MABANO, Michelle Mae L./Tax Exercises No.

4 August 10, 2014

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1. What are the kinds if deductions from gross income?

The kinds of deductions from gross income are: (1) itemized deductions and (2) optional
standard deductions.

Itemized deduction is available to individual and corporate taxpayers which includes ordinary
business expenses, bad debts, interests, taxes, depreciation, depreciation, depletion, losses,
charitable contributions and pension trusts. [Sec. 34 A,B,C,D,E,F,G,H,I and J] It also includes
special deductions as provided by Sec. 37. Any claim for these deductions must be
substantiated by competent proof, i.e, official receipts.

Optional Standard Deduction is a scheme whereby a taxpayer is given the option to deduct
from his gross revenue or gross income a lump sum equivalent to a percentage of such gross
revenue or gross income for purposes of computing the net taxable income on which the
income tax rate will be applied. The OSD is an amount not exceeding (a) 40% of the gross sales
or gross receipts of a qualified individual taxpayer and (b) 40% of the gross income of a
qualified corporation. In OSD, no substantiation requirements needed. [Sec. 34(L)]


2. Is compensation income earner entitled to any deductions?
NO. The first sentence of Sec. 34 provides that taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship is not subject to
the allowable deductions set forth under the same section except for that under subsection
(M).

3. What are the conditions for expenses to be deductible from gross income?

The conditions for deductibility of expenses from gross income are as follows:

a. It is paid or incurred during the taxable year
b. The expense must be substantiated by proof
c. The expense must be incurred in trade or business carried on by the taxpayer
d. The expense must be reasonable
e. The expense must be ordinary or necessary
f. If subject to withholding tax, proof of payment to BIR
g. Expenses must not be against public policy, public morals or law.


4. May interest expenses for loans to be used for capital expenditure be claimed as outright
deduction from gross income?
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YES. Sec. 34(B)(3) gives the taxpayer an option to consider interest incurred to acquire
property used in trade, business or profession either as part of the (1) allowable deduction
under Sec. 34(B)(2); or (2) treated as capital expenditure which forms part of the cost of the
asset.

5. What is the meaning of depreciation?
Depreciation is the gradual diminution in the useful value of a tangible property used in trade,
business or profession resulting from exhaustion, wear and tear and obsolescence.

6. Distinguish deductions from gross income with the following:
a. Exemption
b. Exclusion from gross income
What are their similarities, if any?
a. Deduction is an amount allowed by law to be subtracted from gross income to arrive at
taxable income. Exemption from taxation is the grant of immunity to particular persons or
corporations or ti persons or corporations of a particular class from a tax which others
generally within the same taxing district are obliged to pay. Deduction is a reduction of
wealth which helped earn the income subject to tax. Exemption is the theoretical
personal, family and living expenses of an individual.
b. Deduction refers to the amount which the law allows as deductions from gross income in
orders to arrive at net income or taxable income. It is necessary to arrive at net or taxable
income. It is something paid or incurred in earning gross income. Exclusion, on the other
hand, refers to income received or earned but is not taxable as income because it is
exempted by law or treaty. Such tax-free income is not to be included in the income tax
return unless information regarding it is specifically called for. [Sec. 61, RR # 2]
The similarity among the three is that all are not included in the determination of the tax base
which is subject to tax.

7. Give the different itemized deduction pursuant to Sec. 34 of RA 8424?
The itemized deductions under Sec 34 are:
(A) Expenses (F) Depreciation
(B) Interest (G) Depletion
(C) Taxes (H) Charitable and Other Contributions
(D) Losses (I) Research and Development
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(E) Bad Debts (J) Pension Trusts

8. Who can claim the optional standard deduction and for how much?
a. An individual subject to tax under Sec. 24, other than a nonresident alien, may elect a
standard deduction in an amount not exceeding 40% of his gross sales or gross receipts as
the case maybe.
b. A corporation subject to tax under Sec. 27(A) and Sec. 28(A)(1) may elect a standard
deduction in an amount not exceeding 40% of its gross income as defined under Sec. 32.
[Sec. 34(L)]


9. Explain the meaning of improperly accumulated earnings stocks?
Improperly accumulated earnings refer to profits of a corporation that are accumulated
instead of distributing it to its stockholders for the purpose of avoiding the income tax with
resect to its shareholders or the shareholders of another corporation.

10. Discuss the implications of the last paragraph of Sec. 30, RA 8424 with respect to private
educational institutions?
The last paragraph of Sec. 30, states that the exception granted to educational institutions
applies only to income derived from related trade or business (i.e., tuition fees, school fees).
Thus, income from unrelated trade or business such as income from properties, real or
personal, or from other activities shall be subject to the normal tax rate of 30%.

11. What is the meaning of De Minimis Benefits? What Is its tax implications?
De minimis benefits are facilities or privileges furnished or offered by an employer to its
employees that are of relatively small value and are offered or furnished by the employer
merely as a means of promoting health, goodwill, contentment and efficiency of employees.
Tax Implication: De minimis benefits when received by the employee shall not be part of its
taxable income (therefore, not subject to tax). However, if the total amount of de minimis
benefits exceeds the Php 30,000.00 limit, the excess shall be considered as part of the
compensation income (subject to tax).

12. What is the tax treatment of fringe benefits?
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Fringe benefits are subject to a final tax of 32% on the grossed-up monetary value of fringe
benefit furnished or granted to the employee to be paid by the employer. However, fringe
benefits, when given to rank and file employees, become part of their compensation income.
[Sec. 33(A), NIRC]