GROSS INCOME - INCLUSIONS

1. Taxable income
Taxable income defined The term ‘taxable income’ means the pertinent items of gross income specified in the Code,
less deductions, if any, authorized for such types of income by the Code or other special
laws.
Corporation Gross income Pxxx
Less: Deductions xxx
Taxable income Pxxx
Individual Gross income Pxxx
Less: Deductions xxx
Taxable income Pxxx

Note: Basic personal exemption and additional exemptions are no longer allowed to be deducted
from the gross income of an individual taxpayer starting January 1, 2018.

2. Meaning of income
a. Broad sense Income means all wealth, which flows into the taxpayer’s hands other than as a mere return of
capital.
b. Judicial definition Income is the gain derived from labor, or from capital, or from both labor and capital, including
the gain derived from the sale or exchange of capital asset.
c. Requisites of a a. There must be gain;
taxable income b. The gain must be realized or received;
c. The gain must not be excluded by law from taxation.

3. Gross income defined

Gross income [Sec. 32 Except when otherwise provided, gross income means all income from whatever source,
(A)] including (but not limited to the following items):
a. Compensation for services in whatever form paid, including but not limited to fees,
salaries, wages, commissions, and similar items;
b. Gross income derived from the conduct of trade or business or the exercise of a
profession;
c. Gains derived from dealings in property;
d. Interests;
e. Rents;
f. Royalties;
g. Dividends
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner’s distributive share from the net income of the general professional partnership.

4. Income distinguished from other terms

a. From capital Capital is the fund or property existing at one distinct time, while income denotes a flow of
wealth during a definite period.
b. From receipts Receipts have reference to all wealth that flows into the taxpayer, which includes returns of
capital. Receipts are broader in scope than income.
c. From revenue 1) Revenue, as applied to taxation, refers to all the funds or income derived by the government,
whether from tax or any other source while income, for tax purposes, is employed in its “natural
and obvious sense” to mean money or gain received, coming to a person (natural or juridical)
during a given period of time.
2) Revenue is to the government while income is to a person (natural or juridical).

5. Items of gross income explained

a. Compensation for personal services
1) Gross compensation Gross compensation income means all remuneration for services performed by an employee
income defined for his employer, whether paid in cash or in kind, unless specifically excluded under the Tax
Code (e.g., salaries, wages, emoluments, honoraria, bonuses, allowances, director’s fees).
2) Director’s fee Director’s fee is part of the gross compensation income if the director is at the same
time an employee of the employer/corporation. If the director is not an employee, the
director’s fee is subject to 10% creditable withholding tax if the current year’s gross
income is
P720,000 and below (15% if current year’s gross income exceeds P720,000.)
3) Compensation in the In the absence of employer-employee relationship, compensation for personal services shall be
absence of employer- considered as gross professional fee (e.g., audit fee received by CPA from his client, lawyer’s
employee relationship fee.)
4) Examples of All kinds of compensation for services rendered constitute gross income. They include:
compensation for a) salaries, wages and fees;
services rendered b) commissions paid to salesmen;
c) compensation for services on the basis of a percentage of profits;
 d) commissions on insurance premiums;
e) tips;
f) pensions or retiring allowances paid by private persons or by the government (except
pension exempt from tax); and
g) marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelist, or religious worker for services
rendered.
5) Forms of Forms of compensation Taxable amount
compensation a) Payments made in cash The full amount received
b) Services paid for with something The fair market value (FMV) of the thing taken in
other than money (in kind) payment
c) Services rendered at a stipulated In the absence of evidence to the contrary, the
price stipulated price shall be presumed to be the fair
market value (FMV)
d) Equity grant once exercised or Taxable compensation
availed by grantee-employee
6) Examples of Payments in kind Taxable Amount
payments in kind a) Compensation paid to an employee Fair market value of the stock at the time the
of a corporation in its stock services are rendered
b) Promissory note and other evidence a) Promissory note is not interest bearing
of indebtedness in payment of Year received - Fair discounted value
services, and not merely as security Year collected- Face value less fair discounted
for such payment value
b) Promissory note is interest bearing
Year received - Face value
Year collected - Maturity value less face value

b. Gross income derived from the conduct of trade or business, or the exercise of profession
Format of computation Gross sales/receipts xxx
Less: Sales returns and allowances xxx
Sales discount xxx xxx
Net sales/receipts xxx
Less: Cost of sales/services xxx
Gross income from operation xxx
Add: Other income xxx
Total gross income xxx

c. Gains derived from dealings in property

1) Property acquired by Selling price xxx
purchase on or after Less: Cost xxx
March 1, 1913. Gain xxx
2) Property acquired by Selling price xxx
inheritance Less: FMV, date of inheritance xxx
Gain xxx
3) Property acquired by Selling price xxx
gift Less: Value in the hands of the donor xxx
Gain xxx

