Net taxable income 7.

Retirement benefits, pension, gratuities

8. Separation pay caused by death, sickness,
It does not include income subject to final tax or final
or other disability or other separation pay
withholding tax
for any cause beyond the control of the
Sec. 32. Gross Income official or employee
9. Social security benefits, retirement
1. What is Gross income?All income derived from gratuities, pensions, and similar benefits
whatever source (whether in legal or illegal from foreign government agencies
sources) EXCEPT when: 10. SSS benefits
a. It is a return of capital; 11. GSIS benefits
b. A form of indemnity;
c. A retirement fund or pension etc. What are not included in the gross income?
2. What are included in the Gross Income?
Sec. 33. Special Treatment of Fringe Benefits
CGGIRRDAPPP
a. Compensation income Fringe Benefit means any good, service or other benefit
b. Gross income derived from the conduct of furnished or granted in cash or in kind by an employer
trade or business or exercise of a profession to an individual employee (except rank and file
c. Gains derived from dealings in property employees)—anything that does not fall under the
d. Interest compensation income.
e. Rents
1. Determine: [ELEMENTS]
f. Royalties
a. Is it a managerial employee? Yes.
g. Dividends
b. Is it a fringe benefit? Yes.
h. Annuities
c. Is it for the convenience of the employer?
i. Prizes and winnings
[Employer Convenience Rule] No.
j. Pensions
2. What are examples of fringe benefits? House,
k. Partner’s distributive share from the net
car, household personnel (maid, driver),
income of the GPP
expenses for foreign travel, life or health
3. What are excluded from the Gross Income?
insurance, membership fees in social and
1. Life Insurance
athletic clubs etc.
2. Amount received by insured as return of
3. If these fringe benefits are given to a rank-and-
premium
file employee, will FBT apply? No.
3. Gifts, bequests, devises, or descents
4. What is the tax imposed? 35% on the grossed-
 But income from such property
up money value of fringe benefit furnished or
shall be included in the gross
granted to the employee.
income
5. If the beneficiary of the life insurance is not
4. Compensation for personal injuries or
the corporation? Not included, because it is for
sickness
the benefit of the employer.
5. Income exempt under any treaty
6. What are de minimis benefits?
6. Benefits received from US Veterans
Administration
 From Ingles Book
I. What are Itemized deductions?
What are the allowable deductions?
Itemized deductions are expenses and losses related to trade or business or the practice of a profession.
What are the itemized deductions? CBTL DIED RP
1) Expenses
2) Interest
3) Taxes
4) Losses
5) Bad debts
6) Depreciation
7) Depletion
8) Charitable and other contributions
9) Research and Development
10) Pension trusts
SECTION 34. (A) Expenses. –
(1) Ordinary and Necessary Trade, Business or Professional Expenses
(2) Expenses Allowable to Private Educational Institutions
A. All ordinary and necessary Expenses in carrying on the
development, management, and operation of a trade,
business or profession, including reasonable allowance for:
1) Salaries, wages, and other forms of compensation
including fringe benefits
2) Travel expenses, here and abroad, in pursuit of trade
and business
3) Rentals and other which are required for the continued
use of the property
4) Entertainment, amusement, recreation expenses that
are directly connected to the trade, business, or
profession (but should not be contrary to law, morals)
Requirements:
(a) Expenses must be ordinary and necessary.
 Ordinary—normal in relation to the
business of the taxpayer.
 Necessary—it is appropriate or helpful in
the development of the taxpayer’s
business. See if it is intended to minimize
losses or to maximize profits.
(b) It must have been paid during the taxable year.
(c) It must have been paid or incurred in carrying on
the trade or business
(d) It must be supported by receipts, records, or other
pertinent papers
 Payment of bribes and kickbacks are not deductible.
 If taxpayer failed to deduct such deductions, he cannot
deduct the same for the next year.
 Advertising expenses:
1. To stimulate the current sale of merchandise or
use of services— deductible as business expense if
it is reasonable.
2. To stimulate the future sale of merchandise or use
of services— it should be spread out over a
reasonable time. (Efforts to establish reputation
are akin to acquisition of capital assets, and thus,
expenses related thereto are not business expense
but capital expenditures.)
 Litigation expenses—incurred in defense of title to
property are capital in nature and not deductible.
 Conditions precedent to the deduction of bonuses are:
1. The payment of the bonuses is in fact
compensation;
2. It must be for personal services actually rendered;
3. The bonusses, when added to the salaries, are
Notes from Atty. Acas
1. What are ordinary and necessary expenses? It depends on what kind
of business.
Example: Glittered thongs are ordinary and necessary expenses in
a business engaged in night clubs or bars.
2. What are the requisites? It must be:
a. Related to the trade, business, or profession (TBP)
b. Directly attributable to the TBP
c. Incurred within the taxable year
d. It must be reasonable
3. It includes:
a. Salaries, wages, and other forms of compensation for personal
services actually rendered
b. Reasonable allowance for travel expenses
c. Reasonable allowance for rentals xxx property to which the
taxpayer has not taken or taking title or in which he has no equity
other than of a lessee, user, or possessor
 It will be an ordinary and necessary expense if the
taxpayer does not own the property
 You cannot rent the property to yourself
d. Reasonable allowance for entertainment, amusement, and
recreation expenses
 Cap/ceiling (based on revenue regulation): If you are
engaged in services, it is 1% of gross; If you are engaged
in the sale of goods, it is 0.5% of gross. If you are selling
both, depends.
4. Substantial Requirement:
It must be supported with sufficient evidence such as receipts or
other adequate records (acknowledgement receipts if there is no
official receipt such as in the public markets; if the thing is VAT-able,
