[NOTES TAX MAKEUP RECORDING 1]

3 TYPES OF INCOME:
1. Compensation Income
2. Business Income
3. Passive Income

4. Miscellaneous Income

I. COMPENSATION INCOME
General Rule: Any amount/benefit that an employee receives under employeremployee relationship (including allowances), whether in cash or in kind
[unless expressly excluded by statute]
Notes in re Allowances:
Usually companies would spoil employees with allowances. GR: TAXABLE
under Compensation Income! Why? Unless subject to liquidation and EE
presents accounting/liquidation + receipts + reason/business purpose of the
expense!
IF not required, this is TAXABLE COMPENSATION INCOME
Q: When is it not subject to tax, then if thats only a general rule?
A: The following are examples:
1. De Minimis Benefits (i.e. P1.5K sacks of rice per month, medical allowance,
monetized vacation leave not exceeding 10 days, laundry allowance 300, etc.)
[simply for the convenience, contentment and well-being of the EE]
Q:What about the excess?
A: Thats taxable COMPENSATION INCOME
Q: How do you escape?
A: LAGAY MO SA 13th MONTH PAY AND OTHER BENEFITS (taas
na bruh from 30K naging 82K). It can be lumped under that!
2. 13th Month Pay and Other Benefits, up to 82K as mentioned

3. Benefits for the benefit or convenience of the ER

Henderson Case; they were given lavish house way beyond their
means; SC Ruled it was for the benefit of the ER (so the EE can hold
meetings and other activities for business purposes)
Downside: Compensation income no deductions lol EXCEPT PERSAONAL
AND ADDITIONAL EXCEMPTIONS
Q: What about the benefits after the EE left?
A: Taxable income if benefits were in consideration for the services rendered
when there was an ER-EE relationship

4. Fringe Benefits TAXABLE COMPENSATION INCOME esp. rank and

file
If received by other than rank and file, NOT TAXABLE INCOME BUT
RATHER SUBJECT TO Fringe Benefit Tax, which is withheld by ER and
subject to final tax [monetary value of benefit divided by 0.68% = grossed
upmonetary value x 32% = final tax]

II. BUSINESS INCOME

Q: Why make the distinction?
A: Because you can claim deductions for business income, but not for
compensation income
- Can claim ALL expenses which are ordinary and necessary
o 2 options:
Itemized deductions
Optional standard deduction (40%)
Q: Dean Lily Gruba problem
Distinguish w/n there is ER-EE relation or none
If no, NOT compensation income:

Either:
o Income derived from ones Profession
o From ones business (business income)
Note:
- There is a trade-off. You can claim deductions but aside from the taxes from
business income, taxpayer has to deal with Value Added Tax (VAT)
*Note, threshold for VAT. If TP does not reach the threshold, it goes to
Other Percentage Tax
Note:
Business income can even be earned by self-employed
Note:
Business income can be deducted (Creditable Withholding Tax). Some
amount of payments made to the taxpayer are withheld by the customer. The
amount withheld can be credited against taxable income. Still, you must
report them though come April 15 when you file your annual income tax
return.
Distinguish this to Final Withholding Tax. This brings us to the discussion on
III. PASSIVE INCOME

III. PASSIVE INCOME

IMPORTANT TO DISTINGUISH ACTIVE v. PASSIVE INCOME
- Creditable Withholding Tax not applicable to PASSIVE income; FINAL
WITHHOLDING TAX is what is applicable!
- So what? Its already subject to Final Tax. No need to pay anything
anymore (53:00 minutes)
- Unlike business income, it should be lumped, less itemized deductions
or OSD, times 32% income tax, less CWT equals income tax payable.
o In short, yung mga na subject sa CWT, isasama pa rin sa
computation ng total gross income. You will report all of that up
to the last centavo.
o Those subjected to FWT, no need!

Q: Do you report dividends income that you received?

A: NO. This has already been subjected to FINAL WITHHOLDING TAX! No
need to report!
Q: What about interests earned from banks? How are these treated for tax
purposes?
A: Again, it is subjected to FINAL WITHHOLDING TAX. No need to report
this as income; same with ROYALTIES and other PASSIVE INCOME. (0:58)
Q: Prizes and Winnings from raffle?
A: Same, since it is also passive income. In short basta nakatunganga ka lang
diyan tas papasok ang pera, subject dapat yan sa FWT. No need to report as
income. Same with Capital Gains [Subject to Final Capital Gains Tax, no
need to report as part of gross income] (1:02-1:04)
Q: Can you claim deductions?
A: No you cannot, because these are already subjected to final tax. You are
not even including them as part of your gross income.
Note Commissioner Hinares requirement of reporting all those subject to FWT
to see if these income are dubious. If these are huge, the BIR will check again
your income because youre probably evading tax. But legally, reporting
passive income cannot be compelled. There is no LAW requiring such. Besides,
it is fucking impracticable. Imagine having to report your interest income from
all your bank accounts and all other passive income. [At least this is according
to Atty. Baniqued]

IV. MISCELLANEOUS INCOME

Try to classify if the income is from any of the three mentioned above. If not,
treat it as miscellaneous income. (1:18)
- Yung mga hindi mo alam saan mo isasaksak, basically

FRINGE BENEFITS
(1:23)

If employer gives these to managerial or supervisory, employer must remit

to BIR 32%
Q: Why not just include it as part of compensation income? (1:27)
A: This has been subject to abuse so congress deemed it fit to hold the
employer liable for FBT instead of the employee

Note that FBT is only assessed when the fringe benefit is paid to managerial
or supervisory. If not, meaning it is given to a rank and file, it is subject to
withholding tax (part of compensation income)
Note the meaning of managerial/supervisory under labor law applies to
tax law.
If the fringe benefit is a DE MINIMIS benefit, then it is not subject to FBT
nor withholding tax for compensation. De minimis benefits are ALWAYS
EXCLUDED.
If the fringe benefit is FOR THE CONVENIENCE OF THE ER, it is also not
subject to FBT, nor withholding tax for compensation, just like de minimis
benefits.
Examples
a. Housing Privilege
Take into account the depreciation of real property [so 50% of 5%
(depreciation value) x 32%]
Basta consider grossed up monetary value

b. Allowances (groceries, transportation, etc.)

However, if such expenses are really for the benefit of the employer, and as
long as there is accounting and substantiation, not subject to FBT. The
concept of convenience of the employer comes into play.

c. Motor vehicles
For example, ER buys a vehicle and names the vehicle in the name of the
company, but assigns it to the EE
d. Household expenses
e. Below market rate interest loans (lower than 12%)
Baniqued: This should be amended/this is wrong. The comparison should be
on the prevailing legal interest rate, not the fixed 12%
Q: Golf club membership where the ER can only bring clients
A: You can argue, but burden of proof is on you, that the benefit is for the
benefit of the ER. If not exclusively for business purposes, FBT comes into
play. So basically, you have to distinguish personal and business purpose.

f. Holiday Expenses