A.

ALLOWABLE DEDUCTIONS,
DEFINED
Deductions are items or amounts which the law allows to be
deducted from gross income of certain taxpayers in order to arrive at
the taxable income.
B. Kinds of Deductions
• Itemized Deductions
• Optional Standard Deduction
• Personal Exemptions
• Special Deductions allowed in special cases
 Taxpayer Allowable Deductions
Individuals earning pure compensation income 1). Basic Personal Exemption
2). Additional Personal Exemption
3). Premium Payments on health/hospitalization
insurance

Individuals deriving income from trade, business or 1). Basic Personal Exemption
practice of profession 2). Additional Personal Exemption
3). Premium Payments on health/hospitalization
insurance
4). Itemized deductions or Optional Standard
Deduction
Corporations Itemized deductions or Optional Standard Deduction
C. Itemized deductions
• Ordinary and necessary business expenses in general
• Interest
• Taxes
• Losses
• Bad debts
• Depreciation
• Depletion
• Charitable Contribution
• Research and development
• Contributions to Pension Trust
• Premium Payments on Health and/or Hospitalization Insurance
D. Ordinary and Necessary Trade, Business
or Professional Expenses
• Salaries, wages and other forms of compensation for personal
services actually rendered, including the grossed-up monetary value
of fringe benefit granted by the employer to the employee.
• Travel expenses
• Rentals
• Entertainment, Amusement and Recreation Expense
• Other necessary business expenses
Requisites for deductibility, in general
• Must be ordinary and necessary
• Paid or incurred during the taxable year;
• Connected with trade, business or practice of profession;
• Supported by sufficient evidence; and
• Not against the law, morals, public policy or public order;
• It must have been subjected to withholding tax, if applicable
Entertainment, Amusement and Recreation
Expense
Amount of Deductible – lower amount between (1) actual and (2) limit
Limit
Sale of Goods or Properties Net sales x ½ of 1%
Sale of services Net Revenue x 1%
Minor or Ordinary Repairs & Maintenance
Kind of Repair Treatment
Repairs that materially add to the value of the Capitalize
property
Repair that appreciably prolong the life of the Capitalize
property
Repair that keep the property in its ordinarily efficient Outright Expense
operating condition

Organizational and Pre-Operating Expenses

Organizational and pre-operating expenses are considered as capital expenditures. However, upon start of
commercial operations, it can be amortized over 60 months.
E. INTEREST EXPENSE
• Requisites for Deductibility:
1). There must be an indebtedness.
2). The indebtedness must be that of the taxpayer;
3). The indebtedness is connected with taxpayer’s trade, business or
practice of profession;
4). There must be legal liability to pay interest;
5). It must be paid or incurred during the taxable year.
Amount deductible, in general:

Interest Expense PXXX

Less: (Interest Income subject to final tax x 33%) (XXX)

Deductible Interest PXXX

Exception: Interest on tax delinquency or deficiency, provided, the tax is related to trade, business or practice of
profession shall be 100% deductible

Optional Treatment of Interest

Interest related to acquisition of property used in trade business or profession may, at the option of the taxpayer,
be:
1). Claimed as outright expense;
2). Capitalize and claim depreciation
Organizational and Pre-operating Expenses
• Organizational and pre-operating expenses are considered as capital
expenditures. However, upon start of commercial operations, it can
be amortized over 60 months.
F. Taxes
• The term “taxes” means taxes proper and no deductions should be allowed for amounts
representing interest, surcharge, or penalties incident to delinquency.

• General Rule – Taxes paid or incurred within the taxable year in connection with the taxpayer’s
profession, trade or business, shall be allowed as deduction.

• Exception – The following taxes are not deductible:

1). Income tax
2). Income tax paid abroad if claimed as tax credit
3). Estate tax
4). Donor’s tax
5). Special assessment
G. Losses
• Kinds of Losses:
1. Casualty Losses
2. Net operating loss carry-over (NOLCO)
3. Capital losses and securities becoming worthless
4. Special losses
a). Losses from wash sales of stock securities
b). Wagering losses
c). Abandonment losses
CASUALTY LOSSES
Requisites for Deductibility
1). The loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement;
2). The property lost is connected with the trade, business or practice of
profession;
3). Actually sustained during the taxable year;
4). Not compensated for by insurance or other forms of indemnity.
5). Incurred in trade, profession or business.
6). Reported with the BIR within forty-five (45) days from the time of loss; and
7). Not claimed as deduction for estate tax purposes.
NET OPERATING LOSS CARRY - OVER
• “Net operating loss” means the excess of allowance deduction over
gross income of the business in a taxable year.

