1

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

DEDUCTIONS AND EXEMPTIONS Dela Cruz / De Vera / Llamado

1. Which of the following statements is true?

a. Payments which constitute bribes, kickbacks and others of similar nature which are necessary to
realize profits are allowed as deductions from gross income.
b. The taxes which are deductible from gross income include the taxes, interest and penalties incident
to tax delinquency.
c. Deductions are amounts allowed by the Tax Code to be deducted from gross income to arrive at the
income tax liability of a taxpayer.
d. Losses from wagering transactions shall be allowed only up the extent of the gains from such
transactions.

2. This is not deductible from gross income

a. Transportation expenses from the main office to the branch.
b. Transportation expenses from home to the office and from the office back to home.
c. Travel expenses on business trips.
d. Travel expenses while away from home in the pursuit of trade, business or profession.

3. A revenue expenditure is
a. Usually incurred in the acquisition, betterment or permanent improvement of the asset.
b. Capitalized and the cost is recovered through annual depreciation.
c. Ordinarily to benefit more than one accounting period.
d. To benefit one accounting period and is a deduction from gross income in the year paid or
incurred.

4. No deductions shall be allowed where the transaction is between “related taxpayers” under Sec. 36(B)
of the Tax Code for
A) Losses from sales or exchanges of property
B) Interest expense
C) Bad debts

a. A and B b. B and C c. A and C d. A, B and C

5. The phrase “related taxpayers” under Sec. 36(B) of the Tax Code will apply to the following, except:
a. Between members of a family
b. Between the grantor and a fiduciary of any trust
c. Between a fiduciary of a trust and a beneficiary of such trust
d. Between an individual and a corporation more than 50% in value of the outstanding stock of
which is owned, directly or indirectly by or for such individual, in case of distributions in
liquidation

6. The optional standard deduction for corporations is

a. 10% of the gross income
b. 10% of the gross sales/receipts
c. 40% of the gross income
d. 40% of the gross sales/receipts

7. The optional standard deduction for individuals is

a. 10% of the gross income
b. 10% of the gross sales receipts
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c. 40% of the gross income

d. 40% of the gross sales/receipts

8. Interest expense incurred to acquire property used in trade or business or exercise of a profession is
a. Not allowed as a deduction against gross income
b. Required to be treated as a capital expenditure to form part of the cost of the asset
c. Allowed as a deduction, or treated as a capital expenditure at the option of the taxpayer
d. Allowed as a deduction or treated as a capital expenditure at the option of the government

9. A Corp. had net sales of P1M. The actual entertainment, amusement and recreation expense amounted
to P20,000. The deductible “EAR” expense is
a. P20,000 b. P6,000 c. P10,000 d. P5,000

10. C Corp. had net revenues of P1M. The actual entertainment, amusement and recreation expense
amounted to P20,000. The deductible “EAR” expense is
a. P20,000 b. P6,000 c. P5,000 d. P10,000

11. C Corp. is engaged in the sale of goods and services with net sales and net revenue of P2M and P1M,
respectively. The actual entertainment, amusement and recreation expense amounted to P18,000. The
deductible “EAR” expense is
a. P18,000 b. P16,000 c. P12,000 d. P6,000

12. If an individual is on the cash basis of accounting, will interest paid in advance be allowed as a
deduction?
First answer – No, it is a deduction in the year that the indebtedness is paid and not in the year that the
interest is paid.
Second answer – Yes, if the indebtedness is payable in periodic amortizations, the amount of the
interest which corresponds to the amount of the principal amortized or paid during
the year shall be allowed as a deduction in such taxable year.

a. True, true b. True, false c. False, false d. False, true

13. One of the following losses cannot be deducted from gross income:
a. To construct a bigger warehouse, a corporation demolished an old warehouse which had a
construction cost of P2 M and a book value of P300,000.
b. Expenses of demolition of a building existing on land purchased, where the corporation 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.
c. A corporation retired its machinery from the business because of the increase in the cost of
production and the failure of the machinery to meet the desired number of units of production.
d. A Corp., a dealer in securities, ascertained that its B Corp. stocks are worthless because of the total
insolvency of B Corp.

