PART 7 L . Deductions from, Gross JUcome ! / — DEDUCTIONS FROM THE GROSS INCOME Section 34 of the Tax Code, as amended Deductions, are the amounts, which the law allows to be deducted from gross income in order to arrive at net income, On the other hand, “Exclusions” are something received or earned by the taxpayer that do not form part of gross income while deductions are something spent or paid in earning the gross income. Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income, KINDS OF DEDUCTIONS 1.’ Itemized Deductions 2. Optional Standard Deduction 3. Special Deductions allowed under special cases. [AXPAYER ‘ALLOWABLE DEDUt “| Individuals earning pure Beginning 2018, no more deduction is allowed to compensation income purely compensation income earners. Individuals deriving income from Itemized deductions or Optional Standard Deduction trade, business or practice of profession, ' | Corporations: Itemized deductions or Optional Standard Deduction ITEMIZED DEDUCTIONS Section 34 of the Tax Code, as amended, provides that, except for taxpayers earning ‘compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section, in computing taxable income subject to income tax under Sections 24(A); 25(/); 26; 27(A) and 27(8); there shall be allowed the following deductions from gross income as follow: A. Expenses B. Interest C Taxes D. Losses E, Bad debts F. Depreciation G. Depletion H. Charitable Contribution I. Research and development 3. Contributions to Pension Trust 379Dadactions from Gress ficone ITEMS NOT DEDUCTIBLE (Sec. 36, NIRC) — any case be allowed in A. General Rule. ~ In computing net income, 0 deduction shall in respect to 1. Personal, living or family expenses: ovements, or bettermen 2. Rparnunt paid out fr new bullings or for permanent Py - 7 ‘Subsection shall not apply tree to nase the velue of any propery of Se tons hich ae to intangible drilling and development costs tno ed Pax code. deductible under Subsection (6)(1) of Section 349 ing good the exhaustion thereot 3. Any amount expended in restoring propery. ag for which an allowance is or has been made; eae 44 Premiums pad on any fe insurance poly cove es a ‘or of any person financially inter a taxpayer individual or corporate, when the taxpayers direct” oF Indirectly @ beneficiary under such policy, 2t income, no deduction shall B, Losses from Sales or Exchanges of Property. ~ In computing Tar Coes be alowed in rgpec of losses from sales or exchanges of Property decty or Indirectly — 1. Between members of a family. For individual shall include only his Brothers, fle sisters (whether: spouse, ancestors, and lineal descendants; oF 2, Except in the case of distributions in liquidation, between an individual and a corporation more than fifty percent (50%) in value of the ‘outstanding stock of which is owned, directly or indirectly, by or for such individual; oF 3. Except in the ree Py Crtatons in ligudation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual f either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; or 4, Between the grantor and a fiduciary of any trust; or 5, Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or 6. Between a fiduciary of a trust and a beneficiary of such trust. Sues JORDINARY AND NECESSARY TRADE, BUSINESS OR PROFESSIONAL EXPENSES ‘Section 34(A)(1)(a) of the Tax Code, as amended of this paragraph, the family of an a by the whole or halfblood), In general, there shall be allowed as deductions from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: 1. Salaries and wages ‘A reasonable allowance for salaries, wages, and other forms of compensation for personal services rendered, including the gross-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, that the income tax imposed on such salaries and fringe benefits has been paid; 2. Travel A reasonable allowance for travel expenses, here and abroad, whil ome in the pursuit of trade, business or profession; — 380Dedactions fron Gress Income Rentals A reasonable allowance for rentals and/or other payments which are required as & condition for the continued use of possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking tale or in which he has no equity other than that of a lessee, user or possessor; Entertainment, Amusement and Recreation Expense A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as prescribed under RR 10-2002. Provided, that any expense Incurred for entertainment, amusement or recreation (EAR) that is contrary to law, ‘morals, public policy or public order shall in no case be allowed as deduction. ‘AMOUNT DEDUCTIBLE - lower Amount between actual and limi UMIT Sale of Goods or Properties Net Sales x Ys of 1% Sale of services Net Revenue x 1% For sellers of both goods or properties and services, an apportionment formula is used in determining the “ceiling” on such expenses based on the following apportionment formula: Net Sales/Revenue x Actual Expense Total Net Sales/Revenue CEEETEESSATET Upon effectivity of CREATE law, an additional deduction {from taxable income of one-half (1/2) of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in -public senior high schools, public higher education institutions, or public technical vocational institutions {and duly covered by an apprenticeship ‘agreement under presidential decree no. 442, series of 1974, or the "Labor Code of the Philippines", as amended, shall be granted to enterprises: Provided, further, that for the additional deduction for enterprise-based training’ of students from public educational institutions, the enterprise shall secure ‘proper certification from the DEPED, TESDA, or CHED: Provided, finally, that such ‘deduction shall not exceed ten percent (10%) of direct labor wage (RR 5-2021), REQUISITES FOR DEDUCTIBILITY IN GENERAL: ‘Must be ordinary and necessary; Paid or incurred during the taxable year; Connected with trade, business or practice of profession; ‘Supported by sufficient evidence; and ‘Not against the law, morals, public policy or public order; Tt must have been subjected to withholding tax, if applicable, MINOR OR ORDINARY REPAIRS & MAINTENANCE KIND OF REPAIR TREATMENT Repairs that materially add to the value of the property Capitalize Repair that appreciably prolong the life of the property Capitalize Repair that keeps the property in its ordinarily efficient operating Outright Expense condition 381Ra "Satan SHANA) oF the Tax Code, as amend In addition to the expenses Institution; referred to under Sect ‘Section 34(B)af the Tax Code, as amendedD) In General, The amount of interest paid oF ute jon C (jrvss Micon, INSTITUTIONS mae Section 34, a private educat .s deductions under ucationy, pore aes code, may ae lt aptor ‘elect to either: capa and claim deprecation as deduction oF Gaim as outright expense. yy CREATE Law ina taxable year on indebtedness Incurred within ¢ it be allowed as deduction to ‘connection with the taxpayer's profession, trade OF business gross income. , REQUISITES FOR DEDUCTIBILITY under RR 5-2021 in relation to CREATE Law. 1, The indebtedness must be that of the taxpayer 2. The interest must have been stipulated In writings 3. The interest must be legally due; 4, The interest payment arrangement must Not DE between related taxpayers as mandated in Sec. 34(B)(2)(b), in relation to Sec. '36(B) both of the Tax Code of 1997 ss rclrnerest nck not be ered finance petoleut, OPEMENS! ANM &. The interest was not treated as “capital expenclture" IF such interest was incurred in acquiring property used in trade, business or exercise of profession. ss othenwise allowable for. shall be (20%) of the interest income Subjected to final tax: Provided, finally that if the Interest income tax is adjusted in ahe future, the interest expense reduction rate shall be adjusted accordingly based on the prescribed standard formula as defined in the rufes and regulations to be promulgated by the secretary of finance, upon the recommendation of the ‘Commissioner of Internal Revenue (CIR). Provided, however, that' «Prior to CREATE law, the reduction in the elowable interest expense was 33% of income subjected to final tax. : “The reduction of Interest expense by a percentage of income subjected to final ‘withholding tax is known as the "tax arbitrage” rule, CREATE LAW: The taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equivalent to twenty percent (20%) of interest Income ‘subjected to final tax. However, if the final withholding tax rate on interest Income Of 20% will be adjusted in the future, the interest expense reduction rate shall be adjusted accordingly. Difference =RCIT 25% - FWT rate of 20% = 5% Reduction = 5%/25% = 20% (CREATE Law) In the case of corporations, since the income tax rates changed effective JuY 1, 2020, it follows that the deduction from the interest ‘of 20% shall be effective also on the said date. ee 382Deductions prom Gross Ine MSMEs va a sorieste Corporations with net taxable income not exceeding Five Million (P100,000 00% 000) and total assets not exceeding One Hundred Million plant ‘and yoo ua the land on which the particular business entity's office, Gifference I aoment ae situated, the deduction Js 09% since there is no i ape in the Income tax rate on the taxable income (20%) with the tax rate eercee ihe Interest income subjected to final tax (20%). Thus, there Is no interest arbitrage. The allowabl ene | able Interest expense shall be the same with the NOTE: + Interest (tax) arbitrage “borrowings or loans", “ Coons Sting fom "unpaid taxes” or “tax assessment” or Interest juency or deficiency, provided, the tax is related to. trade, business or practice of Profession shall not be covered by this limitation, Meaning, the related interest shall be 100% deductible. [In the case of individuals engaged in business or practice of profession, such ‘eduction shall take effect upon the effectivity of the CREATE law on April 11, 2021 instead of July 1, 2020, shall apply only to interest expense arising from Computation: Interest Expense (from borrowings) Proc Less: Reduction Interest income subject to FWT Prox Multiply by: CREATE law (except MSMEs) 20% (xm Deductible Interest Beet OPTIONAL TREATMENT OF INTEREST [Sec. 34(B)(3)] Interest related to acquisition of property used in trade, business or profession may, at the option of the taxpayer, be: 1. Claimed as outright expense; 2. Capitalize and claim depreciation. NON-DEDUCTIBLE INTEREST 1, Interest paid to persons classified as related taxpayers under Section 36(B) of RA 18424 (the Tax Code); : 2. If the indebtedness is incurred to finance petroleum exploration [Sec.34(B)(2)(b)] 3. _ Interest on preferred stock PREPAID INTEREST [Sec. 34(B)(2)(a)] “Prepaid interest” of an individual under cash basis is deductible not in the year that the interest was paid in advance but in the year that the indebtedness was fully paid: However, if the indebtedness is payable in periodic amortization, ‘the amount terest which corresponds to the amount of the principal amortized or paid during the year ‘hall be allowed as deduction in such taxable year. Prepaid interest shall likewise be allowed as deduction from the gross income “at the time of payment” for businesses engaged in rendering services using cash basis of accounting. 