DEDUCTIONS FROM GROSS INCOME

Allowable deductions – deductions from gross income other than compensation

income, expense incurred in conduct of trade or business
Items of income granted with itemized deductions:
INCOME EARNER SOURCE
Business/professional  Resident Citizen  Within and outside
income  NRC, RA, NRA PH
 General co-  Within PH
partnership
Business income  Domestic  Within and outside
corporation of PH
Business income  Proprietary
educational
institutions
 Non-profit hospitals
 Proprietary
government-owned
or controlled
corporation
 Foreign  Within PH
corporation

Composition of Regular Allowable Itemized Deductions

1. General business expenses
Requisites: ordinary and necessary to business or profession, substantiated
with ORs, reasonable in amount, withheld with tax and paid to the BIR, not
contrary to law

Representation Expense – entertainment, amusement, and recreation

expenses (a. ½% of net sales, b. 1% of net revenue)

2. Interest – cost of money incurred on indebtedness

Requisites: valid, the taxpayer’s, connected with trade, business or
profession, paid or incurred in the taxable year, stipulated in writing, legally
due, not between related parties, not incurred to finance petroleum
operations, not treated as capital expenditure, not expressly allowed by law to
be deducted

Subject to limit
Interest income subjected to 20% final tax + interest expense = reduced to
33% (individual or corporation)

Deductible in full
 No interest income subject to 20% final tax, paid in favor of the government,
delinquent taxes – paid to government not reduced by tax differential
Nondeductible
Not business related, in favor of a relative, paid in advance, purchase or carry
tax, to finance petroleum explorations, unclaimed salary

3. Taxes
- when paid and incurred within the taxable year
- NRA-ETB & resident foreign corporation – income from sources within PH
- Income tax paid to any foreign country – item of deduction or tax credit
Requisites:
Paid and incurred within the taxable year, in connection with profession, trade
or business, imposed directly upon the taxpayer
TAXES DEDUCTIBLE FROM GROSS INCOME
 Percentage tax
 Documentary stamp tax
 Occupational taxes
 Privilege and license taxes
 Excise taxes
 Fringe benefit tax
 Import duties
 Local business taxes, except special assessment
 Automobile registration fees
 Community tax
 Municipal tax; and
 Income tax paid to foreign country if NOT CLAIMED AS TAX CREDIT
TAXES NOT DEDUCTIBLE FROM GROSS INCOME
 Philippine income tax, except fringe benefit tax
a. Final income tax
b. Capital gains tax
c. Regular income tax
 Estate and donor’s taxes
 Foreign income tax, if claimed as tax credit
  Percentage tax on stock transaction
 Value-added tax
 Taxes not related to business, trade, or profession; and
 Other items related to tax such as: SPECIAL ASSESSMENT,
SURCHARGES, and COMPROMISE PENALTY
4. Charitable and other contributions
Non-operating expense

Requisites:
Must be engaged in a profession, trade or business, must have actual
payment, recipient must be an entity or institution, institution’s net income
must not inure to the benefit of stockholder

Contribution deductible in full

Donations to the government or any of its agencies to finance specific priority
activities.
Donations to international organizations in compliance with agreements.
Donations to accredited NGOs (30% for admin purposes, utilized on or before
the fifteenth day of the third month, dissolution – distribute the assets)

Subject to limit
Corporation – 5% of taxable income (before contribution) or the actual
contribution, whichever is LOWER
Individual – 10% of taxable income (before contribution) or the actual
contribution whichever is LOWER

5. Contributions to pension and trusts

Amount deductible:
Actual contribution to the extent of pension liability (normal cost)
Amortization of past service cost (actual contri - normal cost) (10 years
amortization)
TOTAL

6. R&D Costs
Treatments:
1. Related to capital accounts – capitalized as part of the cost of property
(depreciation expense)
2. Not related to capital accounts – 1. outright expense, 2. deferred expense
(5 years amortization)
Organizational and pre-operating expenses – capital expenditures
Start of commercial operations – amortized over 60 months
OPTIONAL STANDARD DEDUCTION (OSD) – 40%
Individual Corporation
Rate 40% gross 40% gross income
sales/revenues
Tax Base Excluding passive income Excluding passive income
subject to final subject to final
withholding tax withholding tax
Cost of Sales/Services Not allowed to deduct Allowed to deduct
COS/Services COS/Services

INCOME TAXATION ON INDIVIDUAL

FILIPINO CITIZEN
The following individuals are citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of the 1987
constitution.
2. Those whose fathers or mothers are citizens of the Philippines.
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine
Citizenship upon reaching the age of majority.
4. Those who are naturalized in accordance with law.

