Chapter 13-A

Question 1

True or False: In order for indebtedness on interest expense be valid, it must be a written agreement.

Answer 1

True

Question 2

True or False: For this topic only, interest expense may be deductible even if the interest is not stipulated in writing.

Answer 2

False. Interest not stipulated in writing is void.

Question 3

As a general rule, how much interest expense shall be deductible? What is the XPTN?

Answer 3

GR: Entire amount

XPTN: If the taxpayer earns interest income subject to FWT during the same taxable year when the interest expense incurred.

Question 4

What is the arbitrage cap or limit on interest expense?

Answer 4

01/01/21 to present is 20%
Prior to that is 33%

Question 5

True or False: Discounts or pre deducted interests are considered prepayments so these are deductible.

Answer 5

False. Prepayments are not yet expenses so they are not deductible.

Question 6

This is a term in stock market where there is simultaneous purchase and sale of stocks in different markets in order to derive profits arising from varying prices included in markets.

Answer 6

Arbitrage

Question 7

True or False: The arbitrage limit is a direct application of the matching rule.

Answer 7

False. It is indirect.

Question 8

True or False: The arbitrage limit’s result on interest expense deductible would have had the same result as if the law simply provided that only interest expense connected with gross income subject to regular tax is deductible.

Answer 8

True

Question 9

True or False: There is no arbitrage limit for qualified MSMEs subject to 20% corporate tax.

Answer 9

True

Question 10

True or False: The law did not set separate arbitrage limits for individual and corporate taxpayers so the rule must be applied to both alike.

Answer 10

True

Question 11

True or False: Thrift banks are exempted from the arbitrage limit.

Answer 11

True

Question 12

True or False: Interests on installments due of a loan are not deductible.

Answer 12

False. Each interest pertaining to each installments are deductible.

Question 13

What is the optional treatment of interest expense?

Answer 13

1. outright deduction from gross income
2. capital expenditure claimable though depreciation

Question 14

Are special assessments deductible as an expense?

Answer 14

No. It is capitalized as cost of the land.

Question 15

Are tax surcharges business expenses?

Answer 15

No since these are unnecessary and avoidable expenses.

Question 16

Income taxes paid in a foreign country can either be claimed as?

Answer 16

1. deduction
2. tax credit

Question 17

What is the formula for the limit on foreign taxes?

Answer 17

Total foreign taxable income /World taxable income x Philippine income tax due

Question 18

Who can claim tax credit or deduction for foreign taxes paid?

Answer 18

Those taxable on world income:
1. RC
2. DC

Question 19

True or False: Refunds of non-deductible taxes are not exempt from income tax.

Answer 19

False. It is exempt.

Question 20

How many days from date of discovery of theft or embezzlement must the taxpayer declare to the BIR the casualty loss for it to be deductible?

Answer 20

45 days

Question 21

What are the types of losses?

Answer 21

1. Ordinary loss
2. Capital loss
3. Wagering or gambling loss
4. Abandonment loss

Question 22

The GR is that illegal expenses are not deductible. What is the XPTN?

Answer 22

Extent of gambling winnings

Question 23

Are ordinary losses deductible?

Answer 23

Yes in full.

Question 24

Are capital losses deductible?

Answer 24

Yes only to the extent of capital gains

Question 25

Are loss of value of assets deductible?

Answer 25

No since this is reversible and temporary.

Question 26

Is loss on insured property deductible?

Answer 26

Yes to the extent of the excess of the tax basis of the property over the insurance reimbursement

Question 27

True or False: Notice of abandonment to be filed with the CIR is optional.

Answer 27

False.

Question 28

Can abandonment be reversed?

Answer 28

Yes

Question 29

A requisite of claim for bad debts deduction says that the taxpayer must be under what basis of accounting?

Answer 29

Accrual

Question 30

How is a bad debt ascertained to be worthless?

Answer 30

When the taxpayer had already exerted diligent effort to collect the debt through demand letter yet there were no collection.

Question 31

Are estimated bad debts expense deductible in the year of estimation?

Answer 31

No. These are projected expenses and are not yet actually incurred.

Question 32

Does change in accounting period lead to deduction?

Answer 32

No

Question 33

How are bad debts subsequently recovered treated as?

Answer 33

Inclusion to gross income to the extent of income tax benefit

Question 34

Can a taxpayer deduct an obligation that had already been prescribed?

Answer 34

No since a requisite says it must be subsisting.

Question 35

Can a taxpayer who sustained bad debts under cash basis then subsequently changed its accoutning method to accrual basis claim deductions on bad debts?

Answer 35

No. What cannot be done directly cannot be done indirectly.

Question 36

What are the depreciation methods?

Answer 36

1. straight line method 2. syd method (sum of the year digit) 3. declining balance method 4. those prescribed by the secretary of finance

Question 37

If the tenant if a life tenant, not the owner, is depreciation allowable as a deduction?

Answer 37

Yes

Question 38

How is the depreciation of properties held in trust deductible?

