DEDUCTIONS

 AMOUNTS ALLOWED TO BE SUBTRACTED FROM

GROSS INCOME TO ARRIVE AT TAXABLE
INCOME IN THE INCOME TAX RETURN.
 TAXPAYER MAY CHOOSE NOT TO AVAIL OF THE
DEDUCTIONS
 IF DEDUCTIONS ARE CLAIMED, THE BURDEN
OF PROVING THE LEGALITY AND
CORRECTNESS OF THE DEDUCTIONS RESTS
UPON THE TAXPAYER. THE TAXPAYER HAS
THE OBLIGATION TO SUBSTANTIATE WITH
RECEIPTS AND OTHER EVIDENCES EVERY ITEM
OF DEDUCTION WHEN REQUIRED.
EXCLUSIONS VERSUS DEDUCTIONS
EXCLUSIONS DEDUCTIONS
REFERS TO FLOW OF WEALTH REFER TO THE AMOUNTS WHICH
WHICH ARE NOT TREATED AS THE LAW ALLOWS TO BE
PART OF GROSS INCOME DUE TO: SUBTRACTED FROM GROSS
(1) EXEMPTED BY INCOME IN ODER TO ARRIVE AT
FUNDANMENTAL LAW; (2) NET INCOME
EXEMPTED BY THE STATUTE; (3)
NOT INCLUDED WITHIN THE
DEFINITION OF INCOME

PERTAIN TO THE COMPUTATION PERTAIN TO THE COMPUTATION

OF GROSS INCOME OF NET INCOME
SOMETHING EARNED OR SOMETHING SPENT OR PAIN IN
RECEIVED BY THE TAXPAYER EARNING OF GROSS INCOME
WHICH DO NOT FORM PART OF
GROSS INCOME
 BASIC PRINCIPLES
GOVERNING DEDUCTIONS
 THE TAXPAYER SEEKING DEDUCTION MUST
POINT TO SOME SPECIFIC PROVISIONS OF THE
STATUTE AUTHORIZING THE DEDUCTION; AND
 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.
KINDS OF DEDUCTIONS
1. PERSONAL AND ADDITIONAL DEDUCTIONS
(FOR INDIVIDUALS, AND ESTATES IN YEAR
OF DECEDENT’S DEATH)
2. INCOME DISTRIBUTED TO HEIRS OR
BENEFICIARIES (FOR ESTATES AND TRUSTS)
3. P20,000 SPECIAL EXEMPTION (FOR ESTATES
AFTER YEAR OF DECEDENT’S DEATH, AND
FOR TRUSTS)
4. HEALTH AND/OR HOSPITALIZATION
INSURANCE PREMIUM (H/H) UNDER SECTION
34(M) OF THE TAX CODE
5. ITEMIZED DEDUCTIONS (ID) OR OPTIONAL
STANDARD DEDUCTION (OSD)
 KINDS OF DEDUCTIONS
(NOTES)
A. INDIVIDUALS ENGAGED IN TRADE OR
BUSINESS, OR PROFESSION CAN SELECT THE
ID OR THE OSD, PLUS THE H/H PREMIUM;
B. INDIVIDUALS EARNING PURELY
COMPENSATION INCOME ARE ALLOWED ONLY
THE H/H PREMIUM BUT ONLY IF THEY COMPLY
WITH THE REQUIREMENTS OF SECTION 34(M)
OF THE TAX CODE;
C. ESTATES AND TRUSTS CAN CLAIM THE ID OR
THE OSD;
D. DOMESTIC CORPORATIONS, RESIDENT
FOREIGN CORPORATIONS, ANMD
PARTNMERSHIPS CAN CLAIM ID OR OSD.
 SUMMARY OF ALLOWABLE
DEDUCTIONS
DEDUCTION INDIVIDUALS ESTATES
EMPLOYED SELF- DECEDENT DIED
EMPLOYED
W/IN TAXABLE AT LEAST 1
YEAR YEAR AGO

ID OR OSD   

H/H  
INCOME  
DISTRIBUTED TO
HEIRS OR
BENEFICIARIES

PERSONAL AND   
ADDITIONAL
EXEMPTIONS
P20,000 SPECIAL 
EXEMPTION
 SUMMARY OF ALLOWABLE
DEDUCTIONS
DEDUCTIONS TRUSTS CORPORATIONS PARTNERSHIPS
ID OR OSD   
H/H
INCOME 
DISTRIBUTED
TO HEIRS OR
BENEFICIARIES
PERSONAL AND
ADDITIONAL
DEDUCTIONS
P20,000 SPECIAL 
EXEMPTION
 OPTIONAL STANDARD
DEDUCTION
OPTIONAL STANDARD DEDUCTION IS THE
DEDUCTION WHICH CAN BE TAKEN IN
LIEU OF IDs (BOTH ORDINARY AND
SPECIAL IDs).
WHO MAY CLAIM THE OSD?
FOR INDIVIDUALS: CITIZENS, RESIDENT
ALIENS, ESTATES AND TRUSTS
FOR CORPORATIONS: ONLY DOMESTIC
AND RESIDENT FOREIGN CORPORATIONS
AMOUNT OF OSD (FOR INDIVIDUALS)

40% OF GROSS SALES, NET OF RETURNS,

ALLOWANCES, AND DISCOUNTS (ACCRUAL
BASIS) + OTHER TAXABLE INCOME FROM
OPERATIONS NOT SUBJECT TO FTs

OR
40% OF GROSS RECEIPTS, NET OF RETURNS,
ALLOWANCES, AND DISCOUNTS (CASH BASIS) +
OTHER TAXABLE INCOME FROM OPERATIONS
NOT SUBJECT TO FTs
NOTE: OSD IS IN LIEU OF COGS (OR COS) +
ITEMIZED DEDUCTIONS
AMOUNT OF OSD (FOR CORPORATIONS)

