Kinds of Deductions:

1. Itemized Deductions (“ID”); or

2. Optional Standard (“OSD”)

Notes:
a) Individuals engaged in trade or business, or profession can select the ID or the OSD, if
they are being taxed under the graduated rates. If they are taxed under the 8% tax
regime, no deductions shall be available in computing their tax bases.
b) Individuals earning compensation income are not allowed any deduction from their
compensation income.
c) Domestic corporations, resident foreign corporations, and partnerships can claim ID or
OSD.

Optional Standard Deduction (OSD)

OSD is the deduction which can be taken in lieu of Itemized Deductions (both ordinary
and special IDs).
Who may claim the OSD?
1) For individuals:a) citizen; Who compute their income tax under the
graduated rates.
b) Resident aliens
c) Estates and trusts
Amounts of OSD = 40% of [Gross Sales, net of returns, allowances,
and discounts (accrual basis) +
Other taxable income from operations not
subject to FTs]
Or
40% of [Gross Receipts, net of returns, allowances,
and discounts (cash basis) + Other
taxable income from operations not
subject to FTs]
For individuals, OSD is in lieu of COGS (or COS) + the Itemized Deductions
Subject to 30% of net taxable income
2) Corporations: Only domestic corporations and
resident foreign corporations.
Amount of OSD = 40% of [Gross Income (GI) + Other taxable income not
subject to FTs]
For corporations, OSD is in lieu of the Itemized Deductions only.

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? a) Domestic corporations including partnerships
and GOCCs
b) Resident foreign corporations
c) Individuals engaged in trade, business,
profession
d) Estates and trusts

Items of IDs: Business expenses Depletion of oil and gas wells

Interest expense Charitable and other contributions
Deductible taxes Research and development
expenses
Losses Pension trust contributions
Bad Debts
Depreciation

I. ORDINARY ITEMIZED DEDUCTIONS (under the Tax Code)

A) BUSINESS EXPENSES
Requisites for deductibility:
1) Ordinary and necessary for the business;
2) Incurred or paid during the taxable year;
3) Connected with the trade, profession, or business of the taxpayer;
4) Reasonable expenses of the business;
5) Substantiated by official receipts/records;
6) The withholding tax required to be withheld has been withheld and remitted
to the BIR.

(1) Compensation expenses (of employer) for personal services

actually rendered;
(a) Includes salaries and other forms of compensation, including bonuses,
and the Grossed-up Monetary Value of fringe benefits
subject to FT.
(b) Includes management and labor expenses, commissions, and pension
payments.
(c) Includes compensation for injuries paid by the employer less any
insurance proceeds.
(d) Includes premiums on life of the employee where the beneficiary is
not the employer but the employee.
(e) 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
 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:

1) For taxpayers engaged in the sale of goods and properties: ½ of 1%
of net sales;
2) For taxpayers engaged in the sale of services/leasing of properties:
1% of net revenues.

(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:
(a) 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.
(b) Taxes and other obligations of the lessor which are paid by the lessee, are
allowed as deductions;
(c) 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;
(10) Miscellaneous expenses.