Accountancy Review Center (ARC)

of the Philippines Inc.

One Dream, One Team

STUDENT HANDOUTS
TAXATION M.V.U. SIA/E.D. TABAG
TAX.111—ALLOWABLE DEDUCTIONS MAY 2021 CPALE REVIEW

LEARNING OBJECTIVES

1. Identify the kinds of deductions.

3. Determine the expenses/losses not allowed as deduction
2. Know the requisites for claiming deductions

REVIEW NOTES

ALLOWABLE DEDUCTIONS, DEFINED
Deductions are items or amounts which the law allows to be
deducted from gross income of certain taxpayers.
This is only allowed to taxpayers subject to graduated income
tax rate, in the case of individuals, and Regular Corporate
Income Tax for Corporations.
the development, management, operation and/or conduct of the
trade, business or exercise of a profession, including:
1. A reasonable allowance for salaries, wages, and other forms
of compensation 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
hereof has been paid;

KINDS OF DEDUCTIONS 2. A reasonable allowance for travel expenses, here and

abroad, while away from home in the pursuit of trade,
1. Itemized Deductions business or profession;
2. Optional Standard Deduction
3. Special Deductions 3. A reasonable allowance for rentals and/or other payments
which are required as a condition for the continued use or
ALLOWABLE DEDUCTIONS IN RELATION TO TAXPAYER possession, for purposes of the trade, business or
AND TYPE OF INCOME profession, of property to which the taxpayer has not taken
or is not taking title or in which he has no equity other than
TAXPAYER ALLOWABLE that of a lessee, user or possessor;
DEDUCTIONS
Individuals earning pure 4. A reasonable allowance for entertainment, amusement and
NONE recreation expenses during the taxable year, that are
compensation income
Individuals deriving directly connected to the development, management and
income from trade, Itemized deduction or operation of the trade, business or profession of the
business or practice of Optional Standard taxpayer, or that are directly related to or in furtherance of
profession. Deduction the conduct of his or its trade, business or exercise of a
Corporations profession not to exceed such ceilings as the Secretary of
Finance may, by rules and regulations prescribe, upon
ITEMIZED DEDUCTION recommendation of the Commissioner: Provided, That any
expense incurred for entertainment, amusement or
1. Ordinary and necessary trade, business or professional recreation that is contrary to law, morals public policy or
expenses public order shall in no case be allowed as a deduction.
2. Interest
3. Taxes 5. Upon effectivity of CREATE (April 11, 2021), an additional
4. Losses deduction from taxable income of one-half (1/2) of the
5. Bad debts value of labor training expenses incurred for skills
6. Depreciation development of enterprise-based trainees enrolled in
7. Depletion Public Senior High Schools, Public Higher Education
8. Charitable Contribution Institutions, or Public Education Institution, or Public
9. Research and development Technical and Vocational Institutions and duly covered by
10. Contributions to Pension Trust an apprenticeship agreement under PD No. 442, Series of
1974, or the Labor Code of the Philippines, as amended,
ORDINARY AND NECESSARY TRADE, BUSINESS OR shall be granted to enterprises. Provided, further, that for
PROFESSIONAL EXPENSES additional deduction for enterprise-based training of
students from Public Educational Institutions, the
There shall be allowed as deduction from gross income all the enterprise shall secure proper “certification” from the
ordinary and necessary expenses paid or incurred during the Department of Education (DepEd), Technical Educational
taxable year in carrying on or which are directly attributable to, and Skills Development Authority (TESDA), or Commission

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS
on Higher Education (CHED). Provided, finally, that such
deduction shall not exceed Ten Percent (10%) of Direct
Labor Wage.
SUBSTANTIATION REQUIREMENTS
Deduction mentioned above shall only be disallowed if the
taxpayer can substantiate with sufficient evidence, such as
official receipts or other adequate records:
1. the amount of the expense being deducted, and
2. the direct connection or relation of the expense being
deducted to the development, management, operation
and/or conduct of the trade, business or profession of the
taxpayer.
BRIBES, KICKBACKS AND OTHER SIMILAR PAYMENTS
No deduction from gross income shall be allowed for any
payment made, directly or indirectly, to an official 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 foreign government, or to a
private corporation, general professional partnership, or a
similar entity, if the payment constitutes a bribe or kickback.
REQUISITES FOR DEDUCTIBILITY
1. Must be ordinary and necessary;
2. Paid or incurred during the taxable year;
3. Connected with trade, business or practice of profession;
4. Supported by sufficient evidence; and
5. Not against the law, morals, public policy or public order;
6. It must have been subjected to withholding tax, if
applicable.
ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSE
AMOUNT DEDUCTIBLE - lower Amount between:
1. Actual
2. Limit
LIMIT
Sale of Goods or Net Sales x ½ of 1%
Properties
Sale of services Net Revenue x 1%
MINOR OR ORDINARY REPAIRS & MAINTENANCE
KIND OF REPAIR TREATMENT
Repairs that materially
add to the value of the Capitalize
property
Repair that appreciably
prolong the life of the Capitalize
property
Repair that keeps the
property in its ordinarily Outright Expense
efficient operating
condition
ORGANIZATIONAL AND PRE-OPERATING EXPENSES
Organizational and pre-operating expenses are considered as
capital expenditures. However, upon start of commercial
operations, it can be amortized over 60 months.
INTEREST EXPENSE
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The amount of interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's profession,
trade or business shall be allowed as deduction from gross
income: Provided, however, That the taxpayer's otherwise
allowable deduction for interest expense shall be reduced 33%
(25% starting July 1, 2020 for Corporate taxpayers subject to
20% pursuant to CREATE and zero for Corporate taxpayers
subject to 20%).
REQUISITES FOR DEDUCTIBILITY
1. The indebtedness must be that of the taxpayer;
2. The interest must have been stipulated in writing;
3. The interest must be legally due;
4. The interest payment arrangement must not be between
related taxpayers as mandated in Sec. 34(B)(2)(b), in
relation to Sec. 36(B)both of the Tax Code of 1997;
5. The interest must not be incurred to finance petroleum
operations; and
6. The interest was not treated as “capital expenditure”, if such
interest was incurred in acquiring property used in trade,
business or exercise of profession.
In the case of corporations, since the income tax rates changed
effective July 1, 2020, it follows that the deduction from interest
expense of 20% (33% prior to CREATE) shall be effective also
on the said date. For other domestic corporations with net
taxable income not exceeding P100,000,000, excluding the land
on which the particular business entity’s office, plant and
equipment are situated, the deduction is 0% since there is no
difference in the income tax rate on the taxable income (20%)
with the tax rate applied on the interest income subjected to
final tax (20%). However, in the case of individuals engaged in
business or practice of profession, such deduction shall take
effect upon the effectivity of CREATE.
AMOUNT DEDUCTIBLE
IN GENERAL:
Interest Expense PXXX
Less: (Interest Income subject to
final tax x 33%/20%) (XXX)
Deductible Interest PXXX
TRANSITORY PROVISIONS
For the rate to be used in the deduction of a certain percentage
of interest income subject to final tax from the claimed interest
expense to come up with the allowable interest expense, or the
interest arbitrage, the following shall be applied for taxable year
2020 by corporations, except non-resident foreign
corporations:
Compute for the interest arbitrage using the applicable rate:
a) Divide the gross interest income subjected to final tax for
the year by 12 months:
Interest income subjected to final tax ÷ 12
b) Multiply the number of months applicable to old arbitrage
rate by the resulting monthly gross interest income
subjected to final tax; then multiply the product by the old
arbitrage rate:
Number of months applicable x (a) x 33.33%
c) Multiply the number of months applicable to the new
arbitrage rate by the resulting monthly gross interest
income subjected to final tax; then, multiply the product by
the new arbitrage rate:
Number of months applicable x (a) x (20% or 0%, as the
case may be)
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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS ARC – ACCOUNTANCY REVIEW CENTER

d) Add the computed interest arbitrage under items (b) and

(c) above to get the amount to be deducted from the interest 3. Interest on preferred stock.
expense claimed to arrive at the allowable interest expense.

