Name: 
 

Allowed Deductions from Gross Income

Multiple Choice
Identify the choice that best completes the statement or answers the question.
 
 1. In computing for the optional standard deduction of individuals, the computation is based on:
a. Gross sales or receipts
b. Gross income
c. Net income
d. Taxable income
 
 2. Which of the following items is included in the computation of the base of optional standard
deduction for corporations?
I. Interest income from short-term currency bank deposits
II. Gain from sale of shares of a domestic corporation sold directly to the buyer
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
 
 3. Statement 1: If a taxpayer fails to choose whether he opts to claim itemized deduction or
optional standard deduction, the default mode of claiming deduction is itemized deduction.
Statement 2: If a taxpayer chooses optional standard deduction, such taxpayer is barred from
switching to itemized deduction for the next three taxable years.
a. Only Statement 1 is true.
b. Only Statement 2 is true.
c. Both statements are true.
d. Both statements are not true.
 
 4. Which of the following is an example of income tax credit?
a. Net operating loss carry over
b. Advertising expense
c. Excess MCIT carry over
d. Depreciation
 
 5. Statement 1: Non-business income is taxable.
Statement 2: Non-business expenses are deductible.
a. Only Statement 1 is true.
b. Only Statement 2 is true.
c. Both statements are true.
d. Both statements are not true.
 
 6. Failure to withhold and remit taxes when the law requires that a taxpayer becomes a withholding
agent will result to:
I. Non-deductibility of expenses
II. Interest and penalties
III. Annulment of the transaction
a. I only.
b. II only.
c. I and II only.
d. I, II, and III.
 
 7. As distinguished from deductions, tax credit is:
a. A deduction on tax due
 b. A deduction from gross income
c. A deduction from gross sales/receipts
d. A deduction from other income
 
 8. Which of the following deductions is subject to a limit expressed as a percentage of net sales or
receipts?
a. Interest expense
b. Entertainment, amusement, and recreational expense
c. Rent expense
d. Charitable contributions
 
 9. The ceiling for entertainment, amusement, and recreational expense of 1% of net revenues
applies to
a. Taxpayers engaged in the sale of goods
b. Taxpayers engaged in the sale of services
c. Taxpayers engaged in exportation
d. Taxpayers engaged in domestic sales
 
 10. Bad debts, as an allowable deduction:
a. Requires proof of worthlessness and uncollectibility
b. Is an estimate of worthless and uncollectible accounts
c. Is determined by the lapse of time at which accounts remain uncollected
d. Is determined by materiality of the amount on uncollected accounts
 
 11. Past service costs are
a. Claimable in full.
b. Amortized over a period of 3 years.
c. Amortized over a period of 5 years.
d. Amortized over a period of 10 years.
 
 12. Statement 1: For a resident alien, foreign taxes paid may be claimed only as a Philippine income
tax credit but never as a deduction from gross income for Philippine income tax purposes.
Statement 2: For a resident citizen, foreign taxes paid may be claimed either as a Philippine
income tax credit or as a deduction from gross income for Philippine income tax purposes.
a. Only Statement 1 is true.
b. Only Statement 2 is true.
c. Both statements are true.
d. Both statements are not true.
 
 13. Net operating loss carry over
a. Can be deducted against income tax due to arrive at taxable income.
b. Can be deducted against income tax due to arrive at income tax payable.
c. Can be deducted against gross income to arrive at income tax payable.
d. Can be deducted against gross income to arrive at taxable income.
 
 14. Which of the following statements is/are true regarding the optional standard deduction (OSD)?
I. A taxpayer availing of OSD cannot simultaneously avail of itemized deductions.
II. A taxpayer availing of OSD cannot simultaneously avail of net operating loss carryover.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
 
 15. All of the following are not entitled to any deduction for NOLCO, except:
a. Resident foreign corporations
b. PEZA-registered entities
c. SBMA-registered entities
d. International carriers
 
 16. Under the CREATE Act, what is the limit for the additional deduction on labor training
expenses?
a. 20% of the research and development expense toot
b. 30% of the direct cost of services
c. 15% of net sales/receipts
d. 10% of the direct labor wage
 
