EXPENSES, INTEREST AND TAXES

1. Personal vs. profit motivated activity. Tony is a physician whose practice employs two full-time and two part
time employees. The business is a sole proprietorship. He also employs two women who work as domestic workers
in her residence.

Which payment of salary constitutes a deductible business expense by Tony?

The payment of salary to the employees in her clinic constitutes deductible expense while the salaries of domestic helpers in
her residence are personal expenses, and therefore, not deductible from her income.

2. Ordinary expenses. During the current year, Christina purchases a plot of land and an old vacant warehouse.
She anticipates making a long-run profit from the investment because the value of the land is expected to appreciate
eventually due to commercial development in the area. To help the costs of holding the property, Christina plans to
rent storage space in the warehouse. During the current year, the following expenses are incurred:

Property P2,000
Insurance 1,500
Utilities 8,000
Repair of roofing and electrical connections 40,000

Which of the above expenses qualify as ordinary and deductible from gross income?

The purchase value of the land and the old vacant warehouse are capitalizable as well as the expenses for the repair of
roofing and electrical connections, while the rest of the expenses are deductible from gross income.

3. Unincurred expenses. Ferdinand Romero, a CPA, is engaged in the practice of his profession. During the year,
he spends P40,000 for journals, taxation books, renewal of license with the Professional Regulation Commission and
the Philippine institutes of Certified Public Accountants (PICPA) and fees for the seminars that help him meet the
Professional Regulation Commission’s requirement of Continuing Professional Education (CPE). However, the fees for
the seminars are being reimbursed by De La Salle Araneta University, where he is a tax professor. In preparing his
income tax return, which of the above expenses are deductible?

The expenses incurred in the subscription of journals and the purchase of books and renewals of license are
deductible. However, the fees for the seminars are not allowable deductions because these are subject to
reimbursement by the school

4. Allowed deductions on professionals. Erra passed the October 2008 CPA Licensure Examinations and engaged
in the practice of her profession. In preparing her income tax return she listed the following deductible items: (a)
fees paid to the Professional Regulation Commission (PRC) to be able to take the board examinations; (b) fees paid
to ARTS Review Center to enroll in its CPA Review; (c) malpractice insurance; (d) registration fee with the PRC
payment; (e) fees paid in attending the oath-taking ceremony at the Philippine International Convention Center
(PICC); (f) Membership fee with the Philippine Institute of Certified Public Accountants (PICPA), and (g) amount
spent to entertain a BIR employee who is assigned to examine the books of his client.

Which deductions are allowable?

Under Sec. 69 of Rev. Reg. No. 2, as amended, the following professional expenses are deductible: Sec. 69. A
professional may claim as deductions the cost of supplies used by him or in the practice of his profession, expenses
paid in the operation and repair of transportation equipment used in making professional calls, dues to professional
societies and subscriptions to professional journals; the rent paid for office rooms, the expenses of the fuel, light,
water, telephone, etc. used on such offices, and the hire office assistants. Amounts currently expended for books,
furniture and professional instruments and equipment, the useful life of which is short, may be deducted. But
amounts expended for books, furniture and professional instruments and equipment of a permanent character are
not allowable deductions.
Based on the foregoing, only the premiums paid for malpractice insurance is deductible.

5. Illegal payments. Dave is an operator of jueteng in Central and Southern Luzon. Following is a list of income
and expense items for the year:
 Remittances from curiadores and cabos P720,000,000
Salaries to employees 12,000,000
Depreciation of equipments 500,000
Bribes to politicians and law enforcers 200,000,000
Payments to winning bettors 350,000,000

What is Dave’s taxable income from the illegal business activity?

The rule is: “Income from illegal transactions are taxable; legitimate expenses of illegal businesses or
transactions are deductible, while illegal expenses incurred are not deductible, whether the business is
legitimate or illegitimate.”

Consequently, Dave’s taxable income from operation of jueteng is computed as follows:

Remittances 720,000,000
Less: Deductions
Salaries P 12,000,000
Depreciation 500,000
Payments to bettors 350,000,000 362,500,000
Taxable income 357,500,000

The bribes given to politicians and law enforcers are not deductible because they are not legitimate expenses. They
constitute “corruption of public officers” which is a criminal act.