40% OF GROSS INCOME

GROSS INCOME = (GROSS SALES –
SALES RETURNS – SALES
ALLOWANCES – DISCOUNTS – COGS)
+ OTHER TAXABLE INCOME NOT
SUBJECT TO FTs
NOTE: OSD IS IN LIEU OF ITEMIZED
DEDUCTIONS ONLY
 ELECTION OF OSD
 MADE IN THE 1ST QUARTERLY RETURN.
FAILURE BY TAXPAYER TO INDICATE
OSD ELECTION IN THE 1ST QUARTERLY
RETURN MEANS THAT TAXPAYER IS
CLAIMING IDs.
 WHEN MADE, IT IS IRREVOCABLE FOR
THE ENTIRE YEAR.
 FAILURE TO FILE THE 1ST QUATERLY
RETURN IS EQUIVALENT TO AVAILING
IDs FOR THE YEAR.
 ILLUSTRATION 1
ASSUME THAT A TAXPAYER HAD THE FOLLOWING
DATA:
GROSS INCOME FROM BUSINESS P2,500,000
COST OF GOODS SOLD WITH RECEIPTS 1,000,000
COST OF GOODS SOLD WITHOUT RECEIPTS 700,000
PREPARE AND COMPUTE THE NET TAXABLE INCOME
IF THE TAXPAYER IS:
1. SINGLE
2. DOMESTIC CORPORATION
 ILLUSTRATION 1
INDIVIDUAL DOMESTIC
(SINGLE) CORPORATION
GROSS SALES P2,500,000 P2,500,000
LESS: COST OF SALES 0 1,000,000
GROSS INCOME/SALES P2,500,000 P1,500,000
40% OF OSD 1,000,000 600,000
NET INCOME P1,500,000 P900,000
LESS: PERSONAL EXEMPTION 50,000 0
NET INCOME P1,450,000 P900,000
 PERSONAL EXEMPTIONS
THE THEORETICAL PERSONAL, LIVING, AND
FAMILY EXPENSES OF AN INDIVIDUAL
ALLOWED TO BE DEDUCTED FROM THE
GROSS OR NET INCOME OF AN INDIVIDUAL
TAXPAYER. THESE ARE ARBITRARY
AMOUNTS WHICH HAVE BEEN
CALCULATED BY OUR LAWMAKERS TO BE
ROUGHLY EQUIVALENT TO THE MINIMUM
OF SUBSISTENCE, TAKING INTO
CONSIDERATION THE PERSONAL STATUS
AND QUALIFIED DEPENDENTS OF THE
TAXPAYER. (PANSACOLA V. CIR, G.R.
159991)
 PERSONAL EXEMPTIONS
WHO MAY AVAIL?
RESIDENT CITIZENS; NON-RESIDENT CITIZEN; OVERSEAS
CONTRACT WORKER; RESIDENT ALIENS; AND NON-
RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS,
OR THE EXERCISE OF A PROFESSION IN THE
PHILIPPINES ON THE BASIS OF RECIPROCITY.
NOTE: PERSONAL EXEMPTION GIVEN TO NRA-ETB IS THE
EXEMPTION(S) ALLOWED BY THE FOREIGN COUNTRY
(OF WHICH THE ALIEN IS A CITIZEN) TO NON-
RESIDENT FILIPINOS, OR THE EXEMPTIONS ALLOWED
BY THE PHILIPPINES, WHICHEVER IS LOWER.
PROCESSUAL PRESUMPTION – WHERE THE FOREIGN LAW
IS NOT PROVEN, THE PRESUMPTION IS THAT FOREIGN
LAW IS THE SAME AS THE PHILIPPINE LAW.
 PERSONAL EXEMPTIONS
WHO MAY NOT AVAIL?
NON-RESIDENT ALIEN ENGAGED IN
TRADE OR BUSINESS, OR THE EXERCISE
OF A PROFESSION IN THE PHILIPPINES,
AND THERE IS NO RECIPROCITY; NON-
RESIDENT ALIEN NOT ENGAGED IN
TRADE OR BUSINESS IN THE
PHILIPPINES; AND SPECIAL ALIENS.
 PERSONAL EXEMPTIONS
TWO KINDS OF PERSONAL EXEMPTIONS
BASIC PERSONAL EXEMPTION ADDITIONAL EXEMPTIONS
PHP50,000 PHP25,000
A. FOR SINGLE INDIVIDUAL FOR EACH QUALIFIED DEPENDENT
B. FOR HEAD OF FAMILY CHILD, WHETHER LEGITIMATE OR
C. FOR EACH MARRIED ILLEGITIMATE, INCLUDING A
INDIVIDUAL FOSTER CHILD; A QULAIFIED
D. FOR MARRIED INDIVIDUAL PERSON WITH DISABILITY (PWD);
JUDICIALLY DECREED AS AND A SENIRO CITIZEN
LEGALLY SEPARATED
PERSONAL EXEMPTIONS
RULES ON BASIC PERSONAL
EXEMPTIONS:
IN CASE OF MARRIED INDIVIDUALS
WHERE ONLY ONE OF THE SPOUSE
IS DERIVING GROSS INCOME, ONLY
SUCH SPOUSE SHALL BE ALLOWED
THE PERSONAL EXEMPTION.
 PERSONAL EXEMPTIONS
RULES ON ADDITIONAL EXEMPTIONS:
LIMIT = 4 ADDITIONAL EXEMPTIONS
IN CASES OF LEGAL SEPARATION,
ADDITIONAL EXEMPTIONS MAY BE
CLAIMED BY THE SPOUSE WHO HAS
CUSTODY OF THE CHILD OR CHILDREN.
PROVIDED, THE TOTAL ADDITIONAL
EXEMPTIONS FOR BOTH SPOUSES SHALL
NOT EXCEED FOUR (4).
PERSONAL EXEMPTIONS
IN CASE OF MARRIED INDIVIDUALS,
THE ADDITIONAL EXEMPTION MAY
BE CLAIMED BY ONLY ONE SPOUSE.
GENERAL RULE: HUSBAND SHALL
CLAIM THE ADDITIONAL
EXEMPTION(S).
 PERSONAL EXEMPTIONS
EXCEPTIONS:
• HUSBAND WAIVES HIS RIGHT TO CLAIM
THE ADDITIONAL EXEMPTIONS;
• HUSBAND HAS NO INCOME;
• HUSBAND IS A NON-RESIDENT CITIZEN
DERIVING INCOME FROM ABROAD;
• WIFE WAS AWARDED CUSTODY OF HER
CHILDREN IN A LEGAL SEPARATION CASE;
• HUSBAND EARNS PURELY BUSINESS
INCOME WHILE THE WIFE RECEIVES
PURELY COMPENSATION INCOME.
 PERSONAL EXEMPTIONS
