Module 14.

QUICKNOTES ON DEDUCTIONS FROM GROSS INCOME, ESTATE TAX,

DONOR'S TAX

ALLOWABLE DEDUCTIONS, DEFINED

Deductions are the amounts, which the law allows to be deducted from gross income in
order to drive at net income. On the other hand, “Exclusions” are something received or
earned by the taxpayer that do not form part of gross income while deductions are something
spent or paid in earning the gross income. Exclusions pertain to the computation of gross
income, while deductions pertain to the computation of net income.

KINDS OF DEDUCTIONS
1. Itemized Deductions
2. Optional Standard Deduction
3. Special Deductions allowed in special cases.

TAXPAYER ALLOWABLE DEDUCTIONS

Individuals earning pure compensation Beginning 2018, no more deduction is

income allowed to purely compensation income
earners.

Individuals deriving income from trade, Beginning 2018

business or practice of profession 1) Itemized deductions or Optional
Standard Deduction

Corporations 1) Itemized deductions or Optional

Standard Deduction

ITEMIZED DEDUCTIONS
1. Ordinary and necessary business expenses in general
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable Contribution
9. Research and development
10. Contributions to Pension Trust
11. Premium Payments on Health and/or Hospitalization Insurance

ORDINARY AND NECESSARY TRADE, BUSINESS, OR PROFESSIONAL EXPENSES

1. Salaries, wages, and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value of fringe benefit granted by the
employer to the employee.
2. Travel expenses
3. Rentals
4. Entertainment, Amusement, and Recreation Expense.
 5. Other necessary business expenses

REQUISITES FOR DEDUCTIBILITY IN GENERAL:

1. Must be ordinary and necessary;
2. Paid or incurred during the taxable year;
3. Connected with trade, business or practice of profession;
4. Supported by sufficient evidence; and
5. Not against the law, morals, public policy or public order;
6. It must have been subjected to withholding tax, if applicable.

CHARITABLE CONTRIBUTIONS
FULLY DEDUCTIBLE DONATIONS
The following charitable contributions shall be fully deductible:
1) Donations to the Government of the Philippines or to any of its agencies or political
subdivisions including fully owned government corporations, exclusively to be used in
undertaking priority activities in:
a. Education;
b. Health;
c. Youth;
d. Sports development;
e. Human settlement;
f. Science and culture;
g. Economic development

2) Donations to foreign institutions or international organizations which are fully deductible

in pursuance of:
a. Arrangement;;
b. Treaties;
c. Commitments; or
d. Special laws.
3) Donations to Accredited Non-Government Organizations.
The term “non-government organization” means a non-profit domestic corporation:
a. Organized and operated exclusively for:
i. Scientific;
ii. Research;
iii. Educational;
iv. Character building;
v. Youth and sports development;
vi. Health;
vii. Social welfare;
viii. Cultural;
ix. Charitable purposes; or
x. A combination thereof.

b. No part of the net income of which inures to the benefit of any private individual.
c. Not later than 15th day of the third (3rd) month after the close of the taxable year
in which contributions are received, makes utilization, unless an extended period
is granted by the Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue.
d. The level of administrative expense of which shall, on an annual basis, in no
case to exceed thirty percent (30%) of the total expenses;
e. The assets of which, in the event of dissolution, would be distributed to:
i. Another domestic corporation organized for similar purpose or purposes; or
ii. The State for public purposes; or
 iii. Another organization to be used in such a manner as in the judgment of
the court shall best accomplish the general purpose for which the dissolved
organization was organized.

PER SPECIAL LAWS, DONATIONS MADE TO THE FOLLOWING ARE DEDUCTIBLE IN

FULL:

1. Integrated Bar of the Philippines (P.D. 181)

2. International Rice Research Institute (R.A 2707)
3. Development Academy of the Philippines (P.D 205)
4. The University of the Philippines & other state colleges
5. Cultural Center of the Philippines
6. Artesian Well Fund (R.A 1977)
7. Ramon Magsaysay Award Foundation
8. Task Force on Human Settlement
9. Donations to the National Museum, Library and Archives (P.D. 373)
10. National Museum on Culture
11. Humanitarian Science Foundation
12. National Social Action Council

DONATIONS SUBJECT TO LIMIT

The following donations, which do not fall under fully deductible donations, shall be subject
to limit;
1) Donations to the Government of the Philippines or any agencies or any political
subdivision thereof exclusively for public purposes;
2) Donations to accredited domestic corporations or associations operates
exclusively for:
a. Religious;
b. Charitable;
c. Scientific;
d. Youth and sports development;
e. Cultural;
f. Educational;
g. Rehabilitations of veterans;
h. Social welfare institutions; or
i. Non-government organization.

