Gross Income

Income means all wealth that flows to the taxpayer other than a mere return of capital. Income is gain derived from labor or capital, or both labor and capital; and includes the gain derived from the sale or exchange of capital assets.

When Income is Taxable?

For income to be taxable, the following requisites must be present:

There must be gain
The gain must be realized or received
The gain must not be excluded by law or treaty from taxation

Only income is subject to income tax. Return of Capital or capital appreciation is not subject to income tax. Stock dividends and increases in the value of shares are not considered as income, hence, not subject to income tax.

Income	Capital
Denotes a flow of wealth during a definite period of time.	Fund or property existing at one distinct point in time.
Service of wealth	Wealth itself
Subject to tax	Return of capital is not subject to tax
Fruit	Tree

There are several tests in determining whether income is earned for tax purposes.

Tests in Determining Whether Income is Earned for Tax Purposes

Realization test. No taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income.

Claim of right doctrine or doctrine of ownership, command, or control. If a taxpayer receives money or other property and treats it as its own under the claim of right that the payments are made absolutely and not contingently, such amounts are included in the taxpayer's income, even though the right to the income has not been perfected at that time.

2013 Bar, VI: In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and investigated Helen.

Would the BIR be correct if it determines that Helen earned taxable income under these facts? (1%)

(A) No, she had no income because she had no right to the mistakenly credited funds.

(B) Yes, income is income regardless of the source.

(D) No, the funds in excess of$1,000 were in effect donated to her.

Answer: (B) Yes, income is income regardless of the source.

This scenario falls under the claim of right doctrine because Helen refuses to return the credited excess as she claims ownership over the same.

Economic benefit test or doctrine of propriety interest. Any economic benefit to the employee that increases his net worth, whatever may have been the mode by which it is effected, is taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise (not upon the grant or vesting of the right).

Severance test. Under the doctrine of severance test of income, in order that income may exist, it is necessary that there be a separation from capital of something of exchangeable value. The income requires a realization of gain.

All Events Test. This requires: (1) fixing a right to income or liability to pay; and (2) the availability of reasonably accurate determination of such income or liability.

Accounting Methods

REVENUE AUDIT MEMORANDUM ORDER NO. 1-00

The taxable income of a taxpayer shall be computed in accordance with the method of accounting he regularly employs in keeping his books. However, if the taxpayer does not regularly employ a method of accounting which reasonably shows his correct income, the computation of income shall be made in such manner as in the opinion of the Commissioner of Internal Revenue or his -duly authorized representative that clearly reflects such income.

The methods of accounting recognized under the Tax Code are:

Cash Basis is a method of accounting whereby all items of gross income received during the year shall be accounted for such taxable year and that only expenses actually paid for shall be claimed as deductions during the year. This method of accounting is generally used by taxpayers who do not keep regular books of accounts.

Under this method, income is realized upon receipt of cash or its equivalent including those constructively received (such as deposits for the taxpayer's account by customers) but not including gifts or donations. Users of cash basis accounting are mostly individuals engaged in business and practice of profession, professional partnerships and professional service organizations.

Accrual Basis is a method of accounting for income in the period it is earned regardless of whether it has been received or not. In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid.

Under this method, net income is being measured by the excess of income earned during the period over the expenses incurred. Expenses not being claimed as deductions by taxpayers in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year.

Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. The accrual basis of accounting is being used by taxpayers whose nature of business uses inventories since this method of accounting will correctly reflect income by matching purchases and expenses against sales.

This method is being applied by most medium and large corporations.

Completion of Contract Basis is an accounting method applicable to contractors in the construction of building, installation of equipment and other fixed assets, or other construction work covering a period in excess of one year.

Under this method, gross income is to be reported in the taxable year in which the contract is fully completed and accepted by the contractee if the taxpayer elected it as a consistent practice to treat such income, provided that such method clearly reflects the net income.

Under this method, all expenditures, are deducted from gross income during the life of the contract which are properly allocated thereto, taking into consideration any materials and supplies charged to the work under the contract but remaining on hand at the time of the completion.

However, pursuant to Republic Act No. 8424 which took effect on January 1, 1998, contractors are no longer allowed to adopt this method of reporting their income derived in whole or in part from long-term contracts.

Percentage of Completion Basis is a method applicable in the case of a building, installation or construction contract covering a period in excess of one year whereby gross income derived from such contract may be reported upon the basis of percentage of completion. In determining the percentage of completion of a contract, generally one of the following methods is used:

The costs incurred under the contract as of the end of the tax year are compared with the estimated total contract costs; or
The work performed on the contract as of the end of the tax year is compared with the estimated work to be performed.

In such case, the return should be accompanied by a certificate of the architect or engineer showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the materials and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied.

Beginning January 1, 1998 income from log-term contracts are required to be reported using this method only.

