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Items of Gross Income

1. Computation of taxable income Corporation Gross income Less: Deductions Taxable income Individual Gross income Less: Deductions Income before personal exemption Less: Personal exemption Taxable Income

P xxx xxx P xxx P xxx xxx P xxx xxx P xxx

2. Meaning of income Broad sense. Income means all wealth, which flows into the taxpayers hands other than as a mere return of capital. Judicial definition. Income is the gain derived from labor or from capital, or from both labor and capital, including the gain derived from the sale or exchange of capital asset. Requisites of a taxable income. a. There must be gain b. The gain must be realized or received c. The gain must not be excluded by law from taxation 3. Gross income defined. Except when otherwise provided, gross income means all income from whatever source, including (but not limited to the following items): a. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items; b. Gross income derived from the conduct of trade or business or the exercise of a profession; c. Gains derived from dealings in property; d. Interest; e. Rents; f. Royalties; g. Dividends; h. Annuities; i. Prizes and winnings; j. Pensions; and k. Partners distributive share from the net income of a general professional partnership. 4. Income distinguished from other terms From capital. Capital is the fund or property existing at one distinct time, while income denotes a flow of wealth during a definite period. From receipts. Receipts have a reference to all wealth that flows into the taxpayer, which includes returns of capital. Receipts are broader in scope than income. From revenue. Revenue, as applied in taxation, refers to all funds or income derived by the government, whether from tax or any other source while income, for tax purposes, is employed in its natural and obvious sense to mean money or gain received, coming to a person (natural or juridical) during a given period of time. Revenue is to the government while income is to a person (natural or juridical). 5. Items of gross income defined a. Compensation for personal services i. Gross compensation income defined. Gross compensation income means all remuneration for services performed by an employee for his employer, whether paid in cash or in kind, unless specifically excluded under the Tax Code (e.g. salaries, wages, emoluments, honoraria, bonuses, allowances, directors fee. ii. Directors fee. Directors fee is part of gross compensation income if the director is at the same time an employee of the employer/corporation. If the director is not an employee, the directors fee is subject to 10% creditable withholding tax if the current years gross income is P720,000 and below (15% if current years gross income exceeds P720,000) iii. Compensation in the absence of employer-employee relationship. In the absence of employeeemployer relationship, compensation for personal services shall be considered as gross professional fee. (e.g. audit fees received by CPA from his client, lawyers fee)
Items of Gross Income

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iv. Examples of compensation for services rendered. All kinds of compensation for services rendered constitute gross income. They include: Salaries, wages and fees Commissions paid to salesmen Compensation for services on the basis of a percentage of profits Commissions of insurance premiums Tips Pensions of retiring allowances paid by private persons or by government (except pensions exempt from tax) Marriage fees, baptismal offerings, sums paid for saying masses for the dead and other contributions received by a clergyman, evangelist or religious worker for services rendered. v. Forms of compensation. Forms of compensation Taxable amount a. Payments made in cash The full amount received b. Services paid for with something other The fair market value (FMV) of the thing taken than money (in kind) in payment c. Services rendered at a stipulated price In the absence of evidence to the contrary, the stipulated price shall be presumed to be the far market value (FMV) vi. Examples of payment in kind Payments in kind Taxable amount a. Compensation paid to an employee of a Fair market value of the stock at the time corporation in its stock received by the employee b. Promissory note and other evidence of a) Promissory note in not interest bearing indebtedness in payment of services, and Year received - fair discounted value not merely as security for such payment Year collected - face value less fair discounted value b) Promissory note is interest bearing Year received - face value Year collected - maturity value less face value b. Gross income derived from the conduct of trade or business, or the exercise of profession Gross sales/receipts P xxx Less: Sales return and allowances P xxx Sales discount xxx xxx Net sales/receipts P xxx Less: Cost of sales/services xxx Gross income from operation P xxx Add: Other income xxx Total gross income P xxx c. Gains derived from dealing in property 1) Property acquired by purchase on or after March 1, 1913 Selling price Less: Cost Gain 2) Property acquired by inheritance Selling price Less: FMV, date of inheritance Gain 3) Property acquired by gift Selling price Less: Valued in the hands of the donor Gain

P xxx xxx P xxx P xxx xxx P xxx P xxx xxx P xxx

d. Interest income 1) Included in interest income. Interest includes such interest arising from indebtedness, whether business or non-business. Unless exempted by law, interest received by a taxpayer, whether or not usurious, are taxable. 2) Subject to final tax. Interest income from Philippines sources subject to final tax (not included in the taxable net income subject to tax rates in general)
Items of Gross Income

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Interest from any currency bank deposit Yield or any other monetary benefit from deposit substitute Yield or any other monetary benefit from trust funds and similar arrangements Interest income received from a depository bank under expanded foreign currency deposit system Interest income from long-term deposit or investment evidence by certificates prescribe by Bangko Sentral ng Pilipinas if pre-terminated before the fifth year. 3) Exempt from tax. Interest income from Philippine sources exempt from tax: Interest income received by a depository bank under the expanded foreign currency deposit system by non-residents (individuals or corporations) Interest income from long-term deposit or investments evidenced by certificates prescribed by Bangko Sentral ng Pilipinas. e. Rent income 1) Income of lessor under lease agreement Payments Made Lessor a) Rent Income b) Obligation of lessor to third Income person paid by lessee c) Advance rent Income in full in the year received regardless of accounting method used d) Leasehold improvement Income reported under lump-sum or annual method

