GROSS INCOME

Concept of Gross Income

Gross Income means the total income of a taxpayer subject to tax. It includes the gains, profits, and income
derived from whatever source, whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross Income defined

Gross Income means all income derived from whatever source, including (but not limited to) the following
items:

1. Compensation for services;

-Including pensions and retiring allowances (except those exempt by law)
2. Gross Income derived from the conduct of trade or business or the exercise of a profession;
3. Partner’s distributive share from the net income of a general professional partnership;
4. Rents;
5. Annuities (excess over premium paid);
6. Gains derived from dealings in property;
7. Interest Income;
8. Royalties;
9. Dividends;
10. Prizes and Winnings;

Items of Gross Income

1. Compensation for services

The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages,
emoluments and honoraria, allowances, commissions (e.g. transportation, representation,
entertainment, and the like); fees, including director’s fees, if the director is at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits, except those which are
subject to the fringe benefits tax under Section 33 of the Tax Code; taxable pensions and retirement
pay; and other income of a similar nature constitute compensation income.

A. Compensation Income which may be in the following forms:

Forms Valuation
a. Cash
b. Allowances
c. Property FMV of the thing taken in payment is the
amount of compensation.

d. Employer’s stock FMV of the shares at the time the services

were rendered.
e. Promissory notes The fair discounted value of the note as the
time of the receipt. The employee shall also
record additional income upon the recovery of
the discount.

f. Forgiveness of debt for services rendered Note: Where the debtor is a stockholder
to a creditor condoning the debt, the condonation of the
 debt, the condonation of the debt amounts to
an indirect payment of dividend.

g. Income tax of the employee assumed or

paid by the employer, in consideration of
the latter’s services.

h. Pensions and retiring allowances-except

those exempt by law

i. Stock options- FMV of the stock option at the time of the

services were rendered by the employee.

B. Fringe Benefits which may be in the form of (1) meals furnished or subsidized by the employer; (2)
living quarters; (3) life insurance premiums paid by the employer where the insured employee is the
beneficiary; (4) facilities or privileges provided by the employer; or (5) allowances.

Fringe Benefits included in gross income in the ITR

-Fringe benefits given to rank and file employees
-Fringe benefits given to employees holding managerial or supervisory employees and which are
not listed in RR No. 3-98, as amended

C. Salaries and Allowances during leaves of absence

D. Separation pay not due to a cause beyond the control of the employee
General Rule: Separation pay is included in gross income of separated employee

Exception: if separation if caused by something not of the employee’s making.

E. Fees
Fees received by an employee for the performance of a service for the employer, including
director’s fees (including per diems and allowances), are regarded as compensation income.
F. Dismissal Payment
Any payment made by an employer to an employee on account of dismissal, that is involuntary
separation from the service of the employer constitutes wages.
G. Tips and Gratuities
Tips or gratuities paid directly to an employee (by a customer of the employer) which are not
accounted for by the employee to the employer are considered taxable income but not subject to
withholding tax.

Sample Problem on Compensation Income:

Noah, a supervisory employee, received the following income in 2019:

Gross Compensation Income, before P800,000
contributions to SSS, PhilHealth, and HMDF
totaling P124,000
Fringe Benefits 200,000
Gain from redemption of shares in mutual fund 100,000
Commission Income 150,000
Required: Determine the total income to be reported by Noah in gross income.
2. Gross Income from Business
In general, gross income means total sales less COGS, plus any income from investments and from
any income from investments and from any incidental or outside operations or sources.

Formula:

Gross sales Pxxx

Less: Cost of goods sold (xxx)
Gross profit Pxxx
Add: Other income
(a) Income from investment Pxxx
(b) Income from outside xxx xxx
Gross Income xxx

Sample Problem on Business Income

Cain, a sole proprietor, has the following data in 2019, its first year of merchandising:
Gross sales P300,000
Cost of goods sold 150,000
Other income 50,000
Selling expenses 20,000
Depreciation expense 4,000
How much is Cain’s gross income?

3. Payments made by a GPP to a partner, and the distributive share of partners in the net income
of a GPP

4. Rent or Lease Income

Rent paid by the lessee for the use or lease of property is taxable income to the lessor.

5. Annuities and Life Insurance Policies

a. Annuities- paid under an annuity contract in excess of the consideration paid are includible in
gross income.
b. Life Insurance Policies- Where insured outlives the term of policy, amounts received by the
insured in excess of the premiums paid are included in gross income.

