LO 1: Discuss the concepts of

deductions
 Deductions from Gross Income
 Deductions from gross income pertain to business expenses incurred by
a taxpayer engaged in business or engaged in the practice of profession.
Business Expense vs. Personal
Expense
 Business expenses are costs of doing trade, business or practice of
profession such as employee salaries, office utilities, supplies and rent,
taxes, losses, bad debts depreciation on business properties, research
and development and the like. On the other hand, personal expenses
include the living and family expenses of individual taxpayers such as
family food, personal recreation and transportation, medication, home
rentals and utilities, tuition fees of dependents, and other similar
expenses.
Business Expense vs. Capital
Expenditures
 Business expenses benefit only the current accounting period. They are
cost of generating income or gains for the current period. Hence, they
are deductible against gross income in the current period. Capital
expenditures are expenses that benefit future accounting periods. They
are initially recorded as asset upon acquisition then later deducted
against future gross income when used in the trade, business or
profession of the taxpayer.
Requisites for Deductibility

 1. Deductions must be paid or incurred in connection with the taxpayer’s trade, business, or
profession (Matching Principle)

 Note: Ordinary and necessary expenses must have been paid or incurred during the taxable
year for it to be deductible from gross income. Further, the deduction shall be taken for the
taxable year in which 'paid or accrued' or 'paid or incurred.' Otherwise, the expenses are
barred as deductions in subsequent years (CIR v. Isabela Cultural Corporation, G.R. No.
172231, February 12, 2007).

 2. Deductions must be supported by adequate receipts or invoices (XPN: standard deduction).

 3. The withholding and payment of tax required must be shown.

 Any income payment which is otherwise deductible shall be allowed as a deduction from gross
income only if it is shown that the income tax required to be withheld has been paid to the BIR
(Sec. 2.58.5, RR 2-98).
Itemized Deductions under TRAIN
(Sec. 34)
 1. Expenses
 2. Interest
 3. Taxes
 4. Losses
 5. Bad debts
 6. Depreciation
 7. Depletion of oil and gas wells and mines
 8. Charitable and other contributions
 9. Research and development
 10. Contributions to pension trusts
Expenses in General

 There shall be allowed as deduction from gross income

 1. All the ordinary and necessary expenses
 2. Paid or incurred during the taxable year
 3. In carrying on or which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession (Sec. 34[a],
NIRC).

 Note 1: Payments made in exchange for the revelation of a competitor’s trade secrets is
considered as an expense which is against law, morals, good customs or public policy, which
is not deductible (3M Philippines, Inc. v. CIR, G.R. No. 82833, September 26, 1988).

 Note 2: The law does not allow the deduction of bribes, kickbacks and other similar
payments. Applying the principle of ejusdem generis, payment made in exchange of
competitor’s trade secret would fall under “other similar payments” which are not allowed
as deduction from gross income (Section 34(A)(l)(c), NIRC).
Travelling/transportation expenses

 Requisites for its deductibility

 1. Reasonable and necessary expenses;
 2. Incurred or paid while away from home; and
 3. In pursuit of trade, business or profession.
Repairs and Maintenance

 Repairs are allowed as deduction when it is minor and ordinary, and

keeps the asset in its ordinary working condition. Major and
extraordinary repairs are capitalized and included in determining
depreciation expense because they tend to prolong the life of the asset.
Advertising and Promotional
Expenses
 a. Advertising to stimulate the CURRENT sale of merchandise or use of
services are deductible as business expenses, provided the amount
incurred is reasonable.
 b. Advertising designed to stimulate the FUTURE sale of merchandise or
use of services must be spread over a reasonable period of time that it
helps earn the income Ratio: Matching concept of deductibility
 c. Advertising to promote the sales of SHARES OF STOCK or to create a
corporate image is not deductible as an advertisement.
(2) Interest

 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 (Sec 34 (B),
NIRC).
(3) Taxes

 Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction
xxx (Sec 34 C, NIRC).
(4) Losses

 Losses actually sustained during the taxable year which are not
compensated by insurance or other forms of indemnity shall be allowed
as deductions:
 a. If incurred in trade, profession or business;
 b. Of property connected with the trade, business or profession, if the
loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement (Sec. 34 (D), NIRC).

