Principles
1. Statement 1: Deductions are items or amounts allowed to be subtracted from to arrive at the taxable
income.
Statement 2: Exclusions are receipts which are excluded from the gross income, hence, do not form part
of the gross income.
a Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
2. Which of the following is not a characteristic of a deduction?
a. It is a reduction of wealth that helped earn the income subject to tax.
b. An immunity or privilege, a freedom from a charge or burden to which subjected.
C. It is not a receipt.
d. It is a subtraction to arrive at income subject to tax.
3. Political campaign contributions are not deductible from gross income
a. If they are not reported to the Commission on Elections.
b. If the candidate supported wins the election because of possible corruption.
C. Since they do not help earn the income from which they are to be deducted.
d. Since such amounts are not considered as income of the candidate to whom given.
4. Statement 1: Deductions from gross income are not presumed.
Statement 2. As a rule, deductions means itemized deductions
a. Only statement 1 is correct
b. Only statement 2 is correct
C. Both statements are correct
d. Both statements are incorrect
5. Statement 1: Revenue expenditures are period costs that are related to a particular period of time of
business operation. Statement 2: Capital expenditures are non-recurring expenditures related to
acquisition of depreciable assets to be used in the business.
a.Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
6. Lester bought an equipment under a two-year instaliment basis to be used in his office in the practice
of his profession. Lester will pay P50,000 monthly for a period of twelve (12) months For income tax
purposes, the P50,000 monthly payment shall be.
a. Treated as business rental, hence deductible
b. Treated as capital expenditure, hence not deductible
C. Treated as depreciation expense, hence deductible
d. Treated as ordinary business expense
7. Statement 1: A taxpayer can only deduct an item or amount from gross income only if there is a law
authorizing such a deduction.
Statement 2: For income tax purposes, a taxpayer is free to deduct from ross income the full amount of
the deduction allowed, or a lesser amount or not to claim any deduction at all.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct.
d. Both statements are incorrect
8. In cases of deductions and exemptions on income tax returns, doubts shall be resolved
a Strictly against the taxpayer
b. Strictly against the government.
c. Liberally in favor of the taxpayer
d Liberally in favor of the employer
9. Statement 1: The taxpayer has the burden of justifying the allowance of any deduction claimed
Statement 2 Deductions are strictly construed against the government
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct.
d. Both statements are incorrect
10. Statement 1: Only business expenses may be deducted from the gross income taxpayers. Statement
2: Itemized deductions from gross income should be duly supported by vouchers or receipts.
a. Only statement 1 is correct
b. Only statement 2 is correct
c Both statements are correct
d. Both statements are incorrect
11. Which of the following is a deductible expense for income tax purposes?
a. Salaries of domestic servants
b. Ordinary repair of the personal car
c. Provision for doubtful accounts
d. None of the above
12. This is not a requisite for business expense to be deductible
a. It must be reasonable
b. It must be paid during the taxable year
c. The withholding tax otherwise required have been deducted and remitted to the BIR
d. It must be ordinary and necessary
13. One of the requirements in order for expenses to be claimed as deduction for income tax purposes is
that, it should be subject to withholding tax if applicable. What is the withholding tax rate applicable to
rental payments?
a 1%
b. 5%
c. 2%
d. 10%
14. In the conduct of his business in 2021, Modesto found it necessary to give gifts to the government
officials with whom he had official dealings to the substantiation rule.
a. These gifts are deductible expenses subject to the substantation rule
b. The value of the gift, if de minimis, are allowed to be deducted
c. Irrespective of the value, the gifts are considered as bribes and not allowed to be deductible
d. These gifts are deductible if found to be necessary and properly supported by receipts.
Ordinary Business/Professional Expenses
15. Which of the following is not deductible from gross income?
a.Salaries and wages of employees
b. Entertainment, amusement and recreation expenses
c. Rental expenses
d. Bribes, kickbacks and other similar payments
16. Which of the following can be deducted from gross income in the year paid or incurred?
a. Repairs that materially add to the value of the property
b. Repair that appreciably prolong the life of the property
c. Repair that keep the property in its ordinarily efficient operating condition
d. All of the choices
17. Which of the following is allowable expense(s) of an employer?
a. Tax withheld by a corporation from its employees salary.
b. Kickback payment to a government official.
C. Distribution of profits to partners.
d. None of the above
18. The following are the requisites for deduction of compensation expense, except
a Personal services must have been actually rendered
b. The compensation for such services must be reasonable
C. Both "a" and "b
d. Neither "a" nor "b"
19. Which of the following is allowable compensation expense of an employer?
a. Salary of employee paid for a limited period of time after his death to his widow is deduction of the
employer.
b. Manager's expense account subject to fringe benefit tax.
c. Both "a" and "b
d. Neither "a" nor "b"
20. Statement 1: Cost of technical books used by a CPA in the practice of his profession is allowable
business expense. Statement
2: Tuition fees, board and lodging incurred by a medical doctor while attending a continuing professional
education seminar is allowable business expense.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
21. Which of the following business expenses of a professional practitioner is not allowed to be
deducted from the gross income?
a. Professional expenses incurred outside the Philippines by a nonresident allen engaged in business in
the Philippines
b. Income tax paid by a resident citizen to a foreign country.
