Deductions

INCOME TAXATION
Name:__________________________ Date:
Section:_________________________ DEDUCTIONS & EXEMPTIONS
1. Which of the following statements is true?

a. Payments which constitute bribes, kickbacks, and others of similar nature which are necessary to realize the
profit are allowed as deduction from gross income
b. The taxes which are deductible from the gross income include taxes, interest and penalties incident to tax
delinquency
c. Deductions are amounts allowed by the Tax Code to be deducted from gross income to arrive at the income
tax liability of a taxpayer.
d. Losses from wagering transactions shall be allowed only up to the extent of the gains from such
transactions.
2. The following may elect optional standard deduction or itemized deductions, except
a. Taxable estates and trusts c. General professional partnership
b. Domestic corporation d. Foreign corporation
3. The following may be allowed to claim optional standard deduction, except

a. Resident Citizen c. Resident Alien
b. Non-resident Citizen d. Non-resident alien
4. May be deducted from gross income

a. Philippine Income tax c. Estate or donor’s tax
b. Foreign income tax d. Special Assessment
5. This is not deductible from gross income

a. Transportation expenses from the main office to the branch
b. Transportation expenses from home to the office and from the office back to home
c. Travel expenses on business trips
d. Travel expenses while away from home in the pursuit of trade, business or profession
6. A revenue expenditure is
A. Usually incurred in the acquisition, betterment or permanent improvement of the asset
B. Capitalized and the cost is recovered through annual depreciation
C. Ordinarily to benefit more than one accounting period
D. To benefit one accounting period and is a deduction from gross income in the year paid or incurred
7. No deductions shall be allowed where the transaction is between “related taxpayers” for
A. Losses from sales or exchanges of property
B. Interest expense
C. Bad Debts
A. A and B b. B and C c. A and C d. A, B and C
8. The phrase “related taxpayers” will apply to the following, except:

A. Between members of a family
B. Between the grantor and fiduciary of any trust
C. Between a fiduciary of a trust and a beneficiary of such trust
D. Between an individual and a corporation more than 50% in value of the outstanding stock of which is
owned, directly or indirectly by or for such individual, in case of distributions in liquidation
9. The deduction for premium payments on health and/or hospitalization insurance is not available to:
A. An individual with gross compensation income only
B. An individual with gross income from business or practice profession, whether he is availing of the
optional standard deduction or the itemized deduction
C. An individual with mixed income
D. Both husband and wife
10. The optional standard deduction allowed to individuals and corporations is computing their taxable income took
effect on
A. January 1, 1998 b. July 1, 2008 c. January 1, 2008 d. July 6, 2008
11. The optional standard deduction for corporations is

/etd
A. 10% of the gross income c. 40% of the gross income
B. 10% of the gross sales/receipts d. 40% of the gross sales/receipts
12. The optional standard deduction for individuals is

A. 10% of the gross income c. 40% of the gross income
B. 10% of the gross sales/receipts d. 40% of the gross sales/receipts
13. For individuals, premiums paid during the taxable year for health and/or hospitalization insurance taken out by
him on himself, including his family shall be allowed as deductions from gross income, provided that the family
has a gross income of
A. More than P250,000 c. Not more than P250, 000
B. More than P500, 000 d. Not more than P2, 400
14. First statement- In case of married taxpayer, only the spouse claiming the additional exemptions for dependents
shall be entitled to the deduction on premium payments on health and/ or hospitalization insurance
Second statement- the deduction for premium payments on health and/or hospitalization insurance shall not
exceed P2, 400 for the family or P200 a month
A. True, True b. True, False c. False, True d. False, False
15. Interest expense incurred to acquire property used in trade or business or exercise of a profession is
A. Not allowed as a deduction against gross income
B. Required to be treated as a capital expenditure to form part of the cost of the asset
C. Allowed as a deduction or treated as a capital expenditure at the option of the taxpayer
D. Allowed as a deduction or treated as a capital expenditure at the option of the government
16. WALANG FOREVER Corp. Had a net sales of P1M. The actual entertainment, amusement and recreation expense
amounted to P20, 000. The deductible “EAR” expense is
A. P20, 000 b. P6, 000 c. P10, 000 d. P5, 000
17. PAASA Corp had a net revenue of P1M. The actual entertainment, amusement and recreation expense
amounted to P20, 000. The deductible “EAR” expense is
A. P20, 000 b. P6, 000 c. P5, 000 d. P 10, 000
18. UMASA Corp. Is engaged in the sale of goods and services with net sales and net revenue of P2M and P1M
respectively. The actual entertainment, amusement and recreation expense amounted to P18, 000. The
deductible “EAR” expense is
A. P18, 000 b. P16, 000 c. P12, 000 d. P6, 000
19. In 2018, MANHID, a resident citizen, engaged in business borrowed money from UMAASA Bank from which he
had an interest expense of P20, 000. His deposit in ABC bank yielded an interest income of P25, 000. His
deduction for interest expense is
20 to 21
A taxpayer had the following:
Year 1 Year2 Year3 Year4 Year5
Gross Income P900,000 P900,000 P880,000 P840,000 P980,000
Allowable deductions P980,000 P880,000 P900,000 P830,000 P900,000
20. The net income to be reported in year 2 is?

