BM2215

ACTIVITY
Read and analyze each item. Provide what is asked. (3 items x 10 points)
1. Debtor Corporation (not classified as MSME) shows the following data during the 2021 taxable year:
Sales P500,000
Interest income, net of 20% final tax 24,000
Cost of sales 300,000
Salaries and wages 120,000
Interest expense 60,000
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
Interest on unpaid taxes 5,000
Required: How much is the allowable deduction from the gross income?
Note that interest on taxes paid or accrued shall be deductible in full. It shall not be reduced by 20% of
interest income subjected to final tax.

To compute for the allowable deduction from gross income, we need to determine the deductible expenses
of the Debtor Corporation. These are the expenses that are considered ordinary and necessary in carrying out
its trade or business. Here are the calculations:

Gross Sales = P500,000

Less: Cost of Sales = 300,000
Gross Income = 200,000
Add: Interest Income (net of 20% final tax) = 24,000 / 0.80 = 30,000
Less: Salaries and Wages = 120,000
Less: Rent Expense = 24,000
Less: Advertising Expense = 6,000
Less: Depreciation Expense = 5,000
Total Deductible Expenses = 175,000

To compute for the taxable income, we need to subtract the total deductible expenses from the gross
income:

Taxable Income = Gross Income - Total Deductible Expenses

= P200,000 - P175,000
= P25,000

Since the interest on unpaid taxes is deductible in full, we need to add it back to the taxable income:

Taxable Income with Deductible Interest on Unpaid Taxes = Taxable Income + Interest on Unpaid Taxes
= P25,000 + P5,000
= P30,000

Therefore, the allowable deduction from the gross income of the Debtor Corporation is P175,000, and its
taxable income is P30,000.

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2. ABC Company incurred the following taxes during 2021:

Documentary stamp taxes P1,000
Income taxes paid in favor of key officers as a fringe benefit 13,600
Income taxes paid in favor of rank-and-file employees as a fringe benefit 22,400
Local taxes, including a surcharge of P800 and interest of P200 6,000
Philippine income tax 100,000
Municipal tax 2,000
Community tax 1,500
Value-added tax 90,000
Compromise penalty on taxes 50,000
Percentage tax paid on the sale of shares sold thru the local stock 12,000
exchange
Donor’s tax for 2020 25,000
Foreign income tax payments claimed as tax credits 10,000
Required: What is the correct amount of taxes that can be deducted from gross income?
Note the following:
o Interest on surcharges is deductible from gross income but as “interest expense,” not as a tax expense.
o Income taxes paid in favor of key officers as a fringe benefit is a fringe benefit tax expense classified as manpower
cost or compensation expense. Fringe benefit tax (FBT) is a final tax of the employee, not the employer, withheld
only by the latter for remittance to the BIR. Likewise, income taxes paid in favor of rank-and-file employees as a
fringe benefit is also part of the compensation expense of the employer.
o The following items are non-deductible expenses: income tax, value-added tax, compromise penalty on taxes,
percentage tax paid on the sale of shares sold thru the local stock exchange, donor’s tax, and foreign income on
tax payments claimed as tax credits.

The correct amount of taxes that can be deducted from gross income is:

Documentary stamp taxes P1,000

Income taxes paid in favor of key officers as a fringe benefit 13,600
Income taxes paid in favor of rank-and-file employees as a fringe benefit 22,400
Local taxes (excluding surcharge and interest) 6,000
Interest on surcharges (deductible as interest expense) 200
Municipal tax 2,000
Community tax 1,500
Total deductible taxes P46,700

The deductible taxes are documentary stamp taxes, income taxes paid in favor of key officers as a fringe benefit,
income taxes paid in favor of rank-and-file employees as a fringe benefit, local taxes (excluding surcharge and
interest), and interest on surcharges (deductible as interest expense).

The following items are non-deductible expenses: income tax, value-added tax, compromise penalty on taxes,
percentage tax paid on the sale of shares sold thru the local stock exchange, donor’s tax, and foreign income on
tax payments claimed as tax credits.

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3. On July 1, 2018, a lawyer purchased an automobile for P500,000, which will be used exclusively for the
practice of the profession. He deducted annual depreciation based on an estimated useful life of five (5)
years. On July 1, 2021, the automobile was partially damaged in an accidental collision with another
vehicle. The vehicle's fair market value before the crash equals the carrying value of P200,000. After the
collision, the fair value was determined at P100,000. The taxpayer received insurance proceeds of
P70,000 to cover the loss.
Required: How much is the deductible loss?

To compute for the deductible loss, we need to determine the adjusted basis and the fair market value of
the automobile before the collision.

The adjusted basis of the automobile can be computed as follows:

Purchase Price = P500,000

Depreciation (3 years) = P500,000 x 3/5 = P300,000
Adjusted Basis = Purchase Price - Depreciation = P500,000 - P300,000 = P200,000

The fair market value of the automobile before the collision is also P200,000. Since the carrying value of
the automobile before the collision is equal to its fair market value, there is no gain or loss to be
recognized for tax purposes.

The fair value of the automobile after the collision is P100,000. Since the insurance proceeds received is
only P70,000, the deductible loss can be computed as follows:

Deductible Loss = Adjusted Basis - Fair Value after the Collision - Insurance Proceeds
Deductible Loss = P200,000 - P100,000 - P70,000 = P30,000

Therefore, the deductible loss is P30,000

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