C Entire amount incurred for meals, lodging, and travel in connection with own business.
d. None of the above
22. The following are allowable compensation expenses of the employer, except
a.Overtime pay paid to a rank-and-file employee
b. Cash dividends paid
c. Amounts paid for pensions of retired employees
d. All of the above
23. Earl is the product manager of Mcdo Bee Inc. Earl had a dinner with Clifford, owner of a chain of
restaurants, to convince the latter to carry Mcdo Bee products. Clifford agreed. After dinner, Earl and
Clifford went their separate ways. Earl decided to celebrate by going to a bar where he picked-up a
partner and consumed a bottle liquor. He drove home and on his way, he sideswiped Delfin, a
pedestrian who suffered injuries as a result of the accident. Earl settled the case extra-judicially by
paying Delfin amounting to P100,000 for actual damages (the money comes from Mcdo Bee Inc.). Which
of the following is correct?
a. The expenses incurred in having dinner with Clifford may be deducted from gross income of Mcdo
Bee
b. The expenses incurred by Earl while celebrating with a partner in a bar is deductible to expense of
Modo Bee
c. The amount paid to Delfin may be deducted from gross income of Modo Bee
d. The amount paid to Delfin may be deducted but the amount will be reduced to an equitable amount
to qualify as ordinary and necessary expenses.
24. (Based on illustration in RR 5-2021). COD Corporation, a domestic manufacturing corporation, had
gross sales of P100,000,000 for fiscal year ending June 30, 2021 and incurred cost of sales of
P60,000,000 and cost of sales of P17,500,000, with the following details:
26. This is a non-deductible interest expense
a. Interest paid on indebtedness incurred to finance petroleum exploration.
b. Interest paid by a corporation on scrip dividends.
c. Interest paid by a corporate taxpayer who is liable on a mortgage upon real property of which the said
corporation is the legal or equitable owner.
d. Interest paid on tax deficiency if the tax where the interest is in itself an item that is deductible from
gross income.
27. This is a deductible interest expense
a. Interest on deposits paid by authorized banks of the BSP to depositors, if it is shown that the tax on
such interest was withheld and paid.
b. Interest paid on indebtedness between related taxpayers.
C. Interest paid on preferred stock.
d. Interest paid when there is no stipulation for the payment thereof
28. Which of the following is a deductible expense for income tax purposes?
a. Interest paid on delinquent business taxes
b. Provisions for doubtful accounts
C. Ordinary repair for personal car
d. Salaries of domestic servants.
29. Statement 1: As a rule, the interest must be on an indebtedness of the taxpayer, otherwise is not
deductible.
Statement 2: Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or
equitable owner, even though the taxpayer is not directly liable upon the bond or not secured by such
mortgage, may be deducted as interest on his indebtedness.
a Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
30. In 2020 (prior to the effectivity of the CREATE Law), Roy borrowed money from the Bank amounting
to R1,000,000 at an annual interest rate of 7%. He invested the money in deposit substitutes eaming
annual interest income of 8%. How much is the deductible interest?
a. P43,600
b. P26,400
c. P70,000
d. P80,000
Actual interest= P1,000,000 x 7%= 70,000
Less: Reduction P1,000,000 x 8% x 33% = (26,400)
Allowable interest expense= 70k - 26.4k = 43,600
31. (CREATE Law, Based on illustrations in RR 5-2021). For fiscal year ending June 30, 2021, assuming
that JHB Corporation, aside from the operating expenses of P7,500,000, incurred interest expense of
P400,000 which satisfied the prescribed requirement for deductibility, but it also earned interest income
of P100,000, net of final tax of twenty percent (20%). How much is the allowable deduction for interest
expense?
a. P25,000
b. P100,000
c. P375,000
d. P400,000
32. (CREATE Law, Based on illustrations in RR 5-2021) For taxable year 2021. SGC Corp. incurred interest
expense of P500,000 on its bank loan. For the year, its gross assets amounted to P50,000,000, exclusive
of the cost of the land of P7,100,000. It registered a gross income of P10,000,000 and incurred operating
expenses of P6,000,00 inclusive of P500,000 interest expense. It had interest income earned for the
same year amounting to P150,000. How much is the allowable deduction for interest expense?
