Gordon College: College of Business and Accountancy

Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, Donor Street,
East Tapinac, Olongapo City
College of Business and Accountancy
__________________________________________________________________________________
Course Code : TAX 101 Academic Year : 2020-2021

Course Title : Income Taxation Academic Term : 2nd Semester
DETAILED LEARNING MODULE
Number :3
Title : Income Taxation – Exclusions and Deductions
I. Learning Objectives
This module aims to enable students to explain, identify, appreciate and/or apply
the following concepts:
1. Exclusions from Gross Income (Exempt from Income Tax)

2. Deductions from Gross Income
3. Regular and Special Allowable Deductions
4. Net Operating Loss Carry Over
5. Methods of Deduction
II. Topics and Key Discussions
EXCLUSIONS FROM GROSS INCOME (EXEMPT from income tax)
1. Proceeds of life insurance policy upon the death of the insured.

However, it is taxable if the insured outlives the policy
2. Return of premiums either during the term, at the maturity, or upon

surrender of contract
3. Value of property acquired by gift, bequest, devise or descent
4. Compensation for personal injuries or sickness received from insurance

plus damages
5. Income of any kind which are contained in a treaty binding upon the
Philippine government
6. Retirement benefits if they meet the prerequisites (1-10-50-RPBP)
7. Separation pay if the separation is due to

- Death, sickness, physical disability
- Any cause beyond the control of the employee
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City of Olongapo
GORDON COLLEGE
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8. Prizes and awards given to charitable, religious, scientific, educational,

artistic, literary or civic achievement provided that:
- The recipient did not join the contest
- He is not required to render substantial future services
9. Benefits received by persons residing in the Philippines under U.S laws

administered by the US Veterans Administration
10. Benefits received from SSS and GSIS including retirement gratuity
received by government officials and employees
11. Income derived by foreign governments
12. Income derived by the government or its political subdivisions from

public or any essential government function
13. Prizes and awards granted to athletes in

- Local and international sports competitions
- In the Philippines or abroad
- Sanctioned by their national sports associations
- The sports association must be recognized by the Philippine Olympic
Committee
14. 13th month pay and other benefits up to P90,000
15. GSIS, SSS, Medicare, HDMF and union dues of individuals
16. Gains from sale of bonds, debentures and other certificates of

indebtedness with a maturity period of more than 5 years
17. Gains realized by investors upon redemption of shares in a mutual fund

company
18. Compensation income of Minimum Wage Earners (MWEs) workers in the

private sector(and public sector not exceeding the minimum wage in
the non-agricultural sector, including holiday pay, overtime pay, night
shift differential pay and hazard pay
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City of Olongapo
GORDON COLLEGE
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DEDUCTIONS FROM GROSS INCOME
REGULAR ALLOWABLE ITEMIZED DEDUCTIONS (ELIT – BaDD – PReC)

1. EXPENSES IN GENERAL
Other legal, ordinary, actual and necessary expenses of business can be

claimed by the taxpayers as long as these are substantiated with official
receipts or other pertinent records.
Examples of other deductible expenses:

1. Salaries and allowances
2. Fringe benefits
3. SSS, GSIS, Philhealth, HDMF, and other contributions
4. Commissions
5. Outside services
6. Advertising
7. Rental
8. Insurance
9. Royalties
10. Repairs and maintenance
11. Entertainment, amusement, and recreation expenses
12. Transportation and travel
13. Fuel and Oil
14. Communication, light, and water
15. Supplies
16. Miscellaneous expenses
However, the list is not all inclusive.
Some items that need further discussion are as follows:
a. Travelling Expenses:
Includes transportation expenses, meals, lodging and laundry
expenses and should be incurred away from home
b. Entertainment, amusement and recreation expenses:
Limit:
½% of net sales for those engaged in sale of goods or properties
1% of net revenue for taxpayers engaged in sale of services
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City of Olongapo
GORDON COLLEGE
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Apportioned for those deriving income from both

