Chapter 1: General Principles and

Concepts of Taxation
Three inherent powers of the sovereign
state
1. Police Power superior to non
impairment, due process clause.
2. Eminent domain just
compensation, take private
property.
3. Taxation inferior to non
impairment.
Taxation defined
1. Power inherent power of a state.
2. Process legislative undertaking,
implemented by the BIR to raise
revenue.
3. Means collecting and
apportioning the cost of the
government.
Nature of tax power
1.
2.
3.
4.
5.
6.
7.

Inherent power of sovereignty

Essentially a legislative function
For public purposes
Territorial in operation
Tax exemption of government
Strongest inherent power
Subject to constitutional and
inherent limitations.

Four Elements of state

1.
2.
3.
4.

People
Territory
Sovereignty
Government

Local government no inherent power

Privity of relationship reciprocal duties
International Comity friendly agreement
interaction and respect accorded by one
nation the laws and institutions of
another.
Government functions tax exempt
Proprietary functions not tax exempt
(ex. PNR)
Principles
A. Necessity right to compel citizens
B. Reciprocal Duties benefits
received

Purposes of taxation
1. Revenue purpose fiscal policy
2. Regulatory purpose (sumptuary)
discriminatory, countervailing,
marking, dumping
3. Excise objects transaction,
privilege, right, interest.
Inherent Limitations natural restrictions
Constitutional Limitations
1.
2.
3.
4.
5.
6.
7.

Due process of law

Equal protection of law
Rule of uniformity and equity
Non impairment of contracts
Presidents veto power
Exemption from property taxation
Public money not for religious
purposes
8. Congress granting tax exemption
9. Supreme courts final judgement
10.
No imprisonment for poll tax
11.
Taxes are general funds of
government
Progressive system of taxation ability to
pay
Item veto power items only
Pocket veto power bill itself
2/3 of the house can make the bill law
30 days failure to communicate
Tax exemption (religious etc. purposes)
real properties for INTENDED purposes.
Not exempt transfer taxes, idle lands,
not used for intended purposes (it should
be exclusively used for charitable
purposes)
Tax exemption granted by majority,
congress (not attendees)
Three stages of taxation
1. Levy imposition of taxes involves
the passage of tax laws or
ordinances.
2. Assessment administration &
implementation.
3. Tax collection
1 & 2 impact of taxation
3 Incidence of taxation

Sound taxation system (Adam smiths

canon of taxation)
1. Fiscal Adequacy (surplus in budget
or budget deficit)
2. Equality and theoretical justice (tax
policy)
3. Administrative feasibility (tax
administration)
Collection of taxes
Assigning authorized bans
Quarterly filing and payment
Certain doctrines in taxation
1. Prospective application of tax laws
2. Imprescriptability of taxes
3. Double taxation
4. Escape from taxation
5. Exemption from taxation
6. Equitable recoupment
7. Set off taxes
8. Taxpayer suit
9. Compromises
10.
Power to delay (Marshall
Dictum)
Ex post facto not applicable to tax
Tax evasion illegal
Tax avoidance legal (tax minimization)

Tax option, shifting.

transformation
Exemption reciprocity, public
policy, contracts (basis)

Exemption expressed exemption,

implied exemption or by omission,
contractual exemption

1. Secretary of Justice (Chief Legal

Officer)
2. Various offices
3. Appropriate government office
4. Banks accredited
BIR deputy commissioners
1.
2.
3.
4.

