TAXATION SIA / Since 1977

TABAG
TAX 2811 - Deductions from Gross Income MAY 2020

A. ALLOWABLE DEDUCTIONS, DEFINED

3. Connected with trade, business or practice of
profession;
Deductions are items or amounts which the law allows
4. Supported by sufficient evidence; and
to be deducted from gross income of certain taxpayers
5. Not against the law, morals, public policy or public
in order to arrive at the taxable income.
order;
6. It must have been subjected to withholding tax, if
B. KINDS OF DEDUCTIONS
applicable.
1. Itemized Deductions
2. Optional Standard Deduction
ENTERTAINMENT, AMUSEMENT AND RECREATION
3. Personal Exemptions
EXPENSE
4. Special Deductions allowed in special cases.
AMOUNT DEDUCTIBLE - lower Amount between:
TAXPAYER ALLOWABLE DEDUCTIONS
1. Actual
Individuals earning pure Prior to 2018 only: 2. Limit
compensation income 1) Basic Personal
Exemption LIMIT
2) Additional Personal Sale of Goods or Net Sales x ½ of 1%
Exemption Properties
3) Premium Payments on Sale of services Net Revenue x 1%
health/hospitalization
insurance MINOR OR ORDINARY REPAIRS & MAINTENANCE
Individuals deriving Prior to 2018 only:
income from trade, 1) Basic Personal KIND OF REPAIR TREATMENT
business or practice of Exemption Repairs that materially
profession. 2) Additional Personal add to the value of the Capitalize
Exemption property
3) Premium Payments on Repair that appreciably
health/hospitalization prolong the life of the Capitalize
insurance property
4) Itemized deductions or Repair that keep the
Optional Standard property in its ordinarily Outright Expense
Deduction
efficient operating
Corporations Itemized deductions or condition
Optional Standard
Deduction
ORGANIZATIONAL AND PRE-OPERATING EXPENSES

C. ITEMIZED DEDUCTIONS Organizational and pre-operating expenses are considered as

1. Ordinary and necessary business expenses in capital expenditures. However, upon start of commercial
general operations, it can be amortized over 60 months.
2. Interest
3. Taxes E. INTEREST EXPENSE
4. Losses
5. Bad debts REQUISITES FOR DEDUCTIBILITY:
6. Depreciation 1. There must be an indebtedness;
7. Depletion 2. The indebtedness must be that of the taxpayer;
8. Charitable Contribution 3. The indebtedness is connected with taxpayer’s
9. Research and development trade, business or practice of profession;
10. Contributions to Pension Trust 4. There must be legal liability to pay interest;
11. Premium Payments on Health and/or 5. It must be paid or incurred during the taxable
Hospitalization Insurance (prior to 2018 only) year.

D. ORDINARY AND NECESSARY TRADE, BUSINESS AMOUNT DEDUCTIBLE IN

OR PROFESSIONAL EXPENSES
GENERAL:
1. Salaries, wages, and other forms of compensation Interest Expense PXXX
for personal services actually rendered, including Less: (Interest Income subject to final tax x (XXX)
the grossed-up monetary value of fringe benefit 33%)
granted by the employer to the employee. Deductible Interest PXXX
2. Travel expenses
3. Rentals EXCEPTION: Interest on tax delinquency or
4. Entertainment, Amusement and Recreation deficiency, provided, the tax is related to trade,
Expense business or practice of profession shall be 100%
5. Other necessary business expenses deductible.

REQUISITES FOR DEDUCTIBILITY IN GENERAL:

1. Must be ordinary and necessary;
2. Paid or incurred during the taxable year;

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2811
EXCEL PROFESSIONAL SERVICES, INC.
OPTIONAL TREATMENT OF INTEREST
Interest related to acquisition of property used in
trade, business or profession may, at the option of the
taxpayer, be:
1. Claimed as outright expense;
2. Capitalize and claim depreciation.
TIME WHEN ADVANCE INTEREST CAN BE CLAIMED BY
INDIVIDUAL UNDER CASH BASIS
Interest paid in advance through discount or otherwise
shall be allowed as deduction in the year the
indebtedness is paid.
NON-DEDUCTIBLE INTEREST
1. Interest paid to persons classified as related
taxpayers under Section 36 (B) of RA 8424;
2. If the indebtedness is incurred to finance
petroleum exploration;
3. Interest on preferred stock
F. TAXES
The term “taxes” means taxes proper and no
deductions should be allowed for amounts representing
interest, surcharge, or penalties incident to
delinquency.
GENERAL RULE – Taxes paid or incurred within the
taxable year in connection with the taxpayer’s
profession, trade or business, shall be allowed as
deduction.
EXCEPTION – The following taxes are not deductible:
1. Income tax
2. Income tax paid abroad if claimed as tax credit
3. Estate tax
4. Donor’s tax
5. Special assessment
G. LOSSES
KINDS OF LOSSES:
1. Casualty Losses
2. Net operating loss carry-over (NOLCO)
3. Capital losses and securities becoming worthless
4. Special Losses
a) Losses from wash sales of stock or securities
b) Wagering losses
c) Abandonment losses
CASUALTY LOSSES
REQUISITES FOR DEDUCTIBILITY:
1. The loss arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft or
embezzlement;
2. The property lost is connected with the trade,
business or practie of profession;
3. Actually sustained during the taxable year;
4. Not compensated for by insurance or other forms
of indemnity
5. Incurred in trade, profession or business
6. Reported with the BIR within forty-five (45) days
from the time of loss; and
7. Not claimed as deduction for estate tax purposes.
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NET OPERATING LOSS CARRY-OVER
“Net Operating Loss” means the excess of allowable
deduction over gross income of the business in a
taxable year.
The net operating loss of the business or enterprise for
any taxable year shall be carried over as a deduction
from gross income for the next three (3) consecutive
taxable years immediately following the year of such
loss.
REQUISITES FOR DEDUCTIBILITY:
1. At the time of incurring net loss, the taxpayer must
not be exempt from income tax; and
2. There is no substantial change in the ownership of
the business or enterprise in that –
a) Not less than seventy-five (75%) in nominal
value of outstanding issued shares, if the
business is in the name of a corporation, is
held by or on behalf of the same persons; or
b) Not less than seventy-five (75%) of the paid
up capital of the corporation, if the business is
in the name of a corporation, is held by or on
behalf of the same persons.
NOLCO FOR MINES OTHER THAN OIL & GAS WELLS
For mines other than oil and gas wells, net operating
loss incurred in any of the first ten (10) years of
operation may be carried over for the next five (5)
years.
LOSSES FROM WASH SALES OF STOCK OR
SECURITIES
In case of any loss claimed to have been sustained
from any sale or other disposition of shares of stock or
securities shall not be deductible if:
1) The seller is not a dealer in securities;
2) Within a period of thirty (30) days before the sale
ending thirty (30) days after the sale, the seller
either:
a) Acquired (by purchase or exchange) stock or
securities identical to the stock or securities
sold; or
b) Has entered into a contract or option to
acquire stock or securities identical to the
stock or securities sold.
WAGERING LOSSES
Losses from wagering transactions shall be allowed only
to the extent of the gains from such transactions.
ABANDONMENT LOSSES
1) In the event a contract area where petroleum
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and
development expenditures pertaining thereto shall
be allowed as deduction.
2) In case a producing well is subsequently
abandoned, the unamortized costs thereof, as well
as the undepreciated costs of equipment directly
used therein, shall be allowed as deduction.
EFFECT IF ABANDONED WELL IS REENTERED AND
PRODUCTION IS RESUMED OR EQUIPMENT IS
RESTORED INTO SERVICE
TAX
2811
 If the abandoned well is re-entered and production
PROPERTIES USED IN MINING OPERATIONS
is resumed or equipment is restored into service,
the effects are: If expected life of Normal rate of
a) The amount previously claimed as deduction property is ten (10) years depreciation (depreciate
shall be recognized as income; and or less over actual useful life)
b) Such amount shall also be capitalized and If expected life is more Depreciated over any
amortized or depreciated, as the case may be. than ten (10) years number of years between
five (5) years and the
expected life.
H. BAD DEBTS
DEPRECIATION DEDUCTIBLE BY NON-RESIDENT
REQUISITES FOR DEDUCTIBILITY: ALIENS ENGAGE IN TRADE OR BUSINESS OR
1) There must be an existing indebtedness due to the RESIDENT FOREIGN CORPORATIONS
taxpayer which must be valid and legally
demandable; In the case of non-resident aliens engage in trade or
2) The same must be connected with the taxpayer’s business or resident foreign corporations, depreciation
trade, business or practice of profession; shall be allowed only if the property is located in the
3) The same must not be sustained in a transaction Philippines.
between related taxpayers;
4) The same must be actually charged off in the OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO
books of accounts of the taxpayer as of the end of DEPRECIATION
the taxable year; and
5) The same must be actually ascertained to be Allowance for obsolescence may be deducted in
worthless and uncollectible. addition to reasonable allowance for the exhaustion,
wear and tear.
SECURITIES BECOMING WORTHLESS
J. DEPLETION OF OIL AND GAS WELLS AND MINES
REQUISITES FOR DEDUCTIBILITY
1) Securities are ascertained to be worthless;
In case of oil and gas wells or mines, capital invested
2) The same is charged off within the taxable year;
may be amortized using cost-depletion method,
3) It must be a capital asset.
provided:
1) When allowance for depletion shall equal capital
I. DEPRECIATION
invested, no further allowance shall be granted;
2) After production in commercial quantities has
REQUISITES FOR DEDUCTIBILITY:
commenced, intangible exploration and
1) The property subject to depreciation is used in the
development drilling costs shall be treated as
trade, business or practice of profession;
follows:
2) The allowance for depreciation must be sustained
by the person who owns or who has a capital
INTANGIBLE EXPLORATION AND DEVELOPMENT
investment in the property;
DRILLING COSTS
3) The allowance for depreciation must be KINDS TREATMENT
reasonable;
Incurred for non- Deductible in the year
4) The allowance for depreciation should not exceed
producing wells and/or incurred.
the cost of the property;
mines
5) The schedule of the allowance must be attached to
At the option of the
the return.
taxpayer:
METHODS OF COMPUTATION IN GENERAL
Incurred for producing OPTION 1 – Deductible
wells and/or mines in full in the year paid or
1) Straight-line method
incurred; or
2) Declining-balance method – rate should not exceed
twice the rate in straight-line method
OPTION 2 – Capitalize
3) Sum-of-the-years-digit method; and
and amortize.
4) Any other method which may be prescribed by the
Secretary of finance upon recommendation of the
DEPLETION OF OIL AND GAS WELLS AND MINES
DEDUCTIBLE BY A NON-RESIDENT ALIEN INDIVIDUAL
PROPERTIES USED IN PETROLEUM OPERATIONS
OR FOREIGN CORPORATION

