PART IX Allowable Deductions From Gross Income

PART IX ALLOWABLE DEDUCTIONS FROM GROSS INCOME
1. Basic Principles
a. Strict Construction Against the Taxpayer
The taxpayer must point to some specific
provisions of the statute authorizing the
deduction; and
He must be able to prove that he is entitled
to the deduction authorized or allowed
If a taxpayer fails to deduct certain
expenses for the taxable year, he cannot
deduct them from the income of the next
or any succeeding year
b. The Cohan Rule Principle
If there is showing that expenses have
been incurred but the exact amount
thereof cannot be ascertained due to the
absence of documentary evidence, it is
the duty of the BIR to make an estimate of
deduction that may be allowed in
computing the taxpayers taxable income
bearing heavily against the taxpayer
whose inexactitude is of his own making.
A disallowance of 50% of the taxpayers
claimed deduction is valid
c. Deductions as distinguished from exclusions

Deductions Exclusions
Amounts declared from
gross income to arrive at net
income
Amounts/items exempt from
tax by virtue of the tax code or
special law

d. Deductions as distinguished from Personal
Exemptions

Deductions Exemptions
Business expenses represent
cost of doing business
Personal expenses cover
personal, living or family
expenses
These are actual business or
professional expenses
incurred in the pursuit of
trade, business or profession
These are arbitrary amounts
representing personal daily
living expenses allowed as a
deduction by law to qualified
individual taxpayers
Both individual and
corporate taxpayers may
claim
Only individual is entitled
Deductions must be
supported by receipt
No need for supporting
receipt
They are allowed deductions
to enable the taxpayer to
recoup his cost of doing
business
They are allowed to cover
personal, family and living
expenses

e. Deductions as distinguished from Tax Credit

Deductions Tax Credit
Deductible from gross
income before tax is
computed
Deductible from Philippine
income tax due
It reduces the taxpayers
liability dollar for dollar
It reduces the taxable income
upon which the tax liability is
calculated
Sources: deductible taxes
such as: business tac, excise
tax, percentage tax and
other business connected
taxes
Sources: Foreign income tax,
war-profits and excess profit
tax and estate tax

2. Deductions, defined These are amounts or
expenses allowed by law to be subtracted from
gross income to arrive at the taxable income
3. Kinds of Deductions
a. Itemized Deductions
Who may claim Available to all kinds of tax
payers engaged in trade or business or
practice of profession in the Philippines,
such as Corporation, General Professional
Partnerships, individuals engaged in trade,
business or profession, estate and trust
engaged in trade or business
Partnership exempt from income tax can
also claim itemized deductions in computing
its net income
Partners in GPP have the tax status of self-
employed individuals engaged in the
practice of their profession in the
partnership formed. As such, they may claim
the itemized deductions or elected the OSD
No limit as to amount of deduction provided
the Substantiation Rule has been complied
with
If the taxpayer failed to elect the kind of
deduction in his income tax, he shall be
considered as having availed himself the
itemized deduction
b. Optimized Standard Deductions (OSD)
Under RA 8424, only individual taxpayers
who are citizens and resident aliens
derviving income from business, trade or
profession, capital gains and passive
incomes NOT subject to final tax, or other
income may elect OSD in lieu of the itemized
deductions. It is 40% of the gross income of
the tax payer and corporations DC and RC
may now claim OSD under RA 9504
This is optional. Thus, unless the taxpayer
signifies in his return his intention to elect
OSD, he is considered as having availed of
ISD
The choice must be signified in the income
tax return of the taxpayer, and once chosen,
it is irrevocable for the taxable year for
which the return is made. However, he can
change to ISD in succeeding years
No need to include financial statements in
the return of OSD was claimed
c. Special Deductions
Secs 37 and 38 under EO 226, the BOI Laws
These are deductions allowed to be
deducted in addition to the itemized
deductions allowable to corporations which
may be availed of by insurance companies,
mutual insurance companies, mutual marine
insurance companies, assessment insurance
companies, estates and trusts and private
educational training institutions
Estates and trusts which may avail of
itemized deductions can deduct from gross
income any amount of income paid,
credited or to be distributed to the
beneficiaries but this income shall be
taxable to the beneficiaries
4. Entitled to Avail of Itemized Deductions
a. Resident Citizen (Sec 24 (A) (1) (a)
b. Nonresident Citizen (Sec 24 (A) (1) (b)
c. Resident Alien (Sec 24 (A) (1) (c)
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.
(1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
and (D) of this Section, derived for each taxable year from all
sources within and without the Philippines be every
individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (B), (C)
sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines
including overseas contract workers referred to in
Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code,
other than income subject to tax under Subsections (b), (C)
sources within the Philippines by an individual alien who is a
resident of the Philippines.
The tax shall be computed in accordance with and at the
rates established in the following schedule:
Not over P10,000 5%
Over P10,000 but not over
P30,000
P500+10% of the excess over
P10,000

P70,000
P2,500+15% of the excess
over P30,000

P140,000
over P70,000

P250,000
over P140,000

P500,000
over P250,000

Over P500,000 P125,000+34% of the excess
over P500,000 in 1998.

Provided, That effective January 1, 1999, the top marginal
rate shall be thirty- three percent (33%) and effective
January 1, 2000, the said rate shall be thirty- two percent
(32%).
For married individuals, the husband and wife, subject to the
provision of Section 51 (D) hereof, shall compute separately
their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be
definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be
divided equally between the spouses for the purpose of
determining their respective taxable income.
d. Non Resident Alien Engaged in Trade or
Business in the Philippines

SEC. 25. Tax on Nonresident Alien Individual. - (A)
Nonresident Alien Engaged in trade or Business Within the
Philippines. -
(1) In General. - A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all
sources within the Philippines. A nonresident alien individual
who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180)
days during any calendar year shall be deemed a
'nonresident alien doing business in the Philippines'. Section
22 (G) of this Code notwithstanding.
(2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarters or
Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and
Other Winnings. - Cash and/or property dividends from a
domestic corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a regional
operating headquarters of multinational company, or the
share of a nonresident alien individual in the distributable
net income after tax of a partnership (except a general
professional partnership) of which he is a partner, or the
share of a nonresident alien individual in the net income
after tax of an association, a joint account, or a joint venture
taxable as a corporation of which he is a member or a co-
venturer; interests; royalties (in any form); and prizes (except
prizes amounting to Ten thousand pesos (P10,000) or less
which shall be subject to tax under Subsection (B)(1) of
Section 24) and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to an
income tax of twenty percent (20%) on the total amount
thereof: Provided, however, that royalties on books as well as
other literary works, and royalties on musical compositions
shall be subject to a final tax of ten percent (10%) on the
total amount thereof: Provided, further, That
cinematographic films and similar works shall be subject to
the tax provided under Section 28 of this Code: Provided,
furthermore, That interest income from long-term deposit or
investment in the form of savings, common
or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax imposed under
this Subsection: Provided, finally, that should the holder of
the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the
entire income and shall be deducted and withheld by the
depository bank from the proceeds of the long-term deposit
or investment certificate based on the remaining maturity
thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years
to less than four (4) years - 12%; and Less than three (3)
years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or
exchange of shares of stock in domestic corporations not
traded through the local stock exchange, and real properties
shall be subject to the tax prescribed under Subsections (C)
and (D) of Section 24.

e. Partners in General Professional Partnership

SEC. 26. Tax Liability of Members of General Professional
Partnerships. - A general professional partnership as such
shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a
general professional partnership shall be liable for income
tax only in their separate and individual capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
computed in the same manner as a corporation.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income
of the partnership.
f. Domestic Corporations

