Allowable Deductions - Personal Exemptions

Distinguish a Exclusion from
Gross Income from Deductions

from Gross Income. Give an
example of each.
2001 BAR Examination
atty. cleo d. sabado-andrada, cpa, mba

Deductions from Exclusions from
Gross Income Gross Income
Section 34 Section 32(B)
Should not form part

Something paid or of gross income
incurred in doing because excluded by
business or trade law, by the
constitution or does
not fall within the
definition of income.
Pertains to the
computation of Pertains to the
ordinary taxable determination of
income. Gross Income.
Section
Section 34
34 of
of the
the NIRC
NIRC
SHALL NOT APPLY TO

GROSS COMPENSATION INCOME
EXCEPT Section 34 (M).
CAN BE DEDUCTED from

Gross Compensation Income
Section 35 of the NIRC
SUBSTITUTES FOR THE DISALLOWANCE OF
FAMILY, LIVING and PERSONAL EXPENSES
Kinds
BASIC PERSONAL EXEMPTION
ADDITIONAL PERSONAL EXEMPTION

Deductions from Allowance for
Gross Income Personal Exemptions
Section 34 Section 35
Actual business Arbitrary amounts

expenses or because it may not
As to
expenses incurred AMOUNT be enough to cover
in the exercise of personal living
profession expenses.
To recover the To cover the family,

cost of doing As to living and personal
business. PURPOSE expenses.

Business Family, living and

As to
Expenses NATURE personal expenses.
Corporate
Taxpayers except
NRFC, it can also Individual
be claimed by
As to Taxpayers only
CLAIMANT except NRA-
Individual
Taxpayers except NETB.
NRA-NETB.
1. Itemized
Deductions
2. Optional 1. Basic Persona
Deductions Exemption
As to 2. Additional
(OSD) of 40% of KINDS
Gross Income or Personal
Receipt. Exemption.
OSD is applicable to
individual and
corporate
taxpayers (Sec. 3
R.A. 9504)
Section
Section 34
34 of
of the
the NIRC
NIRC
SHALL NOT APPLY TO

GROSS COMPENSATION INCOME
EXCEPT Section 34 (M).
CAN BE DEDUCTED from

Gross Compensation Income
These are amounts allowed by law to

reduce the gross income to taxable income.

BASIC PRINCIPLES
NON RESIDENT ALIEN NOT
ENGAGED IN TRADE OR BUSINESS
and NON RESIDENT FOREIGN
CORPORATION are not allowed to
claim deductions
The taxpayer must point
to some specific
provisions of the
statute/law authorizing
the deduction. cpa, mba
atty. cleo d. sabado-andrada,
BASIC PRINCIPLES
The taxpayer must prove that
he is entitled to the
deduction authorized or
allowed.
If the taxpayer fails to deduct certain
expenses for the taxable year, he cannot
deduct them from the income of the next or
any succeeding year
BASIC PRINCIPLES
If expenses were incurred and there r no
documentary evidence to support such,
BIR must make an estimate of
Cohan
deduction that may be allowed in
Rule
computing the taxpayers taxable
Principle
income.
disallowance of 50% of
the taxpayers claimed
deduction is VALID.
KINDS OF ALLOWABLE DEDUCTIONS
I.
PREMIUM PAYMENTS ON HEALTH
and/or HOSPITALIZATION INSURANCE
(PHHI) Section 34(M)
premiums paid during the taxable year for

health and/or hospitalization insurance
taken by him on himself, including his
family.
applicable only to individual
I.
(PHHI)
CONDITIONS BEFORE PHHI SHALL BE
ALLOWED AS DEDUCTION FROM GROSS
INCOME.
1. That the family had a gross income of not
more than two hundred fifty thousand
pesos (P250,000.00) for the taxable year.
PARENTS and the
CHILDREN who are not
NUCLEAR yet taxpayers their
FAMILY income
notwithstanding.
I.
(PHHI)
INCOME.
2. In case of married persons, only the
spouse claiming the additional exemptions
for dependents shall be entitled to the
deduction;

I.
(PHHI)
INCOME.
3. The deduction shall not exceed P2,400

for the family, or P200 a month.

II.
OPTIONAL STANDARD DEDUCTION
(OSD) Section 34(L)
OSD is a deduction from gross income allowed

to be taken in lieu of the itemized deductions.
Applicable to INDIVIDUAL (but not to

non-resident alien)
applicable also to CORPORATION as
allowed by Sec. 3 of R.A. 9504.
REVENUE REGULATIONS
NO. 16-2008
Implementing the Provisions of Section 34(L)
of the Tax Code of 1997, As Amended by
Section 3 Republic Act No. 9504, Dealing on
the Optional Standard Deduction (OSD)
Allowed to Individuals and Corporations in
Computing their Taxable Income

PERSONS COVERED:
1. Individuals:
i. Resident Citizen
ii. Non-resident citizen
iii. Resident Alien
iv. Taxable estates and trusts
2. Corporations:
i. Domestic corporation
ii. Resident foreign corporation
II.
OPTIONAL STANDARD DEDUCTION
(OSD)
OSD
RATE
40% 40%
Of Gross Sales/Gross Of Gross Income
Receipts CORPORATE
INDIVIDUAL TAXPAYERS, TAXPAYERS
other than NRA
It should be emphasized that the
cost of sales in case of individual
seller of goods, or the cost of services
in the case of individual seller of
services, are not allowed to be
deducted for purposes of
determining the basis of the OSD
pursuant to this Section inasmuch
as the law (RA 9504) is specific as to
the basis thereof which states that
for individuals, the basis of the 40%
OSD shall be the gross sales or
In the case of sellers of services, the
term gross income means the gross
receipts less sales returns, allowances,
discounts and cost of services. Cost of
services means all direct costs and
expenses necessarily incurred to
provide the services required by the
customers and clients including
salaries and employees benefits of
personnel, consultants and specialists
directly rendering the service,
SEC. 5. ILLUSTRATIVE EXAMPLES IN
DETERMINING THE BASIS OF THE 40%
OSD FOR INDIVIDUALS AND
CORPORATIONS.
Suppose a retailer of goods, whose
accounting method is under the accrual
basis, has a gross sales of P1,000,000.00
with a cost of sales amounting to P800,00.

if Individual If Corporation
Gross Sales P1,000,000 P1,000,000
Less: Cost of Goods Sold 800,000
Basis of the OSD P1,000,000 P 200,000
X OSD Rate (maximum) .40 .40
OSD Amount P 400,000 P 80,000

