GROSS INCOME

inclusion
exclusion
deductions
“
GROSS INCOME means all income
derived from whatever source
unless exempt from tax.
3

INCLUSIONS IN
GROSS INCOME
4

Inclusions in Gross Income

▸ Compensation for services in whatever form paid including fees,
salaries and wages, commissions, and similar items;
▸ Gross income derived from the conduct of trade or business or the
exercise of a profession;
▸ Gains from dealings in property;
▸ Interests;
▸ Rents;
▸ Royalties;
▸ Dividends;
▸ Annuities;
▸ Prizes and winnings;
▸ Pensions; and
5

GROSS COMPENSATION INCOME

▸ BASIC SALARY OR WAGE

[Link] – earnings received periodically for a regular work rather than a manual
labor, such as a monthly salary of an employee
[Link] – earnings received usually according to specific intervals of work, as by
the hour, day, or week. An example is a carpenter’s daily wage.
***Backwages are subject to income tax and the withholding tax on wages.

▸ MANDATORY CONTRIBUTIONS– employee’s mandatory contributions to SSS,

GSIS, PhilHealth, HDMF , and union dues
- These mandatory contributions are non-taxable compensation income

▸ HONORARIA – payments given in recognition for services performed for

which established practice discourages charging a fixed fee.
 6

GROSS COMPENSATION INCOME

▸ FIXED OR VARIABLE ALLOWANCES

A. Fixed allowances – regularly received as part of the B. Paid vacation and sick leave allowances – paid
basic monthly, bi-weekly, weekly or daily salaries or absences of an employee applied against his
wages are part of the regular compensation. vacation or sick leave credits which are normally
received as part of the regular salary is part of the
Amounts incurred by the employee in the performance
of his duties are not compensation subject to regular compensation
withholding tax if the following are satisfied:
a. It is for ordinary and necessary traveling and
representation or entertainment expenses of
employees incurred in the pursuit of the employer’s
trade, business or profession.
b. The expense is subject to accounting or liquidation.
c. Any excess advances are returned to the employer.
7

GROSS COMPENSATION INCOME

▸ FEES, COMMISSION, TIPS & GRATUITIES
B. Commission– a percentage of total sales or in
A. Fees – received by an employee for the services certain quota of sales volume attained as part of
rendered to employer in the performance of his official
incentive, such as sales commission.
duties over and above their salary
Compensation items:
*commission to non-employees such as
independent sales agent are business income to
1. Director’s fee of the company the sales agent
2. Fees paid to public officials C. Tips & Gratuities – paid directly to an
3. Legal fees paid by a union on behalf of its president employee by customers of the employer which
Non-compensation item: are not accounted for by the employee to the
1. Retainer fees of consultants, talents, and directors
employer are not considered compensation
who have no management function in the business are income, but are to be reported as “other income”
professional income, not compensation income of the in the income tax return of the employee.
recipient
 8

GROSS COMPENSATION INCOME

▸ OVERTIME, HOLIDAY, HAZARD, AND NIGHT DIFFERENTIAL PAY
- Additional payment received due to worker’s working beyond regular hours and
exposure to danger or harm while working. This is added to the basic salary to arrive at
the gross salary.
- Hazard, overtime, night shift differential and holiday pay of a minimum wage earner
(MWE) is nontaxable, as long as the MWE has no other reportable income
 9

GROSS COMPENSATION INCOME

▸ RETIREMENT PAY
NON-TAXABLE RETIREMENT PAY:
- Lump sum payment received by an 1. SSS or GSIS retirement pay
employee who has served a company 2. Retirement due to old age provided the following
for a considerable period of time and requisites are met:
has decided to withdraw from work a. The retirement program is approved by the BIR
into privacy Commissioner;

- Generally taxable b. It must be a reasonable benefit plan. Its implementation

must be fair and equitable for the benefit of all
employees;
c. The retiree should have been employed for at least 10
years in the said company;
d. The retiree should have been at least 50 years old at the
time of retirement;
e. It should have been availed of for the first time.
10

