8.

Charitable and other contributions

TAX REVIEWER (Deductions) 9. Research and development
10. Pension Trusts
DEDUCTIONS
 Amounts allowed by law to REDUCE the EXPENSES (allowed as deductions)
ACTUAL GROSS INCOME to TAXABLE/NET  all the ordinary and necessary expenses
INCOME paid or incurred during the taxable year in
 Allowed to taxpayers by legislative grace carrying on or which are directly
and the taxpayer claiming them must prove attributable to the development,
compliance with the law management, operation, and/or conduct
o In other words, burden is on the of the trade, business, or exercise of
taxpayer to show compliance with profession
law granting tax
EXCLUSIONS Expenses include: (S-T-R-E)
 Pretty much the same, but as opposed to 1. Salaries, wages, and other forms of
deductions, NOT INCLUDED in ITR1 compensation
- Includes fringe benefits
Section 34 - Deductions from Gross Income 2. Travel expenses
(amended by TRAIN) - Both here and abroad as long as it’s in
pursuit of trade
Taxpayer Deductions from Gross
3. Rentals
Income
- Includes other expenses for continued
Earning compensation NO DEDUCTIONS
use/maintenance of property
income from personal
4. Entertainment, amusement, and recreation
services under an
expenses
employer-employee
- Should not be contrary to law, morals,
relationship
and public policy
Individuals with gross OSD2 or itemized
income from business or deductions
General Requirements for Deductible Claims: (SE-
practice of profession
DC)
Corporations OSD or itemized
1. Sufficient evidence (official receipts or
deductions
other records)
2. Direct connection of the expense to the
ITEMIZED DEDUCTIONS development, management, operation, or
 Expenses and losses related to trade, conduct of trade or profession
business, or practice of profession
 It does NOT apply to those who earn Additional Requirements: (CIR v. Isabela) --
income with an employer-employee MEMORIZE THIS! (ON-TY-CO-S)
relationship because most likely it’s the 1. Must be ordinary and necessary
boss/company that bears the expenses and 2. Must have been paid or incurred during
losses. taxable year
3. Must have been paid/incurred in carrying
LIST of ITEMIZED DEDUCTIONS on the trade/business
1. Expenses 4. Must be supported by receipts, records, or
2. Interest other pertinent papers
3. Taxes
4. Losses Additional Notes:
5. Bad Debts
 NEVER DEDUCTIBLE because ILLEGAL:
6. Depreciation
o Payments of bribes and kickbacks
7. Depletion
given to public/private person
o Paying for police protection
1
Income Tax Return (Calanoc)
2 Optional Standard Deduction

MFP - TAX I (Gruba/Ingles)

 Additional Notes:
ACCRUAL METHOD - The abovesaid examples are not deductible
- Accrual of income and expense is permitted from taxable income because they are akin to
when the all-events test has been met. acquisition of capital assets, so they are
- ALL-EVENTS TEST: Know this! CAPITAL EXPENDITURES (not mere advertising
1. Fixing of a right to income or liability to expenses to promote current or future sales)
pay
2. Availability of the reasonable accurate - Litigation Expenses incurred in defense of title
determination of such income or to property also NOT deductible for being
liability capital in nature
- “Reasonable accuracy”
o Implies something less than an exact or BONUSES
completely accurate amount Bonuses to employees made in good faith and as
o Accrual is judged by the facts that a additional compensation for the services actually
taxpayer knew, or could reasonably be rendered are DEDUCTIBLE.
expected to have known, at the closing  As long as the payments do NOT
of its books for the taxable year exceed reasonable compensation for
- A taxpayer authorized to deduct certain stuff for the services rendered (in addition to
the current year, BUT FAILED to do so, cannot agreed-upon salary)
deduct the same for the next year.  Taxpayer has the burden of showing
- Ordinary that actual personal services have been
o Normal in relation to the biz rendered and the amount was
o Need not be recurring reasonable.
- Necessary  BONUSES NOT DEDUCTIBLE IF:
o When it is appropriate and helpful in o Given to corporate officers out
the development of the biz of sale of corporate land when
o Intended to minimize losses and/or officers didn’t really do
maximize profits anything to effectuate the sale

ADVERTISING EXPENSES Requisites for Deductible Bonuses MEMORIZE!

