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First Preboards Flashcards

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1
Q
  1. One of the following does not form part of gross income.
    a. Pensions
    b. Royalties
    c. Annuities
    d. Gift, bequest and devises
  2. In computing allowable deduction for purposes of income taxation:
    1st Statement - Interest expense in connection with the taxpayer’s business shall be reduced by an amount equal to twenty percent (20%) of interest income subjected to final tax.
    2nd Statement - Interest incurred to acquire property used in trade shall only be allowed to be treated as a capital expenditure.
    a. True; False
    b. True; True
    c. False; True
    d. False; False
  3. Patricia was injured in a vehicular accident in 2022. He incurred and paid medical expenses of P100,000 and legal fees of P50,000 during that year. In 2022, he recovered P350,000 as settlement from the insurance company which insured the car owned by the other party involved in the accident. From the above payments and transactions, the amount of income taxable to Patricia in 2022 is:
    a. P200,000
    b. P250,000
    c. P350,000
    d. P 0
  4. One of the following is not excluded from gross income.
    a. Amounts received by insured as return of premium
    b. Life insurance proceeds
    c. Compensation for injuries
    d. Share in the net income of a general professional partnership.
  5. To be allowed as a valid deduction, charitable and other contribution must not exceed:
    a. 5% of taxable income after charitable contribution, income of individuals
    b. 10% of taxable income after charitable contribution, in case of individuals
    c. 5% of taxable income before charitable of contribution, in case of individuals.
    d. 10% of taxable income before charitable contribution, in case of individuals.
  6. Which of the following penalty tax remained enforce after R.A. 11534 also known as CREATE law?
    a. Improper Accumulated Earnings Tax (IAET) 10%.
    b. Gross Income Tax (GRT) 15%.
    c. Fringe Benefit Tax (FBT) 33%.
    d. Minimum Corporate Income Tax (MCIT) 2%.
A
  1. D
    Explanation:
    Under the National Internal Revenue Code (NIRC), gross income generally includes all income derived from whatever source.
    However, gifts, bequests (inheritance from a will), and devises (real property gifted through a will) are explicitly excluded from gross income under Section 32(B).
    They are not considered income from services, labor, or capital, and are not subject to income tax.
  2. A
  3. D
  4. D
  5. D
  6. D
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2
Q
  1. 1st Statement - The term quasi-banking activities means borrowing funds from twenty or more persons at any one time through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits.
    2nd Statement - Interest in government debt securities are exempt income.
    a. True; False
    c. False; True
    b. True; True
    d. False; False
  2. In case of sale of land under the agrarian reform law:
    1st Statement - Interest earned by the owner/seller is exempt income.
    2nd Statement - Capital gain in the sale of the land is taxable income, either as capital gains tax or net income tax at the option of land owner.
    a. True; False
    c. False; True
    b. True; True
    d. False; False
  3. In computing net income, no deduction shall in any case be allowed in respect to, except:
    a. Personal, living or family expenses.
    b. Any amount paid out for new buildings or for permanent improvements, or betterment made to increase the value of any property or estate.
    c. Any amount expended in restoring property or in making good the exhaustion thereof which an allowance is or has been made.
    d. Premiums paid on any life insurance policy covering the life of any officer or employee, when the immediate family members of such employee are directly the beneficiary.
  4. Losses from wash sales of stock or securities shall not be deductible except:
    a. The taxpayer is a dealer of securities or stock and made in the course of business of such dealer.
    b. The shares of stock sold and then reacquired or repurchased are identical stock or securities.
    c. The shares of stock sold and then reacquired within a period beginning thirty (30) days before the date of such sale or disposition.
    d. The shares of stock sold and then reacquired within a period ending thirty (30) days after such sale or disposition.
  5. 1st Statement - The allowable deduction for pension trust contributions will only apply to a qualified pension plan that is funded.
    2nd Statement - The pension trust deduction is composed of the past service cost and the present service cost.
    a. True; False
    c. False; True
    b. True; True
    d. False; False
A
  1. A
  2. A
  3. D
  4. A
  5. B
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3
Q
  1. Dodgers Inc, has been in business for the past 10 years. For the year 2024, it decided to establish a pension fund for its employees. The pertinent data of the fund are us follow:
    Past Service Cost (lump sum payment) P1,000,000
    Present Service Cost 100,000
    How much allowable deduction for pension cost could be claimed?
    a. P1,000,000
    c. P 200,000
    b. P1,100,000
    d. P 100,000
  2. Assuming the same facts in number 12, the allowable deduction for pension cost after 10 years:
    a. P1,000,000
    b. P1,100,000
    c. P 200,000
    d. P 100,000
  3. Mr. R was retired by his employer corporation and paid P1,000,000 as a retirement gratuity without any deduction for withholding tax. The corporation became bankrupt the following year. Can the BIR subject the P1,000,000 retirement gratuity to income tax?