Installment Basis is a method considered appropriate when collections extend over relatively long periods of time and there is a strong possibility that full collection will not be made. As customers make installment payments, the seller recognizes the gross profit on sale in proportion to the cash collected.

Crop Year Basis is a method applicable only to farmers engaged in the production of crops which take more than a year from the time of planting to the process of gathering and disposal. Expenses paid or incurred are deductible in the year the gross income from the sale of the crops are realized.

In relation to the foregoing accounting methods, the Tax Code provides for a tax credit system in computing the tax payable by certain taxpayers. While the tax credit system is not an accounting system, it is discussed here for the proper understanding of the computation of taxes due from taxpayers.

Gross Income

Gross Income means all income derived from whatever source, including (but not limited to) the following items:

Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
Gross income derived from the conduct of a trade or business or the exercise of a profession;
Gains derived from dealings in property;
Interests;
Rents;
Royalties;
Dividends;
Annuities;
Prizes and winnings;
Pensions; and
Partner's distributive share from the net income of the general professional partnership.

We can categorize the above as follows:

Compensation Income	Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
Profession or Business Income	Gross income derived from the conduct of trade or business or the exercise of a profession; Partner's distributive share from the net income of the general professional partnership.
Passive Income	Interests; Rents; Royalties; Dividends; Annuities; Prizes and winnings; Pensions;
Capital Gain	Gains derived from dealings in property;

For the purposes of computation of taxable income, gross income does not include exclusion from gross income, incomes subject to final tax, and capital gains subject to capital gains tax.

The situs of income should also be considered as a tax base for certain types of taxpayers.

Compensation Income

Compensation Income means all remuneration for services performed by an employee for his employer under an employer-employee relationship unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial.

Employer-Employee Relationship

The elements of the employer-employee relationship are

Selection and engagement of the employee;
Payment of wages;
Power of dismissal; and
Employer’s power to control the employee’s conduct with respect to the means and methods by which the work is to be accomplished

An employer-employee relationship exists when a person for whom services were performed (employer) has the right to control and direct an individual who performs the services (employee), not only as to the result of the work to be accomplished but also as to the details, methods, and means by which it is accomplished. An employee is subject to the control of the employer not only as to what shall be done but how it shall be done. It is not necessary that the employer actually exercises the right to direct or control the manner in which the services are performed. It is sufficient that there exists a right to control the manner of doing the work.

The term 'employer' means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that:

If the person for whom the individual performs or performed any service does not have control of the payment of the wages for such services, the term 'employer' (except for the purpose of Subsection(A) means the person having control of the payment of such wages; and
In the case of a person paying wages on behalf of a nonresident alien individual, foreign partnership, or foreign corporation not engaged in trade or business within the Philippines, the term 'employer' (except for the purpose of Subsection(A) means such person.

The term 'employee' refers to any individual who is the recipient of wages and includes an officer, employee, or elected official of the Government of the Philippines or any political subdivision, agency, or instrumentality thereof. The term 'employee' also includes an officer of a corporation.

Basis of Payment of Compensation

The basis upon which remuneration is paid is immaterial. It may be paid on the basis of a piece of work, percentage of profits, hourly, weekly, monthly, or annually.

The income tax due on compensation income is based on the applicable income tax rate and the taxable compensation income.

Measurement of Compensation Income

In Cash

If compensation is paid in cash, the full amount received is the measure of the income subject to tax.

Other than money

If services are paid for in a medium other than money (e.g., shares of stock, bonds, and other forms of property), the fair market value (FMV) of the thing taken in payment is the amount to be included as compensation subject to tax.

If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the FMV of the remuneration received.

If a corporation transfers to its employees its own stock as remuneration for services rendered by the employee, the amount of such remuneration is the fair market value of the stock at the time the services were rendered.

For promissory note and other evidence of indebtedness' in payment of services and not merely as security for such payment, the following rules shall apply:

If non-interest-bearing: in the year of receipt, income to be recognized is equivalent to the discounted value. In the year of collection, the income to be recognized is equivalent to the discount (fair value less the discounted value).

If interest-bearing: in the year of receipt, income to be recognized is equivalent to the face value. In the year of collection, the income to be recognized is equivalent to the interest earned (maturity value less the face value).

Convenience of the Employer Rule

Allowances in kind furnished to the employee for and as a necessary incident to the performance of his duties are not taxable.

Forms of Compensation

As a rule, every form of compensation is taxable regardless of how it is earned, by whom it is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it is received.

Compensation may be paid in money or in some medium other than money. The forms of compensation are relevant in determining the proper measurement of compensation income.

Salaries are earnings received periodically for regular work other than manual labor, e.g., the monthly salary of an employee.

