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UNIT 7 (GROSS INCOME) Payments in kind Taxable amount

▲ Gross income – total income of a taxpayer subject to tax which
Compensation paid to an Fair market value of the stock at
includes gains, profits and income derived from any source whether legal
employee of a corporation in its the time received by the employee
or illegal
stock
Corporation Promissory note and other a. Non-interest bearing
Gross income xxx evidence of indebtedness in Year received – fair discounted
payment of services, and not value
Less: Deductions (xxx) merely as security for such
payment Year collected – face value less
Taxable income xxx fair discounted value

b. Interest bearing
Individual
Year received – face value
Gross income xxx Year collected maturity value less
Less: Deductions (xxx) face value

Income before personal xxx

exemptions ■ Tips and gratuities
Less: Personal exemptions (xxx) Directly paid to an employee Taxable income of the employee
(Before TRAIN law) but not subject to withholding
Taxable income xxx Accounted for by the employee Taxable income of the employee
to the employer and subject to withholding

• Requisites of Income
■ There must be gain or profit ■ Maternity Leave
■ The gain must be realized or received ◊ RA 11210 (105-Day Expanded Maternity Leave)
■ The gain must not be excluded by law or treaty from taxation - The maternity benefit of the female employee shall pertain to the full pay
or full salary wherein one of its components is the salary differential

• Types of Income
 Salary Differential – difference that shall be shouldered by the
■ Compensation
employer when actual cash benefit received SSS is less than the full salary
■ Business Income of the female employee
■ Gains from dealings in property - Exempt from Income tax and withholding tax on compensation
■ Interest
■ Rent ■ De Minimis Benefits – facilities and privileges offered or furnished by
■ Royalties the employer merely as a means of promoting the health, goodwill,
■ Dividends contentment or efficiency of his employees
■ Annuities - Tax exempt
■ Prize and Winnings
■ Pensions ◊ Monetized unused vacation leave credits to employees not exceeding ten
(10) days during the year
■ Partner’s distributive share from GPP’s net income
◊ Monetized value of vacation and sick leave credits paid to government
officials and employees
1. Compensation – encompasses all remuneration for services performed
◊ Medical cash allowance to dependents of employees, not exceeding
by an employee for his employer whether paid in cash or in kind
P1,500 per employee per semester of P250 per month
• Salaries, wages, fees
◊ Rice subsidy of P2,000 or one sack 50kg rice per month amounting to
• Commissions paid to salesmen not more than P2,000
• Compensation for services on the basis of a percentage of profits ◊ Uniform and clothing allowance not exceeding P6,000 per annum
• Commissions on insurance premiums ◊ Actual medical assistance, e.g. medical allowance to cover medical and
• Tips healthcare needs, annual medical/executive check-up, maternity assistance,
• Pensions or retiring allowances paid by private persons or by the and routine consultations, not exceeding P10,000.00 per annum
government (except pension exempt from tax) ◊ Laundry allowance not exceeding P300 per month
• Other similar items ◊ Employees achievement awards, e.g. for length of service or safety
achievement, which in the form of a tangible personal property other than
cash or gift certificate, with an annual monetary value not exceeding
Forms of compensation Taxable amount P10,000 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees;
In cash Full amount received
◊ Gifts given during Christmas and major anniversary celebrations not
Services paid for with something Fair market value of the thing exceeding P5,000 per employee per annum
other than money (in kind) taken in payment
◊ Daily meal allowance for overtime work not exceeding (25%) of the
Services rendered at a stipulated In the absence of evidence to the basic minimum wage
price contrary, the stipulated price shall
◊ Benefits received by an employee by virtue of a collective bargaining
be presumed to be the fair market
value agreement (CBA) and productivity incentive schemes provided that the
total annual monetary value received from both CBA and productivity
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incentive schemes combined do not exceed Php 10,000.00 per employee - Gains derived from dealings in property
per taxable year - In sales or exchange of real or personal property

■ 13th month pay
- Tax exempt beginning January 1, 2018 – P90,000
- Not applicable to Self-employed and Income generated from Business
■ Other Benefits (90,000)
◊ Christmas Bonus (in excess of P5,000 under de minimis)
◊ Productivity Incentive Bonus (if not more than P10,000 under de
minimis) Loyalty Awards Gifts in cash or in kind and other benefits of
similar nature actually received by officials and employees of both
government and private entities
- Not applicable to Self-employed and Income generated from Business
• Ordinary assets – assets used or traded in the ordinary course of
business
- Those arising from the sale of ordinary assets form part of the taxable
income subject to the graduated/basic/regular income tax
- Likewise, losses arising from such sale may be claimed as deductible
expense, without any limitation as to amount, unlike in capital losses
■ Stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close
of the taxable year
■ Property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business
■ Property used in the trade or business, of a character which is subject to
the allowance for depreciation
■ Real property used in trade or business of the taxpayer.

