ReSA

The Review School of Accountancy

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TAXATION TAMAYO/GARCIA
TX - 801: Income Tax (Items of Gross Income)

1. Computation of taxable income

Corporation Gross income Pxxx
Less: Deductions xxx
Taxable income Pxxx
Individual Gross income Pxxx
Less: Deductions xxx
Income before personal exemptions Pxxx
Less: Personal exemption xxx
Taxable income Pxxx

2. MEANING OF INCOME
a. Broad sense Income means all wealth, which flows into the taxpayer’s hands other than as a mere return of
capital.
b. 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.
c. Requisites of a a. There must be gain;
taxable income b. The gain must be realized or received;
c. The gain must not be excluded by law from taxation.

3. Gross income defined

Gross income 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. Interests;
e. Rents;
f. Royalties;
g. Dividends
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner’s distributive share from the net income of the general professional partnership.

4. INCOME DISTINGUISHED FROM OTHER TERMS

a. From capital Capital is the fund or property existing at one distinct time, while income denotes a flow of
wealth during a definite period.
b. From receipts Receipts have reference to all wealth that flows into the taxpayer, which includes returns of
capital. Receipts are broader in scope than income.
c. From revenue 1) Revenue, as applied to taxation, refers to all the 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.
2) Revenue is to the government while income is to a person (natural or juridical).

5. Items of gross income explained

a. COMPENSATION FOR PERSONAL SERVICES
1) Gross compensation Gross compensation income means all remuneration for services performed by an employee
income defined 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, director’s fees).
2) Director’s fee Director’s fee is part of the 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 director’s
fee is subject to 10% creditable withholding tax if the current year’s gross income is
P720,000 and below (15% if current year’s gross income exceeds P720,000.)
3) Compensation in the In the absence of employer-employee relationship, compensation for personal services shall be
absence of employer- considered as gross professional fee (e.g. audit fee received by CPA from his client, lawyer’s
employee relationship fee.)

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4) Examples of All kinds of compensation for services rendered constitute gross income. They include:
compensation for a) salaries, wages and fees;
services rendered b) commissions paid to salesmen;
c) compensation for services on the basis of a percentage of profits;
d) commissions on insurance premiums;
e) tips;
f) pensions or retiring allowances paid by private persons or by the government (except
pension exempt from tax); and
g) 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.
5) Forms of Forms of compensation Taxable amount
COMPENSATION a) Payments made in cash The full amount received
b) Services paid for with something The fair market value (FMV) of the thing taken in
other than money (in kind) payment
c) Services rendered at a stipulated In the absence of evidence to the contrary, the
price stipulated price shall be presumed to be the fair
market value (FMV)
6) Examples of Payments in kind Taxable Amount
payments in kind a) Compensation paid to an employee Fair market value of the stock at the time received by
of a corporation in its stock the employee
b) Promissory note and other evidence of a) Promissory note is not interest bearing
indebtedness in payment of services, Year received - Fair discounted value
and not merely as security for such Year collected- Face value less fair discounted value
payment 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
Format of computation Gross sales/receipts xxx
Less: Sales returns and allowances xxx
Sales discount xxx xxx
Net sales/receipts xxx
Less: Cost of sales/services xxx
Gross income from operation xxx
Add: Other income xxx
Total gross income xxx

c. GAINS DERIVED FROM DEALINGS IN PROPERTY

1) Property acquired by Selling price xxx
purchase on or after Less: Cost xxx
March 1, 1913. Gain xxx
2) Property acquired by Selling price xxx
inheritance Less: FMV, date of inheritance xxx
Gain xxx
3) Property acquired by Selling price xxx
gift Less: Value in the hands of the donor xxx
Gain xxx

D. INTEREST INCOME
1) Included in interest Interest includes such interest arising from indebtedness, whether business or non-business.
income Unless exempted by law, interests received by a taxpayer, whether or not usurious, are taxable.
2) Subject to final tax Interest income from Philippine sources subject to final tax (not included in the taxable net
income subject to tax rates in general)
a) Interest from any currency bank deposit;
b) Yield or any other monetary benefit from deposit substitute;
c) Yield or any other monetary benefit from trust funds and similar arrangements;
d) Interest income received from a depository bank under expanded foreign currency deposit
system;
e) Interest income from long-term deposit or investment evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas if pre-terminated before fifth year.
3) Exempt from Interest income from Philippine sources exempt from tax:
income tax a) Interest income received from a depository bank under expanded foreign currency deposit
system by non-residents (individuals or corporations);
b) Interest income from long-term deposit or investments evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas.

