LECTURE NOTES – DEDUCTIONS FROM GROSS INCOME

1. Deductions from Gross Income - taxpayer's taxable income

In general, deductions are bearing heavily against the
expenses and losses incurred in taxpayer whose inexactitude is of
connection with the realization of his own making. A disallowance
gross income, which tile law of 50% of the taxpayer's claimed
allows to be deducted from such deduction is valid (Rev. Memo.
income to arrive at net income Circular No. 23-2000).
subject to tax.
1. 5. Deductions against Exclusions
1.1. The purpose of deductions from
gross income is to provide the Deductions Exclusions
taxpayer a just and reasonable Amounts Amounts/items
taxable amount as the basis of deducted from exempt from tax by
tax. Generally, personal expenses gross income to virtue of the Tax
are not allowed as a deduction arrive at net Code or special law.
from compensation, profession, income.
trade or business income.
1.6 Deductions against Personal
1.2. If a taxpayer fails to deduct Exemptions
certain expenses for the taxable
year, he cannot deduct them from Deductions Personal
the income of tile next or any Exemptions
succeeding year (Section 76, Rev, Business Personal expenses
Reg. No.2) expenses cover personal,
represent cost of living or family
1. 3. Not allowed to claim deductions doing expenses
(Tax base: Gross Income) : Both individual Only individual is
and corporate entitle
1.3.1 NRA-NETB taxpayers may
claim
1.3.2 NRFC
2. Requisites of allowable
1.4. The Cohan Rule Principle deductions

1.4.1 If there is showing that expenses 2.1. The expense must be ordinary
have been incurred but the exact and necessary.
amount thereof cannot be
ascertained due to the absence of 2.1.1 Expenses are considered
documentary evidence, it is the "ordinary and necessary" if they
duty of the BIR to make an are directly attributable to
estimate of deduction that may development, management,
be allowed in computing the operation, and or conduct of the

