TAX 1: GROSS PROFIT - Created, fabricated, manufactured,

I. Introduction to Gross Profit extracted, processed, cured, or aged

Capital is the wealth, while Income is the service II. Inclusions and Exclusions
of wealth.
~INCLUSIONS~
Income A. Compensation income
- Gains derived from sale or other - Paid in money – full consideration
disposition - Other than money – FMV of thing
- Amount of money coming to a person - Paid in kind – FMV of stock at time of
within a period service rendition, not when received
- Measurement: value received / right to
receive NOTE:
Retirement Pay
Taxable Income GR: Part of Compensation Income
- Pertinent items of gross income specified XCP: Exempt.
in the code, LESS DEDUCTIONS, if any,
authorized for such type of income or Manager / Supervisory Fringe Benefits are
other special laws. subject to FBT; rank and file = basic tax
- All income subject to basic tax and
CWT Tips and Gratuities
- Includes gains, profits, and income - paid DIRECTLY to EE and NOT TOLD TO
derived from whatever source. ER is subject to BASIC TAX, but not to
CWT!
Items indirectly benefitting taxpayers are
EXCLUDED from gross income! Stipends of Resident Physicians
- subject to CWT which includes per diems,
Schedular Tax System allowances, and any other form of income
- Classification and accorded different tax payments NOT SUBJECT TO
treatments WITHHOLDING TAX ON COMPENSATION.
- Individual Taxpayers except those below.
COLA of MWE = exempt
Global Tax System
- Grouped together without any Exercise of Stock Options
distinction - considered as additional compensation
- Subjected to a FIXED rate subject to BASIC TAX and WTC
- NRFC, NRANETB
B. BAD DEBTS
SA PHILIPPINES - subsequent recovery of previous written
- Partly schedular, partly global off bad debt = TAXABLE INCOME to the
extend of the TAX BENEFIT
BASIC FEATURES OF PHILIPPINE TAXATION
1. Comprehensive situs Provided! Write off of account resulted
a. Nationality into a LOWER TAXABLE INCOME. (Tax
b. Residence Benefit Rule)
c. Source NOTE:
If Bad debt written off reduced taxable
2. Progressive in nature – Individual income, recovery = Taxable Income
Flat Rate – Corporations
Otherwise, it is only a MERE RETURN OF
3. STS > GTS – individuals CAPITAL, which is not taxable.
GTS > STS – corporations
If NET LOSS when bad debt was incurred on
NOTE: write-off, NO TAXABLE INCOME AS TO ITS
Produced RECOVERY.
 b. Spread Over the estimated depreciated
value of such PPT at the termination of the
C. TAX REFUND lease (Spread Out)
- Taxable if tax paid was DEDUCTED FROM o BV / Rem. UL
GROSS INCOME. o Cost / (longer of UL and LT)
- Taxes not previously allowed as
deductions SHOULD NOT FORM PART OF H. DIVIDENDS
TAXABLE INCOME Liquidating Dividends
o Why? Kasi hindi ka naman - A sale or exchange of property
nagbenefit! - Recognized as a TAXABLE INCOME or
DEDUCTIBLE LOSS the GAIN REALIZED,
D. CANCELLATION OF DEBTS NOT THE DIVIDENDS
- Nasa flashcards (hehe activate premium) - FMV of Assets Received – Adjusted Cost to
Stockholders
E. INTEREST INCOME
- Generally taxable income Stock Dividends
- Transfer of surplus to the capital
NOTE! - No alteration of pre-existing proportionate
Interest from lending money, goods, or credits interest
from one person to another, or interest earned on - No increase in the intrinsic value of
normal conduct of business interest
- BASIC TAX.
GR: Exempt from Tax
Interest from deposits in BANKING XCP: Taxable if Cash / Property in lieu of Stock
INSTITUTIONS and DEPOSIT SUBSTITUTES and D.
INVESTMENT IN GOV’T SECURITIES
- FINAL WITHHOLDING TAX 20% I. Annuity Payment
NOTE:
F. RENTAL INCOME Interest – taxable
May be in the Form of: Return of Capital – not taxable
1. Cash at agreed price
2. Obligations of Lessor ASSUMED BY Lessee If dead within the insurance period, NO
3. Advance Payment TAXABLE INCOME.
a. Prepaid Rent (FULL IN YR OF
RECEIPT) ~EXCLUSIONS~
b. Security Deposit APPLIED TO - Grant of immunity to particular persons
RENTAL** or corporations of a particular class from a
tax which persons and corporations are
** If security deposit is for ensuring Faithful generally within the same
performance, or Prepaid Rent is for OPTION jurisdiction.
MONEY - Privilege that MAY BE REVOKED
- NOT TAXABLE INCOME. - Freedom from a financial charge

G. LEASEHOLD IMPROVEMENT *other deets, on Flashcards.

- Lessee may claim depreciation on
improvements as DEDUCTIONS FROM A. RETIREMENT PAY
GROSS INCOME over the: Type 1: Private firms with Reasonable Private
Benefit Plan
Remaining UL of Improvements or Lease, - Registered plan with Certificate of
whichever is SHORTER!!! Qualification
- In service with the same ER for AT LEAST
- Lessor has the option to report: 10 YEARS
a. Income, the FMV (Outright) - EE must NOT BE LESS THAN 50 YEARS
OLD AT RETIREMENT
 - First time to avail at an ER IGNORED (or rather… carried over
- Can be availed ONLY ONCE as NCLCO)

3. Holding Period
o Only applicable to INDIVIDUALS,
ESTATES, & TRUSTS
Type 2: No Reasonable Retirement Plans o NOTE! Corporations recognize THE
- Age must be AT LEAST 60 YEARS OLD WHOLE AMOUNT (Pls take note,
BUT NOT MORE THAN 65 this is your weakness!)
- Served at least 5 YEARS o From acquisition to sale duration

SEPARATION PAY 4. NCLCO (End Call Ko)

- Because of death, sickness, or other o Only applicable to INDIVIDUALS.
physical disability, or for any cause o NOTE! NO ESTATES AND TRUSTS.
beyond control of the said EE or official o Valid for 1 succeeding year.
(includes RETRENCHMENT
- Involuntary = Exempt PERCENTAGE TAX (STT)
Voluntary = Taxable - The ff are liable for this tax: sellers or
transferors of stock that are;
NOTE: o Individual, CITIZEN OR ALIEN
To avail SSS or GSIS Tax Exemptions, o Corporation, DC EVEN FC
there should be a PERMANENT RESIDENT in
o Others
the country.
- Stocks sold should be classified as
CAPITAL ASSETS.
III. Dealings in Property
- Ignores gain or sale from exchange
Dealings in Property
- Disposals of assets either through sale or
NOTE: If seller is a DEALER IN SECURITIES,
exchanges
sale is subject to BASIC TAX and VAT
Capital assets are the residual definition of
IV. DEDUCTIONS
Ordinary assets.
- Trading stock treated as inventory if on
hand
- Property subject to depreciation
- Real Property primarily for sale
- Real Property used in trade or Business

Q: What if Personal property used in trade

or Business?

A: Capital Asset.

RULES ON CAPITAL GAINS AND LOSSES

1. Of course, it should be a Capital asset
sold through exchange or sale.

2. NET CAPITAL GAINS

o Added to ORDINARY Gains

NET CAPITAL LOSSES

o Deducted ONLY UP TO NET
CAPITAL GAINS.
o i.e. if NCG = 10,000, NCL =
12,000, then the 2,000 excess is