DEDUCTIONS

Question 1

1. In cases of deduction and exemption on income tax return doubts shall be resolved
   a. Strictly against the taxpayer
   b. Strictly against the government
   c. Liberally in favor of the tax payer
   d. Liberally in favor of the employer

Question 2

2. The following are examples of expenses deductible from gross income, except one
   a. Representation expenses designed to promote business
   b. Payment of the tuition fees of the taxpayer’s children
   c. Expenses paid to an advertising firm in order to create a favorable image for the business
   d. Premiums on life insurance covering the life of an employee if the beneficiary is his heirs

Question 3

3. The interest expense of a domestic corporation on a bank loan in connection with the purchase
   ofproduction equipment
   a. Is not deductible from gross income of the borrower-corporation
   b. Is deductible from the gross income of the borrower-corporation during the year or it
   maybe capitalized as part of cost of the equipment
   c. Is deductible only for a period of five years from date of purchase
   d. Is deductible only if the taxpayer uses the cash method of accounting

Question 4

4. Statement 1: Interest paid or incurred in the acquisition of fixed assets may be capitalized to
   theasset account.
   Statement 2: An individual on the cash basis of accounting shall deduct interest paid in advance
   in the year that the principal is paid.
   a. Statement 1 is correct while statement 2 is wrong
   b. Statement 1 is wrong while statement 2 is correct
   c. Both statements are correct
   d. Both statements are wrong

Question 5

5. One of the following is not correct for deductibility of losses from gross income
   a. It must arise from fire, storm, or other casualty, robbery, theft, or embezzlement
   b. It must not be compensated by insurance or any form of indemnity
   c. A Notice of Loss by casualty should be filed with the Bureau of Internal Revenue within
   60 days from the date of discovery
   d. It is a property used in trade, business or practice of profession

Question 6

6. Which of the following losses is deductible?
   a. Loss on wash sale
   b. Loss on merger
   c. Loss on a transfer of property to a corporation solely stock resulting in control
   d. Loss on casualty

Question 7

7. Statement 1: A net operating loss is the excess of allowable deductions over the gross income
   from business for a taxable year.
   Statement 2: A net operating loss which had not previously been deducted from gross income
   shall be carried over as a deduction only in the next year immediately following the year of such
   loss.
   a. True, true
   b. False, false
   c. True, false
   d. False, true

Question 8

8. Statement 1: In a total loss due to casualty, the measure of loss is the book value of the asset
   reduced by any form of indemnity.
   Statement2: In apartial loss due to casualty,themeasure oflossisthe book value ofthe property,
   or the cost to restore the property to its normal operating condition, whichever is lower,
   reduced by any form of indemnity.
   Statement 3: In a wash sale, loss is not deductible.
   Statement 4: In a merger or consolidation, or transfer to a controlled corporation, loss is not
   deductible.
   a. True, true, true, true
   b. False, false, false, false
   c. True, false, true, false
   d. False, true, false, true

Question 9

9. Statement 1: Bad debt is an accounting expense when a provision is made for it.
   Statement 2: Bad debt is a deduction from the gross income when the account is written off.
   a. The first statement is true while the second statement is false
   b. The first statement is false while the second statement is true
   c. Both statements are true
   d. Both statements are false

Question 10

10. Statement 1: The cost of leasehold improvements shall be deductible by the lessee by spreading
    the cost of the improvements over the life of the improvements or remaining term of the lease,
    whichever period is shorter.
    Statement 2: Depreciation expense can be a deduction for both tangible and intangible property
    with limited useful life.
    a. True, true
    b. False, false
    c. True, false
    d. False, true

Question 11

11. Statement 1: Contributions by the employer to a pension trust for past service cost is deductible
    in full in year that the employer made the contributions if he is on the cash basis of accounting.
    Statement 2: Contributions or donations given directly to individuals cannot be deducted
    from gross income.
    a. True, true
    b. False, false
    c. True, false
    d. False, true

Question 12

12. Which statement is wrong about research and development costs?
    a. When related to the acquisition and/or improvement of land and building, must
    becapitalized
    b. If not related to land and building, may be treated as an outright deduction
    c. If not related to land and building, may be treated as a deferred expense which may
    be amortized
    d. Cannot be deducted because it has unlimited life

Question 13

13. Statement 1: A corporation cannot deduct a loss arising from a sale between the corporation
    andthe controlling individual stockholders.
    Statement 2: A corporation cannot deduct a loss arising from a sale between the corporation and
    the controlling parent corporation.
    a. First statement is correct, but the second statement is wrong
    b. First statement is wrong, but the second statement is correct
    c. Both statements are correct
    d. Both statements are wrong

Question 14

14. The phrase “related taxpayers” will apply to the following, except
    a. Between members of the family
    b. Between the grantor and a fiduciary of any trust
    c. Between a fiduciary of a trust and a 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

Question 15

15. The following are deductible taxes, except
    a. Community tax
    b. Documentary stamp tax
    c. Excise tax
    d. Philippine income tax

Question 16

16. The following are non-deductible taxes, except
    a. Special assessment
    b. VAT
    c. Stock transaction tax
    d. Local taxes

Question 17

17. Which interest expense can be deducted from gross income?
    a. Interest expense on money borrowed to buy government bonds
    b. Interest expense on money borrowed to finance petroleum operations
    c. Interest expense between a corporation and the controlling individual
    d. None of the above

Question 18

18. Which statement is wrong? Research and development cost
    a. On land and building acquired for research and development purposes is not deductible as research and development cost
    b. May be claimed as an outright deduction from gross income
    c. May be treated as a deferred expense to be amortized over the period which will
    benefitfrom the expenditure
    d. May be treated as a deferred expense to be amortized over a period of not less than
    sixty months from the date benefit from expenditure is derived

Question 19

19. Which of the following statements is wrong?
    a. A deduction for bad debt is not available when a provision for it is made
    b. A deduction for bad debt is available only when a write off is made
    c. There is no deduction for bad debt when there is a surety for the debtor against whom collection may be enforced
    d. None of the above

Question 20

20. Which statement is wrong? Contributions made by an employer to a pension trust
    a. For lump sum payment to cover past service cost, is allowable as deduction beginning with the year the payment was made
    b. For lump sum payment to cover past service cost is allowable as deduction amortized
    forperiod of ten years
    c. For a lump sum payment to cover past service cost, may be amortized over a period of more than, but not less than ten years
    d. For present service cost, is deductible in the year that payment is made

Question 21

21. Statement I: Interest paid on preferred stock is deductible from gross income of the paying
    corporation.
    Statement II: A capital expenditure usually benefits more than one accounting period and
    is deductible from gross income in the year it is paid or incurred.
    a. True, true
    b. True, false
    c. False, true
    d. False, false

Question 22

22. Which statement is not correct? Deduction for depletion
    a. Is allowed on wasting assets only
    b. For foreign corporations engaged in doing business in the Philippines is allowed only if themine is located in the Philippines
    c. For domestic corporations, shall be allowed only if the mine is located in the Philippines
    d. Is separate from deduction for depreciation of building in the mine site

Question 23

23. In order that an expense may be deductible from gross income
    I. It should be paid or incurred within the taxable year.
    II. It should be in connection with trade or business.
    III. It should be supported by vouchers or receipts.
    IV. If subject to withholding income tax when received as income by the payee, the income tax should have been withheld.
    Which is the correct answer?
    a. All the statements are true
    b. All the statements are false
    c. One of the statements is true
    d. One of the statements is false

Question 24

24. Which of the following is not deductible from gross income?
    a. Salaries and wages of employees
    b. Entertainment, amusement and recreation expenses
    c. Rental expenses
    d. Bribes, kickbacks and other similar payments

Question 25

25. Which of the following is not a requisite for taxes to be deductible?
    a. Must have been paid or incurred within the taxable year
    b. Deductible only by the person/s upon whom the tax is imposed by law
    c. Must be in connection with the taxpayer’s profession, trade or business
    d. Must be imposed by the national government

Question 26

26. Which of the following is the correct allowable entertainment expense?
    a. Not more than 1⁄2% of revenue from services
    b. Not more than 1% of net sales of goods
    c. Not more than 1 1⁄2% of revenue from services
    d. Not more than 1⁄2% of net sales of goods

Question 27

27. The net operating loss of the business or enterprise for any taxable immediately preceding
    thecurrent taxable year, which had not been previously offset as deduction from gross income
    shall
    a. Be carried over as a deduction from gross income for the next 3 consecutive taxable
    yearsimmediately following the year of such loss
    b. Be carried over as a deduction from gross income for the next 5 consecutive taxable
    yearsimmediately following the year of such loss
    c. Not be carried over as a deduction from gross income in any of the succeeding years
    d. Be carried over as a deduction from gross income in any of the succeeding years until it
    is fully offset

