Adarose G.

Romares 4-BSA
Seat work 2- Midterm

1. Ben is an alumnus of ABC University, a privately-owned center for

learning which grants yearly dividends to its stockholders.  ABC has a
chapel located within its campus where Ben used to offer a dozen of
roses everyday while he was still reviewing for the CPA Board Exam. 
When he passed the Board Exam, he wanted to give back to the chapel
by donating P100,000 to its caretakers which was evidenced by an
acknowledgment receipt.  In computing for his taxable income, can Ben
use his donation to the chapel as an allowable deduction from his gross
income?

No. It is not deductible from his gross income. The chapel is owned by a
privately-owned university thus, the donation for the maintenance of the
chapel is a donation to the university. The donation to be deductible must
comply with the requirement of its deductibility. Under the Sec. 34 (H) of Tax
Code- Charitable & other contributions, the following are requisites for
deductibility:
[1] The contribution or gift must be actually paid
[2] It must be given to the organizations specified in the code
[3] The net income of the institution must not inure to the benefit of any private
stockholder or individual

In the given situation, the university is granting yearly dividends to its stock
holders which gives benefit to a private stockholder or individual. As a result, it
is a clear violation of the law known as “private inurement doctrine” thereby
makes the donation non-deductible from gross income (Section 34(H)(1),
NIRC).

[Link] is OSD?
It stands for Optional Standard Deduction. Section 34(L) provides that in lieu
of the itemized deductions, an individual subject to tax excluding a
nonresident alien may elect a standard deduction of not exceeding 40% of his
gross sales or gross receipts, as the case may be. In the case of a domestic
corporation and a resident foreign corporation, it may elect a standard
deduction in an amount not exceeding 40% of its gross income.A non-resident
alien (whether engaged or not) and a non-resident foreign corporation cannot
claim OSD. The election to use OSD when made in the return shall be
irrevocable for the taxable year for which the return is made.

What is the basis of OSD for individual and corporate taxpayers?

RR 16-2008 [NOVEMBER 26, 2008] provides for the following rules:
1. For individuals
a. If on accrual basis of accounting, the OSD shall be based on gross sales
b. If on cash basis of accounting, the OSD shall be based on gross receipts
c. Cost of sales and cost of services are not allowed to be deducted for
purposes of determining the basis of the OSD
2. For corporations
a. It shall be based on gross income

Who are covered and not covered?

The following can avail of the OSD:
1. A citizen, whether resident or non-resident
2. Resident alien
3. Taxable estate or trust
However, a non-resident alien and a non-resident foreign corporation cannot
claim OSD.

In 2016, Ben decided to return to his hometown to start his own practice
as a CPA.  At the end of 2016, he found that he earned gross
professional income in the amount of P1,000,000; while he incurred
expenses amounting to P560,000 constituting mostly of his office space
rent, utilities, and miscellaneous expenses related to his CPA
profession.  However, to his dismay, only 320,000 of his expenses were
duly covered by receipts.  What are the options available for Ben so he
could maximize the deductions from his gross income?

Ben may opt to use the optional standard deduction (OSD) in lieu of the
itemized deduction. OSD is a maximum of forty percent (40%) of his gross
receipts during the taxable year. Proof of actual expenses is not required, but
Ben shall keep such records pertaining to his gross receipts.

3. What are non-deductible expenses based on Sec 26 of the NIRC?

Briefly Explain

According to SEC. 36 of the Tax Code, the following are non-deductible items:
(A) General Rule. - In computing net income, no deduction shall in any case
be allowed in respect to -

(1) Personal, living or family expenses:

(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
This Subsection shall not apply to intangible drilling and development costs
incurred in petroleum operations which are deductible under Subsection (G)
(1) of Section 34 of the Tax Code.
(3) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer
or employee, or of any person financially interested in any trade or business
carried on by the taxpayer, individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under such policy.

(B) Losses from Sales or Exchanges of Property. - In computing net income,

no deductions shall in any case be allowed in respect of losses from sales or
exchanges of property directly or indirectly -

(1) Between members of a family. For purposes of this paragraph, the family
of an individual shall include only his brothers and sisters (whether by the
whole or half blood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and

corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations

more than fifty percent (50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the corporation preceding the
date of the sale of exchange was under the law applicable to such taxable
year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and beneficiary of such trust.

