Part 6

INCOME TAXATION – NOTES

A. Gross income means all income derived from whatever source, including (but
not limited) to the following items:
1. Compensation for services in whatever form paid, including but not
limited to fees, salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the
exercise of a profession;
3. Gains derived from dealings in property:
4. Interests;
5. Rents;
6. Royalties;
7. Dividends:
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general
professional partnership.

Special rules on gross income:

1. Compensation for personal services
a. paid in cash- actual amount paid is taxable
b. paid in kind - compensation income is the fair market value of the
property received
c. tips and gratuities - taxable
2. Compensation paid in promissory note If the note can be discounted, the fair
market value of note upon receipt is the fair discounted value.
3. Transportation, representation and other allowances received by officials or
employees
a. General rule: Taxable as compensation income
b. Exception: If they are:
i. Ordinary and necessary expenses of the employer.
ii. Paid or incurred in the pursuit of trade, business or professions,
iii. The employee is required to account/liquidate
c. The excess over the actual incurred - taxable income if such as amount
is not returned to the employer. d. Vacation and sick leave allowances -
taxable, except the monetized value of unutilized vacation leave credits
not exceeding ten (10) days of employees of private firms.

4. Condonation of debt
a. Debtor rendered services of the creditor - taxable income to the debtor;
b. No services rendered - taxable to the creditor as gift given to the debtor;
c. Creditor is a corporation while the debtor is a stockholder - it has the
effect of a payment of dividend;
d. Creditor is the stockholder while debtor is the corporation - amount
condoned is considered as an additional investment.
5. Recovery of bad debts previously deducted (application of the tax benefit rule)
a. Taxable - if deduction of bad debt has reduced the tax liability of
taxpayer.
 b. Not taxable - if there was no reduction in the tax liability of the taxpayer
6. Dividend income
a. Received by domestic corporation from another domestic corporation -
not taxable
b. Received by resident foreign corporation from another domestic
corporation - not taxable
c. Received by nonresident foreign corporation from a domestic
corporation - 25% but maybe 15% if there is application of tax sparing
credit.
d. Dividents received by domestic corporation from nonresident foreign
corporations shall be exempt from tax if:
1. The dividends actually received or remitted into the Philippines
an reinvested in the business operations of the domestic corporation
within the next taxable year from the time the foreign-sour dividends were
received or remitted;
2. The dividends received shall only be used to fund the working
capital requirements, capital expenditures, dividend payments, investment
in domestic subsidiaries, and infrastructure project; and
3. The domestic corporation holds directly at least twenty percent
(20%) in value of the outstanding shares of the foreign corporation and
has held the shareholdings uninterrupted for a minimum of two years at
the time of the dividend declaration.
7. Rules on lease contracts and leasehold improvements
a. Rent for the use of property - taxable income to the lessor; deductible
expense to the lessee.
b. Taxes and other expenses assumed by lessee on behalf of the lessor -
constitutes additional rent and taxable income to the lessor
c. if ownership of leasehold improvements on leased premises will be
transferred without cost to the lessor upon termination-income to the
lessor which may be reported using either:
1. Outright method - the fair market value of the improvements in
the year of completion is reported as income.
2. Spread out method - the book value of the improvements at the
termination of the lease contract is spread over the remaining term
of the lease.
d. Depreciation on the improvements - the lessee may claim depreciation
of the improvements over the remaining term of the lease or the life of the
improvements, whichever is shorter.
e. Premature termination of lease- the income to be reported by the lessor
shall be computed by subtracting the amounts already reported as income
by the lessor from the book value upon termination.

EXCLUSIONS from gross income (EXEMPT from income tax)

1. Proceeds of life insurance policy payable upon the death of the insured. It is
taxable if (a) the insured outlives the policy, or (2) the insured assigned the
policy.
2. Return of premiums either during the term, at the maturity, or upon surrender
of the contract.
3. The value of the property acquired by gift, bequest, devise or descent,
4. Compensation for personal injuries or sickness received from insurance plus
damages;
5. Income of any kind which are contained in a treaty binding upon the Philippine
government
6. Retirement benefits, pensions, etc.
A. Retirement benefits-requisites
a. The employer must maintain a private pension plan which is approved
by the BIR;
b. The employee has been in the service of the same employer for at least
c. The retiring employee must not be less than 50 years old upon 10
years:
d. The benefit of the exemption can be availed of only once. retirement
B. Separation pay-separation of employee from service must be due to
a. Death, sickness, physical disability, or
b. Any cause beyond the control of the employee.
Examples: Dismissal due to installation of labor saving device retrenchment,
bankruptcy and redundancy
7. Prizes and awards - given to religious, charitable, scientific, educational,
artistic, literary, or civic achievement, provided that:

a. The recipient did not join the contest; and

b. He is not required to render substantial future services.
8. Benefits received by persons residing in the Philippines under U.S. laws
administered by U.S. Veterans Administration;
9. Benefits received from SSS, GSIS including retirement gratuity received by
government officials and employees.
10. Income derived by foreign governments;
11. Income derived by the government or its political subdivisions from public
utility or any essential governmental function.
12. Prizes and awards granted to athletes in-
a. local and international sports competitions,
b. in the Philippines or abroad,
c. sanctioned by their national sports associations
d. and the sports association must be recognized by the Philippine
Olympic Committee (POC)
13. 13th month pay and other benefits up to P90,000;
14. GSIS, SSS, Philhealth, Pag-Ibig contributions and union dues of individuals;
15. Gains from sale of bonds, debentures and other certificate of indebtedness
with a maturity period of more than 5 years;
16. Gains realized by investors upon redemption of shares in a mutual fund
company.
17. Compensation income of Minimum Wage Earners (MWES) who work in the
private sector (and public sector not exceeding the minimum in the non-
agricultural sector) and being paid the Statutory Minimum Wage (SMW), as fixed
by the Regional Tripartite Wages & Productivity Board (RTWPB)/National Wages
and Productivity Commission (NWPC), applicable to the place where he/she is
assigned. including their holiday pay, overtime pay, night shift differential pay and
hazard pay.
Non-Recognition of Gain or Loss on Exchange of Property
No gain or loss shall be recognized on a corporation or on its stock or
securities if such corporation is a party to a reorganization and exchanges
property in pursuance of a plan or reorganization solely for stock or securities in
another corporation that is a party to the reorganization.
The gain or loss shall also be recognized if property is transferred to a
corporation by a person, alone or together with others, not exceeding four (4)
persons, in exchange for stock or unit of participation in such corporation of
which as a result of such exchange, the transferor/s. collectively, gains or
maintains control of said corporation. Provided, that stocks issued for services
shall not be considered as issued in return for property.

TAX ON INDIVIDUALS
1. Rules on situs
a. Only resident citizens are taxable on income derived from sources
within and without the Philippines.
b. Resident aliens, nonresident citizens and nonresident aliens are taxable
on income within only.

2. Tax on NRA NETB - final withholding tax of 25% from all sources within.
Exceptions:
a. Capital gains on sale, exchange or other disposition of real property
(capital asset) located in the Philippines
Rate: 6%
Base: Whichever is the highest among:
1. Selling price
2. FMV as determined by the Commissioner (zonal value)
3. FMV as determined by Provincial or City Assessor (assessor's value)
b. Sale of shares of stocks not listed and traded in the stock exchange.
Tax Base and Tax Rate: 15% of net capital gain

3. Income earned by special groups of aliens

Tax Rate and Base: 15% of gross income coming from salaries, wages,
annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances received by:
a. Aliens employed by Regional or Area Headquarters and Regional
Operating Headquarters of multi-national companies;
b. Aliens employed by Offshore Banking Units (OBU);
c. Aliens employed by Foreign Petroleum Service Contractor and
This special tax rate shall entitle only the employees who have
been Subcontractor. availing of this preferential tax rate before January 1,
2018.

4. RATES OF TAX ON CERTAIN PASSIVE INCOMES

a. Income payments to resident citizen, resident alien, nonresident citizen
and nonresident alien (ETB) taxpayers:
1. 20% final tax on income derived from sources within
a. Interest from Philippine currency bank deposit;
 b. Yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements;
c. Royalties (except on books and other literary works and musical
compositions which shall be subject to 10% tax);
d. Prizes (except prizes amounting to P10,000 or less which shall
be subject to the graduated tax);
e. Winnings;
f. Sweepstakes and lotto winnings (except amounts not exceeding
P10,000)
g. Interest income from long-term deposit or investment in the form
of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates which was pre terminated by the holder
before the 5th year at the rates herein prescribed:

Holding Period Rate

4 years to less than 5 5%
years
3 years to less than 4 12%
years 20%
Less than 3 years
Note: If the maturity is more than 5 years - tax exempt

b. Income payments to citizen or resident alien individuals.

1. 15% on interest income received from a depository bank under
the Foreign Currency Deposit System.
2. 10% final tax on cash and/or property dividends actually or
constructively received from any of the following:
a. domestic corporation
b. joint stock company
c. insurance or mutual fund companies
d. on the share of an individual partner in the distributable
net income after tax of a partnership (except general
professional partnership). Or
e. on the share of an individual in the net income after tax of
an association, a joint account or a joint venture or
consortium of which he is a member or a co-venturer:
c. 20% final tax on income payment to NRA ETB out of income from
sources within.
1. Cash and/or property dividend from a domestic corporation;
2. Share of a partner in the distributable net income after tax of a
partnership (except general professional partnership);
3. Share in the net income after tax of an association, a joint
account, or a joint venture of which he is a member or a co-
venturer;
4. Interest from Philippine currency bank deposit (foreign currency
- exempt).
TAX ON POGO WORKERS
Philippine Offshore Gaming Operators (POGO) workers are taxable at 25% final
tax of gross income but shall in no case the monthly tax be lower than P12,500.
The term gross income shall include, whether in cash or in kind, basic
salary/wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, received from such service provider of
offshore gaming operator.

THE 8% INCOME TAX OPTION

1. This is allowed if:
a. The taxpayer is individual.
b. Earning self-employment income
c. Annual gross sales/receipts do not exceed P3,000,000 and is not VAT-
registered.
2. Other important points:
a. If the income is a pure compensation income, the 8% option is not
allowed;
b. If the taxpayer is a mixed income earner, the compensation income
shall be subject to the graduated tax rates;
c. Non-operating incomes are included in the determination of the P3
million threshold and the computation of the 8% income tax, unless
exempt;
d. Businesses which are not subject to the percentage tax under Sec 116
cannot avail of the 8% income tax;
e. Self-employment incomes that were subjected to the 8% income tax are
no longer subject to business tax.
f. Those who claimed deductions (either OSD or itemized) cannot avail of
the 8% income tax option.

TAX ON CORPORATIONS
1. Situs of taxable income
Income
within without Tax Base

A. Domestic corporations YES YES TAXABLE INCOME

B. Resident foreign corporations YES NO TAXABLE INCOME
C. Nonresident foreign YES NO GROSS INCOME
corporations
Tax rate-25% of taxable income
20% income tax rate shall be imposed on domestic corporation if it complies
with the following requirements: a. With net taxable income not exceeding P5
million; and b. The total assets do not exceed P100 million (excluding land on
which the particular business entity's office, plant, and equipment are situated)

2. Minimum Corporate Income Tax (MCIT) - 2% of gross income if higher than Normal
Income Tax (NIT).
a. Effectivity: 4th taxable year immediately following the year the corporation has
commenced business.
b. Carry forward of excess minimum corporate income tax - three (3) immediately
succeeding taxable years.
c. Limitation on carry over - the excess of MCIT over the NIT can be carried
forward only to the next three (3) succeeding years when the normal income tax is
greater than the MCIT. It cannot be claimed as credit against the MCIT itself or against
any other losses.
Application of Minimum Corporate Income Tax (MCIT)
CORPORATIONS RATE EFFECTIVITY
Domestic corporation and 1% July 1, 2020 – June 30, 2023
resident foreign corporation 2% July 1, 2023
Offshore banking units (OBUs) 1% Upon effectivity of the CREATE
2% July 1, 2023
Regional Operating Headquarters 1 % Jan 1. 2022 – June 30, 2023
2% July 1, 2023

Special Corporations:
RATE TAX BASE
Proprietary educational institutions and 1% TAXABLE INCOME
hospitals (from July 1, 2020 to June 30,
2023)
Exception: If income from unrelated activity 25 % TAXABLE INCOME
is more than 50% of entire gross income
International carrier 2.5 % Gross Phil. Billings
Nonresident cinematographic film owner, 25 % Gross income within
lessor or distributor
NR owner or lessor of vessels chartered by 4.5 % Gross rental, lease or
[Link] charter fees within

NR owner or lessor of aircraft, machineries 7.5 %

and other equipment Gross rentals or fees
within
Interest on foreign loans 20 % Interest on loans
contracted on or after
August 1, 1986

Resident Foreign Corporations

Tax rate and tax base: 25% of taxable income effective July 1, 2020
1. Offshore Banking Units (OBUS) - taxable as resident foreign corporation; 25% of
taxable income upon effectivity of CREATE.
2. Regional Operating Headquarters (ROHQ) - tax rate of 25% effective January 1,
2022
3. 25% of interest income from a depositary bank under the expanded foreign currency
deposit system.
4. Final tax of 15% of capital gains from sale of shares of stock not traded in the stock
exchange
Non-Resident Foreign Corporations
1. Tax rate and tax base: 25% of entire gross income within effective January 1, 2021.
2. 25% intercorporate dividend received from a domestic corporation. However, if the
country in which the NRFC is domiciled, allows a tax credit equivalent to the difference
between the regular income tax rate of 25% and the 15% tax on intercorporate
dividends or does not impose tax on dividends, the rate to be imposed shall be 15%.
3. Final tax of 15% of capital gains from sale of shares of stock not traded in the stock
exchange
4. Passive income subject to final withholding tax

Income within of domestic and resident foreign corporation subject to 20% final tax:
a. Interest on bank deposit
b. Yield or any other monetary benefit from deposit substitutes
c. Yield from trust funds and similar arrangements
d. Royalties

Tax Exempt Corporations:

a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Local water districts
d. Home Development Mutual Fund (HDMF)

EXEMPTIONS FROM TAX ON CORPORATIONS

The following organizations are not taxable in respect to income received by them as
such:
a. Labor, agricultural or horticultural organization not organized principally for profit;
b. Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes and
without profit;
c. A beneficiary society, order or association operating for the exclusive benefit of the
members such as fraternal organization operating under the lodge system, or a mutual
aid association or a nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;
d. Cemetery Company owned and operated exclusively for the benefit of its members;
e. Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer, or any specific person;
f. Business league, chamber of commerce, or board of trade, not organized for profit
and no part of the net income of which inures to the benefit of any private stockholder or
individual;
g. Civic league or organization not organized for profit but operated exclusively for the
promotion of general welfare;
h. A nonstock and nonprofit educational institution; i. Government educational
institution;
j. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely
local character, the income of which consists solely for the sole purpose of meeting its
expenses; and
k. Farmers' fruit growers', or like association organized and operated as a sales agent
for the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them;
 Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under the code.

TAX ON PARTNERSHIPS
1. General professional partnership - tax exempt, but required to file income tax return.
2. Business partnership - taxable as a corporation, subject to corporate tax.
3. Share of partners in the net income of business partnership - subject to a final tax of
10%
4. Share of partners in the net income of professional partnership - taxable to the
partners as ordinary income, whether distributed to them or not (principle of
constructive receipt).
5. Income payments to partners in a professional partnership in the form of drawings,
advances, sharings, allowances, stipends, etc. - subject to creditable withholding tax of
15% if the income payments to the partner for the current year exceeds P720,000, and
10% if otherwise.
6. Co-ownership refers to the ownership of undivided thing or right which belongs to two
(2) or more persons.
• Exempt from income tax if the activities of the co-owners are limited to the
preservation of the property and collection of income therefrom
• Taxable as a corporation if the co-owners make contribution of efforts, or new capital,
or if the co-ownership income is reinvested.
7. Partnership formation
a. There must be an unmistakable intention among the partners to form a partnership.
b. Mere sharing of gross returns does not in itself establish a

ESTATES AND TRUSTS

1. Estate - All property, rights and obligations of a person which are not extinguished by
his death and also those which have accrued thereto since the opening of the
succession.
Rules:
a. Taxable only if it is under judicial settlement;
b. Taxed in the same manner as individual.
income Test of source of income
1. Income from services Place of performance
2. Rent Location of property
3. Royalties Place of use of intangible
4. Gain on sale of real property Location of property
5. Gain on sale of personal property Place of sale
purchased in one country and sold in
another
6. Gain on sale of domestic shares of Income within
stock
7. Interest Residence of debtor
8. Dividend
a. From domestic company Income within

b. From foreign company Partly income within and partly without

if 50% or more of the gross income of
the company for the preceding 3 years
prior to declaration of dividend was
derived from sources within.

Income without if less than 50% the

gross income of the company for the
preceding 3 years prior to declaration
 of dividend was derived from sources
within.
2. Trust.-The arrangement created by will or an agreement under which title to property
is passed to another for conservation or investment with the income therefrom and
ultimately the corpus (principal) to be distributed in accordance with the directions of the
creator as expressed in the governing instrument..
Rules:
a. Taxable if the trust is irrevocable;
b. Taxed in the same way as estates under judicial settlement, including exemptions
and rule of accrual.

SOURCES OF INCOME

Formula to compute income within:

Income Within = Total Gross Income (3 yrs)

Total gross Income (3 yrs) X dividend

CAPITAL ASSETS
CAPITAL ASSETS means property held by the taxpayer (whether or not connected with
his business) but does not include the following because they are classified as ordinary
assets:
1. Stock in trade;
2. Property which would be included in the inventory if on hand at the close of taxable
year;
3. Property primarily for sale in the ordinary course of his trade business;
4. Personal property used in business and subject to allowance for depreciation; 5. Real
property used in trade or business.

A. RULES ON SALE OR EXCHANGE OF PERSONAL PROPERTY (CAPITAL

ASSET)
1. Capital losses - deductible only from capital gain.
2. Corporations - no holding period, no carry over
3. Holding period (not applicable on corporations)
a. Short-term (not more than 12 months) - 100%
b. Long-term (more than 12 months) - 50%
4. Carry over
a. The amount allowed is limited to the net income during the year in which the loss was
sustained.
b. Carry-over is good only for one year.

B. SALE OF REAL PROPERTY (CAPITAL ASSET)

1. By individual - 6% final tax
Tax Base: Whichever is the highest among:
- Selling price
- FMV as determined by CIR (zonal value) the City or Provincial Assessor
- FMV as determined by (assessor's market value)
Exemption: Capital gains realized from sale of principal residence if
a. The proceeds are utilized in acquiring new residence within 18 calendar
months from the date of sale;
b. Commissioner is notified within 30 days from the sale or disposition;
c. The exemption can be availed of only once in every 10 years.
d. The 6% capital gains tax due on the presumed capital gains shall be deposited
in interest bearing account with an authorized bank under an escrow agreement.
2. By corporation - 6% final tax on sale of lands and/or buildings not used in the
business.

C. SALE OF SHARES OF STOCKS

1. Not traded shares
Tax Base & tax rate: 15% of Net Capital Gain
2. Traded shares - the sale is exempt from income tax, but subject to Other Percentage
Taxes (Stock Transaction Tax).

D. TRANSACTIONS RESULTING TO CAPITAL GAINS OR LOSSES EVEN IF THERE

IS NO SALE OF CAPITAL ASSETS:
1. Retirement of bonds, etc.
2. Short sales of property
3. Option gains or losses
4. Worthless securities
5. Liquidating dividend
6. Liquidation of partnership.

E. WASH SALES occur when substantially identical securities are acquired within a 61-
day period beginning 30 days before the sale and ending 30 days after sale.
Wash sales are not deductible from gross income. However, the wash sales
provisions do not apply to:
a. Dealers in stocks or securities if the sale or disposition is made in the ordinary course
of trade or business.
b. Short sale transactions - A sale of stock which the seller does not own (he merely
borrows the stock certificate through or from the broker) and subsequently buys or
covers the stock to complete the transaction.

DEDUCTIONS FROM GROSS INCOME

1. Itemized Deductions
A. EXPENSES in general
1. Requisites for deductibility:
a. Must be ordinary and necessary;
b. Paid or incurred during the taxable year;
c. Connected with trade, business or profession;
d. Supported by sufficient evidence; and
e. Not against the law or public policy.
2. Travelling expenses
- include transportation expenses, meals, lodging and laundry expenses - incurred while
away from taxpayer's tax home
3. Entertainment, amusement and recreation expenses
Requisites for deductibility:
a. Paid or incurred during the taxable year;
b. Directly connected to the development, management and operation or directly
related to or in furtherance of the conduct of his or its trade business or
profession;
c. Must not have been paid directly or indirectly to an official of the government
(including foreign) or private entity if it constitutes a bribe, kickback or other
similar payment.
d. Not contrary to law, morals, public policy or public order.
e. Duly substantiated by proof.
f. Must not exceed 1/2 % of net sales or 1% of net revenue for taxpayers
engaged in sales of goods or properties, or sale of services, respectively.
However, if the taxpayer is deriving income from both, the allowable deduction
 shall be based on an apportionment formula taking into consideration the
percentage of the net sales/net revenue to the total net sales/net revenue, but in
no case shall exceed the maximum percentage ceiling.
4. Bribes, kickbacks and other similar payments not deductible if paid, directly or
indirectly, to official or employee of the government or private entity.
5. Private educational institutions – costs incurred for the expansion of school facilities
maybe its option:
a. Capitalize and claim the annual depreciation as deduction; or
b. Deduct as expenditures during the taxable year.
6. Non-deductible expenses:
a. Personal living and family expenses;
b. Amount paid out for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate;
c. Amount expended in restoring property or in making good exhaustion thereof
for which an allowance is or has been made; or
d. Premiums paid on any life insurance policy covering the life of an 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.
7. Additional deduction from taxable income
An additional deduction from taxable income of 1/2 of the value of labor training
expenses incurred for skills development of enterprise- based trainees enrolled
In Public Senior High Schools, Public Higher Education Institutions, or Public
Technical And Vocational Institutions and duly covered by an apprenticeship
agreement under the Labor Code of the Philippines shall be granted to
enterprises, provided that:
a. For the additional deduction for enterprise-based training of students from
public educational institutions, the enterprise shall secure proper certification
from the DepEd, TESDA, or CHED; and
b. Such deduction shall not exceed 10% of direct labor wage.

B. INTEREST
1. Requisites for deductibility:
a. There must be an indebtedness.
b. The indebtedness must be that of the taxpayer;
c. The indebtedness is connected with taxpayer's trade, business or
profession;
d. Legal liability to pay interest.
e. Interest must be paid or incurred during the taxable year.
2. Reduction of interest expense by interest income

a. The taxpayers' interest expense shall be reduced by an amount

equivalent to 20% of interest income subjected to final tax. However, if the
final withholding tax rate on interest income of 20% will be adjusted in the
future, the interest expense reduction rate shall be adjusted accordingly.

Corporations subject to tax rate of 20%, the deduction is 0% since there is

no difference in the income tax rate on the taxable income with the tax
rate applied on the interest income subjected to final tax.
b. Interest incurred or paid by the taxpayer on all unpaid business related
taxes shall be fully deductible from gross income and shall not be subject
to the limitation on deduction.
 3. Optional treatment of interest - at the option of the taxpayer, interest incurred
to acquire property used in trade, business or exercise of profession may be
allowed as a deduction or as a capital expenditure.
4. Non-deductible interest
a. Interest on loan between related taxpayers.
b. Interest on loan paid in advance through discount individual taxpayer
reporting income on cash basis.
c. If indebtedness is incurred to finance petroleum operations.

C. TAXES
- pertains to taxes proper which does not include, surcharges, penalties, or fines
incident to delinquency.
1. Requisites for deductibility:
a. Paid or incurred within the taxable year;
b. Connected with taxpayer's profession, trade or business;
c. Imposed directly on the taxpayer.
2. Non-deductible taxes
a. Philippine income tax
b. Foreign income tax, if claimed as tax credit
c. Estate and donor's tax
d. Special assessments
3. Tax credit - the taxpayer's right to deduct from income tax due the amount of
tax he has paid to a foreign country, subject to limitations.
The following taxpayers are allowed to claim tax credit:
a. Resident citizens
b. Domestic corporations
c. Members of general professional partnerships
d. Beneficiaries of estate or trust.

4. Tax benefit rule-taxes claimed as deduction, when refunded or credited, shall

be included as part of gross income in the year of receipt to the extent of the
income tax benefit of said deduction.

D. LOSSES
1. Requisites for deductibility:
a. Actually sustained during the taxable year;
b. Not compensated by insurance or other forms of indemnity
c. Incurred in connection with trade, profession or business;
d. Sustained in a closed and completed transaction.
e. Arose from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement.
f. Not claimed as a deduction for estate tax purposes.
g. Reported to the BIR within 45 days from the occurrence of such loss.
2. Special Rules on Losses:
a. Wagering loss - deductible only to the extent of the gains from such
transactions.
b. Loss on sale between related taxpayers is not deductible.
c. Voluntary removals of buildings
1. Taxpayer purchased the land without intending to use the
building- the value of old building razed plus other costs are added
to the cost of the land.
2. An old building is demolished to construct new one - the value of
the building demolished plus demolition costs are deductible as
losses.
 d. Loss on shrinkage in value of stocks due to fluctuation in market – not
deductible; the loss allowed is that actually suffered when the stocks are
disposed of.
e. Abandonment losses- when a producing well is abandoned, the
unamortized costs thereof and the undepreciated costs of equipment
directly used therein are deductible in the year of abandonment, but if the
service is restored later, said costs shall be included as part of gross
income and shall be amortized or depreciated.
f. Net Operating Loss - the excess of allowable deduction over gross
income of the business in a taxable year can be carried over as deduction
from gross income of the next three (3) succeeding years.
However, operating losses incurred in 2020 & 2021 shall be allowed as carry-
over and deducted from gross income in the next five (5) consecutive taxable
years.

Rules:
1. Net loss in a taxable year during which the taxpayer was exempt from income
tax are not deductible.
2. Deduction is allowed only if there is no substantial change in the ownership of
business.
3. Not less than 75% in nominal value of outstanding issued shares if the
business is held by or on behalf of the same persons;
4. Not less than 75% of the paid up capital of the corporation, if the business is in
the name of a corporation, is held by or on behalf of the same persons.
5. Carry-over is not allowed if the corporation will pay income tax based on MCIT
6. Carry-over is not allowed if the taxpayer availed of the optional standard
deduction in computing taxable income.

E. BAD DEBTS
1. Requisites for deductibility:
a. Valid and subsisting debt;
b. Debt is ascertained to be worthless and uncollectible;
c. Charged-off during the taxable year;
d. Connected with profession, trade or business;
e. Not sustained in a transaction entered into between members of the
same family or related taxpayers.
Tax benefit rule (equitable doctrine of tax benefit) - recovery of bad
debts previously allowed as deduction in the preceding years shall be
included as part of the gross income in the year of recovery to the extent
of the income tax benefit of said deduction.

F. DEPRECIATION
Requisites for deductibility:
1. There must be an exhaustion, wear and tear (including reasonable allowance
for obsolescence);
2. Property is used in business;
3. Reasonable allowance for depreciation.

Methods of depreciation allowed

1. Straight-line method
2. Declining balance method
3. Sum-of-years-digit method
4. Other methods prescribed by Secretary of Finance, recommendation of the
Commissioner of Internal Revenue.
G. DEPLETION
-the removal, extraction or exhaustion of a natural resource like mines and gas wells as
a result of production or severance from such mines or wells.
Rules:
1. The method of depletion allowed is Cost Depletion Method.
2. When the allowance shall equal the capital invested, no additional allowance shall be
granted.
3. In the case of a foreign corporation, depletion of oil and gas wells and mines shall be
only oil and gas wells and mines located in the Philippines.
H. PENSION TRUSTS
Requisites for deductibility:
1. Employer must have established a pension or retirement plan;
2. Pension plan must be reasonable;
3. Funded by the employer;
4. Amount contributed by the employer must no longer be subject to his control.
I. RESEARCH AND DEVELOPMENT
Requisites for deductibility:
a. Paid or incurred during the taxable year;
b. Connected with trade, business or profession
Alternatives:
1. Treat as ordinary and necessary expenses - deductions from gross income in the
year paid or incurred;
2. Treat as deferred expenses - deduction ratably distributed over a period of not less
than 60 months.
J. CHARITABLE AND OTHER CONTRIBUTIONS Requisites for deductibility
1. Contribution or gift must be actually paid or made within the taxable year;
2. Given to entity or institution specified by law;
3. Net income of the institution must be not inure to the benefit of any private individual
or stockholder;
4. Taxpayer making contribution must be engaged in trade, profession or business.