Net sales or Net revenue__ x Actual EAR
Total net sales and revenues
***In no case should the deductible EAR exceed the maximum

percentage ceiling
c. Bribes, kickbacks and other similar payments are NOT deductible IF paid,
directly or indirectly, to official or employee of the government or private
entity
d. Cost of expansion of school facilities of private educational institutions

may be
(1) Capitalized and claim annual depreciation as deduction or
(2) Expensed outright during the taxable year
NON-DEDUCTIBLE EXPENSES
Personal and living expenses
Amount paid out for new buildings or for permanent improvements or

betterments made to increase the value of any property or estate
Amount used in restoring property or in making good exhaustion

thereof for which an allowance is or has been made
Premiums paid on any life insurance policy covering the life of an

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
2. LOSSES
– deductible if they meet the requisites for deductibility, enumerated as
follows:
1. It must be incurred in trade, profession or business of the
taxpayer. (The loss must be a business loss, not a personal loss.)
2. It must pertain to property connected with the trade, business
or profession, if the loss arises from fires, storms, shipwrecks, or
other casualties, or from robbery, theft, or embezzlement. (The
loss must be an ordinary loss.)
3. The loss must not be compensated by insurance or indemnity
contract. (The loss must be actually sustained, not temporary.)
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City of Olongapo
GORDON COLLEGE
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4. A declaration of loss must have been filed by the taxpayer
within 45 days from the date of discovery of the casualty or
robbery, theft or embezzlement giving rise to the loss.
5. The loss must not have been claimed as a deduction for estate
tax purposes in the estate tax return. (Double deduction is not
allowed.)
Types of losses
1. Ordinary loss
2. Capital loss
Losses from ordinary assets are deemed normal to the taxpayer’s trade,
business or profession; hence, these are deductible in full. Losses on
capital assets are deemed by law unnecessary expenses; hence, these
are deductible only up to the extent of capital gains.
Special rules on losses include the following:
a. Wagering loss
– deductible only to the extent of gains from such transactions
b. Loss on sale between related parties is NOT deductible
c. Loss on shrinkage in value of stocks due to fluctuation in the market is

NOT deductible
d. Abandonment losses
- when a producing well is abandoned, the unamortized cost thereof
and the undepreciated costs of equipment directly used therein are
deductible in the year of abandonment, but if the service is resumed
later, the costs shall be included as part of gross income and
amortized or depreciated.
3. INTEREST
– Deductible if meets the requisites
a. Taxpayer’s interest income will be reduced by an amount equal to

33% of interest income SUBJECTED TO FINAL TAX.
b. Interest incurred or paid by the taxpayer on all unpaid business

related taxes shall be fully deductible from gross income and shall not
be subject to the limitation on deduction
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City of Olongapo
GORDON COLLEGE
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c. At the option of the taxpayer, interest incurred to acquire property
used in trade, business or exercise of profession may be allowed as
deduction or as a capital expenditure
NONDEDUCTIBLE INTEREST
Interest on loan between related taxpayers
Interest on loan paid in advance through discount by individual

taxpayer reporting income on a CASH basis
If indebtedness is incurred to finance petroleum operations
4. TAXES
– pertains to taxes paid which DOES NOT INCLUDE surcharges, penalties
or fines incident to delinquency
NONDEDUCTIBLE TAXES
Philippine income tax
Foreign income tax if claimed as tax credit
Estate and donor’s tax
Special assessments
5. BAD DEBTS – pertains to bad debts ascertained to be WORTHLESS related

to a VALID and SUBSISTING debt and NOT entered into between
members of the same family or related taxpayers
6. DEPRECIATION
7. DEPLETION
a. Cost depletion method allowed

b. No additional allowance for depletion is granted when the
allowance equals invested capital
c. For foreign corporations, depletion of oil and gas wells and mines shall
only be allowed for those mines and wells located in the Philippines
8. PENSION TRUSTS
– deductible if it meets the following requisites
a. Employer has an established reasonable pension or retirement plan
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City of Olongapo
GORDON COLLEGE
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b. The plan is funded by the employer
c. Amount contributed by employer must no longer be subject to his
control
9. RESEARCH AND DEVELOPMENT
Alternative treatments:
Treat as ordinary and necessary expenses – deductions from gross
income in the year paid or incurred
Treat as deferred expenses – deduction distributed over a period of

