INCOME TAX

- Income taxation is in the nature of an excise taxation system, or taxation on the exercise of privilege,
the privilege to earn yearly profits from various sources. It is a system that does not provide for the
taxation of property .
- It tax on all the profits, gains or earnings of the taxpayer, arising from trade or business, from dealing
in property, from the practice of profession, from employments, from investments in stock, and from
like sources.
- Income tax is a tax on all yearly profits arising from – property, profession, trade, or business, or a tax
on person’s income, emoluments, profits and the like.
- It is generally regarded as an excise tax. It is not levied upon persons, property, funds, or profits but
on the privilege of receiving said income or profit.

Types of Philippine Income Tax:

1. Minimum corporate income tax (MCIT)
2. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as
capital asset
3. Capital gains tax on sale or exchange of real property located in the Philippines classified as capital
asset
4. Final withholding tax on certain passive investment incomes
5. Final withholding tax on income payments made to non-resident individuals or corporations
6. Fringe benefit tax (FBIT)
7. Branch profit remittance tax
8. Improperly accumulated earnings tax (IAET)
9. Normal corporate income tax on corporations
10. Graduated income tax on individuals, or
11. Optional income tax of 8% for individuals
12. Special income tax on certain corporations

Kinds of Taxable Periods:

1. Calendar Period
- The 12 consecutive months starting from January 1 and ending December 31.
Instances when calendar year shall be the basis for computing net income:
- When the taxpayer is an individual
- When the taxpayer does not keep books of account
- When the taxpayer has no annual accounting period
- When the taxpayer is an estate or a trust
NOTE: Taxpayers other than a corporation are required to use only the calendar year.
The final adjustment return shall be filed on or before the fifteenth (15th) day of April.
2. Fiscal period
- It is a period of 12 months ending on the last day of any month other than December
NOTE: The final adjustment return shall be filed on or before the fifteenth (15 th) day of the fourth (4th) month
following the close of the fiscal year.
3. Short period
GR: The taxable period, whether it is a calendar year or fiscal year always consists of 12 months.
Instances when the taxpayer may have a taxable period of less than 12 months:
- When the corporation is newly organized and commenced operations on any day within the year
- When the corporation changes its accounting period
- When a corporation is dissolved
- When the Commissioner of Internal Revenue, by authority, terminates the taxable period of a
taxpayer
- In case of final return of the decedent and such period ends at the time of his death

5. Objects being taxed in income taxation

A. Individuals
1. Resident Citizen
a. Citizen of the Philippines residing therein
b. Citizen residing outside the Philippines without the intention of residing thereat permanently
 c. Citizen who did not manifest to the total satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein perm.
2. Nonresident Citizen - citizen of the Philippines who:
(a) Establishes the fact of his physical presence abroad with a definite intention to reside therein
(b) Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a
permanent basis.
(c) Works & derives income from abroad & whose employment requires him to be physically present
abroad most of the time (i.e. not less than 183 days) during the taxable year
(d) Previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines
3. Resident Alien
(a) An individual residing in the Philippines who is not a citizen thereof
(b) Intention to reside in the Philippines is not necessary
4. Non-resident Alien Engaged in Trade or Business in the Philippines (NRA ETB)
(a) Engaged in retail trade or business
(b) Engaged in the exercise of profession therein
(c)Staying for an aggregate period of more than 180 days for the calendar year
5. Non-resident Alien Not Engaged in Trade of Business in the Phils. (NRA NETB)
(a) NRAs not engaged in business but deriving income in the country
6. Aliens Employed in MNCs, OBUs, & Petroleum Service Contractors
B. Estate and Trust
Estate - property, rights and obligations of a person which are not extinguished by his death and those
that accrues thereto; taxed in the same way as an individual provided it is irrevocable and earns income; what
is taxed is not the property that constitutes the trust (this was already subject to donor’s tax) but the income
of such property.
Trust - arrangement created by agreement under which title to property is passed to another for
conservation or investment with the income and the corpus/principal distributed in accordance with the
directions of the creator; to be taxable as a separate entity, grantor must have absolutely and irrevocably given
up control and benefit over the trust.
C. Corporation
A corporation shall include partnerships, no matter how created or organized. Joint stock companies, joint
accounts, associations, and insurance companies.
-But does not include, for the purpose of imposing ordinary 35% corporate income tax:
• general professional partnerships
• joint venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement
under a service contract with the government.
D. Partnerships
Kinds of Partnerships:
1. General Professional Partnerships
• Established solely for purpose of exercising common profession and not part of income derived from
engaging in trade or business.
• As an entity, it is not subject to income tax. Partners are liable for income tax on their distributive share
(computed by dividing net income of GPP). Each partner shall report his distributive share as part of his gross
income.
2. Taxable/Business/Ordinary Partnership
• All other partnerships no matter how created or organized.
• Includes unregistered joint ventures and business partnerships.
• Taxable as an entity - ordinary corporate income tax.
• Joint ventures are not taxable as corporations when its purpose if
a) undertaking construction projects;
b) engaged in petroleum, coal and other energy operation under a service contract with the government.
• Partners are considered stockholders; therefore, their distributive share is taxed as dividends.

