Hi guys, please check out a couple of our earlier blogs/episodes to follow JCruz’s tax questions.
Our triathlon coach, JCruz, is now at a stage where he’s choosing between accepting BIR’s peace offering, the Optional Standard Deduction (OSD), or attempt to identify, segregate, and document all his receipts/expenses. His monthly revenue is P30,000, and below is summary of his monthly expenses, excluding those paid for/reimbursed by his clients.
Transo/gas/parking 2,500
Meeting costs/food 2,000
Equipment 2,500
Miscellaneous 2,000
Total 9,000
*rent “difference” 3,500
In our previous blog we mentioned most of JCruz’s bills, and the lease, are not under his name. Plus it’s not that simple to split, say, the gas bill between personal and business. Under BIR rules JCruz must track, segregate and secure proper receipts for every single peso for these bills to qualify as tax deductions…yes, every single expense. This is referred to as “Itemized Deduction”, or what I call Option Ooh, because that’s the reaction I get whenever I explain how it works. Or he may choose OSD (let’s call this Option O) and limit expenses at 40% of revenue, which in this case would be P12,000 (P30,000 x 40%). This P12,000 is a bit under JCruz’ initial list of P12,500 (P9,000 + 3,500), but if he selects Option O it is an automatic P12,000 deduction. Simple. No further info needed.
And there two other advantages. Unlike Option “Ooh”, there is no need to list down every single type of expense (just one line, that’s it). Secondly, under Option “O” or OSD, there’s no need to file audited financial statements should your revenues exceed P150,000 in any given quarter. “Audited” means you need to hire/pay a separate CPA (other than your accountant, if you have one) to basically check your or the accountant’s numbers.
Of course OSD is not for all. For taxpayers under special tax rates they must report and itemize all expenses to the BIR. There are also businesses with very low margins (ex. a supermarket) where that would be a bad choice. But for many professionals and especially home-based solopreneurs, OSD could be a far easier and cheaper way to file income taxes.