Ordinary Allowable Deductions 1

Chapter 13 ,
13 A
-
, 13 B
-
Gnome taxation by Pang ga want
Ordinary Allowable Deductions

Regular Income Tax
There are multiple kinds of income tax:
A. Taxation on compensation income
B. Taxation on business income of individuals
C. Regular Corporate Income Tax
D. Minimum Corporate Income Tax
E. Improperly Accumulated Earnings Tax
F. Gross Income Tax
G. Taxes on Passive Income (commonly denoted as Final Taxes)
H. Fringe Benefits Tax
I. Capital Gains Tax and other taxes in dealings in property
J. Withholding Tax (strictly speaking not a separate tax)
These can be organized into three groups:

Income Tax
Final Income Taxes Capital Gains Taxes Regular Income Tax
Fringe Benefits Tax Capital Gains Tax Tax on Compensation
Taxes on Passive Income Other dealings in Property Tax on businesses of individuals
Withholding Tax Withholding Tax Regular Corporate Income Tax
Regular income of some taxpayers Minimum Corporate Income Tax
Improperly Accumulated Income Tax
Gross Income Tax
Regular income tax is the most common form of income taxation. It is essentially the default method of
income tax.
Regular income tax is computed in the following manner:
Gross Income XXXXX

Less: Allowable deductions XXXXX
Taxable Income XXXXX
Multiply: Applicable tax rate XX%
Tax due XXXXX
Less: Previously paid income taxes XXXXX
Less: creditable withholding taxes XXXXX
Tax payable or refundable XXXXX
Regular income tax is computed yearly. All transactions for one taxable year are summarized to compute
the income tax. That means that the allowable deductions above is the sum of all allowable deductions
for one taxable year.
CVGCastro 1S 2022-2023
GNH Income
( Allowable bedkaimi )
taxable Income
Allowable deductions refers to all deductions from the gross income allowed by the NIRC. Gross income
less allowable deductions results in the taxable income. There are two general classes of allowable
deductions: ordinary
(1) Itemized Deductions itemized deductions (
a. Ordinary itemized deductions allowable deduction ( optimal standard
special
b. Special itemized deductions

deduction
(2) Optional Standard Deduction
Note that no deductions are allowed for compensation income. For individuals earning both
compensation and business income, deductions may be allowed for items related to business income, but
not for compensation. This also means that personal expenses such as food and recreation cannot be
deducted, even for business income.
Illustration
An individual had the following data:
Compensation income ₱150,000

Business income 200,000
Allowable deductions 210,000
The computation of taxable income is as follows:

the
deduction is only up to
name
Compensation income ₱150,000 extent the merinos .
1 of
Business income 200,000 210K , took it deducted

instead OF .
Gross income 350,000 deduction Mutt not exceed

y in
Allowable deductions (200,000) the tunnels in ome .
Taxable income ₱150,000
Since no deduction is allowed against compensation income, the allowable deductions presented shall
only be up to the amount of business income. TAKE NOTE Allowable deductions are only applicable to
:
Buh NEW INCOME
(no allowable deductions for C. I -7
Not compensation Income
Shown differently, the computation is as follows:
RECALL :
Both Business income 9 compensation Income are

under GR0H1NM income subject to
Compensation income ₱150,000
Business income ₱200,000 64mA Income :
1 Mt
Allowable deductions (210,000) compensation Income

