Allowableasdasdasdasdasdadeductions Personal Exemptions
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Transcript of Allowableasdasdasdasdasdadeductions Personal Exemptions
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Distinguish a “Exclusion from
Gross Income” from “Deductions
from Gross Income”. Give an
example of each.
2001 BAR Examination
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Deductions fromGross Income
Section 34
Exclusions fromGross IncomeSection 32(B)
Something paid or
incurred in doingbusiness or trade
Should not form part
of gross income
because excluded bylaw, by the
constitution or does
not fall within the
definition of income.Pertains to thecomputation of
ordinary taxable
income.
Pertains to the
determination of
Gross Income.
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Section 34 of the NIRC
SHA !"# APP$ #"
G%"SS &"'P(!SA#I"! I!&"'(
EXCEPT Section 34 (M).
&A! )( D(D*(D from
Gross &ompensation Income
Section 34 of the NIRC
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Section 35 of the NIRC
S*)S#I#*#(S +"% #H( DISA"A!&( "++A'I$, I-I!G and P(%S"!A (P(!S(S
KindsBASIC PERSONAL EXEMPION
ADDIIONAL PERSONAL EXEMPIONatt. c
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Deductions fromGross Income
Section 34
Allo!"nce forPerson"l Exem#tions
Section 35
Actual business
expenses or
expenses incurredin the exercise of
profession
Arbitrary amounts
because it may not
be enough to co/erpersonal li/ing
expenses.
#o reco/er thecost of doing
business.
#o co/er the family,li/ing and personal
expenses.
As to
AMO$N
As toP$RPOSE
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Deductions fromGross Income
Section 34
Allo!"nce forPerson"l Exem#tions
Section 35
)usiness
(xpenses
+amily, li/ing and
personal expenses.
&orporate
#axpayers except
NRFC, it can alsobe claimed by
Indi/idual
#axpayers except
NRA-NETB.
Indi/idual
#axpayers only
except NRA-
NETB.
As to
NA$RE
As toCLAIMAN
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Section 34 of the NIRC
S%A&& ') A**&+ #"G%"SS &"'P(!SA#I"! I!&"'(
EXCEPT Section 34 (M).
&A! )( D(D*(D from
Gross &ompensation Income
Section 34 of the NIRC
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Section 34 of the NIRC
#hese are amounts allo,ed - la, to
reduce the gross income to taxable income.
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Section 34 of the NIRC
BASIC PRINCIPLES
%e t"x#"&er must #ointto some s#eci'c#ro(isions of t%est"tute)l"! "ut%ori*in+t%e deduction,
NON RESIDEN ALIEN NO
ENGAGED IN RADE OR B$SINESS"nd NON RESIDEN -OREIGN
CORPORAION "re not "llo!ed tocl"im deductions
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Section 34 of the NIRC
BASIC PRINCIPLES
The taxpayer must prove that
he is entitled to thededuction authorized orallowed.
If the taxpayer fails to deduct certainexpenses for the taxable year, he cannot
deduct them from the income of the next or
any succeeding year
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Section 34 of the NIRC
BASIC PRINCIPLES
CohanRule
Principle
If expenses were incurred and there r no
documentary evidence to support such,BIR must make an estimate of
deduction that may be allowed in
computing the taxpayer’s taxable
income.
disallowance of 867 of
the taxpayer9s claimed
deduction is -AID.att. cleo d. sabado-andrada ca mba
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KINDS O- ALLO.ABLE DED$CIONSI.
PREMIUM PAYMENTS ON HEALTHand/or HOSPITALIZATION INSURANCE
(PHHI)Section 34(M)
premiums paid during the taxable year or
health and!or hospitali"ation insuranceta#en by him on himsel$ including hisamily%
"##lic"/le onl& to indi(idu"l
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I.
PREMIUM PAYMENTS ON HEALTHand/or HOSPITALIZATION INSURANCE
(PHHI)
CONDITIONS B&'R& P* S+,, B&
+,,-&. +S .&./C0*1 'R RSS*1C&%
0, %"t t%efamily
%"d " +ross income of notmore t%"n t!o %undred 'ft& t%ous"nd
#esos 1P2345444,446 for t%e t"x"/le &e"r,
NUCLEAR
FAMILY
PARENTS and theCHILDREN who are not
yet taxpayers their
incomenotwithstandin .att. cleo d. sabado-andrada ca mba
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I.
PREMIUM PAYMENTS ON HEALTHand/or HOSPITALIZATION INSURANCE
(PHHI)
CONDITIONS B&'R& P* S+,, B&
+,,-&. +S .&./C0*1 'R RSS*1C&%
2, In case of married persons5 onl& t%es#ouse cl"imin+ t%e "ddition"l exem#tions
for de#endents s%"ll /e entitled to t%ededuction7
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I.
PREMIUM PAYMENTS ON HEALTHand/or HOSPITALIZATION INSURANCE
(PHHI)
CONDITIONS B&'R& P* S+,, B&
+,,-&. +S .&./C0*1 'R RSS*1C&%
8, %e deduction s%"ll not exceed P25944
for t%e f"mil&5 or P244 " mont%,
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KINDS O- ALLO.ABLE DED$CIONSII.
OPTIONAL STANDARD DEDUCTION(OSD)Section 34(L)
! is a deduction from gross income allowed
to be ta:en in lieu of the itemi1ed deductions.
A""lica#le to IN!I$I!UAL (#%t not tonon&'eient alien)
a""lica#le alo to CR*RA+IN a
allo,e #y Sec. 3 of R.A. -54.att. cleo d. sabado-andrada ca mba
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REEN!E RE"!LATI#NSREEN!E RE"!LATI#NS
N#. $%&'(()N#. $%&'(()Implementing the Provisions of ection !"#$%Implementing the Provisions of ection !"#$%
of the &ax 'ode of ())*, +s +mended byof the &ax 'ode of ())*, +s +mended by
ection ! Republic +ct o. )-", /ealing onection ! Republic +ct o. )-", /ealing on
the 0ptional tandard /eduction #0/%the 0ptional tandard /eduction #0/%
+llowed to Individuals and 'orporations in+llowed to Individuals and 'orporations in'omputing their &axable Income'omputing their &axable Income
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PERS#NS C#ERED*PERS#NS C#ERED*
0.0. Indi/iduals;Indi/iduals;i. %esident &iti1eni. %esident &iti1en
ii. !on
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II.
OPTIONAL STANDARD DEDUCTION(OSD)
!
RA+E
4/
"f Gross Sales=Gross
%eceipts
I!DI-ID*A #APA$(%S,
other than NRA
4/
"f Gross Income&"%P"%A#(
#APA$(%S
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It s%ould /e em#%"si*ed t%"t t%eIt s%ould /e em#%"si*ed t%"t t%e
cost o salescost o sales in c"se ofin c"se of indi(idu"lindi(idu"lseller of +oodsseller of +oods5 or t%e5 or t%e cost o ser6ices cost o ser6ices in t%ein t%e c"se of indi(idu"l seller ofc"se of indi(idu"l seller of
ser(icesser(ices5 "re5 "re not allowed to benot allowed to bededucted for purposes ofdeducted for purposes of
ete#minin% ete#mini n% the basis of the OSDthe basis of the OSD pursuant to this Section inasmuch pursuant to this Section inasmuch
as the law (R !"#$% is speci&c as toas the law (R !"#$% is s peci&c as to
the basis thereof which states thatthe basis thereof which states that
for indi'iduals the basis of the $#)for indi'iduals the basis of the $#)
OSD shall be the *+ross sales, orOSD shall be the * +ross sales, or* ** *att.cleo d. sabado-andrada ca mba
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In the case ofIn the case of sellers of ser/icessellers of ser/ices, the, the
termterm “gross income” “gross income” means the >grossmeans the >gross
receipts? less sales returns, allowances,receipts? less sales returns, allowances,discounts and cost of ser/ices.discounts and cost of ser/ices. >>Cost ofCost of
services” services” means all direct costs andmeans all direct costs and
expenses necessarily incurred toexpenses necessarily incurred topro/ide the ser/ices re@uired by thepro/ide the ser/ices re@uired by the
customers and clients includingcustomers and clients including
salaries and employees benefits ofsalaries and employees benefits ofpersonnel, consultants and specialistspersonnel, consultants and specialists
directly rendering the ser/ice,directly rendering the ser/ice,
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SE/. !. I&&0S)RA)I1E E2A*&ES I'SE/. !. I&&0S)RA)I1E E2A*&ES I'
DE)ERI'I'G )%E 4ASIS 5 )%E #"6DE)ERI'I'G )%E 4ASIS 5 )%E #"6
SD 5R I'DI1ID0A&S A'DSD 5R I'DI1ID0A&S A'D
/R*RA)I'S./R*RA)I'S.