Page 1 of 18
 trade or business of the taxpayer,
or in the exercise of the taxpayer's
profession.
2.1.2. Ordinary, when it is normal
(common or usual) in relation to
the business of the taxpayer and
the surrounding circumstances.
Need not be recurring.
2.1.3. It is called ordinary in most cases
to distinguish it from a capital
expenditure.
2.1.4. Recapitalization and
reorganization expenses are
capital expenditure as well as
cost of obtaining stock
subscription and promotion
expenses.
2.1.5. Ransom money paid to secure the
return of an individual is not
deductible as it has nothing to do
with profit making.
2.1.6. Payment of the debts of bankrupt
company to which the taxpayer
was an officer to establish his
credit is, according to U.s.
Supreme Court not ordinary.
2.2. The expenses must be incurred
in trade or business carried on
by the taxpayer. This means that
the same is not incurred in the
trade or business of another.
2.2.1. Stockholder's expense in
connection with the acquisition of
additional stock in order to sell it
to certain company executives in
furtherance of a management
Incentive plan of the company –
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not incurred in connection with
the trade or business of the
company.
2.2.2. Fees paid by tile taxpayer to
recover its lost assets occasioned
by the war and to rehabilitate its
business - business connected
expenses.
2.2.3. Mere holding of investments
cannot be considered engaging in
business so that the expenses in
managing the investments .are
not considered ordinary and
necessary in the pursuit of a trade
or business.
2.2.4. Margin fees paid to the Bangko
Sentral ng Pilipinas of a foreign
corporation doing business in the
Philippines; on its profit
remittances to head office are not
ordinary and necessary expenses.
REASON: The fees were paid not in
the production of income, but in the
disposition of said income after it had
already been earned. Hence, it is an
expense properly attributable to
the head office and not in the
carrying on of its trade or
business in the Philippines.
2.3. The expenses must be
substantiated by proof.
2.3.1. It is incumbent upon the taxpayer
to establish proximate relation
between the expense and the
taxpayer's.
2.3.2. Receipts are the best proof.
Burden of proof lies upon the
taxpayer. In certain cases, this
 rule is relaxed. Even if no
records/receipts are available,
the oral testimony of a CPA, if
not contradicted by the
government is sufficient.
2.4. The expenses must be reasonable
2.5. Paid or incurred during the
taxable year
2.5.1. Cash basis method - deducts
expenses in the year in which
they are paid.
2.5.2. Accrual basis method - licenses; payments in excess of
recognizes expenses in the year
they accrue.
2.5.3. Paid or incurred within the
taxable year.
2.5.3.1.Paid - If the taxpayer keeps his
books on the cash basis, expenses
are deductible in the year they
are paid.
2.5.3.2.Incurred - If the taxpayer keeps
his books on the accrual expenses
are deductible in the year they
are incurred, whether paid or not.
2.6. Expenses must not be against
public policy, public moral or
law
2.6.1. Fines and penalties - against
public policy.
2.6.2. Attorney's fee 'incurred in
defending civil action based on
illegal act - deductible provided it
is business connected.
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2.6.3. Even though the defense is
unsuccessful - as long a5 it is
business connected - deductible.
2.6.4. Entertainment expenses incurred
by officer of a corporation to
entertain certain government
officials to discuss
transactions/dealings at Manila
Hotel - against public policy.
2.6.5. The purchase price of political
influence to obtain or hold public
contracts; dollar allocations from
the Central Bank; import control
the maximum amount authorized
by law - against public policy.
Reason: To permit a violator to
gain a tax advantage through
deductions would in effect lessen
the degree of punishment
intended, or would frustrate the
purpose and effectiveness of the
public policy that has been
violated.
2.6.6. Bribe to obtain protection from
arrest or prosecution against
public policy.
2.7. If subject to withholding tax,
proof of payment to BIR must
be shown
2.7.1. Professional expenses- 10%
2.7.2. Rent expense - 5%
3. Items not allowed as deduction
from gross income
3.1. Personal, living or amily
expenses. Reason: Non-business
expenses.
3.2. Amounts paid out for new
buildings or for permanent
improvements, or betterment
made to increase the value of any
property or estate.
3.2.1. Exception: Intangible drilling and
development cost incurred in
petroleum operations.
3.3. Capital Expenditures (Rev. Reg.
No.2):
3.3.1. Cost of defending or perfecting
title to property;
3.3.2. Architects fee – part of the cost of
building;
3.3.3. Commissions paid in selling
securities - part of the cost;
3.3.4. Expenses of the administrator of
the estate Attorney's fee and
Executor's commission – charge
to the corpus of the estate;
3.3.5. Corporate expenses for
reorganization such as
incorporation fees, attorney's fee
and accountant charge (subject to
amortization).
3.3.6. Amount expended in restoring
property or in making good the
exhaustion thereof for which an
allowance has been made.
3.4. Premiums paid on a life
insurance policy covering the life
