Allowable Deductions under Sections 34 and 35 of the NIRC

General Rules for Deduction 1. It must be paid or incurred in connection

with the taxpayer’s trade, business or
profession;
2. It must be paid or incurred during the
taxable year;
3. It must be supported by required proof;
4. It must be subjected to withholding tax;
and
5. It must pass all the requisites provided for
by each type of deduction
Who may avail of deductions? 1. Resident citizen;
2. Nonresident citizen;
3. Resident alien;
4. Nonresident alien engaged in trade or
business;
5. General professional partnerships and
partners of general professional
partnerships, as the case may be;
6. Domestic corporations, proprietary
educational institutions and hospitals,
government-owned and controlled
corporations, agencies and
instrumentalities;
7. Resident foreign corporations, as a
general rule.
 Who cannot avail of deductions?
Business Expenses (expenses related to the
conduct of the business of the taxpayer and are
deducted in the year it is incurred)
Types of business expenses:
1. Salaries, wages, compensation for services
rendered, pensions, compensation for
injuries, commissions;
2. Benefits to employees, “de minimis”
benefits, and the grossed-up monetary
value of fringe benefits subject to FBT;
3. Travel expenses, while away from home,
solely in the pursuit of a trade or business;
4. Rentals for the use of business property;
5. Entertainment, amusement and recreation
expenses;
6. Incidental repairs;
7. Cost of materials and supplies;
8. Advertising expense and other selling
expenses;
9. Professional services;
10. Insurance premiums against fire, storm,
theft, accident or other similar losses in
case of a business;
11. Equipment used in trade or business;
12. Organizational or operating expenses;
13. Management expenses;
14. Training expenses; and
15. Other necessary expenses incurred in
1. Taxpayers earning compensation income
arising from personal services rendered
under an employer-employee relationship,
except for deduction of premium
payments and/or hospitalization insurance
under Section 34(M) of the NIRC;
2. Nonresident aliens not engaged in trade
or business;
3. Aliens employed by RHQs or ROHQs of
multinational corporations;
4. Aliens employed by OBUs;
5. Aliens employed by petroleum service
contractors and subcontractors;
6. International carriers;
7. OBUs;
8. Branches of foreign corporations on the
profits remitted to their offices;
9. RHQs;
10. ROHQs; and
11. Nonresident foreign corporations.
General requisites for the deductibility of
business or professional expenses
1. Ordinary and necessary expense –
ordinary means it is normal in relation to
the business of the taxpayer and the
circumstances surrounding the expense;
necessary means that the expense is
appropriate and helpful in the taxpayer’s
business;
2. Paid or incurred during the taxable year;
3. Paid or incurred in carrying on the trade or
business or the exercise of profession by
the taxpayer;
4. Reasonable amount;
5. Supported by proof of expense;
6. If subject to withholding tax, the same
must be remitted and paid; and
7. Expenses must not be contrary to laws,
public policy, public order or morals.
Salaries
1. Must be given pursuant to personal
service actually rendered
 carrying on the business. Travel/Transportation Expense
1. The expense must be incurred while away
Types of professional expenses: from the residence
1. The cost of supplies used by him in the
practice of profession;
2. Expenses paid in the operation and repair of
transportation equipment used in making
professional calls;
3. Dues to professional societies;
4. Subscriptions to professional journals;
5. Rent paid for office rooms;
6. Fuel, light, water, telephone expenses used Rental expenses
in offices; 1. The expense is conditioned on the use
7. Salaries of office assistants; and possession of property; and
8. Amounts currently expended for books, 2. Taxpayer has no other interest in the
furniture and professional instruments and property except as possessor or lessee.
equipment, with a short useful life;
9. Training expenses; and
10. Other necessary expenses incurred in the
practice of the profession.

