TAXATION M.V.U.

SIA
TAX.06 - Deductions from Gross Income MAY 2020

A. ALLOWABLE DEDUCTIONS, DEFINED 2. Limit

Deductions are items or amounts which the law allows
to be deducted from gross income of certain taxpayers LIMIT
in order to arrive at the taxable income. Sale of Goods or Net Sales x ½ of 1%
Properties
B. KINDS OF DEDUCTIONS Sale of services Net Revenue x 1%
1. Itemized Deductions
2. Optional Standard Deduction MINOR OR ORDINARY REPAIRS & MAINTENANCE
3. Personal Exemptions
4. Special Deductions allowed in special cases. KIND OF REPAIR TREATMENT
Repairs that materially
TAXPAYER ALLOWABLE DEDUCTIONS add to the value of the Capitalize
Individuals earning pure NONE property
compensation income Repair that appreciably
Individuals deriving 1) Itemized deductions; or prolong the life of the Capitalize
income from trade, 2) Optional Standard property
business or practice of Deduction Repair that keep the
profession. property in its ordinarily Outright Expense
Corporations 1) Itemized deductions; efficient operating
or condition
2) Optional Standard
Deduction ORGANIZATIONAL AND PRE-OPERATING EXPENSES

C. ITEMIZED DEDUCTIONS Organizational and pre-operating expenses are

1. Ordinary and necessary business expenses in considered as capital expenditures. However, upon
general start of commercial operations, it can be amortized
2. Interest over 60 months.
3. Taxes
4. Losses E. INTEREST EXPENSE
5. Bad debts
6. Depreciation REQUISITES FOR DEDUCTIBILITY:
7. Depletion 1. There must be an indebtedness;
8. Charitable Contribution 2. The indebtedness must be that of the taxpayer;
9. Research and development 3. The indebtedness is connected with taxpayer’s
10. Contributions to Pension Trust trade, business or practice of profession;
4. There must be legal liability to pay interest;
D. ORDINARY AND NECESSARY TRADE, BUSINESS 5. It must be paid or incurred during the taxable
OR PROFESSIONAL EXPENSES year.

1. Salaries, wages, and other forms of compensation AMOUNT DEDUCTIBLE

for personal services actually rendered, including IN GENERAL:
the grossed-up monetary value of fringe benefit
Interest Expense PXXX
granted by the employer to the employee.
Less: (Interest Income subject to final tax x (XXX)
2. Travel expenses
33%)
3. Rentals
Deductible Interest PXXX
4. Entertainment, Amusement and Recreation
Expense
5. Other necessary business expenses EXCEPTION: Interest on tax delinquency or
deficiency, provided, the tax is related to trade,
REQUISITES FOR DEDUCTIBILITY IN GENERAL: business or practice of profession shall be 100%
1. Must be ordinary and necessary; deductible.
2. Paid or incurred during the taxable year;
3. Connected with trade, business or practice of OPTIONAL TREATMENT OF INTEREST
profession; Interest related to acquisition of property used in
4. Supported by sufficient evidence; and trade, business or profession may, at the option of the
5. Not against the law, morals, public policy or public taxpayer, be:
order; 1. Claimed as outright expense;
6. It must have been subjected to withholding tax, if 2. Capitalize and claim depreciation.
applicable.
TIME WHEN ADVANCE INTEREST CAN BE CLAIMED BY
ENTERTAINMENT, AMUSEMENT AND RECREATION INDIVIDUAL UNDER CASH BASIS
EXPENSE
Interest paid in advance through discount or otherwise
AMOUNT DEDUCTIBLE - lower Amount between: shall be allowed as deduction in the year the
1. Actual indebtedness is paid.

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TAX.06
EXCEL PROFESSIONAL SERVICES, INC.