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of any officer or employee, or of
any person financially interested
in any trade or business carried
on by the taxpayer, individual or
corporate, when the taxpayer is
directly or indirectly beneficiary
under such policy.
3.4.1. Premiums paid by a family
corporation of the life insurance
policy covering the life of its
president where the wife is the
beneficiary is not
deductible/corporation being
indirectly beneficiary under the
policy (BIR Ruling, 10 November
1960).
3.4.2. Premiums paid by a corporation
on life insurance policies
covering the lives of two
executives naming each other
beneficiary' is deductible i
because the corporation is not
directly and indirectly the
beneficiary of the policies (BIR
Ruling, 27 May 1953).
3.5. Losses from sales or exchanges
of property between related
taxpayers.
3.5.1 Members of the same family – to
prevent avoidance of income tax
by means of purported or
simulated sale or exchange.
3.5.2. Losses from wash sales except
that of a dealer in stock and
securities and in respect to a
transaction made in the ordinary
course of the business of such
dealer.
3.5.3. Losses actually sustained during
taxable year and hot
compensated for by insurance or
other forms indemnify, if such
loss has been claimed as a
deduction for estate tax purposes
in the estate tax return;
3.5.4. Bribes, kickbacks and other
similar payments;
3.5.5. Net capital losses or capital
losses if not covered by existing
capital gains from sale of capital
assets;
3.5.6. Net wagering losses if not
covered by existing wagering
gains;
3.5.7. Bad debts resulting to a
transaction between related
taxpayer
3.5.8. Other expenses not allowed by
law as deductions from gross
income.
4. Kinds of deductions under the
Tax Code
4.1. Special Deductions - are neither
personal nor itemized
c1eductionsbut specifically
permitted by the law to reduce
the taxable income of an
individual taxpayer.
4.1.1. Premium payments, for,
Health/Hospitalization
Insurance (Sec. 34M, NIRC).
NIRC provides the actual
premium payments for health
and/or hospitalization insurance
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taken by an individual taxpayer
(single, head of the family or
married) for himself or for his
family is, allowed as deduction at
an amount not exceeding P2,400
per family provided that, said
family has a gross income of not
more than P250,000. In case of
married taxpayers, only the
spouse claiming the additional
exemption for the dependent
shall be entitled to his deduction.
4.2. Optional deductions - is a
deduction from gross income
allowed to' be taken in lieu of the
itemized deductions. It can be
claimed only by an Individual.
But it cannot be claimed by a
non-resident alien. The taxpayer
shall, signify in the income tax
return his intention to elect the
Optional Standard Deduction, or
else he shall be considered as
having availed of the itemized
deductions. And once elected is
irrevocable for the taxable year
which the choice is made.
4.2.1. The Optional Standard
Deduction is an amount equal to
40% of the gross sales or receipts
during the taxable year for
individual taxpayer (Resident
Citizen, Non-Resident Citizen,
resident Alien & Taxable Estates
and Trusts) and 40% of gross
income for corporate taxpayer
Domestic Corporation & Resident
Foreign Corporation).
4.2.2. It is not available against
compensation income arising out
 of an employer-employee
relationship.
4.2.3. An individuals or corporations
who are entitled to, and who
claimed, the, Optional Standard
Deduction is not required to
submit with his income tax
return any financial statement,
but he should keep records
pertaining to his gross income
4.3. Itemized deductions - are
specific expenses permitted by
the tax code to be deducted from
the gross income provided that
supporting documents are
available, they may represent
payments of liabilities, realized
losses or reductions in value or
interest of property used in
business. Income subject to
itemized deductions
4.3.1. Business and professional income
derived within and outside the
Philippines by a resident citizen
taxpayer (domestic corporation),
within the Philippines only by a
non-resident alien (foreign
corporation);
4.3.2. Business and professional income
of a general co-partnership;
4.3.3. And business income of
proprietary educational
institution and non-profit
hospitals, proprietary
government-owned or controlled
corporation.
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5. Composition of Itemized
Deductions
5.1. General Business Expenses
5.1.1. Compensation for personal
services - inclusive of wages and
other forms of compensation for
personal services actually
rendered, salaries, wages, fees for
professional services,
commissions, management
expense bonuses, vacation and
retirement pay, pensions, and
compensation for injuries and
gross-up monetary value of
fringe, provided the
corresponding related
withholding tax has been
deducted and remitted.
5.1.1.1.Requisites for deductibility of
compensation payments. They
are reasonable; and they are, in
fact, payments purely for service.
5.1.2. Traveling Expenses - incurred
within and outside the country
while away from home in the
pursuit of trade, business or
profession. Deductible traveling
expenses includes transportation
expenses' and meals and lodging
as long as they are incurred
