10

Deductions from the Gross Income

· Our in~ome tax system allows deductions . for various items, especially
expenses. m~urred necessary. to produce the· income. This is to provide
taxpayers with a more equitable tax base and true measure of income.
Specifically, Section 30 of the tax code allows ordinary and necessary
business expenses paid or i_ncurred during the taxable year as deductions
from ·the gross income in order to arrive at the taxable income. In .addition,
Section 31 of the tax code defines "taxable income" as the pertinent items of
gross income specified less the deductions and/or personal and additional
exemptions, if any, authorized for such types of .income by the tax code or
other special laws. In general, all taxpayers can .avail of qeductio~s fr?m the
. gross income, except for taxpayer~ ear~ing purely compensation income
arising from employer-employee relatIonsh1p.

Deductions in General

► -
I. For Individuals earning purely comTpRAenlsNaton in(~~gi~~ing Jan 1 2018)
Upon effectivity of RA 10963_- .
•
aw
No more deduction Is allowed
· '
·

· .
II. For individuals with gross mco
. me from business, trade or practice of
m ixed _income tional Standard Deductions (OSD)
profession or _
► ltem!zed ~educt1on_s or O P .
ble Partnerships
Ill. For Corporations an~ taxa tional Standard Deductions (OSD)
a. Itemized Deductions or O P
b. Special Deductions for_ .
■ lnsuran?e compani~~ anies .
• Mutual msu_ran~e ~ran~e companies
• Mutual mann~ ms nee companies
• Assessment msura -

IV. Estates and Trust_s _ ·th individual taxpayers

Same deductions w1

441
 EX.CLus·10NS vs.,.DEDUCTl,ONS

. Exclusions from gross income refer to a flow of wealth to the taxpa

. that are not treated as part of gross inco~e, for purp~ses of computing
taxpayer's taxable income, due to the following reasons. e
i~r
1) It is _exempted by the fundamental law or statute such as:
• De minimis benefits
• . Employer's share in SSS, GSIS, Pag-ibig and Philhealth
■ Interest income from long~term inve$tment~ derived by individuals
■ Inter-corporate dividends

2) It 'does not .come within the definition of income such as:

• Proceeds of life insurance upon the death of the insurea .
· • -stock dividend
• Temporary increase in the fair market value of debt and equity
investments.

Deductions; on the other hand, are the amounts, which the law allows to
be deducted from gross income ·in order to arrive at net income. Exclusions
pertain to the computation of gross income, while deductions pertain to the
'Computation of net income. Exclusions are someth.ing received · or earned by
the taxpayer that do not form part of gross income _while deductions are
something spent or paid in earning gross income. ·

CAPITAL EXPENDITURE VS. REVENUE EXPENDITURE

Expenditures are classified as capital expenditure and revenue

expendifure. · The 9istinctions between the two types of expenditures are as
follows:

C MAJOR .CLASSIFICATION OF EXPENDITURES

. CAPITAL EXPENDITURE . .REVENUE EXPENDITURE.
Material in amounts Small amounts, individually
Increase useful life, capacity Helps current operations
and efficiency
Non-recurring Ordinarily recurring
Benefits future ·periods (current Benefits . current period only
and long-term) . (short-term)
Allocated throughout the periods Charged to operations
benefited

442
DEDUCTIO VS. TAX CRE
. DIT
. A lthough the t . . ·
·t erm is .
ere d, generally refers to not specific 11 .
tax liability." It is an "allan amount that is~ Ybdefined in our Tax Code tax
wnat ·is owe d" by a taxpa wance against thesu t tracted d.irect1Y from one's 'total
0
.
Corp_. , (GR No. 159(,47 Yer to t~e governmentx1 itself' or "a deduction from
d
credit reduces the tax 15 ~pr// 2005), the 8 ~ n CIR v. Central Luzon Drug
that is determined afte ue, inc~uding, whehev!reme. Court ruled. that A tax
income. A deduction o r thapply1ng the correspo j.pllcable, the mcome tax
tax in order to arrive ~t t
e other hand reduces~ in_g tax rates to taxable
axab/e income. ' e income that is subject to

. A ~ax ·credit is used only after .

ded~ct,on_ is applied before the c th~ tax has been computed while a
detailed discussion on Tax Crect·t _amputation of the applicable tax. A more
I is presented in Chapter 10

Tax Credit
Deductions
Income Tax Due Pxx- Gross Income Pxx
Less: Tax Credit (xx) Less: Allowable Deductions (xx)
Income Tax Payable Pxx Net Taxable Income Pxx
·'

TIONS FROM THE GROSS INCOME .

Sec. 34, Tax Code .. - · .· .

Except for 'taxpayers earning purely compensation income arising from

personal services ren_dered under an ·employ~r.. employee relationship where
no deductions shall be allowed in computing ·taxable income subject to basic
tax (Section 24A), there shall be allowed the following deductions from gross
income on all ordinary and necessary trade and business expenses paid or
ihcurred during the taxable year ·jn carrying on or which are directly
attributable to the development, management, operation and/or conduct of the
trade and business which include the following:

-ection 34 (A to K) oUhe Tax Code-lterniz~d Deductions '

■ 5

1. Secti(o;) ~~~~::n~~!~ssary Trade, Business or Professional Expenses.

( ) Expenses Allowable to Private Educational Institutions .
2

2. Section 34(8) - lntere 5t

3. Section 34(~i ~ Taxes
4. Section 34(D, - Losses ,

443
 5. Section 34(E) - Bad Debts
6. Section 34(F) - Depreciation . d G W nd Mn
7.
8.
Section 34(G) - Depletion of 011 anis a t .~II ~-
Section 34{H) - Charitable and Other on ~1· u ions
I
es

9. Section 34(1) - Research and Developmen

10. Section 34(J)- Pension Trusts. . .
11. Section 34(K) _Additional Requirements for Deductions of Certain Payments

■ Section 34 L of the Tax Code-O ti~nal Standa,rd Deduction OSD

Revenue regulations 2-98 and Seption 34 of the Tax Code, as amended,

provide that the aforementioned deductible items shall be allowed as
deductions• only if it is shown that the taxes required to be deducted and
withheld therefrom have been paid to the BIR.

The rule that exclusions· from income are strictly construed against
taxpayers should likewise apply to deductions claimed against the gross
income. Hence, the burden of proof lies upon the taxpayers. Meaning, one
seeking a deduction must point to some specific provisions of the statute or
law in which that deduction is authorized and must be able to prove that he is
entitled to the deduction which the law allows.

"Substantiation" requirements should also be complied with which means

that ·no expens~s shall be allowed unless the taxpayer shall substantiate with
sufficient evid~nce such as official receipts, invoices, vouchers , bank
statements or other adequate records

a) The amount of the expense being deducte~; and

b) The direct connection o~ relation of t.he expense being deducted

,to the development, management, operation and/or conduct of
the trade, b_usiness or profession of the taxpayer.

In addition, deductions claimed shoul,d "not be contrary to public policy!

morals or ord~r". While illegal income forms part of the gross income of a
taxpayer as_d1scu~sed ~n Chapter 7 and 8, "deductions", on the other 11and
which constitute bnbe, k.1ckback, and other similar payment made to an official
or .employee
. of the national,. local or forei·gn gove rnmen t or sImI
• - ar enti'ties
1
bemg agamst law and publ!c policy are not d d ·t'bl f - ·ncorne
[Section 34(A)(1 )(c), NIRC]. e · uc ' e ram gross 1

444
 . ·n er£a7ot1u £ {jrtHs l~
~----:-@l•iiU
th
#iiitlGi4it¥ i«U4it•M!i
fhe pro ns of e Tax Code under Section 34(A), as amended, provides:

(1) Ordinary and Necessary Trade: Business or Professional Expenses.

(a) In Gen~ral - There shall- be allowed as deduction from gross income

~all the ordma~ and ~ecessary expenses paid or ir.icurred during the
taxable year in carrying on or which are directly attributable to , the
development, management, operation and/ or conduct of the trade ,
business or exercise of a profession, including:

i. A reasona?le allowance for salaries, wages, and other - forms of

compensat_ion for personal services actually rendered, including the
grossed- up monetary value of fringe benefit furnished or granted by
the employer to the employee: Provided, That the final tax imposed
under Section 33 of the Tax Code of has been paid;
ii. A reasonable allowance for travel expenses, here and abroad, while
away from home in the pursuit of trade, business or profession;
iii. A reasonable allowance for rentals and/ or other payments which are
required as a condition for the continued use or po~se~sion , for ·
purposes of the trade, business or profession, of property to which
the taxpayer has not takeri or is not taking title or in which he has no
equity other ttian that of a lessee, user or possessor;
·iv. A reasonable allowance for entertainment, amusement and recreation
expenses during the taxable year, that ·are directly connected to the
development, managem·ent and operation of the trade, business or
profession of the taxpayer, or that are directly related to or in
furtherance of the conduct of his or its trade, business or exercise of a · ·
profession not to exceed such ceilings as the Secretary of Finance
may, by rules and regulatio_ ns prescribe, .upon recommendation of the
Commissioner, taking into account the needs as well as the special
circumstances, 'nature arid character of the industry, trade, business ,
or profession of the taxpayer: Provided, That any expense incurred
for. entertainment, amusement or recreation that is contrary to law ,
· morals, public policy or public order shall in no case be allowed as a
deduction .

v. Added under CREATE Act Upon effectivity of CREATE law, an

additional deduction from taxable income of one-half ( 1/2) of the
value of labor training expenses incurred for skills development of
enterprise-based trainees e~rol_led in public_ senior . high schools,
public higher education inst1tutIons, or pu_bhc .t.echrn cal vocational
institutions and duly covered by an apprent1cesh1p agreement under
presidential decree no. 442, series of 197 4, or the "Labor Code of the
Philippines", as amended, shall be g.ranted to ente_rprises: Provided ,
furthe r, that for the additional deduction for enterprise-based training

445
 De/du»M , £91~¾s ~llc0-~
7 ktfhu L' •

f · ublic educational institutions, the enterprise ·

of students rom p . . . from the DEPED, TESDA Shau
secure proper cert1f1cat1on , or CHED
.d d t· · lly that such deduction shall not exceed ten Per :
P rovI e , ma. , . ) cent
(10%) of direct labor wage (RR 5- 2 021 ·

(b) Substantiation Requirements - ·

REQUISITES FOR DEDUCTIBl~ITY IN GENERAL~

■ Must be ordinary and necessary;
■ Paid or incurred during the taxable year;_ .
■ Connected with trade, business or practice of profession;
■ Supported by suffident ~vidence'. ~nd. . .
• Not against the law, morals, publl_c policy or pub_llc ord_er;
■ It must have been subjected to withholding tax, if applicable.

MINOR OR ORDINARY REPAIRS & MAINTENANCE

KIND OF REPAIR TREATMENT
Repairs that materially add to the value of the property Capitalize -
Repair that appreciably prolong the life of the property Capitalize
Repair that keep the property in its ordinarily efficient operating Outright Expense
condition

(b) Bribes, Kickbacks and Other Similar Payments

No deduction from gross income shall be allowed under

Subsection .(A) hereof for any payment made, directly or indirectly, to
· an offic/al or employee of the national government, or to an official or
· employee of any local government unit, or to an official or employee
of a government owned or-controlled corporation, or to an. official or
employee or representative of a for~ign government, or to a private
corporation, general professional partnership, or a similar entity, if the
payment- constitutes a bribe or kickback.

(1) Expenses Allowable to Private Educational Institutions

I

· Expenses Allowable to Private Ed~cational Institutions. - In

addition to th~ -expenses allowable as deductions under this Chapter, a
private educational institution; referred to under Section 27(8) of the Tax
Code, .as amended, may at its option elect either:

a. To de~uct expe~di!ures otherwise considered as capital outlays_of

depreciable ~~~ets incurred during the taxable year for the expansion
of school fac1llt1es; or ·

b. To deduct al_lowance for depreciation thereof.

446
 .0
RDINARY AN D NECESSARY E .
D~-w:r _/q.UJiU

XP~NSES
'(}-lru t/te, r tJ:Ss / ~

· In general, there -shall be

. ry and nee a 11 owed as d d ·
the ordina . .es_sary expenses . e ~ct,on from gross income .f or all
which are directly _attributable to th paid or incurred during the taxable year
and/or conduct of the trade, busine e_dev~lop_ment, management, operation
expenses cafl only be claimed 1
th
a
'f ss or exercise :of profession. As a rule,
rofession, trade or business ·0 ~Y are paid or incurred as part of the
P I. · Perat1on Of
. e·xpenses, 1vmg or family expen s the taxpayer.- Hence personal
are expe["\ses which are normal ses are ~ot deductible. "Ordinary"' expenses
and the surrounding circumstanor usual in relation to the taxpayer's business
us 488_ [1_940], ~he court held t~!t t~n th e c~se ?f ·D~puty vs. Du Pont, 308
tax law in its common significanc e _term ordmary 1s used in the income
nd
usual or customary. On the othee ~ it ~as the connotation of being normal ,
which are appropriate and helpfu~ _. a~ ; necessary" expenses are expenses
and are intended to minimize lossein e ~evelopment of. taxpayer's business
to-day expenses. . s or to increase profits. These are the day-

Examples of Ordinary and Necessary Expenses:

a) ~~~~E~Ari~:GES, ALLOWANCES . and other forms of

d d . d" ' no matter how called, for personal services actually
_ren .ere , me1u mg the grossed-up monetary. value of fringe benefit
furrnsh~d or granted by the employer to .. the employee, employer's share
<?n SSS, PHIC, HDMF and .the like.

Requisites:
• Employer-employee relationship
■ Reasonable
• Personal services actually rendered
• Withholding tax imposed has been paid

RA 9994 - EXPANDED SENIOR CITIZENS ACT OF 2010;

(RR 7-2010) .
ADDITIONAL COMPENSATION EXPENSE

Private establishments employing senior citizens sh~II be e·ntitled to

additional deduction from their gross income equivalent to 15% of the
total amount paid as salaries and wages to senior citize~s provided :

0 The employment shall have to continue for a period of at least six (6)
months ,
a The annual taxable income of the senior citizen(s) . does not exceed
' the poverty level as may be determined by the NEDA ·

447
 De£d~tH!u tf: (_}ross J~
RA 7277 - Magna Carta for Disabled Persons (PWDs)
ADDITIONAL COMPENSA T/ON EXPENSE ,

• ·_ t e en t·t·
Pnva 11e s that employ disabled persons who meet. , the requ·ired
skills or qualifications, either as regular emp 1oyee, appr~ntice or learner
shall be entitled to -an additional deducfl?n from t~eir gross incorn~
equivalent to 25% of the total amount paid as salaries and wages to
disabled persons

b) TRAVEL EXPENSES in the pursu.it of trade, business or profession;

REQUISITES: .
■ Reasonable ·
■ Incurred or paid while away from home (business home )t within and
· without the country. . .
■ Incurred or paid in the pursuit of trade, business, profession
EXCLUDED:
Personal travel,s sponsored by the employer subject to fringe benefit
tax (FBT). '

c) RENTALS and/or other payments.

Expenditures incurred for the continued use or possession of property

to which the taxpayer has not taken or is not taking title or in which he has
no equity other than that of a lessee, user or possessor in connection wrth
trade, b1:-1siness or · profession. The property may be real or personal
under operating lease. ·

REQUISITES:
■ Reasonable _ and for the purpose of trade, business or profession.
■ Taxpayer has not taken or is not taking title to or in which he has no
equity other than 1hat of the lessee, user, or possessor.

LEASE AGREEMENTS

In addition to .the periodic payments made by the lessee to the lessor

for the use of the latter's property, a lessee may have some other
payments (i.~., leas~ bonus), for_ whic~ deductions may be taken. Wh r
a leasehold ~s acquired for business purposes for a specifi d sum, the
purchaser may take a deduction in his return for an liquot part
{proportionate or pro-r~ta) of such sum each year, ba ed on th number
of years the le_ase will run . Cost of le~sehold improvement may be
~ecovered ~Y the lessee over the remaining t . rm of the le s or over the
life of the improvements, whichever i short r. The taxe p .id qy the
lessee . to or for the lessor under a lease contract constitute additional
deductible rent expense for the lessee.

448
d) Entertainment, amuseme t .
. n and recreation expenses
(RR l 0-02), Representation
. expenses
pertain to expenses incurred in .d.
prov, mg There is a ulimit" in claiming expenses
amusement and recreation to or . on entertainment, amusement and
.h , meeting
wit ' a guest at a dining place, place of recreation. Entertainment amusement
' '
amusement, country club theater and recreation expenses are limited to
. , , concert,
ploy, . sporting events and s1m1 . . ½ % of net sales for sellers of goods or
1ar 1% of net revenue for seller/provider of
establishments.
services.
For . sellers of both goods · : . .
apportionment form 1 • . or properties and serv1c~s, an
u a ts used , in determining the "ceiling" on such
expenses based on the following apportionment formula:

--:N:,:-:e~t:-;-S-;:;al~es;--;/;;-=-Re~v-=-e=nu:.::e____ x Actual Expense

Total Net- Sales/Revenue

REQUISITES:
a) Must be paid or incurred during the year ·
b) Must be directly connected to trade, business or profession or that
are directly related to or in furtherance of the conduct of his or its
trade, business or exercise of a profession. _
c) Must not be contrary to law, -morals public policy or public order
d) It must not have been paid, directly or indirectly, to an official or
employee, if it constitutes bribe, kickback, or other similar payments
e) It must be duly substantiated by adequate proof
f) The appropriate withholding tax, if applicable, should have been
withheld therefrom and paid to the Burea~ of Internal Revenue

ILLUSTRATION 1 - Representation expenses:

CASE A: · .
Niah Co-rporation is· engaged in the sale of go~ds with net sales of P3,000,000. The
actual entertainment, amusement ~nd recreation expenses for the taxable quarter
totaled PS0,000.
. . • t·ax purposes how much ·is the deductible entertainment,
Quesflon: For income · ' ·
amusement and recreation expenses'.

