INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 70

SUGGESTED ANSWERS
Chapter 8: Deductions from Gross Income

CHAPTER 8
DEDUCTIONS FROM GROSS INCOME
Problem 8 – 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME
1. Nondeductible
2. Deductible
3. Deductible
4. Deductible
5. Nondeductible
6. Nondeductible
7. Nondeductible
8. Deductible
9. Deductible
10. Deductible
11. Nondeductible
12. Nondeductible
13. Deductible, in lieu of tax credit (Sec. 34C3, NIRC)
14. Deductible
15. Deductible
16. Nondeductible
17. Nondeductible
18. Deductible
19. Deductible
20. Nondeductible

Problem 8 – 2 TRUE OR FALSE
1. False – Some business expenses are nondeductible; some are subject to limit.
2. True
3. False – Compensation income is not subject to OSD.
4. False – NOLCO is not an itemized deduction.
5. True – Amortized over the term of the lease
6. False – ½ of 1%
7. False – 33%
8. False – Double –declining method
9. True
10. True
11. False – Income outside the Philippines by a NRC is not taxable in the Philippines, hence,
no allowable deduction is allowed.
12. True
13. True
14. True
15. False – Business expenses related to business income outside the Philippines is
deductible also by domestic corporations and resident Filipino.
16. False – Business expense is deductible from gross income.
17. True
18. False – 40% based on sales or gross receipts.

B 2. B 3. D 8.000 Repair of furniture 1.000 Add: Allocated operating expenses within (P200. C Problem 8 – 7 C Expensed Capitalized Change of motor of air condition P60. B 4. D 5.000 Cleaning of computers 9.000 Problem 8 – 8 C Identifiable operating expenses – Philippines P400. C 2.000 Deductible expense P54. A 7.000 Loss of business equipment 38. A 5.000 Capital loss 4. C 10. B 8. C 7.000 Damages paid due to workers’ injury P20. C 6. D 4.000 Problem 8 – 10 D Depreciation expense (P1. D 7. A 4. C 2. C 3. C 1.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 71 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Problem 8 – 3 Problem 8 – 4 Problem 8 – 5 Problem 8 – 6 1. D 1. D 6. Letter A . A 3.000 . A 1. A 9.000 Expansion of store 50. C 9. Totals P40.000 Problem 8 – 11 D 1. C 3. A 10.000 x 40%)/25 P16. D 10.000 Repainting of building 10. C 8. A 5. A 9. A 9. C 8. C 5.000 Amount of nondeductible expenses and losses P39. C 2. C 6.000.000 Interest expense paid to his father 10.000 P110. A 7.000 Operating expenses – Philippines P440. B 6.000 Gifts made to employees during birthday 5.000 x P1M/P5M) 40. C 10.000 Problem 8 – 9 D Police protection P20. C 4.

000 Repair (P100. No. Rev.000 Note: For tax purposes.000) P200. 3. NIRC).000 x 10%) 10.000 P295. The OSD (40% of gross sales or gross receipts) is only allowed as deduction from income derived from business. Letter B Depreciation (P20.000 x 10%) P 2. the miscellaneous expense is not deductible because it was not reported last year. NIRC.000 Compromise penalty 50.000 Problem 8 – 12 B Tax laws GAAP Salary expense (P180. 34(A)(b).000 Depreciation expense 30.000 Multiplied by percent of OSD 40% Optional standard deduction P240. 2) . the reported operating expenses are not deductible (Sec.000 Total gross income P600.000 Rent income (P475.000 Estimated uncollectible accounts 10.000 Multiplied by OSD rate 40% Optional standard deduction P120.000 Deductible from earnings P230. Sec.000 30. the miscellaneous expense can be deducted as prior period adjustment from retained earnings.000 Problem 8 – 15 D Since there are no official receipts and documents to support the operating expenses.000 Miscellaneous expense . 34(L). 5.000 Office supplies 6.000 P200. If an individual opted to use OSD. (Sec. No personal exemption will be granted to a nonresident alien with business in the Philippines if his country does not have an exemption reciprocity law favoring a Filipino citizen. NIRC). 9. Regs. Problem 8 – 13 A Sales P300. [Sec.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 72 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income No personal or business expense is deductible.000/95%) 500.000 + P20. 2. No. he is no longer allowed to deduct cost of sales.000 The compensation income is not included in determining OSD. 34(L). For accounting purposes. Rev.000 Total deduction P18. The OSD is not allowed for nonresident aliens (Sec. 16-2008] Problem 8 – 14 B Gross receipts from profession P100. Regs.

