8.

Charitable and other contributions

TAX REVIEWER (Deductions) 9. Research and development
10. Pension Trusts
DEDUCTIONS
 Amounts allowed by law to REDUCE the EXPENSES (allowed as deductions)
ACTUAL GROSS INCOME to TAXABLE/NET  all the ordinary and necessary expenses
INCOME paid or incurred during the taxable year in
 Allowed to taxpayers by legislative grace carrying on or which are directly
and the taxpayer claiming them must prove attributable to the development,
compliance with the law management, operation, and/or conduct
o In other words, burden is on the of the trade, business, or exercise of
taxpayer to show compliance with profession
law granting tax
EXCLUSIONS Expenses include: (S-T-R-E)
 Pretty much the same, but as opposed to 1. Salaries, wages, and other forms of
deductions, NOT INCLUDED in ITR1 compensation
- Includes fringe benefits
Section 34 - Deductions from Gross Income 2. Travel expenses
(amended by TRAIN) - Both here and abroad as long as it’s in
pursuit of trade
Taxpayer Deductions from Gross
3. Rentals
Income
- Includes other expenses for continued
Earning compensation NO DEDUCTIONS
use/maintenance of property
income from personal
4. Entertainment, amusement, and recreation
services under an
expenses
employer-employee
- Should not be contrary to law, morals,
relationship
and public policy
Individuals with gross OSD2 or itemized
income from business or deductions
General Requirements for Deductible Claims: (SE-
practice of profession
DC)
Corporations OSD or itemized
1. Sufficient evidence (official receipts or
deductions
other records)
2. Direct connection of the expense to the
ITEMIZED DEDUCTIONS development, management, operation, or
 Expenses and losses related to trade, conduct of trade or profession
business, or practice of profession
 It does NOT apply to those who earn Additional Requirements: (CIR v. Isabela) --
income with an employer-employee MEMORIZE THIS! (ON-TY-CO-S)
relationship because most likely it’s the 1. Must be ordinary and necessary
boss/company that bears the expenses and 2. Must have been paid or incurred during
losses. taxable year
3. Must have been paid/incurred in carrying
LIST of ITEMIZED DEDUCTIONS on the trade/business
1. Expenses 4. Must be supported by receipts, records, or
2. Interest other pertinent papers
3. Taxes
4. Losses Additional Notes:
5. Bad Debts
 NEVER DEDUCTIBLE because ILLEGAL:
6. Depreciation
o Payments of bribes and kickbacks
7. Depletion
given to public/private person
o Paying for police protection
1
Income Tax Return (Calanoc)
2 Optional Standard Deduction

MFP - TAX I (Gruba/Ingles)


