TAXATION I REVIEWER

CHAPTER 7: ALLOWABLE DEDUCTIONS

SEC. 34: Deductions from Gross Income (vvi)

Allowed deductions from Gross Income:

A. EXPENSES

I. ORDINARY AND NECESSARY EXPENSES includes

1. Accrued expenses-expenses already incurred but not yet paid at the end
of the tax period.

2. Allowance for salaries, wages and other forms of compensation for

personal services actually rendered, including grossed-up monetary value
of fringe benefit.

3. Travel expenses in pursuit of trade, business or profession.

4. Allowance for Rentals

5. Allowance for entertainment, amusement and recreation expenses,

provided that it should not be contrary to law, morals, public policy or
public order .

II. EXPENSES ALLOWED TO PRIVATE EDUCATIONAL INSTITUTIONS

1. Proprietary Educational Inst. May at its option elect either : a.) to deduct
expenditures called capital outlays of depreciable assets (i.e. construction
costs of a school bldg. & acquisition cost of school equipment) incurred
during the taxable year for the expansion of school facilities or b.) to
deduct allowance for depreciation under subsection f.

B. INTEREST

I. GENERAL – amount of interest paid or incurred within a taxable year on

indebtedness in connection with the taxpayer’s profession, trade or
business shall be allowed as deduction from gross income

II. EXCEPTIONS – NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF

INTEREST UNDER THE SUCCEEDING PAR.:

a.) If within the taxable year an individual taxpayer reporting income

on the cash basis incurs an indebtedness on which an interest is
paid in advance through discount or otherwise, provided that such
interest shall be allowed as a deduction in the year the
indebtedness is paid.

b.) MEMORIZE. If both the taxpayer and the person to whom the
payment has been made or is to be made are persons specified
under sec.36(B)-i. members of the same family; ii. Individual and
corp. more than 50% of the outstanding capital stock of latter is
owned by the former.
 III. OPTIONAL TREATMENT OF INTEREST EXPENSE- at the option of the
taxpayer, interest incurred to acquire property used in trade, business
or exercise of a profession may be allowed as a deduction or treated as
capital expenditure.

C. TAXES

I. IN GENERAL - Taxes paid or incurred within the taxable year in

connection with the taxpayer’s profession, trade or business, shall be
allowed as deduction except:

a.) Income tax under this title

b.) Income taxes imposed by authority of any foreign country but this
deduction shall be allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent the benefits of
par. 3 of this subsection

c.) Estate and donor’s taxes

d.) Taxes assessed against local benefits of a kind tending to increase

the value of the property assessed.

Provided, that taxes allowed under this subsection, when refunded

or credited shall be included as part of gross income in the year of
receipt to the extent of the income tax benefit of said deduction.

II. CREDIT AGAINST TAX FOR TAXES OF FOREIGN COUNTRIES

If the taxpayer signifies in his return his desire to have the benefits of
this paragraph, the tax imposed by this title shall be credited with:

a.) Citizen and domestic corp.- in the case of a citizen and a domestic
corp., the amount of income taxes paid or incurred during the
taxable year to any foreign country.

b.) Partnership and estates- in the case of any such individual who is a
member of a general professional partnership or a beneficiary of an
estate or trust, his proportionate share of such taxes of the general
professional partnership or the estate or trust paid or incurred
during the taxable year to a foreign country, if his distributive share
of the income of such partnership or trust is reported for taxation
under this title.

** An alien individual and a foreign corp. shall not be allowed the

credits against the tax for the taxes of foreign countries..[ notes ni sir:
because their income in foreign country is not taxable in the
Philippines. All taxpayers who are taxable on income from Phil.
Sources only are not entitled to deduct income tax paid in foreign
country either as allowable deduction or tax credit.]

** proof of credits- credits hereof shall be allowed only if the taxpayer

establishes the satisfaction of the commissioner the ff:
 a.) Total amount of the income derived from sources without the
Phils.

b.) Amount of income derived from each country, the tax paid or
incurred to which is claimed as a credit.

c.) All other information necessary

D. LOSSES

I. IN GENERAL – Losses (ordinary) actually sustained during the taxable

year and not compensated for by insurance or other forms of
indemnity ( such as reimbursement by the wrongdoersh) all be allowed
as deduction:

a.) If incurred in trade, profession or business.

b.) Of property connected with the trade, business or profession, if the

loss arises form fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement.