Operations Group
Legal and Enforcement
Information Systems group
Resource Management group

Executive Order 430 (GMA)

5. Tax Reform Administration Group
6. Special Concerns Group
Powers of BIR Commissioner
1. Interpret tax laws
2. Decide disputed tax assessment
3. Summon and obtain information or
testimony of persons
4. Make assessments and prescribe
additional tax requirements
May be degated
5. Compromise, abadte and refund or
credit taxes
6. Suspend the business operations
7. Delegate powers
Letter of Authority
Jeopardy Assessment termination of tax
period
Temporary closure not less than 5 days
Division chief or higher may be
delegated
Compromise or abate cannot be
delegated

Chapter 2: Tax Administration

New TIN estate of the deceased person

Tax Administration assessment,

collection

P500 Annual registration fee (before or

on January 31)

Tax Administrative Agencies

BIR forms 1901 self employed, mixed

income

Department of Finance
1. Bureau of Internal Revenue
2. Bureau of Customs & Tariff
commission
3. Land transportation office
4. Duly and lawfully authorized
collectors
5. Local offices

Other tax enforcers

1902 pure compensation

1903 corporations and partnerships
1904 one time taxpayer
1905 updates

0605 payment, receipt of assessment,

tax liability

Five years following the assessment of

tax

1906 authority to print

Distraint (constructive, actual)

Sales/Commercial Invoices goods

Levy (real property)

Receipts services

P25 or more required invoices, vice

versa, three years document keeping
P1,919,500 or less not vat registered
1700 and 1701 AITR individuals
1702 Corporations and partnerships
2316 ITR. Certificate of withholding
Government remedies

Assessment of tax
Compromise
Tax lien
Levy or distraint

Taxpayers remedies

Assessment
Compromise
Tax refund
Amendment of returns

Tax assessment formal letter by BIR

Kinds of tax assessment
1. Self assessment
2. Prospective assessment (15 days
to explain)
3. Deficiency assessment
4. Jeopardy assessment
5. Disputed assessment
6. Final assessment
7. Illegal or void assessment
Pre-assessment notice
1. Notice for informal conference
2. Preliminary assessment notice
Ways to contest the validity of
assessment
1.
2.
3.
4.

Motion
Motion
Motion
Motion

for
for
for
for

Reconsideration
Reinvestigation
Withdrawal
Cancellation

Seizure (sale)
Forfeiture (government)
Redemption within one year

Other Collection Remedies

1.
2.
3.
4.

Imposition of Injunction
Enforcement of tax lien
Enforcement of forfeiture
Entering into compromise of tax
case
5. Requiring the filing of bonds
6. Requiring proof of filing of ITR
7. Giving of rewards to informers
8. Making arrest, search and seizure
9. Deportation of aliens
10.
Inspection of books of
accounts
11.
Use of national tax register
12.
Imposition of civil and
criminal action
All criminal violations may be
compromised except: a. filed in court, b.
involving fraud
Minimum COMPROMISE percentage
A. 10% - individual incapability
B. 20% - corporate incapability
C. 40% - financial incapability
(impairment in the original capital
50%)
D. 40% - doubtful validity of
assessment
Letter of Authority permission of
necessary examination of said books and
records.
Chapter 3: Concept of Income
Income increase in net worth
Dependent child P25,000 Max (4)
Additional investment deduct, included
in assets
Withdrawals added back
Unrealized loss added back
Capital vs. Income
Revenue vs. Income
Receipts vs. Income
Nontaxable vs. taxable

Income tax payable

Characteristics of taxable income
1. There must be gain or profit
2. The gain must be realized or received
Income without earnings from outside of
the Philippines
Resident citizen or domestic corporation
generally subject to tax (within and without)

Remuneration pay
Minimum wage earners Not taxable
overtime pay, holiday pay, night shift
differential pay, hazard pay.
CLASSIFICATION OF GROSS COMPENSATION
INCOME
1. Employee, employer relationship
Wages - specific intervals of work
Salary other than manual labor

Classification of Income
1. Compensation Income
2. Profession or Business Income
3. Passive Income
4. Capital Gain
Tax accounting periods
1. Calendar period
2. Fiscal period
3. Short period
4. Variable period
Servicing Business Cash basis
Trading and manufacturing Accrual Basis
Special Methods
1. Instalment
2. Deferred payment
3. Long term construction contract
a. Completed contract method
b. Percentage of completion method
4. Farming
a. Cash basis
b. Accrual basis
c. Crop basis
Instalment do not exceed 25% of initial
payment
MCIT minimum corporate income tax
NCIT normal income tax
Non taxable items
Sweepstakes or lotto
Thirteenth month pay (P30,000)
Causal sale payment exceeds 25%
Selling price vs. zonal value (whichever is
higher)
Reportable Income =
Installment received x (gross profit / contract
price)
Installment tax due =
Total Tax due x (Installment payment
received/contract price)
Chapter 4 Gross Income
Gross income from whatever source
Includes other income not subject
to passive income tax or final
withholding tax.