RULES OF CHANGE OF STATUS:
• IF DURING THE TAXABLE YEAR, THE
TAXPAYER SHOULD HAVE ADDITIONAL
DEPENDENTS, THE TAXPAYER MAY CLAIM THE
CORRESPONDING ADDITIONAL EXEMPTIONS
IN FULL FOR SUCH YEAR.
• IF DURING THE TAXABLE YEAR, ANY OF THE
DEPENDENTS DIES, MARRIES, BECOMES 21, OR
GAINFULLY EMPLOYED, THE TAXPAYER MAY
STILL CLAIM THE FULL ADDITIONAL
EXEMPTIONS AS IF THE EVENT OCCURRED AT
THE END OF THE YEAR.
 PERSONAL EXEMPTIONS
RULES OF CHANGE OF STATUS:
 IF DURING THE TAXABLE YEAR, THE
TAXPAYER DIES, HE IS CONSIDERED TO HAVE
DIED AT THE CLOSE OF THE YEAR. HIS ESTATE
MAY CLAIM HIS BASIC AND ADDITIONAL
EXEMPTIONS FOR THE TAXABLE YEAR (YEAR
OF DEATH).
 FOR ANY OTHER EVENT AND FOR WHICH
THERE ARE SPECIFIC RULES APPLICABLE FOR
THE ABOVEMENTIONED, THE STATUS OF THE
TAXPAYER AT THE END OF THE YEAR SHALL
DETERMINE HIS EXEMPTIONS. (STRICTLY
CONSTRUED AGAINST THE TAXPAYER)
 PERSONAL EXEMPTIONS
HEAD OF THE FAMILY
• UNMARRIED OR LEGALLY SEPARATED PERSON WITH
ONE OR BOTH PARENTS, OR ONE OR MORE BROTHERS
OR SISTERS, OR ONE OR MORE LEGITIMATE,
RECOGNIZED NATURAL OR LEGALLY ADOPTED
CHILDREN LIVING WITH AND DEPENDENT UPON THE
TAXPAYER FOR THEIR CHIEF SUPPORT; AND
• WHERE SUCH BROTHER/SISTER OR CHILDREN ARE
NOT MORE THAN 21 YEARS OF AGE, UNMARRIED, AND
NOT GAINFULLY EMPLOYED, OR WHERE SUCH
DEPENDENTS REGARDLESS OF AGE, ARE INCAPABLE
OF SELF-SUPPORT BECAUSE OF MENTAL OR PHYSICAL
DEFECT.
 PERSONAL EXEMPTIONS
 LIVING WITH THE TAXPAYER – DOES
NOT NECESSARILY MEAN THAT THE
TAXPAYER AND THE DEPENDENT(S)
LIVE UNDER ONE ROOF. THE
CHARACTEWR OF THE SEPARATION
MUST BE CONSIDERED. IF, WITHOUT
NECESSITY, THE DEPENDENT MAKES
HIS HOME ELSEWHERE, THE TAXPAYER
CANNOT BE CONSIDERED HEAD OF THE
FAMILY.
 PERSONAL EXEMPTIONS
QUALIFIED DEPENDENT IS A:
1. LEGITIMATE, LEGALLY ADOPTED, OR
ILLEGITIMATE CHILD – CHIEFLY DEPENDENT
UPON AND LIVING WITH THE TAXPAYER, IF
SUCH DEPENDENT IS:
• NOT MORE THAN 21 YEARS OF AGE;
• UNMARRIED; AND
• NOT GAINFULLY EMPLOYED; OR
• IF SUCH DEPENDENT, REGARDLESS OF AGE,
IS INCAPABLE OF SELF-SUPPORT BECAUSE OF
MENTAL OR PHYSICAL DEFECT. (SEC. 35 (B),
NIRC)
 PERSONAL EXEMPTIONS
QUALIFIED DEPENDENT IS A:
2. FOSTER CHILD – A FOSTER CHILD CAN BE
TREATED AS A QUALIFIED DEPENDENT FOE AN
ADDITIONAL EXEMPTION PROVIDED:
• THE PERIOD OF FOSTER CARE IS ATLEAST A
CONTINUOUS PERIOD OF ONE (1) TAXABLE
YEAR; AND
• ONLY ONE FOSTER PARENT CAN TREAT THE
FOSTER CHILD AS A DEPENDENT FOE A
PARTICULAR TAXABLE YEAR. AS SUCH, NO
OTHER PARENT OR FOSTER PARENT CAN
CLAIM THE SAID CHILD AS A DEPENDENT FOR
THAT PERIOD.
 PERSONAL EXEMPTIONS
QUALIFIED DEPENDENT IS A:
3. PERSON WITH DISABILITY (PWD) OR THOSE
SUFFERING FROM RESTRICTIONS IN
PERFORMING AN ACTIVITY IN A MANNER
CONSIDERED NORMAL BECAUSE OF MENTAL,
PHYSICAL, OR SENSORY IMPAIRMENT, AND
WHO ARE:
 WITHIN THE 4TH CIVIL DEGREE OF
CONSANGUINITY OR AFFINITY TO THE
TAXPAYER, REGARDLESS OF AGE; AND
 NOT GAINFULLY EMPLOYED, AND CHIEFLY
DEPENDENT UPON THE TAXPAYER.
 PERSONAL EXEMPTIONS
QUALIFIED DEPENDENT IS A:
4. SENIOR CITIZEN WHO IS:
 ANY RESIDENT CITIZEN OF THE PHILIPPINES;
 AT LEAST SIXTY (60) YEARS OLD, INCLUDING
THOSE WHO HAVE RETIRED FROM BOTH
GOVERNMENT OFFICES AND PRIVATE
ENTERPRISES; AND
 HAS AN INCOME OF NOT MORE THAN SIXTY
THOUSAND PESOS (60,000) PER ANNUM
SUBJECT TO THE REVIEW OF THE NATIONAL
ECONOMIC DEVELOPMENT AUTHORITY
(NEDA) EVERY THREE YEARS.
 PERSONAL EXEMPTIONS
THE COURT OF TAX APPEALS HAS RULED IN CTA
CASE NO. 5280 THAT SENIOR CITIZENS SHALL BE
TREATED AS DEPENDENTS FOR PURPOSES OF
QUALIFYING FOR BOTH PERSONAL AND
ADDITIONAL EXEMPTIONS IN ACCORDANCE
WITH R.A. 7432.
THE BIR, IN SEVARAL RULINGS, HAS UNDERTAKEN
THE POSITION THAT SENIOR CITIZENS DO NOT
QUALIFY AS “DEPENDENTS” FOR PURPOSES OF
THE ADDITIONAL EXEMPTION. HOWEVER, THE
BIR HAS NOT BEEN ABLE TO SUCCESSFULLY
ASSAIL OR OVERTURN THE ABOVE CTA
DECISION.
HEALTH AND/OR HOSPITALIZATION
PREMIUM (HH) (SEC. 34 (M))