Two kinds: 1. Payment of the bonus is in fact
1. Stimulates current sale of merchandise or use of compensation
services 2. Must be for personal services actually
2. Stimulates the future sale of merchandise or rendered
use of services 3. When added to salaries, are reasonable
 Creates or maintains some form of when measured by the amount and quality
goodwill for the taxpayer’s trade of the services performed in relation to the
biz of the taxpayer
ADVERTISING EXPENSES
1st type: for Current Sale 2nd type: for Future Sale COST of MATERIALS
o Deductible for - Normally, for it to - If materials and supplies are on hand, taxpayer
sure be deductible, it should only include as expense the cost of
o Just ask if it’s should be spread materials and supplies only to the amount that
reasonable or out over a they are actually consumed and used in
not reasonable time operation during the year for which the return
is made.
What are NOT deductible as advertising expenses?  Cost of such materials should NOT have
(based on Atlas Consolidated v. CIR) been deducted in determining the net
- Expenses for promoting sale of capital stock for income for any previous year.
acquisition of additional capital - Incidental materials on hand and not recorded
- Efforts to establish reputation to have been consumed, or where no physical
inventories at the beginning and end of the year

MFP - TAX I (Gruba/Ingles)

 were taken  permissible for taxpayer to  If the remainder of the term of lease is
include in his expenses and deduct from gross greater than the probable life of the
income the total cost of the supplies as were building erected, or of the
purchased during the year for which return is improvements made = deduction will
made take form of allowance.
 As long as the net income is clearly
reflected PROFESSIONAL EXPENSES
- Allowable deductions include:
REPAIRS  Cost of supplies
- Allowable deduction as expense: cost of  Expenses paid in the operation and
incidental repairs which: repair of transpo equipment used in
 DON’T materially add to the value of making professional class
the property or prolong its life  Due to professional societies and
 But merely keep it in an ordinary subscriptions to professional journals
efficient operating condition  Rent paid for offices
 As long as the plant/property account  Expenses for utilities on offices
is not increased by amount of the  Expenses for hiring office assistants
expenditure  Books, furniture, and professional
- If repairs are really in the nature of instruments with short useful life
replacement, it should be charged against - Those with a permanent character NOT
the depreciation reserves. allowable.

LEASE AGREEMENT EXPENSES SPECIAL DEDUCTIBLES FOR PRIVATE EDUCATIONAL

- The following are allowed as deductions: INSTITUTIONS
1. Allowed to deduct expenditures considered as
Kind of Lease What to deduct capital outlays of depreciable assets incurred
Leasehold is for business Aliquot part of sum for the expansion of school facilities
purposes for a specified each year, based on the 2. Allowed to capitalize the expenditure, and
sum number of years the claim deduction by way of depreciation
lease will run
Taxes paid by a tenant Amount of tax REPRESENTATION, AMUSEMENT, RECREATION
to landlord for business deductible by the EXPENSES, and ENTERTAINMENT FACILITIES
property landlord - Representation expenses incurred n connection
(counts as additional with the conduct of one’s trade, biz, or
rent; taxable income to Please cross-check profession for:
the landlord) because it seems like  Entertaining, providing amusement and
recreation to, or meeting with guests
the correct answer is
 At a dining place, place of amusement
it’s deductible from the
country club, theater, concert, play,
tenant, but TMLT says sporting event, and similar places
otherwise. - Registered member of a country/golf/sports
club taxpayer  presumption that expenses are
fringe benefits subject to FBT
- Leasehold improvements are not considered  Unless proven as representation
business expenses, but CAPITAL INVESTMENTS. expenses
 An annual deduction may be made - Entertainment facilities include: yachts,
from gross income of an amount equal vacation homes or condos, or similar real
to the cost of such improvements properties used by taxpayer primarily for
divided by the number of years entertainment/recreation.
remaining of the lease term.  Forms part of the taxpayer’s trade, biz,
 The deduction shall be in lieu of a or profession for which he claims
deduction for depreciation. depreciation or rental expense

MFP - TAX I (Gruba/Ingles)

