How to compute Optional Standard Deductions (OSD)?

Under the advent of Republic Act No. 8424 otherwise known as “The Tax Reform Act of 1997” (RA 8424), OSD is applicable only to individual taxpayers engaged in trade or business, or engaged in the practice of profession. It is computed at ten percent (10%) based on the gross profit after deducting the cost of sales or cost of service like the illustration below based on assumed figures:

Gross sales/receipts                                                       P220,000

Less: Sales returns, discounts & allowances             20,000

Net Sales                                                                             P200,000

Less: Cost of sales/service                                               70,000

Gross profit                                                                        P130,000

OSD rate                                                                                      10%

Allowable deduction – OSD                               P  13,000

Based on the amendment of Republic Act No. 8424 introduced by Republic Act No. 9337 (RA 9337), OSD is now applied at forty percent (40%) of net sales without deducting cost of sales or service for individuals, or forty percent (40%)  based on gross profit after deducting cost of sales or service for corporations. In short, the amendment made the following changes:

Individual taxpayers:

1. Increase the applicable rate from 10% to 40%; and,
2. Change the tax base to gross sales/receipts without deducting cost of sales;

Corporate:

1. Included corporation in the coverage of OSD; and,
2. Deduction of cost of sales/service in arriving the tax base.

Applying the above figures, OSD for INDIVIDUAL will now be as follows:

Gross sales/receipts                                                       P220,000

Less: Sales returns, discounts & allowances             20,000

Net Sales                                                                             P200,000

OSD rate                                                                                      40%

Allowable deduction – OSD                            P  80,000

On the other hand, OSD for CORPORATE taxpayer will be computed like individual taxpayer under RA 8424, except that the rate is 40% and not 10% illustrated below:

Gross sales/receipts                                                       P220,000

Less: Sales returns, discounts & allowances             20,000

Net Sales                                                                             P200,000

Less: Cost of sales/service                                               70,000

Gross profit                                                                        P130,000

OSD rate                                                                                      40%

Allowable deduction – OSD                             P 52 ,000

You may try to work on other figures to master the above OSD formulas. I likewise suggest that you consult a professional to ensure correct application of OSD on your quarterly and annual income tax returns.

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

Related post:

Tax Savings under OSD.

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(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.

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