Professional Documents
Culture Documents
Allowable Deductions
Allowable Deductions
Allowable Deductions
STUDENT HANDOUTS
TAXATION M.V.U. SIA/E.D. TABAG
TAX.112—ALLOWABLE DEDUCTIONS AY 2022 - 2023
LEARNING OBJECTIVES
REVIEW NOTES
ALLOWABLE DEDUCTIONS, DEFINED the development, management, operation and/or conduct of the
trade, business or exercise of a profession, including:
Deductions are items or amounts which the law allows to be 1. A reasonable allowance for salaries, wages, and other forms
deducted from gross income of certain taxpayers. of compensation for personal services actually rendered,
including the grossed-up monetary value of fringe benefit
This is only allowed to taxpayers subject to graduated income furnished or granted by the employer to the employee:
tax rate, in the case of individuals, and Regular Corporate Provided, That the final tax imposed under Section 33
Income Tax for Corporations. hereof has been paid;
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TAXATION | TAX.112—ALLOWABLE DEDUCTIONS ARC – ACCOUNTANCY REVIEW CENTER
on Higher Education (CHED). Provided, finally, that such The amount of interest paid or incurred within a taxable year on
deduction shall not exceed Ten Percent (10%) of Direct indebtedness in connection with the taxpayer's profession,
Labor Wage. trade or business shall be allowed as deduction from gross
income: Provided, however, That the taxpayer's otherwise
SUBSTANTIATION REQUIREMENTS allowable deduction for interest expense shall be reduced 33%
(25% starting July 1, 2020 for Corporate taxpayers subject to
Deduction mentioned above shall only be disallowed if the 20% pursuant to CREATE and zero for Corporate taxpayers
taxpayer can substantiate with sufficient evidence, such as subject to 20%).
official receipts or other adequate records:
1. the amount of the expense being deducted, and REQUISITES FOR DEDUCTIBILITY
2. the direct connection or relation of the expense being 1. The indebtedness must be that of the taxpayer;
deducted to the development, management, operation 2. The interest must have been stipulated in writing;
and/or conduct of the trade, business or profession of the 3. The interest must be legally due;
taxpayer. 4. The interest payment arrangement must not be between
related taxpayers as mandated in Sec. 34(B)(2)(b), in
BRIBES, KICKBACKS AND OTHER SIMILAR PAYMENTS relation to Sec. 36(B)both of the Tax Code of 1997;
5. The interest must not be incurred to finance petroleum
No deduction from gross income shall be allowed for any operations; and
payment made, directly or indirectly, to an official or employee 6. The interest was not treated as “capital expenditure”, if such
of the national government, or to an official or employee of any interest was incurred in acquiring property used in trade,
local government unit, or to an official or employee of a business or exercise of profession.
government-owned or -controlled corporation, or to an official
or employee or representative of a foreign government, or to a In the case of corporations, since the income tax rates changed
private corporation, general professional partnership, or a effective July 1, 2020, it follows that the deduction from interest
similar entity, if the payment constitutes a bribe or kickback. expense of 20% (33% prior to CREATE) shall be effective also
on the said date. For other domestic corporations with net
REQUISITES FOR DEDUCTIBILITY taxable income not exceeding P100,000,000, excluding the land
1. Must be ordinary and necessary; on which the particular business entity’s office, plant and
2. Paid or incurred during the taxable year; equipment are situated, the deduction is 0% since there is no
3. Connected with trade, business or practice of profession; difference in the income tax rate on the taxable income (20%)
4. Supported by sufficient evidence; and with the tax rate applied on the interest income subjected to
5. Not against the law, morals, public policy or public order; final tax (20%). However, in the case of individuals engaged in
6. It must have been subjected to withholding tax, if business or practice of profession, such deduction shall take
applicable. effect upon the effectivity of CREATE.
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EXCEPTION TAXES
Interest expense on tax delinquency or deficiency, provided, the The term “taxes” means taxes proper and no deductions should
tax is related to trade, business or practice of profession shall be be allowed for amounts representing interest, surcharge, or
100% deductible. penalties incident to delinquency.
OPTIONAL TREATMENT OF INTEREST GENERAL RULE – Taxes paid or incurred within the taxable year
in connection with the taxpayer’s profession, trade or business,
Interest expense related to acquisition of property used in trade, shall be allowed as deduction.
business or profession may, at the option of the taxpayer, be:
1. Claimed as outright expense; EXCEPTION – The following taxes are not deductible:
2. Capitalize and claim depreciation. 1. Income tax
2. Income tax paid abroad if claimed as tax credit
TIME WHEN ADVANCE INTEREST CAN BE CLAIMED BY 3. Estate tax
INDIVIDUAL UNDER CASH BASIS 4. Donor’s tax
5. Special assessment
If within the taxable year an individual taxpayer reporting 6. VAT
income on the cash basis incurs an indebtedness on which an 7. Stock transaction tax
interest is paid in advance through discount or otherwise, the
same shall be allowed as a deduction in the year the LOSSES
indebtedness is paid: Provided, further, That if the indebtedness
is payable in periodic amortizations, the amount of interest KINDS OF LOSSES
which corresponds to the amount of the principal amortized or
paid during the year shall be allowed as deduction in such 1. Losses in General
taxable year. 2. Casualty Losses
3. Voluntary removal of buildings
NON-DEDUCTIBLE INTEREST 4. Loss of value
5. Net operating loss carry-over (NOLCO)
1. Interest paid to persons classified as related taxpayers 6. Capital losses and securities becoming worthless
under Section 36 (B) of RA 8424 shown below; 7. Special Losses
a) Losses from wash sales of stock or securities
a) Between members of a family. b) Wagering losses
c) Abandonment losses
For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters LOSSES IN GENERAL
(whether by the whole or half-blood), spouse,
ancestors, and lineal descendants; or Losses must usually be evidenced by closed and completed
transactions. Proper adjustment must be made in each case for
b) Except in the case of distributions in liquidation, expenditures or items of loss properly chargeable to capital
between an individual and corporation more than fifty account, and for depreciation, obsolescence, amortization, or
percent (50%) in value of the outstanding stock of depletion. Moreover, the amount of the loss must be reduced by
which is owned, directly or indirectly, by or for such the amount of any insurance or other compensation received,
individual; or and by the salvage value, if any, of the property. A loss on the
sale of residential property is not deductible unless the property
c) Except in the case of distributions in liquidation, was purchased or constructed by the taxpayer with a view to its
between two corporations more than fifty percent subsequent sale for pecuniary profit. No loss is sustained by the
(50%) in value of the outstanding stock of which is transfer of property by gift or death. Losses sustained in illegal
owned, directly or indirectly, by or for the same transactions are not deductible.
