TAXATION ATTY.

MACMOD, CPA
Deductions from Gross Income

Allowable deductions refer to amounts representing stocks of which is owned directly or indirectly
different expenses authorized by law to be deducted from by or such individual, except in distribution in
the gross income of certain income taxpayers in computing liquidation.
for their taxable income. c) If between two corporations, more than 50%
A. Kinds of deductions under the Tax Code: in value of the outstanding stock of each is
1. Itemized Deductions owned.
2. Optional Standard Deductions for Individual and 6. Bribes, Kickbacks and Other Similar Payments.
Corporate Taxpayers 7. Other expenses not allowed by law as deductions
3. Special Deductions allowed in special cases. from gross income

B. Requisites of Allowable Deductions Specific Requisites of each Allowable Deduction:

1. The expenses must be both ordinary and 1. Business expenses, in general
necessary. A. Compensation for personal services
2. The expenses must be paid or incurred during the Requisites:
taxable year. (1) Compensation is for services rendered
3. The expenses must be sustained with sufficient, (2) Services were actually rendered
competent, and evidential matter. (3) Compensation must be reasonable
4. The expenses must be reasonable and not contrary
to law. B. Travelling expenses
Requisites:
C. Itemized Deductions for Corporation & Individuals (1) Must be reasonable and necessary
a. Ordinary and necessary business expenses in (2) Must be paid or incurred in connection with the
general trade or business
b. Interest (3) Must be paid or incurred while away from
c. Taxes home
d. Losses (4) Supported by adequate records
e. Bad debts
f. Depreciation / Depletion C. Rentals
g. Charitable Contribution Requisites:
h. Contributions to Pension Trust (1) Property rented must be used in trade or
i. Personal exemptions and health / hospitalisation business of the lessee
insurance premiums paid for individuals only (2) Rental expense must be paid or incurred
during the taxable year
D. Optional Standard Deductions
(3) Rental expense is a condition for the use of the
For individual tax payers – 40% of gross sales if
property
merchandising concern; 40% of gross receipts in sale
(4) If exceeding P500, must have been subjected
of services and not granted to NRAs. For corporations
to 5% withholding tax
– 40% of their gross income..

E. Special Deductions 1 Repairs and improvements by the lessee:

a. For non-life insurance companies (net additions to
reserve funds) Cost of Improvement Deductible expenses
b. For private educational institutions __________________= (amortization/depreciation)
c. For estate and trusts Term of lease / Est.; useful life of
Improvement (whichever is shorter)
F. Items not allowed as deduction from gross income
1. Personal, living or family expenses D. Entertainment expenses
2. Any amounts paid out for new building or for Requisites:
permanent improvements, or betterments made to (1) Must be directly related to the business or
increase the value of any property or state. trade of the taxpayer.
3. Any amounts expended in restoring property or in (2) Must be paid or incurred during the taxable
making good the exhaustion thereof for which an year.
allowance is has been made (3) Must be reasonable and not contrary to law,
4. Premiums paid on any life insurance policy - morals, public policy.
When not deductible: If it covers the life of any (4) Supported by adequate records.
officer or employee or of any person financially
interested in any trade or business carried on by E. Cost of Materials and Supplies
the taxpayer, individual or corporate, when the tax Requisites
payer is directly or indirectly a beneficiary under (1) Used in trade or business
such policy. (2) Paid or incurred during the taxable year
5. Losses from sales or exchanges or property (3) Must be reasonable
interest expense and bad debts written-off
between related taxpayers under Sec. 30 of the Methods used may be actual consumption or direct
Tax Code. purchase
F. Repairs
When not deductible:
a) If between members of a family (brother,
Requisites:
sister, whether by the whole or half blood),
(1) Must be incurred in connection with the trade
spouse, ancestors, and lineal descendants.
or business
b) If between an individual and a corporation,
(2) Must be paid or incurred during the taxable
more than 50% in value of the outstanding
year

