Mantuano Deduc

MANTUANO, Donita Marie B.
BSBA – FM2A
GROSS INCOME – EXCLUSIONS AND INCLUSIONS

A. Exclusions from Gross income
1. Proceeds of Life Insurance

Exercise: After two years from the death of her husband, Nancy Matyas received the proceeds of
life insurance of her husband amounting to P1,254,400 including 12% compounded interest per
year. How much is the taxable amount?
Solution: 1,254,400 x 0.12 = 150,528 x 2 years = 301,056
Answer: Php 301,056.00
Exercise: Mrs. Vina Lucena was insured under an endowment policy with value of P500,000.
Total premiums paid by her for life insurance policy was P490,000 from which there was a return
of premiums of P40,000. At the maturity of the policy, Mrs. Lucena received P500,000. The
income of Mrs. Lucena under the policy is ____.
Solution: 490,000 – 40,000 = 450,000
500,000 – 450,000 = 50,000
Answer: Php 50,000.00
2. Return of Insurance Premium
3. Gift, Bequest or Devise
Exercise: On March 1, 200B, Mayumi received a building property from his parents as
inheritance with fair market value of P10,000,000. This property was acquired for P8,000,000
five years ago by his parents. The monthly rental income of the property is P100,000 with an
average monthly expense of P20,000. Mayumi’s income after expenses, subject to income tax for
the year 200B is ____.
Solution: 100,000 – 20,000 = 80,000
80,000 x 10 months (March 200B – Dec 200B) = 800,000
Answer: Php 800,000
4. Compensation for Personal Injuries or Sickness
Exercise: Mr. Mario was injured in a vehicular accident in 200B. He incurred and paid medical
expenses of P20,000 and legal fees of P10,000 during the year. In 200C, he received P70,000 as
settlement from the insurance company which insured the car owned by the other party involved
in the accident.
From the above payments and transactions, what is the amount of taxable income accruing to
Mr.Mario in 200C?
Answer: None.
5. Income Exempt Under Treaty
6. Retirement Benefits, Pension, Gratuities, etc.
Address: Governor Feliciano Leviste Road, Lipa City 4217, Batangas, Philippines
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Telephone Numbers: +63 43 757 5277
Exercise: Mr. Mario Matiyaga, 50 year old, rendered service as a security guard of Anscor
Corporation. He had a monthly salary of P5,000 before retirement in October 31, 200x. During
the same taxable year he received P500,000 retirement benefits in accordance with reasonable
private benefit plan maintained by Anscor Co.
Required: Compute for the amount to be included in the gross income of Mr. Matiyaga for 200x
based on the following independent assumptions:
1. He received the retirement benefit for the first time after serving for 10 years
2. He received the retirement benefit for the second time
3. He has served the company for 10 non continuous years.
Answer:
1. Based on the assumption, it is exempted because he has been in the service of the same
employer for at least 10 years and he is not less than 50 years old at the time of retirement.
Also, he did not previously avail the retirement benefit plan since it was mentioned that it
was only his first time.
2. The retirement pay is now taxable since it is already his second time. The tax to be imposed
is based on the graduated tax rate which P30,000 plus 25% excess of P400,000. Thus, the
answer is P55,000.
3. Same answer with #2 except the reason why it is taxed is because he is supposed to have the
same employer for at least ten years to avail the exemption.
7. Miscellaneous Items
PROBLEMS
Problem 1: Precious Lara received cash amounting to P1,000,000 plus a house and lot amounting to
P3,000,000 for winning as Miss International. How much is tax exempt from the awards of Miss Lara?
Answer: ZERO. All the prizes and winnings provided (P4,000,000) are subject to tax.
Problem 2: Onyok Velasco, a national athlete, received the following during the year:
Ramon Magsaysay Award P50,000

Athlete of the Year Award 100,000
Prize – Jollibee Raffle 5,000
Prize for winning the Silver Olympic Medal 500,000
Cash Award from Mr. Alfred Lim 250,000
Car from Nissan as a gift 1,000,000
Winnings – Philippine sweepstake 100,000
Gambling Winning 500,000
How much is the total winnings/awards and prizes not subject to income tax?
Answer:
Ramon Magsaysay award P50,000
Athlete of the year award 100,000
Prize for winning the silver Olympic medal 500,000
Cash award from Mr. Alfred Lim 250,000
Car from Nissan as a Gift 1,000,000
AWARDS NOT SUBJECT TO INCOME TAX P1,900,000
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Problem 3: The following earnings were realized from investment in 5 year government bonds:
Interest Income P 60,000

Gains from sale of bonds classified as capital asset 140,000
How much is the total taxable income?

Answer: Interest Income P60,000
TAXABLE INCOME P60,000
Interest income derived from investments in government securities are subject to 20% final tax.
While gains from sale of bonds are exempt from tax.
Problem 4: M. Jose Velasco received the following items for the taxable year 200x.
Winning from charity horse race sweepstakes from PCSO P500,000

Winnings from gambling, net of P700,000 loss from gambling 800,000
Interest on government debt securities 100,000
Damages awarded by the court for breach of contract
(of which 40% is damages for unrealized profits) 1,000,000
Gains from redemption of shares in mutual fund 300,000
Gain from sale of bonds with maturity of more than five years 60,000
Gifts from friends 200,000
Required: Compute the total amount of exclusion from gross income.
Winning from charity horse race sweepstakes from PCSO P500,000

