Page 59

EXERCISES 8 1 1 . a. The partnership formed is a general professional partnership because the objective of the partners is to exercise a common profession. b. No, a general professional partnership is not subject to income tax. c. Yes. Although not subject to income tax a general professional partnership is required to file an income tax return for the purpose of furnishing information to the B ! the amount that each partner "ill receive from the net income of the partnership. d. The partners are required to file an income tax return# the$ are taxable on their respective share in the net income of the partnership. % . a. The$ formed a business partnership because the partners have contributed mone$ and industr$ for the purpose of dividing the profit among themselves. b. A business partnership is considered as a corporation subject to corporate tax. Thus, the partnership is subject to an income tax of &%'%,()), computed b$ multipl$ing the net income of &*(),))) b$ the tax rate of +(,. c. The share of the partners in the partnership are subject to a final tax of 1),. + . The assessments "ere justified. t is clear that the$ formed a general co-partnership "hen their respective share in the extrajudiciall$ partitioned propert$ "as entrusted to their mother for administration and the income therefrom having been distributed to them proportionatel$. a. /avier0s ordinar$ gain on the sale of the machine is &(,))) 1((,)))2 (),)))3. b. ( . f the partnership sells the machine for &'(,))), it has to recogni4e a gain of &1),))) 1&'(,))) 2 ((,)))3.

. .

!ita should report &+(,))) in her income tax return representing her salar$ for five 1(3 months 15anuar$ to 6a$3 "hen she "as still an emplo$ee of the partnership. 7er share in the net income of &'(,))) as partner in the partnership is not returnable because it is subject to final tax of 1),.

' .

a. No, because a co-o"nership is exempt from income tax. b. The sale of the coconut land is not taxable to the co-o"nership because it is exempt from tax. 7o"ever, the respective share in the &(),))) shall be taxable to the co-o"ners considering that the$ are taxable on their share in the income of the co-o"nership.

Page 60

c. Yes. B$ subdividing the lot, introducing developments and entering into series of transactions, the co-o"nership has been converted into a partnership, subject to corporate income tax. * . f the partnership availed of itemi4ed deductions, 5ehan and 8ina shall onl$ be entitled to avail of itemi4ed deduction in computing its taxable income based on the share in the net income of the general professional partnership. 7o"ever, if the partnership availed of optional standard deduction, the partner shall neither be allo"ed to claim optional nor itemi4ed deduction.

EXERCISE 8 2 1. %. +. .. ANSWER: D ANSWER: D ANSWER: C ANSWER: C Yvonne 1%(),))) x (),3 1%(,))) 6ar$france 1%(),))) x (),3 1%(,))) Total %(),))) Appl$ing the principle of constructive receipt, the share of Yvonne and 6ar$france in the net income of the partnership is taxable to them, "hether distributed or other"ise. (. ANSWER: C The principle of constructive receipt applies "hether onl$ a portion or no part of the share in the income has been received b$ them.

EXERCISES 83 1. ANSWER: B 9eneral professional partnerships are not subject to tax. %. ANSWER: B :hare in partnership income; &artnership gross income 8ess; <xpenses Net income &artnership interest Add; ncome from other business 9ross income 8ess; <xpenses & .(),))) 1%(,))) +%(,))) .), 1'),))) '(,)))

1+),)) ) =(,))

Page 61

Total income 8ess; &ersonal exemptions Basic personal Additional exemption 1%(,))) x %3 Taxable income Tax on & *),))) ((,))) x %), ncome tax due 8ess; ?ithholding tax 1&.),))) x 1),3 ncome tax pa$able +. ANSWER: D &artnership net income &artnership interest :hare in partnership income 8ess; &ersonal exemption Taxable income Tax on &1.),))) (,))) x %(, ncome tax due 8ess; ?ithholding tax 1&'),))) x 1),3 ncome tax pa$able .. ANSWER: B @inal tax on dividend 1>,()) x 1),3 ANSWER: A @inal tax on interest 1+,))) x %),3 ANSWER: B Business partnerships are taxable as corporations. PROBLEM 83.2: 1. ANSWER: D >() & %%,()) 1,%() %+,*() ',))) 1*,*() & >,()) 11,))) 1=,()) .,))) 1(,()) (),))) (),)))

) %%(,)) ) 1)),)) ) 1%(,)) )

+%(,))) '), 1=(,)) ) (),)) ) 1.(,)) )

(. '.

'))

Page 62

%.

ANSWER: A 9eneral professional partnerships, "hether registered or not, are exempt from income tax.

EXERCISE 8 4

PROBLEM 84.1 1. ANSWER: D :ales 8ess; Aost of sales nventor$, 5anuar$ 1 Add; &urchases 9oods available for sale 8ess; nventor$, Becember +1 9ross profit 8ess; :elling and administrative expenses Net income Add; Bividend from resident foreign corporation Taxable income !ate of tax ncome tax due %. ANSWER: C Taxable income 8ess; ncome tax Net income after tax Add; nterest on banC deposit 1&(,))) x >),3 Bividend from domestic corporation Total income &artnership interest :hare in partnership net income !ate of tax @inal tax +. ANSWER: A &artnersD share in partnership income are subject to final tax at a rate of 1),. PROBLEM 84.2 1. ANSWER: D 9ross income *(),))) ++),)) ) ==,))) %+1,))) .,))) %(,))) %=,))) %'),))) (), 1+),))) 1), 1+,))) 1%),))) .(),))) (*),))) '),))) 1,))),)) )

(1),))) .=),))) %1),))) %>),))) (),))) ++),))) +), 11(,())

Page 63

8ess; <xpenses Net income !ate of tax ncome tax due %. ANSWER: C Net income 8ess; ncome tax Net income after tax Add; Bividend from domestic corporation nterest on banC deposit E1),))) 2 11),))) x %),3F Total income :hare of 6ax 1.'>,))) x ((,3 x 1), :hare of 5ess 1.'>,))) x .(,3 x 1), PROBLEM 84.3: 1. ANSWER: C Net income, sole proprietorship 8ess; &ersonal exemption Taxable income Tax on & %(),))) *),))) x +), ncome tax due %. ANSWER: D Net income, sole proprietorship 8ess; &ersonal exemption Taxable income Tax on & *),))) +. ANSWER: B Bividend, gross of tax 1%),)))G=),3 !ate of tax @inal tax on dividend .. ANSWER: C Net income after tax Add; NH8AH ()),))) %+),))) & & >,()) & (),))) %1,))) *1,)))

%)),))) ((),))) +), 1'(,)))

((),))) 1'(,))) +>(,))) *(,))) >,))) .'>,))) %(,*.) %1,)')

& +*),))) (),))) +%),)))

& 1%),))) (),))) *),)))

%%,%%% 1), %,%%%

Page 64

Total &artnership interest :hare in the partnership income Bividend tax rate Bividend tax (. ANSWER: C

*+),))) .), %=%,))) 1), %=.%))

The income tax rate on corporations and partnerships shall be +), effective 5anuar$ 1, %))=. PROBLEM 8-4.4: 1. ANSWER: A 9ross compensation income 8ess; &ersonal exemption 1head of famil$3 Taxable income Tax on & *),))) (),))) x %(, ncome tax due %. ANSWER: A Net income of carenderia 1+%(,))) 2 %'(,)))3 8ess; &ersonal exemption Taxable income Tax on & 1),))) +. ANSWER: C 9ross compensation income 8ess; &ersonal exemption 1single3 Taxable income Tax on & *),))) (),))) x %(, ncome tax .. ANSWER: D Net income from carenderia :hare in partnership income 1*),))) x 1>)G.))3 Total income 8ess; &ersonal exemption Net income Tax on &*),))) *,))) x %), >,()) 1,.)) & >,()) 1%,()) %1,))) =(,()) +1,()) 1%*,))) (),))) **,))) ()) 1*),))) (),))) 1%),))) & '),))) (),))) 1),))) & >,()) 1%,()) %1,))) & 1*),))) (),))) 1%),)))

Page 65

ncome tax PROBLEM 8-4.5 1. ANSWER: A

=,=))

The share of the partners in the gross income of an exempt partnership is considered as an ordinar$ income and not subject to final tax. %. ANSWER: C The partnership formed for the purpose of selling Cinalas to the public is a taxable partnership# tt is subject to corporate tax. 9ain on sale of a manufacturing equipment is a business 1ordinar$3 gain "hich is subject to ordinar$ income tax. +. ANSWER: A An unregistered partnership falls under the phrase Ipartnership no matter ho" created or organi4ed.J 7ence, it is considered as a corporation subject to corporate tax. EXERCISE 8 5 1. ANSWER: C None, the mere sharing of gross returns does not in itself establish a partnership. To be considered as a partnership, there must be an unmistaCable intention bet"een them to form a partnership. ?hen the$ decided to invest the income of the land b$ purchasing an apartment house, the$ have formed a partnership on that income because the$ have contributed mone$ to a common fund for the purpose of dividing the profit bet"een themselves. 6oreover, there is an unmistaCable intention bet"een them to form a partnership. %. ANSWER: A :ee the discussion in No. 1. +. ANSWER: C No gain shall be reported in the tax returns because the sale of the land is subject to a final tax of ', of the selling price, marCet value, or 4onal value, "hichever is the highest price among them. 7o"ever, if "hat is being sold are subdivision lots the gain on sale are includible in the income tax return because these are cases of sale of ordinar$ assets. .. ANSWER: A

