Chapter 7 Introduction To Regular Income Tax

CHAPTER 7 INTRODUCTION TO REGULAR INCOME TAX
True or False 1
1. There are 2 types of regular income tax; proportional income tax for corporations and
progressive income tax for individuals. ( T )
2. NRA-NETBs and NRFCs are also subject to regular income tax. ( F )
3. All taxpayers are subject to final tax. ( F )
4. Taxable income is synonymous to net income. ( F )
5. For all taxpayers, taxable income means the pertinent items of gross income not subject to
capital gains tax and final tax less allowable deductions. ( T )
6. All taxpayers are subject to regular income tax. ( T )
7. Employed taxpayers can claim expenses from their employment as deductions against their
compensation income. ( F )
8. Items of gross income subject to final tax and capital gains tax are excluded in gross income
subject to regular income tax. ( T )
9. The 250,000 income tax exemption for individuals is designed to be in lieu of their personal
and business expenses. ( F – only in lieu of personal expense )
10. Non-taxable compensation are items of compensation that are excluded against gross
income. ( T )
True or False 2
1. The taxable compensation income is computed as gross compensation less the non-taxable
compensation income. ( T )
2. The deadline of filing the corporate quarterly income tax return is the same with the deadline
of the quarterly income tax return of individuals. ( F )
3. Business expenses can be deducted against all types of gross income subject to regular tax. (
F)
4. No deduction shall be allowed against taxable income. ( T )
5. Only corporations may incur deductions against gross income. ( F )
6. The gross income from business is measured as sales or gross receipts less cost of sales or
cost of services. ( T )
7. The tax due of individuals is determined by means of a schedules of tax rates. ( T )
8. The tax due of corporations is determined by multiplying their gross income by 30%.( T )
9. The deadline of the annual income tax return of corporations using the calendar year is
similar to the deadline fixed for individual taxpayers. ( T )
10. Every individual taxpayer is exempt from income tax on compensation up to P250,000
annually but the same exemption does not apply to business income. ( T )
Multiple Choice 1
1. The general rule in income taxation is: Regular Income taxation
2. Active income is subject to: Regular tax
3. Which of the foregoing are passive incomes subject to: Either A (Regular tax) or B (Final
tax)
4. Which of the foregoing are capital gains subject to: Either A (Regular tax) or C (Capital
Gains tax)
5. The net amount of regular income subject to regular tax is called: Taxable income
6. Which is not generally subject to regular income tax: Passive Income

7. What are allowable deductions against gross income: Business expenses
8. Deductions are allowed to: Taxpayers engaged in business
9. Personal exemptions are allowed to: Individual taxpayers only
10. Which is not a feature of the regular income tax: Final withholding tax
11. Which is true with the final withholding tax: It applies to certain passive income
12. Which is not true with the creditable withholding tax: No need to pay further taxes
13. Progressive income tax is applicable to: Individual taxpayers
14. Proportional regular income tax is applicable to: Corporations only
15. Which of the following individual taxpayers is not subject to tax on taxable income:
NRA-NETB
16. Which of the following corporate taxpayers is not subject to tax on taxable income: Resident
foreign corporation
17. Which is a source of income subject to regular income tax: Trade or business or exercise of a
profession
18. Which interest income will not be included in the income tax return: Interest income from
employees
19. Which is not subject to final tax: Prizes amounting to 11,000
20. Which of the following is a passive income but is nevertheless subject to regular tax by
virtue of exclusion under final income taxation: Prizes amounting to 10,000
Multiple Choice 2
1. The following may be relevant in the determination of taxable income: Gross income subject
to final tax and Personal exemption
2. Which is a correct statement regarding exclusion in gross income: They are subject to final
tax
3. Which of these types of employees may be subject to final fringe benefit tax: Rank-and-file
employees
4. Which is not considered an operating income: Sale of scrap
5. Which is a non-operating income: Gain of sale of office building
6. Which is an incorrect statement: Business expenses are deductible by individuals and

corporations
7. Which of the following will least likely to be considered an operating income of a security
leader: Gain on sale of bonds
8. The distinction between operating and non-operating income is not required in the income
tax return of: Self-employed individuals in business
9. The reporting classification of gross income into operating and non-operating is unnecessary
for: Neither corporate or individual taxpayers
10. Which is not part of compensation income: Basic pay of rank and file employees
11. Which cannot claim deductions: Self-employed taxpayers in business
12. Who are required to file quarterly declaration of income: Individuals engaged in business
13. Mr. Jones wishes to file his 2019 income tax return. To avoid penalty, he must file his return
on or before: April 15, 2020
14. An individual taxpayer must file his income tax return for the third quarter of 2019 on or
before: August 15, 2019
15. Avida corporation is filing its income tax return for the quarter ending February 28, 2019.
The return must be filed on or before: March 30, 2019.
16. Which of these taxpayers is required to file an income tax return: A special alien with respect
to his compensation income.
17. The taxable income of corporate taxpayers is the: taxable compensation income plus net
income from business.
18. The taxable income of a pure compensation income earner is the: Net income from business
less personal exemption.
19. The taxable income of a mixed income earner is the: Taxable compensation income.
20. The taxable income of a pure professional income earner is the: Net income from profession
less personal exemption.
21. Which of the following statements is incorrect with respect to the determination of the
taxable income of individual taxpayers with other income: The other income is simply
ignored in the computation of taxable income.
22. Statement 1: Individuals with higher income are subject to higher tax rates.
Statement 2: Corporations with higher income are subject to higher tax rates. Which is correct
regarding the regular income tax: Neither statements are correct.
23. Which is incorrect in the determination of the taxable income of individual taxpayers: Under
the TRAIN law, there is no instance where the compensation income of taxpayers could
become zero.
24. Statement 1: Corporations with the same net income may not have the same tax due.
Statement 2: Individuals with the same net income may not have the same tax due. Which
statement is incorrect regarding the regular income tax.: Statement 2.
25. A purely engaged in business individual taxpayer shall use: BIR FORM 1701A
26. BIR FORM 1701 is not intended for: Mixed income earner
27. BIR FORM 1700 is intended for: Pure compensation income earner
28. A corporation subject to different tax rates shall use: FORM 1702-MX
29. A non-profit corporation with a taxable income shall use: FORM 1702-EX
30. A school which is subject to a preferential or special tax rate shall use: FORM 1702-MX
31. A corporation that is subject only to a 30% income tax rate shall use: FORM 1702-RT
CHAPTER 8 – REGULAR INCOME TAX: EXCLUSION FROM GROSS INCOME
True or False 1
1. The proceeds of life insurance received by the heirs of the insured upon his death. ( T )
2. The amount received in excess of the premium paid in an insurance contract constitutes an
item of gross income. ( T )
3. Donated income is included in the gross income of the donee. ( F )
4. Compensation for injuries and sickness constitutes profit; hence, an inclusion in gross
income. ( F )
5. It is sufficient that the employee rendered more than 10 years of service for his retirement
benefit to be exempt. ( F )
6. An employee can secure retirement benefit exemption only once in a lifetime. ( T )
7. It is a must that the employer maintains a reasonable pension benefit plan for the retirement
benefit to be exempt. ( T )
8. An employee must have rendered more than 10 years of service before claiming exemption
for his termination benefits. ( F )
9. The income of the Philippine government from essential public functions is exempt from any
income tax. ( T )
10. Prizes paid to corporations are an inclusion in gross income subject to final tax. ( T )
11. Only the mandatory portion of GSIS, SSS, PhilHealth, and union dues can be excluded in
gross compensation income. ( T )
12. Social security benefits, retirement gratuities, and other benefits from foreign governments
are excluded in gross income. ( T )
13. Social security benefits, retirement gratuities, and other benefits from foreign private entities
are included in gross income. ( F )
14. The gain from redemption of shares in mutual fund is an exclusion in gross income subject to
regular tax because it is an inclusion in gross income subject to capital gains tax. ( F )
15. 13th Month pay and other benefits are taxable only up to P90,000. ( F )
True or False 2
1. GSIS and SSS benefits are included in gross income to the extent they exceed P90,000. ( F )
2. Prizes awarded upon the condition that the recipient shall render specified future services is
an item of gross income. ( T )
3. Prizes from contests are included in gross income subject to regular income tax. ( F )
4. The income from government owned and controlled corporations is an item of gross income.
( T)
5. Benefits of veterans of war or retired US army personnel are excluded in gross income. ( T )
6. The employer’s share to SSS, Philhealth, and Pag-Ibig contributions are an exclusion in
gross income. ( F )
7. Compared to exclusion, deduction is included in the amount of gross income but both
exclusion and deductions are not reflected in the amount of taxable income. ( T )
8. The interest income from any bond or debentures, short-term or long-term, is an item of
gross income. ( T )
9. Cooperatives that transact business only with members will, in no case, be subject to income
tax. ( F )
10. Cooperatives, regardless of their classification, are taxable on income from their unrelated
activities. ( T )
11. The gain on sale of long-term bonds with a maturity of 5 years in exclusion in gross income.
( F)
12. A non-stock, non-profit entity is subject to tax on income from unrelated activities. ( T )
13. A general professional partnership can be registered as a BMBE. ( F )
14. Items of income subject to final tax or capital gains tax are exclusions in gross income
subject to regular income tax. ( T )
15. A BMBE must have a net asset not exceeding P3,000,000 to be exempt. ( F )
Multiple Choice 1
1. Statement 1: Items of passive income from abroad are subject to regular income tax.
Statement 2: Items of passive income from the Philippines are generally subject to final income
tax. :Both statements
2. Which is true with the regular income tax? :Tax is payable at regular intervals
3. Which is not a feature of regular income tax? :Gross income tax
4. Statement 1: Capital gains are generally subject to capital gains tax.
Statement 2: Items of passive income in the Philippines are generally subject to regular income
tax. :Neither statement 1 nor 2 is true.
5. Deductions from gross income are :Business expenses.
6. Which of the following statement best distinguishes deductions from exclusions from gross
income? :Deductions are outflows from gross incomes while exclusions are not outflows
from gross income.
7. Progressive income tax does not apply to a :Non-resident alien.
8. Proportional income tax does not apply to a :General professional partnership.
9. Which is not included under the term “corporation”? :Co-ownership.
10. The highest marginal tax rate for individual income taxpayers is :35%.
11. Which corporate taxpayer is not subject to regular income tax? :Domestic corporation.
12. Which individual income taxpayer is not subject to regular tax? :Non-resident alien engaged
in trade or business.
13. Which is correct with respect to exclusions from gross income? :They are included as part of
gross income but are subsequently deducted.
14. Which is correct with respect to deductions from gross income? :They include all expenses
incurred in the generation of any income.
15. Which constitute a taxable item of gross income? :Compensation for personal injuries.
Multiple Choice 2
1. The proceeds of an insurance policy received by the corporation as beneficiary on the life
insurance of its officer is :Exempt from income tax.
2. Mr. Buguey was insured in a life insurance with his daughter, Ybon as the irrevocable
beneficiary. Ybon was paid the entire proceeds when Mr. Buguey died. The proceeds
constitute :Exclusion from gross income.
3. A policy holder who outlived the policy and received a cash surrender value in excess of
premiums paid is exempt upon :The amount representing a return of premiums.
4. The assignment of an insurance policy at an amount in excess of the premiums paid on the
policy is subject to :Income tax.
5. A widow collected the life insurance proceeds of her deceased husband is :Exempt to the
entire amount of the proceeds.
6. The policyholder of a life insurance contract outlived his insurance policy. He was paid
P300,000 upon maturity of the policy. He paid 250,000 total premiums. What is the inclusion
in gross income? :P50,000.
7. Which of the following is subject to tax? :All of these.
8. Which is not a requisite of exemption of a retirement benefit plan? :The retiree must be a
senior citizen.
9. Termination benefits are exempt from income tax provided that the reason for termination is
:Beyond the employee’s control.
10. Which is not an item of exclusion from gross income? :Income from government owned and
controlled corporations (GOCCs)
11. Which of the following government owned and controlled corporations is subject to income
tax? :National Dev’t Corporation or PCSO.
12. Which is not an acceptable ground for exemption of termination pay? :Grave Misconduct
and neglect of duty.
13. Which is not an item of gross income for taxation purposes? :Unrealized income.
14. Which is subject to income tax? :Interest income on long-term bonds with a maturity period
exceeding 5 years.
15. Which of the following is not an exclusion from gross income? :Income government
properties.
CHAPTER 9 : REGULAR INCOME TAX: INCLUSION IN GROSS INCOME
True or False 1
1. Items of gross income subject to regular income tax and capital gains tax are reportable to
the government. (T)
2. Rent is a passive income, but not subject to final tax. (T)
3. The interest income from bonds issued by banks is subject to final tax. (F)
4. Gains from dealings in capital assets are generally subject to the regular income tax. (T)
5. The gross income from operations enjoying a tax holiday is included in gross income subject
to regular tax but are presented as deductions in the income tax return. (F)
6. The share in a business partnership is subject to final tax, but the share in a general
professional partnership is subject to regular income tax. (T)
7. Gains from dealings in ordinary assets are subject to regular income tax. (T)
8. Items of passive royalty income are subject to final income tax while items of active royalty
income are subject to regular income tax. (T)
9. Compensation income is an inclusion in gross income subject to regular tax except