• The net operating loss of the business or enterprise for any taxable
year 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.
Requisites for Deductibility
• At the time of incurring net loss, the taxpayer must not be exempt
from income tax; and
• There is no substantial change in the ownership of the business or
enterprise in that –
a). Not less than seventy – five (75%) in nominal value of
outstanding issued shares if the business is in the name of the
corporation, is held by or on behalf of the same persons; or
b).Not less than seventy – five (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.
NOLCO FOR MINES OTHER THAN OIL
& GAS WELLS
• For mines other than oil and gas wells, net operating loss incurred in
any of the first ten (10) years of operation may be carried over the
next five (5) years.
Losses from wash sales of stock or Securities
• In case of any loss claimed to have been sustained from any sale or
other disposition of shares of stock or securities shall not be deductible
if:
1). The seller is not a dealer in securities;
2). Within a period of thirty (30) days before the sale ending thirty
(30) days after the sale, the seller either:
a). Acquired (by purchase or exchange) stock or securities identical
to the stock or securities sold; or
b). Has entered into a contract or option to acquire stock or
securities identical to the stock or securities sold.
Wagering Losses
• Losses from wagering transactions shall be allowed only to the extent
of the gains from such transactions.
Abandonment Losses
• In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures pertaining thereto shall be
allowed as deduction.

• 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 deduction.
EFFECT IF ABANDONED WELL IS REENTERED AND
PRODUCTION IS RESUMED OR EQUIPMENT IS RESTORED
INTO SERVICE.
• If the abandoned well is re-entered and production is resumed or
equipment is restored into service, the effects are:
a). The amount previously claimed as deduction shall be recognized
as income and;
b). Such amount shall also capitalized and amortized or depreciated,
as the case may be.
H. BAD DEBTS
• REQUISITES FOR DEDUCTIBILITY
1). There must be an existing indebtedness due to 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 between related
taxpayers;
4). The same must be actually charged off in the books 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.
SECURITIES BECOMING WORTHLESS
• REQUISITES FOR DEDUCTIBILITY:
1). Securities are ascertained to be worthless;
2). The same is charged off within the taxable year;
3). It must be a capital asset.
I. Depreciation
• Requisites for Deductibility
1). The property subject to depreciation is used in the trade,
business or practice of profession;
2). The allowance for depreciation must be sustained by the person
who owns or who has a capital investment in the property;
3). The allowance for depreciation must be reasonable;
4). The allowance for depreciation should not exceed the cost of the
property;
5). The schedule of the allowance must be attached to the return.
Methods of Computation in General
• Straight – line method
• Declining balance method – rate should not exceed twice the rate in
straight line method.
• Sum of the years digit method; and
• Any other method which may be prescribed by the Secretary of
finance upon recommendation of the
Properties Used in Petroleum Operations
Properties directly related to production 1). Straight line
2). Declining – balance method

Note: useful life to ne used is shorter period

between: a). 10 years; or b). Useful life
Properties not directly related to production - Only straight line is allowed
- Useful life is always presumed to be 5 years.
Properties Used in Mining Operations
If expected life of property is ten (10) years or less Normal rate of depreciation (depreciate over actual
useful life)
If expected life is more than (10) years Depreciated over any number of years between five
(5) years and the expected life.

DEPRECIATION DEDUCTIBLE BY NON-RESIDENT ALIENS ENGAGE IN TRADE OR BUSINESS OR RESIDENT FOREIGN

CORPORATIONS
In the case of non-resident aliens engage in trade or business or resident foreign corporations, depreciation
shall be allowed only if the property is located in the Philippines.
Obsolescence may be deducted in addition to depreciation.
Allowance for obsolescence may be deducted in addition to
reasonable allowance for the exhaustion, wear and tear.
J. DEPLETION OF OIL AND GAS WELLS
AND MINES
• In case of oil and gas wells or mines, capital invested may be
amortized using cost-depletion method, provided:
1). When allowance for depletion shall equal capital invested, no
further allowance shall be granted:
2). After production in commercial quantities has commenced,
intangible exploration and development drilling costs shall be treated
as follows:
INTANGIBLE EXPLORATION AND
DEVELOPMENT DRILLING COSTS
Kinds Treatment
Incurred for non-producing wells and/or mines Deductible in the year incurred.
Incurred for producing wells and/or mines. At the option of the taxpayer:

Option 1 – Deductible in full in the year paid or

incurred; or

Option 2 – Capitalize and amortize

Depletion of oil and gas wells and mines deductible by
a non-resident alien individual or foreign corporation
• In the case of non-resident aliens engage in trade or business or
resident foreign corporations, depletion shall be allowed only if the oil
and gas wells or mines are located in the Philippines.
K. Charitable Contributions
• Fully Deductible Donations: The following charitable contributions shall be fully deductible:
1). Donations to the Government of the Philippines or to any of its agencies or political
subdivisions including fully owned government corporations, exclusively to be used in
undertaking priority activities in:
 Education
 Health
 Youth
 Sports development
 Human settlements
 Science and culture
 Economic development
2. Donations to foreign institutions or international organizations which
are fully deductible in pursuance of
 Agreements
 Treaties
 Commitments; or
 Special laws.
3. Donations to Accredited Non-Government Organizations
The term “non-government organization” means a non-profit domestic corporation:
a. Organized and operated exclusively for:
 Scientific
 Research
 Educational
 Character building
 Youth and sports development;
 Health
 Social welfare
 Cultural
 Charitable purposes; or
 A combination thereof.
b. No part of the net income of which inures to the benefit of any private
individual;

c. Not later than 15th day of the third (3rd) month after the close of the
taxable year in which contribution are received, makes utilization, unless
as extended period is granted by the Secretary of Finance, upon
recommendation of the Commissioner of Internal Revenue.

d. The level of administrative expense of which shall, on an annual basis

in no case to exceed thirty percent (30%) of the total expenses.
e. The assets of which, in the event of dissolution, would be distributed
to:
 Another domestic corporation organized for similar purpose or
purposes or
 The state for public purpose; or
 Another organization to be used in the court shall best accomplish
the general purpose for which the dissolved organization was
organized
Per special laws, donations made to the following deductions in full:
1. Integrated Bar of the Philippines (P.D. 181)
2. International Rice Research Institute (R.A. 2707)
3. Development Academy of the Philippines (P.D. 205)
4. The University of the Philippines & other state colleges.
5. Cultural Center of the Philippines
6. Artesian Well Fund (R.A. 1977)
7. Ramon Magsaysay Award Foundation
8. Task Force on Human Settlement
9. Donations to the National Museum, Library and Archives (P.D. 373)
10. National Commission on Culture
11. Humanitarian Science Foundation
12. National Social Action Council
Donations Subject to Limit
The following donations, which do not fall under fully deductible donations, shall be
subject to limit:
1. Donations to the Government of the Philippines or any agencies or any political
subdivisions thereof exclusively for public purposes;
2. Donations to accredited domestic corporations or associations operated exclusively for:
a. Religious; f. educational
b. Charitable g. Rehabilitation of veterans
c. Scientific h. Social welfare institutions; or
d. Youth and sports development; i. Non-governmental organization
e. Cultural
Taxpayer LIMIT
Rate Base
Corporation 5% Taxable Income from trade, business or practice of
profession before charitable contributions
Individual 10%
Valuation in case of donations of non-cash property

The amount of any charitable contribution of property other than

money shall be taxed on the acquisition cost.
I. RESEARCH AND DEVELOPMENT
If not chargeable to capital account. Claim as outright expense
If chargeable to capital account but not chargeable to At the option of the taxpayer:
property subject to depreciation or depletion
Option 1 – claim as outright expense

Option 2 – Amortize over 60 months

If chargeable to property subject to depreciation of or Capitalize
depletion
Limitations on Deduction
The following Research and Development expenditures are not
deductible:
1. Any expenditure for the acquisition or improvement of land, or for
the improvement of property to be used in connection with
research and development of a character which is subject to
depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining
the existence, location, extent, or quality of any deposit of one or
other mineral, including oil and gas.
M. Pensions Trusts
Amount Deductible
BActual contribution to the extent of pension liability Pxxx
Amortization of Past Service Cost xxx
Total Pxxx
Pension liability
Pension liability is equivalent to Normal Cost
Past service cost is the excess of actual contributions over the normal
cost. It shall be amortized over ten (10) years.
N. Optional Standard Deduction (OSD)
Optional Standard Deduction can be claimed in lieu of itemized deductions (except premium
payments on health and hospitalization insurance)