SEC. 27. Rates of Income tax on Domestic Corporations. -
(A) In General. - Except as otherwise provided in this Code,
an income tax of thirty-five percent (35%) is hereby imposed
upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate
shall be thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent
(32%).
In the case of corporations adopting the fiscal-year
accounting period, the taxable income shall be computed
without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and
expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.
The reduced corporate income tax rates shall be applied on
the amount computed by multiplying the number of months
covered by the new rates within the fiscal year by the taxable
income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein,
after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP); (2) A ratio of forty percent (40%) of
income tax collection to total tax revenues; (3) A VAT tax
effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public
Sector Financial Position
(CPSFP) to GNP. The option to be taxed based on gross
income shall be available only to firms whose ratio of cost of
sales to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
The election of the gross income tax option by the
corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified under
the scheme.
For purposes of this Section, the term 'gross income' derived
from business shall be equivalent to gross sales less sales
returns, discounts and allowances and cost of goods sold.
"Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern, "cost of goods" sold
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where
the goods are actually sold, including insurance while the
goods are in transit.
For a manufacturing concern, "cost of goods manufactured
and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the
factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances
and discounts.
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their
taxable income except those covered by Subsection (D)
hereof: Provided, that if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed
in Subsection (A) hereof shall be imposed on the entire
taxable income. For purposes of this Subsection, the term
'unrelated trade, business or other activity' means any trade,
business or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function. A "Proprietary educational institution" is any
private school maintained and administered by private
individuals or groups with an issued permit to operate from
the Department of Education, Culture and Sports (DECS), or
the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws
and regulations.
(C) Government-owned or Controlled-Corporations, Agencies
or Instrumentalities. - The provisions of existing special or
general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government
Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the
Philippine Charity Sweepstakes Office (PCSO) and the
Philippine Amusement and Gaming Corporation (PAGCOR),
shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations
engaged in s similar business, industry, or activity.
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. - A final tax at the rate
of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived
by a domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to
a final income tax at the rate of seven and one-half percent
(7 1/2%) of such interest income. (2) Capital Gains from the
Sale of Shares of Stock Not Traded in the Stock Exchange. - A
final tax at the rates prescribed below shall be imposed on
net capital gains realized during the taxable year from the
sale, exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of
through the stock exchange:
Not over P100,000................................... 5%
Amount in excess of P100,000................. 10% (3) Tax on
Income Derived under the Expanded Foreign Currency
Deposit System. - Income derived by a depository bank under
the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency depository system units and other
depository banks under the expanded foreign currency
deposit system, including interest income from foreign
currency loans granted by such depository banks under said
expanded foreign currency deposit system to residents, shall
be subject to a final income tax at the rate of ten percent
(10%) of such income. Any income of nonresidents, whether
individuals or corporations, from transactions with
depository banks under the expanded system shall be
exempt from income tax. (4) Intercorporate Dividends. -
Dividends received by a domestic corporation from another
domestic corporation shall not be subject to tax.
(5) Capital Gains Realized from the Sale, Exchange or
Disposition of Lands and/or Buildings. - A final tax of six
percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of
lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets,
based on the gross selling price of fair market value as
determined in accordance with Section 6(E) of this Code,
whichever is higher, of such lands and/or buildings.
(E) Minimum Corporate Income Tax on Domestic
Corporations. - (1) Imposition of Tax. - A minimum corporate
income tax of two percent (2%0 of the gross income as of the
end of the taxable year, as defined herein, is hereby imposed
on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which
such corporation commenced its business operations, when
the minimum income tax is greater than the tax computed
under Subsection (A) of this Section for the taxable year. (2)
Carry Forward of Excess Minimum Tax. - Any excess of the
minimum corporate income tax over the normal income tax
as computed under Subsection (A) of this Section shall be
carried forward and credited against the normal income tax
for the three (3) immediately succeeding taxable years. (3)
Relief from the Minimum Corporate Income Tax Under
Certain Conditions. - The Secretary of Finance is hereby
authorized to suspend the imposition of the minimum
corporate income tax on any corporation which suffers
losses on account of prolonged
labor dispute, or because of force majeure, or because of
legitimate business reverses. The Secretary of Finance is
hereby authorized to promulgate, upon recommendation of
the Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he may
suspend the imposition of the minimum corporate income
tax in a meritorious case.
(4) Gross Income Defined. - For purposes of applying the
minimum corporate income tax provided under Subsection
(E) hereof, the term 'gross income' shall mean gross sales
less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold' shall include all business
expenses directly incurred to produce the merchandise to
bring them to their present location and use.
For a trading or merchandising concern, "cost of goods sold'
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where
the goods are actually sold including insurance while the
goods are in transit. For a manufacturing concern, cost of
"goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used,
direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the
raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances,
discounts and cost of services. "Cost of services" shall mean
all direct costs and expenses necessarily incurred to provide
the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of
supplies: Provided, however, That in the case of banks, "cost
of services" shall include interest expense.

g. Proprietary Educational Institutions and
Hospital which are non Profit

SEC. 27. Rates of Income tax on Domestic Corporations.
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their
taxable income except those covered by Subsection (D)
hereof: Provided, that if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed
in Subsection (A) hereof shall be imposed on the entire
taxable income. For purposes of this Subsection, the term
'unrelated trade, business or other activity' means any trade,
business or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function. A "Proprietary educational institution" is any
private school maintained and administered by private
individuals or groups with an issued permit to operate from
the Department of Education, Culture and Sports (DECS), or
the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws
and regulations.
h. Government Owned or Controlled corporations,
agencies or instrumentalities which are non-
exempt

SEC. 27. Rates of Income tax on Domestic Corporations. -
(C) Government-owned or Controlled-Corporations, Agencies
or Instrumentalities. - The provisions of existing special or
general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government
Service Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the
Philippine Charity Sweepstakes Office (PCSO) and the
Philippine Amusement and Gaming Corporation (PAGCOR),
shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations
engaged in s similar business, industry, or activity.

5. Itemized Deductions from Gross Income
a) Expenses All the 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 the exercise of a profession.
b) Interest It is the amount of interest paid or
incurred within the taxable year on
indebtedness incurred in connection with the
taxpayers trade, business, or profession
c) Taxes taxes means taxes proper and
therefore, no deductible are allowed for
amounts representing: 1)interest 2)surcharges
3) fines or penalties incident to delinquency
d) Losses The term implies an unintentional
parting with something of value. It is used in
the income tax law in a very broad sense to
comprehend all losses which are not in general
or natural to the ordinary course of business
and are not covered under some other heading
such as bad debts, inventory losses,
depreciations, etc.
e) Bad Debts Bad debts are debts due to the
taxpayer which are actually ascertained to be
worthless and charged off within the taxable
year
f) Depreciation Is the gradual diminution in the
useful value of tangible property used in trade,
business, or profession resulting from
exhaustion, wear and tear, and obsolescence.
The term is also applied to amortization of the
value of intangible assets, the use of which on
trade or business is definitely limited in
duration
g) Depletion of Oil and Gas Wells and Mines
depletion is the exhaustion of natural resources
like mines and oil and gas wells as a result of
production or severance from suchh mines or
wells
h) Charitable and other contributions
i) Research and Development A taxpayer may
treat research or development expenditures
which are paid or incurred by him during the
taxable year in connection with his trade,
business or profession as ordinary and
necessary expense which are not chargeable to
capital account. The expenditures so treated
shall be allowed as deduction during the
taxable year when paid or incurred
j) Pension Trust
k) Optional Standard Deductions
l) Premium payments on health and/or
hospitalization insurance of an individual
taxpayer
6. On Business Expenses
a) Nature and Scope They are ordinary and
necessary expenses directly incurred or paid
during the taxable year in carrying on the
taxpayers trade, business or profession or
which are directly related to the development,
management, opearation and/or conduct of the
business, trade or profession
b) Requisites
i. Ordinary Expense Those payments
which are normal (need not be habitual)
in relation to the business of the
taxpayer, or one generally incurred also
by taxpayers in the same or similar line
of business or trade.
ii. Necessary Expense Those that will
minimize loss and maximize profit or
those that are appropriate and helpful to
the taxpayers business. Expenses that
are useful and reasonable such as
salaries and other compensation for
personal service actually rendered to the
taxpayer, cost of supplies, transportation
expense, reasonable and legitimate
representation and ordinary repair and
maintenance due to wear and tear
iii. Paid and Incurred within the year
Paid if the taxpayer keeps his
books on the cash receipts basis
expenses are deductible in the year they
are paid
Incurred If the taxpayer keeps
his books on the accrual basis, expenses
are deductible in the year they are
incurred, whether paid or not

