Competency Appraisal Course

College of Accounting Education

3rd Floor, Business & Engineering Building, Matina, Davao City
Telefax: (082)300-1496
Phone No.: (082) Local 137

TAXATION
Session 8: Gross Income: Inclusions and Exclusions

Items of Gross Income Subject to Regular Tax

Gross income means all income derived from whatever sources including, but not limited to, the following items:
1) Compensation for services in whatever form paid
2) Gross income derived from the conduct of trade or business or the exercise of a profession;
3) Gains derived from dealings in property;
4) Interests
5) Rents,
6) Royalties;
7) Dividends;
8) Annuities;
9) Prizes and winnings;
10) Pensions; and
11) Partner’s distributive share from the net income of the general professional partnership.

A. Compensation for services in whatever form paid – the types of employee benefits that are subject to regular tax
B. Gross income derived from the conduct of trade or business or the exercise of a profession – income from any trade or
business, legal or illegal, and whether registered or unregistered. However, the following shall not be included in gross
income subject to regular income tax:
a. Business income exempt from income tax
b. Business income subject to special tax regime
c. Business income subject to final tax
C. Gains from dealings in properties
Important Notes:
• Dealings in ordinary assets (ordinary gain or ordinary loss)– subject to regular income tax
• Dealings in capital assets, other than domestic stocks and real properties (capital gain or capital loss) – subject to
regular income tax

Determination of Gains or Losses in Dealings in Properties

Selling price P XXX

Less: Tax basis or adjusted basis of the asset disposed _______XXX
Gain or loss P XXX

• Selling price – sum of money received and fair value of non-cash properties received
• Tax basis – cost, carrying amount or depreciated cost of an asset

Tax Treatment of Ordinary Gains and Losses

• Ordinary gain – taxable in full
• Ordinary loss – deductible in full

Tax Treatment of Capital Gains and Losses

• Net Capital gain – item of gross income subject to regular income tax
• Net Capital loss – NOT an item of deduction against gross income

Determination of net capital gain or net capital loss

A. INDIVIDUAL TAXPAYERS (HOLDING PERIOD RULE):
a. Not more than one year (short-term holding period) – 100% of the capital gain or loss is recognized
b. More than one year (long-term holding period) – 50% of the capital gain or loss is recognized
B. CORPORATE TAXPAYERS – 100% of capital gain or loss is recognized

Situs on Dealings in Properties

• If taxable on world income, rules of dealings in properties apply to all properties regardless of location
• If taxable only on Philippine income, the rules of dealings in properties will be applied only to properties located
in the Philippines

Net Capital Loss Carry Over

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 1

 • Allowed for INDIVIDUAL TAXPAYERS as a deduction against NET CAPITAL GAIN of the following year subject to
the following limits:
o Limit 1 – the amount of net income in the year the net capital loss was sustained, and
o Limit 2 – the available net capital gain in the following year
• Strictly for ONE YEAR ONLY and DOESN’T APPLY to CORPORATE TAXPAYERS.

Illustration 1: Sweet reported the following in 2018 and 2019:

2018 2019
Net income before dealings in properties P 70,000 P 300,000
Dealings in ordinary assets:
Ordinary gains P 40,000 P 30,000
Ordinary loss ( 80,000) ( 50,000)
Dealings in capital assets:
Capital gains P 20,000 P 80,000
Capital losses ( 60,000) ( 30,000)
Net capital gains or (loss) (P 40,000) P 50,000

Compute for net capital loss carry over, net capital gain for 2019 and net income for 2019.

Illustration 2: Bitter had the following net capital gains or losses.

2018 2019
Net income before dealings in capital assets P 80,000 P 150,000
Dealings in capital assets:
Capital gains P 20,000 P 80,000
Capital losses ( 60,000) ( 50,000)
Net capital gain (loss) (P 40,000) P 30,000

Compute for the net capital loss carry over and net income for 2019.