  Yacht restricted to certain employees 5. Lawyer or professional partnership rendering
or officers would amount to a fringe free legal services  deduction fom the gross
benefit, subject to FBT. income the amount that could have been
collected or up to 10% of the gross income
- Not considered entertainment expenses: derived from the actual performance of the
 Treated as compensation or fringe benefits profession (whichever is LOWER)
 Expenses for charitable events
 Expenses for bona fide meetings of INTEREST
stockholders, partners, or directors  Interests paid on debts are allowable as
 Expenses for attending or sponsoring an
deductions BUT:
employee to a business league meeting
o Must be incurred in connection
 Expenses for events organized for
promotion, marketing, and advertising with the taxpayer’s profession,
(including concerts, conferences, seminars, trade, or biz
etc.) o Allowable deduction decreased by
 Other expenses of similar nature 33% of the interest income subject
to final tax
*May still qualify as deductions under other
provisions of Sec. 34 Requisites for Deductibility of Interest Expense: (I-
IE-TY-TP-TBP-W-LD-PA-PO-CE) MEMORIZE!
Requisites of Deductibility for Entertainment, 1. There must be an indebtedness
Amusement, and Recreational Expenses: (TY-TBP-L- 2. There should be an interest expense paid or
B-AP-WP) MEMORIZE! due and demandable upon the
1. Paid or incurred during the taxable year indebtedness
2. Must be directly connected to or related to 3. Indebtedness must be that of the taxpayer
the furtherance of the development, 4. Incurred during the taxable year
management, and operation of the trade, 5. Connected with the taxpayer’s trade, biz, or
business, or profession of the taxpayer profession
3. Not contrary to law, public morals, etc. 6. Interest stipulated in writing
4. Not been a bribe or kickback paid to gov 7. Legally due
official or private individual, corp, or GPP 8. Payment arrangement must NOT be
5. Substantiated by adequate proof like between related taxpayers
receipts or invoices 9. The interest must not be incurred to finance
6. Taxes must be withheld (if applicable) and petroleum operations
paid to the BIR (if subject to final tax) 10. If incurred to acquire property used in
trade, biz, or profession, it was not treated
Ceiling for Representation, Entertainment, and as capital expenditure.
Amusement Expenses: - Taxpayer has the option to treat the
 Engaged in sale of goods or properties = interest expenses as either:
0.5% of net sales 1. Deductible in full
 Engaged in sale of services, including 2. As a capital expenditure and
exercise of profession, and use/lease of claim as deduction only the
properties = 1% of net revenue periodic
amortization/depreciation
OTHER BIZ EXPENSES ALLOWED BY SPECIAL LAWS
AS DEDUCTIONS  No more tax arbitrage advantage because
1. Discounts granted to PWDs and senior citizens corporations used to abuse this
2. Expenses incurred by a private health and non-  Interest paid or accrued on taxes related to
health facility/institution  up to 2X the business or practice of profession can be
amount incurred deducted in full.
3. Expenses incurred in training schemes   As long as there is interest expense
additional 50% of amount actually incurred incurred and interest income earned
4. Expenses incurred for adopting a school  (subjected to final withholding tax), the
additional 50% also limitation shall apply regardless of:

MFP - TAX I (Gruba/Ingles)

 o Whether or not a tax arbitrage the year, shall be allowed
scheme was entered into by the as deduction in such
taxpayer; or taxable year.
o The date when the investment was
made CASE: CIR v. Vda. de Prieto
 Limitation will only apply if there is interest Late payment of tax = DEBT
income subject to final tax  if NOT, then Interest on taxes is interest on indebtedness so it’s
you can deduct in full deductible!