2. There is no substantial change in the ownership of

NON-DEDUCTIBLE INTEREST the business or enterprise in that –
a) Not less than seventy-five (75%) in nominal
1. Interest paid to persons classified as related value of outstanding issued shares, if the
taxpayers under Section 36 (B) of RA 8424; business is in the name of a corporation, is
2. If the indebtedness is incurred to finance held by or on behalf of the same persons; or
petroleum exploration; b) Not less than seventy-five (75%) of the paid
3. Interest on preferred stock up capital of the corporation, if the business is
in the name of a corporation, is held by or on
F. TAXES behalf of the same persons.

The term “taxes” means taxes proper and no NOLCO FOR MINES OTHER THAN OIL & GAS WELLS
deductions should be allowed for amounts representing
interest, surcharge, or penalties incident to For mines other than oil and gas wells, net operating
delinquency. loss incurred in any of the first ten (10) years of
operation may be carried over for the next five (5)
GENERAL RULE – Taxes paid or incurred within the years.
taxable year in connection with the taxpayer’s
profession, trade or business, shall be allowed as LOSSES FROM WASH SALES OF STOCK OR
deduction. SECURITIES

EXCEPTION – The following taxes are not deductible: In case of any loss claimed to have been sustained
1. Income tax from any sale or other disposition of shares of stock or
2. Income tax paid abroad if claimed as tax credit securities shall not be deductible if:
3. Estate tax 1) The seller is not a dealer in securities;
4. Donor’s tax 2) Within a period of thirty (30) days before the sale
5. Special assessment ending thirty (30) days after the sale, the seller
6. VAT either:
7. Stock transaction tax a) Acquired (by purchase or exchange) stock or
securities identical to the stock or securities
G. LOSSES sold; or
b) Has entered into a contract or option to
KINDS OF LOSSES: acquire stock or securities identical to the
1. Casualty Losses stock or securities sold.
2. Net operating loss carry-over (NOLCO)
3. Capital losses and securities becoming worthless WAGERING LOSSES
4. Special Losses
a) Losses from wash sales of stock or securities Losses from wagering transactions shall be allowed
b) Wagering losses only to the extent of the gains from such transactions.
c) Abandonment losses
ABANDONMENT LOSSES
CASUALTY LOSSES
1) In the event a contract area where petroleum
REQUISITES FOR DEDUCTIBILITY: operations are undertaken is partially or wholly
1. The loss arises from fires, storms, shipwreck, or abandoned, all accumulated exploration and
other casualties, or from robbery, theft or development expenditures pertaining thereto shall
embezzlement; be allowed as deduction.
2. The property lost is connected with the trade,
business or practice of profession; 2) In case a producing well is subsequently
3. Actually sustained during the taxable year; abandoned, the unamortized costs thereof, as well
4. Not compensated for by insurance or other forms as the undepreciated costs of equipment directly
of indemnity used therein, shall be allowed as deduction.
5. Incurred in trade, profession or business
6. Reported with the BIR within forty-five (45) days
from the time of loss; and EFFECT IF ABANDONED WELL IS REENTERED AND
7. Not claimed as deduction for estate tax purposes. PRODUCTION IS RESUMED OR EQUIPMENT IS
RESTORED INTO SERVICE
NET OPERATING LOSS CARRY-OVER

“Net Operating Loss” means the excess of allowable If the abandoned well is re-entered and production
deduction over gross income of the business in a is resumed or equipment is restored into service,
taxable year. the effects are:
a) The amount previously claimed as deduction
The net operating loss of the business or enterprise for shall be recognized as income; and
any taxable year shall be carried over as a deduction b) Such amount shall also be capitalized and
from gross income for the next three (3) consecutive
amortized or depreciated, as the case may be.
taxable years immediately following the year of such
loss.
H. BAD DEBTS
REQUISITES FOR DEDUCTIBILITY:
1. At the time of incurring net loss, the taxpayer must REQUISITES FOR DEDUCTIBILITY:
not be exempt from income tax; and

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EXCEL PROFESSIONAL SERVICES, INC.

