DEDUCTIONS

TAX RULES ON THE DEDUCTIBILITY OF EXPENSES

(NORMAL TAX)
Individual Corporate
Taxpayer Taxpayer
Personal Expenses Non deductible Not Applicable
Business Expenses *
Deductible Deductible
Revenue expenditures
outright outright
Deductible Deductible
Capital expenditures ** over time over time

* Subject to tax rules on deductibility

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

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

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

Gross Sales - Sales less discounts, returns and allowances

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

Gross Income - Gross sales/receipts less cost of sales

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

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

Estates and Trusts ✓ ✓

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

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

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

Net operating loss Excess of allowable deductions over gross income

(NOL)
NOLCO Shall be carried forward on a FIFO basis as a special deduction from gross
income for the next three (3) succeeding years immediately following the year
of such loss, without interruption.
Taxpayers entitled • Individual taxpayers, engaged in trade or business
to deduct NOLCO • Domestic and resident foreign corporations subject to normal tax
• Special corporation subject to normal tax
Taxpayers not • Tax exempt individual/corporations
entitled to deduct • Those whose tax base is other than net taxable income such as follow:
~ Offshore banking unit
~ Entity registered with the Board of Investments (BOI)
~ Entity registered with the Philippine Economic Zone Authority (PEZA)
~ Entity registered Under R.A. 7227 or Bases Conversion and Development
Act of 1992
~ Foreign corporations engaged in international shipping or air carriage
business in the Philippines

ALLOWABLE DEDUCTIONS
Net Operating Loss Carry Over
NET OPERATING LOSS CARRY-OVER (NOLCO)

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

• NOL sustained prior to Merger or Consolidation

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

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

General business expenses Depreciation

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

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

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - GENERAL BUSINESS EXPENSES

Employee Withholding tax is properly withheld and remitted, unless employee

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

Travel Includes transportation, meals, and lodging during travel, local or abroad
Leasehold The taxpayer-lessee may deduct the cost of leasehold improvement
improvement through depreciation over the shorter of lease term and useful life.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - GENERAL BUSINESS EXPENSES

Rent • Withholding tax on rent must be withheld, unless exempted.

• The deductibility of rent expense is subject to the following rules:
Accrual basis Cash basis
Prepaid, including bonus ✓ (Prorated) ✓ (Prorated)
Incurred and paid ✓ ✓
Accrued ✓ X
Entertainment, • EAR must be for the entertainment, amusement of taxpayer's clients,
Amusement, and guests or customers, and not of its employees.
Representation
expense • Deductible amount is lower between the actual EAR and the
prescribed ceilings as follow:
~ .50% of net sales - sale of goods/properties
~ 1% of net revenues - sale of services (including leases)
• If taxpayer is engaged in both sale of goods and services, actual EAR
shall be prorated based on the ratio of net sales and net revenues.

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

Requisites • The indebtedness must be in writing.

• The indebtedness must have been accrued or paid during the taxable year.
• The indebtedness must be comply to the LOAN principle and related party rule.
Deductible • Gross interest expense less amount equal to 33% on interest income subject to
amount 20% final tax.
• The 33% rate is applicable to both individual and corporate taxpayers.
Nondeductible • Indebtedness not business related (LOAN)
interests • Indebtedness in favor of a related party (related party rule)
• Prepaid interests (discounting)
• Interest to purchase or carry tax-exempt transactions
• Interest on indebtedness to finance petroleum explorations (part of deferred
exploration cost)
• Interest on unclaimed salary
• Interest on preference shares
• Imputed interest (Effective interest)

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

Interest on The interest on indebtedness obtained to acquire fixed assets used

indebtedness in the in trade/business/profession has the following options:
acquisition of fixed • Outright deduction
assets • Capitalized amount, deductible through depreciation
Discounting of • Deductible when it accrues
interest (Prepaid • For an individual taxpayer using cash basis, deductible when the
Interest) loan is paid in full or proportionate to installments.
Interests • If the business has no interest income subject to 20% final tax.
deductible in full • Interest paid to the government, e.g. interest on delinquent tax.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - BAD DEBTS

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

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

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

Optional • Deduction from gross income, at actual amount

treatments • Tax credit, subject to limit
Tax rule when claimed as tax credit

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

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPRECIATION

Methods of • Straight line method (SLM)