Gains from redemption of shares in mutual fund 300,000
Gain from sale of bonds with maturity of more than five years 60,000
Gifts from friends 200,000
TOTAL EXCLUSION FROM GROSS INCOME P1,060,000
Problem 5: Mr. Allan Cruz received the following:
Return of his life insurance premium paid for 25 years P2,000,000

with annual premium of P15,000
Proceeds his mother’s life insurance paid premium for 1,000,000
30 years with annual premium of P5,000
Cash gift from his missionary friend 50,000
House and lot inherited from his mother 3,000,000
Rent income from house and lot inherited 100,000
Required: Compute for the following:
1. Amount to be excluded from gross income
2. Amount to be included as gross income
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Solution:
EXCLUSION INCLUSION
Proceeds of his life insurance P2,000,000
Proceeds of his mother’s life insurance P1,000,000
Cash gift P50,000
House and lot inherited from his mother P3,000,000
Rent Income P100,000
TOTAL P6,050,000 P100,,000
Answer: Amount to be excluded from gross income : P6,050,000

Amount to be included as gross income :P100,000
Problem 6: The following relates to the compensation income of Ms. Cruz in 20X4:
Compensation P1,900,000
Contribution to SSS, Philhealth, and HDMF
Mandatory contributions 125,000
Voluntary contributions 150,000
Creditable withholding taxes 190,000
Labor union dues 10,000
Advances from Company 450,000 (925,000)

Net Compensation 975,000
Solution:
Mandatory Contributions P 125,000
Labor Union Dues P 10,000
Total Exclusion in Gross Income: P 135,000
Total exclusion in gross income

(Mandatory contributions & Labor Union dues) P135,000
B. Inclusions from Gross Income

Exercise: Atty. Anita Lucenario is employed as a corporate-lawyer of FLP, International. In 200B, he
received the following from his employment.
Salary P300,000
One thousand corporate shares of stock for special service
rendered in October 200A:
Fair market value per share – 200A 100
Fair market value per share – 200B 125
Cancellation of debt in lieu of service rendered 50,000
Insurance (the company is the beneficiary) 20,000
Profit sharing 40,000
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Required: Compute for the gross taxable compensation income of Mr. Thomas for year 200B.
Solution:
Salary P300,000
Fair market value– 200A (100 per share) 100,000
Cancellation of debt in lieu of service rendered 50,000
Insurance (the company is the beneficiary) 20,000
Profit sharing 40,000
Total: P51
Answer: P510,000.00
Exercise A: Ria leased a facility from Cathy Company. Part of the lease agreement is for Ria to improve
facility. Details of the improvement were as follows:
Cost of Construction (Improvements) P10,000,000

Estimated Useful Life of Improvements 20 years
Remaining Terms of the Lease 10 years
What amount, if any, should Cathy Company report as income from leasehold improvements under the
following independent assumptions?
a. The income from the improvements is to be reported in one lump sum amount ___
b. The income from the improvements is to be reported annually ____
Solution:
Spread-out method / Annual method:
Depreciated value after lease term: (10,000,000 x 10/20) = P5,000,000
Remaining term of the lease 10 years
Annual income from leasehold improvement P500,000
Answer:
a. The income from the improvements is to be reported in one lump sum amount P10,000,000.
b. The income from the improvements is to be reported annually P500,000.
Exercise B: In connection from Problem A: Assume the income from the improvements is to be
reported annually. However, at the beginning of the 6 th year, both parties agreed to terminate the lease
agreement. Consequently, Cathy took possession of the improvements. The fair value of the
improvements at that time was P3,500,000. What amount should Cathy report as income from
improvements on the 6th year of the lease agreement?
Solution:
Fair value of the improvements P3,500,000
Income for the first five years (500,000 x 5) (2,500,000)
Income on the 6th year 1,000,000
Answer: P 1,000,000.
Problem 1: Determining the Taxability of an Item

