DEDUCTIONS

• Nature of Deductions
• Deductions from gross income business expenses
• Interest
• Taxes
• Losses
• Bad debts
• Depreciation
• Depletion
• Charitable and other contributions
• Research and development
• Pension and trust
• Items not deductible
 NATURE OF
DEDUCTIONS
 1. ITEMIZED
DEDUCTIONS
A. Expenses
•. Ordinary and necessary trade, business, or
professional expenses
•. Expenses allowable to private educational institutions
B. Interest
C. Taxes
D. Losses
E. Bad Debts
F. Depreciation
G. Depletion of Oil and Gas Wells and Mines
H. Charitable and Other Contributions
I. Research and Development
J. Pension Trusts
K. Premium Payments on Health and/or Hospitalization
Insurance
 2. Optional Standard Deduction
• Resident citizens, non-resident citizens, resident
aliens and taxable estates and trusts, may deduct a
standard deduction in an amount not exceeding
40% of their gross sales or gross receipts
• Domestic and foreign corporations may also elect a
40% OSD of its gross income.
 Deductions from gross income business
expenses
• Deductions from gross income apply to individuals
and corporations engaged in trade or business; and
to individuals in the exercise of profession.
• As a rule, if a taxpayer does not within any year
deduct his expenses, losses, interests, taxes or
other charges, he can no longer deduct them from
the income of any succeeding year.
 Itemized
Deductions
Business
Expenses
• In general, all 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 trade, business, or the exercise of a
profession are deductible.
• For an expense to be allowed, the reasonableness
of the amount being claimed is a prime
consideration. Payments which constitutes bribes,
kickbacks, and others of similar nature, shall not be
allowed
 An expense may either be treated as:

1. Revenue Expenditure – an expenditure that

benefits only the current period

2. Capital Expenditure – an expenditure that

benefits current and future periods.
Compensation Payments must be for personal
services actually rendered by employees under an
employer-employee relationship.

Ex. : Salaries, wages, commissions, bonuses and

incentives.
Fringe Benefits – the grossed up monetary value of
fringe benefit furnished or granted by the employer to
the employee is deductible provided that the final tax
has been paid.
- any good, service, or other benefit furnished or
granted by an employer in cash or in kind in addition to
basic salaries, to an individual employee.
Ex. : Education Assistance, Insurance (medical, life,
dental, disability, SSS, and GSIS), vacation pay,
holiday pay, and maternity leave, contribution to
retirement (pension pay), and uniform and clothing
allowance
Travel Expenses

Travel expenses here and abroad while away from

home in pursuit of a trade, business, or profession.
Ex. : Airfare, Automobile travel, Rental cars, Lodging,
Daily Meals, and Miscellaneous Travel Costs
Rentals

Includes other payments required to be made as a

condition to the continued use or possession, for the
purpose 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.
Cost of Improvement xx
Divide by term of lease
or estimated useful life xx
(which ever is shorter)
___________________
Annual Deduction xx
 Entertainment, Amusement, and Recreation
Expenses (EAR)

Expenses during the taxable year that are directly

connected or related to the operation or conduct of the
trade, business, or profession, or that are directly
related to or in furtherance of the conduct of his/its
trade, business, or exercise of a profession not to
exceed such ceilings prescribed by rules and
regulations.
Coverage:

•Individuals engaged in trade/business, including

estates and trusts
•Individuals engaged in the practice of profession
•Domestic corporations
•Resident foreign corporations
•General professional partnerships, including its
members
Exclusions:

1. Expenses which are treated as compensation or fringe

benefits for services rendered under an employer-
employee relationship, pursuant to Revenue Regulations
2-98, 3-98 and amendments thereto;
2. Expenses for charitable funds or raising events;
3. Expenses for bonafide business meeting of stockholders,
partners, or directors;
4. Expenses for attending or sponsoring an employee to a
business league or professional organization meeting;
5. Expenses for events organized for promotion, marketing
and advertising including concerts, conferences, seminars,
workshops, conventions, and other similar events;
6. Other expenses of a similar nature
Requisites for Deductibility

1. It must be paid or incurred during the taxable year;

2. It must be
a. Directly connected to the development,
management and operation of the trade,
business or profession of the taxpayer; or
b. Directly related to or in furtherance of the
conduct of his or its trade, business or exercise
of a profession;
3. It must not be contrary of the law, morals, good
customs, public policy or public order;

