ReSA
The Review School of Accountancy
TAXATION
1. Deductions from Gross Income
a. Kinds of deductions
b. Itemized deductions
(Sec. 34)
c. Special deductions
(Sec. 37)
2. Itemized Deductions Amplified
a. Expenses in General
1) Requisites for
deductibility of
expenses, in general
2) Requisites for deductibility
of salaries, wages, and
other forms of
compensation including
the grossed-up monetary
value of fringe benefits
3) Requisites for
deductibility of travel
expenses, here and abroad
4) Requisites for
deductibility of rentals
5) Requisites for
deductibility of
entertainment,
amusement and
recreation expenses
Tel. No. 735-9807 & 734-3989
TAMAYO/GARCIA
TX 1102: DEDUCTIONS FROM GROSS INCOME
1) Itemized deductions;
2) Special deductions;
3) Optional standard deduction.
a) Ordinary and necessary trade, business or professional expenses;
b) Interest;
c) Taxes;
d) Losses;
e) Bad debts;
f) Depreciation;
g) Depletion of oil and gas wells and mines;
h) Charitable and other contributions;
i) Research and development;
j) Pension trusts;
k) Additional requirements for deductibility of certain payments
l) Optional standard deduction
m) Premium payments on health and/or hospitalization insurance of an individual taxpayer.
Note: The above deductible items shall be allowed as deduction only if it is shown that the
tax required to be deducted and withheld therefrom has been paid to the BIR
[(Sec. 34 (K)].
(A) Insurance companies
(a) Net additions required by law to be made within the year to reserve funds; and
(b) The sums other than dividends paid within the year on policy and annuity contracts.
(B) Mutual insurance companies – any portion of the premium deposits returned to
their policy holders.
(C) Mutual marine insurance companies
(a) Amounts paid for reinsurance;
(b) Amounts repaid to policyholders on account of premiums previously paid by them
and interest paid upon those amount between the ascertainment and payment
thereof.
(D) Assessment insurance companies - Actual deposit of sums with the officers of the
Government of the Philippines pursuant to law, as additions to guarantee or reserve fund
a) Ordinary and necessary;
b) Paid or incurred during the taxable year;
c) Directly attributable to the development, management, operation and/or conduct of the
trade, business or exercise of profession;
d) Substantiated with sufficient evidence, such as official receipts or other adequate
records.
a) Reasonable;
b) Personal services actually rendered;
c) Withholding tax imposed has been paid.
a) Reasonable;
b) Incurred or paid while away from home;
c) Incurred or paid in the pursuit of trade, business or profession.
a) Reasonable;
b) For purposes of trade, business or profession;
c) Taxpayer has not taken or is not taking title or in which he has no equity other than that
of a lessee, user or possessor.
a) Must be paid or incurred during the taxable year;
b) Must be directly connected to the development, management and operation or to
conduct of trade, business or profession or directly related to or in furtherance of the
conduct of his or its trade, business or exercise of profession;
c) Must not be contrary to law, morals, public policy or public order;
d) Must not have been paid, directly or indirectly, to an official or employee of the national
government, or any local government unit, or of any government-owned or controlled
corporation (GOCC), or of a foreign government, or to a private individual, or
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corporation, or general professional partnership, or a similar entity if it constitutes a
bribe, kickback or other similar payments;
e) Must be duly substantiated by adequate proof. The official receipts or invoices or bills or
statements of accounts must be in the name of taxpayer claiming the deduction;
f) The appropriate amount of withholding tax, if applicable, should have been withheld
therefrom and paid to the BIR.
6) Ceiling on deductible a) Sales of goods or properties – One-half percent (0.50%) of net sales (gross sales less
entertainment, sales returns/allowances and sales discount)
amusement and b) Sale of services, including exercise of profession and use or lease of property
recreation expenses – One percent (1%) of net revenue (gross revenue less discounts)
7) Exercise
ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000
respectively. The actual entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000.
How much is the amount of the deductible entertainment, amusement and recreation expense?

