DEDUCTIONS FROM GROSS INCOME

- amounts which the laws allow to be deducted from gross income in order to arrive at net income.

KINDS OF DEDUCTION:

1. Itemized Deductions
2. Optional Standard Deduction
3. Special Deductions allowed under special cases

TAXPAYER ALLOWABLE DEDCUTIONS

INDIVIDUALS EARNING PURE COMPENSATION Beginning 2018, no more deduction is allowed to
INCOME purely compensation income earners.
INDIVIDUALS DERIVING INCOME FROM TRADE, Itemized or Optional Standard Deduction
BUSINESS OR PRACTICE OF PROFESSION
CORPORATIONS Itemized deductions or Optional Standard
Deduction

A. ITEMIZED DEDUCTIONS
EXCEPTION: Taxpayers earning compensation income arising from personal services rendered under an
employer-employee relationship.

The following deductions from gross income as follows:

1. EXPENSES
General: all the ordinary and necessary expense paid or incurred during taxable year in carrying on or
which are directly attribute to, the development, management, operation and/or conduct of the trade,
business or exercise of a profession including:
• SALARIES AND WAGES
• TRAVEL
• RENTALS
• ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSE
Limitation
Lower amount between actual and limit:
SALE OF GOODS Net Sales*1/2 of 1% or .005
SALE OF SERVICES Net Revenue*1%
• ADDITIONAL TRAINING EXPENSES
ACTUAL EXPENSE+ (Actual expense* ½ but not exceeding 10% direct labor expense)

Requisites for deductibility in general:

1. Must be ordinary and necessary

2. Paid or incurred during the taxable year
3. Connected with trade, business or practice of profession
4. Supported by sufficient evidence
5. Not against the law, morals, public policy or public order
6. It must have been subjected to withholding tax, if applicable

2. INTEREST
General: The amount of interest paid or incurred within a taxable year on indebtedness in connection with
the taxpayer’s profession, trade or business shall be allowed as deduction from gross income.

Requisites for deductibility:

1. The indebtedness must be that of the taxpayer
 2. The interest must be legally due
3. The interest payment arrangement must not be between related taxpayers

Limitation: Interest expense xx

Interest income*20% (xx)
xx
Non-deductible Interest:
1. Interest paid to persons classified as related taxpayers
2. If the indebtedness is incurred to finance petroleum exploration
3. Interest on preferred stock

3. TAXES
General: Taxes paid or incurred within taxable year in connection with the taxpayer’s profession, trade or
business, shall be allowed as deduction.
Exception: Nondeductible
a. Income tax
b. Income tax paid abroad if claimed as tax credit
c. Estate tax
d. Donor’s tax
e. Special Assessment

Limitation: NRA individual engaged in trade or business in the Ph and a RFC , the deductions for taxes shall
be allowed only if and to the extent that they are connected with income from sources within the
Philippines.

Credit against tax for taxes of foreign countries

Income tax paid or incurred during the year to any foreign country, at the option of the following
taxpayers, may be treated as operating expenses by the following taxpayers:

a. Resident citizen
b. Domestic corporation
c. Partnerships and Estates- In the case of any individual who is a member of a GPP or a beneficiary of an
estate or trust, his proportionate share of such taxes of the GPP or the estate or trust paid or incurred
during the taxable year to a foreign country, if this distributive share of the income of such partnership
or trust is reported for taxation purposes.

4. LOSSES
-sustained during taxable year not compensated for by insurance or other forms of indemnity shall be
allowed as deductions.
KINDS OF LOSSES:
a. CASUALTY LOSSES
o The loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement
o The property lost is connected with the trade, business or practice of profession
o Actually, sustained during the taxable year
o Not compensated by insurance
o Reported with the BIR within 45 days from the time of loss
o Not claimed as deduction for estate tax purposes

b. NET OPERATION LOSS CARRY-OVER (NOLCO)

-excess of allowable deduction over gross income
-carried over 3 years (5years if the NOLCO during 2020-2021; beginning 2022 3yrs)

Requisites:
 1. At the time incurred net loss, the taxpayer must not be exempt from income tax; and
2. There is no substantial change in the ownership of the business or enterprise in that
• 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
• Not less that 75% of the paid0up capital of the corporation, if the business is in
the name of a corporation, is held by or on behalf of the same persons.
c. LOSS ON WASH SALES OF STOCK OR SECURITIES
NOT DEDUCTIBLE IF:
-the seller is not a dealer in securities
-within a period of 30 days before the sale ending thirty days after the sale, the seller either:
-Acquired by purchase or exchange) stock or securities identical to the stock or securities; or
has entered into a contract or option to acquire stock or securities identical to the stock or securities
sold.