individual if either one of such corporations, with
respect to the taxable year of the corporation preceding CASUALTY LOSSES
the date of the sale of exchange was under the law
applicable to such taxable year, a personal holding Losses sustained due to fires, storms, shipwreck, or other
company or a foreign personal holding company; casualties, or from robbery, theft or embezzlement are
deductible provided the following requisites are present;
d) Between the grantor and a fiduciary of any trust; or 1. The property lost is connected with the trade, business or
practice of profession;
e) Between the fiduciary of and the fiduciary of a trust and 2. Actually sustained during the taxable year;
the fiduciary of another trust if the same person is a 3. Not compensated for by insurance or other forms of
grantor with respect to each trust; or indemnity
4. Incurred in trade, profession or business
f) Between a fiduciary of a trust and beneficiary of such 5. Reported with the BIR within forty-five (45) days from the
trust. time of loss; and
6. Not claimed as deduction for estate tax purposes.
2. If the indebtedness is incurred to finance petroleum
exploration;
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Loss due to the voluntary removal of or demolition of old Losses from wagering transactions shall be allowed only to the
buildings, the scrapping of old machinery, equipment, etc., extent of the gains from such transactions.
incident to renewals and replacements will be deductible from
gross income. When a taxpayer buys real estate upon which is ABANDONMENT LOSSES
located a building, which he proceeds to raze with a view to
erecting thereon another building, it will be considered that the 1) In the event a contract area where petroleum operations
taxpayer has sustained no deductible expense on account of the are undertaken is partially or wholly abandoned, all
cost of such removal. accumulated exploration and development expenditures
pertaining thereto shall be allowed as deduction.
LOSS OF USEFUL VALUE
2) In case a producing well is subsequently abandoned, the
When through some change in business conditions, the unamortized costs thereof, as well as the undepreciated
usefulness in the business of some or all of the capital assets is costs of equipment directly used therein, shall be allowed as
suddenly terminated, so that the taxpayer discontinues the deduction.
business or discards such assets permanently from use of such
business, he/it may claim as deduction the actual loss sustained. EFFECT IF ABANDONED WELL IS REENTERED AND
PRODUCTION IS RESUMED OR EQUIPMENT IS RESTORED INTO
NET OPERATING LOSS CARRY-OVER SERVICE
“Net Operating Loss” means the excess of allowable deduction If the abandoned well is re-entered and production is resumed
over gross income of the business in a taxable year. or equipment is restored into service, the effects are:
1. The amount previously claimed as deduction shall be
The net operating loss of the business or enterprise for any recognized as income; and
taxable year shall be carried over as a deduction from gross 2. Such amount shall also be capitalized and amortized or
income for the next three (3) consecutive taxable years depreciated, as the case may be.
immediately following the year of such loss. However, business
or enterprise which incurred net operating loss for taxable BAD DEBTS
years 2020 and 2021 shall be allowed to carry-over the same as
a deduction from gross income for the next five (5) consecutive Receivables which are no longer collectible are deductible,
taxable years immediately following the year of such loss. provided the following requisites are present:
1) There must be an existing indebtedness due to the taxpayer
REQUISITES FOR DEDUCTIBILITY: which must be valid and legally demandable;
1. On the year of net loss, the taxpayer must not be exempt 2) The same must be connected with the taxpayer’s trade,
from income tax (Income tax holiday); and business or practice of profession;
2. There is no substantial change in the ownership of the 3) The same must not be sustained in a transaction between
business or enterprise in that – related taxpayers;
a) Not less than seventy-five (75%) in nominal value of 4) The same must be actually charged off in the books of
outstanding issued shares, if the business is in the name accounts of the taxpayer as of the end of the taxable year;
of a corporation, is held by or on behalf of the same and
persons; or 5) The same must be actually ascertained to be worthless and
b) Not less than seventy-five (75%) of the paid-up capital uncollectible.
of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons. In the case of Philippine Refining Co. vs. Court of Appeals (G.R.
No. 118794 dated May 8, 1994), the Court held that there are
NOLCO FOR MINES OTHER THAN OIL & GAS WELLS steps outlined to be undertaken by the taxpayer to prove that he
exerted diligent efforts to collect the debts, viz:
For mines other than oil and gas wells, net operating loss a. Sending of statement of accounts
incurred in any of the first ten (10) years of operation may be b. Sending of collection letters;
carried over for the next five (5) years. c. Giving the account to a lawyer for collection; and
d. Filing a collection case in court.
