ITEMIZED DEDUCTIONS FROM GROSS INCOME

1. Interest expense
2. Taxes
3. Losses
4. Bad debts
5. Depreciation
6. Depletion
7. Charitable and other contributions
8. Contributions to pension and trusts
9. Research and development costs
10. Other ordinary and necessary trade, business, or professional expenses If not directly
connected with the selling of goods or rendering of services, these items of expenses are
classified as “Regular allowable itemized deductions.”

INTEREST EXPENSE

Requisites on the deductibility of interest (RR13-2000):

1. There must be a valid indebtedness.

2. The indebtedness must be that of the taxpayer.

3.The indebtedness must be connected with the taxpayer’s trade, business or

4. Interest expense must have been paid or incurred during the taxable year or Exercise of profession.

5.Interest must have been stipulated in writing.

6. Interest must be legally due.

7.Interest payments must not be between related taxpayers.

8.Interest must not be incurred to finance petroleum operations.

9. In case of interest incurred in the acquisition of property, used in trade, business or profession, the
same is not treated as a capital expenditure.

10. The interest is not expressly disallowed by law to be deducted from gross income of the taxpayer.

Deductible amount of interest expense

The deductible amount of interest expense is the gross interest expense reduced by the following
percentage of the interest income subject

Effectivity

January 1, 2009. 33%

January 1, 2021. 20%

This percentage is referred to as the arbitrage limit or the arbitrage cap.

Rationale of the arbitrage limit

The limit is intended to recover the tax savings of taxpayers who take advantage of higher regular tax
savings created from interest expense deduction and a lower Final tax on deposit interest income.

This will motivate taxpayers to enter into unnecessary loan-and-deposit transaincome to save from total
income tax.

Determination of the Arbitrage Limit

To eliminate the arbitrage savings, a deduction cap was set which was mathematically computed as:
(Corporate income tax rate-final tax on Interest income) /Corporate Income tax rate

Effect of the Arbitrage Limit Under current corporate income tax rate, the arbitrage limit is (25-20)/25 or
20%.

It must be emphasized also that the basis of the arbitrage limit is the Interest income subject to final tax
because no arbitrage savings will arise on interest income not subject to final tax. The net interest
income must be grossed-up first by the percentage net of the final tax (1.e. 100%-20%) before
computing the arbitrage. MSMES qualified to 20% corporate tax no arbitrage for qualified MSMEs
subject

It is noteworthy to consider that there is to 20% corporate tax. The arbitrage limit would be computed
as (20-20)/20 = 0%.

As such, qualified MSMES can deduct the full amount of interest expense without deduction of arbitrage
limit.

Arbitrage is deemed applicable to any taxpayer subject to regular tax. The arbitrage limit is apparently
set in the context of corporate taxpayers. However, the NIRC did not distinguish between individuals
and corporations in the application of the rule. The revenue regulations did not set a separate limit for
individual taxpayers. rule shall apply to individuals and corporations. Since the law did not make a
distinction, neither should we. The 33% arbitrage limit will apply to individuals before the effectivity of
the CREATE. The 20% arbitrage limit will apply thereafter. Moreover, in applying the limit, the law did
not provide for any qualification of the arbitrage limit based on intent. Therefore, it is construed to
apply regardless of whether or not there is an intentional arbitrage. Interestingly, however, the revenue
regulations currently exempt thrift banks from the coverage of the arbitrage limit.

Arbitrage limit under CREATE transition

The change in corporate tax rate caused by the CREATE directly impacts the arbitrage limit. Corporations
are previously subject to 30% corporate tax. This will transition to 25% to corporations in general and
20% to qualified MSMES starting July 1, 2020.

Deductibility of discount or pre-deducted interest

Discount or pre-deducted interest is a prepayment. Hence, it is not deductible upon release of the loan
but upon payment of the same or as it accrues as expense. If the loan is due on installments, the interest
pertaining to each installment shall be deductible.