OPTIONAL STANDARD DEDUCTION (OSD)

Optional Standard Deduction can be claimed in lieu of itemized deductions.
The following may be allowed to claim OSD:
1) Individuals
a. Resident Citizen
b. Non-resident citizen
c. Resident alien
d. Taxable estates and trusts

2) Corporations
a. Domestic corporations
b. Resident foreign corporation

AMOUNT DEDUCTIBLE
Individual/Estates/Trusts Gross Sales/Gross Receipts x 40%
Corporations/Partnerships Gross Income x40%
NON-DEDUCTIBLE ITEMS
1. Bribes, Kickbacks, and other similar payments
2. Personal, Living, or Family expenses
3. Any amount paid out for new buildings or for permanent improvements, or betterments
made to increase the value of any property or estate
4. Any amount expended in restoring property or in making good the exhaustion thereof
for which an allowance is or has been made
5. Premiums paid for any life insurance policy covering the life of any officer or employee,
or of any person financially interested in any trade or any business carried on by the
taxpayer, individual or corporate, when the taxpayer is directly or indirectly, a
beneficiary under such policy.
6. Interest, Losses and Bad Debts:
a. Between members of a family, Family of an individual shall include only his brothers
and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants; or
b. Except in the case of distribution in liquidation, between an individual and a corporation
more than fifty percent (50%) in value of the outstanding stock of which is owned,
directly or indirectly, by or for such individuals; or
c. Except in the case of distribution in liquidation, between two corporations more than
fifty percent (50%) in value of outstanding stock of each which is owned directly or
indirectly, by or for the same individual, if either one of such corporations, with respect
to the taxable year of the corporation preceding the date of the sale or exchange was a
personal holding company;
d. Between the grantor and a fiduciary of any trust; or
e. Between a fiduciary of a trusts and a fiduciary of another trust if the same person is
grantor with respect to each trust; or
f. Between a fiduciary of a trust and a beneficiary of such trust.

SPECIAL DEDUCTIONS

EXPENSES ALLOWABLE TO PROPRIETARY (PRIVATE) EDUCATIONAL

INSTITUTIONS

Cost incurred for the expansion of school facilities may at its option:

1. Capitalized and claim depreciation as deduction; or

2. Claim as outright expense.

SPECIAL DEDUCTION ALLOWED TO INSURANCE COMPANY

1. Net additions made within the year to reserve funds; and

2. The sum other than dividends paid within the year on policy and annuity
contracts.

NOTE: Released reserve shall be treated as income for the year of release.

ESTATE TAX AND DONOR'S TAX

(Estate Tax Rate 6%)

TRANSFER TAXES

Transfer taxes imposed upon gratuitous disposition of private properties or rights. Gratuitous
transfer is one that neither imposes burden nor requires consideration from transferee or
recipient. The transfer of ownership is free because of the absence of financial consideration.
Hence, gratuitous transfers are essentially donations. The applicable taxes on gratuitous
transfer are as follows:

Estate Tax

Estate Tax is a tax imposed on the privilege that a person is given in controlling to a
certain extent, the disposition of his property to take effect upon death. As shown in the table
above, Estate Tax is an excise tax imposed on the act of passing the ownership of property at
the time of death and not on the value of the property or right.

● Accrual: It accrues as of the death of the decedent, notwithstanding the

postponement of the actual possession or enjoyment of the estate by the beneficiary.
Upon the death of the decedent, succession takes place and the right of the “State” to
the tax the privilege to transmit the estate vests instantly upon death (RR 2-2003).
● Filing of Estate Tax Return:

o Decedent died before 2018: within 6 months after death

o Decedent died on or after Jan. 1, 2018: within 1 yr. from date of death
o The accrual of the tax is distinct from the obligation to pay the same (filing
period)
o Under meritorious cases (to be determined by the BIR), filing of estate tax
return may be extended for a period of not more than 30 days

● Taxpayer: The “estate” of the decedent as juridical person

● Personal obligation to file and pay the applicable taxes:

o Primary liable: Administrator or executor

o Secondary liable: Any of the heirs

● Law to be applied: The law/statute in force as of the date of death of the decedent.