solely for carrying on the trade,
business or profession.
5.1.2.1.If the trip is undertaken for
purposes other than business the
transportation' expenses are
personal expenses and the meals
and lodging are living expenses;
and, therefore, not deductible.
5.1.2.2.If the trip is solely on business,
the reasonable and necessary
travel expenses, including
transportation expenses, meals
and lodging become business
instead of personal expenses. (see
par. I, Sec. 66, Regs.)
5.1.2.3.Requisites for deductibility of
travel. They are: (1) The expenses
must be reasonable and
necessary; (2) They must be
incurred or paid "while away
from home"; and (3) They must
be paid or incurred in the
conduct of trade or business.
5.1.3. Rent Expenses - are expense
incurred for the continued use or
possession, for purposes of trade,
business or profession, of
property to which the taxpayer
has not taken or is not taking title
to or in which he has no equity
other than that of a lessee, user or
possessor.
5.1.3.1.Requisites: (1) Property rented
must be used in trade or business
of the lessee; (2) Rental expense
must be paid or incurred during
the taxable year; (3) Rental
expense is a condition for the use
of the property; (4) If exceeding ;
P500, must have been subjected
to 5% withholding tax.
5.1.3.2 Rent Expenses includes: (1)
Leasehold (2) Taxes paid by
lessee considered as additional
rent (3) Repairs and
improvements made by the
lessee. The cost borne by a lessee
in erecting buildings or making
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permanents improvements on the
ground of which he is the lessee
is held to be a capital investment
and not deductible as a business
expense. In order to return such
taxpayer his investment of
capital, an annual deduction may
be made from gross income of
capital, an amount equal to the
cost of such improvements
divided by the number of years
remaining of the term of lease,
and such deduction shall be in
lieu of a deduction for
depreciation. If the remainder of
the term of lease is greater than
the: probable life of the buildings
erected or of the improvements
made, this deduction take the
form of an allowance for
depreciation. Expressed in
formula:
Cost of improvement = Deductible amortization
Term or lease
or
Cost of improvement =
Estimated useful life
Deductible depreciation
The rule, therefore, is: Divide the
cost of the improvement by the
estimated useful life of the
improvement or by the term of
tile lease, whichever is shorter.
5.1.4. Representation and Recreation
Expenses - incurred during the
year which are directly connected
to the development, management
and operation of the trade,
business or profession of the
taxpayer, or that are directly
related to or in furtherance of the
conduct of his trade, business .or
exercise of a profession not to
exceed such ceilings as the
 Secretary of Finance may, by
rules and regulations prescribed.
Must not contrary to law, morals,
public policy and supported by
adequate records.
5.1.4.1.Entertainment, amusement and
recreation expenses to be
deductible lay down by the law
for the allowance of ordinary and
necessary expenses.
5.1.4.2.Requisite: (1) It must be shown
that the expenditures are directly
attributable to the development,
management, operation and/or
conduct of the trade, business or
exercise of a profession. In other
words, they were made to
promote business of the taxpayer.
Thus, entertainment expenses to
obtain contracts with private
firms or individuals are
deductible; but those spent for
government officials to procure
government contracts are not
deductible for being contrary to
public policy. (2) In
substantiating expenses for
entertainment and
representation, receipts or chits
issued by the entities to which
payments had been made should
be produced.
5.1.5. Cost of Materials and Supplies -
used in the trade or business,
paid or incurred during the
taxable year and must be
reasonable (Method used may be
actual consumption or direct
purchase).
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5.1.5.1.There are two methods that may
be used in deducting material
and supply expenses. (1) Actual
consumption. - This is computed
by the inventory method. If the
taxpayer keeps a record of
consumption of materials and
supplies or takes physical
inventories at the beginning and
end of the year, he should
include as expense the cost of
materials and supplies actually
consumed and during the year.
Actual consumption is also
arrived at if the taxpayer has
records of consumption such as
stock cards. Actual materials and
supplies used could be taken by
just adding up all the stock cards.
(2) Total purchase. -If. a taxpayer
carries incidental materials or
supplies on hand for which no
record of consumption is kept or
of which no physical inventories
are taken, it is permissible for
him to include in his expenses
and deduct from gross income,
the total of such supplies and
materials purchased during the
year, provided the net income is
clearly reflected in this method.
5.1.6. Repairs - must be incurred in
connection with the trade or
business, be paid or incurred
during the taxable year,
reasonable and not materially
add to the value of the property
or extends its life (Repairs that
prolong the life of the property
distinguished from incidental
repairs and maintenance are
capital expenditures subject to
depreciation).

