PART 7 

Deductions from Gross Income

ALLOWABLE DEDUCTIONS, DEFINED 

Deductions, are the amounts, which the law allows to be deducted from co income in
order to arrive at net income. On the other hand, "Exclusions are something received or earned
by the taxpayer that do not form part of gross income while deductions are something spent or
paid in earning the gross income Exclusions pertain to the computation of gross income, while
deductions pertain to the computation of net income. 

KINDS OF DEDUCTIONS 
1. Itemized Deductions
2. Optional Standard Deduction
3. Personal Exemptions
4. Special Deductions allowed in special cases. 
TAXPAYER ALLOWABLE DEDUCTIONS
Individuals earning pure Prior to 2018:
compensation income 1) Basic Personal Exemption
2) Additional Personal Exemption
3) Premium Payments on health/hospitalization
insurance

Beginning 2018, no more deduction is allowed to

purely compensation income earners.

Individuals deriving income Prior to 2018:

from trade, business or 1) Basic Personal Exemption
practice of profession. 2) Additional Personal Exemption
3) Premium Payments on health/hospitalization
insurance
4) Itemized deductions or Optional Standard
Deduction

Beginning 2018
1) Itemized deductions or Optional Standard
Deduction
Corporations 1) Itemized deductions or Optional Standard
Deduction
ITEMIZED DEDUCTIONS 
1. Ordinary and necessary business expenses is general 
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion
8. Charitable Contribution
9. Research and development
10. Contributions to Pension Trust
11. Premium Payments on Health and/or Hospitalization insurance 

ORDINARY AND NECESSARY TRADE, BUSINESS OR PROFESSIONAL EXPENSES 

1. Salaries, wages, and other forms of compensation for personal services actually
rendered, including the grossed-up monetary value of fringe benefit granted by the
employer to the employee. 
2. Travel expenses
3. Rentals
4. Entertainment, Amusement and Recreation Expense
5. Other necessary business expenses 

REQUISITES FOR DEDUCTIBILITY IN GENERAL:

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 Properties Net Sales x 12 of 1%

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 property Capitalize
Repair that appreciably prolong the life of the property Capitalize
Repair that keep the property in its ordinarily efficient Outright Expense 
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 
REQUISITES FOR DEDUCTIBILITY:
1. There must be an indebtedness;
2. The indebtedness must be that of the taxpayer;
3. The indebtedness is connected with taxpayer's trade, business or practice of 
1. profession;
4. There must be legal liability to pay interest;
5. It must be paid or incurred during the taxable year. 

IF THE INTEREST EXPENSE ARISES FROM LOANS, the deductible amount shall be: 
Interest Expense (from loans) Pxx
Less: (Interest Income subject to final tax x 33%) (xx)
Deductible interest  PXX

EXCEPTION: Interest on tax delinquency or deficiency, provided, the tax is related

to trade, business or practice of profession shall be 100% deductible. 

OPTIONAL TREATMENT OF INTEREST

Interest related to acquisition of property used in trade, business or profession may, at the
option of the taxpayer, be: 
1. Claimed as outright expense;
2. Capitalize and claim depreciation. 

NON-DEDUCTIBLE INTEREST
1. Interest paid to persons classified as related taxpayers under Section 36 (B) of RA
8424;
2. If the indebtedness is incurred to finance petroleum exploration;
3. Interest on preferred stock 

TAXES
 The term “taxes” means taxes proper and no deductions should be allowed for amounts
representing interest, surcharge, or penalties incident to delinquency

GENERAL RULE- Taxes paid or incurred within the taxable year in connection with the
taxpayer’s profession, trade or business, shall be allowed as deductions.

EXCEPTION - The following faxes are not deductible: 

1. Income tax
2. Income tax paid abroad if claimed as tax credit 
3. Estate tax
4. Donor’s tax
5. Special assessment

LOSSES 

KINDS OF LOSSES
1. Casualty Losses
2. Net operating loss carry-over (NOLCO)
3. Capital losses and securities becoming worthless 
4. Special Losses
a) Losses from wash sales of stock or securities
b) Wagering losses
c) Abandonment losses 

CASUALTY LOSSES 

REQUISITES FOR DEDUCTIBILITY:

1. The loss arises from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement;
2. The property lost is connected with the trade, business or practice of profession; 
3. Actually sustained during the taxable year
4. Not compensated for by insurance or other forms of indemnity
5. Incurred in trade, profession or business
6. Reported with the BIR within forty-five (45) days from the time of loss; and
7. Not claimed as deduction for estate tax purposes. 

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. 
REQUISITES FOR DEDUCTIBILITY:
1. At the time of incurring net loss, the taxpayer must not be exempt from income tax;
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. 

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:
a) The amount previously claimed as deduction shall be recognized as income, and
 b) Such amount shall also be capitalized and amortized or depreciated, as the case may
be.

BAD DEBTS 
REQUISITES FOR DOUCTIBILITY 
1) There must be an existing indebtedness due to the time, which must 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.

SECURITIES BECOMING WORTHLESS

REQUISITES FOR DEDUCTIBILITY 
1) Securities are ascertained to be worthless;
2) The same is charged off within the taxable year,
3) It must be a capital asset. 

DEPRECIATION 
REQUISITES FOR DEDUCTIBILITY:
1) The property subject to depreciation is used in the trade, business or practice of
profession;
2) The allowance for depreciation must be sustained by the person who owns or who has
a capital investment in the property;
3) The allowance for depreciation must be reasonable;
4) The allowance for depreciation should not exceed the cost of the property,
5) The schedule of the allowance must be attached to the return. 

METHODS OF COMPUTATION IN GENERAL 

1) Straight-line method
2) Declining-balance method - rate should not exceed twice the rate in straight-line
method
3) Sum-of-the-years-digit method; and
4) Any other method which may be prescribed by the Secretary of finance upon
recommendation of the 

PROPERTIES USED IN PETROLEUM OPERATIONS 

 Properties directly related 1) Straight-line
production 2) Declining-balance method

NOTE: Useful life to be used is shorter period

between;
a. 10 years; or
b. Useful life

Properties not directly  Only straight line method is allowed

related to production  Useful life is always presumed to be 5 years.

PROPERTIES USED IN MINING OPERATIONS

If expected life of property is ten Normal rate of depreciation (depreciate
(10) years or less Over actual useful life) 

If expected life is more than Depreciated over any number of years

ten (10) years  between five (5) years and the expected
life 
 

DEPRECIATION DEDUCTIBLE BY NON-RESIDENT ALIENS ENGAGE IN TRADE OR BUSINESS OR

RESIDENT FOREIGN CORPORATIONS 

In the case of non-resident aliens engage in trade or business or resident foreign

corporations, depreciation shall be allowed only if the property is located in the Philippines. 

OBSOLESCENCE MAY BE DEDUCTED IN ADDITION TO DEPRECIATION 

Allowance for obsolescence may be deducted in addition to reasonable allowance for the
exhaustion, wear and tear. 

DEPLETION OF OIL AND GAS WELLS AND MINES 

In case of oil and gas wells or mines, capital invested may be amortized using cost-depletion
method, provided:
1) When allowance for depletion shall equal capital invested, no further allowance shall be
granted;
2) After production in commercial quantities has commenced, intangible  exploration and
development drilling costs shall be treated as follows: 
 INTANGIBLE EXPLORATION AND DEVELOPMENT DRILLING COSTS
KINDS TREATMENT
Incurred for non-producing Deductible in the year incurred.
wells and/or mines 
At the option of the taxpayer. 

OPTION 1 - Deductible in full in the year paid

Incurred for producing wells
or incurred, or 
and/or mines 
OPTION 2 - Capitalize and amortize. 

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 government corporation, exclusively to be used in
undertaking priority activities in:
a. Education, 
b. Health; 
c. Youth
d. Sports development;
e. Human settlements; 
f. Science and culture;
g. Economic development.