compensation income of special aliens. (T)
10. The reportable gross income from business or the exercise of a profession is net of cost of
goods sold or cost of services. (T)
11. Items of income which are included in gross income subject to final tax are excluded in gross
income subject to regular income tax. (T)
12. Imputed interest income is an item of gross income subject to regular income tax. (F)
13. Advanced rentals are income in the year received. (T)
14. Real property tax and insurance on the property if assumed by the lessee constitute income to
the lessor. (T)
15. Corporate winnings are exclusions in gross income; hence, they are exempt from income tax.
(F)
16. Stock dividends are never subject to income tax. (F)
17. Pensions or retirement benefits are inclusions in gross income subject to regular income tax
if the employee is terminated due to any cause within his control. (T)
18. (F) Prizes in athletic competitions sanctioned by the Philippine government are exclusions in
gross income subject to final tax but, are inclusions in gross income subject to regular income
tax.
19. Corporate prizes are exclusions in gross income subject to final tax but are inclusions in
gross income subject to regular income tax. (T)
20. Stock splits are never subject to income tax. (T)
True or False 2
1. The distributable net income of a general professional partnership is subject to creditable

withholding tax. (T)
2. Exempt joint ventures and co-ownerships are treated as pass-through entities and are subject
to income tax. (F)
3. The distribution by the GPP of items of passive income is an inclusion in gross income of the
partner subject to regular income tax. (T)
4. General professional partnerships are exempt from tax and hence, exempt from withholding.
(T)
5. The share from the net income of a joint venture organized abroad is subject to 10% final
withholding tax. (F)
6. Income distribution from taxable estates and trusts is an inclusion in gross income subject to
regular tax by the heir or beneficiary.(T)
7. The recovery of past deduction must be reverted back to gross income of taxpayers using the
cash basis. (T)
8. The recovery of bad debts need not be reverted back to gross income of taxpayers using the
cash basis. (F)
9. The recovery of deduction from any exempt year is subject to tax. (F)
10. General professional partnerships are not exempt from regular tax but are subject to final tax
and capital gains tax. (F)
11. An indebtedness cancelled by the creditor out of mercy is an income to the debtor. (F)
12. When there is a net loss in the period the deduction is taken, the subsequent recovery of the
deduction will not have any tax benefit. (F)
13. The refund or recovery of non-deductible taxes shall not be reverted back to gross income.
(T)
14. The loss of the partnership can be claimed by the partners as deduction in their income tax
returns. (T)
15. The accounting period of the taxpayer has a direct impact upon the amount of gross income
to be reported. (F)
16. The power of the CIR to redistribute income and expense includes the power to impute
income between affiliated enterprises. (F)
17. The situs of taxation has an impact on the extent of the reportable gross income. (T)
18. Creditable withholding taxes are added back to the amount of reportable gross income. (T)
19. The output VAT must be included as part of gross income of VAT taxpayers. (F)
20. The requirement to revert back to gross income the amount of withheld taxes applies only to
VAT taxpayers. (F)
21. Generally, all items of income of NRA-NETB and NRFCs from the Philippines are
inclusions in gross income subject to final tax. (T)
22. The taxpayer must enter into an advanced pricing agreement with the BIR for its
cross-border transfer pricing with associated enterprises. (F)
23. Transfer pricing between associated enterprises must be made at arm’s length. (T)
24. The transfer pricing regulations apply only to cross-border transfers of goods and services
between associated enterprises. (F)
25. Corporations under the direct and indirect control of the same controlling individual or
corporation are associated enterprises. (T)
26. Under the accrual basis of accounting, items of gross income are reported in the period they
are received. (F)
27. Basically, transfer pricing adjustment is needed when the income reported for Philippine
taxation is understated. (T)
Multiple Choice 1
1. Which is not subject to income tax? : All of these.
2. Which is an item of gross income subject to regular tax? : Gain on sale of lot by realty
dealer.
3. Which is not an item of gross income subject to final tax? : Share in the income of a general
professional partnership.
4. Which of these employee benefits is subject to final tax? : Fringe benefits to supervisory and
managerial employees.
5. All of these are items of gross income subject to regular tax except one. Select the exception.
: Interest income from long-term bank deposits.
6. Which is an income exempt from income tax? : Taxes collected by the government.
7. All of these are subject to regular income tax, except : Capital gain from the sale of real
property located in the Philippines.
8. Which is exempt from regular tax? : Income of qualified pension plans.
9. Which item of gross income is not subject to regular tax? : Capital gain on the sale of bonds
with more than 5 years maturity.
10. Which is not part of compensation income subject to regular tax? : Portion of salary
contributed to SSS.
11. Which is included in the gross income subject to regular tax of a resident alien? : Interest
income from promissory notes of resident clients.
12. Which of the following deductions from gross compensation income is included as part of
gross income subject to regular tax? : Dues withholding tax.
13. Which interest income is subject to regular tax? : All of these.
14. Dividends subject to regular tax includes : Foreign dividends.
15. Statement 1: All prizes earned abroad are subject to regular tax.
Statement 2: All prizes in the Philippines are subject to final tax. Which statement is generally
correct? : Statement 1.
16. Which is an item of gross income subject to regular tax? : Lottery winnings from abroad.
17. Which of the following is not subject to regular tax of a domestic corporation or resident
citizen? : Income from abroad exempt under treaty.
18. Which is subject to regular tax to a non-resident foreign corporation or non-resident alien not
engaged in trade or business? : None of these.
19. Which is subject to regular tax to a resident foreign corporation? : Gain from sale of real
property capital assets in the Philippines.
20. The proceeds of life insurance received by the wife of the insured is : Exempt from income
tax.
Multiple Choice 2
1. Which of the following will not be reported in gross income? : Receipt of inheritance.
2. Which is not a reportable type of gross income? : Capital gains from the sale of domestic
stocks through the PSE.
3. Which of the following is included in gross income subject to regular tax? : Farming income.
4. All income earned abroad that would otherwise be subject to final taxes if earned within the
Philippines shall be subject to a progressive tax of a : Resident citizen.
5. All items of passive income earned abroad are subject to regular to : A resident citizen and
domestic corporation.
6. Which individual taxpayer is not subject to progressive tax? : Special aliens.
7. Which corporate taxpayer is not subject to regular tax? : Non-resident foreign corporation.
8. Individual taxpayers shall report their income on : A calendar year.
9. Corporations are allowed to report their income on: Either a fiscal year or calendar year.
10. Which is subject to progressive tax to an individual taxpayer? : Amounts received by the
insured in excess of premiums paid.
11. Which of these is subject to Philippine regular income tax to a foreigner? : Interest income
from domestic bonds.
12. If not covered by the substituted filing system, employed individual taxpayers shall report
their regular income. : Annually.
13. Corporations and individuals engaged in business or in the exercise of a profession are
required to report their regular income. : Quarterly and annually.
14. Which is incorrect concerning transactions between associated enterprises? : Pricing should
be motivated by the need to save from total income tax.
15. Which is not an associated enterprise to the controlling individual of a holding company? :
An associate of a subsidiary in the group.
CHAPTER 10: COMPENSATION INCOME
True or False 1
1. A special employee may include Filipino citizens. ( T )
2. A rank-and-file employees recommends managerial actions. ( F )
3. A consultant is not an employee. ( T )
4. A manager has the power to lay down and execute policies. ( T )

5. A regular employee is subject to the regular income tax. ( T )
6. Filipinos employed by international missions are generally exempt. ( F )
7. Filipinos working in Philippine embassies are exempt from taxation. ( F )
8. A minimum wage earner is exempt from income tax. ( T )
9. Compensation income includes regular compensation, supplemental compensation, and 13th

Month pay and other benefits in excess of P90,000. ( T )
10. Compensation income includes all remunerations received under an employer-employee

relationship, including all fringe benefits of managerial or supervisory employees. ( F )
11. Benefits for the advantage of the employee are exempt from income tax. ( F )
12. Remunerations received as incidents of employment are exempt. ( T )
13. The employee’s share in SSS, GSIS, PhilHealth and HDMF are excluded in the
14. The exempt vacation leave credit is 10 days for government employees. ( F )
15. Tax exempt de minimis benefits include all benefits of relatively small value. ( F )
16. The excess of de minimis is considered “other income” for any employee.( F )
17. The sick leave credit of private employees up to 10 days is exempt de minimis. ( F )
18. The overtime pay of minimum wage earners is exempt from tax. ( T )
True or False 2
1. Supplemental compensations are fixed amounts regularly received by the employee every
payroll period. ( F )
2. A regular employee can be a managerial, supervisory, or rank-and-file employee. ( T )

3. Regular compensation includes variable performance-based remuneration received by the
employee with or without regard to the payroll period. ( F )
4. All directors are not considered employees. ( F )
5. Rank-and-file employees do routinary or clerical jobs. ( T )
6. A minimum wage earner with business income is considered a regular employee subject to
income tax. ( F )
7. A managerial employee is least likely to be a minimum wage earner. ( T )
8. The statutory minimum wage is P60,000 annually or the amount fixed by the Regional
Tripartite Wage and Productivity Board whichever is lower. ( F )
9. An OBU is a division of a local bank authorized to conduct banking transactions in foreign

currencies. ( F )
10. The position and function test, compensation threshold test, and exclusivity test are required
for alien employees. ( F )
11. A managerial employee can be a special employee. ( T )
12. The Christmas gift of private employees forms part of “other benefits” while that of
government employees is considered de minimis benefit. ( F )
13. The fringe benefits of managerial or supervisory employees are generally subject to fringe
benefit tax. ( T )
14. Resident Filipinos employed by foreign embassies, missions, or international organizations

are generally taxable. ( T )
15. Non-resident Filipinos employed by foreign embassies, missions, or international

organizations are generally exempt. ( T )
16. Filipinos employed in Philippine embassies are generally exempt. ( F )