-
Net Operating Loss ₱10,000 -

Business Income
─ -
beatings in propertied
Grow Home
other inclusion m
•
Taxable income ₱150,000
itemized Deductions : → mentioned by Niro
ordinary
" "" " d " "" M
( Interest expehle Charitable 9 other
"
-
-
/ special -
taxes contributions
hostel research 8 Development
-
allowable deduction,
-
Bad Debt /
\ optional ordinary a necessary
-
standard
-
Depreciation
-
Deduction expenses of
-
Amortization of tontines Hi
Ordinary Itemized deductions intangible anti
These refer to deductions specifically mentioned by the NIRC. Recall that cost of sales, cost of services,
and discounts are not itemized deductions, because those are automatically deducted from revenue to
obtain gross income.
must be related to
business
I. Interest expense me
Interest on borrowings related to business are deductible but only to a limited extent. The
amount of deductible interest expense is reduced by an arbitrage cap, which is 20% of the
interest income subject to final tax (NIRC Sec 34(B)(1)). deductible interest eicpenle
( arbitrage cap ) → soy .
interest income
-
subject to FIT
Illustration allowable intent expert
The taxpayer is a resident alien deduction
Interest expense on loans for business expansion ₱100,000

Interest income from bank deposit 81,500
Interest income from loan 120,000
Interest income on FCDU 18,500
Interest expense ₱100,000

Interest on deposit 81,500 from intent
Interest on FCDU 18,500 deductedallowable deduction
7
100,000 expense
→ arbitrage cap
Multiply: 20% (20,000) G hit of intent
Deductible int. exp. 80,000 income subject to
FIT
Gross Income 120,000

Allowable deduction: (80,000)
Taxable Income 40,000
Note that if the interest expense was used to acquire property related to trade or business
(for example, loans taken to finance building construction), then the taxpayer may capitalize
the interest instead of immediately deducting it as an expense. Capitalized interest will be
depreciated and thus treated as depreciation expense.
Before CREATE, the arbitrage cap was 33%.
II. Taxes
Taxes may be treated as deductible expenses for the purposes of lowering the taxable income.
The following taxes are not deductible (NIRC Sec. 34 (C)(1)):
1. Philippine Income Tax
2. Estate Tax
3. Donor’s Tax
4. Stock transaction tax
5. Special assessments
6. Value Added Tax
PEDSSV
Surcharges and penalties for unpaid taxes are not considered taxes. They are not deductible.
Income taxes paid to foreign countries can be treated as deductions for the following
allowed to make income taxes taxpayers:
paid t
foreign countries as
deductions : a. Resident Citizens1

b. Domestic Corporation
1.) KC
il ne c. Partners in a General Professional Partnership, on his proportionate share of such taxes

a) Partners in Gpp of the general professional partnership
4) Beneficiaries of
6
taxable estate / G #-) d. Beneficiaries of an estate or trust
deduct The taxpayer has the option of treating income taxes paid to foreign taxes as either:
can choose to
the taxes on a. Allowable deductions deducted against the gross income
b. A tax credit deducted against the tax due
tax due
income
grow to The taxpayer can only use one of the two. The difference in the two options are as follows:
1- at
credit
As As tax a
to subject to maximum deduction credit
deduction
from the tax due
limit : Items of gross income XXXX XXXX
Items of gross income XXXX XXXX
foreign taxable
income
✗ Philippine
Gross Income XXXX XXXX
world income income tax
due
Expense XXXX XXXX
Expense XXXX XXXX
Tax paid to foreign country AAAA ─
Allowable deductions XXXX XXXX

Allowable deductions (XXXX) (XXXX)
Taxable income XXXX XXXX
Multiply: tax rate XX% XX%
Income tax due XXXX XXXX
Tax paid to foreign country ─ (BBBB)
Tax payable / refundable XXXX XXXX
A separate computation is made in case the taxpayer claims the foreign tax credit. If the
foreign tax is used as a credit against the income tax due, it is subject to a maximum limit as
follows:
𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒

𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥 𝑑𝑢𝑒
𝑊𝑜𝑟𝑙𝑑 𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒
Thus, there is a case where some of the foreign income tax cannot be credited. / deducted
Illustration
A domestic corporation has the following data:
Income tax: ₱125,000
Taxable Foreign income

income tax paid
Philippines 300,000
Taiwan 200,000 60,000
Total 500,000 60,000
The limit is computed as follows:
Actual tax paid

