Deductions - TAXATION REVIEWER PDF

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INCOME TAXATIONName:__________________________ Date: Section:_________________________ DEDUCTIONS & EXEMPTIONS Which of the following statements is true? a. Payments which constitute bribes, kickbacks, and others of similar nature which are necessary to realize the profit are allowed as deductio...

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INCOME TAXATION Name:__________________________ Section:_________________________

Date: DEDUCTIONS & EXEMPTIONS

1. Which of the following statements is true? a. Payments which constitute bribes, kickbacks, and others of similar nature which are necessary to realize the profit are allowed as deduction from gross income b. The taxes which are deductible from the gross income include taxes, interest and penalties incident to tax delinquency c. Deductions are amounts allowed by the Tax Code to be deducted from gross income to arrive at the income tax liability of a taxpayer. d. Losses from wagering transactions shall be allowed only up to the extent of the gains from such transactions. 2. The following may elect optional standard deduction or itemized deductions, except a. Taxable estates and trusts c. General professional partnership b. Domestic corporation d. Foreign corporation 3. The following may be allowed to claim optional standard deduction, except a. Resident Citizen c. Resident Alien b. Non-resident Citizen d. Non-resident alien 4. May be deducted from gross income a. Philippine Income tax b. Foreign income tax

c. Estate or donor’s tax d. Special Assessment

5. This is not deductible from gross income a. Transportation expenses from the main office to the branch b. Transportation expenses from home to the office and from the office back to home c. Travel expenses on business trips d. Travel expenses while away from home in the pursuit of trade, business or profession 6. A revenue expenditure is A. Usually incurred in the acquisition, betterment or permanent improvement of the asset B. Capitalized and the cost is recovered through annual depreciation C. Ordinarily to benefit more than one accounting period D. To benefit one accounting period and is a deduction from gross income in the year paid or incurred 7. No deductions shall be allowed where the transaction is between “related taxpayers” for A. Losses from sales or exchanges of property B. Interest expense C. Bad Debts A. A and B b. B and C c. A and C d. A, B and C 8. The phrase “related taxpayers” will apply to the following, except: A. Between members of a family B. Between the grantor and fiduciary of any trust C. Between a fiduciary of a trust and a beneficiary of such trust D. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly by or for such individual, in case of distributions in liquidation 9. The deduction for premium payments on health and/or hospitalization insurance is not available to: A. An individual with gross compensation income only B. An individual with gross income from business or practice profession, whether he is availing of the optional standard deduction or the itemized deduction C. An individual with mixed income D. Both husband and wife 10. The optional standard deduction allowed to individuals and corporations is computing their taxable income took effect on A. January 1, 1998 b. July 1, 2008 c. January 1, 2008 d. July 6, 2008

11. The optional standard deduction for corporations is /etd

A. 10% of the gross income B. 10% of the gross sales/receipts

c. 40% of the gross income d. 40% of the gross sales/receipts

12. The optional standard deduction for individuals is A. 10% of the gross income c. 40% of the gross income B. 10% of the gross sales/receipts d. 40% of the gross sales/receipts 13. For individuals, premiums paid during the taxable year for health and/or hospitalization insurance taken out by him on himself, including his family shall be allowed as deductions from gross income, provided that the family has a gross income of A. More than P250,000 c. Not more than P250, 000 B. More than P500, 000 d. Not more than P2, 400 14. First statement- In case of married taxpayer, only the spouse claiming the additional exemptions for dependents shall be entitled to the deduction on premium payments on health and/ or hospitalization insurance Second statement- the deduction for premium payments on health and/or hospitalization insurance shall not exceed P2, 400 for the family or P200 a month A. True, True b. True, False c. False, True d. False, False 15. Interest expense incurred to acquire property used in trade or business or exercise of a profession is A. Not allowed as a deduction against gross income B. Required to be treated as a capital expenditure to form part of the cost of the asset C. Allowed as a deduction or treated as a capital expenditure at the option of the taxpayer D. Allowed as a deduction or treated as a capital expenditure at the option of the government 16. WALANG FOREVER Corp. Had a net sales of P1M. The actual entertainment, amusement and recreation expense amounted to P20, 000. The deductible “EAR” expense is A. P20, 000 b. P6, 000 c. P10, 000 d. P5, 000 17. PAASA Corp had a net revenue of P1M. The actual entertainment, amusement and recreation expense amounted to P20, 000. The deductible “EAR” expense is A. P20, 000 b. P6, 000 c. P5, 000 d. P 10, 000 18. UMASA Corp. Is engaged in the sale of goods and services with net sales and net revenue of P2M and P1M respectively. The actual entertainment, amusement and recreation expense amounted to P18, 000. The deductible “EAR” expense is A. P18, 000 b. P16, 000 c. P12, 000 d. P6, 000 19. In 2018, MANHID, a resident citizen, engaged in business borrowed money from UMAASA Bank from which he had an interest expense of P20, 000. His deposit in ABC bank yielded an interest income of P25, 000. His deduction for interest expense is 20 to 21 A taxpayer had the following: Year 1 Gross Income P900,000 Allowable deductions P980,000