    1st Answer: Yes, if the retirement gratuity was paid based on a reasonable pension where Mr. R was 50 years old and has served the corporation for more than 10 years.
    2nd Answer: No, If Mr. R was forced by the corporation to retire beyond Mr. R’s control.
    a. Both answer are wrong
    b. Both answer are correct
    c. 1st answer is correct, 2nd answer is wrong
    d. 1st answer is wrong, 2nd answer is correct
  4. The widow of your best friend has just been paid P1,000,000 on account of the life insurance of the deceased husband. She asks you whether she declare the amount the amount for income tax purpose or for estate tax purposes.
    1st Advice: The proceeds of life insurance paid to the beneficiary upon the death of the insured are exempt from income tax and need not be declared for income tax purposes.
    2nd Advice: The proceeds of life insurance would have to be declared for estate tax purposes if the designation of the beneficiary was irrevocable, otherwise it need not be declared.
    a. Both advices are correct
    b. 1st advice correct; 2nd advice wrong
    c. Both advices are wrong
    d. 1st advice wrong, 2nd advice correct
  5. ABC Corporation took two keymen insurance on the life of its President, Mr. X. In one policy, the beneficiary is the corporation to compensate it for its expected loss in case of death of its president. The other policy designates Mr. X’s wife as its irrevocable beneficiary.
    Question 1: Are the insurance premiums paid by X corporation in both policies deductible?
    Question 2: Will the insurance proceeds be treated as income subject to tax by the corporation and by the wife?
    a. Yes to 1st and No to 2nd questions
    b. Yes to both questions
    c. No to 1st questions and Yes to 2nd question.
    d. No to both questions
A
  1. C
  2. D
  3. D
    1st should be NO because of the explanation
    It implies that voluntary retirement under a reasonable pension plan is taxable.
    But under Section 32(B)(6)(a) of the NIRC, retirement benefits are exempt if:
    The employee is at least 50 years old
    Has served for at least 10 years
    The retirement is under a reasonable BIR-approved plan
  4. B
    should be REVOCABLE para ma apil sa estate
    If the designation is revocable –> the proceeds are included in the gross estate.
    If the designation is irrevocable –> the proceeds are excluded from the gross estate.
  5. D
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4
Q
  1. A worked for a manufacturing firm but due to business reverses, the firm offered a voluntary redundancy program in order to reduce overhead expenses. Under the program, an employee who offered to resign would be given separation pay equivalent to his 3 months basic salary for every year of service. A accepted the offer and received P800,000 as separation pay under the program. After all the employees who accepted the offer were paid, the firm found its overhead still excessive. Hence, it adopted another program, where various unprofitable departments were closed. As a result, B was separated from the service, B also received P800,000 as separation pay. At the time of separation both A and B have rendered at least 10 years of service but A was 55 years old while B was only 45 years old. As a result,
    a. Both amounts are exempt from income tax
    b. Both amounts are subject to income tax
    c. Only Mr. A is subject to income tax
    d. Only Mr. B is subject to income tax
  2. The Constitution provides, “charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non-profit cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.” This provision exempts charitable institutions and religious institutions from what kind of taxes?
    a. From all kinds of taxes, i.e. income, vat, customs, local taxes, and real property tax
    b. From income tax only
    c. From value-added-tax
    d. From real property tax
    e. From capital gains tax
  3. Cash dividend received by a NON-RESIDENT corporation from a domestic corporation is
    a. Exempt from income tax
    b. Subject to final tax
    c. Part of taxable income
    d. Partly exempt, partly taxable
  4. Cash dividend received by a domestic corporation from a domestic corporation is
    a. Exempt from income tax
    b. Subject to final tax
    c. Part of taxable income
    d. Partly exempt, partly taxable
  5. An internal revenue officer (IRO), having been reliably informed from an unimpeachable source that articles subject to excise taxes were kept in the house of Y, entered said house to look for and to seize the aforementioned articles over the objection of Y. Since said officer was not armed with a search warrant, Y invoked the sanctity of his home. Is the internal revenue officer’s actuation described above sanctioned by law or not?
    a. Yes, because of primary jurisdiction of the BIR over excisable goods pursuant to the lifeblood
    doctrine.
    b. Yes, the IRO is exempted from obtaining a search and seizure warrant.
    c. No, violative of search and seizure clause of the Constitution.
    d. No, violative of the right to privacy and abode.
  6. If a friend inquires whether or not the cost of educational assistance to the employee and /or his dependents which are borne by the employer shall be taxable. What will your answer be?
    First Answer – A scholarship grant to the employee by the employer shall not be treated as taxable fringe benefit if the education or study involved is directly connected with the employer’s trade, business or profession and there is a written contract between them that the employee is under obligation to remain in the employ of the employer for a period of time that they have mutually agreed upon.
    Second Answer – The cost of educational assistance extended by an employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee unless the assistance was provided through a competitive scheme under the scholarship program of the company.
