i.

SECTION 34(A)

ALLOWABLE DEDUCTIONS - A
SEC. 34. Deductions from Gross Income. - Except for taxpayers earning
compensation income arising from personal services rendered under an
employer-employee relationship where no deductions shall be allowed under this
Section other than under subsection (M) hereof, in computing taxable income
subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28
(A) (1), there shall be allowed the following deductions from gross income;
(A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession,
including:
(i) A reasonable allowance for salaries, wages, 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 to the employee: Provided,
That the final tax imposed under Section 33 hereof has been paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away from
home in the pursuit of trade, business or profession;
(iii) A reasonable allowance for rentals and/or other payments which are required
as a condition for the continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity other than that of a lessee, user or
possessor;
(iv) A reasonable allowance for entertainment, amusement and recreation
expenses during the taxable year, that are directly connected to the development,
management and operation of the trade, business or profession of the taxpayer,
or that are directly related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as the Secretary
of Finance may, by rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the special
circumstances, nature and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense incurred for
entertainment, amusement or recreation that is contrary to law, morals public
policy or public order shall in no case be allowed as a deduction.
(b) Substantiation Requirements. - No deduction from gross income shall be
allowed under Subsection (A) hereof unless the taxpayer shall substantiate with
sufficient evidence, such as official receipts or other adequate records: (i) the
amount of the expense being deducted, and (ii) 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.
(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross
income shall be allowed under Subsection (A) hereof for any payment made,
directly or indirectly, to an official or employee of the national government, or to
an official or employee of any local government unit, or to an official or employee

of a government-owned or -controlled corporation, or to an official or employee

or representative of a foreign government, or to a private corporation, general
professional partnership, or a similar entity, if the payment constitutes a bribe or
kickback.
Q: Define deductions from gross income.
A: Deductions from gross income refer to items or amounts authorized by law to be
subtracted from pertinent items of gross income to arrive at the taxable income.
Q: What are the conditions in order that the taxpayer can claim deductions?
A: The taxpayer must:
1. Point to some specific provisions of the statute authorizing the deduction;
2. Able to prove that he is entitled to the deduction authorized or allowed;
3. Any amount paid or payable which is otherwise deductible from, or taken into account
in computing gross income or for which depreciation/amortization may be allowed, shall
be allowed as deduction only if it is shown that the tax required to be deducted and
withheld therefrom has been paid to the BIR; (Sec. 34, NIRC) and
4. Deductions for income tax purposes partake of the nature of tax exemptions hence, if
tax exemptions are to be strictly construed, then it follows that deductions must also be
strictly construed.
Q: What are the rules in claiming deductions?
A:
1. Deductions must be paid or incurred in connection with the taxpayers trade, business
or profession
2. Deductions must be supported by adequate receipts or invoices (except standard
deduction)
Q: Who are not allowed to claim deductions?
A: NRA-NETB and NRFC are not allowed since their tax base is gross income.
Note: A RC, NRC, and RA whose income is purely compensation income are also not
entitled such deductions except for premium payments on health and/or hospitalization
insurance)
Q: Distinguish exclusion from gross income from allowable deductions from
gross income.
A:
ALLOWABL
EXCLUSION E
DEDUCTIO
NS
Refers to a
Refer to
flow of
amounts
wealth which which the
does not
law allows
form part of
as
the gross
deductions
income
from gross
because:
income
1. it is
order to
exempted by arrive at net
the
income or
fundamental taxable
law;
income
2. it is
exempted by
the statute;

3. it does
not come
within the
definition of
income
Material to
arrive at
gross
income
Something
earned or
received
which do not
form part of
the gross
income

Necessary to
arrive at net
or taxable
income
Something
paid or
incurred in
earning
gross
income

Q: What are the kinds of allowable deductions from gross income?

