TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
2ND SEMESTER ACADEMIC YEAR 2020-2021
TAX 3 – SPECIAL TAXATION
DEDUCTIONS ON GROSS INCOME
Deductions from the gross income applies to
individuals and corporations engaged in trade or
business; and to individuals in the exercise of
profession.
Deductions are amounts allowed by the Tax Code and
other special laws to be
deducted against the gross income to arrive at the
taxable income for purposes of computing the income
tax liability.
As a rule, if the taxpayer does not within any year
deduct his expenses, losses, interests, taxes or other
charges, the taxpayer can no longer deduct them from
the income of any succeeding year.
General Requisites for an item to be Deductible
(ON LAWS)
1. Ordinary in the conduct of trade/business or
profession
2. Necessary in the conduct of trade/business or
profession
3. Legitimate/Legal in nature
4. Actually paid (cash basis) or incurred (accrual
basis)
5. Withholding required was made, if applicable
(See RR 11-2018 Sec. 1 and 2)
6. Substantiated or documented by valid
documents such as receipts or invoices
Non-deductible Expenses:
a. Personal living and family expenses;
b. Amount paid out of new buildings or for
permanent improvements or betterments
made to increase the value of any property or
estate;
c. Amount expended in restoring property or in
making good exhaustion thereof for which an
allowance is or has been made; or
d. Premiums paid on any life insurance policy
covering the life of an officer or employees, or
of any person financially interested in trade or
business carried on by the taxpayer, individual
or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.
I. Regular Itemized Deductions
A. Business Expenses
B. Interest
C. Taxes and Licenses
D. Losses
Net Operating Loss Carry-Over (NOLCO) –
is the excess of allowable deductions over
gross income that can be carried over as a
deduction from gross income for the next three
consecutive taxable years immediately
following the year of such loss.
For the years 2020 and 2021, NOLCO can be
carried over for five consecutive taxable years
immediately following the year of such loss
(Bayanihan to Recover as One Law)
E. Bad Debts
F. Depreciation
G. Depletion
H. Charitable and Other Contributions
I. Pension Trust
II. Special Allowable Itemized Deductions
A. Special deductions under NIRC and special
laws
1. Any amount of discount granted to senior
citizens under RR 7-2010 and to PWDs
under RR 5-2017 shall be a tax-deductible
expense on the part of the company
granting such discount.
2. Income distribution from a taxable estate
and trust are deductible on the part of the
estate and trust but an item of gross income
on the part of the beneficiary.
3. Transfer to reserve fund and payments to
policies and annuity contracts of insurance
companies.
4. Transfers to mandated reserves funds of
taxable cooperatives.
5. Dividend distribution
Investment Trust.
of
Real
Estate
B. Deduction incentives under special laws
1. Additional compensation expense for
senior citizen employees. (RA 9257)
̶̶̶ additional deduction from gross income
equivalent to 15% of the total amount paid
as salaries and wages to senior citizens as
long as:
i. Employment shall have to continue
for at least 6 months, and
ii. The annual taxable income of the
senior citizen does not exceed the
TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
2ND SEMESTER ACADEMIC YEAR 2020-2021
TAX 3 – SPECIAL TAXATION
poverty level as determined by the
NEDA.
2. Additional compensation expense for
persons with disabilities. (RA 9442)
̶̶̶ additional deduction from the gross
income equivalent to 25% of the total
amount paid as salaries and wages to
disabled persons provided:
i.
ii.
The entity present proof as certified
by the Department of Labor and
Employment that disables persons
are employed.
The
disabled
employee
is
accredited with the DOLE and DOH
as to his disability, skills and
qualifications.
3. Cost of facilities improvements for persons
with disability. (RA 7277)
̶̶̶ additional deduction equivalent to 50% of
the direct costs of the improvement or
modifications.
4. Additional training expense under Jewelry
Industry Development Act. (RA 8525)
̶̶̶ additional deduction equal to 50% of the
expenses incurred in training schemes
approved by TESDA provided the business
submitted to the BIR a certified true copy of
its Certificate of Accreditation issued by
BOI.