2.

Honoraria

3. Fixed or variable allowances WHT

Transportation and cell phone
allowances (not taxable)
Fixed monthly allowance
(transportation)
1,500 (rank and file)
3,000 (supervisory)
1,200 (mobile phone allowance)
Transportation and Night shift
allowances, meal and/or out of
town allowances (not taxable)
Taxi/transportation allowances
(beyond 10PM) precomputed
4. Commission
5. Fees
6. Tips taxable, but no subject to
withholding tax
7. Retirement pay taxable except
SSS or GSIS
Old age (approved by the
BIR commissioner)
10 years employee
50 years old
Availed it for the 1st time
8. Hazard or emergency pay
9. Separation pay
Voluntary taxable
Involuntary non taxable
10.Pension taxable (unless so provides)
11.Vacation and sick leave
Taxable utilized
Private, 10 days or less (vacation
leave, not taxable)
Sick and vacation monetized, not
subject
12.13th month pay (30,000 rule)
13.Fringe benefits & de minimis not
compensation
14.Overtime pay (back pay)
compensation
15.Profit sharing
16.Awards for special services
17.Beneficial payments
18.Other forms of benefit
Shares of stock FAIR VALUE OF SERVICE
Cancellation of debt corporation, dividend
Insurance premiums other family members,
compensation, (deductible expense)

Living quarters convenience of the

employer (not compensation income)
Causal labor incidental
Not compensation (not in the
course of EMPLOYER)
Gross
1.
2.
3.
4.
5.

income from Business

Manufacturing
Merchandising or Trading
Servicing
Farming
Long term contract

Manufacturi
ng
Merchandisi
ng
Mining

Service

Sales (includes investments

and other incidental or outside
operations)
(SRA)
(SD)
(Cost of Sales)
= Gross income
Gross receipts
(SRA)
(SD)
=Gross Income

Gross Income = Net Sales Cost of

Sales

Cost of Services (MCIT)

Salaries
Personnel, Consultants, Specialist
Cost of Facilities
Interest Expense (Banks only(
Leasehold Improvements
Outright method
Spread out method
Estimated BV of leasehold improvement
Passive Income taxpayer merely waits for it
to be realized
1. Yield from deposits substitutes
2. Interest Income
3. Royalty Income
4. Dividend Income
5. Prizes and Winnings
Deposit substitute & trust fund interest
income
Interest Income
For individuals, long term, exempt
Form income tax.
BSP prescribed form
Maturity, not less than 5 years
Denominations 10,000 *
Pre termination fee
5%
4 years less than 5
10%
3 years to less than 4
years
20%
Less than 3 years
Tax Exempt Interest Income
1. Duly registered cooperative

2. BSP prescribed form long term

3. EFCD Non resident citizen
4. CARP
20% -FWT
30%

Banking Institution
NCIT (lending)

Royalty Income
10%
20%

Literary
Others

Dividend Income
Tax Exempt
Dividends are tax exempt if
1. Received from a
domestic corporation
by:
Another domestic
Resident foreign
2. Received form a
cooperative
3. Pure stock dividend
4. Pure liquidating
dividend (return of
capital)
Final
Tax
(FWT)
10%
20%
25%
15%
Normal
tax

Dividends are subject to final tax

if received from a Domestic
Corporation by a:
Citizen or Resident Alien
Non-resident Alien doing
business
Non-resident Alien not doing
business
Non-resident Foreign
Corporation
Dividend are subject to yearend normal tax of individuals
or corporations if such
dividends are:
1. Not included as tax
exempt dividends
2. Not subject to final tax
3. Distributive shares of
partners in
professional partneship

Chapter 5: Exclusion from Gross Income

Exclusion not included in the determination
of the taxable income.
Items excluded from gross income are
generally non taxable
NONTAXABLE COMPENSATION INCOME
1.
2.
3.
4.
5.
6.

