Deductions From Gross Income: Income Taxation 6Th Edition (By: Valencia & Roxas) Suggested Answers

INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS
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Chapter 8: Deductions from Gross Income
CHAPTER 8
DEDUCTIONS FROM GROSS INCOME

Problem 8 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME 1. Nondeductible 2. Deductible 3. Deductible 4. Deductible 5. Nondeductible 6. Nondeductible 7. Nondeductible 8. Deductible 9. Deductible 10. Deductible 11. Nondeductible 12. Nondeductible 13. Deductible, in lieu of tax credit (Sec. 34C3, NIRC) 14. Deductible 15. Deductible 16. Nondeductible 17. Nondeductible 18. Deductible 19. Deductible 20. Nondeductible Problem 8 2 TRUE OR FALSE 1. False Some business expenses are nondeductible; some are subject to limit. 2. True 3. False Compensation income is not subject to OSD. 4. False NOLCO is not an itemized deduction. 5. True Amortized over the term of the lease 6. False of 1% 7. False 33% 8. False Double declining method 9. True 10. True 11. False Income outside the Philippines by a NRC is not taxable in the Philippines, hence, no allowable deduction is allowed. 12. True 13. True 14. True 15. False Business expenses related to business income outside the Philippines is deductible also by domestic corporations and resident Filipino. 16. False Business expense is deductible from gross income. 17. True 18. False 40% based on sales or gross receipts.
Problem 8 3 1. C
Problem 8 4 1. D
Problem 8 5 1. A
Problem 8 6 1. C
2. C 3. A 4. D 5. A 6. B 7. A 8. C 9. C 10. D Problem 8 7 2. B 3. B 4. C 5. A 6. D 7. C 8. C 9. A 10. A C Expensed Change of motor of air condition Expansion of store Damages paid due to workers injury Repainting of building Cleaning of computers Repair of furniture Totals Problem 8 8 C Identifiable operating expenses Philippines Add: Allocated operating expenses within (P200,000 x P1M/P5M) Operating expenses Philippines Problem 8 9 D Police protection Interest expense paid to his father Gifts made to employees during birthday Capital loss Amount of nondeductible expenses and losses Problem 8 10 D Depreciation expense (P1,000,000 x 40%)/25 Loss of business equipment Deductible expense Problem 8 11 D 1. Letter A No personal or business expense is deductible. 2. Letter B Depreciation (P20,000 x 10%) Repair (P100,000 x 10%) Office supplies Total deduction B Tax laws P200,000 30,000 . P20,000 10,000 9,000 1,000 P40,000 Capitalized P60,000 50,000 2. C 3. C 4. A 5. D 6. C 7. A 8. B 9. A 10. C 2. C 3. B 4. C 5. C 6. D 7. D 8. A 9. C 10. C
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. P110,000 P400,000 40,000 P440,000 P20,000 10,000 5,000 4,000 P39,000 P16,000 38,000 P54,000
P 2,000 10,000 6,000 P18,000 GAAP P200,000 10,000 50,000 30,000 5,000
Problem 8 12
Salary expense (P180,000 + P20,000) Estimated uncollectible accounts Compromise penalty Depreciation expense Miscellaneous expense
Deductible from earnings P230,000
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P295,000
Note: For tax purposes, the miscellaneous expense is not deductible because it was not reported last year. For accounting purposes, the miscellaneous expense can be deducted as prior period adjustment from retained earnings. Problem 8 13 A
Sales Multiplied by OSD rate Optional standard deduction
P300,00 0 40% P120,00 0
The compensation income is not included in determining OSD. The OSD (40% of gross sales or gross receipts) is only allowed as deduction from income derived from business. If an individual opted to use OSD, he is no longer allowed to deduct cost of sales. [Sec. 34(L), NIRC; Sec. 3, Rev. Regs. No. 16-2008]
Problem 8 14 B Gross receipts from profession Rent income (P475,000/95%) Total gross income Multiplied by percent of OSD Optional standard deduction Problem 8 15 D
P100,000 500,000 P600,000 40% P240,000
Since there are no official receipts and documents to support the operating expenses, the reported operating expenses are not deductible (Sec. 34(A)(b), NIRC). The OSD is not allowed for nonresident aliens (Sec. 34(L), NIRC). No personal exemption will be granted to a nonresident alien with business in the Philippines if his country does not have an exemption reciprocity law favoring a Filipino citizen. (Sec. 9, Rev. Regs. No. 2)
Problem 8 16 A
Sole Proprietor Sales Less: Cost of sales Basis of OSD Multiplied by OSD rate Optional standard deduction P1,000,00 0 . P1,000,00 0 40% P 400,000
Corporatio n P1,000,000 300,000 P 700,000 40% P 280,000
RA 9504 is specific as to the basis of OSD. For individuals, the basis of the 40% OSD shall be the gross sales or gross receipts. In the case of corporate taxpayers subject to tax under Sections 27(A) and 28(A)(1) of the Tax Code, as amended, the basis of the 40% OSD shall be the gross income.
