lOMoAR cPSD| 2916355
DEDUCTIONS FROM GROSS INCOME
Itemized Deductions:
•
•
•
•
•
•
•
•
•
•
Ordinary & necessary business expenses in general
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion
Charitable Contributions
Research & Development
Contributions to Pension Trust
Ordinar y
Expense s
an d
Necessar y
Trade ,
Busines s
o r
Professiona l
a. Salaries, wages, and other forms of compensation for personal
services actually rendered, including the grossed-up monetary
value of fringe benefit granted by the employer to the employee
b. Travel Expenses
c. Rentals
d. Entertainment, Amusement and Recreation Expense
e. Other Necessary business expenses
Requirements for deductibility in general:
1. Must be Ordinary (normal or usual in relation to the taxpayer’s
business and the surrounding circumstances) & Necessary
(appropriate and helpful in the development of taxpayer’s
business and are intended to minimize losses or to increase
profits);
2. Paid or incurred during the taxable year;
3. Connected with trade, business or practice of profession;
4. Supported by sufficient evidence; and
5. Not against the law, morals, public policy or public order;6. It
must have been subjected to withholding tax, if applicable.
Interes t
Expens e
Requirements for deductibility:
1. There must be indebtedness;
2. There should be an interest expense paid or incurred upon
suchindebtedness;
3. The indebtedness must be that of the taxpayer;
4. The indebtedness must be connected with the taxpayer’s
trade,business, exercise of profession.
lOMoAR cPSD| 2916355
5. The interest expense must have been paid or incurred during
thetaxable year;
6. The interest must have been stipulated in writing;
7. The interest must be legally due.
If the interest expense arises from loans, the deductible amount shall
be:
Interest Expense (from loans)
Less: (Interest Income subject to final tax x 33%)
Deductible Interest
Pxx
(xx
)
Pxx
Exception: Interest on tax delinquency or deficiency, provided, the
tax is related to trade, business or practice of profession shall be
100% deductible.
Optional Treatment of Interest:
Interest related to acquisition of property used in trade, business or
profession, 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 RA8424
2. If the indebtedness is incurred to finance petroleum exploration;
3. Interest on preferred stocks.
Taxes
The term ‘’taxes’’ means taxes proper and no deduction should be
allowed for amounts representing interest, surcharge, or penalties
incident to delinquency.
Gen. Rule: Taxes paid or incurred within the taxable year in
connection with taxpayer’s profession, trade or business, shall
be allowed as deduction. Exception: The following taxes are not
deductible:
1.
2.
3.
4.
5.
Income tax
Income tax paid abroad if claimed as tax credit
Estate tax
Donor’s tax
Special Assessment
Losses Requirements for
deductibility:
lOMoAR cPSD| 2916355
1.
2.
3.
4.
5.
6.
Actually sustained during the taxable year
Connected with the trade, business or profession
Evidenced by a close and completed transaction
Not compensated for by insurance or other form of indemnity
Not claimed as a deduction for the estate tax purposes
Notice of loss must be filed with BIR within 45 days from thedate
of discovery of the casualty or robbery, theft or embezzlement.
A. Ordinary Losses
1. Incurred in trade or business, or practice of profession
Refers to the excess of allowable deductions over the gross
income of the business for any taxable year which had not been
previously offset as deduction from gross income.
Can be carried over as deduction from gross income for the
next 3 consecutive years immediately following the year of
such loss.
Note: The 3-year period shall continue to run notwithstanding
that the corporation paid its taxes under MCIT, or that the
individual availed the 40% OSD.
2. Of property connected, with the trade, business or profession,
if the loss arises from fires, storms, shipwreck or other
casualties, or from robbery, theft, or embezzlement.
a. Total Destruction
The net book value (cost less accumulated depreciation)
immediately preceding the casualty, to be reduced by any
amount of insurance or compensation received.
b. Partial Destruction
The replacement cost to restore the property to its normal
operating condition, but in no case shall the deductible
loss be more than the net book value of the property as a
whole, immediately after casualty.
The excess over the net book value immediately before the
casualty should be capitalized, subject to depreciation
over the remaining useful life of the property.
B. Capital Losses (Losses are deductible only, to the extent
ofcapital gains)
1. Losses from sales or exchange of capital assets
lOMoAR cPSD| 2916355
2. Losses resulting from securities becoming worthless and which
are capital assets
3. Losses from short sales of property
4. Losses due to failure to exercise privilege or option to buy
or sell property
C. Special Kinds of Losses
1. Wagering Losses – Deductible only to the extent of gains or
winnings; deemed to apply only to individuals
2. Losses on wash sales of stocks – Not deductible because these
are considered to be artificial loss
Wash Sales – a sale or other disposition of stock or securities
where substantially identical securities are acquired or
purchased within 61-day period, beginning 30 days before the sale
and ending 30 days after the sale. Gen. Rule: Losses from wash
sales are not deductible.
Exception: When the sale is made by a dealer in stock or
securities with respect to a transaction made in the ordinary
course of the business of such dealer, losses from such sales
is deductible. Elements of Wash Sales
1. The sale or other disposition of stock resulted to a loss;
2. There was an acquisition or contract or option for
acquisitionof stock or securities within 30 days before the
sale or 30
days after the sale; and
3. The stock or securities sold were substantially the same
asthose acquired within the 61-day period.
