INCOME

TAXATION

DEDUCTIONS
TAX RULES ON THE DEDUCTIBILITY OF EXPENSES
(NORMAL TAX)
Individual Corporate
Taxpayer Taxpayer
Personal Expenses Non deductible Not Applicable
Business Expenses *
Deductible Deductible
Revenue expenditures
outright outright
Deductible Deductible
Capital expenditures
over time over time
Subject to tax rules on deductibility
Includes capital expenditures subsequent to acquisition

ALLOWABLE DEDUCTIONS
TAX CLASSIFICATION OF BUSINESS DEDUCTIONS
CLASSIFICATION DEFINITION
Cost of sales/services Deducted outright against sales, revenues, receipts, or fees of individual
taxpayers to measure gross income from operations.
Allowable Deductions Deductions from Gross Income
Regular Allowable Itemized • All necessary and ordinary expenses paid or incurred during the taxable
Deductions (RAID) year
• Must comply to substantiation requirements
• Default deductible expense
Optional Standard • Deductions as a fixed percentage (40%) of gross income, gross sales, or
Deductions (OSD) gross receipts
RR 16-2008 • No substantiation requirements
• The taxpayer must signify his intention to avail the OSD in the 1st
quarter ITR
Special Allowable Itemized Additional deductions from Gross Income provided by the NIRC, or special
Deductions (SAID) laws.

Net Operating Loss Excess of RAID over Gross Business Income in a taxable year.
Carry-Over (NOLCO)

ALLOWABLE DEDUCTIONS
RULES ON OPTIONAL STANDARD DEDUCTIONS
Individual 40% of Gross Sales (Accrual) / Gross Receipts (Cash basis)

Gross Sales - Sales less discounts, returns and allowances

Gross Receipts - Nonrefundable/unrestricted receipts less
discounts, returns and allowances
Corporation 40% of Gross Income subject to normal tax

Gross Income - Gross sales/receipts less cost of sales

services plus other income not subjected to final tax, including
gain from sale of capital asset (undiminished by capital
losses) not subjected to CGT.

ALLOWABLE DEDUCTIONS
Optional Standard Deductions
 TAXPAYERS ENTITLED TO ALLOWABLE DEDUCTIONS
RAID OSD
Individuals
Resident citizen ✓ ✓
Nonresident citizen ✓ ✓
Resident alien ✓ ✓
Nonresident alien engaged in business ✓ X
Nonresident alien not engaged in business X X

Estates and Trusts ✓ ✓

Corporations
Domestic ✓ ✓
Resident foreign ✓ ✓
Nonresident foreign X X
* If a taxpayer uses RAID , it also follows the use of SAID and NOLCO .

ALLOWABLE DEDUCTIONS
COMPUTATION OF TAXABLE INCOME UNDER NORMAL TAX
Taxable Individual/
Income, if Estate/ Corporate
OSD is not Trust taxpayer
availed taxpayer
Gross Sales/Receipts xxxx *
Cost of Sales/Service (xxxx) X ✓
Gross business income xxxx
Other operating income subject to normal tax xxxx *
Other nonoperating income subject to normal tax xxxx
Gross income xxxx *
Regular itemized deductions (xxxx) X X
Special allowable itemized deductions (xxxx) X X
NOLCO (xxxx) X X
Taxable Income xxxx
✓ May still be availed as a deduction if the taxpayer availed OSD
X Replaced by OSD, if availed
* Basis in the computation of OSD at 40%

ALLOWABLE DEDUCTIONS
Optional Standard Deductions
NET OPERATING LOSS CARRY-OVER (NOLCO)

Requisites for • The taxpayer must not be exempt from tax during the year the
deductibility NOLCO was incurred.
• There is no substantial change in ownership (change of more
than 75% of paid-up capital)
• NOLCO is computed on an annual basis, not quarterly.
Special Rules on • NOL of Mining Companies
NOLCO ~ NOL incurred within the first 10 years in operation can be
carried over 5 years succeeding the year it was incurred.
• NOL sustained prior to Merger or Consolidation
~ The acquirer's NOLCO is deductible after the merger
provided there is no substantial change in ownership. (RR14-
2001)
~ The acquiree's NOLCO is nondeductible by the surviving
entity. (RR 214-2012)
NET OPERATING LOSS CARRY-OVER (NOLCO)

Requisites for • The taxpayer must not be exempt from tax during the year
deductibility the NOLCO was incurred.
• There is no substantial change in ownership (change of more
than 75% of paid-up capital)
Special Rules on • NOL of Mining Companies
NOLCO ~ NOL incurred within the first 10 years in operation can be
carried over 5 years succeeding the year it was incurred.