6. When is income Taxable?

REQUISITES FOR INCOME TO BE TAXABLE:
1) There must be a gain or addition to net worth
2) The gain must be realized or received, actually or constructively; recipient must have complete dominion
3) The gain must not be excluded by law or treaty from taxation
The following are important considerations to discover whether or not there is income for tax purposes:
1. Existence of income
A primary consideration in income taxation is that there must be income before there could be income
taxation
Receipts not considered as income
a. Advance payments or deposits for payments;
- Advances are not revenues of the period in which they are received but as revenue of the period or
period in which they are earned.
b. Property received as compensation but subject to forfeiture;
c. Assessments for additional corporate contributions;
d. Increments resulting from revaluation of property;
- Until the revalued property is disposed of there is no income realized.
e. Parent’s share in the accumulated and current equity on subsidiaries’ net earnings prior to
distribution;
f. Money earmarked for some other persons not included in gross income;
g. Money or property borrowed;
- Borrowed money has to be repaid by the debtor. On the other hand, the creditor does not receive
any income upon payment because it is merely a return of capital.
h. Increase in net worth resulting from adjusting entries
2. Realization of income
- Under the realization principle, revenue is generally recognized when both of the following conditions
are met:
a. The earning process is complete or virtually complete
b. An exchange has taken place
NOTE: Mere increase in the value of property is not considered as income for tax purposes since it is an
unrealized increase in capital.
3. Recognition of income
When income considered received for Philippines income tax purposes:
a. If actually or physically received by taxpayer; or
b. If constructively received by taxpayer.
Actual vis-à-vis constructive receipt
Actual receipt – income may be actual receipt or physical receipt.
Constructive receipt – occurs when money consideration or its equivalent is placed at the control of the person
who rendered the service without restriction by the payer.

8. Tests in determining whether income is earned for tax purposes

1. Realization test – There is no taxable income unless income is deemed realized. Revenue is generally
recognized when both conditions are met:
a. The earning process is complete or virtually complete; and
b. An exchange has taken place
2. Claim of Right Doctrine / Doctrine of Ownership, Command, or Control – a taxable gain is conditioned
upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation
to return or repay.
3. Economic – Benefit test / Doctrine of Proprietary Interest – taking into consideration the pertinent
provisions of law, income realized is taxable only to the extent that the taxpayer is economically benefited.
4. Severance Test – there is no taxable income until there is a separation of the capital from the exchangeable
value, thereby supplying the realization of transmutation that would result in the receipt of income.

9. What is Gross Income?

Gross income refers to all income derived from whatever source, including, but not limited to, the following
items:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional partnership.

What is the concept of “income from whatever

derived?”
- A legislative policy to include all income not expressly exempted within the class of taxable income
under our laws.
10. Gross Income vs Net Income
Gross income is all income subject to tax. Net income refers to gross income less the allowable deductions and
exemptions. Taxable income is the pertinent items of gross income specified in the NIRC,
less deductions, if any, authorized for such types of income.

11. Ordinary Assets vs Capital Assets

The term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or
business), but does not include:
1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year;
2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business;
3. Property used in the trade or business, of a character which is subject to the allowance for depreciation
4. Real property used in trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. Thus, if the property or asset is not among the
exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets.