17. Half of the benefits given for the convenience or necessity of the employer are taxable. (F)
18. Fixed allowances are supplemental compensation income. ( F )
19. For managerial employees, the excess of de minimis benefits over their limits are included as
“other benefits”. ( F )
20. The excess of the 13th Month pay and other benefits over P90,000 is considered
21. The substituted filing system applies to employees who have multiple or successive
employments. ( F )
22. An employer controls the means and methods by which the work is to be accomplished. (T)
23. An employee who became a minimum wage earner during the year is exempt from tax for
the entire year. ( F )
24. Minimum wage earners who are disqualified for exemption during the year shall be taxable
as regular employees. ( T )
25. Minimum wage earners who breached the minimum wage threshold by a salary increase
during the year are taxable only starting from the months of increase.( T )
26. A fringe benefit is usually in the nature of an incentive. Compensation income is in the
nature of performance-based pay. ( T )
Exercise Drill 1
Rank and file employee Manager or supervisor
1. Uniform allowance DM DM
2. Commissions SC SC
3. Rice Allowance DM DM
4. Productivity incentive DM DM
5. Christmas bonus-gov’t OB OB
6. Fixed monthly RATA – RC RC

government
7. Medical benefits DM DM
8. Additional OB OB
compensation allowance
– gov’t.
9. 13th month pay OB OB
10. Christmas gift-private DM DM
11. Anniversary gift DM DM
12. Shuttle allowance to a EB EB

distant facility
13. Excess de minimis OB FB

benefits
14. Basic salary RC RC

15. Profit sharing SC SC
16. Other employee OB FB

personal expenses paid
by employer.
17. Emoluments and SC SC

honoraria
18. Stock bonus SC SC
19. Educational assistance EB EB

to employee under
employment bond.
20. Used sick leave credit RC RC
21. Monetized unused sick OB FB

leave – private
22. Monetized unused DM & OB for excess DM & OB for excess

vacation leave – private
23. Monetized unused sick EB EB

leave – government
24. Monetized unused EB EB

vacation leave –
government
25. Excess over P90,000 of SC SC
13th month pay and other
benefits.
Multiple Choice 1
1. Which is not an element of an employer-employee relationship? :Payment of fixed wages.
2. Which is not an employee classification as to function? :Special employee.
3. Which is not an employee classification as to taxability? :Managerial employee.
4. Which is usually an employee :A director who is at the same time the CEO.
5. The statutory minimum wage is :The higher between P5,000 a month or P60,000 annually or
the rate fixed by the Regional Tripartite Wage and Productivity Board.
6. Which is not included in the gross taxable compensation income of an employee? :13th
Month pay and other benefits not in excess of P90,000.
7. Which is not an exclusion criterion on employee benefits? :Necessity of employee rule.
8. For purposes of fringe benefit tax, fringe benefits pertain to :Other fringe benefits not
specifically included as compensation income of managerial or supervisory employees.
9. Which is a correct statement? :The compensation income of rank-and-file employees is

subject to regular tax.
Multiple Choice 2
1. Which is not a supplemental compensation income? :De minimis benefits
2. Fringe benefits include :De minimis benefits.

3. De minimis benefits are generally :Exempt from tax.
4. Which do not form part of other benefits of rank-and-file employees? :Salaries and wages
5. The term “de minimis benefits” does not include :Christmas bonus
6. Select the most accurate statement. :The benefits of rank-and-file employees are not subject
to fringe benefit tax.
7. Which is taxable as compensation? :Termination benefits from resignation
8. Which of the following is subject to income tax? :Voluntary contribution to SSS, PHIC,
AND HDMF
9. All of these are exempt benefits of a minimum wage earner except :Vacation pay.
10. Which is correct when a minimum wage earner derives other income outside his
employment? :He is exempt from withholding tax, but subject to income tax.
11. Rice allowance is taxable when :Given more than 1,500.
12. Meal allowance is taxable when :As incentive to all employees.
13. Which is an exempt de minimis benefit? :Rice subsidy of half sack a month valued at P1,000
or uniform allowance of P5,500.
14. Which is a correct de minimis limit? :Laundry allowance of P3,600 per year.
15. Statement 1: Excess de minimis is considered compensation income as “other benefits” for
rank-and-file employees and managerial or supervisory employees.
Statement 2: Excess de minimis is a fringe benefit subject to fringe benefit tax. :Both statements
are incorrect.
16. Which is considered compensation? :Cost-of-living allowance.

17. Which of the following remuneration is an item of compensation income? :Commissions to a
minimum wage earner
18. Night differential pay is exempt from taxation when received by a :Minimum wage earner.
19. Which is not subject to the P90,000 exemption threshold for a private employee? :Profit
sharing bonus
20. The P90,000 exemption threshold is applicable to :All employees.
21. The excess of “13th Month pay and other benefits” is :Subject to regular tax.
22. Which is subject to the withholding tax on compensation? :Salary of minimum wage earners
receiving fixed allowances.
23. Statement 1: A minimum wage earner who loses the benefit of exemption by transferring to a
region with a lower minimum wage is taxable on all income during the year.
Statement 2: A minimum wage earner who qualifies as such during the year is exempt from tax
on all income earned during the year. :Both statements are incorrect.
CHAPTER 11: FRINGE BENEFITS TAX
True or False 1
1. Rank-and-file employees may be subject to fringe benefit tax. ( F )
2. Fringe benefits are always subject to fringe benefit tax. ( F )
3. The personal expenses of employees shouldered by the employer are fringe benefits. ( T )
4. Managerial or supervisory employees are subject to fringe benefit tax. ( T )

5. The tax base of the fringe benefit tax is the grossed-up monetary value of the fringe benefit. (
T)
6. The fringe benefit tax is a creditable withholding tax presumed to have been withheld at
source by the employer from the fringe benefits of supervisory or managerial employees. ( F
)
7. The taxable fringe benefit subject to the fringe benefit tax is the excess of the de minimis
benefits over P90,000. ( F )
8. Half of the benefits that are necessary to the trade of the employer’s business are subject to
fringe benefit tax. ( F )
9. Benefits in the form of properties transferred to the name of the employee are subject to fringe
benefit tax in full. ( T )
10. Benefits provided by the employer for his convenience are exempt from fringe benefit tax. (
T)
True or False 2
1. The annual depreciation value of a real property is presumed to be 10% of the value of the
property. ( F )
2. The monetary value of benefits given in cash is the cash paid. ( T )
3. The monetary value of benefits given in kind is 100% of the value of the property given. ( T
)
4. The monetary value of fringe benefits in the form of free usage of property is 50% of the
rental or depreciation value of the property. ( T )
5. Employee benefits are employee expense by nature that are paid by the employer. ( F )
6. The annual depreciation of a movable property is 20% of the value of the property. (T )
7. When title over property is transferred, the monetary value is the fair value of the property
given. ( T )
8. When the employer leases a house and lot as the usual residence of the supervisory or
managerial employee, the monetary value of the benefit is 50% of the rental payments. ( T )
9. Educational assistance to the employee is exempt from fringe benefit tax if there is an
employee bond and the study is related to the trade or business of the taxpayer. ( T )
10. Aircraft including helicopters are considered for business use and not subject to fringe
benefit tax. ( T )
11. The monetary value of benefit from loans at less than market rate shall be the difference
between 12% and the actual rate charged. ( T )
12. Lodging costs on foreign travel is a taxable fringe benefit regardless of amount. ( F )
13. 30% first-class tickets in foreign travel is a taxable fringe benefit. ( T )
14. The expenses of family members of the employee shouldered by the employer constitute
taxable fringe benefit in full. ( T )
15. An employee expense receipted in the name of the employer is considered a business
expense of the employer. ( F )
Multiple Choice 1
1. Which is not part of de minimis benefits? : Month pay.
2. The de minimis benefits not exceeding their thresholds are : Exempt from income tax.
3. Select the answer which more accurately completes the statement. The taxable fringe benefit
of a supervisory employee is : Subject to fringe benefit tax.
4. Who is subject to the fringe benefit tax? : Managerial or supervisory employees.

5. Which of these items is subject to fringe benefit tax? : Fringe benefits of managerial or
supervisory employees.
6. The fringe benefit tax by nature is a : Final tax.
7. Which is the correct statement? : The personal expenses of managerial or supervisory

employee shouldered by the employer are subject to fringe benefit tax.
8. As a rule, hybrid expenses are presumed : 50% fringe benefit.
9. Which of the following phrases is not an exemption criterion for purposes of the fringe
benefit tax? : For the furtherance of the employer’s business.
10. What percentage of the depreciation value is considered fringe benefit in the free usage of
employer’s real properties? : 50%.
11. When fringe benefit is in the form of free use of real properties, what percentage of the fair
value of the property is considered fringe benefit? : 5%.
12. When fringe benefit is in the form of free use of personal properties, what percentage of
depreciation value of the property is considered fringe benefits? : 50%.
13. An employer transferred title over property to the employee. What percentage of the benefit
is considered for purposes of the fringe benefit tax? : 100%.
14. For purposes of computing the annual value of benefits involving the free use of movable
properties, what percentage of the value of the property is used? : 20%.
15. For purposes of computing the annual value of benefits involving the free use of immovable
properties, what percentage of the value of the property is used? : 5%.
Multiple Choice 2
1. Which is not a characteristic of the fringe benefit tax? : Imposed upon the monetary value of
benefits.
2. Which is correct with respect to the fringe benefit tax? : Employees do not need to file
income tax returns to report the fringe benefit.
3. The actual value of benefits realized by the managerial or supervisory employee is referred
to as : Monetary value.
4. Which is not an exempt housing benefit? : Housing benefit for four months.
5. Which is not subject to fringe benefit tax? : Expenses of employees considered in

furtherance of the employer’s business.
6. The free usage of which of the following items is exempt from fringe benefit tax? :
Helicopter.
7. What percentage of the fair value of the yacht is considered in measuring depreciation value?
: 5%.
8. Which is subject to fringe benefits? : Housing for the family members of an employee.
9. To which of the following is the tax benefit rate not applied? : The monetary value of the
fringe benefit.
10. Which fringe benefit is subject to fringe benefit tax? : If given for the convenience or
advantage of the employee.
CHAPTER 12: DEALINGS IN PROPERTIES
True or False 1
1. The loss on the sale of stocks by a trust company is an ordinary loss. ( T )
2. The capital gain from the sale of domestic bonds and foreign stocks are subject to regular
income tax. ( T )
3. Capital loss is deductible to the extent of capital gains. ( T )
4. The sale of foreclosed land by a bank is subject to regular income tax. ( T )
5. Ordinary loss and capital loss are items of deduction from gross income. ( F )
6. Tax basis means cost or depreciated cost of the property. ( T )
7. The loss on the sale of bonds by banks is an ordinary loss. ( T )
8. An ordinary gain is an item of gross income while a net capital gain is an exclusion from
gross income. ( F )
9. The holding period rule is relevant to individuals and corporate taxpayers. ( F )
10. The gain is said to be short-term if the sale of the asset is made in less than one year from its
acquisition. ( F )
11. 50% of the capital gain or loss is considered if the asset is held by individuals for one year or
more. ( F )
12. Ordinary gains or losses are subject to the holding period rule if the taxpayer is an individual
taxpayer. ( F )
13. The gain or loss on the sale of any stocks is subject to capital gains tax. ( F )
14. Ordinary loss is deductible to the extent of ordinary gains. ( F )
15. A net ordinary loss is deductible from gross income while a net capital loss is
non-deductible. ( T )
True or False 2
1. If assets are acquired by way of inheritance, their basis shall be their fair value at the point of
death of the decedent. ( T )
2. The indicated gain in a tax-free exchange shall be recognized not to exceed the value of cash
or properties received other than stocks. ( T )
3. The amount of net capital loss carry-over must not exceed the net income in the year it was
sustained. ( T )
4. If assets are acquired by way of donation, their basis shall be the fair value on the date of the
donation. ( F )
5. The net capital loss can be carried over to a period of 3 years from the time it is sustained. (
F)
6. Obligations assumed on the property purchased form part of the basis thereof. ( T )
7. The basis of properties received as boot in a tax-free exchange is their fair value upon
receipt. ( T )
8. Gains but not losses are recognized in tax-free exchanges. ( F )
9. When no other property is involved in a share-swap pursuant to a plan of merger or