Contributions deductible in full!

1. Donations to the-
a. Government of the Philippines, or b. Any of its agencies, or
c. Political subdivisions, or
d. Fully owned government corporations
- to be used exclusively in undertaking priority activities (determined by NEDA) in
a. Education
b. Health
C. Youth and sports development
d. Human settlements
e. Science and culture f. Economic development
2. Donations to certain foreign institutions or international organizations;
3. Donations to Nongovernment Organizations accredited by Philippine Council for
NGO Certification (PCNC). - A nonprofit domestic corporation organized and operated
exclusively for-
a. Scientific
b. Research
c. Educational
d. Character building and youth and sports development
e. Health
f. Social welfare
g. Cultural
h. Charitable
i. Or a combination thereof
Conditions for deductibility:
a. The donation must be utilized not later than 15th day of the 3rd month after the close
of taxable year;
b. Administration expenses must not exceed 30% of total expenses;
c. Upon dissolution, the assets must be distributed to another nonprofit domestic
corporation, to the state or by a court to another similar organization.
d. If the above conditions are not complied, contributions shall be subject to limit.
Contributions subject to limit - Contributions or gifts actually paid to or for the use of
the:
1. Government of the Philippines;
2. Agencies or political subdivisions of the government;
3. Accredited domestic corporations or associations organized and operated exclusively
for –
a. religious
b. charitable
c. scientific
d. youth and sports development
e. cultural
f. educational
g rehabilitation of veterans
h. Social welfare institutions
i. Nongovernment organizations.
j. Limitations on deduction of contribution:
Individual taxpayer - 10%
Corporation - 5%
The rate shall be multiplied by the taxable income derived from trade, business or
profession before deducting the contributions.
II. OPTIONAL STANDARD DEDUCTION (in lieu of itemized deductions)
2. ON INDIVIDUAL-
Rate and Base: Not exceeding 40% of gross sales or receipts from business or
profession
2. ON CORPORATION
Rate and Base: Not exceeding 40% of its Gross Income Requisites:
a. The taxpayer signified in the return its intention to elect optional standard deduction;
b. Such election shall be irrevocable for the taxable year for which the return is made;
c. That individual who is entitled to and claimed for the optional standard deduction shall
not be required to submit with his tax return such financial statements otherwise
required under the Code;
d. Except when the Commission otherwise permits, said individual shall keep such
records pertaining to his gross sales or gross receipts or the said corporation shall keep
such records pertaining to his gross income.

FRINGE BENEFITS TAX

Fringe benefit means any good, service, or other benefit furnished or granted by an
employer in cash or in kind, in addition to basic salaries, to an individual employee
(except rank and file employee).
Fringe benefits not subject to fringe benefits tax:
1. Those authorized and exempted from income tax under the Code, or special law;
2. Contributions of the employer for the benefit of the employee to retirement, insurance
and hospitalization benefit plans;
3. Benefits given to the rank and file, whether granted under a collective
bargaining agreement or not;
4. De minimis benefits;
5. The fringe benefits given to the employee is required by the nature of, or necessary
to the trade, business or profession of employer; or
6. If the fringe benefit is for the convenience of the employer.
Applicable rates:
Monetary value 65%
Fringe benefit tax 35%
DE MINIMIS BENEFITS
De minimis benefits in general are limited to facilities or privileges furnished or offered
by an employer to his employees that are of relatively small value and are offered or
furnished by the employer merely as a means of promoting the health, goodwill,
contentment, or efficiency of his employees, such as the following:
1. Monetized unused vacation leave credits of private employees not exceeding 10 days
during the year;
2. Monetized value of leave credits paid to government officials and employees;
3. Medical cash allowance to dependents of employees not exceeding P1,500 per
semester or P250 per month;
4. Rice subsidy of P2,000 or one sack of 50 kg. rice per month amounting to not more
than P2,000;
5. Uniforms and clothing allowance not exceeding P6,000 per annum;
6. Actual yearly medical benefits not exceeding P10,000 per annum;
7. Laundry allowance of P300 per month;
8. Employees achievement awards, e.g. for length of service or safety achievement,
which must be in the form of a tangible property other than received by an employee
under an established written plan which does not cash or gift certificate, with an annual
monetary value not exceeding P10,000 discriminate in favor of highly paid employees;
9. Gifts given during christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum;
10. Flowers, fruits, books or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
11. Daily meal allowance for overtime work not exceeding 25% of the basic
minimum wage.
12. Benefits received by an employee by virtue of a Collective Bargaining Agreement
(CBA) and productivity incentives schemes provided that the total annual monetary
value received from both CBA and productivity incentives schemes combined, do not
exceed P10,000 per employee per taxable year.
All other benefits given by employers which are not included in the above
enumeration shall not be considered as "de minimis benefits", and hence, shall be
subject to income tax as well as withholding tax on compensation.
Employer gives benefit beyond the ceiling. - The amount of de minimis benefits
conforming to the ceilings herein prescribed shall not be considered in determining the
P90,000 of other benefits. However, if the employer pays more than the ceiling, the
excess shall be taxable to the employee if such excess is beyond P90,000.
ACCOUNTING PERIODS AND METHODS
1. Fiscal year vs. calendar year
a. Fiscal year. - Accounting period of 12 months ending on the last day of any month
other than December.
b. Calendar year. - Accounting period of 12 months which starts on the 1st day of
January and ends on the last day of December.
2. Taxable income shall be computed on the basis of calendar year if:
a. Annual accounting period is other than fiscal year, or
b. Taxpayer has no annual accounting period; or
c. He does not keep books, or d. Taxpayer is an individual.
d. Taxpayer is an individual
3. Accounting Methods - A rule that is used to determine the year in which income are
reported and expenses are deducted for tax purposes.
a. Cash basis (cash receipts and disbursements method) taxpayer is required to report
income for the tax year in which payments are actually or constructively received while
expenses are deducted in the year it is paid.
b. Accrual method - income is reported in the year earned while expenses are deducted
in the year incurred.
c. Constructive receipt of income taxpayers are required to report taxable income
though no cash is actually received, it includes the following:
1. Interest credited to a bank savings deposit;
2. Matured bond interest coupons which have not been redeemed;
3. Salary available to an employee who does not accept payment;
4. Share of partners in the profits of general professional partnership
d. Percentage of completion method. - Taxpayer reports a percentage of gross income
from a long-term contract based on the portion of work that has been completed.
e. Completed contract method - income from contract is reported in the taxable year in
which contract is completed.
Note: In long term contracts, percentage of completion is used instead of completed
contract method.
f. Installment method is a special method of accounting under which the taxpayer
reports as income only a part of the gross profit to be realized from the sale on the
installment plan equivalent to that proportion of the amount of installments received
every year which the gross profit realized or to be realized when payment is completed
bears to the contract price.
g. Deferred payment sales - sales in which the payments received in cash or property
other than evidence of indebtedness of the purchaser during the taxable year in which
the sale is made exceed 25% of the selling price (the obligations of the purchaser
received by the vendor are to be considered as equivalent of cash)
Persons Entitled to Use Installment Method
1. Dealers in personal property - those who regularly sell or otherwise dispose of
personal property on the installment plan.
2. Casual sellers of personal property - those who make casual sale or other casual
disposition of personal property on the installment plan where the:
a. Selling price is over P1,000;
b. Initial payments do not exceed 25% of selling price; and
c. Property is not of a kind which would be included in the taxpayer's inventory if on
hand at the close of the taxable year.
3. Sellers of real property - those who make a sale or disposition of real property
(whether capital or ordinary asset) on the installment plan where the initial payments do
not exceed 25% of S.P.
Formulas:
SELLING PRICE:
Cash received by the seller Pxxx
Add: FMV of property received (if any) Pxxx
Installment obligation of buyer xxx
Mortgage assumed by buyer xxx xxx
Selling price xxx
INITIAL PAYMENT:
Down payment Pxxx
Add: Installment received (year of sale) xxx
Excess of mortgage over cost (if any) xxx
Initial payment xxx
CONTRACT PRICE:
Selling price Pxxx
Add: Excess of mortgage over cost xxx
Total xxx
Less: Mortgage assumed by buyer (if any) xxx
Contract price xxx
RETURNS AND PAYMENT
1. INDIVIDUALS REQUIRED TO FILE:
a. Every filipino citizen, residing in the Philippines;
b. Non-resident citizen on income within;
c. Resident alien on income within;
d. Nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines.
2. INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN
a. An individual earning purely compensation income whose taxable income does not
exceed P250,000.
b. Regardless of amount of income-
1. If the sole income has been subjected to final tax.
2. Exempt pursuant to provisions of tax code and other laws.
c. Purely compensation income earner regardless of the amount, from one employer in
the Philippines for the calendar year if the income tax has been withheld correctly (this
is known as substituted filing), except:
1. When deriving compensation income from two or more employers concurrently
or successively at anytime during the taxable year;
2. When the income tax has not been withheld correctly;
3. Those deriving other non-business, non-profession-related income in addition
to compensation income not otherwise subject to a final tax;
4. Individuals receiving purely compensation income from a single employer,
although the income tax of which has been correctly withheld, but whose spouse
falls under any of the three (3) enumerated classifications above;
 5. Nonresident aliens engaged in trade or business in the Philippines deriving
purely compensation income or compensation income and other non-business,
non-profession-related income.
3. A minimum wage earner
4. Others:
a. Husband and wife
1. If they are still required to file returns, only one return for the taxable year shall
be filed which return shall be signed by the husband and wife unless physically
impossible to do so, in which case signature of one of the spouses would suffice.
2. In case of unidentifiable income - it shall be divided equally between the
spouses.
b. Parent-children
Income of unmarried minors derived from property received from living parent
shall be included in the tax return of parent, except when:
1. Donor's tax has been paid, or
2. The transfer of such property is exempt from donor's tax.
c. Disabled persons
The return may be made by a duly authorized agent or representative, by guardian or
other person charged with the care of his person or property.
4. Time for filing to be filed in duplicate setting forth specifically the gross
amount of income from all sources.
a. Purely compensation income - on or before 15th day of April.
b. Self-employment income (including mixed income) - declare an estimated income on
or before April 15 of the same taxable year.
c. Corporations shall file a true and accurate quarterly income tax return on a
cumulative basis and a final return.
5. Place of filing
Authorized agent bank, Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in which the taxpayer has legal
residence or place of employment/business or if there be no legal residence or place of
business in the Philippines, with the Office of the Commissioner.
Tax Tables for Income Tax
Over Not Over Tax Exempt Plus Of Excess O.
P250,000
P250,000 400,000 - 20% P250,000
400,000 800,000 P30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000
Effective January 1, 2018 until December 31, 2022:
Over Not Over Tax Exempt Plus Of Excess O.
P250,000 0%
P250,000 400,000 15% - P250,000
400,000 800,000 P22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000

BIR FORMS FOR INCOME TAX

BIR Form To be Used In the Filing Date
Filing Of
1700 Annual Income Tax On or before April 15 of
Return for Individuals each year
Earning Purely
Compensation Income
(including Non- On or
before April
Business/Non-
Profession Related
Income)
1701 Annual Income Tax On or before April 15 of
Return For Individuals each year
 (including On or before
April Mixed Income
Earner), Estates and
Trusts
1701A Annual Income Tax On or before April 15 of
Return For Individuals each year
Earning Purely from
Business/Profession
(Those under from
graduated rates with
OSD as mode of
deduction OR those who
opted to avail of the 8%
flat income tax rate)
1701Q Quarterly Income Tax On or before:
Return for Individuals, 1stQ-May 15
Estates and Trusts 2ndQ-Aug 15
3rdQ-Nov 15
1702- EX Annual Income Tax On or before 15th day of
Return for Corporation, the 4th month following
Partnership and Other the close of taxpayer’s
Non-Individual Taxpayer taxable year
Exempt from Income (fiscal/calendar)
Tax (Sec. 27 (C) and 30
of NIRC; and Other
Special Laws with no
Other Taxable Income
1702- RT Annual Income On or before 15th day of
Partnership and other the 4th month following
Non-Individual Taxpayer the close of taxpayer’s
Subject only to Regular taxable year
Income Tax Rate (fiscal/calendar)
1702Q Quarterly Income Tax Within 60 days following
Return for Corporations, the close of the first 3
Partnerships and Other quarters of the taxable
Non-Individual quarter
Taxpayers
1706 Capital Gains Tax Within 30 days following
Return for Onerous each sale,
Transfer of Real exchange/disposition of
Property Classified as real property
Capital Asset (Taxable
and Exempt)
1707 Capital Gains Tax Cash Sale – Within 30
Return For Onerous days after each
Transfer by Sale, barter, transaction;
Exchange or Other Installment Sale – Within
Disposition Of Shares Of 30 days following the
Stocks Not Traded receipt of every payment
Through The Local
Stock Exchange
1707A Annual Capital Gains Individual – On or before
Tax Return For Onerous April 15 of each year;
Transfer by Sale, barter, Corporation – on or
Exchange or Other before 15th day of 4th
Disposition Of Shares of month following close of
Stocks Not Traded the taxable year
Through The Local
Stock Exchange
 INCOME TAXATION
(Multiple Choice Questions)

A. Individual
1. Who among the following is a non-resident alien? (RPCPA)
A. An alien who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished.
B. An alien who comes to the Philippines for a definite purpose which in its nature would
require an extended stay.
C. An alien who has acquired residence in the Philippines.
D. An alien who lives in the Philippines with no definite intention as to his stay.

2. Christopher, a staff auditor of the Sycip, Gorres, Velayo & Co., took and passed the
examination for Certified Tax Technician (CTT). In the following year, he resigned from
his job and left the Philippines on April 10, 2019 to work permanently as tax clerk in a
big establishment in Melbourne, Australia. For income tax purposes, which of the
following statements is correct with respect to Christopher's classification?
A. He shall be classified as nonresident citizen for the whole year of 2019.
B. His classification as a nonresident citizen will start in 2020.
C. He shall be classified as nonresident citizen for the year 2019 with respect to his
income derived from sources without from April 10, 2019.
D. He shall be classified as nonresident citizen for the year 2019 with respect to his
income derived from sources without from April 11, 2019.

3. Michaelani Bongalontani, Italian, arrived in the Philippines on January 1, 2019 and

continued to live and engaged in business in the Philippines. He went on a tour in
Southeast Asia from August 1 to November 5, 2019. He returned to the Philippines on
November 6, 2019 and stayed until April 15, 2020 when he returned to France. He
earned during his stay in the Philippines a gross income of P3 million from his
investments in the country. For the year 2019, Michaelani's taxable status is that of
(BEQ)
A. a resident alien engaged in trade or business in the Philippines.
B. a resident alien not engaged in trade or business in the Philippines.
C. a non-resident alien engaged in trade or business in the Philippines.
D. a non-resident alien not engaged in trade or business in the Philippines.

4. All of the following, except one, are taxable on income within only:
A. Resident alien B. Nonresident citizen
C. Resident citizen D. Nonresident alien

5. Who among the following individual taxpayers is taxable on income within and
without?
A. Alcazar, a native of General Santos City, working as overseas contract worker in
Iraq.
B. Philander Rudyman, naturalized Filipino citizen and married to a Filipina. He had
been living in Olongapo City since 1970.
C. Rodrigo de la Hoya, Spanish citizen, a resident of Madrid, Spain, spent a one (1)
week vacation trip in Boracay.
D. Dao Ming So, Taiwanese singer, held a 3-day concert in Manila.
Alcazar is a nonresident citizen, while Rodrigo de la Hoya and Dao Ming So are
nonresident alien not engaged in business in the Philippines.
They are taxable on income derived from sources within the Philippines only.

6. Which of the following statements is correct about a non-resident alien?

A. Taxable on income within and without
B. May be entitled to claim personal exemption.
C. Subject to tax based on taxable income.
D. Shall be taxable on income derived from sources within the Philippines.

7. In 2019 Rustom, Filipino, legally separated from his wife, Mina, left for the United
States with his daughter, Robina, to permanently reside therein which fact has been
established to the satisfaction of the Commissioner of Internal Revenue. In 2020, he
earned P 2 million as income from his beauty parlor in that country. Which of the
following statements is correct?
A. For Philippine income tax purposes, Rustom may deduct from his gross income his
expenses in earning such income.
B. For Philippine income tax purposes, Rustom's gross income is subject to a creditable
withholding tax of 10%.
C. Rustom's gross income of P2 million is not taxable in the Philippines.
D. For Philippine income tax purposes, his income is still taxable in the Philippines.

8. Which of the following income derived from within the Philippines by a resident
individual is not subject to the rates in Section 24(A) of the NIRC? (RPCPA)
A. Salary received by a managing partner of a general professional partnership.
B. A passive income in the form of a prize won in a raffle amounting to P4,000.
C. A gain from sale of a motor vehicle as another income of a taxpayer who is a
compensation income earner.
D. A gain on sale of a real property for private use of the family of the taxpayer.

The salary of a managing partner of a general professional partnership is included in

gross income. Hence, it is subject to the graduated rates of tax on income.
Prizes amounting to P10,000 or less are subject to the rates in the tax table.
Gain on sale of motor vehicle of a compensation income earner is a capital gain which
is subject to the graduated rates in the tax table.
A real property for private use of the family of the taxpayer is a capital asset. Its sale or
exchange is subject to 6% final tax. Therefore, any income derived from the sale is not
subject to the graduated rates of income tax.

9. Which of the following income is subject to final tax if received by an individual

taxpayer?
I. Share of a partner in the net income of a business partnership.
II. Cash dividend received by a stockholder from a domestic corporation.
Ill. Winnings in lotto.
IV. Raffle prizes amounting to P6,000.
A. I, II and III B. III and IV
C. I, II and IV D. I, II, III and IV

A
10. Case 1: Pepe, a CPA, had signed a legally enforceable agreement with his wife,
Pilar, that the earnings from the exercise of his profession would be shared equally
between them for purposes of computing the income to be reported in their respective
individual income tax return. Is the agreement valid?
Case 2: Lorenzo advised his daughter, Lorena that the rent income on the dormitory
owned by Lorenzo will accrue to the latter. Lorena collected the income and reported it
on her own income tax return. taken by Lorenzo and Lorena valid?

Case 1 Case 2 Case 1 Case 2

A. YES NO C. NO YES
B. YES NO D. NO YES

An individual is taxed on the earnings from his personal services. The court held that "a
fruit (income) could not be attributed to a tree other than the one on which it grew."
Lorenzo should be taxed on the rent income because he owns the dormitory. The
income from property is taxable to the owner of the property. To transfer the income to
another, the taxpayer must normally transfer ownership of the property itself.

11. Which of the following statements is incorrect on winnings of a resident citizen?

A. Lotto winnings in the United States of a Filipino residing in the Philippines is taxable
in the Philippines.
B. Lotto winnings of P100,000,000 sponsored by the Philippine Charity Sweepstakes
Office is not taxable to a resident citizen.
C. Winnings of a brand new car in a raffle draw sponsored by a shopping mall is
taxable.
D. Winnings in a raffle draw sponsored by a cigarette company is subject to final
withholding tax.

12. The payor of passive income subject to final tax is required to withhold the tax from
the payment due the recipient. The withholding of the tax has the effect of (BEQ).
A. a final settlement of the tax liability on the income.
B. a credit from the recipient's income tax liability.
C. consummating the transaction resulting in an income.
D. a deduction in the recipient's income tax return.

13. Passive income includes income derived from an activity in which the earner does
not have any substantial participation. This type of income is (BEQ)
A. usually subject to a final tax.
B. exempt from income taxation.
C. taxable only if earned by a citizen.
D. included in the income tax return.

Items 14 and 15 are based on the following information:

Sharon received the following income in 2023:
Business income, Philippines P 300,000
Business income, United States 250,000
Expenses, Philippines 200,000
Expenses, United States 125,000
Interest on deposit with Metrobank 3,000
Interest on deposit in U.S. ($1 = P50) $ 500
Cash prize won in a local contest P6,000
Cash prize won in a contest in U.S. 10,000
Winnings in lotto 20,000
Winnings in lotto in U.S 50,000
Dividends from SMC, a domestic company 25,000

14. The taxable income if Sharon is a resident citizen, single is –

A. P 316,000 C. P 66,000
B. 331,000 D. 61,000

Business income, Philippines P300,000

Less: Expenses, Philippines 200,000 P100,000

Business income, U.S. 250,000

Less: Expenses, U.S. 125.000 125,000
Interest on deposit in U.S. ($500 x 50) 25,000
Cash prize, local contest 6,000
Cash prize, U.S. 10,000
Lotto winnings in U.S. 50,000
Taxable income 316,000

Resident citizens are taxable on income derived from sources within and without the
Philippines.
The interest on deposit with Metrobank and the dividends from SMC are not part of the
taxable income because they are subject to final tax. The winnings in lotto in the
Philippines is subject to final tax.

15. The gross income if Sharon is a non-resident alien ETB, married with five (5)
dependent children –
A. P 106,000 C. P 74,000
B. 56,000 D. None

Business income, Philippines P300,000

Less: Expenses, Philippines 200,000 P100,000
Cash prize, local contest 6,000
Gross income 106,000
Nonresident alien ETB are taxable on income derived from sources within the
Philippines only.
The interest on bank deposit with Metrobank and dividends from domestic corporations
are subject to final tax.
Lotto winnings in the Philippines are not taxable to a NRA.

16. The final tax on Sharon assuming she is a nonresident alien NETB, single, is
A. P 83,500 C. P 18,500
B. 88,500 D. 334,000

Business income, Philippines P300,000

Interest, deposit with Metrobank 3,000
Cash prize, local contest 6,000
Lotto, Philippines 20,000
Dividend from domestic company 25,000
Gross income 354,000
Rate of tax 25%
Income tax (Final tax) 88,500
Notes:
1. NRA NETB are subject to tax on gross income derived from sources within the
Philippines only.
2. The total income from sources within is subject to a final withholding tax of 25%.
Numbers 17 through 19 are based on the following information:
Elvis and Madonna, husband and wife, have the following data in 2023-
Elvis Madonna
Semi-monthly compensation income P12,000 P8,000
Rent income (net of 5% WT) 76,000
Royalties on books 70,000
Dependent children 6
Withholding tax on the compensation 3,800 -
During the year, the spouses had self-employment income of P500,000 and
expenses of P105,000 which cannot be identified as solely earned by the wife or the
husband.

17. The income tax payable/overpayment of Elvis under graduated rates is -

A. P 3,000 C. P (5,500)
B. 47,800 D. 63,575

Compensation income (P12,000 x 24) P 228,000

Rent income (P76,000/95%) 80,000
Self-employment income (500,000 - 105,000)/2 197,500
Taxable income 565,500

Tax on P 400,000 22,500

165,500 x 20% 33,100
Income tax due 55,600
Less: Withholding tax
On rent (P80,000 - 76,000) P 4,000
On compensation income 3,800 7,800
Tax payable 47,800

18. The taxable income of Madonna if she is a minimum wage earner is-
A. P 27,500 C. P 11,600
B. 37,500 D. None

Compensation income (MWE), not taxable P -

Share in self-employment income 197,500
Taxable income 197,500
Tax payable Exempt
MWES are not subject to income tax on compensation income. Moreover, the holiday
pay, overtime pay, night shift differential pay and hazard pay received by a minimum
wage earner are exempt also from tax.
However, if the taxpayer is a mixed income earner, the self-employment income (such
as income from the conduct of trade, business or practice of profession, except income
subject to final tax) and non-operating income are returnable/taxable.

19. The final tax on the passive income is –

A. P 14,000 C. None
B. 7,000 D. No answer

Royalty P 70,000
Rate of tax 10%
Final withholding tax 7,000

20. The optional standard deduction on individual is –

A. 40% of taxable income.
B. 40% of business and /or professional including compensation income.
C. 40% of gross sales/receipts from business and/or professional income.
D. 10% of business and/or professional excluding compensation income.

21. Optional standard deduction is allowed on

A. Resident alien
A. Nonresident alien engaged in trade or business
A. Nonresident alien not engaged in trade or business
A. Nonresident foreign corporation

Answer: A

Numbers 22 and 23 are based on the following information:

Rodil, married, with two dependent children, had the following income and
expenses in 2023:

Salary (October to December), net of WT of P5,000 P 155,000

13th month pay 12,900
Gross receipts from profession, net of WT of P1,800 88,200
Rent income, net of 5% withholding tax 57,000
Gross receipts from business 125,000
Professional and business expenses 56,500

22. The income tax payable by Rodil if he availed of the itemized deductions -
A. P25,700 C. P19,275
A. 15,900 D. 9,475

Answer: D

Salary (P155,000+ 5,000) P 160,000

Professional income (88,200+ 1,800) P 90,000
Rent income (P 57,000/95%) 60,000
Business income 125,000 275,000
Total income 435,000
Less: Expenses 56,500
Taxable income 378,500

On P 250,000 Exempt
128,500 x 15% P19,275
Income tax due 19,275
Less: Withholding taxes on-
Salary P 5,000
Professional income 1,800
Rent 3,000 9,800
Income tax payable 9,475

23. The income tax payable by Rodil if he availed of the optional standard
deductions-
A. P 1,450 C. Exempt
A. 15,000 D. P 5,200

Answer: A

Compensation income P160,000

Professional income P 90,000
Rent income 60,000
Business income 125.000
Total 275,000
Less: OSD (275,000 x 40%) 110,000 165,000
Taxable income 325,000
 Tax on P 250,000 Exempt
75,000 x 15% P11,250
Income tax due 11,250
Less: Total withholding taxes 9,800
Income tax due and payable 1,450

Numbers 24 and 25 are based on the following information:

Spouses Carlo and Irene, government employees, had the following data in 2019:

Carlo Irene
13th month pay and other benefits P 18,949 P 8,605.00
SSS, Philhealth & HDMF contributions 24,549 4,559.75
Basic salary (gross of statutory contributions) 310,438 68,465.25
RATA (reimbursable) 96,000
Personnel Economic Relief Allowance 6,000.00
Overtime pay 12,450 4.457.04
Holiday pay 3,000 1,783.25
Hazard pay - 6,000.00
Total amount of taxes withheld 17,046 -

Answer: D

Basic salary P 310,438

Add: Overtime pay 12,450
Holiday pay 3,000
Gross compensation income 325,888
Less: Non-taxable (SSS, Philhealth. Pag-ibig) 24,549
Taxable compensation income 301,339

Tax on P 250,000 Exempt

51,339 × 20% 10,267.80
Income tax due 10,267.80
Less: Withholding tax 17,046.40
Income tax payable -

The taxable compensation income of the taxpayer does not include SSS, GSIS,
Philhealth, Pag-Ibig contributions, and union dues.
Married individuals shall file a single return for the taxable year to include the income of both
spouses, separately computing their individual income tax based on their respective taxable
compensation income.

Where it is impractical for the spouses to file one return, each spouse may file a
separate return.

Hazard pay, overtime pay, night shift differential pay and holiday pay of
regular/supervisory employees are subject to withholding tax and consequently income
tax.

25. The income tax payable on Irene if she is a minimum wage eamer is -
A. P 448.29 C. P (983.19)
A. 1,431.45 D. None

Answer: D

Basic salary (minimum wage earner-not taxable) P68,465.25

Hazard pay, overtime pay, night shift differential pay and holiday pay for minimum wage
earners are not subject to withholding tax and income tax.