D. Interests – interest income other than passive interest income subject to final tax
a. Interest income from lending activities to individuals and corporation by banks, finance companies and other
lenders
b. Interest income from bonds and promissory notes
c. Interest income from bank deposits abroad

Exemption:
a. Interest income earned by the landowners in disposing their lands to their tenants in pursuant to the
Comprehensive Agrarian Reform Law.
b. Imputed interest income

Illustration 3: LMS Bank has the following income in 2018:

Interest income from loans P 3,000,000
Interest income from deposits with other banks 400,000
Interest income from notes rediscounting 100,000
Interest income from Treasury notes 50,000

How much is the interest income subject to regular income tax?

E. Rents – a passive income but is not subject to final tax

VALUATION
Rental Payments PXXX
Expenses of the lessor assumed by the lessee XXX
Income from leasehold improvements XXX
Total Rental Income PXXX

A. RENTAL PAYMENTS - Rental income shall be taxable on the year received, whether earned or unearned,
provided, there is no restriction as to its use, and regardless of method of accounting employed.

B. SECURITY DEPOSIT – shall be taxable:

1. Upon forfeiture in favor of the lessor; or
2. Upon application as rental payments.

C. LEASEHOLD IMPROVEMENTS - Improvements made by the lessee shall be treated as income of the lessor if:
1) The improvements will be owned by the lessor at the end of the lease;

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 2

 2) The lessor is not required to pay the lessee the value of such improvements.

Income from leasehold improvements is reported as follows:

METHOD VALUATION OF INCOME

1) Outright Fair Market Value of Improvements
2) Spread-out Book Value at the end of lease term/Remaining term of the lease

F. Royalties – active royalty income are royalties earned from sources outside the Philippines are subject to regular income
tax

G. Dividend Income

CASH & PROPERTY DIVIDENDS - Cash and property dividends shall be taxable upon declaration.

STOCK DIVIDENDS
GENERAL RULE: Distribution of stock dividend is not taxable because they are not realized income.
EXCEPTION: A stock dividend constitutes income if it gives the shareholder an interest different from that which his
former stockholdings represented.

LIQUIDATING DIVIDENDS - Liquidating dividends are exempt up to the extent on the cost of investment being a mere
return of capital. However, anything in excess of the cost shall be considered income and therefore taxable. If the
amount received by the stockholder in liquidation is less than the cost of investment, the loss in the transaction is
deductible to extent allowed for capital losses.

H. Annuities – excess of annuity payments received by the recipient over premium paid is taxable income in the year of
receipt
Illustration 4: Jerry purchased an annuity contract for P100,000 which shall pay him P10,000 annually until he
dies. How much of the receipts will be part as gross income subject to regular tax?

I. Prizes and winnings – prizes and winnings of corporation are subject to regular income tax

J. Pensions – these are those that fail to meet the exclusion criteria

K. Partner’s distributable share from the net income of the general professional partnership
• General professional partnerships are not subject to regular income tax.
• The partners are the ones subject to regular tax on their share in the net income of the general professional
partnership.
• The computation of the partner’s share in the net income from the partnership shall include the items of
income exempted from capital gains tax and final tax to the general professional partnership.

Illustration 5: B1 and B2 practice their profession in a general professional partnership and share profits 60:40.
Their firm reported the following:

Gross receipts P 2,000,000

Less: Professional expenses 1,200,000
Net income from operations P 800,000
Interest from bank deposits, net of final tax __ 20,000
Distributive net income P __820,000

L. Gross income from whatever sources derived

The law imposes a tax on income from whatever source which means that it includes income whether coming from legal
or illegal sources.
EXAMPLES:
1) Income from jueteng
2) Income from swindling activities
3) Unutilized/excess campaign funds

OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX

1. Income distributions from taxable estates or trusts
2. Share from the net income of other pass-through entities;
a. Exempt joint venture
b. Exempt co-ownership
3. Farming income
4. Recovery of past deduction
5. Reimbursement of expenses
6. Cancellation of indebtedness for a consideration

