1.

Definition

CONCEPT OF INCOME
2. Nontaxable and Taxable Income
3. Sources of Income
4. Classifications of Income
5. Form and Valuation of Income
 DEFINITION
Income refers to ALL EARNINGS derived from:
service rendered (labor),
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

Rule-of-thumb-test: INCREASE IN NET WORTH/

REALIZATION TEST
 DEFINITION (CONT’D…)
Determine if the following is income or not:

1. Increase in the value of property

2. Increase in book value of fixed assets as a
result of re-appraisal
3. Increase of inventory
DEFINITION (CONT’D…)
NET WORTH METHOD
DEFINITION (CONT’D…)
NET WORTH METHOD
Example:
 DEFINITION (CONT’D…)
RETURN ON CAPITAL
Income is not a mere return OF capital
Income is a return ON capital

RECEIPTS OF CASH
Receipts may include capital as well as its earnings
Income refers to the amount after EXCLUDING capital invested

Example: If a 1M deposit earns 9,000, the return of capital is 1M and the

return ON capital is 9,000. 9,000, therefore is INCOME.
 NONTAXABLE AND TAXABLE INCOME
Income could be TAXABLE or EXEMPT
TAXABLE INCOME could be reportable in the annual tax return
or collected with final tax
Nontaxable Income
> those expressly excluded by law or treaty from taxation
Taxable Income
> pertinent items of gross income specified in the Tax Code
less deductions, if any, and/or personal and additional
exemptions authorized by the Tax Code or other special laws
(NIRC Sec. 31)
 NONTAXABLE AND TAXABLE INCOME (CON’D…)
Taxable Income
> synonymous to NET INCOME in accounting
> means gross income less statutory deductions
> characteristics:
1. There must be gain or profit
- a VALUE is received in the form of cash or its equivalent as a
result of rendition of service or earnings in excess of capital invested
- mere expectation of income (hence still unrealized) is NOT income
 NONTAXABLE AND TAXABLE INCOME (CON’D…)
Taxable Income (cont’d..)
2. The gain must be realized or received
- the realization of gain may take the form of actual receipt of cash
or may occur as a contructive receipt of income
NONTAXABLE AND TAXABLE INCOME (CON’D…)
Taxable Income (cont’d..)
2. The gain must be realized or received (cont’d..)
NONTAXABLE AND TAXABLE INCOME (CONT’D…)
Taxable Income (cont’d..)
2. The gain must be realized or received (cont’d..)

Note: With respect to SALE of SERVICES, income is recognized upon

RECEIPT of consideration REGARDLESS of when earned
 NONTAXABLE AND TAXABLE INCOME (CONT’D…)
Taxable Income (cont’d..)
2. The gain must be realized or received (cont’d..)
INCOME CONSTRUCTIVELY RECEIVED
- income is considered constructively received when it is
CREDITED to the account of, or segregated, in favor of a person
without any substantial limitations
- examples:
a. interest credited on savings bank deposit
b. dividends applied by the corporation against the indebtedness
of a stockholder
 NONTAXABLE AND TAXABLE INCOME (CONT’D…)
Taxable Income (cont’d..)
3. The law must does not EXCLUDE the gain from taxation
~ in general, ALL items of income, from
whatever sources, are TAXABLE unless a law or
treaty exempts them from taxation
SOURCES OF INCOME
 SOURCES OF INCOME (CONT’D..)
> is ascribed to the PLACE wherein income is earned
> governed by the situs of taxation
> income may be earned from
a) within the Philippines
b) without (outside) the Philippines
c) partly within and partly without (outside) the
Philippines
 SOURCES OF INCOME (CONT’D..)
INCOME FROM SOURCES WITHIN THE PHILIPPINES (RA 8424 Sec. 42)
> comprises earnings from within the Philippine territory
> examples are:
a) compensation for labor or service derived from Philippine sources
b) interest on bonds, notes, deposits and the like earned in the Philippines
c) dividends declared received from domestic corporations
d) rentals from property located within the Philippines
e) gains, profits and income sale of real property and personal property in the
Philippines
As a rule, if income is derived WITHIN the Phiippines, such income is taxable WITHIN.
SOURCES OF INCOME (CONT’D..)
INCOME FROM SOURCES WITHIN THE PHILIPPINES (cont’d…)

The amount of Mr. F’s income within the Philippines would be ________
 SOURCES OF INCOME (CONT’D..)
INCOME FROM SOURCES WITHOUT (OUTSIDE) THE PHILIPPINES (RA 8424 Sec. 42)
> refers to earnings from outside the Philippines or derived from foreign countries
> examples are:
a) compensation for labor or service rendered by overseas contract workers
b) interest on bonds, notes, deposits and the like earned abroad
c) dividends received from nonresident foreign corporations
d) rentals from property located outside the Philippines
e) gains, profits and income sale of real property and personal property located
outside the Philippines
Conversely, earnings derived outside the Phil’s by nonresident Filipino citizens and
foreign corporations are NOT subject to tax in the Philippines
 SOURCES OF INCOME (CONT’D..)
INCOME PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES (RA 8424 Sec. 42)
> refers to earnings from outside the Philippines or derived from foreign countries
> examples are:
a) compensation for labor or service rendered by overseas contract workers
b) interest on bonds, notes, deposits and the like earned abroad
c) dividends received from nonresident foreign corporations
d) rentals from property located outside the Philippines
e) gains, profits and income sale of real property and personal property located
outside the Philippines
Conversely, earnings derived outside the Phil’s by nonresident Filipino citizens and
foreign corporations are NOT subject to tax in the Philippines
 SOURCES OF INCOME (CONT’D..)
INCOME PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES (cont’d…)
Illustration:
 CLASSIFICATIONS OF INCOME
1. Compensation Income – the gain derived from labor,
especially employment (earned from employer-employee
relation)