Ba d
Debt s
Requirements for deductibility:
1. There must be an existing indebtedness due to the taxpayer
whichmust be valid and legally demandable;
2. The same must be connected with the taxpayer’s trade, business
orpractice of profession;
3. The same must not be sustained in a transaction between
relatedtaxpayers;
4. The same must be actually charged off in the books of accounts
ofthe taxpayer as of the end of the taxable year; and
5. The same must be actually ascertained to be worthless
anduncollectible.
Depreciation Requirements for
deductibility:
lOMoAR cPSD| 2916355
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 personwho
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
theproperty;
5. The schedule of the allowance must be attached to the
return.Methods of Computation in General
1. Straight-line method
2. Declining-balance method – rate should not exceed twice the
ratein straight-line method
3. Sum of the years-digit method; and
4. Any other method which may be prescribed by the Secretary
ofFinance upon recommendation of the BIR
Depletio n
o f
oi l
&
ga s
well s
an d
mine s
Exhaustion of natural resources as in mines, oil and gas wells. The
natural resources are called ‘’wasting assets’’. As the physical units
representing such resources are extracted and sold, such assets move
towards exhaustion.
Only mining entities owning economic interest in mineral deposits can
avail depletion. Economic interest means interest in minerals in place
investment therein or secured by operating or contract agreement for
which income is derived, and return of capital expected, from the
extraction of mineral.
Charitabl e
Contribution s
A. Deductible in full
The following charitable contributions shall be fully deductible:
1. Donations to the Government of the Philippines or to any of
its agencies or political subdivisions including fully owned
government
corporations,
exclusively
to
be
used
in
undertaking priority activities in: a. Education
b. Health
c. Youth
d. Sports development
e. Human Settlement
f. Scientific & Culture
g. Economic Development
2. Donation
to
foreign
institutions
or
international
organizations which are fully deductible in pursuance of: a.
Agreements
b. Treaties
lOMoAR cPSD| 2916355
c. Commitments or
d. Special Laws
3. Donations to Accredited Non-Government Organizations. The
term ‘’non-government organization’’ means a non-profit
domestic corporation:
a. Organized and operated exclusively for:
• Scientific
• Research
• Educational
• Charitable Building
• Youth and sports development
• Health
• Social Welfare
• Cultural
• Charitable purposes
• A combination thereof
b. No part of the net income of which inures to the benefit
ofany private individual;
c. Not later than 15th day of the 3rd month after the close of
the taxable year in which contributions are received, makes
utilization, unless an extended period is granted by the
Secretary of Finance, upon recommendation of CIR.
d. The level of administrative expense of which shall, on an
annual basis, in no case to exceed thirty percent (30%) of
the total expenses;
e. The assets of which, in the event of dissolution, would
bedistributed to:
•
•
•
Another domestic corporation organized for similar
purposes or
The state for public purposes
Another organization to be used in such manner as in
the judgement of the court shall best accomplish the
general purpose for which the dissolved organization
was organized.
B. Donations subject to Limit
The following donations, which do not fall under fully deductible
donations, shall be subject to limit:
1. Donations to Government of the Philippines or any agencies
orany political subdivision thereof exclusively for public
purpose;
2. Donations to accredited domestic corporations or
associationsoperated exclusively for:
• Religious
lOMoAR cPSD| 2916355
•
•
•
•
•
•
•
•
Charitable
Scientific
Youth & Sports
Cultural
Educational
Rehabilitation
Social welfare
Non-government
development
of veterans
institutions or
organization
LIMIT:
TAXPAYER
Corporation
Individual
Researc h
RATE
5%
10%
&
BASE
Taxable Income from
trade, business or
practice of
profession before
charitable
contributions
Taxable Income from
trade, business or
practice of
profession before
charitable
contributions
Developmen t
If not chargeable to capital
Claim as outright expense account
If chargeable to capital account At the option of the taxpayer: but
not chargeable to property Option 1 – Claim as outright subject to
depreciation or expense
depletion
Option 2 – Amortize over 60
months.
If chargeable to property subject Capitalize
to depreciation or depletion
Limitations on Deduction:
The following Research & Development expenditures are not deductible:
1. Any expenditure for the acquisition or improvement of land, orfor
the improvement of property to be used in connection with
research and development of a character which is subject to
depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining
the existence, location, extent, or quality of any deposit of ore
or other mineral, including oil or gas.
Pension Trusts Amount
Deductible:
lOMoAR cPSD| 2916355
Actual contribution to the extent of pension liability
Amortization of Past Service Cost
Total
Pxx
xx
Pxx
Pension Liability Pension liability is
equivalent to normal cost.
Past Service Cost
Past service cost is the excess of actual contributions over the
Normal Cost. It shall be amortized over 10 years.
Optional
Standard Deduction (OSD)
OSD can be claimed in lieu of itemized deductions.
