Effectively, in computing the net taxable income for individual taxpayers using the OSD, the cost of sales or cost of services are not allowed as deductions. For the individuals, on the other hand, the OSD is computed and deducted from the gross sales/receipts to arrive at the net taxable income. Corporations are allowed to deduct the cost of sales from the sales to arrive at the gross income, and from the gross income the OSD is computed and deducted to arrive at the net taxable income. The OSD allowed shall be in an amount not exceeding 40 percent of their gross income. It further emphasized that the “cost of sales” in case of individual seller of goods, or the “cost of services” in the case of individual seller of services, are not allowed to be deducted for purposes of determining the basis of the OSD, inasmuch as the law (RA 9504) is specific as to the basis thereof.Ĭompare this to corporate taxpayers. Implementing this was RR 16-08, which emphasized, among others that the OSD allowed to individual taxpayers shall be a maximum of 40 percent of gross sales or gross receipts during the taxable year. On the OSD, the following were the significant changes made: (1) the OSD rate was increased four times from 10 percent to 40 percent (2) for individuals, previous computation of the OSD based on gross income was changed to gross sales or gross receipts and (3) the inclusion of corporate taxpayers from those entitled to avail of the OSD. The situation was significantly changed in 2008 when RA 9504 introduced amendments to the National Internal Revenue Code of 1997. That same option was not yet made available to corporate taxpayers. Republic Act (RA) 8424 or the National Internal Revenue Code of 1997 retained the same privilege for individual taxpayers, allowing them to elect a standard deduction in an amount not exceeding 10 percent of their gross income. Subsequent revisions, however, in the Tax Code included some changes in the OSD rules. And as opposed to the current rules, when the OSD was first introduced in our tax system for the individuals, the basis of the 10 percent (OSD rate at that time) standard deduction was the gross income and not the gross sales or receipts. In its original conceptualization, only individual taxpayers were given the option to claim a specific percentage of the gross income as deduction in the computation of his income tax liability, instead of identifying each item of expenses. The privilege to choose OSD was not available to corporate taxpayers. For corporate taxpayers, the 40 percent is computed on the gross income while for individuals, it is based on the gross sales or gross receipts.īut note that when the OSD was first introduced in our income tax system, the same was available only to individual taxpayers. While this is available to both corporate and individual taxpayers, there is a difference in the basis of the 40 percent. This option is usually referred to as the optional standard deductions or OSD. In lieu of reporting the individual/itemized deductions, the current law allows the taxpayer to elect a standard deduction (of 40 percent) in the computation of net taxable income. Traditionally, these are the costs and expenses incurred by the taxpayer in earning the taxable income or in running the business. Except for certain types of taxpayers or types of income where no deductions or where there are only limited deductions in the computation of income taxes due, individual and corporate income taxpayers are generally entitled to claim deductions in computing their net income subjected to income tax.
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