Sie sind auf Seite 1von 36

DEDUCTIONS

FROM GROSS INCOME


NATURE OF DEDUCTIONS

• In general, deductions or allowable deductions ,business expenses


and losses incurred which the law allows to reduce gross business
income to arrive at net income subject to tax.
• The taxpayer may choose not to avail of the deductions
• If the deductions are claimed, the burden of proving the legality
and correctness of the deductions rests upon the taxpayer. The
taxpayer has the obligation to substantiate with receipts and other
evidences every item of deduction when required.
KINDS OF DEDUCTIONS
1. Optional Standard Deduction (OSD)
2. Itemized Deduction (ID)
• Regular allowable itemized deduction
• Special allowable itemized deduction
NOTES
• Individuals engaged in trade or business, or profession can select
itemized deduction or the OSD, if they are being taxed under the
graduated rates.
• Individuals earning compensation income are not allowed any
deduction from their compensation income.
• Domestic corporations, resident foreign corporations, and
partnerships can claim ID or OSD.
In lieu of allowable itemized
deductions, the OSD may be deducted
OPTIONAL from gross income as follows:
STANDARD 1. Individuals other than nonresident
DEDUCTION alien, the OSD is 40% of his gross
(OSD) sales or gross receipts.
2. A corporation, the OSD is 40% of its
gross income.
GROSS INCOME
Individuals
• Gross sale/Gross receipts, net of returns, allowance, and
discounts (accrual basis) + Other taxable income from
operations not subject to FT
Corporation
• Gross sales less sales returns, allowances, & discounts less
COGS (cost of goods sold)
EXAMPLE

Assume the following data of a taxpayer:

Gross sales 1,000,000


Cost of goods sold 800,000

How much is the OSD if the taxpayer is a/an (1) individual, or (2) a
corporation?
ELECTION OF THE OSD

• Made in the 1st Quarterly Return. Failure by taxpayer to indicate


OSD election in the 1st Quarterly Return means that taxpayer is
claiming IDs;
• When made, it is irrevocable for the entire year;
• Failure to file the 1st Quarterly Return is equivalent to availing
IDs for the year.
ITEMIZED DEDUCTIONS (IDS)

When a taxpayer claims IDs, the taxpayer is specifying the


particular expenses to be deducted from gross income.
WHO MAY CLAIM IDS?

• Domestic corporations including partnerships and GOCCs


• Resident foreign corporations
• Individuals engaged in trade, business, profession
• Estates and trusts
ITEMS OF IDS
• Business expenses • Deductible taxes
• Interest expense • Pension trust contributions
• Losses • Research and development expenses
• Bad Debts
• Depreciation
• Depletion of oil and gas wells
• Charitable and other contributions
BUSINESS EXPENSES
Requisites for deductibility:
• Ordinary and necessary for the business;
• Incurred or paid during the taxable year,
• Connected with the trade, profession, or business of the
taxpayer;
• Reasonable expenses of the business;
• Substantiated by official receipts/records;
• The withholding tax required to be withheld has been withheld
and remitted to the BIR
Notes:
a) Bribes and kickbacks (to both local and foreign officials) are not
allowed as deductions.
b) Deductible business expenses of non-resident citizens, resident
aliens, NRAETBs, and RFCs constitute expenses paid or incurred in
carrying out its business in the Philippines.
1) Compensation expenses (of employer) for personal services
actually rendered;
• Includes salaries and other forms of compensation, including bonuses, and
the Grossed-up Monetary Value of fringe benefits subject to FT.
• Includes management and labor expenses, commissions, and pension
payments.
• Incudes compensation for injuries paid by the employer less any insurance
proceeds.
• Includes premiums on life insurance of the employee where the beneficiary
is not the employer, but the employee.
• Includes salaries paid after death of the employee, but does not include
donations for coffin and wake expenses.
2)Travelling Expenses
• Includes transportation expenses, meals, and lodging incurred
solely for carrying on the trade, business or profession.
Additional requisites for deductibility:
• Must be incurred while away from home (“tax home”). Tax home
refers to the place of work, business, or employment
3)Entertainment Amusement, and Recreational Expense (EAR);
• Expenses in entertaining or meeting with guests, or clients (called
representation expenses)
• Includes depreciation or rental expenses relating to entertainment facilities.
• Subject to the following ceilings:
• For taxpayers engaged in the sale of goods and properties: ½ of 1% of net
sales:
• For taxpayers engaged in the sale of services/leasing of properties: 1% of net
revenues.
EXAMPLE
Mr. Scapa Teofilo, a manager of Maharlika Corporation with
total net sales of goods amounting to P10,000,000 in 2018,
incurred a total entertainment and recreation expenses
amounting to P60,000 with adequate receipts. It was incurred
to conduct a special meeting with major customers at
Supreme hotel.

How much is the representation expense allowed as a


deduction of Maharlika Corporation?

