EXERCISES 5-1
1. None. The entire income is exempt because Minnie is a MWE. Basic salary P 48,000
Overtime and night-shift differential pay 14,000 Hazard pay 12,000 Other benefits:
13th month pay P 4,000
Less: Exemption 30,000 - . Total (not taxable) 74,000 2.
a. None. Proceeds of life insurance policy payable upon the death of theinsured are excluded from gross income. b
. Fernando must report P20,000 [(P12,000 x 10) – 100,000] as income.The rule is "amounts received in excess of the face amount of the policy are usually taxable as interest;” hence, included in the gross income. c
. No. It does not matter whether the insured is the mother or the wife ofthe beneficiary. The exclusion exists because life insurance benefits closely resemble inheritances which are not taxable.
3. None, because Angel is not required to pay income tax on the entire amount he received as proceeds from insurance policy. The reason being that the insured did not outlive the policy.
If however, his father outlived the life insurance policy, Angel must report an income of P75,000 (the face amount of P100,000 minus the premiums paid in the amount of P25,000).
4. Rodolfo must report an income of P75,000.
Although acquired by him, he is not required to report the value of the inherited properties in his income tax return because properties acquired thru inheritance are subject to estate tax; the liability being on the estate and not on the recipient of the estate.
5.
a. The P20,000 given to cover medical expenses are actual damages, whilethe other P20,000 constitutes moral damages. Both actual and moral damages are not subject to tax.
b
. The P150,000 awarded by the court for winning in the libel case is nottaxable. Libel is included in the phrase "personal injury or sickness," which is exempt from income tax.
c. Not included in the gross income. The amount of P12,000 being givenby the employer to its employees in case of disability are not salaries but compensation for personal injuries being suffered by its employees.
d. Taxable. Salaries received by employees who are unable to work due topersonal injuries or sickness are taxable. It does not make any difference between receiving the salary while he is working and receiving the same even while the employee is unable to work.
e. Not taxable. The P60,000 is in the form of moral damages which is notcapable of pecuniary estimation. Besides, it is in the nature of a return of capital.
6. 6. No, because all the requisites for exemption from income tax are present: (1) Tanda retired at age 60 which is more than the required age of 50 years; (2) a private pension plan is maintained by the employer; and, (3) he worked with San Jose Corporation for more than 10 years. The law does not require continuous service. Therefore, the 10-year service requirement is satisfied even if he had a broken service with the company.
7. The amount is taxable to Nilo. Separation pay is exempt from income tax if the cause of separation from service is death, sickness, physical disability, or any cause beyond the control of the employee.
None of the above-mentioned can be pointed out as the very cause of his separation from service. Inefficiency in service due to frequent tardiness caused by heavy traffic is not beyond the control of the employee. 8. a. Taxable. b . Taxable. c
. Not taxable. Kay was awarded without joining the contest and notrequired to render substantial future services. Moreover, the prize given was in recognition of an educational attainment.
9. The prize won by Tornado is taxable. The fight was not sanctioned by a national sports associations. As a matter of fact, it was held in a very secluded place. The main purpose of the fight is for the gamblers to bet on their favorite fighter and not to promote sports.
10. Answer: P38,000 Salary (P20,000 x 12) 240,0 00 Add: Benefits Christmas bonus 20,000 Productivity bonus 2,000
Loyalty award 3,000 Cash gift 1,000 Anniversary bonus 2,000 13th month pay 20,000 Total 48,000 Less: Exemption 30,000 18,0 00
Income subject to tax 258,0
00 EXERCISES 5–5:
1. ANSWER: D
The entire amount of proceeds of the insurance policy received by the beneficiary of Okeze from Filipinas Life Assurance Company is not taxable because they are more considered as indemnity rather than as gain or profit.
2. ANSWER: B
Proceeds of life insurance 500,00 0 Less: Premiums paid (1,000 x 12 x
20) 240,000
Subject to tax 260,00
0 3. ANSWER: C
Total amounts received (50,000 x 12) 600,00 0 Less: Face value of the policy 500,00 0 Deemed interest (taxable) 100,00 0 4. ANSWER: C
Total amounts received (50,000 x 12) 600,00 0 Less: Amount of premiums paid
(1,000 x 12 x 20) 240,000
Subject to tax 360,00
0 Prob 5-5.2
Proceeds of insurance 500,0 00 Less: Premiums paid (P10,000 x
20) 200,000
Income subject to tax 300,00 0 2. ANSWER: D
None because Sonia died. Prob 5-5.3
ANSWER: D
Income from coconut land 50,0 00 Income from bus operation 30,000 Income subject to tax 80,000 Prob 5-5.4:
ANSWER: B
Proceeds of life insurance policy Less: Amounts of premiums paid Amount subject to tax
P 500,00 0 400,00 0 100,00 0 Prob 5-5.5: ANSWER: C
Proceeds of insurance policy P 200,00 0 Less: Amount paid upon
assignment 60,000P Premiums subsequently paid 80,000 140,000 Taxable income 60,00 0 Prob 5-6.1 ANSWER: C
from employment of Mr. Jacobo was due to a cause which is within his control, that is resignation; while the cessation from employment of Mr. Kintanar was made without his control.
Therefore, the separation pay received by Mr. Jacobo is a taxable income while the amount received by Mr. Kintanar is not taxable. Prob 5-6.2
ANSWER: C
The retirement benefit of P300,000 is taxable to Jovito because he retired at the age of 48. To be exempt from the payment of income tax, the taxpayer must be at least 50 years on the date of his retirement.
In the case of the proceeds from insurance policy, the amount exempt is P40,000 (P2,000 x 20) only which represents the return of the premiums paid.
Prob 5-6.3
ANSWER: B
There is no showing that Mario was in the service of the same employer for at least ten (10) years, that he is at least fifty(50) years of age at the time of retirement, that he has never availed of the benefit of exclusion, and that the retirement gratuity came from a reasonable retirement plan maintained by his employer.
The amount of P250,000 is taxable because Remus is only 49 years old upon retirement. To be exempt from income tax, the retirement age of an employee must be at least 50 years.
Prob 5-6.4
ANSWER: D
The money value of the accumulated leave credits given to a retiring government official or employee is not subject to tax (CIR s. CA, et.al, 203 SCRA 72).
Prob 5-6.5
ANSWER: A
The P1,000,000 is part of Larry's retirement pay and not a gift. Considering that the requisites for exemption from payment of tax are satisfied, the additional P1,000,000 is not taxable.
ANSWER: D
The separation pay received by Evelyn is taxable because of the voluntary action on her part. To be exempt, the causes for separation must be either death, sickness, physical disability, or any cause beyond the control of the employee.
The separation pay received by Ling-ling and Gina are exempt because they are separated from service due to redundancy and disability, causes which are beyond their control.
EXERCISES 5–7. Prob 5–7.1
ANSWER: C
Only the amount of P300,000 corresponding to the income which was lost during the period of treatment is taxable because even if he did not meet an accident, that income would have been taxable.
Prob 5-7.2
ANSWER: A
Two months' salary 40,0 00 Increase in value of car (P600,000 -
450,000) 150,000
Income 190,00
0 Prob 5-7.3
ANSWER: C
Payment for the salaries 60,0 00 Prob 5-7.4
ANSWER: D
The amount of P500,000 should not be declared in the income tax returns of the heirs. The amount represents damages received on account of personal injuries (which includes death), therefore excludible from gross income [Sec. 32 (B) {1}, TRA). The reason is that life insurance proceeds represents indemnity and not income.
