CHAPYER 13-B-Special Allowable Itemized Deductions and NOLCO

True or False

1. The employers are allowed additional deduction of 15% on the compensation paid to
persons with disability.
ANSWER: False (25%)
2. An adopting private entity of a public school is entitled to a deduction incentive
equivalent to double the amount donated to a public school.
ANSWER: False (additional 50%)
3. Taxpayers who installed improvements in their facilities to accommodate persons with
disability are allowed an additional 50% deduction incentive based on the value of such
improvement
ANSWER: True
4. The distribution of the corpus of a taxable estate or trust is an item of special deduction
against the gross income of the estate or trust.
ANSWER: False (only distribution of income)
5. The transfer to the reserve fund of insurance companies is a special deduction, but the
release from the reserve fund is an item of gross income.
ANSWER: True
6. Dividends are non-deductible by any taxpayer except real estate investment trusts.
ANSWER: True
7. The transfers to all reserve funds of the cooperative including mandatory and
discretionary funds are deductible from the gross income of cooperatives.
ANSWER: False
8. Persons with disability are mandatorily allowed a discount of 20% from all
establishments.
ANSWER: True
9.Senior citizens are mandatorily allowed a discount of 25% from certain establishments
ANSWER: False (20%)
10. The employer of senior citizens can claim additional deductions equivalent to 50% of the
compensation paid to senior citizens who have income below the poverty line.
ANSWER: False (15%)
11.Expenses incurred to comply with the requirement of the Expanded Breastfeeding Act are
allowed an additional incentive equivalent to the amount of the expense incurred.
ANSWER: . True (deductible amount in total is twice the
amount of expense)
12. Attorneys are entitled to the value of their pro-bono services to indigent clients as
deduction from gross income.
ANSWER: True
13. The allowable incentives to lawyers for pro-bono services shall not exceed 10% of the
gross income from the actual performance of the legal profession.
ANSWER: True
14. Employers are entitled to an additional deduction of 50% of the productivity incentive
bonus paid to their employees.
ANSWER: True
15. The amount of NOLCO shall not include the amount of deduction incentives allowed by
law.
ANSWER: True
16. A small business was merged to a larger business. Even after the merger, the NOLCO of
the small business is deductible by the larger business
ANSWER: False
17. NOLCO is valid for 3 years
ANSWER: True
18. NOLCO always exist when there is a net operating loss.
ANSWER: False
19. Net capital loss carry over cannot be carried over together with NOLCO.
ANSWER: True
20. An acquirer in a business combination sustained a net operating loss before the
business combination. The acquirer is allowed to carry-over its net operating loss in prior years
ANSWER: True (Note: acquirer’s own NOLCO)

Exercise Drills
For each of the following special deduction incentive, indicate the percent incentive and the
limit, if applicable.
Expense/Expenditure Deduction incentive Incentive limit
1. Salaries paid to senior citizen employees
2. Salaries paid to persons with disability
3. Training expense under the Jewelry Industry Development Act 4. Cost of facility
improvement for employees with disability
5. Contribution under the "Adopt-a-
School Program"
6. Cost of compliance with the "Rooming-in and Breastfeeding
Practices Act"
7. Free legal expense
8. Productivity incentive bonus and employee training program
Multiple Choice - Problems 1

1. A fitness gym catering to senior citizens recorded a total gross revenue of P345,000 from
senior citizens. The gym provides 24% discount in excess of the legal requirements. What is the
deductible amount of senior citizen's discount?
a. PO
c. P82,800
b. P 69,000
d. P90,789
ANSWER: D(P345K X 20%)

2.Germania Inc. employs three senior citizens as regular employees. Two of them are receiving
the minimum wage which is within the poverty level. Total
minimum wages paid to these senior citizen employees during the year were P182,000. One of
the senior citizen employees is a director of the company who was paid P780,000
compensation during the year.Compute the deductible additional compensation expense
a. 0 c. P91,000
b. P27,300 (P182K X 15%) d. P144,300

3. An employer hired two senior citizens during the year as temporary replacements for its two
staffs who were on leave. Both senior citizens were paid salaries not in excess of the poverty
level.

Mang Pandoy received a total of P144,000 during the year. Aling Maria substituted for an
employee who filed for maternity leave for 3 months.
Aling Maria received a total of P28,000 during the year. Compute the total deductible additional
compensation expense.
a. PO
b. P21,600 (P144K X 15%)
c. P25,800
d. P43,000

4. Mr. Bakilan irrevocably designated in trust his investment portfolio consisting of domestic
stocks and bonds. The dividend income from the stocks shall be distributed to the beneficiary
while the interest on the bonds shall be accumulated. During the year, the portfolio earned
P200,000 interest and P135,000 dividends, net of final tax.
What is the total deduction allowable to the trust for the income distribution?
a. PO
b. P15,000
c. P135,000
d. P150,000

5. A grantor irrevocably designated in trust a real property in favor of a beneficiary.Under the

trust indenture, 20% of the trust gross income shall be distributed to the beneficiary. The trustee
shall be paid 5% of the gross income as management fee. During the year, the trust collected
P810,000 rent income, net of 10% to creditable withholding taxes. The trust recorded P350,000
in expenses.
Compute the deductible amount of income distribution to the fund.
a. PO
b. P101,000 [(P900K-P350K-P45K) X 20%]
c. P110,000
d. P180,000

6. The required reserve for an insurance company was P3,200,000 as of December 31, 2013
and P3,500,000 as of December 31, 2014. What is the deductible amountof transfer to the
reserve fund?
a. PO
b. P300,000 (P3.5M-P3.2M)
c. P3,200,000
d. P3,500,000
7.A real estate investment trust (REIT) earned P4,100,000 from property rentals total business
expenses were P2,100,000. Assuming the REIT declared the mandatorily required dividend
distribution, what is the amount of deductible dividend against gross income?
a. PO
b. P1,800,000 (P4.1M-P2.1M)
c. P1,890,000
d. P3,690,000

8. A cooperative transacting business only with its members is on its operation. It reserves 50%
of its operating income in compliance CDA regulation. During the year, it reported a total
operating P3.000.000 inclusive of P2,400,000 income from related activities.Compute the
deductible amount of transfers to reserve against gross income.
a P0
b. P240,000
c. P60,000
d. P300,000 [(P3M-P2.4M) X 50%]

9. An establishment granting senior citizens 25% discounts recorded the for sales during the
period:
Customers
- Regular Senior citizen
Gross sales P 8,000,000 P 800,000 Cost of sale. P
5,000,000 P 400,000. What is the deductible senior citizens' discount?
a. PO
c. P200,000
b. P160,000 (P800K X 20%)
d. P266.667

10. A restaurant granted 25% discounts to senior citizens in excess of the 20% mandatory
requirement. During the year, the restaurant reported receipts of P93,750 from senior citizen
customers.Compute the deducton for senior citizens' discount balance
a. PO
b. 7,250
c. P23,437.50
d. P25,000 [(P93,750/75%) X 20%]

11. An employer embarked on a socio-economic program named "A World Empowered by

Persons with Disability." Under the ambitious program, the employer established a business
which is fully manned by persons with disability the employer incurred P300,000 in workplace
improvements specifically designed for its disabled employees. The business venture turned
very profitable due to overwhelming public sympathy. During the year, the employer paid
P2,100,000 in compensation expense. Compute the additional deduction compensation
expense.
a. P0
b. P210,000
c. P315,000
d. P525,000 (P2.1M X 25%)

12. In the immediately preceding problem, what is the deductible additional expense for the
improvements made for the employees with disability?
a. PO
b. P45,000
c. P75,000
d. P150,000 (P300K X 50%)

