13-B

INCOME DISTRIBUTION MADE BY TAXABLE ESTATES OR TRUSTS

Illustration
Don Mariano transferred a commercial lot and a P1m stock investment in irrevocable trust in favour of
his son, Ritchie. The trust earned the following income in 2014:

Rent income on the lot P1,200,000

Less: Leasing expenses 200,000
Rental net income P1,000,000
Dividend income, net of final tax 36,000
Trust net income P1,036,000

In accordance with the trust indenture, the trustee distributed half of the gross rentals and the entire
dividends to Ritchie.

Special deduction
The special deduction is P600,000, the half of the gross rentals given to Ritchie. The distribution of the
P36,000 dividend to Ritchie shall not be deductible as this is not included in the gross income of the trust
for purposes of the regular income tax.

TRANSFER TO RESERVE FUND OF COOPERATIVES

Under ra 9520

Illustration
Lowland Coop summarized the following income and expenses from its exempt related activities:

Related Unrelated
Activities Activities Total
Sales P2,000,000 P1,000,000 P3,000,000
Cost of sales 1,200,000 600,000 1,800,000
Gross income P 800,000 400,000 P1,200,000
Operating expenses 500,000 150,000 650,000
Net income P 300,000 P 250,000 P 550,000

In compliance with the Cooperative Development Act, Lowland Coop appropriates 10% of profit to the
reserve fund, plus additional 40% to other required and optional funds.

THE EXPANDED SENIOR CITIZEN’S ACT OF 2003 (RA 9257)

Illustration
Goodhealth Drugstore Inc. recorded a P1,200,000 total deductible expense and the following sales:

Customers
Regular Senior citizens
Gross sales P5,000,000 P1,200,000
Cost of sales 3,000,000 800,000

Goodhealth adopts a policy of giving senior citizens a 25% discount. Consequently, it granted P300,000
total senior citizens’ discounts during the period.

Illustration 2
Tasty Restaurant Corporation provides a 20% discount to senior citizens. It recorded the following
receipts during the year:

Customers
Regular Senior citizens Total
Receipts P4,000,000 P 500,000 P4,500,000
Cost of services 2,800,000
Other deductible expenses 1,100,000

DEDUCTION INCENTIVES UNDER SPECIAL LAWS

Additional claimable compensation expense for senior citizen employees

Ra 9257, private establishments employing sc
15% of the total amount paid as salaries and wages to senior citizens

Illustration
Assume a taxpayer employs both regular and senior citizen employees and paid the following
compensation during the year:

Regular employees P200,000

Senior citizen employees with salary grades
above poverty level 50,000
Senior citizen employees with salary grades
below poverty level 40,000
Total compensation expense P290,000

ADOPT-A-SCHOOL ACT OF 1998 (RA 8525)

50%
Illustration
In 2016, Robotics Inc. entered into a memorandum of agreement with two schools to adopt them as
part of its corporate social responsibility:

Name Nature Assistance granted

Balabak High School A public secondary school P1,500,000
Divine World College A non-profit accredited donee P1,000,000
institution

Adopt-A-School program was designated by the NEDA as a priority program in the 2016 national Priority
Plan.
Valuation of deductions (RR10-2003)

Illustration 1
In 2016, Banawe Realty Corporation participated in the “Adopt-A-School Program” by contributing its
services to a public school in La Trinidad, Benguet. The agreed value fixed in the MOA for the
construction of the public school building was p1,000,000. However, Banawe Realty was able to
complete the same at a total cost of P800,000.

Illustration 2
Victory Bus Line contributed a lot and a bus to its adopted public school. The lot shall be used by the
public school for building expansion and the bus as a school bus. The “Adopt-A-School Program”
is a national priority program during the year.

The following relates to the value of the lot and the bus:

Appraisal value of lot P5,000,000

Zonal value of the lot 3,600,000
Assessed value of the lot 2,500,000
Acquisition cost of the lot 3,000,000
Acquisition cost of the bus 2,400,000
Depreciated cost of the bus 1,500,000
Depreciated appraised cost of the bus 2,000,000

NET OPERATING LOSS CARRY-OVER

Illustration
Assume the following operating (losses) or profits of the taxpayer:

Year 1 Year 2 Year 3 Year 4

Operating loss (profit) (P400,000) (P300,000) (P200,000) P20,000

Illustration: NOLCO Computation

Nexus Corporation incurred a net operating loss during the year:

Gross income P1,500,000

Less:
Regular itemized deductions P1,200,000
Special deductions under the NIRC 700,000
Deduction incentives under special law 300,000 2,200,000
Net operating loss (P 700,000)
Illustration
A corporate taxpayer reported the following net income and loss from business:

2012 2013 2014 2015

Gross income P 400,000 P 500,000 P 720,000 P 900,000
Less: Deductions 600,000 450,000 610,000 650,000
Net income: (NOLCO) (P 200,000) P 50,000 P 110,000 P 250,000

Required: Compute the taxable net income from 2013 to 2015.

Illustration: NOLCO from exempt years

In 2013, Mr. Tan started a “Hot Siopao” manufacturing plant with less than P3M capitalization and was
registered as a Barangay Micro Business Enterprise (BMBE). At the start of 2014, Mr. Tan’s certificate of
authority to operate as BMBE was revoked when he up scaled his business operations.

Mr. Tan’s business gross income and business expense were as follows:
2013 2014 2015
Gross business income P 400,000 P 700,000 P1,500,000
Less: Business expenses P 650,000 P 800,000 1,000,000
Net income (NOLCO) (P 250,000) (P 100,000) P 500,000

Required: Compute the net income before personal exemptions in 2015.

