What is Optional Standard Deduction

Optional Standard Deduction (OSD) for Philippine tax purposes, is an allowable deduction from professional or business income of the persons who are entitled and who may elect to use this kind of deduction in lieu of the itemized deductions. The election to claim either OSD or the itemized deduction for the taxable year must be signified by checking the appropriate box in the income tax return filed for the first quarter of the taxable year. Once the election to avail of the OSD or itemized deduction signified in the return, it shall be irrevocable for the taxable year.

It implies that if a taxpayer elected to avail of the Optional Standard Deduction, he or she shall signify in his  return such intention, otherwise he shall be considered as having availed himself of the itemized deduction. Once the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns and in the final income tax return for the taxable year.

Who are Entitled to Use Optional Standard Deduction

The taxpayers who are allowed to use Optional Standard Deduction are the following:

  • Resident citizens
  • Nonresident citizens
  • Resident aliens
  • Taxable Estate and Trusts
  • Partnership
  • Domestic corporation
  • Resident foreign corporation.

The taxpayers who are not allowed to use Optional Standard Deduction are the following: nonresident alien engaged in trade or business, nonresident alien not engaged in trade or business and Nonresident foreign corporation.

How much is the Optional Standard Deduction?

For individual taxpayers, forty percent (40%) of their gross sales or gross receipts shall compose the OSD. While for partnerships and corporations, Optional Standard Deduction shall be forty percent (40%) of their gross income during taxable year.

 

A taxpayer who fails to file an income tax return for the first quarter of the taxable year, shall have to claim itemized deductions for the rest of the year. An individual taxpayer who is entitled to and claimed OSD shall not be required to submit with his tax return such financial statements otherwise required under the National Internal Revenue Code.

As a support to what have  been discussed above, the BIR recently issued RR 2-2010 amending Secs. 6 and 7 of RR 16-2008 clarifying the manner of claiming the Optional Standard Deduction by General Professional Partnerships (GPPs) and the partners comprising them and the manner of manifesting the election to use OSD for the taxable year concerned.

The amendments are enumerated as follows:

  1. If the GPP availed of itemized deductions, the partners are not allowed to claim the OSD from their share in the net income because the OSD is a proxy for all the items of deductions allowed in arriving at taxable income.
  2. If the GPP avails of OSD in computing its net income, the partners comprising it can no longer claim further deduction from their share in the said net income.
  3. The type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners.
  4. If a partner also derives other gross income apart and distinct from his share in the net income of the GPP, the deduction that he can claim from his other gross income would follow the same deduction availed of from his partnership income; provided that if the GPP opts for the OSD, the individual partner may still claim 40% of its gross income but not to include his share from the net income of the GPP.
  5. The election to claim either the OSD or the itemized deduction for the taxable year must be signified by checking the appropriate box in the income tax return filed for the first quarter of the taxable year adopted by the taxpayer. Once the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns and in the final income tax return for the taxable year. Any taxpayer required but fails to file the quarterly income tax return shall be considered as having availed of the itemized deductions option for the taxable year.