383Deductions frit Gress Inco, EE ee The term “taxes” means taxes proper representing terest, surcharge, or penakies nce conneation with GENERAL RULE ~ Taxes pad or incre wt the twat YER the tara profession, trade or busness, shall be awed as deductn EXCEPTION - The folowing taxes are not deductible: . Income tax eutt Income tax paid abroad if aimed 25 (2% Estate tax Donor's tax Speaal assessment LIMITATIONS ON DEDUCTIONS [Sec. 34(C)(2)]._In the case ee engaged in trade or business in the Phiippies and a resident FIG) ©” Tate at eduction for taxes shal be alowed ony i and to the extent ha wath income from sources within the Philippines. COUNTRIES [See. 34(C)(3)] Ray foreign country, atthe option OF the Follning the following taxpayers: CREDIT AGAINST TAX FOR TAXES OF FO! Income Tax paid or incurred during the year to 2 taxpayers, may be treated as operating expenses bY + Resident citizen; + Domestic corporation; «partnerships and Estates ~ In the case of any such individual who Is member of a genera professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation Purposes. ‘An alien individual and a foreign corporation shall not be allowed the credits against the tay for the taxes of foreign countries allowed under this paragraph. LOSSES (Sec. 34(D)ofthelTa Losses actualy sustained turing the taxable year an forms of indemnity shall be allowed as deductions: (a) If incurred in trade, profession or business, (b) OF property connected with the trade, business or profession, if the loss arises from fres, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. id not compensated for by insurance or other KINDS OF LOSSES: 1. Casualty Losses 2. Net operating loss carry-over (NOLCO) 3. Capital losses and securities becoming worthless 4. Special Losses a) Losses from wash sales of stock or securities b) Wagering losses ©) Abandonment losses CASUALTY LOSSES (RMO 31-09 dated October 16, 2009) REQUISITES FOR DEDUCTIBILITY: 1. The loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft ‘or embezzlement; The property lost is connected with the trade, business or practice of profession; ‘Actually sustained during the taxable year; Not compensated for by insurance or other forms of indemnity Incurred in trade, profession or busin van 3846. Reported with the & 7. Not claimed as ded ‘Over gross income of the business ean the business or enterprise for ‘any taxable year shat Immediately following the year of sen {or the next three (3) consecutive taxable Bayanihan Act Il, the NOLCO of the busines 025: However, u ried over aS a deduction from be ie ately folowing the yeor cee ars ‘Income for the next five (5) consecutive taxable years summary: + NOLCO incurred prior to 2020 and 2021 — + NOLCO incurred in 2020 and 2091 3 Rese te + NOLCO beginning 2022 ~3 consecutie er years REQUISITES FOR DEDUCTIBILITY i AEE rs OF incurring net loss, the taxpayer must not be exempt from income 2 There ‘5 no substantial change in the owmership of the business or enterprise in a) be rea Seventy-five (75%) in nominal value of outstanding issued usiness is in the name of. behalf Of the same persons; or ime of a corporation, is held by or on b) Not less than seventy-five (75 7 ft the business vent five (75%) of the paid-up capital ofthe corporation, In the name of a corporation, is If of the mane corporation, is held by or on behalf of ately shown in the taxpayers income tax return for in the Reconciliation portion of the Tax Return; resented in the Notes to the 2020 Financial Statements (with details of year sustained and amount aimed); 3. NOLCO for taxable year 2020 shall be presented in the Notes to the Financial Statements separately from the NOLCO for other taxable years, NOLCO FOR MINES OTHER THAN OIL & GAS WELLS For mines other than oll and gas wells, net operating loss incurred in any y Of the first ten (10) years of operation may be carried over for the next five (5) years. LOSSES FROM WASH SALES OF STOCK OR SECURITIES In case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities shall not be deductible if: 1) The seller is not a dealer in securities; . 2) _ Within a period of thirty (30) days before the sale ending thirty (30) days after the sale, the seller either: 8) Acquired (by purchase or exchange) stock or securities identical to the stock or securities sold; or : ») Has entered into a contract or option to acquire stock or securities identical to the stock or securities sold. WAGERING LOSSES Sec. [34(D(6)] Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. 385Datuctions fron Goss Ineony ABANDONMENT LOSSES Jeu operations are undertaken ' parti, Ve vent a ntact ary where Pere Wd development expenct Yt er ait accumuted exponen. tee, luction, Wang thereto shal be akowed 38 SEAN. yqamortied Cost thre, ibsequently aba get 2) Incase a producog tots of equipment cre used tere HIDE atone 9, deduction, ION IS Ri EFFECT IF ABANDONED WELL IS REENTERED AND PRODUCTI 'S RESUMED OR, EQUIPMENT IS RESTORED INTO SERVICE hagas eran Ir the abandoned wells re-entered and production restored into service, the ats sae a) The amount previously claimed as ) Such amount shal also be captalized and amo may be. EP eesene Rl :DUCTIBILITY: yet n Soe en custing Inebtedness due to the taxpayer which must be valid ang legally demandable; 2) The year tbe connected with the taxpayer's trade, DUSINESS OF practice i eae 7 related taxpayers; 3) The same must not be sustained in a transaction betwee syers; 3 ‘The came must be actually charged off in the books of accounts of the taxpayer as of the end of the taxable year; and 5) The same must be actually ascertained to be worthless and uncollectible, ‘deduction shall be recognized 2s income; ang tized of depreciated, 35 the case SECURITIES BECOMING WORTHLESS REQUISITES FOR DEDUCTIBILITY 1)» Securities are ascertained to be worthless; 2), The same Is charged off within the taxable year; 3) Tt must be a capital asset. PEGE “There shall be allowed as a deprecation deduction a reasonable allowance for the exhaustion, ‘wear and tear (Including reasonable allowance for obsolescence) of property used In the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as ifthe life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees In accordance with the pertinent provisions of the instrument creating the trust, or In the absence of such provisions, on the basis of the trust income allowable to each, REQUISITES FOR DEDUCTIBILITY: 1) The property subject to depreciation Is used in the trade, business or practice of profession; 2) The allowance for depreciation must be sustained by the person who owns or who has a capital investment in the property; 3) The allowance for depreciation must be reasonable; 4) The allowance for depreciation should not exceed the cost of a 5) The schedule ofthe alomance must be attached tothe returns en 386,Deductions from Gress Income syer#005 OF COMPUTATION IN GENERAL (See, ACF Y(2)) 1) Straightline method 2) Declining-balance metho 3) Sum-of-the-years-digit method; 4) Any other method which may \ pROPERTIES USED IN PETROLEUM op, Popes checly rete ta ey i see. a et = peo 2 Destning balance method ie. Useful life to be used is shorter period een: 10 years; or b. Useful life Properties not directly related to production 7 Only straight line method is allowed Useful life. is always presumed to be 5 years. PROPERTIES USED IN MINING OPERATIONS [Sec. 34(F)(5 Monee 6 eo Property is ten ‘Normal rate of depreciation (depreciate over (10) ye actual useful life) 1 expected Hfe fs more than ten Deprecited over any number of years between five (5) years and the expected life. DEPRECIATION DEDUCTIBLE BY NON-RESIDENT ALIE} OEE ENT ee ee NS ENGAGE IN TRADE OR BUSINESS In the case of non-resident aliens engage in trade or business or resident foreign corporations, depreciation shall be allowed only if the property is located in the Phillppines. OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO DEPRECIATION Allowance for obsolescence may be deducted in addition to easonable allowance for the exhaustion, wear and tear. DEPLETION OF OIL AND GAS WELLS /ANDIMINES|[Seci34(G) In case of oil and gas wells or mines, capital invested may be amortized using cost-depletion method, provid 1) When allowance for depletion shall equal capital invested, no further allowance shall be granted; : 2) After production in commercial quantities has commenced, intangible exploration and development driling costs shall be treated as follows: INTANGIBLE EXPLORATION AND DEVELOPMENT DRILLING COSTS KINDS TREATMENT Incurred for non-producing wells Deductible in the year incurred. and/or mines At the option of the taxpayer: OPTION 1 - Deductible in full in the year paid or Incurred for producing wells incurred; or ‘and/or mines OPTION 2 ~ Capitalize and amortize 387Dedections jen POS Teco, Pee ae Ocoee ie FOREIGN CORPORATIC In the case of nomrresident alana engage 16 wade "Suess bes Corporations, depletion shall be allowed only i the meas Tame gas We OF MNES Are kyon RI B Contributions er gifts actually pard or made within Government of the Philippines or any ofits agencies OF any {or publ purposes, orto accredited domestic corporatens* sively for religious, charitable, scientific, you teducabonal purposes or for the rehabatabon of veterans, of to Socal welfare Sitios, yt, ongovernment organizations, in accordance with rules and Lsgepeyel erated m Secretary of Finance, upon recommendation ofthe Cammissione’, 10 Part of We Wet noe gg which inures to the benefit of any private stockholder or individual in an amount Aot in excess eg ten percent (10%) in the case ofan Indidua, and five percent (S¥6) in the Ose a ee of the taxpayer's taxable income derived from trade, ‘business oF P os Compe the benefit of this and the following subparagraphs. FULLY DEDUCTIBLE DONATIONS ‘The following charitable contributions shall be fully deductibie. 