Deduction From GI

TAXATION
FAR EASTERN UNIVERSITY – MANILA

DEDUCTIONS FROM GROSS INCOME (2201)
a. Sec. 34 – Deductions from b. Sec. 35 – c. Sec. 36 – Items Not Deductible d. Sec. 37 – Special
Gross Income Allowance of provisions (deductions)
Personal
Exemption for
Individual
Taxpayer
Section 34 (A) to (M) a. Basic personal (A) General Rule 1. Special deductions
a. Ordinary and necessary exemption allowed to insurance
expenses b. Additional Items Not Deductible companies
b. Interest expense exemption for General – No deduction shall be allowed for:
c. Taxes dependents • Personal, living or family expenses 2. Mutual insurance
d. Losses • Payment for new buildings or for permanent companies
e. Bad debts improvement, or betterment made to increase the value
f. Depreciation of any property or estate (not applicable to intangible 3. Mutual marine insurance
g. Depletion of oil and gas drilling and development costs incurred in petroleum companies
wells and mines operations);
h. Charitable and other Note: This shall not apply to intangible drilling and 4. Assessment insurance
contributions development costs incurred in petroleum operations which are companies
i. Research and development deductible through reasonable allowance for depletion or
j. Pension trusts amortization.
k. Additional requirements for a. Proprietary educational
deductibility of certain • Expenses in restoring property or in making good institutions and non-profit
payments the exhaustion thereof for which an allowance is or has hospitals - expenditures
l. Optional standard been made; otherwise considered as
deduction capital outlays of depreciable
• Premium paid on any life insurance policy covering
m. Premium payments on assets incurred during the
the life of any officer or employee, or of any person
health and/or hospitalization taxable year for the
financially interested in any trade or business carried on
insurance of an individual expansion of school facilities
by the taxpayer, individual or corporation, when the
taxpayer
taxpayer is directly or indirectly a beneficiary under such
b. Insurance companies
policy; and
Note: The above deductible items 1. Net additions required by
shall be allowed as deduction only it • Losses from sales or exchanges of property between law to be made within the
is shown that the tax required to be related parties. year to reserve funds and
deducted and withheld therefrom 2. The sums other than
has been paid to the BIR (Sec. 34 In computing net income, no deduction shall in any case be dividends paid within the
K) allowed in respect of losses from sales or exchanges of year on policy and annuity
property directly or indirectly – contracts
1. Between members of the family.
c. Mutual marine
Note: The family of an individual shall include only his insurance companies
brothers and sisters (whether by the whole or half-blood), 1. Amounts paid for
spouse, ancestors, and lineal descendants. reinsurance
2. Amounts repaid to
2. Except in case of distributions in liquidation, between an policyholders on account of
individual and a corporation more than 50% in value of the premiums previously paid by
outstanding stock of which is owned, directly or indirectly, by them and interest paid upon
or for such individual. those amount between the
ascertainment and payment
3. Except in case of distributions in liquidation, between two thereof.
corporations, more than 50% in value of the outstanding
stock of each of which is owned, directly or indirectly, by or d. Assessment insurance
for the same individual, if either one of such corporations, companies – Actual
with respect to the taxable year of the corporation preceding deposits of sums with the
the date of the sale or exchange was, under the law applicable officers of the Government
to such taxable year, a personal holding company or a foreign of the Philippines pursuant
personal holding company. to law, as additions to
4. Between the grantor and a fiduciary of any trust. guarantee or reserve funds
5. Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to e. Mutual insurance
each trust. companies – any portion of
6. Between a fiduciary of a trust and a beneficiary of such the premium deposits
trust. returned to their policy
holders
A. Deductions: Expenses
General Requirements
22. Deductions from gross income Page 1 of 23

1. Should be ordinary and necessary expenses paid/incurred during the taxable year for the development,
management, operation and/or conduct of the trade, business or profession such as:
• Salaries and other remuneration
• Travel expenses
• Rentals
• Entertainment, amusement, and recreation expenses directly related to or in furtherance of trade
2. Substantiated by adequate proof – documented by official receipts or adequate records which reflect the:
a. Amount being deducted
b. Connection or relation of expense to business/trade
3. Not contrary to law, morals, public policy or order (e.g. bribes, kickbacks or similar payments)
4. The taxes required to be withheld (if applicable) have been properly withheld and remitted on time.
Requisites from deductibility a. Reasonable

of salaries, wages and other b. Employer-employee relationship
forms of compensation c. Personal service actually rendered
including the gross up d. Withholding tax imposed has been paid
monetary value of fringe
benefits
Requisites for deductibility a. Reasonable
of travel expenses, here and b. Incurred or paid while away from home
abroad c. Incurred or paid in the pursuit of trade, business or profession
d. Excluded : personal travels sponsored by the employer subject to FBT
Requisites for deductibility of a. Reasonable
rentals b. For purposes of trade, business or profession
c. Taxpayer has not taken or is not taking title or in which he has no equity other than that
of a lessees, user or possessor
Entertainment, Amusement, and Recreation

(EAR) Expenses RR No. 10-2002
Definition
• “EAR” includes representation expenses and/or depreciation or rental expense relating to entertainment facilities.
• “Representation expenses” – expenses incurred by a taxpayer in connection with the conduct of his trade, business or
exercise of profession, in entertaining, providing amusement and recreation to, or meeting with, a guest or guests at a dining
place, place of amusement, country club, theatre, concert, play, sporting event, and similar events or places.
• Does NOT refer to fixed representation allowances that are subject to withholding tax on wages.
Definition of Entertainment Facilities
• To be considered an entertainment facility, such yacht, vacation home or condominium, or item of real or personal
property must be owned or form part of the taxpayer’s trade, business or profession or rented by such taxpayer, for which the
taxpayer claims a depreciation or rental expense.
• A yacht shall be considered an entertainment facility if its use is in fact not restricted to specified officers or
employees or positions in such a manner as to make the same fringe benefit for purposes of imposing the FBT.
Definition of Guests
“Guests” mean persons or entities with which the taxpayer has direct business relations, such as but not limited to, clients/customers or
prospective clients/customers. The term shall NOT include employees, officers, partners, directors, stockholders, or trustees of the taxpayer.
EAR Expenses RR No. 10-2002

Substantiation Requirements
For purposes of proving that said expense is a representation expense and not fringe benefits, taxpayer should maintain
receipts and adequate records that indicate the following:
• Amount of expense
• Date and place of expense
• Purpose of expense
• Professional or business relationship of expense
• Name of person and company entertained with contact details.

Exclusions from EAR
• Expenses which are treated as compensation or fringe benefits for services rendered under an employer-employee
relationship;
• Expenses for charitable or fund raising events;
• Expenses for bonafide business meeting of stockholders, partners or directors;
• Expenses for attending or sponsoring an employee to a business league or processional organization meeting;
• Expenses for events organized for promotion, marketing and advertising including concerts, conferences, seminars,
workshops, conventions, and other similar events;
• Other expenses of a similar nature.
Ceiling on EAR Expense
• For tax payers engaged in the sale of goods/properties – 0.50% of net sales (i.e..gross sales less sales
returns/allowances and sales discounts.)
• For taxpayers engaged in the sale of services (including exercise of profession and use or lease of properties) – 1% of
net revenues (i.e., gross revenues less discounts)
Ceiling on EAR Expense
For taxpayers engaged in both sale of goods/properties and services-apportionment formula
Apportionment Formula:
Net Sales/Net Revenues

------------------------------------------- X EAR Expense
Total Net Sales and Net Revenues
• Notwithstanding the ceiling on such expense, the claimed expense shall be subject to verification and audit for
purposes of determining its deductibility as well as compliance with the substantiation requirements.
• If after verification, a taxpayer is found to have shifted the amount of the EAR expense to any other expense in order
to avoid the tax being subjected to the ceiling, the amount shifted shall be disallowed in its totality, without prejudice to such
penalties as may be imposed by the Tax Code.
EAR Expenses RR No. 10-2002 Reportorial Requirement

• Taxpayer is required to use the account title “entertainment, amusement and recreation expense” in its FS and ITR, or
to disclose in the notes to FS the corresponding amount.
• EAR expense should be reported in the taxpayer’s ITR as a separate expense item.
PROBLEMS
Problem 1 (Salary Expense): During 20X0, the total net amount paid for the salaries and wages amounted to P9,000,000
after effecting the following deduction for employees:
SSS premium contributions P420,000
Philhealth premium contributions 100,000
Pag-ibig premium contributions 180,000
Creditable withholding tax 300,000
In addition, the corporation provided it’s vice-president for operations P340,000, cash as fringe benefit. The allowable
deduction for salaries and benefits is________________
Problem 2 (Traveling Expenses): A Corporation incurs the following travel expenses:

Plane tickets and hotel bills of its officers who were sent to business seminars:
In Zambales P 50,000
In USA 200,000
Transportation expenses of its officers from home to office and vice versa as part of their employment contract, P68,000 on
which final tax of P32,000 was remitted. Transportation expenses of messengers from office to several clients’ places at
P40,000, inclusive of meals amounting to P25,000. How much is the total allowance expense that could be claimed by A
Corporation?

