C. ALLOWABLE DEDUCTIONS
Learning Objectives. At the end of this module, students are expected to:
1. Identify allowable deductions for both individual and corporate taxpayers;
2. Identify the differences between itemized and optional standard deductions;
3. Identify deductible expenses;
4. Identify expenses that are fully and partly deductible
INDIVIDUAL
Deductions from Gross Income. –
Employment expenses
Aliens, whether residents or not, who are receiving only salary or compensation income are
not allowed any deduction against such income.
Personal deductions
Home mortgage interest, medical expenses, contributions, and other personal expenses
cannot be claimed as deductions for income tax purposes. However, social security
contributions, up to the prescribed amount of maximum mandatory contributions, are
excluded from gross income.
Business deductions
In the case of individuals engaged in business or the practice of a profession, and who opted
to be taxed at the regular graduated income tax rates, the following expenses are allowed as
deductions from gross income:
 All ordinary and necessary expenses paid or incurred during the taxable year in
connection with the trade, business, or profession, including raw materials, supplies,
and direct labor.
 Wages and other forms of compensation for personal services actually rendered,
including the grossed-up monetary value of fringe benefits and travel expenses
incurred in the pursuit of the trade or profession.
 Business rentals.
 Interest paid or incurred within a taxable year in connection with the conduct of a
taxpayer’s profession, trade, or business, less an amount equal to a certain percentage
of the interest income subject to final tax.
 Entertainment, amusement, and recreation expenses, not to exceed the following
ceilings:
o 0.50% of net sales for taxpayers engaged in sale of goods or properties.
o 1% of net revenue for taxpayers engaged in sale of services, including
professionals and lessors of properties.
 Taxes.
 Losses.
 Bad debts.
 Depreciation.
 Charitable and other contributions, subject to certain limitations.
 Research and development (R&D) expenditures.
CORPORATION
Corporate – Deductions and Optional Standard Deduction
Corporate taxpayers can avail themselves of the optional standard deduction computed at 40%
of gross income. The optional standard deduction is in lieu of the itemized operating expenses.
1. Depreciation and Depletion -Depreciation is usually computed on a straight-line basis,
although any reasonable method may be elected if the aggregate amount of depreciation,
plus salvage value at the end of the useful life of the property, will equal the cost of the
property.
A cost depletion allowance is allowed:
 For oil and gas wells, depletion is based on actual reduction in flow and production
ascertained, not by flush flow, but by the settled production or regular flow.
 For mines, depletion is allowable up to an amount not to exceed the market value, as
used for purposes of imposing the mining ad valorem taxes, of the products mined and
sold during the year.
2. Goodwill - Amortization of goodwill is not deductible for tax purposes.
3. Start-up expenses - Start-up expenses are deductible when incurred.
4. Interest expenses- The allowable deduction for interest expense shall be reduced by an
amount equal to 33% of interest income that is subject to final tax, if any.
5. Bad debts- Bad debts are deductible expenses when written-off, subject to certain
requirements.
6. Charitable contributions - The deduction for charitable contributions ordinarily may not
exceed 5% of taxable income. However, contributions to certain institutions are 100%
deductible, subject to certain conditions.
7. Entertainment expenses- Entertainment, amusement, and recreation expenses should not
exceed 0.5% of net sales for taxpayers engaged in the sale of goods or properties, or 1% of
net revenue for taxpayers engaged in the sale of services, including professionals and
lessors of properties.
Special deductions - Special deductions are allowed for certain businesses (e.g. insurance,
mining, petroleum, and real estate investment trust).
1. Fines and penalties - Interest penalties are deductible. Surcharge and compromise
penalties imposed for non-payment or late payment of taxes are not deductible for tax
purposes.
2. Taxes - Corporate taxpayers can claim a deduction for all taxes paid or accrued within the
taxable year in connection with their trade or business, except for the following:
 Philippine CIT.
 Income taxes imposed by authority of any foreign country, unless the taxpayer elects
to take a deduction in lieu of a foreign tax credit. For a resident foreign corporation, the
only option is to deduct; foreign tax credit is not allowed to be claimed
 Donor’s tax and estate tax.
 Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
In the case of a foreign corporation, deductions for taxes are allowed only if they are connected
with income from sources within the Philippines.
3. Net operating losses - A net operating loss for any taxable year immediately preceding the
current taxable year, which had not been previously offset as a deduction from gross
income, may be carried over as a deduction from gross income for the next three
consecutive taxable years immediately following the year of this loss (except losses during
the period when the taxpayer was tax-exempt),
4. Loss carrybacks are not allowed.
5. Payments to foreign affiliates – A Philippine corporation can claim a deduction for royalties,
management service fees, and interest charges paid to foreign affiliates, under arm'slength terms, where the appropriate WHTs are withheld and remitted.
6. Head office expense allocations –A resident foreign corporation is allowed to claim
allocated head office expenses as a deduction, subject to certain requirements.
Expenses. - Ordinary and Necessary Trade, Business or Professional Expenses
1. Advertising and Promotions
2. Amortizations
3. Bad Debts
4. Charitable Contributions (Note: Donations should be made to BIR accredited donee
institutions, otherwise individual taxpayers can only claim 10% of the donation as
deductible)
5. Commissions
6. Communication, Light and Water
7. Depletion
8. Depreciation
9. Director’s Fees
10. Fringe Benefits
11. Fuel and Oil Insurance
12. Interest (Note: The taxpayer’s allowable deduction for interest expense shall be
reduced by an amount equal to the 33% of the interest income subjected to final tax.
Moreover, all interest incurred or paid to related parties cannot be claimed as
deductions to income)
13. Janitorial and Messengerial Services
14. Losses
15. Management and Consultancy Fee (Note: A portion of expenses must be withheld and
paid to BIR.)
16. Miscellaneous
17. Office Supplies
18. Other Services
19. Professional Fees (Note: A portion of expenses must be withheld and paid to BIR.)
20. Rental (Note: A portion of expenses must be withheld and paid to BIR.)
21. Repairs and Maintenance-Labor
22. Repairs and Maintenance-Materials/Supplies
23. Representation and Entertainment (Note: Limited to 0.5% of net sales for sellers of
goods or 1% of net revenue for seller/provider of services.)
24. Research and Development
25. Royalties
26. Salaries and Allowances
27. Security Services
28. SSS, GSIS, Philhealth, HDMF and Other Contributions
29. Taxes and Licenses
30. Tolling Fees
31. Training and Seminars
32. Transportation and Travel
As a general rule, allowable deductible expenses must meet the following criteria:
 Relates to the business
 Supported by substantiated documents
 Not contrary to law, public morals, policy and order
 Reasonable in Amount
 Complied with Withholding Tax Requirements
Items not Deductible.
General Rule. - In computing net income, no deduction shall in any case be allowed in
respectto 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;
3. Bribes, Kickbacks and Other Similar Payments.
4. Losses from Sales or Exchanges of Property.
5. Special Provisions Regarding Income and Deductions of Domestic or
ForeignInsurance Companies
a. Special Deduction Allowed to Insurance Companies.
b. Mutual Insurance Companies.
c. Mutual Marine Insurance Companies.
d. Assessment Insurance Companies.
6. Losses from Wash Sales of Stock or Securities