a. P0
b. P150,000
c. P470,000
d. P500,000
33. In computing allowable deduction for purposes of income taxation:
Statement 1: Beginning July 1, 2020, interest expense arising from loans or indebtedness in connection
with taxpayer's business shall be reduced by an amount equal to 20% interest income subjected to final
tax
Statement 2: Interest incurred on money used to acquire property to be used in trade shall only be
allowed as a capital expenditure.
a. Only statement 1 is correct
b. Only statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect
34. An individual taxpayer has the following data for 2019 taxable year:
Interest paid, business loan- P100,000
Interest paid, loan finance personal car- 500,000
Interest expense on delinquency business related taxes 50,000
Interest income, BDO West Avenue branch (net)- 24,000
For income tax purposes, the deductible interest expense shall be
a. P102,000
b. P138,600
c. 140,100
d. 150,000
35. Debtor Corporation, with total assets of P15,000,000, shows the following data during taxable
What is the correct amount of itemized deduction?
a. P202,400
b. P205,100
c. P215,000
d. P265,000
36. Leomar Corporation paid the following during 2021:
How much is the deductible interest for 2021?
a. P1,822,500
b. P1,122,500
c. P1,000,000
d. P50,000
37. How shall interest related to acquisition of property used in trade, business or profession be
treated?
a. Claim as outright expense
b. Capitalize
c. At the option of the taxpayer, may be claimed as outright expense or capitalize
d. At the option of the government, may be claimed as outright expense or capitalize
38. Mrs. Sarabia is a self-employed individual using cash basis of accounting in recording her business
transactions. She borrowed money from the bank in 2021 payable after 2 years in lump sum. The
proceeds given to her by the bank was already net of P100,000 interest. When can she claim as
deduction the said interest?
a. In 2021
b. In 2022
c. In 2023
d. Spread over the term of the loan
39. The following interest are non-deductible, except?
a. Interest paid to persons classified as related taxpayers
b. Interest related to indebtedness incurred to finance petroleum exploration
c. Interest on preferred stock
d. Interest related to indebtedness incurred to finance working capital requirements
40. A lessee paid the real estate tax on the property he leased. For income tax purposes, the amount
paid was:
a. Deductible as part of lease expenses.
b. Deductible as tax expense
c. Deductible as an interest expense
d. Non-deductible expense
41. The cost of leasehold improvements shall be deductible by the lessee by
a. Spreading the cost of the improvements over the life of the improvements or remaining term of the
lease, whichever is shorter
b. Spreading the cost of the improvements over the life of the improvements or remaining term of the
lease, whichever is longer.
c. Spreading the cost of the improvements over the term of the lease or may be expensed outright in
full, at the option of the lessee.
d. Any of the above
42. A leasehold is acquired for business purposes for P5,000,000. The lease contract is for 10 years. How
much is the deductible amount from the gross income during the year?
a. P500,000
c. P5,000,000
b. P1,000,000
d. P0
A: deduction=P5,000,000/10 years P500,000
43. On January 1, 2021, Mr. V-leased his vacant lot for a period of 12 years to Mr. J at an annual rate of
P2,400,000. It was also agreed that Mr. J will pay the following:
* P4,800,000 representing rental payment for year 2021 and 2022
* Security deposit of P2,400,000.
* Annual real property tax of 30,000.
The lease contract provides, among others that the lessee will construct a 5-storey building for parking
purposes at a cost of P9,500,000. Ownership of the building shall belong to the lessor upon the
expiration or termination of the lease contract. The building was completed on July 1, 2023 with an
estimated useful life of 15 years. How much can Mr. J claim as deduction in relation to the lease in
2021?
a P2,430,000
b. P4,830,000
c. P2,400,000
d. 24,800,000
Rentals for 20121= P2.4M annual rent x 6 mos/12 mos= P2,400,000
Annual real property Tax= 30,000
Total Rent Expense-202= P2,430,000
44. How much can Mr. J claim as deduction in relation to the lease in 20227
a. P2,430,000
b. P4.830,000
c. P2,400,000
d. P4,800,000
45. Using the same information above, how much can Mr. J claim as deduction in relation to the
a P2,430,000
b. P2,930,000
c. P2,400,000
d. P3,063,333
46. Using the same information above, how much can Mr. J claim as deduction in relation to the lease in
2024?
a. P2,430,000
b. P2,930,000
c. P3,430,000
d. P3,063,333
47. Mike leased his land to Leomar for two years beginning July 1, 2021. Leomar would pay monthly
rental of P100,000. He paid rent up to October 2021 and then defaulted for the rest of the year Under
accrual method, how much was the income of Mike in 2021?
a. P200,000
b. 400,000
c. P600,000
d. None of the choices
48. Using the same data in the preceding number, under cash method, how much was the incomeof
Mike in 2021?
a. P200,000
b. 400,000
c. P600,000
d. None of the choices
49. Under accrual method, how much was the deductible expense of Leomar in 2021?
a. P600,000
b. 400,000
c. P200,000
d. None of the choices