 17. Which of the following tax is an allowable deduction from gross income of a VAT-Registered
Taxpayer?
a. Stock transaction tax
b. Real property tax
c. Value added tax
d. Estate tax
 
 18. Which type of income taxpayer may still claim cost of sales as allowable deduction aside from
the 40% Optional Standard Deductions?
a. Individual income taxpayer
b. Corporate income taxpayer
c. Both a and b
d. Neither a nor b
 
 19. What rule or principle is applied to determine the income taxability of tax refund or recovery of
previously written off bad debts?
a. Tax benefit rule
b. Tax credit rule
c. Tax avoidance rule
d. Tax dodging rule
 
 20. When shall bad debt expense be claimed as allowable deduction from gross income?
a. On the taxable year the bad debt expense is recognized
b. On the taxable year the accounts receivable is recorded
c. On the taxable year the bad debt is actually written off
d. On the taxable year the bad debt is estimated to be uncollectible
 
 21. For how many years may the net operating carry-over be claimed as deduction from gross
income from the date it is reported?
a. For the next two (2) consecutive taxable years immediately following the year of such
loss
b. For the next four (4) consecutive taxable years immediately following the year of such
loss
c. For the next five (5) consecutive taxable years immediately following the year of such
loss
d. For the next three (3) consecutive taxable years immediately following the year of such
loss
 
 22. Up to what extent may wagering losses be claim as deductions?
a. Up to 100% of wagering gains
b. Up to 25% of wagering gains
c. Up to 50% of wagering gains
d. Up to 75% of wagering gains
 
 23. In case of charitable donations subject to limitations, up to what extent may an individual claim
deductions?
a. 10% of the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit the charitable donations
b. 15% of the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit the charitable donations
c. 5% of the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit the charitable donations
 d. 20% of the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit the charitable donations
 
 24. Which of the following may be claimed as allowable deductions by a businessman?
a. Bribed money and illegal kickbacks
b. Immoral expenses
c. Personal and living expenses
d. None of the above
 
 25. What is the maximum entertainment and recreational expenses that may be claimed by provider
of services?
a. 2% of gross service revenues
b. 0.5% of gross sales
c. 1% of gross service revenues
d. 1.5% of gross sales
 
 26. Which of the following taxes is not allowed to be claimed as allowable deductions from gross
income?
a. Capital gains tax
b. Documentary stamp tax
c. Other percentage tax
d. Local business tax
 
 
Situational Problem No. 1: For items 27 to 28, refer to the following information:

Paggie Ong has an entrepreneurial mind, but perhaps an evil one. In order to maximize his
wealth, Paggie Ong engaged in the illegal trading of drugs and other contrabands, all of which
were smuggled from overseas or produced in clandestine laboratories in unsuspecting areas of
the country.

Paggie Ong is registered with the Bureau of Internal Revenue as a VAT-registered sole
proprietor, but he is not declaring amounts in relation to his illegal operations. Accordingly,
Paggie Ong

Three years after he started his illegal operations, Paggie Ong was sacked by the Philippine
Drug Enforcement Agency. The PDEA was able to obtain a record of Paggie Ong's transactions
throughout the year, and it was forwarded to the Bureau of Internal Revenue for possible
assessment of taxes.
 
 27. Which of the following statements is true regarding Paggie Ong's income?
a. Only Paggie Ong's income from legal operations is subject to income tax.
b. Only Paggie Ong's income from illegal operations is subject to income tax.
c. Both Paggie Ong's income from legal and illegal operations are subject to income tax.
d. No amount of Paggie Ong's income is subject to income tax.
 
 28. Which of the following statements is true regarding Paggie Ong's expenses?
a. The expenses from Paggie Ong's illegal operations are deductible from gross income.
b. The expenses from Paggie Ong's illegal operations are not subject to withholding
requirements.
c. The expenses from Paggie Ong's illegal operations are not allowable deductions.
d. The expenses from Paggie Ong's illegal operations are subject to a limit of deductibility
of 10% of gross income.
 
 
Situational Problem No. 2: For items 29 to 34, refer to the following situation:

Gaga Company is a domestic corporation engaged in the manufacturing of beauty products.