GROSS COMPENSATION INCOME

▸ SEPARATION PAY
- Taxable if voluntarily availed of
- It shall not be taxable if involuntary
Example of involuntary separation:
1. Death
2. Sickness
3. Disability
4. Reorganization/Merger of company
5. Company at the brink of bankruptcy (retrenchment, redundancy, or cessation of
business)
11

GROSS COMPENSATION INCOME

▸ PENSION
- Stated allowance paid regularly to a person on his retirement or to his dependents
on his death, in consideration of past services, meritorious work, age, loss, or
injury.
- Taxable unless the law states otherwise or unless the BIR approves the pension
plan of a private company
* Gain from redemption of shares in mutual fund is exempt from income tax.
12

GROSS COMPENSATION INCOME

▸ 13th MONTH PAY AND OTHER BENEFITS NOT EXCEEDING

P90,000 – not taxable if the amount is P90,000 or less, any amount exceeding
P90,000 is taxable
▸ Other benefits:
a. Christmas bonus of private employees
b. Cash gifts other than Christmas or anniversary gifts of private employees
c. Additional compensation allowance (ACA) of government personnel
d. 14 month pay, 15 month pay, etc.
th th

e. Other fringe benefits of rank and file employees.

13

GROSS COMPENSATION INCOME

▸ FRINGE BENEFITS
- Any goods, service or other benefit furnished or granted by an employer, in cash or
in kind, in addition to basic salaries of an individual employee
Tax treatment of fringe benefits:
a. Fringe benefits that are fixed every payroll period are considered regular
compensation income (e.g fixed transportation allowance)
b. Fringe benefits that are variable and performance-based are considered
supplemental compensation (e.g commission, profit-sharing, overtime pay)
c. Fringe benefits in the form of incentives are considered “13 month pay and other
th

benefits”
d. Fringe benefits furnished for the employer’s convenience or necessity are exempt
from income tax.
14

GROSS COMPENSATION INCOME

▸ FRINGE BENEFITS
- Any goods, service or other benefit furnished or granted by an employer, in cash or in kind, in
addition to basic salaries of an individual employee
Other fringe benefits not included or classifiable as items of compensation income and which are
not exempted by law:
a. For rank and file employees – treated as part of compensation income as part of “other
benefits” under “13 month pay and other benefits”
th

b. For managerial and supervisory employees – excluded in compensation income and subject
to FINAL FRINGE BENEFIT TAX of 35% of the GROSSED-UP MONETARY VALUE OF THE
BENEFIT.
Example: Alexander, a Filipino supervisory employee, was given P13,000 worth of groceries for
personal use.
Monetary Value = P13,000
Grossed-up monetary value = P13,000/.65 = 20,000
Fringe benefit tax = 20,000 x .35 = 7,000
15

GROSS COMPENSATION INCOME

▸ FRINGE BENEFITS
Example:
The employer pays for the tuition fee of the employee in addition to his
compensation.
The tuition fee paid is a fringe benefit which will be treated as follows:
1. As a compensation income as part of “other benefits” under “13 th month pay
and other benefits” if the employee is a rank and file employee.
2. As a fringe benefit subject to fringe benefit tax if the employee is a managerial
or supervisory employee.
3. As an exempt fringe benefit, regardless of the type of employee, if the same
was given by the employer for his convenience or business necessity such as
when the employee is required to study to acquire expertise for the future use
of the employer’s business.
16

GROSS COMPENSATION INCOME

▸ DE MINIMIS BENEFITS
- Privileges of relatively small value as given by the employer to his employees; not
considered as compensation subject to income tax and consequently to
withholding tax
1. Monetized unused vacation leave credits of private employees not exceeding 10
days during the year.
2. Monetized unused vacation and sick leave credits paid to government officials and
employees
3. Medical cash allowance to dependents of employees not exceeding P1,500 per
employee per semester or P250 per month.
4. Rice subsidy not exceeding P2,000 or 1 sack of 50 kg rice per month amounting to
not more than P2,000
5. Uniform and clothing allowance not exceeding P6,000 per annum
6. Actual Medical Assistance not exceeding P10,000 per annum
17