❖ Answer: P15,000 PS0,000

Actu0I 15, 000
Limit (P3M x.005)
P15,000
Allowed

449
 CASE 8: f d d erv'ce 'th
Niah Corporation is engaged in the sale O goo ~ an s 1 5 wi net sales and
revenue of PB,000,000 and P4,000,000, respectively. The actual entertainment
1
amusement and recreation expenses for the taxable year totaled P1 50,000.

Question. For income tax purposes, how much is the total deductible entertainment 1

amusement and recreation expenses?

❖ Answer: PB0,000
Actual -Sal? of Goods:
(P150,000 X 8/12) P100,000
· Limit (PBM x .OOSJ 40,0f!O
Allowed , P40,000
Actual -Sale of Service:
(P150,000 X 4/12) . PS0,000
Limit (P4M x .o~ 40,000
Allowed 40,000
Total deductible expense PB0,000

~ff41Mlf¥1W] of the Tax Code, as amended by RA 11534 (CREA TE Act)

Interest Expense

1) IN GENERAL. '
The amount of .interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession , trade or business
sha'II be allowed as deduction from gross· income.

Interest expense was defined under related revenue regulations as the

payment for the use or forbearance or detention of money, regardless of the
name it . is called or denominated. It includes the amount paid for the
borrower'~ us~ of money during the term of the loan, as well as for his
0
detention of money after tne due date of its repayment..

REQUISITES FOR DEDUCTIBILITY under RR 5-2021 in relation to

CREATE LAW.
• The indebtedne$s must be that of the taxpayer;
• The interest must have been stipulated in writing ;
• The interest must be legally due;
• The interest payment arrangement must not be between related
taxpayers as mandated in Sec. 34(8)(2)(b) in relation to Sec. 36(8) of
the Tax Code, as amended (Refer to Page 458);
• The interest must not be incurred to finance petrol . um operations;
and

- 450
 DeM7tHtu tf: (jm,s //tC(Jh/,b
• The interest was not tr t d ·" .
. . ea e as capital expenditure" ·if such interest
was incurred in acquirin . · ' -·
.
of profess1on. . 9 property used in trade ' business or exercise

Provid~d, how_ever,. that the taxpayer's otherwise ailowable

deductton for interest expense shall be reduced by twenty
perc_en t (~0%) · of the . int~rest income subjected to final tax:
Provided, fm_ally, that if the interest .income tax is adjusted in the
· f.uture, the interest expense reduction rate shall be adjusted
accordingly base.d on the prescribed standard formula as defined ·
in the .rules and regulations to be promulgated by the secretary of
finance, upon the recommendation of the Commissioner of
Internal Revenue (CIR). In th.e case .of corporations, since the
incom(:] tax rates changed effective .July 1, 2020, it follows t~at
the deduction -from the intere~t expense of 20% shall be effective
also on the said date. · ·

■
Prior'to CREA TE law or under the TRAIN L~w, the reduction in the allowable
interest expense was i3% of income subjected to final tax.

The reduction of interest expense by a percent~ge of i~com~

subjected to final withholding tax is known as the tax arb1_trage
rule, illustrated as follows:

CREATE ACT - 20%

RCIJ ...:...25%
FWT-20%
Tax Arbitrage:
· . · Difference = 25% -20% =:= 50 0 !
=
Arbitrage 5%/~5% = 2O%

th · t:'4 duction is O% since there is no difference in the income

For MSMEs, . ~ ~I ·ncome (20%). with the tax rate applied on _the interest
tax _rate on ~he ax~ fi~~I tax (20%). Thus. there is no interest arbitrage. The
income subJect~d t hall be the sam·e with the actual interest incurred.
allowable interest expense ~ .

0
TRAIN LAW - 3~ / 0
RCIT-30%
FWT-20%
Tax Arbitr~ge: ce = 30% -20% =10%
D1ff?ren - 1oo/c /30% = 33%
Arbitrage - . 0

451
 \

NOTE: ) b't ge shall apply only to interest expense arising fro

• Interest (tax ar I ra rn
"borrowings or loans"· . " "t · m t" ·
. . g from "unpaid taxes or ax assess en or interest 0
• lnteres~ expense ar~s1~ciency provided the tax is related !o trade, business dn
tax d~llnquencyf or . e I shall ~at be co~ered by this limitation. Meaning th;
practice of pro ess1on . . ,
related interest shall be 100% deductible. . . . .
•
1
th of individuals engaged in business or practice of profession, such
;edu~tf:;:hall take effect upon the effectivity of the CREATE law on April 11,
2021 instead of July 1, 2020.

COMPUTATION: . ·
· Interest Expense ( from borrowmgs) Pxxx
Less: Reduction -.
Interest income. subject to ·FWT Pxxx
Multiply by either:
TRAIN law 33%
CREATE /aw (except MSMEs) 20% (XXX)
Deductible Interest Pxxx

2) EXCEPTIONS
The Tax Code, under Sect.ion 34(8)(2) provides that NO DEDUCTION
shall be allowed · in respect of interest under the succeeding
subparagraphs:

a) If within the taxable year an individual taxpayer reporting in'come on

the cash basis incurs an indebtedness on· which an interest is paid in
advance through discount or otherwise: Provided, That such interest
shall be allowed as a deduction in the year the indebtedness is paid:
Provided, further, That if the indebtedness is . payable in periodic
amortizations, the amount of interest which corresponds to the
amount of the p~incipal amortized or paid durrng the year shall be
allowed as _deduction in s~ch taxable year; ·

b) If both the taxpayer and the person to whom the payment has been
·made or is to be made are related persons specified under Section
36 (8) presented in Page 458; or
c) If the indebte~ness is incurred to finance petroleum exploration.
I

. . . Based on the fore~oi~g paragraphs, "prepaid interest" of an

~nd1v1du~I unde~ c~sh basis 1s deductible not in the year that the
interest was_ P.a1d in advance but in the year that the (ndebted~e~s
was f~lly . paid. However, if the indebtedness is payable in penqdic
.a~ort1za~10~, the am~unt of interest which corresponds to the amount
of the pnnc1pal amortized or paid during the year shall be allowed as
·•,

452
 deduction in such taxable
D~-7 _/"'
· wiu
.
0-1,i, tll& qrtJ:ss /;~
allowed as deduction fr Year. Prepaid interest shall likewise be
+. b · om the gro •
,or usmesses engaged . . ss income ''at the time of payment"
accounting. · tn re ndering services using cash basis of

3) OPTIONAL TREATMENT OF
Interest related to ac ui ·t'·NTEREST [Sec. 34(8)(3)]
8
profession may at th~ ~. ion of property used in trade, business or
0
1. Claimed as' outright Pe ion of the taxpayer, be:
. . xpense; or
2 . C ap1tallze and claim depr . t·
- ec1a 10n.
NON-DEDUCTIBLE INTEREST .
1. Interest paid to pe .
S r ( rsons classified as related taxpayers under
10
ec ~ 36 8 ) of RA 8424 (the Tax Code);
2 - If. th e indebtedness is incurred to finance petroleum exploration
[Sec.34(B)(2)(b )]
3. Interest on preferred stock

ILLUSTRATION 2

CASE 1: PREPAID INTEREST by an individual taxpayer using Cash Basis

Sec. 34(8)(2)(a) ·

In 2021, Earl obtained a P1 ,000,000 loan from a bank for business use (using
cash basis of accounting). · The proceeds of the loan amounted to P900,000, net
of P100,000 interest deducted in advance. Earl paio the loan in full in 2022.

Question 1: How much may Earl claim as interest expense in 2021?

❖ Answer: PO
The interest expense may be claimed as a deduction from the gross
income only upon full payment of the loan.

Question 2 How much may Earl claim as interest expense in 2022?

❖ Answer: P100,000

CASE 2· PREPAID INTEREST - Installment Paymen~s . -

Assume· the same data in case A except that the pnnc1paltart~ount of the lo n
'd . f (4) annual installments at P250,000 a years a mg 2022.
were p~, in oHur h may Earl claim as interest expense in 2021?
Question 1: ow muc . .
❖ Answer: PO

E I claim as interest exp nse In 2020?

Question 2. How much mayp ar • (P-1oo ooo x 250/1,000)
❖ Ans er: 2.5,000 , '

53
 I '

· NAL TREATMENT OF INTEREST EXPENSE

CASE C: OPTIO t' . using accrual basis of accounting. On January 1 2021 .
Mabuhay Corpora ion is 'th the increasin 9 d , , it
decided to purchase an equipment to cope up WI · emands of his
· •pment was acquired at a cost of P10,000,000 and w
customers. Th e equ1 (10) The equipm t as
estimated to have a useful life of ten yea:s. · en was financed
thrciugh a bank loan at an annual rate of_ 121/o. lntere_st of P1 ,200,000 Was
. t d • f by the bank Other business related interests amounting t
dIscoun e in u11 . · , d'. . . o
P300,000 ·were also paid during the. year.. In ad ition, ,_nterest inco~e of
p2oo,ooo (gross of 20% final tax) from ,ts various bank deposits were credited to
the account of Mabuhay during the current year,. ..
Question 1: Assume Mabuhay opted to recognized the interest related to the
acquisition of equipment as an outright expense, how much was the deductible
interest of the company in 2018?
❖ .Answer: P1 ,460,000
Interest incurred in acquiring the equipment P1 ,200,000
Reduction: (20% x P200,000) (40,000)
Other business related interest 300,000
Allowable interest expense ·for 2021 P1 ,460,000

Question 2. Assume the company opted to capitalize the interest related to the
acquisition of equipment, how much was the deductible interest of Mabuhay
for 2021? . · ·
❖ Answer: P.300,000. . Only the "Other'' business related interest shall be
considered as interest expense.

Question 3: Assume that Mabuhay opted to capitalize the interest related to the
acquisition of equipment, how much would be the cost of the equipment?
❖ Answer: P11,200,000 ·
Acquisition cost P10,000,000
Interest incurred in acquiring the ~quipment 1,200,000
· Capitalized cost of the equipment P11,200,000

LIM/TA TION ON INTEREST EXPENSE:

) As discussed in ~age 451_, Section 34(8) of the Tax Code, as amended by CREATE Act and
RR 5-2021 provide that the amount of interest paid or incurred within a taxable year on
indebt~dness in conne~tio~ with the taxpayer's professio~, trade or business is allowed as
?eduction from gross income. However, the taxpayer's otherwise allowable deduction for
,_nterest exp~nse should be reduced by 20% (Upon effectivity of CREATE Act) of the interest
tn,come subjected ~o final tax. The regulation specifically provides that the limitation shall apply
for _as long _as, during the taxable year, there is an interest expense incurred on one side and
a~ inter~st income earned on the other side, which interest income had been subjected to fin~I
withholding t_ ax. If a t~xpayer incurred indebtedness and Interest expense connected with his
tra~e or busin_ ess du~rng the taxable year and at the same time also earned ·interest inc0rne
wh1~h had been subJec~ed to :1nal withholding tax, the am·ount of interest expense shall be
subJect to the aforem~ntioned limitation (the reduction prior to CREATE Act was 33%).

454
 Dek,- vu L. ./'
ILLUSTRATION 3:
Debtor Corporation (not clas 'fi
J '
'fMrf, t/u, 9rtJss J/U:,t!//f,b

. ~. - - - - ----...
2021 taxable year si ied as MSME)
Sales · • shows th e following data during
Interest income .
Cost of sal~s , net.of 20% final tax P500,000
SI · · 24,000
a anes and wages 300,000
Interest expense 120,000.
Rent e~~en~e 60,000
, Advert1~ing expense 24,000
Depreciation expense 6,000
. Interest on unpaid taxes 5.,000
Quesfton: How much is th 5 000
Answer: P214,000 e allowable deduction from the gross inc~me?
Salaries and wages
Interest expense P12O,OOO
LESS: Limitation: P6O,OOO
Interest income subject to FT
(P24,000/80%) ,
P3O,OOO
Multiply by.
20% (6,000) 54,000
Rent expense
Advertising·expense 24,000
6,000
Depreciation expense
5,000
· Interest on unpaid taxes~ 5,006
Allowable deductions P214,000

...,nt:rest_ on tax~s paid or accrued shall be deductible in full. 11 shall not be reduced
b 201/o of mter~st income sub ected to final tax Refer also to Illustration #4 .· .

~i5it•nf?K+JJ of the Tax Code, as amended

TAXES · ,
Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deductions from
gross income. In the case of a nonresident alien indivjdual engaged in trade
or business in the Philippines and a resident foreign corporation, the
allowable deductions for taxes provided in tax code shall be allowed only if
and to the extent that they are connected with income from sources within the
Philippines, . . '

REQUISITES: ·
a) It must b~ aid or incurred within the ta~able year.. , .
b) It . t b- p 'd • urred in connection with the taxpayers profession ,
mus e ·pa1 or inc - ·
trade or business.
c) The tax must be imposed directly upon th e taxpayer.

455
 . d Non-Deductible Taxes
EXAMPLES of Ded~ctible an .' · ... ··N.ON-DEDUCTIBLE
. . .· · DEDUCTIBLE : ·· .

·Income tax paid abroad, claimed ■ Philippine income tax except

• fringe benefit tax
as operating expense**
• Documentary stamp taxes • Income tax paid abroad, claimed
• as tax credit **
Occupational t~xes
• Excise taxes • Estate and Donor's taxes
• Import duties • Percentage taxes under Section
• Local business taxes 127, otherwise known as stock
• Percentage taxes und~r the Tax transaction taxes
Code excep/Section 127, • Value added tax
otherwise known as stock • Taxes not related to business,
transaction taxes trade, or rofession.

Proof of Credit (Foreign income

taxes)
. The foreign income taxes
paid shall be alloweq .only a~
deductions from the gross income tf
the taxpayer establishes to the
satisfaction of the Commissioner the
following:
a) The total amount of income
derived from sources without the
Philippines.
b) The amount of income derived
from each country, the tax paid or
incurred determined under rules
and regulations prescribed by the
Secretary of Finance; and
c) All · other information necessary
for the verification and
computation of such credits . .
**Optional Treatment of Foreign
Income Taxes paid
At the option of the taxpayer, foreign
income taxes paid may_be claimed as:
■ Deduction from gross •income; or
■ As tax credit (deductions from
income tax due).
Once the option to credit the foreign
taxes in the year incurred is made, the
~redits for all subsequent years shall be
taken upon the same basis. In addition,
· .no portion of any such foreign taxes
shall be allowed as deduction in the .
same or any succeeding year.

INTEREST FOR UNPAID TAxES

,.