ACCRUAL METHOD
- Accrual of income and expense is permitted
when the all-events test has been met.
- ALL-EVENTS TEST: Know this!
1. Fixing of a right to income or liability to
pay
2. Availability of the reasonable accurate
determination of such income or
liability
- “Reasonable accuracy”
o Implies something less than an exact or
completely accurate amount
o Accrual is judged by the facts that a
taxpayer knew, or could reasonably be
expected to have known, at the closing
of its books for the taxable year
- A taxpayer authorized to deduct certain stuff for
the current year, BUT FAILED to do so, cannot
deduct the same for the next year.
- Ordinary
o Normal in relation to the biz
o Need not be recurring
- Necessary
o When it is appropriate and helpful in
the development of the biz
o Intended to minimize losses and/or
maximize profits
ADVERTISING EXPENSES
Two kinds:
1. Stimulates current sale of merchandise or use of
services
2. Stimulates the future sale of merchandise or
use of services
 Creates or maintains some form of
goodwill for the taxpayer’s trade
ADVERTISING EXPENSES
1st type: for Current Sale 2nd type: for Future Sale
o Deductible for - Normally, for it to
sure be deductible, it
o Just ask if it’s should be spread
reasonable or out over a they are actually consumed and used in
not reasonable time
What are NOT deductible as advertising expenses?
(based on Atlas Consolidated v. CIR)
- Expenses for promoting sale of capital stock for
acquisition of additional capital
- Efforts to establish reputation
MFP - TAX I (Gruba/Ingles)
Additional Notes:
- The abovesaid examples are not deductible
from taxable income because they are akin to
acquisition of capital assets, so they are
CAPITAL EXPENDITURES (not mere advertising
expenses to promote current or future sales)
- Litigation Expenses incurred in defense of title
to property also NOT deductible for being
capital in nature
BONUSES
Bonuses to employees made in good faith and as
additional compensation for the services actually
rendered are DEDUCTIBLE.
 As long as the payments do NOT
exceed reasonable compensation for
the services rendered (in addition to
agreed-upon salary)
 Taxpayer has the burden of showing
that actual personal services have been
rendered and the amount was
reasonable.
 BONUSES NOT DEDUCTIBLE IF:
o Given to corporate officers out
of sale of corporate land when
officers didn’t really do
anything to effectuate the sale
Requisites for Deductible Bonuses MEMORIZE!
1. Payment of the bonus is in fact
compensation
2. Must be for personal services actually
rendered
3. When added to salaries, are reasonable
when measured by the amount and quality
of the services performed in relation to the
biz of the taxpayer
COST of MATERIALS
- If materials and supplies are on hand, taxpayer
should only include as expense the cost of
materials and supplies only to the amount that
operation during the year for which the return
is made.
 Cost of such materials should NOT have
been deducted in determining the net
income for any previous year.
- Incidental materials on hand and not recorded
to have been consumed, or where no physical
inventories at the beginning and end of the year
 were taken  permissible for taxpayer to
include in his expenses and deduct from gross
income the total cost of the supplies as were
purchased during the year for which return is
made
 As long as the net income is clearly
reflected
REPAIRS
- Allowable deduction as expense: cost of
incidental repairs which:
 DON’T materially add to the value of
the property or prolong its life
 But merely keep it in an ordinary
efficient operating condition
 As long as the plant/property account
is not increased by amount of the
expenditure
- If repairs are really in the nature of
replacement, it should be charged against
the depreciation reserves.
LEASE AGREEMENT EXPENSES
- The following are allowed as deductions:
Kind of Lease What to deduct
Leasehold is for business Aliquot part of sum
purposes for a specified each year, based on the
sum number of years the
lease will run
Taxes paid by a tenant Amount of tax
to landlord for business deductible by the
property landlord
(counts as additional
rent; taxable income to Please cross-check
the landlord) because it seems like
the correct answer is
it’s deductible from the
tenant, but TMLT says
otherwise.
- Leasehold improvements are not considered
business expenses, but CAPITAL INVESTMENTS.
 An annual deduction may be made
from gross income of an amount equal
to the cost of such improvements
divided by the number of years
remaining of the lease term.
 The deduction shall be in lieu of a
deduction for depreciation.
MFP - TAX I (Gruba/Ingles)
 If the remainder of the term of lease is
greater than the probable life of the
building erected, or of the
improvements made = deduction will
take form of allowance.
PROFESSIONAL EXPENSES
- Allowable deductions include:
 Cost of supplies
 Expenses paid in the operation and
repair of transpo equipment used in
making professional class
 Due to professional societies and
subscriptions to professional journals
 Rent paid for offices
 Expenses for utilities on offices
 Expenses for hiring office assistants
 Books, furniture, and professional
instruments with short useful life
- Those with a permanent character NOT
allowable.
SPECIAL DEDUCTIBLES FOR PRIVATE EDUCATIONAL
INSTITUTIONS
1. Allowed to deduct expenditures considered as
capital outlays of depreciable assets incurred