Suppose a retailer of goods, whoseSuppose a retailer of goods, whose
accounting method is under the accrualaccounting method is under the accrual
basis, has a gross sales of P0,666,666.66basis, has a gross sales of P0,666,666.66
with a cost of sales amounting to P66,66.with a cost of sales amounting to P66,66.
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if Indi/idualif Indi/idual If &orporationIf &orporation
Gross SalesGross Sales P0,666,666P0,666,666 P0,666,666P0,666,666
ess; &ost of Goods Soldess; &ost of Goods Sold 66,666 66,666
)asis of the "SD)asis of the "SD P0,666,666P0,666,666 P 266,666P 266,666
"SD %ate 3maximum4 "SD %ate 3maximum4 .56 .56 .56 .56
"SD Amount"SD Amount P 566,666P 566,666 P 6,666P 6,666
BBBBBBBBBBBBBBBBBBBBBB BBBBBBBBBBBBBBBBBBBBBB
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If If Indi(idu"lIndi(idu"lIf Cor#or"tionIf Cor#or"tion
GrossGross S"lesS"les P054445444P054445444 P054445444P054445444
Less:Less: Cost of S"lesCost of S"les ;445444 ;445444
Gross S"les)GrossGross S"les)Gross P054445444P054445444 P 2445444P 2445444
Less: OSDLess: OSD 1m"ximum61m"ximum6 9445444 9445444 ;45444 ;45444
Net IncomeNet Income P
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REEN!E RE"!LATI#NSREEN!E RE"!LATI#NS
N#. '&'($(N#. '&'($(Amendment to Sections < "nd >Amendment to Sections < "nd >of Re(enue Re+ul"tions No, 0
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If the GPP a/ailed of the itemi1ed deduction inIf the GPP a/ailed of the itemi1ed deduction in
computing its net income,computing its net income, the partners may stillthe partners may still
claim itemi1ed deductions from said share,claim itemi1ed deductions from said share,pro/ided, that, in claiming itemi1ed deductions,pro/ided, that, in claiming itemi1ed deductions,
the partner is precluded from claiming the samethe partner is precluded from claiming the same
expenses already claimed by the GPP.expenses already claimed by the GPP. If theIf the
GPP claimed itemi1ed deductions the partnersGPP claimed itemi1ed deductions the partnerscomprising it can only claim itemi1edcomprising it can only claim itemi1ed
deductions which are in the nature of ordinarydeductions which are in the nature of ordinary
and necessary expenses for the practice ofand necessary expenses for the practice ofprofession which were not claimed by the GPPprofession which were not claimed by the GPP
in computing its ne income or distributable netin computing its ne income or distributable net
income during the year.income during the year.att. cleo d. sabado-andrada ca mba
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(xamples of these are(xamples of these are
representation expensesrepresentation expenses incurred byincurred bythe partner where the co/ering in/oicethe partner where the co/ering in/oice
of receipt is issued in his nameCof receipt is issued in his nameC
tra/elling expensestra/elling expenses while away fromwhile away fromhone, which were not li@uidated by thehone, which were not li@uidated by the
partnershipCpartnershipC depreciation of a cardepreciation of a car usedused
in the practice of profession where saidin the practice of profession where saidcar is registered in the name of thecar is registered in the name of the
partner andpartner and similar expenses.similar expenses.
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Hence,Hence, ifif the GPP a/ailed of itemi1edthe GPP a/ailed of itemi1ed
deductions, the partners are not alloweddeductions, the partners are not allowed
to claim the "SD from their share in theto claim the "SD from their share in thenet income because the "SD is a proxynet income because the "SD is a proxy
for all the items of deductions allowed infor all the items of deductions allowed in
arri/ing at taxable income.arri/ing at taxable income.
If the GPP a/ails of "SD in computing itsIf the GPP a/ails of "SD in computing its
net income, the partners comprising it cannet income, the partners comprising it can
no longer claim further deduction fromno longer claim further deduction from
their share in the said net income.their share in the said net income.att. cleo d. sabado-andrada ca mba
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If t%e #"rtner "lso deri(esIf t%e #"rtner "lso deri(es ot%er +rossot%er +ross
income from tr"de5 /usiness or #r"ctice ofincome from tr"de5 /usiness or #r"ctice of
#rofession "#"rt "nd distinct from %is s%"re#rofession "#"rt "nd distinct from %is s%"re
in t%e net income of t%e GPP5in t%e net income of t%e GPP5 t%et%e
deduction t%"t %e c"n cl"im from %is ot%erdeduction t%"t %e c"n cl"im from %is ot%er
+ross income !ould follo! t%e s"me+ross income !ould follo! t%e s"mededuction "("iled of from %is #"rtners%i#deduction "("iled of from %is #"rtners%i#
income "s ex#l"ined in t%e fore+oin+ rules,income "s ex#l"ined in t%e fore+oin+ rules,
Pro6ided$ ho7e6er$ that i the PP opts orPro6ided$ ho7e6er$ that i the PP opts or
the S.$the S.$ t%e indi(idu"l #"rtner m"& stillt%e indi(idu"l #"rtner m"& stillcl"im 94 of its +ross income from tr"de5cl"im 94 of its +ross income from tr"de5
/usiness or #r"ctice of #rofession/usiness or #r"ctice of #rofession +,t not+,t not
to inc-,de his share rom the netto inc-,de his share rom the net
income o the "PP.income o the "PP.att.cleo d. sabado-andrada ca mba
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II.OPTIONAL STANDARD DEDUCTION (OSD)
the taxpayer must signifies in his return his
intention to elect ptional Standard Deduction7
OTHERWISE , he shall be considered as ha/ing
a/ailed of the Itemi8ed Deductions.
The election of OSD is irrevocable forthe taxable year for which the choice is
made.att. cleo d. sabado-andrada ca mba
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%e election to cl"im eit%er t%e OSD or t%e %e election to cl"im eit%er t%e OSD or t%e
itemi*ed deduction for t%e t"x"/le &e"ritemi*ed deduction for t%e t"x"/le &e"r mustmust
/e si+ni'ed /& c%ec@in+ t%e "##ro#ri"te /ox/e si+ni'ed /& c%ec@in+ t%e "##ro#ri"te /ox
in t%e income t"x return 'led for t%e 'rstin t%e income t"x return 'led for t%e 'rstu"rter of t%e t"x"/le &e"r "do#ted /& t%eu"rter of t%e t"x"/le &e"r "do#ted /& t%e
t"x#"&er,t"x#"&er, Once t%e election is m"de5Once t%e election is m"de5 t%et%e
s"me te of deduction must /e consistentl&s"me te of deduction must /e consistentl&
"##lied for "ll t%e succeedin+ u"rterl&"##lied for "ll t%e succeedin+ u"rterl&
returns "nd in t%e 'n"l income t"x return forreturns "nd in t%e 'n"l income t"x return for
t%e t"x"/le &e"r, An& t"x#"&er !%o ist%e t"x"/le &e"r, An& t"x#"&er !%o is
reuired /ut f"ils to 'le t%e u"rterl& incomereuired /ut f"ils to 'le t%e u"rterl& incomet"x return for t%e 'rst u"rter s%"ll /et"x return for t%e 'rst u"rter s%"ll /e
consideredconsidered "s %"(in+ "("iled of t%e itemi*ed"s %"(in+ "("iled of t%e itemi*ed
deductions o#tiondeductions o#tion for t%e t"x"/le &e"r,for t%e t"x"/le &e"r,
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II.OPTIONAL STANDARD DEDUCTION (OSD)
S%A&& ') A**&+ #"GRSS /*E'SA)I'
I'/E A%ISI!G "*# "+('P"$(%
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KINDS O- ALLO.ABLE DED$CIONSIII.