TAXATION – INCOME TAX (ITEMS OF GROSS INCOME) (BATCH 22)

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e. Rent income
1) Income of lessor under lease agreement
Payments Made Lessor Lessee
a) Rent Income Expense
b) Obligation of lessor to
third person paid by lessee Income Expense
c) Advance rent Income in full in the year received regardless Expense to be prorated over the period
of accounting method used covered regardless of accounting method
d) Leasehold improvement Income reported under lump sum or annual Expense (depreciation) over the term of the
method lease or estimated life whichever is shorter

2) ADVANCE PAYMENT NOT REPRESENTING RENT

a) Loan Advance payment representing loan to the lessor is not taxable unless applied to unpaid rent.
b) Security deposit Advance payment representing security deposit is not taxable unless violation in the lease
contract arises.

3) LEASEHOLD IMPROVEMENT
a) Additional income to the
lessor
b) Recognition of income
from leasehold improvement
c) Computation of loss due to
destruction of leasehold
improve-ment before the
term of the lease expires
Leasehold improvement is a source of additional income to the lessor if it shall become his
upon the expiration of the lease.
(1) Lump sum or outright method - Lessor may report as income, at the time when
such buildings or improvements 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 xxx
Less: Accumulated depreciation (remaining term of lease) xxx
Book value, end of lease xxx
Annual income
Book value, end of lease/Remaining term of lease xxx
(3) Computation of income resulting from premature termination of
lease
FMV of improvement when lessor took possession xxx
Less: Amount already reported as income xxx
Income, year of termination xxx
Amount already reported as income xxx
Less: Insurance recovery xxx
Salvage value xxx xxx
Loss xxx

EXERCISE
(Phil. CPA) Mr. C. Conte bought a 2,000 square meter land at a cost of P500,000. He leased the land to Mr. D. Damian at an
annual rental of P40,000. The term of the contract of lease was 15 years. The contract of lease provided that Mr. Damian will
construct a building on the land, which will belong to the lessor at the end of the term of the lease or at the termination of the
lease. The building was constructed for a total cost of P400,000 and has an estimated useful life of 20 years which was the
basis of a straight-line method of depreciation. The remaining term of the lease when the building was completed was 14 years.

Compute the following:

a. Income from lease contract in the year the improvement was completed assuming Mr. Conte will report his income from
leasehold improvement using outright or lump sum method.
b. Yearly income assuming Mr. Conte will spread his income from leasehold improvement over the term of the contract of lease.
c. Income of Mr. Conte in the 11 th year assuming the contract of lease was terminated after the 10th year or at the beginning of
the 11th year due to the fault of the lessee.
d. Deductible loss of the lessor assuming the leasehold improvement was destroyed at the beginning of the 9th year of the
lease contract.