• NOL sustained prior to Merger or Consolidation

~ The acquirer's NOLCO is deductible after the merger
provided there is no substantial change in ownership.
(RR14-2001)
~ The acquiree's NOLCO is nondeductible by the surviving
entity. (RR 214-2012)

ALLOWABLE DEDUCTIONS
Net Operating Loss Carry Over
REGULAR ALLOWABLE ITEMIZED DEDUCTIONS (RAID)

General business expenses Depreciation

Interest expense Depletion
Taxes Charitable and other contributions
Losses Contributions to pension and trusts
Bad debts Research and development costs

ALLOWABLE DEDUCTIONS
RULES ON DEDUCTIBILITY OF REGULAR ITEMIZED DEDUCTIONS
Legitimate, Expenses must be legitimate, ordinary, actual, and necessary, otherwise, such
ordinary, actual, expenses are nondeductible.
and necessary
(LOAN)
Matching Principle Expenses incurred/paid that generate income not subject to normal tax are
nondeductible.
Related Party Rule Expenses incurred with/paid to a related party are nondeductible
For bad debts, • Members of a family
interests, and • Except in cases of liquidation, the direct or indirect controlling individual
losses • Except in cases of distribution in liquidation, corporations under direct or
indirect common control by or for the same individual
• Grantor and fiduciary of any trust
• Fiduciaries of trusts with the same grantor
• Fiduciary of a trust and the beneficiary of such trust
Withholding Rule Expenses of a taxpayer should be reduced by withholding tax upon payment;
if such payments are not exempted from withholding tax; otherwise, such
expense is nondeductible.

ALLOWABLE DEDUCTIONS
RULES ON DEDUCTIBILITY OF REGULAR ITEMIZED DEDUCTIONS
ACCRUAL BASIS CASH BASIS
Prepayments
Refundable Nondeductible Nondeductible
Nonrefundable Incurred Incurred
Accrual of expense Incurred Paid

REVENUE EXPENDITURES CAPITAL EXPENDITURES

Repairs and ➪ If there is no increase in fair ➪ If there is increase in useful life
Improvements value or useful life ➪ If there is an increase in fair
value, only up to the extent of
the increase to fair value, any
excess is immediately
deductible.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - GENERAL BUSINESS EXPENSES

Employee Withholding tax is properly withheld and remitted, unless

Compensation employee compensation is exempted from income tax,
e.g. MWE, 13th month pay, de minimis.
Employee • Salary of an employee received by his heirs after his death
compensation for • Salary paid during partial incapacity
injuries and • The death or incapacity of an employee must occur in the
pension performance of his work
Materials and • Product cost (related to goods or services)
Supplies Inventory deductible when such good is sold or the
(prepayments) method service is rendered
• Period cost (unrelated to goods or services) - deductible
when used

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - GENERAL BUSINESS EXPENSES

Travel Includes transportation, meals, and lodging during travel, local or

abroad
Leasehold The taxpayer-lessee may deduct the cost of leasehold improvement
improvement through depreciation over the shorter of lease term and useful life.
Entertainment, • EAR must be for the entertainment, amusement of taxpayer's
Amusement, clients, guests or customers, and not of its employees.
and • Deductible amount is lower between the actual EAR and the
Representation prescribed ceilings as follow:
expense ~ .50% of net sales - sale of goods/properties
~ 1% of net revenues - sale of services (including leases)
• If taxpayer is engaged in both sale of goods and services, actual
EAR shall be prorated based on the ratio of net sales and net
revenues.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - INTEREST EXPENSE (RR 13-2000)

Requisites • The indebtedness must be in writing.

• The indebtedness must have been accrued or paid during the taxable year.
• The indebtedness must be comply to the LOAN principle and related party
rule.
Interest • Computation of deductible interest with limit:
expense, NOT Interest expense from lending, deductible with limit xxxx
deductible in full Less: 33% x Interest income subject to 20% final tax xxxx
Deductible interest expense xxxx

• The 33% rate is applicable to both individual and corporate taxpayers.