ITEMIZED DEDUCTIONSSection 34(A to J)
T&ese a#e expenses #elate to t#ae o#
b"siness o# to t&e p#actice o' p#o'ession
"##lic"/le to BO indi(idu"l "ndcor#or"te t"x#"&ers
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III.ITEMIZED DEDUCTIONS
/INDS #0 ITE1I2ED
DED!CTI#N1/& st"tutor& cl"ssi'c"tion6
A.)usiness (xpenses
).Interest
&.#axes
D.osses
(.)ad Debtsatt. cleo d. sabado-andrada ca mba
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III.ITEMIZED DEDUCTIONS
/INDS #0 ITE1I2ED
DED!CTI#N1/& st"tutor& cl"ssi'c"tion6
+. Depreciation
G. DepletionH. &haritable and "ther &ontributions
I. %esearch and De/elopment (xpenditure
. Pension #rust &ontribution
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III.
ITEMIZED DEDUCTIONS
A.)usiness (xpenses
#he expenses must be RDI'AR+ and 'E/ESSAR+
when it is normal or
common or usual in
relation to the businessof the taxpayer and the
surrounding
circumstances.
!%ere it is "##ro#ri"te"nd %el#ful in t%e
de(elo#ment of t%et"x#"&ers /usiness5
me"nin+ it isintended to rea-i3e
a pro4t or to
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III.
ITEMIZED DEDUCTIONS
A.)usiness (xpenses
#he expenses must be incurred in trade or business
carried on - the taxpaer.
#he expenses must be substantiated by proof
not incurred in the tradeor business of another.
Receipts are the best proof BUT theburden of proof lies upon the taxpayer
to establish the relationship of the
expenses and the business.
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III.
ITEMIZED DEDUCTIONS
A.)usiness (xpenses
#he expenses must be reasonable
#he expenses must not be against public policy,
public moral or law.
If the expense is subEect to withholding tax,
proof of payment to )I% must be shown
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'& Garcia, a contractor who won thebid for the construction of a public
highway, claims as expenses,
facilitation fees which according to
him is standard operating procedurein transactions with the go/ernment,
Are these expenses allowable as
deduction from gross incomeF
1(() BAR Examination
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III.
ITEMIZED DEDUCTIONS
A.)usiness (xpenses
#he expenses must be paid or incurred during the
taxable year.
+,o (0) Acco%ntin1 Metho
in the recognition of expenses
/AS% E)%D%ecogni1ed when paid
so, expenses will be
deducted in the year in
which they are paid.
A//R0A& 4ASISE)%D
%ecogni1ed when incurred so,
expenses will be deducted in
the year in which they accrue.
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+,o (0) Acco%ntin1 Metho
in the recognition of expenses
/AS% E)%D
%ecogni1ed whenpaid so, expenses
will be deducted in
the year in which
they are paid.
&ash basis tax payers include
income ,hen it is #ecei!e ,
and claim deductions ,henexpenses are pai . A cash
basis taxpayer can loo: to the
doctrine of constructi/e receipt
and the
doctrine of cash e@ui/alence to
help determine when income is
recei/ed.
http://en.wikipedia.org/wiki/Constructive_receipthttp://en.wikipedia.org/wiki/Doctrine_of_Cash_Equivalencehttp://en.wikipedia.org/wiki/Doctrine_of_Cash_Equivalencehttp://en.wikipedia.org/wiki/Constructive_receipt
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+,o (0) Acco%ntin1 Metho
in the recognition of expenses
A//R0A&
4ASISE)%D
%ecogni1ed when
incurred so,
expenses will bededucted in the year
in which they accrue.
Accrual basis taxpayers
include items ,hen the
are ea#ne and claimdeductions ,hen expenses
are inc"##e . An accrual
basis taxpayer loo:s to the >
allearlier
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+,o (0) Acco%ntin1 Metho
in the recognition of expenses
A//R0A&
4ASISE)%D
%ecogni1ed when
incurred so,
expenses will bededucted in the year
in which they accrue.
*nder the all9events test7 an
accrual basis taxpayer
generally must incl"eincome *'o# t&e taxable
$ea# +&en all t&e e!ents
&a!e occ"##e t&at 'ix t&e
#i%&t to #ecei!e income ant&e amo"nt o' t&e income
can be ete#mine +it&
#easonable acc"#ac$ .
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+,o (0) Acco%ntin1 Metho
in the recognition of expenses
A//R0A&
4ASISE)%D
%ecogni1ed when
incurred so,
expenses will bededucted in the year
in which they accrue.
*nder the :earlier9of test:7
an accrual basis taxpayer
recei/es income when; (;$ the re@uired performance
occurs,
(
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"estion A/ 2010 BAR Examination
hat is the >all e/ents test?F
(xplain briefly.
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
Re"isites
< Personal ser/ices actuall rendered< &ompensation is for such ser/ices rendered.
< %easonable
0, Com#ens"tion for Person"l
Ser(ices
Salary e!enses are allo"e# as #e#$ctions from gross
%$siness income only i' t&e co##esponin% +it&&olin%
tax &as been e"cte an #emitte to t&e BR
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
2, r"(ellin+ Ex#enses
1include tr"ns#ort"tion5 me"ls "nd lod+in+ex#enses
Re"isites
< Paid or incurred while “a,a from home”
< Paid or incurred in the conduct of trade or
-usiness
< %easonable and necessary necessary
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
8, Re#resent"tion "nd Entert"inment
Ex#ensesRe"isites
< Paid or incurred in the conduct of trade or
business
< Paid or incurred during the taxable year < !ot contrary to law, morals and public policy
< %easonable and necessary
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
9, Ad(ertisin+ "nd Promotion"l Ex#enses
Re"isites
< 'ust be substantiated.
< All payments for the purchase of promotional gi/e<
aways, contest pri1es or similar material m"stbe p#ope#l$ #eceipte.
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
3, Rent Ex#ense
Fo# b"siness p#ope#t$
at least P866 !6
Non-b"siness3#esiential p#ope#t$
< at least P06,666 !6
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
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III.
ITEMIZED DEDUCTIONS
I!DS of )*SI!(SS (P(!S(S
>, Re#"irs
Rules on deducti-ilit=
nciental o# o#ina#$ #epai#s are deducti-le
keeps the asset in its ordinary workincondition Ext#ao#ina#$ #epai#s are not deducti-le
expenses incurred that will add material valueto the property or prolon its life. They are
capital expenditures.
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III.
ITEMIZED DEDUCTIONS
E5E1PTI#N* CPIT. EXPENDIT/RESALLO.ABLE OPRIAE
ED$CAIONAL INSI$IONS
Section 891A6126
GE'ERA& R0&E= &API#A (P(!DI#*%(S
A%( !"# D(D*I)(.
*)I'S=
0. Deduct immediately as expenditures
2. Deduct as allowances for depreciationatt. cleo d. sabado-andrada ca mba
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III.
ITEMIZED DEDUCTIONS
). Interest (xpenses
amount which one has contracted to pay for
the use of -orro,ed mone or amount ofcompensation paid for the use of mone or
for-earance from such use.
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III.
ITEMIZED DEDUCTIONS
). Interest (xpenses
#here must be an indebtedness.*no indebtedness no deduction,
interest or penalties or crimecommitted are NOT DED/CTI0.E-
att. cleo d. sabado-andrada ca mba
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III.
ITEMIZED DEDUCTIONS
). Interest (xpenses
Indebtedness must be that of the taxpayer.
Fo# co#po#ation,
the loan must be obtained in itscorporate capacity, using corporate
assets as security.
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III.
ITEMIZED DEDUCTIONS
). Interest (xpenses
#he debt must ha/e been incurred in
connection with taxpayer9s trade or business.