” In the case of corporate taxpayers subject to tax under Sections 27(A) and 28(A)(1) of the Tax Code.000 400.000 . 300.000 Problem 8 – 18 B Salary expense P120.000 Rent expense 24.000 x 33%) ( 9.100 NOLCO is not an itemized deduction.000.000 Basis of OSD P1.000 P1.000.000) P1.000 Allowable itemized deductions P1.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 73 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Problem 8 – 16 A Sole Proprietor Corporatio n Sales P1.000 RA 9504 is specific as to the basis of OSD.005) 100. Problem 8 – 19 D Using OSD Using Itemized Sales P1.000 Representation expense – Actual P300.000 Less: OSD or Itemized deductions .000 Gross income P1.800.200.200.Limit (P20.000.000 x 0. the basis of the 40% OSD shall be the “gross sales” or “gross receipts.Lower 100.000 Advertising expense 6.000 Tax differential on interest income (P30.000 Cost of sales .” Problem 8 – 17 B Operating expense before representation expense (P2.000 – P300.000 P 500. as amended.000 Depreciation expense 5.000.0 .200.000 Interest expense 60. 700. For individuals.000 .700.00 P1.900) Total itemized deductions P205.000 0 Less: Cost of sales . the basis of the 40% OSD shall be the “gross income.00 P 700.000 0 Multiplied by OSD rate 40% 40% Optional standard deduction P P 280.000.

200.000 Problem 8 – 21 C Assume bonus is computed after tax but before bonus. 12. records or other pertinent papers can be used to support it (CIR vs.000 . 2007). 172231.143.000 Less: Income tax (P76.000 – 30% (76.000 – T) T = 30% (76.000) No itemized deduction is allowed if no official receipts. In case of individual taxpayer. Rev. The answer is letter D = P8. No.400 – 3. the basis of the 40% shall be the “gross sales” or “gross receipts” and not the “gross income.285 .0 - Net income before personal exemption P 720.000 x 40%) 480.000 Less: Deductible contribution (P80. Regs.” (Sec. computed as follows: Net income before charitable contribution (P75.000 Allowed deduction using OSD (P1.045B B – 0.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 74 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income (P1.000 x 5%) – lower of actual 4.000) P 80.000. Feb.000.000 – B) B = 15% [76.R.000 – 24.356 Proof: Income before bonus and tax P76.000 Net income before income tax and bonus P 76.000 – P8.000 Less: Cost of sales 700.955B = 7.000 B = 15% (76.320 + 30%B) B = 11.000 P 500.382) x 30% 20. G.980/0. 3.000 + P5.000 Deductible salaries and fringe benefits expenses P7.000 Grossed-up monetary value of fringe benefits 1. the “cost of sales” or the “cost of services” are not allowed to be deducted for purposes of determining the basis of OSD inasmuch as the law (RA 9504) is specific as to the basis thereof which states that for individuals. Isabela Cultural Corporation. No. 16-2008) Problem 8 – 20 A Gross salaries of employees P6.955 B = 8.980 0.000 Net disadvantage using OSD (P220.420 +0.200.000 x 40%) P 480.000.045B = 7.000 – B)] B = 15% (76.

000 Terminal pay 25.250 .000 Total deductible expenses P95. 72.000 Decreased in inventory 20.000 + P200. (Sec.500 x 60%) x 2/12 150 Deductible rent expense P24.000) P250. Letter B Rent for 6 months based on usage (P20.000 P37.000 x 60%) x 2 mos from Oct.000 2.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 75 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Income after tax but before bonus P55.000 x 6) x 80% P96.250 Monthly deductible expense P8.715 Multiplied by rate of bonus 15% Bonus P 8.000 x 60%) x 2/12 300 Real property tax (P1. 31 to Dec.450 Note: The city services is not a rent expense. hence. Problem 8 – 26 1. 31 P24. Regs.000 Increased in inventory .000/68%) 100.000 Insurance premium (P3.356 Problem 8 – 22 B Monthly salary P 5.000) P320. Rev. 2) Problem 8 – 23 C Inventoriable cost Supplies expense Purchases P300. not deductible.000 P40.000 Note: Donation for coffin and other wake expenses is not business or compensation related and.000 Death benefits 50.000 Transportation expense – messenger 40.000 Total allowable expense P390. Letter D Actual cash collection for rent P150.000 Continuous compensation after the burial for three months 15.000 Fringe benefit expense (P68.000 Problem 8 – 27 D Monthly rental expense P2.000 Monthly depreciation (P600.000 Problem 8 – 24 D Traveling expenses (P50.000/8)/ 12 6.000 Problem 8 – 25 B Monthly rent (P20. ( 3.

