DEDUCTIONS ON GROSS INCOME Flashcards
General Rule: The taxpayers engaged in trade are allowed to use itemized deduction
- RC
- NRC
- RA
- NRAETB
- GPP
- DC
- GOCC
- RFC
The taxpayers exempted from using deductions
- Purely compensation income earner
- NRANETB
- NRFC
MANDATORY ITEMIZED DEDUCTIONS TO THE FOLLOWING TAXPAYERS
- Those exempt under the Tax Code
- Those with income subject to special/preferential tax rates
- Those subject to regular rate and also with income subject to special/preferential tax rates.
REQUISITES IN CLAIMING EXPENSES
✓ Ordinary
✓ Necessary in trade, business or profession
✓ Actually incurred
✓ Direct connection on the Development, Operation or Management (DOM) of the business or profession
✓ Reasonable
✓ Withholding tax is paid (Repealed by EOPT)
✓ There is proof (official receipt or adequate record) Note: No more official receipt in EOPT
ADDITIONAL DEDUCTION FOR TRAINING EXPENSES
An additional deduction from taxable income of one-half (1/2) of the value of labor training expenses shall be granted to enterprises
Ceiling of EAR
- Seller of goods or properties – lower of actual EAR and .5% of Net Sales (Gross sales less RAD)
- Seller of service – lower of actual EAR and 1% of Net Revenue (Gross revenue less discounts)
- Seller of goods and seller of service – apportionment formula
Net Sales/Net Revenue DIVIDED BY Total Net Sales and Net Revenue x Actual EAR
Compensation Deductibility Requisites
A. personal services must have been actually rendered
B. the compensation for such services must be reasonable, including the grossed-up monetary value of fringe benefit furnished to the employee and the applicable final tax withheld and remitted to the BIR
Deductibility of rental & utilities
the lessee must not hold title to the property
Entertainment, Amusement or Recreation Expenses (EAR) or Representation expense Deductibility Requisites
a. it must be directly related to the DOM or furtherance of trade, profession or business
b. it must not be contrary to law, morals, good customs, public policy or public order
c. must be substantiated with adequate proof
d. not paid directly or indirectly to the official or employee
e. it must be within the limits prescribed by the Tax Code
Deductibility of Interest Expense
- The indebtedness must be that of the taxpayer
- The interest must have been stipulated in writing
- The interest must be legally due
- The interest payment arrangement must not be between related taxpayers
- The interest must not be incurred to finance petroleum operations
- The interest was not treated as “capital expenditure”, if such interest was incurred in acquiring property used in trade, business or exercise of profession.
ADDITIONAL DEDUCTION FOR TRAINING EXPENSES Simplified Computation
Additional deduction is lower of 10% of Direct Labor and 50% of Actual Training
Expenses
Conditions ADDITIONAL DEDUCTION FOR TRAINING EXPENSES
- Incurred for skills development of enterprise-based trainees
- Enrolled in PUBLIC
- Duly covered by an apprenticeship agreement
- enterprise shall secure proper “certification” from the (DepEd), (TESDA), or (CHED).
- Such deduction shall not exceed Ten Percent (10%) of Direct Labor Wage
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to acquire property used in trade, business or profession may be allowed as a capital expenditure (capitalized instead of outright expense)
The taxpayer’s otherwise allowable deduction for interest expense shall be reduced by an amount equivalent to________ of interest income subjected to final tax
(20%)
Deductibility of interest from deficiency taxes
Interest imposed and assessed from deficiency taxes are deductible
Effectivity of tax arbitrage
In the case of corporations, since the income tax rates changed effective July 1, 2020
In the case of individuals engaged in business or practice of profession, such deduction shall take effect upon the effectivity of CREATE (April 11, 2021)
When Tax arbitrage is not applicable
✓ if the RCIT is 20%
✓ if there is no interest income subject to final tax rate of 20%
Deductibility of Taxes
In general, taxes paid or accrued within the taxable year in connection with the taxpayer’s trade or business or exercise of a profession are deductible.
