**WAG NYO NA PANSININ YUNG MGA  The lesser amount

TOPICS NA HINDI INCLUDED SA TOPIC.  Not to claim any deduction at all

 Upon the discretion of taxpayer

**deductions are allowed because it is in favor of

GROSS INCOME DEDUCTIONS
the government
DEDUCTIONS
KINDS OF DEDUCTION
 Deductions are amounts allowed by the
 Itemized deductions
Tax Code to be deducted from Gross
 Optional standard deduction (OSD)
income to arrive at the taxable income for
purpose of computing the income tax GENERAL RULE IN CLAIMING DEDUCTIONS
liability under Sec. 24(a), 25 (a), 26 (c),
1. It is necessary, ordinary, and
and 28(a)(1)
substantiated
 Individuals and corporation engaged in
 Necessary (kailangan) – example:
trade/business
employees are vital in running a
 Individuals in the exercise of profession
business. Therefore, salary expense is
necessary
 Ordinary (lagging nakikita) – depends
GROSS INCOME xxxx
on kind of business but what is
DEDUCTION (xxxx) important is the thing usual to you.
Routinary
Taxable income xxxx
 Substantiated (hard facts, may
Tax due/liability xxxx
pinggalingan) – you can verify that
there is such expense. Receipt,
documents is needed. If it is not
CONCEPT OF DEDUCTION
substantiated, it cannot be claimed as
 Matter of legislative grace. A taxpayer can deduction.
deduct an item or amount from gross 2. Depends upon the taxpayer’s residence
income only if there is a law authorizing and citizenship and his/her source of
such deductions. In the absence of a law, income
the expense of the taxpayer, whether  Not all taxpayer can claim deduction
business-related, reasonable, or equitable, even if he is engaged on
cannot be deducted from gross income business/trade or is exercising
 There must be a LAW authorizing on profession
why there should be deduction  Depends on residency, citizenship and
source of income
TAXPAYER CAN DEDUCT (actions allowed by
3. This is a law authorizing the deduction
Taxpayer)
 There must be a law.
 The full amount of the deduction allowed

Page: 1
  Absence of law will make deductions - Generate revenue for business
not valid even if it is necessary, (necessary)
ordinary, and substantiated

EXCLUSION VS. DEDUCTION

Exclusion

 Income except from taxable income

- They are income exempt from
taxation
- Inflow of resources income, but is
exempted
ITEMIZE DEDUCTION
Deduction
 Specific expenses and other items that
 Expense
are deductible from gross income.
- Kabawasan
Under Sec. 34 of the tax code, it
- Outflow of economic resources
consist of the following items:

CAPITAL EXPENDITURE VS. REVENUE - Class of expenses that are

EXPENDITURE deducted from gross income are

itemized (inisa-isa)
Capital Expenditive
1. Expenses
 Non-recurring, large monetary amount 2. Interest
and typically benefit value than one 3. Taxes
accounting period 4. Losses
- Malakihan 5. Bad debts
- Not ordinary 6. Depreciation
- Capital expenditure 7. Depletion of oil and gas wells and minds
- Example: Nagtayo ka ng Banana 8. Charitable and other contributions
Cue and building for the said 9. Research and deployment expenses
business. Yung pagpapatayo ng 10. Pension trust contributions
building is hindi pang araw-araw
ELECTION OF DEDUCTION ITEMIZED
- Not expenses
DEDUCTIONS OR OSD
- Not deductions
 “The 1st quarter or the initial quarter of
Revenue Expenditive
the taxable year of the
 Recurring and typical benefit one commencement of a new
accounting period business/practice of profession. Once
- Deductions the election is made it must be
- Not necessarily large in amount consistently applied to all succeeding

