Answer Key Ch8

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

1

Chapter 8: Deductions from Gross Income

CHAPTER 8

DEDUCTIONS FROM GROSS INCOME

Problem 8 – 1 DEDUCTIBLE OR NONDEDUCTIBLE FROM GROSS INCOME1. Nondeductible2. Deductible3. Deductible4. Deductible5. Nondeductible6. Nondeductible7. Nondeductible8. Deductible9. Deductible10. Deductible11. Nondeductible12. Nondeductible13. Deductible, in lieu of tax credit (Sec. 34C3, NIRC)14. Deductible15. Deductible16. Nondeductible17. Nondeductible18. Deductible19. Deductible20. Nondeductible

Problem 8 – 2 TRUE OR FALSE1. False – Some business expenses are nondeductible; some are subject to limit.2. True3. False – Compensation income is not subject to OSD.4. False – NOLCO is not an itemized deduction.5. True – Amortized over the term of the lease6. False – ½ of 1%7. False – 33%8. False – Double –declining method9. True10. True11. False – Income outside the Philippines by a NRC is not taxable in the Philippines,

hence, no allowable deduction is allowed.12. True13. True14. True15. False – Business expenses related to business income outside the Philippines is

deductible also by domestic corporations and resident Filipino.16. False – Business expense is deductible from gross income.17. True18. False – 40% based on sales or gross receipts.

Problem 8 – 3 Problem 8 – 4 Problem 8 – 5 Problem 8 – 61. C 1. D 1. A 1. C


2


2. C 2. B 2. C 2. C3. A 3. B 3. C 3. B4. D 4. C 4. A 4. C5. A 5. A 5. D 5. C6. B 6. D 6. C 6. D7. A 7. C 7. A 7. D8. C 8. C 8. B 8. A9. C 9. A 9. A 9. C10. D 10. A 10. C 10. C

Problem 8 – 7 CExp e n s e d C a p i t a li z e d

Change of motor of air condition P60,000Expansion of store 50,000Damages paid due to workers’ injury P20,000Repainting of building 10,000Cleaning of computers 9,000Repair of furniture 1 ,0 0 0 . Totals P 4 0 ,0 0 0 P 1 1 0 ,0 0 0

Problem 8 – 8 CIdentifiable operating expenses – Philippines P400,000Add: Allocated operating expenses within

(P200,000 x P1M/P5M) 40 ,0 0 0 Operating expenses – Philippines P 4 4 0 ,0 0 0

Problem 8 – 9 DPolice protection P20,000Interest expense paid to his father 10,000Gifts made to employees during birthday 5,000Capital loss 4 ,0 0 0 Amount of nondeductible expenses and losses P 3 9 ,0 0 0

Problem 8 – 10 DDepreciation expense (P1,000,000 x 40%)/25 P16,000Loss of business equipment 38 ,0 0 0 Deductible expense P 5 4 ,0 0 0

Problem 8 – 11 D1. Letter A

No personal or business expense is deductible.

2. Letter BDepreciation (P20,000 x 10%) P 2,000Repair (P100,000 x 10%) 10,000Office supplies 6 ,0 0 0 Total deduction P 1 8 ,0 0 0

Problem 8 – 12 B T a x la w s GAA P

Salary expense (P180,000 + P20,000) P200,000 P200,000Estimated uncollectible accounts 10,000Compromise penalty 50,000Depreciation expense 30,000 30,000Miscellaneous expense . 5 , 00 0


3


Deductible from earnings P 2 3 0 ,0 0 0 P 2 9 5 ,0 0 0

Note: For tax purposes, the miscellaneous expense is not deductible because it was not reported last year. For accounting purposes, the miscellaneous expense can be deducted as prior period adjustment from retained earnings.

