LA CONSOLACION UNIVERSITY PHILIPPINES

COLLEGE OF BUSINESS, ENTREPRENEURSHIP AND ACCOUNTANCY

INCOME TAXATION
HANDOUT ON INCLUSION, EXCLUSIONS AND DEDUCTIONS FROM GROSS INCOME
INSTRUCTOR: MR. LEOMAR B. SEMINIANO, MICB, CPA

SEC. 32. GROSS INCOME. -

(A) GENERAL DEFINITION. - EXCEPT WHEN OTHERWISE PROVIDED IN THIS TITLE, 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.

1. Computation of taxable income

Corporation Gross income Pxxx
Less: Deductions xxx
Taxable income Pxxx
Individual Gross income Pxxx
Less: Deductions xxx
Income before personal exemptions Pxxx
Less: Personal exemption xxx
Taxable income Pxxx

2. Meaning of income
a. Broad sense Income means all wealth, which flows into the taxpayer’s hands other than as a mere return of
capital.
b. Judicial definition Income is the gain derived from labor, or from capital, or from both labor and capital, including
the gain derived from the sale or exchange of capital asset.
c. Requisites of a a. There must be gain;
taxable income b. The gain must be realized or received;
c. The gain must not be excluded by law from taxation.

3. Gross income defined

Gross income Except when otherwise provided, gross income means all income from whatever source,
including (but not limited to the following items):
a. Compensation for services in whatever form paid, including but not limited to fees, salaries,
wages, commissions, and similar items;
b. Gross income derived from the conduct of trade or business or the exercise of a profession;

c. Gains derived from dealings in property;

d. Interests;
e. Rents;
f. Royalties;
g. Dividends
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner’s distributive share from the net income of the general professional partnership.

4. Income distinguished from other terms

a. From capital Capital is the fund or property existing at one distinct time, while income denotes a flow of
wealth during a definite period.
b. From receipts Receipts have reference to all wealth that flows into the taxpayer, which includes returns of
capital. Receipts are broader in scope than income.
c. From revenue 1) Revenue, as applied to taxation, refers to all the funds or income derived by the government,
whether from tax or any other source while income, for tax purposes, is employed in its “natural
and obvious sense” to mean money or gain received, coming to a person (natural or juridical)
during a given period of time.
2) Revenue is to the government while income is to a person (natural or juridical).

5. Items of gross income explained

a. Compensation for personal services

1) Gross compensation Gross compensation income means all remuneration for services performed by an employee
income defined for his employer, whether paid in cash or in kind, unless specifically excluded under the Tax Code
(e.g. salaries, wages, emoluments, honoraria, bonuses, allowances, director’s fees).
2) Director’s fee Director’s fee is part of the gross compensation income if the director is at the same time
an employee of the employer/corporation. If the director is not an employee, the director’s fee
is subject to 10% creditable withholding tax if the current year’s gross income is
P720,000 and below (15% if current year’s gross income exceeds P720,000.)
3) Compensation in the In the absence of employer-employee relationship, compensation for personal services shall be
absence of employer- considered as gross professional fee (e.g. audit fee received by CPA from his client, lawyer’s fee.)
employee relationship
 4) Examples of All kinds of compensation for services rendered constitute gross income. They include:
compensation for a) salaries, wages and fees;
services rendered b) commissions paid to salesmen;
c) compensation for services on the basis of a percentage of profits;
d) commissions on insurance premiums;
e) tips;
f) pensions or retiring allowances paid by private persons or by the government (except
pension exempt from tax); and
g) marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelist, or religious worker for services rendered.
5) Forms of Forms of compensation Taxable amount
compensation a) Payments made in cash The full amount received
b) Services paid for with something The fair market value (FMV) of the thing taken in
other than money (in kind) payment
c) Services rendered at a stipulated In the absence of evidence to the contrary, the
price stipulated price shall be presumed to be the fair
market value (FMV)
6) Examples of Payments in kind Taxable Amount
payments in kind a) Compensation paid to an employee Fair market value of the stock at the time received by
of a corporation in its stock the employee
b) Promissory note and other evidence of a) Promissory note is not interest bearing
indebtedness in payment of services, Year received - Fair discounted value
and not merely as security for such Year collected- Face value less fair discounted value
payment b) Promissory note is interest bearing
Year received -Face value
Year collected - Maturity value less face value

b. Gross income derived from the conduct of trade or business, or the exercise of profession
Format of computation Gross sales/receipts xxx
Less: Sales returns and allowances xxx
Sales discount xxx xxx
Net sales/receipts xxx
Less: Cost of sales/services xxx
Gross income from operation xxx
Add: Other income xxx
Total gross income xxx

c. Gains derived from dealings in property

1) Property acquired by Selling price xxx
purchase on or after Less: Cost xxx
March 1, 1913. Gain xxx
2) Property acquired by Selling price xxx
inheritance Less: FMV, date of inheritance xxx
Gain xxx
3) Property acquired by Selling price xxx
gift Less: Value in the hands of the donor xxx
Gain xxx

d. Interest income
1) Included in interest Interest includes such interest arising from indebtedness, whether business or non-business.
income Unless exempted by law, interests received by a taxpayer, whether or not usurious, are taxable.
2) Subject to final tax Interest income from Philippine sources subject to final tax (not included in the taxable net income
subject to tax rates in general)
a) Interest from any currency bank deposit;
b) Yield or any other monetary benefit from deposit substitute;
c) Yield or any other monetary benefit from trust funds and similar arrangements;
d) Interest income received from a depository bank under expanded foreign currency deposit
system;
e) Interest income from long-term deposit or investment evidenced by certificates prescribed by
Bangko Sentral ng Pilipinas if pre-terminated before fifth year.
3) Exempt from Interest income from Philippine sources exempt from tax:
income tax a) Interest income received from a depository bank under expanded foreign currency deposit
system by non-residents (individuals or corporations);
b) Interest income from long-term deposit or investments evidenced by certificates prescribed by
Bangko Sentral ng Pilipinas.
e. Rent income
1) Income of lessor under lease agreement
Payments Made Lessor Lessee
a) Rent Income Expense
b) Obligation of lessor to
third person paid by lessee Income Expense
c) Advance rent Income in full in the year received regardless Expense to be prorated over the period
of accounting method used covered regardless of accounting method
d) Leasehold improvement Income reported under lump sum or annual Expense (depreciation) over the term of the
method lease or estimated life whichever is shorter

2) Advance payment not representing rent

a) Loan Advance payment representing loan to the lessor is not taxable unless applied to unpaid rent.
b) Security deposit Advance payment representing security deposit is not taxable unless violation in the lease
contract arises.

3) Leasehold improvement
a) Additional income to the Leasehold improvement is a source of additional income to the lessor if it shall become his
lessor upon the expiration of the lease.
b) Recognition of income (1) Lump sum or outright method - Lessor may report as income, at the time when such
from leasehold improvement buildings or improvements are completed, the fair market value (FMV) of such buildings or
improvements subject to the lease.
(2) Annual or spread out method
Cost of leasehold improvement xxx
Less: Accumulated depreciation (remaining term of lease) xxx
Book value, end of lease xxx
Annual income
Book value, end of lease/Remaining term of lease xxx
(3) Computation of income resulting from premature termination of
lease
FMV of improvement when lessor took possession xxx
Less: Amount already reported as income xxx
Income, year of termination xxx
c) Computation of loss due to Amount already reported as income xxx
destruction of leasehold Less: Insurance recovery xxx
improve-ment before the Salvage value xxx xxx
term of the lease expires Loss xxx

Exercise
(Phil. CPA) Mr. C. Conte bought a 2,000 square meter land at a cost of P500,000. He leased the land to Mr. D. Damian at an
annual rental of P40,000. The term of the contract of lease was 15 years. The contract of lease provided that Mr. Damian will
construct a building on the land, which will belong to the lessor at the end of the term of the lease or at the termination of the
lease. The building was constructed for a total cost of P400,000 and has an estimated useful life of 20 years which was the basis
of a straight-line method of depreciation. The remaining term of the lease when the building was completed was 14 years.

Compute the following:

a. Income from lease contract in the year the improvement was completed assuming Mr. Conte will report his income from
leasehold improvement using outright or lump sum method.
b. Yearly income assuming Mr. Conte will spread his income from leasehold improvement over the term of the contract of lease.
c. Income of Mr. Conte in the 11th year assuming the contract of lease was terminated after the 10th year or at the beginning of
the 11th year due to the fault of the lessee.
d. Deductible loss of the lessor assuming the leasehold improvement was destroyed at the beginning of the 9th year of the lease
contract.

f. Royalties
1. Subject to final tax Royalties from Philippine sources
2. Subject to tax rates in Royalties from foreign sources
general

g. Dividend income (including shares in the net income of certain entities)

1) Difference between direct A direct dividend is one where the paying corporation acknowledges that the distribution is
and indirect dividends a dividend payment.

An indirect dividend is a distribution of profits disguised as payment of services, properties,

etc.
2) Dividends/shares a) Cash and/or property dividends actually or constructively received by individuals from
in net income subject to domestic corporation or from a joint stock company, insurance or mutual fund company
final tax and regional operating headquarters of multinationals;
b) Inter-corporate dividends received from domestic corporation by non-resident foreign
corporations;
c) Share of an individual in the distributable net income after tax of a partnership (other than
a general professional partnership) of which he is a partner;
d) Share of an individual in the net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which he is a member or co- venturer.
3) Dividends/shares in net a) Dividends from foreign corporations;
income subject to tax b) Share in the net income of a general professional partnership.
rates in general
4) Dividends that are a) Inter-corporate dividends received from domestic corporation by other domestic
exempt from tax corporation and resident foreign corporation.

h. Annuities
 1) Meaning of annuity An annuity is a specified income payable at stated intervals for a fixed or a contingent period,
often for the recipient’s life, in consideration of a stipulated premium paid either in prior
installment payments or in a single payment.
2) Non-taxable annuity Annuity representing return of premium
3) Taxable annuity Excess of the amount returned as premium

i. Prizes and winnings

1) Subject to tax a) Prizes and winnings from foreign sources received by individuals and corporations;
rates in general b) Prizes and winnings from Philippine sources received by corporations;
c) Prizes from Philippines sources received by individuals amounting to P10,000 or less.
2) Subject to final tax a) Prizes received by individuals from Philippine sources [except prizes amounting to P10,000
or less which shall be subject to tax under Sec. 24 (A)];
b) Other winnings of individuals from Philippine sources (except Philippine Charity
sweepstakes and Lotto winnings)
3) Exempt/excluded a) Philippine Charity sweepstakes and Lotto winnings;
from gross income b) Prizes and awards made primarily in recognition of achievements in the following fields:
1) Religious; 3) Scientific; 5) Artistic; 7) Civic.
2) Charitable; 4) Educational; 6) Literary;

Conditions for the exemption of prizes and awards:

a. The recipient was selected without any action on his part to enter the contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
c) All prizes and awards granted to athletes to local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national
sports association.

j. Pensions (see exclusions from gross income)

k. Partner’s distributive share from the net income of the general professional partnership [Subject to Section 24 (A)]

l. Income from whatever source

1) Examples of income from 1) Gains arising from expropriation of property;
whatever source 2) Gambling gains;
3) Income from illegal business or from embezzlement;
4) Damage recovery (compensation for damages);
5) Forgiveness of debt;
6) Bad debt recovery;
7) Tax refunds; and
8) Prizes and awards.
2) Damage recovery 1) Recovery of lost profit is taxable.
2) Recovery of lost capital is not taxable.
3) Forgiveness of debt 1) If debtor rendered service in favor of the creditor forgiveness of debt results in a taxable
income to the debtor.
2) If the debtor did not render service in favor of the creditor forgiveness of debt results in a
taxable indirect gift.
3) If the debtor is a stockholder of a corporation forgiveness of debt by the creditor-
corporation results in dividend distribution.
4) Bad debt recovery 1) Bad debt recovery is generally taxable.
2) Tax benefit rule: If in the year the bad debt was written off there was a reduction of
taxable income, bad debt recovery shall constitute a taxable income.
5) Tax refunds 1) If the refunded tax is a deductible tax, the tax refund is taxable.
2) If the refunded tax is not a deductible tax, the tax refund is not taxable.

Examples of non-deductible taxes:

1) Philippine income tax;
2) Transfer taxes (estate tax and donor’s tax);
3) Special assessment;
4) Foreign income tax claimed as tax credit;
5) Value-added tax;
6) Stock transactions tax.
6. Integrative case

The following are the revenue items in the Income Statement of a domestic corporation for the year 2011:
Sales P 1,000,000
Cost of sales 500,000
Gain from sale of an office equipment 20,0000
Gain from sale of land not used in business (selling price P300,000) 100,000
Gain from sale of shares of stock directly to the buyer 50,000
Gain from sale of shares of stock through the stock exchange (selling price, P200,000) 10,000
Interest income from bank deposit, Philippines 40,000
Yield from deposit substitute, Philippines 80,000
Interest income received from depository bank under EFCDS, Philippines 60,000
Interest income from bank deposit, USA 400,000
Interest on trade notes receivable, Philippines 30,000
Advance rent for two (2) years, Philippines 600,000
Royalties, Philippines 70,000
Royalties, USA 300,000
Property dividend received from domestic corporation 150,000
Stock dividend received from a domestic corporation 100,000
Cash dividend received from a foreign corporation 350,000
Prizes and winnings, Philippines 400,000
Refund of Philippine value-added tax 100,000
Bad debt recovery 50,000

Question 1 – How much was total exempted/excluded income?

2 – How much was the total final withholding taxes on passive income?
3 – How much was the total capital gains tax?
4 – How much was the total gross income subject to the 30% corporate income tax?

(B) EXCLUSIONS FROM GROSS INCOME. - THE FOLLOWING ITEMS SHALL NOT BE INCLUDED IN GROSS INCOME AND SHALL BE
EXEMPT FROM TAXATION UNDER THIS TITLE:

(1) LIFE INSURANCE. - THE PROCEEDS OF LIFE INSURANCE POLICIES PAID TO THE HEIRS OR BENEFICIARIES UPON THE DEATH
OF THE INSURED, WHETHER IN A SINGLE SUM OR OTHERWISE, BUT IF SUCH AMOUNTS ARE HELD BY THE INSURER UNDER AN
AGREEMENT TO PAY INTEREST THEREON, THE INTEREST PAYMENTS SHALL BE INCLUDED IN GROSS INCOME.

(2) AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM. - THE AMOUNT RECEIVED BY THE INSURED, AS A RETURN OF
PREMIUMS PAID BY HIM UNDER LIFE INSURANCE, ENDOWMENT, OR ANNUITY CONTRACTS, EITHER DURING THE TERM OR AT
THE MATURITY OF THE TERM MENTIONED IN THE CONTRACT OR UPON SURRENDER OF THE CONTRACT.

(3) GIFTS, BEQUESTS, AND DEVISES. - THE VALUE OF PROPERTY ACQUIRED BY GIFT, BEQUEST, DEVISE, OR DESCENT:
PROVIDED, HOWEVER, THAT INCOME FROM SUCH PROPERTY, AS WELL AS GIFT, BEQUEST, DEVISE OR DESCENT OF INCOME
FROM ANY PROPERTY, IN CASES OF TRANSFERS OF DIVIDED INTEREST, SHALL BE INCLUDED IN GROSS INCOME.

(4) COMPENSATION FOR INJURIES OR SICKNESS. - AMOUNTS RECEIVED, THROUGH ACCIDENT OR HEALTH INSURANCE OR
UNDER WORKMEN'S COMPENSATION ACTS, AS COMPENSATION FOR PERSONAL INJURIES OR SICKNESS, PLUS THE AMOUNTS OF
ANY DAMAGES RECEIVED, WHETHER BY SUIT OR AGREEMENT, ON ACCOUNT OF SUCH INJURIES OR SICKNESS.

(5) INCOME EXEMPT UNDER TREATY. - INCOME OF ANY KIND, TO THE EXTENT REQUIRED BY ANY TREATY OBLIGATION BINDING
UPON THE GOVERNMENT OF THE PHILIPPINES.

(6) RETIREMENT BENEFITS, PENSIONS, GRATUITIES, ETC.-

(A) RETIREMENT BENEFITS RECEIVED UNDER REPUBLIC ACT NO. 7641 AND THOSE RECEIVED BY OFFICIALS AND EMPLOYEES OF
PRIVATE FIRMS, WHETHER INDIVIDUAL OR CORPORATE, IN ACCORDANCE WITH A REASONABLE PRIVATE BENEFIT PLAN
MAINTAINED BY THE EMPLOYER: PROVIDED, THAT THE RETIRING OFFICIAL OR EMPLOYEE HAS BEEN IN THE SERVICE OF THE
SAME EMPLOYER FOR AT LEAST TEN (10) YEARS AND IS NOT LESS THAN FIFTY (50) YEARS OF AGE AT THE TIME OF HIS
RETIREMENT: PROVIDED, FURTHER, THAT THE BENEFITS GRANTED UNDER THIS SUBPARAGRAPH SHALL BE AVAILED OF BY AN
OFFICIAL OR EMPLOYEE ONLY ONCE. FOR PURPOSES OF THIS SUBSECTION, THE TERM 'REASONABLE PRIVATE BENEFIT PLAN'
MEANS A PENSION, GRATUITY, STOCK BONUS OR PROFIT-SHARING PLAN MAINTAINED BY AN EMPLOYER FOR THE BENEFIT OF
SOME OR ALL OF HIS OFFICIALS OR EMPLOYEES, WHEREIN CONTRIBUTIONS ARE MADE BY SUCH EMPLOYER FOR THE OFFICIALS
OR EMPLOYEES, OR BOTH, FOR THE PURPOSE OF DISTRIBUTING TO SUCH OFFICIALS AND EMPLOYEES THE EARNINGS AND
PRINCIPAL OF THE FUND THUS ACCUMULATED, AND WHEREIN IT IS PROVIDED IN SAID PLAN THAT AT NO TIME SHALL ANY
PART OF THE CORPUS OR INCOME OF THE FUND BE USED FOR, OR BE DIVERTED TO, ANY PURPOSE OTHER THAN FOR THE
EXCLUSIVE BENEFIT OF THE SAID OFFICIALS AND EMPLOYEES.

(B) ANY AMOUNT RECEIVED BY AN OFFICIAL OR EMPLOYEE OR BY HIS HEIRS FROM THE EMPLOYER AS A CONSEQUENCE OF
SEPARATION OF SUCH OFFICIAL OR EMPLOYEE FROM THE SERVICE OF THE EMPLOYER BECAUSE OF DEATH SICKNESS OR OTHER
PHYSICAL DISABILITY OR FOR ANY CAUSE BEYOND THE CONTROL OF THE SAID OFFICIAL OR EMPLOYEE.

(C) THE PROVISIONS OF ANY EXISTING LAW TO THE CONTRARY NOTWITHSTANDING, SOCIAL SECURITY BENEFITS, RETIREMENT
GRATUITIES, PENSIONS AND OTHER SIMILAR BENEFITS RECEIVED BY RESIDENT OR NONRESIDENT CITIZENS OF THE
PHILIPPINES OR ALIENS WHO COME TO RESIDE PERMANENTLY IN THE PHILIPPINES FROM FOREIGN GOVERNMENT AGENCIES
AND OTHER INSTITUTIONS, PRIVATE OR PUBLIC.

(D) PAYMENTS OF BENEFITS DUE OR TO BECOME DUE TO ANY PERSON RESIDING IN THE PHILIPPINES UNDER THE LAWS OF
THE UNITED STATES ADMINISTERED BY THE UNITED STATES VETERANS ADMINISTRATION.

(E) BENEFITS RECEIVED FROM OR ENJOYED UNDER THE SOCIAL SECURITY SYSTEM IN ACCORDANCE WITH THE PROVISIONS OF
REPUBLIC ACT NO. 8282.

(F) BENEFITS RECEIVED FROM THE GSIS UNDER REPUBLIC ACT NO. 8291, INCLUDING RETIREMENT GRATUITY RECEIVED BY
GOVERNMENT OFFICIALS AND EMPLOYEES.

(7) MISCELLANEOUS ITEMS. –

(A) INCOME DERIVED BY FOREIGN GOVERNMENT. - INCOME DERIVED FROM INVESTMENTS IN THE PHILIPPINES IN LOANS,
STOCKS, BONDS OR OTHER DOMESTIC SECURITIES, OR FROM INTEREST ON DEPOSITS IN BANKS IN THE PHILIPPINES BY (I)
FOREIGN GOVERNMENTS, (II) FINANCING INSTITUTIONS OWNED, CONTROLLED, OR ENJOYING REFINANCING FROM FOREIGN
GOVERNMENTS, AND (III) INTERNATIONAL OR REGIONAL FINANCIAL INSTITUTIONS ESTABLISHED BY FOREIGN GOVERNMENTS.

(B) INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL SUBDIVISIONS. - INCOME DERIVED FROM ANY PUBLIC UTILITY
OR FROM THE EXERCISE OF ANY ESSENTIAL GOVERNMENTAL FUNCTION ACCRUING TO THE GOVERNMENT OF THE PHILIPPINES
OR TO ANY POLITICAL SUBDIVISION THEREOF.

(C) PRIZES AND AWARDS. - PRIZES AND AWARDS MADE PRIMARILY IN RECOGNITION OF RELIGIOUS, CHARITABLE, SCIENTIFIC,
EDUCATIONAL, ARTISTIC, LITERARY, OR CIVIC ACHIEVEMENT BUT ONLY IF:
(I) THE RECIPIENT WAS SELECTED WITHOUT ANY ACTION ON HIS PART TO ENTER THE CONTEST OR PROCEEDING; AND
(II) THE RECIPIENT IS NOT REQUIRED TO RENDER SUBSTANTIAL FUTURE SERVICES AS A CONDITION TO RECEIVING THE PRIZE
OR AWARD.

(D) PRIZES AND AWARDS IN SPORTS COMPETITION. - ALL PRIZES AND AWARDS GRANTED TO ATHLETES IN LOCAL AND
INTERNATIONAL SPORTS COMPETITIONS AND TOURNAMENTS WHETHER HELD IN THE PHILIPPINES OR ABROAD AND
SANCTIONED BY THEIR NATIONAL SPORTS ASSOCIATIONS.