4. Differentiate Ordinary Assets from Capital Assets;

ORDINARY ASSET CAPITAL ASSET

Stock in trade of the taxpayer or property held by the
other property of a kind which taxpayer whether or not
would properly be included in the connected with his trade or
inventory of the taxpayer if business, except those
on hand at the close of the taxable enumerated as ordinary assets in
year Section 39.
Property held by the taxpayer
primarily for
sale to customers in the ordinary
course of
his trade or business
Property used in trade or business
of a
character that is subject to
allowance for
depreciation
Real property used in trade or
business of
the taxpayer
(Section 39 Tax Code, and Section
132, RR 2)

Ordinary Income/Loss from Capital Gain/Loss.

ORDINARY GAIN/LOSS CAPITAL GAIN/LOSS

The gains realized from the sale,
Any gain from the sale or exchange, or other disposition of
exchange of property which is not the properties of a taxpayer
a capital asset or property classified as capital assets.
Derived from property used in Derived from property not used in
trade or business trade or business whether or not
connected thereto
Ordinary gains are not adjusted by Some types of capital gains are
the holding period in Section 39(B) adjusted by the holding period in
Section 39(B)
Only ordinary losses may be Ordinary losses may be deducted
deduced from ordinary gains from certain types of capital gains
The concept of net operating loss The concept of net loss carryover
carryover (NOLCO) applies to applies to capital gains taxation
ordinary gains taxation. (NELCO)
Deductions are usually allowed for Generally no deductions are
ordinary gains allowed from capital gains
Ordinary gains are subject to the Capital gains are subject to final
graduated rates or corporate taxes
income tax rate as the case may
be
Ordinary income is to be included Income from capital gains tax are
in the annual income tax return not included in the annual income
 tax return

What is the holding period of capital gain/loss for individual and

corporate taxpayers?  

Holding Period:
 A holding period is the number of periods that the taxpayer used or held the
property since the acquisition date until its final disposal or transfer.
 In computing the net capital gains or net capital losses, consider the holding
period, especially when the taxpayer is an individual taxpayer.

HOLDING PERIOD INDIVIDUAL CORPORATION

 no more than 12 100% of the Capital NOT APPLICABLE
months Gain or Loss (entire gain or loss)
 more than 12 months Only 50% of the Capital NOT APPLICABLE
Gain or Loss (entire gain or loss)

Ben is in the business of pest control.  He had ordinary income of

P25,000, capital gains of P6,000 (from the sale of his personal car which
he held for 4 years), and capital losses of P4,000 (from the sale of his
vintage bike which he held for 2 years).  How much is his total taxable
income?

Ordinary Income 25,000

Net Capital Gains:
Capital gains (6,000* 50%) 3,000
Capital Losses (4,000* 50%) 2,000 1,000
Total Taxable Income 26,000

5. Ben sold a car worth P100,000 to ABC Corp. in exchange for P110,000
worth of of ABC Corp. stock, P10,000 cash and P20,000 property.
How much is the gain for Ben?

Gain of 30,000. It came from the received 10,00 cash and 20,000 property by
Ben. It is to take note that there is no gain or loss if the transaction is property
for stocks. Section 40 (C) (3) states that an individual, a shareholder, a
security holder or a corporation receives not only stock or securities permitted
to be received without the recognition of gain or loss, but also money and/or
property, the gain, if any, but not the loss, shall be recognized but in an
amount not in excess of the sum of the money and fair market value of such
other property received.

What about the loss for ABC?

No loss recognized for ABC Corp.
Based upon the Section 40 (C) (3) of the Tax Code:
If Ben
- distributes it in pursuance of the plan of merger or consolidation, no gain to
the corporation shall be recognized from the exchange.
- does not distribute it in pursuance of the plan of merger or consolidation, the
gain, if any, but not the loss to the corporation shall be recognized but in an
amount not in excess of the sum of such money and the fair market value of
such other property so received, which is not distributed.

How do you make the transaction a tax-free exchange? Refer to Sec

40(c)

Tax-free exchanges refer to those instances enumerated in Section 40(C)(2)

of the National Internal Revenue Code (NIRC) of 1997 that are not subject to
Income Tax, Capital Gains Tax, Documentary Stamp Tax and/or Value-added
Tax, as the case may be. It has 2 Types:
a. Transfer to Controlled Corporation
b. Merger or Consolidation

To qualify as a tax-free exchange, Ben should transfer property to a

corporation in exchange for stocks issued by that corporation, and as a result
of such exchange, Ben gains control of said corporation. The term “control”
defines Section 40 (C) (6) as “ownership of stocks in a corporation possessing
a least fifty-one percent (51%) of the total voting power of all classes of stocks
entitled to vote.