#he interest must ha/e been stipulated in writing.
att. cleo d. sabado-andrada ca mba
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III.
ITEMIZED DEDUCTIONS
). Interest (xpenses
Interest must be paid or accruedwithin the taxable year.
/ash 4asis > #e#$cti%le in the year it is act$ally
!ai#&Accrual 4asis9 #e#$cti%le in the year it is accr$e#
even if not act$ally !ai#&
att. cleo d. sabado-andrada ca mba
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). Interest (xpenses
I!#(%(S# (P(!S( D(D*I)(
I#H I'I#A#I"! Section 45B/1/
Situation= #axpayer has interest income subEected to 267final tax and at the same time incurred during
interest expense during the year
5or I'DI1ID0A&7
the allowable deduction for
interest expense shall be
reduced by an amount e@ual
to 3?6 of interest income
!ormal #ax %ate J27
ess; +inal #ax on
Interest Income 267
#ax Difference 027
Di/ided by J27
)ax Differential Rate 3?6
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). Interest (xpenses
I!#(%(S# (P(!S( D(D*I)(
I#H I'I#A#I"! Section 45B/1/
record shows the
following data;
Interest (xpense on
business loan P28,666Interest Income
on #ime Deposit P06,666
How much is the interest
expense deductibleF
Actual Interest
(xpense P28,666
ess; #ax differentialon interest income
'(),))) *+- P J,66
Deducti-le
Interest Expense *
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). Interest (xpenses
I!#(%(S# (P(!S( D(D*I)(
I#H I'I#A#I"! Section 45B/1/
Situation= #axpayer has interest income subEected to 267final tax and at the same time incurred during
interest expense during the year
5or /R*RA)I'7
the allowable deduction for
interest expense shall be
reduced by an amount e@ual
to 336 of interest income
!ormal #ax %ate J67
ess; +inal #ax on
Interest Income 267
#ax Difference 067
Di/ided by J67
)ax Differential Rate 336
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). Interest (xpenses
I!#(%(S# (P(!S( D(D*I)(
I#H I'I#A#I"! Section 45B/1/
&orporation record
shows the following data;
Interest (xpense on
business loan P86,666Interest Income
on #ime Deposit P56,666
How much is the interest
expense deductibleF
Actual Interest
(xpense P86,666
ess; #ax differentialon interest income
'.),))) **- P 0J,266
Deducti-le
Interest Expense *3@7?""
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). Interest (xpenses
!"! D(D*I)( I!#(%(S# (P(!S(
Section 45B/2/
0. Interest paid in ad/ance or Prepaid InterestSection */'0-'/-'a-
If ta!ayer is re!orting income on CASH
0ASIS, the interest e!ense of a %$siness
loan pai in a!ance shall %e allo+e as
e"ction in t&e $ea# t&at t&e p#incipal
inebteness is F6778 9AD.
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). Interest (xpenses
!"! D(D*I)( I!#(%(S# (P(!S(
Section 45B/2/
0. Interest paid in ad/ance or Prepaid InterestSection */'0-'/-'a-
If the in#e%te#ness is !aya%le in !erio#ic
amorti1ation, the amo"nt o' inte#est
expense +&ic& co##espons to t&e
amo"nt o' t&e p#incipal amo#ti:e o# pai
"#in% t&e $ea# SHA22 0E A22OWE3 AS
3E34CTION IN S4CH TA5A02E 6EAR&
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). Interest (xpenses
!"! D(D*I)( I!#(%(S# (P(!S(
Section 45B/2/
2. Interest payment on indebtedness not business
relatedC
Interest payment in fa/or of a relati/e 3related
debtor and creditor4Section */'0-'/-'%-
J. Interest paid on indebtedness to finance
petroleum explorations.Section */'0-'/-'c-
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). Interest (xpenses
"P#I"!A #%(A#'(!# "+ I!#(%(S# (P(!S(
Section 45B/4/
Interest incurred by the taxpayer toacuire propert used in trade or
-usiness or exercise of profession
TA5PA6ER has T7# 8'9#PTI#NS:
0,DED$C I O$RIG2,REA I AS CAPIAL
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(xplain if the following items are deductible from
gross income for income tax purposes. Disregard
who is the person claiming the expense.
0.Interest on loans used to ac@uire capitale@uipment.
2.Depreciation of goodwill.
1(() BAR Examination
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III.
ITEMIZED DEDUCTIONS
&. #A(S
Re2%iite fo' !e%cti#ility of +a3e
1.It must be paid or incurred within thetaxable year2.It must be paid or incurred in connectionwith the taxpayer’s profession, trade orbusiness3.The tax must be imposed directly upon the
taxpayer
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&. #A(S
!"! D(D*I)( #A(S from G%"SS I!&"'(
1. Philippine income tax
2. Estate and donor9s taxes(Sec. 83, Rev. Regs. No. 2.)
3. Foreign income tax, if claimed as a taxcredit
4. Percentage tax on stock transaction5. Value-added tax
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&. #A(S!"! D(D*I)( #A(S from G%"SS I!&"'(
6. Taxes not related to business, trade, orprofession7. Other items related to tax such as:
- Special assessment tax
- Surcharges - Compromise penalty
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). Interest (xpenses
!"! D(D*I)( #A(S from G%"SS I!&"'(
U+5
*' 0&R& *S 0+8 R&'/1. or 0+8 CR&.*0$ S+&S+,, B& *1C,/.&. +S P+R0 ' RSS *1C&*1 0& 9&+R ' R&C&*P0 0 0& &80&10' 0&
*1C& 0+8 B&1&'*0 ' S+*. .&./C0*1%
+A6 ENEFI+ RULE
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&. #A(S
#A(S D(D*I)( from G%"SS I!&"'(
1. Documentary stamp taxes
2. Occupational taxes3. Privilege and license taxes4. Excise taxes5. Import duties
6. Local Business taxes7. Automobile registration fees8. Community tax9. Municipal tax
http://www.animationfactory.com/en/search/close-up.html?&oid=4953912&s=1&sc=1&st=110&q=yes&spage=1&hoid=046fce32c0e40af499ed12e1cbcb1717
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&. #A(S
#A(S D(D*I)( from G%"SS I!&"'(
0#R: NRA&ET; and
R0C *
ALLO.ED ONLF I- AXES ARECONNECED .I INCOME -ROM
SO$RCES .IIN E PILIPPINES,Section 891C6126
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III.
ITEMIZED DEDUCTIONS
D. "SS(S
red,ctions on reso,rces dueto unintended destruction
ordepri
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&API#A GAI! &API#A "SS
Section 4(A/2/4/
o' t&e NRC
"%DI!A%$ GAI! R!INARY LSS
D. "SS(S
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D. "SS(S
Re=,isites or Ded,cti+i-ity o #rdinaryLosses1.The loss must beactually sustainedin a
closed and completed transaction;
2. The loss must be that of the taxpayer andincurred in trade, profession or business;
3. The lossmust not be compensated byinsurance or other forms of indemnity;
4. The loss must bereported to the BIR from 30days to 90 days from the date of its
discovery.
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D. "SS(S
!"! D(D*I)( "SS(S from G%"SS I!&"'(
3not allowed by law as deductions4
1. Loss on voluntary removal of building on landpurchased with a view to erect another building(Sec. 97, Rev. Reg. No. 2);
2. Gambling losses not covered by gambling
gains(Sec. 34[D][6], NIRC);!an be allowed as deductions to the extent ofamblin wins. "OT #$$O%&D #S D&DU!T'O"from business income( compensation income and
ains from sale of capital assets.
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D. "SS(S
!"! D(D*I)( "SS(S from G%"SS I!&"'(
3not allowed by law as deductions4
3. Capital loss not covered by capital gains(Sec. 34[D][4], NIRC);
&apital oss
deductible to the
extent of &apitalGain, can not
-e deducti-le
from rdinar
Gain
To !reserve Section *.'A-'(- of the
NIRC that only OR3INAR6 an#
NECESSAR6 E57ENSES "ill %eallo"e# to %e #e#$cte# from the 8ross
Income&
Capital Loss is not a business connected
expense, not ordinary expense.
