Taxation - Defined - August 22, 2013

CHAPTER I - DEFINITION OF SOME TERMINOLOGIES
Taxation is an act of imposing tax.

Tax - is a power inherent in a sovereign state to enforce a charge or a burden upon persons, properties or
rights or privileges, to defray the expenses of the government, and to enable it to discharge its appropriate
functions.
Nature of taxation it is inherent in any sovereign or independent state. It is exercised by the congress or
the legislative branch of government. Under the local government code, the local council can impose
taxes within the area of their jurisdiction.
Scope of taxation
It is unlimited and comprehensive. There are inherent and constitutional limitations, but any limitations
will depend on the sense of responsibility of the members of the legislature to its constituents.
Inherent limitations:
The tax is imposed for public purpose. The power to tax cannot be delegated. Double taxation should be
avoided or prevented. Government agencies and instrumentalities are exempted from tax. Tax can be
imposed only within the territorial jurisdiction of the state. Tax laws cannot be applied to properties of
foreign governments.
Double taxation is taxing twice, by the same public authority, within the same jurisdiction or taxing
district, for the same purpose in the same year or taxing period.
Constitutional limitations:
Existing contracts shall not be impaired. No person shall be imprisoned for non- payment of debt or poll
tax. Taxation must be uniform and equitable. All kinds of land, buildings and improvements actually,
directly or exclusively used for religious or charitable purposes are exempt from taxation.
Basic principles of a sound tax system
Fiscal adequacy the source of revenue must be enough to sustain the finances of the government
Theoretical justice taxes must be based on the taxpayers ability to pay.
Administrative feasibility taxes collected must be sufficient to implement the law of the land efficiently
and effectively.
Taxes distinguished from eminent domain

Concept of eminent domain it is the power of the state to take or control private property for public use
after paying the owner a just compensation to be determined according to law.
Taxation applies to all persons, properties or rights (national coverage). Eminent domain applies only to a
particular owner of property.
In taxation, there is payment of taxes to the government by the taxpayer. In eminent domain, there is the
taking of property by the government.
In taxation, the taxpayer is presumed to receive benefits from the government directly or indirectly. In
eminent domain, the owner of the property receives a fair and just compensation from the government.
Taxation distinguished from police power:
Concept of police power it is the right of the state to enact laws in relation to properties or persons as
may promote public health, public morals, public safety and the general welfare of the people.
The purpose of taxation is to raise revenues. The purpose of police power is for regulation.
In taxation, there is no limit on the amount of tax to be imposed. In police power, the license fee is just
enough to implement the regulation.
Classification of taxes
a. As to subject matter:
1. Personal or capitation or poll tax or cedula fixed amount on all persons who are residents
within a specific territory.
2. Property tax tax assessed on all properties located within the jurisdiction of the taxing
authority, in proportion to its value or in some method of apportionment.
3. Excise tax a tax which is not covered under personal or property.
b. As to who bears the burden
1. Direct tax The one who pays shoulders the tax.
2. Indirect tax The one who pays shifted the burden of the tax to someone else.
c. As to determination of amount:
1. Specific tax a tax which imposes a specific amount per head or number, or some standard of
weight or measurement.
2. Ad valorem tax a tax based on the value of the article subject to tax. It is a certain
percentage of the invoices or appraised value of the article or product subject to tax.
d. As to purpose:
1. General tax tax levied to raise revenues for the government.
2. Special tax tax levied for special purpose.
e. As to scope
1. National tax tax levied by the national government.
2. Local tax tax levied by the local government.
f. As to proportionality
1. Progressive or graduated increase in the tax rate is proportional to the increase in tax base.
Ex. Income tax, estate tax, and gift tax.
2. Regressive increase in the tax rate is not proportional to the increase in tax base. We do not
use this kind of taxation.
3. Proportional fixed percentage of amount of the base (e.g. value of the property, or gross
receipts) Ex. Value added tax (VAT), real property taxes.
Some doctrines in Taxation

1. Prospectively of tax laws tax laws must be imposed not retroactively but forwardly.
2. Indirect double taxation Ex. When business tax is imposed by the municipal government prior
to the issuance of business license to a taxpayer for engaging in an advertising business. His
income from his advertising business shall later be imposed income tax by the national
government
3. Set-off of taxes are not subject to offsetting of the claims that the taxpayer may have against the
government.
4. Escape from taxation avoiding or evading tax.
a. Shifting is the transfer of the burden of the tax to someone else. Ex. Indirect tax
b. Capitalization the reduction in the price of taxed object equal to the future value of
the taxes to be paid, which the purchaser expects to pay.
c. Transformation is the method of improving the process of production, turning out
his units of product at a lower cost.
d. Evasion use of illegal or fraudulent means to avoid or lessen the payment of tax.
e. Avoidance use of legal means to prevent or reduce tax liability.
f. Exemption is the granting of immunity to a certain taxpayer so that it will not pay
tax.
Situs of taxation it is the place of taxation. It is the channel wherein the state can collect or levy a
subject being taxed if he has a situs under its jurisdiction.
1.
2.
3.
4.
5.
Persons residence of the taxpayer

Real property or tangible property location of the property
Intangible personal property domicile or the taxpayer unless he acquired a place elsewhere
Income taxpayers residence or citizenship, or place the income was earned.
Business, occupation and transaction place where business is operated or located, occupation is
practiced and transaction is completed.
6. Gratuitous transfer of property taxpayers residence or citizenship, or location of the property.
Tax differentiated from toll.
Meaning of toll it an amount paid for the use of a road, bridge, or the like of a public nature.
A toll is a demand of the owner and is paid for the use of anothers property and maybe imposed by
individual private or government entities, while tax is a demand of the state for the support of
government.
Tax differentiated from penalty

Penalty is any sanction imposed as a punishment for violation of law.
A penalty is designed to discipline the conduct of the subject and it may be imposed by the government or
private individuals or entities. Tax is primarily aimed at raising revenues and maybe imposed only by the
government.
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Tax differentiated from special assessment

Special assessment is an enforced contribution from owners of land for special benefits resulting from
public improvements.
Special assessment is levied only on land, is not a personal liability of the person assessed, is based
wholly on benefits. Tax is levied on persons, properties or rights, which may be made a personal liability
of the person assessed, is based on necessity and is of general application.
From permit or license fee

Permit or license fee is a charge imposed under the police power of the state for purposes of regulation.
License fee is imposed for regulation and involves the exercise of police power, while tax is imposed for
revenue and involves the exercise of the taxing power. Failure to pay a license fee makes an act illegal,
while failure to pay a tax does not necessarily make an act illegal.
From debt
A debt is based on contract, is assignable and maybe paid in kind. While a tax is based on law, cannot be
assigned and is paid in money. A person cannot be imprisoned for non-payment of debt while he can be
imprisoned for non-payment of tax.
From Revenue
It is broader than tax since it includes all funds or income derived by the government aside from taxes.
Other sources of funds by the government are servicesm income from public enterprises and foreign
loans.
From custom duties
Custom duties are taxes imposed on goods exported from or imported to a country. Custom duties are also
taxes but the latter is broader in scope.
Questions and exercise:

Questions:
1.
2.
3.
4.
What is a tax?
What is the scope of taxation? Discuss.
Enumerate the constitutional and inherent limitations of taxation. Discuss.
What are the classification of taxes?
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5. Describe some doctrines that is generally accepted in taxation. Explain.

6. Differentiate tax with the following:
a. Toll
b. Penalty
c. Special assessment
d. License fee
e. Debt
f. Revenue; and
g. Customs duties
Exercise: True of False. Write in the space provided before each number the word
True if the statement is correct and the word False if the statement is incorrect.
____________ 1. No person shall be imprisoned for non-payment of income tax.
____________2. Taxation is unlimited and therefore it has no limitation.
____________3. The power of eminent domain interferes to the right of the person to
privacy.
____________4. Tax laws may be affected prospectively and retroactively.
____________5. Shifting is the method of improving the process of production,
turning out his unit of product at a lower cost.
____________ 6. Value added tax is an example of excise tax.
____________7. Regressive income tax means increase in the tax rate is not
proportional to the increase in tax base.
____________8. Progressive or graduated tax means a fixed percentage of the income
tax base.
____________9. The power to tax is exercised only by the executive branch of the
government.
____________ 10. The Constitution totally disallows double taxation.
CHAPTER 2 INCOME TAXATION

History of the Philippine Income Tax
At first, our inhabitants were living in our country as a free people. But when the Spaniards came into our
country, our people realized that we are now a slave in our own country . In order to sustain the
colonization of our country, not only they exploited our natural resources, but also required every citizen
to pay the poll tax or the cedula as a symbol of Filipinos vassalage to Spain. This cedulawas the most
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popular tax that we pay during the Spanish times. But when the USA took over the Philippines from
Spain, they introduced the first income tax law in the Philippines and subsequently it undertook several
revisions from different generations of government until it becomes what is now.
Bureau of Internal Revenue (BIR)
One form of taxation is tax on income. Income tax is defined as a tax on income, whether gross or net (27
Am. Jur., 308). Income taxation in the Philippines is mostly covered under a law known as the National
Internal Revenue Code. Aside from that, it also includes special laws, revenue regulations and circulars,
rulings of the BIR, opinions of the Secretary of Justice, decisions of the Supreme Court and the lower
courts. The implementing agency is the Bureau of Internal Revenue under the Department of Finance.
Powers and duties of the BIR
1.
2.
a.
b.
c.
d.
e.
f.
g.
h.
1.)
2.)
Officers Chief Commissioner and seven (7) deputy commissioners.

Powers and duties:
Assessment and collection of all national internal revenue taxes, fees and charges;
Enforcement of all forfeitures, penalties and fines;
Execution f judgments in all cases decided in favor by the court of tax appeals and ordinary
courts.
Administration of supervisory and police powers conferred to it.
Interpret tax laws and decide tax cases
Obtain information, and to summon, examine, and take testimony of persons.
Make assessments and prescribe additional requirement for tax administration and enforcement.
The commissioner has the power to inquire bank deposits of:
Decedent to determine his gross estate.
Any taxpayer who has filed an application for compromise of his tax liability.
This is exempted under RA no. 1405 or Secrecy of Bank Deposit Law.

Questions:
1.
2.
3.
4.
Describe the evolution of tax in the Philippines.

What are the functions of BIR?
Are the powers of the BIR enough to force the taxpayers to pay the right taxes? Discuss.
What are some of the problems the BIR faces in our present system of taxation?
Chapter 3 Concept of Income Tax

Concept of Income Tax and Income
Income tax is a tax on all annual profits realized from property, profession or from doing trade or
business, or a tax on annual income, emoluments, and the like from employment which is payable by a
taxpayer. Income tax is regarded as an excise tax.
Income means all profits, gains which flow into the taxpayer during a specific period of time, but not
the return on capital. It also includes gains from the sale of capital assets.
Requisites for income to be taxed:
1. There must be a gain or profit.
2. The gain must be realized or received.
3. The gain must be excluded by law or international treaty.
Types of income
There are three (3) types of income of the taxpayers subject to tax:
1. Capital gains subject to capital gains tax
2. Passive income subject to final tax
3. Other income subject to tax depending upon the classification of taxpayers.
Classification of taxpayers
1.
2.
3.
4.
5.
6.
7.
Individual taxpayers
Corporations
Special corporations
General Professional Partnerships and not
Estate and trust
Co-ownerhip
Joint ventures not covered under the definition of a corporation
Accounting methods recognized by the tax code

1. Principal methods
a. Cash basis
b. Accrual basis
c. Hybrid method
2. Crop-year basis
3. Deferred payment sales
a. Installment basis
b. Deferred payment basis
4. Percentage of completion basis (long-term contracts)
5. Leasehold improvements
a. Income over the term of the lease basis
b. Income in the year of completion basis
6. In general, any method of accounting that reasonably reflects the income of the taxpayer for each
taxable year will do.
Explanation of accounting methods:

1. Main methods:
a. Cash basis Within a specific period of time, income earned is recognized as income only when
received and expenses not yet paid is recognized as expenses only when paid.
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b. Accrual basis Within a specific period of time, income earned is recognized as income even
when it is not yet received and expenses incurred are recognized as expenses even if it is not yet
paid.
c. Hybrid method is a combination of both the cash basis and accrual basis.
2. Crop year basis expenses in the production of crops are deducted in the year the gross income
from the crop has been realized. It is applicable only to farmers producing crops. It may take
more than a year. ( from the time of planting to the time of sale of the produce)
3. Installment and deferred payment sales It discusses various methods of acceptable reporting of
gross income.
4. Long term contracts means building, installing or contracting contracts covering a period in
excess of one year. A person whose gross income is derived from long term contracts shall
report his income on the basis of percentage of completion.
The computation must be supported by certifications from a reliable architect and engineering
consultants showing the percentage of completion during the taxable year of work done under the
contract.
5. Leasehold improvements sometimes the lessee make permanent improvements on the property
leased, under an agreement that upon the expiration of the lease contract, the improvement will be
for the lessor. It therefore behooves that the lessor must recognize income from the
improvements.
1. Income from leasehold improvements shall be reported at the time the
buildings or improvements are completed.
2. Income from leasehold improvements shall be divided over the life of the
lease
Chapter 4 Formula for taxable income
Taxable income it is gross income less deductions and personal and additional exemptions if any.
Gross income depends upon the source of income of the taxpayer.
A, Employment Compensation for the services rendered
B. Business Net sales less Cost of sales
1. Gross income/profit derived from the conduct of trade or business or exercise of profession.
2. Gains derived on the sale of properties or assets.
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3. Interests
4. Rents
5. Royalties
6. Dividends
7. Annuities
8. Prizes and winnings
9. Pensions; and
10. Partners distributive share from the net income of a general professional partnership.
Definition of income
Income is the amount of money (cash or its equivalent) received by a taxpayer (person or
artificial being) within a specific period of time, whether as payment of services, interest or profit from
investment. It may also be defined as the flow of fruits from ones labor.
Capital is wealth. Income is the flow of additional wealth. Capital is a tree, while income is the
fruit.
Income tax is a tax on all annual profits arising from trade or business, exercise of a profession or
use or sale of property, or is a tax on persons compensation through employment. It is generally an
example of excise tax. Income tax is based on income either gross or net, realized in one taxable year.
Compensation Income
Definition It means all remuneration for services rendered by a employee for his employer under an
employee-employer relationship, unless specifically excluded by the Code. Thus, it includes salaries,
wages, emoluments, honoraria, allowances, commissions, (e.g. transportation, representation,
entertainment and the like); fees including directors fees and other income of similar nature. If services
are paid in kind other than money (e.g. stocks, bonds or other forms of property) its fair market value
should be taken as payment.
Forms of compensation
1. Money
2. In kind such as stocks, bonds, or other forms of property. Fair market value
3. The value of quarters or meals so furnished should be added to remuneration.
Compensation with exemptions:
1. De minimis benefits are not considered as compensation such facilities or privileges are
relatively of small value and are given to employees to promote their health, goodwill,
contentment, and efficiency.
a. Monetized unused vacation leave credits of employees not exceeding 10 days during the year.
b. Medical cash allowance to dependents of employees not exceeding P750 per employee per
semester or P125 per month.
c. Rice subsidy of P1,500 or one (1) sack of 50-kg rice per month amounting to not more than
P1,500.
d. Uniforms and clothing allowance not exceeding P4,000 per annum.
e. Actual yearly medical benefits not exceeding P10,000 per annum.
f. Laundry allowance not exceeding P300 per month.
g. Employee achievement awards, e.g. for length of service or safety achievement, with an
annual monetary value of P10,000, under an established written plan, which does not
discriminate highly paid employees.
h. Gift given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum.
i. Flowers, fruits, books or similar items given to employees under special circumstances, e.g.
on account of illness, marriage, birthday, birth of a baby, etc.
j. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.
The excess from the above ceiling prescribed, shall be considered as part of other benefits, which are
taxable to the employee receiving the benefits, if such excess is beyond the P30,000 ceiling.
2. Fringe Benefits is an employee benefit supplementing a money wage or salary. It may be in the
form of food, service, or other benefit furnished or granted in cash or in kind. A salary or wage
given to an employee cannot be reduced, while a fringe benefit maybe discontinued or reduced.
It is not a part of the basic pay to compute for OT pay, separation pay, etc. as a basis.
a. Basic rules on fringe benefit and fringe benefit tax.
1.) Fringe benefit given to a rank and file employee (whether under a collective bargaining
agreement or not) is not subject to the fringe benefit tax.
2.) Fringe benefit given to a supervisory or managerial employee is subject to the fringe
benefit tax.
3.) De minimis benefits, whether given to rank and file employee or to a supervisory or
managerial employee is not subject to the fringe benefit tax.
Examples of fringe benefits given to a supervisory or managerial employees subject to
fringe benefit tax:
Housing, expense accounts, vehicle of any kind, housing personnel such as maid, driver
and others, interest on loan at less than market rate to the extent of difference between the
market rate and actual; membership fees, dues and other expenses in social and athletic
clubs or other similar organizations; expenses for foreign travel; holiday and vacation
expenses, educational assistance to the employee or his dependents; life or health
insurance and other non-life insurance premiums or similar amounts in excess of what the
law allows.
4.) Exemptions from tax are as follows:
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a. Benefit required by the nature of, or necessary to the trade, business or profession of the
employer.
b. Benefit for the convenience or advantage of the employer (convenience of the employer
rule)
c. Benefit which is authorized and exempted from tax under special law.
d. Contribution by the employer for the benefit of the employee to retirement, insurance,
and hospitalization benefit plans.
e. De minimis benefits.
5.) Computation of fringe benefit tax:
1. Determine the grossed-up monetary value of the fringe benefit. This is the monetary
value of the benefit divided by sixty-eight percent (68%);
2. Compute the fringe benefit tax by multiplying the grossed-up monetary value of the
fringe benefit by thirty two percent (32%).
The fringe benefit tax is a final tax that should be withheld by the employer and paid on
or before the tenth day of the month following the calendar quarter in which the fringe
benefit was granted.
Exclusions from gross income:
A. Direct exclusions under NIRC
1. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured.
2. The amount received by the insured as a return of premium paid by him under life insurance,
endowment or annuity contract.
3. The value of the property acquired by gift, bequest, devise or descent.
4. Amount received through accident or health insurance, or under Workmens Compensation
Act as compensation for personal injuries or sickness.
5. Income of any kind to the extent required by any treaty binding upon GOP.
6. Payment of benefit due to any person residing in the Phils under US laws administered by US
Veterans Administration.
7. Interest derived from investment in the Philippines by foreign governments or institutions.
8. Income derived from any public utility or from the exercise of any essential government
functions accruing to GOP or to any political subdivision.
9. Prizes or awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement.
10. Prizes or awards granted to athletes in local or international sports competition sanctioned by
their national sports associations.
11. Gains realized from the sale or exchange or retirement of bonds, debentures, or other
certificate of indebtedness with a maturity of more than 5 years.
12. Gains realized by the investor upon redemption of shares of stock of a mutual fund company.
B. Exemptions which have special significance to an employee or wage earner:
1. GSIS, SSS, Philhealth and Pagibig contributions and union dues of individuals.
2. Gross benefits received by officials and employees of public or private entities, as thirteenth
month pay and other benefits, but the total exclusion shall not exceed thirty thousand pesos
(P30,000). Example: Productivity incentive pay, and Christmas bonus.
3. Benefits received or enjoyed under the SSS or GSIS.
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4. Retirement benefits received under RA No. 7641 and those received by employees of private
firms with a reasonable private benefit plan.
5. Amount received by an employee or its heirs as a consequence of separation from the service
because of death, sickness or other physical disability or for any cause beyond the control of
the employee.
6. Social security benefits, retirement benefits, pensions, and other similar benefits received by
a resident or non-resident citizen of the Philippines or resident alien.
7. Minimum wage earners shall be exempt from the payment of income tax.
C. Other Exemptions under NIRC:

1. Interest on long term deposits or investments in banks (with a maturity of 5 years or more)
except for non-resident aliens not engaged in business or practice of profession in the Phils.
2. Interest received by a non-resident individual or non-resident corporation from deposits under
the FCDU system.
3. Dividends received by a domestic or resident corporation. (Intercompany dividend)
4. De Minimis benefits received by a managerial or supervisory employee.
5. Income tax shall not apply to an employees trust which forms part of pension, stock bonus,
or profit sharing plan of an employer for the benefit of some or all of his employees.
Chapter 5 Application of Installment and Deferred Payment Methods and Long-Term Contracts
1. Payment of capital gain tax in installment - Not all revenues or sales of capital assets are received
on cash. Sometimes to generate more revenues you have to have to adopt installment method of
sales. It would be unfair if for example, a taxpayer will have to receive payment yet by
installment and require him to pay tax due as a whole on the date of sale, hence the method of
paying capital tax should be made as the taxpayer received payment.
2. Installment method of reporting income Likewise, if the sale of ordinary asset is made on
installment, the reporting of income can be made also by installment.
3. Installment method of reporting capital gain Furthermore, if the sale of capital asset is made on
installment, the capital gain realized can also be made by installment.
Below is the integrated comparison of the three types of application of installment and deferred methods:
Application of Installment and Deferred Payment Method
Illustrative Problem
Payment of capital gain

tax in installment
F Co., a domestic corp,
on January 2, 2009 sold
Installment method of
reporting income
On Nov 5 2009, Mr. B
sold a piece of land held
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Installment method of
reporting capital gain
On Jun 1 2009, Mr. P
sold bonds held as
a piece of land in USA,

held as capital asset
with data as follows:
SP
P2,000,000
FMV
P1,800,000
Cost
P1,000,000
Payment as follows:
DP
P 500,000
Jan 2, 10 P1,000,000
Jul 2, 10 P 500,000
Step 1
Step 2 Initial
payments must not
exceed 25% of the
selling price
Determination of capital
gain tax:
SP
2,000,000
FMV
1,800,000
CGT
120,000
Determination of initial
payments:
IP in 2009 500,000
(not exceeding 25% of
SP)
Step 3. If there is no
mortgage, the contract
price is the selling price
Selling Price is the

Contract Price
Step 4. Computation
Determination of
installment payments on
the tax:
Jan 2, 2009
P120.000/P2,000,000 x
500,000 = P30,000
January 28, 2010
P120,000/P2,000,000 x
P1,000,000 = P60,000
as ordinary asset on
installments. Data are as
follows:
SP
P1,000,000
Cost
P500,000
Mortgage P600,000
Payments:
DP of P130,000 and
installment payments of
P20,000 every month
thereafter except for last
month P30,000.
Determination of gross
profit:
SP
P1,000,000
Cost
P 500,000
GP
P 500,000
payments:
DP in 2009 P130,000
Ins payment 20,000
Excess of mortgage
Over cost
P100,000
Init, paymt P250,000
Determination of
contract price:
SP
P1,000,000
Mortgage
(600,000)
Excess of Mortgage
over cost
100,000
Contract Price 500,000
Determination of
income to report:
2009:
P500,000/P500,000 x
P250,000 = P250,000
2010:
P500,000/P500,000 x
P250,000 = P250,000
July 2, 2010
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capital assets on
installments: Data are as
follows:
SP
P200,000
Cost
P100,000
Payments:
2009: DP P25,000
Dec 1 2009 P25,000
2010:
Jun 1 2010 P75,000
Dec 12010 P75,000
gain:
SP
P200,000
Cost
100,000
GP
100,000
payments:
DP in 2009 P25,000
Payment:
12/1/2009 P25,000
Init paymt
P50,000
Selling Price is the
contract Price
gain to be reported:
2009:
P100,000/P200,000 x
P50,000 = P25,000
50% thereof P12,500
P100,000/P200,000 x
P150,000 = P75,000
50% thereof P37,500
P120,000/P2,000,000 x
P500,000 = P30,000
However, if the
initial payments is
more than 25%, it
can be reported on
the basis of
deferred payment
method
Not applicable
L Co, a real estate

dealer, sold on Dec
1 2008 a piece of
real estate with the
ff. data:
SP
P3,000,000
Cost
P1,200,000
DP
P1,000,000
Mort. Note
P2,000,000,
payable at
P1,000,000 on Dec
1, 2009, and
P1,000,000 On Dec
1, 2010. It has a
FMV of 85% of its
face value.
In 2008:
Collected
P1,000,000
FMV of note:
P2,000,000 X 85%
P1,700,000
Total amt
P2,700,000
On Jun 1 2009, Mr.

S sold shares of
stock of a resident
corporation held as
capital assets for
20 months. Data
are as follows:
SP
P200,000
Cost
P100,000
DP
P
50,000
Balance is secured
by a mortgage
note, the FMV is
90% of its face
value. Payments
were as follows:
12/1/2009
P50,000
6/1/2010
P50,000
12/1/2010
P50,000
In 2009:
Collected:
Date of sale
P50,000
12/1/2009
P50,000
FMV of the
Note=,9xP100,000
P90,000
Total
190,000
Less: Cost
100,000
Capital gain
90,000
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In 2009:
Collected
P1,000,000
Less: Income prev.
reported:
85% x P1M
850,000
Income
150,000
50% thereof
45,000
In 2010:
Cash received:
6/1/2010
P50,000
12/1/2010
P50,000
Total
P100,000
Less income prev.
reported
90,000
Capital gain
10,000
50% thereof
P5,000
In 2010:
Collected
P1,000,000
Less: Income prev.
Reported:
85% x P1M
850,000
Income
150,000
Long term contracts

It means a construction contract whose period of completion exceeds one year. A
taxpayer whose gross income is derived in whole or in part from long-term contracts
shall report income from such contracts on a percentage of completion method. It
shall be based on progress billing approved by independent architectural or
engineering consultants showing the actual percentage of completion accomplished
during the period.
Example: Mr. Cruz is a contractor. On May 1, 2011, he started the construction of a
building and finished it in 2013. The contract price of the building was P10,000,000.
By the end of 2011, the building was thirty percent (30%) completed at a cost of
P2,000,000. It was eighty percent (80%) completed by the end of 2012, with an
additional cost of P4,000,000 for that year. The building was completed in 2013,
with an additional cost of P1,000,000 for that year. The income to be reported for
each year during the period of construction would be as follows:
15
2011:
Contract price P10,000,000
(30% of P10,000,000)
Less: Cost to date (December 31, 2011)
2,000,000
Income for the year
P3,000,000
P1,000,000
2012:
(80% of P10,000,000)
Less: Cost to date:
2011
2012
Balance
Less: Income reported in 2011
Income for the year
P8,000,000
P2,000,000
4,000,000
2013:
(100% of P10,000,000)
Less: Cost to date
2011
2012
2013
Balance
Less: Income already reported:
2011
2012
Income for the year
1,000,000
6,000,000
P 2,000,000
1,000,000
P 1,000,000
P10,000,000
P2,000,000
4,000,000
1,000,000
P1,000,000
1,000,000
16
7,000,000
P 3,000,000
2,000,000
P
Chapter 6 : Tax Rules for individual Taxpayer

Summary of Tax Rules for Individual Taxpayers
Resident
Citizen
Nonresident
Citizen
Resident
Alien
Non-resident
Alien
engaged in
business
Nonresident
Alien not
engaged
in
business
Naturalborn
Stay out
for more
than 183
days
Stay in for
more than
a year
Stay in for
more than
180 days
Stay in for
less than
180 days
a. Sale of
shares of
stock
Uniform
rules
Uniform
rules
Uniform
rules
Uniform
rules
Uniform
rules
b. Sale of
real
property
Uniform
rules
Uniform
rules
Uniform
rules
Uniform
rules
Uniform
rules
c. Interest
on FCDU
7.5%
exempt
7.5%
exempt
d. Interest
on any
currency
bank
20%
20%
20%
Who are
they?
Capital
Gains
Passive
income
17
deposit,
yield or
benefits
derived
from
deposit
substitute.
e. Royalty
on books,
literary &
musical
compositio
ns
10%
10%
10%
10%
f. Royalty
other than
(e), Prize
>
P10,000,
other
winnings
except
lotto and
PCSO
20%
20%
20%
20%
f.
Dividends
10%
10%
10%
20%
g. Interest
on deposit
for 5 years
or more
exempt
exempt
Exempt
exempt
Within and
without
the
Philippines
Within the
Philippines
Within the
Philippines
Within the
Philippines
5%-32%
5%-32%
5-32%
Other
Income
h. Taxable
income
5%-32%
Other
rules in
18
Final tax
i. Gross
income
from
within the
Philippines
J. Personal
exemption
s
Cinematogra
phic films
and similar
works only
25%
25% Final
tax
Uniform
rule
Uniform
rule
Uniform
rule
Uniform rule
or that
allowed by
the country
of his origin
whichever is
lower
None
A. Uniform rule for Capital gains subject to capital gain tax:

1. For shares of stock:
a. Capital gain = Selling price Cost of shares of stock
b. Tax on the net capital gain:
Not over P100,000
Final tax of 5%
In excess of P100,000
Final tax of 10%
c. Tax is due within 30 days from the date of sale.