6. Travel expenses. Kares is sent by her company to Bacolod City on a seven (7) day employment-related business
trip and incurs the following expenses:
Plane ticket (Manila to Bacolod and vice-versa) P4,500
Taxi fare 1,200
Meals 3,500
Hotel bills at Bacolod Pension Plaza 4,900
Laundry and other incidental expenses 600
Value of souvenir items purchased at Gaisano Mall 3,500

How much travel expense is deductible?

Plane ticket 4,500

Taxi fares 1,200
Meals 3,500
Hotel bills 4,900
Laundry and other expenses 600
Total deductible traveling expenses 14,700

7. Entertainment expenses. Manding, the company’s branch manager in Naga City was advised by the main office
in Manila to entertain Andy, a company’s prospective client who will spend a two (2) day visit just to be apprised of
the business status in Bicol.

In entertaining the guest, Manding incurred expenses for meals of P2,000; for wines and liquors at Bistro Roberto
P2,000; hotel accommodation at Villa Caceres Hotel P4,000 and P2,000 for guest relations officer which Andy brought
to his hotel room.

How much entertainment expense is deductible?

Meals and lodging 4,000

Hotel accommodation 4,000
Wines and liquors 2,000
Total entertainment expenses 10,000

8. Contribution to a candidate. Lacky Trading, a business establishment engaged in the sale of office supplies
contributed P300,000 to the campaign fund of Madelaine who is running for re-election as mayor of a certain city. Is
the P300,000 allowable as a deduction from gross income?
9. Bribe and kickbacks. In June of 2015, Harla Corporation enters into a contract with the Department of Public
Works and Highways to construct a ten (10) kilometer megadike in the Province of Pampanga. It is a standard
procedure of the corporation to kick back 20% of the project cost to the high officials of the government.

Under the terms of the contract, the project is to be completed by September 30, 2016. If it is not completed and
accepted by the DPWH on or before that date, Harla Corporation will be subject to a fine of P5,000 a day for everyday
after that date until the project is accepted. By September 1, the project foreman realizes that the company will not
make the deadline if it complies with all the requirements imposed by the inspectors to “look the other way” on
several of the requirements in exchange for a payment of money.

Discuss the issue on deductibility or non-deductibility of some expenditures incurred by the corporation.

The 20% kickback to the officials of the government is nondeductible. The bribe money given to the inspectors so
that it will not be strict in complying with the requirements of the contract is not also deductible.

10. Expenses of private educational institutions. The Near Western University, a private educational institution,
spent P3 million in the construction of additional building. The administration has no idea if they can claim deductions
on the cost of the building or not. The administration consulted you on the matter. What will be your advice?

The school administration can choose between (1) capitalizing the cost of the construction and claim the annual
depreciation as deduction from income, or (2) to claim the entire amount of P3 million as expense and deduct from
its income in the year of completion of the construction of the building.

11. Capitalization vs. Expense. Ling-ling incurs the following expenditures on an apartment building which she
owns:
Item Amount
Replace the roof P115,000
Repaint the interior walls 4,500
Replacement of electrical wiring 16,000
Install new doorknobs 600
Replace broken glass windows 900

Discuss the proper tax treatment of these expenditures

Replacement of roof - Capital

Repainting of interior walls - Capital
Replacement of electrical wiring - Capital
 Installation of doorknobs - Expense
Replacement of broken glass or windows - Expense

12. Interest expense. Cathy, a businesswoman, pledges some stocks and securities as collateral for a P500,000
loan. She then purchased a car with the proceeds of the loan. The car is used 100% of the time for personal purposes.
Is the interest expense allocated to the loan deductible for income tax purpose?

No, because the proceeds of the loan was used for the purchase of a car which is for personal use of Cathy. Inorder
that the interest expense can be allowed as deduction, the purpose in buying the car must be for use in business.

13. Interest expense minus interest income. During the year, Mahogany Company, a small-sized corporation,
paid a total of P185,000 interest expense on loans borrowed from various lending institutions. It also earned an
interest income from time and savings deposit of P5,000, gross of final tax. How much interest expense is deductible
by the company?

