Chapter 7

Gross Income

Income

For income tax purposes:
Income is defined as the gain
derived from capital, from labor, or
from both, provided it be understood
to include profit or gain through sale
or conversion of an asset

Gains from dealings in in whatever form paid property Gross income derived from Interests the conduct of trade or Rents business or from the Royalties exercise of a profession Dividends Partner’s distributive share from net income of a Annuities general professional Prizes and winnings partnership Pensions .Gross Income Compensation for services.

in the case of corporations. or gross taxable business/professional income. in the case of an individual taxpayer engaged in trade and business .Gross Income Gross taxable income.

transportation. honoraria. wages. director’s fees If paid other than money. representation. FMV of the thing taken in payment is the amount to be included as compensation . emoluments.Compensation Remuneration received under an employer-employee relationship Salaries. entertainment. allowances. commissions.

the value of the quarters and meals shall be added to remuneration. contentment or efficiency of employees . if furnished for the convenience of the employer.FMV of the thing taken in payment. subject to withholding 2) Living quarters and meals – if a person receives salary as as remuneration + living quarters or meals. subject to withholding. bonds or other property . value need not be included as part of compensation 3) Facilities and privileges of a relatively small value – “de minimis benefits” to promote health. goodwill.Forms of Compensation 1 ) Compensation paid in kind – paid in stocks.

000 per annum .500 or one sack of 50-kg rice per month Uniform and clothing allowance not exceeding P4.De Minimis Benefits Monetized/unused vacation leave credits of private employees not exceeding 10 days during the year Monetized/unused vacation leave credits of government employees Medical cash allowance to dependents of employees not exceeding P750 per employee per semester or P125/month Rice subsidy of P1.

000 per annum Laundry allowance not exceeding P300 per month Employees achievement award in the form of tangible personal property not exceeding P10.De Minimis Benefits Actual Medical Assistance not exceeding P10.000 per employee per annum Daily meal allowance for overtime work .000 under an employee established written plan Gifts given during Christmas and major anniversary celebrations not exceeding P5.

wages and allowances De minimis benefits shall be considered as deductible expense of the employer .000 limit shall be taxable on the excess benefits as well as his salaries.De Minimis Benefits Shall not be considered in determining the P30.000 ceiling MWE’s receiving benefits in excess of P30.000 ceiling If the employer pays more than the ceiling prescribed. the excess shall be considered as part of “other benefits” and taxable to the employee if such excess is beyond the P30.

Forms of Compensation 4) Tips and Gratuities .tips or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding 5) Pensions. sickness or other physical disability or for any cause beyond the control of the employee b) The employer pays benefits to the official or employee or his heirs as a consequence of such separation . retirement and separation pay – subject to withholding except: a) when the employee is separated from the service of the employer due to death.

representation and other allowances – is compensation subject to withholding. traveling allowance subject to liquidation is not compensation 7) Vacation and Sick Leave Allowances – constitute compensation except monetized leave credits of gov’t employees and 10 days monetized leave credits of private employees . except RATA allowances granted to public officers and employees under the GAA and PERA which constitute reimbursement of expenses in the performance of functions.Forms of Compensation 6) Fixed or variable transportation.

including withheld tax is deemed paid to the employee as compensation at the time the deduction is paid 9) Remuneration for services as employee of a non-resident alien individual or foreign entity – compensation for services rendered to an alien 10) Compensation for services rendered performed outside the Philippines – treated as compensation subject to tax .Forms of Compensation 8) Deductions made by employer from compensation of employee – all deductions by the employer.

Gross Income – Manufacturing. or for other items not ordinarily used in computing cost of goods sold. Merchandising or Mining Total Sales Less: COGS = Gross Profit from Sales + Other Income = Gross Income Deductions for depreciation. are not allowed . selling expenses or losses. depletion.

