Lecture 01: Deductions from Gross Income

Deductions are amounts allowed by the Tax Code to be deducted from Gross
Income to arrive ate the taxable income for purposes of computing the income tax
liability under Sec. 24(A), 25(A), 26(A.c) and 28(A)(1).
As you can at the definition there is already a formula for the computation of the
deduction from Gross Income which is:
Gross Income xxx
Deductions (xxx)
Taxable Income xxx
Tax Due/Liability xxx
Deductions are simply expenses from the term itself deduction which mean less.
However, not all expenses will be claim as a deduction as for the definition only those
allowed by the Tax Code. The Law is needed for us to tell if an expense is considered
an expense.
Not every taxpayer may get a deduction. Only those individual and corporation
engaged in Trade/Business and individuals in the exercise of profession. A business
must be present to claim a deduction or an individual who practices in the exercise of
his profession. There are no other deductions aside from that.
Concept of Deductions:
Deductions are a matter of legislative grace. A taxpayer can deduct an item or
amount from gross income only if there is a law authorizing such deductions. In the
absence of a law, the presence of the taxpayer whether business-related, reasonable,
or equitable cannot be deducted from gross income.
The legislation provides deductions as a way to assist reduce the amount of tax
due.

Lecture 02: Itemized Deductions (Allowable Deductions)

A cost known as an itemized deduction can be deducted from your adjusted
gross income (AGI) in order to minimize your taxable income and, as a result, the
amount of taxes you owe. These deductions enable those who qualify to pay less tax
than they would have if they had chosen to claim the standard deduction, a set sum that
fluctuates depending on filing status. Mortgage interest, donations to charities, and
unreimbursed medical costs are examples of allowable itemized deductions, which may
be subject to limitations.
 Your taxable income is reduced through itemized deductions. Your tax bracket
determines the precise amount you can save.
Tax credits, which immediately lower your tax burden, should not be confused
with tax deductions.
Schedule A of Form 1040 contains a list of itemized deductions. In the event that
you are audited by the Internal Revenue Service (IRS), you must save all of your
receipts. Bank statements, insurance bills, medical bills, and tax receipts from
recognized charity organizations are a few other examples of proof of costs.
Deductions You Can Itemize:
- donations to charities
- Expenses for health and dental care that are more than 7.5% of gross income
(AGI)
- Taxes on sales or personal property in addition to state and municipal income
taxes
- Losses from gambling
- Interest on investments
Deductions You Can’t Itemize:
- Personal property taxes, sales taxes, and state and municipal income taxes
- Unpaid costs of employees
- Cost of tax preparation
- Losses due to natural disasters (unless in a federally declared disaster area)
Typically, you may deduct up to 60% of your AGI in charitable contributions (the
exact percentage depends on the type of contribution and charity).
Debt from home equity loans was also impacted, but in a complex way. Consult
your tax advisor to see whether the interest on any home equity loans or lines of credit
(HELOCs) you hold is tax deductible.
You have the option to itemize your deductions or accept the standard deduction,
which is a set dollar amount based on your filing status, when you submit your income
tax return. In contrast to the standard deduction, the amount of itemized deductions is
dependent upon the costs that the taxpayer claims on Schedule A of Form 1040. Your
real taxable income is the sum after the total has been deducted from the taxpayer's
taxable income.
