Inclusion in Gross Income

ITEMS OF GROSS INCOME

• The term “items of gross income” or “inclusions in gross income”
pertains to all items of income subject to taxation, namely:
1. Gross income subject to FINAL TAX
2. Gross income subject to CAPITAL GAINS TAX
3. Gross income subject to REGULAR TAX
ITEMS OF GROSS INCOME SUBJECT
TO REGULAR TAX
• Gross income includes, among others, the following items:
1. Compensation for services in whatever form paid
2. Gross income from the conduct of trade, business, or exercise of a profession
3. Gains derived from dealings in properties
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner's distributive share from the net income of general professing partnership
Compensation For Services In Whatever
Form Paid
• Under the current tax rules, the term "compensation income"
technically pertains to the types of employee benefits that are subject
to regular tax.
• The fringe benefits or managerial or supervisory employees are not
considered compensation income and are subject to final tax.
• Compensation income will be discussed in Chapter 10.
Gross Income From The Conduct Of Trade,
Business, Or Exercise Of A Profession
• This includes income from any trade or business, legal or illegal, and
whether registered or unregistered. Gross income from business or
profession is determined as follows:

Sales Revenue/Gross receipts P XXX,XXX.XX

Less: Cost of sales/services XXX,XXX.XX
Gross Income P XXX,XXX.XX
Gross Income from the Conduct of Trade,
Business, or Exercise of a Profession
• The following business income shall not be included in gross income subject to regular income tax.
1. Business income exempt from income tax such as:
a. Gross income from a Barangay Micro-Business Enterprise (BMBE) under RA 9178
b. Gross income from enterprises enjoying tax holiday incentives under the CREATE law which have not yet
graduated to their income tax holiday incentives
2. Business income subject to special tax such as:
a. Philippine Economic Zone Authority (PEZA)-registered enterprises subject to 5% gross income tax

b. Tourism Infrastructure and Enterprise Zone Authority (TIEZA)-register enterprises subject to 5% gross income
tax
c. Income of self-employed and/or professional (SE/P) who opted to be taxed under the 8% income tax
3. Business income subject to final tax when not subjected to final tax by the payor
a. Subcontractors of petroleum service contractors subject to 8% final tax
b. Business income of foreign currency deposit units (FCDUs and expanded FCDU (eFCDUs) from Philippine
residents subject to 10% final tax
Gains from Dealings in Properties
• The gains or losses in dealing in ordinary assets are subject to regular
income tax.
• Dealings in capital assets other than domestic stocks and real
properties are also subject to regular income tax.
• Ordinary gains are included as items of gross income. Ordinary losses
are items of deductions against gross income.
• The net capital gain from other capital assets after deducting capital losses
is also included as an item of gross income. A net capital loss is not an
item of deduction against gross income.
• The tax rules on measurement and recognition of gains from dealings in
properties will be discussed in Chapter 12.
Interest Income
• This refers to interest income other than passive interest income
subject to final tax. A taxable interest income must have been
actually paid out of an agreement to pay interest. It cannot be
imputed. (CIR vs. Filinvest Development Corporation, GR 163653
and 167689)
• Examples of interest income subject to regular income tax.
1. Interest income from lending activities to individuals and
corporations by banks, finance companies, and other lenders
2. Interest income from corporate bonds and promissory notes
3. Interest income from bank deposits abroad
Interest Income
• The following are exempt from regular income taxation:
1. Interest income earned by landowners in disposing their lands to
their tenants pursuant to the Comprehensive Agrarian Reform
Law
2. Imputed interest income
Imputed interest income (the opportunity cost of money) does not
constitute an actual income; hence, it is exempt from income tax.