5.1.6.1.(1) Expenses for repairs are
deductible if such repairs are
incidental or ordinary, that is,
made to keep the property used
in the trade or business of the
taxpayer in an ordinarily efficient
operating condition. They do not
materially add to the value of the
property nor appreciably prolong
its life. Thus, the expenses
incurred for repair of walls or
roof of a building to prevent
leaking are deductible. (2)
Repairs in the nature of
replacement to the extent that
they arrest deterioration and
prolong the life of the property
are capital expenditures (as
distinguished from maintenance
and incidental repairs) and
should be debited against the
corresponding allowance for
depreciation. Thus, the cost of the
construction of a hallow block
fence with iron grills around the
compound of the taxpayers was
properly disallowed because it
involved an addition which
prolonged the life of the property
and materially increased its
value.
5.1.7. Expenses of Farmers - incurred in
the operation of a farm for
project, reasonable and
supported by adequate records,
and incurred or paid within the
taxable year.
5.1. 7.1.The following are deductible
from gross income: (a) Cost of
ordinary tools of short life or
small cost such as hand tools,
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including shovels, rakes, etc.; (b)
Cost of gasoline or fuel, repairs
and upkeep of the transportation
equipment; and (c) Cost of
feeding and raising livestock in
so far as it represents actual
outlay but not including the
value of farm produce grown
upon the farm.
5.2. Interest Expense - the cost of
money paid or incurred within a
taxable year on indebtedness in
connection with the taxpayer's
professions, trade or business.
Requisites for interest expense to
be allowed as deduction from
business/professional income:
5.2.1. (1) There must be an indebtedness
stipulated in writing; (2). The
indebtedness must be that of the
taxpayer in connection with trade,
business or profession; and (3). The
interest must have been paid or
accrued during the taxable year; (4)
must be reasonable and not contrary
to law; (5) the taxpayer's allowable
deduction for interest shall be
reduced by an amount equal to the
following percentages of interest
income subjected to final tax: (1)
Beg. Jan. 1, 2000 - 38% (for
individual) (2) Beg. Jan. 1, 2009 -
33% (for corporation)
5.2.2. The reason for this limitation, is
based on the principle that there
is a differential tax of 12% with
respect 'to ·the tax rate applied, to
interest expense (32% tax
reduction) and interest income
(20% tax payment) of the same
year. In order that the difference
 be offset against another, the
allowable interest expense shall
reduced by 38% or 12/32% of the
interest income of the same year.
5.2.3. If individual is on the cash of
accounting, interest paid in
advance, through discount or
otherwise, shall be allowed as
deduction not in the year that the
interest was paid in advance, but
in the year that the indebtedness
was paid. However, if the
indebtedness is payable in
periodic amortization, the
amount of the!' interest which
corresponds to the amount of the
principal amortized or paid
during the year shall be allowed
as deduction in such taxable year.
5.2.4. Optional treatment of interest
expense – at the option of the
taxpayer, interest incurred to
acquired property used in trade,
business or exercise of a
profession may be allowed as a
deduction from gross income or
treated as a capital expenditure.
Interest expense is nondeductible
under the following situations:
5.2.4.1.If, within taxable year an
individual taxpayer reporting,
income on the cash basis incurs
an indebtedness on which an
interest is paid in advanced
through discount or otherwise:
Provided, that such interest shall
be allowed as a deduction in the
year the indebtedness is paid;
Provided further that if the
indebtedness is payable in
periodic amortization, the
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amount of interest which
corresponds to the amount of the
principal amortized or paid
during the year shall be allowed
as deduction in such taxable year;
5.2.4.2.At the option of the taxpayer,
interest incurred to acquire
property used in business or
exercise of a profession if treated
as a capital expenditure.
5.2.5. Interest for tax delinquency,
although taxes are not considered
debts, interest paid for tax
delinquency is deductible. It is
well-settled that taxes constitute
indebtedness for purpose of
deduction from gross income of
the amount of interest paid on
indebtedness.
5.2.6. Non-deductible interest, the
following interest cannot be
deductible from income:
5.2.6.1.Interest paid or incurred abroad
by a non-resident lending
institution in respect of which no
deduction is allowable to its
branch in the Philippines unless
the indebtedness was incurred to
provide funds, for investment in
the said resident branch, the
income from which is taxable,
and provided there is an
authenticated copy of the
investment agreement and such
other information as may be
required.
5.2.6.2.Interest on preferred stocks
which in reality is dividend
thereon;