REQUISITES:
1. TAXPAYER MUST BE AN INDIVIDUAL;
2. GROSS INCOME OF FAMILY IS LESS THAN OR
EQUAL TO 250,000 FOR THE TAXABLE YEAR;
3. IF MARRIED WITH NO DEPENDENTS, THE
HUSBAND CLAIMS THE DEDUCTION;
4. IF MARRIED WITH QUALIFIED DEPENDENTS,
SPOUSE CLAIMING THE ADDITIONAL
EXEMPTIONS IS ENTITLED TO THIS
DEDUCTION.
5. DEDUCTION IS CLAIMABLE BY THE SPOUSE
WHO ACTUALLY PAID THE PREMIUMS.
HEALTH AND/OR HOSPITALIZATION
PREMIUM (HH) (SEC. 34(M))

WHO ARE ALLOWED TO DEDUCT “HH”?

“HH” IS CLAIMABLE BY ALL INDIVIDUAL TAXPAYERS
SUBJECT TO PROGRESSIVE TAX, EXCEPT NON-
RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS
(NRA-ETB).
AMOUNT: LESS THAN OR EQUAL TO 200 PER MONTH
OR 2,400 PER YEAR.
NOTE: THE “HH” DEDUCTION MAY BE AVAILED OF
EVEN BY INDIVIDUAL TAXPAYERS EARNING
PURELY COMPENSATION INCOME. THE “HH”
DEDUCTION MAY BE AVILED OF WHETHER THE
INDIVIDUAL TAXPAYER ENGAGED IN TRADE,
BUSINESS, OR PROFESSION ITEMIZES DEDUCTIONS
OR ELECTS THE OSD.
ITEMIZED DEDUCTIONS
WHEN A TAXPAYER CLAIMS IDs, THE
TAXPAYER IS SPECIFYING THE PARTICULAR
EXPENSES TO BE DEDUCTED FROM GROSS
INCOME.
WHO MAY CLAIM IDs?
 DOMESTIC CORPORATIONS INCLUDING
PARTNERSHIPS AND GOCCs
 RESIDENT FOREIGN CORPORATIONS
 INDIVIDUALS ENGAGED IN TRADE,
BUSINESS, PROFESSION
 ESTATES AND TRUSTS
ITEMIZED DEDUCTIONS
 ORDINARY AND NECESSARY EXPENSES
 INTEREST
 TAXES
 LOSSES
 BAD DEBTS
 DEPRECIATION
 DEPLETION
 CHARITABLE CONTRIBUTIONS
 REASEARCH AND DEVELOPMENT
 PENSIONS
 BUSINESS EXPENSES
NECESSARY EXPENSES – APPROPRIATE
AND HELPFUL IN THE DEVELOPMENT OF
TAXPAYER’S BUSINESS AND ARE
INTENDED TO MINIMIZE LOSSES OR
INCREASE PROFITS.
ORDINARY EXPENSES – NORMAL OR
USUAL IN RELATION TO THE
TAXPAYER’S BUSINESS AND THE
SURROUNDING CISCUMSTANCES.
 BUSINESS EXPENSES
REQUISITES:
• ORDINARY AND NECESSARY;
• PAID OR INCURRED WITHIN THE TAXABLE YEAR;
• PAID OR INCURRED IN CARRYING ON A TRADE OR
BUSINESS;
• SUBSTANTIATED WITH OFFICIAL RECEIPTS OR
OTHER ADEQUATE RECORDS;
• IF SUBJECT TO WITHHOLDING TAXES, PROOF OF
PAYMENT TO THE BUREAU OF INTERNAL REVENUE
MUST BE SHOWN;
• MUST BE REASONABLE. (WHEN THE EXPENSE IS
NOT LAVISH, EXTRAVAGANT, OR EXCESSIVE
UNDER THE CIRCUMSTANCES)
 BUSINESS EXPENSES
NOTE: WHILE ILLEGAL INCOME WILL FORM PART
OF INCOME OF THE TAXPAYER, EXPENSES WHICH
CONSTITUTE BRIBE, KICKBACK, AND OTHER
SIMILAR PAYMENT,BEING AGAINST LAW AND
PUBLIC POLICY, ARE NOT DEDUCTIBLE FROM
GROSS INCOME.
NOTE: DEDUCTIBLE BUSINESS EXPENSES OF NON-
RESIDENT CITIZENS, RESIDENT ALIENS, NON-
RESIDENT ALIEN ENGAGED IN TRADE OR
BUSINESS, AND RESIDENT FOREIGN
CORPORATION – EXPENSES PAID OR INCURRED
IN CARRYING OUT ITS BUSINESS IN THE
PHILIPPINES.
 BUSINESS EXPENSES
COMPENSATION EXPENSES FOR PERSONAL SERVICES
ACTUALLY RENDERED
 INCLUDES SALARIES AND OTHER FORMS OF
COMPENSATION, INCLUDING BONUSES, AND GROSSED-
UP MONETARY VALUE OF FRINGE BENEFITS SUBJECT TO
FT.
 INCLUDES MANAGEMENT AND LABOR EXPENSES,
COMMISSIONS, AND PENSION PAYMENTS.
 INCLUDES COMPENSATION FOR INJURIES PAID BY THE
EMPLOYER LESS ANY INSURANCE PROCEEDS.
 INCLUDES PREMIUMS ON LIFE INSURANCE OF THE
EMPLOYEE WHERE THE BENEFICIARY IS NOT THE
EMPLOYER
 INCLUDES SALARIES PAID AFTER DEATH OF THE
EMPLOYEE, BUT DOES NOT INCLUDE DONATIONS FOR
COFFIN AND WAKE EXPENSES.
 BUSINESS EXPENSES
TRAVELLING EXPENSES
 INCLUDES TRANSPORTATION
EXPENSES, MEALS, AND LODGING.
ADDITIONAL REQUISITES FOR
DEDUCTIBILITY:
 MUST BE INCURRED WHILE AWAY FROM
HOME (“TAX HOME”). TAX HOME
REFERS TO THE PLACE OF WORK,
BUSINESS, OR EMPLOYMENT.
 BUSINESS EXPENSES
ENTERTAINMENT, AMUSEMENT, AND RECREATIONAL
EXPENSES (EAR)
 EXPENSES IN ENTERTAINING OR MEETING WITH
GUESTS, OR CLIENTS (CALLED REPRESENTATION
EXPENSES).
 INCLUDES DEPRECIATION OR RENTAL EXPENSES
RELATING TO ENTERTAINMENT FACILITIES.
SUBJECT TO THE FOLLOWING CEILINGS:
 FOR TAXPAYERS ENGAGED IN THE SALE OF GOODS
AND PROPERTIES: ½ OF 1% OF NET SALES;
 FOR TAXPAYERS ENGAGED IN THE SALE OF
SERVICES/LEASING PROPERTIES: 1% OF NET
REVENUES.
 ILLUSTRATION 2
 A TAXPAYER WITH NET SALES OF P2,000,000
AND COST OF SALES OF P1,800,000 INCURRED
P15,000 FOR ENTERTAINMENT, AMUSEMENT,
AND RECREATION EXPENSES (EAR). COMPUTE
THE ALLOWABLE DEDUCTION FOR EAR
EXPENSES.
 A TAXPAYER WITH GROSS RECEIPTS OF
P2,000,000 AND DIRECT COST OF SERVICES OF
P1,800,000 INCURRED P15,000 FOR
ENTERTAINMENT, AMUSEMENT, AND
RECREATION EXPENSES. COMPUTE THE
ALLOWABLE DEDUCTION FOR EAR EXPENSE.
 ILLUSTRATION 2
 A TAXPAYER REPORTED SALES OF
P3,000,000 AND GROSS RECEIPTS OF
P2,000,000 DURING 2011. HE INCURRED
ENTERTAINMENT, AMUSEMENT, AND
RECREATIONS EXPENSES OF P35,000.
COMPUTE THE DEDUCTIBLE EAR
EXPENSE.
 BUSINESS EXPENSES
RENTAL EXPENSE (OF THE LESSEE) OF PROPERTY
USED IN BUSINESS
NOTES:
 ADVANCE OR PREPAID RENTALS ARE NOT
ALLOWED TO BE DEDUCTED IN YEAR OF PAYMENT.
INSTEAD, ADVANCE RENTALS SHALL BE
APPORTIONED OVER THE TERM OF THE LEASE.
 TAXES AND OTHER OBLIGATIONS OF THE LESSOR
WHICH ARE PAID BY THE LESSEE, ARE ALLOWED
AS DEDUCTIONS.
 DEPRECIATION OF LEASEHOLD IMPROVEMENTS IS
AVAILABLE AS DEDUCTION TO THE LESSEE.
 BUSINESS EXPENSES
OTHER BUSINESS EXPENSES
1. MATERIALS AND SUPPLIES ACTUALLY CONSUMED
IN BUSINESS;
2. MAINTENANCE AND REPAIRS WHICH DO NOT ADD
TO THE VALUE OF THE PROPERTY NOR
APPRECIABLY PROLONG ITS LIFE;
3. ADVERTISING AND OTHER SELLING EXPENSES;
4. OPERATING EXPENSES OF TRANSPORTATION
EQUIPMENT USED IN THE TRADE, PROFESSION,
OR BUSINESS;
5. INSURANCE PREMIUMS AGAINST FIRE STORM,
THEFT, ACCIDENT, OR OTHER SIMILAR LOSSES IN
TRADE OR BUSINESS;
6. UTILITIES EXPENSES.
 BUSINESS EXPENSES
7. MISCELLANEOUS EXPENSES
 AMORTIZATION OF PRE-OPERATING
EXPENSES, WHICH ARE TREATED AS
DEFERRED EXPENSES, FOR NOT MORE THAN 60
MONTHS;
 COSTS OF SUITS ARE ALLOWED AS
DEDUCTIONS;
 JUDGMENTS AGAINST THE TAXPAYER LESS
ANY AMOUNT COMPENSATED FOR BY
INSURANCE OR OTHERWISE;
 LOSS UPON A CORPORATION’S SALE OR
RETIREMENT OF ITS OWN BONDS.
 BUSINESS EXPENSES
CAPITAL EXPENDITURES – AN
EXPENDITURE THAT BENEFITS NOT
ONLY THE CURRENT PERIOD BUT ALSO
FUTURE PERIODS. IT IS NOT
DEDUCTIBLE BUT DEPRECIABLE,
EXCEPT, IF THE TAXPAYER IS A NON-
PROFIT PROPRIETARY EDUCATIONAL
INSTITUTION WHICH MAY ELECT
EITHER TO DEDUCT THE CAPITAL
EXPENSE OR DEPRECIATE IT.
 INTEREST EXPENSE
REQUISITES: (RR13-2000)
 THERE MUST BE INDEBTEDNESS;
 THERE SHOULD BE AN INTEREST EXPENSE
PAID OR INCURRED UPON SUCH
INDEBTEDNESS;
 THE INDEBTEDNESS MUST BE THAT OF THE
TAXPAYER;
 THE INDEBTEDNESS MUST BE CONNECTED
WITH THE TAXPAYER’S TRADE, BUSINESS,
EXERCISE, OR PROFESSION;
 INTEREST EXPENSE
REQUISITES: (RR13-2000)
 THE INTEREST EXPENSE MUST HAVE
BEEN PAID OR INCURRED DURING THE
TXABLE YEAR;
 THE INTEREST MUST HAVE BEEN
STIPULATED IN WRITING;
 THE INTEREST MUST BE LEGALLY
DUE.
 INTEREST EXPENSE
REDUCTION OF ALLOWABLE DEDUCTION FOR
INTEREST EXPENSE BY:
 33% OF INTEREST INCOME SUBJECT TO FT
BEGINNING JANUARY 1, 2009. (30%)
 42% OF INTEREST INCOME SUBJECT TO FT
BEGINNING NOVEMBER 1, 2005. (35%)
 38% OF INTEREST INCOME SUBJECT TO FT
BEGINNING JANUARY 1, 2000. (32%)
 39% OF INTEREST INCOME SUBJECT TO FT
BEGINNING JANUARY 1, 1999. (33%)
 41% OF INTEREST INCOME SUBJECT TO FT
BEGINNING JANUARY 1, 1998. (34%)
 ILLUSTRATION 3
INTEREST INTEREST ALLOWED ALLOWED
EXPENSE INCOME INTEREST INTEREST
SUBJECT TO FT EXPENSE IN 2008 EXPENSE IN 2009
P2,000 P1,500

