DEDUCTIONS FROM GROSS INCOME If against the law and public policy – not
deductible
Deductions Exclusions
The law allows to be Not treated as part of Ordinary and Necessary Expenses
deducted from gross gross income Directly attributable to the
income development, management, operation
Computation of net Computation of gross and conduct of trade, business or
income income exercise of profession
Something spent or Something received or Personal expenses, living or family
paid in earning gross earned by taxpayer
expenses are not deductible
income that do not form part
Ordinary expenses
of gross income
o Expenses which are normal or
Tax Credit usual in relation to the
Subtracted directly from one’s total tax taxpayer’s business
liability Necessary expenses
An allowance against the tax itself or a o Expenses which are appropriate
deduction from what is owed by a and helpful in the development
taxpayer to the government of taxpayer’s business and are
Reduces the tax due, including, intended to minimize losses or
whenever applicable, the income tax to increase profits
that is determined after applying the o Day to day expenses
corresponding tax rates to taxable Salaries, Wages, Allowances and other
income forms of compensation
o Requisites:
Deductions from Gross Income Employer-employee
Ordinary and necessary trade, business relationship
or professional expenses Reasonable
Taxes Personal services
Interest actually rendered
Losses Withholding tax
Bad Debts imposed has been paid
Depreciation Additional Compensation expense for
Depletion Senior Citizens
o 15% of the total amount paid as
Charitable and other contributions
salaries and wages provided:
Research and development
The employment shall
Pension trusts
have to continue for a
Additional requirements for
period of at least 6
deductibility of certain payments
months.
Optional standard deduction
The annual taxable
Premium payments on health and/or
income of the senior
hospitalization insurance of an
citizen does not exceed
individual taxpayer
the poverty level as
Strictly construed against the taxpayer
may be determined by Must be directly
NEDA connected to trade,
o Magna Carta for PWDs business or profession
Either as regular Must not be contrary to
employee, apprentice law, morals, public
or learner policy or public order
25% of the total Must not have been
amount paid as salaries paid, directly or
and wages indirectly, to an official
o Travel Expenses or employee, if it
Reasonable constitutes bribe,
Incurred or paid while kickback, or other
away from home, similar payments
within or without the Must be duly
country substantiated by
Incurred or paid in the adequate proof
pursuit of trade, The appropriate
business, profession withholding tax, if
Excluded: personal applicable, should have
travels sponsored by been withheld
the employer subject to therefrom and paid to
FBT the BIR
o Rentals
Reasonable Taxes Expense
For purpose of trade, Must be paid or incurred within the
business or profession taxable year
Taxpayer has not taken Must be paid in connection with the
or is not taking title to taxpayer’s profession, trade or business
or in which he has no Tax must be imposed directly upon the
equity other than that if taxpayer
the lessee, user or
possessor Deductible Non-deductible
o Entertainment, amusement and IT paid abroad, PH Income tax
recreation expenses claimed as except FBT
Limited to ½% (.005) of operating expense
net sales for sellers of Docs stamp taxes IT paid abroad,
goods or 1% (.01) of net claimed as tax
credit
revenue for
Occupational taxes Estate and Donor’s
seller/provider of
taxes
services
Excise taxes Stock Transaction
Must be paid or Taxes
incurred during the Import duties Value Added Tax
year Local business Taxes not related
taxes to trade, business,
profession the said
Percentage taxes corporation is the
except stock legal or equitable
transaction taxes owner
The foreign IT paid shall be allowed Interest Expense
only as deductions from gross o Payment for the use or forbearance or
income if the taxpayer establishes detention of money, regardless of the
to the satisfaction of the name it is called or denominated
Commissioner the: o Includes the amount paid for the
o Total amount of income derived borrower’s use of money during the
from sources without the term of the loan, as well as for his
Philippines detention of money after the due date
o The amount of income derived of its repayment
from each country, the tax paid o Requisites for deductibility:
or incurred determined under Must be on indebtedness which
rules and regulations prescribed is connected with trade,
by the Secretary of Finance business, profession
