SAINT COLUMBAN COLLEGE

COLLEGE OF BUSINESS EDUCATION

INCOME TAXES
2nd Semester, S.Y. 2023-2024
TAXATION (TAX) JOHN KHELVIN A. ORBETA, CPA
DEDUCTIONS FROM GROSS INCOME

LECTURE NOTES
Methods of Deductions
1. Itemized Deductions
2. Optional Standard Deductions (OSD)

Note: OSD is in lieu of the itemized deduction

General Rule: The following taxpayers are allowed to use itemized deduction:
1. RC
2. NRC
3. RA
4. NRAETB
5. GPP
6. DC
7. GOCC
8. RFC
Exceptions:
1. Purely compensation income earner
2. NRANETB
3. NRFC
MANDATORY ITEMIZED DEDUCTIONS TO THE FOLLOWING TAXPAYERS
Individuals and corporations, partnerships and other non-individual taxpayers mandated to use itemized
deductions:
1. Those exempt under the Tax Code, as amended and other special laws, with no other taxable income
a. BMBE-registered enterprises
b. Non-stock, non-profit organizations
c. NGOs

2. Those with income subject to special/preferential tax rates

a. Proprietary Education Institutions or Hospitals – (Old rate 10%; New rate 1%)
b. PEZA-Registered Enterprises which are subject to 5%
3. Those subject to regular rate and also with income subject to special/preferential tax rates.
ITEMIZED DEDUCTIONS
A. Expenses, in general
Requisites:
• Ordinary
• Necessary in trade, business or profession
• Actually incurred
• Direct connection on the Development, Operation or Management (DOM) of the trade, business or practice
of profession
• Reasonable
• Withholding tax is paid
• There is proof (official receipt or adequate record)
A. Expenses
1. Compensation
Requisites:
a. personal services must have been actually rendered
b. the compensation for such services must be reasonable, including the grossed-up monetary value of
fringe benefit furnished to the employee and the applicable final tax withheld and remitted to the BIR
2. Transportation and travel – whether domestic or abroad
3. Rental and utilities – the lessee must not hold title to the property
4. Entertainment, Amusement or Recreation Expenses (EAR) or Representation expense
Requisites:
a. it must be directly related to the DOM or furtherance of trade, profession or business
b. it must not be contrary to law, morals, good customs, public policy or public order
c. must be substantiated with adequate proof
d. not paid directly or indirectly to the official or employee
e. it must be within the limits prescribed by the Tax Code

Ceiling of EAR
1. Seller of goods or properties – lower of actual EAR and .5% of Net Sales (Gross sales less RAD)
2. Seller of service – lower of actual EAR and 1% of Net Revenue (Gross revenue less discounts)
3. Seller of goods and seller of service – apportionment formula
 Net Sales/Net Revenue x Actual EAR
Total Net Sales and Net Revenue

Exercises: Compute the allowable and the disallowed representation expense:

a. ABC Corp’s gross sales amounted to Php 1 Million. The company spent Php 50,000 for representation.
b. ABC Corp’s gross receipts amounted to Php 1 Million. The company spent Php 50,000 for representation.
c. ABC Corp reported gross sales of Php 1 Million and gross receipts of Php 1 Million. The company spent
Php 50,000 for representation.

Sale of goods Sale of service Mixed transaction

(a) (b) (c)
Amt Rate Limit Actual (Pro- Allowed
rate)
GS
GR
Total

Note: Shifting EAR to any other expense in order to avoid being subjected to ceiling is NOT allowed. The amount
shifted shall be disallowed in its totality without prejudice to penalties which may be imposed.
ADDITIONAL DEDUCTION FOR TRAINING EXPENSES:
An additional deduction from taxable income of one-half (1/2) of the value of labor training expenses shall be
granted to enterprises:

Conditions:
1. Incurred for skills development of enterprise-based trainees
2. Enrolled in:
• Public Senior High Schools
• Public Higher Education Institutions
• Public Education Institution
• Public Technical and Vocational Institutions
3. Duly covered by an apprenticeship agreement under Presidential Decree No. 442, Series of 1974, or the
Labor Code of the Philippines, as amended,
4. For the additional deduction for enterprise-based training of students from Public Educational
Institutions, the enterprise shall secure proper "certification" from the Department of Education (DepEd),
Technical Education and Skills Development Authority (TESDA), or Commission on Higher Education
(CHED).
5. Such deduction shall not exceed Ten Percent (10%) of Direct Labor Wage.

