Deduction from Gross Income

1. Which of the following is not a characteristic of a deduction?

a. It is a reduction of wealth that helped earn the income subject to tax.

b. It is not a receipt.

c. It is a subtraction to arrive at income subject to tax.

d. An immunity or privilege, a freedom from a charge or burden to which others are subjected.

2. Statement 1: Exclusions are receipts which are excluded from the gross income, hence, do not form part of the gross income.

Statement 2: Exclusions are items or amounts allowed to be subtracted from gross income to arrive at the taxable income.

Statement 3: Deductions from gross income are not presumed.

a. Only statements 1 and 3 are false

b. Only statement 2 is false

c. Only statement 1 and 2 are true

d. All statements are true

3. Statement 1: The taxpayer has the burden of justifying the allowance of any deduction claimed.

Statement 2: Deductions are strictly construed against the government.

a. Statements 1 & 2 are false

b. Statement 1 is true but statement 2 is false

c. Statement 1 is false but statement 2 is true

d. Statements 1 and 2 are true

4. Statement 1: Revenue expenditures are period costs that are related to a particular period of time of business operation.

Statement 2: Capital expenditures are nonrecurring expenditures related to acquisition of depreciable assets to be used in the business.

a. Statements 1 & 2 are false

b. Statement 1 is true but statement 2 is false

c. Statement 1 is false but statement 2 is true

d. Statements 1 and 2 are true

5. Which of the following is allowable compensation expense of an employer?

I. Salary of employee paid for a limited period of time after his death to his widow is allowable deduction of the employer.

II. Managers expense account subject to fringe benefit tax.

a. I only c. I and II

b. II only d. Neither I nor II

6. Which of the following items of expenses is not deductible?

a. Salaries, wages, commissions and professional fees.

b. Bonuses paid in good faith as additional compensation for services rendered.

c. Pension and compensation for injuries if compensated for by insurance.

d. Grossed-up monetary value of fringe benefits provided that the final tax imposed has been paid.

7. Brianne Corporation has incurred rent expense amounting to P500,000. Brianne paid the lessor the gross amount of P500,000 without deducting 5% withholding tax. How much rent can Brianne claim as allowable deduction from its gross income?

a. P500,000 c. P475,000

b. P450,000 d. nil

8. RRO Corporation is engaged in the sale of goods and services with net sales/net revenue of P3,000,000 and P2,000,000 respectively. The actual entertainment, amusement and recreational (EAR) expense for the taxable year totalled P30,000.

How much is the deductible EAR expense?

a. P30,000 c. P25,000

b. P27,000 d. nil

9. Which of the following expenses is not deductible from gross income?

a. Salaries and wages of employees.

b. Entertainment, amusement and recreation expenses.

c. Rental expenses.

d. Bribes, kickbacks and other similar payments.

10. In the conduct of his business in 2013, Modesto found it necessary to give gifts to the government officials with whom he had official dealings.

a. These gifts are deductible expenses subject to the substantiation rule.

b. The value of the gifts, if de minimis, are allowed to be deducted.

c. Irrespective of the value, the gifts are considered as bribes and not allowed to be deductible.

d. These gifts are deductible if found to be necessary and properly supported by receipts.

11. Roy borrowed money from the Bank amounting to P1,000,000 at an annual interest rate of 7%. He invested the money in deposit substitutes earning annual interest income of 8%. How much is the deductible interest?

a. P43,600 c. P70,000

b. P26,400 d. P80,000

12. Which of the following is not a requisite for taxes to be deductible?

a. Must have been paid or incurred within the taxable year.

b. Deductible only by the person/s upon whom the tax is imposed by law.

c. Must be in connection with the taxpayer's profession, trade, or business.

d. Must be imposed by the national government.

13. Which of the following is non-deductible?

a. Percentage tax on common carriers by land

b. Franchise tax

c. Overseas communications tax

d. Stock transaction tax

14. The term "net operating loss" shall mean

a. The excess of capital losses over capital gains deductible from ordinary income.

b. The excess of capital losses over capital gains not deductible from ordinary income.

c. The excess of allowable deductions over gross income.

d. The excess of capital losses over ordinary losses.

15. All of the following, except one, are requisites in the carry-over of net operating loss:

a. There must be no substantial change in the ownership of the business

b. Carry-over is not allowed if the corporation is subject to MCIT during the taxable year

c. Even if the corporation paid MCIT, the running of the prescriptive period is not interrupted.

d. The carry-over is good for one (1) year.

16. When shall bad debts be allowed as deduction from gross income?

a. Upon setting up of allowance for doubtful accounts

b. Upon write-off in the books

c. At the option of the taxpayer, upon setting up of allowance or upon write-off

d. At the option of the government, upon setting up of allowance or upon write-off

17. Optional standard deduction is allowed to

a. Non-resident alien engaged in business

b. Non-resident alien not engaged in business

c. Resident alien

d. Non-resident foreign corporation

18. A retailer of goods has gross sales of P1,000,000 with a cost of sales amounting to P800,000. Assuming that the taxpayer is an individual and opted to claim optional standard deduction, how much is the taxable income?

a. P600,000 c. P120,000

b. P550,000 d. P80,000

19. A retailer of goods has gross sales of P1,000,000 with a cost of sales amounting to P800,000. Assuming that the taxpayer is a corporation and opted to claim optional standard deduction, how much is the taxable income?

a. P600,000c. P120,000

b. P550,000d. P80,000

20. The taxpayer is a domestic corporation:

Gross sales P9,350,000

Sales returns and allowances 250,000

Sales discounts 100,000

Interest income on trade notes receivable 150,000

Other income 50,000

Cost of sales 3,000,000

Operating expenses with vouchers and receipts 4,000,000

Operating expenses without vouchers and receipts 500,000

Interest income from savings deposit 80,000

Interest income from deposit under FCDS 125,000

Royalty income 100,000

How much is the taxable income using itemized deduction?

a. P1,675,000c. P1,700,000

b. P2,175,000 d. P2,200,000