2) Donations to foreign institutions or international organizations which are fully

deductible in pursuance of:
a. Agreements;
b. Treaties;
c. Commitments, or
d. Special laws. 
 3) Donations to Accredited Non-Government Organizations 
The term "non-government organization" means a non-profit domestic corporation:
a. Organized and operated exclusively for: 

i. Scientific,
ii. Research; 
iii. Educational;
iv. Character building; 
v. Youth and sports development; 
vi. Health;
vii. social welfare;
viii. Cultural; 
ix. Charitable purposes; or
x. A combination thereof. 
 
b. No part of the net income of which inures to the benefit of any
private individual;
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
i. The state for public purposes; or
ii. 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 (RA. 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, Library and Archives (P.D. 373)
10. National Commission on Culture
11. Humanitarian Science Foundation
12. 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 RATE BASE
Corporation 5% Taxable Income from trade, business or practice of
Individual  10%  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. 

RESEARCH AND DEVELOPMENT 

If not chargeable to capital account  Claim as outright expense 

If chargeable to capital account but At the option of the taxpayer: 

not chargeable to property subject to
depreciation or depletion  OPTION 1 - Claim as outright expense.
OPTION 2 - Amortize over 60 months. 

If chargeable to property subject to Capitalize 

depreciation or depletion 
 LIMITATIONS ON DEDUCTION
The following Research and Development expenditures are not deductible:
1. Any expenditure for the acquisition or improvement of land, or for the improvement
of property to be used in connection with research and development of a character
which is subject to depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, including oil or
gas. 

PENSION TRUSTS 
AMOUNT DEDUCTIBLE 
Actual contribution to the extent of pension liability Pxx
Amortization of Past Service Cost xx
Total  pxx

PENSION LIABILITY
Pension liability is equivalent to Normal Cost. 

PAST SERVICE COST

Past service cost is the excess of actual contributions over the Normal Cost. It shall be
amortized over ten (10) years. 

OPTIONAL STANDARD DEDUCTION (OSD)

Optional Standard Deduction can be claimed in lieu of itemized deductions.
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/Estates/Trusts Gross Sales/Gross Receipts x 40%
Corporations/Partnerships  Gross Income x 4096 

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, betterments
made to increase the value of any property or estate
4) Any amount expended in restoring property or in making good to exhaustion thereof
for which an allowance is or has been made
5) Premiums paid on any life insurance policy covering the life of any office or employee,
or of any person financially interested in any trade or business carried on by the
taxpayer, individual or corporate, when the taxpayers directly or indirectly a
beneficiary under such policy.
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 
EXPENSES ALLOWABLE TO PROPRIETARY (PRIVATE) EDUCATIONAL INSTITUTIONS 
 
Cost incurred for the expansion of school facilities may at its option:
1. Capitalize and claim depreciation as deduction; or
2. Claim as outright expense. 

SPECIAL DEDUCTIONS ALLOWED TO INSURANCE COMPANIES

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. 
*QUIZZER* 

Choose the letter of the correct answer. 

Principles
1. Statement 1: Deductions are items or amounts allowed to be subtracted from gross income
to arrive at the taxable income.
Statement 2: Exclusions are receipts which are excluded from the gross income, hence, do
not form part of the gross income.
a. Only statement 1 is correct 
b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 C

2. Which of the following is not a characteristic of a deduction? 

a. It is a reduction of wealth that helped earn the income subject to tax.
b. An immunity or privilege, a freedom from a charge or burden to which others
are subjected.
c. It is not a receipt.
d. It is a subtraction to arrive at income subject to tax. 
 B
 “B” refers to “exclusions", not deductions. 

3. Political campaign contributions are not deductible from gross income

a. If they are not reported to the Commission on Elections.
b. If the candidate supported wins the election because of possible corruption.
c. Since they do not help earn the income from which they are to be deducted. 
d. Since such amounts are not considered as income of the candidate to whom given.
 C
 Refer also to letter “a” of No. 2 

4. Statement 1: Deductions from gross income are not presumed.

Statement 2: As a rule, deductions means itemized deductions
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect 
 C

5. Statement 1: Revenue expenditures are period costs that are related to a particular period
of time of business operation.
Statement 2: Capital expenditures are non-recurring expenditures related to acquisition of
depreciable assets to be used in the business.
 a. Only statement 1 is correct
b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 C

6. Lester bought an equipment under a two-year instalment basis to be used in his office in the
practice of his profession. Lester will pay P50,000 monthly for a period of twelve (1 2)
months. For income tax purposes, the P50,000 monthly payment shall be:
a. Treated as business rental, hence deductible
b. Treated as capital expenditure, hence not deductible
c. Treated as depreciation expense, hence deductible
d. Treated as ordinary business expense 
 B
Pro-forma Journal Entries:
Upon acquisition:
Equipment  Pxx
Accounts Payable Pxx
Instalment payment:
Accounts Payable  Pxx
Cash  Pxx

7. 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 deduction allowed, or a lesser amount or not to claim any deduction
at all.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect 
 C

8. In cases of deductions and exemptions on income tax returns, doubts shall be resolved
a. Strictly against the taxpayer
b. Strictly against the government
c. Liberally in favor of the taxpayer
d. Liberally in favor of the employer 
 A 
 
9. 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. Only statement 1 is correct
 b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 C

10. Statement 1: Only business expenses may be deducted from the gross income taxpayers.
Statement 2: Itemized deductions from gross income should be duly supported by
vouchers or receipts.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct 
d. Both statements are incorrect 
 C

11. 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 
 D
 “A and B” are personal expenses “C” is an unrealized loss.
 Unrealized gains and losses are not recognized for tax purposes. 

12. This is not a requisite for business expense to be deductible 

a. It must be reasonable
b. It must be paid during the taxable year
c. The withholding tax otherwise required have been deducted and remitted to the BIR
d. It must be ordinary and necessary 
 B

13. One of the requirements in order for expenses to be claimed as deduction for income
tax purposes is that, it should be subject to withholding tax if applicable. What is the
withholding tax rate applicable to rental payments? 
a. 1% c. 2%
b. 5% d. 10%
 B

 Refer to the preceding number (letter “c”) for the requisites for his expense to
be deductible.
 The creditable withholding tax rates under RR 11-2018; RR 14-2018 are as
follows:
 PURCHASE OF/PAYMENT FOR: CWT %

Professional fees, talent fees, etc. for services

rendered 
Individual Payee:
If gross income did not exceed P3M 5%
If gross income is more than P3M or vat 10
registered
Regardless of amount

Non-individual Payee:
If gross income did not exceed P720,000 10%
If gross income is exceed P720,000 15%

Rentals If 5%

Income payments made by top withholding

agents to their local supplier of goods or services:
Goods 1%
Services 2%

Income payments to beneficiaries of 15%

estates/trusts (except tax exempt and incomes
subject to FWT) 

Income payments to partners of GPPs 

More than P720,000  15%
Not more than P720,000 10%

Certain income payments made by credit card 1%

companies 
 

14. In the conduct of his business in 2018, Modesto found it necessary to give gifts to
the government officials with whom he had official dealings. 
a. These gifts are deductible expenses subject to the substantiation rule.
b. The value of the gifts, if de minimis, are allowed to be deducted.
c. Irrespective of the value, the gifts are considered as bribes and not allowed to be
deductible.
d. These gifts are deductible if found to be necessary and properly supported by receipts. 
 B
 “C” is a bribe, hence, non-deductible.
 Refer to Page 312 for non-deductible items. 
Ordinary Business/Professional Expenses
15. Which of the following is not deductible from gross income? 
a. Salaries and wages of employees
b. Entertainment, amusement and recreation expenses 
c. Rental expenses
d. Bribes, kickbacks and other similar payments 
 D
 “D” is illegal payment, hence, non-deductible
 “A-C" are ordinary business expenses 

16. Which of the following can be deducted from gross income in the year paid or incurred? 
a. Repairs that materially add to the value of the property
b. Repair that appreciably prolong the life of the property
c. Repair that keep the property in its ordinarily efficient operating condition
d. All of the choices 

17. Which of the following is allowable c expense(s) of an employer? 

a. Tax withheld by a corporation from its employees' salary.
b. Kickback payment to a government official.
c. Distribution of profits to partners.
d. None of the above 
 B
 “A” is a liability, not a deductible expense
Sample Journal Entries:
Compensation expense  Pxx
Cash Pxx
Withholding tax payable xx