Page: 2
 quarterly returns and in the final 1. Individual citizens, resident aliens and
income tax return for the taxable year non-resident aliens engaged in the trade
- When should the taxpayer claim or business, under the graduated rates
itemize deduction? - All can choose itemized deductions
- ^ except, non-resident aliens not
- Taxpayer will have to choose engaged in trade/business
st
during the 1 quarter of the year - Graduated rates – uses table
(January-March) - Tax of non-resident aliens not
- What if your business just started engaged in trade/business is final
running at the 3rd quarter of the withholding tax (do not use
year (July – September)? Election graduated rates)
rd
will happen in the 3 quartile 2. Domestic corporations and business
- Taxpayer have to choose one partnerships
between itemize deduction or 3. Proprietary educational institutions and
optional standard deduction hospitals which are non-profit
- Once he choose, he cannot change - Special corporations
or modify it 4. Government-owned and controlled
- How will we know if the taxpayer corporations, agencies, and
has selected his choice? In the instrumentalities
form, there is a “X” on whether you - They are taxed similar to how
choose itemize of OSD corporates are taxed
5. Resident foreign corporations
WHO MAY CLAIM THE ITEMIZED DEDUCTION?
- Non-resident foreign corporation
- Not all taxpayer can have any or all are subject to final withholding tax
of the deductions listed in the (do not use graduated tax) –
“ITEMIZED DEDUCTION” section. Exemption
This is because, the concept of
deduction requires a taxpayer to
have a business or practice  General professional partnership shall
profession before being entitled to be allowed the same deduction for
such deductions purpose of computing the distributive
- Employees under EE-ER shares of its partner
relationship is are not subject to - GPPP are allowed to choose
itemized deduction Itemized deduction for the
- Not all business or those who purposes of computations
practice profession are subject to
itemize deduction
- The following are those are allowed BUSINESS EXPENSES ITEMIZED DEDUCTIONS

to choose itemized deduction

Business Expense

Page: 3
  Ordinary and necessary expenses paid 5. Incidental repairs
or incurred during the taxable year in - Repairing
carrying on or which are directly - Must be ordinary
attribute to the development - No replacement
management, operation and/or - Inayos lang ang sira
conduct of the trade, business or the - Kapag pinaganda after the repair
exercise of profession (not deductible as of the moment –
- Most vague they may be capitalized (asset))
- Pangkaraniwan at kinakailangang 6. Operating expenses of transformation
gastusin sa pagpapatakbo ng equipment in the trade, profession, or
negosyo business
- Among all itemized deduction listed - Vehicle (gas, etc.)
in tax code, business expenses is - Expenses to operate
the broadest transformation equipment
- Gross income concept – once you
ITEMS INCLUDED IN BUSINESS EXPENSES
receive the cash, that will become
1. Management expenses part of gross income (DIFFERENT
- Expenses to manage business are FROM THE RULINGS IN
deductible DEDUCTIBLE)
- Example: expenses for board - In here, usage of property (even
meeting without payment) – considered as
2. Commissions deductions – accrual method of
- If you achieve something or meet accounting
quota, you will receive additional 7. Rental for the use of business property
money (commission) - Rentals of building to run the
- Deductible business
- Commission are important to 8. Advertising and other selling expenses
motivate employees to become - Necessary and ordinary expenses
more productive to promote products and services
3. Labor 9. Travelling expenses while away from
- Salaries of employees home solely in the pursuit of a trade,
4. Supplies profession, or business
- Example: office supplies - business expenses
- Supplies necessary to run a - Pamasahe employees papunta sa
business company (NOT DEDUCTION)
- Deductible once the supplies is use - Example: you are residing from
(if not use – prepaid asset) – Quezon City. The company ask you
actual usage to go to Mindanao for a seminar.
- Without records/inventory (when TRAVEL EXPENSES – DEDUCTIBLE
purchased )

