CHAPYER 13-B-Special Allowable Itemized Deductions and NOLCO

True or False

1. The employers are allowed additional deduction of 15% on the

compensation paid to persons with disability.
2. An adopting private entity of a public school is entitled to a deduction
incentive equivalent to double the amount donated to a public school.
3. Taxpayers who installed improvements in their facilities to accommodate
persons with disability are allowed an additional 50% deduction incentive
based on the value of such improvement
4. The distribution of the corpus of a taxable estate or trust is an item
of special deduction against the gross income of the estate or trust.
5. The transfer to the reserve fund of insurance companies is a special
deduction, but the release from the reserve fund is an item of gross
income.
6. Dividends are non-deductible by any taxpayer except real estate
investment trusts.
7. The transfers to all reserve funds of the cooperative including
mandatory and discretionary funds are deductible from the gross income of
cooperatives.
8. Persons with disability are mandatorily allowed a discount of 20% from
all establishments.
9.Senior citizens are mandatorily allowed a discount of 25% from certain
establishments
10. The employer of senior citizens can claim additional deductions
equivalent to 50% of the compensation paid to senior citizens who have
income below the poverty line.
11.Expenses incurred to comply with the requirement of the Expanded
Breastfeeding Act are allowed an additional incentive equivalent to the
amount of the expense incurred.
12. Attorneys are entitled to the value of their pro-bono services to
indigent clients as deduction from gross income.
13. The allowable incentives to lawyers for pro-bono services shall not
exceed 10% of the gross income from the actual performance of the legal
profession.
14. Employers are entitled to an additional deduction of 50% of the
productivity incentive bonus paid to their employees.
15. The amount of NOLCO shall not include the amount of deduction
incentives allowed by law.
16. A small business was merged to a larger business. Even after the
merger, the NOLCO of the small business is deductible by the larger
business
17. NOLCO is valid for 3 years
18. NOLCO always exist when there is a net operating loss.
19. Net capital loss carry over cannot be carried over together with
NOLCO.
20. An acquirer in a business combination sustained a net operating loss
before the business combination. The acquirer is allowed to carry-over
its net operating loss in prior years

Exercise Drills
For each of the following special deduction incentive, indicate the
percent incentive and the limit, if applicable.

Expense/Expenditure Deduction incentive Incentive

limit
1. Salaries paid to senior citizen
employees
2. Salaries paid to persons with
disability
3. Training expense under the
Jewelry Industry Development Act
4. Cost of facility improvement for
employees with disability
5. Contribution under the "Adopt-a-
School Program"
6. Cost of compliance with the
"Rooming-in and Breastfeeding
Practices Act"
7. Free legal expense
8. Productivity incentive bonus and
employee training program

Multiple Choice - Problems 1

1. A fitness gym catering to senior citizens recorded a total gross

revenue of P345,000 from senior citizens. The gym provides 24% discount
in excess of the legal requirements. What is the deductible amount of
senior citizen's discount?
a. PO
c. P82,800
b. P 69,000
d. P90,789

2.Germania Inc. employs three senior citizens as regular employees. Two

of them are receiving the minimum wage which is within the poverty level.
Total
minimum wages paid to these senior citizen employees during the year were
P182,000. One of the senior citizen employees is a director of the company
who was paid P780,000 compensation during the year.Compute the deductible
additional compensation expense
a. 0 c. P91,000
b. P27,300 d. P144,300

3. An employer hired two senior citizens during the year as temporary

replacements for its two staffs who were on leave. Both senior citizens
were paid salaries not in excess of the poverty level.

Mang Pandoy received a total of P144,000 during the year. Aling Maria
substituted for an employee who filed for maternity leave for 3 months.
Aling Maria received a total of P28,000 during the year.
Compute the total deductible additional compensation expense.
a. PO
b. P21,600
c. P25,800
d. P43,000

4. Mr. Bakilan irrevocably designated in trust his investment portfolio

consisting of domestic stocks and bonds. The dividend income from the
stocks shall be distributed to the beneficiary while the interest on the
bonds shall be accumulated. During the year, the portfolio earned P200,000
interest and P135,000 dividends, net of final tax.
What is the total deduction allowable to the trust for the income
distribution?
a. PO
b. P15,000
c. P135,000
d. P150,000

5. A grantor irrevocably designated in trust a real property in favor of

a beneficiary.Under the trust indenture, 20% of the trust gross income
shall be distributed to the beneficiary. The trustee shall be paid 5% of
the gross income as management fee. During the year, the trust collected
P810,000 rent income, net of 10% to creditable withholding taxes. The
trust recorded P350,000 in expenses.
Compute the deductible amount of income distribution to the fund.
a. PO
b. P101,000
c. P110,000
d. P180,000

