INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

CHAPTER 8

DEDUCTIONS FROM GROSS INCOME

Problem 8 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS
INCOME
1. Nondeductible
2. Deductible
3. Deductible
4. Deductible
5. Nondeductible
6. Nondeductible
7. Nondeductible
8. Deductible
9. Deductible
10. Deductible
11. Nondeductible
12. Nondeductible
13. Deductible, in lieu of tax credit (Sec.
34C3, NIRC)
14. Deductible
15. Deductible
16. Nondeductible
17. Nondeductible
18. Deductible
19. Deductible
20. Nondeductible
Problem 8 2
TRUE OR FALSE
1. False Some business expenses are nondeductible; some are subject
to limit.
2. True
3. False Compensation income is not subject to OSD.
4. False NOLCO is not an itemized deduction.
5. True Amortized over the term of the lease
6. False of 1%
7. False 33%
8. False Double declining method
9. True
10.True
11.False Income outside the Philippines by a NRC is not taxable in the
Philippines, hence, no allowable deduction is allowed.
12.True
13.True

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

14.True
15.False Business expenses related to business income outside the
Philippines is deductible also by domestic corporations and resident
Filipino.
16.False Business expense is deductible from gross income.
17.True
18.False 40% based on sales or gross receipts.

Problem 8 3
1. C
2. C
3. A
4. D
5. A
6. B
7. A
8. C
9. C
10. D
Problem 8 7

Problem 8 4
1. D
2. B
3. B
4. C
5. A
6. D
7. C
8. C
9. A
10. A

Problem 8 5
1. A
2. C
3. C
4. A
5. D
6. C
7. A
8. B
9. A
10. C

Problem 8 6
1. C
2. C
3. B
4. C
5. C
6. D
7. D
8. A
9. C
10. C

Change of motor of air condition

Expansion of store
Damages paid due to workers injury
Repainting of building
Cleaning of computers
Repair of furniture
Totals
Problem 8 8
C
Identifiable operating expenses
Philippines
Add: Allocated operating expenses
within
(P200,000 x P1M/P5M)
Operating expenses Philippines
Problem 8 9
D
Police protection
Interest expense paid to his father
Gifts made to employees during birthday

Expensed Capitalized
P60,000
50,000
P20,000
10,000
9,000
1,000
.
P40,000
P110,000
P400,000

40,000
P440,000
P20,000
10,000
5,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Capital loss
Amount of nondeductible expenses and losses

4,000
P39,000

Problem 8 10
D
Depreciation expense (P1,000,000 x 40%)/25
Loss of business equipment
Deductible expense

P16,000
38,000
P54,000

Problem 8 11
D
1. Letter A
No personal or business expense is
deductible.
2.

Letter B
Depreciation (P20,000 x 10%)
Repair (P100,000 x 10%)
Office supplies
Total deduction

Problem 8 12

P 2,000
10,000
6,000
P18,000

Salary expense (P180,000 + P20,000)

Estimated uncollectible accounts
Compromise penalty
Depreciation expense
Miscellaneous expense
Deductible from earnings

Tax laws
P200,000
30,000
.
P230,000

GAAP
P200,000
10,000
50,000
30,000
5,000
P295,000

Note: For tax purposes, the miscellaneous expense is not deductible because
it was not reported last year. For accounting purposes, the miscellaneous
expense can be deducted as prior period adjustment from retained earnings.
Problem 8 13

Sales

Multiplied by OSD rate

Optional standard deduction

P300,0
00
40
%
P120,0
00

The compensation income is not included in determining OSD. The

OSD (40% of gross sales or gross receipts) is only allowed as deduction
from income derived from business. If an individual opted to use OSD,

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

he is no longer allowed to deduct cost of sales. [Sec. 34(L), NIRC; Sec.

3, Rev. Regs. No. 16-2008]
Problem 8 14
B
Gross receipts from profession

P100,00
0
500,00
0
P600,00
0
40
%
P240,00
0

Rent income (P475,000/95%)

Total gross income
Multiplied by percent of OSD
Optional standard deduction
Problem 8 15

Problem 8 16

Since there are no official receipts and documents to support the

operating expenses, the reported operating expenses are not
deductible (Sec. 34(A)(b), NIRC). The OSD is not allowed for
nonresident aliens (Sec. 34(L), NIRC). No personal exemption will be
granted to a nonresident alien with business in the Philippines if his
country does not have an exemption reciprocity law favoring a Filipino
citizen. (Sec. 9, Rev. Regs. No. 2)

Sales
Less: Cost of sales
Basis of OSD
Multiplied by OSD rate
Optional standard deduction

Sole Proprietor Corporati

on
P1,000,0 P1,000,0
00
00
300,0
.
00
P1,000,0
P
00
700,000
40
40
%
%
P
P
400,000
280,000

RA 9504 is specific as to the basis of OSD. For individuals, the basis of

the 40% OSD shall be the gross sales or gross receipts. In the
case of corporate taxpayers subject to tax under Sections 27(A) and
28(A)(1) of the Tax Code, as amended, the basis of the 40% OSD shall
be the gross income.

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 8 17
B
Operating expense before representation expense
(P2,000,000 P300,000)
Representation expense Actual
- Limit (P20,000,000 x
0.005)
- Lower

P1,700,00
0
P300,000
100,000
100,00
0
P1,800,00
0

Allowable itemized deductions

Problem 8 18
Salary expense

B
P120,00
0
24,000
6,000
5,000
60,000
( 9,90
0)
P205,10
0

Rent expense
Advertising expense
Depreciation expense
Interest expense
Tax differential on interest income (P30,000 x 33%)
Total itemized deductions

NOLCO is not an itemized deduction.

Problem 8 19

Sales
Cost of sales
Gross income
Less: OSD or Itemized deductions
(P1,200,000 x 40%)
Net
income
exemption

before

personal

Using
OSD
P1,200,0
00
- 0
P1,200,0
00

Using
Itemized
P1,200,000

480,0
00
P
720,000

- 0 -

700,000
P 500,000

P 500,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Allowed deduction using OSD (P1,200,000 x

40%)
Less: Cost of sales
Net disadvantage using OSD

P 480,000
700,000
(P220,000)

No itemized deduction is allowed if no official receipts, records or other

pertinent papers can be used to support it (CIR vs. Isabela Cultural
Corporation, G.R. No. 172231, Feb. 12, 2007).
In case of individual taxpayer, the cost of sales or the cost of
services are not allowed to be deducted for purposes of determining
the basis of OSD inasmuch as the law (RA 9504) is specific as to the
basis thereof which states that for individuals, the basis of the 40%
shall be the gross sales or gross receipts and not the gross
income. (Sec. 3, Rev. Regs. No. 16-2008)
Problem 8 20
A
Gross salaries of employees
Grossed-up monetary value of fringe benefits
Deductible salaries and fringe benefits
expenses

P6,000,000
1,000,000
P7,000,000

Problem 8 21
C
Assume bonus is computed after tax but before bonus. The answer is letter D
= P8,143, computed as follows:
Net income before
charitable
contribution
(P75,000 + P5,000)
Less: Deductible contribution (P80,000 x 5%)
lower of actual
Net income before income tax and bonus
B = 15% (76,000 T)
T = 30% (76,000 B)
B = 15% [76,000 30% (76,000 B)]
B = 15% (76,000 24,320 + 30%B)
B = 11,400 3,420 +0.045B
B = 7,980

P 80,000
4,000
P 76,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

0.045B
0.955B = 7,980/0.955
B = 8,356
Proof:
Income before bonus and tax
Less: Income tax (P76,000 P8,382) x 30%
Income after tax but before bonus
Multiplied by rate of bonus
Bonus

P76,000
20,285
P55,715
15%
P 8,356

Problem 8 22
B
Monthly salary
Death benefits
Terminal pay
Continuous compensation after the burial for three
months
Total deductible expenses

P 5,000
50,000
25,000
15,000
P95,000

Note: Donation for coffin and other wake expenses is not business or
compensation related and, hence, not deductible. (Sec. 72, Rev. Regs. 2)
Problem 8 23

Purchases
Decreased in inventory
Increased in inventory

Inventoriable
cost
P300,000
20,000
.
P320,000

Problem 8 24 D
Traveling expenses (P50,000 + P200,000)
Fringe benefit expense (P68,000/68%)
Transportation expense messenger
Total allowable expense
Problem 8 25 B
Monthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to
Dec. 31
Insurance premium (P3,000 x 60%) x 2/12
Real property tax (P1,500 x 60%) x 2/12
Deductible rent expense
Note: The city services is not a rent expense.