Page: 4
 10. Insurance premiums against fire, storm,  It includes representation expenses
theft, accident, or other similar losses in and/or depreciation or rental expenses
trade or business relating to entertainment facilities
- Insurance - Gumagastos para magbigay ng
- In case of risk, may sasalo sa saya sa guest dahil mayroon kang
business kailangan
- Parang nililigawan mo yung client
para mapapayag sa agreement or
REQUISITES FOR DEDUCTIONS OF BUSINESS negotiation
EXPENSES
REQUISITES OF DEDUCTIBILITY OF EAR
1. The expense must be ordinary and EXPENSES
necessary
1. It must be paid or incurred during the
2. It must be paid or incurred during taxable
taxable year
year
- Dapat nangyari yung expenses
3. It must be connected with the trade,
during taxable year
profession, or business
- If before pa nangyari or sa future
4. It must be reasonable
pa (hindi pasok sa taxable year
5. The amount paid shall be allowed as
(current) – hindi pasok sa
deduction only if it is shown that the tax
deduction
required to be deducted and withheld
2. It must be directly connected with the
therefrom has been paid to the BIR
development, management, and
- Involves remittance in BIR
operation. Or in the furtherance of the
- BIR required
conduct of the taxpayers trade, business,
or exercise of profession
3. It must not be contrary to law, good
SUBSTANTIATION REQUIREMENTS
customs, public policy or public order
 No deduction shall be allowed unless - Must be in accordance to law
the taxpayer show substantiate with - Hindi pwedeng contrary to the
sufficient evidence such as official abovementioned factors
receipts or other adequate records - Kapag illegal ang approach, hindi
- Documentation pwedeng i-claim ang deduction
- Evidence to proof that deduction 4. It must not constitute a bribe kickback or
really does happen other similar payment
- Bawal suhulan
- “lagay”
ENTERTAINMENT, AMUSEMENT AND
5. It must be substantiated with adequate
RECREATION EXPENSES ITEMIZED DEDUCTIONS
proof. The official receipts, invoices, or
bills or a statement of accounts should be

Page: 5
 in the name of the taxpayer claiming the - Not included kasi trabaho na talaga
deductions ng Police yun
- Documentation/proof/evidence b. Expenses for political campaigns
6. The appropriate amount of withholding c. Expenses to attend funeral of friends
tax, if applicable should been withhold - Abuloy – hindi kasama sa
therefrom and paid to the BIR deductions
- There are instances,na d. Cost of admission tickets to operas
magkakaroong ng withholding ang
taxpayer
- Non-compliance with the
withholding, hindi pwedeng ma
EXCLUSIONS
claim ang deduction
 NOT CONSIDERED as EAR expenses
CEILINGS WITH EXPENSES
but may qualify as other items of

 Para maiwasan ang sobra-sobrang pag deduction

claim ng deduction - Not considered as EAR expenses

- Can be claimed as deduction (sa
Net sales:
ibang items kasama)
= gross sales – sales discount, return, and  Compensation or fixed representation
allowances allowances subject to withholding taxes on
wages or fringe benefits for services under
Sales of good/properties
EE-ER relationship
 ½ of 1% of net asset - Kung gagastuhan ang employee,
hindi na sya considered as EAR
Sale of service
expenses
 1% of net revenues - Deductible sya pero hindi under

Note: EAR expenses

- Employees are part of business nt
If both sale of goods and sale of services:
guest
1) Net sales or  Expenses for charitable of fund raising
2) Net revenue events
X Actual expenses
Total sales and revenue - Nagbigay ng money sa charity
- Not EAR expenses
- Ibang accounting name
NON-DEDUCTIBLE EAR EXPENSES  Expense for bonifide meetings of
shareholders, parties, or directors
a. Expenses for police protection
- Hindi guest ang shareholder
- Binayaran ang police para bigyan
- Bahagi sila ng company
sila ng protection
- Same with letter a
- Not representation

Page: 6
 - Ibang expenses 5. There is a liability to pay interest on the
 Expenses for attending or sponsoring an indebtedness in that which interest is
employee to business league or stipulated in writing and is legally due
professional organizational meeting - Express NOT implied
- Not EAR 6. The interest payment arrangement must
- Same with a and c not be between related taxpayer’s as
 Expenses for events organized for provided in Sec. 3(b) of the tax code
promotion marketing and advertising - Dapat hindi kaano ano yung ka
including concert contract
- Not EAR - If related (not interest)
- Related to running a business not 7. The interest must not be incurred to
as an entertainment finance petroleum operations
 Other expenses of similar nature - Petroleum operation, ang
treatment sa interest is capital
8. In case where interest is incurred to
INTEREST EXPENSE - ITEMIZED DEDUCTIONS. acquire property to be used in trade,
business, or in the exercise of profession,
Interest
the same is not treated as a capital
 Compensation in money stipulated by the expenditure
parties fixed by law for loan use of - Interest should NOT be capitalize
forbearance of money or credits para ma claim as deduction
- Interest = principal (rate) (time)