4. It must not be paid, directly or indirectly, to an official

or employee of the national government, or any
local government unit, or of any government-owned
or controlled corporation (GOCC), or of foreign
government, or to a private individual, or
corporation, or general professional partnership
(GPP), or a similar entity, if it constitutes a bribe,
kick back or other similar payment;
5. It must be duly substantiated by adequate proof.
The official receipts, or invoices, or bills or
statements of accounts should be in the name of the
tax payer claiming the deduction; and

6. The appropriate amount of withholding tax, if

applicable, should have been withheld there from
and paid to the Bureau of Internal Revenue.
Ceiling on Entertainment, Amusement
and Recreation Expense

There is a limit in claiming expenses on

Entertainment, amusement and recreation (EAR).
EAR expenses are limited to 0.5% of net sales for
sellers of goods or 1% of net revenue for
seller/provider of services. For sellers of both goods
or properties and services an apportionment formula
is used in determining the ceiling on such expenses.
 Net Sales / Net Revenue
x Actual Expense
Total Net Sales and Net Revenue
 REPAIRS
These are expenditures to restore assets to good
operating condition upon breakdown by replacing of
broken parts.

1. Extraordinary repairs are material replacement of parts,

involving large sum of money, that extend the useful life
of the asset. Repairs of this type are usually capitalized
by debiting the corresponding allowance for depreciation.
2. Ordinary repairs are minor replacement of parts,
involving small sum of money, and are frequently
encountered. Ordinary repairs are normally charged as
expense when incurred.
 COST OF MATERIALS AND SUPPLIES

1. Actual Consumption – taxpayers maintain a

record of consumption of materials and supplies or
takes physical inventories at the end of the year.
He shall include among his expense, the cost of
materials and supplies actually used during the
year.
Beginning Inventory xx

Add: Purchases
during the year xx
____________
Materials and supplies
available during the year xx

Less: Ending Inventory xx

_____________
Materials and Supplies expensexx
2. Total Purchases – If a taxpayer carries incidental
materials or supplies on hand for which no record of
consumption is kept or of which no physical
inventories are taken, it is permissible for him to
include in his expenses and deduct from gross
income, the total of such supplies and materials
purchased during the year, provided the net income
is clearly reflected in this method.
Cost and Expenses of a Regular Banking Unit (RBU)

Income earnings of banks can be derived from

the operations of its RBU or from its foreign
currency deposit unit (FCDU) or expanded foreign
currency deposit unit (EFCDU) or offshore banking
unit (OBU). These units are governed by different
income taxation regime in the NIRC of 1997 as
amended.
 Only costs and expenses attributable to the
operations of the RBU can be claimed as deduction to
arrive at the taxable income of the RBU subject to
regular income tax.

In computing for amount allowable as deduction

from RBU operations, all costs and expenses should
be allocated between the RBU and FCDU or
EFCDU or OBU using the following basis:
• By specific identification or;
• By allocation
 Additional Deduction to a Private
Educational Institution

It may deduct expenditures otherwise considered

as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school
facilities, or deduct allowance for depreciation.
 Deduction from Gross Income of a
Corporation Engaged in Farming

1. Cost of ordinary tools of short life or small cost

such as hand tools, shovels, rakes, etc.
2. Cost of feeding and raising livestock representing
actual outlay but not including the value of farm
products grown upon the farm.
3. Cost of gasoline or fuel, repairs and upkeep of the
transportation equipment.
 Expenses Not Deductible from Gross
Income of Farmers

The following are not deductible from gross income

because they are treated as capital expenditures
and may be subject to depreciation:

1. Cost of farm machinery, equipment, and farm

buildings.
2. Amount expended in the developments of farms,
orchards, and ranches, prior to the time when the
productive state is reached.
3. Amounts expended in purchasing work, breeding or
dairy animals unless such as animals are included in
an inventory

4. Cost of gasoline or fuel, repairs and upkeep of

transportation equipment, used of pleasure or
convenience of the farmer or his family. If such
transportation equipment is used partly for business
and partly for pleasure or convenience, the cost shall
be apportioned and the portion of such cost attributed
to use for pleasure or convenience is not deductible.
INTEREST
 Interest
- Refers to the payment for the use or forbearance or
detention of money, regardless of the name it is called
or denominated.

