Professional Documents
Culture Documents
GROSS INCOME
EXEMPTION
→ All income derived from WHATEVER SOURCE including, but NOT LIMITED to the following:
1. Final Tax
2. Basic Tax – included in income tax model
3. Exempt – not subject to any taxes, EXCLUDED
1. Individual
2. Corporation
3. Trusts
4. Estates
5. Partnership
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Withholding Tax
General Rule
COMPENSATION INCOME
*Mandatory GSIS, SIS, Philhealth, PAG-IBIG contributions and union dues are considered as tax-
exempt contributions (MANDATORY ONLY)
*You can contribute more (VOLUNTARY CONTRIBUTION)
2. AIIowances
• May be fixed or variable
• Fixed Allowances - Allowances which are fixed in amounts and regularly received as
part of the basic monthly, bi-weekly, weekly or daily salaries or wages are part of
regular compensation. This applies even if a portion of the allowances are actually
used in the employer’s business.
• GENERALLY SUBJECT TO TAX, except:
➢ If the allowance is an ordinary and necessary travelling, representation, or
entertainment expense of employee in the pursuit of his trade, business or
profession.
➢ The employee is required to account/liquidate for the foregoing expenses
➢ Any excess advances are returned to the employer
• Hence, variable and liquidated allowances are not subject to tax. However, amounts
of allowances that are retained by the employee for himself shall be considered
compensation.
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1. Fees
• Retainer fees of consultants, talents & directors who have no management functions
in the business are professional income, not compensation income of the recipient.
2. Commissions
• To non-employees such as independent sales agent are business income to the sales
agent
3. Tips and Gratuities
• Tips and gratuities paid directly to an employee by customers of the employer which
are not accounted for by the employee to the employer are not considered as
compensation income, but are to be reported as “other income” in the income tax
return of the employee.
• Not withheld by the employer
4. Overtime Pay
• Premium payment received for working beyond
5. Hazard Pay
• Amount paid by employer to employees assigned to danger or strife torn areas,
disease-infected, distressed which exposed them to great danger
6. Night Differential
• Pay received by an employee for every hour of work performed between 10pm and
6am
7. Holiday pay
• Received by an employee on the occasion of regular holiday or special day
2. Other Benefits
• Christmas bonus, productivity incentive bonus, loyalty award, gift in cash or in kind,
and other benefits similar in nature
• 13th month pay and other benefits are NOT TAXABLE if the total amount received is
P90,000 or less
Mr. Wang is the vice president of CID Corporation. He receives an annual salary of P720,000, 10% of
which pertain to SSS, PHIC, and PAG-IBIG Contributions. At the end of the year, he received 13th and
14th (equivalent to one-month salary for each pay), Christmas bonus of P120,000.
3. De Minimis Benefits
• Benefits considered minimal, in value, when given to employer, NOT TAXABLE
• Conversion of leaves to money (when retiring)
➢ Excess over Threshold
o NOT EXACTLY TAXABLE
o Part of 13th
• Monetized unused vacation leave credits of private employees, not exceeding 10
days during the year
• Monetized unused vacation and sick leave credits paid to government officials
and employee (No limit)
• Medical cash allowance to dependents of employees not exceeding P1,500 per
employee per semester, or P250 per month
• Rice subsidy not exceeding P2,000 or 1 sack of 50-kg rice per month amounting to
not more than P2,000
• Uniform and clothing allowance not exceeding P6,000 per annum
• Actual medical assistance not exceeding P10,000 per annum
• Laundry allowance not exceeding P300 per month
• Employees achievement award, in form of tangible personal property other than
cash or gift certificate, with an annual monetary value not exceeding P10,000 received
by the employee under an established written plan which does not discriminate in favor
of highly paid employees.
• Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per year
• Daily meal allowance for overtime work and night/graveyard shift not exceeding
25% of the basic minimum wage
• Benefits received, by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided total annual monetary value of both not
exceeding P10,000 per employee per taxable year
Other Benefits
1. Separation Pay
• Amount due to the employee who has been terminated from service for causes
authorized by law
• GENERALLY, it is TAX EXEMPT
➢ Separation/termination must be due to job-threatening sickness, death, or
other physical disability
➢ Exempt from income tax and withholding tax
• NOT TAXABLE:
➢ if the reason is beyond the control of the employee/official, regardless of age
or length of service.
➢ Same must be due to any cause beyond control of employee/official:
o Redundancy
o Installation of labor-saving devices
o Retrenching
o Downsizing
o Closure of employer’s business
1. Ysa is an employee of Goldfish Company which closed its business during the year. Ysa’s last
paycheck shows the following details:
2. Helbert’s employer was downsizing its business operations. Helbert was identified among
other to be laid off. To avoid implications of inefficiencies on his part, Helbert filed a resignation
letter to the company and received a separation pay of P120,000.
