10/13 deadline of submission

10/20 defense

TAX PRACTICE SET REVIEWER

PRO-FORMA
Regular Corporate Income Tax (RCIT) Minimum Corporate Income Tax
Gross sales/receipts Gross sales/receipts
Less: Cost of Services Less: Cost of Services
Gross income from operations Gross income from operations
Add: Other income Add: Other income
Gross income Gross income
Less: Allowable Deductions Times: MCIT (2%)
Taxable income Tax due
Times: Corporate tax (30%) Less: Tax credits
Tax Due Income tax still due
Less: Tax credits
Income tax still due

Note: The tax to be paid shall be whichever is higher between the income tax still due of RCIT and MCIT
OSD OSD in lieu of Itemized Deductions
Gross sales/receipts Gross sales/receipts
Less: Cost of Services Less: Cost of Services
Gross income from operations Gross income from operations
Add: Other income Add: Other income
Gross income Gross income
Times: OSD rate (40%) Less: OSD
OSD Tax due
Less: Tax credits
Income tax still due
TAX CREDITS
Tax due P xxx
Less: Income tax paid previous quarters P xxx
Creditable withholding taxes xxx xxx
Tax still due and payable P xxx

GROSS INCOME
Gross sales
Less: Cost of services (see D. Cost of Services)
Gross income
Note: “Gross sales” is referred to as Net Sales in accounting; sales discount is already deducted.
(see C. Sales Transaction)

Q: Is the gross income above the basis for computing OSD and MCIT?
A: Not yet. Other income shall be considered. (see F. Other income/(expense)). However, not all items presented in
the other income section is included. Exclude items which were subjected to Final Tax, Capital Gains Tax, or Other
Percentage Tax. (the last two taxes are also final taxes)
Prepared by: Jay Anthony P. Santos
 10/13 deadline of submission
10/20 defense

Note: Items that are in other income and expense section are GAINS and LOSSES, not the final tax paid. For example, A
land was sold for P10,000,000 which was bought P8,000,000 three years ago. The gain to be reported is P2,000,000.
The 6% Capital Gains Tax on the transaction is to be reported on Taxes and Licenses breakdown (see E. Deductions –
Exhibit 3) for accounting purposes only but excluded in the computation of regular income for tax purposes.

OTHER INCOME
GENERAL RULE: Remove all transactions which have already been subjected to final taxes (includes CGT and OTP)
for the purposes of computing the regular income tax.
Realized foreign exchange gain
This gain is included in the computation of regular corporate income tax, unless specified that this gain came from
gain on year-end foreign exchange transaction which are not necessarily realized. Disambiguation – foreign
currency deposits
Dividend from PLDT
Corporate dividend from a domestic corporation is tax-exempt. However, this is disclosed on the “Tax-Exempt”
section of the ITR. Thus, excluded in other income.
Foreign exchange gain in resulting from offsetting of accounts
This is a forex gain derived from the hedging contract of the taxpayer with a bank, and is included in the
computation of regular corporate income tax.
Gain on sale of real properties subjected to capital gains tax (CGT)
(see additional information, item no. 1)
A capital gain is subject to REGULAR TAX, but a gain on sale of real property (also a capital gain), 6% CGT is
applied. The final tax (CGT is a type of final tax) is presented already on the Taxes and Licenses breakdown (see E.
Deductions – Exhibit 3) for accounting purposes but excluded in the computation of Income Statement for tax
purposes.
Gain on sale of shares of stock subjected to CGT
(see additional information, item no. 2)
Capital gains tax of 15% (revised under TRAIN Law, 5%-10% on NIRC) on the GAIN (not the selling price) is
imposed on gain on sale of shares of stock if NOT TRADED in the stock exchange.
However, disregard this on the presentation of transactions subjected to final tax because the Annual ITR allows
only shares issued from Jan 1. 2017 to Dec. 31 2017. On the transaction, the shares were issued on Feb. 14, 2015.
Gain on sale of shares of stock subjected to other percentage tax (OPT)
(see additional information, item no. 3)
A 0.06% (or 0.006) Other Percentage Tax is applied for transactions relating to sale of shares TRADED in the stock
exchange times the SELLING PRICE. Since OPT is a final tax, remove this item on the other income computation.