Simplified Computation: Additional deduction is lower of 10% of Direct Labor and 50% of Actual Training
Expenses

ILLUSTRATION:
MOC Corporation, a domestic manufacturing corporation, had gross sales of P100,000,000.00 for Fiscal Year
ending June 30, 2021 and incurred cost of sales of P60,000,000.00 and operating expenses of
P17,500,000.00, with the following details:

Cost of Sales
Direct Materials P 30,000,000.00
Direct Labor 20,000,000.00
Manufacturing Overhead 10,000,000.00
Total P 60,000,000.00
Operating Expenses
Salaries and Wages P 7,000,000.00
Taxes 300,000.00
Depreciation 3,500,000.00
Professional Fees 200,000.00
Advertising Expenses 3,000,000.00
Training Expenses 3,000,000.00
Office Supplies 500,000.00
Total P 17,500,000.00
Assuming MOC corporation has complied with the withholding tax requirement on all cost and expenses
incurred subject to withholding tax, compute for the corporation's net taxable income:

Gross Income P 40,000,000.00

Less: Allowable Deductions
Salaries and Wages P 7,000,000.00
Taxes 300,000.00
Depreciation 3,500,000.00
Professional Fees 200,000.00
Advertising Expenses 3,000,000.00
Training Expenses 3,000,000.00
Office Supplies 500,000.00
Expenses before additional P 17,500,000.00
deduction on Training Expenses
Additional Allowable Deductions 1,500,000.00 P 19,000,000.00
on Training Expenses (see
Note)
Net Taxable Income P 21,000,000.00

Note:
The amount of P 1,500,000.00, which is one-half of the value of the actual training expenses of P
3,000,000.00, can be claimed as additional deduction since it did not exceed ten percent (10%) of the Direct
Labor Wage. In this scenario, the corporation's direct labor wages incurred was P 20,000,000.00. Thus, the
one-half value of the actual training expenses of P 1,500,000.00 did not exceed the P 2,000,000.00 (10% of
P 20,000,000.00) threshold. Provided further, that all the prescribed requirements in this section has been
complied with (e.g., Apprenticeship Agreement, Certification from DepEd or TESDA or CHED, whichever is
applicable). If the company's direct labor wage is only P10,000,000.00, the additional deduction that can be
allowed shall be P1,000,000.00 and not P1,500,000.00.
B. Interest Expense
Interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession,
trade or business shall be allowed as deduction from gross income, provided the same also satisfied the
following criteria:

1. The indebtedness must be that of the taxpayer

2. The interest must have been stipulated in writing
3. The interest must be legally due
4. The interest payment arrangement must not be between related taxpayers as mandated in Sec.
34(B)(2)(b), in relation to Sec. 36(8) both of the Tax Code of 1997
5. The interest must not be incurred to finance petroleum operations
6. The interest was not treated as "capital expenditure", if such interest was incurred in acquiring
property used in trade, business or exercise of profession.

Optional Treatment of Interest Expense

At the option of the taxpayer, interest incurred to acquire property used in trade, business or profession
may be allowed as a capital expenditure (capitalized instead of outright expense)

Notes:
• The taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount
equivalent to twenty percent (20%) of interest income subjected to final tax.
• If the final withholding tax rate on interest income of 20% will be adjusted in the future, the interest
expense reduction rate shall be adjusted accordingly.
• In the case of corporations, since the income tax rates changed effective July 1, 2020, it follows that the
deduction from the interest expense of 20% shall be effective also on the said date.
• For other domestic corporations with net taxable income not exceeding Five Million Pesos (P5,000,000)
and total assets not exceeding One Hundred Million (P 100,000,000), excluding the land on which the
particular business entity's office, plant and equipment are situated, the deduction is 0% since there is
no difference in the income tax rate on the taxable income (20%) with the tax rate applied on the interest
income subjected to final tax (20%).
• In the case of individuals engaged in business or practice of profession, such deduction shall take effect
upon the effectivity of CREATE.
• Interest imposed and assessed from deficiency taxes are deductible.
C. Taxes
In general, taxes paid or accrued within the taxable year in connection with the taxpayer’s trade or business
or exercise of a profession are deductible.

