Basic Income Tax and Deductions

Practice flashcards covering the fundamentals of income tax computation, the five requisites for deductibility, and the rules governing the Optional Standard Deduction (OSD).

Net taxable income

The amount arrived at by taking the gross income and subtracting the allowable deductions.

$25\%$ RSAID

The specific rate or standard mentioned for computing the income tax of corporations.

Itemized deductions

One of the two types of allowable deductions which require actual expenses to be substantiated with supporting documents.

Optional Standard Deduction (OSD)

A deduction type that allows for a standard rate of $40\%$ in lieu of itemized deductions.

Ordinary and necessary

A requisite for deductibility stating the expense must be essential for the operation of the business, such as salaries or rent.

Paid or incurred

A requisite for deductibility meaning an expense can be deducted whether it is on a cash basis or has been recognized during the taxable year even if unpaid.

Business-related

A requisite for deductibility requiring the expense to be connected with trade, business, or the exercise of a profession rather than being a personal expense.

Substantiated with supporting documents

A requisite for deductibility particularly applicable to itemized deductions, requiring proof such as invoices or official receipts.

Legal expense

The requirement that a deductible item or expense must not be against the law, morals, public policy, or public order.

Irrevocable for the rest of the year

The rule stating that once a taxpayer signifies the use of OSD or itemized deductions in the first quarter income tax return, they cannot change the method for the remaining quarters.

Individual OSD Base

The figure upon which the $40\%$ OSD is calculated for individuals, identified as gross sales or receipts ($GSR$).

Corporation OSD Base

The figure upon which the $40\%$ OSD is calculated for corporations, identified as gross income.

Gross income (for OSD basis)

Calculated for corporations by taking the gross sales or receipts and subtracting the cost of sales or cost of services.

RC, NRC, RA, and NRA

The classifications of individuals for whom the Optional Standard Deduction is applicable.

DC, RFC, and NRFC

The classifications of corporations for whom the Optional Standard Deduction is applicable.