• Capital assets (Personal property of business) – all assets not classified

under ordinary assets
- Those arising from the sale of capital assets shall be taxed depending on
the nature of the property
- Gains derived from sale or disposition of capital assets may be subject to
Capital Gains Tax or Ordinary Income Tax

■ Formula for Gain or Loss

Money received xxx
FMV of property received xxx
Amount realized xxx
Less: Basis or adjusted basis (xxx)
Gain (Loss) xxx

■ Basis for Determining Gain or Loss of Property Sold

Manner of Acquisition Basis
Purchase Cost
Inheritance FMV as of the date of acquisition
Gift Basis is the same as if it would be
in the hands of the donor or the
last preceding owner who did not
acquire the property by gift
Exception: FMV at the time of
donation if lower than the amount
above
Property acquired for adequate Amount paid by the transferee
consideration in money or
money’s worth

2. Business Income
- Gross income derived from the conduct of trade or business or the
exercise of a profession
- In the case of manufacturing, merchandising or other business:
4. Interest
- Interest arise from indebtedness, whether business or non-business
- Unless exempted by law, interest received by a tax payer, whether or not
usurious are taxable
- Interest income from Philippine sources subject to final tax are not
included in the taxable net income subject to tax rates in general (20%
Final tax)

• Interest from any currency bank deposit

3. Gains from dealings in property
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• Yield or any other monetary benefit from deposit substitute
• Yield or any other monetary benefit from trust funds and similar
arrangements
• Interest income received from a depository bank under expanded foreign
currency deposit system
• Interest income from long-term deposit or investment evidenced by
certificates prescribed by Bangko Sentral ng Pilipinas if pre-terminated
before fifth year
< 3 Years - 20%
< 4 Years - 12%
< 5 Years - 5%
> 5 Years – Tax exempt

5. Rent – amount paid for the use or enjoyment of a thing or right

- Derived only from real property, but also from the use of personal
property

• Income or lessor under lease agreement

• Advance payment not representing rent

Loan Advance payment representing loan to the lessor is not
taxable unless applied to unpaid rent
6. Royalties – any payment of any kind received as consideration for the
Security Advance payment representing security deposit is not use of or right to use
deposit taxable unless violation in the lease contract arises

• Subject to final tax (Philippine sources)

• Leasehold improvement ■ 20% Final Tax
◊ Any patent, trademark, design or model
◊ Secret formula or process
◊ Industrial, commercial or scientific equipment
◊ Information concerning industrial, commercial or scientific experience

■ 10% Final Tax

◊ Books and other literary works
◊ Musical compositions

• Subject to tax rates in general (Foreign sources)

7. Dividends – any distribution whether in cash or in other property in the

ordinary course of business even if extraordinary in amount
Resident citizen/Non- Non-resident Alien –
resident Engage in Trade or
citizen/Resident alien business
Domestic corporation 10% Final tax 20% Final tax
Foreign corporation Gross income Gross income

• Forms of Dividend and Income Tax Treatment

■ Cash dividend
- It is paid to shareholders or members in cash and is taxable at 6%, 8%,
10% final tax, beginning Jan. 1, 1998, 1999, and 2000, respectively.

■ Property dividend
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- It is paid in property of the corporation such as bonds, securities or stock
investments held by the corporation paying the dividend and is taxable at
the same rate as cash dividend.
■ Stock dividend (Non)
- It is paid in stock and is not taxable unless it represents stock distribution
of earnings or profit
■ Scrip dividend
- It is issued in the form of a promissory note and is taxable at the same
rate as cash dividend.
■ Liquidating dividend (Non)
- Does not constitute income. The cost of the shares surrendered by the
stockholder is a taxable capital gain or deductible capital loss to the extent
of the capital gain.
■ Indirect dividends
- These are other payments or rights received by the taxpayer which in
reality, are dividends.

8. Annuities
- Annuity policy sold by insurance companies, which provide installment
payment for life or for a guaranteed fixed. Of time whichever is longer of
our life or guaranteed fixed.

Taxable annuity Represents interest

Non-taxable annuity Payment that represents return of premium

9. Prizes and other Winnings

Before TRAIN law

After TRAIN law

Pagatpat, Aischelle Mhae R.