The following may be allowed to claim OSD:
1. Individuals – 40% of Gross Sales/ Gross Receipts
a. Resident Citizen
b. Non-Resident Citizen
c. Resident Alien
d. Taxable Estates & Trusts
2. Corporations – 40% of Gross Income
a. Domestic Corporation
b. Resident Foreign Corporation
Non-Deductible Expenses
a. Personal, living or family expenses
b. Amount paid out for new building or for permanent improvements,or
betterment made to increase the value of any property or estate.
Except: that intangible drilling and development cost incurred in
petroleum operations are deductible.
c. Amount expended in restoring property or in making good
theexhaustion thereof for which an allowance has been made;
d. Premiums paid on any life insurance policy covering the life of
any officer or employee, or of any person financially interested
in any trade or business carried on by the taxpayer, individual
or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy.
e. Interest, Bad debts & Losses from sales or exchanges of
propertybetween related taxpayers.
Sample Questions:
1. Which of the following is a deductible expense for income
taxpurposes?
lOMoAR cPSD| 2916355
a.
b.
c.
d.
Salaries of Domestic Servants
Ordinary repair of the personal car
Provision for doubtful accounts
None of the above
2. This is not a requisite for business expense to be deductible
a. It must be reasonable
b. It must be paid during the taxable year
c. The withholding tax other required have been deducted
andremitted to the BIR
d. It must be ordinary & necessary
3.
In computing allowable deductions for purposes of
incometaxation:
1st Statement – Interest expense in connection with the taxpayer’s
business shall be reduced by an amount equal to 33% of interest
income subjected to final tax.
2nd Statement – Interest incurred to acquire property used in
trade shall only be allowed to be treated as a capital
expenditure.
a. True, False c. False, True
b. True, True
d. False, False
4.
a.
b.
c.
d.
5.
a.
b.
c.
d.
To be allowed as a valid deduction, charitable &
othercontribution must not exceed:
5% of taxable income after charitable contribution, income
ofindividuals.
10% of taxable income after charitable contribution, in caseof
individuals.
5% of taxable income before charitable contribution, in caseof
individuals.
10% of taxable income before charitable contribution, in case
of individuals.
Losses from wash sales of stock or securities shall not
bedeductible except:
The taxpayer is a dealer of securities or stock and made in
the course of business of such dealer.
The shares of stock sold and then reacquired or repurchasedare
identical stock or securities.
The shares of stock sold & then reacquired within a period
beginning 30 days before the date of such sale or disposition.
The shares of stock sold & then reacquired within a
periodending 30 days after such sale or disposition.
lOMoAR cPSD| 2916355
6.
1st Statement – The allowable deduction for pension payments
to employees will only apply to those pension plan that is
funded.
2nd Statement – The pension trust deduction is composed of the
past service cost and the present service cost.
a. True, False
b. True, True
7.
c. False, True
d. False, False
Dian Inc., has been in business for the past 10 years. For
the year, it decided to establish a pension fund for its
employees. The pertinent data of the fund are as follows:
Past Service Cost (lump sum payment)
Service Cost
100,000
P1,000,000 Present
How much allowable deduction for pension cost Dian Inc. could
claim?
a. P1,000,000
c. P200,000
b. P1,100,000
d. P100,000
8.
Assuming the same facts in no. 7, the allowable deduction
of DianInc. for pension after 10 years?
a. P1,000,000
c. P200,000
b. P1,100,000
d. P100,000
9.
a.
b.
c.
d.
Which of the following maybe deducted from gross income?
Special Assessment
Transfer Tax
Documentary Stamp Tax (DST)
Income Tax
10.
Z bought from FYI Corp. 1,000 shares of stock, 90 days
thereafter the corporation was adjudged bankrupt and its
stock was worthless. The lose of Z for income tax purposes
is a. Wagering Loss
b. Short-Term Capital Loss
c. Long-Term Capital Loss
d. Non-deductible loss for income tax purposes
11.
A domestic corporation made a borrowing from CDE Bank
thereby incurring a business connected interest expense of
P60,000 for taxable year 2020. During the same year, the
corporation earned an interest income subject to final tax
in the amount of P100,000. The deductible interest is
a. P27,000 c. P60,000
b. P33,000 d. P0
lOMoAR cPSD| 2916355
12.
Which of the following items is correct?
a. Interest incurred on loan from a brother is deductible
b. Interest expense incurred on unpaid value-added tax is
reducedby 42% of interest income subject to final tax.
c. Interest payable which had already prescribed is deductible
ifpaid voluntarily by the taxpayer.
d. Interest incurred to acquire a business asset may be added to
the cost of the property.
13.
Interest on business is deductible for income tax purposes.
However, one of the following is not deductible?
a. Interest on delinquency tax.
b. Interest on indebtedness incurred to purchase
deliveryequipment.
c. Interest on indebtedness secured to purchase a tax-exempt
security.
d. None of the above
14.
Which interest is deductible?
a. Interest incurred on unpaid value-added tax.
b. Interest on loan by an individual from a corporation if 60%
ofthe outstanding stock of the latter is owned indirectly by
such individual.
c. Interest on loan between members of a family.
d. Interest on loan by a fiduciary of a trust and beneficiary
ofsuch trust.
15.
A deductible interest expenses.
a. Interest on loan between members of a family
b. Interest on loan that was used to finance the construction
ofthe taxpayer’s residential house.
c. Interest on tax delinquency
d. Interest on indebtedness to finance petroleum operations.
