Deducting Expenses Before Taxes

The NIRC provides two methods of deduction the taxpayer may use, depending on his capability and convenience: the Optional Standard Deduction and Itemized Deduction.

1.) Optional Standard Deduction

For individuals, estates and trusts, 40% of gross sales or gross receipts may be deducted as expenses. For corporations and partnerships, 40% of the gross income may be deducted as expenses. This option is available to resident citizens, nonresident citizens, resident aliens, estates, trusts, partnerships, domestic corporations and resident foreign corporations. It cannot be availed of by nonresident aliens, whether doing business in the Philippines or not, and nonresident foreign corporations. This options does NOT require the presentation of supporting documents to claim the 40% deduction!

2.) Itemized Deduction

Expense deductions must be supported by the necessary documents and evidence to claim such a deduction. Therefore, the taxpayer has the burden of proof to prove that his expenses are correct. This option is not available to nonresident foreign corporations and nonresident aliens not doing business in the Philippines.

So choose whichever suits your concerns!

Here's a suggestion. Before you pay your taxes (and before the tax man arrives to assess you) do an accounting. Depending on the results of your inventory, you can then choose which option to use to deduct your expenses with. Each option has its advantages.