INCOME TAXATION 8.

Holiday and vacation expenses

Concept of Income 9. Educational assistance
One popular definition of income is the amount of wealth accumulated 10. Life or death insurance
plus savings and the value of the personal consumption. Reasons of granting Fringe Benefits:
Net Worth is equal to total assets minus total liabilities. 1. Incentive to encourage employees’ productivity and loyalty to employer
The net worth method is commonly used in determining taxable income. 2. During financial difficulties
Capital – denotes the original investment. 3. Additional remunerations for overtime and separation pay.
Fringe Benefit Tax (FBT)
Revenue – pertains to all funds accruing to the treasury of the government
It is monetary burden imposed by the sovereignty on any good, service, or
derived from tax, donation, grants, and any other source.
other benefit furnished or granted by an employer, in cash or in kind, in
Nontaxable Income – it should be excluded by law or treaty from taxation,
addition to basic salaries, to an individual employee other than a rank and
example: winning in a sweepstakes.
file employee.
Taxable Income – means the pertinent items of gross income specified in
The grossed-up monetary value of the fringe benefit shall be determined
the Tax Code less the deductions. It is synonymous to net income.
by dividing the monetary
Characteristics of Taxable Income:
value of the fringe benefits by 68%.
1. There must be gain or profit
Classification of Fringe Benefits
2. The gain must be realized or received
1. Rank and file employees are taxable as compensation income subject to
3. The law or treaty does not exclude the gain from taxation
normal tax
Passive Income – an income in which the taxpayer merely waits for the
2. Managerial employees are taxable with final fringe benefit tax of 32%.
amount to come in like royalty, interest, prizes, and winnings. It is subject
3. Allowances which are fixed in amounts and are regularly received by the
to final tax.
employee as part of his monthly compensation income shall not be treated
Passive Income Examples
as taxable fringe benefit but as compensation income.
1.Yield from deposit substitutes and trust fund:
Taxable amount – is the grossed-up monetary value of benefit
2.Interest income;
granted/furnished. The fringe benefit tax is 32% of the grossed-up
3.Royal income;
monetary value of benefit. The grossed-up monetary value is
4.Divided income; and
the benefit expense of the employer which is also the income of the
5.Prizes and winnings
employee. The fringe benefit tax is the income tax on income earned by
Fringe Benefit
the employee. The fringe benefit income tax is a final tax on gross taxable
“Any good, service, or other benefit furnished or granted by an employer,
income.
in cash or in kind, in addition to basic salaries, to an individual but are not
Dealings in Property
limited to:
The term “dealings in property” refers to the disposal through sale or
Examples of Fringe Benefit
exchange of ordinary assets or capital assets.
1. Housing
Ordinary Assets
2. Expense account
1. Stock in trade intended for sale in the normal course of business such as:
3. Vehicle of any kind
a. Merchandise inventory (finished goods, in process and raw materials)
4. Household personnel
5. Interest on loan at less than market share b. Securities held or being sold by dealers in securities
6. Membership fees 2. Real properties acquired by real estate dealers or developers
7. Expenses for foreign travel 3. Properties used in business subject to depreciation
4. Real properties used in trade or business including real property held for
rent
Capital Assets
The law defines the term “capital assets” by exclusion. They are property
of a taxpayer other than ordinary assets.
1. Stocks and securities held by taxpayers other than dealers in securities
2. Interest in partnership and joint venture
3. Goodwill
4. Real and personal properties not used in trade or business like
residential house and lot, car, jewelries, etc.
5. Investment property
Ordinary Gain is the gain derived from the sale or exchange of ordinary
assets including gains from performance of services and business.
Ordinary Loss is the excess of business expenses and losses over the
business income of the taxpayer derived from the sale or exchange of
ordinary assets.
Capital Gain is the excess of value received over the determined cost from
the sale or exchange of a capital asset.
Capital Loss refers to the excess of the determined cost
over the value received from the sale or exchange of a capital asset.
Corporation’s Own Shares of Stock
Preferred Stock – is a class of the stock refer to the shares of stock to be
issued by the charter or by-laws with respect to dividends.
Common Stock – represents basic interest of ownership in a corporation.
Stockholders holding common shares are called common stockholders.
Sale of Treasury Stock
Treasury Stock is a corporation’s own stock that has been issued and then
reacquired but not cancelled.
Revenue expenditures are ordinary recurring expenditures that provide
benefits to the current accounting period.
usually called “period cost”
Examples:
 Salary expense
 Supplies expense
 Repairs and maintenance expense
 Other operating expenses
Capital expenditures are nonrecurring expenditures related to the
acquisition of depreciable assets to be used in the business, but not for
sale, having a useful life for several years.
Situs of Expenses
As a rule, business expenses are deductible only if they are incurred in
relation to the business income taxable in the Philippines. If a business
expense could not be traced whether incurred within or not, such expense
shall be allocated based on the gross income within and without.
