May 25, 2010

Itemized Vs. Optional Deductions On Income Tax

In July of 2008, the Optional Standard Deduction (OSD) was increased to forty (40%) percent for both individual and corporate taxpayers so that a Filipino businessman can now decide  whether he will stick to the old itemized deduction of expenses or use OSD in filing his income tax returns. Taxpayers who retain the services of knowledgeable bookkeeper or accountant must have been briefed on the advantages and disadvantages of the two (2) schemes. This article is intended for those who are doing their income tax returns by themselves so that they can intelligently decide on which method of deduction to use.

When using itemized deductions it must be said that in claiming a tax deduction for an expense, a taxpayer must not only establish the relation of the expense to the conduct of his business. He must substantiate the expense by keeping adequate records and presenting documentary evidence like invoices and official receipts. This is to establish that the expenses were used for business rather than personal purpose. Otherwise, the tax deduction may be disallowed and he may be assessed additional taxes and penalties.

To avoid this struggle in record-keeping and accounting for deductions, a taxpayer may choose to avail of the OSD method. Only the sales records need to be kept, thus retaining the services of a bookkeeper or accountant will no longer be necessary unlike the itemized method of deducting expenses where a bookkeeper or accountant is needed to book your sales and expenses.

Aside from the above, another important consideration in choosing between itemized deduction and OSD is to determine which of the two will allow you to claim higher deductions. In the remote possibility wherein your itemized deductions and OSD approximately equal each other, availing of the OSD is the more practical choice if you want to avoid disputes and unnecessary stress from BIR examination.

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