Interest Paid or accru~d on taxes related to busilless or practice 0:

profession, such as those paid tor
deficiency or delinquency (since !axes ~r
consid~red indebt~dness} are d~dl/ctible as interest expense: Provided, 1n~t1
the tax 1s a deductible tax. Such interest shall be deductible in full. It shal~ al
be reduced by 20% (under CREATE Act) of interest income subject to inot
tax. However, fines, penalties, and surcharges on account of taxes are n

456
 . .
deductible. Deductible interest
D~ -7 / 9 I- Wl1.S ·tHrL, t!w r tJ.S.S /UX)-11'/,b

. · · • . expenses m · .
orpora t,on on scnp d1v1dends ·int ay include interest paid by a
C . , erest on de •t .
of the Bsp. t 0 d epos,tors (provided the posi _s pa!d by authorized banks
interest paid ~y a corporate taxpayer w a~pr?pnate tax was withheld) and
property of which the said corporatio . ho is liable on a mortgage upon real
. n 15 th e legal or equitable. owner. .
ILLUSTRATION 4:
ABC Company incurred the following ta d .
Documentary stamp taxes . xes unng 2021:
Income taxes paid in favor of key offi · . P1 ,000
·. . icers as fnnge benefit 13,600
Income taxes paid in favor of rank & fil •
benefit . ' e emp 1oyees as fnnge 22,400
Local taxes, including surcharge of PB00 d . t 6,000
Philippine. income tax an in erest of P200
100,000
. Municipal tax ·
2,000
·community tax
1,500
Value added tax 90,000
Con:,promise penalty on taxes 50,000
Percentage tax paid an sale of shares sold thru the local stock 12,000
exchange
Donor's tax for 2020 25,000
Foreign ·income tax payments claimed as tax credits 10,000

Question: What is the correct amount of taxes that can be deducted from gross
income? ·
Answer: P9,500 computed as follows:

Documentary stamp taxes . P1,000

Local taxes excluding surcharge and interest 5,000
Municipal tax 2,000
Community.tax 1,500
Total P9,500

❖ Interest on surcharges is deductible from gross income but as "interest expense", -not as tax
expense. . ·
❖ .Income taxes paid in favor of key officers. as fringe benefit is_ a fringe benefit tax expense
classified as manpower cost or compensation expense. FBT 1s a fina/ tax of the employee,
.not the employer, withheld only by latter for rem~ttance to the. BIR. Likewise, income taxes
paid in favor of rank and 'file employees as fringe benefit 1s also part of compensation
expense of the employer. . .
❖ The following -items provided in the problem are NONdeduct1ble.expenses:
o Income tax
o Valued added tax
0 Compromise penalty on taxes · • .
Percentage tax paid on sale of shares sold thru the local stock exchange
0
o Donor's tax
Forei n income tax a ments claimed as tax credits
0

457
 ·- . ~::,
:,
/

Deko/Mt, £ {jr05s J~
NONDEDUCTIBLE INTEREST AND .LOSSES -(f?ELA TED TAXPA YERs
Sec. 36(8 ) of the Tax Co~e, as amended · - )
I

Interest expenses as well as losses are not allowed as a deduction fr

the gross income if both the taxpayer and the person to Whom ~hrn
payment has been made or is to be made are: · e
a. .Between members of the family.
The family of an individual shall include only his brothers and
sisters (whether by the whole or half-blood), spouse, an~estors,
and linea1 descendants; or

b. Except in case of distributions in liquidation, between a_n individual

and corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, ·directly or indirectly, by or for
such ·individual.

c. Except in case -of distributions in liquidation , between two

corporations more than fifty percent (50%) in value of the
outstaQding stock of which is owned, directly or indirectly, by or for .
the same individual if either on·e, of such corporations, with respect
to the .taxable year of the corporation preceding the date of the
sale of exchange was under the law applicable to such taxable
year; a personal holding company or a foreign personal holding
company; ·

d. Between the ~r~ntor and a fiduciary of any trust

e. Between the fiduciary of a trust and the fiduciary of another trust if
the sa~e person is a grantor with respect to each trust.
f. Between a fiduciary of a trust _and beneficiary of such trust.

~i441M)it/li)Jof the tax Code, as amended

LOSSES

Losses may be offset against .all -income and capital gains in the same
tax year. However, losses are deductible from gross income only on the
following grounds:

a) Ordinary losses arising from losses incurred in trade business, or

professi~n including n et operating loss carry-over; '

b) , Casualty losses

458
casualty Losses

The los~ is _ . qf . property

connec~ed w1~~ trade, busir1ess, or ' Casualty losses are not allowed /

profession ansing from fire storm as deductions from the gross

shipwre~k or other casu~lty, ~ . income if such losses have been
0 claimed as deductions for estate
from ropbery, theft, . or
embezzlement, and for which a tax purposes in the estate tax
return.
declaration · of loss was filed with
the BIR within 45 days from the
date the loss was incurred. ·

In the·case of a nonresjdent alien individual or foreigri corporatiori, the .

losses deductible shall be those actually sustained during the year
inc·urred in business, trade or exercise of a profession conducted within
the Philippines, when such losses are not compensated for by
insurance or other forms of indemnity.

.. MEASUREMENT OF CAS()AL TY
Actual loss shall be reduced
LOSS:
- . by insurance recovery or any
form of' indemnity. Any
■ Total Loss: Actual loss is the excess of cost to restore over
book value of the asset. the book value shall be
■ Partial Los·s: Book value or cost capitalized. ·
to restore the asset to its normal • I

operating condition, whichever is

lower.

ILLUSTRATION 5:
Case A: · · hased for PSOO 000 an automobile which will be
On July 1, 2018, a l~wyer ~u~cof rofession H~ deducted annual depreciation on
t
used exclusively for ~is practic f lite of fi~e (5) years. On July 1, 2021 , the
the basis of an es~imated use~ ·n an accidental collision with another vehicle.
automobile was partially damat1 ~efore the collision equals the carrying value at
The fair mark~t value of t~e. ve ;~: fair value was determined at P100,000. The
P200 000. After the coll1s1on, d of P70 000 to cover the loss.
' . . ce procee s ,
taxpayer received msurha~ the deductible loss?
Question 1: How muc is
❖ Answer: P30,000 ooo x 215) P200,000
Carrying vaf_!ue ((;~~~ 000-100, 000) 100,000
Cost to res ore ' P100,000
Lower amount . nee {70,000)
Less: Proceeds from m5ura _ _ _ _ _ _ _ _--=-P3.;. ;.0.:. .,o_oo_ _ _____
Allowable deduction

459
 Question 2 How much is the deductible' loss if the automobile was totally
destroyed? · · ·
❖ Answer: P130,000 computed as follows;
Carrying value . P200,000
Less: Proceeds from insurance (70,000)
Allowable deduction P130,000

Question J:' Assume cost to restore was P250,000 (ignore fair market values).
How much is the deductible loss? ·
· ❖ Answer: P130,000
Carrying value (PS00,900 x 215) P200,D00
Cost to restore 250,000

Lower amount P200,000

Less: Proceeds from insurance (70,000)
Allowable deduction P130,000

_Question 4.· As~ume the same data in question #3, what is the new cost basis of
the automobile for depreciation purposes?
❖ Answer: P250,000
Book value p200;000
Add: Excess of cost to restore over BV 50,000
Adjusted Cost Basis P250,000

NET OPERATING LOSS CARRY-OVER NOLCO

"Net Operating ·Loss" means the excess of allowable deduction over
gross ir.icome 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. However, under RA 11494, also known as the
Bayanih_an Act 11, the NOLCO of the business or enterprise for
taxable years 2020 and 2021 shall be carried over as a deduction
from gross income for .the next five (5) consecutive taxable years
immediately following the year of loss. ·

Summary: .
♦ · NOLCO incurred prior to.2020 and 2021 - 3 consecutive years.
♦ . NOLCO incurred in 2020 and 2021 - -5 consecutive years ·
+ NOLCQ beginning 2q22 - 3 consecutive years

460
 .. De£ctUHU LOl!u £ {jm.s.s I~
REQUISITES FOR DEDUCTIBILITY J ' v •

1. At the time of incurring n t -

oss, th e taxpayer must not be exempt from
1
income tax; e
2. There is no substantial .ch
enterprise in that ange in the ownership of the business or

a) Not less than sevent -f . . ·

issued shares, if'the b~ !ve (7_ 50~0 ) tn nominal value of outstanding
by or on behalf of th siness is tn the name of a corporation, is held
b) Not less tha e same persons; or
corporation, i'f ~h!ebve~ty-fiv~ ~75%) of t~e paid-up ~apit~I of the
or on behalf of th usiness is tn the name .of a corporation, 1s ·held by
e same persons.

3. NOT applicable against MC.IT·

4. Applied ?na Fi~st-in, First-Out (FIFO) basis (RR 14-2001 ); and
5. Not applicable under Optional Standard Deduction.

ADDITIONAL REQUIREMENTS for NOLCO incurred in 2020 and 2021

under Bayanihan Act II and'RR 25~2020:
. .
1. NOLCO shall b·e separately shown .in the taxpayer's income tax return for
taxable year 2020 and in the Reconciliation portion of the Tax Return;
2. Unused NOLCO shall b.e presented in the Notes to the 2020 Financial
Statements (with details of year sustained and amount claimed);
3. . NOLCO for taxable y~ar 2020 shall be prese~ted in the Notes to the
Financial Statements separat~ly from the NOLCO for other taxable
years.

RR 25-2020
SECTION 4. Five (5) Year Period of Entitlement to Deduct ~et ~perat~ng Loss
·incurred for Taxable Years 2020 and 2021. - Unless otherwise disqualified from
claiming the deduction, the business o( enterprise which incurred net operating loss
for taxable years 2020 and 2021 shall be allowed to carry ov~r the same as a
dedUCt.10n fro m ·1ts gross income for the . next five (5) consecutive
t' I f
taxable years
'd t bl
immediately following the year of such. loss. The net opera 1~9 .oss or sa1 axa ·. e
b · d over as a deduction even after the expiration of RA No. 11494
year~ mayh e came . e clai·med within the next five (5) consecutive taxable years
provided t e same ar
immediately following the year 0~ such loss.
ar reglementary period on the carry-over of
The three ( 3 ) te d in 2020 and 2021 period - five years)
NOLCO (excep~, those in~~:;fanding the fact that the corporation paid its
shall continue to run, notwi M'nimum Corporate Income Tax (MCIT)
1
income tax under th e
computation.
 '
. The 75% equity, .ownership or interest described ~bove shall only apply to
a transfer or assignment of the taxpayer's net opera.ting l_oss_es as a result of
or arising from the · said taxpayer's merger or con~olldatio~ or business
combination with another person. In case the tran 5 fe~ or assignment of th
taxpayer's net operating losses arising from the said taxpayer's merge;
consolidation or combination with another perso~ , th~ _transferee or a~signe~
shall not be entitled to claim the same as de?uc~ion from gr~ss income
unless, as a result of the said merger, consolidation or ~ombination, the
shareholders of the transferor/assignor, or the transferor (in case of other
business c·ombinations) gains control of at least 75% or more in nominal value
of the outstanding issued shares or paid up capital of the transferee/assignee
(in case ·the transferee/assignee is a corporation) or 75% or more ·interest in
the b_usiness of the transferee/assignee in case the transferee/assignee is
other than a corporation (RR ,14-2001 ).

Individuals (including estates and trusts) engaged in trade or

business, or exercise of profession, ·domestic corporations, resident
· corporations, and special corporations such as proprietary educational
institutions, hospitals and regional operating headquarters of multinational
corporations may be allowed to deduct NOLCO from its gross income.

By or on behalf of the same persons

By or on behalf of the sa·me persons shall refer to maintenance of

Ownership' despite change as when: .
a) No actu.al change in the ownership is involved in case the transfer
involves change from d_irect ownershi'p to indirect ownership, or vice
versa.
b) No actual change in_ the ownership is .involved in the case of merger
of the subsidiary into the parent company ·

ILLUSTRATION 6 - NO~~O (based on RR 14-2001) .

CASE A: Change f~om direct ownership to indirect ownership
P corporation own~ ~ corporation that has NOLCO. p corpora · n
transfers ~ corporation s shares to R corporation in exchange for 100 ¼ f
R corporation's shares.

Held: · Q corporation's NO~CO is retained because Q c rp ti ns

shares are held by R corporation "on behalf of p corporation the origin I
owne~ •

. CASE B: Merger o~ the subsidiary into the parent co _

X corporation owns 100 of y · , mpan~ . fz
. . · . corporation. Y oorporat,on owns 100° 0
corporat~on. Z corporation has NOLCO. z corporation is merged into Y
cor oration.

462
 . De./4d7/Mt; £ 9ro-.s.s J/Wiflttb
tf~ld: Z corporation's NO .
, corporation. Prior to th LCO should be ·retained and transferred to Y
corporation. ·After th~ merger, X corporation already indirectly owned Z
absorbed cor oration :h'!7_ehrger,. X now d.irectly .owns Z corporation
ic continues to exist in Y car oration.

TAXPAYERS OT ALLOWED TO CLAIM NOLC9 (RR 14-2001)

a. Taxpayers who are exempt f • · ·
NIRC or special law(s}) at th r~m income tax (ei!her by provi~ions of the
·Offsho·re Banking un·t f e time ~he net operating loss was mcurr_ed.
b. currency Deposit u •t1·sf o a foreign .
bank· t·
mg corpora ,on an
d F ·
ore,gn
authorized as such ~' toh a domestic or foreign banking corporation, duly
rr . . Y. e Bangko Sentral ng Pilipinas
c. .En I ies enJoying .1ncorne _T ax Holiday with· respect ·to ~et operating losses
incurred or s.ustained during the period of such Income Tax Holiday, such
as thos~ registered by the B01 and PEZA. •
d. Enterprises registered under RA 722} (Bases· Conversion Development
Act). ·
e. Foreign corporations en~aged in international shipping or air carriage in
the Philippines. ·.

NET OPERA TING LOSS FOR MINES OTHER THAN OIL AND GAS WELLS

For mines other than oil a~d gas wells, a net operating loss incurred
in any of the first ·10 years of qperation may be- carried over as a deduction
from the taxable income for the next 5 years imm~diately following the year of
such loss. The entire amount of the loss shall be carried over to the first 5
taxable years following the loss, arid any portion of such loss which exceeds
the taxable income of such first year shall be deducted in like manner from
the taxabfe income of the next remaining 4 years.

ILLUSTRATION 7 - NOLCO (additional illustrations): . .

CASE A: (Entire NOLCO were claim~d as deduction from_ Gross Income):
The following are the records of Hanarnah Company (MSME).
2019 2020 2021
P3,300,000 2~40,000 P1,0. 5 0 0
Gross sales 0 000 -
2,400,000 1,200,000
Cost of sales 32 000
140,000
Dividend from resident foreign
corporation (forelgn•sourcedJ 16 -00
28,000
Interest income on notes
receivable 13 000
Capital gain 20 000
Capital loss 1,475,000 1,115,000
O ratin ex enses

4 3
Determine the following:
1. Taxable income(loss) for 201~
❖ . Answer: (P407,000)

Solution: P3,300,000
Gross sales
(2,400,000)
Cost of Sales
(1,475,000)
Operating expenses
Dividend income from foreign corp. 140,000
Interest income on notes receivables 28,000
Net Operating Loss (P407,000)

2. Taxable income(loss) for 2020

❖ Answer: PO

Solution:
Gross sales P2, 640,000
Cost of Sales (1,200,000)
Operating expenses · (1,115,000)
· Capital gain , 13,000
Interest income on note~ receivables 16,400
Net income 2020 (before NOLCO) 354,400
' .
NOLCO-2019*** (354,400)
Taxable income(loss) . (PO)
***Net operating losses for any taxable year (other than 2020 and 2021) immediately
preceding the current taxable year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction from the gross income for the next
three (3) consecutive taxable years (NOLCO) immediately following the year of such loss .
However, the amou·nt allowed as deduction is to the extent only of the net income for the
year before deducting the NOLCO. The balance (P407,000-354.400 = P52,600) may be
carried over in 2021 and 2022. NOLCO incurred in·2020 and 2021 may be carried over
for the next five (5) years under RA 11494 or the Bayanihan Act 2.

3. Taxable income(loss) for 2021

❖ Answer: P254,400

Solution:
Gross sales P1,025,000 ·
· Cost of Sales (350,000)
Operating expenses (400,000)
Dividend income from foreign corp. 32,000
Capital gain · 18,500
Capital loss** (18,500)
Net income 2021 (before NOLCO) 307,000
Balance ?f 2019 NOLCO (52,600)
** . . Taxa~le mcome-2021 P254,400
Capital loss 1s deductible only to the extent of capital gain (Chapter 9) . •

464
CASEB
Onl a ortion of NOLCO . ·
Assume the same 'd t were claimed as d d .
further the foHo .. a a for ?019 and 2020 . e_uc~,o~ from Gross Income :
.wing data for 2021 to 2023: as provided m<;:ASE A. Assume
Gross sales 2021 202 2 2023
C?~t of sales P3,0oo,ooo 2,840,000 P3,000,000
D1v1den~ - -resident foreign 2,000,000 1,600;000 350,000
corporation (foreign-sourced· 100,000 20,000
not tax-exempt) '
Interest income on notes
receivable 50,000 35,000
Capital gain
Capital loss 15,000 18,500
10,000 22,000
Operating expenses 1,500,000 1,500,000 400,000
Determine the following:
1. Taxable income(loss) in 2021
1

❖ Answer: (P3.50,000) .computed as follows:

Gross sales P3,000,000
Cost of Sales (2,000,000)
Operating expenses (1,500,000)
Dividend income from foreign corp. · 100,000
lnteresJ income on notes receivables 50,000
Net income(loss) in 2021 ** befo(e NOLCO (P350,000)
2019 NOLCO (balance)***
Taxable income(loss) 2021 (P350,000)

** The operating loss for 2021 may be carried over against the operating income for.
the next five years as provided under RA 11494 (Bayanihan Act 2). This amoun is
independent from 2019 NOLCO.
*tt Since the operations for 2021 resulted to a loss, the balance of 2019 NOLCO
(P52,600) cannot be carried over against the net income of 2021.

2. Taxable income(loss) in 2022

• • Answer: (P210,000} computed as follows:
P2,840,000
Gross sales (1,600,000)
Cost of Sales (1,500
Operating expenses .
Int rest income on notes reqe,vab/es
C It I g in (P
N I Inc m (I ) in 2022 befo NOL CO
2019 NOLCO
2021 NOL.CO (P210,0 ~
Tax bl ·inco

5
3. Taxable income(loss) in 2023 d f1
·1ows·
❖ An~wer: P1 ,710,000 compute as O - ·
P3,000,000
Gross sales
(350,000)
Cost of Sales
Operating expenses . (400,000)
. Dividend income from foreign corp. 20,000
Capital gain 18,500
Capital loss (18,500)
(to the extent of capital gain only
Net income 2023 (before NOLCO) 2;270,000
NOLCO-2019***
NbLCO-2021 (350;000)
NOLCO-2022 (210,000)
Taxable income P1, 710,000
wr The unclaimed amount for 2019 operating loss (407,'000-354,490 ~ P52,600) is no longer deductib'Q
from the operating income of 2023 and succeeding years. NOLCO may be claimed only within ·3
consecutive years from the time the operating loss was incurred, provided the loss was not incurred in 2020
and 2021 .(5-year period).

