Deductions from Gross Income

Deductions are items or amounts which the law allows to be deducted from the gross income of a
taxpayers to arrive at taxable income and determine the tax due.
Under the Tax code, a taxpayer means any person subject to income tax, and a person may be an
individual, estate, trust, or corporation
Taxes – used in the Tax Code, refers to taxes proper and, therefore, deductions are not allowed in amounts
representing: (1) surcharges, (2) penalties, or (3) fines incident to delinquency
As a rule, taxes are deductible except for those which the law does not permit deduction.
If the taxes for which deduction is claimed are connected with income from sources within the Philippines,
taxes can be deducted to a nonresident alien individual and a foreign corporation engaged in trade or
business in the Philippines.
Examples of taxes that are deductible.
1. Import paid to customs officers;
2. Business taxes, i.e., value-added tax, other percentage taxes, and excise taxes;
3. License tax;
4. Privilege taxes;
5. Documentary stamp taxes;
6. Professional /occupational tax;
7. Real property tax; and
8. Any other taxes of every amount and nature paid directly to the government or any political
subdivision
Postage is not a tax.

Examples of taxes that are not deductible:

1. Philippine income tax, except fringe benefit tax;
2. Income taxes imposed by the authority of any foreign country, but this deduction is allowed in the
case of a taxpayer entitled to tax credit but does not avail of the same;
3. Estate and donor’s taxes;
4. Special assessments or levies (which are really not taxes) assessed against local benefits of a kind
tending to increase the value of the property assessed.
5. Taxes not in connection with the trade, business or profession of the taxpayer; and
6. Taxes which are final.
Requisites for deductibility
1. The taxes must be paid or incurred within the taxable year;
2. The taxes must be in connection with the taxpayer’s profession, trade or business; and
 3. The taxes are imposed on the taxpayer. Thus, the tax imposed by law upon sales is not deductible
by the purchaser even though the tax may be billed to the latter as a separate item.
Business expenses deductible from gross income are the 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 taxpayer’s trade, business or exercise of a profession.
This includes
1. Salaries, wages and other forms of compensation
2. Travel expenses – a reasonable allowance for travel expenses, here and abroad, while away from
home in pursuing the taxpayer’s trade, business or profession;
3. Rentals and similar payments – a reasonable allowance for rentals and/or other payments required
as a condition for the continued use or possession for purposes of the trade, business or
profession, of property to which the taxpayer has not taken or is not taking title or in which he has
no equity other than that of a lessee, user or possessor.
4. EAR Expenses – A reasonable allowance for entertainment, amusement, and recreation expenses
during the taxable year that are directly connected to the development, management and operation
of the trade, business or profession of the taxpayer. Any expense incurred form entertainment,
amusement, or recreation that is contrary to law, morals, public policy or public order shall in no
case be allowed as a deduction;
5. Labor training expenses – an additional deduction from taxable income of ½ of the value of labor
training expenses incurred for skills development of enterprise-based trainees enrolled in public
senior high schools, public higher education institutions, or public technical and vocational
institutions and duly covered by an apprenticeship agreement under PD 442 of the Labor Code of
the Philippines, as amended.
Interest is the compensation allowed by law or fixed by the parties for the loan or forbearance of money,
goods, or credits.
*Generally, any amount of interest paid or incurred within the taxable year on indebtedness in connection
with the taxpayer’s trade, business or profession may be deducted from gross income.
When expense is ordinary and necessary
1. An expense is considered ordinary when it is commonly incurred or business of the taxpayer. An
ordinary expense connotes a payment that is normal in relation to the business of the taxpayer.
Requisites for interest to be deductible
1. The taxpayer must have an indebtedness.
2. The indebtedness must be connected with the trade, business, or profession of the taxpayer.
3. The interest must have been paid or incurred during the taxable year.
4. The interest must be legally due.
5. The interest must have been stipulated in writing.
6. The interest payment arrangement must not be between related taxpayers as mandates in Section
34 (B) (2) (b), in relation to Section 36(B) both of the Tax Code.
 7. The interest must not be incurred to finance petroleum operations
8. The interest was not treated as “capital expenditure” if such interest was incurred in acquiring
property used in trade, business or exercise of profession.

1. The expenses must be ordinary and necessary;

2. They must be paid or incurred during the taxable year;
3. They must be paid or incurred in carrying on any trade, business or profession;
4. They must be reasonable in amount;
5. They must be substantiated by adequate proof;
6. They must not be against law, morals, public policy or public order; and
7. The tax required to be withheld therefrom (if applicable) has been withheld and remitted to the BIR.
The term “paid and incurred” and “paid or accrued,” as used in the Tax Code, shall be construed according
to the method of accounting upon the basis of which the taxable income is computed.