2. For sale of real property in the Philippines held as capital asset
Tax is based on the gross selling price, or the current fair market value
at the time of sale, whichever is higher Final tax of 6%.
The tax is withheld at source.
Capital Gain terms used:
19
Capital Assets are assets not used in business. It is the opposite of Ordinary
assets.
Capital gain Selling price Cost. Selling Price is the amount paid on the sale,
either in cash or in kind. The selling price or the fair market value, whichever is
higher, is reduced by the expenses of the sale. Cost is the purchase price increased
by the expenses of the purchase.
Real property land, building or anything attached to the soil with permanence.
Problems:
1. The taxpayer is Mr. A, a citizen of the Philippines, residing in the

Philippines, directly sold shares of stock of a domestic corporation to a
buyer at a selling price of P750,000. Expenses of sale is P50,000.
Purchase price of the shares sold is P400,000. Expenses on the
acquisition of shares is P25,000. Compute for the capital gains tax.
2. The taxpayer is a citizen of the Philippines, residing in the Phils. Shares
of a resident corporation held as capital assets were sold in the
Philippines directly to a buyer.
Selling price of shares
P600,000
Cost of shares
P300,000
Capital gain tax?
3. The taxpayer is a citizen of the Philippines, residing in the Phils. Shares

of stock of a domestic corporation held as capital assets were sold thru
the Philippine Stock Exchange.
Selling price, net of stock brokers commission
P500,000
Cost (purchase price of stock brokers commission) P150,000

Capital gain tax?
20
4. The taxpayer is a citizen of the Philippines, residing in the Philippines:

Selling price on a direct sale to a buyer of shares of a domestic
Corporation held as capital asset
P600,000
Fair market value of the shares at the time of sale
P700,000
Cost of the shares
P200,000
Capital gain tax?
5. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Selling price of land and building in the Philippines
P5,000,000
Fair market value at the time of sale
P5,500,000
Cost of the land and building
P3,000,000
Capital gain tax?

Selling price of land and building in the Philippines
P4,000,000
Commission of the broker who facilitated the sale

Purchase price of the land
150,000
1,500,000
Commission of the broker who facilitated the

purchase
100,000
Capital gain tax?

Land in Malaysia, held as capital asset, were sold to a buyer in the
Philippines:
21
Selling Price
P2,000,000
Cost
P1,000,000
Capital gain tax?
B. Passive income with final tax:

1. Passive incomes are income received by the taxpayer even without doing
anything. So it comes to the taxpayer without any effort at all.
2. Final tax is the tax that is withheld at source, and the amount received by
the taxpayer is net of the tax. The payor remits the tax to the BIR.
Terms used in Passive Incomes
FCDU it is a unit of bank, whether local or foreign, authorized by the Banko Sentral
Ng Pilipinas to engage in foreign currency denominated transactions. These
transactions include accepting foreign currency deposits and granting of foreign
loans to domestic borrowers.
Deposit substitute it is a means of borrowing money from the public other than by
way of deposits with banks through the issuance of debt instruments. e.g. Treasury
notes of BSP. The yield is subject to final tax.
Trust fund example is when a bank pools together the small amounts entrusted to
it by clients for investment in safe and high-yielding securities. The yield and
additional yield is subject to final tax.
Prize is the result of an effort (e.g. prize in beauty contest). A winning is the result of
a transaction where the outcome depends upon chance (e.g. betting).
Problems:
22
1. The taxpayer is a resident citizen of the Philippines with the following

data in a calendar year:
Net income from business
P4,000,000
Interest on peso deposits with PNB
30,000
Interest on time deposits with Security bank with

maturity of more than 5 years.
80,000
Interest on Treasury Bill of BSP

90,000
Interest on dollar deposits with FCDU unit of Citibank
100,000
Dividend from a San Miguel Corporations Shares
50,000
Dividend from a resident foreign corporation

30,000
Royalties from books authored
200,000
Final tax on each of the passive income.

How much was the passive income of the year, net of final withholding
income tax?
C. Other Income subject to graduated tax of 5-32%

1. An income that cannot be classified on the above is called Other Income It
may come from:
a. Employer-employee relationship which is called compensation income.
b. Business or profession;
c. Sale or exchange of property which is not subject to the capital gains
tax;
d. Incidental sources, such as interest or dividend, which is not subject to
final tax.
Tax formula I for an individual who derive income from employment and who is not
a minimum wage earner:
23
Gross compensation income

Less: Premiums on health and hospitalization insurance (PHHI)
Less: Personal exemptions
Equals: Taxable compensation income
Problems:
1. Mr. Armand Gutierrez, a citizen and resident of the Philippines, was an

employee who had the following data in a calendar year:
Basic salary
P100,000
Hazard pay
12,000
Overtime pay
70,000
Night shift differential
5,000
Holiday pay
3,000
How much was the income tax at the end of the year?
2. Mr. Juan de la Cruz is a resident citizen. He is employed and had the

following data in a taxable year:
Salaries before payroll deductions
Allowances
P400,000
50,000
Payroll deductions:
SSS contributions
5,500
Philhealth contributions
2,900
Pag-ibig contributions
1,800
24
Labor union dues
2,000
Payment of loan to employer
30,000
How much was the withholding income tax?

Was an income tax return required to be filed at the end of the year?
3. Mr. Conrado Reyes, a resident citizen of the Philippines, an employee,

had no child at the beginning of the year. A child was born within the
year. He had the following data for the eyar:
Salary, net of exclusions for SSS, etc.
P300,000
Thirteenth month pay
30,000
Christmas bonus
30,000
Productivity incentives pay
20,000
Withholding income tax on the compensation income
52,000.
Was an income tax return required to be filed at the end of the year?
What would the ITR have shown?
Tax formula II for an individual who is self-employed (business or practice of

profession)
Gross income
Less: Deductions for expenses and losses and personal exemptions
Equals : Taxable income
Problems:
1. Mr. Ed Go is a citizen of the Philippines. Mr. Go and wife had

the following income and expenses data in one year as
follows:
25
Mr.
Gross income
P600,000
Expenses
Mrs.
P800,000
200,000
400,000
Separate computations of the income tax of Mr. & Mrs Go for

the year?
Income tax to be paid by Mr. and Mrs Go as reflected in one

income tax return? (No quarterly income tax were paid)
2. Mr. and Mrs. Reyes are citizens of the Philippines with three
dependent children. They had the following data on net
income for a year (disregard consideration of quarterly
income tax):
Net income of Mr. Reyes
Net income of Mrs Reyes
P650,000
450,000
Net income (joint) of Mr. and Mrs. Reyes 150,000

Mrs. Reyes is to claim the additional exemptions.
Income tax due from Mr. and Mrs Reyes at the end of the
year?
Tax formula III for an individual who has mixed income:
Gross compensation income

Add: Net income from business or profession (Gross income less deductions for
expenses and losses)
Less: Personal exemptions
Equals: Taxable income
26
Problems:
1. Mr. Edgardo Roque is a resident citizen of the Philippines with income from
business. Mrs. Roque is a citizen of the Philippines who is employed. They
have two (2) qualified dependent children. They had the following data on
income for a year as follows:
Mr.
Gross income
Expenses
Mrs.
P800,000
400,000
Salaries and benefits, net of exclusions
P300,000
(Disregard consideration of any quarterly income tax)

How much was the income tax withheld on the compensation income?
How much was the income tax still due from the husband and the wife?
A minimum wage earner is exempt from income tax on:

1. The minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential pay
5. Hazard pay.
Personal exemptions
1. Definition they are reasonable amounts allowed by law to an individual
taxpayer, supposed to be to provide for personal, living and family
expenses.
2. Present Personal Exemptions:
a. Basic personal exemption:
For the taxpayer
P50,000
27
b. Additional exemption:
For each qualified dependent child
(not exceeding four)
P25,000
Dependent child is a legitimate, illegitimate or legally adopted child.

Qualifications:
1. Chiefly dependent upon and living with the taxpayer.
2. Should not be more than 21 years old, unmarried, and not gainfully
employed.
3. If such dependent, regardless of age, is incapable of self-support because
of mental or physical defect.
In the case of married individuals, if only one is deriving income, only such spouse
shall be allowed personal exemption.
Husband and wife, both income earners, accomplish one income tax return only.
Each spouse shall be entitled to basic personal exemption.
Premiums on health and/or hospitalization insurance (PHHI)
For individuals, premiums paid during the taxable year for health and/or
hospitalization insurance taken out by him on himself, including his family shall be
allowed deduction under the following conditions:
1. That the family had a total income of not more than two hundred fifty
thousand pesos (P250,000) for the taxable year.
2. In case of married persons, only spouse claiming the additional
exemptions for dependents shall be entitled to deduction.
a. The deduction shall not exceed two thousand four hundred pesos
(P2,400) for the family, or two hundred pesos (P200) a month.
Family means nuclear family total family.
Total family income includes primary income and other income received by all
members of the family, i.e. father, mother, unmarried children living together, or a
single parent with children.
28
Problems:
1. How much is the basic personal exemption, and the additional exemptions, if
any, in each of the following cases?
a. The taxpayer, a citizen of the Philippines, is single, with an illegitimate child,
two years old.
b. The taxpayer, a citizen of the Philippines, is single, with a brother, 25 years
old, who is mentally ill.
c. The taxpayers are husband and wife, citizens of the Philippines, both with
compensation income, with six qualified dependent children.
d. The taxpayer, citizen of the Philippines, was single at the beginning of the
year. Within the year the taxpayer got married and had a legitimate child.
e. The taxpayer, citizen of the Philippines, was married at the beginning of the
year. Within the year he died.
f. The taxpayer, citizen of the Philippines, was married with a dependent child
at the beginning of the year. On July 1 of the year the child celebrated his
twenty-first birthday.
g. The taxpayer, a citizen of the Philippines was married with a qualified
dependent child at the beginning of the year. Within the year the child got
married.
h. The taxpayer, a citizen of the Philippines, was married with a qualified
dependent child at the beginning of the year. Within the year the child
became gainfully employed.
i. The taxpayer, citizen of the Philippines was married with a child 24 years old.
Within the ear the child became insane.
j. The taxpayer is a resident alien who is married with a qualified dependent
child.
k. The taxpayer is a non-resident alien engaged in business in the Philippines,
married, with a legitimate child one year old. His country would give a Filipino
engaged in business in his country, not residing in the country, a basic
personal exemption as married of P60,000 and an additional exemption for a
dependent child of P9,000.
l. The taxpayer is a non-resident alien not engaged in business in the
Philippines, but with income from the Philippines. His country would give a
non-resident Filipino, not engaged in business in his country, but with income
in the country, a basic personal exemption of P60,000
Optional Standard Deduction is a deduction from gross income allowed to be taken
instead of the itemized deductions. It is an amount not exceeding forty percent
(40%) of gross income.
It can be claimed by any of the following taxpayers:

1. An individual who is self employed, if:
29
a. a resident citizen
b. a non-resident citizen
c. a resident alien;
2. A corporation, if:
a. a domestic corporation
b. a resident corporation.
Graduated income tax for individuals:
On taxable income of:
The tax is:
Not over P10,000
5%
Over P10,000 but not over P30,000
P500 + 10% of excess over P10,000
Over 30,000 but not over 70,000
2,500 + 15% of excess over 30,000
8,500 + 20% of excess over 70,000
22,500 + 25% of excess over 140,000
50,000 + 30% of excess over 250,000
Over 500,000
125,000 + 32% of excess over 500,000
Problems:
1. Mr. Gomez, is a citizen and resident of the Philippines. The following data
were his business data in each of the quarters of a year:
First quarter
P230,000
Second quarter
310,000
Third quarter
294,000
Fourth quarter
325,000
30
How much was the income tax due at the end of each of the first ,second,
and third quarters of the year?
How much was the income tax due at the end of the year?
Chapter 7: Tax Rules on Corporations

Summary of Tax Rules on Corporations
31
Kinds
Domestic
Resident
Non-Resident
Definition
Created under
Philippine laws
Foreign corporation
engaged in business
in the Philippines.
Foreign
corporation not
engaged in
business but is
deriving income
in the Philippines.
Capital
Gain Tax
Same as the Uniform

Rules of Individuals
( a and b) except on
sale of real properties
which include sale of
real properties
located abroad
Only on (a) Sale of

shares of domestic
stock
Only on (a) Sale

of shares of stock
Passive
Income
Final Tax
Interest under the

FCDU 7.5%
Interest under the

FCDU 7.5%
Interest on any
currency bank
deposit, yield or
benefit from deposit
substitute, trust fund,
or royalty 20%
Interest on any
currency bank
deposit, yield or
benefit from deposit
substitute, trust fund
or royalty 20%
Interest on
foreign loans
20%
Dividend from
domestic corporation
( Intercompany
dividends) exempt
Dividend from
domestic
corporation
( intercompany
dividends) exempt
Dividend from
domestic
corporation
( under certain
conditions) 15%
Net taxable income

from all sources
within and without
the Phils. NT 30%
Net taxable income

from all sources
within the Phils. NT
30%
Gross income
from sources
within the Phils. Final tax of 30%
But, beginning with

the 4th year from the
start of operations,
whichever is higher:
Same as domestic
corporations
Other
income
32
NORMAL TAX 30%

Minimum Corporate
Income tax on Gross
Income 2%.
In lieu of the above,

beginning with the
year 2000:
Gross Income Tax

(GIT) on GIT Gross
Income from all
sources within the
Phils. 15%
Special
Corporati
ons
Taxpayer
Tax Base
Rate
Proprietary
educational
institution and nonprofit hospital
Taxable income from

all sources
10%
Resident international
carrier
Gross Philippine
Billings
2%
Non-resident owner or
lessor of vessel
Gross rentals, lease

and charter fess
from the Philippines
4%
Non-resident
cinematographic film
owner, lessor or
distributor
Gross income from

the Philippines
25 %
Non-resident lessor of
aircraft, machinery
and other equipment
Gross rentals,
charges and other
fees from Philippine
sources
7%
Regional operating
headquarters of
Philippine taxable
10%
33
multinational
corporations
income
Problems:
1. A domestic corporation had the following data in its second year of

operations:
a. Capital gain on sale of land in Thailand, on a selling
price at fair market value of P5,000,000
P2,000,000
b. Capital loss on sale of land and building in the Phils
on a selling price of P6,000,000
400,000
c. Capital gain on direct sale to buyer of shares of stock

of a domestic corporation
200,000
d. Gross profit from sales

e. Interest on bank deposits
f. Expenses of operations
Compute for the following:
3,000,000
150,000
1,000,000
Capital gain taxes?