→ Taxable income: P120,000
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2. Retirement Pay
• Received by employees/officials of private firms in accordance with a reasonable
private benefit plan maintained by the employer.
• Retiring employee receives half-month salary for every year of service. A fraction of at
least six (6) months is considered one (1) whole year in calculating the payment.
• REQUISITE OF EXEMPTION:
➢ General rule: NOT TAXABLE, except: (ALL must present)
(1) The employer maintains a reasonable private plan; registered in BIR
✓ If silent, assumed to be registered
(2) Retiring employee/official is at least 50 years of age
(3) Been in service of the SAME employer for at least 10 years
(4) First time availment of retirement benefit exemption
1. Angela was employed in 2002 when she was 25 years old. In 2024, she availed of early
retirement program of her employer.
→ Taxable; 47/22
2. Assume that Angela joined another employer and worked therein for 7 more years after which
she retired from her employment.
→ Taxable; 54/7
3. Assume that Angela joined another employer and worked therein for 10 more years after which
she retired from her employment.
→ Exempt; 57/10
4. Assume instead that Angela was 30 years old when she joined her first employer and worked
therein for 20 years after which she retired at 50. She immediately joined another employer
and retired after 10 years of service when she was 60 years old.
→ Exempt; 50/20
→ Taxable; 60/10
1. Business Income – arises from habitual engagement in any commercial activity involving
regular sales of goods or services by an individual or corporation.
2. Professional Income – arises from exercise of profession or business income from sales of
services
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1. Farming
• Business methods engaged in agriculture, farm, or production of farm animals
• Methods of Recognizing Income:
➢ Cash basis: A method that recognizes revenues and expenses at the time
cash is received or paid out.
➢ Accrual basis: A method that recognizes income at the time the revenue is
earned and records expenses when liabilities are incurred regardless of when
cash is received or paid.
➢ Crop year basis: Only recognizes expenses when there is a harvest;
otherwise, defer the cost
Determine the gross income under the cash and accrual basis.
CASH BASIS:
ACCRUAL BASIS
Juan Dela Cruz, a farmer, plants a certain crop that takes more than a year to harvest. Juan had the
following data on his farming operations:
2023 2024
P 750,000 P 1,000,000
(600,000) (800,000)
Gross Income P 150,000 P 200,000
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2. Construction
• Business engaged in the construction of roads, bridges, etc.
• Methods of Recognizing Income:
➢ Completed Contract: Only recognize income once project is fully completed
➢ Percentage of Completion: Only recognize income based on the progress of
work completed
SDD Construction Company has entered into a contract with UNIV. Co. for the construction of a P40
million gymnasium. The project is expected to be completed within four years after signing of the
contract.
REQUIRED: Compute the gross income from year 1 to year 4 if the company is using:
4,000,000
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3. Interest Income
• Earning derived from depositing/lending money, goods, or credit
• Depends on the SOURCE:
➢ Bank – passive income; subject to FINAL TAX
➢ Nonbank – active income; subject to BASIC TAX
INDIVIDUAL CORPORATION
NRA-NETB NRFC
(EX NRA-NETB) EX. NRFC
ST Deposits 20% 25% 20% 25%
LT Deposits EXEMPT 25% BASIC 25%
INDIVIDUAL CORPORATION
9,000 20% 1,800 9,000 20% 1,800
15,000 20% 3,000 15,000 20% 3,000
20,000 exempt 20,000 basic tax
44,000 4,800 44,000 4,800
The Bank of Cebu has the following interest in its peso savings and deposit accounts from the following
depositors:
DEPOSITORS AMOUNT
Resident Individual P 600,000
Resident and Domestic Corporations 800,000
Non-Resident Aliens not engaged in business 200,000
Non-Resident Corporations 100,000
DEPOSITORS AMOUNT
Resident Individual P 600,000 20% 120,000
Resident and Domestic Corporations 800,000 20% 160,000
Non-Resident Aliens not engaged in business 200,000 25% 50,000
Non-Resident Corporations 100,000 25% 25,000
355,000
If the long-term deposits of individual taxpayers is pre-terminated before 5 years, any previously
untaxed or exempted interest income will be subjected to the following final taxes upon pre-
termination.
On January 1, 2023, Alicia invested P1,000,000 in Bank of Cebu’s 5-year time deposit. The deposit
pays 10% interest annually. Alicia pre-terminated the deposit on July 1, 2026.
Compute the final tax to be withheld by Bank of Cebu before it releases the total proceeds to
Alicia.