Problem 3: (Prepaid Rent ) On June 30, 200B, G rents an apartment for P20,000 and subsequently sublease 80% of the
apartment to CPA reviewers for P25,000 a month beginning (July 1,200B). G’s records show the following rental collections
and payments during the year:
Total payments P 80,000
Total collections 150,000
How much is the deductible rent expense for the year?
Problem 4: (Capital Expenses of Educational Institution) In 200x, TUV University, a private educational institution,
constructed a building with a contract price of P10,000,000. The building has an estimated useful life of 50 years with a salvage
value of 10%. How much is the deductible expense allowed to TUV University for year 200x under the two options?
Problem 5: (Representation Expense ) Mr. X, a sole proprietor, is engaged in computer sales and computer repairs,
reported the following income and expenses during year:
Net sales P700,000
Net repair revenue 300,000
Representation expense 10,000
Salaries expense 100,000
Cost of sales 600,000
Cost of services 200,000
How much is the deductible representation expense?
Problem 6: (Revenue vs. Capital Expenditures) ABC Store incurred additional expenditures of P130,000 for its
business fixed assets as follows:
Installation of new air condition P60,000
Expansion of store 50,000
Damages paid due to workers’ injury 20,000
Repainting of store building 10,000
Cleaning of computers 9,000
Repair of furniture 1,000
The amount to be immediately expensed and capitalized would be
Problem 7: (Deductible from Gross Income) Mr. Apo Liwayway, married, works as a supervisor of Golden
Construction receiving P240,000 as his annual gross compensation income. He maintains a small consulting firm that earns
P120,000 a year. He incurred the following expenses during the year:
Premium payments of his life insurance P25,000
Depreciation of his house (10% is used as office for his firm) 20,000
Repair of his house (10% used as office for his firm) 100,000
Interest expense paid to his brother 10,000
Office supplies used 6,000
Donation to the burial of his friend 5,000
Required:
1. From the items above, how much is the total deduction from gross compensation income of Liwayway?
2. From the items above, how much is the total deduction from gross income from professional of Liwayway?
B. Deductions: Interest
Interest- Payment for the use or forbearance or detention of money, regardless of the name by which it is called. It
includes the amount paid for the borrower’s use of money during the term of the loan, as well as for his detention of money
after the due date for its repayment.
(RR No. 13-2000, implementing Codal provision on deductibility of interest)
Requisites for deductibility:

1. An indebtedness exists.
2. The interest has been paid or incurred.
3. The indebtedness must be that of the taxpayer.
4. The indebtedness is connected with the taxpayer’s trade, business or exercise of profession.
5. The interest was paid or incurred during the taxable year.
6. The interest is stipulated in writing.
7. The interest is legally due.
8. The indebtedness is not between related taxpayers.
9. The interest was not incurred to finance petroleum exploration.
10. If incurred on an indebtedness to acquire property, the interest was not treated as a capital expenditure.
• The amount of deductible interest shall be reduced by an amount equal to 42% (effective November 1, 2005)
of interest income earned which had been subjected to final withholding tax, provided rate shall be 33% effective
January 1, 2009.
• The limitation applies whether or not a tax arbitrage scheme was entered into by the taxpayer, or regardless of
the date of the interest-bearing loan and the date the investment was made for as long as, during the taxable year, an
interest expense was incurred on one side and an interest earned on the other side, which income was subjected to
final tax. (BIR No. 6-00 dated January 5, 2000)
Interest: When fully Deductible
Interest incurred or paid on all unpaid business-related taxes shall be fully deductible from gross income and shall not be
subject to the limitation on deduction. Thus, such interest expense shall not form part of the expense that is to be diminished
by 42% of interest income subjected to final tax, provided the rate shall be 33% effective January 1, 2009. (RR No. 13-00)
When Interest May not be Deducted
Interest shall not be deducted when:
• Paid in advance through discount or otherwise by a cash basis individual taxpayer but such interest shall be allowed as
deduction in year indebtedness is paid (provided that if the indebtedness is payable in periodic amortizations, the interest which corresponds to
the principal amortized shall be allowed as deduction for the taxable year)
• Paid on loans between related taxpayers
• Paid on indebtedness to finance petroleum exploration.
Related taxpayers under Section 36 (B) of Tax Code
• Between members of a family. For purposes of this paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or
• Between the grantor and a fiduciary of any trust; or
• Between the grantor and a fiduciary of another trust if the same person is a grantor with respect to each trust; or
• Between the fiduciary of a trust and a beneficiary of such trust.
• Except in the case of distributions in liquidation, between an individual and a 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
• Except in the case of distributions in liquidation, between two corporations more than fifty (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 sale or exchange was, under the law
applicable to such taxable year, a personal holding company or a foreign personal holding company.
• RR No. 13-00
• (iii) “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.”
Optional Treatment of Interest Expense
Interest incurred to acquire property used in trade or business may be:

1. Allowed as a deduction or
2. Treated as a capital expenditure.
PROBLEMS
Problem 1: (Interest Expense) A corporation earned income, inclusive of P50,000 interest income and net of interest
expense of P40,000, amounting to P1,500,000. The deductible interest expense would be_____
Problem 2: (Deductible vs. Nondeductible Interest Expense) Mr. Tee, a taxpayer reporting in cash basis,showed the
following interest expense related to his business during the year:

Interest paid in advance P20,000
Interest paid to a brother 12,000
Interest paid on delinquency taxes 8,000
Interest on borrowings to finance his family home 30,000
Interest paid to finance petroleum exploration 100,000
If Mr. Tee has an interest income of P10,000 earned from the bank, and P20,000 interest income from trade notes receivables,
how much is the deductible and non-deductible interest expense during the year?
C. Deductions: Taxes
Taxes paid or incurred within the taxable year in connection with the taxpayer’s trade or business, except:
• Philippine income tax
• Foreign income tax, if taxpayer avails of the foreign tax credit
• Estate and donor’s tax
• Taxes assessed against local benefits of a kind that tends to increase the value of the property assessed.
Alternative treatment for taxes paid in foreign countries.

• Claim the same as Foreign Tax Credit to be deducted against Philippine income tax due of citizens and
domestic corporations.
• BIR Requirements – proof of:
- The total amount of income derived from foreign sources;
- The amount of income derived from each country, the tax paid or incurred which is being claimed as a
credit; and
- All other information necessary for the verification and computation of such credit.
PROBLEM
1. The following tax expenses related to business were paid by X Trading during the taxable year:
Business taxes other than VAT P20,000
Documentary stamp tax 1,000
Automobile registration fees (business use) 3,000
Real property taxes 50,000
Annual registration fee 500
Stock transaction tax 200,000
Income tax 400,000
Value-added tax 50,000
Donor’s tax 30,000
How much is the amount of taxes deductible from gross income?
2. Mang Antoy is a resident citizen with earnings within and outside the Philippines. His financial records during the taxable
year show the following:
Business income within and without P520,000
Business expenses within and without 200,000
The business expense includes P10,000 representing income tax payment made in foreign country.
If his personal exemption is P50,000, how much is the correct net taxable income to avail better tax savings?
D. Deduction: Losses
Types of Losses
• Ordinary losses
Losses incurred in trade, business, or profession
Losses of property connected with trade, business, or profession, if due to casualty, etc.
• Capital losses
Losses from sales or exchanges of capital assets (allowable only to the extent of capital gains)
Securities becoming worthless (considered loss from sale or exchange, on last day of the taxable year)
• Special kinds of losses
Losses from wash sales of stock or securities
Wagering losses
Abandonment losses in petroleum operations

Requirements for deductibility of Losses:
1. Actually sustained and charged-off during the taxable year and not compensated for by insurance or other forms of
indemnity.
2. Incurred in trade, profession or business.
3. 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.
4. Loss has not been claimed as deduction for estate tax purposes.
5. Sustained in a closed and completed transaction.
Losses (Casualty)
Substation for loss arising from casualties, robbery, theft or embezzlement.