b. Interest Expense
1) Requisites for a)
There must be an indebtedness;
deductibility of interest b)
Paid or incurred upon such indebtedness;
expense c)
The indebtedness must be that of the taxpayer;
d)
Connected with taxpayer’s trade or business or exercise of profession;
e)
Must have been paid or incurred during the taxable year;
f)
Must have been stipulated in writing;
g)
Must be legally due;
h)
Must not be between related taxpayers;
i)
Must not be incurred to finance petroleum operation;
j) In case of interest incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as capital expenditure.
2) Reduction of deductible The allowable deduction for interest shall be reduced by an amount equal to the following
interest expense percentages of the interest income subject to final tax.
Beginning January 1, 2000 – 38%
Beginning November 1, 2005 to December 31 2008 – 42%
Beginning January 1, 2009 – 33%
3) Interest incurred or paid Interest incurred or paid by the taxpayer on all unpaid business-related taxes shall be fully
on all unpaid business- deductible from the gross income and shall not be subject to reduction by an amount equal
related taxes to certain percentage of the interest income subject to final tax.
4) Prepaid interest of an Deductible not in the year that the interest was paid in advance but in the year that the
individual under cash basis indebtedness was paid.
5) Exercises
a) In 2010, an individual taxpayer, using cash basis of accounting, obtained a P500,000 loan from a bank for business use.
The bank deducted in advance an interest of P50,000. In 2011, the P500,000 loan was paid in full by the taxpayer.
How much was the deductible interest in 2010 and 2011?
b) Using the same information in letter a. except that payments were made as follows: 2011, P300,000; 2012, P200,000.
How much was the deductible interest expense in 2010, 2011 and 2012?
c) AJD Corporation used accrual basis yearly since it was organized. On March 1, 2010 it purchased an equipment for
P1,120,000, VAT inclusive. The equipment was estimated to have a life of 5 years. The equipment was financed through a
one-year loan with Banco de Plata with interest at the rate of 18% per annum beginning January 16, 2010, which was
discounted in full. During the same year, the corporation also paid interest on business-related taxes amounting to P50,000.
In 2010, AJD had interest income from its bank deposit in the amount of P100,000. AJD decided to expense outright the
interest incurred to acquire the equipment.
Question 1 - How much was the deductible interest?
2 - Assuming AJD Corporation decided to capitalize the interest incurred to acquire the equipment, how much
would be the total cost of the equipment?
d) COU Corporation paid the following during the year 2011:
Interest for late payment of income tax for 2010 P 5,000
Surcharge and compromise penalty for late payment of income tax for 2010 7,250
Interest on bonds issued by COU Corporation 100,000
Interest on money borrowed by the Corporation from Conrad Uberita, 60% owner of COU Corporation 50,000
Interest on preferred stock which in reality is a dividend 20,000
How much is the deductible interest?

c. Taxes

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1) Requisites for deductibility a. Paid or incurred within the taxable year;
b. Connected with the taxpayer’s profession, trade or business.
2) Meaning of the term a. The term “taxes” includes national and local taxes, and means tax proper only.
“taxes” b. No deduction shall be claimed for any surcharge or penalty on delinquent taxes.
3) Interest on delinquent Deductible as interest expense, not as taxes.
taxes
4) Non-deductible Taxes a. Philippine income; d. Foreign income tax claimed as tax credit;
b. Estate and donor’s taxes; e. Stock transaction tax
c. Special assessment; f. Value-added tax
5) Credit against tax for Allowable income tax credit – Lower between:
taxes in foreign countries a. Actual foreign income tax paid; and
b. Statutory limitation.
6) Year in which tax credit is a. At the option of the taxpayer and irrespective of the method of accounting used, tax
taken credit shall be taken in the year in which the taxes of the foreign country were incurred;
b. Once the option to credit the foreign taxes in the year incurred is made, the credits for
all subsequent years shall be taken upon the same basis;
c. No portion of any such foreign taxes shall be allowed as deduction in the same or any
succeeding year.
7) Exercise
Mr. Jose San Jose, resident citizen, married, derived income from sources within and without the Philippines.
The following were the data on his taxable income and foreign taxes for the year 2011:
Net income, Philippines P150,000
Net income, Country A (before P50,000 income tax) 200,000
Net income, Country B (after P30,000 income tax) 70,000
Net income, Country C (before P32,000 income tax) 150,000
Net income, Country D (150,000 )
Net income, Country E (no income tax paid) 50,000
The taxes paid by Mr. San Jose when he filed the quarterly declarations for the first three (3) quarters in 2010 were P10,000.
How much was the tax payable in the Philippines when the taxpayer filed his annual return, assuming he opted to claim
foreign income taxes as: 1) tax credit? 2) deduction?

