INSTITUTO NG PANGANGALAKAL AT PAGTUTUOS

Subject Code: ACT25

Subject Title: Income Taxation
No. of Units: 3
MODULE 10
DEDUCTIONS FROM GROSS INCOME
I. PRE-TEST / ACTIVITY
1. In cases of deductions and exemptions on income tax returns, doubts shall be resolved _____.
a. strictly against the taxpayer c. liberally in favor of the taxpayer
b. strictly against the government d. liberally in favor of the employer

2. Which of the following taxes is allowed to be deducted from gross income derived from the exercise of a profession,
trade or business?
a. Philippine income tax c. Import duties
b. Estate and donor’s taxes d. Taxes on sale of shares of stock traded
through the local stock exchange

II. CONTENT
A. DEDUCTIONS FROM GROSS INCOME
These refer to items or amounts authorized by law to be subtracted from pertinent items of gross income to arrive at the
taxable income. On the other hand, “exclusions” are something received or earned by the taxpayer that do not form part
of gross income while deductions are something spent or paid in earning the gross income.

Burden of Proof is with the taxpayer to establish the validity of the deductions claimed. He must point to some specific
provisions of the statute in which that deductions is authorized and must be able to prove that he is entitled to deduction
which the allows. This is consistent with the rule that tax exemptions must be strictly construed against the taxpayer and
liberally in favor of the State.

Kinds of Deductions
1. Itemized deductions
2. Optional standard deduction
3. Special deductions allowed under special cases

Taxpayer Allowable Deductions

Individual earning pure compensation income Beginning 2018, no more deduction is allowed
Individual deriving income from trade, business Itemized deductions or Optional Standard Deduction
or practice of profession
Corporation Itemized deductions or Optional Standard Deduction

B. ITEMIZED DEDUCTIONS
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation
7. Depletion of Oil and Gas Wells and Mines
8. Charitable and Other Contributions
9. Research and Development
10. Pension Trusts

EXPENSES
There shall be allowed as deduction from gross income:
1. All the ordinary and necessary expenses
2. Paid or incurred during the taxable year
3. In carrying on or which are directly attributable to, the development, management, operation and/or
conduct of the trade, business or exercise of a profession (Section 34 (A)(1)(a), NIRC).

Requisites for deductibility

1. Paid or incurred during the taxable year;
2. The expense must be substantiated by proof; (Substantiation Rule)
3. The expense must be incurred in trade or business carried on by the taxpayer (must be directly attributable
to the development, management, operation, and or conduct of trade or business of the taxpayer, or in the
exercise of the taxpayer’s profession);
4. The expense must be reasonable;

1
 5. The expense must be ordinary and necessary;
6. If subject to withholding taxes, proof of payment to BIR; and
7. Expenses must not be against public policy, public moral or law such as bribes, kickbacks, for immoral
purposes.

Additional 50% deduction for labor training expense, subject to below conditions: (CREATE Law)
1. Not to exceed 10% of direct labor wage;
2. Covered by apprenticeship agreement; and
3. Supported by DEPED, TESDA or CHED certification

Expenses allowable to private educational institution

In addition to the expenses allowable as deductions under Section 34, a private educational institution; referred
to under Section 27(B) of this Code may at its option elect to either:
1. Capitalize and claim depreciation as deduction, or
2. Claim as outright expense

Minor or ordinary repairs & maintenance

Kind of repair Treatment
Repairs that materially add to the value of the property Capitalize
Repair that appreciably prolong the life of the property Capitalize
Repair that keeps the property in its ordinarily efficient operating condition Outright expense

Entertainment, Amusement and Recreation Expenses

Directly connected to the development, management and operation of trade, business/profession
Subject to a limit of: (lower amount between actual and limit)
1. 0.5% of net sales (gross sales less sales returns/allowances & sales discounts) for taxpayers engaged in
sale of goods or properties;
2. 1% of net revenue (gross revenue less discounts) for those engaged in sale of services, including exercise
of profession and use or lease of properties.
3. If taxpayer is deriving income from both sales of goods and services, the allowable EAR expense shall be
based on an apportionment formula, but which in no case shall exceed the minimum percentage ceiling.
4. Formula: Whichever is lower
Lower
Sale of Goods Net Sales (Sale of Goods) X 0.5% = xx xx