1) There must be an existing indebtedness due to the DEPRECIATION DEDUCTIBLE BY NON-RESIDENT

taxpayer which must be valid and legally ALIENS ENGAGE IN TRADE OR BUSINESS OR
demandable; RESIDENT FOREIGN CORPORATIONS
2) The same must be connected with the taxpayer’s
trade, business or practice of profession; In the case of non-resident aliens engage in trade or
3) The same must not be sustained in a transaction business or resident foreign corporations, depreciation
between related taxpayers; shall be allowed only if the property is located in
4) The same must be actually charged off in the the Philippines.
books of accounts of the taxpayer as of the end of
the taxable year; and OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO
5) The same must be actually ascertained to be DEPRECIATION
worthless and uncollectible.
Allowance for obsolescence may be deducted in
SECURITIES BECOMING WORTHLESS addition to reasonable allowance for the exhaustion,
wear and tear.
REQUISITES FOR DEDUCTIBILITY
1) Securities are ascertained to be worthless; J. DEPLETION OF OIL AND GAS WELLS AND MINES
2) The same is charged off within the taxable year;
3) It must be a capital asset. In case of oil and gas wells or mines, capital invested
may be amortized using cost-depletion method,
I. DEPRECIATION provided:
1) When allowance for depletion shall equal capital
REQUISITES FOR DEDUCTIBILITY: invested, no further allowance shall be granted;
1) The property subject to depreciation is used in the 2) After production in commercial quantities has
trade, business or practice of profession; commenced, intangible exploration and
2) The allowance for depreciation must be sustained development drilling costs shall be treated as
by the person who owns or who has a capital follows:
investment in the property;
3) The allowance for depreciation must be INTANGIBLE EXPLORATION AND DEVELOPMENT
reasonable; DRILLING COSTS
4) The allowance for depreciation should not exceed KINDS TREATMENT
the cost of the property; Incurred for non- Deductible in the year
5) The schedule of the allowance must be attached to producing wells and/or incurred.
the return. mines
At the option of the
METHODS OF COMPUTATION IN GENERAL taxpayer:

1) Straight-line method Incurred for producing OPTION 1 – Deductible

2) Declining-balance method – rate should not exceed wells and/or mines in full in the year paid or
twice the rate in straight-line method incurred; or
3) Sum-of-the-years-digit method; and
4) Any other method which may be prescribed by the OPTION 2 – Capitalize
Secretary of finance upon recommendation of the and amortize.

PROPERTIES USED IN PETROLEUM OPERATIONS
Properties directly related
to production
Properties not directly
related to production
PROPERTIES USED IN MINING OPERATIONS
If expected life of
property is ten (10) years
or less
If expected life is more
than ten (10) years
DEPLETION OF OIL AND GAS WELLS AND MINES
DEDUCTIBLE BY A NON-RESIDENT ALIEN INDIVIDUAL
1) Straight-line OR FOREIGN CORPORATION
2) Declining-balance
method In the case of non-resident aliens engage in trade or
business or resident foreign corporations, depletion
NOTE: Useful life to be shall be allowed only if the oil and gas wells or
used is shorter period mines are located in the Philippines.
between:
a. 10 years; or K. CHARITABLE CONTRIBUTIONS
b. Useful life
- Only straight line FULLY DEDUCTIBLE DONATIONS
method is allowed
- Useful life is always The following charitable contributions shall be fully
presumed to be 5 deductible:
years. 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
Normal rate of activities in:
depreciation (depreciate a. Education;
over actual useful life) b. Health;
Depreciated over any c. Youth
number of years between d. Sports development;
five (5) years and the e. Human settlements;
expected life. f. Science and culture;
g. Economic development.

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EXCEL PROFESSIONAL SERVICES, INC.

