BASIC TAX (GROSS INCOME ONWARDS) Flashcards
Define Taxable Income
In Section 31 of the NIRC as amended by TRAIN, taxable income means the pertinent items of gross income specified in this Code, less the deductions, if any, authorized for such types of income by this Code or other special laws.
Meaning of Net Income
Net income is the amount of money left after all expenses, taxes, and deductions have been subtracted from total revenue or earnings. It reflects the actual profit of a business or an individual.
For example:
- If a business earns ₱500,000 in revenue but has ₱200,000 in expenses (like rent, salaries, and materials), the net income would be ₱300,000.
- For individuals, net income is often referred to as take-home pay, meaning the amount left after deductions like taxes, retirement contributions, or insurance.
Would you like help understanding how net income is calculated in different scenarios?
Meaning of the term gross receipts means the entire receipts without any deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception.
Yes, that’s a precise definition! Gross receipts represent the total revenue received by a business or individual without any deductions for expenses, costs, or taxes. They include income from sales, services, rents, interests, and other sources.
Once deductions are applied—such as operating costs, salaries, or tax exemptions—the amount changes from gross receipts to net receipts (or net income). This distinction is critical, especially in taxation, where some taxes are applied directly to gross receipts, meaning businesses or individuals must pay tax on the full amount received before considering expenses.
However, if a law specifically allows deductions from gross receipts before taxation, then exceptions may apply. Would you like to explore real-world applications or laws regarding gross receipts taxation?
Define Gross Income
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SEC. 32. Gross Income. -
(A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner’s distributive share from the net income of the general professional partnership.
What are the requisites for income to be taxable?
- There must be gain
- The gain must be realized or received and
- The gain must not be excluded by law or treaty from taxation
This phrase means that any gain—such as profit, income, or financial benefit—must be subject to taxation unless a specific law or treaty explicitly exempts it.
In other words, if a person or business earns money, that gain is normally taxable unless there’s a legal provision or international agreement that excludes it. Some common examples of tax-exempt gains include:
- Income from diplomatic personnel (covered under treaties)
- Certain government benefits (like pensions or social security)
- Tax-exempt investments (such as specific retirement accounts or municipal bonds)
If no such law or treaty applies, the gain must be reported and taxed accordingly.
Would you like to explore specific cases where gains are excluded from taxation?
explain Net income
Net income tax refers to the tax imposed on a person’s or business’s net income, which is the remaining earnings after deducting allowable expenses, exemptions, and deductions. It is calculated based on the taxable portion of income rather than total revenue.
For example:
- If an individual earns ₱500,000 in a year but qualifies for ₱100,000 in deductions (such as retirement contributions or business expenses), their net taxable income becomes ₱400,000.
- The government then applies the appropriate tax rate to this amount to determine the final income tax liability.
Net income tax is commonly used in personal income taxation and corporate taxation, ensuring businesses and individuals pay taxes only on profits rather than total earnings.