6. The required reserve for an insurance company was P3,200,000 as of

December 31, 2013 and P3,500,000 as of December 31, 2014. What is the
deductible amountof transfer to the reserve fund?
a. PO
b. P300,000
c. P3,200,000
d. P3,500,000
7.A real estate investment trust (REIT) earned P4,100,000 from property
rentals total business expenses were P2,100,000. Assuming the REIT
declared the mandatorily required dividend distribution, what is the
amount of deductible dividend against gross income?
a. PO
b. P1,800,000
c. P1,890,000
d. P3,690,000

8. A cooperative transacting business only with its members is on its

operation. It reserves 50% of its operating income in compliance CDA
regulation. During the year, it reported a total operating P3.000.000
inclusive of P2,400,000 income from related activities.Compute the
deductible amount of transfers to reserve against gross income.
a P0
b. P240,000
c. P60,000
d. P300,000

9. An establishment granting senior citizens 25% discounts recorded the

for sales during the period:
Customers
- Regular Senior citizen
Gross sales P 8,000,000 P 800,000
Cost of sale. P 5,000,000 P 400,000.
What is the deductible senior citizens' discount?
a. PO
c. P200,000
b. P160,000
d. P266.667

10. A restaurant granted 25% discounts to senior citizens in excess of

the 20% mandatory requirement. During the year, the restaurant reported
receipts of P93,750 from senior citizen customers.Compute the deducton
for senior citizens' discount balance
a. PO
b. 7,250
c. P23,437.50
d. P25,000

11. An employer embarked on a socio-economic program named "A World

Empowered by Persons with Disability." Under the ambitious program, the
employer established a business which is fully manned by persons with
disability the employer incurred P300,000 in workplace improvements
specifically designed for its disabled employees. The business venture
turned very profitable due to overwhelming public sympathy. During the
year, the employer paid P2,100,000 in compensation expense. Compute the
additional deduction compensation expense.
a. P0
b. P210,000
c. P315,000
d. P525,000

12. In the immediately preceding problem, what is the deductible

additional expense for the improvements made for the employees with
disability?
a. PO
b. P45,000
c. P75,000
d. P150,000

13. In 2016, Bernard Bakilan, a practicing lawyer, adopted a public

elementary school and contributed P500,000 for the acquisition of computer
equipment and software. Bernard had an operating income of P900,000 before
this contribution. Assuming the "Adopt-a-School Program" is an investment
priority program of the government in 2016, compute Bernard's additional
contribution expense and net income respectively.
a P250,000; P150,000
b. P250,000; P 650,000
b P125,000; P275, 000
d. P125,000; P775,000

14. In the preceding problem, compute Bernard's additional contribution

expense and net income, respectively, if the "Adopt-a-School program" is
no longer a government priority program in 2016?
a. P0; P810,000
b. PO; P400,000
c. P250,000; P650,000
d. P250,000; P560,000

15. Binondo Jewellery is a qualified jewelry enterprise registered with

the Board of Investments.In order to modernize its jewelry making
business, it instituted an in-house training program and hired external
experts to train its employees. The program was duly approved by TESDA.
The program cost P300,000 during the year.
What is the deductible amount of additional training expenses
a. P30,000
b. P45,000
c. P75,000
d. P150,000

16. Girl Power Corporation employs purely women. It installed a lactation

station at a total cost of P350,000 and secured a "Working Mother-Baby-
Friendly Certificate" from the Department of Health.
Compute the additional deduction under the Rooming-in and Breastfeeding
Practices Act.
a. PO
b. P175,000
c. P350,000
d. P700,000

17.A government provincial hospital established a milk bank at a cost of

P1,000,000.Determine the additional deduction incentive it is allowed
under the Rooming-in and Breastfeeding Practices Act.
a, PO
b. P250,000
c .P500,000
d. P1,000,000

18. In the immediately preceding problem, what would be the additional

deduction assuming the hospital is a proprietary medical center?
a P0. c. P1,000,000
b. P500,000. d. P2.000.000

19. Atty.Midsayaf is a practicing lawyer in the remote provinces of

Mindanao. During the year, he provided 180 actual hours for pro-bono
services inclusive of the 60 hour mandatory legal aid services to indigent
clients. These services would have been billed P1000 per hour if rendered
to paying clients.Atty Midsayaf has a P1,400,000 gross income duting the
year exclusive of P20,000interest on his savings deposit.
Compute the special deduction for the free legal services. com
a. P60,000
b. P120,000
C. P140,000
d. P142,000

20. Curaratnit, Bolalatsing & Associates, a law firm, earned an operating

income of P8,000,000, net of P6,000,000 administrative expenses and
P12,000,000 direct cost of services. During the year, it represented
selected clients under its free legal assistance program. The value of
these services would have been P1,500,000. It also represented indigent
clients for free. the value of which would have been P400,000. Compute
the special deduction for free legal services.
a. P1,200,000 C. P1,500,000
b. P1,400,000 d. P1,900,000

