Inclusions in Gross Income

Question 1

Items of gross income subject to regular tax

Answer 1

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 in the dealings of properties
4. Interest Income
5. Rental Income
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of general purpose partnership

Question 2

Compensation for services in whatever form paid

Answer 2

Pertains to the employee benefits that are subject to regular tax.

EXC: Fringe benefits of managerial and supervisory employees are subject to FINAL TAX.

Question 3

Gross income from the conduct of trade, business, or exercise of a profession

Answer 3

Includes income from any trade or business, legal or illegal, whether registered or unregistered.

EXEMPTIONS NOT SUBJECT TO RIT:

1. Business income exempt from income tax
2. Business income subject to special tax
3. Business income subject to FIT

Question 4

Gains derived in the dealings of properties

Answer 4

Gains or losses in dealing in ordinary assets are subject to regular income tax. Capital assets other than domestic stocks and real properties are also subject to income tax.

Gains from ordinary assets are included as items of gross income. Losses from ordinary assets are items of deductions against gross income. Net capital gains are included as an item of gross income after deducting net capital loss. A net capital loss is not an item of deduction against gross income.

Question 5

Interest income

Answer 5

Interest income other than passive interest income subject to final tax. Must have been actually paid and not imputed for it to be taxable.

Question 6

Interest income subject to RIT

Answer 6

1. Interest income from lending activities to individuals and corporations by banks, financial institutions, and other lenders
2. Interest income from corporate bonds and promissory notes
3. Interest income from bank deposits abroad

Question 7

Interest income exempt from regular income taxation

Answer 7

1. Interest income earned by landowners in pursuant to Comprehensive Agrarian Reform Law
2. Imputed interest income

Question 8

Rental Income

Answer 8

Arises from leasing properties of any kind. It is a passive income not subject to FIT, hence it is subject to RIT.

Question 9

Special considerations on rent

Answer 9

1. Obligations of the lessor assumed by the lessee are additional income to the lessor.
2. Advance rentals are:
   a. ) Item of gross income if:
3. Unrestricted
4. Restricted to be applied in future years or upon the termination of the lease
   b. ) Not an item if:
   a. ) It constitutes a loan
   b. ) It is a security deposit to guarantee payment or rent is subject to contingency
5. Leasehold improvements on the leased property made by the lessee is recognized as income by the lessor using spread-out method or outright method

Question 10

Royalties

Answer 10

Active royalties and royalties earned from sources outside the Philippines (abroad
0 are subject to RIT. Passive royalties earned within the Philippines are generally subject to final income tax. (Applicable for RC)

Question 11

Spread-out Method

Answer 11

Depreciated value = (Cost of leasehold improvement - Excess of the useful life over the lease term) / Useful life of improvement

Income recognized by the lessor = Depreciated value / Lease term

Question 12

Outright Method

Answer 12

The FMV of the leasehold improvement shall be recognized as income of the lessor.

Question 13

Dividends

Answer 13

Dividends declared by foreign corporations received by individual are subject to RIT (subject to situs rules). Dividends declared by domestic corporations are subject to 10% FIT if the recipient is an individual taxpayer and exempted if domestic corporations or RFC.

Question 14

Annuities

Answer 14

The excess of annuity payments over the premium paid is taxable income in the year of the receipt.

Question 15

Prizes and winnings - individuals who received the following prizes and winnings are subject to RIT:

Answer 15

1. Prizes earned within amounting to 10,000 and below

2. Prizes and winning earned abroad (for RC)

Question 16

Pensions

Answer 16

Pertains to pensions and retirement benefits that fail to meet the exclusion criteria and hence subject to RIT.

Question 17

Partner’s distributive share from the net income of general purpose partnership

Answer 17

General professional partnerships are not subject to income ta because they are merely viewed as pass-through entities. The partners are the ones subject to regular income tax on their share in the net income, it shall be included in their respective gross income. Applies to other pass through entities such as exempt joint ventures and exempt co-ownerships.

Question 17

Partner’s distributive share from the net income of general purpose partnership

Answer 17

General professional partnerships are not subject to income ta because they are merely viewed as pass-through entities. The partners are the ones subject to regular income tax on their share in the net income, it shall be included in their respective gross income. Applies to other pass through entities such as exempt joint ventures and exempt co-ownerships.

The net income of the GPP shall include the items of gross income which are exempted from FIT and CGT.

Question 18

Taxable joint venture or co-ownership

Answer 18

Subject to RIT if organized or constituted abroad if the taxpayer is resident citizen.

Question 19

General criteria for items of gross income

Answer 19

The regular income tax has a catch-provision for all income derived from whatever sources that are:

1. Not subject to FIT, CGT, and special tax
2. Not excluded or exempted by law, treaty, or contract from taxation

Question 19

General criteria for items of gross income

Answer 19

The regular income tax has a catch-provision for all income derived from whatever sources that are:

1. Not subject to FIT, CGT, and special tax
2. Not excluded or exempted by law, treaty, or contract from taxation

Question 20

Other sources of gross income subject to RIT

Answer 20

1. Income distributions from taxable estates or trusts
2. Share from pass-through entities such as exempt JV and exempt co-ownership
3. Farming income
4. Recovery of past deductions
5. Reimbursement of expenses
6. Cancellation of indebtedness for a consideration

Question 21

Income distributions from taxable estates or trusts

Answer 21

Any income distributions received by an heir/beneficiary from a taxable estates or trusts are included in his gross income subject to RIT, provided that such income must not have been subjected to FIT or CGT.

Question 22

Recovery of past deductions

Answer 22

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

Question 23

Tax benefit can be:

Answer 23

1. Direct - reduction of taxable income in the year deduction was made
2. Indirect - through reduction of future taxable income through carry-over of net operating loss (NOLCO)

Question 24

Examples of recoveries of past deductions

Answer 24

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

Question 25

Refund of non-deductible expenses

Answer 25

Expenses or payments which are non-deductible against gross income in the computation of taxable net income will never create tax benefit to the taxpayer. As such, their recovery should not be included in gross income.

Question 26

Refund of the following non-deductible items is not taxable:

Answer 26

1. Philippine income tax
2. Estate or donor’s tax
3. Income tax paid or incurred to a foreign country if the taxpayer claimed a credit for such tax in the year it was paid or incurred
4. Stock transaction tax in disposing stocks through the Philippine Stock Exchange
5. Special assessment

Question 27

Reimbursement of expenses

Answer 27

Expenses of the taxpayer that are reimbursed or paid by the customer or client constitute additional income to the taxpayer

Question 28

Cancellation of indebtedness

Answer 28

a. ) In consideration of service or goods - treated as income
b. ) As an act of gratuity - treated as gift
c. ) As capital transaction such as forfeiting the right to receive dividends in exchange of debt - treated as dividend income

Question 29

Accounting method

Answer 29

Cash basis - reports gross receipts or collections as gross income
Accrual basis - reported gross income includes collected and uncollected income