CHAPTER 13
DEDUCTIONS FROM GROSS INCOME P433-P436
Deductions from gross income pertain to business
expenses incurred by the taxpayers engaged in business
or engaged in the practice of profession.
What is a business?
In taxation, the term business is generally used to include
the exercise of a profession. Self-employment is a
business but employment is not a business.
Business Expense vs. Personal Expense
Business expenses are costs of doing trade, business or
practice of profession.
Personal expenses include the living and family expense
of individual taxpayers such as family food, personal
recreation and transportation.
The separation of the business expenses and the
personal expenses of an individual income taxpayer is
important because only business expenses are
deductible.
Personal Expense are non-deductible.
Allocation of common expenses
Expenses that are intended for both the business and for
personal use of the taxpayer are allocated between the
two. Only those that pertain to the business are
deductible.
Business Expense vs. Business Capital Expenditure
Business expenses benefit only the current accounting
period. They are costs of generating income or gains for
the current period. Hence, they are deductible against
gross income in the current period.
Examples of expenses:
1. Salaries and wage expense
2. Utilities expense such as electricity, telephone,
internet, gas and water.
3. Selling expenses such as delivery and commission
expense
4. Rent
5. Local taxes and permits.
Capital expenditures are expenses that benefit future
accounting periods. They are initially recorded as assets
upon acquisition then later deducted against future gross
income when used in the taxpayer's trade, business or
profession.
Examples of Capital Expenditures:
1. Items of property, plant and equipment
2. Inventory
3. Investments
4. Prepayments
5. Acquisition of intangible assets
6. Expenses to promote business goodwill
7. Rentals on capital lease or finance lease that transfers
ownership.
Acquisition of Intangible Properties
The acquisition of intangible assets such as patents and
franchises constitute capital expenditure that must be
amortized (deducted) over the period they are expected
to be used.
Expenses to promote business goodwill
Expenses incurred to create or maintain some form of
goodwill for the taxpayer's trade or business or for the
industry or profession of which the taxpayer is a member
are non-deductible.
Rental payments on finance lease that transfer
ownership
"Rent-to-own" arrangements are not considered
expense.
The rental constitutes acquisition cost of the leased
property that should be initially capitalized.
The capitalized cost shall be depreciated throughout the
useful life of the property.
Rules on Deducting Capital Expenditures P436-P440
1. Non-depreciable asset
2. Depreciable Properties
3. Intangible Asset
4. Inventory
5. Prepaid expenses
1. Non-depreciable asset
The cost of assets that do not depreciate by usage or by
passage of time such as land is deducted against the
selling price when sold.
2. Depreciable properties
The depreciable cost of the acquisition cost, net of
expected salvage value, is allocated as deduction over
the useful life of the property. The useful life of the
property is the length of time it is expected to be
serviceable or its legal life, if applicable, whichever is
lower.
Depreciation Method
The taxpayers may choose from the following methods.
a. Straight line method
b. Sum-of-the-years-digit method
c. Declining balance method (150% or 200%)
d. Other methods which may be prescribed by
the Secretary of Finance upon recommendation
of the Commission of Internal Revenue
a. Straight line method
The depreciable cost simply spread equally over the
useful life. The annual depreciation expense is computed
as: (Acquisition cost - salvage value) / useful life in years
b. Sum-of-the-years-digit Method (SYD)
The depreciation charge is computed as a fraction of the
remaining useful life over the total of the annual
remaining useful life of the asset.
c. Declining Balance Method
A declining rate not exceeding double of the straight-line
rate is applied to the book value of the property. For
every period, depreciation expense is computed by
multiplying the depreciation rate to the declining book
value of the property. The salvage value is initially
ignored in computing depreciation expense, but consider
the terminal year of the property.
Under the 150% declining rate and double declining rate,
the depreciation rate is determined by multiplying the
straight-line rate by 150% and 200% respectively.
3. Intangible Assets
Amortizable intangible assets or those that lose their
value over time should be expensed over their legal life
or expected usage life whichever is lower.
4. Inventory
For goods inventory and supplies, their costs are
deducted when sold or used in the business using the
inventory method or the specific identification method
with the aid of a Point-of-Sale (POS) machine.
Presentation of the Income Tax Return
The cost of goods sold is deducted outright from gross
sales in the measurement of the gross income from
operations.
5. Prepaid Expenses
Prepayments are deducted in the future period as they
expire or as they are used in the business or profession
of the taxpayer. The advanced deduction of
prepayments, if material in amount, will cause significant
distortion in net income; hence, it is not allowed.
Special Considerations with Deductions P440 Under the accrual basis, deductions include the
following:
1. Property repairs and improvements

