INCOME INCLUSIONS,

EXCLUSIONS, AND
DEDUCTIONS
Income Taxation: Gross Income –
Inclusions

4 Broad Types of Returnable Income:

1.Compensation Income
2.Business or Professional Incomes
3.Passive Income
4.Capital Gains
Gross Income:
Compensation Income

All remunerations paid to the employee arising from an

employer-employee relationship which include, but
not limited to:
a. Salaries and wages except wages given to MWE
b. Bonuses and allowances except 13th month pay and other
bonuses not exceeding P 90,000.
c. Holiday pay, Overtime pay, Night shift differential, and
Hazard Pay received by persons other than an MWE.
Gross Income:
Compensation Income
d. De minimis and other fringe benefits not subjected
to fringe benefit tax (given to rank-and-file), subject to
P90,000 limit
e. Separation Pay, Retirement pay, and similar
remunerations which do not meet the requirements
f. Fees, honoraria, emoluments, commissions, etc.
Income Taxation: Individual – Exclusions
from Gross Income
1. Holiday pay, Overtime pay, Night shift differential,
and Hazard pay (HONsHa) earned by MWE (non-
taxable).

2. 13th Month Pay, productivity incentives, Christmas

bonus and other bonuses and benefits (de minimis) not
exceeding PhP 90,000.
Income Taxation: Individual – Exclusions
from Gross Income
3. Gifts, bequests and devises (subject to transfer taxes)
are not subject to income tax, but income derived
from the use of such gifts, bequests and devises are
subject to income tax.
4. Income derived by foreign government
5. Income derived by the Philippine government or its
political subdivisions.
Income Taxation: Individual –
Exclusions from Gross Income
6. De Minimis not exceeding their statutory limits.
7. Proceeds of life insurance paid to the heirs upon death of
the insured or whoever the beneficiary is (also not subject
to estate tax if the beneficiary is the third person
irrevocably designated as heir; subject to estate tax if the
beneficiary is the estate, administrator or executor or if the
designation to third persons is revocable).
Income Taxation: Individual –
Exclusions from Gross Income
8. Retirement benefits under RA 7641 (private
benefit plan), provided:
a. The employee is at least 50 years old at the
time of retirement;
b. The employee has rendered 10 years in the
same company
c. The employee availed it for the first time
d. Such private benefit plan is approved by the BIR.
Income Taxation: Individual –
Exclusions from Gross Income
9. Separation pay paid to the employee for
causes beyond the control of said employee
(involuntary). If the cause of separation is
voluntary, such payment shall be taxable.

10. Mandated contributions such as SSS, GSIS,

PHIC and HDMF contributions and union dues.
Income Taxation: Individual –
Exclusions from Gross Income
11. Amounts received as a return of premiums paid.
12. Prizes and awards in recognition of religious, charitable,
scientific, educational, artistic, literary or civic achievement
as well as awards in authorized sports competitions.
13. Gains from sale of bonds, debentures or other
certificates of indebtedness with a maturity of longer than
five years.
 Gross Income: Business or
Professional Income
Generally, arising from selling goods or services.
Whether individual or corporate taxpayer, may include:
Sale of goods and properties (real or personal)
Sale of services (professional services, lease of properties,
etc.)

Note: Withholding taxes from professional incomes and other

sale of services which are subject to CWT must be correctly
withheld.

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Gross Income: Passive Income
General Rule: Passive income earned within the
Philippines are taxable unless specifically
exempted by law.

Exception: If the passive income is not subjected

to final tax, such is added to the gross income
subject to normal tax.

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Gross Income: Capital Gains
Capital gains arising from the sale of capital assets (real or personal
assets) are taxable as follows:
a. If REAL property not used in business, subject to capital gains
tax of 6% of the selling price, or FMV, or Zonal Value, whichever
is the highest.

b. If shares of stocks not traded in the local stock exchange,

subject to 15% capital gains tax.

c. All other capital gains, which are not subject to CGT, are subject
to normal tax (5-35%), subject to the pertinent rules in property.

