GROSS

INCOME
GROSS
INCOME
All income derived from whatever source,
be it legal or illegal.
Question

1. Which of the following are sources of

income?
I. Labor
II. Gifts and inheritance
III. Use of Capital

I and III only

Gifts and inheritance are subject to Transfer taxation
Question

Which of the following is not an income for

income tax purposes?
A. Gain derived from labor
B. Return on Capital
C. Excess of selling price over cost of assets
sold
D. Gifts Received

Ans. D.
Requisite for an income to be taxable:
1. There must be gain
2. The gain must be realized or received
3. The gain must not be excluded by law from taxation
Question

Which of the following is not a characteristics of

income?
A. Increase in taxpayers wealth
B. Realization of receipt of gain
C. Earnings constructively received
D. Return of taxpayer’s wealth
Ans. D.
Question

The share in profits of a partner in a General Professional

Partnership is regarded as received by him and thus taxable
although not yet distributed. This principle is known as:
A. Actual receipt of income
B. Advance reporting of Income
C. Accrual method of accounting
D. Constructive receipt of income

Ans. D.
Situs of Taxation:
Type of Income Situs
1. Sale of Property Purchased Place of Sale
2. Interest Income Residence of the debtor
3. Royalties Place of use of intangible
4. Gain on sale of real property Location of real property
5. Labor Place where service is performed
Question

Pedro earned interest income from a promissory note issued to him

by Juan a resident of USA. Assuming Pedro is a NRC, the Interest
income is
A. Subject to income tax
B. Subject to final tax
C. Not subject to income tax
D. Partly subject to scheduler and partly subject to final tax.

Ans. C.
Ans. C.
Question

Mr. Parker a French citizen residing the in the PH, received several items during
the taxable year. Which among the following is not subject to Philippine income
taxation?
A. Consultancy fees received for designing a computer program and installing
the same in Shanghai facility of a Chinese firm.
B. Interest from his deposits in a local bank of FCDU
C. Dividends received from an American Corp which derived 60% of its annual
gross receipts from Philippine sources
D. Gains from sale of his condominium in Quezon City.

Ans. A
Question

Situs of taxation from sales of shares from a domestic corp?

A. Always treated as income from within the the PH
B. Always treated as income from without the the PH
C. Maybe treated as income from within or without depending on the
place of sale.
D. Maybe treated as income within or without depending where the
shares are kept.

Ans. A.
Question

Situs of taxation from sales of shares from a foreign corp?

A. Always treated as income from within the the PH
B. Always treated as income from without the the PH
C. Maybe treated as income from within or without depending on the
place of sale.
D. Maybe treated as income within or without depending where the
shares are kept.

Ans. C.
If foreign shares, situs is place of sale
Ans. B
 Gross income derived from conduct of

Trade or Business Profession

Not under an employee-employer contract

Income is subject to Regular Income Tax

 Compensation Income
Arises of out employer-employee relationship
All remuneration for services performed by an employee for
his employer whether paid in cash or in kind

Kinds of compensation

1. Regular Salary- a fixed regular payment,

typically paid on a monthly or biweekly basis but
often expressed as an annual sum, made by an
employer to an employee
-subject to regular income tax
Question

Pedro is a member of the board of directors of ABC company. During the

current taxable year, Pedro received director’s fees amounting to 300,000 from
quarterly board meetings he attended. Such fees should:
A. Form part of Pedro’s gross compensation income whether or not he is the
same time an employee of the corporation.
B. Form part of Pedro’s gross compensation income only if he is at the same
time an employee of the corporation.
C. Both a and b
D. Neither a or b

Ans. B
Ans. C.
2. Fringe Benefits
Taxable FB received by:
Rank and File: basic income tax
Supervisory or managerial: Fringe Benefit Tax
Tax exempt FB
1. Exempt under Law
2. If the grant is required by the nature of or necessary to the
trade, business or profession of the employer
3. The grant is for the convenience of the employer
4. De minimis:
Conforming to the ceiling
-tax exempt
In excess of ceiling
- added to the 13 month and other
benefits
3. 13 month pay and other benefits

Exempt up to the first 90,000

Excess is subject to Regular Income tax
3. Cost of Living Allowances (COLA)
General rule- Subject to basic income tax
However COLA of minimum wage earners are exempt from basic income tax

