INCOME TAX MIDTERM

Regular income taxation In general, every form of compensation

(Inclusion in Gross Income) income is taxable regardless of how it is
earned, by whom it is paid, or the form in
Taxable income which it is received.
Gross income (Inclusion)
Less: allowable deduction EXCEPTIONS:
Taxable income 1. The fringe benefits of managerial or
supervisory employees are not
Items of Gross Income considered compensation income but
• Gross income subject to Final Tax are subject to final tax.
o 0619-F 2. The compensation of Minimum Wage
• Gross income subject to Capital Gains Earners (MWE) is exempt from tax.
Tax (CGT)
o 1706 Example:
• Gross income subject to Regular Tax
Retirement pay, separation pay, 13th month
o 1701 pay, de minimis benefits
Items of Gross Income 2. Gross Income from Business or
1. Compensation Profession
2. Gross income from the conduct of
trade, business, or exercise of a This includes income from any trade or
profession business, legal or illegal, and whether
3. Gains derived from dealings in registered or unregistered.
property.
4. Interest Gross Income from business or profession
5. Rents is determined as follows:
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions In case of manufacturing, merchandising,
11. Partner's distributive share from the or mining business, gross income shall
net income of General Professional mean gross sales less sales returns and
Partnership allowances and discounts, and cost of
goods sold plus any income from
1. Gross Compensation investment and other incidental or outside
operation or sources.
Gross Compensation income means any
remuneration for rendering personal Extensively, the formula for computing the
gross income is:
services. Generally, compensation income
is obtained from an employer-employee
relationship between payor and recipient.

(salary, honoraria, fixed allowances,

commissions, tips and gratuities, hazard
pay, retirement pay, separation pay)

