06 Gross Income

PART 6
Gross Income
GROSS INCOME
Gross Income means all income derived from whatever source, including, but not limited to, the
following items: (Section 32, RA 8424)
Inclusions from Gross Income

1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional partnership.
Exclusions from Gross Income

The following items shall not be included in gross income and shall be exempt from
income tax:
1) Life Insurance
2) Amount Received by Insured as Return of Premium
3) Gifts, Bequests, and Devises
4) Compensation for Injuries or Sickness
5) Income Exempt under Treaty
6) Retirement Benefits, Pensions, Gratuities, etc.
7) Miscellaneous Items
a) Income Derived by Foreign Government
b) Income Derived by the Government or its Political Subdivisions
c) Prizes and Awards
d) Prizes and Awards in Sports Competition
e) 13th Month Pay and Other Benefits
f) GSIS, SSS, Medicare and Other Contributions
g) Gains from the Sale of Bonds, Debentures or other Certificate of
Indebtedness
h) Gains from Redemption of Shares in Mutual Fund
Compensation Income
Compensation income is income arising out of an employer employee relationship. It
encompassed all remuneration for services performed by an employee for his employer whether
paid in cash or in ' kind (RR2-98). Remuneration for services constitutes compensation income
even if the relationship of employer and employee does not exist any longer at the time when
payment is made between the person in whose employ the services had been performed and the
individual who performed them.
 Fringe Benefits:
◊ Taxable FB received by:
 Rank & file: Subject to basic tax:
 Supervisory or managerial: Subject to FBT (a final tax):
◊ Tax Exempt FB
 Exempt under the law
 If the grant is required by the nature of, or necessary to the trade, business
or profession of the employer.
 If the grant is for the convenience of the employer.
 De minimis
o Conforming to the ceiling
 Tax exempt
 No included in the P90,000 threshold
o In excess of the ceiling
 Subject to tax only on the excess over P90,000
 Tax exempt 13th month pay and Other benefits
◊ Prior to 2015 – P30,000

◊ 2015 to 2017 – P82,000
◊ Beginning Jan. 1, 2018 – P90,000
"Other Benefits" include:
 Christmas bonus
 Productivity incentive bonus
 Loyalty awards
 Gifts in cash or in kind and other benefits of similar nature actually received by
officials and employees of both government and private offices.
Further, RR 3-2015 emphasized that this exclusion from gross income is not applicable
to:
 Self-employed individuals; and
 Income generated from business
 Fixed or Variable Allowances
In general, fixed or variable allowances in addition to the regular compensation, fixed for
his position or office, is compensation subject to income tax and creditable withholding tax
on compensation income [Section 2.78.1 (A) of RR 2-98 as amended by RR 10-2008].
Examples of fixed or variable allowances are transportation allowance, representation
allowance, communication allowance, living away from home allowance (LAFHA), and the
like.
 Pre-computed business allowances
Reasonable amounts of 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 an assignment or duty need not be subject to the requirement of substantiation and to
withholding (i.e, Per Diem).
 Business related allowances subject to liquidation

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, if the following conditions are satisfied:
 It is for ordinary and necessary travelling and representation or entertainment expenses

paid or incurred by the employee in the pursuit of the trade, business or profession; and
 The employee is required to account/liquidate for the foregoing expenses in accordance

with the specific requirements of substantiation for each category of expenses pursuant
to Sec. 34 of the tax code.
REPRESENTATION AND TRANSPORTATION ALLOWANCES (RATA)

RATA granted to certain officials and employees of the government are considered
reimbursements for the expenses incurred in the performance one's duties rather than as
additional compensation. However, the excess of RATA, if not returned to the employer,
constitutes taxable compensation income of the employee.
STIPENDS OF RESIDENT PHYSICIANS

The stipends received by resident physicians during their intensive training in the
residency program of a hospital and individuals engaged in the practice of profession or calling
like doctors of medicine are subject to creditable withholding tax (CWT) imposed under tax Code,
as amended [BIR Ruling No. DA (C-004)024-2010, February 4, 2010].
COST OF LIVING ALLOWANCE (COLA)

COLA of minimum wage earners is exempt from income tax. The COLA forms
part of the new wage rates or statutory minimum wage. Hence, it is covered by the
income tax exemption of MWEs under RA 9504, as implemented by Revenue
Regulations No. 10-08, which 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.
 Premiums on Life Insurance
Premium on life insurance covering the life of an employee paid by the

employer is taxable income to the employee, where the insured employee, directly or
indirectly is the beneficiary under the policy.
 Retirement Benefits, Separation Pay, Pension
◊ With Reasonable private benefit plan
Retirement pay as a rule, is taxable, except those received by officials

and employees of private firms, whether individual or corporate, under a
reasonable private benefit plan maintained by the employer which meets the
following requirements:
1. The retirement plan must be approved by the Bureau of Internal Revenue;
2. The retiring official or employees must have been in the service of the
same employer for at least ten (10) years, and;
3. Is not less than fifty (50) years of age at the time of retirement; and
◊ In the absence of reasonable private benefit plan
An employee may receive tax-exempt retirement benefits who has

reached the age of 60 years or more, but not more than 65 years, who has
served at least 5 years in the establishment (BIR Ruling No. 495-14 dated
December 11, 2014).
 Tips and Gratuities
◊ If paid directly to an employee: taxable income of the employee but not subject
to withholding.
◊ If accounted for by the employee to the employer (i.e., included in the bill paid
by customers): taxable income of the employee and subject to withholding,
Rental Income
Rental Payments PXXX

Expenses of the lessor assumed by the lessee XXX
Income from leasehold improvements XXX
Total Rental Income PXXX
RENT INCOME
Rent is the amount paid for the use or enjoyment of a thing (real or personal right.
 Taxable Rent Income of the lessor may in the form of:
1. Cash received, at stipulated price.
2. Obligations of the lessor to third persons paid or assumed by the lessee in

consideration of the contract of lease.
3. Advance payment, which may be in the form of:
 Prepaid rent (reported in full in the year of receipt)
 A security deposit that is applied to rental
 Non-Taxable Rent Income of the lessor may in the form of:
1) Advance rentals representing option money
2) Security deposits to insure faithful performance of certain obligations of the lessee.
RENTAL PAYMENTS
Rental income shall be taxable on the year received, whether earned or unearned,
provided, there is no restriction as to its use, and regardless of method of accounting employed.
Security deposit shall be taxable:
 Upon forfeiture in favor of the lessor; or
 Upon application as rental payments.
LEASEHOLD IMPROVEMENTS
Improvements made by the lessee shall be treated as income of the lessor If:
 The improvements will be owned by the lessor (transfer of ownership) at the end of the
lease;
 The lessor is not required to pay the lessee the value of such improvements.
INCOME FROM LEASEHOLD IMPROVEMENTS IS REPORTED AS FOLLOWS:
METHOD TAXABLE AMOUNT
1) Outright or
Lump-sum Method FMV of improvement
2) Spread-out or Annual = BV, end of lease term
Annual Method Income Remaining Term of lease
 Pre-Termination of the lease
The additional income arising from the pre-termination is computed as follows:
FMV, year of pre-termination Pxxx

Income already recognized/reported (xxx)
Income, year of pre-termination Pxxx
DIVIDEND INCOME
KINDS:
1) Cash Dividends
2) Property Dividends
3) Stock Dividends
4) Liquidating Dividends
CASH & PROPERTY DIVIDENDS
 Cash and property dividends shall be taxable upon declaration.
STOCK DIVIDENDS
 GENERAL RULE. Distribution of stock dividend is not taxable because they are not
realized income.
EXCEPTION: A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stockholdings represented.
LIQUIDATING DIVIDENDS
 Liquidating dividends are exempt up to the extent of the cost of investment being a
mere return of capital. However, anything in excess of the cost shall be considered
income and therefore taxable.
If the amount received by the stockholder in liquidation is less than the cost of
investment, the loss in the transaction is deductible to the extent allowed for capital
losses.
SITUS OF DIVIDEND INCOME
1) Dividends from within:
a) Dividend income from Domestic Corporation
b) Dividend income from Foreign Corporation, IF at least 50% of gross income for the
three year period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in existence)
was derived from sources within the Philippines.
2) Dividends from without:
a) Dividend income from Foreign Corporation (in general)
b) Dividend income from Foreign Corporation, IF the ratio of the gross income
Philippines over worldwide income for the three-year period ending with the close of its
taxable year preceding the declaration of such dividends (or for such part of such period
as the corporation has been in existence) is less than 50%.
3) Partly within and partly without. Refer to the summary below:
SOURCE OF DIVIDEND SOURCE OF INCOME

DOMESTIC CORPORATION Income is purely from Philippine sources
FOREIGN CORPORATION
Ratio: If Ratio is:
GI-Phils x Dividend  < 50%: Income is treated as entirely derived from
GI-world source outside of the Philippines
 ≥ 50%: Income is derived partly from sources
within and partly without the Philippines
PRIZES AND OTHER WINNINGS
Subject to 1) Prizes received by individuals (except NRA-NETB and SAE)

20% FWT from sources within the Philippines exceeding P10, 000.
2) Other winnings from sources within the Philippines
regardless of amount except PCSO and Lotto winnings.
NOTE: PCSO/Lotto- taxable if received by a NRA-NETB and SAE.
Subject to 3) Prizes and Other winnings derived by resident citizens and

basic income domestic corporations from sources without the Philippines
tax 4) Prizes and winnings received by corporations
5) Prizes received by individuals from sources within the
Philippines amounting to P10, 000 or less
Subject to Prizes and Other winnings including PCSO and Lotto

25% final winnings received by NRAS-NETB and SAEs
tax
Exempt from 1) Prizes and award made primarily in recognition of

income tax • Religious, Charitable
• Scientific
• Educational artistic, literary; or
• civic achievement
Provided the recipient was:

a) Selected without any action on his part to enter the
contest or proceeding (not constituting gains from
labor); and
b) Not required to render substantial future services as a
condition to receive the prize/award.
2) All prizes and awards granted to athletes in local and international sports
competitions and tournaments, whether held in the Philippines or abroad and
sanctioned by their respective national sports association.
3) Winnings under Section 126 of the tax code (winnings on

horse racing)
GROSS INCOME FROM WHATEVER SOURCE DERIVED
The law imposes a tax on income from whatever source which means tha includes
income whether coming from legal or illegal sources.
EXAMPLES:
1) Income from jueteng
2) Income from swindling activities
3) Recovery of bad debts
4) Refund of taxes
5) Unutilized/excess campaign funds
6) Forgiveness of indebtedness
 RECOVERY OF BAD DEBTS
In order for recovery of bad debts be considered income, the following must be
complied:
1) Bad debts were written off in the previous year/s;
2) Such bad debts were deducted in arriving at taxable income;
3) There is a resulting tax benefit on the deduction.
 REFUND OF TAXES
The following are the requirements before refund of taxes be considered income:
1) There is payment of tax in the previous year/s;
2) The tax paid was deducted in arriving at the taxable income;
3) There is a resulting tax benefit on the deduction,
 FORGIVENESS OF INDEBTEDNESS
TYPE TAX TREATMENT

Debtor performs services to the creditor Compensation Income
Creditor desires to benefit the debtor without Gift

any consideration
Creditor is a corporation and the debtor is a Dividend Income

stockholder of such corporation
LIFE INSURANCE
GENERAL RULE: Exempt from tax since it is a mere reimbursement for the loss of life.
EXCEPTION: The following shall be taxable:

1) The beneficiary was chosen for a valuable consideration,
2) The interest earned on the insurance policy.
RETURN OF PREMIUM
The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contracts, either during the term or at the maturity of
the term mentioned in the contract or upon surrender of the contract.
Return of Premium Exempt

In excess Income
GIFTS, BEQUESTS & DEVISES

The value of property acquired by gift, bequest, devise, or descent: Provided, however,
that income from such property, as well as gift, bequest, devise, or descent of income
from any property, in cases of transfers of divided interest, shall be included in gross
income.
Property inherited or received as gift Exempt

Income of above properties Taxable
COMPENSATION FOR INJURIES OR SICKNESS

Amounts received, through Accident or Health Insurance or under Workmen's
Compensation Act, as compensation for personal injuries or sickness, plus the amounts
of any damages received, whether by suit or agreement, on account of such injuries or
sickness.
INCOME EXEMPT UNDER TREATY

Income of any kind, to the extent required by any treaty obligation binding upon the
Government of the Philippines, shall be exempt.
RETIREMENT BENEFITS, PENSIONS, GRATUITIES ETC.