On Schedule A of Form 1040, you itemize your deductions. Unreimbursed
medical and dental costs, long-term care insurance premiums, house mortgage interest,
home equity loan (or line of credit) interest, charity contributions, certain taxes, loss from
theft and accidents, and some gaming losses are all typically deductible.
You can choose to itemize your deductions or accept the standard deduction. It
probably makes sense to itemize if the amount of your allowable expenses exceeds the
standard deduction.
 Lecture 03: Business Expenses
Costs incurred in the regular course of business are referred to as business
expenditures. They may be used by both big and small businesses. The income
statement includes costs related to the business. A company's taxable net income is
calculated by deducting business expenditures from revenue on the income statement.
Rent, utilities, pay, salaries, maintenance, depreciation, insurance, and the cost
of items sold are a few examples of costs. Expenses are often ongoing costs associated
with running a firm.
In order to legitimately deduct these costs, the taxpayer must provide appropriate
documentation, such as official receipts or other suitable documents, to support both the
amount being deducted and the expense's direct connection to the taxpayer's business.
For individuals under OSD, they may deduct 40% of their gross revenues or
sales, or for companies, 40% of their gross income. In place of itemized deductions,
OSD does not require supporting documentation, and the taxpayer must specify this
choice on its first quarterly income tax return (ITR).
Any firm will incur expenditures. You can know where your money is going if you
keep meticulous records, and doing so can also help you pay less in taxes. To avoid
paying more taxes than necessary, it's also essential to understand what company
costs are and what you may write off.
Although predicted, variable costs are subject to fluctuate. Examples include
shipping fees, business car gas expenditures, and sales commissions. Each month, you
anticipate variable costs, but the precise sum will change. You can keep an eye on
whether your firm will make profits or losses by tracking your spending.
The expenditures associated with running a business are referred to as business
expenses or deductions. The revenue statement has a record of them. To determine a
company's net profit or loss and taxable income, business revenue will be deducted
from these costs.
Section 162 of the Internal Revenue Code contains guidelines for business costs
(IRC). A cost can be disclosed to the IRS in order to lower tax burden as long as it is
thought to be normal and necessary.
Ordinary costs are those that are typical for most business owners in the industry
or trade, according to the IRS. When costs are necessary, it signifies that they support
your company's operations and are reasonable for your firm.
Any cost that falls within the IRS's definition of "ordinary and essential" is eligible
for deduction. A cost must be undertaken by a business with the intention of turning a
profit in order to be written off. Some costs could be entirely deductible, while others
might only be partially deductible or not entirely deductible in the year they are spent.
 Things you acquire for your firm as part of daily operations are known as
business purchases. Items that don't relate to your business are personal costs. What
about items like home offices, though? You might be eligible to deduct that cost if you
utilize a home office largely for professional purposes. However, you won't be able to
deduct the whole amount of your mortgage. There are times when you can itemize
particular costs, such as phone bills, property taxes, or utilities. In case you are ever
audited, it is extremely crucial for you to maintain detailed documents that explain why
you are deducting these expenses.

