DEDUCTIONS FROM GROSS INCOME CAPITAL EXPENDITURE vs REVENUE

EXPENDITURE
Deductions are amounts allowed by the Tax Code to
be deducted from Gross Income to arrive at the Capital Expenditure – non – recurring, large
taxable income for purposes of computing the monetary amount and typically benefit more than
income tax liability under Sec. 24 (A), 25 (A), 26 one accounting period (not considered ordinary, not
(A.c) and 28 (A) (1). deductions, only the depreciation is deducted)
 Individuals and corporation engaged in
trade/business
Revenue Expenditure – recurring and typically
 Individuals in the exercise of profession
benefit one accounting period
Gross income xxx
Deductions (xxx)
Taxable income xxx Itemized deductions – specific expenses and other
Tax Due/Liability xxx items that are deductible from gross income. Under
Sec. 34 of the Tax Code, it consists of the following
CONCEPT OF DEDUCTIONS items:

“Deductions are a matter of legislative grace. A A. Expenses

taxpayer can deduct an item or amount from gross B. Interest Expense
income only if there is a law authorizing such C. Taxes
deductions. In the absence of a law, the expense of D. Losses
the taxpayer, whether business-related, reasonable, E. Bad Debts
or equitable, cannot be deducted from gross F. Depreciation
income.” G. Depletion of Oil and Gas Wells, and Mines
H. Charitable and Other Contributions
I. Research and Development Expenses
J. Pension Trust Contributions
The taxpayer can deduct:
a) The full amount of the deduction allowed
b) The lesser amount ELECTION OF DEDUCTION: ITEMIZED OR
c) Not to claim any deduction at all OSD
“The 1st Quarter or the initial quarter of the taxable
year after the commencement of a new
GENERAL RULE IN CLAIMING DEDUCTIONS
business/practice of profession. Once the election is
1. it is necessary, ordinary, and substantiated made, it must be consistently applied to all
(with receipt/evidence) succeeding quarterly returns and in the final income
2. Depends upon the taxpayer’s residence and tax return for the taxable year.”
citizenship and his/her source of income
3. There is a law authorizing deduction.
WHO MAY CLAIM THE ITEMIZED
EXCLUSION vs DEDUCTION
DEDUCTIONS?
Exclusion – income exempt from taxation
1. Individual citizens, resident aliens, and non-
Deduction – expense resident aliens engaged in trade or business, under
the graduated rates.
2. Domestic Corporations and business partnerships
3. Proprietary educational institutions and hospitals
which are non-profit
4. Government-owned and controlled corporations,
agencies, and instrumentalities
5. Resident foreign corporations
* General Professional Partnership shall be allowed
the same deductions for purposes of computing the
distributive shares of its partners.
A. Business Expenses – ordinary and necessary
expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to the
development, management, operation and/or
conduct of the trade, business or the exercise of a
profession.
ITEMS INCLUDED IN BUSINESS EXPENSES
1. Management expenses (i.e., salary of the
President)
2. Commissions
3. Labor
4. Supplies (necessary for running business –
deductible in two ways: deductible once
supply is used, and deductible actual
purchase)
5. Incidental repairs (deductible because
necessary – it must be ordinary – giayo
rajud ang unsay guba – wala gipa prolong
ang life, gipanindot, kay they will not be
part of business expense at the moment,
must capitalized, only under depreciation)
6. Operating expenses of transportation
equipment used in the trade, profession or
business
7. Rental for the use of business property
(income – when received; expense – kung
kailan gamitin ang property)
8. Advertising and other selling expenses
9. Travelling expenses while away from
home solely in the pursuit of a trade,
profession or business (traveling expense
of employee – not a business expense,
normal expense)
10. Insurance premiums against fire, storm,
theft, accident, or other similar losses in
trade or business
REQUISITES FOR DEDUCTION OF BUSINESS
EXPENSES
1. The expense must be ordinary and necessary
2. It must be paid or incurred during the taxable
year
3. It must be connected with the trade, profession,
or business
4. It must be reasonable
5. The amount paid shall be allowed as deduction
only if it is shown that the tax required to be
deducted and withheld therefrom has been paid to
the BIR
SUBSTANTIATION REQUIREMENTS
“NO deduction shall be allowed unless the taxpayer
shall substantiate with sufficient evidence such as
official receipts or other adequate records.”
ENTERTAINMENT, AMUSEMENT, AND
RECREATION EXPENSES
- It includes expenses and/or depreciation or
rental expenses relating to entertainment
facilities.
REQUISITED OF DEDUCTIBILITY OF EAR
EXPRENSES
1. It must be paid or incurred during the taxable
year.
2. It must be (i) directly connected with the
development, management, and operation of, or (ii)