Optional treatment of interest expense Interest incurred in financing the acquisition of property used in
trade or business may, at the option of the taxpayer, be claimed as:

1. An outright deduction from gross income or

2. A capital expenditure claimable through depreciation

Other deductible interest expense

1. Interest from tax delinquency (CIR vs. Vda. De Prieto)

2. Interest from scrip dividends

Examples of non-deductible interest

 1. Interest on personal loans
2. Interest incurred with a related party
3. Discount or pre-deducted interest applicable to future periods for individual Taxpayers
4. Interest expense incurred to finance petroleum operations

5. Interest on redeemable preferred shares

6. Imputed interest

TAXES

Taxes paid or incurred within the taxable year in connection with the taxpayer’s trade, business, or
exercise of profession shall be allowed as deduction except:

1. Philippine income taxes except fringe benefit tax

A. Final income tax

B. b. Capital gains tax
C. c. Regular income tax

2. Foreign income tax, if claimed as tax credit

3. Estate tax and donor’s tax

4. Special assessment

Rationale of non-deductibility

Income taxes are not costs of earning income but are impositions on net income accruing only after
income is earned; hence, they are non-deductible. Foreign income tax is not a cost of earning income.
However, it is allowed to be claimed as a deduction under the NIRC if not claimed as tax credit. Special
assessment is not a Tax expense, but is capitalized to the cost of the land.

Other non-deductible taxes

1. Business taxes, in particular the Value added tax (VAT)

2. Surcharges or penalties on delinquent taxes Business tax includes VAT, percentage tax, and
excise tax. Businesses pay VAT or percentage tax on their sales or receipts. Manufacturers of
excisable articles such As sin products and non-essential commodities pay the excise tax.

In principle, business taxes are consumption taxes required by the government to be collected from
consumers through the businesses. Hence, they should be recognized by businesses as liability upon
making the sales. This principle is well applied under the VAT; hence, VAT is not a deductible expense.
However, this is not the case with percentage tax.

Contrary to the principle, current regulatory developments treated percentage tax

As a deductible expense. This might be due to the fact that this treatment yields

The government higher tax collections.

Businesses subject to excise tax normally include the tax on their selling price. Hence, excise taxes are
deductible as tax expenses.

For the buyer, business taxes form part of the cost of purchases; hence, deductible

Through cost of sales or other expense categories but not as tax expense.

Examples of deductible taxes:

1. Percentage tax
2. Excise tax
3. Documentary stamp tax
4. Occupational tax
5. License tax
6. Fringe benefit tax
7. Local taxes except special assessment
8. Community tax
9. Municipal tax
10. Foreign income tax if not claimed as tax credit

Only basic tax is deductible

Only the basic tax of a deductible tax is allowable as deduction. Tax surcharges for late payments are
avoidable and unnecessary expenses; hence, they are non- deductible. Moreover, allowing these as
deduction will relax policy on tax collection. Nevertheless, interest for late payment of tax was held
deductible by the Supreme Court but as interest expense rather than as tax expense.
Unused input VAT

Historically, unused input VAT on zero-rated sales of services after the expiration of the two-year
prescriptive period is allowed as an item of deduction against

Gross income.

However, the BIR reversed the rule in BIR Ruling 123-2013 by disallowing the

Deduction for lack of legal basis. (See also RMC 57-2013)

FOREIGN INCOME TAX

Income taxes paid in a foreign country can either be claimed as:

1. Deduction
2. Tax credit

Who can claim tax credit or deduction for foreign taxes paid? Consistent with the matching rule, only
taxpayers taxable on world income such as domestic corporations and resident citizens can claim
deduction or tax credit for foreign income taxes paid. Tax treatment of refunds or credit of taxes

The refund or credit of deductible taxes must be reverted back to gross income to

the extent of their tax benefit. Incidentally, the refund of non-deductible taxes is

exempt from income tax.

LOSSES

Losses actually sustained during the taxable year and not compensated by Insurance or other indemnity
shall be allowed as deductions.
Requisites for the deduction of losses 1. It must be incurred in trade, profession, or business of the
taxpayer. (The loss

must be a business loss, not a personal loss.)