** Sec. of Finance, upon recommendation of Commissioner, is

authorized to promulgate rules and regulations prescribing the time
and manner by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft or
embezzlement, provided however, that the time limit to be so
prescribed in the rules and regulations shall not be less than
30days nor more than 90 days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the loss.

c.) No loss shall be allowed as a deduction under this sec. if at the time
of the filing of the return, such loss has been claimed as a
deduction for estate tax purposes in the estate tax return.

II. NET OPERATING LOSS CARRY-OVER

- The net operating loss 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.

- i.e. If the corp. sustained 2M operating loss in 2011 and the

taxable income in 2012 is ₱ 5M, the loss of ₱ 2M in 2011 is
deductible from the taxable income in 2012 thereby resulting to
₱ 3M taxable income in 2012. In 2013 and 2014, no operating
loss can be deducted because it was already fully deducted in
2012.

III. CAPITAL LOSSES

 a.) Securities Becoming Worthless- If securities become worthless ( the
issuing corp. is either insolvent or bankrupt) during the taxable year
and are capital assets (holder/owner is NOT a dealer-in-securities),
the loss resulting therefrom shall, be considered as a loss from the
sale or exchange (although actually there is no sale/exchange)

IV. LOSSES FROM WASH SALES OF STOCK OR SECURITIES- Losses from

“wash sales” of stock or other securities (such as bond) are not
deductible.

V. WAGERING LOSSES- Losses from wagering transactions shall be

allowed only to the extent of the gains from such transactions.

i.e. (1.) wagering gains amount to ₱1M. wagering losses amt to ₱ 800k.
The net wagering gain of 200k is added to the taxable income from the
business of the taxpayer.

(2) wagering gains amount to ₱ 500k while wagering losses

amount to ₱ 800k. The net wagering losses of ₱300k is not an
allowable deduction and this cannot be carried over during the
succeeding taxable year.

** notes ni sir: these rules are however, subject to Sec. 24B on other
winnings which are subject to 20% final tax. In other words, if the
wagering gains had been subjected to final tax of 20%, the net capital
gain is no longer added to the taxable income from business nor will it
be included in the ITR of the taxpayer.

E. BAD DEBTS

I. IN GENERAL – Debts due to the taxpayer actually ascertained to be

worthless ( such as when the debtor is already dead leaving no
properties at all or the debtor is already insolvent/bankrupt or if the
debtor has absconded) and charged off (or written off or removed
from the accounting records )within the taxable year EXCEPT those not
connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Sec. 36B.
Provided, that recovery of bad debts previously allowed as deduction
in the preceding years shall be included as part of the gross income in
the year of recovery to the extent of the income tax benefit of said
deduction.

II. SECURITIES BECOMING WORTHLESS – If securities (such as bonds) are

ascertained to be worthless and charged off within the taxable year
and are capital assets, the loss resulting therefrom shall, in case of a
taxpayer, be considered as a loss (deductible as capital loss not as
bad debts) from the sale or exchange, on the last day as such taxable
year, of capital assets.
 Problem:

1. The corp. taxpayer wrote off a receivable amounting to ₱ 100,000

in 2011. In 2012, the corp. recovered the ₱ 100k bad debts
previously allowed as deduction in 2011. The income tax benefit
of this deduction is ( ₱100,000 x 30% ) ₱ 30,000. The corp. shall
report in 2012 ₱ 30,000 as PGI or part of gross income.

2. Same facts in #1 except that the amount recovered in 2012 is

₱20,000 instead of ₱100k. How much will the corp. report as PGI
in 2012?

Ans: Corp. will report as PGI in 2012, ₱ 20,000, the actual amount
recovered. Therefore, the amount of recovery to be included as
PGI is the income tax benefit or the amount recovered whichever is
lower.

F. DEPRECIATION

-this term includes amortization of intangible assets, patent, franchise and

copyright.

I. GENERAL RULE – There shall be allowed as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear ( including
reasonable allowance for obsolescence) of property used in the trade
or business

II. USE OF CERTAIN METHODS AND RATES-

a.) Straight –line method- i.e . the taxpayer purchased on Jan.2, 2012
a machinery at a cost of ₱10M. The estimated useful life of the
machinery is 10 yrs. The annual depreciation is cost ÷ useful life/ ₱
10,000,000 ÷ 10yrs = ₱ 1,000,000. The taxpayer can deduct from
his gross income, ₱ 1,000,000 from 2012 to 2021.

