TAX FINALS REVIEW Flashcards
What is gross income?
All income derived from whatever source, including but not limited to the items listed in NIRC Sec. 32(A) (CARD-GRIPPP)
What are the items listed as gross income under NIRC Sec. 32A
CARD GRIPPP
1. Compensation for services in whatever form paid, including, but not limited to: (SWag-CoFS) [Salaries, Wages, Commissions, Fees, an Similar Items]
2. Annuities;
3. Rents;
4. Dividends;
5. Gains derived from dealings in property;
6. Royalties;
7. Interests;
8. Gross income derived from the conduct of trade or business or the exercise of a Profession;
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership (NIRC Sec. 32A)
What is compensation?
All remuneration for services performed by an employee for his employer under an ER-EE relationship, unless exempted under NIR (RR No. 8-2018, Sec. 2a)
What are the rules in determining whether income is compensation or not?
Rules to determine w/n income is compensation:
1. Whether such income is received by virtue of an ER-EE Relationship
- The name by which the remuneration for services is designated is immaterial
How is the various kinds of compensation valued?
Valuation of Amount of Compensation:
If payment is made in:
- Cash - full amount received;
- Other than cash - FMV of the thing at the time of payment or rendition of service;
- Promissory note or other evidence of evidence - (1) if not discounted, face value; (2) if discounted, fair discounted value of the note at the time of receipt;
- Stocks - FMV of the stock (if stock option, difference between the FMV of the shares at the time the option is exercies and the option price)
- Living quarters furnished in addition to cash - the rental value of such quarters.
Compensation Income includes??
Compensation Income include (WSRM-DFL)
1. Wages
2. Separation Pay
3. Retirement Benefits
4. Monetary benefits
5. Director’s fees
6. Fringe benefits granted to rank and file employees
7. Love gifts received by pastors from pastoral ministry
What are wages? What does it include and what does it exclude?
Wages - means all remuneration (other than fees paid to a public official) for services performed by an emplyee for his employer, including the cash value of all remuneration paid in any medium other than cash (NIRC Sec. 78A)
INCLUSIONS: BBALD - Backwages, allowances, and benefits awarded in labor disputes
EXCLUSIONS: Wages do not include remuneration paid for the following: (AD-CaS)
i. Agricultural labor paid entirely in products of the farm where the labor is performed;
ii. Domestic service in a private home;
iii. Casual labor not in the course of the employer’s trade or business; and
iv. Services by a citizen or resident of the PHilippines for a foreign government or an international organization (NIRC Sec. 78A)
When is separation pay taxable compensation?
Separation pay - taxable compensation of the separated official or employee when the cause of the separtaion is within the control of such official or employee (e.g. the employee is separated under a voluntary separatio program of the employer)
NOTE: Sep. pay received because of death, sickness or other physical disability or for any cause beyond hte control of the separated official or employee are excluded from gross income and, as such, are not taxable (NIRC Sec. 32B6b)
When is retirement benefit taxable?
Retirement benefit is taxable as part of compensation if such benefits were received by an employee who fails to meet the minimum requirements of a reasonable private benefit plan under RA No. 4917 and RA 7641.
What are annuities?
Annutiies refers to the periodic installment payments of income or pension by insurarnce companies during hte life of a person or for a guaranteed fixed period of time, whichever is longer, inconsideration of capital paid by him. It is paid annually, monthly or periodically, computed upon the amount paid yearly, but not necessarily for life.
NOTE: mere return of premium is not taxable. excess of premium is what is taxable.
Is income from leasehold improvements taxable?
When the lessee erected or built permanent improvements inthe leased property which will become the property of the lessor upon the expiration of the lease, the value of hte imporvements should be reported as income of the lessor (RR NO. 02-40 Sec. 49)
Two methods for reporting income from leasehold improvements:
- Outright methods - recognized as income to lessor at the time when such building or imporvements are compeleted, at FMV
- Spread-out Method - lessor spread over hte life (or remaining period) of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each year of the lease, an aliquot part thereof (RR NO. 02-40 Sec. 49)
What are dividends?
Dividends are any distribution made by a corprotion to its shareholders out of the unrestricted retianed earnings payable to its hsareholder, whether in money, property or stock. (NIRC Sec. 73A)
What is the rule on the taxability of stock dividends?
Taxability of Stock Dividends:
General Rule: Stock dividends are not taxable.