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D. "SS(S
!"! D(D*I)( "SS(S from G%"SS I!&"'(
3not allowed by law as deductions4
4.Losses fromexchanges of propertyin corporate readjustments
(Sec. 40, NIRC);
S ti .)'C- f th NIRC SA&ECE2/%A'GE 5 *R*ER)+
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'o GAI'7 'o &SS RecoBni8ed (Gain not
taxa-le7 &oss not deducti-le
!" &ASH IS GI-(!,
T;EREFORE, TA<
E
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TRANSACTI#N
S N#TS#LEL6 IN
/IND
>AN is RECO>N?ED
B6T 7OSS isNOT
DED6CTB7E.
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D. "SS(S
!"! D(D*I)( "SS(S from G%"SS I!&"'(
3not allowed by law as deductions4
5. Losses from illegal transactions(Sec. 96, Rev. Reg. No. 2)
6. Losses from sales or exchanges of property between related taxpayers
(Sec. 36 [B], NIRC).
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#THER TRANSACTI#NS 7HEREIN THE
"AIN IS REC#"NI2ED AND L#SS ISN#T DED!CTI;LE
0. Illegal #ransactions
2. #ransactions between %elated #axpayers. Section JK3)4, !I%&
Strangers, Section LL3)4 of the !I%&
#THER TRANSACTI#NS 7HEREIN THE
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#THER TRANSACTI#NS 7HEREIN THE
"AIN IS REC#"NI2ED AND L#SS IS N#TDED!CTI;LE
J. ash Sale, Section *+ of the NIRC
A sale or #is!osition of stoc9 or sec$rities, %y a
seller "ho is not a #ealer in sec$rities or shares or
stoc9s, "here s$%stantially i#entical sec$rities areac:$ire# or !$rchase# "ithin a ;( #ay !erio#,
%eginning *) #ays %efore the sale an# en#ing *)
#ays after the sale&
Even if sol# %y a #ealer in sec$rities if the
transaction "as not ma#e in the or#inary co$rse of
the %$siness of s$ch #ealer, there is WASH SA2E&
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D. "SS(S
!"! D(D*I)( "SS(S from G%"SS I!&"'(
3not allowed by law as deductions4
M. Losses from exchanges of property wherethe property received is not substantiallydifferent from the property disposed of
(Sec. 40, NIRC);
8. Losses not incurred in trade, profession or business or in any transaction entered intofor profit
(Sec. 36 [A], NIRC)
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Gi/e the re@uisites for deductibility of a loss.
1(() BAR Examination
att. cleo d. sabado-andrada ca mba
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D. "SS(S
D(D*I)( "SS(S from G%"SS I!&"'(3 !rovi#e# the re:$isites for #e#$cti%ility are com!lie# "ith4
Re=,isites or Ded,cti+i-ity o #rdinaryLosses1.The loss must beactually sustainedin a
closed and completed transaction;2. The loss must be that of the taxpayer and
incurred in trade, profession or business;
3. The lossmust not be compensated byinsurance or other forms of indemnity;
4. The loss must bereported to the BIR from 30days to 90 days from the date of its
discovery.
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D. "SS(S
D(D*I)( "SS(S from G%"SS I!&"'(3 !rovi#e# the re:$isites for #e#$cti%ility are com!lie# "ith4
0, Business losses suc% "s losses incurred intr"de or #rofession7
2, C"su"lt& losses suc% "s losses due to storms5'res5 s%i#!rec@ or ot%er
c"su"lties of #ro#ert& connected!it% #rofession5 tr"de or
/usiness78, Losses of /usiness #ro#ert& due to t%eft5
ro//er& or em/e**lement79, Net O#er"tin+ Loss C"rr& O(er 1NOLCO6,
Section >?8D98>9
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D. "SS(S
D(D*I)( "SS(S from G%"SS I!&"'(3 !rovi#e# the re:$isites for #e#$cti%ility are com!lie# "ith4
In case of PA%#IA "SS, what is the measure of lossF
Cost to restore !ro!erty %ac9 to its normal
con#ition OR 0oo9
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NET CAPITAL L#SS CARR6 #ER
8NCLC#9Section 3:(.) o the 1*RC
Applies only to Indi/idual #axpayer and
'E1ER to a /orporate )axpaer.
NET #PERATIN" L#SS CARR6 #ER8N#LC#
Section 34(.)(3) the 1*RC
!"#
# H(sameas
APPLICABLE O BO INDIID$AL "ndCORPORAE AXPAFERS
D. "SS(S
att. cleo d. sabado-andrada ca mba
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NET #PERATIN" L#SS CARRF OER1NOLCO
Section 34(.)(3) o the 1*RC
D. "SS(S
the excess of allowable deductions
o/er gross income of the business or
enterprise for any taxable year.Section 45D/4/ii/
#he net operating loss, +&ic& &a not been
p#e!io"sl$ o''set as e"ctions '#om %#oss income,
shall be carried o/er as a deduction from gross income
for the next three (3$ consecutive taxa-le ears
immediately following the year of such loss.
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
H" A%( (!#I#(D #" &AI' !"&"F
Indi/idual taxpayers engaged in trade or
business or in the exercise of his profession.
Domestic and resident
foreign corporations subEect
to normal income tax.
Special &orporation subEect to preferential tax rates
such as pri/ate educational institutions, hospitals,
and regional operating head@uarters.
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2007 2008 2009 2010 2011Salary as a professor
Gross business income
Business deductions
P180,000
200,000
350,000
P190,000
250,000
200,000
P200,000
300,000
340,000
P210,000
400,000
380,000
P210,000
600,000
400,000
X, single, reported the following income and expenses:
Gross business income
Business deductions
Income(loss) from business
Less: Applicable NOLCO
Net business income (loss)Salary as a professor
Taxable income before
personal exemption
P 200,000
( 350,000)
(P150,000)
.
(P150,000)P 180,000
P 180,000
P 250,000
( 200,000)
P 50,000
( 50,000)
P - 0 –P 190,000
P 190,000
P340,000
(300,000)
P 40,000
( 40,000)
P – 0 –P200,000
P200,000
P400,000
(380,000)
P 20,000
( 20,000)
P - 0 -P210,000
P210,000
P600,000
400,000
P200,000
.
P200,000 210,000
P410,000
X’s taxable income before personal exemption for the
said years would be:
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Gross business income
Business deductions
Income(loss) from businessLess: Applicable NOLCO
Net business income (loss)
Salary as a professor
Taxable income before
personal exemption
P 200,000
( 350,000)
(P150,000) .
(P150,000)
P 180,000
P 180,000
P 250,000
( 200,000)
P 50,000( 50,000)
P - 0 –
P 190,000
P 190,000
P340,000
(300,000)
P 40,000( 40,000)
P – 0 –
P200,000
P200,000
P400,000
(380,000)
P 20,000( 20,000)
P - 0 -
P210,000
P210,000
P600,000
400,000
P200,000 .
P200,000
210,000
P410,000
)NO!O cannot be deducted a"ainst compensationincome #employer$employee relationship%.
@t%e rem"inin+ P945444 NOLCO c"nnot /e deductedfrom t%e /usiness income of t%e &e"r 2400 /ec"uset%e t%ree?&e"r re+lement"r& #eriod %"s ex#ired,
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NET #PERATIN" L#SS CARRF OER
1NOLCOSection 34(.)(3) o the 1*RC
If a person, nat$ral or
=$ri#ical, is enEoyingtax exemption
pursuant to the !I%&
or any special law,
N+
EN+I+LE! +
!E!UC+
NLC
+%"' G%"SSI!&"'(
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NET #PERATIN" L#SS CARRF OER
1NOLCOSection 34(.)(3) o the 1*RC
In cases of )*SI!(SS
&"')I!A#I"!S, if there
is a su-stantial chanBein the ownership of
business.
N+
EN+I+LE! +
!E!UC+
NLC
+%"' G%"SS
I!&"'(
If less than !6 percent of thepaid9up capital or nominal
value of outstandinB shares
retained by the same persons.att. cleo d. sabado-andrada ca mba
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NET #PERATIN" L#SS CARRF OER
1NOLCOSection 34(.)(3) o the 1*RC
In cases of )*SI!(SS
&"')I!A#I"!S, if there
is ' su-stantialchanBe in the ownership
of business.
