DEDUCTIONS HANDOUT

LEARNING OBJECTIVES:
Deductions – Amounts allowed to be subtracted from Gross Income to arrive at taxable income in the ITR. Taxpayers
may choose not to avail of deductions. If deductions are claimed, the burden of proving the legality and correctness of
the deductions rests upon the taxpayer. The taxpayer has the obligation to substantiate with receipts and other
evidences every item of deductions when required.

Types of deduction:
1. Itemized Deductions (ID)
2. Optional Standards (OSD)

Notes:
a. Individuals engaged in trade or business, or profession can select the ID or OSD if they are being taxed under the
graduated rates. If they are taxed under the 8% tax regime, no deductions shall be available in computing their tax
based.
b. Individuals earning compensation income are not allowed any deduction from their compensation income.
c. If the taxpayer is cash basis – accrued expense are not deductible, however, if the taxpayer is accrual basis accrued
expense are deductible

ITEMIZED DEDUCTIONS:

Ordinary Itemized Deductions Special Itemized Deductions

1. Business expenses 1. Special deduction of insurance company
2. Interest expense 2. Special deduction of real estate
3. Deductible taxes 3. Deduction of establishment granting sales
4. Losses discount to persons with disability (PWD)
5. Special losses and senior citizen
6. Bad debts 4. Tax incentives for employers of disabled
7. Depreciation and depletion persons and senior citizen
8. Pension contribution 5. Tax incentives for establishments and
9. Charitable contribution institutions with rooming-in and
10. Research and development breastfeeding practice
6. Tax incentives for lawyers or GPPs rendering
free legal services
7. Tax incentives for establishments
participating in the dual training system
8. Tax incentives for enterprises adopting
productivity incentives programs
9. Donation to public schools
10. Qualified employer’s contribution to PERA
11. Tax incentives granted to registered tourism
enterprises
12. Tax incentives granted to qualified jewelry
enterprises
13. Tax deduction for hospitals or medical clinics
14. Deduction of private Filipino seed producers
15. Deduction of business enterprises that
Generate and Sustain Green Jobs

Page 1 of 12
1. Business Expenses:
a. Compensation expense
I. Includes salaries and other form of compensation, including bonuses, and the Gross-up Monetary
Value of fringe benefits subject to final tax.
II. Includes management and labor expenses, commissions, and pension payments.
III. Includes compensation for injuries paid by the employer less any insurance proceeds.
IV. Includes premium on life insurance of the employee where the beneficiary is not the employer, but
the employee
V. Includes salaries paid after death of the employee, but does not include donation for coffin and wake
expenses.

b. Travelling expense:
I. Includes transportation expenses, meals and lodging

II. Additional requisites for deductibility: Must be incurred while away from home. Tax home refers to
the place of work, business, or employment.

c. Entertainment, amusement, and recreational expense (EAR):

I. Expenses in entertaining or meeting with guests, or clients (called representation expenses)
II. Includes depreciation or rental expenses relating to entertainment facilities:
III. Subject to the following limit:
- For taxpayer engaged in the sale of goods and properties: ½ of 1% of net sales
- For taxpayer engaged in the sale of services: 1% of net revenue

d. Materials and supplies actually consumed in business

e. Maintenance and repairs which do not add to the value of the property nor appreciably prolong its life

f. Rental expense of property used in business

- Advance or prepaid rentals are not allowed to be deducted in year of payment.
- Taxes and other obligations of the lessor which are paid by the lessee, are allowed as deductions.
- Depreciation of leasehold improvement is available as deduction.

g. Operating expenses of transportation equipment used in the trade, profession, or business.

h. Insurance premiums against fire, storm, theft, accident, or other similar losses in trade.

i. Miscellaneous expenses
- Amortization of pre-operating expenses, which are treated as deferred expenses, for not more
than 60 months.
- Costs of suits (litigation) are allowed as deduction.
- Judgment against the taxpayer less any amount compensated for by insurance or otherwise
- Amortization of the discount upon issuance of a corporation’s bonds
- Loss upon a corporation’s retirement of its own bonds

j. Capital expenditure of private education institution

- The capital expenditure can be claimed as allowable deduction either of the following method:
I. Expense immediately
II. Capitalized and depreciate

Requirements for deductibility:

- Ordinary and necessary for the business
- Incurred or paid during the taxable year
- Connected with the trade, profession, or business of the taxpayer
- Reasonable expenses of the business
- Substantiated by official receipts/records
- The withholding tax required to be withheld has been withheld and remitted to the BIR

Notes:
- Bribes and kickbacks (both local and foreign officials) are not allowed as deductions
- Deductible business expenses of non-resident citizen, resident aliens, NRAETB, and RFC’s constitute expenses
paid or incurred in carrying out its business in the Philippines.