P6,000 P5,000

P2,500 P4,000

P6,000 P4,500

P25,000 P15,000
 INTEREST EXPENSE
EXCEPTIONS: WHERE INTEREST EXPENSE IS
DEDUCTIBLE IN FULL
 IF TAXPAYER HAS NO INTEREST INCOME
SUBJECT TO FT;
 INTEREST ON ALL UNPAID BUSINESS-RELATED
TAXES (RR 13-2000);
 INTEREST PAYMENTS OF AN OCCUPANT OF A
SOCIALIZED HOUSING PROJECT INCURRED
FOR THE CONSTRUCTION OF PURCHASE OF
THE HOUSE (R.A. 7279).
 INTEREST EXPENSE
INTEREST EXPENSES INCURRED IN
ACQUIRING ASSETS, SUCH AS
BUILDING, MACHINERIES, OFFICE
EQUIPMENT AND FURNITURE, TO BE
USED IN BUSINESS SHALL BE IN THE
DISCRETION OF THE TAXPAYER
WHETHER TO BE USED AS CAPITAL OR
AS AN OUTRIGHT DEDUCTION FROM
GROSS INCOME IN THE YEAR OF
ACQUISITION.
 INTEREST EXPENSE
NON-DEDUCTIBLE INTEREST EXPENSE (SEC.
34(B)(2))
 INTEREST PAID IN ADVANCE (THRU
DISCOUNT) BY A CASH-BASIS TAXPAYER. THE
INTEREST EXPENSE IS NOT ALLOWED TO BE
DEDUCTED IN THE YEAR THE CASH-BASIS
TAXPAYER TAKES OUT THE LOAN. THE
INTEREST EXPENSE WILL BE DEDUCTED ONLY
IN THE YEAR THE DEBT IS PAID.
 IF DEBT IS INCURRED TO FINANCE PETROLEUM
EXPLORATION.
 INTEREST ON PREFERRED STOCK WHICH IS
ACTUALLY A DIVIDEND.
 INTEREST EXPENSE
NON-DEDUCTIBLE INTEREST EXPENSE
(SEC. 34(B)(2))
 INTEREST EXPENSE ATTRIBUTABLE TO
INCOME WITHOUT THE PHILIPPINES OF
AN ALIEN OR FOREIGN CORPORATION.
 INTEREST ON DEBT INCURRED TO
PURCHASE A TAX-EXEMPT SECURITY.
 INTEREST WHICH IS NOT STIPULATED
IN WRITING.
 INTEREST EXPENSE
NON-DEDUCTIBLE INTEREST EXPENSE (SEC.
34(B)(2))
 INTEREST PAID BETWEEN MEMBERS OF A
FAMILY OR RELATED TAXPAYERS UNDER
SECTION 36(B):
a) BETWEEN TAXPAYER AND HIS
BROTHERS/SISTERS, SPOUSE, ANCESTORS,
AND LINEAL DESCENDANTS;
b) BETWEEN GRANTOR AND A FIDUCIARY
(TRUSTEE) OF A TRUST;
c) BETWEEN FIDUCIARIES OF 2 TRUSTS HAVING
THE SAME GRANTOR;
d) BETWEEN THE FIDUCIARY AND A
BENEFICIARY OF A TRUST;
 INTEREST EXPENSE
e) BETWEEN A CORPORATION AND AN
INDIVIDUAL WHO OWNS, DIRECTLY OR
INDIRECTLY MORE THAN 50% IN VALUE OF THE
OUTSTANDING STOCK OF SUCH CORPORATION
(EXCEPT IN CASES OF DISTRIBUTIONS IN
CORPORATE LIQUIDATION);
f) BETWEEN 2 CORPORATIONS WHERE MORE
THAN 50% IN VALUE OF THE OUTSTANDING
CAPITAL STOCK OF EACH CORPORATION IS
OWNED, DIRECTLY OR INDIRECTLY, BY THE
SAME INDIVIDUAL (EXCEPT IN CASES OF
DISTRIBUTIONS IN CORPORATE LIQUIDATION).
 TAXES
REQUISITES:
• PAID OR INCURRED WITHIN THE
TAXABLE YEAR;
• MUST BE CONNECTED WITH THE
PROFESSION, TRADE, OR BUSINESS OF
THE TAXPAYER; AND
• IS DIRECTLY IMPOSED ON THE
TAXPAYER.
 TAXES
EXAMPLES OF DEDUCTIBLE TAXES: IMPORT
DUTIES; BUSINESS TAXES (LIKE PERCENTAGE
TAXES); LOCAL BUSINESS TAXES; COMMUNITY
TAX; OCCUPATION TAX; PRIVILEGE AND
LICENSE TAXES; EXCISE TAXES;
DOCUMENTARY STAMP TAX; AUTOMOBILE
REGISTRATION FEES; REAL PROPERTY TAX.
EXAMPLES OF NON-DEDUCTIBLE TAXES: INCOME
TAX; FOREIGN INCOME TAX IF CLAIMED AS A
TAX CREDIT; ESTATE TAX; DONOR’S TAX;
SPECIAL ASSESSMENTS; VAT; FINAL TAXES;
STOCK TRANSACTION TAX UNDER SEC. 127(A);
CAPITAL GAINS TAX.
 TAXES
NOTES:
 VAT IS NON-DEDUCTIBLE EXCEPT INPUT
VAT ALLOCATED TO EXEMPT SALES (IS
DEDUCTIBLE).
 FINES AND PENALTIES IMPOSED DUE TO
LATE PAYMENT OF TAX ARE NOT
DEDUCTIBLE. BUT INTEREST IMPOSED DUE
TO THE SAME IS DEDUCTIBLE.
 TAX BENEFIT RULE APPLIES TO REFUND OF
DEDUCTIBLE TAXES.
 ILLUSTRATION 4
MR. A, A SINGLE PROPRIETOR IN A
TRADING BUSINESS, CONDUCTS
HIS BUSINESS IN A BUILDING
WHERE HE USES THE FIRST FLOOR
AS HIS STORE AND THE SECOND
FLOOR AS HIS RESIDENCE. IN 2013,
HE MADE THE FOLLOWING
PAYMENTS OF TAXES:
 ILLUSTRATION 4
REGISTRATION FEE FOR 2012 OF THE BUSINESS WITH P500
THE B.I.R
INCOME TAX OF 2012 200,000
VALUE-ADDED TAX (INCLUDING INTEREST OF P20,000 420,000
AND SURCHARGES OF P60,000)
FRINGE BENEFIT TAX ON BENEFIT GIVEN TO THE 32,000
MANAGER
COMMUNITY TAX 2,005
REAL ESTATE TAX ON LAND AND BUILDING 3,500
CITY BUSINESS TAXES AND CITY MAYOR’S PERMIT 5,500
MOTOR VEHICLE REGISTRATION FEE (CAR IS FOR 3,050
NON-BUSINESS USE) INCLUDING INTEREST OF p50
AND SURCHARGE OF PENALTY OF P1,500
 TAX CREDIT
IT IS A RIGHT OF AN INCOME TAXPAYER TO
DEDUCT FROM INCOME TAX PAYABLE THE
FOREIGN INCOME TAX HE HAS PAID TO HIS
FOREIGN COUNTRY SUBJECT TO
LIMITATION.
WHO MAY CLAIM TAX CREDITS?
ONLY TAXPAYERS TAXBLE ON WORL INCOME
SUCH AS DOMESTIC CORPORATIONS AND
RESIDENT CITIZENS CAN CLAIM DEDUCTION
OR TAX CREDIT FOR FOREIGN INCOME TAXES
PAID.
 TAX CREDIT
LIMITATIONS ON TAX CREDIT: (SEC. 34(C)(4)
• 1ST LIMITATION
(TAXABLE INCOME (PER FOREIGN COUNTRY)
DIVIDED BY TOTAL TAXABLE
INCOME)*PHILIPPINE INCOME TAX = LIMIT
 2ND LIMITATION
(TAXABLE INCOME (ALL FOREIGN COUNTRIES)
DIVIDED BY TOTAL TAXABLE
INCOME)*PHILIPPINE INCOME TAX = LIMIT
 TAX CREDIT
RULES IN APPLICATION OF THE LIMITS
FORMULA:
 IF THERE IS ONE FOREIGN COUNTRY
INVOLVED, USE ONLY THE FORMULA FOR THE
FIRST LIMITATION.
 IF THERE ARE TWO OR MORE FOREIGN
COUNTRIES INVOLVED, USE BOTH FORMULA.
 IN CASE BOTH FORMULAS ARE USED, TWO TAX
CREDITS WILL BE COMPUTED. ONE BASED ON
THE FIRST LIMT, AND THE OTHER BASED ON
THE SECOND LIMIT.
THE FINAL TAX CREDIT IS WHICHEVER IS THE
LOWER BETWEEN THE TWO AMOUNTS.
 ILLUSTRATION 5
GROSS BUSINESS FOREIGN
INCOME EXPENSES TAX
PHILIPPINES P350,000 P150,000
U.S.A. 500,000 200,000 P98,000
CANADA 100,000 50,000 20,000
JAPAN 250,000 300,000
 LOSSES
ORDINARY LOSSES
 BUSINESS LOSSES – LOSSES INCURRED IN THE
TRADE, PROFESSION, OR BUSINESS OF THE
TAXPAYER.
 CASUALTY LOSSES – DUE TO MISHAP, ACCIDENT,
FORTUITOUS EVENT, ROBBERY, THEFT,
EMBEZZLEMENT OF PROPERTY USED IN THE
TRADE, PROFESSION, OR BUSINESS OF THE
TAXPAYER.
 NET OPERATING LOSS – EXCESS OF ALLOWABLE
