INCOME TAXATION P2

MR. SAM BARBO, JR.

INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

⮚ Amounts received for services rendered, such as salaries,

wages, commissions and prefessional fees, are taxable
income to the recipient.

⮚ Compensation arising out of an employer-employee

relationship is called gross compensation income.
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

⮚ Compensation for personal services rendered is usually

made in money, but cases may arise when compensation
may be recieved in kind, or both in money anf in kind.
⮚ When compensation is received in money, the measure of
income is the amount of money received.
⮚ When compensation is received other than in money, the
fair market value of the thing taken in payment is the
measure of income.
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

⮚ If services were rendered at a stipulated price, in

the absence of proof to the contrary, such price
shall be presumed to be the measure of income.
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

 Example
1. Under a written contract, Mr. S was to render
personal services to Mr. N, for a price of P 20,000,
Philippine currency. After the services were
rendered, Mr. B could not pay in money. Mr. B paid
in property with fair matket value of P25,000.
 The Income of Mr. A will be P 25,000 (disregard the
stipulated price P 20,000.)
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

 Example
2. Under a written contract, Mr. S was to render
personal services to Mr. N, for a price of P 20,000,
Philippine currency. After the services were rendered,
Mr. B could not pay in money. Mr. B paid in property,
but there is no evidence of the fair market value.
 The Income of Mr. A will be P 20,000 (the stipulated
price P 20,000.)
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

⮚ Promissory notes or other evidences of indebtedness

received in payment of services, and not merely as
security for such payment, constitute income in the
amount of their fair market value.
⮚ A taxpayer receiving as compensation a note
considered good for its face value at maturity,
⮚ For nor bearing interest, shall treat as income at the
time of receipt the fair discounted value of the note.
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

⮚ If the payment due on the note as accounted for is net

as it becomes due, there shall be included as income in
respect of such payment, such amount thereof
representing the recovery of the discount originally
deducted.
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

 Example
1. Mr. S redendered personal services in 2019 and
was paid in 2019 with a non-interest bearing note
with face value of P 40,000. The prevailing discount
rate in 2019 wa 10%. In 2020, Mr. S collected the
gace value of the note.
 Mr. S income for 2019, P36,000 (40,000 - 10,000)
 Mr. S income for 2020, P4,000 (40,000 - 36,000)
INCOME FROM SERVICES AND OTHER SOURCES

LONG-TERM CONTRACTS

⮚ The term long-term contracts means building,

installation, or construction contracts covering a
period in excess of one year.
⮚ A person whose gross income is derived in whole or in
aprt from long-term contracts shall report income from
ch contracts upon the basis of percentage of
completion.
INCOME FROM SERVICES AND OTHER SOURCES

LONG-TERM CONTRACTS

⮚ The formula under the percentage of completion

methid recognizing income is, in effect, recognizing
only the protion earned during the year from the whole
contract price.
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

 Example
1. Mr. S is a building contractor. On June 1, 2019, he
started constructing a building which he finished in 2021.
The contract price was P5,000,000. By the end of 2019,
the building was 40% completed at a cost of P1,280,000
 Mr. S income for 2019, P720,000
 Contract Price (5,000,000 x 40%) -P2,000,000 less Cost
to date P1,280,000.
INCOME FROM SERVICES AND OTHER SOURCES

OTHERS

 Within the meaning of “Others” to be discussed are the

gollowing items of gross income:
1. Bad debt recovery
2. Tax refund
3. Cancellation of indebtedness
4. Damage recovery
5. Prize or award
INCOME FROM SERVICES AND OTHER SOURCES

BAD DEBT RECOVERY

 Bad debts recovery Income Tax rule:

1. Bad debt recovry is taxable income. This rule is qualified by
the tax benefit rule.
 Tax benefit rule : the recovery of the account previously
written off shall constitute taxable income only if in the year
of recognition of being worthless, the write off resulted in a
tax benefit (reduction of a taxable income).
INCOME FROM SERVICES AND OTHER SOURCES

INCOME FROM SERVICES

 Example
Taxable income begore write of of bad debts - P50,000
Less: Deduction for write off of bad debts - 10,000
Taxable Income P40,000

 The write off resulted in a tax benefit. The recovery of

the P10,000 or any part thereof, shall consitute taxable
income.
INCOME FROM SERVICES AND OTHER SOURCES

