DEDUCTION FROM

GROSS INCOME-
DEDUCTION ALLOWED
UNDER SPECIAL LAW
 Our income tax system allows
deduction for various items,
especially expenses incurred
necessary to produce the income.
This is to provide taxpayers with a
more equitable tax base and true
measure of income.
 DEDUCTION IN GENERAL
I. For individuals earning purely
compensation income.
a. Premium payments on health and/or
hospitalization insurance
b. Personal exemptions (Prior to effectivity of
RA 10963 only)
• Basic exemptions
• Additional exemptions
II. For individuals with gross income from
business, trade or practice of profession
or mixed income
a. Premium payments on health and/or hospitalization
insurance
b. Personal exemptions (Prior to effectivity of RA
10963 only)
• Basic exemptions
• Additional exemptions
c. Itemized deduction or optional standard
deductions
 ITEMIZED DEDUCTION
• These deductions from gross income
include all ordinary and necessary trade
and business 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 and business
 OPTIONAL STANDARD
DEDUCTION
• Both individual taxpayers and corporation have the
option to claim optional standard deduction (OSD) .The
following are OSD for individuals and corporation
• INDIVIDUAL TAXPAYER
1. Increase the applicable rate from 10% to 40%
2. Change the tax base to gross sales/receipts without
deducting cost of sales.
• CORPORATION
1. Included corporation in the coverage of OSD and;
2. Deduction of cost of sales/services in arriving tax base.
III. For corpoations and taxable
partnerships
a) Itemized deductions or optional standard
deductions
b) Special Deduction for
• Insurance companies
• Mutual insurance companies
• Mutual marine insurance companies
• Assessment insurance companies
IV. Estates and trusts

a. Personal of 20,000( Prior to effectivity of

RA 10963)
b. Itemized Deductions (same deductions
with individual taxpayers)
c. Special deductions on income of the
estate/trust distributed to the
heirs/beneficiaries
EXCLUSIONS
VS.
DEDUCTION
• Exclusions from gross income refers to a flow of
wealth to the taxpayers that are not treated as part
of gross income, for purposes of computing the
taxpayers taxable income, due to the following
reasons:

1. It is exempted by the fundamental law or

statute such as:
• De minimis benefits
• Employers share in SSS, GSIS, Pag-ibig and
Philhealth
• PCSO and lotto winnings
• Interest income from long-term investments
• Inter- corporate dividends
 DE MINIMIS BENEFITS
• The term ‘’De minimis benefit’’ which are
exempt from the fringe benefit tax shall, in
general, be limited to facilities or privileges
furnished or offered by an employer to his
employees that are of relatively small value
and are offered or furnished by the employer
merely as means of promoting the health,
goodwill , contentment, or efficiency of his
employees.
 2. It does not come within the definition of
income such as:
• Proceeds of life insurance upon the death of the
insured
• Stock dividend
• Temporary increase in the fair market value of
debt and equity investments.

Deductions, on the other hand, are the

amounts, which the law allows to be deducted
from gross income in order to arrive at net income.
TABLE 10-1: COMPARISONS BETWEEN DEDUCTIONS AND PERSONAL EXEMPTIONS

DEDUCTIONS PERSONAL EXEMPTIONS

(PRIOR TO TRAIN LAW ONLY)

As to amount allowable deductions generally Items of income

Refer to actual expenses incurred excluded by law,
the pursuit of trade, business or constitutions or by
Practice of profession . the tax code.mm

As to nature allowable deductions constitute Personal exemptions

business expenses . pertain to personal
expenses.

As to purpose Deductions are allowed to enable Personal exemptions are

the taxpayer to recoup his cost of allowed to cover
doing business. Personal, family and
living expenses.

As to claimants Allowable deductions can be Personal exemptions

claimed by all the taxpayers, can be claimed only by
corporate or otherwise. Individual taxpayers.
CAPITAL EXPENDITURE

VS.

REVENUE EXPENDITURE
 TABLE 10-2: MAJOR CLASSIFICATION OF
EXPENDITURES
CAPITAL EXPENDITURES REVENUE EXPENDITURES

• Material in amounts • Small amounts,

• increase useful life, individually
capacity and • Helps current
efficiency operations
• Non-recurring • Ordinarily recurring
• Benefits future • Benefits current period
periods ( current and only (short term)
long term) • Charged to operations
• Allocated throughout
the periods benefited
DEDUCTION VS. TAX CREDIT
 Although the term is not specifically
defined in our Tax code, tax credit generally
refers to an amount that is ‘’subtracted
directly from one’s total tax liability.’’ It is an
‘’allowance against the tax itself’’. Or ‘’a
deduction from what is owed’’ by a tax
payers to a government.
 TAX CREDIT DEDUCTIONS
Tax Due Pxx Gross income Pxx
Less: Tax credit (xx) Less: Allowable deductions (xx)
_________ ________
Tax still due or Payable Pxx Taxable/Net income Pxx
Deduction from the Gross Income(Section 34-NIRC)

1. Ordinary and necessary trade, business or professional expenses;

2. Taxes;
3. Interest;
4. Losses;
5. Bad debts;
6. Depreciation;
7. Depletion of oil and gas wells and mines;
8. Charitable and other contributions;
9. Research and development;
10. Pension trusts;
11. Additional requirements for deductibility of certain payments
12. Optional standard deduction
13. Premium payments on health and/or hospitalization insurance of an
individual taxpayer.
 ORDINARY AND NECESSARY
EXPENSES

In general, there shall be allowed as

deduction from gross income for all the
ordinary and necessary expenses paid or
incurred during the taxable year which are
directly attributable to the development,
management, operation, and/or conduct of
the trade, business or exercise of
profession.
Examples of Ordinary and necessary expenses
a) SALARIES, WAGES and other form of
COMPENSATION

