NOTRE DAME - SIENA COLLEGE OF POLOMOLOK

Polomolok, South Cotabato

School year 2020-2021

GROSS INCOME

Module No. 3-4 Inclusive Week: August 23-27, 2021

Module Overview Reference / Research Links
This module focuses on the Gross Income Income Taxation – Valencia & Roxas
which is important to the financial success. www.bir.gov.ph
Your gross income is every piece of your Income Taxation – Rex Banggawan
income, where your net income is what you Section 32 (A) of the Tax Code
take home with you because knowing your TRAIN LAW
finances and how they’re defined is
important.
MODULE CONTENT

GROSS INCOME - Except when otherwise provided, gross income means all income from
whatever source including but not limited to the following items:
A. COMPENSATION FOR SERVICES in whatever form paid, including but not limited
to fees, salaries, wages, commissions and similar items;

Gross Compensation Income means all remuneration for services performed by an

employee for his employer, whether paid in cash or in kind, unless specifically excluded
under the Tax Code
 Salaries and Wages; Honoraria; Fixed and Variable Allowances; Commission;
Fees; Tips and Gratuities; Hazard and Emergency Pay; Retirement Pay;
Separation Pay; Pension; Vacation and Sick Leave; 13 th Month Pay; Fringe
Benefits and De Minimis; Overtime Pay; Profit Sharing; Award for Special
Services; Beneficial Payments; Other form of Compensation.
Exception: The compensation income including the overtime pay, holiday pay, night
shift differential pay and hazard pay, earned by a Minimum Wage Earners (MWE), who
has no longer returnable income, are nontaxable and not subject to withholding tax on
wages.

Vacation and Sick Leave

The following rules shall be observed in determining whether money received for
vacation and sick leave is taxable or not:
 (A) If paid or availed of as salary of an employee who is on vacation or on sick leave
notwithstanding his absence from work, it constitutes taxable compensation income.
(B) Monetized value of unutilized vacation leave credits of 10 days or less which were
paid to private employees during the year are not subject to tax and to withholding
tax.
(C) Monetized value of vacation and sick leave credits paid to gov’t officials and
employees are not subject to income tax and to the withholding tax.

B. GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE OR BUSINESS

OR THE EXERCISE OF PROFESSION

Cost of Goods Manufactured & Sold – Manufacturing Concern (Cost of Sale)

Cost of Goods Sold – Trading or Merchandising Concern (Cost of Sale)

Note: Cost of Services from service business shall include the direct costs and expenses
necessarily incurred to provide the services required by the customers and clients which
include the following items:
 A. Salaries
B. Benefits of personnel, consultants and specialists directly rendering the
service
C. Cost of facilities directly utilized in providing the service such depreciation or
rental of equipment used and cost of supplies.
D. In case of banks, costs of services shall include interest expense.

C. GAINS FROM DEALING IN PROPERTY

D. INTEREST

1. Included in Interest Income – Interest includes such interest arising from

indebtedness, whether business or non-business. Unless exempted by law, interests
received by a taxpayer, whether or not usurious, are taxable.

2. Subject to Final Tax – Interest Income from Philippines sources subject to Final Tax
(not included in the taxable net income subject to tax rates in general)

A. Interest from any currency bank deposit

B. Yield or any other monetary benefit from deposit substitute
C. Yield or any other monetary benefit from trust funds and similar arrangements
D. Interest income received from depository bank under expanded foreign
currency deposit system
E. Interest income from long-term deposit or investment evidenced by
certificates prescribed by Bangko Sentral ng Pilipinas if preterminated before
5th year.

 Final Tax of 5% - Four years to less than Five Years

 Final Tax of 12% - Three years to less than Four years
 Final Tax of 20% - Less than three years

3. Exempt from Income Tax – Interest Income from the Philippines sources exempt
from taxes:

A. Interest Income received from depository bank under Expanded Foreign

Currency Deposit System by non-resident ( Individuals or Corporation)
B. Interest Income from long-term deposit or investments evidenced by
certificates prescribed by Bangko Sentral ng Pilipinas (more than 5 years)
C. Interest earnings received from a duly-registered Cooperative
D. Interest earnings received from a tenant who paid interest to a landowner on
the price of land under a tenant-purchaser agreement, CARP
E. RENTS
Rental Income refers to earnings derived from leasing real estate as well as personal
property.

 Advance payment not representing rent

A. Loan – Advance payment representing loan to lessor is not taxable unless

applied to unpaid rent.
B. Security Deposit – Advance payment representing security deposit is not
taxable unless violation in the lease contract arises.

 Leasehold Improvement

A. Additional Income to the Lessor – Leasehold Improvement is a source of

additional income to the lessor if it shall become his upon the expiration of the
lease.
B. Recognition of Income from Leasehold Improvement

(1) Lump sum or Outright Method – Lessor may report as income, at the time
when such buildings or improvements are completed, the fair market value
(FMV) of such buildings or improvements subject to lease.
(2) Annual or Spread-Out Method

(3) Computation of Income resulting from premature termination of lease

C. Computation of loss due to destruction of leasehold improvement before the

term of the lease expires
F. ROYALTIES

Royalty Income is a payment or portion of proceeds paid to the owner of a right, such as
an oil right or a patent for the use of it, or a portion of the proceeds from the work of an
author or composer.