Problem 8 – 13 ASales P300,00

0Multiplied by OSD rate 4 0 % Optional standard deduction P 120 , 0 0

0

The compensation income is not included in determining OSD. The OSD (40% of gross sales or gross receipts) is only allowed as deduction from income derived from business. If an individual opted to use OSD, he is no longer allowed to deduct cost of sales. [Sec. 34(L), NIRC; Sec. 3, Rev. Regs. No. 16-2008]

Problem 8 – 14 BGross receipts from profession P100,000Rent income (P475,000/95%) 5 0 0 ,0 0 0 Total gross income P600,000Multiplied by percent of OSD 40 % Optional standard deduction P 2 4 0 ,0 0 0

Problem 8 – 15 DSince there are no official receipts and documents to support the operating expenses, the reported operating expenses are not deductible (Sec. 34(A)(b), NIRC). The OSD is not allowed for nonresident aliens (Sec. 34(L), NIRC). No personal exemption will be granted to a nonresident alien with business in the Philippines if his country does not have an exemption reciprocity law favoring a Filipino citizen. (Sec. 9, Rev. Regs. No. 2)

Problem 8 – 16 A

S o l e P r o p r i e t o r C o r p o r a t i o n

Sales P1,000,000

P1,000,000

Less: Cost of sales . 300 , 0 0 0Basis of OSD P1,000,00

0P 700,000

Multiplied by OSD rate 4 0 % 4 0 %Optional standard deduction P

400 , 0 0 0P 280 , 0 0 0

RA 9504 is specific as to the basis of OSD. For individuals, the basis of the 40% OSD shall be the “gross sales” or “gross receipts.” In the case of corporate taxpayers subject to tax under Sections 27(A) and 28(A)(1) of the Tax Code, as amended, the basis of the 40% OSD shall be the “gross income.”


4


Problem 8 – 17 BOperating expense before representation expense

(P2,000,000 – P300,000) P1,700,000Representation expense – Actual P300,000

- Limit (P20,000,000 x 0.005) 100,000- Lower 1 0 0 , 0 0 0

Allowable itemized deductions P 1 ,8 00 , 0 0 0

Problem 8 – 18 BSalary expense P120,000Rent expense 24,000Advertising expense 6,000Depreciation expense 5,000Interest expense 60,000Tax differential on interest income (P30,000 x 33%) ( 9 ,9 0 0 ) Total itemized deductions P 2 0 5 ,1 0 0

NOLCO is not an itemized deduction.

Problem 8 – 19 D

U s i n g O S D U s i n g Ite mi ze d

Sales P1,200,000

P1,200,000

Cost of sales - 0 - 700 , 0 0 0Gross income P1,200,00

0P 500,000

Less: OSD or Itemized deductions(P1,200,000 x 40%) 480 , 0 0

0Net income before personal exemption P

720 , 0 0 0

- 0 - P

500 , 0 0 0

Allowed deduction using OSD (P1,200,000 x 40%) P 480,000Less: Cost of sales 700 , 0 0 0 Net disadvantage using OSD (P2 2 0, 0 00 )

No itemized deduction is allowed if no official receipts, records or other pertinent papers can be used to support it (CIR vs. Isabela Cultural Corporation, G.R. No.172231, Feb. 12, 2007).

In case of individual taxpayer, the “cost of sales” or the “cost of services” are not allowed to be deducted for purposes of determining the basis of OSD inasmuch as the law (RA 9504) is specific as to the basis thereof which states that for individuals, the basis of the 40% shall be the “gross sales” or “gross receipts” and not the “gross income.” (Sec. 3, Rev. Regs. No. 16-2008)

Problem 8 – 20 AGross salaries of employees P6,000,000


5


Grossed-up monetary value of fringe benefits 1 , 000 , 0 0 0 Deductible salaries and fringe benefits expenses P 7 ,0 00 , 0 0 0

Problem 8 – 21 CAssume bonus is computed after tax but before bonus. The answer is letter D = P8,143, computed as follows:

Net income before charitable contribution (P75,000 + P5,000)Less: Deductible contribution (P80,000 x 5%) – lower of actual

P 80,000

4 , 00 0

Net income before income tax and bonus P 76 ,0 0 0

B T ==

15% (76,000 – T)30% (76,000 – B)

B B B ===

15% [76,000 – 30% (76,000 – B)]15% (76,000 – 24,320 + 30%B)11,400 – 3,420 +0.045B

B – 0.045B = 7,9800.955B = 7,980/0.955

B = 8 , 3 5 6

Proof:Income before bonus and tax P76,000Less: Income tax (P76,000 – P8,382) x 30% 20 , 2 8 5 Income after tax but before bonus P55,715Multiplied by rate of bonus 15 % Bonus P 8 , 35 6

