Chapter 12: Income Tax Credit and Optional Standard Deductions (OSD)
Chapter 12
Income Tax Credit and Optional Standard Deductions (OSD)
Concept of foreign income tax credit
Resident citizens and domestic corporations are taxable on their income from all sources (income derived from within and without the Philippines). Consequently, income tax derived by them from sources outside of the Philippines may have been subjected to income tax in the country where such income is derived. Nonetheless, the same income, hence, resulting to indirect double taxation.
Tax credit refers to the amount of income tax paid to a foreign country, subject to limitations.
To lessen the adverse effect of indirect double taxation on the part of the taxpayer, the amount of income taxes paid or incurred during the taxable year from any foreign country may be availed as deduction to the taxpayer's income tax due. Income tax payable after income tax credit is computed as follows:
Domestic Corporation
Taxable income (within and without) Pxxx
x Income tax rate (CREATE Act) 20%/25%
Income tax due Pxxx
Less: Income tax credit** (Pxx)
Income tax payable Pxxx
Resident Citizen
Taxable income (within and without) Pxxx
x Income tax rate (CREATE Act) Tax Table
Income tax due Pxxx
Less: Income tax credit** (Pxx)
Income tax payable Pxxx
** The income tax credit allowed as a deduction from the income tax due is based on a statutory formula as presented in page 535 and 536.
Income Tax Credit and OSD
In the case of any individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his distributive share in the income of the general professional partnership or estate or trust paid or incurred during the taxable year to a foreign country, income tax credit may be availed of if his distributive share of the income of such partnership or trust is reported for taxation.
To minimize impact of double taxation on income, the taxpayer signifies in his return his desire to have the benefits of tax credit under the Tax Code.
Taxpayers who can avail Income Tax Credit
• Resident citizens
• Domestic corporations
• Members of general professional partnerships
• Beneficiaries of estates & trusts
The principle of double taxation is not applicable to non-resident citizens and non-resident foreign corporations. Therefore, they shall not be allowed tax credits for taxes of foreign countries.
REQUISITES
The Credits for taxes paid in foreign countries shall be allowed as deduction only if the taxpayer establishes to the satisfaction of the Commissioner the following:
1. The total amount of income derived from sources without the Philippines;
2. The amount of income derived from each country, the tax paid or incurred to which is claimed as credit, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and
3. All other information necessary for the verification and computation of such credits.
EXISTENCE OF TAX LIABILITIES PRIOR TO THE AVAILMENT OF TAX CREDIT
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is to begin with, no existing obligation to the government. However, the existence of a credit or its grant by law may not be the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not.
While a tax liability is essential to the availment or payment of any tax credit, prior payments are not. On the contrary, for the existence or grant solely of such tax credit neither a tax liability nor a tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid. For example, in computing the estate tax due, Section 86(D) of the Tax Code, as amended, allows a tax credit for taxes paid outside the Philippines even if no payment was actually made found in Section 101(C) is a similar provision for donor's taxes, again credits in both instances count to the prior payment of taxes, even if not made to our government. (CIR v. Central Luzon Drug Corp., GR No. 159647, 15 April 2005).
LIMITATIONS ON CREDIT
The amount of the credit taken shall be subject to each of the following limitations:
1. The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country bears to his entire taxable income for the same taxable year; and
2. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within the Philippines bears to his entire taxable income for the same taxable year.
Statutory Formula for the computation of tax credit
The computation for the allowable income tax credit depends on the number of foreign countries in which payment of income tax were made.
Limit 1 or Limit A - If there is only one (1) foreign country
Net income, foreign country
Net income, world
x Philippine Tax Due = Pxxx
versus
Actual Tax paid in the foreign country
Lower Amount
Limit 2 or Limit B - If there are more than one foreign countries
Step 1:
Compute Limit A or Limit 1, "per foreign country" as shown above. Foreign countries where no income taxes were paid should be excluded only for purposes of computing Limit A or L1.
Step 2:
Compute Limit B or Limit 2 using the following formula:
Net income, all foreign countries
Net income, world
x Philippine Tax Due = Pxxx
versus
Actual Taxes Paid in foreign countries
Lower Amount
Step 3:
Compute the allowed tax credit by choosing the lower amount between Limit A and Limit B
Limit A (from Step 1) Pxxx
Limit B (from Step 2) Pxxx
Allowed Tax Credit (lower amount) Pxxx
ILLUSTRATION 1:
CASE A: 1 Foreign Country Only
A taxpayer provided the following data for calendar year ending December 31, 2024: (Assume exchange rate of $1=$0).