21. An employer paid a total of P800,000 productivity incentive bonus to

its production workers. What is the additional productivity incentive
bonus expense?
a. PO. c. P200,000
b. P80,000. d. P400,000

22. An employer provides manpower training and special studies to its

rank and fileemployees at a total cost of P200,000. The in-house program
was accredited by TESDA. What is the deductible additional productivity
incentive bonus expense?
a.P0 C . P100,000
b. P20,000. d. P200,000

Multiple Choice - Problems 2

1. A taxpayer had the following results of operations:

2019. 2020
Gross income. P 1,200,000 P 2,500,000
Itemized deductions 1,400,000 1,000,000
Deduction Incentive. 200,000 300,000
What is the net income in 2020?
a. P 800,000 c. P1,100,000
b. P1,000,000 d. P1,200,000

2. An enterprise registered with the BOI had a consistent profitable

operation. Just before graduating from its BOT tax holiday incentives in
2019, it sustained a P1,800,000 operating loss due to an employee strike
in 2019. The settlement of the deadlock in 2020 enable the enterprise to
post a P2,400,000 operating income.
What is the allowable NOLCO deduction in 20202
a. PO. c. P1,800,000
b. P900,000 d. P2,400,000

3. A corporate taxpayer incurred an operating loss in 2020

Sales P 3,000,000
Less: Cost of sales. 1,200,000
Gross income P 1,800,000
Less: Deductions
Regular itemized deduction P1,200,000
Special itemized deductions 800,000
Deduction incentives 400,000 2,400,000
Net operating loss P 600,000
What is the amount of NOLCO to be carried over in the next three years?
a. PO. c. P400,000
b. P200,000 d. P600,000

4. An individual taxpayer reported the following in 2019:

Gross income P 1,500,000
Less:
Administrative expenses P 800,000
Selling expenses 650,000 1,450,000
Operating income P 50,000
Less: Personal expenses 150,000
Excess of personal expenses over income P 100,000
What is the NOLCO to be carried over in the next three years?
a. P 0 c. P100,000
b. P50,000 d. P150,000
5.In 2020, a taxpayer finally posted a P1,000,000 operating profit after
four years of continuous losses. The results of operations in prior years
were:

2016 (P 800,000)
2017 ( 400,000)
2018 ( 200,000)
2019 ( 100,000)
Compute the deductible NOLCO in 2020
a P0
b P700,000
c P1,000,000
d P1,500,000

6.In 2016, Warren Buffet purchased the net assets of Berkshire Hathaway,
a losing business which posted a cumulative P10,000,000 loss in the past
three years. Buffet's charismatic leadership led the business to turn
P4,000,000 profits in 2016.What is the allowable NOLCO deduction for 2016?
a. PO
b. P4,000,000
c. P5,000,000
d. P10,000,000

7. A taxpayer has the following historical results of operations:

2016 (P 600,000)
2017 ( 700,000)
2018 400,000
2019 ( 200,000)
2020 100,000
What is the total outstanding NOLCO at the end on 2020 which can be
carried
in future years?
a. PO c. P600,000
b. P200,000 d. P800,000

8. A taxpayer reported the following items of gross income and deductions

in 2020
Rent Income P 400,000
Service fees 200,000
Interest income from bank deposits 50,000
Deductible expenses 800,000
Non-deductible expenses 100,000
Compute the NOLCO to be carried over in the next three years.
a. P300,000 c. P200,000
b. P250,000 d. P150,000
9. The carry-over of NOLCO is allowed when
a. the net operating loss is sustained from an exempt year.
b. there is a change for at least 75% of the paid-up capital or nominal
value of the outstanding shares of a corporation.
c. the business is acquired by another taxpayer.
d. there is a change in the controlling shareholder representing 51%
ownership.

10. Which is incorrect with regard to the net operating loss carry-over
(NOLCO)?
a. NOLCO can be claimed together with Optional Standard Deductions.
b. NOLCO cannot be claimed if the net operating loss arises in a year
where the taxpayer is exempt from income tax.
C. NOLCO can be carried over to a period of three years.
d. NOLCO cannot be claimed by non-resident foreign corporation.

11. The following pertains to the salaries paid by the taxpayer during
the year
Salaries to regular employees P 400,000
Salaries to senior citizens (above poverty line) 30,000
Salaries to senior citizens (below poverty line) 50,000
Salaries to persons with disability 200,000
Compute the total deductible salaries expense under regular allowable
itemized deductions and the total special deduction.
a. P680,000; PO
b. P680,000; P57,500
c. P 742,500; PO
d. P 680,000; P62,500