Nondeductible • Indebtedness not business related (LOAN)
interests • Indebtedness in favor of a related party (related party rule)
• Prepaid interests (discounting)
• Interest to purchase or carry tax-exempt transactions
• Interest on indebtedness to finance petroleum explorations (part of
deferred exploration cost)
• Interest on unclaimed salary
ALLOWABLE DEDUCTIONS
• Interest on preference shares
• Imputed interest (Effective interest)
REGULAR ITEMIZED DEDUCTIONS - INTEREST EXPENSE (RR 13-2000)

Interest on The interest on indebtedness obtained to acquire fixed assets

indebtedness in the used in trade/business/profession has the following options:
acquisition of fixed • Outright deduction
assets • Capitalized amount, deductible through depreciation

Discounting of • Deductible when it is incurred

interest (Prepaid • For an individual taxpayer using cash basis, deductible
Interest) when the loan is paid in full or proportionate to installments.

Interests • If the business has no interest income subject to 20% final

deductible in full tax.
• Interest paid to the government, e.g. interest on delinquent
tax.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - BAD DEBTS

Who are allowed to Taxpayers using accrual basis (only under accrual basis a receivable is
deduct? recognized)
Timing of deduction • Insolvency of the debtor • Disappearance of the debtor
• Death of an insolvent debtor
Other requisites for • There must be a valid and subsisting claim
deductibility • The claim must be written off within the taxable year
• The receivable must be comply to the LOAN principle and related party rule.
Amount deductible • Amount writen off
as bad debts • Only receivables previously reported as income can be claimed as bad debts
when uncollected.
• On factored receivables, the Factor (buyer of receivable) shall apply the
following rules:
~ Without recourse - the factor shall claim bad debts up to the extent of
the amount paid
~ With recourse - no bad debt shall be deducted unless the entity
who sold the receivables becomes insolvent

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - TAXES
DEDUCTIBLE NONDEDUCTIBLE
Documentary stamp tax Philippine income tax
Occupational tax Transfer taxes (estate and donor)
Privilege and license tax Percentage tax on stock transaction
Excise tax Value-added tax, of a VAT registered taxpayer
Import duties Other percentage tax (OPT)
Local business taxes Special assessment
Automobile registration fees Surcharge and penalties
Community tax Compromise penalty
Municipal tax Foreign income tax paid, claimed as tax credit
Fringe benefit tax
Real property tax
VAT paid by a NonVAT registered entity
Foreign income tax paid, not claimed
as tax credit

ALLOWABLE DEDUCTIONS
 REGULAR ITEMIZED DEDUCTIONS - TAXES (continuation)
FOREIGN INCOME TAXES PAID
Taxpayers who can • Resident citizens
avail • Domestic corporations

Optional • Deduction from gross income, at actual amount

treatments • Tax credit, subject to limit
Tax rule when claimed as tax credit
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݁ ݉‫݋‬
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ܴ ‫ܮܱ ܹ ܧ‬ ܹ ݈݀‫݁ܿ݊݅ ܽ ܾ ݈ܾܽ ݐ݁ݔ݋ݎ‬ ݉
݁ ݉‫݋‬
ሺ
‫ܮ݉ ݅ݐ‬ ݅ ‫ܣ‬ሻ
ൌ
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݈݈ܽܽ‫݁ܿ݊݅ ݋ݎ݁ ݅ ݃ ݂݊ ݋ݐ‬ ݉ ‫ܽݔ݁ݏ‬
݁ ݉‫݋‬ ݀݅ ܽ
‫݌ܽ݅݀ ݐ ݐݔ‬
ܴ ‫ܮܱ ܹ ܧ‬
ሺܶܽ݅ ݀ ‫ܿݎ݁ݔ‬‫ݐ‬ ሻ ݊ ݃ ݅ ݁‫ܨݎ‬
‫݁ܨ݋‬ ܾ݈ܽ݁ ݈ܾܽ‫ܽݔ‬ ܾ݈ܽ ܾ ܽ ‫݁ܿ݊݅ ݐ‬
݁ ݉‫݋‬ ݉
‫ݎ‬ሺ݁‫݌‬
‫݋ݑ݊ݐ ݕ ܿ ݁ ݊ݎ‬ሻ
ൌ ‫݈݄݁݅݅ܲ ݔ‬ ݊ ݅ ݁ ݉‫ܽݔ ݉ ݁ ݋‬
݁݊݅‫݌݌‬ ܿ‫ܫ‬
ܽ ݊‫ݐ‬
ܴ ‫כܮ ܱ ܹ ܧ‬ ܹ݀ ݈‫݁݋ݎ‬ ܾ݈ܽ݁ ݈ܾܽ‫ܽݔ‬
ܾ݈ܽ ܾ ܽ ‫݁ܿ݊݅ ݐ‬ ݁ ݉‫݋‬݉
‫ܮ݉ ݅ ݐ‬݅ ‫ܤ‬
ൌ݊ ݃ ݅ ݁‫ܨݎ‬
‫݁ܿ݊݅ ܨ݋‬ ݉ ‫ܽݔ݁ݏ‬
݁ ݉‫݋‬ ݁ ܽ ‫݌ܽ݅݀ ݐ‬
݀ ݅ ܽ ‫ݎ‬ሺ݁‫݌‬
‫ݎݐ‬
‫݋ݑ݊ ݕܿ ݁ ݊ݑ‬ሻ

