Allowable Deductions

Allowable deductions
Definition of Terms
 Deductions - items or amounts which the law allows to be
deducted from gross income to arrive at taxable income.
 Revenue expenditures - refer to those that benefit one
accounting period and are deductible from gross income in the
year it was paid or incurred.
 Capital expenditures - expenses usually incurred in the
acquisition, betterment, or permanent improvement of an
asset, benefits more than one accounting period and are
not deductible from gross income in the year it was
paid.
GCRO Module 120 eVer.2.0 JAN 2023 85

Allowable deductions
Definition of Terms
 Ordinary expense - expenses which are normal or
usual, although not necessarily recurring.
 Necessary expense - refers to those which are useful and

reasonable such as salaries and other compensation for
personal service actually rendered to the taxpayer, cost
of supplies, transportation expense (not from the
residence to office or back which is personal in nature),
reasonable and legitimate representation and ordinary
repair and maintenance due to wear and tear.

Allowable ITEMIZED
deductions
Business expenses
 Entertainment, Amusement and  Depletion

Recreation Expenses  Charitable and Other
 Interest Contribution
 Taxes  Research and Development
 Tax Credit  Contribution to Pension
 Losses Trust
 Bad Debts  Other Deductions Subject
 Depreciation to Withholding Tax

Allowable ITEMIZED
deductions
Business Expenses
 Basic principles governing deductions :
 Taxpayers seeking a deduction must point to some specific
provisions of a statute authorizing the deduction; and
 He must be able to prove that he is entitled to the
deduction claimed.
 A taxpayer claiming the expenses must comply with the provisions
of the law authorizing the deduction (Basilan Estate, Inc. vs.
CTA). The burden of proof to establish the validity of the
claimed deduction lies with the taxpayer.
 A taxpayer may deduct all authorized expenses whether itemized or
optional, from his gross income for the taxable year or deduct a
lower amount or not claim at all.

Allowable ITEMIZED
deductions
Business Expenses
 Conditions for an expense to be deductible:
 Ordinary and necessary;
 Paid or incurred within the taxable year;
 Arose in the conduct of the business, trade or profession;
 Not contrary to law, public policy or morals;
 Substantiated by sufficient proofs; and
 Subjected to withholding tax, if applicable.

Allowable ITEMIZED
deductions
Business expenses
 Except for charitable contribution and to a certain degree,

losses incurred by the taxpayer, deductions are in a way
limited to those that are related to or connected with the
trade or business, which are categorized into five (5) kinds:
 Ordinary and necessary trade, business or professional
expenses
 Compensation
 Travelling expenses (here or abroad)
 Rentals and other payments
 Entertainment, amusement and recreation

Allowable ITEMIZED
deductions
Interest
 Refers to the payment for the use of forbearance

or detention of money, regardless of the name it
is called or denominated; includes amount paid for
the borrower’s use of money during the term of the
loan, as well as for his detention of money after
the due date for its re-payment.

Allowable ITEMIZED
deductions
Interest
 Requisites for deductibility of Interest Expense:
 Indebtedness;
 Interest expense paid or incurred upon such indebtedness;
 Indebtedness must be of the taxpayer;
 Indebtedness must be connected with the taxpayer’s trade, business
or exercise of profession;
 Interest expense must have been paid or incurred during the
taxable year;
 Interest must have been stipulated in writing;
 Interest must be legally due;
 Interest payment arrangement must not be between related taxpayers;
 Interest must not be incurred to finance petroleum operations; and
 In case of interest incurred to acquire property used in trade,
business or exercise of profession, the same was not treated as
a capital expenditure.
Allowable ITEMIZED
deductions
Interest
 If the taxpayer earned interest income subject to final tax,
allowable deduction for interest expenses shall be reduced by
an amount equal to the following percentage of interest
income subjected to final tax:
 41% beginning January 1998