GROSS COMPENSATION INCOME

▸ DE MINIMIS BENEFITS
1. Laundry allowance not exceeding P300 per month
2. Employee Achievement Award, e.g for length of service or safety achievement, which
must be in the form of tangible property other than cash or gift certificates, with an
annual monetary value not exceeding P10,000 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees.
3. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
per employee per annum
4. Daily meal allowance for overtime work and night or graveyard shift not exceeding 25%
of the basic minimum wage on a per region basis (overtime basis)
5. Benefits received by an employee by virtue of a collective bargaining agreement (CBA)
and productivity incentive schemes provided that the total annual monetary value
received from both CBA and productivity incentive schemes combined do not exceed
P10,000 per employee per taxable year.
18

GROSS COMPENSATION INCOME

▸ SHARES OF STOCK RECEIVED AS COMPENSATION
- If compensation is received in the form of shares of stock, the fair market value
of the shares of stock at the time the service is rendered is the basis of tax.
▸ CANCELLATION OF DEBT
1. If creditor merely desires to benefit a debtor and without any consideration cancels the
debt, the amount of the canceled debt is a gift, not an income of the debtor.
2. If a corporation to which a stockholder is indebted forgives the debt, the transaction
has the effect of the payment of a dividend income to debtor.
3. If, however, a debtor performs services for a creditor, who in consideration thereof
cancels the debt, the debtor realizes income for his services to the extent of the amount
of debt cancelled.
19

GROSS COMPENSATION INCOME

▸ INSURANCE PREMIUMS AS COMPENSATION
- Premiums paid by the employer on life insurance coverage of the employee
wherein the beneficiary is the employee’s family
- These constitute taxable income on the basis of the amount of premium paid

▸ INCOME TAX PAID AS COMPENSATION – the basis of tax is the amount

of tax paid
20

ILLUSTRATION
A private employee derived the following remunerations and benefits in 2019:

Basic compensation, net of P32,000 SSS, PhilHeath, HDMF, union P533,000

dues, and P35,000 withholding tax
Overtime pay 21,000
Vacation expenses of the employee paid by employer 24,000
Cost of Living Allowance (COLA) 12,000
Pre-computed daily transaction allowance 16,000
Rice subsidy (12 cavans worth P2,600 each 31,200
13th month pay 50,000
Monetized unused leave credit (10 VL and SL) 18,000
Uniform Allowance 9,000
Total compensation income 714,200
21

GRADUATED TAX RATES

22

GROSS INCOME FROM BUSINESS & PROFESSION

▸ Business – any commercial activity engaged in as a means of livelihood or profit of an

individual or group of individuals. Examples are trading, merchandising, manufacturing
and other similar activities.
▸ Profession – primarily any endeavor or work requiring specialized training in the field of
learning, art, or science engaged as a means of livelihood, or profit of an individual or
group of individuals. In general, a practice of profession is a service business. Examples
are CPA, Lawyers, Medical Doctors, and the like.
▸ Gross income from business or profession is determined as follows:
Sales/Revenues/Receipts/Fees xx
Less: Cost of Sales or Services xx
Gross income from operations xx
23

GAINS FROM DEALINGS IN PROPERTIES

▸ The gains or losses in dealings in ordinary assets are subject to regular income tax
▸ Dealings in capital assets other than domestic stocks and real properties are also
subject to regular income tax
▸ Ordinary gains are included as items of gross income
▸ Ordinary losses are items of deductions against gross income
▸ Net capital gain from other capital assets after deducting capital losses is also included
as an item of gross income.
▸ Net capital loss is not an item of deduction against gross income.
24

OTHER SOURCES:

▸ RECOVERY OF PAST DEDUCTIONS

- Past deduction that created tax benefit to the taxpayer must be reverted back to
gross income in the year of recovery so that the government will recover the tax
lost from the deduction
▸ REIMBURSEMENT OF EXPENSES
- Expenses of the taxpayer that are reimburse or paid by the customer or client
constitue additional income to the taxpayer
25

EXCLUSIONS
FROM
GROSS INCOME
“
Exclusions from gross income are
income which will not be subject to
income tax. They are not included in
gross income subject to regular tax,
capital gains tax, or final tax.
27