6. What are fringe benefits? 

As defined by Section 33(B), the term “fringe benefit” means any good,
service or other benefit furnished or granted in cash or in kind by an employer
to an individual employee (except rank and file employees as defined herein)
such as, but not limited to, the following:
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and
others;
5. Interest on loan at less than market rate to the
extent of the difference between the market rate
and actual rate granted;
6. Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-life
insurance premiums or similar amounts
in excess of what the law allows.

What is Fringe Benefits Tax? 

A fringe benefit tax (FBT) is a final withholding tax imposed on the grossed-up
monetary value of fringe benefit furnished or granted to the employee except
rank and file employees (managerial or supervisory employees) by the
employer whether such employer is an individual, professional partnership or
corporation, regardless of whether the corporation is taxable or not, or the
government and its instrumentalities. (Section 33, RA 8424, RR No. 3-98)

What are not subject to FBT?

The following fringe benefits are not taxable under this Section:
1) Fringe benefits given to rank and file employees;
2) Housing benefits/privilege;
3) Expenses incurred by employee, paid by employer and expenses paid by
employee but reimbursed by employer, provided:
a. the expenditures are duly receipted for and in the name of the employer
b. it does not partake the nature of a personal expense attributable tot he
employee;
4) Allowances subject to liquidation (tax exempt allowances)
• allowances not subject to liquidation are taxable
• representation and transportation allowances which are fixed in amounts
and are regularly received by the employees as part of their monthly
compensation (exempt from FBT but subject to basic income tax)
5) Reasonable business travel expenses
6) Educational assistance;
7) Contributions of the employer for the benefit of the employee;
8) Cost of premiums borne by employer for group insurance of his employees;
9) Fringe benefits which are:
• authorized and exempted from tax under special laws;
• are required by the nature of or necessary to the trade, business or
profession of the employer;

ABC Corp grants all its employees (rank & file, supervisors and
managers) 5% discount of the purchase price of its products.  During an
audit investigation, the BIR assessed the company the corresponding
tax on the amount equivalent to the courtesy discount received by all
employees, contending that the courtesy discount is considered as
additional compensation for the rank and file employees and additional
fringe benefits for the supervisors and managers.  In its defense, the
company argues that the discount given to the rank and file employees
is a de minimis benefit and not subject to tax.  As to its managerial
employees, it contends that the discount is nothing more than a
privilege and its availment is restricted.  Is the BIR assessment correct?

No. The courtesy discounts given to rank and file employees are considered
“de minimis benefits” falling under the category of other facilities and
privileges furnished or offered by an employer to his employees which are of
relatively small value intended to promote the health, goodwill, contentment or
efficiency of the employee. These benefits are not considered as
compensation subject to income tax and consequently to the withholding tax.
If these “de minimis benefits” are furnished to supervisors and managers, the
same are also exempt from the fringe benefits tax .

7. What is withholding tax?

Withholding tax is a method of collecting income tax in advance from the
taxable income of the recipient of income. In the operation of the withholding
tax system, the payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts no more than an agent of the
government for the collection of the tax in order to ensure its payment.

Who is a withholding agent?

A separate entity acting no more than an agent of the government for the
collection of tax in order to ensure its payments. He is merely a tax collector,
NOT a taxpayer. If a withholding agent was assessed for deficiency
withholding tax under the Code, as such, it is being held liable in its capacity
as a withholding agent and not its personality as a taxpayer.

The following persons are constituted as withholding agents:

i. Juridical persons, whether or not engage in trade or business
ii. Individual, with respect to payments made in connection with his trade or
business
iii. Individual buyers with regard to taxable sale, exchange, or transfer of real
property, although not engaged in trade or business

What is final withholding tax? 

 The amount of income tax withheld by the withholding agent is constituted
as a full and final payment of the income tax due from the payee on the said
income.
 The liability for payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the tax or in case of
under withholding, the deficiency tax shall be collected from the
payor/withholding agent.
 The payee is not required to file an income tax return for the particular
income.
 The finality of the withholding tax is limited only to the payee’s income tax
liability on the particular income. It does not extend to the payee's other
tax liability on said income, such as when the said income is further subject to
a percentage tax.

What are subject to final tax? 