Properties directly related
to production
Properties not directly
related to production
1) Straight-line
2) Declining-balance
method
NOTE: Useful life to be
used is shorter period
between:
a. 10 years; or
b. Useful life
- Only straight line
method is allowed
- Useful life is always
presumed to be 5
years.
In the case of non-resident aliens engage in trade or business
or resident foreign corporations, depletion shall be allowed
only if the oil and gas wells or mines are located in the
Philippines.
K. CHARITABLE CONTRIBUTIONS
FULLY DEDUCTIBLE DONATIONS
The following charitable contributions shall be fully
deductible:
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
8. Task Force on Human Settlement
activities in:
9. Donations to the National Museum, Library and
a. Education;
Archives (P.D. 373)
b. Health;
10. National Commission on Culture
c. Youth
11. Humanitarian Science Foundation
d. Sports development;
12. National Social Action Council
e. Human settlements;
f. Science and culture;
g. Economic development.
DONATIONS SUBJECT TO LIMIT
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 the contributions
benefit of any private individual;
VALUATION IN CASE OF DONATION OF NON-CASH
c. Not later than 15th day of the third (3 rd) 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 chargeable taxpayer:
dissolution, would be distributed to:
to property subject to
i. Another domestic corporation
depreciation or depletion OPTION 1 – Claim as
organized for similar purpose or
outright expense.
purposes; or
ii. The state for public purposes; or
OPTION 2 – Amortize
iii. Another organization to be used in
over 60 months.
such manner as in the judgement of
the court shall best accomplish the If chargeable to property Capitalize
general purpose for which the subject to depreciation or
dissolved organization was organized. depletion