Foreign income 200,000
Divide: World inc 500,000
40%
Multiply: 125,000
Max tax credit ₱50,000
Thus, the tax payer can only credit ₱50,000 and not the actual ₱60,000.
If there are multiple foreign taxes paid, then the limit is first computed on a total world basis,
then it is computed on a country by country basis. The lower of the two will be used.
OMMY BY MANY
lower tax great
Illustration MULTIPLE FOREIGN TAXES PAID
.
worldwide
.
of
The domestic corporation has the following data on its operations, with Philippine Income tax
m lie tax credited )
of ₱230,400 allowable deduction that is
M subject to a LIMITATION
Taxable Foreign income
income tax paid
Philippines 480,000
United States
Taiwan
192,000
96,000
45,000
30,000 ¥
:
Total 768,000 75,000
The tax credit is computed as follows:
World
Actual tax paid 75,000
US 192,000
Taiwan 96,000
288,000
Divide: 768,000
37.5%
Multiply: 230,400 86,400
Allowed tax credit (a) 75,000 → worldwide
credit
tax
United States
Actual tax paid 45,000 14
192,000
Divide: 768,000
25%
Multiply: 230,400 57,600
Allowed tax credit (b) 45,000 →
country by country
tax cheat
Taiwan
Actual tax paid 30,000 on
96,000
Divide: 768,000
12.5%
country
Multiply: 230,400 28,800 Meaty bb credit
tax
G)
→
Allowed tax credit 28,800

a lower tax credit
between the two
Country by Worldwide
country
¥
Tax credit for US tax 45,000
Tax credit for Taiwan tax 28,800
Total 73,800 (a) 75,000
Final Allowed credit: ₱73,800
Income tax due ₱230,400

Foreign tax credit (73,800)
Income Tax payable ₱156,600
III. Losses
Losses that are not compensated or indemnified are allowed as deductions.
losses :
i. Destruction of property
The other requirements are as follows: (NIRC Sec 34(D)(1)):
a) capital losses
a.) Net capital loss carry a. It must be incurred in trade, profession or business
over ( Wollo ) b. The loss must be relating to property connected with the trade, business or profession, if
4.) Nath
→
Jalil I
deductible for dealers of
the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft
schlemiel Mlt or embezzlement
c. The loss was not claimed as a deduction for estate tax purposes
Destruction of property
Losses due to destruction of property may be claimed as deductions. If the property is insured,
then the loss to be deducted is the excess loss not covered by insurance. The amount covered
by insurance is compensated for by insurance and thus not an actual loss. Note that if the
insurance proceeds exceed the tax basis of the property, the excess proceeds results in
taxable income.
be an
allied low can
deductible ( allowable deduction / replacement • its
not armed → an capitatitable

destruction of a
BY MMA NC µ Guerre a'able
property insured in full based
deductible
•
excels PROCEED
the insurance
→
ta×db " / on
fully destroyed
(tax ban's )
of the property
from ✓ restoration • It '
in cute of exuep
*
replacement / Mto ration
\ partially destroyed →
our tax uan 's
is CAPITA "?
If the property is restored or replaced, then the amount to be deducted depends on whether
the destruction is in full or in part. For fully destroyed property, the entire tax basis of the
property is deductible. Any replacement costs will be fully capitalizable and depreciable. If the
property is only partially destroyed, then only the restoration costs in excess of the tax basis
of the property lost is capitalizable.
Illustration
Property A Property B Property C Property D
Tax basis (amount of loss) 2,100,000 2,600,000 800,000 1,100,000
Restoration cost ─ 3,000,000 ─ 1,300,000
Insurance proceeds 1,800,000 900,000 900,000 ─
Destruction Full Full Partial Partial
Tax basis 2,100,000 2,600,000 800,000 1,100,000

