GROSS INCOME
Disability
COMPENSATION
- any remuneration for rendering personal
services under an employer-employee
relationship (ER-EE). There is ER-EE when the
Employer exercises control over the
conduct of the employee’s work and work
results.
Types:
1. Salary or Wage
a. Salary – periodical pay other
than manual labor
b. Wage – specified intervals of
manual labor
2. Honoraria
a. recognition of services
performed
3. Allowances
a. Transportation, representation,
cost of living allowance
(COLA) are part
compensation subject
Withholding Tax (WHT)
b. Reimbursements for
activities are NOT taxable
4. Commission
a. Incentive for sales
5. Fees
a. For services rendered above
their regular tasks
6. Tips and Gratuities
a. Those not accounted for by the
employer are taxable income
BUT NOT subject to WHT.
7. Hazard/Emergency/Overtime/Night
shift pay
a. Part of gross salary
b. NOT Taxable if received by a
Minimum-wage earner
8. Retirement Pay
a. Generally taxable, except:
i. SSS/GSIS retirement pay
ii. Retirement Program
1. BIR approved
2. Reasonable and
afforded to all
3. Employed for 10
years
4. At least 50 years
old
5. First time availed
9. Separation Pay
a. Voluntary – taxable
b. Involuntary – not taxable:
i. Death
ii. Sickness
iii.
iv. Company restructure
v. Bankruptcy
10. Vacation/Sick leave pay
a. Leave with pay is Taxable
b. 10 days and below monetized
unused VL/SL of private
employees are NOT taxable
c. Monetized SL/VL to
government employees are
NOT taxable (no limit)
11. Thirteenth Month Pay and other
benefits
a. NOT Taxable up to PhP 90,000.
12. Profit share
a. Part of taxable compensation
13. Monetary awards for special services
a. Part of taxable compensation
14. Beneficial payments
a. Part of taxable compensation
b. Such as payment of
employee’s tax by the
of employer
to
___ - revisions introduced by the TRAIN law
usual
PASSIVE INCOME
Common examples:
1. Interest Income
a. On deposits = 20% Final Tax
b. On Long Term = Tax Free
i. BSP Certificate
ii. At least 5-year maturity
iii. Otherwise: 20% on entire
interest income
c. Foreign Currency Deposit
i. 15% on interest income
2. Royalty Income
a. In general = 20% FT
b. Arts and Literature = 10% FT
3. Dividend Income
a. DC to DC/RC = exempt
b. DC to Indiv/NRC = taxable (see
table)
4. Capital Gains on Sale of Shares not
Traded in the PSE
a. 15% on the gain
5. Prizes and winnings
a. Prizes
i. Reward for competitions
ii. 20% FT if more than
PhP10,000.
iii. Sec. 24 (A) if PhP10,000
and below.
b. Winnings
 i. Reward for a game of 4. Rice Subsidy of PhP1,500 or one (1)
chance derived in PH 50kg sack per month
ii. 20% FT regardless of 5. Actual medical assistance not
amount exceeding PhP10,000 per year
iii. Lotto or PCSO winnings 6. Laundry allowance of up to PhP300
of more than 10,000. per month
7. Established employee achievement
plan with a value not exceeding
EXCLUSIONS FROM GROSS INCOME PhP10,000 per annum
8. Gifts during Holidays and
EXCLUSIONS anniversaries not exceeding PhP5,000
--items of income not considered taxable per employee
income 9. Daily meal allowance for
-- exempt from income tax (if within the Overtime/Night Shift not exceeding
requirements) 25% of minimum wage
10. Uniforms and clothing allowance of
Examples: PhP5,000 per year
1. Holiday/overtime/night shift/Hazard 11. Productivity incentive under a
pay of minimum wage earner not collective bargaining agreement not
having other reportable income exceeding PhP10,000 per year
2. Outside income of NRC, OCW, RA,
and FC • amounts exceeding these limits are
3. 13th Month pay and other benefits not added to the “other benefits or bonus”
exceeding PhP90,000 threshold of Php90,000
4. Proceeds of life insurance policies
5. Amounts received through accident Fringe Benefits
or health insurance
6. Retirement Pay (BIR approved) Types:
7. Separation Pay (involuntary) 1. To Rank and File
8. SSS/GSIS benefits a. Taxable at normal tax
9. Allowances paid to military personnel b. Except:
10. Prizes and awards for recognition of i. De minimis
religious, charitable, educational, ii. Benefits provided for the
artistic, literary, or civic achievement convenience of the
if the recipient was: EMPLOYER
a. Selected without his/her 2. To Managerial and Supervisorial
participation a. Fringe Benefit tax of 35% on the
b. Not required to render future grossed-up monetary value of
services as a precondition the benefit
11. Prizes and awards granted to athletes b. Except:
in local and international sports i. De minimis
competitions sanctioned by the ii. Benefits provided for the
national sports association convenience of the
12. Interest of long-term deposits with a EMPLOYER
maturity of at least 5 years
13. Sweepstakes/Lotto Winnings • rank and file = neither managerial or
14. De Minimis Benefits within limits supervisorial