2) Donations to foreign institutions or international The following donations, which do not fall under
organizations which are fully deductible in fully deductible donations, shall be subject to limit:
pursuance of: 1) Donations to the Government of the
a. Agreements; Philippines or any agencies or any political
b. Treaties; subdivision thereof exclusively for public
c. Commitments; or purposes;
d. Special laws. 2) Donations to accredited domestic
corporations or associations operated
3) Donations to Accredited Non-government exclusively for:
Organizations a. Religious;
b. Charitable;
The term “non-government organization” means a c. Scientific;
non-profit domestic corporation: d. Youth and sports development;
a. Organized and operated exclusively for: e. Cultural;
i. Scientific; f. Educational
ii. Research; g. Rehabilitation of veterans;
iii. Educational; h. Social welfare institutions; or
iv. Character building; i. Non-government organization.
v. Youth and sports development;
vi. Health; LIMIT
vii. social welfare; TAXPAYER LIMIT
viii. Cultural; Rate Base
ix. Charitable purposes; or Corporation 5% Taxable Income from trade,
x. A combination thereof. Individual 10% business or practice of
profession before charitable
b. No part of the net income of which inures to contributions
the benefit of any private individual;
VALUATION IN CASE OF DONATION OF NON-CASH
c. Not later than 15 th day of the third (3rd) month PROPERTY
after the close of the taxable year in which
contributions are received, makes utilization, The amount of any charitable contribution of property
unless an extended period is granted by the other than money shall be based on the acquisition
Secretary of Finance, upon recommendation of cost.
the Commissioner of Internal Revenue.
L. RESEARCH AND DEVELOPMENT
d. The level of administrative expense of which
shall, on an annual basis, in no case to exceed If not chargeable to Claim as outright expense
thirty percent (30%) of the total expenses; capital account
If chargeable to capital At the option of the
e. The assets of which, in the event of account but not taxpayer:
dissolution, would be distributed to: chargeable to property
i. Another domestic corporation subject to depreciation or OPTION 1 – Claim as
organized for similar purpose or depletion outright expense.
purposes; or
ii. The state for public purposes; or OPTION 2 – Amortize over
iii. Another organization to be used in 60 months.
such manner as in the judgement of If chargeable to property Capitalize
the court shall best accomplish the subject to depreciation or
general purpose for which the depletion
dissolved organization was organized.
LIMITATIONS ON DEDUCTION
Per special laws, donations made to the following
are deductible in full: The following Research and Development expenditures
1. Integrated Bar of the Philippines (P.D.181) are not deductible:
2. International Rice Research Institute (R.A. 1. Any expenditure for the acquisition or
2707) improvement of land, or for the improvement of
3. Development Academy of the Philippines (P.D. property to be used in connection with research
205) and development of a character which is subject to
4. The University of the Philippines & other state depreciation and depletion; and
colleges 2. Any expenditure paid or incurred for the purpose of
5. Cultural Center of the Philippines ascertaining the existence, location, extent, or
6. Artesian Well Fund (R.A. 1977) quality of any deposit of ore or other mineral,
7. Ramon Magsaysay Award Foundation including oil or gas.
8. Task Force on Human Settlement
9. Donations to the National Museum, Library and M. PENSION TRUSTS
Archives (P.D. 373)
10. National Commission on Culture AMOUNT DEDUCTIBLE
11. Humanitarian Science Foundation
12. National Social Action Council Actual contribution to the extent of pension PXXX
liability
DONATIONS SUBJECT TO LIMIT