No matter how called, for personal services actually

rendered, including the grossed-up monetary value of
fringe benefit furnished or granted by employer to the
employee, employers share on SSS, PHIC, HDMF and the
like.
Requisites:
 Employer-Employee relationship
 Reasonable
 Personal services actually rendered
 withholding tax imposed has been paid
FRINGE BENEFIT TAX
Fringe benefit tax (FBT) is a final
withholding tax on the grossed-up monetary
value of the fringe benefit granted by the
employer to an employee who holds a
managerial or supervisory position. FBT is
treated as final income tax on the employee
which shall be withheld and paid by the
employer on a calendar quarterly basis.
How to compute fringe benefit tax?
The final withholding tax on fringe
benefit shall be computed based on the
grossed-up monetary value multiplied by the
applicable tax rate..
a. The grossed-up monetary value of the
fringe benefit shall be determined by
dividing the monetary value of the fringe
benefit as provided for in Revenue
regulations No. 3-98 by the percentage
divisor in accordance with the following
schedule:
• In general, for citizens, resident aliens and non-
resident alien engaged in trade or business in
the Philippines……………………68%
• For non-resident alien engaged in trade or
business in the Philippines……..75%
• For alien or Filipino individuals employed by
foreign petroleum service
contractors/Subcontractors, offshore banking
units and regional or area headquarters and
regional operating headquarters of multinational
companies occupying executive/managerial and
technical position…………………85%
 b. APPLICABLE TAX RATES
• The fringe benefit shall be imposed at the following
rates:
• In general…………………..32%
• For non resident alien individual who is not engaged in
trade or business in the Philippines…………………..25%
• For alien or Filipino individuals employed by foreign
petroleum service contractors/Subcontractors, offshore
banking units and regional or area headquarters and
regional operating headquarters of multinational
companies occupying executive/managerial and
technical position ……………………….15%
 Sample computation for fringe benefit tax
• Q.) VQA Company( a domestic employer/company) granted Mr.
Santos ( a Filipino branch manager employee) in addition to his
basic salaries, Php 4,000 cash per quarter of his personal
membership fees at Astro Gym( a fitness and athletic club). How
much is the FBT that VQA company should withhold and remit to
BIR per quarter?
COMPUTATION/ANSWER:
Monetary value of fringe benefit: P4,000
Percentage divisor applicable: 68%
Fringe benefit tax rate: 32%

FBT=(Monetary value of fringe benefit/68%)x32%

FBT=( Php 4,000/68%)x32%
FBT= Php 5,882.35x32%
FBT= Php 1,882.35
 RA 9994-EXPANDED SENIOR CITIZEN ACT OF
2010(RR-7 2010)
ADDITIONAL COMPENSATION EXPENSE

• Private establishments employing Senior citizen

shall be entitled to additional deduction from their
gross income equivalent to 15% of the total amount
paid as salaries and wages to senior citizens
provided:
 The employment shall have to continue for a period
of atleast six(6) months.
 The annual taxable income of the senior citizens
does not exceed the poverty level as may be
determined by the NEDA.
 RA 7277- MAGNA CARTA FOR DISABLED
PERSONS (PWD’S)
ADDITIONAL COMPENSATION EXPENSE

• Private entities that employs disabled

persons who meet the required skills or
qualification, either as regular employee,
apprentice or learner, shall be entitled to
an additional deduction from their gross
income equivalent to 25% of the total
amount paid as salaries and wages to
disabled persons.
 B.) TRAVEL EXPENSES in the pursuit of
trade, business or profession
REQUISITES:
• Reasonable
• Incurred or paid while away from
home(business home), within or without the
country.
• Incurred or paid in the pursuit of trade,
business, or profession
• Excluded: Personal travels sponsored by the
employer subject to FBT.
 c. Rentals and/or other payments
Expenditures incurred for the continued use or
progressive of property to which the taxpayer has not
taken or is not taking title or in which he has no equity
other than that of lessee, user or possessor in
connection with trade, business or profession. The
property may be real or personal under operating lease.

Requisites:
• Reasonable and for the purpose of trade, business
or profession.
• Taxpayer has not taken or is not taking title to or in
which he has no equity other than that of the lessee,
user or prossessor.
d. Entertainment, amusement and recreation expenses

(RR 10-02) Representation There is a “limit” in claiming

expenses pertain to expenses
incurred in providing amusement
and recreation to, or meeting with,
a guest at a dining place, place of
amusement, country club, theater,
concert, play, sporting events and
similar establishments.
expenses on entertainment,
amusement and recreation.
Entertainment , amusement and
recreation expenses are limited to
½% of net sales for sellers of goods
or 1% of net revenue for
seller/provider of services.

For sellers of both goods or properties and services, an apportionment

formula is used in determining the “ceiling” on such expenses based on
the following apportionment formula:

Net Sales/Revenue
________________________ x Actual expense
Total Net Sales/Revenue
ILLUSTRATION 1 – Representation expenses

CASE A. Niah Corporation is engaged in the

sale of goods with net sales of
P3,000,000. The actual entertainment
amusement and recreation expenses for
the taxable quarter totaled P50,000. For
income tax purposes, how much is the
deductible entertainment amusement and
recreation expenses?
ANSWER : P15,00

Actual P50 000

Limit(P3Mx.005) P15 000
Allowed P15 000
CASE B: Niah Corporation is engaged in
the sale of goods and services with net
sales and revenue of P8 000 000 and 4 000
000 respectively. The actual entertainment
amusement and recreation expenses for the
taxable year totaled P900 000. For income
tax purposes, how much is the total
deductible entertainment amusement and
recreation expenses?
ANSWER : P600 000

Actual- Sale of Goods:

(900 000x8/12) P600 000
Limit (8Mx005) 400 000
Allowed 400 000
Actual- Sale of Service:
(900 000x4/12) P300 000
Limit (4Mx.005) 200 000
Allowed 200 000
____________
Total deductible expense P600 000
Taxes Expenses
Taxes paid or incurred within the taxable
year in connection with the taxpayer's profession,
trade or business, shall be allowed as deductions
from gross income. In the case of a non resident
alien individual engaged in trade or business in the
philippines and a resident foreign corporation, the
allowable deduction for taxes provided in tax code
shall be allowed only if and to the extent that they
are connected with income from sources within the
philippines.
EXAMPLES of Deductible and Non-Deductible Taxes
DEDUCTIBLE
• Income tax paid abroad,
claimed as operating expense**
• Documentary stamp taxes
• Occupational taxes
• Excise taxes
• Import duties
• Local business taxes
• Percentage taxes under the tax
code except section 127(A) and
(B), otherwise known as stock
transaction taxes.
NON-DEDUCTIBLE
• Philippine income tax except
fringe benefit tax
• Income tax paid abroad,
claimed as tax credit**
• Estate and Donor's taxes
• Percentage taxes under section
127 (A) and (B), otherwise
known as stock transactiontaxes
• Value added tax
• Taxes not related to business,
trade, or profession.
INTEREST FOR UNPAID TAXES
Interest paid or accrued on taxes
related to business of practice of
profession, such as those paid for
deficiency or delinquency(since taxes are
considered indebtedness) are deductible
tax. It is deductible in “full”. It shall not be
reduced by 33% of interest income
subject to final tax.
ILLUSTRATION 2:
ABC Company inccured the following taxes during 2018:
Documentary stamp taxes 1 000
Income taxes paid in favor of key officers as fringe benefit 13 600
Income taxes paid in favor of rank 22 400
& file employees as fringe benefit
Local taxes, including surcharge of P800 ad interest of P200 6 000
Philippine income tax 100 000
Municipal tax 2 000
Community tax 1 500
Value added tax 90 000
Compromise penalty on taxes 50 000
Percentage tax paid on sale of shares sold 12 000
thru the local stock exchange
Donor's tax for 2018 25 000
Foreign income tax payments claimed as tax credits 10 000
Question: What is the correct amount of
taxes that can be deducted from gross
income?
Answer: P9 500 computed as follows:

Documentary stamp taxes P1 000

Local taxes excluding surcharge 5 000
of and interest
Municipal tax 2 000
Community tax 1 500
_________
Total P9 500
The following items provided in the problem
are non deductible expenses:

• Income tax
• Valued added tax
• Compromise penalty on taxes
• Precentage tax paid on sale of shares sold
thru the local stock exchange
• Donor's tax
• Foreign income tax payments claimed as
tax credits
Interest Expense
Interest expense was defined under related
revenue, regulations as the payment for the use
or forbearance or detention of money, regardless
of the name it is called or denominated.

Requisites for deductibility:

a. It must be on indebtedness which is
connected with trade, business, or practice
of profession.
b. The indebtedness must be that of the
taxpayer.
 c. The interest must be in writing and legally
due.ear
d. Interest is paid or incurred upon such
indebtedness with the taxable year.

PREPAID INTEREST
“Prepaid interest” of an individual under cash
basis is deductible not in the year that the interest
was paid in advance but in the year that the
indebtedness was fully paid.
ILLUSTRATION 3:
CASE 1: Prepaid Interest by an individual taxpayer using
cash basis

In 2017, earl, using cash basis of accounting obtained a

P1 000 000 loan from a bank for business use. The proceeds of the
loan amounted to P900 000, net of P100 000 interest deducted in
advance. Earl paid the loan in full in 2018?

Question 1: How much may earl claim as interest expense in 2017?

Answer: P0
The interest expense may be claimed as a deduction from the
gross income only upon full payment of the loan.

Question 2: How much may Earl cliam as interest expense in 2018?

Answer: 100 000
Case 2: Prepaid Interest-Installment Payments
Assume the same data in case A except that the
principal amount of the loan were paid in four(4)
annual installments at P250 000 a year starting
2018.

Question 1: How much may Earl claim as interest

expense in 2018?
Answer: P0
Question 2: How much may Earl claim as interest
expense in 2018?
Answer: P25 000 (P100 000 x 250/1 000)
E. When the taxpayer has interest expense and interest
income with final tax, the interest expense shall be
reduced by 33% of interest income subject to final tax.

Limitation on Interest Expense:

Section 34 (B) of the Tax Code and Revenue
Memorandum Circular provide that the amount of interest
paid or incurred within a taxable year on indebtedness in
connection with the taxpayer’s profession, trade or
business is allowed as deduction from gross income.
However, the taxpayer’s otherwise allowable deduction for
interest expense reduced by 33% of the interest income
subjected to final tax.
The regulation specifically provides that the limitation shall
apply during taxable year.
ILLUSTRATION 4:
Debtor Corp shows the ff data during taxable year:

Sales P500,000
Interest income, net of 20% final tax 24,000
Cost of Sales 300,000
Salaries and wages 120,000
Interest expense 60,000
Rent expense 24,000
Advertising Expense 6,000
Depreciation Expense 5,000
Interest on unpaid taxes 5,000
Question: How much is the allowable deduction from the
gross income?

Answer: P210, 000

Solution:
Salaries and wages P120,000
Interest expense P60,000
LESS: Limitation:
Interest income subject to FT
(P24,000/80%) 30,000
Multiply by: 33% (9,900) 50,100
Rent Expense 24,000
Advertising Expense 6,000
Depreciation Expense 5,000
Interest Expense on unpaid 5,000
Allowable Deductions P210,000
F. In case of interest incurred to acquire property used in
trade, business or exercise of profession, the same was not
treated as a capital expenditure.
Optional Treatment of Interest Expense:
• Deduction of Gross Income; or
• Treated as capital expenditure.

G. It is not expressly allowed by law to be deducted from

gross income of the tax payer such as interest to finance
petroleum operations.