- It includes the amount paid for the borrower’s use of

money during the term of the loan, as well as the for
his detention of money after the due date for its
repayment.
 Taxpayer
• A person, whether natural or juridical, engaged in
trade, business or in the exercise of profession,
except one earning compensation income arising
from personal services rendered under an
employer–employee relationship.
Requisites for Deductibility
1. There must be an indebtedness;
2. There should be an interest expense paid or
incurred upon such indebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the
taxpayer’s trade, business or exercise of
profession;
5. The interest expense must have been paid or
incurred during the taxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due;
8. The interest payment arrangement must not be
between related taxpayers;
9. The interest must not be incurred to finance
petroleum operations; and
10. In case of interest incurred to acquire property
used in trade, business or exercise of profession,
the same was not treated as capital expenditure
 Rules on the Deductibility of
Interest Expense
In general, the amount of interest expense paid or
incurred within a taxable year on indebtedness in
connection with the taxpayer’s trade, business or
exercise of profession shall be allowed as deduction
from the taxpayer’s tax income.

41% - beginning Jan. 1, 1998

39% - beginning Jan. 1, 1999
38% - beginning Jan. 1, 2000 – Oct. 31, 2005
42% - beginning Nov. 1, 2005
33% - beginning Jan. 1, 2009
Illustration: On Jan. 25, 2014, A Company, a depositor
of B Bank, obtain a loan from C Financing Corp. to
operate its (A Company’s) business. For the year
2014, interest income from A Company’s deposit
with B Bank is 180,000 on which a final tax of
36,000 was withheld; its the interest expense on the
loan obtained from C Financing is 150,000. The
deductible interest expense is computed as follows:
Interest Expense 150,000
Less: 33% x 180,000 59,400
_____________
Deductible Interest Expense 90,600
 Interest on Unpaid Taxes
Interest paid or incurred by the taxpayer on all
unpaid business-related taxes shall be fully
deductible from gross income and shall not be
subject to the limitation on deduction. Interest on
delinquent taxes are considered as interest on
indebtedness and not as taxes.
Non-deductible Interest Expense
1. If within the taxable year, an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in
advance through discount or otherwise.
2. If both taxpayer and the person to whom the
payment has been made or is to be made are
persons specified under Sec. 36B and Tax Code of
1997
3. If the indebtedness on which the interest expense
is paid is incurred to finance petroleum operations
in the Philippines.
 Interest Expense on Capital
Expenditure
At the option of the taxpayer, interest expense on a
capital expenditure incurred to acquire property
used in trade, business or exercise of a profession
may be allowed as a deduction in full in the year
when incurred, the provisions of Section 36(A)(2)
and (3) of the Tax Code of 1997 to the contrary
notwithstanding, or may be treated as a capital
expenditure for which the taxpayer may claim only
as a deduction the periodic amortization of such
expenditure.
Reversal of Accrued Interest Expense
When No Tax Benefit was Derived

If a company did not derived a tax benefit from

accrued interest because it operated at a loss even
without the accrual, a reversal of the accrual in
subsequent years arising from the condonation of
the interest payable shall not result in any income
being recognized and taxed in the year such
reversal was made. The “tax benefit doctrine”
provides for the inclusion in later years only to the
extent that such deductions resulted in tax benefits
in those earlier years (BIR Ruling DA-545-04, Nov.
5, 2004).
TAXES
• Taxes deductible from gross income are taxes
proper only.
• As a general rule, all taxes, national or local, paid or
incurred within the taxable year in connection with
the taxpayer’s trade, business or profession are
deductible from gross income.
 Exceptions
1. Philippine income tax
2. Income taxes imposed by authority of any foreign
country. But in case a taxpayer does not signify in
his return his desire to avail of the foreign tax
credit, this may be deductible from gross income.
3. Estate and donor’s taxes.
4. Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
 Taxes when refunded or credited shall be included
as part of the gross income of the year of receipt to the
extent of the income tax benefit of said deduction.

