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d) A statement on the allowance must be attached to the return.

e) The property must have a limited useful life.

(2) Methods of computing depreciationallowance

(a) Straight-line method

Spreads the total depreciation over the useful life of the asset and generally results inan equal depreciation per unit of time regardless of the use to which the properties are put.

(b) Declining-balance method

Uses a rate to the declining book value of the asset. Depreciation is largest in amountthe first year and declines in the years thereafter.

(c)Sum-of-the-years-digitmethod

Requires the application of a changing fraction to the cost basis of the property,reduced by the estimated residual salvage value.

g) Charitable and other contributions

(1) Requisites for deductibility

a) Must actually be paid or made to the Phil. Government or any of its agencies or political subdivision or to any domestic corporations or associations.

b) Must be made within the taxable year;

c) Must not exceed 10% of the individuals taxable income and 5% of thecorporations taxable income before deducting the contribution; and

d) Must be evidenced by adequate records or receipts. (Sec. 34 (H) of NIRC)

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(2) Amount that may be deducted

Subject to limit Deductible in full

a) Donations to the Philippine governmentor any of its agencies or any politicalsubdivision thereof exclusively for public

purposes;

b) Donations to accredited domesticcorporations or associations organized andoperated exclusively for:

1. Religions;

2. Charitable;

3. Scientific;

4. Youth and sports development;

5. Cultural; or

6. Educational purposes; or for the

7. Rehabilitations of veterans; and

c) Donations to social welfare institutionsor to non-government organizations in

accordance with rules and regulations promulgated by the Secretary of Finance, provided no part of the net income of which inures to the benefit of any privatestockholders or individual. (Sec. 34 (H)(1)of NIRC)

a) Donations to the government of thePhilippines or to any of its agencies or

political subdivisions, including fully-owned government corporationsexclusively to finance, to provide for, or to

be used in undertaking priority activities in:

1. Education;

2. Health;

3. Youth and sports development;

4. Human settlements;

5. Science and culture; and

6. Economic development.

b) Donations to foreign institutions or international organizations in pursuance or compliance with agreements, treaties, or commitments entered into by thegovernment of the and the foreign laws or

international organizations or in pursuanceof special laws, and

c) Donations to certain accredited non-government organization.

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h) Contributions to pension trusts

(1) Requisites for deductibility

a) The employer must have established a pension or retirement plan to provide for the payment of reasonable pensions to its employees;

b) The pension plan is reasonable and actuarially sound.

c) It must be funded by the employer;

a) The amount contributed must no longer be subject to its control or disposition;and

b) The payment has not therefore been allowed as a deduction.

(i) Deductions under special laws

These are deductions usually allowed only for particular business or enterprises andnot to others, or may be allowed for all but are not provided for under the provisions of the

NIRC but under special laws.

4) Optional standard deduction

a) Individuals, except non-resident aliens

A maximum of forty percent (40%) of gross sales or gross receipts during the taxableyear.

The cost of sales or the cost of services is not allowed to be deducted for purposes of determining the basis of the OSD inasmuch as the law (R.A. 9504, MinimumWage Earner Law) is specific as to the basis thereof which states that for individuals, the

basis of the 40% OSD shall be the gross sales or gross receipts and not gross income.(Rev. Reg. No. 16-2008)

b) Corporations, except non-resident foreigncorporations

Not exceeding forty percent (40%) of their gross income.

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c) Partnerships

1. If the GPP avails of itemized deductions under Sec. 34 of the NIRC incomputing net income, the partners may still claim itemized deductions on

their net distributive share that have not been claimed by the GPP;

2. The partners, however, are not allowed to claim OSD on their share of netincome because the OSD is a proxy for all items of deductions allowed in arriving at taxableincome;

3. If the GPP avails of OSD in computing net income, the partners may nolonger claim further deductions from their net distributive share, whether itemizedor OSD;

4. The election to claim either the OSD or itemized deductions must be signified

in the income tax return filed for the first quarter of the taxable year; once the election ismade, the same type of deduction must be consistently applied for all succeeding quartersand in the annual income tax return; and

4. A taxpayer who is required but fails to file the quarterly income tax return for thefirst quarter shall be deemed to have elected to avail of itemized deductions for thetaxable year. (RR No. 2-2010)