Examples of deductible National Taxes:
Fringe benefit tax (if not claimed in salaries)
Documentary stamp tax
Percentage tax (3%)
Excise tax
Annual Registration Fee (Php 500.00) *repealed
VAT (part of cost or expense if non-VAT registered)
Examples of deductible Local Taxes:
Registration fees from LGUS
License fees
Mayor’s permit fee
Local business tax
Community tax certificate (cedula)
Real property tax
Payment for barangay clearance
LTO Registration
Non-deductible Taxes:
- Income tax and withholding taxes (final tax, withholding tax on compensation, expanded withholding tax, capital gains tax even if paid for by the taxpayer/withholding agent) Note: FBT allowed
- Income tax imposed by a foreign country (if the taxpayer opted to claim them as deduction rather than as tax credit)
- Estate or donor’s tax
- Taxes assessed against local benefits of a kind tending to increase the value of the property assessed (Special assessment)
- Value-added tax (input tax) for VAT-registered taxpayers
- Deficiency taxes, surcharges and/or penalties.
OPTIONAL TREATMENT ON FOREIGN TAX PAYMENTS
Applicable to resident citizens and domestic corporations engaged in trade or business
1. tax credit or
2. deduction from income
Deductibility of Ordinary Loss/Transaction Loss/Casualty loss
Requisites:
1. loss must be actually sustained during the taxable year
i. incurred in trade, profession or business
ii. of property connected with the trade, business or profession
iii. loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement
2. not compensated for by insurance or other forms of indemnity
3. the loss must be reported to the BIR within 45 days from the date of loss or discovery
4. not claimed as a deduction in the estate tax return for individual income taxpayer only
Spoilage
pertains to the condition of goods which become waste due to damage or impairment in
quality caused by natural or other causes
Deterioration
pertains to the condition wherein the goods have been determined to be waste due to
damage or impairment in quality caused by corrosion, weakening or disintegration, whether by natural or other causes
Obsolescence
pertains to the condition wherein the goods are rendered useless and outdated or have
lost their value due to advances in technology, product innovation or development, or change in consumer demand
Expiration
pertains to the condition of consumable goods that have become unfit for consumption
due to the termination or lapse of its predetermined useful life
Methods to dispose or destruct goods, properties or assets
- Physical witness by a Revenue Officer
- Virtual means
- Third party
Period to File Application for Destruction of Assets
At least seven (7) days from date of disposition
Issued for destruction of assets
BIR will issue Certificate of Deductibility of Goods/Assets Disposed/Destructed
Net Operating Loss Carry Over (NOLCO)
(NOL) of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction 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.
The net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that
i. Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or
ii. Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons.
Net operating loss (NOL)
excess of allowable deduction (regular allowable itemized deduction) over gross income in a taxable year
NOLCO is NOT applicable to:
a. Taxpayers subject to gross income tax
b. Taxpayers enjoying income tax holidays (ITH)
NOLCO is applicable to
individuals, estates and trusts and non-individual taxpayers (DC and RFC) including those subject to preferential tax rates (PEI and NPH)
NOLCO if taxpayer opt to use OSD
NOLCO is non-deductible
NOLCO UNDER Bayanihan to Recover as One Act (R.A. 11494)
NOLCO incurred by businesses or enterprises for taxable years 2020 and 2021 shall be allowed to carry over the same as deduction from its gross income for the next five (5) consecutive taxable years immediately following the year of such loss.
Capital Loss
Capital losses are deductible only to the extent of capital gains. Net capital loss carry-over can be deducted in the succeeding year for individual taxpayers.
Wagering losses
Losses from wagering transactions shall be allowed only to the extent of the gains from transactions.