 Interest is not deductible if: TAXES

o Both the taxpayer and the person  Paid or accrued within the taxable year in
to whom interest was paid are connection with the taxpayer’s trade, biz, or
related taxpayers. profession are deductible from gross
 Family members income.
 Individual + corporation  EXCEPTIONS to deductibility:
- More than 50% o PH income tax
of OS is owned o Estate tax
by the individual o Donor’s tax
 2 corporations o Special assessments
- More than 50% o Income tax imposed by a foreign
of the OS of each country for income sourced
is owned by the outside the PH
other or by the  Will be allowed if taxpayer
same individual doesn’t signify his desire
 Grantor + fiduciary of any to enjoy any benefits of
trust the tax credit for taxes
 Fiduciary of a trust + paid to foreign countries
fiduciary of another trust o Stock transaction tax
- If the fiduciary is o VAT
a grantor with o Income, war profits, and excess
respect to each profits taxes imposed by authority
trust of the foreign country
 Fiduciary of a trust +  Will be allowed also under
beneficiary circumstances in #5
o Indebtedness is incurred to finance  For tax credits, only resident citizens and
petroleum operations domestic corps are affected.
o If an individual is on the cash basis o Members of GPP and beneficiaries
of accounting and interest is paid of estates/trusts can avail.
in advance thru discount or o NOT allowed for aliens and foreign
otherwise corps
 Interest expense shall be  Options for taxpayers qualified for credit:
allowed as deduction, not o Deduct foreign income tax from
in the year that the gross income
interest was paid in o Claim tax credit
advance, but the year Determining amount of tax to be credited
that the indebtedness EXAMPLE:
was paid. *Remember! All are taxable since tax credit only
 But if payable in periodic applies to resident citizens and domestic corps -- so
amortization, amount of taxable worldwide talaga.
interest which
corresponds to the Income foreign country = 100k
amount of the principal Income in PH = 300k
amortized or paid during Taxable income worldwide = 400k

MFP - TAX I (Gruba/Ingles)

Income tax paid to foreign country = 40k Taxpayer has to submit a Sworn Declaration of Loss
30% Corporate Income Tax = 120k to forewarn the BIR the extent of the loss, and so
Less: Tax credit for foreign tax they can conduct their own investigation.
Otherwise, the deduction will not be allowed.
Formula: - TMLT seems to imply that if the loss was so
(Income in foreign country/worldwide taxable obvious or highly-publicized, no need for
income) SDL (Super Bowl example)
x
(30% corporate income tax)  For non-resident individuals and foreign
= 30k corporations, the losses should be those
actually sustained:
(Compare it to 40k income tax paid to foreign o Within the PH
country and choose whichever is lower) o During taxable year
 Claim of deductibilty for loss can no longer
Since 30k is lower than the 40k paid abroad, the be made if already deducted for estate tax
former is the allowed tax credit. Because taxpayer purposes
was supposed to pay 120k originally, the corp now  Casualty
only has to pay 90k. o complete/partial destruction of
property from an identifiable event
 Recommended to go for tax credit because of a sudden, unexpected or
your take-home would be more. unusual nature
o If you choose to deduct, what o NOT progressive deterioration
would happen is you just deduct through a steadily operating cause
the tax that was actually paid to  Embezzlement
the foreign country , then you o Fraudulent appropriation of
apply the 30% corporate income another’s property by a person to
tax, so you end up paying more. whom it has been entrusted or
 Fines and penalties for late payment of into whose hands it has lawfully
taxes not deductible. come
o Note that the interest is still  Theft
deductible o Criminal appropriation of another’s
o It’s just the surcharges and property
penalties that are NOT.
SPECIAL RULES ON LOSSES
LOSSES 1. Voluntary removal of buildings, machinery,
equipment, etc.
Requisites for Deductibility of Losses (TY-NC-BP- o Basically, demolition for practical
FSS) MEMORIZE! reasons/life safety
1. Actually sustained during the taxable year o NO deduction for demolition with
2. not compensated by insurance, or another intention to construct a new
form of indemity building
3. Incurred in trade, business, or profession; 2. Loss of useful value of assets
OR o Change in business conditions
4. Of property connected with trade, business, suddenly terminates the
or profession, the loss comes from fire, usefulness of some or all of the
storm, shipwreck, or other casualty, or from capital assets  may claim as
robbery, theft, or embezzlement deduction the actual loss sustained
o Amount of loss needs to take into
 Declaration of loss needed within 45 DAYS account improvements,
from time of loss. depreciation, and the salvage value
 Taxpayer bears burden of proof. of the property

CASE: H. Tambunting Pawnshop v. CIR

MFP - TAX I (Gruba/Ingles)

 o GR: There needs to be a sale or  Not less than 75% of the paid-up
other disposition of property to capital of the corporation is held
establish a loss by the same persons
o Exception: Proof of some - For MINES, other than oil and gas wells,
unforeseen causing the property to NOL without the benefit of incentives from
be prematurely discarded the Omnibus Investments Code, may be
- Examples: increase in carried over as deduction for the next 5
cost, change in years immediately following the year of
manufacture, new loss.
legislation makes it
impossible to be CASE: Paper Industries Corp. v. CA
profitable There’s a limit to the transfer of NOLCO because to
allow indiscriminate transfer would result in
corporations simply buying and benefiting from the
NET OPERATING LOSS CARRY OVER (NOLCO) operating losses of another corporation.
- What is NET OPERATING LOSS? - So even if Company A merged with
o Excess of allowable deduction over Company B, the former cannot benefit from
gross income of the business in a the losses sustained by the latter prior to
taxable year the merger.