Net Sales (Sale of Goods) X Actual Expense = xx

Total Net Sales & Net Revenue

Sale of Service Net Revenue (Sale of Service) X 1% = xx

Net Revenue (Sale of Service) X Actual Expense = xx xx

Total Net Sales & Net Revenue

EAR = xx

INTEREST
Requisites for deductibility (RR 5-2021, CREATE Law)
1. The indebtedness must be that of the taxpayer
2. The interest must have been stipulated in writing
3. The interest must be legally due
4. The interest payment arrangement must not be between related taxpayers as mandated in Sec. 34(B)(2)(b),
in relation to Sec. 36(B) both of the Tax Code of 1997
5. The interest must not be incurred to finance petroleum operations, and
6. The interest was not treated as “capital expenditure”, if such interest was incurred in acquiring property
used in trade, business or exercise of profession

Non-deductible interest expense

1. 20% of interest income subjected to final tax
2. There no tax arbitrage for MSMEs
3. Interest (tax) arbitrage shall apply only interest expense arising from “borrowing or loans”

Interest expense (from borrowings)…………………….. ₱xx

Less: Interest Income subject to FWT x 20% =………… (xx)
Deductible Interest……………………………………… xx

Optional treatment of interest

Interest related to acquisition of property used in trade, business or profession may, at the option of the taxpayer,
be:
1. Claim as outright expense
2. Capitalize and claim depreciation

2
TAXES
Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business,
shall be allowed as deduction (Sec 34 C, NIRC).

Non-deductible taxes:
1. Philippine income tax
2. VAT
3. Estate and donor’s taxes;
4. Stock transaction tax
5. Income tax paid abroad if claimed as tax credit
6. Special assessment - taxes assessed against local benefits of a kind tending to increase the value of the
property assessed

Tax credit – taxpayer has the option to claim the foreign income tax either as:
1. Tax credit; or
2. Deduction from income

Persons entitled to claim tax credit

1. Resident citizens
2. Domestic corporations
3. Members of a GPP; and
4. Beneficiary of an estate or trust

Persons not entitled to claim tax credit

1. Alien individuals, whether resident or non-residents;
2. Foreign corporation, whether resident or non-residents; and
3. Non-resident citizen including overseas contracted workers and seamen.

Limitations when claiming tax credit

1. The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same
proportion of the tax against which such credit is taken, which the taxpayer’s taxable income from sources
within such country bears to his entire taxable income.
2. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
taken, which the taxpayer’s income from sources without the Philippines taxable under Title II of the
NIRC (Tax on Income) bears to his entire taxable income for the same taxable year (NIRC, Sec. 34 C [4]).

LOSSES
Losses actually sustained during the taxable year, and not compensated for by insurance or other forms of
indemnity shall be allowed as deductions: a) If incurred in trade, profession or business; b) Of property connected
with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement (Sec. 34 (D), NIRC).

Kinds of losses
1. Casualty losses
2. Net operating loss carry-over (NOLCO)
3. Capital losses and securities becoming worthless
4. Special losses
a) Losses from wash sales of stock
b) Wagering losses
c) Abandonment losses

Requisites for deductibility of ordinary loss

1. Loss belongs to the taxpayer
2. Actually sustained during the taxable year
3. Evidenced by a closed and completed transaction
4. Not compensated for by insurance or other forms of indemnity
5. Not claimed as a deduction for estate tax purposes in case of individual taxpayers
6. Must be connected with taxpayer’s trade, business or profession or incurred in any transaction or incurred
by an individual in any transaction entered into for profit though not connected with his trade, business or
profession
7. If in case of casualty loss, it is evidenced by a declaration of loss filed within forty-five (45) days with the
BIR (RMC 31-2009 mention on January 26, 2020; Rising from the ashes: How to claim tax relief from
Taal’s unrest).