iv. It must be directly connected with
taxpayers trade, business or profession
v. The tax required to be within on the
expense paid or payable is shows to have
been remitted to the BIR
vi. It must be reasonable and substantiated
by adequate proofs
vii. It must not be against morals, public
policy, and public order
c) Kinds of Business Expenses
i. Compensation for personal services (1)
actually rendered (2) reasonable
There must exist an employer-
employee relationship between the
person who renders the services and
the person to who such services are
performed
The basis upon which the
compensation is paid is immaterial
Bonuses id paid in good faith as
additional compensation for services
rendered
Fringe benefit tax paid by the
employer on the fringe benefit paid
or furnished to its supervisory or
managerial employees
If corporations require its officers to
be members of social or athletic
clubsto promote is businesses and
the club dues are paid by the
corporation, such dues are ordinary
and necessary expenses
deductible
ii. Travelling expenses not only for
transportation fare but includes meals
and lodging in connection with the trade,
business or profession of the taxpayer,
whether local or foreign
Requisites:
1. Incurred while away from
home
2. In the pursuit of the business
or trade
3. Must be reasonable and
necessary

iii. Rentals
aa. Requisites
1. Made as a condition to the
continued use of, or possession
of property
2. Taxpayer has not taken or is not
taking title to the property or has
not equity other than that of a
lessee, user or possessor
3. Property is used in trade,
business or profession
4. It is subjected to 5% expanded
withholding tax on rent
otherwise it is disallowed
bb. Items deductible under rental
expense:
1. If a leasehold is acquired for
business purposes for a specified
sum, the purchaser may take
deduction for a aliquot part of
such sum each year based on the
number of years the lease will
cover
2. Taxes of the lessor paid by the
lessee under the contract of
lease is added to the monthly
rental and claimed as a rent
expense by the lessee. Whereas,
to the lessor the taxes assumed
by the lessee is income to him
3. Obligations of the lessor as to
third persons assumed or paid by
the lessee constitute additional
rent
4. Cost of erecting a building or
making permanent
improvements borne by a lessee
is a capital investment and NOT
deductible as a business expense
5. Rights or goodwill do not qualify
as rental deduction because they
are in the nature of capital
advance to secure the lease of
the premises
6. If the property rented is owned
by the taxpayer himself, he can
either a) depreciate its value b)
include the rental value as
income for his personal return
and declare the same value as
expense for the companys
return
7. If the taxpayer has acquired
equity or title over the property,
he can start depreciating, even if
he has not fully paid the same.
Thus, if taxpayer has no such
equity or title, he can declare the
rentals as ordinary expense
8. It the taxpayer is renting an
office/business space he ust
withhold the tax due on the rent,
otherwise, he would not be
allowed to deduct the same from
his income, even if it is a
legitimate expense
9. The lessee deducts cost of
improvements introduced by him
under depreciation allowance
and the lessor reports value of
improvements as his income
earned.
iv. Entertainment, amusement and recreation
expenses
aa. Requisites:
1. Must be directly connected to the
development, management and
operation of trade, business or
profession of the taxpayer, or
incurred to promote the business
of the taxpayer
2. Must be reasonable
3. Must not be contrary to laws,
morals, and public policy or public
order
4. Must be substantiated with
sufficient evidences such as or
other adequate records
5. Persons or guests entertained are
those with whom the taxpayer has
direct business relations, such as
but not limited to current or
potential clients or customers.
bb. Expenses not treated as
entertainment, amusement and
representation expenses
1. Expenses for charitable and fund
raising event
2. Expenses for bonfire business,
meetings of stockholders, partners
and/or directors
3. Expenses for events organized for
promotion, marketing, advertising,
conference, seminars, workshops,
conventions and other similar events
4. Other expenses of similar nature
cc. Illegal expenses
1. Expenses that are illegal
2. Any payment made to official or
employee of the national
government, local government units,
GOCCs, or to representatives of
foreign government, private
corporation, GPP or any similar
entity if it constitutes a bribe or
kickback
3. Expenses to obtain contracts with
private firms or individuals are
deductible of ot os not contrary to
law, public policy, and morals
4. Payments to secure political
influence to obtain favorable public
contracts are non-deductible
5. Police protection
v. Cost of Materials and Supplies dedutible
only to the full amount actually consumes
or used in operation during the year. Cost
of goods purchased for resale with proper
adjustment for opening and closing
inventories is deductible from gross sales in
comuting gross income
vi. Equipment used in trade or business
expenses on repairs, maintenance and
operation are deductible
vii. Operating Expenses on Transportation
viii. Maintenance and Incidental Repairs
1. Expenses on minor or ordinary repair
are deductible from gross income
because it keeps the assets in its
ordinary and efficient working
condition. They do not materially add
to the value of the property nor
prolong its life
2. Expenses on major or extraordinary
repairs are NOT deductible because it
is capitalized and subject to
depreciation expense. Major expense
tends to prolong life of the asset
ix. Advertising and other Selling Expenses
Advertising expenses incurred to take
advantage of the holidays or special
occasions are ordinary expenses deductible
in full. Whereas, those that will stimulate
future sales or to create favorable
company image are considered capital
expenditures
x. Insurance Premiums against fire, storm,
theft, accident, or other similar losses in
the case of a business or trade
xi. Expenses to farmers those incurred in the
operation of a farm for profit or
commercial basis and not merely for
recreation or pleasure
1. Cost of ordinary tolls of short-life or
small cost for hand tools, shovel, rakes
and the like
2. Cost for feeding and raising livestock,
except farm produce grown on the
farm or through the labor of the
farmer
3. Cost of gasoline or fuel, repair and
upkeep of transportation equipment
used wholly in farming or only a
portion of such expense if the
equipment is used partly for pleasure
or convenience of the farmer
4. Cost of fertilizers, seeds and seedlings
aa. Non-deductible expense to farmers
1. cost of farm machinery, equipment
and farm buildings
2. amounts spent in the development of
farms, orchards and ranches, prior to
the time when the productive state is
reached
xii. Other business Expense
1. Pre-operating expenses are deferred
expenses and deducted from gross
income for not more than 60 months.
The amortization period commences
with the month in which the business
begins. Such as expenses incurred
before and I anticipation of the start of
the business in an activity for profit or
the production of income.
2. Organization costs are amortized over
the life of the corporation
3. Cost of defending a civil suit affecting
the business is deductible, irrespective
of the outcome of the defense
4. Judgement or other binding
adjudication on account of damages
for patent infringement, personal
injuries or other causes, are deductible
when the claim is adjudicated and paid
5. Promotion expenses
6. Overhead expenses incurred by foreign
head office related to the production
of the Philippine-derived income or to
Philippine operations of the branch are
deductible expenses of the local
branch without apportionment.