Question 28

28. Which statement is wrong? The net operating loss carry-over (NOLCO) is
    a. Available to a domestic corporation
    b. Available to a registered general partnership in business in the Philippines
    c. Available to an individual in business in the Philippines
    d. Not available to resident foreign corporations

Question 29

29. Which of the following is not correct regarding NOLCO?
    a. NOLCO is allowed as deduction from business income for the next 3 succeeding years.
    b. Domestic and resident foreign corporation subject to normal income tax is allowed
    withNOLCO
    c. Offshore banking unit of a foreign corporation is allowed with NOLCO
    d. Private educational institution enjoying preferential tax rate is allowed with NOLCO

Question 30

30. All of the following, except one, are not deductible from gross income
    a. Tuition fees and other expenses of the taxpayer’s children
    b. Replacement of the roof of the office building
    c. Premiums paid in insuring the life of the Corporate President, appointing the corporation as the beneficiary of the policy
    d. Premiums paid on a life insurance policy of a rank-and-file employee with the latter’s
    children as the appointed beneficiary

Question 31

31. To be deductible in full, certain accredited non-government organizations or non-profit
    domestic corporations must meet certain requisites. One of the following is not a requisite

a. Organized and operated exclusively for scientific, research, educational, character-
building and youth and sports development, health, social welfare, cultural and charitable purposes or combination of these purposes
b. Not later than the 15th day of the third month after the close of the taxable year in which the contributions are received, makes utilization of the contributions directly for the purposes or function for which the organization is organized and operated
c. The assets of which, in the event of dissolution, would be distributed to another non-profit domestic corporation organized for similar purpose or purposes, or to the State for public purpose or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized
d. The administrative expenses shall, on an annual basis, not exceed 40% of the total
expenses

Question 32

32. One of the following charitable and other contributions is not deductible in full
    a. Donations to Government of the Philippines or to any of its agencies or political subdivisions, including fully owned government corporations, exclusively to finance, provide for, or to be used in undertaking priority projects
    b. Donations to certain foreign institutions or international organizations (i.e. International Red Cross, World Health Organization)
    c. Donations to accredited non-government organizations or non-profit domestic corporations that satisfied the four requirements set by law
    d. Donations made for the use of the Government of the Philippines or any of its agencies or political subdivision exclusively for public purpose

Question 33

33. To be allowed as a valid deduction, charitable and other contribution must not exceed
    a. 5% of taxable income after charitable contribution, in case of individuals
    b. 10% of taxable income after charitable contribution, in case of individuals
    c. 5% of taxable income before charitable contribution, in case of individuals
    d. 10% of taxable income before charitable contribution, in case of individuals

Question 34

34. In computing allowable deduction for purposes of income taxation
    Statement 1: Interest expense arising from loans or indebtedness in connection with taxpayer’s
    business shall be reduced by an amount equal to 33% interest income subjected to final tax.
    Statement 2: Interest incurred on money used to acquire property to be used in trade shall only
    be allowed as capital expenditure.
    a. Only statement 1 is correct
    b. Only statement 2 is correct
    c. Both statements are correct
    d. Both statements are incorrect

Question 35

35. Research and development expenses treated as a deferred expense shall be allowed as
    deductionratably 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 less 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

Question 36

36. Optional standard deduction
    a. Is equal to 40% of the gross income from business practice of profession
    b. Cannot be used as a deduction from compensation income
    c. May be availed by all individuals
    d. May be availed of by the taxpayer whether or not he signifies his desire to elect optional
    standard deduction

Question 37

37. The following may be allowed to claim OSD in lieu of the itemized deductions, except
    a. Taxable estates and trust
    b. Non-resident aliens
    c. Resident foreign corporation
    d. Domestic corporations

Question 38

38. Which of the following should be sued as a basis in computing the Optional Standard Deduction?
    I. For individual taxpayers using the accrual basis of accounting, OSD is based on 40% of gross sales.
    II. For individual taxpayers using the cash basis of accounting, OSD is based on 40% of gross receipts.
    III. For individual taxpayers using the other basis of accounting such as percentage of completion method, OSD is based on 40% of gross receipts of sales, as the case may be.
    IV. For OSD purposes, corporate taxpayers shall compute the OSD in the same manner with individual taxpayers.
    a. I and III only
    b. I, II and III only
    c. All of the above
    d. None of the above