2. It must pertain to property connected with the trade, business or profession, if

the loss arises from fires, storms, shipwrecks, or other casualties, or from

robbery, theft, or embezzlement. (The loss must be an ordinary loss.) 3. The loss must not be
compensated by insurance or indemnity contract. (The loss must be actually sustained, not temporary.)
4. A declaration of loss must have been filed by the taxpayer within 45 days from

the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

5. The loss must not have been claimed as a deduction for estate tax purposes in the estate tax return.
(Double deduction is not allowed.)

Types of losses

1. Ordinary loss

2.Capital loss

Losses from ordinary assets are deemed normal to the taxpayer's trade, business or profession; hence,
these are deductible in full. Losses on capital assets are deemed by law unnecessary expenses; hence,
these are deductible only up to the extent of capital gains.

Examples of deductible ordinary losses

A. Loss on disposal or destruction of any ordinary asset

B. Loss due to voluntary removal of building incident to renewal or replacement
C. Permanent or irreversible loss in value of assets due to changes in business Conditions,
only to the extent actually realized
D. Abandonment loss
Rules on restoration or replacement of destroyed properties

1. Total destruction of properties

If the restoration involves total replacement of the previous property, the tax basis of the old
property shall be claimed as a loss while the entire allowance for depreciation.
2. Partial destruction of properties Replacement cost is capitalized as cost of the replacement
property subject to If the restoration involves partial replacement of the previous property, the
Restoration cost shall be expensed up to the extent of the tax basis of the Property immediately
before the casualty. Any excess is capitalized subject to Allowance for depreciation.

Loss of value of assets

The loss of value of assets, as a rule, is not deductible due to their temporary and reversible nature.
However, Impairment losses that became actually sustained can be deducted.

Loss on Insured Property

The excess of the tax basis of the property over the insurance reimbursement is a Deductible loss in the
year of insurance settlement. Abandonment losses In the event a contract area where petroleum
operations are undertaken is Abandoned, the accumulated exploration and development expenditures
Pertaining thereto, including the adjusted tax basis of equipment directly used in The abandoned
contract area, shall be allowed as a deduction. Notice of. Must be filed with the Commissioner of
Internal Revenue. When the abandoned well is reentered and production is resumed or if such
equipment or facility is restored into service, the amount of abandonment loss previously claimed shall
be reversed and included in gross income in the year of

Resumption or restoration and shall also be amortized or depreciated as the case may be. From
wagering transactions or passive activities

Losses from wagering transactions or passive activities Losses

Losses from wagering transactions such as gambling and other passive activities Shall be allowed only up
to the extent of the gains from the same transaction.

Application of the matching rule

Taxpayers taxable on global income can deduct losses on properties wherever situated, but taxpayers
taxable only on Philippine income can only deduct losses on properties situated in the Philippines. Bad
debts refer to debts due to the taxpayer which were actually ascertained to be
BAD DEBTS

Worthless and were charged off within the taxable year. Requisites of claim for deduction of bad debt:

1. The debt must have been ascertained to be worthless.

2. 2. It must be charged off within the taxable year.
3. It must be connected with the taxpayer’s profession, trade or business (ie, Uncollectible
personal credits are non-deductible).
4. 4. The taxpayer must be under the accrual basis of accounting.
5. It must not be incurred from a related party. The accounting bad debt expense called “estimated
bad debt expense” is not deductible in taxation because it is a mere estimate rather than an
actual loss. The

Deductible bad debt expense pertains to the write-off of uncollectible receivables after having been
actually ascertained to be worthless. In CIR vs Goodrich, the Supreme Court held that it was essential
that the taxpayer did in fact ascertain the debt to be worthless in the year in which the deduction

Was sought and in doing so, he acted in good faith. Note that the requirement that the taxpayer must
be under the accrual basis is inserted by regulations. There is no comparable provision in the NIRC. This
rule should not be taken in general. It should be applied only to bad debts representing loss of income
and not to bad debts representing loss of capital. Bad debts Representing loss of capital can be deducted
by both accrual basis and cash basis Taxpayers.