7. On Interest Expense
a. Interest The amount paid by a debtor to his
creditor for the use or forbearance of maney,
goods or credit.
b. Requisites:
i. There is an indebtedness
ii. The indebtedness must be that of the
taxpayer
iii. In connection with taxpayers profession,
trade or business
iv. There is liability to pay interest on the debt
v. The interest must have been paid or
incurred within the year
vi. It must be legally die and stipulated in
writing
vii. It must not be expressly disallowed by law
to be deducted from taxpayers gross
income
viii. It must be within the limit set by law
ix. The interest payment must not be made
between related parties
c. Interest expense as amended by RA 9337
Effective November 1, 2006 The Tax Code
provides that the taxpayers otherwise
allowable deduction as interest expense shall
be reduced by 42% (previously 38% under RA
8428) of the interest income subjected to final
tax. Provided that effective January 1, 2009 the
percentage shall be 33%
d. Tax arbitrage The simultaneous payment of
taxes and income earnings on he same loan
proceeds in order to profit from such price
discrepancies. This is a method of borrowing
without entering into a debtor-creditor
relationship to resolve financing and exchange
control problem. Oftentimes, it is used to
circumvent the law and has the effect of
lowering the taxes due the government
e. Deductible Interest Expense
i. Interest on taxes paid on deficiency or
delinquency, provided the tax is a deductible
tax, except on income tax. But, fines and
penalties on account of taxes are not
deductible. Surcharge for late payment is
also non-deductible from income tax
ii. Interest on scrip dividends paid by a
corporation
iii. Interest on deposits paid by banks or trust
companies to depositors: if it is shows that
the tax on such interest was withheld and
paid
iv. Interest paid by a corporate taxpayer who is
liable on mortgage upon real property of
which the said corporation is the legal or
equitable owner, even though it is not
directly liable for the indebtedness
f. Non-deductible Interest Expense
i. An individual taxpayer reporting income on
a cash basis incurs and indebtedness where
advance interest was paid. Such interest
may be deducted only when principal
likewise paid.
ii. Interest paid on indebtedness between
related relatives
iii. Interest paid on indebtedness incurred or
continued to purchase or carry obligations
the interest on which is exempt from tax
iv. Interest on indebtedness incurred to finance
petroleum exploration
v. Interest on unpaid salaries and bonuses
vi. Interest paid where no stipulation for such
payment was agreed
vii. Interest paid on unenforceable obligation
viii. Interest paid on preferred shares of stocks
ix. Interest on preferred stocks which is reality
is dividend thereon. Preferred shares are
considered capital regardless of the
conditions under which such shares are
issued and consequently, dividends or
interest paid thereon shall not be allowed
as a deduction from gross income of the
corporation
x. Advances given without any expectation of
repayment do not give rise to valid and
subsisting debts. Interest incurred thereon is
non-deductible
xi. Interest on indebtedness for purely personal
reasons
xii. Interest calculated for cost-keeping or other
purposes on account of capital or surplus
invested in the business which does not
represent a charge arising under an interest-
bearing obligation
xiii. Interest paid abroad by a non-resident
parent/holding company in respect of which
no deduction is allowable to its branch on
the Philippines unless the indebtedness was
incurred to provide funds for investment in
the said resident branch, the income from
which is taxable and provided the branch
submits as authenticated copy of the
investment agreement and such other
information required.
g. Related parties
i. Between family embers including
taxpayers brother or sisters, whether full or
half blood, spouse, ancestors and lineal
descendants
ii. Between an individual and a corporation
where more than 50% in value of the
outstanding stock of which is owned,
directly or indirectly by or for such a
taxpayer. Except, in the case of distributions
in liquidation
iii. Between two corporations except in the
case of distribution of liquidations, between
2 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 loan (sale or exchange) was, under
the law applicable to such taxable year, a
personal holding company or a foreign
personal holding company
iv. Between the fiduciary of a trust and
fiduciary of another trust if the same person
is a grantor with respect to each trust
v. Between the grantor and a fiduciary of any
trust
8. On Taxes
a. In general All taxes (main), whether national
or local, paid or incurred within the taxable year,
in connection with the taxpayers profession,
trade or business excluding surcharge, penalties
and fines incident to delinquency
b. Exclusions surcharge, penalties, and fines
incident to delinquency
c. Requisites for deductibility
i. Paid or incurred within the taxable year
ii. Must not be specifically excluded by law
from being deducted from taxpayers gross
income
iii. Deductible only by the person(s) upon
whom the tax is imposed by law
iv. Connected with taxpayers profession, trade,
or business
(1) Exceptions Taxes of shareholder upon
his interest as such and paid by the
corporation without reimbursement
from him can be claimed as a deduction
by the corporation.
However, a corporation paying the
tax for the holder of its bonds or other
obligations, containing a tax-free covenant
clause cannot claim deduction for such taxes
paid by it pursuant to such covenant
d. taxpayers allowed to claim taxes as deductions
(1) Resident citizen
(2) Non-resident citizen, OCW and seaman
(3) Resident alien
(4) Non-resident alien engaged on trade or
business in the Philippines
(5) Members of a general professional
partnership
(6) Domestic corporation
(7) Resident foreign corporation
e. Deductible taxes: Examples
i. Import duties
ii. Business occupation, license, privilege,
excise and permit
iii. Percentage tax and tax on gross receipts
paid or accrue
iv. Privilege or occupation taxes
v. Fringe benefit taxes under certain conditions
vi. Automobile registration fees (taxes in
nature)
vii. Documentary stamp taxes
viii. Income, war-profits and excess-profits taxes
imposed by the authority of any foreign
country only if the taxpayer does not signify
in his return his desire to have any extent
the benefits of the provisions of law
allowing credits against the tax for taxes of
foreign countries
ix. Any other taxes of every amount and nature
paid directly to the government or any
political subdivision
f. Non deductible taxes, examples
i. Income Tax (Philippine or foreign)
ii. Value added tax
iii. Estate and Donors taxes
iv. Special assessment or levies on properties
v. Energy tax (BP 36)
vi. Taxes not related with the trade, business or
profession of the taxpayer
vii. Taxes which are final in nature
viii. Stock transfer tax on shares that are listed
or traded in the exchanges which are final in
character
ix. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed
x. War profit tax
xi. Foreign income taxes imposed by authority
of a foreign country
EXCEPTION: This shall be allowed in the case
of a taxpayer who does not signify in his
return his intention to avail of the benefits
of tax credit for taxes paid to foreign
countries
g. Limitations on Deductions od Resident Citizen
and NRAETB
a. Limited to the extent that such taxes
are connected with income realized
form sources within the Philippines
b. Tax on interest of shareholder paid by
corporation without reimbursement is
not deductible from gross income but
also not treated as income of the
shareholder
c. In case of corporate bonds or other
obligations containing a tax-free
covenant clause, the corporation
paying a tax or any part of it for
someone else pursuant to an
agreement is NOT entitled to deduct
such payment from gross income on
any ground
d. In the case of a resident alien whose
income from sources within such
foreign country is NOT taxable, then
only that portion of the taxes paid to
such foreign country which
corresponds to his net income taxable
shall be allowed as deduction
e. An alien individual and a foreign
corporation shall NOT be allowed the
credits against the tax for the taxes of
foreign contries allowed in Sec 34 (c)
(3) of the Tax Code
Examples of local taxes that is
deductible: Community development
tax, percentage tax on business, real
property tax on property used in
business and license or permit for the
conduct of the business