REQUISITES FOR DEDUCTION OF INTEREST

REDUCTION OF ALLOWABLE DEDUCTION FOR
1. There is an indebtedness INTEREST EXPENSE
2. There should be an interest expense paid
 The taxpayers, otherwise allowable
or incurred upon such indebtedness during
deduction for interest expense, shall be
the taxable year
reduced by an amount equal to 33% of
- Totoong nagkaron ng interest
interest income subject to final tax. This
expense na binayaran mo
limitation that has been imposed primarily
- Kapag binayaran mo in advance
to nullify the tax arbitrage schemes
ang interest (NOT DEDUCTIBLE)
- Yung perang inutang mo ginamit
- Dapat withtin taxable year
mo as investment which kumite ng
3. The indebtedness is that of the taxpayer
pers (income), may interest din. –
- Kapag hindi kanya ang
arbitrage schemes
pagkakautang, therefore, hindi rin
- Not favored
sakanya ang interest
- Limitations (33%) – sa income
4. The indebtedness is connected with the
about ^
taxpayers’ profession or business

SAMPLE:

Page: 7
Total interest expense 100,000 the local exchange or through initial public
offerings
Interest to final tax
3. Local business taxes
(50,000 x 33%) (16, 500) 4. Community taxes
5. Municipal taxes
Deductible interest expense 83, 500
6. Occupation taxes
7. Privilege and license taxes
8. Excise taxes - (privilege and sin taxes)
9. Documentary stamp taxes
10. Automobile registration fees
TAXES EXPENSE – ITEMIZED DEDUCTIONS
NON-DEDUCTIBLE TAXES
Taxes
1. Philippine income tax
 Amount of money, usually a percentage of 2. Foreign income tax, if claimed as a tax
one’s income or of the value of property credit
owned, that one must pay to help support 3. Estate and donor’s tax
the government 4. Taxes assessed against local benefits of a
kind tending to increase the value of
REQUISITES FOR DEDUCTIONS OF TAXES
property assessed (special assessment)
1. Must be paid or incurred within the - Kayo ang makikinabang
taxable year 5. Electricity energy consumption tax
2. It must be paid or incurred in connection - Taxes paggamit ng kuryente
with the taxpayer’s profession, trade, or 6. Final taxes on passive income
business - Passive income – inaantay mo lang
3. The tax must be paid directly upon the pera na dumating sayo. No effort
taxpayer 7. Capital gains taxes on capital gains
- Ikaw mismo ang tina-tax, hindi - Dealings in property
ibang tao 8. Value added tax
- VAT
DEDUCTIBLE TAXES
- 12%
- Penalties are not included in - Indirect tax sya kaya di pwedeng
deduction even if it has something ma deduct
to do with business
IN CASES OF REFUND
1. Import duties paid to the proper customs
officers Deductible
- Import goods
- In case na ma-refund yung
2. Business taxes, like percentage taxes,
deductible taxes, magiging taxable
except tax on sale, barter, or exchange of
yung na refund
shares of stock listed and traded through
Non-deductible

Page: 8
 - In case na ma-refund yung non- RECOVERY OF BAD DEBTS
deductible taxes, not taxable sya
- Is it taxable?
- Depends if deductible or not

BAD DEBTS – ITEMIZED DEDUCTIONS CAUSALTY LOSSES – ITEMIZED DEDUCTIONS

Bas debts Loss

 Debts resulting from worthlessness of  Implies an unintended deduction or

uncollectibility, in whole or in part, of deprivation of or separation from property
amounts due the taxpayer by others, or something of value not in the ordinary
arising from money lent or uncollectible course of things
amounts of income from goods sold or
KINDS OF LOSSES
services rendered
- Cannot collect anymore 1. Ordinary losses
2. Capital losses
REQUISITES FOR DEDUCTIOSN OF BAD DEBTS
3. Special losses
1. There must be an existing indebtedness 4. Non-deductible losses
due to the taxpayer which must be valid
ORDINARY LOSS
and legally demandable
- Consider prescriptions 1. Loss incurred in the trade, profession or

