Deductions Flashcards by Paul Robert CPA

Deductions from Gross Income
- must be business expenses (✘ personal expenses)
- must be period expenses (✘ CAPEX)

Yes

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General Principles of Deduction (LOANS)

Legal → illegal expenses = ✘ deductible
Ordinary
Actual → estimates = ✘ deductible
Necessary → unreasonable = ✘ deductible
Substantiated

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What is the result if in LOAN
- LOA is violated
- N is violated

disallowance of deduction
reduction of amount (since dapat necessary)

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Related Party Rule
- Gains from RP are taxable. True or False?
- Losses from RP are deductible. True or False?

Gains = Taxable
Losses = ✘ deductible
- since related party, baka dayain yung losses

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Only those expenses related to RIT are deductible
- related to Exempt, FWT, CGR → not deductible

Yes

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Prepaid Expenses are not deductible whether accrual basis or cash basis.

aakalain mo deductible siya pag cash basis (since cash basis), pero ang rule is prepaid expenses → not deductible

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Sales less COGS = Gross Income

Gross Income less Deductions = Taxable Income

Deductions can be
- itemized
- OSD

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Every individual and corporations can claim deductions. True or False?

Somehow true
- Purely Compensation → cannot claim deductions because they do not have “business” expenses

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Itemized Deductions (PREDICTABLE)

Pensions
- must be maintained and established by employer
- actuarial assumptions → must be sound & reasonable
- fund assets → must be independent and not subject to control of employer

Current Service Cost are 100% deductible. True or False?
Past Service Cost are not deductible. True or False?

True
False (amortized for 10 years)

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Itemized Deductions (PREDICTABLE)

R&D Expenses
- if ✘ chargeable to capital account → outright expense
- what if ✔chargeable to PPE?
- what if ✔ chargeable to others?

PPE → capitalize
Others → outright expense or amortized for 5 years

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Itemized Deductions (PREDICTABLE)

NOT R&D Expenses
- for improvement of land
- for ascertaining location or quality of deposit …

Yes

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Itemized Deductions (PREDICTABLE)

EAR Expenses
- the amount of deductible EAR expenses is the lower of actual expenses vs limit. (lower since deduction)
- what is the limit for sale of services?
- what is the limit for sale of goods?

Services - 1% of Net Revenue
Goods - 0.5% of Net Sales

1 S = 0.5%

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Itemized Deductions (PREDICTABLE)

EAR Expenses
- if sale of both services and goods, just prorate. How?

Net Sales / Total Sales
x Actual EAR

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Itemized Deductions (PREDICTABLE)

Depreciation Methods
- SL method
- Declining balance method
- SYD
- other method prescribed by DOF secretary

Yes

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Itemized Deductions (PREDICTABLE)

Depreciation (Petroleum Operation)

Identify if used in production or not used in production.
- SL method only
- Useful life is 5 years

Not Used in Production

Used in Production
- SL method or DB method
- UL = shorter of 10 years vs actual life

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Itemized Deductions (PREDICTABLE)

Depreciation (Mining)

Identify what is the useful life to use.
- useful life is 11 years
- useful life is 10 years

actual UL
between 5 years and actual UL

NOTE : For NRA ETB and RFC → property should be in PH

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Itemized Deductions (PREDICTABLE)

Depreciation (Proprietary Educational Institution)

can claim as deductions the following:
- Capital outlays for expansion
- Allowance for depreciation

Yes

Itemized Deductions (PREDICTABLE)

Depletion
- cost-depletion method
- limit of allowance for depletion → capital invested

Stages of Wasting Assets
- Explore → Develop → Commercial Production

Yes

Itemized Deductions (PREDICTABLE)

Depletion (Intangible Drilling and Development Costs)
- after commercial production

What is the treatment if ✔ producing mines?
What is the treatment if ✘ producing mines?

either outright expense or amortize
outright expense

NOTE : For NRA ETB and RFC → property should be in PH

Itemized Deductions (PREDICTABLE)

Interest
- must be in writing
- must be legally due
- ✘ finance petroleum operations
- Related to Property, can choose either
(1) Outright Expense
(2) Capitalize

How to compute the amount of deductible interest expense?