- What is NOLCO? - General Rule: Transfer/assignment of

 Net operating loss of the NOLCO arising from
business/enterprise for: merger/consolidation/combination with
- any taxable year another person does NOT give the
immediately preceding transferee/assignee a claim to the same
the current taxable year deduction.
- not been previously - Exception: When as a result, the
offset as deduction from shareholders of the transferor/assignor
the gross income gains control of:
 It shall be carried over as  75% or more of the outstanding
deduction from gross income for issued shares/paid-up capital of
the next 3 consecutive taxable the transferee/assignee; OR
years immediately following the  75% or more interest in the
year of loss. business of the
 In other words, mas marami yung transferee/assignee
allowable deduction mo
compared to what you earned - An individual who claims the 40% OSD
(gross income), so if you earned cannot claim deduction of NOLCO
PHP300, but your allowable simultaneously.
deduction actually reaches - Even if the NOLCO was not claimed, 3 year
PHP900, PHP600 will be deducted period keeps running.
from the next 3 YEARS - “First-in, first-out” availment
immediately after.
- Only allowed if there has been no NOT qualified for NOLCO:
substantial change in ownership of the 1. OBUs3 for a foreign banking corporation
business, meaning: and FCDUs4 of domestic banking
 Not less than 75% of outstanding corporations
shares is in the name of the 2. Enterprise registered with the BOI with
corporation held by the same Income Tax Holiday Incentive
persons

3
Offshore Banking Units
4 Foreign Currency Deposit Units

MFP - TAX I (Gruba/Ingles)

 3. PEZA-registered enterprise deducted shall form part of gross
4. SBMA-registered enterprise income the year it resumes.
5. Foreign corporations engaged in
international shipping/air carriage business FOREX LOSSES
in the PH - When foreign currency is acquired in the
6. Any natural or juridical person with regular course of biz, and ordinary gain or
exemption from income tax loss results from the fluctuations  loss is
deductible only in the year it is sustained
CAPITAL LOSSES - If loans have not actually been paid, losses
- Losses from sales ir exchanges of capital therefrom have not been realized  NOT
assets  allowed as provided in Sec. 39 deductible yet
- For securities becoming worthless during - Losses sustained from the devaluation of
taxable year and are capital assets, loss will peso, but remittance of scheduled
be considered as a loss from sale/exchange amortization consisting of principal and
on the last day of the taxable year. interests payments on foreign loan has not
 Not applicable for banks or trust actually been made  NOT deductible yet
companies because the increase has not been realized

LOSSES FROM WASH SALES of STOCKS/SECURITIES BAD DEBTS

- NOT allowed to be claimed in sales of  Amounts borrowed from taxpayer which
stock/securities if: have become worthless or uncollectible.
 Within a period of 30 days before o Money extended as loan
the sale, and 30 days after the o Uncollectible payments of goods
sale (61 days total; important)  sold or services rendered
taxpayer acquires or enters into
an option to purchase Requisites for Deductibility of Bad Debts (EI-TBP-
substantially the same TY-WU-F-RP) MEMORIZE!
stocks/securities 1. Existing indebtedness due to the taxpayer
- ALLOWED if the taxpayer is a stockbroker which is valid and legally demandable
and the sale/purchase was made in the - Not losses from investment
regular course of business 2. Connected with trade, biz, or profession of
- Basically, hindi pwede na a person sells the taxpayer
shares of Jollibee at a loss, then he buys 3. Actually ascertained to be worthless and
substantially the same amount of shares 20 uncollectible
days after the sale. 4. Charged off within the taxable year
5. Uncollectible even in the future
WAGERING LOSSES 6. Not sustained between related parties
- Allowed only to the extent of gains from
such transactions *If recovered, it shall be included as part of the
gross income during the year of recovery
ABANDONMENT LOSSES
- When a petroleum operation is CASE: Hermanos v. CIR
partially/wholly abandoned  all Losses or bad debts must be ascertained to be so,
accumulated exploration and development and must be written off during taxable year.
expenses can be deducted
- Notices of abandonment should be fled NO PARTIAL DEDUCTIONS  Deductible in full or
with the Commissioner. not deductible at all
- For producing wells subsequently
abandoned  unamortized costs and Financial assistance lent to a corporation, if without
undepreciated costs allowed as deduction any expectation of repayment, cannot be
 But in the event it resumes considered a bad debt. It becomes an investment,
production, costs previously not a loan.