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Problem 8 17 B Operating expense before representation expense (P2,000,000 P300,000) Representation expense Actual - Limit (P20,000,000 x 0.005) - Lower Allowable itemized deductions Problem 8 18 B Salary expense Rent expense Advertising expense Depreciation expense Interest expense Tax differential on interest income (P30,000 x 33%) Total itemized deductions
P1,700,000 P300,000 100,000 100,000 P1,800,000 P120,000 24,000 6,000 5,000 60,000 ( 9,900) P205,100
NOLCO is not an itemized deduction.

Problem 8 19 D
Using OSD Sales Cost of sales Gross income Less: OSD or Itemized deductions (P1,200,000 x 40%) Net income before personal exemption P1,200,00 0 - 0 P1,200,00 0 480,00 0 P 720,000
Using Itemized P1,200,000 700,000 P 500,000 - 0 P 500,000 P 480,000 700,000 (P220,000)
Allowed deduction using OSD (P1,200,000 x 40%) Less: Cost of sales Net disadvantage using OSD
No itemized deduction is allowed if no official receipts, records or other pertinent papers can be used to support it (CIR vs. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007). In case of individual taxpayer, the cost of sales or the cost of services are not allowed to be deducted for purposes of determining the basis of OSD inasmuch as the law (RA 9504) is specific as to the basis thereof which states that for individuals, the basis of the 40% shall be the gross sales or gross receipts and not the gross income. (Sec. 3, Rev. Regs. No. 16-2008)
Problem 8 20 Gross salaries of employees A P6,000,000
Grossed-up monetary value of fringe benefits Deductible salaries and fringe benefits expenses
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1,000,000 P7,000,000
Problem 8 21 C Assume bonus is computed after tax but before bonus. The answer is letter D = P8,143, computed as follows: Net income before charitable contribution (P75,000 + P5,000) Less: Deductible contribution (P80,000 x 5%) lower of actual Net income before income tax and bonus B T B B B B 0.045B 0.955B B = = = = = = = = 15% (76,000 T) 30% (76,000 B) 15% [76,000 30% (76,000 B)] 15% (76,000 24,320 + 30%B) 11,400 3,420 +0.045B 7,980 7,980/0.955 8,356 P 80,000 4,000 P 76,000
Proof: Income before bonus and tax Less: Income tax (P76,000 P8,382) x 30% Income after tax but before bonus Multiplied by rate of bonus Bonus Problem 8 22 B Monthly salary Death benefits Terminal pay Continuous compensation after the burial for three months Total deductible expenses
P76,000 20,285 P55,715 15% P 8,356 P 5,000 50,000 25,000 15,000 P95,000
Note: Donation for coffin and other wake expenses is not business or compensation related and, hence, not deductible. (Sec. 72, Rev. Regs. 2) Problem 8 23 Purchases Decreased in inventory Increased in inventory Problem 8 24 D Traveling expenses (P50,000 + P200,000) C Inventoriable cost P300,000 20,000 . P320,000 Supplies expense P40,000 ( 3,000) P37,000 P250,000
Fringe benefit expense (P68,000/68%) Transportation expense messenger Total allowable expense Problem 8 25 B Monthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31 Insurance premium (P3,000 x 60%) x 2/12 Real property tax (P1,500 x 60%) x 2/12 Deductible rent expense Note: The city services is not a rent expense. Problem 8 26 1. Letter B Rent for 6 months based on usage (P20,000 x 6) x 80% 2. Letter D Actual cash collection for rent Problem 8 27 D Monthly rental expense Monthly depreciation (P600,000/8)/ 12 Monthly deductible expense Problem 8 28 C Rent expense (P5,000 x 12) Add: Depreciation expense [(P950,000/9.5) x 11/12] Deductible expense in 200y P 60,000 91,667 P151,667
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100,000 40,000 P390,000 P24,000 300 150 P24,450
P96,000 P150,000 P2,000 6,250 P8,250
At the start of the used of the building, the remaining period for the contract of lease is 9.5 years. The salvage value is ignored in the computation of the depreciation because T Foods could no longer benefit on it since the improvement on the land will be owned by the lessor at the end of the 10-year contract of lease.
