BAINCTAX

Income Taxation
1TAY2022

Regular Income Taxation

Regular
Deductions
 ALLOWABLE DEDUCTIONS
Deductions from gross income pertain to business expenses incurred by a taxpayer engaged in business or engaged in the
practice of profession.

Business means habitual engagement in a commercial activity involving the regular sale of goods and services to customers or
clients. In taxation, the term business is generally used to include the exercise of a profession self-employment is a business
but employment is not a business.

Business expenses are costs of doing trade, business or practice of profession such as employee salaries,
office utilities, supplies and rent, taxes, losses, bad debts, depreciation on business properties, research and
Business
development and the like. Personal expenses include the living and family expenses of individual taxpayers
Expense vs.
such as family food, personal recreation and transportation, medication, home rentals and utilities, tuition
Personal
fees of dependents, and other similar expenses.
Expense
Expenses that are intended for both the business and for personal use of the taxpayer are allocated between
the two. Only those that pertain to the business are deductible
Business Business expenses benefit only the current. They are costs of generating income or gains for the current
Expense vs. period. Hence, they are deductible against gross income in the current period. Capital expenditures are

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 Business Capital expenses that benefit future accounting periods. They are initially recorded as assets upon acquisition then
Expenditure later deducted against future gross income when used in the trade, business or profession of the taxpayer.
The advanced deduction of capital expenditures is not warranted as it contradicts the Lifeblood Doctrine.

Expenses to Promote Business Goodwill

Expenses incurred to create or maintain some form of goodwill for the taxpayer's trade or business or for the industry or
profession of which the taxpayer is a member are non-deductible.

Non-Depreciable Asset
The cost of assets that do not depreciate by usage or by passage of time such as land is deducted against the selling price when
sold.

Depreciable Properties
The "depreciable cost" or the acquisition cost, net of expected salvage value, is allocated as deduction over the useful life the
property. The useful life of the property is the length of time it is expected to be serviceable or its legal life, if applicable,
whichever is lower. Note that the law requires maximum usage life on certain items of properties such as vessels or aircrafts
after which they must be de-commissioned from use. The depreciation method is similar to the ones you learned in Intermediate
Accounting.

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 Intangible Assets
Amortizable intangible assets are those that lose their value over time should be expensed over their legal life or expected usage
life whichever is lower. Intangible assets that do not lose their value such as franchise of public utility vehicles shall not be
amortized.

Inventory
For goods inventory and supplies, their costs are deducted when sold or used in the business using the inventory method or the
specific identification method with the aid of a Point-of-Sale (POS) machine.

Immaterial Capital Expenditures

The acquisition of items of property, plant and equipment, inventories or prepayments of expenses which are relatively
immaterial in amount may be deducted outright as expense upon acquisition as this will not materially distort net income.

If the fair value of the property increases due to repairs, improvements or additions, the actual cost of
the repairs, improvements or additions that should be capitalized should not exceed the appreciation
Repairs and in fair value. If the fair value of the property is not determinable, the excess of the actual repair cost
Improvements over the tax basis of the property is presumed a capitalizable increase in fair value. Improvements and
additions to properties normally increase the value or useful life of properties; hence, these are
capitalized and depreciated.

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 Replacements and The tax treatments for these are the same with what you learned in Intermediate Accounting.
Demolition
All costs directly related to the acquisition of an item of property, plant and equipment such as in-
Asset Acquisition- transit insurance, title guarantee insurance, freight, finder's fee or commissions, import duties, and
Related Costs other taxes (excluding VAT for a VAT taxpayer) are capitalized as part of the cost of the property subject
to depreciation.
Expenses of issuing equity or debt securities (i.e., stock or bonds) such as cost of registering shares of
stock to the Securities and Exchange Commission (SEC), cost of printing bond or stock certificates, or
Security Issue Costs
brokers' commission on selling stocks or bonds, are not deductible expense against gross income. They
are deducted against the proceeds of such securities.
Manufacturing The same computations you learned from your Intermediate and Cost Accounting classes are
Expenses applicable for manufacturing expenses.
Effect of Concurrent Similar to items of gross income, the effect of value-added tax and expanded withholding taxes are
Taxes applicable to the allowable deductions.

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 LOAN PRINCIPLE
A deductible business expense is legitimate, ordinary, actual and necessary.

