Deductions From GI

Question 1

Deductions from Gross income

Answer 1

• Do not include personal living expenses. The TRAIN law provides for P250,000 annual income tax exemption to individual taxpayers in lieu of personal, living expenses of individual taxpayers.
• Pertains to expenses of doing business or expenses of exercising a profession
• Pertain to period expenditures rather than capital expenditures

Question 2

Principles of Deductions

Answer 2

1. LOAN

The deductions are legal, ordinary, actual and necessary expenses of business or profession.

2. Matching Principle

Only expenses of generating income subject to regular tax is deductible.

3. Related party rule

All incomes between related parties are taxable but losses, interest and bad debts are non-deductible.

4. Withholding rule

No withholding, no deduction. Withholding taxes includes final taxes, withholding tax on compensation and expanded withholding taxes

Question 3

Related Parties

Answer 3

1. Members of a family
2. Except in cases of distribution in liquidation, and the direct or indirect controlling individual
3. Except in cases of distribution in liquidation, corporations under direct or indirect common control by or for the same individual
4. Grantor and fiduciary of any trust.
5. Fiduciaries of trusts with the same grantor
6. Fiduciary of a trust and beneficiary of such trust

Question 4

Special Considerations with Deductions

Answer 4

1. Effects of VAT on deductions

VAT paid by Non-VAT taxpayers are part of costs and expenses while VAT paid by VAT taxpayers are not.

2. Effects of accounting methods

Accrued expenses would be deductible for accrual taxpayers but not for cash basis taxpayers. Regardless of the method used, prepayments are non-deductible.

3. Effect of extent of taxation

Taxpayers taxable globally could deduct global expenses while those taxable only in the Philippines could deduct Philippine expenses.

Question 5

Modes of Claiming Deductions

Answer 5

1. Itemized deductions
2. Optional standard deductions

• 40% of gross sales or receipts for individual taxpayers
• 40% of gross income for corporations

The option must be indicated in the first quarter return.

Question 6

Classification of Itemized Deductions

Answer 6

1. Cost of sales or cost of services
2. Regular allowable itemized deductions (RAID)
3. Special allowable itemized deductions (SAID)
4. Net operating loss carry-over

Question 7

Mandatory Itemized Deductions

Answer 7

1. Non-resident alien engaged in business
2. Exempt taxpayers
3. Taxpayers subject to special tax rates
4. Taxpayers subject to mixed rates

Question 8

Non-deductible Expenses

Answer 8

1. personal, living, or family expenses
2. any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate (this rule don’t apply to intangible drilling and development costs incurred in petroleum operations)
3. any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or
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, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy
5. losses from sales or exchanges of property directly or indirectly between related parties.