Year2 P900,000 P880,000

Year3 P880,000 P900,000

20. The net income to be reported in year 2 is? A. P20,000 b. P900,000 c. P880,000

d. 0

21. The income to be reported in year 5 is A. P60,000 b. 70,000 c. P80,000

d.0

Year4 P840,000 P830,000

Year5 P980,000 P900,000

22. Examples of taxes that are deductible except A. Occupational tax c. Documentary stamp tax B. Privilege tax d. Philippine income tax 23. Non-deductible taxes, except A. Special Assessment

b. Donor’s tax c. Estate tax

d. Business Tax

24. UMAASA-PA-RIN, not happy with her present job, resigned and started her own business. The business requires her to travel so she used her car for the purpose. Assume that UMAASA-PA-RIN started her business on April 1

/etd

and that she uses the car for business 70%of the time, assuming total expenses for the year for the use of the car is P300, 000, the deductible expense is A. 210, 000 b. P300, 000 c. P225, 000 d. P157,000 25. INIWAN acquired a machine at a cost of P500,000. Scrap value is P40,000 and the estimated useful life was 25 years. After depreciating the asset fir 20 years using the straight-line method, it was determined that the remaining life is not five years. The annual depreciation from the 21st year assuming a remaining life of 10 years without scrap is A. P17, 600 b. P20, 000 c. P35, 200 d. P13, 200 26. I. An expense which is necessary but not ordinary, or ordinary but not necessary is deductible from gross income II. The taxpayer must signify his intention to elect the itemized deduction, otherwise, he is deemed to have chosen the optional standard deduction A. True, True b. True, False c. False, True d. False, False 27. I. Interest paid on preferred stock is deductible from gross income of the paying corporation II. A capital expenditure usually benefits more than one accounting period and is deductible from gross income in the year it is paid or incurred. A. True, True b. True, False c. False, True d. False, False 28. For individuals with gross compensation income, the following maybe deducted, except: A. Personal exemptions B. Additional exemptions C. Optional Standard Deduction D. Premium payments on health and/or hospitalization insurance 29. For individuals with gross income from business or practice of profession, the following may be deducted A. Optional standard deduction B. Itemized deduction C. Personal exemptions D. Additional exemptions E. Premium payments on health and/ a hospitalization insurance a. A,B,C and D

b. B,Cand D

c. C, D and E and either A or B

d. All of the above

30. Any amount subsequently received on account of a bad debt previously charged off and allowed as a deduction from gross income in prior years must be included in gross income in the taxable year in which received. This is a. Severance test c. Destination of income test b. Life-blood theory d. Equitable doctrine of tax benefit 31. INIWAN, a dedicated and honest employee of PAASA Corp. For the past 20 years was advised that he is to be retrenched as the company was losing heavily but that he would be given the separation pay provided by law. To avoid implication of inefficiency INIWAN was advised to file a letter of resignation instead of being retrenched. If INIWAN files a letter of resignation and receives the separation pay, such amount is a. Taxable in full c. Exempt from income tax b. Partly taxable, partly exempt d. Subject to final tax 32. Using the preceding no. If INIWAN is retrenched and receives the separation pay, such amount is a. Taxable in full c. Exempt from income tax B.Partly taxable, partly exempt d. Subject to final tax 33. May consider capital expenditures as revenue expenditures a. Resident citizen c. Private educational institutions b. Domestic corporation d. Resident alien 34. May claim tax credit for income taxes paid to foreign country a. Resident citizen c. Non-resident citizen b. Resident alien d. Non-resident alien 35. A building was partially destroyed by fire in 2018. The building had a book value of P5M the insurance company was willing to pay 4M, which was refused by the owner. Finally, the claim was settled in 2020 for P4.6M. the proceeds will be a. Exempt from income tax c. Subject to final tax