1) Retirement benefits received under Republic Act No. 7641
2) Those received by officials and employees of private firms, whether individual or

corporate, in accordance with a reasonable private benefit plan maintained by the
employer: Provided
a. That the retiring official or employee has been in the service of the same
employer for at least ten (10) years;
b. At least fifty (50) years of age at the time of his retirement and
c. That the benefits granted shall be availed of by an official or employee only once.
3) Any amount received by an official or employee or by his heirs from the employer as
a consequence of separation of such official or employee from the service of the
employer because of:
a. Death
b. Sickness
c. Other physical disability or for any cause beyond the control of the said official or
employee.
4) Social security benefits, retirement gratuities, pensions and other similar, retirement
benefits received by resident or nonresident citizens of the Philippines or liens who
come to reside permanently in the Philippines from foreign government agencies
and other institutions, private or public.
5) Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
6) Benefits received from or enjoyed under the Social Security System in accordance
with the provisions of Republic Act No. 8282.
7) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
MISCELLANEOUS ITEMS
1) Income derived from investments in the Philippines in loans, stocks, bonds or other
domestic securities, or from interest on deposits in banks in the Philippines by:
a. Foreign governments
b. Financing institutions owned, controlled, or enjoying refinancing from foreign
governments; and
c. International or regional financial institutions established by
foreign governments.
2) Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the Philippines or to
any political subdivision thereof.
3) Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary, or civic achievement but only if:
a. The recipient was selected without any action on his part to enter the contest
or proceeding; and.
b. The recipient is not required to render substantial future services as a condition

to receiving the prize or award.
4) All prizes and awards granted to athletes in local and international

sports competitions and tournaments whether held in the Philippines or abroad and
sanctioned by their national sports associations.
5) Gross benefits from 13th month pay and other benefits received by officials and
employees of public and private entities up to the extent of P82, 000.
6) 6) GSIS, SSS, Medicare and. Pag-Ibig contributions, and union dues of individuals.
7) Gains realized from the sale or exchange or reurement of bonds, debentures or

other certificate of indebtedness with a maturity of more than me (5) years.
8) Gains realized by the investor upon redemption of shared stock in a mutual fund
company,
SOURCE OF INCOME
CLASSIFICATION OF INCOME AS TO SOURCE
1) Income from sources within the Philippines
2) Income from sources partly within or partly without the Philippines
3) Income from sources without the Philippines
INCOME FROM SOURCES WITHIN THE PHILIPPINES

1) Interests derived from sources within the Philippines, and interest on bonds, notes or
other interest-bearing obligations of residents, corporate or otherwise;
2) Dividends from:
a) Domestic Corporation
b) Foreign corporation, IF at least 50% of gross income for the three year period ending
with the close of its taxable year preceding the declaration of such dividends (or for
such part of such period as the corporation has been in existence) was derived from
sources within the Philippines.
Dividend Income PXXX

Multiply by: (GI, Ph/GI, World) X%
Dividend Income, Ph PXXX
3) Compensation for labor or personal services performed in the Philippines;
4) Rentals and royalties from property located in the Philippines or from any interest in
such property;
5) Gains, profits and income from the sale of real property located in the Philippines;
6) Gains, profits and income from sale of personal property:
a. If purchased, only if sold in the Philippines;
b. If manufactured, only if manufactured and sold within the Philippines.
INCOME FROM SOURCES PARTLY WITHIN OR PARTLY WITHOUT
1) Gains, profits and income from the sale of personal property produced (in whole or
in part) by the taxpayer within and sold without the Philippines' or
2) Produced (in whole or in part) by the taxpayer without and sold within
the Philippines.
INCOME TAX SYSTEMS

◊ SCHEDULAR TAX SYSTEM VS. GLOBAL TAX SYSTEM
SCHEDULAR GLOBAL
Tax Treatment:  Income tax rules varies and  Uniform tax
made to depend on the treatment or rules
kind or category of taxable
income of the taxpayer
Characteristics:
1. Classification of  Categorizes or classifies  Does not categorize
income income income
2. Tax rates  Imposes different tax  Imposes uniform tax

tax treatment and rates rates
3. Applicability  Individual taxpayers Corporate taxpayers
Approach used in the Philippines

Partly scheduler (i.e. income tax for individuals) and partly global
(i.e. income tax for corporations).
GROSS INCOME TAXATION VS. NET INCOME TAXATION
Gross income taxation Net income taxation
Deductions/  No deductions or exemptions  Allows deductions, exemptions
Exemptions allowed
Tax Base  Gross income  Taxable income
Applicability  NRA-NETB  Individuals taxpayers except
NRA-NETB
 Nonresident corp.  Corporate taxpayers except
nonresident foreign cop.
Advantages  Minimizes source of graft and  Just, fair and reasonable

corruption due to minimization Equitable relief (deductions
of margin of discretion and exemptions) to taxpayers
exercised by revenue district  More revenue to the
officers government
 Simplifies tax system  Minimizes tax evasion
Dealings in Property
CLASSIFICATION OF ASSETS
1) Ordinary
2) Capital
ORDINARY ASSETS
The following are classified as ordinary assets:

◊ Stock in trade of the taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer;
◊ Property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business;
◊ Property used in the trade or business, of a character which is subject to allowance for
depreciation; or
◊ Real property used in trade or business of the taxpayer.
The sale of the above assets will result either to gain or loss. The gain is subject to basic tax
while the loss is fully deductible in arriving at the taxable income.
CAPITAL ASSETS
All assets not classifiable under ordinary shall be classified as capital assets.
Net Capital Gain - means the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges.
Net Capital LOSS - means the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges.
PERCENTAGE TAKEN INTO ACCOUNT
In the case of a taxpayer, other than a corporation, only the following percentages of the
gain or loss recognized upon the sale or exchange of a capital asset shall be taken into
account in computing net capital gain, net capital loss, and net income:
1) One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and
2) Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months.
LIMITATION ON CAPITAL LOSSES

GENERAL RULE: Losses from sales or exchanges of capital assets shall be allowed only to
the extent of the gains from such sales or exchanges.
EXCEPTION: The limitation on capital losses will not apply provided:

1) The seller is a domestic bank or trust company;
2) A substantial part of whose business is the receipt of deposit;
3) The asset sold is:
a. Bond
b. Debenture
C. Note
d. Certificate; or
e. Other evidence of indebtedness
NET CAPITAL LOSS CARRY-OVER
If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss,
such loss (in an amount not in excess of the net "taxable income" for such year) shall
be treated in the succeeding taxable year as a loss from the sale or exchange of a capital
asset held for not more than twelve (12) months.
GAINS & LOSSES FROM SHORT SALES ETC.
The following shall be considered capital gains or losses:

1) Gains or losses from short sales; and
2) Gains or losses attributable to the failure to exercise privileges or options to buy or
sell property.
DETERMINATION OF AMOUNT AND RECOGNIZTION OF GAIN OR LOSS
COMPUTATION OF GAIN OR LOSS
Money received PXXX

FMV of property received XXX
Amount Realized PXXX
Basis or Adjusted Basis (XXX)
Gain (Loss) PXXX
BASIS FOR DETERMINING GAIN OR LOSS of Property Shall be:
MANNER OF ACQUISITION BASIS

1) Purchase Cost
2) Inheritance Fair Market Value at the time of inheritance
3) Donation GENERAL RULE:
The same as it would be in the hands of the
donor or the last preceding owner.
EXCEPTION:
Fair Market value at the time of donation if lower
than the amount above, for the purpose of
determining the loss.
4) If acquired for less than
an adequate and full Amount paid by the transferee
consideration in money
or money's worth
EXCHANGE OF PROPERTY
GENERAL RULE: Upon the sale or exchange of property, the entire amount of the gain or loss shall
be taxable.
EXCEPTION: No gain or loss shall be recognized if:

1) In pursuance of a plan or merger or consolidation –
a) A corporation, which is a party to the merger or consolidation, exchanges property solely
for stock in a corporation, which is a party to the merger or consolidation; or.
b) A shareholder exchanges stock in a corporation, which is a party to the merger or
consolidation, solely for the stock of another corporation also a party to the merger or
consolidation; or
c) A security holder of a corporation, which is a party to the merger or consolidation,
exchanges his securities in such corporation, solely for stock or securities in another
corporation, a party to the merger or consolidation.
2) If property is transferred to a corporation by a person in exchange for stock or unit of

participation in such a corporation of which as a result of such exchange said person,
alone or together with others, not exceeding four (4), gains control of said corporation.
QUIZZER
Choose the letter of the correct answer
Principles
1. Income, for tax purposes:
I. Means all income from whatever source (legal or illegal), unless specifically excluded
under the Tax Code.
II. II.Means all wealth which flows into the taxpayer other than return of capital.
III. Is recognized in the year it is actually received in cash or cash equivalent.
IV. Refer to the amount of money coming to a person or corporation within a specified
time, whether as payment of services, interest, or profits from investment.
a. l, ll and III only C. I, II, III and IV:
b. I and IV only d. None of the above
 Answer: "C"
2. The sources from which income is derived
a. Labor
b. Illegal activities
c. C. Profits derived from sale or exchange of capital assets
d. All of the above
 Answer: "D"
3. The sources from which income is derived
A. B. C. D.
Labor True True True False

Gifts and inheritance True False False False
Use of capital True True False False
 Answer: "B"
4. In 2018, Pedro sent his sister Ana $10,000 via a telegraphic transfer through the Banko De
Uro el Pilipinas. Lorna, the bank's remittance clerk made a mistake and credi Ana with
$100,000 which she promptly withdrew. The bank demanded the relu of the mistakenly
credited excess, but Ana refused. The BIR entered the picture investigated Ana. Would the
BIR be correct if it determines that Ana ear taxable income under these facts?
a. No, she had no income because she had no right to the mistakenly credited in
b. Yes, income is income regardless of the source.
c. No, it was not her fault that the funds in excess of $10,000 were credited to
d. No, the funds in excess of$10,000 were in effect donated to her.
 Answer: "B"
Section 32 of the NIRC defines gross income as all income derived from
whatever source. Consequently, the flow of wealth, without any distinction as
to lawfulness of its source, is subject to income tax. In other words, the phrase
"income from whatever source" discloses a legislative policy to include all
income not expressly exempted within the class of taxable income under the
law.
5. Which of the following is a characteristic of income?
A. B. C. D.
Increase in taxpayer’s wealth True True True False

Realization of gain True False False False
Return on taxpayer’s wealth True True False False
 Answer: “A”
6. Which of the following is a requisite for an income to be taxable?
a. There must be gain
b. The gain must be realized or received
c. The gain must not be excluded by law from taxation
d. All of the above
 Answer: "D"
7. Which of the following is not an income for income tax purposes?
a. Gain derived from labor.
b. Return on capital
c. Excess of selling price over cost of assets sold.
d. Gift received
 Answer: “D”
8. Which of the following is not an income for income tax purposes?
a. Collection of loans receivable
b. Condonation of debt for services rendered
c. Excess of selling price over the cost of an asset sold
d. None of the above