Elements of Succession

● DECEDENT – the person whose property is transmitted through succession, whether

or not he left a will (Art. 775, CCP).
● bHEIR – the person called to the succession either by the provision of a will or by
operation of law (Art. 782, CCP).
● ESTATE- refers to all the property, rights, and obligations, of a person which are not
extinguished by his death (Art. 776, CCP).

Kinds of Heirs

1) Compulsory Heirs. They inherit with or without will.

● Primary Compulsory Heirs

➔ Legitimate children and descendants
➔ Illegitimate children
➔ Widow or widower
● Secondary Compulsory Heirs
 ➔ In default of legitimate children and descendants, legitimate parents and ascendants
➔ The compulsory heirs are entitled to their legitime, with or without a will, unless validity
“dis-inherited”

2) Voluntary Heir. They inherit only if they are in the will.

3) Intestate Heirs.. The compulsory heirs in testamentary succession are also heirs in
intestate succession. They are entitled to their legitime. However, as to the free portion of the
estate, it shall be distributed to the following intestate heirs as follows (order of priority) in
absence of a valid will:

a. Legitimate children
b. Legitimate parents
c. Illegitimate children
d. Spouse
e. Brothers or sisters
f. Relatives by consanguinity up to 5th civil degree
g. State
 ESTATE TAX RATE

RA 10963 (TRAIN Law) simplifies the computation of estate tax due, from six (6) bracket
schedules with rate schedule with rates ranging from 5% to 20% to a single rate of 6% based
on the value of the net estate as presented in the foregoing format of computing the estate tax
due.

M14. Assignment: Components of Gross Estate and Exemptions and Exclusions from
Gross Estate

GROSS ESTATE

Consists of all properties and interest in properties of the decedent at the time of
his death as well as properties transferred during lifetime (only inform), but the substance was
only transferred at the time of death.

1. Components of Gross estate

PROPERTIES EXISTING AT THE TIME OF DEATH SUCH AS:

a. Real property and other tangible Personal Property
b. Decedent's interest and Intangibles
● Decedent’s Interest – Refers to the extent of equity or ownership participation of the
decedent on any property physically existing and present in the gross estate, whether or not
in his possession, control or dominion. It also refers to the value of any interest in property
owned or possessed by the decedent at the time of his death (interest having value or
capable of being valued transferred)

Intangible properties considered located in the Philippines:

● Franchise which must be exercised in the Philippines
● Shares, obligations, or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines
 ● Shares, obligations, or bonds issued by any foreign corporation, at least 85% of the
business of which is located in the Philippines;
● Shares, obligations, or bonds issued by any foreign corporation if such shares,
obligations, or bonds, have acquired a business situs (used in the furtherance of its
business in the Philippines) in the Philippines;
● Shares or rights in partnership, business or industry established in the Philippines.
c. Properties transferred gratuitously during lifetime, but in substance,
transferred upon death:

1. Transfer in Contemplation of death

2. Transfer with retention or reservation of certain right – allows the
transferor to continue enjoying, possessing or controlling the property
(beneficial ownership) because the naked title has been transferred.
3. Revocable transfer – decedent transfers the enjoyment of his property to
another, subject to his right to revoke the transfer at will, with or without
notifying the transferee, any time because he dies.
4. Property passing under General Power of Appointment (GPA)
5. Transfer of insufficient consideration – sale of property substantially
below fair market value (FMV):

● Amount included in gross estate:

FMV at the time of death Pxx
Less: Selling Price (xxx)
Included in Gross Estate Pxx

6. Proceeds from life insurance – the following are included in the gross
estate:
a. Whether REVOCABLE or IRREVOCABLE, when they beneficiary
is the:
● Estate of the deceased
● His executor; or
● Administrator
b. When the beneficiary is a third person, only if REVOCABLE.