(E) 13TH MONTH PAY AND OTHER BENEFITS. - GROSS BENEFITS RECEIVED BY OFFICIALS AND EMPLOYEES OF PUBLIC AND
PRIVATE ENTITIES: PROVIDED, HOWEVER, THAT THE TOTAL EXCLUSION UNDER THIS SUBPARAGRAPH SHALL NOT EXCEED
NINETY THOUSAND PESOS (P90,000) WHICH SHALL COVER:
(I) BENEFITS RECEIVED BY OFFICIALS AND EMPLOYEES OF THE NATIONAL AND LOCAL GOVERNMENT PURSUANT TO REPUBLIC
ACT NO. 6686; AN ACT AUTHORIZING ANNUAL CHRISTMAS BONUS TO NATIONAL AND LOCAL GOVERNMENT OFFICIALS AND
EMPLOYEES STARTING CY 1988
(II) BENEFITS RECEIVED BY EMPLOYEES PURSUANT TO PRESIDENTIAL DECREE NO. 851, AS AMENDED BY MEMORANDUM ORDER
NO. 28, DATED AUGUST 13, 1986; 13TH MONTH PAY LAW
(III) BENEFITS RECEIVED BY OFFICIALS AND EMPLOYEES NOT COVERED BY PRESIDENTIAL DECREE NO. 851, AS AMENDED BY
MEMORANDUM ORDER NO. 28, DATED AUGUST 13, 1986; AND (13TH MONTH PAY LAW)
(IV) OTHER BENEFITS SUCH AS PRODUCTIVITY INCENTIVES AND CHRISTMAS BONUS.
(F) GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS. - GSIS, SSS, MEDICARE AND PAG-IBIG CONTRIBUTIONS, AND UNION
DUES OF INDIVIDUALS.
(G) GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER CERTIFICATE OF INDEBTEDNESS. - GAINS REALIZED FROM THE
SAME OR EXCHANGE OR RETIREMENT OF BONDS, DEBENTURES OR OTHER CERTIFICATE OF INDEBTEDNESS WITH A MATURITY
OF MORE THAN FIVE (5) YEARS.
(H) GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND. - GAINS REALIZED BY THE INVESTOR UPON REDEMPTION OF
SHARES OF STOCK IN A MUTUAL FUND COMPANY AS DEFINED IN SECTION 22 (BB) OF THIS CODE.

DEDUCTIONS FROM GROSS INCOME

A. KINDS OF DEDUCTIONS 1) ITEMIZED DEDUCTIONS;
2) SPECIAL DEDUCTIONS;
3) OPTIONAL STANDARD DEDUCTION.
B. ITEMIZED DEDUCTIONS a) Ordinary and necessary trade, business or professional expenses;
(SEC. 34) b) Interest;
c) Taxes;
d) Losses;
e) Bad debts;
f) Depreciation;
g) Depletion of oil and gas wells and mines;
h) Charitable and other contributions;
i) Research and development;
j) Pension trusts;
k) Additional requirements for deductibility of certain payments
l) Optional standard deduction
m) Premium payments on health and/or hospitalization insurance of an individual taxpayer.

NOTE: THE ABOVE DEDUCTIBLE ITEMS SHALL BE ALLOWED AS DEDUCTION ONLY IF IT IS

SHOWN THAT THE TAX REQUIRED TO BE DEDUCTED AND WITHHELD THEREFROM
HAS BEEN PAID TO THE BIR
[(SEC. 34 (K)].
C. SPECIAL DEDUCTIONS (A) INSURANCE COMPANIES
(SEC. 37) (A) NET ADDITIONS REQUIRED BY LAW TO BE MADE WITHIN THE YEAR TO RESERVE
FUNDS; AND
(B) THE SUMS OTHER THAN DIVIDENDS PAID WITHIN THE YEAR ON POLICY AND
ANNUITY CONTRACTS.
(B) MUTUAL INSURANCE COMPANIES – ANY PORTION OF THE PREMIUM DEPOSITS
RETURNED TO THEIR POLICY HOLDERS.
(C) MUTUAL MARINE INSURANCE COMPANIES
(A) AMOUNTS PAID FOR REINSURANCE;
(B) AMOUNTS REPAID TO POLICYHOLDERS ON ACCOUNT OF PREMIUMS PREVIOUSLY
PAID BY THEM AND INTEREST PAID UPON THOSE AMOUNT BETWEEN THE
ASCERTAINMENT AND PAYMENT THEREOF.
(D) ASSESSMENT INSURANCE COMPANIES - ACTUAL DEPOSIT OF SUMS WITH THE
OFFICERS OF THE
GOVERNMENT OF THE PHILIPPINES PURSUANT TO LAW, AS ADDITIONS TO GUARANTEE
OR RESERVE FUND

1. ITEMIZED DEDUCTIONS AMPLIFIED

A. EXPENSES IN GENERAL
1) REQUISITES FOR A) ORDINARY AND NECESSARY;
DEDUCTIBILITY OF B) PAID OR INCURRED DURING THE TAXABLE YEAR;
 EXPENSES, IN GENERAL C) DIRECTLY ATTRIBUTABLE TO THE DEVELOPMENT, MANAGEMENT, OPERATION AND/OR
CONDUCT OF THE TRADE, BUSINESS OR EXERCISE OF PROFESSION;
D) SUBSTANTIATED WITH SUFFICIENT EVIDENCE, SUCH AS OFFICIAL RECEIPTS OR OTHER
ADEQUATE RECORDS.
2) REQUISITES FOR A) REASONABLE;
DEDUCTIBILITY OF B) PERSONAL SERVICES ACTUALLY RENDERED;
SALARIES, WAGES, AND C) WITHHOLDING TAX IMPOSED HAS BEEN PAID.
OTHER FORMS OF
COMPENSATION
INCLUDING
THE GROSSED-UP
MONETARY VALUE OF
FRINGE BENEFITS
3) REQUISITES FOR A) REASONABLE;
DEDUCTIBILITY OF B) INCURRED OR PAID WHILE AWAY FROM HOME;
TRAVEL C) INCURRED OR PAID IN THE PURSUIT OF TRADE, BUSINESS OR PROFESSION.
EXPENSES, HERE AND
ABROAD
4) Requisites for deductibility A) REASONABLE;
of rentals B) FOR PURPOSES OF TRADE, BUSINESS OR PROFESSION;
C) TAXPAYER HAS NOT TAKEN OR IS NOT TAKING TITLE OR IN WHICH HE HAS NO EQUITY
OTHER THAN THAT OF A LESSEE, USER OR POSSESSOR.
5) REQUISITES FOR A) MUST BE PAID OR INCURRED DURING THE TAXABLE YEAR;
DEDUCTIBILITY OF B) MUST BE DIRECTLY CONNECTED TO THE DEVELOPMENT, MANAGEMENT AND
ENTERTAINMENT, OPERATION OR TO CONDUCT OF TRADE, BUSINESS OR PROFESSION OR DIRECTLY
AMUSEMENT AND RELATED TO OR IN FURTHERANCE OF THE CONDUCT OF HIS OR ITS TRADE, BUSINESS
RECREATION EXPENSES OR EXERCISE OF PROFESSION;
C) MUST NOT BE CONTRARY TO LAW, MORALS, PUBLIC POLICY OR PUBLIC ORDER;
D) MUST NOT HAVE BEEN PAID, DIRECTLY OR INDIRECTLY, TO AN OFFICIAL OR EMPLOYEE
OF THE NATIONAL GOVERNMENT, OR ANY LOCAL GOVERNMENT UNIT, OR OF ANY
GOVERNMENT-OWNED OR CONTROLLED CORPORATION (GOCC), OR OF A FOREIGN
GOVERNMENT, OR TO A PRIVATE INDIVIDUAL, OR CORPORATION, OR GENERAL
PROFESSIONAL PARTNERSHIP, OR A SIMILAR ENTITY IF IT CONSTITUTES A BRIBE,
KICKBACK OR OTHER SIMILAR PAYMENTS;
E) MUST BE DULY SUBSTANTIATED BY ADEQUATE PROOF. THE OFFICIAL RECEIPTS OR
INVOICES OR BILLS OR STATEMENTS OF ACCOUNTS MUST BE IN THE NAME OF
TAXPAYER CLAIMING THE DEDUCTION;
F) THE APPROPRIATE AMOUNT OF WITHHOLDING TAX, IF APPLICABLE, SHOULD HAVE
BEEN WITHHELD THEREFROM AND PAID TO THE BIR.
6) CEILING ON DEDUCTIBLE A) SALES OF GOODS OR PROPERTIES – ONE-HALF PERCENT (0.50%) OF NET SALES
ENTERTAINMENT, (GROSS SALES LESS SALES RETURNS/ALLOWANCES AND SALES DISCOUNT)
AMUSEMENT AND B) SALE OF SERVICES, INCLUDING EXERCISE OF PROFESSION AND USE OR
RECREATION EXPENSES LEASE OF PROPERTY – ONE PERCENT (1%) OF NET REVENUE (GROSS REVENUE
LESS DISCOUNTS)
7) EXERCISE
ERA CORPORATION IS ENGAGED IN THE SALE OF GOODS AND SERVICES WITH NET SALES/NET REVENUE OF P200,000
AND P100,000 RESPECTIVELY. THE ACTUAL ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSE FOR THE TAXABLE
QUARTER TOTALED TO P3,000.
HOW MUCH IS THE AMOUNT OF THE DEDUCTIBLE ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSE?

B. INTEREST EXPENSE
1) REQUISITES FOR A) THERE MUST BE AN INDEBTEDNESS;
DEDUCTIBILITY OF B) PAID OR INCURRED UPON SUCH INDEBTEDNESS;
INTEREST EXPENSE C) THE INDEBTEDNESS MUST BE THAT OF THE TAXPAYER;
D) CONNECTED WITH TAXPAYER’S TRADE OR BUSINESS OR EXERCISE OF PROFESSION;
E) MUST HAVE BEEN PAID OR INCURRED DURING THE TAXABLE YEAR;
F) MUST HAVE BEEN STIPULATED IN WRITING;
G) MUST BE LEGALLY DUE;
H) MUST NOT BE BETWEEN RELATED TAXPAYERS;
I) MUST NOT BE INCURRED TO FINANCE PETROLEUM OPERATION;
J) IN CASE OF INTEREST INCURRED TO ACQUIRE PROPERTY USED IN TRADE, BUSINESS
OR EXERCISE OF PROFESSION, THE SAME WAS NOT TREATED AS CAPITAL
EXPENDITURE.
2) REDUCTION OF THE ALLOWABLE DEDUCTION FOR INTEREST SHALL BE REDUCED BY AN AMOUNT EQUAL
DEDUCTIBLE INTEREST TO THE FOLLOWING PERCENTAGES OF THE INTEREST INCOME SUBJECT TO FINAL TAX.
EXPENSE BEGINNING JANUARY 1, 2000 – 38%
BEGINNING NOVEMBER 1, 2005 TO DECEMBER 31 2008 – 42%
BEGINNING JANUARY 1, 2009 – 33%
3) INTEREST INCURRED OR INTEREST INCURRED OR PAID BY THE TAXPAYER ON ALL UNPAID BUSINESS-RELATED
PAID ON ALL UNPAID TAXES SHALL BE FULLY DEDUCTIBLE FROM THE GROSS INCOME AND SHALL NOT BE
BUSINESS-RELATED SUBJECT TO REDUCTION BY AN AMOUNT EQUAL TO CERTAIN PERCENTAGE OF THE
TAXES INTEREST INCOME SUBJECT TO FINAL TAX.
4) PREPAID INTEREST OF AN DEDUCTIBLE NOT IN THE YEAR THAT THE INTEREST WAS PAID IN ADVANCE BUT IN THE
INDIVIDUAL UNDER CASH YEAR THAT THE INDEBTEDNESS WAS PAID.
BASIS
5) EXERCISES
A) IN 2010, AN INDIVIDUAL TAXPAYER, USING CASH BASIS OF ACCOUNTING, OBTAINED A P500,000 LOAN FROM A BANK
FOR BUSINESS USE. THE BANK DEDUCTED IN ADVANCE AN INTEREST OF P50,000. IN 2011, THE P500,000 LOAN WAS
PAID IN FULL BY THE TAXPAYER.