CASE C (NOLCO AND MCIT): .

Assume the same data for 2019 and 2020 as provided in CASE A. Assume
further th~ following data for 2021 to ·2023:
2021 2022 2023
Gross sales P3,000,000 5,000,000 P~ 000,000 1

Cost of sales 2,000,000. 1,600,000 350,000

Dividend - resident foreign · 100,000 20,000
corporation
Interest income on notes 50,000 35,000
receivable
Capital gain 15,000 18,500
Capital loss 10,000 22,000
Operating_expenses 1,500,000 400,000
Determine the following:
1. Ta?(able income(loss) in 2021
❖ Answer: (P350,000) computed as follows:
Gross sales P3,000 000
Cost of Sales
(2,000,000)
Operating expenses
(1,500,000
Dividend income from foreign corp. 100,000
Interest income on notes receivables 50000
Net income(loss) in 2021 before NOLCO
2019 NOLCO -
Taxable income(loss) 2021 ·
(P3 0,000}
2. Taxable·income(,loss) in 2022
❖ Answer/ Pf50,000 computed as follows:

466
 Gross sales
Cost of Sales PS,ooo,·ooo
Operating expenses (1,600,000)
Interest Income 0 (3,300,000)
Capital gain n notes receivables
35,000
Net income~oss) in 2022 b f 15,000
2019 NOLCO *** e ore NOLCO P150,000
2021 NOLCO ***
Taxabl~ income(loss) 2022
P150,000
NOTE: .
■
MCIT for 2022 is higher than RCIT computed as follows:
Gross sales
P5,000,000
Cost ofsa/es ·
(?,600,000)
Gross incom~
Add: Interest income on noies receivable 35,000
Capital gain . 15,000
Gross income for MC/T purposes P3,450,000 ,
X . .
1%
MC/Tunder CREATE Act. P34,500
RC/TforMSME (Pr50,000 x 20%) · PJ0,000
TAX DUE (Higher Amount) P34,500

■ Carry-over of operating loss for a prior ,taxable .year is not allowed if the basis
of tax due for the year that NOLCO is claimed is the MCIT. At the same.time,
the three (3) yea·r or give (5) year reglementary period, as the case may be, on
the carry-over of NOLCO sha.11 continue to run, notwithstanding the fact that the
corporation paid its inco111e tax under the Minimum Corporate Income Tax
(MCIT) comptitation.' Hence_,the amount of unclaimed NOLCO for 2019 is no
longer deductible against the net income of 2023.
'
3. Taxable income(loss) for 2023
I

❖ Answer: P1 ,920,000 computed as follows:

Gross sales P3,000,000
Cost of Sales (350,000)
Operating expenses . _ (400,000)
Dividend income from foreign corp. 20,000
18,500
Capital gain
(18,500)
Capital loss . , 2,270,000
Net Income 2023 (before NOLCO)
NOLCO-2019*** (350,000)
NOLCO-2021 P1 920 0
r. xable Income .. 2023 1

467
CAPITAL LOSS [Sec. 34(0)(4)]

Capital Losses are losses from capital assets other than th

subjected to 'capital gains taxes. C~pital losses are deduc~ible ~nly to ~~e
extent of capital gains as discussed in Chapt~r 9. Hence, if capital loss .e
I

higher than capital gains, the "net" capital loss shall not be considered in t~!
determination of the taxable gross income of the taxpayer.

SPECIAL TYPES OF CAPITAL LOSSES

• .Wash Sale [Sec. 34(0)(5); Sec. 38]

. In the case of any loss claimed to have be~~ sustained from any
sale or other disposition of shares of stock, secunt,es or stock options,
where it appears that, within a period t;>eginning thirty days before the
date of such sale or disposition, and ending thirty days after such date
(also known as 61-day period), the taxpayer has acquired {by purchase or
exchange upon which the entire gain or loss was recognized by law), or
has -entered into a contract or option to acquire, substantially identical
· s_ e curities or stock (stock of the same class, or in case of bonds, same
terms thereof), · then no deductfon for the lo~s shall be allowed (RR 6-
2008) . .However, the amount of loss not deductible from the gross income
shall form part of the co.st of acquiring securities. In addition, gain from
wash sale transaction is taxable.

The rationale for non-deductibility of loss from wash saJe is that the
. loss is not actua·lly sustained or incurred oy the seller. It is only an
artificial loss. Substantially identical securities indicate stocks or
. securities of the same class or similar on their importar:,r features like
bonds where th~ only difference is the date of maturity. .

The following exchanges of . non~identical

· securities are NOT subject to rules on wash . Individuals/
sales: corporations acting as
• Common· $tock to p~eferrea stock dealers in stocks or
• Voting stock to nonvoting stock securities are n~t
• Stock of one corporation to stock .of covered by the rules on
anothet corporation wash sales [Sec.
Bonds that differ in ·terms and 38(A)].
conditions such as interest rates.
and debenture and nondebentu.re
bonds

468
ILLUSTRATION 8:
Case A
ABC, whose taxable year is th ,
e calendar y
100 shares of common stock of XYZ C ear, on December 1, 2020, purchased
2020, purchase~ 100 additional shar -ompany for P100,000 and on December 15,
100 shares purchased on Dec b es for P9o,ooo. On January?, 2021, it sold the
within the 61-da eriod frame~ er 1, 2020, for P90,000. Since the transaction is
P1 O000 (SP P90 000 I ecember 1 2020 to Janua 2 2021 the loss of
st
sale:' which is a n~ndedesst_bclo ?f p~ OO,O00) should be classified as loss on "wash
uc I e loss under the tax code. .
'\
Case B
ABC,_whose taxab_le year is the calendar year, on September 21, 2020, purchased
100 shares of the common stock of XYZ Company for P50,000. On December 21 ,
2020, ABC purchased 50 shares of substantially identical stock for P27,500, and
on December 26, 2020, 25 additional shares of such stock for P11,250. On
January 2, 2021, it sold for P40,000 the 100 shares purchased on Septembe·r 21 ,
2020.' There is an indicated loss of P10,000 on the sale of the 100 shares (Cos~ of
P59,000 vs SP of P40.,000). ABC purchased a total of 75 substantially identical
additional shares within the sixty-one-day period (from December 21 and 26, 2020
to January 2, 2021 ). Therefore, a portion of the P10,000 indicated loss should be
classified as.lo~s on wash sale and the remaining portion as deductible capital loss
illustrated as follows:
Se.lling price (for 100 shares) P40,000
Cost of 100 shares acq'd. on Sept. 21, 2020 50,000
Indicated Loss on the 100 shares sold. . *P10,000
C ► ■ *75 shares should pertain to acquisition within the prohibited period
(50 share~ on Decem~er 21 and 25 s~ares on December 26).
• The loss attributable to" the 75 shares is los~ on wash sale ~P_10,000
Iass X 75/100 = P? ,SOO) which
'
is nondeduct1,ble. The remammg
' . h . d d t'bl
P2 500 loss should be classified as capital loss wh1c is e uc .1 ~
onl~ fron:i capital gains, if any. .

Case C . . . 1 2021 he had the following transactions on

Floyd is not a dealer in secunt1~:s1i~ corp~ration:
ordinary shares of JJ Co., a do . . P100,000
Jan. 12 Purchase 100 sharesh d on Jan. 12 80,000
June 20 Sold the shares pure ase 50,000
June 30 Purchased 70 shpa~~:hase on June 30 75,000
Oct. 15 Sold the shares

469
 Question 1: How much was the ioss on wash sale?
❖ Answer: P14,000
I SP
Cost
P8o,ooo
Indicated loss on 100 shares ~
~
Loss on Wash Sale (**70/100 x P20,000)
P14,ooo
(Not allowed as deduction from Gross Income but
should form part of the cost of subsequent
acquisition of securities-Refer to Question 3)
**Only the.70 additional were acquired within.the
prohi~ited period (61-day rule) . , ·
'

Question 2 How much was the c_

apital loss?
❖ Answer: P6,000 (***30/100 x P20,000)
Deductible only from capital gains, if any.
·***Since only 70 shares were acquired within the prohibited period (61-da
rule), the loss attributable to the remaining 30 shares should not be treate~
as loss on was sale.

Question 3. How much was the cost of shares purchased on June 30?
❖ Answer: P64,000 computed as follows:
Purchase price P50,000
Add: Loss on wash sale 14,000
., Cost basis 64,000

·Ql/estion 4: How much was the capital gain on sale of shares on October 15?
❖ Answer: P11,000 . · ·
SP P75,000
Cost (64,000)
Gain on Sale · P11,000 .
No acquisition or disposal-were made within the 61-day prohibited period.
Hence, any loss incurred in disposing the shares shall not be classified-as
, "loss·on wash sale".

~ ■ Short Sales [Sec. 3~(F)]

Sale of stocks which 'the seller does not own .(he merely borrows
th
!
stock certificate through or.from his stock bro~er) and subsequent~y b~~e
or cover$ the stock to complete the transaction, thereby postponi~~tion
delivery to a l~ter date. Thus, a short ·sale represents an _obh9 the
payable in kind or goods. Seller merely speculates that on this daY he
price of the security or share will increase. If the price decrea_se~rs a
earns a-capital gain-. On the other hand, if the ·price increases, he inc
capital loss.

470
 WASH SALE
Gain: Treated as capi~taG:Ig~ai~n- --+-=--~SH~O~R~T1S~A~LE~ _ _J
Taxable Treated as capital gain
Loss: ■ N · . Taxable

ILLUSTRATION .9·. .
Lester speculated that the f · · 1 • •
week due to an adver · b ~Ir va ues of San ~19 shares will decrease within the
·t t· se usmess deal entered into by San Mig Clifford unaware
of th e s1 ua 10n was I d b · . · '
t ·d r · ' ure Y Lester to buy San Mig shares at P120 per share for
1a er e tve~ · If the fair value of the shares increase to P125 per share at the time
Lester acquires San Mig shar'es for de11very
- .
to Clifford, •
Lester incurs •
a capital loss
of P5 per share. On the other hand, ·if the fair value of the shares becomes P110
per share as Lester an~icipated, he should recognize a capital gain on short sale at
P10 per share.

• ·Securities Becoming Worthless; Shrinkage in the value of Stocks

If the stocks of ·the corporation become worthless, the cost or other

basis may be deducted by the owner in the taxable year in which the
stocks became worthless. If ·these worthless securities are capital assets,
the .owner rs Considered to have incurred a ·capital loss as of the last day
o_f the taxable year and, therefore, deductible t6 the extent of capital
gains. This deduction, however, is not allowed to ·a bank or trust
company. [Section 34(E)(2), . NIRC]. It is neither a wash sale nor a short
sale. The two (2) requisites for deductibility are as follows:
• The securities are ascertained to be worthle.ss;
■ · The taxpayer claiming the capital los_s_ s~ould not be ? bank or a
· trust company incorporated under Philippines laws.

· On the other hand, any amoun~ clai~eq as a ~oss _on account of

shrinkage in · value of the stock through ~-uctuat,on in the market
or otherwise cannot be deducted from gross income, for tax purposesJ
because the loss is not realized .

. . Wagering Losses
I transactions shall be allowed only to the extent
• -

Losses from wageri ng .

of the gains from such transactions.

471
■ Loss on Merger or Co.n solidation

. In a merger or consolidation involving an exchange of stock

·t t k · I · · so1e1\,
for stock, or security solely for secun Y or soc , . no 0 s_s 1s recogni ,
When in addition to stock, cask and/or p_roperty 1s received, ga'in if ~d.
· (not exceeding the sum of money and fair market value of any pro ny
received), but not. the loss is recognized. Th~ gain to be recognized ~~rty
not exceed the cash/and or fair market value of prop·erty received. all

ILLUSTRATION 10:

CASE A:
Francis Company was merged into Villamin C~mpany, and o~ly Villamin Company
continue to exist. Paul, a shareholder of Francis Company was ·asked to surrender
his ·100 shares of Francis Company that he acquired for P90,000 and received
under the. me~ger 100 shares of Villamin Company with a fair market value of
P1.50,000 and cash of P30,000 and a property valued at P10,000. Villamin shares
were subsequently sold at P110,000.
. .

Question 1: How much should Paul recognize .as gain from ~he merger?
❖ Answer: ·P40,000

Fair value of shares received . P150,000

Add: Cash and property received 401000
Total · 190,000 ·
east of shares surrendered (90,000)
Indicated ga!n P100,000
Gain to be re_cognized . P40,000
■ Gain to be recognized is limited to the amount of cash and property received.

Question 2 What is the.adjuste.d cost basis of Villamin shares received?

❖ An~wer: P90,000

Cost of shares surrendered (Francis) P90,000 .

Less: Cash and property received · (40,000)
Total · 50,000
Add: Gain recognized 40,000
Adjuste~ cost basis of shares received P90,000

Question 3: How much should Paul recog·nize as gain f;om sale of Villarnin
.shares.? . ·
❖ Answer: P20,000
Selling price of Villamin shares· P110,000
Less: Cost of Villamin shares (90,000)
Gain on sale of Villamin shares P20,000

472
 CASE B:
Assume the same data . ·
P30,000 ..Assume f rthin Case A except that th .
P80 000 · u er th at the Villarnin sh e fair value of Villamin shares was
Qu~stion 1: How much s . ares were subsequently sold at
• hould Paul reco ·
;♦• Answer: PO
. , gnize as gain/loss from the transaction?·
. A:?;~ehof shares received . .
Tot~I s and property received P30,ooo
40,000
Co~t of sfyares surrendered 70,000
Indicated loss-Not recognized (90,000)
• . (P20,000)
Quesflon 2. What is the ad· t d .
. ❖ . Answer: J~1~,0g~st bas,s. . of Villamin. shares received?
.

Cost _of shares surrendered (Francis)

P90,000
Less. Cash fmd property' received
·Total . (40,000)
50,000
Add: Gain recognized ·
0
Adjusted cost basis of shares received· P50,000

Question 3: How much shou Id Paul recognize as gain from

shares? · sale of Villamin

❖ Answer: P30,000 .
Selling price of Villamin shares PB0,000
Less: Cost of Vil/amin shares (50,000)
Gain on sale of Villamin shares P30,000

OTHER TYPES OF
LOSSES
•· Losses due to voluntary removal of building incident to r~newal
or replacem~nts .- deductible expense fro'm gross income
Loss of useful value of capital assets due to charges in· business
· conditi'ons -deductible expense only to the extent of actual loss
sustained (after adjustment for . improvement, depreciation, and
salvage value) . .
■ Abandonment losses in petroleum operations
■
Losses arising from a failure to exercise an "Option" money to buy a_
capital property _shall be treated by the . buyer _as a .capital loss.
Likewise the seller shall consider the same as capital gain.
I , I .

.NONDEDUCTIBLE LOSSES . . · . .
• '· L t · u·rr·ed ·1n trade profession or business or in any .
osses . no me . : .
transaction entered i~to for hprof,t of· property entered into between
■ L f les or exc ange 5 ··
osses rom sa ( . t d ductible as provided under Section 36 of the
related taxpayers no e · ·
Tax Code, but the gains are taxable). ·
,.
 ·. •
ZJeM~~ £ 9r1Jcfs

es of property in a corporate readjustment

l'
• Losses from exchang rising from merger and consolidation) (refer
to discussion on losses.a .
·11 I transactions
• Losses from I ega oval of building on land purchased with .
• Loss on voluntary ~e~ Such loss shall form part of the co ta View
to erect another building. · s of the
new bu,ilding to be erec!ed.

~i44iM«R P9l of th~ Tax Code, as amen<!ed ·

BAD DEBTS
In general debts due to the taxpayer actually ascertained to be Worthl ·
' · t th t ess
and charged off within the taxable year exc~p ?se no ~on~ected With
profession, trade or business and those sustained in_ a transaction entered
into between '.'related parties" mentioned under Section 36 (8) of the T
Code and as discussed in the foregoin~ topics are deductible. · Provid!~
further,_that recovery of bad debts previously allow~d. as deduction in the
pr~ceding years shall be included a;; part of ~he gr~ss mc·o ~e in the year of
.recovery to the extent of the irwome tax benefit of said deduction.