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EXCEL PROFESSIONAL SERVICES, INC.
Amortization of Past Service Cost XXX
Total PXXX
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 ten
(10) years.
N. OPTIONAL STANDARD DEDUCTION (OSD)
Optional Standard Deduction can be claimed in lieu of
itemized deductions (except premium payments on
health and hospitalization insurance).
The following may be allowed to claim OSD:
1) Individuals
a. Resident Citizen
b. Non-resident citizen
c. Resident alien
d. Taxable estates and trusts
2) Corporations
a. Domestic corporation
b. Resident foreign corporation
AMOUNT DEDUCTIBLE
Individuals Gross Sales/Gross Receipts
x 40%
Corporations Gross Income x 40%
O. NON-DEDUCTIBLE ITEMS
1) Bribes, Kickbacks and other similar payments
2) Personal, living or family expenses
3) Any amount paid out for new buildings or for
permanent improvements, or betterments made to
increase the value of any property or estate
4) Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made
5) 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.
6) Interest, Losses and Bad Debts:
a. Between members of a family. Family of an
individual shall include only his brothers and
sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or
b. Except in the case of distributions in
liquidation, between an individual and a
corporation more than fifty percent (50%) in
value of the outstanding stock of which is
owned, directly or indirectly, by or for such
individual; or
c. Except in the case of distributions in
liquidation, between two corporations more
than fifty percent (50%) in value of the
outstanding stock of each of which is owned,
directly or indirectly, by or for the same
individual, if either one of such corporations,
with respect to the taxable year of the
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corporation preceding the date of the sale or
exchange was a personal holding company;
d. Between the grantor and a fiduciary of any
trust; or
e. Between the fiduciary of a trust and fiduciary
of another trust if the same person is the
grantor with respect to each trust; or
f. Between a fiduciary of a trust and a beneficiary
of such trust.
P. SPECIAL DEDUCTIONS
EXPENSES ALLOWABLE TO PROPRIETARY (PRIVATE)
EDUCATIONAL INSTITUTIONS
Cost incurred for the expansion of school facilities may
at its option:
1. Capitalize and claim depreciation as deduction; or
2. Claim as outright expense.
SPECIAL DEDUCTIONS ALLOWED TO INSURANCE
COMPANIES
1) Net additions made within the year to reserve
funds; and
2) The sum other than dividends paid within the year
on policy and annuity contracts.
NOTE: Released reserve shall be treated as income for
the year of release.
MULTIPLE CHOICE EXERCISES
1. JJ Corporation sold one of its property from which
it realized a profit therefrom. A portion of this
profit was given as bonuses to the corporate
officers as authorized by its by-laws. Which of the
following statements is correct?
a. The bonuses are deductible from gross income
as ordinary and necessary expenses.
b. The bonuses are disguised dividends which are
not allowed to be deductible from gross
income.
c. Both “a” and “b”
d. Neither “a” nor “b”
2. 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%
3. Brianne Corporation has incurred rent expense
amounting to P500,000. Brianne paid the lessor
the gross amount of P500,000 without deducting
5% withholding tax. How much rent can Brianne
claim as allowable deduction from its gross
income?
a. P500,000 c. P475,000
b. P450,000 d. nil
4. Bobadilla Charity (nonstock and nonprofit
charitable institution) paid for its regular repairs
and maintenance of its facilities to Johnson
Manpower Services (JMS). As the accountant of
Bobadilla Charity, how much withholding tax will
you impose to JMS?
a. Exempt from withholding tax
b. 1% withholding tax on its gross payment
TAX.1003
EXCEL PROFESSIONAL SERVICES, INC.

c. 2% withholding tax on its gross payment b. Repair that appreciably prolong the life of the
d. 5% withholding tax on its gross payment property
c. Repair that keep the property in its ordinarily
5. De Leon Manufacturing Corporation hired Sia, efficient operating condition
Cabarles & Trinidad (SCT & Co.) for its annual d. All of the choices
financial statement audit for 2015 taxable year.
De Leon agreed to pay SCT & Co. for its services 11. Which of the following expenses is not deductible
amounting to P2,000,000. Such payment to SCT from gross income?
& Co. shall be a. Salaries and wages of employees.
a. Exempt from withholding tax b. Entertainment, amusement and recreation
b. 1% withholding tax on its gross payment expenses.
c. 2% withholding tax on its gross payment c. Rental expenses.
d. 5% withholding tax on its gross payment d. Bribes, kickbacks and other similar payments.