2. Profession or Business Income – the value derived from an

exercise of profession, business or utilization of capital
including profit or gain derived from sale or conversion of
assets.
Examples: Net income from business, gain from sales of assets used
in business
 CLASSIFICATIONS OF INCOME (CONT’D..)
3. Passive Income – an income in which the taxpayer
merely waits for the amount to come in examples are
royalty, Interest, prizes, and winnings.

4. Capital Gain – an income derived from sale of assets

NOT USED in trade or business.
Examples: Sale of family home, and other sales of shares
of stocks which are subject to final taxes.
 FORMS AND VALUATION OF INCOME
Income may be received either in the form of a) cash, b) property, c)
service or d) a combination of the three.
A. CASH
~ pertains to money or money substitutes received as compensation for
or earnings derived from labor, practice of profession, and conduct of
business
~ examples: bills and coins in circulation and are legal tender, money
orders, treasury warrants
~ valued at actual cash received for income earned
 FORMS AND VALUATION OF INCOME (CONT’D..)
B. PROPERTY
~ as income denotes the RIGHT OF OWNERSHIP over a
tangible or intangible thing earned as a result of labor,
business or practice of profession
~ examples are real estate, stocks, personal property
~ valued at fair value of property as payment for income
earned
 FORMS AND VALUATION OF INCOME (CONT’D..)
C. SERVICE
~ a form of income based on performance received in
payment for the work previously rendered by one person to
another

~ fair value of service received (in the absence of any

stipulate price) as payment for income earned
 ACCOUNTING PERIODS
TAX ACCOUNTING PERIODS TO REPORT INCOME

1. Calendar period- covers a period from January 1 to

December 31 of the taxable year
2. Fiscal period- - covers a period of 12 months which ends
on the last day of any calendar month OTHER THAN
December
 ACCOUNTING PERIODS (CONT’D..)

3. Short period- a period less than 12 months; required

when a taxpayer dies or when under jeopardy
assessment
4. Variable period- period varies depending on the nature of
income earned; may be monthly, quarterly or semi-
annually; covers taxes paid on a PER
TRANSACTION basis
 ACCOUNTING PERIODS (CONT’D..)
Sec. 43 to 47 of Amended NIRC (RA 8424) not superseded by TRAIN LAW
1. General rule:
~ The taxable income shall be computed upon the basis of the taxpayer’s
REGULAR ANNUAL ACCOUNTING PERIOD (fiscal or calendar)
2. Exceptions:
~ If the method employed does not clearly reflect the income, computation should
be based on method given by BIR Commissioner
~ If taxpayer has NO annual accounting period or does not keep any books of
accounts, CALENDAR YEAR METHOD shall be employed
~ In case of death of taxpayer, taxable income includes amounts accruing up to
his death
 ACCOUNTING METHODS
- The timing WHEN INCOME was earned
- The following methods of reporting income and expenses are as follows:

CASH METHOD
> reports income upon cash COLLECTION and reports expenses upon PAYMENT
> if earned from rendering of service, income is reported in the year of COLLECTION regardless of
when earned

ACCRUAL METHOD
> reports income when EARNED and reports expense when INCURRED
> if earned from sale of goods, income is reported in the year of SALE irrespective of collection
> utilizes the “All-events Test” (fixing of a right to income or liability to pay and availability of the
reasonable accurate determination of such income or liability)
ACCOUNTING METHODS (CONT’D..)
ACCOUNTING METHODS (CONT’D..)
ACCOUNTING METHODS (CONT’D..)
ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS
Can be used when the nature of the taxpayer’s operation is
PECULIAR to the business industry
1. Installment
> considered appropriate when collections EXTENDS over relatively LONG PERIODS
of time and there is a STRONG possibility that full collection will not be made
> as customers make installment payments, the seller recognizes the GROSS PROFIT
on sale in PROPORTION to the CASH COLLECTION
ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS (cont’d..)
1. Installment (cont’d…)
FORMULA TO COMPUTE REPORTABLE INCOME

FORMULA TO COMPUTE INSTALLMENT TAX DUE

ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS (cont’d..)
1. Installment (cont’d…)
IMPORTANT TERMS
ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS (cont’d..)
1. Installment (cont’d…)
IMPORTANT TERMS
ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS (cont’d..)
1. Installment (cont’d…)
IMPORTANT TERMS
ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS (cont’d..)
1. Installment (cont’d…)
IMPORTANT TERMS
ACCOUNTING METHODS (CONT’D..)
SPECIAL METHODS
1. Installment (cont’d…)

Compute for the ff:

following:
1. Selling price
2. Contract price
3. Initial payment, and
4. Annual installment
taxes due