ALLOWABLE DEDUCTIONS FROM GROSS INCOME

Taxable income subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) &(C); and 28(A), there shall be allowed
the following deductions from gross income:

EXPENSES

I. Ordinary and Necessary Trade, Business or Professional Expenses

a) GENERAL
i. Reasonable Allowance for salaries, wages, and other forms of compensation for
personal expenses ACTUALLY rendered, including GROSSED-UP MONETARY VALUE of
fringe benefit furnished to the employee: Provided, final tax under Sec. 33 has been
paid.
ii. RA for travel expenses here and abroad, in business pursuit.
iii. RA for rentals/ other payments required for continued use to which taxpayer has not
taking title other than that of lessee, user or possessor
iv. RA for entertainment, amusement and recreation expenses during the taxable year
directly connected to business, trade or profession. Provided, that is not contrary to law,
morals, public policy and public order.

b) SUBSTANTIATION REQUIREMENTS
No deductions allowed unless with sufficient evidence: official receipts or adequate records
i. The amount of expense being deducted
ii. The direct connection or relation of the expense to the dev’t, management, operation
etc. of the taxpayer.

c) BRIBES, KICKBACKS AND OTHER SIMILAR PAYMENTS

No deductions from gross income shall be allowed for payment made, directly or indirectly to (if
the payment constitutes bribe or kickback):
 An official or employee of the national government
 An official or employee of any local government unit
 An official /employee/representative of a foreign government
 A private corporation
 General professional partnership

II. EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL INSTITUTIONS

Private educational institutions referred under Sec. 27(B) may option elect:
a) To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities
b) To deduct allowance for depreciation thereof under Subsection (F)

INTEREST

1. General – the amount of INTEREST PAID OR INCURRED by the taxpayer’s profession, trade or business SHALL BE
ALLOWED AS DEDUCTIONS FROM GROSS INCOME.
Provided, that the taxpayer’s otherwise allowable deductions for interest expense shall be reduced to 42% OF
THE INTEREST INCOME SUBJECT TO FINAL TAX. Provided, that effective January 1, 2009, the percentage shall be
33%.

2. Exceptions – no deductions shall be allowed in respect of interest under:

 a) If within the taxable year the taxpayer reporting income under cash basis incurs 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.
Provided further, if indebtedness is payable in amortization, the amount of interest which corresponds
to the principal amortized or paid shall be allowed as a deduction.
b) If both the taxpayer and the person to paid are persons specified under Sec. 36(B) or.
c) If the indebtedness is incurred to finance petroleum exploration.

3. Optional treatment of Interest Expense

- At the option of the taxpayer, interest incurred to acquire property used in e.g. trade may be allowed as a
deduction or treated as a capital expenditure.

TAXES

1. General - taxes paid or incurred within the taxable year in connection with the taxpayer’s profession, trade or
business shall be allowed as deductions EXCEPT:

a. The income tax provided in this Title

b. Income taxes imposed by authority for 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 any extent the benefits of (relating to credits for
taxes of foreign countries)
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 the 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.

2. Limitations on deductions
In case, NRAETB IN Phil and RFC the deductions for taxes shall be allowed only if and to the extent that they are
CONNECTED WITH INCOME SOURCE WITHIN THE PHILIPPINES.

3. Credits against Tax for Taxes of Foreign Countries

If the taxpayer signifies in his return his desire to the benefit of this, tax imposed shall be credited with:

a. Citizen and Domestic Corporation – the amount of income taxes incurred or paid during the taxable year to any
foreign country
b. Partnerships and Estates – the individual’s proportionate share of such taxes of the general professional
partnership or the estate or the 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.

A NRA and a FC shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this
paragraph.

4. Limitations on Credit
a. The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same
proportion tax against which such credit is taken, which the taxpayer’s taxable income from sources within such
country under this Title bears to his taxable income for the same taxable year.
 b. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer’s taxable income from sources without the Phil taxable under this Title bears to his
taxable income for the same taxable year.

5. Adjustments on Payment of Incurred Taxes

- Based on the Commissioner’s requirement and demand.

6. Year in which Credit Taken

- Be taken in the year in which the taxes of the foreign country were incurred, however, if the taxpayer elects to take
such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be
taken upon the same basis, and no portion shall be allowed as a deduction in the same year or any succeeding year.

7. Proof of Credits – if the taxpayer establishes satisfaction to the Commissioner the following:
a. The total amount of income derived from sources without the Philippines
b. The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under
said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of
Finance
c. All other information necessary for the verification and computation of such credits.

LOSSES

1. General – losses actually sustained during the taxable year and not compensated for by insurance or other forms of
indemnity shall be allowed as deductions:

a. If incurred in trade, profession or business

b. Of property connected with the e.g. trade if the loss arises from fire, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement.

By the Secretary of Finance, provided the time limit to be so prescribed in the rules and regulations shall not be
less than (30) days nor more than (90) days from the date of discovery of the casualty etc.

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

2. Proof of Loss
If NRA or FC, loss deductible shall be those actually sustained during the year incurred in the e.g. business
conducted in the Philippines, when such losses are not compensated for by insurance or other forms of indemnity.
Provided not less than 30 days nor more than 90 days.

3. Net Operating Loss Carry-over

Net operating loss which hadn’t 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.

Provided, that for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for
under Executive Order No. 226 as amended otherwise known as the Omnibus Investments Code of 1987, incurred in any
of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years
immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5)
taxable years following the loss, and any portion of such loss which exceeds the taxable income of such first year shall be
deducted in like manner from the taxable income of the next remaining four years.
4. Capital Losses
a. Limitation – losses from sale or exchanges of capital assets shall be allowed only to extent provided in Sec. 39.
b. Securities Becoming Worthless – if become worthless and a capital asset, considered from sale or exchange
on the last day of such taxable year, of capital assets.

5. Losses from Wash Sales of Stock or Securities

6. Wagering Losses
7. Abandonment Losses

BAD DEBTS