GROSS INCOME

REGULAR TAX
GROSS INCOME – REGULAR TAX

Incudes pertinent items of income referred to in Section 32A of the tax code.

- It includes all income from whatever source (unless exempt from tax by law)
including, but not limited to:

1. Compensation for services in whatever form, including fees salaries, wages,

commissions and similar items

2. Gross income derived from conduct of trade or business, or in the exercise

of a profession

3. Gain from dealings of properties

4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the NI of the GPP
GROSS COMPENSATION INCOME
• any remuneration for rendering PERSONAL SERVICES
• Obtained from employer-employee relationship

GR: every form of compensation is taxable regardless of

1. how it is earned,
2. By whom it is paid
3. The label by which it is designated
4. The basis upon which it is determined, or
5. The form in which it is received
• EXCEPT:
if the compensation income, including OT pay, holiday pay, NSD, hazard
pay, is earned by Minimum wage earners (MWE), such income is Non-taxable,
and are not subject to withholding tax on wages
WHEN DOES AN EMPLOYER-EMPLOYEE
RELATIONSHIP EXIST?
The usual test used to determine the existence of employer-employer relationship is
the so-called four-fold test. In applying this test, the following elements are generally
considered:
1. Right to hire or to the selection and engagement of the employee. –absolute
power
2. Payment of wages and salaries for services.
3. Power of dismissal or the power to impose disciplinary actions.
4. Power to control the employee with respect to the means and methods by which
the work is to be accomplished. This is known as the right-of-control test.
Of the above-mentioned elements, the right of control test is considered as the
most important element in determining the existence of employment relation

NB:
-compensation income subject to tax is based on GI less applicable exemptions

- NO business and personal expenses are allowed as deductions from GI

- Rules on compensation only applies to RC, NRC, RA, and NRA engaged in
trade or business in the Philippines
CLASSIFICATION OF GROSS COMPENSATION
INCOME
1. Basic Salary or wage
Salary- refers to earnings received periodically for a regular work OTHER
THAN manual labor
Wages- refer to earnings received usually according to specified intervals
of work, as by hour, by day, or by week
 2. Honoraria – payments in recognition for services performed for which
established practice discourages charging a fixed fee. Eg, honorarium of a
speaker
3. Fixed or variable allowances- these are fixed or variable transportation,
COLA (Cost of Living Adjustments), and other allowances which are given to
employees in addition to the regular compensation fixed for his position.

- These allowances are subject to tax, and withholding tax; EXCEPT

a. It is ordinary and necessary expenses by the employee in the pursuit of the
EMPLOYER’S business or profession and

b. The employee is REQUIRED to liquidate for such expenses

LATEST RULINGS ON ALLOWANCES
1. Transportation and cell phone allowances given to CALL CENTER employees
are NON TAXABLE

a. Fixed monthly transportation allowance of 1500 for Rank and file, and P3000 for
supervisory employees

b. Mobile phone allowance of P1200 for supervisors, managers and directors WHO
ARE EXPECTED to be ON call 24 hours a day
2. Transportation and Night Shift Allowances granted to Night shift employees, and
“Meal and out of town allowances” for employees in field work are not subject to
Fringe benefit tax (FBT), income tax, and withholding tax
3.Transportation allowance of P100 per day given to BPO Company servicing global
business 24 hours a day to employees working OT beyond 10 pm, or if work starts at
10 pm is exempt from tax
4. Commission- usually a percentage of total sales or on certain quota
5. Fees – received by an employee for services rendered to an employer over
and above their regular salaries, including director’s fee of the company, and
clerks of court.
6. Tips and gratuities – paid directly to an employee ( by a customer of the
employer) which are not accounted for by the employee to the employer, it is
taxable, but not subject to withholding tax.
7. Hazard or emergency pay- additional payment received due to employee’s
exposure to danger or harm while working.
8. Retirement pay- refers to the lump sum payment received by an employee
who has served a company for a considerable period of time
 General Rule: retirement pay is taxable
Except: (50-10-1)
1. SSS or GSIS retirement pays
2. Retirement pay due to old age, provided
a. The retirement program is approved by CIR
b. Its implementation must be fair and equitable for the benefit of all
employee
c. The retiree should have been employed for at least 10 years
d. The retiree is at least 50 years old at the time of retirement
e. It should have been availed of for the first time
9. Separation Pay –
Taxable if voluntarily availed of.
Nontaxable if NOT voluntary (cause is beyond the control of the employee)
Examples of Involuntary separation:
a. Death
b. Sickness
c. Disability
d. Reorganization/ merger of the company
e. Company in the brink of bankruptcy (order of payment: BIR, employee,
creditors)
10. Pension –
allowance paid regularly to a person on his retirement or to his dependents
on his death, in consideration of past services, meritorious work, age, loss, or
injury.
GR: taxable
Except: expressly exempt, or the BIR approves the pension plan
11. VACATION AND SICK LEAVE

TAXABLE NONTAXABLE

• If paid or availed of as salary of an • Monetized value of unutilized

employee who is on vacation or on VACATION LEAVE credits of ten
sick leave (10) days or less which were paid to
private employees during the year
• Monetized value of unutilized
VACATION and SICK Leave
credits paid to GOVERNMENT
officials and employees
12. Thirteenth Month pay and other benefits
13th month pay and other benefits are NOT TAXABLE if the amount is P
90,000 or less.
13. Fringe benefits and de minimis benefits
Fringe benefits- any good, service or other benefit furnished or granted by
an employer, in cash or in kind, in addition to basic salaries of an individual
employee.
E.g. housing, vehicle of any kind, membership fees to social athletic clubs.
De minimis benefit- privileges of relatively small value as given by the
employer to his employees.
14. Overtime pay
refers to the premium, payment for working beyond regular hours of work
which is included in the computation of gross salary of the employee.
15. Profit sharing
It is proportionate share in the profits of the business received by the
employee in addition to his wages.
16. Awards for special services
the amount received as an award for special services of employee or
suggestions to employer resulting in the betterment of the organization.
17. Beneficial payments
payments where an employer pays the income tax owed by an employee
18. Other forms of compensation
Other forms received due to service rendered and compensation paid in
kind.
e.g. insurance premium paid by employer for insurance coverage where the
heirs of employee are the beneficiaries
CANCELLATION OF DEBT

• The cancellation of debt may either be considered INCOME, GIFT, or

CAPITAL TRANSACTION depending on the situation
• Income if Cancellation is due to performance of service
• Gift, if the creditor is not asking for anything in return
• Capital transaction, if it is in effect as payment of a dividend
INSURANCE PREMIUM AS COMPENSATION

• - the insurance premium is PAID by the employer, for employee’s coverage,

and the beneficiary is his FAMILY.
INCOME TAX PAID AS COMPENSATION

• If the employer paid the tax due of its employee, such payment shall be
considered as part of his compensation.

• The basis of tax is the amount of tax paid

CONVENIENCE OF THE EMPLOYER’S RULE

• Allowances in kind furnished to the employee as a necessary incident in the

performance of his duties are NOT TAXABLE.
 LIVING QUARTERS

1. If it is furnished in addition to cash salary, then the Rental Value is reported

as compensation Income

2. If it is for the exclusive benefit of the employer, the Rental Value is NOT
part of Compensation income
MEALS SUBSIDIZED BY EMPLOYER

GR: the value of any board and lodging furnished by an employer is

TAXABLE INCOME of the employee.
Exception:
If it is given for the convenience of the employer and it is incidental to
the requirement of his work.
 REMUNERATION FOR CASUAL LABOR

Casual labor – labor which is occasional, accidental or irregular

Rules:
1. Casual labor which is NOT in the course of trade or business of the employer* =
NOT compensation

2. Casual labor is In the course of business of the Er = Compensation

3. Casual labor performed for a Corporation = Compensation

* in the course of trade or business of the employer = if it promotes or advance the

business of the employer
GROSS INCOME FROM BUSINESS OR
PROFESSION
Business- any commercial activity engaged as a means of livelihood or profit
of an individual or group of individuals
Profession- primary endeavor or work, requiring specialized training in the
field of learning, art, or science engaged as a means of livelihood or profit of an
individual or group of individuals
GROSS INCOME FROM BUSINESS
The gross income from business is classified into several groups, namely:

1. Manufacturing
2. Merchandising or Trading
3. Servicing
4. Farming
5. Long-term contract
Sales P XX
Less: COS/COGM XX
Gross Income P XX

COST OF SALES
Beginning Inventory P XX
Purchases XX
Ending Inventory (XX)
Cost of Sales P XX
TELEGRAPH AND CABLE SERVICES
The gross income of telegraph and cable services of a FOREIGN
CORPORATION shall include income from services within the Philippines
only.
Income may be derived from the following:
1. Gross revenues derived form messages ORIGINATING from the
Philippines

2. Amount received by the company collected abroad on collect messages

ORIGINATING from the Philippines and deducting such amounts paid or
accrued for transmission of messages beyond the company’s own circuit.
RENTAL INCOME
- Refers to earnings derived from leasing personal as well as real property.
- It also includes all other obligations assumed to be paid by the lessee to the
third party, in behalf of the lessor. (e.g. interest, taxes, loans, insurance)

- Includes GROSS RECIPTS for the year (Earned or Unearned)

RENTAL INCOME: RULES
a. Prepaid rental
- if the prepaid rental is WITHOUT restrictions, the ENTIRE amount is
TAXABLE in the year received

NB. GR , if servicing business = Cash Basis

All advanced payment is income UNLESS the amount represents
SECURITY DEPOSIT.
RENTAL INCOME: RULES
b. Security Deposit with Restrictions-
If the advanced payment is a security deposit which restricts the lessor to its
use, it shall be excluded in the determination of income.
c. Security Deposit with Acceleration clause
If there are stipulations, the Security deposit will be part of the income if
such stipulation is violated.
LEASEHOLD IMPROVEMENT