A. P20,000 b. P900,000 c. P880,000 d. 0
21. The income to be reported in year 5 is

A. P60,000 b. 70,000 c. P80,000 d.0
22. Examples of taxes that are deductible except

A. Occupational tax c. Documentary stamp tax
B. Privilege tax d. Philippine income tax
23. Non-deductible taxes, except

A. Special Assessment b. Donor’s tax c. Estate tax d. Business Tax
24. UMAASA-PA-RIN, not happy with her present job, resigned and started her own business. The business requires
her to travel so she used her car for the purpose. Assume that UMAASA-PA-RIN started her business on April 1
/etd
and that she uses the car for business 70%of the time, assuming total expenses for the year for the use of the
car is P300, 000, the deductible expense is
A. 210, 000 b. P300, 000 c. P225, 000 d. P157,000
25. INIWAN acquired a machine at a cost of P500,000. Scrap value is P40,000 and the estimated useful life was 25
years. After depreciating the asset fir 20 years using the straight-line method, it was determined that the
remaining life is not five years. The annual depreciation from the 21st year assuming a remaining life of 10 years
without scrap is
A. P17, 600 b. P20, 000 c. P35, 200 d. P13, 200
26. I. An expense which is necessary but not ordinary, or ordinary but not necessary is deductible from gross income
II. The taxpayer must signify his intention to elect the itemized deduction, otherwise, he is deemed to have
chosen the optional standard deduction
27. I. Interest paid on preferred stock is deductible from gross income of the paying corporation
II. A capital expenditure usually benefits more than one accounting period and is deductible from gross income
in the year it is paid or incurred.
28. For individuals with gross compensation income, the following maybe deducted, except:
A. Personal exemptions
B. Additional exemptions
C. Optional Standard Deduction
D. Premium payments on health and/or hospitalization insurance
29. For individuals with gross income from business or practice of profession, the following may be deducted
A. Optional standard deduction
B. Itemized deduction
C. Personal exemptions
D. Additional exemptions
E. Premium payments on health and/ a hospitalization insurance
a. A,B,C and D b. B,Cand D c. C, D and E and either A or B d. All of the above
30. Any amount subsequently received on account of a bad debt previously charged off and allowed as a deduction
from gross income in prior years must be included in gross income in the taxable year in which received. This is
a. Severance test c. Destination of income test
b. Life-blood theory d. Equitable doctrine of tax benefit
31. INIWAN, a dedicated and honest employee of PAASA Corp. For the past 20 years was advised that he is to be
retrenched as the company was losing heavily but that he would be given the separation pay provided by law.
To avoid implication of inefficiency INIWAN was advised to file a letter of resignation instead of being
retrenched. If INIWAN files a letter of resignation and receives the separation pay, such amount is
a. Taxable in full c. Exempt from income tax
b. Partly taxable, partly exempt d. Subject to final tax
32. Using the preceding no. If INIWAN is retrenched and receives the separation pay, such amount is
a. Taxable in full c. Exempt from income tax
B. Partly taxable, partly exempt d. Subject to final tax
33. May consider capital expenditures as revenue expenditures

a. Resident citizen c. Private educational institutions
b. Domestic corporation d. Resident alien
34. May claim tax credit for income taxes paid to foreign country
a. Resident citizen c. Non-resident citizen
b. Resident alien d. Non-resident alien
35. A building was partially destroyed by fire in 2018. The building had a book value of P5M the insurance company
was willing to pay 4M, which was refused by the owner. Finally, the claim was settled in 2020 for P4.6M. the
proceeds will be
a. Exempt from income tax c. Subject to final tax
/etd
b. Part of taxable income d. Partly exempt, partly taxable
36. One of the following is not correct for deductibility of losses from gross income
a. Must arise from fire, storm or other casualty, robbery, theft or embezzlement
b. Must not be compensated by insurance or other form of indemnity
c. A declaration of loss by casualty should be filed with the Bureau of Internal Revenue
d. Must have been claimed as deduction in the estate return of the taxpayer
37. The net operating loss, which had not been previously offset as deduction from gross income shall be carried
over as deduction from gross income for the next
a. 2 consecutive taxable years immediately following such loss
b. 3 consecutive taxable years immediately following such loss
c. 4 consecutive taxable years immediately following such loss
d. Taxable year immediately following such loss
38-39
A taxpayer engaged in business incurred a partial loss of property as follows:
Asset 1 Asset 2
Book value of the asset at the time of loss P200, 000 P200,000
Cost to restore the property back to its normal operating condition 120,000 300,000
Insurance Recovery 50, 000 None
Salvage none 40, 000
38. The deductible loss for asset 1 is

a. P120, 000 b. P170, 000 c. P30,000 d. P80,000
39. The deductible loss for asset 2 is

a. P300, 000 b. P40, 000 c. P160,000 d. P240,000
40-42
NANG-IWAN corp put up a qualified retirement plan approved by the BIR. It appointed INIWAN Corp to
administer the plan which is called for the payment of P200, 000 to cover the retirement of employees for the
past services rendered and a yearly contribution of P50, 000. The following amounts were paid for the first three
years of the plan’s operation.
Contribution for services

Past years Current Years
First year........... P100,000 P 50,000
Second year.......... 60,000 50,000
Third year 40, 000 50, 000
40. The pension expense for the first year is
a. P150, 000 b. P15, 000 c. P60, 000 d. P105, 000
41. The pension expense for the second year is

P110, 000 b. P11, 000 c. P56, 000 d. P66, 000
42. The pension expense for the third year is

P150, 000 b. P15, 000 c. P60, 000 d. P105, 000
43. The records of a domestic corporation organized in 2000 show:
2015 2016 2017 2018
Gross Income P2,000,000 P2,200,000 P2,500,000 P2,800,000
Deductions (Where 5% represents
Bad debts written off) 1,900,000 2,000,000 2,520,000 2,400,000
Net income (loss) P 100,000 P 200,000 (P20,000) P400,000
Subsequent recovery of bad debts written off:

In 2015 P60,000
In 2017 P10,000
A. The income tax payable for 2015 is
a. P30,000 b. P40,000 c. P58, 500 d. P40,500
B. The income tax payable for 2016 is

a. P78,000 b. P68,000 c. P60, 000 d. P50,000
/etd
C. The income tax payable for 2017 is
a. P0 b. P50,000 c. P18, 000 d. P24,000
D. The income tax payable for 2018 is

a. P73,000 b. P70,000 c. P67, 000 d. P64,000
44. A Corporation is engaged in trading business. The reported income and expenses for taxable year 2018 show:
Sales P 10,000,000
Cost of sales 6,000,000
General business expenses 1,000,000
Interest on time deposit (gross) 100,000
Interest expense on loans payable 180,000
The net taxable income is
a. 2,820,000 b. P 2, 853,000 c. P 2,862,000 d. P 2,858,000
45. The term “net operating loss” shall mean

a. The excess of allowable deduction over gross income of the business in a taxable year
b. The excess of itemized deduction over gross income of the business in a taxable year
c. The excess of optional standard deduction over gross income of the business in a taxable year
d. Loss incurred which shall be carried over as a deduction from gross income to be spread for the next three years
46. For mines other than oil and gas wells, a net operating loss without the benefit of incentives under Executive
Order 226, as amended, otherwise known as the Omnibus Investment Code of 1987, maybe carried over as a
deduction from taxable income, if incurred in any of the
a. First 10 years of operation c. First 3 years of operation
b. First 4 years of operation d. First 5 years of operation
47. Using the preceding number, such net operating loss can be carried over as a deduction from taxable income,
within how many years immediately following the year of such loss?
a. 5 years b. 3 years c. 10 years d. 4 years
48. Atty. Xanthrons rendered the following services during the year:
Gross receipts from legal fees Php 3,000,000
Value of 60 hours assistance to indigent client 200,000
Value of other pro-bono services 150,000
Direct cost of services 1,200,000
Other deductible expenses 900,000
The net income( before personal exemption) of Atty. Xanthrons is

a. Php 550,000 b. Php 720,000 c. Php 750,000 d. Php 900,000
49. MOVE-ON-NA-AKO Corporation employs regular, person with disabilities (pwd’s) and senior citizen employees
and paid the following compensations:
Regular employees Php 800,000
PWD’s employees 300,000
Senior Citizen employees with salary grade:
a. Above poverty level 200,000
b. Below poverty level 100,000
The deductible compensation expense is
a. Php 1,400,000 b. Php 1,490,000 c. Php 1,115,000 d. Php 1,500,000
50. MAY-BAGO-NA-AKO Drugs Corporation had the following during the year:
Customer
Transactions Totals
Regular Senior Citizen
receipts (net) Php 8,000,000 Php 3,200,000 Php 11,200,000
Cost of Sales 5,000,000 2,000,000 7,000,000
Other Deductible expenses 2,000,000
MAY-BAGO-NA-AKO adopts a policy of giving senior citizen 20% discount. As a result, it granted php 800,000 total senior
citizen’s discount during the year. The taxable net income is
/etd
51. KAMI-NA Eatery Corporation provides 20% discount to senior citizens. It recorded the following during the year:
Customer
Transactions Totals
Regular Senior Citizen
receipts (net) Php 8,000,000 Php 2,000,000 Php 10,000,000
Cost of Services 6,000,000
Other Deductible expenses 2,000,000
The regular and special itemized deduction from gross income is

52. Using the above data, the taxable net income is

53. To improve productivity, MAY-FOREVER-NA Corporation negotiated a productivity incentive program wherein
the employees will receive productivity bonus equivalent to 40% of production cost savings measured by an
independent expert. MAY-FOREVER-NA requires employees to undergo studies through an “employee
advancement study program” with TESDA. All employees who finished their special studies are required to
remain at MAY-FOREVER-NA for a period of at least 2 years. The following were determined during the year:
Cost of special studies:
Managerial employees Php 2,000,000
Rank & File employees 4,000,000
Total distributable productivity bonus 2,000,000
Total Php 8,000,000
The allowable deduction for the benefits given is
Principles
54. 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, 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 statement are incorrect
55. Which of the following is not a characteristic of a deduction?

a. It is 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 subtraction to arrive at incomes subject to tax.
B
 “B” refers to “exclusions”, not deductions
56. Political campaign contributions are not deductible from the gross income.
a. If they are not reported to the Commission on Elections.
b. If the candidates 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 give.
C
 Refer also to letter “a” of No. 2
57. Statement 1 : Deductions from gross income are not presumed.

Statement 2 : As rule, deductions means itemized deductions
c. Both statement are correct
d. Both statement are in correct
/etd
C
58. 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. Treated as business rental, hence deductible
b. Treated as capital expenditure, hence not deductible
c. Treated as depreciate expense, hence deductible
d. Treated as ordinary business expense.
B
Pro-form Journal Entries:
Upon acquisition:
Equipment Pxx
Accounts Pxx
Installment payment:
Accounts Payable Pxx
Cash Pxx
59. Statement 1 : A taxpayer can only deduct on 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.
d. Both statements are incorrect
60. 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
61. Statement 1 : The taxpayer has the burden of justifying the allowance of any deductions claimed.
Statement 2 : Deductions are strictly construed against the government.
62. Statement 1 : Only business expenses may be deducted form the gross income taxpayer.
Statement 2 : Itemized deductions from gross should be duly supported by vouchers or receipts.
63. Which of the following is deductible expenses for income tax purposes?
a. Salaries of domestics servants
b. Ordinary repair of the personal car
c. Provision for doubtful accounts
d. None of the above
/etd
D
 “A” and “B” are personal expenses
 “C” is an unrealized loss. Unrealized gains and losses are not recognized for tax purposes.
64. 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
65. 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%
b. 5%
c. 2%
d. 10%
B
 Refer to the preceding number (letter “c”) for the requisites fro the business 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 registered 10
Regardless amount
Non-individual Payee
If gross income did not exceed P720,000 10 %
If gross income is exceed P720,000 15 %
Rentals
Income payments made by top withholding to their

local supplier of goods or service:
Goods 1%
Services 2%
Income payments to beneficiaries of estate/trusts

(except tax exempt and incomes subject to FWT) 15 %
Income payments to partners of GPPs

