule - the taxpayer’s allowable as part of gross income in the year of
deduction for interest expense shall be reduced receipt to the extent of the income tax
by an amount equal to 20% of the interest benefit.
income subjected to final tax. It only applies to: ➢​ Refunds of non-deductible taxes are not
1.​ Individuals to be included in the computation of
2.​ Corporations subject to 25% gross income.

Non-deductible Interest Taxes Paid in Foreign Country

Interest: ➢​ Resident citizens and domestic
1.​ paid in advance on a cash basis. corporations have the option to claim
2.​ Period amortization foreign taxes paid abroad through
3.​ between family and related taxpayers. either:
4.​ that has been capitalized. 1.​ Itemized deduction
5.​ on indebtedness incurred to finance 2.​ Tax credit
petroleum exploration.
6.​ on preferred stock which in reality is
dividend.
Tax Deductions and Credit gains from such sales or exchanges.
➢​ Tax Deductions
○​ Deduction from gross income Capital Loss Limitation Rule
○​ Reduces taxable income ➢​ Capital losses are deductible to the
○​ Indirectly reduces income tax extent of capital gain.
due ○​ It applies to individuals and
○​ Not subject to limit corporations.
➢​ Tax Credit
○​ Deduction from income tax due Net Capital Loss Carry-Over Rule
○​ No effect in taxable income ➢​ It can be carried over to the succeeding
○​ Directly reduces income tax due taxable year.
○​ Subject to limit ○​ It only applies to individuals.

Losses Holding Period Rule

➢​ sustained during the taxable year and ➢​ Only 50% of the capital gain or loss is
not compensated for by forms of recognized if the capital asset has been
indemnity shall be allowed as held for more than 12 months.
deductions: ○​ It only applies to individuals.
○​ If incurred in trade, profession or ➢​ 100% of the capital gains or loss shall
business. be recognized.
○​ If loss arises from casualties or ○​ It applies to individuals if the
from theft. 50% is not recognized and is
always recognized in
Partial Loss corporations
➢​ The deductible amount is the book value
of the asset or the replacement cost, Wagering Losses
whichever is lower, less any amount ➢​ It is deductible to the extent of gains
recovered from insurance. from such transactions. (gambling)

Total Loss Charitable and Other Contributions

➢​ The deductible amount is the book value ➢​ It may be deductible in full or subject to
of an asset less any amount of statutory limitations.
insurance proceeds or compensation
received. Limit of Contribution
➢​ 10% - individual
Operating Loss ➢​ 5% - corporation
➢​ Deductible from gross income: ○​ Taxable income before the
1.​ Sustained during the taxable deduction for contributions and
year when the loss is claimed donations.
2.​ Must not be compensated for by
insurance.
Optional Standards Deduction
Net Operating Loss Carry-Over (NOLCO)
➢​ The excess of allowable deductions
Taxpayers OSD Base
over the gross income of the business
for any taxable year.
Individual 40% Gross sales/receipts
➢​ It may be carried over as deductions
from gross income for the next 3
Corporation 40% Gross income
consecutive years.
➢​ availed in FIFO basis
➢​ allowed as a deduction on quarterly and The ff. Taxpayers are covered by the OSD:
annual income tax returns 1.​ Resident citizen
2.​ Non-resident citizen
Capital Losses 3.​ Resident alien
➢​ The excess of the losses from sales or 4.​ Estate and trust
exchanges of capital assets over the 5.​ General professional partnership
 6.​ Domestic corporation INCOME TAX ON INDIVIDUALS
7.​ Resident foreign corporation
Individual taxpayers are subject to the ff.
The ff. Taxpayers cannot use the OSD: Taxes:
1.​ Individual taxpayers earning 1.​ Regular income tax
compensation income. 2.​ Final income tax on passive income
2.​ Individuals who opted to be taxed at an 3.​ Capital gains tax
8% income tax rate.
3.​ Non-resident aliens engaged in trade or Classifications of Taxpayers under EOPT Act
business. (RA No. 11976)
4.​ Non-resident alien not engaged in trade
or business
Group Gross Sales
5.​ Non-resident foreign corporations.
Micro Less than 3 million
Individuals
➢​ The cost of sales or cost of services is
Small 3 million to less than 20 million
not deducted from the gross sales or
gross receipts for purposes of
Medium 20 million to less than 1 billion
determining the basis of the OSD.
Large 1 billion and above
Corporations
➢​ Gross income shall mean gross sales
less sales returns, discounts and
allowances and cost of goods sold. Kinds of Taxpayer and Situs of Income