LOSSES FROM WASH SALES OF STOCK OR SECURITIES
SECURITIES BECOMING WORTHLESS
In case of any loss claimed to have been sustained from any sale
or other disposition of shares of stock or securities shall not be If securities are ascertained to be worthless and charged off
deductible if: within the taxable year and are capital assets, the loss resulting
1) The seller is not a dealer in securities; therefrom shall, in the case of a taxpayer other than a bank or
2) Within a period of thirty (30) days before the sale ending trust company incorporated under the laws of the Philippines a
thirty (30) days after the sale, the seller either: substantial part of whose business is the receipt of deposits, be
a) Acquired (by purchase or exchange) stock or securities considered as a loss from the sale or exchange, on the last day of
identical to the stock or securities sold; or such taxable year, of capital assets.
b) Has entered into a contract or option to acquire stock or
securities identical to the stock or securities sold. DEPRECIATION
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1) The property subject to depreciation is used in the trade, PROPERTIES USED IN MINING OPERATIONS
business or practice of profession;
2) The allowance for depreciation must be sustained by the If expected life of property Normal rate of
person who owns or who has a capital investment in the is ten (10) years or less depreciation (depreciate
property; over actual useful life)
3) The allowance for depreciation must be reasonable; If expected life is more Depreciated over any
4) The allowance for depreciation should not exceed the cost than ten (10) years number of years between
of the property; five (5) years and the
5) The schedule of the allowance must be attached to the expected life.
return.
DEPRECIATION DEDUCTIBLE BY NON-RESIDENT ALIENS
USE OF CERTAIN METHODS AND RATES ENGAGE IN TRADE OR BUSINESS OR RESIDENT FOREIGN
CORPORATIONS
The term 'reasonable allowance' shall include, but not limited
to, an allowance computed in accordance with rules and In the case of non-resident aliens engage in trade or business or
regulations prescribed by the Secretary of Finance, upon resident foreign corporations, depreciation shall be allowed
recommendation of the Commissioner, under any of the only if the property is located in the Philippines.
following methods:
1) Straight-line method OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO
2) Declining-balance method – rate should not exceed twice DEPRECIATION
the rate in straight-line method
3) Sum-of-the-years-digit method; and Allowance for obsolescence may be deducted in addition to
4) Any other method which may be prescribed by the reasonable allowance for the exhaustion, wear and tear.
Secretary of finance upon recommendation of the BIR.
EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL
AGREEMENT AS TO USEFUL LIFE ON WHICH DEPRECIATION INSTITUTIONS
RATE IS BASED
A private educational institution may at its option elect either:
Where under rules and regulations prescribed by the Secretary a) to deduct expenditures otherwise considered as capital
of Finance upon recommendation of the Commissioner, the outlays of depreciable assets incurred during the taxable
taxpayer and the Commissioner have entered into an agreement year for the expansion of school facilities; or
in writing specifically dealing with the useful life and rate of b) to deduct allowance for depreciation.
depreciation of any property, the rate so agreed upon shall be
binding on both the taxpayer and the National Government in DEPLETION OF OIL AND GAS WELLS AND MINES
the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The In case of oil and gas wells or mines, capital invested may be
responsibility of establishing the existence of such facts and amortized using cost-depletion method, provided:
circumstances shall rest with the party initiating the 1) When allowance for depletion shall equal capital invested,
modification. Any change in the agreed rate and useful life of the no further allowance shall be granted;
depreciable property as specified in the agreement shall not be 2) After production in commercial quantities has commenced,
effective for taxable years prior to the taxable year in which intangible exploration and development drilling costs
notice in writing by certified mail or registered mail is served by shall be treated as follows:
the party initiating such change to the other party to the
agreement: INTANGIBLE EXPLORATION AND DEVELOPMENT
DRILLING COSTS
Provided, however, that where the taxpayer has adopted such KINDS TREATMENT
useful life and depreciation rate for any depreciable and claimed Incurred for non- Deductible in the year
the depreciation expenses as deduction from his gross income, producing wells and/or incurred.
without any written objection on the part of the Commissioner mines
or his duly authorized representatives, the aforesaid useful life At the option of the
and depreciation rate so adopted by the taxpayer for the taxpayer:
aforesaid depreciable asset shall be considered binding.
Incurred for producing OPTION 1 – Deductible in
PROPERTIES USED IN PETROLEUM OPERATIONS wells and/or mines full in the year paid or
incurred; or
Properties directly related 1) Straight-line
to production 2) Declining-balance OPTION 2 – Capitalize
method and amortize.
NOTE: Useful life to be 'Intangible costs in petroleum operations' refers to any cost
used is shorter period incurred in petroleum operations which in itself has no salvage
between: value and which is incidental to and necessary for the drilling of
a. 10 years; or wells and preparation of wells for the production of petroleum:
b. Useful life Provided, That said costs shall not pertain to the acquisition or
Properties not directly - Only straight-line improvement of property of a character subject to the allowance
related to production method is allowed for depreciation except that the allowances for depreciation on
- Useful life is always such property shall be deductible under this Subsection.
presumed to be 5
years.
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Any intangible exploration, drilling and development expenses government corporations, exclusively to be used in
allowed as a deduction in computing taxable income during the undertaking priority activities in:
year shall not be taken into consideration in computing the a. Education;
adjusted cost basis for the purpose of computing allowable cost b. Health;
depletion. c. Youth
d. Sports development;
ELECTION TO DEDUCT EXPLORATION AND DEVELOPMENT e. Human settlements;
EXPENDITURES f. Science and culture;
g. Economic development.
n computing taxable income from mining operations, the
taxpayer may at his option, deduct exploration and 2) Donations to foreign institutions or international
development expenditures accumulated as cost or adjusted organizations which are fully deductible in pursuance of:
basis for cost depletion as of date of prospecting, as well as a. Agreements;
exploration and development expenditures paid or incurred b. Treaties;
during the taxable year: Provided, That the amount deductible c. Commitments; or
for exploration and development expenditures shall not exceed d. Special laws.