Deductible interest expense P185,000

No deduction of 20% of interest income because it is taxable at a rate of 20%.

14. Senior citizen and persons with disability. Lolo Tan Der rode in a sea vessel from Matnog, Sorsogon to Allen,
Samar. If the regular fare (inclusive of VAT) is P448, how much should he pay if he is a senior citizen? How about if
he is also a PWD?

Regular fare P448

Less: VAT component (448 / 1.12) (48)
Net of VAT P400
Less: Discount (400 x 20%) (80)
Amount payable P320

PWDs cannot avail of further VAT exemption and discount. Thus, the amount payable is still P320

15. Optional treatment of interest expense. Baby Company purchased an equipment worth P500,000 on June
30, 2016. The equipment with an estimated useful life of 5 years was financed thru a 1-year loan with PNB with
interest at the rate of 18% per annum beginning January 16, 2016 which was discounted in full.

In 2016, Baby Company realized an interest income on its bank deposit in the amount of P4,500, which was subjected
to 20% final tax.

How much is the amount of deduction in 2016 if the interest is treated as an expense? As a capital expenditure?

a. Interest is treated as an expense

Interest expense (500,000 x 18% x 11.5/12) 86,250
Less: Interest income subjected to final tax (4,500 x 20%) 900
Deductible interest 85,350

b. Interest is treated as a capital expenditure

Cost of equipment 500,000
Add: Interest on loan (500,000 x 18%) 90,000
Total cost 590,000

Depreciation as deduction in 2008 ( 590,000 / 5 x 6/12) 59,000

16. Discounted notes. On December 1, 2016, Farrah borrows P50,000 from a bank to use in her business. Under
the terms of the contract, Farrah actually receives P40,000 but is required to repay the P50,000 on February 1, 2017
(three months later). If Farrah is a cash method taxpayer, when can she claim the interest as deduction from her
income? How about if she is an accrual method taxpayer?

If Farrah is a cash method taxpayer, she is allowed to claim the interest as deduction in 2017, the year in which the
indebtedness was paid. However, if she is on accrual basis, she must claim the deduction in 2016.
17. Related taxpayers. Andres borrowed P2,000,000 from Kaibigan Corporation payable annually for five (5) years.
Andres owns fifty-five percent (55%) of the outstanding stock of the corporation. During the year, Andres paid an
interest on the loan totaling to P350,000. Is the interest deductible to Andres?

No, because the P350,000 is an interest on loan between related taxpayers. When a stockholder owns more than
50% of the outstanding stock of the corporation, then the stockholder and the corporation are considered to be
related taxpayers. In such a case, interest is not deductible from gross income

18. Tax refund. In 2016, Gordon Corporation is claiming donors tax of P40,000 and real property tax of P85,000 as
deduction from taxable income before taxes in the amount of P250,000. The following year, donor’s tax and the real
property taxes were refunded to the corporation. How much tax refund shall be taxable?

The entire amount of percentage taxes refunded to the corporation is taxable because the entire amount was allowed
as deduction in 2016. The refund of donor’s tax is not taxable because it is not allowed ad deduction from gross
income.

19. Deductible taxes. Which of the following tax payments are deductible?

A. Real property tax on apartment houses.

B. Real property tax on residential house.
C. Foreign income tax paid which was claimed as tax credit.
D. Value-added tax paid by Aristocrat Restaurant, a sole proprietorship business.
E. Income tax paid by Cecile Company engaged in business.
F. Special assessment on land used in business by the taxpayer.
G. Business taxes imposed by Naga City.

a. Real property tax on apartment houses - deductible

b. Real property tax on residential house - not deductible
c. Foreign income tax claimed as tax credit - not deductible
d. Value-added tax paid by sole proprietorship - not deductible
e. Income tax paid by company - not deductible
f. Special assessment - not deductible
g. Local business taxes - deductible

