MODULE 8- GROSS INCOME

Concept of Gross Income Gross income means the total income of a taxpayer subject to tax. It includes
the gains, profits, and income derived from whatever source, whether legal or illegal.

It does not include income excluded by law, or which are exempt from income tax.

Gross Income Defined

Gross income means all income derived from whatever source, including (but not limited to) the following
items:

(1) Compensation for services; - Including pensions and retiring allowances (except those exempt by law)

(2) Gross income derived from the conduct of trade or business or the exercise of a profession;

(3) Partner’s distributive share from the net income of a general professional partnership;

(4) Rents;

(5) Annuities (excess over premium paid);

(6) Gains derived from dealings in property;

(7) Interest income;

(8) Royalties;

(9) Dividends;

(10)Prizes and winnings;

Note: The above enumeration is not exclusive. Gross income may also include other forms of income
which are not even mentioned in the list above. An example of this would be income from illegal sources.

Items of Gross Income

1. Compensation For Services

Compensation for services, of whatever kind and in whatever form paid, forms part of gross
income. The name by which the remuneration for services is designated is immaterial. Thus, salaries,
wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation,
entertainment, and the like); fees, including director’s fees, if the director is, at the same time, an
employee of the employer/corporation; taxable bonuses and fringe benefits, except those which are
subject to the fringe benefits tax under Section 33 of the Tax Code; taxable pensions and retirement pay;
and other income of a similar nature constitute compensation income.

A) Compensation Income which may be in the following forms:

a) Cash
b) Allowances

c) Property – the FMV of the thing taken in payment is the amount of compensation.

d) Employer’s stock – the FMV of the shares at the time the services were rendered.

e) Promissory notes – the fair discounted value of the note as of the time of receipt. The employee shall
also record additional income upon the recovery of the discount.

f) Forgiveness of debt for services rendered to a creditor

Note: Where the debtor is a stockholder of the corporation condoning the debt, the condonation
of the debt amounts to an indirect payment of dividend.

g) Income tax of the employee assumed or paid by the employer, in consideration of the latter’s services.

h) Pensions and retiring allowances – except those exempt by law

i) Stock options – the FMV of the stock option at the time the services were rendered by the employee.

B) Stock Options

1) The amount of compensation shall be the FMV of the stock options at the time the services were
rendered.

2) When the employee exercises the option by paying the exercise price (equity-settlement option), it
results in additional income. Such additional income shall equal the higher of the book value or FMV of
the shares, less the exercise price.

(a) If the employee is a rank-and-file employee, the additional income shall be recognized by the employee
as taxable compensation and shall be subject to the CWT on compensation.

(b) If the employee is a supervisory or managerial employee, the additional income shall be treated as a
fringe benefit subject to the final FBT.

3) When the grantor (the corporation) simply pays the difference between the FMV of the shares and the
exercise price (cash-settlement option), the same rules in (2) above apply.

C) Fringe Benefits which may be in the form of (1) meals furnished or subsidized by the employer; (2)
living quarters; (3) life insurance premiums paid by the employer where the insured employee is the
beneficiary; (4) facilities or privileges provided by the employer; or (5) allowances.

Fringe benefits are classified under the following categories, namely:

Those subject to the fringe benefits tax (“FBT”)

- Fringe benefits given to employees holding managerial or supervisory positions, and which are listed in
RR No. 3-98, as amended.

Those included in gross income in the ITR

- Fringe benefits given to rank and file employees - Fringe benefits given to employees holding managerial
or supervisory employees and which are not listed in RR No. 3-98, as amended Those which are not taxable
- Fringe benefits given to employees for the convenience of the employer, or if incurred by the employee
in the pursuit of the trade, business, or profession of the employer and is liquidated and accounted for by
the employee. - “De minimis” fringe benefits

D) Salaries and Allowances During Leaves of Absence

E) Separation Pay NOT Due to a Cause Beyond the Control of the Employee

General Rule: Separation pay is included in gross income of separated employee.

Exception: If separation is caused by something not of the employee’s making. For example, if separation
is due to cessation of the business, or as a consequence of death, sickness, other physical disability, or for
any cause beyond his control, the separation pay shall be exempt from tax.

F) Fees

Fees received by an employee for the performance of a service for the employer, including director’s fees
(including per diems and allowances), are regarded as compensation income.

Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions
received by a clergyman, evangelist, or religious worker for services rendered are considered
compensation.

Exception: Authorized fees paid to public officials, such as notaries public, clerks of court, sheriffs, etc.,
for services rendered in the performance of their official duties, are not considered wages.

G) Dismissal Payment

Any payment made by an employer to an employee on account of dismissal, that is, involuntary separation
from the service of the employer, constitutes wages, regardless of whether the employer is legally bound
by contract, statute, or otherwise to make such payment.

H) Tips and Gratuities

Tips or gratuities paid directly to an employee (by a customer of the employer) which are not accounted
for by the employee to the employer are considered taxable income, but not subject to withholding tax.

2. Gross Income From Business

1) In general, “gross income” means total sales less COGS, plus any income from investments and from
any incidental or outside operations or sources.