Per special laws, donations made to the following LIMITATIONS ON DEDUCTION

are deductible in full:
1. Integrated Bar of the Philippines (P.D.181) The following Research and Development expenditures
2. International Rice Research Institute (R.A. are not deductible:
2707) 1. Any expenditure for the acquisition or
3. Development Academy of the Philippines (P.D. improvement of land, or for the improvement of
205) property to be used in connection with research and
4. The University of the Philippines & other state development of a character which is subject to
colleges depreciation and depletion; and
5. Cultural Center of the Philippines 2. Any expenditure paid or incurred for the purpose of
6. Artesian Well Fund (R.A. 1977) ascertaining the existence, location, extent, or
7. Ramon Magsaysay Award Foundation quality of any deposit of ore or other mineral,
including oil or gas.
 outstanding stock of each of which is owned,
M. PENSION TRUSTS directly or indirectly, by or for the same
individual, if either one of such corporations,
AMOUNT DEDUCTIBLE with respect to the taxable year of the
corporation preceding the date of the sale or
Actual contribution to the extent of pension PXXX exchange was a personal holding company;
liability d. Between the grantor and a fiduciary of any trust; or
e. Between the fiduciary of a trust and fiduciary of another
Amortization of Past Service Cost XXX trust if the same person is the grantor with respect to
Total PXXX each trust; or
PENSION LIABILITY f. Between a fiduciary of a trust and a beneficiary
of such trust.
Pension liability is equivalent to Normal Cost.
P. SPECIAL DEDUCTIONS
PAST SERVICE COST
EXPENSES ALLOWABLE TO PROPRIETARY (PRIVATE)
Past service cost is the excess of actual contributions EDUCATIONAL INSTITUTIONS
over the Normal Cost. It shall be amortized over ten
(10) years. Cost incurred for the expansion of school facilities may
at its option:
N. OPTIONAL STANDARD DEDUCTION (OSD) 1. Capitalize and claim depreciation as deduction; or
2. Claim as outright expense.
Optional Standard Deduction can be claimed in lieu of
itemized deductions (except premium payments on SPECIAL DEDUCTIONS ALLOWED TO INSURANCE
health and hospitalization insurance). COMPANIES