Indicate whether the item is taxable or nontaxable with income tax.
1. NON TAXABLE Novel prize received for achievement civic achievements.
2. TAXABLE Prizes and awards in sport competition, not sanctioned by their respective national
association accredited by POSC.
3. NON TAXABLE World Bank’s income earned in the Philippines.
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4. NON TAXABLE Cost of living allowance
5. NON TAXABLE Union due contribution
6. NON TAXABLE Proceeds from life insurance policy, revocable designation of beneficiary.
7. TAXABLE Pensions, in general.
8. NON TAXABLE Income of PAGCOR.
9. TAXABLE Proceeds from The sale of land (capital asset) P100,000: costs P120,000.
10. NON TAXABLE Income of government from holders of public utility franchise.
11. TAXABLE Interest income
12. TAXABLE Board of director’s fee
13. NON TAXABLE Mandatory retirement pay
14. TAXABLE Professional athlete’s salary
15. TAXABLEWinnings from Sweepstakes or Lotto
16. TAXABLE Income derived from smuggling
17. TAXABLE Interest received from life insurance’s annuity
18. NON TAXABLE Annual clothing allowance of P4,000.00
19. NON TAXABLE Hazard pay received by MWE
20. NON TAXABLEGains from redemption of shares in mutual fund
21. NON TAXABLE Magsaysay awards
22. NON TAXABLEGSIS retirement benefits
23. TAXABLE Cash surrender value received from insurance in excess of premium paid
24. NON TAXABLE Proceeds from life insurance of a deceased employee received by the employer
25. TAXABLE Dividend income derived in the Philippines by the Taiwan Government
26. TAXABLE Gains from the sale of bond with a maturity of four years
27. NON TAXABLE Gains from the sale of certificate of indebtedness with a maturity of six years
28. TAXABLE Cancellation of debt in lieu to service rendered
29. TAXABLE Shares of stock received due to professional service rendered.
30. NON TAXABLE Accumulated vacation and sick leave credits for government employees
converted into cash at the end of employment contract
Problem 2: Mrs. Rowena Gorospe reports the following items of income and expenses as of December
31, 200B:
Cash salary, net of withholding tax, P25,000 and SSS, P3,000 P302,000
Dividend from San Magnolia Corporation 30,000
Cancellation of her debt from San Magnolia Corporation 50,000
Living quarters an meals allowances, within the employer’s premises 40,000
Income tax paid by the employer 5,000
One year note receivable from the employer, net of discount
P1,000 (maturity June 30, 200B) 19,000
Gross income from business 400,000
Allowable expenses 250,000
Prepaid rent income 50,000
Interest from bank deposit, net of withholding tax 18,000
Bad debt recovery (60% previously written-off) 38,000
Gambling winnings 20,000
Gambling losses 30,000
Income tax refund 8,000
Household expenses 200,000
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Donation from relatives 150,000
Winnings 10,000
Stock dividends from Asia Brewery at fair market value 4,000
Required: Compute the taxable income subject to normal tabular tax.
Solution:
(Taxable)
Cash salary, net of withholding tax, P25,000 and SSS, P3,000 P302,000
Gross income from business 400,000
Prepaid rent income 50,000
Cancellation of her debt from San Magnolia Corporation 50,000
Income tax paid by the employer 5,000
One year note receivable from the employer, net of discount
P1,000 (maturity June 30, 200B) 19,000
Dividend from San Magnolia Corporation 30,000
Winnings 10,000
Gambling winnings 20,000
Interest from bank deposit, net of withholding tax 18,000
Bad debt recovery (60% previously written-off) 38,000
Stock dividends from Asia Brewery at fair market value 4,000
Total: P 946,000
(Non-Taxable)
Living quarters and meals allowances, within the employer’s premises 40,000
Allowable expenses 250,000
Gambling losses 30,000
Income tax refund 8,000
Household expenses 200,000
Donation from relatives 150,000
Total: P 678,000
Answer: P 946,000 is the taxable income subject to normal tabular tax.
Problem 3: the following are the revenue items in the income statement of Domestic Corporation for the
year 20X1:
Sales P1,000,000
Cost of sales 500,000
Interest income from bank deposit, Philippines 40,000
Yield from deposit substitute, Philippines 80,000
Interest income received from depository bank under EFCDS, Philippines 60,000
Interest income from bank deposit, USA 400,000
Interest on notes receivable – trade, Philippines 30,000
Royalties, Philippines 70,000
Royalties, USA 300,000
Cash dividend received from domestic corporation 150,000
Prizes and winnings, Philippines 400,000
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Refund of Philippine value added tax 100,000
Bad debt recovery (tax benefit rule) 50,000
Required:
1. How much was the total exempted/excluded from the gross income?
2. How much was the total gross income subject to 30% corporate income tax?
Solution:
(Excluded from the gross income)
Interest income from bank deposit, USA P400,000
Royalties, USA 300,000
Refund of Philippine value added tax 100,000
Total: P800,000
(Gross income subject to 30% corporate income tax)

Sales P1,000,000
Interest income from bank deposit, Philippines 40,000
Yield from deposit substitute, Philippines 80,000
Interest income received from depository bank under EFCDS, Philippines 60,000
Royalties, Philippines 70,000
Interest on notes receivable – trade, Philippines 30,000
Cash dividend received from domestic corporation 150,000
Prizes and winnings, Philippines 400,000
Bad debt recovery (tax benefit rule) 50,000
Total: P2,380,000
Answer:
1. The total exempted from the gross income is P800,000.
2. The total gross income subject to 30% corporate income tax is P2,380,000.
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DEDUCTIONS FROM GROSS INCOME
DEDUCTIONS: EXPENSES
Problem 1 (Salary Expense): During 20X0, the total net amount paid for the salaries and wages
amounted to P9,000,000 after effecting the following deduction for employees:
SSS premium contributions P420,000

PhilHealth premium contributions 100,000
Pag-Ibig premium contributions 180,000
Creditable withholding tax 300,000
In addition, the corporation provided its vice-president for operations P340,000, cash as fringe benefit.
The allowable deduction for salaries and benefits is P 1,340,000.
Problem 2 (Traveling Expenses): A Corporation incurs the following travel expenses:

Plane tickets and hotel bills of its officers who were sent to business seminars:
In Zambales P50,000
In USA 200,000
Transportation expenses of its officers from home to office and vice versa as part of their
employment contract , P68,000 on which final tax of P32,000 was remitted. Transportation expenses
of messengers from office to several clients’ places at P40,000, inclusive of meals amounting to
P25,000. How much is the total allowance expense that could be claimed by A Corporation?
Solution:
Plane tickets and hotel bills (Zambales & USA)P250,000
Transportation expense (68k-32k+40k) 76,000
Inclusive of meals 25,000
Total: P351,000
Answer: P351,000 is the total allowance expense that could be claimed by A Corporation.
Problem 3 (Prepaid Rent): On June 30, 200B, G rents an apartment for P20,000 and subsequently
sublease 80% of the apartment to CPA reviewers for P25,000 a month beginning (July 1, 200B). G’s
records show the following rental collections and payments during the year:
Total payments P80,000
Total collections 150,000
How much is the deductible rent expense for the year?
Answer: P80,000 is the deductible rent expense for the year.
Problem 4 (Capital Expenses of Educational Institution): In 200x, TUV University, a private

educational institution, constructed a building with a contract price of P10,000,000. The building has
an estimated useful life of 50 years with salvage value of 10%. How much is the deductible expense
allowed to TUV University for year 200x under the two options?
Solution:
Building – contract price P10,000,000
Estimated useful life 50 years
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Salvage value (10%) P1,000,000
(10,000,000 – 1,000,000) / 50 = 9,000,000 / 50 = P180,000
Answer: The amount P180,000.00 is the deductible expense allowed to TUV University for year
200x.
Problem 5 (Representation Expense): Mr. X, a sole proprietor, is engaged in computer sales and
computer repairs, reported the following income and expenses during year:
Net sales P700,000

