Tax savings under Optional Standard Deduction (OSD)

For taxpayers engaged in trade, business, or practice of profession, optional standard deduction (OSD) is a good are to look at for tax savings.  Under Section 34(L) of the Tax Code, as amended by Republic Act No. 9504 dated June 17, 2008, and hereunder quoted:

“Section 34(L) Optional Standard Deduction. – In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case maybe. In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made. Provided, That an individual who is entitled to claim for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits the said individual shall keep such records pertaining to this gross sales or gross receipts, or the said corporation shall keep such records pertaining to this gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.”

Based on the above provision, a taxpayer may opt for optional standard deduction (OSD) to be deducted from the gross income instead of itemized deductions, in arriving at the taxable income. Such optional standard deduction, if chosen would have the following features:

  • 40% based on gross receipts/sales for individuals or 40% based on gross income for corporate taxpayers,
  • Irrevocable for the taxable year of choice, even by amendment on the later years,
  • No substantiation is required for claimed allowable deductions and no disallowance of expense for non-withholding, but the taxpayer may nevertheless be held liable for non-withholding,
  • Individuals opting for OSD no longer required to attach audited financial statements to its annual income tax return but is still required to maintain books of accounts,
  • Corporate taxpayers availing OSD are still required audited financial statements, and,
  • To qualify for the OSD, the taxpayer should apply the same at the very first quarter of the taxable year.

The choice between OSD or itemized deductions could not be that easy to make because for a wise entrepreneur, business advantage shall be considered. In short, the determination would lead to finding which option would save taxes or which would be more advantageous to the entrepreneur. Such determination works in many ways, and may not alone be financial. Financial wise, it will be beneficial if OSD computations would be higher than the itemized deductions because this will mean lower income tax due.

  • For individuals, OSD would be better if the total expenses will not reach 40% like service concerns, professionals and the likes.
  •  For corporate taxpayers, OSD would be beneficial if there is less cost of sales/service because there could be a higher tax based for OSD, and there could be less operating expense.

On the other hand, even if figures would go against OSD, you may still avail of the same because of the following:

  •  Your substantiation is not in accordance with the regulations like if they are not in the name of the company, or no substantiation at all;
  • You are an individual and you do not want an independent Certified Public Accountant (CPA) to conduct an audit for cost cutting measures.

I leave it now to you good entrepreneurial judgment to determine how OSD works for you. I suggest you seek confirmation of a professional to assure that the anticipated benefits from OSD would turn out to be benefits, indeed.

Note: Article published before TRAIN or R.A. No. 10963 effective Jan. 2018.

Related professional service:

Tax study to determine benefits of OSD availment.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may also please send mail at info(@), or you may post a question at Tax and Accounting Center Forum and participate therein.

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