BIR Income Tax Allowable Deductions - Personal Exemptions

All individual tax payers are allowed a personal exemption of Php50,000. In addition, individual tax payers are allowed additional exemption of Php25,000 for each qualified dependent child (QDC), provided that the total number of dependents shall not exceed four (4) dependents. The additional exemptions for QDC shall be claimed by ONLY ONE of the spouses in the case of married individuals.

Example: A freelancer has Php200,000 income and Php40,000 freelancing related expenses for the year and is single. Tax calculation would be as follows:

Total Freelance Fees = Php200,000

Less: Deductions

Operating Expenses = Php40,000

Personal Exemption (single with no dependent) = Php50,000

Net Taxable Income (Php200k - 40k - 50k) = Php110,000

Qualified dependent child means a legitimate, illegitimate or LEGALLY ADOPTED CHILD chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. (RR 10-2010).

To claim additional exemption for qualified dependent child you need to file BIR Form 2305.

TIPS:

1. You CANNOT claim additional exemptions for your dependent parents, minor siblings or relatives (unless you have legally adopted them).

2. You CAN claim dependents (children) who are incapable of self-support due to mental or physical defect REGARDLESS OF AGE (even more than 21 years old).  Medical certificate maybe required by BIR when you file Form 2305.

BIR Income Tax - Allowable Deductions

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