In the case of a non-resident alien individual and a

resident foreign corporation both engaged in trade or
business in the Philippines, deduction is allowed only if
and to the extent that they are connected with income
sources from within the Philippines.
LOSSES
 Losses of property arising from fire, storms,
shipwreck, other casualties, robbery, theft or
embezzlement; and other losses, if incurred in
connection with trade, business or profession
actually sustained during the taxable year and not
compensated for by insurance or other forms of
indemnity, shall be allowed as deductions.
 Fire Loss
Illustration: In a taxable year, a taxpayer constructed
a building for business use which cost him
P3,000,000. improvements were made on the building
and an additional P1,500,000 was spent.
Unfortunately, the building was totally razed by fire. At
this point, the building had been depreciated for
P2,400,000. Recovery from insurance relative to the
loss was P1,800,000. How much shall be deductible
as loss?
Construction cost 3,000,000
Add: Improvements 1,500,000
________
Total 4,500,000
Less: Accumulated Depreciation 2,400,000
________
Book Value 2,100,000
Less: Insurance Recovery 1,800,000
________
Deductible Loss 300,000
 Accounting Entry
Receivable from insurance company 1,800,000
Allowance for Depreciation 2,400,000
Fire Loss 300,000
Building 4,500,000
 No. 1 No.2

Book Value at the time of loss P625,000 P500,000

Cost to restore the property 250,000 600,000

Salvage Value 62,500

Recovery from insurance 187,500
 No. 1 No.2
Measure of loss P250,000 P500,000
(lower amount between
Book value and cost to restore)

Less: Salvage Value 62,500

Recovery from Insurance 187,500
__________________
Deductible Loss P62,500 P437,500
 Casualty Loss
1. A taxpayer engaged in trade or business may be
entitled to claim, as business deductions, casualty
losses incurred for properties actually in the
business enterprise that were damaged and
reported as losses in the appropriate declaration
filed with the BIR.

2. Said properties must have been properly reported

as part of the taxpayer’s assets in the taxpayer’s
accounting records and financial statements in the
year immediately preceding the occurrence of the
loss, with the costs of acquisition clearly
established and recorded.
3. The recovery of casualty losses through insurance
claims shall governed by the guidelines set forth in
Revenue regulation 12-77. The amount of loss that
shall be compensated by insurance coverage
should not be claimed as a deductible loss.

4. The deduction of assets as capital losses must be

properly recorded in accounting reports, with the
adjustment of the applicable accounts.
5. In the event of a total loss/destruction of properties
used in the business enterprise, the net book value
immediately preceding the natural disaster should
be used as the basis in claiming casualty losses,
and shall be reduced by the amount of insurance
proceeds received.

6. The restoration of the damaged property, or the

acquisition of the new property to replace it, must be
properly recorded and recognized as either repairs
expense or as capitalized asset.
Net Operating Loss Carry-Over (NOLCO)

The net operating loss (excess of allowable

deductions over gross income) 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.
 A 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—

a. Not less than 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
b. Not less than 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.
 Taxpayers Entitled to Deduct NOLCO

1. Any individual (including estates and trusts)

engaged in trade or business or in the exercise of
his profession . An individual who claims the 40%
optional standard deduction shall not
simultaneously claim deduction of the NOLCO.
2. Domestic and resident foreign corporations subject
to the normal income tax (e.g., manufacturers and
traders.)
3. Domestic and resident foreign corporations subject
to the preferential tax rates under the code (e.g.,
private educational institutions, hospitals, and
regional operating headquarters.)
 For mines other than oil and gas wells, a net
operating loss without the benefit of incentives
provided under the Omnibus Investment Code of
1987, incurred in any of the first 10 years of operation
may be carried over as a deduction from taxable
income for the next 5 years following the year of such
loss.
The entire amount of such loss shall be carried over to
the first of the 5 taxable years following the loss, and
any portion of such loss which exceeds the taxable
income of such first year shall be deducted in like
manner from the taxable income of the next remaining
4 years.
 Taxpayers Entitled to Deduct
NOLCO
1. Any individual (including estates and trusts)
engaged in trade or business or in the exercise of
his profession. An individual who claims the 40%
optional standard deduction shall not
simultaneously claim deduction of the NOLCO.
2. Domestic and resident foreign corporations subject
to the normal income tax (e.g., manufacturers and
traders)
3. Domestic and resident foreign corporations subject
to the preferential tax rates under the Code (e.g.,
private educational institutions, hospitals, and
regional operating headquarters)
Illustration:
Assuming that a taxpayer has the following gross
income and deductions for five consecutive years,
compute the taxable income for these years:
 Loss from Shrinkage in Value
Stock
A person possessing stock of a corporation cannot
deduct from gross income any amount claimed as a
loss merely on account of shrinkage in value of such
stock through fluctuation of the market or otherwise.
The loss allowable in such case is that actually
suffered when the stock is disposed of.
Illustration:
X, Inc. bought 2000 shares of stock at P20 per
share or P40,000. After ten months, the shares were
selling at P10 per share.