    a. Both answers are correct
    b. Both answers are wrong
    c. Only the first answer is correct
    d. Only the second answer is correct
A
  1. C
  2. D
  3. B
  4. A
  5. A
  6. A
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5
Q
  1. As regards taxable year, one of the following statements is not correct
    a. The taxable year is the accounting period
    b. The taxable year may be less than 12 months.
    c. The taxable year of a sole proprietorship business may be fiscal or calendar year
    d. The taxable year of a domestic corporation may be fiscal or calendar year.
  2. Which of the following taxes may be deducted from gross income:
    a. Special Assessment
    b. Transfer tax
    c. Documentary stamp tax
    d. Income tax
  3. All of the following taxpayers are not entitled to the foreign tax credit, except
    a. Resident citizen with income only from the Philippines
    b. Resident citizen with income only from abroad
    c. Resident alien with income from within and without the Philippines
    d. Non-resident citizen with income from within and without the Philippines
  4. A operates a retail store and owns the following properties. Which of the following is a capital asset in the hands of A
    a. Building which houses the retail store
    b. Fixtures used in the retail store
    c. Inventory on hand at the end of the year
    d. Trade accounts receivable
  5. A bought from XYZ Corp. 1,000 shares of stock, ninety days thereafter the corporation was adjudged bankrupt and its stock was worthless. The loss of A for income tax purposes is a. Wagering loss
    b. Short term capital loss
    c. Long-term capital loss
    d. Non-deductible loss for income tax purposes
A
  1. C
    Under Philippine tax rules, individual taxpayers, including sole proprietors, are required to use the calendar year as their taxable year.
    The fiscal year option is only available to corporations, specifically domestic corporations, subject to approval by the BIR.
  2. C
  3. B
  4. D
    For dealers in receivables or financial institutions that trade receivables, AR would be ordinary assets.
    But for a retail store owner, even if AR arose from sales, it’s not held for sale or used directly in operations like buildings or inventory. It’s classified as a capital asset because:
    It’s a financial claim.
    It’s not subject to depreciation.
    It’s not sold as part of regular business operations.
    Think of it like this: A bakery sells cupcakes (inventory), uses ovens and display cases (fixtures), works inside a shop (building), and tracks down payment from customers who haven’t settled yet (AR). The AR, while originating from business, is simply a claim—not inventory, not equipment. That’s why it earns its label as a capital asset in taxation.
  5. B
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6
Q
  1. XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling in June 2005 that exempts from tax the importation of some of its raw materials. The ruling is of first impression, which means the interpretation made by the Commissioner of Internal Revenue is one without established precedents. Subsequently, however, the BIR issued another ruling which in effect would subject to tax such kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which means that all their importations done before the issuance of the second ruling could be subject to tax. May the BIR rulings be given retroactive effect?
    a. No, BIR rulings are prospective in nature.
    b. No, BIR rulings are not retroactive if they are prejudicial to the taxpayer.
    c. Yes, tax exemptions should be interpreted strictly against the taxpayer.
    d. Yes, tax must favor the government’s power to collect its revenues.
  2. Which of the following statements on tax exemptions is not correct:
    a. When an electric light and power franchise holder is exempt under its franchise from property tax on its poles, wires and transformers, its exemption does not extend to the VAT of its importation of said articles.
    b. Where a taxpayer receives as payment for the land expropriated by the government tax
    exempt bonds, such tax-exempt bonds should be included in the total price to determine correct taxable profit therefrom
    c. The salaries of the justices of the Supreme Court are exempt from income tax
    d. Exemption granted to cooperatives does not extend to the members thereof in the sale of their products
  3. A was selected as the most outstanding teacher in her region. Her name was submitted by the school principal without her knowledge. She received a trophy and a cash award of P15,000.
    a. Taxable income
    b. Subject to final tax
    c. Exempt from income tax
    d. Partly taxable, partly exempt
  4. This will not result to a taxable gain or loss
    a. The sale by a corporation of its shares of stock from the unissued stock over its par or stated value.
    b. The sale by a corporation of its treasury stock over its cost or other basis of acquisition
    c. The purchase and retirement by a corporation of its bonds at a price less than the issue price or face value.
    d. The issuance by a corporation of its bonds at a premium.
  5. Which of the following does not represent compensation income?
    a. Honorarium as a guest speaker
    b. Emergency leave pay
    c. Vacation and sick leave pay
    d. Gratuitous condonation of obligation
A
  1. B
  2. C
  3. C
  4. A
    This transaction does not result in a taxable gain or loss because:
    When a corporation sells unissued shares (i.e., original issuance), any amount received in excess of par or stated value is considered additional paid-in capital, not income.
    It is a capital transaction, not a revenue-generating one, and thus not subject to income tax.