Exceptions
1. Cancellation or Redemptions of shares of stocked issued as dividends, the amount distributed in redemption or cancellation shall be considered taxable income (NIRC, Sec. 73B)
- Recipient is Other than shareholder, in which sae, stock dividend is taxable to usufructuary;
- Dividend declared inthe Guise of treasury stock dividend to avoid the effects of income taxation;
- Distribution of Treasury stocks;
- Change in the stochkholder’s Equity, right/interest in the net assets of the corporation;
- Different classes of stock were issued.
What are royalties?
Royalties are payments for the use and exhaustion of property such as earnings from copyrights, patents, trademarks, formulas and natural resources under lease (RMC NO. 44-2005 Sec. 3)
NOTE; Royalties must e derived from sources within the Philippines to be considered as passive income. (NIRC Sec. 4 A2)
What are the kinds of royalties?
There are two kinds of royalties:
1. Non-Passive (Active) Income
2. Passive Income
What are the tax rates imposed on royalty income subject to final tax?
Tax Rates Imposed on Royalty Income Subject to Final Tax
- In general - 20% (NIRC, Sec. 24(B)(1) as amended by TRAIN Law);
- Derived from books, other literary works or musical compositions - 10% (NIRC,Sec. 24-25)
- In all instances above, for non-resident alien not engaged in business, rate is 25%; while for domestic and resident foreign corporation, 20%; and for nonresident foreign corporations, 30% (NIRC, Secs. 27-28)
What are the conditions for interest income to be treated as passive income?
Conditions for interest income to be treated as passive income: (WEC)
1. Derived from sources Within the Philippines;
2. Earned by an individual citizen, resident alien individual, or non-resident alien individual engaged in trade or business in the Philippines or earned by a domestic corporation or resident foreign corporation; and
3. Derived from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements (NIRC Sec. 42 B1)
What are the tax rates on interest income subject to Final Tax?
The interest income subject to final tax are:
1. Interest from any currency bank deposit, yield, or any other monetary benefit from deposit substitutes and from trust fudns and similar arrangements derived from sources within the Philippines; rate is 20% (NIRC Sec. 24B1) [does not cover interest paid by cooperatives]
- Interest from long term deposit (LTD) or investment in the form of savings, common or individual trust funds, substitutes, investment management accounts, and other investments evidenced by certificates in such form prescribed by BSP - exempt.
NOTE: In case of pre-termination before the 5th yr, a final tax shall be imposed on the entire income, whose holding period was:
a. 4 years to less than 5 years - 5%
b. 3 to less than 4 years - 12%
c. Less than 3 years - 20%
- From foreign currency deposit units, except nonresidents - 15% (RR NO. 14-2012)
Who is a professional income taxpayer?
A professional income taxpayer is a person certified by a professional body belonging to a specific profession by having completed a required course of studies and or practice. It also refers to a person who engages in some art or sport for money, as a means of livelihood rather than as hobby.
What are gross income from trade or business?
- Self-employment income - consists of earnings derived by an individual from the practice of profession, or conduct of trade or business carried on by him as a sole proprietor, or by a partnership of which he is a member (NIRC Sec. 74A);
- Business income - refers to income derived from merchandising, mining, manufacturing, farming, and other similar operations. It arises from habitual engagement in any commercial activity involving regular sales of goods or services by an individual or a corporation. The income from business, legal or illegal, registered or unregistered, is taxable.
What are the tax rates for trade or business income?
Tax rates for Trade or Business Income:
1. For individuals - graduated rates (0% to 35%) (NIRC Sec. 24A2a)
2. For corporations - normal corporate income tax [DC - 25%, DC Prop-ed/Prop-H 10%; GOCCs 25%; RFC 25%; NRFC - 25% gross income]
What are the prizes and winnings subjected to final tax of 20%?
Prizes and winnings subject to final tax of 20%
1. Prizes derived from sources within the Philippines by an individual amounting to more than P10,000. Such prizes are taxed on a per transaction basis;
- Other winnings (except winnings amounting to P10,000 or less from PCSO which shall be exempt)
- PCSO and Lotto winnings in excess of P10,000
NOTE: Under Sec. 25A2 of the NIRC, NRA-ETB’s PCSO and Lotto winnings, regardless of the amount is EXEMPT from income tax;
NOTE:
What are the prizes and winnings subjected to final tax of 20%?
