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Tabag Allowable Deductions Overview

This document discusses allowable deductions under Philippine tax law. It defines deductions as amounts subtracted from gross income to arrive at net income, while exclusions are items exempt from gross income. Deductions reduce taxable income, while tax credits reduce the tax due. The document outlines various types of allowable deductions including business expenses, interest, taxes, losses, bad debts, and net operating losses. It provides details on the requirements and limitations for claiming each type of deduction.

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Natalie Serrano
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3K views5 pages

Tabag Allowable Deductions Overview

This document discusses allowable deductions under Philippine tax law. It defines deductions as amounts subtracted from gross income to arrive at net income, while exclusions are items exempt from gross income. Deductions reduce taxable income, while tax credits reduce the tax due. The document outlines various types of allowable deductions including business expenses, interest, taxes, losses, bad debts, and net operating losses. It provides details on the requirements and limitations for claiming each type of deduction.

Uploaded by

Natalie Serrano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
  • Tabag-Allowable Deductions
  • Deduction Rules and Examples
  • Non-deductible Taxes and Bad Debts
  • Requisites for Deduction of Taxes
  • Ordinary Losses and Net Operating Loss

CHAPTER 10 TABAG-ALLOWABLE DEDUCTIONS

DEDUCTIONS VS EXCLUSIONS:

Deductions are the amounts which the law allows to be deducted from gross income in order to come at
net income.

Exclusions are those items exempted, those that are not treated as part of gross income.

DEDUCTIONS VS. TAX CREDIT:

Deductions reduces the income that is subject to tax

Tax credit reduces the tax due

PRO-FORMA FORM:

TAX CREDIT: DEDUCTIONS:


Tax due Gross income
Less: tax credit Less: allowable deductions
Answer: tax still due or payable Answer: Taxable/net income

NOTE: Tax credit is used only after the tax has been computed while a deduction is applied before the
computation of the applicable tax

CAPITAL EXPENSITURE VS. REVENUE EXPENDITURE

CAPITAL EXPENDITURE- non recurring, large monetary amount and benefit more than one accounting
period

REVENUE EXPENDITURE-Recurring and benefit one accounting period. Not large amount

THE TAXPAYER CAN DEDUCT:

1. The full amount


2. The lesser amount
3. Not to claim any deduction at all

TAX ARBITRAGE:

The tax arbitrage rule' reduces the allowable deduction for interest expenses by 33% of the interest
income subjected to final tax.

ALLOWABLE DEDUCTIONS: (ITEMIZED DEDUCTIONS)

1. Ordinary and necessary trade, business or professional expenses


2. taxes
3. interest
4. losses
5. bad debts
6. depreciation
7. depletion
8. charitable contributions
9. research and development
10. pension
11. additional deductability of certain payments
12. Optional standard deduction
13. Premium payments on health and or hospitalization insurance

ELEMENTS/GENERAL RULE IN CLAIMING DEDUCTIONS:

1. Necessary to the business, ordinary to the business, and substantiated


2. Depends upon the taxpayers residence and his/her source of income
3. There is a law authorizing deduction

WHO MAY CLAIM THE ITEMIZED DEDUCTIONS?

1. Individual citizens, resident aliens, and non resident citizens,engaged in trade or business under the
graduated rates
2. domestic corporations and business partnerships
3. proprietary educational institutions and hospitals which are nonprofit
4. government owned and controlled corporations, agencies and instrumentalities
5. resident foreign corpo

NOTE: GPP shall be allowed the same deductions for purposes of computing the distributive shares of its
part

EXAMPLES OF EXPENSES:

1. business expenses- 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 exercise of profession

Items included in business expenses:

-management expenses
-commissions
-labor
-supplies
-incidental repairs
-operating expenses of transportation equipment in the trade business or profession
-rental for the use of business property
-advertising and other selling expenses
-travelling expenses away from home solely in the pursuit of a trade, business or profession
-insurance premiums against fire storm theft accident or other similar losses in trade or business

REQUISITES FOR DEDUCTION OF BUSINESS EXPENSES:


1. The expense must be ordinary and necessary
2. it must be paid or incurred the taxable year
3. it must be connected with the trade profession or business
4. it must be reasonable
5. the amount paid 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 BIR

2. entertainment, amusement and recreation expenses

Ceilings for EAR expenses:


Sale of goods/properties-1/2 of 1% (0.50) of net sales
Sale of services-1% of net revenues

Non-deductible ear expenses


a. expenses incurred for police protection
b. expenses for political campaigns
c. expenses to attend funeral of friends
d. cost of admission tickets to operas

EXCLUSIONS-not considered as EAR expenses but may qualify as other items of deductions
a. compensation or fixed representation allowances subject to withholding tax on wages or fringe
benefits for services under employee-employer relationship
b. expenses for charitable or fund raising events
c. expenses for bonafide meetings of shareholder, partners or directors
d. expenses for attending or sponsoring an employee to business league or professional organizational
meeting
e. expenses for events organized for promotion, marketing and advertising. Including conferences
seminars workshops, conventions and other similar events
f. other expenses of a similar nature

3. INTEREST EXPENSE-For loan use or forbearance of money or credits

REQUISITES FOR DEDUCTION OF INTEREST:


A, there is indebtedness
b. there should be an interest expense paid or incurred upon such during the taxable year
c. the indebtedness is that of a taxpayer
d. the indebtedness is connected with the taxpayers profession trade or business
e. there is a liability to pay interest on the indebtedness in that such interest is stipulated in writing and
is legally due
f. the interest payment arrangement must not be between related taxpayers as provided in sec 36(b) of
the tax code
g. the interest must not be incurred to finance petroleum operations
h. in case where interest is incurred to acquire property to be used in trade business or profession the
same is not treated as capital expenditure.

REDUCTION OF ALLOWABLE DEDUCTION FOR INTEREST EXPENSE:


-The taxpayer otherwise allowable deduction for interest expense shall be reduced b an amount equal
to 33% of interest income subject to final tax. This limitation has been imposed primarily to nullify the
tax arbitrage schemes.

4. TAXES-amount that one must pay to help support the government


REQUISITIES FOR DEDUCTION OF TAXES:
A. it must be paid or incurred within the taxable year
b. it must be paid or incurred in the connection with the taxpayers profession, trade or business
c. the tax must be imposed directly upon the taxpayer

DEDUCTIBLE TAXES:
A. import duties paid to the proper customs officers
b. business taxes like percentage taxes, except tax on sale, barter or exchange of share of stock listed
and traded through the local exchange or through initial public offerings
c. local business taxes
d. community tax
e. municipal tax
f. occupation taxes
g. privilege and license taxes
h. excise taxes
i. documentary stamp taxes
j. automobile registration fees

NONDEDUCTIBLE TAXES:
A. Philippine income tax
b. foreign income tax, if claimed as tax credit
c. estate and donor’s taxes
d. taxes assessed against local benefits of a kind tending to increase the value of property assessed
(special assessment)
e. electricity energy consumption taxes
f. final taxes on passive income
g. capital gains taxes on capital gains
h. value added tax

5. BAD DEBTS- Debts resulting from from worthlessness or uncollectability

REQUISITES:
A. There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable
b. the debt must be connected with the profession, trade or business of the taxpayer
c. the debt must not be sustained in a transaction entered into between related parties enumerated
under sec 36(b) of the tax code
4. the debt must actually be ascertained to be worthless and uncollectible os of the end
5. the debt must be actually charged off the books of accounts of the taxpayer as of the end of the
taxable year

6. losses-implies an unintended destruction or deprivation of or separation from property or somethings


of value not in the ordinary course of things

Kinds of losses:
a. ordinary losses
b. capital losses
c. special losses
d. non deductible losses

Ordinary loss:
a. loss incurred in trade, profession or business
b. loss due to fire storms shipwreck or other casualties of property connected with trade business or
profession
c. loss due to robbery theft or emblezzlement of property
d. net operating loss carry over

REQUISITES:
A. The loss must be actually sustained
B. the loss must involve ordinary properties
C. the loss must be that of a taxpayer
D. the loss must not have been claimed as a deduction for estate tax purposes
E the loss must not be compensated by insurance or other forms of indemnity
F the loss must be reported to the BIR within 45 days from the date of loss

7. NET OPERATING LOSS-Excess of allowable deductions over gross income of the business in a taxable
year

TAXPAYER ENTITLED TO DEDUCT NOLCO:


A. Individuals engaged in trade or business or in the exercise of a profession
B estates and trusts
C domestic and resident foreign corp subject to normal income tax
D special corporations subject to preferential tax rates such as private educational institutions hospitals
and regional operating headquarters

Common questions

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Tax arbitrage affects the deduction of interest expenses by reducing the otherwise allowable deduction for interest expenses by an amount equal to 33% of the interest income subject to final tax . This limitation is introduced primarily to counteract tax arbitrage schemes where taxpayers might otherwise manipulate income through leveraging differential tax treatments of income and deductions . This effectively reduces the benefit obtained from such financial strategies, ensuring that the actual benefit from interest deductions is limited by the amount of interest income taxed separately.