 "B" is an illegal payment

 “C” distribution of company profits is not a business expense
 Sample Journal Entries: 
Retained earnings  Pxx
Dividend payable/Cash  Pxx
. 
18. The following are the requisites for deduction of compensation expense, except 
a. Personal services must have been actually rendered
b. The compensation for such services must be reasonable 
c. Both "a" and "b"
d. Neither “a” nor "b" 
 C

19. Which of the following is allowable compensation expense of an employer? 

a. Salary of employee paid for a limited period of time after his death to his widow
is allowable deduction of the employer.
 b. Manager's expense account subject to fringe benefit tax.
c. Both "a" and "b"
d. Neither "a" nor "b" 
 C

20. Statement 1: Cost of technical books used by a CPA in the practice of his profession
is allowable business expense
Statement 2: Tuition fees, board and lodging incurred by a medical doctor while attending
a continuing professional education seminar is allowable business expense.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect 
 C

21. Which of the following business expenses of a professional practitioner is not allowed to be
deducted from the gross income?
a. Professional expenses incurred outside the Philippines by a nonresident alien engaged
in business in the Philippines.
b. Income tax paid by a resident citizen to a foreign country.
c. Entire amount incurred for meals, lodging, and travel in connection with own business.
d. None of the above 
 A
 NRA-NETB is taxable only on income derived from Philippine sources.
Consequently, expenses incurred abroad shall not be deducted from
gross income derived in the Philippines.
 Income tax payments abroad by a resident citizen or domestic
corporation may be claimed as a tax credit or as a deduction from the
gross income, at the option of the taxpayer.
 “C” is an ordinary and necessary business expense. 

22. The following are allowable compensation expenses of the employer, except 
a. Overtime pay paid to a rank-and-file employee.
b. Cash dividends paid
c. Amounts paid for pensions of retired employees 
d. All of the above 
 B
 “A and C” are ordinary business expenses
 “B” is a distribution of company's earnings

23. Which of the following cannot be claimed as deduction by an individual earning

purely compensation income prior to the effectively of the TRAIN Law?
a. Basic Personal Exemption
b. Additional Personal Exemption
 c. Premium payments on health and/or hospitalization insurance
d. Optional Standard Deduction 
 D
 Beginning January 1, 2018, all the aforementioned items are no longer
allowed as a deduction from the gross income of a purely compensation
income earner.
 For business income earner, only item “D” shall be deductible beginning
2018.

24. The following are the requisites for deduction of compensation expense, except 
a. I Personal services must have been actually rendered
b. The compensation for such services must be reasonable 
c. Both “a” and “b”
d. None of the above 
 D

25. Earl is the product manager of Mcdo Bee Inc. Earl had a dinner with Clifford, owner of
a chain of restaurants, to convince the latter to carry Mcdo Bee products. Clifford agreed.
After dinner, Earl and Clifford went their separate ways. Earl decided to celebrate by going
to a bar where he picked-up a partner and consumed a bottle of liquor. He drove home and
on his way, he sideswiped Delfin, a pedestrian who suffered injuries as a result of the
accident. Earl settled the case extra-judicially by paying Delfin amounting to P100,000 for
actual damages (the money comes from Mcdo Bee Inc.). Which of the following is correct?
a. The expenses incurred in having dinner with Clifford may be deducted from
gross income of Mcdo Bee.
b. The expenses incurred by Earl while celebrating with a partner in a bar is deductible to
expense of Mcdo Bee.
c. The amount paid to Delfin may be deducted from gross income of Mcdo Bee.
d. The amount paid to Delfin may be deducted but the amount will be reduced to an
equitable amount to qualify as ordinary and necessary expenses. 
 A
 “A” is an ordinary business expenses (promotional/representation cost) 
 The expenses incurred in the bar as well as the amount paid to Delfin are
non-business related (personal expenses), consequently, non-
deductible. 

Rental Expenses 
26. A lessee paid the real estate tax on the property he leased. For income Tax purposes the
amount paid was
a. Deductible as part of lease expenses.
b. Deductible as tax expense
c. Deductible as an interest expense
d. Non-deductible expense 
 A
27. The cost of leasehold improvements shall be deductible by the lessee by 
a. Spreading the cost of the improvements over the life of the improvements
or remaining term of the lease, whichever is shorter.
b. Spreading the cost of the improvements over the life of the improvements
or remaining term of the lease, whichever is longer.
c. Spreading the cost of the improvements over the term of the lease or may
be expensed outright in full, at the option of the lessee.
d. Any of the above 
 A

28. A leasehold is acquired for business purposes for P5,000,000. The lease contract is for 10
years. How much is the deductible amount from the gross income? 
a. P500,000  c. P5,000,000
b. P1,000,000  d. P0 
 A
 Allowable deduction = P5,000,000/10 = P500,000 

29. On January 1, 2016, Mr. V leased his vacant lot for a period of 12 years to Mr. J at
an annual rate of P2,400,000. It was also agreed that Mr. J will pay the following: 
 4,800,000 representing rental payment for year 2016 and 2017.
 Security deposit of P2,400,000. 
 Annual real property tax of P30,000. 

The lease contract provides, among others that the lessee will construct a 5-storey
building for parking purposes at a cost of 29,500,000. Ownership of the building shall
belong to the lessor upon the expiration or termination of the lease contract. 

The building was completed on July 1, 2018 with an estimated useful life of 15 years.
How much can Mr. J claim as deduction in relation to the lease in 2016?
a. P2.430,000  c. P2,400,000
b. P84,830,000  d. P84,800,000 
 A
Solution: 
Rentals for 2016 = P2.4M/2 P2,400,000 
Annual real property tax 30,000
Total-2016   P2,430,000 

30. How much can Mr. J claim as deduction in relation to the lease 
a. P2,430,000  c. P2,400,000
b. P84,830,000  d. P84,800,000 
 A
 Same solution with the preceding number. 
31. Using the same information above, how much can Mr. J claim as deduction in relation to  the
lease in 2018? 
a. P2,430,000  c. P2,400,000
b. P2,930,000  d. P3,063,333 
 B
Solution: 
Rentals for 2018 = P2.4M/2 P2,400,000 
Annual real property tax 30,000 
Depreciation expense, improvement
=(P9,500,000/10) x 1/2 500,000
Total-2018  P2,930,000 
 
 The leasehold improvement shall be depreciated using the shorter between
the remaining lease term and useful life. 

32. Using the same information above, how much can Mr. J claim as deduction in relation to  the
lease in 2019? 
a. P2,430,000  c. P3,430,000
b. P2,930,000  d. P3,063,333 
 B
Solution: 
Rentals for 2018 = P2.4M/2 P2,400,000 
Annual real property tax 30,000 
Depreciation expense, improvement
=P9,500,000/10 1,000,000
Total-2019  P3,430,000 

 The leasehold improvement shall be depreciated using the shorter between

the remaining lease term and useful life. 

33. Mike leased his land to Leomar for two years beginning July 1, 2018. Leomar would
pay monthly rental of P100,000. He paid rent up to October 2018 and then defaulted for the
rest of the year. Under accrual method, how much was the income of Mike for 2018?
a. P200,000  c. P600,000
b. 400,000  d. None of the choices 
 B
 Based on collections, regardless of accounting method used. 

34. Using the same data in the preceding number, under cash method, how much was
the income of Mike in 2014?
a. P200,000  c. P600,000
b. 400,000  d. None of the choices 
 B
35. Under accrual method, how much was the deductible expense of Leomar in 2018? 
a. P600,000  c. P200,000
b. 400,000  d. None of the choices 
 A

36. Under cash method, how much was the deductible expense of Leomar in 2014? 
a. P600,000  c. P200,000
b. P400,000  d. None of the choices 
 B 

37. Pedro leased his lot to Jose. The contract calls for Jose to construct a house which  would
serve as the residence of the latter, the ownership thereof to be transferred to Pedro after
the expiration of the lease. When the house was completely constructed, the remaining
term of the lease was 10 years. The residential house had an estimated useful life of 15
years. What is the tax implication of the leasehold improvement?
a. Pedro derives taxable income on the improvement; Jose can claim depreciation expense
as a deduction from gross income.
b. Pedro derives taxable income on the improvement; Jose cannot claim
depreciation expense as a deduction from gross income.
c. Pedro does not derive taxable income on the improvement; Jose cannot
claim depreciation expense as a deduction from gross income."
d. Pedro does not derive taxable income on the improvement; Jose can claim depreciation
expense as a deduction from gross income. 
 B
 Jose cannot claim depreciation expense because at the point of view of
Jose, the improvement is a personal asset (pertaining to his house),
therefore, any depreciation in relation to the improvement is non-
deductible.
 Pedro will derive an income because the ownership of the property will be
transferred to him upon expiration of the lease term. 