H. The interest payment arrangement must not be between

related taxpayers as mandated under Section 34 B 2 b in
relation to Section 36B, both of Tax Code.
Nondeductible Interest and Losses (Related Taxpayers)

a. Between members of the family

b. Except in case of distributions in liquidation, between an
individual and corporation more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by or
such individual.
c. Except in case of distributions in liquidation, between 2
corporations more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for the same individual
neither of such corporations, with respect to the taxable year of the
corporation
d. Between the grantor and a fiduciary of any trust.
e. Between the fiduciary of a trust and the fiduciary of another trust if
the same person is a grantor with respect to each trust.
f. Between a fiduciary of a trust and beneficiary of such trust .
Interest Deductible in Full Non- Deductible Interest

1. There is no interest 1. Interest paid to persons

income subject to final classified as related
tax; or/and taxpayers.
2. Interest expense on tax 2. If the indebtedness is
delinquency or incurred to finance
deficiency, provided the petroleum exploration
tax is related to trade or 3. Interest on preferred
business or practice of stocks.
profession, shall be
100% deductible.
LOSSES

Losses may be offset against all income and capital gains

in the same tax year. However, losses are deductible from
gross income only on the ff grounds:
a. Ordinary losses arising from the losses incurred in
trade, business, or profession including net operating
loss carry-over
b. Casualty losses – the losses for which declaration of
loss was filed with the BIR within 45 days from the date
of loss was incurred. (e.g. Property loss, fire, storm,
storm, etc.)
Note: Casualty losses are not allowed as deductions from
the gross income if such losses have been claimed as
deductions for estate tax purposes in the estate tax return.
Measurement of Casualty Loss:

Total Loss: actual loss is the book value of

the asset

Partial Loss: Book value or cost to restore

the asset to its normal operating condition,
whichever is lower.
ILLUSTRATION 5:
Case A:

On July 1,2015, a lawyer purchased for

P500,000 an automobile which will be used exclusively
for his practice of profession. He deducted annual
deprecation on the basis of an estimated useful life of
5 years. On July 1, 2018, the automobile was partially
damaged in an accidental collision with another
vehicle. The fair market value of the vehicle before the
collision equals the carrying value are P200,000. After
the collision, the fair value was determined at
P100,000. The taxpayer received insurance of
P70,000 to cover the loss.
Question 1: How much is the deductible loss?

Answer: P30,000

Carrying Value (P500,000 x 2/5) P200,000

Cost to restore (P200,000- 100,000) 100,000

Lower Amount P100,000

Less: Proceeds from insurance (70,000)
Allowable Deductions P30,000
Question 2: How much is the deductible
loss if the automobile was totally destroyed?
(ignore fair market values)

Answer: P130,000
Carrying Value P200,000
Less: Proceeds from insurance (70,000)
Allowable deductions P130,000
Question 3: Assume cost to restore was
P250,000 (ignore the FMV) How much the is
the deductible loss?

Answer: P130,000
Carrying value (P500,000 x 2/5) P200,000
Cost to restore 250,000

Lower Amount P200,000

Less: Proceeds from Insurance (70,000)
Allowable deductions
P130,000
Question 4: Assume the same data in Q3,
what is the new cost basis of the
automobile for depreciation purpose?

Answer: P250,000

Book Value P200,000

Add: Excess of cost to 50,000
restore over BV
Adjusted Cost Basis P250,000
Net Operating Loss Carry- Over (NOLCO)

• Net Operating losses of the business or

enterprise for any taxable year immediately
preceding the current taxable year
• Net operating loss means the excess of
allowable deduction over gross income of the
business in taxable year
• Any net loss incurred in a taxable year during
which the taxpayer is exempt from income tax
shall not be allowed as deduction or as part of
NOLCO
Requisites:

1. Limited to Operating losses accumulated beginning Jan

1, 1998.
2. Any net loss incurred in a taxable year during which the
taxpayer is exempt from income tax shall not be allowed
as deduction or as part of NOLCO
3. Allowed only if there has been no substantial change in
the ownership of the business or enterprise, in that:
a. Not less than 75% in the nominal value of shares, if
the business is in the name of the corporation, is held
by or on behalf of the same persons; or
b. Not less than 75% of the corporation, if the business
is in the name of the corporation, is held by or on
behalf of the same persons.
4. Not applicable against MCIT
5. Applied on a first in first out (FIFA) basis
6. Not applicable under Optional Standard Deduction

BY OR ON BEHALF OF THE SAME PERSONS

By or on behalf of the same person shall refer to
maintenance of ownership despite change as when:

A: No actual change in ownership is involve incase the

transfer involves change from direct ownership to indirect
ownership or vice versa.
B: No actual change in the ownership is involved in the
case of merger of the subsidiaryinto the parent company.
ILLUSTRATION 6: NOLCO (based on RR14-2001)

CASE A: CHANGE FROM DIRECT OWNERSHIP

TO INDIRECT OWNERSHIP

P Corporation owns Q Corporation that has

NOLCO P Corporation transfer Q Corporation’s
shares to R Corporation’s in exchange for 100% of R
Corporations shares.

Held : Q Corporation NOLCO is returned because Q

Corporation shares are held by R corporation on
behalf of P Corporation the original owner.
CASE B: MERGER OF SUBSIDIARY INTO THE
PARENT COMPANY
X Corporation owns 100 of Y Corporation. Y
Corporation owns 100% of Z Corporation. Z
Corporation has NOLCO. Z Corporation is merged
into Y Corporation.

Held: Z Corporation’s NOLCO should be retained

and transfer to Y Corporation. Prior to merger, X
corporation already indirectly owned Z Corporation.
After the merger X, now directly owns Z Corporation
which continues to exist in Y Corporation.
Tax payers not allowed to claim NOLCO
A. Tax payers who are exempt for income tax (either by provisions
of the NIRC or special laws) at the time the net operating loss
was incurred.
B. Offshore banking units of a foreign banking corporation and
foreign currency deposit unit of a domestic or foreign banking
corporation duly authorized as such by the Bangko Sentral ng
Pilipinas.
C. Entities registered with the bureau of investments BPI enjoying
Income tax Holiday with respect to net operating losses
incurred or sustained during the period of such income tax
holiday.
D. Entities registered with Philippine Economic Zone Authority
(PEZA)
E. Enterprises registered under RA 7227
F. Foreign Corporations engaged in international shipping or air
carriage in the Philippines.
ILLUSTRATION 7-NOLCO
Case A: (Entire amount of NOLCO were claimed as deduction from gross
income)
The following are the records of Hananiah Company

2016 2017 2018

Gross sales P 3 300 000 2 640 000 1 025 000
Cost of sales 2 400 000 1 200 000 350 000
Dividend resident foreign 140 000 32 000
corporation

