Chapter 13

Question 1

These are business expenses incurred by a taxpayer engaged in business or engaged in the practice of profession.

Answer 1

Deductions from gross income

Question 2

True or False: The government has the ability to dispense the grant of deductions from gross income.

Answer 2

True as deductions are mere privileges.

Question 3

This is the habitual engagement in a commercial activity involving the regular sale of goods and services to customers or clients.

Answer 3

Business

Question 4

Which category of expenses are deductible and which are not?

Answer 4

Business expenses are deductible.

Personal expenses are non-deductible.

Question 5

Differentiate business expenses from personal expenses.

Answer 5

Business expenses are costs of doing trade, business, or practice of profession.

Personal expenses include the living and family expenses of individual taxpayers.

Question 6

True or false: The 250,000 annual income exemption in the tax table for individuals is deemed in lieu of all personal expenses.

Answer 6

True

Question 7

What are common expenses and are they treated as deductible or non-deductible?

Answer 7

Common expenses are those intended for both the business and for personal use.

They are partly deductible and partly non-deductible. They are allocated between business and personal use.

It is allocated pro rata.

Question 8

Differentiate business expense from business capital expenditure.

Answer 8

Business expense benefit only the current accounting period.

Business capital expenditure benefit future accounting periods.

Business expenses are costs of generating income.

Business capital expenditures are recorded as assets when acquired then later deducted when used in the business.

Question 9

True or False: The acquisition of intangible assets are business expenses and not capital expenditures.

Answer 9

False. They are capital expenditures.

Question 10

True or False: Expenses to promote goodwill are capital expenditures and not business expenses.

Answer 10

True

Question 11

This is used to denote the benefit arising from connection and reputation the business.

Answer 11

Goodwill

Question 12

True or False: Rent-to-own rental payments are expenses.

Answer 12

False.

Question 13

True or False: The taxpayer and the CIR may enter into a written agreement on the estimated useful life and rate of depreciation of any property.

Answer 13

True

Question 14

True or False: Any change in the agreed rate and useful life shall be applied retrospectively starting on the taxable period when the change occurred.

Answer 14

False. It should be applied prospectively in the taxable period when notice is rendered.

Question 15

True or False: The inventory method is only applicable to taxpayers using cash basis.

Answer 15

False. It is applicable to those who use cash basis or accrual basis.

Question 16

True or False: Prepayments and capital expenditures may be deducted outright on certain circumstances.

Answer 16

False

Question 17

True or False: Projected expenses are deductible.

Answer 17

False. They are non-deductible since they are only estimated future costs and have not actually been incurred.

Question 18

True or False: For a VAT taxpayer, the input VAT is claimable as a deduction.

Answer 18

False. It is not claimable as a deduction but is claimable as a tax credit.

Question 19

True or False: For a non-VAT taxpayer, the input VAT is claimable as a deduction.

Answer 19

True. It is part of the costs of the purchase.

Question 20

What are the 4 general principles of deductions from gross income?

Answer 20

1. LOAN principle
2. Matching rule
3. Related party rule
4. The withholding rule

Question 21

What does LOAN stand for?

Answer 21

L - Legitimate
O - Ordinary
A - Actual
N - Necessary

Question 22

What does it mean for a business expense to be legitimate? (5)

Answer 22

1. Incurred in and for the current period
2. Not a capital expenditure
3. Pertains to the business
4. Not contrary to law
5. Adequately substantiated

It means it is not simulated.

Question 23

What does it mean for a business expense to be ordinary? (2)

Answer 23

When it is normal in the conduct of trade or business of the taxpayer.

Also when it is normally incurred by other taxpayers under the same line of business.

Question 24

True or False: The BIR may disallow a deduction on an expense that is ordinary but unnecessary.

Answer 24

True

Question 25

What does it mean for a business expense to be actual?

Answer 25

If it is paid or resulted to an incurrence of an obligation to the taxpayer.

Question 26

True or False: In case of a loss, an actual expense must be sustained or realized by the taxpayer in a closed and completed transaction.

Answer 26

True

Question 27

What does it mean for a business expense to be necessary?

Answer 27

If it is reasonable and essential to the development and operation of the trade or business.

Question 28

True or False: Extraordinary expenses are always non-deductible.

Answer 28

False. They may be deductive if proven necessary and connected to the business by the taxpayer.

Question 29

What does the matching principle state?

Answer 29

Only those business expenses incurred in connection with the generation of income subject to regular income tax are deductible.

Question 30

What does the related party rule state?

Answer 30

In case of transactions between related parties, gains are taxable but losses are not deductible.

Question 31

What is the transfer pricing rule?

Answer 31

Non-arms' length expenses incurred between associated enterprises may be restated to their arm's length fair values to reflect the correct income of each of the enterprises.

Question 32

Who are related parties?

Answer 32

1. Members of a family (up to 4th degree level consanguinity) 2. the direct or indirect controlling individual of a corporation 3. corporations under the same direct or indirect control 4. Grantor and fiduciary of any trust 5. Fiduciaries of trusts with the same grantor 6. Fiduciary of a trust and the beneficiary of such trust

Question 33

True or False: Only full blood family are considered members of a family and are related parties.

Answer 33

False. Half-blood or full-blood members are all related parties.

Question 34

Control is the ownership of more than what percent of the voting stocks of a corporation?

Answer 34

50%

Question 35

What is the withholding rule?

Answer 35

No withholding, no deduction

Question 36

True or False: The withholding rule only requires the tax on income be withheld and not necessarily remitted to the government.

Answer 36

False. It should be both withheld and remitted.

Question 37

True or False: Premiums paid on life insurance policies covering the life of an employee is a deductible expense.

Answer 37

False. It is non-deductible

Question 38

Are amounts expended in restoration of property deductible expenses or not?

Answer 38

Not deductible

Question 39

What are the tax reporting classifications of deductions? (4)

Answer 39

1. costs of sales/services 2. ordinary allowable itemized deductions 3. special allowable itemized deductions 4. nolco

Question 40

Differentiate the ordinary/regular itemized deductions from special itemized deductions.

Answer 40

Ordinary - expenses arising from the trade or business Special - arising from special laws

Question 41

These are bonus deductions for taxpayers.

Answer 41

Deduction incentives

Question 42

NOLCO is only allowed by the law for how many years?

Answer 42

3 years

Question 43

True or False: NOLCO is an expense.

Answer 43

False. It is a special deduction incentive allowed by law.

Question 44

What are the modes of claiming deductions from gross income?

Answer 44

1. itemized deductions 2. optional standard deductions

Question 45

Differentiate itemized deductions from OSD.

Answer 45

ID - based on actual amount of expenditure and is where the TP lists all items. Here, no receipt, no deduction OSD - 40% is deductible based on gross sales/income. Substantiation is not required.