Income Taxation

Prof. Jennifer I. Malabrigo, MBA

CONCEPT OF
INCOME
PROF. JENNIFER MALABRIGO
ST. JOSEPH COLLEGE OF BULACAN

Income
Income refers to all earnings derived
from service rendered (labor), from capital
(business or investment), or both including
gain derived from sale or exchange of
personal or real property classified as
either ordinary or capital asset.

Net-Worth
Net-Worth Method
Net worth, ending P xxx
Less: net worth, beginning
xxx
Increase (decrease) in net worth
P xxx
Add: Nondeductible items
xxx
Total
P xxx
Less: Nontaxable items
P xxx
Personal exemptions (for Individuals)
Net taxable income P xxx

xxx

xxx

net worth is equal to total assets minus total liabilities

Return on Capital
Return on
Investment.

Capital

means

Return

on

A sale does not necessary mean income, it

must exceed its costs to be considered
income.
Illustration:
If a P1,000,000, 90-day time deposit earns
P9,000, the return of capital is P1,000,000
and the return on capital is P9,000.

Taxable income
Taxable Income is the pertinent
item of gross income specified in the
Tax Code less the deductions allowed
by law, including in the case of
individuals, the allowable personal and
additional exemptions.

Characteristics of Taxable
Income
1. There must be gain or profit
2. The gain must be realized or
received
3. The law or treaty does not
exclude the gain from taxation

Sources and Taxability of Income

A. Individuals
1. Citizen
a. Resident Citizen (Taxable within and outside)
b. Non-Resident Citizen (Taxable within)
2. Alien
a. Resident Alien (Taxable within)
b. Non-resident alien, doing business in the Philippines
(Taxable within)
c. Non-resident alien, not doing business in the
Philippines (Taxable within)
B. Corporations and Partnerships
1. Domestic corporation (Taxable within and outside)
2. Resident foreign corporation (Taxable within)
3. Non-resident foreign corporation (Taxable within)
C. Estates and Trusts (Taxable as individual taxpayer)

Classification of Income
1. Compensation Income -Gain derived from labor,
especially employment (subject to normal tax).
2. Profession or Business Income The value derived
from an exercise of profession, business or
utilization of capital (subject to normal tax).
3. Passive Income an income in which the
taxpayer merely waits for the amount to come in
(subject to final tax)
4. Capital Gains an income derived from sale of
assets no9t used in trade or business (subject to
final tax/normal tax)

Summary of Groups of Income

Compensation
Income

Salaries
Wages
Holiday pay
Sick leave pay
Vacation leave
pay
Per diem
Honorarium
Night Shift
Differential
Hazard pay
Commission
Allowances
Tips
Bonus
13th month pay
Retirement pay
Terminal pay
Pension

Business Income

Passive Income

Capital Gain

Income from
Trading
Income from
Merchandising
Income from
Manufacturing
Professional
income
Income from
Farming
Rent Income
Income from
construction
Contract

Interest Income

Sale of Capital
Assets
(Not an
inventory/ not
used in
business)

Royalties
Dividends
Prizes
Winnings

Sale of Real
Property
(capital asset)
Sale of shares of
stock
(sold outside
stock exchange)

Income Tax Return

An Income Tax Return (ITR) is a
formal statement of the taxpayers
taxable income and deductions,
reported in the BIR prescribed form,
to be filed and paid using the normal
or regular tax rates.
Final Quarter Annual ITR is prepared

Normal Tax vs. Final Tax

Normal
Tax
also
called
regular
or
customary/ordinary tax - is imposed on earnings
(all other incomes not subjected to final tax in the
Philippines).
Final Tax the term used to describe the tax on
earnings* that have been subjected to complete
withholding tax payment at sources (Ex. Interest
income from the bank, royalty and dividend income)
*no longer included in the determination of taxable
income subject to regular tax.