20. Foreign income tax. Sherryl, single, is a resident citizen who earns a business income in Spain. During the
current year, Sherryl earns P200,000 in Spain, gross of expenses of P60,000 and pays P20,000 of foreign income
tax. She also earns an income of P420,000 in the Philippines while the deductions, other than taxes, amounts to
P50,000. How much will be her taxable income if she elects to claim foreign taxes as deduction? How much is the
income tax payable if she decides to claim the foreign income tax as tax credit?
21. Tax credit. Malakas Corporation, a domestic corporation has the following data during the year:

Philippines United States Hongkong

Taxable income P6,500,000 P7,000,000 P8,000,000
Income tax paid - 400,000 500,000

Compute the income tax payable after tax credit by Malakas Corporation.
 LOSSES, BAD DEBTS, DEPRECIATION AND DEPLETION

1. Not connected with business. Tango, a businessman, went to Manila to spend a three-day vacation. While
walking along Recto Avenue, he accidentally bumped a beautiful lady wearing the school uniform of one of the
universities along Mendiola St. After asking an apology, Tango went inside a food chain and ordered chicken and
softdrinks for his lunch. It was only there that he discovered that his wallet containing P10,000 is missing. Can he
deduct the P10,000 from his gross income on business?

One of the requisites for deductibility of losses is that the loss must be incurred in connection with the business or
profession of the taxpayer. Neither the property lost nor the purpose of Tango in going to Manila is connected with
business. He went to Manila just to spend a vacation there. Consequently, the P10,000 is not deductible from his
business income

2. Casualty losses. Antonio, an auto mechanic, owns an auto repair shop business. During the year, a fire occurred
in his garage destroying the following properties:
Asset Book Value Book Value After Replacement Cost Insurance
Before Casualty Casualty Recovery
A P25,000 P0 P0 P10,000
B 10,000 2,000 15,000 5,000
C 8,000 1,000 6,000 3,000

Because of the fire, Antonio has to close the garage for two weeks. He estimates P14,000 lost in income while it is
closed, none of which is compensated by insurance. How much losses shall be allowed on Antonio?

2. Asset A: Total Destruction

Deductible loss:
Book value before casualty P25,000
Less: Insurance recovery 10,000 15,000

Asset B: Partial Destruction

Deductible loss:
Book value before casualty 10,000
Book value after casualty 2,000
Loss on book value 8,000
Replacement cost 15,000
Book value (lower) 8,000
Less: Insurance recovery 5,000 3,000

Asset C: Partial Destruction

Book value before casualty 8,000
Book value after casualty 1,000
Loss on book value 7,000
Replacement cost 6,000
Replacement cost (lower) 6,000
Less: Insurance recovery 3,000 3,000
Total loss on destruction 21,000
Add: Loss due to temporary closure 14,000
Total deductible loss 35,000

3. Casualty losses - Year of Deduction. Greg sprayed his mango plantation with a pesticide in June 2016. Shortly
thereafter, all of the trees unaccountably died. The fair market value of the trees was P2,500,00. Unfortunately, the
plantation was not insured. Later that year, the pesticide that Greg used. It also announced a program whereby
consumers would be repair for any damage caused by the improper mixture.
 A. Assume that in 2016 Greg files a claim for his losses and received notification that payment of P2,500,000
will be received in 2016. Greg receives full payment for the damage in 2017. When should the loss be
deducted from his income?
B. Suppose the manufacturer files a bankruptcy proceedings and Greg receives P200,000 in total and final
payment for his claim. How much loss shall be deducted from his income?
C. How will answer to Question (a) change if the announcement and the reimbursement do not occur until late
in 2017, after Greg has already filed his tax return for 2016?

A.. In 2018, Greg is not entitled to claim loss as deduction considering that there was already an assurance that the
value of the loss suffered of P250,000 will be totally paid by the pesticide manufacturer. Moreover, he cannot claim
the value of the damage because it was already paid.

B. In this case, Greg is entitled to claim P230,000 (P250,000 – 20,000) deduction from his income because only
P20,000 was paid by the manufacturer. He is entitled to claim the losses in the year the amount is finally determined,
provided that written notice has been submitted to the BIR in not less than 30 but not more than 90 days from the
date of discovery of the loss.