 Note: A declaration of loss must be filed with the BIR within 45 days
after the date of event.
Net Operating Loss Carry-over
(NOLCO)
 This refers to the excess of allowable deduction over gross income of the
business in a taxable year. The net operating loss 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 3 consecutive taxable years immediately following the year of
such loss
(5) Bad Debts

 These are debts due to the taxpayer actually ascertained to be

worthless and charged off in the books of the taxpayer within the
taxable year except those:
 1. Not connected with trade, business or profession; and
 2. Between related taxpayers (Sec 35 (E), NIRC).
(6) Depreciation

 Requisites for deductibility

 1. There must be an exhaustion, wear and tear (including reasonable
allowance for obsolescence);
 2. Property is used in business; and
 3. Reasonable allowance for depreciation.
Methods of depreciation allowed

 1. Straight-line method
 2. Declining balance
 3. Sum-of-year digit method
 4. Other methods prescribes by secretary of Finance, upon the
recommendation of the CIR.
(7) Depletion

 The removal, extraction or exhaustion of a natural resource like mines

and gas wells as a result of production or severance from such mines or
wells.
(8) Charitable and Other
Contributions
 Contributions that are deductible in full
 These are: [GAFA]
 1. Donations to the Government of the Philippines, or political subdivisions including fully-
owned government corporation to be used exclusively in undertaking priority activities in:
[CHEESHY]
 a. Culture
 b. Health
 c. Economic Development
 d. Education
 e. Science
 f. Human Settlement
 g. Youth and Sports development

(8) Charitable and Other
Contributions
 2. Donations to Foreign institutions and international organizations in
compliance with treaties and agreements with the Government.

 3. Donations to Accredited NGO’s

 a. Exclusively for: [C2HES2Y-RC]
 i. Cultural
 ii. Charitable
 iii. Health
 iv. Educational
 v. Scientific
(8) Charitable and Other
Contributions
 vi. Social welfare
 vii. Character building &youth and sports
 viii. Research & Development
 ix. Any combination of the above
 b. Donation must be utilized not later than the 15th day of the 3rd month
following the close of taxable year;
 c. Administrative expense must not exceed 30% of the total expenses;
 d. Upon dissolution, assets shall be transferred to another non-profit domestic
corporation or to the State.


 4. Donations of prizes and awards to Athletes
(9) Research and Development

 Taxpayer may treat research or development expenditures paid or

incurred by him during the taxable year in connection with his trade,
business or profession as:
 a. Ordinary and necessary expenses, which are not chargeable to capital
account, and shall be allowed as deduction during the taxable year
when paid or incurred;
 b. Deferred expenses - distributed over a period of not less than 60
months (beginning with the month in which the taxpayer first realizes
benefits from such expenditures).
(10) Pension Trust

 Requisites for deductibility:

 1. Employer must have established a pension or retirement plan;
 2. Pension plan must be reasonable;
 3. Funded by the employer;
 4. Amount contributed by the employer must no longer subject to his
control.
LO 3: Recognize the Special Allowable
Itemize Deductions
 Special Allowable Itemized Deductions
 Special deductions are other items of deduction which may or may not
partake the nature of an expense, but are allowed by the NIRC or by
special laws as deductions. Special deductions include deduction
incentives to taxpayers in assisting and in complying with certain legal
requirements.
Special Allowable Deductions

