Income – refers to all wealth which flows into the taxpayer other than a mere return of capital.

It
includes forms on income specifically described as gains and profits, including gains derived from the
sale or other disposition of capital assets.

Gross income

- All income derived from whatever source, including but not limited to the following:
1. Compensation – all remuneration for services performed by an employee for his
employer under
 Compensation services rendered by independent contractor, where there is no
EE-ER relationship, does not fall under gross compensation income. However it
shall be recorded as income from trade or business.
 Valuation of amount of compensation:
 Cash
 Other than cash – fair market value (FMV) of the thing at the time of
payment
 Promissory note or other evidence of indebtedness
 Stocks
 Living quarters furnished in addition to cash
 Compensation amount includes:
 Wages
 Separation pay – taxable compensation of the separated official or
employee when the cause of such official or employee is separated
under voluntary separation program.
 Retirement benefits – taxable compensation to the retiring official.
 Monetary benefits –
 Director’s fees’ –
 Fringe benefits granted to rank-and-file –
 Love gifts received by pastors from pastoral ministry –
2. Annuities – it refers to the periodic installment payments of income or pension by
insurance companies during the life of a person or for a guaranteed fixed period of time
 whichever is longer in consideration of capital paid by him. It is paid annually, monthly,
or periodically, computed upon the amount paid yearly, but not necessarily for life.
3. Rents – the amount paid for the use or lease or enjoyment of a property, whether real
or personal property, to the owner of the property.
 Operating lease –
 Financial lease –
4. Dividends – any distribution made by a corporation to its shareholders out of the
unrestricted retained earnings payable to its shareholders, whether in money, property
or stock.
5. Gains from dealings in property
6. Royalties – these are payments for the use and exhaustion of property such as earnings
from copyrights, patents, trademarks, formulas and natural resources under lease.
7. Interests
8. Gross income from profession, trade or business –
 Self-employment income – earnings derived by an individual from the practice
of profession or conduct of trade or business carried on by him as a sole
proprietor, or by a partnership of which he is a member
 Professional income – it refers to fees received by a professional from the
practice of his profession. Provided there’s no employee-employer relationship.
 Professional income taxpayer – it refers to a person certified by a professional
body belonging to a specific profession by having completed a required course
of studies and or practice.
 Professional income vs compensation - the existence of employer-employer
relationship determines whether the income shall be treated as compensation
income or professional fee.
 Business income – refers to income derived from merchandising, mining,
manufacturing, farming, and other similar operations.
9. Prizes and winnings – amount of money in cash or in kind received by chance or by luck,
prizes refer to those obtained as a result of effort, while winnings are product of chance
or luck.
 Subject to 20% final tax
 10. Pensions – refers to amount of money received in lump sum or on staggered basis in
consideration of services rendered given after an individual reaches the age of
retirement.
11. Partner’s distributive share from the net income – GPP shall not be subject to income
tax since it is the individual partners who shall be subject to income tax in their separate
and individual capacities.

DEDUCTIONS FROM GROSS INCOME

- Items or amounts which law allows to be deducted from the gross income in order to arrive at
the taxable income
- NO DEDUCTIONS shall be allowed to individual taxpayers earning compensation income arising
from personal services rendered under an employer-employee relationship, and those who
opted to be taxed at 8% income tax rate on their income from business/practice of profession

General rules

1. Matching concept for deductibility – deductions must match the income; deductions
must be pair or incurred in connection with the taxpayer’s trade, business, or profession
2. Substantiation rule – deductions must be supported by adequate receipts or invoices.
3. Subject to limitation – the taxpayer is mandated to deduct amounts only within the
limits allowed.
4. Additional requirement relating to withholding – any amount paid or payable which is
otherwise deductible form, or taken into account in computing gross income or for
which depreciation or amortization may be allowed, shall be allowed as a deduction
only if it is shown that the tax required to be deducted and withheld therefrom has
been paid to the BIR.

RETURN OF CAPITAL – income tax is levied by law only on income, which may be gross income, or net
income; hence, the amount representing return of capital should be deducted from the proceeds from
sales of assets and should not be subject to income tax.
Kinds of deductions:

1. Itemized deductions, which are ordinary and necessary, incurred or paid for the practice
of profession
2. Special deductions
3. Optional standard deduction

Itemized deductions – are those allowed by the NIRC to be deducted from the gross income before the
income is subjected to tax

Optional standard deduction – is a fixed percentage deduction without regard to any actual expenditure
in lieu of the itemized deductions. It is merely a privilege that may be enjoyed by certain taxpayers.