Net repair values 300,000
Representation expense 10,000
Salaries expense 100,000
Cost of service 200,000
How much is the deductible representation expense?
Solution:
Actual – Sale of Goods:
(P110,000 x 7/12) 64,166.67
Limit (700,000 x 0.005) 3,500.00
Allowed 3,500.00
Actual – Sale of Service:
(110,000 x 5/12) 45,833.33
Limit (500,000 x 0.01) 5,000.00
Allowed 5,000.00
Total Deductible Expense 8,500.00
Answer: The deductible representation expense costs P8,500.00.
Problem 6 (Revenue vs. Capital Expenditures): ABC Store incurred additional expenditures of
P130,000 for its business fixed assets as follows:
Installation of new air condition P60,000

Expansion of store 50,000
Damages paid due to workers’ injury 20,000
Repainting of store building 10,000
Cleaning of computers 9,000
Repair of furniture 1,000
The amount to be immediately expensed and capitalized would be .
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Solution:
Installation of new air condition P60,000
Expansion of store 50,000
Repainting of store building 10,000
Cleaning of computers 9,000
Repair of furniture 1,000
Total: P130,000
Answer: The amount to be immediately expensed and capitalized would be P130,000.
Problem 7 (Deductible from Gross Income): Mr. Apo Liwayway, married, works as a supervisor of
Golden Construction receiving P240,000 as his annual gross compensation income. He maintains a
small consulting firm that earns P120,000 a year. He incurred the following expenses during the year:
Premium payments of his life insurance P25,000

Depreciation of his house (10% is used as office for his firm) 20,000
Repair of his house (10% used as office for his firm) 100,000
Interest expense paid to his brother 10,000
Office supplies used 6,000
Donation to the burial of his friend 5,000
Required:
1. From the items above, how much is the total deduction from gross compensation income of
Liwayway?
2. From the items above, how much is the total deduction from gross income from professional of
Liwayway?
Solution:
Gross Compensation Income
Gross Income P240,000
Less:
Premium payments of his life insurance 25,000
Depreciation of his house 18,000
Repair of his house 90,000
Interest expense paid to his brother 10,000
Donation to the burial of his friend 5,000 (148,000)
Total: P92,000
Gross Income from Professional

Gross Income P120,000
Less:
Depreciation of his house (10% for firm) 2,000
Repair of his house (10% for firm) 10,000
Office supplies used 6,000 (18,000)
Total: P102,000
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Answer:
1. The total deduction from gross compensation income of Liwayway is P148,000.
2. The total deduction from gross income from professional of Liwayway is P18,000.
DEDUCTIONS: INTEREST
Problem 1 (Interest Expense): A corporation earned income, inclusive of P50,000 interest income and
net of interest expense of P40,000, amounting to P1,500,000. The deductible interest expense would be
.
Solution:
Interest expense P1,500,000
Less: Limitation:
Interest income subject to final tax
(50,000/80%) 62,500
Multiply by 33% (20,625)
Total: P1,479,375
Answer: The deductible interest expense would be P1,479,375. (The taxpayer’s allowable
deduction for interest expense should be reduced by 33% (effective January 2009) of the
interest income subjected to final tax.
Problem 2 (Deductible vs. Nondeductible Interest Expense): Mr. Tee, a taxpayer reporting in cash
basis showed the following interest expense related to his business during the year:
Interest paid in advance P20,000

Interest paid to a brother 12,000
Interest paid on delinquency taxes 8,000
Interest on borrowing to finance his family home 30,000
Interest paid to finance petroleum exploration 100,000
If Mr. Tee has an interest income of P10,000 earned from the bank, and P20,000 interest income from
trade notes receivables, how much is the deductible and non-deductible interest expense during the
year?
Solution:
Deductible Interest Expense

Interest expense P50,000
Less: Limitation:
Interest income subject to final tax
(30,000/80%) 37,500
Total: P37,635
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Non-deductible Interest Expense
Interest paid to a brother 12,000
Interest paid to finance petroleum exploration 100,000
Total: 112,000
Answer:
1. The deductible interest expense during the year amounted to P37,635.
2. The non-deductible interest expense during the year amounted to P112,000.
3. Interest paid on delinquency taxes shall be 100% deductible.
DEDUCTIONS: TAXES
Problems
1. The following tax expenses related to business were paid by X Trading during the taxable
year:
Business taxes other than VAT P20,000
Documentary stamp tax 1,000
Automobile registration fees (business use) 3,000
Real property taxes 50,000
Annual registration fee 500
Stock transaction tax 200,000
Income tax 400,000
Value-added tax 50,000
Donor’s tax 30,000
How much is the amount of taxes deductible from gross income?
Solution:
Documentary stamp tax 1,000
Automobile registration fees (business use) 3,000
Annual registration fee 500
Stock transaction tax 200,000
Income tax 400,000
Total: P604,500
Answer: P604,500 is the amount of taxes that is deductible from gross income.
2. Mang Antoy is a resident citizen with earnings within and outside the Philippines. His
financial records during the taxable year show the following:
Business income within and without P520,000