2. The debt must be connected with the business

profession, trade, or business of taxpayer  Business loss

3. The debt must not be sustained in a - Example: nagbebenta ka ng gulay,

transaction entered into between related after some time, it perishes

parties connected under Sec. 3(b) of the

2- 3 [casualty loss]
tax code
4. The debt must actually be ascertained to 2. Loss due to fire, storms, shipwreck, or

be worthless and uncollectible as of the other casualties of property connected

end of the taxable year with trade, business, or profession

5. The debt must be actually charged off the - Act of God

debts of accounts of the taxpayer as of 3. Loss due to robbery theft or

the end of the taxable year embezzlement of property

- Nairecord na sa book of accounts - Act of man

- May entry dapat to claim deduction 4. Net grafting loss carry-over

Page: 9
  NOLCO NET OPERATING LOSS CARRY OVER - ITEMIZED
DEDUCTIONS

Net Operating Loss (NOL)

REQUISITES FOR DEDUCTION OF CSUALTY
LOSSES  Excess of available deductions over gross
income of the business in taxable year
1. Loss must be actually sustained
- Mas mataas ang expenses
- Totoong dapat nangyari
- To help new business na kumita
2. The loss must involve ordinary properties
- Must be business related
3. It must be sustained in a dead and
TAXPAYER ENTITLED TO DEDUCT NOLCO
completed transaction
- Close transaction 1. Individual in trade or business or in the

- Hindi pwedeng moving transaction exercise of profession

palang 2. Estates and trusts

- Trsnaction must be completed - Treatment: they are as if

4. The loss must be that of the taxpayer individuals

5. The loss must not have been claimed as a 3. Domestic and resident foreign corporation

deduction for estate tax purposes subject to normal income tax

- If nag claim ka ng deduction sa - Kapag subject to final withholding

losses, and ginamit mo sya sa tax, cannot claim NOLCO

estate taxation, hindi mon a sya 4. Special corporations subject to

ma ce-claim yun na deductions as preferential tax rates such as provide

a deduction sa income tax educational institutions, hospitals, and

- Dapat isa lang regional operating headquarters

6. The loss must not be compensated by 5. Tourism enterprises registered with the

insurance or offer forms of indemnity Tourism Infrastructure And Enterprise Zon

- If may nawalang property pero Authority (TIEZA)

insured, walang loss dun

- If hindi lahat insired, yung hindi
lang na cover ang pwedeng ma GENERAL PRINCIPLES AND POLICIES

claim sa deduction sa losses 1. In general, NOLCO shall be allowed as a

- Property or something of value deduction of the same taxpayer regardless
insurance (animals, farmers are of the change in its ownership
included) - Pagnagbago yung business
- Not life of human structure, pwede nya pa rin ma
7. The loss must be reported to the BIR claim ang NOLCO sa old structure
within 45 days from the date of loss 2. However, NOLCO shall be allowed only if
there is no substantial change in
ownership of the business

Page: 10
 - Same ang taxpayer  Losses arising from state of capital assets.
 Hold by or on behalf of the same Deductible only up to the extent of capital
persons: asset gains
 75% in nominal value of - Kapag binienta ang capital asset
outstanding - Kapag walang capital gain, hindi
 75% of the paid-up capital ma claim as a deduction ang
3. BOLCO shall not be transferred or capital losses
assigned to another person - For capital gains ONLY
- Not assignable
- Hindi pwedeng ipasa
4. NOLCO shall be allowed as a deduction in
computing taxpayer’s quarterly income
SPECIAL LOSSES
tax returns and annual final judgement
income tax return 1. wagering losses