1
 INCOME TAX MIDTERM
Illustration:
Robredo’s Store has just gone through its
initial operation and provided the following
data to determine the gross income for the
current year.
The gross income of Robredo’s Store would
be:
The following business income shall not be
included in gross income subject to regular
income tax:
1. Business income exempt from income
tax.
• Gross income from BMBE
• Gross income from enterprises
enjoying tax holiday incentives.
2. Business income subject to special tax
• PEZA registered entity subject to 5%
gross income tax (GIT)
• Tourism Infrastructure and
Enterprise Zone Authority
(TIEZA)-registered entity subject to
5% GIT
• Income of self-employed who opted
to be taxed under the 8% income tax.
3. Business income subject to final tax
• Subcontractors of petroleum service
contractors subject to 8% final tax.
• Business income of foreign
currency deposit units (FCDU) and
expanded FCDU (eFCDU) from
Philippine residents subject to 10%
final tax.
3. Gains derived from dealings in
property.
This refers to the income derived from sale,
and/or exchange of assets, which results in
gain because of the excess of the amount or
value received by the taxpayer over the
determined value of the property he has
disposed of.
RULE:
1. Gains and losses in dealing ordinary
assets are subject to regular income tax.
2. Dealings in capital assets other than
domestic stocks and real properties
are subject to regular income tax.
3. Ordinary gains are included as items of
gross income.
4. Ordinary losses are items of deductions
against gross income.
5. Net capital gain from other capital
assets after deducting capital losses is
included as items of gross income.
6. A net capital loss is not an item of
deduction against gross income.
4. Interest Income
Interest income is an earning derived from
depositing or lending of money, goods, or
credits. Unless exempted by law, interest
income received by the taxpayer, whether
or not usurious, is subject to income tax.
Tax exempt:
Interest earnings received from:
1. Cooperatives
2. BSP prescribed from investments
(more than 5 years)
2
 INCOME TAX MIDTERM
3. Expanded FCDU earned by
nonresident.
4. Earned by landowners in disposing
of their lands to their tenants
pursuant to CARL.
Subject to FWT:
Interest earnings received from:
1. Financial companies
2. Not BSPP prescribed from
investments.
3. Expanded FCDU earned by
residents.
Subject to normal tax:
Interest earnings received from:
1. Principal business activity
2. Not BSP prescribed form
investments. Incidental interest
earnings not subject to FWT.
3. Interest income from bank deposits
abroad.
4. Interest income from corporate
bonds and promissory notes.
5. Rents
Refers to earnings derived from leasing real
estate as well as personal property.
Rental income is generally determined by
the gross receipts for the year, (earned or
unearned under accrual basis) because the
nature of business involved is service.
Special considerations on rent
1. Obligations of the lessor that are
assumed by the lessee are additional
rental income to the lessor.
2. Advance rentals are:
• Item of gross income upon receipt if:
− Unrestricted
− restricted to be applied in
future years or upon the
termination of the lease.
• Not an item of gross income if:
− It constitutes a loan.
− It is a security deposit to
guarantee payment or rent
subject to contingency
which may or may not
happen.
3. Leasehold improvements made by the
lessee on the leased property are
recognized by the lessor as income
using the spread-out method or outright
method.
6. Royalties
A payment or portion of proceeds paid to
the owner of a right, such as an oil right or
a patent for the use of it, or a portion of the
proceeds from the work of an author or
composer.
1. Under the regulation, the 10%
preferential royalty final tax on books a
literary works pertains to printed
literature.
Royalties on books sold on e-copies or CDs
such as eBooks are subject to 20% final tax.
2. Royalties on cinematographic films an
similar works paid to NRA-ETBs, NRA-
NETBs, NRFCs are subject to final tax
of 25%
Royalties earned from sources within the
Philippines are generally subject to final
income tax except when they are active in
nature.
Note further that active royalty income and
royalties earned outside the Philippines
are subject to regular income tax.
3
 INCOME TAX MIDTERM
7. Dividends
These pertain to dividends declared by
foreign corporations. Cash, property, and
script dividends from foreign corporations
are generally items of gross income subject
to regular income tax.
Tax exempt:
Dividends are tax-exempt if:
1. Received from a DOMESTIC
CORPORATION by:
a. Another domestic corp.
b. Resident Foreign corp.
2. Received from a Cooperative
3. Pure stock dividend / Pure
liquidating dividend (return of
capital)
Subject to FWT:
Dividends are tax-exempt if:
1. Citizen or Resident alien
- 10% final tax
2. NRA – ETB
- 20% final tax
3. NRA – NETB
- 25% final tax
4. NRFC
- 15% final tax
Subject to normal tax:
Dividends are s.t. regular/normal tax of
individuals/ corporations is such dividends
are:
1. Not included as tax-exempt
dividends
2. Not subject to final tax
3. Distributive shares of partner in
GPP
8. Annuities
The excess of annuity payments received
by the recipient over premium paid is
taxable income in the year of receipt.
Illustration:
Marcos purchased an annuity contract for
P100,000 which shall pay him P10,000
annually until he dies.
The receipt of the first 10 annual annuity
payments is a return of capital. Any further
receipt from year 11 onwards is an item of
gross income subject to regular income tax.
9. Prizes and Winning
Prize – Reward for a contest or competition.
Winning – Reward for an event that
depends on chance such as winnings from
gambling, lottery etc.
Note: The above applies to individual
taxpayers:
Taxable prizes and winnings of
corporations are subject to regular income
tax.
10. Pensions
Stated allowance paid regularly to a person
on his retirement or to his dependents on his
death, in consideration of past services,
meritorious work, age, loss, or injury.
Pension pay is taxable unless the law states
otherwise, or unless the BIR approves the
pension plan of a private company.
11. Partner's distributable share from
the net income of the GPP
The GPPs are not subject to income tax (i.e.,
final tax, capital gains tax, or regular
income tax) because they are merely
viewed as pass-through entities. The
partners are the ones subject to regular tax
on their share in the net income of the GPP.
4
 INCOME TAX MIDTERM

INDIVIDUAL INCOME TAXATION 6. Fees, including director’s fee (if

1. Compensation Income
For individuals earning purely
compensation income, the only allowable
deductions are the mandatory government
contributions (SSS, PAGIBIG and
PHILHEALTH), and union dues.
A taxable income of not exceeding
P250,000 is subject to 0% tax.
director is an employee)
7. Emoluments and honoraria
8. Taxable retirement and separation pay
9. Value of living quarters or meals
10. Gains on exercise of stocks options
11. Profit sharing and taxable bonuses
12. 13th month pay and other benefits
Tax model on compensation income