1. It is incurred in and for the current taxable period.

2. It is not a capital expenditure.
L Legitimate 3. It pertains to the business or profession of the taxpayer.
4. It is not contrary to law, public policy or morals.
5. It is adequately substantiated with receipts or other documents.
It is "ordinary" when it is normal in relation to the business of the ta,payer and the surrounding
O Ordinary
circumstances.
An expense is actual if it is paid or resulted to an incurrence of an obligation to the taxpayer. In case of a
A Actual
loss, it must be sustained or realized by the taxpayer in a closed and completed transaction.
An expense is necessary if reasonable and essential to the development, management, operation, or
N Necessary
conduct of the trade, business or exercise of profession of the taxpayer.

MATCHING PRINCIPLE
It is a well-established rule in income taxation that only business expenses that are incurred for the generation of items of gross
income subject to regular tax are deductible. This is a pervasive criterion that is consistently observed by the NIRC, revenue

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 regulations, and BIR rulings. Business expenses incurred to generate items of gross income that are either exempt or excluded
from taxation, subject to final tax or capital gains tax or to a special tax regime, must not be matched or deducted against gross
income subject to regular tax.

THE RELATED PARTY RULE

Gains realized between related parties are taxable, but losses are non-deductible. The rule is intended as a control measure due
to the fact that related party transactions can be easily tailored in a way to evade taxes. This rule is particularly relevant in the
claim of losses, bad debts, and interest expenses.

The following are considered as related parties.

1. Members of a family
2. Except in cases of distribution in liquidation, the direct or indirect controlling individual of a corporation
3. Except in cases of distribution in liquidation, corporations under direct or indirect common control by or for the same
individual
4. Grantor and fiduciary of any trust
5. Fiduciaries of trusts with the same grantor
6. Fiduciary of a trust and the beneficiary of such trust

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 Members of a family includes brothers and sisters (whether half-blood or full-blood), spouse, lineal ascendants and
descendants. Control means ownership of more than one half (½) of the voting stocks of a corporation.

WITHHOLDING RULE
Payors of income are required to withhold income taxes on their payments. The failure to comply with this requirement shall
result in the disallowance of the expense as deduction. The rule is “No Withholding, No Deduction.”

TAX REPORTING CLASSIFICATION OF DEDUCTIONS

Cost of sales or cost of services is deducted outright against sales, revenues, receipts or fees of
individual taxpayers in the measurement of gross income from operations. It must be noted that
Cost of Sales or Cost
expenses that are directly related to the rendering of services or in the acquisition of goods are excluded
of Services
from the regular allowable itemized deductions and are included in "cost of sales" or "cost of services"
as the case may be.
Regular allowable itemized deductions pertain to all necessary and ordinary expenses paid or incurred
Regular Allowable
during the taxable year including directly attributable costs in carrying on the development,
Itemized Deductions
management, operation and/or conduct of the trade, business or exercise of profession. Expenses

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 which are not directly related to the acquisition of goods or provision 01 services are included in regular
allowable itemized deductions.
Special Allowable Special allowable itemized deductions are additional deductions as provided under the NIRC or special
Itemized Deductions laws.
This pertains to the excess of expense deduction over gross income during a taxable year which is
Net Operating Loss allowed by the law to be deducted against the net income of the following three years. Technically,
Carry Over NOLCO is not an expense. It is a special deduction incentive allowed by law. Technically, deduction
(NOLCO) incentives are deductible only in the year they are availed of but NOLCO is exceptionally allowed to
be carried over three years.

MODE OF CLAIMING DEDUCTIONS

Under the itemized deductions, taxpayers list every item of business expense they claim as deductions.
Deductions are strictly construed against the taxpayer. The taxpayer has to point to the provision of the
law authorizing the deduction, substantiate his claim by supporting the deduction with official receipts,
Itemized Deductions
payment vouchers, cancelled checks or other adequate records and documentations, and comply with
any withholding tax requirements on expenses. Deductions claimed must also comply with any
applicable deduction ceilings set by law.

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 The optional standard deduction is in lieu of the itemized deductions, regular or special, including
Optional Standard
NOLCO. The deduction is merely presumed as a fixed percentage of gross income for corporations and
Deductions
gross sales or gross receipts for individuals.