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2. Interest expense
a. Requirements:
I. Must be connected with the trade or business
II. There must be a liability to pay interest. The obligation to pay interest must be stipulated in writing
and must be legally due.
III. Must be paid or accrued within the taxable year.
IV. Interest expense must be the obligation of the taxpayer
V. Interest payment must not be between related taxpayers.
Related taxpayers are:
• Between the taxpayer and his brother/sisters, spouse, ancestors
• Between corporation and an individual who owns, directly or indirectly, more than 50% in
value of the outstanding stock of such corporation
• Between 2 corporations where more than 50% in value of the outstanding capital stock of
each corporation is owned directly or indirectly, by the same individual.
• Between the grantor and fiduciary
• Between the fiduciary and trust having the same grantor
• Between the fiduciary and a beneficiary of a trust

b. Deduction to allowable interest is equal to 25% of interest income subjected to final tax.

Interest expense P XX
Interest income from bank deposit ( XX)
Interest expense allowable as deduction P XX

c. Optional treatment of interest incurred to acquire property used in trade or business can be claimed as
allowable deduction either of the following method:
I. Immediately expense
II. Capitalized as part of the cost of the property

d. Non-deductible interest
I. Prepaid interest by a cash-basis taxpayer. The interest expense is not allowed to be deducted in the
year the cash-basis taxpayer takes out the loan. The interest expense will be deducted only in the year
the debt is paid.
II. Interest paid between related taxpayers
III. If debt is incurred to finance petroleum exploration
IV. Interest expense attributable to income without the Philippines of an alien or foreign corporation
V. Interest on preferred stock which is actually a dividend
VI. Interest on debt incurred to purchase a tax-exempt security
VII. Interest which is not stipulated in writing

3. Deductible Taxes
a. Requirements:
I. Paid or incurred within the taxable year
II. Must be connected with the profession, trade, or business
III. Is directly imposed on the taxpayer

b. List of deductible and non-deductible taxes

Deductible Taxes Non Deductible Taxes
1. Import duties 1. Income tax
2. Percentage taxes 2. Estate tax
3. Local business taxes 3. Donor’s tax
4. Community tax 4. Special assessment
5. Occupation tax 5. VAT
6. Privilege and license taxes 6. Final taxes
7. Excise taxes
8. DST
9. Automobile registration fees
10. Real property taxes
11. FBT
12. Interest on delinquent taxes

Page 3 of 12
 c. Notes
I. VAT is non-deductible except input VAT allocated to exempt sales (which is deductible).
II. Fines and penalties imposed due to late payment of tax are not deductible. But interest imposed due
to the same is deductible
III. Tax benefit rule applies to refund of deductible taxes.

4. Ordinary Losses
a. Casualty losses – due to mishap, accident, fortuitous event, robbery, theft, embezzlement of property used in
the trade, profession, or business of the taxpayer.

I. Requirements:
• Must be involve ordinary properties
• Actually sustained
• Not claimed as a deduction for estate tax purposes
• Not compensated for by insurance or by other form
• Must be reported to the BIR within 45 days from the date of loss

II. If loss is total – the deductible amount is the book value of the asset less any amount of insurance
proceeds or compensation received.

III. If loss is partial – the deductible amount is the replacement cost or book value of the asset, whichever
is lower. If replacement cost is greater than the book value, the excess shall be capitalized and
depreciated over the remaining useful life of the property.

b. Business losses – losses incurred in the trade, profession, or business of the taxpayer
I. Losses from sale of ordinary asset
II. Partner’s share in the losses of GPP
III. A denied VAT refund claim is valid loss which may be properly deducted from gross income

5. Net Operating Loss Carrying Over (NOLCO) – excess of allowable deduction over gross income in taxable year:
a. Net operating loss can be carried over and deducted from income for the next 3 consecutive taxable years.
Under Bayanihan Act 1 and 2, NOLCO incurred in 2020 and 2021 can be carried over for the next 4 years. Mining
entities can claim NOLCO as deduction for the next 5 years.

b. NOLCO shall be allowed only if there has been no substantial change in the ownership of the business. “No
substantial change” means > 75% in value of the outstanding shares or > 75% of the paid-up capital of a
corporation, is held by or on behalf of the same person.

