Itemized Deductions

ITEMIZED DEDUCTIOS (BITCLoD³EP²)

1. Bad debts
2. Interest
3. Taxes
4. Charitable and other contributions
5. Losses
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Development and research
9. Expenses, in general
10. Pension trusts
11. Premium on health and/or hospitalization insurance (for individual taxpayers only)

OPTIONAL STANDARD DEDUCTION (OSD)

1. Who may claim? This may be claimed in lieu of itemized deductions by self-employed and professional
individuals only, other than non-resident aliens.
2. Amount – 10% of gross income
3. How will taxpayer elect optional? He must signify in he return his intention to elect the optional
standard deduction.
4. Effect of election. Such election made in the return shall be irrevocable for the taxable year for which
the return was made.

BAD DEBTS
a. Requisites for deduction
1. There must be a valid and subsisting debt.
2. It must be connected with the trade, profession or business.
3. The debt is ascertained to be worthless.
4. It must be charged off within the taxable year.
b. Non-deductible bad debts
1. Those sustained in a transaction entered into by related taxpayers.
c. Recovery of bad debt previously deducted
1. Taxable if deduction of the bad debt resulted in income tax benefit to the taxpayer.
2. Not taxable if deduction did not result in income tax benefit to the taxpayer.

INTEREST
a. Requisites for deduction
1. There should be an indebtedness.
2. There must be legal liability to pay interest.
3. The indebtedness must be incurred in connection with the taxpayer’s trade, profession or
business.
4. The allowable deduction for interest expense shall be reduced by an amount equal to the
following percentages of the deduction for interest income subjected to final tax, beginning:
November 1, 2005 – 42%
January 1, 2009 – 33%

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b. Non-deductible interest
1. Interest paid in advance through discount on indebtedness incurred by an individual taxpayer
reporting income under cash basis. Such interest shall be allowed as deduction in the taxable
year that the indebtedness is paid. If the indebtedness is payable in installments, the amount of
interest which corresponds to the amount of the amortized principal shall be allowed as
deduction in the year paid.
2. If the taxpayer and the person to whom the interest payment has been made are related to
each other.
3. If the indebtedness is incurred to finance petroleum exploration.
c. Optional treatment of interest expense – At the option of the taxpayer interest incurred to acquire
property used in trade, business or exercise of a profession may be allowed as outright deduction or
treated as a capital expenditure.

TAXES
a. Requisites for deduction
1. It must be paid or accrued within the taxable year
2. It must be incurred in connection with the taxpayer’s trade, profession or business.
b. Non-deductible taxes
1. Philippine income tax
2. Foreign income tax, if claimed as a tax credit
3. Estate and gift taxes
4. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed.
c. Refund of taxes
1. If tax refunded is deductible tax that resulted in income tax benefit to the taxpayer, refund is
taxable.
2. If tax refunded is not deductible tax or, if deductible, but the deduction did not result in income
tax benefit to the taxpayer, refund is not taxable.
d. Tax credit for foreign income tax
1. Option – Taxpayer has the option to claim the foreign income tax either as:
a) Tax credit, or
b) Deduction from income
2. Who can claim tax credit? Only resident citizens and domestic corporations.
3. Who can not claim tax credit or deduction? Non- resident citizens, aliens and foreign
corporations.
4. Limitation on tax credit
1st limitation 2nd limitation
Foreign taxable income Total foreign taxable income
Total taxable income x Phil. Income Tax Total taxable income x Phil. Income Tax

CHARITABLE & OTHER CONTRIBUTIONS

a. Requisites of deduction
1. The contribution or gift must be actually paid

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2. The contribution f property shall be measured based on acquisition cost.

3. It must be given to the organizations specified herein.
4. The net income of the institution must not inure to the benefit on any private stockholder or
individual.
5. The taxpayer making the charitable contribution must be engaged in trade, profession or
business.