TAX REFUND

⮚ In the accounting records of a taxpayer, all tax payments

within a year e recorded as expenses, perhaps under the
account title Taxes and Licenses.
⮚ If there was a refund within the year of tax that was paid
within the year, the tax expense of the year shall be
reduced.
⮚ If the refund occured in a year subsequent to the year
of recognition of expense, the refund shall be or shallnot
be an income
INCOME FROM SERVICES AND OTHER SOURCES

TAX REFUND

 The Income Tax Rule

⮚ As a general rule, a refund of tax related to business or
the practice of profession (the payment of which was
recognized as expense and deduction from gross income
in a previous year) is a taxable income in the year of tax
refund.
INCOME FROM SERVICES AND OTHER SOURCES

TAX REFUND

 The Income Tax Rule

⮚ If a tax payment, although an expense in the books of
account was not allowed under the income tax law as
deductible from gross income , or did not duce a taxable
income, a refund of it shall not be a taxable income
(tax benefit rule)
INCOME FROM SERVICES AND OTHER SOURCES

TAX REFUND

 The Tax Benefit Rule

⮚ (expressly mentioned in the law, but with nothing in the law
itself what it means) If a tax was not an allowale deduction
from gross income when paid (no reduction of the taxable
income, hence no tax benefit), the refund is not taxable.
INCOME FROM SERVICES AND OTHER SOURCES

TAX REFUND

 Non-Taxable Refunds
1. Income Tax
2. Estate or donor’s tax
3. Special Assessment
4. Income tax of a foreign country
5. Stock transaction tax (business tax)
INCOME FROM SERVICES AND OTHER SOURCES

CANCELLATION OF DEBT

 Cancellation of indebtedness may result in:

1. Income from services
2. Gift
3. Dividend income
INCOME FROM SERVICES AND OTHER SOURCES

CANCELLATION OF DEBT

 The Cancellation of indebtedness may hace any of the three

possible consequences:
1. It may amount to a payment of income. - The creditor
compensated the debtor for the service rendered; the debtor
paid his indebtedness out of the compensation recieved.
 Example, an individual performs services to a creditor, and in
consideration thereof, the creditor cancels the debts.
 In that case, income in that amount is realized by the
debtor as compensation for personal services.
INCOME FROM SERVICES AND OTHER SOURCES

CANCELLATION OF DEBT
 The Cancellation of indebtedness may hace any of the three
possible consequences:
2. It may amount to a gift. - if a creditor wishes merely to
benefit the debtor, and without any consideration therefore,
cancels the debt, the amount of the debts is a gift to the
debtor and need not be included in the latter’s report of
income.

 Related to this, there may be a donor’s tax to be aid by the

creditor.
INCOME FROM SERVICES AND OTHER SOURCES

CANCELLATION OF DEBT

 The Cancellation of indebtedness may hace any of the

three possible consequences:

3. It may amount to a capital transaction. - if a corporation to

which a stockholder is indebted forgive the debt, the
transaction has as the effect of a payment of a dividend.

 The dividend may subject to a rehular tax, or a final tax, or

exempt from tax.
INCOME FROM SERVICES AND OTHER SOURCES

DAMAGE RECOVERY
 Compensatory damages, when constituting returns of capital, are not
taxable.

 Amounts received as moral damages for personal actions, such as

for alienation of afections, libel, slander and breach of promise to
marry are not taxable.

 Recovered damages representing recoveries of lost profit, are

taxable, just as profits are taxable in the regular sourse of business.
Thus, damages recovered in patent infringement suit are taxable.
INCOME FROM SERVICES AND OTHER SOURCES

PRIZE OR AWARD
 Contest prize or award received is generally taxable. such payments
constitutes gain derived grom labor.

 If effor was exerted with a peize in mind, the prize is income.

 If the prize was for outstanding achievements, there is no income (no

prize in the mind at the time effort was exerted).

 Prizes and awards in the nature of gifts do not constitute taxable

income (but there may be a donor’s tax to pay).
INCOME FROM SERVICES AND OTHER SOURCES

PRIZE OR AWARD

 Prizes and awards received in recognition of religious,

charitable, scientific, educational, artisitic, literary or
civic achievement are exclusion from gross income if:
1. the recipient was selected without any action on his
part to enter a contest or procedings; and
2. the recipient is not required to render subdtantial
future services a condition to receiving the prize or
award.
INCOME FROM SERVICES AND OTHER SOURCES

PRIZE OR AWARD

 Prizes and awards granted to athletes in local and

international sports competitions and tournaments held
in the Philippines and abroad and sanctioned by their
national sports associations are exempt from income
tax.
 THANK
YOU PO AND GOD
BLESS