GROSS INCOME

Definition of 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. Income derived from the conduct of trade or business or the exercise of a profession
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of a general professional partnership

Exclusions from Gross Income

1. Proceeds of life insurance policies

2. Amount received by insured as return of premium
3. Gifts, bequests and devices
4. Compensation for injuries or sickness
5. Income exempt under Treaty
6. Retirement benefits, pensions, and gratuities
7. Income derived by foreign government
8. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement
9. Prizes and awards in sports competitions held in the Philippines and abroad and
sanctioned by the National Sports Association
10. Thirteenth-month pay and other benefits not exceeding P30,000
11. GSIS, SSS, Medicare and Pag-Ibig contributions and union dues
12. Gains realized from sale debenture bonds with maturity of more than five years
Compensation Income

Compensation Income means all remuneration for services performed by an employee for
his/her employer under the employee-employer relationship, unless expressly excluded by the
Tax Code.

Compensation Income includes:

1. Salary, wage or fee (director's fee, accountant's fee)
2. Commission
3. Honoraria
4. Allowances
5. Thirteenth-month pay and other benefits
6. Holiday pay, overtime pay, night shift differential, and hazard/emergency pay
7. Separation pay
8. Retirement pay
9. Sick leave and vacation leave
10. Fringe benefits

Director's Fee

If the director is at the same time an employee of the company, the director's fee shall be
included as part of gross taxable income. If the director is not an employee, the director's fee
shall be subject to creditable withholding tax as follows:
a. 10% if the fee is P720,000 and below; and
b. 15% if the fee exceeds P720,000

Separation Pay

Separation pay is taxable if voluntary on the part of the employee. Payment of separation
pay is not taxable on account of:
a. Sickness
b. Disability
c. Death
d. Reorganization of the company
e. Bankruptcy of the company

Retirement Pay

Generally, retirement pay is taxable. The exceptions are:

1. Retirement pay from SSS or GSIS
2. Retirement pay from employer, provided the following requirements are complied:
 a. the retirement plan of the company has been approved by the Commissioner of the
BIR;
b. the retiree should have been connected with the company for 10 years;
c. The retiree should be at least 50 years old.
d. The retiree availed the retirement for the first time; and
e. The retirement plan is fair and equitable to all employees regardless of position.

Valuation of Compensation Income

The amount of taxable compensation income depends upon the forms of payment as follows:
Forms of Payment Valuation or Taxable Amount
1. Cash Total amount received
2. Property other than cash FMV of the property at the time of
payment
3. Services FMV of the services at the time services
are rendered
4. Promissory notes or other forms of FMV of the notes determined as follows:
indebtedness a. Interest bearing note
Year received - Face value of the note
Year collected - Maturity value less face
value
b. Non-interest bearing note
Year received - Present value of the
note
Year collected - Face value less present
value

5. Company's own share of stock FMV of stock at the time services are
rendered
6. Cancelation of debt a. Presence of employee-employer
relationship - taxable amount is equal to
the debt canceled
b. Cancelation of debt without
consideration - amount canceled is a gift
or donation
c. Cancelation of debt of stockholder
without consideration - debt canceled
represents dividend payment
Business Income
Gross income derived from business shall be equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold.
Gross sales or receipts xxxxxx
Less:Sales returns and allowances xxxxxx
Sales discounts xxxxxx xxxxxx
Net Sales xxxxxx
Less:Cost of Sales xxxxxx
Gross Income xxxxxx

Methods of Recognizing Business Income

The accounting methods of recognizing business income are:
1. Accrual Basis
2. Cash Basis
3. Hybrid Method
4. Crop-year Method
5. Installment Method
6. Deferred Payment Method
7. Percentage of Completion Method
8. Complete Contract Method
9. Spread-out Method
10. Outright Method

Installment Method
The following may report income under e installment method:
1. A taxpayer who regularly sells a personal property on installment basis
2. A taxpayer who makes a casual sale of personal property, other than inventory, on installment
basis, provided the selling price exceeds P1, 000 and the initial payments do not exceed 25% of
the selling price
3. A taxpayer who sells or disposes real property on installment basis, provided the initial
payments do not exceed 25% of the selling price