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 (3) Must be reasonable to exhaustion, wear and tear, including the
(4) They do not materially add to the value of the reasonable allowance for obsolescence.
property or extends its life
2 Repairs that prolong the life of the property Requisites:
distinguished from incidental repairs and (15) Must arise from the use of the property in
maintenance are capital expenditures subject to connection with trade or business
depreciation. (16) Must be incurred during the taxable year
(17) Depreciation method is allowed by law
G. Expenses of farmers (18) Must be reasonable
Requisites: (19) Other formal requisites
(1) Incurred in the operation of a farm for project
(2) Reasonable and supported by adequate Depreciation may be under any of the following
records methods:
(3) Incurred or paid within the taxable year (1) Straight - line method
(2) Declining balance method
2. Interest (3) Sum-of-the-years-digit method
Requisites: (4) Any other method which may be prescribed by
(4) Existence of indebtedness the Secretary of Finance upon recommendation
(5) Indebtedness must be in carrying on the trade of the Commissioner of Internal Revenue.
or business
(6) Interest must have been paid or incurred 5 Depreciation of Properties used in petroleum
during the taxable year operations
(7) The interest must be in writing (a) Directly related to production - Straight-line
(8) It must be reasonable and not contrary to law method or double declining balance at the
(9) The taxpayer’s allowable deduction for interest option of service contractor may be used but
shall be reduced by an amount equal to the useful life of the property shall only up to 10
following percentages of Interest Income years or shorter.
subjected to final tax: (b) Not directly related to production - Straight-
Beg. Jan 2009 – 33% line method shall be used on the basis of an
estimated useful life of five years.
3 Interest expense may be treated by the taxpayer
in 2 ways:  Non-resident aliens or foreign corporation
1. As an expense deductible from gross income
7. Depletion - the exhaustion of natural resources like
2. As a capital expenditure or part of the cost of
mines and gas well as a result of production of
the property.
severance from such mines or wells. (1995 CCh
4 The following are non-deductible interest Federal Tax Course)
1. Those paid in advance by cash basis taxpayer
1 Basis - Adjusted cost basis of the
2. Between members of a family or related
property
taxpayers
3. Those used to finance petroleum exploration Accumulated exploration and
development expenses………. Pxxx
3. Taxes
Less: Accumulated cost of
Requisites:
depreciation ……………………. xxx
(1) Must be in connection with the trade or
Adjusted Cost Basis (ACB) …………………… P xxx
business of the taxpayer.
(2) Must have been paid or incurred during the
taxable year. 8. Charitable and Other Contributions
(3) Must not be excluded by law. d. The gift or contribution must be actually paid to an
entity or institution specified by law.
4. Losses e. The institution must be non-stock-non profit.
Requisites: f. The donor must be engaged in business D-5 or
(4) Must be actually sustained during the taxable practices of profession.
year. g. It is subjected to limitation (unless deductible in
(5) Must be incurred in trade, profession or full as provided by law) Corporation-5 % Individual
business. - 10% of taxable Income from business or
(6) Must arise from fires, storms, shipwreck or profession without the benefit of deduction or
other casualties or from robbery, theft or from contributions.
embezzlement.
(7) Not compensated for by insurance or 2 The following donations are deductible
otherwise. in full:
(8) Must be reasonable and allowed by law. a. Donations to the government or
(9) Must be reported within 30 to 90 days from political subdivisions including fully
date of loss with Sworn Declaration of loss. owned government corporations
5. Bad debts: exclusively for undertaking priority
Requisites: activities in:
(10) Validity and existence of debt a. Education
(11) Actually ascertained to be uncollectible b. Health
during the taxable year c. Youth and Sports Development
(12) Must arise from business or trade d. Human Settlement
(13) Written of during the taxable year e. Science and Culture
f. Economic Development
(14) Other formal requisites