38. Assume the same facts in the immediately preceding number, except that at the time of  the
completion of the residential house, the remaining term of the lease was 15 years while the
useful life of the house was 10 years. What is the tax implication of the leasehold
improvement?
a. Pedro derives taxable income on the improvement; Jose can claim
depreciation expense as a deduction from gross income.
b. Pedro derives taxable income on the improvement; Jose cannot claim
depreciation expense as a deduction from gross income.
c. Pedro does not derive taxable income on the improvement; Jose cannot claim
depreciation expense as a deduction from gross income.
d. Pedro does not derive taxable income on the improvement; Jose can claim
depreciation expense as a deduction from gross income. 
 C
  Jose cannot claim depreciation expense because at the point of view of
Jose, the improvement is a personal asset (pertaining to his house),
therefore, any depreciation in relation to the improvement is non-
deductible.
 Pedro will not derive an income from the improvement because the
useful life of the improvement is shorter than the lease term. Therefore,
upon termination of the lease, there is no more improvement to be
transferred to Pedro, 

Interest Expense
39. In computing allowable deduction for purposes of income taxation: 
Statement 1: Beginning the year 2009 interest expense arising from loans or indebtedness
in connection with taxpayer's business shall be reduced by an amount equal to 33%
interest income subjected to final tax
Statement 2: Interest incurred on money used to acquire property to be used in
trade shall only be allowed as a capital expenditure.
a. Only statement 1 is correct
b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 A
 “B” is incorrect. Interest incurred in acquiring property may be treated as
capitalized or treated as part of operating expenses. 

40. Statement 1: As a rule, the interest must be on an indebtedness of the taxpayer, otherwise

it is not deductible.
Statement 2: Interest paid by the taxpayer on a mortgage upon real estate of which he is
the legal or equitable owner, even though the taxpayer is not directly liable upon the bond
or not secured by such mortgage, may be deducted as interest on his indebtedness.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect 
 C

41. This is a non-deductible interest expense 

a. Interest paid on indebtedness incurred to finance petroleum exploration.
b. Interest paid by a corporation on scrip dividends.
c. Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of
which the said corporation is the legal or equitable owner.
d. Interest paid on tax deficiency if the tax where the interest is in itself an item that
is deductible from gross income. 
 A
42. This is a deductible interest expense 
a. Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown les
that the tax on such interest was withheld and paid.
b. Interest paid on indebtedness between related taxpayers,
c. Interest paid on preferred stock. 
d. Interest paid when there is no stipulation for the payment thereof 
 A 

43. Which of the following is a deductible expense for income tax purposes? 
a. Interest paid on delinquent business taxes
b. Provisions for doubtful accounts
c. Ordinary repair for personal car
d. Salaries of domestic servants. 
 A

44. An individual taxpayer has the following data for the year 2011: 
Interest paid, business loan P100,000
Interest paid, loan to finance personal car 500,000
Interest expense on delinquency business related taxes 50,000
Interest income, BDO West Avenue branch (net)  24,000 

For income tax purposes, the deductible interest expense shall be 
a. a.P102,000  c. P140,100
b. b.P138,600  d. P150,000 
 C
Solution: 
Interest paid P100,000 
Reduction (33% x P30,000) (9,900) 
Interest on taxes 50,000
Allowable deductions P140,100 

45. Debtor Corporation shows the following data during taxable year: 
Sales  P500,000
Interest income, net of 20% final tax 24,000
Cost of sales  300,000
Salary expense  120,000
Interest expense  60,000
Rent expense  24,000
Advertising expense  6,000
Depreciation expense  5,000
NOLCO  50,000 

What is the correct amount of itemized deduction? 

a. P202,400  c. P265,100
 b. P215,000  d. P265,000 
 C
Solution: 
Salary expense  P120,000
Interest expense  50,100
= 60,000 - [(24,000/80%) x 33%]
Rent expense  24,000 
Advertising expense  6,000
Depreciation expense  5,000
Total Itemized Deduction   P 205,100

 The result of operations is already negative even before deducting NOLCO

46. RRO Corporation paid the following during 2018: 

Interest paid for late payment of income tax for 2017  P50,000
Surcharge and compromise penalty for late payment of 2017
income tax 72,500
Interest on bonds issued by RRO  1,000,000
Interest on money borrowed by RRO from Rey, 60% owner of RRO 500,000
Interest on preferred shares which in reality is dividend  200,000
 
How much is the deductible interest for 2018? 
a. P1,822,500  c. P1,000,000
b. P1,122,500  d. P50,000 
 C
 Interest expense for late payment of income tax is non-deductive because
the tax itself (income tax) is a non-deductible item

47. Roy borrowed money from the Bank amounting to P1,000,000 at an annual interest rate of
7%. He invested the money in deposit substitutes earning annual interest income of 8%.
How much is the deductible interest? 
a. P243,600  c. P70,000
b. P26,400  d. P280,000 
 A 
Actual interest = P1,000,000 x 7% P70,000
Less: Reduction = P1,000,000 x 8% x 33% (26,400)
Allowable interest expense  P43,600 

48. How shall interest related to acquisition of property used in trade, business or
profession be treated? 
a. Claim as outright expense
b. Capitalize
c. At the option of the taxpayer, may be claimed as outright expense or capitalize
d. At the option of the government, may be claimed as outright expense or 
  C

49. Mrs. Sarabia is using cash basis of accounting. She borrowed money from the bank in 2016
payable after 2 years in lump sum. The proceeds given to her was already net of P100,000
interest. When can she claim as deduction the said interest? 
a. In 2016
b. In 2017
c. In 2018
d. Spread over the term of the loan 
 C

 “Prepaid interest" of an individual under cash basis is deductible not in the

year that the interest was paid in advance but in the year that the
indebtedness was fully paid. However, if the indebtedness is payable in
periodic amortization, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed
as deduction in such taxable year. Prepaid interest shall likewise be
allowed as deduction from the gross income "at the time of payment" for
businesses engaged in rendering services using cash basis of accounting. 

50. The following interest are non-deductible, except? 

a. Interest paid to persons classified as related taxpayers under Section 36 (B) of RA 8424
b. Interest related to indebtedness incurred to finance petroleum exploration
c. Interest on preferred stock
d. Interest related to indebtedness incurred to finance working capital requirements
 D

Tax Expense
51. Which of the following is not a requisite for taxes to be deductible? 
a. Must have been paid or incurred within the taxable year.
b. Deductible only by the person/s upon whom the tax is imposed by law.
c. Must be in connection with the taxpayer's profession, trade, or business,
d. Must be imposed by the national government. 
 D

52. Which of the following is non-deductible? 

a. Percentage tax on common carriers by land
b. Franchise tax
c. Overseas communications tax
d. Stock transaction tax 
 D

53. Mapanlinlang Corporation was assessed by the BIR due to underpayment of

Percentage Taxes. The Assessment Notice disclosed the following: 
 Basic Tax P 1,000,000
Surcharge  250,000
Interest  200,000
Penalties  25,000
Total  P 1,475,000 

It also generated interest income from bank deposits amounting to P100,000. How much
is the deductible interest? 
a. P200,000 c. P167,000
b. P162,000 d. nil 
 A
Solution: 
OPT expense P1,000,000 
Interest expense 200,000
Total allowable deduction  P1,200,000 

 Percentage Taxes, in general (except Stock Transaction Taxes under

Section 127 of the Tax Code), are deductible from gross income.
 If the tax paid is allowable expense under the Tax Code, the related
interest is also classified as deduction from the gross income.
 Penalties and surcharges, are non-deductible expense regardless of the
classification of the tax paid.
 If the interest payment did not arise from a loan or indebtedness, it shall
not be reduced by 33% of interest income earned from the bank. 