 Answer: “A”
9. Which of the following is not a characteristic of income?
a. Increase in taxpayer's wealth.
b. Realization or receipt of gain.
c. Earnings constructively received.
d. Return of taxpayer's wealth.
 Answer: "D"
10. Which is not a valid definition of income?
a. Income is the return from capital invested.
b. Income is a fund at one distinct point of time.
c. Income means all wealth which flows into the taxpayer other than a mere return
of capital.
d. Income means cash or its equivalent unless otherwise specified,
 Answer: “B”
11. The share in the profits of a partner in a general professional partnership is regarded
as received by him and thus taxable although not yet distributed. This principle is known as
a. Actual receipt of income

b. Advance reporting of income
c. Accrual method of accounting
d. Constructive receipt of income
 Answer: “D”
12. Which of the following is considered or construed as an example of "constructive receipt"?
a. Retirement benefits, pensions, gratuities
b. Fees paid to a public official
c. Interest coupons that have matured and are payable but have not been cashed
d. Deposits for rentals to answer for damages, restricted as to use
 Answer: "C"
13. Constructive receipt occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the service without restrictions by the payor. The
following are examples of constructive receipts, except
a. A security deposit to insure the faithful performance of certain obligations of the lessee
to the lessor.
b. Deposit in banks which are made available to the seller of services without restrictions;
c. Issuance by the debtor of a notice to offset any debt or obligation and

acceptance thereof by the seller as payment for services rendered;
d. Transfer of the amounts retained by the payor to the account of the contractor.
 Answer: “A”
14. There is constructive receipt of income when:
a) Payment is credited to payee's account
b) Payment is set aside for the payee, or otherwise made available so the payee may draw
upon it at any time, or so the payee could have drawn upon it during the taxable year if
notice of intention to withdraw had been given without substantial limitations.
c) Both “a” and “b"
d) Neither “a” nor "b"
 Answer: "C"
15. When different types of income are subjected to common tax rate, the tax system
is described as
a) Global tax system
b) Gross income tax system
c) Scheduler tax system
d) Final tax system
 Answer: “A”
Situs of Income
16. Situs, for taxation purposes will depend upon various factors, including
I. The nature of the tax and the subject matter thereof.
II. The possible protection and benefit that may accrue both to the government and to
the taxpayer. Domicile or residence
III. Citizenship
IV. Source of income
a. I and V only C. I, III, IV and V
b. I, III and IV only d. I, II, III, IV and V.
 Answer: "D"
17. As a rule, income from whatever source is taxable. Income from whatever source may come
from:
I. Gains arising from expropriation of property
II. Gambling gains
III. Income from illegal business or from embezzlement
IV. Recovery of receivables previously written off
V. Tax refunds
VI. Compensation for injury suffered
VII. Gratuitous condonation of debt
a. I and II only
b. I, 1V and V only
c. I, IV, V and VI only
d. I, II, III, IV and V only
 Answer: “D”
18. Situs of taxation on income from sale of property purchased.
a. Place of the seller
b. Place of sale
c. Place of buyer
d. As determined by the Commissioner
 Answer: "B"
19. Which of the following test of source of income is incorrect?
a. Interest income - residence of the debtor
b. Income from services - place of performance
c. Royalties - place of use of intangible
d. Gain on sale of real property - place of sale.
 Answer: "D"
20. Situs of taxation on income from sale shares of a domestic corporation.
a. Always treated as income derived from within the Philippines
b. Always treated as income derived from without the Philippines
c. May be treated as income within or without the Philippines depending on the place of
sale
d. May be treated as income within or without the Philippines depending where

the shares are kept
 Answer: “A”
21. Situs of taxation on income from sale shares of a foreign corporation.
a. Always treated as income derived from within the Philippines
b. Always treated as income derived from without the Philippines
c. May be treated as income within or without the Philippines depending on the place of
sale
d. d. May be treated as income within or without the Philippines depending where

the shares are kept
 Answer: “C”
22. Statement 1: A gain from sale of shares of a domestic corporation shall be

considered derived from the Philippines regardless of where the shares were sold. Statement
2: A gain from a sale of shares of a foreign corporation shall be considered derived from the
country where the corporation was created or organized.
a. Statements 1 & 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
 Answer: "B"
23. Pedro earned interest income from a promissory note issued to him by Juan, a of California,
U.S.A. Assuming that Pedro is a nonresident citizen, the interest in
a. Subject to basic income tax
b. Subject to final tax

c. Not subject to income tax
d. Partly subject to scheduler and partly subject to final tax
 Answer: "C"
 The situs of receivable is the residence of the debtor. Since the debtor is a
resident of USA, the income is considered derived from abroad. Pedro, as
provided in the problem, is a nonresident citizen (taxable only on income
derived from sources within the Philippines), hence, the income is non-
taxable.
24. Mr. Parker, a French citizen permanently residing in the Philippines, received several items
during the taxable year. Which among the following is not subject to Philippine income
taxation?
a. Consultancy fees received for designing a computer program and installing the same in
Shanghai facility of a Chinese firm.
b. Interest from his deposits in a local bank of foreign currency earned abroad converted
to Philippine pesos.
c. Dividends received from an American corporation which derived 60% of its annual
gross receipts from Philippine sources for the past ten (10) years.
d. Gains derived from the sale of his condominium unit located in Quezon City.
 Answer: "A"
25. It is important to know the source of income for tax purposes (i.e., from within or
without the Philippines) because:
a. Some individual and corporate taxpayers are taxed on their worldwide income while
others are taxable only upon income from sources within the Philippines
b. The Philippines imposes income tax only on income from sources within
c. Some individual taxpayers are citizens while others are aliens
d. Export sales are not subject to income tax
 Answer: "A"
26. Which of the following taxpayers is taxable on income from all sources within and
outside the Philippines?
a. Domestic corporation
b. Resident foreign corporation
c. Resident citizen
d. Both "a" and "C"
 Answer: “D”
27. Which of the following is NOT true about source of income?
a. In case of income derived from labor, source is the place where the labor is performed
b. In case of income derived from use of capital, source is the place where the capital is
employed.
c. In case of profits from the sale or exchange of capital assets, source is the place
or transaction occurs.
 Answer: "D"
28. Which income from sources partly within and partly outside the Philippines is allocated on
the time basis?
a. Income of the international shipping corporation with vessels touching Philippine ports
b. Income of a telegraph company with transmission from the Philippines to

points abroad
c. Income from goods produced in whole or in part in the Philippines and sold in a foreign
country, or vice-versa
d. Income from personal services performed in part in the Philippines and in part abroad
 Answer: "D"
29. A taxpayer is employed by a shipping company touching Philippine and foreign ports.
In 2018, he received a gross payment for his services rendered of P3,000,000. In that year,
the vessels on board of which he rendered services had a total stay in Philippine ports of four
months. His gross income from the Philippines was
a. P0 c. P1,500,000
b. P1,000,000 , d. P3,000,000
 Answer: "B"
 Income derived from Philippines (allocated) = P3M X 4/12 = P1,000,000
30. Chris is a Filipino immigrant living in the United States for more than 15 years. He is retired
and he came back to the Philippines as a balikbayan. Every time he comes to the Philippines,
he stays here about a month. He regularly receives a pension from his former employer in
the United States, amounting to US$2,000 a month. While in the Philippines, with his
pension pay from his former employer, he purchased three condominium units in Makati
which he is renting out for P25,000 a month each. Does the US$2.000 pension become
taxable because he is now in the Philippines
a. Yes. Income received in the Philippines by the non-resident citizens is taxable.
b. Yes. Income received in the Philippines or abroad by non-resident citizen is taxable.
c. No. Income earned abroad by a non-resident citizen is not taxable in the Philippines.
d. No. The pension is exempt from taxation being one of the exclusions from
gross income.
 Answer: "C"
31. All of the following are correct except one. Which is the exception?
a. The source of interest income is the country where the debtor resides.
b. The source of interest income is the country where the creditor resides.
c. Rents or royalties are considered derived from the country where the property is
located.
d. Income from personal services is considered derived from the county where the
services were rendered.
 Answer: "B"
32. Which of the following is considered income derived from within the Philippines?
I. Gain on sale of personal property purchased in the Philippines and sold in Canada.
II. Compensation received from services in the Philippines.
III. Rent income from real property located in USA.
IV. Gain on sale of shares of a foreign corporation sold in the Philippines.
a. I and II only c. ll and IV only

b. l, ll and IV only d . All of the above
 Answer: "C"
33. Which of the following is not an income derived from sources within the Philippines
for income tax purposes?
a. Interests derived from bonds issued by a foreign corporation
b. Interest on notes or other interest-bearing obligations of residents
c. Both “a” and “b”.
d. Neither “a” nor “b”
 Answer: “A”
34. Which of the following statements is correct with respect to valuation of income?
a. The amount of income recognized is generally the value received or which the taxpayer
has a right to receive.
b. If the services were rendered at a stipulated price, in the absence of any evidence to
the contrary, such price shall be presumed to be the fair market value of the
compensation received.
c. Transfer of land made by a person to another in payment of services rendered in the

form of attorney's fees shall be considered as part of the gross income of the latter
valued at either the fair market value or the zonal valuation, whichever is higher, in the
taxable year received.
d. All of the above
 Answer: “D”
Compensation Income
35. Compensation income is earned when an employer-employee relationship exists. Which of
the following income represents income earned through employee-employer relationship?
I. Professional fees
II. Wages
III. Pension pay
IV. Capital gain
a. I only c. ll and III only
b. I and III only d. I, II, III and IV
 Answer: "C"
 I. "Professional" fees are classified as business income
 IV: Capital gains are derived from sale/disposal/exchange/barter of capital

assets.
36. Pedro is a member of the board of directors of ABC Company. During the taxable year, Pedro
received director's fees amounting to P300,000 from quarterly hi meetings he attended. Such
fees should
a. Form part of Pedro's gross compensation income, whether or not he is at the same
time an employee of the corporation
b. Form part of Pedro's gross compensation income only if he is at the same time an
employee of the corporation
c. Both “a” and “b” are correct
d. Neither “a” nor “b” is correct
 Answer: "B"
37. Which of the following compensation will be subject to graduated rates?
a. Basic salary whether or not the employee is a minimum wage earner

b. Basic salary only if the employee is not a minimum wage earner
c. 13th month pay and other benefits not exceeding P30,000
d. Fringe benefits received by supervisory or managerial employee
 Answer: "B"
38. Which of the following items that reduces salaries of employees is not an exclusion
from gross income?
a. GSIS or SSS Contributions
b. Pag-Ibig Contributions
c. Labor Union Dues
d. None of the choices
 Answer: "D"
39. One of the following compensation income of an individual taxpayer is not an exclusion from
gross income:
a. Monetized vacation leaves not exceeding 10 days a year.
b. Separations pay of an employee who resigned from his employment.
c. Retirement benefits of an employee under a qualified benefit plan who has worked for
an employer for at least 10 years, who at the time of retirement is 10 50 years of age,
and who avails of the retirement for the first time
d. All of these
 Answer: "B"
 Separation pay, in general, is a taxable compensation income, unless

the reason for the separation is beyond the control of the employee
such as but not limited to:
◊ Retrenchment
◊ Illness
40. Which of the following is taxable?
a. Separation pay received by a 50-vear old employee due to the retrenchment program
of the employer
b. Retirement pay received from a benefit plan registered with the BIR where at the time
the employee retired, he was 57 years of age, retiring from employment for the first
time in his life, and was employed with the employer for 8 years
c. Social security benefit received by a balikbayan from employer abroad at age of 30
 Answer: "B"
41. Statement 1: Amounts received by reason of involuntary separation remain exempt

from income tax even if the official or employee at the time of separation has rendered less
ten (10) years of service and/or below fifty (50) years of age.
Statement 2: Any amount received by an official or employee or by his heirs from the
employer due to death, sickness or other physical disability or for any cause beyond the
control of the said official or employee, such as retrenchment, redundancy, or cessation of
business are exempt from income tax.
a. Both statements are correct
b. Both statements are not correct

c. Only the first statement is correct
d. Only the second statement is correct
 Answer: “A”
42. The taxpayer was retired by his employer in 2016 and paid P2,000,000 as a
retirement gratuity without any deduction for withholding tax. The corporation became
bankrupt in 2018. Can the BIR subject the P2,000,000 retirement gratuity to income tax in
2018?
1st Answer: Yes, if the retirement gratuity was paid based on a reasonable pension where
the taxpayer was 50 years old and has served the corporation
2nd answer: No, if the taxpayer was forced by the corporation to retire.
a. 1st and 2nd answers are correct
b. 1st answer 1 is correct but 2nd answer is wrong
c. 1st answer is wrong but 2nd answer is correct
d. 1st and 2nd answers are wrong
 Answer: "D"
 1st answer is wrong. To be exempt, the retirement pay must be based on

a reasonable retirement plan and the employee must be at least 50
years old and should have served the company for at least 10 years.
2nd statement is wrong. The rules on tax-exempt retirement pay and

separation pay are different. 2nd statement is applicable to separation
pay rather than retirement pay.
43. JJ. An official of Excel Corporation, asked for an earlier retirement because immigrating to
Canada with his girlfriend. He was paid P3, 000,000 as separation day in recognition of his
valuable services to the corporation. Paul, another official of the same company was
separated for occupying a redundant position. He was given P1, 000 separation pay. Rene
who has rendered 11 years of service and who is now P55 yrs. old opted to retire for the first
time. He received P2, 000,000 retirement pay. The total income subject to withholding tax is
a. P1,000,000 c. 3,000,000
b. P2,000,000 d. P6,000,000
 Answer: "C"
44. Which among the following is part of the taxable income of an employee?
I. Insurance premium provided by employer on the life insurance policy of

the employee where the designated beneficiary is the relative of the employee.
II. Insurance premium paid by employer on the life insurance policy of the employee
where the designated beneficiary is the employer.
III. The income tax of the employee paid by the employer as part of the employee's
benefit.
IV. The income tax of the employee advanced by the employer, deductible
against future income of the employee.
a. I only c. II and III only
b. I and III only d. III only
 Answer: "B"
45. Statement 1: Remuneration for services constitutes compensation income even if

the relationship of employer and employee does not exist any longer at the time when
payment is made between the person in whose employ the services had been performed
and the individual who performed them.
Statement 2: In general, fixed or variable allowances which are received by a public officer or
employee or officer or employee of a private entity, in addition to the regular compensation,
fixed for his position or office, is compensation subject to income tax and consequently,
creditable withholding tax on compensation income,
b. Both statements are incorrect
 Answer: “A”
 Statement 2: Basis: Section 2.78.1(A) of RR 2-98 as amended by 2008.

