TOPIC: REGULAR INCOME TAX – Exclusions from AND Inclusions in 5.

Rent Income
Gross Income
Aljon J. Roque, CPA, MBA * Income of lessor under lease agreement

Payments Lessor Lessee

Gross Income, Defined Made
Except when otherwise provided, gross income means all income from a) Rent Income Expense
whatever source, including (but not limited to the following items): b) Obligation of
lessor to third Income Expense
 Compensation for services in whatever form paid, including person paid by
but not limited to fees, salaries, wages, commissions, and lessee
similar items; c) Advance rent Income in full in Expense to be
 Gross income derived from the conduct of trade or business the year received prorated over the
or the exercise of a profession; regardless of period covered
 Gains derived from dealings in property; accounting regardless of
 Interests; method used accounting method
 Rents; d) Leasehold Income reported Expense
 Royalties; improvement under lump sum (depreciation) over
 Dividends or annual method the term of the lease
 Annuities; or estimated life
 Prizes and winnings; whichever is shorter
 Pensions; and
 Partner’s distributive share from the net income of the * Advance payment not representing rent
general professional partnership.
a) Loan Advance payment representing loan to the lessor is no
INCLUSIONS not taxable unless applied to unpaid rent.
b) Security Advance payment representing security deposit is
1. Compensation deposit not taxable unless violation in the lease contract
arises.
2. Gross Income – trade, business or exercise of profession
* Leasehold improvement
 Exempt from income tax Leasehold improvement is a source of additional income to the lessor
- Income of Barangay Micro-Business Enterprise (BMBE) if it shall become his upon the expiration of the lease.
under RA 9178
- Enterprises enjoying tax holiday incentives under EO Recognition of income from leasehold improvement
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 Those subject to special tax regimes 1. Lump sum or outright method - Lessor may report as
- Philippine Economic Zone Authority (PEZA)- registered income, at the time when such buildings or improvements
entities – 5% gross income tax are completed, the fair market value (FMV) of such buildings
- Tourism Infrastructure and Enterprise Zone Authority or improvements subject to the lease.
(TIEZA)- registered enterprises – 5% gross income tax 2. Annual or spread out method
 Those subject to final taxes Cost of leasehold improvement xxx
- Subcontractors of petroleum service contractors – 8 % Less: Accumulated depreciation
final tax (remaining term of lease) xxx
- ROHQs, OBUs and FCDUs – 10% final tax Book value, end of lease xxx

3. Gains derived from dealings in property Annual income

Book value, end of lease xxx
4. Interest Income – refers to interest income other than passive Divided by: Remaining term of lease xxx
income. A taxable interest income must have been actually paid out of
an agreement to pay interest. It cannot be imputed. 3. Computation of income resulting from premature
termination of lease
Examples of Exempt Interest Income:
FMV of improvement when lessor took possession xxx
 Imputed interest income Less: Amount already reported as income xxx
 Interest income earned by landowners in disposing their Income, year of termination xxx
lands to tenants pursuant to Comprehensive Agrarian
Reform Law Computation of loss due to destruction of leasehold improve-ment
 Those subject to final tax before the term of the lease expires

