Your income tax payable is simply calculated as: Total Taxable Income less Allowable Deductions.
Determining your Taxable Income is fairly straightforward for most businesses/ professions. Allowable Deductions is a bit more complicated. Below are basic guidelines in determining what you can deduct against your taxable income.
Allowable Deductions
Individual taxpayers have the
choice to apply Optional Standard Deduction OR Itemized Deductions against Gross Income to arrive at taxable income.
Optional
Standard Deduction (OSD) – There shall be allowed
as deduction a maximum of 40% of gross income. A taxpayer who opts to avail of
this deduction need not submit the Account Information Form /Financial
Statements and avoids the hassle of keeping receipts and documents to support
expenses (as required under Itemized Deductions).
OR
Itemized Deduction –All ordinary and
necessary expenses paid or incurred during the taxable year in carrying on or
which are attributable to the development, management, operation and/or conduct
of the trade, business or exercise of profession.
The following are the itemized deductions:
1. Salaries, Wages and Other Employee’s Benefits, Fringe Benefits, SSS, GSIS, Medicare, HDMF and other Contributions
2. Commission, Outside Services
3. Advertising, Rental, Insurance, Royalties
4. Repairs and Maintenance
5. Representation and Entertainment- limitation: 1/2 % -- seller of goods (based on net sales) 1% -- seller of service (based on net revenue)
6. Transportation and Travel –here and abroad
7. Fuel and Oil, Communication, Light, Power and Water, Supplies
8. Interest -paid or incurred during the taxable year of indebtedness (with limit)
9. Taxes and Licenses
10. Losses-actually sustained during the taxable year & not compensated for by insurance
11. Bad Debts - Actually ascertained to be worthless & charged off within the taxable year
12. Depreciation, Amortization and Intangibles, Depletion
13. Charitable Contributions (limit: 10% of Net Income before Contributions)
14. Research and Development
15. Amortization of Pension Contribution
16. Professional Fees, Insurance Expenses
17. Miscellaneous Expenses
Sample documents/Evidence sufficient to support deductibility of expenses:
a. Official Receipts (OR), Cash/Sales Invoice
b. Payroll (for employees salaries)
c. Vouchers
d. Bank Statements
e. Debit/Credit Memo
1. Salaries, Wages and Other Employee’s Benefits, Fringe Benefits, SSS, GSIS, Medicare, HDMF and other Contributions
2. Commission, Outside Services
3. Advertising, Rental, Insurance, Royalties
4. Repairs and Maintenance
5. Representation and Entertainment- limitation: 1/2 % -- seller of goods (based on net sales) 1% -- seller of service (based on net revenue)
6. Transportation and Travel –here and abroad
7. Fuel and Oil, Communication, Light, Power and Water, Supplies
8. Interest -paid or incurred during the taxable year of indebtedness (with limit)
9. Taxes and Licenses
10. Losses-actually sustained during the taxable year & not compensated for by insurance
11. Bad Debts - Actually ascertained to be worthless & charged off within the taxable year
12. Depreciation, Amortization and Intangibles, Depletion
13. Charitable Contributions (limit: 10% of Net Income before Contributions)
14. Research and Development
15. Amortization of Pension Contribution
16. Professional Fees, Insurance Expenses
17. Miscellaneous Expenses
Sample documents/Evidence sufficient to support deductibility of expenses:
a. Official Receipts (OR), Cash/Sales Invoice
b. Payroll (for employees salaries)
c. Vouchers
d. Bank Statements
e. Debit/Credit Memo
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