Charging-off of an account should be made Criteria in determining

by rem·oving the worthless accounts from the
"worthlessness" of
hooks_of accounts in the year that the debt is
receivables
ascertained to be worthless. Hence, "resetved
or .provision for bad debts" are not allowed as 1. Taxpayer did in fact
deduction - from gross income because the ascertain that the debt
mere setting up of reserves will not give rise to is worthless in the
any deductjon under Section 34(E) of the . year for which the
9o?e: Hence, only the "direct method" or · deduction was sought
.. write-off' method of accounting for bad debt ·is and that in so doing,
allowed for tax purposes. .he acted in good faith.
exe;'":'orthfl~ssnedsbs" is determined upon the , 2. The account is not
qse_ o .soun . usin·ess judgment based on supported by a
the particular fpcts and circumstances of the guarantor or surety.
case. T? be considered worthless it must b
uncoll~ctrble eve~ ih the .future ( Collector :
Goodnch lnternahona/ R_ ubber Co., 21 SCRA
1336 December: 22, 1967). . ·

REQUISITES:
1. The debt must be valid and sub . t'
2. The debt is connected with the ts_!ng '
between related parties . axpayer s tr -d or b it1
3. There is an actual ascertainm - - -
4. The debt is charged.. off w'th' ent th t th d ti s;and
, tn the ta~ ble y ar.
 D~ .
~-"'~'-"~ of the Tax Cod
ebt4ffiz,Nf(aj ·· ·'-<J-tu ' (/' £ limss
J ,.f'dttt, ~, /llCd-ltU,,
oEPRECIA TION e, as amended

GENERAL RULE [Sec. 34(F)( 1)]

There shall be· allowed as d · ·
h r d a epreciation d ·d ·
ex aus wn, wear an tear (includin e uct10n a reasonable allowance for the
used in the trade ~r business. In tgh reasonable allowance for obsolescence) of property
. d t . th . e case of pro rt h
remam er o ano er person, the .deduct' P~ Y eld by one person for life with
the abso!ute owner of the propert d ion shall be computed as if the life tenant were
property held in trust, the allowali/~ dsha!J be allowed to the life tenant. In the case of
beneficiaries and the trustees . e uct,on shall. be appo~ioned between the income
instrument creating the trust or in ~~ a~ordance with the pertinent provision~ of the
8
income allowable tp each. ' e sence of such provisions, on the basis of the trust

Depreciation expense as a d- d t· · · ·
· . . e uc ion from the gross income refer to a
· reasonable allowan~e for the exhaustion, wear and tear and normal
0
obsolescence_ ~ ta~g1bl~ property used in the trade or business . .It pertains to
the .graqual d1mmut1on in the useful value of tangible property resulting from
or0inary · wear and tear · and -fron)' normal obsolescence. The term is also
applied to am(?rtization of the value. of intangible assets the use of which in
the trade or business is definit~ly limited in duration.

REQUISITES FOR DEDUCTIBILITY , .

1. The allowance for depreciation must be reasonable.
·2. It must be for property used for employment in trade or business or
out of its not being used temporarily during the year. .- ·
3. The allowance must be ch.arged off. The rea sonaf bthle allowf ~~e may
be either deducted directly from the book va 1ue o e asse
credited to an accumulated depreciation .·account.
4. Schedule on the a~lowance must be attached to the return.

METHODS AND RATE~

, . nee" as used .in·the prece~ing paragraph
. The term 'reasona~le_ allo1: an .allowance computed ,~ accordance
shall include, but not _limited s~ribed by the Secretary of Finance, u~on
with rules and regulations pre . • er under any of the following
recommendation of the Comm1ss1on '
methods: th d . · · th
1 Straight-line me O d using a rate not exceeding twi ce e
2.. Declining-balance me th o ' d had the annual allowance been
. Id have been use .
rate which w~u t ·ght lina method
puted using 5 r~i . d
csom - f-the-years-d1g1_t metho b prescribed by the Secretary of
3. , um oth method which may e i·the Commissioner.
4. Any o er . ommendat1on o
'Finance upon rec .

475
 ve£ct~~ £ {jr05s J~
. HICLES (RR 12-2002)
DEP~ECIATION OF MOTOR VE .
· b r 2 2012 prescribes the rules on th
1
RR 12-2012 issu~d. on Octo es as it relates to purchase of vehicles ane
deductibility of deprec1at1on expen~einput taxes allowed therefor, to wit: d ·
other expense~ related theret~, anme for depreciation s_hall be_ allowed unles
1. No deduction from gr?ss m~o urchase with sufficient evidence, such a!
th~ ~axpaye~ substantiates d e iate records ·which contain the following
off1c1al receipts or other a eq . .,
amo;_g o::~~c Motor Vehicle Identification Number, Ch~ssi_s Number or
. t bl 'identification numbers of the vehicle,
oth er regIs ra e . . b' t t O d ·f
b. The total price of the specific vehic 1~ su Jee ~pre~ia ion; and
c. .The direct connection or relation of the vehicle to the
development, management, operation and/pr conduct of the trade
or business or profession of the taxpayers ..

2. Only one vehicle ·for land transport is allowed for the u.se of a~ ?fficial or
employee, the value of which should not exceed Two Million- Four
Hundred Thousand Pesos (Php 2,400,000.00);
3. No depreciation shall be allowed for yachts, helicopters, airplanes and/or
aircrafts and land vehicles which exceed the above threshold amount
unless the taxpayer's main line of business is transport operations o~
lease of transportation equipment arid the vehicles purchased are used in
said operations;
4. All maintena·nce expe,n~es on account of non-depreciable vehicles for
taxation purposes are disallowed in its entirety; ·
5: The input ta~es on the purchase ?f non-depreciable vehicles and all input
taxes on maintenance expenses incurred thereon are likewise disallowed
for taxation purpose.

DEPRECIATION OF PROPERT~ES USED IN PETROLEUM OPERATIONS

[Sec. 34(F)(4)] ,. ,

An allowance for depreciation in respect of 11 . .·

. related to production of petroleum initially placed . a_ p~opert1es directly
shall be allowed u'nder the t . ht • in sery1ce in a taxable year
· s raig -1me or deer · b I f
depreciation at the option of the . ming- a ance method o
. service contractor H ·t h ·
contractor initially elects the de rI . b · owever, 1 t e service
subsequent date shift to the stra. i·ghct ~mg- alance method, it may at any
' -Ine
1 method.

The useful life ~f properties d ·. · ·

petroleum shall be ten (10) years
O
: u~e °~
in related to production of
the Commissioner. Properties not :s!~c . short~r ltfe as may be permitted by
sh~II be depreciated under the strai ~ir~ctly in the production of petroleum
. estimated useful life of five (S) years. g t-1ine method on the . basis of an

476
 v~7tH!v ti: (jrcw /
1'

l1Pflllb

ot:PRECIATION OF MINING OPERATIONS [Sec. 34(F)(5)]

An allowance for depteciation in respect of all properties used in

. •ng operations other than petroleum' operations shall be computed as
111 1n1 . , '
follows: · · t (10)
a) At the ·normal rat~ 9f depreciation if the expected life 1s en
years or less; or ..
b) Depreciated over any number of years between five (5) years a . nd
the expected life if the latter is more than ten .(10) .years, and th e
depreciation thereon allowed as deduction from taxable income:
Provided, That the contractor notifies the Commissioner at the
beginning of the depreciation period which depreciation rate
allowed by this Section will be used.

DEPRECIATION DEDUCTIBLE BY .NON-RESIDENT ALIENS E GA GED I

TRADE OR BUSINESS OR RESIDENT FOREIGN CORPORATIO S
[~ec. 34(F)(6)]

In the.case of a non-residenfalien individual engaged in trade or

business or resident foreign corporation, a reasonable allowance for the
deterioration of property arising out of its use or employment or its non-use in
the business, trade or profession shall be permitted only when such property
is located in the Philippines . . ,

Vi4Qif.i,f¥l©] of the Tax Code, as amended

DEPLETION OF OIL AND G.AS WELLS AND MINES

IN GENERAL [Sec. 34(G)(1 )]

In the case of oil and gas wells or mines, a reasonable allowance for depletion or
amortization computed in accordance with the cost-depletion method shall be gra.nted
under rules and regulations to be prescribed by the Secretary of Finance upon
recommendation qf the Commissioner. Provided, That when the allowance for depf.eti n
shall equal the capital invested no further allowance shall be granted: Provided furth r
That after production in commercial quantities has commenced, certain intangi J
exploration and development drilling costs: (a) shall be deductible in the year in u . d if
such expenditures are incurred for non-producing wells and/or mines, or (b h II
ded_uct_ible in full in the year paid or incurred or, at the election of the ta p y r m .
capitalized and amortized if .such exp~nditures incurred are for produ in . 11
mines in th same contract area. ·

Any intangible exp/of'. tion, drilling nd dev lopm nt pens /lo d a

dedu?tion in computing taxable incom during th year h II not b{, taken ·nto
consideration in computing the adjust d co t b si

77
 DEPLETION . . f . natural
Depletion pertains to exhau st ion .0 · ·
·
resources due to production a · th· t Is allowed
Depletion of Oil and Ga
as deduction to recover c~st of th e prop~~~ , wells and mines · s
or wasting asset. Exploration expenditures deductible by a non-
those incurred for the purp?se resident alien or foreign
of ascertaining · the existence, location, corporation only in
extent, or quality of any deposit of ore/o.ther respect of oil and gas
mineral and paid or incurred befor~ the · wells or mines located in
beginning of the development stage of the the Philippines.
mine . or deposit. On the other ~and,_
Development expenditures are those paid or
incurred during development stage of · the ·
ni.irie or other natu_~al 'deposits. .

Intangible costs in petrolef.!m operations refers to any cost

incurred in. petroleum · operations which in itself has no salvage value and
1
which is incidental to and necessary for the drilling of wells and prepa_ration of
wells for the production of 'petroleum: Provided, That said costs shall not ·
pertain to the acquisition or improvement of property of a character subject to
·the allowance for depreciation except that the allowances for depreciation on
such property shall be deductible under Sec. 34(G)(1 ).

ELECTION TO DED.UC-T EXPLORATION AND DEVELO.PMENT

EXPE~DITURES [Sec. 34{G)(2)]
- .
In computing taxable income from mining operations, the taxpayer
may, at his· option, deduct exploration and development expenditures
accumulated as . cost or adjusted basis for cost depletion as of date of
prospecting, as , well as exploration and development expenditures paid or
incurred during the taxable year: Provided, That the amount deductible for
exploration and development expenditures shall not . exceed twenty-five
percent (25%) of the net income from mining operations computed without the
benefit of any tax incentives under ex_ isting laws. The actual exploration and
develop_m_~nt expenditl:Jres r:r,inus twenty-five percent (2~%) of the net i~come
from m1~1ng shall qe earned forward to the succeeding years until fully
deducted. The election by the taxpayer to deduct the exploration ~nd
. development expenditures is ;,;evocable and shall be binding in succeeding
taxable years.

. Net income from mininfl operations, shqll mean gross income _ fr?;
operat~ons less allowable deductions which are necessary or related to minr a
operat1?ns_. Allowable deduct~ons shall include mining millin~ ~~e, 1

marketing expenses, and depreciation of properties directly used in

478
('

. . . .
Dect:a.·7 £9r0:Ss
.
,· .
uJtu 'tJht, JtlC(/-1!1,C,
""'inin9 operations. This parag , . . 1
,.. . . . . . raph sh 11 ·
acquisition or improv~ment of pro ert a not ~pply to ~xpenditures for the
. allowance for ~.epre~1~tion. In no tas/ of a c~aracter which is subject to the
to amounts paid or incurred for the ,e:hall t~is paragraph apply with r~spect
gas. . .' · plora!I0 n and development_of oil and

The term exploration · · . .

incurred for the purpose of asce_i~~d,tures ~ean e_xpenditures paid or
quality of any ~eposit of ore or ot~ aint~g the ex1ste~ce, location, extent or
beginning of the development sf r mineral, and paid .or incurred tJefore the
development expenditures .mean age of _the mm~ or ?eposit. Th~ term
development stage of the m· expe nd1 tures paid or _incurred during the .
stage of a mine or·other natuJnf d~r ot~er natural.. deposits. The development
of ore or other minerals a r~ eposit s~all _begin at the time when deposits
and quality and shall e~ed s own to exist in sufficient commercial· quantity
. upon commencement of actual commercial
extract ,on. · ·

DEPLETION OF OIL AND GAS WELLS AND MINES DEDUCTIBLE BY A

NON-RESIDENT ALIEN INDIVIDUAL OR FOREIGN CORPORATION
[Sec. 34(G)(3}] - ·

In ·the case of a non-resident alien individual engaged in, trade or

business in the Philippines or a resident foreign corporation, allowance for .
depletion of oil and gas wells or mines sh.all be ·authorized only in respect to
oil ·and gas wel.ls or mines located ~ithin the Philippines.

OIL AND GAS WELLS AND MINES CONVERTED INTO INVENTORIES ·-

. .

There shall ._ be no reduction .of cost or value of natural resources such as

oil and gas wells, .and mines as the resources are converted into inventories.·
No further allowance is granted if the allowance for depletion is equal to tl1\e.
capital irwested. Intangible exploration c;md .dev~lopment.drilling costs may
be:
■ . For non-producing ·wells and mines. - Deducted jn .the year the costs
were incurred. _. · , · . _ . .
■ Fbr producing wells and mines - Deduct Ir) full or cap1tahze and
amortize.

~MORTIZATION OF GOODWILL
• • I

A . · ... d ill is not allowed a$ deduction from gross income.

. mortIzatIon for goo W b mort·ized it is only allowed to th.ose
Wh·1
• 1e · ·
intangibles may be allowed. to e a trade is definitely
' limited in duration
s
intangibles whose use in the bu ines:i~ 17) such is not the case wiU~
(Basilan Estates, Inc. v, CIR, 21 ·
goodwill.

479
 ABANDONMENT LOSSES
If contract area where petroleum operation~ are undertaken is
partially or wholly abandoned, all accumul~ted exploration an~ developrnent
expenditures pertaining to contract area shall be allow~d as a deduction. If
producing well is subsequently a~andoned: the unamort1.zed costs, as Well as
the undepreciated costs of equipment directly __us~d, shall be allowed as
deduct_ion in ·the year such well, _equipment or factllty 1s a_bandoned.

~i@,M,fd/wJof the Tax Code, as amended '

CHARITABLE AND OTHER CONTRIBl)T/ONS

IN GENERAL [Sl;C. _34(H)(1)] . .

Contributions or gifts actually paid or made within the taxable year to, or for the use
of the Government of the Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or to accredited domestic
corporations or associ~tions organized . and operated exclusively for religious,
charitable, scientific, youth and sports development, cultural or educational purposes
or for the rehabilitation of veterans, or to social welfare institutions, or to
nongovernment organizatio_ns, in acco_rdance with rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the Commissioner, no part of
the net income of which inures to _the benefit of any private stockholder or individual
in
in an amount not excess of ten percent (10%) in the case of an individual, and five
percent (5%) in the case of a corporation, of the taxpayer's taxable income derived
from trade, business or profession as cJJmputed without the benefit of this and the
·fallowing subparagraphs.

Contributions deductible from gross income may be deductible in full or

subject to. limitation depending upon the- organization to which the donation is
given (Refer to Table 9-4 provided below). The-amount of any contribution of
property other than money shall be based on the acquisition cost of said
property [Sec 34 (H) Tax Code]. . .

. REQUISITES FOR DEDUCTIBILITY: ·

1) The contribution or gift must _be actually paid ·
2) ,It must be given to organization specified by law
3) It must be within ~he taxable year
4) The net income of the institution must not inure to the benefit of any
private individual or shareholder.
5) The t~xpayer clai~ing the deduction ·must be engaged in trade,.
practice of profession or business.

480
TABLE 9_-4: .
coNTRIBUTIONS DEDUCTIBLE IN FULL and SUBJECT TO LIMITATIONS
DEDUCTIBLE IN FULL
. SUBJECT TO LIMITATIONS
1_ [Sec. 34(H_)(2)(a)] Donations to the government of 1. Donations to the government of
the Philippines, any of its agencies or political the Philippines or political
subdivisions or fully owned government
subdivisions for exclusively
corpo~ations_ t~ ?e ~sed exclusively in undertaking
prioritv ac/Jv1fles m: . .
public purposes.
• The purpose of the
■ Education
donation is not for the
■ Health
priority activities of the
■ Youth and Sports development government as
■ Human settlements determined by NEDA
■ Science and culture
Economic development

The Priority Plan must be determined by

the National Economic Development Authority
(NEDA), in consultation with appropriate
government agencies; including its regional
development councils and private philanthropic
persons and institutions. Hence, ~contributions
made to the grantees above which i&/are not made
in accordance with the said annual priority plan
shall be subject to limitation~.

2. Donations to domestic
2. (Sec. 34(H)(2)(b)] Donations to ~ert~in f~reign corporations or associations
institutions or international organizations in organized and operated
compliance with agreements, treatie~ or special exclusively for the following
laws. · purposes:
■ Religious
■ Charitable -
• Scientific
■ Youth and sports
development
■ Cultural .
·■ Educational purpose
■ Rehabilitation of
veterans
■ Social welfare
institutions

481
 SUBJECT TO LIMITATIONS
.DEDUCTIBLE IN FULL
3. Accredited NGOs ·if the
3. [Sec. 34(H)(2){c)] Donations to Accre~itehd Non- n requisites for full dedu t:
government Organizations (NGOs) _whic are ~o -· . t c ion
are no complied with.
profit domestic corporations organized exclusively ·
for:
■ ·Scientific research· LIMIT OR ALLOWABLE
■ Educational DEDUCTION:
• Character building .
• Youth and sports development • Individual t~xpayer _ 10%
■ Health of taxable income derived
• Social welfare from trade, business 0r
.
• Cultural profess1on .· before
• Charitable purposes; or deducting.the contrib~
• . Combination thereof
·Provided: ■ Corp9rate taxpayer - 5% of
• No part of the net income of above accredited ·
taxable income derived
NGOs must inure to the benefit of any private
from trade, business or
individual. profession before
• The donation mus(be utilized not later than
deducting the contribution
the 151h day of the Jrd month following the
close of its taxable year.
• ■ The administrative expense must conform with
the rules and regu_lations to be prescribed by
the Secretary of Finance, upon
recommendation ·of the Commissioner, but in
no case to exceed 30% of the total expenses.
• The assets of which, in the event of ·
dissolution, would be distributed to~
i. Another domestic corporation
organized for similar purpose
or purposes; or ·
ii. The state for public purposes;
or
iii. .Another organization to be
I

used in such manner as in the

judgement of the court shall
best accomplish the general
purpose for which the dissolved
or anization was or anlzed.