b. Donations to certain foreign
6. Depreciation - the gradual diminution in the useful institutions or international
value of a property used in trade or business due organization by virtue of treaties or
Executive Agreements.
 c. Donations to certain private
foundations or accredited non- 2. Premiums on fire insurance for the
government organizations under the building for one year paid on June 1, CY 120,000
following requisite:
1. Organized exclusively for scientific, research, 3. Rent Expenses:
educational, character-building and youth and a. Rent office building, 150,000
sports development, health, social welfare, b. For residential house of the
cultural or charitable purposes. company’s executives 340,000
2. Donations must be utilized not later than 15th
day of the third month after the close of the 4. Office equipment bought on July 1, CY,
accredited NGO’s taxable year. estimated useful life is 10 years. 1,500,000
3. The administrative expense shall not exceed
30% of the total expenses. 5. Interest expense on the office equipment
4. The assets of which, must be distributed to bought (1 yr. Expense starting
another non-profit domestic corporation of July 1, CY) 200,000
the state, in the event of dissolution.
Per special laws, donations made to the following 6. Other interests:
are deductible in full: a. On Deficiency Income Tax 10,000
1. Integrated Bar of the Philippines (P.D.181) b. On a note payable contracted
2. International Rice Research Institute (R.A. 12 yrs. ago 15,000
2707) c. On a money borrowed from a
3. Development Academy of the Philippines subsidiary Co. (60% owned by XYZ) 25,000
(P.D. 205) d. Interest paid on a money borrowed
4. The University of the Philippines & other state from the mother of the company’s
colleges President (President owns 1% the
5. Cultural Center of the Philippines company’s shares) 40,000
6. Artesian Well Fund (R.A. 1977)
7. Ramon Magsaysay Award Foundation 7. Surcharges & Penalties paid to BIR 130,000
8. Task Force on Human Settlement
9. Donations to the National Museum, Library 8. Real Estate Taxes Paid:
and Archives (P.D. 373) a. Building it is renting 10,000
10. National Commission on Culture
11. Humanitarian Science Foundation 9. Taxes Paid:
12. National Social Action Council a. Customs Duties 15,000
b. Car Registration fees & other LTO
9. Pension Trust charges 12,500
Requisites:
5. The employer must have established a pension trust 10. Losses:
or pension plan to provide for the payment of a. Due to theft, reported 50 days after, 150,000
reasonable pensions to his employee. b. Due to fire; acquisition cost of
6. The pension plan must be reasonable and actually vehicle was P200,000 with estimated
sound. useful life of 8 years. Destroyed end of
7. It must be funded by the employer. the 3rd year, insurance recovery was
8. Amount contributed must no longer be subjected to P20,000 & P10,000 scrap value
the employer’s control or disposition. materials recovered; reported 30 days after.
9. The payment has not been allowed as a deduction.
10. Net Operating Loss carry Over excess of A.D. from 11. Capital Losses (Long Term) 150,000
G.I. deduction from G.I. for the next time three
immediately (3) consecutive taxable years 12. Bribes, kickbacks paid to certain
government employees 250,000
Summary Problem on Deductions:
A domestic corporation BSM Corporation engaged in 13. Charitable contributions:
brokerage and other services provided the following data for a. To the University of the Philippines 150,000
taxable year CY. b. To a charitable foundation 250,000
Commission income from brokerage
(Gross of VAT) P4,480,000 14. Salaries & wages 500,000
Other income: 15. L. W. Telephone 125,000
Dividend Income
From Domestic Corporation 200,000 16. Office Supplies 10,000
Interest Income from Bank Deposit 50,000 REQUIRED:
Capital Gains (short term) 100,000 a. Total Deductible Expenses
Rental Income (net of 5% tax) 190,000 b. TNI of the Corporation
c. TNI if the business above is a single proprietorship
Expenses claimed: business
1. Premium on life insurance for the year: owned by Mr. De Lima married with 4 minor children
- For the V. Pres. With son as beneficiary 60,000 d. What if under Letter C, Mr. De Lima opted to claim
- For the Pres. With the company as the 40% OSD.
beneficiary 75,000

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