Application of the matching principle

In case of receivables representing loss of income only write-off of receivables which have been
previously recognized in gross income can be as bad debt expense. Since accrued income is not reported
in gross income under the cash basis of accounting, cash basis taxpayers cannot claim bad debt expense.
Securities becoming worthless

For domestic banks and trust companies a substantial part of whose business is

The receipts of deposits, securities becoming worthless are bad debt expense and

Net capital loss. However, the term securities specifically covers only bonds, Debentures, notes,
certificates, or other evidence of indebtedness with interest Coupons or in registered form.
Examples of capital losses not deductible as bad debts

1. Bad debts from personal receivables

2. Securities becoming worthless of taxpayers other than domestic banks and trust companies a
substantial part of whose business is the receipts of deposits
3. Loss on capital investments in partnerships, joint ventures, or corporations

Subsequent recovery of bad debts. Under the NIRC, the recovery of bad debts previously allowed as a
deduction in the preceding years shall be included as part of the gross income in the year of recovery to
the extent of the Income tax benefit of said deduction. See discussion in Chapter 9.

Subsequent change in accounting methods Bad debt expense sustained by the taxpayer under the cash
basis of accounting should not be deducted even if the taxpayer subsequently changed its accounting
method to the accrual basis of accounting. What cannot be done directly cannot be done indirectly.

DEPRECIATION

There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion and wear
and tear (including reasonable allowance for obsolescence) of property used in the trade or business.

Depreciation refers to the gradual exhaustion in the value of tangible business properties brought by
ordinary wear and tear through usage or obsolescence by the passage of time. It is a provision for the
periodic return of the invested capital on the property throughout its useful life.

Depreciation

1. Straight-line method
2. 2. Declining-balance method

3. Sum-of-the-year-digit method

4. Any other method which may be prescribed by the Secretary of Finance upon
Recommendation of the CIR

These methods were discussed in the preceding chapter.

Special Rules on Depreciation

1. Life tenancy to a property

2. Properties held in trust
3. Revaluation on properties
4. Rules on depreciation of passenger vehicles

Life tenancy to a property In the case of property held by one person for life with remainder to another
person, the deduction shall be computed as if the life tenant was the absolute owner of the property
and shall be allowed to the life tenant.

Properties held in trust

In the case of property held in trust, the allowable deduction shall be apportioned

Between the Income beneficiaries and the 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.

Depreciation on revalued property

The depreciation of an asset must be premised on its acquisition cost and not on its reappraised value.
(Basilan Estates, Inc. vs. CIR) Taxpayers using the revaluation model in accounting for items of property,
plant, and equipment under Philippine Accounting Standards (PAS) 16 are not allowed to deduct the
depreciation of the revaluation surplus on the value of property as this is not an actual cost.
Similarly, impairment losses on items of property, plant, and equipment recognized under PAS 36 are
not deductible. These are deductible when sustained through disposal or retirement of the asset.

Rules on Deductibility of Depreciation on Passenger Vehicles 1. Substantiation of the purchase with

sufficient evidence such as official

Receipts and other documents bearing the total purchase price Including specific motor vehicle
Identification numbers of the vehicles 2 Substantiation of the direct connection or relation of the vehicle
to the development, operation, and/or conduct of the trade, business, or profession of the taxpayer

4. Only one vehicle for land transport is allowed for an official and employee,

And the value of which shall not exceed P2,400,000.

5. No depreciation shall be allowed for yachts, helicopters, airplanes or aircrafts,

And land vehicles which exceeded the threshold unless the main line of

Business is transport operation or lease of transportation equipment and the

Vehicles purchased are used in said operations Effective October 17, 2012, vehicles not confirming with
these rules are referred to as non-depreciable vehicles for taxation purposes. Non-depreciable assets
shall be considered capital assets.

AMORTIZATION OF INTANGIBLE ASSETS

The same concepts discussed herein are also applicable to the exhaustion of

Intangible assets with definite useful life such as patents, royalties, and franchises.
The depreciation of intangible assets is referred to as “amortization expense.” However, intangible
assets that do not lose their value throughout time should not be amortized. Optional Expensing of
Capital Expenditure Under the NIRC, private educational institutions are granted the option to treat

Capital expenditure as an outright expense or as a deduction through allowance

For depreciation.