* Sum of the computed lower amounts of all foreign countries analyzed on a per country basis

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPRECIATION

Methods of • Straight line method (SLM)

Depreciation • Declining balance method (DBM)
• Sum of the Years Digit method (SYD)
• Others that may be prescribed by the Secretary of Finance
upon recommendation of the CIR.
Special Rules on • Life tenancy to a property
Depreciation • Properties held in trust
• Revaluation of properties
• Depreciation of passenger vehicles
• Depreciation of properties of Petroleum Operations
• Depreciation of properties of Mining Operations
• Capital expenditures of Private Educational Institutions

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPRECIATION
SPECIAL RULES
Life tenancy to a Deduction shall be allowed to the life tenant as if it is the
property absolute owner of the property.
Properties held in Depreciation of properties held in a taxable trust shall be
trust allocated to the beneficiaries and the trust, based on the
allocated gross rent income.
Revaluation of Revaluation of properties is not allowed for tax purposes.
properties
Depreciation of • Only one vehicle for land transport is allowed for an official and
passenger vehicles employee and the value of which shall not exceed ₱2,400,000.
• No depreciation shall be allowed for yachts, helicopters,
airplanes or aircrafts if the taxpayer is not engaged in transport
operation or lease of transport vehicles
• Nondepreciable vehicles are considered as capital assets

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPRECIATION
SPECIAL RULES
Depreciation of Directly used Not directly used
properties of Depreciation method SLM or DBM* SLM
Petroleum Operations Useful life 10 years or shorter** 5 years
* Changes between SLM and DBM are allowed
** As permitted by the CIR
Depreciation of The contractor should notify the CIR at the beginning of the depreciation
properties of Mining period as to the depreciation rates to be used, as follows:
Operations ≤
• If useful life is 10 years: use the normal rate of depreciation
• If useful life is > 10 years: use any number of years from 5 to 10
Capital expenditures of years.
The capital expenditure of PEIs, at the option of the taxpayer, may be
private educational accounted as follows:
institutions • Outright expense
• Capitalized and deducted against gross income through depreciation.

¥ Tangible Exploration and Development Costs

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPLETION
INTANGIBLE EXPLORATION AND DEVELOPMENT COSTS
Exploration cost Expenses paid/incurred before the development stage of the mine
intended to ascertain the existence, location, extent, or quality of any
deposit of ore or other mineral.
Development Expenses paid/incurred during the development stage of the mine or
cost other natural deposits which begins when deposits or mineral ores are
shown to exist in sufficient commercial quantity and quality and shall
end upon commencement of actual commercial extraction.
Intangible costs Include any incidental and necessary costs of drilling wells or preparing
in petroleum wells for petroleum production and which have no salvage value.
Intangible costs Include costs of diamiond drilling, tunneling, and other improvements
in mining of a nature that is no subject to allowance for depreciation.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPLETION (MINING AND PETROLEUM)
INTANGIBLE EXPLORATION, DEVELOPMENT AND DRILLING COSTS (EDDC)
Irrevocable tax
Non producing Producing
treatment to Period incurred wells/mines wells/mines
intangible EDDC Before commercial production Capitalize Capitalize
(per contract area After commercial production Outright* Outright* or Capitalize
basis) ✱ With special rules on deductibility for m ining operation

Limit on outright Deductible outright intangible exploration & development cost:

cost from mining Accumulated (including If higher
operations prior years) actual  the excess over the 25%
Lower intangible exploration and is deductible in the
development cost succeeding year with no
expiration.
25% of net income from mining operations
(tax incentives under existing laws are excluded
from the com putation)