C.. If the announcement was made only by the pesticide manufacturer in late 2019, Greg would be entitled to claim
the losses of P250,000 in 2008. However, upon receiving the reimbursement, the P250,000 will be reported as
income in his income tax return in the year of receipt.

4. Losses - Year of Deduction. A tobacco plantation in Ilocos Sur costing P1,500,000 was destroyed by pests
starting December 2016. By the end of the year, about P500,000 was worthless. In January 2017, the plantation
was totally destroyed. It was not insured with any insurance company.

A. How much loss is deductible in 2016?

B. How about in 2017?
C. How much loss is deductible if the report was only made in June, 2017?

A. No loss is deductible in 2018 because the plantation was totally destroyed only the following year. One requisite
for deductibility of losses is that it must be sustained in a closed and completed transaction.

B. In 2019, the loss has already been sustained in a closed and completed transaction. Hence, it is already deductible.

C. The loss is not deductible because it was only reported after more than 90 days from the date of the discovery of
such loss.

5. Theft losses. On December 27 of the current year, Kelly’s business office safe is burglarized. The theft is
discovered five (5) days after the burglary. Five Thousand Pesos (P5,000) cash from the safe is stolen. In addition,
equipment and fixtures worth P45,000 were also lost. Unfortunately, these are not insured. When is Kelly allowed to
claim losses as deduction from gross income? How much?

Kelly can validly claim the deduction in the current year even if the burglary was discovered only on January 1 of the
following year (five days after December 27).
The amount of loss deductible is P50,000 which is composed of the cost of the equipment and fixtures of P45,000
and the cash valued at P5,000.

6. Net operating loss. During 2016, Kitana, single, reports the following:

Revenue from business P 65,000

Expenses from business 90,000
Kitana also worked as part-time employee during the year, earning a salary of P60,000. She reported dividends of
P2,000 and interest on time deposit of P1,500; but she had a long-term capital loss of P5,000 on the safe of a
personal property.

A. What is Kitana’s taxable income for 2016?

B. What is Kitana’s net operating loss for 2016?

a. Revenue P65,000
Less: Expenses 90,000
Loss on business (25,000)

Salary P60,000

Taxable income 60,000

b. Revenue P65,000
Less: Expenses 90,000
Net operating loss 25,000

Notes:
1. The dividends and interest on time deposit are not included in the computation because they are passive
income subject to final tax.
2. The capital loss is deductible only if the taxpayer has a capital gain.
3. The loss of P25,000 in operation cannot be deducted from the salary because losses are not allowed as
deduction from compensation income.

7. Wagering losses. Liamado, an operator of farm for fighting cocks, regularly attends to local and national
cockfighting derbies. During the year, because he believes that he is frequently in bad luck, he decides to stop
temporarily in going to cockpit. Also during the year, his total wagering gains is P475,000 while the losses amount
to P700,000. His net income from business is P250,000. If Liamado is single, how much is his taxable income?
Business income 250,000
Wagering transactions:
Wagering gains 475,000
Wagering losses 700,000
Net wagering loss (225,000)

Taxable income 250,000

Note:
The net wagering loss of P225,000 cannot be deducted from the business income because wagering losses are
deductible only from wagering gains.

8. Voluntary removal of buildings. Jose and Allan are close competitors in business. During the year, Jose
managed to buy a parcel of land with an old building thereon for P1,500,000. The land had an allocated price of
P1,000,000 while the old building is P500,000. Jose’s intention is to demolish the old one and replace it with a three-
storey commercial building. He spent P80,000 for the demolition, but earned P15,000 from the sale of the scrap. The
cost of the newly constructed building is P4,000,000.

Upon knowing that Jose is constructing a new office beside his business place, Allan decided also to demolish his
building with an undepreciated value of P1,500,000. He spent P18,000 for the demolition but earned P5,000 from
the sale of the scrap. He spent P3,500,000 for the construction.

