Allowable deductions

Taxpayers engaged in trade, business, or profession

These individuals and corporations can claim allowable deductions, unlike pure-compensation earners.

Allowable deductions

Items that are subtracted from gross income to arrive at taxable income.

Ordinary and necessary expenses

Directly attributable expenses paid or incurred during the taxable year for the business.

Ordinary salaries & wages

Reasonable allowance for services actually rendered, including gross-up fringe benefits where final tax is paid.

Ordinary travel expenses

Incurred here and abroad while away domestically for business.

Ordinary rentals

Property used in business where taxpayer has no title or equity.

Ordinary entertainment, amusement, & recreation (EAR)

Directly connected to the business within ceilings prescribed by Secretary of Finance.

EAR ceiling (limitations)

The limits are either 1% (service) or 0.5% (products) of net revenue/sales.

Ordinary labor training

Additional deduction of ½ of training expenses for enterprise-based trainees capped at 10% of direct labor wage.

Expense substantiation

No deduction is allowed without sufficient evidence.

Official receipts (invoices)

Sufficient evidence that contains exact amount and direct connection to the business.

Private educational institutions

Capital outlays can either be deducted outright or over time (depreciation).

Interest expense

Incurred on business indebtness that

• does not include prepaid interest (cash basis), between related parties, and for financing petrol operations

• deducted outright or capital expediture (acquired property)

Interest arbitrage limit

Allowable deduction must be reduced by 20% of interest income subject to final tax.

Non-deductible taxes

Philippine income tax, foreign income tax (claimed as credit), estate & donor’s taxes, and assessed taxes against local benefits increasing property value.

Tax benefit rule

If deducted taxes are refunded, they must be included in gross income in year of receipt (refund).

Foreign tax credit

Citizens, resident aliens, and domestic corporations only can claim paid foreign taxes as tax credits subject to proportional limits.

Input VAT

Those on local purchases attributable to VAT-exempt sales are deductible to gross income. VAT-registered taxpayers cannot claim this deduction.

Losses

Uninsured losses actually sustained due to ordinary business or casualties (fire, storm, theft), declared 30 to 90 days from discovery. (Not deductible if claimed in estate tax)

Specific losses

Non-deductible which include

• capital losses (subj. to limits)

• worthless securities (capital losses)

• wash sales

• wagering losses (limited to wagering gains)

• abandonment losses (petrol operations)

Net operating loss carry-over (NOLCO)

Loss can be carried over as a deduction for the next three consecutive years, provided no substantial ownership change (at least 75%). For mines, it’s 5 years for first 10 years of operation.

Bad debts

Debts written-off that are connected to trade, business, or profession, and not through related party transactions. Recovered accounts are declared to extent of prior tax benefit.

Depreciation & depletion

Reasonable allowance using straight-line, declining, syd, or cost-depletion (oil, gas, or mines). Intangible drilling costs can be deducted outright or amortized.

• Petrol products directly for production are depreciated over 10 years (straight-line or declining).

• Non-production petrol over 5 years.

Charitable contributions to gov’t and accredited NGO’s

Deductions are limited to 10% (individuals) or 5% (corporations) of taxable income prior to charitable deductions.

Fully deductible charitable contributions

No limits if donations are to:

• gov’t for priority activities (NEDA)

• specific foreign institutions (treaties)

• accredited ngos that are non-profit, who fully utilize the funds by the 3rd month of the following year and with administrative expenses not exceeding 30% of total expenses