for the expansion of school facilities
2. Allowed to capitalize the expenditure, and
claim deduction by way of depreciation
REPRESENTATION, AMUSEMENT, RECREATION
EXPENSES, and ENTERTAINMENT FACILITIES
- Representation expenses incurred n connection
with the conduct of one’s trade, biz, or
profession for:
 Entertaining, providing amusement and
recreation to, or meeting with guests
 At a dining place, place of amusement
country club, theater, concert, play,
sporting event, and similar places
- Registered member of a country/golf/sports
club taxpayer  presumption that expenses are
fringe benefits subject to FBT
 Unless proven as representation
expenses
- Entertainment facilities include: yachts,
vacation homes or condos, or similar real
properties used by taxpayer primarily for
entertainment/recreation.
 Forms part of the taxpayer’s trade, biz,
or profession for which he claims
depreciation or rental expense
  Yacht restricted to certain employees
or officers would amount to a fringe
benefit, subject to FBT.
- Not considered entertainment expenses:
 Treated as compensation or fringe benefits
 Expenses for charitable events
 Expenses for bona fide meetings of
stockholders, partners, or directors
 Expenses for attending or sponsoring an
employee to a business league meeting
 Expenses for events organized for
promotion, marketing, and advertising
(including concerts, conferences, seminars,
etc.)
 Other expenses of similar nature
*May still qualify as deductions under other
provisions of Sec. 34
Requisites of Deductibility for Entertainment,
Amusement, and Recreational Expenses: (TY-TBP-L-
B-AP-WP) MEMORIZE!
1. Paid or incurred during the taxable year
2. Must be directly connected to or related to
the furtherance of the development,
management, and operation of the trade,
business, or profession of the taxpayer
3. Not contrary to law, public morals, etc.
4. Not been a bribe or kickback paid to gov
official or private individual, corp, or GPP
5. Substantiated by adequate proof like
receipts or invoices
6. Taxes must be withheld (if applicable) and
paid to the BIR (if subject to final tax)
Ceiling for Representation, Entertainment, and
Amusement Expenses:
 Engaged in sale of goods or properties =
0.5% of net sales
 Engaged in sale of services, including
exercise of profession, and use/lease of
properties = 1% of net revenue
OTHER BIZ EXPENSES ALLOWED BY SPECIAL LAWS
AS DEDUCTIONS
1. Discounts granted to PWDs and senior citizens
2. Expenses incurred by a private health and non-
health facility/institution  up to 2X the
amount incurred
3. Expenses incurred in training schemes 
additional 50% of amount actually incurred
4. Expenses incurred for adopting a school 
additional 50% also
MFP - TAX I (Gruba/Ingles)
5. Lawyer or professional partnership rendering
free legal services  deduction fom the gross
income the amount that could have been
collected or up to 10% of the gross income
derived from the actual performance of the
profession (whichever is LOWER)
INTEREST
 Interests paid on debts are allowable as
deductions BUT:
o Must be incurred in connection
with the taxpayer’s profession,
trade, or biz
o Allowable deduction decreased by
33% of the interest income subject
to final tax
Requisites for Deductibility of Interest Expense: (I-
IE-TY-TP-TBP-W-LD-PA-PO-CE) MEMORIZE!
1. There must be an indebtedness
2. There should be an interest expense paid or
due and demandable upon the
indebtedness
3. Indebtedness must be that of the taxpayer
4. Incurred during the taxable year
5. Connected with the taxpayer’s trade, biz, or
profession
6. Interest stipulated in writing
7. Legally due
8. Payment arrangement must NOT be
between related taxpayers
9. The interest must not be incurred to finance
petroleum operations
10. If incurred to acquire property used in
trade, biz, or profession, it was not treated
as capital expenditure.
- Taxpayer has the option to treat the
interest expenses as either:
1. Deductible in full
2. As a capital expenditure and
claim as deduction only the
periodic
amortization/depreciation
 No more tax arbitrage advantage because
corporations used to abuse this
 Interest paid or accrued on taxes related to
business or practice of profession can be
deducted in full.
 As long as there is interest expense
incurred and interest income earned
(subjected to final withholding tax), the
limitation shall apply regardless of:
 o Whether or not a tax arbitrage
scheme was entered into by the
taxpayer; or
o The date when the investment was
made
 Limitation will only apply if there is interest
income subject to final tax  if NOT, then
you can deduct in full
 Interest is not deductible if:
o Both the taxpayer and the person
to whom interest was paid are
related taxpayers.
 Family members
 Individual + corporation
- More than 50%
of OS is owned
by the individual
 2 corporations
- More than 50%
of the OS of each
is owned by the
other or by the
same individual
 Grantor + fiduciary of any
trust
 Fiduciary of a trust +
fiduciary of another trust
- If the fiduciary is
a grantor with
respect to each
trust
 Fiduciary of a trust +
beneficiary
o Indebtedness is incurred to finance
petroleum operations
o If an individual is on the cash basis
of accounting and interest is paid
in advance thru discount or
otherwise
 Interest expense shall be
allowed as deduction, not
in the year that the
interest was paid in
advance, but the year
that the indebtedness
was paid.
 But if payable in periodic