A. How much is the cost of the building to Jose? To Allan?

B. How is the cost of the land to Jose?
C. How much is the deductible loss caused by the demolition of old building to Jose? To Allan?

a. Cost of building
To Jose 4,000,000
Allan 3,500,000
 b. Allocated price of the old building 500,000
Demolition cost 80,000
Value of scrap ( 15,000)
Added to the cost of the land 565,000
Allocated price of the land 1,000,000
Cost of the land to Jose 1,565,000

c. Amount of deductible loss

To Jose -
In the case of Jose, no loss is deductible because the cost of the old building plus the demolition
cost minus the sale of scrap is added to the cost of the land.

In the case of Allan, the deductible loss is computed as follows:

To Allan -
Book value of the old building 1,500,000
Demolition cost 18,000
Value of scrap ( 5,000)
Deductible loss 1,513,000

9. Loss of useful value. Gates Advertising Office uses typewriters in preparing all pertinent data and documents.
When computers were introduced, they discovered that aside from the fact that computers are, the service of one
computer is equivalent six (6) ordinary typewriters, Gates Advertising Office decided to abandon the services of six
(6) typewriters, sold them at P1,000 each, and purchased two (2) sets of computers. The value of each typewriter
upon its abandonment was P4,000. How much loss is deductible by Gates Advertising Office?

Total value of typewriters (P4,000 x 6) 24,000

Less: Selling price (P1,000 x 6) 6,000
Loss of useful value 18,000

10. Decline in value of securities; sale of traded stocks at a gain. Nitz purchased 5,000 shares of Objective
Corporation stock for P50,000 on February 22 of the current year. On September 30 of the same year, the price of
the stocks in the stock market declines to P45,000. May Nitz deduct the P5,000 loss? How about if she sells the stock
for P44,000?

Suppose she was able to sell them at P55,000, will the gain on the sale be subject to income tax?

Nits cannot deduct the P 5,000 which is the result of usual fluctuation of the price of stocks in the market. However, if
she sells the stocks for P 44,000, she is entitled to claim P 6,000 (50,000-44,000) deduction from her income because
it is the amount that she actually suffered when the stocks were disposed of.
If the stocks are sold at P55,000 resulting to a gain of P5,000 (55,000 – 50,000), the gain is not subject to income tax
because sales of shares of stock which are traded in the stock exchange are not subject to income tax. They are
subject to business taxes known “other percentage taxes – stock transaction tax.”

11. Business bad debt. Elaine is a physician who uses the cash method of accounting for tax purposes. During the
current year, Elaine bills Ralph P30,000 for office visits and outpatient surgery. Unfortunately, unknown to Elaine,
Ralph moves away leaving no payment and no forwarding address. What is the amount of Elaine's bad debt deduction
with respect to Ralph's debt?

All services rendered can only be considered as bad debts and deductible from gross income of taxpayer if it has
already been declared as income. In the case of Elaine since she is using cash method of accounting, she will only
report income from services upon receipt of payment. Considering that she has not yet received the cash payment,
the income has not yet been declared. Hence, she cannot deduct the P30,000 as bad debt.

12. Nonbusiness bad debt. During 2014, Yoly, who owns a single proprietor-ship business, loans her brother
Howard P25,000, which he intends to use to establish a small business. Since Howard has no other assets and needs
cash to expand the business, the agreement provides that Howard will repay the debt if (and when) sufficient funds
are generated from the business. No interest rate is agreed upon. The business is unsuccessful, and Howard is forced
to file for bankruptcy in 2016. In 2017 the bankruptcy proceedings are closed, and the creditors received 10% due
on the debt.
to establish a small business. What is Yoly's bad debt deduction in 2017?
Yoly is not entitled to claim bad debt as deduction from her income. One of the requisites for its deductibility is that
the bad debts must not be sustained in a transaction entered into between the members of the same family or related
taxpayers. Since Howard, the debtor, is a brother of Yoly, the creditor, the transaction is considered as entered into
between members of the same family. Consequently, the bad debt is not deductible from her gross income.

13. Worthless accounts. A number of students enrolled in Better Business School are failing to pay their
matriculation fees despite repeated demands from the school authorities. When typhoon Reming occurred in the
region, these students quit from schooling without paying their accounts. The school is using accrual method of
reporting income and the expected collections have already been recorded. Can the school declare these unpaid fees
as bad debts even if no suit was instituted in court?

