Gross Income
Gross income means all income derived from
whatever source, including (but not limited to) the
following items:
(1) Compensation for services in whatever form
paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
(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;
Gross Income
(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.
Compensation Income
• All remuneration for services performed by an
employee for his employer under an employeremployee relationship
• Includes salaries, wages, emoluments and
honoraria, allowances, commissions; fees including
director’s fees if the director as at the same time an
employee if the corporation/employer; taxable
bonuses and fringe benefits not subject to FBT;
taxable pensions and retirement pay; and other
income of similar nature.
Forms of Compensation
1. Compensation paid in kind – valued at the fair market
value of the thing taken in payment
2. Living quarters and meals – the value furnished to the
employee shall be added to the remuneration paid
3. Facilities and privileges of a relatively small value – (de
minimis benefit) ordinarily not subject to income tax and
withholding tax
4. Tips and gratuities – if paid directly to employee by a
customer of employer which are not accounted for by
the employer are considered as taxable income not
subject to withholding
5. Pensions, retirement and separation pay – constitute
compensation income subject to withholding
Forms of Compensation
6. Fixed or variable transportation, representation and
other allowances – in general, considered
compensation subject to withholding
7. Vacation and sick leave allowances – amounts paid
constitute compensation
8. Deductions made by employer from compensation of
employee – part of compensation
9. Remuneration for services as employee of a nonresident alien individual or foreign entity – included as
compensation
10. Compensation for services performed outside the
Philippines –treated as compensation subject to tax
Business Income
Manufacturing, Merchandising or Mining
• Gross income means total sales, less cost of goods
sold plus any income from investments and from
incidental or outside operations or sources.
Gross Sales
Less: COGS
GP from Sales
Add: Other Income
Gross Income
xxx
xxx
xxx
xxx
xxx
• Subtractions are not allowed for depreciation,
depletion, selling expenses or losses, or for items not
ordinarily used in computing the cost of goods sold
Business Income
Farming
• Gross income includes gain or profit derived from
the operations of farms, such as stock, dairy, poultry,
fruits and truck farms; plantations; ranches; etc.
• Income may be reported using either cash basis,
accrual basis or crop year basis
Business Income
Cash Basis
Cash sales (or value of merchandise or other property received) of
livestock and farm products raised in the farm
Sales of livestock and other items purchased
Less: Cost of Sales
Gross Profit
Miscellaneous Income
Gross Income
xxx
xxx
(xxx)
xxx
xxx
xxx
Business Income
Accrual Basis
Ending Inventory
Cash sales (or value of merchandise or other property received) of
livestock and farm products raised in the farm
Sales of livestock and other items purchased
Miscellaneous Income
Total
Less: Beginning inventory
Cost of livestock and other items purchased
Gross Income
xxx
xxx
xxx
xxx
xxx
(xxx)
(xxx)
(xxx)
xxx
Crop year basis – used by farmers whose crop take more than
one year from planting up to harvesting and disposing. The entire
cost of production is deducted from the gross income in the year
it was realized.
Business Income
The ff. business income shall not be included in gross
income subject to regular income tax:
• Business income exempt from income tax
o Gross income from Barangay Micro-Business Enterprise (BMBE) under RA 9178
o Gross Income from enterprises enjoying tax holiday inentives under EO 226
which have not yet graduated to their income tax holid ay incentives
• Business income subject to special tax regime:
o PEZA-registered enterprises subject to 5% gross income
o TIEZA-registered enetrprises subject to 5% gross income tax
o Income of SEP who opted to be taxed under the 8% income tax.
• Business income subject to final tax when not
subjected to final tax by the payor
o Subcontractors of pertoleum service contractors subject to 8% FT
o Business income of FCDUs and OBUs from Phil. residets subkect to 10% FT
Gains from Dealing in
Property
• Includes all income derived from the disposition of
property – real, personal, or mixed – for money
(sale) or for other property (exchange) or for a
combination of both
• Results in gain (loss) because of the difference
between the taxpayer’s investment in what he
disposed of and the value in what he received
• General rule: The entire amount of gain or loss is a
taxable gain or deductible loss
Interests
• Interest arising form indebtedness, that is,
compensation for the loan or forbearance of
money, goods or credits.
• Interest arising from indebtedness, whether business
or non-business, legal or illegal.
• Subject to final tax
• 20% final tax for RC, NRC, RA, NRA-ETB, DC and RFC
• 25% final tax for NRA-NETB
• Normal income tax for NRFC
Illustration
Sapphire has the ff. income in 2014:
Interest income from loans
P3,000,000
Interest income from deposits w/ other banks 400,000
Interest income from notes rediscounting
100,000
Interest income from Treasury notes
50,000
Rents
• Rent income from use of real and personal property
• 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.
