TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

Gross income (inclusions) – Section 32 (A) performed by an employee

of the Tax Code for his employer whether paid
in cash or in kind.
 All income derived from whatever
 Includes:
source (whether coming from legal
 Salaries and wages
or illegal source), including but not
 Emoluments (salary,
limited to: (not all inclusive) fee, or profit from
o Compensation services (in employment or office)
whatever form paid)  Honoraria
 Fees  Taxable bonuses
 Salaries  Allowances
 Wages  Transportation
 Commissions
 Representatio
o Gross income derived from
n
the conduct of trade or
 Entertainment
business/ exercise of
 Fringe benefits fees
profession (business income)
 Director fees if
o Gains derived from dealings
the director is
in property
at the same
o Interest
time an
o Rents employee of
o Royalties the employer
o Dividends  Taxable pensions and
o Annuities retirement pay
o Prizes and winnings  Commission
o Pensions  Compensation for
o Partner’s distributive share services on the basis
from the net income of the of a percentage of
general professional profits
partnerships  Commissions on
 Shall include all types of income not insurance premiums
specifically enumerated under Sec  Tips
32 (A) of the Tax Code and are not  Marriage fees
exempt or excluded from income  Baptismal offerings
taxation  Sums paid for saying
o Income derived by masses for the dead
youtubers, vloggers, and  Other contributions
online sellers. received by a
clergyman,
evangelists or
religious worker for
 COMPENSATION INCOME
services rendered.
 Income arising out of
 May be paid on the basis of piece-
employer-employee
work (percentage of profits) because
relationship.
the basis upon which the
 Rules on compensation
remuneration is paid is immaterial in
income are applicable only
determining whether the
to individual tax payers,
remuneration constitutes
except nonresident alien
compensation.
not engage in trade or
 May be paid in money or in some
business.
medium other than money:
 Corporations, estate, and
o Stocks
trusts are not covered by the
rules on compensation due to o Bonds
lack of employer-employee o Other forms of property
relationship.  If compensation is paid in cash, full
 Encompassed all amount received is the measure of
remuneration for services compensation income.
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

 If services are paid in medium other representation, transportation and

than money, the fair market value of others paid to an employee per
the thing taken in payment is the payroll period.
amount of compensation. Supplemental compensation –
 If compensation is paid in kind includes payments to an employee
(stocks of the employer), the fair in addition to the regular
market value of the stock at the time compensation:
the services were rendered is the o Overtime pay
measure of compensation. o Fees (including director’s
 Income tax of the employee fees)
assumed or paid by the employer in o Commission
consideration of the latter’s services o Profit sharing
is considered compensation income o Monetized vacation and sick
of the latter. leave
o Fringe benefits received by
rank-and-file employees
Employee – (defined by RR 2-98) o Hazard pay
 Individual performing services under o Taxable 13th month pay and
an employer-employee relationship. other benefits
 No distinction is made between o Other remunerations
classes or grades of employees. received from an employee-
 Superintendents, managers, and employer relationship, with or
officers are considered as without regard to payroll
employees. period.