Employer-employee relationship
1. Selection and engagement of Illustration 1:
employees
2. Payment of Wages Ms. Pina Palad reported the following
3. Power of dismissal income for the taxable year:
4. Power of control

Types of Employees as to Function

1. Managerial
2. Supervisory
3. Rank and file employees

Types of Employees as to Taxability

• Minimum wage earners -
recipients of minimum wage
(EXEMPT)
• Regular employees - subject to
regular tax (progressive)
ANSWER:
Ms. Palad retired at the age of 45 as of Dec.
31, 2021, receiving a retirement pay of
P1,000,00. What is the gross compensation
income of Miss Palad for 2021?

The regular compensation income includes

fixed renumeration due to be received by
an employee every period such as:

1. Basic salary
2. Fixed allowances such as COLA, fixed
housing allowances, transportation, and
other allowances paid to an employee 2. Business / Professional Income
every payroll period.
In case of manufacturing, merchandising,
Other additional compensation under or mining business, gross income shall
tax rules: mean gross sales less sales returns,
1. Overtime pay discounts and allowances, and cost of
2. Hazard pay goods sold plus any income from
3. Night shift differential pay investment and other incidental or outside
4. Holiday pay operations or sources.
5. Commission

5
 INCOME TAX MIDTERM

exceed P3,000,000 and only beginning the

After computing the gross income, the 2018 taxable year.
individual taxpayer may claim itemized
deductions (ID) or the optional standard
deduction (OSD).

Itemized Deductions (ID) - expenses

incurred in conducting business or practice
of profession are allowed as deductions
provided they meet all the requirements.

Optional Standard Deduction (OSD)- In

lieu of allowable ID, the OSD may be
deducted from the gross income.
Optional Standard Deduction
1.Individual taxpayers - 40% of total
sales/revenues/receipts/fees
2.Corporate taxpayers - 40% of gross
income
Illustration:
Ms. X operates a convenience store while
she offers bookkeeping services to her
clients. In 2021, her gross sales amounted
to P800,000. In addition to her receipts
from bookkeeping services of 300,000 and
incurred costs and expenses of P300,000
and P100,000, respectively.

How much is her tax due using the 8% tax

rate?

If taxpayer opts to use the OSD in lieu of

the itemized deduction allowed, his/ its net
taxable income shall be as follows:

1. Ms. X's gross sales/receipts from

8% Income Tax Option
The TRAIN Law introduced a new tax
scheme for individual taxpayers - the 8%
optional income tax.
The income tax rate applies ONLY to
income from business or practice of
profession where the gross sales or receipts,
including the non-operating income, do not
business and practice of profession did
not exceed P3,000,000. Thus she can
avail of the 85 income tax rate
2. The tax base is the gross sales/receipts.
Thus, the cos of sales, expenses or even
the OSD is not allowed as deduction.
3. Since she is earning purely from such
business and practice of profession, he
first P250,000 is considered non-
taxable

6
 INCOME TAX MIDTERM

Mixed Income Earners

1. Compensation income - is ALWAYS

subject to the graduated tax rate.
2. Business/professional income

i. If the taxpayer's gross sales/receipts,

together with other non-operating
income, do not exceed P3,000,00;
either:
a. 8% income tax rate without the first
P250,000 exempt (since this will be
considered in the application of the
graduated rates for income from
compensation) ANSWER:
b. Graduated rates (taxable income will
be added to the compensation
income).

ii. If the taxpayer's gross

sales/receipts, together with
other non-operating income,
exceeds P3,000,000 - use
graduated rates.
Graduated income tax rate for
individuals
Referred to as basic income tax /
schedular income tax / regular income tax
for individuals.
Illustration:
Ms. X operates a convenience store while
she offers bookkeeping services to her
clients. In 2021, her gross sales amounted
to P800,000 in addition to her receipts
from bookkeeping services of 300,000 and
incurred costs and expenses of P300,000
and P100,000, respectively.
1. Ms. X's gross sales/receipts from
business and practice of profession did
not exceed P3,000,000. Thus she can
avail of the 8% income tax rate
applicable only to such income.
2. The tax base is the gross sales
/receipts. Thus, costs, expenses or even
the OSD is not allowed as a deduction.
3. Income from compensation is always
subject to the graduated tax rates.
4. Since she is a mixed-income earner,
there is no first P250,000 considered
non-taxable as to her business
/professional income since this amount
has already been considered in the
computation from Compensation
income.

