DEDUCTIONS FROM GROSS INCOME

Deductions From Gross Income:

• Pertains to expenses of doing business or expenses of exercising a profession

• Pertain to period expenditures rather than capital expenditures

• Do not include personal living expenses. The TRAIN law provides for P250K annual income tax exemption to individual taxpayers in lieu of personal, living expenses of individual taxpayers.

Principles of Deductions

1. LOAN - The deductions are Legal, Ordinary, Actual and Necessary of business or profession.

2. Matching Principle - Only expense of generating income subject to regular tax is deductible (Expenses na subject sa RIT lang ang pwedeng i-deduct)

3. Related Party Rule - All income between related parties are taxable but losses, interest and bad debts are non-deductible

Related Party

1. Family Members (Siblings, descendants)

2. Trust Relationship (Guarantor - Beneficiary not related) (T1 - T2 are related if same Beneficiary)

3. Controlling Individual & Group in Common Control

Withholding is no longer a requisite to deductibility under the EOPT law, but non-compliance to withholding tax requirements shall be subject to penalties (T/F)

True

CWT of Rentals

5%

CWT of Professional Services:

• Gross Receipts ≤ P3M -

• Gross Receipts > P3M -

• Gross Receipts ≤ P3M - 5%

• Gross Receipts > P3M - 10% (GR)

What percentage will be used for the professional services of VAT registered individual

10%

CWT of GPP

0%

CWT of Corporation

• Gross Income ≤ P720K/year -

• Gross Income > P720K/year -

• Gross Income ≤ P720K/year - 10%

• Gross Income > P720K/year - 15% (GR)

CWT of E-market platforms

Exceed in P500K x 50% x 1%

CWT of Large Withholding Agents

• Sales of goods -

• Sales of services -

• Sales of goods - 1%

• Sales of services - 2%

CWT of Income Distribution from estate / trust

15%

CWT of Profit Sharing From GPP (makukuha ng partner)

• Gross Income ≤ P720K/year -

• Gross Income > P720K/year -

• Gross Income ≤ P720K/year - 10%

• Gross Income > P720K/year - 15% (GR)

Timing of withholding under EOPT

When the obligation becomes payable

AAA leased the building of BBB. In their contract, AAA will pay 300K, at the start of the lease agreement. 100K for Y1, 100K for Y2, and the remaining 100K is for the rental deposit refundable in case their is no problem with the property.

Compute the Withholding Tax on each year.

Withholding Tax is Payable when the obligation becomes payable.

Y1 - 200K x 5% = 10K. The remaining 100K is not income

Y2 - 0

Y3 - 100K x 5% - 5K

Special Considerations With Deductions

1. Effects of VAT on deductions

2. Effects of accounting methods

3. Effect of extent taxation

1. VAT paid by Non-VAT taxpayers are part of costs and expenses while VAT paid by VAT Taxpayers are not

2. Accrued expenses would be deductible for accrual taxpayers but not for cash basis taxpayers. Regardless of the method used, prepayments are non-deductible

3. Taxpayers taxable globally could deduct global expenses while those taxable only in the Philippines could deduct Philippine expenses.

How much is the WHT if the VAT taxpayer rented to VAT lessor for 100K VAT exclusive.

5K

Input VAT (100K x 12%) 12K

Rental Expense 100K

WHT payable (100K x 5%) 5K

Cash 107K

How much is the rent expense if the Non-VAT taxpayer rented to VAT lessor for 100K VAT exclusive.

112K

Rental Expense (100 × 1.12) 112K

WHT payable (100K x 5%) 5K

Cash 107K

Modes of Claiming Deduction

1. Itemized Deductions

2. Optional Standard Deductions (OSD)

   • 40% of Gross Sales or Receipts for Individual Taxpayers

   • 40% of Gross Income for Corporations

Classification of Itemized Deductions

1. Cost of Sales/ Services

2. Regular Allowable Itemized Deductions (RAID) (Ordinary)

3. Special Allowable Itemized Deductions (SAID)

4. Net Operating Loss Carry-over (NOLCO) (3 years)

These are direct cost of providing the goods or service

COGS / COS

These are indirect cost of providing the goods or service

RAID (admin, selling, finance)

These are incentive deductions in the form of +% deduction. For example, if you employ PWD, you can deduct their salaries + 25% of their salaries

SAID (only for the year availed)

Allocation of Common Deductions

If the entity has operations in different tax scheme:

1. If traceable - specific identification

2. If not traceable - allocate based on the ratio of gross income

3. If fraudulent - CIR can assign

Non-deductible Expenses

1. Personal, living, or family expenses

2. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate (not applicable to intangible drilling and development costs incurred in petroleum operations)

3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made

4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy

5. Losses from sales or exchanges of property directly or indirectly between related parties

Check deductible and cross non-deductible expense:

1. Estimated uncollectible accounts

2. Highly probable loss

3. Permanent impairment in the fair value of investments

4. Write-off of receivables

5. Unpaid salaries under cash basis

6. Value of stolen crops

7. Damage on an insured car

8. Fire loss in an uninsured building caused by an adjacent establishment

9. Realized loss on sale of equipment to a brother

10. Interest expense on borrowing between sister companies

11. Professional fees paid without withholding taxes

12. Loss of property which is claimed in the estate of the decedent

13. Factory employee payroll incurred in producing goods

14. Repair on the taxpayer's residence

15. Interest expense incurred in financing the acquisition of a plant machinery

16. Payroll expenses by a PEZA-registered enterprise

17. Entertainment expense for public officials

18. Depreciation of property used by a non-profit organization for eleemosynary activities

19. Foreign taxes and licenses paid abroad by a domestic corporation

20. Depreciation of foreign properties by a resident foreign corporation

21. Leisure travels of the taxpayer

22. Salaries of domestic helpers

23. Tuition fees of a supervisor sent by the taxpayer to undergo job-related studies

24. Donation of business property to the government

25. Gift of property to the taxpayer's son

26. Uncollectible receivables under cash basis

27. Donation of car to an outside director that is not part of management

28. Loss of trading stocks through the PSE

29. Cost of equipment purchased

30. Expenses of a purely employed individual taxpayer

31. Value of a stolen calf

32. Repair which caused an increase in the value of the property

33. Facilitation fees in securing government permits

34. Expenses to create a business goodwill

35. Freight of purchasing goods

36. Dividends on preferred stocks

37. Bad debts arising from loans granted to relatives

38. Loss on sale of real property capital asset

39. Loss on sale of domestic bonds

40. Loss on theft of property currently under investigation

1. ❌

2. ❌

3. ❌ - not disposed

4. ✔

5. ❌

6. ❌ - future income

7. ❌

8. ❌

9. ❌ - 2nd degree of consanguinity

10. ❌ - control group

11. ✔

12. ❌ - no double deduction

13. ❌ - CapEx

14. ❌

15. ❌/✔ - can be capitalized or expense, but not both. Borrowing cost

16. ❌

17. ❌

18. ❌

19. ✔

20. ❌

21. ❌

22. ❌

23. ✔

24. ✔

25. ❌

26. ❌

27. ❌

28. ❌ - except dealers

29. ❌

30. ❌

31. ❌

32. ❌

33. ❌

34. ❌

35. ❌

36. ❌

37. ❌

38. ❌

39. ❌

40. ❌

Purchase of equipment (paid in cash)	200,000
Freight on purchase of equipment (paid in cash)	20,000
2020 salaries expenses paid this period (cash expense)	50,000
Supplies bought in 2019, half was used in 2020	16,000
Depreciation expense on property	24,000
2020 expenses, not paid this period (accrued expense)	12,000
2021 expenses, paid this period (prepaid expense)	18,000

Required: Determine the total deductions under:

1. Cash basis of accounting

2. Accrual basis of accounting

	Cash Basis	Accrual Basis
Purchase of equipment (paid in cash)	CapEx	CapEx
Freight on purchase of equipment (paid in cash)	CapEx	CapEx
2020 salaries expenses paid this period (cash expense)	50,000	50,000
Supplies bought in 2019, half was used in 2020	16,000	16,000
Depreciation expense on property	24,000	24,000
2020 expenses, not paid this period (accrued expense)	-	12,000
2021 expenses, paid this period (prepaid expense)	Prepayment	Prepayment
Total	90K	102K

Miss Dona Emiliano leases an office space from Tower Realty. The lease contract specified a P100,000 monthly rent over a period of 3 years. An advanced three-month payment is required which is broken down as follows:

First month of lease 100,000

Last month of lease 100,000

Security deposit 100,000

Total initial payment, excluding taxes 300,000

Required: Provide JE under the following assumptions:

1. Lessee is VAT Taxpayer; Lessor is VAT taxpayer

2. Lessee is VAT Taxpayer; Lessor is Non-VAT taxpayer

3. Lessee is Non-VAT Taxpayer; Lessor is VAT taxpayer

4. Lessee is Non-VAT Taxpayer; Lessor is Non-VAT taxpayer

1. Lessee is VAT Taxpayer; Lessor is VAT taxpayer

Rent Expense 100K

Prepaid Rent 100K

Advances to Lessor 100K

Output Vat 24K

WHT (200K x 5%) 10K

Cash 314K

2. Lessee is VAT Taxpayer; Lessor is Non-VAT taxpayer

Rent Expense 100K

Prepaid Rent 100K

Advances to Lessor 100K

WHT (200K x 5%) 10K

Cash 290K

3. Lessee is Non-VAT Taxpayer; Lessor is VAT taxpayer

Rent Expense 112K

Prepaid Rent 112K

Advances to Lessor 100K

WHT (200K x 5%) 10K

Cash 314K

4. Lessee is Non-VAT Taxpayer; Lessor is Non-VAT taxpayer

Rent Expense 100K

Prepaid Rent 100K

Advances to Lessor 100K

WHT (200K x 5%) 10K

Cash 290K

Indicate a check mark on the appropriate extent of taxpayer's deduction.

	Within	Without
Employed resident citizen
Resident alien engaged in business
NRA not engaged in trade / business
Domestic corporation
Resident foreign corporation
Non-resident foreign corporation

	Within	Without
Employed resident citizen	❌	❌
Resident alien engaged in business	✔	❌
NRA not engaged in trade / business	❌	❌
Domestic corporation	✔	✔
Resident foreign corporation	✔	❌
Non-resident foreign corporation	❌	❌

ABC Manufacturing is a manufacturer of various products with complex business operations subject to different tax regimes. During the period, it has the following details of income and expenses:

	Manufacturing Operations for the domestic market	Operations in less developed areas registered with BOI under Income Tax Holiday	Export Operations registered with the PEZA
Sales	3M	2M	5M
Direct Costs	2M	1M	3M
Traceable Expenses	300K	200K	400K

ABC has a total of P1,200,000 administrative expenses that are not traceable to a specific type of operations during the

year.

Required: Determine the taxable income and tax due for each type of operation.

	Manufacturing Operations for the domestic market	Operations in less developed areas registered with BOI under Income Tax Holiday	Export Operations registered with the PEZA
Sales	3M	2M	5M
Direct Costs	(2M)	(1M)	(3M)
Gross Income from Operation	1M	1M	2M
Traceable Expenses	(300K)	(200K)	(400K)
Non-traceable expense (12M x GI ratio)	(300K)	(300K)	(600K)
Taxable Income	400K	500K	1M
Tax Due	100K (25%) RIT	0 (0%)	100K (2M x 5%)

During the period, Mr. X earned P800,000 compensation income. Mrs. X also earned P1,200,000 from her professional practice. The spouses also own a building which is leased as residence to several tenants who paid P400,000 in rentals. They also have a savings bank account which earned P24,000 in interest.

The spouses incurred the following expenses:

1. Expense of Mr. X related to his employment, P 200,000

2. Expenses of Mrs. X related to her practice, P 300,000

3. Local business taxes for the building, P2,000

4. P500,000 major repairs on building which increased its fair value by P400,000 to P2,000,000. The building is expected to last for 40 years with no residual value.

5. A typhoon destroyed the attic of the family residence which required a P200,000 repairs for restoration. This repair did not increase the value of the residence.

6. Utilities: P12,000 for the family home, P18,000 for the building.

7. Real property tax on the residence and the building were P10,000 and P15,000, respectively.

Required: Determine the reportable income of the spouses

	Mr. X	Mrs. X
Compensation Income	800K
Professional Income		1,200K
Rent Income	200K	200K
Business Exp		(300K)
Local Bus Tax	(1K)	(1K)
Repair Exp (500-400)	(50K)	(50K)
Utility Exp - Building	(9K)	(9K)
RPT -Building	(7.5K)	7.5K)
TNI	932,500	1,032,500

• Interest Exp - Final Tax

1. No deduction can be deducted in Compensation Income

3. Half

4. 500K expense, increase of 400K = 100K - business expense

5. Personal Expense

6. 12K - FH = personal expense

7. RPT - FH = personal expense