March 2018

Includes NIRC and TRAIN Law

Items or amounts which the law allows to be
deducted from gross income in order to
arrive at the taxable income.
a. The taxpayer seeking a deduction must
point to some specific provisions of the
statute authorizing the deduction; and
b. He must be able to prove that he is entitled
to the deduction authorized or allowed.
(Atlas Consolidated Mining & Dev. Corp. vs.
Commissioner, GR No. L-26911, January 21,
1981)
c. Any amount paid or payable which is
otherwise deductible from, or taken into
account in computing gross income or for
which depreciation or amortization may be
allowed, shall be allowed as deduction only if it
is shown that the tax required to be deducted
and withheld therefrom has been paid to the
BIR. [Sec. 34(K), NIRC]
 CANNOT
1. Citizens and resident aliens whose income is purely
compensation income (except for premium payments on
health and/or hospitalization insurance NIRC);
2. Non-resident aliens not engaged in trade or business in
the Philippines (NRANETB); and
3. Non-resident foreign corporation (NFRC)
1. Individuals
a. With gross compensation income from
employer-employee relationship only
(1)premium payments on health and/or
hospitalization insurance (NIRC)
(2) personal and additional personal
exemptions (NIRC)
 b. Gross income from business or practice of profession
 Optional Standard Deduction (OSD)
 Itemized deductions (BITE DeDe Loss CPR)
 premium payments on health and/or hospitalization insurance (NIRC not in TRAIN
LAW)
 Personal and additional personal exemptions (NIRC not in TRAIN LAW)
2. CORPORATIONS
• Itemized Deductions or OSD
1. Optional standard deduction (OSD) [As
amended by R.A. 9504 which took effect
July 6, 2008]
(a) An individual, other than a nonresident
alien, may elect a standard deduction of 40%
of his gross sales or gross receipts. (prior to RA
9504, rate is 10% of gross income)
b. In the case of a corporation, it may elect s
standard deduction of 40% of its gross income
as defined in Section 32 of the Tax Code. (prior
to RA 9504, no OSD benefit for corporation)
( Gross income = Gross sales – COGS)
2. Personal and Additional Exemption
(a) Basic Personal Exemption (NIRC)
Pursuant to amendments under RA No. 9504,
there shall be allowed personal exemptions
amounting to P50,000 for each individual
taxpayer regardless of whether he is single,
head of the family or married.
(b) Additional Exemptions for Taxpayers with
Dependents
There shall also be allowed an additional
exemption of P25,000 for each “dependent”
not exceeding four.
A “dependent” means:
 A legitimate, illegitimate or legally adopted child
 Chiefly dependent upon and living with the
taxpayer
 Not married, not gainfully employed, not more
than 21 years of age
Except: If such dependent, regardless of age, is
incapable of self-support because of mental or
physical defect.
1. In case of married individuals, the additional
exemption shall be claimed by only one of the
spouses.
2. The proper claimant of the exemption would be
generally be the husband, EXCEPT if the husband
is (1) unemployed (2) working abroad like an
OFW or seaman (3) husband waived his right to
the exemption
3. For legally separated spouses, the additional
exemption may be claimed only by the spouse who
has custody of the child

 However, the total amount of additional exemption

that may be claimed by both shall not exceed 4.
 Non-resident aliens engaged in trade or business
(NRAETB) may be entitled to personal exemptions
(but not additional exemption) subject to
reciprocity such that :
i. The country from which he is a citizen has an
income tax law;
ii. The income tax law of his country allows personal
exemption to citizens of the Philippines not
residing therein but deriving income therefrom
and not to exceed the amount allowed in NIRC.
The personal exemption shall be equal to that
allowed by the income tax law of the country to a
citizen of the Philippines not residing therein, or the
amount provided in the NIRC, whichever is LOWER.
eg.
Allowed personal exemption in Canada: P 60, 000
Allowed by NIRC: P 50, 000 per dependent
Deductible personal exemption is P 50, 000 (lower)
 Non-resident aliens not engaged in trade or
business (NRANETB) cannot claim any personal or
additional exemption.
(c) Individuals NOT entitled to personal and
additional exemptions:
i. Non-resident alien NOT engaged in trade or
business
ii. Alien individual employed by Regional or Area
Headquarters of Multinational Companies
iii. Alien Individual employed by Offshore Banking
Units
iv. Alien Individual employed by Petroleum Service
Contractor and Subcontractor
(d) Status-at-the-end-of-the-year-rule
i. If the taxpayer marries or should have additional
dependent(s) as defined above during the
taxable year, the taxpayer may claim the
corresponding personal or additional exemption,
as the case may be, in full for such year.
ii. If the taxpayer dies during the taxable year, his
estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if
he died at the close of such year.
iii. If the spouse or any of the dependents dies or if
any of such dependents marries, becomes twenty-
one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim
the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married,
became twenty-one (21) years old or became
employed at the close of such year.
(1) Inclusions
a) Monetary benefits
 i. Salaries, wages, emoluments and honoraria,
allowances, commissions (e.g. transportation,
representation, entertainment and the like);
 ii. Fees including director's fees, if the director is, at
the same time, an employee of the
employer/corporation;
 iii. Taxable pensions and retirement pay;
 iv. Other income of a similar nature
(b) Non-monetary