EXCEPTION TAXES

Interest expense on tax delinquency or deficiency, provided, the The term “taxes” means taxes proper and no deductions should
tax is related to trade, business or practice of profession shall be be allowed for amounts representing interest, surcharge, or
100% deductible. penalties incident to delinquency.

OPTIONAL TREATMENT OF INTEREST GENERAL RULE – Taxes paid or incurred within the taxable year
in connection with the taxpayer’s profession, trade or business,
Interest expense related to acquisition of property used in trade, shall be allowed as deduction.
business or profession may, at the option of the taxpayer, be:
1. Claimed as outright expense; EXCEPTION – The following taxes are not deductible:
2. Capitalize and claim depreciation. 1. Income tax
2. Income tax paid abroad if claimed as tax credit
TIME WHEN ADVANCE INTEREST CAN BE CLAIMED BY 3. Estate tax
INDIVIDUAL UNDER CASH BASIS 4. Donor’s tax
5. Special assessment
If within the taxable year an individual taxpayer reporting 6. VAT
income on the cash basis incurs an indebtedness on which an 7. Stock transaction tax
interest is paid in advance through discount or otherwise, the
same shall be allowed as a deduction in the year the LOSSES
indebtedness is paid: Provided, further, That if the indebtedness
is payable in periodic amortizations, the amount of interest KINDS OF LOSSES
which corresponds to the amount of the principal amortized or
paid during the year shall be allowed as deduction in such 1. Losses in General
taxable year. 2. Casualty Losses
3. Voluntary removal of buildings
NON-DEDUCTIBLE INTEREST 4. Loss of value
5. Net operating loss carry-over (NOLCO)
1. Interest paid to persons classified as related taxpayers 6. Capital losses and securities becoming worthless
under Section 36 (B) of RA 8424 shown below; 7. Special Losses
a) Losses from wash sales of stock or securities
a) Between members of a family. b) Wagering losses
c) Abandonment losses
For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters LOSSES IN GENERAL
(whether by the whole or half-blood), spouse,
ancestors, and lineal descendants; or Losses must usually be evidenced by closed and completed
transactions. Proper adjustment must be made in each case for
b) Except in the case of distributions in liquidation, expenditures or items of loss properly chargeable to capital
between an individual and corporation more than fifty account, and for depreciation, obsolescence, amortization, or
percent (50%) in value of the outstanding stock of depletion. Moreover, the amount of the loss must be reduced by
which is owned, directly or indirectly, by or for such the amount of any insurance or other compensation received,
individual; or and by the salvage value, if any, of the property. A loss on the
sale of residential property is not deductible unless the property
c) Except in the case of distributions in liquidation, was purchased or constructed by the taxpayer with a view to its
between two corporations more than fifty percent subsequent sale for pecuniary profit. No loss is sustained by the
(50%) in value of the outstanding stock of which is transfer of property by gift or death. Losses sustained in illegal
owned, directly or indirectly, by or for the same transactions are not deductible.
individual if either one of such corporations, with
respect to the taxable year of the corporation preceding CASUALTY LOSSES
the date of the sale of exchange was under the law
applicable to such taxable year, a personal holding Losses sustained due to fires, storms, shipwreck, or other
company or a foreign personal holding company; casualties, or from robbery, theft or embezzlement are
deductible provided the following requisites are present;
d) Between the grantor and a fiduciary of any trust; or 1. The property lost is connected with the trade, business or
practice of profession;
e) Between the fiduciary of and the fiduciary of a trust and 2. Actually sustained during the taxable year;
the fiduciary of another trust if the same person is a 3. Not compensated for by insurance or other forms of
grantor with respect to each trust; or indemnity
4. Incurred in trade, profession or business
f) Between a fiduciary of a trust and beneficiary of such 5. Reported with the BIR within forty-five (45) days from the
trust. time of loss; and
6. Not claimed as deduction for estate tax purposes.
2. If the indebtedness is incurred to finance petroleum
exploration;