Wages are earnings received usually according to specified intervals of work, as by the hour, day, or a week, e.g., a carpenter’s wage. Backwages are subject to income tax and withholding tax on wages [BIR Ruling No. DA-073-2008]

The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid:

For agricultural labor paid entirely in products of the farm where the labor is performed, or
For domestic service in a private home, or
For casual labor not in the course of the employer's trade or business, or
For services by a citizen or resident of the Philippines for a foreign government or an international organization

Emoluments and honoraria are payments given in recognition for services performed for which the established practice discourages charging a fixed fee, e.g., an honorarium of a guest lecturer

Fixed or variable allowances i.e. Transportation, Representation, and other allowances such as Cost of Living Allowances (COLA). Fixed or variable transportation, representation or other allowances that are received by a public officer or employee of a private entity, in addition to the regular compensation fixed for his position or office is COMPENSATION subject to withholding tax. [Rev. Regs. 2-98]

Any amount paid specifically, either as advances or reimbursements for travel, representation, and other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are NOT COMPENSATION subject to withholding tax, provided the following conditions are satisfied:

It is for ordinary and necessary traveling and representation or entertainment expenses paid or incurred by the employee in the pursuit of the employer’s trade, business, or profession; and
The employee is required to account or liquidate for the foregoing expenses.

The excess of actual expenses over advances made shall constitute taxable income if such amount is not returned to the employer.

Commissions are usually a percentage of total sales or on a certain quota of sales volume attained as part of an incentive such as sales commission.

Fees (including director's fees, if the director is, at the same time, an employee of the employer/corporation) are received by an employee for the services rendered to the employer including a director’s fee of the company, fees paid to the public officials such as clerks of court or sheriffs for services rendered in the performance of their official duty over and above their regular salaries.

Taxable bonuses include thirteenth-month pay and other benefits exceeding the threshold of P90,000. Bonuses are not taxable if the total amount received is P90,000 [RA 10963] or less.

Fringe Benefits refer to any good, service, or other benefit furnished or granted by an employer, in cash or in-kind, in addition to basic salaries of an individual employee [Sec. 33, NIRC].

De Minimis are privileges of relatively small value as given by the employer to his employees. De Minimis is not considered compensation subject to income tax and withholding tax.

The following De Minimis Benefits are exempt from income tax and withholding tax on compensation income of both managerial and rank and file EEs:

Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year. Note that the monetization of unused VL credits in excess of 10 days and monetization of SL even if not exceeding 10 days are subject to tax; (RR No. 5-2011)
Monetized value of vacation and sick leave credits paid to government officials and employees. Note that there is no limit as to the number of credits; [RR No. 5-2011]
Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month; [RR No. 11-2018]
Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more than P2,000; [RR No. 11-2018]
Uniform and Clothing allowance not exceeding P6,000 per annum; [RR No. 11-2018]
Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000.00 per annum; [RR No. 5-2011]
Laundry allowance not exceeding P300 per month; [RR No. 5-2011]
Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; [RR No. 5-2011]
Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; [RR No. 5-2011]
Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; [RR No. 3-98]
Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000.00 per employee per taxable year. [RR No 1-2015]

Taxable pensions refer to the stated allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss, or injury. Pension is taxable unless the law states otherwise, OR unless the BIR approves the pension plan of a private company.

Retirement pay includes a lump sum payment received by an employee who has served a company for a considerable period of time and has decided to withdraw from work into privacy. [RR 6-82, Sec. 2b]

In general, retirement pay is taxable except in the following instance: SSS or GSIS retirement pays and Retirement pay under RA 7641.

Retirement pay under RA 7641 should meet the following requirements:

The retirement program is approved by the BIR Commissioner;
It must be a reasonable benefit plan. (Its implementation must be fair and equitable for the benefit of all employees)
The retiree should have been employed for 10 years in the said company;
The retiree should have been 50 years old or above at the time of retirement; and
It should have been availed of for the first time.

Separation pay is taxable if voluntarily availed. It shall not be taxable if involuntary, i.e., death, sickness, disability, reorganization/ merger of company and company at the brink of bankruptcy or for any cause beyond the control of the said official or employee.

Amounts received by reason of involuntary separation remain exempt from income tax even if the official or the employee, at the time of separation, had rendered less than ten (10) years of service and/or is below fifty (50) years of age.

Any payment made by an employer to an employer to an employee on account of dismissal, constitutes compensation regardless of whether the employer is legally bound by contract, statute, or otherwise, to make such payment.

Vacation and sick leave are subject to the following rules:

If paid or availed of as salary of an employee who is on vacation or on sick leave notwithstanding his absence from work, it constitutes taxable compensation income.

The monetized value of vacation and sick leave credits paid to government officials and employees are not subject to income tax and to withholding tax.

The monetized value of unutilized vacation leave credits of ten (10) days or less that were paid to private employees during the year is not subject to income tax and to withholding tax. Monetization of sick leave credits of private employees even if not exceeding 10 days is not exempt from income tax and withholding tax on wages.

Terminal leave or money value of accumulated vacation and sick leave benefits received by heir upon death of an employee is not taxable.

Tips and Gratuities are those paid directly to the employee (usually by a customer of the employer) which are not accounted for by the employee to the employer (taxable income but not subject to withholding tax) [RR NO. 2-98, Sec. 2.78.1]

Hazard or Emergency Pay refers to additional payment received due to the workers’ exposure to danger or harm while working. It is normally added to the basic salary together with the overtime pay and night differential to arrive at a gross salary.

Overtime Pay pertains to premium payment received for working beyond regular hours of work which is included in the computation of the gross salary of the employee. It constitutes compensation.

Profit-Sharing is the proportionate share in the profits of the business received by the employee in addition to his wages.

Awards for past services or suggestions to employers resulting in the prevention of theft or robbery, etc. are also compensations.

Beneficial Payments such as where the employer pays the income tax owed by an employee are additional compensation income.

Other forms of compensation received due to services rendered are compensation paid in kind, e.g., insurance premium paid by the employer for insurance coverage where the heirs of the employee are the beneficiaries is the employee’s income.

Income from Business/Profession

Income from business refers to any income derived from doing business.

The term ‘doing business’ implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization.

Gross Sales/Receipts

Gross Receipts

Refer to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services, and deposits and advance payments actually or constructively received during the taxable period for the services performed or to be performed for another person, except returnable security deposits for purposes of these regulations.

In the case of VAT Taxpayer, this shall exclude the VAT component.

Gross Sales

Refer to the total sales transactions net of VAT, if applicable, reported during the period, without any other deduction.

Gross sales subject to the 8% income tax rate option shall be net of the following deductions:

Sales returns and allowances
Discounts

Sales Returns and Allowances

Sales returns and allowances for which a proper credit or refund was made during the month of the quarter to the buyer for sales previously recorded as taxable sales.

Discounts

Discounts determine and grated at the time of sale, which are expressly indicated in the invoice, the amount thereof forming part of the gross sales duly recorded in the books of accounts.

Sales discounts indicated in the invoice at the time of sale, the grant of which is not dependent upon the happening of a future event, may be excluded from the gross sales within the same month/quarter it was given.

Self-employed

A sole proprietor or an independent contractor who reports income earned from self-employment. He controls who she works for, how the work is done, and when it is done.

It includes those hired under a contract of service or job order and professionals whose income is derived from the practice of the profession and not under an employer-employee relationship.

Business Income is subject to graduated income tax rates or optional gross income tax of 8%.

Professional income

Professional income refers to fees received by a professional from the practice of his profession, provided that there is no employer-employee relationship between him and his clients.

It includes the fees derived from engaging in an endeavor requiring special training as professional a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers, and the like.

The existence of the employee-employer relationship is the distinguishing factor between compensation income versus professional income.

Professional

A person formally certified by a professional body belonging to a specific profession by virtue of having completed a required examination or course of studies and/or practice, whose competence can usually be measured against an established set of standards.

It also refers to a person who engaged in some art or sport for money, as a means of livelihood, rather than as a hobby.

Professional includes but not limited to

doctors,
lawyers,
engineers,
architects,
CPAs,
professional entertainers,
artists,
professional athletes,
producers,
insurance agents,
insurance adjusters,
management and technical consultants,
bookkeeping agents, and
other recipients of professional promotional and talent fees.

Professional Income is subject to graduated income tax rates or optional gross income tax of 8%.

Gains Derived from Dealings in Property

Dealings in property mean sales, exchanges, or other dispositions not in the ordinary course of business or incidental thereto involving ordinary asset or capital asset.

Classification of Assets

The classification of assets determines the types of gain derived from dealings in property.

Ordinary Asset

The following are ordinary assets:

Stock in trade of the taxpayer/ other property of a kind that would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
Property used in the trade or business of a character which is subject to the allowance for depreciation, or
Real property used in the trade or business of the taxpayer, including property held for rent.

Capital Asset

The Tax Code defines capital assets by means of exclusion. Capital asset refers to property held by the taxpayer, whether or not connected with his trade or business, which is not an ordinary asset.

For example, investment in debt or equity instruments, idle or vacant land or building, family cars, home appliances, jewelry.

Types of Gain

There are two types of gains from dealings in property. Corollary there are two types of losses.

1. Ordinary gain. This refers to gains or losses earned or incurred in connection with trade or business or in the exercise of profession or property.

If the asset involved is classified as ordinary, the entire amount of the gain from the transaction shall be included in the computation of gross income [Sec 32(A)], and the entire amount of the loss shall be deductible from gross income. [Sec 34(D)].

Ordinary gain is subject to regular income tax.

2. Capital gain. This includes gain involving capital asset transactions.

If the asset involved is a capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income.

The taxation of capital gains depends on the type of capital gains. Capital gains are subject to regular income tax, except capital gains on the sale of shares of Stock of a Domestic Corporation not listed and traded through a local stock exchange and capital gains on the Sale of Real Property located in the Philippines which are subject to capital gains tax.

The amount of gain subject to income tax depends on the cost basis of the capital asset and the applicable capital gains tax.

Rules on Capital Gains and Losses

The following rules apply to the sale, exchange, and other disposition of other capital assets, which capital gains or losses form part in the computation of gross income or allowable deductions, respectively.

Loss Limitation Rule. Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. This rule applies to individuals and corporations.

Loss carry-over rule. If an individual sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for the year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than 12 months. Note that this applies only to individuals.

Note that NCLCO is different from NOLCO.

Net Operating Loss Cary-Over	Net Capital Loss Carry Over
Means excess of allowable deduction over gross income of the business in the taxable year	Excess of the losses from sales or exchanges of capital assets over gains from such sales or exchanges
Allowed to both individuals and corporations	Allowed to individuals, estates or trusts
Can be carried over for the next 3 consecutive years immediately following the year of such loss	Can be carried over in the succeeding taxable year only.

Holding period rule. The following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:

If the taxpayer is an individual –

100% if the capital asset has been held for not more than 12 months; and
50% of the capital asset has been held for more than 12 months

Illustration: J, a resident citizen, realized an ordinary gain of P400,000. Its capital asset transactions during the year are as follows. How much is J’s taxable income?

	Holding Period	Amount
A, Capital gain	6 months	P50,000
B, Capital gain	2 years	45,000
C, Capital loss	12 months	23,000
D, Capital loss	10 years	28,000

Answer: P435,000

1. Compute the capital gains

A, Capital Gain is 100% taxable since the holding period is 6 months. B, Capital Gain is 50% taxale since its holding period is 2 years. Hence,

= A x 100% + B x 50%

= 50,000 + 45,000 x 50%

= 72,500

2. Compute the capital loss

C, Capital loss is 100% deductible since its holding period is not more than 12 months. D, Capital is 50% deductible since its holding period is 10 years. Hence,

= C x 100% + B x 50%

= 23,000 + 28,000 x 50%

= 37,000

Note that capital loss is deductible only to the extent of capital gain.

3. Compute the taxable income

= capital gain - capital loss (to the extent of capital gain) + ordinary gain

= 72,500 - 37,000 + 400,000

= 435,500

If the taxpayer is a corporation, 100%, regardless of the holding period of the capital asset.

	Individual	Corporation
Deductibility of net capital losses	To the extent of capital gain	To the extent of capital gain
Net capital loss carry-over	Yes, for the succeeding taxable year only	Not applicable
Holding period	50% if held for more than 12 months 100% if held for not more than 12 months	Always 100%

The above rules do not apply to the following:

Capital gains tax on the sale of real property situated in the Philippines
Capital gains tax on the sale of shares of stock of a domestic corporation not traded in the local stock exchange
Tax-free exchanges

Also, the sale of shares of stock of a domestic corporation, held as capital assets, through the stock exchange by either individual or corporate taxpayers, is subject to 0.6 of 1% percentage tax based on gross selling price.

Taxable Stock Transactions

Sale of shares of stock subject to basic income tax	e.g., sale by dealers in securities
Sale of shares subject to capital gains tax (final income tax)	e.g., sale of shares not traded in stock exchange by a resident citizen who is not a dealer in securities
Sale of shares subject to percentage tax	e.g., shares of stock traded in stock exchange as provided under Section 127 of the NIRC

Dealers in Securities

Dealer in securities means merchant of stocks or securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and the resale thereof to customers; that is, one who, as a merchant, buys securities and re-sells them to customers with a view to the gains and profits that may be derived therefrom.

Dealer in securities means any person who buys and sells securities for his/her own account in the ordinary course of business.

Sale of Stocks through PSE

Exempt from income tax but subject to percentage tax
0.6 of 1% of the gross selling price of the stock or gross value in money of the shares of stock sold, bartered, exchanged, or otherwise disposed of which shall be assumed and paid by the seller or transferor through the remittance of the stock transaction tax by the seller or transferor’s broker.

Actual gain

Actual Gain refers to the amount realized from the sale or other disposition of property less Basis or Adjusted Basis.

Amount realized from the sale or another disposition of property is the sum of money received plus the fair market value of the property (other than money) received.

Presumed Gain

In the sale of real property located in the Philippines, classified as a capital asset, the tax base is the gross selling price or fair market value, whichever is higher. This is called the presumed gain. The law presumes that the seller makes a gain from such a sale.