NLC I
ALL7E! +
E
!E!UC+E!
+%"' G%"SS
I!&"'(
If ') less than !6 percent ofthe paid9up capital or nominal
value of outstandinB shares
retained by the same persons.
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NET #PERATIN" L#SS CARRF OER
1NOLCOSection 34(.)(3) o the 1*RC
0#R 1INES3other than oil and gas wells4
NOLCO incurred in any of the first 10
years of operation may be carried over asa deduction from taxable income for thenext 5 years immediately following theyear of such loss.
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
0#R 1INES3other than oil and gas wells4
"n December J0, 266A, Gold 'ines mar:ed its 06
consecuti/e year of operation. It has an operating loss in
year 266A amounting to PJ6,666,666.
If Gold 'ines continues operation with the following
data, the taxable income would be;
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
0#R 1INES3other than oil and gas wells4
200B 200C 200D 200E 200F 200G(In millions of
pesos)Revenue P 20 P30 P24 P28 P35 P40Cost of goods sold ( 5) ( 7) ( 6) ( 7) (10) (12)Operating expenses ( 13) (15) (15) (15) (16) (18)Net income (loss) P 2 P 8 P 3 P 6 P 9 P10
NOLCO ( 2) ( 8) ( 3) ( 6) ( 9) - 0 -Taxable income - 0 - - 0 - - 0 - - 0 - - 0 - P10
Only 7/+> o$t of 7*)> net o!erating loss is covere# %y the ?
year !erio# for the #e#$cti%ility of NO2CO
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
SP(&IA="#H(% %*(S "! "SS(S
A taxpayer who claims the #"6 SD shall
not simultaneously claim deduction of the!"&". )he three9ear reBlementar
period shall continue to run
not,ithstandinB the fact that the aforesaid
taxpayer a/ailed of the "SD during the said
period
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
SP(&IA="#H(% %*(S "! "SS(S
Domestic and resident foreign corporation
taxed during the taxable year with /I)cannot enEoy the benefit of !"&".
!e/ertheless, the runninB of the tee 4/
$ea# pe#io for the expir of '&/ is notinterrupted by the fact that such corporation
is subEect to '&I#
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
SP(&IA="#H(% %*(S "! "SS(S
a loss in one line of business is notpermitted as allowable deduction from gain
in another line of business, if one of the two
lines is exempted from tax.
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NET #PERATIN" L#SS CARRF OER 1NOLCOSection 34(.)(3) o the 1*RC
H" A%( !"# (!#I#(D #" &AI' !"&"F
O G s %o re
B" n @ i n+ $ n i t
" nd -o re i+ n
C u r re nc &
De #o s i t $ n i t
Ent er #r ise r e+ist er ed !it %
t %e Bo"r d of In(est ment s
Enter#risere+istered !it%
PEHA
Enter#rise re+isteredunder t%e /"sesCon(ersion "nd
De(elo#ment Act of 02-orei+n Cor#or"tions en+"+ed in
Intern"tion"l S%i##in+ or "irc"rri"+e /usiness in t%e
P%ili##ines,
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III.
ITEMIZED DEDUCTIONS(. )AD D()#S
claim that becomes worthless or uncollectible arising
from money lent or from goods sold or ser/ices
rendered.
att. cleo d. sabado-andrada ca mba
http://www.animationfactory.com/en/search/close-up.html?&oid=4951976&s=1&sc=1&st=54&q=bad%20debt&spage=1&hoid=ede74468273c8958869c33e9d96cc72dhttp://www.animationfactory.com/en/search/close-up.html?&oid=4951976&s=1&sc=1&st=54&q=bad%20debt&spage=1&hoid=ede74468273c8958869c33e9d96cc72dhttp://www.animationfactory.com/en/search/close-up.html?&oid=4951976&s=1&sc=1&st=54&q=bad%20debt&spage=1&hoid=ede74468273c8958869c33e9d96cc72dhttp://www.animationfactory.com/en/search/close-up.html?&oid=4951976&s=1&sc=1&st=54&q=bad%20debt&spage=1&hoid=ede74468273c8958869c33e9d96cc72d
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Reuisites for the deducti-ilit of 4ad De-ts Expense
/ charged off or written off against the boo:s of the taxpayer
0 the amount written off must be uncollectible in the nearfuture, no slim chance of reco/ery collecting such an
amount.
4 it must arise from business trade=profession
A ascertain to be worthless
' not arising from transactions between related taxpayers
(. )AD D()#S
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A! !E+S REC$ERY
Shall be included in the Gross Income in the
year of reco/ery to the extent of the tax benefit
of said deduction.
So, upon reco/ery of bad debts, it is a taxa-le
Bain
(. )AD D()#S
+A6 ENEFI+ RULE o'
RECA*+URE RULE
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III.ITEMIZED DEDUCTIONS
+. D(P%(&IA#I"!
annual reasonable allowance to reduce the usefulvalue of the tanBi-le fixed assets resulting from
wear and tear and normal obsolescence
For intangible assets such as patents,copyrights and franchise,the annual allowanceto reduce their useful value is called
“amortization.”
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+. D(P%(&IA#I"!
Re2%i(ite( fo' !e)%cti#ility8
•It must be reasonable.
•It must be charged off during the year.
•The asset must be used in profession,trade or business.
•The asset must have a limited useful life.
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0. hat is the proper allowance for depreciation of
any property used in trade or businessF
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+. D(P%(&IA#I"!
MEODS O- DEPRECIAIONSection 3#(5$(
-
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+. D(P%(&IA#I"!
MEODS O- DEPRECIAIONSection 3#(5$(
-
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+. D(P%(&IA#I"!
MEODS O- DEPRECIAIONSection 3#(5$(
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+. D(P%(&IA#I"!
DEPRECIAION O- PROPERIES $SED INPEROLE$M OPERAIONS
Section 3#(5$(#$
1ethod oDepreciation orINITIALL6 PLACED
PR#PERTIES
S+RAI9:+ ;LINE
ME+:!
DECLININ";ALANCE1ETH#D
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+. D(P%(&IA#I"!
DEPRECIAION O- PROPERIES $SED INPEROLE$M OPERAIONS
Section 3#(5$(#$
1ethod oDepreciationor INITIALL6
PLACEDPR#PERTIES
S+RAI9:+
;LINEME+:!
DECLININ";ALANCE
1ETH#D
Initially elected At any subse@uent date,
It can change to
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+. D(P%(&IA#I"!
DEPRECIAION O- PROPERIES $SED INPEROLE$M OPERAIONS
Section 3#(5$(#$
Estimated !SE0!L LI0E oPR#PETIES
Directl& used orrel"ted in t%e
#roduction of#etroleum
$( years or "s%orter life "s
#ermitted /& t%e BIR
NO directl& used orrel"ted in t%e#roduction of
#etroleum years ,nderthe Straight
Line 1ethodatt.cleod.sabado-andrada ca mba
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+. D(P%(&IA#I"!
DEPRECIAION O- PROPERIES $SED INMINING OPERAIONSSection 3#(5$(!$
1. Expected life is ten (10) years or less—THE
NORMAL RATE OF DEPRECIATION.2. Expected life is more than ten (10) years–DEPRECIATED OVER ANY NUMBER OF YEARS
between five (5) years and the expected life.
3. The depreciation thereon allowed as deductionfrom taxable income.4. The contractor should notify the BIRCommissionerat the beginningof the depreciationperiod as to which depreciation rate will be used.
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+. D(P%(&IA#I"!
DEPRECIAION DED$CIBLE BFNRA?EB "nd R-CSection 3#(5$(@$
e"'ecia#le aet m%t #e
locate in the *hili""ine.