Insurance proceeds 1,800,000 900,000 900,000 ─
Allowable deduction (taxable income) 300,000 1,500,000 (100,000) 1,100,000
C. all
N¥ffdim GallowayHuai m
G taxable income Gallow ahh deduction
Restoration cost ─ 3,000,000 ─ 1,300,000
Tax basis ─ ─ ─ 1,100,000
Capitalizable, depreciable ─ 3,000,000 ─ 200,000
Revenue Memorandum Order (RMO) 21-2020 clarified the following:

The valuation that will be used for the inventory or assets to be disposed/destructed
shall be the actual cost. Currently, where the actual cost cannot be accurately
determined, the inventory valuation maintained and used by the taxpayer shall be
adopted subject to adjustment upon verification during the audit. In the case of fixed
assets, the carrying book value shall be considered.
Capital losses
There is no problem for losses from sales on ordinary assets; such losses would be fully
deductible.
Capital losses, on the other hand, can only be deducted against capital gains. Thus, any excess
capital loss cannot be deducted against any other item of gross income. Capital losses are
deducted directly from gross income and not presented as part of allowable deductions.
HOLDING PEHOD y applicable only to INDIVIDUALS not corporations
→
lwbt
Additionally, the holding rule is present for individuals. If the asset was held for 1 year or less,
any loss is fully deductible. Otherwise, the loss is only deductible up to 50%. (NIRC Sec
34(4)(a), NIRC Sec 39(B)): G more than Itr .
Date purchased Date of sale Gain or loss

Valve Inc. 5/10/2019 8/13/2020 (15,000)
Bethesda Inc. 9/18/2020 10/16/2020 (30,000)
EA Inc. 11/28/2019 12/1/2020 (22,000)
subject to the Anding
Me
, period
Corporate Individual
taxpayer taxpayer
Valve Inc. 15,000 7,500
Bethesda 30,000 30,000
EA 22,000 11,000
Total losses 67,000 48,500
If the capital losses exceed the capital gains, the excess is no longer deductible.
Taxpayer 1 Taxpayer 2
Gain or loss Gain or loss
A 50,000 16,000
B 15,000 11,000
C (15,000) (19,000)
D (30,000) 6,500
E (22,000) (7,000)
Net capital gain or loss (2,000) 7,500
A 50,000 16,000
B 15,000 11,000
D 6,500
Capital gains 65,000 33,500
C (15,000) (19,000)
D (30,000)
E (22,000) (7,000)
Capital losses (67,000) (26,000)
Items of gross income XXXX XXXX
Capital gains 65,000 33,500
Capital losses (65,000) (26,000)
Expenses XXXX XXXX

Allowable deductions XXXX XXXX

Allowable deductions (XXXX) (XXXX)
Taxable income XXXX XXXX
Multiply: tax rate XX% XX%
Income tax due XXXX XXXX
Tax credits (XXXX) (XXXX)
Tax payable / refundable XXXX XXXX
INDIVIDUALS
no applicable only to
Net Capital Loss Carry-Over (NCLCO)

If the taxpayer is an individual, the excess losses of ₱2,000 are subject to a capital loss carry-
over. This means that the loss can be deducted in full next year. This item is still limited to
the amount of capital gains; that means if the next year transactions still result in a net capital
loss, then the carry-over cannot be deducted in the next year. 2 Additionally, the amount to
be carried over shall not exceed the net income before dealings in capital assets in the year
the net loss was incurred.
The carry-over is available only for one year. If it is unused in the next year, then it can no
longer be carried over further.
Illustration
2020 2021 2022
A 50,000 10,000 3,500
B 15,000 11,000 6,000
C (15,000) (19,000) (2,500)
D (30,000) 4,500 (1,000)
E (22,000) (7,000) (4,500)
Net capital gain or loss (2,000) (500) 1,500
2020 2021 2022

Items of gross income XXXX XXXX XXXX
Capital gains 65,000 25,500 9,500
Gross Income XXXX XXXX XXXX
Expense XXXX XXXX XXXX