More than P720,000 15 %
Not more than P720,000 10 %
Certain income payments made by credit card companies 1%
66. 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 the receipt.
B
 “C” is a bribe, hence, non-deductible
 Refer to Page 312 for non-deductible items.
/etd
Ordinary Business/Professional Expenses
67. Which of the following is not deductible from the 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
 “A” is a liability, not a deductible expense.
Sample Journal Entries:
Compensation expense Pxx
Withholding tax payable Pxx
 “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
68. 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”
69. Which of the following is allowable compensation expense of an employee?

a. Salary of employee paid for a limited period of time after his death to his widow is allowable deductible of the employee.
b. Manager's expense account subject to benefit tax.
d. Neither “a” nor “b”
70. Statement 1 : Cost of technical books used by a CPA in the practice of his profession is allowable business expense.
Statement 2 : Tuition fees, bound and lodging incurred by a medical doctor while attending a continuing professional
education seminar is allowable business expense.
71. 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 an 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.
A
 NRA-NETB is taxable only 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.
72. The following are allowable compensation expenses of the employer, except
a. Overtime pay paid to a rank-and-file employee
/etd
b. Cash dividends paid
c. Amounts paid for pensions of retired employee.
d. All of the above
B
 “A” and “C” are ordinary business expenses
 “B” is a distribution of company's earnings
73. Which of the following cannot be claimed as deduction by an individual earnings 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.
74. The following requisites for education of compensation expense, except

a. Personal service must have been actually rendered
b. The compensation for such services must be reasonable
75. Earl is 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 bottled of liquor.
He drove home 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 the Mcdo Bee Inc. ) Which is the followinf is correct?
a. The expenses incurred in having dinner with Clifford may be deducted from the 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 the 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
ordianry 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
76. 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
77. The cost leasehold improvement shall be deductible by the lessee by

a. Spreading the cost of the improvements over life of the improvements or remaining terms of lease, whichever is
shorter.
b. Spreading the cost of the improvements over life of improvements or remaining terms of 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
/etd
A
78. 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
b. P1,000,000
c. P5,000,000
d. P0
A
 Allowable deductible = P5,000,000/10 = P500,000
79. On January1, 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:
 P4,800,000 representing rental payment for year 2016 and 2017
 Security deposit of P2,400,000
 Annual real property tax pf P30,000.
The lease contract provides, among others that the lessee will construct a 5-story building for parking
purposes at a cost P9,500,000. Ownership of the building shall belong to the lessor upon the expiration or termination
of the lease contract.
80. 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
b. P4,830,000
c. P2,400,000
d. P4,800,000
A
Solution:
Rental for 2016 = P2.4M/2 P2,400,000
Annual real property tax 30,000
Total-2016 P2,430,000
81. How much can Mr. J claim as deductible in relation to the lease in 2017?
a. P2,430,000
b. P4,830,000
c. P2,400,000
d. P4,800,000
A
 Same solution with the preceding number.
82. Using the information above, how much can Mr. J claim as deduction in relation to the lease in 2018?
a. P2,430,000
b. P2,930,000
c. P3,430,000
d. P3,063,000
B
Solution:
Rental for 2018 = P2.4M/2 P2,400,000
Depreciation expense, improvement
=(P9,500,000/10 x ½ 500,000
Total-2018 P2,930,000
 The leasehold improvement shall be depreciated using the shorter between the remaining lease term and useful
life.
83. Using the same information above, how much can Mr. J claim as deduction in relation to the lease in 2019?
a. P2,430,000
b. P2,930,000
/etd
c. P3,430,000
d. P3,063,000
B
Solution:
Rental for 2018 = P2.4M/2 P2,400,000
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.
84. 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
b. P400,000
c. P600,000
d. None of the choices
B
 Based on collections, regardless of accounting method used.
85. Using the same data in the preceding number, under cash method, how much was the income of Mike in 2014?
a. P200,000
b. P400,000
c. P600,000
86. Under accrual method, how much was the deductible expense of Leomar in 2018?
a. P600,000
b. P400,000
c. P200,000
87. Under cash method, how much was the deductible expense of Leomar in 2041?
a. P600,000
b. P400,000
c. P200,000
88. Pedro leased his lot to Jose. The contact calls for Jose to construct a house which would serve as a 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 the gross
income.
b. Pedro derives taxable income on the improvement; Jose cannot claim depreciation expense as a deduction from the
gross income.
c. Pedro does not derive taxable income on the improvement; Jose cannot claim depreciation expense as a deduction
from the gross income.
d. Pedro does not derive taxable income on the improvement; Jose can claim depreciation expense as a deduction from
the gross income.
/etd
B
 Jose cannot claim depreciate expense because of the point of view of Jose , the improvement is a personal asset
(pertaining to his house), therefore, any depreciate 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.
89. 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 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 the gross
income.
b. Pedro derives taxable income on the improvement; Jose cannot claim depreciation expense as a deduction from the
gross income.
c. Pedro does not derive taxable income on the improvement; Jose cannot claim depreciation expense as a deduction
d. Pedro does not derive taxable income on the improvement; Jose can claim depreciation expense as a deduction from
the gross income.
C
 Jose cannot claim depreciate expense because of the point of view of Jose, the improvement is a personal asset
(pertaining to his house), therefore, any depreciate in relation to the improvement is non-deductible.
 Pedro will not derive an income because the useful life of the improvement is shorter than the lease term. Thereof
, upon termination of the lease, there is no more improvement to be transferred to Pedro.
Interest Expense
90. In computing allowable deduction for purposes of income taxation:

Statement 1 : Beginning the year 2009 interest expense arising from the loans or indebtedness in connection with
taxpayer's business shall be reduced by an amount equal to 33% interest income subjected to the final tax.
Statement 2 : Interest incurred on money used to acquire property to be use in the trade shall only be allowed as a
capital expenditure.
A
 “B” is incorrect. Interest incurred in acquiring property maybe treated as capitalized or treated as part of operating
expenses.
91. Statement 1 : As a rule, The interest must be on an indebtedness of the taxpayer's 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.
92. This is a non-deductible interest expense

a. Interest paid on indebtedness incurred to fiance petroleum explosion.
b. Interest paid by a corporation on script dividends.
c. Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which a said corporation is the
legal or equitable owner.
d. Interest paid on tax deficiency if the tax where the interests is in itself an item that is deductible from gross income.
93. This is a deductible expense

a. Interest on deposit paid by authorized banks of the BSP to depositors, if it is shown that the tax on such interest was
held and paid
/etd
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
94. 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 domestics servants
95. An individual taxpayer has the following data for the year 2011:
Interest paid, business loan P100,000
Interest paid, loan 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. P102,000
b. P138,600
c. P140,100
d. P150,000
C
Solution:
Interest paid P100,000
Reduction (33% x P30,000) (9,900)
Interest on taxes 50,000
Allowable deductions P140,000
96. Deptor 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
b. P215,00
c. P255,100
d. P265,000
C
Solution:
Salary expense 120,000
= 60,000 – [(24,000/80% x 33%]
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
NOLCO 50,000
Total Itemized deduction P255,100
97. RRO Corporation paid the following during 2018:

Interest paid for late payment of income tax for 2017 P50,000
/etd
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. P1,882,500
b. P1,122,500
c. P1,050,000
d. P50,000
C
Interest paid for the late payment of income tax for 2017 P50,000
Interest on bonds issued by RRO 1,000,000
Total P1,050,000
98. Roy barrowed money from the bank amounting to P1,000,000 at an annual interest rate of 7%. He invested the
money in deposit substitution earning annual income of 8%. How much is the deductible interest?
a. P43,600
b. P26,400
c. P70,000
d. P80,000
Actual interest = P1,000,000 x 7% P70,000

Less: Reduction = P1,000,000 x 8% x 33% (24,400)
Allowable interest expense P43,600
99. How shall interest related to acquisition of property used in the trade,business or profession be treated?
a. Claim as outright expense
b. Capitalize
c. At the option of the taxpayer,maybe claim as outright expense or capitalize
d. At the option of the government, may be claim as outright expense or capitalize.
100. 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 the interest shall likewise be allowed as deduction from the gross income “at the
time of payment” for business engaged in rendering services using cash of accounting.
101. The following interest are non-deductible, except?

a. Interest paid to the person classified as related taxpayers under Section 36 (B) of RA 8424
b. Interest related to indebtedness incurred to finance petroleum explotion
c. Interest on preferred stock
d. Interest related to indebtedness incurred to finance working capital requirements.
Tax Expenses
102. Which of the following is not a requisite for taxes to be deductible?
b. Deduction only by the person/s upon whom the tax is imposed by law.
/etd
c. Deductible be in connection with the taxpayer’s profession, trade, or business c. Must be been paid or incurred within
the taxable year.
d. Must be imposed by the national government.
103. . Which of the following is non-deductible?

a. Percentage tax on common carries by land
b. Franchise tax
c. Overseas Communication tax
d. Stock transaction tax
104. Mapanlinlang Corporation was assessed by the BIR due to underpayment of Percentage Taxes. The
Assessment Notice disclosed the following:
Basic Tax P1,000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
Total P1,475,000
It also generated interest income from bank deposits amounting to P100,000. How much is the deductible interest?
a. P200,000
b. P162,000
c. P167,000
d. nil
A
Solution:
OPT expense P1,000,000
Total allowable deduction P1,200,000
 Percentage Taxes, in general (except Stock Transaction Taxes under Section 127 of the Tax Code), are deductible
 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.
105. Based on the above, how much is the deductible taxes?
a. P1,275,000
b. P1,000,000
c. P1,250,000
d. nil
106. 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
 Since the related tax (donor’s tax) is non-deductible from ‘’gross income’’ the related interest shall likewise to be
non-deductible.
The following TAXES are not deductible:
 Income tax, Income tax paid abroad if claimes as tax credit, Estate tax, Donor’s tax. Special assessment.
Entertainment, Amusement and Recreation expenses
/etd
107. Which of the following if 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.
108. Niah Corporation is engaged in the sales of goods with net sales of P2,000,000. The actual entertainment,
amusement and recreation expenses for the taxable quarter totalled P20,000. For income tax purposes, how much
is the deductible entertainment, amusement and recreation expenses?
a. P1,100
b. P10,000
c. P20,000
d. P0
A
Solution:
Actual vs P20,000
Limit (1/2 % of net sales) 10,000
Allowed P10,000
109. RRO Corporation is engaged in the sale of goods and services with net sales/net revenue and recreational
(EAR) expense for the taxable year totalled P30,000.
a. P30,000
b. P27,000
c. P25,000
d. nil
B
Allowed
(Lower)
Sales of Goods:
Actual = P30,000 x 3.5 P18,000
Limit = P3M x ½ % P15,000 P15,000
Sale of Service 12,000

Actual = P30,000 x 2/5 P12,000
Limit = P2M x 1 % P20,000
TOTAL P27,000
Losses/NOLCO
110. 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 the gross income shall be carried
over as only in the next year immediately following the year of such loss.
111. Which of the following items of expenses require that noptice be filed with the BIR to be allowed as
deduction from the gross income?
a. Taxes
b. Interest
c. Losses
d. Salaries
112. The operating loss of the business or enterprise for any taxable year immediately preceding the current
/etd
taxable year, which had not been previously offset as deduction from the gross income shall:
a. Be carried over such a deduction from gross income for the next 3 consecutive taxable years immediately following the
year of such loss.
b. Be carried over such 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 year until it is fully offset
113. 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 not deductible from ordinary income.
c. The excess of allowable deductions over gross income.
d. The excess of capital losses over ordinary losses.
114. All of the following, except one, are requisites in the carry-over of net operating loss:
a. The 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 in the corporation paid MCIT, the running of the prescriptive period is not interrupted.
d. The carry-over is good for one (1) year.
115. Which of the following instances will NOLCO can still be claimed as deduction?
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 Corporation's NOLCO is transferred to X Corporation
d. Z Corporation's NOLCO can no longer be used.
116. In March2017, Tonette, who is food 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 P1.5M incurring a loss of P250,000.00. She used the P1.5M to buy a solo diamond ring in November 2017
which she sold for P1.5M 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 acrry over and deduct her 2017 loss only from her 2018 gain
c. Tonette may acrry over and deduct her 2017 loss only 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.
Loss on Wash Sale