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III.ITEMIZED DEDUCTIONS
G. D(P(#I"! "+ "I and
GAS (S and 'I!(S
the exhaustion of natural resources li:emines, oil and gas wells due to production
similar to depreciation allowance, thepurpose of which is to reco/er the in/ested
capital in the property
att.cleod.sabado-andrada ca mba
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G. D(P(#I"! "+ "I and
GAS (S and 'I!(S
H" A%( (!#I#(D #" &AI' D(P(#I"! AS
D(D*I"! +%"' G%"SS I!&"'(
Persons who deri/ed income from the extractionof oil, gas and mineral for the purpose of
reco/ering his capital.
#he taxpayer must ac@uire economic interest in amineral land and must ha/e capital in/estment
in the property and not mere economic
disad/antage.
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G. D(P(#I"! "+ "I and
GAS (S and 'I!(S
Re"isites o' e"ctibilit$
0. Depletible natural resources assets li:emines, gas and oil wells.
2. &harged off within the taxable year
J. Allowance for depletion is computed in
accordance with the cost depletion method.
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G. D(P(#I"! "+ "I and GAS (S and 'I!(S
(A'P( with the &"S# D(P(#I"! '(#H"D
X Mining acquired a coal property with anestimated depositof 2,000,000 tonsfor P4,200,000. It is estimated that theproperty has a salvage value of P200,000. If Baguio Mining
was able to produce 400,000 tons, What is the amount of thedeductible depletion expense during the year?
Cost of coal property P4,200,000Less: Salvage value 200,000Depletion base P4,000,000Divided by estimated tons to be extracted 2,000,000Depletion per ton P 2Multiplied by number of tons extracted during the
year
400,000
Depletion expense during the year P 800,000
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G. D(P(#I"! "+ "I and
GAS (S and 'I!(S
In ca(e of fo'ei1n co'"o'ation(5
depletion shall be allowed only if the miningproperty is located in the Philippines.
att.cleod.sabado-andrada ca mba
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G.D(P(#I"! "+ "I and GAS (S and 'I!(S
(P"%A#I"! and D(-("P'(!# &"S#Section 45>/2/
expenditures paid or incurred during the
development stage of the mine or other natural deposits.
att.cleod.sabado-andrada ca mba
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G.D(P(#I"! "+ "I and GAS (S and 'I!(S
(P"%A#I"! and D(-("P'(!# &"S#Section 45>/2/
#A #%(A#'(!#
D"#in% t&e taxable $ea#, t&e TA
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(P"%A#I"! and D(-("P'(!# &"S#Section 45>/2/
#A #%(A#'(!#
' t&e TA
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(P"%A#I"! and D(-("P'(!# &"S#Section 45>/2/
CONDTONS
If total amount deductible for exploration anddevelopment expendituresshall not exceed 25% of the
net income from mining operations computed withoutthe benefit of any tax incentives under existing laws.
The actual exploration and development expendituresminus25% of thenet income from mining shall becarried forward to the succeeding years until fullydeducted.
III
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129/163
III.ITEMIZED DEDUCTIONS
H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
It is not an "P(%A#I!G (P(!S(.
4U+5 allowed by law, to be deducted
from Gross Income
att.cleod.sabado-andrada ca mba
III
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III.ITEMIZED DEDUCTIONS
H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
Reuisites for Deducti-ilit=
A,%e contri/ution or +ift must /e "ctu"ll&#"id durin+ t%e t"x"/le &e"r,
3m$st state the name an# a##ress of
organi1ation, a!!roimate #ate an# amo$nt ofthe gift, if not money, @>< of the gift an# m$st
%e signe# %y the ta!ayer or the res!onsi%le
officer of the cor!oration-
att.cleod.sabado-andrada ca mba
III
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III.ITEMIZED DEDUCTIONS
H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
). 'ust be gi/en to the organi1ation specified by
the #A &ode or special law.
&. #he net income of the institution must notinure to the benefit of any member or
indi/idual.
Reuisites for Deducti-ilit=
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H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
As p#o!ie b$ t&e Tax Coe, contributions or donations
made to the following are D(D*I)( I! +*.
0.Donations to the 1o>e'nment o' "olitical
%#i>iion incl%in1 f%lly o,ne 1o>e'nmentco'"o'ation to be used exclusi/ely in underta:ing
P%I"%I#$ AI-I#I(S I! e"cation, &ealt&, $o"t& an
spo#ts e!elopment, &"man settlement, science an
c"lt"#e, economic e!elopment.
2. Donations to inte'national o'1ani?ation o'
fo'ei1n intit%tion in compliance with agreements
or treaties.
H &HA%I#A)( d "#H(% &"!#%I)*#I"!S
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H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
As p#o!ie b$ t&e Tax Coe, contributions or donationsmade to the following are D(D*I)( I! +*.
J. Donations to accredited non
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H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
As p#o!ie b$ Special 7a+ , contributions or donationsmade to the following are AS" D(D*I)( I! +*.
0. Integrated )ar of the Philippines )P P '7&3& (+()-
2.De/elopment Academy of the Philippines '7&3& /)?-J.Agricultural Department of Southeast Asian +isheries
De/elopment &enter '7&3& /B/-
5. !ational Social Action &ouncil '7&3& /B.-
8. #as: +orce on Human Settlement
K. !ational 'useum, ibrary N Archi/es '7&3& **-
M. Intramuros Administration '7&3& (;(;-
. ungsod ng abataan '7&3& (;*(-
H &HA%I#A)( d "#H(% &"!#%I)*#I"!S
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H. &HA%I#A)( and "#H(% &"!#%I)*#I"!S
Cont#ib"tion s"bects to 7imitation ;
are not deducti-le in full as specified by the law or such
deduction has not met the re@uisites to be deducted in full.
&orporate< !6 of the !et Income before charitablecontributions or the A*A &"!#%I)*#I"! whiche/er is
lower
Indi/idual #axpayer< ;"6 of the net Income before&haritable contributions or the A*A &ontribution
whiche/er is "(%.
III
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III.ITEMIZED DEDUCTIONS
I. %(S(A%&H and D(-("P'(!#
&osts incurred by the taxpayer durinB the taxa-le
ear in connection ,ith his trade7 -usiness or
profession for the following;
0.impro/ements of processes and formulasC
0.de/elopment of impro/ed or new products.
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I. %(S(A%&H and D(-("P'(!#
#A #%(A#'(!#
Ordin"r& "ndNecess"r&
Ex#enseDED!CT0R#1 "R#SS
INC#1E
DE-ERREDEXPENSES
CHAR"E T#CAPITAL
ACC#!NT
Allowed as deduction rata-l distri-uted for aperiod of not less than @" months beginning
with the month in which the taxpayer +I%S#
%(AIO(S benefits from such expenditure.
att cleod sabado-andrada ca mba
III
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III.ITEMIZED DEDUCTIONS
. P(!SI"! #%*S#S
fund intended to pro/ide retirement
benefits to the employees.
att cleod sabado-andrada ca mba
P(!SI"! #%*S#S
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. P(!SI"! #%*S#S
Re2%iite fo' e%cti#ility8
0. (mployer must ha/e established a pension or
retirement plan for the payment of reasonable
pension to its employees and appro/ed by the )I%C2. Pension plan is reasonable and actuarially sound.
J. It must be funded by the employer
5. Amount contributed by the employer must no longer
be subEect to control of the employer
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Section 35 of the NIRC
S*)S#I#*#(S +"% #H( DISA"A!&( "+
+A'I$, I-I!G and P(%S"!A (P(!S(S
KindsBASIC PERSONAL EXEMPION
ADDIIONAL PERSONAL EXEMPIONatt cleod sabado-andrada ca mba
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P(%S"!A (('P#I"!
I.
A IC
*ER NAL
E6EM*+IN
II.
A!!I+INAL
*ER NAL
E6EM*+IN
*5
whether taxpayer ismarried, head of
the family or single.(R.A. !"#$
*05
I! ADDI#I"! to the basic
personal exemption for each
@ualified dependent children not
exceeding four 354.(R.A. !"#$
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P(%S"!A (('P#I"! 3P(4
#APA$(%S A"(D
for P(%S"!A (('P#I"!
#APA$(%S !"# A"(D
+"% P(%S"!A (('P#I"!