Busines expenses within and without 200,000
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The business expense includes P10,000 representing income tax payment made in foreign
country.
If his personal exemption is P50,000, how much is the correct net taxable income to avail
better tax savings?
Solution:
Business income within and without P520,000
Busines expenses within and without 200,000
Business expense (ITP made in foreign country) (10,000) 190,000
Total: P710,000
Answer: The correct net taxable income to avail better tax savings amounted to
P710,000.
DEDUCTIONS: LOSSES
Problem 1 (Various Losses): Mr. Santol incurred the following losses related to this construction
business:
Loss on unrealized earnings P500,000
Casualty losses 250,000
Compensatory liquidated damages 100,000
Book value of partially damaged machine 50,000
Replacement cost of damage portion of machine 40,000
Abandoned equipment due to technological problem 150,000
Accumulated depreciation of abandoned equipment 120,000
Embezzled funds by the cashier 70,000
Loss on sale of capital asset 30,000
The casualty losses was reported to the BIR within 45 days and compensated by insurance amounting
to P300,000.
Required: Compute the total amount of deductible losses.
Solution:
Loss on unrealized earnings P500,000
Abandoned equipment due to technological problem 150,000
Embezzled funds by the cashier 70,000
Loss on sale of capital asset 30,000
Total: P750,000
Answer: P750,000 is the total amount of deductible losses.
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Problem 2 (NOLCO): The following are the comparative income statements of Venus:
Year 1 Year 2
Gross profits P500,000 P600,000
Estimated bad debts 20,000 10,000
Other operating expense 580,000 490,000
Income (loss) (P100,000) P100,000
Required: Compute the NOLCO that could be deducted from year 2 income.
Solution:
1. Taxable income for year 1
Gross profit P500,000
Estimated bad debts (20,000)
Other operating expense (580,000)
Income loss (100,000)
Net operating loss: (200,000)
2. Taxable income for year 2

Gross profit P600,000
Estimated bad debts (10,000)
Other operating expense (490,000)
Income 100,000
Net income for year 2 200,000
NOLCO – year 1 (200,000)
Taxable income (loss) 0.00
Answer: The NOLCO that could be deducted from year 2 income is P0.00.
Problem 3 (Corporate Readjustment): A and B are stockholders incorporation which are being
consolidated into a new corporation, had the following data on their shares of stock:
A B FMV of shares xx
received x
Consideration received: + FMV of property xx
received x
FMV of shares P75,000 P81,000 + Cash xx
FMV of property 5,000 5,000 received
Total consideration
x
xx
Cash 10,000 4,000 received
- BV of the property
x
(xx
Cost of shares surrendered 80,000 80,000 transferred Indicated x)
gain xxx
VS
1. The gain or loss to be recognized by A is .
Gain to be recognized should not exceed the cash and
2. The gain or loss to be recognized by B is . FMV of property
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Solution:
1. Stockholder A
FMV of shares P75,000
FMV of property 5,000
Cash 10,000
Total: 90,000
CoS surrendered (80,000)
Indicated gain: P10,000
2. Stockholder B
FMV of shares P81,000
FMV of property 5,000
Cash 4,000
Total: 90,000
CoS surrendered (80,000)
Indicated gain: P10,000
Gain to be recognized P9,000
Answer:
1. The gain to be recognized by Stockholder A is P10,000.
2. The gain to be recognized by Stockholder B is P10,000. Gain to be recognized is limited
to the amount of cash and property received.
Problem 4 (Wash Sales): A taxpayer under calendar year has the following selected transactions:
Sept. 9, 20X0 – purchased 100 shares of K Co. common for P5,000.
Dec. 21, 20X2 – purchased 50 shares of K Co. common for P2,750.
Dec 26, 20X2 – sold the 100 shares purchased on Sept 9. 20X0 for P4,000.
Jan 2, 20X3 – purchased 25 shares of K Co. common for P1,125.
Required: Compute the following:

1. Shares sold at a loss without covering acquisition
2. Loss on wash sale and the capital loss
3. The adjusted cost of the shares bought on December 21, 20X2 and January 2, 20X3
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Solution:
Taxpayer’s purchase
100 shares P5,000 P5,000
75 shares 3,750 3,875
50 shares 2,500 2,750
25 shares 1,250 1,125
1. Shares sold at a loss without covering acquisition

Purchased 100 shares P5,000
Sold 100 shares P4,000
Total P1,000

50 shares P2,750 75 shares 3,750
25 shares 1,125 Taxpayer’s purchase 3,875
Total P3,875 Total: -125.00
3. The adjusted cost of the shares bought on December 21, 20X2 and January 2, 20X3
50 shares bought on 12/21/20X2
P2,750
(2,500)
P250.00 – adjusted cost
25 shares bought on January 2, 20X3