Interest income on Notes 28 000 16 400

Receivable

Capital gain 13 000 18 500

Capital loss 20 000 22 000
Operating expense 1 475 000 1 115 000 400 000
Determine the following:

1. Taxable income(loss) for 2016

ANSWER: (407 000)

SOLUTION:
Gross sales 3 300 000
Cost of sales (2 400 000)
Operating expense (1 475 000)
Dividend Income from foreign corporation 140 000
Interst income on Noted Receivable 28 000
________________
Net operating loss (407 000)
2.Taxable Income (loss) for 2017

ANSWER: 0

Solution:
Gross sales 2 640 000
Cost of sales (1 200 000)
Operating expense (1 115 000)
Capital gain 13 000
Interest income on Notes Receivable 16 400
____________
Net income 2017 (before NOLCO) 354 400
NOLCO 2016 (354 000)
_____________
Taxable income(loss) 0
3.Taxable income(loss)2018

ANSWER: 254 400

SOLUTION:
Gross sales 1 025 000
Cost of sales (350 000)
Operating expense (400 000)
Dividend income foreign corp 32 000
Capital gain 18 500
Capital loss (18 500)
____________
Net income 2018 (before NOLCO) 307 000
Balance 2016 (52 600)
_____________
Taxable Income 2018 254 400
Case B: Only a portion of NOLCO were claimed as
deduction from Gross Income assume the same data for
2016 and 2017 as provided in case A. Assume further the
following data for 2018 to 2020
2018 2019 2020
Gross sales P 3 000 000 2 840 000 3 000 000
Cost of sales 2 000 000 1 600 000 350 000
Dividend resident foreign 100 000 20 000
corporation
Interest income on notes 50 000 35 000
Receivable
Capital Gain 15 000 18 500
Capital loss 10 000 22 000
Operating expense 1 500 000 1 500 000 400 000
Determine the following :

1.Taxable income(loss) for 2018

ANSWER: (3 500 000)

SOLUTION:
Gross sales 3 000 000
Cost of sales (2 000 000)
Operating expense (1 500 000)
Dividend Income from foreign corporation 100 000
Interest income of Notes receivables 50 000
Net income(loss) for 2018 before NOLCO (350 000)
2016 NOLCO (balance) ---
____________
Taxable Income(loss) 2018 350 000
2. Taxable Income(loss) for 2019

ANSWER: (210 000)

SOLUTION:
Gross sales 2 840 000
Cost of sales (1 600 000)
Operating expense (1 500 000)
Interest Income on Notes Receivable 35 000
Capital Gain 15 000
Net income (loss) for 2019 before NOLCO (210 000)
2016 NOLCO -
2108 NOLCO -
___________
Taxable income (loss) 2019 (210,000)
3. Taxable Income(loss) for 2020

ANSWER: 1,710,000

SOLUTION:
Gross sales 3 000 000
Cost of sales (350 000)
Operating expense (400 000)
Dividend Income frome foreign corporation 20,000
Capital Gain 18500
Capital Loss (18500)
Net Income 2020 before NOLCO 2 270 000
NOLCO 2016 -
NOLCO 208 (350000)
NOLCO 2019 (210000)
Taxable income 1 710 000
CASE C: (NOLCO AND MCIT)
Assume the same data for 2016 and 2017 as provided in
CASE A. Assume further the following data for 2018 to 2020:

2018 2019 2020

Gross sales P3 000 000 5 000 000 3 000 000

Cost of sales 2 000 000 1 600 000 350 000

Dividend resident foreign 100 000 - 20 000
corporation
Interest income on notes 50 000 35 000
receivable
Capital gain - 15 000 18 500
Capital loss 10 000 - 22 000

Operating expenses 1 500 000 3 300 000 400 000

Determine the following:
1.Taxable income(loss) for 2018

Answer: (350 000)

Solution:
Gross sales 3 000 000
Cost of sales (2 000 000)
Operating expense (1 500 000)
Dividend income from foreign corporatio 100 000
Interest income on notes receivable 50 000
Net income(loss) for 2018 before NOLCO (350 000)
2016 NOLCO -
___________
Taxable income(loss) 2018 (350,000)
2.Taxable income(loss) for 2019

Answer: 150 000

Solution:
Gross sales 5 000 000
Cost of sales (1 600 000)
Operating expenses (3 300 000)
Interest income on notes receivable 35 000
Capital gain 15 000
Net Income(loss)for 2016 before NOLCO 150 000
2016 NOLCO -
2018 NOLCO -
___________
Taxable income(loss)2019 150 000
Note: MCIT for 2019 is higher than NCIT computed
as follows:
Gross sales P5 000 000
Cost of sales (1 600 000)
Gross Income
Add: Interest income on notes receivable 35 000
Capital gain 15 000
Gross Income for MCIT purposes P3 450 000
x 2%
MCIT P69 000
NCIT 45 000
TAX DUE P69 000
CAPITAL LOSS
 Capital Losses are losses from capital
assets other than those subjected to capital
gains taxes. Capital losses are deductible
only to the extent of capital gains as
discussed in Chapter 8. Hence, if capital
loss is higher than capital gains the “net”
capital loss shall not be consideredin the
determination of the taxable gross income of
the taxpayer.
SPECIAL TYPES OF CAPITAL LOSSSES

• Wash Sale
In the case of any loss claimed to have been sustained
from any sale or other disposition of shares of stock, securities
or stock options, where it appears that within a period beginning
thirty days such date (also knowsn as 61 day period), the
taxpayer has acquired (by purchased or exchange upon which
the entire gain or loss was recognized by law) or gas entered
into contract of options acquire. Substantially identical securities
or stock (stock of the same class or in case of bonds same
terms thereof), then no deduction for the loss shall be allowed
(RR 6-2008). However, the amount of loss not deductible from
gross income shall from part of cost of acquiring securities. In
addition, gain from wash sale transactions is taxable.
 The rationale for non-deductivity or loss from wash sale is
that the is not actually suntained or incurred by the seller. It is only
an artificial loss. Substantially identical securities indicates stocks or
securities of the same class or similar on their important features
like bonds where the only difference is the date of maturity .