Itemized deductions

A. Business expenses
B. Interest
C. Taxes
D. Losses
E. Bad debts
F. Depreciation
G. Depletion
H. Charitable and other contributions
I. Research and development
J. Pension trust contribution

Ordinary and necessary trade, business, and professional expenses

- Ordinary expenses – it is that is normal or usual in relation to the taxpayer’s business and the
surrounding circumstances
- Necessary expense – it is one which is appropriate and helpful in the development of the
taxpayer’s business and are intended to minimize losses or to increase profits
Capital expenditures (CAPEX) – payment which creates or enhances what is essentially a separate and
distinct asset or made to increase the value of the taxpayer’s property or for any amount expended in
restoring property or in making good the exhaustion thereof

Kinds of business expenses –

1. Compensation for personal services

2. Travelling/transporting expenses
3. Lease agreement expenses
4. Entertainment, amusement and recreation expenses
5. Cost of materials and supplies
6. Expenses of professionals
7. Repair expenses
8. Advertising expenses
9. Expenses allowed to private educational institutions

Interests – compensation for the use or forbearance or detention of money, regardless of the name it is
called or denominated it includes the amount paid for the borrower’s use of money during the term of
the loan as well as for his detention of money after the due date for its repayment. (p121)

Tax arbitrage – refers to a situation where a taxpayer profits from the differences on how income or
gains are taxed.

Taxes – all taxes, whether national or local, shall be allowed as deduction (p.124)

Tax credit – peso-for-peso reduction from a taxpayer’s tax liability. It is a direct subtraction from the tax
payable to the government.

Losses – actually sustained during the taxable year and not compensated for by insurance or other
forms of indemnity are the losses contemplated to be deductible.

Classification of losses:

1. Ordinary losses – incurred in trade or business or practice of profession

 2. Casualty losses – incurred by property connected with trade, business or profession, if the loss
arises from fire, storm shipwreck or other casualties or from robbery, theft, or embezzlement.
(p127)
3. Capital losses – losses arising from the sale or exchange of capital assets and losses resulting
from securities becoming worthless which are capital assets.
4. Wagering losses – deductible only to the extent of gain or winnings it applies only to
INDIVIDUALS.
5. Losses on securities becoming worthless
6. Losses on wash sales of stocks
a. Wash sale – sale of stock or securities where substantially identical securities are
acquired or purchased within 61 day period. (p128)
7. Abandonment losses in petroleum operation – all accumulated exploration and development
expenditures pertaining there to shall be allowed as a deduction.
8. Abandonment losses in producing well –
9. Losses due to voluntary removal of building incident to renewal or replacements – deductible
expense from gross income.
10. Loss of useful value of capital assets due to changes in business conditions and a capital asset is
terminated.
11. Losses of farmers
12. Net operating loss carry over (p130)

Bad debts – refers to those debts resulting from the worthlessness or uncollectibility, in whole or in
part, of amounts due the taxpayers by others. Arising from money lent or from uncollectible amounts of
income from goods sold and services rendered. (133)

Depreciation – is the gradual diminution in the useful value of tangible property resulting from wear and
tear and normal obsolescence. (134)

Depletion of oil and gas wells and mines – is the exhaustion of natural resources owing to production or
severance. (136)
Kinds of contributions:

A. Ordinary/partially deductible contributions – those which are subject to limitation as to the

amount deductible from gross income.
B. Special/full deductible contributions – donations which are deductible in full from the gross
income. (137)

Research and development

- All costs incident to the development of an experimental or pilot model, a plant process, a
product, a formula or invention, or similar property and the improvement of already existing
property of the type mention.

Research – original and planned investigation undertaken by the taxpayer with the prospect of gaining
new scientific or technical knowledge and understanding

Development – it is the application of research findings or other knowledge to a plan or design for the
production of new or substantially improved materials, devices, products processes systems or services
before the start of commercial production or use. (139)

OPTIONAL STANDARD DEDUCTION (OSD)

- A fixed percentage deduction without regard to any actual expenditure in lieu of the itemized
deductions it is merely a privilege that may be enjoyed by certain taxpayers. (141)

SPECIAL DEDUCTIONS

- Are usually allowed only for particular businesses or enterprises and not to others or may be
allowed for all but are not provided for under NIRC but under special laws.
1. Insurance companies
2. Productivity bonus and manpower training under the productivity incentives act of 1990
3. Deductions for training expenses of qualified jewelry enterprises
4. Deductions under the adopt-a-school act of 1990
5. Deductions under the expanded senior citizens act of 2010
6. Tax incentives given to private entities which employ disabled persons.