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

A. Resident Citizen (RC)
1. A Filipino citizen residing in the Philippines.
2. Taxable by income derived from sources within and without the Philippines.
B. Nonresident Citizen (NRC) (Section 22 (E), RA 8424)
1. Who establishes the fact of his physical presence abroad with definite
intention to reside therein
2. who leaves the Philippines during the taxable year to reside abroad as an
immigrant or for employment on a permanent basis
3. who works and derives income from abroad, employment requires physical
presence abroad for at least 183 days
4. previously considered as nonresident citizen and who arrives in the
Philippines to reside permanently
5. Overseas Contract Worker (OCW) or Overseas Filipino Worker (OFW) –
RR No. 1-2011
 - employed in foreign countries, paid by an employer abroad, must be
duly registered with POEA with valid OEC
- seaman – duly registered with POEA with valid SIRB or Seaman’s
Book by the MARINA
6. Taxable by income from all sources within the Philippines
D. Resident Alien (RA) (Section 22 (F), RA 8424)
An individual whose residence is within the Philippines and who is not a
citizen thereof
1. Actually present in the Philippines who is not a mere transient or sojourner
2. Who comes to the Philippines for a definite purpose that would require an
extended stay
3. Floating intention – acquire residence, retains the status, then depart from
the Philippines
4. Who shall have stayed in the Philippines for more than one (1) year
E. Nonresident Alien (NRA)
1. engaged in trade or business (Section 25 (A), RA 8424)
- individual actually engaged in trade or business in the Philippines
- who shall come to the Philippines and stay therein for an aggregate
period of more than 180 days
- subject to income tax in the same manner as NRC and RA individuals
on taxable income received from all sources within the Philippines
2. not engaged in trade or business (NETB)
- those not included in no. 1
- who stays in the Philippines not more than 180 days
- taxable by income received from all sources within the Philippines
F. Special Employees (Repealed under TRAIN Law)
1. Special Alien Employee – employed by the following:
a. Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies (Section 25 (C), RA 8424)
b. offshore banking units (Section 25 (D), RA 8424)
C. petroleum service contractors or subcontractors (Section 25 (E), RA 8424)
2. Special Filipino Employee – Filipino employees of a, b, and c above
occupying managerial or technical position
Preferential Tax Rate for Special Employees – income derived prior to 2018
taxable year or prior to effectivity of RA 10963 (TRAIN Law)
Special Employees under TRAIN Law – subject to graduated income tax rate