 A. Special expenses under the NIRC and special laws

 1. Income distribution from a taxable estate or trust
 2. Transfer to reserve fund and payments to policies and annuity
contracts of insurance company
 3. Dividend distribution of a Real Estate Investment Trust (REIT) under
RA 9856
 4. Transfer to reserves funds of taxable cooperation
 5. Discount to senior citizens under RA 9257
 6. Discounts to persons with disability under RA 9442
B. Deduction incentives under special
laws.
 1. Additional compensation expense for senior citizen employees under
RA 9257
 2. Additional compensation expense for persons with disability under RA
7277, as amended by RA 9442.
 3. Cost of facilities improvements for persons with disability in
accordance with RA 7277
 4. Additional training expense under the RA 8502 – Jewelry Industry
Development Act of 1998
B. Deduction incentives under special
laws.
 5. Additional contribution expense the Adopt-a-School program under RA
8525
 6. Additional deductions for compliance to rooming-in and breast-
feeding practices under RA 7600, as amended by RA 10028
 7. Additional free legal assistance expense under RA 9999
 8. Additional productivity incentive bonus expense under RA 6971
LO 4: Discuss the Optional Standard
Deduction (OSD)
 OPTIONAL STANDARD DEDUCTION
 OSD is a fixed percentage deduction which is allowed to certain taxpayers
without regard to any expenditure. This is in lieu of the itemized deduction.

 The optional standard deduction is an amount not exceeding:
 1. 40% of the gross sales or gross receipts of a qualified individual taxpayer;
or
 2. 40% of the gross income of a qualified corporation (Sec. 34 [L], NIRC).

 Note: It requires no proof of expenses incurred because the allowable deduction

is a percentage not exceeding 40% of gross sales or receipts or gross income as
the case may be.
When OSD is elected?

 The election to claim either the OSD or itemized deductions must be signified in
the income tax return filed for the first quarter of the taxable year. Once the
election is made, it shall be irrevocable for the taxable year for which the return
is made.
 Note 1: A taxpayer who is required but fails to file the quarterly income tax
return for the first quarter shall be deemed to have elected to avail of itemized
deductions for the taxable year.

 Note 2: An individual who avails of the OSD is not required to submit final
statements provided that said individual shall keep such records pertaining to
his gross sales or gross receipts.
 Note 3: A corporation is still required to submit its financial statements when it
files its annual income tax return and keep such records pertaining to its
gross income.
LO 5: Discuss the classification of
Individual Income Taxpayers and their
taxability
 Classification of Gross Income
 1. Compensation Income Earners – There is an employee-employer
relationship
 2. Business or Professional Income Earners – Selling of goods or services
 3. Mixed Income Earners – Both Compensation and Business or
Professional Income.
 Compensation Income Earners
 Source(s) of Income Payment of Tax
 Income Tax Return
 1. Purely Compensation Income - Substituted Filing - No need to file an
ITR personally
 2. W/ Other Taxable Income - Need to file an ITR – Consolidated Income -
Annual – BIR Form 1700
 3. w/ Business or Professional Income - Need to file an ITR –
Consolidated Income Quarterly and Annual – 1701
 Note: Substituted Filing may only be availed by Pure compensation
Income earners. The latter may relieve from the obligation to file an
annual ITR. Provided further that the latter has: (1) no other taxable
Income; (2) no other employer; and (3) Income Tax Withheld was
correct.
Business or Professional Income
 Source(s) of Income Payment of Tax
 Income Tax Return
 1. Pure Business or Professional Income - ITR Quarterly & Annually
- BIR Form 1701A – May use 8% Optional Income Tax or Regular Income
Tax.
 2. Mixed Income Earners - ITR Quarterly & Annually BIR Form
1701
 Note: The 8% Income Tax shall be in lieu of (1) Progressive Tax; and (2)
3% Progressive Tax. It may only be availed by non-VAT taxpayers.
Partners in partnership

 It is the individual partners who shall be subject to income tax, and

consequently, to withholding tax, in their separate and individual
capacities pursuant to Section 26 of the 1997 Tax Code, as amended.
Furthermore, each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of the
partnership.
 Progressive Income Tax Table
 1. Pure Compensation Income Earner
 When the employee has no other taxable income, he may avail of the substituted filing
system. Under this system, the withholding tax on compensation is considered enough
evidence of tax compliance of the employee, provided that the employer withheld the
correct tax.

 2. Concurrent or Successive Employment

 In 2022, Black Panther was employed concurrently/successively in Hulk Co. and Ironman
Co. . The following were his income:

Hulk Co. Ironman

Co.
 Taxable Compensation Income P 300,000 P 400,000
 Tax withheld from compensation 10,000 30,000

 Black Panther shall file a consolidated return covering his total income from both
employments, whether successive or concurrent, and pay the tax deficiency if any.
Computation

 Step 1: Compute the total taxable compensation

 Total taxable compensation Income (P300,000+P400,000) P
700,000

 Step 2: Using the graduated tax table, determine which tax bracket it
belongs.
Computation

 Step 3: Compute the tax due using the tax bracket.

 1st P 400,000 P 30,000
 In excess of P400,000 (P300,000*25%) 75,000
 Tax Due P 105,000

 Step 4: Compare tax due and total tax withheld

 Income Tax due P 105,000
 Less: Tax Withheld 40,000
 Tax payable/(Tax refund) P 65,000
 Computation
3. Compensation Income Earner with Other Income

 Spiderman is a Photographer in Marvel Superheroes Corp. . He received the following compensation from
the latter:
 Gross Compensation Income P 1,000,000
 De minimis benefits 40,000
 Mandatory deductions for SSS, PHIC,HDMF 50,000
 Total Tax Withheld 163,000

 During the same taxable year, he also derive the following income:
 Interest income from his friends 75,000
 Gain on sale of his PSP 50,000

If spiderman ask you whether or not he needs to file a separate income tax
return, what should be your advice?

 Ans: Spiderman shall file BIR Form 1700 to include his other income subject to regular tax.
 Computation
Step 1: Following the same procedure in the preceding illustration, compute
the total taxable income.
 Net taxable compensation P 910,000
 Total other income 125,000
 Total Taxable Income P 1,035,000

 Step 2: Using the graduated tax table, determine which tax bracket it
belongs.
Computation

 Step 3: Compute the tax due using the tax bracket.

 1st P 800,000 P 130,000
 In excess of P800,000 (P235,000*30%) 70,500
 Tax Due P 200,500

 Step 4: Compare tax due and total tax withheld

 Income Tax due P 200,500
 Less: Tax Withheld 163,000
 Tax payable/(Tax refund) P 37,500
4. Pure Business or Professional
Income

Thor, a self-employed taxpayer, have the following details on its books:

 Gross receipts P 2,150,000
 Cost of Sales 840,000
 Business Expense 490,000
 Personal Expenses 300,000
 2307 – Withholding Tax Cert. 70,000
Computation

 Compute the tax payable of Thor.

 A. Regular Income Tax

 Step 1: Compute the Net Taxable Income

 Gross receipts P 2,150,000
 Less: Cost of Sales 840,000
 Gross Income: P 1,310,000
 Business Expense 490,000
 Net Taxable Income P 820,000
 Computation
 Step 2: Using the graduated tax table, determine which tax bracket it belongs.

 Step 3: Compute the tax due using the tax bracket.

 1st P 800,000 P 130,000
 In excess of P800,000 (P20,000*30%) 6,000
 Tax Due P 136,000
Computation

 Step 4: Compare tax due and total tax withheld

 Income Tax due P 136,000
 Less: 2307 – CWT 70,000
 Tax payable/(Tax refund) P 66,000

 B. 8% Optional Income Tax

 Gross receipts P 2,150,000
 Individual Income exemption 250,000
 Taxable Income P 1,900,000
 Multiply by Optional Inc Tax. 8%
 Tax Due P 152,000
 Less: 2307 – CWT 70,000
 Tax payable/(Tax refund) P 82,000