you cannot use the acknowledgement receipt as a proof of input tax,
because the invoicing requirement in VAT is strict.)
5. Bribes, kickbacks, or similar expenses—it is not allowed as a
deductible expense (even if committed directly or indirectly), but it is
subject to income tax.
6. What is the definition of a private education institution? They are
for profit (they declare income and have deductions). In addition to
the expenses allowable as deductions, it may, at its option to elect
either:
(a) To deduct expenditures otherwise considered as capital outlays
of depreciable assets incurred during the taxable year for the
 reasonable when measured by the amount and
quality of the services performed with relation to
the business of the taxpayer.
B. Interest—must be incurred in connection with the
taxpayer’s profession, trade, or business
 Interest in not deductible if:
1. Both the taxpayer and the person to whom
interest was paid are related taxpayers, meaning:
 Members of a family;
 An individual and a corporation where more
than 50% of the OCS of the corporation is
owned by the individual;
 2 corporations where more than 50% of the
OCS of each is owned by the other or by the
same individual;
 Between grantor and fiduciary of any trust;
 Between fiduciary of a trust and the
fiduciary of another trust if the same person
is a grantor with respect to each trust; or
 Between a fiduciary of a trust and the
beneficiary.
2. The indebtedness is incurred to finance petroleum
operations; and
3. If an individual is on the cash basis of accounting
and the interest is paid in advance, through
discount or otherwise.
 If so, the interest expense shall be allowed as
deduction not in the year that the interest
was paid in advance, but in the year that the
indebtedness was paid.
 But if the indebtedness is payable in periodic
amortization, the amount of the interest
which corresponds to the amount of the
principal amortized or paid during the year
shall be allowed as deduction in such taxable
year.
 Late payment of tax is considered a debt, and therefore
interest on taxes is interest on indebtedness and is thus
taxable. But surcharges and penalties are not
deductible.
C. Taxes—taxes paid or accrued within the taxable year in
connection with the taxpayer’s trade or business or exercise
of a profession are deductible from gross income.
Exceptions:
1. Philippine Income tax
2. Estate tax
expansion of school facilities
 When you buy/build something that is depreciable, you
have to use depreciation.
What is depreciation?
 You may only claim on a yearly value which is depreciated.
For example, you cannot claim the full amount of a building
as a deduction in your gross income. It must be depreciated
over a period of years.
 Example: A building was worth P15M, it was finished in
2019. How do I claim the value of the building as a
deduction?Divide the value of the building by 15 because
the life of a building is 15 years).
(b) To deduct allowance for depreciation thereof under subsection
(F) Depreciation—you claim the P15M upfront.
Interest Expense
1. The taxpayer filing the income tax is the debtor, and he is paying
interest.
2. An interest payment is usually subject to final tax. It is not
included in the ITR (income earned by the creditor).
3. An interest payment is treated in two ways:
a. As an income—it is subject to final withholding tax. It is the
income of the creditor.
b. As an expense—the debtor is paying it. No tax is being paid
by the debtor
 RR: you cannot claim an expense unless you withheld
tax from it; Example: Building (cement, hollow blocks,
services) If you were the business owner, for you to
claim these as a deduction, there is a requirement of
withholding 1% from goods and 2% of services—
creditable withholding tax.
 It is an income of the supplier and the expense of
the business owner.
 100M expense; 1M tax withheld
 ITR of supplier: 100M income; 50M COGS; 50M
Gross; 30M other expenses; 20M net income;
20M x 30%= 6M; deduct 1M the tax already
withheld (Form 2307); Tax due: 5M
4. Exceptions—no deduction shall be allowed in respect of interest
under:
a. If an individual is on the cash basis of accounting and the
interest is paid in advance, through discount or otherwise.
GR: Interest expenses is deductible whether paid or payable
because of accrual method
E: When the interest expenses is amortized, and the
amount of interest corresponds to the amount amortized.
 There is a loan and interest must be paid; cash and
accrual method [Periodic amortizations]
 Can I claim the interest expense already because I
have accrued it? No.
b. Related Party Transaction
c. The indebtedness is incurred to finance petroleum
exploration
5. 2 Options how to treat the interest:
a. As an ordinary expense OR
b. AS a capital expenditure—you can capitalize it;
meaning, that it is part of the cost of the goods or
services
Taxes—taxes paid or accrued within the taxable yearin connection with the
taxpayer’s trade or business or exercise of a profession are deductible from
gross income.
1. Allowed?NIRC: DST, certain classes of Percentage tax, Excise tax
(what you pay on alcohol, cigarettes etc.); business tax,
2. Not allowed?NIRC: VAT, income tax, donor’s tax, estate tax
 3. Donor’s tax
4. Stock transaction tax
5. VAT xxx
 The Tax Code allows resident citizens and domestic
corporations to claim taxes paid to a foreign country to
be deducted or claimed as a tax credit, because they
are the only ones taxed worldwide.
D. Losses actually sustained during the
taxable year and not compensated
by insurance or other form of
indemnity are deductible from gross
income.
 If incurred in trade, business or
profession;
 Of property connected with trade,
business or profession, if the loss
arises from fire, storm, shipwreck, or
other casualty, or from robbery, theft,
or embezzlement
 Declaration of loss is needed within 45
days from time of loss.
o If the taxpayer fails to submit a
Sworn Declaration of Loss, the
deduction from casualty loss will
not be allowed.
 For non-resident individuals and
foreign corporations, losses must be
sustained during the taxable year
incurred in trade, business, or
profession conducted within the
Philippines.
 If loss is already claimed as deduction
for estate tax purposes, it is no longer