1) Donations to the Government of the Philippines ot to amy of i&s agence Or pola, subdivisions induding fully owned goverment corporations, ‘exclusively to be used in undertaking prionty activities: a. Education; b. Health; «Youth d. Sports development; fe. Human settlements; f. Science and cutture; \ gq. Economic development. 2) Donations to foreign insttutions or international organizations which are fully deductible in pursuance of: a, Agreements; b. Treaties; Commitments; or d. Special laws. 3) Donations to Accredited Non-Government Organizations ‘The term "non-government organizatiot” means a non-profit domestic corporation: a. Organized and operated exclusively for: i. Scientific; i, Research; iil, Educational; iv. ‘Character bi yi ' ve Youth and sports development; vi. Health; vil. social welfare; viii. Cultural; x, Charitable purposes; or x A combination thereof. b. _No part of the net income of which inures to the benefit of any private individual;Dele lions from Gress Income Not later than 15% day of th © Ir which contributions are nett'"@,(3") month after the close of the taxable year Isgranted by the Secretary of Fine ecnate® wUllaton, unless an extended period of Internal Revenue, ©, Upon recommendation of the Commissioner & evceed hry percent Con the shal onan annua as, In no cse expenses The assets of which nthe event of dssluion, woud be etrbuted to i. Another dom or estic corporation organized for similar purpose or purposes; The state for public pur poses; oF Anothe iz ’ ler Organization to be used in such manner as in the judgement of the court shall best accompli 4 mpl dissolved organization ae a ener Purpose for which the pen SPECIAL LAWS, DONATIONS MADE TO THE FOLLOWING ARE DEDUCTIBLE IN 4, _ Integrated Bar of the Philippines (P. J imemational Rice Resoarer traktor tha 2707) 3, Development Academy of the Philippines (P.D, 205) 4, The University of the Philippines & other state colleges 5, Cultural Center of the Philippines fs 6, Artesian Well Fund (R.A. 1977) 7, Ramon Magsaysay Award Foundation 8. Task Force on Human Settlement 9, Donations to the National Museum, Libra 40. National Commission on Culture Bact AS) 41. Humanitarian Science Foundation 42. National Social Action Council DONATIONS SUBJECT TO LIMIT The following donations, which do not fall’ under fully deductible donations, shall be subject to limit: 1) Donations to the Government of the Philippines or any agencies or any political subdivision thereof exclusively for public purposes; 2) Donations to accredited domestic corporations or associations operated exclusively for: a. Religious; b. Charitable; . Scientific d. Youth and sports development; e. Cultural; f. Educational g. Rehabilitation of veterans; h. Social welfare institutions; or i. Non-government organization. UME: ‘TAXPAYER RATE Corporation 5% Taxable Income from trade, business or practice of Individual 10% profession before charitable contributions IN:CASH PROPERTY VALUATION IN CASE OF DONATION OF NO! a ble f property other than money shall be based on ‘The amount of any charitable contribution of the acquisition cost. 389segs fro GOs Fecinn o0 oinpmenit eNO TSI 05 OFeSNary anys A taxpayer may feat research or ev ness ot cueing ‘ trace, US i ma the Unable year Mr connection Wat NS WAS TT, th experetture 8 treats Necessary egpenses wiveh are not chargeable 19 ‘year wher ance shall be altowed as deduction during the twnabie ate “WAN chargentie to capital account taxpayers TY chargeatie to capital account but not At ehe oH ces chargestic to prepay SIT oy | — cam as outight ewense Seprenation or depietion OFTTON 2 — Ametie over GO mereha, | If chargeable to property subject to Captelse i depreciation or depletion eras LIMITATIONS ON DEDUCTION are not deductible: ‘The following Research and Development eXPENGT ‘of land, oF for the improvement oy 2 ‘Any expenditure forthe acquistuon or improvement ee econ nh ear a er OHSS SOA is subject to depreciation and depletion; ‘ 2 Ste Cr ca eteprne tere aS ae extent, oF qualty of any depasit of ore of other minersl rch PENSION TRUSTS: 3) ‘AMOUNT DEDUCTIBLE. = PRX ‘Aclual corisibution to the extent of pension Wiabilty | amortization of Past Service Cost SY (ate ee PENSION LIABILITY Pension liability is equivalent to Normal Cost. PAST SERVICE COST ‘over the Normal Cost. It shall be Past service cost is the excess of actual contributions amortized over ten (10) years. PEN e ee OI imed IN LIEU of itemized deductions. The following ‘Optional Standard Deduction can be da may be allowed to claim OSD: 1) Individuals a. Resident Citizen b. Non-resident citizen cc. Resident alien d. Taxable estates and trusts 2) Corporations a. Domestic corporation: b. Resident foreign corporation AMOUNT DEDUCTIBLE Individuals/Estates/Trusts 40% of Gross Sales/Gross Receipts Corporations/Partnerships 40% of Gross Income x 40%ps 4) 2) 3) 4) 5) 6) LZ Deductions from Cross Income Ere ) pribes, Kickbacks and other simi personal, living or family expenses Pavments Any amount paid out for new bul i 195 or for sy man conic remanence © Any IN restoring thereof for which an allowance is or hos wee, ana ern DE the exhaustion oe er o mrsuance policy covering the life of any officer or oak aiaaes va, Interested in any trade or business carried ayer F co) indirect @ beneficiary under such pogo When the taxpayer is directly oF Interest, Losses and Bad Debts; a. Between members of a family, ese by or for such individual; or ns in liquidation, between two orations more than fifty percent (50%) in value ofthe outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was a personal holding company; 4. Between the grantor and a fiduciary of any trust; or €. Between the fiduciary of a trust and fiduciary of another trust if the same person is the grantor with respect to each trust; or f Between a fiduciary of a trust and a beneficiary of such trust. c. Except in the case of distribut IZZER Choose the letter of the correct answer. Principles Statement 1: Deductions are items or amounts allowed to be subtracted from gross income to arrive atthe taxable income. Slatement 2: Exclusions are receipts which are excluded from the gross income, henge, do notform part ofthe gross income. + b, c q. Only statement 1 is correct Only statement 2 is correct Both statements are correct Both statements are incorrect . . Answer: C 391L Yelactivts jen Goss bnveny ! deduchon? . He orate neore eutyent i X Marge or burdan to which others are Which of he totowng nat o characters ete pteducton of wealth tha! helped b Anemmunity 0 paviege, @ freedom from & sutyected c ftisnote recent tree subtecton to emwve at income subject 19 tox & Answer B © Bi rwlers te “exctusons’, nat deductions Pita! sarin conto are rt deduce tom gross BOP ission , 2 I they are riot reported to the Commis ey penile Il the candidate supported wis the election becat i Since they do rat help eam the come from which they are to be deducted a ‘Since such arrounts are not considered as income ofthe candidate to whom given, + Answer C ‘Statement 1: ‘Deductions from gross income are not presumed Stalement 2 As 2 tule, deductions means temized deductions 2 Only statement 1 is comect b Only statement 2 is correct © Both statements are correct Both statements are incorrect 4 Answer: ©; Refer aso t Quizzer #B and #9 Statement 1 Revenue expenditures are period costs that are related to a particular period of ime of busmess operation. a Statement 2 Capital expenditures are non-recurring expenditures related to acquisition of depreciable assets to be used in the business Only statement 1 is correct Lester bought an equipment under a two-year installment basis to be used in his office inthe pracize of his profession. Lester will pay P50,000 monthly for a period of twelve (12) mons For income tax purposes, the P50,000 monthly payment shall be: 2 Treated as business rental, hence deductible Treated as captal expenditure, hence not deductible “Trmated as depreciation expense, hence deductible ‘Treated as ondary busmess expense noe + Answer B10. 