Prepared by: Jay Anthony P. Santos

 10/13 deadline of submission
10/20 defense

Reversal of prior year provision for bad debts due to over recording in prior year (not claimed as
deduction in previous year)
(see additional information, item no. 4)
There are two types of bad debts treatment: allowance method and write-off method. If an allowance for bad debt
is established, it must not be an item of deduction because it is only an allowance for uncollectible accounts. Once
the management has already made its full efforts in collecting these accounts but has failed to commence its
collection, this is the time where they are allowed to write-off the accounts receivable. PROVISION and
ALLOWANCE are used interchangeably.
Q: How are bad debts recovery treated?
A: Subsequent recovery of bad debts previous allowed as a deduction (written off prior year/s) shall be reverted to
the computation of gross income but not to recovery of bad debts from allowance for bad debts. (see additional
information, item no. 4) The recovery from deduction is a tax benefit which must be added back to gross income.
The entries pertaining to the transaction are illustrated as follows:
2016 2017 (current)
Dr Bad Debts Expense Dr Allowance for Bad Debts
Cr Allowance for Bad Debts Cr Bad Debts Expense
Interest income
(see E. Deductions – exhibit 1)
Interest income on Peso deposits, net of 20% final tax AND Interest income on foreign currency deposits, net of
15% final tax are not included. Once a transaction is subjected to final tax, it will no longer be included in the
computation of regular income tax. The remaining interest incomes are still part of the total interest income
inclusion.
Share in equity earnings of Mabuhay Services, Inc., a local subsidiary
Tax-exempt; equity earnings are primarily referred to as income from stock dividends. Stock dividends are
generally tax-exempt, unless a corporation subsequently cancelled its distribution or redemption.
Royalties already subjected to 20% final withholding tax (fully supported by BIR Form No. 2306)
Royalties are passive income subject to 10%-20% final tax depending on the recipient. The final tax of 20% (TRAIN
Law revised) was already deducted on the figures presented. Gross up by dividing the figures by 80% (100%-20%)
to arrive at gross amount.
Q: Why gross-up?
A: At the latter part of BIR Form 1702-RT for Corporations, final taxes paid are required to be disclosed separately
from the computation of corporate income tax. This computed amount is not included in the regular tax
computation.
Insurance proceeds on casualty losses
(see additional information, item no. 9)
The insurance proceeds on are to reduce the loss incurred from destruction of properties related to trade or
business by force majeure, natural calamities, theft, robbery, or embezzlement.
This item shall be added back to compensate the loss and is no longer included in other income.
Prepared by: Jay Anthony P. Santos
 10/13 deadline of submission
10/20 defense

Ex. Earthquake Loss P (1,000,000)

Insurance proceeds 500,000_
Total Loss P (500,000)
Unrealized foreign exchange loss
Unrealized loss is not an object of deduction. Hence, it is not also included in the computation of gross income.

DEDUCTIONS
There are two types of deduction: Itemized Deduction and Optional Standard Deduction (OSD). The option to claim
OSD must be signified in the income tax return, otherwise, itemized deduction is presumed.
Deductions are tax benefits to the taxpayers.
Deductions presented in the income statement per books of the company are significantly different from
deductions to be included in the net income per ITR. To reconcile, add the non-deductible expenses/taxable other
income to the net income per books and deduct the non-taxable income subjected to final tax therewith.
Which deductions are allowed?
Checklist:
 Supporting documents are provided (i.e., official receipts)
 The OR should be named to the official and complete name of the corporation. If it is named to an
employee, it is still invalid.

NOTES ON DEDUCTIONS (see E. Deductions)

Salaries and Allowances
o As is. Deduct at full amount
Rentals computed on straight-line basis in compliance with PAS 17

(✓)1,500,000 vs (×)1,692,300

1,692,300 is computed based on a generally accepted accounting principle. The actual payment was 1,500,000.
Take note of the differences between tax and accounting principles. Not all GAAP are tax applicable.
Professional fees; Management and Consultancy Fee
*Subject to expanded withholding tax. However, EWT implications reflected in the ORs are disregarded. These are
to be recorded at full amount.
Janitorial and Messengerial Services
OR No. 000290. Name of company from whom the payment is received is incorrect. This is to be removed.
Other Outside Services
- As is. Deduct at full amount