d. Interest income
1) Included in interest
income
2) Subject to final tax
3) Subject to tax rates in
general
3) Exempt from
income tax
Interest includes such interest arising from indebtedness, whether business or non-business.
Unless exempted by law, interests received by a taxpayer, whether or not usurious, are taxable.
Interest income from Philippine sources subject to final tax (not included in the taxable net
income subject to tax rates in general)
a) Interest from any currency bank deposit
b) Yield or any other monetary benefit from deposit substitute
c) Interest on government debt instrument and securities (regardless number of lenders)
d) Yield or any other monetary benefit from trust funds and similar arrangements
e) Interest income received from a depository bank under expanded foreign currency deposit
system
f) Interest income from long-term deposit or investment evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas if pre-terminated before fifth year or received by individual
issued by financial institution other than a bank
a) Interest income from foreign sources
b) Interest income from debt instrument not within the coverage of deposit substitute
c) Interest from long-term deposit or investment received by domestic and resident foreign
corporation
Interest income from Philippine sources exempt from tax:
a) Interest income received from a depository bank under expanded foreign currency deposit
system by non-residents (individuals or corporations)
b) Interest income from long-term deposit or investments evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas (issued by banks to individuals in P10,000 denomination)
d. Rent income
1) Rental income of the
lessor
2) Rental income of
corporation from leased
property
3) Tax treatment of
leasehold improvements
made by the lessee
4) Computation of income
resulting from premature
termination of lease
5) Computation of loss due
to destruction of
leasehold improvement
before the term of the
lease expires
6) Prepaid or advance rental
7) Income from long-term
contract
f. Royalties
1. Subject to final tax
2. Subject to tax rates in
general
g. Dividend income (including shares in the net income of certain entities)
1) Difference between direct A direct dividend is one where the paying corporation acknowledges that the distribution is
and indirect dividends a dividend payment.
An indirect dividend is a distribution of profits disguised as payment of services, properties,
etc.
a) Amount paid for the use or lease or enjoyment of property
b) Additional amount paid, directly or indirectly, by the lessee in consideration for the lease
Payment of lessee in lieu of other rental an amount equivalent to a certain rate of dividend
on the lessor’s capital stock or interest on the lessor’s outstanding indebtedness, together
with taxes, insurance or other fixed charges, notwithstanding the fact that the dividends and
interests are paid by the lessee directly to the shareholders and bondholders of the lessor.
The fact that a corporation has conveyed or let its property and has parted with its
management and control or has ceased to engage in the business for which it was originally
organized, will not relieve it from liability to the tax.
When buildings are erected or improvements made by a lessee in pursuance of an
agreement with the lessor, and such buildings or improvements are not subject to removal
by the lessee, the lessor may at his option report the income therefrom upon either of the
following cases:
a) Outright method. – The lessor may report as income at the time when such buildings
or improvements are completed the fair market value of such buildings or
improvements subject to the lease.
b) Spread-out method. – The lessor may spread over the life of the lease the estimated
depreciated value of such building or improvement at the termination of the lease and
report as income for each tear of the lease an aliquot part thereof.
Cost of leasehold improvement xxx
Less: Accumulated depreciation (remaining term of lease) xxx
Book value, end of lease xxx
Annual income
Book value, end of lease/Remaining term of lease xxx
In a particular case, it was held that if improvements are in lieu of rent, the value thereof is
income to the landlord only in the year of termination of the lease.
FMV of improvement when lessor took possession xxx
Less: Amount already reported as income xxx
Income, year of termination xxx
Amount already reported as income xxx
Less: Insurance recovery xxx
Salvage value xxx xxx
Loss xxx
Prepaid or advance rental shall only be considered as rental income of the lessor once the
advance rental is utilized by the lessee. It will only be treated as security deposit which is
not considered as income.
The entire amount of advance rental is considered as taxable income to the lessor in the year
received, if so received under a claim of right and without restriction as to its use, and
regardless of method of accounting employed.
Advance payment representing loan to the lessor is not taxable unless applied to unpaid rent.
Advance payment representing security deposit is not taxable unless violation in the lease
contract arises. Security deposit applied to the rental of the terminal month or period of
contract must be recognized as income at the time it is applied.
Taxable for the period in which the income is determined, such determination depending
upon the nature and terms of particular contract.
Income is reported upon the basis of percentage of completion method accompanied by
certificate of architects or engineers showing the percentage of completion during the taxable
year of the entire work performed under the contract.
When a person pays royalty to another for the use of its intellectual property such as
copyright, patents, trademarks, such royalty is a passive income of the owner thereof
subject to final withholding tax (if from Philippine sources).
Royalties from foreign sources are subject to the normal individual or corporate income tax.
Any gain derived from sale of “royalty” considered a valuable property developed and sold
on a regular basis for a consideration is treated as an active business income subject to the
normal income tax. It is a special form of rental income for the use of intangible property.
 2) Dividends/shares
in net income subject to