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS
VOLUNTARY REMOVAL OF BUILDINGS
Loss due to the voluntary removal of or demolition of old
buildings, the scrapping of old machinery, equipment, etc.,
incident to renewals and replacements will be deductible from
gross income. When a taxpayer buys real estate upon which is
located a building, which he proceeds to raze with a view to
erecting thereon another building, it will be considered that the
taxpayer has sustained no deductible expense on account of the
cost of such removal.
LOSS OF USEFUL VALUE
When through some change in business conditions, the
usefulness in the business of some or all of the capital assets is
suddenly terminated, so that the taxpayer discontinues the
business or discards such assets permanently from use of such
business, he/it may claim as deduction the actual loss sustained.
NET OPERATING LOSS CARRY-OVER
“Net Operating Loss” means the excess of allowable deduction
over gross income of the business in a taxable year.
The net operating loss of the business or enterprise for any
taxable year shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years
immediately following the year of such loss. However, business
or enterprise which incurred net operating loss for taxable
years 2020 and 2021 shall be allowed to carry-over the same as
a deduction from gross income for the next five (5) consecutive
taxable years immediately following the year of such loss.
REQUISITES FOR DEDUCTIBILITY:
1. On the year of net loss, the taxpayer must not be exempt
from income tax (Income tax holiday); and
2. There is no substantial change in the ownership of the
business or enterprise in that –
a) Not less than seventy-five (75%) in nominal value of
outstanding issued shares, if the business is in the name
of a corporation, is held by or on behalf of the same
persons; or
b) Not less than seventy-five (75%) of the paid-up capital
of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
NOLCO FOR MINES OTHER THAN OIL & GAS WELLS
For mines other than oil and gas wells, net operating loss
incurred in any of the first ten (10) years of operation may be
carried over for the next five (5) years.
LOSSES FROM WASH SALES OF STOCK OR SECURITIES
In case of any loss claimed to have been sustained from any sale
or other disposition of shares of stock or securities shall not be
deductible if:
1) The seller is not a dealer in securities;
2) Within a period of thirty (30) days before the sale ending
thirty (30) days after the sale, the seller either:
a) Acquired (by purchase or exchange) stock or securities
identical to the stock or securities sold; or
b) Has entered into a contract or option to acquire stock or
securities identical to the stock or securities sold.
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WAGERING LOSSES
Losses from wagering transactions shall be allowed only to the
extent of the gains from such transactions.
ABANDONMENT LOSSES
1) In the event a contract area where petroleum operations
are undertaken is partially or wholly abandoned, all
accumulated exploration and development expenditures
pertaining thereto shall be allowed as deduction.
2) In case a producing well is subsequently abandoned, the
unamortized costs thereof, as well as the undepreciated
costs of equipment directly used therein, shall be allowed as
deduction.
EFFECT IF ABANDONED WELL IS REENTERED AND
PRODUCTION IS RESUMED OR EQUIPMENT IS RESTORED INTO
SERVICE
If the abandoned well is re-entered and production is resumed
or equipment is restored into service, the effects are:
1. The amount previously claimed as deduction shall be
recognized as income; and
2. Such amount shall also be capitalized and amortized or
depreciated, as the case may be.
BAD DEBTS
Receivables which are no longer collectible are deductible,
provided the following requisites are present:
1) There must be an existing indebtedness due to the taxpayer
which must be valid and legally demandable;
2) The same must be connected with the taxpayer’s trade,
business or practice of profession;
3) The same must not be sustained in a transaction between
related taxpayers;
4) The same must be actually charged off in the books of
accounts of the taxpayer as of the end of the taxable year;
and
5) The same must be actually ascertained to be worthless and
uncollectible.
In the case of Philippine Refining Co. vs. Court of Appeals (G.R.
No. 118794 dated May 8, 1994), the Court held that there are
steps outlined to be undertaken by the taxpayer to prove that he
exerted diligent efforts to collect the debts, viz:
a. Sending of statement of accounts
b. Sending of collection letters;
c. Giving the account to a lawyer for collection; and
d. Filing a collection case in court.
SECURITIES BECOMING WORTHLESS
If securities are ascertained to be worthless and charged off
within the taxable year and are capital assets, the loss resulting
therefrom shall, in the case of a taxpayer other than a bank or
trust company incorporated under the laws of the Philippines a
substantial part of whose business is the receipt of deposits, be
considered as a loss from the sale or exchange, on the last day of
such taxable year, of capital assets.
DEPRECIATION
There shall be allowed as a depreciation deduction a reasonable
allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the
trade or business, provided the following requisites are present:
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1) The property subject to depreciation is used in the trade, PROPERTIES USED IN MINING OPERATIONS
business or practice of profession;
2) The allowance for depreciation must be sustained by the If expected life of property Normal rate of
person who owns or who has a capital investment in the is ten (10) years or less depreciation (depreciate
property; over actual useful life)
3) The allowance for depreciation must be reasonable; If expected life is more Depreciated over any
4) The allowance for depreciation should not exceed the cost than ten (10) years number of years between
of the property; five (5) years and the
5) The schedule of the allowance must be attached to the expected life.
return.
DEPRECIATION DEDUCTIBLE BY NON-RESIDENT ALIENS
USE OF CERTAIN METHODS AND RATES ENGAGE IN TRADE OR BUSINESS OR RESIDENT FOREIGN
CORPORATIONS
The term 'reasonable allowance' shall include, but not limited
to, an allowance computed in accordance with rules and In the case of non-resident aliens engage in trade or business or
regulations prescribed by the Secretary of Finance, upon resident foreign corporations, depreciation shall be allowed
recommendation of the Commissioner, under any of the only if the property is located in the Philippines.
following methods:
1) Straight-line method OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO
2) Declining-balance method – rate should not exceed twice DEPRECIATION
the rate in straight-line method
3) Sum-of-the-years-digit method; and Allowance for obsolescence may be deducted in addition to
4) Any other method which may be prescribed by the reasonable allowance for the exhaustion, wear and tear.
Secretary of finance upon recommendation of the BIR.
EXPENSES ALLOWABLE TO PRIVATE EDUCATIONAL
AGREEMENT AS TO USEFUL LIFE ON WHICH DEPRECIATION INSTITUTIONS
RATE IS BASED
A private educational institution may at its option elect either:
Where under rules and regulations prescribed by the Secretary a) to deduct expenditures otherwise considered as capital
of Finance upon recommendation of the Commissioner, the outlays of depreciable assets incurred during the taxable
taxpayer and the Commissioner have entered into an agreement year for the expansion of school facilities; or
in writing specifically dealing with the useful life and rate of b) to deduct allowance for depreciation.
depreciation of any property, the rate so agreed upon shall be
binding on both the taxpayer and the National Government in DEPLETION OF OIL AND GAS WELLS AND MINES
the absence of facts and circumstances not taken into
consideration during the adoption of such agreement. The In case of oil and gas wells or mines, capital invested may be
responsibility of establishing the existence of such facts and amortized using cost-depletion method, provided:
circumstances shall rest with the party initiating the 1) When allowance for depletion shall equal capital invested,
modification. Any change in the agreed rate and useful life of the no further allowance shall be granted;
depreciable property as specified in the agreement shall not be 2) After production in commercial quantities has commenced,
effective for taxable years prior to the taxable year in which intangible exploration and development drilling costs
notice in writing by certified mail or registered mail is served by shall be treated as follows:
the party initiating such change to the other party to the
agreement: INTANGIBLE EXPLORATION AND DEVELOPMENT
DRILLING COSTS
Provided, however, that where the taxpayer has adopted such KINDS TREATMENT
useful life and depreciation rate for any depreciable and claimed Incurred for non- Deductible in the year
the depreciation expenses as deduction from his gross income, producing wells and/or incurred.
without any written objection on the part of the Commissioner mines
or his duly authorized representatives, the aforesaid useful life At the option of the
and depreciation rate so adopted by the taxpayer for the taxpayer:
aforesaid depreciable asset shall be considered binding.
Incurred for producing OPTION 1 – Deductible in
PROPERTIES USED IN PETROLEUM OPERATIONS wells and/or mines full in the year paid or
incurred; or
Properties directly related 1) Straight-line
to production 2) Declining-balance OPTION 2 – Capitalize
method and amortize.

Properties not directly
related to production
NOTE: Useful life to be 'Intangible costs in petroleum operations' refers to any cost
used is shorter period incurred in petroleum operations which in itself has no salvage
between: value and which is incidental to and necessary for the drilling of
a. 10 years; or wells and preparation of wells for the production of petroleum:
b. Useful life Provided, That said costs shall not pertain to the acquisition or
- Only straight-line improvement of property of a character subject to the allowance
method is allowed for depreciation except that the allowances for depreciation on
- Useful life is always such property shall be deductible under this Subsection.
presumed to be 5
years.

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS ARC – ACCOUNTANCY REVIEW CENTER

Any intangible exploration, drilling and development expenses government corporations, exclusively to be used in
allowed as a deduction in computing taxable income during the undertaking priority activities in:
year shall not be taken into consideration in computing the a. Education;
adjusted cost basis for the purpose of computing allowable cost b. Health;
depletion. c. Youth
d. Sports development;
ELECTION TO DEDUCT EXPLORATION AND DEVELOPMENT e. Human settlements;
EXPENDITURES f. Science and culture;
g. Economic development.
n computing taxable income from mining operations, the
taxpayer may at his option, deduct exploration and 2) Donations to foreign institutions or international
development expenditures accumulated as cost or adjusted organizations which are fully deductible in pursuance of:
basis for cost depletion as of date of prospecting, as well as a. Agreements;
exploration and development expenditures paid or incurred b. Treaties;
during the taxable year: Provided, That the amount deductible c. Commitments; or
for exploration and development expenditures shall not exceed d. Special laws.
twenty-five percent (25%) of the net income from mining
operations computed without the benefit of any tax incentives 3) Donations to Accredited Non-government Organizations
under existing laws. The actual exploration and development
expenditures minus twenty-five percent (25%) of the net The term “non-government organization” means a non-
income from mining shall be carried forward to the succeeding profit domestic corporation:
years until fully deducted. a. Organized and operated exclusively for:
i. Scientific;
The election by the taxpayer to deduct the exploration and ii. Research;
development expenditures is irrevocable and shall be binding in iii. Educational;
succeeding taxable years. iv. Character building;
v. Youth and sports development;
'Net income from mining operations' shall mean gross income vi. Health;
from operations less 'allowable deductions' which are vii. social welfare;
necessary or related to mining operations. 'Allowable viii. Cultural;
deductions' shall include mining, milling and marketing ix. Charitable purposes; or
expenses, and depreciation of properties directly used in the x. A combination thereof.
mining operations. This paragraph shall not apply to
expenditures for the acquisition or improvement of property of b. No part of the net income of which inures to the benefit
a character which is subject to the allowance for depreciation. of any private individual;

In no case shall this paragraph apply with respect to amounts
paid or incurred for the exploration and development of oil and
gas.
The term 'exploration expenditures' means expenditures paid
or incurred for the purpose of ascertaining the existence,
location, extent or quality of any deposit of ore or other mineral,
and paid or incurred before the beginning of the development
stage of the mine or deposit.
The term 'development expenditures' means expenditures paid
or incurred during the development stage of the mine or other
natural deposits. The development stage of a mine or other
natural deposit shall begin at the time when deposits of ore or
other minerals are shown to exist in sufficient commercial
quantity and quality and shall end upon commencement of
actual commercial extraction.
DEPLETION OF OIL AND GAS WELLS AND MINES DEDUCTIBLE
BY A NON-RESIDENT ALIEN INDIVIDUAL OR FOREIGN
CORPORATION
In the case of non-resident aliens engage in trade or business or
resident foreign corporations, depletion shall be allowed only if
the oil and gas wells or mines are located in the Philippines.
CHARITABLE CONTRIBUTIONS
FULLY DEDUCTIBLE DONATIONS
The following charitable contributions shall be fully deductible:
1) Donations to the Government of the Philippines or to any of
its agencies or political subdivisions including fully owned
c. Not later than 15th day of the third (3rd) month after the
close of the taxable year in which contributions are
received, makes utilization, unless an extended period
is granted by the Secretary of Finance, upon
recommendation of the Commissioner of Internal
Revenue.
d. The level of administrative expense of which shall, on
an annual basis, in no case to exceed thirty percent
(30%) of the total expenses;
e. 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 used in such
manner as in the judgement of the court shall
best accomplish the general purpose for which
the dissolved organization was organized.
Per special laws, donations made to the following are
deductible in full:
1. Integrated Bar of the Philippines (P.D.181)
2. International Rice Research Institute (R.A. 2707)
3. Development Academy of the Philippines (P.D. 205)
4. The University of the Philippines & other state colleges
5. Cultural Center of the Philippines
6. Artesian Well Fund (R.A. 1977)
7. Ramon Magsaysay Award Foundation
8. Task Force on Human Settlement
9. Donations to the National Museum of the Philippines
(RA No. 11333)

