ii. Optional Standard Deduction

Distinguish: Itemized Deduction v. Optional Standard Deduction

Deductions are classified into:

• Itemized deductions
• Optional standard deduction (OSD)
• Special deductions

Itemized Deductions

• Bad debts
• Business expenses
• Losses
• Taxes
• Depreciation
• Interest
• Depletion of oil and gas wells and mines
• Charitable and other contributions
• Pension trusts
• Research and development

(2) OPTIONAL STANDARD DEDUCTION (OSD) (Sec. 34 (L))

• Individual other than a nonresident alien - may elect a standard deduction of 40% of his gross sales or gross receipts.
• Corporation other than non-resident foreign corporations may elect a standard deduction of 40% of its gross income as defined in Section 32 of the NIRC¹.
• General professional partnerships GPP and the partners comprising such partnership may avail of the OSD only once, either by the GPP or the partners comprising the partnership.

Note: No deductions shall be allowed to individual taxpayers earning compensation income arising from personal services rendered under an employee-employer relationship and those who opted to be taxed a 8% income tax rate on their income from business/practice of profession. (Rev. Regs. 08-18, Sec. 8)²

There is no need to substantiate OSD. Unless the taxpayer signifies in his first quarter return his intention to elect the OSD, he shall be considered as having availed himself of the deductions in Secs. 34(A) to (K) of the NIRC as amended by TRAIN Law³. Such election when made in the return shall be irrevocable for the taxable year for which the return is made. (Sec. 34(L))⁴

Summary: Who can claim OSD?

All taxpayers who are subject to tax on taxable net income (RC, NRC, RA, DC, RFC) can claim except the following:

• Those not subject to income tax in the Philippines
• NRA whether or not engaged in trade or business in the Philippines
• NRFC
• Taxpayers mandated to use itemized deductions under RR 2-2014, Sec.5⁵:
• Corporations, partnerships and other non-individuals:
• Those exempt under the Tax Code, as amended [Section 30⁶ and those exempted under Section 27(C)⁷] and other special laws, with no other taxable income;
• Those with income subject to special/preferential tax rates; and
• Those with income subject to income tax rate under Section 27(A)⁸ and 28(A)(1) of the Tax Code, as amended⁹, and also with income subject to special/preferential tax rates.
• Individual taxpayers who are not entitled to avail of the OSD and thus use only the itemized deduction method are as follows:
• Those exempt under the Tax Code, as amended, and other special laws with no other taxable income [e.g. Barangay Micro Business Enterprise (BMBE)];
• Those with income subject to special/preferential tax rates; and
• Those with income subject to income tax rate under Section 24 of the Tax Code, as amended¹⁰, and also with income subject to special/preferential tax rates.

Illustration 1 (Rev. Regs. 08-18, Sec. 8¹¹)

Ms. RPSV is an independent contractor who offers architectural and engineering services. Her total gross receipts amounted to P4,250,000 for taxable year 2018. Her recorded cost of service and operating expense were P2,150,000 and P1,000,000, respectively. She opted to avail of the 40% OSD.

Illustration 2 (RR 08-18 Sec. 8¹²)

The gross sales of GEAL Corporation for 2018 amounted to P6,000,000 with cost of sales amounting to P4,000,000. It incurred operating expense amounting to P1,000,000, and on the filing of its first quarter ITR, it signified its intention to avail of the OSD.

(iii) Optional Standard Deduction (OSD)

In lieu of the itemized deductions, a corporation may elect to claim an optional standard deduction (OSD) in an amount not exceeding forty percent (40%) of gross income of corporations.

A taxpayer who elected to avail of the OSD shall signify in his/its first quarter return such intention. Otherwise, he/it shall be considered as having availed himself of the itemized deductions.

Once the election to avail the OSD is signified in the return, it shall be irrevocable for the taxable year for which the return is made.

Who can claim OSD?

All corporations who are subject to tax on taxable net income can claim except the following:

• NRFC
• Taxpayers mandated to use itemized deductions

(iii) Optional Standard Deduction (OSD)

In lieu of the itemized deductions, a corporation may elect to claim an optional standard deduction (OSD) in an amount not exceeding forty percent (40%) of gross income of corporations.

A taxpayer who elected to avail of the OSD shall signify in his/its first quarter return such intention. Otherwise, he/it shall be considered as having availed himself of the itemized deductions.

Once the election to avail the OSD is signified in the return, it shall be irrevocable for the taxable year for which the return is made.

Who can claim OSD?

All corporations who are subject to tax on taxable net income can claim except the following:

• NRFC
• Taxpayers mandated to use itemized deductions