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 3

 A. INCOME DISTRIBUTION FROM A TAXABLE ESTATES OR TRUSTS – subject to regular income tax provided that such
income must not have been subjected to final tax or capital gains tax
B. SHARE FROM THE NET INCOME OF EXEMPT JOINT VENTURES AND CO-OWNERSHIP – same treatment as for the
recognition of share in the net income of a general professional partnership
C. FARMING INCOME
a. Raise and sell operation – proceeds on sales of livestock or farm products is included in gross income
subject to regular income tax. Animal raising expenses are presented as items of deductions against gross
income
b. Purchase and sell operation – Gross profit from the sale is included in gross income
D. RECOVERY OF PAST DEDUCTION
a. Recovery of Bad Debts - In order for recovery of bad debts be considered income, the following must be
complied:
1) Bad debts were written off in the previous year/s;
2) Such bad debts were deducted in arriving at taxable income;
3) There is a resulting tax benefit on the deduction.
b. Refund of Taxes - The following are the requirements before refund of taxes be considered income:
1) There is payment of tax in the previous year/s;
2) The tax paid was deducted in arriving at the taxable income;
3) There is a resulting tax benefit on the deduction.

Illustration 6: Assume that Aida had the following bad debt expense (accounts written off) and subsequent
recoveries of accounts written off:

2017 2018
Net income before bad debt expense P 100,000 P 100,000
(Bad debt expense)/Recoveries ( 60,000) 35,000
Net income after bad debt expense P 40,000

Required: How much of the P35,000 recovery in 2018 has tax benefit and thus be reverted
back to gross income?

Illustration 7: Supposing Lorna had the following data:

2017 2018
Net income before bad debt expense P 100,000 P 100,000
(Bad debt expense)/Recoveries ( 120,000) 100,000
Net income after bad debt expense (P 20,000)

Required: How much of the P100,000 recovery in 2018 has tax benefit?

Illustration 8: Supposing Fe had the following data:

2017 2018
Net income before bad debt expense P 70,000 P 100,000
(Bad debt expense)/Recoveries ( 120,000) 40,000
Net income after bad debt expense (P 50,000)

Required: How much of the P40,000 recovery in 2018 has tax benefit?

E. REIMBURSEMENT OF EXPENSES – constitutes additional income to the taxpayer

F. FORGIVENESS OF INDEBTEDNESS

TYPE TAX TREATMENT

Debtor performs services to the creditor Compensation Income
Creditor desires to benefit the debtor without any consideration Gift
Creditor is a corporation and the debtor is a stockholder of such corporation Dividend Income

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME

1. Accounting Method
Kinds: (1) Calendar Year; (2) Fiscal Year

INSTANCES WHEN USE OF CALENDAR YEAR IS REQUIRED

Taxable income shall be computed on the basis of calendar year in the following cases:
a. If the taxpayer’s annual accounting period is other than a fiscal year;
b. If the taxpayer has no annual accounting period;
c. If the taxpayer does not keep books of accounts;

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 4

 d. If the taxpayer is an individual

SHORT PERIOD RETURN

Accounting period may be less than twelve (12) months (Short Accounting Period) may arise when:
a. A corporation is newly organized
b. When a corporation is dissolved
c. When the taxpayer dies
d. When a corporation changes accounting period

ACCOUNTING METHODS: (1) Cash method; (2) Accrual method; (3) Crop basis; (4) Percentage of completion; (5)
Installment method

PERCENTAGE OF COMPLETION
• Percentage Of completion method is only allowed in case of “long-term contracts”.
• “Long-term contracts” means building, installation or construction contracts covering a period in excess of
one (1) year.