Net income from Gross income from operations xxxx

mining operations Less: Allowable deductions from mining operations✤ (xxxx)
Net income from mining operations xxxx
ALLOWABLE DEDUCTIONS
✤ Expenses from mining , milling , market ing , and d ep re ciat ion of properties
d irect ly used in m ining operations
REGULAR ITEMIZED DEDUCTIONS - CHARITABLE AND OTHER CONTRIBUTIONS

Charitable A non-operating expense allowed by the tax law as deduction from taxable
Contribution income
Requisites for • The taxpayer-donor must be a domestic institution
deductibility • The taxpayer making the contribution must be engaged in business,
trade, or profession.
• There must be an actual payment of contribution/gift.
• The recipient must be an entity or institution specified by law
• The net income of the institution must not inure to the benefit of any
individual or private stockholder.
• The donations must be properly documented.

Contributions with The computation of deductible donation is as follows:

limit Ceiling Computation of ceiling:
Gross business income xxxx
Lower
Actual charitable Less: Itemized deductions before donations xxxx

contributions Taxable income before donations xxxx

Multiplied by: 5% or 10%
ALLOWABLE •DEDUCTIONS
Donor-Corporation - 5% Maximum donation xxxx

•
• Donor-Corporation - 5%
Donor-Individual - 10%
REGULAR ITEMIZED DEDUCTIONS - CHARITABLE AND OTHER CONTRIBUTIONS
DONEES DEDUCTIBLE IN FULL WITH LIMITATION
Philippine Priority activites determined by NEDA Exclusively for public purposes not in
government and (National Economic Development Authority) in: accordance with priority activities.
subdivisions/ (Mnemonics: HEY CHE)
GOCCs
• Health • Culture and sports
• Education • Human settlements
• Youth and sport • Economic
development development
Foreign/ In pursuance or in compliance with agreement,
international treaties or special laws.
institutions
Non-government Donee-NGOs should be accredited with Non-accredited NGOs organized
institutions (NGOs) certifications by any of the following: exclusively for the following purposes:
(Mnemonics: C²RYERS²)
• DSWD • Charitable • Education
• DOST • Cultural • Rehabilitation
• CHED • Religious of veterans
• Philippine Sports Commission • Youth and sport • Scientific
• National Council for Culture and Arts development • Social welfare
Certificate of donation must be issued by the donee to the donor. The RDO officer, where the donor is
situated, must be notified by the latter within 30 days from the receipt of the certificate of donation in cases
where the donation is more than ₱1,000,000 .

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - CHARITABLE AND OTHER CONTRIBUTIONS
DONATIONS TO ACCREDITED NGOs
Requisites for Full • The NGO must be organized and operated exclusively for the purpose
Deductibility mentioned and no income incures to the benefit of any private
individuals.
• The NGO makes utilization of the contribution not later than the 15th
day of the third month after the close its taxable period.
• The administrative expenses of the NGO do not exceed 30% of its
total expenes.
• Members of the Board of Trustees must not receive remunerations.
• In the event of liquidation, the asset of the NGO will be distributed to
another nonprofit domestic corporation organized for similar purpose.
• The amount of contribution of property other than money must be
valued at acquisition cost.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - CONTRIBUTIONS TO PENSIONS AND TRUSTS

Types of Defined contribution plan - The liability of the employer is to contribute

retirement/ the defined or contracted periodic contribution as per agreement with the
pension plan administrator. The retiremen payable to the retireewould be dependent
on how the administrator managed the fund to become profitable.

Defined benefit plan - The benefits that the retiree would receive are
defined and normally based on certain percentage of the salary of the
employees eligible to the benefit plan.
Pension expense Current service cost (CSC) - pension expense of the employer accruing
under the terms of the pension plan for services rendered by employees
during the year.