Final tax on passive income?
Year-end tax?
Total income tax expense for the year?
2. A domestic corporation had, in its fourth taxable year the following data:
Gross profit from sales
P5,000,000
Expenses of operations
3,000,000
(Disregard quarterly income tax payments)

Minimum corporate income tax?
Normal income tax?
Income tax of the year?
3. A domestic corporation had the following data in its fifth year of operations:
34
Gross profit from sales
P3,000,000
Interest income from notes receivable

100,000
2,100,000

Normal income tax?
Income tax expense for the year?
4. In the sixth year of operations, a domestic corporation, a service provider,

had the following data:
Gross revenue
P7,000,000
Cost and expenses:
Direct cost of services
4,000,000
Other operating expenses
1,000,000

Normal tax?
Income tax expense for the year?
Excess MCIT carry-forward it is an excess of MCIT over its estimated normal tax,
and it is usually carried forward on the next three (3) consecutive years against
normal tax.
Example:
Year
MCIT
NT
Income tax
90,000
50,000
90,000
35
Taken from
Remarks
Excess
MCIT of
40,000
60,000
40,000
60,000
20,000
30,000
50,000
40,000
50,000
30,000
70,000
40,000
Excess
MCIT of
20,000
30,000 is
taken from
excess
MCIT in
Year 4
Balance of
10,000
from Year 4
Excess
MCIT of
10,000
30,000 is
taken from
Year 5
(20,000)
and Year 7
(10,000)
Year 4
excess of
10,000 has
already
been
forfeited.
Problem:
1. The following were computed income taxes (MCIT and NT) of a domestic
corporation:
Year
MCIT
NT
70,000
20,000
10,000
30,000
40,000
15,000
10
2,000
5,000
11
45,000
80,000

Required:
Income tax at the end of each year?
36
2. A domestic corporation had the following data at the end of each of the first
three quarters, and end, of its fifth year of operations:
First
Second
Third
Year
Gross profit
fro
400,000
600,000
700,000
900,000
160,000
400,000
520,000
580,000
m sales
Operating
expenses
Income tax due at the end of each of the first three quarters, and due at refundable
at the end of the year.
3. A domestic corporation had the following data on transactions in each of the

quarters of a taxable year:
First
Second
Third
Fourth
Gross profit
from sales
500,000
Dividend
from a
domestic
corporation
20,000
Interest on
bank deposit
Operating
expenses
450,000
350,000
800,000
900,000
20,000
4,000
8,000
12,000
340,000
810,000
450,000
Income tax due at the end of each of the first three (3) quarters, and due or
refundable at the end of the year?
4. A foreign corporation is doing business in the Philippines through its branch in
the Philippines. Philippine operations in its fifth year in the Philippines had the
following data:
Gross income from operations of the year
Interest on Philippine currency bank deposit
Operating expenses of the year
Remittance of profits to John Company, its Mother
Company abroad (net of remittance tax)
How much is the minimum corporate income tax?
37
P8,000,000
100,000
4,000,000
425,000
How much is the aggregate income taxes of the year?

5. A foreign corporation not licensed to do business in the Philippines derived an
income ofP4,000,000 from a incidental transaction in the Philippines, on
which the total of related expenses was P300,000. How much is the income
tax to be paid in the Philippines.
6. The domestic corporation is a private educational institution in its fifth year of
operations, with the following data on income and expenses for the year:
Gross income from tuition fees
P5,000,000
Gross income from miscellaneous fees
600,000
Gross income from rentals, net of a 5% creditable withholding tax
190,000
Interest on bank deposits, net of withholding final tax
48,000
Operating expenses
4,000,000
How much is the MCIT?
How much is the income tax at the end of the year?
38
Chapter 8-Partnership, Estate and Trust

Two kinds of partnership for income tax purposes:
a. General professional partnerships; and
b. Other partnership
A general professional partnership is formed purely for the purpose of practicing the same profession and
there will be no other business except for that purpose.
Ex. Cesar and Jose are both lawyers. They can form a partnership to practice law. But they cannot use the
same business for other purpose.
A. Rules on general professional partnership and those that are not.
Items
General Professional Partnership
Income tax
Not subject to income tax
Liability for income tax
Liable only in their separate or

individual capacities
Based on the net income of the
partnership
Each partner shall report as gross
income his distributive share in
the partnership income subject to
a 10% withholding tax, if the
income is P720,000 and below.
But if it exceeds P720,000 it will
be 15%.
Computation for the distributive

share of the partners
Share in the partnership
Illustration:
General professional partnership
Assume the following:
Partner I
Partner J
Gross income
Partnershi
p
600,000
80,000
90,000
Expenses of the operations
200,000
30,000
20,000
Quarterly income tax paid

39
Not a general professional

partnership
Subject to the rules on tax for
corporations
Both the partnership and the
partners
Based on the net income after tax
of the partnership
The share of a partner in the
partnerships distributive net
income of a year, even if not
actually received, will be
considered actually received on
the same year the net income is
determined subject to 10% final
tax.
Not a general professional
partnership
Partnershi Partner
Partner
p
K
L
1,000,000
400,000
520,00
0
600,000
250,000
300,00
0
100,000
12,000
25,000
Income is to be shared equally
Solution:
Gross income
Less: Expenses
Net income
Income tax at 30%
Less: Quarterly income tax
paid
Income tax still due
Distributive income:
Net income
Income tax
Distributive income
Gross income share in the
partnership income (1/2)
Final tax at 10%
Gross income own
600,000
200,000
400,000
0
1,000,000
600,000
400,000
120,000
100,000
20,000
400,000
0
400,000
400,000
120,000
280,000
200,000
200,000
140,000
14,000
80,000
90,000
400,000
280,000
290,000
400,000
Less: Expenses - own
30,000
20,000
250,000
Personal exemption
50,000
50,000
50,000
200,000
220,000
100,000
Income tax (graduated rates)
37,500
42,500
14,500
Less: Withholding income tax

by the partnership (10%)
Less: Quarterly income tax
paid
20,000
20,000
Total
Taxable income
140,00
0
14,000
520,00
0
520,00
0
300,00
0
50,000
170,00
0
30,000
12,000
25,000
17,500
22,500
2,500
5,000
B. Tax Formula for Taxable Estate and Taxable Trust

Items
Taxable Income
Tax exemption
Taxable Estate
Taxable income is the same as
individual except that a special
deduction for any amount of
income paid, credited or
distributed to the heirs
P20,000
40
Taxable Trust
The same as taxable estate and in
addition a special deduction for
any amount of the income
applied for the benefit of the
grantor.
P20,000
Tax rates
Income tax returns (ITR)
Graduated rates for individuals.

Creditable withholding tax on the
heir 15%,
Shall be filed if the gross income
is P20,000 or more and the tax
paid by the executor or
administrator.
Graduated rates for individuals.

Creditable withholding tax on
the beneficiary 15%.
Same as taxable estate and tax is
paid by the fiduciary.
Illustration: The estate administrator and the heirs as income taxpayers. Mr. Reyes died leaving a net
estate of P3,000,000. The heir of the estate is Mr. Cruz.
Gross income of the estate
Expenses of the estate
Withholding income tax (5%)
Amount given to Mr. Cruz
P300,000
50,000
15,000
50,000
Data for Mr. Cruz:

From the properties (called corpus)
From the current years income
Expenses
Income tax withheld from Mr. Cruz
P100,000
50,000
10,000
7,500
Gross income
Additions/Deductions
Expenses
Income distribution
Net income
Less: Exemption
Taxable income
Income tax (graduated
rates)
Less: Withholding income
tax on rent
Estate
P300,000
Beneficiary Mr. Cruz

P50,000
(50,000)
(50,000)
200,000
(20,000)
180,000
32,500
(10,000)
50,000
90,000
(50,000)
40,000
4,000
(15,000)
(7,500)
17,500
(3,500)
Illustration if we include the trust:

Assuming a taxable trust administered in the Philippines, had gross income from the
property held in trust of P490,000 and expenses of P350,000. There was a quarterly
income tax paid of p2,500. It was provided in the trust documents that P10,000 of
each years net income shall be used for the payment of premium of life insurance
of the grantor. For the year it distributed P40,000 out of the years income to the
beneficiary. Shown below is the computation of the income tax of the trust.
Gross income
P490,000
41
Less: Deductions for:

Expenses
Distribution to heir
Distribution to grantor
Exemption
Total deductions
Taxable income
Income tax
Less: quarterly payments
(350,000)
(40,000)
(10,000)
(20,000)
(420,000)
70,000
8,500
2,500
6,000
Problem Solving:
1. PJ & Co is a general professional partnership, with Partners Pedro and Juan
sharing equally in the partnership net income or net loss. In a calendar year,
the partnership and the partners had the following income tax data:
PJ & Co:
Gross income
P1,000,000
400,000
Partner Pedro:
Gross income
Expenses related to the gross income
600,000
300,000
Partner Juan:
Gross income
700,000
450,000
(Any distribution made to the partners was subjected to a creditable

withholding income tax.)
How much is the income tax of all the taxpayers?
2. RD & Co is a general professional partnership. Its partners, Mr. Ric and Mr.
Dan share equally in the partnership net income or net loss. The partnership
and the partners had the following information:
RD & Co:
Gross income
P1,200,000
500,000
Advances made by the partners form partnership income:

Partner Ric
200,000
Partner Dan
100,000
Partner Ric:
Gross income (not including amounts received
from RD & Co)
42
900,000
460,000
Gross income (not including amounts received

from RD & Co)
500.000
600,000
Partner Dan:
(Any distributable net income to the partners was subjected to a creditable

withholding income tax)
How much is the income tax of all the taxpayer?
3. FE & Co is a general partnership in trade, with partners Fred and Erap sharing
equally in the net profit or net loss. The partnership and the partners had the
following information:
FE & Co
Fred
Erap
Gross income
P2,000,000
P700,000
P800,000
Expenses
1,000,000
320,000
410,000
How much is the income tax of the partnership?
How much is the income taxes of the partners?
4. MG & Co is a trading company, a partnership with Messrs. Mike and Glorio
sharing equally in the partnership net income or net loss. Data for the year
2013 (fourth year of operations) follow:
Gross income
Expenses
Advances from years net income:
To Mike
To Glorio
P6,000,000
5,800,000
300,000
0
How much is the income tax of the partnership, if any?

What are the income taxes of the partners?
5. Mr. Rosales died leaving a net estate of P10,000,000. He had two (2) children,
Messrs. Ron and Job. The estate is under administration. Data are as follow:
Estate
Ron
Job
Gross income
P900,000
P400,000
P360,000
Expenses
200,000
100,000
120,000
Distribution of
income:
To Ron
50,000
To Job
100,000
Income taxes were withheld when proper:
How much is the income tax of the estate?
How much is the income tax still due from each of the heirs?
6. Under the terms of a trust, Mr. Kent, the fiduciary, must accumulate the
income of the trust and turn over such income to the beneficiary, Mr. Larry,
43
when Mr. Larry shall have finished a college degree, but to make a
distribution or application of such income, if Mr. Larry shall need the money to
finish his college course. In a taxable year the trust had the following
information:
Gross income
Distribution of income to beneficiary
P500,000
40,000
On any taxable gross income, deduction is taken at forty percent (40%) of

such gross income. Income taxes were withheld when proper. The income tax
still due from any party to the trust relationship?
7. Mr. V created 2 trusts (No1 and No2) in favor of Mr. T. No1 and No2 had a net
income from their respective properties of P400,000 and P700,000, after a
distribution of income by each of P40,000 to Mr. T. There were withholding
taxes , when required.
Income tax shown on the income tax return of No1 and No2?
Income tax still due from No1 and No2?
Income tax still due from Mr. T if he claims a deduction equal to 40% of any
taxable gross income?
CHAPTER 9: TAX ON JOINT VENTURES AND CO-OWNERSHIP

1. Joint Ventures
Joint Venture Not a Corporation
1. Provision
of law
based on
the
meaning
of a
corporatio
n in
taxation
2. Income
taxation
3. Application
a. Joint ventures for the

purpose of undertaking
construction projects
b. Joint ventures for engaging
in petroleum, coal,
geothermal and other energy
operations pursuant to an
operating or consortium
agreement under a service
contract with government.
These joint ventures are not
subject to income tax, but each
member of the joint venture shall
be taxable on the share of income
distributed by the joint venture.
A Co and B Co both in construction

business formed a joint venture to
build condo projects with an agreed
sharing of income to be divided
44
Joint Venture
Corporation
Except joint
ventures
mentioned as not
a corporation.
Subject to income
tax, but the
distributable
income is exempt
from income tax
under the
provision of
intercompany
dividend.
X Co and Y Co,
are both freight
and brokerage
companies. They
equally.
Joint
Vent
ure
Gro 40,0
ss
00,0
inco 00
me
Exp 20,0
ens 00,0
es
00
Qua
rterl
y
inco
me
paid
A
Co
B
Co
70
0,0
00
80
0,0
00
25
0,0
00
12
5,0
00
30
0,0
00
16
0,0
00
formed a joint
venture,
contributing their
resources
agreeing to divide
the income
equally:
Joint
Ventu
re
Gros 3,000
s
,000
inco
me
Expe 1,500
nses ,000
Quat 300,0
erly
00
inco
me
tax
Solution:
A. Joint Venture Not a Corporation
Gross Income
Less: Expenses
Taxable income
Distributable
income
Share in the joint
venture
Own gross
income
Total
Less: Own
expenses
Taxable income
Income tax as
corporation (30%)
Less: Quarterly
income tax paid
Income tax still
due
Joint Venture
40,000,000
20,000,000
20,000,000
20,000,000
45
A Co
B Co
10,000,000
10,000,000
700,000
800,000
10,700,000
250,000
10,800,000
300,000
10,450,000
3,135,000
10,500,000
3,150,000
125,000
160,000
3,010,000
2,990,000
B. Joint Venture as a Corporation