INSTALLMENT METHOD
The following sales may be reported on installment basis:
a. Sales of Dealers in Personal Property – These include sales by persons who regularly sell or otherwise
dispose of personal property on the installment plan.
b. Casual Sales of Personal Property – These include casual sales or other casual disposition of personal
property (other than property of a kind which are ordinarily included in the inventory of the taxpayer),
provided:
a. The selling price exceeds P1,000; and
b. The initial payments do not exceed 25% of selling price.
c. Sales of Real Property – These include sales of real property on the installment plan, provided: The
initial payments do not exceed 25% of the selling price.
d. Sales of Real Property Considered as Capital Assets by Individuals – An individual taxpayer who sell
real property considered as capital assets and the initial payments do not exceed 25% of the selling
price may pay the capital gains tax in installments.

FORMATS OF COMPUTATION
a. Selling Price (SP)
Cash received P XXX
FMV of the property received XXX
Receivables XXX
Unpaid mortgage assumed by the buyer XXX
Selling price P XXX

b. Contract Price (CP)

Selling price P XXX
Less: Mortgage assumed by the buyer XXX
Balance P XXX
Add: Excess unpaid mortgage over cost XXX
Contract Price P XXX

c. Initial Payments (IP)

Downpayment P XXX
Expected installment collections in the year of sale XXX
Excess of unpaid mortgage over cost XXX
Initial Payments P XXX

d. Realized Gross Profit (RGP) – if sale is subject to basic tax

RGP = Collections x Gross Profit Rate
Gross Profit Rate = Gross Profit/Contract Price

e. Installment Capital Gains Tax

Installment CGT = Total CGT x Collection/CP

2. Situs rules
A. Interest income – debtor’s residence
B. Royalties – where the intangible is employed
C. Rent income – location of the property
D. Service income – place where the service is rendered

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 5

 3. Effects of Value Added Tax on Reportable Gross Income
Illustration 9: A VAT-registered taxpayer charged P 112,000 to a client for rental less withholding tax. Compute
the rental income subject to income tax.

Illustration 10: A non-VAT taxpayer charged P 112,000 to a client for rental. Compute the rental income subject to
income tax.

4. Creditable withholding tax – not exclusions. Therefore, should be added back to the reportable amount of gross
income. These are tax credits that are deductible against the annual income tax due of the taxpayer.
Illustration 11: DomCor Inc., a domestic corporation, reported the following:

Rent income, net of 5% CWT P 475,000

Professional fees, net of 10% CWT 360,000
Interest income, net of 20% final tax 40,000
Dividends from a domestic corporation 10,000
Business expenses 500,000

Required: Determine the total reportable gross income and the income tax due and
payable under the regular income tax.

5. Power of the CIR to redistribute income and deductions (Sec 50, NIRC)
In case of two or more organizations, trades or businesses owned or controlled directly or indirectly by the same
interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or
among such organization, trade or business, if he determined that such distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or
business.

EXCLUSIONS FROM GROSS INCOME

The following items shall not be included in gross income and shall be exempt from income tax:

1) Proceeds of life insurance policy

2) Amount Received by Insured as Return of Premium
3) Gifts, Bequests, and Devises
4) Compensation for Injuries or Sickness
5) Income Exempt under Treaty
6) Retirement Benefits, Pensions, Gratuities, etc.
7) Miscellaneous Items
a) Income Derived by Foreign Government
b) Income Derived by the Government or its Political Subdivisions
c) Prizes and Awards
d) Prizes and Awards in Sports Competition
e) 13th Month Pay and Other Benefits
f) GSIS, SSS, Medicare and Other Contributions
g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
h) Gains from Redemption of Shares in Mutual Fund

A. LIFE INSURANCE

GENERAL RULE: Exempt from tax since it is a mere reimbursement for the loss of life.
EXCEPTION: The following shall be taxable:
1. The beneficiary was chosen for a valuable consideration.
2. The interest earned on the insurance policy.

B. RETURN OF PREMIUM - The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity of the mentioned in the
contract or upon surrender of the contract.