d. Losses
1) Requisites for a) Actually sustained during the taxable year;
deductibility of losses b) Not compensated for by insurance or other forms of indemnity;
c) Incurred in trade, profession or business;
d) Property is connected with trade, business or profession;
e) Arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement;
f) Declaration of loss is submitted within 45 days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to the loss;
g) Not claimed as deduction for estate tax purposes in the estate tax return.
2) Net operating loss a) Meaning of net operating loss - Excess of allowable deduction over gross income of
the business in a taxable year.
b) Net operating loss carry over - Pertains to net operating loss of the business or
enterprise for any taxable year immediately preceding the current taxable year.
c) Requisites for deductibility of NOLCO
(1) The operating loss had not been previously offset as deduction from gross income;
(2) There has been no substantial change in the ownership of the business or enterprise
in that:
(a) not less than 75% in nominal value of outstanding issued shares, if the business
is in the name of a corporation, is held by or on behalf of the same persons;
(b) not less than 75% of the paid up capital of the corporation, if the business is in
the name of a corporation, is held by or on behalf of the same persons.
d) Carry over period - The net operating loss shall be carried over as a deduction from
gross income for the next 3 succeeding taxable years immediately following the year
of such loss.
e) Net operating loss for mines other than oil and gas wells
(1) For mines other than oil and gas wells, a net operating loss incurred in any of the
first 10 years of operation may be carried over as a deduction from the taxable
income for the next 5 years immediately following the year of such loss.
(2) The entire amount of the loss shall be carried over to the first 5 taxable years
following the loss, and any portion of such loss which exceeds the taxable income of
such first year shall be deducted in like manner from the taxable income of the next
remaining 4 years.
3) Capital loss Deductible from capital gain only
4) Loss on wash sales a. Losses from wash sales are not deductible
b. Gains from wash sales are taxable
5) Wagering losses Deductible to the extent of the gains from wagering transactions
6) Abandonment losses a. If contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining to
contract area shall be allowed as a deduction.
b. If producing well is subsequently abandoned, the unamortized costs, as well as the
undepreciated costs of equipment directly used, shall be allowed as deduction in the

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year such well, equipment or facility is abandoned.
7) Loss due to voluntary
removal of building Deductible
incident to renewal
8) Real estate bought upon Not deductible expense on account of cost of removal, the value of the real estate,
which is located a exclusive of the old improvements, being presumably equal to the purchase price of the
building land and building plus the cost of removal
9) Loss of useful life Actual loss is deductible
10) Shrinkage in the value of Not deductible. But if a stock of a corporation becomes worthless, the cost or other basis
stock may be deducted in the taxable year the stock became worthless.
11) Corporate readjustment a. Loss is not deductible
(merger and b. Gain may be recognized if the taxpayer received cash and property
consolidation)
12) Transfer of property a. Loss is not recognized
for stock that led to b. Gain may be recognized if the taxpayer received cash and property in addition to the
control of corporation shares received
13) Exercises
a) A domestic corporation has the following data on gross income and expenses:
Gross income Business expenses
1997 P500,000 P550,000
1998 P700,000 P900,000
1999 P900,000 P800,000
2000 P600,000 P550,000
2001 P700,000 P680,000
2002 P800,000 P600,000

How much is the taxable net income in 2002?

b) A taxpayer has a business property having an adjusted basis of P100,000. It is completely destroyed by fire in 2006.
The only claim for reimbursement consists of an insurance claim for P80,000 is settled in 2007.
Question 1 – In what year can the taxpayer deduct the casualty loss?
2 – How much is the deductible loss?