482
ILLUSTRATION 11:
CASE A: Corporate Taxpayer
Adomestic corporation has the following data on income and e~penses
Sales · · · . . P10,000,000
· Cost of sales ' 4,000,000
Operating expenses excluding contributions to the 3,000,000 ·
government and charitable institutions
Contr!but~ons to Government for priority project in education 200,000
Contr~but~ons to Goyernment for public purpose 1 100,000
Contr~but~on to domestic charitable organiz~tion 100,000
Contnbut1on to a proprietary educational institution 200,000
Contributions to a "Party List" candidate 300,000
REQUIRED: Determine the taxpayer's taxable income
❖ Answer: P2,650,000 computed as: ·
Sales P10, 000,000
Cost of sales (4,000,000)
OPEX (3,000,000)
Net income before contributions . P3,000J000
· Contributions- Deductible in full:
Contributions·to Gov't forpriority projects (200,000)
Contributions - Deductible with limit:
,,.,,.*Actual= P200,000
L(mit =P3M x- 5% =150,000
Allowed (Lower amount) (150,000)
Taxable income P2,650,000
*** Composed of: .
·► Contributions·to the government for public purpose
► Cqntributions to domestic charitable institutions.

❖ The co'ritributions to a proprietary educational institution and to a Party List candidate

are nondeductible expenses. . .
. '
CASE B: Individual Taxpayer
Assume the same data in Case A except that the taxpayer is a resident cit~zen.
REQUIRED: Determine the taxpayer's taxable income
❖ Answer: P2,600,000 ·
Sales P10,000,000
Cost of sales (4, 000,000)
OPEX . (3,000 000)
Net income before contributions P3 000,000
Contributions deductible in full:
Contributions to Gov't for priority projects (200,000)
Contributions deductib'Je with limit:
Actual = P200,000 ·
Limit= P3M x 10%= 300,000
Allowed (Lower: amount) (200,000)
Taxable Income P2, 600, 000

483
 vM7/Jltu ti: gross 1~
BIR VERIFICATION d RMC 86-2014):
(RR 13-98 as amended un er .
· , • ·ng donations and contributions to accredited
Donors c1aIm1 d d t·
_ ft corporation/NGO as e uc ions from the·
non-bsltocbk, _non P~1onc'orne should submit evidences or proofs to their
taxa e usiness · d · d' ·
. BIR by showing the Certificate(s) of donation an in icating therein
the following: .
• Actual receipt by the accredited . no~-stock, non-profit
corporation/NGO of the donation or contribution and the date of
receipt thereof. . t 'b t· . .
• The amount of the charitable donation or co~ ~1. u ion, 1f in cash; if
property, whether real or personal, the acq~Is1t1on cost of the said
property. '

The information required under the regulations shall be in a

Certificate of Donation (BIR Form 2322) consisting of two parts, a
donee certification and a donor's statement of values . . The values
declared by the donor in the Statement shall still be subject to further
confirmation by the Bureau as to its correctness_and accuracy. The
donor's statement must be signed by the · donor or authorize
representative. Finally, the books of, accounts and other pertinent
records of tax exempt organizations or grantees of tax incentives
shall be subject to the examination by the Bureau for purposes of
ascertaining compliance with the conditions under which they have
b_een granted exemptions or tax incentives, and their tax liability, if
any. ·

~ffld,1,fklU] of the "fax Code, as amended

RESEARCH AND DEVELOPMENT

A taxpayer may treat research or development expenditures which

are paid or incurred by hfn:i during the taxable year in connection with his
trade, business or profession as ordinary and necessary expenses which are
not chargeable . to capital account. The · expenditures so treated shall be
allowed as deduction during the taxable year when paid or incurred
Researcl} and Development shall not apply to:
• ~ny expenditure for the acquisition or improvement of land or for the
improvement of property to be used in connection w ith research and
development of a character which is subject to depreciaUon and
depletion; and
• A~y expenditur~ paid or incurred for the purpose of ascertaining tt,e
e~1stenc~, loc~bon, extent, or quality of any deposit of ore or other
mineral, including oil or gas.

84
 AMORTIZATION OF CERTAIN R
EXPENDITURES .
- ·
D~·:r _/ ,l,(}--;u

E~EA~CH AND DEVELOPMENT

'{}f;~ tllb 9rtJ:ss / ;t,C,/}llt,b
·

f'

At the election of the tax .

regulations to . be prescribed P6er and in accordance with the rules and
recommendation of the - Comm; Y . the Secretary of Finance, upon
development expenditures ma b ssion~r, the following research_ and
1.) Paid or incurred by th yt e treate_d as deferred expenses:
· business or professio~; axpayer in connection with his trade,
2) Not treated as expenses hereof· and ·
3) Chargeable to capital '
h t . . account but not chargeable to property of a
c arac er which is subject to _
depreciation or depletion.

In ~omputing ta~a~le income, such deferred expenses shall be allo~ed a~

deduction ratably .distributed over a period of not less than sixty (60) months
as may b~ electe_d by the taxpayer (beginning with the month in -which the
taxpayer first realizes benefits from such expenditures). The election ·may
be made for ,any taxable year beginning after the _ effectivity of this Code, but
only if made not later than the time prescribed by law for filing the return for
such taxable year. The method so elected, and the period selected by_-the
taxpayer, shall _be adhered to in computing taxable income for the taxable
year fot which the election is made and for all subsequent taxable years
unless with the approval of the Commissioner, a change to a different method
is authorized with respect to a part or all of such expenditures .. The electi.on
shall not apply to any expenditure ·paid or incurred during any taxable year for _
• which the taxpayer makes the election. /

~i§QIMll ?MJJof the Tax Code, as amended

PENSION TRUSTS CONTRIBUTIONS

·
Pens1on trust contributions pertain ·to deductions applicable only to
, . • t · I f th
the employer on account of its contributions __to a pr:va be ~ens10~ pa~ or t e
benefit of its employees. This deduction -is pure~ usf mehss in c aract erf,
established or maintained by emptoyer to provide or t e paymen o
reasonable pension? to his employees.

REQUISITES . · tablished a pension or retirement plan to

1) The ~mployer must h~~eof ~easonable pensions to his employees.
provide for the pa~m~ . bl and actuarially sound. ·
2) The pension plan 1s reasona, e ·
3) It must be funded by the emptl?bye~.o ionger subject to the control and
4) The amount contributed mus e _ · ·
disposition of the employer. allowed as a deduction. '
5)· The payment has not yet been _ ..

485
 ·De£ctef tJhu £ {jmss J ~
B). The deduction is apportioned in equal part~ ave~ a period of ten (10)
consecutive years beginning with the year in _which the transfer .of
payment is made.

Present Service Cost (or Normal Cost) and Past ?ervice Cost

Contribution during the_ ~axable year to cover th~ pen·sion liability

accruing during •the taxable 1/ear 1s _known as pr~sent service cost or normal
cost. Such contribution is allowed as a deduction under Sec. 34(A)( 1) as
"expenses in general". On the other ha~d, past service_ cost pe~ains_ to an
amount· paid in excess of present service c~st (covering pens!on liability
pertaining to ol~ employees that accrued durmg t~e years previous to the ,
establishment of the pensiqn trµst). It is allowed a~ deduction and
apportion~d in equal parts over 10 consecutive years beginning with the year
in which the transfer/payment is. made (Sec. 34[J]) . · ·

ILLUSTRATION 12: '

An employer maintains.pension trust for its employees. The following contributions are
made: ·
2019 2020 ·2021
Current service costs PS00,000 · PS00,000 PS00,000
Past service ·costs 600,000 700,000 500,000
Required: Determine the deductible pension contributions for: 2019, 2920 and 2021
Answer: '
2019 2020 2021
Current service costs PS00,000 PS00,000 PS00,000
2019 (P600,000/10) 60,000 60,000 60,000
2020 (P?00,000/10) 70,000 ·70,000
2021 (PS00,000/10) 50,000
Deductible expense P560,000 P630,000 P680,000
. . .

Premium Payment .on Life Insurance of Ea:nployees Taken Out by the

e·mployer/corporation: . . · .

Premium payment on Life Insurance of employees taken-out by the

employer/corporation may be allowed as deduction . from the latter~s gross
income provided the designated beneficiary is the employee or his/her
heirs/benefici,aries ··

PREMIUM PAYMENT/PROCEEDS FROM LIFE INSURANCE

■ · Beneficiary is the e~ployee/heirs = deductible · expense of the
emp!oyer and taxable .income of the employee. The proceeds to be
rece1v~? by _the employ~e's heir(s) is exclusion from gross income.
■ Benef1c1ary 1s the employer = nondeductible expense of the employer.
The proceeds ~f the life insurance to be received by the
employer/corpora~1on shall form part of its taxable income.

486
 ne£ct7fNIJ, tf: qr(}-;SS j ltC(Jhl&
orHER ALLOWABLE .DEDUCTIONS UNDER SPECIAL.LAWS

RA 99 94 (Magna Carta for Senior Citizens) and RA 7277 (Magna

c arta for PW Ds) . . ·

Discounts Granted to PWDs and Senior Ci~izens (SC)

Th~ l~w-also allows the establishments to claim the discounts as tax

deductions b~sed on th~ net cost of goods sold or services rendered. The
cost of the discounts shall be allowed as a deduction from their gross
income for the same taxable year that the discount is granted, and the
tota_
l amount _of th~ claimed tax deduction ·net of VAT, if applicable, shall
be included in their gross sales receipts for tax purposes and shall be
subject io proper documentation and ·to the provision·s of the · National
· lnt~rnal Revenue Code (NIRC). . ·

Further, . the s~les records of the establishments claiming tax

deductions must contain the .
name of the PWD/SC ' his/her PWD/SC ID -
number, and if ?3PPlicable, his/her Tax Identification Number (TIN). Failure
on the part of such establishments to ·include such details in their records
will result in the disallowance of the sales discount claimed as deduction ·

These rules shall apply to the 20% discount on sale of certain goods
and services as well as the 5% discount on basic and prime commodities
granted to ser:iior citizens and PWDs.. Likewise, the input tax attributable
to the VAT-exempt sale, if any, may be claimed by the seller as cost or
expense.

RA 8525 - Adopt A School Program '(RR 10-2003)

Deduction from the gross income of the amount of

contribution/donation that were actually, dicectly and exclusiveJy incurr·e d
for the Program, subject to limitations, conditions and rules set forth in
S.ection 34(H) of the Tax Code, plus an additional amount equiv alent to
fifty percent (50%) of such contribution/donation

· A 7600 - A n Act Providing Incentives to ALL Gov't/Privat · e.

Institutions with Rooming-In & breastfeeding Practices.

The exp nses incurred by a priv~te h~alth and_n_on-he . ·1th f~dlity,

e _tablishment .or institution, in complying with the prov1s1ons of this Act,
shall be deductible expens . for income t x purposes up · o ice the
actual amount incurred:

87
 veMo/tJm, ti: 9rtJss J ~
r~n
1 37 of the Tax Code
SPECIAL DEDUCTIONS ~nd er Sec

A. Insurance companies . by law to be made within the year to res 0

■ Net additions required rve
■ ~;::~:sd other than dividends paid within the year on policy and annuity
contracts.
NOTE:- The released reserve be treated as income for the year of
release.

B. Mutual insurance companies . . · .·

■ any portion of the premium deposits returned to their _policy holders.

In the ~ase of mutual fire and mutual employers' liability and mutt.la!
workmen's compensation and mutual c~sualty in~urance companies requiring
their members to make premium deposits to provide for l?s~es and expenses,
said companies shall not return as income any portion of the_ premium
dep_osits returned to their policyholders, but sha_
ll return as taxable !nco_
me all
income received by them from all other source~ plus such portion of the
premium deposits as are retained by the companies for purposes other than
the -payment of losses and expenses _and reinsurance reserves.
' '

C. Mutual marine insurance companies

■ Amounts paid for reinsurance
■ Amounts rep.aid to policyholders on account 9f premiums previously paid
by them and interest paid upon those amounts between the
ascertqinment and payment thereof.

Mutual marine insurance companies shall include· in their return of gross

income, gross premiums collected and received by them less amounts paid
for reinsurance, but shall be entitled to include in the deductions from gross
income amounts repaid to policyholders on account of premiums previously
paid by , them and interest paid upon those amounts between the
ascertainment and payment thereof.

D. Assessment insurance companies - Actual deposit of sums with the officers

of the Government. of the Philippines pursuant to law as additions to
guarantee or reserve fund. · · '

DEDUCTIONS FOR MIXED INCOME

Deductions sh~uld be i?ehtified with the income to which they pertain, but
~here there are deductions_ which cannot be clearly identified with any source of
income (unallocated deductions), allocation shall be made as follows :
. • r'I
Phil. Gross Income x · Unallocated Philippine oeductlO
Gross income, world Deductions

488
 CHAPTER EXERCISES ·
PROBLEMS
p10.1. .
The following data were provided b
. th th Y Alpha Corporation (domestic
corpora t 10n o e: . an MSME) for 20 21 :
Taxes and licenses
40,000
Documentary stamp taxes 4,000
Other Percentage taxes 120,000
Refund of local business taxes·paid in 2019 10,000
Income tax due for 2021 300,000
Refund of income tax for 2020 25,000
Interest income
From trade notes receivable 100,000
From peso bank deposits 100,000
From bank deposits abroad · 20,000
Interest expense on bank loan 150,000
Tax assessment on underpayment of Percentage taxes · 75,000
Surcharges on tax assessments 25,000
Interest expense on tax ·assessments 12,500

DETERMINE THE FOLLOWING

1. Deductible interest expense in 2021
2. Deductible tax·es in 2021
3. Taxable tax refunds in 2021

P10.2.
On January 1, 2021, Mike leased his vacant lot for a period of 12 years
to Leomar at an annual rate of P2,400,000. It was also agreed that
Leomar will pay the following:
■ . P4,800,000 representing rental payment for year 2021 and
2022.
• Security deposit of P2,400,000.
• Annual real property tax of P.30,000.

The lease contract provides, among other~ that the lessee will construct
a 5-storey building for parking purposes at a cost of P~,500,000.
Ownership of the building shall belong to t~e _lessor upon the expiration
or termination of the lease contract. The building was completed on July
1, 2023 with an estimated useful life of ,15 years.

DETERMINE THE F OLLOWING . .

· 1. Deductible expenses of Leomar ~n 2021
2. Deductible expenses of Leomar ~n 2022
3. Deductible expenses of Leomar in 2023

489
 P10.3. . . · . .
Clifford borrowed m~mey from the Citib~nk amounting to P1 ,~00,00o at
an annual interest rate of , 10% .. He inve ste~ · th e money in de.posit
substitutes earning annual interest incom_e of_ 121/o. · . _
Required: Deterr,nine the deductible interest of Clifford. _

·P10~4.
Lester received an assessment from the· BIR amounting to P250,ooo
including interest .of PS0,000 due to non-payment of stock transaction
tax. He .also received a P125,000 assessment from the City of
Mandaluyong due to under payment of variou~ loc~I business taxes.
Th~ amount is inclusive of P25,000 interest. During the year, however,
he earned P100 ' 000 inte·rest
.
income from his 'various bank deposits.
' .
Required: Determine the deductible interest of Lester.

P10.5. _
On July .1, 202t, a taxpayer obtained a P6,000,000 loan from a barik with
annual •interest rate of 12%. The proceeds of the loan amounted to
PS,280,000 net of interest. .~n~wer the questions under the following
independent cases:
1. Assume the taxpayer is a resident citizen (under cash basis) and the
loan including the interest is payable o~ June 30, 2022. How much
·is the deductible interest expense in 2021 and 2022?.
2. How much is the correct int~rest expense for 2021 and 2022
assuming the taxpayer is a resident citizen (under cash basis) and
the loan is payable o~ installment as · follows; · P1 ,500,000 on
Septe.mber 30, 2021", December 31, 2021, March 31,· 2022 and June
30, ·2022. . . ·
3. Assume. the taxpayer is a domestic corporation (under cash basis)
and the loan including the interest is payable on June 30, 2022. How
· · much is .the deductible interest expense in 2021 and 2022?

P10.6. · .
On January 2, 2021 Erwin contracted a 1-year P.2,000,000 loan from BPI
for the purchase ·ot computers. The computers were acquired three (3)
months ~fter securing the loan with depreciable ·life of eight (8) years.
Erwin paid P200,000 interest to BPI on December 31, 2021 in relation to
the loan. On the other hand, his bank deposit with BOO earned P~0,000
interest during .the year.

