Deduction From Gross Income
Deduction From Gross Income
Deduction From Gross Income
Q: Define Deductions
Answer: Deductions are item or amounts authorized by law to be subtracted from the pertinent items of gross income
to arrive at taxable income (NIRC, Sec. 34).
Answer:
- Deductions must match the income; deductions, must be paid or incurred in connections with the taxpayer’s
trade, business or profession (2 DOMONDON, Taxation, supra at 522).
2. Substantiation Rule
- Deductions must be supported by adequate receipts or invoices. The taxpayer has the burden of proving
entitlement to a claimed deductions of refund (Paper Industries Corp. of the PHL v Court of Appeals, G.R. Nos.
106949-50, December 1, 1995
3. Subject to limitation
- The taxpayer is mandated to deduct amounts only within the limits allowed by law. He could choose to avail
only of a lesser amount or even non at all (Commissioner of Internal Revenue v. Phoenix Assurance CO., Ltd.,
G.R. No. L-19727, May 20, 1965).
- any amount paid or payable which is otherwise deductible from, or taken into account in computing gross
income or for which depreciation or amortization may be allowed, shall be allowed as deduction only if it shown
that the tax required to be deducted and withheld therefrom has been paid to the BIR (NIRC, Sec. 34, par. (K) R.R
No.12-2013; R.M.C No. 63-2013).
Q: Discuss the concept of return of capital (cost of sales or services) in relation to deductions.
Answer: Income tax is levied by law only on income, which may be gross income or net income; hence, the
amount representing return of capital should be deducted from the proceeds from sales of assets and should
not be subject to income tax (R.R. No. 02-40, Sec. 65)
Answer: Yes. These taxpayers shall be considered as having availed of the itemized deduction, unless they signify
in their income tax return the intention to elect the OSD. Such elections of the option, when made in the return,
shall be irrevocable for the taxable year for which the return is made (R.R. No. 8-2018, Sec. 8). However,
taxpayers earning purely compensation income arising from personal services rendered under an employer-
employee relationship cannot avail of this itemized deduction (NIRC, as amended by TRAIN Law. Sec. 34).
EXPENSES
Q: Are expenses which constitute bribe, kickback and other similar payment deductible from gross income?
Answer: No
Deductions from gross income shall be allowed for any payment made, directly or indirectly, to an official or
employee of any local government unit, or to an official or employee of a GOCC, or to an official or employee or
representative of a foreign government, or to a private corporation, GPP, or a similar entity if the payment
constitutes a bribe or kickback. While illegal income will form part of gross income of taxpayer (within the
concept of “income from whatever source”), expenses which constitute bribe, kickback and other similar
payment being against law and public policy are not deductible from gross income.
Q: Are Payments made in exchange for the revelation of a competitor’s trade secrets deductible?
Answer: Payments made in exchange for the revelation of a competitor’s trade secrets is considered as an
expense which is against law, morals, good customs or public policy which is not deductible (3M Philippines, Inc.
v. CIR, September 26, 1988)
Q: Are Payments made in exchange for the revelation of a competitor’s trade secrets deductible?
An ordinary expense is that is normal or usual in relation to the taxpayer’s business and the surrounding
circumstances. In order to be deductible as a business expense, three conditions must concur [Business test]: (1)
the expense must be ordinary and necessary; (2)it must be paid or incurred within the taxable year; and (3) it
must be paid or incurred in carrying on a trade or business. Additionally, the taxpayer must substantially prove
by evidence or records the deductions claimed under the law (Atlas Consolidated Mining & Devt. Corp. v.
Commissioner of Internal Revenue, G.R. No. L-26911, January 27, 2981
It is one which is appropriate and helpful in the development of the taxpayer’s business and is intended to
minimize losses or to increase profits (General Electric [P.I.] Inc. v. Collector of Internal Revenue, CTA Case No.
1117, July 14, 1963).
Q:Is media advertising expenses paid and incurred constitute ordinary and necessary expenses fully deductible
under the NIRC?
Under this principle, if there is showing that expenses have been incurred but the exact amount thereof cannot be
ascertained due to the absence of documentary evidence, it is the duty of the BIR to make an estimate of deduction that
may be allowed in computing the taxpayer’s taxable income bearing heavily against the taxpayer whose in exactitude is
of his own making ( Cohan v. Commissioner of Internal Revenue, 39 F. 2d 540 (2d Cir. 1930 [as cited in Pilmicu-Mauri
Foods Corp., v Commissioner of Internal Revenue, C.T.A. EB No. 97, August 29, 2006]).
Q: In general, what are the ordinary and necessary expenses deductible from gross income incurred in the conduct of
trade, business or profession?
Sec. 34 (A)(1) of the NIRC provides the following ordinary and necessary Trade, Business or Professional
Expenses:
1. Salaries, wages and other forms of compensation for personal services actually rendered including Grossed-up
monetary value (GMV) of fringe benefit;
2. Travel or transportation expenses (here and abroad);
3. Rentals and/or other payments for the continued use or possession of property;
4. Entertainment, amusement and recreation expenses.
SALARIES, WAGES AND OTHER FORMS OF COMPENSATION FOR PERSONAL SERVICES ACTUALLY RENDERED
Q: What does compensation for personal services rendered include?
It Includes:
1. Salaries, wages, commissions, professional fees, vacation-leave pay, retirement pay, and other
compensation.