Problem 8 – 22 BMonthly salary P 5,000Death benefits 50,000Terminal pay 25,000Continuous compensation after the burial for three months 15 , 0 0 0 Total deductible expenses P 9 5 ,0 0 0

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

Problem 8 – 23 CI nv e n t o r i a b l e

c o s t S u p p l i e s e x p e n s e

Purchases P300,000 P40,000Decreased in inventory 20,000

Increased in inventory . ( 3 , 00 0 ) P 3 2 0 ,0 0 0 P 3 7 ,0 0 0

Problem 8 – 24 DTraveling expenses (P50,000 + P200,000) P250,000

Problem 8 – 30 BActual representation expenseMultiplied by percent of representation expense

P10,000

for sales [P700,000/(P700,000 + P300,000)] 7 0 %

Limit (P700,000 x 0.005), lower P3,500

Actual representation expenseMultiplied by percent of representation expense

P10,000

for revenue [P300,000/(P700,000 + P300,000)]Apportioned representation expense for sales

3 0 % P 3,0 0 0

Limit (P300,000 x 0.01)Deductible representation expense

3,0 0 0 P 6,5 0 0


6


Fringe benefit expense (P68,000/68%) 100,000Transportation expense – messenger 40 ,0 0 0 Total allowable expense P 3 9 0 ,0 0 0

Problem 8 – 25 BMonthly rent (P20,000 x 60%) x 2 mos from Oct. 31 to Dec. 31Insurance premium (P3,000 x 60%) x 2/12

P24,000300

Real property tax (P1,500 x 60%) x 2/12Deductible rent expense

15 0 P 2 4 ,4 5 0

Note: The city services is not a rent expense.

Problem 8 – 261. Letter B

Rent for 6 months based on usage (P20,000 x 6) x 80% P 9 6 ,0 0 0

2. Letter DActual cash collection for rent P 1 5 0 ,0 0 0

Problem 8 – 27 DMonthly rental expenseMonthly depreciation (P600,000/8)/ 12Monthly deductible expense

P2,000 6 , 2 5 0 P 8 , 2 5 0

Problem 8 – 28 CRent expense (P5,000 x 12) P 60,000Add: Depreciation expense [(P950,000/9.5) x 11/12]Deductible expense in 200y

91 , 6 6 7 P 1 5 1 ,6 6 7

At the start of the used of the building, the remaining period for the contract of lease is 9.5 years. The salvage value is ignored in the computation of the depreciation because T Foods could no longer benefit on it since the improvement on the land will be owned by the lessor at the end of the 10-year contract of lease.

Problem 8 – 291. Letter B

Trading - Limit lower (P5,000,000 x .005) P 2 5 ,0 0 0

2. Letter CServicing – actual lower P 3 0 ,0 0 0

Apportioned representation expense for sales P 7,0 0 0


7


Problem 8 – 31 AInterest expense P40,000Tax differential (P50,000 x 33%) ( 16 , 5 0 0 ) Deductible interest expense P 2 3 ,5 0 0

Problem 8 – 32 BBreast-feeding assistance to the needy – additional P200,000Salary of senior citizens – additional (P100,000 x 15%) 15,000Senior’s citizen discount (P300,000 x 20%) 60,0 0 0 Total special itemized deduction P275 , 0 0 0

Problem 8 – 33 BDe d u c t ibl e N ond e d u c t i b l e

Interest paid in advanced P 20,000Interest paid to a brother 12,000Interest paid on delinquency taxes P 8,000Interest on borrowings to finance his family home 30,000Interest paid to finance petroleum exploration . 1 0 0 ,0 0 0 Total P 8 , 00 0 P 1 6 2 ,0 0 0

Problem 8 – 34 BInterest expense on unpaid salaries P 60,000Add: Nondeductible tax differential (P40,000/80%) x 33% 16,5 0 0 Nondeductible interest expense P 76,5 0 0