Example of deductible Taxes:

National Taxes Local Taxes
Annual Registration Fee (Php 500.00) Registration fees from LGUs
Fringe benefit tax (if not claimed in salaries) License fees
Documentary stamp tax Mayor’s permit fee
Percentage tax (3%)* Local business tax
Excise tax Community tax certificate (cedula)
Real property tax
Payment for barangay clearance

Non-deductible Taxes:
1. Income tax and withholding taxes (final tax, withholding tax on compensation, expanded withholding
tax, capital gains tax even if paid for by the taxpayer/withholding agent) Note: FBT allowed
2. Income tax imposed by a foreign country (if the taxpayer opted to claim them as deduction rather than
as tax credit)
3. Estate or donor’s tax
4. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed
(Special assessment)
5. Value-added tax

Notes:
1. No deduction is allowed for deficiency taxes, surcharges and/or penalties.
2. For Non-VAT taxpayers, the VAT paid is part of cost or expense.

OPTIONAL TREATMENT ON FOREIGN TAX PAYMENTS

Applicable to resident citizens and domestic corporations
1. tax credit or
2. deduction from income

LIMITATIONS ON CREDIT
1. The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer's taxable income from
sources within such country bears to his entire taxable income for the same taxable year
2. The total amount of the credit shall not exceed the same proportion of the tax against which such credit
is taken, which the taxpayer's taxable income from sources without the Philippines taxable bears to his
entire taxable income for the same taxable year.

FORMULA
1. Limit 1: Per Country – lower of the actual amount of foreign tax paid and the amount which reflects the
ratio which the gross income from the foreign country bears with the total world taxable income to the
Philippine income tax

Country x Taxable Income x Philippine income tax

Total World Taxable Income

2. Limit 2: Total Foreign Country: lower of the aggregate lower values of the per-country and the amount
which reflects the ratio of the taxable income from all foreign countries bears with the total world taxable
income to the Philippine tax

Total Foreign Taxable Income x Philippine income tax

Total World Taxable Income

Illustration 1: One Foreign Country

ABC Corp., a domestic corporation reported the following information for your review.
• Net Taxable Income in the Philippines - Php 10,000,000
• Net Taxable Income in Singapore – Php 5,000,000
• Income tax paid in Singapore – Php 1,000,000
As a CPA, he asks you to compute the following:
a. Allowable Tax Credit
b. Income Tax Payable

Illustration 2: More than one foreign country

ABC Corp., a domestic corporation reported the following for your review.
• Net Taxable Income in the Philippines - Php 10,000,000
• Net Taxable Income in Singapore – Php 5,000,000
• Income tax paid in Singapore – Php 1,000,000
• Net Taxable Income in South Korea – Php 5,000,000
• Income tax paid in South Korea – Php 100,000

As a CPA, he asks you to compute the following:

a. Allowable Tax Credit
b. Income Tax Payable
D. Losses
Ordinary Loss/Transaction Loss/Casualty loss
Requisites:
1. loss must be actually sustained during the taxable year
i. incurred in trade, profession or business
ii. of property connected with the trade, business or profession
iii. loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement
2. not compensated for by insurance or other forms of indemnity
3. the loss must be reported to the BIR within 45 days from the date of loss or discovery
4. not claimed as a deduction in the estate tax return for individual income taxpayer only

Loss may arise from:

1. Spoilage - pertains to the condition of goods which become waste due to damage or impairment in
quality caused by natural or other causes.
2. Deterioration - pertains to the condition wherein the goods have been determined to be waste due to
damage or impairment in quality caused by corrosion, weakening or disintegration, whether by natural
or other causes.
3. Obsolescence - pertains to the condition wherein the goods are rendered useless and outdated or have
lost their value due to advances in technology, product innovation or development, or change in
consumer demand.
4. Expiration - pertains to the condition of consumable goods that have become unfit for consumption
due to the termination or lapse of its predetermined useful life.

Methods to dispose or destruct goods, properties or assets:

1. Physical witness by a Revenue Officer
2. Virtual means - mode of online communication through the use of technology available to both BIR and
the taxpayer in witnessing the process of destruction or disposal.
3. Third party - a person recommended by the taxpayer who may either be a BIR accredited tax
practitioner or external auditor, subject to BIR approval to witness the process of destruction or
disposal.

Notes:
• Period to File Application for Destruction of Assets: At least seven (7) days from date of disposition
• BIR will issue Certificate of Deductibility of Goods/Assets Disposed/Destructed

Net Operating Loss Carry Over (NOLCO)

The net operating loss of the business or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from gross income shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years immediately following the year of
such loss.

The net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership
of the business or enterprise in that -
i. Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business
is in the name of a corporation, is held by or on behalf of the same persons; or
ii. Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in
the name of a corporation, is held by or on behalf of the same persons.

Notes:
1. Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall
not be allowed as a deduction.

