Corporate Income Tax - 4

Allowable Deductions From Gross Income

1. General Rules

a) It should be related to the business or profession
It should be ordinary and necessary for the conduct of trade or business or profession. Personal expenses are not allowed. Some exceptions are donation
b) Supported by substantiated documents

All allowable deduction must be supported by documents like official receipts, board resolution for bad debts, etc. Taxpayers name should be written in these supporting documents. You don't need to attach this when you file your Income Tax Return. Just keep it for the case BIR audit.
c) Not contrary to law, public morals, policy and order
Bribes are not allowed as deduction to your sales/receipts.
d) Reasonable in Amount
Some expenses are subjected to limitations. For example, representation and Entertainment expense should not exceed 0.5% of net sales of goods, or 1% of net receipts of service.
e) Complied with withholding tax requirements
If the business expenses is subject to withhold tax, it must be withheld to be deductible. Examples are salaries and wages, rental, professional fees, contractors, commissions and expense payment of top twenty thousand corporation (TTC). No withholding means no deduction. Plus, you will be the one liable to the government.

2 Deductible Items 

• Advertising and Promotions
• Amortizations
• Bad Debts
• Charitable Contributions (Donations should be made to BIR accredited donee institutions, otherwise individual taxpayers can only claim 10% of the donation as deductible)
• Commissions (This is subject to withholding tax)
• Communication, Light, and Water
• Depletion
• Depreciation (This should tally with the Depreciation schedules of your property, plant, and equipment)
• Director’s Fees (This is subject to withholding tax)
• Fringe Benefits (This is subject to withholding tax – final)
• Fuel and Oil Insurance
• Interest (This is subject to withholding tax – final and the taxpayer interest expense shall be reduced by 33% of interest income subject to final tax.)
• Janitorial and Messengerial Services (This is subject to withholding tax – expanded)
• Losses (actual loss during the year which is not compensated for by insurance or other forms)
• Management and Consultancy Fee (This is subject to withholding tax – expanded)
• Miscellaneous
• Office Supplies
• Other Services
• Professional Fees (This is subject to withholding tax – expanded)
• Rental (This is subject to withholding tax – expanded)
• Repairs and Maintenance – Labor & Materials
• Repairs and Maintenance – Materials/Supplies
• Representation and Entertainment (Expenses are limited to 0.5% of net sales for seller of goods or 1% of net revenue for seller/provider of services)
• Research and Development
• Royalties (This is subject to withholding tax – final)
• Salaries and Allowances (This is subject to withholding tax – compensation)
• Security Services (This is subject to withholding tax – expanded)
• SSS, GSIS, Phil health, HDMF and Other Contributions 
• Taxes and Licenses (Taxes that are deductible are usually percentage tax and local business taxes. Income tax, Value Added Tax (VAT), and tax penalties are not deductible.) 
• Tolling Fees
• Training and Seminars
• Transportation and Travel
• Others

Items not Deductible from Gross Income

• Personal, living, or family expenses;
• Amounts paid out for new buildings or for permanent improvements, or betterments made which tend to increase the value of any property or estate;
• Amounts spent for restoring property or in making good the exhaustion thereof for which an allowance is or has been made;
• 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, where the taxpayer is directly or indirectly a beneficiary under such policy;
• Losses from sales or exchanges of property under certain conditions.
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