Gaga Company has employees named Alice, Donatella, Joanne, Alejandro, Mary Jane, Venus,
and John Wayne.
 For taxable year 2021, Gaga Company paid salaries amounting to P2,200,000 to the above
employees, as duly recorded in the payroll of the Company. However, Gaga Company neglected
to deduct the applicable withholding taxes, social security dues, and Philhealth dues in
accordance with law.

In addition, Gaga Company granted fringe benefits to Alice, the Chief Financial Officer of the
Company in the form of use of the company car. Under the terms of the Benefit Plan, Alice may
use the car for personal purposes, but ownership will remain with Gaga Company. The same
benefit was likewise provided to Alejandro, a rank-and-file employee. The two cars were both
newly acquired at a cost of P1,000,000 each on 1 January 2021.
 
 29. Fringe benefits tax will be imposed on the car benefits provided to:
a. Alice only.
b. Alejandro only.
c. Both Alice and Alejandro.
d. Neither Alice nor Alejandro.
 
 30. Compute for the fringe benefits tax to be paid for the fourth quarter of 2021.
a. 3,365
b. 13,462
c. 26,923
d. 53,846
 
 31. Which of the following items is deductible from gross income of Gaga Company?
I. Fringe benefits tax it paid
II. Depreciation of the car it provided to Alice
III. Depreciation of the car it provided to Alejandro
a. II only.
b. I and II only.
c. II and III only.
d. I, II, and III.
 
 32. What is the effect of Gaga Company's non-withholding on the salaries of its employees?
a. The salaries will be subject to income tax.
b. The salaries expense may be disallowed as a deduction from gross deduction from
income.
c. Only 50% of the salaries expense may be claimed as a deduction from gross income.
d. The employees will be liable for surcharge, penalties, and interest.
 
 33. Assume that a Letter of Authority and consequently, a Preliminary Assessment Notice (PAN)
was already issued by the Bureau of Internal Revenue (BIR) assessing Gaga Company of
deficiency income tax arising out of the disallowance of the salaries expense as a deduction from
gross income. Gaga Company intends to remit the withholding tax it failed to withhold in order
to minimize the tax exposure. Gaga Company sought your advice. What will your advice be?
a. Gaga Company may proceed with the remittance of the withholding tax, along with the
payment of interest and surcharges. Such will allow the deductibility of the salaries
expense.
b. Gaga Company may proceed with the remittance of the withholding tax, without the
payment of interest and surcharges. Such will allow the deductibility of the salaries
expense.
c. Gaga Company may proceed with the remittance of the withholding tax, but it will not
cure the non-deductibility of the salaries expense.
d. Gaga Company should not proceed with the remittance of the withholding tax for it will
not cure the non-deductibility of the salaries expense.
 
 34. In the PAN, it was further alleged by the BIR that the salaries expense was not supported by
official receipts, and hence, non-deductible. Rule on this contention of the BIR.
 a. The BIR's contention is meritorious. BIR Regulations provide that, in order to be
considered sufficient evidence of deductibility, the supporting documentation must have
a valid Authority to Print.
b. The BIR's contention is erroneous. The Tax Code merely provides for sufficient
evidence which is not necessarily in the form of official receipt.
c. The BIR's contention is meritorious. The Tax Code provides that for services rendered,
the proper documentation is an official receipt.
d. The BIR's contention is erroneous. The Tax Code provides that for services rendered,
the proper documentation is an invoice.
 
 
Situational Problem No. 3: For items 35 to 41, refer to the following information:

San Miggy Corporation, a corporation engaged in the selling of beer and other alcoholic drinks,
obtained information that you are studying Taxation. Upon knowing such, the Chief Executive
Officer of San Miggy Corporation contacted you and sought your help for the computation of
their income tax due. She presented to you their income statement for the fiscal year ending
February 28, 2022:

Sales   25,000,000
Cost of sales   (15,000,000)
Gross income   10,000,000
Interest income   200,000
Rental income   1,800,000
Total   12,000,000
Expenses:    
Advertising expense 400,000  
Entertainment expense 500,000  
Interest expense 170,000  
Salaries expense 600,000  
Charitable contributions 800,000  
Training expense 330,000  
Utilities expense 550,000  
Repairs expense 850,000 (4,200,000)
Net income   7,800,000

The charitable contributions were made to athletes. The training expenses were spent for
chemists who enrolled in public universities under an apprenticeship agreement in accordance
with the Labor Code. The interest income is gross of the 20% final withholding tax, which have
been duly withheld and remitted by the bank. The rental income is gross of the 5% creditable
withholding tax, which have been duly withheld and remitted by the lessees. Prior quarter's
income tax payments amounted to P440,000.
 