Forms of Income
Cash income pertains to money or money
substitutes received as compensation or earnings
derived from labor, practice of profession or conduct
of business (Ex. bills and coins, bank drafts, money
order and treasury warrants).
Property income denotes the right of ownership
over a tangible or intangible thing earned as a
result of labor, business or practice of profession
(Ex. Real estate, stocks, bonds, etc.)
Service form of income based on performance
received in payment for the work previously

Valuation of Income
1. Cash received for income earned;
2. Fair value of property received as payment for
income earned;
3. Fair value (at the date the income was earned)
of the share of stocks received as payment of
income earned;
4. Fair value of the service received (in the absence
of any stipulated price) as payment of income
earned;
5. Fair value of the promissory notes received as
payment of income is:
a. Face value of the note, if interest bearing,
and

Tax Accounting Periods to Report Income

1. Calendar Period - Covers a period from January 1 to
December 31 of the taxable year. Almost all taxpayers
elect to report income covering a calendar year, which.
2. Fiscal period Covers a period of 12 months which ends
on the last day of nay calendar month other than
December 31. Some taxpayers may opt to report income
on a fiscal year basis.
3. Short period Income for a period less than 12 months is
required to be reported when the taxpayer dies or when
the taxpayer is under jeopardy assessment.
4. Variable period A taxpayer is required to file and pay tax
within a period that varies depending on the nature of
income earned (monthly, quarterly, semi-annually or at
specific time per sale or exchange transaction. It means
that taxes paid on per transaction basis.
* Certain rules by NIRC on accounting periods and

Methods of Reporting Income and Expenses

1. Cash Method - Reports income upon cash collection and
reports expenses upon payment.
If earned from rendering services, income is to be
reported in the year of collection whether earned and/or
unearned.
2.

Accrued Method Reports income when earned and

reports expense when incurred.
If earned from sale of goods, income is to be
reported in the year of sale, irrespective of
collection.

3. Special Method - The taxpayer use this when the nature

of its operation is peculiar to the business industry.
Special
methods
in
reporting
income

installment,
deferred
payment,
Long
-Term
Construction Contract, Farming as categorized

GROSS INCOME

PROF. JENNIFER MALABRIGO

ST. JOSEPH COLLEGE OF BULACAN

Gross income
Gross income is all income but not including
exempt income and income subject to final income
tax.
Includes, but is not limited to the following:
Compensation for services, in whatever form
paid, including but not limited to fees, salaries,
wages, commissions and similar item
Gross income derived from the conduct of trade
or business or the exercise of profession
Gains derived from dealings in property,
Interest, Rents, Royalties, Dividends, Annuities
Prizes and winnings, Pensions
Partner's distributive share from the net income
of the general professional partnerships

Gross Income
Items Included in Gross Income, In
General
a. Compensation Income
b. Fringe Benefits
c. Professional Income
d. Income from Business
e. Income from Dealings in Ordinary
and Capital Property

Gross Income
Items Included in Gross Income, In
General
f. Passive Investment Income
- Interest Income
- Dividend Income
- Royalty Income
- Rental Income
g. Annuities, Proceeds from Life
Insurance or
Other Insurance

Gross Income
Items Included in Gross Income, In General
h. Prizes and Awards
i. Pensions, retirement benefit, or
separation
pay
j. Partners distributive share from the net
income of the general professional
partnerships

Incomes Subject to Final Tax

Passive Incomes - Certain incomes are
subject to final tax which shall be withheld by
the payor and paid by him to the Bureau of
Internal Revenue.
They are reported by the withholding agent
(payor) and paid by him to the BIR.
Examples of such incomes
corresponding final rates are:

and

their

Passive Income

Royalties in General = 20% ; on books, literary

works and musical compositions)= 10%

Interest income from long-term deposit or investment

(above 5 years) in the form of savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other investments
evidenced by certificates are exempted.
Upon pre-termination before the fifth year, there
should be imposed on the entire income from the
proceeds of the long-term deposit based on the
remaining maturity thereof: 4 years to less than 5
years = 5%; 3 years to less than 4 years =12%; Less
than 3 years = 20%