11 Dedactions from Gross Income Proforma Journal Enines Upon acquisition, Equipment ba ‘Accounts Payablo Pox ql ‘Accounts Payable P Cash |e ‘Statement 1: ‘A taxpayer can only deduct an item or amount from gross income only if there is a law authorizing such a deduction, Statement 2: For income tax purposes, a taxpayer is free lo deduct from ross inoome the full amount of the deduction allowed, or lesser amount or not to claim any deduction at al a. Only statement 1 is correct b. Only statement 2s correct c. Both statements are correct d. Both statements are incorect Answer: C In cases of deductions and exemptions on income tax fetums, doubts shall be resolved a. Strictly against the taxpayer b. _ Strictly against the government c. Liberally in favor ofthe taxpayer 4. Liberally in favor ofthe employer > Answer: A Statement 1: The taxpayerhas the burden of justiying the allowance of any deduction claimed. Statement 2: Deductions are strictly construed against the govemment. a: Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are incorrect > “Answer: A Statement 1: Only business expenses may be deducted from the gross income taxpayers. ‘Statement 2: Itemized deductions from gross income should be duly supported by vouchers or receipts. a, “Only statement 1 is correct b. Only statement 2is correct c. Both statements are correct d. Both statements are incorrect “Answer: C Personal and non-business related expenses are not alowed fo be deducted from the gross income for income taxalion purposes. © Referalso to Page 406 for non deductible items Which of the folowing is @ deductible expense for income tax purposes? a. Salaries of domestic servants 393Z Yeductions jon ss licong Ordinary ropair of tho personal car ©. Provision for doubtful accounts 4. Nono ofthe abovo + Answor: D © "Nand Ui are persanal expenses © ‘Cis unrealized loss. Unrealized gains and losses aro not recognized for Lax purposes, This is nota roquisita for businoss oxponso fo bo deductiblo 4, It must be reasonabla , Htmust bo pold during the taxable your ©. The withholding tax olhorwisa roquired havo beon do‘ 4, _Itmust bo ordinary and nocossory ducted and remitted to the BIR Answer: B © "B'isincorrect. Business expenses ineurrad andor paid may Ue deducted from tho taxpayer, {ross ncomo One of the requirements In order for expenses to be claimed as deduction for income tax purposes is that, it should bo subject to withholding tax If applicable. What Is the withholding tax rate applicable to rontal payments? a 1% ©. 2% b 5% d. 10% Answer: B 0 Refer to tha precoding number (‘aller °C’) for the roquises for business expense to bo ‘deducible. Somo of tho crodtabo vilhnoling tax rates under RR. 11-2018 and RR 142010 ao 09 follows Professvonal lees, lalont fees, ole. (or services rendored Individual Bayon I gross income did not excoed PM a% If gross income > P3M or, regardless of amount if 10 val registered ‘Hon indviouolPayoo I 038 come did not excoed P720,000 10% 1.1058 income is oxcoed P720,000 16% Renlals 5% Income payments mado by top vahholding agents to their focal supplier of goods or services Goods % Senco % ‘Income payments to bencficianes of estalesvusts 16% (excep ax exempt and ncomes subject FW) Income payments to pariners of GPs More than P720,000 1% Not more than P720,000 10% Certain income payments made by credit card companies 1% 394Deductions from Gross Jucome In the conduct of his business in 2021, Modesto found it necessary to give gifts to the government officials with whom he had offical dealings. 2, These gifts are deductible expenses subject to the substantiation rue. b. The value ofthe gi, if de minimis, are alowed to be deducted c. renee Of the value, the gits are considered as bribes and not allowed to be feducibe, These ifs are deduce if ound tobe necessary and properly supported by receipts 4 Answer: B. ; ‘Cis a bbe, hence, non-deductible inary Business/Professional Expenses 45. Which of the following is not deductible from gross income? a. Salaries and wages of employees b. Entertainment, amusement and recreation expenses c. Rental expenses d. Bribes, kickbacks and other similar payments “Answer: D 0 ‘Drisillegal payment, hence, non deductible; Refer to page 330, © “AC* are ordinary business expenses 416. Which of the following can be deducted from gross income in the year paid or incurred? ‘a, Repairs that materially add tothe value ofthe property b. _ Repair that appreciably prolong the life ofthe property ¢, Repair that keep the propery in its ordinal eficient operating condition 4. Allof the choices ‘ o> Answer: C ; "AandC* shallbe capitalized 47. Which ofthe following is allowable expense(s) of an employer? a. Tax withheld by a corporation from its employees’ salary Kickback payment to a government oficial. ©. Distribution of profits to partners. 4 None of the above . Answer: D " @ — *A’isa liability, not a deductible expense. — Sample toumalEnty. Compensation expense Px Cash Px Witold tox payable « is an legal payment, hence, non deductible. distribution of company profs is nol a business expense Sample Jounal Enlty Relained earings Pre Dividend payabe/Cash Pex 395Datactions fri Gress Income 18. The fllowing are the requisites for doduetion of componsation oxPense, seer ‘2. Porsonal services must have boon actualy rendarod b. The compensation for such services must be reasonable © Botha’ and"b* Neither a" nor"b Answer: D. ; “AandB"ar required for ecmpansal jon expense of an amployer? of time after his death to his widow is allowable tion oxpense to be deductible 19. Which ofthe following is allowable compensati 8, Salary of employee paid for a limited period deduction ofthe employer. : b. Manager's expense account subject to fringe benefit tax. Both ‘a’ and d._Neither‘a’ nor "b* Answer: C 20. Statement 1: Cost of technical books used by @ CPA in the practice of his profession is allowable business expense, ‘ ‘ Statement 2: Tuition oes, board and lodging incurred by a medical doctor while attending @ continuing professional education seminar is allowable business expense. a.’ Only statement 1 is correct b. Only statement 2 is correct ©. Both statements are correct 4d. Both statements are incorect ‘Answer: C; Both oxpendiures are business roaled Which of the following business expenses of a professional practitioner is not allowed to be deducted from the gross income? | i 1. Professorial expenses incuted outside the Philippines by a nonresident alien engaged in business in the Philippines. b. Income tax paid by a resident citizen to a foreign country. c. Entire amount incurred for meals, lodging, and travel in connection with own business, d. None of the above, “> Answer: A © NRA.NETE 1s taxable only on income derived from Philippine sources. Consequenty, ‘expenses incurred abroad shall nol be deducted from gross income denwved inthe Philippines Income tax payments abroad by a resident ctizen or domestic corporalion may be clamed as ‘fax creditor asa deduction from the gross income (OPEXY), atthe opin ofthe taxpayer © “Cis an ordinary and necessary business expense 21. ° 22. The following are allowable, compensation expenses of the employer, except a, Overtime pay paid to a rank-and-file employee. b. Cash dividends paid ¢. Amounts paid for pensions of retired employees d. Allofthe above > Answer: B 396Deductions foom Grass Income HY business . peN808, ded ‘leampanys a vee from gross came sis the product manager of Med Bg resturais, foconvince he atrophy 8 dew itd, coma of chain | OB at ard Cliford wet thelr Soparato ways, Ea degey i sane DG besos H @ icked-up a partner and consumed Meswiped Den, a edestian who gute! ISU: Ho drove home and on his woy, he tre case extra judicially by paying Delin gy rons 88 8 result of the accident. Ear! settled comes fom Medo Bee Inc). Which of tefl ing to P100,000 for actual damages (the money 4 The expenses inured in having dinner win cy coe wing is come eric itford may be deducted tam gross income of The expenses incurred by Ear ; pense of Medo Bee,» WH celebrating wit a parner in a bar is deductible to The amount paid to Delfin may be c ‘ q feduced from gross in 4, Theamount paid fo Delin maybe deduced tat te ameuniobe oan oaulble amount to qualify as ordinary and Necessary luced to an eqt © *Aand C* aro ordi © ‘Bisadstnbution expenses, + Answer: A 0 “R''san ordinary business expense (romotonalepresentation cost) © Theerpensesincuredin he bars el, as the amount paid t are non-business related (personal expenses), coneminy.nondeduae, ns nmenmneusnesse eT eyes (oe ERO We 24, (Based on illustration in RR 5-2021): COD Corporation, a domestic manufacturing corporation, had gross sales of P100,000,000 for fiscal year ening June 30,2021 andinoured costo sales of P60,000,000 and cost of sales of P17,500,000, with the folowing deta: Cost of Sales Direct materials 30,000,000 Direct labor 20,000,000 Manufacturing overhead 10,000,000 60,000,000 Operating expenses : Salaries and wages 7,000,000 Taxes 300,000 ~ Depreciation 3,500,000 Professional fees 200,000 Advertising expenses 3,000,000 Training expenses 3,000,000 Office supplies 500,000 17,500,000 How much is the additional allowable training expense, if any? ~ a, PO c. P1,500,000 b. P1,000,000 d, P3,000,000 ‘Answer: C © Additional deduction = ¥ of value of the actual training expenses of P3M = P1.5M The amount of 1,500,000, which is one-half ofthe value ofthe actual raining expenses of P 3,000,000.00, canbe claimed as additional deduction, since it dd not exceed ten percent (10%) °F the Direct Labor Wage inthis scanari, the corpratn's dct labor wages cured was 397 :Dalactions from Gres: lacone P-20.000.00000 Thus, the one hall vale of the. oi ee rte ae ‘not exceed the 2,000,000 (ores povided huether, sscrided requirements has bpd nth ec Pe fisr nag sey P 10.00900000, te esta owed shal bg P1,000,000 and nol P 1,500,000 25, How much s the taxable netinoome ofthe Company”? a. P1,500,000 . P40,000,000 b. P17,500,000 dd. P21,000,000 aoe 100,000,000 Cost Stes (soo Gross come 001 Expenses before additonal deducton for taining expenses (17,500,000) ‘Additonal alowabl expense for rang expenses i (3,000,000 x) 721,000,000 Net Torable Income © Section 34(A)(1}(a)(V) of the Tax Code, 28 ore eat pees ai Upon effe ‘of CREATE law, an addivonal deduction from le an fone » pee CERT oie en a ton td . {famees envled m puble senor hgh schoals, pubic higher education insblutons, ot pubic fed by an oppreniceshp agreement undr al tutions and duly oover tecnica veins uns and dy re Phipps residential decree no. 442, senes of 1974, eee shal be arated fo enlerprses: Prowded, ther, (hal forte additonal deduction 26. This is a non-deductible interest expense a. Interest paid on indebtedness incurred to finance petroleum exploration. b. Interest paid by a corporation on scrip dividends. Interest pad by a corporate taxpayer who is able on a mortgage upon real property of which the said corporation is the legal or equitable owner. 