DEDUCTION ( EXCLUDES NOLCO AND ANY ITEM OF
INCENTIVE DEDUCTION UNDER SPECIAL LAWS
THAT DOES NOT INVOLVE ANY CASH OUTLAY)
OVER GROSS INCOME IN A TAXABLE YEAR.
 LOSSES
REQUISITES OF CASUALTY LOSSES:
• MUST INVOLVE ORDINARY PROPERTIES;
• ACTUALLY SUSTAINED;
• NOT CLAIMED AS A DEDUCTION FOR
ESTATE TAX PURPOSES;
• NOT COMPENSATED FOR BY INSURANCE
OR BY OTHER FORMS OF INDEMNITY;
• MUST BE REPORTED TO THE BIR WITHIN
45 DAYS FROM THE DATE OF LOSS.
 LOSSES
 IF LOSS IS TOTAL, THE DEDUCTIBLE
AMOUNT IS THE BOOK VALUE OF THE
ASSET LESS ANY AMOUNT OF INSURANCE
PROCEEDS OR COMPENSATION RECEIVED.
 IF LOSS IS PARTIAL, THE DEDUCTIBLE
AMOUNT IS THE REPLACEMENT COST OR
BOOK VALUE OF THE ASSET, WHICHEVER IS
LOWER. IF REPLACEMENT COST IS
GREATER THAN BOOK VALUE, THE EXCESS
SHALL BE CAPITALIZED AND DEPRECIATED
OVER THE REMAINING USEFUL LIFE OF THE
PROPERTY.
 LOSSES
NET OPERATING LOSS CARRY-OVER CAN BE
AVAILED OF BY INDIVIDUAL TAXPAYERS
ENGAGED IN TRADE, BUSINESS, OR A
PROFESSION, ESTATES AND TRUSTS,
DOMESTIC AND RESIDENT FOREIGN
CORPORATIONS SUBJECT TO THE NORMAL
INCOME TAX, AND SPECIAL CORPORATIONS
SUBJECT TO PREFERENTIAL TAX RATES
(HOSPITAL CORPORATIONS, PROPRIETARY
EDUCATIONAL CORPORATIONS, AND
REGIONAL OPERATING HEADQUARTERS OF
MULTINATIONAL CORPORATIONS).
 LOSSES
TAXPAYERS NOT ENTITLED TO NET
OPERATING LOSS CARRY-OVER:
 OBUs AND FCDUs OF DOMESTIC OR
FOREIGN BANKING CORPRATIONS;
 PEZA, SBMA, CDA, ETC. REGISTERED
ENTERPRISES WITH RESPECT TO THEIR
REGISTERED BUSINESSES;
 FOREIGN CORPORATIONS ENGAGED IN
INTERNATIONAL SHIPPING OR AIR
CARRIAGE BUSINESS IN THE PHILIPPINES.
 LOSSES
 NO NET OPERATING LOSS CARRY-OVER IF NET
OPERATING LOSS WAS INCURRED IN A YEAR
DURING WHICH TAXPAYER WAS EXEMPT FROM
INCOME TAX.
 A LOSS IN ONE LINE OF BUSINESS WHICH IS
TAX-EXEMPT IS NOT PERMITTED AS A
DEDUCTION IN ANOTHER LINE OF BUSINESS
WHICH IS TAXABLE.
 NET OPERATING LOSS CAN BE CARRIED OVER
AND DEDUCTED FROM GROSS INCOME FOR THE
NEXT 3 CONSECUTIVE TAXABLE YEARS.
 LOSSES
 FOR MINES, OTHER THAN OIL AND GAS WELLS,
NET OPERATING LOSS INCURRED WITHOUT
THE BENEFIT OF INCENTIVES PROVIDED
UNDER THE OMNIBUS INVESTMENT CODE, IN
ANY OF THE FIRST 10 YEARS OF OPERATIONS,
CAN BE CARRIED OVER AS DEDUCTIONS FOR
THE NEXT 5 YEARS FOLLOWING THE YEAR OF
LOSS.
 NET OPERATING LOSS CARRY-OVER SHALL BE
ALLOWED ONLY IF THERE HAS BEEN NO
SUBSTANTIAL CHANGE IN THE OWNERSHIP OF
THE BUSINESS.
 LOSSES
“NO SUBSTANTIAL CHANGE” MEANS MORE
THAN OR EQUAL TO 75% IN VALUE OF THE
OUTSTANDING SHARES OR MORE THAN OR
EQUAL TO 75% OF THE PAID-UP CAPITAL OF A
CORPORATION, IS HELD BY OR ON BEHALF OF
THE SAME PERSONS. (SEC. 34(D)(3))
NOTE: APPLIES TO TRANSFERS OF NET
OPERATING LOSS AS A RESULT OF A MERGER,
CONSOLIDATION, OR BUSINESS COMBINATION.
THIS MEANS THAT THE TRASFEREE IS NOT
ENTITLED TO THE NET OPERATING LOSS
CARRY-OVER UNLESS THE TRANSFEROR OWNS
AT LEAST 75% OF THE OUTSTANDING SHARES
OR AT LEAST 75% OF THE PAID-UP CAPITAL OF
THE TRANSFEREE.
 ILLUSTRATION 6
A DOMESTIC CORPORATION HAD:
YEAR GROSS PROFIT BUSINESS
FROM BUSINESS EXPENSES
2012 P600,000 P700,000
2013 500,000 470,000
2014 900,000 850,000
2015 850,000 900,000
2016 920,000 620,000
 ILLUSTRATION 7
THE TAXPAYER IS A DOMESTIC
CORPORATION.
DATA IN 2015:
GROSS PROFIT FROM SALES P1,600,000
OPERATING EXPENSES 1,800,000
DIVIDEND INCOME FROM DOMESTIC 20,000
CORPORATION
INTEREST INCOME ON TRADE NOTES 15,000
RECEIVABLE
CAPITAL GAIN ON DIRECT SALE TO BUYER OF 100,000
SHARES OF DOMESTIC CORPORATION
 ILLUSTRATION 7
DATA IN 2016:
GROSS PROFIT FROM SALES P3,000,000
OTHER OPERATING EXPENSES 1,200,000
ON A LOSS BY FIRE OF A WAREHOUSE WHERE THE INSURANCE
COMPANY CARTED AWAY THE SCRAP:
COST 2,000,000
ACCUMULATED DEPRECIATION 800,000
INSURANCE RECOVERY 700,000
ON A LOSS BY EMBEZZLEMENT OF A BONDED CASHIER, 150,000
WHERE THERE IS A P50,000 BY A BONDING COMPANY,
AND WHERE A CASE WAS FILED IN COURT FOR THE
ENTIRE AMOUNT OF EMBEZZLEMENT OF
 ILLUSTRATION 7
ON A LOSS BY ACCIDENT OF A DELIVERY EQUIPMENT, WITH THE
FOLLOWING DATA:
COST OF DELIVERY EQUIPMENT P1,500,000
ACCUMULATED DEPRECIATION 800,000
COST TO RETORE TO NORMAL OPERATING 250,000
CONDITION
INSURANCE RECOVERY 180,000
 LOSSES
SPECIAL LOSSES
• LOSS OF INCOME WHICH WAS
PREVIOUSLY REPORTED UNDER THE
ACCRUAL METHOD.
• WAGERING LOSSES – DEDUCTIBLE ONLY
TO THE EXTENT OF GAINS OR WINNINGS.
NOTE: COST OF LOTTO OR SWEEPSTAKES
TICKET IS NOT DEDUCTIBLE FROM LOTTO
OR SWEEPSTAKES WINNING BECAUSE
SUCH WINNINGS ARE EXEMPT FROM TAX.
 LOSSES
 LOSS DUE TO THE VOLUNTARY
REMOVAL OF OLD BUILDINGS OR OLD
MACHINERY.
HOWEVER, WHERE A TAXPAYER BUYS
LAND ON WHICH STRUCTURES ARE
ERECTED AND THEN SUCH TAXPAYER
PROCEEDS TO REMOVE THE
STRUCTURES. IT IS PRESUMED THAT
THE PRICE OF THE LAND ALREADY
INCLUDES THE COST OF SUCH REMOVAL.
 LOSSES
 LOSS OF USEFUL VALUE – LOSS OF
USEFULNESS OF AN ASSET OR PROPERTY DUE
TO CHANGES IN BUSINESS CONDITIONS.
AMOUNT OF LOSS = BV – ACCUM. DEP. – SV
LOSS MUST BE CHARGED OFF THE BOOKS.
 ABANDONMENT LOSSES IN PETROLEUM
OPERATIONS – WHEN PETROLEUM
OPERATIONS ARE ABANDONED, ALL
ACCUMULATED EXPLORATION AND
DEVELOPMENT EXPENDITURES, AS WELL AS,
UNAMORTIZED COSTS AND UNDEPRECIATED
COSTS OF EQUIPMENT CAN BE DEDUCTED;
 LOSSES
 SECURITIES, SHARES OF STOCK (CLASSIFIED
AS ORDINARY ASSETS) BECOMING
WORTHLESS
AMOUNT OF LOSS = COST OR BASIS OF SHARES
OF STOCK
 LOSSES FROM WASH SALES OF SHARES OF
STOCK WHERE SELLER IS A DEALER IN
SECURITIES – WASH SALE IS A SALE OF A
SECURITY IF, WITHIN A PERIOD OF 30 DAYS
BEFORE THE DATE OF SALE AND ENDING 30
DAYS AFTER SUCH SALE, THE TAXPAYER