i. Taxable bonuses and fringe benefits except those which

are subject to the fringe benefits tax under Sec. 33 of the
Code;
(a) Fringe Benefit Subject to FBT
 Any good, service, or other benefit furnished or granted by
an employer in cash or in kind, in addition to basic salaries,
to a managerial or a supervisory employee
 Subject to a final tax of 32% based on the grossed-up
monetary value of the benefit given withheld by the
employer
(b) De minimis benefits
1. Monetized and Unused vacation leave of Private employees NOT
EXCEEDING 10 days
2. Monetized value of Vacation AND SICK leave credits paid to
GOVERNMENT OFFICIALS and EMPLOYEES
3. Medical Cash allowance to dependents of employees nor
exceeding P 750 per employee per semester of P 125 per month
4. Rice subsidy of P 1500 or One sack of 50-kg sack per month
amounting to P 1500
5. Actual medical assistance, e.g medical allowance to cover medical
and healthcare needs, annual medical/executive checkup, maternity
assistance, and routine consultations, NOT EXCEEDING P 10, 000.
6. Laundry allowance NOT EXCEEDING P 300 per month
7. Employees achievement awards, which must be in the form of a
tangible personal property other than cash or gift certificate, with an
annual Monetary value of NOT EXCEEDING P 10,000
8. Gifts given during CHRISTMAS and major anniversary celebrations
NOT exceeding P 5000 per employee per annum
9. Daily meal allowance for overtime work and night/graveyard shift
not exceeding 25 % the basic minimum wage.
10. Uniforms and Clothing allowance NOT EXCEEDING P 5000 per
annum
11. Productivity incentive schemes arising from collective bargaining
agreement NOT EXCEEDING P 10, 000 per year.