Prizes and winnings subject to final tax of 20%
1. Prizes derived from sources within the Philippines by an individual amounting to more than P10,000. Such prizes are taxed on a per transaction basis;
- Other winnings (except winnings amounting to P10,000 or less from PCSO which shall be exempt)
- PCSO and Lotto winnings in excess of P10,000
NOTE: Under Sec. 25A2 of the NIRC, NRA-ETB’s PCSO and Lotto winnings, regardless of the amount is EXEMPT from income tax;
NOTE: NRA-NETB (prizes and winnings regardless of amount) - 25% Final Tax (NIRC Sec. 25B)
What are the prizes excluded from gross income?
Prizes excluded from gross income:
1. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(a) the recipient was selected without any action on his part to enter the contest or proceeding; and
(b) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and
- All prizes and awards granted to athletes in local and international sports competitions and tournamets whether held in the Philippines or abrooad and sanctioned by their national sports associations (NIRC, Sec. 32B7d to e)
What are income excluded from gross income under the COnstitution?
- Income of non-stock non-profit educational institutions used actually, directly, and exclusively for educational purposes are exempt from taxes (Sec. 4(3), Art. XIV, 1987 Constitution)
What are items of exclusion?
Items of exclusions (LAG-CRIME)
- Life insurance;
- Amount received by insured as return of premium;
- Gifts, bequests, and devises;
- Compensation for injuries or sickness;
- Retirement benefits, pensions, gratuities;
- Income exempt under treaty; and
- Miscellaneous items:
a. Income derived by foreign government;
b. Income derived by the government or its political subdivisions;
c. Prizes and awards;
d. Prizes and awards in sports competition;
e. 13th month pay not exceeding P90,000 and other benefits
- Exclusions under Special Laws
When are life insurance proceeds included in the gross income?
When life insurance proceeds are included in the Gross income (EPAgO-MOV-PC)
- Payments for reasons other than death are subject to tax to the extent of the Excess of the Premiums paid. If there are any policy loans (borrowing made on the policy), these are to be considered as advances deductible from the life insurance proceeds received upon death;
- If such amounts are held by the insurer under an Agreement to pay interest thereon, the interest payments shall be included in gross income;
- When the insured Outlives the policy, the proceeds from life insurance (less the total amount of premiums paid) should be included in the gross income since death is an essential element for the exclusion;
- Where the life insurance policy is used to secure a Money Obligation
- Where the life insurance policy was transferred for a Valuable consideration
- The recipient of the insruance proceeds is a Partnership in which the insured is the partner and the insurance was taken to compensate the partnership for any loss in income that may result form the dissolution of the partnership caused y the death of the insured partners; and
- The recipient of the life insurance proceeds is a Corporation in which the insured was an employer officer.
How do we determine if the Gift Bequest, Devise or Decent is excluded?
Gift Tax Test:
1. If there is no legally demandable obligation to give the gift – not taxable; and
2. If there is a legally demandable obligation to give, there is income - taxable
What kind of damages are taxed and excluded from tax?
Kind of damages arising from personal injuries and sickness which are excluded from Gross Income
- Actual or compensatory damages
- Moral, nominal, temperate or moderate and liquidated damages
What are the retirement benefits, pensions, and gratuities excluded from gross income?
RETIREMENT BENEFITS, PENSIONS AND GRATUITIES EXCLUDED FROM GROSS INCOME
- Those received by officials and employees of private employers in accordance with a reasonable private benefit plan under RA No. 4917
- Those derived under RA 7641 from private firms without a BIR-approved reasonable retirement plan
- Separation pay due to death, sickness or other disability or any other cause beyond the control of the employee or the official (e.g. retrenchment)
- Social security benefits, retirement ratuities, pensions and other similar benefits received by citizens or aliens who come to reside permanently in the Philippines from foreign government agencies, private or public;
- Benefits due to residents under laws of the United States administered by the Untied States Veterans Adminstration;
- SSS benefits received in accordance with RA NO. 8282; and
- GSIS benefits under RA No. 8921
What are miscellaneous items excluded from gross income?