COLA includes the following:

1. Holiday Pay
2. Overtime Pay
3. Night shift differential pay
4. Hazard Pay
4. Fixed or Variable Allowances
In addition to the regular salary fixed for his/her position or office
Subject to regular income tax and creditable withholding tax
Examples:
a. Transportation allowance
b. Representation allowance
c. Communication allowance
d. Living away from home allowance (LAFHA)
e. others
5. Pre-computed business allowances

- Reimbursements or advances for travelling and

entertainment purposes pre-computed on a daily
basis and are paid to an employee while he is on
an assignment or duty need not be subject to the
requirement of substantiation and to withholding.
 Business related allowances subject to liquidation
Are not compensation income if the following are satisfied:
1. Ordinary and necessary travelling, representation and entertainment expenses
in pursuit of trade, business or profession.
2. The employee is subject to account or liquidate the expenses.

1. Representation and Transportation Allowances (RATA)

- reimbursements for the expenses incurred in the performance of their duties
However, the excess of RATA if not returned by the employee to the employer
will be subject to taxable compensation income of the employee.
2. Stipends of Resident Physicians
Subject to regular income tax and therefore subject to creditable withholding
taxes.
Representation and Transportation Allowances (RATA)
- reimbursements for the expenses incurred in the performance of their duties,
therefore not taxable

However, the excess of RATA if not returned by the employee to the employer
will be subject to taxable compensation income of the employee.

Stipends of Resident Physicians

Subject to regular income tax and therefore subject to creditable withholding
taxes.
6. Premiums on Life Insurance
Premium on life insurance covering the life
of an employee paid by the employer is
taxable income to the employee where the
insured employee directly or indirectly is
the beneficiary under the policy
ANS. B
7. Retirement benefits, Separation pay and Pension
General Rule= Taxable as compensation income
However they maybe exempt if: (for Private employees only)
With reasonable private benefit plan
1. The retirement plan must be approved by the BIR
2. The retiring employee must have been in service for at least 10 years.
3. Must be at least 50 years old
In the absence of reasonable private benefit plan
1. The retiring employee must have been in service for at least 5 years.
2. The retiring employee must not less than 60 years old but not more than 65 years
old.

It will also be exempt if the separation was involuntary

in the part of the employee
Maybe due to death, sickness or for any cause beyond the control of the said
employee

For voluntary retirement the rules above will apply.

ANS. B
ANS. A
ANS. B
ANS. 3,000,000
8. Tips and Gratuities

A. If paid directly to an employee- taxable income of the employee but

not subject to withholding

B. If accounted for by the employee to the employer- taxable income of

the employee and subject to withholding.
Question

One of the following compensation income of an individual

taxpayer is not an exclusion from gross income:
A. Monetized vacation leave not exceeding 10 days a year
B. Separation pay of an employee who resigned from his
employment
C. Retirement benefits under a qualified benefit plan
D. All of these
Ans. B
Juana, widow received the following during 2016:
I. Received $500 ($1=P44) monthly interest income from the pension plan of his deceased
husband who served in the US army of 20 years.
II. Won a beauty contest “Miss Byuda 2018”. She received the following as prizes:
a. Cash prize 50,000
b. Free trip abroad worth 100,000
c. College scholarship worth 50,000
d. Goods worth 20,000
III. 100,000 from her debtor in payment of a loan and interest in the sum of 15,000
IV. Inherited from her grandmother an apartment value at 2,500,000 from which she is
receiving monthly rental of 15,000

The income subject to tax is?

Monthly interest on pension ($500 x 44 x 12) 264,000 Basic Income tax
Total prizes received from a beauty contest 220,000 Final tax
Interest Income from a debtor 15,000 Basic Income tax
Rental Income (15,000 x 12) 180,000 Basic Income tax
Total Income subject to tax 679,000
Rent Income
The amount paid for the use or employment of a thing(real or personal) or right
Rent includes the following:
1. Cash received at stipulated price.
2. Obligations of the lessor to third persons paid or assumed by the lessee.
3. Advance payment, which may be in the form of:
a. Prepaid Rent ( Reported in full in the year of receipt
b. A security deposit that is applied to rent

Rental payments shall be taxable on the year received whether earned or unearned
provided there is no restriction as to is use and regardless of method of accounting
employed.
Security Deposit shall be taxable:
a. Forfeiture in favor of the lessor or
b. Upon applications as rental payments
Problem
Mike leased his land to Leomar for two years beginning July 1, 2018. Leomar would pay monthly
rental of 100,000. He paid up to October 2018 and then defaulted for the rest of the year.

