Here’s a Philippine-context explainer on non-operating income when you elect the Optional Standard Deduction (OSD)—who can use OSD, what the OSD base actually includes, which “other income” items you may (and may not) fold into that base, and how this plays out for individuals vs. corporations.

One-minute snapshot

OSD = 40% deduction in lieu of all itemized deductions.
Individuals (sole props/professionals): 40% of gross sales/receipts plus other non-operating income subject to the regular tax (i.e., exclude items hit by final taxes or capital gains taxes, and exclude compensation income).
Corporations (domestic & resident foreign): 40% of gross income (gross sales/receipts minus cost of sales/services) plus other taxable income subject to the regular corporate income tax (again, exclude items subject to final/capital-gains tax).
You may not tack on any itemized or specific expenses (rent, salaries, depreciation, interest, NOLCO, etc.). OSD is all-or-nothing for the taxable year you elect it.

Who can elect OSD (and who can’t)

Can:
- Individuals earning income from business or practice of profession (including nonresident aliens engaged in trade/business here).
- Domestic corporations and resident foreign corporations engaged in trade or business in the Philippines.
Typically can’t:
- Pure compensation earners (no business/pro practice).
- Nonresident foreign corporations (taxed on gross Philippine-source income by final tax).
- Taxpayers already using 8% gross-receipts option for individuals (that’s a different regime—you can’t mix it with OSD for the same income).

Irrevocability note: Once you tick OSD for the year (do it in your 1st quarter return), you stick with it for the entire taxable year for that taxpayer and activity.

What exactly is the OSD base?

A) Individuals (sole proprietors / professionals)

OSD base = Gross sales (goods) or gross receipts (services) + other non-operating income that is subject to the regular graduated income tax.
Do not include:
- Compensation income (taxed separately).
- Passive income subject to final tax (e.g., bank interest subject to final withholding, cash/property dividends from domestic corps, royalties at final rates, certain prizes/winnings).
- Capital gains subject to final CGT (e.g., 6% CGT on sale of real property that is a capital asset, 15% CGT on sale of shares not traded on the exchange).
No COGS deduction for individuals under OSD: the 40% is taken off the gross, not “gross income.”

B) Corporations

OSD base = Gross income, i.e.:
- For sale of goods: Gross sales minus sales returns/allowances/discounts minus cost of goods sold (COGS);
- For services: Gross receipts minus cost of services;
- Plus any other income subject to the regular corporate income tax.
Exclude from the base any income items already subject to final taxes or capital-gains regimes (taxed separately and not part of regular-tax base).

So… which non-operating income can I include?

Think of non-operating income as items not part of your main line of sales or services but still taxed under the regular income-tax schedules (not final/capital-gains). Those can go into your OSD base.

Common allowed non-operating items (both INDIVIDUALS and CORPORATIONS), if subject to regular tax:

Foreign exchange gains on trade-related transactions not covered by final taxes.
Recovery of bad debts previously written off (and not otherwise final-taxed).
Gains on sale of ordinary assets (e.g., equipment used in business; for individuals, real property used in business is generally ordinary, not a capital asset).
Scrap sales and miscellaneous income from business operations.
Penalty/late-payment charges you bill customers.
Rental income that is incidental and not subject to a separate final tax (e.g., you rent out part of your business premises; for professionals, office-space sublet). If leasing property is actually your core business, it’s operating income; if it’s incidental, it’s “other non-operating income” but still regular-taxed—either way, it’s includible.
Service charges/commissions outside your principal line, where no final-tax regime applies.

Not allowed in the OSD base (taxed separately; do not fold into OSD):

Bank deposit interest and deposit substitutes subject to final withholding tax.
Cash/property dividends (final-taxed at the shareholder level; inter-corporate domestic dividends may be exempt at the corporate level, but in any case not part of the regular-tax base).
Royalties and certain prizes/winnings hit by final taxes.
Capital gains subject to CGT (6% on sale of capital-asset real property; 15% on non-traded shares).
Stock-market gains already covered by stock transaction tax (separate regime).
Passive income with its own final tax treatment (e.g., long-term deposit interest rules).

Mixed-income earners: Your compensation stays separate; OSD applies only to the business/professional basket.

Numeric mini-examples

1) Individual retailer (OSD elected)

Gross sales: ₱5,000,000
Scrap sales (other non-operating, regular-taxed): ₱50,000
Bank interest (final tax): ₱10,000

OSD base = ₱5,000,000 + ₱50,000 = ₱5,050,000 OSD (40%) = ₱2,020,000 Taxable income (before personal items) = ₱5,050,000 − ₱2,020,000 = ₱3,030,000 (₱10,000 bank interest is final-taxed separately; no itemized expenses allowed.)

2) Domestic corporation (services) (OSD elected)

Gross receipts: ₱12,000,000
Direct costs of services: ₱3,000,000
FX gain (regular-taxed): ₱100,000
Cash dividends from domestic corp: ₱200,000 (exempt at corporate level; not in base)

Gross income = ₱12,000,000 − ₱3,000,000 + ₱100,000 = ₱9,100,000 OSD (40%) = ₱3,640,000 Taxable income = ₱5,460,000 (Dividends excluded; pay regular corporate income tax or MCIT as applicable.)

Compliance & planning notes (things people miss)

MCIT still applies to corporations. OSD only replaces itemized deductions for the normal tax; if Minimum Corporate Income Tax (computed on gross income) is higher, you pay MCIT for that year.
VAT/percentage tax unaffected. OSD is an income-tax concept. You still compute/output VAT or percentage tax on the proper bases.
No NOLCO, no interest expense, no depreciation under OSD. That’s the trade-off for simplicity.
Books & substantiation remain required. OSD does not excuse you from keeping books and proving your gross figures and your classification of “final-tax” vs. “regular-taxed” income.
Election timing: Indicate OSD in your 1st quarter return (and consistently in subsequent quarters and annual return).
Partners & GPPs: A GPP itself is a pass-through; it can’t use OSD. Individual partners may elect OSD for their separate solo practice but not against their share in the GPP’s net income (already netted at the partnership).
Property classification matters for gains: For individuals, real property used in business is ordinary → gain is regular-taxed (can be included in OSD base). Real property that is a capital asset triggers 6% CGT (exclude from OSD).

Quick decision tree

Is the income subject to a final tax / CGT / special regime? → Yes: Exclude from OSD base; tax it under its own regime. → No: Go to (2).
Is the income part of your regular-tax basket (business/professional for individuals; regular corporate tax for corps)? → Yes: Include in OSD base (individuals: add to gross sales/receipts; corporations: add to gross income). → No / compensation: Keep it separate.

Bottom line

Under OSD, you can include non-operating income in your 40% base only if it’s regular-taxed business/professional (for individuals) or corporate income (for corporations).
Keep out anything already hit by final/CGT/special taxes—and remember you get no itemized deductions at all when you choose OSD.
When in doubt, classify each income line first by tax regime, then decide if it belongs in the OSD base.

If you want, share your income lines (even anonymized) and entity type—I’ll map each item to OSD-base vs. excluded, compute a quick OSD vs. itemized comparison, and flag any MCIT or final-tax traps.