=========== ===========

If Individual If Corporation
Gross Sales P1,000,000 P1,000,000
Less: Cost of Sales 800,000
Gross Sales/Gross P1,000,000 P 200,000
Less: OSD (maximum) 400,000

80,000
Net Income P 600,000 P 120,000

===========
===========

REVENUE REGULATIONS
NO. 2-2010
Amendment to Sections 6 and 7
of Revenue Regulations No. 16-
2008 with Respect to the
Determination of the Optional
Standard Deduction (OSD) of
General Professional Partnerships
(GPPs) and the Partners Thereof,
As Well as the Manner and Period
for Making the Election
to Claim
If the GPP availed of the itemized deduction in
computing its net income, the partners may still
claim itemized deductions from said share,
provided, that, in claiming itemized deductions,
the partner is precluded from claiming the same
expenses already claimed by the GPP. If the
GPP claimed itemized deductions the partners
comprising it can only claim itemized
deductions which are in the nature of ordinary
and necessary expenses for the practice of
profession which were not claimed by the GPP
in computing its ne income or distributable net
income during the year.
Examples of these are
representation expenses incurred by
the partner where the covering invoice
of receipt is issued in his name;
travelling expenses while away from
hone, which were not liquidated by the
partnership; depreciation of a car used
in the practice of profession where said
car is registered in the name of the
partner and similar expenses.
Hence, if the GPP availed of itemized
deductions, the partners are not allowed
to claim the OSD from their share in the
net income because the OSD is a proxy
for all the items of deductions allowed in
arriving at taxable income.
If the GPP avails of OSD in computing its

net income, the partners comprising it can
no longer claim further deduction from
their share in the said net income.
If the partner also derives other gross
income from trade, business or practice of
profession apart and distinct from his share
in the net income of the GPP, the
deduction that he can claim from his other
gross income would follow the same
deduction availed of from his partnership
income as explained in the foregoing rules.
Provided, however, that if the GPP opts for
the OSD, the individual partner may still
claim 40% of its gross income from trade,
business or practice of profession but not
to include his share from the net
income of the GPP.
II.
OPTIONAL STANDARD DEDUCTION (OSD)
the taxpayer must signifies in his return his

intention to elect Optional Standard Deduction,
OTHERWISE, he shall be considered as having

availed of the Itemized Deductions.
The election of OSD is irrevocable for

the taxable year for which the choice is
made.
The election to claim either the OSD or the
itemized deduction for the taxable year must
be signified by checking the appropriate box
in the income tax return filed for the first
quarter of the taxable year adopted by the
taxpayer. Once the election is made, the
same type of deduction must be consistently
applied for all the succeeding quarterly
returns and in the final income tax return for
the taxable year. Any taxpayer who is
required but fails to file the quarterly income
tax return for the first quarter shall be
considered as having availed of the itemized
deductions option for the taxable year.
II.
OPTIONAL STANDARD DEDUCTION (OSD)
SHALL NOT APPLY TO

GROSS COMPENSATION
INCOME ARISING OUT OF
EMPLOYER-EMPLOYEE
RELATIONSHIP.

III.
ITEMIZED DEDUCTIONS
Section 34(A to J)
These are expenses related to trade or

business or to the practice of profession
applicable to BOTH individual and

corporate taxpayers

III.
ITEMIZED DEDUCTIONS
KINDS OF ITEMIZED
DEDUCTION
(by statutory classification)
A.Business Expenses
B.Interest
C.Taxes
D.Losses
E.Bad Debts
III.
ITEMIZED DEDUCTIONS
KINDS OF ITEMIZED
DEDUCTION
(by statutory classification)
F. Depreciation
G. Depletion
H. Charitable and Other Contributions
I. Research and Development Expenditure
J. Pension Trust Contribution
III.
ITEMIZED DEDUCTIONS
A.Business Expenses
The expenses must be ORDINARY and NECESSARY
when it is normal or where it is appropriate

common or usual in and helpful in the
relation to the business development of the
of the taxpayer and the taxpayers business,
surrounding meaning it is
circumstances. intended to realize
a profit or to
III.
ITEMIZED DEDUCTIONS
A.Business Expenses
The expenses must be incurred in trade or business

carried on by the taxpayer.
not incurred in the trade
or business of another.
The expenses must be substantiated by proof
Receipts are the best proof BUT the
burden of proof lies upon the taxpayer
to establish the relationship of the
expenses and the business.
III.
ITEMIZED DEDUCTIONS
A.Business Expenses
The expenses must be reasonable
The expenses must not be against public policy,

public moral or law.
If the expense is subject to withholding tax,

proof of payment to BIR must be shown
MC Garcia, a contractor who won the
bid for the construction of a public
highway, claims as expenses,
facilitation fees which according to
him is standard operating procedure
in transactions with the government,
Are these expenses allowable as
deduction from gross income?

III.
ITEMIZED DEDUCTIONS
A.Business Expenses
The expenses must be paid or incurred during the
taxable year.
Two (2) Accounting Methods
in the recognition of expenses
CASH METHOD ACCRUAL BASIS

Recognized when paid METHOD
so, expenses will be Recognized when incurred so,
deducted in the year in expenses will be deducted in
which they are paid. the year in which they accrue.
Cash basis tax payers include

CASH METHOD income when it is received,
Recognized when and claim deductions when
paid so, expenses
expenses are paid. A cash
will be deducted in
the year in which basis taxpayer can look to the
they are paid. doctrine of constructive receipt
and the
doctrine of cash equivalence to
help determine when income is
received.
Accrual basis taxpayers

include items when they ACCRUAL
are earned and claim BASIS
deductions when expenses METHOD
Recognized when
are incurred. An accrual
incurred so,
basis taxpayer looks to the expenses will be
all-events test and earlier-of deducted in the year
test to determine when in which they accrue.
income is earned.
Under the all-events test, an
accrual basis taxpayer ACCRUAL
generally must include BASIS
income "for the taxable METHOD
year when all the events Recognized when
incurred so,
have occurred that fix the
expenses will be
right to receive income and deducted in the year
the amount of the income in which they accrue.
can be determined with
reasonable accuracy."
Under the "earlier-of test",
an accrual basis taxpayer ACCRUAL
receives income when: BASIS
(1) the required performance METHOD
occurs, Recognized when
incurred so,
(2) payment therefore is due,
expenses will be
or; deducted in the year
(3) payment therefore is in which they accrue.
made, whichever happens
earliest.
What is the all events test?
Explain briefly.
Question II (A) 2010 BAR Examination

