Business Expenses

Illustration 1:

Sales P 500,000
Sales Discounts, Returns and Allowances 20,000
Cost of Sales 230,000
Entertainment and Representation Expense 5,000

How much is the amount allowed to be deducted as EAR expense? P 2,400

Net Sales P 480,000
x ½%
P 2,400
P 2,600
Business Expenses
Illustration 2:

Sales P 500,000
Sales Discounts, Returns and Allowances 20,000
Service Revenue 320,000
Cost of Sales 230,000 60% Net Sales P 3,000
Entertainment and Representation Expense 5,000
40% Net Revenue P 2,000

How much is the amount allowed to be deducted as EAR expense? P 4,400

Net Sales P 480,000 Net Revenue P 320,000
x ½% x 1%
P 2,400 P 3,200
P 600 P 2,000
Business Expenses
Illustration 3:

Sales P 500,000
Sales Discounts, Returns and Allowances 20,000
Cost of Sales 230,000
Rent Expense 50,000
Salaries and Wages 50,000
Entertainment and Representation Expense 5,000

How much is the total allowable itemized deduction? P 102,400

How much is the taxable income? P 147,600
Business Expenses
Illustration 4:
PHIL A USA A
Sales P 500,000 P 600,000
Sales Discounts, Returns and Allowances 20,000 50,000
Cost of Sales 230,000 250,000
Rent Expense 50,000 80,000
Salaries and Wages 50,000 60,000
Entertainment and Representation Expense 5,000

If the taxpayer is a resident citizen;

How much is the total allowable itemized deduction? P 245,000
How much is the taxable income? P 305,000
 Interest Expense
Illustration 1: ada
Interest on loan from a bank used to finance a business P 50,000
Interest on loan from a finance company used to build residence 20,000
Interest on loan obtained from sister and used for business 5,000
Interest on loan from lending institution used to buy office equipment 2,000
Interest for late payment of value-added tax 1,500
Interest on loan obtained to finance oil exploration 22,000
Interest on purchase price of residential lot bought in installments 3,000
Interest payment on a debt which has prescribed 2,000

How much is the deductible interest expense? P 53,500

Interest Expense
Illustration 2:
Sales P 500,000
Sales Discounts, Returns and Allowances 20,000
Cost of Sales 230,000
Rent Expense 50,000
Salaries and Wages 50,000
Entertainment and Representation Expense 5,000
Interest Expense 10,000
Interest on Bank Deposits 10,000 x 33% = P 3,300
Interest on Promissory Notes 20,000

How much is the deductible interest expense? P 6,700

How much is the taxable income? P 160,900
Interest Expense
Illustration 3:

A service provider, on cash basis of accounting. Borrowed P150,000 from a

bank at an interest rate of 20% per annum on September 1, 2020. The bank
released to him P120,000 after deducting in an advance an interest of P30,000.
Payment on the loan was at P12,500 a month, beginning October 1, 2020.

How much is the deductible interest expense? P 7,500

Interest Expense
Illustration 4:
A Company, on accrual basis, purchased factory equipment as follows:
Cost of equipment P 1,000,000
Estimated useful life 5 years
Date acquired March 1, 2020
The equipment was financed through a 1-year loan with a Bank at an
interest rate of 18% per annum beginning January 16, 2020 which was
discounted in full.
In 2020, A company realized interest income on its bank deposit in the
amount of P100,000, which was subjected to 20% final tax.

How much is the deductible interest if treated as an expense? P 139,600

Taxes and Licenses Expense
Illustration 1: The following taxes were paid by an individual income taxpayer in 2020
Real property tax on residential house P 4,500
Real property tax on apartment houses 26,000
Value-added tax on importation of TV set for personal use 2,500
Value-added tax on machinery imported for business use 14,000
Value-added tax on importation of equipment used in business 26,000
Income tax paid for being engaged in business 132,600
Value-added tax paid for a restaurant business 83,500
Special assessment on real property used in business 7,800
Professional tax as CPA practitioner 560