General Professional Partnership

Income derived
The distributable net income of the partnership
Kinds of Taxpayer from
may be determined by claiming either:
1.​ Itemized expenses which are ordinary
Within Without
and necessary, incurred or paid for the
practice of profession.
Resident Citizen ✔ ✔
2.​ OSD (may be availed only once)
Non-resident citizen ✔ -
Items Not Deductible
1.​ Personal, living or family expenses. Resident and ✔ -
2.​ Any amount paid out for new buildings Non-resident Alien
or for permanent improvement made to
increase the value of any property or Domestic Corporation ✔ ✔
estate.
3.​ Any amount expended in restoring Foreign Corporation ✔ -
property.
4.​ Premiums paid on any life insurance
policy Kinds of Income
5.​ Interest expense between related 1.​ Returnable income
parties 2.​ Passive income subject to final tax
6.​ Bad debts between related parties 3.​ Capital gains subject to capital gains tax
7.​ Losses from sales or exchanges of 4.​ Fringe benefits subject to fringe benefits
property between related taxpayers tax
8.​ Capitalized interest
9.​ Non-deductible taxes Returnable Income includes:
10.​ Non-deductible losses 1.​ Compensation income, including fringe
11.​ Fines and penalties due to late payment benefits received by rank-and-file
of taxes. employees.
2.​ Business and professional income
3.​ Passive income, not subject to final tax
4.​ Capital gains, not subject to capital
 gains tax. benefits tax shall be subject to regular
5.​ Income from whatever sources. income tax.
1.​ Graduated Tax Rates
Passive Income subject to Final Tax 2.​ 8% Income Tax Rates
requisites:
1.​ Derived from sources within
Graduated 8%
2.​ Passive income
3.​ Specifically provided in the NIRC
Applicability To all Individuals
4.​ Not exempted
individual engaged in
5.​ Not an exclusion
taxpayers business/
practice of
Capital Gains subject to Capital Gains Tax
profession
1.​ Net capital gains from sales of shares of
whose gross
stock in a domestic corporation not
sales/receipts
traded through the local stock
and other
exchange.
non-operating
2.​ Presumed gain on the sale, exchange,
income did not
or other disposition of real property.
exceed 3 million
Fringe benefits subject to fringe benefits tax
Basis Net taxable Gross
➢​ The fringe benefits received by
income sales/receipt
rank-and-file employees are treated as
and other
part of compensation income subject to
non-operating
graduated tax rates.
income
Modes of Collection
Allowed Itemized Reduction of
Self-Assessment System (Pay as you file)
deductions deductions or 250,000 from
➢​ The taxpayer calculates the tax by
OSD the gross, only
himself or through an accountant fills up
for individuals
his tax return, files it with the proper tax
whose income
office, and pays the tax due thereon.
comes purely
from
Assessment through Enforcement
business/practic
➢​ The tax returns having been filed are
e of profession.
processed and subjected to the
necessary tax if warranted, which
Otherwise, no
sometimes results in additional taxes
reduction is
payable or deficiency taxes.
allowed.
Withholding Tax System
Business % Tax or VAT If qualified, not
1.​ Encourages voluntary compliance
tax subject to % tax
2.​ Reduces cost of collection effort
3.​ Prevents delinquencies and revenue
loss Required itemized: If qualified, no
4.​ Prevents dry spells in the fiscal financial Gross financial
conditions of the government by statement sales/receipts statements shall
providing revenues throughout the are less than 3 be required
taxable year. million
Types of withholding taxes OSD
1.​ Final withholding tax Not required
2.​ Creditable withholding tax

Regular Income Tax

➢​ All income subject to final tax on passive
income, capital gains tax and fringe
Graduated Tax Rates ➢​ An individual taxpayer receiving a
self-employment income shall file a
quarterly tax return:
1st quarter - on or before May 15
2nd quarter - on or before August 15
3rd quarter - on or before November 15

Presumption of Fraud
➢​ Failure to report sales, receipts or
income in an amount exceeding 30% of
that declared per return.
➢​ A claim of deductions in an amount
exceeding 30% of actual deductions,
shall render the taxpayer liable for
substantial under-declaration of sales,
receipts or income.

Interest
1.​ Deficiency interest
2.​ Delinquency interest
3.​ Interest on extended payment
NOTE: The deficiency and delinquency interest
Individuals Required to File Income Tax shall be imposed simultaneously.
Returns
1.​ Resident Citizen - on his income from Taxation of Compensation Income
all sources. Every form of compensation is taxable
2.​ Non-resident Citizen, Resident Alien, regardless of how it is earned, by whom it is
and Non-resident Alien engaged in paid.
trade or business in the Philippines -
on his income derived from sources Taxpayer Tax Rate Tax Base
within the Philippines.
Compensatio 0% - 35% Taxable
Persons Under Disability n income compensation
➢​ The return may be made by his duly earner income
authorized agent or representative or by
the guardian or other person charged Non-resident 25% Gross Income
with the care of his person or property. alien not
engaged in
Income Tax Return trade or
➢​ A statement of income tax of a taxpayer business
showing the nature and amounts of his
Minimum - -
income less the allowed deductions for
Wage Earners
the taxable year.
Special Aliens 20% - Taxable
Filing of Return
35% compensation
➢​ It refers to the act of accomplishing and
income
submitting the prescribed tax return,
electronically or manually, to the BIR, or
Aliens 25% Gross Income
through any authorized agent.
employed by
POGO
Filing Date
➢​ Individuals shall file an annual income
tax return on or before the 15th day of The 8% income tax rate does not apply to purely
April of each year covering income for compensation income earners.
the preceding taxable year.
Minimum Wage Earner
Mixed-Income Graduate 8%
Shall be exempt from the payment of income tax
d Income Income
based on their:
Tax Rates Tax Rate
1.​ Statutory minimum wage rates
2.​ Holiday pay
Compensation Income ✔
3.​ Overtime pay
4.​ Night shift differential pay
Business or
5.​ Hazard pay
Professional Income:
Aliens Employed by Offshore Gaming
If gross sales/receipts ✔ ✔
Licensee
and other non-operating
➢​ Alien individuals regardless of residency
income did not exceed 3
and who are employed and assigned in
million in a taxable year
the Philippines shall pay a final
withholding tax of 25% on their gross
If gross sales/receipts ✔
income.
and other non-operating
➢​ The minimum final withholding tax due
income exceed 3 million
for any taxable month from said person
in a taxable year.
shall not be lower than 12.5 million.