P50,000
4) Materials and supplies actually consumed in business
5) Maintenance and repairs which do not add to the value
of the property nor appreciably prolong its life
6) Rental expense (of the lessee) of property used in business;
Notes:
• Advance or prepaid rentals are not allowed to be deducted in year of payment
Instead, advance rentals shall be apportioned over the term of the lease.
• Taxes and other obligations of the lessor which are paid by the lessee, are
allowed as deductions;
• Depreciation of leasehold improvement is available as deduction to the lessee.
7) Advertising and other selling expenses;
8) Operating expenses of transportation equipment used
in the trade, profession, or business
9) Insurance premiums against fire, storm, theft accident
or other similar losses in the trade or business
INTEREST EXPENSE
Requisites:
• Must be connected with the trade or business of the taxpayer;
• There must be a liability to pay interest. The obligation to pay
interest must be stipulated in writing and must be legally due.
• Must be paid or accrued within the taxable year.
• Interest expense must be the obligation of the taxpayer.
• Interest payment must not be between related taxpayers.
Reduction of Allowable Deduction for Interest Expense By:
• 33% of interest income subject to FT beginning January 1,2009

Exceptions: Where Interest Expense Is Deductible in Full


• If taxpayer has no interest income subject to FT;
• Interest on all unpaid business-related taxes (RR 13-2000);
• Interest payments of an occupant of a socialized housing project
incurred for the construction or purchase of the house (R.A. No.
7279).
EXAMPLE

Assume that the taxpayer engaged in business incurring an interest


expense of P400,000. In the same year, the business also earned
P300,000 interest income from time deposit in the bank.

How much is the deductible interest expense?

P301,000
DEDUCTIBLE TAXES
Requisites:
• Paid or incurred within the taxable year,
• Must be connected with the profession, trade, or business of the taxpayer, and
• Is directly imposed on the taxpayer.
Examples of deductible taxes: import duties; business taxes (like percentage
taxes); local business taxes; community tax; occupation tax; privilege and license
taxes; excise taxes; DST; automobile registration fees; real property tax, fringe
benefits tax (FBT)
Examples of non-deductible taxes: Income tax; estate tax; donor’s tax; special
assessments; VAT; final taxes; stock transaction tax; capital gains tax;.
NOTE
The amount of deductible taxes is limited to the basic tax and shall
not include the amount of any surcharge or penalty on delinquent
taxes. However, interest on delinquent taxes, although not
deductible as tax, can be deducted as interest expense at its full
amount.
EXAMPLE

X Corporation paid in 2018 the following taxes which were incurred


in connection with the business: Community tax, basic amount of
P1,000 and surcharge P250 plus interest of P125. Real property tax
of P5,000 plus surcharge of P1,250 and interest of P500. Income
tax, P100,000, plus surcharge of P25,000 and interest of P10,000.

How much is the amount deductible from gross income of X


Corporation?

P16,625
LOSSES
ORDINARY LOSSES
• These losses are usually incurred in relation to trade, profession or business,
property used in business, and profit-seeking transaction incidental to
business.
• Casualty losses due to mishap, accident, fortuitous event, robbery, theft,
embezzlement of property used in the trade, profession or business of the
taxpayer.
Business losses - losses incurred in the trade, profession, or business of
the taxpayer.
• Losses from sale of ordinary assets
• Partner’s share in the losses of a GPP.
EXAMPLE
Swan Enterprises incurred the following losses for the year 2018:
• Building razed by fire, costing P5,000,000; accumulated depreciation
P3,000,000, insurance payment received P1,600,000, salvage value
P250,000.
• Loss of P50,000 due to cash shortage embezzled by the cashier.
• Loss on robbery of computers costing P70,000; accumulated depreciation,
P25,000, insurance recovered P25,000.
How much is the deductible losses?

P220,000
If loss is total, the deductible amount is the book value of the asset
less any amount of insurance proceeds or compensation received.
If loss is partial, the deductible amount is the replacement cost or
book value of the asset’s damaged portion, whichever is lower. If
replacement cost is greater than the book value, the excess shall
be capitalized and depreciated over the remaining useful life of the
property.
EXAMPLE

Lesley Inc. sustained fire loss on its machine in 2018. The


machine, however, is 40% partially damaged. Lesley spent
P90,000 for major repair. Prior to fire, documents reveal
that the machine had an acquisition cost of P300,000 and
accumulated depreciation of P60,000.

How much is the deductible loss of Lesley?

P90,000
Net Operating Loss Carry-Over (“NOLCO”) - excess of allowable
deductions over gross income in a taxable year
• Can be availed of by individual taxpayers engaged in trade,
business, or a profession, estates and trusts, domestic and
resident foreign corporations subject to the normal income tax.
• Net operating loss can be carried over and deducted from gross
income for the next 3 consecutive taxable years.
• NOLCO cannot be deducted against compensation income.
EXAMPLE
John Ibuan, single, reported the following income and expenses.
2007 2008 2009 2010 2011
Salary as a professor 180,000 190,000 200,000 210,000 210,000
Gross business income 200,000 250,000 340,000 400,000 600,000
Business deductions 350,000 200,000 300,000 380,000 400,000

How much is the taxable income of Mr. Ibuan for the taxable years 2007 to
2011?
BAD DEBTS
Requisites:
• There must be a valid and subsisting debt owed the taxpayer;
• The debt must be connected with the trade, business, or profession of the
taxpayer;
• The debt must be ascertained to be worthless or uncollectible;
• The debt must be charged off within the taxable year.
Note: Recovery of bad debts previously allowed as a deduction is governed by the
Tax Benefit Rule. The recovery of a bad debt is included in gross income if its
deduction in a previous year resulted in an income tax benefit to the taxpayer
(i.e., a decrease in tax).
DEPRECIATION/DEPLETION
• Gradual decrease in the useful value of an asset/property from wear or tear,
or obsolescence
• Also includes amortization of intangible assets (patents, copyrights, etc.)
• Limited to the cost or amount invested in the asset/property
• Depletion (for oil and gas wells) refers to the exhaustion of natural
resources
Requisites:
1. Asset must be used in trade, business, or profession of the
taxpayer.
2. Asset has a limited useful life;
3. Allowance for depreciation must be reasonable;
4. Allowance for depreciation must be charged off during the
taxable year.