Module 4: Expenditure Cycle

Professor: Lourene Bautista, CPA

Accountancy Department
College of Business Administration and Accountancy
De La Salle University - Dasmariñas
Definition of Terms
BIR Bureau of Internal Revenue
CTA Court of Tax Appeals
GOCC Government-owned and controlled corporations
NIRC National Internal Revenue Code
NOLCO Net Operating Loss Carry-Over
NCLCO Net Capital Loss Carry-Over
NRA-ETB Non-resident alien engaged in trade or business
Person/taxpayer Individual or corporation
RAMO Revenue Audit Memorandum Order
RCIT Regular Corporate Income Tax
RR Revenue Regulations

Module 4: Expenditure Cycle

Classifications of Allowable Deductions
from Gross Income
Optional Standard Deduction (OSD) OR Itemized Deductions
Gross sales/receipts xxx Gross sales/receipts xxx
Less: Sales returns/discounts/allowances (xxx) Less: Sales returns/discounts/allowances (xxx)
Net Sales xxx Net Sales xxx
Add: Other income xxx Add: Other income xxx
Gross income xxx Gross income xxx
Less: OSD (xxx) Less: Itemized deductions: (xxx)
• 40% of gross income for corporations; or • Ordinary allowable itemized deductions;
• 40% of gross sales/receipts for individuals • Special allowable itemized deductions; and
• NOLCO
Taxable income xxx Taxable income xxx

Note: If the problem is silent, use itemized deductions.

Module 4: Expenditure Cycle

OSD vs. Itemized Deductions
OSD Itemized Deductions
Amount of Computed as: Actual expenses paid or incurred
deductions 40% of gross income for corporations; or
40% of gross sales/receipts for individuals
Who can claim General rule: All taxpayers who are Mandatory itemized deductions:
OSD/itemized subject to tax on taxable net income can 1. Those with income subject to
deductions? claim OSD special/preferential tax rates
Exceptions (meaning not allowed to use 2. Those with income subject to RCIT and
OSD: special/preferential tax rates
1. NRA-ETB 3. Exempt GOCC and non-stock, non-profit
2. Taxpayers mandated to use itemized corporations with no taxable income
deductions 4. Exempt individuals under NIRC and special
laws with no taxable income
Responsibility to Required if applicable Required if applicable
withhold taxes

Module 4: Expenditure Cycle

OSD vs. Itemized Deductions

• The option to claim OSD or itemized deductions shall be made in the

1st quarter income tax return. Such election is irrevocable in the
current taxable year the option is made.
• The accounting method (i.e., accual or cash basis) used by the
taxpayer shall be the same basis to be used for purposes of
computing the OSD of itemized deductions.

Module 4: Expenditure Cycle

Nature of OSD

• In lieu of all itemized deductions (ordinary itemized deductions,

special itemized deductions, NOLCO)
• NOLCO cannot be claimed simultaneously with OSD since NOLCO is
an item of deduction.
• NCLCO may be claimed simultaneously with OSD since NCLCO is an
item of gross income and not an item of deduction.

Module 4: Expenditure Cycle

Itemized Deductions

A. Timing of Claiming of Deductions

B. Nature of Deductions
C. General Requirements
D. Specific Requirements

Module 4: Expenditure Cycle

Itemized Deductions
A. Timing of Claiming of Deductions

• A taxpayer has the right to deduct all authorized allowances for the
taxable year.
• The expenses not claimed as deductions in the current year when
they are allowed to be claimed as deductions cannot be claimed as
deductions in the succeeding years. (Ref: RAMO No. 1-2000)

Module 4: Expenditure Cycle

Itemized Deductions
B. Nature of Deductions (Ref: Section 34 of the NIRC)
1. Interest
2. Taxes
3. Losses
4. Bad debts
5. Depreciation
6. Depletion of oil and gas wells and mines
7. Charitable and other contributions
8. Research and development
9. Pension trusts
10. Other expenses

Module 4: Expenditure Cycle

Itemized Deductions
B. General Requirements (Ref: Section 34 of the NIRC)

1. Ordinary and necessary trade, business, or professional expenses

2. Substantiated with sufficient evidences such as Official Receipts
(OR) or other adequate records:
3. Not contrary to laws, morals, public policy, or order (e.g., bribes,
kickbacks, and other similar payments)
4. The taxes required to be withheld (if applicable) have been properly
withheld and remitted

Module 4: Expenditure Cycle

Itemized Deductions
B. General Requirements

1. Ordinary and necessary trade, business, or professional expenses

• Ordinary – when it connotes a payment which is normal in relation to the

business of the taxpayer and the surrounding circumstances. The term
“ordinary” does not require that the payments be habitual or normal in the
sense that the same taxpayer will have to make them often; the payment may
be unique or non-recurring.

• Necessary – where the expenditure is appropriate and helpful in the

development of the taxpayer’s business. (CTA Case No. 8372 dated March 31,
2016)

Module 4: Expenditure Cycle

Itemized Deductions
B. General Requirements

2. Substantiated with sufficient evidences* such as Official Receipts

(OR) or other adequate records:

• The amount of the expense being deducted; and

• The direct connection or relation of the expense being deducted to the,

development, management, operation and/or conduct of the trade, business
or profession of the taxpayer.

*Except sale and transfer of merchandise or for services rendered valued below
Php100 (Ref: Section 237 of the NIRC)

Module 4: Expenditure Cycle

Itemized Deductions
B. General Requirements

3. Not contrary to laws, morals, public policy, or order (e.g., bribes,

kickbacks, and other similar payments)

• No deduction from gross income shall be allowed for any payment made,
directly or indirectly, to an official or employee of the national government, or
to an official or employee of any local government unit, or to an official or
employee of a GOCC, or to an official or employee or representative of a
foreign government, or to a private corporation, general professional
partnership, or a similar entity, if the payment constitutes a bribe or kickback.

Module 4: Expenditure Cycle

Itemized Deductions
B. General Requirements

4. The taxes required to be withheld (if applicable) have been properly

withheld and remitted

• Any amount paid or payable which is otherwise deductible from, or taken into
account in computing gross income or for which depreciation or amortization
may be allowed, shall be allowed as a deduction only if it is shown that the
tax required to be deducted and withheld therefrom has been paid to the BIR.

Module 4: Expenditure Cycle

Itemized Deductions
B. General Requirements
• A deduction will be allowed as deduction in the following cases where no
withholding of tax was made:
A. The payee reported the income and pays the tax due thereon and the
withholding agent pays the tax including the interest incident to the
failure to withhold the tax, and surcharges, if applicable, at the time of the
audit investigation or reinvestigation/reconsideration.
B. The recipient/payee failed to report the income on the due date thereof,
but the withholding agent/taxpayer pays the tax, including the interest
incident to the failure to withhold the tax, and surcharges, if applicable, at
the time of the audit/investigation or reinvestigation/reconsideration.
C. The withholding agent erroneously under-withheld the tax but pays the
difference between the correct amount and the amount of tax withheld,
including the interest, incident to such error, and surcharges, if applicable,
at the time of the audit/investigation or reinvestigation/reconsideration.
(Ref: RR No. 02-98)
Module 4: Expenditure Cycle