5. Additional contribution under the Adopt-aSchool Project. (RA 8525)
̶̶̶ additional deduction equivalent to 50% of
the contribution of the adopting entity for
the “Adopt a School Program”
performance of the legal profession
whichever is lower. The free legal assistance
is exclusive of the 60 hours mandatory free
legal assistance rendered to indigent clients
as mandatory requirement for practicing
lawyers.
8. Additional productivity incentive bonus
expense. (RA 6971)
̶̶̶ additional deduction equivalent to 50% of
the total productivity bonuses given to
employees under the program.
9. Additional special deduction from the
taxable income equivalent to 50% of the
total expense for skills training and
research/development expenses under RA
10771 also known as “Philippine Green Job
Act of 2016”
10. Special deductions allowed under the
Bayanihan to Heal as One (RA 11469) and
Bayanihan to Recover as One Law (RA
11494)
III. Optional Standard Deduction (OSD)
For individual taxpayers (resident citizens, nonresident citizens, resident aliens and taxable estates
and trusts only):
✓ In place of the cost of sales or cost of services;
regular itemized deductions, and special itemized
deductions, taxpayers may deduct a standard
deduction in an amount not exceeding:
a. 40% of their gross sales if the individual is
under the accrual basis, or
b. 40% gross receipt if the individual is under
the cash basis.
6. Additional deduction for compliance to
rooming-in and breastfeeding practices. (RA
7600, as amended by RA 10028)
̶̶̶ the expenses incurred in complying with
the rooming-in and breastfeeding practices
shall be deductible up to twice the actual
amount.
✓ Note that cost of sales or cost of services in case
of individual sellers or goods and services, are not
allowed to be deducted for determining the basis
of the OSD.
7. Additional free legal assistance expense (RA
9999)
̶̶̶ allowable deduction equivalent to the
amount that could have been collected for
the actual performance of the actual free
services rendered or up to 10% of the gross
income derived from the actual
For domestic corporations and resident foreign
corporations:
✓ Non-operating income are not included in the
basis of computing the 40% OSD for individuals.
✓ Corporations may elect a 40% OSD of its gross
income (income after deducting cost of sales or
cost of services) in lieu of regular itemized and
special itemized deductions.
TARLAC STATE UNIVERSITY - COLLEGE OF BUSINESS AND ACCOUNTANCY
2ND SEMESTER ACADEMIC YEAR 2020-2021
TAX 3 – SPECIAL TAXATION
✓ The 40% OSD is based on all gross income subject
to regular income tax regardless if operating or
non-operating or other income.
✓ The corporation must signify in the first quarterly
income tax return its intention to elect optional
standard deduction as method of deduction,
otherwise, the taxpayer deemed opted to use
itemized deductions. Such election shall be
irrevocable for the whole taxable year for which
the return was made.
For all taxpayers claiming for Optional Standard
Deductions:
✓ The taxpayer who is entitled to and claimed for
the OSD shall not be required to submit with his
tax return such financial statements otherwise
required under the Tax Code.
✓ The taxpayer is not relieved from the
responsibility of withholding taxes as a
withholding agent of the government on certain
income payments made as required by
regulations.
✓ Individuals and corporations mandated to use
itemized deductions are not allowed to opt for
OSD which includes exempt corporations, exempt
individuals and taxpayers subject to special or
preferential tax rates.
Other special cases of considerations for OSD:
✓ The partner’s share in the distributive net income
of a general professional partnership (GPP) cannot
claim for OSD anymore since the share is already
net of the allowable deductions of the GPP.
✓ In case the partner has separate business other
than the GPP, the business can claim OSD to
compute for the taxable income related to the
conduct of business.
✓ Compensation income earners are not allowed to
claim OSD.
✓ For Mixed income earners, only those related to
trade/business or profession can be subjected to
OSD.