(1) In general, royalty income includes those which are derived from natural resources or
products such as coal, gas, oil, copper, silver, gold, and other similar products. These
kinds of royalty income are subject to 20% final tax
(2) Royalties on books, literary works and musical composition are royalty income
subject to 10% final tax
Note: Subject to Final Tax if Royalties from Philippine Sources (20%); Subject to Tax
Rates in General if Royalties from Foreign Sources
G. DIVIDENDS
Dividend Income is a form of earnings derived from the distribution made by a
corporation out of its earnings or profits and payable to its stockholders, whether in
money or in the property.

Forms and Valuation of Dividend Income

1. Cash Dividend – Most common form of dividend, valued and taxable to the extent of
amount of money received by the stockholder.
2. Property Dividend – Usually valued and taxable to the extent of the Fair Market
Value of the property received at the time of declaration.
 3. Stock Dividend – General rule, Pure Stock Dividends are not subject to tax except
when the following circumstances exists:
A. There is an option that some stockholders could take cash or property dividends
instead of stock dividend
B. Some stockholders exercised the option to take Cash or Property dividends
C. The exercise of option resulted in a change of the stockholder’s proportionate
share in the outstanding shares of the corporation.
4. Scrip Dividend – is issued in the form of promissory note and is taxable to the extent
of its fair market value. It is taxable in the year when the warrant was issued.
5. Indirect Dividends – are those other dividends representing payments or rights
received by the taxpayer, which are really dividends.
6. Liquidating Dividends – are return of stockholders investment. It arises from the
distribution of assets by a corporation to its stockholders upon corporate dissolution.
As a rule, the excess amount of liquidating dividends over cost of shares surrendered
is taxable. Such excess is a gain realized which is taxable. If the Stockholders sustain
a loss, such loss is deductible.

H. ANNUITIES

Annuity is a specified income payable at stated intervals for a fixed or a contingent

period, often the recipient, in consideration of a stipulated premium paid either in prior
instalment payment or in a single payment.

Non-Taxable Annuity – Annuity representing return of premium

Taxable Annuity – Excess of the amount returned as premium

I. PRIZES AND WINNINGS

Prize is a reward for a contest or a competition and represents remuneration for an effort
reflecting one’s superiority.
Winning is a reward for an event that depend on chance such as winnings from
gambling, lottery or raffle ticket.
 Note: Train Law - Philippine Charity Sweepstakes and Lotto Winnings in excess of
P10,000 shall be subject to 20% final tax.
J. PENSIONS
Pension is a stated 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.
Pension pay is taxable unless the law states otherwise, or unless the BIR approves the
pension plan of a private company.

Note: Retirement Pay refers to a lump sum payment received by an employee who has
served a company for a considerable period of time and has decide to withdraw from
work into privacy.

In general, it is taxable except in the following instances:

(A) SSS or GSIS Retirement pays
(B) Retirement pays due to old age provided that the following requisites are met:
(1) The retirement program is approved by the BIR Commissioner;
(2) It must be a reasonable benefit plan. Its implementation must be fair and
equitable for the benefit of all employee
(3) The retiree should have been employed for 10 years in the said company;
(4) The retiree should have been 50 years old at the time of retirement;
(5) It should have been availed of for the first time.
 K. PARTNER’S DISTRIBUTIVE SHARE from the net income of General Professional
Partnership

The partner’s share in the distributive profit of a professional partnership represents his
gross income. This topic is to be discussed further in the following module.

L. OTHER SOURCES OF INCOME

These earning are categorized as “other sources of income” because they are generally
incidental earnings or not common source earnings.

Rulings:
1. Damage Recovery
(A) Recovery of lost profit is taxable.
(B) Recovery of lost capital is not taxable
2. Forgiveness of Debt
(A) If debtor rendered service in favour of the creditor forgiveness of debt results in a
taxable income to the debtor.
(B) If the debtor did not render service in favor of the creditor forgiveness of debt results
in a taxable direct gift.
(C) If the debtor is a stockholder of a corporation forgiveness of debt by the creditor –
corporation result in dividend distribution.
3. Bad Debt Recovery
(A) Bad debts recovery is generally taxable
(B) Tax Benefit Rule: If in the year the bad debts was written off there was a reduction of
taxable income, bad debt recovery shall constitute a taxable income.
4. Tax Refund
(A) If the refunded tax is a deductible tax, the tax refund is taxable.
(B) If the refunded tax is not a deductible tax, the tax refund is not taxable.
Example of non-deductible taxes:
1. Philippines Income Tax
2. Transfer Taxes ( Estate and Donor’s)
3. Special Assessment
4. Foreign Income Tax claimed as Tax Credit
5. Value-Added Tax
6. Stock Transaction Tax
 LEARNING OUTCOMES

At the end of the lesson, the students shall be able to understand that understanding your gross income
and how to calculate your gross income can lead to savings on your taxes in the future. It’s important to
stay informed about your own finances that will help you make the most of your income in the future.