Lecture 04: Interest Expenses

The fee spent by a business for borrowed cash is known as an interest
expenditure. A non-operating item that appears on the income statement is interest
expense. It stands for the interest due on all borrowings, including bonds, loans,
convertible debt, and credit lines. In essence, it is determined by multiplying the interest
rate by the debt's outstanding principal. Instead of the amount of interest paid during the
reporting period, interest expense on the income statement shows interest accumulated
during that time. While interest costs are tax deductible for businesses, they may not be
in the case of a person, depending on their jurisdiction and the purpose of the loan.
Since there are typically lags between interest accruing and interest paid, interest
expenditure frequently shows as a line item on a company's balance sheet. If interest
has accumulated but not yet been paid, it would be included in the balance sheet's
"current liabilities" column. On the other hand, if interest has been paid in advance, it
will show up as a prepaid item in the "current assets" column.
The overall level of interest rates in the economy determines how much interest
is paid by debt-ridden businesses. Since the majority of businesses will have taken on
debt with a higher interest rate, interest expenses will tend to be on the higher side
during periods of rife inflation. On the other hand, interest expense will be reduced
during times of moderate inflation.
Profitability is directly impacted by interest expenditure, particularly for
businesses with a high debt load. During economic downturns, heavily leveraged
corporations could find it difficult to make their loan payments. Investors and analysts
pay extra close attention to solvency measures like debt to equity and interest coverage
during these periods.
The purpose of the loan is also important in evaluating whether interest
expenditure is tax-deductible. For instance, most countries would let the interest
expenditure for a loan to be written off from taxes if it was utilized for legitimate
investment reasons. Even this tax-deductible status, though, has limitations.
 Lecture 05: Taxes Expense
A tax cost is a debt that must be paid over a specific time period, usually a year,
to the federal, state, provincial, and/or local governments.
After taking into account variables including non-deductible items, tax assets,
and tax liabilities, the appropriate tax rate for an individual or corporation is multiplied by
the income received or generated before taxes.
Tax Expense = Effective Tax Rate x Taxable Income
Given that various forms of income are taxed at different rates, calculating tax
expenses can be challenging. A company must pay payroll tax on employee wages,
sales tax on some asset acquisitions, and excise tax on specific products, among other
taxes.
The range of tax rates that apply to various income levels, as well as the varied
tax rates in various jurisdictions and the numerous income tax layers, all contribute to
the difficulty of calculating an entity's tax expenditure. Tax authorities like the Internal
Revenue Service (IRS) and GAAP/IFRS meticulously outline how to determine the right
tax rate and identify the right accounting procedures for items that influence one's tax
expenditure.
The treatment of some items of income and cost under generally accepted
accounting principles (GAAP) and the international financial reporting standards (IFRS)
may differ from the allowance under the relevant government tax legislation.
Since the ordinary income tax rate is applied to company income, it is doubtful
that the amount of tax cost realized would exactly equal that rate. To put it another way,
the inconsistencies between tax law and financial accounting might lead to a tax
expenditure that is different from the real tax obligation.
To calculate the depreciation reported in their financial statements, for instance,
many businesses use straight-line depreciation. However, they are permitted to use an
accelerated form of depreciation to calculate their taxable profit, resulting in a taxable
income figure that is lower than the reported income figure.
Because tax cost is a liability that must be paid to the federal or state
government, it has an impact on a company's net earnings. The cost lowers the amount
of profits that may be paid out as dividends to shareholders.
For stockholders of C companies, who must pay taxes again on the dividend they
received, this is much more detrimental. A tax cost, however, is only recorded when a
business has taxable revenue. If a loss is identified, the company may carry it forward to
subsequent years to offset or lower upcoming tax obligations.
According to conventional company accounting principles, the tax expense is the
amount that an entity has calculated it owes in taxes. The income statement shows this
expense. The tax payable is the amount of taxes actually owing in accordance with the
tax code's regulations. Until the corporation pays the tax bill, the due amount is
recorded as a liability on the balance sheet. A deferred tax liability is an additional
obligation that must be settled in the future if the tax cost exceeds the tax liability. The
deferred tax asset, on the other hand, is a category of assets that may be used to cover
any future tax expenses if the tax payable is larger than the tax expenditure.