 All income subject to final taxes (i.e. passive income, gross income of NRA-
NETB)
 Fringe benefit
 Informer’s reward to persons instrumental to the discovery of violations of
the NIRC and the discovery and seizure of smuggled goods

8. What is creditable withholding tax?

 Taxes withheld on certain income payments are intended to equal or at
least approximate the tax due of the payee on said income.
 The income recipient is still required to file an income tax return to report
the income and/or pay the difference between the tax withheld and the tax
due on the income

What are subject to creditable withholding tax?

 Expanded withholding tax on certain income payments made by private
persons to resident tax payers.
Examples: Professional fees, income payments to broker, income payments
to partners of GPP, etc.
 Withholding tax on compensation income for services done in the
Philippines.
 Withholding tax on payments made by the government.

When is the return for final tax & creditable withholding tax filed, and the
tax paid?

FINAL WITHHOLDING TAX:

 Within 25 days from the close of each calendar quarter for FWT.
Passive Income:
 January to November - 10th day of the month following the month the
withholding was made
 December- January 15 of the succeeding year
CREDITABLE WITHHOLDING TAX:
 Not later than the last day of the month following the close of the quarter
during which withholding was made. (Section 58(A), Tax code)

9. For individual taxpayers, who are required to file income tax returns? 
Based on Section 51, Individual Return of the Tax Code, the following
individuals are required to file income tax return:
a) Every Filipino Citizen residing in the Philippines;
b) Every Filipino Citizen residing outside the Philippines, on his income
from sources within the Philippines;
c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
d) Every nonresident alien engaged in trade or business or in the exercise
of its profession in the Philippines.

Who are NOT required to file income tax returns? 

The following individuals shall NOT be required to file an income tax return:
a) An individual whose taxable income does not exceed P 250,000.
b) An individual with respect to pure compensation income, as defined in
Section 32(A)(1), derived from sources with in the Philippines , the income tax
on which has been correctly withheld (tax due equals tax withheld) under the
provisions of
section 79 of the Code: Provided, that an individual deriving compensation
concurrently from two or more employers at any time during the taxable year
shall file an income tax return;
c) An individual whose sole income has been subject to final withholding tax
pursuant to Section 57(A) of the Tax Code, and;
d) A minimum wage earner as defined in Section 22 (HH) of the Tax Code or
an individual who is exempt from income tax pursuant to the provision of the
tax code and other laws, general or special.

When is the deadline of filing of the quarterly income tax returns and the
annual income tax returns?
 Apply calendar year

PURELY COMPENSATION INCOME EARNERS: April 15 of the succeeding

year.
BUSINESS INCOME EARNERS (including from practice of profession and
mixed income earners):
 the individual taxpayer is required to file a quarterly tax return (regardless of
the result of operations) as follows:
1st Quarter May 15 (TRAIN LAW)
 2nd Quarter August 15 (or 45 days after end of Quarter)
3rd Quarter November 15 (or 45 days after end of Quarter)
April 15 of the succeeding year (same with 1st
Annual Return quarter return for income earned prior to TRAIN
Law)

10. For corporate taxpayers, when is the deadline of filing of the

quarterly income tax returns and the annual income tax returns? 

 QUARTERLY
- Every corporation subject to tax must file. The return shall be filed by the
president, vice-president or other principal officer and shall be sworn to by
such officer and by the Treasurer or Assistant Treasurer. (FORM1702Q)
- The corporate quarterly income tax return shall be filed with or without
payment within sixty (60) days following the close of each of the first three (3)
quarters of the taxable year whether calendar or fiscal year.

1st Quarter 60th day, after close of

the quarter
2nd Quarter 60th day, after close of
the quarter
3rd Quarter 60th day, after close of
the quarter

 ANNUAL
- Corporation, Partnership and other Non-Individual Taxpayer Subject Only to
REGULAR Income Tax Rate of 30% must file.
- This return is filed, with or without payment, on or before the 15th day of the
4th month following close of the taxpayer's taxable year. (April 15th)

1st Quarter 60th day, after close of

the quarter
2nd Quarter 60th day, after close of
the quarter
3rd Quarter 60th day, after close of
the quarter
Final/ Adjusted Return April 15, next year

Can payment of income tax be made by installment?

Individual Taxpayers: Yes.
Corporate Taxpayers: No.

 INSTALLMENT
- When the tax due is in excess of Two thousand pesos (P2,000), the
taxpayer other than a
corporation may elect to pay the tax in two (2) equal installments
- The first installment shall be paid at the time the return is filed and the
second installment, on or before July 15 following the close of the calendar
year. If any installment is not paid on or before the date fixed for its payment,
the whole amount of the tax unpaid becomes due and payable, together with
the delinquency penalties.