Gross Income
Philippines: P4,000,000
Canada: 15,000
Deductions
Philippines: 2,500,000
Canada: 3,000
Income tax paid
Philippines: 0
Canada: 3,000
Question: Assume the taxpayer is a resident citizen, how much should be report as income tax payable at year end?
❖ Answer: P477,500
Net income, Philippines P1,500,000
Net income abroad 250,000
Total net taxable income P2,750,000
Tax Due (TRAIN Law Tax Table):
First P2,000,000 P402,500
Excess P750,000 x 30% 225,000
Less: Tax Credit P62,500
Income Tax Payable 2024 P477,500
L1: 1,250,250 x P730,000
Limit versus Actual
P31,818 versus P150,000
Allowed Credit P31,818
CASE B - Two (2) or More Foreign Countries
A domestic corporation (other than MSME) had the following data in 2024:
Taxable income, world: P1,000,000
Taxable income, Canada: 400,000
Taxable income, U.S.A: 250,000
Income tax paid to Canada: 120,000
Income tax paid to U.S.A: 110,000
Philippine tax paid, three quarters of the year: 10,000
Required: Determine the income tax payable.
❖ Answer: P140,000
Taxable income, world P2,000,000
x Tax Rate (CREATE Act) 25%
Income tax due P500,000
Less: Tax Credit*** (P360,000)
Income tax payable P140,000
TAX CREDIT:
LIMIT 1:
Canada:
Limit: (400/2,000 x P500,000) P100,000
Actual: 120,000
Allowed: 100,000
U.S.A:
Limit: (250/2,000 x P500,000) P62,500
Actual: 110,000
Allowed: 62,500
Total L1: P162,500
LIMIT 2:
Limit: (1,000/2,000 x P500,000) P250,000
Actual: 230,000
Allowed: 230,000
TAX CREDIT ALLOWED (L1 vs L2): P250,000
OPTION TO AVAIL FOREIGN INCOME TAXES PAID AS PART OF ALLOWABLE EXPENSES OR AS A TAX CREDIT
Income tax payments to a foreign country by taxpayers who can avail of foreign income tax credit, may, "at the option of the taxpayer" and irrespective of the method of accounting employed in keeping his books, be taken as a deduction from the gross income in the year in which the taxes of the foreign country were incurred or as a tax credit against income tax due.
ILLUSTRATION 2:
Assume the same data in "Illustration #1, CASE B", except that the corporation opted to deduct from the gross income the foreign income tax payments. How much would have been the income tax payable?
❖ Answer: P297,500
Net income before tax credit (void) P2,000,000
Taxes paid to foreign countries treated as OPEX (P310,000)
Net taxable income P1,690,000
x Tax Rate under CREATE Act (other than MSME) 25%
Tax due P422,500
Less: Payments, 3 quarters (P105,000)
Tax payable P297,500
OPTIONAL STANDARD DEDUCTIONS (OSD)
Section 8 of RR 8-2018 provides that, in general, there shall be allowed at the option of the taxpayer, itemized deductions or an Optional Standard Deduction (OSD) at the rate of forty percent (40%).
In case of individual taxpayers, OSD shall be computed at the rate of forty percent (40%) of gross sales/receipts, as the case may be. Corporations may elect OSD in an amount not exceeding forty percent (40%) of its gross income. However, no deductions shall be allowed to individual taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship, and those who opt to be taxed at 8% income tax rate on their income from business/profession.
TABLE 12-1: OSD VS ITEMIZED DEDUCTION
Optional Standard Deduction
• At the option of the taxpayer
• In lieu of itemized deduction
• Irrevocable for the taxable year
• 40% flat rate
• No substantiation requirement
• Trade/business/profession related
Itemized Deductions
• Applicable, in general
• On a per item or expense basis
• Incurred or paid during the year
• Generally, no limit as to amount
• Substantiation requirement, in general
• Trade/business/profession related
Once the election to avail of OSD or itemized deduction is signified in the return, it shall be irrevocable for the taxable year for which the return is made.