 33% beginning January 2009 (RA 9337)
 CREATE 20%
Allowable ITEMIZED
deductions
Taxes
 All taxes, national or local, paid or incurred within the

taxable year, in connection with the taxpayer's trade,
business or exercise of profession may be deducted, except:
 Income tax;
 Income taxes imposed by a foreign country, subject to
certain qualifications;
 Estate and donor’s taxes; or
 Taxes assessed against local benefits of a kind tending
to increase the value of the property assessed (special
assessment).
 VAT

Allowable ITEMIZED
deductions
Taxes
 Tax deduction is allowed to a non-resident alien individual

engaged in trade or business in the Philippines and resident
foreign corporation only if and to the extent that such
taxes are connected with income sources within the
Philippines.
 Taxes allowed under the Tax Code, shall be included as part
of gross income in the year of receipt to the extent of the
income tax benefit of said deduction.

Allowable ITEMIZED
deductions
Tax Credit for Taxes paid to Foreign Countries
 Refers to the taxpayer's right to deduct from the income tax

due or the income tax withheld on income payments the
amount of tax paid to a foreign country subject to the rule
on reciprocity.
 Persons entitled:
 Resident citizens
 Domestic corporations which include all partnership
except general professional partnership
 Members of general professional partnership
 Beneficiaries of estates and trusts

Allowable ITEMIZED
deductions
Tax Credit for Taxes paid to Foreign Countries
Distinction between tax credit and taxes as a deduction

 The former is deducted from the tax itself; the latter is
deducted from the gross income to arrive at the taxable
income.
 In the former, only three (3) kinds of foreign taxes are
deductible, namely: foreign income tax, war-profits and
excess-profit; while in the latter, all taxes as a general
rule are deductible with the exception of the four (4)
kinds of taxes expressly excluded (see previous slide),
(5) including VAT.

Allowable ITEMIZED
deductions
Losses
 Refers to such losses arising from fires, storms, shipwreck,

or other casualties, or from robbery, theft or embezzlement,
which do not come under the category of bad debts, inventory
losses, depreciation, etc., and which arise in trade or
business.
 Requisites for deductibility:
 Actually sustained in a closed and completed transaction;
 Not compensated by insurance or other form of indemnity,
or not deducted for estate tax purposes, for individuals;
 Liquidated and charged-off during the taxable year; and
 Profession or business-related.

Allowable ITEMIZED
deductions
Losses
 Certain rules on losses:

 Capital losses may only be deducted from capital gains
unless a final tax on capital transaction is imposed.
 Losses from wagering transaction shall be allowed only
to the extent of the gains (except where a final tax is
imposed).
 Losses on account of the shrinkage in value of
securities or shares of stock are not deductible until
after the loss would have been actually sustained by the
disposition of the said securities.

Allowable ITEMIZED
deductions
Losses
 Net Operating Loss Carry-Over – net operating loss of the business

or enterprise for any taxable year immediately preceding the
current taxable year, which had not been previously offset as
deduction from gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss.
Conditions
 Any net loss incurred in a taxable year during which the
taxpayer was exempt from tax shall not be allowed; and
 Net operating loss carry-over shall be allowed only if
there has been no substantial change in ownership of the
business or enterprise

Allowable ITEMIZED
deductions
Losses
 Manner of Carry-over
 Net operating loss of mines other than oil and gas
well without the benefit of incentives under
Executive Order (EO) 226, incurred in the first ten
(10) years of operation may be carried over as a
deduction from taxable income for the next five (5)
years immediately following the year of loss; The
entire amount of loss shall be carried over to the
first of the five (5) taxable years following the
loss…(Refer further to RR 19-2002)

Allowable ITEMIZED
deductions
Bad Debts
 Include debts due to taxpayer actually ascertained to be worthless and

charged off within taxable year except those not connected with
profession, trade or business and those sustained in a transaction
entered into between parties mentioned under Sec. 36 (B) of the NIRC.
 Securities of Becoming Worthless – if securities, as define in Sec. 22

(T), are ascertained to be worthless and charged off within the taxable
year and are capital assets, the loss resulting therefrom shall, in the
case of a taxpayer other than a bank or trust company incorporated under
the laws of the Philippines a substantial part of whose business is the
receipt of deposits, for the purpose of this be considered as a loss
from the sale or exchange, on the last day of such taxable year, capital
assets.