26. There is no taxable income until such income is recognized. Taxable income is
recognized when the (BEQ)
A. taxpayer fails to include the income in his income tax return
A. Income has been actually received in money or its equivalent.
A. income has been received, either actually or constructively
A. transaction that is the source of the income is consummated

Answer: C

27. In 2019 Mr. Platon sent his sister Helen $1,000 via a telegraphic transfer through
the Bank of Pl. The bank's remittance clerk made a mistake and credited Halen with
$1,000,000 which she promptly withdrew. The bank demanded the return of the
mistakenly credited excess, but Helen refused. The BIR entered the picture and
investigated Helen. Would the BIR be correct if it determines that Helen earned taxable
income under these facts'? (BEQ)

A. No, she had no income because she had no right to the mistakenly credited
funds.
A. Yes, income is a taxable income regardless of the source.
A. No, it was not her fault that the funds in excess of $1,000 were credited to her
A. No, the funds in excess of$1,000 were in effect donated to her.

Answer: B

28 Mrs. Evangelista owns a residential parcel of land worth P500,000 which she
inherited from her father in 2022 when it was worth P300,000. Her father purchased it in
2010 for P100,000. If Mrs Evangelista transfers this parcel of land to her wholly owned
corporation in exchange for shares of stocks of said corporation worth P450,000, Mrs.
Evangelista's taxable gain is (RPCPA)-

A. Zero C. P 150,000
A. P 50,000 D. 350,000

Answer: A

Value of property acquired P 450,000

Less: Value of property given 300,000
Gain on exchange 150,000

The gain on the exchange is not taxable as a gain becasse the transfer is subject to
a capital gains tax of 6%

29. Mr Juan de la Cruz transferred his commercial land with a cost of P500,000 but with
a fair market value of P750 000 to JDC Corporation in exchange of the stocks of the
corporation with par value of P,.000,000 As a result of the transfer he became the major
stockholder of the corporation.

As a result of the transfer (RPCPA):

A. The recognized gain is the difference between the fair market value the shares of
stocks and the cost of the land
A. The recognized gain is the difference between the pair value of the stocks and
the fair market value of the land.
A. No recognized gain because the land was in exchange of purely stocks and Mr.
de la Cruz became the majority stockholder
A. No recognized gain because the land was in exchange of stocks of the
corporation.

Answer: C
No gain is recognized because the transfer of property by the taxpayer for stocks
of the corporation resulted in control of the corporation by the taxpayer-stockholder.
30. Mr. Santiago purchased a life annuity for P100,000 which will pay him P10,000 a
year. The life expectancy of Mr. Santiago is 12 years. Which of the following will Mr.
Santiago be able to exclude from his gross income? (RPCPA)
A. P 100,000 C. P 20,000
A. 10,000 D. 120,000

Answer: A

31. If an individual performs services for a creditor who in consideration thereoft cancels
the debt, the cancellation of indebtedness may amount: (RPCPA)
A. To a gift C. To a donation inter vivos
A. To a capital contribution D. To a payment of income

Answer: D

32. Mr. Anakin, an employee of Fuerte Corporation is receiving a monthly salary (net of
P233.40 monthly withholding tax) of P21.766 60. Due to an outstanding
accomplishment in July, 2019, the corporation gave him 200 shares of stock of the
corporation with a par value of P100 per share and a fair market value of P150. The fair
value on the date of receipt is P152 per share.

How much is the income of Mr. Anakin in 2019?

A. P 50,000 C. P 270,000
A. 294,000 D. 264,000

Answer: B

Salary (P21,766.60 + 233.40) x 12 P264,000

Shares of stock (200 x P150) 30,000
Gross income 294,000

Whenever the corporation transfers to its employees its own stock as remuneration
for services rendered, the amount of such remuneration is the fair market value at
the time the services were rendered.

The income tax withheld is part of the compensation income.

33. Carandang is indebted to Dacuycuy. Due to his inability to pay the debt, he was
asked to clean the piggery of the latter for three months. Thereafter, Dacuycuy gave him
P5,000 cash and condoned the debt amounting to P10,000

How much income should be declared by Carandang?

A. P 5,000 C. P 15,000
A. 10,000 D. None

Answer: C
Cash payment from Dacuycuy P 5,000
Amount of debt condoned 10,000
Gross Income 15,000

Condonation of debt by the creditor after requiring the debtor to render services to
him is a taxable income to the debtor

34. Rewards given to persons instrumental in the discovery of violations of the National
Internal Revenue Code are subject to
A. Final tax of 10% on rewards collected
A. Final tax of 10% of P1,000,000
A. Final tax of 10% of rewards collected or P1,000,000, whichever is higher.
A. Final tax of 10% of rewards collected or P1,000,000, whichever is lower

Answer: D
35. One of the following tax informers is entitled to a tax informer's reward:
A. Revenue District Officer of ROO No. 22
B. High ranking official of the Department of Finance
C. First cousin of a BIR employee.
D. Former BIR employee who has been engaged in public tax practice for two
decades

Answer: D

36. In 2018, Alonte received from his employer a promissory note with a face value of
P100,000 for services rendered: The note will mature in 2019 However, it was sold to a
financing institution at a discount of 25%. The employer paid the promissory note in
2019. How much taxable income is to be declared by Alonte on the promissory note in
2018 and 2019?
2018 2019 2018 2019
A. P50,000 P 50,000 C. P75,000 P25,000
A. 25,000 75,000 D. None 100,000

Answer: C

2018
Face value P100,000
Less: Discount (P100,000 x 25%) 25,000
Taxable income 75,000

2019
Face value P 100,000
Less: Income reported in 2018 75,000
Taxable income 25,000

37. Using the same data in the preceding number, except that 50% of the face value of
the note is payable in 2019 while the remaining 50% is payable in 2020

How much income is taxable to Alonte in 2018, 2019 and in 2020?

2018 2019 2020
A. P100,000 None None
A. 75,000 P 12,500 P 12,500
A. 25,000 37,500 37,500
A. - 50,000 50,000

Answer: B

2018
Face value P 100,000
Less: Discount (P100,000 x 25%) 25,000
Taxable income 75,000

2019
Face value 100,000
Less: Amount reported as income in 2018 75,000
Amount reportable in 2019 and 2020 25,000
× Portion paid in installment 50%
Income reportable in 2019 12,500
2020
Amount reportable in 2019 and 2020 25,000
x Portion paid in installment 50%
Income reportable in 2020 12,500

38. A domestic corporation had the following data:

2021 Case 1 Case 2 Case 3

Income before write-off
 of bad debt P 370,000 P 170,000 P 370,000
Less: Bad debt written off 40,000 80,000 155,000
Income after bad debt 330,000 90,000 215,000

2022
Amount recovered P 40,000 30,000 150,000

The taxable amount on the recovery of bad debt previously deducted is

Case 1 Case 2 Case 3

A. P 40,000 P 30,000 P 150,000
A. 40,000 None 115,000
A. 30,000 80,000 55,000
A. 30,000 None 150,000

Answer: A

39. Which of the following statements is correct with respect to a leasehold contract?

l. Security deposits are reportable as income of the lessor in the year of receipt.
II. As a deductible expense of the lessee, the depreciation on the improvement is
computed by dividing the cost by the life of the asset or the remaining term of the lease,
whichever is longer.
III. Prepayment of rentals by the lessee are to be recorded by the lessor using cash
method even if he is ordinarily using accrual method of accounting.

A. I only C. II and III

A. I and II D. III only

Answer: D

40. Which of the following statements is WRONG on leasehold improvement?

A. The amount of the improvement is not taxable to the lessor if he will pay the
lessee whatever is the book value of the improvement at the expiration of the
lease contract
B. The amounts due on the lessor such as realty taxes shall be deductible
expenses to the lessee if assumed by the latter
C. A lessor shall consistently apply accrual method of accounting regardless of the
prepayments in rents received from the lessee
D. Generally, the lessor will pay lesser income tax if he avails of the spread-out
method rather than take the outright method in reporting income on the
improvement.

Answer: C

Numbers 41 to 45 are based on the following information:

Bryant leased a land to Jose for a period of 11 years starting January 1, 2020
at an annual recital of P12,000. Observing the provisions of the contract Jose
constructed a building which shall become the property of Bryant at the expiration of the
lease. The construction was completed on January 1, 2023 at a cost of P1,000,000 with
an estimated useful life of 20 years.

It is also stipulated in the contract that the lessee will pay to the local
government the P1,500 annual real property tax on the land starting 2020 and P500 on
the building starting 2024.

41. Assuming that on January 1, 2020, Jose paid P24,000 to Bryant covering the lease
contract for two years, how much income is to be reported by Bryant in 2020?
A. P12,000 C. P 24,000
A. 13,500 D. 25,500

Answer: D

Gross receipts from rental P 24,000

Real property tax assumed by lessee 1,500
Income to be reported by lessor 25,500

Taxes and other obligations of the lessor which are assumed by the lessee are
income to the lessor.

Rentals are taxable in the year they are received, if prepaid, irrespective of the
accounting method being used by the taxpayer. Thus, advance payments of rental are
to be reported by the lessor in the year of receipt.

42. How much income is to be reported by Bryant in 2023 under the outright method?

A. P 13,500 C. P 1,013,500
A. 1,500 D. 1,014,000

Answer: C

Fair market value of improvement P 1,000,000

Annual rental 12,000
Taxes assumed by lessee 1,500

Income to be reported by lessor P 1,013,500

Under the Outright Method of reporting income on leasehold improvement, the

lessor shall report as income the fair market value of the improvement in the year of
completion.

43. How much income is to be reported by Bryant in 2023 under the spread-out
method?

A. P 13,500 C. P 1,013,500
A. 1,500 D. 88,500

Answer: D

Annual rental P12,000

Taxes assumed by lessee 1,500
Income on leasehold improvement:
Cost P 1,000,000
Less: Accumulated depreciation
(1,000,000/20) x 8 years 400,000
Book value, end of lease 600,000
Income in 2023 on improvements (600,000/8) 75,000
Income to be reported in 2023 88,500

44. Based on the information given, how much is the deductible expense of the lessee
in 2024?

A. P 138,500 C. P 125,000
A. 139,000 D. 13,500

Answer: B
 Rent expense P 12,000
Taxes paid by lessee (1,500 +500) 2,000
Depreciation of building (1,000,000/8) 125,000
Deductible expense 139,000

The leasehold improvement shall be depreciated over the remaining term of the
lease or the life of the improvement, whichever is shorter.

45. Assuming that due to the fault of the lessee, the lease contract was terminated on
January 1, 2025, how much income is to be reported by the lessor in 2025?

A. P 763,500 C. P 88,500
A. 750,000 D. 1,013,500

Answer: B

Cost P 1,000,000
Less: Depreciation (P1,000,000/20) x 2 100,000
Book value upon termination 900,000
Less: Income already reported
2023 P 75,000
2024 75,000 150,000
Income of lessor in 2025 750,000

Numbers 46 to 52 are based on the following information:

Artemio leased a 216 square meter of idle land to Leizzie College of Business
(LCB), a proprietary educational institution, for a period of twenty (20) years effective
January 1,2020.

The lease contract provides that Leizzie College of Business (LCB) will erect a
building thereon to be used as classroom, which it did on the lot of Artemio.

The agreement provides also that the building shall become the property of the
lessor at the end of the lease. The building was completed on June 30, 2022 at a cost of
P1,800,000. The estimated life of the leasehold improvement is thirty (30) years and will
be occupied in the immediately succeeding quarter following its construction

It was further agreed that Leizzie College of Business (LCB) will pay the real estate
tax on the land assessed at P3,000 annually

On January 2, 2020, LCB paid Artemio P120,000 consisting of rental covering the
two (2) year period (24 months) from 2020 to 2021

46. The rent income to be reported by Artemio in 2020-

A. P60,000 C. P120,000
A. 123,000 D. 63,000

Answer: B

Cash received (for 2020 and 2021) P120,000

Tax paid by lessee 3,000
Income 123,000

47. The income to be reported by Artemio in 2022 under outright method is

A. P 1,860,000 C. P1,860,750
A. 1,862,250 D. 1,863,000

Answer: B
 Rent income (120,000/24 x 12) P 60,000
Leasehold improvement 1,800,000
Tax from 1st to 3rd Q(3,000/4)x3 2,250
Income under outright method 1,862,250

48. The income to be reported by Artemio in 2022 under spread-out method is

A. P 84,429 C. P 81,429
A. 21,429 D. 83,679

Answer: D

Rent income P60,000

Tax paid by lessee 2,250
Income on leasehold improvement:
Cost P 1,800,000
Less: Accumulated depreciation
(1,800,000/30 x 17.5) 1,050,000
Book value, end of lease 750,000
(750,000/17.5) x 6/12 21,429
Income under spread-out method 83,679

49. Which of the following statements is correct?

A. Effective January 1, 2023, the land shall be exempt from real estate tax.
A. Effective June 30, 2022, the land shall be exempt from real estate tax
A. Effective January 1, 2022, the land and the building shall be exempt from real
estate tax
A. Effective October 1, 2022 the land and the building shall be exempt from real
estate tax

Answer: D

October 1, 2022 the land and the building shall be exempt from real estate tax
because it is now being used actually, directly and exclusively for educational purpose.

50. The deductible expense of Lezzie Business College in 2023-

A. P 165,857 C. P114,429
A. 162,857 D. 84,429

Answer: B

Rent expense P60,000

Depreciation (1,800,000/17.5) 102,857
Deductible expense 162,857

51. The income to be reported by Artemio in 2023 under spread-out method is

A. P 105,857 C. P114,429
A. 102,857lD. 84,429

Answer: B

Rent income P 60,000

Leasehold improvement (750,000/17.5) 42,857
Income to be reported 102,857

52. Suppose the lease contract was terminated on December 31, 2025 do to the fault of
the lessee, the income to be reported by Artemio under spread aut method in 2026 is-
A. P 1,443,000 C. P1,440,000
A. 1,397,143 D. 1,482,857

Answer: B

Rent income P 60,000

 Leasehold improvement:
Cost P1,800,000
Less: Accumulated depreciation
(1,800,000/30 x 4.5) 270.000
Book value upon termination 1,530,000
Less: Amount declared as income
2022 (6 months) P21,429
2023 42,857
2024 42,857
2025 42,857
2026 42,857 192,857 1,337,143
Total 1,397,143

53. On January 1, 2017. Atutubo leased a lot to Bengbeng with a building erected
thereon for a period of 10 years. The lease contract provides that Bengbeng will pay the
following:
a. Monthly rental of P10,000.
a. Fire insurance premium of P15,000 per year.
a. Real property tax of P 5,000 a year.

The lessee will construct a concrete fence surrounding the lot at a cost of
P1,200,000 with a useful life of 20 years which shall belong to the lessor at the
expiration of the lease. The fencing was finished on 30, 2019

In 2019, Atutubo shall report as income from lease (spread-out method) an amount
of-
A. P 75,000 C. P140,000
A. 740,000 D. 190,000

Answer: D

Rent income (10,000 x 12) P120,000

Fire insurance 15,000
Real property tax 5,000
Income on leasehold improvement:
Cost P1,200,000
Less Accumulated depreciation
(1,200,000/20x7.5) 450,000
Book value, end of lease 750,000
Income to be reported (750,000/7.5)x6/12 50.000
Income in 2019 190,000

54. In Number 53 above, the lessee can claim a deductible expense in 2019 of
A. P215,000 C. P215,000
A. 220,000 D. 190,000

Answer: B

Rent expense P 120,000

Fire insurance expense 15,000
Real property tax 5,000
Depreciation (1,200,000/7.5)x6/12 80,000
Deductible expense 220,000

B. Exclusions from Gross Income

1. The proceeds received under a life insurance endowment contract is not

considered part of gross income (BEQ)

A. if it is so stated in the life insurance endowment policy

A. if the price for the endowment policy was not fully paid.
A. where payment is made as a result of the death of the insured
A. where the beneficiary was not the one who took out the endowment contract

Answer: C

2. Proceeds of insurance taken by a corporation on the life of an executive indemnify it

against loss in case of his death is (RPCPA)
A. Exempt from income tax
A. Part of taxable income
A. Subject to final tax
A. Partly exempt, partly taxable

Answer: A

3. Which of the following is correct? Proceeds of life insurance policy

A. is exempt from income tax upon the death of the insured if the beneficiary is not
the estate, executor or the administrator
A. is not subject to income tax if taken by a person other than the insured such as
the employer
A. are subject to income tax in its entirety if the insured outlives the policy
regardless of the amount of premiums paid by the insured
A. are exempt from income tax upon the death of the insured because the
requirement of irrevocability, and appointment of beneficiary other than the estate,
executor or administrator are applicable only on estate tax and not to income tax

Answer: D

4. Mrs Lucena was insured under an endowment policy with a value P500,000. Total
premiums paid by her during the term of premium payments on the policy was
P490,000 from which there was a return of premiums of P40,000 At the maturity of the
policy. Mrs. Lucena received P500,000 The income of Mrs. Lucena under the policy is
(RPCPA)

A. Zero C. P 10,000
A. P500,000 D. 50,000

Answer: D

Amount of proceeds received P500,000

Less: Net premiums paid (490,000-40,000) 450,000
Income under the policy 50,000

5. Sonia took a life insurance from Sunstar Insurance Company, with her husband Noli
as the beneficiary Under the policy. Sunstar will pay Sonia the amount of P500,000
when the policy matures, or to her beneficiary husband in case she dies before the
maturity. Sonia will pay P10,000 annually for 20 years.

Assuming that the policy matured when Sonia reached 50 years old and she received
the entire P500,000 from the insurer, how much income should she report?

A. P 500,000 C. P 300,000
A. 200,000 D. None

Answer: C

Proceeds from insurance P 500,000

Less: Amount of premiums paid (P10,000 x 20) 200,000
Taxable amount 300,000
The proceeds of life insurance are taxable if the insured outlives the policy. However,
the total amount of premiums paid are to be deducted from the proceeds because they
are considered as return of capital.

6. In the preceding problem assuming that Sonia died after 10 years of paying premum.
How much income should be reported to the BIR

A. P500,000 C. P400,000
A. 100,000 D. None

Answer: D

The proceeds of P500,000 is not taxable because it is considered more as an

indemnity rather than as gain or profit.

Numbers 7 to 9 are based on the following information:

Paulo insured his life with an insurance company. Under the contract he will pay a monthly
premium of P2,000 for 10 years in case of death before the 10th year, his beneficiary will
receive an indemnification in the amount of P150,000. If he is still living on the 10th year, he will
receive the face value of P500,000

7. If Paulo dies on the 5th year, his beneficiary will report an income of
A. P 500,000 C. P250,000
A. 150,000 D. Exempt

Answer: D

Whenever the insured in a life insurance policy dies, the entire amount of proceeds
received from an insurance company is exempt from tax

8. Suppose Paulo dies on the 5th year and his beneficiary was offered to receive the
P150,000 in lump sum or to receive it at P20,000 a month for ten (10) months and the
beneficiary chose the 2nd option, he will report an income of

A. P 500,000 C. P 50,000
A. 150,000 D. Exempt

Answer: C

Total amount to be received (20,000 x 10) P200,000

Less: Face value 150,000
Taxable amount/Interest 50,000

9. Supposed Paulo survived the policy and was able to receive P500,000, he will report
an income of -

A. P500,000 C. P150,000
B. 260,000 D. None

Answer B

Amount of proceeds P500,000

Less: Premiums paid (P2,000 x 12 x 10) 240,000
Taxable Amount 260,000
10. Andrew is the owner and beneficiary of a P500,000 policy on the life of his father.
Andrew sells the policy to his brother. Rolly, for P150,000. Rolly subsequemtly pays
premiums of P50,000. Upon his father’s death, Rolly must

A. Include P500,000 in his gross income.

B. Exclude the entire proceeds in his gross income
C. Include P300,000 in his gross income.
D. Include P350,000 in his gross income.

Answer C

Proceeds from life insurance P500,000

Less: Investment
Acquisition cost P150,000
Premiums paid 50,000 200,000
Taxable income 300,000

11. Mr. Basilio insured his life with his estate as beneficiary. In 2019, after Mr. Basilio
had paid P65,000 in premium, he assigned the policy to Mr. Jose Llamado for P60,000
and Mr. Llamado continued paying the premiums. Mr. Basilio died and Mr. Llamado
collected the total proceeds of P200,000. Mr. Llamado after the assignment and before
Mr. Basilio’s death, paid total premiums of P80,000. As a result of the above
transaction, Mr. Llamado: (RPCPA)

A. May consider the proceeds of P200,000 as exempt from tax

B. Derived a taxable income of P55,000
C. Derived a taxable income of P60,000
D. Answer not given

Answer C

Proceeds from life insurance P200,000

Less: Investment
Acquisition cost P60,000
Premiums paid 80,000 140,000
Taxable income 60,000

12. Binata Reyes won the international Billard Championship held in Madrid, Spain. The
tournament was sanctioned by a national sports association which is recognized by the
Philippine Olympic Committee. He was awarded U.S. $60,000 by the sponsor of the
tournament. He was also given a cash prize of P250,000 by San Miguel Corporation
 In the same year, he entered into a contract with the same company to advertise
their
product for P1,500,000

If the exchange rate of every U.S. $1 is P50, Binata Reyes should report an
income of

A. P4,750,000 C. P1,750,000
B. 1,500,000 D. 3,370,000

Answer B

The cash prizes of $60,000 and P250,000 received from the sponsor and San Miguel
Corporation, respectively, are exempt from income tax.
The talent fee in advertising the products is taxable because it is not included anymore
as part of the prizes and awards received in sports competition.

13. Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid
the court’s award that included among others, P100,000 as moral damages for the
mental anguish Aleta suffered.

Did Aleta earn a taxable income?

A. She had a taxable income of P100,000 since income is income from whatever
source.
B. She had no taxable income since moral damages are compensatory.
C. She had taxable income since she made a profit.
D. She had no taxable income because it was a donation.

Answer B

14. While crossing along the intersection of Legarda St. And Recto Avenue in
Sampaloc, Manila, Miss Mina Malas was bumped by a passenger jeepney. As a
consequence of the accident, She was hospitalized for 20 days. The driver and the
operator of the passenger jeepney paid her a total amount of P135,000 for the following
expenses she incurred:

Hospital bills P60,000

Cost of medicines 15,000
Moral damages for mental anguish and others 60,000

She also received P20,000 as settlement of a libel case that she filed against a
television
station which announced that she was pregnant at the time of the accident and that the
fetus was aborted.

The income to be report by Mina is -

A. P0
B. 20,000
C. P60,000
D. 155,000

Answer A

Compensation for personal injuries or sickness are not subject to tax. The hospital bills
and costs of medicines are mere return of capital; they are not subject to income tax.
Moral damages, being purely compensatory in nature, are excludible from gross
income. Moreover, mental anguish, grief, anxiety, etc. Cannot be measured pecuniarily.
Recoveries of damages arising from libel are included in the phrase “personal injury or
sickness”, which are exempt from tax.

15. Mr. Monte was injured in a vehicular accident in 2019. He incurred and paid medical
expenses of P20,000 and legal fees of P10,000 during the year. In 2020 he received
P70,000 as settlement from the insurance company which insured the car owned by the
other party involved in the accident. From the above payments and transaction the
amount of taxable income of Mr. Monte in 2019 is (RPCPA)

[Link]
B.P40,000
C.P70,000
D.50,000

Answer A

16. An accident attributed to the negligence of the driver of Superman Lines resulted in
the death of Richard’s wife, physical injuries to Richard that prevented him from working
for two (2) months and the toal wreck of his brand new car which he had bought for
P1,650,000

In an action for damages. The court awarded to Richard the following.

P140,000- Injuries to Richard consisting mainly in the loss of his left leg.
80,000- Two months’ salary of Richard.
120,000- For the death of his wife.
100,000- Moral damages for the physical suffering and mental anguish.
1,800,000- For the loss of his car, the value of which had increased.

Based on the foregoing, Richard should report income of-

A. P190,000
B. 680,000
C. P230,000
D. 240,000

Answer C
Two months’ salary P80,000
Gain on value of the car (1,800,000 - 1,650,000) 150,000
Income 230,000
17. Lenny was hit by a wayward bus while on her way home. She survived but had to
pay P150,000 for her hospitalization. She was unable to work for sic (6) months which
meant that she did not receive her usual salary of P20,000 a month or a total
P120,0000. She sued the bus company and was able to obtain a final judgement
awarding her P150,000 as reimbursement for her hospitalization, and P250,000 as
moral damages for her pain and suffering. She was able to collect in full from the
judgement. How much income did she realize when she collected from the judgement?

A. P460,000
B. 250,000
C. P60,000
D. 120,000

Answer D

18. Samsona was injured in a vehicular accident a=in 2019. She incurred and paid
hospital expenses of P30,000 and legal fees of P15,000 during that year, In 2020, she
recovered P40,000 as settlement from the insurance company which insured the car
owned by Dimar, the other party involved in the accident. From the above payments
and transaction, the amount of income taxable to Samsona is:

A. P40,000 in 2020
B. 5,000 in 2020
C. P5,000 in 2019
D. None

19. Which of the following is taxable income? (RPCPA)

A. Income from qualified pension plan

B. Compensation for personal injuries
C. Moral damages
D. Interest on moral damages

Answer D

20. All the items below are excluded from gross income, except: (BEQ)

A. Gain from sale of long-term bonds, debentures and indebtedness;

B. Value of property received by a person as donation or inheritance;
C. Retirement benefits received from the GSIS, SSS, or accredited retirement plan;
D. Separation pay received by a retireing employee under a voluntary retirement
program of the corporate employer.
 Answer D

21. Miss Cruz had recently joned the MMC as sales executive, She was advised to be
retrenched because the company was losing heavily, but that she would be given
substantial separation pay. The general manager, however, suggested to Miss Cruz to
file a letter of resignation from the company instead of having been involuntary
separated as the latter would have implications of inefficiency on her part. Miss cruz
chose to resign from the company and received the sump of P100,000 as separation
pay. The above amount is (RPCPA)

A. Exempt from income tax

B. Taxable in full
C. Non-deductible expense on the part of the company
D. Partially taxable

Answer B

One of the requisites for non-taxability of separation pay is that the causes of the
separation from employment must be beyond the control of the employee.
In this case, the separation of Miss Cruz from MMC is not retrenchment but her
resignation from the company, a cause which, undoubtedly, is within her control.

22. Sharaine, an official of Sampaguita Corporation asked for an earlier retirement

because she was emigrating to Canada, she was paid P1,000,000 as a separation pay
in recognition of her valuable services to the corporation.

Shane, another official of the same company was separated for occupying a
redundant
position, she was given P500,000 as separation pay.

Sheila, was separated due to her failing eyesight. She was given P250,000 as
separation
pay.

All of the three (3) were not qualified to retire under the BIR approved pension
plan of the
Corporation

Q1: Is the separation pay given to Sharmain subject to income tax?

Q2: How about the separation pay received by Shane?
Q3: How about the separation pay received by Sheila?

A. Yes to all questions.

B. Yes to 2nd question.
C. No to all questions.
D. No to 2nd and 3rd questions.
 Answer D

The separation from employment of Sharmaine is due to resignation, a cause

which is within her control.
The causes of separation from employment of Shane and Sheila, respectively,
are beyon their control. Therefore, the separation pay received by them are not
taxable.

23. During the year, Bata received a coconut land from his mother by way of an inter-
vivos donation. The land had a market value of P700,000 and earning an average
annual income of P50,000.

In the same year, his mother died. He inherited a passenger bus valued at
P400,000 and a
residential house worth P2,000,000. the bus earned a total income of P30,000 in the
hands of Bata.

As a consequence of his mother’s death, he received P400,000 from an insurance

company as proceeds of an insurance policy taken by his mother who appointed him as
the beneficiary. The toal premiums paid was P150,000.

The income subject to tax is -

A. P3,500,000
B. 3,350,000
C. P330,000
D. 80,000

Answer D

Income on coconut land P50,000

Income of bus 30,000
Income subject to tax 80,000

24. After working for 30 years at Sto. Domingo Corporation, Miss Tela Pia retired from
employment at the age of 60. She received P600,000 as retirement pay from the private
retirement plan being maintained by the employer.

