Taxation 3: Special Taxation

Chapter 2: Optional Standard Deduction the annual return. The option is irrevocable
I. Concept of OSD - In lieu of allowable only for the current year it is made.
itemized deduction, the OSD may be
deducted from gross sales or gross receipts Provided that an individual who is entitled to
or gross income as the case may be and claimed for the OSD shall not be
required to submit with his tax return such
financial statements otherwise required
Itemized OSD
Deduction under the NIRC. (as amended by TRAIN
LAW: R.R. No. 8-2018, Sec. 8)
Those allowed be It is a fixed
the NIRC to be percentage
deducted from the deduction of 40% II. Persons Covered
gross income without regard to
The following may avail of the OSD:
before the income any actual
is subjected to tax expenditure, in lieu (ICG)
of the itemized 1. Individuals (including estate and
deductions. It is trust)
merely a privilege Except:
that may be a. Individuals earning pure
enjoyed by certain
compensation income
taxpayers.
b. Non-resident aliens

In the absence of an express selection, a 2. Corporations

taxpayer is considered to have availed of Except: Non-resident foreign
itemized deductions corporation

Unless the taxpayer signifies in his return 3. General Professional Partnership

his intention to elect the OSD, he shall be Provided that:
considered as having availed himself of the a. GPP and partners comprising such
deductions allowed in Sec. 34(A) to (K). partnership may avail OSD only
Such election when made in the return shall once ***
be irrevocable for the taxable year for which b. Either by the GPP or the partners
the return is made. comprising the partnership.

When to indicate the option to use OSD? TABLE OF ALLOWABLE DEDUCTIONS

For individual taxpayers, the option to use
OSD can be indicated only in the annual Itemized OSD
Deduction
income tax return because quarterly income
tax returns are mere estimates of gross Individuals
income and deductions.
For corporate taxpayers, the option to use RC (NPCI)* RC (NPCI)
the OSD for the taxable year must be
NRC (NPCI) NRC (NPCI)
indicated in the first quarter return and shall
be applied to all subsequent quarters and in RA (NPCI) RA (NPCI)

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018
Taxation 3: Special Taxation

NRA-ETB
III. OSD Bases and Percentages
Estates and Trusts and General 1. Individual taxpayers
Professional Partnership a. Selling goods under accrual
basis - 40% of gross sales
E&T E&T
b. Selling services under the
GPP GPP** cash basis - 40% of the
gross receipts
Corporation c. Selling services under
accrual basis - 40% of
DC DC
revenue
RFC RFC 2. Corporate Taxpayers - 40% of
gross income
*NPCI - Not purely compensation income

A general professional partnership and the

partners comprising such partnership may Individual Corporate
avail of the OSD only once, either by the OSD OSD
general professional partnership or the
partners comprising the partnership. ***
Cost of ✔ 𐄂
Sales/cost
of services
Mandatory Itemized deductions
(RR2-2014) Regular ✔ ✔
1. Corporations mandated to use the allowable
itemized deductions: itemized
deductions
a. Exempt GOCCs and
non-stock, non-profit Special ✔ ✔
corporations with no taxable allowable
income itemized
b. Those with income subject to deductions
special/preferential tax rates
NOLCO ✔ ✔
c. Those with income subject to
regular corporate income tax
and special/preferential tax
IV. Determination of the Amount of OSD
2. Individual taxpayers mandated to for Individuals, Corporations, and GPP
use the itemized deductions:
a. Exempt individuals under the Rules on Determination of OSD for
NIRC and special laws with Individual Taxpayers
no other taxable income
b. Those with income subject to Gross Sales (Net Sales) - include only
special/preferential tax rates sales contributory to income subject to
c. Those with income subject to regular tax. Allowances and discounts must
regular income tax and be deducted from the total recorded sales.
special/preferential income

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018
Taxation 3: Special Taxation
Gross Receipts - amounts actually or
constructively received during the taxable
year.
For sellers of services employing the
accrual accrual basis of accounting , the
term “gross receipts” shall mean gross
revenue during the taxable year
Sales / Revenue/ Receipts/ Fees XX
Less: Sales returns, allowances (xx)
and discounts
Net Sales/ Revenue/receipts/fees XX
Multiply by: OSD percentage 40%
Optional Standard deduction XX
Rules on Determination of OSD for
Corporate Taxpayers
Gross Income (NIRC)
a. Gross sales less sales return,
discounts and allowances and cost
of sales; or
b. Gross receipts, less sales return,
discounts and allowances and cost
of services.
Amended Definition: gross income for
purposes of the corporate OSD pertains to
all gross income subject to regular
income tax.
-gross income from operations
-gross income from non-operating sources
Net Sales/Revenues/Receipts/Fees
Less: Cost of sales or services
Gross income from operations
Add: Other taxable income,not subject
to final tax
Total gross income
Multiply by: OSD percentage
Optional Standard Deduction
Cost of Services - all direct cost of
expenses necessary to provide the service
required by the customer such as:
References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018
a. Salaries and employee benefits of
personnel, consultants, and
specialist directly rendering the
service
b. Cost of facilities directly utilized in
providing the service such as
depreciation or rental of equipment
used and cost of supplies.
Optional Standard Deduction for General
Professional Partnerships
-not taxable entity
-merely viewed as a “pass-through”entity
where income is ultimately taxed to the
partners.
-each partner shall report as gross income
his distributive share, actually or
constructively received, in the net income of
the GPP.
Determination of Net Income of GPP
For purposes of computing the distributive
share of the partners, the net income of the
partnership shall be computed in the same
manner as a corporation.
As such GPP can choose either the
itemized deduction or the optional standard
deduction in computing its distributable net
income.
XX OSD= 40% of gross income similar to the
(xx) OSD allowed for corporations.
XX
Partner’s share in net income from GPP
(xx) -A partner can no longer claim deductions
XX from their share in GPP net income. ***
40% -The share in the net income of the GPP is
XX not gross receipt but rather a gross income.
-A partner is not also allowed to avail of the
8% income tax rate since their distributive
share from the GPP is already net of costs
and expenses. (RR8-2018)
Taxation 3: Special Taxation

Share in the net income v. Actual profit

distribution

Share in the net Actual profit

income distribution

Computed from the Computed from net

net income of the income as
GPP as determined determined by
by tax rules generally accepted
accounting
principles

These two normally differ because of the

following:
a. Deductibility limits or requirements
on some items of deductions
b. Use of OSD by the general
professional partnership.

NB: It must be noted that the amount to be

included in the gross income of the partner
is the share in net income for purposes of
the regular tax and not the actual profit
distribution.

NB:
Net Operating Loss Carry-Over cannot be
claimed simultaneously with OSD because
NOLCO is an item of deduction while OSD
is a proxy for all itemized deductions.

OSD does not replace net capital loss

carry-over (NCLCO) of individual taxpayers.
Net capital loss carry-over is not an item of
deduction. A net capital loss carry-over from
the prior year can still be deducted against
the net capital gain of the current year even
if the taxpayer opted to deduct optional
standard deduction for the current year.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018