5.2.6.3.Interest calculated for cost-
keeping or other purposes on
capital surplus invested in the
business which does not
represent a charge arising under
an interest-bearing;
5.2.6.4.Interest on loans between related
taxpayers;
5.2.6.5.Interest paid on earned but
unclaimed salary
5.2.6.6.Interest on indebtedness incurred
to finance petroleum explorations
and
5.2.6.7.Interest on indebtedness for
purely personal reasons;
5.2.6.8.Interest on loans between related
taxpayers, interest on loans are
not deductible if such loans' are
between related taxpayers, that
is, if both the taxpayer and the
person to whom the payment has
been made or is to be made are
persons specified within anyone
of those mentioned in Section
36(B) of the Tax.
5.2.6.9.Deductible interest, the following
interests are allowable
deductions from gross income:
(1) Interest paid by a corporation
on scrip dividends; (2) III the case
of banks and loan or trust
companies, interest deposits or
on savings received for
investment and secured by
interest bearing certificates of
indebtedness issued by such
bank or company and (3) Interest
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paid on account of delinquency
in the payment of taxes, a tax
obligation being considered an
indebtedness favor of the
government.
5.2.7. Deductibility of interest paid in
advance through discount, if
within the taxable year an
individual taxpayer reporting
income on the cash basis incurs
an indebtedness on which an
interest is paid in advance
through discount, or otherwise,
such interest is not deductible.
However, such interest shall be
allowed as a deduction in the
year the indebtedness is paid.
5.2.8. Interest on indebtedness
periodically amortized, in the
case of indebtedness which is'
payable in periodic
amortizations, the amount of
interest which corresponds to the
amount of the principal
amortized or paid during the
year shall be allowed as
deduction in such taxable year.
5.3. Taxes Expense - taxes, local or
international, paid or incurred
within the taxable year in
connection with the taxpayer's
profession, trade or business,
shall be allowed as a deduction
from gross income.
5.3.1. Non deductible Taxes
5.3.1.1.Individual and corporate income
tax;
5.3.1.2.Income tax paid to any foreign
country, only if the taxpayer
availed of the tax credit option;
5.3.1.3.Estate and donor's tax;
5.3.1.4.Taxes assessed against local
benefits of a kind tending to
increase the value of the property
assessed (special assessment tax).
5.3.1.5.Stock transaction tax (a
percentage tax)
5.3.1.6.Value Added Tax;
5.3.1.7.Surcharges (interest on
delinquent taxes, although not
deductible as tax, can be
deducted as interest expense.
5.3.1.8.Compromise penalty
5.3.2. Taxes that are deductible, all
taxes, national or local, paid or
accrued within the taxable year,
in connection with the taxpayer's
trade, business or profession is
deductible from gross income.
5.3.2.1.Import duties paid to customs
officers, if the importation or the
articles is in connection with the
trade or business of the taxpayer;
5.3.2.2.Business taxes, i.e, other
percentage taxes, and excise
taxes;
5.3.2.3.License taxes;
5.3.2.4 Privilege taxes; Documentary
stamp taxes; and
5.3.2.5 Any other taxes of every amount
and nature paid directly to the
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government or any political
subdivision.
5.3.3. Taxes of shareholder paid by a
corporation, where tile taxes
imposed upon the shareholder of
the corporation upon his interest
as shareholder are paid by the
ration without reimbursement
from the shareholder, the
deduction for the taxes paid is
allowed to the corporation. I case,
the shareholder shall not be
allowed deductions for the
amount of such taxes.
5.4. Losses - actually sustained
during the taxable year and not
compensated by insurance or
other form of indemnity are
deductible from gross income (a).
If incurred in trade, business or
profession; (b) of property
connected with trade, business or
profession, if tile loss arises from
fire, storm, shipwreck, or other
casualty, or from robbery, theft or
embezzlement.
5.4.1. In case of nonresident
individuals and foreign
corporations, the losses
deductible shall be those actually
sustained during the taxable
year, incurred in trade, business
or profession conducted within
the Philippines, where such
losses were not: compensated by
insurance or other form of
indemnity
5.4.2. The taxpayer should submit a
declaration of loss sustained from
casualty or from robbery, theft or
 embezzlement during the taxable
year, which shall be (by provision
of law: not less than 30 days nor
more than 90 days from the date
of discovery of the casualty or
robbery, theft or embezzlement;
to be fixed by revenue regulation)
within 45 days from the date of
discovery of loss.
5.4.3. Net operating loss carry-over
(NOLCO), is the excess of
allowable deductions from gross
income of the business for any
taxable year, which had been
previously offset as deduction
from gross income, shall be
carried over as a deduction from
gross income for the next three
(3) consecutive taxable years
immediately following the year
of such loss. It can not be
deducted against compensation
income (employer-employee
relationship).
5.4.4. Special rules on losses
5.4.4.1.Wagering losses, deductible to
the extent of wagering gains;
5.4.4.2.Voluntary removal of building,
losses due to voluntary removal
or demolition of the old
buildings, the scrapping of old
machinery, equipment, etc.,
incident to renewal or
replacement will be deductible
from gross income.
5.4.4.3.Loss of useful value, actual loss
sustained
Page 13 of 18
5.4.4.4.Shrinkage in value of stocks, the
cost or other basis may be
deducted, provided a satisfactory
5howing of its worthlessness is
made (not included the loss on
account of shrinkage through
fluctuation of the market).
5.4.4.5.Loss from wash sale, not
deductible except on the shares·
sold at a loss with no covering
acquisitions, a period beginning
30 days before and ending 30
days after the date of sale or
disposition (the sixty one day
period).
5.5. Bad Debts - A bad debt results
from the worthlessness or
uncollectibility (must be
ascertained with a reasonable
degree of certainty that the
amount is uncollectible and there
must be no likelihood of recovery
at any time in the future), in
whole or in part, of amounts due
to the taxpayer by others arising
from money lent or from
uncollectible amounts of income
from goods sold or services
rendered.
5.5.1. Requisites for Deduction of Bad
Debts
5.5.1.1.There must be a valid and
subsisting claim;
5.5.1.2.The claim must be connected
with the profession, trade or
business;
5.5.1.3.The claim must actually be
ascertained to be worthless; and

