Deductions, Principles governing deductions, kinds of deductions

Deductions- items or amounts which the law allows be deducted from gross income on order to arrive at the taxable income.

Basic Principles Governing Deductions

1. taxpayer seeking a deduction must point to some specific provisions of the law authorizing such deductions;

2. he must be able to prove that he is entitled to the deduction authorized or allowed.

Kinds of Deduction

1. Optional standard deductions- deduction based upon a flat rate percentage of 40% of the gross income which is allowed to be taken in lieu of itemized deduction for individuals;

2. Itemized deductions for
a. individual taxpayer engaged in business or practice of profession
(i) raw materials, supplies and direct labor;
(ii) salaries of employees directly engaged in activities in the course of our pursuant to the business or practice of their profession;
(iii) telecommunications, electricity, fuel, light and water;
(iv) business rental;
(v) depreciation;
(vi) contributions made to the government and accredited relief organizations for the rehabilitation of calamity-stricken areas declared by the president and;
(vii) interest paid or accrued within a taxable year on loan contracted from accredited financial institution which must be proven to have been incurred in connection with the taxpayer’s profession, trade or business
b. corporate taxpayers whether domestic or resident foreign
(i) business expenses;
(ii) interest (paid on indebtedness)
(iii) taxes (except certain taxes like income tax)
(iv) losses (not compensated for by insurance or otherwise)
(v) bad debts (actually ascertained to be worthless)
(vi) depreciation of property
(vii) depletion of natural resources
(viii) charitable and other contributions
(ix) pensions trust contributions of employees.

3. Special or extraordinary- granted because of the fact that there are laws applicable and transaction peculiar to them only, these are in addition to the itemized deductions allowed by law.

a. non-life insurance and mutual fund companies
b. estates and trusts
c. in addition to ordinary and necessary expenses, private education institutional institution may, at its option, elect either:
(i) deduct expenditures or otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or
(ii) deduct allowance for depreciation thereof.