f. ROYALTIES
1. Subject to final tax Royalties from Philippine sources
2. Subject to tax rates in Royalties from foreign sources
general
g. Dividend income (including shares in the net income of certain entities)
1) Difference between direct A direct dividend is one where the paying corporation acknowledges that the distribution
and indirect dividends is a dividend payment.
An indirect dividend is a distribution of profits disguised as payment of services,
properties, etc.
2) Dividends/shares a) Cash and/or property dividends actually or constructively received by individuals from
in net income subject to domestic corporation or from a joint stock company, insurance or mutual fund company
final tax and regional operating headquarters of multinationals;
b) Inter-corporate dividends received from domestic corporation by non-resident foreign
corporations;
c) Share 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;
TAXATION – INCOME TAX (ITEMS OF GROSS INCOME) (BATCH 22)
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ReSA: The Review School of Accountancy
3) Dividends/shares in net
income subject to tax
rates in general
4) Dividends that are
exempt from tax
h. Annuities
1) Meaning of annuity
2) Non-taxable annuity
3) Taxable annuity
i. Prizes and winnings
1) Subject to tax
rates in general
2) Subject to final tax
3) Exempt/excluded
from gross income
j. Pensions (see exclusions from gross income)
k. Partner’s distributive share from the net income of the general professional partnership [Subject to Section 24 (A)]
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d) 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.
a) Dividends from foreign corporations;
b) Share in the net income of a general professional partnership.
a) Inter-corporate dividends received from domestic corporation by other domestic
corporation and resident foreign corporation.
An annuity is a specified income payable at stated intervals for a fixed or a contingent
period, often for the recipient’s life, in consideration of a stipulated premium paid either in
prior installment payments or in a single payment.
Annuity representing return of premium
Excess of the amount returned as premium
a) Prizes and winnings from foreign sources received by individuals and corporations;
b) Prizes and winnings from Philippine sources received by corporations;
c) Prizes from Philippines sources received by individuals amounting to P10,000 or less.
a) 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)];
b) Other winnings of individuals from Philippine sources (except Philippine Charity
sweepstakes and Lotto winnings)
a) Philippine Charity sweepstakes and Lotto winnings;
b) Prizes and awards made primarily in recognition of achievements in the following fields:
1) Religious; 3) Scientific; 5) Artistic; 7) Civic.
2) Charitable; 4) Educational; 6) Literary;
Conditions for the exemption 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.
c) 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.

l. INCOME FROM WHATEVER SOURCE

1) Examples of income from 1) Gains arising from expropriation of property;
whatever source 2) Gambling gains;
3) Income from illegal business or from embezzlement;
4) Damage recovery (compensation for damages);
5) Forgiveness of debt;
6) Bad debt recovery;
7) Tax refunds; and
8) Prizes and awards.
2) Damage recovery 1) Recovery of lost profit is taxable.
2) Recovery of lost capital is not taxable.
3) Forgiveness of debt 1) If debtor rendered service in favor of the creditor forgiveness of debt results in a taxable
income to the debtor.
2) If the debtor did not render service in favor of the creditor forgiveness of debt results in
a taxable indirect gift.
3) If the debtor is a stockholder of a corporation forgiveness of debt by the creditor-
corporation results in dividend distribution.
4) Bad debt recovery 1) Bad debt recovery is generally taxable.
2) 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 a taxable income.
5) Tax refunds 1) If the refunded tax is a deductible tax, the tax refund is taxable.
2) 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 donor’s tax);
3) Special assessment;
4) Foreign income tax claimed as tax credit;
5) Value-added tax;
6) Stock transactions tax.

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6. Integrative case
The following are the revenue items in the Income Statement of a domestic corporation for the year 2011:
Sales P 1,000,000
Cost of sales 500,000
Gain from sale of an office equipment 20,0000
Gain from sale of land not used in business (selling price P300,000) 100,000
Gain from sale of shares of stock directly to the buyer 50,000
Gain from sale of shares of stock through the stock exchange (selling price, P200,000) 10,000
Interest income from bank deposit, Philippines 40,000
Yield from deposit substitute, Philippines 80,000
Interest income received from depository bank under EFCDS, Philippines 60,000
Interest income from bank deposit, USA 400,000
Interest on trade notes receivable, Philippines 30,000
Advance rent for two (2) years, Philippines 600,000
Royalties, Philippines 70,000
Royalties, USA 300,000
Property dividend received from domestic corporation 150,000
Stock dividend received from a domestic corporation 100,000
Cash dividend received from a foreign corporation 350,000
Prizes and winnings, Philippines 400,000
Refund of Philippine value-added tax 100,000
Bad debt recovery 50,000

Question 1 – How much was total exempted/excluded income?

2 – How much was the total final withholding taxes on passive income?
3 – How much was the total capital gains tax?
4 – How much was the total gross income subject to the 30% corporate income tax?

- = END = -

THOT: Reading is to the mind what exercise is to the body. - JOSEPH ADDISON

jb

TAXATION – INCOME TAX (ITEMS OF GROSS INCOME) (BATCH 22)

TX-
801