De Minimis Benefits • supervisorial = recommends actions to

1. Monetized unused Vacation/Sick
leaves not exceeding 10 days
(private employees)
2. Monetized unused Vacation/Sick
leaves of gov’t employees
3. Medical cash allowance to
dependents of employees not
exceeding PhP125 per month per
employee
managerials having functions that are not
clerical/routinely done and requires
independent judgment
• managerial = power to lay down and
execute management policies and affect
status of employees.
• the deductible amount is the grossed-up
monetary value of the fringe benefit
ITEMIZED DEDUCTIONS
BUSINESS EXPENSES
GENERAL requisites for deductibility:
1. Ordinary or Necessary
2. Paid/Incurred during tax year
3. Supported by receipts/invoices
4. Tax was withheld
5. For the trade or business (T/B) of the
Taxpayer (TP)
6. Must not be illegal, immoral, or
against public policy/order
7. Reasonable
• Cohan Principle
-- If there are findings that expenses were
incurred but are not supported by
documentary evidence, it is the BIR’s duty
to make an estimate based on the
circumstances of the Taxpayer.
Business expenses under the tax code
1. Salaries
a. For services performed
2. Travel
a. Incurred while away from
home
3. Rental
a. 5% Withholding
b. property must be used in trade
or business
4. Representation
(entertainment/amusement/recreati
on)
a. Not constitute
bribe/kickback
b. Within limits
i. Seller of goods = 0.5% of
Net Sales
ii. Seller of services = 1% of
Net Revenue
Other examples of business expenses
1. Repairs and maintenance
a. Only to maintain ordinary
working condition
b. Not to prolong its life or add to
its value
2. Training
a. Must be part of Trade/Business
(T/B)
• Note the difference of business expenses
and capital expenditures.
INTEREST
Special requisites for deductibility:
1. Indebtedness & interest in writing
2. Indebtedness connected to T/B
3. Interest due
4. Interest paid/incurred in tax year
5. Not between related parties
a. Family
b. Majority ownership (corp)
c. Grantor-Fiduciary
d. Fiduciary-Fiduciary of same
grantor
e. Fiduciary-Beneficiary
6. Not for petroleum operations
7. Not a capital expenditure
a. TP may opt to capitalize
8. Allowable deduction reduced by
33% of interest income (interest
arbitrage)
9. May include interest on taxes
TAXES
Special requisites for deductibility
1. Tax payments for the tax year
2. For Trade/Business of Taxpayer
3. Direct taxes
4. Deductible as per law
5. Except:
a a. Income Tax
b. Foreign Income Tax
c. Estate and Donor’s Tax
d. VAT
e. Special Assessments
• Note the diff. between Tax Credits and
Deductions.
• TP taxable on worldwide income may
avail of foreign tax credits for taxes paid
abroad within the limit:
income within x PH income tax
 income worldwide
LOSSES
Special requisites for deductibility:
1. Sustained within tax year
2. Completed or closed transaction
within tax year
3. Not compensated by insurance
4. Connected to T/B
5. If casualty loss, declared in 45 days
6. Not claimed as estate deduction
7. Not to exceed the adjusted or
depreciated value of the asset
• Capital losses are only deductible from
capital gains not subjected to CGT
• Wagering losses only deductible from
wagering gains
Net Operating Loss Carry-Over
-- excess of allowable deductions over gross
income of a business within the tax year of
any individual engaged in T/B/P or
Domestic and RF Corps subject to normal
corporate income tax
Special Requisites for deductibility
1. From T/B
2. From immediately preceding tax year
3. Not previously offset as deduction
4. Carried over as deduction to Gross
income for the next three (3)
consecutive tax years
5. No substantial change in ownership
of the T/B
a. 75% ownership transfer
• Note the relationship of NOLCO with MCIT.
The 3-year period continues despite
subjected to MCIT
BAD DEBTS
Special requisites for deductibility:
1. Existing indebtedness
2. Due and demandable
3. Not between related parties
4. Written-off in books of the tax year
5. Ascertained to be worthless
6. Uncollectible despite collection effort
• Note that recovery of a previous bad
debts shall be part of Gross Income of TP on
the year of recovery
DEPRECIATION
-- the gradual diminution of the value of
tangible asset with respect to its useful life
due to its wear and tear or obsolescence.
Special requisites for deductibility:
1. Reasonable
2. Property used in T/B
3. Charged-off in the tax year
4. Statement is attached to the return
Methods:
1. Straight-line
a. Cost less scrap value divided
by the useful life of the asset
2. Double Declining
a. Accelerated method of
Straightline
3. Sum-of-the-years-digits (SYD)
a. Proportional reduction based
on the number of useful years
DEPLETION
--similar to depreciation (straight line
method)
--cost less salvage value divided by the
estimated tons to be extracted
CHARITABLE CONTRIBUTIONS
Special requisites for deductibility
1. Paid to PH Gov’t or association
2. Within the tax year
3. Supported by receipts/records
4. Within the limits:
a. 10% of taxable income for
individuals
b. 5% of taxable income for
corporations
Degree of deductibility
1. FULL
a. To the PH Gov’t in line with the
NEDA National Priority Plan
 b. To foreign institutions/orgs
c. To accredited NGO’s NEW INDIVIDUAL INCOME TAX RATES:
2. LIMITED
a. To the PH Gov’t for general
public purpose
b. Accredited domestic corps for
religious, charitable, scientific,
etc. purposes
c. Social welfare institutions
d. NGO’s (not accredited)

CONTRIBUTIONS TO PENSION TRUSTS

Special requisites for deductibility

1. Established Pension/Retirement Plan
2. Reasonable
3. Employer-Funded
4. Amount contributed not subject to
control of employer (established)
5. Payment not part of other deduction

Notable Revisions introduced by the TRAIN

Law:
1. Removal of the Health and/or
Hospitalization Premiums as an
allowable deduction (2,400 annually
per family provided household
income not exceeding 250k)
2. Removal of Basic (50k) and
Additional (25k per child, 4 children
max) Personal Exemptions
3. Individual whose taxable income
does not exceed 250k need not file
an ITR (except those engaged in
trade or business)

OLD INDIVIDUAL INCOME TAX RATES: