Income Tax

Question 1

The following are characteristics of gross income, except:

a. Return of capital
b. Realized benefit
c. Not exempted by law, contract, treaty or the Constitution
d. All of the choices are characteristics of gross income

Answer 1

a.

Note: Return ON capital, not Return OF capital

Question 2

Which of the following items constitute gross income?

a. Sale of goods to a customer
b. Cancellation of debt in payment of service
c. Proceeds of life insurance policy
d. Choices a and c

Answer 2

d

Question 3

The following are items of gross income which are exempted by the Constitution, statutes or treaty or contract, except:

a. Income of GOCCs
b. GSIS, SSS, HDMF, and PhilHealth contributions
c. Income of foreign government or corporations owned or controlled by such foreign government
d. Tax holiday for entities registered pursuant to the Omnibus Investment Code

Answer 3

a

Question 4

Statement I - J holds shares of XYZ Co. totaling P1M. At the end of the year, the fair value of the shares amount to P2M. The unrealized gain on investment is an item constituting gross income for taxation purposes.

Statement II - K owns a cattle ranch. At year-end, one of the cows gave birth to a calf. The birth of the calf is an item which does not constitute gross income for taxation purposes.

Identify which of these statements are true.

a. Statement I
b. Statement II
c. Both statements
d. None of the statements

Answer 4

b

Question 5

Identify the correct statement/s:

I. The capital gains tax on gain on sale of real property classified as capital asset located abroad is 6%
II. The capital gains tax on net gain on sale of domestic stocks through the stock exchange by a non-dealer is 0%

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer 5

b

Capital gains tax on gain on sale of real property located IN THE PHILIPPINES IS 6%.

There is no capital gains tax on net gain on sale of domestic stocks through the stock exchange by a non-dealer, because the transaction is subject to Stock Transaction Tax.

Question 6

What is the final tax rate on winnings by a Resident Citizen?

a. 0%
b. 25%
c. 10%
d. 20%

Answer 6

d

Question 7

What is the final tax rate on interest income on FCDU banks by a non-resident citizen?

a. 25%
b. 10%
c. Exempt
d. 15%

Answer 7

c

Question 8

What is the final tax rate on interest income on FCDU banks by a non-resident citizen?

a. 25%
b. 10%
c. Exempt
d. 15%

Answer 8

c

Question 9

H won a minor raffle prize from SM Baguio amounting to P5,000. As a result, the amount of the prize is exempt from final tax. True or false?

a. True. Since it is a prize, it is not subject to final tax, but rather, to income tax.
b. True, since this prize, being below the limit of P10,000, is exempt from any taxes.
c. False, since this prize was won by effort, he should be exempted from any taxes.
d. False, since this prize is not a “prize” at all, but winnings, as it is a game of chance, he will be taxed at 20%, regardless of whether or not the amount exceeded P10,000.

Answer 9

d

Winnings in general = 20% FIT
PCSO/Lotto winnings = Exempt (if below P10,000); 20% FIT if above P10,000

Exception to the 20% FIT rate are NRA-NETB, who will be instead taxed at 25% FIT.

Note:

Winnings = based on CHANCE (no effort needed)
Prize = based on EFFORT

Question 10

One of the items below is an example of passive income, but can be classified as active income. Which of these items?

a. Dividends
b. Winnings
c. Rent
d. Interest

Answer 10

c

Question 11

J, a resident of Baguio, loaned P100,000 to F, a Japanese citizen residing in Nagasaki, Japan. The loan took place in Sydney, Australia. The loan bears interest of 12%, payable annually. What is the situs of the interest?

a. Baguio City, Philippines
b. Sydney, Australia
c. Nagasaki, Japan
d. None of the choices

Answer 11

c

Question 12

Shepherd received dividends amounting to P5,000,000 from Shadow Company, a domestic corporation. The dividends were given in New York, USA. Shepherd claims that the dividends, being given by Shadow in the US, were taxable without. True or false?

a. True, since the dividends were distributed outside of the Philippines, they are taxable without.
b. False. Shepherd must determine the world gross income for the tree-year period ending the current taxable year first before determining if the dividends were taxable within or without.
c. False. Since Shadow Company is a domestic corporation, dividends received by a domestic corporation is taxable within, regardless of where it was distributed.
d. True, since Shepherd is a NRA-NETB, he should be taxed without.

Answer 12

c

If problem is silent, assume that the taxpayer is RC. Thus in this case, Shepherd is an RC.

Question 13

J, a Filipino currently based in India, performed house repair services to K, an Israeli national RA, in his home in Sagada, Mt. Province. Should J record his income as within the Philippines or without?

a. Without, since he performed services to an Israeli national RA
b. Within, since the services were performed in the Philippines.
c. Without, since J is outside of the Philippines when the services took place.
d. Within, since J, being an OFW, is a citizen, he must record income both within and without.

Answer 13

b

Situs of income for services is the place of performance (in this case, in Sagada, Mountain Province, Philippines)

Question 14

W, a resident alien, rented out his house situated in Auckland, New Zealand, to X, a Chinese national, for 7 months. What is the situs of taxation for the house rented, and is it taxable?

a. Within; taxable
b. Without; non-taxable
c. Within; non-taxable
d. Without; taxable

Answer 14

b

Analysis:

1. W is a resident alien. Resident aliens are only taxable WITHIN.
2. Situs of income for rent is the location of the property. W’s property is located in New Zealand. He could have been taxable, but given that he, a resident alien, is taxable only within the Philippines, W’s rent income is not taxable.

Question 15

F owns a merchandising business. F purchased T-Shirts from Canada to be sold in his online store in the Philippines. What is the situs of income for merchandising?

a. Within
b. Without
c. Exempt
d. Within and without

Answer 15

a

Question 16

Who can avail of the Calendar year tax accounting period?

a. Taxpayers with no annual accounting period
b. Taxpayers who do not keep books
c. Individuals
d. All of the choices

Answer 16

d

Question 17

This is any 12 month period ending the last day of any month other than December 31.

a. Fiscal period
b. Breakeven period
c. Calendar year
d. None of the choices

Answer 17

a

Question 18

When can a short accounting period not be permitted?

a. When an individual wants to change from a calendar year to fiscal period
b. Termination of account period by the CIR
c. Death of a taxpayer
d. Dissolution of business

Answer 18

a

Question 19

The following items are not subject to regular income tax for a Resident Citizen, except for one item:

a. Royalty income from abroad
b. Interest from bank deposits
c. Prizes amounting to P20,000
d. Grand prize in a raffle promo by SM Department store amounting to P1,000,000

Answer 19

a.

Royalties are generally subject to Final Income Tax when it is earned WITHIN the Philippines. Any passive income earned OUTSIDE the Philippines are taxable without and thus, this is taxable income.

Question 20

Which of the following is a nature of Regular Income Tax?

a. It employs creditable withholding system
b. It is a specific and regressive tax
c. It is imposed on gross income only
d. All of the choices are correct

Answer 20

a.

Question 21

J, the supervisor of the production department of ABC Company, L, the Chief Operations Officer of ABC Company, and K, a marketing staff of the same company, all received SUVs as fringe benefits from the company. On the part of L, the company bought him the SUV for purposes of travelling to the different plants of ABC for him to check on its daily operations. Which of these two are subject to income tax?

a. J
b. K
c. L
d. Both J and L

Answer 21

b.

The SUV received by J is subject to Fringe Benefit Tax. The same scenario would have occurred to L, but since this represents a necessity of the employer (given his duties), this will be instead exempted.

Question 22

J sold his personal car, a capital asset, to R for P1,200,000. The car was bought 3 years ago for P1,000,000 and has a carrying amount of P900,000. Is this sale taxable?

a. Yes, it is subject to Capital Gains Tax since it is a sale of a capital asset.
b. Yes, it is subject to Regular Income Tax since it is a sale of an ordinary asset.
c. Yes, it is subject to Regular Income Tax because the car sold, while being a capital asset, is classified as other capital asset subject to regular income tax
d. Yes, it is subject to Capital Gains Tax of 6% since cars are immovable in nature.

Answer 22

c.

Only income subject to CGT are:

15% CGT on sale or disposition of domestic stocks directly to a buyer.

6% CGT on sale of real property classified as a capital asset.

Question 23

Which of the following expenses is deductible?

a. Utilities expense on house of J, under cash basis
b. Telecommunications expense on IDK Company using accrual basis
c. Gasoline expenses on the personal car of one of the accountants of JGH Company
d. Entertainment expenses for public officers in order for F Company to be not sued to court for illegal activities

Answer 23

b.

Items a and c are personal expenses (remember LOAN). Item d is an illegal expense (classified as bribery)

Question 24

Which of the following income is subject to RIT?

a. Sale of domestic stocks by Q, a non-dealer to the Stock Exchange
b. Royalties on books in the Philippines earned by L
c. Income earned by ABNKKBSNPLAKO, a Non-Profit Organizations in relation to their main line of activities
d. Income received by F, a hitman, for assassinating X, a political rival of R.

Answer 24

d

Income, whether earned legally or illegally, is subject to tax. However, expenses incurred in illegal activities are not deductible.

Item a is subject to Stock Transaction Tax
Item b is subject to 10% FIT
Item c is exempt because this is a Non-Profit Organization

Question 25

Which of the following demonstrates an employer-employee relationship?

a. W, an artist under contract from VivaFilms
b. J, an accountant who runs his own accounting firm
c. R, a basketball player under contract with Rain or Shine Basketball Team of the PBA.
d. D, a loans clerk of VBN Credit Cooperative

Answer 25

d.

Items a and c seems like employees, but they are actually categorized as “professionals”.
Item b likewise practices his profession

Question 26

L donated one of his buildings which houses his restaurant business to F on April 1, 2023. The building is valued at P5,000,000. Income of the restaurant operations amounted to P345,000 from January 1 to April 1, while the total income generated by the business for the year amounted to P2,500,000. F has no other businesses nor does he practice a profession nor employed. How much income is subject to regular income tax in the viewpoint of F for 2023?

a. P5,000,000
b. P5,345,000
c. P2,155,000
d. P2,500,000

Answer 26

c

Total income of the business FOR THE YEAR is P2,500,000. This includes the P345,000 earned 1/1 to 4/1. We only need the amount from 4/2 to 12/31. P2,500,000 - P345,000 = P2,155,000

Question 27

F, an employee of Red Bowl Company, retired from his work in 2023. He joined Red Bowl in 1999, when he was 23 years old. Red Bowl maintains a reasonable private benefit plan which is accredited by the BIR.

If F received P500,000 retirement benefits, will he be subject to income tax?

a. No since he retired from work.
b. No, since retirement benefits are exclusions from gross income
c. Yes. F did not meet one of the criteria, which is that he should be at least 50 years old at the time of retirement.
d. Yes, because the benefits exceed P250,000

Answer 27

c

Question 28

F, an employee of Red Bowl Company, retired from his work in 2023. He joined Red Bowl in 1991, when he was 23 years old. Red Bowl maintains a reasonable private benefit plan which is accredited by the BIR.

If F received P500,000 retirement benefits, will he be subject to income tax?

a. No, since he met all the criteria of 1-10-50-RPBP. Thus, his retirement benefits are exempt.
b. No, since retirement benefits are exclusions from gross income
c. Yes. F did not meet one of the criteria, which is that he should be at least 50 years old at the time of retirement.
d. Yes, because the benefits exceed P250,000

Answer 28

a

Question 30

In addition to his compensation from work amounting to P350,000, X also had the following items for the year 2017:

13th month pay = P75,000
De minimis benefits in excess of their limits = P9,000

How much of the 13th month pay and other benefits would be included in gross income?

a. P84,000
b. P2,000
c. P9,000
d. P0

Answer 30

b

The ceiling for de minimis benefits until 2017 is P82,000. Any amount in excess is included in gross income.