4. Interest paid on tax deficiency if the tax where the interest is in itself an item thats deductible from gross inoome. ‘Answer: A _ REQUIREMENTS FOR DEDUCTIBILITY melaton o CREATE Law, of Intorest expense as ald down in RR52021: 1. The indebtedness must be that of the taxpayer, 2. The interest must have been stpulated in wntng, 3 Theinlerest mustbe legaly due; 4 The nterest payment arangement must nt be between related taxpayers as mandated in ‘Sec. 4(B}2Kt), in tela 1 Sec. 36(B) bot of the Tax Cade of 1997 The Interest must not be Incurred to finance petroleum operations; and 6 The interest was nol wealed as “coptal expenditure’ such interest was incured in aoquring propery used m rade, business or exeraise of profession. Prowded, further, thatthe taxpayers otherwise allowable deduction for interest expense shat be reduced by an amount equivalent to twenty percent (20%) of interest income subjected 10 398Digs - Wctions fro Gro: ome oo im Cpross Income mito het on 3 a Minerest income of 20% wil be acpsstod chon tla shal bo adjusted ac isis a deductible interest expense : ae Interest on deposits paid by auth the tax on such interast was when eons (of the BSP lo dopositors, i tis shown that Interest pai on indebiedness between raf ft : Interest paid on preferred slock, "64 taxpayers Interest paid when there i no stipulation ortho Payment thoroof ont thereat am 4 Answer: A ° ° . is be uc 28 provded under RR 5.201 ci ©. shale teated as dhvidend payment rather han Payment of interest 18. Which of the following is a deduotible e a. _ Interest paid on delinquent busin b. Provisions for doubtful accounts ‘ 4 *Xpense for income 18 te ess taxes et Ordinary repair for personal car Salaries of domestic servants. > Answer: A 0° Aris deduct ic Niagetas, rowed the taxis petning oa ax classed as operating expenses under ae ‘Siness laxes’, in general ae classified as operating expense for income Hevise be heated ac ewvenl. the interest associated with Hose types of taxes shall 0 “Band O are nanaeg lita expenses, peicaly under "interest expense account eat ible (RR 13-2000). Refer to the explanatory note in the preceding ° “Crisnon-deducible. i shal|be ireated as dividend payment rather han payment of ntrest. D. Siseent dings, Me te inlerest must.be onan indebiedness ofthe taxpayer, otherwise it Statement 2: Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly lable upon the bond or not secured by such mortgage, may be deducted as interest on his indebtedness. a. Only statement 1 is correct, b. Only statement 2is correct c. Both statements are correct d. Both statements are incorrect Answer: C 30. In 2020 (prior to the effectivity of the CREATE Law), Roy borrowed money from the Bank ‘amounting to F,000,000 at an annual interest rate of 7%. He invested the money in deposit substitutes earning annual interest income of 8%. How much is the deductible interest? * a. P43,600 c. P70,000 b. P26,400 d. P80,000 + Answer: A ‘Actual interest = P 1,000,000 x 7% 70,000 Less: Reduction = P1,000,000 x 8% x 2% (26.400) Allowable interest expense PA3,600 399pron Gris h ene Z Naduclic sun terest xpuroe wre 21080 Ui yy, © Tha tstroan ane Taxarinay’ rule i z Hearse ath Sees Teinteal vu tenet tray depo he prods ote fantboTowng® #18 ba tee ig aang tal ax whch unaty et (Sc 0 88 EAS cory, Pesmesef30%, turn ening vai as ee ef PAD SETS ony Eso. 20% «10%, To nauaze to impacto fe unbalance Pelee Om Wane ara lrn ne redced nab acne rn te racogrbo ol earl SPa098 9d WB hy, tothe terest ncame deved om such bank depos. the Free ncaa Ney Fecogryzeg shal be raced by 33% of merest nome subjected 0 FT ( ee Reduction {00% = 33%) However, ts scheme shal apply on lo mlees| ARENAS arg fo, “borrowngs or loans* gue ding June 30, 2024 31. (CREATE Law; Based on ilustations in RR 5-2021), For fiscal year , 2021, suming that JHB Corporation, aside from the operating expenses of envy inoured terest expense of P400,000 which saisied the preserbed requirement for deductibility, bu it also eared interest income of 100,000, net of final tax of twenty peroent (20%). How much is the allowable deduction for interest expense? a. P25,000 c. P375,000 b. P100,000 4. P400,000 Answer: C ‘Actual interest expense 400,000 less. Reducton ‘Interest income subject fo FWT (nel) ‘100,000 Divide by 80% Interest income subject to FWT (grass) ‘125,000 Multiply by 20% (25000 Deductible interest expense ‘375,000 © UNDER THE CREATE LAW, the taxpayer's otherwise allowable deduction for_intere ‘exense stall be reduced by twenty percent (20%) ofthe interest income subjected tonal tex 32. (CREATE Law; Based on illustrations in RR 5-202). For taxable year 2021, SGC Corp. incurred interest expense of P500,000 on its bank Joan. For the year, its gross assets amounted to P50,000,000, exclusive ofthe cost of the land of P7,100,000. It registered a gross inoome ‘f P10,000,000 and incurred operating expenses of P6,000,00 inclusive of P00, 000 interest expense. It had interest income eamed forthe same year amounting to P150,000. How much is the allowable deduction for interest expense? a. PO cc. P470,000 b. P150,000 d, P500,000 “Answer: D 0 THE CREATE LAW further provides that'for other domestic corporations with ne taxable income not exceeding Five Millon Pesos (PS,000,000) and total assels not exceeding One Hundred Milion (P100,000,000), excluding the land on which the particular business ents fice, plant and equipment are sivated, also known as MSMEs, the deduction is 0% srice there is no diference in the income tax-ale on the taxable income (20%) wit the lax ale applied on the interest income subjected to fina tax (20%). Thus, there is noinlerestarirage ‘The allowable intorest expense shall be the same with the actual interest incurred. 400from Gross Income : its taba income da cio, 4 te con of land Since te 0 exceed Pst ng gt Sut a RC nano 20% sn "hori no diteence an a2 20%, rd tha tna nd ne ered POM, exch stolen etary i shal ba P00 009 a9 ting allowable deduct: 4p. Incompulting allowab lon for purpo fement 1: Beginni 128 of in ‘ pontedioh vith toes eid eran expome one {rom loans or indebtedness income see to final tax 8 shall be reduced: ‘by an amount equal to 20% interest fement 2: Interest i ayo dived bs ipl expe! aio propery be usd in tad hel Only statement 1 is correct, ae Only statement 2 is correct Both statements are correct Both statements are incorrect “> Answer: A © “Statement 2"s incorrect. Ine treated as operating expense © Inthe case of «erations, since the income tax rales changed efective July 4, 2020 (CREATE Law), itfolows that the deduct etleclive als one snas eae a bere expense of 20% hal be ° : a fant 0 individuals engagedin business or praciceof rotessn such deduction shall ‘pon the effectity of the CREATE law on April 11, 2024 instead of July 1, 2020. est incured in aoquring propery maybe capitalized 4, Anindividual taxpayer has the following data for 2021 taxable year Interest paid, business loan P 100,000 Interest paid, loan to finance personal car 500,000, Interest expense on delinquency business related taxes 50,000 Interest income, BDO West Avenue branch (net) 24,000 For income tax purposes, the deductible interest expense shall be a. P102,000 ©. P144,000 b. P138,600 d. P150,000 +, Answer: C Interest paid on loan, 100,000 Reduction (20% x P30,000) (6,000) Interest on taxes 0.000 Allowable deductions 35. Debtor Corporation, with total assets of P15,000,000, shows the fllowing data during taxable Pe ase 500,000 Interest income, net of 20% final tax iedoee Cost of sales 420,000 Salary expense 60,000 Interest expense 24,000 Rent expense 401Daduetions fort Goes Trcsey Advertising expenso 1 Deprociaton expensa f Whats tho correct amount of itemized deduction? a, P202,400 . P215,000 b 205,100 , P265000 > Answer: © 2000 Salary expenso f Interesteponse 62.000 Rent expense 24,000 Advertising expense 6000 Deprociatian expense 5 Total lfomized Deducton —F7i5.00~ © Footer domesbe crporatons classed as MSMEs, tha deduction 80% since throng difrence inte iceme fx rate onthe taxable income (20%) withthe Lx rato appted cn thy interest ncomo subjected o fina tax (20%) Thus, hero1s no interest abitage The alowatie inlerest expense shall be equal wih te actual interest incurred 36. Leomar Corporation paid the following during 2021: Interest paid for late payment of 2020 income tax 50,000 Surcharge and compromise penalty for late payment of 2020 income tax 72500 Interest on bonds issued by Leomar Corporation 1,000,000 Interest on money borrowed by Leomar Corporation from Cabarles '500,000 Incorporated (owns of 60% shares of Leomar Corporation) Interest on preferred shares which in realty is dividend 200,000 How much is the deductible interest for 20217 a. P1,822,500 , P1,000,000 b. P1,122,500 d. P50,000 “> Answer: C : © Interest Expense (on bonds Issued by Leomar) = Pt,000,00 © INTEREST incured forthe payment of ax ot deficiency taxis allowed to be deducted from the gross income ONLY IF the relaled ‘tax’ is cassiied as operating expense for taxaion purposes, However, ‘income taxis not classed as operating expenso under the Tax Code ‘Therefore, the interes paid for lle payment of such taxis NONdeductile because the related taxis nol classified as operating expense © Surcharges as well as penalies are NON-deductblo expenses. © The interest on money borrowed by Leomar Corporation from Cabatles Incorporated was derived from ‘related paty transaction’. Interest expense, losses and bad dobis are NON- deductible IF incured in relation toa transection with a related party. RR 13-2003 amended ‘by RR 5202 prowdes thal the interest payment arangement must nol be between elated taxpayers es mandated in Sec 34(8)(2)(),n relation to Sec. 36(8) ofthe Tax