Amount already reported as income xxx

Less: Insurance recovery xxx
Salvage value xxx xxx
Loss xxx
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6. Royalties
7. Dividends
8. Annuity - a specified income payable at stated intervals for a fixed
or a contingent period, often for the recipient’s life, in consideration of
a stipulated premium paid either in prior installment payments or in a
single payment.
- Annuity representing return of premium (NON
TAXABLE)
- Excess of the amount returned as premium (TAXABLE)
9. Prizes and Winnings
10.Pensions (see exclusions from gross income)
11. Partner’s distributive share from the net income of the general
professional partnership [Subject to Section 24 (A)]
12. Income from whatever source
1) Examples of 1) Gains arising from expropriation of
income from property;
whatever source 2) Gambling gains;
3) Income from illegal business or from
embezzlement;
4) Damage recovery (compensation for
damages);
5) Forgiveness of debt;
6) Bad debt recovery;
7) Tax refunds; and
8) Prizes and awards.
2) Damage 1) Recovery of lost profit is taxable.
recovery 2) Recovery of lost capital is not taxable.
3) Forgiveness of 1) If debtor rendered service in favor of the
debt creditor forgiveness of debt results in a
taxable income to the debtor.
2) If the debtor did not render service in
favor of the creditor forgiveness of debt
results in a taxable indirect gift.
3) If the debtor is a stockholder of a
corporation forgiveness of debt by the
creditor- corporation results in dividend
distribution.
4) Bad debt 1) Bad debt recovery is generally taxable.
recovery 2) Tax benefit rule: If in the year the bad
debt was written off there was a reduction
of taxable income, bad debt recovery shall
constitute a taxable income.
5) Tax refunds 1) If the refunded tax is a deductible tax, the
tax refund is taxable.
2) If the refunded tax is not a deductible tax,
the tax refund is not taxable.
Examples of non-deductible taxes:
1) Philippine income tax;
2) Transfer taxes (estate tax and donor’s
tax);
3) Special assessment;
4) Foreign income tax claimed as tax
credit;
5) Value-added tax;
6) Stock transactions tax.
EXCLUSIONS
1) Proceeds of life insurance;
2) Amount received by insured as returns 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 subdivision;
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, debenture or other certificate of
indebtedness with maturity of more than 5 years;
h) Gains from redemption of shares in mutual fund.
Proceeds of life Insurance
Proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise
are excluded from gross income.
If such proceeds are held by the insurer under an agreement to pay
interest thereon, the interest payment shall be included in the gross
income.
Amount received by insured as return of premium
The amount received by the insured, as a return of premium 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 of the contract.
If the amounts, when added to amounts received before the taxable
year under such contract, exceed the aggregate premium paid,
whether or not paid during the taxable year, then the excess shall be
included in gross income
In the case of a transfer for a valuable consideration by assignment or
otherwise, of a life insurance, endowment or annuity contract or any
interest therein, only the actual value of such consideration and the
amount of the premiums and the sums subsequently paid by the
transferee are exempt from taxation.
Participating dividends are not income to the insured. They are
treated as return of capital.
Gifts, bequests and devises
Gifts, bequests and devises are subject to transfer taxes (estate tax or
donor’s tax.)
Income from property derived from its investment, sale or otherwise
shall be included in the gross income.
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Gift, bequest, devise or descent of income from any property, in cases
of transfers of divided interest, shall be included in the gross income.
Neither alimony nor an allowance based on a separation agreement is
taxable income.
Benefits received from the GSIS including retirement gratuity received
by government officials and employees are not included in the gross
income.
Miscellaneous items

Compensation for injuries or sickness

The following compensation for injuries or sickness shall not be 1. Income derived by governments
included in the gross income:
1) Amounts received through Accident or Health Insurance or Under a) Income derived by foreign governments, financing
Workmen’s Compensation Act; institutions owned, controlled or enjoying refinancing
2) Amounts of any damages received, whether by suit or agreement from foreign governments, and international or regional
on account of such injuries or sickness. financial institutions established by foreign governments
from investment in loans, stocks, bonds or other domestics
Recoveries of damages, representing compensation for personal securities, or from interest on deposits in banks in the
injuries arising from libel, defamation, slander, breach of promise to Philippines.
marry, alienation of affection are not subject to income tax and shall
not be included in gross income. b) Income accruing to the Government of the Philippines
derived from any public utility or from the exercise of any
Income exempt under treaty essential government functions.
Income of any kind to the extent required by any treaty obligation
binding upon the Government of the Philippines is exempt from 2. Prizes and awards
taxation.
3. 13th month and other benefits
1) Salaries of officials of the United Nations assigned in the Philippines
if paid by the United Nations and certified by the Secretary General of 4. GSIS, SSS, Medicare and Pag-ibig contributions, and union dues
the United Nations;
2) Salaries, allowances, fees, or wages received by citizens of the 5. Gains realized
United States of America working in consular offices in the Philippines
a) Gains realized from the sale or exchange or retirement of bonds
are exempt from all taxes;
debentures or other certificate of indebtedness with a maturity of
3) Salaries of diplomatic officials and agents.
more than 5 years shall not be included in the gross income.
Retirement benefits
b) Gains realized by the investor upon redemption of shares of stock in
Retirement benefits received under R.A No. 7641 and those received
a mutual fund company.
by officials and employees of private firms whether individual or
corporate in accordance with a reasonable private pension plan
maintained by the employer.
1) The retiring official or employee has been in the service of the same
employer for at least 10 years and is not less than 50 years of age at
the time of his retirement;

The benefits granted shall be availed of by an official or employee only

once.

Any amount received by an official or employee of by his heirs from

the employer as a consequence of separation of such official or
employee from the service of the employer because of death, sickness
or physical disability or for any cause beyond the control of the said
official or employee is not included in the gross income

The provisions of any existing law to the contrary notwithstanding,

social security benefits, retirement gratuities, pensions and other
similar benefits received from foreign government agencies and other
institutions, private or public by resident or nonresident citizen of the
Philippines or aliens who come to reside permanently in the
Philippines are not included in the gross income.

Payments of benefits due or to become due under United States

Veterans Administration are not included in the gross income

Benefits received from or enjoyed under the Social Security System

(SSS) are not included in the gross income.