Computation of Taxable Income under Installment Method

1. The property sold is without mortgage; or with mortgage to be assumed by the buyer but the
mortgage does not exceed the cost to the seller

Income to be reported = Gross Profit x Amount of installment collection received

Contract Price
Property sold is mortgaged and assumed by the buyer; and the mortgage exceeds the cost to
the seller, the formulas are:

a. On the date of sale

Income to be reported = Gross Profit x Initial payment

Contract Price

b. On subsequent collection
Income to be reported = Gross Profit x Amount of installment collection received
Contract Price

Computation of Initial Payment

1. No mortgage on property sold or the mortgage assumed by the buyer does not exceed the
cost to the seller
Downpayment xxxxx
Add : Additional payments made during the year xxxxx
Initial payment xxxxx

2. Mortgage assumed by the buyer exceeds the cost to the seller

Downpayment xxxxx
Add: Additional payments made during the year xxxxx
Excess of mortgage over cost to the seller xxxxx xxxxx
Initial payment xxxxx

Computation of Contract Price

1. No mortgage on property sold
Contract price = Selling price

2. Mortgage assumed by the buyer does not exceed the cost to the seller
Selling price xxxxx
Less : Mortgage assumed by the buyer xxxxx
Contract price xxxxx

3. Mortgage assumed by the buyer exceeds the cost to the seller

Selling price xxxxx
Add: Excess of mortgage assumed by buyer over cost to the seller xxxxx
Total xxxxx
Less: Mortgage assumed by the buyer xxxxx
Contract price xxxxx

Deferred Payment Method

Deferred payment method - a variation of the installation method, wherein properties are
also sold in installation basis, but the initial payment exceed 25% of the selling price.
Year of sale - taxable income is equal to collection less the cost of property
Subsequent years - taxable income is equal to actual collection

Interest Income
1. Interest income on bank deposits
a. Earned within the Philippines - subject to 20% final tax
b. Earned outside the Philippines - included in gross taxable income subject to
schedular tax rate.
2. Interest income arising other those from bank deposits - included in gross taxable
income subject to schedules tax rate.

Rent Income
Taxable rent income is the sum of
1. Current rent or lease payment;
2. Advance rent payment or security deposit without restriction in the tear received
regardless of the accounting method used;
3. Payment of the lessee to the third parties in behalf of the lessor;
4. Uncollected rent income earned already (accruals) at the end of the period; and
5. Income from leasehold improvements.

Income from Leasehold Improvement

1. Outright method - taxable income is the FMV of the improvement on the date such
improvement has been completed nothwithstanding the effective date of lease contract
2. Spread-out method - annual taxable income is the allocated portion pertaining to each term,
which is equal to the book value of the improvement at the end of the lease term divided by the
term of the lease.

Cost of improvement xxxxx

Less : Accumulated depreciation(as of the end of the lease term) xxxxx
Book value - end of lease term xxxxx
Divided by - remaining term of lease xxxxx
Annual taxable income on leasehold improvement xxxxx
Premature Termination or Destruction
1. Brought about by fire, typhoon, earthquake, and other calamities - recognized deductible
loss, whether using out right or spreads out method, equal to income previously
recognized minus recoverable insurance and salvage value.

Amount previously recognized as income xxxxx

Less : Recoverable insurance xxxxx
Salvage value xxxxx xxxxx
Loss on leasehold improvement xxxxx

2. Termination with valid cause

a. Outright method - no additional income
b. Spread-out method - additional income equal to the excess of fair market value of the
improvement at the time of termination over income previously recognized

FMV of leasehold at the time of termination xxxxx

Less: Income previously recognized xxxxx
Addition income - year of termination xxxxx