EXCLUSIONS FROM GROSS INCOME

▸ Proceeds of life insurance policy

▸ Amount received by the insured as a return of premium
▸ Gift, bequest devise, or descent
▸ Compensation for injuries or sickness
▸ Income exempt under treaty
▸ Retirement benefits, pensions, gratuities, etc.
▸ Miscellaneous items
a. Income in the Philippines of foreign GOCCs
b. Income of the government and its political subdivisions
c. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievements
d. Prizes and awards in athletic sports competitions
28

EXCLUSIONS FROM GROSS INCOME

a. Contributions to SSS, GSIS, PhilHealth, Pag-IBIG, and union dues

b. Contributions to Personal Equity Retirement Account (PERA)
c. PERA investment income and PERA distributions
d. 13 month pay and other benefits not exceeding P90,000
th

e. Gains from sale of bonds, debentures, or certificates of indebtedness with maturity of

more than 5 years
f. Gains from redemption of share in mutual fund
29

Proceeds of a Life Insurance Policy

30

Gifts, Bequests, and Devises or Descent

- The value of property acquired by gift, bequest, devise, or

descent is excluded provided, however, that income from
such property as well as gift, bequest, devise, or descent
of income from any property, in cases of transfers of
divided interest, shall be included in gross income.
31

Compensation for injuries and sickness

- Amounts received through accident or health insurance

or under Workmen’s Compensation Acts as
compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
32

Income exempt under treaty

Income items that are excluded by international

agreement to which the Philippine is a signatory are
excluded from income tax. It must be recalled that treaty
agreements override provisions of our revenue tax laws in
case of conflict under the exemption doctrine of
international comity.
 Retirement Benefits, Pensions, Gratuities and other
33

benefits

Refer to requisites of exemption for Retirement Benefits, Pensions, Gratuities

and other benefits
34

Separation or Termination

Refer to requisites of exemption for Separation Pay

35

DEDUCTIONS
FROM
GROSS INCOME
36

NATURE OF DEDUCTIONS

DEDUCTIONS or ALLOWABLE DEDUCTIONS are business

expenses and losses incurred which the law allows to
reduce gross business income to arrive at NET INCOME
subject to tax. The purpose of deductions is to provide
the taxpayer a just and reasonable taxable amount as the
basis of income tax.
37

MANDATORY WITHHOLDING OF TAXES

1. No deduction shall be allowed on income payments if

it is shown that the applicable withholding taxes
required by the rules had not been withheld.
2. A deduction will still be deductible even if the
withholding tax, surcharge including interest of such
late withholding is paid at the time of audit
investigation or reinvestigation.
38

SITUS OF DEDUCTIBLE EXPENSES

39

ITEMS NOT DEDUCTIBLE FROM GROSS INCOME

1. Personal, living, or family expenses
2. Any amount paid out for new buildings or for permanent improvements, betterments made to
increase the value of any property or estate.
3. Any amount expended in restoring property for which an allowance is or has been made.
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of
any person financially interested in any trade or business carried on by the taxpayer, when the
taxpayer is directly or indirectly a beneficiary under such policy.
5. Transactions between related taxpayers resulting to losses from sales or exchanges of
property, interest expense or bad debts.
6. Bribes, kickbacks and other similar payments.
7. Donations made to employees and others, which do not have in them the element of
compensation or are in excess of reasonable compensation for services.
8. The amount spent for political campaign, campaign funds and donations to political parties or
candidates are NOT deductible either as business or contribution expenses from gross
income.
40

CLASSIFICATION OF DEDUCTIONS
Sales xx
Less: Cost of Sales xx
Gross Income xx
Less: Allowable Itemized Deductions xx
Net taxable Income xx

Classification of Deductions from Gross Income:

1. Optional Standard Deduction (OSD)
2. Regular Allowable Itemized Deduction
3. Special Allowable Itemized Deduction (SAID)
41

CLASSIFICATION OF DEDUCTIONS

TAXPAYER ALLOWABLE DEDUCTIONS

Individuals earning pure Beginning 2018 no more deduction

compensation income is allowed to purely compensation
income earners
Individuals deriving income from Itemized deduction or Optional
trade, business or practice of Standard Deduction
profession
Corporations Itemized deduction or Optional
Standard Deduction
42

OPTIONAL STANDARD DEDUCTION (OSD)

- In lieu of the itemized deductions including NOLCO (Net Operating Loss Carryover)
- Allowable is presumed as a percentage of gross sales or receipt for individuals
and gross income for corporations
- No need to support every item of expense
- Does not relieve the taxpayer of the responsibility to deduct withholding tax on
certain income payments

WHO CAN CLAIM OSD?