16.
The interest expense of a domestic corporation on a bank
loan in connection with the purchase of a production
equipment: a. Is not deductible from gross income of the
borrower corporation.
b. Is deductible from the gross income of the borrower
corporation during the year or it may be capitalized as part
of cost of the equipment.
c. Is deductible only for a period of five years from date
ofpurchase.
d. Is deductible only if the taxpayer uses the cash method
ofaccounting.
17.
The following interest payments were made by an individual
income taxpayer in 2020:
lOMoAR cPSD| 2916355
Interest on loan from BDO used to finance a business
Interest on loan from Pag-Ibig to build residence
P50,00
0
100,00
0
25,000
Interest on loan obtained from brother and used in
business
Interest on loan from BPI used to buy computer
30,000 equipment
in the office.
Interest for late payment of value-added tax
2,500
Interest on purchase price of residential lot bought in
2,000
installments
Interest payment on debt which has prescribed
12,000
The deductible amount of interest is
a. P221,500c. P175,000
b. P80,000 d. P82,500
18.
On January 2, 2015, Marspautang contracted a 1-year
P100,000 loan from Metrobank for the purchase of computers.
The equipments which had a depreciable life of 8 years were
acquired on April 1, 2015. The interest expense for 1 year
amounted to P15,000.
In the same year, his bank deposit with PNB earned an Interest
Income of P2,000. During the year, he incurred an interest
expense on unpaid business tax of P600. The deductible
interest expense of Marspautang in 2015 is
a. P14,240 c. P14,940
b. P14,760 d. P13,600
19.
In number 18 above, the deduction of Marspautang in 2015
assuming that the interest on loan was capitalized.
a. P14,375 c. P10,781.25
b. P15,000 d. None
20.
Lester bought an equipment under a 2-year installment basis
to be used in his office in the practice of his profession.
Lester will pay P50,000 monthly for a period of 12 months.
For income tax purposes, the P50,000 monthly payment shall
be: a. Treated as business rental, hence deductible
b. Treated as capital expenditure, hence not deductible
c. Treated as depreciation expense, hence deductible
d. Treated as ordinary business expense
lOMoAR cPSD| 2916355
21.
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 to
deduct from the gross income the full amount of the deduction
allowed, or a lesser amount or not to claim any deduction at all.
a. Only statement 1 is correct.
b. Only statement 2 is correct.
c. Both statements are correct.
d. Both statements are incorrect.
22.
a.
b.
c.
d.
In cases of deductions and exemptions on income tax
returns, doubts shall be resolved
Strictly against the taxpayer
Strictly against the government
Liberally in favor of the taxpayer
Liberally in favor of the employer
23.
One of the requirements in order for expenses to be claimed
as deduction for income tax purposes is that, it should be
subject to withholding tax if applicable. What is the
withholding tax rate applicable to rental payments?
a. 1% c. 2%
b. 5% d. 10%
24.
a.
b.
c.
d.
Which of the following is not deductible from gross income?
Salaries and wages of employees
Entertainment, amusement and recreation expenses
Rental expenses
Bribes, kickbacks and other similar payments
25.
Which of the following can be deducted from gross income in
the year paid or incurred?
Repairs that materially add to the value of the property
Repair that appreciably prolong the life of the property
Repair that keep the property in its ordinarily efficient
operating condition
All of the choices
a.
b.
c.
d.
26.
a.
b.
c.
d.
27.
Which of the following is allowable expenses of an
employer?
Tax withheld by a corporation from its employees’ salary.
Kickback payment to a government official.
Distribution of profits to partners.
None of the above.
1ST Statement: Cost of technical books used by a CPA in the
practice of his profession is allowable business expense.
lOMoAR cPSD| 2916355
2ND Statement: Tuition fees, board and lodging incurred by a
medical doctor while attending a continuing professional
education seminar is allowable business expense.
a.
b.
c.
d.
Only
Only
Both
Both
statement 1 is
statement 2 is
statements are
statements are
correct.
correct.
correct.
incorrect.
28.
Which of the following business expenses of a professional
practitioner is not allowed to be deducted from the gross
income? a. Professional expenses incurred 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
inconnection with own business.
d. None of the above
29.
A lessee 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
d. Non-deductible expense
30.
a.
b.
c.
d.
31.
The cost of leasehold improvements shall be deductible by
the lessee by
Spreading the cost of the improvements over the life of the
improvements or remaining term of the lease, whichever is
shorter.
Spreading the cost of the improvements over the life of
theimprovements or remaining term of the lease, whichever is
longer.
Spreading the cost of the improvements over the term of
thelease or may be expensed outright in full, at the option of
the lessee.
Any of the above
A leasehold is acquired for business purposes for
P5,000,000. The lease contract is for 10 years. How much is
the deductible amount from gross income?
a. P500,000c. P5,000,000
b. P1,000,000
d. P0
lOMoAR cPSD| 2916355
32.
Drake leased his land to Mavin for 2 years beginning July
1, 2018. Mavin would pay monthly rental of P100,000. He
paid rent up to October 2018 and then defaulted for the
rest of the year.
Under cash method, how much was the deductible expense of Mavin
for 2018?
a. P200,000c. P600,000
b. P400,000d. None of the choices
33.
