Deductions or Allowable Deductions are businesses expenses and losses incurred which the law allows

to reduce gross businesses income to arrive at net income subject to tax.

Revenue vs. Capital Expenditures
Revenue Expenditures- are ordinary recurring expenditures that provide benefits to the current
accounting period. They are usually called period costs.
Capital expenditures- are nonrecurring expenditures related to the acquisition of depreciable
assets to be used in the business but not for sale, having a useful life of several years. They
provide current and future benefits in business operations.
Expenditures after Acquisition
1. Increase in useful life
2. Increase in capacity
3. Increase in efficiency
Tax Laws vs GAAP
Notes:
1. Observe that there are expenses that are allowed as deductions under GAAP but disallowed
under Tax Code. The gross profit under GAAP is the business income under the Tax Code and
operating expenses under GAAP at the itemized deductions under the Tax Code.
2. Determination of the Net Taxable Income
Employed taxpayer- the deductions of the items specified in Section 34 of NRC are not
allowed with respect to compensation income arising from personal services rendered
under an employer-employee relationship.
Employed and Self-employed- the deductions allowed by law under Section 34 of NRC
are allowed to reduce only the gross businesses income of an individual taxpayer.
Classifications of Deductions from Gross Income
1. Optional Standard Deduction (OSD)- is lieu of allowable itemized deductions, the OSD may be
deducted from the gross income as follows:
If the taxpayer is
An individual other than a nonresident alien, the OSD is 40% of the gross sales or gross
receipts.
A corporation, the OSD is 40% of its gross income.
2. Regular Allowable Itemized Deductions- are allowed deductible ordinary and necessary
business expenses paid or incurred during the taxable year.

Income Subject to Regular Allowable Itemized Deductions

The following items of income are granted with itemized deductions:
1. Business/professional income derived within and outside the Philippines by a resident citizen.
2. Business/professional income derived within the Philippines by a nonresident citizen; a resident
alien; and a nonresident alien.
3. Business/professional income of a general co-partnership.
4. Business income derived within and outside the Philippines by a domestic corporation.
5. Business income of proprietary educational institutions and nonprofit hospitals.
6. Business income of proprietary government owned or controlled corporation; and
7. Business income within the Philippines earned by a foreign corporation.
Composition of Regular Allowable Deductions
Section 34 A to J lists the following as the composition of itemized deductions;
1. General business expenses
7. Depletion of oil and gas wells and mines
2. Interest
8. Charitable and other contribution
3. Taxes
9. Research and development
4. Losses
10. Pension trust; and
5. Bad debts
11. Premium payments on health and/or hospitalization
6. Depreciation
insurance.
General Business Expenses
These expenses are directly attributable to the development, management, operation and/or conduct of
the trade, business of exercise of a profession. These include a reasonable

Meaning of ordinary and necessary

An expense is ordinary if it is reasonable and common to the particular business of the taxpayer
as distinguished from a capital expenditure.
An expense is necessary when it is useful or helpful to the business, it need not be essential or
indispensable to the business as distinguished from ordinary expenditure.
Meaning of Trade or Business
A business is an activity intended to make profit. Carrying on a business connotes regularity in a
transaction that might result to profit.
Salaries and wages

Compensation for Injuries and Pensions

Materials and supplies

The costs of materials or supplies are deductible as expense when consumed or used in the
business operation during the taxable period.
Traveling Expenses
These are expenses incurred within and outside the country while away from home in the
pursuit of trade, business or profession.
Rent Expenses
These are expenses incurred for the continued use or possession of property to which the
taxpayer has not taken or is not taking title to or in which he has no equity other than that of a lessee,
user or possessor.
Deductible Leasehold Improvement
When a lessee constructed an improvement on the leased property, the costs of such
improvement shall be depreciated over the life of the improvement or the term of the lease contract,
whichever period is shorter.
Representation Expense
These are entertainment, amusement and recreation (EAR) expenses incurred or paid during the
year that are directly connected to the development, management and operation of the trade, business
or profession of the taxpayer.
Interest Expense
The cost of money incurred within a taxable year on indebtedness in connection with the
taxpayers profession, trade or business.