54. Based on the above problem, how much is the deductible taxes? 
a. P1,275,000  c. P1,250,000
b. P1,000,000  d. nil
 B
 
55. Assuming the tax underpaid is donor's tax, how much is the deductible interest and tax? 
a. P200,000 and P1,000,000, respectively
b. P200,000 and zero, respectively 
c. Zero and P1,000,000, respectively
d. Zero for both items 
 D
 Since the related tax (donor's tax) is non-deductible from “gross income",
the related interest shall likewise be non-deductible.
The following TAXES are not deductible: 
 Income tax, Income tax paid abroad if claimed as tax credit, Estate
tax, Donor's tax, Special assessment 

Entertainment, Amusement and Recreation expenses 

56. Which of the following is the correct allowable entertainment expense? 
 a. Not more than ½ % of revenue from services.
b. Not more than 1% of net sales of goods.
c. Not more than 1 ½ % of revenue from services.
d. Not more than 1 ½ % of net sales of goods. 
 A

57. Niah Corporation is engaged in the sale of goods with net sales of P2,000,000. The actual
entertainment, amusement and recreation expenses for the taxable quarter totaled
P20,000. For income tax purposes, how much is the deductible entertainment, amusement
and recreation expenses? 
a. P1,100  c. P20,000
b. P10,000  d. P0 
 A
Solution: 
Actual vs P20,000 
Limit (172% of net sales) 10,000
Allowed  P10,000 

58. RRO Corporation is engaged in the sale of goods and services with net sales/net revenue of
P3,000,000 and P2,000,000 respectively. The actual entertainment, amusement and
recreational (EAR) expense for the taxable year totalled P30,000. How much is the
deductible EAR expense? 
a. P30,000  c. P25,000
b. P27,000  d. nil 
 B

Allowed
(Lower) 
Sale of Goods:
Actual = P30,000 x 3/5 P18,000
Limit = P3M x 5% =  P15,000  P15,000 

12,000 
Sale of Service:
Actual = P30,000 x 2/5 P12,000 
Limit = P2M X 1% TOTAL  P20,000 
TOTAL P27,000 

 
Losses/NOLCO
59. Statement 1: A net operating loss is the excess of allowable deductions over the
gross income from business for a taxable year.
 Statement 2: A net operating loss which had not previously been deducted from gross
income shall be carried over as a deduction only in the next year immediately following the
year of such loss.
a. Only statement 1 is correct
b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 A

60. 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 
 C

61. The net operating loss of the business or enterprise for any taxable year immediately rent
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. 
 A 

62. The term "net operating loss" shall mean 

a. The excess of capital losses over capital gains deductible from ordinary income.
b. The excess of capital losses over capital gains not deductible from ordinary income.
c. The excess of allowable deductions over gross income.
d. The excess of capital losses over ordinary losses. 
 C
 
63. All of the following, except one, are requisites in the carry-over of net operating loss: 
a. There must be no substantial change in the ownership of the business
b. Carry-over is not allowed if the corporation is subject to MCIT during the taxable year
c. Even if the corporation paid MCIT, the running of the prescriptive period is
not interrupted
d. The carry-over is good for one (1) year. 
 D

64. Which of the following instances will NOLCO can still be claimed as deduction? 
a. Transfer of ownership involves change from direct ownership to indirect ownership, or
vice versa.
 b. Merger of the subsidiary into the parent company. 
c. Either “a” or “b”
d. Neither “a” nor “b” 
 C

65. X Corporation owns 100% of Y Corporation. Y Corporation owns 100% of Z Corporation that

has NOLCO. Z Corporation is merged into Y Corporation. Which of the following statements
is correct? 
a. Z Corporation's NOLCO can be used by it to the exclusion of all other parties.
b. Z Corporation's NOLCO is transferred to Y Corporation.
c. Z Corporations NOLCO is transferred to X Corporation.
d. Z Corporations NOLCO can no longer be used. 
 B

66. In March 2017, Tonette, who is fond of jewelries, bought a diamond ring for P750,000.00, a
bracelet for P250,000.00, a necklace for P500,000.00, and a brooch for P500,000.00.
Tonette derives income from the exercise of her profession as a licensed CPA. In October
2017, Tonette sold her diamond ring, bracelet, and necklace for only P1.25 million incurring
a loss of P250,000.00. She used the P1.25 million to buy a solo diamond ring in November
2017 which she sold for P1.5 million in September 2018. Tonette had no other transaction
in jewelry in 2018. Which among the following describes the tax implications arising from
the above transactions? 
a. Tonette may deduct his 2017 loss only from her 2017 professional income.
b. Tonette may carry over and deduct her 2017 loss only from her 2018 gain.
c. Tonette may carry over and deduct her 2017 loss from her 2018 professional income
as well as from her gain.
d. Tonette may not deduct her 2017 loss from both her 2018 professional income and her
gain. 
 B

Loss on Wash Sale 

67. Which of the following losses is not deductible? 

a. Abandonment losses in petroleum operation.
b. Excess of expenses over gross income from sale of ordinary assets.
c. Losses on wash sales of stocks.
d. Losses on sale of investments. 
 C

68. Which of the following is not correct regarding NOLCO? 

a. NOLCO is allowed as deduction from business income for the next 3 succeeding years.
b. Domestic and resident foreign corporation subject to normal income tax is allowed
with NOLCO.
c. Offshore banking unit of a foreign corporation is allowed with NOLCO.
 d. Private educational institution enjoying preferential tax rate is allowed with NOLCO. 
 C

69. Which of the following is entitled to claim NOLCO? 

a. An employee with respect to his compensation income.
b. Foreign international carrier 
c. Offshore banking unit
d. Self-employed individual 
 D

70. Which of the following taxpayers may be allowed to claim losses from wash sales
as deduction? 
a. Dealer in Real Properties
b. Dealer in personal properties
c. Dealer in securities
d. Investor in shares of stocks 
 C

71. On December 1, 2017, Ms. Anne Felipe purchased 100 shares of common stock of Jessie
company for Php 10,000. On December 15, 2017, she purchased 100 additional shares for
9,000. On January 2, 2018, she sold the 100 shares purchased on December 1, 2017 for
Php9,000. 

How much is the deductible loss?

a. P10,000  c. P5,000
b. 27,500  d. zero
 D
 
Selling price  P9,000 
Cost (10,000)
Indicated loss (10,000)
 61-Day Rule: Prohibited Period = 30 days before sale and 30 days after sale
 December 15 to January 2, 2018 is within the 30-day prohibited period.
Consequently, the indicated loss is classified as “loss on wash-sale", a non-
deductible loss. 

72. Bobby had the following stock transactions: 

 On September 21, 2017, purchased 100 shares of the common stock of Jay-r Inc. for
Php5,000.
 On December 21, 2017, he purchased 50 shares of substantially identical stock for
Php2,750. On December 26, 2017, he purchased 25 additional shares of such stock for
Php1,125.
 On January 2, 2018, he sold for Php4,000 the 100 shares purchased on September 21,
2017 
 How much is the non-deductible loss?
a. P1,000  c. P250
b. P750  d. zero 
 B
Selling price P4,000
Cost (5,000)
Indicated loss  (1,000)

Non-Deductible = P1,000 x 75**/100 P750

Deductible Loss = P1,000 - 750 P250 
 61-Day Rule: Prohibited Period = 30 days before sale and 30 days after sale.
 December 21, 2017 to January 2, 2018 is within the 30-day prohibited period.
The total number of shares purchased on those acquisitions was 75. 

Casualty losses/ Securities becoming worthless other losses

73. Statement 1: casualty, robbery, theft or embezzlement loses are deductible only when
a “Declaration of Loss" is submitted within 45 days from the date of discovery of the
casualty or robbery, theft or embezzlement that caused the loss.
Statement 2: casualty, robbery, theft or embezzlement loses are deductible from gross
income if at the time of the filing of the income tax return, they have not been claimed as
deductions for estate tax purposes in the estate tax return.
a. Only statement 1 is correct
b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 C
‫܇‬ 
74. It denotes an accident, a mishap, some sudden invasion by a hostile agency, and excludes
the progressive deterioration or property through a steady operating cause. 
a. casualty  c. abandonment
b. business  d. wager 
 D

75. 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 scrap 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 
 D
Book value of the old warehouse P200,000 
Demolition cost 25,000
Proceeds from scrap (10,000)
 Deductible loss  P215,000 

76. Statement 1: In a total loss due to casualty, the measure of loss is the book value of
the asset reduced by any form of indemnity
Statement 2: In a partial loss due to casualty, the measure of loss is the book value of the
property, or the cost to restore the property to its normal operating condition, whichever is
lower, reduced by any form of indemnity.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect 
 C

77. On July 1, 2015, 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, 2018, 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. P230,000 
 D
Book value P200,000
Cost to restore  100,000 

Allowed (lower) P100,000

Proceeds from insurance (70,000)
Deductible loss  P30,000 

 Partial Loss = the lower between remaining book value before the
casualty loss and cost to restore, less insurance proceeds.
 Total loss = remaining book value before the casualty loss less insurance
proceeds. 