III.
ITEMIZED DEDUCTIONS
KINDS of BUSINESS EXPENSES

1. Compensation for Personal
Services
Requisites:
- Personal services actually rendered
- Compensation is for such services rendered.
- Reasonable
Salary expenses are allowed as deductions from gross
business income only if the corresponding withholding
tax has been deducted and remitted to the BIR
III.
ITEMIZED DEDUCTIONS
2. Travelling Expenses
(include transportation, meals and lodging
expenses
Requisites:
- Paid or incurred while away from home

- Paid or incurred in the conduct of trade or
business
- Reasonable and necessary necessary
III.
ITEMIZED DEDUCTIONS
3. Representation and Entertainment
Expenses
Requisites:
- Paid or incurred in the conduct of trade or
business
- Paid or incurred during the taxable year
- Not contrary to law, morals and public policy
--Subject
Reasonable
to theand
rulenecessary
of substantiation
(there must be records as to the amount, date and place of expense,
purpose or relationship of the expense to the business.)
III.
ITEMIZED DEDUCTIONS
4. Advertising and Promotional Expenses
Requisites:
- Must be substantiated.
- All payments for the purchase of promotional give-
aways, contest prizes or similar material must
be properly receipted.
-All payments for services such as radio and TV time,
print ads, advertising expertise must be subjected to
withholding tax.
III.
ITEMIZED DEDUCTIONS
5. Rent Expense
For business property

at least P500 5%
Non-business/residential property
- at least P10,000 5%
III.
ITEMIZED DEDUCTIONS
6. Cost of material and supplies
deductible only to the amount actually

consumed or used in operation.

III.
ITEMIZED DEDUCTIONS
7. Repairs
Rules on deductibility:
Incidental or ordinary repairs are deductible
keeps the asset in its ordinary working
condition
Extraordinary repairs are not deductible
expenses incurred that will add material value
to the property or prolong its life. They are
capital expenditures.
III.
ITEMIZED DEDUCTIONS
GENERAL RULE: CAPITAL EXPENDITURES
ARE NOT DEDUCTIBLE.
EXEMPTION: CAPITAL EXPENDITURES
ALLOWABLE TO
PRIVATE
EDUCATIONAL INSTITUTIONS
Section 34(A)(2)
OPTIONS:
1. Deduct immediately as expenditures
2. Deduct as allowances for depreciation
III.
ITEMIZED DEDUCTIONS
B. Interest Expenses
amount which one has contracted to pay for

the use of borrowed money or amount of
compensation paid for the use of money or
forbearance from such use.
III.
ITEMIZED DEDUCTIONS
There must be an indebtedness.

no indebtedness, no deduction
interest or penalties for crime

committed are NOT DEDUCTIBLE.

III.
ITEMIZED DEDUCTIONS
Indebtedness must be that of the taxpayer.
For corporation,
the loan must be obtained in its
corporate capacity, using corporate
assets as security.
III.
ITEMIZED DEDUCTIONS
The debt must have been incurred in

connection with taxpayers trade or business.
The interest must have been stipulated in writing.

III.
ITEMIZED DEDUCTIONS
Interest must be paid or accrued

within the taxable year.
Cash Basis deductible in the year it is actually

paid.
Accrual Basis- deductible in the year it is accrued
even if not actually paid.

INTEREST EXPENSE DEDUCTIBLE
WITH LIMITATION (Section 34(B)(1)
Situation: Taxpayer has interest income subjected to 20%

final tax and at the same time incurred during
interest expense during the year
For INDIVIDUAL, Normal Tax Rate 32%

the allowable deduction for Less: Final Tax on
Interest Income 20%
interest expense shall be Tax Difference 12%
reduced by an amount equal Divided by 32%
Tax Differential Rate 38%
to 38% of interest income
How much is the interest

X record shows the expense deductible?
following data:
Actual Interest
Expense P25,000
Interest Expense on Less: Tax differential
business loan P25,000 on interest income
Interest Income (10,000 x 38%) P 3,800
on Time Deposit P10,000 Deductible
Interest Expense P21,200
Situation: Taxpayer has interest income subjected to 20%

final tax and at the same time incurred during
interest expense during the year
For CORPORATION, Normal Tax Rate 30%

the allowable deduction for Less: Final Tax on
Interest Income 20%
interest expense shall be Tax Difference 10%
reduced by an amount equal Divided by 30%
Tax Differential Rate 33%
to 33% of interest income
How much is the interest

X Corporation record expense deductible?
shows the following data:
Actual Interest
Expense P50,000
Interest Expense on Less: Tax differential
business loan P50,000 on interest income
Interest Income (40,000 x 33%) P 13,200
on Time Deposit P40,000 Deductible
Interest Expense P36,800
NON DEDUCTIBLE INTEREST EXPENSE
(Section 34(B)(2)
1. Interest paid in advance or Prepaid Interest

Section 32(B)(2)(a)
If taxpayer is reporting income on CASH

BASIS, the interest expense of a business
loan paid in advance shall be allowed as
deduction in the year that the principal
indebtedness is FULLY PAID.
(Section 34(B)(2)
1. Interest paid in advance or Prepaid Interest

Section 32(B)(2)(a)
If the indebtedness is payable in periodic

amortization, the amount of interest
expense which corresponds to the
amount of the principal amortized or paid
during the year SHALL BE ALLOWED AS
DEDUCTION IN SUCH TAXABLE YEAR.
(Section 34(B)(2)
2. Interest payment on indebtedness not business

related;
Interest payment in favor of a relative (related
debtor and creditor)
Section 32(B)(2)(b)
3. Interest paid on indebtedness to finance

petroleum explorations.
Section 32(B)(2)(c)
OPTIONAL TREATMENT OF INTEREST EXPENSE

(Section 34(B)(3)
Interest incurred by the taxpayer to

acquire property used in trade or
business or exercise of profession
TAXPAYER has TWO (2)

OPTIONS:
1.DEDUCT IT OUTRIGHT
2.TREAT IT AS CAPITAL
Explain if the following items are deductible from
gross income for income tax purposes. Disregard
who is the person claiming the expense.
1.Interest on loans used to acquire capital
equipment.
2.Depreciation of goodwill.

