GROSS INCOME

Handout No. 1-04 A.G. DULAY

A. DEFINITION OF GROSS INCOME

Except when otherwise provided, it means ALL income from whatever source.

Examples of income from whatever source:

a. Gains arising from expropriation of property
b. Gambling gains
c. Income from illegal business or from embezzlement
d. Damage recovery (compensation from damages)

Rule: Recovery of lost profit = taxable

Recovery of lost capital = not taxable

e. Forgiveness of debt

Rules:
1. Debtor rendered service in favor of the creditor = forgiveness of debt results in a
taxable income to the debtor
2. Debtor did not render service in favor of the creditor = forgiveness of debt results in a
taxable indirect gain
3. Debtor is a stockholder of a corporation = forgiveness of debt by the creditor-
corporation results in dividend distribution

f. Bad debt recovery

Rules:
1. It is generally taxable.
2. Tax benefit rule: If in the year the bad debt was written off there was a reduction of
taxable income, bad debt recovery shall constitute a taxable income.

g. Tax refunds

Rules:
Tax refunded is a deductible tax = tax refund is taxable
Tax refunded is not a deductible tax = tax refund is not taxable

Examples of non-deductible tax:

1. Income tax
2. Transfer taxes (e.g. estate tax and donors tax)
3. Special assessment
4. Foreign income tax claimed as tax credit
5. Value-added tax
6. Stock transaction tax

h. Prizes and awards

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GROSS INCOME
Handout No. 1-04 A.G. DULAY

B. ITEMS OF GROSS INCOME

Under Section 32(A) of the Tax Code, as amended, the term gross income includes, but is not
limited to the following items:

a. Compensation for services in whatever form paid, including but not limited to fees, salaries,
wages, commissions and similar items;
b. Gross income derived from the conduct of trade or business or the exercise of a profession;
c. Gains derived from dealings in property;
d. Interests;
e. Rents;
f. Royalties;
g. Dividends;
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partners distributive share from the net income of the general professional partnership (GPP).

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(ITEMS OF GROSS INCOME EXPLAINED)

A. COMPENSATION FOR SERVICES

Gross Compensation Income (GCI)

Refers to all remuneration for services performed by an employee for his employer, whether
paid in cash or in kind, unless specifically excluded under the Tax Code, as amended
(applies to RC, NRC, RA and NRA engaged in business in the Philippines)

Examples of compensation for services performed:

a. Salaries, wages and fees
b. Commissions paid to salesmen
c. Compensation for services in the basis of a percentage of profits
d. Commissions on insurance premiums
e. Tips
f. Pensions or retiring allowance paid by private persons or by the government EXCEPT pension
exempt from tax
g. Marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelist or religious worker for services rendered
h. Emoluments
i. Honoraria
j. Allowance and bonuses
k. Directors fees

Rule: Directors fee is part of GCI if the director is at the same time an employee of the
employer/corporation.

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Handout No. 1-04 A.G. DULAY

Director is an employee = part of GCI

Director is NOT an employee
1. if current years GI P720,000 10% creditable withholding tax
2. if current years GI > P720,000 15% creditable withholding tax

Concept of employer-employee relationship:

Rule: Generally, compensation income is obtained from an employer-employee relationship

between payor and recipient.

An employer-employee relationship exists when the person for whom services are
rendered has the right to control and direct the individual who performs the services,
not only as to the result in accomplishing the work but also as to the details and
means by which that result is accomplished.

with E-E relationship -> GCI

no E-E relationship -> Gross professional fees

Forms of compensation:

Forms Taxable Amount

In cash Full amount received
In kind Fair Market Value (FMV) of the thing taken as
payment
Services rendered at a stipulated In the absence to the contrary, the stipulated
price price shall be presumed to be the FMV.

Examples of payments in kind:

Example Taxable Amount

Compensation paid to an
employee of a corporation in its
stock
Promissory note and other
evidence of indebtedness in
payment of services, and not
merely as security for such
payment
FMV of the stock at the time received by the
employee
(1) Promissory note is interest-bearing:
Year received - Face value
Year collected - Maturity less face value
(2) Promissory note is NOT interest bearing:
Year received - Fair discounted value
Year collected - Face value less fair
discounted value

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GROSS INCOME
Handout No. 1-04 A.G. DULAY

B. GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE OR BUSINESS OR THE EXERCISE OF A
PROFESSION

Gross sales/receipts P xx
Less: Sales reurns and allowances P xx
Sales discount xx xx
Net sales/receipts P xx
Less: Cost of sales or services xx
Gross income from operation P xx
Add: Other Income xx
Total Gross Income P xx

C. GAINS DERIVED FROM DEALINGS IN PROPERTY

a. Property acquired by purchase on or after March 1, 1913

Selling Price P xx
Less: Cost xx
Gain P xx

b. Property acquired by inheritance

Selling Price P xx
Less: FMV at t he dat e of inherit ance xx
Gain P xx

c. Property acquired by gift

Selling Price P xx
Less: Value in t he hands of t he donor xx
Gain P xx

D. INTEREST INCOME
Includes such interest arising from indebtedness, whether business or non-business.

Rule: Unless exempted by law, interests received by a taxpayer, whether or not usurious, are
taxable.