Answer 38

Through apportioning it between the beneficiaries and trusteed based on the basis of income allowable or to pertinent provisions.

Question 39

Is depreciation of the revaluation surplus of PPEs deductible?

Answer 39

No these are not actual costs.

Question 40

True or False: The depreciation of an asset may be premised on its reappraised value.

Answer 40

False. It must be on its acquisition cost.

Question 41

True or False: Substantiation is required in the deductibility of depreciation on passenger vehicles.

Answer 41

True

Question 42

Who has the option to expense capital expenditures according to the NIRC?

Answer 42

Private educational institutions

Question 43

How is amortization of intangible assets treated as?

Answer 43

The same as discussed on depreciation.

Question 44

This is a provision for the periodic return of capital investments in wasting assets such as mineral, gas, oil.

Answer 44

Depletion expense

Question 45

What are the stages of wasting asset activities?

Answer 45

1. exploration period 2. development period 3. commercial production

Question 46

This period of wasting asset activities involves ascertaining the existence, location, extent, or quality of any deposit or mineral.

Answer 46

Exploration period

Question 47

This period of wasting asset activities commences when deposits of ore or minerals are shown to exist in sufficient commercial quantity.

Answer 47

Development period

Question 48

This period of wasting asset activities is the stage of actual extraction, processing, and sale.

Answer 48

Commercial production

Question 49

True or False: In properties directly used in petroleum operations, a shift from straight-line method to declining balance method is not allowed.

Answer 49

False. It is allowed.

Question 50

What is the useful life of properties directly used in petroleum operations?

Answer 50

10 years or shorter as permitted by CIR

Question 51

What is the useful life of properties not directly used in petroleum operations?

Answer 51

5 years

Question 52

What depreciation method is prescribed by the NIRC for properties not used directly in petroleum operations?

Answer 52

Straight-line method

Question 53

If the expected life of the property used in mining is 10 years or less, how is it depreciated?

Answer 53

using the normal rate of depreciation

Question 54

If the expected life of the property used in mining is more than 10 years, how is it depreciated?

Answer 54

using any number of years between 5 to 10

Question 55

Are intangible exploration and development costs before commercial production deductible?

Answer 55

No it is capitalized

Question 56

Expenses incurred on non-producing mines may be deducted outright, but the deductible amount shall not exceed what percentage of the net income?

Answer 56

25%

Question 57

True or False: The option to deduct intangible exploration and development drilling costs is revocable.

Answer 57

False. It is irrevocable.

Question 58

True or False: In claims for deduction on contributions, the donee institution may either be domestic or foreign.

Answer 58

False. It must be domestic.

Question 59

What should the donee institution issue?

Answer 59

Certificate of Donation

Question 60

True or False: All donations adhering to all the requisites for deductibility are fully deductible.

Answer 60

False. Some are partially deductible.

Question 61

What is the limit of deduction for contributions for individuals and corporations?

Answer 61

I - 10% C - 5%

Question 62

The contributions subject to limit or those partially deductible are deductible based on what doctrine?

Answer 62

Doctrine of usage

Question 63

A requisite for full deductibility of contributions to accredited NGOs states that the admin expenses of the NGO should not exceed what percentage of its total expenses?

Answer 63

30%

Question 64

Differentiate a defined contribution plan and a defined benefit plan

Answer 64

DCP - the amount of benefit is not guaranteed DBP - the amount of benefit is guaranteed

Question 65

True or False: The contributions of employees are also deductible as expense by the employer.

Answer 65

False. Only the portion paid by the employer is deductible.

Question 66

Differentiate current from past service cost.

Answer 66

CSC - pension expense accruing during the year as the employees render service for the year PSC - pension expense accruing in prior year for services already rendered

Question 67

How many years is the contribution for past service costs amortized?

Answer 67

10 years

Question 68

If R&D costs are related to capital accounts, they are treated as?

Answer 68

Capitalization

Question 69

If R&D costs are related to capital accounts, they are treated as?

Answer 69

Outright expense; or Deferred expense at the option of the taxpayer

Question 70

This is a test applied in the realization of net income and expense by an accrual-basis taxpayer.

Answer 70

All events test

Question 71

What is the Cohan rule?

Answer 71

The government may allow deductions on expenses not substantiated with receipts if the taxpayer can prove that there was a deductible expense and can estimate how much it was.

Question 72

Under the Cohan rule, how much is disallowed as a deduction?

Answer 72

50%

Question 73

For what period should substantiation ORs be kept?

Answer 73

3 years

Question 74

What happens in the case of lost ORs?

Answer 74

The BIR may accept true receipts that is certified by the person who lost it (through an affidavit) upon proof of loss or destruction

Question 75

What is the ceiling for the payment to directors?

Answer 75

10% of net income

Question 76

What does EAR expense stand for?

Answer 76

Entertainment, Amusement, and Recreation Expense

Question 77

What is the ceiling on deduction for taxpayers engaged in sale of goods and of services?

Answer 77

Goods - 0.5% of net sales Services - 1% of net revenue