MFP - TAX I (Gruba/Ingles)

CASE: CBC v. CA for taxable years prior to the
Equity investments in a subsidiary is not a bad debt. taxable year in which notice in
Neither is it an ordinary asset. Rather, they partake writing is served by the party
of capital assets. So, the rules on capital loss apply. initiating the change.
 If taxpayer has alread adopted a
CASE: Philex Mining v. CIR depreciation rate without written objection
Investments in a partnership are not debts inasmuch on the CIR’s part, then it’s binding on both
as there was no unconditional obligation to return parties.
the same.

In proving worthlessness of debts, one must show Methods for Reasonable Allowance Computation
diligent efforts to collect through the ff. steps: (in 1. Straight-line method
order) MEMORIZE! 2. Declining-balance method
1. Send statement of accounts 3. Sum-of-the-years-digit method;
2. Send collection letters 4. Any other method prescribed
3. Give account to lawyer for collection
4. File collection case  Only one vehicle is allowed for the use of
an official or employee.
For banks  BSP shall: o Value not more than 2.4M
1. ascertain the worthlessness and uncollectibility o Taxpayer should substantiate the
2. approve writing-off of the said debt from the purchase with sufficient evidence.
bank’s books of accounts at the end of the  No depreciation allowed for yachts,
taxable year helicopters, airplanes, and other vehicles
exceeding the threshold amount.
For insurance/surety companies  a receivable o EXCEPTION: Taxpayer’s line of biz
may be written off and claimed as bad debt only if is transport operations/leasing and
such company has been solved due to insolvency or vehicles purchased are used in said
other similar reason by the Insurance Commission biz
 Amortization of intangibles is the periodic
Worthless debts from unpaid wages, salaries, rents, process of allocating cost of an intangible,
and similar items of taxable income  only and it is deductible.
deducted if included in the ITR as income for the o Examples: goodwill, right of lease,
year the bad debt was sought, or the previous year patent, trademark

DEPRECIATION CASES OF DEPRECIATION

 Gradual diminuition in the useful value of Properties used directly 10 YEARS
tangible property resulting from wear and in petroleum production (straight-line or declining
tear and normal obsolescence method, at the option of
 Applies to both tangible and intangible the service contractor)
property Properties used 5 YEARS
 REASONABLE ALLOWANCE is deductible, in indirectly in petroleum (straight-line)
line with the rules and regulations production
prescribed by the SoF, upon recom of Properties used in If expected life is 10
Commissioner. mining operations YEARS/LESS = normal
 If taxpayer and CIR come to an agreement rate of depreciation
on the useful life on which depreciation
would be based  agreement in writing is If more than 10 YEARS =
BINDING notify the CIR
o Party initiating modification has For non-resident aliens Reasonable rate allowed
responsibility of establishing facts engaged in trade or only on properties
and circumstances resident foreign located in the PH
o If there are any changes to the corporations
agreement, it shall not be effective