A:
1. Itemized Deductions: BaD2-TRIP-C-ONEL
a. Bad debts;
b. Depreciation;
c. Depletion;
d. Taxes;
e. Research and development costs;
f. Interest;
g. Pension trust contribution;
h. Charitable and other contributions;
i. Ordinary and Necessary Expenses;
j. Losses.
2. Optional Standard Deduction (OSD)
3. Special Deductions
Q: What are the requisites for deductibility in general?
A: WaR-With-Pro2
1. The deductions must not have been Waived;
2. The Requirements for deductibility must be met;
3. The Withholding and payment of the tax required must be shown;
4. There must be Proof of entitlement to the deductions; ("No deduction without
documentation.") and
5. There must be a specific Provision of law allowing the deductions, since deductions
do not exist by implication.
Note: The burden of proof is with the taxpayer for it to be deductible
ORDINARY AND NECESSARY EXPENSES
Q: What are the requisites for deductibility of expenses (in general)?
A: D-STROWN
1. Paid or incurred During the taxable year;
2. The expense must be Substantiated by proof; (substantation rule)
3. The expense must be incurred in Trade or business carried on by the taxpayer;
4. The expense must be Reasonable;

5. The expense must be Ordinary and necessary;

6. If subject to Withholding taxes, proof of payment to BIR; and
7. Expenses must Not be against public policy, public moral or law such as bribes,
kickbacks, for immoral purposes.
Q: What is ordinary expense?
A: It is any expense that is normal or usual in relation to the taxpayers business and the
surrounding circumstances. (General Electric [P.I.] Inc. v. Collector, CTA Case 1117, July
14, 1963)
Q: What is necessary expense?
A: Necessary expense is one which is appropriate and helpful in the development of
taxpayers business and is intended to minimize losses or to increase profits. (Ibid.)
Q: What is the test to determine whether or not an expense is ordinary and
necessary?
A: If they are directly attributable to the development, management, operation, and or
conduct of trade or business of the taxpayer, or in the exercise of the taxpayers
profession, including:
1. Reasonable allowances for salaries, wages and other compensation for personal
services actually rendered, including gross monetary value of fringe benefits
2. Travel expenses in pursuit of trade or business
3. Rental and other payments for thecontinued use or possession of property, for the
purpose of trade, business or profession
4. Entertainment, amusement and recreation expenses during the taxable year
Q: When there are no receipts to prove a deduction, can the taxpayer still claim it
as a deduction?
A: Yes, the lack of supporting vouchers, receipts, and other documentary proof however
may be excused under Sec. 235 of the NIRC, the provision which requires the
preservation of the books of accounts and other accounting records for a period of 3
years from the date of last entry. (Basilan Estates v. CIR, GR L022492, Sept. 5, 1967)
Q: What is the Cohan Rule Principle?
A: Under this principle, taxpayers may use estimates when they can show that there is
some factual foundation on which to base a reasonable approximation of the expense,
they can prove that they had made a deductible expenditure but just cannot prove how
much that expenditure was. (Cohan v. Commissioner, 39 F (2d) 540)
It is the use of estimates or approximations of the amount of cash and other assets
where the taxpayer lacks adequate records.
Q: What are included as ordinary and necessary expenses?
A:
1. Salaries, wages and other forms of compensation for personal services actually
rendered
2. Travelling expenses
3. Rental expenses
4. Entertainment, amusement and recreation
5. Advertising and promotional expenses
6. Cost of materials and supplies
7. Repairs
Q: MC, a contractor who won the bid for the construction of a public highway,
claims as expense, facilities fees which according to them is standard operating
procedure in transactions with the government. Are these expenses allowable as
deduction from gross income?

A: No, the alleged facilitation fees which they claims as standard operating procedure in
transactions with the government comes in the form of bribes or kickback which are
not allowed as deductions from gross income as they are illegal. (Sec. 34 A [1] c, NIRC)
Q: OXY is the president and CEO of ADD Computers, Inc. When OXY was asked to
join the government service as director of a bureau under the Department of
Trade and Industry, he took a leave of absence from ADD. Believing that its
business outlook, goodwill and opportunities improved with OXY in the
government, ADD proposed to obtain a policy of insurance on his life. On ethical
grounds, OXY objected to the insurance purchase but ADD purchased the policy
anyway. Its annual premium amounted to P100,000. Is said premium deductible by
ADD Computers, Inc.?
A: No, the premium is not deductible because it is not an ordinary business expense.
The term "ordinary" is used in the income tax law in its common significance and it has
the connotation of being normal, usual or customary. (Deputy v. Du Pont, 308 US 488
[1940]) Paying premiums for the insurance of a person not connected to the company is
not normal, usual or customary.
Another reason for its non-deductibility is the fact that it can be considered as an illegal
compensation made to a government employee. This is so because if the insured, his
estate or heirs were made as the beneficiary (because of therequirement of insurable
interest), the payment of premium will constitute bribes which are not allowed as
deduction from gross income. (Sec. 34 A [l] c, NIRC)
On the other hand, if the company was made the beneficiary, whether directly or
indirectly, the premium is not allowed as a deduction from gross income (2004 Bar
Question)
ii.