2. Property acquisition-related costs

Accrued expenses (paid or unpaid) P xxx,xxx
3. Securities issue costs
Amortization of prepayments xxx,xxx
4. Manufacturing expenses
Depreciation of properties xxx,xxx
5. Effects of accounting methods
Total: Accrual basis deductions P xxx,xxx
6. Effects of value added tax

6. Effect of Value Added Tax on Deductions P446

1. Property repairs and improvements
When Purchases of goods or services are made from VAT
Repairs that merely restore the value or functionality of
suppliers, taxpayers will pay the VAT passed-on by the
the property without causing increase in fair value or
supplier. To the seller's perspective, this is called
useful life of the property shall be deducted as outright
OUTPUT VAT. But to the buyer, this is called INPUT VAT.
expense.
Treatment of Input VAT

a. For VAT taxpayer, the input VAT is claimable as tax

2. Replacement of old or destroyed property
The tax basis of the old property is deductible as a loss,
but the cost of the replacement property is capitalized
subject to future provisions for depreciation.
credit against output VAT; hence, it is not claimable as
deduction.
b. For Non-VAT taxpayer, the input VAT is part of costs of
the purchase or expense of the taxpayer; hence, it is
claimable as deduction.

5. Effects of Accounting Method in Deductions GENERAL PRINCIPLES OF DEDUCTIONS FROM GROSS

INCOME P446
-Under the cash basis expenses are deductible when paid
regardless of when they accrued. 1. Expenses must be legitimate, ordinary, actual and
necessary (LOAN)
-Under the accrual basis, expenses are deductible when
they accrued regardless of when they are paid. 2. The Matching Principle

-Prepayments and capital expenditures cannot be 3. The Related Party Rule

deducted outright.
4. The Withholding Rule

Under the cash basis, deductions include the following:

2. The Matching Principle
Cash expenses (paid) P xxx,xxx
It is a well-established rule in income taxation that only
Amortization of prepayments xxx,xxx business expenses that are incurred for the generation of
items of gross income subject to regular tax are
Depreciation of properties xxx,xxx deductible.
Total: Cash basis deductions P xxx,xxx Example of non-deductible expenses under this rule:
P449

1. Expenses on exempt income

2. Expenses on income subject to a special tax regime

3. Business expenses of taxpayers subject to final income
tax
4. Expenses and taxes on income subject to final tax or
capital gains tax
5. Foreign business expenses of taxpayers taxable only
on Philippine income
6. Loss of income not yet recognized in gross income
Regular Allowable Itemized Deductins
Pertains to all necessary and ordinary expenses paid or
incurred during the taxable year.
Special Allowable Itemized Deductions
are additional deductions as provided under the NIRC or
special laws. Special Allowable deductions can be
categorized into two types:

1. Actual compliance expense

The Related Party Rule P450 2. Deduction incentives

Gains realized between related parties are taxable, but

loss are non-deductible.
Net Operating Loss Carry-Over (NOLCO)

Pertains to the excess of deductions over gross income

during a taxable year which is allowed by the law to be
deducted against the net income of the following years.
THE WITHHOLDING RULE P452
NOLCO is not an expense.
" NO WITHHOLDING, NO DEDUCTION."
MODE OF CLAIMING DEDUCTIONS FROM GROSS
Summary of Expanded withholding tax rates:
INCOME
1. 1% - for payments to suppliers of goods, embalmers or
1. Itemized deductions
funeral parlors
2. Optimal standard deductions
2. 2% - for payments to suppliers of services

3. 5% - for payments for rentals or properties

4. 10% - for payments to professionals, brokers, agents,
entertainers
5. 1/2 of 1% - for payments of credit card companies
6. 0% for payments to general professional partnership
1. ITEMIZED DEDUCTIONS
Taxpayers list every item of business expense they claim
as deductions. Deduction are strictly construed against
the taxpayer.
2. OPTIONAL STANDARD DEDUCTION

Is in lieu of the itemized deductions, regular or special,

TAX REPORTING CLASSIFICATION OF DEDUCTIONS P456 including NOLCO.