2. Exemptions and Exclusions from Gross Estate

a. UNDER SECTION 85 and 86 , NIRC

● Capital or exclusive property of the surviving spouse

● Properties outside the Philippines of a non-resident alien decedent
● Properties outside the Philippines of a non-resident alien when the rule of
Reciprocity applies.

b. UNDER SECTION 87, NIRC

1) The merger of the usufruct (right to use) in the owner of the naked title.

2) The transmission from the first heir, legatee or donee in favor of another
beneficiary in accordance with the will of the predecessor. This type of transfer
is most commonly known as “transfer under Special Power of Appointment
(SPA)”

❖ GPA vs SPA:
o GPA = addition to gross estate
o SPA = exclusion from the gross estate
 3) The transmission or delivery of the inheritance or legacy of the fiduciary heir
or legatee to the fideicommissary.
o This is the same with SPA above. The only difference is, in
fideicommissary transfer, the relationship of the donor and donee is
only one degree apart (i.e, from a parent to his/her son)

4) All bequests, devices legacies or transfers to social welfare, cultural and

charitable institutions, provide:
1) No part of net income of said institutions inure to the benefit of any
individual;
2) Not more than 30% of such transfers shall be used for administration
purposes.

C. UNDER SPECIAL LAWS

● Proceeds of life insurance and benefits received by members of the GSIS (RA728)
● Benefits received by members by the SSS by reason of death (RA1792)
● Amounts received from Philippines and United States` governments for war damages
● Amounts received from the Philippine and US government for damages suffered during
World War II (RA227)
● Amounts received from United States` Veterans Administration
● Retirement benefits of officials/employees of a private firm (RA4917)
● Payments from the Philippines of US government to the legal heirs of deceased of
World War II Veterans and deceased civilian for supplies/services furnished to the US
and Philippine Army (RA136)
● Proceeds of life insurance under a group insurance taken out by employer (not taken
out upon his life)
● Transfers by way of bona fide sales
● Transfer of property to the National government or to any of its political subdivisions
● Personal Equity and Retirement Account (PERA) assets of the decedents-contributor
(RA No. 9505)

RECIPROCITY CLAUSE - No tax shall be imposed with respect to intangible personal

properties of a NRA situated in the Philippines:

1) When the foreign country, where such NRA is a resident and citizen , does not impose
transfer tax with respect to intangible personal properties of Filipino citizens not
residing in that country; or
2) When the foreign country imposes transfer tax, but grants similar exemption with
respect to intangible personal properties of Filipino citizens not residing in that country.

Donor’s Tax
The donor's tax for each calendar year shall be six percent (6%) computed on the basis of the total
gifts in excess of Two Hundred Fifty Thousand Pesos (P250,000) exempt gifts made during the
calendar year.

Nature of Donor’s Tax

Donation is an act of liberality whereby a person disposes gratuitously of a thing or

right in favor or another, who accepts it (Art. 725 of the New Civil Code). A donor's tax (or gift
tax) is a tax levied, assessed, collected and paid upon the transfer by any person, resident or
nonresident, of the property by gift (whether the transfer is in trust or otherwise, whether the
gift is direct or indirect, and whether the property is real or personal, tangible or intangible).
 It is a tax imposed on the exercise of the donor’s right during lifetime to transfer
property to others in the form of a gift. Hence, donor’s tax is not a property tax, but it is an
excise tax imposed on the transfer of property by way of gift inter-vivos (RR 12-2018).
Although the law used the term “act”, the law considered donation as a “contract”, as shown
by the fact that it requires acceptance, and that the rules on obligations and contracts apply to
it as a suppletory law ( Art. 732 NCC).

Purposes of Donor’s Tax

1. To supplement the estate tax
2. To prevent the avoidance of incme taxes. Without donor’s tax, the donor may escape
the progressive rates of income taxation through the simple expedient way of splitting
his income among numerous donees.