Sample Problem on Annuities and Life Insurance Policies

Abraham purchased an annuity contract for P100,000 which shall pay him P10,000 annually until he
dies.

Required: What will Abraham include in his gross income on the 11th year of the policy?
6. Gains derived from dealings in Property
Sales of 3 types of property which may give arise to taxable events:

Ordinary asset-100% of the gain or loss shall be recognized in the ITR

Capital asset- subject to final taxes
Other capital asset-holding period of the asset shall be taken into consideration if the seller is an
individual, and only the net capital gain shall be included in the ITR.

7. Interest Income
Interest income, as a rule, is taxable income included in the ITR. Except, those subject to final tax and
those exempt from tax.
Sample Problem on Interest Income:

Israel Bank has the following income in 2019:

Interest Income from loans P3,000,000
Interest Income from deposits with other 400,000
banks
Interest income from notes 100,000
Interest income from Treasury notes 50,000
Required: How much will be included in gross income subject to regular tax?

8. Royalties
Sample Problem on Royalties:

Adam has the following royalties:

Royalties from mining properties in the P550,000
Philippines
Royalties from books published in the 200,000
Philippines
Royalties from books published abroad 300,000
Royalties from franchise exercised abroad 400,000
Required: How much will be included in gross income subject to regular tax?

9. Dividends
Dividends included in gross income in the ITR:
a. Dividends from a foreign corporation
b. Liquidating dividend
10. Prizes and Winnings
Included in the ITR:
1. Prizes amounting to P10,000 or less received by a citizen, resident alien, or NRAETB.
2. Prizes received by domestic corporations.
3. Prizes received by RFCs within the Philippines.
4. Prizes and winnings received by resident citizens from sources without the Philippines.
Gross income from whatever source derived

Examples:

1. Income from jueteng

2. Income from swindling activities
3. Recovery of bad debts
4. Refund of taxes
5. Unutilized/excess campaign funds
6. Forgiveness of indebtedness

Seatwork:

Multiple Choice- Theory: Part 1

1. Compensation income is earned when an employer-employee relationship exists. Which of the

following income represents income earned through employer-employee relationship?
I. Professional fees
II. Wages
III. Pension pay
IV. Capital gain
A. I only
B. I and III only
C. II and III only
D. I, II, III, and IV

2. Which of the following compensation will be subject to graduated rates?

A. Basic salary of a minimum wage earner
B. Basic salary of a non-minimum wage earner
C. 13th month pay and other benefits not exceeding the limit
D. Fringe benefits received by supervisory or managerial employee

3. Which of the following dealings in property is subject to normal tax?

A. Sale of ordinary assets
B. Sale of real property, located in the Philippines, classified as capital asset
C. Sale of shares in domestic corporation sold outside the local stock exchange
D. All of the choices

4. All of these are items of gross income subject to regular tax except one. Select the exception.
A. Compensation income
B. Interest income from long-term bank deposits
C. Ordinary gain on sale of properties
D. Interest on notes receivable

5. As a rule, income from whatever source is taxable. The following are income from whatever source,
except:
A. Gambling gains
 B. Income from illegal business
C. Tax Refund
D. Compensation for injury

Multiple Choice- Problems: Part 2

6. Jews Inc., a domestic corporation, reported the following income in 2019:

Service fees P700,000

Interest Income-Bank 40,000
Royalties-franchise (abroad) 30,000

Compute the total gross income subject to regular income tax.

A. P770,000
B. P740,000
C. P730,000
D. P70,000

7. Mr. Jacob purchased a life annuity for P1,000,000 which will pay him P100,000 a year. What will Mr.
Jacob include in his gross income on the 11th year of the policy?
A. P1,000,000
B. P100,000
C. P200,000
D. P1,200,000

8. The following relates to the gross receipts and expenses of Isaac Company:
Gross Receipts P4,000,000
Cost of Services 1,800,000
Income from investment 100,000
Income from other sources 40,000
What is the reportable income of Isaac Company?
A. P4,000,000
B. P2,340,000
C. P2,200,000
D. P5,900,000

9. A taxpayer collected the following passive income during the year:

Interest Income from Banks-Philippines P300,000

Interest Income from Banks-Abroad 800,000
Royalties from books-Philippines 200,000
Royalties from books-Abroad 100,000
Rent of properties-Philippines 400,000

What is the amount to be reported in gross income if the taxpayer is a resident citizen?
A. P900,000
B. P1,100,000
C. P1,300,000
D. P1,600,000