1. Under accrual method, how much was the income of Mike for 2018?
Ans. 400,000

2. Under cash method, how much was the income of Mike for 2018?
Ans. 400,000
3. Under accrual method, how much is the deductible expense of Leomar
Ans. 600,000
4. Under cash method, how much is the deductible expense of Leomar
Ans. 400,000
 Leasehold Improvements
Improvements made by the lessee shall be treated as income of the lessor if:
a. The improvements will be owned by the lessor at the end of the lease.
b. The lessor is not required to pay the lessee the value of such improvements

Income from Leasehold improvements is reported as follows:

Method Taxable Amount

1. Outright or Lump-sum Method Fair Market Value of Improvements
2. Spread-out or Annual Method Annual Income= Book Value end of lease term
Remaining term of lease

Pre-termination of the lease

FMV, year of pre-termination XX
Less: Income already recognized (XX)
Income, year of pre-termination XX
Problem
On July 1, 2016, Pedro leased his vacant lot for a period of 12 years to Juan at an annual rate of 2,400,000. It
was also agreed that Juan will pay the following in 2016:
•4,800,000 representing rental payment for 2 years
•Security deposit of 2,400,000
•Annual real property tax of 30,000
The lease contract provides among others that Juan will construct a 5-storey building for parking purposes at a
cost of 36,000,000. Ownership of the building shall belong to Pedro upon the expiration or termination of
lease contract. The building was completed on July 1,2018 with an estimated useful life of 15 years.

1. Pedro shall report total income from the lease in 2016 at:
Rental income for 2 years received in 2016 4,800,000
Annual real property tax assume by the lessee 30,000
Income from leasehold improvement 0
Lessor’s taxable income in 2016 4,830,000
Problem
On July 1, 2016, Pedro leased his vacant lot for a period of 12 years to Juan at an annual rate of 2,400,000. It
was also agreed that Juan will pay the following in 2016:
•4,800,000 representing rental payment for 2 years
•Security deposit of 2,400,000
•Annual real property tax of 30,000
The lease contract provides among others that Juan will construct a 5-storey building for parking purposes at a
cost of 36,000,000. Ownership of the building shall belong to Pedro upon the expiration or termination of
lease contract. The building was completed on July 1,2018 with an estimated useful life of 15 years.

2. Pedro shall report total income from the lease in 2017 at:
Rental income for 2 years received in 2017 0
Annual real property tax assume by the lessee 30,000
Income from leasehold improvement 0
Lessor’s taxable income in 2016 30,000
Problem
On July 1, 2016, Pedro leased his vacant lot for a period of 12 years to Juan at an annual rate of 2,400,000. It
was also agreed that Juan will pay the following in 2016:
•4,800,000 representing rental payment for 2 years
•Security deposit of 2,400,000
•Annual real property tax of 30,000
The lease contract provides among others that Juan will construct a 5-storey building for parking purposes at a
cost of 36,000,000. Ownership of the building shall belong to Pedro upon the expiration or termination of
lease contract. The building was completed on July 1,2018 with an estimated useful life of 15 years.
3. Assuming Pedro will use outright method in recognizing income from leasehold improvements,
how much is the total income from lease for year 2018?

Rental Income received in 2018 2,400,000

Annual real property tax assumed by the lessee 30,000
Income from improvement 36,000,000
Lessor’s annual income 38,430,000
Problem
On July 1, 2016, Pedro leased his vacant lot for a period of 12 years to Juan at an annual rate of 2,400,000. It was also agreed that Juan will
pay the following in 2016:
•4,800,000 representing rental payment for 2 years
•Security deposit of 2,400,000
•Annual real property tax of 30,000
The lease contract provides among others that Juan will construct a 5-storey building for parking purposes at a cost of 36,000,000. Ownership
of the building shall belong to Pedro upon the expiration or termination of lease contract. The building was completed on July 1,2018 with an
estimated useful life of 15 years.