P1,125
(1,250)
P-125.00 – adjusted cost
Adjusted costs of the shares

P250.00
(-125.00)
P125.00
Answer:
1. Shares sold at a loss without covering
acquisition a. P1,000.00
a. September 9, 20X0 purchases and December 26, 20X2 sales is not covered on
wash sales.
b. Loss on wash sale and the capital loss purchased on December 21, 20X2 and
January 2, 20X3 is P -125.00.
3. The adjusted cost of the shares bought on December 21, 20X2 and January 2, 20X3 is
P125.00.
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DEDUCTIONS: BAD DEBTS
Problem 1 (Bad Debts Expense): Mr. Uy reports the following bad debts as deductibility from his
gross income for the year 200B:
Bad debts expense from business P200,000
Bad debts expense from practice of profession 50,000
Uncollectible salary 20,000
Uncollectible money lend to brother for operation 10,000
Upon investigation, the following are gathered from the records of Mr. So:
 Bad debts from business:
From insolvent customer with solvent guarantor P100,000
From other customers without guarantor
(60% are estimated collectible and
40% are actually written off during the year) 100,000
Total: P200,000
 100% of bad debts from profession are actually written off during the year.
 Uncollectible salary was due to employer’s bankruptcy.
 Brother died from operation and could not pay anymore.
How much is the deductible bad debts expense of Mr. Uy?
Solution:
Bad debts expense from business P200,000
Bad debts expense from practice of profession 50,000
Total: P250,000
Answer: P250,000 is the deductible bad debts expense of Mr. Uy. The uncollectible are considered
worthless, it is uncollectible even in the future.
DEDUCTIONS: CHARITABLE CONTRIBUTIONS

Problems
1. What would be the allowable deduction for P5,000 contribution made by a resident citizen to
an accredited social welfare organization, from his P60,000 net income after contributions?
Solution:
Income before contributions P65,000
Contributions deductible in full (5,000)
Net income after contributions P60,000
Answer: The P5,000 contribution will be deducted in full since it was donated to an accredited non-
government organization which is a non-profit organization.
2. A domestic corporation made a P20,000 contribution to an accredited social welfare

institution. Its business income for 200A is P500,000. The related business expenses inclusive
of the P20,000 contribution is P150,000. The allowable deduction for charitable contribution
would be .
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Solution:
Income P500,000
Business expenses 130,000
Contributions deductible with limit:
Actual = P20,000
Limit = P500,000 x 5% = P25,000
Allowed (Lower amount) 20,000 (150,000)
Total: P350,000
Answer: The allowable deduction for charitable contribution would be P20,000. (Supposedly
P25,000 would be the allowable deduction, but since the actual deduction is P20,000, then the
allowed amount would be P20,000.)
DEDUCTIONS: PENSIONS
Problem: The SFI Inc., has been in business for the past 10 years. For the year 2004, it decided to
establish a pension fund for its employees. The pertinent data of the fund are as follow:
Past service cost (lump sum payment) P1,000,000
Present service cost 100,000
1. How much allowable deduction for pension cost SFI could claim?
2. Assuming the same facts, allowable deduction of SFI for pension in the year 2016 is:
Solution:
2004
Current service cost 100,000
2004 (1,000,000/10) 100,000
Deductible expense 200,000
Answer:
1. P200,000 is the allowable deduction for pension cost SFI could claim.
2. Assuming the same facts, the allowable deduction of SFI for pension in the year 2016 is
P1,00,000. (The year 2016 is no longer included in the 10 consecutive years beginning
with the year 2004.)
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SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS
Problem 1: ABC Corporation has a soft spot for senior citizens and persons with disability (PWDs).
As such, it hires senior citizens and PWDs to work in the company for at least 6 months. The
following data for the current year taken from the books of accounts are provided by the corporation:
Gross sales P30,000,000

Sales discount (excluding discounts to senior citizens and PWDs) 4,000,000
Cost of sales 10,000,000
Salaries of senior citizens 1,000,000
Salaries of PWDs 600,000
Actual amount of assistance under adopt-A-school program (fully deductible) 400,000
Life insurance expense: (premium on employees group insurance) 500,000
Life insurance expense: (premium on officer’s insurance – beneficiary ABC Corporation 1,000,000
Other operating expenses 6,000,000
During the same period the corporation also allows 20% discount to senior citizens an PWDs who buy
goods from the company. The sales are as follows (not part of the gross sales above):
Sales to senior citizens P1,600,000
Sales to PWDs 1,000,000
Required: How much is the total itemized deductions including the special itemized deductions?
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Solution:
Gross sales P30,000,000

Sales – Senior Citizens P1,600,000
Sales – PWDs 1,000,000 2,600,000
Less:
Sales discount 4,000,000
Sales discount – Senior Citizens 320,000
Sales discount - PWDs 200,000
Cost of sales
Actual amount of assistance under
adopt-A-school program (50% of 400K) (200,000)
Net sales: 17,880,000
Less:
Salaries of senior citizens 1,000,000
Additional deduction (1,000,000x15%) (150,000) (850,000)
Salaries of PWDs 600,000
Additional deduction (600,000x25%) (150,000) (450,000)
Actual amount of assistance under adopt-A-school program 400,000
Life insurance expense: (premium on employees group insurance) 500,000
Life insurance expense: (premium on officer’s insurance –
beneficiary ABC Corporation 1,000,000
Other operating expenses 6,000,000 (7,900,000)
Total: P8,680,000
Itemized Deductions
Sales discount –PWDs P200,000
Actual amount of assistance under adopt-A-school program 400,000
50% of the actual amount of assistance under adopt-A-school program 200,000
Additional deduction from salaries of PWDs 150,000 1,270,000
Special Itemized Deductions
Sales discount – Senior Citizens 320,000
Additional deduction from salaries of senior citizens 150,000 470,000
Total: P1,740,000
Answer: The total itemized deductions including the special itemized deductions amounted to
P1,740,000. ( P1,270,000 for itemized deductions and P470,000 for special itemized deductions)
Problem 2: Care Medical Center reported the following expenses during the year:
Breast-feeding assistance to the needy P200,000