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS
10. Donation to National Performing Arts Companies (RA
No. 11392)
11. National Commission on Culture
12. Humanitarian Science Foundation
13. National Social Action Council
DONATIONS SUBJECT TO LIMIT
The following donations, which do not fall under fully
deductible donations, shall be subject to limit:
1) Donations to the Government of the Philippines or
any agencies or any political subdivision thereof
exclusively for public purposes;
2) Donations to accredited domestic corporations or
associations operated exclusively for:
a. Religious;
b. Charitable;
c. Scientific;
d. Youth and sports development;
e. Cultural;
f. Educational
g. Rehabilitation of veterans;
h. Social welfare institutions; or
i. Non-government organization.
LIMIT
TAXPAYER LIMIT
Rate Base
Corporation 5% Taxable Income from trade,
Individual 10% business or practice of
profession before charitable
contributions
VALUATION IN CASE OF DONATION OF NON-CASH PROPERTY
The amount of any charitable contribution of property other
than money shall be based on the acquisition cost.
RR NO. 9-2020 – IMPLEMENTING SECTION 4(Z)AND
SECTION 4(EE) OF R.A. NO. 11469
FULL DEDUCTIBILITY OF SPECIFIC DONATIONS/GIFTS
ALREADY EXEMPT FROM DONOR’S TAX UNDER THE LAW
The following specific donations/gifts when given for the sole
and exclusive purpose of combatting COVID 19 during the
period of the state of national emergency under R.A. No. 11469,
shall be considered fully deductible against the gross income of
the donor-Corporation/donor-individual:
a) Cash donations;
b) Donations of all critical or needed healthcare equipment or
supplies;
c) Relief goods such as, but not limited to, food packs (rice,
canned goods, noodles, etc.) and water; and
d) Use of property, whether real or personal (shuttle service,
use of lots/buildings);
To be entitled to full deductibility, said donations shall be made
to any of the following:
1. National Government or any entity created by any of its
agencies (including public hospitals) which is not
conducted for profit, or to any political subdivision of the
said Government, including fully-owned government
corporations; and
2. Accredited non-stock, non-profit educational and/or
charitable, religious, cultural or social welfare corporation,
institution, foundation, non-government organization
and/or research institution or organization.
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Moreover, donations of any of the above items to the National
Government or to any of its agencies or political subdivisions,
including fully-owned government corporations, for the sole
and exclusive purpose of combatting the COVID-19, shall be
allowed full deductibility, regardless if covered by the National
Economic and Development Authority (NEDA)’s annual priority
plan.
The requirement of submission of a Notice of Donation shall be
dispensed with.
In order to be fully deductible and allowable as an expense
against the gross income of the donor-corporation and/or
donor-individual, said exempt donation/gifts shall be
supported by the following documents:
Donee-Recipient Supporting Document
National Government or any Deed of Donation
entity created by any of its
agencies (including public
hospitals) which is not
conducted for profit, or to
any political subdivision of
the said Government,
including fully-owned
government corporations
Accredited non-stock, non- Certificate of Donation (BIR
profit educational and/or Form 2322)
charitable, religious, cultural
or social welfare corporation,
institution, foundation, non-
government organization
and/or research institution
or organization
OTHER DONATIONS /GIFTS EXEMPTED DURING THE PERIOD
OF THE STATE OF NATIONAL EMERGENCY
Furthermore, the above donations when made during the
period of the state of national emergency, for the sole and
exclusive purpose of combatting COVID 19, shall also be
considered as exempt donations/gifts, when given to the
following donees:
1. Private hospitals and/or non-stock non-profit educational
and/or charitable, religious, cultural or social welfare
corporation, institution, foundation, non-government
organization (even if non-accredited), trust or
philanthropic organization and/or research institution or
organization; and
2. Local private corporations, civic organizations, and/or
international organizations/institutions provided that they
shall
a. actually, directly and exclusively distribute and/or
transfer said donations/gifts to, and/or;
b. partner as conduit/logistical machinery with, the
accredited NGOs and/or national government or any
entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of
the said Government.
The above donations shall also be deductible in full against the
gross income of the donor-Corporation and/or donor-
individual and subject to the timely submission of documentary
requirements as enumerated below:
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SUPPORTING DOCUMENTS FOR OTHER DONATIONS/GIFTS EXEMPTED DURING THE PERIOD OF THE STATE OF
NATIONAL EMERGENCY
Donee-Recipient Documentary Documentary Requirements for Donor
Requirements for
Donee-Recipient
Accredited non-stock, non-profit educational and/or Liquidation report 1) Sworn Certification executed by the
charitable, religious, cultural or social welfare corporation, President of the donor-corporation or any
institution, foundation, on-government organization, trust of its authorized officers or by the donor-
or philanthropic organization and/or research institution individual himself, stating the name of the
or organization done, the date of the donation, the value
of the donation and stating that the
Non-stock non-profit educational and/or charitable donation was made solely for the purpose
religious, cultural or social welfare corporation, institution, of supporting efforts to fight COVID 19
foundation, non-government organization (even if non- during the period of the state of national
accredited), to include those organized and operated emergency together with proof of
exclusively for health purposes such as private hospitals, purchase (if donation in kind)
trusts or philanthropic organization and/or research
institution or organization
Local private corporations or international 1) Liquidation 1) Certification of Donation (BIR Form
organizations/institutions who partner to serve as conduit report 2322) or Deed of Donation duly issued by
with accredited NGOs and/or national government or any 2) Certificate of the accredited NGO or government
entity created by any of its agencies which is not conducted donation (BIR institution, respectively in the name of
for profit, or to any political subdivision of the said Form 2322) or the donor-corporation/individual.
Government Deed of 2) Proof of purchases (if donation is in kind)
Donation 3) BIR-registered Acknowledgement
Receipt or the template for an
acknowledgement receipt to be issued by
the ultimate beneficiary
These documentary requirements shall be submitted to the respective Revenue District Office (RDO) where the donor and the
donee recipient are registered within sixty (60) days from the lifting of the Enhanced Community Quarantine (ECQ).

However, donations/gifts to foreign institutions or Pension liability is equivalent to Normal Cost per Actuarial
international organizations, shall not be subject to the Valuation Report (AVR) for funding purposes. AVR for PAS 19
documentary requirements enumerated above, but shall be purposes is not the proper amount to be used in determining
subject to verification rules under Section 34 (H) (4) of the NIRC. Pension Liability in determining deductible Pension Trust.