2. Net operating loss means the excess if allowable deduction over gross income in a taxable year
Illustration:
Nicanor has made available the following information:
2015 2016 2017 2018 2019
GI/(NOL) (3,000) 2,000 1,000 (1,000) 2,000
Applied NOLCO
Taxable Income
Summary:
NOLCO
Applied
Unapplied
Expired

Note: Bayanihan to Recover as One Act (R.A. 11494)

NOLCO incurred by businesses or enterprises for taxable years 2020 and 2021 shall be allowed to carry over the
same as deduction from its gross income for the next five (5) consecutive taxable years immediately following
the year of such loss.

The net operating loss for said taxable years may be carried over as a deduction even after the expiration of RA
No. 11494 provided the same are claimed within the next five (5) consecutive taxable years immediately
following the year of such loss.

• Calendar Year – January to December of the taxable years 2020 & 2021.

• Fiscal Year – Taxable year 2020 and 2021 shall include all those corporations with fiscal years ending on
or before June 30, 2021 and June 30, 2022, respectively.

Presentation of NOLCO – The NOLCO shall be separately shown in the taxpayer’s income tax return (also
shown in the Reconciliation Section of the Tax Return) while the unused NOLCO shall be presented in the Notes
to Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or
incurred, and any amount thereof claimed as NOLCO deduction within five (5) consecutive years immediately
following the year of such loss. The NOLCO for taxable years 2020 and 2021 shall be presented in the Notes to
Financial Statements separately from the NOLCO for other taxable years. Failure to comply with this requirement
will disqualify the taxpayer from claiming the NOLCO.

Capital Loss
Capital losses are deductible only to the extent of capital gains. Net capital loss carry-over can be deducted in
the succeeding year for individual taxpayers. (see HO in Capital and Ordinary Assets.)

Wagering losses
Losses from wagering transactions shall be allowed only to the extent of the gains from transactions.
Compute the deductible wagering loss if the transactions occurred in the 1 st quarter.
1 day 3 days
Win Php 1,000
Loss (500)
Win 1,000
Loss (3,000)
Win 500
Loss (500)
Answer:

Abandonment Losses
1. Partial or Full abandonment of petroleum operation – all accumulated exploration and development
expenditures pertaining thereto shall be allowed as a deduction. In all cases notices of abandonment
shall be filed with the Commissioner
2. Subsequent abandonment of producing wells – the unamortized costs thereof, as well as the
undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such
well, equipment or facility is abandoned by the contractor

Note: if the abandoned well is re-entered and production is resumed, or if such equipment or facility is restored
into service, the said costs shall be included as part of gross income in the year of resumption or restoration and
shall be amortized or depreciated, as the case may be (concept of tax benefit).
E. Bad Debts
Requisites:
1. There must be an existing valid and legally demandable indebtedness
2. Debt must be connected with the taxpayer’s trade, business or practice of profession
3. Debt must not be between related parties
4. Debt must be charged off the books of accounts as of the end of taxable year
5. Debt must be actually ascertained to be worthless and uncollectible as of the end of taxable year
Note: Above rules apply to corporations including banks and insurance companies, individuals, estate and trust
that is engaged in trade or business or a professional engaged in the practice of profession
F. Depreciation
Depreciation refers to the exhaustion, wear and tear (including reasonable allowance for obsolescence) of
property used in the trade or business.

Requisites:
1. the property must be used in trade, profession or business
2. the property must have a limited useful life
3. the provision must be charged off during the taxable year
4. the provision must be reasonable

Non-deductible depreciation:
1. Value of motor vehicle exceeds Php 2,400,000.00
2. Exception: If the taxpayer is required by the nature of business to buy vehicles (e.g. transport
network companies)
NOTES:
a. Only one land transport is allowed for use of an official or employee
b. Any or all expenses attributable to the motor vehicle is NOT deductible and not creditable against
output tax
c. Input tax on motor vehicle NOT creditable against output tax
d. Loss from sale is non-deductible loss
e. No depreciation is allowed for yacht, helicopter, airplane or aircraft with value over Php 2.4 Million
unless it is the main business of the company

Methods of Depreciation under the Tax Code:

1. Straight line
2. Declining balance
3. Sum of the years
4. Other methods which may be prescribed by the Secretary of Finance upon recommendation of the
Commissioner of Internal Revenue

Petroleum Operations:
The taxpayer may choose either declining-balance method or straight-line method at the option of the
contractor.
Useful life of depreciable asset:
1. used in or related to the production of petroleum – 10 years or shorter as may be permitted by the
Commissioner of Internal Revenue
2. not used in or not related to the production of petroleum – 5 years under straight line method

Mining Operations:
For all properties used in mining operations, other than petroleum operation:
1. 10 year useful life or less – At normal rate of depreciation
2. More than 10 years useful life – depreciated over any number of years between 5 and the expected
life. Provided the taxpayer notifies the CIR at the beginning of the deprecation period of the rate to
be used.
G. Depletion of Oil and Gas Wells and Mines
Depletion pertains to exhaustion of natural resources due to production that is allowed as deduction to
recover cost of the property or wasting asset in accordance with the cost-depletion method. When the
allowance for depletion shall equal the capital invested no further allowance shall be granted (i.e. up to the
capital investment only).