Illustration 1: Substantial change in ownership

Mr. see owns 80% of Trinoma Corp. In 2016, Mr. see disposed of his 80% interest to Mr. Yuchen. The net
income and (loss) of Trinoma Corporation since 2014 were:

2014 2015 2016

Net income (NOLCO) (P 250,000) P 150,000 P 500,000

Required: Compute the 2015 and 2016 taxable net income of Trinoma Corp.

Illustration 2: Substantial change in ownership

Mr. Tan started a business in 2014. Disheartened by heavy losses, he sold the business to Mr. Song at
the start of 2015. The net income or (loss) of the business were:

2014 2015 2016

Net income (NOLCO) (P 800,000) (P 300,000) P 500,000
Required: Compute the taxable net income of the business in 2016.

Illustration 1:
A corporate taxpayer reported the following from 2012 through 2016:

2012 2013 2014 2015 2016

Gross income P 400 P 320 P 480 P 400 P 500
Less: Deductions 500 450 450 340 340
Net income (NOLCO) (P 100) (P 130) P 30 P 60 P 160
Illustration 2
A domestic corporation reported the following results of operations from years 2011 through 2016:

2011 2012 2013 2014 2015 2016

Gross income P 410 P 300 P 320 P 480 P 400 P 500
Less: Deductions P 500 P 500 P 450 P 340 P 450 P 500
NI/(NOLCO) (P 90) (P 200) P 50 P 60 P 150 P 400

NOLCO FOR INDIVIDUAL TAXPAYERS

Illustration
An individual taxpayer complied the following income, expense and personal exemptions.

2013 2014 2015 2016

Compensation income P 20,000 P 220,000 P 80,000 P 75,000
Business gross income 470,000 400,000 500,000 500,000
Deductions 500,000 420,000 420,000 340,000

Required: Determine the annual taxable income.

13-C

OPTIONAL STANDARD DEDUCTION

Illustration
The income statement of a retailer of goods under the accrual basis of accounting is shown below:

Sales, net of returns, allowances, and discounts P1,000,000

Less: Cost of sales 600,000
Gross income P 400,000
Less: Operating expenses
Administrative expenses P 100,000
Selling expenses 120,000 220,000
Net income P 180,000

Individual=400,000
Corporation=160,000
Illustration 1: Basic
Mr. Lagawe, a manufacturer of goods under the accrual basis, opted to claim optional standard
deduction. Aside from manufacturing, Mr. Lagawe also leases a portion of his building to other
businesses. The following relate to his income:

Gross recorded sales P4,000,000

Sales returns, allowances, and discounts 200,000
Rental income 300,000
Interest income from bond investment 15,000
Interest income from customers’ notes 100,000
Gain on sale of equipment 20,000
Dividend from domestic a corporation 18,000

Net income=2,555,000

Illustration 2: Comprehensive
The following relates to Mr. Agra Rhaman, an audit practitioner and accredited CPE service provider. Mr.
Rhaman had a P50,000 personal exemption during the year.

Compensation income P 300,000

Billings for services rendered during the year:
Audit P4,500,000
Continuing professional education (CPE) seminars 200,000
Total P4,700,000
Collections during the year from:
Past year audit fee billings P 500,000
Current year audit fee billings 3,500,000
CPE seminars 150,000
Interest on bank deposits 34,000
Sale of used equipment (book value=P100,000) 150,000 (gain on sale)
Total P4,334,000

Required: Compute the OSD and present the taxable net income assuming the practitioner is under the:
1. Accrual basis of accounting
2. Cash basis of accounting

RULES ON DETERMINATION OF OSD FOR CORPORATE TAXPAYER

Illustration
Samar Corporation, a taxpayer under the accrual basis of accounting, opted to deduct OSD. The
following relates to its results of operations:

Gross sales, net of returns, allowances, and discounts P3,850,000

Gain on sale of building 500,000
Dividend from domestic corporation 50,000
Beginning inventory P 300,000
Net purchases 3,000,000
Ending inventory 800,000

Recorded administrative and selling expenses P 760,000

Corporate Sellers of Services

Illustration
Pelizloy Realty Corportation, a lessor of commercial spaces, opted to claim optional standard deduction.
The following data relates to the current year:

Gross receipts from rental of commercial spaces P3,600,000

Other receipts
Interest on lessees’ notes P 100,000
Fees from ads on building 30,000
Interest income on time deposits 16,000 146,000
Accrued but uncollected income
Rent P 400,000
Interest on lessees’ notes 20,000 420,000
Gain on cash sale of fully depreciated equipment 40,000
Cost of services:
Cost of services paid, including
Depreciation and supplies expense P1,200,000
Accrued or unpaid cost of services 300,000 P1,500,000

Required: Determine the OSD and present the taxable net income assuming the taxpayer is using:
1. Accrual basis of accounting (osd=1,076,000 tni=1,614,000)
2. Cash basis of accounting(osd= 1,028,000 tni= 1,542,000)
REGULAR INCOME TAXATION-SPECIAL CORPORATIONS

GENERAL CLASSIFICATION AND TAXATION OF CORPORATIONS

A. DOMESTIC CORPORATIONS- 30% REGULAR TAX ON WORLD TAXABLE INCOME

B. RESIDENT FOREIGN CORPORATION- 30% REGULAR TAX ON PHILIPPINE TAXABLE INCOME
C. NON-RESIDENT FOREIGN CORPORATION-30% FINAL TAX ON PHILIPPINE GROSS INCOME
Non resident cinematographic film owner,lessor or distributor-25% final tax on gross income
within the Philippines
Non resident lessor of vessels chartered by Philippine Nationals-4.5% final tax on gross rentals
final tax on gross income within the Philippines.

Non resident owner or lessor of aircraft, machineries and other equipment=7.5% final tax on
rentals and other fees.