    Why the other choices are taxable:
    b. Treasury stock sold over cost: May result in a gain or loss, depending on the difference between selling price and acquisition cost.
    c. Retirement of bonds below issue price: Results in a gain to the corporation, which is taxable.
    d. Issuance of bonds at a premium: The premium is generally amortized and may affect taxable income.
  5. D
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7
Q
  1. One of the following is not subject to final tax
    a. Interest on savings deposit
    b. Royalties
    c. Prizes amounting to more than P10,000
    d. Professional fees paid to individuals
  2. Gain on sale of San Miguel Corporation, domestic corporation shares of stock, in New York City is
    a. Income within the Philippines
    b. Income without the Philippines
    c. Income party within and without
    d. Exempt from income tax
  3. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him to accept the offer for employment, he was offered the arrangement that part of his compensation would be a life insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of the insurance policy. Will the proceeds of the insurance form part of the income of the parents of Noel and be subject to income tax?
    a. Yes, the proceeds of the insurance form part of the gross income of the parents of Noel and be subject to income tax.
    b. Yes, the proceeds of the insurance form part of the income of the parents of Noel and be subject to final withholding tax.
    c. No, the proceeds of the life insurance do not form part of the gross income.
    d. No, the proceeds of the insurance do not form part of the gross income of the parents of Noel being irrevocable beneficiaries.
  4. Jaymae, CPA, resident citizen, was the girlfriend of Daniel Padilla, the heart throb of Philippine cinema. On her suggestion, Daniel Padilla went to college and earned his accounting degree from the Joyful Organization for Liberal and Online Global Studies, a notorious diploma mill. She further suggested that he should attend review classes in CPAR in preparation for the CPALE. Jaymae accompanied her boyfriend on his first day in CPAR. They met Atty. Llamado on the 3rd floor of the CPAR building. Jaymae excitedly introduced Daniel Padilla to her former tax reviewer. The following is a transcript of their conversation:
    Jaymae: Hi, Sir. It is so good to see you again! This is my boyfriend, Daniel.
    Daniel Padilla: Hi. I’m Daniel John.
    Atty. Llamado: Hi. I’m intelligent.
    Jaymae, so enraged with the apparent insult by Atty. Llamado, picked up the poor professor, and threw him out of the 3rd floor window. Atty. Llamado landed on the street pavement, and was run over by a FLORIDA bus. He was brought to St. Luke’s Hospital where he spent 3 months recovering from his injuries.
    Atty. Llamado sued Daniel, even though it was Jaymae who caused his injury. Due to the brilliance of his two lawyers, Atty. Dante de la Cruz and Atty. Kenneth de la Cruz, he was able to receive the following amounts as damages in a legal settlement:
    * ₱5,000,000 for medical expenses directly related to the physical injuries he sustained.
    * ₱300,000 for lost wages and income due to his inability to work because of the injury.
    * ₱10,000,000 in punitive damages awarded by the court to deter similar future conduct.
    * ₱2,000,000 for moral damages to compensate for emotional distress.
    Which of the following statements regarding the taxability of these amounts is most accurate?
    a. The ₱5,000,000 received for medical expenses and the ₱2,000,000 for moral damages are generally considered tax-exempt, while the ₱300,000 for lost wages and ₱10,000,000 in punitive damages are taxable. The punitive damages, specifically, do not represent compensation for loss or injury, and is therefore subject to income tax.
    b. The ₱300,000 is considered taxable income, while the ₱5,000,000 for medical expenses and ₱12,000,000 for moral and punitive damages are tax-exempt.
    c. All forms of damages received by Atty. Llamado, totaling ₱17,300,000, are typically viewed as a mere return of capital and are thus entirely exempt from income tax.
    d. Only the ₱300,000 for lost wages is taxable, and its taxability is primarily determined by the “Tax Benefit Rule,” meaning it is taxable only if Atty. Llamado had previously claimed a deduction for those lost wages.
A
  1. D
  2. A
  3. C
  4. B
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7
Q
  1. Which of the following scenarios best exemplifies the police power of the State being exercised through taxation?
    a. The government levies a special assessment on properties directly benefiting from the construction of a new convention center rivaling the National Convention Center of Singapore.
    b. Congress passes a law increasing the income tax rate to fund infrastructure projects pursuant to the Strategic Investment Plan of the government.
    c. A municipality imposes a higher local business tax on establishments selling alcoholic beverages to discourage excessive consumption and protect public health.
    d. The State exercises its power to acquire private land for the construction of a public hospital upon payment of just compensation.
  2. The statement “the power to tax is the power to destroy” is best understood in the context of:
    a. The primary purpose for which the taxing power may be utilized by the legislature.
    b. The inherent limitation that taxes must be for a public purpose.
    c. The degree of vigor with which the taxing power may be employed by the State to raise revenue.
    d. The constitutional restriction that obligations in contracts may not be impaired by the State through taxation.