Code (lated part transactions) 37. How shall interest related to acquisition of property used in trade; business or profession be treated? a. Claim as outright expense b. Capitalize c.Atthe option of the taxpayer, may be claimed as outright expense or capitalize 402a. + ys. Sarabia is @ solt-employed indi 3 isiness transactions. She borrowed Deductions Joon Cross become Attho option of the Sovernmont, may bo Cllimed as outright expense ot eapstalize ‘Answer: C Widual Using cash basis of accounting in recording hor money from the bank in 2024 or 2 years in sum. The proceeds given to hor by the i payable altor 2 yee lune claim as deduction th sald eee Was already ne of 100,000 intorast. When 8 b. 6 4, o In. 2021 In 2022 12023 Spread over the term of the loan Answer: C “Prepaid interest” ofan ind Ferra nes anil under cashbas s dedi notin yar hal henieret (aitlaeatel in the ear tha the ndebledness was fuly paid. However, if he the amount of hen Pete amorizaion the amount of inlerest which coresponds to or the ancipal amortized or Paid during the year shall be allowed as deduction in Such taxable year. Prepaid inleres! shall likewise be allowed a deduction from the gross income “atthe time of payment” en . sinesses engaged in rendering services using cash basis of accountng (Basis: Sec. 34(8)2)a) ofthe tax Go =_— the Tax Code}. zg, The folowing interest are nondeductble, except? =. Ries pad {o persons classified as related taxpayers b. Interest related to indebtedness incured to fi tt Bere iad irked inance petroleum exploration d. Interest related to indebtedness incurred to finance working capital requirements Answer: D Ges 40. Alessee paid the real estate tax on the Property he leased. For income tax purposes, the ‘amount paid was: a, Deductible as part of lease expenses. b. Deductible as tax expense c. Deductible as an interest expense 4. Non-deductible expense Answer: A 41, The cost of leasehold improvements shall be deductible by the lessee by Spreading the cost of the improvements over the life ofthe improvements or remaining term of the lease, whichever is shorter. 5. Spreading the cost of the improvements over theif ofthe improvements of remaining term ofthe lease, whichever is longer. ©. Spreading the cost of the improvements over the term ofthe lease or may be expensed ‘outright in full, atthe option of the lessee. 4. Anyofthe above ° Answer: A 403Deluctions from Goss Mica Me ‘ 0,000. The lease contra 42 ess purposes for P5,000, I ht Aa wy ws tn ta ‘8, P500,000 , P5,000,000 ». P1,000,000 d. PO 8 for tp deduction = ‘5,000, 000/10 years = ‘P500,000 42 years to Mr. J at 48. Ondanvery 1, 2021, Mr. V leased his vacant ot fora period of ty ita ae re cree 400,000 itwas eco agreed tht Mr. J wil pay the flowing val eee G00 600 representing rental payment fr year 2021 and 2022., + Security deposit of 22,400,000. = Annual real property tax of 30,000. The lence oontracl provides, among olhers that the lessee wil coniruct a 5g y building for parking purposes at a cost of 'P9,500,000. Ownership ofthe buildings belong to te lossot fon the expiration or termination ofthe lease contract. 9 shall July 1, 2023 with an estimated useful life of 15 years. Hoy Answer: Aj The building was completed on at much can Mr. J claim as deduction in relation to the lease in 2021? a. 2,430,000 " ¢. .P2,400,000 b. 4,830,000 d, P4,800,000 Answer: A ‘Rentals for 20121 = P2.4M annual rent x 6 mos/12 mos. 2,400,000 “Annual ea propery tax __39.000_ Pe430,000— Tota! Rent Expense - 2021 44. How much can Mr. J claim as deduction in relation to the lease in 2022? c. - P2,430,000 c. P2,400,000 d. P4,830,000 d. 4,800,000 4 A; Same solution with the preceding number. 45. Using the same information above, how much can ‘Mr. J claim as deduction in relation to the lease in 2023? f a. P2,430,000 c. 2,400,000 b. 2,930,000 d. P3,063,333, * Answer: B Rentals for 2023 P2A ‘Annual real property tax" : to Depreciation expense, improvement : =(P9,500,0009.5 years) x 12 Tolal Rent Expense - 2023 © The leasehold improvement shall be deprecated using the shorter between the resin lease (erm and useful fe © Remaining lease term of 8.5 years upon completion ofthe leasehold improvements sate Compared fo the estimated useful fe (15 years) of the improvement. 46. Using the s Using te same information above, how much can Mr. J claim as deduction in reaton tote & Passo & R4s00n0 404Da Cons from Cpross Income Answer: B Ronials for 2024 Pre hel ad tax Pa. 400 Depreciation oxpenso, impr 000 =P9,500,0009 5 frerovnimnt 1,000, Total Rent Expense - 2024 —ht.000 —P.430,000— wet ra ap R20 ma trey ital oF ip tober ar Under actual method, how much was thence Wika ggg eet of yea 3, P200,000 ©. P600,009 , 400,000 4. None ofthe choices a1. ‘> Answer: B Based on calectons (4 months from Ju : used by he lessor nt om Luly o Oley, regaes of te accountng method Using the same data in the preceding number, under cash method, how much was the income ‘of Mike in 2021? : ‘a.P200,000 - ©. P600,000 . 400,000 4. None ofthe choices ‘Answer: B © rental income is recognized ‘Upon rece ‘accounting method used by he lessor 48. I, (4 months frm July to October), regardless of the Under acorual method, how much was the deductible expense of Leomar in 20217 0p P00 000 c. P200,000 i oe b. 400,000 d. None of the choices A; six(6) months from July to December, 50. Under cash method, how much was the deductible ‘expense of Leomar in 2021? ‘a, P600,000 . P200,000 b. P400,000 4. None of the choices “Answer: B; four (4) months from July to December, 51. Pedro leased his lot to Jose. The contract calls for Jose ‘to construct a house which would serve as the residence of the latter, the ‘ownership thereof to be transferred to Pedro after the expiration of the lease. When the house was ‘completely constructed, the remaining term of the lease was 10 years. The residential house had an estimated useful ie of 15 years, What is the tax implication ofthe leasehold improvement? a. Pedro derives taxable income on the improvement; Jose can claim depreciation expense {8 a deduction from gross income. . Pedro derives taxable income on the improvement; Jose cannot claim depreciation expense as a deduction from gross income. ©. Pedro does not derive taxable income on the improvement; Jose cannot claim depreciation expense as a deduction from gross income. 4. Pedro does not derive taxable income on the improvement; Jose can claim depreciation ‘expense as a deduction from gross income. 405Daluctions from Gross f, > Answer B yecaus at toprol Ve of Jox0, thoy pense them mcm ae re AY mg in prsns decuchlo anprovernent ren dec township ofthe property willbe Uansterg y,| hn Pedro will denve an ncorPe ‘upon expiration ‘of the lease tern 52. Assume the same facts in the immediately precoding pts cio tal a the tna g cpl ls a i lation efthe leasehold my ee Re ‘onthe improvement, Jose cn claim depreciation expen? b. Pad totes (ae rane ‘on the improvement, Jose cannot ciaim erect me expense as @ deduction from gross incor improvement; Jose Caer et derive taxable Inoome om the ITP Cannot clan i ion from gross income. depreciation sxpane as @daduion fo HSS TET ose can cai dope . ation d. Pedro does not derive taxable income on expense as a deduction from gross income > Answer: C 0° Jose cannot aim depres 1s a personal assel (pet ‘improvements non-deductble © ra wal net denve an ncame rm he emproverent because The Use ie of fy re cnet soterhan elas erm, Tere pen ermal ofthe ease th ‘no more improvement fo be | transferred to Pedro ‘AX EXPENSE} 53. Which of the following is not a requisite for taxes to be deductible? ‘Must have been paid or incurred within the taxable year. * hil Hy catenexpensebecaisea he pontf YEW fs, emp oq, aang to hs house), therefore, any deprecaton in reaton yg i ° et = b. Deductible only by the person/s upon whom the tax is imposed by law. ©. Mustbe in connection with he taxpayer's profession, trade, or business, d. Must be imposed by the national government. Answer: D 54. Which of the following is non-deductible? ‘a. Percentage tax on common carriers by land b. Franchise tax c, Overseas communications tax d. Stock transaction tax > Answer: D 55. Mapanlinlang Corporation was assessed by the BIR due to underpayment of Percentage Taxes. The Assessment Notice disclosed the following. Basic Tax P 4,000,000 Surcharge 250,000 Interest 200,000 Penalties 25,000 Total 4,475,000 406“ Sncome also gonoratod intrest ing ; Ih the deductbie intros SI rt snort esto les eu 1.000). Hera erased a, 200,000 b, 162,000 @. °!87,000 ni 4 Answer: A OPT oxponse - Interest expense P1000 609 Tolal allowable deduction ae © Peroontage T 200, Code), ae a ener (ois © Me expat!" G3 nage "Clo Tats une Seton 127 le Tac 12x paid is alowabie a fs dductn tom the goss eg tM TC, bg iia ca "BFE Non deductitte Oren regard i . © The interest expense pip midess ofthe dassiication of the NOT ar reduced by either 33% 6 om 3 lan or ndebedoe 8, henea, shall nol be Subjected onal tax, en mn RATE law) of interest income eamed rom bank epost) don the above problem, how much j 56. nen 1,275,000 Much is the deductible taxes? b> 1,000,000 © P1,250,000 d. nil oe Answer: B ming the tax underpaid is donor’ ‘ sq, Assuring 200,000 and P1,000,00n at: YW MUCh's the deduetbe interest and tax? b. 200,000 and zero, respectively c. Zero and P1,000,000, respectively d. Zero for both items > Answer: D © Sinoe the retated tax (donors tax eS EES EEE 58. Which of the following isthe corect allowable entertainment expense? Not more than 1% of revenue from services, Not more than 14% of net sales of goods, Not more thah 1 4% of revenue from services, : Not more than 1 % % of net sales of goods, aege Answer: A 407Datuctions jon GS Hicon, ods with not eal of 2,000,000, Thy gy “ua t 9 59. Nah Corporation is engaged inthe wale ‘ 2 ven We exponsos for tho taxablo quarter Lote teteronment amusement ane TSE ait onan arse) 0 nd atemme tx purposes, how mul 18 (0 rocreabon expenses? 