Module 3:

Concept of Income
By: Cheryll Eileen B. Nillo
Income

all wealth flows into a taxpayer's hand other

than as a mere return of capital
all earnings derived from service rendered
(labor), from capital (business or investment) or
both including gain derived from sale or
exchange of personal or real property either
ordinary or capital asset
Non-taxable Income

It should be excluded by law or treaty

from taxation
Income is received but not required to be
included in the determination of taxable
income neither shall it be included as part
of the gross income
Taxable Income

Amount of income upon which the tax

rate prescribed by law is applied to obtain
the amount of income tax payable
Characteristics of Taxable Income

There must be a gain or profit

The gain must be realized or received
The gain must not be excluded by law or
treaty from taxation
Classification of Income

 Compensation Income -gain derived from labor especially

employment such as salaries and commissions
 Profession or Business Income - value derived from an exercise
of profession, business or utilization of capital including profit
or gain derived from sale or conversion of assets
 Passive Income - income which the taxpayer merely waits for
the amount to come in (e.g. royalty, interest, prizes, winnings)
 Capital gain - income derived from the sale of assets not used
in trade or business (e.g. sale of family home, sale of jewelry)
Forms of Income

 Cash - money or money substitutes received as

compensation or earnings derived from labor, practice of
profession and conduct of business (e.g. bills and coins in
circulation and legal tender; bank drafts, money order and
treasury warrants)
 Property - income denotes the earned right of ownership over
a tangible or intangible thing as a result of labor, business or
practice of a profession (e.g. real estate; stocks, bonds)
 Service - income based on performance received in
payment for the work previously rendered by one person to
another
Sources of Income - place wherein the
income is earned (situs of taxation)
Within the Philippines
Without the Philippines
Partly within and partly without the
Philippines
Income within - subject to Philippine
tax
Compensation for labor or services
Interest on bonds, notes, deposits
Dividends declared by domestic corporations
Rentals and royalties from property
Gains, profits and income from sale of real
and/or personal properties
Income without - income derived from foreign
countries. It is not subject to Philippine tax unless taxpayer is
a resident Filipino citizen or domestic corporation

 Compensation for labor or services rendered by

overseas contract workers (OFWs)
 Interest on bonds, notes, deposits
 Dividends declared by non-resident foreign
corporation
 Rentals and royalties from property
 Gains, profits and income from sale of real or
personal property
Income partly within and partly without -
Only income within is taxable in the Philippines, except if
the taxpayer is a resident Filipino citizen or a domestic
corporation whose income within and without are
generally subject to tax. It includes gains, profits and
income from:

Transportation or other services rendered

Sale of personal property produced within
and sold outside or vice versa (import and
export)
Income Taxpayer

Individuals
Corporations
General Partnerships
General Professional Partnership
Estate and Trust
Gross Income - all income from whatever
source , including but not limited to:
 Compensation for services in whatever form paid including but not
limited to fees, salaries, wages, commissions and similar items
 Gross income derived from the conduct of trade or business or
exercise of profession
 Gains from dealings in property - income derived from sale or
exchange of assets
 Interests - earning derived from depositing or lending money, goods
or credits
 Rental Income - earnings derived from leasing real estate or
personal property
 Royalties - compensation or portion of proceeds paid to the owner
of a right
 Dividend (Cash, Property or Stock) Income - earnings derived from
distribution made by a corporation out of its earnings or profits and
payable to stockholders
 Gross Income - all income from whatever
source , including but not limited to:
 Annuities -represents installment payments for life insurance sold by insurance
companies. If part of annuity payment represents as interests, then it's taxable
income. If annuity is a return of premium, it's not taxable
 Prizes and winnings - Taxable at 20% final tax rate
 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
 Partner's distributive share from the net income of general professional partnerships
 Illegal Income – taxable
 Bad Debts - (a) valid and existing debt; (b) debt ascertained to be worthless and
uncollected during the taxable year; (c) debt must be charged off during the
taxable year; (d) debt must arise from business or trade of a taxpayer
 Tax Refund/Credit - GR: refunds from taxes paid are taxable. Tax refund or credit
shall be included as part of gross income in the taxable year of receipt to the
extent of the income tax of said deduction
Gross Compensation Income

