15/10/2023

Chapter 9
RIT – INCLUSION IN GROSS
INCOME

INCLUSION IN GROSS INCOME :

ITEMS OF GROSS INCOME (inclusions)
- is a broad category pertaining to all items of income subject to taxation ;
1) Gross income subject to final tax (FIT)
2) Gross income subject to capital gains tax (CGT)
3) Gross income subject to regular tax (RIT)

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

1. Compensation for services in whatever form paid
Compensation Income - technically pertains to the types of employee
benefits that is subject to RIT. (Chap 10)
Fringe benefit of managerial or supervisory employees - are not
considered compensation income and are subject to FIT. (Chap 11)

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

2. Gross income from the conduct of trade, business, or exercise
of profession.
(Business Income & Professional Income)
- this includes income from any trade or business, legal or illegal,
registered or unregistered.
- gross income from business is determined as follows ;

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2. Gross income from the conduct of trade, business, or exercise
of profession.
(Business Income & Professional Income)
Business Income not included in gross income subject to RIT ;
1) Business income exempt from income tax (BMBE, Enterprises with ITH)
2) Business subject to special tax regimes (PEZA, TIEZA, 8% GRT)
3) Business subject to final tax (Subcontractors, FCDUs, OBUs)

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

3. Gains from dealings in properties (Chap 12)
Gains and Losses subject to RIT :
1) Dealings in Ordinary Assets
2) Dealings in Capital Assets other than ;
a. Domestic Stocks directly to buyer (15% CGT)

b. Real Properties (6% CGT)

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

4. Interest Income
- particularly refers to interest income other than passive interest income
subject to FIT.
Examples of Interest Income subject to RIT :
1) Interest income from lending activities to individuals and corporations by
banks or finance companies and other lenders.
2) Interest income from bonds and promissory notes.
3) Interest income from bank deposits abroad. (situs)

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

4. Interest Income
Exempt Interest Income
1) Interest income earned by landowners in disposing their lands to
tenants pursuant to the Comprehensive Agrarian Reform Law.
2) Imputed interest income
- imputed interest income (the opportunity cost) does not constitute an actual
income, hence, exempt from income tax.
- also called theoretical interest.

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

5. Rents (Rental Income)
- arises from leasing properties of any kind.
- a passive income but is not subject to FIT, it is subject to RIT.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

5. Rents
Special considerations on Rent
1) Obligations of the lessor that are assumed by the lessee are additional rental income to
the lessor.
2) Advance rentals
a. Items of gross income upon receipt if ;
i. Unrestricted
ii. Restricted to be applied in future years upon the termination of the lease.
b. Not item of gross income if ;
i. It constitutes a loan
ii. It is a security deposit to guarantee payment or rent subject to contingency which
may or may not happen.
3) Leasehold improvements made by the lessee on the leased property recognized by the
lessor as income (spread-out or outright method) --- Chap 4

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

6. Royalties
The following are the general rules for royalties ;

a. Passive Royalty Income  FIT

b. Active Royalty Income  RIT
c. Royalties earned from sources within the Philippines  FIT
d. Royalties earned from sources without the Philippines  RIT

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

7. Dividends
The following are the general rules for dividends ;
a. Dividends declared from foreign corporations  RIT
b. Dividends declared from domestic corporations ;
Recipient is an individual  FIT
Recipient is a corporation  exempt (DC & RC)

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7. Dividends
Types of Dividends :
a. Cash, Property and Scrip Dividends  are items of gross income (RIT)
b. Stock and Liquidating Dividends  exempt from income tax

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

8. Annuities
The excess of annuity payments received by the recipient over the premium paid is
taxable income in the year of receipt.

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

9. Prizes and Winnings
- prizes and winnings that are exempted from final tax are not items of
gross income subject to RIT.

Exempt Prizes and Winnings :

a. Prizes received without any effort to join the contest
b. Prizes in athletic competitions sanctioned by their respective National Sports
Association
c. Winnings from PCSO and Lotto

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

9. Prizes and Winnings

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

10. Pensions
- this pertains to pensions and retirement benefits that fail to meet the
exclusion criteria, hence subject to RIT. (Chap 8)

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

11. Partner's distributable share from the net income of the
General Professional Partnership (SNI)
- GPP are not subject to income tax (FIT, CGT, RIT) because they are merely
viewed as pass-through entities.
- the partners are the ones subject to RIT on their share on the net income of
the GPP.
Pass Through Entities :
a. General Professional Partnership (GPP)
b. Exempt joint-ventures
c. Exempt co-ownerships

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

Business Partnership and Taxable Joint-venture or Co-ownership
- these are subject to corporate income tax.
- the distributive share of a partner, venturer or co-owner from the net
income of these entities,

a) If organized in the Philippines - share in the net income is subject to 10% FIT.
b) If organized abroad - share in the net income is subject to RIT for taxpayers
taxable on global income.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
1) Income from distributions from taxable estates or trust
- any income distribution received by an heir or beneficiary from a taxable
estate or trust shall be included in the gross income subject to RIT, provided
such income must not have been subjected to FIT and CGT.