Passive Income

Passive Income arises not from the active pursuit of business, not from the primary business purpose to which the business is organized or created or simply, passive income is one that is acquired or earned other than as a result of labor. The taxpayer earns without doing anything.

An income is considered passive if the taxpayer merely waits for it to be realized. For example

Interests;
Rents;
Royalties;
Dividends;
Annuities;
Prizes and winnings;
Pensions;

Certain passive income is subject to final tax.

Interest Income

Interest income refers to an earning derived from currency bank deposit, yield, or any other monetary benefit from deposit substitutes, trust funds, and similar arrangements, or loans of money, goods, or credit.

Unless exempted by law, interest income received by the taxpayer, whether or not usurious, is subject to income tax.

Deposit Substitute

The term 'deposit substitutes' shall mean an alternative form of obtaining funds from the public other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer.

The term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time.

Examples:

bankers' acceptances,
promissory notes,
repurchase agreements, including reverse repurchase agreements, entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and
similar instruments with recourse

Debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover the deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.

Implications of Deposit Substitute

If funds are simultaneously obtained from 20 or more lenders/investors, there is deemed to be a public borrowing and the bonds at that point in time are deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed interest income from the bonds.

For debt instruments that are not deposit substitutes, regular income tax applies.

Long-term Deposit

The term 'long-term deposit or investment certificates' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.

Rental Income

This refers to earnings derived from leasing real estate as well as personal property. Rent income may be in the following forms:

Cash, at the stipulated price
Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract of lease, e.g., real estate tax on the property leased assumed by the lessee
Advance payment
Leasehold Improvement

Pre-paid rent must be reported in full in the year of receipt, regardless of the accounting method used by the lessor.

Aside from the regular amount of payment for using the property, it also includes all other obligations assumed to be paid by the lessee to the third party on behalf of the lessor (e.g., interest, taxes, loans, insurance premiums, etc.).

Advance payment representing a loan to the lessor is not taxable unless applied to unpaid rent. In the same manner, a security deposit for the faithful performance of certain obligations of the lessee is not income to the lessor. But when security is applied to the rental, it becomes income subject to income tax.

Rent Income from leasehold improvements may be recognized outright or spread out.

Outright method - lessor shall report as income FMV of the buildings or improvements subject to the lease in the year of completion.
Spread-out method - lessor shall spread over the remaining term of the lease the estimated depreciated (book) value of such buildings or improvements at the termination of the lease and reports as income for each remaining term of the lease an aliquot part thereof. Estimated BV at the end of the lease contract/ remaining lease term = Income per year

Rent expense may be treated different from rent income.

Royalties

This refers to the amount paid to another for the use of its intellectual property. They are remunerations to owners of an intellectual creation or to a certain holder of intellectual property rights.

The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
The use of, or the right to use in the Philippines any industrial, commercial, or scientific equipment;
The supply of scientific, technical, industrial, or commercial knowledge or information;
The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);
The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery, or other apparatus purchased from such nonresident person;
Technical advice, assistance, or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project, or scheme; and
The use of or the right to use: Motion picture films; Films or videotapes for use in connection with television; and Tapes for use in connection with radio broadcasting.

Royalties could be subject to basic or final tax.

Dividends

Dividends are derived from the distribution made by a corporation out of its earnings or profits and payable to its stockholders, whether in money or in the property. Dividends may be in the form of

Cash,
Stock,
Property, or
Liquidating dividends.

Cash Dividends

Cash dividends are subject to final tax under the NIRC. However, dividends received by a domestic corporation from another domestic corporation, and a non-resident foreign corporation from a domestic corporation are exempt from income tax.

A cash dividend is the most common form of a dividend, valued at the amount of money received by the stockholder. Cash dividends and property dividends are subject to income tax.

Stock Dividends

Stock dividend is generally exempt from income tax, EXCEPT:

If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits (Sec. 73(B), NIRC); or
Where there is an option that some stockholders could take cash or property dividends instead of stock dividends; some stockholders exercised the option to take cash of property dividends, and the exercise of option resulted in a change of the stockholders’ proportionate share in the outstanding share of the corporation.

Property Dividends

One paid in a corporate property such as bonds, securities, or stock investments held by the corporation, not its own stock. They are taxable to the extent of the fair market value of the property received at the time of distribution.

Liquidating dividends

Liquidating dividends are returns of capital, hence, not subject to income tax. But when the amount received in liquidation exceeds the initial amount of capital invested, the excess is treated as income, which is subject to regular tax rates.

Distribution of Dividends

The distribution of dividends involves three significant dates:

Date of declaration, which is the date when the Board of Directors declares the distribution of dividends
Date of record, or the date when the corporation draws a list naming the shareholders who are entitled to dividends
Date of payment, which is the date when the dividends are distributed to shareholders

Taxation of Dividends

Dividends could be subject to final tax, basic income tax, or exempt from income tax. The type of tax depends on the situs of dividends and types of taxpayers.