/etd

b. Part of taxable income

d. Partly exempt, partly taxable

36. One of the following is not correct for deductibility of losses from gross income a. Must arise from fire, storm or other casualty, robbery, theft or embezzlement b. Must not be compensated by insurance or other form of indemnity c. A declaration of loss by casualty should be filed with the Bureau of Internal Revenue d. Must have been claimed as deduction in the estate return of the taxpayer 37. The net operating loss, which had not been previously offset as deduction from gross income shall be carried over as deduction from gross income for the next a. 2 consecutive taxable years immediately following such loss b. 3 consecutive taxable years immediately following such loss c. 4 consecutive taxable years immediately following such loss d. Taxable year immediately following such loss 38-39 A taxpayer engaged in business incurred a partial loss of property as follows: Asset 1 Asset 2 Book value of the asset at the time of loss P200, 000 P200,000 Cost to restore the property back to its normal operating condition 120,000 300,000 Insurance Recovery 50, 000 None Salvage none 40, 000 38. The deductible loss for asset 1 is a. P120, 000 b. P170, 000 c. P30,000

d. P80,000

39. The deductible loss for asset 2 is a. P300, 000 b. P40, 000 c. P160,000

d. P240,000

40-42 NANG-IWAN corp put up a qualified retirement plan approved by the BIR. It appointed INIWAN Corp to administer the plan which is called for the payment of P200, 000 to cover the retirement of employees for the past services rendered and a yearly contribution of P50, 000. The following amounts were paid for the first three years of the plan’s operation. Contribution for services Past years Current Years P100,000 P 50,000 60,000 50,000 40, 000 50, 000

First year........... Second year.......... Third year 40. The pension expense for the first year is a. P150, 000 b. P15, 000 c. P60, 000 41. The pension expense for the second year is P110, 000 b. P11, 000 c. P56, 000

d. P105, 000

d. P66, 000

42. The pension expense for the third year is P150, 000 b. P15, 000 c. P60, 000 d. P105, 000 43. The records of a domestic corporation organized in 2000 show: 2015 2016 Gross Income P2,000,000 P2,200,000 Deductions (Where 5% represents Bad debts written off) 1,900,000 2,000,000 Net income (loss) P 100,000 P 200,000 Subsequent recovery of bad debts written off: In 2015 P60,000 In 2017 A. The income tax payable for 2015 is a. P30,000 b. P40,000 c. P58, 500 d. P40,500 B. The income tax payable for 2016 is a. P78,000 b. P68,000 c. P60, 000

d. P50,000

2017 P2,500,000

2018 P2,800,000

2,520,000 (P20,000)

2,400,000 P400,000

P10,000

/etd

C. The income tax payable for 2017 is a. P0 b. P50,000 c. P18, 000

d. P24,000

D. The income tax payable for 2018 is a. P73,000 b. P70,000 c. P67, 000

d. P64,000

44. A Corporation is engaged in trading business. The reported income and expenses for taxable year 2018 show: Sales P 10,000,000 Cost of sales 6,000,000 General business expenses 1,000,000 Interest on time deposit (gross) 100,000 Interest expense on loans payable 180,000 The net taxable income is a. 2,820,000 b. P 2, 853,000 c. P 2,862,000 d. P 2,858,000 45. The term “net operating loss” shall mean a. The excess of allowable deduction over gross income of the business in a taxable year b. The excess of itemized deduction over gross income of the business in a taxable year c. The excess of optional standard deduction over gross income of the business in a taxable year d. Loss incurred which shall be carried over as a deduction from gross income to be spread for the next three years 46. For mines other than oil and gas wells, a net operating loss without the benefit of incentives under Executive Order 226, as amended, otherwise known as the Omnibus Investment Code of 1987, maybe carried over as a deduction from taxable income, if incurred in any of the a. First 10 years of operation c. First 3 years of operation b. First 4 years of operation d. First 5 years of operation 47. Using the preceding number, such net operating loss can be carried over as a deduction from taxable income, within how many years immediately following the year of such loss? a. 5 years b. 3 years c. 10 years d. 4 years 48. Atty. Xanthrons rendered the following services during the year: Gross receipts from legal fees Php 3,000,000 Value of 60 hours assistance to indigent client 200,000 Value of other pro-bono services 150,000 Direct cost of services 1,200,000 Other deductible expenses 900,000 The net income( before personal exemption) of Atty. Xanthrons is a. Php 550,000 b. Php 720,000 c. Php 750,000

