Chapter 13 Flashcards
These are business expenses incurred by a taxpayer engaged in business or engaged in the practice of profession.
Deductions from gross income
True or False: The government has the ability to dispense the grant of deductions from gross income.
True as deductions are mere privileges.
This is the habitual engagement in a commercial activity involving the regular sale of goods and services to customers or clients.
Business
Which category of expenses are deductible and which are not?
Business expenses are deductible.
Personal expenses are non-deductible.
Differentiate business expenses from personal expenses.
Business expenses are costs of doing trade, business, or practice of profession.
Personal expenses include the living and family expenses of individual taxpayers.
True or false: The 250,000 annual income exemption in the tax table for individuals is deemed in lieu of all personal expenses.
True
What are common expenses and are they treated as deductible or non-deductible?
Common expenses are those intended for both the business and for personal use.
They are partly deductible and partly non-deductible. They are allocated between business and personal use.
It is allocated pro rata.
Differentiate business expense from business capital expenditure.
Business expense benefit only the current accounting period.
Business capital expenditure benefit future accounting periods.
Business expenses are costs of generating income.
Business capital expenditures are recorded as assets when acquired then later deducted when used in the business.
True or False: The acquisition of intangible assets are business expenses and not capital expenditures.
False. They are capital expenditures.
True or False: Expenses to promote goodwill are capital expenditures and not business expenses.
True
This is used to denote the benefit arising from connection and reputation the business.
Goodwill
True or False: Rent-to-own rental payments are expenses.
False.
True or False: The taxpayer and the CIR may enter into a written agreement on the estimated useful life and rate of depreciation of any property.
True
True or False: Any change in the agreed rate and useful life shall be applied retrospectively starting on the taxable period when the change occurred.
False. It should be applied prospectively in the taxable period when notice is rendered.
True or False: The inventory method is only applicable to taxpayers using cash basis.
False. It is applicable to those who use cash basis or accrual basis.
True or False: Prepayments and capital expenditures may be deducted outright on certain circumstances.
False
True or False: Projected expenses are deductible.
False. They are non-deductible since they are only estimated future costs and have not actually been incurred.
True or False: For a VAT taxpayer, the input VAT is claimable as a deduction.
False. It is not claimable as a deduction but is claimable as a tax credit.
True or False: For a non-VAT taxpayer, the input VAT is claimable as a deduction.
True. It is part of the costs of the purchase.
What are the 4 general principles of deductions from gross income?
- LOAN principle
- Matching rule
- Related party rule
- The withholding rule
What does LOAN stand for?
L - Legitimate
O - Ordinary
A - Actual
N - Necessary
What does it mean for a business expense to be legitimate? (5)
- Incurred in and for the current period
- Not a capital expenditure
- Pertains to the business
- Not contrary to law
- Adequately substantiated
It means it is not simulated.
What does it mean for a business expense to be ordinary? (2)
When it is normal in the conduct of trade or business of the taxpayer.
Also when it is normally incurred by other taxpayers under the same line of business.
True or False: The BIR may disallow a deduction on an expense that is ordinary but unnecessary.
True
What does it mean for a business expense to be actual?
If it is paid or resulted to an incurrence of an obligation to the taxpayer.
True or False: In case of a loss, an actual expense must be sustained or realized by the taxpayer in a closed and completed transaction.
True
What does it mean for a business expense to be necessary?
If it is reasonable and essential to the development and operation of the trade or business.
True or False: Extraordinary expenses are always non-deductible.
False. They may be deductive if proven necessary and connected to the business by the taxpayer.
What does the matching principle state?
Only those business expenses incurred in connection with the generation of income subject to regular income tax are deductible.
What does the related party rule state?
In case of transactions between related parties, gains are taxable but losses are not deductible.
What is the transfer pricing rule?
Non-arms’ length expenses incurred between associated enterprises may be restated to their arm’s length fair values to reflect the correct income of each of the enterprises.
Who are related parties?
- Members of a family (up to 4th degree level consanguinity)
- the direct or indirect controlling individual of a corporation
- corporations under the same direct or indirect control
- Grantor and fiduciary of any trust
- Fiduciaries of trusts with the same grantor
- Fiduciary of a trust and the beneficiary of such trust
True or False: Only full blood family are considered members of a family and are related parties.
False. Half-blood or full-blood members are all related parties.
Control is the ownership of more than what percent of the voting stocks of a corporation?
50%
What is the withholding rule?
No withholding, no deduction
True or False: The withholding rule only requires the tax on income be withheld and not necessarily remitted to the government.
False. It should be both withheld and remitted.
True or False: Premiums paid on life insurance policies covering the life of an employee is a deductible expense.
False. It is non-deductible
Are amounts expended in restoration of property deductible expenses or not?
Not deductible
What are the tax reporting classifications of deductions? (4)
- costs of sales/services
- ordinary allowable itemized deductions
- special allowable itemized deductions
- nolco
Differentiate the ordinary/regular itemized deductions from special itemized deductions.
Ordinary - expenses arising from the trade or business
Special - arising from special laws
These are bonus deductions for taxpayers.
Deduction incentives
NOLCO is only allowed by the law for how many years?
3 years
True or False: NOLCO is an expense.
False. It is a special deduction incentive allowed by law.
What are the modes of claiming deductions from gross income?
- itemized deductions
- optional standard deductions
Differentiate itemized deductions from OSD.
ID - based on actual amount of expenditure and is where the TP lists all items. Here, no receipt, no deduction
OSD - 40% is deductible based on gross sales/income. Substantiation is not required.