117. 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
118. 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 until of a foreign corporation is allowed with NOLCO.
d. Private educational institution enjoying preferential tax rate is allowed with NOLCO
C
/etd
119. Which of the following is entitled to claim NOLCO?
a. An employee with respect to his compression income.
b. Foreign international carrier
c. Offshore banking unit
d. Self-employed individual
120. 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. Self-employed individual
121. On December 1, 2017, Ms Anne Felipe purchased 100 shares of common stock of Jessie company for
Php10,000. On December 15, 2017, she purchased 100 additional shares for 9,000. On January 2, 2018, she sold
the 100 shared purchased on December 1, 2017 for Php9,000.
How much is the deductible loss?
a. P10,000
b. P7,500
c. P5,000
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.
122. Bobby had following stock transaction:

 On September 21, 2017, purchased 100 shares of the common stock of Jay-r Inc.
 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 Php1,25.
 On January2, 2018, e sold for Php.4,000 the 100 shares purchased on September 21, 2017.
How much is the non-deductible loss?
a. P1,000
b. P750
c. P250
d. zero
B
Selling price P4,000
Cost (5,000)
Indicated loss (1,000)
Non-deductible = P1,000 x 75**/00 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 acquisition was 75.
Casualty / Securities becoming worthless Other losses

123. Statement 1 : casualty, robbery, theft or embezzlement losses are deductible only when a “Declaration
of Loss” is submitted within 45 days from the discovery of the casualty or robbery, theft or embezzlement that
caused the loss.
Statement 2 : casualty, robbery, theft or embezzlement losses 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.
/etd
124. If denotes an accident, a mishap, some sudden invasion by a hostile agency, and excludes the progressive
or property through a steady operating cause.
a. casualty
b. business
c. abandonment
d. wager
125. Sira Sira Company had an old warehouse which had a cost 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 P25,000 while the scraped were sold for P10,000. How much is the deductible loss in
arriving at taxable income?
a. None
b. P185,000
c. P200,000
d. P215,000
D
Book value of the old warehouse P20,000
Demolition cost 25,000
Proceeds from scarp (10,000)
Deductible loss P215,000
126. Statement 1 : In a total lost 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 a 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, reduce by any form of idemnity.
127. On July 1, 2015, a taxpayers purchased for P500,000 an automobile which be used exclusively for his
practice. He deducted annual depreciation on the basis of an estimated useful life of five (5) years. Only July 1,
2018, the automobile was partially damaged in an accident collision with another vehicle. The cost of repair
amounted of P100,000. The taxpayers received insurance proceeds of P70,000 to cover the loss.

a. P200,000
b. P100,000
c. P130,000
d. P30,000
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.
/etd
128. 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

a. P0
b. P200,000
c. P250,000
d. P100,000
B
Solution:
Book value P200,000
Cost to restore P250,000
Allowed (lower) P200.000
129. One of the following losses cannot be deducted from gross income:
a. The construct a bigger warehouse, a corporation demolished an old warehouse which had a construction cost P3,00,000
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
purchased 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 desire number of unit of production.
d. A corporation ascertained that its B Corp. stocks are worthless because of the total insolvency of B Corp.
130. 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
b. P110,000
c. P90,000
d. nil
C
 To the extend of gambling winnings only.
131. SNJ Inc. purchased sales of stock of value of Valde Corp. for P60,000 and a 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 valued had declined to P28,000.
How much the deductible loss of CNJ Inc.?
a. P90,000
b. P62,000
c. P60,000
d. nil
C
 Worthless securities = deductible loss
 Loss shrinkage in the value of the securities = non-deductible
132. One of the following losses is not deductible from the 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
the trade, business or profession,
c. Not operation loss carry-over
d. Shrinkage in value of stock
/etd
133. When shall bad debts be allowed as deduction from the gross income?
a. Upon setting of the allowance for doubtful accounts.
b. Upon write-off in the books
c. At the portion of the taxpayers, upon setting of the allowance or upon write-off
d. At the portion of the government, upon setting up of allowance or upon write-off
B
 Write-off = deductible loss
 Provision for bad debts = non-deductible
134. The following losses are deductible from the gross income, except one which is deductible only to the
extent of capital gain:
a. net operating loss carry-over
b. accounts written off because there are certain to uncollectible;
c. loss arising from permanent decline in market value;
d. loss incurred from a transaction involving a capital asset.
135. Statement 1 : Capital losses can be deducted only from capital gains
Statement 2 : Ordinary losses can be deducted from any gross income
136. A taxpayers is allowed to use declining balanced 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 twice the rate in straight-line method
d. It should not exceed twice the rate in sum-of-the-years digit method
137. BSE College, a proprietary educational institution, spent P10M for the construction 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
138. Non-resident aliens engage in the trade or business as well as resident foreign corporations are also
allowed to claim depreciation in arriving at taxable income. Which of the following in an absolute requirement
before depreciation can be claimed?
a. The property, regardless or the location, directly helped in the generation of income in the Philippines.
b. The property, regardless or the location, directly helped, directly or indirectly, in the generation of income in the
Philippines.
c. The property is used in the trade or business regardless of location.
d. The property must be located in the Philippines.
Premium Payment on Life Insurance

139. XYZ Co. took two key me 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 premium 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?
/etd
a. Yes to first and No to second question;
b. Yes to both question;
c. No to first and yes to second question;
d. No to both questions.
GUIDE
* Life insurance was taken out by the employee
Premium payment = personal expense; non-deductible
Proceeds
 If the insured outlived the policy, the excess of proceeds over the premium payments shall be taxable to the
taxpayer.
 If the proceeds were received as a result of the death of the taxpayer, 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 of the employee