Page 66

The apartment building is a co-o"nership. Therefore, their shares in the net income are to be reported in their respective income tax returns. f the$ decide to sell the apartment, it shall not be subject to final tax because it is an ordinar$ asset. The gain on sale shall not even be taxable to the co-o"nership. 7o"ever, the share of the respective co-o"ners shall be subject to tax. (. ANSWER: D To be considered as having formed a business partnership, :abado and Bomingo must have entered into series of transactions. A la" firm is classified as a general professional partnership. Therefore, it is not subject to income tax. EXERCISES 9-1 1. a. b. c. The income of &%(),))) is taxable to 5oni because it "as earned prior to his death. Hnl$ income earned after death are taxable to the estate. The estate is subject to income tax because it is under judicial settlement. The &1*(,))) is taxable to the estate because it is under judicial settlement. f the estate is not under judicial settlement, it "ill not be subject to income tax because it shall be treated as a co-o"nership. A co-o"nership is not subject to income tax. Assuming that the trust created is a revocable trust, both the trustor and the beneficiar$ are subject to tax. Thus, Killa and Bev$ are subject to tax on the income of the trust. 7o"ever, if "hat is created is an irrevocable trust onl$ the beneficiar$ is liable because the annual income of &+)),))) goes entirel$ to the trust. +. 6rs. Bisana "ill rule in favor of <riCa. :ec. '% of N !A states as follo"s; ISEC 62. Exemption Allowed to Estates and Trusts. 2 @or the purpose of the tax provided for in this Title, there shall be allo"ed an exemption to T"ent$ thousand &esos 1%),)))3 from the income of the estate or trust.J This section is not covered b$ the amendment caused b$ !A =(). because said la" is explicit that onl$ :ections %%, %., +., +(, (1 and *= of !A >.%. are affected b$ the amendator$ la". @ollo"ing the latin maxim Iinclusio unios est exclusion alterius,J 1"hat the la" does not include, it excludes3 it is cr$stal clear that the personal exemption of &%),))) on estates and trusts is hereb$ retained. t does not therefore follo" the increase in the personal exemption of individual taxpa$ers. EXERCISES 9-2

%.

Page 67

1. %. +. .. (.

ANSWER: C ANSWER: C ANSWER: A ANSWER: B ANSWER: B 9ross income 8ess; <xpenses Amount distributed to beneficiaries 11)),))) x %3 Net income 8ess; <xemptions Taxable income Tax on &+),))) & 1(),))) %)),))) & .)),))) +(),))) (),))) %),))) +),))) %,())

'.

ANSWER: D Net income, Aaipas Net income, 5udas Aonsolidated net income 8ess; <xemption Aonsolidated taxable income & 1%),))) %)),))) +%),))) %),))) +)),)))

*.

ANSWER: A Tax on & %(),))) (),))) x +), ncome tax pa$able b$ Trustee Aaipas 11%)G+%) x '(,)))3 & (),))) 1(,))) '(,))) & %.,+*(

>.

ANSWER: B ncome tax pa$able b$ Trustee 5udas 1%))G+%) x '(,)))3 & .),'%(

=.

ANSWER: B Net income, Trust A 1()),))) - +)),)))3 & %)),)))

Page 68

Net income, Trust B 1.)),))) - %)),)))3 Total 8ess; &ersonal exemption Taxable income Tax on &%(),))) 1+),))) x +), ncome tax due 1). ANSWER: D Amount distributed to beneficiar$ 11(),))) L 1)),)))3 8ess; Hptional deduction 1%(),))) x 1),3 Net income 8ess; &ersonal exemption Taxable income Tax on &1.),))) '(,))) x %(, ncome tax due & %%,()) 1',%() +>,*() & (),))) +=,))) >=,)))

%)),))) .)),))) %),))) +>),)))

& %(),))) %(,))) %%(,))) %),))) %)(,)))

EXERCISES 10 1 1. No. A nonresident foreign corporation is taxable onl$ on income "ithin. The income from services b$ @oranger Aorporation is considered as an income "ithout because it is being performed outside the &hilippines. Aonsidering that the pa$ment to @oranger Aorporation is not taxable, the fees being paid to it abroad cannot be subject to "ithholding tax in the &hilippines. %. An off-line international air carrier is not considered as doing business in the &hilippines and is thus exempt from income from sources outside the &hilippines 1!ev. !eg. 1(-%))%3.

EXERCISES 10 2 1. %. +. .. (. A B B A A '. *. >. =. 1). B < A A A 11. 1%. 1+. 1.. 1(. B A B B A 1'. 1*. 1>. 1=. %). B < < B A

EXERCISES 10 3 1. ANSWER: A

Page 69

!esident citi4en individuals, including domestic corporations are taxable on income "ithin and "ithout the &hilippines, "hile nonresident citi4ens, resident aliens, nonresident aliens and foreign corporations are taxable on income "ithin onl$. %. ANSWER: B The sale of a real propert$ "hich is classified as a capital asset is subject to ', final tax. 7ence, the gain on sale is not included in the gross income. The tax situs of interest on indebtedness is the residence of the debtor, "hile the situs of income from services is the place "here the services "ere performed. Aonsidering that the taxpa$er is a nonresident alien, these incomes are not subject to tax and therefore not included in the gross income. The situs of rent income is the location of propert$. Aonsidering that the real propert$ is located in 6anila, the income is classified as an income "ithin and included in the gross income of a N!A <TB. +. ANSWER: D 9enerall$, dividends received from foreign corporations are considered as income derived from sources "ithout the &hilippines. 9ain on sale of personal propert$ is an income "ithout if the propert$ is sold in the &hilippines, "hile gain on sale of real propert$ located abroad is an income "ithout because its tax situs is the location of propert$. ncome on cop$right being used in the &hilippines is an income "ithin because the tax situs is the place "here the intangible is used. .. ANSWER: D 9ross income, &hils. 8ess; <xpenses, &hils. 9ross income, M.:. 1N+),))) x .)3 8ess; <xpenses, M.: 1N1),))) x .)3 Total 8ess; Mnallocated expense Taxable income !ate of tax 1%))=3 ncome tax (. ANSWER: C 9ross income, &hils. 8ess; <xpenses, &hils. Net income & %,))),))) 1,%)),))) >)),))) &%,))),)) ) 1,%)),))) 1,%)),))) .)),)))

>)),))) >)),))) 1,')),))) +),))) 1,(*),))) +), .*1,)))

Page 70

8ess; Allocated deductions E+),))) x 1%,))),)))G%,))),))) L1,%)),)))3F Taxable income !ate of tax ncome tax '. ANSWER: C 9ross income, &hils. !ate of tax @inal tax *. ANSWER: B 9ross income, &hils. 8ess; <xpenses, &hils 9ross income, M.:. 1N+),))) x &.)3 8ess; <xpenses, M.:. 11),))) x &.)3 Total 8ess; Hther deductions Mnallocated business expense &ersonal exemption Taxable income >. ANSWER: C 9ross income, &hils. 8ess; <xpenses, &hils. Allocated deductions E+),))) x 1%,))),)))G+,%)),)))F Taxable income before personal exemptions 8ess; &ersonal exemption Basic personal exemption Additional exemption 1%(,))) x %3 Taxable income =. ANSWER: D Taxable income before personal exemptions 8ess; &ersonal exemption Taxable income 1). ANSWER: A Taxable income before personal exemptions 8ess; &ersonal exemption Taxable income 11. ANSWER: B &%,))),))) 1,%)),))) 1,%)),))) .)),))) +),))) (),)))

1>,*( ) *>1,%() +), %+.,+*(

%,))),))) +), ')),)))

>)),))) >)),))) 1,')),))) >),))) 1,(%),)))

%,))),))) 1,%)),))) 1>,*() 1,%1>,*() *>1,%() (),))) (),))) 1)),))) '>1,%()

*>1,%() (),))) *+1,%()

*>1,%() (),))) *+1,%()

Page 71

9ross income !ate of tax ncome tax due 1final tax3 1%. ANSWER: B ncome "ithin 11(),))) L %(),))) L ')),)))3 ncome "ithout 1%)),))) L +)),))) L 1)),)))3 Total income from %))( to %))* Bividends received 8ess; ncome "ithin 11,))),)))G1,')),)))3 x & +(,))) ncome "ithout 1+. ANSWER: C ncome from sources "ithin ncome from sources "ithout Total income &ercentage of income "ithin O 1*)),)))G%,))),)))3

%,))),))) %(, ()),)))

1,))),))) ')),))) 1,')),))) +(,))) %1,>*( 1+,1%(

& *)),))) 1,+)),))) %,))),))) +(,

Note; :ince the income derived from sources "ithin during the last three $ears prior to the declaration of dividend is less than (), of the total gross income, the entire amount of dividend received b$ 6ar$france is considered as income "ithout. 1.. ANSWER: A ncome "ithin ncome "ithout Total income &ercentage of income "ithin 11,>)),)))G%,))),)))3 Bividends received 8ess; ncome "ithin ncome "ithout & 1,>)),))) %)),))) %,))),))) =), +(,))) +(,))) ) .

Note; :ince the income derived from sources "ithin during the last three $ears prior to declaration of dividend is more than >(, of the total gross income, the total amount of dividend is considered as income "ithin. 1(. ANSWER: A Bepreciation of apartment house, 9eneral :antos Ait$ <xpenses on sale of lot, &hilippines <xpenses on sale of land, Aanada *(,))) %(,))) 1(,)))

Page 72

Total Add; Allocated expense 1%,))),)))G+,))),))) x +),)))3 Beductible expense PROBLEM 10 4 1 ANSWER: B . @astfood chain, &hilippines !o$alties, Baguio Ait$ Bividend, Painan Aorporation, domestic Bividend, Tsi Tsa Aorporation, foreign 1'G1) x .),)))3 !ent income, Baguio Ait$ ncome "ithin % . ANSWER: D

11(,))) %),))) 1+(,)))

()),))) (),))) %(,))) %.,))) '),))) '(=,)))

@astfood chain, :ingapore !o$alties, 7ongCong Bividend, Tsi Tsa Aorporation, foreign 1.G1) x .),)))3 ncome "ithout + . ANSWER: A ncome "ithin ncome "ithout Total 8ess; Beductions <xpenses, fastfood chain, &hilippines <xpenses, fastfood chain, :ingapore Mnallocated expenses Bepreciation of building Taxable income . . ANSWER: B ncome "ithin 8ess; Beductions <xpenses, fastfood chain, &hilippines Allocated expenses 1(G1( x (),)))3 Bepreciation of building Taxable income

1,))),))) 1)),))) 1',))) 1,11',)))

'(=,))) 1,11',))) 1,**(,))) +(),))) ()),))) (),))) +',)))

=+',))) >+=,)))

'(=,))) +(),))) 1',''* +',))) .)%,''* %(',+++

Page 73

EXERCISES 11 1 1. The refrigerator o"ned b$ 9erong is a capital asset because it is a personal propert$ "hich is not being used in business operation. The refrigerators o"ned b$ Andong are business assets because the$ form part of the inventor$ of the business at the end of the taxable $ear or are held for sale in the ordinar$ course of business. The basis of the car is the acquisition cost of &1%),))) plus the incidental expenses such as &%),))) for bod$ repair and another &%),))) for repainting. 7ence, the total cost of the car is &1'),))). a. The basis of the trucC in determining depreciation is the fair value at the time of the transfer "hich is &1%),))). The &1(),))) cannot be used as the basis because that is the cost "hen the propert$ "as being used for personal activities. The reali4ed loss in the problem is &%),))) computed as follo"s; :elling price 8ess; BooC value @air value Bepreciation 8oss on sale .. & >),))) & 1%),))) %),)))

%.