Prepared by: Jay Anthony P. Santos

 10/13 deadline of submission
10/20 defense

Advertising
Or No. 0056EDK. Name of company from whom the payment is received is incorrect. This is to be removed.
Repairs and Maintenance – Labor
- As is. Deduct at full amount
Repairs and Maintenance – Materials/Supplies
- As is. Deduct at full amount
Office Supplies
- As is. Deduct at full amount
Insurance
- As is. Deduct at full amount
Transportation and Travel
- As is. Deduct at full amount
Fuel and Oil
OR No. 007899. Name of company from whom the payment is received is incorrect. This is to be removed.
Communication, Light, and Water
- As is. Deduct at full amount
Miscellaneous (see Exhibit 2)
- As is. Deduct at full amount
Operating expenses
- As is. Deduct at full amount
Security Services (see additional information, item no. 5)
A notarized certification of the EWT shall be a sufficient substantiation for the expense that will be claimed as a
deduction from gross income of the client. However, transaction on Non-VAT Receipt No. 06789 is not supported
by notarized certification.
Additionally, the other OR (for both remaining transactions) bears the incorrect name of the company.
No deduction shall be drawn from this item.
Representation and Entertainment (see additional information, item no. 6)
The total Entertainment, Amusement, and Recreation (EAR) to be computed shall be subject to limits.
For taxpayers engaged in the sales of goods or properties – 0.05% of net sales
For taxpayers engaged in the sales of services – 1% of net revenues
Q: How are these limits applied?
A: Compare the actual EAR to the computed limit. The amount to be chosen as deduction is whichever is lower.

Prepared by: Jay Anthony P. Santos

 10/13 deadline of submission
10/20 defense

Upon checking the validity of the ORs, the following data were gathered.
1. OR 64332 was in the name of the employee. It should be recalled that all substantiation shall be upon the
official and complete name of the corporation
2. Cherrymike Lover’s Resto transaction has no OR.
3. In Fun World Manila transaction, P200,000 (read additional info) has no VAT-supported ORS
Transactions with discrepancies as listed above are to be removed from the computation of EAR for limits.
Multiply the NET REVENUE to 1%. Compare to the ACTUAL E.A.R. Choose whichever is lower.
Interest Expense on bank loans
(see F. Other income/(expense))
Compute the interest expense by deducting first the total interest income (see Exhibit 1) WHICH WERE SUBJECTED
TO FINAL TAX. The following is the formula:
Gross interest expense P xxx
Less: Interest income (33%) (xxx)
Deductible interest expense P xxx
The limit is intended to recover the tax savings of taxpayers who take advantage of higher regular tax savings
created from interest expense deduction and a lower final tax on deposit interest income.
Note: It must be emphasized also that the basis of the arbitrage limit is the interest income subject to final tax because
no arbitrage will arise from interest income not subject to final tax.
Taxes and Licenses
(see Exhibit 3)
The items which were to be removed here are not qualified as deductions. If these items weren’t removed, the
assumption is that they are claimable as deductions from gross income.
o Payment of deficiency tax – Philippine income tax (i.e., final tax, capital gains tax, and regular tax) is non-
deductible. Whenever a taxpayer fails to make adequate return of income, there is a deficiency. Remove.
o Capital Gains Tax (CGT) on sale of real properties – non-deductible as it is an income tax. Remove.
o CGT on sale of shares of stock - non-deductible as it is an income tax. Remove.
o Other percentage tax on sale of shares of stock - non-deductible as it is an income tax. Remove.
o Payment of Surcharge, Interest, and Compromise – only this type of INTEREST is deductible 100%
(based on Supreme Court ruling) and is an exemption to the arbitrage limit reduction. Remove surcharge and
compromise.
o Business taxes and licenses – Business taxes, in particular, the VAT is non-deductible from gross income.
However, the case stated that VAT implications are to be disregarded. No input VATs were collected from
sales transactions (see C. Sales Transactions). Since there is no VAT to be withheld to the government,
Business taxes and licenses are assumed to be fully deductible. Retain.
Losses
(see additional information, item no. 8)
Earthquake losses suffered are to be reduced by the insurance proceeds on casualty losses. Moreover, the
PROVISION for inventory obsolescence is not deductible. Only written-off inventories, along with accounts
receivables, are deductible and recoveries from within are reversible.