  3. “Fiscal adequacy” as a basic principle of a sound tax system primarily emphasizes that:
    a. The tax burden should be distributed fairly among taxpayers based on their ability to pay.
    b. The implementation and administration of tax laws should be practical and efficient.
    c. The state, as much as possible, should not be raising money through debt.
    d. Tax laws should be interpreted strictly against the government and liberally in favor of the taxpayer in case of doubt.
  4. The Bureau of Internal Revenue (BIR) Commissioner’s power to inquire into bank deposits is generally limited, but an exception exists in which of the following circumstances?
    a. When there is a reasonable suspicion of tax evasion by a taxpayer under investigation.
    b. To determine the gross estate of a decedent.
    c. When authorized by a court order in cases of alleged criminal activity.
    d. For routine verification of income reported by taxpayers.
  5. A resident citizen of the Philippines opens a US dollar bank account with a local bank authorized to operate a Foreign Currency Deposit Unit (FCDU). Which of the following best describes the tax treatment of the interest income earned on this deposit?
    a. It is subject to a final withholding tax of 20%, similar to interest income from peso bank deposits.
    b. It is exempt from income tax, irrespective of the resident status of the depositor.
    c. It is subject to a final withholding tax of 15%.
    d. It is considered income includible in the income tax return, and subject to the graduated income tax rates applicable to the resident citizen.
A
  1. C
  2. C
  3. C
  4. B
  5. A
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7
Q
  1. Global Finance Inc., a non-resident foreign corporation, earns interest income from two sources:
    (a) a Philippine peso time deposit with a local bank, and
    (b) a US dollar time deposit with the same local bank’s Foreign Currency Deposit Unit (FCDU).
    What are the respective final tax rates applicable to these interest incomes in the Philippines?
    a. 25%; Exempt
    b. 25%; 15%
    c. 20%; 15%
    d. 20%; Exempt
  2. Mr. Tan, a resident citizen who is not a securities dealer, received cash amounting to ₱1,000,000 as a result of the complete liquidation of ABC Corporation, a domestic company whose shares are not traded on the Philippine Stock Exchange. Mr. Tan had purchased these shares five years ago for ₱300,000. Which of the following correctly describes the tax treatment of the ₱1,000,000
    received by Mr. Tan?
    a. The entire ₱1,000,000 is considered returnable income subject to the graduated income tax rates applicable to Mr. Tan.
    b. It is subject to a final tax of 10% as it is considered a dividend from a domestic corporation.
    c. The ₱700,000 difference is considered a capital gain subject to a final tax of 15%.
    d. Mr. Tan will recognize a capital gain of ₱350,000 which will be included in the computation of total net capital gains/losses from the sale/disposition of all other capital assets.
  3. DEF Corporation, a resident foreign corporation not engaged in the securities business, held shares of GHI Inc., a domestic corporation traded on the Philippine Stock Exchange. DEF Corporation received ₱500,000 as a result of the complete liquidation of GHI Inc. DEF Corporation had acquired these shares for ₱200,000. What is the tax consequence for DEF Corporation on the ₱500,000 received?
    a. The ₱300,000 gain will be included in the computation of net capital gains from the sale/disposition of all other capital assets which is subject to tax in the ITR.
    b. Only ₱150,000 of the gain will be included in the computation of net capital gains from the sale/disposition of all other capital assets which is subject to tax in the ITR.
    c. The transaction is subject to a stock transaction tax of 1/10 of 1% of the gross selling price.
    d. The entire ₱500,000 is exempt from Philippine income tax because it is a liquidating dividend received by a foreign corporation.
  4. Statement 1: Liquidating dividends, if in the form of real property located in the Philippines, are subject to the 6% capital gains tax.
    Statement 2: When a corporation distributes all of its assets in complete liquidation, a shareholder will never recognize a loss for tax purposes.
    Statement 3: The basis of shares held by a shareholder is irrelevant when determining the taxability of a liquidating dividend.
    a. All are true.
    b. All are false.
    c. Only Statement 1 and 2 are true.
    d. Only Statement 2 is true.
  5. Statement 1: The income of an individual, trust, or estate that owns a proprietary educational institution as a sole proprietor shall be taxed at the preferential rate of 10% (1% from July 1, 2020 to June 30, 2023). Provided, the individual, trust, or estate passes the predominance test.
    Statement 2: The income of a proprietary educational institution organized as a resident foreign corporation shall be taxed at the preferential rate of 10% (1% from July 1, 2020 to June 30, 2023). Provided, such resident foreign corporation passes the predominance test.
    a. nly Statement 1 is true.
    b. Only Statement 2 is true.
    c. Both Statements are true.
    d. Both Statements are false.
A
  1. A
  2. D
  3. A
  4. B
    ❌ Statement 1: Liquidating dividends, if in the form of real property located in the Philippines, are subject to the 6% capital gains tax.
    Incorrect. The 6% capital gains tax applies to sales or exchanges of real property classified as capital assets by individuals or domestic corporations.
    In a liquidating dividend, the corporation is not selling the property but distributing it to shareholders. The shareholder may be subject to tax based on the gain realized, but not via CGT on the property itself.