Question 31

Which of the following taxpayers’ items of gross income is an item of exclusion?

a. Prize of J, resident citizen, from winning a singing contest in Bali, Indonesia, amounting to P1,000,000.
b. Rent income of K, resident citizen, from his apartment, which was donated to him by his friend, L, amounting to P300,000.
c. Amount received by M, an American veteran of WWII, representing USVA-administered benefits, amounting to P1,000,000
d. Overtime pay of P15,000 received by N, an administrative staff of PQR Co.

Answer 31

c.

Question 32

W, a poultry farmer, insured his chickens for P100,000 on May 1, 2023. On June 15, 2023, all of his chickens were killed due to bird flu. W collected the entire proceeds. Which of the following statements is correct?

a. The collection of P100,000 is gross income because it represents recovery of lost capital.
b. The collection of P100,000 is gross income because it represents recovery of lost profits
c. The collection of P100,000 is an exclusion from gross income because life is of unlimited value.
d. The collection of P100,000 is an exclusion from gross income because it is stated in the law.

Answer 32

b

Question 33

X, who uses the accrual basis, operates a clothing retail business. In 2022, X wrote off receivables amounting to P100,000. In 2023, recoveries amounting to P75,000 were collected. How much of the bad debts recovery are taxable in 2022?

a. P100,000
b. P25,000
c. P75,000
d. P0

Answer 33

d.

This is an INTENTIONAL item. Check the year. If, however, the questions asks for 2023, the amount would be P75,000

Question 34

John Price, a British national, went to the Philippines on February 1, 2024. Price has no definite intention as to his stay. What is Price’s classification?

a. Resident alien
b. Nonresident alien engaged in business
c. Nonresident alien not engaged in business
d. Nonresident citizen

Answer 34

a.

To know whether if alien is a resident/non-resident:

1. Is he present in the Philippines and not a transient/sojourner/temporarily living in the country? If yes, he is a RESIDENT ALIEN. Hint is “TEMPORARY”. Otherwise, he is a non-resident alien
2. Does he have a definite intention/purpose for his stay? If yes, he is a NON-RESIDENT ALIEN. Since he/she has an intention, he/she will fulfill such purpose for the period and then leave the country. For example, entering in the country as a tourist to tour the country for a specific period will make the tourist a NON-RESIDENT ALIEN.

If he/she has no definite intention, that means he/she may have multiple GENERAL intentions, and such will instead allow him/her to stay in the Philippines indefinitely. In this case, he/she will be a RESIDENT ALIEN.

3. Does he/she have an intention that requires EXTENDED STAY? If so, he/she is a RESIDENT ALIEN, regardless of intention as to when he/she will return back to his home country.

Question 35

J, a citizen of Japan, went to the Philippines on May 1, 2024 to teach karate in a dojo in Manila. He subsequently returned to Japan 1 month later. What is his classification?

Answer 35

Non-resident alien not engaged in business/trade

Question 36

M, a resident of Lipa City, Batangas, Philippines, works as a seaman in Japan since 2022. During the year 2024, he earned Php300,000 compensation income from his seafaring activities. In addition, he also earned Php70,000 from his sari-sari store. Which of these activities are EXEMPT FROM TAX?

Answer 36

Php300,000 compensation income as a seaman/seafarer.

He is classified as a non-resident citizen because his work as a seaman requires him to be abroad most of the time.

Question 37

Which of the following are taxable only on sources within the Philippines?

a. L, a veterinarian who operates a clinic in Mandaluyong and also goes abroad to explore the hidden wonders of the world

b. M, a CPA who is a consultant in SGV & Co,, and also owns a restaurant in Australia

c. U, an American basketball player who was naturalized in the Philippines in 2022, but had business interests in the Philippines and the USA

d. A, an engineer working abroad in a power plant, where his work requires him to be there most of the time, or else the power plant will fail.

Answer 37

d.

Question 38

J earned the following income as a resident alien:

Interest income from deposits in the PH: P5,000
Interest income from notes in Canada: P10,000
Interest income from deposits in Canada: P15,000

Which of the following interest income will J report in his annual income tax return?