h. Taxes that can be claimed as Tax Credit
(1) Tax Credit defined- This is a taxpayers right
to deduct from the income tax due the
amount of the tax he has paid to a foreign
country subject to specified limitations
(2) Purpose of tax credit to lessen the effects
of international double taxation or multiple
taxations
(3) Taxpayers entitled to claim tax credits
i. Citizens of the Philippines
ii. Members of the general professional
partnership
iii. Beneficiaries of an estate or trust
iv. Resident aliens under the Principle of
Reciprocity
(4) Tax payers not entitled to claim tax credit
i. Non-resident citizens
ii. Non-resident aliens
iii. Resident aliens deriving income solely
from the Philippines
iv. Foreign corporations
(5) Taxes that can be claimed as tax credit
i. War profit taxes- these are income
taxes by reason or on occasion of war in
order to raise funds to prosecute the
war and reach income of war
millionaires
ii. Excess profit taxes These are income
taxes imposed upon excessive earnings
occurring during garrison economic life
in times of undeclared war.
iii. Taxes paid by authority of a foreign
government
NOTE: a taxpayer who has signified in
his tax return his desire to claim a tax
credit of foreign taxes paid shall be
considered to have applied said taxes
paid to all foreign countries and no
portion there of shall be allowed as a
deduction from gross income.
a. Country Limitation Rule: only one
foreign tax was paid
b. Computation:

Tax Credit =

Taxable income from foreign country
x Philippine Income
Tax
Taxable income from all sources

(6) When Tax Credit is applied The taxpayer
at his option and irrespective of the
accounting method employed in keeping
his books should take such credit for taxes
in the year in which the taxes for the
foreign country accrued. An election thus
made by him must be followed in the tax
returns for all subsequent years. No
portion of any such tax credit may be
allowed as a deduction from gross income.

On Losses - The term implies an unintentional parting with
something of value. It is used in the income tax law in a very
broad sense to comprehend all losses which are not general
or natural to the ordinary course of business.
a. Losses covered losses which do not come under the
category of bad debts, inventory losses, depreciation
and the like and which arise in taxpayers profession,
trade or business.
b. Requisites for Deductibility:
(1) loss must be that of the taxpayer
(2) actually sustained during the taxable year
(3) connected with the business, trade or profession of
the taxpayer
(4) not compensated by insurance or other form of
indemnity
(5) evidenced by a closed and completed transaction
(6) not claimed as a deduction for estate tax purposes
(7) if it is a casualty loss, must be reported to the
concerned authorities within prescribed time (45
days)
The Marcelo Doctrine if one business is
taxable and the other is exempt. The loss in the
exempt business is not deductible from the
profits of the former. [Marcelo Steel Corp. vs.
Collector, 109 Phil 921]
c. Allowed Deductible losses to non-resident Foreign
Corporations:
1.) Losses sustained in business or trade in the country
2.) Casualty losses in such business or trade conducted
within the Philippines arising from fire, storms,
shipwreck, TRECUSO (theft, robbery, embezzlement,
calamity, and unexpected sudden occurrences)
3.) Losses actually sustained in transactions entered
into for profit in the Philippines, although not
connected with their trade or business in the
Philippines
d. Amount deductible on losses sustained from property
connected with business, trade or profession:
(1) In case of total destruction the net book
value (cost less accumulated depreciation)
immediately preceding the casualty to be
reduced by any amount of insurance or
compensation received.
(2) In case of partial destruction the replacement
cost to restore the property to its normal
operating condition, but in no case shall be
deductible loss be more than the net book
value of the property as a whole. The excess
over the net book value immediately before the
casualty should be capitalized, subject to
depreciation over the remaining useful life of
the property.
e. Types of Losses, defined, distinguished
(1) Ordinary losses
By individual losses actually sustained during
the taxable year, not compensated for by
insurance, incurred in connection with trade,
business or profession or arising from fire,
storm, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
By non-resident aliens and foreign corporations
losses actually sustained in business, trade or
profession conducted within Philippines, when
such losses are not compensated for by
insurance or other forms of indemnity.
By domestic corporations all losses actually
sustained and charged off within taxable years
and not compensated for by insurance.
(2) Capital Losses [Sec. 39 (3), NIRC] excess of the
losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
aa. Examples:
(a) Losses from sale or exchange of capital
asset
(b) Losses resulting from securities
becoming worthless and which are
capital assets
(c) Losses from short sales of property
(d) Losses due to failure to exercise
privilege or option to buy or sell
property
(3) Special Losses
aa. Kinds:
(a) Wagering Loss deductible only to the
extent of gain or winnings
(b) Losses on Wash Sales of Stocks not
deductible because these are considered as
artificial loss
(c) Abandonment Losses in Petroleum
operation and producing well
(d) Losses due to voluntary removal building
incident to renewal or replacements -
deductible
aaa. Exception: when the building was
never intended to be used when the asset
was acquired.
(e) Loss of useful value of capital asset due to
changes in business conditions
(f) Losses from sales or exchange or property
between related taxpayers.
aaa. Related Taxpayers
1. Between members of a family (which
shall include only his brothers and sisters,
spouse, ancestors and lineal descendants)
2. Between an individual and a corporation
more than 50% in value of the outstanding
stock of which is owned, directly or
indirectly, by or for such individual except
in the case of distributions in liquidation
3. Between 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
4. Between the grantor and the fiduciary of
a 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 the fiduciary of a trust and a
beneficiary of such trust [Section 36(B),
NIRC]
(g) Losses of Farmers
f. Losses which are not Deductible
1.) Loss from sale or exchange of property is not
allowed except in case of distribution of liquidating
dividends.
2.) Losses between corporations if more than 50% in
value of the outstanding stock in both is owned,
directly or indirectly, by the same individual and
only if either one of the corporation were a
personal holding company for the taxable year
preceding the date of the sale.
3.) Also deductible:
Decline in market value of securities
Capital losses to the extent not covered by capital
gains
Loss on exchange property where the property
received is not essentially different from the
property disposed of
Loss on wash sale of stock or securities
Loss due to shrinkage in value of stocks, loss
allowed only when actualized.
Loss in pursuance of a merger or consolidation
Loss in pursuance of a transfer to a controlled
corporation
Loss upon demolition of building acquired with
land, when the building was never intended to be
used in business
Loss from illegal transaction
g. Net Operating Loss Carry-Over (NOLCO) excess of
allowable deduction over gross income. It can be
carried over as a deduction from gross income for the
next 3 consecutive years immediately following the
year of such loss.
(1) Requisites for Deductibility:
1.1) The net loss had not been previously offset
as deduction from gross income
1.2) The taxpayer was not exempt from income
tax in the year of such net operating loss
(Marcelo Doctrine)
1.3) No substantial change in the ownership of
the business enterprise
(2) Substantial change in the ownership of the
Business or Enterprise this refers to the
change in the ownership of the business or
enterprise as a result of or arising from its
merger or consolidation or combination with
another person in a manner provided by law.
(3) Who may avail of NOLCO?
Individual taxpayer (including estate and
trust) engaged in business or trade
Individual taxpayers engaged in the
exercise of profession
Domestic corporation
Resident corporation
NOTE: An individual who opted to
claim OSD of 40% shall not
simultaneously claim deduction of the
NOLCO.
(4) Who may not claim NOLCO?
Offshore Banking Unit (OBU) of a foreign
banking institution/corporation
Foreign currency deposit unit (FCDU) of a
domestic or foreign banking corporation,
duly authorized by the BSP
Enterprises registered with the BOI
enjoying tax holiday
Enterprises registered with PEZA enjoying
tax holiday
Enterprises registered with SBMA enjoying
tax holiday
Foreign corporations engaged in
international shipping or air carriage
business in the Philippines
Any person, entity enjoying tax exemption
from income tax pursuant to the Tax Code
and other Special Law.
(5) Relationship of NOLCO to MCIT
Corporations covered by an MCIT cannot
enjoy the benefit of NOLCO for as long as it
is subject to MCIT in any taxable year. The
running of the three-year period for the
expiry of the NOLCO is not interrupted by
the fact that such corporation is subject to
MCIT in any taxable year during
reglamentary period of 3 years.
(6) Net Operating Loss for Miners Other than Oil
and Gas Wells
Those entities not covered by EO 226
losses incurred in the first 10-year
operation maybe carried over as a
deduction for the next 5 years immediately
following the year of loss.
The entire amount of loss shall be carried
over to the first of the 5 taxable years
following the loss.
Any excess portion of loss in the first year
can be deducted in like manner from the
income of the next remaining 4 years.