+.

b.

1)),))) 1 %),)))3

The gain derived b$ <nciang from the sale of the lots is classified as an ordinar$ gain because b$ subdividing the land "ith the intention of selling them to the public, she has characteri4ed the land into business asset. The first da$ that an asset purchased on 5anuar$ %1, %))> and have a holding period of more than one $ear is 5anuar$ %%, %))=, computed as follo"s; Year %))> 1 %))= 6onth 1 QQ 1 Ba$ %1 1 %%

(.

'.

To allo" the deduction of capital losses from ordinar$ income "ould result to reduction of taxable income of the taxpa$er through personal, non-business related expenses "hich "ill result in substantial losses of revenue to the government. The capital loss deductible from the capital gain during the current $ear is &1(,))). The net capital loss of &1),))) cannot be deducted from the net other income because of the rule that capital losses are deductible onl$ from capital gain. 8ong-term capital gain 11),))) x (),3 :hort-term capital loss, limit Net capital gainGloss & (,))) 1 (,)))3 -

*.

Page 74

&a$able 2 net capital loss carr$-over 1(,)))1(,)))3

11),)))3

Next $ear, the maximum amount of capital loss that can be carried over is &>,))) onl$ instead of &1),))) because of the limitation that capital losses to be carried over should not exceed the amount of net income during the $ear in "hich the loss "as sustained. This is based on the assumption that the capital gain in the succeeding $ear "ill be at least equal to &>,))). >. Asset A B A T =. :ales &rice (%,))) 1*,))) +*,.)) H T A 8 : Basis .),))) %),))) +),))) :hort-Term Aap. 9ainG8oss 1 +,)))3 1 +,)))3 +,*)) =,*)) 8ong-term Aap. 9ainG8oss ',))) Net Aapital 9ainG8oss ',))) 1 +,)))3 +,*)) ',*))

6iCe should consider "hether the propert$ is a capital or business asset. f it is included in the enumeration of the definition of capital asset, then it is a business asset and therefore the gain or loss on sale shall be added to or deducted from the gross income of 6iCe, as the case ma$be. 7o"ever, if it is a capital asset 6iCe has to consider the holding period and determine "hether or not there "as a capital gain or loss on the sale of the car. The sale tooC place seven months after inheriting the propert$. Therefore, the holding period is short-term. 6oreover, a capital gain tooC place on the sale of the propert$. 6iCe should, therefore, consider "hether there "as a capital gain in the $ear of sale because he cannot claim the capital loss as deduction from the ordinar$ income.

1) . Business income 8TA9 1%),))) x (),3 :TA9 1 %),))) x 1)),3 Total 8ess; &ersonal exemption Taxable income 11 . a. Mnadjusted taxable income 8TA9 11.,))) x (),3 Total 8ess; 8TA9 erroneousl$ treated as ordinar$ gain Adjusted taxable income b. Mnadjusted taxable income Add; 8TA9 11.,))) x (),3

1a3 =),))) 1),))) QQQQQ 1)),))) %(,))) *(,)))

1b3 =),))) %),))) 11),))) %(,))) >(,))) .),))) *,))) .*,))) 11.,)))3 ++,))) .),))) *,)))

Page 75

Aorrect taxable income Note;

.*,)))

The capital gain "hich "as erroneousl$ considered as capital loss has not been claimed as deduction due to an absence of a capital gain. Therefore, such capital loss cannot be added bacC for purposes of computing the correct amount of taxable income. c. The carr$-over from the preceding $ear shall appl$ in Aases A and B because 6arsha has &*,))) capital gain declared during the $ear. t should be noted that capital losses can be carried over onl$ if there are capital gains. Thus, their taxable income shall be reduced b$ &%,()) representing the net capital loss carr$ over 1NA8AH3. :elling price 1 %),))) x 1(3 !ate of tax Aapital gains tax 1final tax3 :ame "ith ans"er in 1a3. +)),))) ', 1>,)))

1% .

a.

b. c.

f the land is sold in favor of the government, the seller has the option to 113 report income based on the ', final tax rule, or 1%3 to consider the gain or loss on sale as ordinar$ income subject to graduated rates of tax.

1+ .

:$lvia should consider "hether the sale of the residence is a sale of a capital asset or not. :he should also determine "hether the excess of the selling price over the cost of the construction is subject to tax or not. 6oreover, she must also verif$ if the sale is subject to the ', final tax or not. 8astl$, she should find out if the purchase of a ne" residential house "ill subject her to a pa$ment of income tax.

1. .

a.

The sale of the principal residence b$ 9alog to H$ang is not subject to income tax because the proceeds of the sale "ere to be used in acquiring a ne" residence. 7o"ever, he shall deposit in escro" an amount of &=),))) "hich is equivalent to ', of the 4onal value. The unutili4ed portion of the proceeds from the sale of the residence is subject to tax "hich is computed as follo"s; @air marCet value / Mnutili4ed portion 11,))),))) 2 >)),)))G1,))),)))3 Taxable portion !ate of tax @inal tax 1,()),))) %), +)),))) ', 1>,)))

b.

c.

The unutili4ed portion of the old residence shall not be carried over to the cost of the ne" residence. 7ence, the ne" residence "ill cost &>)),))).

Page 76

1( .

Aase 1 % + .

Net ncome 11),))) 1)),))) >),))) =),)))

:TA9 1:TA83 +),))) 1 (),)))3 1 +*,)))3 1 1(,)))3

8TA89 18TA83 ..,))) '(,))) +),))) 1 =,)))3

BeductibleG Nondeductibl e 1(),)))3 1+),)))3 -

Taxable income 1>.,))) 11(,))) >),))) =),)))

Note; f the taxpa$er is a corporation, there is no holding period. 1' . Net income nterest Aapital gain 2 = months Aapital gain 2 1( months 1no holding period3 Aapital loss 2 = months, limit Taxable income 1* . a. b. c. d . Hrdinar$ Hrdinar$ Hrdinar$ Hrdinar$ 1> . a. b . c. d . e. f. g . h . i. j. Before Hrdinar$ Hrdinar$ Aapital Hrdinar$ Hrdinar$ Hrdinar$ Hrdinar$ Hrdinar$ Hrdinar$ Hrdinar$ %))* 1,))) ()) (,))) 1(,)))3 1,()) After Hrdinar$ Hrdinar$ Aapital Hrdinar$ Hrdinar$ Hrdinar$ Aapital Aapital Aapital Hrdinar$ %))> %,))) %)) (,))) QQQQ *,%))

1= .

The income of &1(),))) 11,*(),))) 2 1,')),)))3 on sales of shares of stocC "hich are traded in the stocC exchange is exempt from income tax but subject to a percentage tax on business at a rate of R of 1, of the gross selling price. 7o"ever, the net capital gain of &.)),))) on the sale of stocCs, "hich are not traded in the stocC exchange are subject to final "ithholding tax. The follo"ing is the computation of its tax liabilit$; Tax on & 1)),))) x (, +)),))) x 1), @inal tax (,))) +),))) +(,)))

Page 77

EXERCISE 11 2
1. %. ANSWER: B f the real propert$ is used in the trade or business, it is classified as an ordinar$ asset. ANSWER: D Accounts receivables are not included in the enumeration for ordinar$ assets. Therefore, it is classified as a capital asset. ANSWER: D ANSWER: C 8ots for rent fall under Ireal propert$ used in the trade or business.J Therefore, it is classified as an ordinar$ asset.

+. ..

EXERCISES 11 3.1 1. %. ANSWER: C Hrdinar$ gains are those gains derived from the sale or exchange or ordinar$ assets. ANSWER: A ?henever, the holding period of a capital asset b$ an individual exceeds 1% months, it shall be considered as long-term and a gain or loss to be reali4ed on the sale or exchange of the capital asset is (), onl$. ANSWER: A f the taxpa$er is a corporation, the rule on holding period "ill not appl$. 7ence, the actual amount of gain or loss on the sale shall be recogni4ed. ANSWER: C ?orthless shares of stocC are classified as capital gain or capital loss as the case ma$be, even if no actual sale of capital assets tooC place. ANSWER: C ncome on installment sales are pa$able "ithin +) da$s 1not ') da$s3 from receipt of ever$ collection from the customerGdebtor. nitial pa$ment includes all the pa$ments received b$ the taxpa$er from the bu$er in the $ear of sale, "hile do"npa$ment pertains onl$ to the pa$ments received b$ the taxpa$er from the bu$erGcustomer at the time of sale. nstallment pa$ment of tax shall be allo"ed if the initial pa$ment does not exceed %(, of the selling price. '. ANSWER: B The rule on carr$-over of the net capital loss to the succeeding $ear does not appl$ to a corporation.

+.

..

(.

Page 78

*.