Taxation of Fringe Benefits Opted Graduated Income Tax Rates

➢​ Mixed-income earners who are subject
Requisites of Fringe Benefits Tax: to be taxed under the graduated income
1.​ Existence of employer-employee tax rates for income from business or
relationship professional income shall combine the
2.​ Taxable fringe benefits are given to taxable income from both compensation
managerial or supervisory employees. and business or professional income in
3.​ The fringe benefits are received within computing the total taxable income.
the Philippines.
4.​ The fringe benefits are not exempted Opted 8% Income Tax Rate
nor are non-taxable fringe benefits. The total sum of the tax of a mixed-income
earner that avails the 8% income tax rate:
35% of the grossed-up monetary value - 1.​ Tax due on compensation income,
residents, citizens, and non-resident aliens computed using the graduated income
engaged in trade or business tax rates.
2.​ Tax due on business or professional
25% of the grossed-up monetary value - income computed by multiplying the 8%
non-resident aliens engaged in trade or income tax rate directly with the total
business gross sales/receipts.
-​ The phrase “in excess of
Computation of Grossed-up Monetary Value 250,000” does not apply.
GMV is determined by dividing the monetary
value of the fringe benefit by the ff: Taxation of Passive Income
1.​ 65% - (100% - tax rate of 35%) - It arises from transactions other than from the
2.​ 75% - (100% - tax rate of 25%) active pursuit of business.
- It may be subject to regular income tax, final
tax or exempt from income tax
Taxation of Self-Employment Income
Requisites:
Mixed Income Earner - refers to an individual 1.​ Derived from source within
earning both compensation income from 2.​ Provided in the NIRC
employment and business or professional 3.​ Not exempted
income. 4.​ Not excluded
 Income Taxation on Interests Income Taxation on Prizes and Winnings
Passive RC, NRC NRAETB NRANETB
Interest Income on Bank Deposits
Income and RA
Passive RC, NRAETB NRANETB
Income NRC Prizes 20% 20% 25%
and exceeding
RA 10,000

Interest from 20% 20% 25% Prizes 10,000 25%

any currency and below
bank deposit,
yield or any Other 20% 20% 25%
other winnings
monetary
benefit from PCSO and Exempt Exempt 25%
deposit Lotto winning
substitutes, not exceeding
trust funds and 10,000
similar
arrangements PCSO and Exempt Exempt 25%
Lotto winning
exceeding
➢​ If the provided amount is net of final tax, 10,000
the same shall be grossed up before
applying the final rate.
Taxation of Capital Gains
Income Taxation on Royalties
Capital Gains RC, NRAETB NRANETB
Passive RC, NRAETB NRANETB NRC,
Income NRC, and RA
and RA
Net Capital 15% 15% 15%
Royalties, in 20% 20% 25% gains from
general sale of shares
of stock of a
Royalties on 10% 20% 25% Philippine
books as well corporation not
as other traded in the
literary works stock
and musical exchange
compositions.
Presumed 6% 6% 6%
gain from the
Income Taxation on Dividends sale of real
➢​ Cash or property dividends from property
domestic corporations and a share in situated in the
distributable net income after tax of a Philippines
partnership, other than a GPP, received
by residents and citizens shall be Other Capital 25%
subject to a 10% final tax Gains
○​ NRAETB - 20%
○​ NRANETB - 25%
Informer’s Reward
➢​ It is subject at a rate of 10%
 Taxable Stock Transactions
Tax rates Tax Types of
base Tax

Net Capital 15% Net Capital

gains from Capital Gains Tax
sale, barter, Gain
exchange or
other
disposition of
shares of
stock in a
domestic
corporation not
traded in the
stock
exchange

sale, barter, 6/10 of Gross % Tax

exchange or 1% Selling
other Price
disposition of
shares of
stock listed in
the Local
Stock
Exchange

Net Capital Graduated Taxable Regular

gains from Tax Rate Income Income
sale, barter, Tax
exchange or
other
disposition of
shares of
stock of Dealer
of securities
(ordinary gain)