Allowable ITEMIZED
deductions
Bad Debts
 Requisites for valid deduction of Bad Debts from Gross Income:
 There must be an existing indebtedness due to the taxpayer which
must be valid and legally demandable;
 The same must be connected with the taxpayer’s trade, business
or practice of profession;
 The same must not be sustained in a transaction entered into
between related parties enumerated under Sec. 36(B), NIRC;
 The same must be actually charged off the books of accounts of
the taxpayer as of the end of the taxable year; and
 The same must be actually ascertained to be worthless and
uncollectible as of the end of t he taxable year.
 Securities, other than shares of stocks and treated as capital assets, which
became worthless may be deducted by a taxpayer, other than bank or trust
company, as loss from the sale or exchange, on the last day of such taxable
year (Refer further to RR 5-1999 and RR 25-2002).

Allowable ITEMIZED
deductions
Depreciation
 Refers to gradual diminution in the service or useful value of
tangible property being used in the trade or business, resulting
from ordinary wear and tear or normal obsolescence.
 Property used or not being used in business;
 Allowance is reasonable;
 Charged off within the taxable year; and
 Schedule of allowance attached to the return.
 Kinds of depreciable property
 Tangible property; and
 Intangible property

Allowable ITEMIZED
deductions
Depreciation
 Methods of depreciation allowed under the NIRC:
 Straight-line method
 Declining-balance method
 Sum-of-the-years-digit method
 Any other method which may be prescribed by the Department of
Finance (DOF) upon recommendation of the Commissioner of
Internal Revenue (CIR).
Note:The straight-line or declining-balance method may be
adopted in the depreciation of properties used in petroleum
exploration.
 In case of modification in the agreed rate and useful life of
depreciation without the written notice and the taxpayer has adopted
such without written objection on the part of the CIR, the aforesaid
useful life so adopted by the taxpayer shall be considered binding.

Allowable ITEMIZED
deductions
Depletion
 Refers to the exhaustion of natural resources as in mines, oil and gas
wells.
 Allowed only to mining entities owning economic interest in mineral
deposits.
 Allowable cost depletion allowance:
 Reasonable allowance for depletion or amortization computed in the
cost of depletion method (gas and oil wells and mines).
 When the allowance shall equal the capital investment, no further
allowance shall be granted.
 After production in commercial quantities has commenced, certain
intangible exploration and development drilling cost….
 Any intangible exploration, drilling and development expenses
allowed as a deduction in computing taxable income during the year
shall not be taken into consideration in computing the adjust cost
basis for the purpose of computing allowable cost depletion.
Allowable ITEMIZED
deductions
Charitable and Other Contribution

 Actually paid or made within the taxable year;
 Given to or for the use of the government of the Philippines or any of
its agencies or political subdivision, exclusively for public purposes
to accredited non-governmental organization, domestic corporation or
association organized exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational purpose for the
rehabilitation of veterans, or to social welfare institution;
 No part of the income of the recipient inures to the benefit of any
private stockholder or individual in an amount not to exceed 10% of the
net income computed without the benefit of this deduction for
individuals; and
 Five percent for corporations.
 If a property, real or personal, is donated other than money, the
acquisition cost of the property donated shall be used for valuation.