The following may be allowed to claim OSD: 1) Net additions made within the year to reserve
1) Individuals funds; and
a. Resident Citizen 2) The sum other than dividends paid within the year
b. Non-resident citizen on policy and annuity contracts.
c. Resident alien
d. Taxable estates and trusts NOTE: Released reserve shall be treated as income for
the year of release.
2) Corporations
a. Domestic corporation MULTIPLE CHOICE EXERCISES
b. Resident foreign corporation
1. Which of the following is not a characteristic of a
AMOUNT DEDUCTIBLE deduction?
Individuals Gross Sales/Gross Receipts x 40% a. It is a reduction of wealth that helped earn the income
Corporations Gross Income x 40% subject to tax.
b. It is not a receipt.
c. It is a subtraction to arrive at income subject
to tax.
d. An immunity or privilege, a freedom from
O. NON-DEDUCTIBLE ITEMS
a charge or burden to which others are
subjected.
1) Bribes, Kickbacks and other similar payments
2) Personal, living or family expenses
2. Statement 1: Exclusions are receipts which are
3) Any amount paid out for new buildings or for
excluded from the gross income, hence, do not
permanent improvements, or betterments made to
form part of the gross income.
increase the value of any property or estate
4) Any amount expended in restoring property or in
Statement 2: Exclusions are items or amounts
making good the exhaustion thereof for which an
allowed to be subtracted from gross income to
allowance is or has been made
arrive at the taxable income.
5) Premiums paid on any life insurance policy
Statement 3: Deductions from gross income are not
covering the life of any officer or employee, or of
presumed.
any person financially interested in any trade or
a. Only statements 1 and 3 are false
business carried on by the taxpayer, individual or
b. Only statement 2 is false
corporate, when the taxpayer is directly or
c. Only statement 1 and 2 are true
indirectly a beneficiary under such policy.
d. All statements are true
6) Interest, Losses and Bad Debts:
a. Between members of a family. Family of an
individual shall include only his brothers and 3. Statement 1: The taxpayer has the burden of
justifying the allowance of any deduction claimed.
sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or Statement 2: Deductions are strictly construed
against the government.
b. Except in the case of distributions in
a. Statements 1 & 2 are false
liquidation, between an individual and a
b. Statement 1 is true but statement 2 is false
corporation more than fifty percent (50%) in
c. Statement 1 is false but statement 2 is true
value of the outstanding stock of which is
owned, directly or indirectly, by or for such d. Statements 1 and 2 are true
individual; or
c. Except in the case of distributions in
liquidation, between two corporations more
than fifty percent (50%) in value of the
4. Statement 1: Revenue expenditures are period
11. XYZ Co. took two key men insurance on the life of
costs that are related to a particular period of time
its President, Mr. A. In one policy, the beneficiary
of business operation.
is the corporation to compensate it for its expected
Statement 2: Capital expenditures are non-
loss in case of death of its president. The other
recurring expenditures related to acquisition of
policy designates Mr. A's wife as its irrevocable
depreciable assets to be used in the business.
beneficiary.
a. Statements 1 & 2 are false
Question 1-Are the insurance premiums paid by
b. Statement 1 is true but statement 2 is false
XYZ Co. in both policies deductible? Question 2-
c. Statement 1 is false but statement 2 is true
Will the insurance proceeds be treated as income
d. Statements 1 and 2 are true
subject to tax by the corporation and by the wife?
a. Yes to first and No to second question;
5. Which of the following is allowable compensation
b. Yes to both questions;
expense of an employer?
c. No to first and yes to second question;
I. Salary of employee paid for a limited period of
d. No to both questions.
time after his death to his widow is allowable
deduction of the employer.
12. All of the following, except one, are not deductible
II. Manager’s expense account subject to fringe
from gross income
benefit tax.
a. Tuition fees and other expenses of the
a. I only c. I and II
taxpayer's children
b. II only d. Neither I nor II
b. Replacement of the roof of the office building
c. Premiums paid in insuring the life of the
6. Which of the following items of expenses is not
Corporate President, Appointing the
deductible?
corporation as the beneficiary of the policy
a. Salaries, wages, commissions and professional
d. Premiums paid on a life insurance policy of
fees.
a rank-and-file employee with the latter's
b. Bonuses paid in good faith as additional
children as the appointed beneficiary
compensation for services rendered.
c. Pension and compensation for injuries if
13. On January 1, 2014, Mr. V leased his vacant lot for
compensated for by insurance.
a period of 12 years to Mr. J at an annual rate of
d. Grossed-up monetary value of fringe benefits
P2,400,000. It was also agreed that Mr. J will pay
provided that the final tax imposed has been
the following:
paid.
 P4,800,000 representing rental payment for
year 2014 and 2015.
7. One of the requirements in order for expenses to
 Security deposit of P2,400,000.
be claimed as deduction for income tax purposes is
 Annual real property tax of P30,000.
that, it should be subject to withholding tax if
applicable. What is the withholding tax rate
The lease contract provides, among others that the
applicable to rental payments?
lessee will construct a 5-storey building for parking
a. 1% c. 2%