Gross Income .does not consider beginning and ending inventories Accrual Basis .beginning and ending inventories of livestock and farm products raised and purchased are considered to arrive at the gross income .Farming Cash Basis .

which results in gain or loss. is taxable gain or deductible loss .Gross Income – Gains from Dealings in Property Includes all income from disposition of property. for money or exchange or combination of both. real or personal or mixed.

Dividends Distributions made by a corp out of its earnings or profits accrued. the liquidating dividends shall not be liable to income tax . on the part of the stockholder. gain or loss is subject to tax. if the corp has already a negative surplus.Gross Income . whether in money or in other property Rules: Cash and property dividends out of retained earnings – not subject to income tax Liquidating dividends – not subject to tax on the part of corp.

goods or credits.Interests Arising from indebtedness or loan or forbearance of money. legal or illegal Interest subject to final tax shall not form part of the gross income for purposes of computing income tax liability of the taxpayer .Gross Income . whether business or non- business. .

including rentals actually earned but uncollected as of end of the period . a taxpayer must report as part of gross income advance rentals received during the taxable year.Gross Income – Rents Amount paid for use or enjoyment of a thing or right. from use of real or personal property For rentals of property.

as to its disposal by the lessor is taxable income to the lessor in the year received If it is a security deposit. when there is no restriction. is not taxable income to the lessor . unless forfeited Rent in the nature of a loan.Gross Income – Rents Advance rentals. is not taxable income to the lessor. if terms of contract is complied with.

Royalties Earnings from copyrights. patents and natural resources under lease. copper. trademarks. timber or other similar products shall form part of gross income . gas.Gross Income . including use and exhaustion of property and use of copyright under software Royalties for properties which produce coal. oil.

Gross Income .Royalties Rules: Stock dividend . based on the FMV of the shares on date the share are received .Non taxable stock dividend if the new certificate plus the old ones do not change the proportionate interest of the stockholder in the net assets of the corporation .Taxable stock dividend constitutes income if it gives a greater proportionate share in the corp after its distribution.

Gross Income: Annuities Annuity policies sold by insurance companies. provided installment payments for life or for a guaranteed fixed period of time Rule: that portion that represents return of premium is not taxable while that portion that represents interest is taxable .

subject to final tax of 20% Rules: Not taxable if: The recipient was selected without any action of his part to enter the contest The recipient is not required to render substantial future services as a condition to receiving the prize or award Prizes and awards granted to athletes in local and international sports competition and sanctioned by their sports associations Prizes and awards in the nature of gifts are not taxable . commercial or non-commercial and constitutes gain from labor If prize is P10.000.000 or less.Gross Income: Prizes and Winnings Contest awards or prized. taxable Above P10.

Gross Income: Pensions Amount of money received in lump- sum or on staggered basis in consideration of services rendered Taxable up to the extent of the amount received except if there is an approved pension plan by the BIR .

the write-off resulted in a tax benefits . compensatory damages constituting returns of capital are not taxable Amount of debt of a stockholder to a corporation when forgiven.Gross Income: From Whatever Source Income from illegal sources Compensation from damages if it represents payment for loss of expected profits.in effect a payment of dividend Bad debts previously charged off but later recovered – constitutes receipt of taxable income if in the year if recognition of its being worthless.

Gross Income: From Whatever Source Taxes paid and subsequently refunded – a tax that is previously reported as an expense should be reported as income when refunded. except: Phil income tax (except fringe benefits) Estate or donor’s tax Special Assessment tax Stock Transaction tax Income tax paid to a foreign country. if the taxpayer claimed a credit for such tax in the year it was paid Tax informer’s reward to persons instrumental in the discovery of violations of the NIRC .

Gross Income: Sources of Income Within the Philippines Without the Philippines Partly within and partly without the Philippines .

Gross Income: Exclusions Life Insurance –proceeds paid to the beneficiaries Gifts.w/ same employer for 10 years and is not less than 50 yrs old . only income from such property Compensation for Injuries and Sickness Income exempt under treaty Retirement Benefits . bequests and Devises – value shall not be included.