Prepared by: Jay Anthony P. Santos

 10/13 deadline of submission
10/20 defense

Provision for Doubtful Accounts

Non-deductible, as explained above.
Depreciation
Depreciation refers to the gradual exhaustion in the value of tangible business properties brought by ordinary
wear and tear through usage or obsolescence by the passage of time. This is generally deductible, except
depreciation on revalued assets, since there is really no gain realized therewith. For example, an asset was
revalued for three times its book value. The gain on revaluation is not recognized for tax purposes. The rule is that
for a rule to be deducted, it must be actual.
However, in this case, depreciation is simply deductible.
Charitable Contributions
(see additional information, item no. 10)
General rules:
o For a donation of more than P50,000, the donor is required to notify the Revenue District Office. (File a
notice of donation).
o Donee must be domestic.
o To be fully deductible, the done must also be a priority project of the government
Charitable contributions limitation is different from other itemized deductions. It is computed after ALL the
itemized deductions have been deducted from the gross income.
The limit is 5% for corporations of its net income before contributions. (Multiply 5% to NI before contributions)
The deduction to be chosen is whichever is lower between the LIMIT and the ACTUAL contributions.
Note: Donation to the Bantay Kalikasan, which is P50,500 (more than P50,000) has no notification to the RDO. It
cannot be included in the computation of actual charitable contributions.
Pension Trusts
BIR requirements:
o The plan must be reasonable and actual
o The plan must be approved by the BIR
The allowable deduction as pension trust is equal to the payment of reasonable pensions to employees OR actual
contribution to the plan, whichever is lower, and the excess of actual contribution to be amortized over 10 years.
(see additional information – item no. 11) BIR-registered plan amounts to P300,900, in which P150,900 pertains to
normal cost and the rest pertaining to past service cost.
Guide: Normal/Actual/Current Cost 100% Deductible x P150,900 = P150,900
Past Service Cost 10% Deductible x 150,000 = 15,000
P165,900
Accrual of contributions to retirement fund
(continuation from above)

Prepared by: Jay Anthony P. Santos

 10/13 deadline of submission
10/20 defense

Accrued expenses are expenses which are incurred but not already paid. BIR requires that for a deduction to be
allowed, it shall be actual.
Amortization of goodwill
A goodwill acquired is not deductible for tax purposes. However, just like depreciation on tangible assets, it is
amortized and the amortization is allowed as deduction.
Depreciation of appraisal increase – fixed assets
No gain is actually realized from revaluation/appraisal increase of assets. Non-deductible.
Loss on write-off of obsolete inventories (without Certificate of Deductibility of Inventory or Asset
Destructed/Disposed/Lost from the BIR)
Losses must be accompanied by sufficient supporting documents for BIR to recognize its deductibility.
Note: Not just losses but also income and expenses should be properly supported by documentation.
Write-off Accounts Receivable (supported by aging schedule)
Written-off accounts receivable is deductible (as explained earlier) as long as it is substantiated with proper
documents to the BIR.

Net Operating Loss-Carry Over (NOLCO)

NOLCO shall mean the excess of allowable deductions over business gross income in a taxable year. It shall be
carried over for the next three consecutive years immediately following the year of such loss.
In other words, NOLCO is applied to compensate the net loss of the company for the current taxable year.
NOLCO information on section (g) shall be simply encoded on the ITR

Minimum Corporate Income Tax (MCIT)

Corporations are subject to a minimum corporate income tax of 2% of gross income (see pro-forma on page 1). If
MCIT is greater than the regular corporate income tax (RCIT), then it shall be the basis for tax due.
Just like NOLCO, the excess of the MCIT over the RCIT in any year is a tax credit that is deductible against any RCIT
tax due in the succeeding years.
The rule is that MCIT applies on the 4th year of operations. For instance, a corporation which started operations on
any day in 2012 will be covered by MCIT in 2016.

Tax Credits and Quarterly Payments

Tax credits reduces the annual income tax to be paid by the taxpayer.
Simply put, total quarterly payment of income and total creditable withholding tax (CWT) are tax credits.

Prepared by: Jay Anthony P. Santos

 10/13 deadline of submission
10/20 defense

Payment of income tax to the BIR quarterly are deductions to the tax due as it is an early payment for the annual
income tax return. Creditable withholding taxes on the other hand must be remitted by the supplier or the payee of
the taxpayer’s expenses and should be credited by the taxpayer on his ITR – total tax due.
However, to be allowed as credit, CWTs must be supported by CWT Certificates which have been stamped received
by the BIR and must bear the registered address of the company. The payment should have also been made in the
current year.
Disclosure of unsubstantiation of CWTs are deducted as follows:

1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER

CWTs 1,239,773 2,101,000 900,000 727,533
With discrepancy (82,500) (1,477,727) (280,200) (439,773)
With discrepancy (30,000) (65,800) (124,000)
CWT with supporting 1,127,273 623,273 554,000 163,760
documents

Prepared by: Jay Anthony P. Santos