- i.e. the taxpayer purchased on Jan. 2, 2012 an equipment

costing ₱ 5,000,000. The estimated useful life of the equipment
is 5 yrs with an estimated scrap value or residual value of ₱
1,000,000.

The annual depreciation of the equipment is Cost- Scrap value

÷ Useful life or

₱5,000,000 -₱1,000,000 ÷ 5 yrs or ₱ 800,000.

b.) Declining-balance method

c.) The sum-of-years digit method

 d.) Any other method such a working hrs/ production method

III. Depreciation is applicable to fixed assets, such as building,

machineries and equipment, furnitures and fixtures. Amortization is
applicable to intangible assets such as patents, franchise and
copyright.

Depletion is applicable to wasting assets such as oil, gas, wells and

mines and other mineral resources such gold and coppers.

G. DEPLETION of Oil and Gas Wells and Mines

IN GENERAL – in case of oil and gas wells or mines, a reasonable allowance

for depletion or amortization computed in accordance with the cost-depletion
method or production method.

H. CHARITABLE AND OTHER CONTRIBUTIONS

I.IN GENERAL – Contributions or gifts or donations actually paid or made

within the taxable year:

1. To or for the use of government of the Philippines or any of its

agencies or any political subdivision thereof exclusively for public
purposes.

2. Or to accredited domestic corps. Or assoc’ns organized and

operated exclusively for religious, charitable, scientific, youth and
sports dev’t, cultural or educ’l purposes or for the rehabilitation of
veterans,

3. Or to social welfare institutions,

4. or to nongovernment organizations

no part of the net income of which inures to the benefit of any

private stockholder or individual in an amount not in excess of 10%
in the case of an individual and 5% in the case of a corp., of the
taxpayer’s taxable income derived from trade as computed without
the benefit of this and the following subpar.

II. Contributions Deductible in Full- Notwithstanding the provisions of the

preceding subparagraph, donations to the ff. institutions or entities shall be
deductible in full in :

1. Donations to the government

2. Donations to Certain Foreign institutions or International Orgs.
3. Donations to Accredited Nongovernment Organizations
 III.Valuation – the amount of any charitable contribution of property other
than money shall be based on the acquisition cost of said property.-(or book
value or carrying value if the property donated is depreciable property)

Example: If the property donated is an equipment with a cost of ₱ 5M but

the accumulated depreciation at the time of donation is ₱ 3M, the book value/
carrying value is ₱ 2M which is the all ALLOWABLE DEDUCTION.

I. RESEARCH AND DEVELOPMENT

I.In General – a taxpayer may treat R&D expenditures which are paid or
incurred by him during the taxable year in connection with his trade, business
or profession as ordinary and necessary expenses which are not chargeable
to capital account. The expenditures so treated shall be allowed as
deduction during the taxable year when paid or incurred.

The taxpayer, may at his option treat expenditures as:

i.) Outright expense to be included in the ordinary and necessary

expense such as Subsec. A. or

ii.) As a Deferred Expense to be amortized over a period of not less than 5

yrs.

PROBLEM:

Corp. A spent ₱ 10M for research and development in 2012. Corp. A may
treat the ₱ 10M as ordinary and necessary expense in 2012 or amortize it
for a period of 5 yrs. From 2012 to 2016 at ₱ 2M per annum as research and
development under Subsection I.

J. PENSION TRUSTS

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
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 10 consecutive years

beginning with the year in which the transfer or payment is made.

PROBLEM:

On Jan. 2, 2006, Corp. A established a pension trust or pension fund and

deposited with a trustee ₱ 20M as initial pension fund. The pension plan
required the corp. to deposit ₱ 1M per annum beginning Jan. 2, 2006.
 The annual contribution of ₱1M is an allowable deduction as ordinary and
necessary under Subsec A. while the (₱ 20M ÷ 10 yrs.) ₱ 2M is an allowable
deduction as pension trust from 2006 to 2015.

K. ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY OF CERTAIN PAYMENTS

L. OPTIONAL STANDARD DEDUCTION

In lieu rof the deductions allowed under the preceding subsections, an

individual subject to tax under Sec. 24(RC,NRC), other than a nonresident
alien, may elect a standard deduction in an amount not exceeding 10% of
his gross income (receipts/sales). Unless the taxpayer signifies in his return
his intention to elect the optional standard deduction, he shall be considered
as having availed himself of the deductions allowed in the preceding
subsections. Such election when made in the return shall be irrevocable for
the taxable year for which the return is made: Provided, that an individual
who is entitled to and claimed for the optional standard deduction shall not
be required to submit with his tax return such financial statements otherwise
required under this Code.

PROBLEM:

The ff. is a partial income statement of a taxpayer for 2012:

Gross Sales ₱10,150,000.00

Less: Sales Discounts, Returns and

Allowances 150,000.00

_______________

Net Sales ₱10,000,000.00

Less: Cost of Sales 7,000,000.00

_______________

Gross Profit or Gross Income ₱ 3,000,000.00

 1. Compute the income tax if the taxpayer is a domestic corp.

Solution:

Gross Income ₱ 3,000,000.00

Less: Optional Std. Deduction
( 40% of ₱3,000,000) 1,200,000.00
_____________

Taxable Income ₱ 1,800,000.00

Rate 30%
______________
Income Tax ₱ 540,000.00

2. Compute income tax if payer is a resident citizen, married and with 4

qualified dependent children.

Solution:

Gross Sales ₱ 10,150,000.00

Less: Optional Std. Deduction

( 40% of ₱ 10,150,000.00 ) 4,060,000.00
______________
Net Income 6,090,000.00
Less: Personal and Additional Exemptions 150,000.00
______________
Taxable Income ₱ 5,940,000.00

First 500,000 ₱ 125,000.00

Excess ( ₱ 5,940,000-500,000 x 32%) 1,740,800.00
_______________
Income Tax ₱ 1,865,800.00

M. ** PREMIUM PAYMENTS ON HEALTH AND /OR HOSPITALIZATION INSURANCE

OF AN INDIVIDUAL TAXPAYER

The amount of premiums not to exceed ₱ 2,400 per family or ₱200 a month
paid during the taxable year for health and/or hospitalization insurance taken
by the taxpayer for himself including his family, shall be allowed as deduction
from his gross income: Provided, that said family has a gross income of not
more than ₱250,000 for the taxable year: Provided finally, that in the case of
married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.

** EXCEPTION: Taxpayers earning compensation income arising from personal

services rendered under an employee-employer relationship where no deductions
shall be allowed OTHER THAN SUBSECTION M.

Notes: NRA not engaged and NRFC are taxable at gross income, therefore not
entitled to allowable deductions nor exemptions

- Income of employees are not subject to final tax.

ANNOTATION:

1. Only business-connected expenses are deductible from income derived from

trade or business or the practice of a profession. The only exceptions are
charitable and other contributions which are allowed to be deducted b
corporations (estate, trusts, NRA-not engaged and NRFC are not allowed to
deduct charitable and other contribution.)

2. (vvi) Sec. 34 covers all deductions in arriving at taxable business income of

corps., partnerships and individuals. There is no more distinction (subj.
to exception: 1. Optional standard reduction; 2. Charitable and other
contributions – 10% for individuals and 5% for corps.;3. Premium payments –
corps. Not allowed; 4. Personal and additional exemptions-corps. Not
allowed )between corps. and individuals with respect to deductions from
business. Gross compensation income of an individual is taxable
without deductions except premium payments ( Subsec. M) and
personal and additional exemptions. (Sec. 35)

3. In lieu of the deductions allowed under Subsections (A) (Expenses) to (J)

(Pension Trusts), an individual taxpayer, other than a non-resident alien
(whether engaged in business or not) may elect an optional standard
deduction (OSD) in an amount NOT EXCEEDING 40% of his Gross Income.
(Subsection L) In addition to the OSD, he is also allowed to deduct premium
payments on health and/or hospitalization insurance and personal and
additional exemptions subject to certain conditions, under Subsection (M).

4. Deductions from compensation income - The deduction of items specified in

Sec. 34 are not allowed with respect to compensation income arising from
personal services rendered under an employee-employer relationship.

** Only premium payments and personal and additional exemptions

are deductible from compensation income.

5. To Be Deductible, business expense must :

a. Constitute ordinary and necessary expenses;

b. Be paid or incurred during the taxable year in carrying on or directly

attributable to operation and/or conduct of trade, business or exercise of a
profession;

c. To be reasonable in amount;

d. Be sustained by adequate proof; and

e. Not be against law, morals, public policy,or public order.