• Filing of a declaration of loss within the time prescribed by the BIR (i.e., within 45 days) from the occurrence or
discovery of the loss.
Losses and Insurance Proceeds
• If a casualty occurs which may result in a loss ad in the year of such casualty or event, there exist a claim for
reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which
reimbursement may be received is sustained until it can be ascertained with reasonable certainty whether or not such
reimbursement will be received.
• Whether a reasonable prospect of recovery exists with respect to a claim for a reimbursement of a loss is a question of
fact to be determined upon an examination of all facts and circumstances.
• Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a
settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. (Section 7 of RR No. 12-77)
• If the loss is covered by insurance and there is a reasonable doubt as to collectability of insurance, then the loss is
deductible in the year of final determination of the insurance claim.
• If the insured has reasonable prospects of collecting insurance but determinable only at a later year, then the loss is
not considered closed and completed until there is insurance settlement.
• If the casualty loss is compensated with insurance the loss is equal to the difference between damage and insurance
recoverable(if insurance provides a definite and enforceable right against the insurance company)
• If the amount of loss is not determinable/estimable in the year incurred, no loss is recognized until extent of damage
is determined. ( Merten’s Law of Federal Taxation, Chapter 28)
Amount of casualty loss deductible
• The amount of casualty loss deductible is limited to the difference between the value of the property immediately
preceding the casualty and its value immediately thereafter, but shall not exceed an amount equal to the cost or other adjusted
basis of the property, or depreciated cost in the case of property used in business, reduced by any insurance or other
compensation received.
• The fair market value of the property immediately before and immediately after the casualty for purposes of determining
the amount of casualty loss deductible shall be ascertained by an impartial but competent appraisal. ( Section 5, RR No. 12-77)
• This appraisal must recognize the effects of any general market decline affecting the undamaged, as well as damaged
property, which may occur simultaneously with the casualty in order that any deduction shall be limited to actual loss resulting
from damage to property.
• The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that:
1. The repairs are necessary to restore the property to its condition immediately before the casualty.
2. The amount spent for such repairs is not excessive.
3. The repairs do not cover more than the damage suffered
4. The value of the property after the repairs does not as a result of the repairs exceed the value of the property
immediately before the casualty. (Section 5, RR No. 12-77)
CASUALTY LOSS RMO NO. 6-2012 DATED APRIL 2, 2012
Destruction/disposal or Verification of Casualty Loss
Where to file: Application for inventory assets disposal/destruction shall be filed with the Large Taxpayers office or
Revenue District where the principal office is registered.

In case the inventories, machineries, or equipments are located outside the territorial jurisdiction of the LT or RDO
where registered: the physical/ocular inspection and supervision over the destruction/disposal maybe conducted by the LT or
RDO having jurisdiction over the place where the items are located.
Casualty loss
RMO No. 6-2012 dated April 2, 2012
Destruction/Disposal or Verification of Casualty loss
In case destruction/disposal cannot be completed in a day

- It shall be scheduled in a manner acceptable to both the BIR Representative and the taxpayer. No destruction/disposal shall
be made without the presence and supervision of the authorized BIR representative.
Report on the result of destruction/disposal:

-To be prepared by the authorized BIR representative who conducted the supervision of the destruction/disposal. The report
along with the supporting documents shall be transmitted to the concerned LT or RDO where the Application was filed.
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 deduction from gross income for the next three (3) consecutive years.
• Can be claimed as deduction for purposes of the quarterly and annual RCIT computation. (Section 6.4 of RR No. 14-
2001)
Conditions when NOLCO is not allowed as deduction:
a. If the net loss is incurred in the year during which the taxpayer was exempt from income tax;
b. If there has been substantial change in the ownership of the business.
There is no substantial change in the ownership of the business when:

-Not less than 75% in normal value of outstanding shares issued is held by or on behalf of the same persons; or
-Not less than 75% of paid up capital of the corporation is held by or on behalf of the same persons.
Capital loss Deductible from capital gain only

Loss on wash sales a. Losses from wash sales are not deductible
b. Gains from wash sales are taxable
Wagering losses Deductible to the extent of the gains from wagering transactions
Abandonment losses a. If contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining to
contract area shall be allowed as a deduction.
b. If producing well is subsequently abandoned, the unamortized costs, as well as the
undepreciated costs of equipment directly used, shall be allowed as deduction in the year
such well, equipment or facility is abandoned.
Loss due to voluntary removal Deductible
of building incident to
renewal
Real estate bought upon Not deductible expense on account of cost of removal, the value of the real estate,
which is located a building exclusive of the old improvements, being presumably equal to the purchase price of the
land and building plus the cost of removal
Loss of useful life Actual loss is deductible
Shrinkage in the value of Not deductible. But if a stock of a corporation becomes worthless, the cost or other basis
stock may be deducted in the taxable year the stock became worthless.
Corporate readjustment a. Loss is not deductible
(merger and consolidation) b. Gain may be recognized if the taxpayer received cash and property
Transfer of property for stock a. Loss is not recognized
that led to control of b. Gain may be recognized if the taxpayer received cash and property in addition to the
corporation shares received.
Sale or Exchange of Property (Corporate Readjustment)

• Within the meaning of corporate readjustment are:
o Mergers and consolidations
o Transfer to controlled corporations
• The term “merger or consolidation” means

o The ordinary merger or consolidation and
o The acquisition by one corporation of all or substantially all of the properties of another corporations
Either of which is undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of
taxation. In determining whether the property transferred to constitutes a substantial portion of the property of the transferor,
the term “ property” shall be taken to include the cash assets of the transferor.
FORMULA:
Fair market value of shares received Px
Add: Cash received, and
Fair market value of property received X
Income value (total consideration received) Px
Less: Outgoing value:
Book value of shares surrendered by the stockholder or
Book value of the securities surrendered by the security holder, or
Book value of the property surrendered by the corporation (x)
Indicated gain to the stock/security holder or corporation on the merger or consolidation Px
Gain to recognize (should not exceed the cash and the fair market value of the property received) Px
To the stockholder, the gain to recognize may be:
Dividend income (to the extent of his participation in his old corporation's retained earnings) and Px
The balance is a gain on the merger or consolidation Px
Basis of the shares / securities/ property transferred Px
Less: Cash and fair market value of the property received (x)
Balance Px
Add: Gain recognized on the merger or consolidation Xx
Basis of the shares / securities received Xx
• In a merger or consolidation, no loss is recognized by a corporation or its stockholder or its security holder
• When a taxpayer property to a corporation is consideration of shares of stock received from the transferee
corporation, and as a result of which the taxpayer gain control of the corporation, no loss is recognized on
the transfer of the property.
Wash Sales/ Short Sales

I. Wash Sales - sale or other disposition of securities where substantially identical securities are acquired or
purchased within a 61-day period beginning 30 days before the sale and ending 30 days after the sales.
a. Treatment;
i. Gains – Taxable
ii. Losses – Not deductible but part of the cost of the acquisition
b. Not applicable to:
i. Individual or corporation acting as dealers in stocks or securities if the sale or disposition is made in
the ordinary course of business.
ii. Short sales transaction
c. Substantially identical – the stock must be of the same class, or in case of bonds, the terms thereof must be
the same.
d. The following may not be considered substantially identical:
i. Preferred stock and common stock of the same corporation
ii. A stock with voting power and a stock with no voting power
iii. A stock of a corporation and the stock of another corporation
iv. Two series of bonds which differ as to interest rates
II. Short Sales - Sale of stocks which the seller does not own ( he merely borrows the stock certificates through or
from his stock broker) and subsequently buys or covers the stock to complete the transactions.
Treatment of Gain (Loss) on Wash Sale and Short Sale

Wash Sale Short Sale
Gain Treated as capital gain (taxable) Treated as capital gain (taxable)

