Using Itemized Deductions on Income Tax Return

itemizedMy Internet connection is back after two (2) straight days without it. How I was able to have it back is another story. For now, let me tackle the other method of deducting your expenses in running a café business. This is the Itemized Deduction Method, which as contrasted with Optional Standard Deduction (OSD), is a bit complicated and may require the services of an experienced bookkeeper and/or accountant in preparing an individual taxpayer’s income tax return.

In the new BIR Form No. 1701 (revised July 2008) and its attachment, the Account Information Form (BIR Form No. 1701-AIF), the various expense accounts of  single-owned businesses are enumerated in full. In our discussion here, we focus only on those expenses being incurred by an i-café owner. The expenses of an i-café business are grouped into Cost of Services (Schedule 1C in Form 1701-AIF) and Allowable Itemized Deduction (Schedule 7 in Form 1701) and their short descriptions are as follows:

A) Cost of Services – These are the expenses that can be directly charged as items necessary in realizing the sales or revenues of the business. It is like saying that without them, the business will have no income.

  1. Salaries, wages and benefits – paid to shop tenders/helpers
  2. Materials, supplies and facilities – expenses on inks, paper, mouse, keyboard, etc.
  3. Rental – the amount paid to owner of shop’s space.
  4. Depreciation – the amount spent on capital investment spread over a reasonable period of time
  5. Outside Services – paid to computer technicians, carpenters, etc.
  6. Others – the amount paid to electric company and DSL providers

B) Itemized Deductions – Normally called Selling and Administrative Expenses in corporate parlance, these are the expenses which indirectly affects the generation of the i-café’s revenue.

  1. Salaries and Allowances – this is normally what the café owner allocates to himself
  2. Fringe Benefit – expenses on free meals, medicines, etc. of employees
  3. SSS, HDMF and Other Contributions – the employer’s share of the employee’s insurance including that for himself if he is self-employed
  4. Commission – paid to an agent who brokered some jobs for the i-café
  5. Outside Services – the amount paid to persons rendering administrative services to the business such as bookkeeper’s and lawyer’s fees

There it goes, now you have the idea on which to use in filing your income tax return on or before this coming April 15. Remember that this time, it is a little unique because the rules were changed in the middle of a taxable year.

Take note also that while itemized deduction method may result to lesser amount of income tax as compared to optional standard deduction, the procedure in preparing such return may require the services of experienced bookkeepers and accountants for most of the i-café owners.

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