Mapaglinlang Corp. was assessed by the BIR due to its
underpayment of Percentage Taxes. The Assessment Notice
disclosed the following:
Basic Tax
Surcharge
Penalties
Total
P1,000,000
250,000 Interest 200,000
25,000
P1,475,000
It also generated interest income from bank deposits amounting to
P100,000. How much is the deductible interest?
a. P200,000c. P167,000
b. P162,000d. NIL
34.
Based on the above problem, how much is the deductible
taxes?
a. P1,275,000
c. P1,250,000
b. P1,000,000
d. NIL
35.
a.
b.
c.
d.
36.
a.
b.
c.
d.
e.
37.
Assuming the tax underpaid is donor’s tax, how much is the
deductible interest and tax?
P200,000 and P1,000,000, respectively
P200,000 and Zero, respectively
Zero and P1,000,000, respectively
Zero for both items
Which of the following is the correct allowable
entertainment expenses?
Not more than ½% of revenue from services.
Not more than 1 ½% of net sales of goods.
Not more than 1 ½% of revenue from services.
Not more than 1 ½% of net sales of goods.
None of the above
Niah Corporation is engaged in the sale of goods with net
sales of P2,000,000. The actual entertainment, amusement
and recreation expenses for the taxable quarter totaled
P20,000. For income tax purposes, how much is the
lOMoAR cPSD| 2916355
deductible entertainment, amusement and recreation
expenses?
a. P1,100 c. P20,000
b. P10,000 d. P0
38.
RRO Corporation is engaged in the sale of goods and
services with net sales/net revenue of P3,000,000 and
P2,000,000 respectively. The actual entertainment,
amusement and recreational (EAR) expense for the taxable
year totaled P30,000.
How much is the deductible EAR expense?
a. P30,000 c. P25,000
b. P27,000 d. NIL
39.
Statement 1: A net operating loss is the excess of
allowable deductions over the gross income from business
for a taxable year.
Statement 2: A net operating loss which had not previously been
deducted from gross income shall be carried over as a deduction
only in the next year immediately following the year of such
loss.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
40.
Which of the following items of expenses require that
notice be filed with the BIR to be allowed as deduction
from gross income?
a. Taxes
c. Losses
b. Interest
d. Salaries
41.
a.
b.
c.
d.
One is not a deductible tax
Local Business Tax
Value-added Tax
Privilege Tax
Occupation Tax
42.
One is a deductible tax
a. Estate Tax
c. Donor’s Tax
b. Franchise Tax
d. Special Assessment
43.
The following taxes were paid by Drake in 2020
Real property tax on condominium unit
P8,500
Real property tax on apartment houses – business
28,000
Value-added tax on importation of car for personal use 2,500
Value-added tax on generator set imported for business 240,00 use
0
lOMoAR cPSD| 2916355
Value-added tax paid for a restaurant business
55,000
Income tax paid for being engaged in business
70,000
Special Assessment on real property used in business
Travel tax paid in going abroad on a business trip
Professional tax as CPA practitioner 300
10,200
1,620
The deductible taxes expense from the taxpayer’s gross income in
2020 is:
a. P28,500
c. P325,500
b. P325,500
d. P29,920
44.
One is not a deductible loss
a. Loss due to removal or demolition of old building, the
scrapping of old machinery or equipment incident to renewal or
replacement.
b. Loss due to removal of building or real estate purchased when
the purchase was for the acquisition of the land and without
intending to use the building.
c. Loss in value of securities of such extent that the
securitieshave become worthless and are written off.
d. Loss in usefulness in business of an asset so that thebusiness
is discontinued, or the asset is discarded.
45.
Max & Jess are business competitors. Max purchased a land
beside the business premises of Jess with the intention of
erecting a new 4-storey building. The land, which was
valued at P1,000,000 had an almost dilapidated building
thereon assessed at P150,000. He spent P40,000 for its
demolition and sold its scrap for P25,000. The construction
of the new building cost him P10,000,000.
When Jess knew the intention
his 20-year old building and
had a cost to him of P80,000
and the construction cost of
P15,000,000.
of Max, he decided also to demolish
to put up a new one. The demolition
but raised P35,000 from the scrap,
the new 6-storey building was
As between Max & Jess, who is entitled to claim loss as deduction
from gross income?
a. Max only.
b. Jess only.
46.
c. Both of them.
d. Neither of them.
Bravo Company purchased a piece of land with a building
thereon for P1,500,000 allocated under a contract of sale
at
P1,000,0000 for the land and P500,000 for the building. It had no
use for the building at the time of purchase and it was its
intention to remove the building in order to build its factory.
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It incurred demolition cost of P50,000. It sold its scrap for
P15,000. The construction of the new building cost the company
P2,500,000.
The total value of the land is
a. P1,000,000
b. P2,615,000
c. P1,615,000
d. P1,535,000
47.
Jimms Company had an old warehouse which had a cost of
P1,200,000. The company demolished the warehouse when it
had a book value of P200,000 in order to construct a new
and bigger warehouse. The demolition cost amounted to
P25,000 while the scrap were sold for P10,000. In its
accounting entry, Jimms Company should debit a loss on
retirement of old building of
a. None
c. P185,000
b. P200,000d. P215,000
48.