HOW MUCH WAS THE DEDUCTIBLE INTEREST IN 2010 AND 2011?

B) USING THE SAME INFORMATION IN LETTER A. EXCEPT THAT PAYMENTS WERE MADE AS FOLLOWS: 2011, P300,000;
2012, P200,000. HOW MUCH WAS THE DEDUCTIBLE INTEREST EXPENSE IN 2010, 2011 AND 2012?
 C) AJD CORPORATION USED ACCRUAL BASIS YEARLY SINCE IT WAS ORGANIZED. ON MARCH 1, 2010 IT PURCHASED AN
EQUIPMENT FOR P1,120,000, VAT INCLUSIVE. THE EQUIPMENT WAS ESTIMATED TO HAVE A LIFE OF 5 YEARS. THE
EQUIPMENT WAS FINANCED THROUGH A ONE-YEAR LOAN WITH BANCO DE PLATA WITH INTEREST AT THE RATE OF 18%
PER ANNUM BEGINNING JANUARY 16, 2010, WHICH WAS DISCOUNTED IN FULL. DURING THE SAME YEAR, THE
CORPORATION ALSO PAID INTEREST ON BUSINESS-RELATED TAXES AMOUNTING TO P50,000.

IN 2010, AJD HAD INTEREST INCOME FROM ITS BANK DEPOSIT IN THE AMOUNT OF P100,000. AJD DECIDED TO EXPENSE
OUTRIGHT THE INTEREST INCURRED TO ACQUIRE THE EQUIPMENT.

QUESTION 1 - HOW MUCH WAS THE DEDUCTIBLE INTEREST?

2 - ASSUMING AJD CORPORATION DECIDED TO CAPITALIZE THE INTEREST INCURRED TO ACQUIRE THE
EQUIPMENT, HOW MUCH WOULD BE THE TOTAL COST OF THE EQUIPMENT?

D) COU CORPORATION PAID THE FOLLOWING DURING THE YEAR 2011:

INTEREST FOR LATE PAYMENT OF INCOME TAX FOR 2010 P 5,000
SURCHARGE AND COMPROMISE PENALTY FOR LATE PAYMENT OF INCOME TAX FOR 2010 7,250
INTEREST ON BONDS ISSUED BY COU CORPORATION 100,000
INTEREST ON MONEY BORROWED BY THE CORPORATION FROM CONRAD UBERITA, 60% OWNER OF COU
CORPORATION 50,000
INTEREST ON PREFERRED STOCK WHICH IN REALITY IS A DIVIDEND 20,000

HOW MUCH IS THE DEDUCTIBLE INTEREST?

C. TAXES
1) Requisites for deductibility
A. PAID OR INCURRED WITHIN THE TAXABLE YEAR;
B. CONNECTED WITH THE TAXPAYER’S PROFESSION, TRADE OR BUSINESS.
2) Meaning of the term A. THE TERM “TAXES” INCLUDES NATIONAL AND LOCAL TAXES, AND MEANS TAX PROPER
“taxes” ONLY.
B. NO DEDUCTION SHALL BE CLAIMED FOR ANY SURCHARGE OR PENALTY ON
DELINQUENT TAXES.
3) Interest on delinquent DEDUCTIBLE AS INTEREST EXPENSE, NOT AS TAXES.
taxes
4) Non-deductible Taxes A. PHILIPPINE INCOME; D. FOREIGN INCOME TAX CLAIMED AS TAX CREDIT;
B. ESTATE AND DONOR’S TAXES; E. STOCK TRANSACTION TAX
C. SPECIAL ASSESSMENT; F. VALUE-ADDED TAX
5) CREDIT AGAINST TAX FOR ALLOWABLE INCOME TAX CREDIT – LOWER BETWEEN:
A. ACTUAL FOREIGN INCOME TAX PAID; AND
TAXES IN FOREIGN B. STATUTORY LIMITATION.

COUNTRIES

6) Year in which tax credit is A. AT THE OPTION OF THE TAXPAYER AND IRRESPECTIVE OF THE METHOD OF
taken ACCOUNTING USED, TAX CREDIT SHALL BE TAKEN IN THE YEAR IN WHICH THE TAXES
OF THE FOREIGN COUNTRY WERE INCURRED;
B. ONCE THE OPTION TO CREDIT THE FOREIGN TAXES IN THE YEAR INCURRED IS MADE,
THE CREDITS FOR ALL SUBSEQUENT YEARS SHALL BE TAKEN UPON THE SAME BASIS;
C. NO PORTION OF ANY SUCH FOREIGN TAXES SHALL BE ALLOWED AS DEDUCTION IN
THE SAME OR ANY SUCCEEDING YEAR.
7) EXERCISE
MR. JOSE SAN JOSE, RESIDENT CITIZEN, MARRIED, DERIVED INCOME FROM SOURCES WITHIN AND WITHOUT THE
PHILIPPINES.
THE FOLLOWING WERE THE DATA ON HIS TAXABLE INCOME AND FOREIGN TAXES FOR THE YEAR 2011:
NET INCOME, PHILIPPINES P150,000
NET INCOME, COUNTRY A (BEFORE P50,000 INCOME TAX) 200,000
NET INCOME, COUNTRY B (AFTER P30,000 INCOME TAX) 70,000
NET INCOME, COUNTRY C (BEFORE P32,000 INCOME TAX) 150,000
NET INCOME, COUNTRY D (150,000 )
NET INCOME, COUNTRY E (NO INCOME TAX PAID) 50,000
THE TAXES PAID BY MR. SAN JOSE WHEN HE FILED THE QUARTERLY DECLARATIONS FOR THE FIRST THREE (3) QUARTERS
IN 2010 WERE P10,000.

HOW MUCH WAS THE TAX PAYABLE IN THE PHILIPPINES WHEN THE TAXPAYER FILED HIS ANNUAL RETURN, ASSUMING HE
OPTED TO CLAIM FOREIGN INCOME TAXES AS: 1) TAX CREDIT? 2) DEDUCTION?

D. LOSSES
1) REQUISITES FOR A) ACTUALLY SUSTAINED DURING THE TAXABLE YEAR;
deductibility of losses B) NOT COMPENSATED FOR BY INSURANCE OR OTHER FORMS OF INDEMNITY;
C) INCURRED IN TRADE, PROFESSION OR BUSINESS;
D) PROPERTY IS CONNECTED WITH TRADE, BUSINESS OR PROFESSION;
E) ARISING FROM FIRES, STORMS, SHIPWRECK, OR OTHER CASUALTIES, OR FROM
ROBBERY, THEFT OR EMBEZZLEMENT;
F) DECLARATION OF LOSS IS SUBMITTED WITHIN 45 DAYS FROM THE DATE OF DISCOVERY
OF THE
CASUALTY OR ROBBERY, THEFT OR EMBEZZLEMENT GIVING RISE TO THE LOSS;
G) NOT CLAIMED AS DEDUCTION FOR ESTATE TAX PURPOSES IN THE ESTATE TAX RETURN.
2) NET OPERATING LOSS A) MEANING OF NET OPERATING LOSS - EXCESS OF ALLOWABLE DEDUCTION OVER
GROSS INCOME OF THE BUSINESS IN A TAXABLE YEAR.
B) NET OPERATING LOSS CARRY OVER - PERTAINS TO NET OPERATING LOSS OF THE
BUSINESS OR ENTERPRISE FOR ANY TAXABLE YEAR IMMEDIATELY PRECEDING THE
CURRENT TAXABLE YEAR.
C) REQUISITES FOR DEDUCTIBILITY OF NOLCO
 (1) THE OPERATING LOSS HAD NOT BEEN PREVIOUSLY OFFSET AS DEDUCTION FROM
GROSS INCOME;
(2) THERE HAS BEEN NO SUBSTANTIAL CHANGE IN THE OWNERSHIP OF THE BUSINESS
OR ENTERPRISE IN THAT:
(A) NOT LESS THAN 75% IN NOMINAL VALUE OF OUTSTANDING ISSUED SHARES,
IF THE BUSINESS IS IN THE NAME OF A CORPORATION, IS HELD BY OR ON
BEHALF OF THE SAME PERSONS;
(B) 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.
D) CARRY OVER PERIOD - THE NET OPERATING LOSS SHALL BE CARRIED OVER AS A
DEDUCTION FROM GROSS INCOME FOR THE NEXT 3 SUCCEEDING TAXABLE YEARS
IMMEDIATELY FOLLOWING THE YEAR OF SUCH LOSS.
E) NET OPERATING LOSS FOR MINES OTHER THAN OIL AND GAS WELLS
(1) FOR MINES OTHER THAN OIL AND GAS WELLS, A NET OPERATING LOSS INCURRED
IN ANY OF THE FIRST 10 YEARS OF OPERATION MAY BE CARRIED OVER AS A
DEDUCTION FROM THE TAXABLE INCOME FOR THE NEXT 5 YEARS IMMEDIATELY
FOLLOWING THE YEAR OF SUCH LOSS.
(2) THE ENTIRE AMOUNT OF THE LOSS SHALL BE CARRIED OVER TO THE FIRST 5
TAXABLE YEARS FOLLOWING THE LOSS, AND ANY PORTION OF SUCH LOSS WHICH
EXCEEDS THE TAXABLE INCOME OF SUCH FIRST YEAR SHALL BE DEDUCTED IN LIKE
MANNER FROM THE TAXABLE INCOME OF THE NEXT REMAINING 4 YEARS.
3) CAPITAL LOSS DEDUCTIBLE FROM CAPITAL GAIN ONLY
4) LOSS ON WASH SALES A. LOSSES FROM WASH SALES ARE NOT DEDUCTIBLE
B. GAINS FROM WASH SALES ARE TAXABLE
5) WAGERING LOSSES DEDUCTIBLE TO THE EXTENT OF THE GAINS FROM WAGERING TRANSACTIONS
6) ABANDONMENT LOSSES A. IF CONTRACT AREA WHERE PETROLEUM OPERATIONS ARE UNDERTAKEN IS PARTIALLY
OR WHOLLY ABANDONED, ALL ACCUMULATED EXPLORATION AND DEVELOPMENT
EXPENDITURES PERTAINING TO CONTRACT AREA SHALL BE ALLOWED AS A
DEDUCTION.
B. IF PRODUCING WELL IS SUBSEQUENTLY ABANDONED, THE UNAMORTIZED COSTS, AS
WELL AS THE UNDEPRECIATED COSTS OF EQUIPMENT DIRECTLY USED, SHALL BE
ALLOWED AS DEDUCTION IN THE YEAR SUCH WELL, EQUIPMENT OR FACILITY IS
ABANDONED.
7) LOSS DUE TO
VOLUNTARY REMOVAL DEDUCTIBLE
OF BUILDING
INCIDENT TO RENEWAL
8) REAL ESTATE BOUGHT NOT DEDUCTIBLE EXPENSE ON ACCOUNT OF COST OF REMOVAL, THE VALUE OF THE REAL
UPON WHICH IS ESTATE, EXCLUSIVE OF THE OLD IMPROVEMENTS, BEING PRESUMABLY EQUAL TO THE
LOCATED A BUILDING PURCHASE PRICE OF THE LAND AND BUILDING PLUS THE COST OF REMOVAL
9) LOSS OF USEFUL LIFE ACTUAL LOSS IS DEDUCTIBLE
10) SHRINKAGE IN THE NOT DEDUCTIBLE. BUT IF A STOCK OF A CORPORATION BECOMES WORTHLESS, THE COST
VALUE OF STOCK OR OTHER BASIS MAY BE DEDUCTED IN THE TAXABLE YEAR THE STOCK BECAME
WORTHLESS.
11) CORPORATE A. LOSS IS NOT DEDUCTIBLE
READJUSTMENT B. GAIN MAY BE RECOGNIZED IF THE TAXPAYER RECEIVED CASH AND PROPERTY
(MERGER AND
CONSOLIDATION)