5.5.1.4.The claim must be written off
within the taxable year,
5.6. Depreciation - the gradual
diminution in the useful value of
a property used (or temporarily
not used) in trade or: business
due to exhaustion, wear and tear,
including the reasonable
allowance for the obsolescence.
5.6.1. Requisites for deductibility.
They are: (1) The allowance for
depredation must be reasonable;
(2) It must be for property arising
out of its use or employment in
the business or trade, or out of its
not being used temporarily
during the year; (3) It must be
charged-off during the taxable
year; and (4) A statement on the
allowance must be attached to
the return.
5.6.2. In case of a nonresident alien or a
foreign corporation, a reasonable
allowance for the deterioration of
property arising out of its use or
employment, in trade or
business, shall be permitted only
when such property is located
within the Philippines.
5.6.3. Depreciation shall be allowed on
tangible property, intangible
property (amortization). If it
develops that the useful life of
the depreciable property will be
longer or shorter than the useful
life as originally estimated under
all the then known facts, the
portion of the cost of the property
not already provided for, through
Page 14 of 18
depreciation allowance shall
spread over the remaining useful
life of the property, as re-
estimated in the light of
subsequent facts, and
depreciation deduction taken
accordingly.
5.6.4. Depreciation may be under any
of the following methods:
5.6.4.1.Straight-line method;
5.6.4.2.Declining balance method;
5.6.4.3.Sum-of-the-year-digit method;
5.6.4.4.Any other method which may be
prescribed by the Secretary of
Finance upon recommendation of
the Commissioner of BIR.
5.6.5. Depreciation of properties used
in petroleum operations
5.6.5.1.Directly related to production -
straight-line method or double
declining balance at the option of
service contractor may be used
but useful life of the property
shall only be up to 10 years or
shorter
5.6.5.2.Not directly related to production
- straight line method shall be
used on the basis of an estimated
useful life of five years.
5.7. Depletion - is peculiar to mining,
the natural resources are called
"wasting assets"; as the physical
units representing such resources
are extracted and sold, such
assets move towards exhaustion.
 (1) When the deduction for
depletion shall equal the capital
invested, no further deduction
shall be allowed. (2) In the case of
foreign corporations, depletion
shall be allowed only if the
mining property is located in the
Philippines
5.7.1. Allowable cost depletion
allowance. Depletion allowance
shall be in accordance with the
following rules: (i) In the case of
oil and' gas wells or mines, a
reasonable allowance for
depletion 'or amortization
computed in accordance with the
cost depletion method shall be
granted under rules an
regulations prescribed by the
Secretary of Finance. (2) When
the allowances shall equal the
capital invested, no further
allowance shall be granted, (3)
After production In commercial
quantities has commenced,
certain intangible exploration and
development drilling cost (a)
shall be deductible in the ,year
incurred if such expenditures are
incurred for non-producing wells
and/or mines or (b) shall be
deductible in full in the year paid
or incurred, or at the election of
the taxpayer, may be capitalized
and amortized if such
expenditures incurred are for
producing wells and/or mines in
the same contract area.
5.8. Pension Trust - An employer
establishing or maintaining a
pension trust to provide for the
payment of reasonable pensions
Page 15 of 18
to its employees shall be allowed
as a deduction from gross
income:
5.8.1. Contributions to such trusts
during the taxable year to cover
the pension liability accruing
during the year; and
5.8.2. A reasonable amount transferred
or paid into such trust the taxable
year in excess of the contributions
but only if such amount (a) has
not theretofore been allowed as a
deduction; and (b) is apportioned
in equal, parts over a period of
ten (10) consecutive years
beginning with the year in which
the transfer or payment is made.
5.8.3. Requisites for deductibility of
payments to pension trusts.
They are; (1) The employer must
have established a pension or
retirement plan to provide for the
payment of reasonable pensions
to its employees; (2) The pension
plan is reasonable and actuarially
sound; (3) It must be funded by
the employer, i.e., the employer
contributes cash to the plan; (4)
The amount contributed must no
longer be subject to its control or
disposition; and (5) The payment
has not theretofore been allowed
as a deduction.
5.8.4. Payments deductible. The
payments to employees' pension
trusts which are deductible are:
(1) Amounts contributed by the
employer during the taxable year
into the pension plan to cover the
pension liability accruing during
 the year; and (2) One-tenth (1/10) 5.9.4. Donations to certain accredited
of the reasonable amount paid by non-government organizations
the employer to cover pension (no-profit domestic corporations)
liability applicable to the years organized and operated
prior to the taxable year; or so exclusively for:
paid to place the trust in a sound
financial basis. 5.9.4.1.Scientific;