Ms. X likewise earned P1,000,000 from

employment with XYZ Company for
which P180,000 was tax withheld and
remitted to the BIR. How much is her
income tax due and payable?

7
 INCOME TAX MIDTERM

GRADUATED INCOME TAX RATE Example:

FOR INDIVIDUALS
A earned P100 interest from his deposits
with X Bank, X bank withheld P20 final tax
due on the interest.

In this transaction:
1. the P100 interest is the passive
income of A
2. X bank will remit the P20 final tax
on interest to the BIR
3. A will receive the interest net of the
tax, P80.
4. The P100 interest will no longer be
included in A's taxable income
subject to income tax.

Special Alien & Filipino Counterparts

• Subject to graduated tax rates

NRA-NETB

Except for sale of capital assets (shares of

stock and real property) the entire income
received from all sources within the PH by
NRANE within the PH such as interest,
cash and/or property dividends, rents,
salaries, wages, premium, annuities,
compensation, remuneration, emoluments,
and other income - the applicable tax rate is
25% (Final tax)

3. Passive Income

Subject to final withholding tax. Not

included in the Gross Income of the
Taxpayer for purposes of computing his
taxable income subject to the
graduated/scheduler/basic income tax rate
or the 8%.

The final withholding tax is the amount of

tax which constitutes the full and final
payment of the income tax due from the
payee of the said income.

8
 INCOME TAX MIDTERM
PASSICE INCOME (EARNED
WITHIN)
Passive income earned from outside the
Philippines:
If a resident citizen earns any of the passive
income items from abroad, it will not be
subject to final withholding tax but to
Regular Income Tax and will thus form part
of his taxable income subject to tax table.
EXEMPT PRIZES
1. Prizes and awards made primarily
in recognition of religious,
charitable, scientific, educational,
artistic, literary or civic
achievement. Provided:
• The individual was selected without
any action on his part to enter the
contest or proceeding; and
• He/she is not required to render
substantial future services as a
condition to receive the prize/award
2. All prizes and awards granted to
athletes on local and international
sports competition and tournaments,
whether held in the Philippines or
abroad and sanctioned by their
respective national sports
association.
Informer's reward
Reward given to persons instrumental to the
discovery of violations of the Tax Code and
in the discovery and seizure of smuggled
goods is entitled to 10% of the revenues,
surcharges or fees recovered and/or fine or
penalty imposed and collected or
P1,000,000 per case, whichever is lower.
The informer's reward shall be subject to 10%
FWT.
9
 INCOME TAX MIDTERM
4, Gains from Disposition of Assets
Ordinary Asset vs. Capital Asset
Ordinary assets mean:
1. Stock in trade of the taxpayer or other
property of a kind which would
properly be included in the inventory
of the taxpayer.
2. Property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or
business.
3. Property used in the trade or business,
of a character which is subject to the
allowance for depreciation.
4. Real property used in trade or
business of the taxpayer.
Capital assets are those NOT falling
within the definition of an ordinary asset.
Determination of Gain/Loss
Gain shall be the excess of the amount
realized from the disposition of property
over the basis or adjusted basis for
determining the gain.
On the other hand, the loss is the excess of
the basis or adjusted basis for determining
loss over the amount realized.
Treatment of Capital Gains
Depending on the nature of the property, the
gains derived from sale or disposition of
capital assets may be subject to:
1. Capital gains tax; or
2. Ordinary income tax
Remember:
Capital Gains Tax is applicable only to:
1. Sale of shares of stock of a
domestic corporation not listed or
traded through a local stock
exchange held as capital assets; and
2. Sale of real property located in the
Philippines held as a capital asset.
All other capital gains are subjected to regular
income tax.
Sale of shares of stock of a domestic
corporation not listed and traded through a
local stock exchange:
CGT rate: 15%
Tax base: is the net capital gain, which is the
excess of the selling price/fair market value
less cost to sell) over the cost of shares.
The fair market value of shares of stock not
listed or traded in local stock exchange are:
1. Common shares - book value based on
the latest available statements.
2. Preferred shares - liquidation value,
which is equal to the redemption price of
the preferred shares as of balance sheet
date, including any premium and
cumulative preferred dividends in arrears.
Illustration:
Assume that Mr. A soldP10,000 shares in X
Corporation on June 30, 2021. The
corporation's accounting period is on a
calendar year bases.
In this case, the book calue as the fair market
value of the shares of stock in X Corporation
shall be determined based on its audited FS for
year ending December 31, 2020, since the
audited S for taxable year 2021 is not yet
existent as of the date of sale of shares.
Assume further that based on the AFS as of
December 31, 2020, the total assets of X
corporation are P50,000,000 while its
liabilities are P20,000,000 resulting to an
equity of P30,000,000. Its outstanding shares
are 200,000/ For thi spurposes, the net book
value as the FMV of each share shall be
computed as:
30m equity/200k outstanding shares = P150
(per share)
10
 INCOME TAX MIDTERM