Net Operating Loss Carry-Over (NOLCO) RR 14-2001

1. Refers to the excess of allowable deductions over gross income of the business for any taxable year, which
has not been previously offset as deduction from gross income.
2. The net operating loss of a business shall be carried over as deduction from gross income for the next
three (3) consecutive taxable years immediately following the year of such loss.

3
 3. The three (3) year period shall continue to run notwithstanding that the corporation paid its taxes under
MCIT, or that the individual availed of the Optional Standard Deduction.
4. For mines other than oil & gas wells, if loss incurred in any of the 1st ten (10) years of operation, carry-
over for the next five (5) years.

Requisites for the deductibility of NOLCO

1. The taxpayer must not be exempt from income tax during the taxable year when the NOLCO was incurred.
2. There has been no substantial change in the ownership of the business or enterprise. (A change of at least
75% of either paid up capital or nominal value of the outstanding shares.)

Summary:
 NOLCO incurred prior to 2020 and 2021 - 3 consecutive years
 NOLCO incurred in 2020 and 2021 – 5 consecutive years (RA11494 - Bayanihan Act II and RR 25-2020)
 NOLCO beginning 2022 – 3 consecutive years

Securities becoming worthless

If securities become worthless during the taxable year and are capital assets, the loss resulting therefrom shall be
considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets (Section 34
(D), NIRC).

Losses from shares of stock, held as capital asset, which have become worthless during the taxable year shall be
treated as capital loss as of the end of the year. However, this loss is not deductible against the capital gains
realized from the sale, barter, exchange or other forms of disposition of shares of stock during the taxable year,
but must be claimed against other capital gains. For 15% net capital gains tax to apply, there must be an actual
disposition of shares of stock held as capital asset, and the capital gain and capital loss used as the basis in
determining net capital gain, must be derived and incurred respectively, from a sale, barter, exchange or other
disposition of shares of stock (RR No. 06-08).

NOTE: Securities becoming worthless refer to shares when offered for sale or requested for share redemption,
no amount can be realized by the owner of the share (RR No. 06-08)

Special Losses
1. Wagering losses – deductible only to the extent of gain or winnings deemed to only apply to individuals
(NIRC, Sec. 34 D [6])
2. Losses on wash sales of stocks
Wash sale - A sale of stock or securities where substantially identical securities are acquired or purchased
within 61-day period, beginning 30 days before the sale and ending 30 days after the sale.

G.R.: Losses from wash sale are not deductible since these are considered as artificial loss.

XPN: When taxpayer is a dealer in securities, and the transaction from which the loss resulted was made
in the ordinary course of business of such dealer, the loss is deductible in full.

BAD DEBTS
These are debts due to the taxpayer actually ascertained to be worthless and charged off in the books of the
taxpayer within the taxable year except those:
1. Not connected with trade, business or profession; and
2. Between related taxpayers (Sec 35 (E), NIRC).

Requisites for deductibility

1. The debts are uncollectible despite diligent effort exerted by the taxpayer;
To prove that the taxpayer exerted diligent efforts to collect the debts:
a) Sending of statement of accounts;
b) Sending of collection letters;
c) Giving the account to a lawyer for collection; and
d) Filing a collection case in court.
2. Existing indebtedness subsisting due to the taxpayer which must be valid and legally demandable;
3. Connected with the taxpayer’s Trade, business or practice of profession;
4. Actually charged off in the books of accounts of the taxpayer as of the end of the taxable year; and
5. Actually ascertained to be worthless and uncollectible as of the end of the taxable year;

DEPRECIATION
Requisites for deductibility:
1. The property subject to depreciation must be property with life of more than one (1) year;
2. The property depreciated must be used in trade, business, or exercise of a profession;
3. The depreciation must have been charged off during the taxable year;
4. The allowance for depreciation must be reasonable.
5. A depreciation schedule should be attached to the income tax return.

