Chapter 13-C - Optional Standard Deduction
Who cannot claim the Optional Standard Deduction (OSD)?
1. Non-resident alien engaged in trade or business
2. Taxpayers mandated to use itemized deductions
Who are the taxpayers who are mandated to use itemized deductions?
1. Corporations :
a. Exempt GOCC’s and non-stock, non-profit corporations with no taxable income
b. Those with income subject to special/preferential tax rates
c. Those with income subject to regular corporate income tax and special/preferential tax (the
corporate taxpayer is earning two (2) kinds of income)
2. Individuals :
a. Exempt individuals under the NIRC and special laws with no other taxable income
b. Those with income subject to special/preferential rates
c. Those with income subject to regular income tax and special/preferential tax (the individual
taxpayer is earning two (2) kinds of income)
3. Non-resident alien not engaged in trade or business
What is the basis and percentage of optional standard deductions?
1. Individual taxpayers – 40% of total sales/revenues/receipts/fees (the only deduction are the sales
returns and allowances and sales discounts)
a. Those selling goods under the accrual basis – 40% of gross sales
b. Those selling services under the cash basis – 40% of gross receipts
c. Those selling services under the accrual basis – 40% of revenue
2. Corporate taxpayers – 40% of gross income ( Gross sales less sales returns and allowances and
cost of sales)
What is the difference between NOLCO and net capital loss carry-over? Can they be claimed
as a deduction simultaneously with OSD?
NOLCO is a net operating loss carried over, which is an item of deduction, but it cannot be claimed
as a deduction simultaneously with OSD, because OSD, already substitutes all itemized deductions,
including NOLCO.
Net Capital Loss Carried Over can still be deducted from capital gains during the year, because net
capital loss is not an item of deduction, but merely used in determining the taxable net capital gain
during the year.
A resident individual taxpayer who is engaged in business has Gross Sales for year 2020
amounting to P2,400,000. Sales returns and allowances amounted to P60,000 and cost of
sales amounted to P1,240,000. The operating expenses of the business amounts to P400,000.
How much is the Optional Standard Deduction (OSD) if the taxpayer opted to use OSD?
P936,000, computed as follows:
P2,400,000 – P60,000 x 40% = P936,000
A resident corporate taxpayer who is engaged in business has Gross Sales for year 2020
amounting to P2,400,000. Sales returns and allowances amounted to P60,000 and cost of
sales amounted to P1,240,000. The operating expenses of the business amounts to P400,000.
How much is the Optional Standard Deduction (OSD) if the taxpayer opted to use OSD?
P440,000, computed as follows:
Gross sales P2,400,000
Less: Sales Returns 60,000
-----------------
Net Sales P 2,340,000
Less Cost of sales 1,240,000
------------------
Gross Income P1,100,000
x 40%
-----------------
OSD P 440,000
A resident corporate taxpayer who is engaged in business has Gross Sales for year 2020
amounting to P2,400,000. Sales returns and allowances amounted to P60,000 and cost of
sales amounted to P1,240,000. The operating expenses which are all allowable deductions of
the business amounts to P400,000. If you are the accountant, what method of deduction will
you use?
OSD, because income is P40,000 lesser
Proof :
Taxable Income using OSD :
Gross income P1,100,000
Less: OSD 440,000
-----------------
Taxable income P 660,000
Taxable income using itemized deduction:
Gross income P1,100,000
Less: Allowable Deductions 400,000
-----------------
Taxable income P 700,000
A resident individual taxpayer who is engaged in business has Gross Sales for year 2020
amounting to P2,400,000. Sales returns and allowances amounted to P60,000 and cost of
sales amounted to P1,240,000. The operating expenses which are all allowable deductions of
the business amounts to P400,000. How much is the taxable income if the taxpayer uses the
Optional Standard Deduction (OSD)?
P1,404,000 computed as follows:
Gross Sales P2,400,000
Less : Sales returns 60,000
------------------
Net Sales P2,340,000
Less: OSD 936,000
------------------
Taxable Income P1,404,000
A resident individual taxpayer who is engaged in business has Gross Sales for year 2020
amounting to P2,400,000. Sales returns and allowances amounted to P60,000 and cost of
sales amounted to P1,240,000. The operating expenses which are all allowable deductions of
the business amounts to P400,000. How much is the taxable income if the taxpayer claims
the itemized Deduction?
P700,000, computed as follows:
Gross sales P2,400,000
Less: Sales returns 60,000
-----------------
Net Sales P2,340,000
Less: Cost of Sales 1,240,000
-----------------
Gross Income P1,100,000
Less: Allowable Deductions 400,000
-----------------
Taxable Income P 700,000