Miscellaneous items (13-PPPIGGG)
- 13th mont hpay and other benefits up to P90,000
*other benefits include christmas bonus, productivity incentive bonus, loyalty award, gifts in cash or in kind and dother enefits of similar nature - Passive income by:
a. Foreign governments;
b. Financin institutions owned, controlled, or enjoying refinancing from foreign gov.
c. Inernational or regional financial institutions established by foreign gov. (NIRC Sec. 32B7a) - Prizes and Awards
- Prizes and awards granted to athletes in sports competitions locally or abroad and sanctioned by their national sports associations (NIRC SEc 32B7d)
- Income derived by the Philippine government and its political subdivisions from:
a. Any public utility; or
b. the exercise of any essential government function
What are the requisites in order to quality prizes and awards as exclusions from gross income?
Requisites: RAS
a. Prize must be received in Recognition of [CARCELS] Charitable, Artistic, Religious, Civic, Educational, Literary, or Scientific achievemtn;
b. Recipient did NOT take an Active part to join although he participated; and
c. Recipient is NOT required to render Substantial future services
What are Exclusions under Special Laws
EXCLUSIONS UNDRE SPECIAL LAWS
- Philippine Export Zone Authority Law (PEZA-registered enterprises);
- Comprehensive Agrarian Reform Program;
- New Central Bank Act (BSP is exempt)
- Urban Development Housing ACT (NHA is exempt)
- Jewel Industry Development Act (Exemption for qualified jewelry enterprises)
- Compensation income of statutory minimum wage earners
What are fringe benefits?
Fringe benefits - any good, service, or other eneift furnished or granted in cash or in kind by any employer to an invididual employee (except rank and file employees) as defined herein, such as but no limited to the following: HEV-HIM-HEEP
- Housing;
- Expense account;
- Vehicle of any kind;
- Household personnel (such as maid, driver, etc.);
- Interest on loans at less than market rate to the extent of the difference between the market rate and actual rate granted;
- Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;
- Holiday and vacation expenses;
- Expenses for foreign travel;
- Educational assistance to the employee or his dependents; and
- Life or health insurance and other non-life insurance Premiums or similar amounts in excess of what the law allows.
How are fringe benefits valued?
VALUATION OF FRINGE BENEFITS:
- Money - value of amount granted or paid;
- Property other than money and ownership is TRANSFERRED to the employee - FMV of the property as determined in accordance with the authority of the BIR to prescribe real property values; or
- Property other than money but ownership is NOT TRANSFERRED to the employee - depreciation value of the property
What is Fringe Benefits Tax?
FBT is a final tax of 35% imposed on the grossed-up monetary value GMV of the fringe benefit furnished or granted ot the empoyee, except rank-and-file employees, by the employer
applies to indiivduals or corporations
What are fringe benefits not subject to Fringe Benefits Tax?
Exempt FBT, regardless if the benefits were given to managerial or supervisory or rank-and-file employees if:
a. FB are authorized and exempted from income tax under the NIRC or under any special law;
b. contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
c. Benefits given to rank and file employees whether granted under a CBA or not;
d. De minimis benefits;
e. grant of fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; and
f. grant is for the convenience or advantage of the employer
What is the convenience of the employer rule?
Benefits given for the exclusive benefit or convenience of the employer are not subject to FBT
Grossed-up Monetary Value for the different kinds of taxpayers
GMV:
65% - citizens, resident aliens, NRA-ETB
75% - NRA-NETB;
85% - Alien individual employed by RHQ or ROQ, OBUs, foreign service contractors or subcontractors engaged in petroleum operations, or any Filipino individual employees who are employed and occupying the same position as those occupied or held by the alien employees
What are non-taxable housing fringe benefits?
Non-taxable housing fringe benefit (MTB)
1. Housing of Military officials of the AFP, cosisting of officials of the Phil Army, Phil Navy, and PAF;
2. Temporary housing for an employee who stays in a housing unit for THREE MONTHS OR LESS;
3.Housing unit which is situated inside or adjacent (ie. 50 m from the perimeter of the business premises) to the premises of the Business or factory (RR No. 03-98, Sec. 2.33B1)
Tax treatment of expense account as fringe benefit
Gen Rule: Expenses incurred by the employee but which are paid by his employer and expenses paid for by the employee but reimbursed by the employer are TAXABLE FRINGE BENEFITS
Exception: such expenses are duly receipted for andi n the name of the employer and the expenditures do not partake the nature of personal expense attributable to the employee, the said expenses are not taxable.
What are De minimis benefits?