Allowable ITEMIZED
deductions
Charitable and Other Contribution

 Contributions deductible in full:
 Donations to the Government or any of its agencies or political subdivision…;
 Donations to foreign institutions or international organizations in compliance
with Government treaties and special laws;
 Donations to accredited non-government organization, which are non-profit
corporations/foundations under the following conditions:
• Organized exclusively for scientific, research, educational, character
building, youth and sports development, etc., (no part of the net income of
which inures to the benefit of any private individual;
• Donation must be utilized not later than the 15th day of the 3rd month
following the close of its taxable year unless extended with approval of
the DOF;
• Upon dissolution, the assets must be distributed to another non-profit
domestic corporation organized for the similar purpose or the state for
public purpose; and
• Level of annual administrative expenses does not exceed 30% of the total
expenses.

Allowable ITEMIZED
deductions
Research and Development

 Generally may be treated by the taxpayer as ordinary and
necessary expense in the year it was paid or incurred when the
expenditure is in connection with his trade, business or
profession.
 Instances when it may be treated as deferred expenses ratably
distributed over sixty (60) months beginning with the month in
which the taxpayer first realized benefit from such expenditure
 Paid or incurred by the taxpayer in connection with his trade,
business or profession;
 Not treated as ordinary expense; and
 Chargeable to capital account but not chargeable to property
of a character subject to depreciation or depletion.

Allowable ITEMIZED
deductions
Research and Development
 Exclusions
 Expenses for the acquisition or improvement of land, or for
the improvement of property to be used in connection with
research and development of a character which is subject to
depreciation or depletion; and
 Expenses paid or incurred for the purpose of ascertaining
existence, location, extent, or quality of any deposit of
ore or other mineral, including oil or gas.

Allowable ITEMIZED
deductions
Contribution to Pension Trust

 A deduction applicable only to the employer on account of its
contribution to a private pension plan for the benefit of its
employees.
 Employer must have established a pension plan;
 Pension plan must be reasonable or actuarially sound;
 Funded by the employer;
 Amount contributed by the employer must not be subject to his
control;
 Payment has not been allowable as deduction; and
 Apportioned over a period of ten (10) consecutive years
beginning with the year in which the transfer in payment was
made.

Allowable ITEMIZED
deductions
Other Deductions Subject to Withholding Tax
If the tax required by law to be deducted and

withheld from any amount paid is not withheld and/or
remitted, the deduction will be disallowed for
income tax purposes.
Addendum: RR 12-2013, RR 6-2018

Allowable ITEMIZED
deductions
Entertainment, Amusement and Recreation Expenses
Includes representation expenses and/or depreciation or

rental expenses relating to entertainment facilities,
subject to certain limitation.

REPRESENTATION EXPENSES
 Expenses incurred by a taxpayer in connection with the

conduct of his trade, business or exercise of
profession, in entertaining, providing amusement and
recreation to, or meeting with, a guest or guests at
a dining place, place of amusement, country club,
theater, concert, play, sporting event, and similar
events or places.
 It does not refer to fixed representation allowances
that are subject to withholding tax on wages pursuant
to appropriate Revenue Regulations No. 10-2002.

GUESTS
 Persons or entities with which the taxpayer has

direct business relations, such as but not limited
to, clients/customers or prospective
clients/customers.
 It does not include employees, officers, partners,

directors, stockholders, or trustees of the taxpayer.

Entertainment, Amusement
and Recreation Expenses
Include representation expenses and/or depreciation or

rental expense relating to entertainment facilities.

ENTERTAINMENT FACILITIES
 a yacht, vacation home or condominium; and

 any similar item of real or personal property used by the
taxpayer primarily for the entertainment, amusement, or
recreation of guests or employees.
To be considered an entertainment facility, such yacht, vacation
home or condominium, or item of real or personal property must be
owned or forms part of the taxpayer’s assets related to the
pursuit of his/its trade, business or profession, or rented by
such taxpayer, for which the taxpayer claims a depreciation or
rental expense.

COVERAGE
 Individuals engaged in business, including taxable estates and

trusts;
 Individuals engaged in the practice of profession;
 Domestic corporations;
 Resident foreign corporations; and
 General professional partnerships, including its members.