Minimum wage earner

Filipino overseas contract worker
13th month pay (P30,000)
De minimis, w/ ceiling
Employers benefit rule
Proceeds of life insurance policies paid
to the heirs upon the death
7. Workmen compensation act
8. Retirement benefits
9. Separation pay, involuntary

10.SSS benefits, retirement gratuities,

pensions etc. resident or non resident,
others
11.SSS benefits
12.GSIS benefits
13.GSIS, SSS, Medicare, Pag-ibig
14.Dollars & Salaries for IRRI & Ford
Foundation
15.Tax exemption for military
16.Casual employment, not related to the
conduct of business of employer
NONTAXABLE OTHER RECEIPTS
1. Return of premium
2. Value of property by gift, bequest,
devise or descent
3. Obligation binding upon the
government
4. United states veterans administration
5. Income derived from investments in
the Philippines by: foreign government
6. Public utility or from the exercise of
any essential governmental function
7. Prizes and awards.
A. Selected without any action on his
part to enter the contest
B. Not require to render substantial
future services
8. Prices and awards sanctioned by
national sports association.
9. Instruments with maturity of more
than 5 years
10.Interest on long term deposits or
investments in banks
11.Expanded foreign currency deposit
system (NRFC)
12.Interest on the price of land (CARP)
13.Gains, investors upon redemption of
shares of stock of a mutual fund
company
14.Intercorporate dividend
15.PCS winning & Philippine Lotto
Winnings
SMW, Holiday Pay, Overtime pay, Hazard
pay, night shift differential pay.

Transportation allowance, precomputed on a daily basis not subject

to tax.

De Minimis not subject to income tax,

withholding tax
A. Monetized unused vacation leave
(10days)
B. Monetized vacation & sick leave.
Government
C. Medical allowance to dependents
P750 per employee per semester
P125 per month
D. Rice subsidy P1,500 (monthly)
E. Clothing P5,000 (annum)
F. Actual medical assistance P10,000
(annum)
G. Laundry P300 monthly

H. Employee achievement awards

Tangible personal property must be
P10,000
I. Gift during Christmas, major
anniversary P5,000
J. Daily meal allowance for overtime
work and night/ graveyard shift (25%)

Excess of de minimis income tax

on compensation

Mandatory government contributions, only

not taxable
Proceeds of Life insurance
Revocable subject to estate tax
Irrevocable not subject to estate &
income tax
Excess of premiums paid taxable
Gifts, Bequests, Devises,
Value excluded from gross income
Income Included in gross income
Bequest personal property
Devise real property
Principal paid under marriage
settlement is not taxable income
Compensation for Damages
Nontaxable represent damange,
recoveries related to physical benefit
SSS funereal benefit (12,000 tax
exempt)
Maternity benefits exempt
PAGCOR vat exempt
NAPOCOR & PNR subject to tax
Gain from sale of certificate of Indebtedness
Exemption (capital gains only, NOT
interest income)
Tax exempt interest income
PNRC, PAG IBIG Mortgage certificates,
senior citizen, MWEs, no tax

Barangay Micro Business Enterprise

Including loans, exclusive of land
Not be more than P3,000,000
Certificate of Authority
2 years
Not subject to income tax

Educational institutions (tax exempt)

Government educational
institutuions
Non stock & non profit
CHAPTER 6: FRINGE BENEFITS

Additional remunerations for overtime

and separation pay do not include
fringe benefits
Fringe benefit tax in cash or in kind,
in addition to basic salaries, to an
individual employee OTHER than rank
and file employee
Government liable of fringe benefit
tax