The following exchanges of no identical securities are not subject to

rule on wash sales:
• Commong stock to preferred stock
• Voting stock to nonvoting stock
• Stock of one coporation to stock of another corporation
• Bonds that differ in terms and conditions such as interest
tates and debenture and nondebenture bonds

Individuals corporation acting as dealers in stocks or

securities are not covered by rules on wash sales.
ILLUSTRATION 8:

Case A: ABC, whose taxable years is the calendar

year, on December 1 2014, purchased 100 shares
of common stock of XYZ Company for 100,000
and on December 15, 2014 purchased 100
additional shares for P90,000. Since the
trancsaction is within the 61 day period(from
December 1,2014 to January 2,2015) THE LOSS
OF P10,000 (SP P90,000 less cost of P100,000)
should be classified as loss on wash sale which is
a nondeductible loss under the tax code.
Case B: ABC,whose taxable year in the calendar year on
September 21, 2014 purchase 100 shares of the common
stock of XYZ Company for P50,000. On December
21,2014 ABC Purchased 50 shares substantially identical
stock for P27,500 AND ON December 26,2014 25
additional shares of such stock for 11,250. On January
2,2015 it sold for 40,000 the 100 sales purchased on
September 21,2014. There is an indicated loss of P10,000
on the sale of the 100 shares (Cost of P50,000 vs SP of
P40,000). ABC purchased a toatal of 75 substaintially
identical additional shares within the 61 day period (from
December 21&26, 2014 to January 2,2015) Therefore a
portion of the P10,000 indicated loss should be classified
as loss on wash sale and the remaining portion as
deductible capital loss illustrated as follows.
Selling price for 100 shares P40,000
Cost of 100 shares acq’d on September 21, 2014 50,000
Indicated loss on the 100 shares sold P10,000

• 75 shares should pertain to acquisition within prohibited perion

(50 shares on December 21, and 25 shares on on December 26).

Case C: Floyd is not a dealer in securities. In 2015 he had the following

transactions on ordinary shares of JJ Co. a domestic corporation:
Jan. 12 Purchased 100 shares P100,000
June 20 Sold the shares purchased on Jan 12 80,000
June 30 Purchased 70 shares 50,000
Oct 15 Sold the shares purchase on June 30 75,000

Question 1: How much was the loss on wash sale?

Answer: P14,000

Solution:
SP P80,000
Cost 100,000
Indicated loss on 100 shares (P20,000)

Loss on Wash sales (**70/100 x P20,000) P14,000

(Not allowed as deduction from gross income but

should form part of the cost of subsequent acquisition of securities refer to
question 3)
**Only the 70 additional were acquired within the prohibited period (61 day
rule).
Question 2: How much was the capital
loss?

Answer: P6 000 (***30/100 x P20,000)

Deductible only from capital gains. In any

***Since only 70 shares were acquired within the
prohibited period 61 day rule. The loss attributable
to the remaining 30 shares should not be threted
as loss on was sale
Question 3: How much was the cost of
shares purchased on June 30?

Answer: P64,000 computed as follows:

Purchased price P50,000

Add: Loss on wash sale 14,000
Cost basis 64,000
Question 4: How much was the capital gain on
sale of shares on October 15?

Answer: P11,000
SP P75,000
Cost 64,000
Gain on Sale 11,000

No acquition or disposal were made within the 61 day

prohibited period.Hence any
Loss incurred in disposing the shares shall not be
classified as loss on wash sale.
Short Sales

Sale of stocks which the seller does not

own he merely borrows the stocks certificate
through or form his stock brocker and
subsequently buys or covers the stock to
complete the transactions thereby
postponing the delivery to a later date.
TABLE 9-3TREATMENT OF GAIN (LOSS) ON WASH SALE AND
SHORT SALE

WASH SALE SHORT SALE

Treated as capital Treated as capital

GAIN:
gain(Taxable) gain(Taxable)
Non Treated as capital
LOSS: deductible(artificial) loss which can be
Forms part of the deducted from
cost of subsequent capital gain(s) only
acquisition
 Securities Becoming Worthless: Shrinkae in the value of Stocks

If the stocks of the corporation become worthless the cost or other

basis may be deducted by the owner in the taxable year in which the
stocks became worthless. If these worthless securities are capital
assets, the owner is considered tohave incurred a capital loss as of the
lasat day of the taxable year and therefore deductible to the extent of
capital gains. This deduction however is not allowed to a bank or thrust
company. (Section 34(E)(2), NIRC). It is neither a wash sale nor a short
sale. The two requisites for deductibility are as follows:

• The securities are ascertained to be worthless

• The taxpayer claiming the capital loss should not be a bank
or a trust company incorporated under the Phililippines laws.
On the other hand. Any amount claimed as a loss on account of
shrinkage in value of the stock through fluctuatuion in the market or
otherwise cannot be deducted from gross income for tax puroposes.
Because the loss is not realized.
Wagering Losses
Losses from wagering transaction shall be allowed
only to the extent of the gains from such transactions.

Loss of Manager or Consolidation

In a merger or consolidation involving a exchange
of stock society for stock or security solely for stock or
security or stock no loss is recognize. When in addition to
stock cask and/or property is received gain if any (not
exceeding the sum of money and fair market value of any
property received). But not the loss is recognized. The gain
to be recognized shall not exceed the cash/and or fair
market values property received.
ILLUSTRATION 10:

CASE A: Francis Company was merged into

Villamin Company, and only Villamin Company
continuie to exist. Paul a share holder of Francis
Company was asked to surrender his 100 shares
of Villamin Company with a fair market value of
under the merger 100 shares of Villamin Company
with a fair market value of P150,000 and cash of
P30,000 and a property valued P10,000. Villamin
shares were subsequently sold at P110,000
Question 1: How much should Paul recognize as gain
from the manager?

Answer: P40,000

Fair value of shares received P150,000

Add: Cash and property received 40,000
Total 190,000
Cost of shares surrendered (90,000)
Indicated gain P100,000
Gain to be recognized P40,000

Gain to recognized is limited to the amount of cash and property

received.
Question 2. What is the adjusted cost basis of
Villamin shares received?