Salary of workers (20% senior citizens (paid)) 500,000
Salary of workers (20% senior citizens (unpaid)) 700,000
If the medical center reported health services revenue amounting P300,000 from senior citizen, how
much is the total special itemized deduction?
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Solution:
Breast-feeding assistance to the needy P200,000
Salary of workers (20% senior citizens (paid)) 100,000
Salary of workers (20% senior citizens (unpaid)) 140,000
Total: P440,000
Answer: The total special itemized deduction amounted to P440,000.
Problem 3: X signed a MOA with Department of Education for the supply of books to Irisan National
High School valued as P1,000,000 for free. During the same year, X reported a business income of
P31,500,000 and business expenses of P22,500,000 before the amount of donation per MOA.
The deductible donation of X is .
Solution:
Business Income P31,500,000
50% of the Contribution (500,000)
Total: 31,000,000
Less:
Business Expenses 22,500,000
Donation per MOA 1,000,000 (23,500,000)
Net Income: P7,500,000
Answer: The deductible donation of X is P1,500,000. (Contributions to the government in

priority activities are deductible in full. • Aside from the usual regular deductible contribution
expense, an adopting entity shall be allowed an additional deduction from gross income
equivalent to 50% of the contribution of the adopting entity for the “Adopt-A-School
Program”.)
Problem 4: CDE employs primarily women. CDE installed a lactation station for its nursing
employees at the following costs.
Remodeling of a space for the lactation station P100,000
Tables and comfortable chairs 200,000
Refrigerator 300,000
Manual and electric breast pumps 400,000
Supplies (sterile milk containers, soaps, etc.) 500,000
Required:
1. The expense deductible as part of regular itemized allowable deductions .
2. The expense deductible as part of special itemized allowable deductions .
\\
Solution:
Remodeling of a space for the lactation station P100,000

Tables and comfortable chairs 200,000
Refrigerator 300,000
Manual and electric breast pumps 400,000
Supplies (sterile milk containers, soaps, etc.) 500,000
Total: P1,500,000
Additional deduction
(1,500,000 x 100%) P1,500,000
Total: P3,000,000
Answer:
1. The expense deductible as part of regular itemized allowable deductions amounted to
P1,500,000.
2. The expense deductible as part of special itemized allowable deductions amounted to
P1,500,000.
(The expenses incurred by a private health and non-health facility, establishment or institution,
in complying with the provisions of this Act, shall be deductible expenses for income tax
purposes UP TO TWICE the actual amount incurred.)
Problem 5: Atty. A rendered the following services during the year:

Gross receipts from legal fees P8,000,000
Value of 60-hour assistance to indigent clients 400,000
Value of other pro-bono services 72,000
Direct cost of services 480,000
Other deductible expense 3,400,000
Required:
1. The expense deductible as part of regular itemized allowable deductions .
2. The expense deductible as part of special itemized allowable deductions .
Solution:
Gross receipts from legal fees P8,000,000
Allowable deduction:
(8,000,000x10%) (800,000)
7,200,000
Value of 60-hour assistance to indigent clients 400,000
Value of other pro-bono services 72,000
Allowable deduction:
(72,000 x 10%) (7,200) 64,800
Other deductible expense (3,400,000)
Total: P4,264,800
Answer:
1. The expense deductible as part of regular itemized allowable deductions is P4,207,200.
2. The expense deductible as part of special itemized allowable deductions is P0.00.
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COMPREHENSIVE PROBLEMS
Problem 1: Classify the items whether deductible or non-deductible from business gross income.
Deductible Non-deductible
1. Kickback payment to the government official ✓
2. Tuition fees, board and lodging incurred by a medical doctor while attending ✓
a continuing professional education seminar
3. Overtime pay paid to rank-and-file employee ✓
4. Fringe benefits paid to an officer of the company ✓
5. Distribution of profits to partners ✓
6. Cash dividend paid ✓
7. Donations made to employee’s birthday party ✓
8. Amounts paid for pensions of retired employees ✓
9. Salary of employee paid to his widow for a limited period after his death ✓
10. Entire amount expended for meals, lodging, and travel in connection with own ✓
business
11. Net capital loss carry-over ✓
12. Philippine income tax ✓
13. Income tax paid by a resident citizen to foreign country ✓
14. Research and development costs of unsuccessful developed products ✓
15. Net operating loss carry-over ✓
16. Operating expenses incurred outside the Philippines by a non-resident alien ✓
engaged in business in the Philippines
17. Donations for coffin and wake expenses ✓
18. Manager’s expense account subjected to fringe benefit tax ✓
19. Cost of technical books used by a CPA in the practice of his profession ✓
20. Withholding income tax on employees’ salaries ✓
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Problem 2: Mr. Michael Arroyo, widower with three qualified dependent children and a practicing
accountant has the following receipts and expenditures for the calendar year ended December 31, 200X:
Receipts
Professional fees (including unearned professional fee of P100,000) P500,000
Compensation income 25,000
Commission from employer 5,000
Interest on time and savings deposit, net of 20%final tax 16,000
Expenditures
Salaries of assistants P96,000
Partial payment of loan 20,000
Interest on loan (loan was used for the repair of the residential house
of Mr. Arroyo) 3,850
Traveling expenses 11,000
Light and water, office 7,890
Light and water, residence 6,500
Stationeries and supplies 1,960
Prepaid rent – office (including expired portion of P60,000) 160,000
Contributions exclusively for religious purposes 38,500
Required: Compute for the allowable deductions from the business gross income.
Solution:
Receipts
Professional fees P400,000
Compensation income 25,000
Commission from employer 5,000
Net income before contributions: P430,000
Contributions deductible with limit:
Contributions exclusively for religious purposes
Actual = P38,500
Limit = P430,000 x 10% = 43,000
Allowed (lower amount) (38,500)
Interest on time and savings deposit, subject to final tax
(P16,000/80%) 20,000
Expenditures
Salaries of assistants (96,000)
Light and water, office (7,890)
Stationeries and supplies (1,960)
Prepaid rent – office (including expired portion of P60,000) (160,000)
Total: P119,050
Answer: The allowable deductions from the business gross income is

