Chapter 13-A Flashcards
True or False: In order for indebtedness on interest expense be valid, it must be a written agreement.
True
True or False: For this topic only, interest expense may be deductible even if the interest is not stipulated in writing.
False. Interest not stipulated in writing is void.
As a general rule, how much interest expense shall be deductible? What is the XPTN?
GR: Entire amount
XPTN: If the taxpayer earns interest income subject to FWT during the same taxable year when the interest expense incurred.
What is the arbitrage cap or limit on interest expense?
01/01/21 to present is 20%
Prior to that is 33%
True or False: Discounts or pre deducted interests are considered prepayments so these are deductible.
False. Prepayments are not yet expenses so they are not deductible.
This is a term in stock market where there is simultaneous purchase and sale of stocks in different markets in order to derive profits arising from varying prices included in markets.
Arbitrage
True or False: The arbitrage limit is a direct application of the matching rule.
False. It is indirect.
True or False: The arbitrage limit’s result on interest expense deductible would have had the same result as if the law simply provided that only interest expense connected with gross income subject to regular tax is deductible.
True
True or False: There is no arbitrage limit for qualified MSMEs subject to 20% corporate tax.
True
True or False: The law did not set separate arbitrage limits for individual and corporate taxpayers so the rule must be applied to both alike.
True
True or False: Thrift banks are exempted from the arbitrage limit.
True
True or False: Interests on installments due of a loan are not deductible.
False. Each interest pertaining to each installments are deductible.
What is the optional treatment of interest expense?
- outright deduction from gross income
- capital expenditure claimable though depreciation
Are special assessments deductible as an expense?
No. It is capitalized as cost of the land.
Are tax surcharges business expenses?
No since these are unnecessary and avoidable expenses.
Income taxes paid in a foreign country can either be claimed as?
- deduction
- tax credit
What is the formula for the limit on foreign taxes?
Total foreign taxable income /World taxable income x Philippine income tax due
Who can claim tax credit or deduction for foreign taxes paid?
Those taxable on world income:
1. RC
2. DC
True or False: Refunds of non-deductible taxes are not exempt from income tax.
False. It is exempt.
How many days from date of discovery of theft or embezzlement must the taxpayer declare to the BIR the casualty loss for it to be deductible?
45 days
What are the types of losses?
- Ordinary loss
- Capital loss
- Wagering or gambling loss
- Abandonment loss
The GR is that illegal expenses are not deductible. What is the XPTN?
Extent of gambling winnings
Are ordinary losses deductible?
Yes in full.
Are capital losses deductible?
Yes only to the extent of capital gains
Are loss of value of assets deductible?
No since this is reversible and temporary.
Is loss on insured property deductible?
Yes to the extent of the excess of the tax basis of the property over the insurance reimbursement
True or False: Notice of abandonment to be filed with the CIR is optional.
False.
Can abandonment be reversed?
Yes
A requisite of claim for bad debts deduction says that the taxpayer must be under what basis of accounting?
Accrual
How is a bad debt ascertained to be worthless?
When the taxpayer had already exerted diligent effort to collect the debt through demand letter yet there were no collection.
Are estimated bad debts expense deductible in the year of estimation?
No. These are projected expenses and are not yet actually incurred.
Does change in accounting period lead to deduction?
No
How are bad debts subsequently recovered treated as?
Inclusion to gross income to the extent of income tax benefit
Can a taxpayer deduct an obligation that had already been prescribed?
No since a requisite says it must be subsisting.
Can a taxpayer who sustained bad debts under cash basis then subsequently changed its accoutning method to accrual basis claim deductions on bad debts?
No. What cannot be done directly cannot be done indirectly.
What are the depreciation methods?
- straight line method
- syd method (sum of the year digit)
- declining balance method
- those prescribed by the secretary of finance
If the tenant if a life tenant, not the owner, is depreciation allowable as a deduction?
Yes
How is the depreciation of properties held in trust deductible?
