Deductions

• The income tax system allows deductions for various items, especially expenses incurred necessary to produce the income.
• Deductions provide taxpayers with a more equitable tax base and true measure of income.
• Section 30 of the Tax Code allows ordinary and necessary business expenses paid or incurred during the taxable year as deductions from the gross income in order to arrive at the taxable income.
• Taxable income is defined as the pertinent items of gross income specified less the deductions and/or personal and additional exemptions.
• Generally, all taxpayers can avail of deductions from the gross income, except for taxpayers earning purely compensation income arising from an employer-employee relationship.
• Individuals earning purely compensation income have no deductions.
• Individuals who have gross income from business, trade or practice of profession or mixed income may have Itemized Deductions or Optional Standard Deductions.
• Corporations and Taxable Partnerships may choose to have Itemized Deductions or Optional Standard Deductions.
• There are special deductions for Insurance Companies, Mutual Insurance Companies, Mutual Marine Insurance Companies, and Assessment Insurance Companies.
• Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed.
• The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows.
• Exclusions from gross income refer to a flow of wealth to the taxpayer that are not treated as part of gross income due to reasons such as (1) it is exempted from law or (2) it does not come within the definition of income.
• Deductions are amounts allowed by the law to be deducted from gross income in order to arrive at net income.
• Exclusions pertain to the computation of gross income while deductions pertain to the computation of net income.
• Exclusions are something received or earned by the taxpayer that do not form part of gross income while deductions are something spent or paid in earning gross income.
• Expenditures are classified as capital expenditure and revenue expenditure.
• Capital Expenditure

  • material in amounts
  • increase useful life, capacity and efficiency
  • non-recurring
  • benefit future periods (both current and long-term)
  • allocated throughout the periods benefited
• Revenue Expenditure

  • small amounts, individually
  • helps current operations
  • ordinarily recurring
  • benefits current period only (short-term)
  • charged to operations
• Tax credit generally refers to an amount that is subtracted directly from one's total tax liability.
• Tax credit is an allowance against the tax itself or a deduction from what is owed by a taxpayer to the government.
• A tax credit reduces the tax due.
• A deduction reduces the income that is subject to tax in order to arrive at taxable income.
• A tax credit is used only after the tax has been computed while a deduction is applied before the computation of the applicable tax.
• All ordinary and necessary trade and business expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade and business are deductible.
• Itemized Deductions

  • Expenses (Ordinary & Necessary Expenses)
  • Expenses Allowable to Private Educational Institutions
  • Interest
  • Taxes
  • Losses
  • Bad Debts
  • Depreciation
  • Depletion of Oil and Gas Wells and Mines
  • Charitable and Other Contributions
  • Research and Development
  • Pension Trusts
  • Additional Rereuiment for Deductions for Certain Payments
• Burden of proof lies upon the taxpayers.
• No expenses shall be allowed unless the taxpayer shall substantiate with sufficient evidence.
• Deductions claimed should not be contrary to public policy, morals or order.
• Ordinary and Necessary Trade, Business or Professional Expenses

  • Salaries, Wages, Compensation including Fringe Benefit granted to the employer to the employee
  • Travel expenses (local and abroad)
  • Rentals and other payments required for continued use or possession of property
  • Entertainment, amusement and recreation expenses
  • 1/2 of labor training expenses for skills development of trainees enrolled in public SHS, public higher education, or public technical vocational institutions (certified by DEPED, TESDA, CHED). Must not exceed 10% of direct labor wage.
• Requisites for Deductibility

  • ordinary and necessary
  • paid or incurred during the taxable year
  • connected with trade, business or practice of profession
  • supported by sufficient evidence
  • not against the law
  • subjected to withholding tax if applicable
• Bribes, kickbacks, and other similar payments to government officials are not deductible.
• Expenses Allowable to Private Educational Institutions

  • capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities
  • depreciation expenses
• Magna Carta for Disabled Persons


  Private entities that employ disabled persons are entitled to an additional deduction from their gross income equivalent to 25% of the total amount paid as salaries and wages to disabled persons
• Personal travels sponsored by the employer subject to fringe benefit tax is not deductible.
• EAR expenses are limited to 0.5% of net sales for sellers of goods and 1% of net revenue for providers of service.
• Mixed Income (Merchandising and Service) for EAR


  (Net Sales or Revenue)/Total Net Sales or Revenue *Actual Expense
• Losses are deductible from gross income only if:

  • ordinary losses including net operating loss carry-over
  • casualty losses
• Casualty Losses


  The loss is of property connected with trade, business, or profession arising from fire, storm, shipwreck or other casualty, or from robbery, theft, or embezzlement and for which a declaration of loss was filed with the BIR within 45 days from the date loss was incurred.
• Measurement of Casualty Loss

  • Total Loss: Actual loss is the book value of the asset
  • Partial Loss: Book value or cost to restore the asset to its normal operating condition, whichever is lower
• Net Operating Loss

  The excess of allowable deduction over gross income of the business in a taxable year.