Entertainment or Recreation Expense

1. Must not have been paid to an official or
employee of the national government, or
any local government unit, or any of the
government-owned and controlled
corporations, or of a foreign government,
or a private individual, corporation,
general professional partnership or any
entity, if it constitutes a bribe, kickback, or
similar payment; and
2. Must not exceed the ceiling of 0.5% of net
sales for sellers of goods or properties or
1% of net revenues for sellers of services.
Research and Development
1. The same is not charged on the capital
account.
 Interest Expense
Taxes
Losses
Types of Losses:
1. Casualty losses – complete or partial
destruction of property resulting from an
identifiable event;
2. Net Operating Loss Carry-Over – excess of
allowable deduction over gross income of
the business in a taxable year;
3. Capital losses and securities becoming
worthless;
4. Special losses
a. Losses from wash sales of stocks or
securities;
b. Wagering losses; and
c. Abandonment losses.
1. Existing indebtedness;
2. Interest expense is paid or incurred in the
taxable year;
3. Indebtedness is incurred by the taxpayer;
4. The loan must be made pursuant to the
taxpayer’s business;
5. Interest is stipulated in writing;
6. Interest is legally due;
7. The interest payment must not be
between related taxpayers;
8. Interest not incurred to finance petroleum
operations;
9. For interest incurred to acquire assets
used in the business, the same is not
treated as capital expenditure;
10. The allowable deduction is reduced to an
amount equal to 33% of the interest
income subject to final tax; and
11. Interest is not expressly disallowed by law
to be deducted from the gross income of
the taxpayer.
1. Tax is imposed by law and payable by the
taxpayer; and
2. Tax is not specifically excluded by law
from being deducted.
Casualty Losses
1. Properties reported as casualty losses
must be properly reported as taxpayer’s
assets immediately preceding the loss;
2. Recovery thru insurance claims governed
by RR12-77; however, the amount
recovered shall not be claimed as
deductible; and
Proper booking in accounting reports of the
loss.
Net Operating Loss Carry-Over
1. Net operating loss of a business;
2. For any taxable year immediately
preceding the current year;
3. The net operating loss has not been
previously offset as a deduction from
gross income;
4. The net operating loss is carried over as a
deduction from gross income;
5. The net operating loss is carried over for
the next 3 consecutive taxable years
immediately following year of loss;
6. Net loss incurred during a taxable year
where taxpayer was exempted from
income tax is not allowed as a deduction;
and
7. Allowed only when there is no substantial
change in the ownership of business.
 Bad Debts
Depreciation Expense (allowable allowance for
the exhaustion, wear and tear and
obsolescence of property used in trade)
Depletion of oil and gas wells (exhaustion of
natural resources owing to production or
severance)
Charitable Contributions
Donations deductible in full:
1. Donations to the government;
2. Donations to certain foreign institutions or
international organizations; and
3. Donations to accredited nonstick, nonprofit
corporations and nongovernment
organizations.
Subject to limits:
1. Contributions for nonpriority activities for the
use of the government of the Philippines or
any subdivision thereto;
2. Donations made to NSNP organizations,
limited deductibility in an amount not in
excess of 10% for an individual donor, and
5% for corporate donors
Deductibility of contributions to pension
trusts
Deductions under Special Laws
1. Existing indebtedness due to a taxpayer
which is valid and legally demandable;
2. Not sustained in a transaction between
related parties;
3. Charged within the taxable year;
4. Determined to be worthless and
uncollectible at the end of the taxable
year; and
5. Uncollectible in spite of diligent efforts
from the taxpayer.
1. Allowance for depreciation must be
sustained by the person who owns or who
has the capital investment in the property;
2. Reasonable allowance for depreciation;
3. For property used in business;
4. Charged in the taxable year;
5. Property has limited useful life;
6. Allowance for depreciation must not
exceed the cost of the property;
7. A statement of the allowance is made and
attached to the return.
1. Allowable cost depletion shall be limited to
the capital invested; and
2. Computed on an adjusted cost basis.
1. Contribution made to entities specified by
law;
2. For contributions other than money, the
amount is based on acquisition cost or the
property; and
3. Not exceeding 10% for individuals or 5%
for corporations of taxpayer’s taxable
income before charitable contributions.
1. Employer has an established pension plan
for the payment of pension to employees;
2. Pension plan is reasonable and sound;
3. Funded by the employer;
4. Amount contributed is not controlled by
employer; and
5. Payment has not yet been allowed as a
deduction previously.
Expanded Breastfeeding Promotion Act
1. Deduction applies to the taxable year
where expenses are incurred;
2. Health and non-health facilities comply
with the law within 6 months after
 approval;
3. Secure a “working mother baby friendly
certificate” from DOH and filed with the
BIR;

Jewelry Industry Development Act

1. Deduction from taxable income of 50% of
expenses for training schemes; and
2. Deduction applies to the taxable year
where expenses are incurred.

Adopt a School Act

1. Deduction from gross income income of
50% of expenses

Free Legal Assistance Act

1. Lawyer or professional partnerships
rendering actual free legal services;
2. Allowable deduction from the gross
income, is the amount that could have
been collected for the actual free legal
services rendered or up to 10% of the
gross income derived from the actual
performance of the legal profession,
whichever is lower

Expanded Senior Citizens Act

1. Discounts given to senior citizens on
certain goods and services shall be
deductible from gross income;
2. Private establishments employing senior
citizens shall be entitled to additional
deductions from gross income equivalent
to 15% of the total amount paid as
salaries and wages to senior citizens.

Magna Carta for Disabled Persons

1. Sales discounts given to persons with
disabilities shall be deductible from gross
income
Optional Standard Deduction (a fixed amount Who may avail of OSD?
is availed of as a deduction) 1. Individuals, taxable estates and trusts,
except individuals earning pure
compensation income; and
2. Corporations, except nonresident foreign
corporations.

Requisites for individuals

1. Individual is a citizen or resident alien;
2. Income is not purely compensation
income;
3. Signify in the return filed for the first
quarter that he will avail of the OSD;
4. Availment of OSD irrevocable for 1 year;
and
5. OSD is maximum at 40% of gross
 sales/receipts for the taxable year.

Requisites for corporations

1. Domestic or resident foreign corporation;
2. Signify in the return filed for the first
quarter that he will avail of the OSD;
3. Availment of OSD irrevocable for 1 year;
and
4. OSD is maximum at 40% of gross income
for the taxable year.

Q: Is there a need to substantially prove by evidence the Deductions Against Gross

Income for such to be an allowable deduction?

A: Yes. To be allowed as deduction, the expense must be: (a) both ordinary and necessary; (b)
incurred in carrying a business or trade; and (c) paid or incurred within the taxable year, then, it
shall be allowed as a deduction from the gross income. It was likewise ruled that not only must
the taxpayer meet the business test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be disallowed.