Itemized Deductions from Gross Income
1. Interest expense
Requisites for deduction of interest expense
1) There must be valid indebtedness.
2) The indebtedness must be that of the taxpayer.
3) The indebtedness must be connected with the
taxpayer’s trade, business or exercise of profession.
4) Interest expense must have been paid or incurred
during the taxable year.
5) Interest must have been stipulated in writing.
6) Interest must be legally due.
7) Interest payments must not between related
taxpayers.
8) Interest must not be incurred to finance petroleum
operations.
9) In case of interest incurred in the acquisition of
property, used in trade, business, or profession, the
same is not treated as a capital expenditure.
10) The interest is not expressly disallowed by law to be
deducted from gross income of the taxpayer.
2. Taxes
Taxes paid or incurred within the taxable year in
connection with the taxpayer’s trade, business, or
exercise of profession shall be allowed as deduction
except:
1. Philippine income taxes except fringe benefit tax
a. Final income tax
b. Capital gains tax
c. Regular income tax
2. Foreign income tax, if claimed as tax credit
3. Estate tax and donor’s tax
4. Special assessment
Other non-deductible taxes
1. Business taxes, in particular the Value added tax
(VAT)
2. Surcharges or penalties on delinquent taxes.
Examples of deductible taxes
1. Percentage tax
2. Excise tax
3. Documentary stamp tax
4. Occupational tax
5. License tax
6. Fringe benefit tax
7. Local taxes except special assessment
8. Community tax
9. Municipal tax
10. Foreign income tax if not claimed as tax credit
3. Losses
Requisites for deduction of bad debts
1. It must be incurred in trade, profession, or business
of the taxpayer (it must be a business loss)
2. It must pertain to property connected with the
trade, business or profession, if the loss arises from
fires, storms, shipwrecks, or other casualties, or from
robbery, theft, or embezzlement (the loss must be
an ordinary loss)
3. The loss must not be compensated by insurance or
indemnity contract. (The loss must be actually
sustained, not temporary)
4. A declaration of loss must have been filed by the
taxpayer within 45 days from the date of discovery
of the casualty or robbery, theft or embezzlement
giving rise to the loss.
5. The loss must not have been claimed as deduction
for estate tax purposes in the estate tax return.
(Double deduction is not allowed)
4. Bad debts
Requisites for deduction of bad debts
1. The debt must have been ascertained to be
worthless.
2. It must be charged off within the taxable year.
3. It must be connected with the taxpayer’s profession,
trade or business.
4. The taxpayer must be under the accrual basis of
accounting.
5. It must not be incurred from a related party.
5. Depreciation
Allowed Methods:
-
Straight line method
Declining balance method
SYD method
Other methods prescribed by the Secretary of
Finance through the CIR
6. Depletion
- Used in wasting assets (non-renewable) such as
in mining or petroleum businesses.
- Output method: a depletion will occur for each
output.
- Will be considered as expenses
7. Charitable and other contributions
1. Donee is a domestic institution.
2. No income of the done must inure to benefit of a
private party.
3. Contribution = Tax basis of donation
4. Taxpayer is engaged in business.
5. Donee issues BIR Form 2322 with statement of
values of the donor.
6. P50,000 or more worth of donation, filing a
notice of donation within 30 days from receipt of
BIR Form 2322
8. Contributions to pension and trust
1. Employer have an established pension or
retirement fund
2. Actuarial assumptions are sound and
reasonable
3. Employer funded
4. Independent and beyond control of employer
5. Current service cost in full
6. Past service cost amortized over a 10-year
period
9. Research and development costs
 Related to Capital Accounts
- Capitalized and depreciated.
 Not Related to Capital Accounts
- Expensed outright.
- Deferred expense not less than 60 months
10. Other ordinary and necessary trade, business, or
professional expenses
1. Salaries and allowances
2. Fringe benefits
3. SSS, GSIS, PHIC, HDMF, and other
contributions
4. Commissions
5. Outsourced services
6. Advertisements
7. Rentals
8. Insurance
9. Royalties
10. Repairs and maintenance
11. Entertainment, amusement, and recreation
expenses (Goods 0.5% and Services 1% of Net
Sales)
12. Transportation and travel
13. Fuel and oil
14. Communication, light, and water
15. Supplies
16. Miscellaneous
Special Allowable Deductions
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Special Expenses under NIRC and Special
Laws
a. Income distribution from a taxable estate or
trust
Income received by beneficiary or heir are
deductible against gross income of trust or estate.
b. Transfer to reserve fund and payments to
policies and annuity
contracts of insurance companies
40% required based on gross premiums, less
returns and cancellations for risks within one year
and any other additional.
Insurance companies are required to maintain a
reserve fund of 40%, this amount will be considered
as deductible even if it exceeds 40%
c. Dividend distribution of a Real Estate
Investment Trust
90% of distributable income, be distributed.
d. Transfer of reserves funds of taxable
cooperatives
Generally, cooperatives are exempt.
Unrelated activities’ income is subject to tax.
Amount transferred to reserve fund out of net
surplus from unrelated activities is a deduction
against gross income.
e. Discount to senior citizens
Senior Citizens Act of 2003
20% of gross sales to senior citizens are claimable
as special deduction.
f. Discount to PWDs
20% of gross sales to persons with disabilities are
claimable as special deduction.

Deduction incentives under Special Laws
g. Additional compensation expense for Senior
Citizen employees
- 15% of total amount paid as salaries to senior
citizens.
 Requisites:
- Employment for at least six months
- Annual taxable income of senior citizen does not
exceed poverty level (determined by DOLE,
NEDA?)
h. Additional compensation expense for PWD
employees
- 25% of total amount paid as salaries to persons
with disabilities.
 Requisites:
- Proof of employment presented to DOLE.
- PWD employee is accredited with DOLE and DOH
as to disability, skills, and qualifications.
i. Cost of facilities improvements for PWDs
- 50% of direct costs of improvements of
modifications
Additional training expense under Jewelry
Industry Development Act
- 50% of expenses incurred in training schemes
approved by TESDA.
- Under Bayanihan Act, 3 years became 5 years, but
we consider 3 years under NIRC
- Income is not exempt
- No substantial change
j.
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k. Additional training expense under internship
program (CREATE law)
50%
Should be under internship/apprenticeship program
Should be TESDA/CHED certified
Intern should be enrolled in a public school
Should not exceed 10% of direct labor wage
So,,,,, 50% vs 10%, whichever is lower
l.
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Additional contribution expense under
Adopt-a-School Program
50% of contribution of adopting entity for the Adopta-School Program
Actual contribution or MOA whichever is lower:
Cash
Personal property
Consumable goods
Services
Real property
m. Additional deductions for compliance to
rooming-in and breast-feeding practices
- Additional 100% of the total amount incurred.
- Net of proceeds of collection from usage of
facilities, if any
n. Additional free legal assistance expense
- Available for lawyers
- 10% of gross income derived from actual
performance of the legal profession or the value of
pro-bono cases whichever is lower.
- Mandatory 60hrs for lawyers is not included
o. Additional productivity incentive bonus
expense
- 50% of total productivity bonuses given to
employees
- 50% rank and file employee training and special
studies costs with institutions accredited by TESDA.
Net Operating Loss Carry Over (NOLCO)
- 3 consecutive years validity according to NIRC
- FIFO ang basis ng pag apply ng loss, pero if di
parin naubos within 3 years, then mag eexpire na
Optional Standard Deduction
- Individual: 40% of gross sales/receipts/revenue
- Corporation: 40% of gross income