Dividend Income
Received from domestic by :
3. Resident citizen, non-resident citizen, resident alien - subject to 10% final tax
4. Non-resident alien engaged in business in the Philippines - subject to 20% final tax
5. Non-resident alien not engaged in business in the Philippines - subject to 25% final
tax
6. Domestic or resident or resident foreign corporation - tax-exempt
7. Nonresident foreign corporation - subject to 30% final tax effective January 1, 2009
with reciprocity of 15%
Received from resident foreign corporation non-resident foreign corporation - included
as part of gross taxable income.
c. Taxpayers taxable within and without the Philippines - recognized full amount of
dividend as taxable income
d. Taxpayers taxable only within the Philippines - recognized dividend income earned
only within based on the ratio of gross income for the preceding three ears prior on
declaration of dividends realized in the Philippines against the total income.
6. Ratio is less than 50% - income of foreign corporation is purely without
 7. Ratio is 50% to 85% - income of foreign corporation is partly within and partly
without
8. Ratio is more than 85% - income of foreign corporation is within the Philippines
9. Problem is silent - income of foreign corporation is assumed realized within the
Philippines

Philippine Gross Income - 3 years

x Dividend declared
Taxable Income = Total Gross Income 3 Yeats prior to Dividends Declaration

Prizes. Winnings, and Awards

3. Included as part of taxable income subject to general tax rates
3. Received by individuals from Philippine sources amounting to 10,000 or less
4. Received by corporations from Philippines sources
5. Received by individuals and corporation from foreign sources
4. Subject to 20% final tax
c. Received by individuals and corporation from foreign sources
5. Tax-exempt / excluded from gross income
a. Winnings from the Philippine Charity Sweepstakes Office (PCSO) and Logo winnings
b. Prizes or awards to athletes in national and international sports competition held
within the Philippines and abroad, and governed by recognized sports associations
c. Prizes and awards in recognition of religious, charitable, educational scientific,
artistic, or literary performance or achievement, provided (1) the recipient was
selected without Acton on his/her part; and (2) he/she is not required to render
substantial future service in view of the award

Recovery of Bad Debs Written Off

Taxable income on bad debts recovery shall be limited to the extent of the income tax
benefit of bad debts deduction which is equal to the actual amount recovered multiples by the
application tax rate at the time of deduction of worthless debts.

Bad debts written off xxxxxx

Multiply by: Applicable tax rate in year written off xxxxx
Bad debts recovered as taxable income xxxxx

Tax Refunds
1. Tax refund is taxable - if refunded tax is a deductible tax
2. Tax refund is non-taxable - if refunded is not deductible tax

Non-deductible Tax; Hence, Non-taxable if Refunded

 1. Philippine income tax, except fringe benefits tax
2. Estate and donor's tax (transfer taxes)
3. Stock transaction tax
4. Value-added tax
5. Special assessment and income tax deficiency
6. Income tax paid in foreign country claimed as tax credit

Determination of Income as to Source

Income Determination of Source
a. Interest income Residence of the debtor
b. Income from services Place of performance
c. Rent income Location of property
d. Royalties Place of use of intangibles
e. Dividends from domestic corporations Income within the Philippines
f. Dividers from foreign corporations a. Within the Philippines if ratio of income from
Philippine source is 85% or more against
income of the world
b. Partly within and partly without if rail is 50%
to 85%
c. Without if ratio is less than 50%
g. Gain on sale of real property Location of property
h. Gain on sale of domestic shares Income within the Philippines
i. Gain on sale of personal property, purchased Place of sale
in one country and sold in another

Passive Income Subject to Final Tax

Types of Income * Resident Citizen Non-Resident Alien
* Non-Resident Citizen Engaged in Business or
* Resident Alien Trade in the Philippines
a. Interest Income
1. Interest Income in the 20% 20%
Philippines
2. Yields or any other 20% 20%
monetary benefits from
deposit substitutes, trust
funds, and similar
arrangements in the
Philippines
3. Interest Income from Exempted Exempted
long term deposits as
evidenced by certificates
prescribed by Bangko
Sentral ng Pilipinas (BSP)
with maturity of 5 years or
more
If long term deposit is pre-
terminated before the 5th
year, the final tax shall be:
4 years to less than 5
years 5% 5%
3 years to less than 4 12% 12%
years 20% 20%
Less than 3 years
Interest income under the 7.5% Exempted
Expanded Foreign Non-resident citizen is
Currency Deposit System exempted
(FCDS)
b. Royalty Income
1. In general 20% 20%
2. On books, literary 10% 10%
works, musical works in
the Philippines
Prizes and Winnings
1. In general 20% 20%
2. Prizes less than Subject to basic tax Subject to basic tax
P10,000
3. From Philippine Charity Exempted Exempted
Sweepstakes Office and
Lotto