000 Limit (P700.000 + P300.000)] 70% Apportioned representation expense for sales P 7.000 Limit (P300. the remaining period for the contract of lease is 9.000 x .000 x 20%) 60.000 Total special itemized deduction P275.000 x 12) P 60.500 Actual representation expense P10.000)] 30% Apportioned representation expense for sales P 3. Problem 8 – 29 1.000 x 15%) 15.000 Tax differential (P50. Letter B Trading .000 + P300.500) Deductible interest expense P23. The salvage value is ignored in the computation of the depreciation because T Foods could no longer benefit on it since the improvement on the land will be owned by the lessor at the end of the 10-year contract of lease.000 Problem 8 – 30 B Actual representation expense P10.Limit lower (P5.667 Deductible expense in 200y P151.000/9.000 Senior’s citizen discount (P300.000 .005) P25.000 Multiplied by percent of representation expense for revenue [P300.005).667 At the start of the used of the building.01) 3.500 Problem 8 – 31 A Interest expense P40. Letter C Servicing – actual lower P30.000/(P700. lower P3.000/(P700.000 x 0.5 years.000 Salary of senior citizens – additional (P100.000 Add: Depreciation expense [(P950.5) x 11/12] 91.000 Deductible representation expense P6.000 x 0.000 2.000.000 Multiplied by percent of representation expense for sales [P700.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 76 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Problem 8 – 28 C Rent expense (P5.500 Problem 8 – 32 B Breast-feeding assistance to the needy – additional P200.000 x 33%) (16.

500 Nondeductible interest expense P 76.000 Deductible interest expense bank loan (P40.000 Documentary stamp taxes 1. Regs. 355) Problem 8 – 35 D Tax savings from interest expense (P100.000 Problem 8 – 34 B Interest expense on unpaid salaries P 60.000 – P16.000) Actual net tax savings P 6.000 Community tax 1. Collector of Internal Revenue.500 The salaries of direct workers should be classified as deductible cost of service and not to be classified as part of itemized deductions (Rev. Problem 8 – 37 C Business taxes P 20.500 Salary expense P600.000/80%) x 33% 16.000 Total P 8.000 Postage stamp taxes 500 .500 Total itemized deductions P823.000 Interest paid on delinquency taxes P 8.000 Automobile registration fees 3.000 Problem 8 – 36 A Documentary stamp taxes P 1. 106 Phil.000 x 12%) x 20% (24.500 Deductible taxes P9.000 Interest paid to finance petroleum exploration .000 x 30%) P30.000 Add: Nondeductible tax differential (P40. vs.16-2008).000 Local tax (P6.000 – P800 – P200) 5. Inc.000 Municipal tax 2.000 Interest paid to a brother 12.500) 23.000 P162.000.000 Interest on borrowings to finance his family home 30.500 Note: The fringe benefit income taxes to key officers and rank-in-file employees are to be classified as deductible fringe benefit expense and not tax expense. (Kuenzel & Streiff.000 Rent expense 200.000 Final tax on interest income (P1. Interest expense on unpaid salaries is not deductible.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 77 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Problem 8 – 33 B Deductible Nondeductible Interest paid in advanced P 20. No. 100.

000 Oil extracting machine (P900.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 78 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Import duty taxes 50.000 40%) Bad debts from profession actual written off 50. Problem 8 – 39 A Asset of Oliva P 60.5 years) P200.000 Deductible bad debts expense P90.500 Problem 8 – 38 D Unadjusted net income (P520.000/11.000) Balance (P40.000 x 90%)/5 years – limit 36.000 Note: The P10.000 Total deductible taxes P 74.000 x 90%)/10 years – limit 81.000 – P5.000)/5 P9. 31) 6/12 Depreciation expense 200B P4.000 Payment to government (P200.000 – P200.000) Net taxable income P280.000 Personal exemption (50.000) P320.000 Computers (P100.000 Add back: Income tax foreign country 10.000 Multiplied by ratio of months used in 200B (July 1 to Dec.000 Annual depreciation expense P229. Properties not used directly in the production of petroleum shall be depreciated under the .000 x 50%) (100.000 x P40.000 x 90%)/8 years P 90.500 The useful life of properties used in or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the BIR Commissioner.000) Deductible bad debts is the entire amount of collectibles P100.) 6/12 Depreciation expense P100.500 Problem 8 – 42 A Annual depreciation (P2.000 Adjusted net income P330.000 x 90%)/4 years 22.000 Multiplied by ratio of months used during the year (from June 30 to Dec.000 Problem 8 – 41 D Annual depreciation expense (P50.000 Problem 8 – 43 D Oil drilling machine (P800.000 Problem 8 – 40 B Bad debts from business actual written off (P100.000 income tax paid to foreign country is better to be treated as tax credit rather than as operating expense.500 Delivery truck (P200.300.

000 Less: Deductible amount of exploration and development cost (see 3) 1.000 3 Letter B .300.000.200.260.000 + 2.500. Depletable costs. Depletion cost 2007 (P2 x 1.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 79 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income straight-line method on the basis of an estimated useful life of five (5) years.000 Less: Production and selling costs: Mining costs P2.000 4 Letter B .400.200.725.725.000 New depletion rate/ unit P 2.000 Problem 8 – 45 1 Letter D .000) P2. Value of production (P12 x 1.400.000.00 2 Letter A .000 units) P14.00 0 Milling costs 3.000 .000 + P1.200.000 units) P2.000.000 Adjusted basis P 1. 200x P12.400.500.000 2.000 Exploration costs 1.000) P5.300.500.000 Multiplied by limit percentage 25% Deductible amount fro exploration and development cost P 1.000/7.000 Depreciation expense 1.000) 6.000 – 1.500.000.000 Marketing expenses 1.000.500. Current exploration and development cost (P1.000.000 Exploration and development cost chargeable to succeeding years P 775.000 Total P15. 34(F) (4).000 Less: Depletion expense (P15.000 0 Net income from operation P 6.000 Depletion expense P 848.000.00 7. January 1.000 Intangible development costs 1.900.200.000.06 Multiplied by number of tons extracted during the year 800.000) x 1.000 – P1.000. (Sec.000.000 Depletion per ton P 1.500.000 + P300.000 Divided by number of extractible estimated tons 5. NIRC) Problem 8 – 44 C Depletion base (P6.000 Divided by remaining reserves (5.000.500.500.

000/10) .lower P 18.000 + P5.000 – P130.000 Problem 8 – 48 A Year X Year Y Actual contribution or normal valuation.000 800.000) P370.000.000 Capital outlay P10.000 10. Problem 8 – 48 B Allowed deductible contribution (P200.000 10.000 Problem 8 – 49 B Allowed deductible contribution (P200.000 Problem 8 – 47 1 Letter B 200A 200B 200C Lower of actual contribution or normal valuation 800.000 Deductible retirement expense 820.000 Note: Only the excess of the actual contribution over the normal valuation is to be amortized over 10 years.000 610.000/10) 20.000 830.500 Problem 8 – 51 B Income before charitable contribution (P500.000 x 5%) P10. 10.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 80 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Problem 8 – 46 B Deductible expense: Capitalized Outright expense Depreciation expense (P10.000 2.000 500.000 Multiplied by percent of limit 5% Allowed deductible contribution .000 300.000 20.000 Add: Amortization of excess 200A (P200.000 per year.000.000 x 90%)/50 P180.000 Add: Amortization (P100.000 200B (P100.000 x 5%) P10.500 Problem 8 – 52 A PPHHI per month P200 Problem 8 – 53 D Not allowed to deduct PPHHI because family income exceeded P250. .000/10) 10.000 530. lower 700.000 600.000) x 10%] P6.000 Deductible retirement expense 710.000 20. Letter A 200A 200B 200C Actual retirement payments 0 400.000 Problem 8 – 50 D Allowed deductible contribution [(P60.