13. In 2016, Bernard Bakilan, a practicing lawyer, adopted a public elementary school and
contributed P500,000 for the acquisition of computer equipment and software. Bernard had an
operating income of P900,000 before this contribution. Assuming the "Adopt-a-School Program"
is an investment priority program of the government in 2016, compute Bernard's additional
contribution expense and net income respectively.
a P250,000; P150,000 [P900K-P500K-(P500K X 50% Contribution expense)]
b. P250,000; P 650,000
c. P125,000; P275, 000
d. P125,000; P775,000

14. In the preceding problem, compute Bernard's additional contribution expense and net
income, respectively, if the "Adopt-a-School program" is no longer a government priority
program in 2016?
a. P0; P810,000
b. PO; P400,000
c. P250,000; P650,000
d. P250,000; P560,000 [P900K-(P900K X 10%)-(P500K X 50% Contribution expense)

15. Binondo Jewellery is a qualified jewelry enterprise registered with the Board of
Investments.In order to modernize its jewelry making business, it instituted an in-house training
program and hired external experts to train its employees. The program was duly approved by
TESDA.
The program cost P300,000 during the year.
What is the deductible amount of additional training expenses
a. P30,000
b. P45,000
c. P75,000
d. P150,000 (P300K X 50%)

16. Girl Power Corporation employs purely women. It installed a lactation station at a total cost
of P350,000 and secured a "Working Mother-BabyFriendly Certificate" from the Department of
Health.
Compute the additional deduction under the Rooming-in and Breastfeeding Practices Act.
a. PO
b. P175,000
c. P350,000 (P350K X 100%)
d. P700,000

17.A government provincial hospital established a milk bank at a cost of P1,000,000.Determine

the additional deduction incentive it is allowed under the Rooming-in and Breastfeeding
Practices Act.
a. PO
b. P250,000
c .P500,000
d. P1,000,000
18. In the immediately preceding problem, what would be the additional deduction assuming the
hospital is a proprietary medical center?
a P0. c. P1,000,000 (P1M X 100%)
b. P500,000. D. P2.000.000

19. Atty.Midsayaf is a practicing lawyer in the remote provinces of Mindanao. During the year,
he provided 180 actual hours for pro-bono services inclusive of the 60 hour mandatory legal aid
services to indigent clients. These services would have been billed P1000 per hour if rendered
to paying clients.Atty Midsayaf has a P1,400,000 gross income duting the year exclusive of
P20,000interest on his savings deposit. Compute the special deduction for the free legal
services. com
a. P60,000
b. P120,000 ( P1.4M X 10% Limit )+[(180-60) x 1k Pro bono]
C. P140,000
d. P142,000

20. Curaratnit, Bolalatsing & Associates, a law firm, earned an operating income of P8,000,000,
net of P6,000,000 administrative expenses and P12,000,000 direct cost of services. During the
year, it represented selected clients under its free legal assistance program. The value of these
services would have been P1,500,000. It also represented indigent clients for free. the value of
which would have been P400,000. Compute the special deduction for free legal services.
a. P1,200,000 C. P1,500,000
b. P1,400,000 [P8M +P6M) X 10% Limit] d. P1,900,000

21. An employer paid a total of P800,000 productivity incentive bonus to its production workers.
What is the additional productivity incentive bonus expense?
a. PO. c. P200,000
b. P80,000. d. P400,000 (P800K X 50%)

22. An employer provides manpower training and special studies to its rank and fileemployees
at a total cost of P200,000. The in-house program was accredited by TESDA. What is the
deductible additional productivity incentive bonus expense?
a.P0 C . P100,000 (P200K X 50%)
b. P20,000. d. P200,000

Multiple Choice - Problems 2

1. A taxpayer had the following results of operations:

2019. 2020
Gross income. P 1,200,000 P 2,500,000
Itemized deductions 1,400,000 1,000,000
Deduction Incentive. 200,000 300,000
What is the net income in 2020?
a. P 800,000 c. P1,100,000
b. P1,000,000 d. P1,200,000
ANSWER: B (P2.5M GI-P1M ID-P300K DI)