Exploration Expenditures – expenditures paid or incurred in ascertaining the existence, location and extent,
or quality of any deposit or ore or other minerals before the beginning of the development stage of the mine
or deposit.
Development Expenditures – expenditures paid or incurred during the development stage of the mine. The
development stage begins when ore or other minerals are shown to exist in commercial quality and quantity
and end upon commencement of actual commercial extraction.
H. Charitable and Other Contributions
Requisites:
1. the contribution or gift must be actually paid/given
2. it must be given to an organization specified by law
3. net income of the specified institution must not inure to the benefit of any private stockholder or
individual
4. the person making the contribution must be engaged in trade, business or profession

Classification of contributions
I. Fully deductible contributions
 a. Donation to the government, any of its agencies or political subdivisions including fully owned
government and controlled corporations to be used exclusively in undertaking priority activities as
determined by National Economic Development Authority (NEDA): (CHEESHY)
1. Culture
2. Human settlement
3. Education
4. Economic developments
5. Sports
6. Health
7. Youth development

NOTE: If donation to the government is NOT a priority activity - subject to limit.

b. Donation to foreign institution or international organization in compliance with agreement or treaties

or due to special laws
c. Donations to accredited domestic non-government organizations:
1. Charitable
2. Cultural
3. Educational
4. Rehabilitation of veterans
5. Religious
6. Scientific
7. Social welfare institutions
8. Youth and sports development
9. Any combination of the listed purposes

Requisites:
1. the administrative expense must not exceed 30% of the total expenses
2. Upon dissolution, assets must be distributed to another non-profit domestic corporation of to the
Government

NOTE:
1. If not complied with, the donation is subject to limit
2. Accreditor for NGO’s is Philippine Council for NGO Certification, Inc (PCNC)

BAYANIHAN TO HEAL AS ONE ACT

Full Deduction if donation is made to the following:
1. National Government or any entity created by any of its agencies (including public hospitals) which is
not conducted for profit, or to any political subdivision of the government including fully-owned
government corporations
2. Accredited non-stock, non-profit corporations, institutions, foundations, NGO
• Educational
• Charitable
• Religious
• Cultural
• Social welfare
• Trust or philanthropic organizations
• Research institutions or organizations
3. Private hospitals and/or non-stock, non-profit educational and/or charitable, religious, cultural or social
welfare corporation, institution, foundation, non-government organization (even if non-accredited), trust
or philanthropic organization and/or research institution
4. Local private corporations, civic organizations, and/or international organizations/institutions* provided
that they shall:
• Actually, directly and exclusively distribute and/or transfer said donations/gifts to,
• Partner as conduit/logistical machinery with, accredited NGOs and/or national government or any entity
created by any of its agencies which is NOT conducted for profit or any political subdivision

Full Deduction if the Donations are:

1. Cash donations
2. Donations of all critical or needed healthcare equipment or supplies in combatting COVID
3. Relief goods such as, but not limited to food packs (rice, canned goods, noodles, etc.) and water
4. Use of property, whether real or personal (shuttle service, use of lots/buildings

II. Contributions subject to limit

1. Donations to the Government of the Philippines, or agencies or political subdivisions exclusively for public
purposes (non-priority activities)
2. Donation to non-government organization or to domestic corporations organized exclusively for the
following purposes:
1. Religious
2. Charitable
 3. Scientific
4. Youth and sports development
5. Cultural
6. Educational
7. Rehabilitation of veterans
8. Social welfare

LIMITATION OF DEDUCTION:
Taxable income before deduction of contributions
1. 10% for Individual
2. 5% for Corporations

ALLOWABLE Deductible Contribution – Lower of

1. actual contribution or
2. computed limitation

Valuation
The amount of any charitable contribution of property other than money shall be based on the acquisition
cost of said property.