Employer-employee relationship Compensation income received after

 Exists when the person for whom
the services were performed has the
right to control and direct the
individual who performs the
services, not only as to the result
accomplished, but also as to details
and means by which such results
are accomplished.
Professional fees – income derived from
sale of services
 Not arising from employer-employee
relationship
Payment of commission as remuneration for
services rendered/products sold
 Common way to reward sales
personnel.
 Should be viewed as income arising
from employer-employee
relationship.
Retirement pay – unless exempt, taxable
compensation income.
CLASSIFICATION OF COMPENSATION
INCOME:
Regular compensation – includes
basic salary, fixed allowances for
termination of employee-employer
relationship
 The related compensation income
was earned at the time the
employer-employee relationship was
not yet terminated.
 Income was derived out of an
employer-employee relationship
 Ex. Separation pay
FRINGE BENEFITS AND 13TH MONTH
PAY
 Any goods, service or other benefit
furnished or granted by an employer
in cash or in kind, in addition to basic
salaries, to individual employees
 Fringe benefits subject to fringe
benefit tax cover only those fringe
benefits given or furnished to a
managerial or supervisory
employee.
 Fringe benefits furnished to rank and
file employees are subject to basic
tax and consequently to withholding
tax on compensation in accordance
with RR 2-98.
FIXED OR VARIABLE ALLOWANCES
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME
 Received by a public officer or
employee or officer or employee of a
private entity, in addition to the
regular compensation, foxed for his
position or office, is compensation
subject to income tax and
consequently, creditable withholding
tax on compensation income.
 Ex. Transportation allowance,
representation allowance,
communication allowance, living
away from home allowance
(LAFHA).
ADVANCES AND REIMBURSEMENTS
FOR TRAVELLING AND
ENTERTAINMENT EXPENSES
 Reasonable amounts
reimbursements/advances for
travelling and entertainment
expenses which are pre-computed
on a daily basis and are paid to an
employee while he is on assignment
or duty need not be subject to the
requirement of substantiation and to
withholding.
 Any amount paid specifically, either
as advances or reimbursements for
travelling, representation and other
bona fide ordinary and necessary
expenses incurred or reasonably
expected to be incurred by the
employee in the performance of his
duties are not compensation subject
to withholding:
o It is for ordinary and
necessary travelling and
representation
entertainment expenses paid
or incurred by the employee
in the pursuit of the trade,
business or profession;
o Employee is required to
account/ liquidate for the
foregoing expenses
accordance with the specific
requirements
substantiation for each
category of expenses
pursuant to Sec. 34 of the
Tax Code.
PREMIUMS ON LIFE INSURANCE
 Covering the life on an employee
paid by the employee is taxable
income to the employee, where the
insured employee, directly or
indirectly is the beneficiary under the
policy.
DEDUCTIBLE EXPENSE OF THE
EMPLOYER
 Any amount given by the employer
as benefits to its employees whether
classified as de mimis benefits or
fringe benefits shall constitute as
deductible expense upon such
employer.
TIPS AND GRATITUIES – paid directly to
an employee by a customer of the employer
that are not accounted for by the employee
to the employer are considered as taxable
income subject to basic tax
of  The same shall be subject to
withholding if accounted for by the
employee to the employer (included
in the bill paid by the customers)
VACATION AND SICK LEAVE
ALLOWANCES
 Amounts of “vacation allowances or
sick leave credits” which are paid to
an employee treated as
compensation income.
 Salary of an employee on vacation
or on sick leave, which are paid
notwithstanding his absence from
work, constitutes compensation.
 Monetized value of unutilized
vacation leave credits of 10 days or
less which were paid to the
employee during the year, being de
minimis benefits, are not subject to
or income tax and to withholding tax.
REPRESENTATION AND
TRANSPORTATION ALLOWANCES
(RATA)
 Granted under sec 34 of the general
appropriations act to certain officials
in and employees of the government
are considered reimbursements for
of the expenses incurred in the
performance one’s duties rather than
as additional compensation.
 Excess of RATA, if not returned to
the employer, constitutes taxable
compensation income of the
employee.
STIPENDS OF RESIDENT PHYSICIANS
 Received during their intensive
training in the residency program of
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME
a hospital are subject to creditable
withholding tax (CWT)
o Shall include not only fees,
but also per diems,
allowances, and any other
form of income payments not
subject to withholding tax on
compensation.
COST OF LIVING ALLOWANCE (COLA)
 Of minimum wage earners is exempt
from income tax.
 Forms part of the new wage rates or
statutory minimum wage
 Covered by the income tax
exemption of MWEs under RA 9504,
as implemented by Revenue
Regulations No. 10-08
o Covers the statutory
minimum wage (inclusive of
COLA under NCR Wage