Salary expense P600,000Rent expense 200,000Deductible interest expense bank loan (P40,000 – P16,500) 23, 5 0 0 Total itemized deductions P823 , 5 0 0

The salaries of direct workers should be classified as deductible cost of service and not to be classified as part of itemized deductions (Rev. Regs. No.16-2008). Interest expense on unpaid salaries is not deductible. (Kuenzel & Streiff, Inc. vs. Collector of Internal Revenue, 106 Phil. 355)

Problem 8 – 35 DTax savings from interest expense (P100,000 x 30%) P30,000Final tax on interest income (P1,000,000 x 12%) x20%

( 2 4 ,0 0 0 )

Actual net tax savings P 6 , 00 0

Problem 8 – 36 ADocumentary stamp taxes P 1,000Local tax (P6,000 – P800 – P200) 5,000Municipal tax 2,000Community tax 1 ,5 0 0 Deductible taxes P 9 , 5 0 0

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.


8


Problem 8 – 37 CBusiness taxes P 20,000Documentary stamp taxes 1,000Automobile registration fees 3,000Postage stamp taxes 500Import duty taxes 50, 0 0 0 Total deductible taxes P 7 4,5 0 0

Problem 8 – 38 DUnadjusted net income (P520,000 – P200,000) P320,000Add back: Income tax foreign country 10 ,0 0 0 Adjusted net income P330,000Personal exemption ( 50 , 0 0 0 ) Net taxable income P 2 8 0 ,0 0 0

Note: The P10,000 income tax paid to foreign country is better to be treated as tax credit rather than as operating expense.

Problem 8 – 39 AAsset of Oliva P 60,000Payment to government (P200,000 x 50%) ( 1 00 , 0 0 0 ) Balance ( P 40 , 0 0 0 )

Deductible bad debts is the entire amount of collectibles

P 1 0 0 ,0 0 0

Problem 8 – 40 BBad debts from business actual written off (P100,000 x40%)

P40,000

Bad debts from profession actual written off 50 , 0 0 0 Deductible bad debts expense P 9 0 ,0 0 0

Problem 8 – 41 DAnnual depreciation expense (P50,000 – P5,000)/5 P9,000Multiplied by ratio of months used during the year (from June 30 to Dec. 31) 6 / 1 2 Depreciation expense 200B P 4 , 5 0 0

Problem 8 – 42 AAnnual depreciation (P2,300,000/11.5 years) P200,000Multiplied by ratio of months used in 200B (July 1 to Dec.) 6 / 1 2 Depreciation expense P 1 0 0 ,0 0 0

Problem 8 – 43 DOil drilling machine (P800,000 x 90%)/8 years P 90,000Oil extracting machine (P900,000 x 90%)/10 years – limit 81,000Computers (P100,000 x 90%)/4 years 22,500Delivery truck (P200,000 x 90%)/5 years – limit 36 ,0 0 0 Annual depreciation expense P 2 2 9 ,5 0 0

The useful life of properties used in or related to production of petroleum shall be ten (10) years or such shorter life as may be permitted by the BIR Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an


9


estimated useful life of five (5) years. (Sec. 34(F)(4), NIRC)

Problem 8 – 44 CDepletion base (P6,000,000 – P1,000,000 + P300,000) P5,300,000Divided by number of extractible estimated tons 5 , 000 , 0 0 0 Depletion per ton P 1.06Multiplied by number of tons extracted during the year 8 0 0 , 0 0 0 Depletion expense P 8 4 8 ,0 0 0

Problem 8 – 451 Letter D.