78. 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 
  B
Solution: 
Book value P200,000
Cost to restore P250,000
Allowed (lower)  P200,000 

79. 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. 
 B

80. Dong, a gambling addict, won P90,000 from cockfighting during the year. However, he also
suffered losses from other gambling activities amounting to P200,000. How much is the
deductible loss?
a. P200,000  c. P90,000
b. P110,000  d. nil 
 C
 To the extent of gambling winnings only. 
. 
81. SNJ Inc. purchased shares of stock of Valde Corp. for P60,000 and of Boba Co. for  P30,000.
At the end of the taxable year, it was ascertained that its Valde 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. 290,000  c. P60,000
b. P62,000  d. nil 
 C
 Worthless securities = deductible loss
 Loss on shrinkage in the value of the securities = non-deductible 

82. One of the following losses is not deductible from gross income 
a. Loss incurred in trade, profession, or business
b. Loss due to fires, storms, shipwreck, or other casualties, robbery, theft,
or embezzlement of property connected with trade, business, or profession.
c. Net operating loss carry-over 
d. Shrinkage in the value of the stock 
  D

83. 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 
 B
 Write-off = deductible loss
 Provision for bad debts = non-deductible 

84. The following losses are deductible from gross income, except one which is deductible  only
to the extent of capital gain: 
a. net operating loss carryover; 
b. accounts written off because these are certain to be uncollectible
c. loss arising from permanent decline in market value ;
d. loss incurred from a transaction involving a capital asset. 
 D

85. Statement 1: Capital losses can be deducted only from capital gains 
Statement 2: Ordinary losses can be deducted from any gross income
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct 
d. Both statements are incorrect 
 C

86. 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 
 A 

87. 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 
 C
88. 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 
 D

Premium Payment on Life Insurance 

89. XYZ Co. took two key men insurance on the life of its President, Mr. A. In one policy,
the beneficiary is the corporation to compensate it for its expected loss in case of death of
its president. The other policy designates Mr. A's wife as its irrevocable beneficiary. 
Question 1-Are the insurance premiums paid by XYZ Co. in both policies deductible?
Question 2-Will the insurance proceeds be treated as income subject to tax by the
corporation and by the wife?
a. Yes to first and No to second question;
b. Yes to both questions;
c. No to first and yes to second question;
d. No to both questions. 
 D

GUIDE: 
 Life Insurance was taken out by the employee
o Premium payment = personal expense; non-deductible
o Proceeds 
 If the insured outlived the policy, the excess of proceeds over the premium
payments shall be taxable to the tax taxpayer.
 If the proceeds were received as a result of the death of the ta xpayer, such
proceeds shall be exempt from income tax. For estate taxation purposes, it
may or may not be part of the gross estate. 

 Life Insurance was taken out by the employer for the employee
o Beneficiary is the employer 
 Premium payment is non-deductible while the proceeds shall be part of the
taxable income of the employer. 
 
o Beneficiary is the employee or the employee's dependents/heirs 
 Premium payment - taxable income of the employee and
deductible expense of the employer.
 Proceeds (to be received by the employee's heirs/beneficiaries) – non-
taxable income of the heirs/beneficiaries 
90. All of the following, except one, are not deductible from gross income 
a. Tuition fees and other expenses of the taxpayer's children 
b. Replacement of the roof of the office building
c. Premiums paid in insuring the life of the Corporate President, Appointing
the corporation as the beneficiary of the policy
d. Premiums paid on a life insurance policy of a rank-and-file employee with the latter's
children as the appointed beneficiary 
 D
 “A” is non-deductible. It is a personal expense.
 “B” is non-deductible. It is a capitalizable cost.
 “C” is non-deductible because the beneficiary is the employer.
 “D” is deductible. The designated beneficiaries are the employee's heirs 

91. In 2017, Delta Company paid total premiums of P10,000 for the life insurance policy of the
vice president, where the beneficiary is the corporation. At the end of the year, Delta
received dividend of P100,000 because of the policy. In 2017, the corporation should
indicate a claim for a deduction for life insurance premium of 
a. P100,000  c. P1,000
b. P10,000  d. nil 
 D

92. Which of the following is deductible from gross income even if the payment is
not connected with business? 
a. Contribution of the employer to the pension trust of the employee
b. Charitable contributions
c. Income tax paid in foreign country.
d. Travelling expenses 
 B

93. Which of the following charitable contributions is not fully deductible? 

a. Donation to the Government of the Philippines to finance priority projects identified by
NEDA.
b. Donation to the Municipality of Milagros in the Province of Masbate for the repair of
Municipal Hall.
c. Donation to International Organizations.
d. Donation to Accredited Non-government Organizations. 
 В 
. 
94. One of the following charitable and other contributions is not deductible in full: 
a. Donations to Government of the Philippines or to an of its agencies or
political subdivisions, including fully owned government corporations, exclusively to
finance, provide for, or to be used in undertaking priority projects.
b. Donations to certain foreign institutions or international organizations
(i.e., International Red Cross, World Health Organization).
 c. Donations to accredited non-government organizations or non-profit
domestic corporations that satisfied the four requirements set by law.
d. Donations made for the use of the Government of the Philippines or any of its agencies
or political subdivision exclusively for public purpose. 
 D

95. To be deductible in full, certain accredited non-government organizations or non-

profit domestic corporations must meet certain requisites. One of the following is not a
requisite
a. Organized and operated exclusively for scientific, research, educational,
character building and youth and sports development, health, social welfare, cultural
and charitable purposes or combination of these purposes.
b. Not later than the 15th day of the third month after the close of the taxable year
in which the contributions are received, makes utilization of the contributions directly
for the purpose or function for which the organization is organized and operated. 
c. The assets of which, in the event of dissolution, would be distributed to another non-
profit domestic corporation organized for similar purpose or purposes, or to the State
for public purpose or would be distributed by a court to another organization to be
used in such manner as in the judgment of said court shall best accomplish the general
purpose for which the dissolved organization was organized.
d. The administrative expenses shall, on an annual basis, not exceed 40% of the total
expenses. 
 D

96. The following donations are non-deductible, except? 

a. Donations given directly to Yolanda survivors
b. Alms given to beggars
c. Political contributions
d. Donations to International Organizations 
 D

97. The amount of deductible charitable contribution of property other than money shall
be based on: 
a. Fair market value
b. Book value
c. Lower of cost or fair market value
d. Acquisition cost 
 D

98. To be allowed as a valid deduction, charitable and other contribution must not exceed: 
a. 5% of taxable income after charitable contribution, in case of individuals
b. 10% of taxable income after charitable contribution, in case of individuals
c. 5% of taxable income before charitable of contribution, in case of individuals. 
d. 10% of taxable income before charitable contribution, in case of individuals. 
99. The following contributions and donations were made by a taxpayer. 
To Christ the King Catholic Church P250,000
To Bukas Palad, non-profit domestic corporation 300,000
To the fire victims of Recto 200,000
To the Gospel church of Taiwan 350,000
 
How much is the total deductible actual charitable and other contributions subject to
limit? 
a. P250,000 c. P750,000 
b. P550,000 d. P1,100,000 
 B
 Deductible with limit = Donations to Christ the King and Bukas Palad
foundation
 Donations directly given to the fire victims as well as to the Gospel
church of Taiwan (foreign corporation not exempt under treaty or
international organizations) are non-deductible contributions. 