Other than her retirement benefits, she also received her endowment insurance
policy in the
Amount of P400,000 which she was paying for 20 years at an annual premium of
P5,000.

How much income must be reported y Miss Tela Pia

A. P300,000
B. 400,000
C. P600,000
D. None
 Answer A

Proceeds from insurance policy P400,000

Less: Premiums paid (5,000 x 20) 100,000
Taxable 300,000

The retirement benefit is not taxable because all the requisites for exemption are
compiled, such as: the existence of a private pension plan, the retirement age of
at least 50 years old, and service to the same employer for at least 10 years.

25. Anton was hired as staff auditor of SBB and company in 2004, in December 2011,
he transferred to Tacandong and Associates. In 2013 he returned back to SBB and
Company until his retirement in 2019 at the age of 55.

Question 1: Are the retirement benefits taxable to Anton?

Question 2: Suppose he was terminated from employment due to dishonesty. Is the
separation pay taxable to Anton?
Question 3: Suppose he was terminated from employment due to the merger of the two
audit firms. Will the separation pay be taxable to Anton.

Answer A
The retirement benefit is not taxable to Anton because he reitred at the age 55 and he
rendered services to SBB and company for more than 10 years. This is based on the
assumption that there was a private pension plan maintained by his employer and
registered with the Bureau of Internal Revenue.
Termination from service due to dishonesty is a cause that is within the control of the
employee, while if the cause of cessation from employment is merger with another
company, the separation is beyond their control.

26. On October 1, 2019, Samantha inherited properties worth P3,000,000 from her
mother, The properties are earning income of P90,000 a month.

How much income is to be deducted by Samantha in 2019?

A. P3.090,000
B. 3,000,000
C. P3,270,000
D. 270,000

Answer D

Taxable income (P90,000 x 3) P270,000

Inherited properties are not considered as income because they are acquired by
gratuitous title subject to estate tax. However, the income on these properties are
subject to income tax.
27. Villamayor, an employee of a cooperative was regularly receiving a monthly salary
and allowance of P8,500 and P1,000 respectively, on June 1, 2019, he was retrenched
by the cooperative paying him a separation pay of P125,000. He decided to use this
money in buying a tricycle. For a six (6) month period, he earned a net income of
P36,000. How much income should Villamayor declare in 2019 for income tax
purposes?

A. P83,500
B. 46,500
C. P173,750
D. 171,000

Answer A

Salary - January to May (8,500 + 1,000) x 5 P47,500

Income from tricycle 36,000
Total income 85,500

28. Raquel Montero was retired by her employer-corporation in 2019 and paid
P2,000,000 as a retirement gratuity without any deduction of withholding tax. The
corporation became bankrupt In 2020. Can the BIR subject the P2,000,000 retirement
gratuity to income tax? (RPCPA)

1st answer : No, if the retirement gratuity was paid based on a reasonable pension plan
where Montero was 60 years old and has served the corporation for 9 years

2nd answer: Yes, if Montero was forced by the corporation to resign to resign due to
retrenchment.

A. Both answers are wrong

B. Both answers are correct
C. First answer is correct, the second is wrong.
D. First answer is wrong, the second is correct.

Answer D

29. After working for 30 years and due to old age, Rufino retired from his employment
on December 31, 2020 as a rank-and-file employee of Tumagay Corporation. As a
consequence of his retirement, he received the following from his employer:

Basic salary for 2020 P250,000

13th month pay 25,000
Anniversary bonus 2,000
Loyatly award 10,000
 Retirement pay 750,000

Based on the above data, the amount subject to tax is -

A. P250,000
B. 257,500
C. 252,500
D. 1,037,500

Answer A

Salary P250,000
Add: Taxable to other benefits
13th month pay P25,000
Loyalty award 10,000
Total other benefits 35,000
Less: Exemption 90,000
Taxable amount 250,000

Numbers 30 to 32 are based on the following information:

Mulry had the following data from his employment in 2019:

Monthly salary, at gross P24,000

Taxes withheld 8,000
Pag-ibig fund contributions 1,500
Union dues 2,400
Philhealth contributions 720
SSS premiums 4,480
13th month pay 24,000
Mid-year bonus 12,000
Loyalty award 5,000

30. The non-taxable compensation income if Mulry is a rank-and-file employee is

A. P5,100
B. 50,100
C. P29,000
D. None

Answer B
 Pag-ibig fund contributions P1,500
Union dues 2,400
Philhealth contributions 720
SSS premiums 4,480
Other benefits
13th month pay P24,000
Mid-year bonus 12,000
Loyalty award 5,000 41,000
Non-taxable compensation income 50,100

31. The gross compensation income of Mulry in 2019 is -

A. P144,000
B. 150,000
C. P329,000
D. 138,900

Answer C

Basic salary (P24,000 x 12) P288,000

Other benefits 41,000
Gross compensation income 329,000

32. The taxable compensation income is

A. P247,000
B. 278,900
C. P329,000
D. 138,900

Answer B

Basic salary (P24,000 x 12) P288,000

Less: Mandatory contributions 9,100
Taxable compensation income 278,000

33. Which of the following compensation payments to a minimum wage earner is

subject to income tax?

A. Holiday pay
B. Overtime pay
C. Night shift differential pay
D. None of the above
 Answer D

A minimum wage earning is exempt from the payment of income tax on

compensation income. The exemption includes holiday pay, overtime pay, night
shift differential pay, and hazard pay.

34. Three tax payers have the following data:

Alcanzo Barrientos Corporal

Monthly basic pay P7,254 P6,431 P20,546
Holiday pay 435 - -
Overtime pay 1,156 1,459 2,543
Hazard pay - - 1,000
Night shift differential pay - 1,686 -
Total pay for the month 8,945 9,576 24,089

Who of the above taxpayers is/are exempt from income tax?

A. Alcanzo only
B. Barrientos and Corporal
C. Alcanzo and Barrientos
D. Corporal only

Answer C
The basis of the computation of the minimum wage rates prescribed by law shall
be normal working hours which shall not be more than eight (8) hours a day.

C. Fringe Benefits Tax

1. Which of the following statements is WRONG about fringe benefit?

A. The fringe benefit tax does not apply to rank-and-file employees

B. The rule on de minimis benefit does not apply to rank-and-file employees.
C. The monetary value received by an official or employee is presumed to be net of the
fringe benefit tax.
D. If the recipient of a fringe benefit is a non-resident alien not engaged in trade or
business, the monetary vaue shall be divided by 75% in order to arrive at the grossed-
up monetary value.
 Answer B

2. ABC Company purchased a residential house and lot with a swimming pool In an
upscale subdivision and required the company president to stay there without paying
rent: it reasoned out that the company president must maintain a certain image be able
to entertain guests at the house to promote the company’s business. The company
president declared that because they are childless, he and his wife could very well live
in a smaller house.

Was there a taxable fringe benefit? (BEQ)

A. There was no taxable fringe benefit since it was for the convenience of the employer
and was necessary for its business.
B. There was a taxable fringe benefit since the stay at the house was for free.
C. There was a taxable fringe benefit because the house was very luxurious.
D. There was no taxable fringe benefit because the company president was only
required to stay there and did not demand free housing.

Answer B

3. ABC Corporation gave fringe benefits to Benny, one of its employees. The benefits
given shall not be subject to fringe benefits tax if Benny is a -

A. Rank and file employee

B. Supervisory employee
C. Managerial employee
D. CEO of the corporation

Answer A

4. Fringe benefits tax is imposed on -

A. Rank and file employees

B. De minimis benefits
C. Supervisory and managerial employees
D. Fringe benefits granted for the convenience of the employer.

Answer C

5. Which of the following is subject to fringe benefit tax?

A. Salary of the rank and file employee.

B. Salary of the supervisory and managerial employee.
C. Fringe benefit of the rank and file employee.
D. Fringe benefit of the supervisory and managerial employee.

Answer D

6. The following statements about fringe benefits are false. Which is the exception?

A. The amount of de minimis benefits given to rank-and-file employees are not subject
to fringe benefits tax.
B. The amount of de minimis benefits given to managerial employees are subject to
fringe benefits tax.
C. The equivalent value of free meals and living quarters which are given to an
employee for the convenience-of-employer are considered as fringe benefits to subject
to fringe benefits tax.
D. The fringe benefits tax is not deductible from gross income in computing the taxable
income of the employer.

Answer A

7. The following earnings are subject to fringe benefits tax, except: (RPCPA)

A. Salary of rank and file employees

B. Housing necessary for the trade and for the convenience of the employer.
C. Food allowance for the convenience of the employer and necessary in the conduct of
the business.
D. All of the above.

Answer D

Items 8 and 9 are based on the following information:

8. Ditso is employed by Holy Cross Hospital as an ambulance driver with a salary of

P20,000 a month. In addition, he is given free meals with a monthly value of P4,500 and
living quarters wthin the hospital compound with an equivalent value of P2,000 a month.

The monthly taxable compensation income of Ditso is -

A. P20,000
B. 24,000
C. P26,500
D. 22,500

Answer C

Salary P20,000
Value of free meals 4,500
 Value of free living quarters 2,000
Monthly compensation income 26,500

The equivalent value of the free meals and lodging is a fringe benefit. However it
is not subject to fringe benefits tax because it is given to a rank and file
employee.

9. If the benefits given to Ditso in Number 8 above is furnished by his employer so that
his services could easily be availed of whenever some patiens will need the urgent
services of an ambulances, his monthly taxable compensation income is -

A. P20,000
B. 24,500
C. P26,500
D. 22,500

Answer A

Under the “convenience of the employer rule” benefits received by employees such as
free meals and lodging which are given by the employer for their own convenience are
not taxable to the employee.

10. The following statements are true, except: (RPCPA)

A. Fringe benefits tax shall be treated as a final income tax on the employee withheld
and paid by the employer on a quarterly basis.
B. The grossed-up monetary value of the fringe benefit is the actual amount received by
the employee.
C. The grossed-up monetary value of the fringe benefit shall be determined by dividing
the monetary value of the fringe benefit by the grossed-up monetary value factor.
D. The person liable for fringe benefit tax is the employer, whether he is an individual,
professional partnership, or corporation regardless of whether the corporation is taxable
or not or the government and its instrumentalities.

Answer B

11. Statement 1: A fringe benefit that is exempt from fringe benefit tax is likewise
exempt from any other form of income tax.

Statement 2: Any amount given by the employer as de minimis benefits to its

employees, shall not constitute as deduction upon such employer.

Which of the above statements is/are true?

A. Statement 2
B. Statement 1
C. Statements 1 and 2
D. Neither Statements

Answer D
A fringe benefit that is exempt from fringe benefit tax may still be subject to other
income tax, except if the same is likewise expressly exempt from any other income tax.

Any amount given by the employer as benefits to its employees, whether classified as
de minimis benefits or other kinds of fringe benefits, shall constitute as deduction upon
such employer.

12. Sarah married with three (3) qualified dependent children, a regular employee of
Confederate Inc. Receives on July 6, 2020 P30,000 as regular monthly salary and half
of his 13th month pay amounting to P15,000 plus other benefits such as rice allowance
for July of P2,500, productivity incentive pay of P30,000 hazard pay of P1,000 overtime
pay of P4,000 and night shift differential of P2,000.

Compute the income subject to withholding tax In July

A. P57,000
B. 37,000
C. P45,500
D. 72,500

Answer B

Regular wage P30,000

Other benefits:
13th month pay P15,000
Rice allowance (2,500 - 2,000) 500
Incentive pay (30,000 - 10,000) 20,000
Total 35,500
Less: Exemption 90,000
Hazard pay 1,000
Overtime pay 4,000
Night shift differential pay 2,000
Income subject to withholding 37,000

13. Mayaman Company owns a fleet of motor vehicles. In 2020, one of the cars which
was acquired at a cost of P1,400,000 was allowed as service vehicle by one of its
officials. During the year its book value amounted to P1,150,000 how much was the
fringe benefit tax due thereon?

A. P75,385
B. 18,823
C. P17,767
D. 88,235

Answer A

Value of the benefit (P1,400,000/5) P280,000

X Taxable portion 50%
Monetary value 140,000
 Divide by 65%
Grossed-up monetary value 215,385
Rate of tax 35%
Fringe benefit tax 75,385

14. Based on the data in Number 13 above, suppose Mayaman Company is just leasing
the car that is being used partly for personal and for business purposes and is paying
an annual rental of P120,000. the annual fringe benefit tax is -

A. P28,229
B. 23,529
C. P73,529
D. 32,308

Answer D

Monetary value (120,000 x 50%) P60,000

Divide by 65%
Grossed-up monetary value 92,308
Rate of tax 35%
Fringe tax benefits 32,308

15. In May 2022, a non-stock, non-profit university provided a 3-day vacation trip to
Panglao Island to the university’s Executive Vice-President and his family. The total
expenses incurred by the school was P100,000. the fringe benefit tax is -

A. P6,400
B. 9,412
C. P35,000
D. 53,846

Answer D

Grossed-up monetary value (100,000/65%) P153,846

Rate of tax 35%
Fringe benefit tax 53,846

Items 16 and 17 are based on the following data

16. XYZ Corporation assigned Mr. Paso one of its employees in the head office in
Manila to manage their branch office in Dagupan. The company provided for the
residential house of the manage paying a monthly rental of P34,000

The monthly fringe benefit tax thereon is -

A. P18,308
B. 9,154
C. P26,154
D. 8,000
 Answer B

Grossed-up monetary value (34,000/65%) x 50% P26,154

X Tax rate 35%
Fringe benefit tax 9,154

17. Based on the same data in the preceding item, the deductible expense from the
gross income of XYZ Corporation is -

A. P43,154
B. 28,166
C. P42,000
D. 34,000

Answer A

Fringe benefit tax expense P 9,154

Fringe benefit expense 34,000
Deductible expense 43,154

Numbers 18 to 20 are based on the following information:

18. Xtra Corporation furnished and granted the use of its condominium unit to its
Executive Vice-President. The fair market value of the propert is P4,800,00 while the
acquisition cost is P3,000,000.

The quarterly fringe benefit tax due thereon is -

A. P14,117.64
B. 5,384.62
C. P16,153.85
D. 32,307.69

Monetary value (5% (P4,800,000 x 50%)] P 120,000.00

Quarterly value (120,000 / 4) 30,000.00
Divide by 65%
Grossed-up monetary value 46,153.85
Rate of tax 35%
Fringe benefit tax 16,153.85

19. Assuming that the data given in the problem is for the second (21 quarter of
2022, the fringe benefit tax should be paid (without surcharges

A. on July 31, 2022 C. not later than July 25, 2022

B. on July 25, 2022 D. not later than July 31, 2022.
C

20. Based on the data in the preceding problem, the deductible expense from the gross
income of Xtra Corporation is -

A. P 16,153.85 C. P 12,132.35
B. 32,307.69 D. 5,384.62

The corporation cannot claim the fringe benefit expense as deduction from
gross income since the cost for the use of the property had already been
recovered as deduction from gross income under Depreciation Expense.
However, the fringe benefit tax expense is allowed as deduction from gross
income.

21. Bernard Company provided cash fringe benefit to its managerial employees in the
amount of P130,000 and to its rank and file employees amounting to P50,000. The
deductible expense by Bernard Company is -

A. P 186,000 C. P 50,000
B. 136,000 D. 250,000

Fringe benefits to managerial employees P 130,000

Fringe benefits to rank and file employees 50,000
Fringe benefits tax paid (P130,000/65%) × 35% 70,000
Deductible fringe benefit expense 250,000

22. The corporation gave a brand new car to its sales manager. The fringe benefit
given is -

A. subject to fringe benefit tax based on the provisions of the tax code
B. subject to fringe benefit tax because it was given to a rank-and-file
employee.
C. exempt from the fringe benefit tax because it is required by the natures
or necessary to the trade or business of the employer.
D. exempt from the fringe benefit tax because. it was given for the
convenience of the employer.

23. Frances Corporation gave the following cash fringe benefits to its employees

To supervisory employees P 220,000

To managerial employees 170,000
To rank and file employees 60,000

The entry to record the above transactions is -

A. Fringe benefits tax P 157,500

Fringe benefit expense 450,000
Cash P 450,000
Fringe benefit tax payable 157,500

B. Fringe benefits tax 210,000

Fringe benefit tax payable 210,000

C. Fringe benefits tax 650,000

Fringe benefit tax payable 650,000

D. Fringe benefit tax expense 210,000

 Fringe benefit expense 450,000
Cash 450,000
Fringe benefit tax payable 210,000

Grossed-up monetary value (220,000 + 170,000)/63% P600,000

Rate of tax 35%
Fringe benefit tax expense 210,000
To supervisory employees 220,000
To managerial employees 170,000
To rank and file employees 60,000
Total fringe benefit expense 450,000

24. Ivy Corporation had the following journal entry on fringe benefits:
Fringe benefit expense P 186.000
Fringe benefit tax expense 63,000
Cash P 186,000
Fringe benefit tax payable 63,000

Based on the above accounting entry, the amount of fringe benefit given to rank and
file employees

A P 69,000 C. P 186,000
B. 63.000 D 117.000

Fringe benefit expense P 186,000

Less: Monetary value of fringe benefit subject to tax 117.000
Fringe benefit given to rank and file 69,000
Computation of monetary value:
Fringe benefit tax expense P 63.000
Divide by fringe benefit tax rate 35%
Grossed-up monetary value 180.000
Multiply by 65%
Monetary value of benefit 117.000

25. Adrian, a supervisory employee of Nognog Corporation borrowed P50.000

from the company payable in four (4) months thru salary deduction. If the
corporation is charging 5% interest per annum on the loan, the fringe benefft
tax expense is

A. P2,000.00 C. P 627 45
B. 666.67 D. 628.21

Interest at benchmark rate (P50,000 × 12% × 4/12) P2,000.00

Interest at special rate (P50,000 × 5% × 4/12) 833.33
Interest foregone / value of benefit 1,166.67
Divide by 65%
Grossed-up monetary value 1,794.88
Rate of tax 35%
Fringe benefit tax expense 628.21

26. Which of the ceilings on the following de minimis benefits is correct?

Rice subsidy
Uniform allowance
(per month) (per annum)
A. P 1,200 P 3,000
B. 2,000 6,000
C. 2.000 5.000
D. 1,500 5,000

27. 1ª Statement: Laundry allowance not exceeding P300 per month is not
exempt de minimis benefit if given to rank-and-file employees
.
2nd Statement: Rice subsidy of P2,000 per month is an exempt de minimis
benefit regardless of whether the recipient employee is occupying
managerial position or not.

A. Both statements are wrong.

B. Both statements are correct.
C. The first statement is correct, while the second statement is wrong
D. The first statement is wrong, while the second statement is correct

4. Using BIR Form No. 1603Q, the amount in Box 18 is

A. P 511,875 C. P 595,875
B. 777,875 D. 787,500

Solution:
To Managerial employees P 942,500
Supervisory employees 520,000
Monetary value 1,462,500
Divide by 65%
Grossed-up monetary value 2,250,000
x Rate 35%
Fringe benefit tax 787.500
 D. Corporation

1. For purposes of income taxation, which of the following is not considered as

a corporation?

A. General professional partnership

B. Business partnership
C. Unregistered partnership
D. Joint stock companies

2. Which of the following businesses is not taxable as a corporation?

A. Andrea, Barbara and Criselda contributed P500,000 each and opened

up a department store in the downtown. They agreed that whatever net
profit is earned will be distributed equally to them. They did not bother
to register the business with the Securities and Exchange Commission.
B. Gigi and Jayjay, two senior staff auditors of a big accounting and
auditing firm, resigned from their job and organized a new firm which
they named as Gigi, Jayjay and Company, CPAs.
C. Lavinia, Dorina, Rosa Mia and Capicat formed a business organization
with the following agreed features: (1) They are deprived of their
general agency to act on behalf of their ventures: (2) The powers of
management are vested in the Board of Trustees; (3) The ownership is
represented in transferable certificates: (4) The business continues for
its fixed term notwithstanding the death or disability of one of them; and
(5) The liability of the partners is not limited to their contributions.
D. A group of five entrepreneurs had organized, filed and registered the
articles of incorporation of Cojangkuha Corporation, It has an
authorized capital stock of P10 million divided into 100,000 shares each
share having a par value of P100.

3. Which of the following is subject to income tax?

A. SSS and GSIS

B. Philippine Health Insurance Corporation (PHIC)
C. Local water districts
D Philippine Amusement and Gaming Corporation (PAGCOR)

4. Which of the following corporations is subject to income tax?

A. Philhealth C. Local water districts

B. PAGCOR D. Home Development Mutual Fund

5. A resident corporation is one that is: (BEQ)

A. organized under the laws of the Philippines that does business in

another country;
B. organized under the laws of a foreign country that sets up a regional
headquarter in the Philippines doing product promotion and information
dissemination;
C. organized under the laws of the Philippines that engages business in a
special economic zone:
D. organized under the laws of a foreign country that engages in business
in Makati City, Philippines

6. "Taxable net income received during each year from all sources is the to
base for income tax purposes of this class of taxpayers (RPCPA)

A. Domestic corporations
B. Resident corporations
C. Resident foreign corporations engaged in trade or business in De Philippines.
D. Resident foreign corporations not engaged in trade or business in it Philippines.

7. One of the following is taxed on gross income

A. domestic corporation
B. resident foreign corporation
C. non-profit cemetery
D. nonresident foreign corporation

8. Aplets Corporation is registered under the laws of the Virgin Islands. It has
extensive operations in Southeast Asia. In the Philippines, its products are
imported and sold at a mark-up by its exclusive distributor, Kim's Trading.
Inc. The BIR compiled a record of all the imports of Kim from Aplets and
imposed a tax on Aplets net income derived from its exports to Kim. Is the
BIR correct? (BEO)

A. Yes. Aplets is a non-resident foreign corporation engaged in trade or

business in the Philippines.
B. No. The tax should have been computed on the basis of gross revenues
and not net income.
C. No. Aplets is a non-resident foreign corporation not engaged in trade or
business in the Philippines.
D. Yes. Aplets is doing business in the Philippines through its exclusive
distributor Kim's Trading. Inc.

9. Interest income of a domestic commercial bank derived from a peso loan to a

domestic corporation in 2022 is: (BEQ)

A. Subject to the 25% income tax based on its net taxable income;
B. Subject to the 20% final withholding tax;
C. Subject to the 7.5% final withholding tax.
D. Subject to 10% final withholding tax

Questions 10 through 12:

Creasar Corporation had a total gross income of P4,800.000 and deductible expenses
of P3,600,000.

10. If the total net assets of the corporation (excluding the land on which the building
which houses its office, plant and equipment) is P80,000,000 how much is the income
tax due on Creasar Coporation

A P 330.000 C. P 360.000
B 300,000 D. 240,000
B

Gross income P 4.800,000

Less: Expenses 3.600,000
Taxable income 1,200,000
January - June (1,200,000 × 30%) × 6/12 180,000
July - December (1,200,000 × 20%) × 6/12 120.000
Income tax due 300,000

11. How about if the total net assets (excluding the land) of the corporation in
2023 is P115,000,000?

A. P 240.000 C. P 360,000
B. 300,000 D. 330,000

Taxable income P1,200,000

× Rate of tax 25%
Income tax due 300,000

12. How much is the income tax due in 2022 it Creasar is a nonresident foreign
corporation?
A. P 1,440,000 C. P 1,200,000
B. 960,000 D. 672,000

423
Gross income P4.800,000
Rate of tax 25%
Income tax due 1,200,000

13. John & Jan Corporation is a foreign corporation which is not engaged in
trade or business in the Philippines. In 2023 it had a gross income of
P1,500,000 and expenses of P650,000 on its isolated transaction in the
Philippines.
The income tax due is –

A. P300.000 C. P 212.500
B.375,000 D. 450.000

Gross income P1,500.000

Rate of tax 25%
Income tax due 375.000

14. Which of the following statements is false?

A. Offshore Banking Units are subject to a regular tax rate of 25% starting
upon the effectivity of the CREATE.
B. Regional Operating Headquarters are subject to a regular tax rate of
25% from the effectivity of the CREATE
C. Non-resident foreign corporations are subject to a regular tax rate of 25%
effective January 1, 2021.
D. Resident foreign corporations are subject to a regular tax rate of 25%
effective July 1, 2020.

The 25% income tax rate on Regional Operating Headquarters (ROHQ)

takes effect January 1, 2022.

15. Equipment Corporation, a domestic corporation had the following records of

income and expenses in 2022:

Gross income, net of 1% withholding tax P 1,435,500

Expenses 756.000
Rent income, net of 5% withholding tax 136,800
Expenses on rent 34,600
Dividend from domestic corporation 25,000
Royalty 80.000
interest from bank deposit with PNB, gross of tax 15,000

The income tax payable if Equipments is a micro corporation -

A. P241,020 C. P 179,150
B. 138.980 D. 259,490

Gross income (1,435.500/99%) P 1,450.000

Rent income (136,800/95%) 144.000
Total 1,594.000
Less: Deductions
Expenses P756,000
Expenses on rent 34,600 790.600
Taxable income 803.400
Rate of tax 20%
Income tax due 160,680
Less: Withholding taxes
On gross income (1,450,000 × 1%) 14.500
On rent (144.000 × 5%) 7.200 21.700
Income tax payable 138,980

16. Based on the data in preceding problem, the total final taxes payable o
Equipments Corporation is –

A. P 19.000 C. P 33,250
B. 21,500 D. 3,00

Royalty (80,000 x 20%) P 16,000

Interest (15,000 × 20%) 3.000
Total final taxes 19.000

Dividends received from domestic corporations are tax exempt.

Items 17 and 18:

Wobble Bubble Corporation had a gross income of P7, 500,000 and
deductible expenses of P2.800,000 The total assets of the corporation is
$129.00,000 which includes the land where the office building is constructed
with a market value of P20,000,000.

17. How much is the tax due in 2022 it the corporation is resident foreign
corporation?

A. P 855,000 C. P 1.292.500
B. 2,250,000 D 1.175,000

D
Gross income P7500,000
Less: Expenses 2,800,000
Taxable income 4.700,000
Rate of tax 25%
Income tax due 1,175.000

The tax rate is 25% effective July 1, 2020 because the corporation is a
resident foreign corporation

18. How much is the tax due in 2021 if the corporation is a nonresident foreign
corporation?

A. P1, 875,000 C. P 1.410.000

B. 1,292,500 D. 2,250,000

Gross income P7500,000

Rate of tax 25%
Income tax due 1,875,000

19. Alliance Corporation, a corporation engaged in business in the Philippines

and abroad, had the following data in 2022:

Gross income, Philippines P 12,750,000

Expenses, Philippines 7.500,000
Gross income, U.S.A. 7.700.000
Expenses, U.S.A. 6.300.000
Interest on bank deposit, gross of tax 5.000

The income tax due if the corporation is -

Domestic Resident Nonresident foreign
A. P109,500 P67,500 P294,000
B. 1,662,500 1,312,500 3,188,750
C. 312,000 515,850 116,800
D. 109,500 67,500 300,000

Domestic Resident Foreign Nonresident foreign

Gross income, Phil P12,750,000 P12,750,000 P12,750,000
Gross income, U.S.A. 7,700,000 - -
Interest, bank deposit - - 5,000
Total 20,450,000 12,750,000 12,755,000
Less: Deductions
Expenses, Phil 7,500,000 7,500,000 -
Expenses, U.S.A. 6,300,000 - -
Total deductions 13,800,000 7,500,000 -
Taxable income 6,650,000 5,250,000 12,755,000
Rate of tax 25% 25% 25%
Income tax due 1,662,500 1,312,500 3,188,750

20. Which of the following statements is WRONG on corporation?

A. Domestic corporations are taxable in the Philippines on income

derived from Japan and Philippine sources.
B. Resident foreign corporations are taxable in the Philippines on income
earned in the United States
C. Nonresident foreign corporations are taxable in the Philippines on
 income derived from sources in the Philippines only
D. Offshore Banking Units (OBUs) are taxable as resident foreign
corporations.

Domestic corporations are taxable on income derived from sources within and without,
while foreign corporations are taxable on income derived from sources within the
Philippines only.