• If the lessee built an improvement on the leased property, and later on after
the contract it will become the property of the lessor, the latter may report the
income using wither OUTRIGHT or SPREADOUT method
a. Outright method- the LI is considered as income of the lessor when the
improvement is COMPLETED as its COST/FMV (FMV will only be used if
the Cost is not given)
LEASEHOLD IMPROVEMENT
b. SPREAD-OUT METHOD
The income will be spread-out to the lease term. The income will be equal
to the BV if the leasehold improvement after the lease term, over the lease term
Use the formula:
TERMINATION OF THE CONTRACT OF LEASE

• Where there is an improvement made by the lessee on the leased property,

and THE TERMINATION OF LEASE CONTRACT IS MADE BEFORE
THE EXPIRATION OF THE LEASE TERM, the following rules shall
apply:

1. If the improvement is DESTROYED before the expiration of the lease, the

LESSOR is entitled to DEDUCT AS LOSS for the year WHEN THE
DESTRUCTION TAKES PLACE, the amount PREVIOUSLY reported as
income, LESS ANY SALVAGE VALUE, to the EXTENT THAT SUCH
LOSS was not compensated by insurance.
2. If for any reason OTHER than a BONA FIDE purchase from the lessee by
the lessor, the lease is terminated, so that the LESSOR comes into possession
of the property PRIOR to FINAL FIXED period of lease contract, the lessor
receives ADDITIONAL INCOME for the year IF the value of the
improvement EXCEEDS the AMOUNT of Income already reported.
FV/BV of the leasehold improvement P XX
Multiply by fraction of years after the lease term up to
%
estimated useful life
Total Income should there be no destruction of Property P XX
Divide by: Lease term LT
Annual Income from leasehold improvement P XX
Multiply by no of years BEFORE TERMINATION YRS
Additional Income Due to pretermination of Lease contract P XX
Add: Portion of LI after termination but before expiration of
XX
lease term (BV * Termination/Lease term)
Total Income to be recognized P XX
GAINS FROM DEALINGS OF PROPERTY

• Refers to income derived from sale, and or exchange of assets , which results
in gain because of the excess of the amount or value received by the taxpayer
over the determined value of the property he has disposed of.
TAX BENEFIT RULE
• If an amount was deducted before, and the taxpayer enjoyed tax benefit,
thereby in subsequent year recovers all or in part of that item, it shall be
subject to tax.
 BAD DEBTS RECOVERY
- What can be taxed is up to the amount of deduction enjoyed before
The following are the rules for deductibility of bad debts:

1. There must be a valid and existing debt arising from business or trade of the
taxpayer

2. The debt must be actually ascertained to be worthless and uncollectible

during the taxable year

3. The debt must be written off during the taxable year

TAX REFUND OR CREDIT
GR: refunds from taxes paid are taxable
EXCEPT:
1. Estate or Donor’s tax
2. Income tax
3. Stock transaction tax
4. VAT, claimed as input tax

If tax paid is deductible, then refund is taxable!

DAMAGES RECOVERY
- An amount received by an injured person as payment for loss of income, or
payment to compensate damage to property, injury, or loss of life

- RULE: payment for loss of income = TAXABLE

-payment TO COMPENSATE damage to property, injury, or loss of life =

NONTAXABLE
ANNUITIES
• These are installment payments received for LIFE INSURANCE SOLD by
insurance companies

Premium NONTAXABLE

ANNUITY

Interest TAXABLE
INCOME FROM WHATEVER SOURCE

• Concept of income from whatever source derived

Income from whatever sources derived means inclusion of all income not
expressly exempted within the class of taxable income under the laws
irrespective of the voluntary or involuntary action of the taxpayer in producing
the gains, and whether derived from legal or illegal sources.
IMPORTANT THINGS TO REMEMBER:

• Minimum Wage Earner

• Senior Citizens
• PWD
MINIMUM WAGE
EARNER
- The minimum wage is fixed by
the Regional Tripartite Wage and
Productivity Board
Minimum wage earner:
-Private Sector- paid the statutory minimum
wage
-Public Sector- not more than the statutory
minimum wage in the non-agricultural sector
where he/she is assigned

SENIOR CITIZENS
- Residents of the Philippines, and
- Who are at least 60 years old
NOTE:
-They are not exempt from income taxes
UNLESS considered Min wage earner
-They are granted a 20% discount from
selected establishments
-They are also exempt from VAT from those
selected establishments
-Discounts given to them are treated as tax
deductions for business establishments under
RA 9257

PERSONS WITH
DISABILITY
- Individuals suffering from
restriction or different abilities
- As a result of mental, physical or
sensory impairment to perform
an activity in a manner or within
the range considered normal for
human beings
NOTE:
-They are not exempt from income taxes
UNLESS considered Min wage earner
-They are granted a 20% discount from
selected establishments
-They are also exempt from VAT from those
selected establishments
-Discounts given to them are treated as tax
deductions for business establishmentss
 THANK YOU!

Summarized notes from various sources

jmc_Mar2019