Passive Income

Interest from currency deposits, trust funds

and deposit substitutes; Prices in excess of
P10,000; Winnings (except from PCSO and
lotto) = 20%; Prices less than P10,000 = 5%

Interest Income of Foreign Currency Deposit

= 7.5%

Cash and property dividends to individuals

from domestic corporations = 10%

Incomes Subject to Final Tax

Passive Incomes - Certain incomes are
subject to final tax which shall be withheld by
the payor and paid by him to the Bureau of
Internal Revenue.
They are reported by the withholding agent
(payor) and paid by him to the BIR.
Examples of such incomes
corresponding final rates are:

and

their

Income Tax
Income tax is a tax on a persons
income, profits and the like, realized in
one taxable year.
Nature and Purpose of Income Tax
It is generally regarded as a privilege tax
and not a tax on property. It is a tax on
privilege to earn an income . Its purpose is
to raise revenue.

EXCLUSION
FROM GROSS
INCOME
PROF. JENNIFER MALABRIGO
ST. JOSEPH COLLEGE OF BULACAN

Exclusions from gross income

Life insurance
Amount received by insured as return of premium
Gifts, bequests and devises
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions, gratuities, etc.
Miscellaneous items

income derived by foreign government

income derived by the government or its political subdivision
prizes and awards in sport competition
prizes and awards which met the conditions set in the Tax Code
13th month pay and other benefits not exceed P80,000
GSIS, SSS, Medicare and other contributions
gain from the sale of bonds, debentures or other certificate of
indebtedness
gain from redemption of shares in mutual fund

Exclusions from Gross Income

Exclusions- income or receipts which are excluded from gross
income and are not subject to income tax. They do not part
from the gross income.
The following items that are not included in the gross income are:
a. Proceeds of life insurance
1. Proceeds of life insurance policies excluded from gross income
Proceeds life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or
otherwise are excluded from the gross income.

2. Interest on proceeds is included in the gross income

If such proceeds are held by the insurer under an agreement to
pay interest thereon, the interest payment shall be included in
the gross income.

Exclusions from Gross Income

The following items that are not included in the gross income
are:
b. Amount received by insured as return of premium
1. Excluded return of premium
The amount received by the insured, as a return of premium
paid by him under life insurance, endowment, or annuity
contracts, either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the
contract.

2. Excess of premium returned shall be included in gross

income
If the amount, when added to amount received before the
taxable year under such contract, exceed the aggregate
premium paid, whether or not paid during the taxable year,
then the excess shall be included from the gross income.

Exclusions from Gross Income

The following items that are not included in the gross income are:
b. Amount received by insured as return of premium
3. Excluded amount from in case of a transfer for a valuable
consideration by assignment or otherwise, of life insurance
In the case of a transfer of a valuable consideration by
assignment or otherwise, of a life insurance, endowment or
annuity contract or any interest therein, only the actual value
such consideration and the amount of the premiums and the
sums subsequently paid by the transferee are exempt from
the taxation.

4. Participating dividend
Participating dividends are not income to be insured, they are
treated as return of capital.

Exclusions from Gross Income

The following items that are not included in the gross income are:
c. Gifts, bequest and devises
1. Subject to transfer taxes
Gift,bequest and devises are subject to transfer taxes (estate tax
or donors tax.)

2. Income from devise or descent of income included in gross

income
Income from property dividend from the investment, sale or
otherwise shall be included in the gross income

3. Gift, bequest, devises or descent of income included in gross

income
Gift, bequest, devises or descent of income from any property, in
cases of transfer of dividend interest, shall be included in the
gross income.

Other examples of exempt income are:

retirement
benefits
(under
certain
conditions) received from private firms,
Social security and GSIS benefits,
Prizes and awards granted in recognition of
religious, charitable, scientific, educational,
artistic literary or civic achievement, or in
sports competition.
Exclusions are not considered in determining
gross income. Deductions, on other hand, are
subtracted from gross income to arrive at
taxable (net) income.