DE MINIIS BENEFITS EXEMPT FROM INCOME TAX:
(facilities or privileges furnished by ER to EE that are of relatively small value, offered merely as a means of promoting health, goodwill, contentment and efficiency of his employees)
RUUMMM-CCOLA
- Rice subsidy =<P2,000 or 1 sack of 50kg rice per month amtng to not more than P2k
- Uniform and clothing allownae = <P6,000
- Monetized Used vacation leave credits of PRIVATE employees =< 10 days during one year
- Monetized value of vacation and sick leaves paid to GOV’t officials (NO LIMIT)
- Medical cahs allowance =< P10,000/yr
- Actual yearly Medical benefits =< P10,000
- Gift during Christmas and major anniversary celebrations =< P5,000
- benefits received by an employee by virtue of a CBA; productiity incentive schemes, provided both do not exceed =< P10,000 per employee per taxable year
- Daily meal allowance of Overtime work and night/graveyard shit =< P25% of basic minimum wage on a per region basis
- Laundry Allowance =< P300
- Employee’s achievement Awards =< P10,000
What are DEDUCTIONS?
Deductions - items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income
Who shall not be allowed deductions?
Taxpayers not allowed deductions:
1. Compensation income earners
2. Those who opted to be taxed at 8% income tax rate on their income from business/practice of profession
Rules on deductions
RULES on deductions
1. Matching Concept for Deductability
2. Substantiation Rule
3. Subject to limitations provided by law
4. Additional requirement relating to withholding
What are the kinds of deductions?
KINDS OF DEDUCTIONS (ISO)
- Itemized Deductions
- Special Deductions; and
- Optional Standard Deduction (OSD)
What is optional standard deduction?
OSD - an individual subject to tax under Section 24 (other than a nonresident alien) may elect a standard deduction in an amount not exceeding 40% of his gross sales or gross receipts
What are the itemized deductions?
ITEMIZED DEDUCTIONS: (ExIn-TaLoBa-DepDep-ChaRD-PeT)
- Business Expenses;
- Interest;
- Taxes;
- Losses;
- Bad Debts;
- Depreciation;
- Depletion;
- Charitable and Other Contributions;
- Research and Development; and
- Pension Trust Contribution (NIRC, Sec. 34)
Why are NRA-NETB and NRFC not allowed deductions?
NRA-NETB and NRFC are not allowed the itemized deductions because they are taxed on their gross income from sources within the Philippines.
What are the requisites for deductibility of business expenses?
Requisites for deductibility of business expenses (D-STROWN)
- It must be paid or incurred during the taxable year;
- It must be substantiated by proof;
- It must be incurred in Trade or business carried on yb the taxpayer
- It must be reasonable (not lavish)
- It must be ordinary and necessary;
- If subject to withholding taxes, the withholding taxes must be paid.
- It must not be contrary to law, public policy, or morals
What is an ordinary expense?
Ordinary expense - it is that which is normal or usual in relation to the taxpayer’s business and the surrounding circumstnaces.
What is a necessary expense?
Necessary expense - one which is appropriate and helpful in the development of the taxpayer’s business and are intended to minimize losses or to increase profits
Two tests of ordinary and necessary expenses
Two tests of ordinary and necessary expenses:
1. Reasonableness of amount
2. Amount incurred must not be a capital outlay
What is capital expenditure
CAPEX - payment which creates or enhances what is essentially a separate and distinct asset or made to increase the value of the taxpayer’s property or for any amount expended in restoring property or in making good the exhaustion thereof.
What are the kinds of business expenses?
Kinds of business expenses:
- Compensation for personal services;
- Travelling/Transportation Expenses;
- Lease Agreement Expenses;
- Entertainment, Amusement and Recreation (Ear) Expenses;
- Cost of Materials and Supplies;
- Expenses of Professionals;
- Repair expenses;
- Advertising expenses;
- Expenses allowed to private educational institutions
What is interest?
Interest is compensation for hte use or forbearance or detention of money, regardless of the name it is called or denominated.
Requisites for deductibility of interest.
Interest: Requisites for deductibility (TID-CROWD-TA)
1. Indebtedness must be that of the Taxpayer
2. Interest expense must have been paid or incurred during the taxable year
3. It msut be on a bona fide debtor-creditor relationship
4. Connected to taxpayer’s trade, business, or exercise of profession
5. Not between related taxpayers
6. Not incurred to finance petroleum operations;
7. Stipulated in writing;
8. Legally Due;
9. Not treated as capital expenditure;
10. Subject to interest Arbitrage rule
Requisites for deductibility of taxes
Requisites for deductibility of taxes (TILE-C)
- Payments must be for taxes and not for amounts representing surcharge or penalties incident to delinquency
- Paid or incurred during hte taxable year in connection with trade or business or profession
- Tax must be imposed by law
- Taxes must not be specifically excluded by law
- for NRA-ETB and RFC, taxes are imposed to income sourced within Philippines
What are deductible losses?
Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity are the losses contemplated to be deductible
Requisites for deductibility of losses
Requisites for deductibility of losses (TEN-ACIDA)
- Loss of Taxpayer
- Evidenced by a closed and completed transaction;
- Not claimed as a deduction for estate tax purposes (for individuals);
- Actually sustained and charged off during the taxable year;
- Not Compensated for by insurance or other form of indemnity;
- For Individuals, the loss must be connected with his trade or business or profession or incurred in any transaction entered into for profit though not connected with his trade, business, or profession
- For casualty losses, Declaration of loss must be field with BIr via a sworn declaration from date of occurrrence (ie within 45 days) or discovery of the casualty or robbery
- Additional rules for deductibility must be satisfied for casualty, capital and special losses
Classifications of losses
Ordinary losses - incurred in trade or business
Casualty losses - incurred by property connected with trade, business, or profession, if loss arises from fire, storm, shipwreck or other casualties, or from robbery, theft or embezzlement
Requisites for deductibility of losses on securities becoming worthless
Losses on Securities becoming worthless (WoCAT)
1. Ascertained to Worthless and charged off within the taxable year;
2. Held as Capital Asset
3. Loss was incurred by a Taxpayer other than a bank or trust company
What are the elemnets of Was Sales?
Elements of Wash Sales (L-30-P-61-NAD)
- The sale or other disposition of stock resulted to a loss
- There was an acquisition or contract or option for acquisition of stock or securities within 30 days before the sale or thirty days afte the sale
- The acquisition must be by Purchase, taxable exchange or through an option contract upon which the entire amount of gain or loss was recognized by law
- The stock or securities sold were substantially the same as those acquired within the 61-day period
- The seller is Not A Dealer in securities
Exception to the exception re: wash sales of stocks
Gen Rule: Losses from sales or exchanges of stock or securities are deductible
XPN: Loss from wash sales of stock is not
XPN2XPN: 1. Taxpayer is a dealer in securities and the transaction from which the loss resulted was made in the ordinary course of business of such dealer, the loss from was sales is deductible in full
- Short sales transactions
- Gains in wash sales as such gains are taxable
What is NOLCO
Net Operating Loss Carry-Over
It is the excess of allowable deductions over gross income of the business for any taxable year, which had not been previously offset as deduction from gross income
What are the requisites of NOLCO
Requisites for deductibility of NOLCO (NOCES)
- It is from the Net operating loss of the business for any taxable year immediately preceding the current taxable year
- It has not been previously offset as deduction from gross income
- It shall be carried over as a deduction from gross income, for the next 3 consecutive taxable years immediately following the eyar of such loss only
- Taxpayer was not exempt from income tax in the year the loss was incurred
- There has been no substantial change in the ownership of hte busines or enterprise
Who are taxpayers entitled to deduct NOLCO?
Taxpayers entitled to deduct NOLCO (PIPET)
- Individuals engaged in trade or business or in the exercise of his profession
- DC and RFC subject to normal income tax
- Special Corp. subject to preferential tax rates
- Estates and Trusts
What are ordinary assets?
ORDINARY ASSETS: (SOUR)
- Stock in trade of the taxpayer or other properties which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year (e.g. supplieso n hand, merchandise inventory)
- Property held by the taxpayer primarily for sale to customers in the Ordinary course of business (eg. subd. lost by real estate developer, groceries by a retail store)
- Personal property Used in trade or business subject to depreciation (e.g. delivery truck, store and office eqp)
- Real property used inn trade or business (e.g. warehouse, factory, office bldg.)
List is exclusive**
What is the tax treatment of ordinary gains?
Treatment of ordinary gains and losses:
1. Ordinary gains are included in the gross income
2. ordinary losses are deductibel from gross income
Is the sale of good will a sale of ordinary asset or capital asset?
The saale of goodwill is not subject to ordinary income tax since goodwill is not an ordinary asset and is not among the exceptions under the definition of capital assets. It is subject to capital gains tax.
