DEDUCTIONS FROM GROSS INCOME
These refer to items or amounts authorized by law to be subtracted from pertinent items of
gross income to arrive at the taxable income.
Nature of deductions
The items of amounts allowed as deductions represent the expenses (reduction of wealth)
of the taxpayer (other than personal expenses and capital expenditures) in earning the
income (increase of wealth) subject to tax as well as reasonable living expenses.
Requisites before deductions are allowed
1.
2.
3.
4.
5.
There must be specific provision of law allowing the deductions, since deductions do
not exist by implication.
The requirements of deductibility must be met.
Refer to discussions on itemized deductions for the requirements of each deduction.
There must be proof of entitement to the deductions. The burden of proof to establish
the validity of claimed deduction is on the taxpayer. This is consistent with the rule that
tax exemptions must be strictly construed against the taxpayer and liberally in favor of
the State.
The deductions must not have been waived.
The withholding and payment of tax required must be shown (Domondon, 2013).
General rules in claiming deductions
Deductions must be paid or incurred in connection with the taxpayer’s trade, business, or
profession.
Matching concept of deductibility
This posits that the deductions must, as a general rule, “match” the income, i.e.
helped earn the income (Domondon, 2013).
Ordinary and necessary expenses must have been paid or incurred during the taxable
year for it to be deductible from gross income. Further, the deduction shall be
taken for the taxable year in which 'paid or accrued' or 'paid or incurred.' Otherwise,
the expenses are barred as deductions insubsequent years (CIR
v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007).
1.
2.
Deductions must be supported by adequate receipts or invoices (XPN: standard
deduction).
The withholding and payment of tax required must beshown.
Any income payment which is otherwise deductible shall be allowed as a deduction
from gross income only if it is shown that the income tax required to be withheld has
been paid to the BIR (Sec. 2.58.5, RR 2-98).
Wherenowithholdingmadebutstilldeductible
A deduction will also be allowed in the following cases where no withholding oftax was
made:
1.
The payee reported the income and the withholding agent/taxpayer pays the
tax,including the interest incident to the failure to withhold the tax, and surcharges, if
applicable, at the time of the original audit and investigation;
The recipient/payee failed to report the income on the due date thereof, but the
withholding agent/taxpayer pays the tax, including the interest incident to the
failure to withhold the tax and surcharges, if applicable, at the time of the original audit
and investigation; or
2.
The withholding agent erroneously underwithheld the tax but pays the difference
between the correct amount and the amount of tax withheld, including the interest, incident to
such error, and surcharges, if applicable, at the time of the original audit and investigation
(Sec. 2.58.5, RR 2-98).
Persons who are NOT ALLOWED to claim deductions from gross income
NRA-NETB and NRFC are subject to final tax on their gross income derived from sources within the
Philippines, hence, no deductions allowed to them.
NOTE: A RC, NRC, and RA whose income is purely compensation income are also not entitled to such
deductions.
Deductions that can be claimed by a corporation
Domestic Corporations (DC) and Resident Foreign Corporation (RFC) may opt between the OSD OR
the Itemized Deductions, except Non-Resident Foreign Corporation (NRFC) which is subject to
final tax on its gross income from sources within the Philippines.
Return of capital (cost of sales or services)
The amount representing return of capital should be deducted from the proceeds from the sales
of assets and should not be subject to income tax. Cost of goods purchased for resale, with
proper adjustment for opening and closing inventories are deducted from gross sales in
computing gross income (Rev. Reg. 2, Sec. 65).
The mere return of capital is allowed as deduction from gross income in order to arrive at
income subject to tax. While in general, the nomenclature of “cost of sales or cost of solds good” is
applied, the return of capital have different components depending upon the nature of the
business being taxed (Domondon, 2013).
Cost of goods sold (CGS)
CGS shall include the purchase price or cost to produce the merchandise and all expenses
directly incurred in bringing them to their present location and use.
For trading or merchandising concern, CGS means the invoice cost of goods
sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods are in transit.
For manufacturing concern, CGS means all costs incurred in the production of the
finished goods such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the
raw materials to the factory or warehouse. The term may be used
interchangeably with "cost of goods manufactured and sold".
Cost of services (COS)
COS means all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including:
1.
Salaries and employee benefits of personnel, consultants and
specialists directly rendering the service, and
2.
Cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies.
NOTE: COS shall not include interest expense except in the case of banks and
other financial institutions (RR 16-08).
Itemized Deductions under TRAIN (Sec. 34)
Except for taxpayers earning compensation income arising from personal services
rendered under an employer-employee relationship where no deductions
shall be allowed other than premium payments on health and/or
hospitalization insurance, in computing taxable income subject to income tax
there shall be allowed the following deductions from gross income:
1.
Expenses
2.
Interest
3.
Taxes
4.
Losses
5.
Bad debts
6.
Depreciation
7.
Depletion of oil and gas wells and mines
8.
Charitable and other contributions
9.
Research and development
10.
Contributions to pension trusts
The itemized deductions are discussed in detail below
EXPENSES
There shall be allowed as deduction from gross income
1.
All the ordinary and necessary expenses
2.
Paid or incurred during the taxable year
3.
In carrying on or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a
profession (Sec. 34[a], NIRC).