Return of Premium Exempt

In Excess Income

Illustration 12: Alberto is insured in a P1,000,000 life insurance policy with annual premium payments of P20,000
up to 10 years. If Alberto outlives the policy after the 10 th year, he will be paid a P500,000 maturity
value.

Scenario 1: Alberto died on the 8th year of coverage and his heirs collected the P1,000,000 proceeds.
Scenario 2: Upon the death of Alberto, the insurance company negotiated for an extension of the payment of
the proceeds wherein the insurance company shall pay P1,050,000 on the extended payment.

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 6

 Scenario 3: Alberto outlived the policy and collected the maturity value of P500,000.
Scenario 4: After 6 years of payment, Alberto assigned the policy to Glino who paid him P130,000 then Glino
continued the premium payments for 2 more years after which Alberto died. Glino collected the
P1,000,000 insurance proceeds.

Property insurance contracts – in excess of tax basis of the property lost or destroyed is TAXABLE

C. GIFTS, BEQUESTS & DEVISES - The value of property acquired by gift, bequest, devise, or descent: Provided,
however, that income from such property, as well as gift, bequest, devise, or descent of income from any property,
in cases of transfers of divided interest, shall be included in gross income.

Property inherited or received as gift Exempt

Income of above properties Taxable

D. COMPENSATION FOR INJURIES OR SICKNESS - Amounts received, through accident or health insurance or under
Workmen’s Compensation Acts, and compensation for personal injuries or sickness, plus the amounts of any
damages received, whether by such or agreement on account of such injuries of sickness.

Illustration 13: Andrew was hit by a jeepney. He spent 3 months in the hospital and paid P100,000 for
hospitalization expenses. He sued the jeepney driver and was awarded by the court a total
indemnity of P340,000 divided as follows: P200,000 indemnity for his pain, anguish and sufferings,
P40,000 for his lost salaries and P100,000 as reimbursement for his hospital bills.

E. INCOME EXEMPT UNDER TREATY - Income of any kind, to the extent required by treaty obligation binding upon the
Government of the Philippines.

F. RETIREMENT BENEFITS, PENSIONS, GRATUITIES ETC

1) Retirement benefit received under Republic Act No, 7641 and those received by officials and employees of
private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained
by the employer: Provided
a) That the retiring official or employee has been in the service of the same employer for at least ten (10)
years;
b) At least fifty (50) years of age at the time of his retirement; and
c) That the benefits granted shall be availed of by an official or employee only once.

Illustration 14: Roda was employed in 1990 when she was 25 years old. In 2010, she availed of the early
retirement program of her employer.

Illustration 15: Assume that Roda joined another employer and worked therein for 7 more years after
which she retired from her employment.

Illustration 16: Assume instead that Roma was 30 years old when she joined her first employer and
worked therein for 20 years after which she retired at 50. She immediately joined another
employer and retired after 10 years of service when she was 60 years old.

2) Separation or Termination
a) Must be due to job-threatening sickness, death or other physical disability
b) Due to any cause beyond the control of the employee or official such as redundancy, retrenchment,
closure of employer’s business, employee lay-off, downsizing of employer’s business, sickness or death
of employee

Illustration 17: Goldilocks is an employee of Goldfish Company which closed its business during the year.
Goldilock’s last paycheck shows the following detail:

Unpaid salary in the last 2 months P 30,000

Current month salary 15,000
Separation pay 100,000
Total pay P 145,000

Illustration 18: Lai’s employer was downsizing its business operations. Lai was identified among others to
be laid off. To avoid implications of inefficiencies on her part, Lai filed a resignation letter
to the company and received a separation pay of P120,000.

3) Social security benefits, retirement gratuities pensions and other similar benefits received by resident or
nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign
government agencies and other institutions, private or public.
4) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the
United States administrated by the UNITED STATES VETERANS ADMINISTRATION.

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 7

 5) Benefits received from or enjoyed under the Social Security System in accordance with the provision of Republic
Act. No. 8282.
6) Benefits received from the GSIS under Republic Act Np. 8291, including retirement gratuities received by
government officials and employees.