EXCLUSIONS
 Expenses which are treated as compensation or fringe benefits

for services rendered under an employer-employee relationship,
pursuant to Revenue Regulations No. 2-98, 3-98 and amendments
thereto;
 Expenses for charitable or fund raising events;
 Expenses for bonafide business meeting of stockholders, partners
or directors;

EXCLUSIONS
 Expenses for attending or sponsoring an employee to a business

league or professional organization meeting;
 Expenses for events organized for promotion, marketing and
advertising including concerts, conferences, seminars,
workshops, conventions, and other similar events; and
 Other expenses of a similar nature.

Requisites of Deductibility of
“EAR Expenses”
 It must be paid or incurred during the taxable year;

 It must be:
 directly connected to the development, management and
operation of the trade, business or profession of the
taxpayer; or
 directly related to or in furtherance of the conduct
of his or her trade, business or exercise of a
profession;

“EAR Expenses”
 It must not be contrary to law, morals, good customs, public

policy or public order;
 It must not have been paid, directly or indirectly, to an
official or employee of the national government, or any local
government unit, or of any Government-Owned or Controlled
Corporation (GOCC), or of a foreign government, or to a private
individual, or corporation, or General Professional Partnership
(GPP), or a similar entity, if it constitutes a bribe, kickback
or other similar payment;

“EAR Expenses”
 It must be duly substantiated by adequate proof. The official

receipts, invoices, bills or statements of accounts should be in
the name of the taxpayer claiming the deduction; and
 The appropriate amount of withholding tax, if applicable, should
have been withheld therefrom and paid to the BIR.

ceiling
Sale of goods or properties Actual EAR expenses but not to

exceed 0.5% or ½% Net Sales
Whichever is lower
Sale of services, practice of Actual EAR expenses but not to exceed
profession and lease of property 1% of Net Revenue Whichever is lower
Sale of both goods and services Apportion EAR expenses to Sales and
Revenue
Net Sales/Revenue X Actual

Total Sales & Revenues EAR
Whichever is lower

ceiling
Apportionment Formula:
Net Sales/Net Revenue x Actual Expense

Total Net Sales and Net Revenue

Illustration on EAR
Expenses
Net Entertainment, Max Allowable Amount

Sales/Ne Amusement & Percentage to be claimed as
t Recreation Expense Ceiling of EAR Expense
Revenue (EAR) based on EAR Expense** (whichever is
(1) Apportionment (3) lower of col 2 or
Formula 3)
(2) (4)
Sale of P200,000 P2,000 P1,000 P1,000
Goods
Sale of P100,000 P1,000 P1,000 P1,000
Services
Total P300,000 P3,000 P2,000 P2,000

Illustration on EAR
Expenses
 Apportionment Formula
Sale of Goods (P200,000/P300,000) x P3,000
Sale of Services(P100,000/P300,000) x P3,000
 Maximum Percentage Ceiling

Sale of Goods (P200,000 x 0.50%)
Sale of Services (P100,000 x 1%)
Note: P 200,000 – Net Sales

P 100,000 – Net Revenue

RULES ON EXEMPTION
 Citizens and resident aliens are allowed personal and additional

exemptions.
 Non-resident aliens engaged in trade or business are entitled to
personal exemptions only by way of reciprocity but not to additional
exemption.
 Change of status of a taxpayer during the taxable year generally
benefits him. This rule is applicable only to changes of status
expressed by law, [i.e., the taxpayer’s civil status (marriage), death
or his dependent’s birth, death or coming of age].
 These exemptions must first be credited against the gross
compensation income, the excess, if any, can be used to offset other
income.
*Note: Personal and additional Exemption – are no longer applicable starting January 1, 2018 pursuant to
RA 10963 or TRAIN Law.

Basic Personal
Exemption*
For individual taxpayers

P50,000.00
regardless of status
*Note:Personal and additional Exemption – are no longer

applicable starting January 1, 2018 pursuant to RA 10963 or TRAIN
Law.