Sale of real property located in the

Philippines held as a capital asset: Illustration 1:

A 6% CGT is imposed on the presumed gain
from sale of real property, based on the gross
selling price or the FMV, whichever is higher.
FMV shall be the higher between:
1. Zonal Value as determined by the
BIR.
2. FMV per local assessor
Mr. F sold his principal residence which he
acquired for P1,000,000 for P3,000,000. At
the time of sale, the FMV is P2,500,000.
After 1 year, Mr. F bought a house and lot
for P3,200,000
Assuming all other requisites are present,
how much is the CGT due on the sale?

Note: ANSWER:

For individuals, real property subject to P0 – The proceeds of P3,000,000 was fully
CGT consists of ALL real properties utilized to acquire a new principal
(classified as capital assets); residence.

For domestic corporations, the only real Illustration 2:

property subject to CGT is lands and/or
buildings. Mr. F sold his principal residence which he
acquired for P1,000,000 for P3,000,000. At
Sale of REAL PROPERTY located in the
the time of sale, the FMV is P2,500,000.
Philippines held as a capital asset. After 1 year, Mr. F bought a house and lot
• sale of principal residence for P2,000,000
Sale of principal residence of natural How much is the CGT?
persons, the proceeds of which is fully
utilized in acquiring or constructing a new
ANSWER:
principal residence within 18 calendar
months from the date of sale or disposition
= 60,000
is not subject to the 6% CGT. Subject to the
(1m/3m)*3m = 1m*6% = P60,000
following requirements:
1. This historical cost or adjusted basis of
real property sold or disposed is carried
over to the new principal residence.
2. The exemption can only be availed once
every 10 years.
3. The BIR is notified by the taxpayer ANSWER:
within 30 days from the date of sale or
disposition of his intention to avail of = 66,000
the tax exemption. (1/3m)*3.3m = 1.1m*6% = P66,000

If there is no full utilization of the proceeds,

the portion of the gain presumed to have
been realized from the sale or disposition
shall be subject to the 6% CGT as follows:

11
 INCOME TAX MIDTERM

Rules Applicable to Capital Gains EXAMPLE:

1. Percentage Taken into Account Mr. Rhad Estoque, a Filipino resident, had
(Holding Period Rule): the following incomes and losses for the
year:
The following percentages of the gain or
loss recognized upon the sale or exchange
of capital assets shall be taken into account
in computing net capital gain, loss or net
income.
The taxable income of Mr. Estoque for the
year is computed as follows:

This rule is NOT applicable to corporations.

Illustration:

Mr. Manila sold various properties as 3. Net Capital Loss Carry-Over

follows in 2021: Compute for the net
capital gain or loss.
If the individual sustains in any taxable
income of such year, such loss, in an
amount not to exceed the net income of
such year, shall be treated in the succeeding
taxable year as a loss from the sale or
exchange of asset held not more than 12
months.

This rule is NOT applicable to a

ANSWER: corporation.
Following the previous example, in the next
year, Mr. Estoque had the following income:

2. Limitation on Capital Losses: The taxable income of Mr. Estoque for the
year is computed as follows:
The capital losses realized during the
taxable year are deductible only to the
extent of capital gains from the same type
of transaction during the same period. This
rule likewise applies to sales of shares of
stock subject to 15% CGT.