amortization, amount of
interest which
corresponds to the
amount of the principal
amortized or paid during
MFP - TAX I (Gruba/Ingles)
the year, shall be allowed
as deduction in such
taxable year.
CASE: CIR v. Vda. de Prieto
Late payment of tax = DEBT
Interest on taxes is interest on indebtedness so it’s
deductible!
TAXES
 Paid or accrued within the taxable year in
connection with the taxpayer’s trade, biz, or
profession are deductible from gross
income.
 EXCEPTIONS to deductibility:
o PH income tax
o Estate tax
o Donor’s tax
o Special assessments
o Income tax imposed by a foreign
country for income sourced
outside the PH
 Will be allowed if taxpayer
doesn’t signify his desire
to enjoy any benefits of
the tax credit for taxes
paid to foreign countries
o Stock transaction tax
o VAT
o Income, war profits, and excess
profits taxes imposed by authority
of the foreign country
 Will be allowed also under
circumstances in #5
 For tax credits, only resident citizens and
domestic corps are affected.
o Members of GPP and beneficiaries
of estates/trusts can avail.
o NOT allowed for aliens and foreign
corps
 Options for taxpayers qualified for credit:
o Deduct foreign income tax from
gross income
o Claim tax credit
Determining amount of tax to be credited
EXAMPLE:
*Remember! All are taxable since tax credit only
applies to resident citizens and domestic corps -- so
taxable worldwide talaga.
Income foreign country = 100k
Income in PH = 300k
Taxable income worldwide = 400k
Income tax paid to foreign country = 40k
30% Corporate Income Tax = 120k
Less: Tax credit for foreign tax
Formula:
(Income in foreign country/worldwide taxable
income)
x
(30% corporate income tax)
= 30k
(Compare it to 40k income tax paid to foreign
country and choose whichever is lower)
Since 30k is lower than the 40k paid abroad, the
former is the allowed tax credit. Because taxpayer
was supposed to pay 120k originally, the corp now
only has to pay 90k.
 Recommended to go for tax credit because
your take-home would be more.
o If you choose to deduct, what
would happen is you just deduct
the tax that was actually paid to
the foreign country , then you
apply the 30% corporate income
tax, so you end up paying more.
 Fines and penalties for late payment of
taxes not deductible.
o Note that the interest is still
deductible
o It’s just the surcharges and
penalties that are NOT.
LOSSES
Requisites for Deductibility of Losses (TY-NC-BP-
FSS) MEMORIZE!
1. Actually sustained during the taxable year
2. not compensated by insurance, or another
form of indemity
3. Incurred in trade, business, or profession;
OR
4. Of property connected with trade, business,
or profession, the loss comes from fire,
storm, shipwreck, or other casualty, or from
robbery, theft, or embezzlement
 Declaration of loss needed within 45 DAYS
from time of loss.
 Taxpayer bears burden of proof.
CASE: H. Tambunting Pawnshop v. CIR
MFP - TAX I (Gruba/Ingles)
Taxpayer has to submit a Sworn Declaration of Loss
to forewarn the BIR the extent of the loss, and so
they can conduct their own investigation.
Otherwise, the deduction will not be allowed.
- TMLT seems to imply that if the loss was so
obvious or highly-publicized, no need for
SDL (Super Bowl example)
 For non-resident individuals and foreign
corporations, the losses should be those
actually sustained:
o Within the PH
o During taxable year
 Claim of deductibilty for loss can no longer
be made if already deducted for estate tax
purposes
 Casualty
o complete/partial destruction of
property from an identifiable event
of a sudden, unexpected or
unusual nature
o NOT progressive deterioration
through a steadily operating cause
 Embezzlement
o Fraudulent appropriation of
another’s property by a person to
whom it has been entrusted or
into whose hands it has lawfully
come
 Theft
o Criminal appropriation of another’s
property
SPECIAL RULES ON LOSSES
1. Voluntary removal of buildings, machinery,
equipment, etc.
o Basically, demolition for practical
reasons/life safety
o NO deduction for demolition with
intention to construct a new
building
2. Loss of useful value of assets
o Change in business conditions
suddenly terminates the
usefulness of some or all of the
capital assets  may claim as
deduction the actual loss sustained
o Amount of loss needs to take into
account improvements,
depreciation, and the salvage value
of the property
 o GR: There needs to be a sale or  Not less than 75% of the paid-up
other disposition of property to capital of the corporation is held
establish a loss by the same persons
o Exception: Proof of some - For MINES, other than oil and gas wells,
unforeseen causing the property to NOL without the benefit of incentives from
be prematurely discarded the Omnibus Investments Code, may be
- Examples: increase in carried over as deduction for the next 5
cost, change in years immediately following the year of
manufacture, new loss.
legislation makes it
impossible to be CASE: Paper Industries Corp. v. CA
profitable There’s a limit to the transfer of NOLCO because to
allow indiscriminate transfer would result in
corporations simply buying and benefiting from the
NET OPERATING LOSS CARRY OVER (NOLCO) operating losses of another corporation.
- What is NET OPERATING LOSS? - So even if Company A merged with
o Excess of allowable deduction over Company B, the former cannot benefit from
gross income of the business in a the losses sustained by the latter prior to
taxable year the merger.