❌ Statement 2: When a corporation distributes all of its assets in complete liquidation, a shareholder will never recognize a loss for tax purposes.
Incorrect. A shareholder can recognize a loss if the fair market value of the assets received is less than the basis of the shares surrendered.
Losses are recognized for tax purposes in liquidation, subject to certain limitations.

❌ Statement 3: The basis of shares held by a shareholder is irrelevant when determining the taxability of a liquidating dividend.
Incorrect. The basis of the shares is crucial in determining whether the shareholder realizes a gain or loss upon liquidation.
Taxable gain or deductible loss is computed as: FMV of assets received – Basis of shares surrendered

  1. D
    The preferential tax rate under Section 27(B) of the NIRC applies to proprietary educational institutions that are non-profit and organized as DOMESTIC CORPORATIONS.
    An individual, trust, or estate operating a school as a sole proprietorship is not a corporation, and therefore does not qualify for the preferential rate.
    Aproprietary educational institution must be organized as a domestic corporation to qualify for the preferential tax rate of 10% (or 1% from July 1, 2020 to June 30, 2023 under CREATE Act). The law does not extend this preferential rate to resident foreign corporations, even if they operate educational institutions in the Philippines.
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8
Q

47-50
Reggie, resident citizen of the Philippines, is employed by ABC Corporation as an HR Manager in its Manila office. For taxable year 2023, he received a net pay of ₱585,000. His employer withheld ₱50,000 as CWT, and ₱15,000 representing his SSS, PhilHealth, and Pag-ibig contributions. The net pay of ₱585,000 is gross of his 13th month pay and other benefits amounting to ₱100,000.

  1. Compute his total Gross Compensation Income for 2023.
    a. ₱650,000
    b. ₱750,000
    c. ₱600,000
    d. ₱800,000
  2. Compute his total Net Taxable Compensation Income for 2023.
    a. ₱545,000
    b. ₱645,000
    c. ₱495,000
    d. ₱695,000
  3. Compute his income tax payable/(overpayment) for 2023.
    a. ₱31,500
    b. ₱21,500
    c. ₱ 1,500
    d. (₱8,500)
  4. For taxable year 2023, how many income tax returns should he file?
    a. 1 Annual Income Tax Return
    b. 4 Quarterly Income Tax Returns
    c. 3 Quarterly Income Tax Returns and 1 Annual Income Tax Return
    d. Only the Withholding Tax Return
    ________________________________________________________________________

51-54
In 2024, Reggie, the same person in numbers 47-50, enrolled in a culinary school. He did so because he felt that he could save money if he cooked his meals himself instead of buying food from restaurants. Little did he know that this decision would change his life.

On the very first day of culinary school, he met Mira. They became partners in pastry class. As the days passed, Reggie was little by little falling for Mira. For him, Mira had eyes sweeter than any pastry every invented, and a smile that would melt even the largest iceberg in the North Pole.

One day, Reggie decided to cook for Mira twelve kinds of “siomai”. He offered them to Mira during their lunch break. Mira asked him “Why so many siomai?” He then responded, “This is to ‘siomai’ everlasting love for you.” Mira laughed and replied, “If you really want to court me, don’t give me siomai. Take me to WOLFGANG STEAKHOUSE.”

Wolfgang Steakhouse is one of the most expensive restaurants in Manila. One meal there would cost around ₱8,000 to ₱10,000. In his desire to bring Mira to Wolfgang Steakhouse, Reggie decided to take a second job in addition to his job with ABC Corporation.