 35. How much is deductible entertainment, amusement, and recreational expense?
a. 125,000
b. 143,000
c. 259,000
d. 500,000
 
 36. How much is deductible interest expense?
a. 104,000
b. 130,000
c. 138,000
d. 170,000
 
 37. How much is deductible charitable contributions?
a. 431,600
b. 432,900
 c. 439,850
d. 800,000
 
 38. How much is income tax due?
a. 1,643,680
b. 1,962,500
c. 2,054,600
d. 2,093,788
 
 39. How much is income tax payable?
a. 1,113,680
b. 1,432,500
c. 1,484,600
d. 1,524,600
 
 40. When is the deadline for the filing of the annual income tax return of San Miggy Corporation?
a. March 31, 2022
b. April 15, 2022
c. April 29, 2022
d. June 15, 2022
 
 41. In order for San Miggy Corporation to claim income tax credits from the amounts that have
already been withheld and remitted by the income payors, what must be attached to the annual
income tax return?
a. BIR Form No. 2307
b. BIR Form No. 2306
c. BIR Form No. 1604-CF
d. BIR Form No. 1601-EQ
 
 
Situational Problem No. 4: For items 42 to 43, refer to the following information:

Taylor Corporation showed to you the following details regarding its interest expense account:

Interest expense from loans from creditors 450,000

Interest expense on redeemable preference shares 550,000
Interest expense on car loan from the bank; car used for 60,000
personal purposes
Interest expense paid on loans extended by Folklore 140,000
Corporation
Interest expense on unpaid taxes 280,000
Interest expense on promissory note 320,000
Interest expense, not in writing 440,000
Total interest expense 2,240,000

Taylor Corporation owns 60% of Folklore Corporation and 30% of Reputation Corporation.
Further, Taylor Corporation's ordinary voting shares are 55% owned by Mr. Alwyn and 10%
owned by Big Machine Corporation.
 
 42. How much is the deductible interest expense?
a. 600,000
b. 770,000
c. 1,050,000
d. 1,600,000
 
 43. Which of the following interest expense is not deductible?
I. Interest expense on loan from Reputation Corporation
II. Interest expense on loan from Mr. Alwyn
III. Interest expense on loan from Big Machine Corporation
 a. I only.
b. II only.
c. III only.
d. I and III only.
 
 
Situational Problem No. 5: For items 44 to 45, refer to the following situation:

Irene, a sole proprietor doing business under the trade name "Red Velvet Cakes", had seen her
business booming because of the introduction of the hit flavor Psycho Cakes.

However, a series of natural disasters and misinformed business decisions had caused Irene to
suffer losses, the details of which follow:

- An equipment with book value of P400,000 that was inundated by floods. The
equipment was not insured and can be repaired for P500,000 to be reusable
again.
- Another equipment with a book value of P330,000 and a fair market value of
P440,000 swept by the same flood. The equipment is totally lost and is insured
only up to P100,000.
- Also swept in the same flood are Irene's appliances inside her home. The
appliances were purchased two years ago at an aggregate cost of P1,000,000,
with an expected useful life of 5 years.
 
 44. How much loss can be claimed by Irene as an allowable deduction?
a. 630,000
b. 730,000
c. 740,000
d. 1,230,000
 
 45. Within how many days should Irene report the loss to the Bureau of Internal Revenue
a. Within 30 days from the date of the flood
b. Within 45 days from the date of the flood
c. Within 30 days from the date of ascertaining the amount lost
d. Within 45 days from the date of ascertaining the amount lost
 

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