Tax Definitions

Gross Income

All income received by a taxpayer before any deductions or exemptions. It includes compensation, business income, gains, interest, rents, and other income subject to tax.

Net Income

Gross income minus all allowable deductions (ordinary and necessary business expenses, personal exemptions, etc.). This is the income left after deductions but before taxes are paid.

Taxable Income

The portion of income that is actually subject to income tax. It’s your gross income minus allowable deductions, exemptions, and exclusions.

Taxable Year

The 12-month period on which income is computed for tax purposes. Usually the calendar year (Jan 1–Dec 31) unless a taxpayer is allowed to adopt a fiscal year.

Deduction

An expense you’re legally allowed to subtract from gross income to arrive at taxable income. Under Sec. 34 NIRC, only expenses that are ordinary, necessary, paid/incurred in the taxable year, directly connected to the business/profession, and properly documented may be deducted

Necessary and ordinary

1. Appropriate and helpful for the business; directly connected to carrying it on and generating income.

2. Common, usual, and accepted in the type of business; doesn’t have to be habitual but must be typical of that business.

Both must be reasonable in amount

Paid or incurred

The expense must have been  • paid (cash basis) • or incurred (accrual basis) during the taxable year to be deductible. Timing follows the taxpayer’s accounting method

Development, management, operation

Expenses must be directly attributable to developing, managing, operating, or running the business—meaning a clear, direct link to business activity, not passive investment

Conduct of trade, business, exercise of profession

Covers activities where a taxpayer is regularly and continuously engaged in selling goods, providing services, or practicing a profession—not just isolated transactions. “Carrying on” means actually conducting and continuing business by doing its usual acts

Reasonable allowance

An expense must be reasonable in size and proportion compared to the taxpayer’s business. Even if necessary, inordinately large or extravagant amounts are not deductible

Salaries and wages; other forms of compensation for personal services

Payments to employees for services rendered—basic pay, commissions, bonuses, allowances, and other compensation. Deductible if ordinary, necessary, reasonable, and properly documented under Sec. 34.

Travel expenses

Reasonable amounts spent on travel (transportation, lodging, meals) while away from home in the pursuit of the taxpayer’s trade, business, or profession. Must be directly related to business and substantiated by receipts.

Entertainment and recreation expenses

Costs for entertainment, amusement, or recreation incurred in connection with business (like taking clients to a business dinner). Deductible only if directly related to business, ordinary, necessary, reasonable, and supported by records.

Rentals

Amounts paid for the use of property (land, building, equipment) used in business. Deductible if ordinary, necessary, reasonable, and paid/incurred within the taxable year.

Other payments which are required for the continued use or possession of the trade, business or profession of the taxpayer

Any other expense the taxpayer must pay to continue using assets, rights, or facilities essential to the business (e.g., franchise fees, leasehold improvements).  Deductible if they meet the ordinary, necessary, reasonable, paid/incurred, and directly attributable tests