- What is NOLCO? - General Rule: Transfer/assignment of

 Net operating loss of the
business/enterprise for:
- any taxable year
immediately preceding
the current taxable year
- not been previously
offset as deduction from
the gross income
 It shall be carried over as
deduction from gross income for
the next 3 consecutive taxable
years immediately following the
year of loss.
 In other words, mas marami yung
allowable deduction mo
compared to what you earned
(gross income), so if you earned
PHP300, but your allowable
deduction actually reaches
PHP900, PHP600 will be deducted
from the next 3 YEARS
immediately after.
- Only allowed if there has been no
substantial change in ownership of the
business, meaning:
 Not less than 75% of outstanding
shares is in the name of the
corporation held by the same
persons
NOLCO arising from
merger/consolidation/combination with
another person does NOT give the
transferee/assignee a claim to the same
deduction.
- Exception: When as a result, the
shareholders of the transferor/assignor
gains control of:
 75% or more of the outstanding
issued shares/paid-up capital of
the transferee/assignee; OR
 75% or more interest in the
business of the
transferee/assignee
- An individual who claims the 40% OSD
cannot claim deduction of NOLCO
simultaneously.
- Even if the NOLCO was not claimed, 3 year
period keeps running.
- “First-in, first-out” availment
NOT qualified for NOLCO:
1. OBUs3 for a foreign banking corporation
and FCDUs4 of domestic banking
corporations
2. Enterprise registered with the BOI with
Income Tax Holiday Incentive

3
Offshore Banking Units
4 Foreign Currency Deposit Units

MFP - TAX I (Gruba/Ingles)

 3. PEZA-registered enterprise
4. SBMA-registered enterprise
5. Foreign corporations engaged in
international shipping/air carriage business
in the PH
6. Any natural or juridical person with
exemption from income tax
CAPITAL LOSSES
- Losses from sales ir exchanges of capital
assets  allowed as provided in Sec. 39
- For securities becoming worthless during
taxable year and are capital assets, loss will
be considered as a loss from sale/exchange
on the last day of the taxable year.
 Not applicable for banks or trust
companies
deducted shall form part of gross
income the year it resumes.
FOREX LOSSES
- When foreign currency is acquired in the
regular course of biz, and ordinary gain or
loss results from the fluctuations  loss is
deductible only in the year it is sustained
- If loans have not actually been paid, losses
therefrom have not been realized  NOT
deductible yet
- Losses sustained from the devaluation of
peso, but remittance of scheduled
amortization consisting of principal and
interests payments on foreign loan has not
actually been made  NOT deductible yet
because the increase has not been realized

LOSSES FROM WASH SALES of STOCKS/SECURITIES BAD DEBTS

- NOT allowed to be claimed in sales of  Amounts borrowed from taxpayer which
stock/securities if: have become worthless or uncollectible.
 Within a period of 30 days before o Money extended as loan
the sale, and 30 days after the o Uncollectible payments of goods
sale (61 days total; important)  sold or services rendered
taxpayer acquires or enters into
an option to purchase Requisites for Deductibility of Bad Debts (EI-TBP-
substantially the same TY-WU-F-RP) MEMORIZE!
stocks/securities 1. Existing indebtedness due to the taxpayer
- ALLOWED if the taxpayer is a stockbroker which is valid and legally demandable
and the sale/purchase was made in the - Not losses from investment
regular course of business 2. Connected with trade, biz, or profession of
- Basically, hindi pwede na a person sells the taxpayer
shares of Jollibee at a loss, then he buys 3. Actually ascertained to be worthless and
substantially the same amount of shares 20 uncollectible
days after the sale. 4. Charged off within the taxable year
5. Uncollectible even in the future
WAGERING LOSSES 6. Not sustained between related parties
- Allowed only to the extent of gains from
such transactions *If recovered, it shall be included as part of the
gross income during the year of recovery
ABANDONMENT LOSSES
- When a petroleum operation is CASE: Hermanos v. CIR
partially/wholly abandoned  all Losses or bad debts must be ascertained to be so,
accumulated exploration and development and must be written off during taxable year.
expenses can be deducted
- Notices of abandonment should be fled NO PARTIAL DEDUCTIONS  Deductible in full or
with the Commissioner. not deductible at all
- For producing wells subsequently
abandoned  unamortized costs and Financial assistance lent to a corporation, if without
undepreciated costs allowed as deduction any expectation of repayment, cannot be
 But in the event it resumes considered a bad debt. It becomes an investment,
production, costs previously not a loan.