12. Guidelines in Determining whether a real property is a Capital Asset or Ordinary Asset:
a) Real properties shall be classified with respect to taxpayers engaged in the real estate business as follows:
1. All real properties acquired by the real estate dealer shall be considered as ordinary assets.
2. All real properties acquired by the real estate developer, whether developed or undeveloped as of the time
of acquisition, and all real properties which are held by the real estate developer primarily for sale or for lease
to customers in the ordinary course of his trade or business or which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or
business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.
3. All real properties of the real estate lessor, whether land, building and/or improvements, which are for
lease/rent or being offered for lease/rent, or otherwise for use or being used in the trade or business shall
likewise be considered as ordinary assets.
4. All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of
real property shall be considered as ordinary assets.
b) In the case of taxpayer not engaged in the real estate business, real properties, whether land, building, or
other improvements, which are used or being used or have been previously used in trade or business of the
taxpayer shall be considered as ordinary assets.
c) In the case of taxpayers who changed its real estate business to a non-real estate business, real properties
held by these taxpayer shall remain to be treated as ordinary assets.
d) In the case of taxpayers who originally registered to be engaged in the real estate business but failed to
subsequently operate, all real properties acquired by them shall continue to be treated as ordinary assets.
e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business,
or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate
business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets.
Provided however, that properties classified as ordinary assets for being used in business by a taxpayer
engaged in business other than real
estate business are automatically converted into capital assets upon showing proof that the same have not
been used in business for more than two years prior to the consummation of the taxable transactions involving
said properties
f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their
character in the hands of the buyer/transferee.
g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the
involuntariness of such sale shall have no effect on the classification of such real property in the hands of
the involuntary seller, either as capital asset or ordinary asset as the case may be.

13. Ordinary Income vs Ordinary Loss

Ordinary Losses

14. Capital Gain vs Capital Loss

Capital gains are gains or income from the sale or exchange of capital assets. These include:
1. Income from dealings in shares of stock of domestic corporation whether or not through the stock
exchange;
2. Income from dealings in real property located in the Philippines;
3. Income from dealings in other capital assets

15. Ordinary Gain vs Capital Gain

Ordinary gains are gains or income from the sale or exchange of property which are not capital assets

16. Actual Gain vs Presumed Gain

17. Interest Income

Earnings generated by investments (i.e., savings accounts, certificates of deposit, other investments that pay
interest).
Sources of interest income:
1. interest on bank deposit/deposit substitutes/trust fund and similar arrangement
2. interest from lending/interest income from bonds
3. interest on uncollected salary
4. interest on foreign bonds/government bonds
5. interest on treasury bills
6. interest earned from depositsmaintained under the foreign currency deposit system
7. interest income of pawnshop operator

18. Dividend Income

“Dividends” means any distribution made by a corporation to its shareholders out of its earnings on profits and
payable to its shareholders, whether in money or in other property.

19. Kinds of Dividend Income

1. Cash dividend
2. Stock dividend/stock rights
3. Property dividend
4. Liquidating dividend

20. Rentals and Royalties

Royalties - Payments for the intellectual property (i.e., use of patents, copyrighted works, natural resources, or
franchises).These are usually legally binding.
Property rental - Any payment you receive for the use or occupation of property.
21. James Doctrine

22. Exclusion from Gross Income

The following items shall not be included in gross income and shall be exempt from income taxation:
1. Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured;
2. Amount received by the insured as return of premiums paid by him;
3. Value of property acquired by gift, bequest, devise, or descent;
4. Compensation for injuries or sickness;
5. Income exempt under treaty;
6. Retirement benefits, pensions, gratuities, etc.;
7. Miscellaneous items –
a. Income derived by foreign government;
b. Income derived by the government or its political subdivisions;
c. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement;
d. Prizes and awards in sports competition;
e. 13th month pay and other benefits;
f. GSIS, SSS, Medicare and other contributions
g. Gains from the sale of bonds, debentures or other certificate of indebtedness;
h. Gains from redemption of shares in mutual fund; and
i. Income Derived from the Sale of Gold

23. Exclusion from Gross Income vs Deductions from Gross Income

Exclusions are items that are not included in the determination of gross income because of the exemption
provided for by law or by tax treaties.
Deductions are items or amounts which the law allows to be deducted under certain conditions from gross
income in
order to arrive at taxable income.
Tax credits are amount of tax previously paid by the taxpayer which later on can be claimed as tax credit from
the tax liability of the taxpayer.
What is the rationale for exclusions and exemptions?
1. They represent return of capital or are not income, gain or profit;
2. They are subject to another kind of internal revenue tax;
3. They are income, gain or profit expressly exempt from income tax under the Constitution, tax treaty, NIRC,
or a general or special law.