Examples of fixed or variable allowances are transportation allowance,
representation allowance, communication allowance, living and from home
allowance (LAFHA), and the like.
46. Statement 1: Representation and Transportation Allowances (RATA) granted under Section 34
of the General Appropriations Act to certain officials and employees of the government are
considered reimbursements for the expenses incurred in the performance one's duties
rather than as additional compensation.
Statement 2: The excess of RATA in statement 1. If not returned to the employer, constitutes
taxable compensation income of the employee.
Statement 3: COLA of minimum wage earners is exempt from income tax.
a. All statements are correct
b. All statements are incorrect
c. Only statement 3 is correct
d. Only statement 3 is incorrect
 Answer: “A”
 The COLA forms part of the new wage rates or statutory minimum
wage. Hence, it is covered by the income tax exemption of MWEs under RA
9504, as implemented by Revenue Regulations No. 10-08, which 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.
47. Juana, widow received the following during 2018:
 Received $500 ($1=P44) monthly interest income from the pension plan of his deceased
husband who served in the US Army for 20 years.
 Won a beauty contest “Miss Byuda 2018”. She received the following as prizes:
◊ Cash prize, P50,000
◊ Free-trip abroad worth P50,000
◊ College scholarship with International College of Business and Economics worth

P100,000
◊ Goods worth P20, 000.
 P100, 000 from her debtor in payment of a loan, and interest in the sum of P15, 000.
 Inherited from her grandmother a lot and apartment valued at P2,500,000 from which
she is receiving monthly rental of P15,000.
The income subject to tax is -

a. P415,000 c. P250,000
b. P679,000 d. P515,000
 Answer: "B"
Solution:
Monthly interest on pension ($500 x P44 x 12) P264,000
Total prizes received from a beauty contest 220,000
Interest income from a debtor 15,000

Rental income in inherited apartment (P15,000 x 12) 180,000
Total income subject to tax P679,000
 The question was income subject to tax. Therefore, it shall

include all types of income subject to income tax (regardless of
the type of income tax; Basic. FWT, CGT).
48. Statement 1: The stipends received by resident physicians during their intensive to in the
residency program of a hospital are subject to creditable withholding to compensation
income.
Statement 2: Reasonable amounts of reimbursements/advances for travellina entertainment

expenses which are pre-computed on a daily basis and are paid to employee while he is on
an assignment or duty such as “per diem” need not be subissis the requirement of
substantiation and to withholding tax.
a. All statements are correct
b. All statements are incorrect
c. Only statement 3 is correct
d. Only statement 3 is incorrect
 Answer: “A”
 Statement 1: Pursuant to Section 2.57.2 (A)(1) of RR 2-98. Under

Section 2.57.2 (A)(1) of RR 2-98.
49. Statement 1: Tips or gratuities 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. Statement 2: The tips described in statement 1 shall not be
subject to withholding the reason that tips are not accounted for by the employee to the
employer.
b. Both statements are incorrect
 Answer: “A”. Basis: RR 2-98
Business income Practice of Profession

50. Which of the following statements is incorrect?
a. Income from business is never subject to final withholding tax
b. Income from exercise of profession may be exempt from income tax
c. Income from business may be subject to capital gains tax
d. Income from exercise of profession may be subject to income tax
 Answer: "C"
The following rules shall be observed on what type of income shall apply:
◊ Ordinary Income = Basic Tax or Normal Tax
◊ Passive income, Philippines (must be in the list of income) = FWT.
◊ Passive income derived abroad = Basic Tax (For RCs and DCs only)
◊ Capital Gains:
 On sale of shares of non-listed DC = CGT
 On sale of real properties in the Phils. = CGT
 On sale of shares of DC listed in the local stock exchange from income tax but
subject to stock transaction tax.
 Other Capital Gains = Basic Tax
Ordinary incomes subject to basic tax are incomes derived from.

◊ Employment (except FBs subject to FBT)
◊ Business income
◊ Sale of ordinary income
◊ Sale of capital assets not subject to CGTS
◊ All other income not exempt from tax + not subject to FWT or CGT
51. Which of the following dealings in property is subject to normal income tax?
a. Sale of ordinary assets
b. Sale of real property, located in the Philippines, classified as capital asset
c. Sale of shares in a domestic corporation sold outside the local stock exchange
d. All of the choices
 Answer: "A"
52. Which of the following interest income is subject to normal tax?
I. Interest income earned or derived from the normal course of trade or business
II. Interest income earned or derived from notes receivable.
III. Interest income earned or derived from the over-payment of income tax
for previous years
IV. Interest income derived from investments in government bonds
a. I only c. I, II and III only
b. I and li only d. All of the above
 Answer: "C"
 item "V" is a passive income (deposit substitute) subject to

FWT.
Recovery of previously written-off bad debts

Refund of previously paid taxes
53. The following data on net income, bad debt, write-off and recovery show:
2017: Case A Case B Case C
Net income (loss) before write-off P120, 000 P60,000 (P40,000)
Less: Bad debt written-off claimed as deduction 40.000 40,000 50.000
Net income (loss) after write-off P80,000 P20,000 (P90,000)
2018:
Subsequent recovery P40,000 P10,000 P50,000
The taxable recovery in 2018 is:
Case A Case B Case C
a. P40,000 P20,000 P50,000
b. P40,000 P20,000 P0
c. P40,000 P10,000 P0
d. P40,000 P0 P0
 Answer: "C"
 APPLY THE "TAX-BENEFIT-RULE"
Amount recovered during the current year shall be treated as taxable

income if:
1. The receivables written-off during the previous year(s) were

allowed as deduction from the gross income during write-off.
2. The write-off resulted to a lower income tax payment due to the

reduction in the taxable net income brought about by the write-
off.
3. There was recovery (partial or full) during the current taxable

year.
 CASE A
◊ Prior Year (2017) - The company was able to reduce the

taxable income by P40,000 thereby resulting to a lower tax
payment.
◊ Current Year (2018) – The entire amount was recovered. Hence,
the entire recovery shall be recognized as taxable income in
2018.
 CASE B:
◊ Prior Year (2017) - The company was able to reduce the

taxable income by P20,000
◊ Current Year (2018) – The recovery amounted only to P10,000,

hence, only the amount recovered (P10,000) shall be recognized
as taxable income in 2018.
 CASE C:
◊ Prior Year (2017) - The company's operations resulted to a loss

even prior to write-off of receivables. T he write-off did not
result to a lower tax payment during the prior year.
Consequently, applying the “tax benefit-rule", the company did
not benefit from prior year write-off. Hence, any amount
recovered in the succeeding period shall not be treated as
taxable income.
54. The following were taken from the income statement of domestic corporation for the taxable
year 2018:
Gross profit on sales P800,000
Less: Deductible expenses P440,000
Provision for bad debts 80,000 (520,000)
Net income before tax P280,000

Additional information:
 Accounts written-off during the year and charged to allowance for bad debts
- P50,000.
 Recoveries on accounts receivable previously written off in 2016 and credited to
allowance for bad debts.
Allowed as deduction by the BIR - P30,000.
Disallowed by the BIR as deduction - P20,000.
The taxable income of the corporation in 2018 should be:

a. P280,000 c. P330,000
b. 260,000 d. P340,000
 Answer: "D"
Gross profit on sales
Less: P800, 000
Deductible expenses P440,000
Provision for bad debts ND
Write-off current year 50,000 (P490,000)
Net income P310,000
Add: Other income
Recovery of previously WO bad debts (with tax benefit) 30,000
Taxable Net Income during 2018 P340,000
55. Which of the following is not a taxable income?
a. Bad debts previously deducted as item of expense and partially recovered subsequently
b. Tax expense previously disallowed as deduction from taxable income, fully

refunded subsequently
c. Income from gambling
d. Income from usurious financing

 Answer: "B"
 Apply the “Tax-Benefit-Rule"
The amount of tax recovered during the current year shall be treated
as taxable income if:
1. The tax payment during the previous year(s) were allowed as

deduction from the gross income.
2. The tax payment (prior year(s)] resulted to a lower taxable net

income.
3. There was recovery (partial or full) during the current taxable

year.
 “A” – Taxable income upon recovery.
“B” - Applying the conditions enumerated above, the tax refunded in

during the current year shall not be treated as taxable income because
it was not previously treated as deduction from the company's gross
income.
"C"-Income regardless of source, is taxable unless exempt under the

law.
"D" same explanation with “C”
56. Which of the following tax refunds is taxable?
a. Percentage tax on person's exempt from VAT
b. Estate or donor's tax
c. Stock transaction tax
d. Income tax paid to a foreign country if claimed as tax credit during the year.
 Answer: “A”
 Examples of tax payments classified as OPEX, hence, may be part

of taxable income upon recovery:
 Local business related taxes
 Percentage taxes except "stock transaction taxes" under Sections

127(a) and (b) of the Tax Code
 Fringe benefit tax
 Income tax paid abroad (by RCs and DCs only) classified by the
taxpayer as OPEX. Income tax paid abroad by RCs and DCs, at the
option of the taxpayer, may be classified either as tax credit or
OPEX.
 Excise taxes on sin products and non-essential goods
 Customs duties
 DST
 Examples of tax payments classified not classified OPEX, hence form part
of the taxable income upon recovery:
 Local non-business related taxes
 Income tax paid abroad (by RCs and DCs only) where the opted to
credit such payment against the income tax due.
 Income tax paid imposed under the Tax Code, as amended
 Stock Transaction Taxes” under Sections 127(a) and (b) of the

Code
 VAT
 Estate Tax
 Donor's tax
 Special assessment
57. The following are not taxable, except
a. Refund of fringe benefits tax
b. Refund of Philippine income tax
c. Refund of estate or donor's tax
d. Refund of special assessment
 Answer: "A"
58. ABC Company paid the following taxes in 2018:
Income tax P 120,000
Common carrier's tax 150,000
Local business taxes 100,000
Donor's tax 60,000
Real estate tax 70,000
The common carrier's tax, real estate tax and P60, 000 of the income tax were refunded in
2018. If the income of ABC in 2018 was P1, 200,000, the taxable income for the year should
be:
a. P 1,200,000 c. P 1,420,000
b. 1,480,000 d. P1, 410,000