The proceeds of life insurance policies paid to the beneficiary, in this case the wife, upon the death of the insured is excluded from gross income.
EXERCISE 5– 8.1:
ANSWER: C
Talent fee 400,000
Professional fee 1,000,000 Total amount taxable 1,400,000 Cash prize 25,000,00 0 Pay per view 30,000,00 0 Talent fee 12,000,00 0 Taxable amount 67,000,00 0 EXERCISES 5-8.2
a. The P350,000 value of the car is subject to a final tax of 20%.
b. The P5,000 is subject to graduated tax to be reported in the income tax return.
c. The cash prize and the equivalent amount of the 100 shares are subject to 20% final tax because the awards given are not in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement.
EXERCISES 5-8.3
Being a resident citizen, Monique Salonga is taxable on income within and without the Philippines. Consequently:
a. The income of $75,000 is taxable to her unless she has acquired the status of a contract worker. In which case, the $75,000 is not taxable to her because contract workers are taxable only on income derived from sources within the Philippines;
b. The talent fees derived from Inter-Island Broadcasting Network amounting to P100,000 is a professional income subject to graduated rates of tax.
c. The $5,000 value of the trophy is not taxable to her because it is in recognition of an outstanding achievement. An award for outstanding achievement is a gift, and not a taxable income.
PROBLEM 5-9.1 ANSWER: D Salary (P25,000 x 12) 300,0 00 Other benefits: 13th month pay 25,00 0 Cash gift 2,500 Longevity pay 30,000 Total 57,500 Less: Amount of exemption 30,000 27,500 Proceeds of life insurance (300,000
– 200,000) 100,000
Income subject to tax 427,50 0
EXERCISE 5 – 10
1. None. Holiday pay, overtime pay, night shift differential pay and hazard pay earned by a minimum wage earner shall likewise be exempt from income tax. 2 . Basic salary 95,000 Commissions 15,000 Honoraria 10,000 Holiday pay 7,000 Overtime pay 8,500 Hazard pay 6,000 Other benefits (36,000 – 30,000) 6,000 Income subject to tax 147,50 0 EXERCISES 5 – 10.2
1. ANSWER: D
Only option D has complied with the requisites for exemption from tax of retirement benefits, viz: (1) There must be a private pension maintained by the employer and approved by the BIR; (2) The retiring official or employee has been in the service of the same employer for at least ten (10) years; (3) The age must be at least 50 years old at
the time of retirement; and (4) The benefit of exemption can be availed of only once.
2. ANSWER: C
A monthly gratuity of P20,000 to a Medal of Valor awardee is exempt from income tax (RA 9049).
Terminal leave pay of employees of the government are exempt from tax (CIR v. Castañeda, GR 96016, Oct. 17, 1991).
Retirement per Collective Bargaining Agreement is considered voluntary, hence subject to income tax and withholding tax on wages (BIR Ruling No. 071-98).
Separation benefits consisting of the market value/zonal value of the residential lot, is tax exempt (BIR Ruling No. 056-95).
3. ANSWER: C
Letter A refers to “deductions from gross income.” Letter B refers to “tax exemption.”
Letter D refers to “tax credit.”
Exclusion refers to income received or earned but is not taxable as income because exempted by law or treaty. Such tax free income are not to be included in the income tax return unless information regarding it is specifically called for (Sec. 61, Regs.).
4. ANSWER: A
This is a case of key insurance where the company insures the life of its key employee. The proceeds is not taxable to the corporation because it is considered as an indemnification for the loss of the president which is one of the company's key employees.
5. ANSWER: A
The P3,500,000 is exempt from income tax because it is given as indemnification for the loss on the destruction of the company building.
6. ANSWER: B
The proceeds of life insurance should be declared for estate tax purposes if the designation of the beneficiary was revocable.
The provision exempting "interest on government securities" has been deleted in the Tax Reform Act. Therefore, interest on government securities are now subject to tax.
8. ANSWER: D
The pension from GSIS is not taxable while the interest from the time deposit is subject to a final tax of 20%.
No, the separation due to the economic condition is one which is beyond the employee’s control, hence, excluded from gross income and not subject to withholding tax.
9. ANSWER: A
The phrase "personal injuries" which are exempt from income tax includes moral damages awarded by the court on account of mental anguish experienced by one person due to libelous statements made against him.
10. ANSWER: C
Prizes amounting to P10,000 or less are to be included in the computation of gross income. They are not subject to final tax.
11. ANSWER: C
The amount of P1,500 given by his mother to Luis is in the form of a condonation or gift and not a taxable income.
12. ANSWER: D
Dismissal from employer due to inefficiency in service is a cause which is not beyond the control of the employee. Under the “beyond the control test,” whenever an employee is separated from service for a cause or causes which is/are beyond his control, the separation pay received by him is not subject to tax.
13. ANSWER: D
Damages received by a taxpayer due to physical injuries or sickness are not taxable to him. However, damages received as compensation for lost profits are subject to tax.
14. ANSWER: D
tax. However, the amount in excess of P30,000 are taxable to the employee.
15. ANSWER: B
Exclusion from gross income 1,000,0 00 16. ANSWER: D
The exemption from income tax on a qualified senior citizen does include exemption from value-added tax, estate tax, donor’s tax and income tax on passive income.
17. ANSWER: A
Monthly salary and allowance
(P3,500 + 1,000) 4,500 Months received (January to June
15) 5.5
Actual amount of salaries received 24,750 Net income from trimobile 24,000 Income subject to tax 48,750
EXERCISES 6-1
1. CLASSIFICATION SITUS OF TAXABLE INCOME
a. Nonresident citizen Within only b. Nonresident alien
(NETB) Within only
c. Nonresident citizen Within only d. Resident alien Within only e. Nonresident alien
(NETB) Within only
f. Nonresident alien
(ETB) Within only
2. a. Yes, Allen is qualified as head of family because of his mother who is dependent upon and living with him.
b. No. An aunt is not a qualified dependent for purposes of claiming the status of head of family. Moreover, the aunt is not living with the taxpayer.
lives with her.
d. No. A taxpayer who is separated in bed and board with the spouse but not legally separated maintains the status of a married taxpayer.
e. No. A benefactor of a senior citizen would be qualified to acquire the status of a head of family regardless of whether such senior citizen is a relative or not if the senior citizen is living with the taxpayer.
3. a. In the absence of an agreement, John has the right to claim the additional exemption because under Revenue Regulation 2-98, husbands have the right to claim additional exemption on the dependent children. Besides, he has actual custody over the two children.
b. If Marsha could prove that she provided chief support over the children, both spouses would be disqualified to claim additional exemption. Marsha is disqualified because the children are not living with her despite the support she is extending. John is disqualified because he does not furnish chief support to his children.
c. Yes, because not one of them can claim P50,000 which is the amount allowed to each married individual taxpayer. At most, they would acquire only the status of either single or head of family depending upon the circumstances surrounding the case.
4. a. Julio is the one qualified to claim as head of family because he is providing chief support to his mother who is also living with him. The rest are giving only minimal amount of support.
b. None. Additional personal exemption can be claimed only on dependent children.
5. a. None. Aunties are not qualified dependents for purposes of claiming additional exemption.
b. None. The mother is not a qualified dependent.
c. None. The daughter is disqualified because of her age. She is already more than 21 years old.
d. None. Both Decepeda and his sister cannot claim additional exemption on their father.
e. P 100,000. Elantra is allowed to claim dependents on his four children only.