 Beneficiary is the employer
 Premium payment is non-deductible while the proceeds shall be part of the taxable income of the employer.
 Proceeds (to be received by the employee's heirs/beneficiaries)- non-taxable income of the
heirs/beneficiaries.
140. All of the following, except one, are not deductible from the gross income.
a. Tuition fees and other expenses of the office building
b. Replacement of the roof of the office of the building
c. Premiums paid by 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 a appointed
beneficiaries.
D
 “A” is non-deductible. It is a personal expense
 “B” is non-deductible. It is capitalizable cost
 “C” is non-deductible because of the beneficiary is the employer.
 “D” is deductible. The designated beneficiaries are the employee's heirs
141. In 2017, Delta Company paid the total premiums of P100,000 for the life insurance policy of the Vice
President, where the beneficiary is the corporation. At the end of the year, Delta receive 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
b. P10,000
c. P1,000
d. nil
Deductible Contributions
142. Which of the following is deductible from the 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. Traveling expenses
143. Which of the following charitable contributions is not fully deductible?

a. Donation to the Government of the Philippines to fiance priority projects identification by NEDA
b. Donation to the Municipality of Milagros in the Province of Masbate for the repair of Municipal Hall.
/etd
c. Donation to International Organizations
d. Donation to Accredited Non-government Organizations
144. One of the following charitable and other contributions is not deductible in full:
a. Donation 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. Donation to certain foreign institute or international organizations (i.e., International Red Cross, World Health
Organization).
c. Donation 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.
145. 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 requisites.
a. Organized and operated exclusively for scientist, researched, educational, character building and youth and sports
development, health, social welfare, cultural and charitable purposes or combination of these purposes.
b. Not later than 15th day of the third month after the closed of taxable year in which the contributions are received,
makes utilization of the the contributions directly for the purpose of the function,for which the organization is organized
and operated.
c. The assets of which, in the event of dissolution, would be distribute 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
distribution 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 to 40% of the total expenses.
146. The following donations are non-deductible, except?

a. Donation given directly to Yolanda survivors
b. Alms given to beggars
c. Political contributions
d. Donations to International Organizations
147. 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 fair market value
d. Acquisition cost
148. 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 contribution, in case of individuals
d. 10% of taxable income before charitable contribution, in case of individuals
149. 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
/etd
How much is the total deductible actual charitable and other contributions subject to limit?
a. P250,000
b. P550,000
c. P750,000
d. P1,100,000
B
 Deductible with limit = Donations to Christ the King and Bukas Palad foundation
 Donations directly give to the fire victims as well as the Gospel Church of Taiwan (foreign corporation not exempt
under treaty or international organizations) are nondeductible contributions.
150. A domestic corporations has the following data on income and expenses
Gross business income P6,200,000
Deductions including SSS and Phil-health contributions of P2,50,000
Contributions to foreign private foundation 100,000
Contributions to domestic charitable organization 190,000
How much is the deductible charitable and other contributions?

a. P390,000
b. P290,000
c. P285,000
d. P211,000
C
Solution:
Actual (w/limit) P190,000
Vs. Limit (net income before contributions x 5%)
=[(6,200,000-2,500,0000x5%] 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 organizations is non-deductible, unless provided for under international
agreements or treaty.
151. Juan reported the following for the current taxable year:
Gross Income P5,000,000
Cost of Sales 3,000,000
Salaries of employees, net 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 management 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?

a. P2,790,000
b. P2,906,000
c. P2,956,000
d. P3,006,000
C
Solution:
Gross income P5,000,000
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)
/etd
Rent Expenses (120,000)
Representation and entertainment expenses
(½ % 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 P3,006,000
Net income before personal exemption 500,000
Basic personal exemption P2,956,000
Taxable Net Income
 Allowable Representation expenses = the lower between the actual expenditures and the limit.
 Limit is:
* Sale of goods = ½ % of Net Sales
* Sales of service = 1 % of Revenues
152. How much is the correct taxable net income of Juan assuming the current taxable years is 2018?
a. P2,790,000
b. P2,906,000
c. P2,956,000
d. P3,006,000
D
 Ignore personal exemptions beginning 2018 year.
153. How much is the correct taxable net income assuming the taxpayer is corporation?
a. P2,970,000
b. P3,173,000
c. P2,956,000
d. P3,006,000
B
Solution:
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 Expenses (120,000)
Representation and entertainment expenses
(½ % 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
Net income before personal exemption
Basic personal exemption P3,173,000
Taxable Net Income
Pension Costs
154. 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 of 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 lump sum payment to cover past service cost, may be amortized ove 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.
/etd
155. 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 donation given directly to individual cannot be deducted from gross income.
B
 “A” is incorrect. Contributions for the past service cost shall be amortized for ten (10) years. Refer to the rules
provided in the preceding number.
156. An employer maintains pension trust for its employee. 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?

20 16 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 P1,140,000 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
157. 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
b. P3,000,000
c. P3,100,000
d. nil
C
Solution:
Current service costs(normal costs) P3,000,000
Past service costs
Exceeded contribution over normal costs)
= P1,000,000/10 100,000
Total P3,100,000
158. Continuing the information above, assuming in 2018 DLC Corp. contribute only P2,000,000 while the
Normal Cost is P3,000,000. How much is the deductible amount?
a. P2,100,000
b. P3,000,000
c. P2,000,000
d. P3,100,000
A
Solution:
Current service costs(normal costs) P2,000,000
Past service costs from 20167 100,000
Total P2,100,000
 Current service to be recognized shall not exceed the actual contributions paid.
/etd
159. 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
b. P200,000
c. P1,000,000
d. P1,100,000
B
Solution:
Current of present service costs P100,000
Past service costs = P1M/10 100,000
Total P200,000
Researched and Development

160. Which of the 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 claim as an outright deduction form the gross income.
c. Ma be treated as deferred expense to be amortized over a period which will benefit from the expenditure.
a. Ma be treated as 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.
161. Research and development deduction shall not apply to

V. Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in
connection which research and development of a character which is subject to depreciation and depletion.
VI. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, quality of any
deposit or ore other mineral, including oil and gas.
a. I only b. II only c. Both I and II d. Neither II nor II
162. 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 more than 6 months beginning with the month in which the taxpayer first realizes benefits from such expenditure.
163. 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 building, may be treated as an outright deduction.
c. If not related to land building, may be treated as a deferred expense which may be amortized.
d. Cannot be deducted in gross income.
Itemized Deductions / Optional Standard Deductions (OSD)

164. 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
/etd
165. 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
 The following may be allowed to claim Optional Standard Deductions (OSD) in lieu of the itemized deductions as
follows:
* Resident citizen
* Non-resident citizen
* Resident alien
* Taxable estates and trusts
* Domestic corporations
* Resident foreign corporations
* Partnership
166. Optional standard deduction

a. Is equal to 405 the gross income from the 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 constantly 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 quarterly income tax return shall be considered as having availed of the itemized deductions option to
the taxable year.
167. 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. Mean gross profit from sales, or gross receipts or revenues less direct cost of services, plus all other items of gross
income.
168. Which of the following should be used as a basis in computing the Optional Standard Deductions?
I. For individual taxpayers using the accrual basis of accounting, OSD is based on 40% of gross sales.
II. For individual taxpayers using the accrual basis of accounting, OSD is based on 40% of gross receipts.
III. For individual taxpayers using the accrual basis of accounting, such as percentage of compilation method, OSD is
based on 40% of gross receipts of 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 II only d. None of the above
169. 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
/etd
b. P740,000 d. P290,000
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 taxpayers is individual, the basis of OSD is gross sales or receipts.
170. 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
Operating expenses with voucher and receipts 4,000,000
Operating expenses without voucher and receipts 500,000
Interest income from savings deposits 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
b. P2,175,000
c. P1,700,000
d. P2,200,000
D
Sales returns and allowances (250,000)
Sales discounts (100,000)
Other income 50,000
Cost of sales (3,000,00)
Less: OPEX with voucher and receipts (4,000,000)
Taxable Net Income P2,000,000
 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.
171. Based on the preceding number, how much is the taxable income using OSD?
a. P3,755,000
b. P5,470,000
c. P3,695,000
d. P3,720,000
D
Other income 50,000
Less: OPEX (P6,200,000 x 40%) (2,480,000)
Taxable Net Income P3,720,000
172. A resident corporation has the following data on income and expenses in 2018:
/etd
Capital gain on asset held for 2 years 50,000
Cost of sales 400,000
Operating expenses with voucher and receipts 500,000
Operating expenses with voucher 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
b. P300,000
c. P340,000
d. P349,000

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 515,00
Less: OPEX with voucher and receipts (215,000)
Net income from from operations P300,000
Add: Net Capital Gain
Capital gain on asset held for 2 years 50,000
Capital loss on asset held for 6 months (10,000) 40,000
Taxable Net Income P340,000
 Holding on capital gains and losses is irrelevant if the taxpayer is a corporation.
173. How much is the taxable income using OSD?
a. P 293,000 c. P 340,000
b. P 300,000 d. P 349,000
Answer: D
Solution:
Gross sales P 935,000 Sales returns and allowances
25,000
Sales discounts 10,000 (35,000)
Net Sales 900,00 0 Less: Cost 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
Add: Net Captial Gain 50,000
Capital gain on asset held for 2 years (10,000) 40,000
Capital loss on asset held for six (6) months P349,000
Taxable Net Income
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.
/etd

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INCOME TAXATION

1. Which of the following statements is true?

3. The following may be allowed to claim optional standard deduction, except

4. May be deducted from gross income

5. This is not deductible from gross income

8. The phrase “related taxpayers” will apply to the following, except:

11. The optional standard deduction for corporations is

12. The optional standard deduction for individuals is

20. The net income to be reported in year 2 is?

21. The income to be reported in year 5 is

22. Examples of taxes that are deductible except

23. Non-deductible taxes, except

a. A,B,C and D b. B,Cand D c. C, D and E and either A or B d. All of the above

33. May consider capital expenditures as revenue expenditures

38. The deductible loss for asset 1 is

39. The deductible loss for asset 2 is

Contribution for services

41. The pension expense for the second year is

42. The pension expense for the third year is

Subsequent recovery of bad debts written off:

B. The income tax payable for 2016 is

D. The income tax payable for 2018 is

45. The term “net operating loss” shall mean

The net income( before personal exemption) of Atty. Xanthrons is

The regular and special itemized deduction from gross income is

52. Using the above data, the taxable net income is

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

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

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

PURCHASE OF/PAYMENT FOR: CWT %

Income payments made by top withholding to their

Income payments to beneficiaries of estate/trusts

Income payments to partners of GPPs

Certain income payments made by credit card companies 1%

 “B” is an illegal payment

69. Which of the following is allowable compensation expense of an employee?

74. The following requisites for education of compensation expense, except

77. The cost leasehold improvement shall be deductible by the lessee by

90. In computing allowable deduction for purposes of income taxation:

92. This is a non-deductible interest expense

93. This is a deductible expense

For income tax purposes, the deductible interest expense shall be

What is the correct amount of itemized deduction?

97. RRO Corporation paid the following during 2018:

How much is the deductible interest for 2018?

Actual interest = P1,000,000 x 7% P70,000

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

103. . Which of the following is non-deductible?

Entertainment, Amusement and Recreation expenses

Sale of Service 12,000

113. The term “net operating loss” shall mean

Loss on Wash Sale

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

122. Bobby had following stock transaction:

Non-deductible = P1,000 x 75**/00 P750

Casualty / Securities becoming worthless Other losses

How much is the deductible loss?

Allowed (lower) P100,000

How much is the deductible loss?