 Answer: "C"
Solution:
2018 Income prior to tax refunds P 1,200,000
Prior year tax payments refunded during 2018:
Common carrier's tax 150,000
Real estate tax 70,000
Taxable net income P1,420,000
Condonation of Debt
59. For tax purposes, which among the following rules shall be observed with respect to
forgiveness of indebtedness?
I. If debtor rendered service in favor of the creditor: forgiveness of debt results a
taxable income to the debtor.
II. If the debtor did not render service in favor of the creditor, forgiveness or
de results in a taxable indirect gift.
III. If the debtor is a shareholder of a corporation, forgiveness of debt by me creditor-
corporation results in dividend distribution.
a. I only c. I and II only
b. ll only d. I, II and III
 Answer: "D"
60. If an individual performs services for a creditor who in consideration thereof cancels
the debt, the cancellation of indebtedness may amount:
a. To a gift
b. To a capital contribution
c. To a donation inter vivos

d. To a payment of income
 Answer: "D"; Refer to the rules provided in the preceding number.
61. Pobre borrowed from Rich P100, 000 payable in five (5) equal monthly installments. Before
the first installment became due, Pobre rendered general cleaning services in th e entire
office building of Rich, and as compensation, Rich cancelled the indebtedness of Pobre up to
the amount of P75, 000. The P75, 000 may amount to:
a. To a gift
b. To a capital contribution
c. To a donation inter vivos
d. To a payment of income
 Answer: "D"
 If a debtor performs services for a creditor who cancels the debt

in consideration for such services, the debtor realizes income to that
amount as compensation for his services. In the given problem, the
cancellation of Pobre's indebtedness up to the amount of P75,000 gave
rise to compensation income subject to income tax, since Rich condoned
such amount as consideration for the general cleaning services rendered
by Pobre.
Rental Income
62. One of the following income shall be returned in the year received.
a. Interest earned on bank deposit.
b. Share in the net income of professional partnership.
c. Stock dividend.
d. Rentals for 2018, 2019 and 2020 received in 2018 by a lessor under accrual method.
 Answer: "D"
 Rental income shall be recognized upon receipt, regardless accounting

method (cash or accrual) applied by the lessor.
 Choices A and B shall be recognized as income when earned.
 “C”, as a rule, is not classified as income.
63. What is the correct treatment of advance payment made by the lessee to the lessor?
I. If the advance payment represents loan, the amount is part of the lessor's taxable
income.
II. If the advance payment represents security deposit, the amount is part of the lessor's
taxable income.
III. If the advance payment representing loan is applied to unpaid rent, the amount is part
of the lessor's taxable income.
IV. Prepaid rent must be reported in full in the year of receipt,
a. All of the above c. I, III, and III only
b. None of the above d. III and IV only
 Answer: “D”
Use the following data for the next four (4) questions:
Mike leased his land to Leomar for two years beginning July 1, 2018. Leomar would pay monthly
rental of P100,000. He paid rent up to October 2018 and then defaulted for the rest of the year.
64. Under accrual method, how much was the income of Mike for 2018?
a. P200,000 c. P600,000
b. 400,000 d. None of the choices
 Answer: "B"
 Rental income shall be recognized upon receipt, regardless of

the accounting method used by the lessor.
65. Using the same data in the preceding number, how much was the income of Mike in 2018
using cash method?
a. P200,000 c. P600,000
 Answer: "B"
66. Under accrual method, how much was the deductible expense of Leomar in 2018?
a. P600,000 c. P200,000
 Answer: “A”
67. Under cash method, how much was the deductible expense of Leomar in 2018?
a. P600,000 c. P200,000
b. b. P400, 000 d. None of the choices
 Answer: "B"
Use the following data for the next three (3) questions:
On January 1, 2017, Cathrina leased her land to Leah. The terms of the contract of lea for
fifteen (16) years and the rental fee i 360,000 a year. The contract provides that Leah construct a
building and at the end of the term of the contract, the ownership of the ina will be transferred
to Cathrina. The building, with a useful life of 30 years, was Completed on January 1, 2018 at a
cost of P6.000.000.
68. Assume Cathrina will spread his income over the term of the contract of lease. For income
tax purposes, Cathrina's 2018 income is:
a. P360,000 c. P760,000
b. P560,000 d. P6,360,000
 Answer: "B"
Annual rental income P360, 000
Income from improvement (spread-out method):
Cost of improvement P6, 000,000
x remaining life after lease term over total useful life 15/30
Book value after lease term P3, 000,000
Divide by the shorter between the remaining lease
term and useful life 15 years 200,000
Cathrina's 2018 taxable income P560, 000
 Leasehold improvement shall be recognized as income only if

the ownership will be transferred to the lessor at the end of
the lease term.
 Under the spread-out method, the remaining book value after

the lease term shall be amortized by the shorter between the
remaining lease term after completion of the improvement
and the useful life of the improvement.
 Remaining lease term upon completion of the improvement

was 15 years. Shorter than the useful life of 30 years.
69. Assume Cathrina opted to use the lump-sum method of recognizing income from leasehold
improvement, her taxable income in 2018 should be:
a. P360,000 c. P760,000
b. P560,000 d. P6,360,000
 Answer: "D"
Annual rental P360, 000
Income Income from improvement (lump-sum; P6M) 6,000,000
Lessor's annual income P6, 360,000
 Under the lump-sum approach, the entire cost of the leasehold

improvement upon completion shall be recognized as income.
70. Using the assumption in the immediately preceding number, Cathrina's taxable income
in 2019 should be:
a. P360,000 c. P760,000
b. b. P560,000 d. P6,360,000
 Answer: "A"
Solution:
Annual rental income P360, 000
Income from improvement (fully recognized during 2018) -
Lessor's annual income P360, 000

Use the following data for the next five (5) questions:
On July 1, 2016, Pedro leased his vacant lot for a period of 12 years to Juan at an annual of P2,
400,000. It was also agreed that Juan will pay the following in 2016:
 84,800,000 representing rental payment for two (2) years.
 Security deposit of P2, 400,000.
 Annual real property tax of P30, 000.
The lease contract provides among others that Juan will construct a 5-storey building for
parking purposes at a cost of P36, 000,000. Ownership of the building shall belong to Pedro
upon the expiration or termination of the lease contract. The building was completed on July
1, 2018 with an estimated useful life of 15 years.
71. Pedro shall report total income from the lease in 2016 at
a. P30,000 c. P2,430,000
b. P2,400,000 d. 24,830,000
 Answer: "D"
Rental income for 2 years received in 2016 P4, 800,000
Annual real property tax assumed by the lessee 30,000
Income from leasehold improvement (not yet completed) -
Lessor's taxable income in 2016 P4, 830,000
72. Pedro shall report total income in 2017 at
a. P30,000 c. P2,430,000
b. P2,400,000 d. 24,830,000
 Answer: "A"
Rental income received in 2017

Annual real property tax assumed by the lessee P30.000
Income from leasehold improvement (not yet completed) -
Lessor's taxable income in 2016 P30, 000
73. Assuming Pedro will use outright method in recognizing income from
leasehold improvements, how much is the total income from lease for year 2018?
a. P3,030,000 c. R38,430,000
b. P3,630,000 d. P2,400,000
 Answer: "C"
Rental income received in 2018 P2, 400,000
Annual real property tax assumed by the lessee 30,000
Income from improvement = cost of construction
(fully recognized upon completion) 36,000,000
Lessor's annual income P38, 430,000
74. Assuming Pedro will use spread-out method in recognizing income from lease no
improvements, how much is the total income from lease for year 2018?
a. P3,030,000 c. $14,430,000
b. P3,630,000 d. P2,400.000
 Answer: "A"
Rental income received in 2018 P2, 400, 00

Annual real property tax assumed by the lessee 30, 000
INCOME from LEASEHOLD IMPROVEMENT:
Cost P36, 000,000
Remaining book value after lease term P12, 000,000
Divide by remaining lease term (shorter) 10
Annual income from leasehold improvement P12, 000,000
x (allocated = July to Dec. only) 6/12
Income from leasehold improvement (2018) 600,000
Pedro's 2018 income P3.030, 000
75. Assuming that due to the fault of the lessee, the lease contract was terminated on
January 1, 2020, how much income is to be reported by the lessor in 2020?
a. P32,400,000 c. 234,830,000
b. P30.600.000 d. P33.030.000
 Answer: "B"
Rental income received in 2020 (terminated beginning of the year
Annual real property tax in 2020 (terminated lease)
Cost P36, 000,000

x remaining life after termination over total useful life 13.5/15**
Remaining book value after termination P32, 400,000
Income from improvement already recognized:
2018 (six months) (600,000)
2019 (one year) (1,200,000)
Remaining book value, Jan. 1, 2020 P30, 600,000
 **Remaining useful life after termination of the lease = 15 years – 1.5

years = 13.5 years.
 The remaining book value upon termination of the lease contract shall
be recognized as income.
76. On January 1, 2017. Mike leased to Leomar a piece of vacant lot on which the
latter constructed a 3-storey building for P 6,000.000. The building was completed on
December 31, 2018. The term of the lease is 10 years, while the estimated useful life of the
building is 15 years. Mike opted to use the spread out method in recognizing income. Which
of the following statements is correct?
a. Mike's annual depreciation expense on the leasehold improvement is P400,000
b. Aside from rent, Mike should recognize annual income of P 350,000 due to the
c. Mike has the option either to deduct in full the cost of the building in the completion, or
claim deductions for such building annual depreciation up to of the term of the lease.
d. If the fair market value of the building as of the date of completion is known a required
to recognize as income such fair market value in the year of completion.
 Answer: "B"
 "A" is correct if the lessor opted to use the lump-sum method:

P600,000/15=P400,000
 “C” is an incorrect statement
 “D” is correct if the lessor opted to use the lump-sum method
Cost P6, 000,000
Remaining book value after lease term P2, 800,000
Divide by remaining lease term (shorter) 8
Annual income from leasehold improvement P350, 000
77. Lessor, had the following information for 2018:
Cost of leasehold improvement P1, 000, 000
Annual rent 100,000
The estimated life of leasehold improvement is 50 years. The term of the lease is 40 years. At
the end of the twentieth (20th) year, the lease was terminated for valid causes done by the
lessee.
What is the income to be reported by the lessor at the end of the 20th year?
a. P100,000 c. P605,000
b. P125,000 d. P700,000
 Answer: "C"
Total Income from leasehold improvement =P1, 000,000 x **10/50 P 200,000
Divide by remaining lease term 40 years
Annual income from leasehold improvement P5, 000
Useful Life 50 years

Lease Term (40 years)
Remaining useful life after lease (Income of the Lessor) 10 years**
Book value of the improvement end of 20th year =P1M x 30/50 P600, 000
Less: income from improvement already recognized as of end of
19th year =P5, 000 x 20 (95,000)
Income to be recognized from the improvement on the 20th year P505.000
ADD: Annual rental income on the 20th year
100,000
Total income to be recognized on the 20th year P605, 000
78. How much is the allowable deduction of lessee on the 20th year?
a. P600,000 c. P100,000
b. P625,000 d. P500,000
 Answer: "B"
Cost of the improvement P1, 000,000
Accumulated Depreciation of the lessee for the past 19 years (475,000)
=P1M x 19/40
Book value of the improvement beginning of 20th year P525, 000
ADD: Annual rental expense on the 20th year

100,000
Total allowable deduction to be recognized on the 20th year P625, 000

Dividend Income
NOTE: This topic was extensively illustrated in Part 2 (individuals) and 4 (corporation).
79. If a corporation distributes its own treasury stocks to its stockholders, this kind on
a corporate distribution which is recognized in the Tax Code is a:
a. stock dividend c. cash dividend
b. property dividend d. liquidating dividend
 Answer: “A”
80. If a corporation distributes its assets to its stockholders upon dissolution, this kind
of corporate distribution will result in:
a. stock dividends c. cash dividend
b. property dividend d. liquidating dividend
 Answer: "D"
81. Which among the following dividend income is tax exempt? Dividend income received from
I. A domestic corporation by a domestic corporation.
II. A domestic corporation by a resident foreign corporation.
III. A domestic corporation by a nonresident foreign corporation.
IV. A resident foreign corporation by a domestic corporation.
a. All of the above c. I and II only
b. None of the above d. I, II and III only
 Answer: "C"
82. Which among the following dividend income is tax exempt?

I. Pure stock dividend
II. Pure liquidating dividend
a. I only c. I and II
b. b. II only d. None of the choices
 Answer: "C"
83. Liquidating dividends are return of shareholders' investment. Which of the following rules on
liquidating dividend is incorrect?
a. The excess amount of liquidating dividend over cost of shares surrendered is taxable.
b. If a shareholder sustains a loss brought about by the liquidating dividend, such loss is
deductible.
c. If a shareholder sustains a loss brought about by the liquidating dividend, such loss is not
deductible.
d. All of the above
 Answer: "C"
 “C” is a capital loss. Deductible to the extent of capital gain
84. Which of the following statements regarding "indirect dividends" is correct?
I. Indirect dividends are other dividends representing payment or rights, which are in
substance, dividends.
II. If the shareholder is a debtor of a corporation, cancellation of indebtedness by the

creditor-corporation results in indirect dividend distribution.
III. The amount of the debt cancelled in statement “II” is returnable income of the
shareholder.
a. I only c. I and II only
b. II only d. I, II and III
 Answer: "C"
 “Ill" is incorrect. If silent, the dividend is assumed to be from a DC; hence,

either subject to FWT (individual shareholder) or tax-exempt (corporate
shareholder).
85. A cash dividend of P100,000 received by a taxpayer in 2018 from a foreign

corporation whose income from Philippine sources is 40% of its total income is
Statement 1: partly taxable if he is a resident citizen.
Statement 2: Partly taxable if he is a non-resident alien
a. Statements 1 & 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
 Answer: "A"
 Di income from DC = income derived purely from Philippine sources
 Di from FC (resident or nonresident):
◊ If silent = income derived from abroad
◊ If ration of GI Phils. over world is available:
 Ratio is less than 50% = purely derived from abroad