INTEREST EXPENSE
1. There must be a valid indebtedness.
2. The indebtedness must be that of the taxpayer.
3. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession.
4. Interest expense must have been paid or incurred during the taxable year.
5. Interest must have been stipulated in writing.
Requisites 6. Interest must be legally due.
7. Interest payments must not be between related taxpayers.
8. Interest must not be incurred to finance petroleum operations.
9. In case of interest incurred in the acquisition of property, used in trade, business or profession,
the same is not treated as a capital expenditure.
10. The interest is not expressly disallowed by law to be deducted from gross income of the taxpayer.

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 Discount or pre-deducted interest is a prepayment. Hence, it is not deductible upon release of the loan
Deductibility of
but upon payment of the same or as it accrues as expense. If the loan is due on installments, the interest
Discount
pertaining to each installment shall be deductible.
Interest incurred in financing the acquisition of property used in trade or business may, at the option
Optional Treatment of the taxpayer, be claimed as either: (a) an outright deduction from gross income or (b) a capital
expenditure claimable through depreciation.

Deductible Non-Deductible
1. Interest from tax delinquency 1. Interest on personal loans
2. Interest from scrip dividends 2. Interest incurred with a related party
3. Discount or pre-deducted interest applicable to future
periods for individual taxpayers
4. Interest expense incurred to finance petroleum
operations
5. Interest on redeemable preferred shares
6. Imputed interest

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 Arbitrage Limit
The deductible amount of interest expense is the gross interest expense reduced by the following percentages basing on interest
income which was subjected to the 20% final tax.

Taxpayer On or before June 30, 2020 July 1, 2020 and after

For corporate taxpayers subject to 20% RCIT 0%
33 1/3%
For all other taxpayers 20%

Illustration 12.1 INTEREST EXPENSE

For the taxable year, Jackie company had the following items of interests.
Interest expense on bank loans 150,000
Interest income from bank deposits, gross of final tax 30,000
Interest income from promissory notes 12,000
The deductible interest expense under each Scenario: (A) Subject to 25% RCIT using CY2020, (B) Subject to 20% RCIT using FY
ending 03/2021, would be computed as follows
A B
Interest expense on bank loans 150,000 150,000
Arbitrage limit

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 On the old rate (15,000 x 33%), (7,500 x 33%) (5,000) (2,500)
On the new rate (15,000 x 20%), (22,500 x 0%) (3,000) -
Deductible interest expense 142,000 147,500

TAXES
The following taxes are classified as to their deductibility against gross income.

Deductible Non-Deductible
1. Fringe Benefit Tax 7. License Tax 1. Final Income Tax
2. Excise 8. Local Taxes 2. Capital Gains Tax
3. Tax 9. Community Tax 3. Regular Income Tax
4. Percentage Tax 10. Municipal Tax 4. Foreign Income Tax, is claimed as tax credit
5. Documentary Stamp Tax 11. Foreign Income Tax, if 5. Value-Added Tax
6. Occupational Tax claimed as tax deduction

Consistent with the matching rule, only taxpayers taxable on world income such as domestic
Who can claim?
corporations and resident citizens can claim deduction or tax credit for foreign income taxes paid.

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 Tax treatment of The refund or credit of deductible taxes must be reverted to gross income to the extent of their tax
refunds or credit of benefit. Incidentally, the refund of non-deductible taxes is exempt from income tax.
taxes

LOSSES
Losses actually sustained during the taxable year and not compensated by insurance or other indemnity shall be allowed as
deductions.

1. It must be incurred in trade, profession or business of the taxpayer. (The loss must be a business
loss, not a personal loss.)
2. It must pertain to property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwrecks, or other casualties, or from robbery, theft, or embezzlement. (The
Requisites loss must be an ordinary loss.)
3. The loss must not be compensated by insurance or indemnity contract. (The loss must be actually
sustained, not temporary.)
4. A declaration of loss must have been filed by the taxpayer within 45 days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