- All taxpayers subject to tax on taxable net income except NRAETB and taxpayer
mandated to use itemized deductions
43
PERCENTAGE OF OPTIONAL STANDARD DEDUCTION (OSD)

1. Individual taxpayers – 40% of total sales/revenues/receipts/fees

a. Those selling goods under 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 Taxpayer – 40% of gross income
44
ILLUSTRATION OF OPTIONAL STANDARD DEDUCTION
(OSD)
OSD of the taxpayer is computed:
Individual Corporation

Gross sales, net of returns, P1,000,000 P1,000,000

Sales, net of returns, P1,000,000 allowances and discounts
allowances and discounts
Less: Cost of Sales/Services - 600,000
Less: Cost of Sales 600,000 Total Sales/Gross Income 1,000,000 400,000
Gross Income 400,000 Multiply by: OSD rate 40% 40%
Less: Operating Expenses OSD P400,000 P160,000
Administrative expenses P100,000
Selling expenses 120,000 220,000 Individual Corporation

Net income P180,000 Gross sales, net of returns, P1,000,000 P1,000,000

allowances and discounts
Less: Cost of Sales/Services - 600,000
Total Sales/Gross Income 1,000,000 400,000
Less: OSD 400,000 160,000
Net Income P600,000 P240,000
45
REGULAR ALLOWABLE ITEMIZED DEDUCTIONS

1. Ordinary and necessary business expenses in general

2. Interest
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion
8. Charitable Contribution
9. Research & Development
[Link] to Pension Trust
[Link] Payments on Health and/or Hospitalization Insurance - REPEALED
 46
Ordinary and necessary business expenses
1. Salaries, wages, and other forms of compensation REQUISITES FOR DEDUCTIBILITY IN
for personal services actually rendered, including GENERAL:
the grossed-up monetary value of fringe benefit
granted by the employer to the employee.
1. Must be ordinary and necessary
2. Supplies, and repairs and maintenance, and other 2. Paid or incurred during the taxable year
incidental expenses. 3. Connected with the trade, business, or
3. Operating expenses of transportation equipment practice of profession
4. Supported by sufficient evidence; and
used in the trade, profession or business
4. Rental for the use of business property 5. Not against the law, morals, public policy
5. Advertising and other selling expenses or public order;
6. It must have been subjected to
6. Travelling expenses withholding tax, if applicable.
7. Insurance premiums against fire, storm, theft,
accident, or other similar losses
47
Entertainment, Amusement and Representation Expense
(EAR)
Example: Rambutan Corporation with a total
AMOUNT DEDUCTIBLE – lower amount between: of net sales of goods amounting to
1. Actual EAR P10,000,000, incurred total EAR amounting to

2. Limit P60,000 with adequate receipts. It was

incurred to conduct a special meeting with
LIMIT
major customers at Supreme Hotel.

Sale of goods & Net Sales x ½ of 1%

The representation expense allowed as
properties deduction is:

Sale of services Net Revenue x 1% Actual P60,000

Total net sales during the year P10,000,000
Multiplied by limit .005 (1/2 of 1%)
Limit 50,000

LOWER is 50,000, so this is the amount

deductible,
 48
INTEREST EXPENSE
REQUISITES FOR DEDUCTIBILITY:
If the taxpayer has interest income subjected to 20%
final tax and at the same time incurred an interest
1. There must be an indebtedness
stipulated in writing;
expense during the taxable year, the interest expense
deductible shall be reduced by 33%. 2. The indebtedness must be that of the
taxpayer in connection with the trade,
Deductible Interest Expense arising from Loans business or profession;
Interest expense xx 3. The interest must have been paid or
Less: (Interest Income subject to Final tax x 33%) (xx) accrued during the taxable year;
Deductible Interest xx 4. The interest payment must not be in favor
of a relative.
49
TAXES

GENERAL RULE:
Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession,
trade or business, shall be allowed as deduction.

