e) Bad debts Debts due to the taxpayer when actually ascertained to be worthles and charged-off within the taxable

year.(Sec.34 (E)(1) of NIRC) They refer to those debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due to the taxpayer by others, arising from money lent or from uncollectible amounts of income from goods sold or services rendered. (Sec.2 [a], RR No.599)

(1) Requisites for deductibility 1) There must be a valid and subsisting debt. 2) The same must be connected with the taxpayers trade, business or practice of profession. 3) The same must not be sustained in a transaction entered into between related parties. 4) The same must be actually charged-off the books of accounts of the taxpayer as of the end of the taxable year. 5) The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year. f) Depreciation The gradual diminution in the useful value of tangible property used in trade or business resulting from exhaustion, wear and tear, and normal obsolescence. The term is also applied to amortization of value of intangible assets the use of which in trade or business is definitely limited in duration.(REVIEWER ON TAXATION
MAMALATEO (2008) p. 208)

(1) Requisites for deductibility a) The allowance for depreciation must be reasonable b) It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year c) It must be charged-off during the taxable year;
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d) A statement on the allowance must be attached to the return. e) The property must have a limited useful life.

(2) Methods of computing depreciation allowance (a) Straight-line method Spreads the total depreciation over the useful life of the asset and generally results in an equal depreciation per unit of time regardless of the use to which the properties are put. (b) Declining-balance method Uses a rate to the declining book value of the asset. Depreciation is largest in amount the first year and declines in the years thereafter. (c)Sum-of-the-years-digit method Requires the application of a changing fraction to the cost basis of the property, reduced by the estimated residual salvage value. g) Charitable and other contributions (1) Requisites for deductibility a) Must actually be paid or made to the Phil. Government or any of its agencies or political subdivision or to any domestic corporations or associations.

b) Must be made within the taxable year;

c) Must not exceed 10% of the individuals taxable income and 5% of the corporations taxable income before deducting the contribution; and
d) Must be evidenced by adequate records or receipts. (Sec. 34 (H) of NIRC)

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(2) Amount that may be deducted Subject to limit Deductible in full

a) Donations to the Philippine government or any of its agencies or any political subdivision thereof exclusively for public purposes;

a) Donations to the government of the Philippines or to any of its agencies or political subdivisions, including fullyowned government corporations exclusively to finance, to provide for, or to be used in undertaking priority activities in:

b) Donations to accredited domestic corporations or associations organized and operated exclusively for:

1.

Education;

2. Health; 1. Religions; 2. Charitable; 3. Scientific; 5. Science and culture; and 4. Youth and sports development; 5. Cultural; or 6. Educational purposes; or for the 7. Rehabilitations of veterans; and 6. Economic development. b) Donations to foreign institutions or international organizations in pursuance or compliance with agreements, treaties, or commitments entered into by the government of the and the foreign laws or international organizations or in pursuance of special laws, and 3. Youth and sports development; 4. Human settlements;

c) Donations to social welfare institutions or to non-government organizations in accordance with rules and regulations promulgated by the Secretary of Finance, provided no part of the net income of which inures to the benefit of any private stockholders or individual. (Sec. 34 (H)(1) c) Donations to certain accredited nonof NIRC) government organization.
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h) Contributions to pension trusts (1) Requisites for deductibility a) The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees; b) The pension plan is reasonable and actuarially sound. c) It must be funded by the employer;

a) The amount contributed must no longer be subject to its control or disposition; and b) The payment has not therefore been allowed as a deduction.