deductible from gross income
 Deductions are not allowed for
taxpayers earning compensation
income under an employer-employee
relationship
Net Operating Loss Carry Over (NOLCO)
(taxable event that is being taxed is the transfer of property); Real
property tax (in lieu of ownership of property)
 VAT is not deductible because he is not the one who paid it,
he just collected it (Example: The customer paid the VAT,
and Jollibee only collected it)
3. The tax must be related to the business
4. The Tax Code allows resident citizens and domestic corporations
to claim taxes paid to a foreign country to be deducted or claimed
as a tax credit, because they are the only ones taxed worldwide.
 You pay both so you will use the tax credit from other
country here in the Philippines.
Losses
General rule: All losses are deductible
Exception: It is insured or compensated by other form of indemnity
 It is not required that the indemnity is actually received. If you filed a claim and it was not
approved against the insurance, that is when it can be classified as losses, because it is no
longer classified as an insured loss.
 A loss may be insured by the taxpayer or by a third party. It does not require that the
insurance is taken out by the taxpayer.
NOLCO
When does this apply?
Net operating loss—The allowable deduction is more than the gross income of the business in a
taxable year
NOLCO—The net operating loss of the business which has not been previously offset as deduction
shall be carried over as deduction from gross income for the next three consecutive years
immediately following the year of such loss.
Can you still apply MCIT even if you have NOLCO? Yes, because NOLCO is just a deduction.
When is there substantial change?
1. When there is a change of ownership of 75% of the subscribed shares/ outstanding
shares
2. When there is change as to the person who held 75% of the paid-up capital of the
corporation
Capital losses
You are allowed to claim capital losses from capital assets.
Normally, the treatment of ordinary assets and capital assets is different, because capital assets are
subject to capital gains tax. But in here, if you have capital loss, you are allowed to deduct from the
gross income to determine the allowable net income. Why?
Losses from Wash Sales of Stock or Securities
The loss must be realized to be deductible. If your corporation is holding shares of stocks but you
did not sell it yet, but the value of the stocks is less than the acquisition cost, it is unrealized loss. If
you already sold it and the value is less than the acquisition cost, the loss is already realized.
Wagering losses
1. It must be in connection with the trade, business, or profession.
2. It must be substantiated.
Abandonment losses
When a petroleum operation is partially or wholly abandoned, all accumulated exploration and
development expenses shall be allowed as a deduction.
When no loss could be recognized? P. 343
 E. Bad debts—amounts borrowed from
the taxpayer which have become
worthless or uncollectible.
For bad debts to be considered deductible, the
following must concur:
1. There is an existing debt due to the
taxpayer which is valid and legally
demandable;
2. The debts are connected to the
trade, business, or profession;
3. They are actually ascertained to be
worthless, uncollectible, and
charged off within the taxable year;
4. The taxpayer must show that it is
uncollectible even in the future;
5. The debts are not between related
parties;
6. If ever these are recovered, they
should be included in the year of the
recovery.
F. Depreciation—is the gradual
diminution in the useful value of
tangible property resulting from
wear and tear and normal
obsolescence.
 A company has the right to claim
depreciation, but the law does not
allow depreciation beyond its
acquisition cost.
G. Depletion
 Oil and gas wells or mines are
allowed a reasonable allowance for
depletion or amortization computed
using the cost-depletion method.
 When the allowance for depletion
equals the capital invested, no
further allowance shall be granted.
 The formula for the rate of depletion
is: cost of mine property divided by
the estimate ore deposit.
Bad debts
You must show that you exerted effort to collect the payment.
There must be a reasonable certainty that the debt cannot be collected.
Depreciation
1. What are depreciable assets (because not all assets are depreciable)? Assets which have a
life of more than 1 year.
 Is a pen a depreciable asset? No.
2. What are examples of depreciable assets?
Tangible: Buildings
Intangible:
3. What is straight-line method?
4. What is the relation of depreciation to income tax? It is a deduction to gross income to
arrive at a net taxable income.
5. Building worth 100M. C
Expected life of a building: 15 years.
Cost/Value of the building divided by the expected life
6.66M
6. What is salvage value?
7. May a lessee claim for the depreciation cost of the property being leased? No. He may only
claim the rents he paid as deductions to his gross income.
8. Who will claim for the depreciation cost? The lessor. The income is arising out of the rentals
paid by the lessee.
9. What is a life tenant?
10. You cannot claim as deduction a value more than the cost of the building.
11. Requirements:
a. Ownership
b. Useful life of more than 1 year
`What is depletion? It is the exhaustion of natural resources owing to production or severance. The
allowance for depletion is based on the theory that the extraction of minerals gradually exhausts
the capital investment in the mineral deposit.
Who may avail of the cost of depletion? Annual depletion deductions are allowed only to mining
entities which own an economic interest in mineral deposits.
In the case of a non-resident alien individual engaged in trade or business in the Philippines or a
resident foreign corporation, allowance for depletion of oil and gas wells or mines shall be
authorized only in respect to oil and gas wells or mines located within the Philippines.
 Income is earned here and expense is spent here then you can deduct it.
For, properties use in petroleum and mining
Depletion is the exhaustion of
Malampaya gas project—is this subject to depreciation or depletion?
Declaratory Exploration Permit
 How much is the mineral or oil deposit