Problem 8 29 1. Letter B Trading - Limit lower (P5,000,000 x .005) 2. Letter C Servicing actual lower Problem 8 30 B
P25,000 P30,000
Actual representation expense Multiplied by percent of representation expense for sales [P700,000/(P700,000 + P300,000)] Apportioned representation expense for sales Limit (P700,000 x 0.005), lower Actual representation expense Multiplied by percent of representation expense for revenue [P300,000/(P700,000 + P300,000)] Apportioned representation expense for sales Limit (P300,000 x 0.01) Deductible representation expense
P10,000 70% P 7,000 P3,500 P10,000 30% P 3,000 3,000 P6,500
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Problem 8 31 A Interest expense Tax differential (P50,000 x 33%) Deductible interest expense
P40,000 (16,500) P23,500
Problem 8 32
Breast-feeding assistance to the needy additional Salary of senior citizens additional (P100,000 x 15%) Seniors citizen discount (P300,000 x 20%) Total special itemized deduction
Problem 8 33 Interest Interest Interest Interest Interest Total B Deductible paid in advanced paid to a brother paid on delinquency taxes on borrowings to finance his family home paid to finance petroleum exploration B P 8,000 . P 8,000
P200,000 15,000 60,000 P275,000

Nondeductible P 20,000 12,000 30,000 100,000 P162,000
Problem 8 34
Interest expense on unpaid salaries Add: Nondeductible tax differential (P40,000/80%) x 33% Nondeductible interest expense Salary expense Rent expense Deductible interest expense bank loan (P40,000 P16,500) Total itemized deductions
P 60,000 16,500 P 76,500 P600,000 200,000 23,500 P823,500
The salaries of direct workers should be classified as deductible cost of service and not to be classified as part of itemized deductions (Rev. Regs. No.16-2008). Interest expense on unpaid salaries is not deductible. (Kuenzel & Streiff, Inc. vs. Collector of Internal Revenue, 106 Phil. 355)
Problem 8 35 D Tax savings from interest expense (P100,000 x 30%) Final tax on interest income (P1,000,000 x 12%) x 20% Actual net tax savings Problem 8 36 A Documentary stamp taxes Local tax (P6,000 P800 P200) Municipal tax Community tax Deductible taxes P30,000 (24,000) P 6,000 P 1,000 5,000 2,000 1,500 P9,500
Note: The fringe benefit income taxes to key officers and rank-in-file employees are to be classified as deductible fringe benefit expense and not tax expense.
