QuestionsQuestions (BIR REVENUE REGULATIONS NO. 16-2008)
RR No. 16-2008 implements the provisions of Section 34(L) of the Tax Code of 1997, as amended by Section 3 of Republic Act (RA) No. 9504, governing the Optional Standard Deduction (OSD) for individuals and corporations. Its authority is stated in relation to Sec. 244 of the Tax Code.
The Regulations cover: (1) Individuals—resident citizen, non-resident citizen, resident alien, and taxable estates and trusts; and (2) Corporations—domestic corporations and resident foreign corporations.
For individuals, the OSD is capped at 40% of gross sales or gross receipts during the taxable year. If the individual uses accrual basis, the basis is gross sales; if cash basis, the basis is gross receipts.
Because RA 9504 is specific that the basis for individuals’ 40% OSD is gross sales or gross receipts—not gross income—so cost of sales/cost of services are not used to compute the OSD base.
If allowed under law to use another method (e.g., percentage of completion), the gross sales/gross receipts used as the basis of the 40% OSD shall be determined in accordance with that acceptable method of accounting.
For corporations taxable under Sections 27(A) and 28(A)(1) of the Tax Code, the OSD shall not exceed 40% of gross income.
Gross income means gross sales less sales returns, discounts, allowances, and cost of goods sold.
Trading/merchandising: cost of goods sold includes invoice cost plus import duties, freight to place of sale, and insurance while goods are in transit. Manufacturing: cost of goods sold includes costs incurred in producing finished goods (raw materials, direct labor, manufacturing overhead, freight, insurance, and other costs to bring raw materials to the factory/warehouse).
Gross income is treated as gross receipts less sales returns/allowances/discounts and cost of services. Gross receipts are amounts actually or constructively received; if on accrual basis, gross receipts are amounts earned as gross revenue. Cost of services includes direct costs such as salaries/benefits of personnel directly rendering services and depreciation or rental of equipment plus supplies used; it does not include interest expense except for banks and other financial institutions.
Items of gross income under Section 32(A) that are required to be declared in the income tax return for the taxable year form part of gross income against which OSD may be deducted.
No. Passive incomes already subjected to final tax at source do not form part of the gross income for purposes of computing the 40% optional standard deduction.
A taxpayer who elects OSD must signify this intention in the return; otherwise, the taxpayer is considered to have availed of itemized deductions under Section 34. Once the election is signified in the return, it is irrevocable for that taxable year.
No. RR No. 16-2008 states that once a taxpayer initially files a return availing OSD, the taxpayer is precluded from amending it to shift to itemized deductions for the same taxable year.
For individuals, no—RR No. 16-2008 expressly states that the choice must be either itemized deductions or OSD for the entire taxable year. For corporations, the transitory rules for Year 2008 allow different treatment by period due to RA 9504 effectivity.
Individual taxpayers are not required to submit financial statements otherwise required under the Code (except when the Commissioner permits), but they must keep records pertaining to gross sales/gross receipts. Corporations still need to submit financial statements when filing the annual income tax return and keep records pertaining to gross income as defined.
In filing quarterly income tax returns, taxpayers may opt to use either the itemized deduction or OSD. However, in the final adjustment return, the taxpayer must choose the method to determine taxable net income for the entire year (no hybrid for the entire year).
RA 9504 took effect July 6, 2008, but RR No. 16-2008 simplifies that July 1, 2008 shall be considered the start when the 40% OSD may be allowed. For individuals: OSD rate is 10% of gross income for January 2008 to June 30, and 40% for July 1 to December 31 if OSD is chosen in the annual return. For corporations, the OSD is applied only for the period beginning July 1/July 6 (as described) while earlier periods remain under itemized deductions.
RR No. 16-2008 took effect on July 6, 2008, which corresponds to the effectivity date of RA No. 9504.