ANSWER: D :elling price 8ess; BooC value Aost 8ess; Accumulated depreciation %))> %,))) %))= .,))) 9ain on sale ',))) +.,))) %,))) & 1>),))) &1)),)) ) (),)) ) 1(),))) +),))) (), 1(,))) & & +',))) & .),)))

>.

ANSWER: C 8iquidating dividend, %)1) 8ess; nvestment, %))> :hare in %))= income 9ain !ate 1long-term3 Taxable gain

=.

ANSWER: D Ao-o"nerships are not taxable on gains or income derived from its operations or transactions entered into. Thus, the gain on sale of the vacant lot is not taxable. 7o"ever, the co-o"ners are liable on the income derived b$ them from the co-o"nership. ANSWER: B 8oss on short sales, option loss, and loss on liquidation of partnership are considered as capital losses. The$ are deductible onl$ from capital gains because of the basic rule that capital losses are deductible onl$ from capital gains. 8oss on "ash sales are not deductible "hether from capital gains or ordinar$ gains.

1).

11.

ANSWER: C :elling price 8ess; Aommission 1&1>),))) x 1,3 Balance 8ess; Aost &urchase price Aommission 8oss !ate 1long term3 & 1>),))) 1,>)) 1*>,%)) &%(),)) ) (,)))

%((,))) 1 *',>))3 (),

Page 79

8ong-term capital loss EXERCISES 11-3.2 1. ANSWER: C Net profit from operations :ale of capital assets; Aapital gain Aapital loss ncome to be reported %.

1 +>,.))3

& (),))) & >,))) 1 (,)))3 +,))) (+,)))

ANSWER: D A sale of real propert$ "hich is classified as a capital asset is subject to ', capital gains tax based on the selling price or fair marCet value, "hichever is higher, regardless of "hether the sale resulted to a gain or a loss.

EXERCISES 114.1: 1. ANSWER: C 9ains on sale or exchange of shares of stocC "hich are not listed and traded in the stocC exchange are subject to final income tax based on the net capital gain. 7o"ever, if the stocCs are listed and traded, the gain derived from the sale or exchange are not subject to income tax. 7o"ever, the$ are subject to percentage tax. ANSWER: C ANSWER: B ANSWER: C Not subject to income tax but subject to business tax. (. '. ANSWER: D ANSWER: B 9ross selling price 1'( x 1),)))3 8ess; Aost 1() x 1),)))3 Net capital gain Tax on &1)),))) x (, (),))) x 1), @inal tax *. ANSWER: A 9ross selling price 1&'( x 1),)))3 & & (,))) (,))) 1),))) & '(),))) ()),)) ) 1(),)) )

%. +. ..

Page 80

8ess; Aost 1&() x 1),)))3 Net capital gain Tax on &1)),))) x (, (),))) x 1), @inal tax >. ANSWER: A :ame solution "ith No. ' =. ANSWER: A :ame solution "ith No. ' 1 ) ANSWER: A :ame solution "ith No. ' EXERCISES 114.2 1. ANSWER: B Sonal value 1higher3 !ate of tax @inal tax %. ANSWER: D The same is exempt from income tax. +. ANSWER: B :elling price 8ess; Mtili4ed portion Mnutili4ed portion Taxable portion 1()),)))G%,))),))) x %,()),)))3 !ate of tax @inal tax .. ANSWER: A 9ross selling price 8ess; Mtili4ed portion & (,))) (,))) 1),)))

'(),))) ()),)) ) 1(),)) )

&%,()),))) ', 1(),)))

%,))),)) ) 1,()),)) ) ()),))) '%(,))) ', +*,()) (,))),)) ) %,()),))

Page 81

Mnutili4ed portion Taxable portion 1%,()),)))G(,))),))) x & (,))),)))3 !ate of tax @inal tax (. ANSWER: A :elling price 1higher3 !ate of tax @inal tax ANSWER: B Sonal value 1higher3 1&*)) x ())3 !ate of tax @inal tax *. ANSWER: B 9ross selling price !ate of tax @inal tax >. ANSWER: B Net income :ale of ordinar$ assets; Apartment house 5e"elr$ in a je"elr$ store Transportation equipment :ale of capital asset; 5e"elr$ for personal use 1.,%)) x 1)),3 &ersonal car 1%),))) x (),3 Net capital loss Net income before personal exemption =. ANSWER: B Net income Net capital loss, %))> 8imit 1not exceeding net income in %))>3 Net capital loss carr$ over Taxable income before personal exemptions & (,>)) (,))) 1 (,)))3

) %,()),)) ) %,()),)) ) ', 1(),))) '>),))) ', .),>))

'.

& +(),))) ', %1,)))

& +)),))) ', 1>,)))

& (,))) & +(,))) >,))) 11),)))3 & .,%)) 11),)))3 1 (,>))3

++,)))

- . +>,)))

&1+),)) ) QQQQQQ 1+),)))

Page 82

1) ANSWER: D Net income Hther income; Apartment house Transportation equipment Taxable income & (,))) & +(,))) 11),)))3 %(,))) +),)))

EXERCISES 12 A.1
1. The pa$ment of salar$ to the emplo$ees in her clinic constitutes deductible expense "hile the salaries of domestic helpers in her residence are personal expenses, and therefore, not deductible from her income. The purchase value of the land and the old vacant "arehouse are capitali4able as "ell as the expenses for the repair of roofing and electrical connections, "hile the rest of the expenses are deductible from gross income. The expenses incurred in the subscription of journals and the purchase of booCs and rene"als of license are deductible. 7o"ever, the fees for the seminars are not allo"able deductions because these are subject to reimbursement b$ the school. Mnder :ec. '= of !ev. !eg. No. %, as amended, the follo"ing professional expenses are deductible; :ec. '=. A professional ma$ claim as deductions the cost of supplies used b$ him or in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in maCing professional calls, dues to professional societies and subscriptions to professional journals# the rent paid for office rooms, the expenses of the fuel, light, "ater, telephone, etc. used on such offices, and the hire office assistants. Amounts currentl$ expended for booCs, furniture and professional instruments and equipment, the useful life of "hich is short, ma$ be deducted. But amounts expended for booCs, furniture and professional instruments and equipment of a permanent character are not allo"able deductions. Based on the foregoing, onl$ the premiums paid for malpractice insurance is deductible. (. The rule is; I ncome from illegal transactions are taxable# legitimate expenses of illegal businesses or transactions are deductible, "hile illegal expenses incurred are not deductible, "hether the business is legitimate or illegitimate.J Aonsequentl$, Bave0s taxable income from operation of jueteng is computed as follo"s; !emittances 8ess; Beductions :alaries Bepreciation &a$ments to bettors & 1%,))),))) ()),))) +(),))),))) *%),))),)) )

%.

+.

..

+'%,()),))

Page 83

Taxable income

) +(*,()),)) )

The bribes given to politicians and la" enforcers are not deductible because the$ are not legitimate expenses. The$ constitute Icorruption of public officersJ "hich is a criminal act. '. &lane ticCet Taxi fares 6eals 7otel bills 8aundr$ and other expenses Total deductible traveling expenses 6eals and lodging 7otel accommodation ?ines and liquors Total entertainment expenses .,()) 1,%)) +,()) .,=)) ')) 1.,*)) .,))) .,))) %,))) 1),)))

*.

>.

No. the contribution given is not directl$ attributable to the development, management, operation andGor conduct of business of 8acC$ Trading. @urthermore, it ma$ even be considered as a bribe. The %), CicCbacC to the officials of the government is nondeductible. The bribe mone$ given to the inspectors so that it "ill not be strict in compl$ing "ith the requirements of the contract is not also deductible.

=.

1) The school administration can choose bet"een 113 capitali4ing the cost of the construction and claim the annual depreciation as deduction from income, or 1%3 to claim the entire amount of &+ million as expense and deduct from its income in the $ear of completion of the construction of the building. n either "a$, the school administration should choose the option, "hich "ill give the maximum amount of tax benefit. 11 . !eplacement of roof !epainting of interior "alls !eplacement of electrical "iring nstallation of doorCnobs !eplacement of broCen glass or "indo"s 1% . 1+ . - Aapital - Aapital - Aapital - <xpense - <xpense

No, because the proceeds of the loan "as used for the purchase of a car "hich is for personal use of Aath$. norder that the interest expense can be allo"ed as deduction, the purpose in bu$ing the car must be for use in business. nterest expense %>(,)))

Page 84

8ess; nterest income 11(,))) x .%,3 Beductible interest 1. . a. In !"!# $# "!a !% a# an !&'!n#!

',+)) %*>,*))

nterest expense 1()),))) x 1>, x 11.(G1%3 8ess; nterest income subjected to final tax 1(),))) x .%,3 Beductible interest 1%))>3 (. In !"!# $# "!a !% a# a )a'$ a* !&'!n%$ +"! Aost of equipment Add; nterest on loan 1()),))) x 1>,3 Total cost Bepreciation as deduction in %))> 1 (=),))) G ( x 'G1%3 1( . 1' .

>',%() %1,))) '(,%() ()),))) =),))) (=),))) (=,)))

f @arrah is a cash method taxpa$er, she is allo"ed to claim the interest as deduction in %))=, the $ear in "hich the indebtedness "as paid. 7o"ever, if she is on accrual basis, she must claim the deduction in %))>. No, because the &+(),))) is an interest on loan bet"een related taxpa$ers. ?hen a stocCholder o"ns more than (), of the outstanding stocC of the corporation, then the stocCholder and the corporation are considered to be related taxpa$ers. n such a case, interest is not deductible from gross income The entire amount of percentage taxes refunded to the corporation is taxable because the entire amount "as allo"ed as deduction in %))>. The refund of donor0s tax is not taxable because it is not allo"ed as deduction from gross income.

1* .