6. a. Carina is qualified as head of family. She is already a widow and has one dependent daughter living with her.
b. Gross compensation income 420,0 00 Less: Personal exemption
Basic personal 50,000 Additional 25,000 75,0 00 Taxable income 345,0 00 Tax on P 250,000 50,000 95,000 x 30% 28,500 Income tax 78,500
c. If Carina has no daughter to support, her filing status is “single.”
d. Gross compensation income 420,0 00 Less: Basic personal exemption 50,00 0 Taxable compensation income 370,0 00 Tax on P 250,000 P 50,000 120,000 x 30% 36,000 Income tax 86,000
7. a. Compensation income – Jim 160,0 00 Less: Personal exemption 50,0 00 Taxable compensation income 110,0 00 Business income – Pat 500,0 00
Less: Expenses 275,0
00
Net income 225,0
00 Less: Personal exemptions 50,00 0
Taxable income 175,0
b. Compensation income – Jim 160,0 00 Less: Personal exemptions
Basic personal 50,000 Additional exemptions 25,000 75,00 0 Taxable income 85,00 0 Tax on P 70,000 P 8,500 15,000 x 20% 3,000 Income tax due 11,500
Business income – Pat 500,0 00
Less: Expenses 275,0
00
Net income 225,0
00 Less: Personal exemptions 50,00 0
Taxable income 175,0
00 Tax on P 140,000 22,500
35,000 x 25% 8,750 Income tax due 31,250
Income tax – Jim P
11,500 Income tax – Pat 31,250 Total income tax 42,750 8. a. Tax on P 40 x 5% 2.00 b. Tax on P 10,000 x 5% 500 c. Tax on P 10,000 500.00 2,245.40 x 10% 224.54 Income tax 724.54 d. Tax on P 250,000 50,000 e. Tax on P 250,000 50,000 206,780 x 30% 62,034
Income tax due 112,034 f. Tax on P 500,000 125,000. 00 623,251.27 x 32% 199,440. 41 Income tax due 324,440. 41 9
. a. Salary - Compensation
b. Interest on bank deposit - Passive income – tax exempt c. Honorarium - Compensation income
d. Prizes - Ordinary business income (not exceeding P10,000)
e. Lotto winnings - Tax exempt f. Income from farming - Business income g. Royalties on books - Passive income (10%) h. Dividends from domestic
company - Passive income (10%) i. 13th month pay - Exempt up to P 30,000
j. Interest on preterminated
deposits - Passive income (12%) 10
. a. Juan
Salary 150,0
00 Less: Personal exemptions
Basic personal 50,000 Additional exemptions (25,000 x 3) 75,000 125,000 Taxable income 25,00 0 Tax on P 10,000 500 15,000 x 20% 3,000 Income tax due 3,500 Less: Withholding tax 10,100 Income tax payable ( 6,6
00) b. Maria
00 Less: Basic personal exemptions 50,00 0
Taxable income 75,00
0 Tax on P 70,000 8,500
5,000 x 20% 1,000 Income tax due 9,500 Less: Withholding tax 15,000 Income tax payable ( 5,500) Income tax – Juan ( 6,600) Income tax – Maria ( 5,500) Income tax payable 12,100 11
. a. Monthly insurance premium 150 Times number of months in a year 12 Deductible health insurance premium 1,800 b
. Monthly insurance premium (maximum) 200 Times number of months in a year 12 Deductible health insurance premium 2,400 c
. No amount of health or hospitalization insurance premium isdeductible because the total income of the family exceeds P250,000.
d
. Monthly insurance premium (maximum 200 Times number of months during the year 8 Deductible health insurance premium 1,600 1
2. a. Compensation income 200,000 Less: Personal exemption
Basic personal 50,000
Additional (25,000 x 4) 100,000 150,0 00 Total compensation income 50,000 Tax on P 30,000 2,500 20,000 x 15% 3,000 Income tax due 5,500
b
. Gross income 200,000
Less: Allowable deductions
Expenses 105,000 Basic personal 50,000 Additional exemptions 100,000 255,00 0 Taxable income (55,00 0) Tax on P 30,000 2,500 25,000 x 15% 3,750 Income tax due 6,250 c
. Gross income 200,000
Less: Optional standard deductions
(200,000 x 10%) 20,000
Net income 180,00
0 Less: Basic personal and additional
exemptions 150,000
Taxable income 30,0
00 Income tax due P 30,000 28,50
0 Case 1 Case 2 1 3. Compensation income 125,000 80,000 Business income 186,0 00 230,000 Gross income 311,0 00 310,000 Less: Deductions Optional (186,000 x 40%) 74,400 Itemized 105,00 0 Personal exemption 50,0 00 50,000 Total 124,4 00 155,000 Taxable income 186,6 155,00
00 0 EXERCISE 6 – 5 1. ANSWER: B Gross receipts 950,00 0 Less: Expenses 120,00 0 830,000 Prize, contest 5,000 Salary (37,600 + 2,400) 40,000 Rent income (38,000/95%) 40,000 Less: Depreciation 8,000 32,000 Total 907,00 0 Less: Basic personal exemption 50,00 0 Taxable income 857,00 0 2. ANSWER: D Tax on P 500,000 125,00 0 357,000 x 32% 114,24 0
Income tax due 239,24
0 Less: Withholding taxes
Profession (950,000 x 15%) 142,50 0 Salary 2,400 Rent (40,000 – 38,000) 2,00
0 146,900 Income tax payable 92,34 0 3. ANSWER: B
Interest on preterminated deposit (20,000 x
12%) 2,400
Winnings in raffle (100,000 x 20%) 20,000 Dividend from C Corp. (6,000 x 10%) 600 Total final withholding tax 23,000 4. ANSWER: B
Interest on long-term bank deposit 40,000
Winnings in lotto 20,000
Life insurance benefits 150,00 0 Loan benefits - SSS 20,00 0 Total income exempt from income tax 233,50 0 EXERCISE 6 - 7
I N C O M E Resident or
citizen NRAETB 1. Interest on bank deposit with Banco de
Oro- Php 20% 20%
2. Interest on bank deposit with a bank in the
United States in U.S. dollar Tax table Not taxable 3. Earnings from interest on money market 20% 20% 4. Royalties on inventions 20% 20%
5. Royalties on books 10% 10%
6. Prizes amounting to P7,500 Tax table Tax table 7. Prizes amounting to P20,000 20% 20% 8. Winnings in lotto – Philippines Exempt Exempt
9. Winnings in lottery 20% 20%
10. Interest on long-term investment Exempt Exempt 11. Interest on deposit for 4 ½ years 5% 5% 12. Cash dividends – domestic corp. 10% 20% 13. Share of partner in net income of taxable
partnership 10% 20%
14. Interest income under expanded foreign
currency deposit system 7.5% Exempt EXERCISES 6–8.1
1. ANSWER: A
Under the Tax Reform Act, only resident citizens are taxable on income derived from sources within and without the Philippines. All others are taxable on income within only.
EXERCISE 6–8.2
INCOME RC RA,
NRC NRA(ETB) NRA(NETB) 1. Rent on apartment in the
Phils.