purposes at a cost of P9,500,000. Ownership of
b. 5% d. 10%
the building shall belong to the lessor upon the
expiration or termination of the lease contract.
8. Brianne Corporation has incurred rent expense
amounting to P500,000. Brianne paid the lessor
The building was completed on July 1, 2016 with
the gross amount of P500,000 without deducting
an estimated useful life of 15 years. How much can
5% withholding tax. How much rent can Brianne
Mr. J claim as deduction in relation to the lease in
claim as allowable deduction from its gross
2014?
income?
a. P2,430,000 c. P2,400,000
a. P500,000 c. P475,000
b. P4,830,000 d. P4,800,000
b. P450,000 d. nil
14. Using the same information above, how much can
9. Bobadilla Charity (nonstock and nonprofit
Mr. J claim as deduction in relation to the lease in
charitable institution) paid for its regular repairs
2016?
and maintenance of its facilities to Johnson
a. P2,430,000 c. P2,400,000
Manpower Services (JMS). As the accountant of
b. P2,930,000 d. P3,063,333
Bobadilla Charity, how much withholding tax will
you impose to JMS?
15. RRO Corporation is engaged in the sale of goods
a. Exempt from withholding tax
and services with net sales/net revenue of
b. 1% withholding tax on its gross payment
P3,000,000 and P2,000,000 respectively. The
c. 2% withholding tax on its gross payment
actual entertainment, amusement and recreational
d. 5% withholding tax on its gross payment
(EAR) expense for the taxable year totalled
P30,000.
10. De Leon Manufacturing Corporation hired Sia,
Cabarles & Trinidad (SCT & Co.) for its annual
How much is the deductible EAR expense?
financial statement audit for 2018 taxable year.
a. P30,000 c. P25,000
De Leon agreed to pay SCT & Co. for its services
b. P27,000 d. nil
amounting to P2,000,000. Such payment to SCT &
Co. shall be
16. Which of the following can be deducted from gross
a. Exempt from withholding tax
income in the year paid or incurred?
b. 1% withholding tax on its gross payment
a. Repairs that materially add to the value of the
c. 2% withholding tax on its gross payment
property
d. 5% withholding tax on its gross payment
b. Repair that appreciably prolong the life of the
property
 c. Repair that keep the property in its
ordinarily efficient operating condition
d. All of the choices
17. Which of the following expenses is not deductible
from gross income?
a. Salaries and wages of employees.
b. Entertainment, amusement and recreation
expenses.
c. Rental expenses.
d. Bribes, kickbacks and other similar
payments.
18. In the conduct of his business in 2013, Modesto
found it necessary to give gifts to the government
officials with whom he had official dealings.
a. These gifts are deductible expenses subject to
the substantiation rule.
b. The value of the gifts, if de minimis, are
allowed to be deducted.
c. Irrespective of the value, the gifts are
considered as bribes and not allowed to be
deductible.
d. These gifts are deductible if found to be
necessary and properly supported by receipts.
19. Roy borrowed money from the Bank amounting to
P1,000,000 at an annual interest rate of 7%. He
invested the money in deposit substitutes earning
annual interest income of 8%. How much is the
deductible interest?
a. P43,600 c. P70,000
b. P26,400 d. P80,000
20. An individual taxpayer has the following data for the
year 2018:
Interest paid, business loan P100,000
Interest paid, loan to build 500,000
residential house
Interest expense on delinquency 50,000
taxes (business related)
Interest income – BPI Makati, net 24,000
For income tax purposes, the deductible interest
expense shall be
a. P0 c. P140,100
b. P100,000 d. P150,000
21. How shall interest related to acquisition of property
used in trade, business or profession be treated?
a. Claim as outright expense
b. Capitalize
c. At the option of the taxpayer, may be
claimed as outright expense or capitalize
d. At the option of the government, may be
claimed as outright expense or capitalize
22. On January 2, 2018 Mr. B contracted a 1-year
P100,000 loan from Metrobank for the purchase of
computers. The equipment which had a c. Import duties
depreciable life of eight (8) years were acquired on
April 1, 2018. The interest expense for one (1)
year amounted P15,000.
In the same year, his bank deposit with PNB earned
an interest income of P2,000. During the year, he
incurred an interest expense on unpaid business
tax of P600.
The deductible interest expense of Mr. B in 2018 is
- exclusively for his practice. He deducted annual
a. P14,240 c. P14,760
b. P13,600 d. P14,940
23. Which of the following items may be allowed as
deduction from gross income?
a. Interest paid on tax delinquency
b. Fines and penalties for late payment of taxes
c. Interest paid on indebtedness incurred to
finance petroleum exploration
d. Interest on unpaid salaries and bonuses
24. Which of the following is not a requisite for taxes
to be deductible?
a. Must have been paid or incurred within the
taxable year.
b. Deductible only by the person/s upon whom the
tax is imposed by law.
c. Must be in connection with the taxpayer's
profession, trade, or business.
d. Must be imposed by the national
government.
25. Which of the following is non-deductible?
a. Percentage tax on common carriers by land
b. Franchise tax
c. Overseas communications tax
d. Stock transaction tax
26. Mapanlinlang Corporation was assessed by the BIR
due to underpayment of Percentage Taxes. The
Assessment Notice disclosed the following:
Basic Tax P 1,000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
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
27. 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
28. Based on the preceding number, 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
