Ordinary Business/Professional Expenses

1. ABC Co had the following data for the year 2020:

Sale of goods 1,800,000

Cost of sales 800,000
Salary expense 120,000
Rent expense 50,000
Entertainment, amusement and recreation expense 10,000
Fees to facilitate the transaction with the custom 20,000
Travel expenses 30,000

How much is the deductible expenses from the gross income?

OSD (40% x 1,000,000) 400,000
Salary expense 120,000
Rent expense 50,000
Fees to facilitate the transaction with the custom 20,000
Travel expenses 30,000
EAR (1.8M x .50%) 9,000
Total Expense Deductible 629,000

Rent Expense and Leasehold Improvement

2. On January 1, 2018, Mr. Chris leased his vacant lot for a period of 12 years to Mr. Topher at an
annual rate of P 2,400,000. It was also agreed that Mr. Topher will pat the following:
● P 4,800,000 representing rental payment for 2018 and 2019.

● Security deposit of P 2,400,000.

● Annual real property tax of P 30,000.

The lease contract provides, among others that the lessee will construct a 5-storey building for
parking purposes at a cost of P 9,500,000. Ownership of the building shall belong to the lessor
upon the expiration or termination of the lease contract.

The building was completed on July 1, 2020, with an estimated useful life of 15 years. How much
can Mr. Topher deduct in relation to the lease in 2018?
Rentals for 2 years 4,800,000
Security Deposit 2,400,00
Annual real property tax of 30,000
Deductions 7,230,000

How much can Mr. Topher claim as deduction in relation to the lease in 2019?
Annual real property tax of 30,000
Deductions 30,000
 How about 2020?
Depreciation for leasehold improvement P 9,500,000
[(9,500,000/5 years)]*6/12
Annual Rent 2,400,000
Annual Real Property Tax 30,000
Deductions in relation to the lease in 2020 P 3,380,000

How about in 2021?

Depreciation for leasehold improvement P 1,900,000
(9,500,000/5 years)
Annual Rent P 2,400,000
Annual Real Property Tax 30,000
Deduction in relation to the lease in 2021 P 4,330,000

Interest Expense

3. An individual taxpayer has the following data for the year 2020:

Interest paid, business loan P 100,000

Interest paid, loan to finance personal car 500,000
Interest expense on delinquency business related taxes 50,000
Interest income, BDO West Avenue branch (net) 24,000
For income tax purposes, the deductible interest expense shall be____?

Interest paid, business loan P100,000

Reduction (9,900)
Interest expense on delinquency business related taxes 50,000
P 140,100

Tax Expense

4. ABC Company Corporation was assessed by the BIR due to underpayment of Percentage Taxes.
The Assessment disclosed the following:
Basic tax P 1,000,000
Surcharge 250,000
Interest 200,000
Penalties 25,000
Total P 1,475,000

It also generated interest income from bank deposits amounting to P 100,000. How much is the
deductible expenses?
Interest Expense 200,000
 Less: FWT 20T x 20% 4,000
Deductible Expenses 196,000
Deductible Expenses with NOLCO

5. ABC Company shows the following data during the taxable year:
Sales P 500,000
Interest income, net of 20% final tax 24,000
Cost of sales 300,000
Salary expense 120,000
Interest expense 60,000
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
NOLCO 50,000

What is the correct amount of itemized deduction?

Gross income 200,000
Salaries expense 120,000
Interest expense 55,200
Rent expense 24,000
Advertising expense 6,000
Depreciation expense 5,000
NOLCO 50,000
Total 260,200
Losses

6. ABC Company had an old warehouse which had a cost of P 1,200,000. The company demolished
the warehouse which had a book value of P200,000 in order to construct a new and bigger
warehouse. The demolition cost amounted to P 25,000 while the scrap was sold for P 10,000.

How much is the deductible loss in arriving at taxable income?

Book Value of the Old Warehouse 20,000
Demolition Cost 25,000
Proceeds from scrap (10,000)
Deductible Cost 215,000

7. ABC Company purchased shares of stock of Valde Corp. for P 60,000 and of Boba Co. for P
30,000. At the end of the taxable year, it was ascertained that Valde Corp. stock was worthless
because of the complete insolvency of the corporation, and its Boba Co. shares had declined to
P 28,000. How much is the deductible loss of ABC Company?
60,000

OSD vs. Itemized Deduction

8. A resident citizen has the following data on income and expenses in 2018:
Gross compensation income P 200,000
Gross sales 900,000
 Cost of sales 500,000
Business expenses 200,000
Taxpayer availed OSD. How much is the taxable net income?
Gross receipts 1,100,000
OSD (40% x 1,450T) (440,000)
Taxable income 660,000

Disregarding compensation income, if the taxpayer is a corporation, how much is the taxable net
income?
Gross receipts 900,000
Cost of service (500,000)
Gross income 400,000
OSD (40% x 400,000) (160,000)
Taxable income 240,000

9. A domestic corporation has the following data on income and expenses in 2018:
Gross sales P 9,350,000
Sales returns and allowances 250,000
Sales discounts 100,000
Interest income on trades notes receivable 150,000
Other income 50,000
Cost of sales 3,000,000
Operating expenses with vouchers and receipts 4,000,000
Operating expenses without vouchers and receipts 500,000
Interest income from savings deposit 80,000
Interest income from deposit under FCDS 125,000
Royalty income 100,000

How much is the taxable income under itemized deduction?

Gross sales P 9,350,000
Sales returns and allowances (250,000)
Sales discounts (100,000)
Interest income on trades notes receivable 150,000
Other income 50,000
Cost of sale (3,000,000)
Gross income 6,200,000
OSD (40% x 6,200,000) (4,000,000)
Taxable income 2,200,000

10. Using the facts in problem 9, how much is the taxable income using OSD?
Gross sales P 9,350,000
Sales returns and allowances (250,000)
Sales discounts (100,000)
Interest income on trades notes receivable 150,000
Other income 50,000
Cost of sale (3,000,000)
Gross income 6,200,000
OSD (40% x 6,200,000) (2,480,000)
Taxable income 3,720,000