Annuities

It refers to periodic installment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him. It is paid annually, monthly, or periodically, computed upon the amount paid yearly, but necessary for life.

The annuity payments represent a part that is taxable and not taxable. If part of the annuity payment represents interest, then it is a taxable income. If the annuity is a return of premium, it is not taxable.

Prizes and Winnings

A prize is a reward for a contest or a competition. It represents remuneration for an effort reflecting one’s superiority.

Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor.

Pensions

Pensions are paid for past employment services rendered. A stated allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss, or injury. It is generally taxable unless the law states otherwise.

In general, retirement pay is taxable except in the following instances:

SSS or GSIS retirement pays.
Retirement pay (RA 7641) due to old age provided the following requirements are met:
The retirement program is approved by the BIR Commissioner;
It must be a reasonable benefit plan. (Its implementation must be fair and equitable for the benefit of all employees)
The retiree should have been employed for 10 years in the said company;
The retiree should have been 50 years old or above at the time of retirement; and
It should have been availed of for the first time.

Partner's Distributive Share From the

Net Income of the General Professional Partnership

GPP is not subject to come tax imposed pursuant to Sec. 26 of the Tax Code, as amended. However, the partners shall be liable to pay income tax on their separate and individual capacities for their respective distributive share in the net income of the GPP.

The GPP is not a taxable entity for income tax purposes since it is only acting as a pass-through entity where its income is ultimately taxed to the patterns comprising it.

Partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which is already net of cost and expenses cannot avail of the 8% income tax rate option.

General Professional Partnership

Ms. K, is a partner of CCF & Co., a general professional partnership and owns 25% interest. The gross receipts of CCF & Co. amounted to P10 million for taxable year 2018. The recorded costs of service and operating expenses of CCF & Co. were P2,750,000 and P1,500,000, respectively. How much is the income tax due of Ms. K?

a. P321,250

b. P130,000

c. P191,250

d. P250,000

Answer: a. P321,250

1. Compute the net income for distribution to partners

= gross receipts - cost of service - operating expenses

= 10,000,000 - 2,750,000 - 1,500,000

= 5,750,000

There is no income tax liability for CCF & CO. being a GPP. But it is liable to business tax.

2. Compute Ms. K's share in distributive profit

= net income for distribution to partners x 25%

= 5,750,000 x 25%

= 1,437,500

3. Compute income tax due on Ms. K's share

		Computation	Tax Due
First	P800,000	See bracket over P800,000 but not over P2,000,000	P130,000
Next	637,500	(P1,437,500 – 800,000) x 20%	191,250
Total	P1,437,500	Income Tax Due	P321,250

Individual Partner is not allowed any deduction on his distributive share since this is already net of costs and expenses.

A taxpayer is not allowed to avail of the 8% income tax rate option since his distributive share from GPP is already net of costs and expenses.

Income From Whatever Source

Inclusion of all income not expressly exempted within the class of taxable income under the laws irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources (e.g, gambling, extortion, smuggling.).

Some examples are

Gains arising from expropriation of property
Gambling gains
Income from illegal business or from embezzlement
Damage recovery (compensation for damages)
Forgiveness of debt
Bad debt recovery
Tax refunds

Damage Recovery. As a rule, recovery of lost profit is taxable while recovery of lost capital is not taxable.

Condonation of indebtedness. Condonation of indebtedness could be treated as income, gift, or dividends.

It is treated as compensation income on the part of the debtor if the condonation is in consideration of service performed to or for the creditor. The debtor shall pay income tax.

If the condonation is without any consideration or by mere liberality of the creditor, the condonation is treated as a gift. The creditor shall pay the donor’s tax.

If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of a payment of dividend.

For example, Jack is indebted to Jill in the amount of P75,000. When Jack trained Jill for an intense tennis lesson for one month, Jill canceled the indebtedness of Jack.

How much is subject to income tax?

The entire P75,000 is subject to income tax. Since the condonation of debt is in consideration of the training, such P75,000 is income realized by Jack as compensation for services performed.

If the amount is canceled without the services being rendered, then it is tantamount to a gift.

Recovery of accounts previously written off. Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayer’s gross income in the year of such recovery to the extent of the income tax benefit of said deduction.

There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser income and hence tax savings for the company.

Receipt of tax refunds or credit. A refund of a tax related to the business or the practice of a profession is taxable income (e.g., a refund of fringe benefits tax) in the year of receipt to the extent of the income tax benefit of said deduction (i.e., the tax benefit rule applies).

If the refunded tax is a deductible tax, the tax refund is taxable
If the refunded tax is not a deductible tax, the tax refund is not taxable.

