Persons Eligible to Claim OSD
- Individuals: resident citizens, non-resident citizens, resident aliens, taxable estates and trusts.
- Corporations: domestic corporations and resident foreign corporations.
OSD for Individual Taxpayers
- Maximum 40% of gross sales or gross receipts for the taxable year.
- Basis: gross sales if accrual accounting; gross receipts if cash basis accounting.
- Cost of sales or services not deductible when computing OSD base.
- For other accounting methods, gross sales/receipts determined accordingly.
OSD for Corporations
- Maximum 40% of gross income.
- Gross income = gross sales less returns, allowances, discounts, and cost of goods sold.
- Definitions:
- Gross sales include income taxable under Section 27 (A).
- Cost of goods sold includes purchase/production costs plus direct expenses.
- For services, gross income equals gross receipts less returns and cost of services.
- Cost of services includes salaries, employee benefits, depreciation, rentals, and supplies but excludes interest (except banks).
- Gross receipts mean amounts actually or constructively received; if accrual method, amounts earned.
- Passive income subject to final tax excluded from gross income for OSD computation.
- Other accounting methods to follow applicable rules.
Example of OSD Computation (Individual vs Corporation)
- Gross sales P1,000,000 with cost of goods sold P800,000.
- Individual OSD basis: P1,000,000 x 40% = P400,000.
- Corporation OSD basis: (P1,000,000 - P800,000) x 40% = P80,000.
- Net income after OSD: Individual P600,000; Corporation P120,000.
OSD for General Professional Partnerships (GPPs) and Partners
- GPP itself not subject to income tax; partners taxed individually.
- GPP computes net income like a corporation; may claim itemized or OSD (max 40%).
- Partners report distributive share of net income as gross income.
- Partners may claim itemized deductions or OSD on their share, ensuring no double deduction.
- Four election scenarios for GPP and partners concerning OSD or itemized deductions.
Election and Irrevocability of OSD
- Must signify election of OSD in tax return.
- Election is irrevocable for the taxable year.
- No amendment allowed to switch from OSD to itemized deductions once filed.
- Individual taxpayers claiming OSD are not required to submit financial statements but must keep sales/receipts records.
- Corporations must still submit financial statements and maintain records.
- Quarterly returns may use either deduction method, but the final annual return must adopt one.
- Hybrid method combining OSD and itemized deductions within one taxable year not allowed.
Transitory Provisions for 2008 Implementation
- RA 9504 became effective July 6, 2008; July 1, 2008 used for transition ease.
- For individuals, OSD before July 1 applied at 10%, after at 40%.
- Example illustrates the prorated application for taxpayers switching methods during 2008.
- Choice of deduction method must be for the whole taxable year; no hybrid method.
- Corporations allowed itemized deductions before July 6, 2008 and OSD after.
Repealing Clause
- All inconsistent regulations and rules amended, modified, or repealed.
Effectivity Clause
- Regulations effective July 6, 2008, coinciding with RA 9504 effective date.