 Ratio is at least 50% = partly derived from Phils and
abroad
 Statement 1 is wrong. If the taxpayer is RC, it must be taxable in full
 Statement 2 is wrong. If the taxpayer is NRA, it is not taxable because

dividend income is considered derived purely from without the Philippine.
86. Using the above data, which of the following is correct? The cash dividend is
a. Exempt from income tax if he is a resident citizen.
b. Partly taxable if he is a resident alien.
c. Taxable in full if he is a nonresident citizen.
d. Exempt from income tax if he is a nonresident alien.
 Answer: "D". Refer to explanation in the preceding number.
Use the following data for the next two (2) questions:
A resident alien had the following data in 2018:
Gross income, Philippines P2, 000,000
Business expenses 1 1,200,000
Dividends received:
From domestic corporation (net).
60% of its income came from the Philippines 90,000
From resident foreign corporation (gross)
87. The taxpayer's taxable income is
a. P750,000 c. P796.000
b. P830,000 d. P800,000
 Answer: "B"
Solution:
Gross Income P2, 000,000
Business expenses (1,200,000)
Dividend income from foreign corp. (50,000 x 60%) 30,000
Taxable income P830, 000
88. The final withholding taxes on dividends amount to
a. P16,200 c. P25,200
b. P18,000 d. P26,000
 Answer: "B"
 FWT on Di from DC = (P90,000 + 72,000)/90% x 10% = P18.000 2
 DI income is considered income derived purely from within the

Philippines (regardless of the % of income actually derived from within the
Philippines)
89. Cabarles Corporation declared and distributed to its stockholders shares of Soliman
Corporation. One of its stockholders, Brianne, who is a Filipino, received 100 shares of
Soliman Corporation as dividends. At the date of dividend declaration, the fair market value
of shares of Soliman Corporation was P120 per share and by the time Brianne received the
dividend the fair market value per share was P180. Which of the following is correct? The
dividend is
a. A stock dividend, hence, exempt from income taxation.
b. A property dividend, hence, taxable subject to the graduated tax rate.

c. A property dividend, hence, taxable and subject to the final tax rate of 10%.
d. A property dividend, hence, taxable and subject to the final tax rate of 20%.
 Answer: "C"
90. This refers to a specified income payable at stated intervals for a fixed or a contingent period,
often for the recipient's life, in consideration of a stipulated premium paid either in prior
installment payments or in a single payment.
a. Annuity c. Pension
b. Royalty d. Gratuity
 Answer: "A"
91. Annuity payments received by a taxpayer represent a part which is taxable and not taxable.
Which of the following statement is correct?
a. If annuity received represents interest, it is a taxable income.
b. If annuity received represents return of premium, it is not a taxable income.
c. Both statements are correct
d. Both statements are not correct
 Answer: "C"
92. Mr Santiago purchased a life annuity for P100, 000 which will pay him P10,000 a year. The life
expectancy of Mr Santiago is 12 years. Which of the following will Mr Santiago be able to
exclude from his gross income?
a. . P10,000 C. P100,000
b. P20,000 d. P120,000
 Answer: "C"; Return “of” capital.
Prizes, Awards and Other Winnings

93. Ana received the following winnings in 2018. Which of the following is subject to final tax of
20%
a. P10, 000 winnings outside the Philippines
b. P1, 000,000 Lotto winnings
c. P6,000 prize in a singing contest
d. P8,000 PCSO winnings
 Answer: “B”
 “A” is subject to basic tax (assuming Ana is a resident citizen)
 “C” is subject to basic tax because the amount is not more than P10,000
 “D” is exempt under TRAIN Law because the amount is not more than
P10,000
 “B” is correct. Under TRAIN Law (effective beginning January 1, 2018: PCSO
and Lotto winnings are subject to 20% FWT unless received by me NETB. In
such cases, the FWT rate shall be 25%.
94. Prizes and awards received shall be exempt from income tax when the following conditions
are met, except
a. It is given in recognition of religious, charitable, scientific, educational, artistic, literary or

civic achievement.
b. The recipient of the award or prize is not required to render substantial future Services
as a condition in receiving the prize or award.
c. The recipient of the award was selected without any action on his part to enter the
contest or proceeding.
d. d. The amount of prizes does not exceed P10, 000

 Answer: "D"
95. Prizes and awards received shall be exempt from income tax when the following conditions
are met, except
a. It is given in recognition of religious, charitable, scientific, educational, artistic, literary or

civic achievement.
b. The recipient of the award or prize is not required to render substantial future services
as a condition in receiving the prize or award.
c. The recipient of the award was selected without any action on his part to enter
the contest or proceeding.
 Answer: "D"
96. Pedro was selected as the most outstanding "barrio teacher” in Di Mahagilap town of Region
XX. His name was submitted by the school principal without his knowledge. He received a
trophy and a cash award of P50, 000. The amount he received is
a. Subject to basic income tax
b. Subject to final tax
c. Exempt from income tax
d. Partly taxable, party exempt
 Answer: "C"
97. Brian is an amateur boxer who represented the Philippine team in the recently concluded Rio
Olympics held in Brazil. For winning in the said competition, he received the following
amounts:
 P500,000, cash prize from the Amateur Boxing Association of the

Philippines (accredited national sports association)
 P2,000,000 cash award donated by Rizal Commercial Banking Corporation (RCBC);
 P600,000 talent fee as model of a known boxing gear; and
 P900,000 professional fee from ABS-CBN for being an instant celebrity.
How much of the above amounts is taxable to Brian?

a. P0 c.P2,000,000
b. P1,500,000 d. R4,000,000
 Answer: "B"
◊ Taxable = P600,000 + P900,000 = P1,500,000
98. Pacman, a professional boxer, won in his title-bout against Timmy Bradly held at Mandalay
Bay, Las Vegas, Nevada. During the year, Pacman received the following amounts:
 P25 Million as cash prize in the fight
 P30 million from Pay Per View
 P12 million talent fee as commercial model of San Miguel Beer.
How much of the following amounts is exempt from income tax?

a. P0 c. 230,000,000
b. P25,000,000 d. P67,000,000
 Answer: "A"
◊ All the aforementioned incomes are taxable

99. Apol, a citizen and resident of the Philippines, is a professional boxer. In a professional boxing
match held in 2018, he won prize money in United States (US) dollars equivalent to P800,
000,000.
Question 1: Is the prize money paid to and received by Apol in the US taxable in the
Philippines?
Question 2: May Apol's prize money qualify as an exclusion from his gross income?
Question 3: The US already imposed and withheld income taxes from Apol's prize money.
How may Apol use or apply the income taxes he paid on his prize money to the US when he
computes his income tax liability in the Philippines for 2017?
Answer to Question 1:
Yes. Under the Tax Code, the income within and without of a resident citizen is taxable.
Since Apol is a resident Filipino citizen, his income worldwide is taxable in the
Philippines.
No. Under the law, all prizes and awards granted to athletes in local and international
sports competitions whether held in the Philippines or abroad and sanctioned by their
national sports association are excluded from gross income. However, in this case, there
is no showing that the boxing match was sanctioned by the Philippine National Sports
Commission. Therefore, the prize money is not excluded.
Apol may avail of tax credit against his tax liability in the Philippines for taxes paid in
foreign countries. He may also choose to classify such income tax payments as deduction
from his gross income. He has to signify in his income tax return his desire to avail the
deduction.
a. All the answers to the questions are correct

b. Only the answers to Questions 1 and 2 are correct
c. Only the answer to Question 3 is incorrect d.
d. All the answers to the questions are incorrect
 Answer: "A"
100. JJ a member of the Philippine boxing team received the following during 2018:
Prize for winning gold in the Asian games P500, 000

Athlete of the year award 100,000
Winnings from Philippine lotto 400, 00
Prize - Mc Donald raffle promo 10,000
Cash gift from his SM Foundation 100,000
The amount not subject to income tax is

a. P700,000 c. P1,110,000
b. P1,100,000 d. P1,010,000
 Answer: "A"
Solution:
Prize for winning gold in the Asian games P500, 000
Athlete of the year award 100,000
Cash gift from his SM Foundation in the day 100,000
Total amount not subject to income tax P700, 00
Proceeds from Insurance
101. Proceeds of insurance taken by a corporation on the life of an executive to indemnify

it against loss in case of his death is
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable

 Answer: "B"
RULES ON PROCEEDS FROM LIFE INSURANCE:

 Insurance was taken out by the insured (individual):
◊ As a result of the death of the insured = nontaxable
◊ The insured "outlived" the policy (not due to the death of the insured) =
the amount received by the insured shall be treated as partly “return of
capital” which is not taxable and partly "return on capital” which shall
form part of the taxable income of the taxpayer.
 Insurance was taken out by the corporation (employer):
◊ The beneficiary is the employee = nontaxable income of the employee's

heirs or beneficiaries
◊ The beneficiary is the corporation = taxable income of the employer

NOTE:
 In the problem provided, it appears that the beneficiary is the employer.
corporation. The problem states “to indemnify it against loss in case of death"
Applying the rules discussed above, the amount received shall be treated by the
employer-corporation as part of its taxable income.
102. The proceeds received under a life insurance endowment contract is not considered
part of gross income:
a. If it is so stated in the life insurance endowment policy.
b. If the price for the endowment policy was not fully paid.
c. Where payment is made as a result of the death of the insured.
d. Where the beneficiary was not the one who took out the endowment contract.
 Answer: "C"
103. Pedro, single received the following during the taxable year:
Proceeds of his life insurance paid at an annual premium of P2, 000,000

P15, 000 within 25 years
Proceeds of his mother's life insurance paid at an annual premium 1, 000,000
of P10,000 within 20 years
House and lot inherited from his mother 4,000,000
Rent income from inherited properties P200, 000
For income tax purposes, how much of the above items must be included in his
gross income?
a. P7, 200,000 C. P200, 000
b. P1, 200,000 d. P1, 825,000
 Answer: "D"
Solution:
Proceeds of his life insurance; Taxable = P2M – (P15, 000 x 25) P1, 625,000
Rent income from inherited properties
200,000 Total P1,825,000
◊ The P2M received by Pedro from the insurance company is

partly taxable because he outlived the policy (Refer to the
discussions in the immediately preceding number). The amount
he received is in relation to "his” life insurance. If Pedro died,
the proceeds should have been received by his heirs or
beneficiaries. The amount of income to be recognized shall be
the portion pertaining only to "return on capital”. The P2M he
received is composed of his contributions for the past 25 years
(return of capital) and return "on" capital. Only the latter shall
be recognized as taxable income.
◊ Proceeds of life insurance as a result of the death of the insured
is a non taxable income.
◊ Property received from gratuitous transfer (donation and

inheritance) is not considered income for income taxation
purposes. However, if such properties derived income either
from use, lease or sale, such income shall form part of the
taxable income of the taxpayer.
104. Pedro insured his life with his estate as beneficiary. In 2016, after Pedro nad P650,000
in premium, he assigned the policy to Jose for P600,000. Jose cont paving the
premiums. Pedro died in 2018 and Jose collected the total proceeds 22.000.000. Jose,
after the assignment and Pedro's death paid total premiums of 2800.000. As a result of
the above transactions, Jose:
a. May consider the proceeds of P2,000,000 as exempt from tax
b. Derived a taxable income of P550,000
c. Derived a taxable income of P600,000
d. Answer not given
 Answer: "C"
◊ Taxable income = Proceeds - capital
◊ TI = P2,000,000 - 600,000 - 800,000 = P600,000
◊ Jose is not the beneficiary of Pedro. Therefore, though the

proceeds were collected as a result of Pedro's death. the amount
received in excess or capital shall be considered as part of Jose's
taxable income.
105. Which of the following may be excluded from the gross income of a taxpayer?
a. Income derived from bequests and devices.
b. Interest on proceeds of life insurance policies.
c. Interest received from a domestic corporation.
d. None of the above.
 Answer: "D"
◊ Income derived from "bequests and devices” means income from

properties received through inheritance (gratuitous transfer).
Properties received from gratuitous transfers are not income,
however, any income derived from these properties, are income
subject to tax (refer also to the immediately succeeding number).
◊ Generally, proceeds derived from life insurance are tax-exempt (refer

to previous discussions). However, interest income derived from
proceeds of life insurance is taxable.
106. Which of the following is taxable?
a. Property acquired through donation
b. Inherited properties
c. Income from letters "a" and "b"
d. None of the choices
 Answer: "C"
Compensation for Injuries suffered