Answer 38

None.

Resident aliens are taxable only on sources WITHIN.

Interest income from deposits in the PH are subject to Final Withholding Taxes and are not reported in the Annual ITR because the amount received is already NET of the tax.

Interest income from notes in Canada can be a taxable income that is reportable in the AITR; however, J is only taxable within the PH, so this is not taxable for him. Same case for interest income for deposits in Canada.

Question 39

Yuri, a Geodetic Engineer, works as a Contract of Service employee of DENR Central Office. He claims that, since he is an “employee”, he should also receive 13th month pay and other benefits such as Performance Based Incentive and Collective Negotiation Agreement Incentive, as well as be entitled to the Php7,000 cash allowance. Is his claim tenable?

Answer 39

No.

Contract of Service is a form of SELF-EMPLOYED/CONTRACTOR Service. They are not entitled to benefits usually found in employees having an employer-employee relationship. That being said, they don’t have any employer-employee relationship with the agency/company.

Question 40

L is a Lawyer who practices his profession in his own law firm. In addition, he is also employed as a legal officer at DAR, where he handles cases on land disputes. For the year 2024, he chose to be taxed at the 8% option. What is the computation of tax with respect to his compensation income at DAR?

Answer 40

Using the graduated rates (tax table)

Question 41

L is a Lawyer who practices his profession in his own law firm. In addition, he is also employed as a legal officer at DAR, where he handles cases on land disputes. For the year 2024, he chose to be taxed at the 8% option. What is the computation of tax with respect to his income from his practice of profession?

Answer 41

All gross sales and receipts and taxable non-operating income x 8% (no deduction of 250,000 allowed since that would be claimed for the income tax on compensation under the graduated rates)

Question 42

L is a Lawyer who practices his profession in his own law firm. In addition, he is also employed as a contract of service legal officer at DAR, where he assists in handling cases on land disputes. For the year 2024, he chose to be taxed at the 8% option. What is the computation of tax with respect to his income in his law firm?

Answer 42

(Gross sales/receipts + taxable non-operating business income - 250,000) x 8%

The same goes for his income earned as a COS of DAR.

Question 43

Which of the following is not a requisite for the 15% CGT on sale/exchange/disposition of shares of stocks?

a. Shares should be from a domestic corporation

b. Sale is made directly to buyer

c. Seller should be a dealer of securities

d. None of the choices

Answer 43

c.

Seller should not be a dealer of securities (meaning, these shares sold must be a CAPITAL ASSET). If he/she is a seller, such shares are part of his inventories, which are ORDINARY ASSETS.

Question 43

J, a Filipino OFW working in Australia, has a parcel of land in Nueva Vizcaya and another parcel of land in Australia. Both were valued at Php3M, and both were held as capital assets.

On February 1, 2024, J sold his land in Nueva Vizcaya for Php5M. The zonal value as provided by the CIR is Php4.5M, while the Fair Market Value provided by a independent assessor is Php4.9M. Which of the following statements is false?

a. The land in Nueva Vizcaya is subject to the 6% CGT

b. The CGT for the sale of land held as capital asset is computed as Php5M x 6%

c. The Fair Market Value as provided by the independent assessor should be ignored

d. The CGT for the sale of land held as capital asset is computed as Php4.9M x 6%

Answer 43

d.

The 6% CGT is computed as the higher between selling price and FMV of the property x 6%.

The FMV is the higher between:

a. FMV provided by the CITY/PROVINCIAL ASSESSORS (INDEPENDENT ASSESSORS ARE IGNORED); and

b. Zonal Value, as provided by the CIR.

Question 44

On July 1, 2024, F sold his shares of stock to the Philippine Stock Exchange. The FMV of the shares (which is also the cost of the stocks when he acquired them in 2020) is Php50,000 and the shares were sold for Php60,000. Which of the following statements are incorrect?

a. The sale is subject to the 15% CGT

b. The sale is subject to a specific percentage tax

c. The tax rate for this transaction is 6/10 of 1%

d. All of the choices are correct

Answer 44

a.