1> .

a. !eal propert$ tax on apartment houses b . c. d . e. f. g . !eal propert$ tax on residential house @oreign income tax claimed as tax credit Kalue-added tax paid b$ sole proprietorship ncome tax paid b$ compan$ :pecial assessment 8ocal business taxes @oreign income tax claimed as deduction ncome, :pain

- deductible - not deductible - not deductible - not deductible - not deductible - not deductible - deductible

1= .

a.

%)),)) )

Page 85

ncome, &hilippines Total 8ess; Beductions &ersonal exemptions Tax paid, :pain Taxable income b. @oreign tax claimed as tax credit ncome, :pain ncome, &hilippines Total 8ess; Beductions &ersonal exemptions Taxable income Tax on &()),))) (),))) x +%, ncome tax 8ess; Tax credit Tax paid, :pain 8imit 1%))G'%) x 1.1,)))3 Aredit allo"ed ncome tax pa$able after tax credit %) . Taxable income, &hilippines Taxable income, M: Taxable income, 7ongCong Total !ate ncome tax *)),))) >)),))) %),))) .(,.>. (),))) %),))) (),))) %),))) %),)))

.%),)) ) '%),)) ) =),)) ) (+),)) ) %)),)) ) .%),)) ) '%),)) ) *),)) ) ((),)) ) 1%(,)) ) 1',)) ) 1.1,)) )

%),))) 1%1,)) ) '(),))) 1,()),)) ) %,1(),)) ) +), '.(,)))

Page 86

8ess; Tax credit M: tax paid .),))) 8imit 1*))G%,1() x '.(,)))3 %1),))) Beductible 1lo"er3 7ongCong tax paid (),))) 8imit 1>))G%,1() x '.(,)))3 %.),))) Beductible 1lo"er3 Total credits, 1st limitation %nd limitation 11,()) G %,1() x '.(,)))3 Aredit allo"ed 1lo"er3 ncome tax due
EXERCISES 12-B.

.),))) (),))) =),))) .(),)) ) =),))) (((,)))

1. Hne of the requisites for deductibilit$ of losses is that the loss must be incurred in connection "ith the business or profession of the taxpa$er. Neither the propert$ lost nor the purpose of Tango in going to 6anila is connected "ith business. 7e "ent to 6anila just to spend a vacation there. Aonsequentl$, the &1),))) is not deductible from his business income. %. Asset A; Total Bestruction Beductible loss; BooC value before casualt$ 8ess; nsurance recover$ Asset B; &artial Bestruction Beductible loss; BooC value before casualt$ BooC value after casualt$ 8oss on booC value !eplacement cost BooC value 1lo"er3 8ess; nsurance recover$ Asset A; &artial Bestruction BooC value before casualt$ BooC value after casualt$ 8oss on booC value !eplacement cost !eplacement cost 1lo"er3 8ess; nsurance recover$ Total loss on destruction Add; 8oss due to temporar$ closure Total deductible loss

&%(,))) 1),)))

1(,)))

1),))) %,))) >,))) 1(,))) >,))) (,))) >,))) 1,))) *,))) ',))) ',))) +,)))

+,)))

+,))) %1,))) 1.,))) +(,)))

+. A.. n %))>, 9reg is not entitled to claim loss as deduction considering that there "as alread$ an assurance that the value of the loss suffered of &%(),))) "ill be totall$ paid b$ the

Page 87

pesticide manufacturer. 6oreover, he cannot claim the value of the damage because it "as alread$ paid. B. n this case, 9reg is entitled to claim &%+),))) 1&%(),))) 2 %),)))3 deduction from his income because onl$ &%),))) "as paid b$ the manufacturer. 7e is entitled to claim the losses in the $ear the amount is finall$ determined, provided that "ritten notice has been submitted to the B ! in not less than +) but not more than =) da$s from the date of discover$ of the loss. C.. f the announcement "as made onl$ b$ the pesticide manufacturer in late %))=, 9reg "ould be entitled to claim the losses of &%(),))) in %))>. 7o"ever, upon receiving the reimbursement, the &%(),))) "ill be reported as income in his income tax return in the $ear of receipt. .. A. No loss is deductible in %))> because the plantation "as totall$ destro$ed onl$ the follo"ing $ear. Hne requisite for deductibilit$ of losses is that it must be sustained in a closed and completed transaction. B. n %))=, the loss has alread$ been sustained in a closed and completed transaction. 7ence, it is alread$ deductible. C. The loss is not deductible because it "as onl$ reported after more than =) da$s from the date of the discover$ of such loss. (. Pell$ can validl$ claim the deduction in the current $ear even if the burglar$ "as discovered onl$ on 5anuar$ 1 of the follo"ing $ear 1five da$s after Becember %*3. The amount of loss deductible is &(),))) "hich is composed of the cost of the equipment and fixtures of &.(,))) and the cash valued at &(,))). '. a. !evenue 8ess; <xpenses 8oss on business :alar$ 8ess; &ersonal exemptions Taxable income b. !evenue 8ess; <xpenses Net operating loss Notes; 1. The dividends and interest on time deposit are not included in the computation because the$ are passive income subject to final tax. %. The capital loss is deductible onl$ if the taxpa$er has a capital gain. &'(,))) =),))) 1%(,)))3 &'),))) %),))) .),))) &'(,))) =),))) %(,)))

Page 88

+. The loss of &%(,))) in operation cannot be deducted from the salar$ because losses are not allo"ed as deduction from compensation income. *. Business income ?agering transactions; ?agering gains ?agering losses Net "agering loss 8ess; &ersonal exemption Taxable income Note; The net "agering loss of &%%(,))) cannot be deducted from the business income because "agering losses are deductible onl$ from "agering gains. >. a. Aost of building To 5ose Allan b. Allocated price of the old building Bemolition cost Kalue of scrap 3 Added to the cost of the land Allocated price of the land Aost of the land to 5ose c. ('(,))) 1,))),))) 1,('(,))) .,))),))) +,()),))) ()),))) >),))) 1 1(,))) .*(,))) *)),))) 1%%(,)))3 %),)) ) %+),)) ) %(),)) )

Amount of deductible loss To 5ose n the case of 5ose, no loss is deductible because the cost of the old building plus the demolition cost minus the sale of scrap is added to the cost of the land. n the case of Allan, the deductible loss is computed as follo"s; To Allan BooC value of the old building Bemolition cost Kalue of scrap 3 Beductible loss 1,(1+,))) %.,))) ',))) 1>,))) 1,()),))) 1>,))) 1 (,)))

=. Total value of t$pe"riters 1&.,))) x '3 8ess; :elling price 1&1,))) x '3 8oss of useful value

Page 89

1). Nits cannot deduct the & (,))) "hich is the result of usual fluctuation of the price of stocCs in the marCet. 7o"ever, if she sells the stocCs for & ..,))), she is entitled to claim & ',))) 1(),)))-..,)))3 deduction from her income because it is the amount that she actuall$ suffered "hen the stocCs "ere disposed of. f the stocCs are sold at &((,))) resulting to a gain of &(,))) 1((,))) 2 (),)))3, the gain is not subject to income tax because sales of shares of stocC "hich are traded in the stocC exchange are not subject to income tax. The$ are subject to business taxes Cno"n Iother percentage taxes 2 stocC transaction tax.J 11. All services rendered can onl$ be considered as bad debts and deductible from gross income of taxpa$er if it has alread$ been declared as income. n the case of <laine since she is using cash method of accounting, she "ill onl$ report income from services upon receipt of pa$ment. Aonsidering that she has not $et received the cash pa$ment, the income has not $et been declared. 7ence, she cannot deduct the & +),))) as bad debt. 1%. Yol$ is not entitled to claim bad debt as deduction from her income. Hne of the requisites for its deductibilit$ is that the bad debts must not be sustained in a transaction entered into bet"een the members of the same famil$ or related taxpa$ers. :ince 7o"ard, the debtor, is a brother of Yol$, the creditor, the transaction is considered as entered into bet"een members of the same famil$. Aonsequentl$, the bad debt is not deductible from her gross income. n the instant case, filing a case in court is ver$ impractical. @irstl$, the$ "ould be filing numerous cases in court just for small amount of claims. :econdl$, even if the$ "in the case, the school could not expect that the students could afford to pa$ the judgment mone$. ?herefore, the requirement of taCing reasonable steps has alread$ been complied even if no cases "ere instituted in court. 1.. Mnder the tax benefit rule, the recover$ of bad debts previousl$ deducted is taxable if at the time it "as claimed as deduction from gross income, it resulted to a reduction in the tax pa$able b$ the taxpa$er. f not, its recover$ is not also taxable. n the instant case, since the corporation had suffered loss of &1(),))) before bad debt, the deduction of the latter did not reduce its tax liabilit$. 7ence, the recover$ of & '(,))) is not taxable to the corporation. 1(. A 2 &ropert$ "ith useful life of less than one 113 $ear B 2 nventories or stocC in trade A 2 ncidental repairs B 2 Mrgent repairs on car "hich "as bumped - No - No - No - No

1+.

EXERCISES 12-C.1
1. The corporation elects to expense ! T B 8aborator$ supplies and materials & .),)))

Page 90

8aborator$ equipment Mtilities and rent :alaries Total research and development expense %.

'),))) (),))) (),))) %)),)))

The corporation elects to defer expenses and amorti4e it over a period of ') months; None of the expenses incurred above are deductible. The deduction shall commence in 5anuar$, %))= the $ear in "hich the benefits are first reali4ed. %))= 2 Total ! T B expenditures Bivide b$ amorti4ation month 6onthl$ amorti4ation %)),))) ') +, +++ (,))) (,))) 1),))) 1,))), ))) +(),))) '(),))) %)),)) ) .(),))) &%),)) ) & %),))) %%,()) %),))) .),)) ) .1),)))

%.

Amount paid during the taxable $ear Amount paid to cover past pensions 1(),)))G1)3 Total amount deductible :ales 8ess; Aost of :ales 9ross income 8ess; Beductions 1except contributions3 Taxable income before contributions 8ess; Aontributions Beductible in full :ubject to limit, actual 8imit 1&.(),))) x (,3 Beductible 1lo"er3 Taxable income

+.