107. The following are examples of nontaxable compensation for injuries, except .
a. Actual damages for injuries suffered.
b. Compensatory damages for unrealized profits.
c. Moral damages for grief, anxiety and physical sufferings
d. Exemplary damages.
 Answer: "B"
108. This income is subject to basic tax
a. Compensation for personal injuries or sickness
b. Salaries or emoluments received during a leave of absence
c. Winnings from PCSO and Philippine lotto
d. Fringe benefits given to managerial employees
 Answer: "B"
109. Marlon was hit by a car driven by Jaysee causing severe injuries to the former. It
was found out during trial that the driver was drunk at the time of the incident. After
trial, the court awarded the following:
 P1, 500,000 actual damages for hospitalization
 P300,000 exemplary damages
 P500,000 for loss of income, and
 P100,000 moral damages.
Marlon also received a cash gift of P100, 000 from Jaysee. The taxable income received
by Marlon is:
a. P2, 400,000 c. P1,500,000
b. P1,900,000 d. P500,000
 Answer: "D"
◊ Q Only equivalent to the amount received in compensation of lost

income
110. Recoveries of damages, shall not form part of the taxable income when it
represents compensation for personal injuries arising from:
I. Libels
II. Defamation
III. Slander
IV. Breach of promise to marry
V. Alienation of affection
a. I and II only c. I, II, III, IV and V
b. I, II and III only d. None of the above
 Answer: "C"
111. The following are examples of nontaxable compensation for injuries, except.
a. Actual damages for injuries suffered.
b. Compensatory damages for unrealized profits.
c. Moral damages for grief, anxiety and physical sufferings
d. Exemplary damages.
 Answer: "B"
112. In order for gains realized from the sale or exchange or retirement of bonds,
debentures or other certificate of indebtedness be exempt from income taxation, what
is the prescribed length of its maturity?
a. 5 years or more
b. 5 years or less
c. More than 5 years
d. Exactly 5 years
 Answer: "C"
113. Which is not a creditable withholding income tax?
a. Expanded withholding income tax
b. Withholding income tax on passive income
c. Withholding income tax at source
 Answer: "B"
114. Mike is the hottest designer and make-up artist in the Metropolis today. His
annual professional income is P15, 000,000. On February 14, 2014, he inherited from a
relative a 10-door high-end apartment worth P50, 000,000. Net rental income from the
apartment during the year amounted to P3, 000,000. Mike's other income is from
interest on his gratuity of P5, 000,000 under time deposit with BDO at a rate of 10% per
annum. Which among the following is correct?
a. The apartment he inherited forms part of his taxable income during the year,
b. The net rental income from apartment he inherited forms part of his
taxable income during the year.
c. The interest on his gratuity forms part of his taxable income during the year.
d. All of the above
 Answer: "B"
115. A tax exclusion is defined as
a. An item or amount which the law allows to be deducted from gross income in
order to arrive at net income.
b. The grant of immunity to particular persons or corporations from a tax which

others within the same taxing district are obliged to pay.
c. Income received but which is not part of gross income as it is exempted by law
or by treaty.
d. A deduction from income tax due of any amount paid to a foreign country
subject to limitation.
 Answer: "C"
116. Which of the following is not an income tax on corporations?
a. Normal tax
b. Minimum corporate income tax
c. Gross income tax
d. Stock transaction tax
 Answer: "D"
◊ Stock transaction tax is a business tax, not an income tax

◊
117. Which among the following are examples of income that are exempt from income tax
by virtue of a treaty?
a. Salaries of officials of the United Nations assigned in the Philippines if paid by

the United Nations and certified by the Secretary General of the United Nations.
b. Salaries, allowances, fees, or wages received by citizens of the United States

of America working in consular offices in the Philippines are exempt from all taxes.
c. Salaries of diplomatic officials and agents.
d. All of the above
 Answer: "D"
118. Which among the following are examples of income that are exempt from income tax
by virtue of special laws?
a. Payments of benefits due or to become due under United States

Veterans Administration are not included in the gross income.
b. Benefits received from or enjoyed under the Social Security System (SSS) are
not included in the gross income.
c. Benefits received from the GSIS including retirement gratuity received

by government officials and employees are not included in the gross income.
d. All of the above
 Answer: "D"
119. Which of the following items is not part of gross income to be reported in the income
tax return?
a. Increase in value of land
b. Gambling winnings
c. Prize of P10,000
d. Gain from sale of store's air conditioner
 Answer: "A"
◊ Unrealized gains and losses are not recognized for income taxation
purposes. Example of unrealized gain is a mere increase in the value of
a land.
120. Mr. Joe, an American residing in Hongkong came to the Philippines to sing the
American national anthem on a professional boxing championship match held in the
Araneta Coliseum. He was paid P1, 000, 000 as talent fee. His Philippine income tax
would be:
a. P320,000 c. P250,000
b. P285,000 d. P150,000
 Answer: "C"
◊ Income Tax Due = P1,000,000 x 25% = P250,000
121. 1st statement: To be exempt from income taxation. long term bank deposit or
investment should not be terminated by the investor before the 5th year; otherwise, it
shall be subjected to final tax rates of 5%, 12%, or 20% on interest income earnings.
2nd statement: For purposes of exemption from income taxation, the long term deposit
investment above refer to those investments issued by banks and other financial
institutions.
a. Only 1st statement is correct
b. Only 2nd statement is correct
c. Both statements are correct
d. Both statements are incorrect
 Answer: “A”
◊ Only interest income from long-term bank deposit or investment is

exempt from income tax.
122. Which of the following organizations shall be exempt from income tax?
a. Organizations such as provincial fairs and like associations of a quasi-

public character, which are designed to encourage the development of better
agricultural and horticultural products through a system of awards, prizes, or
premiums, and whose income derived from gate receipts, entry fees, donations is
used exclusively to meet all the necessary expenses of upkeep and operation
b. Associations which have for their purpose, the holding of periodical race meets,
the profits from which may inure to the benefit of their shareholders.
c. Corporations engaged in growing agricultural or horticultural products or

raising livestock or similar products for profits.
d. None of the choices.
 Answer: “A”
123. Which of the following government owned or controlled corporations, agencies

or instrumentalities shall pay such rate of tax upon their taxable income as are imposed
upon corporations or associations engaged in similar business, industry or activity?
a. Government Service Insurance System (GSIS)

b. Social Security System (SSS)
c. Philippine Amusement and Gaming Corporation (PAGCOR)
d. Philippine Charity Sweepstakes Office (PCSO)
 Answer: "C"
124. Ana sued Pedro for breach of promise to marry. Pedro lost the case and duly paid the
court's award that included, among others, P100,000 as moral damages for the mental
anguish Ana suffered. Did Ana earn a taxable income?
a. She had a taxable income of P100, 000 since income is income from
what source.
b. She had no taxable income because it was a donation.
c. She had taxable income since she made a profit.
d. She had no taxable income since moral damages are compensatory.
 Answer: "D"
◊ She had no taxable income since moral damages are compensatory.

Exemplary and moral damages awarded to a party-litigant are not
considered taxable income (America N.A.-Manila Branch vs. Commissioner
of Internal Revenue CTA Case No. 6144, March 14, 2005).
Dealings in Property
Capital Gains and Losses
125. Income from dealings in property (real, personal, or mixed) is the gain or loss derived:
a. Only from the cash sale of property
b. From cash and gratuitous receipts of property
c. From sale and lease of property
d. Only from sale of property
 Answer: "D"
126. The term “capital assets” includes
a. Stock in trade or other property included in the taxpayer's inventory.
b. Real property not used in the trade or business of taxpayer.
c. Property primarily for sale to customers in the ordinary course of trade or

business.
d. Property used in the trade or business of the taxpayer and subject to

depreciation.
 Answer: "B"
127. Under Section 39 (b) of the Tax Code, how much shall be taken into account computing
net income, if a gain is realized by an individual taxpayer from the sale or exchange of
capital assets (other than real properties and shares of stocks, more than 12 months?
a. 40% of the net capital gain.
b. 50% of the net capital gain.
c. 60% of the net capital gain.
d. 100% of the net capital gain.
 Answer: "B"
128. Lots being rented when subsequently sold are classified as
a. Capital assets c. Ordinary assets
b. Liquid assets d. Fixed assets

 Answer: "C"
129. The following rules shall be observed when a capital gain or capital loss is sustained by
a corporation, except
a. Capital gains and losses are recognized to the extent of its full amount.
b. Capital losses are deductible only to the extent of capital gains.
c. Net capital losses are not deductible from ordinary gain or income but
ordinary losses are deductible from capital gains.
d. There is a holding period
 Answer: "D"
130. The following taxpayers consider holding period in determining the taxable capital gain
or deductible capital loss and carry-over net capital loss the following year, except
a. Individual c. Corporation
b. Estates d. Trusts
 Answer: "C"
131. Rules on capital gains and losses of corporations, except:
a. Capital gains and losses are recognized to the extent of 100% regardless of
the holding period.
b. The net capital loss carry over is not applicable.

c. Capital losses are deductible only to the extent of capital gains.
d. There is a final tax of 5% on real property sold.
 Answer: "D"
132. Which of the following statements is incorrect?
a. Capital losses are deductible only to the extent of capital gains.
b. Ordinary losses are deductible only to the extent of ordinary gains.
c. Ordinary gains are always subject to basic tax.
d. Capital gains may be subject to basic tax.
 Answer: “B”
133. In computing gain or loss from the sale or other disposition of property acquired as gift
or donation, the basis of cost shall be:
a. The fair market value as of the date of acquisition.
b. The purchase price plus expenses of acquisition.
c. The latest inventory value.
d. The same as it would be in the hands of the donor.
 Answer: "D"
134. Juan received as gift from his mother property purchased ten years ago for R100.00 0
at the time of donation, the property had a fair market value of P2,000,000. After
owning the property for 3 years, Juan sold them for P2,500,000. Which of the following
statements is correct?
a. The gain on the sale was a capital gain of P2, 400,000.
b. The gain on the sale was an ordinary gain of P2, 400,000.
c. The holding period of the asset is immaterial
d. The gain on the sale going into the net taxable income was P2, 400,000.
 Answer: "A"
◊ “B” is wrong. What was sold was a capital asset.
◊ “D” is wrong. Applying holding period, the taxable income should have
been P1, 200,000.
135. Andres inherited a piece of land from his father (purchased by the father at
P5,000,000) with a fair market value of P3,000,000 when inherited. He transferred this
property to a corporation where he is the majority stockholder, Omega Corporation,
and received for it newly issued shares of stocks with a par value of P4, 500,000 and fair
market value of P5,000,000. Which of the following is wrong?
a. The gain to Andres on the transfer is P2, 000,000.
b. The gain to Omega Corporation on the transfer is PO.
c. The basis of the shares in the hands of Omega is P5, 000,000.
d. There is no gain from any and all transactions.
 Answer: "D"
136. Manuel transferred his commercial land with a cost of P500,000 but with a fair
market value of P750,000 to MHD Corporation in exchange of the stocks of the
corporation with par value of P1,000,000. As a result of the transfer, he became the
major stockholder of the corporation. As a result of the transfer:
a. The recognized gain is the difference between the fair market value of the shares
of stocks and the cost of the land.
b. The recognized gain is the difference between the par value of the stocks and
the fair market value of land.
c. No recognized gain because the land was in exchange of purely stocks and
Manuel became the majority stockholder.
d. No recognized gain because the land was in exchange of stocks of the corporation.
 Answer: "C"
137. Emilio was a stockholder of EAC Co. He owned shares of stock which he acquired
five years ago at a cost of R100, 000. EAC was dissolved. He received a liquidating
dividend of R140, 000. The gain subject to income tax is
a. An ordinary gain to consider is P40, 000.
b. A capital gain to consider is R40, 000.
c. A capital gain to consider is P20, 000.
d. No gain to consider.
 Answer: "C"
138. Apol owns 51% of JJ Corporation valued at P25,000,000. Due to bankruptcy, JJ was
liquidated. Apol received P20, 000,000 as liquidating dividend. Was the loss
deductible?
a. No, because Apol and JJ are considered related parties.
b. Yes, the loss is classified as capital loss and could be deducted from capital gain, if
any.
c. No, because the amount received by Apol was subject to capital gains tax.
d. Yes, because losses as a rule are deductible.
 Answer: "B"
139. Pedro generated net income from trade amounting to P400, 000. His capital
asset transactions during 2017 are summarized as follows:
Holding Period Amount
Capital gain 6 months P50, 000
Capital gain 2 years 45,000
Capital loss 12 months 23,000
Capital loss 10 years 28,000

How much is Pedro's taxable income in 2017?
a. P484,000 c. P435,500
b. P444,000 d. P385,500
 Answer: "D"
Solution:
Income from trading activities P400, 000
Add: Net Capital Gain
Short term capital gain @ 100% P50, 000
Long-term capital gain @ 50% 22,500
Short term capital loss @ 100% (23,000)