000.000 – P30.000 Total operating expenses before contribution P176.000 P 5.000 P 5.500 Add: NOLCO 500.000 – (P40.800.000.000 Net taxable income P1.000 40.000 40.000 Depreciation expense (P140.200.000 Traveling expenses 11.960 Office rent 60. Gross income (P5.000/80%) x 33%] 33.000 Adopt a school program – incentive (P1.200.000 – P2. 2.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 81 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Problem 8 – 54 C Actual value of donation – priority program P1.315 Allowable itemized deductions P209.850) x 10%) 32.000) P3. 3.165 Problem 8 – 57 Sole Proprietorship Corporation Partnership Bad debts written-off (P35.500.000 – P176.850 Add: Contribution subject to limit (P500.000 Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD. Operating expenses (1.000 Deductible donation P1.500 Note: NOLCO is not an itemized deduction but part of deductible expenses.000 Interest expense (P50.500 Total itemized deductions P283.000 Problem 8 – 55 1.000 P250.000.000.000 Problem 8 – 56 Salaries of assistants P 96.000 – P100.890 Stationeries and supplies 1.000 Multiplied by OSD rate 40% OSD P1.000.000.000 .000 Total deductible expenses P783.000) P 5.000 x 50%) 500.000) 40. Gross income P3.000.000 x 30%) – P50.000 Light and water – office 7.000 Less: OSD 1.

000) 620.095.000 Total allowable deductions P 265.400 Depreciation expense 40.000 Deductible retirement expense 1.000 1.000 25. lower 1.000 750.000 (P2.000 Local government – limit (lower is actual) 100.400 60.100.000 x 20%) 20. Problem 8 – 60 1.400 Note: NOLCO is an allowable special deduction but not an itemized deduction.000 500.000 or (P2.000 620.000 Less: Deductible retirement expense – taxation 1.000 20.100.000 250.full 20.000 – P380.000 – P100.000 Donations subject to limit: Lower of actual.000 – (P96.000 Group insurance expense 50.000 Total 51. NIRC).000 Bad debts expense (P100.000/80%) x 33%) 60. 125. P170.500.000/10) 255.000 Net income for tax purposes 50.000 40. hence.000 125.000 Retirement (P250.000 Add: Amortization .000.000 x .000.000 20.025.095.025.000 – P270.000 Problem 8 – 59 Corporation Individual Salary expenses 500.000 61.000 P 220.5) 750.000 900.200A (P250.000 60.000 50.000 2.500.400 2. its amortization shall be made in the succeeding five years when the taxpayer realizes benefits from such expenditures (Sec.000 Retirement expense (P1.000.000 Representation expense (P10.000 60.000 50.000 50.000 925.000 The research and development cost is to be treated as a deferred expense.000 100. 341.000) 100. Individual Corporation Salaries expense (P680.000 x 1.000 x 5%) . Financial net income 50. 200A 200B Actual contribution or normal valuation. Problem 8 – 58 1.000 Interest expense – limit: (P100.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 82 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Donation to the government – priority program 50.000/10) 25.000 x 10%) 170.275.000 Contribution expenses: TESDA priority project (500.000 925.000 + P50.000 Add: Retirement benefit expense – accounting 1.000 580.000 100.000 Bad debts expense (P370.005) 50.000.075.000 50.000 Rent expense 250.000.200.200.000 Total itemized deductions 2.000 P 220.000 Interest expense paid to the BIR .000) 580.000 255.000 .

500) x 5%=375.208.000.251.000.500 Total itemized deduction before contributions 1.000 Total sales P39.000) P9.000.000.460.075 .000 100.000 x 0.000 – P100.000) 30.000) 4.000 Ind: (P39.460.958.208.000 Taxes expense (P300.000 – P30.208.000 + P800.000 x 150%) 750.000 Interest expense [(P200.958.000 Cost of sales 30.500 Net taxable income P6.000.000) 180.000 + P370.000 + P1.500 Contribution expenses: Donation to TESDA priority project (P500.000 Operating expenses deducted (P680.500) x 10%=750.000 – P1.000 400.000 + P800.000 + P150. Total allowable deductions 3.000 2.000 x 33%) + P20.000) 50. .000 180.500 3.000 – P30.500 3.000 – P20.000 Rent expenses (P200.460.INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) 83 SUGGESTED ANSWERS Chapter 8: Deductions from Gross Income Representation expense (P39.000 Donations for Rooming-in and Breast-feeding (200k x 2) 400.000.000 30.958.500 Computation of sales: Financial income P 5.251.000 – P270.000 Donations NGO’s (35% for admin.150 Corp: (P39.000 + P300.460.000.) 100.500 1.500 P6.000 Life insurance expense (P150.000 Less: Total allowable deductions 3.000 750.000 – P1.460.000 – P30.000 195.000 + P160.500 203.000 P9.000 50.005) 195.460.000] 203.500 . Individual Corporation Gross income (P39.000 + P200.000 – (50.460.958.208.