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TAX-901 (Gross Income - Inclusions)
TAX-901 (Gross Income - Inclusions)
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.
2) Rental income of Payment of lessee in lieu of other rental an amount equivalent to a certain rate of dividend
corporation from leased on the lessor’s capital stock or interest on the lessor’s outstanding indebtedness, together
property 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.
3) Tax treatment of When buildings are erected or improvements made by a lessee in pursuance of an
leasehold improvements agreement with the lessor, and such buildings or improvements are not subject to removal
made by the lessee 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.
4) Computation of income FMV of improvement when lessor took possession xxx
resulting from premature Less: Amount already reported as income xxx
termination of lease Income, year of termination xxx
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.
7) Income from long-term Taxable for the period in which the income is determined, such determination depending
contract upon the nature and terms of particular contract.
f. Royalties
1. Subject to final tax 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).
2. Subject to tax rates in Royalties from foreign sources are subject to the normal individual or corporate income tax.
general
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.
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 price,
80,000
P800,000)
Yield from deposit substitute, Philippines 80,000
Interest income received from depository bank under EFCDS, Philippines 60,000
Interest income from bank deposit, USA 400,000
Interest from long-term deposit, Philippines 30,000
Rent income (with unearned rent income of P400,000 which is part of the advance rents for
three (3) years), Philippines 200,000
Royalties, Philippines 70,000
Royalties, USA 300,000
Property dividend income from domestic corporation 150,000
Cash dividend income from a foreign corporation 350,000
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
Question 6 – Total final withholding taxes on passive income (resident foreign corporation)
Interest income from bank deposit, Philippines (40,000 x 20%) P 8,000
Yield from deposit substitute, Philippines (80,000 x 20%) 16,000
Interest income received from depository bank under EFCDS, Philippines (60,000 x 15%) 9,000
Royalties, Philippines (70,000 x 20%) 14,000
Final withholding taxes on passive income P47,000
Gain from sale of shares of stock directly to the buyer (50,000 x 15%) P 7,500
Total P54,500
Question 7 – Total final withholding taxes on passive income (non-resident foreign corporation)
Interest income from bank deposit, Philippines (40,000 x 25%) P10,000
Yield from deposit substitute, Philippines (80,000 x 25%) 20,000
Interest income received from depository bank under EFCDS, Philippines Exempt
Royalties, Philippines (70,000 x 25%) 17,500
Property dividend received from domestic corporation (150,000 x 15%) 22,500
Final withholding taxes on passive income P70,000
Gain from sale of shares of stock directly to the buyer (50,000 x 15%) P 7,500
Total P77,500
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