24. Life Insurance Proceeds: When is it excluded from gross income?

- Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured
• If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be
included in the GI
• Insured must die to avail of total exemption. If he survives, there/s only partial exemption - to the extent that
the proceeds constitute return of capital (total amount of premiums paid)

25. Deductions from Gross Income

The allowable deductions from gross income are:
1. Expenses
a. Ordinary and necessary trade, business or
professional expenses
b. Expenses allowable to private educational
institutions
2. Interests on indebtedness;
3. Taxes in connection with taxpayer’s business,
trade or profession;
4. Losses;
5. Bad debts;
6. Depreciation;
7. Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Research and development expenditures;
10. Contribution to pension trusts.

Itemized deductions are the allowable deductions as enumerated under Section 34 of the NIRC.
Optional Standard Deduction is the standard deduction in an amount not exceeding 40% of the gross income
of individuals, other than nonresident aliens, or corporations in lieu of the deductions
enumerated under Subsections A-J of Section 34 of the NIRC.

26. Nature of Deductions

- Items or amounts which the law allow to be deducted from gross income in order to arrive at the
taxable income.
- The basic principle governing deductions from gross income apply to all taxpayers.
- Because deductions are strictly construed against the taxpayer, one seeking a deduction must point to
some specific provisions of the statute in which that deduction is authorized & must be able to prove
that he is entitled to the deduction which the law allows.
- Adequate records should be kept to support the deductions.
- The deduction claimed must have been subjected to withholding tax, if required.
- Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are to be strictly construed, then it follows that deductions must be STRICTLY construed.
- He must be able to prove that he is entitled to the deduction authorized or allowed.
27. Requisites before deductions are allowed

28. Persons who are not allowed to claim deductions from gross income:
1. Citizens and resident aliens whose income is purely compensation income (except for premium payments on
health and/or hospitalization insurance);
2. Non-resident aliens not engaged in trade or business in the Philippines; and
3. Non-resident foreign corporation

29. Exemption vs Allowable deductions

Deduction is an amount allowed by law to be subtracted from gross income to arrive at taxableincome.
Exemption from taxation is the grant of immunity to particular persons or corporations or to persons or
corporations of a particular class from a tax which others generally within the same taxing district are obliged
to pay

30. Expenses
Ordinary expense – normal or usual in relation to the taxpayer’s business and the surrounding circumstance.
Necessary expense – appropriate and helpful in the development of taxpayer’s business and are intended to
minimize losses or to increase profits. These are the day to day expenses. While illegal income will form part of
the income of the taxpayer, expenses which constitute bribe, kickback, and other similar payment, being
against law and public policy are not deductible from gross income.
Business expense – expenditure related to the business that is deductible in the year incurred, in the same
taxable year.
Capital expense – expenditure that improves or adds to the value of your property or equipment. Not
immediately deductible. It is deductible over time, such as in the form of depreciation.

31. Requisites for deductibility of expenses:

a. Must be ordinary AND necessary (both must be complied with)
b. Must be paid or incurred during the taxable year
c. Must be paid or incurred in carrying on or which are directly attributable to, the development, management,
operation and or conduct of the trade, business or exercise of a profession, including
reasonable allowance for:
1. salaries, wages & other forms of compensation for personal services actually rendered (including grossed-
up monetary value of FB); but the final tax should have been paid
2. travel expenses in pursuit of trade, business/ profession
3. rentals &/or other payments as lessee, user or possessor
4. entertainment, amusement & recreation expenses directly connected to the devt., mgt. & operation &
conduct of trade, business/ profession
EXPENSES TO BE DEDUCTIBLE:
- Amount must be reasonable.
- Amount must be substantiated.
- It is not contrary to law, public policy or morals.
- Tax required to be withheld must have been paid to the BIR
32. Ordinary Expenses vs Capital Expenditures