c) J. Ireneo acquired machinery for use in his business. After a strong typhoon, the machinery suffered partial damage.
The following data were made available in connection with the determination of the deductible loss:
Cost P500,000
Accumulated depreciation 300,000
Restoration cost 250,000
Estimated remaining useful life 5 years
Question 1 – How much was the deductible loss?
2 – How much would be the new basis for depreciation?
d) A taxpayer under calendar year has the following selected transactions:
Sept. 9, 2004 – Purchased 100 shares of Kaye Co. common for P5,000.
Dec. 21, 2006 – Purchased 50 shares of Kaye Co. common for P2,750.
Dec. 26, 2006 – Sold the 100 shares purchased on Sept. 9, 2004 for P4,000.
Jan. 2, 2007 - Purchased 25 shares of Kaye Co. common for P1,125.
Compute the following:
1) Shares sold at a loss without covering acquisition
2) Loss on wash sale and the capital loss
3) The adjusted cost of the shares bought on December 21, 2006 and January 2, 2007
e) Anton Corporation was merged with Conrad Corporation. A stockholder of Anton Corporation, which ceased to exist,
surrendered his Anton Corporation shares valued at P8,000 in exchange for Conrad Corporation shares valued at
P10,000. How much is the gain to be recognized?
f) A stockholder of a corporation that was merged with another corporation had the following data:
FMV of shares received P10,000
Cash received 3,000
FMV of property received 500
Cost of the shares surrendered 9,000

Compute the following: 1) The amount of gain recognized 2) Adjusted basis of the shares received.
g) (Phil. CPA) Mr. Juan de la Cruz transferred his commercial land with a cost of P500,000 but with a fair market value of
P750,000 to JDC Corporation in exchange of the stocks of the corporation with a par value of P1,000,000. As a result
of the transfer, he became the majority stockholder of the corporation.

How much is the gain (loss) to be recognized?

e. Bad Debts
1) Requisites for deductibility a) There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable;
b) Connected with taxpayer’s profession, trade or business;
c) Not sustained in a transaction entered into between related parties;

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2) Measure of bad debts
Page 5 of 10
d) Actually charged off the books of accounts of the taxpayer as of the end of the taxable
year;
e) Actually ascertained to be worthless and uncollectible as of the end of the taxable year.
a. If a corporation computes the income upon the basis of valuing its notes or accounts
receivable at their fair market value, the amount deductible for bad debts in any case is
limited to such original valuation.
b. A purchaser of accounts receivable which cannot be collected and are consequently
charged off the books as bad debts is entitled to deduct them, the amount of deduction
being based upon the price paid for them and not upon their face value.
c. Only the difference between the amount received in distribution of the assets of a
bankrupt company and the amount of the claim may be deducted as bad debt.
d. The difference between the amount received by a creditor of a decedent in the
distribution of the assets of the decedent’s estate and the amount of the claim may be
considered a worthless debt.

f. Depreciation
1) Requisites for a. Reasonable;
deductibility b. Property is used in the trade or business;
c. Property must have a limited useful life;
d. Allowance must be charged off during the year.
2) Methods of depreciation a. Straight line method;
b. Declining balance method;
c. Sum-of-the-years-digit method;
d. Other methods which may be prescribed by the Secretary of Finance upon recommendation
of the Commissioner.
3) Depreciation of a. Depreciation of properties directly related to production of petroleum initially placed in
properties used in service in a taxable year shall be allowed under straight-line method or declining balance
petroleum operations method on the basis of an estimated life of 10 years or such shorter life as may be
permitted by the Commissioner.
b. Properties not used directly in the production of petroleum shall depreciated under the
straight-line method on the basis of an estimated life of 5 years.
4) Depreciation of a. At the normal rate of depreciation if the expected life is 10 years or less;
properties used in mining b. Depreciated over any number of years between 5 years and the expected life if the latter is
operations other than more than 10 years.
petroleum operations

g. Depletion of Oil and Gas Wells and Mines

1) Method of depletion Cost-depletion method
2) Limitation of depletion It cannot exceed the capital invested in the mine.
3) Intangible exploration a. Deductible in the year incurred if such expenditures are incurred for non-producing wells
and development and/or mines;
drilling costs b. Deductible in full or may be capitalized and amortized if such expenditures incurred are for
producing wells and/or mines in the same contract area.
4) Total amount deductible a. Not to exceed 25% of the net income from mining operations computed without the benefit
for exploration and of any tax incentives under existing laws.
development
b. Actual exploration and development expenditures minus 25% of the net income from
expenditures (if the
mining shall be carried forward to the succeeding years until fully deducted.
taxpayer elects to
deduct exploration and
development
expenditures)
h. Charitable and Other Contributions