The following may be allowed to claim Optional Standard Deductions (OSD) in lieu of the itemized deductions as follows:
TABLE 12-2: OPTIONAL STANDARD DEDUCTION (RR 16-2008 & RR 2018)
Taxpayer
1. Individuals
a. Resident citizens
b. Non-resident citizens
c. Resident aliens
d. Taxable estates and trusts
Basis
• Accrual basis of accounting: 40% of Gross Sales
• Cash basis of accounting: 40% of Gross Receipts
For individuals allowed to report their income or deductions under a different method of accounting (other than cash and accrual accounting such as percentage of completion method), the OSD shall be determined in accordance with such acceptable method of accounting.
2. Corporations
a. Domestic corporations
b. Resident F. Corp.
Basis
• 40% of Gross Income
3. General Professional Partnerships
Basis
• 40% of Gross Income
FOR INDIVIDUAL TAXPAYERS, "Cost of sales" or "Cost of services" are NOT ALLOWED to be deducted for purposes of determining the basis in computing the allowable OSD (RR 16-2008). "Gross Income" shall mean the gross sales less sales returns, discounts and allowances and cost of goods sold.
"Gross Sales" shall include only sales contributory to income taxable under the tax code. "Cost of Goods Sold" shall include the purchase price or cost to produce the merchandise and all expenses directly incurred in bringing them to their present location and use.
A taxpayer who elected to avail of OSD:
• Shall signify in his/her return such intention, otherwise, s/he shall be considered as having availed himself of the itemized deduction; and
• Once the election to avail of the OSD or itemized deduction is signified in the return (by checking the appropriate box in the income tax return filed for the first quarter of the taxable year), it shall be irrevocable for that taxable year. Meaning, the same type of deduction must be consistently applied for all the succeeding quarterly returns and for the taxable year.
COST OF GOODS SOLD
Merchandising
Invoice cost of the cost of goods sold plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods were still in transit.
Manufacturing
All cost incurred in the production of the finished goods such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums, and other costs incurred to bring the raw materials to the factory or warehouse. The term may be used interchangeably with cost of goods manufactured and sold.
Sellers of Service
All direct costs and expenses necessarily incurred to provide the services including:
• salaries and benefits of personnel, consultants and specialists
• cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.
Interest expense is not allowed as deduction under this category except in the case of banks and other financial institutions.
GENERAL PROFESSIONAL PARTNERSHIPS (GPPS)
As discussed in Chapter 6, for purposes of computing the distributive share of a partner of GPP, the net income of either shall be computed in the same manner as a corporation using either itemized deduction or OSD (Section 26 of the Tax Code; Section 6 of RR 16-2008).
Section 34(L) of the Tax Code, as amended by RA 10963 (TRAIN Law) provides, that a General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP or the partners comprising the Partnership.
A GPP is NOT SUBJECT TO INCOME TAX imposed pursuant to Section 26 of the Tax Code, as amended. However, the partners shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP. The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-through" entity where its income is ultimately taxed to the partners comprising it (Section 8 of RR 8-2018).
Section 26 of the Tax Code, as amended, likewise provides that "For purposes of computing the distributive share of the partners, the net income of the GPP shall be computed in the same manner as corporation. As such, a GPP may claim either the itemized deductions allowed under Section 34 of the Code or in lieu thereof, it can opt to avail of the OSD allowed to corporations in claiming the deductions in an amount not exceeding forty percent (40%) of its gross income.
The regulations likewise state that the GPPs and their individual partners to signify their intention to avail either the OSD or the itemized deduction by checking the appropriate box in their income tax return filed the first quarter of the taxable year. Once the election is made, the same type of deduction must be consistently applied for all the succeeding quarterly returns and in the final income tax return for the taxable year. Any taxpayer who is required to file the quarterly income tax return but fails to do so shall be considered as having availed of the itemized deductions option for the taxable year. (Revenue Regulations No. 02-10, February 24, 2010).
SUBMISSION OF FINANCIAL STATEMENTS
An individual taxpayer who is entitled to claim the OSD shall not be required to submit with his return such financial statements otherwise required under the tax code. Provided, however, when the Commissioner otherwise permits, the individual shall keep such records pertaining to his gross sales or receipts.
In the case of corporation, however, said corporation is still required to submit financial statements when it files its annual income tax return and to keep such records pertaining to its gross income.
ILLUSTRATIVE EXAMPLES IN DETERMINING THE BASIS OF THE 40% OSD FOR INDIVIDUALS AND CORPORATIONS.