DEPLETION

Depletion expense is a provision for the periodic return of capital investments in wasting assets such as
minerals, gas, and oil.

Stages of wasting asset activities:

1St Exploration period

2nd Development period

3rd production

Exploration stage involves ascertaining the existence, location, extent or quality of any deposit or
mineral. The development stage commences when deposits of ore or minerals are shown to exist in
sufficient commercial quantity. Commercial production is the stage of actual extraction, processing and
sale.

Common rules for both mining and oil operations

Taxpayers engaged in wasting assets shall classify their expenditures into:

1. Costs of acquisition or Improvement of tangible properties.

2. Intangible exploration, drilling, and development costs.

Treatment of tangible development costs

Tangible development costs include the acquisition or improvement of tangible property which are of a
character subject to the allowance for depreciation. This may Include construction of mine-plant roads,
buildings, processing plants and Installation of heavy equipment on-site. Tangible exploration and
development drilling costs are capitalized and deducted

Through allowance for depreciation subject to the following rules: 1. Petroleum operations Properties
directly used in petroleum operations

The NIRC prescribes either the straight-line method or declining-balance method at the option of the
taxpayer for properties directly related to the production of petroleum. A shift from the straight-line
method to declining balance method is allowed. The useful life shall be 10 years or such shorter life as
may be permitted by the CIR.

Properties not used directly in petroleum operations The NIRC prescribed the straight-line method on
the basis of an estimated useful life of 5 years.

3. Mining Operations

If the expected life of the property used in mining is 10 years or less, the taxpayer can use the normal
rate of depreciation. If the expected life is more than 10 years, the property can be depreciated over any
number of years between 5 years and 10 years. (Sec. 34€(5), NIRC)

Intangible exploration and development costs

Intangible costs in petroleum operations include any incidental and necessary costs of drilling wells or
preparing wells for petroleum production and which have no salvage value.

Intangible costs in mining operations include the costs of diamond drilling, tunneling, and other
improvements of a nature that is not subject to allowance for depreciation.

Tax treatment of intangible exploration and development costs

 A. Before commercial production – capitalized as cost of the wasting asset

B After commencement of commercial production, if incurred 1. Non-producing wells or mines,

deducted in the period paid or incurred

With:

3. Producing wells or mines, at the option of the taxpayer, either:

A. Capitalized and amortized using the cost-depletion method or
B.deducted in the year paid or incurred

The limit applies only to mining operations. No comparable rule exists for petroleum operators.
Hence, petroleum exploration and development drilling costs on non-producing wells after
commercial production can be claimed outright.

Application of the matching rule

Taxpayers subject to tax on world income can deduct depreciation and depletion expense on
properties wherever situated. Those taxable only on Philippine income are only allowed to claim
depreciation and depletion on properties located within the Philippines.

CHARITABLE AND OTHER CONTRIBUTIONS Contributions or gifts made to the government or

non-government organizations

(NGOs) may be deducted against gross income.

Requisites of claim for deduction on contributions: 1. The donee institution must be a domestic
institution.

2 No income of the donee institution must inure to the benefit of any private stockholder or
individual. 3. The contribution must be valued at the tax basis of the property donated.

4. The taxpayer must be engaged in trade or business. 5. The donee must issue a Certificate of
Donation (BIR Form 2322) which

Includes a donor’s statement of values. 6. If the amount of donation is at least P50,000 the
donor shall file a Notice of Donation to the RDO where he is registered within 30 days upon
receipt of the

Certificate of Donation.

Donations that fail any of the requisites are non-deductible. Those that meet the

Requisites are either:

 a. Fully deductible –

b. Partially deductible (deductible subject to limit)

Classification of contributions

A. Fully deductible contributions (Mnemonics: PTA)

1. Donations to the government or political subdivisions including fully owned

Government and controlled corporations to be used exclusively in undertaking priority activities

as determined by the National Economic Development in:

Authority (NEDA) a. Education

c. Human settlements

b. Health

d. Culture and sports

E . Youth and sports development

f. Economic developments

3. Donation to foreign institution or international organization in pursuance of or in compliance

with agreements, treaties or special laws

Note that this is an exception to the rule that the donee Institution must be a domestic
organization.