DETERMINE THE FOLLOWING:

1. Deductible ihterest expe'nse for the year .
2. Allowable deduction of Erwin from t,is gross income assuming that
the interest on loan was capitalized. ·

490
 ,'fl. ,,,,,,,,

p10.7.
c£rer ~cises
. .
Dekw:fO#u 9mss lllllHM
. '
omega Corpor_ ation Paid the following during 2021 :
Interest paid for late Payment of 2020 income tax ·
Surch_arge and P50,000
2020 income taxcompromise penalty for late payment of
72_,500
Interest on bonds issued tiy Omega
Interest on money borrowed by Omega from Alpha 250,000
Corporation (Alpha owns 60% of Omega's outstanding 80,000
shares)
Interest on preference shares
125,000
REQUIRED:· DeterrTline the d~ductible int€lrest of OITl(lga in 2021 .

.in ~()~1,.a ~elf-~mployed ;esidenl citizen, paid the following t~~~~.

1

Philippine income tax ?50

000 _
Professional tax 20,000
Gravel and sand tax 180 ooo
Income tax paid in Singapore '000
Real property tax on his house so:ooo
8
Road user's tax on his delivery t~ucks 10,000
Local anniJal fixed tax for his delivery trucks 12,000
Other local business taxes . b . ss 5,000
Special assessment on land used in usme .

. si nified in his return to avail of

REQUIRED: If the taxpayer had 'dg how much deduction for
. . ff ·gn income tax pa1 ,
tax credit o ore1 . his 2021 income? .
taxes may he .claim on .

P1 0:9. . a Corporation inc~rred. the .following expenses in

In 2021, orherhe
. connection conduct of its _bus1nessd hCltel bills of its employees
w1 · rth of plane tickets an
• p 100' 000 wo to business seminars. . officers from home to
. who were sent rtation allowances _of itsl yment contract, net of
• P136 000 transpo part of their emp 0
.' d vice versa a5 . .
,. P64,00aon WI·thholding
office rtationtaxexpenses of messerigers from office to
• PB0,000 transpo
several clie~ts sessment .
• P20,000 special as . . ble expenses that could be
REQUIRED: De~er;~ir~~~:i::;f~om its gross income
deducted by Orn 9

49 1
 .c'fiv- quc!ses - vko/tH!t, CJr(Jss 1~
P10.10. th rt f ·t
Delta Corporation took two key men insur~n~e 0 ~ e I e O I s President
Mr. Masigasig. In one policy, the. beneficiary ,s .D~lt~ Corp?ration t~
compensate it for its expected loss in case of dea th .of its president. The
company paid total premiums of P5~,0_00 on that policy._:he other Policy
designates Mr. Masigasig's wife as ,ts irrevocable beneficiary. Delta Paid
P75,000 premiums on that policy. ..
REQUIRED: Determine the amount of allowable premium payment that
could be deducted by Delta Corporation from its ~ross !ncome.

P10.11. .
, A taxpayer had the following data in 2021:
Gross income from busines$ P1 ,000,000
Capital gain 50,000
Capital loss . 20;000 ·
Operating expenses 400,000
Donation to an accredited NGO 30,000
Donation to CBCP 20,000
DETERMINE THE FOLLOWING:
1. Taxable income assuming the taxpayer is an individual with a
compensation income during the year amounting to. P600,000.
2. Taxable income assuming the taxpayer is a domestic corporation.

P10.12.
The. following contributions and donations were made by a taxpayer.
To Christ ·the King Catholic Church P250,000
· To Bukas Palad, non-profit domestic corporation 300,000 .
To the fire victims of Recto 200 000
'
To the Gospel church of Taiwan 350,000
R~QUIRED: Determine following: ·
1. _Deductible charitable aQd other contributions subject to limit.
2. Total nondeductible contributions

P10.13.
A domestic corpor.ation has the following data on income and expenses:
Gross business income P6,200,000
Operating expenses including SSS and Philhealth 2,500,000
contributions of P150,000
Contributions to Government for priority project in 100,000
education
Contribution to a foreign private foundation 100,000
Contribution ~o a domestic charitable organization 190,000

REQUIRED: Determine total amount of deductible charit ble and other

contributions

492
 cC,zter
I
E.erciseo - D / o/°
u/Ju:t-UJ-tr.,s 'tJtll, 9rtJss J
/1,C{J-/rlb
p10.14. .
Juan, reported the followin f
Gross Income · . 9 or taxable year 2021 :
Cost of Sales P5,000,000
Salaries of employees, net . . . 3,000,000
1
and P50,000 SSS Med·ic of P 00,000 Withholding tax 800,000
, are and p ·b·
contributions ag-1 19 premium
Fringe benefits given to rank and f
1 300,000
Fringe benefits given to man·ag . i le employees
• ena employees 136,000
Business related representation and t .
expenses en ertainment 100,000
Rent~xpense
·120,000
Donation to religious and charitable institutions . 500,000
REQUIRED: Determine. the taxable income of Juan.

P10.15.
a
On July 1, 2018, taxpayer purchased .for P1 000·000 a vehicle which
1

he used as delivery truck for his trading busin~ss. He deducted annual

depreciation on the basis of an estimated useful life of five (5) years. In
July 1, 2021, the automobile was partially damaged in an accidental
collision with another vehicle. The qost of repairs amounted to
P200,000. The taxpayer received insurance proceeds of P100,000 to
cover the loss.
REQUIRE.D: Determine the amount of loss that could be ded~cted from
the taxpayer's gross income in 2021.

P10~16. f
Matatag Corporation, a domestic corporation ~ith total assets o
PS0,000,000 provided the following results of oper~tIqns for 2021 taxable
year: P6,200,000
Sales 2,500,000
Cost of sales
Dividend income . 60,000
From another domestic corpor~t1on 30,000
From ABC, a resident corporation. 20 000
From DEF, a nonresident corporation
Interest income . 75 000
From trade notes rece1~a~le ·1 50,000
From peso bank deposits in M_arn a 40 000
From peso$ deposits in Tagu1g 30 000
From bank deposits abroad 40,000
500,000
Royalty incom · .. . P M of land in the Philippin s held
Capital gain on sale at 6 .
30,000
for 1O yea~s . . f 1o-year bonds of a domestic
Capital gain on sale ~ t (B) years
8
corporation held for eiijh

493
 cfter f:tucUa - DM~t% {jrtJss Ill df1U

f a domestic corp0ration 20
Capital loss on sale of bon ds O ,OOo
held for one (1) year f tock of a domestic 1s,000
ap1 . on sale ·of. shares oths sold directly
·taI gain . to. a buyer
C ~ ·

corporation held for six (6) mon s, · Of a domestic 12,soo

st
Capital gain on sale of shares of ock PSE
corporation held for six (6) mo~ths, sol~ thru k -
2s,000
Income from trust indenture with Security Ban
1s,000
Provision for bad debts 20,000
Bad •debts written-off 10,000
Recovery of bad debts written-off in 2020 . . . .
350, .
Salaries and wages excluding fr!nge bene~1ts/de min1m1s
De minimis benefits provided to rank and .file employees 70,0
De minimis benefits provided to managerial employe~s 30,00
Fringe benefits provided to rank and file employees . 50,00
Fringe benefits provided to managerial employees 156tO0
50,000
Taxes and licenses ·
Refund of local business taxes and licenses in 2020 10,000
Tax assessment on unpaid .local business taxes 100,000
Interest expense on the tax assessment · 15,000
Surcharge and penalties on·the tax assessment 25,000
Utilities expense · 100,000
Casualty losses 60f000
Shrinkage in the value of short-term debt securities 5,000
Depreciation expense 40,000
Dividend declared and paid J
200,000
Income tax paid for the first 3 quart~rs 240,000

ADDITIONAL INFORMATION:
. • ABC Corrporation: The ratio of gross income derived in the
Philippines over total gross income was 60%.

• DEF Corporation:
"'
◊ Matatag .holds directly 25% in value of the outstanding
shares of DEF. .
◊ The di~iden ds received ware reinvested in the bus·ness
1

oper~t,ons of. Matag Corporation for its working apit I 1

requirements in 2022. -

DETERMINE THE FOLLOWING:

a. Income tax. payable in 2021
b~ Total Final tax on passiv incom
c. T t I capital in t ·x
 CCrer
.
~dsi'-0 De£a.iotu~ '/)-/r&
.
9 r0:Ss l llCIJ-IJt&
TRUE OR FALSE. ·
1. Deductions from gro . · .
t axpayers that are notss
t
income f ·
r~ er to the flow -of wealth to the
2. Exclusions are the amreated as Part of gross income
ounts wh· · h ·
from gross income in ord _,c the law allows to be. deducted
3. Allowable deductions er to arrive at -net income
. ti f
d irec Y rom one's total ta . . .refe r t o amounts·:that are subtracted
generally
· 4. Deductions wh· h ~ 1iabiltty.
ic const,tut b · .
payment made to an ff . e _ nbe, kickback, and other similar
O
foreign government or . ,c~al or ~r:'1ployee of the national, local or
1
policy are not deductibi!'~ lar ent,ti~s, ,bei~g against law and public
5. The deductible taxes are l~o~ ~oss income. -
6. Domestic and resident for;' e only -to national taxes.
cannot claim NOLCO ,ign corporations with . a higher MCIT due
1
7 Decline in value throu· h • k •
· , t· . g mar et fluctuation of investments in stock of
a corpora ion is not a deductible loss.
8. Casualty,: r.obbery_, theft or embezzlement loses are deductible only
when a ~eclaration of Loss" is submitted within 45 days from the
date c;>f discovery of the casualty or robbery, theft or embezzlement
that caused the loss.
9. In a total loss tjue to casualty, the measure of loss is the book value
of the asset red.uced qy any form of indemnity. ·
10. Ordinary losses can be deducted from any gross income. '
11. In a wash sale, loss is not deductible
12. In a merger or consolidation, or transfer to a controlled corporation ,
loss is deductible.
13. Bad debt is an expense in the books of accounts when a provision is
made for it. Such amount should likewise be deducted from gross
income to arrive at taxable income.
14. -The phrase "actualiy charged off from the taxpayer's books of
accounts" · means that the amount of money lent by the taxpayer (in
' the course of his business, trade or profession) fo his debtor that had
been recorded in ,the books of. account as a receivable has actually
become worthless as of the end of the taxable year, and that the said
receivable has been canceiled . and written off from the said
taxpayer's books of accounts.
15. Before a taxpayer may charge off and _deduct a debt, he must
ascertain. and be able to demonstrate · w~th reasonable degree of
certainty the uncollectibility of a deb( .
' •t· were held by an individual as capital asset and were
16-. W hen secun ,es • ·t 1 1 on th- date f th
written off, the write off results in a cap,~ oss e - o e
write off. _ _ BSP thru the Moneta·ry Board, shall ascertain
17. In case of banks, the un~ollectibility of the bad debts, and it shall
the worthlessne~~ an~ of the said indebtedness from the bank's
approve the wntmg-o . d of the taxable year .
books of accounts at the en

495 ·
 cljer Ew-Wes
- Th .t f
va/4d7~ {jmss l ~
ehold improvements shall be deductible by the
18 . e cos o Ieas . t th 8 rt
1
lessee by spreading the cost of the improvemen ~ over . e of the
15
improvements or remaining t~rm _of the lease, whi~hever shorter.
19. Gain from wash sale transaction 1s taxable.
20. A mere recording in the taxpayer's b~oks of a~count of estimate
uncollectible accounts does not constitute . a wn_te-off of ~he said
receivable. Hence, shall not be a valid basis for its deduction as a
bad debt expense. .
21. In no case may. a receivable from an insurance_ or surety company
be written off from the taxpayer's books and cla,m~d as a bad debt
deduction unless such company has been declared closed due to
insolvency or any such similar , reasdn by the Insurance
Commissioner. ·
22. Bad Debt is a dedL:Jction from the ·grdss income when an account is
written-off
23. When the allowance for depletion shall equal the capital invested, no
further allowance shall be granted.
24. Foreign corporations engaged in international shipping or air carriage
in the Philippines may deduct NOLCO from its gross income.
25. If a taxpayer did not benefit from the reduction of a debt written off
because it did not result to any reduction of his income tax in the
year of such deduction, his subsequent recovery thereof shall be
treated as a mere recovery or a return of capital. ·

MULTIPLE CHOICE
1. -Which of the following is not a characteristic of a deduction?
a. It is a reduction of wealth that helped earn the income
subject to tax.
b. An i~munity or privilege, a freedom from a charge or burden
to which others are subjected.
c. . It is not a receipt.
d. It is a subtraction to arrive at income subject to tax.

2. In t~e co~duct of his business in 2021, Modesto found it necessary

_to g~ve gifts to the governrnent officials with whom he had official
dealings. • ,
a. These gifts are deductible expenses b' t tO th
substantiation rule· su ~ec e
'
b. The y alue of the gifts if de minimis are allo .ed to e
. deducted;
c. lrreds~ective of th e value, the gifts are consid red 5 bribes
an not allowed to be deductible
d. These gifts are deductible if found to be n c ssary and
properly supported by receipts.

496
 cfter Ee-~es - De£c -~ h.
3. This is U JtUt b'()-ttu
not, a requisite for business expte d d
{ jr.t~bls l/,C/flflb
a. It must be reasonable · n$e o e e uc I e .
b. It must be paid d .
c. The withholding ~xingtthhe t~xable year
O
and remitt d t erw1se required have been deducted
e o the BIR
d. It must be . ordinary and
. necessary

4. Oneaof the
p following. . .is deductible
.
f .
rom gross income
. ersona 1, 1iving and family expenses
b. Amount
. . paid. out fo r new
· buIldmg
· : or for permanen t
impr,ovement or betterment,· made to increase the value of
property or estate.
c. Losses from ·sales or exchanges directly or indirectly
between members of the family.
d. Grossed~u.p m~netary v,alue of fringe benefits.

5. Which of the following is not deductible from business income?

a. Casual losses on properties connected in the conduct of
trade or business.
b. Loss of business property due to embezzlement.
c. Loss on ex~hange of capital assets ·
tj. Net operating loss carry over

6. In cases of deductions and exemptions on i·ncome tax returns,

doubts shall be resolved ·
a. Strictly against the taxpayer
b. Strictly against the government
c. Liberally in favor of the taxpayer
d. Liberally in favor of the employer

7. For income tax purposes, which of following statements correctly

describe deductions?
a. Deductions are items or amounts excluded·from the
determination of gross income.
b. A taxpayer can avail of any and all deductions authorized by
law for his kind of income to maximize his tax liability.
c. Deductions are a matter of legislative grace.
d. All of the above

8. Shrinkage in value of the stock and loss from wash sale are
nondeducijble losses because . .
Statement 1: Loss on account of shrinkage in value of the stock
throug h fluctuation in the market or .otherwis_e ar~ n?t rea lized loss.
Statement 2: Loss from wash sale 1s only an art1fic1a l loss.
a. Statements 1 and 2 are false . f
b. Statement 1 is true but statement 2 15 a1se

497
 cfter £erel6tJ ~ vM7un {jross l ~
('
c. Statement 1 is false but statement 2 is true
d. Stat~ments 1 and 2 are true

9. Which of the following statement~ regarding NOL.C O is incorre~t?

I. · The source of net operating loss _carry-over (NOLCO) 1s from
the ordinary trade and business of the taxpayer.
II. ·NOLCO is not applicable against MCIT f NOLC
Ill. The reglementary period on. the carry-ot_vtehr toth O s~all
continue to' run notwithstanding the fac a e corporat1on
p~id ·its income tax under the _ M inimum Corporate Income
Tax (MCIT) computation.
a. II on Iy · c. All of the above ·

b. II and 111 only d. None of the above

10. Which of the following. is correct? .,

. a. Interest incurred on loan from a brother is deductible .
b: Interest ·expense incurred on unpaid value added tax is
reduced by 33% of interest income subjected to final tax
c. Interest payable which had already prescribed is deductibl~
if paid voluntarily by the taxpayer
d. Interest incurred to acquire -a business asset may be added
to the cost of th,e property ,

11. This is a non-deductible interest expense

a. Interest paid on indebtecfness incurred to finance petroleum
exploration
b. Interest paid by ·a corporation on scrip dividends
c. Interest paid by a corporate taxpayer who is liable on a
mortgage upon real property of which the said corporation is
the legal or equitable owner
d. · Interest paid on tax deficiency if the tax where the -interest is
in-itself an item that is deductible from gross income

12. Taxes paid_or incurred within the taxable year in connection with the
· taxpayer's profession, trade or business, shall be allowed as
deduction, except:
a. Philip.pine income tax.
b. Foreign income tax claimed as tax credit.
c. Estate and donor's taxes.
d. All of the choices.

13. ~hich of th_e following taxes is allowed to be d duct d fri ·m gross

income derived from the exercis of a rofesslon trade or business?
a. Philippine income tax
b. Estate and donors taxes

98
 C~e-r ~does - De,£.,to/lH!f, {jrrJos / /lC(}I/[&
c. Tax on sale of shar · ·
exchange es of stock traded through the local stock
d. Import duties ·

14. The follo~ng are requisites in the carry-over of NOLCO except

st
a.
. buse_re mu be no substantial,Change in the ow~ership of the
Iness·
b. Carry-ov~r is not allowed if the corporation is subject to
MCIT _during the taxable year
c. Even if the ccirporation is paid based on MCIT the running of
th
e prescriptive period is not interru'pted. · '
·d. The ~arry-o~er is good for one (1) year.