Illustration:
The following appeared in the audited financial statements of a taxpayer:
Gross Income Php 1,000,000
Less: Deductions:
Salaries Php 100,000
Depreciation 100,000
Utilities 100,000
Rental 100,000
Donation 100,000 500,000
Taxable Income Php 500,000

Compute the 1) allowable contribution and 2) non-deductible donation:

Individual taxpayer Non-individual taxpayer
Gross income Gross income
Salaries Salaries
Depreciation Depreciation
Utilities Utilities
Rental Rental
Tax. inc before donation Tax. inc before donation
Rate Rate
Limit Limit
Actual Actual
Allowable (Lower) Allowable (Lower)
Non-Deductible Non-Deductible

BAYANIHAN TO RECOVER AS ONE ACT (R.A. 11494)

Limitation of Deduction on all donations of personal computers, laptops, tablets, or similar equipment (i.e. mobile
phone, printer) for use in teaching and learning in PUBLIC schools (government schools including TESDA
regardless of school levels), starting from the effectivity of the Act on September 15,2020 up to December 19,
2020 (Section 4 (a) of Revenue Regulations No. 26-2020.

Note: Full deduction on donations to “government” is generally allowed EXCEPT donations of computers under
RA 11494.
I. Research and Development
In General. - 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.

OPTIONAL Amortization of Certain Research and Development Expenditures

At the election of the taxpayer, the following research and development expenditures may be treated as deferred
expenses:
a. Paid or incurred by the taxpayer in connection with his trade, business or profession
b. Not treated as expenses
c. Chargeable to capital account but not chargeable to property of a character which is subject to
depreciation or depletion
In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a
period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which
the taxpayer first realizes benefits from such expenditures).

The election provided by may be made for any taxable year beginning after the effectivity of this Code, but only
if made not later than the time prescribed by law for filing the return for such taxable year. The
method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income
for the taxable year for which the election is made and for all subsequent taxable years unless with the approval
of the Commissioner, a change to a different method is authorized with respect to a
part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any
taxable year for which the taxpayer makes the election.

Limitations on Deduction
This shall not apply to:
a. Any expenditure for the acquisition or improvement of land, or for the improvement of property to be
used in connection with research and development of a character which is subject to depreciation and
depletion
b. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral including oil or gas.

J. Pension Trust Contributions

An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions
to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the
taxable year to cover the pension liability accruing during the year, allowed as a deduction) a reasonable
amount transferred or paid into such trust during the taxable year in excess of such contributions, but only
if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts
over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is
made.

Current Service Cost – actually computed value of services rendered by a plan employee during the year
Past Service Cost – value of services rendered by employees in the past that partially satisfy vesting
conditions
OTHER DEDUCTIONS FROM GROSS INCOME
1. 20% Senior Citizens Discount
2. 20% Persons’ with Disability Discount
3. 20% Discount to National Athletes, Coaches and Trainers
4. 10% Discount Solo Parents Act
5. 20% Student Fare Discount
• all domestic public transportation – by land, sea or air
• public utility buses, jeepneys, taxis and other similar vehicles-for-hire, tricycles, passenger
trains, aircrafts and marine vessels
• does not cover school service, tourist service and any similar service
• based on regular fare (in case of air public transportation utilities, discount applies on base fare
or price of ticket before taxes and costs for ancillary services
• available during the entire period while the student is enrolled including weekends and holidays
SPECIAL ADDITIONAL DEDUCTIONS BY VIRTUE OF SPECIAL LAWS
Special Laws Law ADDITIONAL Deduction Conditions
Magna Carta for Senior RA 9994 15% of the total amount paid as 1. Employment is at
Citizens (Employment of salaries and wages to SC least 6 months
Senior Citizens) 2. Annual taxable
income must not
exceed the poverty
level
Magna Carta for PWD RA 10070 25% of the total amount paid as 1. Certificate of
(Employment of PWD) salaries employment of
PWD
2. DOLE certification
of disability, skills
and qualifications
Magna Carta for PWD RA 10070 50% of direct cost improvements Reasonable
(Employment of PWD) or modifications Accommodation only (does
not apply to improvements
under BP 344 or the
Accessibility Law for PWD)
TESDA Law (Employment of RA 7796 50% of the value of training Note: Amended under
Learners and Apprentice) expenses for learners CREATE Law
PEZA Law (Training RA 7916 50% of the value of training
Expenses) expenses for learners
Jewelry Act (Training RA 8502 50% of the value of training
Expenses) expenses
 Adopt-A-School RA 8525 50% of the value of contribution
or donation or expenses incurred
for adoption
Philippine Green Jobs Act RA 10771 50% of the skills training
Free Legal Assistance Act RA 999 Lower of actual free legal services Lawyers or partnerships
or 10% of gross income derived shall attach to the ITR the
from the actual performance of a) certification from the
the legal profession Public Attorney’s Office,
DOJ, or accredited
association of the Supreme
Court the following:
i. The legal
services to be
provided are
within the
defined legal
services
ii. The agencies
cannot provide
the legal
services to be
provided by the
private counsel
iii. The legal
services were
actually
undertaken
(specified hours)
b) Sworn statement of the
lawyer or managing partner
if GPP as to the amount that
could have been collected
for the actual free legal
service
NON-DEDUCTIBLE ITEMS FROM GROSS INCOME
1. Any payment directly or indirectly to an official or employee of the Government (local or national, including
government-owned and controlled corporations) or of a foreign government, or to a private individual,
corporation, General Professional Partnership or a similar entity, if it constitutes bribe, kickback or other
similar payments
2. Personal, living, or family expenses
3. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase
the value of any property or estate
4. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance
is or has been made
5. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the
taxpayer is directly or indirectly a beneficiary under such policy losses from sales or exchanges of property
directly or indirectly between related parties.
Related parties:
1. Members of a family
2. Except in cases of distribution in liquidation, between individual and corporation with more that 50%
ownership owned by the individual in the corporation
3. Except in cases of distribution in liquidation, between two corporations more than 50% is owned by or
for the same individual
4. Grantor and fiduciary of any trust
5. Fiduciaries of trusts with the same grantor
6. Fiduciary of a trust and beneficiary of such trust
OPTIONAL STANDARD DEDUCTIONS (OSD)
Individual Taxpayer – 40% of gross sales/receipts
Non-individual Taxpayer including GPP– 40% of gross income