A Building was partially destroyed by fire in 2014. It had
a book value of P4,000,000. The insurance company was
willing to pay P3,000,000 which was refused by the owner of
the building. Finally, the claim was settled in 2015 for
P3,500,000. The
P3,500,000 proceeds is?
a. Exempt from income tax c. Subject to final tax
b. Taxable in full
d. Partly Taxable, Partly Exempt
49.
a.
b.
c.
d.
Refer to item no. 48 data. The taxpayer can claim a
deductible loss of
P1,000,000 in 2014
P1,000,000 in 2015
P500,000 in 2014
P500,000 in 2015
50.
In 2014, Poy’s residence was totally destroyed by fire. The
property had an adjusted basis and fair market value of
P130,000
before the fire. During 2014, Poy received insurance
reimbursement of P120,000 for the destruction of his home. Poy’s
2014 adjusted gross income was P70,000. Poy had no casualty gains
during the year. What amount of the fire loss was Poy entitled to
claim as an itemized deduction on his 2015 tax return?
a. P0 c. P8,600
b. P8,500 d. P10,000
51.
In 2014, Melissa constructed an office building worth
P2,000,000. In 2015 when it had an accumulated depreciation of
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P72,000 the building was totally destroyed by fire. Assuming that
the amount recoverable from Moon Insurance Company is P500,000,
the deductible loss of Melissa is –
a. P1,928,000
c. None
b. P2,000,000
d. P1,428,000
52.
Mae Company acquired machinery at a purchase price of
P500,000. Freight & Installation cost amounted to P20,000.
At a date in a taxable year when the accumulated
depreciation was P300,000, Mae Company retired the
machinery from the business because the increase in the
cost of production and the change of manufacture of the
product to which the machinery is exclusively devoted made
its continued profitable use impossible. The scrap value of
the machinery was P10,000. The loss on the retirement of
the machinery is?
a. P220,000c. P200,000
b. P280,000d. P210,000
53.
Dark had the following records of income, expenses and
losses during the year:
Wagering gains (wagering losses, P50,000)
P30,000
Temporary decline in value of stocks of TY Corp. 12,500 Sale of
typewriters which were rendered obsolete
by computers (book value, P115,000)
80,000
How much loss is deductible by Dark?
a. P97,500 c. P55,000
b. P35,000 d. P110,000
54.
a.
b.
c.
d.
55.
All of the following, except one, are requirements in the
carry over of net operating loss
There must be no substantial change in the ownership of
thebusiness.
Carry-over is not allowed if the corporation is subject toMCIT
during the taxable year.
Even if the corporation paid tax based on MCIT, the running
ofthe prescriptive period is not interrupted.
The carry-over is good only for 1 year.
1ST Statement – The term ‘’net operating loss’’ shall mean
the excess of allowable deduction over gross income of the
business in a taxable year.
2nd Statement – Non-resident foreign corporation are not entitled
to deduct NOLCO from their gross income.
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3rd Statement – The NOLCO which had not been offset as deduction
from gross income shall be carried over as a deduction from gross
income for the next taxable year only immediately following the
year of such loss.
Which of the above statements is/are false?
a. Statement 1 only
c. Statement 3 only
b. Statements 1 & 2
d. None
56.
The following are the records of Janet Company:
2013
2014
P3,300,000 P2,340,000
2,400,000
1,070,000
140,000
-
2015
P825,000
380,000
32,000
Gross Sales
Cost of Sales
Dividend – Resident foreign
Corp.
Interest Income on notes
28,000
16,400
receivable
Capital gain
13,000
18,500
Capital loss 20,000 - 22,000 Deductions 1,475,000 1,025,000
459,000
The taxable income / operating loss in 2013 is?
a. (P575,000)
c. (P427,000)
b. (P407,000)
d. P1,068,000
57.
Based on no. 56, the taxable income / operating loss in
2014 is
a. P0 c. (P132,600)
b. P274,400d. P254,400
58.
Based on no. 56, the net operating loss carry over in 2015
is
a. P18,000 c. P170,600
b. None
d. P18,000
59.
The following are the records of Hulk, single, resident
citizen:
Gross Sales
2019
2020
P2,560,00 P1,920,00
0
0 Cost of
Sales 1,360,000 895,000
Dividend from resident foreign corp.
41,200 Interest
income on notes receivable 12,500
Interest from deposit
with Chinabank
2,350 1,680
Capital gain
11,450
13,650
Capital loss
17,800
Deductions
1,160,000
458,350
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Additional Information:
•
•
In 2018, the taxpayer had an operating loss of P300,000
In 2020, the taxpayer availed of optional standard deduction.
The taxable income / operating loss in 2019 is
a. P261,400c. P274,400
b. Zero
d. P1,286,400
60.
Based on preceding no., the taxable income/operating loss
in
2020 of Hulk is
a. P1,193,200
c. P287,000
b. P300,000d. P268,200
61.
Which of the following assets is subject to depreciation
for income tax purposes?
a. Inventories or stock in trade c. Equipment used in business
b. Goodwilld. Residential house
62.