33. Substantiation Rule

Substantiation Requirements: sufficient evidence (i.e. official receipts, financial statements or other adequate
records) to substantiate:
(a) amount. of expense deducted
(b) direct connection/relation of the expense to the development, management operation &/or conduct of the
trade, business or profession of the taxpayer

34. Cohan Rule

35. Interest Expense

-interest on taxes, such as those paid for deficiency or delinquency, since taxes are considered indebtedness
(provided that the tax is a deductible tax, except in the case of income tax). However, fines, penalties, and
surcharges on account of taxes are not
deductible. The interest on unpaid business tax shall not be subjected to the limitation on deduction.
- Interest paid by a corporation on scrip dividends.
- Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on such
interest was withheld.
- Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said
corporation is the legal or equitable owner, even though it is not directly liable for the indebtedness.

36. Requirement before interest is deductible:

(a) there must be an indebtedness
(b) there should be an interest expense paid or incurred upon such indebtedness
(c) indebtedness must be that of the taxpayer
(d) indebtedness must be connected with the taxpayer’s trade, business or exercise of profession
(e) interest expense must have been paid orincurred during the taxable year
(f) interest must have been stipulated in writing
(g) interest must be legally due
(h) interest payment arrangement must not be between related taxpayers
(i) interest must not be incurred to finance petroleum operations
(j) in case of interest incurred to acquire property used in trade, business or exercise of profession, the same
was not treated as a capital expenditure
(k) the interest id not expressly disallowed by law to be deducted from gross income of the taxpayer.
GENERAL RULE ON DEDUCTION
- The amount of interest expense paid or incurred within a taxable year of indebtedness in connection with the
taxpayer’s trade, business, or exercise of profession shall be allowed as a deduction from the taxpayer’s gross
income

37. Taxes
- refers to national and local taxes, and means TAXES PROPER, hence, no deductions are allowed for:
a. Interests
b. surcharges
c. penalties or fines incident to delinquency
REQUISITES FOR DEDUCTIBILITY:
a. it must be paid or incurred within the taxable year
b. it must be paid or incurred in connection with the taxpayer’s trade, profession or business
c. it must be imposed directly on the taxpayer
d. it must not be specifically excluded by law from being deducted from the taxpayer’s gross income

38. Examples of Taxes which are deductible

- As a general rule, all taxes,national or local, paid or incurred with the taxable year inconnection with the
taxpayer’s trade, business or profession are deductible from gross income.
- Taxes means taxes proper and, therefore, no deductions are allowed for amounts representing interest,
surcharges and fines or penalties incident to delinquency.
39. Limitation of deduction of taxes
- In case of a nonresident alien individual engaged in trade/business in the Philippines, taxes to be
deducted shall be allowed only if & to the extent that they are connected with income from sources
w/in the Philippines

40. Tax credit vs Tax deduction

Taxes deduction are deducted from the gross income
in computing the net income, while tax credit are deducted from income due itself.

41. Losses
The term implies an unintentional parting with something of value. It is used in the income tax law in a very
broad sense to comprehend all losses which are not general or natural to the ordinary course of business.

42. Requisites for its deductibility

1. The loss must be incurred in the trade, business or profession of
2. It must be actually sustained and charged off within the taxable year.
3. It must be evidenced by a closed and completed transaction.
4. It must not be compensated for by insurance or other forms of indemnity.
5. If it is a casualty loss, the taxpayer has filed a sworn declaration of loss within 45 days after the date of the
discovery of the casualty or robbery, theft, or embezzlement.

43. Types of Losses

1. Ordinary losses/business losses
2. Casualty losses - Loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.
3. Capital losses
4. Securities becoming worthless
5. Losses from wash sales or stock or securities - No deduction for loss shall be allowed for wash sales unless
the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary
course of the business of such dealer.
6. Wagering losses - Losses from wagering shall be allowed only to the extent of gains from such transactions.
7. Abandonment losses - In the event a contract area
where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be allowed as a deduction.

44. Bad debts

Bad debts are debts due to the taxpayer which are actually ascertained to be worthless and charged off within
the taxable year.

45. Requisites for deductibility

1. There must be a valid and subsisting debt.
2. The debt must be actually ascertained to be worthless and uncollectible during the taxable year.
3. The debt must be charged off during the taxable year.
4. The debt must be connected with the trade, business or profession of the taxpayer, and not sustained in a
transaction entered into between related taxpayers.