0.%&2.!%&
J.%A
5.(states and #rusts
8.!%AJ.&orporations5.Partnerships
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P(%S"!A (('P#I"! 3P(4
PRINCIPLE O- RECIPROCIFSection 831D6
means that "R#&TB shall be allowed a personal exemption
only if the income tax law in his country "rantspersonal exemptions to the citi&ens and residents ofthe 'hilippines, sub*ect to the followin limitations+
)The personal exemption does not include additionalexemption ( and)The amount of exemption shall in no case exceed thepersonal exemption "ranted by our law to citi&ens orresidents of the 'hilippines.
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P(%S"!A (('P#I"! 3P(4
PRINCIPLE O- RECIPROCIFSection 831D6
NRA&E+ Those who have stayed within thePhilippinesfor more than 180 days duringthe taxable year shall be deemed
nonresident aliens doing business in thePhilippines.
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'r. &orte1 is non
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P(%S"!A (('P#I"! 3P(4
#APA$(%S (!#I#(D #" ADDI#I"!A (('P#I"!S
0.%&
2.!%&
J.%A if @ualified children are 7N>
@T; ;= N T;E 9;799NES
If chil#ren are living a%roa#, RA is not
entitle# to a##itional eem!tions&
att cleod sabado-andrada ca mba
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P(%S"!A (('P#I"! 3P(4
RE@UISI+ES fo' A!!I+INAL E6EM*+INS
DEPENDENT 1!ST ;E*
0," t"x#"&ers c%ild5 !%et%er le+itim"te5ille+itim"te or le+"ll& "do#ted7
2, c%ieJ& de#endin+ for su##ort on t%et"x#"&er7
8, li(in+ !it% t%e t"x#"&er7
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P(%S"!A (('P#I"! 3P(4
RE@UISI+ES fo' A!!I+INAL E6EM*+INS
DEPENDENT 1!ST ;E*
9, not m"rried7 not +"infull& em#lo&ed5 "nd not moret%"n 20 &e"rs old, (Sec% 35(B)$ 1*RC)
The law allows the continuous additional exemption even if
the dependent child is more than 21 years old ( with theprovision statin ,or if such dependent, re"ardless ofa"e, is incapable of self$support because of mental orphysical defect.) -Sec. /B( par.0( "'R!1
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P(%S"!A (('P#I"! 3P(4
RULES IN CLAIMIN9
A!!I+INAL E6EM*+INS
If onl one spouse
is ,orinB,
said spouse may
claim
Additional(xemption.
If 4)% spouses are ,orinB,
only one can claim the additionalexemption.
>ene#al R"le Husband is the proper
claimant.
Exemption ife can claim if;
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&harlie, a widower, has two sons by his pre/iousmarriage, &harlie li/es with ane who is legally
married to 'ario, #hey ha/e a child named ill. #he
children are all minors and not gainfully employed.
0. How much personal exemption can &harlieclaimF (xplain.
2.How much additional exemption can &harlie
claimF (xplain.
200 BAR Examination
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P(%S"!A (('P#I"! 3P(4
@UALIFIE! !E*EN!EN+S +:ER +:AN C:IL!REN
A. PA%(!#S
0. incapable of self support
2. taxpayer should pro/ide the chief support.
). )%"#H(%S=SIS#(%S
0. should not be more than 20 years old
2. should not be gainfully employedJ. regardless of age, if brother=sister is incapable of self
support due to mental or physical defect
5. taxpayer pro/ided for the chief support.
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P(%S"!A (('P#I"! 3P(4
@UALIFIE! !E*EN!EN+S +:ER +:AN C:IL!REN
&. S(!I"% &I#IO(!
0. resident of the Philippines2. at least K6 years old
J. retired from either go/ernment or pri/ate ser/ice
2. has income of !"# '"%( #HA! PK6,666 per year
which will be re/iewed by !(DA e/ery J years.
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P(%S"!A (('P#I"! 3P(4
@UALIFIE! !E*EN!EN+S +:ER +:AN C:IL!REN
#axpayer or benefactor of senior citi1en shall beentitled only to the )ASI& P(S"!A (('P#I"! of
P86,666.
*e shall not be entitled to claim the+ITION+ --/'TION O0 '2, forsupportin" hisher parents, brothersister orsenior citi&en
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&HA!G( "+ S#A#*S S*''A%$
Individual )axpaer Individual )axpaer ExemptionExemption
Change of Status:
1.Married
2.Died3.Widowed with 1 qualified dependent child
4.Widowed with qualified dependentnothis
child
5.Widowed without dependents
6.Legally separated with 1 qualified
dependent child
7.Legally separated with qualified dependent
nothis child
8Legallyseparatedwithoutdependents
This year
P50,000
P50,000P75,000
P50,000
P50,000
P75,000
P50,000
P50,000
P50000
Next year
P50,000
P75,000
P50,000
P50,000
P75,000
P50,000
P50,000
P50000att cleod sabado-andrada ca mba
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&HA!G( "+ S#A#*S S*''A%$
Additional ExemptionAdditional Exemption
Change of Status:
1.Born
2.Reaches 21 years old – normal child
3.Reaches 21 years old – abnormal child and
incapable to support himself4.Marries
5.Gainfully employed
6.Dies
This year
P25,000
P25,000
P25,000P25,000
P25,000
P25,000
Next year
P25,000
P25,000
DE*E'DE') /%I&DRE'DE*E'DE') /%I&DRE'
(aximum of 5our$(aximum of 5our$
att cleod sabado-andrada ca mba
%A' got married to ISA las anuary 266J "n
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%A' got married to ISA las anuary 266J. "n
!o/ember 26, 266J, ISA ga/e birth to twins.
*nfortunately, howe/er, ISA died in the course of
her deli/ery. Due to complications, one of the twins
also died on December 08, 266J.
In preparing his Income #ax %feturn 3I#%4 for the
year 266J, what should %A' indicate in the I#% as
his ci/il statusF 3a4 single 3b4 married Head of the
+amily 3d4 widower 3e4 none of the abo/e. hyF%easons.
2005 BAR Examination
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!e"en)ent means a legitimate, illegitimateor legally adopted child chiefly dependent
upon and living with the taxpayer if suchdependent met the criteria provided underSec. 35(b) of NIRC.
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hea of family means an unmarried or legallyseparated man or woman with one or both parents, or
with one or more brothers or sisters, or with one ormore legitimate, recognized, natural, or legallyadopted children, living with and dependent upon himor her for theirchief support; where such brothers,sisters or children are not more than twenty-one yearsof age, unmarried, and not gainfully employed; or
where such brothers, sisters or children, regardless of
age, are incapable of self-support because of mentalor physical defect.(Sec. 35A par.3, NIRC)
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Arnold who is single, cohabits with -ilma, who is
legally married to Oachary. Arnold and -ilma ha/esix minor children who li/ed and depend upon
Arnold for their chief support. #he children are not
married and not gainfully employed.
0.+or income tax purposes, may Arnold beconsidered as >head of the family?F
2.Is Arnold entitled to deduct from his gross income
an additional exemption for each of his legitimate
childF
1(() BAR Examination
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li>in1 ,ith may be construed that thetaxpayer and his dependentsreside under
one roof, or do not necessarily resideunder one roof with consideration on thecharacter of the separation.
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9ainf%lly em"loye) means that thedependent is engaged in an employment, work
or trade that will remove him from the statusof chief support from the taxpayer.
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Chief (%""o't refers to the principal or mainsupport whether money or in kind extended
continuously to the dependent, such that if withdrawn, the dependent will have a destitutelife.
att cleod sabadoandrada ca mba
'ar got married in 0LL6 A wee: before their marriage oy
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'ar got married in 0LL6. A wee: before their marriage, oy
recei/ed, by way of donation, a condominium unit worthPM86,666 from her parents. After marriage, some
reno/ations were made at a cost of P086,666. #he spouses
were both employed in 0LL0 by the same company. "n J6
December 0LL2, their first child was born, and a second
child was born on 6M !o/ember 0LLJ. In 0LL5, they sold thecondominium unit and bought a new unit.
*nder the foregoing facts, what were the e/ents in the life of
the spouses that had income tax incidencesF