YES YES YES YES
Canada
3. Dividend-domestic corporation
YES YES YES YES
4. Dividend-foreign corporation YES NO NO NO 5. Lotto winnings in the Phils. YES NO NO NO 6. Lotto winnings in U.S.A. NO NO NO NO 7. Cash prize on contest, Phils. YES YES YES YES
8. Cash prize on contest, U.S.A. YES NO NO NO 9. Interest, bank deposit in
U.S.A.
YES NO NO NO
10. Interest bank deposit – Phils. YES YES YES YES
Problem 6– 8.3
1. ANSWER: C
Taxpayer is resident citizen. Compensation income,
Philippines 120,000
Business income, Philippines 350,00 0 Business income, Canada
($200,000 x P25) 5,000,000
Total gross income 5,470,0
00 Less: Deductions Expenses, Philippines 220,00 0 Expenses, Canada ($150,000 x 25) 3,750,000 3,970,000 Net income 1,500,0 00 Less: Personal exemptions
Basic personal 50,000 Additional 25,000 75,0 00 Taxable income 1,425,0 00 Tax on P500,000 125,000 925,000 x 32% 296,000 Income tax due 421,000 Less: Withholding tax 10,000 Income tax payable 411,200 2. ANSWER: C
Total final taxes paid: Dividend from a domestic
company 40,000
Final tax rate 10% 4,000 Share in income of business
partnership 50,000
Final tax rate 10% 5,000
Total final tax 9,000
3. ANSWER: A
Resident citizen opted to avail of OSD.
Compensation income 120,00 0 Business income, Philippines 350,00
0 Business income, Canada
($200,000 x 25) 5,000,000
Total 5,350,00
0 Less: Optional deductions
(5,350,000 x 40%) 2,140,000 3,210,000
Net income 3,330,0
00 Less: Basic personal exemption 50,0 00
Taxable income 3,280,0
00 4. ANSWER: B
Taxpayer is a resident alien. Compensation income,
Philippines 120,000
Business income, Philippines 350,00 0
Gross income 470,00
0 Less: Expenses, Philippines 220,00 0
Net income 250,00
0 Less: Personal exemption
Basic personal 50,00 0
(P25,000 x 4) 0
Taxable income 100,00
0 5. ANSWER: A
Taxpayer becomes a nonresident citizen.
Net income 250,00
0 Less: Basic personal exemption 50,0 00
Taxable income 200,00
0 6. ANSWER: D
Nonresident alien ETB.
Business income, Philippines 350,0 00 Less: Expenses, Philippines 220,00 0
Net income 130,00
0 Less: Personal exemption (lower) 20,00 0
Taxable income 110,00
0 7. ANSWER: D
Taxpayer is NRA NETB.
Business income, Philippines 350,0 00 Dividend from a domestic
company 40,000
Shares in net income of a
partnership 50,000 Gross income 440,00 0 Rate 25% Final tax 110,00 0 8. ANSWER: D Value of inheritance 500,00 0 Lotto winnings 1,540,0
00 Proceeds of life insurance 250,0 00 Total exemption 2,290,0 00 EXERCISE 6-9.1 ANSWER: D
Optional standard deductions are allowed only on professional or business income of an individual taxpayer, provided that he has signified in the tax return his intention to avail of said deductions. Corporations can avail also of optional standard deductions EXERCISE
6-9.2
ANSWER: B
. The term gross income means total sales, less cost of goods sold plus any income from investments and from incidental or outside operations or sources.
Deductions should not be made for items not ordinarily used in computing the cost of goods sold.
PROBLEM 6-9.3 1. ANSWER: A Salary (99,000 + 5,000) 104,00 0 Professional income (83,000 + 7,000) 90,00 0 Gross income, business 125,00 0
Total 215,00
0 Less: Professional and business expenses 56,50
0 158,500 Rent income (57,000/95%) 60,00 0
Net income 322,50
0 Less: Personal exemptions
Basic personal 50,00 0
Additional (25,000 x 2) 50,000 100,00 0 Taxable income 222,50 0 Tax on P 140,000 22,50 0 82,500 x 25% 20,625 Income tax due 43,125 Less: Tax credit
Withholding tax on Wages P 5,000 Professional income 7,000 Rent (60,000-57,000) 3,000 15,000 Income tax payable 28,125 2. ANSWER: D
Salary 104,00
0 Gross receipts on business P
125,00 0 Rent income 60,000 Professional income 90,00 0 Total 275,00 0 Less: Optional deductions (P275,000 x
40%) 110,000 165,000
Net income 269,00
0 Less: Personal exemption
Basic personal 50,0 00 Additional 50,000 100,00 0 Taxable income 169,00 0 Tax on P 140,000 22,5 00 29,000 x 25% 7,250
Income tax due 29,750 Less: Withholding tax 15,000 Income tax payable 14,750 PROBLEM 6-9.4
1. ANSWER: C
Gross compensation income (7,000 + 300)
x 12 87,600
Less: Personal exemption
Basic personal 50,000
Additional exemption 25,000 75,000
Taxation income 12,600
2. ANSWER: C
Gross business income 150,00
0 Less: Optional deduction (150,000 x 40%) 60,000
Net 90,000
Less: Personal exemptions 50,000 Taxable income 40,000 EXERCISES 6-10.1: PERSONAL
EXEMPTIONS 1. ANSWER: B
Personal exemptions are arbitrary amounts allowed in the nature of a deduction from the amount of gross compensation income and/or net business and/or professional income, as the case may be, for personal, living or family expenses of an individual (Sec. 9, Regs.). 2. ANSWER: A
Nonresident aliens not engaged in trade or business in the Philippines are not allowed to claim personal exemptions. They are subject to final tax based on the entire gross income derived from sources within the Philippines.
3. ANSWER: C
An illegitimate child is now considered as a qualified dependent for purposes of claiming the status as head of family.
The amount of basic personal exemption allowed to NRA ETB must not exceed the amount of exemption being allowed in the Philippines. 5. ANSWER: C
Senior citizens are not considered as qualified dependents by its benefactor for purposes of claiming the additional exemptions.
Illegitimate children are now considered as qualified dependents for purposes of additional exemption provided that all the other requisites are complied.
6. ANSWER: C
The husband is the proper claimant of the additional exemptions except when he does not derive any income from sources within the Philippines or he explicitly waives his right in favor of his wife.
7. ANSWER: D
No matter how big is the income of the wife as compared to the husband, if the latter does not waive his right to claim the additional exemption or he is a nonresident and his income is not purely derived from sources without, he will always claim the additional exemption. 8. ANSWER: B
In cases of personal exemptions, only NRA ETB are subject to the law on reciprocity. Nonresident aliens who shall come to the Philippines and stay therein for an aggregate period of more than 180 days are deemed NRA ETB.
9. ANSWER: D
A moron, although mentally defective shall not qualify as dependent because he is not actually financially dependent from the taxpayer.
A child of a marriage which has been declared void ab initio is a qualified dependent for purposes of additional exemption.
A child pursuing his studies elsewhere is deemed living with the taxpayer. He is considered “away temporarily” from the taxpayer’s home.
A dependent receiving a salary of P1,000 monthly is not considered as gainfully employed.
10. ANSWER: D
The term “benefactor of a senior citizen” pertains to any person who takes care of a senior citizen as his dependent, whether or not related to him.
EXERCISES 6-10.2
1. ANSWER: C
The taxpayer is qualified as head of family because of the legitimate and recognized natural child.