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Problem 8 37
Business taxes Documentary stamp taxes Automobile registration fees Postage stamp taxes Import duty taxes Total deductible taxes
Problem 8 38 D Unadjusted net income (P520,000 P200,000) Add back: Income tax foreign country Adjusted net income Personal exemption Net taxable income
P 20,000 1,000 3,000 500 50,000 P 74,500

P320,000 10,000 P330,000 (50,000) P280,000
Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit rather than as operating expense. Problem 8 39 A Asset of Oliva Payment to government (P200,000 x 50%) Balance Deductible bad debts is the entire amount of collectibles Problem 8 40 B Bad debts from business actual written off (P100,000 x 40%) Bad debts from profession actual written off Deductible bad debts expense Problem 8 41 D Annual depreciation expense (P50,000 P5,000)/5 Multiplied by ratio of months used during the year (from June 30 to Dec. 31) Depreciation expense 200B Problem 8 42 A Annual depreciation (P2,300,000/11.5 years) Multiplied by ratio of months used in 200B (July 1 to Dec.) Depreciation expense Problem 8 43 D Oil drilling machine (P800,000 x 90%)/8 years Oil extracting machine (P900,000 x 90%)/10 years limit Computers (P100,000 x 90%)/4 years Delivery truck (P200,000 x 90%)/5 years limit Annual depreciation expense P 90,000 81,000 22,500 36,000 P229,500 P 60,000 (100,000) (P40,000) P100,000
P40,000 50,000 P90,000 P9,000 6/12 P4,500 P200,000 6/12 P100,000
The useful life of properties used in or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the BIR Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an
estimated useful life of five (5) years. (Sec. 34(F)(4), NIRC)
Problem 8 44 C Depletion base (P6,000,000 P1,000,000 + P300,000) Divided by number of extractible estimated tons Depletion per ton Multiplied by number of tons extracted during the year Depletion expense Problem 8 45 1 Letter D . Depletable costs, January 1, 200x Exploration costs Intangible development costs Total Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 Adjusted basis Divided by remaining reserves (5,000,000 + 2,500,000 1,200,000) New depletion rate/ unit 2 . 3 . Letter A Depletion cost 2007 (P2 x 1,200,000 units) Letter B Value of production (P12 x 1,200,000 units) Less: Production and selling costs: Mining costs Milling costs Marketing expenses Depreciation expense Net income from operation Multiplied by limit percentage Deductible amount fro exploration and development cost 4 . Letter B Current exploration and development cost (P1,500,000 + P1,000,000) Less: Deductible amount of exploration and development cost (see 3) Exploration and development cost chargeable to succeeding years Problem 8 46 B Deductible expense: Depreciation expense (P10,000,000 x 90%)/50 Capital outlay Problem 8 47 1 Letter B Lower of actual contribution or normal Capitalized P180,000
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P5,300,000 5,000,000 P 1.06 800,000 P 848,000
P12,500,000 1,000,000 1,500,000 P15,000,000 2,400,000 P 1,260,000 6,300,000 P 2.00
P2,400,000
P14,400,000 P2,000,00 0 3,000,000 1,500,000 1,000,00 0
7,500,000 P 6,900,000 25% P 1,725,000
P2,500,000 1,725,000 P 775,000 Outright expense P10,000,000
200A 800,000
200B 800,000
200C 500,000
valuation Add: Amortization of excess 200A (P200,000/10) 200B (P100,000/10) Deductible retirement expense 2. Letter A Actual retirement payments A Year X 700,000 10,000 710,000
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20,000 . 820,000 200A 0
20,000 10,000 830,000 200B 400,000
20,000 10,000 530,000 200C 300,000 Year Y 600,000 10,000 610,000
Problem 8 48
Actual contribution or normal valuation, lower Add: Amortization (P100,000/10) Deductible retirement expense
Note: Only the excess of the actual contribution over the normal valuation is to be amortized over 10 years. Problem 8 48 B Allowed deductible contribution (P200,000 x 5%) Problem 8 49 B Allowed deductible contribution (P200,000 x 5%) Problem 8 50 D Allowed deductible contribution [(P60,000 + P5,000) x 10%] Problem 8 51 B Income before charitable contribution (P500,000 P130,000) Multiplied by percent of limit Allowed deductible contribution - lower Problem 8 52 PPHHI per month A P200 P10,000 P10,000 P6,500
P370,000 5% P 18,500