14. A domestic corporation organized in 2006 provided the following information:

2017 2018 2019 2020 2021

Net Sales 3,950,000 4,910,000 5,965,000 6,980,000 8,900,000
Cost of sales (2,000,000) (3,500,000) (4,200,000) (5,000,000) (5,200,000)
Business expenses (1,900,000) (1,550,000) (1,820,000) (2,100,000) (2,300,000)
Other taxable income 50,000 45,000 35,000 20,000 100,000
Total assets 50,000,000 55,000,000 60,000,000 65,000,000 70,000,000

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The income tax still due for 2017 is

a. P35,000
b. P30,000
c. P40,000
d. P32,000

15. The income tax still due for 2021 is

a. P1,285,000
b. P 257,000
c. P 38,000
d. P 161,900

Solution for Number 14 and 15:

2017 2018 2019 2020 2021
Net sales 3,950,000 4,910,000 5,965,000 6,980,000 8,900,000
Less: COGS (2,000,000) (3,500,000) (4,200,000) (5,000,000) (5,200,000)
Gross income from operations 1,950,000 1,410,000 1,765,000 1,980,000 3,700,000
Add: Other taxable income 50,000 45,000 35,000 20,000 100,000
Total gross income 2,000,000 1,455,000 1,800,000 2,000,000 3,800,000
Less: Itemized deductions (1,900,000) (1,550,000) (1,820,000) (2,100,000) (2,515,000)
Net taxable income 100,000 (95,000) (20,000) (100,000) 1,285,000
RCIT rate 30% 30% 30% 25% 20%
RCIT 30,000 0 0 0 257,000

MCIT rate 2% 2% 2% 1.5% 1%

MCIT 40,000 29,100 36,000 30,000 38,000

Tax due (Higher of RCIT or MCIT) 40,000 29,100 36,000 30,000 257,000
Less: Tax credits - - - - (95,100)
Tax still due 40,000 29,100 36,000 30,000 161,900

EMCIT:
(2017-2020) 10,000
(2018-2021) 29,100
(2019-2022) 36,000
(2020-2023) 30,000

NOLCO:
(2018-2021) 95,000
(2019-2022) 20,000
(2020-2025) 100,000

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16. Examples of taxes that are deductible except

a. Occupation tax
b. Privilege tax
c. Documentary stamp tax
d. Philippine income tax

17. Examples of non-deductible taxes, except

a. Special assessment
b. Donor’s tax
c. Estate tax
d. Business tax

18. A, not happy with her present job, resigned and started her own business. The business requires her to
travel so she used her car for the purpose. Assume that A started her business on April 1 and that she
uses the car for business 70% of the time. Assuming total expenses for the year for the use of the car is
P300,000, the deductible expense is
a. P210,000
b. P300,000
c. P225,000
d. P157,500

19. A acquired a machine at a cost of P500,000. Scrap value is P40,000 and the estimated useful life was
25 years. After depreciating the asset for 20 years using the straight-line method, it was determined that
the remaining life is not five years. The annual depreciation from the 21st year assuming a remaining
life of 10 years without scrap is
a. P17,600
b. P20,000
c. P35,200
d. P13,200

20. I. An expense which is necessary but not ordinary, or ordinary but not necessary is deductible from
gross income.
II. The taxpayer must signify his intention to elect the itemized deduction, otherwise, he is deemed to
have chosen the optional standard deduction.

a. True, true
b. True, false
c. False, true
d. False, false

21. I. Interest paid on preferred stock is deductible from gross income of the paying corporation.
II. A capital expenditure usually benefits more than one accounting period and is deductible from
gross income in the year it is paid or incurred.

a. True, true
b. True, false
c. False, true
d. False, false

22. A) The cost of leasehold improvements shall be deductible by the lessee by spreading the cost of the

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improvements over the life of the improvements or the remaining term of the lease whichever period
is shorter.
B) Contributions by the employer to a pension trust for past service cost is deductible in full in the year
that the employer made the contributions.

a. True, true
b. True, false
c. False, true
d. False, false

23. Beginning 1/1/2018, for individuals with purely gross compensation income, the following may not be
deducted:
a. Personal exemptions
b. Additional exemptions
c. Optional standard deduction
d. Premium payments on health and/or hospitalization insurance
e. All of the above.