Fringe benefit tax final tax on the

employees income to be withheld by
the employer.
Grossed up monetary value of the
fringe benefits shall be determined by
dividing the monetary value of the
fringe benefit by 68%
32% effective January 1, 2000

Classification of Fringe benefits

1. Rank and File employees
Normal tax rate
2. Managerial Employees
Final Fringe benefit tax (32%)
3. Allowances, regularly received
Part of compensation income
Managerial employee execute
management policies
Supervisory employee the exercise of such
authority is not merely routinely or clerical in
nature but requires the use of independent
judgement.
Taxable amount grossed up monetary value
The grossed up monetary value is the benefit
expense of the employer which is also
income of employee
Fringe benefit tax a final tax on the gross
taxable income

Fringe benefit tax intended to

recover the lost revenue of the
government due to a previous
malpractice of the employer &
employee

Valuations
1. Fringe benefit money, monetary
value
2. Fringe benefit property transferred to
the employee, FMV of property
3. Fringe benefit property not
transferred depreciated value.
HOUSING FRINGE BENEFITS
Zonal value value of the land and
improvement from Real property
declaration form
Fair Market Value BIR commissioner
Housing privilege
Lease
Assignment
Purchase,
instalment
Purchase, no
instalment

50% x rental
payments
5% x (FMV or ZV) x
50%
5% x AC x 50%
(AC , exclusive of
interest)
MV = FMV or ZV

Motor Vehicle
Purchase by
employer

MV = AC

Cash given to
employee
Purchase of car
on instalment
basis
Employer
shoulder a portion
of the purchase
Employer owns,
and maintain a
fleet of motor
vehicles
Employer leases
and maintains a
fleet of motor
vehicles

MV = cash given
MV = AC/5
MV = amount
shouldered
MV = (AC/5) x 50%

MV = 50% x rental
payments

Aircraft No FBT
Yacht estimated useful life of 20 years
Expense account personal expenditures
only
Representation and Transportation
allowances (fixed in amounts) part of
compensation income
Household Expenses
Salaries of household help etc.
Interest on loan at less than market rate
( 12% rule)
Membership Fees, Dues and Other Expenses
Total amount fringe benefit taxable
Expenses for Foreign travel
Lodging cost in a hotel, etc.
Excess of $300 shall be subject to FBT cost
of economy & business class not subject to
FBT
30% of 1st Class subject to FBT
Inland travel not subject to FBT
No supporting documents, all included in FBT
Holiday and Vacation Expenses FBT
Educational assistance (Gen Rule, subject to
FBT)
Exemptions: relation to trade or business
written contract remain employed
General rule, to dependents, NOT taxable,
competitive scheme
Insurance benefits, not taxable (SSS and
GSIS)
Group insurance of his employees
FBT on Aliens
Non resident Alien
(not engage in
business)
Special Economic
zones
Others

Tax Base
75%

Tax Rate
25%

85% or
75%
85%

25% or
75%
15%

Change in purpose purpose at the time of

SALE
Banks, not dealer of securities, investment in
stocks and securities, capital assets
Investment in securities, capital
ROPA, ordinary
Amount realized amount received & FMV of
property
Capitalized acquisition & incidental costs
Reduction from the selling price- adjusted
cost and the expenses related to the
disposition.
Special rules in determining acquisition cost
1. Property was acquired by purchase, on
or after march 1, 1913
2. Inheritance, FMV at the date of
acquisition
3. FMV of date of donation or acquisition
cost of donor, whichever is lower
4. Property was acquired for less than full
and adequate consideration.
Ordinary Gain (loss) vs. Capital Gain (loss)
Net Capital Gain (Loss) not real property,
subject to ITR
Preferential Tax Treatment for capital gain
1. Net capital gain is added to ordinary
gain but net capital loss is not
deductible from ordinary gain.
2. Net ordinary loss is deductible from
net capital gain
3. Capital losses are deductible only to
the extent of the capital gain
4. For the individual the reportable
percentages of capital gain or loss
shall be
100%
Short term
50%
Long term
5. Net capital loss carry over (see book)
NOTE: NET CAPITAL LOSS NOT DEDUCTIBLE
(to ordinary)
Corporation NO NCLCO
STOCK TRANSACTIONS
CHAPTER 7: DEALINGS IN PROPERTY
Dealings in Property disposal by sale or
exchange
Ordinary assets - subject to regular income
tax
Normal course of business
Capital assets other than ordinary assets
Partnership, joint venture,
investment property