Lecture 06: Bad Debts Expenses

When a receivable is no longer recoverable as a result of a customer's inability to
pay an existing debt owing to bankruptcy or other financial issues, a bad debt charge is
recorded. Companies that offer credit to their clients record bad debts as an allowance
for doubtful accounts, sometimes referred to as a provision for credit losses, on their
balance sheet.
A corporation records a credit to revenue and a debit to an account receivable
when it completes a credit sale. There is no assurance that the business will get the
money, which is the issue with this account receivable balance. A corporation can be
entitled to money from a credit sale but never actually get it for any number of reasons.
Accounting regulations compel a firm to estimate the amount it might not be able
to collect since the company might not really receive all accounts receivable amounts.
As a result, even though revenue had been booked, it was never converted into cash,
hence the amount must be recorded as a deduction against net income.
Bad debt expenditures are what are commonly referred to as sales and general
administration charges. Bad debt expenditure is recorded on the income statement
even if part of the entry for it is on the balance sheet. Accounts receivable on the
balance sheet are reduced when bad debts are recognized, but firms still have the
ability to recover money if the situation changes.
To account for bad debt expenditure, there are two main techniques. The straight
write-off approach involves writing off uncollectible accounts to expenditure as soon as
they become uncollectible. The allowance technique, on the other hand, accrues an
estimate that is continuously updated.
The straight write-off method is applied to income tax calculations. The direct
write-off approach does not, however, adhere to the matching principle employed in
accrual accounting and widely accepted accounting standards, even if it records the
precise amounts of uncollectible accounts (GAAP). According to the matching principle,
costs and corresponding revenues must be matched during the same accounting period
as the revenue transaction.
The uncertainty of when the expenditure may arise is the straight write-main off's
drawback. Consider a business that only has one customer with a sizable quantity of
outstanding receivables. The direct write-off technique would result in 100% of the
expenditure not only being recognized during an unpredictably occurring period, but
also not during the time of the sale.
The debit to "Bad Debt Expense" and the credit to "Accounts Receivable" are the
results of the entries to post bad debt using the direct write-off technique. There is no
allowance, and the entry receivable can be written off with just one posting.
In order to prevent overstating possible profits, corporations might use the
allowance method, a kind of accounting, to include projected losses in their financial
statements. A corporation will predict how much of its sales-related receivables will be
past-due in order to prevent an account overstatement.
A corporation cannot predict which specific accounts receivable will be paid and
which will default because no appreciable amount of time has passed since the
transaction. As a result, a provision for doubtful accounts is set up using an expected or
projected sum.
A business will credit this allowance account and debit the bad debt expenditure.
As a contra-asset account that nets against accounts receivable, the allowance for
doubtful accounts lowers the overall value of receivables when both amounts are shown
on the balance sheet. This allowance may be increased or decreased depending on the
account balance throughout many accounting periods.
There are primarily two ways to calculate the monetary amount of receivables
that aren't expected to be collected. The predicted losses from overdue and bad debt
may be calculated using statistical modeling, such as default likelihood. The statistical
computations can make use of past information from both the company and the sector
as a whole. In order to represent rising failure risk and declining collectibility, the
particular percentage will normally rise as the receivable's age rises.
Alternatively, depending on the business' prior history with bad debt, a bad debt
charge might be calculated by taking a proportion of net sales. The allowance for credit
losses column is frequently modified by businesses to reflect the most recent statistical
modeling allowances.
Bad debt is technically categorized as a cost. Along with other selling, general,
and administrative expenses, it is recorded. In any scenario, bad debt lowers net
income; as a result, it resembles both an expense and a loss account in many aspects.
Selling, general, and administrative expenses make up the majority of the income
statement's portion devoted to bad debt expenditure. However, a set of financial
statements may have many entries to record this bad debt charge. On the balance
sheet, the provision for doubtful accounts is shown as a counter asset. In the
meanwhile, the balance of accounts receivable on the balance sheet is decreased by
any bad debts that are immediately written off.
 Lecture 07: Casualty Losses
The loss or destruction of a taxpayer's personal property results in casualty
losses, which are deductible losses. Casualty losses must be caused by an unexpected,
abrupt incident in order to be deductible.
Casualty loss deductions are only permitted for exceptional, one-time
occurrences that are not typical aspects of daily life. A person must not have been
involved in the event when it happened, such as a car accident. Natural catastrophes
including earthquakes, fires, floods, hurricanes, and storms are included. A loss cannot
be claimed for anything that happened gradually, even if it was caused by a natural
event. Property erosion is a good illustration of this since it happens gradually.
Only when losses are not covered by insurance are they subject to deductibles.
For instance, a tree may fall on your house during a storm that the President has
declared a federal disaster. You receive a quote from a contractor who claims that
repairs would be very expensive. When you submit a claim to your insurance provider,
you anticipate them to pay the whole amount, but instead, they only pay more than half
and decide they don't owe you the remaining balance. According to the new restrictions,
the personal casualty loss is deductible from your federal taxes as a casualty loss.
However, you won't be allowed to deduct the balance not paid by your insurance
carrier from your taxes if the same storm that destroyed the same tree is not designated
a federal disaster emergency by the President.
"Personal casualty and theft losses of an individual experienced in a tax year
beginning after 2017 are deductible only to the extent they're related to a federally
declared catastrophe," the IRS publication 547 "Casualties, Disasters, and Thefts"
states.
As a result, any criminal activity, theft, or act of vandalism committed by a person
that is not a federal emergency as declared by the President is likewise not protected.
Be aware that only the property owner is eligible for this deduction. For instance,
the landlord, not the tenant, would be allowed to claim the deduction if the renter's
house was damaged in a fire brought on by a catastrophe that was officially proclaimed
by the government. However, if the claim is submitted in the same year that the loss
occurred, the tenant could be eligible to deduct rent payments.
If a sonic boom—possibly triggered by low-flying, supersonic enemy warplanes—
is deemed a federal catastrophe, all property damage resulting from it is deductible.