Interest income subject to final tax:

a. Interest from any currency bank deposit
b. Yield or any other monetary benefit from deposit substitute
c. Yield or any other monetary benefit from trust funds and similar arrangements
d. Interest income received from a depository bank under the expanded foreign currency
deposit system
e. Interest income from long-term deposit or investment evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas if pre-terminated before fifth year

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Handout No. 1-04 A.G. DULAY

Interest income exempt from tax:

a. Interest income received from a depository bank under the expanded foreign currency
deposit system by non-residents (individuals or corporations)
b. Interest income from long-term deposit or investments evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas

E. RENT INCOME
a. Income of lessor under lease agreement

Payments Made Lessor Lessee

Rent
Obligation of lessor to 3rd
person paid by lessee
Advance Rent
Leasehold improvement
Income
Income
Income in full in the year
received regardless of
accounting method used
Income reported under lump-
sum or annual method
Expense
Expense
Expense to be prorated over the
period covered regardless of
accounting method used
Expense (depreciation) over the
term of the lease or estimated
life whichever is shorter

b. Advance payment NOT representing rent

b1. As Loan -> Not taxable, unless applied to unpaid rent
b2. As Security Deposit -> Not taxable, unless there is a violation in the lease contract

c. Leasehold improvement

Rule: It is a source of additional income to the lessor if it shall become his upon the expiration
of the lease.

How to recognize income?

1. Lump-sum or outright method
Recognize income using the FMV of the improvements at the time when such
improvements are completed

2. Annual or spread out method

Cost of leasehold improvement P xx

Less: Accumulated depreciation (remaining term of the lease) xx
Book value, end of lease P xx

Annual Income:
Book value, end of lease / Remaining term of the lease P xx

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Handout No. 1-04 A.G. DULAY

Computation of income in case of premature termination of lease:

FMV of improvement when lessor took possession P xx

Less: Amount already reported as income xx
Income on the year of pretermination P xx

Computation of loss due to destruction of improvement before the expiration of the term of lease:

Amount already reported as income P xx

Less: Insurance recovery P xx
Salvage value xx xx
Loss P xx

F. ROYALTIES

Rule: From Philippine sources = subject to final tax

From foreign sources = subject to tax rates in general

G. DIVIDEND INCOME
(including shares in the net income of certain entities)

Direct vs indirect dividend:

Direct Dividend
one where the paying corporation acknowledges that the distribution is a dividend payment

Indirect Dividend
a distribution of profits disguised as payment of services, properties, etc.

Dividends or shares in net income subject to tax rates in general:

a. Dividends from foreign corporations
b. Share in the net income of a GPP

Dividends or shares in net income subject to final tax:

a. Cash and/or property dividends actually or constructively received by individuals from domestic
corporation or from a joint stock company, insurance or mutual fund company and regional
operating headquarters of multinationals
b. Inter-corporate dividends received from domestic corporation by non-resident foreign
corporations
c. Share of an individual in the distributable net income after tax of a partnership (other than a
GPP) of which he is a partner
d. Share of an individual in the net income after tax of an association, a joint account or a joint
venture or consortium taxable as a corporation of which he is a member or co-venturer

Dividends or shares in net income that are exempt from tax:

a. Inter-corporate dividends received from domestic corporation by other domestic corporation
and resident foreign corporation

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Handout No. 1-04 A.G. DULAY

H. ANNUITIES
Refer to specified income payable at stated intervals for a fixed or a contingent period, often for
the recipients life, in consideration of a stipulated premium paid either in prior installment
payments or in a single payment

Taxable vs non-taxable annuity:

Taxable annuity
excess of the amount returned as premium

Nontaxable annuity
annuity representing return of premium

I. PRIZES AND WINNINGS

Prizes and winnings subject to tax rates in general:

a. Prizes and winnings from foreign sources received by individuals and corporations
b. Prizes and winnings from Philippines sources received by corporations
c. Prizes from Philippines sources received by individuals amounting to P10,000 or less

Prizes and winnings subject to final tax:

a. Prizes received by individuals from Philippine sources (except prizes amounting to P10,000 or
less which shall be subject to tax under the Tax Code, as amended)
b. Other winnings of individuals from Philippine sources (except Philippine Charity Sweepstakes and
Lotto winnings)

Prizes and winnings exempt or excluded from gross income:

a. Philippine Charity Sweepstakes and Lotto winnings
b. Prizes and awards made primarily in recognition of achievements in the following fields:
Religious
Charitable
Scientific
Educational
Artistic
Literary
Civic

Conditions for exemption:

The recipient was selected without any action on his part to enter the contest or
proceedings; and
The recipient is not required to render substantial future services as a condition to
receiving the prize or award.

c. All prizes and awards granted to athletes to local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national sports
association

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Handout No. 1-04 A.G. DULAY

J. PENSIONS

K. PARTNERS DISTRIBUTIVE SHARE FROM THE NET INCOME OF THE GENERAL PROFESSIONAL
PARTNERSHIP

Sources:
1. The 1997 National Internal Revenue Code
2. Income Taxation by Valencia and Roxas 6th edition
3. Review Notes from various Review Centers

To succeed, we must lose our fear to begin.

-Anonymous

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