Loss -Non-deductible (artificial) Treated as capital loss which can be
-Forms part of the cost of subsequent acquisitions deducted from capital gain(s) only
PROBLEMS
Problem 1: ( Various losses) Mr. Santol incurred the following losses related to this construction business:
Loss on unrealized earnings P500,000
Casualty losses 250,000
Compensatory liquidated damages 100,000
Book value of partially damaged machine 50,000
Replacement cost of damage portion of machine 40,000
Abandoned equipment due to technological problem 150,000
Accumulated depreciation of abandoned equipment 120,000
Embezzled funds by the cashier 70,000
Loss on sale of capital asset 30,000
The casualty losses was reported to the BIR within 45 days and compensated by insurance amounting to P300,000
Required: Compute the total amount of deductible losses.
Problem 2 (NOLCO) The following are the comparative income statements of Venus:
Year 1 Year 2
Gross Profit P500,000 P600,000
Estimated bad debts 20,000 10,000
Other Operating Expense 580,000 490,000
Income (loss) (P100,000) P100,000
Required: Compute the NOLCO that could be deducted from year 2 income
Problem 3 (Corporate Readjustment) A and B are stockholders incorporations which are being consolidated into a new
corporation, had the following data on their shares of stock: FMV of shares received xxx
A B + FMV of property received xxx
+ Cash received xxx
Consideration received: Total consideration received xxx
FMV of shares P75,000 P81,000 - BV of the property transferred (xxx)
Indicated gain xxx
FMV of property 5,000 5,000
Cash 10,000 4,000 VS
Cost of shares surrendered 80,000 80,000 Gain to be recognized should not exceed the cash and FMV of property
1. The gain or loss to be recognized by A is_______________________

2. The gain or loss to be recognized by B is_______________________
Problem 4: (Wash Sales) A taxpayer under calendar year has the following selected transactions:
Sept. 9, 20X0 - Purchased 100 shares of K Co. common for P5,000.
Dec. 21, 20X2 - Purchased 50 shares of K Co. common for P2,750.
Dec. 26, 20X2 - Sold the 100 shares purchased on Sept. 9, 20x0 for P4,000.
Jan. 2, 20X3 - Purchased 25 shares of K Co. common for P1,125.
Required: Compute the following:

1. Shares sold at a loss without covering acquisition
2. Loss on wash sale and the capital loss
3. The adjusted cost of the shares bought on December 21, 20X2 and January 2, 20X3
E. Deductions: Bad Debts
Bad Debts - Debts resulting from the worthlessness or uncollectibility, in whole or in part, of the amounts due to the
taxpayer by others.
Requisites for deductibility under RR No. 5-99, as amended by RR No. 25-2002 dated November 19, 2002:
i. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;

ii. The same must not be sustained in a transaction entered into between related parties enumerated under Section 36(B) of the
Tax
iii. The same must be connected with the taxpayer’s trade, business or practice of profession;
iv. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;
v. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.
Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to demonstrate with reasonable degree of
certainty the uncollectibility of the debt. The Commissioner of Internal Revenue will consider all pertinent evidence, including:
- The value of the collateral, if any, securing the debt and the financial condition of the debtor in determining
whether the debt is worthless, or;
- The assigning of the case of collection to an independent collection lawyer who is not under the employ of
the taxpayer and who shall report on the obstacle and the virtual impossibility of collecting the same from the
debtor and who shall issue a statement under oath showing the propriety of the deductions thereon made for
alleged debts.
Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce
payment would in all probability not result in satisfaction of execution on a judgement, a showing of these facts will be
sufficient evidence of the worthlessness of the debt for the purpose of deduction.
Tax Benefit Rule on Recovery of Bad Debts

The recovery of bad debts previously allowed as deduction in the preceding year or years shall be included as part of
the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction.
PROBLEMS
Problem 1 (Bad debt Expense) Mr. Uy reports the following bad debts as deductibility from his gross income for the year
200B:
Bad debts expense from business P200,000
Bad debts expense from practice of profession 50,000
Uncollectible salary 20,000
Uncollectible money lend to brother for operation 10,000
Upon investigation, the following are gathered from the records of Mr. So:
• Bad debts from business:

From insolvent customer with solvent guarantor P100,000
From other customers without guarantor
(60% are estimated collectible and 40% are actually written off during the year) 100,000
Total P200,000
• 100% of bad debts from profession are actually written off during the year.
• Uncollectible salary was due to employer’s bankruptcy.
• Brother died from operation and could not pay anymore.
How much is the deductible bad debts expense of Mr. Uy?
F. Deductions: Depreciation / Amortization
Depreciation includes:
• The gradual diminution in the service or useful value of tangible property due from exhaustion, wear and tear and
normal obsolescence.
• Amortization of the value of intangible assets with definitely limited duration.
Requisites for depreciation deduction:

a. must be reasonable;
b. must be property used or employed in the business, or temporarily not in use;
c. must be charged off during the taxable; and
d. must be supported by a statement submitted together with the tax return.
Methods of computing depreciation

a. Straight-line method

b. Declining-balance method
c. Sum-of-the-years digit method
d. Any other method which may be prescribed by the Secretary of Finance upon recommendation of the BIR.
RR NO.1-2012 DATED OCTOBER 12, 2012

Deductibility of Depreciation Expenses as it Relates to Purchase of Vehicles and Other Expenses Related Thereto,
and Taxes Allowed.
The following guidelines shall be observed in determining whether depreciation expense can be claimed or not on
account of Vehicles capitalized by the taxpayer, or in claiming other expenses and input taxes on account of said
Vehicle:
A. No deduction from gross income for depreciation shall be allowed unless the taxpayer substantiates the purchase
with sufficient evidence, such as official receipts or other adequate records which contain the following, among others:
i. Specific Motor Vehicle identification Number, Chassis Number, or other registrable identification numbers of the
vehicle.
ii. The total price of the specific Vehicle subject to depreciation; and
iii. The direct connection or relation of the Vehicle to the development, management operation, and/or conduct of
the trade or business or profession of the taxpayer;
B. Only one Vehicle for land transport is allowed for use of an official or employee, the value of which should not
exceed. Two Million Four Hundred Thousand Pesos (P2,400,000);
C. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the
above threshold amount, unless the taxpayer’s main line of business is transport operations or lease of transportation
equipment and vehicles purchased are used in said operations;
D. All maintenance expenses on account of non-depreciable Vehicles for taxation purposes are disallowed in its entirely;
E. The input taxes on the purchase of non-depreciable Vehicles and all input taxes on maintenance expenses incurred
thereon are likewise disallowed for taxation purposes.
RMC No. 2-2013 dated December 28,2012

Clarifying certain provisions of Revenue Regulations No. 12-2012 on the deductibility of depreciation expenses as it
relates to purchase of vehicles and other expenses related thereto, and the input taxes allowed therefore
The RR applies to land vehicles prospectively, thus, it applies to land vehicles purchased upon its effectivity.
The RR took effect on October 17, 2012, the date it was published.
Any loss that will be incurred as a result of a sale of the non-depreciable vehicles shall likewise be NOT allowed as a
deduction from gross income
For income tax purposes, all expenses related to the no-depreciable vehicles (e.g., repairs and maintenance, oil and
lubricants, gasoline, spare parts, tires and accessories, premium paid for insurance covering said vehicles and
registration fees) shall NOT be allowed as a deduction in its entirety.
G. Deductions: Depletion of oil and gas wells and mines

Depletion – Definition
A reasonable allowance for depletion shall be allowed as deduction:
For entities engaged in oil and gas wells or mines
Under a cost depletion method
Not permitted if depletion allowance has equalled the invested capital.
Limitation of depletion It cannot exceed the capital invested in the mine
Intangible exploration and a. Deductible in the year incurred if such expenditures are incurred for non-producing
development drilling costs wells and/or mines
b. Deductible in full or may be capitalized and amortized if such expenditures incurred are
for producing wells and/or mines in the same contract area.
Total amount deductible for a. Not to exceed 25% of the net income from mining operations computed without the
exploration and development benefit of any tax incentives under existing laws.
expenditures (if the taxpayer
elects to deduct exploration b. Actual exploration and development expenditures minus 25% of the net income from
and development mining shall be carried forward to the succeeding years until fully deducted.

expenditures)
Problem Exploration and Development Expenditures
TUV Mining Co. reported the following data for 200x:
January 1, 200X depletable cost P12,500,000
January 1, 200X probable reserves 5,000,000 units
Cost and Expenses:
Mining costs P2,000,000
Milling costs 3,000,000
Marketing expense 1,500,000
Depreciation expense 1,000,000
Exploration costs 1,000,000
Intangible development costs 1,500,000
Other information during 200X:
(a) Additional probable reserves were determined to be 2,500,000 units.
(b) Actual production was 1,200,000 units.
(c) Selling price per unit is P12.
1. The new depletion rate if the additional exploration and development costs will be part of the adjustment on depletion rate
would be_______________
Answer:
Depletable costs, January 1, 200x P12,500,000
Exploration costs 1,000,000
Intangible development costs 1,500,000
Total P15,000,000
Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 2,400,000
Adjusted basis P 1,260,000
Divided by remaining reserves
(5,000,000 + 2,500,000 – 1,200,000) 6,300,000
New depletion rate/ unit P 2.00
2. The depletion cost for year 200x using assumption 1 is