Depletable costs, January 1, 200x P12,500,000Exploration costs 1,000,000Intangible development costs 1 , 5 0 0 ,0 0 0 Total P15,000,000Less: Depletion expense (P15,000,000/7,500,000) x 1,200,000 2 , 4 0 0 ,0 0 0 Adjusted basis P 1,260,000Divided by remaining reserves

(5,000,000 + 2,500,000 – 1,200,000) 6 , 3 0 0 ,0 0 0 New depletion rate/ unit P 2 . 0 0

2 Letter A.

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

3 Letter B.

Value of production (P12 x 1,200,000 units) P14,400,000Less: Production and selling costs:

Mining costs P2,000,000

Milling costs 3,000,000Marketing expenses 1,500,000Depreciation expense 1 , 000 , 0 0

0 7 , 5 0 0 ,0 0 0

Net income from operation P 6,900,000Multiplied by limit percentage 25 % Deductible amount fro exploration and development cost P 1 , 7 2 5 ,0 0 0

4 Letter B.

Current exploration and development cost (P1,500,000 + P1,000,000)Less: Deductible amount of exploration and development cost (see3)

P2,500,000

1 , 725 , 0 0 0

Exploration and development cost chargeable to succeeding years P 7 7 5 ,0 0 0

Problem 8 – 46 BDeductible expense:Depreciation expense (P10,000,000 x 90%)/50Capital outlay

C a p i t a li z e d P 1 8 0 ,0 0 0

O u t r i g h t e x p e n s e

P 10 , 0 0 0 ,0 0 0

Problem 8 – 471 Letter B

Lower of actual contribution or normal 200 A 800,000

200 B 800,000

20 0 C 500,000


10


valuationAdd: Amortization of excess

200A (P200,000/10)200B (P100,000/10)

20,000 20,000 20,000 . 10 , 0 0 0 10 ,0 0 0

Deductible retirement expense 8 2 0 , 0 0 0 8 3 0 , 0 0 0 5 3 0 , 0 0 0

2. Letter AActual retirement payments

200 A 0

200 B 4 0 0 , 0 0 0

20 0 C 3 0 0 , 0 0 0

Problem 8 – 48 A Y e a r X Y e a r Y

Actual contribution or normal valuation, lower 700,000 600,000Add: Amortization (P100,000/10) 10 ,0 0 0 10 ,0 0 0 Deductible retirement expense 7 1 0 , 0 0 0 6 1 0 , 0 0 0

Note: Only the excess of the actual contribution over the normal valuation is to be amortized over 10 years.

Problem 8 – 48 BAllowed deductible contribution (P200,000 x 5%) P 1 0 ,0 0 0

Problem 8 – 49 BAllowed deductible contribution (P200,000 x 5%) P 1 0 ,0 0 0

Problem 8 – 50 DAllowed deductible contribution [(P60,000 + P5,000) x 10%] P 6 , 5 0 0

Problem 8 – 51 BIncome before charitable contribution (P500,000 – P130,000) P370,000Multiplied by percent of limit 5 % Allowed deductible contribution - lower P 18 ,5 0 0

Problem 8 – 52 APPHHI per month P 2 0 0

Problem 8 – 53 DNot allowed to deduct PPHHI because family income exceeded P250,000 per year.

Problem 8 – 54 CActual value of donation – priority program P1,000,000Adopt a school program – incentive (P1,000,000 x 50%) 5 0 0 , 0 0 0 Deductible donation P 1 ,5 00 , 0 0 0

Problem 8 – 551. Operating expenses (1,000,000 x 30%) – P50,000

Interest expense (P50,000 – (P40,000/80%) x 33%] Total itemized deductionsAdd: NOLCOTotal deductible expenses

P250,000 33 ,5 0 0 P283,500 5 0 0 ,0 0 0 P 7 8 3 ,5 0 0

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

2. Gross income (P5,000,000 – P2,000,000) Multiplied by OSD rate

P3,000,000 40 %


11


OSD P 1 ,2 00 , 0 0 0

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

3. Gross incomeLess: OSDNet taxable income

P3,000,000 1 , 200 , 0 0 0 P 1 ,8 00 , 0 0 0

Problem 8 – 56Salaries of assistants P 96,000Traveling expenses 11,000Light and water – office 7,890Stationeries and supplies 1,960Office rent 60 ,0 0 0 Total operating expenses before contribution P176,850Add: Contribution subject to limit (P500,000 – P176,850) x 10%) 32 ,3 1 5 Allowable itemized deductions P 2 0 9 ,1 6 5

Problem 8 – 57Sole

P r o p r i e t o r s h i p C o r p o r a t i o n P a r t n e r s h i p Bad debts written-off (P35,000 – P30,000) Depreciation expense (P140,000 – P100,000) Donation to the government – priority programDonations subject to limit:

Lower of actual, P170,000 or(P2,500,000 x 10%) (P2,500,000 x 5%)

Total allowable deductions

P 5,00040,00050,000

170,000 .