consolidation, there is no gain to recognize. ( T )
10. Corporations are allowed to carry-over net capital loss for a period of one year. ( F )
11. In initial acquisition of control, it is necessary that there are at least five persons who
acquired control of a corporation so that the exchange is exempt from income tax. ( F )
12. No gain can be recognized on a pure share-swap transaction which is not pursuant to a plan
of merger or consolidation. ( F )
13. Stock splits and stock dividends cause a dilution in the cost per unit of stocks which must be
considered in subsequent gain or loss measurement. ( T )
14. Capital gains within the 61-day period are recognized, but losses are deferred when there are
acquisitions of identical securities in the same period. ( T )
15. When properties are sold for less than an adequate and full consideration, gain is measured as
the difference between fair value and the tax basis of the property disposed. ( F )
Multiple Choice 1
1. Which capital asset is subject to the rules of capital gains tax? : Not in the choices.
2. Which is true regarding taxation of ordinary gain? : It is subject to regular tax regardless of
the taxpayer.
3. The gain arising from the sale of ordinary assets is : Ordinary gain.
4. The gain arising from dealings in capital assets is :Capital gain.
5. Statement 1: The gain on sale of ordinary assets is subject to regular income tax.
Statement 2: The gain on sale of capital assets is subject to capital gains tax. Which statement
is correct? : Statement 1.
6. Which is correct regarding gains from capital assets? : Subject to either regular tax or capital
gains tax.
7. Which is not correct regarding rules in dealings in properties? : Ordinary loss is deductible
only up to the extent of capital gains.
8. Which statement is incorrect? : Capital loss can be deducted from capital gain.
9. Which is an incorrect statement regarding the taxability or deductibility of gains or losses in

dealings in properties? : Net capital loss is deductible in full.
10. Statement 1: Ordinary gains and losses are offset.
Statement 2: Capital gains and losses are offset. Which statement is correct? : Statement 1.
11. Which of the following is not included in the computation of taxable income? : Net capital
loss.
12. Which statement is true? : Capital loss is deductible up to the extent of capital gain.
13. Statement 1: Net loss in dealing ordinary assets is deductible from gross income.
Statement 2: Net loss in dealing capital assets is not deductible from gross income. Which
statement is true? : Both statements are true.
14. Statement 1: The net gain in dealing ordinary asset is subject to regular tax.
Statement 2: Net gain in dealing capital asset is an item of gross income subject to capital
gains tax. Which statement is true? : Statement 1 is true.
15. The short-term holding period is : 12 months or less.
16. Which statement is true regarding the holding period cycle? : Applicable only to individual
taxpayers.
17. The holding period rule applies to : Taxable trusts.
18. To which of the following taxpayer does the holding period assumption not apply? : Business
partnership.
19. For which of the following taxpayers is the holding period ignored? : Corporations.
20. A short-term holding period means : 12 months or less.
21. A long-term holding period mean : More than 12 months.
22. For individual taxpayers, what percentage of the capital gain or loss is considered for capital
assets held for 12 months? : 100%
23. Which of the following properly depicts the percentage of gains considered in dealings in
properties? : Corporation (Short term – 100%, Long term – 100%)
24. What percentage of long-term capital gain shall be included in the computation of the net
capital gain or loss of a corporate taxpayer? : 100%
25. In the computation of the net capital gain or loss, what percentage of long-term capital losses
is taken into consideration by an individual taxpayer? : 50%
26. Which is incorrect in the determination of the net capital gain or loss for individuals? : 100%
of the short-term ordinary gain.
27. Which is incorrect regarding net capital loss carry over? : Applicable to corporate taxpayers.
28. Which is incorrect regarding the application of the net capital loss carry over? : Net capital
loss carry-over can be applied against available ordinary gain in the succeeding year.
29. What is the tax basis of properties received by way of gift? : Whichever is lower of FV on
date of donation and Acquisition cost of the last donor.
30. What is the tax basis of properties received as inheritance? : Fair value of the property on the
date of succession.
Multiple Choice 2
1. Which is an ordinary asset? : Gold inventory.
2. Which is an ordinary asset? : Office supplies.
3. Which is a capital asset? : Investment in foreign currencies.
4. Which is a capital asset? : Home supplies.
5. All of the following are capital assets to a merchandising business except : Store supplies.
6. All of the following are ordinary assets to a real property developer except : Mortgage
receivables on properties sold.
7. Which of the following capital assets when sold, exchanged, or disposed is subject to the
rules of regular income tax? : Domestic bonds.
8. Which capital asset is subject to capital gains tax? : Domestic stocks held as investments.
9. Which capital asset is not subject to regular tax? : Real property held as investment by
non-realty dealer.
10. Which statement is generally true? : A purely employed taxpayer does not have ordinary
assets.
11. Which of the following capital asset is the holding period rule applicable? : Home furniture.
12. Which of the following is considered as capital assets? : Assets not used in business for the
last 2 years. .
13. Mr. Erorita acquired a lot as a future plant site. For lack of financing, the lot is currently
vacant. For taxation purposes, the lot should be classified as a/an : Ordinary asset.
14. Vernon Lacoste, a book publisher, received a lot as donation from a friend who is not
engaged in the realty business. He reserves the lot to house his publication business. What is
the appropriate classification of the lot for taxation purposes? : Ordinary asset.
15. Bantay Kalikasan, a non-profit and non-stock organization, has an office building devoted of
its tax-exempt operations. For taxation purposes, this building is a/an : Capital asset.
16. Which of the following constitutes a long-term holding period? : An asset acquired on March
28, 2018 and was disposed of on April 30, 2019.
17. Which of the following statements is incorrect regarding the presentation of dealings in
properties in the income tax return? : Net capital losses are presented as items of deduction.
CHAPTER 13: PRINCIPLE OF DEDUCTIONS

True or False 1
1. The cost of investments and land are deductible against their proceeds in the year of sale. (T)
2. The entire cost of depreciable properties is deductible against their proceeds in they year of
sale. (F)
3. Prepaid expenses are deductible upon payment consistent with the rule that advanced
incomes are taxable upon receipt. (F)
4. Capital expenditures are deductible against future income. (T)
5. Personal expenses are deductible from gross income. (F)
6. Losses on properties not used in business may be deducted but only to the extent of capital
gains. (T)
7. Expenses intended for business and the personal use of the taxpayer must be allocated
between the two. Only the portion pertaining to the business is deductible. (T)
8. The expense of defending a patent is a business expense deductible in the current period. (F)
9. The depreciation of the property revaluation gain is deductible. (F)
10. Supplies and inventories are expensed using the inventory method. (T)
True or False 2
1. So long as the expense relates to the generation of an income subject to any income tax, the
same is deductible against gross income subject to regular tax. (F)
2. The amount of expense between affiliated companies may be adjusted by the BIR to reflect
their arm’s length. (T)
3. The failure to deduct creditable withholding tax on income payments will render the expense
non-deductible. (T)
4. Immaterial expenditures must always be capitalized. (F)
5. Repairs that increase property useful life are capitalized. (T)
6. Repairs that increase property fair value are capitalized. (T)
7. An unpaid accrual expense may be deducted under the accrual basis of accounting. (T)
8. The government should not enrich itself at the expense of the taxpayers. Losses between
related parties are deductible in the same way gains between related parties are related. (F)
9. Taxpayers opting to use the optional standard deduction must also maintain records of their
expenses. (F)
10. Deduction incentives are deductible because they are actual expenses. (F)
Multiple Choice 1
1. Losses on capital assets are : Not deductible against gross income whether or not
compensated for by insurance.
2. Which is a deductible expense? : Marketing and advertising expenses.
3. The transactions involving an insured property is said to be closed completed when : final
settlement by the insurer is made.
4. Which is a deductible expense? : Acquisition cost of a business franchise.
5. Which is a deductible business expense? : Selling commission to agents.
6. A repair expense is deductible in the period paid or incurred unless it : increases the value of
the property.
7. Losses on property are not deductible unless : sustained in an actual or completed transaction.
8. Losses on insured properties are not deductible : to the extent compensated by insurance.
9. Which statement is the most accurate? : Prepaid expense is deductible in the future period it
relate without regard to the basis of accounting employed by the taxpayer.
10. Cash basis and accrual basis taxpayers differs in the treatment of : current period accrued
expense.
11. Which may not be related? : The grantor and the beneficiary of a trust.
12. Which of the following is an extraordinary non-deductible expense against regular gross
income of a merchandise? : Loss on sale of investment in stocks.
13. Which is a deductible expense against business gross income? : Salaries of marketing
personnel of a manufacturing business.
14. Which is not a general principle of deduction? : The transfer pricing rule.
15. Which is an actual deductible expense? : Loss arising from liability on a contested lawsuit
confirmed by a final judgement.
16. Which is deductible against gross income? : Local taxes.
17. Which of the following is deductible? : Rent of office space.
18. Which is non-deductible against gross income? : Loss on sale of stocks through the PSE.
19. Which is an incorrect statement? : The sum-of-the-years digit method provides for an
increasing deduction against gross income.
20. Which of the following ordinary assets cannot be depreciated? : Land.
21. Statement 1: Only taxpayers under the accrual basis shall use the inventory method in
deducting inventories.
Statement 2: Only taxpayers under the accrual basis can claim deduction for depreciation
and losses. : Neither statement is correct.
22. Statement 1: The cost of goods sold is directly deducted upon sales in the measurement of
the gross income from the sales of goods.
Statement 2: The cost of services is directly deducted from gross receipts in the measurement
of the gross income from the sale of services. : Both statements are correct.
23. Which is not a capital expenditure? : Accrued expenses.
24. Statement 1: Repairs that do not extend the useful life or increase the fair value of an asset
should be capitalized.
Statement 2: The costs of issuing securities of the taxpayer are deductions against gross
income. : Neither statement is correct.
25. Statement 1: Improvements to properties are usually capitalized.
Statement 2: Directly attributable cost of acquisition of properties are added to the basis of the
properties acquired. : Both statements are correct.
Multiple Choice 2
1. Which of the following cannot claim deductions from gross income despite actual engagement
in business? : Non-resident alien not engaged in trade or business.
2. Which of the following taxpayers cannot claim deductions from gross income? : Non-resident
foreign corporation.
3. Which of the following can be claimed as deduction? : Transportation allowance of employees

of the taxpayer.
4. Which expense is deductible despite the fact that it is not an actual expense? : Deduction
incentives for compliance to regulatory requirements.
5. Which is not a characteristic of deductions from gross income? : Capital expenditure.
6. Which is a deductible expense? : Regular repair of office equipment.