Reggie got a job as Chief Accountant with MIL-Pawikan Enterprises. For taxable year 2024, the BIR Form No. 2316 he received from MIL-Pawikan showed the following:

NON-TAXABLE/EXEMPT COMPENSATION INCOME:
Basic Salary (₱250,000 and below) 250,000
13th Month Pay and Other Benefits (max. of ₱90,000) 90,000
De minimis fringe benefits 12,000
SSS, Philhealth, Pag-ibig Contributions and union dues 25,000
Total 377,000

TAXABLE COMPENSATION INCOME:
Basic Salary 1,250,000
Overtime Pay 120,000
Holiday Pay 50,000
Taxable 13th Month Pay and Other Benefits 95,000
Total 1,515,000

Gross Compensation Income (tax & non-tax) 1,892,000
CWT 350,000

In 2024, Reggie’s compensation income from ABC Corporation was the same as in 2023. (Refer to the information given for numbers 47 to 50.)

  1. Compute his total Gross Compensation Income for 2024.
    a. ₱2,542,000
    b. ₱2,492,000
    c. ₱2,692,000
    d. ₱2,500,000
  2. Compute his total Net Taxable Compensation Income for 2024.
    a. ₱2,350,000
    b. ₱2,310,000
    c. ₱2,400,000
    d. ₱2,550,000
  3. Compute his income tax payable for 2024.
    a. ₱122,500
    b. ₱107,500
    c. ₱167,500
    d. ₱ 95,500
  4. For taxable year 2024, how many income tax returns should he file?
    a. 1 Annual Income Tax Return
    b. 2 Annual Income Tax Returns
    c. 3 Quarterly Income Tax Returns and 1 Annual Income Tax Return
    d. Only the Withholding Tax Returns
A
  1. A
  2. A
  3. C
  4. A
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9
Q

55-61.
Christina, single, Filipino with 1 dependent child, received in taxable year 2025 the following professional fees as an independent consultant:
Monthly Fees | Less 5% CWT | Net Monthly Fees
₱240,000 | ₱12,000 | ₱228,000

The monthly cost of her professional services amounted to ₱18,000, net of the 10% CWT.

The rental expenses related to her consultancy business amounted to:
. Monthly rental expense | CWT | Monthly rental exp paid
Office space ₱30,000 | ₱1,500 | ₱28,500
Computer ₱5,000 | None | ₱5,000

Note: The lessor of the office space is Christina’s brother, Christopher.

Her car fuel expenses amounted to ₱10,000 per month. She used the car for her consultancy business 40% of the time.
She is not VAT-registered and instead pays 3% OPT on her gross fees under Section 116 of the Tax Code.
She has excess tax credits from the prior year of ₱15,500 which she chose to credit in the next succeeding taxable year.
In her 1st Quarterly ITR, she chose to be taxed under the graduated rates with OSD as method of deduction.

  1. Calculate her tax payable in the 2nd Quarterly ITR.
    a. ₱53,600
    b. ₱46,500
    c. ₱31,000
    d. ₱23,800
  2. For her annual ITR, she chose to file BIR Form No. 1701A (for Individuals Earning Income Purely from Business/Profession). What is the correct amount to be placed on Part IVC Line 58 of BIR Form No. 1701A (Tax Payments for the First Three (3) Quarters)?
    a. ₱103,000
    b. ₱139,000
    c. ₱ 92,200
    d. ₱136,000
  3. Calculate her tax payable in the Annual ITR.
    a. ₱36,000
    b. ₱68,400
    c. ₱72,000
    d. ₱87,500
  4. If Christina, in her 1st Quarterly ITR, chose to be taxed under the graduated rates with itemized deduction as method of deduction, what would be her tax payable in her 2nd Quarterly ITR?
    a. ₱75,700
    b. ₱61,840
    c. ₱76,240
    d. ₱80,420
  5. If Christina, in her 1st Quarterly ITR, chose to be taxed under the graduated rates with itemized deduction as method of deduction, what would be her tax payable in her 3rd Quarterly ITR?
    a. ₱87,420
    b. ₱94,620
    c. ₱94,350
    d. ₱80,420
  6. Calculate her tax payable in the Annual ITR if she chose to be taxed under the graduated rates with itemized deduction as method of deduction.
    a. ₱98,630
    b. ₱86,420
    c. ₱99,116
    d. ₱86,500
  7. How much total taxes would Christina save in 2024 if she chose the 8% tax option instead of the regular income tax under the graduated rates with itemized deductions?
    a. ₱275,420
    b. ₱284,180
    c. ₱304,180
    d. ₱217,780
A
  1. C
  2. A
  3. C
  4. A
  5. C
  6. A
  7. C
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9
Q

62-66.
On January 1, 2022, Baldur Company, domestic corporation, purchased Machine A, Machine B, and Machine C to be used in its manufacturing process, valued at ₱500,000, ₱1,000,000, and ₱2,000,000, respectively. The useful lives of Machine A, Machine B, and Machine C are 3 years, 5 years, and 6 years, respectively. Machine B will take 2 years for it to be ready for its intended use.