EXERCISES 12 1 1. ANSWER:B The representation expenses and advertising expenses are incurred in connection "ith the business. 6oreover, it is apparent that the$ are ordinar$ and necessar$. The premiums paid on life insurance of the emplo$ee is deductible because the beneficiaries are the heirs of the emplo$ee. f the beneficiar$ is the corporation, "hether directl$ or indirectl$, the amount of premiums paid are not deductible.

Page 91

The contributions to barrio fiestas "ere not given to the government, to organi4ations or institutions specified la". %. ANSWER: D The premium pa$ments on the polic$ "hich designates the corporation as the beneficiar$ are not deductible because the corporation is the direct beneficiar$, "hile the pa$ments on the polic$ appointing the &resident0s "ife as the beneficiar$ are deductible. The proceeds from Ce$men insurance on the life of the &resident are not taxable income because the$ are considered more as an indemnit$ rather than as gains or profits to the corporation, "hile the proceeds "hich are pa$able to the "ife is not taxable to the "ife because it is also considered as an indemnification for the loss of her husband. +. ANSWER: D :alaries of domestic servants and ordinar$ repair of personal car are personal expenses. The$ are not incurred in connection "ith the trade or business. &rovision for doubtful accounts are not deductible. The deductible bad debts are those "hich have alread$ been "ritten-off. .. ANSWER: D

8egal expenses are al"a$s deductible from gross income regardless of "hether the business is legal or illegal. Travelling expenses incurred b$ emplo$ees from office to customer0s place of business and bacC is deductible as transportation expenses. &remiums paid on insurance of the Board &resident are deductible because the corporation is not the beneficiar$, directl$ or indirectl$. The cost of expanding the facilities of a hospital is not deductible from gross income. (. ANSWER: B The amount paid for the premiums on the life insurance polic$ is not deductible because the corporation is the direct beneficiar$ of the insurance polic$. '. ANSWER: C Beductible expense 11(),))) x *), x 'G1%3 *. ANSWER: C (%,())

The car received b$ the couple is purel$ a gift given to them b$ 6r. 8ucero. t is not an income to them. The value of the car given b$ 6r. 8ucero is not connected "ith the business of the corporation. Therefore, it is not deductible from gross income. > ANSWER: D

Page 92

The rest of the expenditures had not been incurred in carr$ing on the trade or business. Therefore, the$ cannot be considered as ordinar$ and necessar$ expenses for "hich deduction ma$ be claimed. :uch expenses "ere personal in nature and are not deductible from the gross income. =. ANSWER: C Hnl$ the amount corresponding to the pa$ment for loss of compensation income is taxable. 1). ANSWER: D Although the operation of the gambling den is illegal, the hiring of personnel and pa$ing their salar$ is not illegal.

EXERCISE 12 2. IN,ERES,
1. ANSWER: D nterests paid b$ a stocCholder of a corporation and b$ a son to his father are interest pa$ments b$ one to another member of the same famil$. The$ are not deductible. %. An#-!": A nterest expense 8ess; ncome subjected to tax 1%(,))) x ++,3 Beductible interest expense +. An#-!": B The interest paid on donor0s tax is not deductible because it is not connected "ith trade, business or profession. The interest on income tax is deductible because it is not expressl$ disallo"ed b$ la" to be deducted from taxpa$er0s gross income. .. An#-!": D nterest expense incurred & 1),))) %),))) >,%() 11,*()

EXERCISE 12 3. ,AXES
1. ANSWER: B

Page 93

The special assessment refers to taxes assessed against local benefits of a Cind tending to increase the value of the propert$ assessed. The special assessment, estate tax and the donor0s tax are specified in the code as not deductible from gross income. 2. ANSWER: B +. ANSWER: C Nonresident citi4ens are not entitled to tax credit for taxes paid to foreign countr$ because the$ are taxable on income derived from sources "ithin the &hilippines onl$. The income "ithout are not taxed in the &hilippines. Therefore, the harshness of double taxation that is being prevented is not present. .. ANSWER: D As previousl$ stated, nonresident aliens, foreign corporations and resident aliens "ith income derived solel$ from sources "ithin the &hilippines are not allo"ed to claim tax credit. (. ANSWER: A 9ross income, &hils. 8ess; Beductions 9ross income, IAJ foreign countr$ &.)),))) 8ess; Beductions %)),))) 9ross income, IBJ foreign countr$ +)),))) 8ess; Beductions, IBJ foreign countr$ %)),))) Taxable income !ate of tax ncome tax 8ess; Tax credit IAJ. tax paid >),))) 8imit 1%))G()) x 1(),)))3 '),))) Aredit allo"ed 1lo"er3 IBJ tax paid %),))) 8imit 11))G()) x 1(),)))3 +),))) Aredit allo"ed 1lo"er3 Total credits, 1st limitation %nd limitation 1+G( x 1(),)))3 Aredit allo"ed 1lo"er3 ncome tax due 1,))),))) >)),))) %)),)) )

%)),)) ) 1)),))) +)),))) ()),))) +), 1(),)))

'),)))

%),))) >),))) =),))) >),))) *),)))

Page 94

6. ANSWER: B Net income, &hilippines Net income, Mnited :tates Total net income !ate of tax ncome tax M. :. tax paid 8imit 1+))G())3 x 1(),))) Aredit allo"ed 1lo"er3 *. ANSWER: A 11),))) =),)))

&%)),))) +)),))) ()),))) +), 1(),)))

=),)))

Transfer taxes refer to donor0s taxes and estate taxes. These are not allo"ed as deduction under the code. >. ANSWER: D

EXERCISE 12 4
1. ANSWER: A The proceeds from insurance in the amount of &+,()),))) is not taxable because it is merel$ an indemnification of the loss suffered. %. ANSWER: D The taxpa$er is allo"ed to claim a deductible loss of &()),))) 1.,))),))) 2 +,()),)))3 in %))=, the $ear in "hich the loss "as actuall$ ascertained. +. ANSWER: B 8osses incurred due to removal of an old building, scrapping of old machiner$ or equipment minus the amount earned on the sale of the scrap are deductible. 8osses actuall$ suffered on the sale of securities are deductible. 7o"ever, losses incurred due to fluctuation of prices in the marCet are not deductible. 8osses incurred b$ business "hen an asset is discarded are deductible. .. (. ANSWER: D ANSWER: A Aost of construction '. ANSWER: A Allocation cost of land Aost of old building Bemolition cost .,()),))) 1,1)),))) %)),))) .),)))

Page 95

:ale of scrap Aost of land *. ANSWER: C Aost 8ess; Accumulated depreciation BooC value !eplacement cost Beductible loss 1lo"er3 >. ANSWER: B

1 1(,)))3 1,+%(,)))

()),))) +)),))) %)),))) +)),))) %)),)))

The value of the car is deductible to Aontrade <nterprises being the car o"ner. t is clear at the time it "as sei4ed b$ the N&A rebels the car "as being used in connection "ith trade or business of the taxpa$er. f there is an$ insurance indemnit$, the same shall be deducted from the booC value of the car for purposes of claiming the loss as deduction. =. ANSWER: C

1) ANSWER: D A corporation cannot enjo$ the benefit of NH8AH for as long as it is subject to 6A T in an$ taxable $ear. 7o"ever, the running of the +-$ear period for the expir$ of NH8AH shall not be interrupted b$ the fact that the corporation is subject to 6A T in an$ taxable $ear during the +-$ear period. EXERCISES 12 5 1. An#-!": D 9ross profit from sales Add; Bad debts recovered Total 8ess; Beductions <xpenses ?orthless accounts ncome subject to tax %. ANSWER: D The basis of the life of an asset for purposes of depreciating its value is the life of similar assets in the general industr$. +. ANSWER: A .. ANSWER: A Aost (*),))) & >)),))) +),))) >+),))) & ..),))) (),)))

.=),))) +.),)))

Page 96

8ess; :crap value Bepreciable cost 8ess; Accumulated depreciationU BooC value Add; Aost of replacement of "orn-out parts Ne" depreciable cost Bivide b$ remaining depreciable life Bepreciation, %))=) Annual depreciation 1&()),)))G1' $ears3 UAccumulated depreciation (. '. ANSWER: C ANSWER: C &a$ment of current pension &a$ment of past pensions; %))' 11,))),)))G1)3 %))* 11,%)),)))G1)3 Beductible pension expense *. ANSWER: B Net income before contribution Aontribution; Actual 8imit 1'',))) x 1),3 Beductible 1lo"er3 ANSWER: A

*),))) ()),))) 1(',%() +.+,*() (),))) +=+,*() 11 +(,*=(..( +1,%() ( $ears 1(',%()

%)),))) & 1)),))) 1%),))) %%),))) .%),))) '',))) 1),))) ',')) ','))

>.

The amount of an$ charitable contribution of propert$ other than mone$ shall be based on the acquisition cost of such propert$. =. ANSWER: D :ince 6r. Biglang-a"a has just been retired as a government emplo$ee, his tax pa$able "ill be based on his income during the previous $ear. Therefore, he is not entitled to deduct the contribution because compensation income earners are entitled onl$ to claim the basic personal exemption, additional personal exemptions and health andGor hospitali4ation insurance as deduction.

1) ANSWER: A Hnl$ the &()),))) is qualified as deduction because the amount given to the cancer patient and the amount paid to the chain restaurant "ere not given to entities allo"ed b$ la".