46. Effect of Recovery of bad Debts

Tax Benefit Rule - Recovery of bad debts previously allowed as deduction in the preceding years shall be
included as part of the gross income in the year of recovery to the extent of the income tax benefit of said
deduction.

47. Depreciation
Depreciation is the gradual diminution in the useful value of tangible property used in trade, business or
profession resulting form exhaustion, wear and tear, and obsolescence.

48. Requisites for deductibility

1. The allowance for depreciation must be reasonable.
2. It must be for property used in the trade, business or profession.
3. It must be charged off during the taxable year.
4. A statement on the allowance must be attached to the return.

49. Depletion of Oil and Gas Wells and mines

Depletion is the exhaustion of natural resources like mines and oil and gas wells as a result of production or
severance from such mines or wells.

50. Conditions for deductibility

Depletion v. depreciation
Both are predicated on the same basic premise of avoiding a tax
on capital. However, depletion is based upon the concept of the exhaustion of a natural resource whereas
depreciation is based
upon the concept of the exhaustion of the property, not otherwise a natural resource, used in a trade or
business or held for the production of income. Thus, depletion and depreciation are made applicable to
different types of assets.

51. Charitable and other contributions

(a) Contributions subject to limitations:
i. Contributions or gifts actually paid or made w/in the taxable year
ii. to or for the use of the govt. or its agencies or any political subdivision, exclusively for public purpose
iii. or, to accredited domestic corps./associations organized & operated exclusively for:
(1) religious
(2) charitable
(3) scientific
(4) youth & sports development
(5) cultural or educational purposes
(6) for the rehabilitation of veterans
(7) to social welfare institutions
(8) to NGOs
iv. no part of NI inures to the benefit of any private stockholder or individual
- for individual: not > 10% of taxable income before deducting the charitable contributions
- for corporation: not > 5 % of taxable income before deducting the charitable contributions
(b) Contributions deductible in full:
i. Donations to the govt. – to finance, to provide for, or to be used in undertaking priority activities in
education, health, youth & sports development, human settlements, science & culture & in economic
development
ii. Donations to certain foreign institutions or international organizations
iii. Donations to accredited NGOs

52. Requisites for deductibility

1.The contribution must actually be paid or made to the Philippine government or any political subdivision
thereof or to any of the domestic corporations or associations specified by the NIRC.
2. No part of the net income of the beneficiary must inure to the benefit of any private stockholder or
individual.
3. It must be made within the taxable year.
4. It must not exceed 10% in thecase of an individual and 5% in the case of a corporation of the taxpayer’s
taxable income (except where the donation is deductible in full) to be determined without the benefit of the
contribution.
5. It must be evidenced by adequate records or receipts.

53. Limitations on Deductions

54. Research and Development Expenditure

A taxpayer may treat research or development expenditures which
are paid or incurred by him during the taxable year in connection with his trade, business or profession as
ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated
shall be allowed as deduction during the taxable year when paid or incurred.
Requisites for amortization of certain R&D expenditures (treated as deferred expenses):
(1) paid/incurred by the taxpayer in connection w/ his trade/business
(2) not treated as expense
(3) chargeable to capital acct. but not chargeable to property of a character w/c is subject to
depreciation/depletion
(4) amortized over a period of not < 60 months as may be elected by the taxpayer
LIMITATIONS ON DEDUCTIONS – not applicable to, EXCLUSIONS:
(1) Any expenditure for the acquisition or improvement of land, or for the important of prop. to be used in
connection w/ R&D of a character subject to depreciation & depletion
(2) Any expenditure paid/ incurred for the purpose of ascertaining the existence, location, extent, or quality of
any deposit of ore or other mineral, including oil or gas (exploration exp.)

55. Pension Trust

Pension Trust Contributions – a deduction applicable only to the employer on account of its contribution to a
private pension plan for the benefit of its employee. This deduction is purely business in character.

56. Requisites for Deductibility

a. The employer must have established a pension or retirement plan to provide for the payment of reasonable
pensions to his employees;
b. The pension plan is reasonable and actuarially sound;
c. It must be funded by the employer;
d. The amount contributed must be no longer subject to the control and disposition of the employer;
e. The payment has not yet been allowed as a deduction; and
f. The deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in
which the transfer
of payment is made.