Sierra circular

Contribution to a pension trust may be claimed as deduction as follows:

(1) Amount contributed for the present/normal

service cost – 100% deductible

(2) Amount contributed for the past service cost

– 1/10 of the amount contributed is deductible in year the contribution is made, the remaining balance will be amortized equally over nine consecutive years

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General Rule: An employer establishing or maintaining a pension trust to provide for the

payment of reasonable pensions to his employees shall be allowed as a deduction, a reasonable amount transferred or paid into such trust in excess of the contributions to such trust made during the taxable year.

Requisites for deductibility of payments to pension trusts.—

(1) There must be a pension or retirement plan established to provide for the payment of reasonable pensions to employees;

(2) The pension plan is reasonable and actuarially sound;

(3) It must be funded by the employer;

(4) The amount contributed must no longer be subject to the employer’s control or disposition; and

(5) The payment has not theretofore been allowed before as a deduction.

Deductions under special laws.—

(1) Special deductions for productivity bonus and manpower training under the

Productivity Incentives Act of 1990

(2) Deductions for training expenses of qualified

jewelry enterprises [Jewelry Industry

Development Act of 1998]

(3) Deductions under the Adopt-a-School Act of

1998

(4) Deductions under the Expanded Senior

Citizens Act of 2003. [Domondon] OPTIONAL STANDARD DEDUCTION Individuals, except non-resident aliens

(1) May be taken by an individual in lieu of

itemized deductions except those earning purely compensation income.

(2) If an individual opted to use OSD, he is no longer allowed to deduct cost of sales or cost of services.

(3) Amount: 40% of gross sales or gross

receipts(under RA 9504, effective July 6, 2008)

Requisites:

(a) Taxpayer is a citizen or resident alien;

(b) Taxpayer’s income is not entirely from compensation;

(c) Taxpayer signifies in his return his intention to

elect this deduction; otherwise he is

considered as having availed of the itemized deductions.

(d) Election is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding years.

Corporations, except non-resident foreign corporations

The option to elect Optional Standard Deduction granted is now granted to corporations (domestic and resident foreign corporations) by virtue of RA 9504.

(1) The OSD is 40% of its gross income.

(2) The domestic and resident foreign corporation shall keep such records pertaining to his gross income as defined in Section 32 of the NIRC during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance upon recommendation of the CIR. (3) Corporations availing of OSD are still

required to submit their financial

statements when they file their annual ITR and to keep such records pertaining to its gross income. [RR 2-2010].

Partnerships

(1) General Co-Partnership

For purposes of taxation, the Code considers general co-partnerships as corporations. Hence, rules on OSD for corporations are applicable to general co- partnerships.

(2) General Professional Partnerships (GPP) (a) If the GPP availed of itemized

deductions, the partners are not allowed to claim the OSD from their share in the net income because the OSD is a proxy for all the items of deductions allowed in arriving at taxable income. This means that the OSD is in lieu of the items of deductions claimed by the GPP and the items of deduction claimed by the partners. (b) If the GPP avails of OSD in computing its

net income, the partners comprising it can no longer claim further deduction from their share in the said net income for the following reasons:

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(i) The partners’ distributive share in the GPP is treated as his gross income not his gross sales/receipts and the 40% OSD allowed to individuals is

specifically mandated to be

deducted not from his gross income but from his gross sales/receipts; and,

(ii)The OSD being in lieu of the itemized deductions allowed in computing taxable income as defined under Section 32 of the Tax Code, it will answer for both the items of deduction allowed to the GPP and its partners.

(c) Since one-layer of income tax is imposed on the income of the GPP and the individual partners where the law had placed the statutory incidence of the tax in the hands of the latter, the type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners. Accordingly, if the GPP claims itemized deductions, all items of deduction allowed under Sec. 34 can be claimed both at the level of the GPP and at the level of the partner in order to determine the taxable income. On the other hand, should the GPP opt to claim the OSD, the individual partners are deemed to have availed also of the OSD because the OSD is in lieu of the itemized deductions that can be claimed in computing taxable income.

(d) If the partner also derives other gross income from trade, business or practice of profession apart and distinct from his share in the net income of the GPP, the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income as explained in the foregoing rules. Provided, however, that if the GPP opts for the OSD, the individual partner may still claim 40% of its gross income from trade, business or practice of profession but not to include his share from the net income of the GPP. [RR 2-2010]

PERSONAL AND ADDITIONAL EXEMPTION