MFP - TAX I (Gruba/Ingles)

 be carried forward to succeeding
CASE: Basilan Estates v.CIR years until fully deducted.
A company has the right to claim depreciation, but  Taxpayer’s election to deduct the E&D
NOT beyond its acquisition cost. expenditures is irrevocable and binding in
succeeding tax years.
DEPLETION
 Oil and gas wells or mines are allowed a CHARITABLE AND OTHER CONTRIBUTIONS
reasonable allowance for depletion and  Donations are partially deductible if made
amortization computed using the COST- to the following: MEMORIZE!
DEPLETION METHOD. 1. Government, exclusively for public
 Allowance for depletion = capital invested purposes
 no further allowance shall be granted 2. Accredited domestic
 After production in commercial quantities corporations/associations,
has started, certain intangible exploration organized and operated exclusively
and drilling costs: for religious, charitable, scientific,
o will be deducted in the year youth and sports development,
incurred if such were incurred for cultural, or educational purposes,
non-producing wells or mines; or or for rehabilitation of veterans, no
o these may be capitalized or part of the net income of which
amortized if such were incurred for inures to the benefit of any private
producing wells/mines in the same stockholder or individual
contract area 3. Social welfare institutions
 Non-resident aliens/resident foreign corps 4. Non-accredited NGOs
 allowance for depletion is limited to oil  The amount deducted should NOT exceed:
wells and mines in the PH o 10%  for individuals
 Intangible costs in petroleum operations o 5%  for corporations
o any cost incurred in petroleum of the taxpayer’s taxable income
operations which in itself has no derived from trade, biz, or profession
salvage value, and which is BEFORE deduction for contributions
incidental to and necessary for the and donations
drilling and preparation of wells for
production  Two things you look at, then see which is
o said costs DO NOT include lower between them:
acquisition or improvement of 1. Charitable contributions
property of a character subject to 2. 10% / 5% (as the case may be) of
the allowance for depreciation your taxable income
 Buzz word: COST OF A WASTING ASSET
CASE: Roxas v. CTA
FORMULA FOR RATE OF DEPLETION (not sure if this Contributions to Christmas funds of City Police NOT
is really important) deductible because they were considered to be
Christmas gifts to the families of the police.  not
Cost of mine property for public purpose exclusively
Estimated ore deposit
 Donations are FULLY DEDUCTIBLE if made
Extra notes from codal: to the ff: MEMORIZE!
 For deduction of exploration and 1. Government, exclusively to finance
development expenditures: government priority activities in
o Shall not exceed 25% of net (ie education, youth, health, sports
income from mining operations development, human settlements,
computed without the benefit of science and culture, and in
any tax incentives economic development according
o Actual expenditures minus 25% of to NEDA)
the net income from mining shall

MFP - TAX I (Gruba/Ingles)

 2. Certain foreign institutions or foster child deduction to the
international organizations agencies extent of
3. Accredited NGOs amount given
4. Via special laws
RESEARCH AND DEVELOPMENT
 NGOs  Can be treated as ordinary and necessary
o Non-profit domestic corporations expenses as long as: MEMORIZE!
organized and operated exclusively o Incurred during taxable year
for scientific research, education, o In connection with trade or biz
etc., where NO PART of the net  Taxpayer can either fully deduct or
income inures to the benefit of amortize the deductions.
any private individual  NOT applicable to expenses:
o Admin expenses cannot exceed o For acquisition/improvement of
30% of the total expenses land or property to be used in
o Must utilize contributions NOT connection with R&D
LATER THAN the 15th day of the 3rd o Incurred for the purpose of
month after the close of the ascertaining the existence,
taxable year when donations were location, extent of quality of any
received deposit of minerals and oil
o Philippine Council for NGO
Certification  accredits PENSION TRUSTS
 2 KINDS OF DEDUCTIONS FOR EMPLOYER:
 For exemption from DONOR’S TAX and full 1. Contributions to such trust to
deduction of donation to qualified donee: cover under pension liability during
o Donor engaged in business must the year
give a NOTICE of DONATION on 2. Reasonable amount paid to the
every donation worth at least trust in excess of such
PHP50k to the RDO5 with contributions
jurisdiction over his place of biz  The employer who established the pension
within 30 days after receipt of trust for his employee’s benefit can
duly issued Certificate of deduct, subject to the following conditions:
Donation, attached to the said 1. Amount paid to trustee is
notice. reasonable
o Notice should state that not more 2. Must not have been previously
than 30% of the said donation/gifts allowed for deduction (no double
for the taxable year shall be used deduction)
by the accredited NGO/institution 3. Must be apportioned equally over
for administration purposes a period of 10 consecutive years,
starting with the year the
SPECIAL LAWS payment is made
Gifts and Exempt from Allowable as  When employer contributes to employee’s
donations to donor’s tax deduction up to PERA6, employer can claim the amount as a
UP 150% of the deduction  but only to the extent of the
value of the employee’s contribution that would
donation complete the maximum allowable PERA
Contributions Exempt from Allowable as contribution of an employee
to the National donor’s tax deduction up to
Book Trust 150% of the ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY
Fund value of the  Taxpayers claiming deductions for expenses
donation (subject to withholding tax), must prove
Donations to Allowed as