MFP - TAX I (Gruba/Ingles)

CASE: CBC v. CA for taxable years prior to the
Equity investments in a subsidiary is not a bad debt. taxable year in which notice in
Neither is it an ordinary asset. Rather, they partake writing is served by the party
of capital assets. So, the rules on capital loss apply. initiating the change.
 If taxpayer has alread adopted a
CASE: Philex Mining v. CIR depreciation rate without written objection
Investments in a partnership are not debts inasmuch on the CIR’s part, then it’s binding on both
as there was no unconditional obligation to return parties.
the same.

In proving worthlessness of debts, one must show
diligent efforts to collect through the ff. steps: (in
order) MEMORIZE!
1. Send statement of accounts
2. Send collection letters
3. Give account to lawyer for collection
4. File collection case
For banks  BSP shall:
1. ascertain the worthlessness and uncollectibility
2. approve writing-off of the said debt from the
bank’s books of accounts at the end of the
taxable year
For insurance/surety companies  a receivable
may be written off and claimed as bad debt only if
such company has been solved due to insolvency or
other similar reason by the Insurance Commission
Worthless debts from unpaid wages, salaries, rents,
and similar items of taxable income  only
deducted if included in the ITR as income for the
year the bad debt was sought, or the previous year
Methods for Reasonable Allowance Computation
1. Straight-line method
2. Declining-balance method
3. Sum-of-the-years-digit method;
4. Any other method prescribed
 Only one vehicle is allowed for the use of
an official or employee.
o Value not more than 2.4M
o Taxpayer should substantiate the
purchase with sufficient evidence.
 No depreciation allowed for yachts,
helicopters, airplanes, and other vehicles
exceeding the threshold amount.
o EXCEPTION: Taxpayer’s line of biz
is transport operations/leasing and
vehicles purchased are used in said
biz
 Amortization of intangibles is the periodic
process of allocating cost of an intangible,
and it is deductible.
o Examples: goodwill, right of lease,
patent, trademark

DEPRECIATION CASES OF DEPRECIATION

 Gradual diminuition in the useful value of Properties used directly 10 YEARS
tangible property resulting from wear and in petroleum production (straight-line or declining
tear and normal obsolescence method, at the option of
 Applies to both tangible and intangible the service contractor)
property Properties used 5 YEARS
 REASONABLE ALLOWANCE is deductible, in indirectly in petroleum (straight-line)
line with the rules and regulations production
prescribed by the SoF, upon recom of Properties used in If expected life is 10
Commissioner. mining operations YEARS/LESS = normal
 If taxpayer and CIR come to an agreement rate of depreciation
on the useful life on which depreciation
would be based  agreement in writing is If more than 10 YEARS =
BINDING notify the CIR
o Party initiating modification has For non-resident aliens Reasonable rate allowed
responsibility of establishing facts engaged in trade or only on properties
and circumstances resident foreign located in the PH
o If there are any changes to the corporations
agreement, it shall not be effective

MFP - TAX I (Gruba/Ingles)