• Security Deposit – taxable upon forfeiture in favor of
the lessor or upon application of rental payments
• Leasehold Improvements – income if it will be
owned by the lessor at the end of the lease or the
lessor is not required to pay the lessee its value.
Income will be reported using either outright or
spread-out method.
Royalties
• Includes earnings from copyrights, trademarks,
patents, and natural resources under lease.
• Involves not only the use of the property but also its
exhaustion.
• Royalties for properties which produce coal, gas, oil,
copper, timber or other similar product shall from
part of gross income for purposes of computing the
income tax liability of the taxpayer under Section
24(A), 27 and 28.
• Active royalty income and royalties earned oustide
the Phils. are subject to RIT.
Dividends
Forms of Dividends:
1. Cash Dividend – 10% final tax
2. Property Dividend – 10% final tax
3. Stock Dividend – not taxable unless represents
distribution of earnings or profits
4. Scrip Dividend – 10% final tax
5. Liquidating Dividend – taxable capital gain or
deductible capital loss
6. Indirect Dividends
Taxable and Non-Taxable
Stock Dividend
1. Non-taxable stock dividend – not income if the
new certificates plus the old one do not change
the proportionate interest of the stockholder in the
net assets of the corporation
2. Taxable stock dividend – constitutes income if it
gives the shareholder a greater proportionate
interest in the corporation after its distribution.
(Measured at fair value of the shares of stock on
the date the stockholder received the shares.
Annuities
• Refer to annuity policies sold by insurance
companies, which provide installment payments for
life, or for a guaranteed fixed period of time
whichever is longer or for life and guaranteed fixed
period.
• The portion of each annuity payment that
represents return of premium is not taxable while
that portion that represents interest is taxable.
Prizes and Winnings
• P10,000 or less, taxable under Section 24(A)
• Above P10,000, 20% final tax
• PCSO and lotto winnings not exceeding P10,000 are
tax exempt
• Prizes and awards in recognition of religious,
charitable, scientific, educational, artistic, literary or
civic achievement are not taxable if:
o The recipient was selected without any action on his part to enter the
contest or proceedings
o The recipient is not required to render substantial future services as a
condition to receiving the prize or award
Pensions
• Amount of money received in lump sum or on
staggered basis in consideration of services
rendered.
• Pensions are being given after the individual
reaches the age of retirement.
• Taxable to the extent of the amount received
except if there is an approved pension plan by the
BIR.
Income from Whatever
Source
• The law imposes a tax on income from whatever
source which means that it includes income
whether coming from legal or illegal sources.
• Examples:
o
o
o
o
o
o
Income from jueteng,
income from swindling activities,
recovery of bad debts,
refund of taxes,
unutilized/excess campaign funds,
forgiveness of indebtedness
Income from Whatever
Source
• Recovery of bad debts – considered income if:
o Bad debts were written off in the previous year/s,
o Such bad debts were deducted in arriving at taxable income
o There is a resulting tax benefit on the deduction
• Refund of taxes considered income if:
o There is payment of tax in the previous year/s
o The tax paid was deducted in arriving at the taxable income
o There is a resulting tax benefit on the deduction
• Forgiveness of indebtedness
Type
Tax Treatment
Debtor performs services to 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
Sources of Income
• Within the Philippines
• Without the Philippines
• Partly within and without
Determination of Source
of Income
1. Compensation Income
2. Merchandising Business
3. Manufacturing Business
4. Mining
5. Farming
6. Interest Income
7. Rent income
8. Royalties
9. Dividend Income
10. Gain on sale of real property
11. Gain on sale of personal property purchased in one
country and sold in another
12. Gain on sale of domestic shares of stock
Exclusions from Gross
Income
1.
2.
3.
4.
5.
6.
7.
Life Insurance
Amount Received by Insured as Return of Premium
Gifts, Bequests, and Devises
Compensation for Injuries or Sickness
Income Exempt under Treaty
Retirement Benefits, Pensions, Gratuities, etc
Miscellaneous Items
a) Income Derived by Foreign Government
b) Income Derived by the Government or its Political
Subdivisions
c) Prizes and Awards
Exclusions from Gross
Income
d)
e)
f)
g)
Prizes and Awards in sports Competition
13th Month Pay and Other Benefits
GSIS, SSS, Medicare and Other Contributions
Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness
h) Gains from Redemption of Shares in Mutual Fund
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