FORMAT OF COMPUTATION (Refer also to illustrations under RR 12-2018)

SUBSEQUENT DONATIONS(s) WITHIN THE

YEAR

Gross Gift, Current Pxxx

Less: Exemptions/Deductions (xxx)

Pxxx

Add: Prior Gift(s) xxx

Total Pxxx

Less: Tax Exempt Gift (under TRAIN Law) (P250,000)

Net Taxable Gift(s) Pxxx

Multiply: Donor’s Tax Rate (6%)

Donor’s Tax Due Pxxx

Tax Paid - Prior Gift(s) (xxx)

Tax Credit (if applicable) (xxx)

Donor’s Tax Payable Pxxx

 NOTE: The computation of the donor’s tax is on a cumulative basis over a period of one
calendar year (regardless of the relationship of the donor and the donee).

DONOR’s TAX RATE

RA 10963 (TRAIN Law) simplifies the computation of donor;s tax due, from seven (7)
bracket schedule with rates ranging from 2% to 15% (for donations made to relatives) and
30% (for donations made to strangers), to a single rate of 6% based on the value of the net
taxable gift (in excess of P250,000) as presented in the foregoing format of computing the
donor’s tax due, regardless of the relationship between the donor and the donee.

EXEMPTIONS and/ or DEDUCTIONS FROM GROSS GIFT

1) Encumbrances on the property donated assumed by the donee
2) Diminution of gift provided by the donor
3) Gifts to the Government - gifts made to or for the use of the National Government or
any entity created by any of its agencies which is not conducted for profit.
4) Gifts to educational, charitable, religious corporations etc.

Requisites:

1) Gifts in favor of the following entities:

i. Education
ii. Charitable
iii. Religious
iv. Cultural
v. Social welfare
vi. Accredited non-government organization;
vii. Trust or Philanthropic organization;
viii. Research institution or organization;
2) Not more than 30% of the said gifts shall be used for administration purposes.

5) Exemption under Special Laws

1. International Rice Research Institute
2. Ramon Magsaysay Foundation
3. Integrated Bar of the Philippines
4. Development Academy of the Philippines
5. National Museum
6. National Library
7. Archives of the National Historical Institute
8. Museum of the Philippine Costumes
9. Intramuros Administration

NOTE:
For the purposes of the donor’s tax, “NET GIFT” shall mean the net economic benefit from
the transfer that accrues to the donee. (RR No. 2-2003)
Sample Case 1:
On January 15, 2018, Jose sold a real property used in business for P600,000 to his
brother-in-law. The assessed value and zonal value of the land were P750,000 and
P1,000,000 respectively. The sale is subject to:
a. Subject to donor’s tax only P9,000.
b. Subject to capital gains tax only of P60,000.
c. Subject to donor’s tax of P9,000 and capital gains tax of P60,000.
d. Subject to donor’s tax of P9,000 or capital gains tax of P60,000 at the option of Jose.

❖ Answer : A
➔ The property sold is classified as “ordinary asset”, not subject to 6% CGT.
➔ The transaction is considered a sale for “insufficient consideration”. The excess of
FMV over the Selling Price is deemed a gift, subject to donor’s tax.

FMV (higher amount) P1,000,000

Vs. Consideration received (600,000)

Excess (deemed GIFT) P400,000

Less: Exempt Gifts (250,000)

Net Taxable Gifts P150,000

Donor’s Tax Rate (TRAIN Law) 6%

Donor’s Tax Due P9,000

Sample Case 2:

On January 15, 2018, Jose donated a vacant lot held as capital assets to his brother-in-law.
The assessed value and zonal value of the land were P750,000 and P1,000,000 respectively.
The land had an unpaid mortgage of P200,000, which was not assumed by the donee and an
unpaid realty tax of P10,000 which was assumed by the donee. The donation is subject to:
a. Subject to donor’s tax only of P44,400.
b. Subject to capital gains tax only of P60,000.
c. Subject to donor’s tax of P44,400 and capital gains tax of P60,000.
d. Subject donor’s tax of P44,400 or capital gains tax of P60,000 at the option of Jose.

❖ Answer : A
➔ “Donation” of real property, regardless of classification (ordinary or capital assets), is
subject to donor’s tax- 6%.
➔ Capital gains tax is applicable to “sale” of real property located in the Philippines.
Zonal Value (higher amount) P1,000,000

Less: Encumbrance assumed by the donee (10,000)

Exempt Gifts (250,000)

Net Taxable Gifts P740,000

Donor’s Tax Rate (TRAIN Law) 6%

Donor’s Tax Due P44,400