4. Assuming Pedro will use spread-out method in recognizing income from leasehold improvements, how much is
the total income from lease for year 2018?
Rental Income received in 2018 2,400,000
Annual real property tax assumed by the lessee 30,000
Income from leasehold improvement:
Cost 36,000,000
X remaining life after lease term X 5/15
Remaining book value after lease term 12,000,000
Divide by the remaining lease term 10
Annual Income from leasehold improvement 1,200,000
X (allocated= July to Dec. only) X 6/12 600,000
Pedros’s 2018 income 3,030,000
 Problem
On July 1, 2016, Pedro leased his vacant lot for a period of 12 years to Juan at an annual rate of 2,400,000. It was also agreed that Juan will
pay the following in 2016:
•4,800,000 representing rental payment for 2 years
•Security deposit of 2,400,000
•Annual real property tax of 30,000
The lease contract provides among others that Juan will construct a 5-storey building for parking purposes at a cost of 36,000,000. Ownership
of the building shall belong to Pedro upon the expiration or termination of lease contract. The building was completed on July 1,2018 with an
estimated useful life of 15 years.
Assuming the due to the fault of the lessee, the lease contract was terminated on January 1, 2020, how much income
is to be reported by the lessor in 2020?
Cost 36,000,000
X remaining life after termination over total useful life X 13.5/15
Remaining book value of after termination 32,400,000
Less: Income already recognized
2018: (six months) (600,000)
2019: (one year) (1,200,000)
Remaining book value, Jan. 1, 2020 30,600,000
Dividend Income
Kinds:
1. Cash Dividends
2. Property Dividends
3. Stock Dividends
4. Liquidating Dividends
Cash and Property Dividends
Cash and property dividends shall be taxable upon declaration

Stock Dividends
General Rule= distribution of stock dividend is not taxable because they are
not realized income.
Exception= a stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stockholdings represented.
Liquidating Dividends
Exempt up to the extent of the cost of investment being a mere return of
capital. However, anything excess of the cost shall be considered income and
therefore taxable.
Question
If a corporation distributes its own treasury stocks to its stockholders, this kind
of a corporate distribution which is recognized in the tax code is a:

A. Stock Dividend
B. Property Dividend
C. Cash Dividend
D. Liquidating Dividend

Ans. A
Question
If a corporation distributes its assets to its stockholders, this kind of a corporate
distribution will result in:

A. Stock Dividend
B. Property Dividend
C. Cash Dividend
D. Liquidating Dividend

Ans. D
Prizes and Awards – Exempt from income tax
1. Made primarily in recognition of:
• Religious or Charity
• Scientific
• Educational artistic, literary or
• Civic achievement
Provided the recipient was:
a. Selected without any action on his part to enter the contest proceeding
b. Not required to render substantial future services as a condition to receive the
prize/reward.
2. All prizes and awards granted to athletes in local and international sports competitions and
tournament, whether held in the Philippines or abroad and sanctioned by their respective national
sports association.

3. Winnings under Section 126 of the tax code ( winnings on horse races).
Brian is an amateur boxer who represented the Philippine team in the
recently conducted Rio Olympics held in Brazil. For winning in the said
competition, he received the following amounts:
• 500,000 cash prize from the amateur boxing association of the Philippines
• 2,000,000 cash award donated by Rizal Commercial Banking Corporation
• 600,000 talent fee as model of known boxing gear and
• 900,000 professional fee from ABS CBN for being an instant celebrity

Ans. 600,000+900,000= 1,500,000

Pacman, a professional boxer, won in his title-bout against Timmy
Bradly held at Mandalay Bay, Las vegas. During the year Pacman
received the following amounts:
• 25 Million as cash prize in the fight Regular Income Tax
• 30 Million from pay per view Regular Income Tax
• 12 million talent fee as a commercial model of San Miguel Beer Regular Income Tax

How much of the following is exempt from income tax?

None, all the mentioned income is taxable
JJ, a member of the Philippine Boxing team received the following during
2018:
• Prize for winning the gold in the Asian Games 500,000 Tax-exempt
• Athlete of the year award 100,000 Tax-exempt
•Winnings from Philippine Lotto 400,000 Final Tax
•Prize- McDonald Raffle Promo 10,000 Final Tax
• Cash gift from his SM Foundation 100,000 Tax-exempt