3 t0.000 . P20,000 b P11,000 4. PO > Answer: A 20.000 a ‘Actual Tint 005 of ol aos) 10000 ‘Alowed 10,000 the sole of goods and services with net salesinetroveny, ‘The actual entertainment, amusement led P30,000. How much s the deducts le 60. JAO Corporation is engaged in 3,000,000 and 2,000,000 respectively. reoreational (EAR) expense fo the taxable year total EAR expense? a, P30,000 o. P25,000 b. 27,000 d. nil Answer: B ' Allowed (Lower) ‘Sale of Goods. ‘Actual = P30,000 x 3/5 ‘18,000 P 15,000 15,000 ‘Sale of Sennce, 12,000 Actua , P12,000 Limit = P2Mx 1% TPO OOO oem TOTAL Sar Resse 61 Which ofthe following is NOT correct regarding NOLCO? 2 NOLCO is allowed as deduction from business income for the next 3 succeeding years (5 yeas ifnoured in 2020 and 2021 under Bayarihan Act I) b. Domest and resident foreign corporation subject fo normal income taxis allowed with NOLCO. Private educational istitulion enjoying preferential tax rate is alowed with NOLCO é d. None of the above “> Answer: D 62. Which ofthe following is entiled to claim NOLCO? ‘a, Anemployee with respect to his compensation income. b. Foreign international carrier Entities registered with the Philippine Economic Zone Authority (PE d. Self-employed individual ¢ WER. #0 408Z Deduction, 7 i s fom C3, foment 1: A nol operating ogg fr " Cross Inew fombusns recat ay, ay = ren 2: AL opera gg yy, h ‘etter ot goes reome hal bo arti mS atta ag bend Vex! Wucted fr 16 sllement is coroe ime loncg nase © only slatement2iscomegt : Both statements are corr § ol sllemens ae incor Answer: A iio ofthe following items of expe, i ssdedicon fom goss ince AI ake eek eau = © Losses : 4. Sales Answer: C; Cousty ene et operating loss ofthe busin 6. The ne SS OF enterprise fo current taxable year, which hag rou axable tea a Tot been previoul feta ‘2. Be carried over as a deduction 1 years immediatly coving a a ch out "the next 3 consecutive taxable b. The business or enterprise wie = Year immediately preceding leduction from gross income of such loss, ¢. The net operating loss for 2020 and 2021 tab a! 0 le years may be carr seein oe after the expiration of RA No, 11494 (also irom = Bnyrian Ad ') Provided, the same are claimed within the next ne (©) consecutive taxable years immediately following the year of such loss. a dd. Allofthe above, Se + Answer: D © SECTION 4 of RR 26-2020. Five (6 ) Year Period of Enilemento Deduct Nel Operating Loss inured for Taxable Years 2020 a nd 202, - Unless cherie squalid fom claiming he ‘eduction the business or enleppse which ncued nel operating ss for xatle years 2020 ‘and 2021 shale allowed lo cary over the same asa deduction fom is gross income othe ‘nex! five (5) consecutive larable years inmate folowing he year of such ss, The nel operating loss for said taxable yeas may be cared over asa deducbon even ale the expiration of RANo. 11494 (also known as Baynihan At I) proved the same are clamed within the next ve (5) consecuvelxabe years immediatly folowing te yea of such oss © NOLCO incurred beginning 2022 may be cared over forthe nexl hee (3) conseculve years. © NOLCO shall be availed ona first in fist out bass (RR 14-2001 3. The term ‘net operating loss” shall mean . 2 a Thecoas f capita losses over capital gains deductible from ordinary income. 'b. The excess of capital losses over capital gains not deduclible from ordinary income. ‘. Theexcess of allowable deductions over gross income. 409pivns from Ores Dofuctioas fon GOSS Ia, ay ts808 ‘ sr eeu otepatvene oro : g Answer a ho carry-over of not operating loss; xo rules In ynorship ofthe business , copt 00, 67 Alot Li hi oi ‘no substanliol ea is subjoct to MCIT during the taxabjg B Gampavor isnot allan TTT yo running of the prescriptive perigg ee ' z ot even if the corporation Pe ed 4 reno js good fron (1) 900" se Answer: D i can si be claimed as deduction? 68. Which of Ref i ie from direct ownership to indirect owne, a. vioe versa b Norge ofthe subsidiary into the parent company. Either ‘a’ orb” d. Neither ‘a’ nor"b” Answer: C : Q tion owns 100% of Z Corpor 69. X Corporation owns 100% of Y Corporation. 'Y Corporat n ' ration that has NOLCO.Z Corporation is merged into Y Corporation. Which of the following statements ig i Corporation's NOLO canbe used byt to the exclusion of all other patties, b. Z.Corporalio’s NOLCO is transfered to ¥ Corporation. ©. ZCarporations NOLO is transferred to X Corporation. d.ZCorportions NOLCO can no longer be used. Answer: B ESOS 70. Which ofthe following losses is not deductible? ‘2. Abandonment losses in petroleum operation. b. Excess of expenses over gross income from sale of ordinary assets, c. Losses on wash sales of stocks. 4d, Losses on sale of investments Answer: C 71. Which ofthe following taxpayers may be allowed to cli ic ol te lening eae to claim losses from wash sales as deduction? b. Dealer in personal properties ¢. Dealer in securities 4. _ Investor in shares of stocks Answer: 410im Cross Income December 1, 2020, Ana pur 7 On December 15, 100 Shao of com Pee sole 00 see ported ada eae pain ora ‘he deductible loss? ed on Docambor 1 20204 P9.000. How much 16 8. 1,000 ©. R509 b. P750 Was Answer: D Selling price Cost 009 Indicated loss 10,0090) © 1-Day Rule: Prohibited p, 9 December 15,2020 to Jan the indicated loss is class (i. ’erlod = te belore sale and 30, days after sale “oss on tt he 30-y probed penod. Consequently ied a "loss on 1on-deductible loss fk had the following stock transactions: 13, EHO chased 100 shares of Commo ? E N slock of Drei ne

Answer: C 77. On July 4, 2018, a taxpayer purchased for P500,000 an automobile which wil be used existe for his prace, He deducted annual depreciation on the basis of an estimated Useful life of five (6) years On July 4, 2024, the automobile was partially damaged in an ‘accidental colision with another vehicle. The cost of repairs amounted to 100,000. The taxpayer received insurance proceeds of P70,000 to cover the loss. How much is the deductible loss? a. P200,000 0 - c. P130,000 b. P100,000 ,—d, R30,000 “Answer: D Book value 200,000 Cost lo restore 100,000 ‘towed (lower) 000 Proceeds from insurance Deductible oss 30,000 (© Pata Loss = the lower between remaining Book value belore the casually loss and costo restore less insurance proceeds © Tolaloss = remanin book value before the caval lossless msurance proceeds 78. Emang acquired a propery forusein her business. Alera devastating typhoon, the machinery suffered partial damage. The following were made available: Cost 500,000 Accumulated depreciation 300,000 Restoration cost 250,000 Estimated useful life 5 years 412Dedavtions fron Gross become How muh i the deco ny 4 b. P200,000 © P250,000 4 100,000 Answer: B Book value Cost to restore P7200 000 ‘Aiowed (lowes) 250.000 200000 p. (ne othe folowing losses cant be deducted rom gross income © ich hed a cone ge aPeUEe, 0 corporation demolished an od warehouse b. emotion of a buliding een! °3:000,000 and a book valve of P00 000 : use forthe building at tng 1nd on 8 and purchased where the crporaton has no balding in odo buld i Of purchase and it was its intention fo remove the cA corporation retired its machinery trom the business ; because of the increase in the cxst of production andthe falure ofthe machinery lo meet the desired number of Units of production d. A corporation ascertained th insoleney of Gore Tati 8 Cor. stocks are worthless because ofthe ft + Answer: B 20. Dong, @ gambling addict, won 90,000 from cockfighting during the year. However, he also suffered losses from other gambling acti " p Eat Gambling acties amounting to P200,000. How much is the a. 200,000 b. 110,000 aoe Answer: C; othe extent of gambling winings only ‘SNJ Inc. purchased shares of stock of Valde Corp. for P60,000 and of Boba Co. for P30,000. At the end of the taxable year, il was ascertained that its Valde Corp. stock was worthless because of the complete insolvency of the corporation, and its Boba Co. shares value had declined to P28,000. How much is the deductible loss of SNJ Inc.? a. 90,000 c. P60,000 b. P62,000 . nil Answer: C © Worthless secures = deductible oss © Loss on shrinkage in the value of the securities = non-deductble 82. One ofthe following losses is not deductible from gross income a. Loss incurred in trade, profession, or business b. Loss due to fires, storms, shipwreck, or other casualties, robbery, theft, or ‘embezzlement of property connected with trade, business, or profession. e c. Net operating loss carry-over d_ Shrinkage in the value ofthe stock Answer: D 41387. 88, Daections fret Gros Teven, \When sho hd dati atone as deduction tr e887 : Upon etry lores ad write of the books © rtrvopten of tu taxpayer, upon sting up of ROwRED® Of Eon tw GP 4 ‘the colon ol he goremert up. eating. o@sowranne ot PON wrk Answer B 0 Wrte-off = deductible loss. © Provision for bad debts = pan-deductiie The folioning losses are dedutbl om goss inca, except one which edie oy the extent of capital gain ‘a net operating loss camyover, . B. acount non of because these ae can tobe uncoTectD loss arising from permanent decine in market valve; 4. loss incued froma ransacton involving @ capital esse + Answer: D ‘Statement 1: Capital losses can be deducted ‘only from capital gains ‘Statement 2: Ordinary losses can be deducted from any gross income a. Only statement {is correct b. Onlystatement 2s correct c. Both statements are correct d_ Both statements are incorrect + Answer: ‘taxpayers allowed to use decining balance melhod in claing deprecation. In such cas, the limitation is — '2. Itshould not exceed twice the rate in traightine method It should not exceed twice the rate in sum-ofthe-years digit method ¢._Itshould not exceed the rate in sraightline method 9 4d. It should not exceed the rate in sum-of-the-years digit method “> Answer. A BSE College, a proprietary educational insttuton, spent P10 milion forthe constuction ofa rnew school building. The amount spent for the construction ‘a. Must be claimed as expense in the year of completion b. Capitalized and claim annual deprecation over te ife ofthe building . Capitalized or expensed outright at the option of the school 4. Capitalized or expensed outight atthe option ofthe BIR, “Answer: C Non-resident aliens engage in trade or business as well as resident foreign corporations e® ake allowed to claim depreciation in arriving et taxable income. Which ofthe folowing is absolute requirement before depreciation can be claimed? 