not less than 60 months
10. CHARITABLE AND OTHER CONTRIBUTIONS

– deductible if it meets the requisites for deductibility.
a. Fully Deductible
Donations to the government, any of it agencies or political

subdivisions including GOCCs to be used for PRIORITY ACTIVITIES as
determined by NEDA in CHEHEY (Culture and Sports, Health, Education,
Human settlements, Economic Development and Youth and Sports
Development)
Donations to certain foreign institutions or international organizations

in pursuance of or in compliance with AGREEMENTS, TREATIES OR
SPECIAL LAWS
Donations to ACCREDITED domestic non-government organizations.
Requisites for full deductibility of contributions to accredited NGOs:

1. The NGO must be organized and operated exclusively for the
abovementioned purposes, and no income inures to the benefit
of any private individuals.
2. The non-profit organization makes utilization of the contribution
not later than the 15th day of the third month after the close of its
taxable period.
3. The administrative expenses of the NGO do not exceed 30% of its
total expenses.
4. Members of the Board of Trustees must not receive remunerations.
5. In the event of liquidation, the asset of the NGO will be distributed
to another non-profit domestic corporation organized for similar
purpose.
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City of Olongapo
GORDON COLLEGE
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6. The amount of contribution of property other than money must be
valued at acquisition cost.
b. Contributions Subject Limit
Donations to the government, any of it agencies or political

subdivisions exclusively for public purpose not in accordance with priority
activities.
Donations to non-accredited non-government organizations or to

domestic corporations organized exclusively for RRECCYSS (Religious,
Rehabilitation of Veterans, Educational, Charitable, Cultural, Youth and
Sports Development Scientific, Social Welfare) purposes.
LIMIT: The following rates are multiplied by the taxable income derived
from trade, business or profession before deducting the contributions
10% for individuals
5% for corporations
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS
A. SPECIAL EXPENSES UNDER NIRC
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City of Olongapo
GORDON COLLEGE
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B. DEDUCTION INCENTIVES UNDER SPECIAL LAWS
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City of Olongapo
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City of Olongapo
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NET OPERATING LOSS CARRYOVER (NOLCO)
FREQUENTLY ASKED QUESTIONS
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City of Olongapo
GORDON COLLEGE
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City of Olongapo
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SAMPLE COMPUTATION FOR NOLCO
Gross Income Php 20,000.00

Less: Deduction 28,000.00
NOLCO Php (8,000.00)
TRY THIS!!!
The given details below are excerpts from Ms. Yu’s result of operation for
the past years:
2018 2019
Salary as part-time bookkeeper 180,000.00 150,000.00
Salary as part-time teacher 120,000.00 100,000.00
Business Receipts 250,000.00 180,000.00
Business Deduction 650,000.00 230,000.00
1. How much is Ms. Yu’s taxable income for the given taxable years?
2. Did Ms. Yu have any tax due for the year 2018?
3. Up to what year can Ms. Yu utilize her NOLCO in 2018?
METHODS OF DEDUCTION
There are two methods of deduction, the Itemized Deduction comprising the
regular and special itemized deductions and the Optional Standard
Deduction.
Optional Standard Deduction (OSD)
OSD is a deduction that can be chosen by taxpayers in lieu of itemized

deductions including NOLCO.
Under Section 2 of RR 16-2008, the following may be allowed to claim OSD in

lieu of the itemized deductions.
A. Individuals
- Resident
- Non-resident Citizen
- Resident Alien
B. Taxable Estates and Trusts
C. Corporations
- Domestic Corporations
- Resident foreign corporations
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City of Olongapo
GORDON COLLEGE
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Rates of OSD
The rate of OSD for individuals and corporations are the same, 40%. However,
the application differs as illustrated below:
Instead of tracking all your expenses, you may opt for OSD in the rate of 40%.
Consequently, 60% of your income shall be taxable.
Requisites for Claiming OSD
1. The taxpayer in the return its intention to elect OSD as the method of
deduction.
2. Such election is irrevocable for the taxable year for which the return is
made.
3. That the individual who is entitled to and claimed for OSD shall not be
required to submit with his tax return financial statements otherwise
required under the Code.
4. Except when the Commission otherwise permits, individual taxpayers