EXCEPTION:
1. Income tax
2. Income tax paid abroad if claimed as tax credit
3. Estate tax
4. Donor’s tax
5. Special Assessment
50
TAXES

TAXES DEDUCTIBLE FROM GROSS INCOME:

1. Documentary stamp taxes
2. Occupational taxes
3. Privilege and license taxes
4. Excise taxes
5. Import duties
6. Local business taxes
7. Automobile registration fees
8. Community tax
9. Municipal tax
[Link] tax paid to foreign country if not claimed as tax credit.
51
LOSSES

KINDS OF LOSSES:
1. Casualty losses
2. Net Operating Loss Carryover (NOLCO)
3. Capital losses and securities becoming worthless
4. Special Losses
a. Losses from wash sale of stock or securities
b. Wagering Losses
c. Abandonment Losses
52
LOSSES – CASUALTY LOSSES

REQUISITES FOR DEDUCTIBILITY:

1. The loss arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft, or embezzlement;
2. The property lost is connected with the trade, business or practice of profession;
3. Actually sustained during the taxable year;
4. Not compensation for by insurance or other forms of indemnity;
5. Incurred in trade, business, or profession
6. Reported within the BIR within forty-five (45) days from the time of loss; and
7. Not claimed as deduction for estate tax purposes.
53
LOSSES – NOLCO

NET OPERATING LOSS – results total allowable deduction is greater than the gross income
- it shall be carried over as deduction from gross income for the next consecutive 3 years
immediately following the year of loss
REQUISITES FOR DEDUCTIBILITY:
1. At the time of incurring net loss, the taxpayer must not be exempt from income tax; and
2. There is no substantial change in the ownership of the business or enterprise in that:
a. Not less than 75% in nominal value of outstanding issued shares, if business is in the name of
a corporation, is held by or on behalf of the same persons; or
b. Not less than 75% of the paid-up capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
NOLCO FOR MINES OTHER THAN OIL & GAS WELLS
NOLCO incurred in any of the first ten (10) years of operation may be carried over for the next five
years.
54
LOSSES – ABANDONMENT LOSSES

1. In the event a contract area where petroleum operations are undertaken is partially or wholly
abandoned, all accumulated exploration and development expenditures pertaining thereto shall
be allowed as deduction.
2. In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as
the undepreciated costs of equipment directly used therein, shall be allowed as deduction.

IF THE ABANDONED WELL IS REENTERED AND PRODUCTION IS RESUMED OR EQUIPMENT IS

RESTORED INTO SERVICE:
1. The amount previously claimed as deduction shall be recognized as income; and
2. Such amount shall also be capitalized or depreciated as the case maybe.
55
BAD DEBTS

REQUISITES FOR DEDUCTIBILITY:

1. There must be an existing indebtedness due to the taxpayer which much be valid and legally
demandable;
2. The same must be connected with the taxpayer’s trade, business or practice of profession;
3. The same must not be sustained in a transaction between related taxpayers;
4. The same must be actually charged off in the books of accounts of the taxpayer as of the end
of the taxable year; and
5. The same must be actually ascertained to be worthless and uncollectible.
SECURITIES BECOMING WORTHLESS REQUISITES FOR DEDUCTIBILITY:
1. Securities are ascertained to be worthless;
2. The same is charged off within the taxable year;
3. It must be a capital asset.
56
DEPRECIATION

REQUISITES FOR DEDUCTIBILITY:

1. The property subject to depreciation is used in the trade, business, or profession
2. The allowance for depreciation must be sustained by the person who owns or who has a
capital investment in the property;
3. The allowance for depreciation must be reasonable;
4. The allowance for depreciation should not exceed the cost of the property;
5. The schedule of the allowance must be attached to the return
DEPRECIATION DEDUCTIBLE BY NRAETB OR RFC
- Depreciation shall be allowed only if the property is located in the Philippines
OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO DEPRECIATION
57
CHARITABLE CONTRIBUTIONS
FULLY DEDUCTIBLE DONATIONS:
1. Donations to the Government of the Philippines or to any of its agencies or political subdivisions
including fully owned government corporations, exclusively to be used in undertaking priority
activities in:
a. Education e. human settlement
b. Health f. science and culture
c. Youth g. economic development
d. Sports development
2. Donations to foreign institutions or international organizations which are fully deductible in
pursuance of:
a. Agreements c. Commitments or
b. Treaties d. Special laws.
58
CHARITABLE CONTRIBUTIONS
FULLY DEDUCTIBLE DONATIONS:
3. Donations to Accredited Non-Government Organizations (NGO) – non profit domestic
corporation
a. organized and operated exclusively for:
i. Scientific ix. Charitable purposes
ii. Research x. a combination thereof
iii. Educational
iv. Character building
v. Youth & sports development
vi. Health
vii. Social welfare
viii. cultural
59
CHARITABLE CONTRIBUTIONS
FULLY DEDUCTIBLE DONATIONS:
b. No part of the net income which inures to the benefit of any private individual;
c. Not later than the 15th day of the 3rd month after the close of the taxable year in which
contributions are received, makes utilization, unless an extended period is granted by the Secretary
of Finance, upon recommendation of the Commissioner of Internal Revenue.
d. The level of administrative expense of which shall, on an annual basis, in no case to exceed 30%
of the total expenses;
e. The assets of which, in the event of dissolutions, would be distributed to:
i. Another domestic corporation organized for similar purpose or purposes; or
ii. The state for public purposes; or
iii. Another organization to be used in such manner as in the judgement of the court shall
best accomplish general purpose for which the dissolved organization was organized.
60
CHARITABLE CONTRIBUTIONS
PER SPECIAL LAWS, THE FOLLOWING ARE DEDUCTIBLE IN FULL:
b. No part of the net income which inures to the benefit of any private individual;
1. Integrated Bar of the Philippines;
2. International Rice Research Institute
3. Development Academy of the Philippines
4. The University of the Philippines and other state colleges
5. Cultural Center of the Philippines
6. Artesian Well Fund
7. Ramon Magsaysay Award Foundation
8. Task Force on Human Management
9. Donations to the National Musuem, Library and Archives
[Link] Commission on Culture
[Link] Science Foundation
[Link] Social Action Council
61
CHARITABLE CONTRIBUTIONS
DONATIONS SUBJECT TO LIMIT
1. Donations to the Government of the Philippines or any agencies or any political subdivision thereof
exclusively for public purposes;
2. Donations to accredited domestic corporations or associations operated exclusively for:
a. Religious f. Educational
b. Charitable g. Rehabilitation of veterans
c. Scientific h. social welfare institutions
d. Youth and sports development i. non-government organization
e. Cultural
LIMIT TAXPAYER RATE BASE

Corporation 5% Taxable income from trade, business or practice

of profession before charitable contributions
Individual 10%
In case of non-cash property donation, the amount shall be based on acquisition cost.
62
CHARITABLE CONTRIBUTIONS
ILLUSTRATION: Paras revealed the following data regarding his income and expenses for the taxable year
200x. If individual:

Gross income from business 800,000 Contribution deductible in full: 50,000

To the government - for specific priority activities in
Business expenses allowed as 600,000 education
deduction (except contributions)
Contributions subject to limit:
Charitable contributions: To the government - for public purposes P60,000
To the government To church 15,000
- For specific priority activities in 50,000 75,000
education Limit (200,000x. 10) 20,000
- For public purposes 60,000
To church 15,000 Total deductible charitable contributions P70,000

Gross income from business P800,000 If corporation:

Business Expenses 600,000 Limit is (200,000 x .05) = 10,000
Taxable income 200,000 Total deductible contributions (50k +10k) = 60,000
63
RESEARCH AND DEVELOPMENT (R & D)
If not chargeable to a capital account Claim as outright expense
If chargeable to capital account but not chargeable to property subject to At the option of the taxpayer:
depreciation or depletion OPTION 1 – claim as outright
expense
OPTION 2 – amortize over 60 months
If chargeable to property subject to depreciation or depletion Capitalize