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1) Requisites for a. Actually paid or made within the taxable year;
deductibility b. Made to the Philippine Government or any political subdivisions or to any non-profit
organizations or institutions specified in the Tax Code;
c. Must be evidenced by adequate records or receipts.
2) Contributions deductible a. Those made for the use of the Government of the Philippines or any of its agencies or
with limit any political subdivision exclusively for public purpose;
b. Those made to accredited domestic corporation or associations organized and operated
exclusively for:
1) religious;
2) charitable;
3) scientific;
4) youth and sports development;
5) cultural or educational purposes; or
6) rehabilitation of veterans.
c. Those made to social welfare organizations;
d. Those made to non-government organizations.
3) Contributions deductible a. Donations to Government of the Philippines or to any of its agencies or political
in full subdivisions, including fully owned government corporations, exclusively to finance, to
provide for, or to be used in undertaking priority activities in education, health, youth
and sports development, human settlements, science and culture, and economic
development.
b. Donations to certain foreign institutions or international organizations;
c. Donations to accredited non-government organizations (nonprofit domestic corporations):
1) Organized and operated exclusively for scientific, research, educational, character
building and youth and sports development, health, social welfare, cultural and
charitable purposes, or a combination of these;
2) Which not later than the 15th day of the 3 rd month after the close of the taxable year in
which the contributions are received, makes utilization of the contributions directly for
the purpose or function for which the organization is organized and operated;
3) The administrative expense shall, on annual basis, not exceed 30% of the total
expenses;
4) The assets of which, in the event of dissolution, would be distributed to another
nonprofit domestic corporation organized for similar purpose or purposes, or to the state
for public purpose, or would be distributed by a court to another organization to be used
in such manner as in the judgment of said court shall best accomplish the general
purpose for which the dissolved organization was organized.
4) Limitation on the a. Individual – 10% of taxable income derived from trade, business or profession before
deductible amount charitable and other contributions.
b. Corporation – 5% of taxable income derived from trade, business of profession before
charitable and other contributions.
5) Valuation The amount of any charitable contribution of property other than money shall be based on the
acquisition cost of said property.
6) Contributions deductible a. In determining its net income, the general professional partnership can deduct
by a general contributions deductible in full;
professional partnership b. Contributions subject to limit shall be claimed and deducted by the partners in proportion
to their respective interest in the partnership.
7) Exercise
An individual taxpayer, married, and with two (2) qualified dependent children, has the following data for the year 2011:
Gross business income P500,000
Long term capital gain 20,000
Short term capital loss 5,000
Deductions (excluding charitable and other contributions) 124,200
Contributions to University of the Philippines 10,000
Contributions to a non-profit religious domestic corporation 25,000
Contribution of office equipment to a non-profit organization for the rehabilitation of veterans
(acquisition cost, P20,000; FMV, P15,000)
How much is the taxable net income?

i. Research and Development

1) Requisites for a. Paid or incurred by the taxpayer in connection with his trade, business or profession;
deductibility b. Not treated as ordinary and necessary expenses;
c. Chargeable to capital account but not chargeable to property of a character which is
subject to depreciation or depletion.
2) Amortization period of Ratably distributed over a period of not less than sixty (60) months as may be elected by the
deferred research and taxpayer (beginning with the month in which the taxpayer first realizes benefits from such
development expenditures).
3) Limitations on a. Any expenditure for the acquisition or improvement of land, or for the improvement of
deduction of research property to be used in connection with research and development of a character which is
and development subject to depreciation and depletion; and
b. Any expenditure paid or incurred for the purpose of ascertaining the existence, location,
extent, or quality of any deposit or ore or other mineral, including oil or gas.

