Deduction from

Gross Income
 Deductions from Gross Income
Pertains to business expenses incurred by a
taxpayer engaged in business or engaged in the
practice of profession
 General Principles
Expenses must be legitimate,
ordinary, actual and necessary
 General Principles
Only business expenses which
contribute to, or are incurred in
connection with the generation of
income, gain, or profits subject to
regular income tax are deductible
 General Principles
Expenses and losses from
transactions between related
parties are not deductible
 General Principles
No deduction is allowed unless
the withholding tax required by
the law is withheld and remitted
 Optional
Standard
Deduction

Cost of Sales or
Deductions
Cost of Service
Regular
Itemized
Deductions
Special
Optional Standard Deduction
(OSD)
 Optional Standard
Deduction
• Individual taxpayers – 40% of total
sales/revenues/receipts/fees

• Corporate taxpayers – 40% of gross

income
 Optional Standard
Deduction
• Individual taxpayers – 40% of total
sales/revenues/receipts/fees
Illustration:
•Gross Sales taxpayers – P2,000,000
Corporate 40% of gross
income
Cost of Sales 400,000
How much is the OSD if taxpayer is
individual? Corporation?
 Optional Standard
Deduction
• Individual taxpayers – 40% of total
sales/revenues/receipts/fees
Illustration:
Gross Sales P5,000,000
•Cost of Sales taxpayers – 40%
Corporate 2,400,000
of gross
income Deduction
Itemized 900,000
How much is taxable income if
taxpayer is individual? Corporation?
(use OSD)
 Optional
Standard
Deduction

Cost of Sales or
Deductions
Cost of Service
Regular
Itemized
Deductions
Special
Itemized Deduction
 Regular Allowable
Itemized Deduction
 Interest  Contribution to pension
 Taxes and trusts
 Losses  Research and
 Bad debts development
 Depreciation  Other ordinary and
necessary trade,
 Depletion business or professional
 Charitable and other expenses
contribution
Interest Expense

Deductible in full

Subject to a limit
 Interest Expense
Illustration:
Mang Deductible inforfull
Jose paid interest late filing
of taxes amounting to P250,000.

Subject to a limit
 Interest Expense
Illustration:
Mang Deductible in full
Jose paid interest for loans
made to the bank amounting to
P50,000. In the same year, the business
also earned 100,000 interest income
subject Subject
to final tax.to a limit
 Interest Expense
Illustration:
Mang Deductible in full
Jose paid interest for loans
made to the bank amounting to
P120,000. In the same year, the
business also earned 90,000 interest
income Subject
subject to to
final tax. Compute
a limit
allowable interest expense.
 Interest Expense
Illustration:
Mang Deductible in full
Jose paid interest for loans
made to the bank amounting to
P100,000. Compute allowable interest
expense.
Subject to a limit
 Interest Expense
Illustration:
Mang Deductible inforfull
Jose paid interest late filing
of taxes amounting to P250,000. In the
same year, the business also earned
500,000 interest income subject to final
tax. Compute
Subject to interest
allowable a limit expense.
Mr Enchong Lee, an entrepreneur reporting in
cash basis, showed the following interest
expense related to his business during the year:
Interest on borrowings to finance family home 30,000
Interest on loan made for capital of his business 25,000
Interest on borrowings to finance office equipment 5,000
Interest paid on delinquency taxes 18,000
Interest paid to brother 12,000
Mr. Lee has an interest income of P10,000
earned from the bank.