EXERCISES 12 5

Page 97

1. ANSWER: D The lumber, "hich is being used in the manufacture of furniture, is considered as a ra" material. t is deductible. Bad debts are deductible if previousl$ "ritten-off. Bonations paid directl$ to t$phoon victims must be given to accredited non-government organi4ations, institutions or to the government. Those that are given directl$ to t$phoon victims are not deductible. %. ANSWER: D Hptional standard deductions are allo"ed onl$ on individuals, estates and trusts. Aorporations can avail onl$ of the itemi4ed deductions. +. An#-!": A :ales 8ess; Aost of sales 11,()),))) x .),3 9ross profit Add; Hther income 1')),))) x (,3 9ross income 8ess; Hperating expenses 11,()),))) x %),3 Taxable income !ate of tax ncome tax .. An#-!": A &er diems and allo"ances 9ross income, hard"are 8ess; Hptional deductions 1.)),))) x 1),3 Total income 8ess; &ersonal exemption Basic personal Additional exemption Taxable income Tax on &%(),))) %.',))) x +), ncome tax 8ess; ?ithholding tax 1%)),))) x 1),3 ncome tax due and pa$able .)),))) .),))) +%,))) +%,))) (),))) *+,>)) 1%+,>)) %),))) 1)+,>)) %)),)) ) +'),))) ('),))) '.,))) .=',))) 1,()),))) ')),))) =)),))) +),))) =+),))) +)),))) '+),))) +), 1>=,)))

EXERCISES 12-6
:ales 8ess; Aost of :ales 9ross profit 1,%)),))) .(),))) *(),)))

Page 98

8ess; Hperating expenses :alaries and "ages 11*),))) 2 1(,)))3 Travelling expenses 8ight, heat and po"er <ntertainment 1%),))) 2 ',())3 Bepreciation nterest expenses @ire loss 1>(,))) 2 1(,)))3 Taxable income before contribution 8ess; Aontributions Actual 8imit 1(, x &.'>,)))3 Beductible 1lo"er3 Taxable income before contribution !ate of tax 1%))>3 ncome tax

1((,))) 1%,))) %.,))) 1+,()) (,))) %,()) *),)))

%>%,)) ) .'>,)))

& (,))) %+,.)) (,)) ) .'+,))) +(, 1'%,)( )

EXERCISES 12-.
13 9ross sales 8ess; Aost of sales 9ross profit 8ess; Allo"able deductions :alaries and "ages !ent expense 8ight and "ater Hffice supplies nsurance expense Travelling expense Advertising expense !epresentation and entertainment expense 1.(,))) %(,)))3 Bepreciation expense !epairs and maintenance 11(,)))-*,%))3 &ostage and telephone nterest expense Taxes and licenses E*',)))-11%,)))L+,)))3F 8osses E1+),)))-1%),)))L1(,)))3F Bad debts 1+',))) x .),3 &ension trust Net income Add; Hther income :ale of office building &+,))),)) ) 1,%)),))) 1,>)),))) +(),))) +',))) +(,))) 1',))) %.,))) %(,))) %%,))) %),))) %),))) *,>)) ',()) 1.,))) '1,))) =(,))) 1.,.)) %(,)))

**1,*)) 1,)%>,+))

Page 99

')),))) 8ess; Aost .(),))) !ent income !efund of overpaid expenses Taxable income before contributions 8ess; Aontributions Actual 8imit 11,1>(,+)) x (,3 Beductible 1lo"er3 Taxable income after contributions !ate of tax ncome tax %3 9ross sales 8ess; Hptional standard deduction 1+,))),))) x .),3 Net Add; Hther income :ale of office building ')),))) 8ess; Aost .(),))) !ent income !efund of overpaid expenses Taxable income before contributions 8ess; Aontributions Actual 8imit 11,=>*,))) x (,3 Beductible 1lo"er3 Taxable income after contributions !ate of tax ncome tax due

1(),))) %(,))) 1%,))) &+),))) (=,%'( +),))) 1,1((,+)) +(, .).,+(( &+,))),)) ) 1,%)),))) 1,>)),))) 1>*,))) 1,1>(,+))

1(),))) %(,))) 1%,))) &+),))) ==,+() +),))) 1,=(*,))) +), (>*,1)) 1>*,))) 1,=>*,)))

EXERCISES 13-1
1. a. b. c. d. @iscal $ear @iscal $ear Not acceptable Aalendar $ear - 6arch 1 to @ebruar$ %>G%= - 5anuar$ 1 to Becember +1

%. No, Aath$ should "ait for the time sufficient funds have been deposited to cover the value of the checC. Although she has alread$ received a checC from her customer, she still cannot consider it as proper pa$ment until it has been encashed "ith the dra"ee banC.. +. a. &+,))) b. None. There "as alread$ cash outla$ although paid in advance. 6ere indication of intent to contribute does not entail pa$ment of cash.

Page 100

c. None. d. None. ..

&a$ment in checC does not mean pa$ment of cash until the dra"ee banC pa$s it. &a$ment of cash "as made onl$ of the follo"ing $ear.

n %))>, 9ie must report &'),)))# the amount of mone$ she received representing the first and last month0s rent. The &.),))) is not income because it is onl$ a deposit and not part of the rental value. n %))=, 9ie should report an income of &1+(,))) representing the months of @ebruar$, 6arch, April, 6a$ and half of 5ul$. The rental for the months of 5anuar$ and 5une have been prepaid during the previous $ear and "ere alread$ reported as income in %))>. The &>,))) "hich "as "ithheld should not be considered as income since it is onl$ a pa$ment on the propert$ damaged.

(. Aost incurred to date Aost to complete Total estimated costs &ercentage of completion Aontract price Total estimated costs 9ross revenue x &ercentage of completion !eali4ed revenue to date !eali4ed revenue in prior $ears !eali4ed revenue each $ear

@irst +,))),))) *,))),))) 1),))),))) +), 11,%)),))) 1),))),))) 1,%)),))) +), +'),))) QQQQQQQQ +'),)))

:econd ',()),))) +,()),))) 1),))),))) '(, 11,%)),))) 1),))),))) 1,%)),))) '(, *>),))) +'),))) .%),)))

Third 1),()),))) QQQQQQQQ 1),()),))) 1)), 11,%)),))) 1),()),))) *)),))) 1)), *)),))) *>),))) 1 >),)))3 &1>),))) &1>),))) 1)),))) >),))) 1+,))) =+,))) %),))) 1+,))) %),))) (+,))) %=...,

'. :elling price :elling price 8ess; 6ortgage assumed b$ bu$er Balance Add; <xcess of mortgage over cost 11)),))) 2 >*,)))3 Aontract price Bo"npa$ment <xcess of mortgage over cost 11)),))) 2 >*,)))3 nstallment received 1$ear of sale3 nitial pa$ment nitial pa$ment rate 1(+,)))G1>),)))3 :elling price 8ess; Aost :elling expenses 9ross profit 1taxable in %))>3 &1>),))) >*,))) 1%,))) ==,))) >1,)))

Page 101

*.

Year of :ale Aollection 9ross profit rate %))' & .),))) +(, %))* 1(),))) ++, %))> %.),))) +%, 9ross profit to be recorded in %))> &a$ment, :igning of Aontract

9ross profit & 1.,))) .=,()) *',>)) &1.),+)) &1%,() ) & %(,))) 1%,()) +*,()) (),))) 1),))) '),))) 1),))) (1),)) ) 1%,()) %).>+, '),))) ', +,')) Tax pa$able =)) 1,>)) =)) +,')) %(),))) %(),))) (),))) %), %(),))) 1(),))) 1)),))) (, (,))) & 1,))) %,))) 1,))) ())

>. nstallment &a$ments; Becember 1, %))= Becember 1, %)1) Total Add; 6ortgage assumed b$ bu$er :elling price 8ess; 6ortgage assumed b$ bu$er Aontract price nitial pa$ment nitial pa$ment rate 11%,())G'),)))3 :elling price !ate of Tax Aapital gains tax 1final tax3 Year of &a$ment %))> 1& 1%,())G(),))) x & +,'))3 %))= 1& %(,)))G(),))) x & +,'))3 %)1) 1& 1%,())G(),))) x & +,'))3 Total =. :elling price Aontract price nitial pa$ment nitial pa$ment rate 1(),)))G%(),)))3 :elling price 8ess; Aost Net Aapital gain !ate of Tax @inal Tax %))' %))* %))> %))=

1& (),))) G %(),))) x (,)))3 1& 1)),))) G %(),))) x (,)))3 1& (),))) G %(),))) x (,)))3 1& %(,))) G %(),))) x (,)))3

Page 102

%)1) Total EXERCISES 13 2 1. %. An#-!": B An#-!": A

1& %(,))) G %(),))) x (,)))3 (,)))

())

Amount of interest paid +. An#-!": B Amount received in %))) .. An#-!": B Beductible amount EXERCISES 13 3 1 An#-!": D % + . An#-!": A An#-!": C An#-!": C Bo"npa$ment, 5anuar$ 1 &a$ment, Becember 1 nitial pa$ment Add; &a$ment, Becember 1, %))= :elling price ( An#-!": C :elling price 8ess; Aost 9ain on sale !ate 1long-term3 8ong-term capital gain nitial pa$ment rate 1(),)))G%)),)))3 9ross profit rate 1.),)))G%)),)))3 ncome to be reported 1(),))) x %),3

'))

%)),)) )

%)),)))

%(,)) ) %(,))) (),))) 1(),))) %)),)))

%)),)) ) 1%),))) >),))) (), .),))) %(, %), 1),)) )

Page 103

'

An#-!": D ncome to be reported 1&1(),))) x %),3 +),)))

An#-!": A 9ross selling price 11,))) x &1()3 8ess; Aost 11,))) x &%)3 Net capital gain !ate 1long-term3 8ong-term capital gain Tax on &'(,))) x (, x >), 1(),)) ) %),))) 1+),))) (), '(,))) %,'))

>

An#-!": D None. :hares of stocCs "hich are traded in the stocC exchange are not subject to income tax

An#-!": C :elling priceGAontract price 8ess; Aost 9ross profit Bo"npa$ment Bue, Hctober Bue, November Bue, Becember nitial pa$ment Bivide b$; :elling price nitial pa$ment rate >)),)) ) ')),))) %)),))) 1)),)) ) (),))) (),))) (),))) %(),))) >)),))) +1.%(,

The income cannot be reported in installment because the initial pa$ment is more than %(, of the selling price. 1). An#-!": C 11. An#-!": D EXERCISES 14 -1 1. No. The income tax on income derived from sources "ithin of a non-resident alien "ho is not engaged in trade or business in the &hilippines is subject to a @inal ?ithholding Tax. %. No. The cit$ government should not have "ithheld taxes because the amount received after five $ears as just compensation is not in an$ "a$ a profit, gain or income on the part of Kargas.