c) 13th month pay and other benefits

Max of P 82, 000
BITE DeDe Loss CPR
B- Bad Debts Loss
I- Interest C- Charitable
T- Taxes and other
E- Expenses contribution
De- Depreciation P- Pension Trust
De- Depletion R- Research and
Development
 Debts due to the taxpayer actually ascertained to be
worthless and charged off during the year may be claimed
as deduction.
 “Actually ascertained to be worthless”
Worthlessness is not determined by an inflexible formula or
slide rule calculation but upon the exercise of sound
business judgment.
 The determination of worthlessness must depend upon the
particular facts and circumstances of the case. It must be
uncollectible even in the future.
 [1] Existing indebtedness due to the taxpayer which must
be valid and legally demandable,
 [2] Connected with the taxpayer’s trade, business or
practice of profession,
 [3] Must not be sustained in a transaction entered into
between related parties,
 [4] Actually ascertained to be worthless and uncollectible
as of the end of the taxable year, and
 [5] Actually charged off in the books of accounts of the
taxpayer as of the end of the taxable year.
 NOTE: Tax Benefit Rule - Recovery of bad debts
previously allowed as deduction in the preceding yrs. shall
be included as part of gross income in the yr. of recovery to
the extent of the income tax benefit of such deduction
The cost of money incurred within a taxable year on
indebtedness in connection with the taxpayer’s
profession, trade or business.
1. There must be an indebtedness stipulated in
writing
2. The indebtedness must be that of the taxpayer in
connection with the trade, business or profession
3. The interest must have been paid and accrued
during the taxable year
4. The interest payment must not be in favor of a
relative
= if the taxpayer has interest income SUBJECT TO 20
% final tax, and the same time incurred an interest
expense during the taxable year, the interest
expense shall be reduced BY 33%
Eg:
Interest expense 100, 000 : Interest income 30, 000
Interest Expense 100,000
Less: Tax differential (30, 000 * .33) 10, 000
Deductible Interest Expense 90, 000
Interest expense is deductible in full when :
1. The business has no interest income subject to 20% FTx
2. The interest expense is paid in favor of the government.
NB: Interest on delinquent taxes is deductible because
taxes are considered legal debt when due (Fines and
penalties are NOT deductible)
The following income are NOT allowed as deduction from
business/professional income:
1. Interest payment on indebtedness NOT business related
2. Interest payment in favor of a RELATIVE (related debtor and
creditor)
3. Interest payment in advance
4. Interest to purchase or carry tax-exempt transactions
5. Interest paid on indebtedness to finance petroleum explorations;
and
6. Interest on unclaimed salary is not deductible from gross income
1. Interest on loan between members of the family, which
includes WIFE, BROTHERS, SISTERS, ANCESTORS, and
other lineal descendants/ascendants
2. Interest on loan between individual and corporation of
which such individual owned more than 50 %
3. Interest on loan between two corporations where the
same individual owns more than 50 % (the two
corporations are affiliates)
4. Interest on loan between fiduciaries of two trust which are
both owned by the same grantor
1. Interest payment by a cash individual taxpayer shall be
deductible in the year that the principal is fully paid.
- Eg. On December 31, 2015, Mr. A acquired a loan of P 100,
000 for business purposes. He received P 90, 000 as
proceed of loan, net of interest. The principal is to be paid
in 2016.
- The interest expense is deductible in 2016, upon the full
payment of the principal.
2. Proportionate to principal amortization
If indebtedness is payable in PERIODIC amortization,
the amount of the interest which corresponds to the amount
of the principal amortized or paid during the year
At the option of the taxpayer, interest incurred to
acquire property used in trade or business may be
allowed as a deduction(outright deduction) or
treated as capital expenditure( capitalized as part of
the cost of equipment).
GR: taxes are allowed as deduction when paid or
incurred within the taxable year in connection with
the taxpayer’s profession, trade or business.
 must be in connection with taxpayer’s business;
 tax must be imposed by law on, and payable by
taxpayer (direct tax); and
 paid or incurred during the taxable year.
1. Philippine Income tax
2. Estate tax and donor’s taxes
3. Foreign income tax, if claimed as a tax credit
4. Percentage tax on stock transaction
5. Value added tax
6. Taxes not related to business, trade, or profession
7. Other items related to tax such as surcharges,
Special assessment, and compromise
GENERAL BUSINESS E
These expenses are direcly attributable to the
development, management, operation and or
conduct of the trade, business or exercise of
profession.
GENERAL BUSINESS E
a. Salaries, wages, management expenses,
commissions and labor
b. Supplies, repairs and maintenance, and other
incidental expenses
c. Operating expenses of transportation equipment
and used in the trade, profession or business
d. Rental for the use of business property
e. Advertising and other selling expenses
And the like ..
E
a. Ordinary and necessary for the conduct of business
or exercise of profession
b. Substantiated with official receipts or any other
adequate records
c. Reasonable amount
d. Withheld with tax and paid to the BIR, if required such
as salary expense or income payment
e. Not contrary to law, morals, public policy, or public
order
f. Incurred or paid and deducted within the taxable
year
Salary expense are allowed as deductions from
gross business income only if the corresponding
withholding tax has been deducted and remitted to
the BIR.
Compensation for injuries and pensions are
deductible expenses.
Even the amount of the salary of an employee paid
for a limited period of time after his death to his
widow or heirs, in recognition for the services,
rendered may be deducted
AS LONG AS IT IS BUSINESS RELATED, DEDUCTIBLE.
Beginning inventory xx
Add: Net Purchases xx
Total available for use xx
Less: Ending Inventory xx
Deductible Supplies Expense xx
These are expenses incurred within and outside the
country while away from home in the pursuit of
trade, business or profession
Rentals paid for the property used in business,
whether the property is real or personal are
deductible as business expense

**Deductible when incurred (even if not paid) in

relation to trade, business and profession and the
corresponding creditable withholding tax has been
made.
- When a lessee constructed an improvement on the
leased property, the cost of such improvement shall
be depreciated over the life of the improvement, or
the term of the lease contract, whichever is shorter.
- Eg. Lease term 10 years
Life of the LI 15 years
The LI will be depreciated over 10 years (shorter)
- These are Entertainment, Amusement, and Recreation
(EAR) expenses incurred and paid during the taxable year
that are directly connected to the development of,
management and operation of the trade, business or
profession of the taxpayer

SUBJECT TO CEILING
A. ½ % of NET SALES (sales- actual returns) = taxpayer=
sale of goods
B. 1 % of NET RECEIPTS (Gross receipts- returns)= Sale of
services
- If both servicing and trading, then
- Step 1. prorate, i.e. Net sales/ Total revenue and Net
receipts/ Total Revenue
- Step 2. Compare with the Statutory limit ( ½% for Net sales,
1% for Net receipts)
- Step 3. Choose whichever is lower.