5. NOLCO may be carried over as a  only to the extent of gains from

deduction for the next 3 consecutive years such transaction

immediately following the year of such  wagering transaction – transaction

- 3 years lang ang NOLCO where the outcome is dependent

- Hindi sya forever upon character

- depending on chance
- kapag natalo ka sa pustahan
- hanggang capital gain lang
2. loss from shrinkage in the value of stocks
– the loss allowable is that actually
suffered when the stock is disposed of
6. NOLCO shall be allowed on the first in first  shrinkage on value – decline in
out basis value of stocks through market
7. NOLCO shall be presented as a separate fluctuation
line item or deduction. It shall not be - bumababa ang value ng stocks
included as part of other itemized - market fluctuation (kapag no
deductions. It must be shown in the actutal disposal, hindi syang
reconciliation section of the tax rate deduction)
- Have to declare NOLCO in - kailangan totoo ang loss (realized
reconciliation section dapat)
3. loss from wash sale of share of stocks –
where the seller is a dealer in stock or
SPECIAL LOSSES, CAPITAL LOSS, NON securities
DEDUCTIBLE LOSS – ITEMOZED DEDUCTION  wash sale – sale of share of stocks
where it appears that within a
period beginning 30 days before

Page: 11
 the date of such sale and ending 9. money confiscated by foreign customs
30 days after such date, the officials for violation of foreign country’s
taxpayer has acquired or has financial regulation
entered in a contract of option so
NON-DEDUCTIBLE LOSSES
to acquire substantially identical
stocks 1. Wagering losses in excess of wagering

- related to stocks winnings

- masyadong maikli ang panahon ng 2. Loss from shrinkage in value of tools

pagbebenta or pagbili ng stock without actual disposition of the same

- may actual disposal 3. Loss from which sale of share of tools

- kapag prodession nya (lagi nyang where the seller is not a dealer in stock or

ginagawa) – deadler) – dun lag securities

pwede maging deductible 4. Loss from sale or exchange of property

4. loss of stocks becoming worthless – between family members and related

considered as ordinary asset taxpayers mentioned in sec. 36(b) of the

- related to number 2 tax code

- wala ng value - Between sa related parties

5. loss of useful value of asset due to change 5. Loss from exchange of property in

in business conditions premise of a plan of merger or

- bumaba ang value ng asset dahil consolidation

sa changing business condition

- wala ng alternative use
6. loss due to voluntary removal of building, DEPLETION OF OIL AND GAS WELLS AND MINES

machinery, etc. incident to – ITEMMIZED DEDUCTION

renewal/replacement Depreciation
- voluntary
 Is the gradual diminution of the useful
- basta para sa business
value of tangible property resulting from
7. abandonment losses in petroleum
wear and tear and normal obsolescence
operation and producing wells
- Tangible property
- wasting asset
- Kapag paulit ulit mong ginagamit,
- sa ppaglipas ng panahon,
bumababa ang value nito
maluluma yung asset
- Example – car
- hindi na itutuloy
 The terms is also applied to the
- yung mga na capitalize, can be
amortization of the value of intangible
claimed as deduction
assets the use of which in the trade or
- nawala na useful value
business is definitely limited in duration
8. loss brought about by pilferage,
- Intangible property na bumababa
shrinkage, and wrong pricing
ang value

Page: 12
 - In taxation, amortization and - Nauubos ang natural resources
depreciation is the same - Allocate cost over certain period of
time
REQUISITES FOR DEDUCTION OF DEPRECIATION
 Wasting assets are physically consumable
1. The asset must be used in trade or and irreplaceable. It usually included coal,
business oil, ore, timber and precious metals like
2. The asset must have a limited useful life gold and silver
3. The allowance must be reasonable - Hindi mapapalitan
4. The allowance must be charged off during - If bumalik angr esources, it is the
the year act of mother nature not through
human efforts
METHODS AND RULE

DEPLETION METHOD ALLOWED:

1. Straight line method
- Pare-parehas ang chinaharge every
year
2. Declining balance method, using a rate
not exceeding twice the rate which would
have used had the annual allowance been
computed under the method described in
sec. 34(f)(2) of the tax code
- Malaki sa una pero habang
tumatagal, nababago
- Double declining balance lang ang
-------------
pwede
- Until 200% maximum YOKO NA ITULOY, TINATAMAD AKO
3. Sum-of-the-years-digit method HAHAHAHAHA
- With formula
4. Any other method which may be
prescribed by the secretary of finance
upon the recommendation of the
commissioner

DEPLETION OF OIL AND GAS WELLS AND MINES.

ITEMIZED DEDUCTIONS

Depletion

 Allocation of the cost our other basis of a

wasting asset over the period the natural
resource is extracted or produced

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