Answer:
Depletion cost 2007 (P2 x 1,200,000 units) P2,400,000
3. If the additional exploration and development cost are to be treated as direct deduction from the taxable income, how
much would be the allowable amount for 200x?
Answer:
Value of production (P12 x 1,200,000 units) P14,400,000

Less: Production and selling costs:
Mining costs P2,000,000
Milling costs 3,000,000
Marketing expenses 1,500,000
Depreciation expense 1,000,000 7,500,000
Net income from operation P 6,900,000
Multiplied by limit percentage 25%
Deductible amount from exploration and development cost P 1,725,000
4. Taking option 2, direct deduction from gross income, what amount of exploration and development costs would be
charged to succeeding years?
Answer:
Current exploration and development cost (P1,500,000 + P1,000,000) P2,500,000

Less: Deductible amount of exploration and development cost (see 3) 1,725,000
Exploration and development cost chargeable to succeeding years P 775,000
H. Deductions: Charitable Contributions
Requisites for deductibility:

• Evidence or proof submitted to the BIR by showing the certificate/s of Donation and indicating therein the
following:
Actual receipt by the accredited non-stock, non-profit corporation/NGO of the donation or contribution
and the date of receipt thereof; and
The amount of the charitable donation or contribution, if in cash; if property, whether real or personal, the
acquisition cost of the said property.
• For donation worth over P1 Million, notice to the Revenue District office is required and Certificate of Donation
must be attached.
Donations to the following shall be allowed FULL deductibility:
Donations to the Philippine Government or to any of its agencies or political subdivisions, including fully-owned
government corporations undertaking priority activities according to a National Priority Plan determined by the
National Economic and Development Authority (NEDA):
Donations to foreign institutions or international organizations pursuant to agreements, treaties, or commitments
entered into by the Philippines Government or pursuant to special laws;
Donations to accredited NGOs subject to conditions set forth in RR No.13-98
Donations actually paid or made to accredited NGOs shall be allowed full deductibility, subject to the following
conditions:
• The accredited NGO shall make utilization directly for the active conduct of the activities constituting the purpose or
function for which it is organized and operated, not later than the fifteenth (15th) day of the month after the close of the
accredited NGOs taxable year in which contribution are received, unless an extended period is granted by the Secretary of
Finance, upon recommendation of the commissioner.
• The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said
property.
• All members of the Board of Trustees of the non-stock, non-profit corporation, organization or NGO do not receive
compensation or remuneration for their service to the aforementioned organization.
• Donations to accredited non stock, non-profit corporations shall be allowed LIMITED deductibility as follows:
For individual donor - not in excess of 10% of the donor’s income derived from trade, business or profession computed
before the donation; and
For corporate donor – not in excess of 5% of the donor’s income derived from trade, business or profession computed
before the donation;
Contribution deductible with a. Those made for the use of the Government of the Philippines or any of its agencies or
limits any political subdivision exclusively for public purpose.
b. Those made to accredited domestic corporation or associations organized and operated
exclusively for:
1. Religious
2. Charitable
3. Scientific
4. Youth and sports development
5. Cultural or educational purposes or
6. Rehabilitation of veterans
c. Those made to social welfare organizations.
d. Those made to non-government organizations.
Contribution deductible in a. Donations to Government of the Philippines or to any of its agencies or political
full subdivisions, including fully owned government corporations, exclusively to finance, to
provide for, or to be used in undertaking priorities activities in education, health, youth,
Notes: Donations actually paid or and sports development human settlements, science and culture, and economic
made to accredited NGOs shall be development.
allowed full deductibility, subject to
the following conditions:
b. Donation to certain foreign institution or international organizations.
- The accredited NGO shall make utilization
directly for the active conduct of the activities c. Donations to accredited non-government organizations (nonprofit domestic
constituting the purpose or function for which it corporations):
is organized and operated, not later than the
fifteenth (15th) day of the month after the close
1) Organized and operated exclusively for scientific, research, educational, character
of the accredited NGOs taxable year in which building and youth and sports development, health, social welfare, cultural and charitable
contribution are received, unless an extended purposes, or a combination of these.
period is granted by the Secretary of Finance, 2) Which not later than the 15th day of the 3rd month after the close of the taxable year in
upon recommendation of the commissioner. which the contributions are received, makes utilization of the contributions directly for the

-The amount of any charitable contribution of purpose of functions for which the organization is organized and operated.
property other than money shall be based on the 3) The administrative expense shall, on annual basis, not exceed 30% of the total
acquisition cost of said property.
expenses.
4) The assets of which, in the event of dissolution, would be distributed to another
-All members of the Board of Trustees of the
nonprofit domestic corporation organized for similar purpose or purposes, or to the state
non-stock, non-profit corporation, organization
or NGO do not receive compensation or
for public purpose, or would be distributed by a court to another organization to be used
remuneration for their service to the
aforementioned organization.
in such manner as in the judgment of said court to another organization to be used in such
manner as in the judgment of said court shall best accomplish the general purpose for
which the dissolved was organized.
Valuation The amount of any charitable contribution of property other than money shall be based on
the acquisition cost of said property.
Contributions deductible by a a. In determining its net income, the general professional partnership can deduct
General Professional contributions in full.
Partnership b. Contributions subject to limit shall be claimed and deducted by the partners in
proportion to their respective interest in the partnership.
PROBLEMS
1. What would be the allowable deduction for P5,000 contribution made by a resident citizen to an accredited social welfare
organization, from his P60,000 net income after contribution?
2. A domestic corporation made a P20,000 contribution to an accredited social welfare institution. Its business income for
200A is P500,000. The related business expenses inclusive of the P20,000 contribution is P150,000. The allowable deduction
for charitable contribution would be__
I. Deductions: Research & Development
Research or development (R and D) expenditures shall be allowed as deduction:

a. if incurred in connection with the trade, business or profession of the taxpayer; and
b. if not charged to capital account
Treatment of R and D Expenditures: At the option of the taxpayer the R and D expenditures may be treated as deferred
expenses to be amortized over a period of not less than 60months:
a. if paid or incurred in connection with trade, business or profession;
b. if not treated as expense; and
c. if chargeable to capital account not subject to depreciation
Expenses Not Considered as R and D.

a. Expenditures for acquisition or improvement of land, or for the improvement of property to be used in connection with
R and D of a character which is subject to depreciation and depletion; and
b. Expenditures paid or incurred for the purpose of ascertaining the existence, location, extent, or quantity of any deposit
of ore or other mineral, including oil gas
J. Deductions: Pensions
Contribution made to a pension trust may be claimed as deduction in the following manner:
• Amount contributed for the normal/current service cost – 100% deductible; and
• Amount contributed for the past service cost – 1/10 of the amount contributed is deductible in year the contribution
is made, the remaining balance will be amortized equally over nine consecutive years.
Requisites for deductibility of payments to pension trusts:

a. There must be a pension or retirement plan to provide for the payment of reasonable pensions to employees;
b. BIR approval for the retirement fund is secured;
c. the pension plan is reasonable and actuarially sound;
d. it must be funded by the employer;
e. The amount contributed must no longer be subject to its control or disposition; and
f. the payment has not theretofore been allowed as a deduction.
PROBLEM
SFI Inc., (SFI) has been in business for the past 10 years. For the year 2004, it decided to establish a pension fund for its
employees.
The pertinent data of the fund are us follow:
Past Service Cost (lump sum payment) P 1,000,000

Present Service Cost 100,000
1. How much allowable deduction for pension cost SFI could claim?
2. . Assuming the same facts, allowable deduction of SFI for pension in the year 2016 is:
K. Additional Requirements for Deductibility of Certain Payments
Additional requirements Any amount paid or payable which is otherwise deductible from, or taken into account in
for deductibility of computing gross income or for which depreciation or amortization may be allowed, shall be
certain payments allowed as a deduction only if it is shown that the tax required to be deducted and withheld
therefrom has been paid to the Bureau of Internal Revenue.
When the obligation to withhold raises
The obligation of the payor to deduct and withhold the tax arises at the time an income payment is:
- Paid or Payable
- Accrued or recorded as an expense or asset, whichever is applicable, in the payor’s books
- Whichever comes first
- [Section 2.57.4 of Revenue Regulations (RR) No. 2-98 as amended by Section 4 of RR No. 12-2001]
- “Payable” refers to the date the obligation becomes due, demandable or legally enforceable.
- Where income is not yet paid or payable, but the same has been recorded as an expense or asset, whichever is
applicable, in the payor’s books, the obligation to withhold shall arise in the last month of the return period in
which the same is claimed as an expense or amortized for tax purposes.
Remedies of withholding agent if expense is disallowed
Section 6 of RR No. 17-2003