shall keep their records pertaining to gross sales or receipts and
corporate taxpayers shall keep records pertaining to their gross income.
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City of Olongapo
GORDON COLLEGE
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Itemized Deduction
We have already discussed the itemized deductions including the NOLCO. To

better appreciate this, please look at this list which can be found in page 3 of
BIR FORM 1701.
***End***
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Republic of the Philippines

Course Code : TAX 101 Academic Year : 2020-2021

DETAILED LEARNING MODULE

1. Exclusions from Gross Income (Exempt from Income Tax)

II. Topics and Key Discussions

EXCLUSIONS FROM GROSS INCOME (EXEMPT from income tax)

1. Proceeds of life insurance policy upon the death of the insured.

2. Return of premiums either during the term, at the maturity, or upon

3. Value of property acquired by gift, bequest, devise or descent

4. Compensation for personal injuries or sickness received from insurance

6. Retirement benefits if they meet the prerequisites (1-10-50-RPBP)

7. Separation pay if the separation is due to

8. Prizes and awards given to charitable, religious, scientific, educational,

9. Benefits received by persons residing in the Philippines under U.S laws

11. Income derived by foreign governments

12. Income derived by the government or its political subdivisions from

13. Prizes and awards granted to athletes in

14. 13th month pay and other benefits up to P90,000

15. GSIS, SSS, Medicare, HDMF and union dues of individuals

16. Gains from sale of bonds, debentures and other certificates of

17. Gains realized by investors upon redemption of shares in a mutual fund

18. Compensation income of Minimum Wage Earners (MWEs) workers in the

REGULAR ALLOWABLE ITEMIZED DEDUCTIONS (ELIT – BaDD – PReC)

Other legal, ordinary, actual and necessary expenses of business can be

Examples of other deductible expenses:

However, the list is not all inclusive.

Some items that need further discussion are as follows:

b. Entertainment, amusement and recreation expenses:

1% of net revenue for taxpayers engaged in sale of services

Apportioned for those deriving income from both

***In no case should the deductible EAR exceed the maximum

d. Cost of expansion of school facilities of private educational institutions

Amount paid out for new buildings or for permanent improvements or

Amount used in restoring property or in making good exhaustion

Premiums paid on any life insurance policy covering the life of an

Special rules on losses include the following:

b. Loss on sale between related parties is NOT deductible

c. Loss on shrinkage in value of stocks due to fluctuation in the market is

a. Taxpayer’s interest income will be reduced by an amount equal to

b. Interest incurred or paid by the taxpayer on all unpaid business

Interest on loan paid in advance through discount by individual

If indebtedness is incurred to finance petroleum operations

Foreign income tax if claimed as tax credit

Estate and donor’s tax

5. BAD DEBTS – pertains to bad debts ascertained to be WORTHLESS related

a. Cost depletion method allowed

a. Employer has an established reasonable pension or retirement plan

9. RESEARCH AND DEVELOPMENT

Treat as deferred expenses – deduction distributed over a period of

10. CHARITABLE AND OTHER CONTRIBUTIONS

Donations to the government, any of it agencies or political

Donations to certain foreign institutions or international organizations

Donations to ACCREDITED domestic non-government organizations.

Requisites for full deductibility of contributions to accredited NGOs:

b. Contributions Subject Limit

Donations to the government, any of it agencies or political

Donations to non-accredited non-government organizations or to

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS

A. SPECIAL EXPENSES UNDER NIRC

B. DEDUCTION INCENTIVES UNDER SPECIAL LAWS

NET OPERATING LOSS CARRYOVER (NOLCO)

FREQUENTLY ASKED QUESTIONS