Additional Exemption*
 An additional exemption of Twenty Five Thousand Pesos

(P25,000) for each qualified dependent not exceeding four
(4) shall be granted.
 The additional exemption for dependent children shall be
claimed by the husband except where the husband executes a
waiver of the claim for additional exemption in favor of the
wife.
 The additional exemption cannot be divided between the
spouses.
*Note:Personal and additional Exemption – are no longer

Law.

Additional Exemption*
 In case of legal separation, the spouse who was awarded

custody of the child may claim the additional exemption, but
in no case will the total exemptions be exceeded.
 Non-resident alien engaged in business in the Philippines is
entitled to a personal exemption equivalent to the
exemption allowed to Filipinos in the country where he is a
citizen/resident, not to exceed the amount fixed as
exemption for a citizen or resident of the
Philippines.
*Note: Personal and additional Exemption – are no longer
Law.

Items Not Deductible
General Rule
 Personal, living and family expenses;
 Amount paid out for new building or for permanent
improvement, or betterment made to increase the value of any
property or estate;
 Amount expended to restore property;
 Premiums on life insurance of employees or officers, when the
taxpayer is directly or indirectly a beneficiary under such
policy; and
 Losses from sales or exchanges of property between
related parties.

Special Allowable
Deductions
 Insurance Companies
 Mutual Insurance Companies
 Mutual Marine Insurance Companies
 Assessment Insurance Companies
 Estates and trusts
 Private Educational Institutions
 Rooming in and Breastfeeding Practices under RA 7600
 Adopt-A-School Program under RA 8525
 Expanded Senior Citizens Act under RA 9994
 Free Legal Assistance under RA 9999
 Expanding the Benefits and Privileges of PWD under RA 10754

Allowable Deductions

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Allowable deductions

GCRO Module 120 eVer.2.0 JAN 2023 85

 Necessary expense - refers to those which are useful and

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 Entertainment, Amusement and  Depletion

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 Except for charitable contribution and to a certain degree,

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 Refers to the payment for the use of forbearance

GCRO Module 120 eVer.2.0 JAN 2023 91

 38% beginning January 2000

 All taxes, national or local, paid or incurred within the

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 Tax deduction is allowed to a non-resident alien individual

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Tax Credit for Taxes paid to Foreign Countries

 Refers to the taxpayer's right to deduct from the income tax

GCRO Module 120 eVer.2.0 JAN 2023 96

Tax Credit for Taxes paid to Foreign Countries

Distinction between tax credit and taxes as a deduction

GCRO Module 120 eVer.2.0 JAN 2023 97

 Refers to such losses arising from fires, storms, shipwreck,

GCRO Module 120 eVer.2.0 JAN 2023 98

 Certain rules on losses:

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 Net Operating Loss Carry-Over – net operating loss of the business

GCRO Module 120 eVer.2.0 JAN 2023 100

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 Include debts due to taxpayer actually ascertained to be worthless and

 Securities of Becoming Worthless – if securities, as define in Sec. 22

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Charitable and Other Contribution

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Charitable and Other Contribution

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Research and Development

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Research and Development

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Contribution to Pension Trust

GCRO Module 120 eVer.2.0 JAN 2023 111

Other Deductions Subject to Withholding Tax

If the tax required by law to be deducted and

Addendum: RR 12-2013, RR 6-2018

GCRO Module 120 eVer.2.0 JAN 2023 112

Entertainment, Amusement and Recreation Expenses

Includes representation expenses and/or depreciation or

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 Expenses incurred by a taxpayer in connection with the

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 Persons or entities with which the taxpayer has

 It does not include employees, officers, partners,

GCRO Module 120 eVer.2.0 JAN 2023 115

Include representation expenses and/or depreciation or

GCRO Module 120 eVer.2.0 JAN 2023 116