2,000x20= 40,000
2,000x10= 20000
________
Loss 20,000
 Loss from Stocks Becoming
Worthless
Loss from sales or exchange of capital assets shall
be allowed only to the extent of capital gains. If
securities held by a taxpayer as capital assets are
ascertained to be worthless and charged off within
taxable year, the resulting loss is to be considered a
loss from sale or exchange of capital assets made on
the last day of such taxable year. However, the
taxpayer has to prove through clear and convincing
evidence that the securities are in fact worthless.
Illustration:
Z, Inc. acquired shares of stock of X Company for
P20,0000 and of Y Company for P30,000. At the end
of the taxable year, Z Inc. ascertained that its X
Company stock had declined in value to P6,000 while
its Y company stock had become worthless because
of the complete insolvency of the corporation.
 Loss of Useful Value
The loss of useful value requires proof of some
unforeseen case by reason of which the property has
been permanently discarded as in the case of the
following:
1. Where an increase in the cost or change in the
manufacture of any product make sit necessary to
abandon such manufacture, to which special
machinery is exclusively devoted; or
2. Where new legislation directly makes the continued
profitable use of the property impossible.
Illustration:
X, Inc. purchased machinery at P200,000. Freight
and installation costs were P40,000. When the
machinery was permanently retired from use, the
accumulated depreciation was P60,000. The
machinery had a salvage value of P20,000. The
deductible loss is computed as follows:
Cost of machinery P240,000
Less: Accumulated Depreciation 60,000
________
Book Value P180,000
Less: Salvage Value 20,000
________
Deductible Loss P160,000
 Loss from Wash Sales
Losses from wash sales of stock or securities are
allowed as deductions if the claim is made by a dealer
in stock or securities and with respect to a transaction
made in the ordinary course of business.
 Wagering Loss
Wagering transaction is a transaction where the
outcome is dependent upon chance. Losses from
wagering transactions shall be allowed only to the
extent of the gains from such transactions.
 Abandonment Loss
1. In the event a contract area where a petroleum
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and
development expenditures pertaining thereto shall
be allowed as deduction. However, accumulated
expenditures incurred in that area prior to Jan. 1,
1979 shall be allowed as deduction only from any
income derived from the same contract area. In all
cases, notices of abandonment shall be filed with
the Commissioner.
2. In case a producing well is subsequently
abandoned, 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. However if such abandoned well is
reentered 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 the resumption or restoration and shall be
amortized or depreciated, as the case maybe.
 Loss from Farming
1. Loss of livestock – the loss sustained in the death of
livestock shall be allowed as a deduction to the extent
of the acquisition cost only if no inventories are taken
into account in determining the income from the
business of farming.
2. Other farm losses – where ground is prepared and
planted or stocked as in case of sugar, coconut and
other agricultural plantations, orchards, fishponds and
other farms and its value is completely destroyed by the
overflow or seepage of water from natural causes, the
cost of the preparation and planting or stocking, up to
the time of the disaster shall be a deductible loss in the
year in which it is incurred
BAD DEBTS
 Refer to those debts resulting from the
worthlessness or uncollectibility, in whole or in part, of
amounts due the taxpayer by others, arising from
money lent or from uncollectible amounts of income
from goods sold or services rendered.
 Before a taxpayer may charge off and deduct a
debt, he must ascertain and be able to demonstrate
with reasonable degree of certainty the uncollectibility
of the debt. The determination of worthlessness in a
given case must depend upon the particular facts and
the circumstances of the case.
Requirements for deductibility of Bad debts from
gross income of the following:

• Individuals engaged in trade or business, including

estates and trusts
• Individuals engaged in the practice of profession
• Corporations
• Banks and insurance companies
 Requisites for Deduction
1. There must be an existing indebtedness due the
taxpayer which must be valid and legally demandable;
2. The same must be connected with the taxpayer’s trade,
business or practice of profession;
3. The same must not be sustained in a transaction
entered into between related parties enumerated under
Sec. 36(B) of the Tax Code of 1997;
4. The same must be actually charged off the book of
accounts of the taxpayer as of the end of the taxable
year; and
5. The same must be actually ascertained to be worthless
and uncollectible as of the end of the taxable year.
Illustration:
Assume that in 2013, a taxpayer estimated that
P140,000 of its accounts receivables was
uncollectible. In 2014, P90,000 of these accounts was
ascertained to be worthless and a write-off has been
effected.
2013
Bad debts 140,000
Allowance for bad debts 140,000
2014
Allowance for bad debts 90,000
Accounts Receivable 90,000
DEPRECIATION
 The difference between the cost of the property
and its value when worn out or retired (salvage
value) is the amount which shall be subject to
depreciation considering the estimated useful life of
the property.

Depreciation is that portion of the cost of the

property allocated or charged as expense for a
specific period.
1. In case of property held by one person for life with
remainder to another person, the deduction shall
be computed as if the life tenant were the absolute
owner of the property and shall be allowed to the
life tenant.
2. In case of property held in trust, the allowable
deduction shall be apportioned between the
income beneficiaries and trustees in accordance
with the pertinent provisions of the instrument
creating the trust, or in the absence of such
provisions, on the basis of the trust income
allowable to each.
 Methods of Depreciation
1. Straight-line method
2. Declining balance method
3. Sum-of-the-years-digit method
 Agreement as to Useful Life
and Rate
Illustration: Assume that a taxpayer acquired a
computer equipment for P180,000. Shipping charges
were P2,500; installation and programming amounted
to P7,500. The equipment is expected to last for four
years. It has a salvage value of 30,000. If the taxpayer
uses the straight line method of depreciating its
equipment, how much is the annual depreciation
deductible?
Cost of machinery
(180,000+2,500+7,500) P190,000
Less: Salvage Value 30,000
__________
Depreciable cost P160,000
Divide by: Estimated life 4 years
__________
Annual depreciation deductible P40,000
 If after two years, it has been estimated that the
computer equipment has four more years of useful life,
the annual depreciation shall be recomputed as cost
less accumulated depreciation divided by useful life, or
Cost of machinery
(180,000+2,500+7,500) P190,000
Less: Accumulated Deprecation
(P40,000x2 years) 80,000
__________
Book Value P110,000
Divide by: Estimated life 4 years
__________
Annual depreciation deductible P27,500
Depreciation of Properties Used
in Petroleum Operations
An allowance for depreciation in respect off all
properties directly related to production of petroleum
initially placed in service in a taxable year shall be
allowed under the straight-line method or declining
balance method of depreciation at the option of the
service contractor.
 The useful life of properties used in or related to
production of petroleum shall be 10 years or such
shorter life as may be permitted by the
Commissioner. Properties not used directly in the
production of petroleum shall be depreciated under
the straight-linen method on the basis of an
estimated useful life of 5 years.
 Depreciation of Properties Used
in Mining Operations
An allowance for depreciation in respect of all
properties used in mining operations other than
petroleum operations shall be computed as follows:
1. At the normal rate of depreciation if the expected
life is 10 years or less; or
2. Depreciated over any number of years between 5
years and the expected life if the latter is more than
10 years, and the depreciation thereon allowed as
deduction from taxable income, provided that the
contractor notifies the Commissioner at the
beginning of the depreciation period which
depreciation rate will be used.
Depreciation by Non-resident Aliens in
Business or Resident Foreign
Corporations
In the case of a non-resident alien engaged in
trade or business, or resident foreign corporation, a
reasonable allowance for the deterioration of
property arising out of its use or employment or its
non-use in the business, trade or profession shall be
permitted only when such property is located in the
Philippines.
DEPLETION
 Wasting assets or natural resources usually
include coal, oil, ore, and precious metals. Wasting
assets are physically consumable and irreplaceable.
The allocation of the cost or other basis of
wasting an asset over the period the natural
resource is extracted or produced is called
depletion. Depletion allowance allows the taxpayer
to recover the capital interest-free from income tax,
at its cost or some other basis.
 Cost Depletion Method
In case of oil and gas wells or mines, a reasonable
allowance for depletion or amortization computed in
accordance with the cost-depletion method shall be
granted under rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation
by the Commissioner:
1. When the allowance for depletion shall equal the
capital invested, no further allowance shall be
granted.
2. After production in commercial quantities has
commenced, certain intangible exploration and
development drilling costs shall be deductible---
a. in the year incurred if such expenditure are
incurred for non-producing wells and/or mines; or
b. in full in the year paid or incurred; or
c. at the election of the taxpayer, may be
capitalized and amortized if such expenditures
incurred are for producing wells and/or mines in the
same contract area.
 Election to Deduct Exploration
and Development Expenditures