The following may be allowed to claim OSD:

1. Individuals
a. Resident Citizen
b. Non-resident citizen
c. Resident Alien
d. Taxable estates and trusts
2. Corporations
a. Domestic corporation
b. Resident foreign corporation
Amount Deductible
Individuals Gross Sales/ Gross Receipts x 40%
Corporations Gross Income x 40%
O. Non-Deductible Items
• Bribes, Kickbacks and other similar payments
• Personal, living or family expenses
• Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value of any
property or estate.
• Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made
• Premiums paid on any life insurance policy any person financially
interested in any trade or business carried on by the taxpayer is directly
or indirectly a beneficiary under such policy.
• Interest, Losses and Bad Debts:
a. Between members of a family. Family of an individual shall include only his brothers and sisters
(whether by the whole or half-blood), spouse, ancestors and lineal descendants; or
b. Except in the case of distributions in liquidation, between an individual and a corporation more
than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or
for such individual; or
c. Except in the case of distributions in liquidation, between two corporations more than fifty percent
(50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the
same individual, if either one of such corporations, with respect to the taxable year of the corporation
preceding the date of the sale or exchange was a personal holding company;
d. Between the grantor and a fiduciary of any trust; of
e. Between the fiduciary of a trust and fiduciary of another trust if the same person is the grantor
with respect to each trust; or
f. Between a fiduciary of a trust and a beneficiary of such trust.
P. Special deductions
• Expenses Allowable to Proprietary (Private) Educational Institutions

Cost incurred for the expansion of school facilities may at its option:
1. Capitalize and claim depreciation as deduction; or
2. Claim as outright expense
Special deductions allowed insurance companies
1. Net additions made within the year to reserve funds; and
2. The sum other than dividends paid within the year on policy and
annuity contracts

Note: Released reserve shall be treated as income for the year of

release.
1. RRD Corporation is engaged in the sale of goods and services with net sales/net revenue of P3,000,000 and P2,000,000
respectively. The actual entertainment, amusement and recreational (EAR) expense for the taxable year totaled P30,000. How
much is the deductible EAR expense?
Formula:
Sales of Goods or properties = Net sales x ½ of 1% = Net sales x .005
Sale of services = Net Revenue x 1%
Solution: The deductible representation expense
Actual allowed EAR Trading Servicing Lower Amount
Trading (30T x 3/5) 18,000
Servicing (30T x 2/5) 12,000 12,000
Statutory limit
Trading (3,000,000 x .005) 15,000 15,000
Servicing (2,000,000 x .01) 20,000 ______
27,000
• Answer P27,000
2. Roy borrowed money from the Bank amounting to P1,000,000 at an annual interest
rate of 7%. He invested the money in deposit substitutes earning annual interest
income of 8%. How much is the deductible interest?
Amount deductible:
Interest expense xxx
Less: (Interest income subject to final tax x 33%) xxx
Deductible Interest xxx
Solution:
Interest expense (1M @ 7%) 70,000
Less: (1M@8% = 80,000@33%) 26,400
Deductible interest 43,600
• Answer: P43,600
3. An individual taxpayer has the following data for the year 2014:
Interest paid, business loan P100,000
Interest paid, loan to build residential house 500,000
Interest expense on delinquency taxes
(business related) 50,000
Interest income – BPI Makati, net of 20% of final tax 24,000

For income tax purposes, the deductible interest expense shall be

Solution:
Interest expense on delinquency 50,000
Interest paid, business loan 100,000
less: Interest income (24,000/80% = 30,000 @ 33%) 9,900 90,100
Deductible interest 140,100
• Answer: P140,100
4. Mapanlinlang Corporation was assessed by the BIR due to underpayment of Percentage Taxes.
The Assessment Notice disclosed the following:
Basic tax P1,000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
Total P1,475,000
It also generated interest income from bank deposits amounting to P100,000.
a. How much is the deductible interest? 200,000
b. How much is the deductible taxes? 1,000,000
c. Based on letter B, but the tax underpaid is donor’s tax, how much is the deductible interest
and tax? Zero for both items
5. Dong, a gambling addict, won P90,000 from cockfighting during the
year. However, he also suffered losses from other gambling activities
amounting to P200,000. How much is the deductible loss? To the
extent of P90,000 gain, deductible loss of P90,000.