12) TRANSFER OF PROPERTY A. LOSS IS NOT RECOGNIZED

FOR STOCK THAT LED TO B. GAIN MAY BE RECOGNIZED IF THE TAXPAYER RECEIVED CASH AND PROPERTY IN
CONTROL OF ADDITION TO THE SHARES RECEIVED
CORPORATION
13) EXERCISES
A) A DOMESTIC CORPORATION HAS THE FOLLOWING DATA ON GROSS INCOME AND EXPENSES:
GROSS INCOME BUSINESS EXPENSES
1997 P500,000 P550,000
1998 P700,000 P900,000
1999 P900,000 P800,000
2000 P600,000 P550,000
2001 P700,000 P680,000
2002 P800,000 P600,000

HOW MUCH IS THE TAXABLE NET INCOME IN 2002?

B) A TAXPAYER HAS A BUSINESS PROPERTY HAVING AN ADJUSTED BASIS OF P100,000. IT IS COMPLETELY DESTROYED
BY FIRE IN 2006. THE ONLY CLAIM FOR REIMBURSEMENT CONSISTS OF AN INSURANCE CLAIM FOR P80,000 IS
SETTLED IN 2007.

QUESTION 1 – IN WHAT YEAR CAN THE TAXPAYER DEDUCT THE CASUALTY LOSS?
2 – HOW MUCH IS THE DEDUCTIBLE LOSS?

C) J. IRENEO ACQUIRED MACHINERY FOR USE IN HIS BUSINESS. AFTER A STRONG TYPHOON, THE MACHINERY
SUFFERED PARTIAL DAMAGE. THE FOLLOWING DATA WERE MADE AVAILABLE IN CONNECTION WITH THE
DETERMINATION OF THE DEDUCTIBLE LOSS:
COST P500,000
ACCUMULATED DEPRECIATION 300,000
RESTORATION COST 250,000
ESTIMATED REMAINING USEFUL LIFE 5 YEARS

QUESTION 1 – HOW MUCH WAS THE DEDUCTIBLE LOSS?

2 – HOW MUCH WOULD BE THE NEW BASIS FOR DEPRECIATION?

D) A TAXPAYER UNDER CALENDAR YEAR HAS THE FOLLOWING SELECTED TRANSACTIONS:

 SEPT. 9, 2004 – PURCHASED 100 SHARES OF KAYE CO. COMMON FOR P5,000.
DEC. 21, 2006 – PURCHASED 50 SHARES OF KAYE CO. COMMON FOR P2,750.
DEC. 26, 2006 – SOLD THE 100 SHARES PURCHASED ON SEPT. 9, 2004 FOR P4,000.
JAN. 2, 2007 - PURCHASED 25 SHARES OF KAYE CO. COMMON FOR P1,125.

COMPUTE THE FOLLOWING:

1) SHARES SOLD AT A LOSS WITHOUT COVERING ACQUISITION
2) LOSS ON WASH SALE AND THE CAPITAL LOSS
3) THE ADJUSTED COST OF THE SHARES BOUGHT ON DECEMBER 21, 2006 AND JANUARY 2, 2007

E) ANTON CORPORATION WAS MERGED WITH CONRAD CORPORATION. A STOCKHOLDER OF ANTON CORPORATION,
WHICH CEASED TO EXIST, SURRENDERED HIS ANTON CORPORATION SHARES VALUED AT P8,000 IN EXCHANGE FOR
CONRAD CORPORATION SHARES VALUED AT P10,000. HOW MUCH IS THE GAIN TO BE RECOGNIZED?

F) A STOCKHOLDER OF A CORPORATION THAT WAS MERGED WITH ANOTHER CORPORATION HAD THE FOLLOWING
DATA:
FMV OF SHARES RECEIVED P10,000
CASH RECEIVED 3,000
FMV OF PROPERTY RECEIVED 500
COST OF THE SHARES SURRENDERED 9,000

COMPUTE THE FOLLOWING: 1) THE AMOUNT OF GAIN RECOGNIZED 2) ADJUSTED BASIS OF THE SHARES RECEIVED.

G) (PHIL. CPA) 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
A PAR VALUE OF P1,000,000. AS A RESULT OF THE TRANSFER, HE BECAME THE MAJORITY STOCKHOLDER OF THE
CORPORATION.

HOW MUCH IS THE GAIN (LOSS) TO BE RECOGNIZED?

E. BAD DEBTS
1) REQUISITES FOR A) THERE MUST BE AN EXISTING INDEBTEDNESS DUE TO THE TAXPAYER WHICH MUST BE
DEDUCTIBILITY VALID AND
LEGALLY DEMANDABLE;
B) CONNECTED WITH TAXPAYER’S PROFESSION, TRADE OR BUSINESS;
C) NOT SUSTAINED IN A TRANSACTION ENTERED INTO BETWEEN RELATED PARTIES;
D) ACTUALLY CHARGED OFF THE BOOKS OF ACCOUNTS OF THE TAXPAYER AS OF THE END
OF THE TAXABLE
YEAR;
E) ACTUALLY ASCERTAINED TO BE WORTHLESS AND UNCOLLECTIBLE AS OF THE END OF
THE TAXABLE YEAR.
2) MEASURE OF BAD DEBTS A. IF A CORPORATION COMPUTES THE INCOME UPON THE BASIS OF VALUING ITS NOTES
OR ACCOUNTS RECEIVABLE AT THEIR FAIR MARKET VALUE, THE AMOUNT DEDUCTIBLE
FOR BAD DEBTS IN ANY CASE IS LIMITED TO SUCH ORIGINAL VALUATION.
B. A PURCHASER OF ACCOUNTS RECEIVABLE WHICH CANNOT BE COLLECTED AND ARE
CONSEQUENTLY CHARGED OFF THE BOOKS AS BAD DEBTS IS ENTITLED TO DEDUCT
THEM, THE AMOUNT OF DEDUCTION BEING BASED UPON THE PRICE PAID FOR THEM
AND NOT UPON THEIR FACE VALUE.
C. ONLY THE DIFFERENCE BETWEEN THE AMOUNT RECEIVED IN DISTRIBUTION OF THE
ASSETS OF A BANKRUPT COMPANY AND THE AMOUNT OF THE CLAIM MAY BE DEDUCTED
AS BAD DEBT.
D. THE DIFFERENCE BETWEEN THE AMOUNT RECEIVED BY A CREDITOR OF A DECEDENT
IN THE
DISTRIBUTION OF THE ASSETS OF THE DECEDENT’S ESTATE AND THE AMOUNT OF THE
CLAIM MAY BE CONSIDERED A WORTHLESS DEBT.

F. DEPRECIATION
1) Requisites for A. REASONABLE;
deductibility B. PROPERTY IS USED IN THE TRADE OR BUSINESS;
C. PROPERTY MUST HAVE A LIMITED USEFUL LIFE;
D. ALLOWANCE MUST BE CHARGED OFF DURING THE YEAR.
2) Methods of depreciation A. STRAIGHT LINE METHOD;
B. DECLINING BALANCE METHOD;
C. SUM-OF-THE-YEARS-DIGIT METHOD;
D. OTHER METHODS WHICH MAY BE PRESCRIBED BY THE SECRETARY OF FINANCE UPON
RECOMMENDATION OF THE COMMISSIONER.
3) Depreciation of A. DEPRECIATION OF PROPERTIES DIRECTLY RELATED TO PRODUCTION OF PETROLEUM
properties used in INITIALLY PLACED IN SERVICE IN A TAXABLE YEAR SHALL BE ALLOWED UNDER STRAIGHT-
petroleum operations LINE METHOD OR DECLINING BALANCE METHOD ON THE BASIS OF AN ESTIMATED LIFE
OF 10 YEARS OR SUCH SHORTER LIFE AS MAY BE PERMITTED BY THE COMMISSIONER.
B. PROPERTIES NOT USED DIRECTLY IN THE PRODUCTION OF PETROLEUM SHALL
DEPRECIATED UNDER THE STRAIGHT-LINE METHOD ON THE BASIS OF AN ESTIMATED
LIFE OF 5 YEARS.
4) Depreciation of properties A. AT THE NORMAL RATE OF DEPRECIATION IF THE EXPECTED LIFE IS 10 YEARS OR LESS;
used in mining operations B. DEPRECIATED OVER ANY NUMBER OF YEARS BETWEEN 5 YEARS AND THE EXPECTED LIFE
other than petroleum IF THE LATTER IS MORE THAN 10 YEARS.
operations

G. DEPLETION OF OIL AND GAS WELLS AND MINES

 1) Method of depletion COST-DEPLETION METHOD
2) Limitation of depletion IT CANNOT EXCEED THE CAPITAL INVESTED IN THE MINE.
3) Intangible exploration A. DEDUCTIBLE IN THE YEAR INCURRED IF SUCH EXPENDITURES ARE INCURRED FOR NON-
and development drilling PRODUCING WELLS AND/OR MINES;
costs B. DEDUCTIBLE IN FULL OR MAY BE CAPITALIZED AND AMORTIZED IF SUCH EXPENDITURES
INCURRED ARE FOR PRODUCING WELLS AND/OR MINES IN THE SAME CONTRACT AREA.
4) Total amount deductible A. NOT TO EXCEED 25% OF THE NET INCOME FROM MINING OPERATIONS COMPUTED
for exploration and WITHOUT THE BENEFIT OF ANY TAX INCENTIVES UNDER EXISTING LAWS.
development
expenditures (if the B. ACTUAL EXPLORATION AND DEVELOPMENT EXPENDITURES MINUS 25% OF THE NET
taxpayer elects to INCOME FROM MINING SHALL BE CARRIED FORWARD TO THE SUCCEEDING YEARS UNTIL
deduct exploration and FULLY DEDUCTED.
development
expenditures)