In the instant case, filing a case in court is very impractical. Firstly, they would be filing numerous cases in court just
for small amount of claims. Secondly, even if they win the case, the school could not expect that the students could
afford to pay the judgment money.

Wherefore, the requirement of taking reasonable steps has already been complied even if no cases were instituted
in court.

14. Tax benefit rule. Nalugi Na Corporation is losing heavily because of big amount of uncollected receivables. In
2016, it suffered a loss of P150,0000 before deducting worthless accounts. The bad debt written off is P65,000

The following year, the P65,000 which was previously written-off was collected. Is the amount collected taxable to
the corporation?

Under the tax benefit rule, the recovery of bad debts previously deducted is taxable if at the time it was claimed as
deduction from gross income, it resulted to a reduction in the tax payable by the taxpayer. If not, its recovery is not
also taxable.

In the instant case, since the corporation had suffered loss of P150,000 before bad debt, the deduction of the latter
did not reduce its tax liability. Hence, the recovery of P 65,000 is not taxable to the corporation.

15. Deductible vs. Non-deductible. Indicate whether the taxpayer can claim depreciation on the following items:

A. Property used in business with useful life of less than one year.
B. Inventories or stocks in trade.
C. Incidental repairs which neither materially add to the value of the property nor appreciably prolong its life.
D. Urgent repairs made on the car which was bumped while being used by Jackie in business.

A – Property with useful life of less than one (1) year - No

B – Inventories or stock in trade - No
C – Incidental repairs - No
D – Urgent repairs on car which was bumped - No

RESEARCH AND DEVELOPMENT, PENSION TRUST, AND CONTRIBUTIONS

1. Research and development. In 2011, Kurosawa Corporation leases a research laboratory to develop new
products and to improve existing products. Kurosawa Corporation, a calendar year taxpayer that uses the accrual
method of accounting, incurs the following expenditures during 2017:

Laboratory supplies and materials P40,000

Laboratory equipment 60,000
Utilities and rent 50,000
Salaries 50,000
Total expenditures P200,000

The benefit from the R & D expenditures are to be realized in January, 2018.

REQUIRED: Compute the research and development expenditures if the company elects to:
A. Expense the R & D expenditures
B. Defer the expense and amortize over a period of 60 months

The corporation elects to expense R & D

 Laboratory supplies and materials P 40,000
Laboratory equipment 60,000
Utilities and rent 50,000
Salaries 50,000
Total research and development expense 200,000

The corporation elects to defer expenses and amortize it over a period of 60 months:

None of the expenses incurred above are deductible. The deduction shall commence in January, 2018 the
year in which the benefits are first realized.

2018 – Total R & D expenditures 200,000

Divide by amortization month 60
Monthly amortization 3, 333

2. Pension trust. Soltoro Company decided to establish a pension plan for its employees. It appointed the Philippine
Trust Company as trustee to administer the plan. During the taxable year, it contributed P50,000 to the plan to cover
pension of employees for past services. It is also required that the employer has to pay P5,000 a year to the trustee.
How much contribution to pension trust can be deducted by the employer from its gross income?

Amount paid during the taxable year 5,000

Amount paid to cover past pensions (50,000/10) 5,000
Total amount deductible 10,000

3. Contributions. Kapuspalad Corporation, a domestic corporation, has the following income and expenses during
the year 2012:
Sales P1,000,000
Cost of sales 350,000
Deductions (except contributions) 200,000
Contributions - deductible in full 20,000
Contributions - subject to limit 20,000
Capital gains (14 years) 30,000
Capital loss (10 months) 10,000

REQUIRED: Compute the taxable income of the corporation.

Sales 1,000,000
Less: Cost of Sales 350,000
Gross income 650,000
Less: Deductions (except contributions) 200,000
Taxable income before contributions 450,000
Less: Contributions
Deductible in full P20,000
Subject to limit, actual P 20,000
Limit (P450,000 x 5%) 22,500
Deductible (lower) 20,000
(40,000)
Other income
Capital gain (no holding period) 30,000
Capital loss (10,000) 20,000
Taxable income 430,000