29. 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
d. Local business tax
30. Which of the following items of expenses require
that notice be filed with the BIR to be allowed as
deduction from gross income?
a. Taxes c. Losses
b. Interest d. Salaries
31. On July 1, 2015, a taxpayer purchased for
P500,000 an automobile which will be used
depreciation on the basis of an estimated useful
life of five (5) years. On July 1, 2018, the
automobile was partially damaged in an accidental
 collision with another vehicle. The cost of repairs
37. Sira Sira Company had an old warehouse which had
amounted to P100,000. The taxpayer received
a cost of P1,200,000. The company demolished the
insurance proceeds of P70,000 to cover the loss.
warehouse when it had a book value of P200,000 in
How much is the deductible loss?
order to construct a new and bigger warehouse.
a. P200,000 c. P130,000
The demolition cost amounted to P25,000 while the
b. P100,000 d. P30,000
scrap were sold for P10,000. How much is the
deductible loss in arriving at taxable income?
32. Emang acquired a property for use in her business.
a. None c. P200,000
After a devastating typhoon, the machinery
b. P185,000 d. P215,000
suffered partial damage. The following were made
available:
38. One of the following losses cannot be deducted
Cost P500,000
from gross income.
Accumulated depreciation 300,000
a. To construct a bigger warehouse, a
Restoration cost 250,000
corporation demolished an old warehouse which
Estimated useful life 5 years
had a construction cost of P3,000,000 and a
book value of P500.000.
How much is the deductible loss?
b. Demolition of a building existing on a land
a. P0 c. P250,000
purchased where the corporation has no
b. P200,000 d. P100,000
use for the building at the time of
purchase and it was its intention to
33. The net operating loss of the business or
remove the building in order to build its
enterprise for any taxable year immediately
factory.
preceding the current taxable year, which had not
c. A corporation retired its machinery from the
been previously offset as deduction from gross
business because of the increase in the cost of
income shall:
production and the failure of the machinery to
a. Be carried over as a deduction from gross
meet the desired number of units of production.
income for the next 3 consecutive taxable
d. A corporation ascertained that its B Corp.
years immediately following the year of
stocks are worthless because of the total
such loss.
insolvency of B Corp.
b. Be carried over as a deduction from gross
income for the next 5 consecutive taxable years 39. The following interest are non-deductible, except?
immediately following the year of such loss.
a. Interest paid to persons classified as related
c. Not be carried over as a deduction from gross
taxpayers under Section 36 (B) of RA 8424
income in any of the succeeding years.
b. Interest related to indebtedness incurred to
d. Be carried over as a deduction from gross
finance petroleum exploration
income in any of the succeeding years until it
c. Interest on preferred stock
is fully offset.
d. Interest related to indebtedness incurred
to finance working capital requirements
34. The term "net operating loss" shall mean
a. The excess of capital losses over capital gains
40. Mike Uro owns 50% of Leomar Corporation’s
deductible from ordinary income.
shares of stocks. Mike sold a property valued at
b. The excess of capital losses over capital gains
P1,000,000 to Leomar for P800,000. Is the loss
not deductible from ordinary income.
deductible from Mike Uro’s gross income?
c. The excess of allowable deductions over
a. Yes, because Mike and Leomar are
gross income.
not considered related parties.
d. The excess of capital losses over ordinary
b. No, because Mike and Leomar are considered
losses.
related parties.
c. Yes, because the sale results from sale of
35. All of the following, except one, are requisites in
property.
the carry-over of net operating loss:
d. No, because the amount of loss cannot be
a. There must be no substantial change in the
identified with certainty.
ownership of the business
b. Carry-over is not allowed if the corporation is
41. During 2018, Mike created a trust in favor of his
subject to MCIT during the taxable year
friend Leomar. He appointed Atty. Ong as the
c. Even if the corporation paid MCIT, the running
trustee. A month later, Brian created a trust in
of the prescriptive period is not interrupted.
favor of his affectionate friend, JJ. Brian appointed
d. The carry-over is good for one (1) year.
Ka Emong as the trustee. Later during the year,
Atty. Ong sold a property to Ka Emong at a price
36. X Corporation owns 100% of Y Corporation. Y
which is substantially lower than the property’s
Corporation owns 100% of Z Corporation that has
current market value. Can Atty. Ong deduct the
NOLCO. Z Corporation is merged into Y
loss as a result of the sale?
Corporation. Which of the following statements is
a. No, because both Atty. Ong and Ka Emong
correct?
were fiduciaries of trusts.
a. Z Corporation’s NOLCO can be used by it to the
b. Yes, because Atty. Ong and Ka Emong are
exclusion of all other parties.
fiduciaries of different grantors.
b. Z Corporation’s NOLCO is transferred to Y
c. No, because Atty. Ong does not have a capital
Corporation.
gain.
c. Z Corporations NOLCO is transferred to X d. Yes, because losses as a rule are deductibl
Corporation.
d. Z Corporations NOLCO can no longer be used. 42. Dong, a gambling addict, won P90,000 from
cockfighting during the year. However, he also
suffered losses from other gambling activities
EXCEL PROFESSIONAL SERVICES, INC.