H. CHARITABLE AND OTHER CONTRIBUTIONS

1) Requisites for A. ACTUALLY PAID OR MADE WITHIN THE TAXABLE YEAR;
deductibility B. MADE TO THE PHILIPPINE GOVERNMENT OR ANY POLITICAL SUBDIVISIONS OR TO ANY
NON-PROFIT ORGANIZATIONS OR INSTITUTIONS SPECIFIED IN THE TAX CODE;
C. MUST BE EVIDENCED BY ADEQUATE RECORDS OR RECEIPTS.
2) Contributions deductible A. THOSE MADE FOR THE USE OF THE GOVERNMENT OF THE PHILIPPINES OR ANY OF ITS
with limit AGENCIES OR
ANY POLITICAL SUBDIVISION EXCLUSIVELY FOR PUBLIC PURPOSE;
B. THOSE MADE TO ACCREDITED DOMESTIC CORPORATION OR ASSOCIATIONS ORGANIZED
AND OPERATED
EXCLUSIVELY FOR:
1) RELIGIOUS;
2) CHARITABLE;
3) SCIENTIFIC;
4) YOUTH AND SPORTS DEVELOPMENT;
5) CULTURAL OR EDUCATIONAL PURPOSES; OR
6) REHABILITATION OF VETERANS.
C. THOSE MADE TO SOCIAL WELFARE ORGANIZATIONS;
D. THOSE MADE TO NON-GOVERNMENT ORGANIZATIONS.
3) Contributions deductible A. DONATIONS TO GOVERNMENT OF THE PHILIPPINES OR TO ANY OF ITS AGENCIES OR
in full POLITICAL
SUBDIVISIONS, INCLUDING FULLY OWNED GOVERNMENT CORPORATIONS, EXCLUSIVELY
TO FINANCE, TO
PROVIDE FOR, OR TO BE USED IN UNDERTAKING PRIORITY ACTIVITIES IN EDUCATION,
HEALTH, YOUTH
AND SPORTS DEVELOPMENT, HUMAN SETTLEMENTS, SCIENCE AND CULTURE, AND
ECONOMIC
DEVELOPMENT.
B. DONATIONS TO CERTAIN FOREIGN INSTITUTIONS OR INTERNATIONAL ORGANIZATIONS;
C. DONATIONS TO ACCREDITED NON-GOVERNMENT ORGANIZATIONS (NONPROFIT
DOMESTIC CORPORATIONS):
1) ORGANIZED AND OPERATED EXCLUSIVELY FOR SCIENTIFIC, RESEARCH, EDUCATIONAL,
CHARACTER BUILDING AND YOUTH AND SPORTS DEVELOPMENT, HEALTH, SOCIAL
WELFARE, CULTURAL AND CHARITABLE PURPOSES, OR A COMBINATION OF THESE;
2) WHICH NOT LATER THAN THE 15TH DAY OF THE 3RD MONTH AFTER THE CLOSE OF THE
TAXABLE YEAR IN WHICH THE CONTRIBUTIONS ARE RECEIVED, MAKES UTILIZATION
OF THE CONTRIBUTIONS DIRECTLY FOR THE PURPOSE OR FUNCTION FOR WHICH THE
ORGANIZATION IS ORGANIZED AND OPERATED;
3) THE ADMINISTRATIVE EXPENSE SHALL, ON ANNUAL BASIS, NOT EXCEED 30% OF THE
TOTAL EXPENSES;
4) THE ASSETS OF WHICH, IN THE EVENT OF DISSOLUTION, WOULD BE DISTRIBUTED TO
ANOTHER NONPROFIT DOMESTIC CORPORATION ORGANIZED FOR SIMILAR PURPOSE
OR PURPOSES, OR TO THE STATE FOR PUBLIC PURPOSE, OR WOULD BE DISTRIBUTED
BY A COURT TO ANOTHER ORGANIZATION TO BE USED IN SUCH MANNER AS IN THE
JUDGMENT OF SAID COURT SHALL BEST ACCOMPLISH THE GENERAL PURPOSE FOR
WHICH THE DISSOLVED ORGANIZATION WAS ORGANIZED.
4) Limitation on the A. INDIVIDUAL – 10% OF TAXABLE INCOME DERIVED FROM TRADE, BUSINESS OR
deductible amount PROFESSION BEFORE CHARITABLE AND OTHER CONTRIBUTIONS.
B. CORPORATION – 5% OF TAXABLE INCOME DERIVED FROM TRADE, BUSINESS OF
PROFESSION BEFORE CHARITABLE AND OTHER CONTRIBUTIONS.
5) Valuation THE AMOUNT OF ANY CHARITABLE CONTRIBUTION OF PROPERTY OTHER THAN MONEY
SHALL BE BASED ON THE ACQUISITION COST OF SAID PROPERTY.
6) CONTRIBUTIONS A. IN DETERMINING ITS NET INCOME, THE GENERAL PROFESSIONAL PARTNERSHIP CAN
DEDUCTIBLE BY A DEDUCT
GENERAL CONTRIBUTIONS DEDUCTIBLE IN FULL;
PROFESSIONAL B. CONTRIBUTIONS SUBJECT TO LIMIT SHALL BE CLAIMED AND DEDUCTED BY THE
PARTNERSHIP PARTNERS IN PROPORTION
TO THEIR RESPECTIVE INTEREST IN THE PARTNERSHIP.
7) EXERCISE
AN INDIVIDUAL TAXPAYER, MARRIED, AND WITH TWO (2) QUALIFIED DEPENDENT CHILDREN, HAS THE FOLLOWING
DATA FOR THE YEAR 2011:
GROSS BUSINESS INCOME P500,000
LONG TERM CAPITAL GAIN 20,000
SHORT TERM CAPITAL LOSS 5,000
DEDUCTIONS (EXCLUDING CHARITABLE AND OTHER CONTRIBUTIONS) 124,200
CONTRIBUTIONS TO UNIVERSITY OF THE PHILIPPINES 10,000
CONTRIBUTIONS TO A NON-PROFIT RELIGIOUS DOMESTIC CORPORATION 25,000
CONTRIBUTION OF OFFICE EQUIPMENT TO A NON-PROFIT ORGANIZATION FOR THE REHABILITATION OF VETERANS
(ACQUISITION COST, P20,000; FMV, P15,000)
 HOW MUCH IS THE TAXABLE NET INCOME?

I. RESEARCH AND DEVELOPMENT

1) REQUISITES FOR A. PAID OR INCURRED BY THE TAXPAYER IN CONNECTION WITH HIS TRADE, BUSINESS OR
DEDUCTIBILITY PROFESSION;
B. NOT TREATED AS ORDINARY AND NECESSARY EXPENSES;
C. CHARGEABLE TO CAPITAL ACCOUNT BUT NOT CHARGEABLE TO PROPERTY OF A
CHARACTER WHICH IS
SUBJECT TO DEPRECIATION OR DEPLETION.
2) AMORTIZATION PERIOD RATABLY DISTRIBUTED OVER A PERIOD OF NOT LESS THAN SIXTY (60) MONTHS AS MAY BE
OF ELECTED BY THE TAXPAYER (BEGINNING WITH THE MONTH IN WHICH THE TAXPAYER FIRST
DEFERRED RESEARCH REALIZES BENEFITS FROM SUCH EXPENDITURES).
AND
DEVELOPMENT
3) LIMITATIONS ON A. ANY EXPENDITURE FOR THE ACQUISITION OR IMPROVEMENT OF LAND, OR FOR THE
DEDUCTION OF IMPROVEMENT OF PROPERTY TO BE USED IN CONNECTION WITH RESEARCH AND
RESEARCH AND DEVELOPMENT OF A CHARACTER WHICH IS SUBJECT TO DEPRECIATION AND DEPLETION;
DEVELOPMENT AND
B. ANY EXPENDITURE PAID OR INCURRED FOR THE PURPOSE OF ASCERTAINING THE
EXISTENCE, LOCATION, EXTENT, OR QUALITY OF ANY DEPOSIT OR ORE OR OTHER
MINERAL, INCLUDING OIL OR GAS.

J. PENSION TRUSTS
1) Requisites for A. REASONABLE;
deductibility B. ESTABLISHED AND MAINTAINED BY EMPLOYER;
C. FOR THE PAYMENT OF PENSIONS TO EMPLOYEES.
2) AMOUNT DEDUCTIBLE A. CONTRIBUTION FOR CURRENT PENSION – IN FULL (CONSIDERED ORDINARY AND
NECESSARY EXPENSE);
B. CONTRIBUTION FOR PAST PENSION – APPORTIONED IN EQUAL PARTS OVER A PERIOD
OF 10 YEARS.
3) EXERCISE: AN EMPLOYER MAINTAINS PENSION TRUST FOR ITS EMPLOYEES. THE FOLLOWING CONTRIBUTIONS ARE
MADE:
2009 2010 2011
CURRENT SERVICE COSTS P 100,000 P 100,000 P 100,000
PAST SERVICE COSTS 80,000 60,000 -
TOTAL CONTRIBUTIONS P 180,000 P 160,000 P 100,000

HOW MUCH IS THE DEDUCTIBLE PENSION CONTRIBUTIONS FOR THE YEAR 2009, 2010 AND 2011?

K. OPTIONAL STANDARD DEDUCTIONS (OSD) (RR NO. 16-2008 AS AMENDED BY RR NO. 2-2010)
1) PERSONS COVERED THE FOLLOWING MAY BE ALLOWED TO CLAIM OSD IN LIEU OF THE ITEMIZED DEDUCTIONS
(I.E. ITEMS OF ORDINARY AND NECESSARY EXPENSES ALLOWED UNDER SECTION 34 (A) TO
(J) AND (M), SECTION 37, OTHER SPECIAL LAWS, IF APPLICABLE):

A) INDIVIDUALS B) CORPORATIONS
(1) RESIDENT CITIZEN (1) DOMESTIC CORPORATION
(2) NON-RESIDENT CITIZEN (2) RESIDENT FOREIGN
CORPORATION
(3) RESIDENT ALIEN
(4) TAXABLE ESTATES AND TRUSTS
2) DETERMINATION OF A) THE OSD ALLOWED TO INDIVIDUAL TAXPAYERS SHALL BE A MAXIMUM OF FORTY PERCENT
THE AMOUNT OF OSD (40%) OF GROSS SALES (IF ON ACCRUAL BASIS) OR GROSS RECEIPTS (IF ON CASH BASIS)
FOR INDIVIDUALS DURING THE TAXABLE YEAR.
B) THE “COST OF SALES” IN CASE OF INDIVIDUAL SELLER OF GOODS, OR THE “COST OF
SERVICES” IN THE CASE OF INDIVIDUAL SELLER OF SERVICES, ARE NOT ALLOWED TO BE
DEDUCTED FOR PURPOSES OF DETERMINING THE BASIS OF THE OSD
C) FOR OTHER INDIVIDUAL TAXPAYERS ALLOWED BY LAW TO REPORT THEIR INCOME AND
DEDUCTIONS UNDER A DIFFERENT METHOD OF ACCOUNTING (E.G. PERCENTAGE OF
COMPLETION BASIS, ETC.) OTHER THAN CASH AND ACCRUAL METHOD OF ACCOUNTING,
THE “GROSS SALES” OR “GROSS RECEIPTS” SHALL BE DETERMINED IN ACCORDANCE
WITH SAID ACCEPTABLE METHOD.
 3) Determination of the A) IN THE CASE OF CORPORATE TAXPAYERS, THE OSD ALLOWED SHALL BE IN AN AMOUNT
amount of OSD for NOT EXCEEDING FORTY PERCENT (40%) OF THEIR GROSS INCOME.
corporations B) “GROSS INCOME” SHALL MEAN THE GROSS SALES LESS SALES RETURNS, DISCOUNTS AND
ALLOWANCES
AND COST OF GOODS SOLD.
C) “GROSS SALES” SHALL INCLUDE ONLY SALES CONTRIBUTORY TO INCOME TAXABLE UNDER
SECTION 27(A) OF THE TAX CODE.
D) “COST OF GOODS SOLD” SHALL INCLUDE THE PURCHASE PRICE OR COST TO PRODUCE
THE MERCHANDISE AND ALL EXPENSES DIRECTLY INCURRED IN BRINGING THEM TO
THEIR PRESENT LOCATION AND USE.
E) IN THE CASE OF SELLERS OF SERVICES, THE TERM “GROSS INCOME” MEANS “GROSS
RECEIPTS” LESS SALES RETURNS, ALLOWANCES, DISCOUNTS AND COST OF SERVICES.
F) “COST OF SERVICES” MEANS ALL DIRECT COSTS AND EXPENSES NECESSARILY INCURRED
TO PROVIDE THE SERVICES REQUIRED BY THE CUSTOMERS AND CLIENTS SUCH AS:
(1) SALARIES AND EMPLOYEE BENEFITS OF PERSONNEL, CONSULTANTS AND SPECIALISTS
DIRECTLY RENDERING THE SERVICES, AND
(2) COST OF FACILITIES DIRECTLY UTILIZED IN PROVIDING THE SERVICE SUCH AS
DEPRECIATION OR RENTAL OF EQUIPMENT USED AND COST OF SUPPLIES.
G) “COST OF SERVICES” SHALL NOT INCLUDE INTEREST EXPENSE EXCEPT IN THE CASE OF
BANKS AND OTHER FINANCIAL INSTITUTIONS.
H) “GROSS RECEIPTS” MEANS AMOUNTS ACTUALLY OR CONSTRUCTIVELY RECEIVED DURING
THE TAXABLE YEAR.
I) FOR TAXPAYERS ENGAGED AS SELLERS OF SERVICES BUT EMPLOYING THE ACCRUAL BASIS
OF ACCOUNTING FOR THEIR INCOME, THE TERM “GROSS RECEIPTS” SHALL MEAN
AMOUNTS EARNED AS GROSS REVENUE DURING THE TAXABLE YEAR.
J) THE ITEMS OF GROSS INCOME UNDER SECTION 32 (A) OF THE TAX CODE, AS AMENDED,
WHICH ARE REQUIRED TO BE DECLARED IN THE INCOME TAX RETURN OF THE TAXPAYER
FOR THE TAXABLE YEAR ARE PART OF THE GROSS INCOME AGAINST WHICH THE OSD
MAY BE DEDUCTED IN ARRIVING AT TAXABLE INCOME. PASSIVE INCOME WHICH HAVE
BEEN SUBJECTED TO A FINAL TAX AT SOURCE SHALL NOT FORM PART OF THE GROSS
INCOME FOR PURPOSES OF COMPUTING THE FORTY PERCENT (40%) OPTIONAL
STANDARD DEDUCTION.
4) DETERMINATION OF A) SINCE THE TAXABLE INCOME IS IN THE HANDS OF THE PARTNER, AS A RULE APART FROM
THE OSD FOR GENERAL THE EXPENSES CLAIMED BY GPP IN DETERMINING ITS NET INCOME, THE INDIVIDUAL
PROFESSIONAL PARTNER CAN STILL CLAIM DEDUCTIONS INCURRED OR PAID BY HIM THAT CONTRIBUTED
PARTNERSHIPS (GPP) TO THE EARNING OF THE INCOME TAXABLE TO HIM.
AND PARTNERS OF GPP B) IF THE GPP AVAILED OF THE ITEMIZED DEDUCTIONS IN COMPUTING ITS NET INCOME,
THE PARTNERS MAY STILL CLAIM ITEMIZED DEDUCTIONS FROM SAID SHARE, PROVIDED,
THAT, IN CLAIMING ITEMIZED DEDUCTIONS, THE PARTNER IS PRECLUDED FROM
CLAIMING THE SAME EXPENSES ALREADY CLAIMED BY THE GPP.
C) IF THE GPP AVAILED OF ITEMIZED DEDUCTIONS, THE PARTNERS ARE NOT ALLOWED TO
CLAIM THE OSD FROM THEIR SHARES IN THE NET INCOME BECAUSE OSD IS A PROXY FOR
ALL THE ITEMS OF DEDUCTION ALLOWED IN ARRIVING TAXABLE INCOME. THIS MEANS
THAT THE OSD IS IN LIEU OF THE ITEMS OF DEDUCTIONS CLAIMED BY THE GPP AND THE
ITEMS OF DEDUCTIONS CLAIMED BY THE PARTNERS.
D) IF THE GPP AVAILS OF OSD IN COMPUTING ITS NET INCOME, THE PARTNERS COMPRISING
IT CAN NO LONGER CLAIM FURTHER DEDUCTIONS FROM THEIR SHARE IN THE SAID NET
INCOME FOR THE FOLLOWING REASONS:
1) THE PARTNERS’ DISTRIBUTIVE SHARE IN THE GPP IS TREATED AS HIS GROSS INCOME
NOT HIS GROSS SALES/RECEIPTS AND THE 40% OSD ALLOWED TO INDIVIDUALS IS
SPECIFICALLY MANDATED TO BE DEDUCTED NOT FROM HIS GROSS INCOME BUT FROM
HIS GROSS SALES/RECEIPTS, AND,
2) THE OSD BEING IN LIEU OF THE ITEMIZED DEDUCTIONS ALLOWED IN COMPUTING
TAXABLE INCOME, IT WILL ANSWER FOR BOTH THE ITEMS OF DEDUCTIONS ALLOWED
TO THE GPP AND ITS PARTNERS.
E) SINCE ONE-LAYER OF INCOME TAX IS IMPOSED ON THE INCOME OF THE GPP AND THE
INDIVIDUAL PARTNERS WHEN THE LAW PLACED THE STATUTORY INCIDENCE OF THE TAX
IN THE HANDS OF THE LATTER, THE TYPE OF DEDUCTION CHOSEN BY THE GPP MUST BE
THE SAME TYPE OF DEDUCTION THAT CAN BE AVAILED OF BY THE PARTNERS.
F) IF THE PARTNER ALSO DERIVES OTHER GROSS INCOME FROM TRADE, BUSINESS OR
PRACTICE OF PROFESSION APART FROM AND DISTINCT FROM HIS SHARE IN THE NET
INCOME OF THE GPP, THE DEDUCTION THAT HE CAN CLAIM FROM HIS OTHER GROSS
INCOME WOULD FOLLOW THE SAME DEDUCTIONS AVAILED OF FROM HIS PARTNERSHIP
INCOME.
G) IF THE GPP OPTS FOR THE OSD, THE INDIVIDUAL PARTNER MAY STILL CLAIM 40% OF ITS
GROSS INCOME FROM TRADE, BUSINESS OR PRACTICE OF PROFESSION BUT NOT TO
INCLUDE HIS SHARE FROM THE NET INCOME OF THE GPP.

5) SUMMARY OF IMPORTANT POINTS IN OSD

CORPORATION GENERAL PROF. INDIVIDUALS

PARTNERSHIP
1) BASIS GROSS INCOME GROSS INCOME GROSS SALES/GROSS
RECEIPTS
2) RATE 40% 40% 40%
3) COST OF
SALES/COST OF DEDUCTED DEDUCTED NOT DEDUCTED
SERVICES
4) CHOICE OF OSD
(IRREVOCABLE) TO BE SIGNIFIED IN THE TO BE SIGNIFIED IN THE TO BE SIGNIFIED IN THE
RETURN RETURN RETURN
5) SUBMISSION OF
FINANCIAL REQUIRED REQUIRED NOT REQUIRED
STATEMENTS
 6) KEEPING OF REQUIRED PERTAINING TO REQUIRED PERTAINING TO REQUIRED PERTAINING TO
RECORDS GROSS INCOME GROSS INCOME GROSS SALES/RECEIPTS
7) HYBRID METHOD
(PARTLY ITEMIZED
DEDUCTIONS
PARTLY OSD) NOT ALLOWED NOT ALLOWED NOT ALLOWED
8) COMPUTATION OF GS/GR XXX GS/GR XXX GS/GR XXX
TAXABLE NET LESS: RET AND ALLOW XXX LESS: RET AND ALLOW XXX LESS: RET AND ALLOW XXX
INCOME USING DISCOUNTS XXX DISCOUNTS XXX DISCOUNTS XXX
OSD XXX XXX XXX
NET SALES XXX NET SALES XXX NET SALES XXX
LESS: COS XXX LESS: COS XXX OTHER INCOME XXX
GROSS INCOME XXX GROSS INCOME XXX TOTAL XXX
OTHER INCOME XXX OTHER INCOME XXX LESS: OSD XXX
TOTAL XXX TOTAL XXX BPE XXX
LESS: OSD XXX LESS: OSD XXX AE XXX XXX
TAXABLE NET INCOME TAXABLE NET INCOME XXX TAXABLE NET INCOME
XXX XXX

6) EXERCISES
A. A RETAILER OF GOODS, WHOSE ACCOUNTING METHOD IS UNDER THE ACCRUAL BASIS, HAS A GROSS SALES OF
P1,000,000 WITH A COST OF SALES AMOUNTING TO P800,000 FOR YEAR 2009. THE TAXPAYER IS QUALIFIED TO CHOOSE
OSD AS DEDUCTIONS.

QUESTION 1 – HOW MUCH IS THE AMOUNT OF OSD ASSUMING THE TAXPAYER IS: 1) AN INDIVIDUAL; 2) A
CORPORATION.

2 – HOW MUCH IS THE NET TAXABLE INCOME ASSUMING THE TAXPAYER IS: 1) AN INDIVIDUAL, SINGLE WITH
NO QUALIFIED
DEPENDENTS. 2) A CORPORATION.

B. THE FOLLOWING DATA PERTAIN TO ME AND COMPANY, CPAS, A GENERAL PROFESSIONAL PARTNERSHIP, FOR THE
CURRENT YEAR:
GROSS RECEIPTS P5,000,000
RETURNS AND ALLOWANCES 100,000
DISCOUNTS 200,000
COST OF SERVICES 1,000,000
TOTAL ITEMIZED DEDUCTIONS 500,000

PARTNER M (50% PARTNER) WHO IS MARRIED AND HAS FIVE (5) QUALIFIED DEPENDENTS IS ALSO ENGAGED IN
TRADING BUSINESS. HIS SALES AND OTHER DATA FOR THE CURRENT YEAR ARE AS FOLLOWS:
GROSS SALES, TRADING BUSINESS P4,000,000
RETURNS AND ALLOWANCES 250,000
DISCOUNTS 150,000
COST OF SALES 1,500,000
TOTAL ITEMIZED DEDUCTIONS 600,000

COMPUTE THE TAXABLE NET INCOME OF PARTNER M ASSUMING THE GENERAL PROFESSIONAL PARTNERSHIP USES:
1) ITEMIZED DEDUCTIONS. 2) OPTIONAL STANDARD DEDUCTION.

L. INTEGRATIVE CASES
A. (PHIL. CPA) FROM THE FOLLOWING DATA, COMPUTE THE INCOME TAX STILL DUE FROM A DOMESTIC CORPORATION
ENGAGED IN MERCHANDISING BUSINESS. FOR THE CALENDAR YEAR 2009, THE NET INCOME PER BOOKS IS P150,000,
AFTER CONSIDERING AMONG OTHERS:
NON-TAXABLE INCOME (OTHERS) P 5,500
INTER-CORPORATE DIVIDENDS 5,000
NET CAPITAL LOSS 2,500
BAD DEBTS WRITTEN OFF 6,500
NON-DEDUCTIBLE EXPENSES (OTHERS) 12,000
CONTRIBUTION TO A NON-PROFIT RELIGIOUS ORGANIZATION 12,000
CONTRIBUTION TO GOVERNMENT’S PRIORITY PROGRAM 1,500
QUARTERLY INCOME TAX PAYMENTS 65,000
PROVISION FOR BAD DEBTS 8,000

THE NET INCOME PER BOOKS SHOULD BE RECONCILED WITH THE PROVISIONS OF THE TAX CODE, MEANING, ITEMS
WHICH ARE NOT TAXABLE MUST BE EXCLUDED, AND ITEMS WHICH ARE NOT DEDUCTIBLE ARE TO BE ADDED BACK.