6. XYZ Co. took two key men insurance on the life of its 12. Roy borrowed money from the Bank amounting to
President, Mr. A. In one policy, the beneficiary is the P1,000,000 at an annual interest rate of 7%. He
corporation to compensate it for its expected loss in invested the money in deposit substitutes earning
case of death of its president. The other policy annual interest income of 8%. How much is the
designates Mr. A's wife as its irrevocable beneficiary. deductible interest?
Question 1-Are the insurance premiums paid by XYZ a. P43,600 c. P70,000
Co. in both policies deductible? Question 2-Will the b. P26,400 d. P80,000
insurance proceeds be treated as income subject to tax
by the corporation and by the wife? 13. An individual taxpayer has the following data for the
a. Yes to first and No to second question; year 2014:
b. Yes to both questions; Interest paid, business loan P100,000
c. No to first and yes to second question; Interest paid, loan to build 500,000
d. No to both questions. residential house
Interest expense on delinquency 50,000
7. On January 1, 2014, Mr. V leased his vacant lot for a taxes (business related)
period of 12 years to Mr. J at an annual rate of Interest income – BPI Makati, net 24,000
P2,400,000. It was also agreed that Mr. J will pay the
For income tax purposes, the deductible interest
following:
 P4,800,000 representing rental payment for year expense shall be
2014 and 2015. a. P0 c. P140,100
 Security deposit of P2,400,000. b. P100,000 d. P150,000
 Annual real property tax of P30,000.
14. How shall interest related to acquisition of property
The lease contract provides, among others that the used in trade, business or profession be treated?
lessee will construct a 5-storey building for parking a. Claim as outright expense
purposes at a cost of P9,500,000. Ownership of the b. Capitalize
building shall belong to the lessor upon the expiration c. At the option of the taxpayer, may be claimed
or termination of the lease contract. as outright expense or capitalize
d. At the option of the government, may be
The building was completed on July 1, 2016 with claimed as outright expense or capitalize
an estimated useful life of 15 years. How much can
Mr. J claim as deduction in relation to the lease in 15. Mrs. Sarabia is using cash basis of accounting. She
2014? borrowed money from the bank in 2014 payable
a. P2,430,000 c. P2,400,000 after 2 years in lump sum. The proceeds given to
b. P4,830,000 d. P4,800,000 her was already net of P100,000 interest. When
can she claim as deduction the said interest?
8. Using the same information above, how much can a. In 2014
Mr. J claim as deduction in relation to the lease in b. In 2015
2016? c. In 2016
a. P2,430,000 c. P2,400,000 d. Spread over the term of the loan
b. P2,930,000 d. P3,063,333
16. The following interest are non-deductible, except?
9. RRO Corporation is engaged in the sale of goods a. Interest paid to persons classified as related
and services with net sales/net revenue of taxpayers under Section 36 (B) of RA 8424
P3,000,000 and P2,000,000 respectively. The b. Interest related to indebtedness incurred to
actual entertainment, amusement and recreational finance petroleum exploration
(EAR) expense for the taxable year totalled c. Interest on preferred stock
P30,000. d. Interest related to indebtedness incurred to
finance working capital requirements
How much is the deductible EAR expense?
a. P30,000 c. P25,000 17. Mapanlinlang Corporation was assessed by the BIR
b. P27,000 d. nil due to underpayment of Percentage Taxes. The
Assessment Notice disclosed the following:
10. Which of the following can be deducted from gross
income in the year paid or incurred? Basic Tax P 1,000,000
a. Repairs that materially add to the value of the Surcharge 250,000
property Interest 200,000
Penalties 25,000