4. Foreign Deposits
• The interest income from foreign currency deposits with foreign currency depositary
banks
Resident Non-Resident
DC and RFC NRFC
Individual Individual
Interest Income from
FCDU/OBU/Foreign 15% EXEMPT 15% EXEMPT
Depositary Banks
Mr. Seaman is an OFW. He deposits all his savings in an account under the FCDU of a domestic
bank. During the month, the account earned $1,500 interest equivalent to P45,000.
Scenario 1: Mr. Seaman deposited his savings through the account of his resident wife.
Scenario 2: Mr. Seaman deposited his savings through a joint account with his resident wife.
Scenario 3: Mr. Seaman deposited his savings through his own account.
5. Rental Income/Rents
• Leasing properties of any kind
• Passive income but subject to regular income tax
• Rent income includes:
➢ Obligations of the lessor that are assumed by the lessee are additional rental
income to the lessor
➢ Advance rentals are:
(a) Items of gross income upon receipt if:
o Unrestricted
o Restricted to be applied in future years or upon the termination
of the lease
(b) Not an item of gross income if:
o It constitutes a loan
o It is a security deposit to guarantee payment or rent subject to
contingency which may or may not happen
• Leasehold improvements made by the lessee on the leased property are recognized
by the lessor as income using the outright or spread-out method
✓ Outright Method – The lessor may report as income at the time when such building
or improvements are completed at the FAIR MARKET VALUE at the DATE OF
COMPLETION of such building and improvements
✓ Spread-out Method – The lessor may spread over the life of the lease the estimated
depreciate value of such buildings or improvements at the termination of the lease and
report as an income for each year of the lease an aliquot part thereof.
Cost
x Remaining Life at the End
Annual Income = Useful Life
Lease Term
On January 1, 2023, Kiara leased a vacant lot to Greg under a 20-year lease contract. Greg
immediately constructed a building on the lot at a total cost of P4,500,000. The building has useful life
of 30 years.
Compute the taxable income for year 2023 using the outright method.
2023 = 4,500,000
Compute the taxable income for year 2023 using the spread-out method
4,500,000 / 30 x 10
= P 75,000 / year
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1. INTEREST INCOME
INDIVIDUALS CORPORATION
NRA-NETB NRFC
(RC, NRC, RA, NRA-ETB) (DC, RFC)
ST Deposits 20% 25% 20% 25%
LT Deposits EXEMPT 25% BASIC 25%
Resident Non-Resident
Individual Individual DC & RFC NRFC
(RC, RA) (NRC, NRA)
Interest Income from
FCDU/OBU/Foreign 15% EXEMPT 15% EXEMPT
Depositary Banks
2. ROYALTIES
INDIVIDUALS CORPORATION
SOURCE NRA-NETB NRFC
(RC, NRC, RA, NRA-ETB) (DC, RFC)
Books, literary
works, and musical 10% 25% 20% 25%
compositions
Other sources 20% 25% 20% 25%
3. DIVIDENDS
INDIVIDUALS CORPORATION
SOURCE NRA-ETB NRA-NETB NRFC
(RC, NRC, RA) (DC, RFC)
Domestic 25% or
10% 20% 25% EXEMPT
Corporation 15%*
Foreign 25% or
BASIC BASIC 25% BASIC
Corporation 15%*
4. PRIZES
5. WINNINGS
TAXPAYER
GUMR FBTR
CLASSIFICATION
RC, NRC, RA, NRA-ETB 65% 35%
NRA-NETB 75% 25%
1. CASH
• MV = cash given / paid
• FBE = GUMV (MV + FBT)
• RENT (use only)
o Except for rent, MV = 50% or 1/2 of cash paid
o FBE for rent = cash given + FBT
2. IN KIND
• MV = purchase price / FMV / book value (whichever is the highest)
o FMV = zonal or market value (whichever is higher)
• FBE = book value + FBT
3. USE OF PROPERTY
• MV = 50% of depreciation
o Useful life:
→ 5 years: Personal property
→ 20 years: Real property
• FBE = FBT
OTHER BENEFITS
7. FOREIGN TRAVEL
• No documentary evidence = 100% of the cost
• With documentary evidence:
o First class ticket = 30% FB
o Business class / economy ticket = EXEMPT
o Lodging expense = EXEMPT
o Food, beverages, and local transportation = $300/day EXEMPT
→ Beyond $300 = TAXABLE
8. EDUCATIONAL ASSISTANCE
• Employee:
o If related to business or with obligation to remain in the employ of the employer
→ EXEMPT
→ Otherwise: TAXABLE
• Dependents:
o Provided under competitive scheme
→ NOT TAXABLE