Gross Income from Business and Profession Gross Profit

- Income derived from the conduct of trade or business or the exercise Plus: Other income (from investment and other incidental or
of profession outside operations or sources)
- May arise from sale of products or services
Examples: Gross Business Income for Tax Purposes
Gross income of a servicing firm (sale of service)
o Fees received by a professional person (doctor’s fee, lawyer’s
Gross Receipts
fee, audit fee)
Less: Returns and Allowances
o Rents received by a person in the real estate business
Less: Discounts
- Taxed at progressive rates on: Less: Cost of Service
Gross Business Income for Tax Purposes
• Net Business Income
• Net Income of a Professional ILLUSTRATION:
ABC’s General Merchandise provided the following data in its initial
▪ Net Business Income operation to determine the gross income for the current year:
Gross Business Income for Tax Purposes Sales 250,000
Less: Allowable Deductions Merchandise inventory, end 30,000
Net Business Income Sales returns and allowances 20,000
Purchases 160,000
▪ Net Income of a Professional
Sales discounts 40,000
Gross Fees/Gross Receipts
Gains from sale of scrap materials 15,000
Less: Allowable Deductions
Net Income before personal exemptions
Less: Personal Exemptions
Net Income of a Professional
Classification of Gross Income from Business
1. Manufacturing
2. Merchandising
3. Servicing
4. Farming
5. Long-term contract

Gross income of a manufacturing and merchandising firm

Total Sales
Less: Sales Return and Allowance
Less: Sales Discounts
Net Sales
Less: Cost of Goods Sold
Cost of Service
- These are the costs and expenses directly incurred to provide the
services required by the customers and clients which includes:
a. Salaries
b. Benefits of employees, consultant’s and other experts directly
rendering the service
c. Cost of facilities directly utilized in providing the service such as:
▪ Depreciation of equipment
▪ Rent of equipment
▪ Cost of supplies used
d. In the case of banks, costs of services shall include interest expense
Rent Income
- This refers to income earned from leasing out of real or personal
property
- The taxable rent income is the aggregate of the following: • Income from leasehold improvements
1. Current rental or lease collection Leasehold Improvements
2. Advance rental collection and/or security deposit without restriction - These are additions, improvements, major renovation to the
3. Payment of the lessee to third parties in behalf of the lessor like: existing property in order to improve the current condition of the
a. Interest Expense property leased out.
b. Taxes Query: What is the appropriate tax treatment of leasehold
c. Loans improvements made by the lessee but subsequently, became the
d. Insurance premiums property of the lessor at the end of the lease term or lease period?
4. Uncollected rent income earned already at the end of the period Answer: In the event the lessee constructed an improvement on the
(accrued rent income) leased property, and such improvement became the property of the
5. Income from leasehold improvements lessor at the expiration of the lease contract, the monetary value of the
leasehold improvement should be recognized as income by the lessor
ILLUSTRATION: Mr. Ruben Padilla leases two rooms of her three-storey in addition to the annual rent income.
commercial building to Ms. Mariel Roguez on January 1 of the current
taxable year. The lessee, as agreed, shall make the following payments:
Monthly rental 20,000
Security deposits (two months equivalent) 50,000
Annual real estate tax 5,000 5,000
Annual premium of fire insurance 4,000
Determine the amount of gross rent income if:
1. Advance rent with restriction
2. Advance rent without restriction

Income from leasehold improvements
Query: What are the appropriate tax procedures if the contract of lease
is terminated before the expiration of the lease term?
Answer: 1. If the leasehold improvement is destroyed by fire, typhoon,
earthquake or other similar inevitable circumstances and has no salvage
value or insurance coverage,
2. If the leasehold improvement is destroyed by fire, typhoon,
earthquake or other similar inevitable circumstancesbut has salvage
value or covered by an insurance contract,
• the life of improvement
3. If the lease term has been terminated by the lessor for a valid cause,
Lessor recognize additional income
ILLUSTRATION:
Mr. Juan Dela Cruz rented the vacant lot of Mr. John Dy for a term of 20
years. The lessee agreed to pay monthly rental of P55,000 in addition
to the real property tax of P7,000.
Mr.Dela Cruz constructed a building on the leased property at a total
cost of P5,500,000 with estimated useful life of 50 years without
residual value. As agreed the building will become the property of Mr.
Dy at the expiration of the lease contract.
When the building was completed and the contract became effective,
the fair market value of the improvement was P7,500,000
CASE 1: Assume further that the lessor was using an outright method
of reporting leasehold improvement, and the improvement was
destroyed by fire at the end of the 15th year. Also, assume that such
improvements has no salvage value and insurance coverage. Compute
the deductible loss:
Answer:

CASE 2: Assume that the lessor was using spread-out method , and that
the building was destroyed by fire at the end of the 15th year with
salvage value of P75,000 and recoverable amount of P175,000 from the
insurance company. Compute the deductible loss:
Answer: