KINDS OF DEDUCTION ITEMIZED DEDUCTIONS

1. Expenses
1. Personal Exemptions 2. Interest
2. Premium Payments on Health and/or 3. Taxes
Hospitalization Insurance 4. Losses
3. Itemized Deductions or Optional Standard 5. Bad Debts
ALLOWABLE DEDUCTIONS Deductions 6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable Contributions
9. Research and Development
10. Pension Trusts

EXPENSES EXPENSES EXPENSES

REQUISITES: KINDS OF EXPENSES: (TRES)

1. It must be ordinary and necessary 1. Salaries and wages
2. It must be paid or incurred during the taxable NOTE: Bribes, kickbacks and other similar 2. Travel Expenses
year payments are non-deductible. 3. Rental
3. It must be directly related to the development, 4. Entertainment, amusement and recreation (EAR)
management, operation and/or conduct of the expenses
trade, business or exercise of profession
4. It must be supported by sufficient evidence
5. It must not be against law or public policy

RENTAL AMORT/DEPN OF PERMANENT IMPROVEMENTS EAR EXPENSE

COMPONENTS OF RENTAL EXPENSE:
Rental Payments PXXX COST OF IMPROVEMENT = DEDUCTIBLE AMOUNT
Expenses of the TERM OF LEASE/USEFUL LIFE SELLER OF GOODS of 1% OF NET SALES
lessor assumed XXX
Amortization/Depreciation TERM USEFUL
of Permanent Improvements XXX OF THE vs. LIFE SELLER OF SERVICES 1% OF NET REVENUES
Total PXXX LEASE

SHORTER
R

EXPENSES INTEREST INTEREST

EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL REQUISITES: AMOUNT DEDUCTIBLE:

INSTITUTIONS 1. There is indebtedness;
In case of capital outlays of depreciable assets for 2. In connection with taxpayers; profession, trade Actual Interest PXXX
expansion of school facilities: or business; Non-deductible
Option 1 Outright Deduction 3. Paid or incurred within the year; (Interest Income
Option 2 Capitalize 4. Stipulated in writing (in general); subject to FT x 33%) (XXX)
5. Within the limit set by law. Deductible PXXX
 OPTIONAL TREATMENT OF INTEREST NON-DEDUCTIBLE INTEREST NON-DEDUCTIBLE INTEREST

TREATMENT OF INTEREST INCURRED TO ACQUIRE PPE? 1. In case of individual taxpayer: 3. Interest on indebtedness incurred to purchase or
OPTION 1: a) reporting income on a cash basis; carry obligations the interest on which is exempt
- Outright deduction b) advance interest paid. from tax
OPTION 2: 4. Interest incurred to finance petroleum exploration
- Capitalize NOTE: It shall be deductible upon payment of the 5. Interest on preferred shares
principal.
2. Interest between related taxpayers;

RELATED TAXPAYERS RELATED TAXPAYERS RELATED TAXPAYERS

1. Family members 3. Between two corporations more than 50% in 4. Between fiduciary of a trust and fiduciary of
2. Between an individual and a corporation where value of the outstanding stock of each is owned another trust if the same person is the grantor
more than 50% in value of the outstanding stock by the same individual and one of the 5. Between the grantor and fiduciary of any trust
of which is owned by such taxpayer (except if corporations is a holding company (except if
under liquidation) under liquidation)

TAXES LOSSES KINDS OF LOSSES

NON-DEDUCTIBLE: REQUISITES: 1. Ordinary losses

1. Income tax 1. Actually sustained during the taxable year 2. Capital losses
2. VAT 2. Not compensated by insurance 3. Special Losses
3. Estate & donors tax 3. evidenced by a close and completed 4. Net Operating Loss Carry-over (NOLCO)
4. Special assessment transaction
5. Stock transaction tax 4. Not claimed as a deduction for estate tax
6. Foreign income tax paid (if claimed as tax credit) purposes
7. Surcharges & penalties 5. If casualty loss, report to BIR within 45 days

SPECIAL LOSSES NOLCO BAD DEBTS

1. Wagering losses deductible only to the extent of 1. Excess of allowable deduction over gross 1. Debts due to the taxpayer (receivables) was
wagering gains income; actually ascertained to be worthless;
2. Losses on wash sales 2. Can be carried over as a deduction for the next 2. Charged off within the taxable year;
GR: Not deductible three (3) consecutive years immediately following 3. Not sustained in a transaction entered into
the year of such loss; between related parties.
Exception: In case of dealer of securities, it is deductible. 3. Taxpayer is not exempt from income tax in the
year of loss;
4. No substantial change in the ownership of the
business.
 DEPRECIATION DEPLETION CHARITABLE CONTRIBUTION (CC)

METHODS (IN GENERAL): Can be claimed only by mining entities owning economic 1. Deductible whether business related or not;
1. Straight-line method; interest in mineral deposits; 2. Actually paid;
2. Declining balance method; 3. Given to the organization specified in the Tax
3. Sum-of-years-digit method; METHOD: Cost depletion method code;
4. Any other method which may be prescribed by 4. Must not exceed the limit set by law, if
the Secretary of Finance upon the applicable;
recommendation of the CIR. 5. Evidenced by adequate records.

KINDS OF CC SPECIAL CC CONDITIONS FOR FULL DEDUCTIBILITY

1. Donations to the government or political 1. No part of the net income of the accredited
1. Ordinary those that are subject to the limit (10% subdivisions including GOCCs to be used in NGOs must inure to the benefit of any private
or 5%); undertaking priority activities; individual;
2. Special those which are deductible in full. 2. Donation to foreign institutions or international 2. Utilized not later than the 15th day of the 3rd
organizations in compliance with treaties; month following the close of its taxable year;
3. Donations to accredited NGOs. 3. Administrative expense does not exceed 30% of
total expenses;
4. Upon dissolution, assets must be distributed to
another non-profit domestic corporation or to the
state.

LIMIT ON CC LIMIT ON CC RESEARCH AND DEVELOPMENT COST

Business Income PXXX RELATED TO CAPITAL EXPENDITURES

Business Expenses - Capitalize
(net of CC) (XXX) Individual = Corporation NOT RELATED TO CAPITAL EXPENDITURES
Base of Limit PXXX 10% = 5% OPTION 1:
Rate XX% - Amortize over 60 months
Limit PXXX OPTION 2:
- Outright expense

PENSION TRUST PENSION TRUST PENSION TRUST

1. Pension plan is reasonable; AMOUNT DEDUCTIBLE: Actual Contribution PXXX

2. Approved by BIR; Normal Cost P XXX Normal Cost (XXX)
3. Funded by the employer (Cash Contribution); Actual Contribution XXX PSC PXXX
4. Employer has no control over the amount Lower Amount XXX Amort. Period 10 yrs.
contributed. Amortization of PSC* XXX Annual Amortization PXXX
Deductible Pension PXXX
*Past Service Cost
*Normal Cost
 NATURE OF OSD WHO CAN CLAIM OSD?
INDIVIDUALS
1. OSD can be claimed in lieu of itemized - RC
deductions; - NRC
Optional standard deduction (OSD) 2. Choice must be signified in the income tax return - RA
of the taxpayer, and once chosen, it is CORPORATIONS
irrevocable for the taxable year. However, it can - DC
be changed in the succeeding year; - RFC
3. No need to attach financial statements in the
return.

AMOUNT OF OSD

INDIVIDUALS
THE END
GROSS SALES/RECEIPTS X 40% T H A N K Y O U ! ! !

CORPORATIONS

GROSS INCOME X 40%