1. Cost of sales or cost of services

2. Regular allowable itemized deductions

3. Special Allowable itemized deductions

4. Net Operating Loss Carry Over (NOLCO)

1. COST OF SALES OR COST OF SERVIES

It is deducted outright against sales, revenues, receipts

or fees of individual taxpayers in the measurement of
gross income from operations.
1.Under the substituted filing system, it is the employer’s
obligation to file the annual income tax return of its
employees and issue the same with proof that tax on
their compensation is withheld.
2.Taxpayers who opt for the 8% income tax option shall
only need to file three (3) quarterly income tax return
(1701Qs) and an annual income tax return (1701A).
3.Only individual taxpayers who are engaged in the
practice of profession are allowed to dispense the filing
of quarterly income tax returns.
4.A consolidated or an adjustment return is needed
whenever tax is correctly withheld and the spouse of the
taxpayer concerned is also employed or has other
income.
-false, consolidated is not needed pag correctly
withheld yung tax
5.The 8% income tax option is valid for as long as the
taxpayer remains a VAT taxpayer during the taxable year.
-false, remains a non-vat taxpayer
6.Whenever there is an error in the tax withheld, the
taxpayer shall file an adjustment return to adjust the tax
due to the correct amount of tax and pay the residual tax
due thereof or claim tax credit or refund for the excess
withholding, as the case may be.
7.The withholding tax on compensation is sufficient
compliance under the substituted filing system and any
error in the computation of the withholding tax may be
corrected thereafter.
8.The option to be taxed at 8% must be indicated in the
first quarter income tax return and such option shall be
irrevocable for the rest of the calendar year.
9.The provision of an automatic annual income tax
exemption of P250,000,00 to any individual taxpayer
subject to regular income tax was replaced by the
concept of personal exemption.
-false, personal exemption is replaced by 250k
10. The amounts indicated by the taxpayer in the income
tax return are his assertions and are deemed final unless
amended by the same.
11.Tax credit is allowed if the tax due on the
compensation earned is incorrectly withheld.
12. Salaried employees are taxed and are subject to
withholding tax on their compensation income in the
same way as minimum wage earners are taxed and
withheld because the tax law does not distinguish.
-false, minimum wage earners are not taxed
13. The option to refund is confined only to the grant of
tax credit certificates.
-false, kahit wala tax cert??
14. Employees who do not meet the conditions of the
substituted filing system may opt to file the annual or
final adjustment return not later than April 15 of the
following year and thereafter claim tax credit.
-false, mandatory to filed adjusted not a choice
15. If the employee has other taxable income, he is
mandatorily required to file a consolidated income tax
return.
16. Once the option to refund is elected, the taxpayer
may carry over the excess refundable amount as tax
credit to the succeeding quarters of the following year.
-false, Pwede refund kahit wala tax credit cert P586
17.The income of unmarried minors from the property
they received from their parents may be excluded from
the returns of their parents if the donor’s tax thereof has
already been settled.
18.The taxable income from business or practice of
profession may be alternatively computed using
itemized deductions or Optional Standard Deduction
(OSD), as the taxpayer may deem convenient and
appropriate under the circumstances.
19.In order not to kill the goose that lays the golden egg,
tax laws are, in theory, based on the individual taxpayer’s
ability to pay.
20.An irrevocable trust that earns income on its
operations is taxed in the same manner as a resident
alien and a non-resident alien engaged in business are
taxed on their income within the Philippines and the
same holds true for estates under judicial administration.
-false, irrevocable trust is treated as individual tax payer
1. The 10% Improperly Accumulated Earnings Tax (IAET)
is a penalty tax that applies to all corporations including
special corporations subject to preferential rates of
income tax.
-false, domestic corporation only not all :>
2. All corporations may opt to be taxed using the 15%
corporate gross income tax which, upon election, shall be
irrevocable for three (3) years.
-false, domestic corporation only not all
3. A non-stock, not for profit charitable corporation shall
maintain its tax exemption status on related activities
even if it is engaged in activities conducted for profit for
as long as such unrelated activities do not substantially
cover the activities of the said corporation for which it
acquired exemption.
4. Corporations shall file their quarterly income tax
returns for the first three quarters of the year due on or
before 60 days from the end of each quarter.
5. Expenses of an exempt corporation that are not
directly traceable to either related or unrelated activities
are allocated based on gross income.
6. The income from unrelated operations of non-stock,
non-profit educational institutions is still exempt from
income tax if used for educational purposes.
7. Minimum corporate income tax (MCIT) is applicable to
all corporations including those that are subject to
preferential rates.
-false, excluded corporation with special tax rate
8. The transfer of net profits to increase the branch
assigned capital accounts is an indirect remittance
subject to income tax.
9. Corporations shall include general professional
partnerships, no matter how created or organized, joint
stock companies, joint accounts, associations, or
insurance companies.
-false, exclude gpp
10. PEZA tax incentives shall accrue to the registered and
unregistered operations of ECOZONE enterprises.
-false, no more accrual of tax incentive to registered
enterprises
11. Minimum corporate income tax (MCIT) is imposed
immediately after the year in which the corporation
commenced its operations.
-false, after 4 years
12. Offshore income of depositary banks under the
Expanded Foreign Currency Deposit System from local
currency transactions with non-residents is exempt from
income tax.
-false, subject to RCIT
13. It is imperative to secure a tax exemption ruling from
the BIR prior the enjoyment of such tax exemption and
the same shall be valid for the remaining life of the
corporation or organization unless sooner revoked by
the BIR.
-false, valid for 3 years
14. International carriers may be subject to a preferential
rate pursuant to an applicable tax treaty or subject to
exemption on the basis of reciprocity.
15. Fund raising activities of an exempt organization are
taxable. -true kasi they are commercial in nature
16. A non-resident foreign corporation is subject to 30%
final tax based on gross income from all sources within
the Philippines and not to the 30% regular income tax.
17. Cooperatives are taxed solely on transactions
entered with non-members.
-false, entered with members and non members whose
accumulated reserve is more than 10M
18. Exempt corporations may be taxed on their income
derived from activities unrelated to the purpose for
which they acquired exemption for.
19. Philippine residents who make income payments to
special non-resident foreign corporations are required to
withhold final tax on such payments and remit the same
to the government as the latter do not file income tax
returns.
20. Government-Owned and Controlled Corporations
(GOCCs) such as the local water districts and the
Philippine Charity Sweepstakes Office (PCSO) are all
exempt from income tax despite their proprietary
nature. -false, PCSO is not exempted from tax
1. An individual taxpayer whose income derives from
practice of profession and from his employer has the
option to be taxed at 8% for his consolidated income.
-false, 8% is applicable for business and mixed earner
only
2. Husband and wife who are qualified under substituted
filing of return should file a consolidated return.
-false, pag qualified na sa substitute wag na
magconsolidate
3.Revocable trust is a pass-through entity only whose
income is taxable to the grantor.
12. A taxpayer who opted to be taxed at 8% income tax
is also liable to pay the 3% percentage tax.
-false, sa 8% kasama na percentage tax
13. The 8% income tax option should be signified in the
1st quarter return of the taxpayer and may be revocable
during the taxable year.
-false, pag ginawa mo na 1st quarter irrevocable na for
the whole year
14. Individual taxpayer earning compensation income
may opt to be taxed at 8% income tax.
-false, compensation income dapat progressive lang

4. Estates under judicial settlement are treated as 15. Failure to elect the 8% income tax option shall mean
individual taxpayer. automatic availment of the graduated income tax rates.

5. Non-resident alien not engaged in trade or business

are subject to progressive income tax.
-false, NRA-NETB are subject to final tax

6. Regular income tax due of an individual taxpayers can

be paid on installment basis provided the tax due to paid
exceed 1,000.
-false, dapat tax due is in excess of 2000

7. The transition from non-vat to a vat registered

taxpayer is retrospective in nature.
-false, prospective

8. The 8% income tax option is applicable to non-vat

taxpayer only.

9. The allowed deduction of 250,000 can only be availed

once.

10. Excess quarterly tax payments may at the option of

the taxpayer be carried over to the following quarters of
the same taxable year or be claimed through tax refund.
-true, tignan niyo solving page 585

11. Taxpayer can amend an income tax return provided

it is within the three-year prescriptive period even if a
letter of authority for investigation had been already
received from the BIR.
-false, dapat di pa nakareceive letter from BIR
Chapter 13 TF
True or False 1 P461
1.The cost of investments and land are deductible
against their proceeds in the year of sale.
2.The entire cost of depreciable properties is deductible
against their proceeds in the year of sale.
3.Prepaid expenses are deductible upon payment
consistent with the rule that advanced incomes are
taxable upon receipt. (Cis: true / 2017 Solman: false)
4.Capital expenditures are deductible against future
income.
5.Personal expenses are deductible from gross income.
6.Losses on properties not used in business may be
deducted but only to the extent of capital gains.
7.Expenses intended for the business and the personal
use of the taxpayer must be allocated between the two.
Only the portion pertaining to the business is deductible.
8.The expense of defending a patent is a business
expense deductible in the current period.
9.The depreciation of the property revaluation gain is
deductible.
10.Supplies and inventories are expensed using the
inventory method.
True or False 2 P461
1.So long as the expense relates to the generation of an
income subject to any income tax, the same is deductible
against gross income subject to regular tax.
2.The amount of expense between affiliated companies
may be adjusted by the BIR to reflect their arm's length
value.
3.The failure to deduct creditable withholding tax on
income payments will render the expense non-
deductible.
4.Immaterial expenditures must always be capitalized.
5.Repairs that increase property useful life are
capitalized.
6.Repairs that increase property fair value are
capitalized. (Cis: true / 2017 Solman: false)
7.An unpaid expense may be deducted under the accrual
basis of accounting.
8.The government should not enrich itself at the expense
of the taxpayers. Losses between related parties are
deductible in the same way gains between related
parties are taxable.
9. Taxpayers opting to use the optional standard
deduction must also maintain records of their expenses.
10. incentives are deductible because they are actual
expense.
Chapter 13-A TF
True or False 1 P506
1. Interest incurred in the financing of petroleum
operations may at the option of the taxpayer be
capitalized or expensed.
2. Income tax is not an expense.
3. The arbitrage limit applies only when there is an
intentional arbitrage.
4. The arbitrage limit applies to all taxpayers including
individuals.
5.Interest expenses incurred with related parties are
deductible. (Cis: false / 2017 Solman: True)
6.Interest expenses are deductible in full amount if there
is no interest income subject to final tax during the
period.
7.Interest on a prescribed debt is deductible.
8.A deductible interest must not be incurred between
related parties.
9.The allowable deduction for deductible taxes includes
the basic tax, surcharge and interest.
10.Foreign taxes can be claimed as a deduction or tax
credit.
11.Foreign corporations and aliens can claim deduction
or tax credit for foreign taxes.
12.Capital loss is deductible to the extent of ordinary gain
while ordinary loss is deductible in full.
13.Losses must be reported to the BIR within 45 days
from the occurrence of the casualty, robbery, theft, or
embezzlement giving rise to the loss.
(Cis: false / 2017 Solman: true)
14.Depreciation on revaluation surplus of properties can
be deducted as part of depreciation expense.
15. the claim of the same loss in the income tax return of
the estate and in the estate tax return is not allowed
True or False 2 P507
1. Bad debt expenses representing loss of capital can be
deducted by cash basis taxpayers.
2. Bad debt expenses between related parties can be
deducted as long as these are adequately supported
with documentary evidence.
3.The loss of capital investment in a business can be
claimed as bad debt expense.
4. The subsequent recovery of bad debt expense must be
reverted back to gross income to the extent of the tax