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 5. The loss must not have been claimed as a deduction for estate tax purposes in the estate tax
return. (Double deduction is not allowed.)
If the restoration involves total replacement of the previous property, the tax basis of the old property
Total Destruction of
shall be claimed as a loss while the entire replacement cost is capitalized as cost of the replacement
Properties
property subject to allowance for depreciation.
If the restoration involves partial replacement of the previous property, the restoration cost shall be
Partial Destruction of
expensed up to the extent of the tax basis of the property immediately before the casualty. Any excess
Properties
is capitalized subject to allowance for depreciation.
Loss of Value of The loss of value of assets, as a rule, is not deductible due to their temporary and reversible nature.
Assets However, impairment losses that became actually sustained can be deducted.
Loss on Insured The excess of the tax basis of the property over the insurance reimbursement is a deductible loss in
Property the year of insurance settlement.
In the event a contract area where petroleum operations are undertaken is abandoned, the
Abandonment Losses accumulated exploration and development expenditures pertaining thereto, including the adjusted
tax basis of equipment directly used in the abandoned contract area, shall be allowed as a deduction.
Losses from Losses from wagering transactions such as gambling and other passive activities shall be allowed
Wagering only up to the extent of the gains from the same transaction.

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 Application of the Taxpayers taxable on global income can deduct losses on properties wherever situated, but taxpayers
Matching Rule taxable only on Philippine income can only deduct losses on properties situated in the Philippines.

BAD DEBTS
Bad debts refer to debts due to the taxpayer which were actually ascertained to be worthless and were charged off within the
taxable year. The following requisites must be met for the deductibility.

1. The debt must have been ascertained to be worthless.

2. It must be charged off within the taxable year.
Requisites 3. It must be connected with the taxpayer's profession, trade or business.
4. The taxpayer must be under the accrual basis of accounting.
5. It must not be incurred from a related party.
1. Bad Debts from personal receivables
Non-Deductible Bad
2. Securities becoming worthless of taxpayers other than domestic banks and trust companies
Debts
3. Loss on capital investment in partnerships, joint ventures or corporations

The deductible bad debt expense pertains to the write-off of uncollectible receivables after having been actually ascertained to
be worthless.

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 DEPRECIATION
Depreciation refers to the gradual exhaustion in the value of tangible business properties brought by ordinary wear and tear
through usage or obsolescence by the passage of time. It is a provision for the periodic return of the invested capita] on the
property throughout its useful life.

1. Straight-line method
2. Declining-balance method
Depreciation
3. Sum-of-the-year-digit method
Methods
4. Any other method which may be prescribed by the Secretary of Finance upon recommendation
of the CIR
In the case of property held by one person for life with remainder to another person, the deduction
Life Tenancy to a
shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to
Property
the life tenant.
In the case of property held in trust, the allowable deduction shall be apportioned between the income
Properties Held in
beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the
Trust
trust, or in the absence of such provisions, on the basis of the trust income allowable to each.
Depreciation on The depreciation of an asset must be premised on its acquisition cost and not on its reappraised value.
Revalued Property Taxpayers using the revaluation model in accounting for items of property. plant, and equipment are

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 not allowed to deduct the depreciation of the revaluation surplus on the value of property as this is not
an actual cost.
1. Substantiation of the purchase with sufficient evidence such as official receipts and other
documents bearing the total purchase price including specific motor vehicle identification
numbers of the vehicles 2
Rules on 2. Substantiation of the direct connection or relation of the vehicle to the development, operation,
Deductibility of and/or conduct of the trade, business, or profession of the taxpayer
Depreciation on 3. Only one vehicle for land transport is allowed for an official and employee, and the value of
Passenger Vehicles which shall not exceed P2,400,000.
4. No depreciation shall be allowed for yachts, helicopters, airplanes or aircrafts, and land vehicles
which exceeded the threshold unless the main line of business is transport operation or lease of
transportation equipment and the vehicles purchased are used in said operations.

AMORTIZATION
The same concepts from depreciation is also applicable to intangible assets.

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 DEPLETION
This is a provision for the periodic return of capital investments in wasting assets such as minerals, gas and oil.

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 Illustration 12.2 DEPLETION EXPENSE
At the start of the year, Minas Company capitalized P8,000,000 as cost of its wasting assets. During the year, it extracted
6,000,000 tons of ores and an estimated remaining extractables of 14,000,000 tons.
For the year, Minas should recognize depletion expense of P2,400,000 (8,000,000 x 6,000,000 / 20,000,000).
Expense Option on Non-Producing Mines
After commercial production has commenced, exploration and development drilling expenses incurred on non-producing
mines may be deducted outright but the deductible amount shall not exceed 25% of the net income from mining operations
without the benefit of any tax incentives under existing laws. The unclaimed balance of the expense shall be carried forward to
the succeeding years until fully deducted.