G. MISCELLANEOUS ITEMS
1) Income derived from investments in the Philippines, in loans, stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by:
a) Foreign Governments
b) Financing institutions owned, controlled, or enjoying refinancing from foreign government; and
c) International or regional financing institutions established by foreign governments.
2) Income derived from any public utility or from the exercise of any essential government function accruing the
Government of the Philippines or to any political subdivision thereof.
3) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary,
or civic achievement but only if:
a. The recipient was selected without any action on his part to enter the contest or proceeding;
b. The recipient is not required to render substantial future services as a condition to receiving the prize or
award.
4) All prizes and awards granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned by their national sports associations.
5) Gross benefits from 13th month pay and other benefits received by officials and employees of public and private
entities up to the extent of P90,000.
6) GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.
7) Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity of more than five (5) years.
8) Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in
Section 22(BB) of this Code.

EXCLUSIONS vs. DEDUCTIONS

Exclusions – not included in the amount of reportable gross income in the income tax return
Deductions – initially included in the amount of gross income but is separately presented as deduction against gross
income in the income tax return

SOURCE OF INCOME
Classification of income as to source
1. Income from sources within the Philippines
2. Income from sources partly within or partly without the Philippines
3. Income from sources without the Philippines

INCOME FROM SOURCES WITHIN THE PHILIPPINES

1. Interests derived from sources within the Philippines, and interest on bonds, notes or other interest-bearing
obligations of residents, corporate or otherwise;
2. Dividends from:
a. Domestic Corporation
b. Foreign Corporation, IF at least 50% of gross income for the three year period ending with the close of its
taxable year preceding the declaration of such dividends (or for such part of such period as the corporation
has been in existence) was derived from sources within the Philippines
Dividend Income XXX
Multiply by: (GI, Ph/GI, World) X%
Dividend Income, Ph PXXX
c. Compensation for labor or personal services performed in the Philippines;
d. Rentals and royalties from property located in the Philippines or from any interest in such property;
e. Gains, profits and income from the sale of real property located in the Philippines;
f. Gains, profits and income from sale of personal property:
i. If purchased, only if sold in the Philippines;
ii. If manufactured, only if manufactured and sold within the Philippines

INCOME FROM SOURCES PARTLY WITHIN OR PARTLY WITHOUT

1. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within
and sold without the Philippines; or
2. Produced (in whole or in part) by the taxpayer without and sold within the Philippines.

References:
*Banggawan, Rex (2019). Income Taxation: Laws, Principles and Application. Real Excellence Publishing

*Tabag, Enrico (2019). Income Taxation with Special Topics in Taxation. EDT Book Shop. Manila

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 8

 MULTIPLE CHOICE EXERCISES

1. Mr. Santiago purchased a life annuity for P100,000 which will pay him P10,000 a year. The life expectancy of Mr.
Santiago is 12 years. Which of the following will Mr. Santiago be able to exclude from his gross income?
a. P100,000 c. P20,000
b. P10,000 d. P120,000

2. The following data on net income, bad debt, write-off and recovery show:
2018: Case A Case B Case C
Net income (loss) before write-off P120,000 P60,000 (P40,000)
Less: Bad debt written-off claimed as deduction 40,000 40,000 50,000
Net income (loss) after write-off 80,000 20,000 (90,000)

2019: Subsequent recovery P40,000 P10,000 P50,000

The taxable recovery is:

Case A Case B Case C

a. P40,000 P20,000 P50,000
b. P40,000 P20,000 P0
c. P40,000 P10,000 P0
d. P40,000 P0 P0

3. On July 1, 2014, Mr. V leased his vacant lot for a period of 12 years to Mr. J at an annual rate of P2,400,000. It was
also agreed that Mr. J will pay the following:
• P4,800,000 representing rental payment for year 2014 and 2015
• Security deposit of 2,400,000
• Annual real property tax of P30,000

The lease contract provides among others that the lessee will construct a 5-storey building for parking purposes at a
cost of P36,000,000. Ownership of the building shall belong to the lessor upon the expiration or termination of the
lease contract.