“Items of deduction representing return of capital such as those pertaining to purchases of raw materials forming part
of finished product or purchases of goods for resale, shall be allowed as deductions upon the withholding agent’s payment of
the basic withholding tax and penalties incident to non-withholding or underwithholding.”
RR NO. 12-2013 DATED JULY 12, 2013 (OLD) (RR 6-2018 revoking RR 12-2013- see note below)
Amending Section 2.58.5 of RR No. 2-98, as amended, Relative to the Requirements for Deductibility of Certain
Income Payments
“Section 2.58.5. Requirement for Deductibility. – Any income payment which is otherwise deductible under the code shall be
allowed as a deduction from the payor’s gross income only if it is shown that the income tax required to be withheld has been
paid to the Bureau in accordance with Sections 57 and 58 of the code. No deduction will also be allowed notwithstanding
payments of withholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no
withholding of tax was made in accordance with Sections 57 and 58 of the code.”
RR- 6-2018 (Revoking Revenue Regulations (RR) No. 12-2013 There bv Reinstating the Provisions of Section 2.58.5 of RR No.
14-2002" as Amended bv RR No. 17-2003.)
SECTION 2. REQUIREMENTS FOR DEDUCTIBILITY OP CERTAIN EXPENSES. – RR No. 12-2013 is hereby revoked, in effect,
reinstating the provisions stated under RR No. l4-2002, as amended b1' RR No. l7-2003 to read as follows:
"Sec. 2.58.5. Requirements for Deductibility. – An income payment which is otherwise deductible under the Code shall be allowed
as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to
the Bureau in accordance with Secs. 57 and 58 of the Code. A deduction will also be allowed in the following cases where no
withholding of tax was made:
(A) The payee reported the income and pays the tax due thereon and the withholding agent pays the tax including the interest incident
to the failure to withhold the tax. And surcharges, jf applicable, at the time of the audit/investigation or reinvestigation/reconsideration.
(B) The recipient/payee failed to report the income on the due date thereof but the withholding agent/taxpayer pays the tax including
the interest incident to the failure to withhold the tax^ and surcharges" if applicable at the time of audit/investigation or reinvestigation /
reconsideration.

(C ) The withholding agent erroneously underwithheld the tax but pays the difference between the correct amount and the amount of
tax withheld including the interest incident to such error and surcharges, if applicable at the time of the audit/ investigation or
reinvestigation/reconsideration.
Items of deduction representing return of capital such as those pertaining to purchases of raw materials forming part of finished product
or purchases of goods for resale shall be allowed as deductions upon withholding agent's payment of the basic withholding tax and
penalties incident to non-withholding or underwithholding.,,
When should expenses be accrued?

Under Section 34 (A) (1) (a) of the Tax Code, 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 exercise of a profession shall be allowed as deductions from taxable income.
Thus, for companies using the accrual method of accounting, deductions and credits must be taken in the year when these are
accrued.
In determining when an expense has accrued for tax purposes, reference may be made to US jurisprudence, which has
persuasive effect in the Philippines, as noted in several Court of Tax Appeals (CTA) decisions involving the deductibility of
accrued expenses.
Under US jurisprudence, accrual of expense is understood in terms of the all-events test. The all-events test states that under
the accrual method of accounting, expenses are deductible in the taxable year in which:
1. All events have occurred which determine the liability; and
2. The amount of liability can be determined with reasonable accuracy.
(Mertens Law of Federal Income Taxation)
L. Optional Standard Deduction
Republic Act (RA) No. 9504

• A corporation may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as
defined in Section 32 of the Tax Code, as amended.
• Unless the taxpayer signifies in his intention to elect the optional standard deduction, he shall be considered as having
availed himself of the deductions allowed in the preceding Subsections of the Tax Code, as amended.
• The election to claim either the OSD or the itemized deduction for the taxable year must be signified by checking the
appropriate box in the income tax return filed for the first quarter of the taxable year adopted by the taxpayer. Once
the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns
in the final income tax return for the taxable year. Any taxpayer who is required but fails to file the quarterly income
tax return for the first quarter shall be considered as having availed of the itemized deductions option for the taxable
year.
• Said corporation shall keep such records pertaining to his gross income as defined in Section 32 during the taxable
year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.
Summary of important points in OSD

Corporation General Prof. Partnership Individuals
1) Basis Gross income Gross income Net sales/Net receipts
2) Rate 40% 40% 40%
3) Cost of sales/Cost of Deducted Deducted Not deducted
services
4) Choice of OSD To be signified in the return To be signified in the return To be signified in the return
(irrevocable)
5) Submission of financial Required Required Not required
statements
6) Keeping of records Required pertaining to gross Required pertaining to gross Required pertaining to gross
income income sales/receipts
7) Hybrid method (partly Not allowed Not allowed Not allowed
itemized deductions partly
OSD)
8) Computation of taxable GS/GR xxx GS/GR xxx GS/GR xxx

Corporation General Prof. Partnership Individuals
net income using OSD Less: Ret and all xxx Less: Ret and all xxx Less: Ret and all xxx
Discounts xxx (xxx) Discountsxxx (xxx) Discountsxxx (xxx)
Net sales xxx Net sales xxx Net sales xxx
Less: COS (xxx) Less:COS (xxx) Other income xxx
GI from operation xxx GI from operation xxx Gross income xxx
Other income xxx Other income xxx Less: OSD xxx
Gross income xxx Gross income xxx BPE xxx
Less: OSD (xxx) Less:OSD (xxx) APE xxx (xxx)
Taxable income xxx Taxable income xxx Taxable income xxx
OSD=Gross income x 40% OSD=Gross income x 40% OSD=Net Sales x 40%
M. Premium payments on health and/or hospitalization insurance of an individual taxpayer
Health and/or The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or
Hospitalization Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization
Insurance 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.
Special Allowable Itemized Deductions
Special Allowable Special deductions are other items of deductions which may or may not partake the nature of an
Itemized Deductions expense but is allowed by the NIRC or by special laws as deductions. Special deductions include
deduction incentives to a taxpayer in assisting and in complying with certain legal requirements.
I. Special expenses 1. Income distribution from a taxable estate or trust
under the NIRC and 2. Transfer to reserve fund and payments to policies and annuity contracts of insurance
special laws companies
3. Dividend distribution of a Real Estate Investment Trust (REIT) under RA 9856
4. Transfer to reserves of funds of taxable cooperatives
5. Discounts to senior citizens under RA 9257
6. Discounts to persons with disability under RA 9442
II. Deduction 1. Additional compensation expense for senior citizen employee under RA 9257
incentives under special 2. Additional compensation expense for persons with disability under RA 7277, as amended by
laws RA 9442
3. Cost of facilities improvements for persons with disability in accordance with RA 7277, as
amended by RA 9442
4. Additional training expense under the RA 8502 – Jewelry Industry Development Act of 1998
5. Additional contribution expense under the Adopt-a-School program under RA 8525
6. Additional deductions for compliance to Rooming-in and Breast-feeding practices under
RA7600, as amended under RA10028
7. Additional free legal assistance expense under RA 9999
8. Additional productivity incentive bonus expense under RA 6971
Special Expenses Under the NIRC or Special Laws

1. Income Income distribution made by the administrator of a taxable estate in favour of the heirs or by a trustee
Distribution of a taxable trust in favor of the beneficiary of the trust is a special deduction against the gross income of
Made by Taxable the estate or trust. The income distribution shall be included by the recipient heir or beneficiary in his
Estate or Trusts gross income.
2. Net Transfer Under the insurance code, non-life insurance companies are required to maintain a reserve equivalent
to Reserve Fund to 40% of their gross income, less returns and cancellations for risks expiring within one year. For
and Payments to marine cargo risks, the reserve is equivalent to the amount of premium on insurance during the last
Policies and two month of the calendar year.
Annuity
Contracts of The net additions, if any, required by law to be made within the year to the reserve funds and the sums,
Insurance other than dividends, paid within the year on policy and annuity contracts may be deducted from the
Companies gross income of insurance companies.