j. Pension Trusts

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1) Requisites for a. Reasonable;
deductibility b. Established and maintained by employer;
c. For the payment of pensions to employees.
2) Amount deductible a. Contribution for current pension – In full (considered ordinary and necessary expense);
b. Contribution for past pension – Apportioned in equal parts over a period of 10 years.
3) Exercise: An employer maintains pension trust for its employees. The following contributions are made:
2009 2010 2011
Current service costs P 100,000 P 100,000 P100,000
Past service costs 80,000 60,000 -
Total contributions P 180,000 P160,000 P 100,000
How much is the deductible pension contributions for the year 2009, 2010 and 2011?

k. Optional Standard Deductions (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
1) Persons covered The following may be allowed to claim OSD in lieu of the itemized deductions (i.e. items of
ordinary and necessary expenses allowed under Section 34 (A) to (J) and (M), Section 37,
other special laws, if applicable):
a) Individuals b) Corporations
(1) Resident citizen (1) Domestic corporation
(2) Non-resident citizen (2) Resident foreign corporation
(3) Resident alien
(4) Taxable estates and trusts
2) Determination of the a) The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of
amount of OSD for gross sales (if on accrual basis) or gross receipts (if on cash basis) during the taxable year.
individuals b) The “cost of sales” in case of individual seller of goods, or the “cost of services” in the case
of individual seller of services, are not allowed to be deducted for purposes of determining
the basis of the OSD
c) For other individual taxpayers allowed by law to report their income and deductions under a
different method of accounting (e.g. percentage of completion basis, etc.) other than cash
and accrual method of accounting, the “gross sales” or “gross receipts” shall be determined
in accordance with said acceptable method.

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3) Determination of the a) In the case of corporate taxpayers, the OSD allowed shall be in an amount not exceeding
amount of OSD for forty percent (40%) of their gross income.
corporations b) “Gross income” shall mean the gross sales less sales returns, discounts and allowances
and cost of goods sold.
c) “Gross sales” shall include only sales contributory to income taxable under Section 27(A) of
the Tax Code.
d) “Cost of goods sold” shall include the purchase price or cost to produce the merchandise
and all expenses directly incurred in bringing them to their present location and use.
e) In the case of sellers of services, the term “gross income” means “gross receipts” less sales
returns, allowances, discounts and cost of services.
f) “Cost of services” means all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients such as:
(1) Salaries and employee benefits of personnel, consultants and specialists directly
rendering the services, and
(2) Cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies.
g) “Cost of services” shall not include interest expense except in the case of banks and other
financial institutions.
h) “Gross receipts” means amounts actually or constructively received during the taxable year.
i) For taxpayers engaged as sellers of services but employing the accrual basis of accounting
for their income, the term “gross receipts” shall mean amounts earned as gross revenue
during the taxable year.
j) The items of gross income under Section 32 (A) of the Tax Code, as amended, which are
required to be declared in the income tax return of the taxpayer for the taxable year are
part of the gross income against which the OSD may be deducted in arriving at taxable
income. Passive income which have been subjected to a final tax at source shall not form
part of the gross income for purposes of computing the forty percent (40%) optional
standard deduction.
4) Determination of the a) Since the taxable income is in the hands of the partner, as a rule apart from the expenses
OSD for general claimed by GPP in determining its net income, the individual partner can still claim
professional deductions incurred or paid by him that contributed to the earning of the income taxable to
partnerships (GPP) and him.
partners of GPP b) If the GPP availed of the itemized deductions in computing its net income, the partners may
still claim itemized deductions from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed by
the GPP.
c) If the GPP availed of itemized deductions, the partners are not allowed to claim the OSD
from their shares in the net income because OSD is a proxy for all the items of deduction
allowed in arriving taxable income. This means that the OSD is in lieu of the items of
deductions claimed by the GPP and the items of deductions claimed by the partners.
d) If the GPP avails of OSD in computing its net income, the partners comprising it can no
longer claim further deductions from their share in the said net income for the following
reasons:
1) The partners’ distributive share in the GPP is treated as his gross income not his gross
sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be
deducted not from his gross income but from his gross sales/receipts, and,
2) The OSD being in lieu of the itemized deductions allowed in computing taxable income, it
will answer for both the items of deductions allowed to the GPP and its partners.
e) Since one-layer of income tax is imposed on the income of the GPP and the individual
partners when the law placed the statutory incidence of the tax in the hands of the latter,
the type of deduction chosen by the GPP must be the same type of deduction that can be
availed of by the partners.
f) If the partner also derives other gross income from trade, business or practice of profession
apart from and distinct from his share in the net income of the GPP, the deduction that he
can claim from his other gross income would follow the same deductions availed of from
his partnership income.
g) If the GPP opts for the OSD, the individual partner may still claim 40% of its gross income
from trade, business or practice of profession but not to include his share from the net
income of the GPP.