III.
ITEMIZED DEDUCTIONS
C. TAXES
Requisites for Deductibility of Taxes
1.It must be paid or incurred within the

taxable year
2.It must be paid or incurred in connection
with the taxpayers profession, trade or
business
3.The tax must be imposed directly upon the
taxpayer
C. TAXES
NON DEDUCTIBLE TAXES from GROSS INCOME
1. Philippine income tax

2. Estate and donors taxes
(Sec. 83, Rev. Regs. No. 2.)
3. Foreign income tax, if claimed as a tax
credit
4. Percentage tax on stock transaction
5. Value-added tax
C. TAXES
6. Taxes not related to business, trade, or

profession
7. Other items related to tax such as:
- Special assessment tax
- Surcharges
- Compromise penalty
BUT,
IF THERE IS TAX REFUND or TAX CREDIT, SAME

SHALL BE INCLUDED AS PART OF GROSS INCOME
IN THE YEAR OF RECEIPT TO THE EXTENTOF THE
INCOME TAX BENEFIT OF SAID DEDUCTION.
TAX BENEFIT RULE

C. TAXES
TAXES DEDUCTIBLE from GROSS INCOME
1. Documentary stamp taxes

2. Occupational taxes
3. Privilege and license taxes
4. Excise taxes
5. Import duties
6. Local Business taxes
7. Automobile registration fees
8. Community tax
9. Municipal tax
C. TAXES
TAXES DEDUCTIBLE from GROSS INCOME
FOR, NRA-ETB and

RFC :
ALLOWED ONLY IF TAXES ARE

CONNECTED WITH INCOME FROM
SOURCES WITHIN THE PHILIPPINES.
Section 34(C)(2)
III.
ITEMIZED DEDUCTIONS
D. LOSSES
reductions on resources due

to unintended destruction
or
deprivation of things not in
the ordinary course of business.
D. LOSSES
CAPITAL GAIN CAPITAL LOSS
Section 39(A)(2)(3)
of the NIRC
ORDINARY GAIN ORDINARY LOSS

D. LOSSES
Requisites for Deductibility of Ordinary
Losses
1.The loss must be actually sustained in a
closed and completed transaction;
2. The loss must be that of the taxpayer and

incurred in trade, profession or business;
3. The loss must not be compensated by

insurance or other forms of indemnity;
4. The loss must be reported to the BIR from 30

days to 90 days from the date of its
discovery.
D. LOSSES
NON DEDUCTIBLE LOSSES from GROSS INCOME
(not allowed by law as deductions)
1. Loss on voluntary removal of building on land
purchased with a view to erect another
building (Sec. 97, Rev. Reg. No. 2);
2. Gambling losses not covered by gambling
gains (Sec. 34[D][6], NIRC);
Can be allowed as deductions to the extent of
gambling wins. NOT ALLOWED AS DEDUCTION
from business income, compensation income and
gains from sale of capital assets.
D. LOSSES
3. Capital loss not covered by capital gains
(Sec. 34[D][4], NIRC);
Capital Loss To preserve Section 34(A)(1) of the

deductible to the NIRC that only ORDINARY and
extent of Capital NECESSARY EXPENSES will be
Gain, can not allowed to be deducted from the Gross
be deductible Income.
from Ordinary Capital Loss is not a business connected
Gain expense, not ordinary expense.
D. LOSSES
4. Losses from exchanges of property

in corporate readjustments
(Sec. 40, NIRC);
Section 40(C) of the NIRC SALE/EXCHANGE OF PROPERTY
No GAIN, No LOSS Recognized (Gain not

taxable, Loss not deductible
With regard to merger and consolidation

(Section 40(C)(2)a,b,c
Exchange of property for TRANSACTIONS
stock SOLELY IN KIND
Exchange of stock for stock NO CASH IS GIVEN,
THEREFORE, TAX
Exchange of securities for EXEMPT
stock or securities
GAIN is RECOGNIZED
TRANSACTION BUT LOSS is
S NOT
SOLELY IN
NOT
KIND DEDUCTIBLE.
D. LOSSES
5. Losses from illegal transactions

(Sec. 96, Rev. Reg. No. 2)
6. Losses from sales or exchanges of property
between related taxpayers
(Sec. 36 [B], NIRC).
OTHER TRANSACTIONS WHEREIN THE
LOSS IS
GAIN IS RECOGNIZED AND
NOT DEDUCTIBLE
1. Illegal Transactions
2. Transactions between Related Taxpayers. Section 36(B), NIRC
Strangers, Section 99(B) of the NIRC

OTHER TRANSACTIONS WHEREIN THE
GAIN IS RECOGNIZED AND LOSS IS NOT
DEDUCTIBLE
3. Wash Sale, Section 38 of the NIRC
A sale or disposition of stock or securities, by a
seller who is not a dealer in securities or shares or
stocks, where substantially identical securities are
acquired or purchased within a 61 day period,
beginning 30 days before the sale and ending 30
days after the sale.
Even if sold by a dealer in securities if the

transaction was not made in the ordinary course of
the business of such dealer, there is WASH SALE.
D. LOSSES
7. Losses from exchanges of property where

the property received is not substantially
different from the property disposed of
(Sec. 40, NIRC);
8. Losses not incurred in trade, profession or
business or in any transaction entered into
for profit
(Sec. 36 [A], NIRC)
Give the requisites for deductibility of a loss.

D. LOSSES
DEDUCTIBLE LOSSES from GROSS INCOME
(provided the requisites for deductibility are complied with)
Requisites for Deductibility of Ordinary
Losses
1.The loss must be actually sustained in a
closed and completed transaction;
2. The loss must be that of the taxpayer and
incurred in trade, profession or business;
3. The loss must not be compensated by
insurance or other forms of indemnity;
4. The loss must be reported to the BIR from 30
days to 90 days from the date of its
discovery.
D. LOSSES
1. Business losses such as losses incurred in
trade or profession;
2. Casualty losses such as losses due to storms,
fires, shipwreck or other
casualties of property connected
with profession, trade or
business;
3. Losses of business property due to theft,
robbery or embezzlement;
4. Net Operating Loss Carry Over (NOLCO).
Section 34(D)(3)
D. LOSSES
In case of PARTIAL LOSS, what is the measure of loss?
Cost to restore property back to its normal

condition OR Book Value, WHICHEVER IS
LOWER, and then reduced by insurance
recovery or any form of indemnity.
D. LOSSES
NET OPERATING LOSS CARRY OVER