o All other information necessary Indebtedness must that of the
for the verification and taxpayer
computations of such credits Interest must be in writing and
Interest for Unpaid Taxes legally due
o Those paid for deficiency of Paid or incurred upon such
delinquency are deductible indebtedness within the taxable
provided that the tax is a year
deductible tax When taxpayer has interest
o Deductible in full expense and interest income
o Fines, penalties, and with FT, the interest expense
surcharges on account of shall be reduced by 33% of the
taxes are not deductible interest income subject to FT
o Deductible interest expense The interest payment must not
may include: be between related taxpayers
Interest paid by a o Prepaid Interest
corporation on Deductible not in the year that
scrip dividends the interest was paid in
Interest on deposit advance but in the year that the
paid by authorized indebtedness was fully paid
banks of the BSP to Be allowed as deduction from
depositors the gross income “at the time
Interest paid by a of payment” for businesses
corporate taxpayer engaged in rendering services
who is liable on using cash basis of accounting
mortgage upon real
property of which
the loss was
incurred
Non-deductible Interest and Losses Not allowed as
o Between members of the family deduction from
Brothers, sisters (whether by gross income if
whole of half-blood), spouse, such losses have
ancestors and lineal been claimed as
descendants deductions for
o Except in cases of distribution in estate tax purposes
liquidation between an individual and in the estate tax
corporation more than 50% in value of return
the outstanding stock of which is Total loss: actual
owned, directly or indirectly, by or for loss is the BV of the
such individual asset
o Between grantor and fiduciary of any Partial loss: BV or
trust cost to restore the
o Between the fiduciary of a trust and the asset to its normal
fiduciary of another trust if the same operating
person is a grantor with respect to each condition,
trust whichever is lower
o Between a fiduciary of a trust and Actual loss shall be
beneficiary of such trust reduced by
insurance recovery
Losses or any form of
May be offset against all income indemnity. Any
and capital gains in the same tax excess of cost to
year restore over the BV
Deductible only on the following shall be capitalized.
grounds:
o Ordinary losses arising from Net Operating Loss Carry-Over (NOLCO)
losses incurred in trade, Shall be carried over as deduction from
business, or profession the gross income for the next three
including net operating loss consecutive taxable years immediately
carry-over following the year of such loss
o Casualty Losses Any net loss incurred in a taxable year
Arising from fire, during which the taxpayer is exempt
storm, shipwreck, from IT shall not be allowed as
or from robbery, deduction or as part of NOLCO
theft, or Requisites:
embezzlement o Limited to operating losses
The declaration of accumulated beginning January
loss was filed with 1, 1998
the BIR within 45 o Allowed only if there has been
days from the date no substantial change in the
ownership of the business or Loss is not previously
enterprise, in that: offset as a deduction
Not less than 75% in from gross income
nominal value of the Losses incurred after
outstanding issued shares, the start of business
if the business is in the operations and
name of corporation, is registered with TIEZA
held by or on behalf of the Not enjoying IT
same person Holidays or the
Not less than 75% of the preferential 5% gross
paid in capital of the income tax rate
corporation, if the business o NOLCO for Mines other than oils and
is in the name if the gas wells
corporation, is held by or Net operating loss incurred in
on behalf of the same any of the first 10 years of
persons operation may be carried over
Not applicable against MCIT as a deduction from taxable
Applied on a FIFO basis income for the next 5 years
Not applicable under OSD immediately following the year
o Taxpayers not allowed to claim NOLCO: of such loss
Taxpayers who are exempt
from IT at the time the Capital Loss
operating loss was incurred Deductible only to the extent of capital
Offshore Banking Units gains
Entities registered with the Wash sale
Bureau of Investment (BPI) Gain from wash sale transaction
enjoying IT Holiday is taxable
Entities registered with PEZA Loss on wash sale-
Enterprises registered under RA nondeductible; forms part of
7227 (Bases Conversion the cost of subsequent
Development Act) acquisitions
Foreign corporations engaged Acting as dealers in stocks or
in international shipping or air securities are not covered by
carriage in the Philippines the rules on wash sales.