Requirements:
- The qualified taxpayer must signify in the 1 st quarter income tax return his intention to elect the optional
standard deduction or the initial return
- Election of OSD shall be irrevocable for the taxable year for which the return was made (no amendment as
to method is allowed)
- Individual taxpayer who opted for OSD is not required to attach audited financial statements in the ITR
(Corporation still required even if OSD)
- May keep records pertaining to sales only (individual) or gross income (corporation)
Not applicable to:
 • Non-resident alien engaged in trade
• Exempt Taxpayers
• Preferential Rate Taxpayers
• Compensation Income Earners
• Taxpayers who chose 8% optional tax rate
OSD FOR GPP
A General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP or the partners
comprising the Partnership.
ILLUSTRATIONS:
OSD FOR INDIVIDUAL TAXPAYER
Problem 1 - Ms. Awra is a well-known accountant who offers auditing and taxation services. Since Ms. Awra's
career flourished, her total gross receipts amounted to Php 4,250,000.00 for taxable year 2019. Her recorded
cost of service and operating expenses was Php 2,150,000.00 and Php 1,000,000.00, respectively. She opted
to avail of the 40% OSD. Total tax withheld (expanded withholding tax) by her clients amounted to Php 425,000
from which she received her BIR Form 2307s.

Compute the income tax payable:

Gross Receipts
Less: OSD
Gross Receipts
Multiply by OSD Rate
Net Taxable Income

Income Tax Due

Less: tax credits (BIR Form 2307)
Income Tax Payable

NOTES:
1. The individual taxpayer elected OSD in the computation of her taxable income and the election is
irrevocable for the taxable year for which the return was made.
2. Taxpayer is not required to submit her financial statements with his tax return.
3. The gross receipts exceeded the VAT threshold of P3,000,000.00, thus the taxpayer is subject to the
graduated income tax rates and liable for VAT, in addition to income tax.

Problem 2 - Ms. Suzy Bey operates a convenience store while she offers bookkeeping services to her clients. In
2019, her sales amounted to Php 1,800,000.00, in addition to her gross receipts from bookkeeping services of
Php 400,000.00. Her recorded cost of goods sold and operating expenses were P1,325,000.00 and P320,000.00,
respectively.

A. If Ms. Suzy Bey will opt to avail of the OSD, compute the income tax due:
Gross Sales – Convenience Store
Gross Receipts – Bookkeeping Services
Total
Less: OSD (Php 2,200,000 x 40%)
Net Taxable Income

Income Tax Due

NOTES:
1. The taxpayer elected OSD in the computation of her taxable income, thus the graduated income tax rate
shall be applied
2. The election of OSD is irrevocable for the taxable year for which the return is made.
3. Taxpayer is not required to submit her financial statements with her tax return
4. Taxpayer is liable for business tax - Percentage Tax, in addition to income tax.

B. Compute Ms. Suzy Bey' s income tax liability if she signifies in her 1st Quarter return her intention to be
taxed at 8% income tax rate:
Gross Sales – Convenience Store
Gross Receipts – Bookkeeping Services
Total
Less: Deduction
Net Taxable Income

Income Tax Due

NOTES:
1. The gross sales and receipts did not exceed the VAT threshold of P3,000,000.00
 2. Taxpayer opted to be taxed at 8%o income tax rate on gross sales/receipts
3. Taxpayer's source of income is purely from self-employment; thus, she is entitled to the amount allowed
as deduction of P250,000.00.
4. Taxpayer is not liable for percentage tax under Section 116 of the Tax Code, as amended, since the 8%
income tax rate is also in lieu of the percentage tax.

Problem 3 – Inday is an online seller. She disclosed the following financial information:
Gross sales Php 1,000,000
Sales returns, allowances and discounts 100,000
Cost of sales 200,000
Expenses 100,000
Other Non-Operating Income 100,000

Compute the Net Taxable Income if Inday opted for OSD:

OSD FOR NON-INDIVIDUAL TAXPAYER

Problem 4 - The gross sales of CTRP Corporation for 2019 amounted to Php 6,000,000.00, with cost of sales
amounting to Php 4,000,000.00. It incurred operating expenses amounting to Php 1,000,000.00, and on the
filing of its First Quarter Income Tax Return, it signified its intention to avail of the OSD. Compute the income
tax due:
Gross Sales
Less: Cost of Sales
Gross Income
Less: OSD (Php 2 Million x 40%)
Net Taxable Income

Income Tax Due:

Old Rate-30%
New Rate:
• 25%
• 20% if TI is ≤ P5M and Assets ≤P100M excluding land

Problem 5 – ABC Corp. disclosed the following financial information:

Gross sales Php 1,000,000
Sales returns, allowances and discounts 100,000
Cost of sales 200,000
Expenses 100,000
Other Non-Operating Income 100,000

Compute the Net Taxable Income if ABC Corp. opted for OSD:

OSD FOR GENERAL PROFESSIONAL PARTNERSHIP (GPP)

Problem 1 - Buknoy is a partner of ABC & Co., CPAs, a general professional partnership, and owns 25% interest.
The gross receipts of the GPP amounted to Php 10,000,000.00 for taxable year 2019. The recorded cost of
service and operating expenses of the GPP were Php 2,750,000.00 and Php 1,500,000.00, respectively.

A. Compute the net income for distribution to partners if the GPP availed of the OSD:
Gross Receipts
Less: Cost of Services
Gross Income
Less: OSD (Php 7,250,000 x 40%)
Net income
 Income Tax Due

Notes:
1. There is no income tax liability for ABC & Co., CPAs since it is a general professional
partnership under Section 26 of the Tax Code, as amended.
2. The GPP elected OSD in the computation of its net income and its election is irrevocable for
the taxable year for which the return is made.
3. The GPP is liable to business tax.
Net distributable income of the GPP
B. Compute the income tax liability of Buknoy:
Share of Buknoy
Distributive share of Buknoy

Income Tax Due

NOTES:
1. Individual partner is not allowed to claim further deduction from his distributive share since
this is already net of cost and expenses.
2. Taxpayer is not allowed to avail of the 8% income tax rate option since their distributive
share from GPP is already net of cost and expenses.

Problem 2 - Ms. Siri is a partner of CCF & Co., a general professional partnership, and owns 25%
interest. The gross receipts of CCF & Co. amounted to Php 10,000,000.00 for taxable year 2019. The
recorded cost of service and operating expenses of CCF & Co. were Php 2,750,000.00 and Php
1,500,000.00, respectively.

A. Compute the Net Income of

CCF & Co.: Gross Receipts
Less: Cost of
Services Gross
Income
Less: Operating Expenses
Distributive Profit
Net income
Share of Buknoy
Distributive share of Buknoy
B. Compute the income tax liability of Ms. Siri:
Income Tax Due

NOTES:
1. There is no income tax liability for CCF & Co. being a general professional partnership under
Section 26 of the Tax Code, as amended.
2. The GPP elected itemized deduction in the computation of its net income and its election is
irrevocable for the taxable year for which the return is made.
3. The GPP is liable to business tax.
4. Individual Partner is not allowed any deduction on his distributive share since this is already
net of cost and expenses
5. Taxpayer is not allowed to avail of the 8% income tax rate option since her distributive
share from GPP is already net of cost and expenses.
E
N
D