benefit of the deduction in the year the deduction is
made. (Cis: false / 2017 Solman: True)
5. The loss on insured property cannot be deducted.
6. In total destruction of properties, restoration costs are
treated as new acquisition of properties.
7.If the fair value of the property is not determinable,
restoration costs are expensed to the extent of the basis
of the original property. The excess over the basis is
treated as an increase in fair value and is capitalized.
8. The loss in value of assets is deductible only when
sustained and realized.
9.Losses on wagering transactions are deductible in full.
10.With the exception of domestic corporations and
resident citizens, expenses incurred abroad cannot be
deducted unless incurred in connection with the:
Philippine business.
11.Contributions are valued at the fair value of the
property donated:
12.The recovery of bad debts by cash basis taxpayers
must always be reverted back to gross income.
13.The recovery of bad debts by accrual basis taxpayers
may be reverted back to gross income.
14.Capital assets can be depreciated for tax purposes.
15. The depreciation expense on properties held under
life tenancy is computed as if the life tenant were the
absolute owner of the property.
True or False 3 P507
1. Petroleum operations are not subject to the limit on
the deduction of intangible exploration and
development costs after the commencement of
commercial production.
2.Contribution expenses are deductible if the donee is a
domestic institution.
3.Donations to foreign institutions covered by treaty
exemptions are fully Deductible.
4. Contribution expenses are measured at the fair value
of the property donated.
5. Private educational institutions are allowed to deduct
capital expenditures.
6. The depreciation on properties held in trust is
apportioned between the income Beneficiaries and the
trustees in accordance with the provision of the
instrument creating the trust or on the basis of the
income allowable to each.
7.The depreciation of revaluation surplus is not
deductible in taxation.
8.No depreciation expense is allowable for helicopters,
yachts, airplanes or aircraft and land vehicles which
exceeds P2,400,000 in value unless the main line of
business of the taxpayer is transport or lease of
transportation equipment.
9.Tangible development costs in wasting assets are
capitalized and depreciated.
10.Intangible exploration and development costs
incurred before commercial production in a wasting
asset operation are capitalized as cost of the wasting
asset.
11.After commencement of commercial production,
intangible exploration and development costs incurred
on non-producing wells or mines are deductible in the
period paid or incurred.
12.After commencement of commercial production,
intangible exploration and development costs incurred
on producing wells or mines are always capitalized and
amortized using the cost-depletion method.
13.The threshold on partially deductible contributions of
corporate taxpayers is 10% of the net income before the
contribution.
14.The funding of past service cost is amortized over 10
years or the actual vesting period whichever is longer.
15.The overfunding of defined benefit plans is treated as
funding of past service cost and is amortized over 10
years.
16.The employee counterpart in a contributory pension
plan is deductible by the employer.
17.Research and development costs related to land must
be capitalized.
18.Research and development costs not related to
capital accounts are either deducted outright or deferred
and amortized over a period of not less than 60 months.
19.The EAR expense on the sale of goods is subject to a
limit of 0.5%of gross sales.
20.The EAR expense on the sale of services is subject to
a limit of 1%of net revenue.
21.Purely employed individuals can claim deductions for
donations made.
Chapter13-B TF
True or False 1 P545
1.The employers are allowed additional deduction of
15% on the compensation paid to persons with disability.
2.An adopting private entity of a public school is-entitled
to a deduction incentive equivalent to double the
amount donated to a public school.
3.Taxpayers who installed improvements in their
facilities to accommodate persons with disability are
allowed an additional 50%deduction incentive based on
the value of such-improvement.
4. The distribution of the corpus of a taxable estate or
trust is an item of special deduction against the gross
income of the estate or trust.
5.The transfer to the reserve fund of insurance
companies is a special deduction, but the release from
the reserve fund is an item of gross income.
6. Dividends are non-deductible by any taxpayer except
real estate investment trusts.
7. The transfers to all reserve funds of the cooperative
including mandatory and discretionary funds are
deductible from the gross income of cooperatives.
8. Persons with disability are mandatorily allowed a
discount of 20% from all establishments.
9. Senior citizens are mandatorily allowed a discount of
25% from certain establishments.