Lecture 07: NOLCO (Net Operating Loss Carry Over)

When a company's permitted deductions exceed its taxable revenue during a tax
period, a net operating loss (NOL) is the outcome for income tax purposes. Through an
IRS tax provision known as a loss carryforward, the NOL can often be used to offset a
company's tax payments made in previous tax quarters.
To lessen a company's future tax obligation, a net operating loss can be carried
forward to offset taxable revenue in subsequent years. When a business loses money
during a tax period, this tax provision aims to provide some sort of tax relief. The IRS is
aware that some businesses' business profits have cyclical characteristics and don't
correspond to a typical tax year.
The company's general ledger lists NOL carryforwards as an asset. They provide
the business with savings on future tax obligations. For the NOL carryforward, a
deferred tax asset is established, which is later used to offset net income. Until the
balance is gone, the deferred tax asset account is depleted annually, but not more than
80% of net income in any one of the following years.
Because it might reduce a company's taxable income in the future, a net
operating loss is a significant asset. The IRS prohibits utilizing an acquired firm solely
for its NOL tax advantages because of this. The acquiring firm may only use a portion of
the NOL in each consecutive year, according to Section 382 of the Internal Revenue
Code, if a corporation with a NOL has at least a 50% ownership change. However,
acquiring a firm with a sizable NOL can result in more money coming to the
shareholders of the acquired company than if the acquired company had a lower NOL.
Through an IRS tax provision known as a loss carryforward, a company's net
operating loss can often be used to reduce its tax payments in later tax quarters. This
has the advantage of reducing a company's future tax obligation by balancing taxable
profits in subsequent years. When a business loses money during a tax period, this tax
provision aims to provide some sort of tax relief.
The company's general ledger lists NOL carryforwards as an asset. For the NOL
carryforward, a deferred tax asset is established, which is later used to offset net
income. Until the balance is gone, the deferred tax asset account is depleted annually,
but not more than 80% of net income in any one of the following years.

Lecture 08: Depreciation Expense

A fixed asset's share that has been deemed consumed in the current period is
subject to depreciation charge. The cost is subsequently added to the expense list. With
this charge, the carrying amount of fixed assets will be steadily decreased as their value
is depleted over time. There is no cash outflow related to this item because it is non-
monetary.
When an entry is made to the depreciation expenditure account, the contra asset
account that offsets the fixed assets (asset) account is the cumulative depreciation
account. Over the course of a fiscal year, the balance in the depreciation expenditure
account grows; at year's end, the account is flushed out and its balance is reset to zero.
Depreciation expenses are subsequently once more stored in the account for the next
fiscal year. The linked expenditure account for intangible assets is referred to as
amortization expense, and the same idea is used.
The expenditure for depreciation is recorded on the income statement just like
any other typical operating expense. If the asset is used for production, the cost is
included in the income statement's operational costs section. This sum represents a
part of the asset's acquisition cost for use in production.
The expenditure for depreciation is recorded on the income statement just like
any other typical operating expense. If the asset is used for production, the cost is
included in the income statement's operational costs section. This sum represents a
part of the asset's acquisition cost for use in production.
For instance, the manufacturing equipment in a garment company's factories has
identifiable revenues and expenses. The corporation makes an assumption about the
asset life and the scrap value to calculate attributable depreciation.
The instructions for calculating life expectancy and scrap value might be unclear.
Therefore, inflated life expectancies and scrap values should be avoided by investors.
The income statement for practically every firm includes depreciation. Since it is
recorded as an expense, it should be taken into consideration anytime an item is
computed for year-end tax purposes or to assess whether it is still viable for liquidation.
Typically, it is simpler to locate the yearly depreciation expenditure on an income
statement than the total depreciation on a balance sheet.