1. Dealers in securities are not liable of

the stock transaction tax of 1%
based on selling price of FMV
whichever is higher (30% normal tax)
2. NOT Dealers either stock transaction
tax of of 1% based on SP or FMV,
whichever is higher or capital gains
tax of 5% to 10%
5%
10%

Up to P100,000
Excess of
P100,000

Unidentifiable shares of Stocks

1. FIFO
2. Seller maintain the books of accounts,
moving average
3. Stock dividend received, an allocated
cost of the original cost shall be
assigned to the said dividends.
Installment sales of shares of stock
1. If the initial payment does not exceed
25% capital gains tax is allowed.
2. Proportionate ratio of the instalment
payment received over the total
selling price or the total contract price.
Short sales of securities
Speculator sells securities which he
does not own, if the price of securities
go up, he incurs a loss.
Wash sales substantially identical securities
Seller is not a dealer in stock or
securities
Loss not deductible
Gain taxable
Securities becoming worthless
Cannot be a bank or a trust company
incorporated under Philippine laws.
Written off amount capital loss
Liquidation Dividend (SF)
Gain or loss (deductibe/taxable)
Tax Treatment no recognition of gain or loss
Own share received in Exchange of Property
FMV of securities

Treasury Shares deductible loss if the loss

incurred is subsequently reissued at less
than cost.
Sale of corporate bonds
Gains or loss, premiums or discount
Amortized, early retirement, realize all

Retirement of Bonds
Taxable gain or deductible loss

Interest in Partnership taxable gain or

deductible loss
Abandoning Property for a foreclosure sale
Capital loss

Disguised Sale two parties, related parities

partly sale/partly gift
In lieu, 6% capital gains tax

Real Properties immovable properties

Whether or not the property is used in
trade or business
Principal Residence - 6% based on the SP or
zonal value
Capital gains tax (Exempted) 18 months
from the date of disposition
1. Historical or adjusted cost basis of
property sold carried to the new
principal residence
2. 30 days to notify the commissioner to
avail the exemption
3. Once every two years
4. Taxable amount
= (Unutilized SP/GSP) x GSV or ZV
*higher
5. Tax should be paid within 30 days after
18 month period
Unutilized taxable
Basis of the New Principal Residence
1. Sales proceeds fully utilized new cost
same as OLD COST
2. Sales proceeds partially applied
Basis of the new principal residence
= (Partially utilized selling price/Gross
selling price) x Basis of the old
principal residence sold
3. Acquisition costs exceeding the entire
sales proceeds, (OLD COST + Total
cost of construction entire sales
proceeds utilized)
Sale or Exchange of Real Property Not used
in business
6% capital gains
Sales or Exchange of Real Property used in
business
RULE # 1 classified as inventory, the gross
selling price or FMV whichever is higher
Creditable Withholding Tax
A. BIR revenue regulation, exempt
B. Real Estate business
P500,000
1.5
Selli
%
ng
Price
More P500,000 to
3.0
2,000,000
%
P2,000,001+
5.0
%
RULE # 2 not classified as inventory,
ordinary asset.
6% of the gross selling price or FMV
*dont forget gain on sale to income
statement
CWT
RULE # 3 sold to go government unit
6% final capital gains Option
tax
30% normal tax rate
Exempt to withhold CWT
a. Corporations with the NLURB
180,000 metro manila
150,000 in other areas