CONTRIBUTIONS SUBJECT TO LIMIT

A. Donations to the government of the Phil. or political subdivisions exclusively for public purposes.
B. Donations to non-government organizations or to DOMESTIC corporations organized exclusively for
the following purposes.
1. Religious
2. Charitable
3. Scientific
4. Youth and sports development
5. Cultural
6. Educational
7. Rehabilitation of veterans
8. Social welfare
C. Limit –based on taxable income derived from trade, profession or business without the benefit of
deduction for contributions:
10% - Individual
5% - Corporation
D. Computation:
Gross business income Pxxx
Less itemized deductions (except contributions) xxx
Net business income before contributions and non business
income(basis of limit) xxx
Less contributions:
Deductible in full Pxxx
Deductible with limit xxx xxx
Balance xxx
Add non-business income xxx
Taxable income, if corporation Pxxx
Less personal exemptions xxx
Taxable income, if individual Pxxx
Note: Partners in GPP shall report as GI their distributive share in the NI of the partnership. NI of the
GPP shall be computed in the same manner as the NI of a corporation.

DEDUCTIBLE IN FULL
A. Donations to the government or political subdivisions including fully owned government corporations
to be used exclusively in undertaking priority activities in:
1. Education
2. Health

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3. Youth and sports development

4. Human settlements
5. Science and culture
6. Economic development

Provided, however, that any donation to the government, etc. not in accordance with said priority
plan shall be subject to limit.

B. Donations to foreign institutions or international organizations in compliance with agreements or

treaties.
C. Donations to accredit non-government organizations. The term non-government organization means a
non-profit domestic organization.
1. Organization exclusively for:
a. Scientific
b. Research
c. Educational
d. Character building
e. Youth and sports development
f. Health
g. Social welfare
h. Cultural
i. Charitable
j. Combination thereof

2. The donation must be utilized not later than the 15th day of the 3rd month following the close of
its taxable year.
3. The administration expense must not exceed 30% of total expenses.
4. Upon dissolution, assets must be distributed to another non-profit domestic corporation or to
the State.

Note: If the above conditions are not complied with, the contributions may be deducted subject to
limit.

LOSSES
a. Requisites for deduction
1. Loss must be actually sustained during the taxable year.
2. It must be sustained in a closed and completed transaction.
3. The loss must be the taxpayer .
4. Not compensated by insurance or other forms of indemnity.
5. The loss must be reported to the BI within 45 days from date of loss.
6. Not claimed as a deduction in the estate tax return for individual income taxpayers only.
b. Deductible losses
1. Loss incurred in trade, profession or business.

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2. Loss due to fire, storm, shipwreck or other casualty if the property is connected with trade,
profession or business.
3. Loss due to theft, robbery, or embezzlement if the property is connected with trade, profession
or business.
c. Computation of amount of loss deductible in (b2) and (b3) above.
1. Total loss – book value.
2. Partial loss – replacement cost of the damaged portion of the asset of the book value thereof at
the time of the loss, whichever is lower.
d. Loss of income – loss of income or worthless debt arising from unpaid rent, interest or similar items is
not deductible, unless the income such items represent has been reported under the accrual method.
e. Losses from sales or exchanges of property which are not deductible (between related taxpayers)
1. Between members of a family. Family of an individual shall include only his brothers and sisters
(whether by whole or half-blood) spouse, ancestors, and lineal descendants.
2. Between the grantor and a fiduciary of any trust.
3. Between the fiduciary of a trust and the fiduciary of another trust; if the same person is a
grantor with respect to each trust.
4. Between a fiduciary of a trust and a beneficiary of such trust.
5. Except in case of distribution in liquidation:
a) Between an individual and corporation if the individual owns directly or
indirectly more than 50% in value of the outstanding stock.
b) Between corporations if more than 50% in value of the outstanding stock in both
is owned directly or indirectly by the same individual, and only if either one of the
corporations was a personal holding company for the taxable year preceding the date of
the sale or exchange.
f. Net operating loss carry-over (NOLCO) – any excess of allowable deductions over gross income of a
business in a taxable year immediately preceding the current taxable year shall be carried over as a
deduction from gross income for the next 3 consecutive taxable years immediately following the year
of such loss.

DEPRECIATION
a. Requisites for deduction
1. The property must be used in trade, profession or business.
2. The property must have a limited useful life.
3. The provision must be charged off during the taxable year.
4. The provision must be reasonable.
b. Proprietary or private educational institution ma at its option elect either to:
1. Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities; or
2. Deduct allowance for depreciation.

