Optional Standard Deduction Revised PDF

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Optional Standard DeductionThe OSD is in lieu of the itemized deductions (both regular and special) including NOLCO allowable under the NIRC and special laws. Under OSD, the allowable deduction of the taxpayer is simply presumed as a percentage of gross sales or receipt for individuals and gross inc...

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Optional Standard Deduction The OSD is in lieu of the itemized deductions (both regular and special) including NOLCO allowable under the NIRC and special laws. Under OSD, the allowable deduction of the taxpayer is simply presumed as a percentage of gross sales or receipt for individuals and gross income for corporations. There is no need to support every item of expense. Who can claim OSD? OSD is a proxy for itemized deductions. As a rule, all taxpayers who are subject to tax on taxable net income can claim deductions except the following: 1. NRA-ETB 2. Taxpayers mandated to use itemized deductions Mandatory itemized deductions 1. Corporations mandated to use itemized deductions a. Exempt GOCCs and nonstock, non-profit corporations with no taxable income b. Those with income subject to special/preferential tax rates (as long as a corporation has special rate/s, itemized deductions is required) c. Those with income subject to regular corporate income tax and special/preferential tax rates

2. Individual taxpayers mandated to use the itemized deductions a. Exempt individuals under NIRC and special laws with no other taxable income b. Those with income subject to special/preferential tax rates c. Those with income subject to regular income tax and special/preferential tax rates 3. NRA-NETB (no deductions for such taxpayer) Special corporations subject to preferential rates are also not allowed to use OSD. The option to claim OSD must be signified in the income tax return, otherwise, itemized deduction is presumed. The option to select OSD must be made in the first quarter return. This is irrevocable for the whole taxable year. Taxpayers who opted to use OSD are not required to submit their financial statements and their income tax return. When to indicate the option to use OSD? Individual taxpayers – annual income tax return Corporate taxpayers – first quarter income tax return

Percentage of OSD Individual Gross Sales Gross Receipts 40% Gross Revenues Corporation Gross Income* 40% *Sales less COGS

Table comparison on OSD Individual Corporation COGS/COS YES NO Regular YES YES Deductions Special YES YES Deductions NOLCO YES YES Forms used 1701A 1702-RT Hence, corporations can claim cost of sales or cost of services while individual taxpayers cannot claim cost of sales or cost of services under the OSD. Rules in determination of OSD for individual taxpayers Gross sales – gross sales, in taxation parlance, means net sales in financial accounting. (net of gross sales from sales discount, returns, and allowances) Gross receipts – amounts earned during the taxable year Net Sales* Add: Other Taxable Income from operations not subject to final tax** Total Sales

xxx

xxx xxx

Multiply: OSD percentage OSD

40% xxx

*Net sales can also mean net revenues, net receipts, and net fees **Other taxable income from operations only. Other income that comes from non-operating income are not included. Examples of these non-operating income are: • Gains from dealings in properties • Distribution from a general professional partnership, exempt co-ownership, and taxable estates and trusts • Casual active income • Passive income or those not connected to the primary or secondary of the business such as: o Interest income on advances to employees o Investment income subject to regular tax NOTE: Determination of the amounts on the given formula may vary according to the accounting method employed by the taxpayer – accrual or cash basis of accounting. Rules on determination of OSD for corporate taxpayers Net Sales* xxx Less: Cost of Sales or xxx Services Gross income from xxx operations

Add: Other taxable income not subject to final tax** Total gross income Multiply: OSD Percentage OSD

xxx xxx 40% xxx

*Net sales can also mean net revenues, net receipts, and net fees **All gross income subject to regular tax can be included, notwithstanding if it is related or not to the corporation’s operations ***The same computation can be applicated to General Professional Partnerships in determining their net income. But, it should be noted that the shares of partners in the net income of GPP is excluded in computing OSD. What constitutes cost of services? Cost of services includes all direct costs and expenses necessary to provide the service required by the customers....