(NOLCO
NOT THE same as
Section 34(D)(3) f the NIRC

APPLICABLE TO BOTH INDIVIDUAL and
CORPORATE TAXPAYERS
NET CAPITAL LOSS CARRY OVER

(NCLCO)
Section 39(D) of the NIRC
Applies only to Individual Taxpayer and
NEVER to a Corporate Taxpayer.
D. LOSSES
(NOLCO
Section 34(D)(3) of the NIRC
the excess of allowable deductions
over gross income of the business or
enterprise for any taxable year.
Section 34(D)(3)(ii)
The net operating loss, which had not been

previously offset as deductions from gross income,
shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable years
immediately following the year of such loss.
NET OPERATING LOSS CARRY OVER (NOLCO
WHO ARE ENTITLED TO CLAIM NOLCO?
Individual taxpayers engaged in trade or

business or in the exercise of his profession.
Domestic and resident

foreign corporations subject
to normal income tax.
Special Corporation subject to preferential tax rates

such as private educational institutions, hospitals,
and regional operating headquarters.
X, single, reported the following income and expenses:
2007 2008 2009 2010 2011
Salary as a professor P180,000 P190,000 P200,000 P210,000 P210,000
Gross business income 200,000 250,000 300,000 400,000 600,000
Business deductions 350,000 200,000 340,000 380,000 400,000
Xs taxable income before personal exemption for the

said years would be:
Gross business income P 200,000 P 250,000 P340,000 P400,000 P600,000
Business deductions ( 350,000) ( 200,000) (300,000) (380,000) 400,000
Income(loss) from business (P150,000) P 50,000 P 40,000 P 20,000 P200,000
Less: Applicable NOLCO . ( 50,000) ( 40,000) ( 20,000) .
Net business income (loss) (P150,000) P - 0 P 0 P -0- P200,000
Salary as a professor P 180,000 P 190,000 P200,000 P210,000 210,000
Taxable income before P 180,000 P 190,000 P200,000 P210,000 P410,000
personal exemption

Gross business income P 200,000 P 250,000 P340,000 P400,000 P600,000
Business deductions ( 350,000) ( 200,000) (300,000) (380,000) 400,000
Income(loss) from business (P150,000) P 50,000 P 40,000 P 20,000 P200,000
Less: Applicable NOLCO . ( 50,000) ( 40,000) ( 20,000) .
Net business income (loss) (P150,000) P - 0 P 0 P -0- P200,000
Salary as a professor P 180,000 P 190,000 P200,000 P210,000 210,000
Taxable income before P 180,000 P 190,000 P200,000 P210,000 P410,000
personal exemption
the remaining P40,000 NOLCO cannot be deducted

from the business income of the year 2011 because
the three-year reglementary period has expired.
NOLCO cannot be deducted against compensation

income (employer-employee relationship).

(NOLCO
If a person, natural or NOT

juridical, is enjoying ENTITLED TO
tax exemption DEDUCT
pursuant to the NIRC NOLCO
or any special law, FROM GROSS
INCOME

(NOLCO
In cases of BUSINESS NOT
COMBINATIONS, if there ENTITLED TO
is a substantial change DEDUCT
in the ownership of NOLCO
business. FROM GROSS
INCOME
If less than 75% percent of the
paid-up capital or nominal
value of outstanding shares
retained by the same persons.
(NOLCO
In cases of BUSINESS NOLCO IS
COMBINATIONS, if there ALLOWED TO
is NO substantial BE
change in the ownership DEDUCTED
of business. FROM GROSS
INCOME
If NOT less than 75% percent of
the paid-up capital or nominal
value of outstanding shares
retained by the same persons.
(NOLCO
FOR MINES
(other than oil and gas wells)
NOLCO incurred in any of the first 10

years of operation may be carried over as
a deduction from taxable income for the
next 5 years immediately following the
year of such loss.
FOR MINES
On December 31, 200A, X Gold Mines marked its 10

consecutive year of operation. It has an operating loss in
year 200A amounting to P30,000,000.
If X Gold Mines continues operation with the following

data, the taxable income would be:
FOR MINES
200B 200C 200D 200E 200F 200G

(In millions of
pesos)
Revenue P 20 P30 P24 P28 P35 P40
Cost of goods sold ( 5) ( 7) ( 6) ( 7) (10) (12)
Operating expenses ( 13) (15) (15) (15) (16) (18)
Net income (loss) P 2 P 8 P 3 P 6 P 9 P10
NOLCO ( 2) ( 8) ( 3) ( 6) ( 9) -0-
Taxable income -0- -0- -0- -0- -0- P10
Only P28M out of P30M net operating loss is covered by the 5

year period for the deductibility of NOLCO
SPECIAL/OTHER RULES ON LOSSES
A taxpayer who claims the 40% OSD shall

not simultaneously claim deduction of the
NOLCO. The three-year reglementary
period shall continue to run
notwithstanding the fact that the aforesaid
taxpayer availed of the OSD during the said
period

Domestic and resident foreign corporation

taxed during the taxable year with MCIT
cannot enjoy the benefit of NOLCO.
Nevertheless, the running of the three (3)
year period for the expiry of NOLCO is not
interrupted by the fact that such corporation
is subject to MCIT
a loss in one line of business is not

permitted as allowable deduction from gain
in another line of business, if one of the two
lines is exempted from tax.

WHO ARE NOT ENTITLED TO CLAIM NOLCO?
f s h o re Enterprise registe
red with
O n it
g U the Board of Inve
Bankin eign stments
n d F o r
a cy
C urr e n Enterprise registered
s i t U n it under the bases
Depo
Conversion and
Development Act of 1992
Enterprise Foreign Corporations engaged in
registered with International Shipping or air
PEZA carriage business in the
Philippines.
III.
ITEMIZED DEDUCTIONS
E. BAD DEBTS
claim that becomes worthless or uncollectible arising

from money lent or from goods sold or services
rendered.
E. BAD DEBTS
Requisites for the deductibility of Bad Debts Expense
C charged off or written off against the books of the taxpayer
U the amount written off must be uncollectible in the near

future, no slim chance of recovery collecting such an
amount.
B it must arise from business trade/profession
A ascertain to be worthless
N not arising from transactions between related taxpayers

E. BAD DEBTS
BAD DEBTS RECOVERY
Shall be included in the Gross Income in the

year of recovery to the extent of the tax benefit
of said deduction.
So, upon recovery of bad debts, it is a taxable

gain
TAX BENEFIT RULE or

RECAPTURE RULE
III.
ITEMIZED DEDUCTIONS
F. DEPRECIATION
annual reasonable allowance to reduce the useful

value of the tangible fixed assets resulting from
wear and tear and normal obsolescence
For intangible assets such as patents,

copyrights and franchise, the annual allowance
to reduce their useful value is called
amortization.
F. DEPRECIATION
Requisites for Deductibility:
It must be reasonable.
It must be charged off during the year.
The asset must be used in profession,

trade or business.
The asset must have a limited useful life.