100. A domestic corporation has the following data on income and expenses 
Gross business income P6,200,000
Deductions including SSS and Philhealth contributions of P150,000 2,500,000 
Contributions to the Government for priority project in education 100,000
Contribution to foreign private foundation 100,000
Contribution to domestic charitable organization  190,000 

How much is the deductible charitable and other contributions? 

a. P390,000  c. P285,000
b. P290,000  d. P211,000 
 C
Solution: 
Actual (w/ limit) P190,000
Vs. Limit (net income before contributions x 5%)
= [(6,200,000 – 2,500,000) x 5%] 185,000
Allowed (lower) P185,000
Add: Deductible in full (priority project) 100,000
Total allowable charitable and other contributions  P285,000
 Contributions to a foreign private organization is non-deductible, unless
provided for under international agreements or treaty. 

101.Juan, reported the following for the current taxable year: 2017 
Gross Income P5,000,000
Cost of Sales 3,000,000 
Salaries of employees, net of P100,000 withholding tax and 800,000 
P50,000 SSS, Medicare and Pag-ibig premiums contributions
Fringe benefits given to rank and file employees 300,000
 Fringe benefits given to managerial employees (GUMV) 250,000
Representation and entertainment expenses (business related) 100,000
Rent expense 120,000
Donation to religious and charitable institutions  500,000 

At what amount should Juan report as taxable income for 2018? 2017 
a. P2,790,000  c. P2,956,000
b. P2,906,000  d. P3,006,000 
 C
Solution
Gross Income P5,000,000 
Cost of Sales 3,000,000
Sales  P8,000,000 

Sales P8,000,000
COS (3,000,000) 
Salaries (gross of withholding tax, SSS, Medicare/Pag-ibig) (950,000)
Fringe benefits given to rank and file employees (300,000)
Fringe benefits (@Grossed-up monetary value) (250,000)
Rent expense (120,000) 
Representation and entertainment expenses 
(1/2 % of N. Sales); P8M x.005 (40,000)
Net income before contributions P3,340,000
Donation to religious and charitable institutions  (334,000) 
Actual = P500,000
Limit: P3,340,000 x 10% = P334,000 
Allowed (lower amount); limit
Net income before personal exemption P3,006,000 
Basic personal exemption (50,000)
Taxable Net Income  P2,956,000 

 Allowable Representation expenses = the lower between the actual

expenditures and the limit 
 Limit is: 
 Sale of goods = 12% of Net Sales
 Sale of service = 1% of Revenues 

102.How much is the correct taxable net income of Juan assuming the current taxable year
is 2018? 
a. P2,790,000  c. P2,956,000
b. P2,906,000  d. P3,006,000 
 D
 Ignore personal exemptions beginning 2018 taxable year.
103.How much is the correct taxable net income assuming the taxpayer is a corporation? 
a. P2,790,000  c. P2,956,000
b. P3,173,000  d. P3,006,000 
 B
Solution: 
Gross Income P5,000,000 
Cost of Sales 3,000,000
Sales  P8,000,000 

Sales P8,000,000
COS (3,000,000)
Salaries (gross of withholding tax, SSS, Medicarel/Pag-ibig) (950,000)
Fringe benefits given to rank and file employees (300,000)
Fringe benefits (@Grossed-up monetary value) (250,000)
Rent expense (120,000) 
Representation and entertainment expenses 
(1/2% of N. Sales); P8M X.005 (40,000)
Net income before contributions P3,340,000 
Donation to religious and charitable institutions  (167,000) 
Actual = P500,000
Limit: P3,340,000 x 5% = P167,000 
Allowed (lower amount); limit
Taxable net income  P3,173,000 

Pension Costs
104.Which statement is wrong? Contributions made by an employer to a pension trust: 
a. For lump sum payment to cover past service cost, is allowable as
deduction beginning with the year the payment was made.
b. For lump sum payment to cover past service cost is allowable as deduction amortized
for period of ten years.
c. For a lump sum payment to cover past service cost, may be amortized over a
period of more than, but not less than ten years.
d. For present service cost, is deductible in the year that payment is made. 
 C

105.Statement 1: Contributions by the employer to a pension trust for past service cost
is deductible in full in the year that the employer made the contributions, if he is on the
cash basis of accounting.
Statement 2: Contributions or donations given directly to individuals cannot be deducted
from gross income.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct 
d. Both statements are incorrect 
  B
 “A” is incorrect. Contributions for past service cost shall be amortized for
ten (10) years. Refer to the rules provided in the preceding number.

106.An employer maintains pension trust for its employees. The following contributions
are made: 
2016  2017 2018
Current service costs P1,000,000 P1,000,000 P1,000,000
Past service costs  800,000 600,000 

How much is the deductible pension contributions? 

2016  2017  2018
a. P1,800,000 P1,600,000 P1,000,000
b. P1,080,000 P1,060,000 P1,000,000
c. P1,080,000  P1,040,000 P1,060,000
d. P1,080,000  P1,140,000 P1,140,000 
 D
Solution: 
2016 2017 2018
Current service costs P1,000,000 P1,000,000 P1,000,000
Past service costs
2016  80,000 80,000 80,000
2017  - 60,000 60,000
2018 - - -
Total  P1,080,000 P1,140,000 P1,140,000

107.DLC Corp. contributed P4,000,000 to its pension plan during the year 2017. The
normal cost appearing on the Actuarial Valuation Report is only P3,000,000. How much can
DLC Corp. claim as deduction?
a. P4,000,000  c. 23,100,000
b. P3,000,000  d. nil 
 C
Solution: 
Current service costs (normal cost) P3,000,000 
Past service costs
(excess contribution over normal cost)
=P1,000,000/10 100,000
Total  P3,100,000 

108.Continuing the information above, assuming in 2018 DLC Corp. contributed

only P2,000,000 while the Normal Cost is P3,000,000, how much is the deductible
amount? 
a. P2,100,000  c. P2,000,000
b. P3,000,000  d. 23,100,000 
  A
Solution: 
Current service costs (normal cost) P2,000,000
Past service costs from 2017  100,000
Total P2,100,000
 Current service to be recognized shall not exceed the actual contributions paid. 

109.Galaxy, Incorporated has been in business for the past 10 years. For the year 2018,
it decided to establish a pension fund for its employees. The pertinent data of the fund are
us follow: 
Past service cost (lump sum payment)  P1,000,000
Present service cost  100,000 

The deductible pension contribution for the year is 

a. P100,000  c. P1,000,000
b. P200,000  d. P1,100,000 
 B
Solution: 
Current or present service costs P100,000 
Past service costs = P1M/10 100,000
Total  P200,000 

Research and Development

110.Which statement is wrong? Research and development cost: 
a. On land and building acquired for research and development purposes is
not deductible as research and development cost. 
b. May be claimed as an outright deduction from gross income.
c. May be treated as a deferred expense to be amortized over the period which
will benefit from the expenditure.
d. May be treated as a deferred expense to be amortized over a period of not less
than thirty-six (36) months from the date benefit from the expenditure is derived. 
 C

111.Research and development deduction shall not apply to 

I. Any expenditure for the acquisition or improvement of land, or for the improvement
of property to be used in connection with research and development of a character
which is subject to depreciation and depletion.
II. Any expenditure paid or incurred for the purpose of ascertaining the
existence, location, extent, quality of any deposit or ore or other mineral, including oil
and gas. 
a. I only c. Both I and II
b. ll only  d. Neither I nor II 
 C
‫܇‬ 
112.Research and development expenses treated as a deferred expenses shall be allowed as
deduction ratably distributed over a period of
a. Not more than 60 months beginning with the month in which the taxpayer
first realizes benefits from such expenditure. 
b. Not less than 60 months beginning with the month in which the taxpayer first realizes
benefits from such expenditure.
c. Not less than 30 months beginning with the month in which the taxpayer first realizes
benefits from such expenditure.
d. Not less than 6 months beginning with the month in which the taxpayer first realizes
benefits from such expenditure. 
 B

113.Which statement is wrong? Research and development costs: 

a. When related to the acquisition and/or improvement of land and building, must
be capitalized.
b. If not related to land and building, may be treated as an outright deduction.
c. If not related to land and building may be treated as a deferred expense which may  be
amortized.
d. Cannot be deducted in gross income. 
 B

Itemized Deductions/ Optional Standard Deductions (OSD)

114.Which of the following income is to be reduced by itemized deductions? 
a. Compensation income
b. Business income
c. Passive income
d. Capital gain 
 B