Gross income
Less: Expenses
Taxable income
Income tax (30%)
Less: Quarterly
income tax paid
Income tax still
due
Taxable income
Less: Income tax
paid
Net income after
income tax
(distributable
income)
Share in the joint
venture net
income
Income tax
Joint Venture
3,000,000
1,500,000
1,500,000
450,000
300,000
X Co
Y Co
525,000
525,000
Exempt
(Intercompany
dividend)
Exempt
(Intercompany
dividend)
150,000
1,500,000
450,000
1,050,000
2. Co-ownership
It is an instance or a situation when more than one person are the owners or heirs
of one property and that they decided to settle the inheritance through amicable
settlements among themselves. During the period of settlement, the property is
administered by the appointed administrator among the heirs or all of the heirs for
whatever has been agreed upon by all of the parties. So it is like a case of an estate
not under administration by a third party, just like an extrajudicial settlement.
Ex: Donation of property to two or more beneficiaries
Rules:
Provision of law
Co-ownership
1. Exempt from
income tax.
2. Limited to the
preservation of
property and
collection of
income therefrom
46
Not a co-ownership
If the undivided income
were invested by the
co-owners in other
income-producing
activities or properties it
becomes a partnership
subject to tax like a
corporation.
Problem: Messrs ANDY and BERT inherited from their father a piece of land with an
apartment thereon. The estate is not under administration. The property had a net
income of P200,000.
Solution:
Coownership
200,000
Net
income
Income
tax as a
corporatio
n
Amount
for
distributio
n
Share in
the coownership
Final tax
at 10%
Add: Own
business
income
Total
Less:
Personal
exemptio
ns
Taxable
income
Not a Coownership
200,000
60,000
200,000
ANDY
100,000
BERT
100,000
140,000
ANDY
70,000
BERT
70,000
7,000
7,000
200,000
180,000
200,000
180,000
300,000
50,000
280,000
50,000
200,000
50,000
180,000
50,000
250,000
230,000
150,000
130,000
Problems:
1. Mr. Ramon died leaving a net estate of P15,000,000. The estate is not under
administration. In a year , the estate had a net income of P2,000,000 without
any distribution of property or income to the heirs. The heirs are Mr. Chit and
Mr. George, both without any income from other sources. From any taxable
gross income, each claims a deduction equal to forty percent (40%) of such
gross income. Income taxes were withheld when proper.
What is the income tax due from the estate?
What is the income tax of each of the heirs?
2. Messrs Ric and Rod allocated between themselves, at one-half each, a piece
of land that they inherited from their father. Seeing the potential of the
47
property on earning income, they contributed P2,000,000 each to build a

high-rise building to be rented out to the tenants. In a taxable year, the
property had the following data:
Rent ncome, net of a 5% withholding income tax
Expenses on the property
P9,500,000
4,000,000
How much is the income tax due from each of the owner?
3. High Co and Low Co are in construction business. They formed a joint venture
to build a high-rise condominium building for an owner of land contributing
labor and capital, with an agreement to share equally in the net income or
net loss from the project. IN the year that the building was started and
completed, the construction project occasioned to High Co and Low Co the
following:
Gross income
Interest expense paid to banks
P4,000,000
1,200,000
100,000
How much is the income tax of the joint venture?

How much is the income tax of High Co and Low Co?
4. Jake Co and Kay Co are both operating bus companies. They formed a joint
venture, pooing their resources on a project of transporting people and cargo
from Manila to any parts of the Philippines. They agreed participation in the
net income or net loss of the joint venture equally every end of the year. The
joint venture and the members had the following data:
Gross income
Expenses
Joint venture
20,000,000
9,000,000
Jake Co
8,000,000
4,000,000
Kay Co
5,000,000
2,000,000
How much is the income tax of the joint venture?

How much is the income tax of the members of the joint venture?
CHAPTER 10 GROSS INCOME CAPITAL GAINS AND LOSSES

Capital assets are those assets not used in business.
Else, it is an ordinary assets. Four categories of ordinary assets are:
48
a. Stock in trade or other property of a kind, which can be included in the

Inventory of the taxpayer at the end of the taxable year.
b. Property held by the taxpayer in the ordinary course of business or trade.
c. Property used I trade or business subject to allowance for wear and tear.
d. Real property used in trade or business.
Rules on capital and losses
a. The transaction on the capital asset should be a sale or exchange.
b. With the transaction being a sale or exchange, if the taxpayer is:
Corporation
An individual, estate or trust
The capital gain or loss should always be The capital gain or loss should be
considered at 100% regardless of the
considered at:
length of the holding period of the asset
1. 100%, if the asset was held for not
more than 12 months
2. 50%, if the asset was held for
more than 12 months.
Capital losses are deductible only to the
Capital losses are deductible only to the
extent of capital gains
extent of capital gains.
Net capital loss carry-over is not
Net capital loss carry-over is available.
available
Net capital loss carry-over. If any taxpayer, except corporation will sustain in any
taxable year a net capital loss, such loss, in an amount not in excess of net income
of such year, shall be treated as a loss in the succeeding year from a sale or
exchange of a capital asset held for not more than 12 months.
Example 1: Mr. Mar, a citizen of the Philippines, had the following income and losses
for the calendar year2011:
Gain on sale of ordinary asset
Gain on sale of capital asset held for six months
Loss on sale of capital asset held for fourteen months
Loss on sale of ordinary asset
Dividend from a resident corporation
P250,000
20,000
12,000
10,000
24,000
30,000
How much is the taxable income for 2013?

Solution:
Dividend income
Gain on sale of ordinary asset
Loss on sale of ordinary asset
Ordinary net income
Gain on sale of capital asset held for
6 mos
100% thereof
Loss on capital asset held for 14 mos
250,0000
30,000
20,000
24,000
12,000
12,000
10,000
49
(4,000)
276,000
50% thereof
Net capital gain
Total
Less: Basic personal exemption
Taxable income
5,000
7,000
283,000
50,000
233,000
Example 2:
Mr. No, a citizen of the Philippines, had the following data for 2012 and 2013:
Interest from notes receivables
Capital gain on assets:
Personal computer held for 8 months
Appliances, held for 2 years
Capital loss on redemption bonds, held for 4 years
2012
90,000
2,000
2013
78,000
4,000
30,000
40,000
70,000
How much is the taxable income for 2012 and 2013?

Solution:

Interest income
Ordinary net income
Capital gain (100%)
Capital gain (50%)
Capital loss (50%)
Net capital loss
Net capital loss carry-over
from 2102
Net capital gain
Total
Less: Basic personal
exemptions
Taxable income
2012
90,000
2,000
92,000
2013
78,000
4,000
82,000
30,000
20,000
35,000
(5,000)
(5,000)
50,000
15,000
97,000
50,000
42,000
47,000
Example 3: Mr. OBrien, a citizen of the Philippines, had the following data for 2012
and 2013:
2012
2013
80,000
90,000
Interest from notes receivable
4,000
2,000
Capital gain on shares of foreign corporation held for 3
50,000
years
Capital gain on appliances held for 8 months
70,000
50
Capital loss on bonds, held for 5 months
120,000

Solution:
Interest income
Ordinary net income
Capital gain (50%)
Capital gain (100%)
Capital loss (100%)
Net capital loss
Net capital loss carry-over from
2012
Net capital gain
Total
Less: Basic personal
exemptions
Taxable income
2012
80,000
4,000
84,000
2013
90,000
2,000
92,000
25,000
70,000
120,000
(95,000)
(34,000)
50,000
36,000
128,000
50,000
34,000
78,000
Problem solving:
1. The taxpayer is a corporation:
Gross income from business
Business expenses
Gain on sale of capital asset held for 8 mos
Loss on sale of capital asset held for 4 years
How much is the taxable income?
P6,000,000
2,000,000
100,000
150,000
2. The taxpayer is an individual:

Gross income from the practice of profession
Expenses on the practice of profession
Gain on the sale of capital asset held for three (3) years
Loss on sale of capital asset held for nine (9) months
How much is the taxable income?
P1,000,000
600,000
300,000
60,000
3. Taxpayer is a taxable estate:

Gross income from
business
Expenses of the business
Capital gain on assets:
Held for two (2) years
Held for six (6) months
Capital loss on assets:
Held for two (2)
months
Held for two (2) years
2012
2,000,000
2013
3,000,000
1,800,000
1,600,000
400,000
400,000
450,000
100,000
51

4. Taxpayer is an individual:
Year 2012:
Net capital loss of P200,000 when the net taxable income was P150,000.
Year 2013:
Gross income from rent
P4,000,000
Expenses of the rent
3,200,000
Capital gain on asset held for two(2) years
400,000
Capital loss on asset held for five (5) months
100,000
How much is the taxable income for 2013?
Chapter 11- Income from business, dividends, interest, rent and

services
52
Gross Income = Total Sales Cost of goods sold + any income from incidental and
outside sources. This any income could be dividend income, interest income, or gain
on sale of assets not subjected to a final tax or capital gains tax.
Dividends represents a distribution of profits.

Direct dividends is one where the paying corporation declares that the distribution
is a dividend payment. Normally, it is embodied in a resolution by the Board of
Directors.
Indirect dividends is a distribution of profits in the form of payment of services,
properties , etc.
Examples of Indirect dividends:
1
2
3
4
Payment to a stockholder on property purchased from him in excess of the

FMV of the property. The excess is an indirect dividend.
On payment to a stockholder for services rendered to the corporation at an
amount in excess of reasonable compensation for the services.
On cancellation of indebtedness of the stockholder to the corporation.
Payment to the stockholder for transportation expenses, representation, and
etc.
Dividend is exempt from income tax if:

1
2
Received by a domestic or resident corporation.

Stock dividend
Dividend is subject to final tax if:

1
2
Received by an individual from a domestic corporation.

Received by a non-resident corporation from a domestic corporation.
Cash and property dividend:

1
2
Cash dividend when taxable , the measure of money received is the basis.
In property dividend, the basis of taxable income is the fair market value of
the property received.
Stock dividend:
Under the NIRC the stock dividend may or may not be taxable. A stock dividend is
taxable if it gives the shareholder an interest different from that which his former
stock represented.
Proportionate interest of shareholders before and after a stock dividend
53
Case A. Stock dividend is not taxable

Stockholder
Before
Dividends:
Shares
A
B
C
D
E
100
100
100
100
100
500
Before
Dividends:
% of
ownership
20
20
20
20
20
100
Stock
Dividend:
10%
After
Dividends:
Shares
10
10
10
10
10
50
110
110
110
110
110
550
Stock
Dividend:
10%
After
Dividends:
Shares
10
110
100
110
100
110
530
After
dividend: %
of
ownership
20
20
20
20
20
100
Case B. Stock dividend is taxable

Stockholder
Before
Dividends:
Shares
A
B
C
D
E
100
100
100
100
100
500
Before
Dividends:
% of
ownership
20
20
20
20
20
100
10
10
30
After
dividend: %
of
ownership
20.76
18.88
20.76
18.88
20.74
100
Taxable/ non-taxable stock dividend determined by the classes of stock issued and
outstanding at the time of dividend:
Stock issued and
outstanding
Common
Common
Common and preferred
Common and preferred
Stock dividend
Taxable/Not taxable?
Common
Preferred
Common
Preferred
Not taxable
Not taxable
Taxable
Taxable
Determination of the New Cost per share

1
Using the FIFO Method
Ex. Mr. ALBA, a resident citizen of the Philippines., acquired shares of stock of BOSS
Com., a resident foreign corporation and sold some of such shares directly to a
buyer. The shares of stock of BOSS Com. that are issued and outstanding are
common shares only. Transactions were:
54
Purchases and dividend;

Feb 14, 2012, 100 shares, at P13,200;
June 5, 2012, 60 shares , at P8,250;
November 2, 2012, 20 shares at P2,640.
June 2, 2013 18 shares, as stock dividend, with fair market value of P140 per
share.
Sale:
July 5, 2013, 80 shares at P142.
Taxable dividend income?
New cost per share after receipt of the stock dividend, if costing is FIFO method?
Gain or loss on the sale?
Capital loss or gain to consider in computing the taxable income at the end of the
year?
Solution:
Date of
Purchase
Lot 1
Lot 2
Lot 3
February
14, 2012
June 5,
2012
November
2, 2012
Shares
before
Dividend
100 shares
Total Cost
Shares After
Dividend
Per Share
P13,200
110 shares
P120
60 shares
P8,250
66 shares
P125
20 shares
P2,640
22 shares
P120
Sale, July 5, 2013

Selling Price (P142 x 80 shares)
P11,360
Less: Cost (P120 x 80 shares)
9,600
Gain on sale of shares
1,760
50% of capital gain
P
55
880
Using the Moving Average Method.
Ex. COSME Company is a domestic corporation. It had investment in the shares of

stock of JOSH Company, a resident corporation. Acquisitions were:
March 5, 2012, Purchase of 200 shares for P20,000.
July 7, 2013, Purchase of 100 shares for P13,000
October 2, 2013, Purchase of 50 shares for P4,800.
November 2, 2013, receipt of 20% Stock dividend.
Sale directly to a buyer:
November 10 2013, sale of 70 shares for P6,300.
Taxable stock dividend?
New cost per share after receipt of the stock dividend, if costing is moving
average method?
Gain or loss on the sale?
Capital gain or loss to consider in computing for the taxable income at the
end of the year?
Solution:
Date
March 5, 2012
July 7, 2013
October 2, 2013
No. of shares
200 shares
100 shares
300 shares
50 shares
350 shares
70 shares
Cost/share
P100
P130
P110
P96
P108
56
Total Cost
P20,000
P13,000
P33,000
P4,800
P37,800
0
420 shares
P90
P37,800
Sale, November 10, 2013:

Selling Price (70 shares)
P6,300
Less: Cost (P90 x 70 shares)
P6,300
Gain on sale
Capital loss to consider
Assuming another classes of shares were issued as dividends: For example,

preferred shares:
Problem example:
Mr. ERNIE, a resident citizen of the Philippines acquired on June 2, 2011 100
common shares of stock at P150 per share, of FOX Co., a resident corporation. Mr.
ERNIE received a one hundred percent stock dividend in preferred. At the time of
the receipt of dividend, the fair market value of the shares were: Common, P200 per
share, and preferred, P50 per share. On Feb 14, 2013, ten common shares were sold
at P220 per share, and ten preferred shares were sold at P55 per share.
New cost per share after receipt of the stock dividend, of common shares? Of
preferred shares?
Capital gain or loss to consider in year-end taxable income?
Solution:
Acquisition cost (P150 x 100 shares)
P15,000
Fair market value at the time of dividend, common (P200x100 shares)
P20,000
Fair market value at the time of dividend, preferred (P50 x 100 shares)
P 5,000
Total
Adjusted cost
To common
P25,000
Per class
P12,000
Per share
P120
57
(P20,000/P25,000 x
P15,000)
To preferred
(P5,000/P25,000 x
P15,000)
P3,000
P30
Common
P2,200
Preferred
Sale of:
Selling price
Common (P220 x 10
shares)
Preferred (P55 x 10
shares)
Less: Cost
Common (P120 x 10
shares)
Preferred P30 x 10 shares)
Gain on sale
50% of the capital gain
P550
P1,200
P300
P250
P125
P1,000
P500
Liquidating dividend When a corporation distributes all of its assets in complete

dissolution and liquidation, there is no dividend income to the shareholder receiving
a liquidating dividend. There is instead a sale or exchange of property. Any gain or
loss sustained by the shareholder, whether individual or corporate, is taxable
income or deductible loss.
For example: Mr. FOE, a resident citizen of the Philippines. On April 5, 2008, he
purchased 200 shares of stock of GAGA Corporation, a resident corporation with
stock issued and outstanding of common only, for P22,000. On October 2, 2010, Mr.
FOE received a 10% stock dividend. On Nov 2, 2010, GAGA Company was dissolved
and Mr. FOE receiving a liquidating dividend of P90 per share.
Capital gain or loss to consider in computing taxable income at the end of the year?
Solution:
Liquidating dividend received P90 x 220 shares
P19,800
Basis of the shares to Mr. FOE
P22,000
Capital loss
P 2,200
50% of the capital loss