o NOLCO for registered tourism Short sales
enterprises (RTE) Sale of stocks which the seller
Shall be carried over as does not own and subsequently
deduction for the next 6 buys or covers the stock to
consecutive taxable years complete the transaction,
immediately following the year thereby postponing the delivery
of such loss to a later date
Requisites: Represents an obligation
payable in kind or goods
If the price increases, he incurs Recovery of bad debts previously
a capital loss allowed as deduction in the preceding
Gain- taxable years shall be included as part of gross
Loss- Capital loss which can be income in the year of recovery to the
deducted from capital gains extent of the income tax benefit of said
only deduction
Securities becoming worthless Provision for bad debts are not allowed
If stock becomes worthless, the as deduction from gross income
cost or other basis may be Only the “direct method” or “write off”
deducted by the owner in the method of accounting for bad debt is
taxable year in which the stock allowed for tax purposes
became worthless Factors in determining whether or not a
Requisites: debt is a bad debt:
The securities are The debt must be valid and
ascertained to be subsisting.
worthless. The debt is connected with the
The taxpayer claiming taxpayer’s trade or business,
the capital loss should and is not between related
not be a bank or a trust parties.
company incorporated There is an actual
under Philippine Laws ascertainment that the debt is
Shrinkage in the value of Stock worthless.
Any amount claimed as loss on The debt is charged-off within
account of shrinkage in value of the taxable year.
stock through fluctuation in the
market cannot be deducted from Depreciation
gross income because the loss is Reasonable allowance for the
not realized exhaustion, wear and tear and normal
Wagering losses obsolescence of tangible property used
Shall be allowed only to the extent in the trade or business
of the gains from such transactions Requisites for deductibility:
Loss on Merger or Consolidation Allowance for depreciation
In merger or consolidation involving must be reasonable.
an exchange of stock solely for It must be for property used for
stock, or security solely for security employment in the trade or
or stock, no loss is recognized. business or out of its not being
When in addition to stock, cash used temporarily during the
and/or property is received, gain if year
any, but not the loss is recognized. Allowance must be charged-off
The gain to be recognized shall not Schedule on allowance must be
exceed the cash and/or fair market attached to the return
value of property received. Depreciation of motor vehicles
No deduction from gross
Bad Debts GAME income for depreciation shall
be allowed unless the taxpayer Exploration and
substantiates the purchase with development not to
sufficient evidence exceed 25% of net
Only one vehicle for land income from mining
transport is allowed for the use operations
of an official or employee, the Excess exploration and
value of which should not development shall be
exceed Php 2,400,000. carried over to the
No depreciation shall be succeeding years until
allowed for yachts, helicopters, fully consumed with no
airplanes and/or aircrafts and expiry
land vehicles which exceed the Intangible exploration and development
above threshold amount, unless may be:
the taxpayer’s main line of For non-producing wells and
business is transport operations mines: deducted in the year the
or lease of transportation costs were incurred
equipment and the vehicles For producing wells and mines:
purchased are used in said deduct in full or capitalize and
operations. amortize
All maintenance expenses on
account of non-depreciable
vehicles for taxation purposes
are disallowed in its entirety.
The input taxes on the purchase
of non-depreciable vehicles and
all input taxes on maintenance
expenses incurred thereon are
likewise disallowed for taxation
purpose.
Amortization of goodwill
Not allowed as deduction from gross
income
Depletion
Depletion of oil gas and wells and mines
Deductible by a NRA or FC only
(located in the Philippines)
At the option of taxpayer, depletion
expense is treated as either:
Part of the cost of property
Allowable deduction with the
following limitations:
