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Sec 34 Deductions

GENERAL RULE: Allowable Deductions are used when the tax payer is NOT
subject to gross income

ROHQ – pays gross income?

Only applies when there is a need to determine TAXABLE INCOME

Non resident foreign corporation not engaged intrade or business in the Phil.
Corporations can claim deductions? False. Because it is probably subject to
FINAL TAX, which taxable base is the GROSS INCOME

A). Expenses

Know Business expenses vs Capital Expenses

Business expense- ordinary and necessary expenses of the business

Example: ben chan goes to clothing store in japan for business of research and
marketing of clothing and clothing franchise, but he wore them, is he allowed to
deductions on expenses? No, if he used such clothes

Example: 15 day hotel stay for business trip, but three days only for actual
business meetings, only on the expenses for the three days are deductible

B. Interest

The amount of interest paid or incurred within a taxable year on indebtedness in


connection with the taxpayer’s profession, trade or business shall be allowed as
deduction from gross income Provided that the taxpayer’s otherwise allowable
deduction for interest expense shall be reduced by 42 percent of the interest
income subjected to the final tax.

EXAMPLE: Surcharge of Taxes- is it a form of interest deductible as business


expense? No.

Penalties? No. They are not allowable deductions.

C. Taxes

Taxes paid incurred within the taxable year in connection with the taxpayer’s
profession, trade or business, shall be allowed as a deduction.

Allowable Deductions- Documentary stamp tax.


Except, Income tax, income taxes imposed by foreign authority, estate/donor’s
tax and taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.

D. Losses- Loses ACTUALLY sustained during the taxable year and not
compensated for by insurance or other forma of indemnity, and MUST BE
PROVEN

Example: If you were robbed, you need proof of loss

Proof: police report, report records of inventory, filing of an action (verified


complaint) in a criminal case

You can claim even if insurance claim is pending, because not sure if insurance
claim will be accepted

E. Bad Debts

Requirements: Debts due to the taxpayer 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 the transaction, entered into
between parties mentioned under 36(b)- (related parties) of this code. Provided
that recovery of such shall be part of gross income in the year of recovery.

-So if you were paid subsequently, it’s part of income

F. Depreciation

Allowed a depreciation deduction a reasonable allowance for exhaustion and


wear and tear (including reasonable OBSOLESCENCE) of property used in trade
or business

NOTE: Capital asset has depreciation, but in this case, ordinary income,
Machinery used in business may depreciate held allowed to be deducted.

Example: rent of building for business may depreciate and held as deductible

Example: Machinery, you purchased batching plants for ten million, it broke
down, you bought tools for repair, are tools and repair capitalized?

No, Business expense hence deductible

But if you added new functions for the to the batching plant (nuclear fission) it is
a capital expense hence non deductible
G. Depletion
In oil wells and mines, depletion schedule upon the contract, that will be the one
use to be deducted

Upon the depletion cost method under rules provided by the commissioner

NOTE: is the DEPRECIATION in oil wells and gas mines?

YES. because there are machinery still involved.

H. Charitable and other contributions- Contributions or gifts actually paid or


made within the taxable year to or for the use of the Government

Requisites:

-Must be a BIR ACCREDITED DONEE INSTITUTION

Example: Ayala Foundation

NOTE: If you make contributions to a Mayor?

No, that is Graft and corruption and tax evasion

I Research and Development

-A taxpayer may treat research or development expenditures which are paid or


incurred by him during the taxable year in connection with his trade or business
as ordinary or necessary expenses

Example: A blogger who travels the world as part of research and development,
is his expenses deductible?

Answer: As long as ascertained by the secretary of finance to fall under such


requirements

J. Pension Trust

- an employer establishing or maintaining a pension trust to provide for payment


of reasonable pensions to his employees shall be allowed as a deduction

Beneficiaries: retirees

Requirements: Cumulative service in accordance to law

Note: Mandatory retirement age: 65

K. Additional Requirements
Deductions should be itemized and substantiated

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.