24. Beginning 1/1/2018, for individuals with gross income from business or practice of profession, which
of the following may be deducted?
A. Optional standard deduction
B. Itemized Deduction
C. Personal basic exemptions
D. Additional exemptions
E. Premium payments on health and/or hospitalization insurance

a. A,B,C and D
b. B, C and D
c. C, D and E and Either A or B
d. Either A or B

25. Any amount subsequently received on account of a bad debt previously charged off and allowed as a
deduction from gross income in prior years must be included in gross income in the taxable year in
which received. This is
a. Severance test
b. Life-blood theory
c. Destination of income test
d. Equitable doctrine of tax benefit

26. A took out a life insurance policy of P1,000,000 naming his wife as beneficiary. The policy provides
that the insurance company will pay A and his beneficiary the amount of P1,000,000 after the 25th year
of the policy, should he die before this date. The premiums paid on the policy is P700,000. If A
outlived the policy and received the proceeds of P1,000,000, such proceeds will be:
a. Taxable in full
b. Exempt from income tax
c. Partly taxable, partly exempt Note: ₱700,000 of the ₱1.0 Million
d. Subject to final tax proceeds is treated as return of
premium and therefore exempt from
income tax.

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27. Using the preceding number, if A dies and his beneficiary received the proceeds of P1,000,000, such
proceeds will be
a. Taxable in full
b. Partly taxable, partly exempt
c. Exempt from income tax
d. Subject to final tax

28. May consider capital expenditures as revenue expenditures

a. Resident citizen
b. Domestic corporation
c. Private educational institutions
d. Resident alien

29. A building was destroyed by fire in 2017. The building had a book value of P5M. The insurance
company was willing to pay P4M, which was refused by the owner. Finally, the claim was settled in
2018 for P4.6M. The proceeds will be
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable

Note: The proceeds of ₱4.6 Million will be charged against the loss of ₱5.0 Million.

The taxpayer will not deduct a net loss in 2017 since the amount thereof has not yet
been determined at such time. In 2018, the taxpayer shall now file an amended return
for taxable year 2017. In such amended return, the net loss of ₱400,000 shall be
claimed as a deduction which shall result in a tax due lower than the amount of tax
reflected in the original return. In the amended return, the taxpayer can choose to
credit in future years the difference between the amended and original amounts, or to
file an application for tax refund/tax credit certificate.

30. One of the following is not correct for deductibility of losses from gross income
a. Must arise from fire, storm or other casualty, robbery, theft or embezzlement.
b. Must not be compensated by insurance or other form of indemnity.
c. A declaration of loss by casualty should be filed with the Bureau of Internal Revenue.
d. Must have been claimed as deduction in the estate return of the taxpayer.

31. Which of the following statements is not correct?

a. The Optional Standard Deduction is an amount equal to forty (40%) of the gross income from
business or practice of profession of the taxpayer.
b. The Optional Standard Deduction is not available against compensation income arising out of an
employer-employee relationship.
c. The election of Optional Standard Deduction is irrevocable for the taxable year for which the choice
is made.
d. Unless the taxpayer signifies in his return his intention to avail of the OSD, he shall be considered
as having availed of the itemized deductions.

32. The net operating loss which had not been previously offset as deduction from gross income shall be
carried over as deduction from gross income for the next
a. 2 consecutive taxable years immediately following such loss.
b. 3 consecutive taxable years immediately following such loss.
c. 4 consecutive taxable years immediately following such loss.
d. Taxable year immediately following such loss.
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Items 33 and 34 pertain to the following:

A taxpayer engaged in business incurred a partial loss of business property as follows:
Asset 1 Asset 2
Book value of the asset at the asset at the time of loss P 200,000 P 200,000
Cost to restore the property back to its normal operating condition 120,000 300,000
Insurance recovery 50,000 None
Salvage None 40,000

33. The deductible loss for asset 1 is

a. P 120,000 c. P 30,000
b. P 70,000 d. P 80,000

34. The deductible loss for asset 2 is

a. P 300,000
b. P 350,000
c. P 160,000
d. P 240,000

Items 35 to 37 pertain to the following:

ABC put up a qualified retirement plan approved by the BIR. It appointed B Corp. to administer the
plan, which called for the payment of P200,000 to cover the retirement of employees for past services
rendered and a yearly contribution of P50,000. The following amounts were paid for the first three years
of the plan’s operation:
Contribution for Services
Past Years Current Years
First year………………… P 100,000 P 50,000
Second year……………… 60,000 50,000
Third year………………… 40,000 50,000

35. The pension expense for the first year is

a. P 150,000 b. P 15,000 c. P 60,000 d. P 105,000

36. The pension expense for the second year is

a. P 110,000 b. P 11,000 c. P 56,000 d. P 66,000

37. The pension expense for the third year is

a. P 90,000 b. P 9,000 c. P 54,000 d. P 70,000

38. Mr. Santos, a retailer of goods, uses the accrual method in reporting his income and expenses. His
transactions show:
Jan. 1 to June 30 July 1 to Sept. 30 Oct. 1 to Dec. 31
Gross Sales P 1,000,000 P 700,000 P 900,000
Cost of Sales 600,000 200,000 300,000
Business expenses 100,000 50,000 70,000
Non-operating income
In the ITR 50,000 40,000 10,000
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If he avails of the OSD, his annual taxable net income under the graduated rates is:
a. P 1,660,000
b. P 1,040,000 Gross sales 2,600,000
c. P 900,000 Less: Cost of sales (0 if OSD) -
d. None of the above Gross income 2,600,000
Less: OSD (1,040,000)
Net income from operations 1,560,000
+ Non-operating income 100,000
+ Share in GPP net income -
Taxable net income 1,660,000

39. Using the preceding number, but using ID, his annual taxable net income is:
a. P 1,380,000
b. P 1,500,000 Gross sales 2,600,000
c. P 1,230,000
Less: Cost of sales (1,100,000)
d. None of the above
Gross income 1,500,000
Less: Itemized deductions (220,000)
Net income from operations 1,280,000
+ Non-operating income 100,000
+ Share in GPP net income -
Taxable net income 1,380,000

40. ABC Corporation, a retailer of goods, uses the accrual method in reporting its income and expenses
under the calendar year basis. Its transactions show:
Jan. 1 to June 30 July 1 to Sept. 30 Oct. 1 to Dec. 31
Gross Sales P 1,000,000 P 700,000 P 900,000
Cost of Sales 600,000 300,000 600,000
Itemized deduction 100,000 50,000 150,000
Other income in the ITR 70,000 20,000 10,000

The annual net taxable income using the OSD is

a. P 1,560,000
b. P 1,040,000
Gross sales 2,600,000
c. P 720,000
d. None of the above Less: Cost of sales (1,500,000)
Gross income 1,100,000
Add: Other taxable income in ITR 100,000
Total Gross Income 1,200,000
Less: OSD (480,000)
Taxable net income 720,000

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41. The records of a domestic corporation, on the calendar year basis, organized in 2010, show financial
data for the following years:

2018 2019 2020 2021

Net Sales 3,925,000 4,810,000 5,939,000 6,945,000
Cost of sales 1,950,000 2,710,000 3,465,000 4,180,000
Business expenses including bad
debts written off 1,900,000 2,000,000 2,520,000 2,400,000
Other taxable income 25,000 100,000 26,000 35,000
Total assets 40,000,000 50,000,000 51,000,000 49,000,000

Recovery of bad debts written off:

In 2018 60,000
In 2019 10,000

The income tax payable for 2018, 2019, 2020, and 2021:
a. ₱ 30,000, ₱78,000, ₱0, ₱73,000
b. ₱ 40,000, ₱68,000, ₱37,500, ₱40,500
c. ₱ 58,500, ₱60,000, ₱18,000, ₱67,000
d. None of the above.