RESEARCH AND DEVELOPMENT PAST SERVICE COST

If not chargeable to capital Claim as outright expense Past service cost is the excess of actual contributions over the
account Normal Cost. It shall be amortized over ten (10) years.
If chargeable to capital At the option of the
account but not chargeable taxpayer: OPTIONAL STANDARD DEDUCTION (OSD)
to property subject to
depreciation or depletion OPTION 1 – Claim as In lieu of the itemized deductions, an individual subject to
outright expense. graduated rated, other than a non-resident alien, may elect a
standard deduction in an amount not exceeding forty percent
OPTION 2 – Amortize over (40%) of his gross sales or gross receipts, as the case maybe. In
60 months. the case of a corporation subject to RCIT, it may elect a standard
If chargeable to property Capitalize deduction in an amount not exceeding forty percent (40%) of its
subject to depreciation or gross income.
depletion
Unless the taxpayer signifies in his return his intention to elect
PENSION TRUSTS the optional standard deduction, he shall be considered as
having availed himself of the itemized deductions. Such election
AMOUNT DEDUCTIBLE when made in the return shall be irrevocable for the taxable
year for which the return is made.
Actual contribution to the extent of pension PXXX
liability* An individual who is entitled to and claimed for the optional
standard deduction shall not be required to submit with his tax
Amortization of Past Service Cost XXX return such financial statements.
Total PXXX
* Compare actual contribution and Normal Cost whichever is A general professional partnership and the partners comprising
lower such partnership may avail of the optional standard deduction
only once, either by the general professional partnership or the
PENSION LIABILITY partners comprising the partnership.

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 TAXATION | TAX.111—ALLOWABLE DEDUCTIONS
Except when the Commissioner otherwise permits, the said
individual shall keep such records pertaining to his gross sales
or gross receipts, or the said corporation shall keep such records
pertaining to his gross income.
The following may be allowed to claim OSD:
1) Individuals
a. Resident Citizen
b. Non-resident citizen
c. Resident alien
d. Taxable estates and trusts
2) Corporations
a. Domestic corporation
b. Resident foreign corporation
AMOUNT DEDUCTIBLE
Individuals Gross Sales/Gross Receipts x
40%
Corporations Gross Income x 40%
A. NON-DEDUCTIBLE ITEMS
1) Bribes, kickbacks and other similar payments;
2) Personal, living or family expenses;
3) Any amount paid out for new buildings or for permanent
improvements, or betterments made to increase the value
of any property or estate, except intangible drilling and
development costs incurred in petroleum operations which
are deductible;
4) Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or
has been made
5) Premiums paid on any life insurance policy covering the life
of any officer or employee, or of any person financially
interested in any trade or business carried on by the
taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.
DISCUSSION QUESTIONS
Allowable deductions, defined
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. It is not a receipt.
c. It is a subtraction to arrive at income subject to tax.
d. An immunity or privilege, a freedom from a charge or
burden to which others are subjected.
2. Statement 1: Exclusions are receipts which are excluded
from the gross income, hence, do not form part of the gross
income.
Statement 2: Exclusions are items or amounts allowed to be
subtracted from gross income to arrive at the taxable
income.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are false
3. Statement 1: A taxpayer can only deduct an item or amount
from gross income only if there is a law authorizing such a
deduction.
Statement 2: For income tax purposes, a taxpayer is free to
deduct from the gross income the full amount of the
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6) Interest, Losses and Bad Debts:
a. Between members of a family. Family of an individual
shall include only his brothers and sisters (whether by
the whole or half-blood), spouse, ancestors, and lineal
descendants; or
b. Except in the case of distributions in liquidation,
between an individual and a corporation more than
fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such
individual; or
c. Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of each of which
is owned, directly or indirectly, by or for the same
individual, if either one of such corporations, with
respect to the taxable year of the corporation preceding
the date of the sale or exchange was a personal holding
company;
d. Between the grantor and a fiduciary of any trust; or
e. Between the fiduciary of a trust and fiduciary of
another trust if the same person is the grantor
with respect to each trust; or
f. Between a fiduciary of a trust and a beneficiary of such
trust.
SPECIAL DEDUCTIONS ALLOWED TO INSURANCE
COMPANIES
In the case of insurance companies, whether domestic or foreign
doing business in the Philippines, the following are deductible:
1) Net additions made within the year to reserve funds; and
2) The sum other than dividends paid within the year on policy
and annuity contracts.
NOTE: Released reserve shall be treated as income for the year
of release.
deduction allowed, or a lesser amount or not to claim any
deduction at all.
a. Statements 1 & 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
Allowable deductions in relation to taxpayer and type of
income
4. Which of the following is not allowed to claim allowable
deductions in computing income tax?
a. Individual taxpayer engaged in business or practice of
profession
b. Individual taxpayer who is a pure compensation
income earner
c. Corporation engaged in business
d. All of the choices
Itemized deductions
5. Which of the following is not one of the itemized
deductions?
a. Ordinary and necessary business expenses
b. Interest
c. Taxes
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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS ARC – ACCOUNTANCY REVIEW CENTER

d. Premium payments on health and/or hospitalization 12. On January 1, 2018, Paquito leased his vacant lot for a
insurance period of 12 years to Romar at an annual rate of P2,400,000.
It was also agreed that Romar will pay the following:
Ordinary and necessary trade, business or professional  P4,800,000 representing rental payment for year 2018
expenses and 2019.
6. Which of the following is allowable compensation expense  Security deposit of P2,400,000.
of an employer?  Annual real property tax of P30,000.
I. Salary of employee paid for a limited period of time
after his death to his widow. The lease contract provides, among others that the lessee
II. Manager’s expense account subject to fringe benefit tax. will construct a 5-storey building for parking purposes at a
a. I only c. I and II cost of P9,500,000. Ownership of the building shall belong
b. II only d. Neither I nor II to the lessor upon the expiration or termination of the lease
contract.
7. Drei Corporation incurred rent expense amounting to
P500,000. Drei paid the lessor the gross amount of The building was completed on July 1, 2020 with an
P500,000 without deducting 5% withholding tax. How estimated useful life of 15 years. How much can Romar
much rent expense can Drei claim as allowable deduction claim as deduction in relation to the lease in 2018?
from its gross income? a. P2,430,000 c. P2,400,000
a. P500,000 c. P475,000 b. P4,830,000 d. P4,800,000
b. P450,000 d. nil
13. Using the same information above, how much can Romar
8. ARC Inc. paid for the regular repairs and maintenance of its claim as deduction in relation to the lease in 2020?
facilities to Johnson Manpower Services (JMS). How much a. P2,430,000 c. P2,400,000
is the applicable withholding tax on such income payment? b. P2,930,000 d. P3,063,333
a. Exempt from withholding tax
b. 1% withholding tax on its gross payment 14. JAO Corporation is engaged in the sale of goods and services
c. 2% withholding tax on its gross payment with net sales/net revenue of P3,000,000 and P2,000,000
d. 5% withholding tax on its gross payment respectively. The actual entertainment, amusement and
recreational (EAR) expense for the taxable year totaled
9. Buladaco Manufacturing Corporation hired Cabarles, Ong, P30,000.
Sia & Tabag (COST & Co.) for its annual financial statement
audit for 2020 taxable year. Buladaco agreed to pay COST How much is the deductible EAR expense?
& Co. for its services amounting to P2,000,000. Such a. P30,000 c. P25,000
payment to SCT & Co. shall be: b. P27,000 d. nil
a. Exempt from withholding tax
b. 1% withholding tax on its gross payment 15. Which of the following can be deducted from gross income
c. 2% withholding tax on its gross payment in the year paid or incurred?
d. 5% withholding tax on its gross payment a. Repairs that materially add to the value of the property
b. Repair that appreciably prolong the life of the property
10. XYZ Co. took two key men insurance on the life of its c. Repair that keeps the property in its ordinarily efficient
President, Mr. A. In one policy, the beneficiary is the operating condition
employer-corporation to compensate it for its expected loss d. All of the choices
in case of death of its president. The other policy designates
Mr. A's wife as its irrevocable beneficiary. 16. Which of the following expenses is not deductible from
Question 1-Are the insurance premiums paid by XYZ Co. in gross income?
both policies deductible? a. Salaries and wages of employees.
Question 2-Will the insurance proceeds be treated as b. Entertainment, amusement and recreation expenses.
income subject to tax by the corporation and by the wife? c. Rental expenses.
a. Yes to first and No to second question; d. Bribes, kickbacks and other similar payments.
b. Yes to both questions;
c. No to first and yes to second question; 17. MOC Corporation, a domestic manufacturing corporation,
d. No to both questions. had gross sales of P100,000,000 for Fiscal Year ending June
30, 2021 and incurred cost of sales of P60,000,000 and
11. All of the following, except one, are not deductible from operating expenses of P17,500,000, with the following
gross income details:
a. Tuition fees and other expenses of the taxpayer's Cost of Sales
children Direct Materials P 30,000,000
b. Replacement of the roof of the office building Direct Labor 20,000,000
c. Premiums paid in insuring the life of the Corporate Manufacturing Overhead 10,000,000
President, appointing the employer-corporation as the Total P 60,000,000
beneficiary of the policy Operating Expenses
d. Premiums paid on a life insurance policy of a rank-and- Salaries and Wages 7,000,000
file employee with the latter's children as the appointed Taxes 300,000
beneficiary Depreciation 3,500,000
Professional Fees 200,000
Advertising Expenses 3,000,000
Training Expenses 3,000,000
Office Supplies 500,000