115.The following may be allowed to claim OSD in lieu of the itemized deductions, except 
a. Taxable estates and trust
b. Non-Resident aliens
c. Resident foreign corporations
d. Domestic corporations 
 B
 The following may be allowed to claim Optional Standard Deductions (OSD) in
lieu of the itemized deductions as follows: 
 Resident citizens
 Non-resident citizens
 Resident aliens
 Taxable estates and trusts
 Domestic corporations
 Resident foreign corporations
 Partnerships 
116.Optional standard deduction 
a. Is equal to 40% of the gross income from business or practice of profession.
b. Cannot be used as a deduction from compensation income.
c. May be availed by all individuals
d. May be availed of by the taxpayer whether or not he signifies his desire to
elect optional standard deduction. 
 B
 “A” is wrong. The basis of OSD is gross sales or receipts.
 "B" is correct. 
 “C” is wrong. It is not allowed to non-resident aliens and non-resident foreign
corporations.
 “D” is wrong. The election to claim either the OSD or the itemized deduction
for the taxable year must be signified by checking the appropriate box in the
income tax return filed for the first quarter of the taxable year adopted by the
taxpayer. Once the election is made, the same type of deduction must be
consistently applied for all the succeeding quarterly returns and in the final
income tax return for the taxable year. Any taxpayer required but fails to file
the quarterly income tax return shall be considered as having availed of the
itemized deductions option for the taxable year. 

117.For purposes of Optional Standard deduction of an individual, the Optional

Standard Deduction of forty percent (40%) should be based on:
a. If a trading concern, gross profit from sales
b. If a service concern, gross receipts less direct cost of services
c. Gross sales or gross receipts
d. Means gross profit from sales, or gross receipts or revenues less direct cost of services,
plus all other items of gross income 
 C

118.Which of the following should be used as a basis in computing the Optional

Standard Deduction? 
I. For individual taxpayers using the accrual basis of accounting, OSD is based on 40% of
gross sales.
II. For individual taxpayers using the cash basis of accounting, OSD is based on 40% of
gross receipts.
III. For individual taxpayers using the other basis of accounting such as percentage of
completion method, OSD is based on 40% of gross receipts or sales, as the case may
be.
IV. For OSD purposes, corporate taxpayers shall compute the OSD in the same manner
with individual taxpayers
a. I and III only c. All of the above
b. I, II and III only d. None of the above 
 B
  "IV" is wrong. The basis of OSD: 
 For individual taxpayers - gross sales or receipts.
 For corporations - gross income 

119.Statement 1: Prior to 2018, an individual taxpayer could claim both the itemized deduction
and personal exemption in the same taxable year.
Statement 2: Prior to 2018, an individual taxpayer could claim both the itemized deduction
and optional standard deduction in the same taxable year.
a. Only statement 1 is correct
b. Only statement 2 is correct 
c. Both statements are correct
d. Both statements are incorrect 
 A
 Statement 2 is incorrect. OSD is in lieu of itemized deductions.
 Prior to 2018, personal exemptions are allowed to be deducted from the gross
income. OSD is not in lieu of personal exemptions. Therefore, both items may
be deducted at the same time.
 Personal exemptions are no longer allowed beginning 2018 taxable year. 

120.The following statements pertain to Optional Standard Deduction (OSD) for

corporations. Which is incorrect?
a. Passive incomes which have been subjected to a final tax at source shall not form  part
of the gross income for purposes of computing OSD.
b. Incomes exempt from income tax shall not form part of the gross income for purposes
of computing OSD.
c. If the taxpayer (individual or corporate) is engaged in trading of goods, OSD should be
based on Gross sales less sales returns, sales discounts and allowances, and cost of
sales.
d. None of the above 
 C
 “C” is incorrect. The basis of computing the OSD should be: 
 For individual taxpayers - gross sales or receipts 
 For corporations - gross income 

121.One of the following statements is correct. A choice by an individual of the

Optional Standard Deduction means that: 
a. His income tax return need not be accompanied by financial statements
b. He need not keep books of accounts
c. He need not have records of gross income
d. His choice can still be changed by filing an amended return 
 A

122.A resident citizen has the following data on income and expenses in 2018: 
Gross compensation income P200,000
 Gross sales  900,000
Cost of sales  500,000
Business expenses  200,000
 
He avails himself of the Optional Standard Deduction. How much is his taxable net
income? 
a. P690,000 c. P420,000
b. P740,000 d. P290,000 
 B
Gross compensation income  P200,000
Gross sales  P900,000
Less: OPEX (OSD); 
= P900,000 x 40%  (360,000) 540,000
Taxable net income  P740,000
 If the taxpayer is individual, the basis of OSD is gross sales or receipts. 

123.A domestic corporation has the following data on income and expenses in 2018: 
Gross sales  P9,350,000
Sales returns and allowances  250,000
Sales discounts  100,000
Interest income on trade notes receivable  150,000
Other income  50,000
Cost of sales  3,000,000
Operating expenses with vouchers and receipts 4,000,000
Operating expenses without vouchers and receipts 500,000
Interest income from savings deposit  80,000
Interest income from deposit under FCDS  125,000
Royalty income  100,000
How much is the taxable income using itemized deduction? 
a. P1,675,000 c. P1,700,000
b. P2,175,000 d. P2,200,000 

 D
Gross sales   P9,350,000
Sales returns and allowances   (250,000)
Sales discounts  (100,000)
Interest income on trade notes receivable  150,000
Other income  50,000
Cost of sales  (3,000,000)
Gross income  P6,200,000
Less: OPEX with vouchers and receipts (4,000,000)
Taxable Net Income  P2,200,000
  Interest income from bank deposits and royalty income are passive
incomes subject to FWT. They are excluded from the computation of
taxable net income subject to basic income tax. 

124.Based on the preceding number, how much is the taxable income using OSD? 
a. P3,755,000 c. P3,695,000
b. P5,470,000 d. P3,720,000 
 D

Gross sales P9,350,000 

Sales returns and allowances (250,000)
Sales discounts (100,000)
Interest income on trade notes receivable 150,000 
Other income 50,000
Cost of sales (3,000,000)
Gross income P6,200,000
Less: OPEX (P6,200,000 x 40%) (2,480,000)
Taxable Net Income  P3,720,000 

125.A resident corporation has the following data on income and expenses in 2018: 
Gross sales  P935,000
Sales returns and allowances  25,000
Sales discounts  10,000
Interest income on trade notes receivable  15,000
Capital gain on asset held for 2 years  50,000
Cost of sales  400,000
Operating expenses with vouchers and receipts 50,000
Operating expenses without vouchers and receipts 200,000
Capital loss on asset held for six (6) months  10,000
How much is the taxable income using itemized deduction? 
a. P293,000  c. P340,000
b. P300,000  d. P349,000 
 C
Gross sales P935,000 
Sales returns and allowances 25,000
Sales discounts 10,000 (35,000) 
Net Sales 900,000
Less: Cost of Sales (400,000) 
Add: Interest income on trade receivable 15,000
Gross Profit 515,000
Less: OPEX with vouchers and receipts (215,000) 
Net income from operations 300,000 
 Add: Net Capital Gain
Capital gain on asset held for 2 years 50,000
Capital loss on asset held for six (6) months (10,000)  40,000
Taxable Net Income  P340,000 

 Holding period on capital gains and losses is irrelevant if the taxpayer is a

corporation 

126.How much is the taxable income using OSD? 

a. P293,000  c. P340,000
b. P300,000  d. P349,000 
 D

Solution:
Gross sales P935,000 
Sales returns and allowances 25,000
Sales discounts 10,000 (35,000) 
Net Sales 900,000
Less: Cost of Sales (400,000) 
Add: Interest income on trade receivable 15,000
Gross Profit 515,000
Less: OPEX under OSD = P515,000 x 40% (206,000) 
Net income from operations 309,000 

Add: Net Capital Gain

Capital gain on asset held for 2 years 50,000
Capital loss on asset held for six (6) months (10,000)  40,000
Taxable Net Income  P340,000 

 Holding period on capital gains and losses is irrelevant if the taxpayer is a

corporation.
 Capital gains and losses are non-business related. Consequently, shall be
excluded in the determination of OSD.