b. BOI, RA 7916, omnibus investment

code 1987
c. GSIS, SSS, PHIC, PCSO
Sale of Real Property Not Located in the
Philippines
Scheduler tax rate or 30% respectively
Capital tax gain 6% - capital assets only
Merger absorbed by another
Consolidation old corporations cease to
exist.
Rules:
1. Nonrecogniton of gains or loss if
Exchange of property is SOLELY in
shares of stock.
2. Recognition of gain but not loss if the
gain to recognize should not exceed
the sum of money and the FMV
A patent an exclusive right granted by the
government to an inventor
A copyright artistic, composer, artist,
author
Goodwill intangible asset that is identifiable
with the entire business entity.
CHAPTER 8: DEDUCTIONS FROM GROSS
INCOME
Deductions of allowable deductions
expense and losses, constructed against the
taxpayer.
Not presumed to prove the taxpayer a
just and reasonable taxable amount as
the basis of income tax.
Revenue expenditures provide benefits to
the current accounting period, called period
cost.
Expensed as incurred.
Capital expenditures nonrecurring
expenditures, provide current and future
benefits in business operations.
Expanded by depreciation or
amortization from period to period in
the form of depreciation or
amortization, cost to capitalize
Increase in useful life,
capacity,efficiency
Situs of Expneses incurred in relation to the
business income taxable in the Philippines
Cannot be traced, it should be
allocated based on the gross income
within and without
The mixed expenses are allocated
based on the gross income.
Items not deductible from Gross Income
Premiums covering life of employee
when the taxpayer is a beneficiary
under such policy
Related taxpayers transactions
GAAP is more inferior to tax laws
Employed taxpayer compensation income
arising from personal services rendered.

Deduction can be, personal exemptions,

PPHHI 2,400/year, does not exceed 250,000
There is still Allowable itemized
deductions
Corporation reduce gross income, no
personal exemptions.
Classification of Deductions from GROSS
INCOME
1. Optional Standard Deductions
2. Regular allowable, itemized
deductions
3. Special allowable, itemized deductions
OSD individual 40 % of gross sales or
gross receipts not gross income
Not required to submit (AIF)/Financial
Statements.
OSD corporations 40% of gross income
NOTE: ODS not required to supporting
documents,
Accrual gross sales, cash, gross receipts
NET sales is used
Not subject to final tax should be included
in OSD.
REGULAR ALLOWABLE ITEMIZED
DEDUCTIONS
Itemized deductions allowed deductible
necessary business expense, requires
supporting documents
Compensation income should not be
deducted,
OSD less premium payments on health
Income subject to Regular Allowable Itemized
deductions
Educational institutions and non profit
hospitals
Government owned and controlled
corporations
Earned within the Philippine earned by
a foreign corporation
COMPOSITION OF REGULAR ITEMIZED
DEDUCTIONS
1. General business expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas and mines
8. Charitable and other contribution
9. Research and development
10.Petition trust
11.Premium payment on heath (for
individual taxpayers)
GENERAL BUSINESS EXPENSE
Directly attributable to the
development, management,
operation, and/or conduct of trade,
business, or profession
Incurred in the year, expires within the
year

NOLCO not regular deduction allowable

deductions
Not included because it happened in
the previous years.
Attributed to the trade and business
ordinary
Trade and business intended to make profit
Salaries and wages of the corresponding
withholding tax has been deducted and
remitted to the BIR
o MWE tax exempt
o Death of the employee, part of
deductible
Material and Supplies deductible
Travelling Expenses deductible in relation
to trade
Rent Expenses are deductible as ordinary
and necessary business expenses
Accrual expense, deductible even if not
paid
Leasehold improvement lower of life of
improvement or lease contract.
Representation expense (EAR)
entertainment, amusement and
recreation
% of net sales for merchandising
1% of net revenue for sale of services
EAR used both for trading and servicing
business no case shall exceed the
maximum percentage ceiling provided in the
regulations