On the same date, Baldur acquired a 4-year loan in the amount of ₱500,000 to fund the purchase of the Machine A, and a 5-year loan in the amount of ₱3,000,000 to fund the purchase of Machines B and C. Both loans come with an annual interest of 10%. The principal in both loans is payable in full at the end of the loan term.

The company chose to capitalize the interest expense attributed to the purchase of Machines B and C only. The company uses the straight-line method of depreciation.

It also earns a yearly interest income of ₱100,000 which is subject to final tax. The corporate income tax rate of Baldur is 25%.

  1. For taxable year 2022, compute the total available deductions related to the acquisition of Machine A and the 4-year loan in the amount of ₱500,000.
    a. ₱186,667
    b. ₱216,667
    c. ₱196,667
    d. ₱166,667
  2. For taxable year 2022, compute the total available deductions related to the acquisition of Machine B and the 5-year loan in the amount of ₱3.0 Million.
    a. ₱300,000
    b. ₱100,000
    c. ₱200,000
    d. ₱0
  3. For taxable year 2022, compute the total available deductions related to the acquisition of Machine C and the 5-year loan in the amount of ₱3.0 Million.
    a. ₱500,000
    b. ₱366,667
    c. ₱100,000
    d. ₱0
  4. Compute the taxpayer’s income tax due in 2023 if in the same year it had sales, cost of sales, operating expenses (excluding interest expense and depreciation expense), and non-operating income amounting to ₱22.0 Million, ₱13.0 Million, ₱1.0 Million, and ₱3.0 Million, respectively.
    a. ₱2,599,167
    b. ₱2,570,833
    c. ₱2,570,800
    d. ₱2,575,833
  5. Compute the taxpayer’s income tax due in 2024 if in the same year it had sales, cost of sales, operating expenses (excluding interest expense and depreciation expense), and non-operating income amounting to ₱24.0 Million, ₱14.0 Million, ₱750,000, and ₱2.75 Million, respectively.
    a. ₱2,745,833
    b. ₱2,750,833
    c. ₱2,792,500
    d. ₱2,771,667
A
  1. C
  2. D
  3. B
  4. A
  5. D
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10
Q
  1. Twinkle Stars Inc., a domestic transportation corporation, paid the following taxes and charges in the current taxable year:
    Income tax paid in the previous year ₱ 451,245
    Surcharge for late payment of the income tax of the previous year 112,811
    Interest paid for late payment of the income tax of the previous year 90,250
    Compromise penalty on late filing and payment of the income tax of the previous year 125,000
    Income taxes of senior management team 240,000
    Documentary stamp taxes 35,000
    VAT 288,000
    Community tax certificate 2,500
    Municipal tax, inclusive of surcharge of ₱1,500 55,000
    Special assessment imposed by National Government 150,000
    Municipal and provincial license fees 35,000

How much can the corporation deduct from its gross income in the current taxable year?
a. ₱456,250 b. ₱457,750
c. ₱366,000 d. ₱367,5

A

A

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11
Q

68-70)
Jaemay in number 36 is the CEO of a SANA ALL Records, a domestic corporation managing the production, distribution, promotion, and artistic development of local musicians and their recorded music.

The records of SANA ALL, organized in 2015 show the following financial information for the following calendar years:
. 2022 2023 2024
Sales, gross of 1% CWT 1,914,000 2,520,240 2,875,000
Cost of Sales 126,500 612,120 585,000
Operating expenses:
(a) Rental expenses, net of CWT 528,200 205,862 626,573
(b) Depreciation expense 1,175,200 1,446,661 862,500
(c) Royalty expense, net of CWT 17,226 68,046 77,625
Non-operating income 62,300 246,100 93,500
Taxes paid in previous quarters 1,438 48,115 93,575

The royalty expenses constitute royalty income payments to individual artists, all resident citizens, for the use of their copyrighted songs.

SANA ALL generated the following amounts in previous years:
. Generated in Amount
NOLCO 2020 5,000
NOLCO 2021 2,000
Excess MCIT 2020 25,000
Excess MCIT 2021 15,000
Excess tax credits 2021 8,000

The corporation chooses to credit in future years any excess tax credits it may have in a taxable year.

  1. Compute SANA ALL’s the tax payable/(refundable) in its 2022 AITR.
    a. ₱1,966
    b. (₱45,462)
    c. (₱5,463)
    d. ₱2,538
  2. What would be the tax payable/(refundable) of SANA ALL in its 2023 AITR?
    a. ₱12,027
    b. (₱40,000)
    c. ₱2,925
    d. None of the above.
  3. What would be the tax payable/(refundable) of SANA ALL in its 2024 AITR?
    a. ₱56,509
    b. ₱66,910
    c. ₱16,509
    d. None of the above.
A
  1. C
  2. D
  3. A
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