BASIC TAX/REGULAR TAX/NORMAL TAX

General Principles:
 Income subject to basic tax is reflected in the income tax return of the
taxpayer.
 It is the payee (income earner) who has the responsibility to file the return
and pay the applicable tax
FORMULA:
Gross Income PXXX
Less: Allowable Deductions ( XXX)
Taxable Income PXXX
Rate (Train law table) XX%
Basic Income Tax PXXX
GROSS INCOME – includes all income not subject to final withholding tax
and not considered exempt under the law.
ALLOWABLE DEDUCTIONS – Business expenses and losses.
1. Classification of Business expenses:
a. Itemized expenses – multiple expenses listed as line items.
b. Optional Standard Deduction OPT - 40% base on Gross sales/receipts.
2. Government regulatory premiums.
a. Social Security System contribution Premium
b. Philhealth contribution premium
c. Pag-big contribution premium
A. MINIMUM WAGE EARNERS (MWEs)
They are exempt from income tax on:
a. Minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential
e. Hazard pay
MWE with additional “business” income:
a. Compensation income as MWE = EXEMPT
b. Business income = TAXABLE
B. DETERMINATION OF BASIC TAX OF MARRIED INDIVIDUALS
Requirements in the filing of ITR of married individuals:
- Required by law to file a consolidated ITR, compute separately their
individual income tax
- Income which cannot be definitely attributed shall be equally divided
between the spouses
- If the spouses are only physically separated (no legal separation), required
by law to file a consolidated or joint returns
C. TAXATION OF NRA-NETB. All income (except interest income from FCDU)
received by NRA-NETB is subject to 25% FWT, except for the following:
a. Interest from a depositary bank under the expanded foreign currency
deposit system – EXEMPT
b. Sale of real property and shares subject to capital gains tax.
D. TAXABLE ESTATES AND TRUSTS (ITR -BIR FORM 1701)
a. Estate – properties, rights and obligations of a decedent not extinguished
by his death which are matters of succession
judicial settlement – individual taxpayer; extrajudicial settlement – exempt
entity
b. Trust – an agreement whereby a trustor transfers property to the
beneficiary which will be held under the management of the trustee
irrevocable trust – individual taxpayer; revocable trust – non-taxable entity

E. EMPLOYED TAXPAYERS: THE SUBSTITUTED FILING OF TAX RETURN

Conditions of the Substituted Filing System ( RR11-2018)
received purely compensation income, e income from only one employer in
the Philippines, amount of tax due from the employee = amount of tax
withheld by the employer, employee’s spouse also complies, employer files
the annual information return (BIR Form No. 1604-CF), employer issues BIR
Form No. 2316; employee uses BIR form No. 1700 or ITR
F. CONSOLIDATED/ANNUAL/ADJUSTMENT INCOME TAX RETURNS
(RR11-2018)
Concurrent employment, Successive employment, Receipt of income
distribution from a general professional partnership, Taxpayers with both
employment income and business income
G. WHO ARE REQUIRED TO FILE INCOME TAX RETURNS?
a. INDIVIDUALS - ITR BIR FORM 1700/1701
1. Resident citizens receiving income from sources within and without.
b. NON-INDIVIDUALS – ITR -BIR FORM 1702
Corporations including Partnerships, Domestic corporations, Foreign
corporations, Estate and trusts engaged in trade or business
H. WHO ARE NOT REQUIRED TO FILE INCOME TAX RETURN?
a. Minimum wage earners
b. gross income does not exceed his total personal and additional exemptions
c. compensation income derived from one employer does not exceed P60,000
d. income has been subjected to final withholding tax (i. Special aliens ii.
NRA-NETB)
e. Pure compensation earner qualified under the substituted filing system
I. ANNUAL INFORMATION RETURN (RA-10963)
a. individuals, estates or trusts (not engaged in business) earning pure
compensation income – BIR 1705 on or before May 15 of the following year
b. self-employed individuals, estates or trusts engaged in business – BIR form
1701AIF
c. corporations and partnership in general – BIR form 1702AIF
J. INSTALLMENT PAYMENT OF THE REGULAR INCOME TAX – when the
tax due is in excess of P2,000
a. 1st instalment – the time the return is filed
b. 2nd instalment – on or before October 15 following the close of the
calendar year
M. The 8% INCOME TAX RATE A. Rate of Tax on Income of Purely Self-
employed Individuals and/or Professionals Whose Gross Sales or Gross
Receipts and Other Non-operating Income Does Not Exceed the Value-added
Tax (VAT) Threshold of P3,000,000 as Provided in RA 10963 and Section
109(BB)
Self-employed individuals and/or professionals shall have the option to avail
of an eight percent (8%) tax on gross sales or gross receipts and other non-
operating income in excess of Two hundred fifty thousand pesos (P250,000)
in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this
Section and the percentage tax under Section 116 of this Code
Rate of Tax for Mixed Income Earners
Taxpayers earning both compensation income and income from business or
practice of profession shall be subject to the following taxes:
(1) All Income from Compensation
(2) All Income from Business or Practice of Profession