6. Special Losses
a. Wagering losses – deductible only to the extent of gains or winnings

b. Cost of Lotto tickets only if the winnings is taxable (i.e., more than P10,000).

c. Loss due to the voluntary removal of old building. However, no deduction is allowed when a taxpayer buys
land on which structures are erected.

d. Loss of Useful value – loss of usefulness of an asset or property used in business due to changes in business
condition. Loss must be charged off the books the remaining depreciable amount.

e. Securities, shares of stock becoming worthless – becoming worthless means value is close to zero; Mere
shrinkage in value is not deductible. If shares of stock are held as capital assets, and have become worthless
during the taxable year, such loss shall be treated as capital losses which can be deducted only against “Other
capital gains” in the ITR.

f. Abandonment losses in Petroleum operation

g. Losses from sale of shares of stock

h. Non-deductible Losses:
• Losses from sale or exchange between related taxpayers
• Losses from wash sales – wash sales is a sale of security if, within a period of 30 days before the date
of sale and ending 30 days after such sale, the taxpayer purchased the same identical shares

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7. Depreciation and depletion
a. Requirements
I. Asset must be used in trade, business, or profession
II. Asset has a limited useful life
III. Allowance for depreciation must be reasonable
IV. Allowance for depreciation must be charged off

b. Method of depreciation allowed:

I. Straight-line
II. Declining balance method
III. Sum of the years digit method
IV. Units of production method
V. Any reasonable method

8. Bad Dets
a. Requirements:
I. There must be a valid and subsisting debt owed the taxpayer
II. The debt must be connected with the trade, business, or profession
III. The debt must be ascertained to be worthless
IV. The debt must be charged (written) off within the taxable year.

b. Non-deductible bad debts:

I. Bad debts not connected with the trade, business, or profession
II. Bad debt between related parties

9. Charitable Contribution
a. Requirements:
I. Contributions or gifts are actually paid.
II. Net income of the recipient odes not inure the benefit of any stockholder of individual owner
III. Taxpayer making the charitable contribution must be engaged in trade, business, or profession

b. Valuation – The amount of any charitable contribution of property other than money shall be based on the net
book value of the said property as reflected in the financial statements of the donor.

c. Recipient of donation - Allowable donation are donation given to:

I. Government

II. Accredited corporations or associations organized and operated exclusively for religious, charitable,
scientific, youth and sports development, cultural, educational, or the rehabilitation of veterans

III. Social welfare institutions

IV. Non-governmental organizations (NGOs)

d. Limit of donation
Donation of Individuals Donation of Corporation
5% of taxable income derived from trade, profession 10% of taxable income derived from trade, profession
or business. The basis of the limit does not include or business. The basis of the limit does not include
non-operating income. non-operating income.

10. Research and Development Expenditure – Must be connected with the trade, business, or profession of the
taxpayer.

Option of taxpayer:
a. Outright deduction.
b. Amortize over a period of 5 years beginning in the month that benefits are first realized.

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OPTIONAL STANDARD DEDUCTIONS FOR INDIVIDUALS:

Resident citizen, resident alien, nonresident citizen who compute their income tax under the graduated tax rate may
avail the OST. Note: Individuals claiming the 8% tax rate is not allowed to claim OSD.

Computation of OSD for individuals:

Net sales P XX
Add: Non-operating income XX
Total P XX
Times: OSD Rate 40%
OSD P XX

Note: For individuals claiming the OSD, taxpayer can no longer deduct their Cost of goods sold and Itemized deduction.
Thus, taxable income of individual is computed as follows:

Net sales P XX
Add: Non-operating income XX
Total P XX
Less: OSD ( XX)
Taxable income P XX

OPTIONAL STANDARD DEDUCTIONS FOR CORPORATION:

Only domestic corporation and resident foreign corporations can claim OSD. Non-resident foreign corporation cannot
claim neither OSD or itemized deduction.