CASE: Basilan Estates v.CIR
A company has the right to claim depreciation, but
NOT beyond its acquisition cost.
DEPLETION
 Oil and gas wells or mines are allowed a
reasonable allowance for depletion and
amortization computed using the COST-
DEPLETION METHOD.
 Allowance for depletion = capital invested
 no further allowance shall be granted
 After production in commercial quantities
has started, certain intangible exploration
and drilling costs:
o will be deducted in the year
incurred if such were incurred for
non-producing wells or mines; or
o these may be capitalized or
amortized if such were incurred for
producing wells/mines in the same
contract area
 Non-resident aliens/resident foreign corps
 allowance for depletion is limited to oil
wells and mines in the PH
 Intangible costs in petroleum operations
o any cost incurred in petroleum
operations which in itself has no
salvage value, and which is
incidental to and necessary for the
drilling and preparation of wells for
production
o said costs DO NOT include
acquisition or improvement of
property of a character subject to
the allowance for depreciation
 Buzz word: COST OF A WASTING ASSET
FORMULA FOR RATE OF DEPLETION (not sure if this
is really important)
Cost of mine property
Estimated ore deposit
Extra notes from codal:
 For deduction of exploration and
development expenditures:
o Shall not exceed 25% of net
income from mining operations
computed without the benefit of
any tax incentives
o Actual expenditures minus 25% of
the net income from mining shall
MFP - TAX I (Gruba/Ingles)
be carried forward to succeeding
years until fully deducted.
 Taxpayer’s election to deduct the E&D
expenditures is irrevocable and binding in
succeeding tax years.
CHARITABLE AND OTHER CONTRIBUTIONS
 Donations are partially deductible if made
to the following: MEMORIZE!
1. Government, exclusively for public
purposes
2. Accredited domestic
corporations/associations,
organized and operated exclusively
for religious, charitable, scientific,
youth and sports development,
cultural, or educational purposes,
or for rehabilitation of veterans, no
part of the net income of which
inures to the benefit of any private
stockholder or individual
3. Social welfare institutions
4. Non-accredited NGOs
 The amount deducted should NOT exceed:
o 10%  for individuals
o 5%  for corporations
of the taxpayer’s taxable income
derived from trade, biz, or profession
BEFORE deduction for contributions
and donations
 Two things you look at, then see which is
lower between them:
1. Charitable contributions
2. 10% / 5% (as the case may be) of
your taxable income
CASE: Roxas v. CTA
Contributions to Christmas funds of City Police NOT
deductible because they were considered to be
Christmas gifts to the families of the police.  not
for public purpose exclusively
 Donations are FULLY DEDUCTIBLE if made
to the ff: MEMORIZE!
1. Government, exclusively to finance
government priority activities in
(ie education, youth, health, sports
development, human settlements,
science and culture, and in
economic development according
to NEDA)
 2. Certain foreign institutions or foster child deduction to the
international organizations agencies extent of
3. Accredited NGOs amount given
4. Via special laws
RESEARCH AND DEVELOPMENT
 NGOs  Can be treated as ordinary and necessary
o Non-profit domestic corporations expenses as long as: MEMORIZE!
organized and operated exclusively o Incurred during taxable year
for scientific research, education, o In connection with trade or biz
etc., where NO PART of the net  Taxpayer can either fully deduct or
income inures to the benefit of amortize the deductions.
any private individual  NOT applicable to expenses:
o Admin expenses cannot exceed o For acquisition/improvement of
30% of the total expenses land or property to be used in
o Must utilize contributions NOT connection with R&D
LATER THAN the 15th day of the 3rd o Incurred for the purpose of
month after the close of the ascertaining the existence,
taxable year when donations were location, extent of quality of any
received deposit of minerals and oil
o Philippine Council for NGO
Certification  accredits PENSION TRUSTS
 2 KINDS OF DEDUCTIONS FOR EMPLOYER:
 For exemption from DONOR’S TAX and full 1. Contributions to such trust to
deduction of donation to qualified donee: cover under pension liability during
o Donor engaged in business must the year
give a NOTICE of DONATION on 2. Reasonable amount paid to the
every donation worth at least trust in excess of such
PHP50k to the RDO5 with contributions
jurisdiction over his place of biz  The employer who established the pension
within 30 days after receipt of trust for his employee’s benefit can
duly issued Certificate of deduct, subject to the following conditions:
Donation, attached to the said 1. Amount paid to trustee is
notice. reasonable
o Notice should state that not more 2. Must not have been previously
than 30% of the said donation/gifts allowed for deduction (no double
for the taxable year shall be used deduction)
by the accredited NGO/institution 3. Must be apportioned equally over
for administration purposes a period of 10 consecutive years,
starting with the year the
SPECIAL LAWS payment is made
Gifts and Exempt from Allowable as  When employer contributes to employee’s
donations to donor’s tax deduction up to PERA6, employer can claim the amount as a
UP 150% of the deduction  but only to the extent of the
value of the employee’s contribution that would
donation complete the maximum allowable PERA
Contributions Exempt from Allowable as contribution of an employee
to the National donor’s tax deduction up to
Book Trust 150% of the ADDITIONAL REQUIREMENTS FOR DEDUCTIBILITY
Fund value of the  Taxpayers claiming deductions for expenses
donation (subject to withholding tax), must prove
Donations to Allowed as