Assume a retailer of goods, whose accounting method is under the accrual basis, has a gross sales of P1,000,000 with a cost of sales amounting to P800,000. The computation of the OSD for individuals and corporations shall be determined as follows:
If Individual
Gross Sales P1,000,000
Less: Cost of Goods Sold Not allowed
Basis of the OSD P1,000,000
X OSD Rate (maximum) 40%
OSD Amount P400,000
If Corporation
Gross Sales P1,000,000
Less: Cost of Goods Sold P800,000
Basis of the OSD P200,000
X OSD Rate (maximum) 40%
OSD Amount P80,000
If the taxpayer opted to use the OSD in lieu of the itemized deductions allowable under Section 34 of the Tax Code, as amended, his net taxable income shall be as follows:
Individual
Gross Sales P1,000,000
Less: Cost of Goods Sold Not allowed
Gross Income P1,000,000
Less: OSD (40%) (P400,000)
Net Taxable Income P600,000
Corporation
Gross Sales P1,000,000
Less: Cost of Goods Sold P800,000
Gross Income P200,000
Less: OSD (40%) (P80,000)
Net Taxable Income P120,000
ILLUSTRATION 3 - CASE A: Corporate Taxpayer:
The following data were provided by ABC Corporation, a domestic corporation classified as MSME:
Gross sales P10,000,000
Cost of sales 5,000,000
Salaries expense 800,000
Depreciation expense 300,000
Rent expense 100,000
Provision for bad debts 50,000
Bad debts written off 0
Interest expense 150,000
Capital gain on asset held for 3 years P200,000
Capital loss on asset held for 2 years 200,000
Capital gain on sale of land held as capital asset 500,000
Interest income from savings deposit 100,000
Royalty income
Required:
1. Determine the taxable income using itemized deduction
2. Determine the taxable income using OSD
Answer:
1. P3,266,000
Gross sales P10,000,000
Cost of sales (5,000,000)
Salaries expense (800,000)
Depreciation expense (300,000)
Rent expense (100,000)
Bad debts written off (50,000)
Interest expense (150,000)
Taxable income P3,500,000
*** Interest expense
Less: Deduction
(NOT applicable to MSME - CREATE Act)
Allowable interest expense P150,000
• Provision for bad debts is a non-deductible expense
• Capital loss is deductible only to the extent of capital gain. For corporate taxpayers, rules on holding period is not applicable
• Capital gain on sale of land is subject to 6% capital gains tax
2. P3,000,000
Gross sales P10,000,000
Cost of sales (5,000,000)
Gross Income P5,000,000
Less: OSD (40%) (P2,000,000)
Taxable income P3,000,000
CASE B - Individual Taxpayer
Assume the taxpayer is resident citizen:
Gross sales P1,050,000
Sales returns and allowances 30,000
Sales discounts 20,000
Cost of sales 600,000
Required:
1. Determine the taxable income using itemized deduction
2. Determine the taxable income using OSD
Answer:
1. P3,400,000
Gross sales P10,500,000
Sales returns and allowances (200,000)
Sales discounts (200,000)
Net Sales P10,100,000
Cost of sales (6,000,000)
Salaries expense (800,000)
Depreciation expense (400,000)
Rent expense (100,000)
Bad debts written off (50,000)
Interest expense (150,000)
Miscellaneous income 134,000
Capital gain on sale of land held as capital asset 500,000
Interest income from savings deposit 200,000
Taxable income P3,403,000
2. P6,014,400 computed as:
Gross sales P10,500,000
Sales returns and allowances (200,000)
Sales discounts (200,000)
Net Sales P10,100,000
Cost of sales Not allowed
Total Sales/Receipts P10,100,000
Less: OSD (40%) (P4,040,000)
Taxable income P6,014,400
CHAPTER EXERCISES
Choose the letter of the correct answer
1. A privilege granted a taxpayer to deduct or set-off against Philippine income tax the income war-profits and excess-profits taxes that he has paid or has accrued in a foreign country
a. Tax exemption
b. Tax consolidation
c. Tax deductions
d. Tax credit
2. Statement 1: At the option of a qualified taxpayer, income taxes paid in foreign countries can be claimed as deduction from gross income or tax credit, subject to limit.