5 Revenue District Officer 6 Personal Equity and Retirement Account

MFP - TAX I (Gruba/Ingles)

 that said deductions were really subjected price/cost to produce the
to proper withholding. merch and all expenses
o If no withholding was made, directly incurred in
deduction will not be allowed. bringing them to their
 No deduction allowed even if withholding present location and use
tax payments were made at the time of o In case of sellers of services, gross
audit investigation or receipts minus sales returns,
reinvestigation/reconsideration in cases discounts, and allowances and cost
where no withholding of tax was made in of services
accordance.  Cost of services include all
o So what should you do? Withhold direct costs and expenses
and pay before the audit necessarily incurred to
investigation in order to claim provide the services
deduction required by customers
and clients
OPTIONAL STANDARD DEDUCTION
 Individuals can elect a standard deduction, The following are NOT ALLOWED to use OSD and
not exceeding 40% of gross sales/gross have to use itemized deductions:
receipts during the taxable year 1. For corporations, partnerships, and other
o Same rule applies to corporations non-individuals:
as regards their gross income a. Those exempt under Tax Code and
during the taxable year other special laws, with no other
o EXCEPTION: Non-resident aliens taxable income
and non-resident corporations b. Those with income subject to
 Those who can claim include partnerships special preferential rates
and taxable estate and trust c. Those with income subject to
income tax under 27(A) and
NOTE: Under TRAIN, GPPs and the partners 28(A)(1) and with
comprising the partnership may only use OSD special/preferential tax rates
once, either as GPP itself or the partners 2. For individuals:
comprising the partnership. a. Those exempt under Tax Code and
- If GPP avails of OSD, partners cannot other special laws, with no other
anymore. taxable income
b. Those with income subject to
 For individuals, the following rules apply: special preferential rates
o If one uses the accrual basis of c. Those with income subject to
accounting for income  OSD shall income tax under 24 and
be based on gross sales during special/preferential tax rates
taxable year
o If cash basis is used  OSD shall be IMPOSITION OF CEILINGS BY THE SOF
based on his gross receipts during  SoF can impose ceilings on deductions after
the taxable year a public hearing
o Cost of sales/services not allowed  Ceiling won’t apply to OSD
to be deducted for purposes of
determining the basis of OSD NON-DEDUCTIBLE EXPENSES
 No need to substantiate with receipts  General non-deductible stuff: MEMORIZE!
 For corporate taxpayers, the following 1. Personal, living, or family expenses
rules apply: 2. Any amount paid for new buildings
o Gross income means gross sales or for permanent improvements
minus sales returns, discounts, and increasing the value of
allowances and cost of goods sold property/estate
 Cost of goods sold 3. Any amount spent in restoring the
includes the purchase property or in making good the

MFP - TAX I (Gruba/Ingles)

 exhaustion for which an allowance
has been made
4. Premiums paid on any life
insurance policy covering the life of
any officer, or employee if the
taxpayer is directly/indirectly a
beneficiary under the policy

 For related taxpayers, the following are

NOT deductible: MEMORIZE!
1. Losses from sales or exchanges of
property
2. Interest expense
3. Bad debts

 For personal expenses:

1. Insurance paid on dwelling owned
and occupied by taxpayer
2. Premiums paid for life insurance
3. When a professional rents a
property for residential purposes
but receives clients in connection
with his work
 Only part used as office is
deductible because it’s
considered a business
expense
4. Allowance given to children
5. Alimony or allowance paid via
separation agreement

 For capital expenses:

1. New buildings, permanent
improvements, or any amount
spent in restoring property
2. Cost of defending or perfecting
title to property
3. Architect’s services
4. Expense for administration of
estate, court costs, attorney’s fees,
and executor’s commissions
5. Amount assessed and paid under
agreement between bondholders
and shareholders of a corporation,
to be used in corporation’s
reorganization

MFP - TAX I (Gruba/Ingles)