1. What is the proper allowance for depreciation of
any property used in trade or business?
2. What is the annual depreciation of a

depreciable fixed asset with a cost of
P100,000 and an estimated useful life of 20
years and salvage value of P10,000 after its
useful life?

F. DEPRECIATION
METHODS OF DEPRECIATION
Section 34(F)(2)
1. Straight-line method
2. Declining balance method
3. Sum of the years digit method
4. Any other method which may be
prescribed by the Secretary of
Finance upon the recommendation
of the Commissioner
F. DEPRECIATION
Section 34(F)(2)
STRAIGHT-LINE METHOD
If no salvage value,
COST LIFE DEPRECIATION

F. DEPRECIATION
Section 34(F)(2)
STRAIGHT-LINE METHOD
If with salvage value,
COST SV
DEPRECIATION
LIFE
F. DEPRECIATION
DEPRECIATION OF PROPERTIES USED IN

PETROLEUM OPERATIONS
Section 34(F)(4)
Method of
Depreciation for
INITIALLY PLACED
PROPERTIES
STRAIGHT LINE DECLINING
METHOD BALANCE
METHOD

F. DEPRECIATION

Section 34(F)(4)
Initially elected At any subsequent date,
It can change to
Method of
Depreciation DECLINING
for INITIALLY BALANCE STRAIGHT
PLACED METHOD LINE
PROPERTIES METHOD
F. DEPRECIATION

Section 34(F)(4)
Estimated USEFUL LIFE of
PROPETIES
Directly used or NOT directly used or
related in the related in the
production of production of
petroleum petroleum
10 years or a 5 years under
shorter life as the Straight
permitted
atty. by the BIR
cleo d. sabado-andrada, Line
cpa, mbaMethod
F. DEPRECIATION
MINING OPERATIONS
Section 34(F)(5)
1. Expected life is ten (10) years or lessTHE

NORMAL RATE OF DEPRECIATION.
2. Expected life is more than ten (10) years
DEPRECIATED OVER ANY NUMBER OF YEARS
between five (5) years and the expected life.
3. The depreciation thereon allowed as deduction
from taxable income.
4. The contractor should notify the BIR
Commissioner at the beginning of the depreciation
period as to which depreciation rate will be used.
F. DEPRECIATION
DEPRECIATION DEDUCTIBLE BY
NRA-ETB and RFC
Section 34(F)(6)
depreciable asset must be

located in the Philippines.

III.
ITEMIZED DEDUCTIONS
G. DEPLETION OF OIL and

GAS WELLS and MINES
the exhaustion of natural resources like

mines, oil and gas wells due to production
similar to depreciation allowance, the

purpose of which is to recover the invested
capital in the property

GAS WELLS and MINES
WHO ARE ENTITLED TO CLAIM DEPLETION AS

DEDUCTION FROM GROSS INCOME
Persons who derived income from the extraction
of oil, gas and mineral for the purpose of
recovering his capital.
The taxpayer must acquire economic interest in a

mineral land and must have capital investment
in the property and not mere economic
disadvantage.
GAS WELLS and MINES
Requisites of deductibility:
1. Depletible natural resources assets like

mines, gas and oil wells.
2. Charged off within the taxable year
3. Allowance for depletion is computed in

accordance with the cost depletion method.
G. DEPLETION OF OIL and GAS WELLS and MINES
EXAMPLE with the COST DEPLETION METHOD
X Mining acquired a coal property with an estimated deposit
of 2,000,000 tons for P4,200,000. It is estimated that the
property has a salvage value of P200,000. If Baguio Mining
was able to produce 400,000 tons, What is the amount of the
deductible depletion expense during the year?
Cost of coal property P4,200,000
Less: Salvage value 200,000
Depletion base P4,000,000
Divided by estimated tons to be extracted 2,000,000
Depletion per ton P 2
Multiplied by number of tons extracted during the 400,000
year
Depletion expense during the year P 800,000
GAS WELLS and MINES
In case of foreign corporations,

depletion shall be allowed only if the mining
property is located in the Philippines.

G.DEPLETION OF OIL and GAS WELLS and MINES
EXPLORATION and DEVELOPMENT COST
Section 34(G)(2)
Exploration expenditures
expenses paid/incurred before the development
stage of the mine intended to ascertain the existence,
location, extent, or quality of any deposit of ore or other
mineral.
Development expenditures
expenditures paid or incurred during the
development stage of the mine or other natural deposits.

G.DEPLETION OF OIL and GAS WELLS and MINES
Section 34(G)(2)
TAX TREATMENT
During the taxable year, the TAXPAYER CAN TREAT IT

AS:
1.Part of adjusted basis for depletion cost
2. Deduction to compute taxable income from mining

operations

Section 34(G)(2)
TAX TREATMENT
If the TAXPAYER will choose option no. 2.
2. Deduction to compute taxable income from mining
operations
ALLOWED
IF:
CONDITIONS ARE COMPLIED WITH.

Section 34(G)(2)
CONDITIONS:
If total amount deductible for exploration and
development expenditures shall not exceed 25% of the
net income from mining operations computed without
the benefit of any tax incentives under existing laws.
The actual exploration and development expenditures

minus 25% of the net income from mining shall be
carried forward to the succeeding years until fully
deducted.
III.
ITEMIZED DEDUCTIONS
H. CHARITABLE and OTHER CONTRIBUTIONS
It is not an OPERATING EXPENSE.

BUT, allowed by law, to be deducted
from Gross Income

III.
ITEMIZED DEDUCTIONS

A.The contribution or gift must be actually
paid during the taxable year.
(must state the name and address of

organization, approximate date and amount of
the gift, if not money, FMV of the gift and must
be signed by the taxpayer or the responsible
officer of the corporation)
III.
ITEMIZED DEDUCTIONS
B. Must be given to the organization specified by

the TAX Code or special law.
C. The net income of the institution must not

inure to the benefit of any member or
individual.