5) Personal and additional exemption

a) Basic personal exemptions

Fifty thousand pesos (P50,000) each individual taxpayer.

b) Additional exemptions for taxpayer withdependents

Twenty-five thousand pesos (P25,000) - each dependent not exceeding four (4).

c) Status-at-the-end-of-the-year rule

1. Taxpayer marries during taxable year - may claim the corresponding BPE in fullfor such year .

2. Taxpayer should have additional dependent(s) during taxable year - may claimcorresponding AE in full for such year.

1. Taxpayer dies during taxable year - his estate may still claim BPE and AE for himself and his dependent(s) as if he died at the close of such year.

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4. If during the taxable year

a. spouse dies, or

b. any of the dependents dies or marries, turns 21 years old or becomesgainfully employed, taxpayer may still claim same exemptions as if the spouse or anyof the dependents died, or married, turned 21 years old or became gainfully employedat the close of such year. (Sec. 35 (C) of NIRC)

d) Exemptions claimed by non-resident aliens

They can be entitled to personal and additional exemptions subject to the rule onreciprocity.

1. Their foreign country allows personal exemptions to citizens of the Philippinesnot residing therein;

2. File an accurate return of their income from all sources within the Philippines ontime; and

3. Amount allowable is not to exceed our maximum allowable personal exemption.

6) Items not deductible

a) General rules

These items are not related to the trade, business or profession of the taxpayer.

b) Personal, living or family expenses

These are personal expenses and not related to the conduct of trade or business.

c) Amount paid for new buildings or for permanent improvements

These are capital expenditures added to the cost of the property and the periodicdepreciation is the amount that is considered as deductible expense.

d) Amount expended in restoring property

They are capital expenditures or those expenditures that result in obtaining benefits of a permanent nature.

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e) Premiums paid on life insurance policycovering life or any other officer or employee financially interested

When the taxpayer is directly or indirectly a beneficiary under such policy. (Sec. 36

[A] of NIRC)

f) Interest expense, bad debts, and losses fromsales of property between related parties

Interest Expense Bad Debts Losses from sales of property between related parties

In general, the amount of interest paid or incurredwithin a taxable year onindebtedness in connectionwith the taxpayer's

profession, trade or business. (Sec. 34 (B) of NIRC)

In general, debts due to thetaxpayer actuallyascertained to be worthlessand charged off within thetaxable year except thosenot connected with

profession, trade or businessand those sustained in atransaction entered into

between parties. Recovery

of bad debts previouslyallowed as deduction in the

preceding years shall beincluded as part of the grossincome in the year of recovery to the extent of theincome tax benefit of saiddeduction. (Sec. 34 (E) of NIRC)

(1) Between members of afamily; or

(2) Except in the case of distributions in liquidation,

between an individual andcorporation more than fifty

percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for suchindividual; or

(3) Except in the case of distributions in liquidation,

between two corporationsmore than fifty percent(50%) in value of theoutstanding stock of whichis owned, directly or indirectly, by or for thesame individual if either oneof such corporations, withrespect to the taxable year of the corporation preceding

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the date of the sale of exchange was under the lawapplicable to such taxableyear, a personal holdingcompany or a foreign

personal holding company;

(4) Between the grantor anda fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trustand the fiduciary of another trust if the same person is agrantor with respect to eachtrust; or

(6) Between a fiduciary of atrust and beneficiary of suchtrust. (Sec. 36 (B) of NIRC)

g) Losses from sales or exchange or property

In general, losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity:

1. If incurred in trade, profession or business;

2. Of property connected with the trade, business or profession, if the loss arises fromfires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. (Sec. 34(D)(1) of NIRC)

h) Non-deductible interest

i) Non deductible taxes

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(F) Business league chamber of commerce, or board of trade, not organized for profitand no part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for

the promotion of social welfare;

(H) A non-stock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a

purely local character, the income of which consists solely of assessments, dues, and feescollected from members for the sole purpose of meeting its expenses; and

(K) Farmers, fruit growers, or like association organized and operated as a sales agentfor the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of producefinished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kindand character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of suchincome, shall be subject to tax imposed under this Code. (Sec. 30 of NIRC)

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