1. The total amount deductible for exploration and

development expenditures shall nit exceed 25% of
the net income from mining operations computed
without the benefit of any tax incentives under
existing laws.
2. The actual exploration and development
expenditures minus 25% of the net income from
mining shall be carried forward to the succeeding
years until fully deducted.
Depletion by a Non-resident Alien
Individual or Foreign Corporation
In the case of a non-resident alien individual
engaged in trade or business in the Philippines or a
resident foreign corporation, allowance for depletion
of oil and gas wells or mines shall be authorized
only in respect to oil and gas wells or mines located
within the Philippines.
CHARITABLE AND
OTHER
CONTRIBUTIONS
Contributions Deductible in Full

1. Donations to the Philippine Government or to any of

its agencies or political subdivision, including fully-
owned government corporation.
2. Donations to certain foreign institutions or
international organizations in compliance with
agreements, treaties or commitments entered into by
the Philippine Government and the foreign
institution or international organizations or in
purchase of special laws.
3. Donations to accredited non-government
organizations (means non-profit domestic corporation)
organized and operated exclusively for scientific,
research, educational, character-building and youth
and sports development, health social welfare, cultural
for charitable purposes or a combination thereof.
4. Donation to integral Bar of the Philippines,
Development Academy of the Philippines,
Agricultural Development of Southeast Asian
Fisheries Development Center, National Social
Action Council, National Museum /
Library/Archives, museum of Philippine Costumes,
Intramuros Administration and Lungsod ng
Kabataan.
5. Any contributor to the Philippine Red Cross Annual
Found Campaign shall entitle the contributor to
membership for one(1) year and the said
contribution shall be deductible in full for taxation
purposes (R.A 10072, Sec. 6).
Contributions Subject to limitations

1. Donations to the Philippines Government or to any

of its agencies or political subdivision exclusively
for public purposes.

2. Donations to accredited domestic corporations or

associations organizations and operated
exclusively for religious, charitable, scientific, youth
and sports development, cultural or educational
purposes, or for the rehabilitations of veterans, or
to social welfare institutions, or to NGOs.
 Donations, contributions or gifts actually paid or
made within the taxable year shall be allowed
limited deductibility in an amount not in excess
10% for an individual donor, and 5% or a
corporate donor, of the donors income derived
from trade, business or profession as computed
before the deduction for charitable contributions.
 Accrediting Entity

The following Departments are designated

accrediting entities: Department of Social Welfare
and Development (DSWD), Department of Science
and Technology (DOST), Philippine Sports
Commission, National Council for Culture and Arts,
and Commission on Higher Education (CHED).

The accrediting entity shall establish and

operationalize a system accreditation to determine
the qualification of non-stock, non-profit corporations
or organization and NGOs, associations and
foundations for accreditation as qualified donee
institutions.
Illustration:
Assuming that X, Inc. has a gross income of
P1,000,000 with allowable deductions as follows:
P140,000 as business expense, P80,000 as taxes,
P20,000 as bad debts, and P40,000 as contribution
to a non-stock, non-profit religious association. The
5% limitation and the taxable income after
contribution are computed:
Gross Income P1,000,000
Deductions except contribution 240,000
_____________
Taxable Income P760,000
Multiplied by 5%
____________
Amount of contribution allowable P38,000
 Assume that in addition to the facts in the previous
illustration, the taxpayer has other contributions as
follows: to the National Government amounting to
P50,000, and to an accredited non-government
organization (NGO) in the amount of P30,000. The
computation will be:
Certificate of Donation

 All accredited non-stock corporation/NGO are required to

issue a certificate of donation in such form as prescribed by
BIR, on every donation or gift they receive. Such certificate
shall be accomplished by the said accredited non-stock, non-
profit corporation/NGO.