Depreciation—nawawalan ng value
Depletion—nauubos
Obsolescence-- ?

H. Charitable and other Contributions Can a corporation donate and claim it as a deduction? Yes. What if the donation was made to
street children? No, it must be a registered charitable institution with BIR accreditation. What are
the requirements of deductibility if you are donating to a private charitable institution?

1. Donee must be BIR accredited donee institution

a. Must not be spending more than 30% to the administrative expense
b. 70% should be given to the charitable purpose
2. Donor must donate not more than 10% of the taxable income prior to the deduction of
the charitable donation
 Value: Acquisition cost of the property, not fair market value—the deductible
amount

Donations to the following are partially deductible:

Donations to the following are fully deductible:

1. Donations to certain government agencies in which its charter grants full deductibility of
the donated property or money
2. Donations to certain foreign institutions or international organizations
3. Donations to accredited non-stock, non-profit corporation/NGOs
I. Research and Development
Research—original and planned investigation undertaken by the taxpayer with the prospect of
gaining new scientific or technical knowledge and understanding

Development—the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products, processes, systems or
services before the start of commercial production or use.

Requisites:
1. R&D expenditures were paid or incurred in connection with the taxpayer’s trade business
or practice of profession;
2. The same had been paid or incurred during the taxable year as ordinary and necessary
expenses
3. The same had not been charged to the capital account.

J. Pension trusts Pension trust—is a trust established or maintained by the employer to provide for the payment of
reasonable pensions to its employees.

Pension trust distribution—it is a deduction applicable only to the employer on account of its
contribution to a private pension plan for the benefit of its employees. The deduction is purely
business in character.

*It must be accredited by the BIR.

*It must be subject to withholding tax.

Where do you get the money from?

Who funds the pension trusts? Who puts the capitalization? The employer. The capitalization that
funds the pension trust may not come from the employee.

II. Optional Standard Deduction (OSD)

III. Non-deductible Expenses If the gross sales is 100M, the OSD is 40M. The net taxable income is 60M. The tax rate is 30% of
Capital Gains and Losses the net taxable income. 18M is the income tax.