Order No. NCR-16)
including holiday pay,
overtime pay, night shift
differential pay and hazard
pay.
INCOME OR GAIN FROM THE EXERCISE
OF STOCK PLANS
 BIR ruled under BIR ruling 119-2012
dated Feb. 22, 2012 that any income
or gain derived by an employee from
the exercise of stock option is
considered as additional
compensation subject to income tax
and to withholding tax on
compensation (WTC).
 BUSINESS INCOME
 Gross income derived from
the conduct of trade or
business or the exercise of
profession.
 They may arise from the sale
of products or services.
 Fees received by a
professional person
 Rents received by a
person in the real
estate business
 Taxed at progressive rates
on net business income
(income from the practice of
a profession; net income after
deduction of certain specified
expenses and any excess of
personal and additional
exemptions over
compensation income).
In the case of manufacturing,
merchandising, or mining business, gross
income
 Sales, less cost of goods sold plus
any income from investments and
from incidental or outside operations
or sources.
BAD DEBT RECOVERY
 Subsequent recovery of bad debt
previously written off in the books is
a taxable income provided that write-
off of the account resulted to a lower
taxable income at the time of write-
off – Tax Benefit Rule
– o The taxpayer is obliged to
declare as taxable income its
subsequent recovery of bad
debts in the year they were
collected to the extent of the
tax benefit enjoyed by the
taxpayer when the bad debts
were written-off and claimed
as deduction from income.
o If the taxpayer realized a
reduction of the income tax
due him on account of a
deduction for bad debts, his
subsequent recovery of the
same from the debtor shall
be treated as a receipt of
taxable income.
 If the taxpayer did not benefit from
the deduction of the said bad debt
written off; it did not result t any
reduction of his income tax in the
year of such deduction, the
subsequent recovery shall not be
treated as receipt of realizes taxable
income but a mere recovery or
return of capital which is not taxable.
TAX REFUND
 Tax benefit rule also applies with
respect to refund or credit for taxes.
 Taxable if the tax, when paid, was
deducted from gross income (local
taxes and fringe benefit tax).
 Shall be reported as income in the
year it was received, if the
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME
accounting method employed by the
taxpayer is the cash method.
o If the accounting method
used is the accrual basis, the
tax refund must be reported
in the year the refund was
ordered.
 Taxes which were not previously
allowed as deductions from the
gross income should not form part
of taxable income when refunded.
 Tax refunds that are not taxable
o Income tax (except fringe
benefit tax)
o Estate tax
o Donor’s tax
o Special assessment
o Stock transaction tax
o Income tax paid to a foreign
country if the taxpayer
claimed a credit for such tax
in the year it was paid.
CANCELLATION OR CONDONATION OF
DEBTS
 Income can come in many forms,
including the cancellation or
condonation of debts.
 Subject to basic income tax
 If services were rendered by
the debtor, in consideration of
which the indebtedness was
cancelled by the creditor.
 Taxable income ni debtor
 Subject to donor’s tax
 If the creditor, without
receiving any consideration
from the debtor and purely
as an act of liberality,
cancels the indebtedness.
 Subject to 10% final tax
 If the debtor is a shareholder
of a corporation that cancels
the indebtedness, such
cancellation constitutes
indirect dividend.
Before the condonation or forgiveness of
indebtedness will give rise to taxable
income, there must be an increase in the
assets of the debtor thereby enriching the
latter.
 A transaction whereby nothing of
exchangeable value comes to or is
received by a taxpayer does not give
rise to or create taxable income
 Gain or profit is essential to the
existence of taxable income.
 The condonation of indebtedness
must result in the debtor acquiring
something of exchangeable value in
addition to what he has before.
 While there was a reduction or
extinguishment of liabilities, there
was no corresponding increase in
assets.
 The debt condonation did not have
the effect of making the subsidiary’s
assets greater that they were before.
 Not subject to income tax nor
donor’s tax
Court Approved Debt Restructuring
 Gain resulting from condonation of a
company’s debts to its various
creditors pursuant to a court-
approved debt restructuring is not
subject to income tax
 Will not be subject to donor’s tax
since the condonation was not
implemented with a donative intent
but only for business consideration.
 The restructuring was not a result of
the mutual agreement of the debtors
and creditors. – through court action.
 GAINS RECEIVED FROM
DEALINGS IN PROPERTY
 Sale, barter, exchange
 Includes all income derived
from the disposition of
property (real or personal, for
sale or in exchange of other
property, or both) which
results in gain or loss.
 The gain from the transaction
shall be taxable gain
 Loss shall be deductible if
incurred in trade, profession,
or business.
Property Sold Type of Applicable
Gain tax
Ordinary asset Ordinary Basic tax
(graduated
rate –
individuals)
(Regular
corporate
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