Exclusions from Individual Gross Income

i. Life insurance proceeds of life insurance
policies paid to the heirs upon the death of
the insured
ii. Return of premium paid amount
received by insured as a return of premium
paid by him under life insurance,
endowment, or annuity contracts

Exclusions from Individual Gross Income

iii. Gifts or inheritance - value of property

acquired by gift, bequest, devise or
descent, but income from such property
shall be included in gross income
iv. Compensation for injuries or sickness amount received through accident or health
insurance as compensation for personal
injury or sickness, including damages
received

Exclusions from Individual Gross Income

B. Exclusions from Gross Income (cont.)
v. Income exempt under tax treaty
ARTICLE 15
INDEPENDENT PERSONAL SERVICES
(1) Xxx.
(2) Income derived by an individual who is a resident of
one of the Contracting States from the performance of
personal services in an independent capacity in the other
Contracting State may be taxed by that other Contracting
State, if:
(a) Xxx.
(b) He is present in that other Contracting State for a
period or periods aggregating 90 days or more in the
taxable year; or

Exclusions from Gross Income (cont.)

vi. Retirement benefits, separation
pay
pensions, gratuities
Retirement:
Companys private benefit plan
50
years old and 10 years
service
Republic Act 7641 60 years old
and 5
years of service

Exclusions from Gross Income (cont.)

vi. Retirement benefits, separation
pay
pensions, gratuities
Separation pay:
Any amount received by
employee or
his heirs resulting
from separation from
service due
to death, sickness, or
physical
disability or for any cause
beyond the control of employee.

Exclusions from Gross Income (cont.)

vi. Retirement benefits, separation
pay
pensions, gratuities
Pensions:
Pensions received by resident or
nonresident citizens and
permanent
resident aliens
from foreign
governments
and other institutions,
public
or private.

Exclusions from Gross Income (cont.)

vi. Retirement benefits, separation
pay
pensions, gratuities
SSS/GSIS benefits:
Benefits received from or
enjoyed under
the SSS or GSIS.
US Veterans: payments to
residents by
the US Veterans
Administration

Exclusions from Gross Income (cont.)

vii. Prizes and awards: made in
recognition of religious, charitable,
scientific, educational, artistic,
literary, or civic achievement,
provided:
- recipient was selected without any
action on his part to enter the
contest
- recipient is not required to render
substantial future services as

Exclusions from Gross Income (cont.)

viii. Prizes and awards in sports
competition: all prizes and awards
given to athletes in local and
international sports competitions
and tournaments, whether in the
Philippines or not, and sanctioned by
their national sports associations

Exclusions from Gross Income (cont.)

ix. 13th month pay: gross benefits,
including productivity incentives and
Christmas bonus, received by
employees of public and private
entities up to the amount of
Php30,000.00.

Exclusions from Gross Income (cont.)

x. Gains from sale of bonds: gains
from sale or exchange or retirement
of bonds or debentures with
maturity of more than five (5) years.
xi. Gains from redemption of shares
in mutual funds.

Illustration 1
The income statement of a taxpayer is as
follows:
Within
Outside
Business income
P100,000 P120,000
Business expenses
40,000
50,000
Passive Income
5,000
5,000
Capital gain
10,000
Capital loss
5,000
Required: Compute the taxable income and the
applicable tax assuming that the taxpayer is:
1. A single individual:
2. A corporation
a. Resident citizen
a. Domestic
b. Alien
b. Foreign

Pro-forma computation

Illustration 2
Assume the following data:
Within
Outside
Business income
P3,000,000 P2,000,000
Business expenses
2,000,000
2,700,000
Required: Compute the taxable income and the
applicable tax assuming that the taxpayer is:

Comparative computation of taxable income and applicable tax