twenty-five percent (25%) of the net income from mining
operations computed without the benefit of any tax incentives 3) Donations to Accredited Non-government Organizations
under existing laws. The actual exploration and development
expenditures minus twenty-five percent (25%) of the net The term “non-government organization” means a non-
income from mining shall be carried forward to the succeeding profit domestic corporation:
years until fully deducted. a. Organized and operated exclusively for:
i. Scientific;
The election by the taxpayer to deduct the exploration and ii. Research;
development expenditures is irrevocable and shall be binding in iii. Educational;
succeeding taxable years. iv. Character building;
v. Youth and sports development;
'Net income from mining operations' shall mean gross income vi. Health;
from operations less 'allowable deductions' which are vii. social welfare;
necessary or related to mining operations. 'Allowable viii. Cultural;
deductions' shall include mining, milling and marketing ix. Charitable purposes; or
expenses, and depreciation of properties directly used in the x. A combination thereof.
mining operations. This paragraph shall not apply to
expenditures for the acquisition or improvement of property of b. No part of the net income of which inures to the benefit
a character which is subject to the allowance for depreciation. of any private individual;
In no case shall this paragraph apply with respect to amounts c. Not later than 15th day of the third (3rd) month after the
paid or incurred for the exploration and development of oil and close of the taxable year in which contributions are
gas. received, makes utilization, unless an extended period
is granted by the Secretary of Finance, upon
The term 'exploration expenditures' means expenditures paid recommendation of the Commissioner of Internal
or incurred for the purpose of ascertaining the existence, Revenue.
location, extent or quality of any deposit of ore or other mineral,
and paid or incurred before the beginning of the development d. The level of administrative expense of which shall, on
stage of the mine or deposit. an annual basis, in no case to exceed thirty percent
(30%) of the total expenses;
The term 'development expenditures' means expenditures paid
or incurred during the development stage of the mine or other e. The assets of which, in the event of dissolution, would
natural deposits. The development stage of a mine or other be distributed to:
natural deposit shall begin at the time when deposits of ore or i. Another domestic corporation organized for
other minerals are shown to exist in sufficient commercial similar purpose or purposes; or
quantity and quality and shall end upon commencement of ii. The state for public purposes; or
actual commercial extraction. iii. Another organization to be used in such
manner as in the judgement of the court shall
DEPLETION OF OIL AND GAS WELLS AND MINES DEDUCTIBLE best accomplish the general purpose for which
BY A NON-RESIDENT ALIEN INDIVIDUAL OR FOREIGN the dissolved organization was organized.
CORPORATION
Per special laws, donations made to the following are
In the case of non-resident aliens engage in trade or business or deductible in full:
resident foreign corporations, depletion shall be allowed only if 1. Integrated Bar of the Philippines (P.D.181)
the oil and gas wells or mines are located in the Philippines. 2. International Rice Research Institute (R.A. 2707)
3. Development Academy of the Philippines (P.D. 205)
CHARITABLE CONTRIBUTIONS 4. The University of the Philippines & other state colleges
5. Cultural Center of the Philippines
FULLY DEDUCTIBLE DONATIONS 6. Artesian Well Fund (R.A. 1977)
7. Ramon Magsaysay Award Foundation
The following charitable contributions shall be fully deductible: 8. Task Force on Human Settlement
1) Donations to the Government of the Philippines or to any of 9. Donations to the National Museum of the Philippines
its agencies or political subdivisions including fully owned (RA No. 11333)
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10. Donation to National Performing Arts Companies (RA Moreover, donations of any of the above items to the National
No. 11392) Government or to any of its agencies or political subdivisions,
11. National Commission on Culture including fully-owned government corporations, for the sole
12. Humanitarian Science Foundation and exclusive purpose of combatting the COVID-19, shall be
13. National Social Action Council allowed full deductibility, regardless if covered by the National
Economic and Development Authority (NEDA)’s annual priority
DONATIONS SUBJECT TO LIMIT plan.
The following donations, which do not fall under fully
deductible donations, shall be subject to limit: The requirement of submission of a Notice of Donation shall be
1) Donations to the Government of the Philippines or dispensed with.
any agencies or any political subdivision thereof
exclusively for public purposes; In order to be fully deductible and allowable as an expense
2) Donations to accredited domestic corporations or against the gross income of the donor-corporation and/or
associations operated exclusively for: donor-individual, said exempt donation/gifts shall be
a. Religious; supported by the following documents:
b. Charitable; Donee-Recipient Supporting Document
c. Scientific; National Government or any Deed of Donation
d. Youth and sports development; entity created by any of its
e. Cultural; agencies (including public
f. Educational hospitals) which is not
g. Rehabilitation of veterans; conducted for profit, or to
h. Social welfare institutions; or any political subdivision of
i. Non-government organization. the said Government,
including fully-owned
LIMIT government corporations
TAXPAYER LIMIT Accredited non-stock, non- Certificate of Donation (BIR
Rate Base profit educational and/or Form 2322)
Corporation 5% Taxable Income from trade, charitable, religious, cultural
Individual 10% business or practice of or social welfare corporation,
profession before charitable institution, foundation, non-
contributions government organization
and/or research institution
VALUATION IN CASE OF DONATION OF NON-CASH PROPERTY or organization
The amount of any charitable contribution of property other OTHER DONATIONS /GIFTS EXEMPTED DURING THE PERIOD
than money shall be based on the acquisition cost. OF THE STATE OF NATIONAL EMERGENCY
RR NO. 9-2020 – IMPLEMENTING SECTION 4(Z)AND Furthermore, the above donations when made during the
SECTION 4(EE) OF R.A. NO. 11469 period of the state of national emergency, for the sole and
exclusive purpose of combatting COVID 19, shall also be
FULL DEDUCTIBILITY OF SPECIFIC DONATIONS/GIFTS considered as exempt donations/gifts, when given to the
ALREADY EXEMPT FROM DONOR’S TAX UNDER THE LAW following donees:
1. Private hospitals and/or non-stock non-profit educational
The following specific donations/gifts when given for the sole and/or charitable, religious, cultural or social welfare
and exclusive purpose of combatting COVID 19 during the corporation, institution, foundation, non-government
period of the state of national emergency under R.A. No. 11469, organization (even if non-accredited), trust or
shall be considered fully deductible against the gross income of philanthropic organization and/or research institution or
the donor-Corporation/donor-individual: organization; and
a) Cash donations; 2. Local private corporations, civic organizations, and/or
b) Donations of all critical or needed healthcare equipment or international organizations/institutions provided that they
supplies; shall
c) Relief goods such as, but not limited to, food packs (rice, a. actually, directly and exclusively distribute and/or
canned goods, noodles, etc.) and water; and transfer said donations/gifts to, and/or;
d) Use of property, whether real or personal (shuttle service, b. partner as conduit/logistical machinery with, the
use of lots/buildings); accredited NGOs and/or national government or any
entity created by any of its agencies which is not
To be entitled to full deductibility, said donations shall be made conducted for profit, or to any political subdivision of
to any of the following: the said Government.