final tax
3) Dividends/shares in net
income subject to tax
rates in general
4) Dividends that are
exempt from tax
h. Annuities
1) Meaning of annuity
2) Non-taxable annuity
3) Taxable annuity
i. Prizes and winnings
1) Subject to tax
rates in general
2) Subject to final tax
3) Exempt/excluded
from gross income
j. Pensions (see exclusions from gross income)
k. Partner’s distributive share from the net income of the general professional partnership [Subject to Section 24 (A)]
l. Income from whatever source
1) Examples of income from
whatever source
2) Damage recovery
3) Forgiveness of debt
4) Bad debt recovery
5) Tax refunds
a) Cash and/or property dividends actually or constructively received by individuals from
domestic corporation or from a joint stock company, insurance or mutual fund company
and regional operating headquarters of multinationals;
b) Inter-corporate dividends received from domestic corporation by non-resident foreign
corporations;
c) Share of an individual in the distributable net income after tax of a partnership (other
than a general professional partnership) of which he is a partner;
d) Share of an individual in the net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which he is a member or co-
venturer.
a) Dividends from foreign corporations
b) Share in the net income of a general professional partnership
a) Inter-corporate dividends received from domestic corporation by other domestic
corporation and resident foreign corporation.
An annuity is 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.
Annuity representing return of premium
Excess of the amount returned as premium
a) Prizes and winnings from foreign sources received by individuals and corporations
b) Prizes and winnings from Philippine sources received by corporations
c) Prizes from Philippines sources received by individuals amounting to P10,000 or less.
a) Prizes received by individuals from Philippine sources [except prizes amounting to
P10,000 or less which shall be subject to tax under Sec. 24 (A)]
b) Other winnings of individuals from Philippine sources (except Philippine Charity
Sweepstakes and Lotto winnings amounting to P10,000 or less which shall be exempt)
a) Philippine Charity Sweepstakes and Lotto winnings amounting to P10,000 or less;
b) Prizes and awards made primarily in recognition of achievements in the following fields:
1) Religious; 3) Scientific; 5) Artistic; 7) Civic.
2) Charitable; 4) Educational; 6) Literary;
Conditions for the exemption of prizes and awards:
a. The recipient was selected without any action on his part to enter the contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
c) All prizes and awards granted to athletes to local and international sports competitions
and tournaments whether held in the Philippines or abroad and sanctioned by their
national sports association.
1) Gains arising from expropriation of property;
2) Gambling gains;
3) Income from illegal business or from embezzlement;
4) Damage recovery (compensation for damages);
5) Forgiveness of debt;
6) Bad debt recovery;
7) Tax refunds; and
8) Prizes and awards.
1) Recovery of lost profit is taxable.
2) Recovery of lost capital is not taxable.
1) If debtor rendered service in favor of the creditor forgiveness of debt results in a taxable
income to the debtor.
2) If the debtor did not render service in favor of the creditor forgiveness of debt results in a
taxable indirect gift.
3) If the debtor is a stockholder of a corporation forgiveness of debt by the creditor- corporation
results in dividend distribution.
1) Bad debt recovery is generally taxable.
2) Tax benefit rule: If in the year the bad debt was written off there was a reduction of
taxable income, bad debt recovery shall constitute a taxable income.
1) If the refunded tax is a deductible tax, the tax refund is taxable.
2) If the refunded tax is not a deductible tax, the tax refund is not taxable.
Examples of non-deductible taxes:
1) Philippine income tax;
2) Transfer taxes (estate tax and donor’s tax);
3) Special assessment;
4) Foreign income tax claimed as tax credit;
5) Value-Added Tax (VAT);
6) Stock transactions tax.
6. Integrative case: The following are the revenue items of a domestic corporation with P80,000,000 total assets for
the year 2022:
Sales P 1,000,000
Cost of sales 500,000
Gain from sale of an office equipment 20,0000
Gain from sale of land not used in business (selling price, P852,500) 100,000
Gain from sale of building used in business (selling price, P900,000) 100,000
Gain from sale of listed shares of stock directly to the buyer not through the local stock
exchange (par value P500,000) 50,000
Gain from sale of shares of stock through the local stock exchange (selling price, P200,000, par value,
10,000
P100,000)
Interest income from bank deposit, Philippines 40,000
Yield from debt instrument not within the coverage of deposit substitute, Philippines (issue
80,000
price, P800,000)
Yield from deposit substitute, Philippines
Yield from
1 –deposit substitute, Philippines 80,000
Question How much was total exempted/excluded income?
Interest income received from depository bank under EFCDS, Philippines 60,000
2 – How much was the total final withholding taxes on passive income?
Interest income from bank deposit, USA 400,000
3 – How much was the total capital gains tax?
Interest from long-term deposit, Philippines 30,000
4 – How much was the total documentary stamp taxes?
Rent income (with unearned rent income of P400,000 which is part of the advance rents for
5 – How much was the total gross income subject to the 20% corporate income tax?
three (3) years), Philippines 200,000
6 – How much was the total final withholding taxes on passive income and
Royalties, Philippines 70,000
the capital gains tax if the corporation is a resident foreign corporation?
Royalties, USA 300,000
7 - How much was the total final withholding taxes on passive income and
Property dividend income from domestic corporation 150,000
the capital gains tax if the corporation is a non-resident foreign
Cash dividend income from a foreign corporation 350,000
corporation?
Stock dividend income from a domestic corporation 100,000
Prizes and winnings, Philippines 400,000
Refund of Philippine percentage tax 100,000
Refund of Philippine value-added tax 100,000
Bad debt recovery 50,000