income tax income subject to 20% final

rate – withholding tax.
corporate  Interest income derived from
tax payers investments in government
Capital asset securities are also subject to
 Shares of Capital Capital 20% final tax
stock gains tax
(domestic Interest income Applicable tax
corporation Arising from Basic tax
not listed indebtedness (graduated rate for
in the local individuals and
stock regular corporate
exchange) income tax for
 Real Capital Capital corporate
property in gain gains tax taxpayers)
the Ph Arising from: bank
 Other Capital Basic tax deposits
types of gain  Bank deposit, 20%;25% FWT
capital deposit
assets substitute,
trust fund,
mutual fund
Gains arising from expropriation of and other
properties or other dispositions of properties similar
to the government of real properties are arrangements
taxable.  Deposit under 15%
FCDU
 Includes taking by the government
 Long term Exempt for
through condemnation proceedings. bank deposit individual taxpayers
 The transfer of property through or investment other than
condemnation proceedings, and the NRANET
payment of just compensation is a
sale or exchange and profit from the
transaction constitutes capital gain.
 RENTAL INCOME
 Rent paid by the lessee for
 INTEREST INCOME the use or lease of property is
 Generally, taxable unless taxable income to the lessor.
exempted by law, whether or  Section 32 (A)(5)
not usurious.  Amount paid for
 Should only refer to such the use or
interest as arising from enjoyment of a
indebtedness (whether thing (real or
business or non-business, personal) or right.
legal or illegal); compensation  May be in the form of:
for the loan or forbearance of  Cash, at stipulated
money, goods, credits. prize
 Ex. Interest derived from  Obligations of the
lending money, goods, or lessor to 3rd persons
credits from one person to paid or assumed by
another or interest earned in the lessee in
the normal conduct of trade or consideration of the
business are subject to basic contract of lease such
tax. as real property taxes
 Interest income on deposits assumed by the
made in banking institutions as lessee on the
well as interest income in property being
deposit substitutes are passive leased, insurance or
other fixed charges.
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

 Such same were made pursuant to an

payments agreement with the lessor and the
shall be building erected or improvements
considered made are not subject to removal by
rental the lessee.
payments to  The lessor does not realize taxable
be reported by gain from leasehold improvements
the lessor as turned over by the lessee at the end
part of its of the lease where leasehold
taxable improvements are considered fully
income. depreciated and where the condition
 Advance payment of said property is such that
 Prepaid rent – necessary renovations and
shall be extraordinary repairs have to be
reported as undertaken to restore the same to
income in full useful condition.
in the year of  The lessee may claim depreciation
receipt, of the improvements as deduction
regardless of from the lessee’s gross income over
the accounting the remaining term of the lease or
method used the life of the improvements,
by the lessor. whichever is shorter.
 Security The lessor may at his option report income:
deposit that is
applied to Outright method (lump-sum method)
rental is a o Report as income the fair
taxable market value of such
income of the buildings or improvements
lessor. o FMV upon completion of the
o NON-TAXABLE RENT – not improvement
considered as income on the Spread-out/annual method
part of the lessor. o Spread over the life of the
 Advance rentals lease the estimated
representing option depreciated value (book
money for the value) of such buildings or
property improvements at the
 Security deposits to termination of the lease and
insure faithful report as income for each
performance of year the lease an aliquot part
certain obligations of thereof.
the lessee o Annual income =
When a person borrows money from Book value , end of leaseterm
another, the amount borrowed is not Remaining term of the lease
income, as the same is neither profit nor o Cost of leasehold
gain. improvements
Less: accumulated
 True in cases of deposits given by a depreciation
lessee to the lessor as security. Book value, end of lease
Divided by the remaining
term of the lease
LEASEHOLD IMPROVEMENT Annual income
 Improvement made to a leased
asset.
 Building erected or improvements PRETERMINATION OF LEASE
made by the lessee on the leased  If for any reason other than a bona
premises are taxable only if the fide purchase from the lessee by the
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