What if, no winnings reported, but then loss of P100,000 from

gambling. Deductible loss, none or zero.
• Answer: P90,000
6. In 2016, Alpha Corp., a calendar-year corporation, contributed
P80,000 to a qualified charitable organization. Alpha’s net income was
P820,000. In 2016, what amount can Cable deduct as charitable
contributions?
7. DLC . Corp. contributed P4,000,000 to its pension plan during the year 2013. The normal cost appearing
on the Actuarial Valuation Report is only P3,000,000. How much can DLC Corp. claim as deduction?
Solution:
Normal cost 3,000,000
Excess contribution over payment amortized by 10 yrs
(1,000,000/10) 100,000
Deduction 3,100,000

8. Continuing the information above, assuming in 2014 DLC Corp, contributed only P2,000,000 while the
Normal Cost is P3,000,000, how much is the deductible amount?
Contributed cost 2,000,000
Excess (1,000,000/10) 100,000
Deduction 2,100,000
A Co. maintains BIR-registered defined benefit retirement plan. The
company’s normal cost per actuarial valuation for funding is P900,000
and P950,000 for years 2019 and 2020, respectively. The actual
contributions of A Co. to the retirement plan were P1,100,000 and
P800,000 for years 2019 and 2020, respectively. The 2019 and 2020
deductible retirement expense would be:
2019 2020
Normal or actual contribution (lower) 900,000 800,000
Add: 2019 amortization of excess contribution over normal cost 20,000 20,000
(200,000/10)
Retirement expense 920,000 820,000
Problem Solving: The taxpayer is a domestic corporation:
Gross Sales P9,350,000 Operating expenses without
vouchers and receipts 500,000
Sales returns and allowances 250,000 Interest income from savings deposit 80,000
Sales discounts 100,000 Interest income from deposit under FCDS 125,000
Interest income on trade notes receivable 150,000 Royalty income 100,000
Other income 50,000
Cost of sales 3,000,000
Operating expenses with vouchers and
receipts 4,000,000

1. How much is the taxable income using itemized 2. Based on the preceding number, how much is the
deduction? 2,200,000 taxable income using OSD? 3,720,000
Solution:
a). Gross sales P9,350,000
Less: sales returns 250,000
Sales discount 100,000
Net sales 9,000,000
Less: Cost of sales 3,000,000
Gross income 6,000,000
Add: Interest income on trades 150,000
Other income 50,000
Total income 6,200,000
Less; Operating expenses with
vouchers 4,000,000
Taxable income 2,200,000
b. Gross sales P9,350,000
Less: sales returns 250,000
sales discounts 100,000
Net sales 9,000,000
Less: Cost of sales 3,000,000
Gross Income 6,000,000
Add: Other income 50,000
Interest on notes 150,000
Total income 6,200,000
Less: Optional standard deduc
(6,200,000*.4) 2,480,000
Taxable net income 3,720,000
Debtor Corporation shows the following data during the taxable year:
Sales P500,000
Interest income, net of 20% final tax 24,000
Cost of sales 300,000
Salary expense 120,000
Interest expense 60,000
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
NOLCO 50,000
What is the correct amount of itemized deduction?
Solution: Salary expense 120,000
Interest expense 60,000
Less: Interest income (24T/.8) 30,000*33% 9,900 50,100
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
205,100
A resident citizen of the Philippines has the following data on income and expenses in 2018:
Gross compensation income (net of exclusions) P200,000
Gross sales 900,000
Cost of sales 500,000
Business expenses 200,000
He avails himself of the Optional Standard Deduction (OSD). How much is his taxable net income?
Solution:
Gross compensation income 200,000
Add: gross sales (900,000 @ 60%) 540,000
Taxable net income 740,000

2017:
Gross income 200,000
Add: Gross sales (900,000@60%) 540,000
Income before personal exemption 740,000
Less: Basic personal exemption 50,000
Taxable net income 690,000