Deductibility of Partial or Full abandonment of petroleum operation
all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction. In all cases notices of abandonment
shall be filed with the Commissioner
Deductibility of Subsequent abandonment of producing wells
the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such
well, equipment or facility is abandoned by the contractor
if the abandoned well is re-entered and production is resumed, or if such equipment or facility is restored
into service
costs shall be included as part of gross income in the year of resumption or restoration and
shall be amortized or depreciated, as the case may be (concept of tax benefit)
Requisites for Deductibility Bad Debts
- There must be an existing valid and legally demandable indebtedness
- Debt must be connected with the taxpayer’s trade, business or practice of profession
- Debt must not be between related parties
- Debt must be charged off the books of accounts as of the end of taxable year
- Debt must be actually ascertained to be worthless and uncollectible as of the end of taxable year
Depreciation
Depreciation refers to the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business.
Requisites for Deductibility of Depreciation
- the property must be used in trade, profession or business
- the property must have a limited useful life
- the provision must be charged off during the taxable year
- the provision must be reasonable
Non-deductible depreciation
Value of motor vehicle exceeds Php 2,400,000.00
Exception: If the taxpayer is required by the nature of business to buy vehicles (e.g. transport network
companies)
No depreciation is allowed for yacht, helicopter, airplane or aircraft with value over Php 2.4 Million unless it is the main business of the company
Methods of Depreciation of Petroleum Operations
The taxpayer may choose either declining-balance method or straight-line method at the option of the contractor.
Depreciation of Mining Operations
For all properties used in mining operations, other than petroleum operation:
1. 10 year useful life or less – At normal rate of depreciation
2. More than 10 years useful life – depreciated over any number of years between 5 and the expected life.
Provided the taxpayer notifies the CIR at the beginning of the deprecation period of the rate to
be used.
Depletion of Oil and Gas Wells and Mines
When the allowance for depletion shall equal the capital invested no further allowance shall be granted (i.e. up to the
capital investment only).
Exploration Expenditures
expenditures paid or incurred in ascertaining the existence, location and extent, or quality of any deposit or ore or other minerals before the beginning of the development stage of the mine or deposit
Development Expenditures
expenditures paid or incurred during the development stage of the mine. The development stage begins when ore or other minerals are shown to exist in commercial quality and quantity
and end upon commencement of actual commercial extraction
Requisites for Deductibility of Charitable and Other Contributions
- the contribution or gift must be actually paid/given
- it must be given to an organization specified by law
- net income of the specified institution must not inure to the benefit of any private stockholder or individual
- the person making the contribution must be engaged in trade, business or profession
Fully deductible contributions
A. Donation to the government, any of its agencies or political subdivisions including fully owned government and controlled corporations to be used exclusively in undertaking priority activities as
determined by National Economic Development Authority (NEDA)
B. Donation to foreign institution or international organization in compliance with agreement or treaties or due to special laws
C. Donations to accredited domestic non-government organizations
If donation to the government is NOT a priority activity
subject to limit
LIMITATION OF DEDUCTION:
Taxable income before deduction of contributions
1. 10% for Individual
2. 5% for Corporations
ALLOWABLE Deductible Contribution – Lower of
1. actual contribution or
2. limit
Requisites for deductibility of fully deductible contributions
- the administrative expense must not exceed 30% of the total expenses
- Upon dissolution, assets must be distributed to another non-profit domestic corporation of to the Government
Notes:
1. If not complied with, the donation is subject to limit
2. Accreditor for NGO’s is Philippine Council for NGO Certification, Inc (PCNC)
Contributions subject to limit
- Donations to the Government of the Philippines, or agencies or political subdivisions exclusively for public purposes (non-priority activities)
- Donation to non-government organization or to domestic corporations organized exclusively for the following purposes (not accredited)
- Donation to TESDA, state universities and colleges (SUCs), DepEd and CHEd-accredited schools of capital equipment, raw materials, spare parts and accessories used directly and exclusively on its registered
project
Valuation of donations
Net Book Value of the donation
- VAT – the transaction is NOT treated as a deemed sale transaction subject to 12%
Valuation of The amount of any charitable contribution of property other than money
based on the acquisition
cost of said property
Deductibility of Research and Development
allowed as deduction during
the taxable year when paid or incurred
OPTIONAL Amortization of Certain Research and Development Expenditures
At the election of the taxpayer, the following research and development expenditures may be treated as deferred
expenses:
a. Paid or incurred by the taxpayer in connection with his trade, business or profession
b. Not treated as expenses
c. Chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion
allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures).
Limitations on Deduction of R&D
This shall not apply to:
a. Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion
b. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral including oil or gas
Deductibility of Pension Trust Contributions
An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions
to his employees shall be allowed as a deduction a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only
if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts
over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is
made.
(in addition to the contributions to such trust during the
taxable year to cover the pension liability accruing during the year, allowed as a deduction)
Current Service Cost
actually computed value of services rendered by a plan employee during the year
Past Service Cost
value of services rendered by employees in the past that partially satisfy vesting
conditions
OTHER DEDUCTIONS FROM GROSS INCOME
The following are classified as REGULAR or ORDINARY itemized deductions:
1. 20% Senior Citizens Discount
2. 20% PWD
3. 20% Discount to National Athletes, Coaches and Trainers
4. 10% Discount Solo Parents Act
5. 20% Student Fare Discount
NON-DEDUCTIBLE ITEMS FROM GROSS INCOME
- Bribes, kickbacks or other similar payments (facilitation fees)
- Personal, living, or family expenses
- Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate
- Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made
- Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy
- Losses from sales or exchanges of property directly or indirectly between related parties.
Related parties:
- Members of a family
- Between individual and corporation with more that 50% ownership owned by the individual in the corporation (Except in cases of distribution in liquidation)
- Between two corporations more than 50% is owned by or for the same individual (Except in cases of distribution in liquidation)
- Grantor and fiduciary of any trust
- Fiduciaries of trusts with the same grantor
- Fiduciary of a trust and beneficiary of such trust
OPTIONAL STANDARD DEDUCTION (OSD) of Individuals
40% of Gross Sales (or Net Sales) excluding other gross income
OPTIONAL STANDARD DEDUCTION (OSD) of Non-Individuals
40% of Gross Income including other gross income
OSD not applicable to
- Special Preferential Rate Taxpayers (itemized deduction only)
- Exempt Taxpayers (itemized deduction only)
- Employees/Compensation Income Earners (no deduction)
- Non-resident alien engaged in trade (itemized deduction only)
- Taxpayers who chose 8% optional tax rate (no deduction)
If distributive share from GPP
is already net of cost and expenses
Taxpayer is not allowed to avail of the 8% income tax rate option
Magna Carta for Senior
Citizens (Employment of
Senior Citizens)
15% of the total amount paid as
salaries and wages to SC
- Employment is at least 6 months
- Annual taxable income must not exceed the poverty level
Magna Carta for PWD
(Employment of PWD)
25% of the total amount paid as
salaries
- Certificate of employment of
PWD - DOLE certification of disability, skills and qualifications
Magna Carta for PWD
(Employment of PWD)
50% of direct cost improvements or modifications
Reasonable Accommodation only (does not apply to improvements under BP 344 or the Accessibility Law for PWD)
TESDA Law (Employment of
Learners and Apprentice)
50% of the value of training
expenses for learners
PEZA Law (Training
Expenses)
50% of the value of training
expenses for learners
Jewelry Act (Training Expenses)
50% of the value of training
expenses
Adopt-A-School
50% of the value of contribution
or donation or expenses incurred for adoption
Philippine Green Jobs Act
50% of the skills training
Free Legal Assistance Act
Lower of actual free legal services or 10% of gross income derived from the actual performance of the legal profession