4
Methods for computing Depreciation Allowance under NIRC
1. Straight line method – The annual depreciation charge is calculated by allocating the amount to be
depreciated equally over the number of years of the estimated useful life of the tangible. It results in a
constant charge over the useful life;
2. Declining balance method – accelerated method of depreciation which writes off a relatively larger
amount of the asset’s cost nearer the start of its useful life than that of the straight line;
3. Sum of the years digit method – accelerated method of depreciation expense in the earlier years and
lower charges in the later years;
4. Any other method which may be prescribed by Department of Finance upon recommendation of the CIR.

Properties used in petroleum operations [sec. 34(F)(4)]

Properties directly related to production 1) Straight-line
2) Declining-balance method
NOTE: Useful life to be used is shorter period
between:
a.10 years; or
b. Useful life

Properties not directly related to production Only straight line method is allowed
Useful life is always presumed to be 5 years

Properties used in mining operations [sec. 34(F)(5)]

If expected life of property is ten (10) years or less Normal rate of depreciation (depreciate over actual
useful life)

If expected life is more than ten (10) years Depreciated over any number of years between five
(5) years and the expected life

Under RR 12-2012, the Bureau of Internal Revenue (BIR) imposed a limit on the deductibility of depreciation
allowance, maintenance expenses and input VAT on motor vehicles, as follows:

a. Purchase of vehicle must be substantiated with official receipts and other records indicating the price,
motor vehicle identification number, chassis number, etc.
b. Taxpayer has to prove the direct connection of the motor vehicle to the business.
c. Only one vehicle for land transport is allowed for the use of an official or employee with value not
exceeding ₱2.4 million.
d. No depreciation shall be allowed for yachts, helicopters, airplanes, and land vehicles over ₱2.4 million
unless the vehicle is used in the company's transport operations or lease of transport equipment.

The non-deductible expenses shall also cover all related expenses and input tax including but not limited to
repairs and maintenance, oil and lubricants, gasoline, spare parts, tires and accessories, premiums paid for
insurance, and registration fees. In case the non-depreciable vehicles will be sold at a loss, any loss shall
likewise not be allowed as a deduction from gross income.

DEPLETION OF OIL AND GAS WELLS AND MINES

1. The method allowed under the rules and regulations prescribed by the Secretary of Finance is cost
depletion method.
2. Can be availed of by oil and gas wells and mines.
3. The basis of cost depletion is the capital invested in the mine which is the accumulated exploration and
development expenses.
4. When the allowance shall equal the capital invested no further allowance shall be granted.
5. In case of RFC allowance for depletion shall be authorized only in respect to oil and gas wells and mines
located in the Philippines.

Intangible exploration and development drilling cost:

1. Deduct in the year incurred if incurred for non-producing wells and mines.
2. Deduct in full or capitalize and amortize if incurred for producing wells and mines in same contract
area.

CHARITABLE AND OTHER CONTRIBUTIONS

1. Contributions or gifts actually paid or made within the taxable year
a) To, or for the use of the Government of the Philippines or any of its agencies or any political
subdivision thereof exclusively for public purposes, or to accredited domestic corporations, or
b) Associations organized and operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purposes or for the rehabilitation of veterans, or
c) To social welfare institutions, or to nongovernment organizations;
2. In accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation
of the Commissioner;
3. No part of the net income of which inures to the benefit of any private stockholder or individual;
4. In an amount not in excess of
a) Ten percent (10%) in the case of an individual, and

5
 b) Five percent (5%) in the case of a corporation, of the taxpayer's taxable income derived from
trade, business or profession as computed without the benefit of this and the following
subparagraphs (Sec 34 (H), NIRC).

Limitation
1. For individual: not more than 10% of taxable income before deducting the charitable contributions.
2. For corporation: not more than 5 % of taxable income before deducting the charitable contributions.