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS ARC – ACCOUNTANCY REVIEW CENTER

Total P 17,500,000 b. Capitalize

c. At the option of the taxpayer, may be claimed as
How much is the additional Allowable Deductions on outright expense or capitalize
Training Expenses? d. At the option of the government, may be claimed as
a. P3,000,000 c. P1,500,000 outright expense or capitalize
b. P1,000,000 d. P2,500,000
27. On January 1, 2019 MJ Corporation contracted a 1-year
18. Based on the preceding number, suppose the direct labor P100,000 loan from Metrobank for the purchase of
wage is only P10,000,000, the additional deduction that can computers. The equipment which had a depreciable life of
be allowed is: eight (8) years were acquired on April 1, 2019. The interest
a. P3,000,000 c. P1,500,000 expense for the year 2019 amounted P15,000.
b. P1,000,000 d. P2,500,000
In the same year, his bank deposit with PNB earned an
Interest expense interest income of P2,000. During the year, he incurred an
interest expense on unpaid business tax of P600.
19. JBC Corporation borrowed money from the Bank
amounting to P1,000,000 at an annual interest rate of 7%. The deductible interest expense of MJ Corporation in 2019
He invested the money in deposit substitutes earning assuming it did not capitalize the interest is –
annual interest income of 8%. How much is the deductible a. P14,240 c. P14,760
interest assuming the transaction happened in 2019 and b. P13,600 d. P14,940
JBC is using Calendar Year accounting period?
a. P43,600 c. P70,000 28. Based on the preceding number, if interest expense was
b. P26,400 d. P80,000 capitalized, how much was the total allowable deduction?
a. P11,381 c. P10,721
20. Using the data in the preceding number except that the b. P10,781 d. P600
transaction happened in 2020 and JBC Corporation is
subject to 25% RCIT beginning July 1, 2020? 29. Mrs. Sarabia is using cash basis of accounting. She borrowed
a. P43,600 c. P54,000 money from the bank in 2018 payable after 2 years in lump
b. P48,800 d. P80,000 sum. The proceeds given to her was already net of P100,000
interest. When can she claim as deduction the said interest?
21. Using the data in number 19 except that the transaction a. In 2018
happened in 2020 and JBC Corporation is subject to 20% b. In 2019
RCIT beginning July 1, 2020? c. In 2020
a. P43,600 c. P56,800 d. Spread over the term of the loan
b. P48,800 d. P80,000
30. The following interest are non-deductible, except?
22. Using the data in number 19 except that the transaction a. Interest paid to persons classified as related taxpayers
happened in 2021 and JBC Corporation is subject to 25% under Section 36 (B) of RA 8424
RCIT? b. Interest related to indebtedness incurred to finance
a. P43,600 c. P54,000 petroleum exploration
b. P48,800 d. P80,000 c. Interest on preferred stock
d. Interest related to indebtedness incurred to finance
23. Using the data in number 19 except that the transaction working capital requirements
happened in 2021 and JBC Corporation is subject to 20%
RCIT? Taxes
a. P43,600 c. P54,000
b. P48,800 d. P70,000 31. Which of the following is not a requisite for taxes to be
deductible?
24. This is a deductible interest expense a. Must have been paid or incurred within the taxable
a. Interest paid on indebtedness between related year.
taxpayers b. Deductible only by the person/s upon whom the tax is
b. Interest paid on preferred stock imposed by law.
c. Interest paid when there is no stipulation for the c. Must be in connection with the taxpayer's profession,
payment thereof trade, or business.
d. Interest on deposits paid by authorized banks of the d. Must be imposed by the national government.
BSP to depositors, if it is shown that the tax on such
interest was withheld and paid 32. Which of the following is non-deductible?
a. Percentage tax on common carriers by land
25. Which of the following items may be allowed as deduction b. Franchise tax
from gross income? c. Overseas communications tax
a. Interest paid on tax delinquency d. Stock transaction tax
b. Fines and penalties for late payment of taxes
c. Interest paid on indebtedness incurred to finance
petroleum exploration
d. Interest on unpaid salaries and bonuses 33. Mapanlinlang Corporation was assessed by the BIR due to
underpayment of Percentage Taxes. The Assessment Notice
26. How shall interest related to acquisition of property used in disclosed the following:
trade, business or profession be treated? Basic Tax P 1,000,000
a. Claim as outright expense Surcharge 250,000

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS ARC – ACCOUNTANCY REVIEW CENTER

Interest 200,000 41. The term "net operating loss" shall mean
Penalties 25,000 a. The excess of capital losses over capital gains
Total P 1,475,000 deductible from ordinary income.
b. The excess of capital losses over capital gains not
It also generated interest income from bank deposits deductible from ordinary income.
amounting to P100,000. How much is the deductible c. The excess of allowable deductions over gross income.
interest? d. The excess of capital losses over ordinary losses.
a. P200,000 c. P167,000
b. P162,000 d. nil 42. All of the following, except one, are requisites in the carry-
over of net operating loss:
34. Based on the above problem, how much is the deductible a. There must be no substantial change in the ownership
taxes? of the business
a. P1,275,000 c. P1,250,000 b. Carry-over is not allowed if the corporation is subject
b. P1,000,000 d. nil to MCIT during the taxable year
c. Even if the corporation paid MCIT, the running of the
35. Based on the data in Number 33, but the tax underpaid is prescriptive period is not interrupted.
donor’s tax, how much is the deductible interest and tax? d. The carry-over is good for one (1) year.
a. P200,000 and P1,000,000, respectively
b. P200,000 and zero, respectively 43. Enrica Tabang owns 50% of Enrico Corporation (EC).
c. Zero and P1,000,000, respectively Enrica sold a property valued at P1,000,000 to EC for
d. Zero for both items P800,000. Is the loss deductible?
a. Yes, because Enrica and EC are not considered related
36. Which of the following taxes incurred in the conduct of parties.
business is not allowed as deduction from business income? b. No, because Enrica and EC are considered related
a. Foreign income tax claimed as tax credit parties.
b. Documentary stamp tax c. Yes, because the sale results from sale of property.
c. Import duties d. No, because the amount of loss cannot be identified
d. Local business tax with certainty.