What is net capital gain and what is net capital loss?
Net capital gain = excess of gains from sales or exchanges of capital assets over the losses from such sales or exchanges (NIRC Sec 39 A2)
Net capital loss = excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges
What are the taxes upon transactions involving capital assets?
Taxes on capital assets transactions
- Capital Gains Tax (CGT) - (1) sales of shares of stock of a domestic corp not listed and not traded through stock exchange; (2) sale of real property in the philippines held as capital asset
- Regular income tax rate - capital gains and losses other than those subjected to CGT (in this tax, holding period applies, loss limitation rule applies, nclo rule applies)
Tax treatment on sale or other disposition of real proeprty subject to CGT by a non-dealer
CGT:
Tax rate: 6%
Tax base: presumed gain which is the Gross Selling Price or Zonal Value or FMV whichever is higher
Tax treatment of sale of principal residence
Sale of principal residence
6% CGT on GSP, ZV, or FMV
XPN: Proceeds is used to acquire or construct a new principal residence within 18 cal. months from date of said sale or disposition, and CIR is notified 30 days from date of sale of intention to avail
Rule on holding period of capital assets
Applies to capital gains and losses subject to regular income tax
Holding period affects the tax base (the amount of capital gain which shall be included in computation of grossi ncome):
i. 100% if capital asset has been held for NOT MORE THAN twelve (12) months
ii. 50% if held for MORE THAN twelve months
What are tax-free exchanges?
Tax-free exchanges refer to those instances enumerated in Sec 40(C)(2) of the NIRC that are not subject to IT, CGT, DST, and/or VAT.
What are tax-free exchanges of property?
Tax-free exchanges of property
- No gain or loss is recognized where in pursuance of a plan of merger or consolidation: (a) Corp-party-to-merger [CPTM] exchanges property solely for stock in the other CPTM– property for stock; (b) shareholder exchanges stock in a CPTM solely for stock of the other CPTM– stock for stock; (c) security holder of CPTM exchanges securities in such corp for stock or securities in the other CPTM– security for stock.
- If property is transferred to a corp. by a person in exchange for stock or unit of participation in such corp. of which as a result of said exchange said person (alone or together with others, NOT EXCEEDING 4 PERSONS) gains control of said corp.
Tax treatment of upstream mergers where parent company does not issue shares to subsidiaries
Treated as donations
RULE ON UPSTREAM MERGER
-An upstream merger between a parent company and its subsidiaries where the parent compenay will not be issuing any shares to the subsidiaries in exchange for the assets to be transferred as a result of the merger takes the nature of a donation made by the subsidiaries to their parent comapny and not a tax-free exchange transaction
How are estates and trusts taxed?
Estates and trusts are considered as individuals taxable as separate taxpayer, except revocable trusts, the income of which shall be included in computing the taxable income of the grantor.
Classification of estates
Classification of estates for income tax purposes:
1. Estates under judicial administration
2. Estates not under judicial administration
Classification of trust
Classification of trust for income tax purposes
1. Ordinary trust
2. Revocable trust - income is included in taxable income of grantor
3. Employee’s tax - exempt from income tax
General rule and exception of accounting periods and methods
Accounting period:
Gen Rule: Accounting period of a taxpayer is 12 months
XPN:
1. Change of acc. per. from fiscal to calendar vice versa
2. TP dies
3. Corp is newly organized
4. Corp. is dissolved
5. TP is terminated by Commissioner because: (1) retirement; (2) leave PH; or (3) performs any act tending to obstruct proceedings for collection of tax
Accounting methods recognized by law
- Cash basis method
- Accrual method
- Installment method
- Percentage completion method
- Crop year method
What are non-deductible items?
Non-deductible items in computing net income (PIRPIL_NNNWP)
- Personal, living, or family expenses;
- Amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate (capital expenditures);
- Amount expended in Restoring property or in making good the exhaustion thereof for which an allowance has been made (major repairs)
- Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financial interested in any trade or business carred on by the taxpayer, individual or corporate, when taxpayer is directly or indirectly a beneficiary under such policy;
- Interest expense, bad debts and losses from sales or exchanges of property between related parties;
- Losses from sales of exchange of proeprty;
- Non-deductible interest expense;
- Non-deductible taxes;
- Non-deductible losses;
- Losses from wash sales of stock securities;
- Political campaign expenses