Only legitimate, illegitimate (which includes recognized natural child) or legally adopted children can qualify as dependent for purposes of claiming additional exemptions. Thus, common law husband and widowed mother of common law husbands are disqualified. The total personal and additional exemptions is:
Personal exemptions 50,00
0 Additional exemptions:
Legitimate child 25,0 00 Illegitimate child (recognized
natural child) 25,000 50,000
Total 100,0
00 2. ANSWER: B
A nonresident alien engaged in trade or business is allowed to claim basic personal exemptions as deduction from gross income. They are not, however, allowed to claim additional exemption.
The personal exemptions allowed shall be the lesser amount between that allowed in his country and the amount fixed as exemption for citizens or residents in the Philippines.
3. ANSWER: D
Basic personal exemptions:
Husband 50,00
0
Wife 50,00
Additional exemptions (25,000 x 4) 100,000
Total 164,000
4. ANSWER: B
Basic personal exemption 50,000 Additional exemption (25,000 x 3) 75,000 Total personal exemptions 1 25, 000 5. ANSWER: D Professional fees 180,000 Allowances 24,000 Total 204,000 Less: Expenses Salaries 36,00 0 Traveling expenses 20,00 0 Office supplies 4,000 Rent expense 36,00 0 96,000 Taxable income before exemption 108,000 Less: Personal exemption (50,000
+[25,000 x 33]) 125,000
Taxable income . 6. Answer: A
Gross compensation income 120,000 Less: Personal exemptions
Basic personal 50,00 0 Additional (25,000 x 4) 100,0 00 150,000 Taxable income 270,000 7. Answer: C
Gross compensation income 220,000 Less: Personal exemptions
Basic personal 50,00 0 Additional (25,000 x 2) 50,00
0 100,000
EXERCISES 6 – 11. CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS
1. ANSWER: D
A nonresident alien not engaged in trade or business (NRA NETB) is not entitled to claim personal exemption.
2. ANSWER: A
An alien who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient (Sec. 5, Regs.).
3. ANSWER: D
The tax base for resident citizens, resident aliens, and nonresident citizens is taxable income, while nonresident aliens NETB are taxed on the entire gross income derived from sources within the Philippines. 4. ANSWER: D
5. ANSWER: B
Prizes amounting to more than P10,000 are subject to a final tax of 20%.
Interest on dollar deposits are subject also to a final tax of 20%. Cash dividends received by individuals as stockholders of a corporation are subject to a final tax of 10%.
6. ANSWER: A
Royalty income on musical compositions are subject to a final tax of 10%.
7. ANSWER: C
Interest and dividends (taxpayer is
NRA ETB) 64,000
Less: Personal exemption 50,000
Taxable income 14,000
EXERCISES 6–12. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE
1. ANSWER: D
Premiums paid by the taxpayer for health insurance of his family is a deduction (but subject to limitations) from the gross income of an individual taxpayer, regardless of his status, i.e. single, married, or head of family.
2. ANSWER: D
Premiums paid on health insurance is deductible from gross income of an individual taxpayer if the income of his family does not exceed P250,000 during the year regardless of the nature of his income.
3. ANSWER: C
Compensation income earners are not allowed deductions except personal exemptions and insurance. The amount of health or hospitalization insurance allowed is limited to P2,400 or P200 a month.
Gross compensation income 200,0 00 Less: Deductions Basic personal 50,000 Additional exemption 25,000 Insurance premiums (200 x 12) 2,400 77 ,400 Taxable income 122,6 00 EXERCISE 6.12.2 Case
1: None because the total gross income of the spouses exceedsP250,000. Case
2: None. The deduction on health insurance can be claimed by the wifebeing the claimant of the additional exemption on dependents. Case
3: The husband can only claim a maximum amount of P1,600 becauseonly P200 is allowed as deduction every month, computed as follows: P200 x 8 = 1,600.
Case
4: P1,200. The husband is allowed to claim the deduction even if in themeantime no dependent is qualified for additional exemption. EXERCISES 6-13
Salary being a compensation income is returnable. Hence, part of the taxpayer’s gross income. Provided, however, that the employee is not a minimum wage earner.
Thirteenth month pay, including other benefits, are exempt from tax up to P30,000. Considering that 13th month pay is P8,000 only, the entire
amount is exempt from income tax. 2. ANSWER: D
None. Nonresident citizens are taxable only on income within. 3. ANSWER: D
Gross compensation income 157,756
Less: Personal exemptions
Basic personal (head of family) 50,000
Additional (25,000 x 3) 75,000 125,00 0
Taxable income 32,756
Tax on P 30,000 2,500.00 2,756 x 15% 413.40 Income tax due 2,913.4 0 4. ANSWER: C
Compensation income 53,000
Add: Professional income 350,000
Less: Expenses 140,000 210,000 Total 263,000 Less: Exemptions Basic personal 50,000 Additional 25,000 75,000 Taxable income 188,000 Tax on P140,000 22,500 48,000 x 25% 12,000 Income tax due 34,500 5. ANSWER: D
Refer to the solution to Problem 6. 6. ANSWER: A
Salary (P191,000 + 25,000) 216,000 Add: Taxable other benefits
13th month pay 18,000
Total 33,000
Less: Exemption 30,000 3,000
Total 219,000
Less: Personal exemption 50,000
Taxable income 169,000
Tax on P 140,000 22,500 29,000 x 25% 7,250 Income tax due 29,750 Less: Withholding tax 25,000 Income tax payable 4,750 7. ANSWER: D
Gross income, restaurant 900,000
Taxable other income (200,000
x 80%) 160,000 Total 1,060,0 00 Less: Deductions Business expenses (900,000 x 60%) x85% 459,000
Basic personal exemption 50,000
Additional exemption 25,000 534,000
Taxable income 526,000
8. ANSWER: A
Basic salary 210,549.
76 Cost of living allowance 6,000.00
Hazard pay 3,600.00 9,600.0
0 Gross compensation income 220,149. 76 Add: Net income from
profession
Professional income P156,890.00
Less: Expenses 67,500.00 89,390. 00
Total gross income 309,539.
76 Less: Personal exemption 50,000. 00
Taxable income 259,539.
76 Tax on P 250,000 50,000.00
9,539.76 x
30% 2,861.93
Income tax due 52,861.93 Less: Withholding tax on
wages 27,609.50
Income tax payable 25,252.37 9. ANSWER: B
Business income, Phils., 1/1 -
4/30 40,000
Less: Expenses, Phils. 17,000 23,000 Business income, Phils., 5/1 - 12/31
540,000
Less: Expenses, Phils.
247,500 292,500
Professional income 22,500
Dividend from foreign corporation (1,500 x 60) 90,000 405,000
Total 428,000
Less: Personal exemption (head of family) 50,000
Taxable income 378,000
Tax on P 250,000 50,00 0 128,000 x 30% 38,400 Income tax due 88,400 10
. ANSWER: B
Gross compensation income (210,438.24 +
6,000) 216,438.24
Less: Personal exemptions
Basic personal 50,000. 00 Additional 75,000. 00 125,000.00 Taxable income 91,438. 24 Tax on P 70,000 8,500.0 0 21,438.24 x 20% 4,287. 65 Income tax due 12,787. 65 Less: Withholding tax 27,246. 40
Income tax payable (14,458. 75) 11 . ANSWER: B Basic salary (48,465.25 + 2,500) 50,965.2 5 Less: Personal exemption 50,000.0 0
Taxable income 965.25
Tax on P 965.25 x 5% 48.26 Less: Withholding tax ( 431.