• The power of the Commissioner to allocate income and deduction

does not include the power to impute "theoretical interest." (Ibid)
Rents
• Rent income arises from leasing properties of any kind. It is a passive income but
is not subject to final tax under the NIRC; hence, it is subject to regular income
tax.
• Special considerations on rent:
1. Obligations of the lessor that are assumed by the lessee are additional rental
income to the lessor.
2. Advance rentals are items of gross income upon receipt if it is unrestricted
or restricted to be applied in future years or upon the termination of the lease.
On the other hand, advance rental is not an item of gross income if it
constitutes a loan, or it is a security deposit to guarantee payment or rent
subject to contingency which may or may not happen.
3. Leasehold improvements made by the lessee on the leased property are
recognized by the lessor as income using the spread-out method or outright
method.
Royalties
• Royalties earned from sources within the Philippines are generally
subject to final income tax except when they are active by nature.
• Active royalty income and royalties earned from sources outside the
Philippines are subject to regular income.
Dividends
• These pertain to foreign-sourced dividends or those declared by foreign
corporations which are generally subject to regular tax and may be exempted if
it met the requirements of the pre-dominance tests.
• Those declared by domestic corporations are subject to the rules of final tax.
• Cash, property, and script dividends from foreign corporations are generally
items of gross income subject to regular income tax.
• Stock dividends are exempt from income tax, but when the declaration confers
to the recipient a different interest or right after the stock dividend declaration or
when stocks dividends are subsequently redeemed such that it amounts to
payment of cash dividend, the fair market value of the stock dividends received
is taxable.
• Liquidating dividend is not income. The liquidating dividends are considered an
amount in exchange for the investment of the investor and are subject to the
rules of dealings in properties in Chapter 12.
Dividends
Source of Dividends
Recipient of dividends Domestic Foreign Corporation
Citizens and residents 10% final tax Regular tax
NRA-ETB 20% final tax Regular tax
NRA-NETB 25% final tax 25% final tax
Domestic Corporation Exempt Regular tax**
Resident Foreign Corporation Exempt Regular tax
Non-resident Foreign Corporation 15% final tax* 25% final tax
* subject to tax sparing rule, otherwise 25%.
** subject to conditional exemption
Dividends
• Under the CREATE law, inter-corporate dividends received by domestic corporations from foreign
corporations are generally subject to regular tax, except if the ratio in the predominance test is less than
50%, the foreign-sourced dividends shall be exempt if the following conditions concur:
1. The domestic corporation directly owns at least 20% in value of the outstanding shares of the
NRFC.
2. The shareholdings in the NRFC must have been held uninterruptedly for a minimum of 2 years
at the time of dividend distribution or throughout the entire existence of the NRFC if it is
operational for less than 2 years.
3. The foreign-sourced dividend received or remitted must be reinvested within the next taxable year in
business operations as working capital, capital expenditures, dividend payments, investment in
domestic subsidiaries, and infrastructure projects.
• Foreign-sourced dividends that are not utilized in the following taxable year shall be declared as
taxable income subject to surcharges, interest and penalties.
• If the ratio in the predominance test is at least 50% the foreign-sourced dividends received by the domestic
corporation shall be exempt from income tax even if the above-mentioned conditions are not met.
Annuities
• The excess of annuity payments received by the recipient
over premium paid is taxable income in the year of receipt.
Illustration
Andrew purchased an annuity contract for P100,000 which
shall pay him P10,000 annually until he dies.
The receipt of the first 10 annual annuity payments is a
return of capital. Any further receipt from year 11 onwards is
an item of gross income subject to regular income tax.
Prizes and Winnings
• Prizes and winnings that are exempted from final tax are not items of gross
income subject to regular income tax.
• Exempt prizes and winnings:
1. Prizes received without effort to join a contest
2. Prizes in athletic competitions sanctioned by their respective national
sports association
3. Winnings from PCSO games, not exceeding P10,000 in amount
Prizes and Winnings
• Summary rules of prizes and winnings: INDIVIDUAL TAXPAYERS
Earned from Sources
Prize Within Abroad
10,000 and below Regular tax Regular tax
More than 10,000 Final tax Regular tax
Winnings
PCSO winnings, exceeding P10,000 Final tax N/a
PCSO winnings, not exceeding P10,000 Exempt N/a
Winnings from other sources Final tax Regular tax
Prizes and Winnings
• Summary rules of prizes and winnings: CORPORATE TAXPAYERS
Earned from Sources
Prize Within Abroad
Prizes regardless of amount Regular tax Regular tax
PCSO winnings, exceeding P10,000 Final tax N/a
PCSO winnings, not exceeding P10,000 Exempt N/a
Winnings from other sources Regular tax Regular tax
Pensions
• These pertain to pensions and retirement benefits that fail
to meet the exclusion criteria and hence subject to regular
tax.
Taxable Partnership and Taxable Joint
Venture or Co-ownership
• Taxable partnership, joint ventures or co-ownerships are taxable as corporations.
The distributive share in the net income of these unincorporated entities shall be
taxable as follows:
Placed organized or constituted
If a partner, venturer, co-owner is an/a Philippines Abroad
Individual 20% Final tax Regular tax
Corporation Regular tax Regular tax

• The share in the net income of non-taxable entities such as general professional
partnership, exempt joint-ventures, or exempt co-ownership shall be subject to
regular income tax to the recipient partner, venturer or co-owner.
 Partner's Distributive Share From The Net
Income Of General Professing Partnership
• A general professional partnership (GPP) is not subject to income
tax (i.e., final tax, capital gains tax, or regular income tax). The
partners are the ones subject to regular tax on their share in the net
income of the GPP. For this purpose, the net income of the GPP
shall include items of income which are exempted from final tax or
capital gains tax to the general professional partnership.
Income Distribution From Taxable
Estates Or Trusts
• Any income distribution received by an heir or beneficiary from a
taxable estate, or trust shall be included in his gross income subject
to regular tax, provided ty such income must not have been subjected
to final tax or capital gains tax.
Share from the Net Income of Exempt
Joint Ventures and Co-ownerships
• The same tax treatment on recognition of share in the net income of
a general professional partnership applies to the share from the net
income of exempt joint ventures and co-ownerships.
Farming Income
• Farming operations can be classified as:
1. Raise and sell operation
The proceeds on the sales of livestock or farm products is included
in gross income subject to regular income tax. Animal raising
expenses are presented as items of deductions against gross income.
2. Purchase and sell operation
The gross profit from the sale (sales less cost of purchase) is
included in gross income.
• The proceeds of crop or livestock insurance constitute a taxable item
of gross income because they are recovery of lost profits.
Recoveries of Past Deductions
• When past year deductions from gross income are subsequently recovered by the taxpayer or
when accrued expense previously deducted are subsequently paid at in amount less than the
deduction claimed, they should be analyzed whether of not they resulted in tax benefit to the
taxpayer.
• Examples of recoveries of past deductions:
1. Recovery of previously claimed bad debt expense
2. Refund of local tax expense
3. Refund of foreign tax previously claimed as deduction
4. Recommissioning of abandoned petroleum service contracts or mining tenements
5. Release of reserve funds of insurance companies
6. Interest expense which were subsequently condoned by the lender
• Past deductions that created tax benefit to the taxpayer must be reverted back to gross income in
the year of recovery so that the government will recover the tax lost from the deduction.