Contributions deductible in full

1. Donations to the government – to finance, to provide for, or to be used in undertaking priority activities
in education, health, youth and sports development, human settlements, science and culture and in
economic development according to National Priority Plan determined by NEDA. If not in accordance
with annual priority plan, donation is subject to limitations in above.
2. Donations to certain foreign institutions or international organizations – in compliance with
agreements, treaties, or commitments entered into by Philippines government and foreign
institutions/international organizations.
3. Donations to accredited NGOs - Organized and operated exclusively for scientific, educational,
character-building and youth and sports development, health, social welfare, cultural or charitable
purposes or combination thereof (no part of net income inures to the benefit of any private individual);
Must be utilized within 15th of the 3rd month after the close of the taxable year, directly for the active
conduct of activities constituting the purpose of the organization, unless period is extended; Administrative
expense should not be greater than 30% of total expenses; Upon dissolution, assets would be distributed
to another nonprofit domestic corp. organized for similar purpose or to the state for public purpose or to
another org. to be used in same purpose as the dissolved corporation.

Donations that are deductible in FULL under special laws

Donations to:
1. The Integrated Bar of the Philippines (IBP) (P.D. 81)
2. Development Academy of the Philippines (P.D. 205)
3. Aquaculture Department of the Southeast Asian Fisheries and Development Center (SEAFDEC) (PD 292)
4. National Social Action Council (P.D. 294)
5. National Museum, Library and Archives (P.D. 373)
6. University of the Philippines and other state colleges and universities
7. Philippine Rural Reconstruction Movement
8. The Cultural Center of the Philippines (CCP)
9. Trustees of the Press Foundation of Asia
10. Humanitarian Science Foundation
11. Artesian Well Fund (R.A. 1977)
12. International Rice Research Institute
13. National Science Development Board (now the DOST) and its agencies and to public or recognized non-
profit, non-stock educational institutions (R.A. 3589)
14. Ministry of Youth & Sports Development (P.D. 604)
15. Social Welfare, Cultural & Charitable Institution (P.D. 507)
16. Museum of Philippine Costumes (P.D. 1388)
17. Intramuros Administration (P.D. 1616)
18. Lungod ng Kabataan (P.D. 1631)
19. Foster child agencies (R.A. 10165)

RESEARCH AND DEVELOPMENT

Requisites for deductibility (as an expense)
1. Paid or incurred during the taxable year
2. Ordinary and necessary expenses in connection with trade, business or profession
3. Not chargeable to capital account

Requisites for amortization of certain R&D expenditures (treated as deferred expenses at the option of the
taxpayer):
1. Paid or incurred by the taxpayer in connection with his trade, business or profession
2. Not treated as expense
3. Chargeable to capital account but not chargeable to property of a character which is subject to depreciation
or depletion
4. Amortized over a period of not greater than sixty (60) months

Research and development expenditures that are not deductible

1. Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used
in connection with R&D of a character subject to depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral, including oil or gas

6
 PENSION TRUSTS
Normal cost – the contributions during the taxable year to cover the pension liability accruing during the taxable
year. Allowed as a deduction under Sec. 34(A)(1) as “expenses in general”.

Past service cost – amount in excess of the above contribution (covering pension liability pertaining to old
employees, which accrued during the years previous to the establishment of the pension trust); allowed as
deduction only if:
1. Such amount not been allowed as a deduction.
2. Apportioned in equal parts over ten (10) consecutive years beginning with the year in which the payment
is made.

Requisites for deductibility

1. The employer must have established a Pension or retirement plan to provide for the payment of reasonable
pensions to his employees
2. It must be Funded by the employer
3. The pension plan is Reasonable and actuarially sound
4. The deduction is Apportioned in equal parts over a period of 10 consecutive years beginning with the year
in which the transfer or payment is made
5. The payment has Not yet been allowed as a deduction
6. The amount contributed must no longer be subject to the Control and disposition of the employer

Deductible payment to pension trusts

1. Employer’s current liability – amount contributed during the taxable year shall be treated as an ordinary
and necessary expense
2. Employer’s liability for past services – 1/10 of the reasonable amount paid to cover pension liability
applicable to the preceding 10 years.

NOTE: When an employer makes a contribution to his employee’s Personal Equity and Retirement Account
(PERA), the employer can claim this amount as a deduction but only to the extent of the employer’s contribution
that would complete the maximum allowable PERA contribution of an employee (R.R. 2011- 17, with R.A.
9505).

