DEDUCTIONS PRINCIPLES

DEDUCTION FROM GROSS INCOME

BUSINESS EXPENSES
ARE DEDUCTIBLE
only those pertaining to business
 business expense
benefit only the current accounting period.
costs of generating income or gains for the current period.
EXAMPLE:
USeR S LOCAL
Utilities expenses
Selling Expenses
Rent
Salaries and Wages Expenses
Local taxes and permits
 business capital expenditure
benefit future accounting period.
initial recorded as an asset but deducted against future GI
EXAMPLE:

Prepayments
P I E R Is A PPE
Inventory
Expenses to promote business GOODWILL
Rental on capital lease/ finance lease that transfer ownership
Investments
Acquistion of Intangible assets such as patent/franchise
Property, Plant, and Equipment Items.
immaterial capital expenditure
it is outright expense upon acquisition.
 special consideration w/ deduction
SMAV REPAIR and ACQUISTION
Securities issue costs
Manufacturing Expenses
Accounting methods
Value Added Tax
Property REPAIR and Improvements
Property ACQUISITION-related costs
securities issue costs
not deductible against GROSS INCOME.

deductible against PROCEEDS of such

securities
MANUFACTURING EXPENSES
Expensed through cost of sales when
sold.

deducted against sales in determining

the GROSS INCOME from operations.
accounting methods
CASH BASIS - deductible when paid
regardless of when they
accrue.
- accrued expenses are
not deductible
ACCRUAL BASIS - deductible when they
accrue regardless when
they are paid.
- accrued + paid.
 value added tax on deductions
CLAIMABLE AS INPUT VAT
DEDUCTIONS

VAT TAXPAYER CLAIMABLE AS TAX CREDIT

AGAINST OUTPUT VAT

PART OF COSTS OF PRUCHASES

NONVAT TAXPAYER OR EXPENSE
 GENERAL PRINCIPLES OF DEDUCTIONS
RELATED PARTY WITHOLD
MATCHING LOAN
RELATED PARTY Rule
WITHOLDING Rule
MATCHING Rule
Legitimate,Ordinary,Actual and Necessary
RELATED PARTY RULE
TAXABLE/ DEDUCTIBLE

GAINS REALIZED TAXABLE

LOSSES NON-DEDUCTIBLE

This rule is a control measure to prevent evasion of taxes

to related party.
Relevant in the claim of losses,bad debts & interest
expenses.
RELATED PARTY RULE
RELATED PARTIES
MEMBERS OF A FAMILY

CORPORATIONS UNDER DIRECT/INDIRECT CONTROLLING

INDIVIDUAL (1/2 OF VOTING STOCKS OF CORPORATION)

GRANTOR AND FIDUCIARY OF A TRUST

FIDUCIARIES OF TRUST W/ THE SAME GRANTOR
FIDUCIARY OF A TRUST & THE BENEFICIARY OF SUCH A TRUST
 TRANSFER PRICING REGULATION
TRANSACTION between ASSOCIATED ENTERPRISES must be
made at ARM'S LENGTH.

the price of non arm's length, otherwise restated to arm's

length FAIR VALUE.

ARM'S LENGTH VALUE is DEDUCTIBLE for the purpose of

income tax
 NO WITHOLDING, NO DEDUCTION
FAILURE TO COMPLY WITH THE REQUIREMENT TO WITHOLD
INCOME TAXES ON THEIR PAYMENTS, SHALL RESULT TO

DISALLOWANCE OF EXPENSE AS
DEDUCTION
 TYPES OF WITHOLDING TAXES

C
COMPENSATION
F
FINAL
E
EXPANDED
BIR FORM OF WITHOLDING TAXES

1601
 TYPES OF WITHOLDING TAXES
TYPES EXPENSES TYPE BIR FORM DEADLINE

ON OR BEFORE
COMPENSATION COMPENSATION 1601-C 1OTH DAY
EXPENSE OF THE MONTH
FOLLOWING THE
CERTAIN PASSIVE INOME
MONTH IN E/
FINAL WITHOLDING TAX AND 1601-F
WITHOLDING WAS
FRINGE BENEFITS
MADE (EXCEPT FOR
OTHER INCOME DECEMBER
EXPANDED WITHOLDING PAYMENTS W/C ARE 1601-E WITHOLDING BEFORE
TAX SUBJECT TO REG TAX TO JAN. 15,NEXT YEAR)
THE RECIPIENT
MATCHING RULE

ONLY BUSINESS EXPENSES THAT ARE

INCURRED FOR THE GENERATION OF
GROSS INCOME SUBJECT TO REGULAR
TAX ARE DEDUCTIBLE.
 NON-DEDUCTIBLE

1) Expense on EXEMPT INCOME

2) Expenses on Income subject to a Special Tax Regime
3) Business Expenses OF A TAXPAYER subject to FINAL INCOME TAX
4) Expenses & Taxes on income subject to FINAL TAX/ CGT.
5) FOREIGN BUSINESS Expenses of taxpayers taxable only on
Philippine Income
6) LOSS of income not yet recognized in GROSS INCOME
 expense on exempt income
1) Incurred to finance acquisition of TAX-EXEMPT SECURITY
2) PREMIUM PAID for LIFE INSURANCE
3) EFCDU or OBU from foreign currency corporation
4) Nonprofit Organizations, Gov't Agencies and Cooperatives
 expense on income subject to str

1) Expenses incurred with TIEZA

2) Expenses incurred with PEZA
 business expenses of taxpayer
subject to final income tax
1) NRA-NETB
2) NONRESIDENT FOREIGN CORPORATIONS
 expenses & TAXES oN INCOME subject
to final TAX OR CAPITAL GAIN TAX
1) Selling Expenses of DOMESTIC STOCKS directly to a buyer
2) Selling Expenses of REAL PROPERTIES (CAPITAL ASSETS)
3) Expenses of PETROLEUM SERVICE SUBCONTRACTORS in supplying
goods and services to petroleum service operators (8% FT in lieu)
 FOREIGN business expenses of
taxpayer TAXABLE ONLY ON PHILIPPINE
INCOME

1) RA/NRA-ETB
2) RESIDENT FOREIGN CORPORATIONS
 LOSS OF INCOME NOT YET RECOGNIZED IN
GROSS INCOME
1) WRITE OFF OF RECEIVABLE under cash basis
2) DESTRUCTION of UNHARVESTED FARM FRUITS/VEGETABLES
3) DEATH of ANIMAL OFFSPRING.
 LEGITIMATE BUSINESS EXPENSES

1) INCURRED in and for CURRENT TAXABLE PERIOD

2) NOT CAPITAL EXPENDITURE
3) BUSINESS/PROFESSION RELATED
4) NOT CONTRARY to a law, public policy or morals.
5) SUBSTANTIATED with receipts or other documents.
 ordinary BUSINESS EXPENSES

1) Necessary and essential

2) normal in relation to the business of the taxpayer
3) normally incurred by other taxpayer under the same line of business
 actual BUSINESS EXPENSES

1) it is paid or resulted to an incurrence of an obligation to taxpayer

2) IN CASE OF LOSS, must be sustained or realized by taxpayer in a
CLOSED and COMPLETED TRANSACTION (no further transaction
emanates from its occurence).
 tax reporting classification of
deductions
1) Cost of sales/ COst of Services
2) Regular Allowable Itemized Deductions
3) Special Allowable Itemized Deductions
4) NOLCO
 mode of claiming deductions

1) Itemized Deductions
2) OSD (in lieu of ITEMIZED)