TAX DEDUCTIONS

Itemized Deductions in General

 Taxes
 Interest
 Losses
 Bad debts
 Pension trust
 Research and development cost
 Charitable contributions
 Depreciation
 Depletion
 Expenses in general (salaries, rent, utilities)

Non-deductible Expenses
1. Capital expenditures
2. Premiums paid on life insurance of officers/employees
3. Losses, interest and bad debts between related taxpayers
a. Members of the family
b. A corporation and controlling stockholder (>50% ownership)

Taxes
 Deductible taxes
o Percentage tax
o Local taxes
 Non-deductible taxes
o Income tax
o VAT
o Transfer taxes
o Penalties for late payment of tax

Interest Expense
 Indebtedness must be in connection with trade or business
 Deductible interest must be net of 33% of interest income on final tax
o Note: Interest on late payment of taxes is deductible in full
 Interest on assets acquired may be treated as:
1. Outright deduction, or
2. Capitalized as cost of the asset

Losses
 Must be related to trade or business or practice of profession
 Not compensated by insurance
 In case of partial loss, the lower between
1. Cost to restore property to normal condition, or
2. Book value of the property
Bad Debts
 Connected with trade, business or profession
 Actually written off (ascertained to be worthless)

Pension
 Current service cost is deductible in full
 Past service cost is amortized over 10 years

Research and Development Cost

 If the purpose is for the development of property, capitalized as cost of the
property
 Other R&D costs:
1. Outright deduction, or
2. Amortized over 60 months

Charitable Contributions/Donations
 Contributions deductible in FULL:
o Donations to the government for priority projects.
o Donations to foreign institutions or international organizations in
compliance with treaties, agreements, special laws.
o Donations to accredited NGOs.
 Contributions deductible subject to limitations:
o Donations to the government for non-priority projects.
o Donations to non-accredited domestic organizations (scientific,
educational, cultural, youth development, social welfare, religious, etc.).
 Note: Limit is 10% of the taxable income before deduction for the
contributions (for individual taxpayers).
 Non-deductible contributions
o Donations to foreign organizations not covered by treaties, agreements,
special laws.
o Donations to street beggars.

Depreciation
 Properties must be used in business/profession
 Methods allowable
o Straight-line
o Declining-balance
o Sum-of-the-years-digits

Amortization
 Intangible properties used in business/profession
 Generally computed using straight line method
Depletion
 Applicable to natural resources
 Normally computed using units of output method
 The value of the land after the extraction becomes the residual value in
computing the depletion charge

Representation and Entertainment

 Limitations
o 0.5% of net sales for sellers of goods
o 1% of net revenue for seller/provider of services

Other Expenses
 Advertising and Promotions
 Commissions
 Communication, Light and Water
 Fringe Benefits
 Fuel and
 Oil Insurance
 Janitorial and Messengerial Services
 Management and Consultancy Fee / Professional Fees (note: a portion of
expenses must be withheld and paid to BIR.)
 Miscellaneous
 Office Supplies
 Rental (note: a portion of expenses must be withheld and paid to BIR.)
 Repairs and Maintenance-Labor/Materials/Supplies
 Royalties
 Salaries and Allowances
 Security Services
 SSS, GSIS, Philhealth, HDMF and Other Contributions
 Training and Seminars
 Transportation and Travel