5) Summary of important points in OSD

Corporation General Prof. Partnership Individuals

1) Basis Gross income Gross income Gross sales/Gross receipts
2) Rate 40% 40% 40%
3) Cost of sales/Cost of
services Deducted Deducted Not deducted
4) Choice of OSD
(irrevocable) To be signified in the return To be signified in the return To be signified in the return
5) Submission of
financial statements Required Required Not required
6) Keeping of records Required pertaining to gross Required pertaining to gross Required pertaining to gross
income income sales/receipts

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7) Hybrid method
(partly itemized
deductions partly
OSD) Not allowed Not allowed Not allowed
8) Computation of GS/GR xxx GS/GR xxx GS/GR xxx
taxable net income Less: Ret and allow xxx Less: Ret and allow xxx Less: Ret and allow xxx
using OSD Discounts xxx xxx Discounts xxx xxx Discounts xxx xxx
Net sales xxx Net sales xxx Net sales xxx
Less: COS xxx Less: COS xxx Other income xxx
Gross income xxx Gross income xxx Total xxx
Other income xxx Other income xxx Less: OSD xxx
Total xxx Total xxx BPE xxx
Less: OSD xxx Less: OSD xxx AE xxx xxx
Taxable net income xxx Taxable net income xxx Taxable net income xxx

6) Exercises
a. A retailer of goods, whose accounting method is under the accrual basis, has a gross sales of P1,000,000 with a cost of
sales amounting to P800,000 for year 2009. The taxpayer is qualified to choose OSD as deductions.
Question 1 – How much is the amount of OSD assuming the taxpayer is: 1) an individual; 2) a corporation.
2 – How much is the net taxable income assuming the taxpayer is: 1) an individual, single with no qualified
Dependents. 2) a corporation.

b. The following data pertain to ME and Company, CPAs, a general professional partnership, for the current year:
Gross receipts P5,000,000
Returns and allowances 100,000
Discounts 200,000
Cost of services 1,000,000
Total itemized deductions 500,000

Partner M (50% partner) who is married and has five (5) qualified dependents is also engaged in trading business. His
sales and other data for the current year are as follows:
Gross sales, trading business P4,000,000
Returns and allowances 250,000
Discounts 150,000
Cost of sales 1,500,000
Total itemized deductions 600,000

Compute the taxable net income of Partner M assuming the general professional partnership uses:
1) itemized deductions. 2) optional standard deduction.

l. Integrative cases
a. (Phil. CPA) From the following data, compute the income tax still due from a domestic corporation engaged in
merchandising business. For the calendar year 2009, the net income per books is P150,000, after considering among
others:
Non-taxable income (others) P 5,500
Inter-corporate dividends 5,000
Net capital loss 2,500
Bad debts written off 6,500
Non-deductible expenses (others) 12,000
Contribution to a non-profit religious organization 12,000
Contribution to Government’s priority program 1,500
Quarterly income tax payments 65,000
Provision for bad debts 8,000
The net income per books should be reconciled with the provisions of the Tax Code, meaning, items which are not taxable
must be excluded, and items which are not deductible are to be added back.
How much is the net tax due and payable?
b. (Phil. CPA) The following were taken from the Statement of Income and Expenses of ABC Corporation for the taxable year
2011:
Gross profits from sales P800,000
Less: Business expenses P440,000
Provision for bad debts 80,000 520,000
Net income before tax P280,000
Additional information:
1) Accounts written off during the year and charged to allowance for bad debts, P50,000;
2) Recoveries on accounts receivable previously written off in 2010 and credited to allowance for bad debts:
Allowed as deduction by BIR, P30,000;
Disallowed as deduction by BIR, P20,000.
How much was the taxable net income?

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-=END=
THOT: He who walks in another’s tracks leaves no footprints.

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