Page 104

n the same vein, the ', annual interest paid b$ the cit$ government in not income. The same partaCes of a nature of a penalt$ or indemnit$ due and accruing to Kargas for having been deprived of the use and benefit b$ not being paid of the fair marCet value of the propert$ since its0 taCing ( $ears ago. +. Yes because pri4es and "innings are subject to a final "ithholding tax of %),. t "ithholding of the tax is the responsibilit$ of the pa$or. EXERCISE 14-2. CASE PROBLEM The B ! is correct. !evenue 6emorandum Aircular +.-%))> categoricall$ states; I t is a "ell settled rule that director0s fees are taxable, for income tax purposes, as compensation income "hen the recipient director is an emplo$ee of the corporation "hich pa$s the same. Being embraced "ithin the term Icompensation incomeJ, the director0s fees are subject to the "ithholding tax on "ages imposed under :ection *=, in relation to :ection %.1A3, both of the National nternal !evenue Aode. The above tax treatment applies "henever it is established that the director and the corporation has an emplo$er-emplo$ee relationship, i.e &resident of a corporation sitting as a member of the Board of Birectors. !evenue !egulations No. %-=> provides that Ithe term IcompensationJ means all remuneration for services performed b$ an emplo$ee for his emplo$er under an emplo$er-emplo$ee relationship, unless specificall$ excluded b$ the AodeJ. Thus, fees including director0s fees, if the director is, at the same time, an emplo$ee of the emplo$erGcorporation constitute compensation income (Section 2.78.1, RR No. 2- 8!." Aonsidering, therefore, that 6anolo Tolo is the &resident and at the same time sitting as member of the Board of Birectors, the fees received b$ him from the corporation is subject to income tax and, consequentl$ to the "ithholding tax on "ages.

EXERCISES 15-1
1. Acido is still required to file income tax return because his monthl$ compensation income does not exceed &(,))) or &'),))) per annum. %. a. Yes. A taxpa$er earning business income is required to file income tax return regardless of the amount of gross income. b. No. The sole income is passive "hich is subject to final tax. c. Yes. The compensation income does not exceed & '),))). t is not subject to substituted filing. d. Yes. The compensation income does not exceed & '),))). 6oreover, the tax "as not properl$ "ithheld, the taxpa$er is required to file tax return. e. Yes. The total compensation income does not exceed & '),))). 6oreover, since she is "orCing "ith t"o 1%3 emplo$ers, she is required to file tax return. f. No. Because the compensation income exceeds & '),))). g. Yes. Because the taxpa$er is a mixed income earner.

Page 105

h. Yes. Because the income is a professional income. i. Yes. Nonresident aliens are required to file income tax return on income derived from sources "ithin the &hilippines. j. No. The income derived from sources "ithin the &hilippines of a N!A N<TB is subject to final tax. +. a. ncome of <d"ard :hare in a unidentifiable income 1*(,))) x R3 Total 8ess; &ersonal exemption Basic personnel Additional 1& >,))) x 13 Taxable income ncome of <mie :hare in unidentifiable income Total 8ess; &ersonnel exemption Taxable income & 1(),))) +*,()) 1>*,()) & +%,))) >,))) .),))) 1.*,()) 1)),))) +*,()) 1+*,()) +%,))) 1)(,())

b. 7usband and "ife shall compute separatel$ their individual income tax based on taxable income of each. 7o"ever, spouses "ho do not derive income purel$ from compensation shall file a return for the taxable $ear to include the income of both spouses. c. No, "here it is impracticable for the spouses to file one return, each spouse ma$ file a separate return but the bureau shall consolidate the returns so filed. n the instant case, since it is impracticable for them to file a joint return the$ can be allo"ed to file separatel$ the income tax return of each. .. ncome of Arisanto Add; ncome of Bonita ncome to be reported 8ess; &ersonal exemption Basic personal Additional 1from Bonita3 Taxable income &1%),))) +%,))) 1(%,))) &%(,))) >,))) ++,))) 11=,)))

(. 1st Vuarter 9ross income 8ess; Beductions Net income Add; !ent income 111.,)))G=(,3 Taxable income !ate of tax ncome tax 8ess; Tax credit 2 "ithholding tax on rent 11%),)))-11.,)))3 &+*(,))) 1'),))) %1(,))) 1%),))) ++(,))) +(, 11*,%() ',)))

Page 106

ncome tax due %nd Vuarter 9ross income, 1st and %nd V 1&+*(,))) L (%),)))3 8ess; Beductions, 1st and %nd V 1&1'),))) L '(),)))3 Net income Add; !ent income, 1st and %nd V 1&1%),))) L 1%),)))3 Taxable income !ate of tax ncome tax 8ess; Tax credit Tax paid, 1st Vuarter ?ithholding tax on rent, 1st V ?ithholding tax on rent, %nd V ncome tax due +rd Vuarter 9ross income, 1st, %nd, T +rd V 1+*(,)))L(%),)))L.>),))3 8ess;Beductions, 1st, %nd, T 1&1'),)))L'(),)))L%+),)))3 Net income Add; !ent income, 1st, %nd, T +rd V 11%),))) x +3 Taxable income !ate of tax ncome tax 8ess; Tax credit Tax paid, 1st quarter Tax, %nd quarter ?ithholding tax on rent, 1st,%nd T +rd V ncome tax due @inal Vuarter 9ross income 8ess; Beductions Net income Add; !ent income Taxable income !ate of tax ncome tax 8ess; Tax credit Tax paid, 1st quarter

111,%()

>=(,))) >1),))) >(,))) %.),))) +%(,))) +(, 11+,*() 111,%() ',))) ',)))

1%+,%() 1 =,())3

1,+*(,))) +rd V 1,).),)) ) ++(,))) +'),)) ) '=(,))) +(, %.+,%()

& 111,%() 1>,)))

1%=,%() 11.,))) %,1((,))) 1,(=),))) ('(,))) .>),)) ) 1,).(,))) +(, +'(,*()

111,%()

Page 107

%nd quarter +rd quarter ?ithholding tax on rent, 1st to .th quarter ncome tax due '.

11.,))) %.,)))

%.=,%() 11',())

Yes because he is deriving compensation income concurrentl$ from t"o emplo$ers at an$time during the taxable $ear.

*. 6r. &en :ioner is exempt from income tax on his pension from the 9: :. Thus, he is not required to file an income tax return. 7e is not also required to file an income tax return on "hatever interest income "ill be derived from the banC deposit "ith Banco de Hro because it is subject to final "ithholding tax. >. A domestic corporation is considered as a corporation subject to corporate tax. n a calendar $ear, a business partnership is required to file three 1+3 times for its Vuarterl$ ncome Tax !eturn "ithin sixt$ 1')3 calendar da$s after each cumulative quarter. @or the .th cumulative quarter 1final quarter3, said taxpa$er must file its income tax return on or before the 1( th da$ of the .th month of the follo"ing $ear. EXERCISES 15 2 1. ANSWER : D A contract "orCer is taxable as a nonresident citi4en. A contract "orCer shall file an income tax return on his income derived from sources "ithin the &hilippines (Sec. #1 $%,&', N(R)!. A compensation earner "ho is receiving his income from % or more emplo$ers is required to file an income tax return. 2. ANSWER: A The income tax return shall be filed in duplicate 1:ec. (1 W.,X, N !A3 3. ANSWER: D 6arried individuals must file a joint return even if the$ are mixed income earners. 4. ANSWER: B As a rule, a pure compensation income earner is covered b$ the substituted filing of income tax return. 7ence, the$ are not required an$more to file a return. 5. An#-!": B Amount pa$able on ever$ installment 1&%%,)))G%3 8ess; ?ithholding taxes 1&(,))) L (,)))3 ncome tax due, 1st installment & 11,))) 1),))) 1,)))

Page 108

Amount pa$able, %nd installment 6. An#-!": B 9ross income 1&.=(,)))G==3 8ess; Beductions Taxable income !ate of tax ncome tax 8ess; Tax credit <xcess credit carr$-over ?ithholding tax ncome tax due .. An#-!": C 9ross income, %nd quarter 1*=%,)))G==,3 L 1.=(,)))G==,3 8ess; Beductions 1*)),))) L .>),)))3 Taxable income !ate of tax ncome tax 8ess; Tax credit ?ithholding tax, 1st quarter 1()),))) 2 .=(,)))3 %nd quarter 1>)),))) 2 *=%,)))3 <xcess credit carr$-over from the preceding quarter ncome tax due 8. 9. An#-!": D An#-!": C

& 11,)))

& ()),))) .>),))) %),))) +(, *,))) 1(,))) (,))) %),))) 1 1+,)))3

&1,+)),))) 1,1>),)) ) 1%),))) +(, .%,))) (,))) >,))) 1+,)) ) %',)))

%',))) 1',)))

10 An#-!": B EXERCISES 15 3 1. ANSWER: B All of the enumerated statements are required to be attached to the tax return of a business "hose gross quarterl$ receiptsGsales exceed & 1(),))). :ince the quarterl$ sales in the problem is &1,()),))), then, all of them 1from A to B3 are required to be attached to the return. 2. ANSWER: B

Page 109

All such corporations, companies, partnership or persons shall Ceep the booCs or records mentioned in :ection %+% hereof in a native language, <nglish or :panish. 1:ec.%+., N !A3 3. ANSWER: D 4. ANSWER: A 5. ANSWER: C :ometimes the communit$ tax receipt number of the customer is required to be indicated in the invoice but not the communit$ tax receipt number of the business establishment.