As provided by the Tax Code, contributions or donations

made to the following are DEDUCTIBLE IN FULL.
1.Donations to the government or political

subdivision including fully owned government
corporation to be used exclusively in undertaking
PRIORITY ACTIVITIES IN education, health, youth and
sports development, human settlement, science and
culture, economic development.
2. Donations to international organizations or

foreign institutions in compliance with agreements
or treaties.
As provided by the Tax Code, contributions or donations
made to the following are DEDUCTIBLE IN FULL.
3. Donations to accredited non-government organizations

(NGO) Exclusively for; SCIENTIFIC, RESEARCH, CHARACTER
BUILDING, YOUTH and SPORTS DEVELOPMENT, HEALTH SOCIAL
WELFARE, CULTURAL, CHARITABLE and ANY COMBINATION
THEREOF.
Provided, not more than 30% of the charitable

contribution should be used for administration purposes.
Provided further that, the contribution must be utilized
not later than the 15th day of the 3rd month after the close of
its taxable year.
As provided by Special Law, contributions or donations

made to the following are ALSO DEDUCTIBLE IN FULL.
1. Integrated Bar of the Philippines BP P (P.D. 1810)

2.Development Academy of the Philippines (P.D. 205)
3.Agricultural Department of Southeast Asian Fisheries
Development Center (P.D. 292)
4. National Social Action Council (P.D. 294)
5. Task Force on Human Settlement
6. National Museum, Library & Archives (P.D. 373)
7. Intramuros Administration (P.D. 1616)
8. Lungsod ng Kabataan (P.D. 1631)
Contribution subjects to Limitation :
are not deductible in full as specified by the law or such

deduction has not met the requisites to be deducted in full.
Corporate- 5% of the Net Income before charitable

contributions or the ACTUAL CONTRIBUTION whichever is
lower
Individual Taxpayer- 10% of the net Income before

Charitable contributions or the ACTUAL Contribution
whichever is LOWER.
III.
ITEMIZED DEDUCTIONS
I. RESEARCH and DEVELOPMENT
Costs incurred by the taxpayer during the taxable

year in connection with his trade, business or
profession for the following:
1.improvements of processes and formulas;
1.development of improved or new products.

I. RESEARCH and DEVELOPMENT
TAX TREATMENT
DEFERRED Ordinary and
EXPENSES Necessary
CHARGE TO Expense
CAPITAL DEDUCT
ACCOUNT FROM GROSS
INCOME
Allowed as deduction ratably distributed for a
period of not less than 60 months beginning
with the month in which the taxpayer FIRST
REALIZES benefits from such expenditure.

III.
ITEMIZED DEDUCTIONS
J. PENSION TRUSTS
fund intended to provide retirement

benefits to the employees.

J. PENSION TRUSTS
Requisites for deductibility:
1. Employer must have established a pension or

retirement plan for the payment of reasonable
pension to its employees and approved by the BIR;
2. Pension plan is reasonable and actuarially sound.
3. It must be funded by the employer
4. Amount contributed by the employer must no longer

be subject to control of the employer

SUBSTITUTES FOR THE DISALLOWANCE OF
FAMILY, LIVING and PERSONAL EXPENSES
Kinds
BASIC PERSONAL EXEMPTION
ADDITIONAL PERSONAL EXEMPTION

PERSONAL EXEMPTION
I. II.
BASIC ADDITIONAL
PERSONAL PERSONAL
EXEMPTION EXEMPTION
P50,000 P25,000
whether taxpayer is IN ADDITION to the basic
personal exemption for each
married, head of qualified dependent children not
the family or single. exceeding four (4).
(R.A. 9504) (R.A. 9504)
PERSONAL EXEMPTION (PE)
TAXPAYERS ALLOWED TAXPAYERS NOT ALLOWED
for PERSONAL EXEMPTION FOR PERSONAL EXEMPTION
1. RC 1. NRA-ETB not
2. NRC enjoying
3. RA reciprocity clause
4. Estates and Trusts 2. NRA-NETB
5. NRA-ETB enjoying 3. Corporations
reciprocity clause 4. Partnerships

PRINCIPLE OF RECIPROCITY
Section 35(D)
means that NRAETB shall be allowed a personal exemption
only if the income tax law in his country grants
personal exemptions to the citizens and residents of
the Philippines, subject to the following limitations:
The personal exemption does not include additional

exemption; and
The amount of exemption shall in no case exceed the
personal exemption granted by our law to citizens or
residents of the Philippines.
PRINCIPLE OF RECIPROCITY
Section 35(D)
NRA-ETB
Those who have stayed within the
Philippines for more than 180 days during
the taxable year shall be deemed
nonresident aliens doing business in the
Philippines.

Mr. Cortez is non-resident alien based in
HongKong. During the calendar year 1999, he
came to the Philippines several times and
stayed in the country for an aggregated period of
more than 180 days. How will Mr. Cortez be
taxed on his income derived from sources within
the Philippines and from abroad?

TAXPAYERS ENTITLED TO ADDITIONAL EXEMPTIONS
1. RC
2. NRC
3. RA if qualified children are LIVING
WITH HIM IN THE PHILIPPINES
If children are living abroad, RA is not

entitled to additional exemptions.

REQUISITES for ADDITIONAL EXEMPTIONS
DEPENDENT MUST BE:
1.a taxpayers child, whether legitimate,

illegitimate or legally adopted;
2. chiefly depending for support on the

taxpayer;
3. living with the taxpayer;

REQUISITES for ADDITIONAL EXEMPTIONS
DEPENDENT MUST BE:
4. not married; not gainfully employed, and not more

than 21 years old. (Sec. 35(B), NIRC)
The law allows the continuous additional exemption even if

the dependent child is more than 21 years old, with the
provision stating or if such dependent, regardless of
age, is incapable of self-support because of mental or
physical defect. (Sec. 35B, par.4, NIRC)
RULES IN CLAIMING
ADDITIONAL EXEMPTIONS
If BOTH spouses are working,
only one can claim the additional
exemption. If only one spouse
General Rule: Husband is the proper is working,
claimant. said spouse may
Exemption: Wife can claim if: claim
-husband explicitly waives Additional
his right Exemption.
- husband has no income.
-husband works abroad.
Charlie, a widower, has two sons by his previous
marriage, Charlie lives with Jane who is legally
married to Mario, They have a child named Jill. The
children are all minors and not gainfully employed.
1. How much personal exemption can Charlie
claim? Explain.
2.How much additional exemption can Charlie
claim? Explain.

QUALIFIED DEPENDENTS OTHER THAN CHILDREN
A. PARENTS
1. incapable of self support
2. taxpayer should provide the chief support.
B. BROTHERS/SISTERS
1. should not be more than 21 years old
2. should not be gainfully employed
3. regardless of age, if brother/sister is incapable of self
support due to mental or physical defect
4. taxpayer provided for the chief support.
C. SENIOR CITIZEN
1. resident of the Philippines
2. at least 60 years old
3. retired from either government or private service
2. has income of NOT MORE THAN P60,000 per year
which will be reviewed by NEDA every 3 years.