Illustration 12.3 DEPLETION EXPENSE

Sanim Company had the following net income before the depletion expenses.
2018 2019 2020
Net income before depletion expense 8,000,000 6,000,000 7,500,000
Explorations Costs 2,500,000 1,500,000 1,000,000
The limits would be computed as:
2018 2019 2020
Net income before depletion expense 8,000,000 6,000,000 7,500,000

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 Limit 25% 25% 25%
Deduction Limit 2,000,000 1,500,000 1,875,000
The deductible depletion expense shall be the lower of the accumulated expenses and the limit, thus,
2018 2019 2020
Depletion Expense Carryover, beginning - 500,000 500,000
Actual Depletion Expense, this year 2,500,000 1,500,000 1,000,000
Total Accumulated Depletion Expense 2,500,000 2,000,000 1,500,000
Less: Deductible Depletion Expense 2,000,000 1,500,000 1,500,000
Depletion Expense Carryover, ending 500,000 500,000 -

CHARITABLE AND OTHER CONTRIBUTIONS

Contributions or gifts made to the government or non-government organizations (NGOs) may be deducted against gross
income.

Fully Deductible Contributions

1. Donations to the government or political subdivisions including fully owned government and
Contributions
controlled corporations to be used exclusively in undertaking priority activities as determined by

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 the National Economic Development Authority (NEDA) in Education, Human settlements,
Health, Culture and sports, Youth and sports development and Economic developments.
2. Donation to foreign institution or international organization in pursuance of or in compliance
with agreements, treaties or special laws
3. Donations to accredited domestic non-government organizations. The NGO must be an
accredited donee institution with certifications issued by the following designated accrediting
entities:
a. Department of Social Welfare and Development - for charitable and or social welfare
organizations, foundations and associations
b. Department of Science and Technology - for research and other scientific activities
c. Philippine Sports Commission - for sports development
d. National Council for Culture and Arts - for cultural activities
e. Commission on Higher Education - for educational activities
1. The NGO must be organized and operated exclusively for the above purposes, and no income
inures to the benefit of any private individuals.
Requisites
2. The non-profit organization makes utilization of the contribution not later than the 15 th day of the
third month after the close of its taxable period.

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 3. The administrative expenses of the NGO do not exceed 30% of its total expenses.
4. Members of the Board of Trustees must not receive remunerations.
5. In the event of liquidation, the asset of the NGO will be distributed to another nonprofit domestic
corporation organized for similar purpose.
6. The amount of contribution of property other than money must be valued at acquisition cost.
Contributions Subject to Limit
1. Donations to the Government of the Philippines or political subdivisions exclusively for public
purposes not in accordance with priority activities
Contributions 2. Donation to non-accredited non-government organizations or to domestic corporations
organized exclusively for the following purposes: Religious, Cultural, Charitable, Educational,
Scientific, Rehabilitation of veterans, Youth and sports development and Social welfare
Based on the taxable income derived from trade, business or profession (i.e., net income) before the
deduction of any contributions.
Limit
Individuals Corporation
10% 5%

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 Illustration 12.4 CHARITABLE CONTRIBUTIONS
Janie Bolido, a practicing architect had the following income and donations during the year:
Professional fees 1,100,000
Donations to government priority activities 100,000
Donations pursuant to treaties 30,000
Donations to accredited charitable institutions 50,000
Donations to the government for public purpose 80,000
Donations to non-accredited charitable institutions 60,000
Donations to a foreign charitable institution 40,000
Donations to street beggars 50,000
Other deductible business expenses 600,000
The taxable income would be computed as:
Professional fees 1,100,000
Other deductible business expenses 600,000
Net Income before donations 500,000
Deductible Contributions
Full: Government priority activities 100,000

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 Accredited charitable institutions 50,000
Treaty-Covered entities 30,000 180,000
Partial: Government non-priority activities 80,000
Non-accredited charitable institutions 60,000 140,000
Limit 50,000 50,000
Taxable Income 270,000

PENSION EXPENSE
Defined Contribution The deductible amount is the amount contributed.
Plans
1. The contribution to the fund is first attributed to current service cost. The funding of current
service cost is deductible in full.
2. The excess funding is attributed to any unfunded past service cost. The funding of past service
Defined Benefit Plan
cost is amortized over 10 years regardless of the actual vesting period of covered employees.
3. Overfunding of the fund is a prepaid pension expense deductible in the future as funding of
future current service cost.