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DEDUCTIONS FROM
GROSS INCOME

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GENERAL RULES:

1. A taxpayer seeking a deduction

must point to some specific
provisions of the statute
authorizing the deduction.
2. Tax exemptions as well as
deductions are generally
disfavored by the law. (strictissimi
juris)
Allowable Deductions:

1. Optional Standard Deduction

2. Itemized Deductions
 THE OSD will be your
Optional Standard Deduction OPEX

individual
Optional standard deduction may be claimed in lieu of the
itemized deductions. SALES
- SALES
DISCOUNT
Individual taxpayers (RC, NRC, RA, taxable estates and - SALES
ALLOWANCES
trusts) who are engaged in business or selling of service = GROSS
may claim OSD, except NRAETB and NRANETB. SALES
x 40%
= OSD
For individual taxpayers, the 40% OSD is multiplied at his
gross sales or gross receipts. For purposes of computing
OSD for individuals, gross sales/receipts shall mean after
deducting sales discounts actually taken, sales returns and
sales allowances.
FIRST QUARTER OF; CHOOSE OPTION BETWEEN OSD
OR ITEMIZED DEDUCTION corporation:

march 31 is first quarter - april 15 GROSS SALES

- COGS
+ other income not subject to
final tax
Optional Standard Deduction = GROSS INCOME
x 40%
= OSD
Corporate taxpayers (domestic and resident foreign), except
non-resident foreign corporation, may claim 40% OSD of its
gross income (sales/receipts less cost of sales/service plus
other income not subjected to final tax).

The selection is not presumed; the taxpayer should signify his

election to claim OSD and such would be irrevocable for the
taxable year in which the return is made.

The failure to indicate the election to avail the OSD shall be

considered as having availed of the itemized deductions.
Itemized Deductions
General Rule: Expenses to be deductible should be
ORDINARY and NECESSARY for the business, and must be
SUBSTANTIATED.

Exception: Optional Standard deduction may be claimed

without substantiation. Take note:
1.RESIDENTS (RC and RA) and CITIZENS (RC and NRC) can
claim OSD.
2.DOMESTIC and RESIDENT FOREIGN corporations can
claim OSD.
Itemized Deductions:
(Ex InTaLoBa DepDep ChaRD PeT)

a. General Business Expenses (salaries and wages, supplies

and repairs, operating expenses, rentals, advertising,
travelling expense, insurance premiums against fire, EAR)
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion
h. Charitable and other contribution
i. Research and Development
j. Pension and Trust
General Business Expenses
Salaries: all remuneration, including wages and
other forms of compensation for services actually
rendered plus the grossed-up monetary value of
fringe benefits granted by the employer to the
employee. Provided, a withholding tax should be
imposed (FBT or Wtax) so that the salaries may be
claimed as a deduction.
General Business Expenses
Materials and Supplies: cost of these expense when
actually consumed.
Travel Expenses: any expenses incurred for
transportation and allowances provided they are
incurred solely for carrying on the trade, business
or profession.
 Rent Expense

LESSEE LESSOR
ACCRUAL Rent is deductible when Rent is taxable when
BASIS INCURRED. RECEIVED.
CASH BASIS Rent is deductible when Rent is taxable when
INCURRED and PAID.* RECEIVED.**

*In cash basis, advance payments are not deductible

unless incurred.
**In cash basis, advance payments constitute a taxable
income the year received, irrespective of the period
earned.
Representation: entertainment, amusement and
recreation (EAR)
Subject to a limit of ½% of net sales if the taxpayer is
engaged in selling of goods; and 1% of the net revenue if
the taxpayer is engaged in selling services.

If the taxpayer is engaged in both selling of goods and

services, the total actual EAR shall be allocated using the
net sales or net revenue times the total of net sales and
net revenue subject to the limits provided above.
Interest: must meet the requisites for deductibility
before can be claimed as deduction
1. Subject to a limit, that is total interest less 20% of total
interest income (grossed-up) subjected to final tax.

2. The interest shall be deductible in full only if

a. there is no interest income subjected to final tax (20%);
or
b. Interest expense on tax delinquency or deficiency,
provided the tax is related to trade or business or
practice of profession, shall be 100% deductible.
The following interests are non-deductible:
a. Interests paid to persons classified as related taxpayers

b. If the indebtedness is incurred to finance petroleum

exploration

c. Interest on preferred stocks.