12
 INCOME TAX MIDTERM

4. Sales of shares of stock subject to 15%

CGT:

For sale, barter, exchange, or other forms of

disposition of shares of stock subject to the
15% capital gains tax, if the transferor of
the capital asset is an individual, the rule on
holding period and capital loss carry-over
will NOT apply.

13
 INCOME TAX MIDTERM
Exclusions from Gross Income
Exclusions = exemptions
Exclusions refer to items or receipts not
included in the determination of the taxable
income because the law or treaty provides
that they are exempt from income tax.
They are not subject to regular tax, capital
gains tax, or final tax.
1. Remunerations received as an
incident of employment.
i. Retirement benefits
Received under RA 7641 AND those
received by officials and employees of
private firms, whether individual or
corporate, under a reasonable private benefit
plan.
a. Those received under a reasonable private
benefit plan: is exempt subject to the
following requisites:
• Plan is reasonable.
• Plan is approved by the BIR.
• Retiring employee must have been
in the service of the same employer
for at least 10 years;
• Retiring employee is 50 years old or
older at the time of retirement; and
• Retiring employee has not
previously availed of the privilege
under the retirement benefit plan of
the same or another employer.
b. Retirement benefits under RA 7641 where:
• No private retirement plan or
retirement plan under the Collective
Bargaining Agreement
(CBA)/employment contract.
• Must have served the company for
at least 5 years.
• Retiree at least 60 years old but not
more than 65 years of age at the
time of retirement.
ii. Any amount received by an
employee, or by his heirs from the
employer due to death, sickness,
or other physical disability or for
cause beyond the control of the
said employee, such as
retrenchment, redundancy, or
cessation of business.
a. The cause of separation by an
employee from the service was
beyond his control.
b. Amounts received by involuntary
separation remain exempt from
income tax even if the employee, at
the time of separation, had rendered
less than 10 years of service and/or
is below 50 years old.
However, any payment made by an
employer to an employee on account of
dismissal constitutes compensation
regardless of legal contract, statute, or
otherwise, to make such payment - thus
NOT exempt.
iii. Social security benefits,
retirement gratuities, pension and
other similar benefits
received by resident and non-resident
citizens of the Philippines or aliens who
reside permanently in the Philippines from
foreign entities, whether private or public.
iv. Payments of benefits due or to
become due to any person residing in
the Philippines under the law of the
US administered by the US Veterans
Administration
v. Payments of benefits made under the
Social Security System Act of 1954
vi. Benefits received from the GSIS Act
of 1937, and the retirement gratuity
received by government officials and
employees.
14
 INCOME TAX MIDTERM
2. Compensation for services by a
citizen or resident of the PH
performed for a foreign government
or international organization.
a. Includes remuneration paid for services
performed by ambassadors, ministers,
and other diplomatic officers and
employees;
b. Includes remuneration paid for services
performed a consular or other employee
of a foreign government or a
nondiplomatic representative of such
government.
3. Damages
Actual, moral, exemplary, and nominal
damages received by an employee or heirs
pursuant to a final judgment or compromise
agreement.
4. Life Insurance Proceeds
Proceeds of life insurance policies paid to the
heirs or beneficiaries upon death of the
insured, whether single sum or otherwise are
exempt.
5. Amount received by the insured as a
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
term mentioned in the contract or upon
surrender.
6. Compensation for injuries or sickness
Amounts received through Accident or
Health Insurance or under Workmen's
Compensation Act, as compensation for
personal injuries or sickness.
7. Income exempt under treaty
Income items that are excluded by
international agreement to which the
Philippine government is a signatory are
excluded from income tax. It must be recalled
that treaty agreements override provision of
our revenue tax laws in case of conflict under
the exemption doctrine of international
comity.
8. 13th Month pay or other benefits
13th month pay and other benefits such as
Christmas bonus, loyalty awards, gifts in cash
or kind, and other benefits of similar nature.
Provided that the total amount shall not
exceed P90,000
9. GSIS, SSS, Medicare and Other
Contributions
GSIS, SSS, Medicare, PAG-IBIG
contributions and union dues of individual
employees. For purposes of computing
taxable income subject to Income Tax and
Withholding Tax on Compensation, the said
contributions are deducted to arrive at taxable
income. However, for employees, the amount
considered not taxable shall only pertain to
the maximum required by law.
10. De Minimis Benefits
Are facilities or privileges furnished or
offered by an employer to his employees that
are of relatively small value and are offered
or furnished by the employer merely as a
means of promoting the health, goodwill,
contentment, or efficiency of his employees.
Treatment:
De minimis benefits are considered non-
taxable and are not included in the
computation of taxable income and
withholding tax on compensation, as well
as fringe benefits tax.
15
 INCOME TAX MIDTERM