Any remuneration received as a result of

rendering personal services. It is obtained
from ER-EE relationship
 Classification of Gross Compensation
Income
 Basic salary (earnings received periodically for a regular work other than manual
labor) or wage (earnings received usually according to specified intervals of
work by hour, day, week)
 Honoraria - payments given in recognition for services performed for which
established practice discourages charging a fixed fee
 Fixed or variable allowance - COLA, transportation, representation, clothing
 Commission - percentage of total sales or on certain quota of sales volume
attained as part of incentive (e.g. sales commission)
 Fees - received by employee for the services rendered to the employer including
director's fee of the company
 Hazard or emergency pay - due to exposure to danger or harm while working
 Retirement pay - lump sum payment reserved by an employee who has served a
company for a considerable length of time and decides to withdraw from work
into privacy
Classification of Gross Compensation
Income: Retirement pay - requisites:
Retirement program is approved by BIR
Commissioner
Its implementation must be fair and
equitable for the benefit of all employees
Retiree should have been 50 years old
It should have been availed for the first
time
Classification of Gross Compensation
Income: Separation pay - not taxable if
involuntary:
Death
Sickness
Disability
reorganization of company/merger
Company at the brink of bankruptcy
Classification of Gross Compensation
Income
VL and SL – taxable
13th Month Pay - if Php90k or less, non-
taxable
OT – taxable
Profit-sharing
Awards for special services
Compensation received other than
cash
 Property – FMV
 Shares of stocks – FMV
 Services – FMV
 Cancellation of debt
 Insurance premium paid by the employer on life insurance
coverage of the employee wherein the beneficiary is the
employee's family constitute taxable income. Basis of the tax is the
amount of premium paid
 Living quarters and meals taxable - Exception: if for the exclusive
benefit of the employer; if furnished on employer's business
premises; employee accepts the lodging as a condition of his
employment in order to perform his duties properly
Gross Income from Business and
Profession
Business - any commercial activity engaged
in as a means of livelihood or profit of an
individual or group of individuals
Profession - any endeavor or work requiring
specialized training in the field of learning, art
or science engaged in as a means of
livelihood or profit of an individual or group of
individuals
Gains derived from dealings in
property
 Taxable gain or deductible loss
 Difference between the amount of value received by the
taxpayer over the determined value of the property he has
disposed of arising from sale and/or exchange of assets
 Determination of cost of the property given: (a) if the property
was acquired by purchase on or after March 1, 1913, the basis is
the acquisition cost; (b) if the property was acquired through
inheritance, the basis is the FMV at the date of acquisition; (c) If
the property was acquired as a gift, the basis is the same as it
would be in the hands of the donor or FMV at the time when the
gift was made, whichever is higher; (d) if the property is
acquired for less than full and adequate consideration, the basis
is the amount paid by the transferee for the property
Assets

 Ordinary asset - assets that are held primarily for sale

to customers in the ordinary course of trade or
business
 Capital asset - all assets held by the taxpayer
whether or nor connected in the trade or business
excluding ordinary assets (e.g. stocks or securities
held by taxpayers other than dealers in securities,
interest in partnership and joint ventures, franchise
rights, goodwill and residential lots)
Gain and Loss
 Ordinary gain - gain derived from the sale or exchange of
ordinary assets including gains from performance of services
and business
 Ordinary Loss - excess of expenses and losses over the income
of the taxpayer derived from sale or exchange of ordinary
assets
 Capital gain - excess of value received over the determined
cost from sale or exchange of a capital asset
 Capital Loss - excess of the gains over the losses on sales or
exchanges of capital assets
 Net Capital Gain - excess of the gain over the losses on sales
or exchanges of capital assets
 Net Capital Loss - excess of the losses over the gains on sales
or exchanges of capital assets