C. OPTIONAL STANDARD DEDUCTION (OSD)

1. An individual, other than a nonresident alien, may elect a standard deduction of 40% of his gross sales or
gross receipts.
2. In the case of a corporation, it may elect standard deduction of 40% of its gross income.
3. Such election should be signified in his return and shall be irrevocable for the taxable year for which the
return was made. Financial statements are not required to be submitted anymore.
4. The following cannot claim OSD:
a. Non-resident aliens
b. Compensation income earners under employer-employee relationship.
c. Those who opted to be taxed at 8% income tax rate on business or practice of profession income
d. Partner’s distributive share in the NI of GPP
e. Non-resident foreign corporation

D. DEDUCTIONS UNDER SPECIAL LAWS

1. RA 9994 Magna Carta for Senior Citizen and RA 7277 Magna Carta for PWDs
a. Deduction from gross income of private establishments for the twenty percent (20%) sales discount
granted to senior citizens on the sale of certain goods and/or services as well as the 5% discount on basic
and prime commodities.
b. Private establishments employing Senior Citizens shall be entitled to additional deduction from their gross
income equivalent to fifteen percent (15%) of the total amount paid as salaries and wages to Senior
Citizens subject to the provision of Section 34 of the Tax Code and its implementing rules and regulations
provided the following conditions are met:
a. The employment shall have to continue for a period of at least six (6) months;
b. The annual taxable income of the Senior Citizen does not exceed the poverty level as may be
determined by the NEDA thru the NSCB. For this purpose, the Senior Citizen shall submit to his
employer a sworn certification that his annual taxable income does not exceed the poverty level.

c. Private entities that employ disabled persons who meet the required skills or qualifications, either as
regular employee, apprentice or learner, shall be entitled to an additional deduction, from their gross
income, equivalent to twenty-five percent (25%) of the total amount paid as salaries and wages to
disabled persons: Provided, however,
a. That such entities present proof as certified by the Department of Labor and Employment that
disabled person are under their employ;
b. That the disabled employee is accredited with the Department of Labor and Employment and the
Department of Health as to his disability, skills and qualifications.
d. Private entities that improved or modify their physical facilities in order to provide reasonable
accommodation for disabled persons shall also be entitled to an additional deduction from their net
taxable income, equivalent to fifty percent (50%) of the direct costs of the improvements or

7
 modifications. This section, however, does not apply to improvements or modifications of facilities
required under Batas Pambansa Bilang 344.

2. Free Legal Assistance Act of 2010

A lawyer or professional partnerships rendering actual free legal services, as defined by the SC, shall be
entitled to an allowable deduction from the gross income.

Deduction would be the amount that could have been collected for the actual free legal services rendered
or up to ten percent (10%) of the gross income derived from the actual performance of the legal
profession, whichever is lower.

Condition for it to be availed of as a deduction from gross income:

It shall be deductible provided that the actual free legal services contemplated shall be exclusive of the
minimum 60-hour mandatory legal aid services rendered to indigent litigants as required under the Rule
on Mandatory Legal Aid Services for Practicing Lawyers, under BAR Matter No. 2012, issued by the SC

3. Additional training expense under the RA 8502 - Jewelry Industry Development Act of 1998
4. Additional contribution expense under the Adopt-a-School Act of 1998 under RA 8525
5. Expanded breastfeeding promotion Act of 2009 as amended by RA 10028

III. ACTIVITY
Problem 1
The following business expenses and losses were submitted by Emily during the taxable year:
Salary of employee...................................... ₱144,000
Police protection.......................................... 24,000
Interest expense paid to his father............... 12,000
Gift made to employees during birthday..... 6,000
Capital loss.................................................. 4,800
Required: Determine the amount of nondeductible expenses and losses.