Statement 2: An alien residing and doing business in the Philippines is allowed to have a tax credit for income taxes paid in other country.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
3. One is entitled to tax credit for taxes paid to a foreign country
a. Resident aliens
b. Domestic corporation
c. Non-resident aliens with reciprocity
d. Non-resident citizens
4. One is entitled to tax credit for taxes paid to a foreign country
a. Non-resident aliens
b. Foreign corporations
c. Resident aliens with income derived solely within the Philippines
d. Beneficiaries of estates and trusts
5. Who is not entitled to foreign tax credit?
a. Nonresident citizen
b. Resident alien
c. Resident foreign corporation
d. All of the above
6. Income tax payment to a foreign country, in the case of a domestic corporation may be claimed as
a. Deduction from gross income
b. Tax credit against income tax due
c. Both deduction and tax credits at the same time
d. Either as a deduction from the gross income or as a tax credit against the income tax due
7. Income tax payment to a foreign country, in the case of a resident corporation may be claimed as
a. Deduction from gross income
b. Tax credit against income tax due
c. Either as a deduction from the gross income or as a tax credit against the income tax due
d. None of the above
8. Which of the following taxpayers is not required to file income tax returns and thus cannot claim any tax credit?
a. Government institutions
b. Private educational institutions
c. Nonresident foreign corporations
d. None of the above
9. How may taxpayer entitled to foreign tax credit claim the same?
a. May be claimed either as deduction from the gross income or as a tax credit, at the option of the taxpayer
b. May be claimed only as a deduction
c. May be claimed only as a tax credit
d. Do not qualify either as a deduction or as an tax credit
10. Tax credit for foreign income tax paid or incurred is allowed to a resident citizen of the Philippines or a domestic corporation. Determine which among the statements below regarding tax credit is correct.
I. When a taxpayer is qualified to take a tax credit for a foreign income tax paid, he may take a deduction of such tax.
II. When there are several countries to which income taxes were paid, a qualified taxpayer opted to take tax credit. He must take all the income taxes paid to foreign countries as tax credit.
III. The term "income tax" for which credit may be taken means tax properly, not including interest or surcharge thereon.
IV. When there is a tax refund to a foreign income tax previously claimed as a tax credit, the refund will constitute taxable income.
a. I and II only
b. I and III only
c. I, II and III only
d. I, II, III and IV
Use the following data for the next two (2) questions:
A taxpayer provided the following data for calendar year ending December 31, 2023: (Assume exchange rate of $1=$0).
Gross Income
Philippines: P4,000,000
Canada: $40,000
Deductions
Philippines: P2,550,000
Canada: $15,000
Income tax paid
Philippines: 0
Canada: $3,000
11. Assume the taxpayer is a resident citizen, how much should he report as income tax payable at year end?
a. P150,000
b. P300,000
c. P462,500
d. P714,000
12. Assume the taxpayer is a domestic corporation (other than MSME), how much should be reported as income tax payable at year end?
a. P150,000
b. P375,000
c. P25,000
d. P810,000
Use the following data for the next two (2) questions:
A domestic corporation other than MSME had the following data for the year:
Taxable income, X Foreign country P1,000,000
Taxable income, Y Foreign country 400,000
Taxable income, Z Foreign country 250,000
Income tax paid to X Foreign country 120,000
Income tax paid to Y Foreign country 110,000
Philippine tax paid, three quarters of the year 110,000
13. Assume the taxpayer is a domestic corporation, how much should be reported as income tax payable at year end?
a. P600,000
b. P300,000
c. P140,000
d. P120,000
14. If the corporation opted to deduct from the gross income the foreign income taxes paid, how much would have been the income tax payable?
a. P600,000
b. P300,000
c. P297,500
d. P37,500
15. The multiplier in the tax credit formulas under limitations 1 and/or 2 for foreign income tax payments is
a. Philippine income tax due based on the taxable income from sources within and without the Philippines
b. Philippine income tax due based on the taxable income from sources within the Philippines only
c. Philippine income tax based on taxable income abroad
d. None of the above
17. For purposes of Optional Standard deduction of an individual, the Optional Standard Deduction of forty percent (40%) should be based on:
a. If a trading concern, gross profit from sales
b. If a service concern, gross receipts less direct cost of services
c. Gross sales or gross receipts
d. Means gross profit from sales, or gross receipts or revenues less direct cost of services, plus all other items of gross income
18. Which of the following should be used as a basis in computing the Optional Standard Deduction?
I. For individual taxpayers using the accrual basis of accounting, OSD is based on 40% of gross sales.
II. For individual taxpayers using the cash basis of accounting, OSD is based on 40% of gross receipts.
III. For individual taxpayers using other basis of accounting such as percentage of completion method, OSD is based on 40% of gross receipts or sales, as the case may be.