Net capital loss carry-over ─ ─ 500
Capital losses 65,000 25,500 8,000
Allowable deductions XXXX XXXX XXXX
Wash sales
Losses on wash sales are not deductible for non-dealers. These are deductible for dealers in
securities.
If a purchase of the same or substantially same security occurs in this period,

the sale is a wash sale
The concern is in the measurement of the non-deductible loss.
Illustration
Marshall had the following transactions during the year:
Date Transaction Shares Price
January 5 Purchase 10,000 ₱4.00
March 1 Purchase 10,000 4.10
March 25 Sale 10,000 3.80
Presume that the sale covered stocks purchased in January 5.
The loss from wash sales are as follows:

January
Sale (10,000 x 3.8) ₱38,000
Cost (10,000 x 4.0) 40,000
Loss (₱2,000)
Illustration
Date Transaction Shares Price
January 5 Purchase 10,000 ₱4.00
March 1 Purchase 8,000 4.10
March 25 Sale 10,000 3.80
January
Sale (10,000 x 3.8) ₱38,000
There were only
Cost (10,000 x 4.0) 40,000
8,000 stocks
Loss (₱2,000)
purchased within 61
Multiply: 8,000 / 10,000 0.8
days, but 10,000 sold.
Non-deductible loss (₱1,600)
Securities becoming worthless

If such securities are capital assets, then the loss is considered a loss from sale or excess. Thus,
it is deductible, subject to the rules on capital losses above.
Wagering losses
Wagers refers to bets made on the possible outcome, such as bets on the results of a boxing
match. Losses from wagers are deductible only to the extent of gains from wagers (NIRC Sec.
34(D)(6)). This is similar to the idea of non-deductible net capital losses. There is no carry-over
applicable.
Non-deductible losses
The following losses from sales or exchanges of property are non-deductible:
1. Between members of a family. Family includes brothers and sisters, spouse, ancestors,
and lineal descendants
2. Between an individual who owns more than 50% of the outstanding stock, directly or
indirectly, of the corporation. Losses from distributions in liquidation are deductible.
3. Between two corporations, one of which owns over 50% of the outstanding stock, directly
or indirectly, of the other, or when both corporations have the same individual owning
more than 50% of the outstanding stock of both. except for losses from distributions in
liquidation. This applies only if either one of the corporation is a personal holding
company or foreign personal holding company to the other.
4. Between the grantor and a fiduciary of any trust
5. Between the fiduciary of a trust and the fiduciary of another trust, both having the same
grantor
6. Between the fiduciary of a trust and the beneficiary of such trust
Impairment losses
Impairment losses or reductions in value of property are non-deductible.
Net Operating Loss Carry-Over (NOLCO)

Net Operating Loss refers to a net loss from operations. It must be only for business income,
less the allowable deductions.
Ordinarily, the excess allowable deductions (the Net Operating Loss) cannot be deducted
against other items of gross income. However, as an incentive to businesses, such losses can
be deducted against future taxable income.
The carryover can be made for the next three consecutive taxable years. The NOLCO is
computed as follows:
Business income XXXX

Allowable deductions excluding previous
NOLCO and deductions under special laws (XXXX)
NOLCO XXXX
The NOLCO can then be deducted against the next year’s business income.
Because NOLCO can be carried over for up to three years, the taxpayer can also deduct up to
three NOLCO’s at a time. When the taxpayer incurs multiple years of net operating losses, the
NOLCO is applied on a First In First Out (FIFO) basis.
Illustration:
2020 2021 2022 2023 2024
Business Income 500,000 330,000 480,000 450,000 620,000
Allowable deductions
excluding any NOLCO (650,000) (420,000) (400,000) (390,000) (520,000)
Income or loss (150,000) (90,000) 80,000 60,000 100,000
2020 2021 2022 2023 2024
Income or loss above (150,000) (90,000) 80,000 60,000 100,000
NOLCO
2020 ─ ─ (80,000) (60,000) ─
2021 ─ ─ (90,000)
Taxable Income (150,000) (90,000) ─ ─ 10,000 3rd Year: the unused
NOLCO expires and
NOLCO Balance cannot be carried
2020 150,000 150,000 70,000 10,000 ─ over anymore
2021 90,000 90,000 90,000 ─
Net operating losses from years in which the taxpayer is tax exempt (such as a tax holiday)
cannot be carried over. Further, if the taxpayer has had a substantial change in its ownership
(i.e. at least 75% change in paid up capital or nominal value of outstanding shares of a
corporation), any NOLCO from previous years cannot be deducted.
For individual taxpayers, the net operating losses must be determined only for items related
to business or profession. Compensation income is not considered in determining or applying
NOLCO.
NOVO -
is a BVJI NEW EXPENSE
Since NOLCO is primarily a business expense, it cannot be deducted against any non-
business income.
Illustration
2020 2021 2022 2023 2024