1. National Government or any entity created by any of its
agencies (including public hospitals) which is not The above donations shall also be deductible in full against the
conducted for profit, or to any political subdivision of the gross income of the donor-Corporation and/or donor-
said Government, including fully-owned government individual and subject to the timely submission of documentary
corporations; and requirements as enumerated below:
2. Accredited non-stock, non-profit educational and/or
charitable, religious, cultural or social welfare corporation,
institution, foundation, non-government organization
and/or research institution or organization.
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SUPPORTING DOCUMENTS FOR OTHER DONATIONS/GIFTS EXEMPTED DURING THE PERIOD OF THE STATE OF
NATIONAL EMERGENCY
Donee-Recipient Documentary Documentary Requirements for Donor
Requirements for
Donee-Recipient
Accredited non-stock, non-profit educational and/or Liquidation report 1) Sworn Certification executed by the
charitable, religious, cultural or social welfare corporation, President of the donor-corporation or any
institution, foundation, on-government organization, trust of its authorized officers or by the donor-
or philanthropic organization and/or research institution individual himself, stating the name of the
or organization done, the date of the donation, the value
of the donation and stating that the
Non-stock non-profit educational and/or charitable donation was made solely for the purpose
religious, cultural or social welfare corporation, institution, of supporting efforts to fight COVID 19
foundation, non-government organization (even if non- during the period of the state of national
accredited), to include those organized and operated emergency together with proof of
exclusively for health purposes such as private hospitals, purchase (if donation in kind)
trusts or philanthropic organization and/or research
institution or organization
Local private corporations or international 1) Liquidation 1) Certification of Donation (BIR Form
organizations/institutions who partner to serve as conduit report 2322) or Deed of Donation duly issued by
with accredited NGOs and/or national government or any 2) Certificate of the accredited NGO or government
entity created by any of its agencies which is not conducted donation (BIR institution, respectively in the name of
for profit, or to any political subdivision of the said Form 2322) or the donor-corporation/individual.
Government Deed of 2) Proof of purchases (if donation is in kind)
Donation 3) BIR-registered Acknowledgement
Receipt or the template for an
acknowledgement receipt to be issued by
the ultimate beneficiary
These documentary requirements shall be submitted to the respective Revenue District Office (RDO) where the donor and the
donee recipient are registered within sixty (60) days from the lifting of the Enhanced Community Quarantine (ECQ).
However, donations/gifts to foreign institutions or Pension liability is equivalent to Normal Cost per Actuarial
international organizations, shall not be subject to the Valuation Report (AVR) for funding purposes. AVR for PAS 19
documentary requirements enumerated above, but shall be purposes is not the proper amount to be used in determining
subject to verification rules under Section 34 (H) (4) of the NIRC. Pension Liability in determining deductible Pension Trust.
If not chargeable to capital Claim as outright expense Past service cost is the excess of actual contributions over the
account Normal Cost. It shall be amortized over ten (10) years.
If chargeable to capital At the option of the
account but not chargeable taxpayer: OPTIONAL STANDARD DEDUCTION (OSD)
to property subject to
depreciation or depletion OPTION 1 – Claim as In lieu of the itemized deductions, an individual subject to
outright expense. graduated rated, other than a non-resident alien, may elect a
standard deduction in an amount not exceeding forty percent
OPTION 2 – Amortize over (40%) of his gross sales or gross receipts, as the case maybe. In
60 months. the case of a corporation subject to RCIT, it may elect a standard
If chargeable to property Capitalize deduction in an amount not exceeding forty percent (40%) of its
subject to depreciation or gross income.
depletion
Unless the taxpayer signifies in his return his intention to elect
PENSION TRUSTS the optional standard deduction, he shall be considered as
having availed himself of the itemized deductions. Such election
AMOUNT DEDUCTIBLE when made in the return shall be irrevocable for the taxable
year for which the return is made.
Actual contribution to the extent of pension PXXX
liability* An individual who is entitled to and claimed for the optional
standard deduction shall not be required to submit with his tax
Amortization of Past Service Cost XXX return such financial statements.
Total PXXX
* Compare actual contribution and Normal Cost whichever is A general professional partnership and the partners comprising
lower such partnership may avail of the optional standard deduction
only once, either by the general professional partnership or the
PENSION LIABILITY partners comprising the partnership.