Interest Expense stipulated in writing in

connection to trade and business or
professions.
33% rule - if there is an interest income of
20% final tax
33% reduced deductible expense
Whether corporation or individual to counter
tax arbitrage scheme
Interest expense no 33% if in favor of
government
- Interest on delinquency taxes, deduct
in full
Nondeductible interest expense
- Relative
- Paid in advance
- Carry tax exempt
- Indebtedness for petroleum
explorations
- On unclaimed salary is not deductible
from gross income
Related debtor and creditor
- 50% rule on ownership, or more
Prepaid interest by a Cash basis individual
taxpayer
1. Full amount principal indebtedness
fully paid
2. Proportionate to principal amortization
year realized
Interest to Finance petroleum exploration
- Tax exempt, no deduction

Optional treatment of interest expense

- Outright deduction and capital
expenditure
TAXES allowed deduction, in connection
with the taxpayers profession, trade or
business
Foreign country tax item of deduction or
tax credit
Not allowed as deductions, those that are
paid to the government, does not include
delinquent taxes.
Interest as interest expense, surcharge not
deductible
Bad debts Expense written off to be
deductible
- Connected to profession trade
business
- *actual amount paid, without recourse
- deductible
- With recourse not deductible
- Original amount
- Proportionate amount
Accounting for worthless accounts
- Direct or actual method, cash method
cannot be deducted
Depreciation Expense allowed deduction
Depreciation in petroleum operations,
initially placed properties
- Straight-line, declining balance
- Estimated useful life
10 years or shorter depending on BIR
5 years, not petroleum, straight line
Depreciation of properties used in mining
operations
5 to 10 years
Depletion Expenses the exhaustion of
natural resources in the mines, oil and gas
well due to production
Option of the taxpayer
- Part of adjusted basis for depleted cost
- Deduction to compute taxable income
from mining operations
Capital Expenses of Private
Educational Institutions
1. Deduct immediately as expenditure
2. Deduct as allowance for depreciation
Deductible Pension Trust
1. Defined benefit plan
2. Defined contribution plan
(normal or actuarian valuation) or
actual contribution to the plan
whichever is lower
(pp. 456)
Charitable and Other Contributions
- Non operating expense, law
specifically provides
- Profession trade or business
- Actual payment

Recipient must be an entity specified

by law
- Not more than 30% of which should be
used for administrative purposes
Subject to limitation
1. 10% - individual taxable income
2. 5% - corporation taxable income
Research and Development
- Ordinary and necessary expenses
- Deferred expenses distributed, Five
years
Premium payment for Health/Hospitalization
Insurance
P2,400 per family or P200 a month
whichever is lower provided gross income
does not exceed P250,000
SPECIAL ALLOWBLE ITEMIZED
DEDUCTIONS
1. Adopt a school program
2. Fifteen (15%) additional deduction of
salaries (wages paid to senior citizens)
3. Senior citizen Discount RA 9257
4. Rooming in and Breast feeding
practices RA 7600
5. Free legal assistance under RA 9999
6. Income to beneficiaries under estate
and trust the amount taxable to the
latter
7. NOLCO
8. Insurance companies
A. Net additions to reserve funds
within a year
B. Premium deposits returned to
policy holders

C. Actual deposit of sums with the

officers of the Government of the
Philippines
Valuation of assistance or donation
Properties acquisition cost,
depreciated value ( lower)
Real property FMV or BV ( lower )
Program is a priority project, +50%
exemption
Limit if not priority project but still plus 50%

Senior Citizens Salaries and Discounts (15%

of salary)
1. Six months
2. Poverty level
Exemptions:
1. For goods and services (20%
discount)
2. 5% registered in the name of the
senior citizen, if the water and
electricity consumptions do not
exceed 30cm and 100kw
3. 50% if the government administer
opted OSD
Rooming and breastfeeding practices
- Double the amount
Free legal assistance
- 10% of gross receipts
- Or rate per hour, less 60 hours