Under current regulations, the transfer to the reserve fund shall be deductible in the year it was actually
paid and not in the year it was determined. Also in consonance to the tax benefit rule, the release of the
reserve is treated as an income in the year of release.
3. Dividend A REIT is a publicly listed corporation established principally for the purpose of owning income-
Distribution of a generating real estate assets. A REIT is legally mandated to distribute 90% of its distributable income as
Real Estate dividends to shareholders.
Investment Trust
or REIT Under RA 9856, the dividend distributions of REITs are treated as special deduction against gross
income.
For purposes of computing the taxable net income of REITs, dividends distributed by them from their
distributable income after the close of a taxable year and on or before the last day of the fifth month
following the close of the taxable year shall be considered as paid on the last day of such taxable year.
4. Transfer To Under RA 9520, cooperatives are required to maintain reserves for their protection and stability.
Reserve Fund of Cooperative are exempt from income tax but are subject to tax on their income from unrelated
Cooperatives activities. The amount transferred by the cooperative to the reserve fund out of the net surplus from
unrelated activities is an item of deduction in the computation of the taxable net income of the
cooperative.
5. Discounts to Senior citizen shall be entitled to claimed at 20% discount from personal consumption only, exclusive
senior citizens use and enjoyment or availment of the senior citizen. The discounts granted to senior citizens by
under RA 9257 covered establishments and service providers are allowed as special deductions against gross income.
6. Discounts to Disabled person – refers to an individual suffering from restriction or different abilities, as result of
Disabled Persons mental, physical or sensory impairment to perform an activity in a manner or within the range
(RA 7277) considered normal for human being. (Shall be entitled to claimed at 20% discount of the gross
selling price or gross receipt net of vat, from establishments relative to the sale of goods or services
for their exclusive use or enjoyment)
20% sales discount expense (allowable deductions from the gross income of the seller of goods or
services), the discount should be separately shown in the sales invoice or office receipt.
DEDUCTION INCENTIVES UNDER SPECIAL LAWS

1. Additional Private establishments employing Senior Citizens shall be entitled to additional deduction from
Claimable their gross income equivalent to fifteen percent (15%) of the total amount paid as salaries and
Compensation wages to Senior Citizens subject to the provision of Section 34 of the Tax Code and its implementing
Expense for rules and regulations provided the following conditions are met:
Senior Citizen 1. The employment shall have to continue for a period of at least six (6) months;
Employees 2. The annual taxable income of the Senior Citizen does not exceed the poverty level as may be
determined by the NEDA (National Economic Development Authority) thru the NSCB. For this
purpose, the Senior Citizen shall submit to his employer a sworn certification that his annual taxable
income does not exceed the poverty level.
The poverty line or poverty threshold pertains to the amount of income sufficient to meet basic food and non-food needs such
as clothing, housing, transportation, and health among others. The senior citizen shall submit to his employer a sworn
certification that his annual taxable income does not exceed the poverty level.
The 15% additional deduction is definitely not an actual expense but is allowed by law merely as an
incentive for employers who consider senior citizens for employment. The regular salaries will be
presented as part of regular allowable itemized deductions. The 15% additional deduction shall be
presented as special allowable itemized deductions.
Senior citizens who are above the poverty level may avail of incentives under the Minimum Wage Law
if they qualify as minimum wage earners.
2. Additional Private entities that employ disabled persons who meet the required skills or qualifications, either as
Claimable regular employee, apprentice or learner, shall be entitled to an additional deduction, from their gross
Compensation income, equivalent to twenty-five percent (25%) of the total amount paid as salaries and wages to
Expense for disabled persons.
Persons with Requisites for deductibility:
Disability 1. That entities present proof as certified by the Department of Labor and Employment that
disabled person are under their employ.
2. That the disabled employee is accredited with the Department of Labor and Employment and
the Department of Health as to his disability, skills and qualifications.
3. Cost of Under RA 7277, private entities that improve or modify their physical facilities in order to provide
Facilities reasonable accommodation for disabled persons shall also be entitled to an additional deduction from
Improvement for their income, equivalent to fifty percent (50%) of the direct costs of the improvements or
Disabled Persons modifications.
4. Additional Under RA 8502 and its implementing rules and regulations, a qualified jewelry enterprise duly registered
Training Expense and accredited with the Board of Investments (BOI) is entitled to an additional deduction from taxable
under the Jewelry income of 50% of the expenses incurred in training schemes approved by Technical Education and
Industry Skills Development Authority (TESDA). The same shall be deductible during the year the expenses
Development Act were incurred.
Conditions for deductibility:

1. A qualified jewelry enterprise must submit to the BIR a certified true copy of its Certificate of
Accreditation issued by the BOI.
2. The training scheme must be approved and certified by TESDA.
5. Additional Implementing the Tax Incentives Provisions of Republic Act No. 8525, Otherwise Known as
contribution the “Adopt-a-School Act of 1998” (RR 10-2003)
expense under
the Adopt-a- “Adopt-a-School Program” – or “Program” shall refer to a program which allows private entities to
School program assist a public school in a particular aspect of its educational program within an agreed period.
under RA 8525
The adopting private entity which may be an individual in business or practice of profession, a partnership,
or a corporation, shall team up with the DepED, CHED or TESDA toward providing much needed
assistance and services to public schools.
“Assistance” - shall refer to the aid/help/contribution/donation provided by an adopting private

entity to a public school. Assistance may be in the form of, but not limited to, infrastructure, teaching
and skills development, learning support, computer and science laboratories, and food and nutrition.
Tax Deduction Incentive

• Contributions to the government in priority activities are deductible in full while those made in
non-priority activities are deductible subject to limit.
• Aside from the usual regular deductible contribution expense, an adopting entity shall be
allowed an additional deduction from gross income equivalent to 50% of the contribution of
the adopting entity for the “Adopt-A-School Program”.
6. Expanded The expenses incurred by a private health institution in complying with the rooming-in and breast-
Breastfeeding feeding practices, shall be deductible expenses for income tax purposes up to twice the actual amount
Promotion Act of incurred.
2009 (RA 10028) Deductions
Regular itemized deduction 100%
Special itemized deduction 100%
Total (Twice) 200%
Conditions for deductibility

1. The deductions shall apply for the taxable period when the expenses were incurred.
2. All health or non-health facilities, establishments and institutions shall comply with the RA 10028
within 6 months after its approval.
3. The facility, establishment or institution secure a “Working Mother-Baby-Friendly Certificate” from
the Department of Health to be filed with the BIR.
7. Free Legal Tax Deduction Incentive
Assistance (RA
9999) The practicing lawyer or professional partnership shall be entitled to an allowable deduction from gross
income equivalent to the amount that could have been collected for the actual performance of the
actual free services rendered or up to 10% of gross income derived from the actual performance
of the legal profession, whichever is lower.
For the purpose of this incentive, the free legal services must be exclusive of the 60-hour mandatory
free legal assistance rendered to indigent clients as mandatorily required under the Rule of Mandatory
Legal Aid Services for Practicing Lawyers.
8. Additional "Productivity Incentives Program" refers to a formal agreement established by the labor-
Productivity management committee containing a process that will promote gainful employment, improve working
Incentive Bonus conditions and result in increased productivity, including cost savings, whereby the employees are
Expense granted salary bonuses proportionate to increases in current productivity over the average for the
preceding three (3) consecutive years. The agreement shall be ratified by at least a majority of the
employees who have rendered at least six (6) months of continuous service.
Benefits and Tax Incentives
(1) A business enterprise which adopts a productivity incentives program, duly and mutually agreed
upon by parties to the labor-management committee, shall be granted a special deduction from gross
income equivalent to fifty percent (50%) of the total productivity bonuses given to employees
under the program over and above the total allowable ordinary and necessary business deductions for
said bonuses.
(2) Grants for manpower training and special studies given to rank-and-file employees pursuant to a
program prepared by the labor-management committee for the development of skills identified as
necessary by the appropriate government agencies (TESDA) shall also entitle the business enterprise to
a special deduction from gross income equivalent to fifty per cent (50%) of the total grants over
and above the allowable ordinary and necessary business deductions.
(3) Any strike or lockout arising from any violation of the productivity incentives program shall
suspend the effectivity thereof pending settlement of such strike or lockout: Provided, That the
business enterprise shall not be deemed to have forfeited any tax incentives accrued prior to the date of
occurrence of such strike or lockout, and the workers shall not be required to reimburse the
productivity bonuses already granted to them under the productivity incentives program. Likewise,
bonuses which have already accrued before the strike or lockout shall be paid the workers within six (6)
months from their accrual.
(4) Bonuses provided for under the productivity incentives program shall be given to the employees not
later than every six (6) months from the start of such program over and above existing bonuses granted
by the business enterprise and by law: Provided, That the said bonuses shall not be deemed as salary
increases due the employees and workers.
PROBLEMS
Problem 1: ABC Corporation has a soft spot for senior citizens and persons with disability (PWDs). As such, it hires senior citizens and
PWDs to work in the company for at least six (6) months. The following data for the current year taken from the books of accounts are
provided by the corporation:
Gross sales P30,000,000
Sales discount (excluding discounts to senior citizens and PWDs) 4,000,000
Cost of sales 10,000,000
Salaries of senior citizens 1,000,000
Salaries of PWDs 600,000
Actual amount of assistance under adopt-A-school program (fully deductible) 400,000
Life insurance expense: (premium on employees group insurance) 500,000
Life insurance expense: (premium on officer’s insurance- beneficiary ABC 1,000,000
Corporation)
Other operating expenses 6,000,000
During the same period the corporation also allows 20% discount to senior citizens and PWDs who buy goods from the company. The
sales are as follows (not part of the gross sales above):
Sales to senior citizens P1,600,000
Sales to PWDs 1,000,000
Required: How much is the total itemized deductions including the special itemized deductions?
Problem 2: Care Medical Center reported the following expenses during the year:
Breast-feeding assistance to the needy P200,000
Salary of workers (20% senior citizens (paid)) 500,000
Salary of workers (20% senior citizens (unpaid)) 700,000
If the medical center reported health services revenue amounting P300,000 from senior citizen, how much is the total special itemized
deduction?
Problem 3:
X signed a MOA with Department of Education for the supply of books to Irisan National High School valued as P1,000,000 for free.
During the same year, X reported a business income of P31,500,000 and business expenses of P22,500,000 before the amount of donation
per MOA.