10.The employer of senior citizens can claim additional
deductions equivalent to 50% of the compensation paid
to senior citizens who have income below the Poverty
line.
11.Expenses incurred to comply with the requirement of
the Expanded Breastfeeding Act are allowed an
additional incentive equivalent to the amount of the
expense incurred.
12.Attorneys are entitled to the value of their pro-bono
services to indigent clients as deduction from gross
income. (Cis: false / 2017 Solman: True)
13.The allowable incentives to lawyers for pro-bono
services shall not exceed 10% of the gross income from
the actual performance of the legal profession.
14.Employers are entitled to an additional deduction of
50%of the productivity incentive bonus paid to their
employees.
15.The amount of NOLCO shall not include the amount
of deduction incentives allowed by law.
16.A small business was merged to a larger business.
Even after the merger, the NOLCO of the small business
is deductible by the larger business.
17.NOLCO is valid for 3 years.
18.NOLCO always exist when there is a net operating
loss.
19.Net capital loss carry over cannot be carried over
together with NOLCO.
20.An acquirer in a business combination sustained a net
operating loss before the business combination. The
acquirer is allowed to carry-over its net operating loss in
prior years.
Chapter13-C TF
True or False 1 P570
1.Unlike individual taxpayers, corporations opting for
OSD can claim deduction for cost of goods sold or cost of
services.
2.OSD is in lieu of all deductions against gross income
including personal exemptions.
3.Individuals can claim OSD up to 40% of gross sales or
receipts or gross income.
4. Taxpayers opting to use the OSD are not required to
submit financial statements.
5.Taxpayers may use the OSD for quarterly returns, then
use the itemized deductions for the annual return.
6.The optional standard deduction is presumed unless
the taxpayer signified in his return his intention to claim
itemized deductions.
7. The taxable net income of individuals is 60%of their
gross sales or receipts
8.Corporate taxpayers opting to use OSD will have
taxable income equivalent to 60% of their gross income.
9. “Gross sales” is net of sales returns, allowances and
discounts.
10. "Gross receipts” include other receipts incidental to
the primary operations of the business.
11.Gains in dealings in properties are included in gross
sales or receipts.
12. Corporate OSD is 40% of operating and non-
operating gross income excluding only those subject to
final tax or capital gains tax and exempt income.
13.For taxpayers using the accrual basis in the sales of
services, gross receipts shall mean revenue.
14.Administrative and selling expenses are included in
"cost of services.”
15.A partner can claim itemized deduction against his
share in the net income of a general professional
partnership provided the partnership is using the OSD.
16.A partner can claim OSD out of his share in the net
income of a general professional partnership.
17.A partner can claim OSD out of his share in the net
income of a general professional partnership provided
the partnership is not using the OSD.
18.No deduction of whatever nature is allowed against
compensation income, except mandatory deductions
and exempt benefits.
19.Net operating loss carry-over and net capital loss
carry-over are items of deductions hence; both are not
claimable simultaneously with OSD.
20. The option to elect OSD may result into a net
operating loss carry over.
Chapter 14 TF
True or False 1 P606
1.A revocable trust does not pay income tax.
2.Estates under judicial administration are considered
individual taxpayers.
3.Non-resident persons shall file their tax return to the
Office of the Commissioner of Internal Revenue.
4.The income distribution by a taxable estate or trust is a
special deduction to the estate or trust, but is an item of
gross income to the recipient heir or beneficiary.
5.The income of minors from properties received as
donations from parents is taxable to the minor if the
donation is exempt from the donor's tax.
6.The husband and the wife are treated as separate
taxable units. Each spouse shall compute his or her
taxable income, but both of them shall file a single return
to include the income of both spouses.
7. The income of minors from properties received as
donations from parents is taxable to the parents if the
donor's tax on the donation is not paid.
8. A disabled person need not file a return by virtue of his
disability.
9.The taxpayer's signature in the income tax return is
presumed prima facie correct.
10.Large taxpayers shall e-file their tax returns through
the BIR Electronic Filing and Payment System.
11.Two or more trusts are consolidated as a single trust
when both are designated for the same beneficiary
without regard to their grantor.
12.When the grantor reserved for himself part of the
income of the trust, the sale shall be treated as income
of the grantor.
13.A trusteed employee pension fund does not pay
income tax.
14.The substituted filing of tax returns does not apply
when there is concurrent or successive employment of
the employee during the year.
15.An employee trust fund must be managed by the
employer to be tax-exempt.
Chapter 15-A
True or False 1 P647
1.Foreign and domestic banks may have an EFCDU.
2.The income of FCDU, OBU, and EFCDU from residents
other than depositary banks in the EFCDS or FCDS is
subject to a 10%final tax.
3.The income of FCDU or EFCDU from foreign sources is
subject to regular income tax.
4.Corporations subject to a rate below 30%are referred
to as special corporations.
5.Corporation includes joint ventures, associations, and
partnerships.
6.Joint ventures formed for the purpose of undertaking
construction projects or engaging in energy operations
are taxable as corporations.
7.Exempt corporations are never subject to corporate
income tax.
8.Government-owned and controlled corporations are
subject to corporate income tax.
9.A non-profit hospital is an exempt corporation taxable
only on income from unrelated activities.
10.PEZA-registered enterprises are exempt from tax.
11.BOI-registered enterprises enjoy income tax holiday
for 20 years.
12.FCDU and OBU are divisions of a foreign bank.
13.The income of OBU from foreign sources is exempt
from income tax.
14.International carriers are subject to a tax of 2.5%on
taxable income.
15.A domestic carrier is subject to 30%tax on Philippine
taxable income.
16.Special corporations can claim optional standard
deduction.
17.Exempt corporations are not required to file income
tax returns because they do not pay tax.
18.Exempt corporations and special corporations are
mandated to use the itemized deductions.
19.Exempt corporations who filed late are not subject to
penalties because they have no tax due.
20.Exempt corporations filing BIR Form 1702-EX will not
pay tax as a rule.
True or False 2 P648
1. The classification rule is applied to private schools and
non-profit hospitals.
2.The dominance test is applied to non-profit schools and
private hospitals.
3.A government school is exempt from income tax.
4.A non-resident owner or lessor of vessel is subject to
tax at 7.5% of the gross rental.
5.A regional area headquarters is exempt from tax
because it does not derive income.
6.A regional operating headquarter of a multinational
company is subject to 10%on world income.
7. A non-resident cinematographic film owner, lessor, or
distributor is subject to 25%tax on taxable income.
8.A non-resident owner or lessor of aircraft, machineries
and other equipment is subject to tax at 4.5%of gross
rentals.
9.A farmers' or fruit growers' association is exempt from
income tax.
10.Exempt corporations are subject to income tax on
their income from unrelated activities.
11.A non-stock, non-profit institution must be organized
for religious, charitable, scientific, athletic, cultural, or for
the rehabilitation of veterans.
12.To be exempt, all of the net income or asset of a non-
profit corporation or association must be devoted to its
purposes, and no part of its net income or asset accrues
to benefit any member or a specific person.
13.The unrelated income of non-profit corporations is
exempt from income tax if the same is diverted to its
non-profit purpose.
14.The exemption of non-stock and non-profit
corporations or associations shall commence when they
secure their tax exemption ruling.
15.The certificate of tax exemption ruling is valid for one
year and renewable every year thereafter.
True or False 3 P648
1.The FCDUs, OBUs and EFCUs are never subject to
regular income tax.
2.Persons and service establishments inside an ECOZONE
are subject to the regular tax.
3.The Gross Philippine Billings of international carriers
includes receipts from outgoing voyage or flights which
must be billed in the Philippines.
4.Expenses of an exempt corporation not directly
traceable to either related or unrelated operations are
allocated based on the ratio of gross income.
5.Local water districts are exempt from income tax.
6.Cooperatives that transacts business with non-
members are taxable on income allocated to interest on
members' capital when their accumulated reserve
exceeds P10,000,000.
7.All cooperatives, regardless of classification, are
subject to income tax on their income from unrelated
activities.
8.The expenses of exempt corporations from exempt
operations are deductible to its gross income from
unrelated operations.
9.When the income from related activities constitutes at
least 50% of total income, private schools are subject to
tax at 10% of taxable income from related and unrelated
activities.
10.When the income from unrelated activities exceeds
50%of total income, only the income from unrelated
activities of private schools and non-profit hospitals is
subject to 30% tax.
11.Refunded tickets and tickets of non-revenue
passengers are excluded in the Gross Philippine Billings.
12.The gross receipts from transient passengers are
excluded from Gross Philippine Billings if they depart
from the Philippines through the same carrier within 48
hours from their arrival.
13.The 48-hour rule does not apply when another carrier
continued the flight or voyage of transient passengers.
14.The 48-hour rule may be extended by force majeure.
15.Domestic film owners, lessors or distributors shall be
subject to 25%tax on gross income from all sources
within.
Chapter 15-B
True or False 1 P687
1 Exempt corporation are subject to MCIT with respect
to their income subject to regular corporate income tax.
2.MCIT does not apply to foreign corporations.
3. As a rule, corporations always pay tax even if there is
a loss effective from the fourth year of their operations.
4.Resident foreign corporations are subject to either
gross income tax or regular corporate income tax.
5.A partnership organized under Philippine law is a
domestic corporation for purposes of taxation.
6.Domestic corporations are subject to either gross
income tax or regular corporate Income tax.
7.The gross income tax applies only to corporations
subject to regular income tax.
8.Non-resident foreign corporation are subject to
minimum corporate income tax.
9.The gross income tax cannot apply if the gross profit
rate falls below 45%.
10.Both the regular corporate income tax and the gross
income tax are subject to the minimum corporate
income tax.
11.The MCIT applies only when income is zero or when
there is an operating loss.
12.Domestic corporations under the gross income tax,
including REITs, are exempt from MCIT.
13.Special domestic corporations and special resident
foreign corporations are exempt from MCIT.
14.MCIT is computed as 2%of the gross income from
operations.
15.If an entity started operations on June 2011, MCIT
shall commence on June 2015.
True or False 2 P687
1. MCIT is applied on a quarterly, but not on an annual
basis.
2.MCIT excess can be deducted only against the excess
of RCIT over the MCIT in any of the succeeding three
years.
3. When there are several excess MCIT in prior years, the
crediting of MCIT is made In a first-in first-out (FIFO)basis.
4. The MCIT gross income includes only those arising
from operations while the OSD gross income covers all
items of gross income subject to regular income tax.
5.For purposes of the MCIT, cost of services includes all
direct costs and expenses incurred in acquiring or
manufacturing the goods.
6.The cost of services of banks includes interest expense.
7.Items of passive income subject to final tax and capital
gains tax are included in the basis of the MCIT.
8.For accrual basis taxpayers, the cost of services shall
include unpaid expenses directly incurred in the
provision of services.
9.The gross receipts of service providers include
advances from clients or customers.
10.Corporations with income subject to special tax are
mandatorily required to use the itemized deductions.
11.Whenever MCIT is payable, there is a Net Operating
Loss Carry-Over.
12.An unused excess MCIT will expire on the fourth year
of operation.
13.The excess MCIT of previous years can be deducted
against the RCIT of any quarter of the year if RCIT is
greater than MCIT.
14.The MCIT rules are applied on the cumulative
balances of the RCIT and MCIT during the quarters of the
taxable year.
15.MCIT can be suspended for a taxpayer suffering from
prolonged labor dispute, force majeure, or legitimate
business reverses.
True or False 3 P688
1.Investment companies and insurance companies are
prima facie presumed improperly accumulating profits.
2.The improperly accumulated earnings tax does not
cover holding companies, publicly listed companies, and
banks.
3.A closely held corporation is one that is not listed in an
organized equity or debt market regardless of the
number of individuals owning it.
4.The improperly accumulated earnings tax applies also
to proprietary educational institutions.
5.The Commissioner of Internal Revenue may suspend
the imposition of MCIT upon submission of the required
proof.
6.The improperly accumulated earnings tax applies to all
regular domestic and foreign corporations.
7.An appropriation involves setting aside of earnings for
immediate needs of the business.
8. The correlation test on appropriation requires that
there must be a direct relationship of business needs to
the accumulation of profits.

9.If the ownership of the top 20 shareholders of a

corporation is more than 50%, the corporation is a
publicly held corporation.

10.A corporation that is owned by a publicly listed

corporation is a public corporation.

11.The investment of substantial profit in unrelated

business, stocks or securities of unrelated business is an
instance of improper accumulation of earnings.

12.IAET is a penalty tax; hence, earnings subjected to

IAET will still be subject to a dividend tax when
subsequently declared.

13.The branch profit remittance tax covers remittance of

special resident foreign corporations except PEZA-
registered entities.

14.Partnerships and Ecozone-registered entities are not

subject to improperly accumulated earnings tax.

15.The branch profit remittance tax covers the profit

remittance, excluding investment income, of branches of
domestic and resident foreign corporations to their head
offices.