Problem 2
Omega Corporation paid the following during 2024:
Interest on bonds issued by Omega.................................................................... ₱225,000
Interest on preference shares.............................................................................. 125,000
Interest on money borrowed by Omega from Alpha Corporation (Alpha owns
60% of Omega's outstanding shares).................................................................. 80,000
Interest paid for late payment of 2023 income tax............................................ 45,000
Surcharge and compromise penalty for late payment of 2023 income tax........ 72,500
Required: Determine the deductible interest of omega in 2024

Problem 3
A Corp. had a net sale of ₱1,750,000. The actual entertainment, amusement and recreation expense amounted to ₱12,000.
The deductible “EAR” expense is _____.

Problem 4
B Corp. had revenue of ₱2,000,000. The actual entertainment, amusement and recreation expense amounted to ₱15,000.
The deductible “EAR” expense is _____.

Problem 5
C Corp. is engaged in the sale of goods and services with net sales and net revenue of ₱2,300,000 and ₱900,000
respectively. The actual entertainment, amusement and recreation expense amounted to ₱16,000. The deductible “EAR”
expense is _____.

Problem 6
Gerry Gonzales, single, an employee with a small business, reported the following income and expenses during the taxable
years:
2019 2020 2021 2022 2023
Salary as bookkeeper.......... ₱216,000 ₱216,000 ₱220,000 ₱220,000 ₱224,000
Business Income, gross...... 350,000 300,000 380,000 400,000 350,000
Business Deductions.......... 550,000 220,000 310,000 380,000 250,000
How much is the taxable income of Mr. Gonzales for the said taxable years?

8
Problem 7
DEF Corporation is engaged in petroleum operations. During 2024, it has the following properties subject for depreciation:
Directly Used Useful Life Cost Salvage Value
Machine 1........................ 8 years ₱2,000,000 ₱50,000
Machine 2....................... 12 years 5,000,000 250,000

Not Directly Used Useful Life Cost Salvage Value

Machine 3........................ 6 years ₱1,000,000 ₱100,000
Machine 4....................... 7 years 800,000 60,000
DEF elects the straight-line method which is duly approved by the CIR. How much is the allowed annual depreciation
expense for tax purposes?

Problem 8
HIJ Corporation purchased a land in 2023 containing natural resource for ₱50,000,000. It was estimated that the natural
resources available for exhaustion was 5,000,000 tons.
 During 2023, it spent ₱5,000,000 to explore some areas which turned out to be empty.
 After the end of 2023, it extracted a total of 500,000 tons.
 In 2024, it also spent ₱15,000,000 to explore and develop producing areas, the taxpayer opts to capitalize this cost.
Total estimated reserves are 6,000,000 tons from the original of 5,000,000 tons.
 At the end of 2024, 1,000,000 tons were extracted.
How much is the deduction for depletion for each year?

Problem 9
A taxpayer had the following data in 2024:
Gross income from business...................................... ₱1,000,000
Capital gain................................................................ 50,000
Capital loss................................................................ 20,000
Operating expenses.................................................... 670,000
Donation to an accredited NGO................................ 30,000
Donation to CBCP..................................................... 20,000
Determine the following:
1. Taxable income assuming the taxpayer is an individual with a compensation income during the year amounting to
₱600,000.
2. Taxable income assuming the taxpayer is a domestic corporation

Problem 10
A manufacturer of food seasoning is continuously conducting research and development on its product lines. In 2024, it
extended its research and development building at a cost ₱1,000,000 which is estimated to be used for 20 years, and
incurred an aggregate amount of ₱1,800,000 for other research and development costs that will immediately benefit the
company. How are these costs treated for income tax purposes?

Problem 11
ABC put up a qualified retirement plan approved by the BIR. It appointed B Corp. to administer the plan, which called for
the payment of ₱240,000 to cover the retirement of employees for past services rendered and a yearly contribution of ₱60,000.
The following amounts were paid for the first three years of the plan’s operation.
Contribution for Services
Past years Current Years
First year ………………….. ₱120,000 ₱60,000
Second year ………………. 72,000 60,000
Third year ………………… 48,000 60,000

1. The pension expense for the first year is _____.

2. The pension expense for the second year is _____.
3. The pension expense for the third year is _____.