15. WhiCh of the following is not correct regarding NOLCO?

a. NOLCO is allowed as deduction from business income for
t he next three (3) succeeding years, provided that NOLCO
_
incurred in 2020 and 2021 shall be allowed as a'deduction
for the next fiv~ (5) years.
b. Domesti~ ,and resident foreign corporations subject to ·
regular corporate income tax are allowed with NOLco·.
c. Entities enjoying income tax holiday.
d. None·of the above
. .
16. Which of the following is entitled to claim NOLC~? .
- · a. · Employee with respect to his compensation income.
b.. Foreign. international carrier
c. Self-employed individu.al
d. All of the above

Use the following data for the next·three (~) questio~s .

The following are the reco·rds of a domestic corpo,ratI02no. 21
2020 -- · 2022
Gross sales P3,300,000 2,340 ,000 P825,000
Cost of sales . 2,400,000 1,070,000 380 ,000
Dividend from resident . . 140,000 32,000
foreign .corporation (denved
within)
Interest income on notes 28,000 16,400
receivable
13,000 18,500
Capita l gain (short term). 20,000
22,000
Capital loss (long-term) 1,475,000 1,025,000 459,000
. Business expenses ,
DETERMINE THE FOLLOWIN_G.Z020
17. The taxable income/(loss) in
C. P(427,000)
a. P(575,000)
d. P1 ,068,000
b. P(4 07 ,000)

99
 ..
2021
18. The taxable income/(loss) in c. P(132,600)
a. PO d P254,400
b. P274,400 .

19. The taxable income/(loss) in 2022

P170,600
a. P18,000 c.
b. PO d. P18,000

20 _ Atty. Cahayon acquired. a property for use in his ?us,iness_. After a

devastatirig typhoon, the machinery suffered partial damage. The
following were made available:
Cost P500,000
Accumulated depreciation 300,000
Restoration cost 250,000
Estimated useful life 5 years

How much is the deductible·loss?

a. PO c. P250,000
b. P200,000 d. P100,000

21. In 2021, a taxpayer's residence was totally destroyed by fire. The

property had an adjusted basis and a fair market value of
P1 ,300,000 before the fire. During 2018, the taxpayer received
insurance reimbursement of P1 ,200,000 for the destruction of his
horri~. Taxpayer's 2021 adjusted income was P?00,000. The
taxpayer had no casualty gains during the year. What amount of the
fire loss was the taxpayer entitled to claim as an itemized deduction
in 2021 tax return?
a. PO C. P86,000
b. P85,000 d. P100,000 ·

22. A taxpayer has a business property having an adjusted basis of

P1 ,000,000. It is completely destroyed by fire in 2021 but
compensated by an insurance cl.aim for PB00,000. How much is the
deductible loss?
a. P1 ,000,000 c. P200,000
_ b. PB00,000 d. P100,000

23. Which of the following is not a deductible loss?

a. Loss ~ue to remova_l or demolition of' old buitding, the
scrapping of old machinery or equipment .incident to renewal
or replacement

500
 / Etercisu -
c£;,ter D / . 'n ,; L'IHll,
e.;fJu:,f:J, {jro,ss J/l,,C(}l1t,& ·

b. Loss due to remov

when the purcha a1 of building or real estate purchased
without intending ~e was for the acquisition of the land and
c. Loss in value of s~cus~_the building .
have become rth un ies of such extent that the securities
d. Loss in usef~~es~e~s abnd are written off
business is d' . in . usiness of an asset soon that
iscontinued or the asset is discarded.

24. Which of the following losses is deductible?

a. Loss on a wash sale
b. Loss on a merger
c. Loss on a transfer of property to a corporation solely for
stock resulting in control
d. Loss on transfer of.property to a controlled corporation solely
for a stock.

25. Alph_a compan~ was merged with Beta, Inc., and only the latter
continues to exist. Mr. Masinop,· a stockholder of Alpha company
was asked to surrender his 100 shares that he acquired for
P1 ,000,000, and received under the merger 1Q0 shares of Beta, Inc.
with a fair market value of P1 ,300,000 and cash of P300,000. The
gain to Mr. Masinop on .the merger was
a. P600,000 · c. P200,000
b. P300,000 d. P100,000

26. A taxpayer received a donation· of a car with a fair market value of

P400,000 at the time of the donation, but which the donor acquired
at a price of- P500,000. The taxpayer sold this for P280,000. The
sale resulted in a loss of
a. P100,000 c. P220,000
b. P200,000 d. P120,000

27. One of the following is not a requisite for deduction of bad debts
a. There must be an existing indebtedness due to the taxpayer
which must be valid and legally demandable.
b. The debt must be connected with profession , trade , or
business of the .taxpayer. ·
c. The debt must be actually ascertained to be worthies and
uncollectible and charged off the books of accounts as of the
end of the taxable year. .
d. The debt must have a maturity of not more than flVe years

501
 crer q;erasa
.I

.
DMlffM £tJlru {jrtJ:Ss l
. ~. "
d ductible bad de,bt.
l_ lM -11ie,

28. One of the following is a e cted with the profession, trade or

Bad debt not conne
a. business of the ~ax~~ye: transaction entered into by related
b. Bad debt sustame in .
parties. d bt arising from unpaid wages, salaries, rents
c. Worthl_es_s ~ s of taxable income not included in the
and simil~r itemsf.or the ·year in which the deduction for bad
returns of income •
. ht tO be made - or in the previous year.
d~bt is sougb t n the a~b~nt received in the distribution of
d. Difference e wee • •
assets of a bankrupt company and the c 1aims against the
said company.

29. Which of the following statements is wrong? . · · . . .

a. A deduction from bad debt is not available when a prov1sIon
for it is made . .
b. A deduction from bad debt is available only when a write off
is made
c. There is no deduction for bad debt when there is a surety for
the debtor against whom collection may be enforced
d. A deduction for uncollectible account is available to a
taxpayer whether he is on the cash or accrual methqd of
accounting.

30. It is the gradual diminution of the useful value of tangible property

-resulting from wear and tear and normal obsolescence. It is also
applied to the amortiza'tion of intangible assets the use of which in
, the trade or business is defini~ely limited in duration.
a. Depreciation c. -Obsolescence
b. Depletion ,d. ·sad debts

31. Mike Ura owns 50% of Leomar Corpora~ion's shares of stocks. Mike
sold a property valued at P1 ,000,000 to Leomar for P800,000. Is
the loss deductible from Mike Uro's gross.income?
a. Yes, because Mike and Leomar are not considered related
parties.
b. No,. because Mike and· Leomar are conside~ed related
parties. .
c. Yes, because th~ sale results from sale of property.
d. No, -~ecause the amount of loss cannot be identified with
certainty.

502
 · C'fcer ~cisea - Dukt~~ {jrAfs /~
2021
32. bunn_g , Mike ~reated a trust in favor of his friend Leomar. He
appo~nte~ Atty. ~ng as the trustee. A month later Erick created a
trust in favor
t Lofthisdaffectionate
. friend
. , JJ . ·Enc .♦ ted Drei as
· k appom
'
the tru~ ee .. a ~r unng the year, Atty. Ong .sold a property to Drei
at a pnce which is substantially lower than the property's current
market value. Can Atty. Ong deduct the loss as a result of the sale?
. a. · _No, because both Atty. Ong and Drei were ·fiduciaries of
trusts.
b. Y~s, because Atty. O~g and Drei are fiduciaries of' different ,
granters.., . ·
c. No, because ·Atty. Ong does not ha~e a .capital gain.
d. Yes, because -losses as a rule are deductible. ·

33. Lucky Me, lr,corporated bought a special machine for its e-bingo
business worth P1 ,000,000. However due to the "tuwid na daan"
I ,

policy of the government, a law was subsequently passed prohibiting

gaming of any kind. _Consequently, Lucky Me permanently retired .
the machine from use. The carrying value of the machine at the time
of retirement w~s P?00,000. How_much is the deductible loss·of
Lucky.Mike? '
a. P300,000 . c. P1 ,000,000
b. P?00,000 d. nil

34. Proceeds of insurance taken by a corporation on the life of an

executive to inder:nnify the latter's beneficiaries against loss in case
, I of his death ·is: _
~.' Exempt from incom~ tax ·
b. Part of taxable income
c. Subject to fina_ltax
. d. Partly exempt, partly taxable .
35. The premiums. paid by the corpor~tion -in the preceding number is
a. Taxable income of the executive
b. Deductible expense of the corporation :
1
c. Both ia" and ~~b"
11 11
d. Neither a" nor b"
' '

36. Which statement is not correct? Deduction for depletion:

Is allowed on wa·sting assets only . . . . .. .
~: For foreign corporations en 9~f~~emm~~~n1s
.Philippines, is- allowed on 1Y I
b~~~~~ ;~ !~:
, Philippines . rations shall be allowed only if th~ mine
c. For domestic corpo '
is lo~ated in the Pdhilfi~~~ for depreciation of building in the
d. Is separate from e , . .
mine site ·

503
 :LA . .
C / :er E-e,reusa
. - v eMuJIU £/JIi
J .- l, (jnJ;ss l ~

· . . m in Ortigas for use as its office.

d Condominiu · I It ·d
37. A business lease a I classified as a finance e~se. pa1 .
The contract was proper Y ndominium owner. For income tax
P125,000 monthly to theac~ent was :
purposes, the mon thI Y P Y ense.
a. Deductible as rent ex~t of amortization.
b. Deductible _as payme the taxpayer was taking title and
c. Not deductible becauseer of the condominium unit.
would bec~me th e ow: the payment was not reasonable.
d. Not deductible becaus
. . ; be·deductible expense-for the .exhaustion
38. Which of the following wi 1.· t corporation?
of intangible asset of wa st mg asse _ ·
a. Depreciation expense
b. Amortization expense
c. Depletion expense
d. Exploration expense

39. To be deductible in full, certain accre?ited non-governme~t

organizations or non-profit d_om~stic corpor~t,?n~ must meet certam
reqµisites. One of the following Is not a requ1s1te.

a. Organized and operated exclusively for scientific, research,

educational, character building and youth and sports
development, health, social welfare, cultural and charitable
purposes or combinations of these purposes.
b. Not later than the 15th day of the third month after the close
of the taxable year in which the contributions are r~ceived,
makes utilizatio_n o.f the contributions directly for the purpose
or function for which the organization is organized and
operated.
c. The assets of which, in the event of dissolution , would be
distributed to another non-profit domestic corporation
orga_nized for similar purpose or purposes, or to the State for
public_ pu~pose -or would be distributed by a court to another
orga~1zat1on to be used in such manner as in the judgment
of ~a,d cou_rt shall best accomplish the general purpose for
wh,~h th~ ~,ssol~ed organization was organized.
d. The admm,strat,ve expenses shall on an annual basis not
~xceed 40% of the total expenses. '

504
 - D~- -
C~~¼e,s
. o/tH/1., {jro-.ss l/lCIJ-IIW
40. One of the following ch .
d~dµctible in full aritable and other contributions is not
a. Donations to G
age , - overnment 0 f th .. .
·ncies or political s . . e Philippines o~ to its
government corporatl ubdivisi~ns, incl~ding fully _owned
or to be used in unde~ns_, excl~si_vely to ~inance, provide for,
b. Donations to cert . aking_ pnonty projects.-
organizations (i e a;nt forei_gn institutions or international
Organization). · ·, n e~national Red Cross, Worl d Health
c. Donations to accred·tI d
non-profit dom f e . non~government organizations or
requirements se~~~cla~orporat,ons that satisfied the four
d. Donations made f th
Ph IT . or e use of the Government of the
I
_ P~mes or any of its agencies or political subdivision
, ex~1us1vely for public purpose.

41. W hich statement is not correct?

a. · '.h~ d_eduction of an individual for contributions subject to
llm1tat1on should not exceed (10%) of his taxable income
from business, trade or profession before deduction for
contributions. _/
b. The deduction of a corporatio_n for contributions subject to
limitation should not exceed five percent (5%) of its taxable
income from business ·or trade before deduction for
contributions.
c. Contributions to media in its fund drive · for the relief of
calamity victims ~re deductible from _gross income. . .
d. Contributions of canned goods to student organizations
during the Christmas season for _distribution to Muntinlupa
inmates are deductible ·from gross income.

42. What w·ould be the allowable deduction !or ~8,000 co~tribution made
- 'd t ·t·
by a res, en c1 Ize n to a religious
- organization
- from his P70.oop
. net
income affer contn'b- ut·ion·?
a. ~ 3,500
b. P7,000
de.
·
P ~•~gg
· P

'
. - . h . s the following data on incom and
43. A ome :t,c corporation a .
·p n P 200,000
- I in.com
in -- ~ nd Phil h ·Ith
.-
2 kQQ,00 ·

t 1 0 000
100,000
c rt of . _· n z Uon 190,0 · 0
Co n to

0
'\
 How much is the total .deductible charitable and other ,
contributions?
c P285,000
a. P390,000
d. P211,000
. b. P_290,000

44. Juan, reported the following for the year ~021:

Gross Income P5,000,0oo
Cost of Sales .. ·· . . 3,000,0QQ
Salaries of employees, ·net of P100,000.w1th_holdmg 800,0QQ
tax ·and P50,000 SSS, Medicare and Pag-lb1g
premiums contributions ·
Fringe benefits given to rank and file empldyees 300,00Q
Fringe benefits given to managerial employees 136,00Q
Representation and entertainment expenses 100,000
(business related)
Rent expense · 120,000
Donation to religious and charitable institutions 500,000

The amount that Juan will report as taxable net income in 2021
shall be ·
a. P2,894,000 c. P2,997,000
b.· P3.054,600 d. p3,051,000

45. Statement 1: Contributions by the employer to a pension trust-for

pa·st service cost is deductible in full in the year that the employer
made fhe ·contributions, if he is <?n the cash basis of accounting.
Statement 2: Contributions or donations. given directly to individuals
cannot be deducted from gross income
• a. Statements 1 and 2 are false
, b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

4-6. An employer maintains pension trust for its employees: The

following contributions are made: ·
2021
..,......._
. 2022
- - 2023
Current service costs . P2,000,000 P2,000,000 P2,000,000
Past service .costs 1,600,000 1,200,900

How much is the deductible pension contr;butions?

2021 2022 2023
a. P3,600,000 P3,200,000 F>2 ,000,000
b. P2, 160,000 P2, 120,000 P2,000,000
C. P2,160,000 P2,280,000 P2,120,000
d. P2,160,000 P2,280,000 P2,280,000 ·

506
 RESEARCH AND DEVELOPMENT .
st
47. Which atement is·wrong? Research and development cost: · ·
nd
. a. On la a~d building acquired for research and development
Pl.lrposes . IS not · deductible as research and development
cost

b. May be claimed as an outright deduction from gross income

c. May be treated. as a deferred expense to be amortized over
the period Which Will benefit from the expenditure .
d • ~ay ?e treated as a deferred expense to be amortized over
a period of not less than thirty-six (36) months fr9m the date
benefit from the expenditure is derived.

48. · Research and .development deduction shall not apply to ·

, I. Any expenditure for the acquisition or improvement of la~d,
or for the improvement of property to be .used in connection
with research and development of a character which is . .
subject to depreciation and depletion. ·
11. Any expenditure paid or incurred for the purpos~ of f
ascertaining the existence, location, extent_, qualtt~ o any
deposit .or ore or other mineral, including 011 and gas . .
a. I only . . c. Both I an9 II '
b. Ii only · d. , Neither I nor 11
I

. arch and development expenses treated a5: ~ d_eferred .

49. . expenses
Rese h
.s a. II be allowed as deduction
. ratably d1stnbuted
' over a ,

period of . han 60 months beginning with the month i_n which

a. Not more t . lizes benefits from such expenditure. .
the taxpayer f~~t :;nths beginning with the month in_which
b. Not less than . . es benefits from such expenditure.
th t Xp ayer first rea 11z · th · h. h
e a 3 months beginning with the mon .m_ w 1c
c. Not less than _ o r
es benefits from such expend1tu~e.
the taxpayer first re:i~~ beginning with the month in "."h1ch
d. Not ·1ess thanf~ mt oealizes benefits from such expenditure.
the taxpayer . irsl r
. ? ·Research and devel_opment costs:
50. Which statement is wrong. e acquisition and/dr improvement of land
a When related to th a italized
t
· and building, muS b~ \~d building, may be treated as an
b If not related to. Ian ,
· · tr·ight deduction d building may be treated as a
ou d tO land an . .
If not relate h. h may be amortized..
c. d pense w ic .
deferre ex t d in gross income
d. Cannot be dedvc e

507
51. Which of the following is a deductible ·expense?. . ·
a. Insurance paid by the employer for the life insurance of its
employees . .
b. Employer's contribution to the Christmas fund of its
employees . . . . ..
c. Contribution to government pnonty act1v1t1es
d. All of the above

52. One is not a deductible loss

a. Loss due to removal or demolition of old building, the
scrapping of old machinery or equipment incident to renewal
or replacement
b. Loss due to removal of building or real estate purchased
when the purchase was for the acquisition of the land and
without intention to use the building
C; Loss in value of securities of such extent that the securities
have become worthless and are written off ·
d. ~os~ in usefulness in business of an asset ~on that business
1s discontinued or the a~set is discarded.

508