Compute allowable interest expense

1. Lee Jong Suk, an entrepreneur, submitted the following expenses during the
taxable year.
Family expenses 120,000
Salaries and wages* 80,000
*tax was withheld but not remitted
How much is the amount of total expenses deductible from his business
income?
2. Walang Forever Inc. showed the following income and expense during the year:
Rent income P 1,000,000
Gross sales of trading business 1,500,000
Cost of sales 180,000
Operating expense (80% undocumented) 560,000
Compute taxable income of Walang Forever if it uses optional standard
deduction? Itemized deduction?
3. Mr Wat Eber showed the following expense during the year:
Interest on borrowings to finance family home 300,000
Interest on loan made for capital of his business 250,000
Interest paid on delinquency taxes 100,000
Interest paid to brother 120,000
How much is the deductible interest expense during the year?
 Taxes
• Taxes paid or incurred within the taxable year
in connection with the taxpayer’s trade,
business, or exercise of profession shall be
allowed as deduction except:
o Philippine income taxes except fringe benefit tax
o Foreign income tax, if claimed as tax credit
o Estate tax and donor’s tax
o Special assessment
o Business taxes (Value-added Tax)
o Surcharges and penalties on delinquent taxes
 Taxes
• Taxes paid or incurred within the taxable year
in connection with the taxpayer’s trade,
Illustration:
business,
Coco or exercise
Marte paid of profession
for the following shall the
taxes during be
allowed
taxable year: as deduction except:
o Philippine
Community tax income taxes except fringe benefit
for his business 3,000 tax
o Foreign
Quarter incomeincome
taxes tax, if claimed as tax credit
o Estate tax and donor’s tax
First quarter 3,250
o Special
Second assessment
quarter 4,500
o Business
Third quarter taxes (Value-added Tax) 7,400
o Surcharges
Value-added tax and penalties on delinquent12,400
taxes
Municipal taxes for business 5,400
Real property tax for his property* 15,000
*Only 15% of the property is used for the business
 Losses
• Losses actually sustained during the taxable
year and not compensated by insurance or
other indemnity shall be allowed as
deductions.
 Losses
• Losses actually sustained during the taxable
Illustration:
year and not compensated by insurance or
During the year, Mang Jose lost his office equipment due
to other
robbery. indemnity shall of be
The carrying value allowed was
the equipment as
deductions.
P150,000. However, Mang Jose was paid P20,000 by the
insurance company.
 Bad Debts
• Bad debts refer to debts due to the
taxpayer which were actually ascertained
to be worthless and were charged off within
the taxable year.
 Charitable and Other
Contributions
• Contributions or gifts made to the
government or non-government
organizations may be deducted against
gross income

Deductible in full

Subject to a limit
 Charitable and Other
Contributions
• Based on the taxable income derived from
trade, business or profession before the
deduction of any contributions
o 10% for individuals
o 5% for corporation
 Charitable and Other
Contributions
• Based on the taxable income derived from
trade, business or profession before the
Illustration:
deduction
The following of any
data contributions
were available for the year:
Gross 10% for individuals
o receipts P2,000,000
Other deductible expenses 800,000
o 5% for
Donations corporation
to city hall for priority activities 150,000
Donations to accredited NGO 30,000
Donations to barangay for administrative purpose 40,000
Donations to local church 50,000
Donations to street children 20,000
Compute for allowable charitable and other
contributions if taxpayer is an individual?
Corporation?
 Expenses in General
• Entertainment, Amusement and Recreation
o .5% of net sales for taxpayers engaged in sale of
goods/properties
o 1% of net revenue for taxpayers engaged in sale
of services
 Expenses in General
• Entertainment, Amusement and Recreation
Illustration:
o .5% of net sales for taxpayers engaged in sale of
goods/properties
To Infinity Bed And Beyond a trading company,
hado 1%
netofsales
net revenue
during for
thetaxpayers
period engaged in sale
amounting to
of services
P5,000,000 and incurred representation expenses
amounting to P35,000 with adequate receipts.
How much representation expense can be
deducted from gross income?
 Expenses in General
• Entertainment, Amusement and Recreation
Illustration:
o .5% of net sales for taxpayers engaged in sale of
goods/properties
We Like to Mow It provides mowing services had
neto 1% of net revenue
revenue during for
thetaxpayers engaged in sale
period amounting to
of services
P2,000,000 and incurred representation expenses
amounting to P15,000 with adequate receipts.
How much representation expense can be
deducted from gross income?
1. The following relates to a taxpayer’s warehouse:
Cost P2,000,000
Residual value 200,000
Current fair market vluae 2,500,000
Estimated useful life 20 years
Dater of purchase March 31, 2018
Compute deductible depreciation expense for taxable year 2018.
2. Nagmahal Ngunit Iniwan Co. made contributions to the following in 2018:
Street beggars 50,000
Barrio fiestas 60,000
Various cancer patients 40,000
Takusa, an accredited non-profit organization 100,000
How much is the deductible contributions during the year if taxable income
before contribution is P1,500,000?
3. Mr Henry Zobel reported a total revenue of P5,000,000. The following
expenses were incurred during the period: Recreation with investors,
P15,000; Dinner with college friends, 5,000; Dinner treat to prospect clients,
10,000; Concert with wife, 20,000; Expenses incurred to entertain clients;
5,000. Compute allowable representation expense
1. The following relates to a taxpayer’s warehouse:
Cost P2,000,000
Residual value 200,000
Current fair market value 2,500,000
Estimated useful life 20 years
Date of purchase March 31, 2018
Compute deductible depreciation expense using straight line for year 2018.
2. Nagmahal Ngunit Iniwan Co. made contributions to the following in 2018:
Street beggars 50,000
Barrio fiestas 60,000
Various cancer patients 40,000
Takusa, an accredited NGO 100,000
How much is the deductible contributions during the year if taxable income before
contribution is P1,500,000?
3. Mr Henry Zobel reported a net revenue of P5,000,000. The following expenses were
incurred during the period: Recreation with investors, P15,000; Dinner with college
friends, 5,000; Dinner treat to prospect clients, 10,000; Concert with wife, 20,000;
Expenses incurred to entertain clients; 5,000. Compute allowable representation expense
4. Taxpayer reported bad debts expenses amounting to P40,000 using direct write-off
method. This includes bad debts from loans made by Chorva’s brother considered to be
worthless, amounting to P25,000.
During taxable year 2017, Miss. Kim Bok Joo had P5,000,000 and 3,000,000
net sales and cost of sales, respectively from her trading business. She had
the following expenses during the period.
Salaries to employees P200,000 Travelling expenses P24,000
Rent expense 43,200 Representation expense 18,000
Interest expense 36,000 Taxes and licenses 24,000
Bad debts expenses 24,000 Charitable contributions 200,000
Additional Information:
-Withholding tax on salaries to employees were properly withheld and remitted to
BIR.
-She went to Manila for a business trip. Her travelling expenses is inclusive of her
expenses spent while visiting some of her relatives in Laguna, P4,000.
-Kim failed to withhold tax on the rent.
-During the year, she had interest income subject to final tax amounting to P60,000.
-Included in taxes paid were quarterly income tax amounting to P9,000, the rest were
local taxes.
-She uses the allowance method of accounting for bad debts.
-She donated to a private institution owned by a close friend.
How much is total allowable itemized deduction?
 Optional
Standard
Deduction