Supplies
expense
P40,000
( 3,000)
P37,000
P250,000
100,000
40,000
P390,000
P24,000
300
150
P24,450

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 8 26
1. Letter B
Rent for 6 months based on usage (P20,000 x
6) x 80%

P96,000

2. Letter D
Actual cash collection for rent

P150,000

Problem 8 27 D
Monthly rental expense
Monthly depreciation (P600,000/8)/ 12
Monthly deductible expense
Problem 8 28 C
Rent expense (P5,000 x 12)
Add: Depreciation expense [(P950,000/9.5) x
11/12]
Deductible expense in 200y

P2,000
6,250
P8,250
P 60,000
91,667
P151,667

At the start of the used of the building, the remaining period for the
contract of lease is 9.5 years. The salvage value is ignored in the
computation of the depreciation because T Foods could no longer
benefit on it since the improvement on the land will be owned by the
lessor at the end of the 10-year contract of lease.
Problem 8 29
1. Letter B
Trading - Limit lower (P5,000,000 x .005)

P25,000

2. Letter C
Servicing actual lower

P30,000

Problem 8 30

Actual representation expense

Multiplied by percent of representation
expense
for sales [P700,000/(P700,000 +
P300,000)]
Apportioned representation expense for
sales
Limit (P700,000 x 0.005), lower
Actual representation expense

P10,00
0
70%
P
7,000
P10,00
0

P3,500

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Multiplied by percent of representation

expense
for revenue [P300,000/(P700,000 +
P300,000)]
Apportioned representation expense for
sales
Limit (P300,000 x 0.01)
Deductible representation expense

30%
P
3,000

3,000
P6,500

Problem 8 31 A
Interest expense
Tax differential (P50,000 x 33%)
Deductible interest expense

Problem 8 32

P40,000
(16,500)
P23,500

Breast-feeding assistance to the needy

additional
Salary of senior citizens additional (P100,000 x
15%)
Seniors citizen discount (P300,000 x 20%)
Total special itemized deduction
Problem 8 33

paid in advanced
paid to a brother
paid on delinquency taxes
on borrowings to finance his family
paid to finance petroleum exploration

Problem 8 34

60,000
P275,000

30,000
.
P 8,000

Add: Nondeductible tax differential (P40,000/80%) x 33%

Nondeductible interest expense

Nondeductible
P 20,000
12,000

P 8,000

Interest expense on unpaid salaries

Salary expense

15,000

B
Deductible

Interest
Interest
Interest
Interest
home
Interest
Total

P200,000

100,000
P162,000

P
60,000
16,50
0
P
76,500
P600,00
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Rent expense
Deductible interest expense
P16,500)
Total itemized deductions

bank

loan

(P40,000

200,000
23,50
0
P823,50
0

The salaries of direct workers should be classified as deductible cost of

service and not to be classified as part of itemized deductions (Rev.
Regs. No.16-2008). Interest expense on unpaid salaries is not
deductible. (Kuenzel & Streiff, Inc. vs. Collector of Internal Revenue,
106 Phil. 355)
Problem 8 35 D
Tax savings from interest expense
(P100,000 x 30%)
Final tax on interest income (P1,000,000 x
12%) x 20%
Actual net tax savings

P30,000
(24,000)
P 6,000

Problem 8 36 A
Documentary stamp taxes
Local tax (P6,000 P800 P200)
Municipal tax
Community tax
Deductible taxes

P 1,000
5,000
2,000
1,500
P9,500

Note: The fringe benefit income taxes to key officers and rank-in-file
employees are to be classified as deductible fringe benefit expense and not
tax expense.
Problem 8 37

Business taxes
Documentary stamp taxes
Automobile registration fees
Postage stamp taxes
Import duty taxes
Total deductible taxes
Problem 8 38
D
Unadjusted net income (P520,000
P200,000)
Add back: Income tax foreign country
Adjusted net income
Personal exemption

P 20,000
1,000
3,000
500
50,000
P 74,500
P320,000
10,000
P330,000
(50,000)

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Net taxable income

P280,000

Note: The P10,000 income tax paid to foreign country is better to be treated
as tax credit rather than as operating expense.
Problem 8 39 A
Asset of Oliva
Payment to government (P200,000 x 50%)
Balance

P 60,000
(100,000)
(P40,000)

Deductible bad debts is the entire amount of

collectibles

P100,000

Problem 8 40
B
Bad debts from business actual written off
(P100,000 x 40%)
Bad debts from profession actual written off
Deductible bad debts expense

P40,000
50,000
P90,000

Problem 8 41 D
Annual depreciation expense (P50,000
P5,000)/5
Multiplied by ratio of months used during the year (from June 30
to Dec. 31)
Depreciation expense 200B
Problem 8 42
A
Annual depreciation (P2,300,000/11.5 years)
Multiplied by ratio of months used in 200B (July
1 to Dec.)
Depreciation expense
Problem 8 43
D
Oil drilling machine (P800,000 x 90%)/8 years
Oil extracting machine (P900,000 x 90%)/10 years
limit
Computers (P100,000 x 90%)/4 years
Delivery truck (P200,000 x 90%)/5 years limit
Annual depreciation expense

P9,000
6/12
P4,500
P200,000
6/12
P100,000

P
90,000
81,000
22,500
36,00
0
P229,500

The useful life of properties used in or related to production of

petroleum shall be ten (10) years or such shorter life as may be
permitted by the BIR Commissioner. Properties not used directly in the
production of petroleum shall be depreciated under the straight-line

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

method on the basis of an estimated useful life of five (5) years. (Sec.
34(F)(4), NIRC)
Problem 8 44 C
Depletion base (P6,000,000 P1,000,000 +
P300,000)
Divided by number of extractible estimated tons
Depletion per ton
Multiplied by number of tons extracted during
the year
Depletion expense

P5,300,000
5,000,000
P
1.06
800,000
P 848,000

Problem 8 45
1 Letter D
.
Depletable costs, January 1, 200x
Exploration costs
Intangible development costs
Total
Less: Depletion expense (P15,000,000/7,500,000)
1,200,000
Adjusted basis
Divided by remaining reserves
(5,000,000 + 2,500,000 1,200,000)
New depletion rate/ unit
2
.

P 1,260,000
6,300,000
P 2.00

Letter A
Depletion cost 2007 (P2 x 1,200,000 units)

3
.

P12,500,000
1,000,000
1,500,000
P15,000,000
2,400,000

P2,400,000

Letter B
Value of production (P12 x 1,200,000 units)
Less: Production and selling costs:
Mining costs

P14,400,000
P2,000,0
00
3,000,00
0
1,500,00
0
1,000,0
00

Milling costs
Marketing expenses
Depreciation expense
Net income from operation
Multiplied by limit percentage
Deductible
amount
fro
exploration

and

7,500,000
P 6,900,000
25%
P 1,725,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

development cost
4
.

Letter B
Current exploration and development cost (P1,500,000
+ P1,000,000)
Less:
Deductible
amount
of
exploration
and
development cost (see 3)
Exploration and development cost chargeable to
succeeding years

Problem 8 46 B
Deductible expense:

1,725,000
P 775,000

Capitalized

Depreciation expense (P10,000,000 x

90%)/50
Capital outlay

Outright
expense

P180,000
P10,000,000

Problem 8 47
1 Letter B

2.

P2,500,000

200A

200B

Lower of actual contribution or normal

valuation
Add: Amortization of excess
200A (P200,000/10)
200B (P100,000/10)

800,000

800,000

20,000
.

20,000
10,000

Deductible retirement expense

820,000

830,000

200A

200B

400,000

200
C
300,000

Year X
700,000

Year Y
600,000

10,000

10,00
0
610,000

Letter A
Actual retirement payments

Problem 8 48

200
C
500,000
20,000
10,00
0
530,000

Actual contribution or normal valuation,

lower
Add: Amortization (P100,000/10)
Deductible retirement expense

710,000

Note: Only the excess of the actual contribution over the normal valuation is
to be amortized over 10 years.
Problem 8 48 B
Allowed deductible contribution (P200,000 x 5%)

P10,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Problem 8 49 B
Allowed deductible contribution (P200,000 x 5%)
Problem 8 50 D
Allowed deductible contribution
P5,000) x 10%]

[(P60,000

P10,000
+

Problem 8 51 B
Income before charitable contribution (P500,000
P130,000)
Multiplied by percent of limit
Allowed deductible contribution - lower
Problem 8 52
PPHHI per month

P6,500

P370,00
0
5
%
P

A
P200

Problem 8 53 D
Not allowed to deduct PPHHI because family income exceeded P250,000 per
year.
Problem 8 54 C
Actual value of donation priority program
Adopt a school program incentive (P1,000,000 x
50%)
Deductible donation
Problem 8 55
1 Operating expenses (1,000,000 x 30%) P50,000
.
Interest expense (P50,000 (P40,000/80%) x 33%]
Total itemized deductions
Add: NOLCO
Total deductible expenses

P1,000,000
500,000
P1,500,000

P250,000
33,500
P283,500
500,000
P783,500

Note: NOLCO is not an itemized deduction but part of

deductible expenses.
2
.

Gross income (P5,000,000 P2,000,000)

Multiplied by OSD rate
OSD

P3,000,00
0
40
%
P1,200,00
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Note: NOLCO is not allowed to be deducted if the taxpayer

uses OSD.
3
.

Gross income

P3,000,00
0
1,200,00
0
P1,800,00
0

Less: OSD
Net taxable income

Problem 8 56
Salaries of assistants
Traveling expenses
Light and water office
Stationeries and supplies
Office rent
Total operating expenses before contribution
Add: Contribution subject to limit (P500,000 P176,850) x
10%)
Allowable itemized deductions

P 96,000
11,000
7,890
1,960
60,000
P176,850
32,315
P209,165

Problem 8 57

Bad debts written-off (P35,000

P30,000)
Depreciation expense (P140,000
P100,000)
Donation to the government priority
program
Donations subject to limit:
Lower of actual, P170,000 or
(P2,500,000 x 10%)
(P2,500,000 x 5%)
Total allowable deductions

Sole
Proprietorsh Corporati Partnershi
ip
on
p
P 5,000 P 5,000 P 5,000
40,000
40,000
40,000
50,000
50,000
50,000
170,000
.
P 265,000

125,00
0
P 220,000

125,00
0
P 220,000

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

The research and development cost is to be treated as a deferred expense,

hence, its amortization shall be made in the succeeding five years
when the taxpayer realizes benefits from such expenditures (Sec. 341,
NIRC).
Problem 8 58
1.
Actual contribution or normal valuation,
lower
Add: Amortization - 200A (P250,000/10)
Deductible retirement expense
2.

Financial net income

Add: Retirement benefit expense
accounting
Total
Less: Deductible retirement expense
taxation
Net income for tax purposes

200A
1,000,00
0
25,00
0
1,025,00
0

200B
900,000

50,000,0
00
1,100,0
00
51,100,0
00
1,025,0
00
50,075,0
00

60,000,000

25,000
925,000

1,200,000
61,200,000
925,000
60,275,000

Problem 8 59
Salary expenses
Retirement (P250,000 + P50,000/10)
Representation expense (P10,000,000 x .005)
Interest expense paid to the BIR - full
Interest expense limit:
(P100,000 (P96,000/80%) x 33%)
Depreciation expense
Rent expense
Group insurance expense
Bad debts expense (P100,000 x 20%)
Contribution expenses:
TESDA priority project (500,000 x 1.5)
Local government limit (lower is actual)
Total itemized deductions

Corporati
on
500,000
255,000
50,000
20,000

Individua
l
500,000
255,000
50,000
20,000

60,400
40,000
250,000
50,000
20,000

60,400
40,000
250,000
50,000
20,000

750,000
100,000

750,000
100,00
0
2,095,40
0

2,095,400

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Note: NOLCO is an allowable special deduction but not an itemized
deduction.
Problem 8 60
1
.
Salaries expense (P680,000 P100,000)
Bad debts expense (P370,000 P270,000)
Retirement expense (P1,000,000 P380,000)
Representation expense (P39,000,000 x 0.005)
Rent expenses (P200,000 P20,000)
Taxes expense (P300,000 P270,000)
Life insurance expense (P150,000 P100,000)
Interest expense [(P200,000 (50,000 x 33%) +
P20,000]
Total itemized deduction before contributions
Contribution expenses:
Donation to TESDA priority project (P500,000
x 150%)
Donations for Rooming-in and Breast-feeding
(200k x 2)
Donations NGOs (35% for admin.)
Ind: (P39,460,000 P30,000,000 P1,958,500) x
10%=750,150
Corp: (P39,460,000 P30,000,000 P1,958,500) x
5%=375,075

Total allowable deductions

Individual
580,000
100,000
620,000
195,000
180,000
30,000
50,000
203,500

Corporatio
n
580,000
100,000
620,000
195,000
180,000
30,000
50,000
203,500

1,958,500

1,958,500

750,000

750,000

400,000

400,000

100,000

100,000
.

.
3,208,500

Computation of sales:
Financial income

P
5,000,000
30,000,00
0

Cost of sales
Operating expenses deducted
(P680,000 + P370,000 + P1,000,000 + P800,000 +
P200,000
+ P300,000 + P150,000 + P160,000 +
P800,000)
Total sales
2
.

Individual
Gross income (P39,460,000 P30,000,000)

3,208,500

P9,460,00
0

4,460,0
00
P39,460,0
00
Corporatio
n
P9,460,00
0

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS)

Less: Total allowable deductions
Net taxable income

3,208,50
0
P6,251,50
0

3,208,50
0
P6,251,50
0