Compensation income 250,000 250,000 250,000 250,000 250,000
Business Income 500,000 330,000 480,000 450,000 620,000

excluding any NOLCO (650,000) (420,000) (400,000) (390,000) (520,000)
Net operating inc/loss (150,000) (90,000) 80,000 60,000 100,000
2020 2021 2022 2023 2024

Income or loss above (150,000) (90,000) 80,000 60,000 100,000
NOLCO
2020 ─ ─ (80,000) (60,000) ─
2021 ─ ─ (90,000)
(150,000) (90,000) ─ ─ 10,000 3rd Year: the unused
NOLCO expires and
NOLCO Balance cannot be carried
2020 150,000 150,000 70,000 10,000 ─ over anymore
2021 90,000 90,000 90,000 ─
2020
Compensation income 250,000
Business Income 500,000 There is a net operating loss of
Allowable deductions 150,000 due to excess allowable
excluding any NOLCO (650,000) ─ deductions. This cannot be deducted
Taxable income 250,000 against the compensation income
2021
Business Income 330,000
excluding any NOLCO (420,000) ─
Taxable income 250,000
2022
NOLCO (80,000)
2023
NOLCO (60,000)
2024
NOLCO (520,000)
excluding any NOLCO (90,000) 10,000
Bad Debts
Unlike the rule prescribed in accounting standards, only writeoffs are deductible. The debts
written off must be connected with the profession, trade or business. The recovery of such
writeoffs in a subsequent period are considered income to the extent of the income tax
benefit from the previous deduction.
Illustration
The following entries have been recorded during the year:
Bad debts expense 90,000
Allowance for bad debts 90,000
Allowance for bad debts 15,000

Accounts receivable 15,000
Only the 15,000 is deductible. The 90,000 bad debts expense is not deductible.
IV. Depreciation
Depreciation refers to a provision for the gradual wear and tear on the value of property. Any
of the following methods may be used to depreciate the property:
1. Straight-line method
2. Declining balance method.
3. Sum of years digits (SYD) method;
4. Any other methods prescribed by the Secretary of Finance upon recommendation by the
Commissioner of Internal Revenue
Any revaluation surplus being depreciated or amortized is not deductible.
V. Amortization of intangible assets

The amortization of intangible assets is also deductible.
VI. Charitable and other contributions

Only contributions made to or for the use of the following are deductible:
1. Philippine Government or any political subdivision, exclusively for public purposes
2. Accredited domestic corporation or associations, operated and organized exclusively for:
a. Religious
b. Charitable
c. Scientific
d. Youth and sports
e. Cultural
f. Educational
g. Rehabilitation of veterans
3. Social Welfare institutions
4. Non-government organizations
If the contribution does not fall under the list above, then it is not deductible.
Additionally, depending on the recipient, the contribution may either be deductible in full or
subject to a limit.
The following contributions are deductible in full:
1. Donations to the Government, any agency or political subdivisions, for the following
exclusive priority activities determined by NEDA:
a. Education
b. Health
c. Youth and sports
d. Human settlements
e. Science and culture
f. Economic Development
2. Donations to certain foreign institutions
3. Donations to accredited NGOs
NGOs refer to non-profit domestic corporations:
a. Organized and operated exclusively for scientific, research, educational, character-
building and youth and sports development, health, social welfare, cultural or
charitable purposes, or a combination. None of its net income must inure to the
benefit of a private individual
b. The level of administrative expense, on an annual basis, must not exceed 30% of total
expenses
c. Members of the Board of Trustees must not receive remunerations
Other deductible contributions are subject to the following limits:

1. 10% of taxable business income from trade, business or profession before deduction of
any contributions, for individuals
2. 5% of above for corporations
Illustration
The following items are available for a domestic corporation:
Sales 1,650,000
Sales discounts 85,000
Cost of sales 565,000
AR written off 100,000
Capital gains 150,000
Capital losses 85,000
Loss on sale of machinery used in
production 75,000
Contributions to the local City Hall 100,000
Contributions to accredited NGO 200,000
Sales 1,650,000
Sales discount (85,000)
Net sales 1,565,000
Business income 1,000,000
Capital losses (85,000) 65,000
Gross Income 1,065,000
In computing
the 5% or 10%, Loss on sale of machinery (75,000)
what is AR written off (100,000) (175,000)
multiplied is Taxable income before contributions 890,000
business City Hall contributions (Actual: 100,000.
income less Limit: 5% x (1,000,000 – 175,000) (41,250)
allowable NGO Contributions (deductible in full) (200,000)
deductions. Taxable income 648,750
The NGO contributions are deductible in full because they are made to an accredited NGO.
The City Hall contributions are not deductible in full because they are not made to specific
priority activities.
VII. Research and Development

R&D expenses are deductible in the year paid or incurred. However, the following R&D
expenditures may be capitalized and amortized:
1. Paid in connection with trade, business or profession
2. Not treated as expenses
3. Chargeable to capital account but not chargeable to depreciable or depletable assets
The amortization must not be less than 60 months, beginning from the month the taxpayer
realizes benefits from the R&D expenditures.
VIII. Other expenses

Other ordinary, actual and necessary expenses of businesses can be claimed as deductions.
The special rules include the following: (NIRC Sec 34(A)(1))
1. Fringe benefits, as well as the fringe benefits tax, are deductible
2. Entertainment, Amusement or Recreation expenses (EAR)
Such EAR expenses must be directly connected to the development, management and
operation of the trade or business.
The deduction is subject to the following limits:

a. 0.5% of net sales for sellers of goods or properties
b. 1% of net revenues for sales of services
Illustration
Sales 1,650,000
Sales discounts 85,000
AR written off 100,000
Capital losses 85,000
Loss on sale of machinery
used in production 75,000
EAR 25,000
Sales 1,650,000
Sales discount (85,000)
Net sales 1,565,000
Capital losses (85,000)
Cost of sales (565,000) 1,065,000
Gross Income 1,065,000
Allowable deductions:
Loss on sale of machinery (75,000)
EAR (Actual: 25,000. Limit:
0.5% x 1,565,000 = 7,825) (7,825)
AR written off (100,000) (182,825)
For taxpayers engaged in sales of both goods and services, the actual EAR and the limits
are determined on a pro-rata basis.
Illustration
Sales 1,800,000
Service Revenue 1,200,000
EAR 20,000
Sales 1,800,000 60%

Service Revenue 1,200,000 40%
Total 3,000,000
Sales Services
Actual EAR 20,000 20,000
Multiply: 60% 40%
Total 12,000 8,000
Limit:
(1,800,000 x 0.5%) 9,000
(1,200,000 x 1%) 12,000
Deductible EAR 9,000 8,000
3. Bribes and kickbacks to/from officials or employees of governments or GOCCs, or to
private corporations or similar entities are not deductible.
IX. Impact of CREATE ACT (Effective 2021)

