Answer key - Cases for Deductions from Gross Income PDF

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Answer key for Cases for Deductions from Gross Income...

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ACC 311 – Income Taxation Topic: Deductions from the Gross Income Cases Representation expenses Case 1 A corporation is engaged in the sale of goods with net sales of P3,000,000. The actual entertainment, amusement and recreation expense for the taxable quarter totaled P50,000. For income tax purposes, how much is the deductible entertainment, amusement and recreation (EAR) expense? Answer: P15,000 Actual Limit (P3M x .005)

50,000 15,000 – the lower

Case 2 A corporation is engaged in the sale of goods and services with net sales and revenue of P8,000,000 and P4,000,000, respectively. The actual entertainment amusement and recreation expenses for the taxable year totaled P150,000. For income tax purposes, how much is the total deductible entertainment, amusement and recreation (EAR) expenses? Answer: P80,000 Actual – sale of goods (150,000 x 8/12) Limit (P8M x .005) Actual – sale of services (150,000 x 4/12) Limit (P4M x .01)

100,000 40,000 - Lower 50,000 40,000 – Lower

Interest Case 1 In 2021, a taxpayer obtained a P1,000,000 loan from a bank for business use (using cash basis of accounting). The proceeds of the loan amounted to P900,000, net of P100,000 interest deducted in advance. The taxpayer paid the loan in full in the year 2022. a. How much may the taxpayer claim as interest expense in 2021? Answer: P0 (to be claimed as deduction from the gross income upon payment) b. How much may the taxpayer claim as interest expense in 2022? Answer: P100,000

Case 2 Using the same data in Case 1, except that the principal amount of the loan were paid in four (4) equal annual installments at P250,000 a year starting 2022. a. How much may the taxpayer claim as interest expense in 2021? Answer: P0 b. How much may the taxpayer claim as interest expense in 2022? Answer: P25,000 (P100,000 x 250/1000) Case 3 A taxpayer (a corporation) is using accrual basis of accounting. On January 1, 2021, it decided to purchase an equipment to cope up with the increasing demands of his customers. The equipment was acquired at a cost of P10,000,000 and was estimated to have a useful life of ten (10) years. The equipment was financed through a bank loan at an annual rate of 12%. Interest of P1,200,000 was discounted in full by the bank. Other business-related interests amounting to P300,000 were also paid during the year. In addition, interest income of P200,000 (gross of 20% final tax) from its various bank deposits were credited to the account of the taxpayer during the current year. a. Assume the taxpayer opted to recognized the interest related to the acquisition of equipment as an outright expense, how much was the deductible interest of the company in 2018? Answer: P1,460,000 Interest incurred in acquiring the equipment Reduction (20% x 200,000) Other business related interest Allowable interest expense for 2021

P1,200,000 ( 40,000) 300,000 1,460,000

b. Assume the taxpayer opted to capitalize the interest related to the acquisition of equipment, how much was the deductible interest of the taxpayer for 2021? Answer: P300,000 – only “other business related interest” shall be considered as interest expense. c. Assume that taxpayer opted to capitalize the interest related to the acquisition of equipment, how much would be the cost of the equipment? Answer: P11,200,000 Acquisition cost Interest incurred Total capitalized cost

P10,000,000 1,200,000 11,200,000

Losses Case 1 On July 1, 2018, a lawyer purchased an automobile for P500,000 which will be used exclusively for his practice of profession. He deducted annual depreciation on the basis of an estimated useful life of five (5) years. On July 1, 2021, the automobile was partially damaged in an accidental collision with another vehicle. The fair market value of the vehicle before the collision equals the carrying value at P200,000. After the collision, the fair value was determined at P100,000. The taxpayer received insurance proceeds of P70,000 to cover the loss. a. How much is the deductible loss? Answer: P30,000 Carrying value (500,000 x 2/5) Cost to restore (P200,000-100,000) Lower amount Less: Proceeds from insurance Allowable deduction

P200,000 100,000 – Lower amount 100,000 ( 70,000) 30,000

b. How much is the deductible loss if the automobile was totally destroyed? Answer: P130,000 Carrying amount P200,000 Less: Proceeds from insurance ( 70,000) Allowable deduction 130,000 c. Assuming the cost to restore was P250,000 (ignoring fair market values). How much is the deductible loss? Answer: P130,000 Carrying value (P500,000 x 2/5) P200,000 – Lower Cost to restore 250,000 Lower amount Less: Proceeds from insurance Allowable deduction

P200,000 ( 70,000) P130,000

d. Using the same information in letter c, what is the new cost basis of the automobile for depreciation purposes? Answer: P250,000 Book value Add: Excess of cost to restore over BV Adjusted cost basis

P200,000 50,000 250,000

NOLCO Case 1 The following are the records of a corporation (an MSME):

Gross sales Cost of sales Dividend from resident foreign corporation (foreignsourced) Interest income on notes Capital gain Capital loss Operating expenses

2019 3,300,000 2,400,000 140,000 28,000 20,000 1,475,000

a. Determine the taxable income (loss) for years 2019 – 2021. 2019 Gross sales Cost of sales Operating expenses Dividend from foreign corp Interest income Net operating loss