Allocation of Unidentified Gross Income

Income from within the Philippines = Identified Gross Income-Philippines x Unidentified Gross Income
Identified Gross Income-World

Computation of Income Within When Production Price or Independent Factory Has not Been Established
Allocation based on gross sales xxxxx
Add:Allocation based on value of property xxxxx
Taxable income within

Allocation based on gross sales is equal to

Gross Sales-Withinx Taxable income
Gross Sales-Total 2

Allocation based on value of property is equal to

Value of Property-Within x Taxable income
Value of Property-Total 2

EXCLUSION FROM GROSS INCOME

1. Proceeds of life insurance

a. Paid to the heirs or beneficiaries - not taxable/excluded
b. Interest on the proceeds held by the insurer - included in the gross income
c. Insured received the proceeds personally or outlived the policy - partly taxable and partly not.
Premiums returned - not taxable; excess of the premium - included in the gross income
d. If the beneficiary is the insured himself/herself or his/her estate - included in the gross income

2. Amount received by insured as return of premium

a. Premium returned - not taxable/excluded
b. Excess of premium returned - included in the gross income
c. Transferred by assignment for valuable consideration - actual value of consideration and
subsequent premiums not taxable

3. Gifts, bequests, and devices

a. Gifts subject to donor's tax; bequests and devices to estate tax
b. Income from transferred property - included in the gross income

4. Compensation for injuries or sickness

Non-taxable compensation damages and payment for injuries or sickness

a. Moral damages arising from grief, anxiety, libel, defamation, slander, breach of promise
to marry
b. Exemplary damages
c. Actual and liquidated damages for injuries
d. Damages to compensate loss of goods or belongings
e. Amounts received through Accident or Health Insurance or under Workers
 Compensation Act
f. Amounts of any damages received, whether by suit or agreement, on account of such
injuries or sickness
Taxable compensation for injuries
a. Damages to compensate loss of income or profit
b. Compensatory damages
c. Payment of interest on non-taxable damages

5. Income exempt under treaty

a. Salaries or diplomatic officials and agents

b. Salaries of officials of United Nations assigned in the Philippines if paid by the
United Nations, and certified by the Secretary General of the United Nations
c. Salaries, allowances, fees, or wages received by citizens of the United States of
America, or other nations, working in the consular offices in the Philippines
d. Income of any kind to the extent required by any treaty obligation binding upon
the Government of the Philippines

6. Retirement Benefits

a. Retirement benefits 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:
That the retiring official or employee has been in the service of the same
employer for atleast 10 years;
The retiring official or employee is not less than 50 years of age at the time of
his/her retirement;
The benefits granted shall be availed of by an official or employee only once.

b. Separation benefits received by an official or employee from employer due to sickness,

death, or physical and mental disability beyond the control of the official or employee

c. Benefits received from or enjoyed under the Social Security System in accordance with the
provisions of Republic Act No. 8282

d. Benefits received from the GSIS under Republic Act. No. 8291, including retirement gratuity
received by government officials and employees.

e. Payment of benefits due or to become due to any person residing in the Philippines under the
laws of the United States administered by the United States Veterans Administration.
f. Socials security benefits, retirement gratuities, pensions, and other similar benefits received
by resident or non-resident citizens of the Philippines or aliens who come to reside permanently
in the Philippines from foreign government agencies and other institutions, private, or public.

7. Income derived by the foreign government in the Philippines

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 government
b. Financing institutions owned or enjoying financing from foreign governments
c. International or regional financial institutions established by foreign governments

8. Income derived by the Government or its political subdivisions

9. Thirteenth- month pay and other benefits not exceeding P30,000
10. GSIS, SSS, Medicare, Pag-Ibig contributions, and union dues
11. Gains from sales of bonds, debentures, or other certificate of indebtedness with
maturity of more than five years
12. Gains from redemption of shares in mutual fund