7. Which of the following taxpayers can claim deduction against gross income? : Resident
citizen earning a mix of passive income and business income.
8. Which is not a separate classification of deduction from gross income? : Net capital loss
carry over.
9. Which statement is incorrect regarding deductions? : The incurrence of an operating loss is

an indication of an unreasonable expense.
10. The following cannot claim deduction from gross income except : A self employed taxpayer.
11. Which is not deductible against gross income? : All of these.
12. Which is a deductible business expense? : Loss on theft of company assets.
13. Which of the following constitutes a deductible business expense? : Interest expense on a
business loan.
14. Which of the following qualifies for deduction for an individual income taxpayer engaged in
business? : Office internet expense.
15. Which of the following can be deducted by an individual taxpayer not engaged in business? :
None of these.
16. Which of the following can be claimed by a resident foreign corporation? : Interest expense
on foreign borrowings used to finance its Philippine business.
17. Which can be treated as a capital expenditure deductible through depreciation expense? :
Interest expense incurred to purchase office equipment.
18. Which of the following items can be deducted in full in the year sustained? : Uninsured fire
loss sustained by the business of the taxpayer.
19. Deductions can be claimed against : talent fees.
20. Which is deductible in full by a taxpayer engaged in the merchandising business? : Value of
inventories destroyed by rodents.
21. Which is not a deductible loss by a security dealer? : Loss on sale of bonds with more than
five years maturity.
22. Determine the deductible loss. : Calamity loss on uninsured property.
23. Which of the following is non-deductible by the fact that it violates the Matching Principle? :
Expense of a tax-exempt operation.
24. Which is incorrect with regard to expenses incurred between associated enterprises? : No
deduction shall be allowed on expenses incurred between associated enterprises.
25. Which is not a business expense? : Depreciation value of properties designated for the use of
company managers and supervisors which are subjected to fringe benefits tax.
Multiple Choice Problems 1
1. On September 30, 2020, a taxpayer borrowed P1,000,000 at 10% annual interest to finance his
acquisition of a luxury car. Compute the deductible interest expense.: 0
2. Spartan Corporation had office supplies valued at P40,000 on January 1, 2020. At the end of
the first calendar quarter, it had P80,000 worth of office supplies. Total supplies purchased were
P250,000 during the period. : 210,000 (P40k+250k-80k)
3. A non-resident alien not engaged in business incurred business expenses of P100,000 and
personal expenses of P20,000. How much is deductible from his gross income? : 0
4. A taxpayer paid the following salaries during the year:

Salaries of administrative employees P80,000
Salaries of sales and marketing employees 70,000
Salaries of factory production employees 120,000
Compute the deductible salaries expense.: 150,000 (80k+70k)

5. On July 1, 2018, a taxpayer purchased equipment for P500,000 which was estimated to be
useful until July 1, 2023, with an expected P100,000 residual value. Compute the 2018
depreciation expense using the straight line method. : P40,000
6. A taxpayer paid P45,000 property insurance having a 12-month coverage starting March 1,
2018. Compute the deductible insurance expense in 2018. : P37,500 (45k/12*10)
7. A storm resulted in the loss of the following livestock:
Value of 2 heifers (purchased @ P15,000 each) P40,000
Value of a bull (purchased for P18,000) 24,000
Value of 12 calves worth P6,000 each 72,000
Total value of lost livestock P136,000
Determine the deductible loss for taxation purposes.: P48,000 [(15k*2)+18k]
8. Mr. Jun, a professional practitioner, incurred the following expenses during the period:
Salaries of household maids P50,000
Salaries of office staff 30,000
Office utilities 12,000
Office supplies 8,000
Depreciation of personal car 15,000
Depreciation of office equipment 20,000
Compute the total deductible expenses.: P70,000 (30k+12k+8k+20k)
9. The following relate to the building of a taxpayer:
FMV P6,000,000
Purchase Price 5,000,000
Carrying amount 4,500,000
Remaining useful life 9 yrs.
Depreciation method Straight line
What is the deductible amount of depreciation expense?: P500,000 (4.5M/9 yrs)
10. The personal car of the taxpayer had the following data:
FMV P6,000,000
Purchase price 5,000,000
Estimated useful life 10 years
What is the deductible annual depreciation expense?: 0
11. The following relate to the inventory of tools held by the taxpayer:
Inventory tools, Jan. 1, 2019 P120,000
Purchases of tools 300,000
Inventory tools, Dec. 31, 2019 140,000
What is the amount of deductible tools expense?: P280,000 (120k+300k-140k)
12. A taxpayer paid the following disbursements and expenses for the current year:
Tuition fees of children P50,000
Donation to friends. 20,000
Purchase of office equipment at the start of year 100,000
(equipment to last for 5 yrs)

Office rent (for 3 yrs including current yr) 90,000
Office supplies (½ used) 20,000
Compute the total deductible expense from the above items.: P60,000
[(P100k/5)+(90k/3)+(20k*½)]
13. Bermuda Inc. insured two of its key employees paying the following premiums annually:
Mr. Croco, the president. P40,000
Mr. Genero, the vice president for operations 34,000
In Mr. Croco’s policy, Bermuda is the beneficiary. In Mr. Genero’s policy, his wife is the
beneficiary of the policy. Compute the total deductible expense.: P34,000
14. Dragon City Corporation is a resident foreign corporation established in China but is
operating in the Philippines. During the year, it paid for P300,000 for salaries of Philippine
employees and P1,200,000 for Chinese employees. Compute the deductible compensation
expense.: P300,000
15. Compute the deduction assuming that Dragon City is a domestic corporation.: 1,500,000
(1.2M+300k)
16. Compute the deduction assuming that Dragon City is a non-resident foreign corporation.: 0
(NRFC is subject to final tax. No deduction is applied)
1. BOAC Company had the following summaries of expenses
Expenses: w/ supporting documentation P200,000
Income payments subject to creditable withholding tax
With withheld CWT P600,000

Without withheld CWT P400,000
Payments not subject to creditable withholding tax P200,000
Determine the amount of deductions: P800,000 (P600K+P200K)
2. Calapan corporation bought equipment costing P500,000. The equipment was expected to
have 50,000 residual value at the end of its 5-year expected life. Calapan Corporation
failed to withhold the creditable withholding tax on the equipment. Compute the
depreciation expense in the first year. P0
3. Tri-Peak semiconductor is an exporter of transistors to the United States. On December
15, 2019, it made a single shipment worth 1,000,000 payable January 21, 2020. The value
of the sales in peso equivalent was as follows”
December 15, 2019 P42,000,000
December 31, 2019 P41,800,000
January 21, 2020 P41,700,000
Compute the deductible foreign currency loss: P300,000 in 2020 (P42M-P41.7M)
4. The taxpayer incurred the following in 2020
Loss on sale of equipment to a subsidiary company P400,000
Loss on sale of equipment to a sister company 100,000
Loss on liquidation of an affiliate company 200,000
What is the deductible amount of loss to a related party? P200,000
5. The accountant of Trinville corp. Provides for an allowance against unrecoverable

accounts equivalent to 3% to Triniville’s total receivables. The allowance for bad debts
had a balance of 45,000 and 50,000 at the start and end of the year, respectively, while
30,000 of previous accounts were actually found to be worthless and were written-off.
What is the deduction against gross income for purposes of taxation? P30,.000
6. The ff. Relate to a translation between associated enterprises wich was subjected to
transfer pricing restatement by the BIR
Amount of expense claimed P800,000
Arm’s length value in a comparable transaction 500,000
What is the deductible amount of expense? P500,000
7. In the immediately preceding problem, what is the required adjustment to taxable net
income? P300,000 increase (P800K-P500K)
8. A taxpayer had the ff. Losses during the year:
Estimated bad debt expense P300,000
Write-off of uncollectible accounts P150,000
Carrying value of property destroyed by fire P1,200,000
Unrealized loss on foreign currency receivables P12,000
Assuming the taxpayer is under the accrual basis, compute the total deduction: P150,000
9. In the immediately preceding problem, compute the deduction assuming the taxpayer is
under the cash basis. P0
10. ABC company incurred and paid the ff expenses in 2020
Salaries (⅛ unpaid) P400,000
Prepaid rent (2020 to 2022) P150,000
Depreciation expense 80,000
Purchases of supplies 60,000
Supplies used 25,000

Compute the total deductions under the cash basis for the year 2020. P505,000 [(P400K
X 7/8)+(P150K X 1/3)+P80K +P25K];NOTE: Supplies is a from prepayment.
11. Compute the total deductions under the accrual basis for the year 2020. P555,000
[P400K+(P150K X 1/3)+P80K +P25K]
12. An equipment was purchased on January 1, 2020 for 4,000,000. The equipment has an
estimated useful life of 400,000 at the end of its five-year useful life. Compute the
depreciation expense assuming the use of the straight line method. P720,000
13. Sum of the years digit method. P1,200,000
14. 150% declining balance method. P1,200,000
15. 200% declining balance method. P1,600,000
1. A certain taxpayer paid the following bill from a VAT- registered supplier of office
supplies. The office supplies were all used in operation during the period:
Selling price P400,000
Plus: Output VAT 48,000
Less: Withholding tax (1%) 4,000
Net cash due 444,000
What is the deductible supplies expense assuming the taxpayer is a VAT-taxpayer?

P400,000
2. What is the deductible supplies expense assuming the taxpayer is a VAT-taxpayer?

P448,000
3. On January 2, 2016, a non VAT taxpayer purchased an equipment with estimated useful
life of 5 years
Selling price P150,000
Plus: Output VAT 18,000

Less: Withholding Tax 1,500
Net amount due P166,500
What is the claimable depreciation expense for the year? P33,600 (The cost of the
equipment for a non-VAT taxpayer shall be (P150,000 + P18,000) or P168,000/5 years =
P33,600.)
4. The taxpayer withheld 5% creditable withholding tax on rental payments to various

VAT-registered lessors. The total taxes withheld were P5,600. What is the deductible
amount of rental expense? P112,000 (P5,600 / 5%, note that the 5% is based on the rent
expense, exclusive of VAT.)
5. Until the time of the examination of its book, the taxpayer failed to withhold 10%
withholding tax amounting P10,000 from the payments of professional fees to a
consultant who is a VAT taxpayer. What is the deductible amount for professional
services paid? P0
6. In the immediately preceding problems, what is the amount of the surcharge due from the
taxpayer? P2,500 (P10,000 x 25% surcharge)
7. Atimonan company received a bill for 27,440 from a non-VAT service provider. The
payment for the services is subject to 2% creditable withholding tax.
What is the deductible expense if Atimonan is a non-VAT taxpayer? P27,440
8. If Atimonan is a non-VAT taxpayer, what respectively is the withholding tax and the
amount of cash to be paid by Atimonan to the service provider? P548.80; P26,891.20
(P27,440 x 2% = P548.8; P27,440 – P548.80 = P26,891.20)
9. If Atimonan is a VAT taxpayer, what is the deductible expense? P27,440 ((The supplier is
non-VAT, so there is no difference as there is no Input VAT to account for.)
10. If Atimonan is a VAT taxpayer, what respectively is the withholding tax and the amount
of cash to be paid by Atimonan to the service provider? P548.80; P26,891.20
CHAPTER 13A: REGULAR ALLOWABLE ITEMIZED DEDUCTIONS
True or False 1
1. Interest incurred in the financing of petroleum operations may at the option of the taxpayer
be capitalized or expensed. (F)
2. Income tax is not an expense. (T)
3. The arbitrage limit applies only when there is an intentional arbitrage. (F)
4. The arbitrage limit applies to all taxpayers including individuals. (T)
5. Interest expenses incurred with related parties are deductible. (F)
6. Interest expenses are deductible in full amount if there is no interest income subject to final
tax during the period. (T)
7. Interest on a prescribed debt is deductible. (F)
8. A deductible interest must not be incurred between related parties. (T)
9. The allowable deduction for deductible taxes includes the basic tax, surcharge, and interest.
(F)
10. Foreign taxes can be claimed as a deduction or tax credit. (T)
11. Foreign corporations and aliens can claim deduction or tax credit for foreign taxes. (F)
12. Capital loss is deductible to the extent of ordinary gain while ordinary loss is deductible in
full. (F)
13. Losses must be reported to the BIR within 45 days from the occurrence of the casualty,
robbery, theft, or embezzlement giving rise to the loss. (T)
14. Depreciation on revaluation surplus of properties can be deducted as part of depreciation

expense. (F)
15. The claim of the same loss in the income tax return of the estate and in the estate tax return is
not allowed. (T)
True or False 2
1. Bad debt expenses representing loss of capital can be deducted by cash basis taxpayers. (T)
2. Bad debts expenses between related parties can be deducted as long as these are adequately
supported with documentary evidence. (F)
3. The loss of capital investment in a business can be claimed as bad debt expense. (F)
4. The subsequent recovery of bad debt expense must be reverted back to gross income to the
extent of the tax benefit of the deduction in the year the deduction is made. (T)
5. The loss on insured property cannot be deducted. (T)
6. In total destruction of properties, restoration costs are treated as new acquisition of