The building was completed on July 1, 2016 with an estimated useful life of 15 years. Mr. V shall report total income
from the lease for 2014 at

a. P2,430,000 c. P4,830,000
b. P2,400,000 d. P2,640,000

4. Assuming Mr. V will use outright method in recognizing income from leasehold improvements, how much is the total
income from lease for year 2016?
a. P3,030,000 c. P38,430,000
b. P3,630,000 d. P2,400,000

5. Assuming Mr. V will use spread-out method in recognizing income from leasehold improvements, how much is the
total income from lease for year 2016?
a. P3,030,000 c. P14,430,000
b. P3,630,000 d. P2,400,000

6. Assuming that due to the fault of the lessee, the lease contract was terminated on January 1, 2018, how much
income is to be reported by the lessor in 2018?
a. P32,400,000 c. P34,830,000
b. P30,600,000 d. P33,030,000

7. Pedro, single received the following during the taxable year:

Proceeds of his life insurance paid at an annual P2,000,000
premium of P15,000 within 25 years
Proceeds of his mother’s life insurance paid at 1,000,000
an annual premium of P10,000 within 20 years
House and lot inherited from his mother 4,000,000
Rent income from inherited properties 200,000

For income tax purposes, how much of the above items must be included in his gross income?
a. P7,200,000 c. P200,000
b. P1,200,000 d. P1,825,000

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 9

 8. Mr. Basilio insured his life with his estate as beneficiary. In 2010, after Mr. Basilio had paid P65,000 in premium, he
assigned the policy to Mr. Jose Llamado for P60,000, and Mr. Llamado continued paying the premiums. Mr. Basilio
died and Mr. Llamado collected the total proceeds of P200,000. Mr. Llamado after the assignment and Mr. Basilio’s
death, paid total premiums of P80,000. As a result of the above transaction, Mr. Llamado:
a. May consider the proceeds of P200,000 as exempt from tax
b. Derived a taxable income of P55,000
c. Derived a taxable income of P60,000
d. Answer not given

9. Marcel was hit by a car driven by Devshon causing severe injuries to the former. It was found out during trial that
the driver was drunk at the time of the incident.

After trial, the court awarded the following:

• P1,500,000 actual damages for hospitalization

• P300,000 exemplary damages
• P500,000 for loss of income; and
• P100,000 moral damages

Marcel also received a cash gift of P100,000 from Devshon. The taxable income received by Marcel is:

a. P2,400,000 c. P1,500,000
b. P1,900,000 d. P500,000

10. Assume the following:

Gain on sale of personal property purchased P400,000
in the Philippines and sold in Hongkong
Compensation received for personal services 200,000
in the Philippines
Rent income from real property in Malaysia 300,000
Gain from sale in the Philippines of shares of 100,000
a foreign corporation
Deductions identified with:
Philippine Income 80,000
Foreign Income 120,000
Deductions unidentified with any particular 30,000
Income

The Philippine net income is

a. P220,000 c. P190,000
b. P211,000 d. P111,000

11. A cash dividend of P100,000 received by a taxpayer in 2010 from a foreign corporation whose income from
Philippine sources is 40% of its total income is
Statement 1: Partly taxable if he is a resident citizen
Statement 2: Partly taxable if he is a non-resident alien
a. Statements 1 & 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true

Use the following data for the next two (2) questions:

A resident alien had the following data in 2018:

Gross income, Philippines P2,000,000

Business expenses 1,200,000
Dividends received:
From domestic corporation (net)
60% of its income came from 90,000
the Philippines
40% of its income came from 72,000
the Philippines

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 10

 From resident foreign corporation (gross)
60% of its income came from 50,000
the Philippines