IV. For OSD purposes, corporate taxpayers shall compute the OSD in the same manner with individual taxpayers
a. I and III only
b. I, II and III only
c. All of the above
d. None of the above
19. The following statements pertaining to Optional Standard Deduction for corporations is incorrect?
a. If the corporation is a trading concern, OSD should be based on Gross sales less sales returns, discounts, allowances, and cost of services.
b. If the corporation is a seller of services, OSD should be based on Gross receipts less sales returns, discounts and allowances, and cost of sales
c. Passive income which have been subjected to final tax at source shall not form part of the gross income for purposes of computing OSD
d. None of the above
20. Optional standard deduction
a. Is always be equal to 40% of the gross income from business or practice of profession.
b. Cannot be used as a deduction from compensation income.
c. May be availed by all individuals
d. May be availed of by the taxpayer whether or not he signifies his desire to elect optional standard deduction.
21. Statement 1: An individual taxpayer may claim either the itemized deduction or optional standard deduction of 40% of net sales/receipts.
Statement 2: A domestic corporation may claim either the itemized deduction or optional standard deduction of 40% of gross income.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
22. Statement 1: All corporations could claim either the itemized deduction or standard deduction in the same taxable year.
Statement 2: All individual taxpayers may claim either the itemized deduction or optional standard deduction.
a. True, True
b. False, False
c. True, False
d. False, True
23. The following may be allowed to claim OSD in lieu of the itemized deductions, except
a. Taxable estates and trust
b. Resident foreign corporations
c. Domestic corporations
d. All of the above
24. One of the following statements is correct. A choice by an individual of the Optional Standard Deduction means that:
a. His/her income tax return need not be accompanied by financial statements
b. She need not keep books of accounts
c. She need not have records of gross income
d. His choice can still be changed by filing an amended return
25. Which of the following income is to be reduced by itemized deductions?
a. Compensation income
b. Business income
c. Passive income
d. Capital gain
26. Statement 1: Business and professional income derived within and outside the Philippines by a resident Filipino citizen is granted with allowable deductions.
Statement 2: A qualified Individual taxpayers may apply for itemized deductions or optional standard deduction.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
Use the following data for the next two (2) questions:
The taxpayer is a domestic corporation classified as MSME:
Gross sales P9,350,000
Sales returns and allowances 250,000
Sales discounts 100,000
Interest income on trade notes receivable 150,000
Other income 50,000
Cost of sales 4,000,000
Operating expenses with vouchers and receipts 3,000,000
Operating expenses without vouchers and receipts 500,000
Interest income from savings deposit 40,000
Interest income from deposit under FCDS 125,000
Royalty income 100,000
Determine the following:
27. Taxable income using itemized deduction
a. P1,700,000
b. P2,175,000
c. P1,675,000
d. P2,200,000
28. Taxable income using OSD
a. P3,755,000
b. P470,000
c. P3,695,000
d. P3,720,000
29. Gary, a resident citizen, had the following data on income and expenses:
Gross sales P12,000,000
Sales returns 1,000,000
Sales discounts 550,000
Purchases 5,000,000
Freight in 150,000
Purchase returns 200,000
Inventory, beginning 100,000
Inventory, ending 300,000
Interest income on notes receivable 100,000
Dividend from resident corporation
• The taxable income using OSD should be
a. P5,600,000
b. P5,603,000
c. P6,370,000
d. P6,420,000
30. A resident citizen of the Philippines has the following data on income and expenses:
Gross compensation income P200,000
(net of exclusions)
Gross sales 900,000
Cost of sales 500,000
Business expenses 20,000
He avails himself of the Optional Standard Deduction (OSD). How much is his taxable net income?
a. P740,000
b. P910,000
c. P420,000
d. P930,000
31. Assume the taxpayer is a general professional partnership (disregard compensation income and the GP's assets are valued at P20,000,000), the distributable income using OSD should be:
a. P180,000
b. P800,000
c. P740,000
d. P375,000
32. Assume the taxpayer is a general professional partnership (disregard compensation income), the distributable income using OSD should be:
a. P168,000
b. P600,000
c. P240,000
d. 540,000