PERSONAL EXEMPTIONS

Q: What are personal exemptions?

A: These are arbitrary amounts allowed as deductions from gross income of an
individual representing personal, living and family expenses of the taxpayer.
Q: What are the kinds of personal exemptions?
A:
1. Basic Personal Exemption the amount subtracted from gross income which is
allowed for the theoretical personal, family, and living expenses of an individual
taxpayer regardless of status, whether single or married individual judicially decreed as
legally separated with no qualified dependents or head of the family.
2. Additional Exemptions these are exemptions in addition to the basic personal
exemptions that are granted to certain individual who have dependents that qualify them
for this exemption.
Note: RA 9504 increased the basic personal exemptions to P50,000 irrespective of
whether the individual is single, head of the family, or married. It also increased the
additional personal exemptions to P25,000 for each child provided not more than 4.
Q: Is a non-resident alien engaged in trade, business, or in the exercise of a
profession in the Philippines (NRA-ETB) entitled to personal and additional
exemptions?
A:
GR: No.
XPN: Can be entitled to personal and additional exemption subject to the rule on
reciprocity:
1. His foreign country allows personal exemptions to citizens of the Philippines not
residing therein;

2. File an accurate return of his income from all sources within the Philippines. on
time; and
3. Amount allowable is not to exceed our maximum allowable personal exemption.
Q: Who among the individual taxpayers are not entitled to personal and additional
exemptions?
A:
1. Non-resident alien not engaged in business
2. Residents aliens and Filipinos employed by and who receive compensation
from:
a. Regional or area headquarter or regional operating headquarters of
multinational corporation established in the Philippines;
b. Offshore banking units established in the Philippines.
c. Petroleum service contractors and subcontractors in the Philippines.
Q: What are the conditions for an individual to be entitled to additional
exemptions?
A: An individual:
1. Whether single or married;
2. Shall be allowed an additional exemption of P 25,000;
3. For each qualified dependent child;
4. Provided, that the total number of dependents for which additional exemptions
may be claimed as long as it shall not exceed 4 dependents. (Sec. 35 [B], NIRC)
Note: The above individual taxpayers are not allowed to enjoy personal exemptions
since they are taxed based on gross incomes. Only individual taxpayers are entitled to
personal and additional exemptions. Corporations are not entitled to such exemptions.
Q: Distinguish allowable deductions from gross income from personal
exemptions.
A:
PERSONAL
ALLOWABLE EXEMPTIONS
DEDUCTIONS
As to nature
In the nature
In the nature of
of business
personal, living
expenses
or family
expenses
As to purpose
To recover or
To recover the
recoup the
personal, living
cost of doing
and family
business
expenses paid
or incurred
during the
taxable year
As to claimant
May be
Are granted
claimed by
only to
individual and
individual
corporate
taxpayer
taxpayers
XPN: NRAXPN: 1. NRA- NETB
NETB
2. NRFC
As to amount
The actual
Arbitrary

expenses paid
or incurred in
the conduct of
trade,
business or
profession

amounts
granted to
approximate
the personal
expenses
that may be
incurred by
individual
taxpayer
As to kinds of deductions or
exemptions
Classified into: Exemption
1. Itemized
may be
deductions;
classified into:
2. Optional
1. Basic
Standard
personal
Deductions:
exemption;
a. Individual 2. Additional
40% of gross
personal
sales or
exemption of
receipts
P25k for every
b. Corporation qualified
- 40% of gross dependent,
income
legitimate,
recognized
illegitimate
child or
children not
more than 4
iii.

PREMIUMS

Section 34 (m) - Premium Payments on Health and/or Hospitalization Insurance of

an Individual Taxpayer. - the amount of premiums not to exceed Two thousand
four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month
paid during the taxable year for health and/or hospitalization insurance taken by
the taxpayer for himself, including his family, shall be allowed as a deduction
from his gross income: Provided, That said family has a gross income of not
more than Two hundred fifty thousand pesos (P250,000) for the taxable year:
Provided, finally, That in the case of married taxpayers, only the spouse claiming
the additional exemption for dependents shall be entitled to this deduction.
Q: Who may avail of the deduction?
A: Only an individual taxpayer may claim said deduction. Individual taxpayers whether
earning purely compensation income during the year or earning business income or in
practice of his profession whether availing of itemized or optional standard deductions
during the year.
In the case of married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction. (Sec. 34 [M], NIRC)
Q: How much is the amount allowed?
A: The amount of premiums not to exceed P2,400 per family or P200 a month paid
during the taxable year for health and/or hospitalization insurance taken by the taxpayer
for himself, including his family, shall be allowed as deduction from gross income. (Sec.
34 [M], NIRC)

Q: What are the conditions in order to avail said deduction?

A:1. The health and/or hospitalization was taken by the taxpayer for himself, including
his family; and
2. That said family has a gross income of not more than P250,000 for the taxable year.
iv.

Section 34 (L) Optional Standard Deduction. - In lieu of the deductions

allowed under the preceding Subsections, an individual subject to tax under
Section 24, other than a nonresident alien, may elect a standard deduction in
an amount not exceeding ten percent (10%) of his gross income. Unless the
taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the deductions
allowed in the preceding Subsections. Such election when made in the return
shall be irrevocable for the taxable year for which the return is made:
Provided, That an individual who is entitled to and claimed for the optional
standard deduction shall not be required to submit with his tax return such
financial statements otherwise required under this Code: Provided, further,
That except when the Commissioner otherwise permits, the said individual
shall keep such records pertaining to his gross income during the taxable
year, as may be required by the rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

Notwithstanding the provision of the preceding Subsections, The Secretary of Finance,

upon recommendation of the Commissioner, after a public hearing shall have been held
for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of
the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for
purposes of determining such ceilings or limitations, the Secretary of Finance shall
consider the following factors: (1) adequacy of the prescribed limits on the actual
expenditure requirements of each particular industry; and (2)effects of inflation on
expenditure levels: Provided, further, That no ceilings shall further be imposed on items
of expense already subject to ceilings under present law.
IV. optional standard deduction (OSD)?
A: The OSD is a scheme whereby a taxpayer is given the option to deduct from his
gross revenue or gross income a lump sum equivalent to a percentage of such gross
revenue or gross income for purposes of computing the net taxable income on which
the income tax rate will be applied.
Note: This is in lieu of the itemized deduction where the taxpayer lists down all his
expenses and the corresponding amounts incurred to determine the amount of
allowable deductions.
Q: How much is allowed as OSD?
A: The optional standard deduction is an amount not exceeding:
1. 40% of the gross sales or gross receipts of a qualified individual taxpayer; or
2. 40% of the gross income of a qualified corporation. (Sec. 34 [L], NIRC)
Note: It should be emphasized that the cost of sales in case of individual seller of
goods, or the cost of service in case of individual seller of services, is not allowed to
be deducted for purposes of determining the basis of the OSD pursuant to RA 9504
(RR No. 16-2008)
Note: Under RA 9504, the 10% OSD allowed to an individual taxpayer engaged in
business and practice of profession was increased to 40% of gross sales or receipts.
Furthermore, corporations subject to the regular corporate income tax under Secs. 27 A

and 28 A [1] of the NIRC are now given the option to avail the OSD at 40% of gross
income.
Q: Differentiate itemized deduction from OSD.
A: Itemized Deduction must be substantiated by receipts while OSD requires no proof of
expenses incurred because the allowable deduction is 40% of gross sales or receipts or
gross income as the case may be.
Q: Who may elect an OSD?
A:
1. Individuals
a. Resident citizens
b. Non-resident citizens
c. Resident aliens
2. Corporations
a. Domestic
b. Resident foreign corporations
3. Estates
4. Trusts
Note: The taxpayer must signify his intention in his income tax return which shall be
irrevocable for the taxable year for which the return is made.
Q: Who may not avail of the OSD?
A:1. Non-resident aliens whether or not engaged in trade or business in the Philippines;
and
2. Non- resident foreign corporations.
Q: How is OSD determined with respect to GPP and the partners thereof?
A: 1. If the GPP avails of itemized deductions under Sec. 34 of the NIRC in computing
net income, the partners may still claim itemized deductions on their net distributive
share that have not been claimed by the GPP;
2. The partners, however, are not allowed to claim OSD on their share of net income
because the OSD is a proxy for all items of deductions allowed in arriving at taxable
income;
4. If the GPP avails of OSD in computing net income, the partners may no longer
claim further deductions from their net distributive share, whether itemized or
OSD;
5. The election to claim either the OSD or itemized deductions must be signified in
the income tax return filed for the first quarter of the taxable year; once the
election is made, the same type of deduction must be consistently applied for all
succeeding quarters and in the annual income tax return; and
6. A taxpayer who is required but fails to file the quarterly income tax return for the
first quarter shall be deemed to have elected to avail of itemized deductions for
the taxable year. (RR No. 2-2010)
V.