45) Income tax payable ( 383.
19) 12
. ANSWER: B
Income tax due of Alex (14,458.7
5) Income tax due of Paloma ( 383.1
9)
Aggregate amount payable/refund (14,841. 94)
13
. ANSWER: A
Gross compensation income 220,00 0 Less: Personal exemptions
Basic personal 50,00 0 Additional (25,000 x 2) 50,000 100,0 00 Taxable income 120,000 14 . ANSWER: C
Gross compensation income 200,00 0 Less: Personal exemptions
Basic personal 50,00 0
Additional 50,000 100,000
Taxable income 100,000
15
. Answer: B
Salary - 1/1 to 6/30 (P8,000 x 6) 48,000 Add: Proceeds of insurance 500,00
0
Less: Premium payments (P5,000 x 20) 100,000 400,000
Gross income 448,000
Less: Personal exemption 50,000
Taxable income 398,000
EXERCISE 6-10.
The petition has merit.
Cooperatives are not required to withhold taxes on interest from savings and time deposits of their members based on a BIR Ruling.
There is nothing in the ruling to suggest that it applies only when deposits are maintained in a bank. Rather, the ruling clearly states, without any qualification, that since interest from any Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes are paid by banks, cooperatives are not required to withhold the corresponding tax on the interest from savings and time deposits of their members. This interpretation was reiterated in BIR Ruling [DA-591-2006] dated October 5, 2006, which was issued by Assistant Commissioner James H. Roldan upon the request of the cooperatives for a confirmatory ruling on several issues, among which is the alleged exemption of interest income on members’ deposit (over and above the share capital holdings) from the 20% final withholding tax. In the said ruling, the BIR opined that:
x x x x
3. Exemption of interest income on members’ deposit (over and above the share capital holdings) from the 20% Final Withholding Tax.
The National Internal Revenue Code states that a “final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from the deposit substitutes and from trust funds and similar arrangement x x x” for individuals under Section 24(B)(1) and for domestic corporations under Section 27(D)(1). Considering the members’ deposits with the cooperatives are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1), therefore, do not apply to members of cooperatives and to deposits of primaries with federations, respectively.
Given that petitioner is a credit cooperative duly registered with the Cooperative Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA 6938, as amended by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere conducive to their growth and development, the State extends all forms of assistance to them, one of which is providing cooperatives a preferential tax treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. — Duly registered cooperatives under this Code which do not transact any business with non-members or the general public shall not be subject to any government taxes and fees imposed under the Internal Revenue Laws and other tax laws. Cooperatives not falling under this article shall be governed by the succeeding section.
ART. 62. Tax and Other Exemptions. — Cooperatives transacting business with both members and nonmembers shall not be subject to tax on their transactions to members. Notwithstanding the provision of any law or regulation to the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that cooperatives exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide goods and services to its members to enable them to attain increased income, savings, investments, and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only mentions cooperatives, this should be construed to include the members.
All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes on interest from the savings and time deposits of its members, as well as the delinquency interest of 20% per annum.
In closing, cooperatives, including their members, deserve a preferential tax treatment because of the vital role they play in the attainment of economic development and social justice. CHAPTER 7
EXERCISES 7 – 1 1
. a. By contributing P100,000 each with the intention of dividingwhatever profit is obtained, Atienza, Bauzon and Carmona have formed a business partnership which is taxable as a corporation. The registration with the Securities and Exchange Commission is not an indispensable requisite in its formation.
In this case, the business organization formed will fall under the phrase “partnership no matter how created or organized,” which is included in the definition of a corporation.
b. The business organization formed is a corporation. The five entrepreneurs served as the incorporators.
c. The two corporations have formed a joint venture because it is clear that their intention is to accomplish a single project which upon completion, the joint undertaking will be automatically dissolved. The joint venture is not taxable as a corporation (BIR Ruling 83-03).
d. Gigi and Jayjay have formed a general professional partnership. By organizing an accounting and auditing firm, they shall exercise a common profession for certified public accountants. A general professional partnership is not subject to income tax.
e. The business organization formed possesses the feature applicable to a joint stock company. It is taxable as a corporation.
2
. Classification Situs of Income Tax Base a. Domestic corporation Within and
without Taxableincome b. Resident foreign
corporation * Within only Taxableincome c. Nonresident foreign
corporation Within only incomeGross
*It is an international carrier (See Comm vs. BOAC, et al, GR Nos.
65773-74, April 30, 1987). In which case, the tax base can be Gross
Philippine Billings. 3 . a. Domestic corporation 2008 2009 Sales – domestic 3,000,0 00 3,000,000 Sales – abroad 7,000, 000 7,000,000 Gross sales 10,000, 000 10,000,000 Less: Cost of goods
sold 5,000, 000 5,000,000 Gross income 5,000,0 00 5,000,000 Less: Expenses Domestic 1,000,0 00 1,000,000 Foreign 2,000,0 00 2,000,000 Total expenses 3,000,0 00 3,000,000 Taxable income 2,000,0 00 2,000,000 Rate 35 % 30% Income tax 700,00 0 600,000
b
. Resident foreign corporation
Sales – domestic 3,000,0
00 3,000,000 Less: Cost of goods sold (3/10 x
5,000,000) 1,500,000 1,500,000
Gross income 1,500,0
00 1,500,000 Less: Expenses on domestic
sales 1,000,000 1,000,000 Taxable income 500,000 500,000 Rate of tax 35 % 30% Income tax 175,00 0 150,000 c
. Nonresident foreign corporation
Sales – domestic 3,000,0
00 3,000,000 Yield from deposit
substitute 400,00 0 400,000 Gross income 3,400,0 00 3,400,000 Rate 35 % 30% Income tax 1,190,0 00 1,020,000 4
. a. Bago Corporation shall be covered by the application of the MCITeffective 2010. b. Yes, the corporation shall be subject to a minimum income tax in 2010 because the normal income tax is P90,000 while the 2% of the gross income which represents the minimum corporate income tax is P100,000, computed as follows: Gross income – 2010 5,000,0 00 Less: Expenses 4,700,0 00 Taxable income 300,000 Rate 30 %
Normal income tax 90,000 Less: Minimum income tax (5,000,000
x 2%) 100,000
Excess MCIT ( 10,00
0)
The counting of the four (4) year period shall commence in 2006 a year following the year in which the corporation was registered with the BIR.