1,100
58
Interest income
As a general rule interest income is subject to income tax.
Rent
The consideration paid by the lessee to the lessor for the use of the property of the
latter is a taxable income.
Included:
The payment of obligations of the lessor to the third parties (e.g. loans, interest,
taxes, insurance premiums, etc.) should be considered as additional rent income.
Advance rentals:
1
2
3
If the advance rental is in the nature of prepaid rent, received by the lessor
under a claim of right and without restrictions as to use, the entire amount is
taxable at the time it was received.
If the amount received is a loan, there is no income upon its receipt by the
lessor.
If the amount received is in the nature of security deposit for the faithful
compliance by the lessee of the tems of the contract, there is no income to
the lessor.
Chapter 12- INCOME FROM FARMING AND OTHER SOURCES

Farming
Farm includes stock, dairy, poultry, fruit, and truck farms , also plantations,
ranches, and all lands used for farming operations.
Farmers all individuals, partnership, or corporation that cultivate, operate, or
manage farms for gain or profit, either as tenants or as owner.
The NIRC allows accounting for income and expenses of a farmer on a cash or
accrual basis.
59
RULES IN THE COMPUTATION OF GROSS INCOME OF FARMERS:

1. A farmer distinguishes between livestock and farm products raised and sold,
and livestock and farm products purchased and sold.
a. For livestock and farm products purchased and sold, the measure of
gross income is the profit from the sale;
b. For livestock and farm products raised and sold, the measure of
gross income si the selling price.
2. Expenses of raising livestock and farm products are deductions from gross
income.
3. Proceeds of crop or livestock insurance constitute gross income;
4. A farmer on the accrual method of accounting considers inventories at the
beginning and at end of the taxable year. An increase in inventory is reflected
in increased gross income, while a decrease in inventory is reflected in a
decreased gross income.
5. Loss from the sale of livestock and farm products does not go into the
computation of gross income of a farmer in the cash method of accounting.
For a farmer in the accrual method of accounting such loss is an item in the
computation of gross income.
ILLUSTRATIVE PROBLEMS:
Problem 1.
Sales of livestock and farm products raised
Sales of livestock and farm products purchased
200,000
Sale of old farm tractor
Expenses of raising livestock and farm products
300,000
Cost of livestock and farm products purchased and sold
120,000
Book value of farm tractor sold
Increase in inventory (beginning-P6,000; ending-P10,000)
Gross income from farming, if cash method of accounting?
Gross income from farming, if accrual method of accounting?
P800,000
50,000
20,000
4,000
Solution:
1. Cash method of accounting
60
P800,000
P200,000
Less: Cost of purchases
120,000
Sale of old farm tractor
P 50,000
Less: Book value
20,000
80,000
30,000
Gross income cash method
P910,000
2. Accrual method of accounting

Inventory, end
10,000
P800,000

1,000,000
200,000
Cost of livestock and farm products purchased
P120,000
Inventory beginning
6,000
Total deductions
(126,000)
Sales of farm tractor
P 50,000
Less: Book value
20,000
Gross income accrual method
30,000
P914,000
Or
Gross income, cash method
P910,000
Add: Increase in inventory
4,000
P914,000
Problem 2
P900,000

300,000
Rent income from farm equipment
5,000
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Expenses of raising livestock and farm products

400,000
350,000
Decrease in inventory ( beginning-P5,000; ending-P2,000)
3,000
1. Gross income from farming cash method of accounting?

2. Gross income from farming- accrual method of accounting?
Solution:
1. Cash method of accounting
P900,000

Less: Cost
P300,000
350,000
Loss
(P 50,000)
5,000
Gross income cash method
P905,000
2. Accrual method of accounting

Inventory, end
2,000
P900,000

1,200,000
300,000
P350,000
Inventory, beginning
5,000
(355,000)
5,000
P852,000
Or
Gross income, cash method
P905,000
Less: Inventory decrease
P 3,000
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Loss on sale of livestock and farm products purchased

53,000
50,000
P852,000
BAD DEBTS RECOVERY

RULE ON THE RECOVERY OF ACCOUNTS PREVIOUSLY WRITTEN OFF
It constitutes a receipt of taxable income if in the year of recognition of being
worthless, the write off resulted in a tax benefit (reduction of taxable income)
Year 1:
Gross income
Deductions before written off for bad debts
Taxable income (net loss) before written off for
bad debts
Deduction for accounts receivable written off
Taxable income (net loss) after written off for
bad debts
Year 2:
Recovery of accounts written off
Taxable income on the recovery
Thus,
Reported taxable income Year 1
Income recognized in bad debts recovery, Year
2
Correct taxable income in Year 1 reported in
two years
A Co
500,000
200,000
300,000
B Co
400,000
460,000
(60,000)
C Co
500,000
495,000
5,000
2,000
298,000
2,000
(62,000)
6,000
(1,000)
2,000
2,000
2,000
None
6,000
5,000
298,000
2,000
0
0
0
5,000
300,000
5,000
Problem 1:
Bad debts recovery
P10,000
Gross income on the bad debts recovery?

Answer: Gross income on the bad debts recovery
P10,000
Problem 2:
Taxable income, 2009 before write off of bad debts
Write off of bad debts, 2009
P100,000
15,000
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Recovery in 2010 on the account written off
15,000
Gross income in 2010 on the bad debts recovery?

Answer : Gross income on the bad debts written off
P15,000
Problem 3:
Net loss 2009 before written off of bad debts
P50,000
Write off for bad debts, 2009
10,000
Recovery in 2010 on the accounts written off
10,000
Gross income in 2010 on the bad debts recovery?

Answer: P0.
Problem 4:
Taxable income, 2009, before written off of bad debts
P20,000
Write off for bad debt, 2009
25,000
Recovery in 2010 on the account written off
25,000
Gross income in 2010 on the bad debt recovery?

Answer: Gross income on the bad debt recovery
P20,000
Problem 5:
Taxable income, 2009, before write off for bad debt
P20,000
Write off for bad debt, 2009
25,000
Recovery in 2010 on the accounts written off
12,000
Gross income in 2010 on the bad debt recovery?
64
Answer: Gross income on the bad debt recovery

P7,000
TAX REFUND
As a general rule, tax refund related to business or exercise of profession, is a
taxable income.
The following tax refunds are not taxable:
1.
2.
3.
4.
Philippine income tax, except the fringe benefit tax.

Estate or Donors tax,
Special assessment;
Income tax of a foreign country, if the taxpayer claimed for it, in the year it
was paid or incurred, a tax credit against ( a reduction of) the Philippine
income tax;
5. Stock transaction tax ( a business tax)
CANCELLATION OF DEBT
1. It may amount to payment of income for services rendered and payment of
indebtedness and therefore an income in that amount is realized by the
debtor.
2. It may amount to a gift. It need not be included in the debtors income.
3. It may amount to a capital transaction which is a return of capital.
Problem:
Mr. A had an indebtedness of P100,000 to C Co:
How much is the gross income of Mr. A if:
The indebtedness was cancelled because Mr. A rendered services to C Co, worth
P100,000?
The indebtedness was cancelled because Mr. A rendered services to C Co., worth
P80,000, with the balance still to be paid by Mr. A?
The indebtedness was cancelled without Mr. A doing anything the cancellation being
merely an act of liberality of C Co.?
65
Mr. A is a stockholder of C Co. and the indebtedness was cancelled without Mr. A
doing anything, the cancellation being merely an act of liberality of C Co.?
Solution:
If Mr. A rendered services (income from personal services)
P100,000
If Mr. A rendered services worth P80,000 (income from personal services)

P80,000
If Mr. A did not do anything (gift)
P0
If the creditor is Mr. As corporation (indirect dividend)

P100,000
COMPENSATORY DAMAGES
1. If it constitutes returns of capital, it is not taxable. E. g. Moral damages for
personal actions, such as alienation of affection, the slander or breach of
promise to marry.
2. If it is recovery of lost profits, it is taxable. E. g. damages recovered in patent
infringement.
Problem:
For patent infringement
P500,000
For physical injuries
50,000
For unfair competition
400,000
For libel
100,000
For damage to property
60,000
Gross income from damage recoveries?
Solution:
Damage for patent infringement
P500,000
Damages for unfair competition
P400,000
66
Gross income from damage recoveries
P900,000
PRIZE OR AWARD
Prize or award received is generally taxable. (gains derived from labor)
Exemption:
1. Prizes and awards received in recognition of religious, charitable, scientific,
educational, artistic and literary or civic achievements are exclusions from
gross income if:
a. The recipient was selected without any action on the his part to enter a
contest or proceedings.
b. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
2. Prizes and awards granted to athletes in local and international sports
competition and tournaments held in the Phils or abroad and sanctioned by
their national sports associations.
3. Prizes and awards in the nature of gifts.
Problem:
Prizes won in an essay contest
The Nobel Peace Prize
50,000
500,000
Award won for honesty at work
10,000
Prize won by Manny Pacman Pacquio in a world billard competition

1,000,000
Gross income from the prize?
Solution:
Prize won in an essay contest (gain derived from labor) but with final tax
P50,000
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CHAPTERS 13 OPTIONAL STANDARD DEDUCTION

DEDUCTIONS:
1. Optional standard deduction (OSD) or
2. Itemized deductions
Deductions it is defined as the amounts allowed by law to reduce the gross income
to taxable income.
The OSD is a deduction from gross income allowed to be taken in lieu of the
itemized deduction. It can be claimed by any type of taxpayer who are exclusively
enumerated below. Excluded also are those taxpayers who are receiving
compensation income.
Who can claim OSD?
Individual taxpayer
Gross income from self employment
1. A resident citizen
2. A non-resident citizen
3. A resident alien
Corporation and partnership

1. Domestic corporation
2. Resident corporation
3. General professional partnership
4. Any other entity on which the
rules for domestic corporations
apply (i.e. partnership other than
general professional partnership,
taxable joint ventures, and
68
taxable co-ownerhip)
Illustrative application of the two taxpayer:

1. Merchandising Business
Individual
Gross sales
Sales
returns
Sales
discounts
Net sales
Less: Cost
of sales
Inventory,
beg
Purchases
Purchase
returns
Purchase
discounts
Total
Freight in
Goods
available for
sale
Inventory,
end
Gross profit
from sales
Less: OSD
1,200,000 x
40%
545,000 x
40%
Balance
Less:
Personal
exemption
Taxable
income
1,200,000
Corporatio
n
1,200,000
150,000
150,000
1,050,000
1,050,000
505,000
505,000
545,000
545,000
100,000
50,000
30,000
500,000
20,000
10,000
30,000
470,000
500,000
15,000
515,000
10,000
480,000
218,000
69
65,000
50,000
327,000
0
15,000
327,000
B. Service Business
Gross revenues
Less: Direct cost of
services
Rentals
Depreciation
Medical supplies
Electricity water, and
light
Salaries and 13th month
pay
Gross income
Less: OSD
980,000 x 40%
460,000 x 40%
Basic personal
exemption
Taxable income
Individual
980,000
Corporatiom
980,000
520,000
520,000
460,000
460,000
120,000
20,000
50,000
150,000
180,000
392,000
50,000
184,000
0
18,000
276,000
Reminder: A taxpayer that claimed the OSD is not required to submit with the
Income Tax Return any financial statement, but the taxpayer should keep records
pertaining to gross income.
CHAPTERS 14 Itemized deductions
Itemized Deductions are expenses and losses related to trade or business. They
areL
a. Interest
b. Taxes
c. Losses
d. Bad debts
e. Depreciation
f. Depletion
g. Pension trust
h. Charitable and other contributions
i. Research and development
70
j.
Expenses in general
Interest
it must be paid or accrued on the taxpayers indebtedness. Indebtedness is a sum
of money owned by one person who is unconditionally bound to pay, and interest is
the amount paid for the use of money.
Generally it is 100% deductible but there will be downward adjustments, if the
taxpayer has interest income subject to final tax, the otherwise allowable deduction
for interest expense will be reduced by an amount equal to 33% of interest income
subjected to final tax.
But interest paid or accrued on taxes related to business or practice of profession
can be deducted in full.
Example:
X Company, a domestic corporation, with interest income on bank deposit of
P4,000, had the following data on interest expense during taxable year:
Interest expense on trade notes payable
P 5,000
Interest expense on late payment of business taxes
10,000
The deduction for interest expense would be computed as follows:

Interest expense on trade notes payable
P5,000
Less: 33% of P4,000

P3,680
1, 320
Interest expense for late payment of business

10,000
Deduction for interest expense
P13,680
Interest on asset acquired

1. As an outright deduction from gross income or
2. As a capital expenditure to form part of the cost of the asset.
Example:
71
A company borrowed P10,000,000 from a bank to construct a building to be used in

business. Interest on it was deducted in advance by the bank and the amount
released to A company was P8,000,000. The transaction will result in>
Alternative 1.
Cost of the building subject to depreciation
P8,000,000
Prepaid interest
2,000,000
Or
Alternative 2:
Cost of the building subject to depreciation
P10,000,000
Problem:
A Company is under accrual method of accounting. In in 2010:
Cost of the building constructed
P5,000,000
Life of the building
20 years
Interest on bank loan for the next 5 year, used to finance construction
Of building
1,000,000
Deduction in 2010, and in subsequent years, if interest expense is claimed as a

deduction for interest?
Deduction in 2010, and in subsequent years, if interest expense is capitalized?
Solution:
a. If interest is claimed as deduction:
Interest expense in 2010 and each of the next four years (P1,000,000/5)
P200,000
Depreciation per year (P5,000,000/20 years)
250,000
Total deductions in 2009 and each of the next 4 years
P450,000
Deduction beginning the sixth year
P250,000
72
b. If interest is treated as a cost of the asset:

Deduction each year beginning with 2009:
(P6,000,000/20 years)
P300,000
TAXES
Taxes paid or accrued in connection with the business are deductible from gross
income except:
1.
2.
3.
4.
5.
6.
Philippine income tax except for fringe benefit tax.