On Bad Debts
a. Bad debts debts due to the taxpayer actually
ascertained to be worthless and charged off
within the taxable year.
b. Requisites for Deductibility:
1.) Debts due to the taxpayer was actually
ascertained to be worthless
2.) Debts must be charged off within the
taxable year
3.) It must be connected with profession,
trade or business
4.) The debt must be valid, legally demandable
and subsisting
5.) Debt must not be sustained in a transaction
entered into between related parties

c. Who can avail of bad debts deduction?
Resident citizens and domestic
corporations in connection with
business connected within or without
the Philippines.
RC, NRC, RA and NRAETB those
arising in the course of trade or
business conducted in the Philippines.
d. How much is deductible? The entire amount
of the bad debt.
Exceptions:
1.) Where corporate taxpayer computes
income on the basis of valuing notes or
accounts receivable on their FMV when
received, which may be less than their face
value, the amount deductible is limited to
such original valuation.
2.) Only the difference between the amount
received by a creditor of a decedent in the
distribution of assets of the decedents
estate and the amount of the claim is
deductible.
3.) Only difference between the amount
received in distribution of the assets of a
bankrupt and the amount of the claim is
deductible.
4.) A debt partially secured by a mortgage is
deductible to the extent not covered by the
mortgage.
5.) Where compromise agreement was arrived
at between debtor and creditor the
amount deductible is the amount absolved
if the debtor is insolvent. (Ex. A debt of
P150K was compromised for P100K, the
P50K is deductible as bad debt)
6.) A purchaser of accounts receivable which
cannot be collected and are consequently
charged off in the books as bad debts is
entitled to deduct them, the amount of
deduction to be based on the purchase
price and not on their face value.
7.) No amount of bad debt is allowed if
mortgage is foreclosed and creditor buys
the mortgaged property and credits the
debt with the purchase price even if such
price is less than the indebtedness, the
security taking the place of the debt.
Voluntary cancellation or forgiveness
of a debt does not give rise to a
deductible loss.
Where mortgagee forecloses the
mortgaged property because the
mortgagor could not pay, and the
purchase price is different from the
indebtedness of the mortgagor, the
difference if less is not a deductible
bad debt.
No partial write-off of bad debts if
such debtor is still in business or in
operation.
Bad debts written off but subsequently
paid are subject to income tax
(Equitable Tax Benefit Rule also known
as Recapture Rule).
NRFC are not allowed to deduct debts-
they are taxed on gross.
e. The Tax Benefit Rule - This doctrine holds that
a recovery of bad debt previously deducted
from gross income constitutes taxable income if
in the year that account was written off, the
deduction resulted in a tax benefit, that is, in
the reduction of taxable income of the taxpayer.

On Depreciation Expense :
Depreciation - This refers to the gradual diminution
or deterioration in the economic potential of property used
in trade or business including the useful value of tangible
property resulting from wear and tear, exhaustion and
normal obsolescence. Likewise the terms applies to the
omortization of the value of intangible assets, the use of
which in trade or business is definitely limited in duration.
Capital expenditures are subject to depreciation allowance :
These are :
a) Amounts paid out for new buildings, or
b) For permanent improvements, or
c) Betterments made to increase the value of the
taxpayers property, or
d) For any amount expended in restoring property or
e) In making good the exhaustion thereof
Requisites :
a) The allowance of depreciation must be reasonable
( determined by the taxpayer)
b) It must be for property use or employment in trade
or business or out of its not being used temporarily
during the year;
c) The allowance must be charged off within the
taxable year;
d) Schedule on the allowance must be attached to
the return

Person entitled to claim : Person who owns the
property and has a capital investment in the
property, such as :
a) Resident citizens
b) Resident aliens
c) Non-resident aliens engaged in trade or
business
d) Domestic corporations
e) Resident foreign corporations

Kinds of properties subject to depreciation allowance :
1. Tangible property susceptible to wear and tear, to
decay or decline from natural causes, to exhaustion
and to obsolescence due to the normal process of the
art or due to inadequacy of the property to meet
growing needs of the business. Example machines
and equipment that must be replaced by a new
invention.
2. Intangible property, the use of which in trade or
business is of limited duration like patents,
copyrights, royalties and franchises.
Estimated life:
Patents - 17 years ( RA 165 )
Copyrights - lifetime of creator + 50 years
without renewal ( PD 49 )
Process - 25 years
Franchises - as provided in the grant
This allowance applies to amortization of intangible
assets, the use of which in trade or business is of limited
duration.

3. Amounts paid for an agreement not to compete in
a trade or businesses, where the taxpayer can
prove the existence of such an agreement, are
capital expenditures subject to depreciation
allowance ratably spread over the period agreed
upon.
4. Properties kept in repair
5. Properties and customes used exclusively in
business in theatrical, stage circuses and the like.
6. Window display or dressing, drawing patterns,
models or work of an experimental nature, with
limited period of usefulness determinable from
experience can be subject to depreciation.

Properties NOT subject depreciation :
1. Inventories in stock
2. Land, apart from the improvements or physical
development added to it;
3. Bodies of minerals which through the process of
removal suffer depletion they are subject to
depletion allowance;
4. Motor vehicle and and other transportation
equipment used solely by taxpayer for his own
pleasure
5. Building used solely for residential purposes by
taxpayer
6. Furniture for furnishing used in taxpayers
residence
7. Personal effects or clothing except properties or
costumes used exclusively in business such as
theatrical, circus and the like
8. Intangibles, the use of which in business or trade is
not of limited duration such as goodwill,
trademarks , trade names and trade brands
because they are not subject to exhaustion.
9. Formulas but if after acquisition, it is found to be
worthless, its cost may be deducted in full as a loss
for the year in which the formula is abandoned as
being worthless.
10. Incidental repairs that neither materially add to
the value of the property nor appreciably prolong
its life, but keep it in an ordinary efficient
operating condition.

Basis of sum recoverable by depreciation :

The sum to be replaced by depreciation
allowance is the cost, or other basis of the
property with respect to which the allowance is
made. The amount of any defimite loss or
damaged sustained by the property through
casualty, as differentiated from the gradual
exhaustion of its utility which is the basis of
depreciation allowance may be added to the
depreciation allowance.
No depreciation deduction will be allowed in
the case of property that has been amortized to its
scrap value and is no longer in use in trade or
business.

When to deduct depreciation allowance?

Depreciation begins with the acquisition of
the property. The period of depreciation starts
when the asset is placed in service . (a) New
building = upon completion and capable to being
used, (b) if the property was initially acquired for
personal use and subsequently converted into
business or investment use = upon conversion.

Depreciation cannot go beyond acquisition
cost of the property and cannot be based on
appraisal value. ( Basilan Estates vs. Collector,
21 SCRA 17 )
It is allowed on properties that are not being
used temporarily during the year(Connell Bros.
Co. vs. Collector, CTA Case)
It applies also to copyright and other
intellectual properties.