Lecture 09: Depletion of Oil and Gas Wells and Mines

Depletion is an accrual accounting method for allocating the cost of obtaining
natural resources from the earth, including lumber, minerals, and oil.
Depletion is a non-cash expense, similar to depreciation and amortization, that
gradually reduces an asset's cost value through regular charges to income. Depletion is
different from wearing out of depreciable assets or aging life of intangibles in that it
relates to the progressive exhaustion of natural resource sources.
To precisely determine the value of the assets on the balance sheet and record
costs in the proper time period on the income statement, depletion is used for
accounting and financial reporting purposes.
The expenses are methodically distributed over various time periods depending
on the resources extracted once the costs related to natural resource exploitation have
been capitalized. Costs are deferred and kept on the balance sheet until expenses are
recognized.
 Each stage of production must be taken into account in order to determine how
costs for the usage of natural resources should be distributed. Capitalized costs that
have been used up across several accounting periods make up the depletion base.
The depletion base is primarily affected by four factors:
Acquisition: The expenses incurred when a firm buys or rents the property rights
to land that it considers to be rich in natural resources.
Exploration: Costs related to drilling beneath leased or purchased land.
Development: The expenditures associated with preparing the land for the
extraction of natural resources, such as drilling wells or digging tunnels.
Restoration: Costs involved in returning the property to its original state when
construction is finished.
The cost approach must be utilized with lumber, according to the Internal
Revenue Service (IRS). It demands that mineral property, which it defines as oil and
gas wells, mines, and other natural resources, including geothermal reserves, be
treated using the approach that results in the greatest deduction. For some natural
resources, the percentage depletion reporting technique is not acceptable since it
considers the property's gross revenue and taxable income limit rather than the
quantity of the natural resource removed.
Lecture 10: Charitable and Other Contribution
A donation or gift made to or for the benefit of an approved organization is
referred to as a charitable contribution. It is given voluntarily and without any
expectation of receiving something of comparable worth.
Generally speaking, you can write off any financial or material gifts you make to
or for the benefit of a qualifying organization. When anything is kept in an enforceable
trust for the qualified organization or in a similar legal structure, it is "for the use of" the
qualified organization. The donations must go to an approved organization rather than
being saved for a particular recipient.
Only if you give to an organization that qualifies may you claim your
contributions as tax deductions. Other than churches and governments, most
organizations must submit an application to the IRS in order to qualify as an entity.
The charitable contributions deduction lowers taxable income by enabling both
individual taxpayers and companies to write off donations of money and other assets
made to recognized charities. Limits that are dependent on the sort of gift and how
your taxes are filed apply to the total amount that may be written off each year.
For taxpayers who itemize their deductions, donations given to recognized
charities are deductible up to a specific amount. Typically, the amount that may be
deductible for cash donations made between 2018 and 2025 is restricted to no more
than 60% of the taxpayer's adjusted gross income (AGI). Thanks to the CARES Act
and the Consolidated Appropriations Act, the 60% AGI cap was increased to 100% for
tax years 2020 and 2021, respectively.
Depending on the sort of property you're donating to and the organization you're
giving it to, other forms of donations may only be allowed to be 50%, 30%, or 20% of
your AGI. Donations of appreciated stock or other capital gains property, for instance,
are capped at 30% of your AGI.
A charitable contribution deduction is also available to taxpayers who elect to
use the standard deduction rather than itemizing their deductions in 2020. This
deduction was increased by the Consolidated Appropriations Act through 2021. In
2021, married couples filing jointly and not itemizing can deduct up to $600 in
charitable contributions.
Taxpayers who itemize their deductions must include charitable donations on
Schedule A of Form 1040. For the 2020 and 2021 tax years, taxpayers who do not
itemize deductions may claim a deduction; for the 2020 tax year, this was a "above-
the-line" deduction allowed.
In 2021, the cap on cash contributions was 100% of gross adjusted income,
although this was a transient COVID-related adjustment. For tax year 2022, the caps
have changed back to the pre-COVID caps, which are typically 60% of the taxpayer's
adjusted gross income (AGI).

Lecture 11: Pension Trust

An employee retirement fund that is funded by both the business and the
employee is known as a pension trust. A legal trustee who will adhere to US
accounting norms receives the financial contributions from both parties.
This money might potentially be invested to increase future withdrawals before it
is turned into a retirement income.
The trustee, the employer, and the employee-beneficiary are the three persons
involved in the pension trust. The trustee may be a third-party entity, i.e., an individual
chosen only to manage the trust who is not employed by the company. Employer is
relieved of administrative tasks as a result. The trustee keeps the employer and the
employee updated on any changes to the trust.