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Except when the Commissioner otherwise permits, the said 6) Interest, Losses and Bad Debts:
individual shall keep such records pertaining to his gross sales a. Between members of a family. Family of an individual
or gross receipts, or the said corporation shall keep such records shall include only his brothers and sisters (whether by
pertaining to his gross income. the whole or half-blood), spouse, ancestors, and lineal
The following may be allowed to claim OSD: descendants; or
1) Individuals b. Except in the case of distributions in liquidation,
a. Resident Citizen between an individual and a corporation more than
b. Non-resident citizen fifty percent (50%) in value of the outstanding stock of
c. Resident alien which is owned, directly or indirectly, by or for such
d. Taxable estates and trusts individual; or
c. Except in the case of distributions in liquidation,
2) Corporations between two corporations more than fifty percent
a. Domestic corporation (50%) in value of the outstanding stock of each of which
b. Resident foreign corporation is owned, directly or indirectly, by or for the same
individual, if either one of such corporations, with
AMOUNT DEDUCTIBLE respect to the taxable year of the corporation preceding
the date of the sale or exchange was a personal holding
Individuals Gross Sales/Gross Receipts x company;
40% d. Between the grantor and a fiduciary of any trust; or
Corporations Gross Income x 40% e. Between the fiduciary of a trust and fiduciary of
another trust if the same person is the grantor
A. NON-DEDUCTIBLE ITEMS with respect to each trust; or
f. Between a fiduciary of a trust and a beneficiary of such
1) Bribes, kickbacks and other similar payments; trust.
2) Personal, living or family expenses;
3) Any amount paid out for new buildings or for permanent SPECIAL DEDUCTIONS ALLOWED TO INSURANCE
improvements, or betterments made to increase the value COMPANIES
of any property or estate, except intangible drilling and
development costs incurred in petroleum operations which In the case of insurance companies, whether domestic or foreign
are deductible; doing business in the Philippines, the following are deductible:
4) Any amount expended in restoring property or in making 1) Net additions made within the year to reserve funds; and
good the exhaustion thereof for which an allowance is or 2) The sum other than dividends paid within the year on policy
has been made and annuity contracts.
5) Premiums paid on any life insurance policy covering the life
of any officer or employee, or of any person financially NOTE: Released reserve shall be treated as income for the year
interested in any trade or business carried on by the of release.
taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
DISCUSSION QUESTIONS
Allowable deductions, defined deduction allowed, or a lesser amount or not to claim any
1. Which of the following is not a characteristic of a deduction? deduction at all.
a. It is a reduction of wealth that helped earn the income a. Statements 1 & 2 are false
subject to tax. b. Statement 1 is true but statement 2 is false
b. It is not a receipt. c. Statement 1 is false but statement 2 is true
c. It is a subtraction to arrive at income subject to tax. d. Statements 1 and 2 are true
d. An immunity or privilege, a freedom from a charge or
burden to which others are subjected. Allowable deductions in relation to taxpayer and type of
income
2. Statement 1: Exclusions are receipts which are excluded 4. Which of the following is not allowed to claim allowable
from the gross income, hence, do not form part of the gross deductions in computing income tax?
income. a. Individual taxpayer engaged in business or practice of
Statement 2: Exclusions are items or amounts allowed to be profession
subtracted from gross income to arrive at the taxable b. Individual taxpayer who is a pure compensation
income. income earner
a. Only statement 1 is correct c. Corporation engaged in business
b. Only statement 2 is correct d. All of the choices
c. Both statements are correct
d. Both statements are false Itemized deductions
5. Which of the following is not one of the itemized
3. Statement 1: A taxpayer can only deduct an item or amount deductions?
from gross income only if there is a law authorizing such a a. Ordinary and necessary business expenses
deduction. b. Interest
Statement 2: For income tax purposes, a taxpayer is free to c. Taxes
deduct from the gross income the full amount of the
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d. Premium payments on health and/or hospitalization 12. On January 1, 2018, Paquito leased his vacant lot for a
insurance period of 12 years to Romar at an annual rate of P2,400,000.
It was also agreed that Romar will pay the following:
Ordinary and necessary trade, business or professional P4,800,000 representing rental payment for year 2018
expenses and 2019.
6. Which of the following is allowable compensation expense Security deposit of P2,400,000.
of an employer? Annual real property tax of P30,000.
I. Salary of employee paid for a limited period of time
after his death to his widow. The lease contract provides, among others that the lessee
II. Manager’s expense account subject to fringe benefit tax. will construct a 5-storey building for parking purposes at a
a. I only c. I and II cost of P9,500,000. Ownership of the building shall belong
b. II only d. Neither I nor II to the lessor upon the expiration or termination of the lease
contract.
7. Drei Corporation incurred rent expense amounting to
P500,000. Drei paid the lessor the gross amount of The building was completed on July 1, 2020 with an
P500,000 without deducting 5% withholding tax. How estimated useful life of 15 years. How much can Romar
much rent expense can Drei claim as allowable deduction claim as deduction in relation to the lease in 2018?
from its gross income? a. P2,430,000 c. P2,400,000
a. P500,000 c. P475,000 b. P4,830,000 d. P4,800,000
b. P450,000 d. nil
13. Using the same information above, how much can Romar
8. ARC Inc. paid for the regular repairs and maintenance of its claim as deduction in relation to the lease in 2020?
facilities to Johnson Manpower Services (JMS). How much a. P2,430,000 c. P2,400,000
is the applicable withholding tax on such income payment? b. P2,930,000 d. P3,063,333
a. Exempt from withholding tax
b. 1% withholding tax on its gross payment 14. JAO Corporation is engaged in the sale of goods and services
c. 2% withholding tax on its gross payment with net sales/net revenue of P3,000,000 and P2,000,000
d. 5% withholding tax on its gross payment respectively. The actual entertainment, amusement and
recreational (EAR) expense for the taxable year totaled
9. Buladaco Manufacturing Corporation hired Cabarles, Ong, P30,000.
Sia & Tabag (COST & Co.) for its annual financial statement
audit for 2020 taxable year. Buladaco agreed to pay COST How much is the deductible EAR expense?