5 Revenue District Officer 6 Personal Equity and Retirement Account

MFP - TAX I (Gruba/Ingles)

 that said deductions were really subjected
to proper withholding.
o If no withholding was made,
deduction will not be allowed.
 No deduction allowed even if withholding
tax payments were made at the time of
audit investigation or
reinvestigation/reconsideration in cases
where no withholding of tax was made in
accordance.
o So what should you do? Withhold
and pay before the audit
investigation in order to claim
deduction
OPTIONAL STANDARD DEDUCTION
 Individuals can elect a standard deduction,
not exceeding 40% of gross sales/gross
receipts during the taxable year
o Same rule applies to corporations
as regards their gross income
during the taxable year
o EXCEPTION: Non-resident aliens
and non-resident corporations
 Those who can claim include partnerships
and taxable estate and trust
NOTE: Under TRAIN, GPPs and the partners
comprising the partnership may only use OSD
once, either as GPP itself or the partners
comprising the partnership.
- If GPP avails of OSD, partners cannot
anymore.
 For individuals, the following rules apply:
o If one uses the accrual basis of
accounting for income  OSD shall
be based on gross sales during
taxable year
o If cash basis is used  OSD shall be
based on his gross receipts during
the taxable year
o Cost of sales/services not allowed
to be deducted for purposes of
determining the basis of OSD
 No need to substantiate with receipts
 For corporate taxpayers, the following
rules apply:
o Gross income means gross sales
minus sales returns, discounts, and
allowances and cost of goods sold
 Cost of goods sold
includes the purchase
MFP - TAX I (Gruba/Ingles)
price/cost to produce the
merch and all expenses
directly incurred in
bringing them to their
present location and use
o In case of sellers of services, gross
receipts minus sales returns,
discounts, and allowances and cost
of services
 Cost of services include all
direct costs and expenses
necessarily incurred to
provide the services
required by customers
and clients
The following are NOT ALLOWED to use OSD and
have to use itemized deductions:
1. For corporations, partnerships, and other
non-individuals:
a. Those exempt under Tax Code and
other special laws, with no other
taxable income
b. Those with income subject to
special preferential rates
c. Those with income subject to
income tax under 27(A) and
28(A)(1) and with
special/preferential tax rates
2. For individuals:
a. Those exempt under Tax Code and
other special laws, with no other
taxable income
b. Those with income subject to
special preferential rates
c. Those with income subject to
income tax under 24 and
special/preferential tax rates
IMPOSITION OF CEILINGS BY THE SOF
 SoF can impose ceilings on deductions after
a public hearing
 Ceiling won’t apply to OSD
NON-DEDUCTIBLE EXPENSES
 General non-deductible stuff: MEMORIZE!
1. Personal, living, or family expenses
2. Any amount paid for new buildings
or for permanent improvements
increasing the value of
property/estate
3. Any amount spent in restoring the
property or in making good the
 exhaustion for which an allowance
has been made
4. Premiums paid on any life
insurance policy covering the life of
any officer, or employee if the
taxpayer is directly/indirectly a
beneficiary under the policy

 For related taxpayers, the following are

NOT deductible: MEMORIZE!
1. Losses from sales or exchanges of
property
2. Interest expense
3. Bad debts

 For personal expenses:

1. Insurance paid on dwelling owned
and occupied by taxpayer
2. Premiums paid for life insurance
3. When a professional rents a
property for residential purposes
but receives clients in connection
with his work
 Only part used as office is
deductible because it’s
considered a business
expense
4. Allowance given to children
5. Alimony or allowance paid via
separation agreement

 For capital expenses:

1. New buildings, permanent
improvements, or any amount
spent in restoring property
2. Cost of defending or perfecting
title to property
3. Architect’s services
4. Expense for administration of
estate, court costs, attorney’s fees,
and executor’s commissions
5. Amount assessed and paid under
agreement between bondholders
and shareholders of a corporation,
to be used in corporation’s
reorganization

MFP - TAX I (Gruba/Ingles)