Notice of Donation

 The donor, on the other hand, should give a notice for every
donation worth over P1 million to the revenue District Officer
where his place of business is located within 30 days after the
receipt of the certificate of donation. The certificate is to be
attached to the notice.
Date and Place of Filling

 Claims for limited or full deductibility of donations

and contributions by the donors shall be filed by the
donors at the time of filling of their income tax
returns. On the other hand, the accredited non-
stock, non-profit corporation/NGO shall file its
annual information return not later than the 15th day
of the fourth of the month after the close of its
taxable year in order to maintain its status as an
accredited non-stock, non-profit corporation/NGO.
 RESEARCH
AND
DEVELOPMENT
 Research and development costs are cost of
material, equipment, facilities, personnel, purchased
intangibles, contract services and a reasonable
location of indirect cost that are specifically related to
research and development activities and that have no
alternative future uses. Research activities are those
undertaken to discover new knowledge that will be
useful in developing new product service or process.
Development activities involve the application or
research finding to develop a product service or
process.
 Amortization of Certain Research
and Development Expenditures
At the election of the taxpayer and in accordance
with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the
commissioner, the following research and development
expenditures may be treated as deferred expenses:
a) Paid or incurred by the taxpayer in connection 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 60 months as
may be elected by the taxpayer (beginning with the
month in which the taxpayer first realizes benefits from
such expenditures.)
 Limitation of deduction
1. Any expenditure for the acquisition or
improvement of the land, or the improvement of
property to be used in connection with research
and development of a character which is subject to
depreciation and depletion; and
2. 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.
PENSION TRUSTS
 An employer establishing or maintaining a pension trust
to provide for the payment of reasonable pensions to his
employee 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 which
is allowed as a deduction) a reasonable amount
transferred or paid into such trust during the taxable year
in excess of such contribution, but only if such amount:

1. Has not 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.
 Any amount paid or payable which is otherwise
deductable from, or taken into account in computing
gross income or for which depreciation or amortized
may be allowed , shall be allowed as deduction only
if it is shown that the tax required to be deducted
and withheld therefrom has been paid to the Bureau
of Internal Revenue in in accordance with the
provisions of the code.
Illustrations:

1. After several years of operation, X corporation

established a pension trust to provide the payment
of the pensions to its employees when they retire.
Under the plan, X corporation has to pay P100,000
annually beginning with the year the trust was
established. The corporation also paid P500,000 to
cover the pensions of employees for the past
services rendered. The annual deduction of X
Corporation is computed as follows:
a) For each of the 10 years since the plan was
established

b) For each year after 10th year, the deductible shall

be P100,000. This is so because after 10 years,
the P100,000 shall have been fully amortized.
2. Assuming that X Corporation paid the P500,000 prior
years pension liability as follows: P375,000 on the
first year, and P125,000 on the second year of the
plans operation, the deductible pension expense will
be:
c. For the 11th year the amount deductible is P112,500
[P100,000 + (10% x P125,000)]. After 10 years, the
amount of P125,000 shall have been fully
amortized.

d. For the 12th year and the succeeding year

thereafter, the amount deductible is 100,000- the
annual contribution.
 ITEMS NOT
DEDUCTIBLE
1. Personal, living or family expenses.

2. Any amount paid out for new building or for permanent

improvements, or betterment made to increase the
value of any property or estate, except that intangible
drilling and development cost incurred in petroleum
operations are deductible. This is capital expenditure.

3. Any amount expended in restoring property or in

making good the exhaustion thereof for which an
allowance is or has been made. This is capital
expenditure.
4. 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 or
directly a beneficiary, individual corporate under such
policy.

5. Losses from sales or exchanges of property between

related taxpayer.
THE END