In 2012, Dr. K decided to return to his hometown to start his own practice. At the end of 2012, Dr. K found that he earned gross professional income in the amount of P1,000,000.00; while he incurred expenses amounting to P560,000.00 constituting mostly of his office space rent, utilities, and miscellaneous expenses related to his medical practice. However, to Dr. K’s dismay, only P320,000.00 of his expenses were duly covered by receipts. What are the options available for Dr. K so he could maximize the deductions from his gross income? (3%)
Suggested answer only. Not an official answer and not legal advice.
Dr. K should avail of the Optional Standard Deduction (OSD) to maximize his allowable deductions. Under Section 34(L) of the NIRC, an individual subject to tax (other than a non-resident alien) may elect an
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Quick check
What is the allowable Optional Standard Deduction rate for self-employed individuals and professionals under Section 34(L) of the NIRC?
Section 34(L) sets the Optional Standard Deduction rate for individual professionals at forty percent of gross sales or gross receipts.
What is the main administrative advantage of electing the Optional Standard Deduction over itemized deductions?
Optional Standard Deduction allows taxpayers to deduct forty percent of gross receipts without providing receipts or proof.
How is the Optional Standard Deduction calculated for an individual professional with gross receipts of ₱1,000,000.00?
For gross receipts of ₱1,000,000.00, OSD equals forty percent or ₱400,000.00.
When must an individual taxpayer signify the election to claim the Optional Standard Deduction for a taxable year?
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What is the statutory consequence of an election made between itemized deductions and OSD in the initial return?
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Learn more about these topics
1. Optional Standard Deduction
Under Section 34(L) of the National Internal Revenue Code, an individual subject to income tax, other than a non-resident alien, may elect an optional standard deduction in an amount not exceeding forty percent of gross sales or gross receipts. For self-employed individuals and professionals, optional standard deduction is computed based on gross sales or gross receipts without deducting cost of sales or services. Availing of optional standard deduction frees the taxpayer from the strict requirement of substantiating business expenses with official receipts or sales invoices.
2. Itemized Deductions Substantiation
Under Section 34(A)(1)(b) of the Tax Code, business or professional expenses claimed as itemized deductions must be ordinary, necessary, directly attributable to the trade or practice, and duly substantiated with official receipts or adequate records. Unsubstantiated expenses cannot be deducted from gross income for income tax computation purposes. When a professional incurs substantial operational expenses but fails to secure official receipts for a portion thereof, claiming itemized deductions limits the allowable deduction exclusively to the substantiated amount.
3. Irrevocability of Election
Under Section 34(L) of the Tax Code and relevant revenue regulations, the election to claim either itemized deductions or the optional standard deduction must be signified in the initial quarterly income tax return filed for the taxable year. Once made in the initial return for the taxable year, such election is irrevocable for that particular taxable year. A taxpayer who fails to signify the intention to elect the optional standard deduction in the initial return is deemed to have chosen itemized deductions for the entire year.