A store building was constructed on January 2, 2010 with
cost of P570,000. Its estimated useful life is 16 years
with scrap value of P70,000 after 16 years. In 2015,
replacement of some worn-outs parts of the building costing
of P50,000 was spent. After the repairs, the building was
appraised with FMV of P770,000. The allowable deduction for
depreciation for the year
2015 is
a. P35,795.45
c. P49,431.82
b. P43,750 d. P31,250
63.
a.
b.
c.
d.
Which of the following is deductible from gross income even
if the payment is not connected with business?
Contribution of the employer to the pension trust of
theemployee.
Charitable contributions
Income tax paid in foreign country
Traveling expenses
64.
The amount of charitable contribution of property other
than money shall be based on
a. Fair Market Value c. Lower of cost or market
b. Book Value
d. Acquisition cost
65.
What would be the allowable deduction for P10,000
contribution made by a resident citizen to a charitable
contribution, from his P60,000 net income before
contribution?
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a. P6,000
b. P7,000
c. P3,000
d. P10,000
66.
Norte Company had the following data in 2015:
Gross Income
P500,000 Deductions (Except contributions) 400,000
Donation to Cultural Center of the Philippines
3,000
Donation to the Rehabilitation of Veterans, Inc.
2,000
Donation to Roman Catholic Church
1,500
Donation to victims of Payatas Tragedy
5,000
The taxable income of the corporation is?
a. P92,000 c. P88,500
b. P93,500 d. P100,000
67.
Santy made a contribution of P15,000 to St. Jude Parish
Church. He had a gross income from business of P500,000 and
deductions (excluding contribution) of P400,000. From this
contribution, how much will be allowed as deduction from
his gross income?
a. P15,000 c. P10,000
b. None
d. P100,000
68.
The taxpayer had the following data in 2018:
Gross Receipts
Cost of Services
Deductions
Capital gain
Capital loss
P1,450,000
565,300
325,800
25,500
6,000
If the taxpayer is single, with one dependent child, the taxable
income if he availed Optional Standard Deduction (OSD) is
a. P889,500c. P503,400
b. P800,000d. P475,320
69.
Based on no. 68, the taxable income if the taxpayer is a
corporation is
a. P542,520c. P889,500
b. P500,000d. P800,000
70.
This is a deductible interest expense
a. Interest on deposits paid by authorized banks of the BSP to
depositors, if it is shown that the tax on such interest was
withheld and paid.
b. Interest paid on indebtedness between related taxpayers.
c. Interest on preferred stock
d. Interest paid when there is no stipulation for the
paymentthereof.
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71.
An individual taxpayer has the following data for the year
2011:
Interest paid, business loan
0 Interest paid, loan to finance personal car
Interest expense on delinquency business-related taxes
Interest income, BDO West Ave. Branch (net)
P100,00
500,000
50,000
24,000
For income tax purposes, the deductible interest expense shall be
a. P102,000c. P140,100
b. P138,600d. P150,000
72.
a.
b.
c.
d.
Which of the following is non-deductible?
Percentage tax on common carriers by land
Franchise tax
Overseas communications tax
Stock Transaction tax
73.
Which of the following items of expenses require that
notice be filed with the BIR to be allowed as deduction
from gross income?
a. Taxes
c. Losses
b. Interestd. Salaries
74.
Which of the following losses is not deductible?
a. Abandonment losses in petroleum operation.
b. Excess of expenses over gross income from sale of
ordinaryassets.
c. Losses on wash sales of stocks.
d. Losses on sale of investments.
75.
a.
b.
c.
d.
Which of the following is entitled to claim NOLCO?
Employee with respect to his compensation income.
Foreign international carrier
Offshore banking unit
Self-employed individual
76.
Which of the following taxpayers may be allowed to claim
losses from wash sales as deduction? a. Dealer in Real
Properties
b. Dealer in Personal Properties
c. Dealer in Securities
d. Investor in shares of stocks
77.
On December 1, 2017, Ms. Melissa Mae purchased 100 shares
of common stock of Lily Company for P10,000. On December
15, 2017,
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she purchased 100 additional shares of 9,000. On January 2, 2018,
she sold the 100 shares purchased on December 15, 2017 for
P9,000.
How much is the deductible loss?
a. P1,000
b. P750
78.
a.
b.
c.
d.
79.
a.
b.
c.
d.
80.
c. P500
d. Zero
One of the following losses is not deductible from gross
income
Loss incurred in trade, profession, or business
Loss due to fires, storms, shipwreck, or other
casualties,robbery, theft, or embezzlement of property
connected with trade, business, or profession.
Net Operating loss carry-over
Shrinkage in the value of stock.
When shall bad debts be allowed as deductions from gross
income?
Upon setting up of allowance for doubtful accounts.
Upon written-off in the books.
At the option of the taxpayer, upon setting up of allowance
orupon written-off.
At the option of the government, upon setting-up of
allowanceor upon written-off.
1st Statement – Capital losses can be deducted only from
capital gains.
2nd Statement – Ordinary losses can be deducted from any gross
income.
a. Only statement 1 is correct
b. Only Statement 2 is correct
c. Both Statements are correct
d. Both Statement are incorrect
81.
a.
b.
c.
d.
82.
BSE College, a proprietary educational institution, spent
P10,000,0000 for the construction of a new school building.