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

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

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

¥ Tangible Exploration and Development Costs

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

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - DEPLETION (MINING AND PETROLEUM)
INTANGIBLE EXPLORATION AND DEVELOPMENT COSTS
Tax treatment to Non producing Producing
intangible wells/mines wells/mines
exploration and Before commercial production Capitalize Capitalize
development costs After commercial production Outright Outright or Capitalize
Limit on If outright deduction is selected, the deduction from taxable income from
deductibility of mining operations is based on the following rules:
intangible ~ Lower between the accumulated deductible amount and 25% of
exploration and the net income from mining operations, computed without the
development costs benefit of any tax incentives under existing laws.
of mining
~ Excess of actual costs over the 25% shall be carried forward to the
operations
succeeding years until fully deducted (no expiration).
Net income from Gross income from operations less allowable deductions which are necessary
mining operations or related to mining operations such as mining, milling, marketing, and
depreciation of properties directly used in mining operations.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - CHARITABLE AND OTHER CONTRIBUTIONS

Charitable A non-operating expense allowed by the tax law as deduction from

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

Contributions with The deductibility of the charitable contributions shall be the lower of the
limit actual amount and the ceiling based on taxable business/profession
income before charitable contributions with the following rates:
• Donor-Individual - 10% • Donor-Corporation - 5%

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

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

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - CONTRIBUTIONS TO PENSIONS AND TRUSTS

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

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

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

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

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - CONTRIBUTIONS TO PENSIONS AND TRUSTS

Deductibility of The tax rules on the deductibility of CSC and PSC are as follow:
Pension expense
CSC PSC
Funded Deductible in full Amortized in 10 years
Unfunded Deductible in the year, Amortized starting the
it becomes funded year it becomes funded

* Funding shall be applied first to CSC, any excess is applied to PSC both on a FIFO basis.
** Overfunding shall not be deductible until there is a CSC/PSC to fund.
*** Unfunded CSC/PSC, due to underfunding, shall be deductible only when funded.
Difference between Overfunding The excess of contributions over the total of CSC and PSC
actual contributions
and pension Underfunding Contributions paid is insufficient to cover both CSC and/or
expense PSC.
Pension not BIR- Deduction is only allowed during actual payment of retirement. No
approved deduction is allowed for contributions.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - RESEARCH AND DEVELOPMENT COSTS

Related to Capitalized and deductible through depreciation.

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

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES

Types of losses • Ordinary loss

• Capital loss (discussed under Dealings in Properties)
Loss on disposal or • Deductible loss is the lower of amount of the replacement cost
destruction of or the book value of the asset's damaged portion, less
ordinary asset insurance recovery if any.
• If insurance is in excess of the loss, a taxable gain is recognized
Losses between Nondeductible
related party
Gambling losses Gambling losses are deductible only against gambling winnings
Losses from theft • Deductible in the year of discovery, if the culprit is no where to be
or embezzlement found.
• If the culprit is known, the loss shall be deductible in the year the
right of recovery becomes worthless.

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES

Mortgage losses The loss sufferred by the taxpayer-mortgagee as the excess of

unpaid indebtedness over the purchase price upon foreclosure
shall be nondeductible until disposal. If not disposed, instead
the property is kept by the taxpayer, the excess shall be a
capitalized.
Losses due to • If replaced or renewed; the loss, if disposed, shall be
voluntary removal deductible.
of property • Dismantling cost of structure on an acquired real property
shall be nondeductible, but shall become part of the cost of
the land.
Losses due to Nondeductible until actually suffered or realized through disposal
shrinkage in value
of stocks

ALLOWABLE DEDUCTIONS
REGULAR ITEMIZED DEDUCTIONS - LOSSES

Losses of Useful • Loss in value due to technological changes or new legislation

Value • Nondeductible until actually suffered or realized through
disposal, except when the asset involves building and
machineries that are permanently abandoned
Abandonment of • All accumulated exploration and development expenditures
Petroleum are deductible except those incurred prior to 01/01/1979
operations in a contract area which shall be deductible only from any
income derived from that area.
• The unamortized cost of a well, any undepreciated assets
therein shall be deductible in the year it is abandoned. If
operation is subsequently resumed, the loss previously
claimed as deduction shall be part of gross income in the
year of restoration, and shall be amortized/depreciated
accordingly.

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

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

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

Transfer to reserve Non-life Amount of required reserves

fund and payments insurance
to policies and companies
annuity contracts
of insurance
companies

Dividend Real Estate Dividend distributed by REIT (REIT is legally

distribution REIT Investment Trust mandated to distribute 90% of its income as
under RA9856 dividends)
Transfer to Cooperatives Amount of reserves taken from income
reserves of funds generated by taxable unrelated activities.
of taxable
cooperatives

ALLOWABLE DEDUCTIONS
ALLOWABLE DEDUCTIONS
ALLOWABLE DEDUCTIONS