GRADUATE ATTRIBUTES
Knowledgeable Taxpayer
TEACHING LEARNING ACTIVITIES ASSESSMENT TOOLS

Activity No. 1 (Total= 45 points) Rubric:

Independent Problems: Accurate Solution & Answer 90%

Enable to solve the problem and shows
(1) Mr. Rodelio , single, reported the following income for correct solution. The answer presented
the taxable year 200A: is clear and accurate.

Detailed Explanation 10%

Writing shows high degree of attention
to logic and reasoning of points.
Explanation includes a reason, example
or details that is meaningful and
supports the solution.

Total: 100%
Mr. Rodelio retired at the age of forty-five as of
December 31, 200A, receiving a retirement pay of P
1,000,000. What is the Gross Taxable Compensation Income
of Mr. Rodelio for 200A?

(2) Assume the following data of Natoy Company:

(A) As a Manufacturing:

Compute the Gross Income?

 (B) As a Trading or Merchandising Business:

Compute for the Gross Income?

(C) As a Servicing Business

Compute the Gross Income?

(3) On March 1, 200A, Ms. Onah leases a portion of its

commercial to Mr. Ohan with the following terms:

The lease contract also stipulates that a 5% Ohan’s Net

Revenue will be credited to Onah as commission. Ohan
Net Revenue during the year is P 2,000,000.

 Onah’s 200A rent income would be?

 Assume that the advanced deposit is restricted, the
Onah’s gross reportable taxable income would be?

(4) The following information are available related to a 10

year lease contract which commenced on June 30,
200B:

The reportable income for leasehold improvement for

the
 year 200B is for Outright Method? For Spread-out
Method?

(5) The following data are pertaining to a 5th year lease

contract which started October 31, 200A:

The income from leasehold improvement was reported

by the lessor using spread-out method. Assuming that
the lease contract was pre-terminated on December 31,
200D, how much would be the additional income in
200D from the pre-termination of contract?

(6) Pacman is a resident Filipino Citizen, an inventor, a

song writer and international singer. He receives
royalties within and outside the Philippines as follows:

 What is the amount of final tax on royalty

income?
 What is the amount of royalty income subject to
normal tax?

Activity No. 2 (Total = 20 points)

Independent Problems:

(1) Gwapong Adonis Corporation received the following

refunds during the taxable year:

How much is the reportable gross income for tax

refunds?
 (2) Nikolai received the following amount in relation to
damage recoveries:

The Gross Income reported subject to tax from damage

recoveries would be?

(3) Mr. Wais invested P 1,000,000 in a 12% long-term

deposit certificate (BSP prescribed form) with five-year
maturity. Is the interest income from investment subject
to income tax?

(4) Mr. Matipid put his retirement pay in the following

investment:

 The interest income not subject to income tax

(final tax) during the year would be?

Note: (Show your solutions and detailed explanation)

 For our online discussion, we will be using Messenger,
Zoom or Google Meet.
 For your assignment, please send it to my email address
nlbtejano@gmail.com or nikkolexistejano@gmail.com.
ASSIGNMENT

Discuss about the Telegraph and Cable Services in computing the Gross Income.
Discuss the ruling about the 13th Month Pay and De Minimis.
Discuss the following rules which shall be observed in the Cancellation and Forgiveness of Indebtedness.

AGREEMENT OF POLICIES SUCH AS A POLICY ON LATE ASSIGNMENT

Attendance

Students are expected to attend all class meetings through messenger, zoom, or google meet. Students
who are absent without cause will be assigned zero points for the participation portion of the meeting. If
an assignment is due during the class meeting, students will still be responsible for submitting their
assignments on-time.

If the total absence excused or unexcused reach 20% of the number of the school days, the student will
be given a failing grade.
Ten cumulative absences without any note from the parents will constitute a valid ground for giving the
student a grade of FA.

Late Assignments

Late assignments will be accepted, but will not receive full credit, without exception. If an assignment is
turned in even 1 minute late, 10% of the total points will be deducted from the total possible grade. For
every 24-hour period that passes following the deadline, and additional 10% will be deducted. No
assignments will be accepted beyond finals week.

Academic Dishonesty

There is zero-tolerance for any form of academic dishonesty. Academic dishonesty includes plagiarism,
sharing individual assignments, and copying other people’s work. Be familiar with college regulations
governing academic dishonesty. Anyone or group found guilty of any academic crime will receive a
grade of zero.

Teacher’s Name : Nikko Lexis B. Tejano

Contact Number : 0905-267-3915 / 0909-743-0024
Email Address : nikkolexistejano@gmail.com / nlbtejano@gmail.com
FB/ Messenger Account : Alexis Nicko