414“ a. es Dey telions fp ‘Tho proporty, regan tho Philppingg, 8 cation, Moet biped sho The property, regerdlog foneraton of income in of income inthe Philippine °°", lp, Sirocty oy The property is used in trad trade oF bu The Property must be locatoy inher arden of location 8 in Gross Income Indirectly, inthe goneration Answer: D. UIE: 4, XYZ. Co. t00k two key men insurance On the life of its beneficiary is the corporation to co erisate it fen President, Mr. A. In one policy, the ren tae rsa Awe ce tf a E 2 * Question 2.Wil the insrenes eine Pld by X¥7 Co, in bath pokacs deducibe? compra and by thea ® lteated as income subject to tax by the a. Yes oft and Noto second b. Yestoboth questions: “Ueston; ¢. Noto rst and yes to second 4. Notoboth questions, “ston; Answer: D GUIDE: + Life Insurance was then outby the employee ° Premium payment = personal e Proceeds v Npense; nondeductibie ' the insured outived the policy the excoss of the excess of proceeds over the premium payments shall be taxable tothe tax taxpayer. : tthe proceeds were received as a shall be exempl from income tax Part of the gross estate, % result ofthe death of he taxpayer, such proceeds For estate taxation purposes, it may or may not be * Lie Insurance was taken out by the employer forthe employee Beneficiary is the employer Y Premium payment is nondeductble wile the proceeds shall be part of the taxable income ofthe employer. Beneficiary isthe employee or the employee's dependentshers Premium payment - taxable income of the employee and deductible expense of the employer. Y Proceeds (tobe received by the empoyee'sheirsfbenefiiaries) ~ nontaxable income of the heirs/benefiiaries $0. Allof the following, except one, are not deductible from gross income a. b. o. d. Tulon fees and te expenoe ofthe payers chien ofthe roof ofthe office buiding ; Aen pa in insuring the life of the Corporate President, Appointing the beneficiary of the policy Presi paeloh ali insurance pay a ank ane employes vith the laters children as the appointed beneficiary 415Dadections Pr Coss Itcone Answer D "Resonate. Misa personal oper 2 Teanmdadatbe Ris acapticaie 8, 0 mrnan dechcte because the Denehaay “D's deductibie ‘The designated beneticianes ae insurance policy ofthe Vieq Company premiums of 10,000 fr the Moi * eee the Neer k tho ‘even ‘At the end of tho em bry teceived dividend of 100,000 because of tho policy: ih 2021, th cxxporation shou cat a claim tor ‘a deduction for life insurance premium of tne erploy! ho employe ees ‘a, 100,000 ¢ P1,000 b. 10,000 d nil Answer: D REE ‘ won if tho paymont Is not connected 982. Which ofthe folowing is deductible from gross income 0 with business? 1 Contbution ofthe omplaya toto ponson tua of tho employa0, b. Charitable contributions ‘c.__ Income tax pad in froign county d.” Traveling expenses Answer, B ibutions is not fully deduetiblo? 93. Which of the following chantablo contri of tho Philippinos to finance priority projects Idontfiod ‘a. Donation to the Government by NEDA. b. Donation to tho Municipality of Milagros in tho Provinco of Masbate for tho repair of Municipal Hall ¢ Donation to Intemational Organizations d_ Donation to Accredited Non-government Organizations “> Answer: B 04, One of the folowing charitable and other contributions is not deductibo i full 4 Donations to Government. of tho Philppines or to an of Its agonclos or polica subdivisions, Including fuly owned government corporations, exclusively to finance, provide fr, of bo used in undertaking prionty projcts, b. Donations to cortain foreign institutions or international organizations (10, Intomnabonal Red Cross, World Health Organization) Donations to accredited non-govemment organizations or non-profit domesbe corporations that saisfied tho four requiroments sot by lav. d_ Donations made fr tho usa of tho Government ofthe Phiippines or any ofits agoncion OF political subdivision exclusively for public purposo. ° Answer: D 46Deductions obo deductible in ul, crt fe his Gus title jobo det | cartain accredited 2 vations must meet. Non-govor bulng end youth and spots dea" Seni, rescarch, ‘eatin pres cmbson thang hol coal are rao chro Not later than the 15! day of the thing soe) ¢ «the eontibutions are received: ent af the cose of th purpose or function for Vaan iplee Ulization of the Sania tia) be c,_ . The assets Of which, in the event ce nization is organized and operated, purpose or would be dist ramet a inthe Rigen, 7) & foto anche organization to be used in uch «which the dissolved organization was src best aocomplish the general purpose for d. The administrative expense: as organized. expenses. shall, on an annual basis, not exceed 40% of the total “> Answer: D 96, The folowing donations are non-deductble, exo . pi >, except? a. Donations given direct t Yolande sors b. Alms given to beggars c. Political contributions d. Donations to Intemational Organizations 7 + Answer: D 97. The amount of deductible charitable contribution of property other than money shall be based a. Fair market value b. Book value c. Lower of cost or fair market value d. Acquisition cost “Answer: D 98. Tobe allowed as a valid deduction, charitable and other contribution must not exceed: 4. 5% of taxable income after charitable contribution, in case of individuals b. 10% of taxable income after charitable contribution, in oase of individuals ©. 5% of taxable income before charitable of contribution, in case of individuals, d. 10% of taxable income before charitable contribution, in case of individuals. + Answer: D 98, The following contributions and donations were made by a taxpayer. To Christ the King Catholic Church, 250,000 To Bukas Palad, non-profit domestic corporation 300,000 To the fire vietims of Recto en To the Gospel church of Taiwan How inuch is the total deductible actual charitable ‘and other contributions subject to limit? 417Deductions from Gros Viitne a. P250,000 ©. P750,000 b. P550,000 d. P1,100,000 © Answer: B ° Osduttle win it = Danan o Cit te ing and Bun Pad rundaion © Donatos drecty gen o be re vckms a wel asf the Gasp a ey ‘corporation na exer under bealyormiemational oanzatons) ae nendecicttle cenksions i 4100. A domestic corporation has the folowing data on income and expenses Gross business income ‘ 6.200.009 Deductions including $8S and Philhealth contributions of P150,000 2,500,009 Contibutions to the Goveriment fr priory projet in education 100,009 Contibuton to foreign private foundation 100,600 Contribution to domestic chatable organcation 190,000 How much is the deductible charitable and other contibutions? a. P390,000 ©. P285,000 b. P290,000 d. P2t1,000 > Answer: C ‘Actual (kg 180.000 Vs. Lind (nel come belo cntrbtons x 516) = [6.200000 - 2500.00) x 5%) 185000 ‘Hiowed fave) Pres oo9 ‘Add. Deda (print prj) 1000 Tela alowatle chartabe and cer cotrntions P25 060 ' NOTE © Contrbutions oa fore prvate cxgaezaton & nondeductble, unless proved lor unter ietoratenal ageemerts or Wealy. fi Use the following data for the next two (2) questions: “Juan, reported the folowing during the taxable year. Gross Income : 5,000.00 Cost of Sales 3,000,000 Salaries of employees, net of P100,000 withholding tax and ‘800,000 50,000 SSS, Medicare and Pag big premeum contributions Fringe benefits given to rank and fle employees 300000 Fringe benefits given to managerial employees (GUMV) 250.000 Representation and entertainment expenses (business related) 100,000 Rent expense 1900 Donation to religious and charitable institutions 500,000 101. At what amount should Juan report as taxable income for 20207 a. P2,790,000 c. P2,956,000 b. P2,906,000 4. P3,006,000 > Answer. D Gross Income p50000% Cost of Stes 300000 Sales Paani 418102. How much is the correct taxable net income as SMCs Deductions from Cos Income sees paontn Salavios (gross of withholding tox, $88. Pa Ae re feel el 5 need wan Fe berets (QC ero p00 Representation ond ontetainment oxpontos on (16% of Not Sle), POM 005 40.07 Net income below connbutons — aban Donation fo religious and charlablo, 734,000) ‘etal = P500,000 ae oe Limit: P3,340,000 x 10% = p34, Allowed (lower amount), limit e Taxable Net Income 008 0- © Allowable Representaton exp, =the loner between the actual expenditures and the iit © Limits + Sale of goods = 14% of Net Sales + Sele of service = 1% of Revenues a, P2,790,000 «. P2,956,000 b. 3,173,000 «4. P3,006,000 Answer: B Gross Income Seles cos Salaries (gross of withholting tax, SSS, Mediare/Pag iba) Fringe benefis given to rank and fle employees ~ Fringe benefits (@Grossed up fonetary value) Rent expense Representation and entertainment (1% of Sales) ; PAM x. 005 [Net income before contibutions ; Donation fo religious and charable instiutons ‘Actual = P500,000 Limit: 3,340,000 x 5% = P167,000 ‘Afowed (ler aroun) nt Taxable net income suming the taxpayer isa corporation? 5,000,000, 3,000,000 +P8,000,000 (4,000,000) (950,000) (00,000) (250,000), (120,000) (40,000) 3,340,000 (167,000) 173.000 4103. Which statement is wrong? Contributions made by an employer to a pension trust: For lump sum payment to cover past service cost, is allowable as deduction beginning b 8 withthe year the payment was made. For lump sum payment to cover past service costs allowable as deduction amortized for period of ten years. Fora lump sum payment to cover past service cost, may be amortized over a period of ‘more than, but not less than ten years, For present service cost, is deductible in the year that payment is made. Answer: C 419