Income Tax definite unconditional obligation to return or repay that which would

otherwise constitute a gain.

Inclusion from Gross Income

Gross income – refers to all income derived from whatever source, including, but
not limited to, the following items:
Taxable Income Corporation Individual
 means the pertinent Gross Income Gross Income  Compensation for services in whatever form paid, including but not
items of gross income XX XX limited to fees, salaries, wages, commissions, and similar items;
specified in the code, Less: Deduction Less: Deduction o Gross compensation income- means all remuneration for
less deductions, if any, XX XX services performed by an employee for his employer, whether
authorized for such Taxable Income Taxable Income paid in cash or in kind, unless specifically excluded under the
types of income by the XX XX Tax Code.
code or other special
o Director’s fee is part of the gross compensation income if the
laws.
*Basic personal director is at the same time an employee of the
exemption and employer/corporation. If the director is not an employee, the
additional exemptions director’s fee is subject to 10% creditable withholding tax if the
are no longer allowed current year’ s gross income is P720,000.
to be deducted from o Compensation in the absence of employer-employee
the gross income of an relationship, compensation for personal services shall be
individual tax payer. considered as gross professional fee. (e.g audit fee received by
CPA from his client, lawyer’s fee.
o All kinds of compensation for services rendered constitute gross
income. They include:
Definition of Income  Salaries, wages and fees
 Commission paid to salesmen
 Income means all wealth, which flows into the taxpayer’s hands other  Compensation for services on the basis of a percentage
than as a mere return of capital. of profits
 Judicially speaking, this is the gain derived from labor, or from capital, or  Commission on insurance premiums
from both labor and capital, including the gain derived from sale or  Tips
exchange of capital assets.  Pensions or retiring allowances paid by private persons
 Requisites of a taxable income or by the government (except pension exempt from tax);
o There must be gain or profit and
o The gain or profit must be realized during the taxable year  Marriage fees, baptismal offerings, sums paid for saying
o The gain or profit is not exempt from income tax. masses for the dead, and other contributions received
by a clergyman, evangelist, or religious worker for
Tests in determining whether the income is earned for tax purposes services rendered.
 Marriage fees, baptismal offerings, sums paid for saying
1. Realization/Severance Test – There is no taxable income until there is a
masses for the dead, and other contributions received
separation from capital of something of exchangeable value, thereby
by a clergyman, evangelist, or religious worker for
supplying the realization or transmutation which would result in the
services rendered.
receipt of income.
2. Economic Benefit Test – Any economic benefit to the employee that
o Forms of compensation
increases his net worth, whatever may have been the mode by which it
 Payments made in cash- The full amount received
is effect, is taxable.
 Services paid for with something other than (in kind)-
3. Claim of Right Doctrine – a taxable gain is conditioned upon the
FMV of the thing taken in payment
presence of a claim of right to the alleged gain and the absence of a
  Services rendered at a stipulated price- in the absence x
of evidence to the contrary, the stipulated price shall be Property acquired Selling Price x
presumed to be the fair market value by gift Less: Value in the x
hands of the donor x
Gain x
o Examples of payments in kind x
 Compensation paid for paid to an employee of a x
corporation in its stock- FMV of the stock at the time
received by the employee
 Interest Income
 Promissory note and other evidence of indebtedness in
o Interest includes such interest arising from indebtedness,
payment of services, and not merely as security for such
whether business or non- business. Unless exempted by law,
payment
interests received by a taxpayer, whether or not usurious, are
1. Promissory note is not interesting bearing
taxable.
Year received- Fair discounted
o Subject to final tax- Interest income from Philippines sources
Year collected-Face value less fair discounted
value subject to final tax (not included in the taxable net income
2. Promissory note is interest bearing subject to tax rates in general)
Year received- Face value  Interest from any currency bank deposit
Year collected- Maturity value less face value  Yield or any other monetary benefit from deposit
 Computation for gross income derived from the conduct of trade or substitute
business, or the exercise of profession  Interest on government debt instrument and securities
(regardless number of lenders)
 Yield or any other monetary benefit from trust funds and
Gross Income x
similar arrangements
x
 Interest income received from a depository bank under
Less: Sales returns and xx
allowances expanded foreign currency deposit system
Sales discount xx  Interest income from long-term deposit or investment
xx evidenced by certificates prescribed by Bangko Sentral
Net sales/receipts x ng Pilipinas if pre-terminated before fifth year or
x received by individual issued by financial institution
Less: Cost of sales/services x other than a bank
x
 Gross income from operation x Gains o Tax rates in general