2. An enterprise registered with the BOI had a consistent profitable operation. Just before
graduating from its BOT tax holiday incentives in 2019, it sustained a P1,800,000 operating loss
due to an employee strike in 2019. The settlement of the deadlock in 2020 enable the enterprise
to post a P2,400,000 operating income.
What is the allowable NOLCO deduction in 20202
a. PO. c. P1,800,000
b. P900,000 d. P2,400,000

3. A corporate taxpayer incurred an operating loss in 2020

Sales P 3,000,000
Less: Cost of sales. 1,200,000
Gross income P 1,800,000
Less: Deductions
Regular itemized deduction P1,200,000
Special itemized deductions 800,000
Deduction incentives 400,000 2,400,000
Net operating loss P 600,000 What is the amount of NOLCO to be
carried over in the next three years?
a. PO. c. P400,000
b. P200,000 (P1.8M GI-P1.2M RID-P800K SID) d. P600,000

4. An individual taxpayer reported the following in 2019:

Gross income P 1,500,000
Less:
Administrative expenses P 800,000
Selling expenses 650,000 1,450,000
Operating income P 50,000
Less: Personal expenses 150,000
Excess of personal expenses over income P 100,000
What is the NOLCO to be carried over in the next three years?
a. P0 c. P100,000
b. P50,000 d. P150,000

5.In 2020, a taxpayer finally posted a P1,000,000 operating profit after four years of continuous
losses. The results of operations in prior years were:

2016 (P 800,000)
2017 ( 400,000)
2018 ( 200,000)
2019 ( 100,000) Compute the deductible NOLCO in 2020

a P0
b P700,000 (P400K+P200K+P100K)
c P1,000,000
d P1,500,000

6.In 2016, Warren Buffet purchased the net assets of Berkshire Hathaway, a losing business
which posted a cumulative P10,000,000 loss in the past three years. Buffet's charismatic
leadership led the business to turn P4,000,000 profits in 2016.What is the allowable NOLCO
deduction for 2016?
a. PO
b. P4,000,000
c. P5,000,000
d. P10,000,000

7. A taxpayer has the following historical results of operations:

2016 (P 600,000)
2017 ( 700,000)
2018 400,000
2019 ( 200,000)
2020 100,000
What is the total outstanding NOLCO at the end on 2020 which can be carried in future years?
a. PO c. P600,000
b. P200,000 d. P800,000

8. A taxpayer reported the following items of gross income and deductions in 2020
Rent Income P 400,000
Service fees 200,000
Interest income from bank deposits 50,000
Deductible expenses 800,000
Non-deductible expenses 100,000
Compute the NOLCO to be carried over in the next three years.
a. P300,000 c. P200,000 (P400K +P200K-P800K)
b. P250,000 d. P150,000

9. The carry-over of NOLCO is allowed when

a. the net operating loss is sustained from an exempt year.
b. there is a change for at least 75% of the paid-up capital or nominal value of the
outstanding shares of a corporation.
c. the business is acquired by another taxpayer.
d. there is a change in the controlling shareholder representing 51% ownership.

10. Which is incorrect with regard to the net operating loss carry-over (NOLCO)?
a. NOLCO can be claimed together with Optional Standard Deductions.
b. NOLCO cannot be claimed if the net operating loss arises in a year where the taxpayer
is exempt from income tax.
C. NOLCO can be carried over to a period of three years.
d. NOLCO cannot be claimed by non-resident foreign corporation.

11. The following pertains to the salaries paid by the taxpayer during the year
Salaries to regular employees P 400,000
Salaries to senior citizens (above poverty line) 30,000
Salaries to senior citizens (below poverty line) 50,000
Salaries to persons with disability 200,000 Compute the total deductible salaries
expense under regular allowable itemized deductions and the total special deduction.
a. P680,000; PO
b. P680,000; P57,500
c. P 742,500; PO
d. P 680,000; P62,500