Income Taxation: Allowable Deductions

Vocabulary practice flashcards covering allowable and non-deductible tax expenses, itemized versus optional standard deductions, and specific statutory requirements under Philippine income taxation.

Itemized Deductions

All ordinary and necessary expenses paid or incurred during the taxable year directly attributable to the development, management, operation, and/or conduct of a trade, business, or the exercise of a profession.

Optional Standard Deduction (OSD)

A standard deduction allowable in place of itemized deductions, capped at an amount not exceeding $40\%$ of gross sales or gross receipts for individuals, estates, and trusts, or $40\%$ of gross income for domestic and resident foreign corporations (under Section 3 of RA 9504).

Entertainment, Amusement and Recreation (EAR) Expenses

Business expenses directly related to or in furtherance of trade, business, or profession, subject to a statutory ceiling of not more than $0.50\%$ of net sales for sellers of goods/properties, or $1\%$ of net revenue for sellers of services, exercise of profession, and lease of properties.

Ordinary Repairs

Expenditures made to restore assets to good operating condition upon breakdown by replacing broken parts, which are charged as deductible expenses when incurred.

Extraordinary Repairs

Material replacements of parts involving large sums of money that extend the useful life of an asset; these must be capitalized and depreciated over a period of time rather than expensed immediately.

Senior Citizen Discount

A mandatory $20\%$ discount granted to resident Filipino citizens aged $60$ years old or above on specific purchases (such as medicines, transport fares, medical fees, and lodging) for their exclusive use, alongside a special $5\%$ discount on basic necessities and prime commodities.

Persons with Disability (PWD) Discount (RA 9442)

A statutory discount of at least $20\%$ granted by commercial establishments to individuals with mental, physical, or sensory impairments for goods and services intended for their exclusive use or enjoyment.

Interest Expense

Payment made for the use, forbearance, or detention of money during the term of a loan or after its repayment due date, deductible if incurred on genuine indebtedness connected with the taxpayer's trade, business, or profession.

Interest Expense Limitation (Tax Arbitrage)

The rule requiring that a taxpayer's allowable deduction for interest expense be reduced by an amount equal to $33\%$ of interest income that was subjected to final tax.

Non-Deductible Taxes

Taxes specifically excluded from being deducted from gross income, which include Philippine Income Tax, income taxes imposed by foreign countries (unless foreign tax credit is not availed of), estate and donor's taxes, and taxes assessed against local benefits that increase property value.

Tax Benefit Rule

The doctrine providing that the recovery of bad debts or refund of taxes previously claimed as deductions must be included in gross income during the year of recovery, to the extent of the income tax benefit derived from the prior deduction.

Casualty Losses

Property losses arising from fire, storms, shipwreck, other casualties, robbery, theft, or embezzlement that are actually sustained during the taxable year in connection with trade, business, or profession and are not compensated by insurance or other forms of indemnity.

Bad Debts

Debts resulting from worthlessness or uncollectibility, in whole or in part, of amounts due to the taxpayer arising from money lent or uncollectible income from goods sold or services rendered, which have been officially written off.

Depreciation Expense

A reasonable deduction allowed for the exhaustion, wear and tear, and obsolescence of property used in the taxpayer's trade or business.

Depletion

The systematic allocation of the cost or other basis of wasting assets (natural resources such as coal, oil, ore, precious metals, and timber) over the period they are extracted or produced.

Depletion Expense Formula

$$\text{Depletion Expense} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Estimated Number of Units}} \times \text{Number of Units Extracted}$$

Wasting Assets

Natural resources—such as coal, oil, gas, ore, precious metals, and timber—that are consumable and irreplaceable, and whose exhaustion is recovered tax-free through depletion allowances.

Charitable Contributions Deductible in Full

Donations permitted full deduction without percentage limitation, including donations to the Philippine Government for priority activities, certain foreign institutions under treaties, accredited NGOs, the Integrated Bar of the Philippines, and the Philippine Red Cross Annual Fund Campaign.

Charitable Contributions Subject to Limitations

Donations limited to an amount not exceeding $10\%$ for individual donors and $5\%$ for corporate donors of taxable business income before deducting charitable contributions, covering donations to the Philippine Government for public use or to accredited domestic religious, charitable, scientific, youth/sports, cultural, or educational bodies.

Research and Development (R&D) Costs

Expenditures on materials, equipment, facilities, personnel, purchased intangibles, and contract services directly related to discovering new knowledge and applying findings to create new products, services, or processes having no alternative future use.

Pension Trust Deduction

A deduction allowed to an employer who establishes or maintains a pension trust, where payments made to fund past service liabilities are apportioned in equal parts over a period of $10$ consecutive years beginning with the year of payment.

Non-Deductible Capital Expenditures

Amounts paid out for new buildings, permanent improvements, or betterments made to increase the value of property, as well as amounts expended in restoring property, all of which must be capitalized rather than claimed as current deductions.