PURCHASED THE SAME IDENTICAL SHARES.
 LOSSES
NON-DEDUCTIBLE LOSSES
 EXCHAGES SOLELY IN KIND PURSUANT TO
MERGERS OR CONSOLIDATIONS UNDER
SEC. 40(C)(2).
 LOSSES FROM SALES OR EXCHANGES
BETWEEN RELATED TAXPAYERS UNDER
SEC. 36(B).
 LOSSES FROM WASH SALES WHERE THE
SELLER IS NOT A DEALER IN SECURITIES.
 BAD DEBTS
REQUISITES:
 THERE MUST BE A VALID AND SUBSISTING
DEBT OWED THE TAXPAYER;
 THE DEBT MUST BE CONNECTED WITH THE
TRADE, BUSINESS, OR PROFESSION OF THE
TAXPAYER;
 THE DEBT MUST BE ASCERTAINED TO BE
WORTHLESS OR UNCOLLECTIBLE;
 THE DEBT MUST BE CHARGED OFF WITHIN
THE TAXABLE YEAR.
 BAD DEBTS
 BAD DEBTS NOT CONNECTED WITH THE
TRADE, BUSINESS, OR PROFESSION OF THE
TAXPAYER.
 BAD DEBTS BETWEEN RELATED PARTIES
UNDER SEC. 36(B).
 WHEN MORTGAGE IS FORECLOSED AND THE
COLLATERAL IS BOUGHT BY THE MORTGAGEE
IN THE FORECLOSURE SALE, THE DIFFERENCE
BETWEEN THE AMOUNT OF THE LOAN AND THE
PURCHASE PRICE OF THE COLLATERAL IS NOT
ALLOWED AS A BAD DEBT DEDUCTION. ANY
LOSS IS DEFERRED UNTIL THE PROPERTY IS
EVENTUALLY SOLD BY THE MORTGAGEE.
 ILLUSTRATION 8
RECOVERY OF BAD DEBT WRITTEN OFF BY THE
TAXPAYER:
NO. 1: P20,000 FROM ACCOUNTS WRITTEN OFF IN
A YEAR WHICH HAD A NET INCOME OF P200,000
BEFORE WRITE-OFF (WRITE-OFF FOR THE
YEAR WAS P20,000)
NO. 2: P5,000 FROM ACCOUNTS WRITTEN OFF IN
A YEAR WHICH HAD A NET LOSS OF P36,000
BEFORE WRITE-OFF (WRITE-OFF FOR THE
YEAR WAS P5,000)
NO. 3: P10,000 FROM ACCOUNTS WRITTEN OFF IN
A YEAR WHICH HAD A NET INCOME OF P8,000
BEFORE WRITE-OFF (WRITE-OFF FOR THE
YEAR WAS P12,000)
DEPRECIATION, DEPLETION,
AND AMORTIZATION
REQUISITES:
 ASSET MUST BE USED IN TRADE,
BUSINESS, OR PROFESSION OF THE
TAXPAYER;
 ASSET HAS A LIMITED LIFE;
 ALLOWANCE FOR DEPRECIATION MUST
BE REASONABLE;
 ALLOWANCE FOR DEPRECIATION MUST
BE CHARGED OFF DURING THE
TAXABLE YEAR.
DEPRECIATION, DEPLETION,
AND AMORTIZATION
METHODS OF DEPRECIATION ALLOWED
UNDER SEC. 34(F)(1):
 STRAIGHT-LINE METHOD;
 DECLINING-BALANCE METHOD;
 SUM OF THE YEARS DIGITS METHOD;
 ANY REASONABLE METHOD OF
MEASURING OBSOLESCENCE APPROVED
BY THE SECRETARY OF FINANCE.
DEPRECIATION, DEPLETION,
AND AMORTIZATION
DEPRECIATION IN PETROLEUM
OPERATIONS:
PROPERTIES USED DIRECTLY IN
PRODUCTION OF PETROLEUM
OPEARTIONS SHALL BE DEPRECIATED
OVER 10 YEARS OR SUCH SHOTER LIFE
AS PERMITTED BY THE CIR.
PROPERTIES NOT DIRECTLY USED IN THE
PRODUCTION OF PETROLEUM SHALL BE
DEPRECIATED OVER 5 YEARS.
DEPRECIATION, DEPLETION,
AND AMORTIZATION
FAVORABLE DEPRECIATION RATE FOR
MINING OPERATIONS:
IF THE PROPERTY HAS AN EXPECTED LIFE
OF NOT MORE THAN 10 YEARS, THE COST
SHALL BE DEPRECIATED AT THE NORMAL
RATE OF DEPRECAITION.
IF THE EXPECTED LIFE IS MORE THAN 10
YEARS, THE PROPERTY CAN BE
DEPRECIATED OVER ANY NUMBER OF
YEARS BETWEEN 5 YEARS AND 10 YEARS.
SEC. 34(E)(5)
DEPRECIATION, DEPLETION,
AND AMORTIZATION
 BEFORE COMMERCIAL PRODUCTION –
CAPITALIZED AS COST OF THE WASTING
ASSET.
 AFTER COMMENCEMENT OF COMMERCIAL
PRODUCTION, IF INCURRED WITH:
1. NON-PRODUCING WELLS OR MINES,
DEDUCTED IN THE PERIOD PAID OR INCURRED
2. PRODUCING WELLS OR MINES, AT THE
OPTION OF THE TAXPAYER, EITHER:
A. CAPITALIZED AND AMORTIZED USING
THE COST-DEPLETION METHOD; OR
B. DEDUCTED IN THE YEAR PAID OR
INCURRED.
DEPRECIATION, DEPLETION,
AND AMORTIZATION
THE EXPENSE OPTION ON NON-PRODUCING
MINES:
AFTER COMMERCIAL PRODUCTION HAS
COMMENCED, EXPLORATION AND
DEVELOPMENT DRILLING EXPENSES
INCURRED ON NON-PRODUCING MINES MAY BE
DEDUCTED OUTRIGHT BUT THE DEDUCTIBLE
AMOUNT SHALL NOT EXCEED 25% OF THE NET
INCOME FROM MINING OPERATIONS WITHOUT
THE BENEFIT OF ANY TAX INCENTIVES UNDER
EXISTING LAWS. THE UNCLAIMED BALANCE OF
THE EXPENSE SHALL BE CARRIED FORWARD
TO THE SUCCEEDING YEARS UNTIL FULLY
DEDUCTED.
DEPRECIATION, DEPLETION,
AND AMORTIZATION
NO DEPRECIATION FOR CERTAIN
TRANSPORTATION VEHICLES:
NO DEPRECIATION SHALL BE ALLOWED FOR
YACHTS, HELICOPTERS, AIRPLANES, AND/OR
LAND VEHICLES WHICH HAVE A VALUE OF
MORE THAN P2,400,000. HOWEVER, THIS
PROHIBITION DOES NOT APPLY IF THE
TAXPAYER’S MAIN LINE OF BUSINESS IS
TRANSPORATION OR THE LEASE OF
TRANSPORT EQUIPMENT, AND THE VEHICLES
PURCHASED ARE USED IN SAID OPERATIONS.
MAINTENANCE EXPENSES OF NON-
DEPRECIABLE VEHICLES ARE NOT ALLOWED
AS DEDUCTIONS.
 PENSION TRUST
CONTRIBUTIONS
REQUISITES:
 THE EMPLOYER MUST HAVE ESTABLISHED A PENSION OR
RETIREMENT PLAN TO PROVIDE FOR THE PAYMENT OF
REASONABLE PENSIONS TO HIS EMPLOYEES;
 THE PENSION PLAN IS REASONABLE AND ACTUARIALLY
SOUND;
 IT MUST BE FUNDED BY THE EMPLOYER;
 THE AMOUNT CONTRIBUTED MUST BE NO LONGER
SUBJECT TO THE CONTROL AND DISPOSITION OF THE
EMPLOYER;
 THE PAYMENT HAS NOT YET BEEN ALLOWED AS
DEDUCTION; AND
 THE DEDUCTION IS APPORTIONED IN EQUAL PARTS OVER A
PERIOD OF 10 CONSECUTIVE YEARS BEGINNING WITH THE
YEAR IN WHICH THE TRANSFER OR PAYMENT IS MADE.
 PENSION TRUST
CONTRIBUTIONS
TO PROVIDE FOR REASONABLE PENSIONS TO
EMPLOYEES:
PAYMENT DEDUCTIBILITY
PRESENT SERVICE COST CONTRIBUTIONS – IN FULL
PAID TO COVER CURRENT PENSION
LIABILITIES ACCRUING DURING THE TAXABLE
YEAR
PAST SERVICE COST CONTRIBUTIONS – PRORATED
PENSION EXPENSE OF THE EMPLOYER OVER 10 YEARS
ACCRUING IN PRIOR YEARS FOR SERVICES BEGINNING
RENDERED BY EMPLOYEES BEFORE THE WITH THE
ESTABLISHMENT OF THE PENSION FUND AND YEAR IN WHICH
ADDITIONAL PENSION EXPENSE ACCRUING IN THE PAYMENT
PRIOR YEARS ARISING FROM IMPROVEMENTS IS MADE
IN THE BENEFIT OFFERING OF THE PLAN
 ILLUSTRATION 9
EWAN CORPORATION FUNDED A
PENSION PLAN FOR ITS 60
EMPLOYEES IN 2007. THE COMPANY
PAID A LUMP SUM OF P2,000,000