21. Tralala Corporation, a domestic corporation had the following record of

income and expenses in 2022:

Gross income from operation P 1,540.000

Expenses 654,000
Dividend from foreign corporation, not
reinvested in the following year 95.000
Royalties, Philippines 230.000
Royalties, U.S. 175.000
Interest on peso deposit with Metrobank 8.000
interest on dollar deposit with BPI (§1 = P50) § 200

The taxable income on Tralala Corporation is –

A. P 886,000 C. P 641.000
B. 1,156,000 D. 616.000

Gross income from operation P1,540,000

Add: Other taxable income
Dividend from foreign corporation P 95.000
Royalties, U.S. 175,000 270,000
Total gross income 1,810,000
Less: Expenses 654,000
Net taxable income 1,156,000

22. The total final withholding taxes on Tralala Corporation is –

A. P 51,100 C. P 103.120
B. 4,396 D. 49.100

Royalties, Philippines ( P230,000 x 20%) P 46,000

Interest, peso deposit (P8,000 x 20%) 1,600
Interest, dollar deposit (S200 x P50) x 15% 1,500
Total final taxes 49,100

Foreign sourced dividends which are not reinvested in the business

of the domestic corporation within the next taxable year from the
time foreign sourced dividends were received or remitted are taxable
income.

Numbers 23 to 25 are based on the following information.

Super B Corporation which started with its operations in 2000 had its following
records in 2022:

1st Quarter 2nd Quarter 3rd Quarter 4th

Quarter
Gross income from operation P5,000,000 P8,500,000 P8,000,000
P7,700,000
Expenses 4,000,000 7,700,000 6,400,000
5,750,000
Dividend-domestic company 15,000 15,000 20,000
20,000
Interest-peso bank deposit 3,000 5,000 3,750 2,250
Income tax withheld 5,000 7,000 8,000 6,750
Rent income, gross of 5% /tax 36,000 36,000 48,000
48,000

The company had an excess payment of 12,500 in 2021 from which it had
decided to claim tax credit on the excess.

23. The income tax payable at the end of first quarter is –

A. P40,800 C. P259,000
B. 36,720 D. 239,700

Gross income from operation P5,000,000

Add; Rent income 36,000
Total gross income 5,036,000
Less: Deductions 4,000,000
Taxable income this year 1,036,000
Rate of tax 25%
Income tax due 259,000
Less: Tax credits
Excess tax, 2021 P12,000
Income tax withheld 5,000
Tax withheld on rent 1,800 19,300
Income tax payable 239,700

24. The income tax payable at the end of the second quarter is

A. P259,000 C. P468,000
B. 28,320 D. 200,200

Gross income from operation P 8,500,000

Add: Rent income 36.000
Total gross income 8,536,000
Less: Deduction 2.200,000
Taxable income, 2nd Q 836,000
Add: Taxable income, 1st Q 1.036,000
Total taxable income 1,872,000
Rate of tax 25%
Income tax due 468,000
Less: Tax credits
Excess tax, 2021 P 12.500
Tax withheld, 1st quarter 5,000
Income tax withheld, 2nd Q 7,000
Tax withheld on rent, 1st Q 1,800
Tax withheld on rent, 2nd Q 1,800
Income tax paid, 1st Q 239,200 267,800
Income tax payable 200,200

25. The income tax payable at the end of the third quarter is –

A. P401,600 C. P 12.640
B. 880.000 D. None

Gross income from operation P8,000,000

Add: Rent income 48,000
Total gross income 8,048,000
Less: Deduction 6,400,000
Taxable income 1,648,000
Add: Taxable income, previous Q 1,872,000
Total taxable income 3,520,000
Rate of tax 25%
Income tax due 880,000
Less: Tax credits
Excess tax paid, 2021 P12.500
Taxes withheld (5,000+7.000+8.000) 20,000
Withholding taxes on rent -
1° & 21 Q (1,800 + 1.800) 3,600
3rd quarter (48,000 × 5%) 2,400
Tax paid, a' quarter 239,700
Tax paid, and quarter 200,200 478,400
Income tax payable 401,600

PAGE 430-448
26. The income tax payable/refund at the end of the year is -

P 490,350 C. .P 75,900
1,379,500 D. 68,610
*A
Gross income P29,200,000
Add: Rent income 168.000
Total gross income 29,368,000
Less: Expenses 23,850.000
Taxable income 5,518,000
Rate of tax 25%
Income tax due 1,379,500
Less: Tax credits
Excess tax paid P 12,500
WT, 1st quarter 5,000
2nd quarter 7,000
3rd quarter 8,000
4th quarter 6,750
WT on rent, 1stquarter 1,800
2nd quarter 1,800
3rd quarter 2,400
4th quarter 2,400
Tax paid, 1st quarter 239,700
Tax paid, 2nd quarter 200,200
Tax paid, 3rd quarter 401,600 889,150
Income tax payable 490,350

27. ABC Company, a domestic corporation has the following data:

Income tax for 2022 1,100,000
Less: Tax credits 1,250,000
Excess tax credits 150,000

2023 1st quarter

Income net of 1% withholding P4,950,000
tax
 Deductions 4,600,000
For the 1" quarter of 2023, the corporation will report. (RPCPA)
Excess tax credit of P 100,000
Tax payable of P 7,000
Excess tax credit of P8,000
Tax payable of P 2,000
*A
Gross income (4,950,000/99%) P5,000,000
Less: Deduction 4.600.000
Taxable income 400,000
Rate of tax 25%
Income tax 100,000
Less: Tax credit
Tax Withheld (5,000,000 x 1%) 50,000
Excess tax credit, 2022 150,000 200,000
Excess credit 100,000

28. A domestic corporation has the following data:

Excess tax credits from 2022 P 150,000
For the year 2023: 1st Quarter 2nd Quarter
Income, net of 1% P4,950,000 P7,920,000
withholding tax
Deductions 4,600,000 7,000,000

How much is the income tax payable in the second quarter? (RPCPA)
A. P 21,000 C. P 70,000
B. 14,000 D. 29,440
*C
Gross income P8,000,000
(P7.920,000/99%)
Less: Deductions 7,000,000
Taxable income, 2nd Q 1,000,000
Add: Taxable income, 1 Q 400,000
Total taxable income 1,400,000
Rate of tax 25%
Income tax 350,000
Less: Tax credit
Withholding taxes
1st Quarter P 50,000
2nd quarter (8,000,000 x 80,000
1%)
Excess credit 150,000 280,000
Income tax payable, 2 quarter 70,000

29. If the gross income from unrelated activity exceeds 50% of the total gross income
derived by any private educational institution, the rate shall be 25% based on the entire
taxable income. This principle is known as

A. constructive receipt C. tax benefit rule

B. end result doctrine D. predominance test
*D

30. What is the rule on the taxability of income that a government educational institution
derives from its school operations? Such income is

A. subject to 1% tax on its net taxable income as if it is a proprietary educational institution.

B. exempt from income taxation if it is actually, directly, and exclusively used for
educational purposes.
C. subject to the ordinary income tax rates with respect to incomes derived from
educational activities.
D. exempt from income taxation in the same manner as government-owned and controlled
corporations.

*D

31. Which is the best option? In 2022, ARTS University (ARUY), a proprietary
educational institution registered with the Securities and Exchange Commission (SEC)
and the Commission on Higher Education (CHED), spent P15,000,000 for the
construction of a new building. For income tax purposes this amount maybe;

A. Claimed entirely as deduction from its 2022 gross income.

B. Classified as an asset or expensed outright, at the option of the government.
C. Classified as an asset or expensed outright, at the option taxpayer.
D. Classified as an asset and claim an annual depreciation over the life of the building.

*C

Numbers 32 and 33 are based on the following information:

The Bicol School of Business and Arts (BSBA), is a private educational institution
recognized by the government. The following are the financial data for its fiscal year
ending June 30, 2022:

Tuition fees P 12,800,000

Miscellaneous fees 1,800,000
Interest on bank deposits 12,300
Rent income of school facilities to 350,000
outsiders
Salary and bonuses, all personnel 7,500,000
Other operating expenses 3,500,000
Repayment of loan 400,000
Quarterly (three quarters) income tax pai 4,800
A building was constructed on April 2, 2022 at a cost of P2,000,000 with a
depreciable life of 50 years.

32. Assuming the cost of construction is treated as an expense, the income tax payable
by the school for the fiscal year ended June 30, 2022 is

A. P 343,000 C. 14,700
B. 147,000 D. 160,000

*C

Tuition fees P 12,800,000

Miscellaneous fees 1,800,000
Rent income 350,000
Total 14,950,000
Less: Deductions
Salary and bonuses 7,500,000
Other operating 3,500,000
expenses
Cost of building 2,000,000 13,000,000
Taxable income 1,950,000
Rate of tax 1%
Income tax 19,500
Less: Quarterly taxes paid 4,800
Income tax payable 14,700

The applicable tax rate is 1% of taxable income because the income derived from
related activity exceeds 50% of the total gross income, computed as follows:
 Related Unrelated Total
Tuition fees P12,800,000 P12,800,000
Miscellaneous fees 1,800,000 1,800,000
Interest on bank P 12,300 12.300
deposits
Rent income 350,000 350.000
Totals 14.600.000 362.300 14.962,300
Ratios 97.58% 2.42% 100%

33. The income tax payable if the cost of building construction is capitalized:

A. P 346,000 C. P 1,203,200
B. 147,000 D. 34,600

*D

Total income P 14,950,000

Less: Deductions
Salary and bonuses P 7,500,000
Other operating expenses 3,500,000
Depr-building (2,000,000/50) x 10,000 11,010,000
3/12
Taxable income 3,940,000
Rate of tax 1%
Income tax 39,400
Less: Quarterly taxes paid 4.800
Income tax due 34,600
If the school decides to capitalize the cost incurred in the expansion of school facilities,
it can claim the annual depreciation of such facilities is deduction from the annual gross
income.

Items 34 and 35:

The books of St. Mary's Academy of Language, Science and Mathematics (SMALSM),
a non-stock proprietary educational institution, revealed the following record of gross
income and expenses:

2022 2023
Gross income P1,200,000 P 3,500,000
Expenses 850,000 2,240,000

34. How much is the income tax due in 2022?

A. P3,500 C. 35,000
B. 24,000 D. 19,250

*A

Gross income P 1,200,000

Less: Expenses 850,000
Taxable income 350,000
Rate of tax 1%
Income tax due 3,500

35. How much is the income tax due in 2023?

A. P 12,600 C. P 126,000
B. B. 2,520 D. 69,300

*D
 Gross income P 3,500,000
Less: Expenses 2,240,000
Taxable income 1,260,000
January – June (1,260,000 x 1%) x 6/12 6,300

July – December (1,260,000 x 10%) x 63,000

6/12
Income tax due 69,300

36. A proprietary educational institution which is registered with CHED had the following
data in 2021-

Related Activities Unrelated Activities

Gross receipts P8,000,000 P4,000,000
Cost of services 3,000,000 1,400,000
Allowable deductions 1,500,000 1,200,000

The income tax due is -

A. P73,500 C. P49,000
B. 980,000 D. 98,000

*C

Related Unrelated Activities Total

Activities
Gross receipts P 8,000,000 4,000,000 12,000,000
Less: Cost of services 3,000,000 1,400,000 4,400,000
Gross Income 5,000,000 2,600,000 7,600,000
Less: Allowable 1,500,000 1,200,000 2,700,000
deductions
Taxable income 3,500,000 1,400,000 4,900,000
Tax rate 1%
Income tax due 49,000

37. Dina Mareach Hospital, a private non-profit hospital, had gross income from related
and unrelated activities of P10,000,000 and P12,000,000, respectively in 2022. The
allowable deductions from both activities was P10,500,000.

The income tax due on the hospital is –

A. P 2,300,000 C. P49,000
B. 2,875,000 D. 115,000

*B

Gross income-related activities P 10,000,000

Gross income- unrelated 12.000.000
activities
Total 22,000,000
Less: Allowable deductions 10,500,000
Taxable income 11,500,000
Tax rate 25%
Income tax due 2,875,000

The hospital is subject to regular tax rate of 25% since its gross income from unrelated
activities is more than 50% of its total gross income (12M/22M= 54-55%)

38. METRO COLLEGE is a non-stock, non-profit educational institution and has proven
by actual operation that its primary purpose is one of those enumerated under Sec 30
(H) of the NIRC.
 Which of the following is NOT applicable on Metro College? It is exempt from

A. income tax on tuition fees and other school fees;

B. income tax on donations and grants;
C. Income tax on income derived from the operation of cafeterias/canteens, dormitories
and bookstores located within its premises, owned and operated by the school.

D. withholding of tax as withholding agent for the government if it acts as an employer and
its employees receive compensation income subject to withholding tax, or if it makes
income payments to individuals of corporations subject to withholding tax pursuant to
Section 57 of the NIRC

*D

39. In 2022, Prosperidad Corporation, a domestic corporation, had a net income of

P2,000,000 it paid a corporate tax of 25% leaving a distributable income of P1,500,000.
If a dividend is declared by the corporation and received by the following stockholders,
which of the following statements is FALSE?

A. Nonresident aliens engaged in trade or business are liable to pay 30% dividend tax.
B. Nonresident aliens not engaged in trade or business are liable to pay 25% dividend tax
C. Resident citizens are liable to pay 10% dividend tax
D. Resident foreign corporations are exempt from the payment of dividend tax.

*A

Dividends received from domestic corporations by NRA engaged in trade or business

are subject to a dividend tax (final tax) of 20%.

40. Which of the following statements is TRUE? Dividends received by a

A. domestic corporation from a resident foreign corporation are subject to final withholding
tax
B. resident foreign corporation from another resident foreign corporation are subject to
schedular income tax in the Philippines.
C. non-resident foreign corporation from a domestic corporation maybe subject to a tax
sparing credit
D. domestic corporation from another domestic corporation are subject to final withholding
tax.

*C

Dividends received by a-

1. Domestic corporation from

a. Resident corporation are subject to regular income tax.
b. Another domestic corporation are tax exempt.

2. Resident foreign corporation from another resident foreign corporation are not taxable
in the Philippines.

41. Dividends from a domestic corporation and/or share in the net income of taxable
partnership received by a citizen during the year 2022 is subject to a final tax of
(RPCPA)

A Zero C. 20%
B. 30% D. 10%

*D
 42. Which of the following requisites is not applicable to the case at hand? Dividends
received by domestic corporations from foreign source is not taxable if

A. The dividends actually received or remitted into the Philippines are reinvested in the
business operations of the domestic corporation within the next taxable year from the
time the foreign-source dividends were received or remitted.

B. The dividends received shall only be used to fund the working capital requirements,
capital expenditures, dividend payments, investment in domestic subsidiaries, and
infrastructure project

C. The domestic corporation holds directly at least 20% in value of the outstanding shares
of the foreign corporation and has held the shareholdings uninterrupted for a minimum
of two years at the time of the dividend’s declaration.
D. All of the above

*D

43. The TY Corporation is an international carrier doing business in the Philippines. Its
taxable base for income tax purposes is (RPCPA) -

A. Gross Philippine Billings

B. Gross Philippine Billings minus deductible expenses.
C. Regular rates of 30% of its net taxable income.
D. Allocation of income from sources within and without the Philippines, as well as
expenses.

*A

44. A resident international carrier had the following data for the current year Gross
income of P700,000 and expenses of P200,000 from the Philippines, Gross income of
P500,000 and expenses of P100,000 from Hongkong How much is the tax payable of
the corporation? (RPCPA)

A. P 288,000 B. 17,500
C. P 160,000 D. 30,000

*B

Gross income, Philippines P700,000

Rate of tax 2.5%
Income tax due 17.500

45. Which of the following statements is FALSE? International carriers are

A. subject to income tax on income derived from sources within the Philippines.
B. subject to an income tax based on preferential rate of 2.5% of gross Philippine billings.
C. exempt from income tax on the basis of reciprocity such that its home
D. country grants income tax exemption to Philippine carriers. D. not taxable in the
Philippines even if they are engaged in business in the Philippines.

*D

46. One of the following is exempt from income tax

A. Proprietary educational institutions

B. Private cemeteries
C. Government educational institutions
D. Mutual savings bank
 *C

47. On February 5, 2022, Zurich Corporation declares 20% stock dividend and issued
shares of stocks amounting to P1,000,000. On March 20, 2022, the corporation
redeemed the stock dividend by virtue of which the stockholders surrendered their stock
certificates in return for the cash paid to them by Zurich Corporation in the amount of
P1,000,000

A. A The stock dividends declared are taxable because generally, s dividends are subject
to income tax.
B. The dividends are taxable to the stockholders because they are actual property
dividends.
C. The redemption of the stock dividend is essentially equivalent to the distribution of a
taxable dividend. Hence, the amount so distributed in redemption shall be considered
as taxable income.
D. The distribution and the redemption of the stocks are not taxable because stock
dividends are exempt from income tax

*C

48. If a corporation distributes its assets to its stockholders upon dissolution, the kind of
corporate distribution will result in (RPCPA)

A. A stock dividend
B. property dividends
C. cash dividends
D. liquidating dividends

*D

49. If a corporation to which the stockholder is indebted forgives the debt, the
transaction has the effect of a payment of what kind of dividend? (RPCPA)

A. Stock dividend
B. Cash dividend
C. Liquidating dividend
D. Indirect dividend

*D

50. In 2022, the minimum corporate income tax (MCIT) is based on-

A. 1% of gross income
B. 5% of gross income
C. 2% of taxable income
D. 15% of gross income

*A

51. In MCIT, the term gross income does not include the following, except

A. Income from operation

B. Income subject to final withholding tax
C. Income exempts from income tax
D. All of them

*A

52. The following statements relate to the rules on minimum corporate income tax.
Which of them is FALSE?
A. It does not apply to nonresident foreign corporations
B. If the corporation has commenced with its business operation in 2018, shall be covered
by the rule effective 2022
C. It shall be imposed whenever the operation of the corporation has resulted to a zero or
negative taxable income.
D. The imposable rate is based on taxable income.

*D

The MCIT is based on gross income.

53. The minimum corporate income tax (MCIT) is imposed on-

A. proprietary educational corporations taxable at 1% of gross income

B. depository banks under the expanded foreign currency deposit system.
C. professional partnerships.
D. offshore banking units.

*D

The MCIT does not apply to the following: (1) non-profit hospitals subject to 1% tax; (2)
International Carriers taxable at 25% of Gross Philippine Billings; and (3) firms that are
under a special tax regime such as those in accordance with the PEZA law and the
Bases Conversion Development Authority

54. Which of the following corporations is subject to the minimum corporate income tax?

A. Proprietary educational institutions subject to tax at 1% of their taxable income.

B. Non-profit hospitals subject to tax at 1% of their taxable
C. Regional Operating Headquarters income.
D. Depository banks under the expanded foreign currency deposit system

*C

The MCIT shall apply only to corporations that are subject to the normal corporate
income tax. Thus, it does not apply also to the following:"

1. International carriers subject to tax at 2.5% of Gross Philippine Billings;

2. Real Estate Investment Trust (REIT); and
3. Firms that are under the special tax regime such as those in accordance with the PEZA
law and the Bases Conversion Development Authority Act.

55. The imposition of minimum corporate income tax shall not be suspended whenever
the corporation suffers losses due to

A. Prolonged labor dispute

B. Force majeure
C. Legitimate business reverses
D. Mismanagement

*D

56. A corporation which was registered with the Bureau of Internal Revenue in May
2019 shall be covered by MCIT in

A. 2020
B. 2021
C. 2022
A. D 2023

*D
 Firms which were registered with Bureau of Internal Revenue in any month in 2019 shall
be covered by the MCIT after the lapse of three (3) calendar years from 2019.

57. Watch out Corporation which commenced business operations in 2004 had a gross
income of P6,320,000 and allowable deductions of P6,200,000 in 2022. Its income tax
payable during the year is-

A. P120,000 C. P30,000
B. 63,200 D. 12,640

*B

Gross income from operations P6,320,000

Less: Deductions 6,200,000
Taxable income 120,000
Rate of tax 25%
Normal income tax 30.000
Minimum Corporate Income Tax 63.200
(6,320,000 x 1%)
Income tax payable (higher) 63.200

58. Quinta Corporation had the following data:

2021 2022
Sales P17,000,000 23,000,000
Cost of sales 10,500,000 14,250,000
Operating expenses 7,150,000 4,800,000
The income tax payable in 2021 is-

A. P 130,000 C. P350,000

B. 65,000 D. None

*B

Gross income (P17,000,000-10,500,000) P6,500,000

Less: Operating expenses 7.150.000
Taxable income
Rate of tax 25%
Normal income tax
MCIT (6,500,000 x 1%) 65,000
Tax payable (higher) 65,000
Excess MCIT 65,000

59. In the problem above, the journal entry in 2021 to record excess MCIT is-

A. Deferred charges-MCIT P 25,000

Income tax payable 25,000
B. Deferred charges - MCIT 65,000
Income tax payable 65,000
C. Provision for income tax 112,000
Income tax 112,000
D. Income tax payable 130,000
Cash 130,000

*B

60. In the problem above, the income tax payable by Quinta Corporation in 2022 is-
 A. P 922,500 C. P 87,500
B. 987,500 D. 1,375,000

*A

Sales P 23,000,000
Less: Cost of Sales 14,250,000
Gross income 8,750,000
Less: Operating expenses 4.800.000

Taxable income 3,950,000

Rate of tax 25%
Normal income tax 987,500
MCIT (8,750,000 x 1%) 87.500
Income tax due (higher) 987,500
Less: Carry forward of excess 65,000
MCIT
Income tax payable 922,500

61. In the problem above, the accounting entry in 2022 to record the cam forward of
excess MCIT against normal income tax liability in 2021 is-

A. Deferred charges-MCIT P 18,000

Income tax payable 18,000
B. Deferred charges - MCIT 65,000
Income tax payable 65,000
C. Income tax payable 65,000
Deferred charges - 65,000
MCIT
D. Retained earnings 18,000
Deferred charges - 18,000
MCIT

*C

62. Statement 1: If the quarterly income tax is based on MCIT, the excess MCIT from
the previous taxable year's shall not be allowed to be credited.

Statement 2: Expanded withholding tax, quarterly corporate income tax payments

under the normal income tax, and the MCIT paid in the previous taxable quarters are
allowed to be applied against the quarterly MCIT due.

A. False, False C. True, False

B. False, True D. True, True

*D

63. Agency Corporation has the following data in 2022:

1st Quarter 2nd Quarter

Normal income tax P10,000 P12,000
Minimum corporate income 8,000 25,000
tax
Taxes withheld during the 2,000 3,000
quarter
Excess MCIT prior year 3,000
Excess W/Tax prior year 1,000

The income tax payable by Agency Corporation for the 1st quarter is-
 A. P 7,000 C. 3,000

B. 4,000 D. 2,000

*B

Normal income tax P10,000

Minimum corporate income tax 8,000
Income tax due 100,000
Less: Taxes withheld – 1st quarter 2,000
Less: Taxes withheld – 1st quarter 2,000
Excess MCIT prior year 3,000
Excess Tax withheld - prior year 1,000 6,000
Tax payable, 1sy quarter 4,000

64. In the preceding item, the income tax payable for the 2nd quarter is-

A. P 15,000 C. 27,000

B. 20,000 D. 23,000

*D

Normal income tax (10,000+ 12,000) P22,000

Minimum corporate income tax (8,000 + 33,000
25,000)
Income tax due 33,000
Less: Taxes withheld - 1st quarter P2,000
Taxes withheld - 2nd quarter 3,000
Excess tax withheld - prior year 1,000
Net income tax payable - 1st 4,000 10,000
quarter
Income tax payable, 2nd quarter 23,000

65. Meldy Corporation had the following items of income and expenses in 2023

Gross receipts P1,000,000

Cost of services 850,000
Dividends from a domestic company 35,000
General and administrative expenses 120,000
The income tax due on Meldy Corporation is -

A. P7,500 C. P9,000
B. 3,000 D. 30,000

*A

Gross receipts P1,000,000

Less: Cost of services 850,000
Gross income 150,000
Less: General and administrative expenses 120,000

Taxable income 30,000

Rate of tax 25%
Normal income tax 7,500
July to December(150,000x 2%) x 6/12 1,500

Total MCIT 2,250

Income tax due 7,500
 66. Joyce Corporation, a domestic corporation has the following records of computation
of its income tax during the three (3) consecutive taxable years.

2017 2018 2019

Sales P3,000,000 P3,600,000 P4,300,000
Less: Cost of sales (1,800,000) (2,450,000) (2,250,000)
Add: Net capital 80,000 10,000
gain
Gross income 1,280,000 1,150,000 2,060,000
Less: Deductions 800,000 925,000 1,945,000
Taxable income 480,000 225,000 115,000
Rate of tax 30% 30% 30%
Normal income tax 144,000 67,500 34,500
MCIT:
2017- None
2018 (1,150,000 x 23,000
2%)
2019 (2,060,000 x 41,200
2%)
Tax payable 144,000 67,500 41,200

Based on the above data, which of the following statements is false?

A. The corporation was organized only in 2014.

B. The excess MCIT in 2019 can be carried-over to the succeeding year even if the
corporation suffers a loss in 2020.
C. The term "gross income" includes other income.
D. The excess MCIT of P6,700 in 2019 can be carried over until 2022 only.

*B

The excess MCIT cannot be applied as a credit against the MCIT itself or against any
other losses.

Gross income includes all income realized or earned by the taxpayer during the taxable
period which are subject to normal income tax (excluded are income exempt from
income tax and income subject to final withholding tax).

Numbers 67 and 68 are based on the following information:

67. Irene Corporation, a domestic corporation has the following data:

2021 2022
Gross income P3,500,000 P2,400,000
Taxable income 125,000 500,000

The income tax due on Irene Corporation for 2021 is:

A. P 37,500 C. P35,000
B. 70,000 D. 40,000

*C

Normal income tax (125,000 x 25%) P31,250

MCTT (3,500,000 x 1%) 35,000
Income tax due (higher) 35,000

68. The income tax payable by Irene Corporation for 2022 is:

A. P 150,000 C. P 121,250
B. 48,000 D. 117,500

*C

Normal income tax (500,000 x 25%) P125,000

MCIT (2,400,000 x 1%) 24,000
Income tax due (higher) 125,000
Less: Carry over of excess MCIT (35,000 3,750
- 31,250)
Income tax payable 121,250

Items 69 and 70:

Minnie Corporation, a domestic corporation, had the following data during the year

2022 2023
Gross sales P45,600,000 P40,350,000
Cost of sales 8,700,000 10,200,000
Non-operating income 300,000 -
Capital loss (40,000) -
Dividend from Beta Company, 25,000 -
domestic
Expenses 36,700,000 26,850,000

69. How much is the tax due in 2022 if it is qualified on the 20% rate?

A. P 100,000 C. P 633,000
B. 844,000 D. 372,000

ANSWER: D
Gross sales P 45.600,000

Less: Cost of sales (8,700,000)

Net sales 36,900,000
Add: Non-operating income 300,000
Gross income 37,200,000
Less: Expenses (36,700,000)
Taxable income 500,000

Rate of tax 50%

Income tax due 100,000
MCIT (37,200,000 x 1%) 372,000
Income tax payable 372,000

70. How much is the income tax payable in 2023?

A. P 301,500 C. P 660,000
B. 452,200 D. 388,000

ANSWER: D
Gross sales P 45,600,000
Less: Cost of sales Gross income (10,200,000)
Gross Income 30,150,000
Less: Expenses (26,850,000)
Taxable income 3,300,000
Normal income tax rate 20%
Normal income tax 660,000
MCIT (30450.000 x 1%) x1/2 150,750
(30.150,000 x 2%) x ½ 301,500
MCIT 2023 452,260
 Income tax due (higher) 660,000
Less: 2022 Excess MCTI carry-over
(372,000- 100,000) 272,000
Income tax payable 388,000

Items 71 through 74:

Recovery Corporation, a resident foreign corporation using calendar year

accounting period, Had the following amounts of gross income and expenses from 2020
to 2023:
Calendar Year Gross Income Expenses
2020 P 50,000,000 P 49,600,000
2021 38 ,000,000 37,700,000
2022 50,120,000 49,250,000
2023 70,000,000 57,500,000

71. How much is the tax due in 2020?

A. P 38,500 C. P 750,00
B. 75,000 D. 110,000

ANSWER: C
Gross income 2020 P 50,000,000
Less: Expenses (49,600,000)
Taxable Income 400,000
January- June (400,000 * 30%) x 6/12 60,000
July to december (400,000 x 25%) x 6/12 50,000
Normal income tax 110,000
MCIT (50,000,000 x 2%) x 6/12 P 500,000
(50,000,000 x 1%) x 6/12 250,000 750,000
income tax due (higher) 750,000

72. How much is the tax due in 2021?

A. P 38,000 C. P 75,000
B. 380,000 D. None

ANSWER: B

Gross income, 2021 P 38,000,000

Less: Expenses (37,700,000)
Taxable income 300,000
Rate of tax 25%
National income tax 75,000
MCIT (38M X 1%) 380,000
income tax due (higher) 380,000

73. How much is the tax due in 2022?

A. P 512,000 C. P 35,000
B. 487,500 D. None

ANSWER: A

Gross income, 2020 P 51,200,000

Less: Expenses (49,200,000)
Taxable income 1,950,000
Rate of tax 25%
Normal income tax 487,500
MCIT (51,000,000 x 1%) 512,000
Income tax due (higher) 512,000
74. How much is the tax payable in 2023?
A. P 3,125,000 C. P 2,155,500
B. 1,050,000 D. 238,050

ANSWER: C

Gross income, 2023 P 70,000,000

Less: Expenses (57,500,000)
Taxable income 12,500,000
Rate of tax 25%
Normal income tax 3,125,000
MCIT (70 million x 1%) x 6/12 P 350,000
(70M X 2%) x 6/12 700,000 1,050,000
Income tax due 9higher) 3,125,000
Less excess MCIT carry-over
2020 (750,000 - 110,000) 640,000
2021 (380,000 - 75,000) 305,000
2022 (512,000 - 487,500) 24,500 969,000
Income tax payable 2,155,500

Rego Corporation is registered in the Philippines as a Regional Operating Head Quarter

(ROHQ). For taxable leaders 2021 to 2023, its operations showed the following financial
results:

2021 2022 2023

Gross income P45,000,000 P53,000,000 P40,000,000
Allowable deductions 32,400,000 41,600,000 41,800,000

75. How much is the tax due in 2021, 2022 and 2023?

2021 2022 2023

A. P- P2,850,000 P800,000
B. - 530,000 400,000
C. 1,260,000 2,850,000 -
D. 1,260,000 2,850,000 600,000

ANSWER: D

2021 2022 2023

Gross income P45,000,000 P53,000,000 P40,000,000
Allowable Deductions 32,400,000 41,600,000 41,800,000
Taxable income 12,600,000 11,400,000 1,800.000
Rate of tax 10% 25% 25 %
Income tax due 1,260,000 2,850,000
MCIT:
Gross income N/A 53,000,000 40,000,000
MCIT rate 1% 1.5%
MCIT 530,000 600,000
Income tax due 1,260,000 2,850,000 600,000

The MCIT rate for ROHQ is 1% from January 1, 2020 to January 30, 2023 and 2%
effective July 1, 2023.

76. One of the following income payments to a resident foreign corporation is subject to
final withholding tax of 20%. Which is it?

A. Tax on Branch Remittances

B. Royalties derived from sources within the Philippines
C. Income derived from a depository bank under the expanded foreign currency
deposit system.
D. Capital gains from sale of shares of stock not traded in the stock exchange.
ANSWER: B

77. Which condition is required in order that dividends received by domestic

corporations from foreign corporations shall be exempt from income tax?

A. The dividends actually receive or Remitted into the Philippines are invested in the
business operations of the domestic corporation within the next taxable year from
the time the foreign source dividends received or remitted
B. The dividends received shall only be used to fund the working capital
requirements, capital expenditures, dividend payments, investment in domestic
substitutes, and infrastructure projects.
C. The domestic corporation holds directly at least 20% in value of the outstanding
shares of the foreign corporation and has held the shareholdings uninterrupted
for a minimum of two years at the same time of the dividend declaration
D. All of them

ANSWER: D

78. DOM Corporation, a domestic corporation, owns 20% of the outstanding shares of
Epsi Corporation a non-resident foreign corporation. on March 1, 2021 it received
dividends amounting to P1,000,000.

Which statement is subject to income tax?

A. The said dividend has not been used until January 13, 2023.
B. The said dividend was utilized on June 15 2022 for its working capital
requirements
C. The said dividend was utilized in 2022 for its dividend payment
D. All of them

ANSWER: A

79. a penalty in the form of a deterrent to the avoidance stockholders who are
supposed to pay dividend tax on the earnings distributed to them by the stockholders.

A. Minimum corporate income tax

B. Fringe benefit tax
C. Improperly accumulated earnings tax
D. Gross income tax

ANSWER: C

80. corporations can claim optional standard deduction in an amount not exceeding

A. 10% of gross income

B. 10% of gross sales or gross receipts, as the case maybe
C. 40% of gross income or gross receipts, as the case maybe.
D. 40% of gross income

ANSWER: D

81. Ann corporation had the following data during the year:
Gross sales P1,540,000
Cost of sales 645,000
Expenses 460,460

If Ann Corporation availed of the optional deduction the taxable income shall be.

A. P537,000
B. 434,540 C. P 741,000
 D. 279,000
ANSWER: A

Cost of sales P1,540,000

Less: Cost of sales 645,000
Gross income 895,000
Less: Optional deduction (895,000 x 40%) 358,000
Taxable income 537,000

Problem

Philippine School of Business (PSB) Is a proprietary educational institution

offering tertiary education. For taxable year 2022, it had the following data of income
and expenses:

Gross receipts from tuition and other fees P10,000,000

Costs of services 400,000
Interest on bank deposit 5,000
Income of bookstore 300,000
Income of school canteen 500,000
Depreciation 80,000
Fringe benefits 140,000
Salaries Wages and Allowances 2,800,000
SSS, Philhealth and PAG-IBIG contribution 410,000
Taxes and licenses 155,000
Transportation and travel 38,000
Income tax paid 1st to 3rd quarter 18,000

Questions:

1. The amount in line 5D, Schedule 2, Page 2 is -

A. P10,000,000 C. P6,805,,000
B. 6,000,000 D. 6,800,000

ANSWER: B

2. The amount in line 11B, schedule 2, page 2 is -

A. P3,623,000 C. P3,177,000
B. 3,641,000 D. 3,503,,000

ANSWER: A

3. The amount in line 18D, Schedule 2, Page 2 is -

A. P120,000 C. P68,000
B. 136,000 D. None

ANSWER: D

4. The amount in line 14, part 11, page 1 is -

A. P317,000 C. P31,770
B. 635,400 D. 13,770

ANSWER: C

5. The amount in line 21, Part 11, page 1 is -

A. P13,770 C. P317,700
B. 31,770 D. 299,700

ANSWER: A
SOLUTION:

Gross receipts P 10 000 000

Less: cost of services 4,000,000
Gross income from operation 6,000,000
Add: other income
Bookstore P300,000
Canteen 500,000 800,000
Total taxable income 6,800,000
Less: Deductions
Depreciation 80,000
Fringe benefits 140,000
Salaries, Wages and Allowances 2,800,000
SSS, Philhealth and PAG-IBIG 410,000
Taxes and licenses 155,000
Transportation and travel 38,000 3,623,000
Net taxable income 3,177,000
Applicable tax rate 1%
Income tax due 31,770
Less: income tax paid 1st to 3rd Q 18,000
Net tax payable 13,770
E. PARTNERSHIP
1. When Dina Mathay died, she left real properties to her husband and three small
children. the husband surviving spouse administered the property the rental income of
which he accumulated and later used in buying a passenger bus

Are the income of the inherited properties and the bus subject to income tax?

Inherited Properties Bus

A. Yes Yes
B. Yes No
C. No Yes
D. No No

ANSWER: C

The inherited property are ownership of the father and the three children because they
did not divide the ownership of the properties among themselves. Co-ownership is not
subject to income tax.

However, the income of the passenger bus is a partnership income which is taxable as
a corporation because by using their respective share in the income of the real
properties in buying the bus, they constituted themselves into a partnership.

2. Andok and Baliwag Contributed and purchased 5 hectares of land in 2021. In the
same year they sold the land at a higher price in 2022, they bought a bigger parcel and
sold it after 3 months at double the price. They paid the corresponding capital gains
taxes.

Question 1: Healthy formed an unregistered partnership subject to tax?

Question 2: Are their respective shares in the income taxable to them?

Question 1 Question 2
A. Yes Yes
B. No Yes
C. Yes No
D. No No

ANSWER: B

Andok and Baliwag have not formed an unregistered partnership. the mirror sharing of
gross returns does not in itself establish a partnership moreover there was no showing
that the joint purchases were for the purpose of earning profits to be divided between
them.

However, they are taxable on their perspective share in the profit on both transaction

3. When their parents died, Cherry and Gil inherited 5 hectares of land in Antipolo
[Link] decided to invest capital and develop the land into a subdivision which they
named as Cherry-Gil subdivision, with small lots being sold either on installment or cash
basis

Question 1: It Is a partnership created by Cherry and Gil?

Question 2: Are they subject to final tax on their respective share in the income?

Question 1 Question 2
A. Yes No
B. No Yes
C. Yes Yes
D. No No
ANSWER: C

By investing capital converting the land into a subdivision, and entering into series of
transactions in selling each parcel, they have undoubtedly entered into a contract of
partnership.

The shares of an individual partner in the distributable net income after tax of a taxable
partnership is subject to a final withholding tax rate of 10%

4. First Q: Is a co-ownership taxable? no, because the activities of the co-owners are
limited to the preservation of the property and the collection of income therefrom.

Second Q: Is the share of a co-owner in the net income of a co-ownership taxable?

Yes, because each co-owner is taxed individually on his distributive share in the income
of the ownership. (RPCPA)

A. Answers to both questions are correct.

B. Answer to question 1 is wrong, answer to question 2 is correct
C. Answer to question one is correct, answer to question 2 is wrong.
D. Answer to both questions are wrong.

ANSWER: A

5. The members of this form of business organization shall be liable for income tax only
on their individual capacity, and their share in the profits, whether distributed or
otherwise, shall be returned for taxation. this applies tO (RPCPA).

A. Duly registered general co-partnership

B. Unregistered general co-partnership
C. General professional partnership
D. Joint stock companies

ANSWER: C

6. The share of a partnership in the profits of a general professional partnership is

regarded as received by him and thus taxable although not yet distributed. This principle
is known as.

A. Advanced reporting of income

B. Actual receipt of income
C. Accrual method of accounting
D. Constructive receipt of income

ANSWER: D

7. Under the NIRC, income is received not only when it is actually are physically
transferred to a person but even when it is merely constructively received by him. an
example of income constructively received is (RPCPA)

A. Rental payments refused by the lessor, when the least standard payment and the
latter made judicial deposit of the rental due
B. Interest coupon not yet and payable
C. Interest on savings deposit not yet credited to the account of the depositor
D. Advance deposit made by the leese.

ANSWER: A

8. Which of the following is considered or constructed as an example of constructive

receipt? (RPCPA)

A. retirement benefits pensions

B. fees to a public official
 C. interest coupons that have matured and are payable but have not been cashed
D. deposits for rentals to owners for damages restricted as to use

ANSWER: C

Numbers 9 and 10 are based on the following information

Bimbam and Company, a business partnership, had the following data of income and
expenses

Gross income P7,500,000

Expenses 2,000,000
Gividend from a domestic corporation 75,000
Interest on bank deposit gross of tax 10,000

Partners bim and bam share profits and losses in the ratio of 55% and 45%,
respectively.

9. The income tax payable by bimbam and company -

A. P218,750 C. P1,100,000
B. 1,650,000 D. 1,375,000

ANSWER: D

Gross income P7,500,000

Less: Expenses 2,000,000
Taxable Income 5,500,000
Rate of tax 25%
Income tax 1,375,000
Business partnerships are subject to income tax at a rate similar to that of a corporation
because partnerships are considered as corporations, subject to corporate tax

10. The final taxes on the respective share of bim and bam in the partnership income -

Bim Bam
A. P231,440 P189,360
B. 226,875 185,625
C. 307,065 251,235
D. 302,500 550,450

ANSWER: A

Taxable income P5,500,000

Add: Othe income
Dividend P 75.000
Net of tax (10k * 80%) 8,000 83,000
Total 558 3000
less income tax paid 1375 000
income for distribution to partners 420 8000

Final taxes on share of individual partners:

Bim Bam
Income for distribution P 4,20,8000 P 4,20,8000
Share in P\Lratio 55% 45%
Partner share in the income 2,314,400 1,893,600
Rate of tax 10% 10%
Final tax 231,440 189,360
Numbers 11 and 12 are based on the following information

Ping, Pong and Company, A partnership of a Certified Public Accountants has a gross
income of P2,200,000 and expenses of 850,000 during the year:

Ping Pong
Share in profit and loss ratio 75% 25%
Income from prince personal businesses P125,000 P325,000
Expenses 80,000 190,000
Amounts withdrawn from partnership 30,000 12,500
FIling status married unmarried
Dependent children none two

11. The income tax payable by the partnership is-

A. P72,600 C. P44,500
B. 45,900 D. none

ANSWER: D

Heneral professional partnership are not subject to income tax. However they are
required to file an income tax return for the purpose of furnishing information as to the
share in the gains or profits which each partner shall include in their individual income
tax return

12. The taxable income of pain and pong is-

A. P 1,057,500 and 472,500 respectively

B. 114,250 and 127,750 respectively
C. 101,250 and 333,750 respectively
D. 96,250 and 68,750 respectively

ANSWER: A

Ping Pong
Gross income (P2,200,000 - 850,000) 1,350,000 1,350,000
Share and profit and loss ratio 75% 25%
Share in partnership income 1,012,500 337 500
Add: Net income dorm personal business
Ping (P125,00 - 80,000) 45,000
Pong (325,000 - 190,.000) 135,000
Taxable Income 1,057,000 472,500

Numbers 13 to 16 are based on the following information:

Max, Single and Jess married with two independent children are partners in the
following partnership:

Max hold a 60% interest while 40% interest belongs to Jess

The partnership income and expenses are given below:

Gross Withdrawal Withdrawal

Partnership Income Expenses Max Jess
Prof. part a P400,000 P 250,000 P60,000 40,000
Prof. part b 300,000 500,000 - -
Bus. part c 500,000 200,000 40,000 20,000
Bus. part d. 200,000 300,000 - -

The partnerships remitted to the BIR the corresponding withholding taxes on the
withdrawals of Max and Jess
The partners` personal income and expenses are shown below:

Max Jess
Gross income from sole proprietorship P 500,000 P600,000
Business expenses 150,000 270,000
Other income
Rent net of 5% withholding tax 57,000
Royalty 50,000
Dividend from domestic company 30,000 50,000

13. The income tax payable by Max is –

A. P20,500 C. 11,500
B. 18,500 D. 17,000

ANSWER: D

Gross income from operation P500,000

Less expenses 150,000
Net income 350,000
Other non operating income:
Rent 57,000 over 95% P60,000
Share in net income over loss of partnership:
a (400,000 - 250,000) x 60% 90,000
b (300,000 - 500,000) x 60% (120,000) 30,000
Taxable income 380,000

Tax on P250,000 P-
130,000 * 20% 26,000
Income tax due 26,000
Less withholding taxes
Rent (60,000 - 57,000) 3,000
Partnership a (60,000 * 10%) 6,000 9,000
Income tax payable 17,000

14. The income tax payable by Jess is -

A. P12,500
B. 8,000
C. 16,500
D. 24,000

ANSWER: B

Gross income from operations 600,000

Less expenses 270,000
Net income 330,000
Income or loss from professional partnership:
A (400,000-250,000) x 40% 60,000
b (300,000-500,000) x 40 80,000 (20,000)
Taxable income 310,000

On 250,000 P-
60,000 * 20% 12,000
Income tax due 12,000
Less withholding tax 40,000 * 10% 4,000
Income tax payable 8000

15. The total final taxes due on max is

 A. 3,000
B. 4,000
C. 7000
D. 22,000

ANSWER: C

Final taxes on
dividend domestic company (30,000 * 10%) 3,000
share in partnership income (40,000 * 10%) 4,000
total 7000

16. The total final taxes and jess is -

A. 17,000
B. 14600
C. 22,200
D. 15200

ANSWER: A

Final taxes on
dividend domestic company (30,000 * 10%) 5,000
share in partnership income (40,000 * 10%) 2,000
Royalty (50k x 20%) 10,000
Total 17000

F. ESTATES 7 TRUSTS

1. The property rights and obligations of a person which are not extinguished by his
death and also those which have accrued thereto since the opening of succession
A. Estate
B. Legacy
C. Trust
D. Will

ANSWER: A

2. An heir who inherits personal property by will is called

A. Legatee
B. Divisee
C. trustor
D. Beneficiary

ANSWER: A

3. An heir inherits real property by will is called

A. Legatee
B. Divisee
C. Trustor
D. Beneficiary

ANSWER: B
4. Tinong died on january 1 2022. He left a gross estate with a cost of 4,000,000 but
valued at 3,500,000 under an administrator. During the year the gross income derived
from the business of the estate what 800,000 while the related expenses amounted to
150,000 beneficiaries felipe and kadafi were given 100,000

The income tax due on the estate of tinong is

A. 30,000
B. 2,500
C. 62,500
D. 50,000

 C
Gross income P 800,000
Less: Deductions P 150,000
Expenses
Distribution to beneficiaries (100,000 x 2) P 200,000 P 350,000
Taxable income 450,000
Tax on P400,000 P 30,000
50,000 x 25% 12,500
Tax due 62,500

5. An arrangement under which title to property is passed to another for investment,

with the income and ultimately the principal to be distributed in accordance with the
direction of the creator is –
A. a will C. an inheritance
B. a trust D. pacto de retro

 B

6. Which of the following is not subject to tax?

A. Estates under judicial settlement.
B. Irrevocable trust
C. Unregistered partnerships
D. Revocable trust

 D
Revocable trusts render the trustor, not the trust itself subject to income tax. Hence,
they are exempt from tax. If the trust is irrevocable, its income is subject to tax.

7. Thor, grantor, transferred an income producing property to Tenco, fiduciary. In trust.

Under the term of the transfer, Tenco shall pay 50% of the net income of the property to
Benny, beneficiary, every year after deducting the annual premium payment for the life
insurance of Thor.
 During the year, the property had a gross income of P1,000,000 and incurred
expenses of P300,000. It paid the life insurance premiums of P30,000 and distributed
income to beneficiary according to the term of the trust agreement. It paid quarterly
income tax of P6,000.
The income tax due on the trust is
A. P 30,000 C. P17,000
B. 11,000 D. Exempt

 B

Gross income P1,000,000

Less: Deductions
Payment of life insurance premium P30,000
Expenses 300,000 330,000
Basis for distribution 670,000
Less: Distribution to Benny (670,000 x 1⁄2) 335,000
Taxable income 335,000
Tax on P250,000 Exempt
85,000 x 20% P17,000
Tax due 17,000
Less: Quarterly taxes paid 6,000
Tax payable 11,000

Numbers 8 and 9 are based on the following information:

During the year, Lucas created two separate trusts for his son Barabas, and
appointed Caipas and Judas as trustees. The business income of the trusts are as
follows:
Trustee - Trustee –
Caipas Judas
Taxable Income P120,000 P200,000
Income from trusts distributed during the year 50,000 75,000
8. The consolidated taxable income of trusts is –
A. P143,000 C. P320,000
B. 23,000 D. 300,000

 C

Taxable income, Trustee – Caipas P120,000

Taxable income, Trustee – Judas 200,000
Consolidated taxable income 320,000

9. The income taxes payable by Trustee Caipas and Trustee Judas are
Caipas Judas
A. P24,375 P24,375
B. 5,250 8,750
C. 3,750 6,250
D. 65,000 23,250

 B

Tax on P250,000 P–
70,000 x 20% 14,000
Income tax due 14,000
Income tax payable by:
 Caipas (P120,000 / 320,000) x P14,000 P5,250
Judas ( 200,000 / 320,000) x 14,000 8,750

G. CAPITAL ASSETS, SALES/EXCHANGES of PROPERTIES

1. The term "capital assets" includes (RPCPA)

A. Stock in trade or other property included in the taxpayer's inventory.
B. Real property not used in the trade or business of taxpayer.
C. Property primarily for sale to customers in the ordinary course of trade or
business.
D. Property used in the trade or business of the taxpayer and subject to
depreciation.

 B

2. Which of the following real properties is classified as a capital asset?

A. Real property initially acquired by a taxpayer engaged in real estate business but
subsequently abandoned or become idle.
B. Real property transferred through succession or donation to the heir or donee
who is not engaged in the real estate business with respect to the real property
inherited or donated, and who does not subsequently use such property in trade
or business.
C. Real properties of the real estate lessor, whether land and/or improvements,
which are for lease or being offered for lease, or otherwise for use or being used
in the trade or business.
D. Real properties acquired in the course of trade or business by a taxpayer
habitually engaged in the sale of real estate.

 B

3. Under Section 39 (b) of the Tax Code, how much shall be taken into account in
computing net income, if a gain is realized by an individual taxpayer from the sale or
exchange of capital assets (other than real properties and shares of stocks) held for
more than 12 months? (RPCPA)
A. 50% of the net capital gain.
B. 5% of the capital assets sold.
C. P 50,000
D. 5,000

 A

4. Lots being rented when subsequently sold are classified as (RPCPA)

A. capital assets C. ordinary assets
B. liquid assets D. fixed assets

 C

5. A feature of ordinary gains as distinguished from capital gains (RPCPA)

A. Gain from sale of assets not stock in trade.
B. May or may not be taxable in full.
C. Sources are capital assets.
D. No holding period.
 D

6. Which of the following taxpayers is allowed to observe the "no holding period and no
carry over of net capital loss"
A. Individual C. Corporation
B. Estates D. Trusts

 C

7. In March 2022, Tonette, who is fond of jewelries, bought a diamond ring for
P750,000, a bracelet for P250,000, a necklace for P500,000, and a brooch for
P500,000. Tonette derives income from the exercise of her profession as a licensed
CPA. In October 2022, Tonette sold her diamond ring, bracelet, and necklace for only
P1.25 million incurring a loss of P250,000. She used the P1.25 million to buy a solo
diamond ring in November 2022 which she sold for P1.5 million in September 2023.
Tonette had no other transaction in jewelry in 2023. Which among the following
describes the tax implications arising from the above transactions? (BEQ)
A. Tonette may deduct his 2022 loss only from her 2022 professional income.
B. Tonette may carry over and deduct her 2022 loss only from her 2023 gain.
C. Tonette may carry over and deduct her 2022 loss from her 2023 professional
income as well as from her gain.
D. Tonette may not deduct her 2022 loss from both her 2023 professional income
and her gain.

 B

8. Which of the following statements is TRUE?

A. The sale by a corporation of its office building shall not result to a capital gain
even if it derived a gain of P240,000 on the sale.
B. A corporation with a net capital loss of P50,000 in 2021 can carry over such
amount only until 2022.
C. A corporation with a net capital loss of P50,000 and a net income of P40,000 in
2021 can carry over only a maximum amount of P40,000 in 2022.
D. A corporation which sold for P120,000 in 2021 an equipment which it acquired in
2012 for P180,000 shall report only a capital gain of P20,000 in 2021.

 A

If the taxpayer is a corporation, there is no holding period and no carry-over..

9. Rules on capital gains and losses of corporations, except (RPCPA)

A. Capital gains and losses are recognized to the extent of 100% regardless of the
holding period.
B. The net capital loss carry-over is not applicable.
C. Capital losses are deductible only to the extent of capital gains.
D. There is a final tax of 5% on real property sold.

 D

The sale of real property (capital asset) is subject to final tax of 6% and not 5%.
Moreover, if the taxpayer is a corporation only sale of land and/or buildings are subject
to this tax.
10. Statement 1: Capital losses are deductible only from ordinary gains.
Statement 2: Corporations are not allowed to observe the holding period and to
carry over net capital loss.

A. Only the first statement is correct.

B. Only the second statement is correct.
C. Both statements are correct.
D. Both statements are incorrect.

 B

11. Joahna Corporation realized an ordinary gain of P400,000. Its capital asset
transactions during the year are as follows:
Holding Period Amount
Capital gain 6 months P50,000
Capital gain 2 years 45,000
Capital loss 12 months 23,000
Capital loss 10 years 28,000

What is Joahna Corporation's taxable income?

A. P484,000 C. P435,000
B. 444,000 D. 44,000

 B

Capital gain, 6 months P 50,000

Capital gain, 2 years 45,000
Capital loss, 12 months (23,000)
Capital loss, 10 years (28,000)
Net capital gain 44,000
Add: Ordinary gain 400,000
Taxable income 444,000

In a corporation, the holding period of a capital asset is not taken into account

12. Jose Sese See, single, had the following data on income and losses:
2021 2022
Ordinary business income P56,700 P60,800
Interest on time deposit with PNB 2,000 3,000
Short-term capital gain 5,000 8,500
Long-term capital gain 3,600 5,200
Short-term capital loss 8,000 2,900
Long-term capital loss 4,400 -
In 2021, the taxable income of Jose Sese See –
A. P58,700 C. P36,700
B. 53,300 D. 56,700

 D

Ordinary business income P56,700

Short-term capital gain (5,000 x 100%) P5,000
Long-term capital gain (3,600 x 50%) 1,800
Short-term capital loss (8,000 x 100%) (8,000)
Long-term capital loss (4,400 x 50%) (2,200)
Net capital loss (3,400) ______
Taxable income 56,700

13. In 2022, the taxable income of Jose Sese See is –

 A. P15,600 C. P65,600
B. 69,000 D. 45,600

 C

Ordinary business income P60,800

Short-term capital gain (5,000 x 100%) P8,500
Long-term capital gain (3,600 x 50%) 2,600
Short-term capital loss (8,000 x 100%) (2,900)
Net capital loss 8,200
Less: Net capital loss carry over from 2021 3,400 4,800
Taxable income 65,600

14. Santos qualified as head of a household for 2021 tax purposes. Santos' 2022
taxable income was P200,000 exclusive of capital gains and losses. Santos had a net
long-term loss of P8,000 in 2022. can Santos offset against 2022 ordinary income?
(RPCPA)
A. P0 C. P4,000
B. 3,000 D. 8,000

 A

The basic rule in capital asset transactions is that the capital losses are
deductible only from capital gains. Therefore, the capital loss in 2022 cannot be offset
from the ordinary income.

Numbers 15 and 16 are based on the following information:

15. Rose, single, had the following data on income and losses:
2021 2022
Net income P 25,000 P50,000
Capital gains 8,000 40,000
Capital losses 40,000 5,000
The taxable income in 2021 is –
A. P 25,000 C. P (25,000)
B. 0 D. ( 7,000)

 A

Net income P 25,000

Capital gains P8,000
Capital losses (40,000)
Net capital loss (32,000) ______
Taxable income 25,000

16. The taxable income in 2022 is –

A. P 80,000 C. P 115,000
B. 55,000 D. 105,000

 D

Net income P95,000

Add: Capital gains P40,000
Capital losses ( 5,000)
Net capital loss carry over - 2021 (25,000) 10,000
Taxable income 105,000
The amount of carry-over of the net capital loss should not exceed the net
income during the year in which the loss was sustained.
17. All of the following, except one, results to a capital gain or loss
A. Gain on short sales C. Worthless securities
B. Option loss D. Ordinary gains

 D

18. Anktryd, Inc., bought a parcel of land in 2011 for P7 million as part of its inventory of
real properties. In 2022, it sold the land for P12 million which was its zonal valuation. In
the same year, it incurred a loss of P6 million for selling another parcel of land in its
inventory. These were the only transactions it had in its real estate business. Which of
the following is the applicable tax treatment? (BEQ)
A. Anktryd shall be subject to a tax of 6% of P12 million.
B. Anktryd could deduct its P6 million loss from its P5 million gain.
C. Anktryd's gain of P5 million shall be subject to the holding period.
D. Anktryd's P6 million loss could not be deducted from its P5 million gain.

 B

19. A transaction in which the speculator sells securities which he does not own (he
merely borrows the stock certificate through or from his stock broker) in anticipation of a
decline in its price, and within a reasonably short period of time buys or covers the stock
to complete the transaction
A. Wash sale C. auction sale
B. short sale D. recissible sale

 B

20. A bought from B Corporation ten shares of stock. Sixty days thereafter, the
corporation was adjudged bankrupt and its stock as worthless. The loss of A to be
reported for income tax purposes is classified as: (RPCPA)
A. a wagering loss
B. non-deductible loss for income tax purposes
C. short-term capital loss
D. casualty loss

 C

21. On capital gains tax on real property, which of the following statements is not
correct? (RPCPA)
A. The tax should be paid, if in one lump sum, within 30 days from the date of the
sale.
B. The term "initial payment" is synonymous to "downpayment."
C. The installment payment of the tax should be made within 30 days from receipt of
each installment payment on the selling price.
D. The tax may be paid in installment if the initial payments do not exceed 25% of
the selling price.

 B

22. Janet sold her principal residence for P5,000,000 when its fair market value was
P6,000,000. The house was purchased five (5) years ago for P3,000,000. Out of the
proceeds of P5,000,000, Janet utilized the P4,000,000 for the purchase of a new
residential house.
The capital gains tax on the sale is –
 A. P 360,000 C. P 72,000
B. 300,000 D. 60,000

 C

Selling price P 5,000,000

Less: Utilized portion 4,000,000
Unutilized portion 1,000,000
Capital gains tax (P1 M/P5 x 6 million) x 6% 72,000

23. In the preceding question, what is the cost basis of the new residence?
A. P 3,000,000 C. P 4,000,000
B. 2,400,000 D. 5,000,000

 B

Formula:
Utilized portion
x Basis of old residence=Basis of new residence
Selling price
(4,000,000 / 5,000,000) x P3,000,000 = P2,400,000

24. Malou has the following data in 2022.

Sale of Property Holding Period Amount
Apartment house 10 years P35,000
Residential house 6 years 120,000
Vacant lot 12 years 72,500
Jewelry for personal use 6 months 4,200
Jewelry in a jewelry store 2 months 8,000
Car for personal use 4 years (20,000)
Transportation equipment 12 months (10,000)

The proceeds from sale of residential house shall be used in acquiring a new
residence.

During the year, Malou had a net income from business (other than the sale of
the properties above) in the amount of P5,000.
The taxable income of Malou in 2022 is –
A. P 32,200 C. P 22,200
B. 38,000 D. 42,200

 B

Net income P 5,000

Sale of ordinary assets:
Apartment house P 35,000
Jewelry in a jewelry store 8,000
Transportation equipment (10,000) 33,000
Sale of capital assets:
Jewelry for personal use
Car for personal use (20,000 x 50%) 4,200
Net capital loss (2019) (10,000) ______
Taxable income ( 5,800) 38,000

25. In the preceding problem, assuming that the net income of Malou in 2023 is
P130,000 which includes a capital gain of P6,000. The taxable income in
2023 is
A. P 125,000 C. P 124,200
B. 130,000 D. 120,000
 A

Net income before capital gain (130,000-6,000) P 124,000

Net capital gain:
Capital gain P 6,000
Capital loss carry-over (not exceeding net
income in 2022) ( 5,000) 1,000
Taxable income 125,000
The amount of capital loss to be carried over in the succeeding year should
not exceed the net income during the year in which the loss was sustained

26. Which of the following does not have a BIR zonal value?
A. Building improvements C. Condominium unit
B. Agricultural land D. Condominium parking space

 A

Numbers 27 to 31 are based on the following information:

On August 15, 2022, Mr. Cruz sold a 500 square meter residential condominium
unit for P3,000,000. The unit was acquired in 2002 for P2,000,000. On the date of sale,
the fair market value of the house as shown in the real property declaration was
P2,500,000 and the assessed value amounted to P450,000. The zonal value was
P7,000 per square meter.

27. The capital gains tax-

A. P 180,000 C. P 150,000
B. 120,000 D. 210,000

 D

Zonal value, higher (P7,000 x 500) P3,500,000

Rate of tax 6%
Capital gains tax (final tax) 210,000

28. The capital gains tax of Mr. Cruz if the proceeds of sale was utilized in acquiring a
new residence –

 D

When the proceeds of sale of a residential house shall be utilized in acquiring a new
residence, the sale is exempt from tax.
However, the 6% capital gains tax due on the presumed capital gains shall be deposited
in an authorized bank under an Escrow Agreement which shall be released later on by
the Revenue District Officer, upon showing that the proceeds of sale had already been
fully utilized in the acquisition of a new principal residence.

29. Mr. Cruz may avail of this exemption from capital gains tax only once every
A. three (3) years
B. eighteen (18) calendar months.
C. ten (10) years
D. five (5) years.

 C
30. The amount to be deposited in escrow if the proceeds of the sale shall be utilized in
acquiring a new residence –

A. P 210,000 C. P 180,000
B. 150,000 D. None

 A

The amount to be deposited in escrow shall be P210,000; the capital gains tax
otherwise due on the presumed capital gains.

31. The capital gains tax payable assuming that Mr. Cruz will utilize only P1,500,000 of
the proceeds in acquiring a new residence?
A. P 90,000 C. None
B. 210,000 D. P 105,000

 D

Formula:
D
A = (B or C)* x --- x 6%
B
A = Capital gains tax
B = Selling price
C = Market value (Zonal or Assessor's value)
D= Unutilized portion of proceeds
* = Whichever is higher
= P 3,500,000 x ¿ ¿
= (3,500,00 x 50%) x 6%
= 1,750,000 x 6%
= 105,000

32. King sold 1,000 square meters of lot with a house thereon for P5 million. The fair
market value in the tax declaration of the lot is P1.5 million and the house is P3 million.
The land had a zonal value of P4,000 per square meter.
How much is the capital gains tax?
A. P 300,000 C. P 210,000
B. 420,000 D. None, because it is an ordinary asset

 B
Land - zonal value (4,000 x 1,000) P 4,000,000
House-assessor's value 3,000,000
Base 7,000,000
Rate of tax 6%
Capital gains tax 420,000

33. In the preceding question, if the deed of sale is executed September 10, 2022 but
the document is notarized September 12, 2022, the deadline for filing of the return and
payment of tax is-
A. October 10, 2022 C. October 12, 2022
B. March 10, 2023 D. April 15, 2023

 C
 Capital gains tax should be paid within 30 days from the date of notarization of the
deed of sale.

34. Mr. Julio Canlas is not engaged in real estate business. He sold a 1,000 square
meter residential land for P3,000,000 on March 15, 2022. The land was acquired by
purchase on March 5, 2015 for P1,200,000. After acquisition, the land was fenced at a
cost of P300,000. A commission of 5% of the sales price was paid to the sales agent.
How much is the capital gains tax due? (RPCPA)
A. P 180,000 C. P 72,000
B. 189,000 D. 90,000

 A

Selling price 3,000,000

Rate of tax 6%
Capital gains tax 180,000

35. Cito had the following records of transactions:

Capital gains (short-term) on sale of -
Domestic shares listed and traded in the stock
exchange P 22,400
Vacant lot, thru a broker, located in Manila
(market value – P 700,000) 150,000
Residential house in New York City 100,000
Capital loss (long-term) on sale of –
Land in Vancouver, Canda 125,000
Family car 50,000
The net capital gain/loss of Cito is –
A. P 12,500 C. P 148,500
B. (75,000) D. (25,000)

 A

House in New York (P100,000 x 50%) P 100,000

Less: Capital losses
Land in Canada (125,000 x 50%) P 62,500
Family car (50,000 x 50%) 25,000 87,500
Net capital gain 12,500
Sales of real properties situated abroad are not subject to 6% capital gains tax even if
they are classifies as capital assets. However, the gain or loss derived from the sale
shall be classified as capital gain/capital loss, as the case maybe (Rev. Reg. 7-2003).

36. A lot located in Cagayan de Oro City was sold by its owner, a resident of Iligan City,
to a buyer from Malaybalay City. The capital gains tax on the sale should be paid in
A. Cagayan de Oro City, the location of property.
B. Iligan City, the place of residence of the seller.
C. Davao City, the place of residence of the buyer.
D. Anywhere in the three cities.

 A

37. After full payment of the capital gains tax, the Bureau of Internal Revenue shall
issue to the owner the following document
A. Certificate of payment and tax clearance.
 B. Certificate authorizing payment..
C. Certificate and receipt
D. Certificate authorizing registration
 D

Numbers 38 to 40 are based on the following information:

38. Col Urom sold a commercial land for P5,000,000. The zonal value of the property is
P3 million while the market value in the tax declaration is P2.8 million.
The tax on the transaction if the seller is not habitually engaged in real estate
business is –
A. P 250,000 C. P 180,000
B. 300,000 D. Exempt

 B

Selling price (highest) 5,000,000

Rate (not habitually engaged) 6%
Creditable withholding tax 300,000

39. How about if the seller is habitually engaged in business?

A. P 250,000 C. P 180,000
B. 300,000 D. Exempt

 A

Selling price (highest) 5,000,000

Rate (habitually engaged) 5%
Creditable withholding tax 250,000

40. In the preceding question, the seller/transferor shall be considered as habitually

engaged in real estate business if, except
A. the nature of its business is to develop real estates
B. registered with the Department of Human Settlements and Urban Development
(DHSUD).
C. he/it consummated at least six taxable real estate transactions during the
preceding year, regardless of amount
D. It is a bank

 D

41. Atty. Moises Dondoyano sold to Jess Abaluyan not traded shares of stocks for a
consideration of P200,000. At the time of the sale, its fair market value was P500,000
Atty. Moises Dondoyano should pay –
A. Capital gains tax C. Documentary stamp tax
B. Donor's tax D. All of the above

 D

Capital gains tax accrues on the sale of the shares of stocks; the donor's tax is on the
sale for insufficient consideration (difference between the selling price and market
value) while the documentary stamp tax is imposed the transactions evidenced by the
document.
42. In the preceding problem, if later on Jess Abaluyan sells the same shares of stocks
to Ed del Rosario for P400,000, the gain subject to tax shall be determined by deducting
the –
A. P200,000 from the P500,000.
B. 200,000 from the 400,000.
C. 400,000 from the 500,000.
D. 400,000 from the 200,000.

 B

If the buyer of shares of stocks later on sells this property and he is taxable on his gain
derived from the sale, his gain from the sale shall be determined by deducting from the
amount of consideration received his purchase price thereof.

43. Rolly sold 1,500 shares of stocks of Achievers Corporation. The par value per share
was P85 but were acquired by him at P90. On the date of sale, the shares had a selling
price of P 120 per share
The capital gains tax on the sale if the shares are not listed and traded in the
Philippine Stock Exchange
A. P2,250 C. P14,000
B. 6,750 D. 11,375
📖B
Gross selling price (P120x1,500). P180,000
Less : Cost (P90x1,500). 135,000
Net capital gain 45,000
Rate of tax 15%
Capital gains tax. 6,750
44, Ronald Corporation, a domestic corporation, sold 1,000 shares of not listed and
traded shares or stocks . The data of which are as foliows:
Selling Price P600,000
Fair market Value 620,000
Expenses on the sale 10,000
Purchase price 440,000
Expenses upon acquisition 3,000
The capital gains tax due is
A. P13,000
B. 14,000
C . P9,700
D. 22,050
📖D
Selling price P 600,000
Less: Selling expenses 10,000
Net 590,000
Less: Cost
Purchase price 440,000
Expenses upon acquisition 3,000. 443,000
Net capital gain 147,000
Rate of tax. 15%
Capital gains tax 22,050
Questions 45 and 46 :
Yolo corporation , a nonresident foreign corporation , sold not traded
shares of stock for P900,000 which had a cost of P785,000.
45. How much is the final with holding tax if the sales transaction took place in 2020?
A. P5,400
B.17,250
C. P6,500
D. 690
📖C
Gross sales. P900,000
Less:Cost. 785,000
Capital gain. 115,000
Tax on P100,000 x 5%. P5,000
15,000 x 10% 1,500
Capital gain tax. 6,500
46. How much is the final withholding tax if the slaes transaction took place in 2021?
A. P5,400
B. 17,250
C. P6,500
D. None
📖B
Gross sales. P900,000
Less: Cost. 785,000
Capital gain. 115,000
Rate of tax. 15%
Capital gain tax. 17,250
47. Nada sold the following shares of stock during the year :
Listed and traded. Not listed and traded. Listed and traded
Selling price. P1,500,000. P630,000. P210,000
Cost. 1,230,000. 570,000. 170,000
Date sold. 1-20-22. 3-16-22. 11-14-
22
The capital gains tax payable is
A. P3,000
B. 32,000
C. P9,000
D. 3,150
📖C

Gross selling price (not listed and traded shares ) P630,000

Less: Cost 570,000
Net capital gain. 60,000
x Rate of tax 15%
Capital gains tax 9,000
Sale of shares of stocls which are listed and traded in the philippines stock Exchange
are not subject to income tax . They are subject to other percentage tax (stock
transaction tax )

Numbers 48 to 52 are based on the following information :

Francia , a resident citizen, had the following transactions of not listed and
traded shares of stocks :
Date of Sale Date of Acquisition. Cost Selling Price
Feb. 13 , 2022 January 18,2022. P80,000. P135,000
April 5 , 2022. November 30,2021. 256,000. 360,000
July 20,2022. September 3,2020. 175,000. 115,000
Oct. 13,2022. August 07, 2022. 144,500. 150,000
48,The capit gains tax on the February 13, 2022 sale
A. P2,750
B. 1,375
C. P 675
D. 8,250
📖D
Selling price P135,000
Less: Cost. 80,000
Net capital gain. 55,000
Rate of tax. 15%
Capital gains tax 8,250
49. The capital gains tax on the April 5,2022 sale is
A. P10,400
B. 15,600
C. P5,200
D. None
📖B
Gross selling price P360,000
Less : Cost. 256,000
Net capital gain. 104,000
Rate of tax. 15%
Capital gains tax. 15,600
[Link] capital gains tax /refund on the July 20,2022 sale is
A. P3,000
B. (3,000)
C. P1,500
D. None
📖D
Selling price. P115,000
Less: Cost 175,000
Net capital loss. (60,000)
If the sale of shares of stocks (not traded) results to a loss , no capital gains tax shall be
paid by the seller .
51. The final capital gains tax payable / refund at the end of the year is
A. Tax payable of P90,000
B. Tax refund of P9,000
C. Tax payable of P2,725
D. Tax refund of P8,625
📖A
Date Sold. Selling price Cost. Capital Gain. Tax Paid
02-13-19. P135,000. P80,000. P55,000. P8,250
04-05-19 360,000. 256,000. 104,000. 15,6000.
07-20-19 115,000. 175,000. (60,000). -
10-13-19. 150,000. 144,500 5,500. 825
760,000. 655,500. 104,500. 24,675
Capital gains tax paid P24,675
Less: Capital gains tax (104,500x 15% ). 15,675
Amount refundable. 9,000
52. On December 1,2022 , Angel Obese whose taxable year is the calendar year ,
purchased 100 shares of common stock of Michael Company for P10,000 . On
December 16,2022 she purchased 100 additional shares for P9,000 . On January
3,2023 , she sold the 100 shares purchased on December 1,2022 for P9,000.
Which of the following statements is correct on Angel Obese?
A. She can claim deductible loss of P1,000 in 2023.
B. She must repOrt a xable capital gain of P1,000 in 2023
C. . She must report taxable capital gain of P9,000 in 2023
D. She is not allowed to claim a deductible loss on the loss on sale in 2023.
📖D
A taxpayer cannot deduct any loss claimed to have been sustained from the sale or
other disposition ot stock, if, within a period beginning 30 days before the date or sucn
sale or disposition and ending 30 days after such date (61-day period), he has acquired
(by purchase or by an exchange upon which the entire amount ot gain or loss was
recognized by law), or has entered into a contract or option so to acquire, substantially
identical stock (ReU. Reg. 6-2008).

53. Miss Beauty, whose taxable year is the calendar year, had the following stock
transactions:
>On September 20, 2020 purchased 100 shares of the common stock of Ugiy Company
for P5,000 or at P50 per share.
>On December 11, 2020, she purchased 50 shares of substantially identical stock for
P2,750 or at P55 per share.
>On December 26, 2020, she purchased 25 additional shares of such stock for P1,125
or at P45 per share.
>On January 2, 2021, she sold for P4,000 the shares purchased on September 20 or at
P40 per share
How much is the deductible loss and non-deductibie lOss on the January 2, 2021
sales?
Deductible. Non deductible
A. P1,000. P0
B. 0. 1,000
C. 125. 0
D. 250. 750
📖D
Shares purchased within the 61-day period :
December 26 25
December 11. 50 75
x Cost per share for shares bought September 20 P50
Amount. 3,750
Less: Proceeds from sale of 75 shares (75xP40 ) 3,000
Non-deductible loss. 750

Cost of shares bought on September 20,2020. 5,000

Proceeds from sale of 100 shares. 4,000
Loss on sale 1,000
Less: Non-deductible loss. 750
Deductible loss on sale of shares of stock. 250
Number 54 and 55 are based on the following information :
Maui had the following data in 2022:
Capital loss on 2-weeks option contract. P5,000
Capital gain on sale of bonds (holding period : 6months 6,000
Loss on sale of delivery truck held for 3 ½ years 40,000
Gain on sale of personal car held for 5years. 16,000
Capital gain on direct sale to buyers of shares of stocks 4,000
Sale of 2-year old residential house (Cost: P540,000). 550,000
In 2019, Maui had a net income of P5,000 and a capital loss of P7,500
54. The net capital gain /capital loss (before carry over ) in 2020 is
A. P17,000
B.9,000
C. P2,000
D. (7,000)
📖B
Sale of bonds (P6,000 x 100%) P6,000
Sale of personal car (16,000 x 50%). 8,000
Total capital gains 14,000
Less: Option loss (5,000 x 100%). 5,000
Net capital gain. 9,000
55. The net capital loss carry-over from 2019 is
A. P7,500
B. None
C. P9,000
D. 5,000
📖D
Capital loss ,2019. P7,500
Limit , Net income in 2019. 5,000
Capital loss carry over to 2020. 5,000
56. In computing gain or loss from the sale or other disposition of property acquired as
gift or donation , the basis of cost shall be : (RPCPA)
A. The fair market value as of the date of acquisition
B. The purchase price plus expenses of acquisition
C. The latest inventory value
D. The same as it would be in the hands of the donor
📖D
57. Shaolo received a residential house valued at P2,500 from his parents as a gif .
After a month , he sold it to Rudy for P2,000,000 only . How muvh is the tax liability of
Shaolo on the sale ?
A. P150,000
B. 120,000
C. P100,000
D. None
📖A
Market value. P2,500,000
Rate of tax. 6%
Capital gains tax. 150,000
58. It is mportant to know the source of income for tax purposes (1e. from within
or without the Philippines) because (RPCPA)
A. Some individual and corporate taxpayers are taxed on their worldwide income while
others are taxable only upon income from sources within the Philippines
B. The Philippines imposes income tax only on imcome from source within
C. Some individual taxpayers are citizens while others are aliens
D. Export sales are not subject to income tax
📖A
59. Mr. Shinn , a non-resident alien stockholder , received a dividend income of
P300,000 in 2020 from a foreign corporation doing business in the Philippines . The
gross income of the foreign corporation from within and without the Philippines for three
years preceding 2020 are as follows : (RPCPA)
Source of income. 2017. 2018. 2019
From within the Philippines 16,000,000. 12,000,000. 14,000,000
From without the Philippines. 8,000,000. 14,000,000. 16,000,000
How much of the dividend income received by Mr. Shinn is considered income from
sources within the Philippines ?
A. Zero
B. P157,500
C. P150,000
D. 300,000
📖B
Formula :. Where :
A=B/B+C. A= Percent of income within
B= Gross income within
C= Gross income without
Computation:
Within. Without
2017. P16,000,000 P8,000,000
2018. 12,000,000. 14,000,000
2019. 14,000,000. 16,000,000
Totals. 42,000,000. 38,000,000
A= 42,000,000/ 42,000,000+38,000,000
= 52.5%
Income within = P300,000 x 52.5 %
= P157,500
Problem
May Tienda sold her 2,000 square meter residential land with TCT No. 2011-985907 ,
including a residential house there on for P4,000,000. The fair market value per Tax
Declaration No. 2018-256-984 and 2018-256-984 of the lot and house is P2,600,589
and P1,980,754 , respectively . The fair market value of the lot as appearing in the BIR
website is P1,200 per square meter .
1. The amount in Box 30C of BIR Form No. 1706 is
A. P4,000,000
B. 4,581,343
C. P4,380,754
D. 6,400,000
📖B
2. The amount in Box 32 of BIR Form No. 1706 is
A. P240,000
B. 262,845
C. P384,000
D. 274,881
📖D
Solution : Land Improvement. Value
Selling price. P4,000,000
Tax declaration. P2,600,589. P1,980,754
4,581,343
Zonal value. 2,400,000. 1,980 , 754.
4,380,754
Tax base 4,581,343
Rate of tax 6%
Tax due.
274,881
 H.

Deductions from Gross Income

1. An ordinary and necessary expenses which is fully documented and supported by
receipts may be fully deducted for income tax purposes over and above the limit set by
law (RPCPA)
A. Medical expense
B. Contribution
C. Representation
D. High shool fee
📖B
2. Which of the following statements is wrong with respect to deductible expenses
incurred by an individual taxpayer ?
A. A resident cirizen of the Philippines who is earming business income abroad is
entitled to claim the expenses incurred abroad as a deduction from his total gross
income.
B. A nonresident citizen of the Philippines who is earning income as an overseas
Filipino worker abroad is entitled to claim the expenses incurred there in as a deduction
from total gross income .
C. A resident citizen of the Philippines who is earning business income abroad , aside
from his incime in the Philippines is entitled to claim the 40% optional standard
deduction as a deduction frkm his gross income within and without the Philippines.
D. A mixed income earner is entitled to claim only the 40% optional standard deduction
as a deduction from the business and /or professional income , to the exclusion of the
compensation income .
📖B
3. Which of the following statements is CORRECT ?
A. All compensation payments made by an employer to an employee are deductible to
the employer .
B. All compensation payments made by an employer to taxable to the employee.
C. All travelling expenses incurred by an employee which are in accordance with the
itinerary of travel approved by the employer are not taxable to the employee.
D Transportation expenses incurred by an employee are nevertheless deductible to
the employer even if they are not incured while "away from home "
📖D
Compensation payments are dedüctible only if they satisfy the requisites for deductibility
of expenses.
Compensation income received by an employee from his employer are taxable only if
they do not fall under the exceptions.
Travelling expenses are taxable if no proper iiquidation of expenses has been made by
the employee.
4. Lahgai Corporation incurred the following expenses. Which of these expense is non-
deductible?
A. Insurance premiums on the building.
[Link] of the officials and employees.
C. Entertaining prospective Customers.
D. Gifts given to public officials who favored Lahgai Corporation's contract with the
government.
📖D
5. Which of the folowing is a deductible expense for income tax purpose ? (RPCPA)
A. Salaries of domestic servants
[Link] repair of the personal car
C. Provision for doubtful accounts
[Link] of the above
📖D
Salaries of domestic servants and repair of personal car are personal, living and family
expenses; they are not connected with trade, profession or business . Doubtful
accounts are deductible if they have been written-off. Thus, mere provision for doubtful
accounts is not deductible .
6. One of the following expenses is deductible from gross income
A. Personal, living and family expenses.
B. Amount paid out for new building or for permanent improvement or betterment ,
made to increase the value of any property estate .
C. Premiums paid on a life insurance policy covering the life of the employee when the
members or the famiy of the employee are the direct beneficiary under such policy
D Any amount expended in restoring property or in making good exhaustion there of for
wnich an alowance is or has been made
📖C
7. As a company accountant, you are being consulted by the Chief Executive Officer
(CEO) as to whether the following items of expenses are deductible to the company or
not.
Which of the following items can be claimed as deduction from gross income?
A. Tuition fees and other expenses of the taxpayer's children.
[Link] of the roof of the office building.
[Link] paid in insuring the life of the Corporate President, appointing the
corporation as the beneficiary of the policy
D. Premimums paid on a life insurance policy of a rank-and-file empioyee with the
employee's children as the appointed benericiary.
📖D
Premiums paid by the taxpayer , individual or corporate , on a life insurance policy
covering the life of an officer or employee , or any person financially interested in any of
its trade or business , is not deductible when thr taxpayer is the direct or indirect
beneficiary under such policy.
Tuition fees and other expenses of children are personal living and family expenses .
Replacement of the roof of the office building is capitalizable .
8. In 2022 , Enzo Corporation paid the following premiums to an insurance company in
insuring the lives of its officials and employees:
Official/Employee. Beneficiary Premiums Paid
Rank- and -file Children P5,000
Personnel Manager Parents 10,000
Treasurer Corporation 15,000
General Manager Corporation 15,000
Board Chairman Corporation 15,000
The deductible expense on the insurance premiums paid by the corporation is
A. P60,000
B.45,000
C.P5,000
D.15,000
📖D
On rank-and -file. P5,000
Personnel manager 10,000
Amount deductible. 15,000
[Link] Corporation took two life insurance policies on the life of its EVP , Mrs. Lopez .
In one policy , the beneficiary is the corporation and the other , designates her husband
as the revocable beneficiary . The insurance premium paid by Corco Corporation is
(RPCPA)
A. Tax deductible in so far as the first policy is concerned .
B. Tax deductible for both policies
C. Not tax deductible for both policies
D. First policy is not deductible ; second policy is deductible
📖D
10. The following are examples of corporate expenses deductible from gross income ,
except one : (RPCPA)
A. Representation expenses designed to promote business
B. Contributions to drum up business like contribution of softdrinks to barrio fiestas.
C. Expenses paid to an advertising firm in order to create a favorable image for the
corporation
D. Premiums on life insurance covering the life of an employee if the beneficiary is his
heirs.
📖B
11. Flores Corporation took two keymen insurance on the life of its President, Mr.
Chan . In one policy , the beneficiary is the corporation to compensate it for its expected
loss in case of death of its President . The other policy designated [Link]'s wife as its
irrevocable beneficiary .
Q1: Are the insurance premiums paid by Flores Corporation in both policies
deductible ?
Q2: Will the insurance proceeds be treated as income subject to tax by the corporation
and by the wife ? (RPCPA)
A. Yes to 1st question and No to 2nd question
B. Yes to both questions
C. No to 1st question and Yes to 2nd question
D. No to both questions
📖D
Numbers 12 and 14 are based on the following information :
In 2022 Lexpr Corporation made some repairs on a building being leased to Leslie , to
wit :
Minor repairs (expensed) P30,000
Major repairs 600,000
The major or extraordinary repair did not add value to the property but appreciably
prolonged its useful life by five(5) years.
12. The entry in the books of Lexor to record the expenses incurred for minor repairs is
A. Building P30,000
Cash P30,000
B. Lease expense - Leslie 30,000
Cash. 30,000
C. Repairs expense 30,000
Cash 30,000
D. No entry
📖C
13. The entry in the books of Lexor to record the expenses incurred for major repair
A. Building. P600,000
Cash P600,000
B. Repairs expenses 600,000
Cash 600,000
C. Allowance for depreciation 600,000
Cash 600,000
D. No entry
📖C
14. Suppose the major repair increased the value by P400,000 and it also prolonged the
life of the asset , the accounting entry to record the repair in the books of Lexor
Corporation is
A. Allowance for depreciation P600,000
Cash P600,000
[Link] 400,000
Cash 400,000
C. Building 400,000
Allowance for depreciation 200,000
Cash 600,000
D. None of the above
📖C
15. Coose the best answer : Regina Mondi College , Inc , a proprietart educational
institution , spent P10million for the construction of a new school building . The amount
spent for the cinstruction
A. Must be claimed as expense in the year of completion
B. Maybe capitalized and claim annual depreciation over the life of the building
C. Maybe capitalized or expensed outright at the option of the school.
D. Maybe capitalized or expensed outright at the option of the BIR
📖C
16. Allowance Corporation is engaged in sales of goods and services with the net sales
and net revenue of P4,000,000 and P2,000,000 , respectively . The actual
entertainment , amusement and recreation expense for the taxable quarter amounted to
P180,000
Allowance Corporation can claim an entertainment , amusement and recreation
expense on the sale of goods and services , respectively of
A. P120,000 and P20,000
B . 20,000 and 60,000
C. P120,000 and P60,000
D. 20,000 and 20,000
📖D
Netsales/net revenue. Expensed based on
formula. Limitation. Allowed
Sales of goods. P4,000,000. P120,000.
P20,000. P20,000
Sale of services. 2,000,000. 60,000.
20,000. 20,000
6,000,000. 180,000.
40,000. 40,000
*Appointment formula :
Sale of goods (4,000,000/6,000,000) x 180,000= 120,000
Sale of services (200,000/6,000,000) x 180,000= 60,000
**Maximum percentage ceiling :
Sale of goods (4,000,000 x 0.50%) = 20,000
Sale of services (2,000,000x 1%) = 20,000
17. The following statements relate to a senior citizen . Which statement is true ?
504 CPA REVIEWER IN TAXATION - Ampongan
A. An American citizen who visits the Philippines on a vacation trip in Boracay may be
entitled to claim 20% discounts on hotel rates and other establishments.
B. As a rule, a senior citizen is exempt from income tax and shall not be required to file
an income tax return.
C. The amount of sales discounts granted to senior citizens shall be allowed as special
deductions in computing the taxable income of the establishment
D. All compensation payments made to a senior citizen employee shall entitle the
employer to an additional deduction of 15% of the total amount paid as salaries and
wages.
📖C
The senior citizen or elderly that shall be entitled to discount privileges are Filipino
citizens who are residents of the Philippines and who are sixty (60) years old or above,
or senior citizens with "dual citizenship" status provided they prove their Filipino
citizenship and have at least six (6 ) months residency in the Philippines.
A qualified senior citizen deriving returnable income during the taxable year, whether
from compensation or otherwise, is required to file his income tax return and pay the tax
as he files the return, unless he is a:
(a) minimum wage earner, or
(b) the aggregate amount of his gross income during the taxable year does not exceed
the amount of his basic personal and additional exemptions.
Private establishments employing senior citizens shall be entitled to additional
deduction from their gross income equivalent to 15% of the total amount paid as
salaries and wages to senior citizens provided the following conditions are met:
1. The employment shall have to continue for a period of at least six (6) months; and
2. The annual taxable income of the senior citizen does not exceed poverty level.
18. Super Lolo and Lolo Thunder, both retired college professors, are having discussion
on the taxability of income of accountng teachers. The options below are the subject of
their discussion.
Which of the following subjects of discussion is correct?
A. Snape, a part-time faculty member of the University of Santo Thomas , Manila
earning a salary and allowances of P30,000 a month is required to pay income tax on
his salary .
B. Hagrid , 80 years old , a retired government employee , is a part time accounting
teacher of Hogwarts School . If his only source of income is his monthly wage from the
school of P12,500 a month , he is not exempt from the payment of income tax .
C. Dobby is a part-ti faculty member of Wesleyan University Philippines , Cabanatuan
City earning a monthly income of P3,000. If he also owns a small store space which is
being leased at a monthly rental of P10,000 , he shall be required to file return and pay
income tax if his only dependent is a small white dog named Blackie .
D. Ron Weasly who is earning a monthiy rental income of P15,000 is taxable on his
income because he is nit a minimum wage earner
📖A
Snape is subject to incomne tax because generally, senior citizens do not enjoy income
tax advantage over other class of taxpayers.
Hagrid is exempt from income tax because he is a minimum wage eamer
Dobby is tax exempt because the total amount of his income does not exceed the
amount of P250,000 exemption.
Ron Weasly is nct a minimum wage earner because the source of his income is not
from compensation. However, the income is not taxable because it does not exceed the
P250,000 exemption.
19. Lolo Daddy, 70 years old, had the following income during the year. which of them
is not taxable?
A. Salary, P 60,000.
B. Interest on bank deposit with Banco de Oro, P 500.
[Link] on books authored by Lolo, P50,000
[Link] in lottery, P 200,000.
📖A
Lolo Daddy is a minimum wage earner ; his salary is tax exempt .
20. LTE Corporation, a domestic corporatior engaged in the manutacture of ready-to-
wear clothes, had the following data during the taxable year ;
Gross sales P 30,000,000
Cost of sales (direct labor, P5.4 M) 18,000,000
Operating expenses 4,500,000
Labor training expenses 500,000

The training expenses were incurred for skills development of enterprise based trainees
in public higher education institutions covered by apprenticeship under the Labor Code,
with Certification from TESDA.

How much is the taxable income of LTE Corporation?

A. P 6,750,000 C. P 7,000,000
B. 7,500,000 D. 7,250,000

Gross sales P 30,000,000

Less: Cost of sales 18,000,000
Gross income 12,000,000
-Allowable deductions
 Operating expenses P 4,500,000
Training expenses 500,000
Additional deduction:
½ of training expenses 250,000
10% of direct labor 540,000
Deductible (lower) 250,000 5,250,000
Taxable income 6,750,000

21. The following interest payments were made by an individual income taxpayer in
2022:

Interest on loan from BDO used to finance a business P 50,000

Interest on loan from Pag-Ibig to build residence 100,000
Interest on loan obtained from brother and used in business 25,000
Interest on loan from BPI used to buy computer equipments in the office 30,000
Interest for late payment of value-added tax 2,500
Interest on purchase price of residential lot bought on installme 2,000
Interest payment on a debt which has prescribed 12,000

The deductible amount of interest is –

A. P 221,500 C. P 175,000
B. 80,000 D. 82,500

On loan from BDO P 50,000

On loan from BPI for purchase of computers 30,000
On late payment of VAT 2,500
Deductible interest 82,500

22. Which of the following items is CORRECT?

A. Interest incurred on loan from a brother is deductible.

B. Interest expense incurred on unpaid value-added tax is reduced by 42% of interest
income subjected to final tax.
C. Interest payable which had already prescribed is deductible if paid voluntarily by the
taxpayer.
D. Interest incurred to acquire a business asset may be added to the cost of the
property.

24. Interest on business is deductible for income tax purposes, However, one of the
following is not deductible (RPCPA)

A. Interest on delinquency
B. Interest on indebtedness incurred to purchase delivery equipment
C. Interest on indebtedness secured to purchase a tax-exempt security.
D. None of the above.
C
24. Which interest is deductible?

A. Interest incurred on unpaid value-added tax.

B. Interest on loan by an individual from a corporation if 60% of the outstanding stock of
the latter is owned indirectly by such individual.
C. Interest on loan between members of a family.
D. Interest on loan by a fiduciary of a trust and a beneficiary of such trust.

25. A deductible interest expense –

A. Interest on loan between members of a family
B. Interest on loan that was used to finance the construction of the taxpayer’s residential
house.
C. Interest on tax delinquency.
D. Interest on indebtedness to finance petroleum operations.

26. The interest expense of a domestic corporation on a bank loan in connection with
the purchase of a production equipment: (BEQ)

A. is not deductible from gross income of the borrower-corporation

B. is deductible from the gross income of the borrower-corporation during the year or it
may be capitalized as part of cost of the equipment.
C. is deductible only for a period of five years from date of purchase.
D. is deductible only if the taxpayer uses the cash method of accounting.

27. On January 2, 2022 Mang Otang contracted a 1-year P100,000 loan from
Metrobank for the purchase of computers. The equipments which had a depreciable life
of eight (8) years were acquired on April 1, 2022. The interest expense for one (1) year
amounted P15,000.

In the same year, his bank deposit with PNB earned an interest income of P2,000.
During the year, he incurred an interest expense on unpaid business tax of P600.

The deductible interest expense of Mang Otang in 2022 is –

A. P 14,240 C. P 15,200
B. 14,760 D. 14,940

Interest expense on unpaid business tax P 600

Add: Interest expense on loan P 15,000
Less: Interest income subjected to
final tax (2,000 x 20%) 400 14,600
Deductible interest expense 15,200

28. In the preceding problem, the deduction of Mang Otang in 2022 assuming that the
interest on loan was capitalized –

A. P 14,375.00 C. P 10,781.25
B. 15,000.00 D. None

Cost of equipment P 100,000.00

Add: Interest on loan 15,000.00
Total cost 115,000.00

Depreciation expense (115,000/8) x 9/12 10,781.25

Note:
The interest paid on unpaid business tax should not be added to the cost of the
equipment because it is not connected with its acquisition.

29. In 2022, Mr. Enteng Resty was charged interest expense on a business related loan
in the amount of P60,000. His interest income on bank account with BPI is P720.
 How much is the deductible interest expense?

A. P 59,856.00 C. P 496.00
B. 60,000.00 D. None

Interest expense P 60,000

Less: Interest arbitrage (720 x 20%) 144
Deductible 59,856

Items 30 and 31:

Ayos Ka Corporation incurred interest expense of P91,500 on its bank loan. The loan
which was contracted on January 2 was used to finance the construction of its new
building. It had an interest income earned for the same year amounting to P5,000

30. The allowable interest expense in 2022 if the corporation is subject to 25% income
tax rate is –

A. P 90,175 C. P 89,850
B. 86,500 D. 90,500

Interest expense P 91,500

Less: Interest arbitrage (5,000 x 20%) 1,000
Deductible 90,500

31. If the corporation is subject to income tax rate of 20%, the allowable interest
expense in 2022 is –

A. P 59,856.00 C. P 496.00
B. 60,000.00 D. 91,500

Interest expense P 91,500

Less: Interest arbitrage _______
Deductible 91,500

32. In December 2019, a taxpayer donated to his son 3,000 shares of stock of San
Manuel Corporation. For failure to file a donor’s tax return on the donation within the
statutory period, the taxpayer was assessed the sum of P100,000, as donor’s tax plus
25% surcharge or P25,000 and 12% interest or P12,000 which he paid January 2021.

On June 20, 2020, he filed his income tax return for 2021 claiming, among others, a
deduction for interest amounting to P1,500.

On June 5, 2021, the taxpayer filed an amended income tax return for the same
calendar year 2020, claiming therein an additional deduction in the amount of P12,000
representing interest paid on the donor’s tax.

A claim for refund of alleged overpaid income tax for taxable year 2019 was filed with
the Commissioner which was subsequently denied.

The Commissioner pointed out that a tax is not indebtedness and that there is a
fundamental distinction between a “tax” and a “debt”. According to the Commissioner,
the deductibility of interest on indebtedness from a person’s income tax cannot extend
to interest on taxes.

Q1. Is the interest on the donor’s tax deductible?

Q2. Is the interest on the income tax deductible?

A. Yes, Yes C. Yes, No

B. No, Yes D. No, No

B
The interest paid on donor’s tax is not deductible because it is not connected with trade,
business or profession.
The interest on income tax is deductible because it is not expressly disallowed by law to
be deducted from taxpayer’s gross income.

33. If a stockholder receives a taxable stock dividend, what is the measure of income
applicable to him? (RPCPA)

A. Par value of the shares on the date he receives them.

B. Fair market value of the shares on the date of declaration.
C. The adjusted cost of the old shares and the new shares of the corporation.
D. The book value of the shares of the preceding calendar year.

34. One is not a deductible tax (RPCPA)

A. Local business tax

B. Value-added tax
C. Privilege tax
D. Occupation tax

Value-added tax is not deductible because the burden of the tax is not shouldered by
the statutory taxpayer. The burden is being shifted to the customer/client.

35. The following taxes were paid by Joselito in 2022:

Real property tax on residential condominium unit P 8,500

Real property tax on apartment houses 28,000
Value-added tax on importation of car for personal use 2,500
Value-added tax on generator set imported for business use 240,000
Value-added tax paid for a restaurant business 55,000
Income tax paid for being engaged in business
70,000
Special assessment on real property used in business 10,200
Travel tax paid in going abroad on a business trip 1,620
Professional tax as CPA practitioner 300

The deductible taxes expense from the taxpayer’s gross income in 2022 is:

A. P 28,500 C. P 325,800
B. 325,500 D. 29,920

Real property tax on apartment houses P 28,000

Travel tax 1,620
Professional tax 300
Deductible 29,920

36. One is a deductible tax (RPCPA)

A. Estate tax C. Donor’s tax

B. Franchise tax D. Special assessment
B

The following taxes are not deductible per NIRC:

1. Philippine income tax;
2. Foreign income tax if claimed by the taxpayer as a tax credit;
3. Estate tax and donor’s tax;
4. Taxes assessed against local benefits of a kind tending to increase the value of
the property assessed.

37. One is entitled to tax credit for taxes paid to foreign country (RPCPA)

A. Resident aliens
B. Domestic corporation
C. Nonresident aliens with reciprocity
D. Non-resident citizens

Only taxpayers who are taxable on income derived from sources outside the Philippines
are entitles to claim tax credit.

38. One is entitled to tax credit for taxes paid to foreign country (RPCPA)

A. Non-resident aliens
B. Foreign corporations
C. Resident aliens with income derived solely from sources within the Philippines.
D. Beneficiaries of the estates and trusts.

39. The following taxpayers can claim tax credit except one (RPCPA)

A. Domestic corporations
B. Members of beneficiaries of partnership or trusts
C. Resident filipino citizens
D. Nonresident aliens

40. In 2022, Vicor Co., a domestic corporation has net income from within the
Philippines, P20,000,000 and from the USA, P30,000,000. Income tax paid on income
from USA is P9,500,000. The tax credit on income tax paid to US government is
(RPCPA)

A. P 7,500,000 C. P 9,000,000
B. 12,500,000 D. 9,500,000

Net income, Philippines P 20,000,000

Net income, USA 30,000,000
Taxable income 50,000,000
Rate of tax 25%
Income tax 12,500,000

Tax paid in USA 9,500,000

Limit (3 / 5 x P12,500,000) 7,500,000
Credit allowed (lower) 7,500,000
41. International Corporation, a domestic corporation with total assets of more than
P100 million, has the following data for the calendar year. The corporation signified its
intention to claim tax credits on income taxes paid to the foreign countries:

Country Gross Income Allowable deductions Tax paid

Philippines P 10,000,000 P 8,000,000 P -

United States 4,000,000 2,000,000 800,000
Japan 3,000,000 2,000,000 200,000

The income tax payable by International Corporation is:

A. P 750,000 C. P 550,000
B. 650,000 D. 500,000

Gross income, Philippines P 10,000,000

Less: Deductions 8,000,000 P 2,000,000
Gross income, United States P 4,000,000
Less: Deductions 2,000,000 2,000,000
Gross income, Japan 3,000,000
Less: Deductions 2,000,000 1,000,000 3,000,000
Taxable income 5,000,000
Rate of tax 25%
Income tax 1,250,000
Less: Tax credit
Tax paid, US P 800,000
Limit (2 / 5 x 1,250,000) 500,000
Allowed (lower) 500,000
Tax paid, Japan 200,000
Limit (1 / 5 x 1,250,000) 250,000
Alowed (lower) 200,000
Total 1st limitation 700,000
nd
2 limitation (3/5 x 1,250,000) 750,000
Allowed (lower) 700,000
Income tax payable 550,000

42. Peñafrancia D. Caceres, single had the following data during the year:

Gross income, Philippines P 8,200,000

Gross income, United States 2,000,000
Expenses, Philippines 800,000
Expenses, United States 1,600,000
Tax paid in the State of California 400,000
Federal income tax paid 85,000

If the foreign tax paid is claimed as deduction, the income tax due is –

A. P 1,228,750 C. P 1,280,000
B. 2,318,800 D. 1,650,000

Gross income, Philippines P 8,200,000

Gross income, United States 2,000,000 P 10,200,000
Less: Deductions
Expenses, Philippines 800,000
Expenses, United States 1,600,000
National tax paid in U.S. 85,000 2,485.000
Taxable income 7,715,000
 Tax on P 2,000,000 490,000
5,715,000 X 32% 1,828,800
Income tax due 2,318,800

43. In the preceding problem, if you are the taxpayer will you opt to claim the foreign tax
paid as tax credit or as a deduction?

A. Tax credit because the tax liability would be P 2,346,000 only.

B. Tax credit because the tax liability would be P 2,261,000 only.
C. Deduction because the tax liability would be P 2,318,800 only.
D. Deduction because the tax liability would be P 1,270,000 only.

Gross income, Philippines P 8,200,000

Less: Expenses, Philippines 800,000 P 7,400,000
Gross income, United States 2,000,000
Less: Expenses, United States 1,600,000 400,000
Taxable income 7,800,000

Tax on P2,000,000 490,000

5,800,000 X 32% 1,856,000
Income tax due 2,346,000
Less: Tax credit
Tax paid in U.S. 85,000
Limit (400/7,800 X 2,346,000) 120,308
Allowed (lower) 85,000
Income tax payable 2,261,000
44. One is NOT a deductible loss (RPCPA)

A. Loss due to removal or demolition of old building, the scrapping of old machinery or
equipment incident to renewal or replacement.
B. Loss due to removal of building or real estate purchased when the purchase was for
the acquisition of the land and without intending to use the building.
C. Loss in value of securities of such extent that the securities have become worthless
and are written off.
D. Loss in usefulness in business of an asset so that the business a discontinued or the
asset is discarded.

45. Max and Jess are business competitors. Max purchases a land beside the business
premises of Jess with the intention of erecting a new 4-storey building. The land which
was valued at P1,000,000 had an almost dilapidated building thereon assessed at
P150,000. He spent P40,000 for its demolition and sold its scrap for P25,000. The
construction of the new building cost him P10,000,000.

When Jess knew the intention of Max, he decided also to demolish his 20-year
old building and to construct a new one. The demolition had a cost to him of P80,000
but raised P35,000 from the scrap, and the construction cost of the new 6-storey
building was P15,000,000.

As between Max and Jess, who is entitled to claim loss as deduction from gross
income?

A. Max only. C. Both of them.

B. Jess only. D. Neither of them.

In the case of Max, the cost of the old building plus the demolition cost minus the
proceeds from the sale of the scrap are to be added to the cost of the land.
46. Bravo Company purchased a piece of land with a building thereon for P1,500,000
allocated under a contract of sale at P1,000,000 for the land and P500,000 for the
building. It had no use for the building at the time of purchase and it was its intention to
remove the building in order to build its factory. It incurred demolition cost of P50,000. It
sold its scrap for P15,000. The construction of the new building had cost the company
P2,500,000.

The total value of the land is –

A. P 1,000,000 C. P 1,615,000
B. 2,615,000 D. 1,535,000

Acquisition cost of the land P 1,000,000

Acquisition cost of building 500,000
Demolition cost 50,000
Scrap value (15,000)
Total value of land 1,535,000

47. Jimms Company had an old warehouse which had a cost of P1,200,000. The
company demolished the warehouse when it had a book value of P200,000 in order to
construct a new and bigger warehouse. The demolition cost amounted to P25,000 while
the scrap was sold for P10,000. In its accounting entry, Jimms Company should debit a
loss on retirement of old building of

A. None C. P 185,000
B. P 200,000 D. 215,000

Book value P 200,000

Add: Demolition cost 25,000
Total 225,000
Less: Scrap value 10,000
Loss on retirement (deductible) 215,000

48. A building was partially destroyed by fire in 2022. It had a book value of P4,000,000.
The insurance company was willing to pay P3,000,000 which was refused by the owner
of the building. Finally, the claim was settled in 2023 for P3,500,000. The P3,500,000
proceeds is (RPCPA)

A. Exempt from income tax. C. Subject to final tax

B. Taxable in full. D. Partly taxable, partly exempt

49. Refer to the preceding question. The taxpayer can claim a deductible loss of
(RPCPA)

A. P 1,000,000 in 2022 C. P 500,000 in 2022

B. 1,000,000 in 2023 D. 500,000 in 2023

50. In 2022, Poy’s residence was totally destroyed by fire. The property had an adjusted
basis and a fair market value of P 1,300,000 before the fire. During 2022, Poy received
insurance reimbursement of P 120,000 for the destruction of his home. Poy’s 2022
adjusted gross income was P 700,000. Poy had no casualty gains during the year. What
amount of the fire loss was Poy entitled to claim as an itemized deduction on his 2023
tax return? (RPCPA)
A. P 0 C. P 1,300,000
B. 1,180,000 D. 700,000

Casualty loss suffered on fire that destroyed a residence is not connected with trade or
business. Hence, the loss suffered is not deductible from gross income.

51. In 2019, Violeta constructed an office building worth P 2,000,000. In 2020 when it
had an accumulated depreciation of P 80,000 the building was totally destroyed by fire.
Assuming that the amount recoverable from Stan Insurance Company is P 500,000, the
deductible loss of Violeta is –

A. P 1,928,000 C. None
B. P 2,000,000 D. P 1,420,000

Cost P 2,000,000
Less: Accumulated depreciation 80,000
Book value 1,920,000
Less: Insurance recovery 500,000
Deductible loss 1,420,000

In case of total loss, the deductible amount from gross income is book value less
insurance recovery, if any.

52. Based on the data in the preceding problem, the accounting entry in the book of
Violeta is –

A. Fire loss P 2,000,000

Building P 2,000,000

B. Fire loss 1,420,000

Allowance for depreciation 80,000
Building 1,500,000

C. Fire loss 500,000

Receivable from Stan Insurance Co. 500,000

D. Receivable from Stan Ins. Co. 500,000

Allowance for depreciation 80,000
Fire loss 1,420,000
Building 2,000,000

53. The following properties were burned in a fire which broke out in the company
premises:
Property A Property B
Type of loss Total Partial
Cost P 800,000 P 1,200,000
Accumulated depreciation 500,000 600,000
Insurance recovery 200,000 150,000
Replacement cost of damaged portion -- 500,000

The deductible loss on Property A is –

A. P 250,000 C. P 50,000
B. 800,000 D. 600,000
C

Cost P 800,000
Less: Accumulated depreciation 550,000
Book value 250,000
Less: Insurance recovery 200,000
Deductible loss 50,000

54. Based on the preceding problem, the deductible loss on Property B is

A. P 600,000 C. P 500,000
B. 350,000 D. 1,200,000

Cost P 1,200,000
Less: Accumulated depreciation 600,000
Book value 600,000
Replacement cost 500,000
Allowed (lower) 500,000
Less: Insurance recovery 150,000
Deductible loss 350,000

In case of partial loss, the measure of deductible loss is the cost to restore back the
property to its normal operating condition, or its book value, whichever is lower, minus
the insurance recovery.

55. Carla Construction Corporation, a MSME domestic corporation had the following
data:

Year 2020:
Gross income for services P 3,200,000
Operating expenses 3,450,000
Rent income oh heavy equipments 70,000
Dividend received from Johna Corporation 36,500
Capital gain on sale of shares of stocks (not listed) 12,250

Year 2021:
Gross income from services 3,560,000
Operating expenses 1,250,000

In 2021, Carla Corporation incurred the following losses:

Fire loss of a company building: Total loss

Cost P 5,000,000
Accumulated depreciation 3,000,000
Amount recovered from Parafago Insurance Co. 750,000
Scrap (taken away by the insurance company) 5,000

Accident loss of a company dump truck: Partial loss

Cost of dump truck P 500,000
Accumulated depreciation 250,000
Restoration cost 150,000
Amount recovered from Madulag Insurance Co. 65,000

56. How much is the net operating loss carry-over to 2021?

A. P (131,250) C. P (180,000)
B. (119,000) D. (250,000)

C
 Gross income from services P 3,200,000
Rent income 70,000
Gross income 3,270,000
Less: Operating expenses 3,450,000
Operating loss (180,000)

The term “net operating loss” shall mean the excess of allowable deduction from gross
income of the business in a taxable year.

57. How much is the casualty loss in 2021?

A. P 1,335,000 C. P 1,400,000
B. 2,150,000 D. 1,435,000

Total loss on building;

Cost P 5,000,000
Less: Accumulated depreciation 3,000,000
Book value 2,000,000
Less: Insurance recovery 750,000
Deductible P 1,250,000

Partial loss on dump truck:

Cost 500,000
Less: Accumulated depreciation 250,000
Book value 250,000
Restoration cost 150,000
Allowed (lower) 150,000
Less: Insurance recovery 65,000 85,000
Casualty loss in 2021 1,335,000

58. How much is the income tax due in 2021?

A. P 238,500 C. P 130,462
B. 278,250 D. 159,000

D
Gross income from services P 3,560,000
Less: Deductions
Operating expenses P 1,250,000
Casualty loss 1,335,000
NOLCO from 2019 180,000 2,765,000
Taxable income 795,000
Rate of tax 20%
Income tax due 159,000

59. Jun, a sales agent on commission basis of Contrade Enterprises which is engaged
in the sale of paper and paper products, while in the course of his travel towards Bicol
Region was apprehended by members of the New People’s Army (NPA) under Melito
Glor Command along Quezon Province. His service car owned by Contrade Enterprises
was seized. The next day, he learned that the NPAs and the members of the Philippine
Army under the Southern Luzon Command (SOLCOM) had a chance encounter. Using
high powered weapons, the military personnel fired at the NPAs that tried to escape
with the use of his car. All the members of the NPA were killed and the car was a total
wreck. Is the value of the car deductible as casualty loss?

A. Yes. It is deductible to Jun being in possession of the car at the time it was seized
B. Yes. It is deductible to Contrade Enterprises provided that the other requisites for
deductibility must be satisfied.
C. No. Casualty loss refers only to fire, earthquake, volcanic eruption and other non-
manmade calamities.
D. No, because it was intentionally wrecked by the member of Philippine Army.

B
The value of the car is deductible to Contrade Enterprises being the car owner. It is
clear at the time it was seized by the NPA rebels that the car was being used in
connection with trade or business of the taxpayer. If there is any insurance indemnity,
the same shall be deducted from the book value of the car for purposes of claiming the
loss as deduction.

60. Quinnie Company acquired machinery at a purchase price of P500,000. Freight and
installation cost amounted to P20,000. At a date in a taxable year when the
accumulated depreciation was P300,000, Quinnie Company retired the machinery from
the business because the increase in the cost of production and the change of
manufacture of the product to which the machinery is exclusively devoted made its
continued profitable use impossible. The scrap value of the machinery was P10.000

The loss on the retirement of the machinery is –

A. P 220,000 C. P 200,000
B. 280,000 D. 210,000

Acquisition cost P 500,000

Freight and installation cost 20,000
Total cost 520,000
Less: Accumulated depreciation P 300,000
Scrap value 10,000 310,000
Loss on retirement 210,000

When due to change in business condition, the usefulness of some or all of the capital
assets of the business is suddenly terminated so that the taxpayer discards such assets
permanently from use, the taxpayer may claim as deduction the actual loss sustained.

61. Floriano had the following records of income, expenses and losses during the year:

Wagering gains (wagering losses, P50,000) P 30,000

Temporary decline in value of stocks of TY Corp. 12,500
Sale of typewriters which were rendered obsolete
by computers (book value, P115,000) 80,000

How much loss is deductible by Floriano?

A. P 97,500 C. P 55,000
B. 35,000 D. 110,000

Book value P 115,000

Selling price of typewriters 80,000
Deductible loss (35,000)

Wagering losses are deductible to the extent of wagering gains. Hence, the excess of
wagering losses from the wagering gains (50,000 – 30,000 = 20,000) is not deductible
from ordinary income.
Temporary decline in value of securities are not deductible. Only those that have been
actually suffered upon disposal are deductible.

62. The excess of allowable deductions over gross income of the business in a taxable
year is known as (BEQ)
A. net operating loss C. net deductible loss
B. ordinary loss D. NOLCO