Income taxation by valencia chapter 8 (deductions from gross income)

False – Business expenses related to business income outside the Philippines is deductible also.. False – Business expense is deductible from gross income.. False – Some business expense

CHAPTER 8

DEDUCTIONS FROM GROSS INCOME

Problem 8 – 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME

4 Deductible, in lieu of tax credit (Sec 34C3, NIRC) 14 Deductible

1 True

2 True

3 False – Business expenses related to business income outside the Philippines is deductible also

4 False – Business expense is deductible from gross income

5 True

6 True

7 True – Once OSD is opted, no capital loss could be deducted from capital gain

8 False – Some business expenses are nondeductible or subject to limit

9 False – Income outside the Philippines by a NRC is not taxable in the Philippines, hence, no allowable deduction is allowed

10 True

11 False – Compensation income is not subject to OSD

12 False – NOLCO is not an itemized deduction

13 True – Amortized over the term of the lease

14 False – ½ of 1%

15 False – 33%

16 False – Double –declining method

17 True

18 True

2 No choice,

13 C

Expensed Capitalized

Change of motor of air condition P60,000

General rule: No personal or business expense is deductible from compensation income

1 A

No personal or business expense is deductible

2 B

Tax laws GAAP

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 – 14

1 B

2 B

Amount of income enjoying tax savings P188,000

Operating expense before representation expense

- Limit (P20,000,000 x 0.005) 100,000

Allowable deduction – fringe benefit expense (P102,000/68%) P150,000

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 +

Less: Deductible contribution (P80,000 x 5%) – lower of

B = 15% (76,000 – T)

T = 30% (76,000 – B)

B = 15% [76,000 – 30% (76,000 – B)]

B = 15% (76,000 – 24,320 + 30%B)

B = 11,400 – 3,420 +0.045B

B – 0.045B = 7,980

0.952B = 7,980/0.955

Continuous compensation after the burial for three months 15,000

Note: Donation for coffin and other wake expenses is not business or compensation related and, hence, not deductible (Sec 72, Rev Regs 2)

Inventoriable

cost Supplies expense

Monthly rent (P20,000 x 60%) x 2 mos from Oct 31 to Dec 31 P24,000

Note: The city services is not a rent expense

Rent for 6 months based on usage (P20,000 x 6) x 80% P96,000

2 A

Problem 8 – 28

1 B

2 C

Sole proprietor Corporation

(P30,000 x 33%) (9,900)

Deductible Nondeductible

Interest paid to finance petroleum exploration 100,000

Final tax on interest income (P1,000,000 x 12%) x

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

Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit

rather than as operating expense

Deductible bad debts is the entire amount of

Bad debts from business actual written off (P100,000 x

Multiplied by ratio of months used in 2007 (July 1 to Dec.) 6/12

Oil extracting machine (P900,000 x 90% / 10 years – limit 81,000

Multiplied by number of tons extracted during the year 800,000

Problem 8 – 42

1

D

Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 2,400,000

Divided by remaining reserves

2

A

Depletion cost 2007 (P2 x 1,200,000 units) P2,400,000 3

Less: Production and selling costs:

0 7,500,000

Deductible amount fro exploration and development cost P 1,725,000 4

Current exploration and development cost (P1,500,000 +

Less: Deductible amount of exploration and development cost (see

Exploration and development cost chargeable to succeeding years P 775,000

Depreciation expense (P10,000,000 x 90%)/50 P180,000

Problem 8 – 44

Lower of actual contribution or normal

Add: Amortization of excess

200B (P100,000/10) 10,000 10,000

Year X Year Y

Note: Only the excess of the actual contribution over the normal valuation is to be

amortized over 10 years

Problem 8 – 48 B

Income before charitable contribution (P500,000 – P130,000) P370,000

Adopt a school program – incentive (P1,000,000 x 50%) 500,000

Problem 8 – 50

Less: Cost of goods manufactured and sold:

Raw materials used:

Net purchases of raw materials 2,000,000

Factory overhead:

Indirect labor – factory supervisor P 120,000

Light and water (P150,000 x 80%) 120,000

Miscellaneous factory expenses 20,000 350,000

Less: Optional standard deduction (P3,000,000 x 40%) 1,200,000

Problem 8 – 51

Problem 8 – 52

Add: Contribution subject to limit (P500,000 – P176,850) x 10%) 32,315

Problem 8 – 53

Sole Proprietorship Corporation Partnership

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

P 5,000 40,000 50,000

170,000

P 265,000

P 5,000 40,000 50,000

125,000

P 220,000

P 5,000 40,000 50,000

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 – 54

Interest expense (P50,000 – (P40,000/80%) x 33%] 33,500

Note: NOLCO is not an itemized deduction but part of deductible

expenses

Note: NOLCO is not allowed to be deducted if the taxpayer uses OSD.

Problem 8 – 55

Actual contribution or normal valuation, lower 1,000,000 900,000 Add: Amortization - 200A (P250,000/10) 25,000 25,000

Add: Retirement benefit expense – accounting 1,100,000 1,200,000

Less: Deductible retirement expense – taxation 1,025,000 925,000

Problem 8 – 56

Corporation Individual

Interest expense – limit:

Group insurance expense 50,000 50,000

Contribution expenses:

Local government – limit (lower is actual) 100,000 100,000

Note: NOLCO is an allowable special deduction but not an itemized deduction.

Problem 8 – 57

Life insurance expense (P150,000 – P100,000) 50,000 50,000 Total itemized deduction before contributions 1,755,000 1,755,000 Contribution expenses:

Donation to TESDA priority project (P500,000 x 150%) 750,000 750,000 Donations to CHED not priority project

(P200,000 actual is lower + 50% of actual) 300,000 300,000 Donations to government (P100,000 actual is lower) 100,000 100,000 Ind: (P39,000,000 – P30,000,000 – P1,752,500) x 10%=724,500

Corp: (P39,000,000 – P30,000,000 – P1,752,500) x 5%=362,250

Computation of sales:

Operating expenses deducted

(P680,000 + P370,000 + P1,000,000 + P800,000 + P500,000

Gross income (P39,000,000 – P30,000,000) P9,000,000 P9,000,000 Less: Total allowable deductions 2,905,000 2,905,000