Losses
37. Which of the following items of expenses require that notice
be filed with the BIR to be allowed as deduction from gross
income?
a. Taxes c. Losses
b. Interest d. Salaries
38. The net operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable
year, which had not been previously offset as deduction
from gross income shall:
a. Be carried over as a deduction from gross income for
the next 3 consecutive taxable years immediately
following the year of such loss.
b. Be carried over as a deduction from gross income for
the next 5 consecutive taxable years immediately
following the year of such loss.
c. Not be carried over as a deduction from gross income
in any of the succeeding years.
d. Be carried over as a deduction from gross income in any
of the succeeding years until it is fully offset.
44. During 2018, Enrico created a trust in favor of his friend
Apol. He appointed Atty. Ong as the trustee. A month later,
Leomar created a trust in favor of his affectionate friend,
Drei. Leomar appointed John as the trustee. Later during
the year, Atty. Ong sold a property to John at a price 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 John were fiduciaries of
trusts.
b. Yes, because Atty. Ong and John are fiduciaries of
different grantors.
c. No, because Atty. Ong does not have a capital gain.
d. Yes, because losses as a rule are deductible
45. Based on the preceding number, suppose both trusts were
created by Enrico, can Atty. Ong deduct the loss as a result
of the sale?
a. Yes, since losses are always deductible
b. No, since Atty. Ong and John are considered related
parties
c. Yes, since Atty. Ong and John are not related parties
d. None of the choices

39. Based on the preceding number, suppose the loss was 46. Which of the following losses is not deductible?
sustained in 2020 or 2021, the NOLCO shall be carried over a. Abandonment losses in petroleum operation.
as deduction from gross income for how long? b. Excess of expenses over gross income from sale of
a. 3 years ordinary assets.
b. 5 years c. Losses on wash sales of stocks.
c. 10 years d. Losses on sale of investments.
d. Not allowed
47. Which of the following taxpayers may be allowed to claim
40. Continuing number 38, suppose the loss happened in the losses from wash sales as deduction?
year when the taxpayer is enjoying Income Tax Holiday a. Dealer in Real Properties
(ITH), the NOLCO shall be carried over as deduction from b. Dealer in personal properties
gross income for how long? c. Dealer in securities
a. 3 years d. Investor in shares of stocks
b. 5 years
c. 10 years 48. ABC, whose taxable year is the calendar year, provided the
d. Not allowed following acquisitions and disposals of its investments in
shares of stocks:

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TAXATION | TAX.111—ALLOWABLE DEDUCTIONS
 September 21, 2019, purchased 100 shares of the
common stock of XYZ Company for P50,000.
 December 21, 2019, purchased 50 shares of
substantially identical stock for P27,500, and on
December 26, 2019, 25 additional shares of such stock
for P11,250.
 January 2, 2020, it sold for P40,000 the 100 shares
purchased on September 21, 2018.
How much is the indicated loss?
a. P10,000 c. P2,500
b. P7,500 d. P0
49. How much is the deductible loss?
a. P10,000 c. P2,500
b. P7,500 d. P0
50. Sira Sira Company had an old warehouse which had a cost
of P1,200,000. The company demolished the warehouse
when it had a book value of P200,000 in order to construct
a new and bigger warehouse. The demolition cost
amounted to P25,000 while the scraps were sold for
P10,000. How much is the deductible loss in arriving at
taxable income?
a. None c. P200,000
b. P185,000 d. P215,000
51. On July 1, 2017, a taxpayer purchased for P500,000 an
automobile which will be used exclusively for his practice.
He deducted annual depreciation on the basis of an
estimated useful life of five (5) years. On July 1, 2020, the
automobile was partially damaged in an accidental collision
with another vehicle. The cost of repairs amounted to
P100,000. The taxpayer received insurance proceeds of
P70,000 to cover the loss. How much is the deductible loss?
a. P200,000 c. P130,000
b. P100,000 d. P30,000
52. Emang acquired a property for use in her business. After a
devastating 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. P0 c. P250,000
b. P200,000 d. P100,000
53. One of the following losses cannot be deducted from gross
income.
a. To construct a bigger warehouse, a corporation
demolished an old warehouse which had a construction
cost of P3,000,000 and a book value of P500.000.
b. Demolition of a building existing on a land purchased
where the corporation has no use for the building at the
time of purchase and it was its intention to remove the
building in order to build its factory.
c. A corporation retired its machinery from the business
because of the increase in the cost of production and
the failure of the machinery to meet the desired
number of units of production.
d. A corporation ascertained that its B Corp. stocks are
worthless because of the total insolvency of B Corp.
54. Dong, a gambling addict, won P90,000 from cockfighting
during the year. However, he also suffered losses from other
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gambling activities amounting to P200,000. How much is
the deductible loss?
a. P200,000 c. P90,000
b. P110,000 d. nil
55. SNJ Inc. purchased shares of stock of P Corp. for P60,000
and of Boba Co. for P30,000. At the end of the taxable year,
it was ascertained that its P Corp. stock was worthless
because of the complete insolvency of the corporation, and
its Boba Co. shares value had declined to P28,000.
How much is the deductible loss of SNJ Inc.?
a. P90,000 c. P60,000
b. P62,000 d. nil
Bad debts
56. When shall bad debts be allowed as deduction from gross
income?
a. Upon setting up of allowance for doubtful accounts
b. Upon write-off in the books
c. At the option of the taxpayer, upon setting up of
allowance or upon write-off
d. At the option of the government, upon setting-up of
allowance or upon write-off
Depreciation
57. A taxpayer is allowed to use declining balance method in
claiming depreciation. In such a case, the limitation is –
a. It should not exceed twice the rate in straight-line
method
b. It should not exceed twice the rate in sum-of-the-years
digit method
c. It should not exceed the rate in straight-line method
d. It should not exceed the rate in sum-of-the-years digit
method
58. BSE College, a proprietary educational institution, spent
P10 million for the construction of a new school building.
The amount spent for the construction -
a. Must be claimed as expense in the year of completion
b. Capitalized and claim annual depreciation over the life
of the building
c. Capitalized or expensed outright at the option of the
school
d. Capitalized or expensed outright at the option of the
BIR
59. Non-resident aliens engage in trade or business as well as
resident foreign corporations are also allowed to claim
depreciation in arriving at taxable income. Which of the
following is an absolute requirement before depreciation
can be claimed?
a. The property, regardless of location, directly helped in
the generation of income in the Philippines.
b. The property, regardless of location, helped, directly or
indirectly, in the generation of income in the
Philippines.
c. The property is used in trade or business regardless of
location
d. The property must be located in the Philippines
Depletion of oil and gas wells and mines
60. What is the method to be used in amortizing the capital
invested in case of oil and gas wells or mines?
a. Straight line method
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b. Declining balance method organizations/institutions shall be fully deductible from

c. Cost depletion method gross income provided:
d. Sum-of-the-years-digit method a. actually, directly and exclusively distribute and/or
transfer said donations/gifts to, and/or;
61. What will be the treatment for taxation purposes of b. partner as conduit/logistical machinery with, the
intangible exploration and development drilling costs if it is accredited NGOs and/or national government or any
related to a non-producing well and/or mines? entity created by any of its agencies which is not
a. Outright expense conducted for profit, or to any political subdivision of
b. Capitalize the said Government;
c. Either “a” or “b” c. Complied with the documentary requirements under
d. Neither “a” nor “b” RR No. 9-2020
d. All of the choices
62. Based on the preceding number, suppose the intangible
exploration and development drilling costs is related to a 69. Mr. Mapagbigay had the following data during 2020:
producing well and/or mines? Gross income from business P1,000,000
a. Outright expense Compensation income 40,000
b. Capitalize Long-term Capital gain 50,000
c. Either “a” or “b” Short-term Capital loss 20,000
d. Neither “a” nor “b” Operating expenses 400,000
Donation to an accredited NGO 30,000
Charitable contributions Donation to church 40,000

