4

Gross Income
What is Gross Income?
- Includes all income from whatever source (unless
exempt from tax by law) including, but not limited
to the following items:
1. Compensation 7. Dividends
2. Business/Profession 8.Annuities
3. Interests 9. Prizes and winnings
4. Rents 10. Pensions
5. Royalties 11. Gains from dealings in property

6. Partner’s share from the net income of general

professional partnership
Gross Compensation Income
- Means any remuneration for rendering personal
services
- Generally obtained from an employer-employee
relationship between payor and recipient
- Note: There is no determination of compensation
until the service is rendered.
- In general, every form of compensation income is
taxable regardless of how it is earned.
- EXCEPTION: The compensation income of
Minimum Wage Earners (MWE) are nontaxable.
When Does and Employer-Employee Exist?
- Generally, it exists when the person for whom
services are rendered has the right to control and
direct the individual who performs the services,
not only as to the result in accomplishing the
work but also as to the details and means by
which that result is accomplished
Classification of Gross Compensation Income
1. Salary or Wage
2. Honoraria
3. Fixed or Variable Allowances e.g. Representation and Cost
of Living Allowances (COLA)
4. Commission
5. Fees
6. Tips and gratuities
7. Hazard or emergency pay
8. Retirement pay
9. Separation pay
10. Pension
11. Vacation and sick leave
12. 13th month pay and other benefits
13. Fringe benefits and de minimis
14. Overtime pay 16. Awards for special services
15. Profit sharing 17. Other form of compensation
Problem 1
Miss Pina Palad, single, reported the following income for the
taxable year 200A:

Salary for the year P384,000

13th month pay 33,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a director 50,000
Availed vacation leave pay (included in the salary) 12,000
Cost of living allowances 9,000
Interest income from time deposit in the BPI 3,000
Royalty income from minin, net of final tax 70,000

Miss Palad retired at the age of forty-five as of December 31,

200A, receiving a retirement pay of P1,000,000. What is the
gross taxable compensation income of Miss Palad for 200A?
Problem 2
On March 31, 200B, Atty. D, a corporate lawyer of JC
Corporation, received 200 JC shares of stocks with a fair
market value of P90 per share as of March 31, 200B. The shares
of stock were intended to pay the services rendered by Atty. A
on December 200A at which time the fair market value was
P75 per share.The par value per share is P50.
Cancellation of Debt
The cancellation and forgiveness of indebtedness
may amount to a payment of income, gift or capital
transaction depending upon circumstances.
1. If a creditor merely desires to benefit a debtor
and without any consideration cancels the debt,
the amount of the canceled debt is a gift, not an
income of the debtor.
2. If a corporation to which a stockholder is
indebted forgives the debt, the transaction has
the effect of payment of dividend income to debtor
Cancellation of Debt
3. If, however, a debtor performs services for a
creditor, who in consideration thereof cancels the
debt, the debtor realizes income for his services to
the extent of the amount of debt cancelled.
Illustration:
Miss Utangera, a computer encoder, borrowed P10,000
payable within two months from Mr. Chan, her employer.
Miss Utangera was not able to settle her debts on the
stipulated time of payment. However, Mr. Chan cancelled her
indebtedness in lieu of her two months services.

The cancelled indebtedness of P10,000 shall be considered

compensation income of Ms. Utangera.
Business Defined
- It means any commercial activity engaged in as a
means of livelihood or profit of an individual as a
means of livelihood or profit of an individual or
group of individuals.
- Examples are trading, merchandising,
manufacturing and other similar activities
Profession Defined
- For tax purposes, profession is primarily any
endeavor or work requiring specialized training in
the field of learning, art, or science engaged in as a
means of livelihood or profit of an individual or
group of individuals. In general, a practice or
profession is a service.
- Examples are Certified Public Accountants,
Lawyers, Medical Doctors, and the like.
Gross Income from Business
1. Manufacturing
2. Merchandising or Trading
3. Servicing
4. Farming
5. Long-term contract
Illustration:
Cabrero’s Store has just gone through its initial operation
and provided the following data to determine the gross
income for the current year:

Sales P240,000
Merchandise inventory, end 20,000
Sales returns and allowances 10,000
Purchases 150,000
Sales discounts 30,000
Gains from sale of scrap materials 5,000
The Cost of Sales or Cost of Goods Sold
- It shall include all business expenses directly incurred
to produce the merchandise to bring them to their
present location and use.
- It is deducted from the net sales to calculate gross
income from business.
- It may be classified as follows:

1. Cost of goods manufactured and sold of

manufacturing concern
2. Cost of goods sold of trading or merchandising
concern
3. Cost of service of servicing concern
Cost of Goods Manufactured and Sold
- It shall include all costs of finished goods that are sold
such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw
materials to the factory or warehouse
Illustration:
Assume the following data of Golden Fry Manufacturing:

Sales P6,100,000
Sales returns and allowances 100,000
Raw materials, beginning 200,000
Raw materials purchases 3,600,000
Raw materials, ending 300,000
Purchase discounts 40,000
Raw material’s insurance 50,000
Freight – in 80,000
Direct labor 500,000
Manufacturing overhead 210,000

How much is the gross income?

Cost of Goods Sold of Trading or
Merchandising Concern
- Refers to the invoice cost of the goods sold, plus
import duties and freight incurred in transporting the
goods to the place where they are actually sold, including
insurance whole the goods are in transit.
Illustration:
Assume the following data of Diamond Grocery:

Sales P6,100,000
Sales returns and allowances 60,000
Sales discounts 40,000
Inventory, beginning 110,000
Purchases 3,600,000
Purchase returns 110,000
Purchase discounts 50,000
Freight-in 80,000
Inventory, ending 300,000
Insurance for goods in transit 60,000

How much is the gross income?

Cost of Services (MCIT)
- For minimum corporate income tax purposes, “gross
income from service business” is gross receipts less
returns, allowances, discounts, and cost of services. The
“cost of services” shall include the direct cost and
expenses necessarily incurred to provide the services
required by the customers and clients which include the
following items:
a. Salaries;
b. Benefits of personnel, consultants and specialist
directly rendering the service;
c. Cost of facilities directly utilized in providing the
services such as depreciation or rental of equipment
used and cost of supplies; and
d. In the case of banks, the cost of services shall include
interest expense
Illustration:
Assume the following data of RR Beauty Parlor:

Service revenue 940,000

Service discounts 40,000
Salaries of beauticians 300,000
Depreciation of beauty equipment 50,000
Consultant’s fee 100,000
Beauty supplies used 150,000
Salary of accountant 120,000
Interest expense 30,000

How much is the gross income?

Prizes and Winnings
Prize - a reward for a contest or a competition. It
represents remuneration for an effort reflecting one’s
superiority, e.g. prize money of a boxing contest.
- In general, prizes are subject to final tax of 20%
except if the amount of the prize P10,000 or less which
shall be subjected to normal tax

Winning – a reward for an event that depends on

chance e.g. winnings from gambling, lottery or raffle
ticket.
- Winnings are subject to final tax of 20%
regardless of amount

Prizes and winnings are generally taxable except when

the law provides for their exemption.
Illustration:
Regine Velasquez won the following prizes/winnings during
the year:

First prize - singing contest P 10,000

First prize – PCSO 1,000,000
Third prize – raffle ticket winnings 5,000

Which of the prizes is subject to normal tax, final tax and

tax exempt?