Problem 8 53 D Not allowed to deduct PPHHI because family income exceeded P250,000 per year. Problem 8 54 C Actual value of donation priority program Adopt a school program incentive (P1,000,000 x 50%) Deductible donation Problem 8 55 1. Operating expenses (1,000,000 x 30%) P50,000 Interest expense (P50,000 (P40,000/80%) x 33%] Total itemized deductions Add: NOLCO Total deductible expenses Note: NOLCO is not an itemized deduction but part of deductible expenses. 2. Gross income (P5,000,000 P2,000,000) Multiplied by OSD rate P3,000,000 40% P1,000,000 500,000 P1,500,000
P250,000 33,500 P283,500 500,000 P783,500
OSD Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD. 3. Gross income Less: OSD Net taxable income
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P1,200,000
P3,000,000 1,200,000 P1,800,000
Problem 8 56 Salaries of assistants Traveling expenses Light and water office Stationeries and supplies Office rent Total operating expenses before contribution Add: Contribution subject to limit (P500,000 P176,850) x 10%) Allowable itemized deductions Problem 8 57 Bad debts written-off (P35,000 P30,000) Depreciation expense (P140,000 P100,000) Donation to the government priority program Donations subject to limit: Lower of actual, P170,000 or (P2,500,000 x 10%) (P2,500,000 x 5%) Total allowable deductions Sole Proprietorship P 5,000 40,000 50,000 170,000 . P 265,000 Corporation P 5,000 40,000 50,000
P 96,000 11,000 7,890 1,960 60,000 P176,850 32,315 P209,165
Partnership P 5,000 40,000 50,000
125,000 P 220,000
125,000 P 220,000
The research and development cost is to be treated as a deferred expense, hence, its amortization shall be made in the succeeding five years when the taxpayer realizes benefits from such expenditures (Sec. 341, NIRC). Problem 8 58 1. Actual contribution or normal valuation, lower Add: Amortization - 200A (P250,000/10) Deductible retirement expense 2. Financial net income Add: Retirement benefit expense accounting Total Less: Deductible retirement expense taxation Net income for tax purposes 200A 1,000,000 25,000 1,025,000 50,000,000 1,100,000 51,100,000 1,025,000 50,075,000 200B 900,000 25,000 925,000 60,000,000 1,200,000 61,200,000 925,000 60,275,000
Problem 8 59 Salary expenses Retirement (P250,000 + P50,000/10) Representation expense (P10,000,000 x .005) Interest expense paid to the BIR - full Interest expense limit: (P100,000 (P96,000/80%) x 33%) Depreciation expense Rent expense Group insurance expense Bad debts expense (P100,000 x 20%) Contribution expenses: TESDA priority project (500,000 x 1.5) Local government limit (lower is actual) Total itemized deductions Corporation 500,000 255,000 50,000 20,000 60,400 40,000 250,000 50,000 20,000 750,000 100,000 2,095,400
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Individual 500,000 255,000 50,000 20,000 60,400 40,000 250,000 50,000 20,000 750,000 100,000 2,095,400
Note: NOLCO is an allowable special deduction but not an itemized deduction. Problem 8 60 1. Salaries expense (P680,000 P100,000) Bad debts expense (P370,000 P270,000) Retirement expense (P1,000,000 P380,000) Representation expense (P39,000,000 x 0.005) Rent expenses (P200,000 P20,000) Taxes expense (P300,000 P270,000) Life insurance expense (P150,000 P100,000) Interest expense [(P200,000 (50,000 x 33%) + P20,000] Total itemized deduction before contributions Contribution expenses: Donation to TESDA priority project (P500,000 x 150%) Donations for Rooming-in and Breast-feeding (200k x 2) Donations NGOs (35% for admin.) Ind: (P39,460,000 P30,000,000 P1,958,500) x
10%=750,150 Corp: (P39,460,000 P30,000,000 P1,958,500) x 5%=375,075
Individual 580,000 100,000 620,000 195,000 180,000 30,000 50,000 203,500 1,958,500 750,000 400,000 100,000 . 3,208,500
Corporation 580,000 100,000 620,000 195,000 180,000 30,000 50,000 203,500 1,958,500 750,000 400,000 100,000 . 3,208,500 P 5,000,000 30,000,000 4,460,000 P39,460,000 Corporation P9,460,000 3,208,500 P6,251,500
Total allowable deductions Computation of sales: Financial income Cost of sales Operating expenses deducted (P680,000 + P370,000 + P1,000,000 + P800,000 + P200,000 + P300,000 + P150,000 + P160,000 + P800,000) Total sales 2. Gross income (P39,460,000 P30,000,000) Less: Total allowable deductions Net taxable income
Individual P9,460,000 3,208,500 P6,251,500

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INCOME TAXATION 6TH Edition (BY: VALENCIA & ROXAS) SUGGESTED ANSWERS

Chapter 8: Deductions from Gross Income