Through apportioning it between the beneficiaries and trusteed based on the basis of income allowable or to pertinent provisions.
Is depreciation of the revaluation surplus of PPEs deductible?
No these are not actual costs.
True or False: The depreciation of an asset may be premised on its reappraised value.
False. It must be on its acquisition cost.
True or False: Substantiation is required in the deductibility of depreciation on passenger vehicles.
True
Who has the option to expense capital expenditures according to the NIRC?
Private educational institutions
How is amortization of intangible assets treated as?
The same as discussed on depreciation.
This is a provision for the periodic return of capital investments in wasting assets such as mineral, gas, oil.
Depletion expense
What are the stages of wasting asset activities?
- exploration period
- development period
- commercial production
This period of wasting asset activities involves ascertaining the existence, location, extent, or quality of any deposit or mineral.
Exploration period
This period of wasting asset activities commences when deposits of ore or minerals are shown to exist in sufficient commercial quantity.
Development period
This period of wasting asset activities is the stage of actual extraction, processing, and sale.
Commercial production
True or False: In properties directly used in petroleum operations, a shift from straight-line method to declining balance method is not allowed.
False. It is allowed.
What is the useful life of properties directly used in petroleum operations?
10 years or shorter as permitted by CIR
What is the useful life of properties not directly used in petroleum operations?
5 years
What depreciation method is prescribed by the NIRC for properties not used directly in petroleum operations?
Straight-line method
If the expected life of the property used in mining is 10 years or less, how is it depreciated?
using the normal rate of depreciation
If the expected life of the property used in mining is more than 10 years, how is it depreciated?
using any number of years between 5 to 10
Are intangible exploration and development costs before commercial production deductible?
No it is capitalized
Expenses incurred on non-producing mines may be deducted outright, but the deductible amount shall not exceed what percentage of the net income?
25%
True or False: The option to deduct intangible exploration and development drilling costs is revocable.
False. It is irrevocable.
True or False: In claims for deduction on contributions, the donee institution may either be domestic or foreign.
False. It must be domestic.
What should the donee institution issue?
Certificate of Donation
True or False: All donations adhering to all the requisites for deductibility are fully deductible.
False. Some are partially deductible.
What is the limit of deduction for contributions for individuals and corporations?
I - 10%
C - 5%
The contributions subject to limit or those partially deductible are deductible based on what doctrine?
Doctrine of usage
A requisite for full deductibility of contributions to accredited NGOs states that the admin expenses of the NGO should not exceed what percentage of its total expenses?
30%
Differentiate a defined contribution plan and a defined benefit plan
DCP - the amount of benefit is not guaranteed
DBP - the amount of benefit is guaranteed
True or False: The contributions of employees are also deductible as expense by the employer.
False. Only the portion paid by the employer is deductible.
Differentiate current from past service cost.
CSC - pension expense accruing during the year as the employees render service for the year
PSC - pension expense accruing in prior year for services already rendered
How many years is the contribution for past service costs amortized?
10 years
If R&D costs are related to capital accounts, they are treated as?
Capitalization
If R&D costs are related to capital accounts, they are treated as?
Outright expense; or
Deferred expense
at the option of the taxpayer
This is a test applied in the realization of net income and expense by an accrual-basis taxpayer.
All events test
What is the Cohan rule?
The government may allow deductions on expenses not substantiated with receipts if the taxpayer can prove that there was a deductible expense and can estimate how much it was.
Under the Cohan rule, how much is disallowed as a deduction?
50%
For what period should substantiation ORs be kept?
3 years
What happens in the case of lost ORs?
The BIR may accept true receipts that is certified by the person who lost it (through an affidavit) upon proof of loss or destruction
What is the ceiling for the payment to directors?
10% of net income
What does EAR expense stand for?
Entertainment, Amusement, and Recreation Expense
What is the ceiling on deduction for taxpayers engaged in sale of goods and of services?
Goods - 0.5% of net sales
Services - 1% of net revenue