HOW MUCH IS THE NET TAX DUE AND PAYABLE?

B. (PHIL. CPA) THE FOLLOWING WERE TAKEN FROM THE STATEMENT OF INCOME AND EXPENSES OF ABC CORPORATION
FOR THE TAXABLE YEAR 2011:
GROSS PROFITS FROM SALES P800,000
LESS: BUSINESS EXPENSES P440,000
PROVISION FOR BAD DEBTS 80,000 520,000
NET INCOME BEFORE TAX P280,000

ADDITIONAL INFORMATION:
1) ACCOUNTS WRITTEN OFF DURING THE YEAR AND CHARGED TO ALLOWANCE FOR BAD DEBTS, P50,000;
2) RECOVERIES ON ACCOUNTS RECEIVABLE PREVIOUSLY WRITTEN OFF IN 2010 AND CREDITED TO ALLOWANCE
FOR BAD DEBTS:
ALLOWED AS DEDUCTION BY BIR, P30,000;
DISALLOWED AS DEDUCTION BY BIR, P20,000.

HOW MUCH WAS THE TAXABLE NET INCOME?

 jb

SEC. 36. ITEMS NOT DEDUCTIBLE. -

(A) GENERAL RULE. - IN COMPUTING NET INCOME, NO DEDUCTION SHALL IN ANY CASE BE ALLOWED IN RESPECT TO -
(1) PERSONAL, LIVING OR FAMILY EXPENSES;
(2) ANY AMOUNT PAID OUT FOR NEW BUILDINGS OR FOR PERMANENT IMPROVEMENTS, OR BETTERMENTS MADE TO INCREASE
THE VALUE OF ANY PROPERTY OR ESTATE;
THIS SUBSECTION SHALL NOT APPLY TO INTANGIBLE DRILLING AND DEVELOPMENT COSTS INCURRED IN PETROLEUM
OPERATIONS WHICH ARE DEDUCTIBLE UNDER SUBSECTION (G) (1) OF SECTION 34 OF THIS CODE.
(3) ANY AMOUNT EXPENDED IN RESTORING PROPERTY OR IN MAKING GOOD THE EXHAUSTION THEREOF FOR WHICH AN
ALLOWANCE IS OR HAS BEEN MADE; OR
(4) PREMIUMS PAID ON ANY LIFE INSURANCE POLICY COVERING THE LIFE OF ANY OFFICER OR EMPLOYEE, OR OF ANY PERSON
FINANCIALLY INTERESTED IN ANY TRADE OR BUSINESS CARRIED ON BY THE TAXPAYER, INDIVIDUAL OR CORPORATE, WHEN
THE TAXPAYER IS DIRECTLY OR INDIRECTLY A BENEFICIARY UNDER SUCH POLICY.

(B) LOSSES FROM SALES OR EXCHANGES OF PROPERTY. -IN COMPUTING NET INCOME, NO DEDUCTIONS SHALL IN ANY CASE BE
ALLOWED IN RESPECT OF LOSSES FROM SALES OR EXCHANGES OF PROPERTY DIRECTLY OR INDIRECTLY –

(1) BETWEEN MEMBERS OF A FAMILY. FOR PURPOSES OF THIS PARAGRAPH, THE FAMILY OF AN INDIVIDUAL SHALL INCLUDE
ONLY HIS BROTHERS AND SISTERS (WHETHER BY THE WHOLE OR HALF-BLOOD), SPOUSE, ANCESTORS, AND LINEAL
DESCENDANTS; OR
(2) EXCEPT IN THE CASE OF DISTRIBUTIONS IN LIQUIDATION, BETWEEN AN INDIVIDUAL AND CORPORATION MORE THAN FIFTY
PERCENT (50%) IN VALUE OF THE OUTSTANDING STOCK OF WHICH IS OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR SUCH
INDIVIDUAL; OR
(3) EXCEPT IN THE CASE OF DISTRIBUTIONS IN LIQUIDATION, BETWEEN TWO CORPORATIONS MORE THAN FIFTY PERCENT
(50%) IN VALUE OF THE OUTSTANDING STOCK OF WHICH IS OWNED, DIRECTLY OR INDIRECTLY, BY OR FOR THE SAME
INDIVIDUAL IF EITHER ONE OF SUCH CORPORATIONS, WITH RESPECT TO THE TAXABLE YEAR OF THE CORPORATION PRECEDING
THE DATE OF THE SALE OF EXCHANGE WAS UNDER THE LAW APPLICABLE TO SUCH TAXABLE YEAR, A PERSONAL HOLDING
COMPANY OR A FOREIGN PERSONAL HOLDING COMPANY;
(4) BETWEEN THE GRANTOR AND A FIDUCIARY OF ANY TRUST; OR
(5) BETWEEN THE FIDUCIARY OF AND THE FIDUCIARY OF A TRUST AND THE FIDUCIARY OF ANOTHER TRUST IF THE SAME
PERSON IS A GRANTOR WITH RESPECT TO EACH TRUST; OR
(6) BETWEEN A FIDUCIARY OF A TRUST AND BENEFICIARY OF SUCH TRUST.

SEC. 37. SPECIAL PROVISIONS REGARDING INCOME AND DEDUCTIONS OF INSURANCE COMPANIES, WHETHER DOMESTIC OR
FOREIGN. -

(A) SPECIAL DEDUCTION ALLOWED TO INSURANCE COMPANIES. - IN THE CASE OF INSURANCE COMPANIES, WHETHER
DOMESTIC OR FOREIGN DOING BUSINESS IN THE PHILIPPINES, THE NET ADDITIONS, IF ANY, REQUIRED BY LAW TO BE MADE
WITHIN THE YEAR TO RESERVE FUNDS AND THE SUMS OTHER THAN DIVIDENDS PAID WITHIN THE YEAR ON POLICY AND
ANNUITY CONTRACTS MAY BE DEDUCTED FROM THEIR GROSS INCOME: PROVIDED, HOWEVER, THAT THE RELEASED RESERVE
BE TREATED AS INCOME FOR THE YEAR OF RELEASE.

(B) MUTUAL INSURANCE COMPANIES. - IN THE CASE OF MUTUAL FIRE AND MUTUAL EMPLOYERS' LIABILITY AND MUTUAL
WORKMEN'S COMPENSATION AND MUTUAL CASUALTY INSURANCE COMPANIES REQUIRING THEIR MEMBERS TO MAKE PREMIUM
DEPOSITS TO PROVIDE FOR LOSSES AND EXPENSES, SAID COMPANIES SHALL NOT RETURN AS INCOME ANY PORTION OF THE
PREMIUM DEPOSITS RETURNED TO THEIR POLICYHOLDERS, BUT SHALL RETURN AS TAXABLE INCOME ALL INCOME RECEIVED
BY THEM FROM ALL OTHER SOURCES PLUS SUCH PORTION OF THE PREMIUM DEPOSITS AS ARE RETAINED BY THE COMPANIES
FOR PURPOSES OTHER THAN THE PAYMENT OF LOSSES AND EXPENSES AND REINSURANCE RESERVES.

(C) MUTUAL MARINE INSURANCE COMPANIES. - MUTUAL MARINE INSURANCE COMPANIES SHALL INCLUDE IN THEIR RETURN OF
GROSS INCOME, GROSS PREMIUMS COLLECTED AND RECEIVED BY THEM LESS AMOUNTS PAID TO POLICYHOLDERS ON ACCOUNT
OF PREMIUMS PREVIOUSLY PAID BY THEM AND INTEREST PAID UPON THOSE AMOUNTS BETWEEN THE ASCERTAINMENT AND
PAYMENT THEREOF.

(D) ASSESSMENT INSURANCE COMPANIES. - ASSESSMENT INSURANCE COMPANIES, WHETHER DOMESTIC OR FOREIGN, MAY
DEDUCT FROM THEIR GROSS INCOME THE ACTUAL DEPOSIT OF SUMS WITH THE OFFICERS OF THE GOVERNMENT OF THE
PHILIPPINES PURSUANT TO LAW, AS ADDITIONS TO GUARANTEE OR RESERVE FUNDS.

SEC. 38. LOSSES FROM WASH SALES OF STOCK OR SECURITIES. -

(A) IN THE CASE OF ANY LOSS CLAIMED TO HAVE BEEN SUSTAINED FROM ANY SALE OR OTHER DISPOSITION OF SHARES OF
STOCK OR SECURITIES WHERE IT APPEARS THAT WITHIN A PERIOD BEGINNING THIRTY (30) DAYS BEFORE THE DATE OF SUCH
SALE OR DISPOSITION AND ENDING THIRTY (30) DAYS AFTER SUCH DATE, THE TAXPAYER HAS ACQUIRED (BY PURCHASE OR
BY EXCHANGE UPON WHICH THE ENTIRE AMOUNT OF GAIN OR LOSS WAS RECOGNIZED BY LAW), OR HAS ENTERED INTO A
CONTACT OR OPTION SO TO ACQUIRE, SUBSTANTIALLY IDENTICAL STOCK OR SECURITIES, THEN NO DEDUCTION FOR THE
LOSS SHALL BE ALLOWED UNDER SECTION 34 UNLESS THE CLAIM IS MADE BY A DEALER IN STOCK OR SECURITIES AND WITH
RESPECT TO A TRANSACTION MADE IN THE ORDINARY COURSE OF THE BUSINESS OF SUCH DEALER.

(B) IF THE AMOUNT OF STOCK OR SECURITIES ACQUIRED (OR COVERED BY THE CONTRACT OR OPTION TO ACQUIRE) IS LESS
THAN THE AMOUNT OF STOCK OR SECURITIES SOLD OR OTHERWISE DISPOSED OF, THEN THE PARTICULAR SHARES OF STOCK
OR SECURITIES, THE LOSS FROM THE SALE OR OTHER DISPOSITION OF WHICH IS NOT DEDUCTIBLE, SHALL BE DETERMINED
UNDER RULES AND REGULATIONS PRESCRIBED BY THE SECRETARY OF FINANCE, UPON RECOMMENDATION OF THE
COMMISSIONER.

(C) IF THE AMOUNT OF STOCK OR SECURITIES ACQUIRED (OR COVERED BY THE CONTRACT OR OPTION TO ACQUIRE WHICH)
IS NOT LESS THAN THE AMOUNT OF STOCK OR SECURITIES SOLD OR OTHERWISE DISPOSED OF, THEN THE PARTICULAR SHARES
OF STOCK OR SECURITIES, THE ACQUISITION OF WHICH (OR THE CONTRACT OR OPTION TO ACQUIRE WHICH) RESULTED IN
THE NON-DEDUCTIBILITY OF THE LOSS SHALL BE DETERMINED UNDER RULES AND REGULATIONS PRESCRIBED BY THE
SECRETARY OF FINANCE, UPON RECOMMENDATION OF THE COMMISSIONER.