(i) Deductions under special laws These are deductions usually allowed only for particular business or enterprises and not to others, or may be allowed for all but are not provided for under the provisions of the NIRC but under special laws. 4) Optional standard deduction a) Individuals, except non-resident aliens A maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. The cost of sales or the cost of services is not allowed to be deducted for purposes of determining the basis of the OSD inasmuch as the law (R.A. 9504, Minimum Wage Earner Law) is specific as to the basis thereof which states that for individuals, the basis of the 40% OSD shall be the gross sales or gross receipts and not gross income.
(Rev. Reg. No. 16-2008)

b) Corporations, except non-resident foreign corporations Not exceeding forty percent (40%) of their gross income.
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c) Partnerships 1. If the GPP avails of itemized deductions under Sec. 34 of the NIRC in computing net income, the partners may still claim itemized deductions on their net distributive share that have not been claimed by the GPP; 2. The partners, however, are not allowed to claim OSD on their share of net income because the OSD is a proxy for all items of deductions allowed in arriving at taxable income; 3. If the GPP avails of OSD in computing net income, the partners may no longer claim further deductions from their net distributive share, whether itemized or OSD; 4. The election to claim either the OSD or itemized deductions must be signified in the income tax return filed for the first quarter of the taxable year; once the election is made, the same type of deduction must be consistently applied for all succeeding quarters and in the annual income tax return; and
4. A taxpayer who is required but fails to file the quarterly income tax return for the

first quarter shall be deemed to have elected to avail of itemized deductions for the taxable year.
(RR No. 2-2010)

5) Personal and additional exemption a) Basic personal exemptions Fifty thousand pesos (P50,000) each individual taxpayer. b) Additional exemptions for taxpayer with dependents Twenty-five thousand pesos (P25,000) - each dependent not exceeding four (4). c) Status-at-the-end-of-the-year rule 1. Taxpayer marries during taxable year - may claim the corresponding BPE in full for such year. 2. Taxpayer should have additional dependent(s) during taxable year - may claim corresponding AE in full for such year. 1. Taxpayer dies during taxable year - his estate may still claim BPE and AE for himself and his dependent(s) as if he died at the close of such year. Page 5 of 10

4. If during the taxable year a. spouse dies, or b. any of the dependents dies or marries, turns 21 years old or becomes gainfully employed, taxpayer may still claim same exemptions as if the spouse or any of the dependents died, or married, turned 21 years old or became gainfully employed at the close of such year. (Sec. 35 (C) of NIRC) d) Exemptions claimed by non-resident aliens They can be entitled to personal and additional exemptions subject to the rule on reciprocity. 1. Their foreign country allows personal exemptions to citizens of the Philippines not residing therein; 2. File an accurate return of their income from all sources within the Philippines on time; and 3. Amount allowable is not to exceed our maximum allowable personal exemption. 6) Items not deductible a) General rules These items are not related to the trade, business or profession of the taxpayer. b) Personal, living or family expenses These are personal expenses and not related to the conduct of trade or business. c) Amount paid for new buildings or for permanent improvements These are capital expenditures added to the cost of the property and the periodic depreciation is the amount that is considered as deductible expense. d) Amount expended in restoring property They are capital expenditures or those expenditures that result in obtaining benefits of a permanent nature.

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e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested When the taxpayer is directly or indirectly a beneficiary under such policy. (Sec. 36
[A] of NIRC)

f) Interest expense, bad debts, and losses from sales of property between related parties Interest Expense Bad Debts Losses from sales of property between related parties

In general, the amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business. (Sec. 34 (B) of
NIRC)

In general, debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties. Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (Sec. 34 (E) of
NIRC)

(1) Between members of a family; or (2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock 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

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the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust. (Sec. 36 (B) of NIRC)

g) Losses from sales or exchange or property In general, losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity: 1. If incurred in trade, profession or business; 2. Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. (Sec. 34
(D)(1) of NIRC)

h) Non-deductible interest i) Non deductible taxes

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j) Non-deductible losses 1. Losses from illegal transactions 2. Losses from sales or exchanges of property between related taxpayers but the gains are taxable k) Losses from wash sales of stock or securities j. Exempt Corporations 1) Proprietary educational institutions and hospitals 2) Government owned or controlled corporations i. Government Service Insurance System (GSIS), ii. the Social Security System (SSS), iii. the Philippine Health Insurance Corporation (PHIC), and iv. the Philippine Charity Sweepstakes Office (PCSO). 3) Others (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

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(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A non-stock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. (Sec. 30 of NIRC)

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