amounting to P200,000. How much is the

d. Travelling expenses
deductible loss?
a. P200,000 c. P90,000
49. Which of the following charitable contributions is
b. P110,000 d. nil
not fully deductible?
a. Donation to the Government of the Philippines
43. SNJ Inc. purchased shares of stock of Valde Corp.
to finance priority projects identified by NEDA
for P60,000 and of Boba Co. for P30,000. At the
b. Donation to the Municipality of Milagros in
end of the taxable year, it was ascertained that its
the Province of Masbate for the repair of
Valde Corp. stock was worthless because of the
Municipal Hall
complete insolvency of the corporation, and its
c. Donation to International Organizations
Boba Co. shares value had declined to P28,000.
d. Donation to accredited Non-government
Organizations
How much is the deductible loss of SNJ Inc.?
a. P90,000 c. P60,000
50. The following donations are non-deductible,
b. P62,000 d. nil
except?
a. Donations given directly to Yolanda survivors
44. When shall bad debts be allowed as deduction from
b. Alms given to beggars
gross income?
c. Political contributions
a. Upon setting up of allowance for doubtful
d. Donations to International Organizations
accounts
b. Upon write-off in the books
51. Mr. Mapagbigay had the following data during
c. At the option of the taxpayer, upon setting up
2018:
of allowance or upon write-off
d. At the option of the government, upon setting-
Gross income from business P1,000,000
up of allowance or upon write-off Compensation income 40,000
Long-term Capital gain 50,000
45. A taxpayer is allowed to use declining balance Short-term Capital loss 20,000
method in claiming depreciation. In such a case, Operating expenses 400,000
the limitation is – Donation to an accredited 30,000
a. It should not exceed twice the rate in straight- NGO

line method Donation to church 40,000

b. It should not exceed twice the rate in sum-of-
the-years digit method How much is the taxable income?
c. It should not exceed the rate in straight-line a. P505,000 c. P575,000
method b. P525,000 d. P555,000
d. It should not exceed the rate in sum-of-the-
years digit method 52. Based on the above problem, but the taxpayer is a
corporation, how much is the taxable income?
46. BSE College, a proprietary educational institution, a. P570,000 c. P560,000
spent P10 million for the construction of a new b. P545,000 d. P600,000
school building. The amount spent for the
construction - 53. In 2018, Alpha Corp., a calendar-year corporation,
a. Must be claimed as expense in the year of contributed P80,000 to a qualified charitable
completion organization. Alpha’s net income was P820,000. In
b. Capitalized and claim annual depreciation over 2018 what amount can Cable deduct as charitable
the life of the building contributions?
c. Capitalized or expensed outright at the a. P41,000 c. P51,000
option of the school b. P45,000 d. P80,000
d. Capitalized or expensed outright at the option
of the BIR 54. DLC Corp. contributed P4,000,000 to its pension
plan during the year 2017. The normal cost
47. Non-resident aliens engage in trade or business as appearing on the Actuarial Valuation Report is only
well as resident foreign corporations are also P3,000,000. How much can DLC Corp. claim as
allowed to claim depreciation in arriving at taxable deduction?
income. Which of the following is an absolute a. P4,000,000 c. P3,100,000
requirement before depreciation can be claimed? b. P3,000,000 d. nil
a. The property, regardless of location, directly
helped in the generation of income in the 55. Continuing the information above, assuming in
Philippines. 2018 DLC Corp. contributed only P2,000,000 while
b. The property, regardless of location, helped, the Normal Cost is P3,000,000, how much is the
directly or indirectly, in the generation of deductible amount?
income in the Philippines. a. P2,100,000 c. P2,000,000
c. The property is used in trade or business b. P3,000,000 d. P3,100,000
regardless of location
d. The property must be located in the 56. Optional standard deduction is allowed to
Philippines a. Non-resident alien engaged in business
b. Non-resident alien not engaged in business
48. Which of the following is deductible from gross c. Resident alien
income even if the payment is not connected with d. Non-resident foreign corporation
business?
a. Contribution of the employer to the pension 57. A retailer of goods has gross sales of P1,000,000
trust of the employee. with a cost of sales amounting to P800,000.
b. Charitable contributions Assuming that the taxpayer is an individual and
c. Income tax paid in foreign country.
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2811
 opted to claim optional standard deduction, how
much is the taxable income?
a. P600,000 c. P120,000
b. P550,000 d. P80,000

58. Based on the preceding number, if the taxpayer is a

corporation, how much is the taxable income?
a. P600,000 c. P120,000
b. P550,000 d. P80,000

59. The taxpayer is a domestic corporation:

Gross sales P9,350,000
Sales returns and allowances 250,000
Sales discounts 100,000
Interest income on trade notes 150,000
receivable
Other income 50,000
Cost of sales 3,000,000
Operating expenses with 4,000,000
vouchers and receipts
Operating expenses without 500,000
vouchers and receipts
Interest income from savings 80,000
deposit
Interest income from deposit 125,000
under FCDS
Royalty income 100,000

How much is the taxable income using itemized

deduction?
a. P1,675,000 c. P1,700,000
b. P2,175,000 d. P2,200,000

60. Based on the preceding number, how much is the

taxable income using OSD?
a. P3,755,000 c. P3,695,000
b. P5,470,000 d. P3,720,000