Interest Expense
Less : Gross Interest Income (FWT) x 20%
= Deductible Interest Expense

Itemized Deductions (PREDICTABLE)

Charitable Contributions
- can be fully deductible
- can be with limit

Fully Deductible
- made to government (priority activities), accredited NGOs

With Limit
- made to government (not priority activites), non accredited NGOs

Yes

Itemized Deductions (PREDICTABLE)

Charitable Contributions (Fully Deductible)
- what are the priority activites? (CHEESY)

Culture
Human Settlements
Education
Economic Development
Science and Health
Youth and Sports Development

Itemized Deductions (PREDICTABLE)

Charitable Contributions (Fully Deductible)

Accredited NGOs (Angat Org)

Assets (in case of liquidation) → will go to another NGO with same purpose
Net Income → not for a private individual
Gamit / Utilization of Contributions → not later than 15th day, 3rd month after close of taxable year
Administrative Expenses → max 30% of expenses
Organized and operated for

Itemized Deductions (PREDICTABLE)

Charitable Contributions (With Limit)

the amount of deductible charitable contributions is the lower of actual contributions vs limit (lower since deduction)
what is the base?
what is the limit for individuals?
what is the limit for corporations?

Individuals → 10%
Corporations → 5%
Base → Net Income before Charitable Contributions

Itemized Deductions (PREDICTABLE) Taxes - generally deductible Non Deductible Taxes (FITS-VSS)

NON DEDUCTIBLE TAXES (FITS-VSS) - Foreign Income Tax - claimed as credit - Income Tax - Transfer Tax - Stock Transaction Tax - VAT - Special Assessment Tax - Surcharge and Penalty NOTE: FBT (even though an income tax) → deductible

FOREIGN INCOME TAX CREDIT - same solving as estate tax - Basis → Taxable Income - Estate Tax = R or C (taxed globally) - Foreign IT = RC and DC only (taxed globally)

Yes

Itemized Deductions (PREDICTABLE) Advertising Expense

Yes

Itemized Deductions (PREDICTABLE) Bad Debts Expense - must be **ascertained to be** worthless and uncollectible - must be **legally due** - **actually charged off** in the books

Yes

Itemized Deductions (PREDICTABLE) Losses 1. Casualty Losses 2. Loss on Wash Sales and Capital Loss 3. NOLCO 4. Abandonment Losses Casualty Losses (same in estate tax) - not compensated by insurance (SHIFTERS) - not claimed as deduction in estate tax - reported to BIR within **?** from date of loss

45 days

Itemized Deductions (PREDICTABLE) Losses Loss on wash sales are generally deductible. True or False?

False (generally **not** deductible) - refer to Dealings in Property

Itemized Deductions (PREDICTABLE) Losses ABANDONMENT LOSSES - Petroleum Operation → Deductible = accumulated exploration and development expenditures - Producing Wells → Deductible = unamortized cost + undepreciated costs of equipment directly used - If resumed → amount shall be reversed anot now included in gross income

Yes

Itemized Deductions (PREDICTABLE) Losses NOLCO - AD > GI - taxpayer must **not be exempt** from income tax - no substantial change in ownership → **at least 75%** of nominal value or paid-up capital = held by / on behalf of same persons - carried over for?

3 years - XPN : 5 years (incurred in 2020 - 2021) - XPN : 5 years (from first 10 years - if mines)

Itemized Deductions (PREDICTABLE) Losses NOLCO - can also be availed by Special DC and Special RFC - First In, First Out - if that year is **MCIT** → **cannot avail** NOLCO however, counting of 3 years will continue

Yes

NOLCO vs NCLCO - 3 years - can be availed by individuals and corporations - deducted to taxable income

NOLCO NCLCO - 1 year - for individuals only - deducted to capital gains ## Footnote refer to Dealings in Property

Itemized Deductions (PREDICTABLE) Expenses (Labor Training) - students enrolled in public schools (OJT has apprenticeship agreement) - company must be certified by DEPED, TESDA.. What is the rate? What is the limit?

Rate → ½ of Labor Training Expenses Limit → 10% of Direct Labor

Special Itemized Deductions FREE LEGAL ASSISTANCE ACT - lower of

- amount that could have been collected - 10% of Gross Income derived

Special Itemized Deductions SENIOR CITIZEN AND PWD - what is the amount for SC? - what is the amount for PWD?

SC → additional 15% of salaries of SC PWD → additional 25% of salaries of PWD

Special Itemized Deductions - FACILITY IMPROVEMENTS FOR PWD - PRODUCTIVITY INCENTIVES - ADOPT-A-SCHOOL ACT What is the amount?

- additional 50% of costs of improvements - additional 50% of bonuses given - additional 50% of contribution

Special Itemized Deductions - ROOMING-IN AND BREASTFEEDING ACT What is the amount?

additional 100% of expense (twice)

All individuals can avail of OSD. True or False? All corporations can avail of OSD True or False? OSD must be signified in 1st quarter (irrevocable) - like 8%

- False (X NRA) - False (X NRFC)

OSD is 40% - what is the base if individual? - what is the base if corporation?

Individual - 40% of Gross Sales Corporation - 40% of Gross Income (Sales less COGS)