The corporation is not covered by the MCIT from 2005 to 2009. It shall be covered only in 2010 or on the 4th year following the year in
which it was registered with the Bureau of Internal Revenue. 5
. 2007 2008 2009
Gross sales 4,580,0
00 5,250,000 2,850,000 Sales returns and discounts 200,00
0 175,000 295,000 Cost of goods sold 860,0
00 620,000 1,200,000 Total 1,060,0 00 795,0 00 1,495,000 Net 3,520,0 00 4,455,000 1,355,000 Add: Capital gain 30,0
00 . 35,000 Gross income 3,550, 000 4,455,000 1,390,000 Less: Deductions 3,480,4 00 4,200,000 850,000 Taxable income 69,600 255,00 0 540,000 Rate of tax 35 % 35% 30% Normal Income tax 24,360 89,250 162,00 0 MCIT: 2007 (3,550,000 x 2%) 71,000 2008 (4,455,000 x 2%) 89,100 2009 (1,390,000 x 2%) . . 27,80 0 Income tax 71,00 0 89,250 162,000 Excess MCIT – 2007 (71,000 – 46,64
24,360) 0 Less: Carry forward of excess
MCIT 46,64 0 ______
Income tax payable 71,00
0 42,61 0 162,000 6
. a. Sales 6,000,000
Sales returns and allowances 200,00 0 Sales discounts 15,00
0 215,0 00
Net sales 5,785,0
00 Less: Cost of goods sold
Inventory, January 1 2,400,0 00 Purchases 1,500,0 00 Freight-in 35,000 Purchase returns and
allowances ( 30,000) Purchase discounts ( 7,00 0) Goods available for sale 3,898,0 00 Inventory, December 31 1,900,0
00 1,998,000
Gross income 3,787,0
00 Less: Operating expenses 1,600,0 00
Taxable income 2,187,0
00
Rate of tax 35
% Normal Income tax 765,4 50 b
. MCIT (3,787,000 x 2%) 75,7 40 c
. Income tax due 765,4 50
. 000 Less: Cost of sales 1,600, 000
Gross income 400,00
0 Less: Optional standard
deduction
Gross income 400,000
Rate 40% 160,00 0
Taxable net income 240,00
0 8
. a. The rate of tax applicable to the educational institution is 10%because the income from unrelated activity does not exceed 50% of the entire gross income.
b
. If the income from unrelated activity is more than the income fromrelated the Arts University would be subject to a tax rate of 35% until 2008 and 30% effective 2009.
9
. 2006 a
. Provision for income tax 50,000
Income tax payable 50,0
00 To record income tax liability using normal
income tax. b
. Deferred charges – MCIT 15,000
Income tax payable 15,0
00 To record excess MCIT (65,000 –
50,000)
c. Income tax payable 65,000
Cash in bank 65,0
00 To record payment of income tax due
for 2006. 2007 a
2007 MCIT is greater than the normal income tax for said year. b
. To record income tax liability using the normal income tax rate.
Provision for income tax 85,000
Income tax payable 85,000
c. To record application of excess MCIT.
Deferred charges – MCIT 15,000
Income tax payable 15,000
d
. To record payment of income tax due for 2007.
Income tax payable 100,00
0
Cash in bank 100,00
0 2008
The corporation is not allowed to carry forward and credit the 2006 and 2007 excess MCIT against the normal income tax liability for 2008 and 2009 since the 2008 and 2009 MCIT are greater than the Normal Income Tax for said year.
The accounting entries in 2008 and 2009 shall be similar to 2006 and 2007 above.
For taxable year 2010 when the expired portion of excess MCIT (65,000 – 50,000) for taxable year 2006 is closed to Retained Earnings account due to its non-application the entry is:
Retained earnings 15,000
Deferred charges – MCIT 15,000 10 . 1. Tuition fees 1,560,000 School canteen 250,000 Dormitories 95,000 Bookstores 48,000 Car stickers 8,30 0 Total 1,961,3 00
. no income shall be reported for income tax purposes because non-stock non-profit schools are not subject to income tax.
3
. If Fatima University is a government educational institution it willnot report any income for income tax purposes because government educational institutions are exempt from income tax.
11
. a. Gross receipts 4,500,000
Less: Cost of sales 1,200,0
00 Gross income 3,300,0 00 Less: Deductions 680,0 00 Taxable income 2,620,0 00 Rate 35 % Income tax 917,0 00 b . Taxable income 2,620,000
Yield from deposit substitutes 75,000
Interest income 42,00
0
Total 2,737,0
00 Less: Dividends paid 375,000
Income tax paid 917,000 Tax on deposit substitutes (75,000 x
20%) 15,000
Tax on interest (42,000 x 20%) 8,400 Reserved for building construction 1,500,0
00 2,815,4 00 Improperly accumulated earnings ( 78,4 00) 12
. The final withholding tax to be paid by the corporation (whetherdomestic, resident foreign or nonresident foreign) is uniformly computed as follows
Gross selling price (P110 x 1,000) P 110,000 Less: Cost (P100 x 1,000) 100,000
Net capital gain 10,000
Rate of tax 5%
Capital gains tax (final tax) 500 EXERCISES 7–2
7–2.1
1. ANSWER: A 2. ANSWER: C 3. Answer: D
For purposes of MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation is registered with the Bureau of Internal Revenue.
Firms registered with BIR in any year shall be covered by MCIT after the lapse of three calendar years.
The corporation is registered with BIR in 2004. Therefore, it shall be subject to MCIT effective 2008.
4. ANSWER: D Gross income 852, 000 Less: Deductions 800,00 0 Taxable income 52,000 Rate of tax 30 %
Normal income tax 15,600
MCIT (P852,000 x 2%) 17,040 Income tax payable (higher) 17,040 5. Answer: C Gross income 632,00 0 Less: Deductions 610,00 0 Taxable income 22,000 Rate of tax 35 % Normal income tax 7,70
0
MCIT (P632,000 x 2%) 12,640
Income tax payable (higher) 12,640 PROBLEM 7-2.2
1. ANSWER: C
Minimum Corporate Income Tax 50,000 Less: Normal income tax 20,000 Excess of MCIT over NIT 30,000 Entry:
Deferred charges - MCIT 30,000
Income tax payable 30,000 2. ANSWER: A
Retained earnings 30,000
Deferred charges - MCIT 30,000 3. ANSWER: B
2005 27,000
2006 5,000
2007 10,000
Total excess of MCIT over NIT 42,000 Journal entry:
Income tax payable 42,000
Deferred charges – MCIT 42,000 PROBLEM
7-2.3:
1. ANSWER: B
Income tax, 1st Qtr (NIT – higher) 100,00
0 Less: Taxes withheld – Prior year 10,000
Taxes withheld – 1st qtr 20,000
Excess MCIT prior year 30,000 60,000 Income tax due, 1st Qtr (normal
income tax) 40,000
2. ANSWER: B
Income tax, 2nd Qtr (MCIT – higher) 330,00
0 Less: Taxes withheld – Prior year 10,000
Taxes withheld – 2nd qtr 30,000
Net income tax payment – 1st
Qtr 40,000 100,000
Income tax due, 2nd Qtr – MCIT 230,00
0 3. ANSWER: C
Income tax, 3rd Qtr (NIT – higher) 470,00
0 Less: Taxes withheld – Prior year 10,000
Taxes withheld – 1st qtr 20,000
Taxes withheld – 2nd qtr 30,000
Taxes withheld – 3rd qtr 40,000
Net income tax payment – 1st
Qtr 40,000
MCIT paid in the 2nd Qtr 230,000
Excess MCIT in prior year 30,000 400,00 0 Income tax due, 3rd Qtr - NIT 70,00
0 4. ANSWER: C
Annual income tax (NIT – higher) 670,00 0 Less: Taxes withheld – Prior year 10,000
Taxes withheld – 1st qtr 20,000
Taxes withheld – 2nd qtr 30,000
Taxes withheld – 3rd qtr 40,000
Taxes withheld – 4th qtr 35,000
Net income tax payment – 1st
Qtr 40,000
Net income tax payment – 3rd
Qtr 70,000
MCIT paid in the 2nd Qtr 230,000
Excess MCIT in prior year 30,000 505,00 0 Income tax due, Final Qtr - NIT 165,0 00 5. ANSWER: A
Annual income tax (MCIT – higher) 550,00 0 Less: Taxes withheld – Prior year 10,000
Taxes withheld – 1st qtr 20,000
Taxes withheld – 2nd qtr 30,000
Taxes withheld – 3rd qtr 40,000
Net income tax payment – 1st
Qtr 40,000
Net income tax payment – 3rd
Qtr 70,000
MCIT paid in the 2nd Qtr 230,000 475,00
0 Income tax due, Final Qtr - NIT 75,0 00 EXERCISE 7–3 1. ANSWER: A Gross income 2,950,0 00 Less: Deductions Expenses 1,750,0 00 NOLCO 300,00 0 2,050,0 00 Taxable income 900,000 Rate of tax 35 %
Income tax due 315,00
0 2. ANSWER: D
Taxable income 900,000
Add: Interest on bank deposit
(16,000/80%) 20,000
Proceeds of insurance 1,200,0 00
NOLCO 300,00
0 Dividends from ABB 75,00
0 1,595,0 00
Total 2,495,0
00 Less: Dividends paid 500,000
Income tax paid 315,000 Interest on bank deposit
(20,000 –16,000) 4,000 819,000 Improperly accumulated taxable
income 1,676,000
Rate 10
% Improperly accumulated earnings
3. ANSWER: D 4. ANSWER: D 5. ANSWER: C PROBLEM 7-4.1 1. ANSWER: C Gross income 11,230,0 00 Less: Expenses
Salary, allowances and bonus 6,400,000 Other operating expenses 2,600,000 Depreciation of additional
school facilities:
Classrooms (1,300,000/20 x
9/12) 48,750 Furniture & equipment
(400,000/20 x 6/12) 10,000 9,058,750 Taxable income 2,171,25 0 Rate of tax 10% Income tax 217,12 5 2. ANSWER: D Tuition fees 9,500,00 0 Miscellaneous fees 1,200,00 0 Income of bookstore 350,000
Income of school canteen 180,00 0
Gross income 11,230,0
00 Less: Expenses
Salary, allowances and
bonus 6,400,000
Other operating expenses 2,600,000 Construction of additional
classrooms 1,300,000
Furniture and equipment 400,000 10,700,0 00
Taxable income 530,000
%
Income tax 53,00
0 3. ANSWER: B
A public elementary school is also a government educational institution. They are exempt from income tax under Sec. 30 of the National Internal Revenue Code.