Donors tax
Special Assessment
Income tax imposed by a foreign country.
Stock transaction tax
VAT
Problem:
Philippine income tax
P100,000
Real estate tax
32,000
Donors tax
10,000
Special assessment
2,000
Value Added Tax
15,000
Stock transaction tax

5,000
Basic and additional community tax
1,700
Percentage tax
6,000
73
Interest for late payment of tax

2,100
Surcharge for late payment of various business taxes
9,000
Compromise penalty for violations on payment of taxes
4,000
City food and beverage taxes
200
Deduction for taxes?
Solution:
Fringe benefit taxes
P32,000
Real estate tax
10,000
Basic and additional community tax
1,700
Percentage taxes
6,000
City food and beverage tax

200
Total
P49,900
LOSSES
Losses are those actually sustained during the taxable year and not compensated
by insurance or other form of indemnity.
Requirements:
1. Incurred here in the Philippines.
2. Incurred in trade, business or profession.
74
3. Of property connected in the proceeding business, the loss was due to fire,
storm, shipwreck, or other casualty, or from robbery theft or embezzlement.
4. The taxpayer must submit a declaration of loss, which must not less thatn 30
days nor more than 90 days from the date of the discovery of the casualty. Or
robbery or theft or embezzlement; within 45 days from the discovery of the
loss.
Measure of loss:
1. The compensation that reduces the loss may be insurance or any other form
of indemnity.
2. In case of partial loss of property used in trade or business or in the practice
of profession, the measure of loss is the Cost to restore the property back to
its normal operating condition or Book value, whichever is lower, reduced by
insurance recovery or any form of indemnity.
Problem 1:
Total loss of an asset used in business in a casualty:
Cost of the asset
P2,000,000
Accumulated depreciation
P1,100,000
Insurance recovery
400,000
Deductible loss?
Solution:
Cost of the asset
P2,000,000
Less: Accumulated depreciation
1,100,000
Book value
Less: Insurance recovery
900,000
400,000
Deductible loss
Problem 2:
75
500,000
Partial loss on properties used in business

2
Asset 1
Cost to restore asset to its normal condition
P200,000
P100,000
120,000
180,000
Book value of asset at the time of loss

Insurance recovery
80,000
Asset
30,000
Deductible loss, Asset 1?

Deductible loss, Asset 2?
Solution:
Asset 1
Asset 2
Cost to restore the property to its normal condition
P200,000
P100,000
Book value of the asset
P120,000
P180,000
Whichever is lower
P120,000
P100,000
80,000
30,000
Less; Insurance recovery

Deductible loss
P 40,000
P70,000
NET OPERATING LOSS

A net operating loss is the excess of allowable deductions over gross income of the
business or enterprise for any taxable year.
NET OPERATING LOSS CARRY-OVER (NOLCO)
A Net operating loss will be carried over as a deduction from gross income for the
next three (3) consecutive years immediately following the year of such loss.
For example:
In pesos
Gross
income
Less:
Deductions
Net loss
Net income
2006
500,000
2007
600,000
2008
700,000
2009
500,000
2010
800,000
900,000
500,000
750,000
420,000
450,000
80,000
350,000
(400,000)
(50,000)
100,000
76
before
NOLCO
Less:
NOLCO2006
2008
Taxable
income
100,000
80,000
50,000
300,000
The unused net operating loss of P220,000 of the year 2006 could not be carried
over beyond 2009. The net operating loss of 2008 could be carried over.
Chapter 14 Bad Debts, Depreciation, Contributions and

Others
BAD DEBTS
Debts due the taxpayer, connected with trade or business, actually ascertained to
be worthless and charged off within the taxable year.
An account is worthless when it must be ascertained that with a reasonable degree
of certainty that the amount is uncollectible.
Cases:
1.
2.
3.
4.
The flight or disappearance of the debtor

Insolvency of the debtor
The death of the debtor
And other situations that may warrant worthlessness of the debt.
If the property is mortgaged, where under a foreclosure of a mortgage, the

mortgagee buys the mortgaged property and credits the indebtedness with the
purchase price, the difference between the purchase price and the indebtedness will
not be an allowable deduction for bad debt, for the property which was a security
for the debt stands in place of the debt. The determination of the loss in such a case
is deferred until the disposal of the property.
Problem 1:
77
The taxpayer had the following journal entry in the books of accounts:
Bad debts
50,000
Accounts receivable
50,000
How much is the deduction for bad debts?
Solution:
Deduction for bad debts
P50,000
Problem 2:
A Co., had a receivable of P500,000 from B Co. The indebtedness of B Co. was
secured by a mortgage on the property of B Co. When B Co. could not pay, A Co.,
foreclosed the on the mortgage and the property was awarded to A Co., (highest
bidder) at public auction for P400,000. The balance cannot be collected anymore.
How much is the deduction for bad debts of A Co?
Solution: P0.
Problem 3:
In 2010, A Co. sold the property for P450,000.
How much is the deduction for bad debts of A company?
Solution:
Basis of the receivable uncollected
P500,000
Less: Selling price of the property
450,000
Deduction in 2010
P 50,000
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DEPRECIATION
A REASONABLE ALLOWANCE for exhaustion, wear and tear (including allowance for
obsolescence) of property used in trade or business.
Depreciable assets
1. Tangible assets
2. Intangible assets (amortization)
Methods of depreciation
1.
2.
3.
4.
Straight line method

Declining balance method
Sum of the years digit method
Any other method which may be prescribed by the sec of finance, upon
recommendation of BIR.
Problem:
a. H co acquired a machine at a cost of P380,000. Scrap value was placed at P0,
and the useful life was estimated at 25 years. Depreciation was computed on
the straight line method. The annual depreciation would have been computed
as follows:
Cost
P380,000
Less: Scrap value
Depreciable base
P380,000
Annual depreciation (P380,000/25 years)
P 15,200
b. If in the preceding example on H Co., after depreciating the asset for twenty
years, it was determined that the life of the asset was not five years but ten
years?
Remaining depreciable cost (P380,000-P304,000)
P76,000
New annual depreciation charge (P76,000/10 years)
7,600
DEPLETION
79
The natural resources are called wasting assets. As the physical units
representing such resources are extracted and sold such assets move towards
exhaustion.
Example:
Land containing natural resources was purchased for P100,900,000. It was
estimated that the land after exploration of its natural resource, wii have a value
of P900,000. It was estimated that the natural resources supply was 5,000,000
tons. If withdrawal of resource from the land in 2009 was 500,000 tons, how
much was the deduction for the year?
Depletion charge per ton:
Purchase price
P100,900,000
Less: Residual value of the land

900,000
Depletion base
P100,000,000
Resource supply in tons

5,000,000
Depletion rate per ton (P100,000,000/5,000,000 tons)
Depletion for 2009 (500,000 x P20)
10,2000,000
P20
P
PENSION TRUSTS
Past service costs- Past services that requires lump sum payment to the pension
fund.
Present service costs for each year after the pension plan was set-up, there
should be a payment to the fund for pension for the services rendered during the
year by the employees.
This deduction for pension payments applies only to a pension plan that is
funded.
Problem:
A pension fund was set up in 2000 for retiring employees. In setting up the fund,
P1,000,000 was deposited as seed money for past service cost. Annual or
present service cost is P50,000, beginning 2000.
80
Deduction in 2000?
Deduction in 2008?
Deduction in 2012?
Solution:
Deduction in 2000:
1/10 of P1,000,000, on past service cost
Present service cost
P100,000
50,000
Total
P150,000
Deduction in 2008
P150,000
Deduction in 2012 (present service cost)
P 50,000
CONTRIBUTIONS AND DONATIONS

1. DEDUCTIBLE IN FULL
a. Donations to the GRP or to any of its agencies or political subdivisions, including
fully owned government corporations, exclusively to finance priority activities in
science, education, culture, health, economic development, human settlement,
youth and sports development.
b. Donations to foreign institutions or international organizations, in compliance
with agreements, treaties or commitments entered id into by GRP and the
foreign institutions in pursuance of special laws.
c. Donations to certain accredited non-government organizations (non-profit
domestic corporations), organized and operated exclusively for scientific,
educational, cultural, character building and youth and sports development,
charitable, social welfare, health and researches.
81
2. Deductible subject to limitations

a. The recipient of the contribution or gift is any of:
1. The GRP or any of its agencies, or any political subdivision thereof, for
exclusively public purposes (not included in the priority activities) or
2. Non-government accredited domestic corporations or associations which are:
a. Domestic and
b. Organized and operated exclusively for scientific, educational, cultural,
scientific, educational, cultural, etc.
3. The amount should not exceed five percent (5%) of the corporations taxable
income before deducting the contribution.
Problem:
N Co had a gross income from business of P1,000,000 and business expenses of
P400,000. It made during the year a contribution that is fully deductible of P10,000
and contribution subject to limitation of P50,000. The deduction for contribution is
P40,000 and the taxable income for the year is P560,000.
Solution:
P1,000,000
Less: Deduction for business expenses
400,000
Taxable income before contributions
600,000
Less: Contributions subject to limitations:

To L Association
P10,000
To M Association
P40,000
Total of actual
P50,000
5% of P600,000
P30,000
Allowed (Whichever is lower)
30,000
Taxable income
P570,0000
RESEARCH AND DEVELOPMENT COSTS
82
These expenses are for improvements of processes and formulas, as well as the
development of improved or new product.
Two ways to account for research and development:
1. For acquisition or improvement of property subject to depreciation or
depletion .
2. Other research and development costs.
a. As an outright deduction (for the full expenditures), in the year the
expense was paid or incurred.
b. As a deferred expense to be spread and recognized as deduction over
a period of not less than 60 months from the date of acquisition of
benefit from the expenditures.
3. Illustration:
Research and development expenditures in 2012:
For acquisition of land for use as research center
P5,000,000
For constructing the research center building, with a useful life of 50 years
3,000,000
Others research and development costs
2,000,000
Benefit from the research expenditure will be received beginning 2013.
Deduction for 2012 if availed of in one lump sum?
Deduction every year/month if the expenditure is recognized as a deferred expense
to be spread and recognized as deduction over a period of not less than 60 months
beginning from the first month from which benefits were received from the
expenditure.
Solution:
A. Research and development costs, deduction in one lump sum
P2,000,000
B. A deferred expense of P2,000,000, from which there shall be a monthly
deduction of P2,000,000 divided by 60 months (cannot be shorter, but can be
longer), or P400,000 per year or P33,000 per month.
EXPENSES IN GENERAL
Two kinds of business expenditures; the revenue expenditures and capital
expenditures. A revenue expenditures benefits only one period abd it is a deduction
from gross income in the year paid and incurred.
83
A capital expenditure, usually incurred in the acquisition, betterment or permanent

improvement of an assets benefits more than one accounting period, and it is not
deductible from gross income in the year paid.
An expense must satisfy the following conditions in order to be deductible from
gross income:
a. It must be ordinary and necessary;
b. It must be paid or incurred within the taxable year;
c. It must be in carrying on or directly attributable to, the development,
management. Operations, and/or conduct in the trade or business, or the
practice of a profession.
d. It must be substantiated by official receipts (OR) and other adequate records.
An expense is considered ordinary, if it is normal in relation to the taxpayers
business and the surrounding circumstances. The expense need not be recurring.
Salaries, wages and others.
Compensation payments rendered to the taxpayer are deductible from gross
income. A compensation payment is reasonable, if the same amount shall be paid
for similar services by similar enterprises under similar circumstances. Any excess
payments may be treated as distribution of earnings on stock or as a capitalized
expense on the purchase price.
Expenses under lease agreements:
In addition to the regular rent, the lessee may have other payments, for which
deductions may be taken.
a. When a leasehold is acquired for a business purposes for a specified sum, the
purchaser may take a deduction in his return an aliquot part of such sum
each year, based on the number of years the lease will run.
b. Taxes paid by the lessee to or for the lessor and other obligations of the
lessor paid by the lessee under a lease contract constitute additional rent
expense for the lessee.
c. The cost of leasehold improvements may be recovered by the lessee over the
remaining term of the lease, or over the life of the improvements whichever
period is shorter.
Example 1: R Company is a lessee of the building. Under the terms of the lease
contract, it had to make the following payments:
Monthly rental
Premium on the fire insurance of the building
Real estate tax on the land and building
20,000
The deduction of R Company for the year is a total of:
84
P50,000
10,000
Rentals for the year (P50,000 x 12)

Premium on fire insurance
Real estate tax
P600,000
10,000
20,000
Total
P630,000
Example 2: Santos Company, a lessee, constructed a building on leased land at a

cost to him of P4,000,000. The useful life of the building is 50 years while the
remaining term of the lease is 40 years.
How much is the annual deduction for Santos Company?
Solution:
The annual deduction for Santos company is P4,000,000 divided by 40 years or
P100,000.
Repairs:
Given the following accounting entries:
Entry No. 1 :
Repairs
Cash
P100,000
P100,000
Entry No. 2 :
Accumulated depreciation
Cash
P1,000,000
P1,000,000
Explanation:
Entry No 1. Records an expenditure which is deductible from gross income. This is
just a minor repair that keeps an asset in its regular operating condition.
Entry No. 2. Records an expenditure that is not deductible form gross income. The
entry represents a major or extraordinary repair, that does not add value to the
asset but prolongs its useful life.
Cost of materials and supplies:
Physical inventories to these items must be taken. The expense deductible to this
item must be computed as follows:
Inventories, beginning
Add: Purchases of materials and supplies during the year
85
P300,000
600,000
Total
Less: Inventories, ending
P900,000
100,000
Deductible expense for materials and supplies during the year

P800,000
Entertainment, amusement and recreation expenses:

Expenses such as this is deductible from gross income if:
a. Directly connected to the development, management, and operations of
trade or business of the taxpayer;
b. Directly related to the furtherance of its trade, or business;
The deduction should not exceed one half percent (1/2%) of net sales (in the case of
sale of goods) and one percent (1%) of net revenues (sale of services).
Any expenses incurred that is contrary to law, morals, public policy or public order
will not be allowed as deduction from gross income.
Expenses of private educational institutions:
An expenditure for expansion of school facilities is a capital expenditure, However,
the school may treat the expenditures in two alternative ways:
1. Deduct the expenditure from its gross income in the year in which it was
made; or
2. Capitalize the expenditure, and calim deduction by way of depreciation.
Illustrative example:
A private educational institution had a gross income of P50,000,000 and expenses
of P30,000,000 before considering an expenditure of P4,000,000 for a building to
separately house one of its colleges. The building has a useful life of 25 years.
Taxable income under alternative treatments for the expenditures?
Solution:
a. When claimed as an outright deduction:
Gross income
Less: Expenses
Net income before expenditure on building
20,000,000
86
P50,000,000
30,000,000
Less; Deduction for expenditure on expansion of school facilities

4,000,000
Taxable income
P16,000,000
b. If depreciation is taken on the building:

Gross income
P50,000,000
Less: Expenses
P30,000,000
Depreciation of new building (P4,000,000/25 years)
160,000
30,160,000
Taxable income
P19,840,000
Tax Filing and Tax Remedies
Filing of Return and Payment of Tax

An income tax return is a document wherein the taxpayer makes a report on his/her
gross income and deductions to the Commissioner of Internal Revenue. Normally it
is prepared by the taxpayer. However in case the taxpayer fails to make and file a
return on time or makes a false or fraudulent return, a return so made will be prima
facie evidence for all legal intents and purposes, unless the taxpayer proves the
contrary.
Who are required to file a return?
1. Individual:
a. Citizen of the Philippines, residing in the Philippines.
b. Citizen of the Philippines, residing outside the Philippines on his income
from within.
c. Resident alien, on his income from within the Philippines.
d. Non-resident alien engaged in business or trade, or in the practice of a
profession in the Philippines, on income from within the Philippines.
2. Taxable estate or trust;
3. Corporation;
a. Corporation which is not exempt from income tax;
b. Corporation which is exempt from income tax, but which had not complied
with the administrative requirement on proof of exemption. (The
corporation is required to file the return, but not required to pay the tax.)
c. General professional partnership.
Who are not required to file returns?

87
1. Individuals who is exempt from income tax.

2. Individual whose sole income has been subjected to final tax.
3. Individual whose gross income does not exceed the total personal and
additional exemptions. (Unless engaged in business or practice of a
profession within the Philippines, in which case regardless of the amount of
gross income, an income tax return shall be filed)
4. Individual whose compensation income does not exceed the statutory
minimum wage as fixed by those authorized by DOLE.
5. Individual with respect to pure compensation income derived within the
Philippines qualified under Substituted Filing of Income Tax Return by
Employees Receiving Purely Compensation Income (Revenue Regulation 32002). The following conditions must be met:
a. The income must be purely compensation income within the Philippines
during the year.
b. There was one employer only in the Philippines.
c. The correct income tax was withheld on the income.
d. The spouse is also entitled to substituted filing under a, b and c, above.
e. The employer filed BIR Form 1604C with the BIR.
f. The employer issued BIR Form 2316 to the employee with the signature of
the employee and the employer.
Who shall prepare the income tax return?

1. Individual
a. A married person, whether citizen, resident alien or non-resident alien will
file only one income tax return showing separately the income of both
spouses.
b. A parent will include in his return the income of an unmarried minor child
derived from property received from a living parent, except when the
transfer of such property was exempt from donors tax or the donors tax
was paid.
c. If the taxpayer is unable to make his own return, the return may be made
by his duly authorized agent. The authority of the agent will be attached
to the return.
2. Estate or trust.
a. The fiduciary of the taxable estate or trust files the return.
b. Should there be two or more fiduciaries, a return filed by one of the
fiduciaries will be enough.
3. Corporation.
a. The income tax return will be filed by the president, vice-president, or
other principal officer and will be sworn to by the treasurer or assistant
treasurer.
b. In cases where there is a receiver or a trustee in bankruptcy, or an
assignee is operating the property, such receiver, trustee or assignee shall
make the income tax return for such corporation.
c. General professional partnership
88
The income tax return shall be filed by the principal officer of the
partnership.
What should accompany the income tax return?

Quarterly Gross Receipts
a. Do not exceed
P50,000
b. Exceed P50,000
but do not exceed
P150,000
c. Exceed P150,000
Financial statements
Statement of Net Worth of Operations
Balance Sheet and Income Statement
1. Balance sheet and Income Statement

duly certified by an independent CPA
2. Comparative income statement for the
year and the preceding year.
3. Schedule of income producing property
and income therefrom.
4. Duly accomplished Account
Information Form (AIF) in the income
tax return.
5. In appropriate cases, copy of the
approval of the claim for tax incentive
granted by the government agency
administering the particular law.
6. For manufacturer, the Manufacturing
Statement
When should the income tax return be filed?

1. In the case of an individual whose income is purely compensation
income, the return shall be filed on or before April 15, covering the
income of the preceding year.
2. In the case of an individual with income from business or practice of a
profession, quarterly and annual income tax returns should be filed, as
follows:
First quarter On or before April 15
Second quarter
On or before August 15.
Third quarter On or before November 15
Annual
On or before April 15 of the succeeding year.
3. In the case of the taxable estate or trust, the income tax return should
be filed on or before April 15, covering the income of the preceding
year.
4. In the case of a corporation, quarterly and annual income tax return
are required, as follows:
First quarter to third quarter ( within sixty days after the close of the
particular quarter)
89
Annual On or before the fifteenth day of the fourth month following

the close of the taxable year (calendar or fiscal year).
5. In the case of a general professional partnership, the information
return is required to be filed on or before April 15, covering the
operations of the preceding year.
Where should the return be filed?

It shall be filed on the authorized agent bank or the Revenue District office where
you are assigned. If filed other than with the proper place, a surcharge of 25% will
be added to the tax.
Where, when and how is the income tax paid?
Under the pay-as-you-file system, the income tax shown on the return shall be
paid at the time the return is filed. If the taxpayer is other than a corporation and
the income tax on the annual return exceeds P2,000, such tax may be paid in two
equal installments, as follows:
First installment
- at the time the return is filed.
Second installment - on or before July 15
Any creditable withholding tax will be credited against the tax due, or in the first
installment of the tax due.
Return on creditable withholding tax
a. Withholding tax on compensation income
1. Monthly return within 10 days after the close of the month.
2. Annual return on or before January 31 of the succeeding year.
b. Expanded withholding tax
1. Monthly return within 10 days after the close of the month.
2. Annual return on or before March 1 of the succeeding year.
Foreign income tax credit

A credit for foreign income tax paid or incurred reduces the Philippine income tax
that should be paid.
Tax credit is given to a taxpayer to provide a relief from onerous burden of taxation
where the same income is subject to a foreign income tax and the Philippine income
tax. In taking a tax credit:
Tax credit is taken for
Tax credit is taken against -
the foreign income tax

the Philippine income tax
The foreign income tax should be understood as tax proper only without the
interest, surcharge, or penalty incident to delinquency on the payment of tax.
90
Who may claim tax credit?

a. Resident citizens of the Philippines;
b. Domestic corporations
How is tax credit computed?
Illustration: B Co, a domestic corporation had a taxable income from within the
Philippines of P300,000 and from Foreign country Z of P100,000. An income tax of
P40,000 was paid to country Z. If B Co chose to take a tax credit for the income tax
paid to country Z, the Philippine income tax due after tax credit would have been
computed as follows:
Taxable income before tax credit, Country Z
Taxable income before tax credit, Philippines
Taxable income, world
Income tax at 30%
Less: Tax credit for foreign income tax
P100,000/P400,000 x P120,000
Foreign income tax paid
Allowed (whichever is lower)
Philippine income tax still due
P100,000
300,000
P400,000
P120,000
P30,000
P40,000
30,000
P 90,000
While the income tax of the foreign country could be taken as a tax credit, the
taxpayer has the option of taking the tax as a deduction from its gross income.
Taxable income before foreign income tax:
Country Z
Philippines
Total
Less: Deductions for income tax, Country Z
Taxable income
Income tax at 30%
P100,000
P300,000
P400,000
40,000
P360,000
P108,000
Deficiency Income tax and Penalties

While good faith may be assumed in the voluntary filing of income tax return and
payment of income tax by an individual or a taxable entity, however, human
frailties may result in erroneous or fraudulent report of income tax data.
Even though the income tax return is reflected in the Books, such Books of Accounts
may not correctly record data on taxable income and deductible expenses. The BIR
has the following powers to determine a corrected taxable income
a. In case there are two or more organizations, trades or businesses, the BIR is
authorized to distribute, apportion or allocate gross income and deductible
91
expenses between or among organizations, trades or businesses to prevent

or determine evasion of taxes.
b. The BIR may at any time conduct inventory of goods of any taxpayer as a
basis of determining tax liabilities, if such has a reason to believe that such
person is not declaring its correct income.
c. When it is found that a business has failed to issue receipts and invoices, and
that the Books do not reflect the proper sales or receipts.
Net worth method of determining undeclared income
1. Statutory authority
a. The net income will be computed upon the basis of the taxpayers annual
accounting period in accordance with the accounting method regularly
employed in keeping the Books of Accounts.
b. If a report required by law as a basis is not forthcoming within the time
fixed by law. The BIR will assess the proper tax on the best evidence
available.
2. Accounting basis
From the accounting equation: Asset minus Liabilities equals Networth, a
years increase in networth of an individual is attributed to income.
From this income is determined the taxable income by adding non-deductible
expenses/losses and deducting non-taxable income/receipts and personal
exemptions. The taxable income so computed is compared with the taxable
income reflected in the income tax return to discover the under declaration of
taxable income and the computation of deficiency income tax.
PENALTIES
Only civil liabilities will be discussed.
a. Surcharge
b. Interest
Surcharge - a surcharge of 25% of the tax due will be imposed on the
following cases:
1. Failure to file the return and pay the tax due on time.
2. Unless otherwise authorized by the Commissioner, filing a return with an
internal revenue officer other than those with whom the return is required
to be filed.
3. Failure to pay the deficiency tax within the time prescribed for payment in
the notice and demand.
4. Failure to pay the full or part of the amount of tax shown an any return
required to be filed of the full amount of tax due, on or before the date
prescribed for the payment.
A surcharge of 50%, of the deficiency tax, in case there is a deliberate and willful
neglect to file the return or when a false or fraudulent return is willfully made.
92
A substantial under declaration of taxable sales, receipts or income, or substantial

overstatement of deductions, will constitute prima facie evidence of false or
fraudulent return. What is substantial?
a. The failure to report sales, receipts or income in amount exceeding 30% of
that declared per return.
b. A claim of deductions in amount exceeding 30% of actual deductions.
Interest
a. In general, there will be assessed and collected on any amount unpaid
amount of tax, interest at the rate of 20% per annum or such higher rate as
may be prescribed by rules and regulations, from the date prescribed for
payment until the amount is fully paid.
b. Deficiency interest. Any deficiency in the tax due will be subject to interest at
the rate of 20% per annum, which interest shall be assessed and collected
from the date prescribed until the full payment thereof.
c. Delinquency interest;
In case of failure to pay:
1. The amount of tax due on any return required to be filed; or
2. The amount of tax due for which no return is required.
3. A deficiency tax, or any surcharge or interest thereon on the due date
appearing on the notice and demand of the Commissioner.
There will be assessed and collected on the unpaid amount, interest at the
rate of 20% per annum until the amount is fully paid, which interest shall
form part of the tax.
d. Interest on extended payment
1. If any person is qualified and elects to pay the tax on installment, but fails
to pay the tax on any installment, or any part of its installment on or
before the prescribed date for its payment.
2. Where the Commissioner has authorized an extension of time within which
to pay a tax or a deficiency tax or any part thereof
There will be assessed and collected interest at 20% per annum on the tax
or deficiency tax or any part thereof unpaid, from the date of notice and
demand until it is paid.
93

Taxation - Defined - August 22, 2013

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Taxation - Defined - August 22, 2013

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CHAPTER I - DEFINITION OF SOME TERMINOLOGIES

Taxation is an act of imposing tax.

Taxes distinguished from eminent domain

Some doctrines in Taxation

Persons residence of the taxpayer

Tax differentiated from penalty

Tax differentiated from special assessment

From permit or license fee

Questions and exercise:

5. Describe some doctrines that is generally accepted in taxation. Explain.

CHAPTER 2 INCOME TAXATION

Officers Chief Commissioner and seven (7) deputy commissioners.

This is exempted under RA no. 1405 or Secrecy of Bank Deposit Law.

Describe the evolution of tax in the Philippines.

Chapter 3 Concept of Income Tax

Accounting methods recognized by the tax code

Explanation of accounting methods:

Chapter 4 Formula for taxable income

C. Other Exemptions under NIRC:

Application of Installment and Deferred Payment Method

Payment of capital gain

a piece of land in USA,

Selling Price is the

L Co, a real estate

On Jun 1 2009, Mr.

Long term contracts

Chapter 6 : Tax Rules for individual Taxpayer

A. Uniform rule for Capital gains subject to capital gain tax:

Final tax of 10%

c. Tax is due within 30 days from the date of sale.

The tax is withheld at source.

Capital Gain terms used:

1. The taxpayer is Mr. A, a citizen of the Philippines, residing in the

Capital gain tax?

3. The taxpayer is a citizen of the Philippines, residing in the Phils. Shares

Cost (purchase price of stock brokers commission) P150,000

4. The taxpayer is a citizen of the Philippines, residing in the Philippines:

Fair market value of the shares at the time of sale

Cost of the shares

Capital gain tax?

5. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Fair market value at the time of sale

Cost of the land and building

Capital gain tax?

6. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Commission of the broker who facilitated the sale

Commission of the broker who facilitated the

Capital gain tax?

7. The taxpayer is a citizen of the Philippines, residing in the Philippines.

Capital gain tax?

B. Passive income with final tax:

1. The taxpayer is a resident citizen of the Philippines with the following

Interest on peso deposits with PNB

Interest on time deposits with Security bank with

Interest on Treasury Bill of BSP

Dividend from a resident foreign corporation

Final tax on each of the passive income.

C. Other Income subject to graduated tax of 5-32%

Gross compensation income

1. Mr. Armand Gutierrez, a citizen and resident of the Philippines, was an

Night shift differential

2. Mr. Juan de la Cruz is a resident citizen. He is employed and had the