LIABILITIES OF WITHHOLDING AGENT

The term 'withholding agent' means any person required to deduct and withhold any tax
under the provisions of Section 57.
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. - Any person
required to withhold, account for, and remit any tax imposed by this Code or who

willfully fails to withhold such tax, or account for and remit such tax, or aids or
abets in any manner to evade any such tax or the payment thereof, shall, in
addition to other penalties provided for under this Chapter, be liable upon
conviction to a penalty equal to the total amount of the tax not withheld, or not
accounted for and remitted.
SEC. 252. Failure of a Withholding Agent to refund Excess Withholding Tax. - Any
employer/withholding agent who fails or refuses to refund excess withholding tax
shall, in addition to the penalties provided in this Title, be liable to a penalty to
the total amount of refunds which was not refunded to the employee resulting
from any excess of the amount withheld over the tax actually due on their return.
Q: Who is a withholding agent?
A: A withholding agent is a separate entity acting no more than an agent of the
government for the collection of tax in order to ensure its payments.
Note: A withholding agent is explicitly made personally liable under Sec. 251, NIRC for
the payment of the tax required to be withheld, in order to compel the withholding agent
to withhold the tax under any and all circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is concentrated upon the person
over whom the Government has jurisdiction. (Filipinas Synthetic Fiber Corporation v.
CA, et al., GR 118498 & 124377, Oct. 12, 1999)
Q: May a withholding agent bring a claim for refund or tax credit of erroneously
withheld tax?
A: Yes, in applications for refund, the withholding agent is considered a taxpayer
because if he does not pay, the tax shall be collected from him. (CIR v. Procter &
Gamble Philippine Manufacturing Corporation, GR L-66838, Dec. 2, 1991)
The withholding agent is liable for the correct amount of the tax that should be withheld.
The withholding agent is, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be
less than the amount that should have been withheld under the law. Given this
responsibility, a withholding agent can validly claim for tax refund.
Q: What are the duties and obligations of the withholding agent?
A: The following are the duties and obligations of the withholding agent to:
1. Register To register within 10 days after acquiring such status with the RDO having
jurisdiction over the place where the business is located.
2. Deduct and Withhold To deduct tax from all money payments subject to withholding
tax.
3. Remit the Tax Withheld To remit tax withheld at the time prescribed by law and
regulations.
4. File Annual Return To file the corresponding Annual Information Return at the time
prescribed by law and regulations.
5. Issue Withholding Tax Certificates To furnish Withholding Tax Certificates to
recipient of income payments subject to withholding.
Jurisprudence: In Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, this Court pointed out that a withholding agent is in fact the agent both of the
government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:

The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the Government
and the taxpayer. With respect to the collection and/or withholding of the tax, he is the
Governments agent. In regard to the filing of the necessary income tax return and the
payment of the tax to the Government, he is the agent of the taxpayer. The withholding
agent, therefore, is no ordinary government agent especially because under Section 53
(c) he is held personally liable for the tax he is duty bound to withhold; whereas the
Commissioner and his deputies are not made liable by law.
If, as pointed out in Philippine Guaranty, the withholding agent is also an
agent of the beneficial owner of the dividends with respect to the filing of the necessary
income tax return and with respect to actual payment of the tax to the government, such
authority may reasonably be held to include the authority to file a claim for refund and to
bring an action for recovery of such claim.
VI.