40% of its income came from 40,000

the Philippines

12. The taxpayer’s taxable income is

a. P750,000 c. P796,000
b. P780,000 d. P830,000
13. The final withholding taxes on dividends amount to
a. P16,200 c. P 25,200
b. P18,000 d. P26,000

Use the following data for the next two (2) questions:

F5 Corporation, a domestic corporation had the following data during the calendar year 2018
Gross Income, Philippines P10,000,000
Allowable itemized deductions/expenses 4,000,000
Dividend Income FROM:
a) Domestic corporation 1,000,000
b) Foreign corporation, 80% of its 1,000,000
gross income were derived from
the Philippines
c) Foreign corporation, 60% of its 800,000
gross income were derived from
the Philippines
d) Foreign corporation, 25% of its 400,000
gross income were derived from
the Philippines

14. The taxable income is

a. P9,200,000 c. P8,200,000
b. P7,500,000 d. P7,430,000

15. Assume that F5 Corporation is a resident foreign corporation, how much is the taxable income?
a. P9,200,000 c. P8,200,000
b. P7,500,000 d. P7,280,000

16. An operator of an illegal horse betting business, single, has the following data:
Receipt from illegal bets P600,000
Rent of space where bets are received, 120,000
gross of 5% withholding tax
Salaries of assistants, gross of creditable 100,000
withholding tax
Bribe money to obtain protection from 50,000
arrest and prosecution
How much is the taxable income?
a. P380,000 c. P180,000
b. P330,000 d. P150,000

17. The policy holder of a life insurance contract outlived his insurance policy. He was paid P300,000 upon maturity of
the policy. He paid P250,000 total premium. What is the inclusion in gross income?
a. P300,000 c. P50,000
b. P250,000 d. P0

18. Mrs. Candoni retired from the government after 30 years of service at the age of 55. He received a total retirement
pay of P1,800,000 plus P400,000 GSIS benefits. How much will be excluded in gross income?
a. P0 c. P1,800,000
b. P400,000 d. P2,200,000

19. Mr. Dimataling was one of the passengers who were hurt in a bus accident. He received a total indemnity of
P800,000 from the insurer of the bus. Mr. Dimataling paid P250,000 in hospital bills due to the accident. Compute
the total amount to be excluded in gross income.

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 11

 a. P0 c. P550,000
b. P250,000 d. P800,000

20. Andres leases a building to a client. During the year, he received the following remittance from the lessee:

Rental, net of 5% creditable withholding tax P 1,900,000

Real property tax of the leased building 50,000
Reimbursement for utilities used by the lessee
Paid by Andres 200,000

How much will be included in gross income subject to regular tax?

a. P2,250,000 c. P2,000,000
b. P2,050,000 d. P1,950,000

21. Mr. Lolong, a supervisory employee, received the following income in 2018:

Gross compensation income, before contributions of SSS, PhilHealth

And HDMF totaling P124,000 P 800,000
Fringe benefits 200,000
Gain from redemption of shares in a mutual fund 100,000
Commission income 150,000
Gain on sale of stocks through the PSE 400,000

Determine the total income to be reported by Mr. Lolong in gross income.

a. P1,526,000 c. P1,026,000
b. P1,426,000 d. P826,000

22. Corazon resigned in 2018 after 12 years of service. She had the following income during the year:
Salary, net of P80,000 withholding tax, P20,000 SSS, P18,000 Philhealth
And P40,000 13th month pay P 480,000
Separation pay 1,000,000

Compute the gross income subject to progressive (regular) tax?

a. P1,560,000 c. P560,000
b. P1,480,000 d. P480,000

23. Mr. Cordillera owns 20% interest in a joint venture engaged in construction projects. In 2020, the joint venture
reported profits of P500,000, inclusive of P20,000 from time deposits.

Compute the total income to be reported in gross income of Mr. Cordillera?

a. P0 c. P96,000
b. P4,000 d. P100,000

Session 8: Gross Income: Inclusions and Exclusions November 6, 2020 Page 12

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