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Total P 1,475,000
It also generated interest income from bank
deposits amounting to P100,000. How much is the
deductible interest?
a. P200,000 c. P167,000
b. P162,000 d. nil
18. 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
19. Based on the data in Number 30, but the tax
underpaid is donor’s tax, how much is the
deductible interest and tax?
a. P200,000 and P1,000,000, respectively
b. P200,000 and zero, respectively
c. Zero and P1,000,000, respectively
d. Zero for both items
20. Which of the following taxes incurred in the
conduct of business is not allowed as deduction
from business income?
a. Foreign income tax claimed as tax credit
b. Documentary stamp tax
c. Import duties
d. Local business tax
21. Which of the following instances will NOLCO can
still be claimed as deduction?
a. Transfer of ownership involves change from
direct ownership to indirect ownership, or vice
versa.
b. Merger of the subsidiary into the parent
company.
c. Either “a” or “b”
d. Neither “a” nor “b”
22. Mike Uro owns 50% of Leomar Corporation’s
shares of stocks. Mike sold a property valued at
P1,000,000 to Leomar for P800,000. Is the loss
deductible from Mike Uro’s gross income?
a. Yes, because Mike and Leomar are not
considered related parties.
b. No, because Mike and Leomar are considered
related parties.
c. Yes, because the sale results from sale of
property.
d. No, because the amount of loss cannot be
identified with certainty.
23. During 2018, Mike created a trust in favor of his
friend Leomar. He appointed Atty. Ong as the
trustee. A month later, Brian created a trust in
favor of his affectionate friend, JJ. Brian appointed
Ka Emong as the trustee. Later during the year,
Atty. Ong sold a property to Ka Emong at a price
which is substantially lower than the property’s
current market value. Can Atty. Ong deduct the
loss as a result of the sale?
a. No, because both Atty. Ong and Ka Emong
were fiduciaries of trusts.
b. Yes, because Atty. Ong and Ka Emong are
fiduciaries of different grantors.
c. No, because Atty. Ong does not have a capital
gain.
d. Yes, because losses as a rule are deductibl
24. X Corporation owns 100% of Y Corporation. Y
Corporation owns 100% of Z Corporation that has
NOLCO. Z Corporation is merged into Y
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Corporation. Which of the following statements is
correct?
a. Z Corporation’s NOLCO can be used by it to the
exclusion of all other parties.
b. Z Corporation’s NOLCO is transferred to Y
Corporation.
c. Z Corporations NOLCO is transferred to X
Corporation.
d. Z Corporations NOLCO can no longer be used.
25. Which of the following losses is not deductible?
a. Abandonment losses in petroleum operation.
b. Excess of expenses over gross income from
sale of ordinary assets.
c. Losses on wash sales of stocks.
d. Losses on sale of investments.
26. 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
27. ABC, whose taxable year is the calendar year,
provide the following acquisitions and disposals of
its investments in shares of stocks:
 September 21, 2014, purchased 100 shares of
the common stock of XYZ Company for
P50,000.
 December 21, 2014, purchased 50 shares of
substantially identical stock for P27,500, and
on December 26, 2014, 25 additional shares of
such stock for P11,250.
 January 2, 2015, it sold for P40,000 the 100
shares purchased on September 21, 2014.
How much is the indicated loss?
a. P10,000 c. P2,500
b. P7,500 d. P0
28. How much is the deductible loss?
a. P10,000 c. P2,500
b. P7,500 d. P0
29. Sira Sira 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.
How much is the deductible loss in arriving at
taxable income?
a. None c. P200,000
b. P185,000 d. P215,000
30. On July 1, 2010, a taxpayer purchased for
P500,000 an automobile which will be used
exclusively for his practice. He deducted annual
depreciation on the basis of an estimated useful
life of five (5) years. On July 1, 2013, the
automobile was partially damaged in an accidental
collision with another vehicle. The cost of repairs
amounted to P100,000. The taxpayer received
insurance proceeds of P70,000 to cover the loss.
How much is the deductible loss?
a. P200,000 c. P130,000
b. P100,000 d. P30,000
31. Dong, a gambling addict, won P90,000 from
cockfighting during the year. However, he also
suffered losses from other gambling activities
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amounting to P200,000. How much is the a. P4,000,000 c. P3,100,000