& Co. for its services amounting to P2,000,000. Such a. P30,000 c. P25,000
payment to SCT & Co. shall be: b. P27,000 d. nil
a. Exempt from withholding tax
b. 1% withholding tax on its gross payment 15. Which of the following can be deducted from gross income
c. 2% withholding tax on its gross payment in the year paid or incurred?
d. 5% withholding tax on its gross payment a. Repairs that materially add to the value of the property
b. Repair that appreciably prolong the life of the property
10. XYZ Co. took two key men insurance on the life of its c. Repair that keeps the property in its ordinarily efficient
President, Mr. A. In one policy, the beneficiary is the operating condition
employer-corporation to compensate it for its expected loss d. All of the choices
in case of death of its president. The other policy designates
Mr. A's wife as its irrevocable beneficiary. 16. Which of the following expenses is not deductible from
Question 1-Are the insurance premiums paid by XYZ Co. in gross income?
both policies deductible? a. Salaries and wages of employees.
Question 2-Will the insurance proceeds be treated as b. Entertainment, amusement and recreation expenses.
income subject to tax by the corporation and by the wife? c. Rental expenses.
a. Yes to first and No to second question; d. Bribes, kickbacks and other similar payments.
b. Yes to both questions;
c. No to first and yes to second question; 17. MOC Corporation, a domestic manufacturing corporation,
d. No to both questions. had gross sales of P100,000,000 for Fiscal Year ending June
30, 2021 and incurred cost of sales of P60,000,000 and
11. All of the following, except one, are not deductible from operating expenses of P17,500,000, with the following
gross income details:
a. Tuition fees and other expenses of the taxpayer's Cost of Sales
children Direct Materials P 30,000,000
b. Replacement of the roof of the office building Direct Labor 20,000,000
c. Premiums paid in insuring the life of the Corporate Manufacturing Overhead 10,000,000
President, appointing the employer-corporation as the Total P 60,000,000
beneficiary of the policy Operating Expenses
d. Premiums paid on a life insurance policy of a rank-and- Salaries and Wages 7,000,000
file employee with the latter's children as the appointed Taxes 300,000
beneficiary Depreciation 3,500,000
Professional Fees 200,000
Advertising Expenses 3,000,000
Training Expenses 3,000,000
Office Supplies 500,000
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40. Continuing number 38, suppose the loss happened in the 47. Which of the following taxpayers may be allowed to claim
year when the taxpayer is enjoying Income Tax Holiday losses from wash sales as deduction?
(ITH), the NOLCO shall be carried over as deduction from a. Dealer in Real Properties
gross income for how long? b. Dealer in personal properties
a. 3 years c. Dealer in securities
b. 5 years d. Investor in shares of stocks
c. 10 years
d. Not allowed 48. ABC, whose taxable year is the calendar year, provided the
following acquisitions and disposals of its investments in
41. The term "net operating loss" shall mean shares of stocks:
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September 21, 2019, purchased 100 shares of the gambling activities amounting to P200,000. How much is
common stock of XYZ Company for P50,000. the deductible loss?
December 21, 2019, purchased 50 shares of a. P200,000 c. P90,000
substantially identical stock for P27,500, and on b. P110,000 d. nil
December 26, 2019, 25 additional shares of such stock
for P11,250. 55. SNJ Inc. purchased shares of stock of P Corp. for P60,000
January 2, 2020, it sold for P40,000 the 100 shares and of Boba Co. for P30,000. At the end of the taxable year,
purchased on September 21, 2018. it was ascertained that its P Corp. stock was worthless
because of the complete insolvency of the corporation, and
How much is the indicated loss? its Boba Co. shares value had declined to P28,000.
a. P10,000 c. P2,500
b. P7,500 d. P0 How much is the deductible loss of SNJ Inc.?
a. P90,000 c. P60,000
49. How much is the deductible loss? b. P62,000 d. nil
a. P10,000 c. P2,500
b. P7,500 d. P0 Bad debts
50. Sira Sira Company had an old warehouse which had a cost 56. When shall bad debts be allowed as deduction from gross
of P1,200,000. The company demolished the warehouse income?
when it had a book value of P200,000 in order to construct a. Upon setting up of allowance for doubtful accounts
a new and bigger warehouse. The demolition cost b. Upon write-off in the books
amounted to P25,000 while the scraps were sold for c. At the option of the taxpayer, upon setting up of
P10,000. How much is the deductible loss in arriving at allowance or upon write-off
taxable income? d. At the option of the government, upon setting-up of
a. None c. P200,000 allowance or upon write-off
b. P185,000 d. P215,000
Depreciation
51. On July 1, 2017, a taxpayer purchased for P500,000 an
automobile which will be used exclusively for his practice. 57. A taxpayer is allowed to use declining balance method in
He deducted annual depreciation on the basis of an claiming depreciation. In such a case, the limitation is –
estimated useful life of five (5) years. On July 1, 2020, the a. It should not exceed twice the rate in straight-line
automobile was partially damaged in an accidental collision method
with another vehicle. The cost of repairs amounted to b. It should not exceed twice the rate in sum-of-the-years
P100,000. The taxpayer received insurance proceeds of digit method
P70,000 to cover the loss. How much is the deductible loss? c. It should not exceed the rate in straight-line method
a. P200,000 c. P130,000 d. It should not exceed the rate in sum-of-the-years digit
b. P100,000 d. P30,000 method
52. Emang acquired a property for use in her business. After a 58. BSE College, a proprietary educational institution, spent
devastating typhoon, the machinery suffered partial P10 million for the construction of a new school building.