4. Donations to accredited domestic non-government organizations. Pursuant to EO 671, the NGO

must be an accredited donee institution with

Certifications issued by the following designated accrediting entities:

Department of Social Welfare and Development for charitable and or

Social welfare organizations, foundations and associations

b. Department of Science and Technology for research and other scientific

activities
 B. Philippine Sports Commission – for sports development

d. National Council for Culture and Arts – for cultural activities e. Commission on Higher
Education – for educational activities

The accreditation by the Philippine Council for NGO Certification, Inc. (PCNC)

Is no longer regarded for this purpose.

The accredited donee institution shall issue to the donor a certificate of

Donation in such form prescribed by the BIR. For donations exceeding

P1,000,000 in value, the donor is required to notify the Revenue District

Officer (RDO) with jurisdiction to his place of business within 30 days from

The receipt of the certificate of donation. Requisites for full deductibility of contributions to
accredited NGOs 1. The NGO must be organized and operated exclusively for the above
purposes,

And no income inures to the benefit of any private individuals. 2. The non-profit organization
makes utilization of the contribution not later

Than the 15th day of the third month after the close of its taxable period.

4. The administrative expenses of the NGO do not exceed 30% of its total

Expenses.

5. Members of the Board of Trustees must not receive remunerations. 5. In the event of
liquidation, the asset of the NGO will be distributed to another

Nonprofit domestic corporation organized for similar purpose. 6. The amount of contribution of
property other than money must be valued at acquisition cost.

C. Contributions subject to limit

1. Donations to the Government of the Philippines or political subdivisions exclusively

for public purposes not in accordance with priority activities
2. Donation to non-accredited non-government organizations or to domestic
Corporations organized exclusively for the following purposes: a. Religious b. Charitable

e. Cultural 1. Educational

c. Scientific

g. Rehabilitation of veterans h. Social welfare

d. Youth and sports development

Limit of deduction for contributions: Based on the taxable income derived from trade, business or
profession (i.e., net Income) before the deduction of any contributions

1. 10% for individuals

2. 5% for corporations

CONTRIBUTIONS TO PENSION TRUSTS Types of Employee Pension Plans:

1. Defined contribution plan

2. Defined benefit plan

Under defined contribution plan, the employer is merely obligated to make certain amounts of
contribution to the pension fund on a regular basis. The employer does not guarantee the amount of
benefits to the employees. The amount of benefits to be received by the employees shall be dependent
upon the investment performance of the pension fund. Because the employer’s liability to the plan is
defined in terms of contributions, actuarial computation is not necessary.

In a defined contribution plan, the deductible expense of the employer is simply

The amount of contributions (i.e., funding) made by the employer to the fund. In case of participating
contribution plans where employees also contribute in the fund as part of their future benefits, the
portion paid by employees is not Deductible by the employer.
Under the defined benefits plan, the employer guarantees the amount of benefits to the employees.
The amount of funding which the employer makes to the fund shall funding if the fund performs and
more if it underperforms. Actuarial be dependent upon the investment performance of the fund. This
means less computations would be necessary to determine the employer’s contributions to ensure that
the promised benefits to covered employees will be met in due time.

In a defined benefit plan, the employer’s contribution or funding is either or both; 1. Funding of current
service cost 2. Funding of prior service cost

Current service cost refers to the pension expense of the employer accruing under the term of the
pension plan for services rendered by employees during the year.

Past service cost refers to the pension expense of the employer accruing in prior years for services
rendered by employees before the establishment of the pension fund and additional pension expense
accruing in prior years arising from improvements in the

Benefit offering of the plan.

In practice, contributions to the pension fund in excess of current service cost is simply presumed as
funding of past service cost without accounting for any prepaid component.

Requisites of deductibility of pension expense 1. The employer must have established a pension or
retirement fund to provide for payment of reasonable pensions to employees.

2.The actuarial assumptions used by the fund must be sound and reasonable.

