Ast TX 801 Items of Gross Income (Batch 22)
Ast TX 801 Items of Gross Income (Batch 22)
Ast TX 801 Items of Gross Income (Batch 22)
TAXATION TAMAYO/GARCIA
TX - 801: Income Tax (Items of Gross Income)
2. MEANING OF INCOME
a. Broad sense Income means all wealth, which flows into the taxpayer’s hands other than as a mere return of
capital.
b. Judicial definition Income is the gain derived from labor, or from capital, or from both labor and capital, including
the gain derived from the sale or exchange of capital asset.
c. Requisites of a a. There must be gain;
taxable income b. The gain must be realized or received;
c. The gain must not be excluded by law from taxation.
TX-801
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4) Examples of All kinds of compensation for services rendered constitute gross income. They include:
compensation for a) salaries, wages and fees;
services rendered b) commissions paid to salesmen;
c) compensation for services on the basis of a percentage of profits;
d) commissions on insurance premiums;
e) tips;
f) pensions or retiring allowances paid by private persons or by the government (except
pension exempt from tax); and
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.
5) Forms of Forms of compensation Taxable amount
COMPENSATION a) Payments made in cash The full amount received
b) Services paid for with something The fair market value (FMV) of the thing taken in
other than money (in kind) payment
c) Services rendered at a stipulated In the absence of evidence to the contrary, the
price stipulated price shall be presumed to be the fair
market value (FMV)
6) Examples of Payments in kind Taxable Amount
payments in kind a) Compensation paid to an employee Fair market value of the stock at the time received by
of a corporation in its stock the employee
b) Promissory note and other evidence of a) Promissory note is not interest bearing
indebtedness in payment of services, Year received - Fair discounted value
and not merely as security for such Year collected- Face value less fair discounted value
payment b) Promissory note is interest bearing
Year received -Face value
Year collected - Maturity value less face value
b. Gross income derived from the CONDUCT OF TRADE OR BUSINESS, OR THE EXERCISE OF
PROFESSION
Format of computation Gross sales/receipts xxx
Less: Sales returns and allowances xxx
Sales discount xxx xxx
Net sales/receipts xxx
Less: Cost of sales/services xxx
Gross income from operation xxx
Add: Other income xxx
Total gross income xxx
D. INTEREST INCOME
1) Included in interest Interest includes such interest arising from indebtedness, whether business or non-business.
income Unless exempted by law, interests received by a taxpayer, whether or not usurious, are taxable.
2) Subject to final tax Interest income from Philippine sources subject to final tax (not included in the taxable net
income subject to tax rates in general)
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 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.
3) Exempt from Interest income from Philippine sources exempt from tax:
income tax a) Interest income received from a depository bank under 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.
3) LEASEHOLD IMPROVEMENT
a) Additional income to the Leasehold improvement is a source of additional income to the lessor if it shall become his
lessor upon the expiration of the lease.
b) Recognition of income (1) Lump sum or outright method - Lessor may report as income, at the time when
from leasehold improvement such buildings or improvements are completed, the fair market value (FMV) of such
buildings or improvements subject to the lease.
(2) Annual or spread out method
Cost of leasehold improvement xxx
Less: Accumulated depreciation (remaining term of lease) xxx
Book value, end of lease xxx
Annual income
Book value, end of lease/Remaining term of lease xxx
(3) Computation of income resulting from premature termination of
lease
FMV of improvement when lessor took possession xxx
Less: Amount already reported as income xxx
Income, year of termination xxx
c) Computation of loss due to Amount already reported as income xxx
destruction of leasehold Less: Insurance recovery xxx
improve-ment before the Salvage value xxx xxx
term of the lease expires Loss xxx
EXERCISE
(Phil. CPA) Mr. C. Conte bought a 2,000 square meter land at a cost of P500,000. He leased the land to Mr. D. Damian at an
annual rental of P40,000. The term of the contract of lease was 15 years. The contract of lease provided that Mr. Damian will
construct a building on the land, which will belong to the lessor at the end of the term of the lease or at the termination of the
lease. The building was constructed for a total cost of P400,000 and has an estimated useful life of 20 years which was the
basis of a straight-line method of depreciation. The remaining term of the lease when the building was completed was 14 years.
f. ROYALTIES
1. Subject to final tax Royalties from Philippine sources
2. Subject to tax rates in Royalties from foreign sources
general
g. Dividend income (including shares in the net income of certain entities)
1) Difference between direct A direct dividend is one where the paying corporation acknowledges that the distribution
and indirect dividends is a dividend payment.
An indirect dividend is a distribution of profits disguised as payment of services,
properties, etc.
2) Dividends/shares a) Cash and/or property dividends actually or constructively received by individuals from
in net income subject to domestic corporation or from a joint stock company, insurance or mutual fund company
final tax 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 general professional partnership) of which he is a partner;
TAXATION – INCOME TAX (ITEMS OF GROSS INCOME) (BATCH 22)
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801
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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.
3) Dividends/shares in net a) Dividends from foreign corporations;
income subject to tax b) Share in the net income of a general professional partnership.
rates in general
4) Dividends that are a) Inter-corporate dividends received from domestic corporation by other domestic
exempt from tax corporation and resident foreign corporation.
h. Annuities
1) Meaning of annuity An annuity is a specified income payable at stated intervals for a fixed or a contingent
period, often for the recipient’s life, in consideration of a stipulated premium paid either in
prior installment payments or in a single payment.
2) Non-taxable annuity Annuity representing return of premium
3) Taxable annuity Excess of the amount returned as premium
i. Prizes and winnings
1) Subject to tax a) Prizes and winnings from foreign sources received by individuals and corporations;
rates in general b) Prizes and winnings from Philippine sources received by corporations;
c) Prizes from Philippines sources received by individuals amounting to P10,000 or less.
2) 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 Sec. 24 (A)];
b) Other winnings of individuals from Philippine sources (except Philippine Charity
sweepstakes and Lotto winnings)
3) Exempt/excluded a) Philippine Charity sweepstakes and Lotto winnings;
from gross income b) Prizes and awards made primarily in recognition of achievements in the following fields:
1) Religious; 3) Scientific; 5) Artistic; 7) Civic.
2) Charitable; 4) Educational; 6) Literary;
Conditions for the exemption of prizes and awards:
a. The recipient was selected without any action on his part to enter the contest or
proceedings; and
b. 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.
j. Pensions (see exclusions from gross income)
k. Partner’s distributive share from the net income of the general professional partnership [Subject to Section 24 (A)]
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THOT: Reading is to the mind what exercise is to the body. - JOSEPH ADDISON
jb