The amount spent for the construction –
Must be claimed as expense in the year of completion.
Capitalized and claim annual depreciation over the life of
thebuilding.
Capitalized or expensed outright at the option of the school.
Capitalized or expensed outright at the option of the BIR.
Non-resident aliens engage in trade or business as well as
resident foreign corporations are also allowed to claim
depreciation in arriving at taxable income. Which of the
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following is an absolute requirement before depreciation can be
claimed?
a. The property, regardless of location, directly helped in
thegeneration of income in the Philippines.
b. The property, regardless of location, helped, directly or
indirectly, in the generation of income in the Philippines.
c. The property is used in trade or business regardless
oflocation
d. The property must be located in the Philippines
83.
In 2017, Delta Company paid total premiums of P10,000 for
the life insurance policy of the vice president, where the
beneficiary is the corporation. At the end of the year,
Delta received dividend of P100,000 because of the policy.
In 2017, the corporation should indicate a claim for a
deduction for life insurance premium of
a. P100,000c. P1,000
b. P10,000 d. nil
84.
a.
b.
c.
d.
85.
a.
b.
c.
d.
86.
Which of the following charitable contributions is not
fully deductible?
Donation in the Government of the Philippines to
financepriority projects identified by NEDA.
Donation to the Municipality of Milagros in the Province of
Masbate for the repair of Municipal Hall.
Donation to International Organizations.
Donation to Accredited Non-Government Organizations.
One of the following charitable and other contributions is
not deductible in full:
Donations to Government of the Philippines or to an of its
agencies or political subdivisions, including fully owned
government corporations, exclusively to finance, provide for,
or to be used in undertaking priority activities.
Donations to certain foreign institutions or
internationalorganizations (i.e. International Red Cross,
World Health
Organization).
Donations to accredited non-government organizations or nonprofit domestic corporations that satisfied the four
requirements set by law.
Donations made for the use of the Government of the
Philippines or any of its agencies or political subdivision
exclusively for public purpose.
The following contributions and donations were made by a
taxpayer.
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To Bukas Palad, non-profit domestic corporationTo Christ the King Catholic
Church
P250,000300,000
To the fire victims of Recto 200,000 To the Gospel church of
Taiwan 350,000 How much is the total deductible actual charitable
and other contributions subject to limit?
a. P250,000c. P750,000
b. P550,000d. P1,100,000
87.
An employer maintains pension trust for its employees. The
following contributions are made:
Current
Service Cost
Past Service
Cost
2016
P1,000,000
2017
P1,000,000
2018
P1,000,000
800,000
600,000
-
How much is the deductible pensions contributions?
2016
2017
2018
a.
P1,800,000
P1,600,000
P1,000,000
b.
P1,080,000
P1,060,000
P1,000,000
c.
P1,080,000
P1,140,000
P1,060,000
d.
P1,080,000
P1,140,000
P1,140,000
88.
DLC Corp. contributed P4,000,000 to its pension plan during
the year 2017. The normal cost appearing on the Actuarial
Valuation Report is only P3,000,000. How much can DLC Corp.
claim as deduction?
a. P4,000,000
c. P3,100,000
b. P3,000,000
d. nil
89.
Continuing the information above, assuming in 2018 DLC
Corp. contributed only P2,000,000 while the Normal Cost is
P3,000,000, how much is the deductible amount?
a. P2,100,000
c. P2,000,000
b. P3,000,000
d. P3,100,000
90.
Research and development expenses treated as a deferred
expense shall be allowed as deduction ratably distributed
over a
period of
a. Not more than 60 months beginning with the month in which
thetaxpayer first realizes benefits from such expenditure.
b. Not less than 60 months beginning with the month in which the
taxpayer first realizes benefits from such expenditure.
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c. Not less than 30 months beginning with the month in which
thetaxpayer first realizes benefits from such expenditure.
d. Not less than 6 months beginning with the month in which
thetaxpayer first realizes benefits from such expenditure.
91.
Which statement is wrong? Research and development costs:
a. When related to the acquisition and/or improvement of land
andbuilding, must be capitalized.
b. If not related to land and building, may be treated as an
outright deduction.
c. If not related to land and building, may be treated as
adeferred expense which may be amortized.
d. Cannot be deducted in gross income.
92.
a.
b.
c.
d.
Which of the following income is to be reduced by itemized
deductions?
Compensation Income
Business Income
Passive Income
Capital gain
93.
The following may be allowed to claim OSD in lieu of the
itemized deductions, except a. Taxable estates & trusts
b. Non-Resident Aliens
c. Resident Foreign Corporations
d. Domestic Corporations
94.
a.
b.
c.
d.
95.
One of the following statements is correct. A choice by an
individual of the Optional Standard Deduction means that:
His income tax return need not be accompanied by financial
statements.
He need not keep books of accounts
He need not have records of gross income
His choice can still be changed by filing an amended return
A resident citizen has the following data on income and
expenses in 2018:
Gross Compensation Income
P200,000
Gross Sales
900,000 Cost of Sales 500,000
Business Expenses
200,000 He avails of the
OSD, how much is the taxable net income?
a. P690,000c. P420,000
b. P740,000d. P290,000