TAX DEDUCTIONS

ITEMIZED DEDUCTIONS

1. Broly Corp. had a net revenues of P 1,000,000, cost of sales of P 300,000, and other operating income
of P 200,000. The actual entertainment, amusement and recreation expense amounted to P 20,000.
Compute the deductible “EAR” expense under the followings cases:
a. The taxpayer is engaged in selling goods. P 5,000
b. The taxpayer is engaged in rendering services. P 10,000

2. In 2018, Mr. Boo, a resident citizen engaged in business, borrowed money from ABC Bank from which
he had an interest expense of P 20,000. His long-term deposit in XYZ bank yielded an interest income
of P 10,000. His deduction for interest expense is: P 20,000

3. Given the following data, compute the deductible interest for the taxable year:
Interest paid on trade notes payable P 2,500
Interest paid on commercial loan-local bank 24,400
Interest paid to brother on a loan related to business 3,500
Interest income on bank deposit, net of tax 8,000 A. P 23,600

4. In a taxable year, a taxpayer had an interest expense on notes payable of P 40,000 and on delinquency
taxes of P 100,000. The taxpayer had an interest income on bank deposits of P 20,000, and dividend
from resident foreign corporation of P 30,000. How much is his deduction for interest expense?
B. P 133,400

5. The taxes paid by a VAT-registered corporation within the year were as follows:
Normal tax P 12,200
Transfer taxes 15,000
Capital gains tax 13,010
Special assessments 10,900
Final taxes on passive income 10,000
Fringe benefits tax 11,000
Value added tax 10,500
Local taxes 12,750
Penalties for late payment of tax 11,800
The total deduction for taxes is:

6. Lux Co. had investments in shares of Blitz Co. that it acquired at a cost of P 20,000. It also had
investments in shares of Copper Co. that it acquired at a cost of P 40,000. The value of the shares of
stocks of Blitz Co. had decreased to P 15,000, while the shares of Copper Co. are now worthless, and
had to be written off. Compute for the amount of deductible loss. B. P 40,000

7. XYZ Corporation reported the following during a taxable year

Gross income from business P 900,000

Fully deductible contributions 100,000
Contributions subject to limitations (actual amount spent) 40,000
Non-deductible contributions 20,000
Operating expenses 300,000
Compute the taxable income and the income tax due of the corporation.

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8. Mr. Kindness, a practicing CPA, had the following income and donations during the year:

Professional fees P 1,100,000

Donations to government priority activities 100,000
Donations to foreign institutions pursuant to a treaty 30,000
Donations to accredited charitable institutions 50,000
Donations to government for public purposes 80,000
Donations to non-accredited charitable institutions 60,000
Donations to a foreign charitable institution 40,000
Donations to street beggars 50,000
Other operating costs and expenses 600,000
Compute the total deductible contribution expense. 230,000

9. An individual taxpayer reported the following information:

Gross income from business P 620,000
Operating expenses with receipts 180,000
Loss of business assets due to theft 12,000
Net capital loss 24,000
Family and living expenses 125,000
The loss due to theft was reported to the BIR 35 days after the incident. Compute the taxable income
and income tax due of the taxpayer.

10. A taxpayer had a net operating loss in 2016 of P 300,000, and the following data was reported for 2017:
Gross income from operations P 2,000,000
Cost and expenses of operations 2,600,000
Capital gain 200,000
Capital loss 300,000

In 2018, the following information was reported:

Gross income from operations P 2,500,000
Cost and expenses of operations 1,700,000
Capital gain 250,000
Requirements:
a. Compute the taxable income and income tax due for 2017.
b. Compute the taxable income and income tax due for 2018.

11. Mr. Lee purchased bonds of MNM Corporation on April 1, 2017 for P 200,000 and held the security
as a capital asset. On March 1, 2018, the issuing corporation closed its operations after three years of
heavy losses. It was also ascertained that the corporation cannot repay anymore the bonds it issued.
What is the tax consequence of the foregoing events?

12. In 2018, Clementine Company set up a pension fund for its 12 employees who have worked for them
for the past 15 years. The initial deposit to the fund was P 100,000, and required annual payments of
P 20,000. The P 100,000 represents the past service cost, while P 20,000 represents the present service
cost. How much is the pension fund expense if the first resent service cost is paid in 2018?

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13. Frederick Corporation paid the following items to its employees for the year:
Annual basic salary P 360,000
th
13 month pay 60,000
Christmas bonuses and other bonuses 40,000
Other fringe benefits 50,000
Overtime pay 20,000
How much is the deduction for salaries and wages from gross income?

12. Louie Tailoring shop has five industrial sewing machines. These machines are run with electricity and
can produce faster that manual machines. During the year, the proprietor spent the following:
Ordinary repair cost of the machines P 1,000
Replacement parts of the machines that will help prolong its useful life 7,000
Annual maintenance check-ups 2,000
Compute the deductible amount of repairs and maintenance.

13. Lily, Inc. constructed a five-storey building at a cost of P 12,000,000. After 12 years, a fire gutted the
whole building. The company used the straight-line method of depreciation. The building was
estimated to have a useful life of 50 years with no salvage value. The insurance company agreed to pay
for 50% of the loss. Compute the tax-deductible loss.

14. A domestic corporation reported the following results of operations for 2018:
Taxable income in the Philippines P 1,800,000
Taxable income in Japan (before tax) 1,200,000
Quarterly taxes paid in the Philippines 200,000
Income tax paid in Japan 300,000
Requirements:
a. Compute the income tax still due (payable) under the deduction approach. 610,000
b. Compute the income tax still due (payable) under the tax credit approach. 400,000

15. A domestic corporation had the following data on its Philippine and foreign operations for the taxable
year 2018:
Taxable income, Philippines P 1,800,000
Taxable income, China 1,200,000
Taxable income, Vietnam 1,000,000
Quarterly taxed paid, Philippines 300,000
Income tax paid in China 400,000
Income tax paid in Vietnam 200,000
Compute the income tax still due (payable) under the tax credit approach.

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OPTIONAL STANDARD DEDUCTION (OSD)

1. A taxpayer, in merchandising business, had the following data in a year:

Gross sales P 1,000,000
Cost of sales 300,000
Operating expenses 150,000
The taxpayer availed of the OSD.
a. Compute the net taxable income assuming the taxpayer is an individual.
b. Compute the net taxable income assuming the taxpayer is a corporation.

2. The taxpayer is a service provider with financial data as follows:

Gross revenues from services P 400,000
Discounts and allowances 30,000
Direct cost of services 100,000
Other operating expenses 20,000
Capital gain on sale of asset 5,000
Dividends from a resident foreign corporation 15,000
The taxpayer availed of the OSD.
a. Compute the net taxable income assuming the taxpayer is an individual.
b. Compute the net taxable income assuming the taxpayer is a corporation.

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