2. Bonuses in good faith;
3. Pension and compensation for Injuries, if not compensated for by insurance or otherwise; and
4. GMV of fringe benefit provided for as long as the final tax imposed has been paid.
Q: What are the general requisites for deductibility of compensation for personal services actually rendered?
The Requisites are the following (OPT-SPR)
1. The expense must be both Ordinary and necessary;
2. The salaries must be Paid or incurred within the taxable year;
3. The salaries must be incurred in carrying on Trade or business;
4. The expense must in fact be Salaries or other compensation;
5. The salaries must be for Personal services actually rendered; and
6. The salaries must be Reasonable in amount (MAMALATEO, Income Tax, supra at 187).
TRAVEL/TRANSPORTATION EXPENSES
Q: What are the requisites for deductibility of travel or transportation expenses?
The requisites are the following:
1. It must be paid or incurred while away from home;
2. It was made in the pursuit
Q: What are the general requisites for deductibility of compensation for personal services actually rendered?
The requisites are the following:
1. It must be paid or incurred while away from home;
2. It was made in the pursuit of trade or business; and
3. It must be reasonable and necessary (NIRC, Sec. 34(A)(1)(a)(ii)).
Interest
Section 3 of RR. 13-2000 provides for the following requirements for deductibility of interest expenses: (TID-
CROWD-TA)
1. The indebtedness must be that of the Taxpayer;
2. Interest expense must have been paid or Incurred during the taxable year;
3. There must be an indebtedness Incurred by the taxpayer based on a bona fide Debtor-creditor relationship;
4. The indebtedness must be Connected with the taxpayer’s trade, business, or exercise of profession;
5. The interest must NOT be between Related taxpayers;
6. The interest must NOT be incurred to finance petroleum Operations;
7. The interest must be stipulated in Writing;
8. The interest must be legally Due;
9. In case of interest incurred to acquire property used in Trade, business or exercise of profession, the same was
NOT treated as capital expenditure (NIRC, Sec. 34, par. (B)); and
10. Interest expense is subject to interest Arbitrage rule. (Commissioner of Internal Revenue vs Ludo & Luym
Corporation, CTA EB No. 1559, June 8, 2018
Q: What is the optional treatment of interest expense incurred to acquire property used in trade, business profession?
At the option of the taxpayer, the interest incurred may be allowed as:
1. Interest expense deductible from gross income: or
2. Treated as capital expenditure wherein the amount of interest is added to the cost of the property(i.e.,
capitalize the interest as part of the acquisition cost of the property and subsequently avail of the
deduction from business income in the form of depreciation) (NIRC, Sec. 34, par. (B)(3)).
Taxes
Q: Who are entitled to deduct taxes from gross income?
The taxpayer upon whom the taxes are imposed (i.e., those liable for direct taxes) are the ones entitled to
deduct taxes from gross income (R.R., No. 02-40, Sec. 80).
Losses
Q: What are considered losses in relation to deductions from gross income?
Losses actually sustained during the taxable year and not compensated for by insurance or other forms of
indemnity (NIRC Sec. 34, par. (D)(1)).
1. Loss must be that of the Taxpayer Loss is personal and not transferable to another;
2. Loss Actually sustained and charged off during the taxable year;
3. Evidenced by a Closed and completed transaction;
4. Not claimed as a Deduction for estate tax purposes (for individuals);
5. Not Compensated for by insurance or other forms of indemnity;
Loss must be connected with his trade, business, or profession or incurred in any transaction entered into for
profit though not connected with his trade, business, or profession; and
For casualty losses, notice of loss must be filed with the BIR (i.e within forty five (45) days) from date of
occurrence or discovery of the casualty or robbery, theft, or embezzlement (RR No. 12-77, Sec 4(b)).
It is a sale of stocks or securities where substantially identical securities are acquired or purchased with sixty-one
(61) day period, beginning thirty (30) days before the sale and ending thirty (30) days after the sale (NIRC, Sec.
38).
Note: The term “substantially identical” means that the stock must be of the same class, or in the case of bonds, the
terms thereof must be the same. It is necessary that there must be similarities on all important particulars (ABELLA,
Taxation Law (20017)) [hereinafter ABELLA, Taxation].
Q: What are the instances on which the provisions on wash sales are not applicable?
The wash sale provisions do not apply to the following:
1. Individuals or corporations acting as dealer in stock such as stock brokers and bans and trust companies. If the
sale or other disposition is made in the ordinary course of trade or business;
2. Short sales transaction; and
3. Gains in wash sales as such gains are taxable (NRC. Sec. 38).
Yes, but they are deductible only to the extent of the gain from such transactions (NIRC, Sec. 34 (D)(6)).
Note: R.A. No. 1169 (An Act Providing for Charity Sweepstakes, Horse Races, and Lotteries) exempts
sweepstakes winnings from taxation. It follows that no losses incurred therefrom can be allowed as deductions
from gross income.
It is the excess of allowable deductions over gross income of the business in a taxable year (NIRC, Sec. 34, par.
(D)(3)).
Q: What are the requisites for deductibility of Net Operating Loss Carry Over (NOLCO)
Q: In case of merger, consolidation, or combination is the transferee or assignee entitled to claim the NOLCO of the
transferor?
The transferee or signee shall not be entitled to claim the same as deduction from gross income except when as
a result of the said merger, consolidation or combination, the shareholders of the transferor/assignor or the
transferor gains control of:
1. At least 75% or more in nominal value of the outstanding issued shares or paid up capital of the
transferee/assignee, if a corporation; or
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