damage. The following were made available: The amount spent for the construction -
Cost P500,000 a. Must be claimed as expense in the year of completion
Accumulated depreciation 300,000 b. Capitalized and claim annual depreciation over the life
Restoration cost 250,000 of the building
Estimated useful life 5 years c. Capitalized or expensed outright at the option of the
school
How much is the deductible loss? d. Capitalized or expensed outright at the option of the
a. P0 c. P250,000 BIR
b. P200,000 d. P100,000
59. Non-resident aliens engage in trade or business as well as
53. One of the following losses cannot be deducted from gross resident foreign corporations are also allowed to claim
income. depreciation in arriving at taxable income. Which of the
a. To construct a bigger warehouse, a corporation following is an absolute requirement before depreciation
demolished an old warehouse which had a construction can be claimed?
cost of P3,000,000 and a book value of P500.000. a. The property, regardless of location, directly helped in
b. Demolition of a building existing on a land purchased the generation of income in the Philippines.
where the corporation has no use for the building at the b. The property, regardless of location, helped, directly or
time of purchase and it was its intention to remove the indirectly, in the generation of income in the
building in order to build its factory. Philippines.
c. A corporation retired its machinery from the business c. The property is used in trade or business regardless of
because of the increase in the cost of production and location
the failure of the machinery to meet the desired d. The property must be located in the Philippines
number of units of production.
d. A corporation ascertained that its B Corp. stocks are
worthless because of the total insolvency of B Corp. Depletion of oil and gas wells and mines
54. Dong, a gambling addict, won P90,000 from cockfighting 60. What is the method to be used in amortizing the capital
during the year. However, he also suffered losses from other invested in case of oil and gas wells or mines?
a. Straight line method
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63. Which of the following is deductible from gross income How much is the taxable income?
even if the payment is not connected with business? a. P575,000 c. P535,000
a. Contribution of the employer to the pension trust of the b. P525,000 d. P555,000
employee
b. Charitable contributions 70. Based on the above problem, but the taxpayer is a
c. Income tax paid in foreign country corporation, how much is the taxable income (ignore
d. Travelling expenses compensation income)?
a. P570,000 c. P560,000
64. Which of the following charitable contributions is not fully b. P545,000 d. P600,000
deductible?
a. Donation to the Government of the Philippines to 71. Chinito Corporation (CC) made various donations under the
finance priority projects identified by NEDA Adopt-A-School Program of the Department of Education
b. Donation to the Municipality of Milagros in the under R.A. 8525 amounting to P1,500,000. The net income
Province of Masbate for the repair of Municipal Hall of CC before deducting the P1,500,000 is P8,000,000. How
c. Donation to International Organizations much is the deductible donation for income tax purposes?
d. Donation to accredited Non-government Organizations a. P2,250,000 c. P750,000
b. P1,500,000 d. P400,000
65. Donation to the Government, even if not identified as
priority project by NEDA, to combat COVID 19 during the Pension trusts
period of the state of national emergency under R.A. No.
11469 shall be: 72. DLC Corp. contributed P4,000,000 to its pension plan
a. Fully deductible from gross income during the year 2019. The Normal Cost (NC) appearing on
b. Deductible from gross income but subject to limitation the Actuarial Valuation Report (AVR) for funding purposes
c. Non-deductible from gross income is only P3,000,000. The AVR for PAS 19 purposes disclosed
d. None of the choices that the Current Service Cost (CSC) is P3,200,000. How
much can DLC Corp. claim as deduction?
66. Under normal circumstances, donation to a Private Hospital a. P4,000,000 c. P3,100,000
is: b. P3,000,000 d. P3,280,000
a. Fully deductible from gross income
b. Deductible from gross income but subject to limitation 73. Continuing the information above, assuming in 2020 DLC
c. Non-deductible from gross income Corp. contributed only P2,000,000 while the NC is
d. None of the choices P3,100,000 and CSC is P3,300,000, how much is the
deductible amount?
67. Based on the preceding number, suppose the donation to a. P2,100,000 c. P2,080,000
the Private Hospital was made for the sole and exclusive b. P3,000,000 d. P3,100,000
purpose of combatting COVID 19 during the period of the
state of national emergency? Special deductions for Insurance Companies
a. Fully deductible from gross income
b. Deductible from gross income but subject to limitation 74. Which of the following is deductible to an insurance
c. Non-deductible from gross income company?
d. None of the choices a. Increase in policy reserve which is a mere provision
b. Increase in Incurred but not reported (IBNR)
68. Donations when made during the period of the state of c. Both “a” and “b”
national emergency, for the sole and exclusive purpose of d. Neither “a” nor “b”
combatting COVID to Local private corporations,
civic organizations, and/or international
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77. Who is allowed to use Optional Standard Deduction? How much is the taxable income using itemized deduction?
a. Non-resident citizen a. P1,675,000 c. P1,700,000
b. Non-resident alien engaged in trade or business b. P2,175,000 d. P2,200,000
c. Non-resident alien not engaged in trade or business
d. None of the choices 81. Based on the preceding number, how much is the taxable
income using OSD?
78. A retailer of goods has gross sales of P1,000,000 with a cost a. P3,755,000 c. P3,695,000
of sales amounting to P800,000. Assuming that the taxpayer b. P5,470,000 d. P3,720,000
is an individual and opted to claim optional standard
deduction, how much is the taxable income?
- END -
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