properties. (T)
7. If the fair value of the property is not determinable, restoration costs are expensed to the
extent of the basis of the original property. The excess over the basis is treated as an increase
in fair value and is capitalized. (T)
8. The loss in value of assets is deductible only when sustained and realized. (T)
9. Losses on wagering transactions are deductible in full. (F)
10. With the exception of domestic corporations and resident citizens, expenses incurred abroad
cannot be deducted unless incurred in connection with the Philippine business. (T)
11. Contributions are valued at the fair value of the property donated. (F)
12. The recovery of bad debts by cash basis taxpayers must always be reverted back to gross
income. (T)
13. The recovery of bad debts by accrual basis taxpayers may be reverted back to gross income.
(T)
14. Capital assets can be depreciated for tax purposes. (F)
15. The depreciation expense on properties held under life tenancy is computed as if the life
tenant were the absolute owner of the property. (T)
True or False 3
1. Petroleum operations are not subject to the limit on the deduction of intangible exploration
and development costs after the commencement of commercial production. (T)
2. Contribution expenses are deductible if the donee is a domestic institution. (T)
3. Donations to foreign institutions covered by treaty exemptions are fully deductible. (T)
4. Contribution expenses are measured at the fair value of the property donated. (F)
5. Private educational institutions are allowed to deduct capital expenditures. (T)
6. The depreciation on properties held in trust is apportioned between the income beneficiaries
and the trustees in accordance with the provision of the instrument creating the trust or on the
basis of the income allowable to each. (T)
7. The depreciation of revaluation surplus is not deductible in taxation. (T)
8. No depreciation expense is allowable for helicopters, yachts, airplanes or aircraft, and land
vehicles which exceeds P2,400,000 in value unless the main line of business of the taxpayer
is transport or lease of transportation equipment. (T)
9. Tangible development costs in wasting assets are capitalized and depreciated. (T)
10. Intangible exploration and development costs incurred before commercial production in a
wasting asset operation are capitalized as cost of the wasting asset. (T)
11. After commencement of commercial production, intangible exploration and development
costs incurred on non-producing wells or mines are deductible in the period paid or incurred.
(T)
12. After commencement of commercial production, intangible exploration and development

costs incurred on producing wells or mines are always capitalized and amortized using the
cost-depletion method. (F)
13. The threshold on partially deductible contributions of corporate taxpayers is 10% of the net
income before the contribution. (F)
14. The funding of past service cost is amortized over 10 years or the actual vesting period
whichever is longer. (F)
15. The overfunding of defined benefit plans is treated as funding of past service cost and is
amortized over 10 years. (F)
16. The employee counterpart in a contributory pension plan is deductible by the employer. (F)
17. Research and development costs related to land must be capitalized. (T)
18. Research and development costs not related to capital accounts are either deducted outright
or deferred and amortized over a period of not less than 60 months. (T)
19. The EAR expense on the sale of goods is subject to a limit of 0.5% of gross sales. (F)
20. The EAR expense on the sale of services is subject to a limit of 1% of net revenue. (T)
21. Purely employed individuals can claim deductions for donations made. (F)
Multiple Choice 1
1. Which of the following cannot be deducted against gross income of non-VAT taxpayers? :
Philippine Income Tax
2. Which is not deductible against gross income? : Salaries of managerial or supervisory

employees
3. Which is deductible tax expense against gross income? : Documentary stamp tax
4. Which is deductible in the measurement of net income from business or profession? : All of
these
5. Which of the following can treat capital expenditures as outright deduction? : Private
educational institutions
6. Which is not a requisite of a deductible loss? : It must be compensated by insurance or

indemnity of contracts
7. Which is a correct statement? : Gains between related parties are taxable
8. Who are not related parties for purposes of the NIRC? : A partner and the partnership
9. Which is a deductible tax expense? : Real property tax or business properties
10. Which of the following can be deducted by a VAT expense? : Interest on tax delinquency
11. Who cannot claim foreign income tax credit? : Resident aliens
12. Foreign income tax can be claimed as : Deduction from gross income (yes), Tax credit
against the income tax due (yes)
13. Estimated quarterly income tax can be claimed as : Deduction from gross income (no), tax
credit against income tax due (yes)
14. Fringe benefit tax can be claimed as : deduction from gross income (yes), tax credit against
income tax due (no)
15. Which of these expenses is not part of the deductible expenses of the taxpayer? :
documentary stamp tax on the sale of stocks directly to a buyer
Multiple Choice 2
1. Wagering losses are deductible : up to the extent of gains on wagering transactions

2. Securities becoming worthless is considered as an ordinary loss to : all of these
3. Bad debts expenses include : uncollectible debts due to the taxpayer
4. Which of these is a partially deductible contribution? : donation to the government for public
purpose
5. Research and development cost that are not chargeable to capital account can be claimed as :
donation to accredited charitable institutions
6. A taxpayer incurred research and development expenditures which are related to a capital
account subject to depreciation. The taxpayer should : treat the R&D expenses as capital
expenditures and depreciate them over the useful life of the related asset
7. A taxpayer paid for research and development expenses that are not chargeable to capital
account. The taxpayer wished to amortize the same over its expected period of benefits. If the
R & D is expected to benefit the taxpayer for 6 years, what is the correct amortization period
for the R&D expenses? : 72 months
8. Which can claim full deduction for the loss of securities becoming worthless? :Security
dealers
9. Which of the following items of entertainment, amusement and recreation expenses can be
claimed as a deduction? : entertainment expenses for potential and existing clients
10. Calauag Inc. owns 51% of the voting power of Quezon Inc. Which is a correct statement
regarding gains and losses between these two entities? : gains between calauag and quezon
are subject to income tax.
1. The following relates to a taxpayer:
Interest expense P400,000
Interest income-promissory notes 100,000

Compute the deductible interest expense.: P400,000
2. The taxpayer has the following losses:
Net operating loss carry over - last year P200,000
Net capital loss - current 80,000
Net capital loss - last year 70,000
Ordinary loss 50,000
Taxable income before losses 400,000
Compute the total deductible losses in the current year.: P250,000 (200k+50k)
3. Gawain Merchandising paid P400,000 to employees, net of P60,000 total withholding tax on
compensation. What is the deductible amount of expense by the employer?: P460,000
(400k+60k)
4. How much is claimable as deductible business expense for the year?: P300,000
(200k+40k+60k)
5. The following relates to a taxpayer’s warehouse:
Cost. P2,000,000
Accumulated depreciation 600,000
Residual value 200,000
Current FMV 2,500,000
Remaining useful life 12 years
Compute the deductible depreciation expense.: P100,000 [(P2M-600k-200k)/12 years]
6. The following relates to a taxpayer:

Interest expense P400,000
Interest income 100,000
Compute the deductible interest expense.: P367,000 [400k-(100k*33%)]
7. An individual income taxpayer reported the following:
Capital loss - current year P50,000
Capital gain - current year 200,000
Compute the total capital loss deductible against capital gain in the current year.: P120,000
(50k+70k)
8. Suppose the income taxpayer in the immediately preceding problem is a corporation, compute
the deductible capital loss against capital gain.: P50,000
9. The following data relate to an individual taxpayer:
Net capital loss- last year 90,000
Net income-last year 80,000
What is the net capital loss carry-over for the current period? : P70,000 (P150k capital gain-80k
capital loss)
10. The following relate to a corporate taxpayer:
Capital loss-current year P60,000
Capital gain-current year 140,000

Net capital loss 40,000
Net income 75,000
What is the net capital loss carry over?: 0
11. An individual income taxpayer reported the following:
Compute the deductible capital loss against capital gain in the current year.: P60,000
12. An individual income taxpayer showed the following:
2019 2020
Gross Income P300,000 P400,000
Deductible business Income (360,000) (300,000)
Net capital gain or (loss) (50,000) 70,000
Compute the 2019 net income. P110,000 [(400k GI-300k Bus. Exp.)+70k-60k 2014 NOLCO]
13. Assume in the immediately preceding problem that the taxpayer is a corporation. What
would be the taxable income in 2020.: P110,000
14. A corporate income taxpayer reported the following gross income and deductions:
Gross income Deductions
2016 P300,000 P450,000
2017 400,000 470,000

2018 450,000 400,000
2019 500,000 420,000
2020 500,000 400,000
Compute the taxable income in 2020. : P30,000 [[500k-400k)-70k 2012 NOLCO]
15. Andrew, a resident citizen, reported a world taxable income of P500,000 and a tax due on
world income of P125,000. P150,000 of the taxable income was earned in Japan out of which he
paid P45,000 in income tax. Compute Andrew’s foreign tax credit. : P37,500
[(150k/500k)*125k]
1. Mr. Aurelius made contributions to the following in 2020:
Street beggars P50,000
Barrios fiestas 60,000
Various cancer patients 40,000
Takusa, an accredited non-profit organization 100,000
Compute the deductible contribution expense.: P100,000
2. ABC Company declared a property dividend with book value of P1,000,000, and fair value of
P1,200,000. The total dividends withheld on the dividends were P60,000. Compute the total
deductible expense.: 0
3. Naga Company paid P32,000 fringe benefits tax for the purchase of merchandise used by the
family of one of its company officers. How much is the deductible expense against gross
income? : P100,000 (32,000/32%)
4. Makati Corporation has operations in Malaysia and Singapore with the following taxable
income and taxes paid during the year:
Philippines Malaysia Singapore
Taxable income P800,000 900,000 700,000
Income tax paid 180,000 288,000 175,000
Makati Corporation wishes to claim the foreign income tax paid as credit. Compute the foreign
income tax credit.: P445,000 (270k+175k)
5. Balanga Inc. contributed P500,000 for its pension fund inclusive of P200,000 funding of
current service cost. How much is the deductible pension expense? : P230,000
[(500k-200k/10+200k]
6. Tawi-tawi Inc, maintained a defined contribution pension plan. The plan is contributory where
employees contribute 20% of the pension contributions. During the year, Tawi-tawi
contributed P1,000,000 inclusive of employee contribution which was pre-deducted through
their salaries. Compute the pension expense. : P800,000 [1M-(20%*1M)]
7. Entertain Corporation set up a plan in 2020. The following relate to the fund:
2020 2021
Funding of current service cost P400,000 P400,000
Funding of past service cost 300,000 200,000
Compute the deductible pension expense in 2020. : P430,000 [(300k/10)+400k]
8. In the immediately preceding problem, compute the pension expense in 2021.: P450,000
[400k+(300k/10)+(200k/10)]
9. Zambales Inc. made the following contributions during 2020.:
Contributions to the government (non-priority) P60,000
Contributions to foreign charitable institutions 40,000

Contributions to accredited non-profit institution 30,000
Contributions to foreign organizations with treaty exemption 100,000
Zambales Inc. has net income before contribution expense of P1,000,000. Compute the
deductible contribution expense.: P180,000 (50k+30k+100k)
10. Compute the deductible contribution expense.: P80,000 (50k+30k)
11. What is the taxable compensation income? : P325,000 (400k-75k)
12. What is the net income? : P220,000 [(500k-200k)-80k]
13. What is the taxable income? : P545,000 (325k+220k)
14. A taxpayer with net sales of P2,000,000 and cost of sales of P1,800,000 incurred P15,000
entertainment, amusement and recreation expenses (EAR). Compute the allowable deduction
for EAR expenses. : P10,000 (2M*0.5%)
15.A taxpayer with gross receipts of P2,000,000 and direct cost of services of P1,800,000
incurred P15,000 entertainment, amusement, and recreation expenses (EAR). Compute the
allowable deduction for EAR expenses. : P15,000 (2M*1%)
16. A taxpayer reported sales of P3,000,000 and gross receipts of P2,000,000 in 2020. It incurred
entertainment, amusement, and recreation expenses of P35,000. Compute the deductible
EAR expense. : P29,000 (15k+14k)
CHAPTER 13B: SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS AND NET

OPERATING LOSS CARRY-OVER
True or False 1
1. The employers are allowed additional deduction of 15% on the compensation paid to persons
with disability. (False, 25%)
2. An adopting private entity of a public school is entitled to a deduction incentive equivalent to

double the amount donated to a public school. (False, Additional 50%)
3. Taxpayers who installed improvements in their facilities to accommodate persons with
disability are allowed an additional 50% deduction incentive based on the value of such
improvement. (True)
4. The distribution of the corpus of a taxable estate or trust is an item of special deduction
against the gross income of the estate or trust. (False, only distribution of income)
5. The transfer to the reserve fund of insurance companies is a special deduction, but the release
from the reserve fund is an item of gross income. (True)
6. Dividends are non-deductible by any taxpayer except real estate investment trusts. (T)
7. The transfers to all reserve funds of the cooperative including mandatory and discretionary
funds are deductible from the gross income of cooperatives. (F)
8. Persons with disability are mandatorily allowed a discount of 20% from all establishments. (T)
9. Senior citizens are mandatorily allowed a discount of 25% from certain establishments. (F,
20%)
10. The employer of senior citizens can claim additional deductions equivalent to 50% of the
compensation paid to senior citizens who have income below the poverty line. (F, 15%)
11. Expenses incurred to comply with the requirement of the Expanded Breastfeeding Act are
allowed an additional incentive equivalent to the amount of the expense incurred. (T)
12. Attorneys are entitled to the value of their pro-bono services to indigent clients as deduction
from gross income. (T)
13. The allowable incentives to lawyers for pro-bono services shall not exceed 10% of the gross
income from the actual performance of the legal profession. (T)
14. Employers are entitled to an additional deduction of 50% of the productivity incentive bonus
paid to their employees. (T)
15. The amount of NOLCO shall not include the amount of deduction incentives allowed by law.
(T)
16. A small business was merged to a larger business. Even after the merger, the NOLCO of the
small business is deductible by the larger business. (F)
17. NOLCO is valid for 3 years. (T)
18. NOLCO always exist when there is a net operating loss. (F)
19. Net capital loss carry over cannot be carried over together with NOLCO.(T)
20. An acquirer in a business combination sustained a net operating loss before the business
combination. The acquirer is allowed to carry-over its net operating loss in prior years. (T)
1. A fitness gym catering to senior citizens recorded a total gross revenue of P345,000 from
senior citizens. The gym provides 24% discount in excess of the legal requirements. What is the
deductible amount of senior citizens’s discount? : P90,789 (345k*20%)
2. Germanic Inc. employs three senior citizens as regular employees. Two of them are receiving
the minimum wage which is within the poverty level. Total minimum wages paid to these senior
citizen employees during the year were P182,000. One of the senior citizen employees is a
director of the company who was paid P780,000 compensation during the year. Compute for the
deductible additional compensation expense. : P27,300 (182k*15%)
3. An employer hired two senior citizens during the year as temporary replacements for its two
staffs who are on leave. Both senior citizens were paid salaries not in excess of the poverty level.
Mang Pandoy substituted for an employee who went on one year sabbatical leave. Mang Pandoy
received a total of P144,000 during the year. Aling Maria substituted for an employee who filed
for a maternity leave for 3 months. Aling Maria received a total of P28,000 during the year.
Compute the total deductible additional compensation expense.: P21,600 (144k*15%)
4. Mr. Bakilan irrevocably designated in trust his investment portfolio consisting of domestic
stocks and bonds. The dividend income from the stocks shall be distributed to the beneficiary
while the interest on the bonds shall be accumulated. During the year, the portfolio earned
P200,000 interest and P135,000 dividends, net of final tax. What is the total deduction allowable
to the trust for the income distribution? : 0
5. A grantor irrevocably designated in trust a real property in favor of a beneficiary. Under the
trust indenture, 20% of the trust gross income shall be distributed to the beneficiary. The trustee
shall be paid 5% of the gross income as management fee. During the year, the trust collected
P810,000 rent income, net of 10% creditable withholding taxes. The trust recorded P350,000 in
expenses. Compute the deductible amount of income distribution to the fund.: P101,000
[(900k-350k-45k)*20%]
6. The required reserve for an insurance company was P3,200,000 as of December 31, 2013 and
P3,500,000 as of December 31, 2013. What is the deductible amount of transfer to the reserve
fund?: P300,000 (3.5M-3.2M)
7. A real estate investment trust earned P4,100,000 from property rentals. Total business
expenses were P2,100,000. Assuming the REIT declared the mandatorily required dividend
distribution, what is the amount of deductible dividend against gross income?: P1,800,000
(4.1M-2.1M)
8. A cooperative transacting business only with its members is on its third year of operation. It
reserves 50% of its operating income in compliance with the new CDA regulation. During the
year, it reported a total operating income of P3,000,000 inclusive of P2,400,000 income from
related activities. Compute the deductible amount of transfers to reserve against gross income. :
P300,000 [(3M-2.4M)*50%]
9. An establishment granting senior citizens 25% discounts recorded the following sales during
the period:
Customers
Regular. Senior Ctizen
Gross Sales P8,000,000. 800,000

Cost of Sales 5,000,000. 400,000
What is the deductible senior citizens’ discount? P160,000 (800k*20%)
10. A restaurant granted 25% discounts to senior citizens in excess of the 20% mandatory
requirement. During the year, the restaurant reported receipts of P93,750 from senior citizen
customers. Compute the deduction for senior citizens’ discount.: P25,000 [(93,750/75%)*20%]
11. An employer embarked on a socio-economic program names “A World Empowered by

Persons with Disability.” Under the ambitious program, the employer established a business
which is fully manned by persons with disability. The employer incurred P300,000 in workplace
improvements specifically designed for its disabled employees. The business venture turned very
profitable due to overwhelming public sympathy. During the year, the employer paid P2,100,000
in compensation expense. Compute the additional deductible compensation expense.: P525,000
[2.1M x 25%]
12. In the immediately preceding problem, what is the deductible additional expense for the
improvements made for the employees with disability? P150,000 [300k x 50%]
13. In 2016, Bernard Bakilan, a practicing lawyer, adopted a public elementary school and
contributed P500,000 for the acquisition of computer equipment and software. Bernard had an
operating income of P900,000 before this contribution expense. Assuming the “Adopt-a-School
Program” is an investment priority program of the government in 2016, compute Bernard’s
additional contribution expense and net income respectively.: P250,000 & P150,000
[P900K-P500K-(P500K X 50% Contribution expense)]
14. In the preceding problem, compute Bernard’s additional contribution expense and net
income, respectively, if the “Adopt-a-School Program” is no longer a government priority
program in 2016? P250,000 & P560,000 [P900K-(P900K X 10%)-(P500K X 50% Contribution
expense)]
15. Binondo Jewellry is a qualified jewelry enterprise registered with the Board of Investments.
In order to modernize its jewelry making business, it instituted an in-house training program and
hired external experts to train its employees. The program was duly approved by TESDA. The
program cost P300,000 during the year.
What is the deductible amount of additional training expense? P150,000 [300k x 50%]
16. Girl Power Corporation employs purely women. It installed a lactation station at a total cost
of P350,000 and secured a “Working Mother-Baby-Friendly Certificate” from the Department of
Health.
Compute the additional deduction under the Rooming-in and Breastfeeding Practices Act.:
P350,000 [350k x 100%]
17. A government provincial hospital established a milk bank at a cost of P1,000,000. Determine
the additional deduction incentive it is allowed under the Rooming-in and Breastfeeding
Practices Act.: 0
18. In the immediately preceding problem, what would be the additional deduction assuming the
hospital is a proprietary medical center? P1,000,000 [1M x 100%]
19. Atty. Midsayaf is a practicing lawyer in the remote provinces of Mindanao. During the year,
he provided 180 actual hours for pro-bono services inclusive of the 60-hour mandatory legal aid
services to indigent clients. Theses services would have been billed P1,000 per hour if rendered
to paying clients. Atty. Midsayaf has a P1,400,000 gross income during the year exclusive of
P20,000 interest on his savings deposit.
Compute the special deducting for the free legal services.: P120,000 ( P1.4M X 10% Limit
)+[(180-60) x 1k Pro bono]
20. Curaratnit, Bolalatsing & Associates, a law firm, earned an operating income of P8,000,000,
net of P6,000,000 administrative expenses and P12,000,000 direct cost services. During the year,
it represented selected clients under its free legal assistance program. The value of these services
would have been P1,500,000. It also represented indigent clients for free, the value of which
would have been P400,000. Compute the special deduction for free legal services.: P1,400,000.
[P8M +P6M) X 10% Limit]
21. An employer paid a total of P800,000 productivity incentive bonus to its production workers.
What is the additional productivity incentive bonus expense? P400,000 [800k x 50%]
22. An employer provides manpower training and special studies to its rank and file employees
at a total cost of P200,000. The in-house program was accredited by TESDA. What is the
deductible additional productivity incentive bonus expense? P100,000 [200k x 50%]
1. A taxpayer had the following results of operations:
2019 2020
Gross income P1,200,000 P2,500,000
Itemized deductions 1,400,000 1,000,000
Deduction incentives 200,000 300,000
What is the net income in 2020?: P1,000,000 (2.5M-1M-300k)
2. An enterprise registered with the BOI had a consistent profitable operations. Just before
graduating from its BOI tax holiday incentives in 2019, it sustained a P1,800,000 operating
loss due to an employee strike in 2019. The settlement of the deadlock in 2020 enable the
enterprise to post a P2,400,000 operating income. What is the allowable NOLCO deduction
in 2020?: P0
3. A corporate taxpayer incurred an operating loss in 2020:
Sales P3,000,000
Less: Cost of Sales 1,200,000
Gross Income 1,800,000
Less: Deductions
Regular Itemized deductions P1,200,000
Special Itemized Deductions 800,000
Deduction Incentives 400,000 2,400,000

Net operating Loss P600,000
What is the amount of NOLCO to be carried over in the next three years?: P200,000
(1.8M-1.2M-800k)
4. An individual taxpayer reported the following in 2019:
Gross income P1,500,000
Less:
Administrative expenses P800,000
Selling expenses 650,000 1,450,000
Operating income 50,000
Less: Personal expenses 150,000
Excess of personal expenses over income P100,000
What is the NOLCO to be carried over in the next three years?: P0
5. In 2020, a taxpayer finally posted a P1,000,000 operating profit after four years of continuous
losses. The results of operations in prior years were:
2016 (P800,000)
2017 (400,000)
2018 (200,000)
2019 (100,000)
Compute the deductible NOLCO in 2020.: P700,000 (400k+200k+100k)
6. In 2016, Warren Buffet purchased the net assets of Berkshire Hathaway, a losing business
which posted a cumulative P10,000,000 loss in the past three years. Buffet’s charismatic
leadership led the business to turn P4,000,000 profits in 2016. What is the allowable NOLCO
deduction for 2016?: P0
7. A taxpayer has the following historical results of operations:
2016 (P600,000)
2017 (700,000)
2018 400,000
2019 (200,000)
2020 100,000
What is the total outstanding NOLCO at the end of 2020 which can be carried over in future
years?: P200,000
8. A taxpayer reported the following items of gross income and deductions in 2020.
Rent income P400,000
Service fees 200,000
Interest income from bank deposits 50,000
Deductible expenses 800,000
Non-deductible expenses 100,000
Compute the NOLCO to be carried over in the next three years.: P200,000 (400k+200K-800k)
9. The carry-over of NOLCO is allowed when: there is a change in the controlling shareholder
representing 51% ownership.
10. Which is incorrect with regards to the net operating loss carry over (NOLCO)? : NOLCO can
be claimed together with Optional Standard Deduction.
11. The following pertains to the salaries paid by the taxpayer during the year:
Salaries to regular employees P400,000
Salaries to senior citizens (above poverty line) 30,000
Salaries to senior citizens (below poverty line) 50,000
Salaries to persons with disability 200,000

Compute the total deductible salaries expense under regular allowable itemized deductions and
the total special deduction.:
CHAPTER 13C: OPTIONAL STANDARD DEDUCTION
True or False 1
1. Unlike individual taxpayers, corporations opting for OSD can claim deduction for cost of
goods sold or cost of services. (T)
2. OSD is in lieu of all deduction against gross income including personal exemptions. (F)
3. Individuals can claim OSD up to 40% of gross sales or receipts or gross income. (F)
4. Taxpayers opting to use the OSD are not required to submit financial statements. (T)
5. Taxpayers may use the OSD for quarterly returns, then use the itemized deductions for the
annual return. (F)
6. The optional standard deduction is presumed unless the taxpayer signified in his return his
intention to claim itemized deductions. (F)
7. The taxable net income of individuals is 60% of their gross sales or receipts. (F)
8. Corporate taxpayers opting to use OSD will have taxable income equivalent to 60% of their
gross income. (T)
9. “Gross sales” is net of sales returns, allowances, and discounts. (T)
10. “Gross receipts” include other receipts incidental to the primary operations of the business.
(T)
11. Gains in dealings in properties are included in gross sales or receipts. (F)
12. Corporate OSD is 40% of operating and non-operating gross income excluding only those
subject to final tax or capital gains tax and exempt income. (T)
13. For taxpayers using the accrual basis in the sales of services, gross receipts shall mean
revenue. (T)
14. Administrative and selling expenses are included in “cost of services”. (F)
15. A partner can claim itemized deduction against his share in the net income of a general
professional partnership provided the partnership is using the OSD. (T)
16. A partner can claim OSD out of his share in the net income of a general professional
partnership. (F)
17. A partner can claim OSD out of his share in the net income of a general professional
partnership provided the partnership is not using the OSD. (F)
18. No deduction of whatever nature is allowed against compensation income, except mandatory
deductions and exempt benefits. (T)
19. Net operating loss carry-over and net capital loss carry-over are items of deductions; hence,
both are not claimable simultaneously with OSD. (F)
20. The option to select OSD may result into a net operating loss carry over. (F)
Multiple Choice 1
1. The optional standard deduction for corporate taxpayers is : 40% if gross income
2. Which of the following individuals engaged in business cannot claim optional standard
deduction? : NRA-NETB
3. Which is correct with optional standard deduction? : It replaces itemized deduction
4. The optional standard deduction for individual taxpayers is : 40% of gross sales or gross
receipts
5. One of the following can claim OSD. Which is it? : A self-employed individual taxpayer
6. When purely employed, who of the following can claim OSD? : None of these
7. Which is not covered by the optional standard deduction? : Premium for health and
hospitalization insurance
8. Which can claim deduction by itemized deduction only? : Non-resident alien engaged in
trade of business
9. Which is not included in corporate OSD? : Creditable withholding tax
10. Corporate OSD is in lieu of all expenses such as the following except : Cost of sales or cost
of services
11. Individual OSD is in lieu of all expenses such as but not including : net capital loss carry
over
Multiple Choice 2
1. The OSD of corporations under the cash basis is based on : total gross income
2. The option to elect OSD is irrevocable : in the year it was made
3. Which is presented as operating income in the income tax return? : gross profit from the sale
of goods
4. Which is not part of cost of services for a manufacturing concern? : interest expense
5. The OSD of corporations under the accrual basis is based on : total gross income
6. The OSD of individuals under the cash basis is based on : gross receipts
7. Which is not deducted in the determination of gross sales? : bad debt expense
8. For purposes of the OSD, which is not deducted in the determination of gross receipts? : cost
of services
9. Non-operating income subject to regular tax is excluded in the OSD base of : individual
taxpayers
10. Cost of services of banks excludes the following except : interest expense on depositors
accounts
11. In the determination of the distributive net income of the general professional partnership, :
partners cannot claim OSD on their share in the net income of a general professional
partnership
12. Which is the correct with respect to the deduction claimable by a partner against his share in
the distributive net income of a general professional partnership? : the partner can claim
itemized deduction provided the general professional partnership uses itemized deductions
13. Individual income taxpayer must indicate his or her option to claim OSD on : the annual
income tax return
14. Corporate income taxpayers must indicate their options to claim OSD on : the first quarter
return during the year
Multiple Choice 1 Problem
1. An individual taxpayer, reported P800,000 net income after the following:
Cost of Sales P600,000 , Administrative expense P300,000 , Selling expense P400,000. Compute
the optional standard deduction. : P840,000 [(P800K+P600K+P300K+P400K) X 40%]
2. In the immediately preceding problem, what is the net income under OSD? : P1,260,000
(P2.1M-840K)
3. An individual taxpayer opted to claim optional standard deduction in his first quarter income
tax return in 2015. Total recorded sales before P150,000 sales discounts and returns were
P2,350,000. Total recorded expenses were P1,180,000 of which only P340,000 were
adequately supported. The cost of sales was P900,000.:
What is the total allowable deduction for 2015 assuming the taxpayer wants to claim itemized
deduction in the annual return? : P340,000
4. The claimable deduction of a taxpayer during the year consisted of the following:
Cost of sales P600,000 , Regular itemized allowable deductions P400,000 , Special itemized
deductions (including P100,000 deduction incentives) P300,000 , Net operating loss carry-over
P150,000. To an individual taxpayer, optional standard deduction is in lieu of : P1,450,000
(P600K+P400K+P300K+P150K)
5. Assuming that the taxpayer in the immediately preceding problem is a corporation, OSD is
in lieu of : P850,000 (P400K+P300K+P150K)
6. Mrs. Belo had the following in 2020:
Sales P3,400,000 , COGS 1,200,000 , Admin Expenses 300,000 , Selling expenses 500,000 ,
Other taxable income from operations 120,000 , Other non-operating income 80,000 , Passive
income (net of final taxes) 70,000. Assuming Mrs. Belo elects to deduct OSD, compute the OSD.
: P1,408,000 [(P3.4M+P120K) X 40%]
7. In the immediately preceding problem, compute the OSD assuming the taxpayer is a
corporation. : P960,000 [(P3.4M-P1.2M)+P120K+P80K]X40%
8. A self-employed practitioner and part-time employee derived the following income in 2020:
Gross Receipts P800,000 , Compensation income 300,000 , Dividend income from a real estate
investment trust 20,000. Assuming the taxpayer opted to avail of OSD, what is the OSD? :
P320,000 (P800K X 40%)
9. The following relate to collections upon billings, receipts, and unpaid billings of a
practitioner during the year:
Receipts from current year billings P800,000 , Receipts from last year’s billings 200,000 ,
Current year uncollected billings 100,000 , Reimbursement for out-of-pocket expenses 20,000.
Compute the OSD if the taxpayer is under the accrual basis. :
P368,000 [(P800K+P100K+P20K)X40%]
10. Compute the OSD if the taxpayer is under the cash basis. :
P408,000 [(P800K+P200K+P20K)X40%]
Multiple Choice 2 Problem
1. The results of operations of the taxpayer resulted in the following:
· Gross sales revenue P7,200,000
· Beginning inventory 300,000
· Purchases 5,800,000
· Ending inventory 1,400,000
· Other operating revenues 100,000
· Non-operating income 20,000. Assuming the taxpayer is an individual, what

is the optional standard deduction? : P2,920,000 [(P7.2M+P100K) X 40%]
2. In the immediately preceding problem, what is the OSD if the taxpayer is a corporation? :
P1,048,000 [(P7.2M-P4.7M COGS)+P100K+P20K]X 40%
3. A professional practitioner has total uncollected billings of P200,000 at the year-end of 2019.
Additional billings totaling P2,500,000 were made in 2020. Uncollected billings at the
year-end of 2020 were P400,000. If he chooses to claim OSD, determine the gross receipts. :
P2,300,000 (P200K+P2.5M-P400K)
4. In the 2nd quarter of 2019, Mr. Mariano reported total gross income of P2,000,000 after
P1,500,000 direct cost of services. If Mr. Mariano claimed itemized deduction in the 1st
quarter, what is the amount of claimable OSD in the 2nd quarter if he wishes to change the
OSD? : P800,000 (P2M X 40%)
5. A private educational institution subject to a 10% preferential corporate tax reported the
following in the 1st quarter of 2020:
· Gross tuition revenues P13,800,000
Less: Tuition discounts and remissions 400,000
Direct cost of services 6,700,000
Gross Income from canteen and bookstores 600,000. Compute the allowable OSD
if the school wants to claim OSD. : P0
6. Mr. Calabarzon reported the following data in 2020:
Sales P1,000,000
Cogs 600,000
Gain on sale of equipment 60,000
Interest income from bank deposits 40,000
Deductible expenses 300,000
Non-deductible expenses 200,000. Compute the optional standard deduction. :

P440,000
7. Compute the taxable income of Mr. Calabarzon. : P660,000 (P1M-400K)+P60K
8. Assuming that Calabarzon is a corporate taxpayer, compute the optional standard deduction.
: P184,000 (P1M-P600K)+60K] X 40%

Chapter 7 Introduction To Regular Income Tax

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Chapter 7 Introduction To Regular Income Tax

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What are the general rules regarding income taxation?

What are the general rules regarding income taxation?

What are the differences between regular income tax and final tax?

What are the differences between regular income tax and final tax?

CHAPTER 7 INTRODUCTION TO REGULAR INCOME TAX

2. NRA-NETBs and NRFCs are also subject to regular income tax. ( F )

3. All taxpayers are subject to final tax. ( F )

4. Taxable income is synonymous to net income. ( F )

6. All taxpayers are subject to regular income tax. ( T )

4. No deduction shall be allowed against taxable income. ( T )

5. Only corporations may incur deductions against gross income. ( F )

7. The tax due of individuals is determined by means of a schedules of tax rates. ( T )

1. The general rule in income taxation is: Regular Income taxation

2. Active income is subject to: Regular tax

6. Which is not generally subject to regular income tax: Passive Income

8. Deductions are allowed to: Taxpayers engaged in business

9. Personal exemptions are allowed to: Individual taxpayers only

13. Progressive income tax is applicable to: Individual taxpayers

14. Proportional regular income tax is applicable to: Corporations only

19. Which is not subject to final tax: Prizes amounting to 11,000

4. Which is not considered an operating income: Sale of scrap

5. Which is a non-operating income: Gain of sale of office building

6. Which is an incorrect statement: Business expenses are deductible by individuals and

11. Which cannot claim deductions: Self-employed taxpayers in business

CHAPTER 8 – REGULAR INCOME TAX: EXCLUSION FROM GROSS INCOME

3. Donated income is included in the gross income of the donee. ( F )

6. An employee can secure retirement benefit exemption only once in a lifetime. ( T )

13. A general professional partnership can be registered as a BMBE. ( F )

3. Which is not a feature of regular income tax? :Gross income tax

4. Statement 1: Capital gains are generally subject to capital gains tax.

7. Progressive income tax does not apply to a :Non-resident alien.

8. Proportional income tax does not apply to a :General professional partnership.

9. Which is not included under the term “corporation”? :Co-ownership.

7. Which of the following is subject to tax? :All of these.

CHAPTER 9 : REGULAR INCOME TAX: INCLUSION IN GROSS INCOME

2. Rent is a passive income, but not subject to final tax. (T)

9. Compensation income is an inclusion in gross income subject to regular tax except

16. Stock dividends are never subject to income tax. (F)

20. Stock splits are never subject to income tax. (T)

1. The distributable net income of a general professional partnership is subject to creditable

1. Which is not subject to income tax? : All of these.

8. Which is exempt from regular tax? : Income of qualified pension plans.

13. Which interest income is subject to regular tax? : All of these.

14. Dividends subject to regular tax includes : Foreign dividends.

6. Which individual taxpayer is not subject to progressive tax? : Special aliens.

8. Individual taxpayers shall report their income on : A calendar year.

CHAPTER 10: COMPENSATION INCOME

1. A special employee may include Filipino citizens. ( T )

2. A rank-and-file employees recommends managerial actions. ( F )

3. A consultant is not an employee. ( T )

4. A manager has the power to lay down and execute policies. ( T )

6. Filipinos employed by international missions are generally exempt. ( F )

7. Filipinos working in Philippine embassies are exempt from taxation. ( F )

8. A minimum wage earner is exempt from income tax. ( T )

9. Compensation income includes regular compensation, supplemental compensation, and 13th

10. Compensation income includes all remunerations received under an employer-employee

12. Remunerations received as incidents of employment are exempt. ( T )

2. A regular employee can be a managerial, supervisory, or rank-and-file employee. ( T )

4. All directors are not considered employees. ( F )