Computation of OSD for corporation:

Net sales P XX
Less : Cost of goods sold ( XX)
Gross income from business P XX
Add: Non-operating income XX
Total gross income P XX
Times: OSD rate 40%
OSD P XX

Note: For corporations claiming the OSD, it can still deduct their Cost of goods sold but not the itemized deduction.
Thus, taxable income of corporations is computed as follows:

Net sales P XX
Less : Cost of goods sold ( XX)
Gross income from business P XX
Add: Non-operating income XX
Total gross income P XX
Less: OSD ( XX)
Taxable income P XX

Election of the OSD:

• Made in the first Quarterly Return. Failure by taxpayer to indicate OSD election in the 1st Quarter means that
taxpayer is claiming itemized deduction.

• When made, it is irrevocable for the entire year.

• Failure to file the 1st Quarter return is equivalent to availing itemized deduction for the year.

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FOREIGN INCOME TAX CREDIT

The tax credit allowed is equivalent to the amount of income tax paid or incurred to any foreign country during the
taxable year but not to exceed the limitations prescribed by law:

1ST Limit

Taxable Income (per foreign country)

x Phil. Income Tax = Limit 1
Total taxable income

2ND Limit

Taxable Income (all foreign country)

x Phil. Income Tax = Limit 2
Total taxable income

ILLUSTRATION:

The records of a domestic company show the following data for the year 2019:

Gross income Business expenses Tax paid

Philippines P 350,000 P 150,000 -
U.S.A. 500,000 200,000 P 98,000
Canada 100,000 50,000 20,000
Japan 250,000 300,000 -
Total P 1,200,000 P 700,000

Required: Compute the tax due claiming the foreign taxes as tax credits:

Gross income P 1,200,000

Expenses ( 700,000)
Taxable income P 500,000
Tax rate 30%
Phil. Income Tax P 150,000

1ST Limit
Taxable Income USA = 300,000
x 150,000 = 90,000
Taxable Income World = 500,000
Tax paid in U.S.A. = 98,000
Lower – USA = 90,000

Taxable Income Canada = 50,000

x 150,000 = 15,000
Taxable Income = World = 500,000
Tax paid in Canada = 20,000
Lower – Canada = 20,000
Lower – USA = 90,000
1ST Limit = 105,000

2ND Limit
Taxable Income Foreign = 300,000
x 150,000 = 90,000
Taxable Income World = 500,000
Tax paid in all foreign = 118,000
2ND Limit = 90,000

1ST Limit = 105,000

2ND Limit = 90,000
Tax paid = 118,000
Tax credit – lowest = 90,000

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DISCUSSION QUESTION:
1. Statement 1 – Deductions from gross income refer to the flow of wealth to the taxpayers that are not treated as
part of gross income.
Statement 2 – Exclusions are the amounts, which the law allows to be deducted from gross income in order to
arrive at net income.
Statement.
Statement 3 – Allowable deductions generally refer to amounts that are subtracted directly from one’s total tax
liability.

A. True, true, true C. True, false, false

B. False, true, false D. False, false, false

2. A Corporation had net sales of P1,000,000. The actual entertainment, amusement and recreation expense
amounting to P20,000. The deductible “EAR” expense is
A. 20,000 C. 10,000
B. 6,000 D. 5,000

3. C Corporation had net revenue of P1,000,000. The actual entertainment, amusement and recreation expense
amounted to P20,000. The deductible “EAR” expense is
A. 20,000 C. 5,000
B. 6,000 D. 10,000

4. C Corporation is engaged in the sale of goods and services with net sales and net revenue of P2,000,000 and
P1,000,000. The actual entertainment, amusement and recreation expense amounted to P18,000. The deductible
“EAR” expense is
A. 18,000 C. 12,000
B. 16,000 D. 6,000

Interest
5. The phrase “related taxpayers” under Sec. 36(B) of the Tax Code will apply to the following, except:
A. Between members of a family
B. Between the grantor and a fiduciary of any trust
C. Between a fiduciary of a trust and 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

6. The following relates to a taxpayer:

Interest expense – mortgage notes P 150,000

Interest expense – notes issued to sister company (60% ownership) 250,000
Interest expense – time deposit, net of final tax 100,000

Compute the deductible interest expense

A. 373,600 C. 117,000
B. 367,000 D. 125,000

7. 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 capital expenditure at the option of the government

8. If an individual is on the cash basis of accounting, will interest paid in advance be allowed as a deduction?
First Answer – No, it is a deduction in the year that the indebtedness is paid and not in the year that the interest is
paid.

Second Answer – Yes, if the indebtedness is payable in periodic amortizations, the amount of the interest which
corresponds to the amount of the principal amortized or paid during the year shall be allowed as a deduction in
such taxable year.