Taxpayer or benefactor of senior citizen shall be

entitled only to the BASIC PESONAL EXEMPTION of
P50,000.
He shall not be entitled to claim the

ADDITIONAL EXEMPTION OF P25,000 for
supporting his/her parents, brother/sister or
senior citizen
CHANGE OF STATUS SUMMARY
Individual Taxpayer Exemption
Change of Status: This year Next year

1.Married P50,000 P50,000
2.Died P50,000
3.Widowed with 1 qualified dependent child P75,000 P75,000
4.Widowed with qualified dependent not his
P50,000 P50,000
child
P50,000 P50,000
5.Widowed without dependents
6.Legally separated with 1 qualified P75,000
P75,000
dependent child
7.Legally separated with qualified dependent P50,000 P50,000
not his child P50,000 P50,000
8.Legally
atty. cleoseparated without dependents
d. sabado-andrada, cpa, mba
P50,000 P50,000
CHANGE OF STATUS SUMMARY
DEPENDENT CHILDREN
(Maximum of Four)
Additional Exemption
Change of Status: This year Next year

1.Born P25,000 P25,000
2.Reaches 21 years old normal child P25,000
3.Reaches 21 years old abnormal child and
incapable to support himself P25,000 P25,000
4.Marries P25,000
5.Gainfully employed P25,000
6.Dies P25,000

RAM got married to LISA las January 2003. On
November 20, 2003, LISA gave birth to twins.
Unfortunately, however, LISA died in the course of
her delivery. Due to complications, one of the twins
also died on December 15, 2003.
In preparing his Income Tax Rfeturn (ITR) for the

year 2003, what should RAM indicate in the ITR as
his civil status? (a) single (b) married Head of the
Family (d) widower (e) none of the above. Why?
Reasons.
Dependent means a legitimate, illegitimate
or legally adopted child chiefly dependent
upon and living with the taxpayer if such
dependent met the criteria provided under
Sec. 35(b) of NIRC.

head of family means an unmarried or legally
separated man or woman with one or both parents, or
with one or more brothers or sisters, or with one or
more legitimate, recognized, natural, or legally
adopted children, living with and dependent upon him
or her for their chief support; where such brothers,
sisters or children are not more than twenty-one years
of age, unmarried, and not gainfully employed; or
where such brothers, sisters or children, regardless of
age, are incapable of self-support because of mental
or physical defect. (Sec. 35A par.3, NIRC)

Arnold who is single, cohabits with Vilma, who is
legally married to Zachary. Arnold and Vilma have
six minor children who lived and depend upon
Arnold for their chief support. The children are not
married and not gainfully employed.
1.For income tax purposes, may Arnold be
considered as head of the family?
2.Is Arnold entitled to deduct from his gross income
an additional exemption for each of his legitimate
child?

living with may be construed that the
taxpayer and his dependents reside under
one roof, or do not necessarily reside
under one roof with consideration on the
character of the separation.

Gainfully employed means that the
dependent is engaged in an employment, work
or trade that will remove him from the status
of chief support from the taxpayer.

Chief support refers to the principal or main
support whether money or in kind extended
continuously to the dependent, such that if
withdrawn, the dependent will have a destitute
life.

Mar got married in 1990. A week before their marriage, Joy
received, by way of donation, a condominium unit worth
P750,000 from her parents. After marriage, some
renovations were made at a cost of P150,000. The spouses
were both employed in 1991 by the same company. On 30
December 1992, their first child was born, and a second
child was born on 07 November 1993. In 1994, they sold the
condominium unit and bought a new unit.
Under the foregoing facts, what were the events in the life of
the spouses that had income tax incidences?


Allowable Deductions - Personal Exemptions

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Allowable Deductions - Personal Exemptions

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Distinguish a Exclusion from

Gross Income from Deductions

atty. cleo d. sabado-andrada, cpa, mba

Should not form part

SHALL NOT APPLY TO

CAN BE DEDUCTED from

ADDITIONAL PERSONAL EXEMPTION

Actual business Arbitrary amounts

To recover the To cover the family,

atty. cleo d. sabado-andrada, cpa, mba

Business Family, living and

SHALL NOT APPLY TO

CAN BE DEDUCTED from

These are amounts allowed by law to

atty. cleo d. sabado-andrada, cpa, mba

premiums paid during the taxable year for

atty. cleo d. sabado-andrada, cpa, mba

3. The deduction shall not exceed P2,400

atty. cleo d. sabado-andrada, cpa, mba

OSD is a deduction from gross income allowed

Applicable to INDIVIDUAL (but not to

atty. cleo d. sabado-andrada, cpa, mba

atty. cleo d. sabado-andrada, cpa, mba

Gross Sales P1,000,000 P1,000,000

Less: Cost of Goods Sold 800,000

Basis of the OSD P1,000,000 P 200,000

X OSD Rate (maximum) .40 .40

OSD Amount P 400,000 P 80,000

atty. cleo d. sabado-andrada, cpa, mba

Gross Sales P1,000,000 P1,000,000

Less: Cost of Sales 800,000

Gross Sales/Gross P1,000,000 P 200,000

Less: OSD (maximum) 400,000

Net Income P 600,000 P 120,000

atty. cleo d. sabado-andrada, cpa, mba

If the GPP avails of OSD in computing its

the taxpayer must signifies in his return his

OTHERWISE, he shall be considered as having

The election of OSD is irrevocable for

SHALL NOT APPLY TO

atty. cleo d. sabado-andrada, cpa, mba

These are expenses related to trade or

applicable to BOTH individual and

atty. cleo d. sabado-andrada, cpa, mba

The expenses must be ORDINARY and NECESSARY

when it is normal or where it is appropriate

The expenses must be incurred in trade or business

The expenses must be reasonable

The expenses must not be against public policy,

If the expense is subject to withholding tax,

1998 BAR Examination

CASH METHOD ACCRUAL BASIS

Cash basis tax payers include

Accrual basis taxpayers

Question II (A) 2010 BAR Examination

KINDS of BUSINESS EXPENSES

- Paid or incurred while away from home

4. Advertising and Promotional Expenses

For business property

6. Cost of material and supplies

deductible only to the amount actually

atty. cleo d. sabado-andrada, cpa, mba

amount which one has contracted to pay for

There must be an indebtedness.