Items not Deductible from Gross Income
1. Personal, living, or family expenses
2. Any amount paid for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate
3. Any amount expended in restoring property for which an allowance is or
has been made
4. Premium paid on any life insurance policy covering the life of any officer
or employee, or of any person financially interested in any trade or
business carried on by the taxpayer, when the taxpayer is directly or
indirectly a beneficiary under such policy
5. Transactions between related taxpayers resulting to losses from sales or
exchanges of property, interest expense or bad debts
6. Bribes, kickbacks and other similar payments
7. Donations made to employees and others which do not have in them
the element of compensation for services.
8. The amount spent for political campaign, campaign funds and donations
to political parties or candidates are not deductible either as business or
contribution from gross income.
Classifications of Deductions from Gross Income
1. Optional Standard Deduction (OSD)
a. An individual other than a nonresident alien, the OSD is 40% of his gross
sales or gross receipts.
2. Regular Allowable Itemized Deduction – itemized deductions are
allowed deductible ordinary and necessary business expenses paid or
incurred during the taxable year.
3. Special Allowable Itemized Deduction
General Business Expenses
1. Salaries and wages, management expenses, commissions, and labor
2. Supplies, repairs and maintenance, and other incidental
3. Operating expenses
4. Rental
5. Advertising and other selling expenses
6. Traveling expenses
7. Insurance premiums
Interest Expense
Taxes
Bad Debts
An expense is ordinary if it is reasonable and common to the particular
business of the taxpayer as distinguished from a capital expenditure.
An expense is necessary when it is useful or helpful to the business; it
needs not be essential or indispensable to the business as distinguished
from ordinary expenditure.
Classification of Deductible Losses
1. Business losses such as losses incurred in trade or profession
2. Casualty losses such as losses due to storms, fires, shipwreck or other
casualties of property connected with profession, trade or business
3. Losses of business property due to theft, robbery or embezzlement
4. Net operating loss carry-over (NOLCO)
Net Operating Loss Carry-Over (NOLCO)
It shall mean the excess of allowable deductions over business gross
income in a taxable year. NOLCO and any item of incentive deduction
allowable under in any special law are not part of the itemized deductions.
Taxpayers entitled to deduct NOLCO
1. Individual taxpayer’s engaged in trade or business or in the exercise of
his profession
2. Domestic and resident foreign corporations subject to normal income
tax
3. Special Corporation subject to preferential tax rates such as private
educational institutions, hospitals, and regional operating headquarters
Income Tax System
1. Global Income Tax
2. Gross Income Tax System
3. Schedular Tax System
Global Income Tax System
This income tax system is a combination of gross compensation income
and/or net income from business, trade or profession to arrive at the total
income subject to tabular tax rates.
In other words, global income tax system employs the grouping of similar
incomes from all sources and subjecting them to a single tax rate or
progressive graduated rates.
Examples:
 Compensation income
 Net income from business, trade or profession
 Passive income (not subjected to final tax)
 Capital gains (not subjected to capital gains tax)
Gross Income Tax System
The taxpayer’s income tax is fixed or computed based on the gross income.
The usual allowable deductions are completely disregarded in computing
this income tax.
Examples:
 Fringe benefit tax
 Passive income subjected to final tax
 Capital gains tax on real property (capital asset)
 Minimum corporate income tax (MCIT)
Schedular Income Tax System
Since income taxes are either computed based on global tax system or
gross income tax system, their filing and payment should be accomplished
with separate BIR form as required per category of income.
Examples:
 Annual income tax return (global income tax)
 Capital gains tax return (sale of real property classified as capital asset,
and sale of shares of stocks not traded in stock market)
Groups and Sources of Income Taxpayer
1. Individuals
1. Citizen
a. Resident citizen (taxable in and out)
b. Nonresident citizen (taxable in)
2. Alien
a. Resident alien (taxable in)
b. Nonresident alien doing business in the Philippines (taxable in)
c. Nonresident alien not doing business in the Philippines (taxable in)
2. Corporations and Partnerships
1. Domestic corporation (taxable in and out)
2. Resident foreign corporation (taxable in)
Losses and Basic Income Tax Patterns
3. Nonresident foreign corporation (taxable in)
3. Estates and Trusts (taxable as individual taxpayer)
Deductions from Business Income
1. Itemized allowable deductions (business expense)
2. OSD – 40% of gross sales or gross receipts for individuals and 40% of
gross income for corporations
Individual Taxpayers
They are natural persons with income derived within the territorial
jurisdiction of a taxing authority. These individual taxpayers are classified
as citizens and aliens.
Filipino Citizen
a. Those who are citizens of the Philippines at the time of the adoption of
the 1987 Philippine Constitution
b. Born with father and/or mother as Filipino citizens
c. Born before January 17, 1973 of Filipino mother who elects Philippine
citizenship upon reaching the age of majority
d. Acquired Philippine citizenship after birth (naturalized) in accordance
with the Philippine Laws
An alien is a foreign-born person who is not qualified to acquire Philippine
citizenship by birth or after birth.
Classification of Citizens
Resident Citizen.
Classifications of Aliens
Nonresident Citizen Resident
Nonresident