P3,000,000 ( 2,400,000) ( 1,475,000) 140,000 28,000 (407,000)

Gross sales Cost of sales Operating expenses Capital gain Interest income on notes receivable Net income 2020 (before NOLCO) NOLCO – 2019 Taxable income (loss)

P2,640,000 ( 1,200,000) ( 1,115,000) 13,000 16,400 354,400 (354,400) 0

Gross sales Cost of sales Operating expenses Dividend from foreign corp Capital gain Capital loss Net income 2021 (before NOLCO) Balance of 2019 NOLCO Taxable income – 2021

P1,025,000 (350,000) (400,000) 32,000 18,500 (18,500) 307,000 (52,600) 254,400

2020

2021

2020 2,640,000 1,200,000

2021 1,025,000 350,000 32,000

16,400 13,000 1,115,000

18,500 22,000 400,00

Case 2 Using the same information from case 1 for years 2019 – 2020 but with data for 2021 – 2023 as follows:

Gross sales Cost of sales Dividend from resident foreign corporation (foreignsourced; not tax-exempt) Interest income on notes Capital gain Capital loss Operating expenses

2021 3,000,000 2,000,000 100,000 50,000 10,000 1,500,000

a. Determine the taxable income (loss) for the years 2021 – 2023 2021 Gross sales Cost of sales Operating expenses Dividend income from foreign corp. Interest income on notes receivable Net income (loss) in 2021 before NOLCO 2019 NOLCO (balance) Taxable income (loss)

P3,000,000 (2,000,000) (1,500,000) 100,000 50,000 (350,000) 000 (350,000)

2022 Gross sales Cost of sales Operating expenses Interest income on notes receivable Capital gain Net income in 2022 before NOLCO 2019 NOLCO 2021 NOLCO Taxable income (loss)

P2,840,000 ( 1,600,000) ( 1,500,000) 35,000 15,000 ( 210,000)

P(210,000)

Gross sales Cost of sales Operating expenses Dividend income from foreign corp Capital gain Capital loss

P3,000,000 (350,000) (400,000) 20,000 18,500 (18,500)

2023

2022 2,840,000 1,600,000

2023 3,000,000 350,000 20,000

35,000 15,000 1,500,000

18,500 22,000 400,000

Net income – 2023 (before NOLCO) NOLCO – 2019 NOLCO – 2021 NOLCO – 2022 Taxable income

2,270,000 (350,000) (210,000) 1,710,000

Wash sales Case 1 A taxpayer, whose taxable year is the calendar year, on December 1, 2020, purchased 100 shares of common stock of XYZ Corporation for P100,000 and on December 15, 2020, purchased 100 additional shares for P90,000. On January 2, 2021, it sold the 100 shares purchased on December 1, 2020 for P90,000. Is the loss of P100,000 deductible from the gross income? Answer: Since the transaction is within 61-day period, the loss of P10,000 should be classified as loss on wash sale which is a nondeductible loss under the tax code. Case 2 A taxpayer, who is not a dealer in securities, had the following transactions on ordinary shares of ABC Corporation, a domestic corporation: 01/12 06/20 06/30 10/15

Purchased 100 shares for P100,000. Sold the shares purchased on Jan. 12 for P80,000 Purchased 70 shares for P50,000 Sold shares acquired on June 30 for P75,000

a. How much was the loss on wash sale? Answer: P14,000 SP Cost Indicated loss on 100 shares

P 80,000 (100,000) ( 20,000)

Loss on wash sale (70/100 x P20,000) b. How much was the capital loss? Answer: P6,000 (30/100 x P20,000) c. How much was the cost of shares purchased on June 30? Answer: P64,000 Purchase price P50,000 Add: Loss on wash sale 14,000 Cost basis 64,000 d. How much was the capital gain on sale of shares on October 15? Answer: P11,000 SP

P75,000

P14,000

Cost Gain on sale

( 64,000) P11,000

Donation A taxpayer, a domestic corporation, has the following data on income and expenses Sales Cost of sales Operating expenses, excluding contributions to the government and charitable institutions

P

10,000,000 4,000,000 3,000,000

Contributions to Government for priority project in education Contributions to Government for public purpose Contributions to a domestic charitable organization Contributions to a proprietary educational institution Contributions to a “Party List” candidate

200,000 100,000 100,000 200,000 300,000

a. Determine the taxpayer’s taxable income. Sales Cost of sales OPEX Net income before contributions Contribution deductible in full Contributions to Govt priority projects Contributions – subject to limit Actual – P200,000 Limit – 3M x 5% - 150,000 – lower Taxable income

P

10,000,000 4,000,000 3,000,000 3,000,000 (200,000)

(150,000) 2,650,000

Case 2 Using the same information in Case 1, but the taxpayer is a resident citizen. What is the taxpayer’s taxable net income? Sales Cost of sales OPEX Net income before contributions Contribution deductible in full Contributions to Govt priority projects Contributions – subject to limit Actual – P200,000 - lower Limit – 3M x 10% - 300,000 Taxable income

P

10,000,000 4,000,000 3,000,000 3,000,000 (200,000)

(200,000) 2,600,000...