63. Which of the following is deductible from gross income How much is the taxable income?
even if the payment is not connected with business? a. P575,000 c. P535,000
a. Contribution of the employer to the pension trust of the b. P525,000 d. P555,000
employee
b. Charitable contributions 70. Based on the above problem, but the taxpayer is a
c. Income tax paid in foreign country corporation, how much is the taxable income (ignore
d. Travelling expenses compensation income)?
a. P570,000 c. P560,000
64. Which of the following charitable contributions is not fully b. P545,000 d. P600,000
deductible?
a. Donation to the Government of the Philippines to 71. Chinito Corporation (CC) made various donations under the
finance priority projects identified by NEDA Adopt-A-School Program of the Department of Education
b. Donation to the Municipality of Milagros in the under R.A. 8525 amounting to P1,500,000. The net income
Province of Masbate for the repair of Municipal Hall of CC before deducting the P1,500,000 is P8,000,000. How
c. Donation to International Organizations much is the deductible donation for income tax purposes?
d. Donation to accredited Non-government Organizations a. P2,250,000 c. P750,000
b. P1,500,000 d. P400,000
65. Donation to the Government, even if not identified as
priority project by NEDA, to combat COVID 19 during the Pension trusts
period of the state of national emergency under R.A. No.
11469 shall be: 72. DLC Corp. contributed P4,000,000 to its pension plan
a. Fully deductible from gross income during the year 2019. The Normal Cost (NC) appearing on
b. Deductible from gross income but subject to limitation the Actuarial Valuation Report (AVR) for funding purposes
c. Non-deductible from gross income is only P3,000,000. The AVR for PAS 19 purposes disclosed
d. None of the choices that the Current Service Cost (CSC) is P3,200,000. How
much can DLC Corp. claim as deduction?
66. Under normal circumstances, donation to a Private Hospital a. P4,000,000 c. P3,100,000
is: b. P3,000,000 d. P3,280,000
a. Fully deductible from gross income
b. Deductible from gross income but subject to limitation 73. Continuing the information above, assuming in 2020 DLC
c. Non-deductible from gross income Corp. contributed only P2,000,000 while the NC is
d. None of the choices P3,100,000 and CSC is P3,300,000, how much is the
deductible amount?
67. Based on the preceding number, suppose the donation to a. P2,100,000 c. P2,080,000
the Private Hospital was made for the sole and exclusive b. P3,000,000 d. P3,100,000
purpose of combatting COVID 19 during the period of the
state of national emergency? Special deductions for Insurance Companies
a. Fully deductible from gross income
b. Deductible from gross income but subject to limitation 74. Which of the following is deductible to an insurance
c. Non-deductible from gross income company?
d. None of the choices a. Increase in policy reserve which is a mere provision
b. Increase in Incurred but not reported (IBNR)
68. Donations when made during the period of the state of c. Both “a” and “b”
national emergency, for the sole and exclusive purpose of d. Neither “a” nor “b”
combatting COVID to Local private corporations,
civic organizations, and/or international

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Comprehensive Problem – Itemized Deduction a. P600,000 c. P120,000

75. Debtor Corporation shows the following data during b. P550,000 d. P80,000
taxable year 2019:
Sales P500,000 79. Based on the preceding number, if the taxpayer is a
Interest income, 24,000 corporation, how much is the taxable income?
net of 20% final tax a. P600,000 c. P120,000
Cost of sales 300,000 b. P550,000 d. P80,000
Salary expense 120,000
Interest expense 60,000 80. The taxpayer is a domestic corporation:
Rent expense 24,000 Gross sales P9,350,000
Advertising expense 6,000 Sales returns and allowances 250,000
Depreciation expense 5,000 Sales discounts 100,000
NOLCO 50,000 Interest income on trade notes 150,000
receivable
What is the correct amount of itemized deduction? Other income 50,000
a. P205,100 c. P255,100 Cost of sales 3,000,000
b. P215,000 d. P265,000 Operating expenses with vouchers 4,000,000
and receipts
Optional standard deduction Operating expenses without 500,000
vouchers and receipts
76. Optional standard deduction is allowed to Interest income from savings 80,000
a. Non-resident alien engaged in business deposit
b. Non-resident alien not engaged in business Interest income from deposit 125,000
c. Resident alien under FCDS
d. Non-resident foreign corporation Royalty income 100,000

77. Who is allowed to use Optional Standard Deduction? How much is the taxable income using itemized deduction?
a. Non-resident citizen a. P1,675,000 c. P1,700,000
b. Non-resident alien engaged in trade or business b. P2,175,000 d. P2,200,000
c. Non-resident alien not engaged in trade or business
d. None of the choices 81. Based on the preceding number, how much is the taxable
income using OSD?
78. A retailer of goods has gross sales of P1,000,000 with a cost a. P3,755,000 c. P3,695,000
of sales amounting to P800,000. Assuming that the taxpayer b. P5,470,000 d. P3,720,000
is an individual and opted to claim optional standard
deduction, how much is the taxable income?

PRACTICE EXAM

1. Statement 1: The taxpayer has the burden of justifying the
allowance of any deduction claimed.
Statement 2: Deductions are strictly construed against the
government.
a. Statements 1 & 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
2. In 2020, The Rise Company paid total premiums of
P100,000 for the life insurance policy of the vice president,
where the beneficiary is the corporation. At the end of the
year, The Rise received dividend of P1,000,000 because of
the policy. In 2020, the corporation should indicate a claim
for a deduction for life insurance premium of:
a. P1,000,000 c. P10,000
b. P100,000 d. nil
b. Salaries of the officials and employees
c. Entertaining prospective customers
d. Gifts given to public officials who favored Lagai
Corporation's contract with the government
5. Which of the following is a deductible expense for income
tax purposes?
a. Salaries of domestic servants
b. Ordinary repair of the personal car
c. Provision for doubtful accounts
d. None of the above
6. D&L Corporation is engaged in sales of goods and services
with net sales/net revenue of P5,000,000 and P3,000,000
respectively. The actual entertainment, amusement and
recreation expense for the taxable quarter amounted to
P60,000.

3. In 2020, APL Corp., a calendar-year corporation, D&L Corporation can claim an entertainment, amusement
contributed P80,000 to a charitable organization. APL’s net and recreation expense on the sale of goods and services,
income was P820,000. What amount can APL deduct as respectively, of -
charitable contributions? a. P37,500 and P22,500
a. P41,000 c. P51,000 b. P25,000 and P30,000
b. P45,000 d. P80,000 c. P25,000 and P22,500
d. P25,000 and P30,000
4. Lagai Corporation incurred the following expenses. Which
of these expenses is non-deductible? 7. Which of the following items is correct?
a. Insurance premiums on the building a. Interest incurred on loan from a brother is deductible

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b. Interest expense incurred on unpaid percentage tax is

reduced by 25% of interest income subjected to final 12. Based on the preceding item, the taxpayer can claim a
tax deductible loss of
c. Interest payable which had already prescribed if paid a. P4,000,000 c. P3,500,000
voluntarily by the taxpayer b. P500,000 d. nil
d. Interest incurred to acquire a business asset may be
added to the cost of the property 13. The following were taken from the income statement of
PHES Corporation for the taxable year 2020:
8. One is a deductible tax Gross profit on sales P800,000
a. Estate tax Less:
b. Franchise tax Deductible expenses P440,000
c. Donor's tax Provision for bad debts 80,000 520,000
d. Special assessment Net income before income tax P280,000

9. One is entitled to tax credit for taxes paid to foreign country Additional information:
a. Resident aliens a. Accounts written-off during the year and charged to
b. Domestic corporation allowance for bad debts – P60,000.
c. Nonresident aliens with reciprocity b. Recoveries on accounts receivable previously written
d. Non-resident citizens off in 2019 and credited to allowance for bad debts.
- Allowed as deduction by the BIR - P30,000.
10. One is not a deductible loss - Disallowed by the BIR as deduction - P20,000.
a. Loss due to removal or demolition of old building, the
scrapping of old machinery or requirement incident to The net taxable income of PHES Corporation is:
renewal or replacement a. P350,000 c. P250,000
b. Loss due to removal of dilapidated building on the land b. P330,000 d. P310,000
purchased when the purchase was for the acquisition of
the land and without intending to use the building 14. Fabian is a self-employed air-conditioning repairman with
c. Loss in value of securities of such extent that the 2019 gross business revenue of P500,000. He is not VAT-
securities have become worthless and are written off registered. Fabian's expenses were as follows:
d. Loss in usefulness in business of an asset so that the Air conditioning parts P250,000
business is discontinued or the asset is discarded Yellow pages listing 20,000
Business long-distance telephone calls 40,000
11. A building was partially destroyed by fire in 2016. It had a Charitable contributions 20,000
book value of P4,000,000. The insurance company
reimbursed P3,500,000 of the loss. The P3,500,000 What amount should Fabian report as net taxable income?
proceeds is: a. P117,000 c. P110,000
a. exempt from income tax b. P170,000 d. P171,000
b. taxable in full
c. subject to final tax
d. partly taxable, partly exempt

- END -

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