x derived  Interest income from foreign sources
Add: Other income x from  Interest income from debt instrument not within the
x coverage of deposit substitute
dealings in
Total gross income x  Interest from long -term deposit or investment received
property
x by domestic and resident foreign corporation
Property acquired Selling Price x
by purchase on Less: Cost x o Exempt from income tax
or after March 1, Gain x
x Interest income from Philippines sources exempt from tax:
1913  Interest income received from a depository bank under
x
x expanded foreign currency deposit system by non-
Property acquired Selling Price x residents (individuals or corporations)
by inheritance Less: FMV @ date of x  Interest income from long-term deposit or investments
inherintance x
Gain x evidenced by certificates prescribed by Bangko Sentral
x
 ng Pilipinas (issued by banks to individuals in P10,000 Book Value, end of lease
denomination) xx
Annual income
 Rent Income xx
o Income of lessor under lease agreement Book Value, end of lease/ Remaining
Term of lease
Payments Made Lessor Lessee xx
a) Rent Income Expense Premature termination of lease
FMV of improvement when lessor took
b) Obligation of Income Expense
possession
lessor to 3rd
xx
person paid
Less: Amount already reported as
by lessee
Income
c) Advance rent Income in full in the Expense to be prorated
xx
year received over the period
Income
regardless of covered regardless of
xx
accounting method accounting method
used
Computation of loss due Amount already reported as income xx
d) Leasehold Income reported Expense (depreciation)
to destruction of Less: Insurance recovery xx
Improvemen under lumpsum or over the term of the
leasehold improvement Salvage value xx
t annual method lease or est. life @
before the term of the xx
shorter
lease expires Loss
xx
o Advance payment not representing rent
Loan-Advance payment representing loan to the lessor is not  Royalties
taxable unless applied to unpaid rent o Subject to final tax- Royalties from Philippines sources
Security deposit- Advance payment representing security o Subject to tax rates in general- Royalties from foreign sources
deposit is not taxable unless violation in the lease contract
arises.  Dividends Income (including shares in the net income of certain entities)
o Dividends/shares in net income subject to final tax
 Leasehold improvement
 Cash/ Property dividends actually or constructively
Additional Income to Leasehold improvement is a source of received by individuals from domestic corporation or
the lessor additional income to the lessor if it shall from a joint stock company, insurance or mutual fund
become his upon the expiration of the company and regional operating headquarter of
lease. multinationals
 Inter-corporate dividends received from domestic
Recognition of income Lumpsum/ Outright method- Lessor may corporation by non-resident foreign corporations;
from leasehold report as income, at the time when such  Share of an individual in the distributable net income
improvement buildings or improvements are completed, after tax of a partnership (other than a general
the fair market value (FMV) of such professional partnership) of which he is a partner.
buildings or improvements subject to the  Share of an individual in the net income after tax of an
lease association, a joint account, or a joint venture or
Annual or spread out method consortium taxable as a corporation of which he is a
Cost of leasehold improvement
member or co-venturer.
xx
Less: Accum. Depreciation (remaining
of lease) o Dividends/shares in net income subject to tax rates in
xx general
  Dividends from foreign corporation
 Share in the net income of a general professional
partnership
o Dividends that are exempt from tax
 Inter-corporate dividends received from domestic
corporation by other domestic corporation and
resident foreign corporation.
 Annuities
o It 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.
o Non- taxable annuity- Annuity representing return of premium
o Taxable annuity- Excess of the amount returned as premium
 Prizes and winnings
o Subject to tax rates in general
 Prizes and winnings from foreign sources received by
individuals and corporations
 Prizes and winnings from Philippines sources received by
corporations
 Prizes from Philippines sources received by individuals
amounting to 10,000 or less.
o Subject to tax rates in 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 Sweeptakes and Lotto
winnings amounting to P10,000 or less which shall be
exempt)
o Exempted/excluded from gross income
 Philippines Charity Sweeptakes and Lotto winning
amounting to P10,000 or less
 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
Condition for the exemptions of prizes and awards
a. The recipient was selected without any action or 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.
 Pension (see discussion on exclusion from gross income)
 Partner’s distributive share from the net income of the general
professional partnership [Subject to section 24 (A)]
 Income from whatever source
o 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)
1. Recovery of lost profit is taxable
2. Recovery of lost capital is not taxable
 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
 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.
 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
 Philippine income tax
 Transfer taxes (estate tax and donor’s tax)
 Special assessment
 Foreign income tax claimed as tax credit
 Value-added tax
 Stock transaction tax