Cost of Sales or
Deductions
Cost of Service
Regular
Itemized
Deductions
Special
 Special Allowable
Itemized Deduction
Net Operating Loss Carry Over
 Net Operating Loss
Carry Over (NOLCO)
• Net operating loss of the business shall be
carried over as a special deduction from
gross income for the next three consecutive
taxable years immediately following the
year of such loss.
 Net Operating Loss
Carry Over (NOLCO)
Mr. Karl Lokohan, reported the following income and
expenses:
2007 2008 2009 2010 2011
Compensation income 60,000 60,000 60,000 60,000 60,000
Business income 30,000 35,000 54,000 50,000 60,000
Allowable deduction 45,000 30,000 40,000 48,000 40,000
How much will be the taxable income?
 Net Operating Loss
Carry Over (NOLCO)
Mr. Karl Lokohan, reported the following income and
expenses:
2007 2008 2009 2010 2011
Business income 30,000 35,000 44,000 55,000 60,000
Allowable deduction 50,000 33,000 40,000 48,000 45,000
How much will be the taxable income per year?
 Net Operating Loss
Carry Over (NOLCO)
Mr. Karl Lokohan, reported the following income and
expenses:
2007 2008 2009 2010 2011
Business income 30,000 28,000 45,000 55,000 75,000
Allowable deduction 50,000 35,000 40,000 45,000 45,000
How much will be the taxable income per year?
 Net Operating Loss
Carry Over (NOLCO)
• A taxpayer who claims 40% OSD shall not
simultaneously claim deduction of the
NOLCO. The three-year reglementary period
shall continue to run notwithstanding the
fact that the aforesaid taxpayer availed of
the OSD during the said period.
 Net Operating Loss
Carry Over (NOLCO)
Mr. Karl Lokohan, reported the following income and
expenses:
2007 2008 2009 2010 2011
Compensation income 60,000 60,000 60,000 60,000 60,000
Gross Receipts 50,000 65,000 45,000 50,000 70,000
COS 20,000 35,000 10,000 20,000 10,000
Allowable deduction 45,000 30,000 30,000 25,000 40,000
During 2008, Mr. Lokohan opted to use OSD because he
cannot substantiate his expenses. How much will be the
taxable income per year?
 Net Operating Loss
Carry Over (NOLCO)
• As a rule, any net loss incurred in a taxable
year during which the taxpayer was exempt
from income tax shall not be allowed as a
deduction.