Long-term capital loss @ 50% (14,000)
Net capital gain 35,500 35,500
Basic personal exemption (50,000)
Taxable Net Income P385, 500
140. How much is Pedro's taxable income assuming the taxable year is 2018?
c. P484,000 c. P435,500
d. P2444,000 d. P385,500
 Answer: "C"
◊ Personal exemption are no longer allowed under TRAIN Law
◊ Taxable net income 2018 = P385,500 + personal exemption = P435,500
141. Based on the above problem, assuming the taxpayer is a corporation, how much is the
taxable income?
a. P484,000 c. 8435,500
b. P444,000 d. P385,500
 Answer: "B"
Solution:
Income from trading activities
Add: Net Capital Gain P400, 000
Short term capital gain @ 100% P50, 000

Short term capital loss @ 100% (23,000)
Long-term capital loss @ 100% (28,000) 44,000
Taxable Net Income P444, 000
The Next six (6) questions are based on the following information:
Emilio, married, with 2 minor children, had the following data:
2016 2017
Business Income P 106,700 P 110,800
Interest on time deposit with BPI 2,000 3,000
Short-term capital gain 10,000 90,500
Long-term capital gain 20,600 80,200
Short-term capital loss 90,000 20,900
Long-term capital loss 80,400
142. How much is the taxable income of Emilio for year 2016?
a. P6,700 c. P106,700
b. P56,700 d. nil
 Answer: "A"
Solution:
Business income P106, 700
Add: Net capital gain
Short-term capital gain @ 100% P10, 000
Short-term capital loss @ 100% (90,000)
Net capital loss (P109, 900)

Less: Personal exemption
Basic personal exemption (50,000)
Additional personal exemption (P25, 000 x 2) (50,000)
Taxable net income P6, 700
◊ Apply the rules on holding period if the taxpayer is individual
◊ Capital losses are deductible only to the extent of capital gains.
◊ Personal exemptions are allowable deductions prior to TRAIN Law
◊ The interest income on BPl is subject to FWT
143. How much is the taxable income of Emilio for the year 2017?
a. P13,800 c. P113,800
b. P110,800 d. P260,600
 Answer: "C"
Solution:
Add: Net capital gain -
Net Capital Gain P109, 700

Less: net capital loss carry-over (2017) (6,700) 103,000
Basic personal exemption (50, 000)
Additional personal exemption (P25, 000 x 2) (50, 000)
◊ Capital loss carry-over should not exceed the net taxable income
during the year the net capital loss was incurred.
144. How much is the taxable income of Emilio assuming the current taxable year is 2018?
a. P13,800 c. P213,800
b. P110,800 d. P260,600
 Answer: "C"

-
Net Capital Gain P109, 700
Less: net capital loss carry-over (2017) (6,700) 103,000
Basic personal exemption -
Additional personal exemption (P25, 000 x 2) -

◊ The rule on capital loss carry-over is not affected under the TRAIN
Law
◊ Personal exemptions are no longer allowed as deductions from the

gross income upon effectivity of the TRAIN Law
145. If the taxpayer is a corporation, how much is the taxable income for the year 2016?
a. P6,700 c. P106,700
b. P56,700 d. nil
 Answer: "C"
Solution:
Add: Net capital gain -
Net capital loss (P139, 800)
◊ The rules on holding period and net capital loss carry-over are not
applicable to corporate taxpayers.
146. If the taxpayer is a corporation, how much is the taxable income for the year 2017?
a. P13,800 c. P113,800
b. P110,800 d. P260,600
 Answer: "D"
Solution:
Long-term capital gain @ 100% 80, 200
Short-term capital loss @ 100% (20, 900) 149, 800
◊ The rules on holding period and net capital loss carry-over are not
applicable to corporate taxpayers.
147. If the taxpayer is a corporation, how much is the taxable income assuming the
current taxable year is 2018?
a. P13,800 c. P113,800
b. P110,800 d. P260,600
 Answer: "D"; Same solution with the immediately preceding number
148. Jose has the following information in 2017:

Gross profit from sale of inventories held for 2 years P 500, 000
Loss on two (2) weeks option contract 50, 000
Gain on sale of bonds (holding period: 6 months) 60, 000
Gain on sale of delivery truck held for 3 12 years 400 000
Gain on sale of personal car held for 5 years 160, 000
Capital gain on direct sale to buyers of shares of stocks held 40, 000
for 4 years 40, 000
Sale of 2-year old residential house (Cost: P540, 000) 5, 500, 000
In 2016, Jose had a net taxable income of P50, 000 and a capital loss of P75,000.
How much is the taxable net income?
a. P415, 000 C. P890,000
b. P490,000 d. P940,000
 Answer: "C"
Solution:
Gross profit from sale of inventories P 500,

000
Gain on sale of delivery truck 400,

000
Loss on option contract = @ 100% (50. 000)
Gain on sale of bonds = @ 100% 60, 000
Gain on sale of personal car = P8k x 50% 80, 000
Net Capital Gain 90, 000

Less: Net capital loss carry-over (50, 000) 40, 000
Basic Personal exemption
(Allowed prior to TRAIN Law) (50, 000)
149. How much is the taxable net income assuming the current taxable year is 2018?
a. P415,000 c. P890,000
b. P490,000 d. P940,000
 Answer: "D"
◊ Personal exemption is no longer deductible under the TRAIN LOW
◊ Taxable Net Income = P890,000 (with personal exemption) +5 ,000 =

P940,000
◊ Capital loss carry-over should not exceed the net taxable income
during the year the net capital loss was incurred.
150. How much is the total capital gains tax?
a. P2,000 c. P332,000
b. P166,000 d. P336,000
 Answer: "C"
Solution:
CGT
On sale of shares of stock = P40, 000 x 5% P2,000
On sale of residential house = P550, 000 x 6% 330,000
TOTAL CGT 332,000
151. How much is the total capital gains tax assuming the current taxable year is 2018?
a. P2,000 c. P332,000
b. b. P166,000 d. P336,000
 Answer: "D"
Solution:
CGT
On sale of shares of stock = P40,000 x 15% P6,000
On sale of residential house = P550,000 x 6% 330.000
TOTAL CGT gmailgma

336,000
◊ CGT on shares of stock under the TRAIN Law is 15% of the capital
gain
152. Juan, a Filipino citizen, migrated to the United States some eight (8) years ago and got
a permanent resident status or green card. He should pay his Philippine income taxes
on:
a. The gains derived from the sale in California, U.S.A. of jewelry he purchased in the ·
Philippines
b. The proceeds he received from a Philippine insurance company as the

sole beneficiary of life insurance taken by his father who died recently.
c. The gains derived from the sale in New York Stock Exchange of shares of stock
in PLDT, a Philippine corporation.
d. Dividends received from a two year old foreign corporation whose gross income
was derived solely from Philippine sources.
 Answer: "C"
◊ “A” is income earned in USA D
◊ "B" is a tax-exempt income.
◊ "C" gain on sale of shares of DC is always considered an income in

the Philippines.
◊ "D" is a dividend income earned outside of the Philippines.
153. Statement 1: Gain on sale of all kinds of capital assets are subject to the final tax
on capital gains.
Statement 2: Gain from sale of real property classified as capital asset and located in
Miami, Florida is not subject to the final tax on capital gain.
b. Both statements are not correct
 Answer: "D"
◊ Gain on sale of capital assets may be:
o Subject to capital gains tax
o Subject to basic income tax

o Exempt from income tax but subject to stock transaction tax
(Section 127 of the Tax Code, as amended)
◊ Sale of real property located abroad is subject to basic income tax.
154. In 2016, Mr. Vicente Tagle, a retiree, bought 10,000 CDA shares that are unlisted in
the local stock exchange for P10 per share. In 2010, the said shares had a book value
per share of P60 per share. In view of a car accident in 2010, Mr: Vicente Tagle had to
sell his CDA shares but he could sell the same only for P50 per share. The sale is subject
to tax as follows:
a. 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50
selling price less P10 cost).
b. 5%/10% capital gains tax on the capital gain of P50 per share, arrived at
by deducting the cost (P10 per share) from the book value (P60 per share).
c. 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50
selling price less P10 cost) plus donor's tax on the excess of the fair market value of
the shares over the consideration.
d. Graduated income tax rates of 5% to 32% on the net taxable income from the sale
of the shares.
 Answer: "C"
◊ Prior to 2018, sale of shares of domestic corporation not listed in the local
stock exchange is subject to CGT as follows:
 5% on first P100,000 capital gain
 10% in excess of P100,000 capital gain
◊ The excess of FMV over consideration received is considered donation

subject to donor's tax.
155. The sale in the immediately preceding number, in case the taxable year is 2018,
IS subject to:
a. 15% capital gains tax on the capital gain from sale of P40 per share (P50 selling
price less P10 cost).
b. 15% capital gains tax on the capital gain of P50 per share, arrived at by deducting
the cost (P10 per share) from the book value (P60 per share).
c. 15% capital gains tax on the capital gain from sale of P40 per share (P50 selling
price less P10 cost) plus donor's tax on the excess of the fair market value of the
shares over the consideration.
d. The revised graduated income tax rates of 20% to 35% on the net taxable income
from the sale of the shares.
 Answer: "C"
◊ Beginning January 1, 2018 (TRAIN Law), sale of shares of domestic

corporation not listed in the local stock exchange is subject to 15% CGT
based on capital gain.
156. Assume the shares sold were from a foreign corporation, the sale iis subject to:
a. 5%/10% capital gains tax on the capital gain from sale of P40 per share (P50
b. 15% capital gains tax on the capital gain from sale of P40 per share (P50
c. Stock transaction tax of 12 of 1% of gross selling price
d. Basic income tax
 Answer: "C"
◊ Gain on sale of shares of foreign corporation is subject to basic income

tax

06 Gross Income

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

06 Gross Income

Uploaded by

Copyright:

Available Formats

PART 6

Inclusions from Gross Income

Exclusions from Gross Income

◊ Taxable FB received by:

 Rank & file: Subject to basic tax:

 Supervisory or managerial: Subject to FBT (a final tax):

 Exempt under the law

 If the grant is for the convenience of the employer.

o Conforming to the ceiling

 No included in the P90,000 threshold

o In excess of the ceiling

 Subject to tax only on the excess over P90,000

 Tax exempt 13th month pay and Other benefits

◊ Prior to 2015 – P30,000

◊ Beginning Jan. 1, 2018 – P90,000

"Other Benefits" include:

 Productivity incentive bonus

 Fixed or Variable Allowances

 Pre-computed business allowances

Reasonable amounts of reimbursements/advances for travelling and entertainment

 Business related allowances subject to liquidation

 It is for ordinary and necessary travelling and representation or entertainment expenses

 The employee is required to account/liquidate for the foregoing expenses in accordance

REPRESENTATION AND TRANSPORTATION ALLOWANCES (RATA)

STIPENDS OF RESIDENT PHYSICIANS

COST OF LIVING ALLOWANCE (COLA)

 Premiums on Life Insurance

Premium on life insurance covering the life of an employee paid by the

◊ With Reasonable private benefit plan

Retirement pay as a rule, is taxable, except those received by officials

1. The retirement plan must be approved by the Bureau of Internal Revenue;

◊ In the absence of reasonable private benefit plan

An employee may receive tax-exempt retirement benefits who has

 Tips and Gratuities

Rental Payments PXXX

1. Cash received, at stipulated price.

2. Obligations of the lessor to third persons paid or assumed by the lessee in

3. Advance payment, which may be in the form of:

 Prepaid rent (reported in full in the year of receipt)

 A security deposit that is applied to rental

 Non-Taxable Rent Income of the lessor may in the form of:

1) Advance rentals representing option money

2) Security deposits to insure faithful performance of certain obligations of the lessee.

Security deposit shall be taxable:

 Upon forfeiture in favor of the lessor; or

 Upon application as rental payments.

INCOME FROM LEASEHOLD IMPROVEMENTS IS REPORTED AS FOLLOWS:

METHOD TAXABLE AMOUNT

2) Spread-out or Annual = BV, end of lease term

Annual Method Income Remaining Term of lease

 Pre-Termination of the lease

The additional income arising from the pre-termination is computed as follows:

FMV, year of pre-termination Pxxx

CASH & PROPERTY DIVIDENDS

 Cash and property dividends shall be taxable upon declaration.

SITUS OF DIVIDEND INCOME

1) Dividends from within:

a) Dividend income from Domestic Corporation

2) Dividends from without:

a) Dividend income from Foreign Corporation (in general)

3) Partly within and partly without. Refer to the summary below:

SOURCE OF DIVIDEND SOURCE OF INCOME