lessor, the lease is terminated, the individual taxpayers other

lessor realized additional income for than NRA-NETBs.
the year to the extent that the value Subject to 20% final tax
of such improvement exceeds the  Royalties derived within the
amount already reported as income PH other than royalties
on account of such improvement. subject to 10% final tax.
 Computation for the additional Subject to basic tax
income – pre-termination  Royalties generated in the
active pursuit and
FMV upon termination
performance of the
Less: income already corporation’s primary
recognized/reported purpose
 Royalties derived by resident
Income, year of pre- citizens and domestic
termination corporations from sources
 ROYALTY INCOME – share of the without the PH.
earnings as from invention, book or
play, paid to the inventor, writer, etc.
for the right to make, use, or publish  DIVIDEND INCOME
the same.  Payments made by a
 In nature are passive corporation to its stockholder
income, subject to final members.
withholding tax.  Portion of corporate profits
 If the royalty was generated paid out to stockholders,
in the active pursuit and direct or indirect.
performance of the  May be subject to basic tax,
corporation’s primary final tax or exempt from tax.
purpose, the same is not
Direct dividend – the paying corporation
passive income but
acknowledges the distribution of dividend
considered ordinary
through a resolution of the Board of
business income subject to
Directors declaring such distribution as
basic tax.
distribution of dividend.
 Income derived or
generated from activities  Subject to tax
that are in accordance with
Indirect dividend – distribution of profits
the purposes provided in its
disguised as payment of services,
articles of incorporation of
properties, etc.
the company are in the
nature of ordinary business  Subject to tax
income.  Ex.
o Payment of property
Payment constitutes compensation for
personal services – the payee has no purchased from shareholders
propriety interest in the property that gave in excess of its fair values
rise to the income. o Payment to shareholders for
services rendered in excess
of the fair value of such
services.
Payment constitutes royalty income – payee
o Cancellation by a corporation
has propriety interest.
of indebtedness of a
shareholder.
TAX TREATMENT ON ROYALTY INCOME TAX TREATMENT OF DIVIDEND INCOME
Subject to 10% final tax Subject to basic tax
 Royalties on books, other  Dividends from foreign
literary works and musical corporations
compositions from sources
within the PH received by
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME
 Share in the net income of a
general professional
partnership
Subject to final tax
 Cash/property dividends
actually or constructively
received by individuals from
domestic corporation or from
a joint stock company,
insurance or mutual fund
company and regional
operating headquarters of
multinationals.
 Inter-corporate dividends
received from domestic
corporation by non-resident
foreign corporations.
 Share of an individual in the
distributable net income after
tax of a partnership (other
than gpp) of which he is a
partner.
 Share of an individual in the
net income (after tax) of an
association, joint account, or
a joint venture or consortium
taxable as corporation for
which he is a member or co-
venturer.
Exempt from tax
 Inter-corporate dividends
received from domestic
corporation by other domestic
corporations and resident
foreign corporations.
Situs of Dividend
 From DC = income within
 From FC = within or without
TYPES OF DIVIDENDS
 Cash dividends
 Dividends paid out in
currency.
 Usually taxable to the
recipient in the year they are
paid.
 Most common method of
sharing corporate profits with
the shareholders of the
company.
 Subject to tax
 Property of dividends
 Dividends paid out in the
form of noncash asset from
the issuing corporation or
another corporation, such as
subsidiary corporation
 Also known as dividends in
kind.
 Subject to tax
 Liquidating dividends
 Generally, is not a dividend
income.
 When the company distribute
all of its assets in complete
liquidation or dissolution, the
gain realized or loss
sustained by the shareholder,
whether individual or
corporation, is a taxable
income or deductible loss of
the latter.
 Characterized as gain from
sale or exchange of shares
subject to ordinary income
tax.
 Gain is measured by the
difference between the fair
market value of the assets
received and the adjusted
cost to the shareholders of
their respective shares.
 In determining the FMV of
patents and trademarks
(brands), the average of the
low and high values of the
valuation of an independent
professional firm may be
used as a basis.
 Stock dividends
 Reflects the corporation
transferring an amount from
“surplus” (retained earnings) to
“capital stock” or paid-up
capital.
 Paid out in the form of
additional shares of the issuing
corporation, usually issued in
proportion to shares owned.
 An increase in the value of
capital investment is not
income.
 Exempt from income tax
 Taxable if it gives the
shareholder an interest
different from that which his
former stock represented.
 Ex. The corporation
gave shareholders
the option to received
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