5. BAD DEBTS
Requisites:
a. There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
b. The same must be connected with the taxpayer’s trade, business or practice of profession
c. The same must not be sustained in a transaction between related taxpayers
d. The same must be actually charged off in the books of accounts of the taxpayer as of the end of the
taxable year; and
e. The same must be actually ascertained to be worthless and uncollectible

B. OPTIONAL STANDARD DEDUCTION

- IN LIEU of itemized deductions.
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a. Resident Citizen
b. Non-resident citizen
c. Resident alien
d. Taxable estates and trusts
Amt deductible: 40% of GROSS SALES OR GROSS RECEIPTS

2. CORPORATIONS
a. Domestic corporation
b. Resident foreign corporations
Amt deductible: 40% of GROSS INCOME

NON-DEDUCTIBLE ITEMS:
A. General rule:
1.) Personal, living or family expense
2.) Any amount paid out for new buildings or for permanent improvements, or betterment, made to
increase the value of any property or estate.
Note: This shall not apply to intangible drilling and development costs incurred in
petroleum operators which are deductible through reasonable allowance for depletion or
amortization.
3.) Any amount expended in restoring property or in making good the exhaustion thereof for which
an allowance is or has been trade.
4.) Premium pad in any life insurance policy covering the life of any person financially interested in
any trade or business carried on by taxpayer, individual or corporate, when the taxpayer is directly or
indirectly a beneficiary.
 B. Losses from sales or exchanges of property- In computing net income, no deduction shall in any
case be allowed in respect of losses from sales or exchanges of property directly or indirectly:

1.) Between members of the family

Note: The family of an individual shall include only his brother and sisters whether by the
whole or half blood, spouse, ancestors, and lineal descendants.
2.) Except in case of distributions in liquidation, between an individual and a corporation more than
50% in value of the outstanding stock which is owner, directly or indirectly by or for such individual;
3.) Excess in case of distributions in liquidation, however two corporations, more than 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 under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;
4.) Between the grantor and a fiduciary of any trust;
5.) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust;
6.) Between a fiduciary of a trust and a beneficiary of such trust.

PROBLEMS:
EXPENSES:
BP Corporation, with total assets of P15,000,000, shows the following data during the taxable year:
SALES 500,000
Interest income 30,000
COS 300,000
Salary expense 120,000
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
What is the correct amount of itemized deduction?

RENTAL EXPENSE:
A leasehold is required for business purposes for P5,000,000. The lease contract is for 10 years. How much is the
deductible amount form the gross income during the year?

ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSES

Hinata Corporation is engaged in the sale of goods with net sales of P2,500,000. The actual EAR expenses for the taxable
quarter totaled P20,000. For income tax purposes, how much is the deductible entertainment, amusement and
recreation expense?
If the corporation is engaged in sale of services, how much is the deductible EAR expense?

ADDITIONAL TRAINING EXPENSE:

KSU Corporation, a domestic manufacturing corporation had a gross sale of P100,000,000 for fiscal year ending June
30,2021 and incurred cost of sales of P60,000,000 and cost of sales of P17,500,000 with the following details:
COST OF SALES
Direct materials P30,000,000
Direct Labor 20,000,000
Manufacturing overhead 10,000,000 P60,000,000
OPERATING EXPENSES
Salaries and wages P7,000,000
Taxes 300,000
Depreciation 3,500,000
Professional fees 200,0000
 Advertising expenses 2,000,000
Training expenses 3,000,000
Office supplies 500,000 P17,500,000

HOW MUCH IS THE ADD’L ALLOWABLE TRAINING EXPENSE, IF ANY?

HOW MUCH IS THE TAXABLE NET INCOME OF THE COMPANY?

INTEREST EXPENSE:
Wendy borrowed money from Red velvet Bank to P1,000,000 at an annual interest rate 7%. He invested the money in
deposit substitutes earning annual interest income 8%. How much is the deductible interest?

TAX EXPENSE
Jona Corporation was assessed by the BIR due to underpayment of Percentage Taxes. The assessment Notice disclosed
the following:
Basic Tax P 1,000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
TOTAL P 1,475,000
It also generated interest income from bank deposits amounting to P100,000. How much is the deductible interest?
How much is the deductible taxes?
Assuming the tax underpaid is donor’s tax, how much is the deductible tax?

CASUALTY LOSS

XG Company had an old warehouse which had a cost of P1,200,000. The company demolishes the warehouse when it
had a book value of P200,000 in order to construct a new and bigger warehouse. The demolition cost amounted
P25,000 while the scrap were sold for P10,000. How much is the deductible loss in arriving at taxable income?

On July 1, 2023 a taxpayer purchased for P500,000 an automobile which will be used exclusively for his practice. After
one week, the automobile was partially damage in an accidental collision with another vehicle. The cost of repairs
amounted to P100,000. The taxpayer received insurance proceed of P70,000 to cover the loss. How much is the
deductible loss?

NOLCO

KSU Corporation has the following results of operations from 2018-2021

2018 2019 2020 2021

Gross Sales 550,000 650,000 800,000 1,200,000
Cost of Sales 300,000 350,000 400,000 500,000
Allowable deductions 300,000 375,000 300,000 300,000
Compute the Taxable Net income.

LOSS ON WASH SALES

On December 1, 2020, Ana purchased 100 shares of common stock of Jaymee company for P10,000. On December
15,2020, she purchased 100 additional shares for P9,000. On January 2,2021, she sold the 100 shares purchased on
December 1,2020 for P9,000. How much is the deductible loss?

OPTIONAL STANDARD DEDUCTIONS (0SD)

A resident citizen has the following data on income and expenses in 2023:

Gross compensation income P200,000

Gross sales 900,000
Cost of sales 500,000
Business expenses 200,000
He avails himself of the Optional standard Deduction. How much is the OSD?

How much is his taxable net income?