In order to fulfill the trustee's moral and legal duties, including serving the
beneficiary's interests, Therefore, it makes judgments that raise trust assets without
placing them in unwarranted danger. In order for the beneficiary's pension to be more
than the total of the contributions provided by the employee and employer, the trustee
can invest the contributions wisely.

Lecture 12: Research and Development Cost

Expenses for research and development (R&D) are related to the creation of
any intellectual property as well as the research and development of a company's
products or services. R&D costs are often incurred by a business while it is looking for
and developing new goods or services.
A business may deduct R&D costs from its operational expenditures on its tax
return.
In order to find answers to new or ongoing issues, or to produce or improve
products and services, research and development is a methodical activity that
combines basic and applied research. Owning intellectual property in the form of
patents or copyrights resulting from discoveries or innovations is frequently the
outcome of a corporation doing its own R&D.
Direct R&D expenditures, which can range from very low costs to several billions
of dollars for big research-focused firms, are a crucial part of a company's research
and development division. Typically, businesses in the industrial, technological,
healthcare, and pharmaceutical sectors spend the most on R&D. Some businesses,
such as those in the technology industry, spend a sizeable amount of their revenues
back into R&D as an investment in their long-term expansion.
Large firms have also been able to do R&D through acquisition by making
investments in, paying for part of the costs of, or buying altogether some of those
smaller enterprises.
Businesses engage in R&D for a variety of reasons, but the creation of new
products is their primary focus. Before a new product is introduced to the market, it
undergoes extensive research and development stages that examine its market
potential, price, and timeframe for manufacture. After conducting sufficient research, a
new product moves on to the development stage, when a corporation builds the good
or service based on the idea developed during the research stage.
Some businesses employ R&D to enhance current goods or carry out quality
checks, in which they assess a product to see whether it is still suitable and talk about
any modifications. The enhancements will be put into practice during the development
stage if they are economical.
 Lecture 13: Optional Standard Deductions
Optional Standard Deduction is referred to as OSD. With OSD, you may simply
declare that 40% of your revenue is a cost rather than tracking every expense to
determine your net expense. Thus, you must pay taxes on 60% of your income.
The fact that you are not required to provide any audited financial statements is
an additional benefit of employing OSD.
Individual and corporate income taxpayers are generally entitled to claim
deductions in computing their net income subject to income tax, with the exception of
certain taxpayers or types of income for which there are no deductions or for which
there are only limited deductions in the computation of income taxes due. Traditionally,
these are the charges and expenses a taxpayer incurs to operate a business or to
produce taxable revenue.
But take notice that the OSD was initially exclusively available to individual
taxpayers under our income tax system. Corporate taxpayers were not have the option
to select OSD. In its initial design, only individual taxpayers had the option to deduct a
certain proportion of their gross income when calculating their tax due. This was done
in place of specifically listing each cost. And in contrast to current regulations, the
foundation for the 10% (the OSD rate at the time) standard deduction was gross
income, not gross sales or revenues, when it was initially implemented in our tax
system for people.
When the National Internal Revenue Code of 1997 was amended in 2008 by
Republic Act No. 9504, the situation underwent a considerable alteration. The OSD
underwent the following notable changes: (1) the rate was raised four times, from 10%
to 40%; (2) for individuals, the OSD computation was modified from gross income to
gross sales or gross revenues; and (3) corporate taxpayers were added to the list of
those eligible to receive the OSD.
This can be compared to corporate taxpayers. The OSD permitted cannot be
more than forty percent (40%) of their gross revenue. In order to calculate their gross
revenue, corporations are permitted to subtract the cost of sales from their sales. From
this gross income, the OSD is then calculated and subtracted to get their net taxable
income. On the other hand, for individuals, the OSD is calculated and subtracted from
the gross sales or revenues to produce the net taxable income.
In actuality, the cost of sales or cost of services are not permitted as deductions
in determining the net taxable income for individual taxpayers utilizing the OSD.
Therefore, there is a clear difference between how individual taxpayers and corporate
taxpayers who choose to compute their income tax due using the OSD approach
compute their net taxable income.