deductible loss? b. P3,000,000 d. nil
a. P200,000 c. P90,000
b. P110,000 d. nil 39. Continuing the information above, assuming in
2019 DLC Corp. contributed only P2,000,000 while
32. SNJ Inc. purchased shares of stock of Valde Corp. the Normal Cost is P3,000,000, how much is the
for P60,000 and of Boba Co. for P30,000. At the deductible amount?
end of the taxable year, it was ascertained that its a. P2,100,000 c. P2,000,000
Valde Corp. stock was worthless because of the b. P3,000,000 d. P3,100,000
complete insolvency of the corporation, and its
Boba Co. shares value had declined to P28,000. 40. Optional standard deduction is allowed to
a. Non-resident alien engaged in business
How much is the deductible loss of SNJ Inc.? b. Non-resident alien not engaged in business
a. P90,000 c. P60,000 c. Resident alien
b. P62,000 d. nil d. Non-resident foreign corporation

33. When shall bad debts be allowed as deduction from 41. A retailer of goods has gross sales of P1,000,000
gross income? with a cost of sales amounting to P800,000.
a. Upon setting up of allowance for doubtful Assuming that the taxpayer is an individual and
accounts opted to claim optional standard deduction, how
b. Upon write-off in the books much is the taxable income?
c. At the option of the taxpayer, upon setting up a. P600,000 c. P120,000
of allowance or upon write-off b. P550,000 d. P80,000
d. At the option of the government, upon setting-
up of allowance or upon write-off 42. Based on the preceding number, if the taxpayer is
a corporation, how much is the taxable income?
34. Which of the following is deductible from gross a. P600,000 c. P120,000
income even if the payment is not connected with b. P550,000 d. P80,000
business?
a. Contribution of the employer to the pension 43. The taxpayer is a domestic corporation:
trust of the employee. Gross sales P9,350,000
b. Charitable contributions Sales returns and allowances 250,000
c. Income tax paid in foreign country. Sales discounts 100,000
d. Travelling expenses Interest income on trade notes 150,000
receivable
35. Which of the following charitable contributions is Other income 50,000
not fully deductible? Cost of sales 3,000,000
a. Donation to the Government of the Philippines Operating expenses with 4,000,000
to finance priority projects identified by NEDA vouchers and receipts
b. Donation to the Municipality of Milagros in the Operating expenses without 500,000
Province of Masbate for the repair of Municipal vouchers and receipts
Hall Interest income from savings 80,000
c. Donation to International Organizations deposit
d. Donation to accredited Non-government Interest income from deposit 125,000
Organizations under FCDS
Royalty income 100,000
36. Mr. Mapagbigay had the following data during
2018: How much is the taxable income using itemized
deduction?
Gross income from business P1,000,000 a. P1,675,000 c. P1,700,000
Compensation income 40,000 b. P2,175,000 d. P2,200,000
Long-term Capital gain 50,000
Short-term Capital loss 20,000 44. Based on the preceding number, how much is the
Operating expenses 400,000 taxable income using OSD?
Donation to an accredited 30,000 a. P3,755,000 c. P3,695,000
NGO b. P5,470,000 d. P3,720,000
Donation to church 40,000

How much is the taxable income? 45. Debtor Corporation shows the following data
a. P505,000 c. P535,000 during taxable year:
b. P525,000 d. P555,000 Sales P500,000
Interest income, 24,000
37. Based on the above problem, but the taxpayer is a net of 20% final tax
corporation, how much is the taxable income? Cost of sales 300,000
a. P570,000 c. P560,000 Salary expense 120,000
b. P545,000 d. P600,000 Interest expense 60,000
Rent expense 24,000
38. DLC Corp. contributed P4,000,000 to its pension Advertising expense 6,000
plan during the year 2018. The normal cost Depreciation expense 5,000
appearing on the Actuarial Valuation Report is only NOLCO 50,000
P3,000,000. How much can DLC Corp. claim as
deduction?

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What is the correct amount of itemized

deduction?
a. P205,100 c. P255,100
b. P215,000 d. P265,000

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