OPTIONS TO PROPRIETARY EDUCATIONAL INSTITUTIONS

SEC. 27. Rates of Income tax on Domestic Corporations. - (B) Proprietary

Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are nonprofit shall pay a tax of ten percent
(10%) on their taxable income except those covered by Subsection (D)
hereof: Provided, that if the gross income from unrelated trade, business
or other activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions or hospitals from all sources, the
tax prescribed in Subsection (A) hereof shall be imposed on the entire
taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the
conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary
purpose or function. A 'Proprietary educational institution' is any private
school maintained and administered by private individuals or groups with
an issued permit to operate from the Department of Education, Culture and
Sports (DECS), or the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA), as the
case may be, in accordance with existing laws and regulations.
Q: How are proprietary educational institutions and non-profit hospitals treated?
A:
GR: They shall pay a 10% tax on their taxable income except those passive income
covered by Sec. 27 [D] of the NIRC. (Sec. 27 [B], NIRC)
XPN: They shall pay 30% corporate income tax if the gross income from unrelated
trade, business or other activity exceeds 50% of the total gross income derived from all
sources.
Q: What is a proprietary educational institution?
A: It is any private school maintained and administered by private individuals or groups
with an issued permit to operate from the DepEd, CHED or TESDA as the case may be.
VII.

OUTRIGHT DEDUCTIONS

Q: What is the optional treatment of interest expense on capital expenditure?

A: Interest incurred to acquire property used in trade, business or profession may be

allowed either:
1. Treated as capital expenditure, i.e., it forms part of the cost of the asset; or
2. As a deduction. (Sec. 34 B [2], NIRC)
Note: Interest paid in advance, interest periodically amortized and interest incurred to
acquire property used in trade or business is also treated the same, the taxpayer can
deduct it as an outright deduction or capital expenditure.
VIII.

DEDUCTIBILITY OF DONATION

Q: What contributions are deductible in full?

A: These are: [GAFA]
1. Donations to the Government of the Philippines, or political subdivisions including
fully-owned government corporation to be used exclusively in undertaking priority
activities in: [CHEESHY]
a. Culture
b. Health
c. Economic Development
d. Education
e. Science
f. Human Settlement
g. Youth and Sports development
2. Donations to Foreign institutions and international organizations in compliance with
treaties and agreements with the Government.
3. Donations to Accredited NGOs
a. Exclusively for: C2HES2Y-RC
i. Cultural
ii. Charitable
iii. Health
iv. Educational
v. Scientific
vi. Social welfare
vii. Character building & Youth and Sports Development
viii. Research
ix. Any Combination of the above
b. Donation must be utilized not later than the 15th day of the 3rd month following the
close of taxable year;
c. Administrative expense must not exceed 30% of the total expenses;
d. Upon dissolution, assets shall be transferred to another non-profit domestic
corporation or to the State.
4. Donations of prizes and awards to Athletes (Sec. 1, RA 7549)
Q: What donations are subject to limitation?
A:
1. Donations that are not in accordance with the priority plan.
2. Donations whose conditions are not complied with.
3. Donations to the Government of the Philippines or political subdivision exclusive for
public purposes.
4. Donations to domestic corporations organized exclusively for:
a. Scientific
b. Educational

c. Cultural
d. Charitable
e. Religious
f. Rehabilitation of veteran
g. Social Welfare
Tax treatment of real properties that have been transferred. Real properties classified
as capital or ordinary asset in the hands of the seller/transferor may change their
character in the hands of the buyer/transferee. The classification of such property in
the hands of the buyer/transferee shall be determined in accordance with the following
rules:
a. Real property transferred through succession or donation to the heir or donee
who is not engaged in the real estate business with respect to the real property
inherited or donated, and who does not subsequently use such property in trade
or business, shall be considered as a capital asset in the hands of the heir or
donee.
b. Real property received as dividend by stockholders who are not engaged in the
real estate business and who not subsequently use such real property in trade or
business shall be treated as capital assets in the hands of the recipient even if
the corporation which declared the real property dividend is engaged in real
estate business.
c. c. The real property received in an exchange shall be treated as ordinary asset
in the hands of the transferee in the case of a tax-free exchange by taxpayer not
engaged in real estate business to a taxpayer who is engaged in real estate
business, or to a taxpayer who, even if not engaged in real estate business, will
use in business the property received in the exchange.
IX.

BAD DEBTS

Q: What are bad debts?