Answer: P90,000

Cost of shares surrendered(Francis) P90,000

Less: Cash and property received (40,000)
Total 50,000
Add. Gain recognized 40,000
Adjusted cost basis of shares received P90,000
Question 3: How much should Paul recognize as
gain from sale of Villamin shares?

Answer: 20,000

Selling prices of Villamin shares P110,000

Less: Cost of Villamin shares (90,000)
Gain on sales of Villamin shares 20,000
 Other types of Losses
• Losses due to voluntary removal
of building incident to renewal or
replacement
• Loss of useful value of capital
assets due to changes in
business conditions
• Abandonment losses
• Losses arising from a failure to
exercise an "Option" money to
buy a capital property shall be
treated by the buyer as capital
loss
Nondeductible Losses
• Losses not incurred in trade
• Loss from sale or exchanges
property entered between
related taxpayers
• Losses form exchange property
incorporation readjustment
• Losses from illegal transactions
• Loss on voluntary removal of
building on land purchased with
a view to erect another building
 Bad Debts
• Refer to debts due to the taxpayer
which were actually ascertained to be
worthless and were charged off within the
taxable year.

Methods:
• 1. Direct write-off method
• 2. Allowance method
 Direct write-off method
• A method for recognizing bad debts
expense arising from credit sales.

Example:
Ms. Solas owns a business of shoes. She recently sold shoes on
credit at the amount of P3,000 and it was agreed that the costumer will
pay within 30 days. But it is now 40 days after the credit of the shoes.
Ms. Solas has been contact with the costumer several time urging for
the payments.
Dr. Cr.
Bad Debts expense P3,000
Account Receivable P3,000
 Allowance method
• The Allowance Method requires recognition of
abad debts loss if the accounts are doubtful of
collection.
Example:
Amount %Uncollectible Required AFDA, end
Not due P900,000 0%
1-30 days past due 600,000 2% P12,000
31-60 days past due 450,000 4% 18,000
61-90 days past due 200,000 10% 20,000
91- 180 days past due 50,000 50% 25,000
P2,200,000 P75,000

AFDA, P20,000 credit before adjustments

1. What is the Doubtful Account Expense?

Dr. Cr.
Doubtful Account Expense 55,000
Allowance for Doubtful Account 55,000

2. What is the AFDA, end? P75,000

3. What is the Net Account Receivable? P2,125,000

Account Receivable P2,200,000

Less: Allowance for Doubtful Account 75,000
Total Account Receivable, net P2,125,000
 Depreciation Expense
Depreciation Expense as a deduction form the
gross income refer to a reasonable allowance for the
exhaustion, wear and tear and normal obsolescence of
tangibleo property used in the trade or business.

Methods:
1. Straight-line method
2. Declining balance method
3. Sum-of-the-year-digit method
 Straight Line Method

Example:
On 1st, January 2005, Machine worth
P20,000 was purchased. The estimated useful life
of this is 4 years and scrap value is estimated
P2,000.
 Declining Balance Method

Example:
On 1st, January 2005, Machine worth
P1,000,000 was purchased. The estimated
useful life of this is 3 years and residual value is
estimated P64,000. Find the rate of
depreciation under Declining Method and
prepare Schedule of Depreciation
 Sum-of-the-year-digit method

Example:
B ABC Ltd. purchased a truck for
P65,000 on 1st January 2001. The expected
life was 5 years and salvage value P5,000.
Calculate the annual depreciation expense
by applying sum-of-the-years’ digits (SYD)
method.
 Amortization of Goodwill
Amortization of Goodwill refers to the
expensing of the cost of the intangible assets of
a firm over the total lifetime of those assets.

Example:
The Unding Corporation purchased a
copyright with a legal life of 10 years and a
remaing useful life of 5 years for P35,000.
 Depreciation of Mining Operations

At the normal rate of depreciation,

if expected life is ten (10) years or less,
or depreciation over any number of
years between five (5) years and the
normal expected life of ten (10) years.
Using the straight line method journalize the amortization
expense

Dr Cr
Amortization expenses - Copyright P7,000
Accumulated Amortization P7,000

Dr Cr
Amortization Expense P7,000
Copright P7,000
 Depletion
Allocation of cost or other basis of a wasting
asset over the period the natural resource is
extracted.
Example:
ABC Corporation purchases land for P300,000
from which it expects to extract 100,000 tons of coal,
the estimated residual value is P20,000, and it mines
8,000 tons of coal in the first year.

= P300,000 — P20,000
100,000 tons
Depletion cost per unit = 2.8 per tons

= 2.8 x 8,000
Annual depletion expenses = P22,400
Abandonment losses
• Petroleum operations that is abandoned - the
accumulated exploration and development
expenditures shall be allowed as deduction
• When petroleum operation is resumed –
abandonment losses shall be reversed and included in
gross income

Charitable and Other Contribution

Contribution deduction from gross income may
be deductible in full or subject to limitation depending
upon the organization to which the donation is given.
 Contribution deductible in full and contributions
subject to limitation

Deduction in Full
1. Donations to the government of the Philippines, or any of its
agencies or political subdivision or fully owned government
corporation to be used exclusively undertaking priority activities in:
• Education
• Health
• Youth and Sports development
• Human settlements
• Science and culture Economic development

2. Donations to certain foreign institutions or international

organizations in compliance with agreements, treaties or special
laws.
 Subject to limitation
1. Donations of the government of the Philippines or political
subdivision for exclusively public purposes.

2. Donation to domestic corporations or associations organized

and operate exclusively for the following purposes:
• Religion
• Charitable
• Scientific
• Youth and Sports development
• Cultural
• Education purpose
• Rehabilitation of veterans
• Social welfare institutions
 Donations to Accredited Non-government
Organizations (NGO’s) which are non-
profit domestic corporations organized
exclusively for:

• Scientific Research • Social Welfare

• Educational Character • Cultural
Building • Charitable purposes; or
• Youth and campus • Combination thereof
development
• Health
Accredited NGO’s if the requisites for full
deduction are not complied with.
LIMIT OR ALLOWABLE DEDUCTION

• Individual taxpayer- 10% of taxable income derived

from trade, business or profession before deducting
the contribution.