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
1) Income from distributions from taxable estates or trust

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
2) Share in the net income of exempt joint-ventures and co-ownership
- the same tax treatment on recognition of share in the net income of the GPP
applies to the net income of exempt joint-ventures and co-ownerships.

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
3) Farming Income
- farming income can be classified as ;
a) Raise and sell operation
- the proceeds on the sale of livestock or farm products is included in gross income
subject to RIT. Animal raising expenses are presented as deductions in gross
income. (GI – AD = TI)
b) Purchase and sell operation
- the gross profit from the sale (Sale - Cost of Purchase) is included in gross income.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
4) Recovery of past deductions
- when past year deductions from income are subsequently recovered, they
should be analyzed whether or not they resulted to tax benefit to the taxpayer.
Examples of recoveries of past deductions :
1) Recovery of previously claimed bad debts expense
2) Refund of local tax expense
3) Refund of foreign tax previously claimed as deduction
4) Re-commissioning of abandoned petroleum service contracts or mining properties
5) Release of reserves funds of insurance companies
6) Interest expense which was subsequently condoned by the lender

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
TAX BENEFIT
- there are 2 ways a taxpayer may benefit from a deduction ;
1) Directly - through reduction of taxable income in the year deduction is
made.
2) Indirectly - through reduction of future taxable income through carry-
over of net operating loss.
Net Operating Loss Carry-over (NOLCO) - the excess of deductions over gross
income in a taxable year is carried over as a deduction against the net
income in the next 3 years.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

NOLCO

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NOLCO

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

NOLCO

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

NOLCO

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

NOLCO

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NOLCO

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

Refund of non-deductible expenses ;
- expenses or payments which are non-deductible against gross income in the
computation of taxable NI will never create tax benefit to the taxpayer.
- the recovery should not be included in gross income.
hence, the refund of the following non-deductible items is not taxable.
1) Philippine income tax
2) Estate or Donors tax
3) Income tax paid or incurred to a foreign country if the taxpayer claimed
a credit
4) Stock transaction tax in disposing stock through the PSE.
5) Special tax assessment

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
5) Reimbursement of Expenses
- expenses of the taxpayer that are reimbursed or paid by the customer or
client constitute additional income to the taxpayer.
Examples :
1) When the lessee pays the ownership costs of the lessor (real property tax and
insurance of the property), the payment constitutes income to the lessor.
2) When a client reimburses the out-of-pocket expenses of the professional
practitioner, the reimbursement is income to the practitioner.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

OTHER SOURCES OF INCOME SUBJECT TO RIT :
6) Cancellation of Indebtedness
- the cancellation of indebtedness may amount to gratuity or payment of
income.
Cancellation of Debt :
1) In consideration of goods or services - income
2) As an act of gratuity - treated as gift, not an income
3) As capital transaction such as forfeiting the right to receive dividends in exchange
of the debt - treated as dividend income

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME
1) Accounting Method
- the accounting method adopted by the taxpayer has a direct effect on the
reportable amount of gross income subject to RIT.
a. Cash basis taxpayers will report their gross receipts or collection as gross income.
b. Accrual basis taxpayers will report their revenue consisting of collected and
uncollected income as gross income.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME
2) Situs Rules
- situs of taxation also affects the extent of income included as items of gross
income of the taxpayer.
- taxpayers are taxable only on Philippine income except resident citizens
and domestic corporations which are taxable on global income.

a. Taxpayers taxable on Philippine income only - items of gross income subject to

RIT from sources within Philippines are included in gross income.
b. Taxpayers taxable on Global income - items of gross income subject to RIT from
sources within and without Philippines are included in gross income.

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SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME
3) Effects of Value Added Tax (VAT)
Business taxpayers are required to either register as ;
a. VAT taxpayers
- if sales or receipts exceeds 3,000,000 in the last consecutive 12-month period.
- the amount reportable as gross income shall not include the output VAT.
(Invoice Price - Output VAT)
b. Non-VAT taxpayers
- if their sales or gross receipts is below the VAT threshold (3,000,000) or are
specifically designated by the law to pay percentage taxes.
- the amount reportable as gross income is the invoice price/receipts.
(Invoice Price only)

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

Value Added Tax (VAT)

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SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME
4) Creditable Withholding Tax
- CWT deducted by income payors against the gross income of the taxpayer
are not exclusions in gross income.
- these should be added back to the reportable amount of gross income.
- CWT are tax credits that are deductible against the annual income tax due
of the taxpayer.

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME
4) Creditable Withholding Tax

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Creditable Withholding Tax

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

SPECIAL CONSIDERATIONS IN REPORTING OF GROSS INCOME
Creditable Withholding Tax and VAT
- VAT taxpayers shall revert back to gross income amounts of withholding tax
but excludes therefrom the amount of VAT charged to customers or clients.
(+ EWT/CWT to get the VAT)

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ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

Creditable Withholding Tax and VAT

ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX (RIT)

Creditable Withholding Tax and VAT

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