A: Bad debts refer to debts resulting from the worthlessness or uncollectibility, in
whole or in part, of amount due to the taxpayer by others, arising from money
lent or from uncollectible amounts of income from goods sold or services
rendered. (Sec. 2, RR 5-99)
These are debts due to the taxpayer actually ascertained to be worthless and
charged off in the books of the taxpayer within the taxable year except those:
1. Not connected with trade, business or profession; and
2. Between related taxpayers
Note: A mere recording in the taxpayers books of account estimated
uncollectible accounts does not constitute a write-off of the said receivable,
hence, it shall not be a valid basis for its deduction as a bad debt expense.
Q: What are the general requisites for deductibility of bad debts?
A: USTCAR
1. The debts are Uncollectible despite diligent effort exerted by the taxpayer;
Note: To prove that the taxpayer exerted diligent efforts to collect the debts:
1. Sending of statement of accounts;
2. Sending of collection letters;
3. Giving the account to a lawyer for collection; and
4. Filing a collection case in court.

2. Existing indebtedness Subsisting due to the taxpayer which must be valid and
legally demandable;
3. Connected with the taxpayers Trade, business or practice of profession;
4. Actually Charged off in the books of accounts of the taxpayer as of the end of
the taxable year;
5. Actually Ascertained to be worthless and uncollectible as of the end of the
taxable year; and
6.Must not be sustained in a transaction entered into between Related parties.
Note:
1. In the case of banks, in lieu of requisite No. 5 above, the BSP, thru its
Monetary Board, shall approve the writing off of said indebtedness from the
banks books of accounts at the end of the taxable year.
2. In no case may a receivable from an insurance or surety company be written
off from the taxpayers books and claimed as bad debts deduction unless such
company has been declared closed due to insolvency or for any such similar
reason by the Insurance Commissioner.
Q: What factors will determine whether or not the debts are bad debts?
A: The factors to be considered include, but are not limited to, the following:
1. The debtor has no property nor visible income;
2. The debtor has been adjudged bankrupt or insolvent;
3. There are numerous debtors with small amounts of debts and further action on the
accounts would entail expenses exceeding the amounts sought to be collected;
4. The debt can no longer be collected even in the future; and
5. Collateral shares have become worthless. (2004 Bar Question)
Note: "Worthless" is not determined by an inflexible formula or slide rule calculation, but
upon the exercise of sound business judgment. In order that debts be considered as
bad debts because they have become worthless, the taxpayer should:
1. Ascertain the debt to be worthless in the year for which the deduction is sought.
2. Act in good faith in ascertaining the debt to be worthless (CIR v. Goodrich
International Rubber Co., GR L-22265, Dec. 22, 1967).
Q: Are reserves for bad debts deductible from gross income for income tax
purposes?
A: No, bad debts must be charged off during the taxable year to be allowed as
deduction from gross income. The mere setting up of reserves will not give rise to any
deduction. (Sec. 34 [E], NIRC)
Q: What is the tax benefit rule as applied to bad debts recovered?
A: This states that the taxpayer is obliged to declare as taxable income subsequent
recovery of bad debts in the year they were collected to the extent of the tax benefit
enjoyed by the taxpayer when the bad debts were written off and claimed as deduction
from gross income.
Q: Is the testimony of a CPA sufficient as substantial evidence for the
deductibility of a claimed worthless debt?
A: No, mere testimony of a CPA explaining the worthlessness of said debts is seen as
nothing more than as a self-serving exercise which lacks probative value. Mere
allegations cannot prove the worthlessness of such debts. (Philippine Refining Co. v.
CA, GR 118794, May 8, 1996)

Q: What is the tax benefit rule ?

SUGGESTED ANSWER: The tax benefit rule posits that the recovery of bad
debts previously allowed as deduction in the preceding year or years shall be included
as part of the taxpayers gross income in the year of such recovery to the extent of the
income tax benefit of said deduction.
NOTES AND COMMENTS:
a.
If in the year the taxpayer claimed deduction of bad debts written-off, he
realized a reduction of the income tax due from him on account of the said deduction,
his subsequent recovery thereof from his debtor shall be treated as a receipt of realized
taxable income. (Sec. 4, Rev. Regs. 5-99)
b.
If the said taxpayer did not benefit from the deduction of the said bad
debt written-off because it did not result to any reduction of his income tax in the year of
such deduction (i.e. where the result of his business operation was a net loss even
without deduction of the bad debts written-off), then his subsequent recovery thereof
shall be treated as a mere recovery or a return of capital, hence, not treated as receipt
of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
X.

DATE OF QUARTERLY FILING OF ITR

Q: When to file the ITR?

A: On or before Apr. 15 of each year covering income of the preceding taxable year for
individual taxpayers. (Sec. 51 [C], NIRC)
Individuals who are self-employed or in practice of a profession are required to file and
pay estimated income tax every quarter as follows:
1. First Quarter - Apr. 15
2. Second Quarter - Aug. 15
3. Third Quarter - Nov. 15
4. Final Quarter - Apr. 15 of the following year
For corporations, a quarterly tax return for the first 3-quarters shall be required on a
strictly 60-day basis. The final adjusted return shall be on the 15th day of the 4th month
following the close of either fiscal or calendar year (Sec. 77 [B], NIRC)
Q: Where to file the ITR?
A: With any authorized agent bank, Revenue District Officer, Collection agent or duly
authorized Treasurer of the municipality or city where such person has legal residence
or principal place of business or with the CIR. (Sec. 51 [B], NIRC)
For non-resident citizens, with the Philippine Embassy or nearest Philippine Consulate
or mailed directly to CIR.
Q: What are those instances wherein inquiry into the ITR of taxpayers may be
authorized?
A: When:
1. Inspection of the return is authorized upon the written order of the President of the
Philippines;
2. Inspection is authorized under Finance Regulation No. 33 of the Secretary of
Finance;
3. Production of the tax return is material evidence in a criminal case wherein the
Government is interested in the result;
4. Production or inspection thereof is authorized by the taxpayer himself.
Q: Who are the individuals exempt from filing an ITR?
A: Individuals:
1. Whose gross income do not exceed the total personal and additional exemptions

2. With respect to pure compensation derived from sources within the Philippines, the
income tax on which has been correctly withheld
3. Whose sole income have been subjected to final withholding income tax
4. Who are exempt from income tax.
Note: Individuals not required to file an ITR may nevertheless be required to file an
information return.
Under RA 9504, minimum wage earners aregranted full tax exemption from paying
income tax.
Q: What is the Confidentiality Rule with respect to tax returns filed with the BIR?
A: Although Sec. 71 of the NIRC provides that the tax returns shall constitute public
records, it is necessary to know that these are confidential in nature and may not be
inquired into in unauthorized cases under the pain of penalty provided for in Sec. 270 of
the NIRC.
Note: For conviction of each act or omission, the penalty of fine of not less than P50,000
but not more than P100,000 or imprisonment of not less than 2 years but not more than
5 years.
Q: How should married individuals file an ITR?
A: They file only one return for the taxable year if they are married and do not derive
income purely from compensation. If impractical to file only one return, each spouse
shall file a separate return of income but the return so filed shall be consolidated by the
BIR. (Sec. 51 [D], NIRC)
Q: What is a tax return?
A: A tax return is a report made by the taxpayer to the BIR on all gross income received
during the taxable year, the allowable deduction including exemptions, the net taxable
income, the income tax rate, the income tax due, the income tax withheld, if any, and
the income tax still to be paid or refundable.
Q: Who are required to file Income Tax Returns (ITR)?
A:
1. Individuals
a. Resident citizens receiving income from sources within or outside the Philippines:
i. Individuals deriving compensation income from 2 or more employers, concurrently or
successively at anytime during the taxable year;
ii. Employees deriving compensation income regardless of the amount, whether from a
single or several employers during the calendar year, the income tax of which has not
been withheld correctly resulting to collectible or refundable return;
iii. Employees whose monthly gross compensation income does not exceed 5,000 or
the statutory minimum wage, whichever is higher, and opted for non-withholding of tax
on said income;
iv. Individuals deriving non-business, non- professional related income in addition to
compensation income not otherwise subject to a final tax;
v. Individuals receiving purely compensation income from a single employer, although
the income of which has been correctly withheld, but whose spouse is not entitled to
substituted filling.
b. Non-resident citizens receiving income from sources within the Philippines.
c. Citizens working abroad receiving income from sources within the Philippines
d. Aliens, whether resident or not, receiving income from sources within the Philippines.
(Sec. 51 A [4], NIRC)
2. Corporations no matter how created or organized including GPPs:
a. Domestic corporations receiving income from sources within and outside the
Philippines.
b. Foreign Corporations receiving income from sources within the Philippines.
3. Estates and Trusts engaged in trade or business

PREPARED BY: CHARLOTTE F. GALLEGO aka dyosa

Suya ma deads