• Corporate taxpayer- 5% of taxable income derived

from trade, business or profession before deducting
the contribution.
ILLUSTRATION:
Case A: Corporate Taxpayer
A domestic corporation has the following data on income and
expenses.
Sales 10,000,000
Cost of sales 4,000,00

Operating expenses excluding contributions 3,000,000

to the government and charitable institutions

Contributions to Government for priority 200,000

project in education

Contributions to Government for public purpose 100,000

Contributions to domestic charitable organization 100,000
Contributions to a proprietary educational institutions 200,000
Contributions to a “Party List” Candidate 300,000
Determine the taxpayer’s taxable income:

ANSWER: 2,650,000

Sales 10,000,000
Cost of sales (4,000,000)
OPEX (3,000,000)
Net Income before contributions 3,000,000
Contributions deductible in full:
Contributions to Gov’s for priority projects (200,000)
Contributions deductible with limit:
*** Actual = 200,000
Limit = 3M x 5% = 150,000
Allowed (Lower amount) (150,000)
ANSWER: 2,650,000

***Composed of:
 Contributions to the government for public purpose
 Contributions to domestic charitable institutions
Case B: Individual Taxpayer
Sales 10,000,000
Cost of sales 4,000,00

Operating expenses excluding contributions 3,000,000

to the government and charitable institutions

Contributions to Government for priority 200,000

project in education

Contributions to Government for public purpose 100,000

Contributions to domestic charitable organization 100,000
Contribution to a proprietary educational institutions 200,000
Contributions to a “Party List” Candidate 300,000
Determine the taxpayer’s taxable income:
ANSWER: 2,600,000

SOLUTION:
Sales 10,000,000
Cost of sales (4,000,000)
OPEX (3,000,000)
Net Income before contributions 3,000,000
Contributions deductible in full:
Contributions to Gov’s for priority projects (200,000)
Contributions deductible with limit:
Actual = 200,000
Limit = 3M x 10% = 300,000
Allowed (Lower amount) (150,000)
Basic Personal exemption (50,000)
Taxable Income 2,600,000
 BIR Verification
(RR 13-98 as amended under RMC 86-2014)
Donors claiming donations and contributions to
accredited non-stock, non-profit corporations/NGO as
deductions from their taxable business income should
submit evidences or proofs to the BIR showing the
Certificate(s) of donation
 RESEARCH AND DEVELOPMENT EXPENSES
A taxpayer may treat research or development
expenditure which are paid or incurred by him during the
taxable year in connection with his trade, business or
profession as ordinary and necessary expenses which
are not chargeable to capital account.
 Amortization to Certain Research Development
Expenditures

At the election of the taxpayer and in

accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following
research and development expenditures may be treated
as deferred expenses.
Pension Trust Contributions
Pension trust contributions pertain to deductions applicable only to
the employer on account of its contributions to a private pension plan
character, established or maintained by employer to provide for the payment
of reasonable pensions to his employee.
Requisites:
1. The employer must have established a pension or retirement plan to
provide for the payment of reasonable pensions to his employee.
2. The pension plan is reasonable and actuarially sound.
3. It must be funded by the employer
4. The amount contributed must be no longer subject to the control and
disposition of the employer.
5. The payment has not yet been allowed as a deduction.
6. The deduction is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer of
payment is made.
Present Service Cost (or Normal Cost) and Past Serivice
Cost
Contribution during the taxable year to cover the
pension liability accruing during the taxable year is
known as present service cost or normal cost. Such
contribution is allowed as deduction under Sec. 34(A)(1)
as “expense general”. On the other hand, past service
cost pertains to an amount paid in excess of present
service cost (covering pension liability pertaining to old
employees that accrued during the years previous to the
establishment of the pension trust.)
ILLUSTRATION:
An employer maintains pension trust for its employee. The
following contributions are made:

2016 2017 2018

Current Cost 500,000 500,000 500,000

Past Service Cost 600,000 700,000 500,000
Required: Determine the deductible contribution for 2016, 2017 and
2018.
ANSWER:
2016 2017 2018
Current Service Cost 500,000 500,000 500,000
2016 (600,000/10) 60,000 60,000 60,000
2017 (700,000/10) 70,000 70,000
2018 (500,000/10) 50,000
Deductible expense 560,000 630,000 680,000
 Premium Payment on Life Insurance of Employee taken
Out by the employer/corporation:
Premium payment of Life Insurance of employees
taken-out by the employer/corporation may be allowed as
deduction from the latter’s gross income provided the
designated beneficiary is the employee or his/her heirs/
beneficiaries.

Premium Payment/Proceeds from Life Insurance

• Beneficiary is the employee/heirs = deductible expenses of
the employer and taxable income of the employee. The
proceeds to be received by the employee’s heir(s) is
exclusion from gross income
• Beneficiary is the employer = nondeductible expenses of
the employer. The proceeds of the life insurance to be
received by the employer/corporation shall form part of its
taxable income.
 OTHER ALLOWABLE DEDUCTIONS UNDER
SPECIAL LAWS

Discounts Granted to PWD’s and Senior Citizen

The law also allows to establishments to claim the
discount as tax deduction based on the net cost of good
sold or services rendered.
RA 8525- Adopt A School Program (RR 10-2003)
Deduction from the gross income of the amount of
contribution/deduction that were actually, directly and
exclusively incurred for the Program, subject to limitations,
contributions and rules set in forth in Section 34(H) of the Tax
Code, plus an additional amount equivalent to fifty percent
(50%) of such contribution.

RA 7600- An act Providing Incentives to ALL Gov’t/Private

Health Institutions with Rooming-In & breastfeeding
Practices
The expenses incurred by a private health and non-
health facility, establishment or institutions, in complying with
the provision of this Act, shall be deductible expenses for
income tax purposes up to twice the actual amount incurred.