A non-stock, non-profit educational institution is exempt from tax under Article XIV, Sec. 4[3], [4] of the Constitution.
A non-profit educational institution is subject to an income tax rate of 10%. 4. ANSWER: D PROBLEM 7–4.2 1. ANSWER: A Gross income 10,000,0 00 Less: Deductions Operating expenses 6,400,0 00 Cost of building 2,500,0 00 8,900,000 Taxable income 1,100,00 0 Rate of tax 10%
Income tax due 110,00
0 2. ANSWER: C Gross income 10,000,0 00 Less: Deductions Operating expenses 6,400,0 00 Depreciation(2,500,000/50x6/ 12) 25,000 6,425,000 Taxable income 3,575,00 0 Rate of tax 10%
Income tax due 357,50
0 3. ANSWER: B
The importation of laboratory equipments are exempt from customs duties if the school is a private educational institutions.
The school building, even if rented only by the school, if being used actually, directly and exclusively for educational purpose is exempt from real property tax.
The portion of the school building is subject to real estate tax because it is not being used actually, directly and exclusively for educational purpose.
The income from operation is taxable. Only income received by non-stock non-profit educational institutions and government educational institutions are exempt.
4. ANSWER: C EXERCISES 7 – 5 PROBLEM 7–5.1. 1. ANSWER: A
Gross income, Philippines P 740,00 0 Less: Expenses, Philippines 425,00
0 315,00P 0 Gross income, U.S.A. 690,00
0 Less: Expenses, USA 450,00
0 240,000 Royalties, USA 50,00 0 Taxable income 605,00 0 Rate of tax (2008) 35% Income tax 211,75 0 2. ANSWER: C
Gross income, Phils. 740,00 0 Less: Expenses 425,00 0 Taxable income 315,00 0 Rate of tax (2008) 35% Income tax 110,25
0 3. ANSWER: A
Gross income, Philippines 740,00 0 Interest on bank deposit, PNB 10,00 0 Total 750,00 0 Rate of tax (2008) 35% Final tax 262,50 0 4. ANSWER: A PROBLEM 7– 5.2 ANSWER: D
Gross income, Phils. 200,00 0
Less: Deductions 80,000 120,00 0 Gross income, USA 60,00
0 Less: Deductions 30,000 30,00 0 Taxable income 150,00 0 Rate (2009) 30% Income tax 45,000 PROBLEM 7– 5.3 ANSWER: C
Gross income, Philippines 2,800,0 00 Less: Deductions 1,300,0 00 Taxable income 1,500,0 00 Rate of tax (2008) 35 % Income tax 525,0 00
PROBLEM 7– 5.4
1. ANSWER: B
Gross income, Philippines 1,200,000
Less: Expenses, Phils. 800,000 400,00 0 Gross income, U.S. ($125,000 x P40)
P5,000,000
Less: Expenses, U.S. ($62,000 x P40)
2,480,000 2,520,000 Gross income, HK ($345,000/5x40) 2,760,000 Less: Expenses, HK ($230,000/5 x 40) 1,840,000 920,000 3,440,000 Taxable income 3,840,0 00 Rate of tax 30 % Income tax 1,152,0 00 2. ANSWER: C
Gross income, Philippines 1,200,0 00 Less: Expenses, Philippines 800,00 0
Taxable income 400,000
Rate of tax 30%
Income tax 120,000
3. ANSWER: D
Gross income, Philippines 1,200,0 00 Rate of tax 30 % Final tax 360,00 0 4 ANSWER: A Gross income 1,200,0 00 Rate of tax 2.5 % Income tax 30,00
0 5. ANSWER: B
Gross income, Philippines 1,200,0 00 Less: Expenses, Philippines 800,00 0 Taxable income 400,000 Rate of tax 30 % Income tax 120,00 0 Amount remitted to mother company
(400,000 - 120,000) 280,000
Rate of tax 15%
Branch profit remittance tax 42,000 6. ANSWER: A
Exempt from branch profit remittance tax. 7. ANSWER: B Gross income 1,200,0 00 Rate of tax 25 % Final tax 300,00 0 8. ANSWER: B Gross income 1,200,0 00 Rate of tax 4.5 % Final tax 54,00 0 EXERCISE 7 – 6 1. ANSWER: A 2. ANSWER: C 3. ANSWER: B
Net income after tax 40,000,0 00
Rate of tax 15%
Branch profit remittance tax 6,000,00 0 4. ANSWER: C
Net income after tax 40,000,0 00 Royalty 3,500,00 0 Dividend 4,000,0 00 Total 47,500,0 00 Less: Branch profit remittance tax 6,000,0 00 Amount to be remitted to head office 41,500,0 00 5. ANSWER: B
6. ANSWER: D
GSIS, SSS, and PHIC are exempt from income tax. PAGCOR is now subject to income tax per RA 9727. 7. ANSWER: C
8. ANSWER: C
All assets of a non-stock non-profit educational institution are exempt from customs duties on importation.
EXERCISE 7–7. MULTIPLE CHOICE THEORY 1. ANSWER: B
Cuentas en participacion is considered as a corporation subject to corporate tax.
General professional partnerships and co-ownerships are not subject to income tax.
A joint venture which is formed for the purpose of undertaking energy operations with the government are exempt from tax.