5.9. Contributions and Donations - 5.9.4.2.Educational;

Contributions to the Government
of the Philippines, or to any of its 5.9.4.3.Cultural;
agencies or political subdivisions,
inc1uding fully owned 5.9.4.4.Character building and youth
government corporations, and sports development;
exclusively to finance, to provide
for, or to be used in undertaking 5.9.4.5.Charitable;
priority activities in :
5.9.4.6.Social welfare;
5.9.1. Science; Education; Culture;
Health; Economic development; 5.9.4.7.Health;
Human settlement; Youth and
sports development. 5.9.4.8.Research; or any combination of
the above, purposes, satisfying
5.9.2. The priority plan is determined certain requirements, no part of
by the National Economic and the net income of which inures to
Development Authority (NEDA) the benefit of any private
in consultation with appropriate stockholder or individual.
government agencies, including
the regional development 5.9.4.9.For the accredited non-
councils and private government organization:
philanthropic persons and
institutions; 5.9.4.9.1Not later than the fifteenth day
after the close of the year in
5.9.3. Donations to foreign institutions which the contribution is
or international organizations, :';n received, makes utilization
compliance with' agreements, directly for the active conduct of
treaties or commitments entered the activities consisting of the
into by the Government of the purposes or functions for which
Philippines and foreign it is organized and operated;
institutions or international
organizations, or in pursuance of 5.9.4.9.2Administration expenses do not
special laws; exceed the level prescribed by the
Secretary of Finance and not

Page 16 of 18
 exceeding thirty percent (30%) of 5.9.4.11.1 Ten percent (10%), In case
the total expenses; of an individual; and

5.9.4.9.3The assets, in the event of 5.9.4.11.2 Five percent (5%), in case

dissolution, would be distributed
to another non-profit domestic
corporation organized for similar
purposes, or to the State for
public use, or to be distributed by
a court to another organization to
be used in such manner that will
accomplish the general purposes
of the dissolved corporation.
5.9.4.10.Deductible subject to
limitation: The recipient of the
contribution or gift is any of:
5.9.4.10.1The government of the
Philippines or any of its agencies
or any political subdivision
thereof, for exclusively public
purposes (not included in the
priority activities); or
5.9.4.10.2Non-government accredited
domestic corporations or
associations which are domestic
and organized and operated
exclusively for:
5.9.4.10.3Scientific; Educational;
Cultural; Youth and Sports
Development; Charitable; Social
Welfare; religious; or
Rehabilitation of Veterans.
5.9.4.10.4No part of the net income of
which inures to be benefit of any
private stockholder or individual;
5.9.4.11 The amount should not
exceed:
of a corporation;
5.9.4.11.3 Of the taxpayer's tax
taxable income derived from
trade business or profession
before the deduction for
contributions and donations;
5.9.4.11.4 In case of contributions of
property, the measure of actual
contributions is the acquisition
cost of such property.
5.9.4.12. The following donations
are deductible in full:
5.9.4.12.1 Donation to government
or political subdivisions
including fully owned
government corporations and to
certain private foundations or
accredited non-government
organizations donation must be
utilized not latter than 15th day
of the third month after the close
of the accredited NGO's taxable
year and exclusively for
undertaking priority activities in:
(1) Educational; Health; Youth
and Sports Development; Human
Settlement; Science and Cultural;
Economic Development; (2) The
administrative expense shall not
exceed 30% of the total expenses.
5.9.4.12.2 Donation to certain foreign
institutions or international
organizations by virtue of treaties
or Executive Agreements.

Page 17 of 18
5.9.4.12.3 The assets of which, must be depreciation or depletion used in
distributed to another non-profit research and development
domestic corporation or the state, (becomes part of the cost of the
in the event of dissolution. asset, and deduction from it is by
way of depreciation, or
5.9.4.12.4 Per special laws, donations depletion);
made to the following are
deductible in full: 5.10.2. Other research and development
costs (maybe treated as (a). an
5.9.4.12.4.1 Integrated Bar of the outright deduction/full
Philippines (PD 181) expenditure in the year that the
5.9.4.12.4.2 International Rice expense was paid or incurred;
Research Institute (RA2707) (b), as a deferred expense/to be
5.9.4.12.4.3 Development Academy of spread and recognized as
the Philippines (PD 205) deduction over a period of not
5.9.4.12.4.4 The Universities of the less than sixty (60) months from
Philippines & either state colleges the date of acquisition of benefit
5.9.4.12.4.5 Cultural Center of the from the expenditure.
Philippines
5.9.4.12.4.6 Artesian Well Fund (RA
1977)
5.9.4.12.4.7 Ramon Magsaysay Award
Foundation
5.9.4.12.4.8 Task Force on Human
Settlement
5.9.4.12.4.9 Donations to the National
Museum, Library and Archives
5.9.4.12.4.10 National Commission on
Culture and the Arts
5.9.4.12.4.11 Humanitarian Science
Foundation
5.9.4.12.4.12 National Social Action
Council

5.10. Research and Development Cost

- are for improvements of
processes and formulas as well as
the development of improved or
new products. Research and
development cost may be
expenditures:

5.10.1. For acquisition or improvements

of property subject to

Page 18 of 18