2018 2019 2020 2021

Net sales 3,925,000 4,810,000 5,939,000 6,945,000
Less: COGS (1,950,000) (2,710,000) (3,465,000) (4,180,000)
Gross income from
operations 1,975,000 2,100,000 2,474,000 2,765,000
Add: Other taxable income 25,000 160,000 26,000 45,000
Total gross income 2,000,000 2,260,000 2,500,000 2,810,000
Less: Itemized deductions (1,900,000) (2,000,000) (2,520,000) (2,420,000)
Net taxable income 100,000 260,000 (20,000) 390,000
RCIT rate 30% 30% 25% 20%
RCIT 30,000 78,000 0 78,000

MCIT rate 2% 2% 1.5% 1%

MCIT 40,000 45,200 37,500 28,100

Tax due 40,000 78,000 37,500 78,000

Less: Tax credits - (10,000) - (37,500)
Tax still due 40,000 68,000 37,500 40,500

EMCIT:
(2018-2021) 10,000
(2020-2023) 37,500

NOLCO:
(2020-2025) 20,000

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42. A Corporation is engaged in the trading business. The reported income and expenses for taxable year
2019 show:
Sales P 10,000,000
Cost of Sales 6,000,000
General business expenses 1,000,000
Interest on time deposit ( gross of FT ) 100,000
Interest expense on loans payable 180,000

The net taxable income is

a. P 2,820,000 b. P 2,853,000 c. P 2,862,000 d. P 2,858,000

2019
Net sales 10,000,000
Less: COGS (6,000,000)
Gross income from operations 4,000,000
Add: Other taxable income -
Total gross income 4,000,000
Less: Itemized deductions
(a) General business expenses (1,000,000)
(b) Interest expense
Interest on loans payable 180,000
Less: 33% of interest income subject to FT (33,000) (147,000)
Net taxable income 2,853,000

43. KLM Corporation, a domestic corporation, had the following financial information for CY 2021:
gross sales of ₱50 Million; cost of sales of ₱35 Million; and operating expenses of ₱12.6 Million,
broken down as follows:

Cost of Sales
Direct materials ₱20,000,000
Direct labor 10,000,000
Manufacturing overhead 5,000,000
Total ₱35,000,000

Operating Expenses
Salaries and wages ₱5,000,000
Taxes 200,000
Depreciation 300,000
Professional fees 200,000
Advertising expenses 3,000,000
Training expenses 3,000,000
Office supplies 500,000
Interest expense 400,000
Total ₱12,600,000

The training expenses of ₱3,000,000 was incurred for its trainees enrolled in a specific skills development
program of TESDA. Moreover, the corporation earned interest income, net of the 20% FT, in the amount
of ₱100,000.
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Assuming the corporation is subject to a 25% regular corporate income tax rate, and has complied with
the withholding tax requirements on all its costs and expenses subject to withholding tax, compute its net
taxable income for taxable year 2021.

a. ₱1,575,000
b. ₱ 1,425,000
c. ₱ 1,500,000
d. None of the above.

Gross sales 50,000,000

Less: Cost of sales (35,000,000)
Gross income 15,000,000
+ Other taxable income not subject to FT -
Total Gross Income 15,000,000
Less: Allowable deductions:
Operating expenses 12,600,000
Additional training expense deduction:
½ of training expense 1,500,000
Limit (10% of direct labor wages) 1,000,000 1,000,000
Less: 20% of interest
income subject to FT (25,000) (13,575,000)
Net taxable income 1,425,000

44. For calendar year 2020, MAMA Corporation incurred an interest expense of ₱400,000. It also earned
interest income subject to final tax of ₱100,000, net of the 20% final tax. If the corporation is subject
to the new regular corporate income tax rate of 25% beginning July 1, 2020, how much interest
expense is it allowed to deduct in computing its net taxable income?

a) ₱366,875
b) ₱400,000
c) ₱379,375
d) None of the above

Computation of blended arbitrage rate:

Jan. 1, 2020 to June 30, 2020 (6 months) 33%
July 1, 2020 to Dec. 31, 2021 (6 months) 20%
Blended arbitrage rate 26.5%

Computation of interest arbitrage:

Interest income (gross of FT) ₱125,000
Blended interest arbitrate 26.5%
Interest arbitrage ₱ 33,125

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The resulting interest arbitrage of ₱33,125 is then subtracted from the ₱400,000
interest expense to get the allowable interest expense deduction.