either cash or scientific, educational,

property dividend artistic, literary or civic
instead of stock achievement provided the
dividend. recipient was:
 Selected without any
action on his/her part
 ANNUITY INCOME to enter the contest or
 Specified income payable at proceeding (not
stated intervals for a fixed or constituting gains
a contingent period, often for from labor)
the recipient’s life, in  Not required to render
consideration of a stipulated substantial future
premium paid either in prior services as a
installment payments or in a condition to receive
single payment. the prize/award.
 The amount received o All prizes and awards
representing return of granted to athletes in local
premium is considered return and international sports
of capital, hence, should be competitions and
excluded in the determination tournaments, whether held
of taxable income. in the PH or abroad and
 The annuity received sanctioned by their
representing interest or respective national sports
amounts over the premiums association
paid are considered return on o PCSO/Lotto winnings not
capital; should form part of exceeding 10k received by
the recipient’s taxable individual taxpayers, except
income. NRA-NETB
 Proceeds of life insurance Subject to basic tax
paid to the beneficiaries upon o Prizes and other winnings
death of the insured are not derived from resident citizens
taxable. and domestic corporations
from sources without the
PH.
 PRIZES AND OTHER WINNINGS o Prizes and winnings received
by corporations, if any
Prize – award to be given to a person or a o Prizes received by individuals
group of people to recognize and reward
from sources within the PH
actions or achievements.
amounting to not more
 Given to publicize noteworthy, or than 10k. (except NRA-
exemplary behavior, and to provide NETB)
incentives for improved outcomes Subject to 20% final tax
and competitive efforts. o Prizes received by individuals
 Taxable unless exempt. (except NRA-NETB) from
sources within the PH
Winnings – for tax purposes, exceeding 10k.
rewards/income by virtue of chance or bets. o PCSO/Lotto winnings
 Taxable unless exempt. exceeding 10k received by
individuals except NRA-
NETB
TAX TREATMENT OF PRIZES AND o Other winnings (other than
OTHER WINNINGS PCSO and Lotto winnings)
from sources within the PH
Exempt from tax regardless of amount.
o Prizes and award made Subject to 25% final tax
primarily in recognition of o Prizes and other winnings
religious, charitable, (including pcso and lotto
TAX – INCLUSIONS & EXCLUSIONS FROM THE GROSS INCOME

winnings) received by NRA- - Flow of wealth to the taxpayers

NETB which are not considered part of the
gross income for purposes of
computing the taxpayers’ taxable
 PENSIONS income due to the ff:
- In general, are subject to o Exempted by the
income tax except pensions fundamental law /statute
and requirement benefits o Does not come within the
exempt under the law. definition of income
- Not taken into account in
determining gross income.
 PARTNER’S SHARE IN THE NET
INCOME OF A GENERAL
PROFESSIONAL PARTNERSHIP Deductions – subtracted from the gross
(GPP) income.
- Section 26 of the Tax Code,
GPP is not subject to income
tax. Exemption from taxation
- Partners shall be liable for
income tax on their separate - Grant of immunity to particular
and individual capacities. persons
 Each partner shall
report as gross
income, his or her
distributive share
(actual/constructive)
in the net income of
the GPP.
Partner’s share in the income of:
 General partnership (GP)
o Treated as dividend income
of the partners
o Subject to applicable final
withholding tax on passive
income
o Not included in the
computation of taxable
income subject to basic tax
o Not included in the partner’s
income tax return.
 General professional partnership
(GPP)
o Not treated as dividend
income
o Subject to basic tax
o Included in the ITR of the
taxpayer or in the
determination of the partner’s
taxable income.

EXCLUSIONS FROM GROSS INCOME