Taxes: may be claimed as deduction if they are not
national Internal revenue taxes such as:
Income tax
transfer tax
claimed as tax credit
percentage tax other than the 3% PT
VAT
Taxes not related to trade
Special assessment tax, surcharges and compromise penalty

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Losses
The following losses may be claimed as deduction:
• Casualty losses
• Net Operating Loss Carry-Over (NOLCO)
• Capital losses and securities becoming
worthless
• Special losses:
 Losses from wash sales of stock or securities
 Wagering losses
 Abandonment losses

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Requisites:
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 idemnity;
Requisites:
5. Incurred in trade, profession or
business;
6. Reported with the BIR within forty- five
days from the time of loss; and
7. Not claimed as deduction for estate tax
purposes.
NOLCO
Net operating loss means the excess of allowable
deductions 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 years
immediately following the year of such loss.

Provided, that at the time of incurring net loss, the taxpayer

must not be exempted from income tax.

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NOLCO
Provided, that for mines other than oil and gas
wells, any net operating loss incurred in any of the
first ten (10) years may be carried over as
deduction from taxable income for the next five (5)
years immediately following such year when the
loss is incurred.
Losses from wash sales of stocks or securities:
In case of any loss claimed to have been sustained from any
sale or other disposition of shares of stocks or securities shall
not be deductible if:
The seller is not a dealer in securities (shrinkage) – the
loss should be ACTUAL.
Within a period of 30 days before the sale or 30 days
after the sale, the seller either:
Acquired (by purchase or exchange) stock or
securities identical to the stock or securities sold; or
Has entered into a contract or option to acquire
stock or securities identical to the stock or
securities sold.
In case of wagering transactions, the loss shall be allowed only to
the extent of the gains from such transactions.
Bad Debts: must be ascertained worthless (actual not
estimated) and the corresponding receivable should
have been written off within the taxable year.
Amount deductible should be the actual amount EXCLUSIVE
of interest.

If the amount claimed as bad debt exceeds the current

income, the excess loss shall be carried over for the next
three years (as NOLCO).

If the amount is recovered or received subsequently, the

amount recovered shall be taxable in full in the year it was
recovered.
Depreciation: must be based on a reasonable
allocation of the cost of capital asset using the
methods recommended by the CIR.
1. If the asset is used in PETROLEUM Operations, properties
DIRECTLY used in the production of petroleum shall be
depreciated over 10 years or shorter as provided by the
CIR. All properties not directly used in the production
of petroleum shall be depreciated under straight-line
method over 5 years.
2. If the asset is used in MINING Operations, ALL properties
shall be depreciated:
a. At a normal rate if the expected life is not more than 10
years.
b. Over years between 5 and the expected life if the
expected life is more than 10.
Exception:

Capital Expenses of a Private Educational

Institution: maybe capitalized subject to
depreciation or deducted at full.
Exploration and Development Expenditures:
INTANGIBLE exploration, drilling and development allowed
as deduction in computing taxable income during the year
shall not be considered in computing the adjusted cost
basis.
Exploration and development costs, OTHER than the
intangible exploration, drilling and development may be:
Computed as part of the adjusted basis for depletion (COST OF
GOODS SOLD); or
Deduction to compute taxable income from mining operations
(OPERATING EXPENSE)

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If the taxpayer choose the second option, it shall be
subject to the following limits:
Amount claimed as deduction for the year shall NOT exceed
25% of the net income from mining operations without the
benefit of any tax incentives under existing laws.
The total actual amount of exploration and development
costs less the 25% limit above shall be carried through
succeeding years until fully deducted.
Contributions: Maybe subjected to limitations or deducted at full:
Charitable contributions made by an individual shall be subject to a
limit of 10% of his taxable income before deducting the
contributions.
Charitable contributions made by a corporation shall be subject to a
limit of 5% of its taxable income before deducting the contributions.
Charitable contributions made by either of the two taxpayers above
to the government for the use of its priority program shall be
deductible at full. Priority programs are: education, health, youth
and sports development, human settlements, science and culture
and economic development.
Pension Trust
Actual contribution to the
extent of pension xx
Amortization of Past Service Cost* xx
Total xx

Past Service Cost is the excess of actual contributions

over the Normal Cost. It shall be amortized over ten
(10) years.

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