- Illustration: page 466 of Valencia’s book

DE
Periodic reduction of the value of tangible permanent assets
due to passage of time, wear and tear and obsolescence.
For intangible assets, such as patents, copyrights, it is called
Amortization
METHODS OF DEPRECIATION
The following are methods of depreciation;
1. Straight-line method
2. Declining method
3. Sum of the years digit
4. Any other methods (DD, 150% Declining)

NOTE: if the problem is silent, use Straight line method

METHODS OF DEPRECIATION
DEPRECIATION AND OTHER RELATED EXPENSES OF
VEHICLES
Only one vehicle for land transport is allowed for the use of
an official or employee (1 car per employee or official), and
the value should not exceed P 2, 400, 000.

Estimated Useful Life= 5 years

METHODS OF DEPRECIATION
Depreciation of Properties used in Petroleum
1. EUL
a. Used DIRECLY in relation to production= 10 years or
shorter as may be permitted by BIR Com
b. NOT used directly in production = 5 years
DEPLETION
Exhaustion of natural resources like mines, oil and gas wells
due to production.
The purpose is to recover the invested capital in the
property
DEPLETION
Cost of property XX
Less: Salvage Value (scrap value) XX
Depletion base XX
Divide by; Estimated tons TO BE extracted XX
Depletion per ton XX
Multiplied by: Number of TON EXTRACTED during the XX
year
Depletion expense during the year XX
LOSSES – refer to such losses which do not come under the
category of bad debts, inventory losses, depreciation, etc.,
and which arise in taxpayer's profession, trade or business.
1. ORDINARY LOSSES
 Incurred in trade or business, or practice of
profession
 Net operating loss carry-over (NOLCO)
Refers to the excess of allowable deductions over gross income
of the business for any taxable year, which had not been
previously offset as deduction from gross income.

Can be carried over as a deduction from gross income for the

next 3 consecutive years immediately following the year of such
loss.
**will be discussed in Chapter 9
2. CAPITAL LOSSES (LOSSES ARE DEDUCTIBLE ONLY TO THE
EXTENT OF CAPITAL GAINS)
3. SPECIAL KINDS OF LOSSES
CHARITABLE AND OTHER CONTRIBUTIONS
- It is non-operating expense, but the law allows some
contribution or gifts within the taxable year as deduction
from gross income
CONTRIBUTIONS DEDUCTIBLE IN FULL
1. Donation to GOVERNMENT OF THE PHILIPPINES, or any
of its instrumentalities, exclusively to finance (HEYSHE)
a. Education
b. Health
c. Youth and sports development
d. Human settlements
e. Science and Culture
f. Economic development
CONTRIBUTIONS DEDUCTIBLE IN FULL
2. Donations to international organizations entered into by
the Philippine government and foreign institutions
3. Donations to Accredited Non-Government Organizations,
provided
a. Not more than 30% of which should be used for
admin purposes
CONTRIBUTIONS SUBJECT TO LIMIT
These contributions are not deductible in full as specified by
the law or such deduction has not met the requisites to be
deducted in full
Limitation:
a. Individuals: 10 % of the taxable income BEFORE actual
contribution, OR actual contribution, whichever is LOWER
b. Corporation: 5% of the taxable income BEFORE actual
contribution, OR actual contribution, whichever is LOWER
PENSION TRUST
PENSION TRUST CONTRIBUTIONS – a deduction applicable
only to the employer on account of its contribution to a
private pension plan for the benefit of its employee. This
deduction is purely business in character.
Defined CONTRIBUTION plan= Ded = amount of contri
Defined BENEFIT plan= either CSC or PSC
Contribution for Current Service Cost= Deductible in Full

Past service cost= amortized over period of 10 years

RESEARCH AND DEVELOPMENT
Taxpayer has the option to consider R & D as:
a. Ordinary expense = deductible from GI in the year the
expense is incurred
b. Deferred expenses subject to amortization over a period
of not less than 60 months beginning the month in which
the taxpayer first realizes benefits from such
expenditures.
PREMIUM PAYMENTS FOR
HEALTH/HOSPITALIZATION INSURANCE (PPHHI)
It is an amount of premium on health and/or hospitalization
paid by an individual taxpayer (head of family or married),
for himself and members of his family during the taxable
year.

(NIRC TRAIN LAW, no more PPHHI)

 Insurance must have actually been taken
 The amount of premium deductible does not exceed P2,400
per family or P200 per month during the taxable ear.
 That said family has a gross income of not more than
P250,000 for the taxable year.
 In case of married individual, only the spouse claiming
additional exemption shall be entitled to this deduction.