Interest expense ₱400,000

Less: interest arbitrage (33,125)
Allowable interest expense deduction ₱366,875

45. If MAMA Corporation in number 44 qualifies and is subject to the regular corporate income tax rate
of 20% beginning July 1, 2020, how much interest expense is it allowed to deduct in computing its net
taxable income?

a) ₱366,875
b) ₱400,000
c) ₱379,375
d) None of the above

Computation of blended arbitrage rate:

Jan. 1, 2020 to June 30, 2020 (6 months) 33%
July 1, 2020 to Dec. 31, 2021 (6 months) 0%
Blended arbitrage rate 16.5%

Computation of interest arbitrage:

Interest income (gross of FT) ₱125,000
Blended interest arbitrate 16.5%
Interest arbitrage ₱ 20,625

The resulting interest arbitrage of ₱20,625 is then subtracted from the

₱400,000 interest expense to get the allowable interest expense deduction.

Interest expense ₱400,000

Less: interest arbitrage (20,625)
Allowable interest expense deduction ₱379,375

46. The term “net operating loss” shall mean

a. The excess of allowable deductions (excluding NOLCO and any deductible item under special
laws that does not involve any cash outlay) over gross income of the business in a taxable year.
b. The excess of the ordinary itemized deductions over gross income of the business in a taxable year.
c. The excess of optional standard deduction over gross income of the business in a taxable year.
d. Loss incurred which shall be carried over as a deduction from gross income to be spread for the next
three years.
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47. The net operating loss incurred in a taxable year during which the taxpayer was exempt from income
tax shall
a. Be carried over as a deduction from gross income for the next taxable year
b. Be carried over as a deduction from gross income for the next 3 consecutive taxable years
c. Be carried over as a deduction from gross income for the next 5 consecutive taxable years
d. Not be allowed as a deduction for the next taxable year.

48. Net operating loss of a business or enterprise for taxable years 2020 and 2021 shall be carried over
as a deduction from gross income for the next

a. Three (3) consecutive taxable years immediately following the year of such loss.
b. Five (5) consecutive taxable years immediately following the year of such loss.
c. Eight (8) consecutive taxable years immediately following the year of such loss.
d. None of the above.

A fiscal year (“FY”) will fall on a taxable year depending on the number of days it has in
the 2 years involved. For example, FY ending March 31, 2020 is considered taxable
year 2019 since it has more days in 2019 (9 months or 274 days) than in 2020 (3
months or 90 days). In another example, FY ending June 30, 2021 is considered
taxable year 2020 since it has more days in 2020 (183 days) than in 2021 (180 days).

Thus, companies with fiscal years ending before July 31, 2020 and those with fiscal
years ending after June 30, 2022 may carry-over net operating losses in such years as
deductions only for the next three (3) consecutive years. This is because such fiscal
years are not considered as taxable years 2020 or 2021.

49. ABC Corporation employs regular people, persons with disabilities (PWDs) and senior citizens as
employees, and pays the following compensation:
Regular employees P 800,000
PWD employee 300,000
Senior citizen employee with salary grade:
a. Above poverty level 200,000
b. Below poverty level 100,000

The deductible compensation expense is

a. P 1,400,000
b. P 1,490,000
c. P 1,115,000
d. P 1,500,000

50. Healthy Drugs Corporation had the following data during the year:

Customer
Transactions Regular Senior Citizen Totals
Sales (net) Php 8,000,000 Php 3,200,000 Php 11,200,000
Cost of Sales 5,000,000 2,000,000 7,000,000
Other Deductible expenses 2,000,000

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Healthy adopts a policy of giving senior citizens a 20% discount. As a result, it granted Php 800,000
total senior citizen’s discount during the year. The taxable net income is
a. ₱2,000,000 b. ₱ 1,400,000 c. ₱2,200,000 d. ₱ 1,250,000

Sales:
(a) To Regular customers 8,000,000
(b) Senior Citizens (gross of discount) 4,000,000 12,000,000
Less: COGS (7,000,000)
Gross income from operations 5,000,000
Add: Other taxable income -
Total gross income 5,000,000
Less: Itemized deductions
(a) Ordinary itemized deductions 2,000,000
(b) Special itemized deductions (SC discount) 800,000 (2,800,000)
Net taxable income 2,200,000

51. Dick Tracy Corporation paid the following expenses during the year:

Interest for late payment (delinquent) income tax ₱ 5,000

Surcharge and compromise for late payment of income tax 30,000
Interest on bonds issued 40,000
Interest on money borrowed by the Company from a stockholder
who owns 80% of the outstanding stock of the Company 20,000