How much is the deductible taxes expense from the gross income? P 26,560
Taxes and Licenses Expense
Illustration 2: The following taxes were paid by a corporation in 2020
Normal tax P 350,000
Improperly accumulated profit tax 85,000
Capital gain tax 26,400
Final tax 50,000
Community tax 12,500
Value-added tax 92,000
Local taxes and licenses 10,000
Interest for late payment of national and local taxes 19,500
Surcharges for late payment of national and local taxes 52,300

How much is the deduction for taxes? P 22,500

Taxes and Licenses Expense
TAX PAID IN FOREIGN COUNTRIES

✓ as tax credit ✓ as deduction from gross income A

Adeduction from tax due
GROSS INCOME
LESS: DEDUCTIONS 30%, Corporations
TAXABLE INCOME
Tax Table, Individuals

actual tax paid

limit FOREIGN TAXABLE INCOME x PHIL INCOME TAX DUE
WORLD TAXABLE INCOME
Taxes and Licenses Expense
TAX PAID IN FOREIGN COUNTRIES

✓ as tax credit ✓ as deduction from gross income A

Adeduction from tax due TAXABLE INCOME P 6,600,000
actual tax paid x Corporation tax rate 30%
limit FOREIGN TAXABLE INCOME x PHIL INCOME TAX DUE TAX DUE P 1,980,000
WORLD TAXABLE INCOME

Illustration 3: A domestic corporation provided the following for the previous calendar year.
Philippines Bhutan
Gross Income P 12,000,000 P 2,000,000
Deductions 6,500,000 750,000
Income Tax Paid 150,000
P 1,250,000 . x ( P 6,750,000 x 30%) INCOME TAX DUE P 2,025,000
= P 375,000
P 6,750,000 2,025,000 Less: TAX CREDIT 150,000
TAX STILL DUE P 1,875,000
Taxes and Licenses Expense
TAX PAID IN FOREIGN COUNTRIES

✓ as tax credit ✓ as deduction from gross income A

Adeduction from tax due TAXABLE INCOME P 7,620,000
actual tax paid x Corporation tax rate 30%
TAX DUE P 2,286,000
limit FOREIGN TAXABLE INCOME x PHIL INCOME TAX DUE
WORLD TAXABLE INCOME
Illustration 4: A domestic corporation provided the following for the previous calendar year.
Philippines Bhutan Vietnam INCOME TAX DUE P 2,535,000
Less: TAX CREDIT 660,000
Gross Income P 12,000,000 P 2,000,000 P 3,000,000 TAX STILL DUE P 1,875,000
Deductions 6,500,000 750,000 1,300,000
Income Tax Paid 150,000 + 680,000 = P 830,000
= P 375,000 = P 510,000
Limit B (total foreign): VIETNAM P 1,700,000 . x P 2,535,000
Limit A (per foreign country): P 8,450,000
P 2,950,000 . x (P 8,450,000 x 30%) = P 885,000 = P 510,000
P 8,450,000 BHUTAN P 1,250,000 . x P 2,535,000 = P 375,000
2,535,000
P 8,450,000
Taxes and Licenses Expense
Illustration 5: A domestic corporation, had the following data for 2020
Taxable income, Philippines P 1,000,000
Taxable income, Thailand 600,000
Taxable income, Singapore 400,000
Income tax paid to Thailand 250,000
Income tax paid to Singapore 100,000
Philippine income tax paid, for 3 quarters of the year 110,000

Tax credit for foreign income taxes paid is? P 280,000

The Philippine income tax still due, after credit
for foreign income taxes paid is? P 210,000
If the corporation chose to claim the foreign taxes paid as a deduction from
income, how much would have been the income tax still due? P 385,000
 Losses
Illustration 1:

An office building was partially destroyed by fire in 2019. The building

had a book value of P4,000,000. The insurance company was willing to
pay P3,000,000 which was refused by the owner of the building.
Finally, the claim was settled in 2020 for P3,500,000.

