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Understanding Optional Standard Deduction

The document discusses the optional standard deduction (OSD) under Philippine tax law, which allows taxpayers to deduct either a percentage of their gross income or sales instead of itemizing deductions, with the percentage being 40% for individuals and corporations. It provides details on who can claim the OSD, how to calculate it, and that the election must be made in the first quarter tax return for the year and cannot be changed. The document also includes an illustration of how to compute the OSD for an individual retailer and corporation.

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Stanley Renz Obaña Dela Cruz
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209 views2 pages

Understanding Optional Standard Deduction

The document discusses the optional standard deduction (OSD) under Philippine tax law, which allows taxpayers to deduct either a percentage of their gross income or sales instead of itemizing deductions, with the percentage being 40% for individuals and corporations. It provides details on who can claim the OSD, how to calculate it, and that the election must be made in the first quarter tax return for the year and cannot be changed. The document also includes an illustration of how to compute the OSD for an individual retailer and corporation.

Uploaded by

Stanley Renz Obaña Dela Cruz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Module No.

14 – Optional Standard Deduction

Learning Outcome/s:
To understand the nature and rules of the optional standard deduction (OSD)

Core Values/Biblical Principles:


What you have learned and received and heard and seen in me – practice these things, and the God of
peace will be with you. Philippians 4:9 (ESV)

Introduction:
Optional standard deduction (OSD) is in lieu of the itemized deductions including NOLCO allowable
under the NIRC and special laws.

Body:
Should the taxpayer opt to deduct under OSD, the allowable deduction of the taxpayer is simply
presumed as a percentage of gross sales or receipts for individuals and gross income for corporation.

Who can claim OSD?


All taxpayers who are subject to tax on taxable net income can claim deductions except:
1. Non-resident alien engaged in trade or business (NRA-ETB)
2. Taxpayers mandated to used itemized deductions

The option to elect OSD or itemized deduction must be made in the first quarter return. Such election
when made shall be irrevocable in the taxable year for which the return is made.

Percentage of OSD
1. Individual taxpayers – 40% of total sales/revenues/receipts/fees
2. Corporate taxpayers – 40% of gross income

Illustration
The income statement of a retailer of goods under the accrual basis of accounting is shown below:
Sales, net of returns, allowances, and discounts Php 1,000,000
Less: Cost of sales 600,000
Gross income Php 400,000
Less: Operating expenses
- Administrative expenses Php 100,000
- Selling expenses 120,000 220,000
Net income Php 180,000

The OSD of the taxpayer is computed as follows:


Individual Corporation
Net sales Php 1,000,000 Php 1,000,000
Cost of sales or services - 600,000
Basis of OSD Php 1,000,000 Php 400,000
OSD Rate 40% 40%
OSD Php 400,000 Php 160,000

Net income of the taxpayer under OSD:


Individual Corporation
Net sales Php 1,000,000 Php 1,000,000
Cost of sales or services - 600,000
Gross income Php 1,000,000 Php 400,000
OSD 400,000 160,000
Net income Php 600,000 Php 240,000
Determination of OSD for Individual Taxpayers
Net sales/revenues/receipts/fees Php xxx
Add: Other taxable income from operation not subject to final tax xxx
Total sales/revenues/receipts/fees Php xxx
OSD rate 40%
OSD Php xxx

Determination of OSD for Corporate Taxpayers


Net sales/revenues/receipts/fees Php xxx
Less: Cost of sales/services xxx
Gross income from operations Php xxx
Add: Other taxable income, not subject to final tax xxx
Total gross income Php xxx
OSD rate 40%
OSD Php xxx

Summary:
Below is the table of summary of the deductions replaced under the OSD method:
Individual Corporation
Cost of sales/services Yes No
Regular allowable itemized deductions Yes Yes
Special allowable itemized deductions Yes Yes
NOLCO Yes Yes

References:
Income Taxation, Rex Banggawan 2019 Edition

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