What is Dick Tracy Corporation’s deductible expense?

a) ₱45,000 b) ₱75,000 c) ₱95,000 d) ₱60,000

52. Mr. Allan Bautista is engaged in the business of buying and selling of used cars. In the taxable year, he
sold a used car to his first cousin thereby incurring a loss of ₱50,000. Allan’s acquisition cost of the car
was ₱100,000. Can Allan deduct the loss in his ITR in computing his income tax payable?

a) No. The loss is a personal, and not connected with his business.
b) No. The loss is connected with his business, but the loss is between related parties under Section
36 (B) of the Tax Code.
c) Yes. The loss is a capital loss which can be offset against capital gains that are includible in the
ITR.
d) Yes. The loss is connected with his business, and is not between related parties.

53. ABC is a domestic corporation engaged in the merchandising business. For the calendar year 2021, it
had a net income per books of P500,000, after considering, among others, the following:

a) Dividend received from a domestic corporation P30,000

b) Provision for doubtful accounts 10,000
c) Dividend received from a foreign corporation 20,000
d) Portion of P150,000 advance rental already earned 100,000
e) Recovery of receivables previously written off:
i) Previously allowed by the BIR as deduction 10,000
ii) Previously disallowed by the BIR as deduction 30,000
f) Refund of deductible taxes
i) Previously allowed by the BIR as deduction 25,000
Tax 92-08
 15

ii) Previously disallowed by the BIR as deduction 15,000

g) Bank interest income:
i) Philippine Bank 80,000
ii) USA Bank 100,000
(h) Amounts for lactation station expensed in current year 50,000
The taxable net income is
a. P435,000 b. P485,000 c. P375,000 d. None of the above

Reconciliation of Net Income per Books Against Taxable Income

Net Income/(Loss) per Books 500,000
Add: Non-deductible expenses
(b) Provision for doubtful accounts 10,000
Add: Taxable Other Income
(d) ₱50,000 advance rental 50,000
(e) Recovery of receivable previously written off 10,000
(f) Refund of taxes previously deducted 25,000
Less: Non-Taxable Income
(a) Intercorporate dividend (30,000)
Less: Income Subject to Final Tax
(g) Bank interest income (80,000)
Less: Special Deductions
(h) Lactation station (50,000)
Net Taxable Income (Loss) 435,000

54. Statement 1: Under Sec. 34(L) of the Tax Code, as amended by R.A. No. 10963 (TRAIN), a general
professional partnership and the partners comprising such partnership may avail of the OSD only
once, either by the GPP or the partners comprising the partnership.

Statement 2: The partners of a GPP may avail either the Itemized Deductions or the OSD against
their distributive shares IF the basis of such distributive share is the GPP’s gross income, and not its
net income. This means that the GPP does not avail either of the Itemized Deductions nor of the OSD
in computing the basis of the distributive shares of the partners.

a. Both are true.

b. Only Statement 1 is true.
c. Only Statement 2 is true.
d. Both are false.

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55. A domestic corporation (on calendar year basis), which started operations in 2010, has the following
data in 2021:

Sales, net of sales discounts of ₱550,000 ₱ 25,000,000

Cost of Sales 13,000,000
Gross income 12,000,000

Salaries of employees (net of payroll deductions) 5,000,000

Fringe benefits given to:
Rank and file employees 520,000
Managerial employees 650,000
Representation and entertainment expenses (business connected) 145,000
Rent expenses 200,000
Depreciation expenses 400,000
Bad debt expenses (1/2 charged off during year) 50,000
Payroll deductions:
CWT on compensation 600,000
SSS premiums 40,000
Philhealth contributions 60,000
Pag-ibig contributions 12,000
Union dues 5,000
Lactation station expenses 100,000
Other Income:
Cash dividend received from:
1) Domestic corporations
a) 70% of its income came from Philippine sources 90,000
b) 30% of its income came from Philippine sources 90,000
2) Resident foreign corporations
a) 70% of its income came from Philippine sources 40,000
b) 30% of its income came from Philippine sources 40,000
3) Non-resident foreign corporation 20,000

Tax withheld by customers/clients during first 3 quarters (BIR Form 2307) 90,000
Tax withheld by customers/clients in 4th Quarter (BIR Form 2307) 30,000

Taxes paid in first 3 quarters:

1st Quarter (RCIT less credits) ₱210,000
2nd Quarter (MCIT less credits)) 330,000
3rd Quarter (RCIT less credits) 149,250

(a) What annual return should it file?