A. True, true C. False, false

B. True, false D. False, true

Page 8 of 12
Deductible Taxes
9. Examples of taxes that are deductible except
A. Occupation tax C. Documentary stamp tax
B. Privilege tax D. Philippine income tax

10. Non-deductible taxes, except

A. Special assessment C. Estate tax
B. Donor’s tax D. Business tax

Losses
11. 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 BIR
D. Must have been claimed as deduction in the estate return of taxpayer

12. A taxpayer engaged in business incurred a partial loss of property as follows:

Asset 1 Asset 2
Book value of the asset at the asset at the time of loss P200,000 P200,000
Cost to restore the property back to its normal operation condition 120,000 300,000
Insurance recovery 50,000 None
Salvage None 40,000

The deductible loss for Asset 1 is

A. 120,000 C. 30,000
B. 70,000 D. 80,000

13. The deductible loss for Asset 2 is

A. 300,000 C. 160,000
B. 330,000 D. 240,000

NOLCO
14. The term “net operating loss’ shall mean
A. The excess of allowable deductions over gross income of the business in a taxable year
B. The excess of the ordinary itemized deductions 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

15. A, domestic corporation organized in 2006 provided the following information:

2021 2022 2023 2024

Net sales 4,000,000 5,000,000 6,000,000 9,000,000
Cost of sales 2,000,000 3,500,000 4,200,000 5,200,000
Business expense 1,900,000 1,550,000 1,820,000 2,300,000
Assume that the applicable tax rate is 20%. The income tax still due for 2024 is
A. 253,000 C. 286,000
B. 300,000 D. 266,000

16. 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 Omnibus Investment Code of 1987, may 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

17. The net operation 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 year immediately following such loss
B. 3 consecutive taxable year immediately following such loss
C. 4 consecutive taxable year immediately following such loss
D. Taxable year immediately following such loss

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Special Losses
18. Which of the following statements is true?
A. Payments which constitute bribes, kickbacks and others of similar nature which are necessary to realize profits
are allowed as deductions from gross income.
B. The taxes which are deductible from gross income include the 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 the extent of the gains from such transactions.

19. One is not deductible loss

A. Loss due to removal or demolition of old building, the scrapping of old machinery or equipment incident to
renewal or replacement
B. Loss due to removal of building or real estate purchased when the purchase was for the acquisition of the land
and without intending to use the building
C. Loss in value of securities of such extent that the securities have become worthless and are written off
D. Loss in usefulness in business of an asset so that the business is discontinued or the asset is discarded.

20. Statement 1 – In a wash sale, loss is not deductible.

Statement 2 – In a merger or consolidation, or transfer to a controlled corporation, loss is deductible.

A. True, true C. True, false

B. False, true D. False, false

21. Lucky Me Incorporated bought a special machine for its e-bingo business worth P10,000,000. However, due to the
“Tuwid na daan” policy of the government, a law was subsequently passed prohibiting gaming of any kind.
Consequently, Lucky Me permanently retired the machine from use. The carrying value of the machine at the time
of retirement was P700,000. How much is the deductible loss of Lucky Me?
A. 300,000 C. 1,000,000
B. 700,000 D. 0

22. Which of the following is not deductible from business income?

A. Casual losses on properties connected in the conduct of trade or business
B. Loss on business property due to embezzlement
C. Loss on exchange of capital assets
D. Net operating loss carry over

23. Losses from the following transactions are transactions between related parties and hence not allowed as
deductible for tax purposes, except?
A. Losses from sales and exchanges of properties between corporations which are controlled directly and
indirectly by the same individual
B. Losses incurred in liquidation by the controlling individual from his interest in a controlled corporation
C. Losses from transaction between fiduciaries of trusts wherein the grantor is the same person, between grantor
and fiduciary of a trust or between the fiduciary of a trust and the beneficiary
D. Losses incurred by a controlling (owning more than 50%) individual to a controlled corporation.

Depreciation
24. Statement 1 – The entire cost of depreciable properties is deductible against their proceeds in the year sale.
Statement 2 – Capital expenditure are deductible against future income

A. True, true C. True, false

B. False, true D. False, false

25. 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

Page 10 of 12
Bad Debt
26. One of the following is not a requisite for deduction of bad debts
A. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable.
B. The debt must be connected with profession, trade, or business of the taxpayer
C. The debt must be actually ascertained to be worthless and uncollectible and charged off the books of accounts
as of the end of the taxable year.
D. The debt must have a maturity of not more than five years.