The dedutible donation of X is________________
Problem 4: CDE employs primarily women. CDE installed a lactation station for its nursing employees at the following costs:
Remodeling of a space for the lactation station P100,000
Tables and comfortable chairs 200,000
Refrigerator 300,000
Manual and electric breast pumps 400,000
Supplies (sterile milk containers, soaps, etc.) 500,000
Required:
1. The expense deductible as part of regular itemized allowable deductions____
2. The expense deductible as part of special itemized allowable deductions____
Problem 5: Atty. A rendered the following services during the year:

Gross receipts from legal fees P8,000,000
Value of 60-hour assistance to indigent clients 400,000
Value of other pro-bono services 72,000
Direct cost of services 480,000
Other deductible expense 3,400,000
Required:
1. The expense deductible as part of regular itemized allowable deductions____
2. The expense deductible as part of special itemized allowable deductions____
COMPREHENSIVE PROBLEMS
Problem 1: Classify the item whether deductible or non-deductible from business gross income.
Deductible Non-
deductible
1. Kickback payment to the government official
2. Tuition fees, board and lodging incurred by a medical doctor while attending a continuing
professional education seminar
3. Overtime pay paid to rank-and-file employee
4. Fringe benefits paid to an officer of the company
5. Distribution of profits to partners
6. Cash dividends paid
7. Donations made to employee’s birthday party
8. Amounts paid for pensions of retired employees
9. Salary of employee paid to his widow for a limited period after his death
10. Entire amount expended for meals, lodging, and travel in connection with own business
11. Net capital loss carry-over
12. Philippine income tax
13. Income tax paid by a resident citizen to foreign country
14. Research and development costs of unsuccessful developed products
15. Net operating loss carry-over
16. Operating expenses incurred outside the Philippines by a non-resident alien engaged in
business in the Philippines
17. Donations for coffin and wake expenses
18. Manager’s expense account subjected to fringe benefit tax
19. Cost of technical books used by a CPA in the practice of his profession
20. Withholding income tax on employees’ salaries
Problem 2: Mr. Michael Aroyo, widower with three (3) qualified dependent children and a practicing accountant has the following receipts
and expenditures for the calendar year ended December 31, 200x:
Receipts

Professional fees (including unearned professional fee of P100,000) P500,000
Compensation income 25,000
Commissions from employer 5,000
Interest on time and savings deposit, net of 20% final tax 16,000
Expenditures
Salaries of assistants P96,000
Partial payment of loan 20,000
Interest on the loan (The loan was used for the repair of the 3,850
Residential house of Mr. Aroyo)
Travelling expenses 11,000
Light and water, office 7,890
Light and water, residence 6,500
Stationeries and supplies 1,960
Prepaid rent – office (including expired portion of P60,000) 160,000
Contributions exclusively for religious purposes 38,500
Required: Compute for the allowable deductions from the business gross income.
Problem 3: ABC Enterprises incurred the following business expenses in the taxable year 200x:
• Allowance per aging accounts receivable at the beginning and ending of the year are P20,000 and P30,000
respectively. The firm’s provision for bad debts during the year is P15,000.
• Depreciation expense based on original cost P40,000; Depreciation expense based on appraisal P50,000
• On December 31, 200x, paid research and development cost of P500,000 treated as deferred expense.
• Contribution during the year are as follows:
To the government for priority program in sports P50,000
To the government for public purposes 10,000
To the accredited NGO’s total administrative expenses is 35% 100,000
To the church of Cebu 60,000
Net income before contribution 2,500,000
Required: Compute the total allowable deductions of Love Enterprises assuming that the firm is a
1. Sole proprietorship
2. Corporation
3. Partnership

Deduction From GI

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TAXATION

FAR EASTERN UNIVERSITY – MANILA

22. Deductions from gross income Page 1 of 23

Requisites from deductibility a. Reasonable

Entertainment, Amusement, and Recreation

Definition of Entertainment Facilities

EAR Expenses RR No. 10-2002

22. Deductions from gross income Page 2 of 23

Ceiling on EAR Expense

Ceiling on EAR Expense

For taxpayers engaged in both sale of goods/properties and services-apportionment formula

Net Sales/Net Revenues

EAR Expenses RR No. 10-2002 Reportorial Requirement

Problem 2 (Traveling Expenses): A Corporation incurs the following travel expenses:

22. Deductions from gross income Page 3 of 23

How much is the deductible representation expense?

The amount to be immediately expensed and capitalized would be

(RR No. 13-2000, implementing Codal provision on deductibility of interest)

Requisites for deductibility:

Interest: When fully Deductible

When Interest May not be Deducted

Interest shall not be deducted when:

Related taxpayers under Section 36 (B) of Tax Code

Optional Treatment of Interest Expense

Interest incurred to acquire property used in trade or business may be:

22. Deductions from gross income Page 5 of 23

Alternative treatment for taxes paid in foreign countries.

How much is the amount of taxes deductible from gross income?

22. Deductions from gross income Page 6 of 23

Substation for loss arising from casualties, robbery, theft or embezzlement.

Losses and Insurance Proceeds

Amount of casualty loss deductible

CASUALTY LOSS RMO NO. 6-2012 DATED APRIL 2, 2012

Destruction/disposal or Verification of Casualty Loss

22. Deductions from gross income Page 7 of 23

In case destruction/disposal cannot be completed in a day

Report on the result of destruction/disposal:

Net Operating Loss Carry-Over(NOLCO)

Conditions when NOLCO is not allowed as deduction:

There is no substantial change in the ownership of the business when:

Capital loss Deductible from capital gain only

Sale or Exchange of Property (Corporate Readjustment)

• The term “merger or consolidation” means

Wash Sales/ Short Sales

Treatment of Gain (Loss) on Wash Sale and Short Sale

22. Deductions from gross income Page 9 of 23

Required: Compute the total amount of deductible losses.

1. The gain or loss to be recognized by A is_______________________

Required: Compute the following:

E. Deductions: Bad Debts

22. Deductions from gross income Page 10 of 23

Tax Benefit Rule on Recovery of Bad Debts

• Bad debts from business:

How much is the deductible bad debts expense of Mr. Uy?

F. Deductions: Depreciation / Amortization

Requisites for depreciation deduction:

Methods of computing depreciation

22. Deductions from gross income Page 11 of 23

RR NO.1-2012 DATED OCTOBER 12, 2012

RMC No. 2-2013 dated December 28,2012

G. Deductions: Depletion of oil and gas wells and mines

22. Deductions from gross income Page 12 of 23