A new allowable deduction is created under CREATE ACT. It is 50% of the value of labor
training expenses incurred for skills development of enterprise-based trainees enrolled in
public senior high schools, public higher education institutions, or public technical and
vocational institutions and duly covered by an apprenticeship agreement under Presidential
Decree No. 442, Series of 1974, or the “Labor Code of the Philippines”, as amended, shall be
granted to enterprises:
The taxpayer must secure proper certification from the DepEd, TESDA, or CHED if the students
are trained in public educational institutions. The deduction is capped at 10% of direct labor
wage.
1 Tax credit
NIRC SEC. 34 (C) Taxes –
(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to
have the benefits of this paragraph, the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or incurred during the taxable year to any foreign
country; and
Note that technically speaking, the NIRC does not specify resident citizens, and thus non-resident citizens
should be able to apply for the tax credit.
However, the purpose of the tax credit is primarily to reduce the burden of indirect double taxation. Since
non-resident citizens are not taxable in the Philippines for income abroad, there is no such indirect double
taxation on their income earned abroad. Thus, they cannot avail of the tax credit.
This is also in line with the concept of the matching principle similarly employed in accounting. The
principle, also applied in taxation, states that items of expenses must be matched with a particular
revenue earned. Since the relevant income on which the foreign tax is levied would be non-taxable in the
Philippines, then there is no income with which the tax expense can be matched against.
2 Net Capital Loss Carry-Over

NIRC SEC. 39 Capital Gains and Losses –
(D) Net Capital Loss Carry-Over. – If any taxpayer, other than a corporation, sustains in any taxable year a
net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in
the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than
twelve (12) months.
This means that it is as if the loss was incurred in the next succeeding year. Therefore, it is subject to the
normal rule of net capital losses not being deductible.

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Ordinary Allowable Deductions 1

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Chapter 13 ,

Gnome taxation by Pang ga want

Ordinary Allowable Deductions

These can be organized into three groups:

Regular income tax is computed in the following manner:

Gross Income XXXXX

b. Special itemized deductions

Compensation income ₱150,000

The computation of taxable income is as follows:

Business income 200,000 210K , took it deducted

Gross income 350,000 deduction Mutt not exceed

Taxable income ₱150,000

Both Business income 9 compensation Income are

Allowable deductions (210,000) compensation Income

Net Operating Loss ₱10,000 -

Taxable income ₱150,000

Interest expense on loans for business expansion ₱100,000

Interest expense ₱100,000

Gross Income 120,000

Before CREATE, the arbitrage cap was 33%.

deductions : a. Resident Citizens1

il ne c. Partners in a General Professional Partnership, on his proportionate share of such taxes

Gross Income XXXX XXXX

𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒

Taxable Foreign income

The limit is computed as follows:

Actual tax paid

The tax credit is computed as follows:

Allowed tax credit 28,800

Final Allowed credit: ₱73,800

Income tax due ₱230,400

not armed → an capitatitable

Tax basis 2,100,000 2,600,000 800,000 1,100,000

Revenue Memorandum Order (RMO) 21-2020 clarified the following:

Date purchased Date of sale Gain or loss

Expenses XXXX XXXX

Gross Income XXXX XXXX

Net Capital Loss Carry-Over (NCLCO)

2020 2021 2022

Expense XXXX XXXX XXXX

If a purchase of the same or substantially same security occurs in this period,

The concern is in the measurement of the non-deductible loss.

Presume that the sale covered stocks purchased in January 5.

The loss from wash sales are as follows:

Securities becoming worthless

Net Operating Loss Carry-Over (NOLCO)

Business income XXXX

2020 2021 2022 2023 2024

Business Income 500,000 330,000 480,000 450,000 620,000

2020 2021 2022 2023 2024

Allowance for bad debts 15,000

Any revaluation surplus being depreciated or amortized is not deductible.

V. Amortization of intangible assets

VI. Charitable and other contributions

Other deductible contributions are subject to the following limits:

VII. Research and Development

VIII. Other expenses