6. While it is difficult to establish any fixed standard for determining what
expenses are ordinary and necessary, it has been said that to be deductible,
expenses must be incurred by a taxpayer in doing the ordinary and
necessary things his business requires to be done to make it function as such
and must be necessary in the course of its conduct.

7. Capital Expenditures are NOT ORDINARY AND NECESSARY EXPENSES.

Examples of capital expenditures are extraordinary repairs of machineries
and equipment, the cost of which is added to the remaining book value of the
machineries and equipment and thereafter, depreciated during the remaining
or extended life of said machineries and equipment. In other words, these
are eventually deducted as depreciation.

8. When expense ORDINARY –What is ordinary within the meaning of our

income tax law is a variable affected by time and place and circumstance. It
has a connotation of normal, usual or customary.

9. Representation expense – fall under the category of business expenses which

are allowable deductions from gross income, If they meet the conditions
prescribed by law, particularly subsection (A, 1,a).

10.For Interest To Be Deductible:

a. The taxpayer must have indebtedness;

b. the interest must have been paid or incurred during the taxable year in
connection with the trade, business or exercise of profession.

c. The interest must have been stipulated in writing; otherwise , it will not be
legally due.

11.As used in Subsection C , taxes means taxes proper and therefore, no

deductions are allowed for amounts representing:

a. Interest – not deductible as tax but is deductible as interest

b. Surcharges – not deductible at all

c. Penalties or fines incident to delinquency – not deductible at all

12. Business taxes such as value-added tax (VAT), other percentage taxes,
excise taxes, custom duties, etc. are deductible. The electric energy
consumption tax is now allowed as a deduction.

Documentary stamp tax, local taxes, real property tax and community taxes
are also deductible.
13.Tax Credit – it refers to the taxpayer’s right to deduct from the income tax
due the amount of tax the taxpayer has paid to a foreign country, subject to
limitations.

14.Those entitled to tax credit for foreign taxes paid are:

a. Resident citizens;

b. Domestic corporations, which include business partnerships; and

c. Members of professional partnerships; (who are RC)and

d. Beneficiaries of estates and trusts (who are RC)

Notes ni sir: because they are taxable on income from within and without
the Phils., hence, the tax paid in a foreign country must be deducted from tax
due in the Phils., to ease the burden of double taxation.

15.Those not entitled are:

a. Non-resident citizens;

b. Resident and Non-resident aliens;

c. Resident and Non-resident foreign corporations.

Notes ni Sir: because they are taxable only on income in the Phils., hence,
there can be no double taxation.

16.For Loss to Be Deductible, Requisites:

a. Be that of a taxpayer;

b. Be actually sustained and charged off /written off within the taxable year;

c. Have been incurred in trade, business or profession;

d. Be evidenced by a closed and completed transaction, such as a final

decision of the court denying the claim of the insured/taxpayer.

e. Not have been compensated for by insurance or other forms of indemnity,

such as from the wrongdoer.

Losses incurred in any transaction entered into for profit if not connected
with trade or business are no longer deductible, from the gross income
from trade, business/ profession but they are deductible to the extent of
the capital gains.

17.Net Operating Loss Carry-over (NOLCO) – It exists when the allowable

deductions exceed the gross income of the business in a taxable year. It is
 now allowed to be carried over and deducted from gross income for the next
3 consecutive taxable years immediately following the year of such loss.

18.Securities Becoming Worthless – Under Subsection (D, 4,b), the loss

sustained by the holder of the securities, which are capital assets to him
( not as dealer in securities), is to be treated as a capital loss as if incurred
from a sale or exchange transaction. A capital gain or a capital loss normally
requires the concurrence of two conditions for it to result:

a. There is a sale or exchange.

b. The thing sold or exchanged is a capital asset. When securities become

worthless, there is strictly no sale or exchange but the law deems the loss
anyway to be a “ loss from sale or exchange of capital assets.”

Capital losses are allowed to be deducted only to the extent of capital gains.
i.e gains derived from sale or exchange of capital assets, and not from any
other income of the taxpayer.

Mere shrinkage (decline) in value of the securities is not deductible.