3. The fund must be actually funded by the employer.

4. The fund assets must be independent from and not subject to the control or Disposal of the

5. Contribution for current service cost is deductible in full.

6. Contribution for past service cost is amortized over a period of 10 years.

Rules in computing the deductible pension expense

1. The contribution to the fund is first attributed to current service cost. Contributions is
deductible up to the extent of current service cost.
 2. The excess funding is attributed to any unfunded past service cost. Any excess funding over the
current service cost is presumed funding past service cost and is amortized over 10 years
regardless of the actual vesting period of covered employees.

RESEARCH AND DEVELOPMENT (R&D) COSTS

Research activities are geared towards discovery of new knowledge. Development Activities are geared
towards determining application of research knowledge which could provide income and benefits for
the business.

Tax Treatment of R&D Costs

1. Research and development costs related to capital accounts such as property Used in business
are capitalized as part of the cost of the property and Deducted through depreciation expense.
2. Research and development costs not related to capital accounts are treated as Follows at the
option of the taxpayer:
a. Outright expense or
b. Deferred expense amortized over a period not less than 60 months beginning from the month
the taxpayer realize benefits from the R&D expenditures

EXPENSES, IN GENERAL

Other legal, ordinary, actual, and necessary expenses of business can be claimed by the taxpayers as
long as these are substantiated with official receipts or other pertinent records.

Examples of other deductible expenses:

1. Salaries and allowances

2. Fringe benefits
3. SSS, GSIS, PhilHealth, HDMF, and other contributions
4. Commissions
5. Outside services
6. Advertising
7. Rental
8. Insurance
9. Royalties
10. Repairs and maintenance
 11. Entertainment, amusement, and recreation expenses
12. Transportation and travel
13. Fuel and oil
14. Communication, light, and water
15. Supplies
16. Miscellaneous expenses

Entertainment, Amusement, and Recreation (EAR) Expense

EAR expense includes representation expense and/or depreciation or rental expense relating to
entertainment facilities. Representation expense shall refer to expenses incurred by a taxpayer in
Connection with the conduct of his trade, business, or exercise of profession in

Entertaining, providing amusement and recreation to, or meeting with, a guest or Guests at a dining
place, place of amusement, country club, theater, concert, play, Sporting event or other similar places.

Representation expense excludes fixed allowances considered as regular compensation of employees

which are subject to the creditable withholding tax

Entertainment facilities refer to a yacht, vacation home or condominium, and any similar item of real
property used by the taxpayer primarily for the entertainment, amusement, or recreation of guests or
employees.

A yacht shall be considered an entertainment facility if its use is in fact not

Restricted to specified officers or employee position in such manner as to make the

Same a fringe benefit subject to fringe benefit tax.

Requisites of deductibility of EAR Expense

3. It must not be contrary to law, morals, good customs, public policy, or public

Order.

1. It must be pald or incurred during the taxable year. 2. It must be directly connected to the
development, management, and operation of the trade, business, or profession of the taxpayer
or directly related to or in furtherance of the conduct of his or its trade, business, or exercise of
a profession.
 4. It must not have been paid, directly or indirectly, to an official or employee of the government
or government-owned and controlled corporation or of a foreign government, private
individual, corporation, general professional partnership or similar entity if it constitutes a bribe,
kickback, or other similar payments. 5. It must have been duly substantiated with adequate
proof. The official receipt,

Invoices, bills or statements of accounts should be in the name of the taxpayer claiming the deductions.
6. The appropriate amount of withholding tax should have been withheld

Therefrom and paid to the BIR. Ceiling on Deduction

For taxpayers engaged in the sales of goods or properties – 0.5% of net sales For taxpayers engaged in
the sales of services – 1% of net revenues “Net sales” is computed as gross sales less sales returns,
allowances and sales discounts. “Net revenue” is gross revenue less discounts.

For taxpayers engaged in the sales of both goods or properties and services,

The allowable EAR shall in all cases be determined based on following

Apportionment formula:

Net sales/Net revenue divided byTotal net sales and net revenue X Actual EAR

In no case shall the deductible EAR exceed the maximum percentage ceiling for the sales of goods and
sales of services.