P 2 6 5 , 0 0 0

P 5,00040,00050,000

1 2 5 ,0 0 0 P 2 2 0 , 0 0 0

P 5,00040,00050,000

1 2 5 ,0 0 0 P 220 ,0 0 0

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 – 581.

Actual contribution or normal valuation, lower 200 A

1,000,000 2 0 0 B

900,000Add: Amortization - 200A (P250,000/10) 25 , 0 0 0 25 ,0 0 0 Deductible retirement expense 1 , 025 , 0 0 0 9 2 5 , 0 0 0

2. Financial net income 50,000,000 60,000,000Add: Retirement benefit expense – accounting 1 , 100 , 0 0 0 1 , 200 , 0 0 0 Total 51,100,000 61,200,000Less: Deductible retirement expense – taxation 1 , 025 , 0 0 0 9 2 5 , 0 0 0 Net income for tax purposes 50 ,0 75 , 0 0 0 60 ,2 75 , 0 0 0


12


Problem 8 – 59

C o r p o r a t i o n I nd i v i d u a l Salary expenses 500,000 500,000Retirement (P250,000 + P50,000/10) 255,000 255,000Representation expense (P10,000,000 x .005) 50,000 50,000Interest expense paid to the BIR - full 20,000 20,000Interest expense – limit:

(P100,000 – (P96,000/80%) x 33%) 60,400 60,400Depreciation expense 40,000 40,000Rent expense 250,000 250,000Group insurance expense 50,000 50,000Bad debts expense (P100,000 x 20%) 20,000 20,000Contribution expenses:

TESDA priority project (500,000 x 1.5) 750,000 750,000Local government – limit (lower is actual) 100 , 0 0 0 100 , 0 0 0

Total itemized deductions 2 , 095 , 4 0 0 2 , 095 , 4 0 0

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

Problem 8 – 601. I nd i v i d u a l C o r p o r a t i o n

Salaries expense (P680,000 – P100,000) 580,000 580,000Bad debts expense (P370,000 – P270,000) 100,000 100,000Retirement expense (P1,000,000 – P380,000) 620,000 620,000Representation expense (P39,000,000 x 0.005) 195,000 195,000Rent expenses (P200,000 – P20,000) 180,000 180,000Taxes expense (P300,000 – P270,000) 30,000 30,000Life insurance expense (P150,000 – P100,000) 50,000 50,000Interest expense [(P200,000 – (50,000 x 33%) + P20,000] 203 , 5 0 0 203 , 5 0 0 Total itemized deduction before contributions 1,958,500 1,958,500Contribution expenses:

Donation to TESDA priority project (P500,000 x 150%) 750,000 750,000Donations for Rooming-in and Breast-feeding (200k x 2) 400,000 400,000Donations NGO’s (35% for admin.) 100,000 100,000Ind: (P39,460,000 – P30,000,000 – P1,958,500) x

10%=750,150Corp: (P39,460,000 – P30,000,000 – P1,958,500) x 5%=375,075 . .

Total allowable deductions 3 , 208 , 5 0 0 3 , 208 , 5 0 0

Computation of sales:Financial income P 5,000,000Cost of sales 30,000,000Operating expenses deducted

(P680,000 + P370,000 + P1,000,000 + P800,000 + P200,000+ P300,000 + P150,000 + P160,000 + P800,000) 4 , 460 , 0 0 0

Total sales P 39 , 4 6 0 ,0 0 0

2. I nd i v i d u a l C o r p o r a t i o n Gross income (P39,460,000 – P30,000,000) P9,460,000 P9,460,000Less: Total allowable deductions 3 , 208 , 5 0 0 3 , 208 , 5 0 0 Net taxable income P 6 ,2 51 , 5 0 0 P 6 ,2 51 , 5 0 0

Answer Key Ch8

Documents

Transcript of Answer Key Ch8