ACC 311 – Income Taxation
Topic: Deductions from the Gross Income
Cases
Representation expenses
Case 1
A corporation is engaged in the sale of goods with net sales of P3,000,000. The actual entertainment,
amusement and recreation expense for the taxable quarter totaled P50,000. For income tax purposes,
how much is the deductible entertainment, amusement and recreation (EAR) expense?
Answer: P15,000
Actual Limit (P3M x .005)
50,000
15,000 – the lower
Case 2
A corporation is engaged in the sale of goods and services with net sales and revenue of P8,000,000 and
P4,000,000, respectively. The actual entertainment amusement and recreation expenses for the taxable
year totaled P150,000. For income tax purposes, how much is the total deductible entertainment,
amusement and recreation (EAR) expenses?
Answer: P80,000
Actual – sale of goods (150,000 x 8/12)
Limit (P8M x .005)
Actual – sale of services (150,000 x 4/12)
Limit (P4M x .01)
100,000
40,000 - Lower
50,000
40,000 – Lower
Interest
Case 1
In 2021, a taxpayer obtained a P1,000,000 loan from a bank for business use (using cash basis of
accounting). The proceeds of the loan amounted to P900,000, net of P100,000 interest deducted in
advance. The taxpayer paid the loan in full in the year 2022.
a. How much may the taxpayer claim as interest expense in 2021?
Answer: P0 (to be claimed as deduction from the gross income upon payment)
b. How much may the taxpayer claim as interest expense in 2022?
Answer: P100,000
Case 2
Using the same data in Case 1, except that the principal amount of the loan were paid in four (4) equal
annual installments at P250,000 a year starting 2022.
a. How much may the taxpayer claim as interest expense in 2021?
Answer: P0
b. How much may the taxpayer claim as interest expense in 2022?
Answer: P25,000 (P100,000 x 250/1000)
Case 3
A taxpayer (a corporation) is using accrual basis of accounting. On January 1, 2021, it decided to
purchase an equipment to cope up with the increasing demands of his customers. The equipment was
acquired at a cost of P10,000,000 and was estimated to have a useful life of ten (10) years. The
equipment was financed through a bank loan at an annual rate of 12%. Interest of P1,200,000 was
discounted in full by the bank. Other business-related interests amounting to P300,000 were also paid
during the year. In addition, interest income of P200,000 (gross of 20% final tax) from its various bank
deposits were credited to the account of the taxpayer during the current year.
a. Assume the taxpayer opted to recognized the interest related to the acquisition of equipment as
an outright expense, how much was the deductible interest of the company in 2018?
Answer: P1,460,000
Interest incurred in acquiring the equipment
Reduction (20% x 200,000)
Other business related interest
Allowable interest expense for 2021
P1,200,000
( 40,000)
300,000
1,460,000
b. Assume the taxpayer opted to capitalize the interest related to the acquisition of equipment,
how much was the deductible interest of the taxpayer for 2021?
Answer: P300,000 – only “other business related interest” shall be considered as interest
expense.
c. Assume that taxpayer opted to capitalize the interest related to the acquisition of equipment,
how much would be the cost of the equipment?
Answer: P11,200,000
Acquisition cost
Interest incurred
Total capitalized cost
P10,000,000
1,200,000
11,200,000
Losses
Case 1
On July 1, 2018, a lawyer purchased an automobile for P500,000 which will be used exclusively for his
practice of profession. He deducted annual depreciation on the basis of an estimated useful life of five
(5) years. On July 1, 2021, the automobile was partially damaged in an accidental collision with another
vehicle. The fair market value of the vehicle before the collision equals the carrying value at P200,000.
After the collision, the fair value was determined at P100,000. The taxpayer received insurance proceeds
of P70,000 to cover the loss.
a. How much is the deductible loss?
Answer: P30,000
Carrying value (500,000 x 2/5)
Cost to restore (P200,000-100,000)
Lower amount
Less: Proceeds from insurance
Allowable deduction
P200,000
100,000 – Lower amount
100,000
( 70,000)
30,000
b. How much is the deductible loss if the automobile was totally destroyed?
Answer: P130,000
Carrying amount
P200,000
Less: Proceeds from insurance
( 70,000)
Allowable deduction
130,000
c. Assuming the cost to restore was P250,000 (ignoring fair market values). How much is the
deductible loss?
Answer: P130,000
Carrying value (P500,000 x 2/5)
P200,000 – Lower
Cost to restore
250,000
Lower amount
Less: Proceeds from insurance
Allowable deduction
P200,000
( 70,000)
P130,000
d. Using the same information in letter c, what is the new cost basis of the automobile for
depreciation purposes?
Answer: P250,000
Book value
Add: Excess of cost to restore over BV
Adjusted cost basis
P200,000
50,000
250,000
NOLCO
Case 1
The following are the records of a corporation (an MSME):
Gross sales
Cost of sales
Dividend from resident foreign corporation (foreignsourced)
Interest income on notes
Capital gain
Capital loss
Operating expenses
2019
3,300,000
2,400,000
140,000
28,000
20,000
1,475,000
a. Determine the taxable income (loss) for years 2019 – 2021.
2019
Gross sales
Cost of sales
Operating expenses
Dividend from foreign corp
Interest income
Net operating loss
P3,000,000
( 2,400,000)
( 1,475,000)
140,000
28,000
(407,000)
Gross sales
Cost of sales
Operating expenses
Capital gain
Interest income on notes receivable
Net income 2020 (before NOLCO)
NOLCO – 2019
Taxable income (loss)
P2,640,000
( 1,200,000)
( 1,115,000)
13,000
16,400
354,400
(354,400)
0
Gross sales
Cost of sales
Operating expenses
Dividend from foreign corp
Capital gain
Capital loss
Net income 2021 (before NOLCO)
Balance of 2019 NOLCO
Taxable income – 2021
P1,025,000
(350,000)
(400,000)
32,000
18,500
(18,500)
307,000
(52,600)
254,400
2020
2021
2020
2,640,000
1,200,000
2021
1,025,000
350,000
32,000
16,400
13,000
1,115,000
18,500
22,000
400,00
Case 2
Using the same information from case 1 for years 2019 – 2020 but with data for 2021 – 2023 as follows:
Gross sales
Cost of sales
Dividend from resident foreign corporation (foreignsourced; not tax-exempt)
Interest income on notes
Capital gain
Capital loss
Operating expenses
2021
3,000,000
2,000,000
100,000
50,000
10,000
1,500,000
a. Determine the taxable income (loss) for the years 2021 – 2023
2021
Gross sales
Cost of sales
Operating expenses
Dividend income from foreign corp.
Interest income on notes receivable
Net income (loss) in 2021 before NOLCO
2019 NOLCO (balance)
Taxable income (loss)
P3,000,000
(2,000,000)
(1,500,000)
100,000
50,000
(350,000)
000
(350,000)
Gross sales
Cost of sales
Operating expenses
Interest income on notes receivable
Capital gain
Net income in 2022 before NOLCO
2019 NOLCO
2021 NOLCO
Taxable income (loss)
P2,840,000
( 1,600,000)
( 1,500,000)
35,000
15,000
( 210,000)
Gross sales
Cost of sales
Operating expenses
Dividend income from foreign corp
Capital gain
Capital loss
P3,000,000
(350,000)
(400,000)
20,000
18,500
(18,500)
2022
P(210,000)
2023
2022
2,840,000
1,600,000
2023
3,000,000
350,000
20,000
35,000
15,000
1,500,000
18,500
22,000
400,000
Net income – 2023 (before NOLCO)
NOLCO – 2019
NOLCO – 2021
NOLCO – 2022
Taxable income
2,270,000
(350,000)
(210,000)
1,710,000
Wash sales
Case 1
A taxpayer, whose taxable year is the calendar year, on December 1, 2020, purchased 100 shares of
common stock of XYZ Corporation for P100,000 and on December 15, 2020, purchased 100 additional
shares for P90,000. On January 2, 2021, it sold the 100 shares purchased on December 1, 2020 for
P90,000. Is the loss of P100,000 deductible from the gross income?
Answer: Since the transaction is within 61-day period, the loss of P10,000 should be classified as loss on
wash sale which is a nondeductible loss under the tax code.
Case 2
A taxpayer, who is not a dealer in securities, had the following transactions on ordinary shares of ABC
Corporation, a domestic corporation:
01/12
06/20
06/30
10/15
Purchased 100 shares for P100,000.
Sold the shares purchased on Jan. 12 for P80,000
Purchased 70 shares for P50,000
Sold shares acquired on June 30 for P75,000
a. How much was the loss on wash sale?
Answer: P14,000
SP
Cost
Indicated loss on 100 shares
P 80,000
(100,000)
( 20,000)
Loss on wash sale (70/100 x P20,000)
b. How much was the capital loss?
Answer: P6,000 (30/100 x P20,000)
c. How much was the cost of shares purchased on June 30?
Answer: P64,000
Purchase price
P50,000
Add: Loss on wash sale
14,000
Cost basis
64,000
d. How much was the capital gain on sale of shares on October 15?
Answer: P11,000
P14,000
SP
Cost
Gain on sale
P75,000
( 64,000)
P11,000
Donation
A taxpayer, a domestic corporation, has the following data on income and expenses
Sales
Cost of sales
Operating expenses, excluding contributions
to the government and charitable institutions
P
10,000,000
4,000,000
3,000,000
Contributions to Government for priority project in education
Contributions to Government for public purpose
Contributions to a domestic charitable organization
Contributions to a proprietary educational institution
Contributions to a “Party List” candidate
200,000
100,000
100,000
200,000
300,000
a. Determine the taxpayer’s taxable income.
Sales
Cost of sales
OPEX
Net income before contributions
Contribution deductible in full
Contributions to Govt priority projects
Contributions – subject to limit
Actual – P200,000
Limit – 3M x 5% - 150,000 – lower
Taxable income
P
10,000,000
4,000,000
3,000,000
3,000,000
(200,000)
(150,000)
2,650,000
Case 2
Using the same information in Case 1, but the taxpayer is a resident citizen. What is the taxpayer’s
taxable net income?
Sales
Cost of sales
OPEX
Net income before contributions
Contribution deductible in full
Contributions to Govt priority projects
Contributions – subject to limit
Actual – P200,000 - lower
Limit – 3M x 10% - 300,000
Taxable income
P
10,000,000
4,000,000
3,000,000
3,000,000
(200,000)
(200,000)
2,600,000