19.Partial disallowance of losses or bad debts not allowed. Neither under

Subsection D, bad debts can there be a partial writing off of a loss or bad
debt. For such losses or bad debts must be ascertained to be so and written
off during the taxable year; therefore losses or bad debts are deductible in
full or not at all, in the absence of any express provision in the Tax Code
authorizing partial deductions.

20.Requisites for Deductibility of Bad debts:

a. It must be an existing indebtedness due to the taxpayer which must be

valid and legally demandable;

b. It must be actually ascertained to be worthless or uncollectible as of the

end of the taxable year.

c. It must be actually charged off from the books of accounts of the taxpayer
as of the end of the taxable year.

d. It must have arisen in connection with the trade, business or profession of

the taxpayer.

e. It must be sustained in the transaction entered into between related

parties.
21. Tax Benefit Rule – The recovery of bad debts previously allowed as
deduction in the preceding year or years shall be included as part of the
taxpayer’s gross income in the year of such recovery to the extent of the
income tax benefit of said deduction.

22.Mere recovery or return of capital – Conversely , if the said taxpayer did not
benefit from the deduction of the said bad debt written off because it did not
result to any reduction of his income tax in the year of said deduction ( i.e.
where the result of his business operation was a net loss even without
deduction of the bad debts written off) then his subsequent recovery thereof
shall be treated as a mere recovery or return of capital.

23.Depreciation – is the reduction in service value of property used in profession,

business or trade resulting from exhaustion, wear and tear and obsolescence.
The term is also applied to amortizations of the value of intangible assets the
use of which in trade of business is definitely limited in duration.

24.Requisites for allowance for depreciation to be deductible:

a. Reasonable

b. For the exhaustion, wear and tear of property used in the trade or
business and

c. Charged off during the taxable year.

25.Method of Depreciation – Straight line or fixed percentage Method ( given in

the BAR)

Cost (or other basis) such as FMV-if donated

____________________________________ = Depreciation per year

Estimated useful life in years

26.Depletion – is the exhaustion of natural resources like mines and oil and gas
wells as a result of production or severance from such mines or wells.

27.(vvi) To be deductible, charitable contributions must be:

a. Actually paid or property other than cash made to any of those specified
in the Tax Code.
 b. Made within the taxable year;

c. not more than 10% of the individual taxpayer’s and 5% of the corp.
taxpayer’s taxable income to be computed without including the
contribution and

d. supported by adequate proof. (such as deed of donation)

28.The amount of any charitable contribution of property other than money shall
be based on the acquisition cost of the property, not its current market
value.

29.If the property donated is a depreciable asset and has already been
depreciated, the charitable contribution is the carrying value or book value
( cost – accumulated depreciation)

30.R & D- a taxpayer may treat research and development expenditures as

ordinary and necessary expenses deductible from gross income under
subsection A. At the election of the taxpayer, the expenditures may be
treated as deferred expenses which shall be amortized for a period not less
than 5 years and allowed as a deduction in computing taxable income.

31. (v.i) PENSION TRUSTS

Payments to employees’ pension trusts which are deductible are:

a. Amounts contributed by the employer during the taxable year to cover the
pension liability accruing during the year (allowable deduction as ordinary
and necessary expense)

b. 1/10 ( the allowable deduction as pension trust) of the reasonable amount

paid by the employer to cover pension liability applicable to the year prior
to the taxable year, or so paid to place the trust in a sound financial basis.

32. Requisites for Deductibility of Pension Trusts

a. The employer must have established a pension or retirement plan

b. The pension plan must be reasonable and actuarially sound

c. It must be funded by the employer

d. The amount contributed must no longer be subject to his control or

disposition;

e. The amount has not been allowed before as deduction and

 f. The amount is apportioned in equal parts over a period of 10 consecutive
yrs. Beginning within the year in which the transfer to the trustee or
payment is made.

33.Withholding of creditable income taxes – such as income tax on the salaries

of employees. The purpose is to insure the collection of the income tax on
these payments which constitute income to the recipients thereof and
therefore, includible in their gross income. Thus when one engaged in trade
or business makes payments that are deductible from his gross income for
tax purposes, it is not enough that he proves that such payments have been
made. He must also show proof that he withheld the tax and remitted it to
the BIR before he can deduct the same as business expense.