DEPLETION
a. What method of depletion is provided by law? COST DEPLETION.
b. Who may avail of cost depletion? Oil and gas wells and mines.

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c. Basis of cost depletion – adjusted cost or capital investment in the mine, which is the accumulated
exploration and development expenses.
d. Limit of depletion – it cannot exceed the capital invested I the mine.
e. Computation of unit depletion charge:
Adjusted cost (Capital invested in the mine)
No. of recoverable units in the mine =Unit depletion charge

RESEARCH AND DEVELOPMENT EXPENDITURES

a. Requisites for deduction
1. It must be paid or incurred during the taxable year.
2. It must be connected with the trade, profession or business.
3. It is not chargeable to capital account.
b. Amortization of certain research and development expenditures
1. Chargeable to capital account but not chargeable to property of a kind which is subject to
depreciation or depletion.
2. Taxpayer opted to treat the expenditures as “Deferred Expenses” rather than outright expense
in the taxable year pad or incurred.
3. Amortized over a period of not less than 60 months starting with the month in which the
taxpayer first realized benefits from such “Deferred Expenses”.
c. Non-deductible research and development expenditures
1. Any expenditures for the acquisition or improvement of land;
2. Any expenditures for the improvement of property to be used in connection with research and
development of a kind which is subject to depreciation and depletion; and
3. Any expenditures paid or incurred for the purpose of ascertaining the existence, location,
extent, or quality f any deposit of ore or other mineral, including oil and gas.

EXPENSES IN GENERAL
a. Requisites for deduction
1. It must be ordinary and necessary.
2. It must be paid or incurred during the taxable year.
3. It must be directly attributable to the development, operation, management and/or conduct of
the trade, profession or business.
4. It must be reasonable.
5. The amount paid shall be allowed as a deduction only if it is shown that the tax required to be
deducted and withheld therefrom has been paid to the BIR.
6. It must be supported by official receipts or adequate records.
b. Requisites for deduction of compensation
1. Personal services must have been actually rendered.
2. The compensation for such services must be reasonable, including the grossed-up monetary
value of fringe benefit furnished to the employee and the applicable final tax remitted to the
BIR.
c. Requisites for deduction of traveling expense
1. It must be incurred while away from home.
2. It must be incurred in the pursuit of a trade, profession or business.

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d. Requisites for deduction of entertainment, amusement or recreation expense (EAR)

1. It must be directly related to or in furtherance of the conduct of trade, profession or business.
2. It must not be contrary to law, morals, good customs, public policy or pubic order.
3. It must not have been paid directly or indirectly to an official or employee of the government
(national or local, including GOCC), or of a foreign government, or to a private individual,
corporation, GPP, or a similar entity, if it constitutes bribe, kickback or other similar payment.
4. The official receipts, invoices, bills or statement of accounts should be in the name of the
taxpayer claiming the deduction.
5. In no case shall such deduction exceed 0.5% of net sales (gross sales less returns, allowances
and discounts) for taxpayers engaged in sale of goods or properties; or 1.0% of net revenue
(gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of
profession and use or lease of properties. If the taxpayer is deriving income from both,
however, the allowable EAR expense shall in all cases be determined based on an
apportionment formula below, but in no case shall exceed the maximum percentage ceiling
herein specified.
Apportionment formula:
Net sales or net revenue
Total net sales and net revenue x Actual EAR expense

CONTRIBUTION TO PENSION TRUST

a. Contribution deductible by employer:
1. Payments to the trust to cover pension liability accruing during the year. (deductible in full)
2. Payments to the trust in excess of contributions in No. 1. This must be pro-rated over a period
of 10 years beginning with the year in which the contribution was made.

EXPENSES NOT DEDUCTIBLE FROM GROSS INCOME

1. Personal, living and family expenses.
2. Any amount spent in restoring property or in making good the exhaustion thereof for which an
allowance has been made.
3. Any amount paid out for new buildings or permanent improvements or betterments made to increase
the value of any property.
4. Premiums paid on any life insurance policy covering the life of an officer or employee, or any person
financially interested in the trade or business of the taxpayer, when the taxpayer is the beneficiary,
directly or indirectly, under such policy.

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