Past service cost (PSC) - pension expense accruing in prior years for
services rendered by employees before the establishment of the pension
plan.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - CONTRIBUTIONS TO PENSIONS AND TRUSTS

Deductibility of The tax rules on the deductibility of CSC and PSC are as follow:
Pension expense
CSC PSC
Funded Deductible in full Amortized in 10 years
Unfunded Deductible in the year, Amortized in 10 years when
it becomes funded it becomes funded
* Funding shall be applied first to CSC, any excess is applied to PSC.
** When funding is applied to CSC, FIFO basis is used. Same procedure for PSC.
*** Deductibility of CSC/PSC shall apply only when funded.
Difference between Overfunding The excess of contributions over the total of CSC and PSC
actual contributions
and pension Underfunding Contributions paid is insufficient to cover both CSC and/or
expense PSC.
Pension not BIR- Deduction is only allowed during actual payment of retirement. No deduction
approved is allowed for contributions.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - RESEARCH AND DEVELOPMENT COSTS

Related to Capitalized and deductible through depreciation.

properties used in
business
Not related to • Outright expense
properties used in • Deferred expense - amortized over a period not exceeding 60
business months, starting the month the taxpayer
realized benefits from the R&D expenditures.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES

Types of losses • Ordinary loss

• Capital loss (discussed under Dealings in Properties)
Loss on disposal or Replacement/restoration cost
destruction of Loss (if higher, any excess over tax base is capitalized)
ordinary asset (Lower)
Book value or tax basis of destroyed property

• The loss is reduced by proceeds from insurance, if any. A taxable

gain is recognized for any excess of insurance over loss
• Dismantling cost of structure on an acquired real property shall
be nondeductible, but shall become part of the cost of the
land.
Losses between Nondeductible
related party
Gambling losses Gambling losses are deductible only against gambling winnings

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES

Mortgage losses Loss = Unpaid debt > Purchase price on foreclosure

(POV of taxpayer- Action taken by taxpayer Treatment of loss
mortgagee) If disposed Deductible
If not disposed (kept) Capitalized

Losses due to • Unrealized loss - nondeductible

shrinkage in value • Realized loss (actually suffered) - deductible
of stocks
Losses of Useful Loss in value due to technological changes or new legislation
Value • Realized loss (actually suffered) - deductible
• Unrealized loss - nondeductible, except when the asset
involves building and machineries that are
permanently abandoned

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES

Losses from theft Case Timing of deduction

or embezzlement Discovered & the culprit is known year it becomes worthless
Discovered & the culprit is not known year of discovery

Abandonment of • All accumulated exploration and development expenditures are

Petroleum deductible except those incurred prior to 01/01/1979 in a
operations contract area which shall be deductible only from any income
derived from that area.
• Unamortized cost of a well & any undepreciated assets
Operation Tax Treatment Amount Timing
Abandoned Deductible as a loss Unamortized/ Year of
undepreciated cost abandoment
Resumed Taxable income, Amount previously Year of
deductible thru deducted as loss restoration
depreciation/
amortization

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES
Losses from Farming
Nondeductible • Shrinkage in weight or physical value due to deterioration of farm
Losses products, except if such shrinkage is reflected in an inventory in
determining profits.
• Total casualty losses of prospective crops.
• Value of animals that perish from among those raised on the
farm, except when such loss is reflected in inventory.
• If gross income is ascertained by inventories, no deduction can be
made for livestock or products lost during the year, whether
purchased for resale, or produced on the farm, as such losses will
be reflected in the inventory by reducing the amount of livestock
or products on hand at the close of the year.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES
Losses from Farming
Deductible • If an individual owns and operates a farm in addition to being engaged in
Losses another trade, business, or calling, and sustains a loss from such
operation of the farm, then the amount of loss sustained may be
deducted from gross income received from all sources, provided the farm
is not operated for recreation purposes.
• The actual cost of other property (with proper adjustment for
depreciation), which is destroyed by order of the authorities, may inlike
manner be claimed as a loss; but if reimbursement is made in whole or in
part on account of stock killed or propert destroyed, the amount received
shall be reported as income for the year in which reimbursement is made.
• The cost of any feed, pasturage, or case which has been deducted as an
expense of operation shall not be included as part of the cost of the stock
for the purpose of ascertaining the amount of a deductible loss.

ALLOWABLE DEDUCTIONS
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS (SAID)
Who can avail? Amount of Special Deduction
Income distribution from Estate Amount distributed to beneficiary
a taxable estate or trust

Transfer to reserve fund Non-life insurance Amount of required reserves, deductible in

and payments to policies companies the year of payment
and annuity contracts of
insurance companies
Dividend distribution REIT Real Estate Dividend distributed by REIT (REIT is legally
under RA9856 Investment Trust mandated to distribute 90% of its income
as dividends)
Transfer to reserves of Cooperatives Amount of reserve fund taken from income
funds of taxable generated by taxable unrelated activities.
cooperatives (Strictly reserve fund only)
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS (SAID)
Who can avail? Requisites for Deductibility Amount of Special Deduction
Discounts to Companies • The gross selling price and sales
senior granting SC discount must be separately 20% discount on
citizens discounts indicated in the official receipt gross sales/receipts
under RA or sales invoice issued by the enjoyed/consumed
9257 establishment for the sale of by senior citizen
goods or services to the senior
citizen. Lower
• The discount can only be (Net of VAT)
allowed as deduction from
gross income during the same
taxable year. Actual discount
• The business establishment is
keeping a separate and
accurate record of sales
Discounts to Companies Same rules as senior citizen Same rules as senior citizen
PWDs under granting PWD
RA7277 discounts
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS (SAID)
Who can avail? Requisites for Deductibility Amount of SAID
Additional Companies • Employment shall have to continue at Additional 15% of the
compensation employing SCs least 6 months. total amount paid as
expense for senior • The annual taxable income of the salaries and wages to
citizen employee senior citizen does not exceed the senior citizens.
under RA9257 poverty level as determined by the
NEDA.
Additional Companies • The entity must present proof Additional 25% of the
compensation employing PWDs certified by DOLE that PWDs are under total amount paid as
expense for their employ. salaries and wages to
persons with • The PWD is accredited with the disabled persons.
disability under DOLE and DOH as to his disability, skills,
RA7277, as and qualifications.
amended by
RA9442
Cost of facilities Companies with Additional 50% of
improvements for physical facilities for direct costs of the
PWDs in accordance PWDs improvements or
with RA7277, as modifications.
ALLOWABLE DEDUCTIONS
amended by RA9442
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS (SAID)
Who can avail? Requisites for Deductibility Amount of Special Deduction
Additional training BOI registered and • Qualified jewelry Additional 50% of the expenses incurred in
expense under the accredited jewelry enterprise enterprise must submit training schemes approved by TESDA during
RA8502 - Jewelry to the BIR a certified true the year it is incurred.
Industry Act of copy of its Certificate of
1998 Accreditation issued by
the BOI
• The training scheme
must be approved and
certified by TESDA.
Additional Private entity adopting a • Deductible in the year ➪ Additional 50% of the actual
contribution qualified government/ paid or incurred contribution to an adopted school
expense under the public schools in all levels • The application and ➪ Valuation of contributions other than cash is
Adopt-a-School Qualification of adopting approved MoA should be as follows (RR 10-2003):
program under private entity filed with the RDO of the • Personal Property - acquisition cost or
RA8525 • Has a credible track adopting private entity depreciated value
record • Substantiated L O W E R
• Have been existence for • Consumab Acquisition Cost FMV at date of
at least a year le goods donation
• Not prosecuted and • Services Actual Value of service
found guilty of engaging expenses per MoA
in illegal activities. • Real incurred
Depreciated Higher between
property cost FMV or ZV
SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS (SAID)
Who can avail? Requisites for Deductibility Amount of Special Deduction
Additional Health, and non- • The deduction shall apply for the taxable period Additional deductions equal to twice the actual
deductions for health facilities when the expenses were incurred amount incurred for complying with the
compliance to and • All health or non-health facilities, establishments rooming-in and breast-feeding practices.
Rooming-in and establishments and institutions shall comply with the IRR of RA
Breast-feeding 10028 within 6 months after its approval.
practices under
RA7600, as • The facility, establishment or institution secure a
amended by "Working Mother-Baby Friendly Certificate"
RA10028 from the DOH to be filed with the BIR.

Free legal Lawyers and • A certification from the PAO, DOJ or association
assistance expense professional accredited by the Supreme Court (SC) is secured Equivalent amount of the pro-bono
under RA9999 partnerships indicating that the said legal services are within legal service if not rendered for
the definition of SC
• The agencies (PAO, DOJ) cannot provide the legal Lower
services performed.
• The free legal service is excluded from the 10% of gross income from
mandatory 60-hour free legal services to indigent rendering legal services alone
clients as required under the Rule on Mandatory
Legal Aid Services for Practicing Lawyers.
Additional Enterprises • Additional 50% of the total productivity
productivity adopting RA6971 bonuses given to employees under the
incentive bonus program.
expense under • Additional 50% of cost of local trainings
RA6971 and special studies accredited by TESDA
provided to rank-and-file employees.