34.Premium Payments- Limitation under subsec. M Requisites:

a. Payment are for health and hospitalization insurance.

b. Amount of premium does not exceed of ₱2,400 per family or ₱ 200 a

month during the taxable year.

c. The insurance is taken by the taxpayer for himself including his family

d. The family has a gross income of not more than ₱250,000.

If all of the requisites are present, only the spouse claiming the additional
exemption for dependents is entitled to this deduction.

SEC. 35. ALLOWANCE OF PERSONAL EXEMPTION FOR INDIVIDUALS (vvi)

I. In general, there shall be allowed a basic personal exemption as follows:

a. In the case of single individual or married individual judicially decreed

as legally separated with no qualified dependents….₱ 50,000

b. In case of married individuals where only one of the spouse is deriving

gross income, only such spouse shall be allowed personal exemption.

II. Additional Exemption for Dependents - ₱ 25,000 for each dependent not
exceeding four.

- The additional exemption for dependents shall be claimed by one of the

spouses in case of married individuals.

- In case of legally separated individuals, additional exemptions may be

claimed only by the spouse who has custody of the child or children.
Provided, that the total amount of additional exemptions that may be claimed
by both shall not exceed the maximum additional exemptions allowed.
-Dependent, means a legitimate, illegitimate or legally adopted child:

1. chiefly dependent upon and living with the taxpayer

2. if such dependent is not more than 21 y.o.

3. unmarried

4. and not gainfully employed or if such dependent , regardless of age, is incapable

of self-support because of mental or physical defect.

III. Change of Status – if the taxpayer should have additional dependents

during the taxable year, the taxpayer may claim the corresponding
additional exemption in full for such year.(no partial exemption allowed)

IV. Personal Exemption Allowable to a Non-Resident Alien individual-An NRA

engage, shall be entitled to personal exemption in the amount equal to
the amount allowed in the income tax law in the country of which he is a
citizen..Provided, that such NRA should file a true and accurate form of
the total income received by him from all sources in the Philippines.

Notes ni sir: NRA engaged are not entitled to add’l exemption even if his
country grants add’l exemption to Filipinos not residing therein but have
income there.

There is no reciprocity in the case of additional exemption.

Problem/illus.:

A & B are husband and wife respectively, A died in 2011 leaving his wife B
and 4 qualified dependent children C,D,E and F. In 2012, the gross
compensation income of B ₱ 360,000 and the amount of the premium
payments on health and hospital insurance is ₱ 6,000. How much is the
taxable income of B?

Answer:

1. Under the NIRC, only married individuals with qualified dependent child /
children and legally separated spouses with custody of their qualified
dependent child/ren are entitled to additional exemption.

Hence, single individual, widow or widower with qualified dependent child/ren

is not entitled to additional exemption.
Under the Solo Parent Law, a parent is entitled to additional exemption for
qualified dependent children.

Under the Senior citizens law, a senior is entitled to claim additional

exemption for qualified dependents not necessarily children.

2. On Nov. 1, 2012, A and B got married. On Dec. 24, 2012, B delivered to

two babies and on Dec. 31, 2012, on of his twins died. How much total
exemptions may A claim?

Answer: A may claim personal exemption of ₱ 50k plus additional

exemption of ₱ 25k per qualified child/ ₱ 50k for a total of ₱100,000.

Birth of a dependent during a taxable year is deemed to occur at the

beginning of the year while death of a dependent is deemed to occur at
the end of the year.

Annotations:

1. Husband and wife are treated as a separate taxable units, but only 1
ITR.

2. Those allowed personal (and additional ) exemptions are:

a. Resident citizens

b. Non-resident citizens with respect to income from Philippine

sources.

c. Resident aliens

d. Non-resident aliens engaged in trade or business in the Phils. (only

personal exemption) in the amount provided in Subsection D.

3. (memorize) under subsection D, the amount of (basic) personal

exemption allowable to non-resident alien individuals is that allowed
by the income tax law of his country or that provided by subsection A,
WHICHEVER IS LOWER..

4. Legally adopted – means that there is a judicial order adjudging that

the child, to all legal intents and purposes, is the child of the person
desiring to adopt.

5. Senior citizen as defined are exempt from the payment of individual

income taxes and are treated by said law as dependents provided for
the Tax Code of the individual taxpayers caring for them , whether the
latter are relatives or not.

6. Chief support means principal or main support. It is more than one-

half of the support required by the dependent. Partial support not
amounting to chief support will not entitle the taxpayer to claim
exemption.