How much is the claimable deductible loss? P 1,000,000 in 2019

 Losses
Illustration 2:

A company acquired equipment for use in the business. Later on, the
equipment suffered damages during a flood which broke out the
company’s premises during the super typhoon. The details of the loss are:
Acquisition cost of equipment P250,000
Accumulated depreciation 80,000
Replacement cost of damaged portion 200,000
Estimated remaining useful life 5 years

How much is the claimable deductible loss? P 170,000

How much is the new cost basis? P 200,000
 ✓ Not a dealer in securities
✓ Similar or identical securities
✓ Within 61 day window
Wash Sales (Capital Loss)
✓ Recognized a gain or loss

Amy is not a dealer in securities. In 2020, she had the following transactions
of common shares of stock of a domestic corporation:
Purchase on February 14, 100 shares P 7,000
Sale on June 18, of the shares purchased on January 5 6,000
Purchase on June 28, 60 shares 6,500
Sale on October 21, of the shares purchased on June 28 8,000
10/21
7/18
5/19

6/18

100s Sale P 6,000 60s Purchase P 6,500

Cost P 7,000 Capitalize ND 600
P S P S Capital Loss P 1,000
Sale P 8,000 60s Tax Basis P 7,100
61-Day Window
Cost 7,100 ND 60/100 = P 600
Gain P 900 D 40/100 = P 400
 Depreciation
Illustration 1:

A building was constructed on January 2, 2015 with a cost of P570,000.

Its estimated useful life is 16 years with scrap value of 70,000 after 16
years.
In January 2020, replacement of some worn-out parts of the building
costing P50,000 was spent. After the repairs, the building was
appraised with a fair market value of P770,000.

How much is the allowable deduction for depreciation for the year
2020?
Depreciable amount P 500,000
Accumulated dep. P 156,250
Book value P 343,750 + P 50,000 = P 393,750 / 11 years = P 35,795.45
 Depreciation
Illustration 2:
UST is a private educational institution recognized by the Government.
It submitted the following data for fiscal year ending April 30, 2018.
Tuition fees P 8,500,000
Miscellaneous fess 800,000
Income from book store 250,000
Income from school canteen 120,000
Salary, allowances, bonus 5,300,000
Other operating expenses 1,800,000
Construction of additional bldg. 1,400,000
Furniture improvements of library 300,000
How much is the income tax due if the school improvements
expenses were used as outright deductions? P 87,000
 Depletion
Illustration 1: the books of a mining company show the following data:
Capital invested in the mine P 18,000,000
Operating expenses (not including depletion) 1,500,000
Selling price per ton 1,200
No. of recoverable units in mine 40,000
No. of tons mined and sold during the year 2,400

How much is the taxable income of the mining company?

GROSS INCOME P 2,880,000 (P 1,200 x 2,400)
LESS: DEDUCTIONS P 2,580,000 [P 1,500 + (18,000,000 x 2,400/40,000)]
TAXABLE INCOME P 300,000 Depletion Expense
Charitable and Other Contributions
Illustration 1:
Contributions and donations made by a taxpayer are as follows:
To the Catholic Church P 50,000
To Tahanang Walang Hagdan 30,000
To a Chapel in Rome 20,000
To street beggars 1,500
How much is the actual contributions subject to limit? P 80,000
Charitable and Other Contributions
Illustration 2:
An individual taxpayer has the following income in 2020:
Gross income from business P 350,000
Deductible business expenses 118,000
Charitable contributions:
To the National Government for priority activities 20,000
To the Church 15,500 10% TIBC
To the fire victims in the barangay 5,000

How much is the deductible contributions? P 35,500

How much is the taxable income? P 196,500
Charitable and Other Contributions
Illustration 3:
A domestic corporation has the following income and expenses in 2020:
Gross income from business P 1,250,000
Deductible business expenses 925,000
Gain from sale of business equipment 30,000
Donations to National Government for priority activities 40,000
Donation to St. Agustin Church 20,000 5% TIBC

How much is the deductible contributions? P 57,750

How much is the taxable income? P 297,250
Pension Trust
Illustration 1:

A domestic company made the following payments to a pension trust.

2019 2020
Payment of pension for current service P 10,000 P 12,000
Payment of pension for past service 120,000 80,000

How much is the deductible expense for contribution

to pension trust in 2019? P 22,000

How much is the deductible expense for contribution

to pension trust in 2020? P 32,000
 Bad Debts

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