(A) BIR Form No. 1702-RT – for Corporations, Partnerships, and Other Non-Individual
Taxpayers Subject Only to Regular Income Tax Rate
(B) BIR Form No. 1702-EX – for Corporations, Partnerships and Other Non-Individual
Taxpayers EXEMPT under the Tax Code (Sec. 30 and those exempted in Sec. 27(C)) and
Other Special Laws, with NO Other Taxable Income
(C) BIR Form No. 1702-MX – for Corporations, Partnerships, and Other Non-Individual
Taxpayers with MIXED Income Subject to Multiple Income Tax Rates or with Income
Subject to Special/Preferential Rates
(D) None of the above.

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 17

(b) How much is the corporation’s total gross sales, and where will it be indicated in the annual
ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱242,000; Part IV, Item 42

(c) How much is the corporation’s total gross taxable income, and where will it be indicated in the
annual ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱242,000; Part IV, Item 42

(d) How much is the corporation’s total allowable deductions, and where will it be indicated in the
annual ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱242,000; Part IV, Item 42

(e) How much is the corporation’s net taxable income, and where will it be indicated in the annual
ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱1,173,900; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱1,104,900; Part IV, Item 55; Part II, Item 15
(D) ₱69,000; Part IV, Item 56; Part II, Item 16

(f) How much is the corporation’s RCIT, and where will it be indicated in the annual ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱978,250; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱1,104,900; Part IV, Item 55; Part II, Item 15
(D) ₱69,000; Part IV, Item 56; Part II, Item 16

(g) How much is the corporation’s MCIT, and where will it be indicated in the annual ITR?
(A) ₱25,550,000; Part IV, Item 27
(B) ₱12,100,000; Part IV, Item 33
(C) ₱8,187,000; Part IV, Item 37
(D) ₱121,000; Part IV, Item 42

(h) How much is the corporation’s total available credits, and where will it be indicated in the
annual ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱1,173,900; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱809,250; Part IV, Item 55; Part II, Item 15

(D) ₱69,000; Part IV, Item 56; Part II, Item 16

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(i) How much is the corporation’s income tax payable, and where will it be indicated in the annual
ITR?
(A) ₱3,913,000; Part IV, Item 39
(B) ₱1,173,900; Part IV, Items 41 and 43; Part II, Item 14
(C) ₱1,104,900; Part IV, Item 55; Part II, Item 15

(D) ₱169,000; Part IV, Item 56; Part II, Item 16

Gross sales 25,550,000

Less: Allowances, discounts, returns (550,000)
Net Sales 25,000,000
Cost of Sales (13,000,000)
Gross income from operations 12,000,000
Add: Other taxable income not subject to FTs 100,000
Total Gross Income 12,100,000
Less: Ordinary Itemized Deductions
(a) Salary expense, net of deductions 5,000,000
Total deductions 717,000 (5,717,000)
(b) Fringe benefits of employees
Rank and file 520,000
Managerial 650,000 (1,170,000)
(c) FBT (₱650,000/65% x 35%) (350,000)
(d) EAR 145,000
Limit (1/2 of 1% of Net Sales) 125,000 (125,000)
(e) Rent expense (200,000)
(f) Depreciation expense (400,000)
(g) Bad debt expense (charged off) (25,000)
(h) Lactation station expense (100,000)
Less: Special Itemized Deductions
Additional deduction for lactation stations (RA
6700) (100,000)
Net taxable income 3,913,000
RCIT (25%) 978,250
MCIT (1% of Total Gross Income) 121,000

Tax due RCIT 978,250

Less: Tax Credits:
(1) Excess tax credits from prior year
(2) Tax paid in previous quarters (689,250)
(3) CWTs (120,000)
(4) Excess MCIT from prior year
(5) Foreign tax credits
(6) Tax paid in previous return if filing amended return

Tax payable/(Tax credit/refund) 169,000

END
Tax 92-08