The key requisites for the deduction of business expenses are: the expense must be ordinary and necessary, paid or incurred during the taxable year, connected with the trade, business or profession, and be reasonable . Additionally, the tax required to be deducted and withheld from these expenses must be paid to the BIR . These requirements ensure that deductions are legitimate, closely tied to the business's operational needs, and comply with the legal and financial management principles to prevent abuse of the tax deduction system, maintaining fair reporting and tax duties.

Deductibility of taxes from gross income allows for a reduction in taxable income, thereby lowering the overall tax burden for the taxpayer. Deductible taxes include import duties, business taxes (except tax on sale of shares), local business taxes, community taxes, municipal taxes, occupation taxes, privilege and license taxes, excise taxes, and documentary stamp taxes . These deductions reflect actual business and operational costs related to taxes directly impacting business activities, thus rightfully reducing tax liability and aligning financial responsibilities with real operational expenses .

Deductions reduce the income subject to taxation by lowering the gross income to arrive at a taxable income, thus effectively impacting the net income calculation before tax rates are applied . In contrast, tax credits directly reduce the amount of tax due after the taxable income has been determined . Therefore, deductions have an indirect effect by decreasing taxable income, while credits reduce tax payable directly, potentially making tax credits more beneficial in cases of equivalent value.

Exclusions represent items exempted from gross income that are not considered part of it . Deductions, on the other hand, are subtracted from gross income to determine taxable income . The distinction is significant as exclusions are never part of taxable income and directly affect the calculation of gross income, while deductions are expenses recognized for the computation of net income after gross income has been determined. This affects both the threshold for reaching taxable income and the compliance approach, with exclusions often seen as more favorable due to their immediate impact on reducing the potential income base subject to tax.

The requirement that business expenses be 'ordinary and necessary' ensures that only those expenses which are common, acceptable, and beneficial for the trade, business, or profession and conducted in accordance with typical and expected operational procedures can be deductible . This criterion prevents arbitrary or lavish expenses unrelated to typical business operations from being claimed, maintaining integrity and fairness in tax deductions and compliance . It encourages prudent financial governance and aligns with ethical taxation practices.

A net operating loss (NOL) occurs when allowable deductions exceed the gross income of a business within a taxable year . Taxpayers entitled to benefit from net operating loss carryovers include individuals engaged in trade or business, estates and trusts, domestic and resident foreign corporations subject to normal income tax, and special corporations subject to preferential tax rates like private educational institutions, hospitals, and regional operating headquarters . NOL carryovers allow these entities to apply the loss to reduce taxable income in subsequent years, aiding in financial recovery and stability.

Deductible losses for tax purposes include ordinary losses such as those incurred in the course of trade, business, or profession, losses due to casualties like fire or theft of business property, and net operating loss carryovers . The essential requirements for claiming these losses are that they must be sustained, involve ordinary properties, cannot have been claimed as deductions for estate tax purposes, must not be compensated by insurance, and must be reported to the BIR within 45 days from the date of loss . These stipulations ensure accurate and fair reporting of genuine financial setbacks as part of business risks.

For an interest expense to be deductible, there must be an indebtedness, it must be connected with the taxpayer's trade, business, or profession, and legally due with a written stipulation to pay interest . The interest must be paid or incurred within the taxable year, the indebtedness must belong to the taxpayer, the arrangement must not be between related taxpayers, and the interest must not be incurred for financing petroleum operations . These stringent criteria ensure that deductions are justified, relevant, and compliant with the integrity of tax frameworks.

Capital expenditures are non-recurring, involve large monetary amounts, and benefit more than one accounting period, making them necessary for only depreciation deductions over time . Revenue expenditures are recurring, benefit only one accounting period, involve smaller amounts, and are fully deductible in the period they are incurred . Recognizing these differences is essential for correct accounting and tax purposes, ensuring expenses are appropriated correctly, and compliance with tax regulations.

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