Lessee Expense Expense Expense to be prorated over the period covered regardless of accounting method Expense (depreciation) over the term of lease or estimated life whichever is shorter

2) Advance payment not representing rent Loan. Advance payment representing loan to the lessor is not taxable unless applied to unpaid rent. Security deposit. Advance payment representing security deposit is not taxable unless violation in the lease contract arises. 3) Leasehold improvement Additional income to the lessor. Leasehold improvement is a source of additional income to the lessor if it shall become his upon the expiration of the lease. Recognition of income from leasehold improvement. (1) Lump sum or outright method - Lessor may report as income, at the time when such buildings or improvement are completed, the fair market value (FMV) of such buildings or improvements subject to the lease. (2) Annual or spread out method Cost of leasehold improvement P xxx Less: Accumulated depreciation (remaining term of lease) xxx Book value, end of lease P xxx Annual income: Book value, end of lease / remaining term of lease P xxx (3) Computation of income resulting from premature termination of lease FMV of improvement when lessor took possession P xxx Less: Amount already reported as income xxx Income, year of termination P xxx (4) Computation of loss due to destruction of leasehold improvement before the term of the lease expires Amount already reported as income P xxx Less: Insurance recovery P xxx Salvage value xxx xxx Loss P xxx f. Royalties Subject to final tax Subject to tax rates in general Royalties from Philippines sources Royalties from foreign sources

g. Dividend income (including shares in the net income of certain entities) 1) Difference between direct and indirect dividends

Items of Gross Income

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A direct dividend is one where the paying corporation acknowledges that the distribution is a dividend payment An indirect dividend is a distribution of profits disguised as payment of services, properties, etc. 2) Dividends/shares in net income subject to final tax Cash and/or property dividends actually or constructively received by individuals from domestic corporation or from a joint stock company, insurance or mutual fund company and regional operating headquarters of multinationals. Inter-corporate dividends received from domestic corporation by non-resident foreign corporations Shares of an individual in the distributable net income after tax of a partnership (other than a general professional partnership) of which he is a partner Share of an individual in the net income after tax of an association, a joint account or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer 3) Dividends/shares in net income subject to tax rates in general Dividends from foreign corporation Share in net income of a general professional partnership 4) Dividends that are exempt from tax Inter-corporate dividends received from domestic corporation by another domestic corporation and resident foreign corporation h. Annuities An annuity is a specified income payable at a stated intervals for a fixed or a contingent period, often for the recipients life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment. Non-taxable annuity. Annuity representing return of premium Taxable annuity. Excess of the amount returned as premium i. Prizes and winnings 1) Subject to tax rates in general Prizes and winnings from foreign sources received by individuals and corporations Prizes and winnings from Philippine sources received by corporations Prizes from Philippine sources received by individuals amounting to P10,000 or less. 2) Subject to final tax Prizes received by individuals from Philippine sources [except prizes amounting to P10,000 or less which shall be subject to tax under Sec. 24 (A)] Other winnings of individuals from Philippine sources (except Philippine Charity Sweepstakes and Lotto winnings) 3) Exempt/Excluded from gross income Philippine charity sweepstakes and Lotto winnings Prizes and awards made primarily in recognition of achievements in the following fields: 1. Religious 2. Charitable 3. Scientific 4. Educational 5. Artistic 6. Literary 7. Civic Conditions for exemptions of prizes and awards: a. The recipient was selected without any action on his part to enter the contest or proceedings; and b. The recipient is not required to render substantial future services as a condition to receiving the prize or award All prizes and awards granted to athletes to local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports association. j. Pensions

k. Partners distributive share from the net income of the general professional partnership subject to tax under Sec. 24 (A)]

Items of Gross Income

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l.

Income from whatever source 1) Examples of income from whatever source Gains arising from expropriation of property Gambling gains Income from illegal business or from embezzlement Damage recovery (compensation for damages) Forgiveness of debt Bad debt recovery Tax refunds Prizes and awards 2) Damage recovery Recovery of lost profit is taxable Recovery of lost capital is not taxable 3) Forgiveness of indebtedness If debtor rendered service in favor of the creditor, forgiveness of debt results in a taxable income to the debtor If the debtor did not render service in favor of the creditor, forgiveness of debt results in a taxable indirect gift If the debtor is a stockholder of a corporation, forgiveness of debt by the creditor corporation results in dividend distribution 4) Bad debt recovery Bad debt recovery is generally taxable Tax benefit rule: If in the year the bad debt was written off, there was a reduction of taxable income, bad debt recovery shall constitute taxable income 5) Tax refunds If the refunded tax is a deductible tax, the tax refund is taxable If the refunded tax is not a deductible tax, the tax refund is not taxable Examples of non-deductible taxes: 1. Philippine income tax 2. Transfer taxes (estate tax and donors tax) 3. Special assessment 4. Foreign income tax claimed as tax credit 5. Value-added tax 6. Stock transaction tax

Items of Gross Income