If the taxpayer decides to deduct interest
payments against its income, he cannot at the
same time capitalize such interest and claim
depreciation on the undepreciated cost which
incudes the interest. (PICOP vs. CIR, December
1, 1995)

The capital sum to be replaced by depreciaton
allowances is the cost or other basis of the
property in respect of which the allowance is
made. To this amount is added the cost of
improvement.

No depreciation deduction is allowed in the
case of properties which has been amortized to
its scrap value and is no longer use.

In case the lease is terminated prior to the
expiration of the lease contract or before the
improvements have been fully depreciated, the
unclaimed balance and of the cost of the
improvements may be deducted in the year of
termination of the lease. ( De Vera vs. Collector,
CTA Case No. 167 March 23, 1959)

Depreciation allowance of NRA or RC : This
allowance is allowed only on properties located
in the Philippines and arising out
of its use or employment or non-use in business,
trade or profession.
Property held by one person for life with the
remainder to another person The allowance
should be computed as if the life tenant was
the absolute owner of the said property and as
such the expense shall accrue to him.
Property held in trust - The allowance shall be
apportioned between the income of
beneficiaries and the trustees in accordance
with the pertinent provisions of the instrument
creating the trust, or in the absence of such
provisions, on the basis of the trust income
allowable to each.

Different kinds or methods of computing the depreciation
allowance :
a) Straight line method This method spreads the
total depreciation over the useful life of the assets.
b) Declining balanced method This method uses a
rate ( usually 1.5 or 2 times the straight line rate )
to the declining book value of the assets.
c) Working hours method The total working and
hours of the machine until its retirement is
estimated and a charge per hour is determined.
d) Unit of production method The estimated service
life is stated in units of products instead of working
hours.
e) Sum-of-the-years-digit method This is a method of
depreciation where bigger depreciation expenses are
provided during the early years of the fixed assets which
gradually diminish until the total depreciation is equal
the cost of the assets. ( This is synonymous to the
declining method of of depreciation ).
f) Any other method which may be prescribed by the
Department of Finance upon recommended of the CIR :

Adjustment of allowance In case the useful life of the
property turns out to be longer or shorter than that
originally estimated an adjustment should be made
accordingly.
Depreciation of allowance of farmers Farm buildings
(except dwelling used by farmers ) farm machinery and
other physical properties, livestock acquired for work or
for breeding or dairy purposes, unless included in an
inventory to determine profits are deductible.

On Depletion Expense :

Deduction arising from the exhaustion of natural
resources as in mines, oil and gas wells. The
amortization is computed in accordance with the cost-
depletion method under the prescribed rules and
regulations. When the allowance for depletion shall
equal the capital invested, no further allowance shall be
granted.

Who may claim? Only mining entities owning economic
interest in mineral deposits.
Economic interest - The interests in minerals in place
acquired by investment therein or secured by operating
or contract agreement for which income is derived, and
return of capital expected, from the extraction of mineral.
More economic or pecuniary advantage to be derived by
production by one who has no capital investment in the
mineral deposit does not amount to economic interest.

How applied?
Intangible exploration and development drilling cost in
petroleum shall be treated either as revenue expenditure or
capital expenditures at the option of the taxpayer.
The total amount deductible for exploration and
development expenditures shall not exceed 25% of net
income from mining operation. The excess shall be carried
forward to the succeeding year until fully deducted.

Exploration expenditures - The amount paid or incurred for
the purpose of ascertaining the existence, location, extent,
or quality of any deposit of ore or other mineral before the
beginning of the development stage of the mine or other
natural deposit.

Development expenditures - The amount paid or incurred
during the development stage of the mine or other natural
deposit.

Development stage - As used in mining industry begins at
the time when deposits of ore or other minerals are
shown to exist in sufficient commercial quantity and quality
and ends upon the commencement of actual commercial
extraction.
Amount recoverable Adjusted cost of the
property being mined plus allowable capital additions.

13.SEC 34
(H) Charitable and Other Contributions. -
(1) In General. - Contributions or gifts actually
paid or made within the taxable year to, or for
the use of the Government of the Philippines or
any of its agencies or any political subdivision
thereof exclusively for public purposes, or to
accredited domestic corporation or associations
organized and operated exclusively for religious,
charitable, scientific, youth and sports
development, cultural or educational purposes or
for the rehabilitation of veterans, or to social
welfare institutions, or to non-government
organizations, in accordance with rules and
regulations promulgated by the Secretary of
finance, upon recommendation of the
Commissioner, no part of the net income of
which inures to the benefit of any private
stockholder or individual in an amount not in
excess of ten percent (10%) in the case of an
individual, and five percent (5%) in the case of a
corporation, of the taxpayer's taxable income
derived from trade, business or profession as
computed without the benefit of this and the
following subparagraphs.
> Charitable and other contributions are
deductible whether business related or not.
A. REQUSITES:
a.) The contribution or gift must be actually
paid
b.) It must be given to the organization
specified in the Tax Code (National
Government, its political subdivisions,
accredited civic organizations among
others) Valuation- acquisition cost of
property contributed.
c.) It must not exceed 10% of the
individuals taxable income and 5% of the
corporations taxable income before
deducting the contribution,
d.) It must be evidenced by adequate records
or receipts and
e.) The net income of the done/recipient
institution must not inure to the benefit of
any private stockholder or individual.
B. Non-Stock Non-Profit (NS-NP)
corporations or organization- refers to an
entity created or organized under the Philippine
laws exclusively for one or more of the following
purposes:
a.) religious b.) charitable c.) scientific d.)
athletic e.) cultural f.) rehabilitation veterans and
g.) social welfare, no part of the net income or
asset of which shall belong to or inure to the
benefit of any member, organizer, officer or any
specific person.
C. Non-Government Organization (NGO)-
refers to a NS-NP domestic corporation or
organization formed and operated exclusively for
scientific, research, educational, character-
building and youth and sports development,
health, social, welfare, cultural or charitable
purposes or a combination thereof, no part of the
net income of which inures to the benefit of any
private individual.
D. 2 KINDS OF CHARITABLE
CONTRIBUTIONS:
1. Ordinary- those that are subject to
limitations (10% or 5%) as to the amount
deductible from gross income;
2. Special- those which are deductible in full
from gross income.
E. LIMITATIONS IN AMOUNT
Individual- 10% of the taxable income from
trade or profession before contribution
Corporation- 5% of the taxable income from
trade or business before contribution
Contribution of property shall be based in
acquisition cost of said property donated.
Donations in favor of accredited NS-NP
corporations or NGO shall be exempt from
donors tax provided not more than 30%
of the said donation is used for
administration purposes.
Donations made to a chapel owned by a
private university that distributes
dividends to its stockholders are not
deductible.
F. CONTRIBUTIONS DEDUCTIBLE IN
FULL (not subject to the limitation)
1. Donations to the government or political
subdivisions including fully owned GOCC to
be used exclusively in undertaking priority
activities in
Education, health, youth and sports
development, human settlement, science
culture and economic development. Provided
however, that any donation to the
government NOT in accordance with the
priority plan shall be subject to the
limitations of 5% or 10%.
2. Donations of foreign institutions or
international organizations in compliance with
agreements, treaties or commitments.
3. Donations to accredited NGOs (non-profit
Domestic Corporation) that are organized
exclusively for
a. Educational, health, youth and sports
development, scientific, research, character
building, social welfare, cultural, charitable
and combination thereof.
b. the donation must be utilized not later
than the 15
th
day of the 3
rd
month following
the close of its taxable year
c. the administrative expense must not
exceed 30% of total expenses
d. upon dissolution, assets must be
distributed to another non-profit domestic
corporation or to the state.
NOTE: If the above 4 conditions are not met,
the contribution shall be deducted subject to
limitations.
G. CONTRIBUTIONS SUBJECT TO
LIMITATIONS: (5% OR 10%)
Donations that are traditional exemptees,
to accredited domestic corporations or
associations organized and operated exclusively
for the following purposes
Religious, charitable, scientific, youth and
sports development, cultural, educational,
rehabilitation of veterans, social welfare
institution and other non-government
organization.
H. VALUATION- The amount of any charitable
contribution of property other than money shall
be based on the acquisition cost of said property.
I. PROOF OF DEDUCTION- Contributions or
gifts shall be allowable as deductions only if
verified under the rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
14. ON RESEARCH AND DEVELOPMENT
EXPENSES
SEC.34 (I) Research and Development.-
In General. - a taxpayer may treat research or
development expenditures which are paid or
incurred by him during the taxable year in
connection with his trade, business or profession
as ordinary and necessary expenses which are
not chargeable to capital account. The
expenditures so treated shall be allowed as
deduction during the taxable year when paid or
incurred.
A.AMOUNT DEDUCTIBLE- Amount ratably
distributed over a period of 60 months beginning
the month, taxpayer realized benefits from such
expenditures.
B. KINDS OF TAX EXPENDITURES
1.revenue expenditures
REQUISITES:
1. Paid or incurred during the taxable year
2. Ordinary and necessary expenses in
connection with trade, business or
profession;
3. Not chargeable to capital account
2. at the option of the businessman
research and development expense may be
treated as deferred expense (pre-operating
expense)
REQUISITES:
1. Paid or incurred in connection with trade,
business or profession
2. Not treated as expense
3. Chargeable to capital account but not
chargeable to property subject to
depreciation or depletion.
NON-DEDUCTIBLE EXPENSES UNDER THIS
CATEGORY:
a) Any expenditure for acquisition or
improvement of land or for the
improvement of property to be used in
connection with research and
development subject to depreciation and
deception allowances;
b) Any expenditure paid or incurred for the
purpose of ascertaining the existence,
location, extent or quality of any deposit
of ore or other minerals including oil or
gas.
C. LIMITATIONS ON DEDUCTION WITH
RESPECT TO RESEARCH AND DEVELOPMENT
EXPENSE
Sec34 (3) Limitations on deduction. - This
Subsection shall not apply to:

(a) 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
(b) Any expenditure paid or incurred for the
purpose of ascertaining the existence, location,
extent, or quality of any deposit of ore or other
mineral, including oil or gas.
15. PENSION TRUST
SEC 34 (J) Pension Trusts. - An employer
establishing or maintaining a pension trust to
provide for the payment of reasonable pensions
to his employees shall be allowed as a deduction
(in addition to the contributions to such trust
during the taxable year to cover the pension
liability accruing during the year, allowed as a
deduction under Subsection (A) (1) of this
Section ) a reasonable amount transferred or
paid into such trust during the taxable year in
excess of such contributions, but only if such
amount (1)has not theretofore been allowed as a
deduction, and (2) is apportioned in equal parts
over a period of ten (10) consecutive years
beginning with the year in which the transfer or
payment is made.
A.CONTIBUTIONS TO PENSION TRUST- An
employer who adopts or has adopted a
reasonable pension plan, actually sound and who
establishes and maintains a pension trust for the
payment of reasonable pensions to his
employees shall be allowed to deduct from his/its
gross income reasonable amounts paid to such
trust.
DEDUCTIBLE PAYMENTS- payments to
employees pension trust which are deductible
are:
1.amounts contributed by the employer during
the taxable year to cover the pension liability
accruing during the year; and
2.1/10 of the reasonable amount paid by the
employer to cover pension liability applicable to
the year prior to the taxable year, or so paid to
place the trust in a sound financial basis (sec118
regs no,2) Payments under No. (1) are
considered as ordinary and necessary business
expenses deductible as such.
B.REQUISITES:
a. employer must have established a pension or
retirement plan for the benefit of his/its
employees
b. the pension plan is reasonable and actually
sound
c. it must be funded by the employer
d. the employer has no control over the amount
contributed
e. the payment has not yet been allowed as a
deduction for income tax purposes, and
f. the deduction is apportioned in equal parts
over a period of 10 consecutive years beginning
the year the payment was made by the
employer.
16. PREMIUM PAYMENTS ON HEALTH
AND/OR HOSPIYALIZATION INSURANCE OF
AN INDIVIDUAL TAXPAYER
(M) Premium Payments on Health and/or
Hospitalization Insurance of an Individual
Taxpayer. - the amount of premiums not to
exceed Two thousand four hundred pesos
(P2,400) per family or Two hundred pesos
(P200) a month paid during the taxable year for
health and/or hospitalization insurance taken by
the taxpayer for himself, including his family,
shall be allowed as a deduction from his gross
income: Provided, That said family has a gross
income of not more than Two hundred fifty
thousand pesos (P250,000) for the taxable year:
Provided, finally, That in the case of married
taxpayers, only the spouse claiming the
additional exemption for dependents shall be
entitled to this deduction.
Notwithstanding the provision of the preceding
Subsections, The Secretary of Finance, upon
recommendation of the Commissioner, after a
public hearing shall have been held for this
purpose, may prescribe by rules and regulations,
limitations or ceilings for any of the itemized
deductions under Subsections (A) to (J) of this
Section: Provided, That for purposes of
determining such ceilings or limitations, the
Secretary of Finance shall consider the following
factors: (1) adequacy of the prescribed limits on
the actual expenditure requirements of each
particular industry; and (2)effects of inflation on
expenditure levels: Provided, further, That no
ceilings shall further be imposed on items of
expense already subject to ceilings under
present law.
PREMIUM PAYMENTS- The limitations are as
follows:
1) the payment are for health and/or
hospitalization insurance;
2) the amount of premium does not exceed
of P2,400 per family or P200 a month
during the taxable year;
3) the insurance is taken by the taxpayer for
himself including his family; and
4) the family has a gross income of not more
than P250,000
*if all the requisites are present, only the spouse
claiming the additional exemption for dependents
is entitled to this deduction.
17. OPTIONAL STANDARD DEDUCTION
L) Optional Standard Deduction. - In lieu of
the deductions allowed under the preceding
Subsections, an individual subject to tax under
Section 24, other than a nonresident alien, may
elect a standard deduction in an amount not
exceeding ten percent (10%) of his gross
income. Unless the taxpayer signifies in his
return his intention to elect the optional standard
deduction, he shall be considered as having
availed himself of the deductions allowed in the
preceding Subsections. Such election when made
in the return shall be irrevocable for the taxable
year for which the return is made: Provided,
That an individual who is entitled to and claimed
for the optional standard deduction shall not be
required to submit with his tax return such
financial statements otherwise required under
this Code: Provided, further, That except when
the Commissioner otherwise permits, the said
individual shall keep such records pertaining to
his gross income during the taxable year, as may
be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
TAXPAYERS ENTITLED TO CLAIM OPTIONAL
STANDARD DEDUCTION
PERSONS COVERED- The following may be
allowed to claim optional standard deduction
(OSD) in lieu of the itemized deductions
(ie.,items of ordinary and necessary expenses
allowed under Sec34 A-J and M, Sec37 and other
special laws, if applicable):
1. INDIVIDUALS
A. Resident citizen
B. Non-resident citizen
C. Resident alien; and
D. Taxable estate and trust

2.
2. CORPPORATIONS
A. Domestic corp
B. Resident foreign corporation
460-468deleon

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