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 Illustration 12.5 PENSION EXPENSE
Following are transactions of Unlonely Company on its defined benefit plan.
2018 2019 2020
Past Service Cost 650,000 - -
Current Service Cost 550,000 560,000 520,000
Annual Contribution 400,000 1,500,000 450,000
The deductible pension expense would be for 2018 is the annual contribution of P400,000 since it is only attributable to the
current service cost.
For 2019, the deductible expense is:
Contribution 1,500,000
Unfunded 2018 Current Service Cost 100,000 100,000
2019 Current Service Cost 560,000 560,000
Excess 840,000
Funding of Past Service Cost 650,000 65,000
Overfunding 190,000
Deductible Pension Expense 670,000
For 2020, the deductible expense is:

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 Contribution 400,000
2019 Prepaid Pension Expense 190,000
Total Funding for 2020 590,000
2020 Current Service Cost 520,000 520,000
Overfunding 70,000
Amortization of 2019 past service cost funding 65,000
Deductible Pension Expense 585,000

RESEARCH AND DEVELOPMENT COSTS

Research activities are geared towards discovery of new knowledge. Development activities are geared towards determining
application of research knowledge which could provide income and benefits for the business.

Tax Treatment
1. Research and development costs related to capital accounts such as property used in business are capitalized as part of the
cost of the property and deducted through depreciation expense.
2. Research and development costs not related to capital accounts are treated as follows at the option of the taxpayer as
Outright expense or Deferred expense amortized over a period not less than 60 months beginning from the month the
taxpayer realizes benefits from the R&D expenditures

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 EXPENSES, IN GENERAL
Other legal, ordinary, actual and necessary expenses of business can be claimed by the taxpayers as long as these are
substantiated with official receipts or other pertinent records. Examples of other deductible expenses:

1. Salaries and allowances 9. Royalties

2. Fringe benefits 10. Repairs and maintenance
3. SSS, GSIS, PhilHealth, HDMF, and other contributions 11. Entertainment, amusement, and recreation expenses
4. Commissions 12. Transportation and travel
5. Outside services 13. Fuel and oil
6. Advertising 14. Communication, light, and water
7. Rental 15. Supplies
8. Insurance 16. Miscellaneous expenses

ENTERTAINMENT, AMUSEMENT, AND RECREATION (EAR) EXPENSE

EAR expense includes representation expense and/or depreciation or rental expense relating to entertainment facilities.

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 Limit
For taxpayers engaged in the sales of both goods or properties and services, the actual EAR to be compared on the limits shall
be based on the allocation via the net sales and revenue.

Taxpayers Selling Goods or Properties Taxpayers Selling Services

0.5% of net sales 1% of net revenues

Illustration 12.6 EAR EXPENSE

Johnny Moon is engaged ngaged in both sales of goods and sales of services. He incurred a total of P9,000 entertainment,
amusement, and recreation expenses in 2020. He reported P300,000 in net sales and P700,000 in net revenues.
The deductible EAR shall be computed as follows:
Sales Limit Rate Limit Actual Deductible
Goods 300,000 0.5% 1,500 2,700 1,500
Services 700,000 1% 7,000 6,300 6,300
Total 1,000,000 9,000 7,800

References:
Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing.
Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply.
Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc.
Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc.

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 Self-Check!
Basing on your readings, answer the following questions.
1. Explain the difference of business and personal expense.
2. What does the LOAN Principle imply on the deductibility of expense?
3. What are the general requisites for deductibility of an expense?
4. What are the two modes of claiming deductions?
5. What are the different caps on the deductibility of expenses?

Exercise 12.1 TRUE OR FALSE

Determine whether the following statements are true or false.
1. The arbitrage limit applies to all taxpayers including individuals.
2. Depreciation on revaluation surplus of properties can be deducted as part of depreciation expense.
3. Losses on wagering transactions are deductible in full.
4. The depreciation expense on properties eld under life tenancy is computed as if the life tenant were the absolute owner
of the property.
5. Donations to foreign institutions covered by treaty exemptions are fully deductible.
6. Purely employed individuals can claim deductions for donations made.

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 7. All business expenses are allowable deductions from gross business income.
8. Repaired that increase property useful life are capitalized.
9. Foreign taxes can be claimed as a deduction or tax credit.
10. Bad debt expenses between related parties can be deducted as long as these are adequately supported with
documentary evidence.

Exercise 12.2 MULTIPLE CHOICE

Choose the best answer from the choices provided.
1. Which is a deductible tax expense?
a. Surcharges and penalties
b. Stock transaction tax
c. Real property tax on business properties
d. Special assessment
2. Which is not deductible against gross income?
a. Depreciation value of fringe benefits given to managerial employee
b. Fringe benefits to rank and file employees
c. Compensation of minimum wage earners

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 d. Salaries of managerial or supervisory employees
3. R&D costs that are not chargeable to capital account can be claimed as
a. Deductible expense
b. Deferred expense subject to amortization
c. Both a and b
d. Either a or b
4. Which of the following taxpayers cannot claim deductions from gross income?
a. General professional partnerships
b. Domestic corporation
c. Resident foreign corporation
d. Non-resident foreign corporation
5. Deductions can be claimed against
a. Talent fees
b. Fixed allowances
c. Fringe benefits
d. Salaries

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 Exercise 12.3 DEDUCTIBILITY
Write DE if the item is deductible, otherwise, write ND.
1. Depreciation expense of vehicle with an acquisition cost of P2,500,000.
2. Qualified Productivity bonuses
3. Salary payments to MWE, without withholding income taxes
4. Deficiency interest on unpaid income taxes
5. Acquisition of land
6. Personal, living or family expenses
7. Donations to political parties
8. Losses on related party transactions
9. Kickback payment to the government official
10. Personal exemptions on corporations
11. Optional standard deduction from compensation income
12. NOLCO within three-year period
13. Tuition fees, board and lodging incurred by a medical doctor while attending a continuing professional education
seminar
14. De minimis not subjected to withholding taxes

Regular Income Taxation Regular Deductions page 32

 15. Fringe benefits granted to executives subjected to FBT
16. Overtime pay paid to rank-and-file employee
17. Fringe benefits paid to an officer of the company
18. Death benefits granted to employees
19. Nontaxable overtime pay of MWE
20. Distribution of profits to partners

Problem 12.1 ITEMIZED DEDUCTIONS

Jackie Company showed the following data during the taxable year:
Sales 500,000
Interest Income, net of 20% final tax 24,000
Cost of Sales 300,000
Salaries Expense 120,000
Interest Expense 60,000
Rent Expense 24,000
Advertising Expense 6,000
Depreciation Expense 5,000

Regular Income Taxation Regular Deductions page 33

 Compute the amount of regular itemized deductions.

Problem 12.2 DEPRECIATION EXPENSE

Jamina Inc.’s fixed assets that are used in its operations are as follows:
Estimated Useful Life Acquisition Cost
Land Infinite 500,000
Production Machinery 8 years 800,000
Store Equipment 20 years 900,000
Office Computers 4 years 100,000
Delivery Truck 10 years 200,000
If all depreciable assets have a salvage value of 10%, how much is the annual depreciation?

Problem 12.3 DEPLETION EXPENSE

Gold Ore acquired a mining property for P6,000,000 believed to have an estimated gold ore deposit of 5,000,000 tons. It is
estimated that the property has a salvage value of P1,000,000 after P300,000 restoration cost.
If it was able to produce 800,000 tons of gold ore, how much is the deductible depletion expense?

Regular Income Taxation Regular Deductions page 34

 Problem 12.4 PENSION EXPENSE
Addie Company set up a BIR-accredited defined benefit plan during 2020. The following relate to the fund:
2020 2021
Funding of Current Service Cost 450,000 630,000
Funding of Past Service Cost 250,000 180,000
Compute the deductible pension expense for both years.

Problem 12.5 EAR EXPENSES

Annie Hardstone owns a spa business. It offers massage services and essential oil products. She obtained the following:
P580,000 net revenues from massage services and P420,000 net sales from its products. She incurred P8,000 EAR expenses.
Compute the deductible EAR expense.

Problem 12.6 CONTRIBUTIONS EXPENSE

A taxpayer has a gross income of P8,500,000 and non-contribution deductions of P5,700,000. During the year, it contributed:
Fully Deductible Contributions 200,000
Contributions subject to Limits 210,000
COVID-19 Pandemic-Related Donations 50,000

Regular Income Taxation Regular Deductions page 35

 Compute the deductible contribution expense assuming the taxpayer is a/n
_____________1. Individual
_____________2. Corporation

Regular Income Taxation Regular Deductions page 36