Limitations on Deduction:
The following R&D expenditures are not deductible:
1. Any expenditure for the acquisition or improvement of land, or for the improvement of property to be
used in connection with R&D which is subject to depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral, including oil or gas.
64
PENSION TRUST

AMOUNT DEDUCTIBLE
Actual contribution to the extent of pension liability xx
Amortization of Past Service Cost (xx)

TOTAL xx

PENSION LIABILITY
Pension liability is equivalent to NORMAL COST

PAST SERVICE COST

Past service cost is the excess of actual contributions over the NORMAL COST. It shall be amortized over 10
YEARS.
65

SPECIAL ALLOWABLE
ITEMIZED DEDUCTIONS
(SAID)
 ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR
66

SENIOR CITIZEN EMPLOYEES

Private establishments Conditions for Deductibility:

employing senior citizens shall a. Employment shall have to
be entitled to additional continue for at least 6
deduction from Gross Income months
equivalent to 15% of total
amount paid as salaries and
b. Annual taxable income of the
wages to senior citizens senior citizen does not
exceed poverty level as
determined by NEDA
67
ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR PWDs

Private establishments Conditions for Deductibility:

employing persons with a. Entity present proof as
disabilities shall be entitled to certified by DOLE that
additional deduction from disabled persons are under
Gross Income equivalent to their employ
25% of total amount paid as
salaries and wages to b. Disabled employee is
disabled persons accredited with DOLE and
DOH as to his disability,
skills and qualifications
68
COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS

50% of direct costs of the improvements or modifications

to provide reasonable accommodation for disabled persons
69
ADDITIONAL TRAINING EXPENSE UNDER THE JEWELRY
INDUSTRY DEVELOPMENT ACT OF 1998

Qualified jewelry enterprise duly registered and accredited

with BOI is entitled to an additional deduction from taxable
income of 50% of expense incurred in training schemes
approved by TESDA
70
ADOPT-A-SCHOOL ACT OF 1998

- In partnership with DepEd, CHED and TESDA

- Any government schools in all levels may participate
- Additional deduction from Gross Income equal to 50% of
the contribution of the adopting entity
71
EXPANDED BREASTFEEDING PROMOTION ACT OF 2009

- All health and non-health facilities are required to

establish a lactation station
Requirements to Health Institutions:
a. Rooming-in policy
b. Milk storage facility
c. Milk Banks
TAX DEDUCTION INCENTIVES:
TWICE the actual amount incurred by a private health
institution in complying with rooming-in and breastfeeding
practices
72
FREE LEGAL ASSISTANCE (lawyers providing pro-bono
services)

- Deduction from Gross Income is equal to the amount

that could have been collected for the actual
performance of the actual free services rendered or up
to 10% of Gross income derived from actual
performance of legal profession, WHICHEVER IS LOWER
- Free legal services must be exclusive of the 60-hour
mandatory free legal assistance rendered to indigents
73
ADDITIONAL PRODUCTIVITY INCENTIVE BONUS EXPENSE

- 50% of the total productivity bonuses given to

employees as special deduction
- Business enterprises providing manpower training &
special studies to rank-and-file employee as accredited
by TESDA are also entitled to 50% additional deduction of
the total grant for local trainings and special studies
- Not allowed on bonuses during pendency of a strike or
lockout arising from any violation of productivity
incentive program
74
ILLUSTRATION

Juan reported the following for 2020:

Sales P8,000,000

Cost of Sales 3,000,000

Salaries of employees, net of P100,000 withholding tax and P50,000 800,000

SSS, Medicare and Pag-ibig premiums contribution
Fringe benefits given to rank and file employees 300,000

Fringe benefits given to managerial employee (grossed-up MV) 250,000

Representation and entertainment expenses (business related) 100,000

Rent expense 120,000

Donation to charitable & religious institutions 500,000

75

GRADUATED TAX RATES