DEDUCTIONS FROM GROSS INCOME

(Basic concepts and principles on deductions from gross income, different allowable deductions in the computation of income tax; and compute deductions from gross income.)

TRUE or FALSE.Write True if the statement is correct, otherwise write False. Write your answer before each number.

1. Capital expenditures are deductible against future income.

2. Personal expenses are deductible from gross income.

3. Expenses intended for the business and the personal use of the taxpayer must be allocated between the two. Only the portion pertaining to the business is deductible.

4. Immaterial expenditures must always be capitalized.

5. So long as the expense relates to the generation of an income subject to any income tax, the same is deductible against gross income subject to the regular tax. 6. The failure to deduct creditable withholding tax on income payments will render the expense non-deductible.

7. Taxpayers opting to use the optional standard deduction must also maintain records of their expense.

8. For an expense to be deductible it must be ordinary and necessary. Therefore, an extraordinary expense can never be allowed as a deductible expense.

9. A capital expenditure is a legitimate business expense so long as it is used for business purposes.

10. Repairs that increase property useful life is capitalized.

IDENTIFICATION EXERCISE.Identify whether the following is a business expense or personal expense by checking the appropriate box corresponding to the the item:

	Business Expense	Personal Expense
1. Medical expense of the proprietor.
2. Transportation expense from office to client establishments.
3. Cost of entertaining family members of the proprietor.
4. Interest expense to finance the construction of the office building.
5. Office utilities expense.
6. Repairs that restores the value of the destroyed business properties.
7. Tuition fee of the taxpayer's dependents.
8. Salary of household help and maids.
9. Travel expense to attend seminar.
10. Costs of renewal if the taxpayer's professional license.

TRUE OR FALSE.Write True if the statement is correct, otherwise write False. Write youranswers before each number.

1. Interest expenses incurred with related parties are deductible.

2. The arbitrage limit applies to all taxpayers including individuals.

3. Losses must be reported to the BIR within 45 days from the occurrence of the casualty,robbery, theft or embezzlement giving rise to the loss.

4. The allowable deduction for deductible taxes includes the basic tax, surcharge andinterest.

5. Depreciation on revaluation surplus of properties can be deducted as part ofdepreciation expense.

6. The recovery of bad debts by accrual basis taxpayers may be reverted back to grossincome.

7. Bad debts expenses between related parties can be deducted so long as adequatelysupported with documentary evidence.

8. With the exception of domestic corporations and resident citizens, expenses incurredabroad cannot be deducted unless incurred in connection with the Philippine business.9. The loss in value of assets is deductible only when sustained and realized.10. Purely employed individuals can claim deductions for donations made.11. Intangible exploration and development costs incurred before commercial production in awasting asset operation are capitalized as cost of the wasting asset.

12. After commencement of commercial production, intangible exploration and developmentcosts incurred on non-producing wells or mines are deductible in the period paid orincurred.

13. Contribution expenses are deductible if the donee is a domestic institution.14. Research and development costs not related to capital accounts are either deductedoutright or deferred and amortized over a period of not less than 60 months.15. Petroleum operations are not subject to the limit on the deduction of intangibleexploration and development costs after the commencement of commercial production.

PROBLEMS.Compute what is being required and write the letter of youranswer on the space before each number. Show your solutions on the space provided aftereach question.

1. Gawan Merchandising paid P400,000 to employees, net of P60,000 total withholding tax oncompensation. What is the deductible amount of expense by the employer?

2. A taxpayer under the cash basis had the following expenditures:

Acquisition of office equipments at the middle of the year

(5 years useful life)P200,000

Payment of employees salaries40,000Payment of office utilities expenses60,000How much is claimable as deductible expense for the year?

3. The following relates to a taxpayer's warehouse:

CostP2,000,000Accumulated depreciation600,000Residual value200,000Current fair market value2,500,000Remaining useful life12 years

Compute the depreciation expense.