d. Php 900,000

49. MOVE-ON-NA-AKO Corporation employs regular, person with disabilities (pwd’s) and senior citizen employees and paid the following compensations: Regular employees Php 800,000 PWD’s employees 300,000 Senior Citizen employees with salary grade: a. Above poverty level 200,000 b. Below poverty level 100,000 The deductible compensation expense is a. Php 1,400,000 b. Php 1,490,000 c. Php 1,115,000 d. Php 1,500,000 50. MAY-BAGO-NA-AKO Drugs Corporation had the following during the year: Transactions receipts (net) Cost of Sales Other Deductible expenses

Customer Regular Senior Citizen Php 8,000,000 Php 3,200,000 5,000,000 2,000,000

Totals Php 11,200,000 7,000,000 2,000,000

MAY-BAGO-NA-AKO adopts a policy of giving senior citizen 20% discount. As a result, it granted php 800,000 total senior citizen’s discount during the year. The taxable net income is a. Php 2,000,000 b. Php 1,400,000 c. Php 2,200,000 d. Php 1,250,000

/etd

51. KAMI-NA Eatery Corporation provides 20% discount to senior citizens. It recorded the following during the year: Customer Transactions Totals Regular Senior Citizen receipts (net) Php 8,000,000 Php 2,000,000 Php 10,000,000 Cost of Services 6,000,000 Other Deductible expenses 2,000,000 The regular and special itemized deduction from gross income is a. Php 2,500,000 b. Php 2,400,000 c. Php 2,000,000 52. Using the above data, the taxable net income is a. Php 1,600,000 b. Php 2,000,000 c. Php 1,500,000

d. Php 1,600,000

d. Php 1,000,000

53. To improve productivity, MAY-FOREVER-NA Corporation negotiated a productivity incentive program wherein the employees will receive productivity bonus equivalent to 40% of production cost savings measured by an independent expert. MAY-FOREVER-NA requires employees to undergo studies through an “employee advancement study program” with TESDA. All employees who finished their special studies are required to remain at MAY-FOREVER-NA for a period of at least 2 years. The following were determined during the year: Cost of special studies: Managerial employees Php 2,000,000 Rank & File employees 4,000,000 Total distributable productivity bonus 2,000,000 Total Php 8,000,000 The allowable deduction for the benefits given is a. Php 8,000,000 b. Php 9,000,000 c. Php 10,000,000 d. Php 11,000,000 Principles 54. Statement 1 : Deductions are items or amounts allowed to be subtracted from gross income to arrive at the taxable income. Statement 2 : Exclusions are receipts which are excluded from the gross, 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 statement are incorrect C

a. b. c. d.

55. Which of the following is not a characteristic of a deduction? It is reduction of wealth that helped earn the income subject to tax. An immunity or privilege, a freedom from a charge or burden to which others are subjected. It is not a receipt. It is subtraction to arrive at incomes subject to tax. B  “B” refers to “exclusions”, not deductions

a. b. c. d.

56. Political campaign contributions are not deductible from the gross income. If they are not reported to the Commission on Elections. If the candidates supported wins the election because of possible corruption. Since they do not help earn the income from which they are to be deducted. Since such amounts are not considered as income of the candidate to whom give. C  Refer also to letter “a” of No. 2

a. b. c. d.

57. Statement 1 : Deductions from gross income are not presumed. Statement 2 : As rule, deductions means itemized deductions Only statement 1 is correct Only statement 2 is correct Both statement are correct Both statement are in correct

/etd

C 58. 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. Treated as business rental, hence deductible b. Treated as capital expenditure, hence not deductible c. Treated as depreciate expense, hence deductible d. Treated as ordinary business expense. B Pro-form Journal Entries: Upon acquisition: Equipment Accounts Installment payment: Accounts Payable Cash

Pxx Pxx Pxx Pxx

59. Statement 1 : A taxpayer can only deduct on 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 the gross 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 C

a. b. c. d.

60. In cases of deductions and exemptions on income tax returns, doubts shall be resolved. Strictly against the taxpayer Strictly against the government Liberally in favor of the taxpayer Liberally in favor of the employer A

a. b. c. d.

61. Statement 1 : T...