P119,050.00.
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Problem 3: ABC Enterprises incurred the following business expenses in the taxable year 200X:
 Allowance per aging accounts receivable at the beginning and ending of the year are P20,000
and P30,000 respectively. The firm’s provision for bad debts during the year is P15,000.
 Depreciation expense based on original cost P40,000; depreciation expense based on
appraisal P50,000.
 On December 31, 200X, paid research and development cost of P500,000 treated as deferred
expense.
 Contribution during the year are as follows:
To the government for priority program in sports P50,000
To the government for public purposes 10,000
To the accredited NGO’s total administrative expenses is 35% 100,000
To the church of Cebu 60,000
Net income before contribution 2,500,000
Required: Compute the total allowable deductions of Love Enterprises assuming that the firm is a
1. Sole proprietorship
2. Corporation
3. Partnership
Solution:
SOLE PROPRIETORSHIP
Net income before contribution P2,500,000
A/R Beginning 20,000
A/R Ending 30,000
Bad debts expense (15,000)
Depreciation expense – original cost (40,000)
Research and development cost (50,000)
Contributions deducted in full:
To the government for priority program in sports (50,000)
Contributions deducted with limit:
To the government for public purposes
Actual = P70,000
Limit = 2,500,000 x 10% = P250,000
To the accredited NGO’s total administrative expenses is 35%
(100,000 x 35% = 35,000) (35,000)
Total: P2,290,000
Contributions deducted with limit composed of:

o Contributions to the government for public purposes
o Contributions to the church of Cebu
Total allowable deductions = 260,000
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CORPORATION
A/R Ending 30,000
Actual = P70,000
Limit = 2,500,000 x 5% = P125,000
(100,000 x 35% = 35,000) (35,000)
Total: P2,290,000

PARTNERSHIP
A/R Ending 30,000
Actual = P70,000
Limit = 2,500,000 x 10% = P250,000
(100,000 x 35% = 35,000) (35,000)
Total: P2,290,000

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Answer:
1. P260,000 is the total allowable deductions of ABC Enterprises assuming that the firm is
a sole proprietorship. (contributions made by an individual taxpayer is subject to 10%
limitation of taxable income before deducting the contribution.)
a corporation. (contributions made by an individual taxpayer is subject to 5% limitation
of taxable income before deducting the contribution.)
a partnership. (Supposedly, contributions subject to limit shall be claimed and deducted
by the partners in proportion to their respective interest in the partnership. But since
proportion is not given, then contributions made is subject to 10% limitation.)
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MANTUANO, Donita Marie B.

GROSS INCOME – EXCLUSIONS AND INCLUSIONS

1. Proceeds of Life Insurance

2. Return of Insurance Premium

3. Gift, Bequest or Devise

4. Compensation for Personal Injuries or Sickness

5. Income Exempt Under Treaty

6. Retirement Benefits, Pension, Gratuities, etc.

Ramon Magsaysay Award P50,000

Interest Income P 60,000

How much is the total taxable income?

Winning from charity horse race sweepstakes from PCSO P500,000

Required: Compute the total amount of exclusion from gross income.

Winning from charity horse race sweepstakes from PCSO P500,000

Problem 5: Mr. Allan Cruz received the following:

Return of his life insurance premium paid for 25 years P2,000,000

TOTAL P6,050,000 P100,,000

Answer: Amount to be excluded from gross income : P6,050,000

Advances from Company 450,000 (925,000)

Labor Union Dues P 10,000

Total Exclusion in Gross Income: P 135,000

Total exclusion in gross income

B. Inclusions from Gross Income

Cost of Construction (Improvements) P10,000,000

Problem 1: Determining the Taxability of an Item

Required: Compute the taxable income subject to normal tabular tax.

(Gross income subject to 30% corporate income tax)

SSS premium contributions P420,000

Problem 2 (Traveling Expenses): A Corporation incurs the following travel expenses:

Problem 4 (Capital Expenses of Educational Institution): In 200x, TUV University, a private

Net sales P700,000

Answer: The deductible representation expense costs P8,500.00.

Installation of new air condition P60,000

The amount to be immediately expensed and capitalized would be .

Answer: The amount to be immediately expensed and capitalized would be P130,000.

Premium payments of his life insurance P25,000

Gross Income from Professional

Interest paid in advance P20,000

Deductible Interest Expense

How much is the amount of taxes deductible from gross income?

Business income within and without P520,000

Answer: P750,000 is the total amount of deductible losses.

2. Taxable income for year 2

Required: Compute the following:

1. Shares sold at a loss without covering acquisition

2. Loss on wash sale and the capital loss

25 shares bought on January 2, 20X3

Adjusted costs of the shares

DEDUCTIONS: CHARITABLE CONTRIBUTIONS

2. A domestic corporation made a P20,000 contribution to an accredited social welfare

Gross sales P30,000,000

Gross sales P30,000,000

Breast-feeding assistance to the needy P200,000

Answer: The total special itemized deduction amounted to P440,000.

Answer: The deductible donation of X is P1,500,000. (Contributions to the government in

Remodeling of a space for the lactation station P100,000

Problem 5: Atty. A rendered the following services during the year:

Answer: The allowable deductions from the business gross income is

Contributions deducted with limit composed of: