REVENUE REGULATIONS NO. 16-2008 issued on December 18, 2008 implements the provisions of Section 34(L) of the Tax Code of 1997, as amended by Section 3 of Republic Act (R.A.) No. 9504, dealing on the Optional Standard Deduction (OSD) allowed to individuals and corporations in computing their taxable income. The following may be allowed to claim OSD in lieu of the itemized deductions (i.e. items of ordinary and necessary expenses allowed under Sections 34 (A) to (J) and (M), Section 37, other special laws, if applicable): a. Individuals: i. Resident Citizen ii. Non-resident citizen iii. Resident Alien iv. Taxable estates and trusts b. Corporations: i. Domestic corporation ii. Resident foreign corporation The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales or gross receipts during the taxable year. If the individual is on the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year. On the other hand, if the individual employs the cash basis of accounting for his income and deductions, the OSD shall be based on his gross receipts during the taxable year. It should be 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 pursuant to Section 3 of the Regulations inasmuch as the law (RA No. 9504) is specific as to the basis thereof which states that for individuals, the basis of the 40% OSD shall be the “gross sales” or “gross receipts” and not the “gross income”. For other individual taxpayers allowed by law to report their income and deductions under a different method of accounting (e.g. percentage of completion basis, etc.) other than cash and accrual method of accounting, the “gross sales” or “gross receipts” shall be determined in accordance with said acceptable method of accounting. In the case of corporate taxpayers subject to tax under Sections 27(A) and 28(A)(1) of the National Internal Revenue Code (NIRC), as amended, the OSD allowed shall be in an amount not exceeding 40 % of their gross income. The items of gross income under Section 32(A) of the Tax Code, as amended, which are required to be declared in the Income Tax Return of the taxpayer for the taxable year are part of the gross income against which the OSD may be deducted in arriving at taxable income. Passive incomes which have been subjected to a final tax at source shall not form part of the gross income for purposes of computing the forty percent (40%) optional standard deduction. For other corporate taxpayers allowed by law to report their income and deductions under a different method of accounting (e.g. percentage of completion basis, etc.) other than cash and accrual method of accounting, the “gross income” pursuant to the Regulation shall be determined in accordance with said acceptable method of accounting. Pursuant to Section 26 of the NIRC, a General Professional Partnership (GPP) is not subject to Income Tax. However, the partners shall be liable to pay Income Tax on their separate and individual capacities for their respective distributive share in the net income of the GPP. Said Section likewise provides that “For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as a corporation.” As such, a GPP may claim either the itemized deductions allowed under Section 34 of the NIRC or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross income. The net income determined by either claiming the itemized deduction or OSD from the GPP’s gross income is the distributable net income from which the share of each partner is to be determined. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. The GPP is not a taxable entity for Income Tax purposes since it is only acting as a “pass-through” entity where its income is ultimately taxed to the partners comprising it. In computing taxable income defined under Section 31 of the NIRC, the individual partner can still claim either itemized deductions or OSD from his share in the net income of the GPP because said share is considered as gross income in the hands of the partner (Section 32(A)(11) and Section 26, NIRC). If the GPP availed of the itemized deduction in computing its net income, the partners may still either claim itemized deduction or OSD from said share, provided, that, in claiming itemized deductions, the partner is precluded from claiming expenses already claimed by the GPP. In fine, if the GPP claimed itemized deductions and a partner is also claiming itemized deductions, the deductions allowed to the partner must be the ordinary and necessary expenses for the practice of profession which were not yet claimed by the GPP in computing its net income. The GPP and each of the partners are entitled to their own election of deductions to claim during the taxable year, thereby resulting to four possibilities, namely: a. The GPP may claim itemized deductions in computing net income and a partner may also claim itemized deductions in computing his taxable income; or b. The GPP may claim OSD in computing net income while a partner may claim itemized deductions in computing his taxable income; or c. The GPP may claim itemized deductions in computing net income while a partner may claim OSD in computing his taxable income; or d. The GPP may claim OSD in computing net income and a partner may also claim OSD in computing his taxable income. A taxpayer who elected to avail of the OSD not exceeding 40% of gross sales or gross receipts, in case of an individual taxable under Sections 24(A) and 25(A)(1) of the NIRC, or 40% of gross income, in case of a corporation subject to tax under Section 27(A) or 28(A)(1) of the same Code shall signify in his/its return such intention, otherwise he/it shall be considered as having availed himself of the itemized deductions allowed under Section 34 of the NIRC. 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. This means that a taxpayer who initially filed a return availing OSD is precluded from amending said return in order to shift to the itemized deductions. An individual taxpayer who is entitled to and claimed the OSD shall not be required to submit with his tax return such financial statements otherwise required under the Tax Code. Provided, that, except when the Commissioner of Internal Revenue otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts. In the case of a corporation, however, said corporation is still required to submit its financial statements when it files its annual Income Tax Return and to keep such records pertaining to its gross income. In the filing of the quarterly Income Tax Returns, the taxpayer may opt to use either the itemized deduction or OSD. However, in filing the final adjustment Income Tax Return, the taxpayer must make a choice as to what method of deduction it/he shall employ for the purpose of determining its/his taxable net income for the entire year. The taxpayer is, thus, not allowed to use a hybrid method of claiming its/his deduction for one taxable year. For taxable period 2008 which is the initial year of the implementation of the 40% OSD under R.A. No. 9504, which modified the OSD for individuals from 10% of gross income to 40% of gross sales/gross receipts and introduced the OSD as an alternative deduction for corporations, the 40% maximum deduction shall only cover the period beginning July 6, 2008, the effectivity of the said Act. However, in order to simplify and provide ease of administration during the transition period, July 1, 2008 shall be considered as the start of the period when the 40% OSD may be allowed. In the case of an individual taxpayer, he is given the option to either use the itemized method of deduction or the 40% OSD in the filing of his quarterly Income Tax Return covering the third quarter ending September 30, 2008. However, if in the filing of his annual Income Tax Return and he chooses OSD to be his method of deduction, the rate of OSD to be applied for the period covering January 2008 to June 30, 2008 shall only be 10% of gross income (i.e. where gross income is determined by deducting cost of sales from the gross sales or gross receipts ) while the rate of OSD for the period covering July 1, 2008 to December 31, 2008 shall be 40% of gross sales/gross receipts. These Regulations shall take effect on July 6, 2008, the effectivity date of R.A. No. 9504.