Edwin Robert O.

Fundales
BACC2A

INCOME TAXATION Final Exam

Please show solution (if necessary).

I. What are the salient features of CREATE law?

- CIT rate is reduced from 30% to 25% for large corporations, and 20% for small and
medium corporations with net taxable income not exceeding P5 million, and total assets
not exceeding P100 million (excluding land) effective July 1, 2020;

- Minimum CIT (MCIT) rate is reduced from 2% to 1% effective July 1, 2020 to June 30,
2023;

- Percentage Tax is reduced from 3% to 1% effective July 1, 2020 to June 30, 2023;

- The improperly accumulated earnings tax shall no longer be imposed on corporations

upon the effectivity of the CREATE onwards;

- Qualified export enterprises shall be entitled to four to seven years Income Tax Holiday
(ITH) to be followed by 10 years 5% Special CIT (SCIT) or enhanced deductions;

- Qualified domestic market enterprises shall be entitled to four to seven years ITH to be
followed by five years enhanced deductions;

- Registered enterprises are exempt from customs duty on importation of capital

equipment, raw materials, spare parts, or accessories directly and exclusively used in
the registered project or activity;

- Value-Added Tax (VAT) exemption on importation and VAT zero-rating on local

purchases shall only apply to goods and services directly and exclusively used in the
registered project or activity by a Registered Business Enterprise (RBE);

- For investments prior to the effectivity of CREATE, RBEs granted only an ITH shall
continue with the availment of the ITH for the remaining period of the ITH while RBEs
granted an ITH + 5% Gross Income Tax (GIT) or currently enjoying 5% GIT shall be
allowed to avail of the 5% GIT for 10 years.

II.

Give instances of short accounting period for tax purposes?

- A short tax year occurs when a business makes a decision to change its taxable year, this
change requires the IRS’ approval and a filing using Form 1128.1
 - The short tax period begins on the first day after the close of the old tax year and ends
on the day before the first day of the new tax year
- For example, a business that has reported income from April to April every year
suddenly decides to change the fiscal year to begin in September. A short tax year from
April to September will be reported for as a transition period
- If a taxpayer, other than an individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to calendar year, a separate final or
adjustment return shall be made for the period between the close of the last fiscal year
for which return was made and the following December 31. If the change is from
calendar year to fiscal year, a separate final or adjustment return shall be made for the
period between the close of the last calendar year for which return was made and the
date designated as the close of the fiscal year. If the change is from one fiscal year to
another fiscal year, a separate final or adjustment return shall be made for the period
between the close of the former fiscal year and the date designated as the close of the
new fiscal year.

III.

Mr. X sold his principal residence for P2M. What are the requisites to claim exemption from CGT on
the sale of his house?

- If Mr X’s capital gains is presumed to have been realized from the sale or disposition of
their principal residence by natural persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence within eighteen (18) calendar
months from the date of sale or disposition, shall be exempt from the capital gains tax
imposed under this Subsection: Provided, That the historical cost or adjusted basis of
the real property sold or disposed shall be carried over to the new principal residence
built or acquired: Provided, further, That the Commissioner shall have been duly notified
by the taxpayer within thirty (30) days from the date of sale or disposition through a
prescribed return of his intention to avail of the tax exemption herein mentioned:
Provided, still further, That the said tax exemption can only be availed of once every ten
(10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax. For this purpose, the gross selling price
or fair market value at the time of sale, whichever is higher, shall be multiplied by a
fraction which the unutilized amount bears to the gross selling price in order to
determine the taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.
 - Mr X. must have owned the home for a period of at least two years during the five years
ending on the date of the sale, and must have used it as his main home for at least two
years during the past five-year period after the sale or exchange. And he cant have used
it for any home sold or exchanged during the two year period. This period ends on the
date of the current sale or exchange.
- Or if he is selling his properties in order to acquire or construct a new home are
exempted from this rule, but only if he ensures that the money will actually go to the
new property and not elsewhere

IV.

Mr. X invested in the stocks of ABC Corporation, a domestic corporation, by purchasing 1,000 shares
for P100,000 on July 1, 2016. ABC declared a P10/share cash dividend on November 12, 2021 payable
on January 12, 2021 for stockholders of record December 12, 2021. On December 8, 2021, Mr X
disposed of his share investment for a total consideration of P120,000. Explain the tax treatment in
the transaction.

- Based on the Sec 24 (C) of the NIRC, A final tax at the rate of fifteen percent shall be
imposed on net capital gains realized during the taxable year from the sale, exchange or
other disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange.

V.

A taxpayer reported the following:

Capital loss – current year P50,000

Capital gain – current year 200,000

Net capital loss – last year 70,000

Q1. Assuming the taxpayer is an individual, compute the capital loss deductible against capital gain
inthe current year.

40% (200,000 – 50,000)

40% (150,000)
= 60,000

Q2. Assuming the taxpayer is a corporation, compute the capital loss deductible against capital gain
inthe current year.

40% (200,000 – 70,000)

40% (130,000)
= 52,000

VI.
Mr. Z, a manufacturer of goods under accrual basis, opted to claim optional standard deduction.
Asidefrom manufacturing, Mr. Z also leases a portion of his business to other businesses. The
following relate to his income:

Gross Sales P4,000,000

Sales returns and allowances 200,000

Rental Income 300,000

Interest Income from bond investment 15,000

Interest Income from customers’ notes 100,000

Gain on sale of old equipment 20,000

Dividend from a domestic corporation 18,000

What is the amount of taxable income?

NOTE: In computing OSD, non-operating income such as interest from bonds and gain on sale of
equipment shall be excluded.

Gross Sales P4,000,000

Less; Sales returns and allowances 200,000
Net Sales 3,800,000
Multiply: OSD rate 40%
Allowable deduction OSD 1,520,000

Net sales 3,800,000

Less: OSD 1,520,000
Taxable income 2,280,000
Add: Other income 453,000
Taxable income 2,733,000

VII.

A taxpayer under the cash basis had the following expenditures:

Acquisition of office equipment at the

Middle of the year (5-year useful life) P200,000
Payment of employee salaries 40,000
Payment for office utilities expenses 60,000

How much is the claimable deductible expenses for the year?

200,000/5 years = 40,000/2 = 20,000

Add: payment of employee salaries 40,000
Payment for office utilities expenses 60,000
120,000
VIII.

True or False.

1. The sick leave credit of private employees up to 10 days is exempt de minimis benefits. TRUE

2. A non-stock, non-profit entity is subject to tax on income from unrelated activities. TRUE

3. Personal expenses can be claimed as part of itemized deductions. FALSE

4. The tax sparing rule is applicable to RFC and NRFC. FALSE

5. General Professional Partnerships are subject to final tax but not to regular income tax. TRUE

- end