27. Statement 1 – Bad debt is an expense in the books of accounts when a provision is made for it. Such amount should
likewise be deducted from gross income to arrive at taxable income.
Statement 2 – Bad debt is a deduction from the gross income when an account is written-off.

A. True, true C. True, false

B. False, true D. False, false

28. Concerning write-off of bad debts, which of the following is deductible?

A. When incurred at the cash basis of reporting taxable income
B. When a right of recourse to a third party can be invoked
C. The balance of a loans receivable which remains outstanding after final liquidation of the taxpayer under an
insolvency proceedings
D. Incurred from personal credit of the taxpayer

Contribution
29. What would be the allowable deduction for P8,000 contribution made by a resident citizen to a religious
organization from his P70,000 net income after contribution
A. 3,500 C. 7,800
B. 7,000 D. 8,000

30. A domestic corporation has the following data on income and expenses

Sales P10,000,000
Cost of sales 4,000,000
Operating expenses (excluding contribution) 3,000,000
Contribution to domestic charitable contribution 500,000
Contribution to proprietary education institution 200,000
Contribution to party list candidate 300,000

Determine the taxpayer’s taxable income

A. 2,700,000 C. 3,000,000
B. 2,500,000 D. 2,600,000

31. Statement I – The cost of leasehold improvement shall be deductible by the lessee by spreading the cost of the
improvements over the life of the improvements or the remaining term of the lease whichever period is shorter.
Statement II – Contributions by the employer to a pension trust for past service cost is deductible in full in the year
that the employer made the contribution

A. True, true C. False, true

B. True, false D. False, false

32. Russel put up a qualified retirement plan approved by the BIR. It appoint B Corporation to administer the plan,
which called for the payment of P200,000 to cover the retirement of employees for past service rendered and a
yearly contribution of P50,000. The following amounts were paid for the first three years of the plan’s operations.
Past service cost Current service cost
First year P 100,000 P 50,000
Second year 60,000 50,000

The pension expense for the first year is

A. 150,000 C. 15,000
B. 60,000 D. 105,000

33. The pension expense for the second year is

A. 110,000 C. 56,000
B. 11,000 D. 66,000

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Research and Development
34. Research and development expenses treated as a deferred expenses shall be allowed as deduction retably
distributed over a period of
A. Not more than 60 months beginning with the month in which the taxpayer first realizes benefits from such
expenditure.
B. Not less than 60 months beginning with the month in which the taxpayer first realizes benefits from such
expenditure.
C. Not more than 30 months beginning with the month in which the taxpayer first realizes benefits from such
expenditure.
D. Not less than 6 months beginning with the month in which the taxpayer first realizes benefits from such
expenditure.

Optional Standard Deduction:

35. The optional standard deduction for corporation is
A. 10% of the gross income
B. 10% of the gross sales/receipt
C. 40% of the gross income
D. 40% of the gross sale/receipt

36. The option standard deduction for individuals is

A. 10% of the gross
B. 10% of the sales receipts
C. 40% of the gross income
D. 40% of the gross sales receipt

37. Santos, an individual retailer of goods, uses the accrual method in reporting his income and expenses. His
transactions show:

Gross sales P 2,600,000

Cost of sales 1,100,000
Business expenses 220,000
Non-operating income 100,000

If the calendar year, and he avails of the OSD, his taxable net income under the graduated rates is
A. 1,620,000 C. 1,040,000
B. 900,000 D. None of the above

38. Assuming Santos used Itemized Deductions, his taxable net income is
A. 1,380,000 C. 1,230,000
B. 1,500,000 D. None of the above

39. Assume Santos is a Corporation, the net taxable income using OSD is
A. 1,560,000 C. 720,000
B. 1,040,000 D. 960,000

Optional Standard Deduction:

40. Which one is entitled to tax credit for taxes paid to foreign country?
A. Resident alien C. Domestic corporation
B. Non-resident aliens D. Non-resident citizen

41. JBC Corporation has operations in Malaysia and Singapore with the following taxable income and taxes paid during
the year:
Philippines Malaysia Singapore
Taxable income P 800,000 P 900,000 P 700,000
Income tax paid 180,000 192,000 116,000

Makati Corporation wishes to claim the foreign income tax paid as tax credit. Compute the foreign income tax
credit
A. 308,000 C. 445,000
B. 296,000 D. 430,000

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