How much is his income tax due, if any?

Amount in excess of the above-mentioned
ceiling will form part of other benefits, ANSWER:
which is non-taxable only up to P90,000
together with other benefits received by 0, computed as follows:
the employee including 13th month pay
and other bonuses.

11. Compensation Income of Minimum

Wage Earners

who work in the private sector and being

paid the Statutory Minimum Wage.

Coverage: No income tax and 12. Tips and Gratuities

consequently, withholding tax, shall be
required on:
• The Statutory Minimum Wage
(SMW)
• Holiday pay
• Overtime pay
• Night shift differential; and
• Hazard pay
Other income earned by MWEs:
Additional compensation such as
commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory
amount to P90,000, taxable allowances and
other taxable income given to an MWE by
the
same employer other than those which are
expressly exempt above shall be subject to
income tax and consequently, withholding
tax on compensation.
Illustration:
Mr. Brent Quito is employed by ABC
Corporation. He received the SMW for
2021 in the total amount of P100,000 and
13th month pay and other bonuses
amounting to P75,000. In the same year, he
also received overtime pay of P40,000 and
nigh shift differential of P25,000/ He also
received commission income from the
same employer of P20,000, thus, total
income received amounted to P260,000.
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 on
compensation. This should then be included
by the recipient in his gross income subject
to regular income tax.
Illustration:
Mr. Brent Quito is employed by ABC
Corporation. He received the SMW for 2021
in the total amount of P100,000 and 13th
month pay and other bonuses amounting to
P75,000. In the same year, he also received
overtime pay of P40,000 and nigh shift
differential of P25,000/ He also received
commission income from the same
employer of P20,000, thus, total income
received amounted to P260,000. How much
is his income tax due, if any?
ANSWER: 0, computed as follows:

16
 INCOME TAX MIDTERM

13. CoVID 19 Benefits 16. Non-Stock and non-profit Entities

As part of the government's response to the
COVID 19 pandemic crisis, RA 11494
provides for the following exempt special
benefits for health workers:
• COVID 19 Special Risk Allowance
• Actual hazard duty pay
• Compensation to health workers
who contracted COVID 19 in the
line of duty
14. Barangay Micro-Business Enterprise
A BMBE is a business entity engaged in the
production, processing or manufacturing of
products or commodities, including agro-
processing, trading and services, whose
total assets including those arising from
loans but exclusive of the land on which the
business entity's office, plant, and equipment
are situated, do not exceed P3,000,000
Income of BMBE from their operation is
exempt; hence, excluded from the gross
income subject to regular income tax.
Non-stock entities that are organized for
profit are exempt from income tax on their
income from operations.
However, their income from unrelated
sources is taxable
17. Qualified Employees' Trust Fund
An employees' trust fund which forms part
of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some
or all his employees is exempt from any
income tax under the NIRC.
18. Income Subject to Final Tax or
Capital Gains Tax
Items of income that are subject to final
income tax or capital gains tax are not items
of gross income subject to regular income
tax.

BMBEs file an Annual Information Return

in lieu of the income tax return. However,
their nonoperating, passive, and capital
gains are subject to the appropriate type of
income tax.

15. Cooperatives

Cooperatives that transact business purely

with members are exempt from all taxes and
fees.

Cooperatives that transact business with

non-members are likewise exempt from all
taxes and fees if their accumulated reserve
and undivided savings do not exceed P10M.

17