AND IS REQUIRED TO PAY AN
ANNUAL CONTRIBUTION OF
P100,000 STARTING 2008.
 CHARITABLE
CONTRIBUTIONS
REQUISITES:
 CONTRIBUTIONS OR GIFTS ARE ACTUALLY PAID;
 GIVEN TO ENTITIES SPECIFIED BY LAW;
 NET INCOME OF THE RECIPIENT DOES NOT INURE
TO THE BENEFIT OF ANY STOCKHOLDER OR
INDIVIDUAL;
 TAXPAYER MAKING THE CHARITABLE
CONTRIBUTION MUST BE ENGAGED IN TRADE,
BUSINESS, OR PROFESSION.
VALUATION: THE AMOUNT OF ANY CHARITABLE
CONTRIBUTION OF PROPERTY OTHER THAN
MONEY SHALL BE BASED ON THE NET BOOK VALUE
OF THE SAID PROPERTY AS REFLECTED IN THE
FINANCIAL STATEMENTS OF THE DONOR.
 CHARITABLE
CONTRIBUTIONS
NOT SUBJECT TO LIMIT:
 DONATIONS TO THE GOVERNMENT OR TO
GOCCs FOR PRIORITY ACTIVITIES IN
EDUCATION, HEALTH, YOUTH AND SPORTS
DEVELOPMENT, HUMAN STTLEMENTS,
SCIENCE, AND CULTURE, OR ECONOMIC
DEVELOPMENT AS DETERMINED BY NEDA.
 DONATIONS TO FOREIGN INSTITUTIONS
AND ORGANIZATIONS PURSUANT TO
TREATIES OR AGREEMENTS ENTERED INTO
BY THE PHILIPPINES GOVERNMENT.
 CHARITABLE
CONTRIBUTIONS
NOT SUBJECT TO LIMIT:
 DONATIONS TO ENTITIES PURSUANT TO
SPECIAL LAW.
EX. STATE COLLEGES AND UNIVERSITIES;
CCP; NATIONAL COMMISSION FOR
CULTURE AND THE ARTS; INTEGRATED
BAR OF THE PHILIPPINES; IRRI; PHILIPPINE
RED CROSS (RA 10072); ANY CHILD-CARING
OR CHILD-PLACING INSTITUTION
ACCREDITED BY THE DSWD (RA 10165).
 DONATIONS TO ACCREDITED NGOs.
 CHARITABLE
CONTRIBUTIONS
SUBJECT TO LIMIT:
 DONATIONS TO THE GOVERNMENT OR GOCCs
EXCLUSIVELY FOR PUBLIC PURPOSES, BUT NOT
FOR PRIORITY ACTIVITIES.
 DONATIONS TO ACCREDITED DOMESTIC
CORPORATIONS OR ASSOCIATIONS ORGANIZED
AND OPERATED EXCLUSIVELY FOR RELIGIOUS,
CHARITABLE, SCIENTIFIC, YOUTH AND SPORTS
DEVELOPMENT, CULTURAL, EDUCATIONAL, OR THE
REHABILITATION OF VETERANS.
 DONATION TO SOCIAL WELFARE INSTITUTIONS.
 DONATIONS TO NON-ACCREDITED NGOs.
 CHARITABLE
CONTRIBUTIONS
LIMITS OF CONTRIBUTIONS:
OF TAXABLE
CORPORATIONS: 5% INCOME DERIVED
FROM TRADE,
BUSINESS, OR
PROFESSION
WITHOUT THE
BENEFIT OF THE
INDIVIDUALS: 10% CHARITABLE
DEDUCTIONS
 CHARITABLE
CONTRIBUTIONS
NON-PROFIT CORPORATIONS:
 ORGANIZED AND OPERATED EXCLUSIVELY FOR SCIENTIFIC,
RESEARCH, EDUCATIONAL, CHARACTER-BUILDING, YOUTH
AND SPORTS DEVELOPMENT, HEALTH, SOCIAL WELFARE,
CULTURAL, OR CHARITABLE PURPOSES;
 NO PART OF THE NET INCOME OF SUCH NGO INURES TO THE
BENEFIT OF ANY PRIVATE INDIVIDUAL;
 USES THE DONATION NOT LATER THAN THE 15TH DAY OF THE
3RD MONTH AFTER THE CLOSE OF ITS TAXABLE YEAR;
 ITS ADMINISTRATIVE EXPENSES IS LESS THAN OR EQUAL TO
30% OF TOTAL EXPENSES;
 ITS ASSETS, UPON DISSOLUTION, SHALL BE GIVEN OR
DISTRIBUTED TO ANOTHER NGO ORGANIZED FOR A SIMILAR
PURPOSE, OR TO THE STATE FOR A PUBLIC PURPOSE.
 RESEARCH AND DEVELOPMNT
COSTS
• RESEARCH AND DEVELOPMENT COSTS RELATED
TO CAPITAL ACCOUNTS ARE CAPITALIZED AS PART
OF THE COST OF THE PROPERTY AND DEDUCTED
THROUGH DEPRECIATION EXPENSE.
• RESEARCH AND DEVELOPMENT COSTS NOT
RELATED TO CAPITAL ACCOUNTS ARE CLAIMABLE
AS FOLLOWS AT THE OPTION OF THE TAXPAYER:
1. OUTRIGHT EXPENSE; OR
2. DEFERRED EXPENSE AND IS AMORTIZED OVER A
PERIOD NOT LESS THAN 60 MONTHS BEGINNING
FROM THE MONTH THE TAXPAYER REALIZE
BENEFITS FROM THE R&D EXPENDITURES.
 ILLUSTRATION 10
EXPENDITURES FOR RESEARCH AND
DEVELOPMENT ON JULY 1, 2016 WERE:
EXPENDITURE 1: LAND P5,800,000
EXPENDITURE 2: BUILDING WITH USEFUL LIFE OF OF 6,000,000
50 YEARS
EXPENDITURE 3: OTHERS, WITH BENEFIT TO BE 3,000,000
RECEIVED BEGINNING NOVEMBER 2, 2016 AND FOR 4
YEARS
EXPENDITURE 4: OTHERS, WITH BENEFIT TO BE 3,600,000
RECEIVED BEGINNING JULY 1, 2016 AND FOR 6 YEARS
 OTHER DEDUCTIBLE
EXPENSES
FOREIGN INCOME TAXES
PAID TAKEN AS
DEDUCTIONS BE RESIDENT
CITIZENS OR DOMESTIC
CORPORATIONS
NON-DEDUCTIBLE EXPENSES
 PERSONAL, LIVING, AND FAMILY
EXPENSES;
 EXPENDITURES WHICH ARE CAPITALIZED,
EXCEPT INTANGIBLE DRILLING AND
DEVELOPMENT COSTS INCURRED IN
PETROLEUM OPERATIONS WHICH MAY BE
DEDUCTED IN FULL;
 LOSSES FROM SALES OR EXCHANGES OF
PROPERTY, INTEREST EXPENSE, AND BAD
DEBTS BETWEEN RELATED PARTIES
UNDER SEC. 36(B);
NON-DEDUCTIBLE EXPENSES
 PREMIUMS PAID BY AN EMPLOYER:
1. COVERING THE LIFE OF AN EMPLOYEE;
AND
2. THE BENEFICIARY IS THE EMPLOYER.
NOTE: IF THE EMPLOYEE IS THE
BENEFICIARY, THE PREMIUMS PAID BY THE
EMPLOYER RE DEDUCTIBLE, AND ARE
FRINGE BENEFITS TO THE EMPLOYEE.
 FINES AND PENALTIES DUE TO LATE
PAYMENT OF TAX.
 ILLUSTRATION 11
THE ECHO CO. IS A DOMESTIC CORPORATION
IN MANUFACTURING BUSINESS. IT OWNS
THE PIECE OF LAND AND BUILDINGS
WHERE IT CONDUCTS MANUFACTURING
OPERATIONS. HOWEVER, MARKETING
ACTIVITIES ARE IN A BUILDING THAT IS
RENTING IN THE SHOPPING CENTER OF
THE METROPOLIS. IN A YEAR, DATA ON
OPERATIONS FOLLOW:
 ILLUSTRATION 11
GROSS PROFIT FROM SALES P20,000,000
DEPRECIATION ON BUILDINGS – MANUFACTURING 200,000
(BASED ON COST)
AMORTIZATION OF PATENTS 300,000
CONTRIBUTIONS TO A PENSION TRUST SET UP DURING THE YEAR:
FOR PAST SERVICE COST 2,000,000
FOR PRESENT SERVICE COST 50,000
PROVISION FOR BAD DEBTS (WRITE-OFF DURING THE 70,000
YEAR WAS P60,000)
RESEARCH AND DEVELOPMENT COSTS, WITH BENEFITS 1,000,000
TO BE RECEIVED FROM IT BEGINNING THE SECOND
SEMESTER OF THE YEAR (TO BE TREATED AS
DEFERRED CHARGES)
 ILLUSTRATION 11
EXPENDITURE FOR LEASEHOLD IMPROVEMENTS ON P1,200,000
RENTED BUILDING (WITH USEFUL LIFE OF 30 YEARS,
AND REMAINING TERM OF LEASE OF 20 YEARS)
CONTRIBUTIONS:
TO THE GOVERNMENT, FOR A PRIORITY ACTIVITY IN 200,000
HOUSING
TO THE QUIAPO CATHOLIC CHURCH 5,000
TO NGOs ORGANIZED AND OPERATED FOR CHARITABLE 500,000
PURPOSES
TO RAPE VICTIMS 12,000
OTHER EXPENSES OF OPERATIONS 10,000,000