Refunds of nondeductible taxes are not to be included in the computation of gross income because these are not deductible from gross income in the first place.

Exclusion from Gross Income

Exclusion from gross income refers to income received or earned but is not taxable as income. Such tax-free income is not to be included in the income tax return unless information regarding it is specifically called for.

Receipts that are not in fact income are, of course, excluded from gross income.

Income derived from sources without, based on the situs of income, are excluded from the tax base of certain types of taxpayers.

Rationale

Exclusions are not included in the determination of gross income because

They represent a return of capital or are not income, gain or profit;
They are subject to another kind of internal revenue tax;
They are income, gain or profit expressly exempt from income tax

Basis of Exclusions

Constitution,
Tax Code,
Special Laws, or
Treaty.

Exclusions under the Constitution

The following are exclusions from gross income under the Constitution:

Income derived by the government or its political subdivisions from the exercise of any essential governmental function
All assets and revenues of a non-stock, non-profit private educational institution used directly, actually, and exclusively for private educational purposes shall be exempt from taxation.

Exclusion under the Tax Code

The following are exclusions from gross income under Tax Code.

Proceeds of Life Insurance Policies
Amount Received by Insured as Return of Premium
Gifts, Bequests, and Devises
Compensation for Injuries or Sickness
Income Exempt under Treaty
Retirement Benefits, Pensions, Gratuities, etc
Miscellaneous Items

Proceeds of Life Insurance Policies

The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

Contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event.

Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith.

Every person has an insurable interest in life and health:

of himself, of his spouse and of his children;
of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;
of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and
of any person upon whose life any estate or interest vested in him depends.

Why excluded

When the insured died, the proceeds are considered indemnity for loss of life. Since the loss of life is not pecuniary in nature, no monetary gain or loss may result therefrom.

When Taxable

Some insurance contracts pay interest. Such interest payments shall form part of gross income and are subject to regular income tax.

Proceeds received by the corporation from life insurance taken on the life of a top-level employee is taxable because the nature of the loss is pecuniary in nature.

Return of Premium

The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

This applies when the insured outlived the life insurance policy. This does not apply when the proceeds of life insurance policies are received by the heirs or the beneficiaries upon the death of the insured.

For example, Roger took out a life insurance policy and paid a total premium of P400,000. The insurer will pay Roger P1,000,000 after the 10th year of the policy or Micah, Roger’s wife if Roger died before the stipulated date. Roger outlived the policy and received P1,000,000.

How much is subject to income taxation?

Total Proceeds	P1,000,000
Return of Premium previously paid	(400,000)
Income subject to income taxation	600,0000

Gifts, Bequests, and Devises

A gift is an act of liberality that requires the acceptance of the done and that anything received therefrom is not derived from a trade or business neither from the exercise of a profession.

Not Subject to Income Tax, but to Transfer Taxes. The value of property acquired by gift, bequest, devise, or descent is not subject to income tax, but they are subject to transfer taxes.

Gifts or donation inter vivos are subject to donor’s tax.
Bequest (personal property) and devises (real property) or gifts which would take effect upon the death of the donor are subject to estate tax.

Income from Gift is Subject to Income Tax. However, income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.

Suppose, YSS inherited a commercial establishment valued at P10,000,000, which generated a rental income of P2,000,000 every year, how much should be included in YSS’s gross income?

Only the rental income of P2,000,000 forms part of his gross income.

Compensation for Injuries or Sickness

Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

Compensation for injuries or sicknesses is excluded in the determination of income because the amount received therefrom is not considered an income but merely a recompense or reward in the form of damages.

To be excluded, damages received, whether by suit or agreement must be on account of injuries or sickness. But damages arising from breach of contract are not excluded from gross income. Consequential damages representing a loss of the victim’s earning capacity are not excluded from gross income.

Illustration

A motor vehicle collision involving a brand new FJ Cruiser of Atty. X and BB Bus Liner resulted in the death of AAA, the driver of Atty. X, physical injuries to the latter, loss of earnings for three months amounting to P600,000, and total loss of the cruiser. The court awarded Atty. X the following by way of damages: P200,000 for the death of Danny, P100,000 for the physical injuries, P600,000 for loss of earning, and P2,000,000 for the cruiser.

The following are not taxable because they are received as compensation for injuries or sickness.

For the death of Danny, P200,000, Not Taxable
Physical injuries, P100,000, Not Taxable
Loss of earnings, P600,000, Not Taxable

Cost of the cruiser, P2,000,000, Not Taxable. This is a mere return of capital.

Income Exempt under Treaty

Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

e.g., RP-US Tax Treaty of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income

Retirement Benefits, Pensions, Gratuities

Retirement Benefits. Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer (under RA 4917).

Republic Act No. 7641

This speaks of retirement benefit of private forms without retirement plan. To be excluded from the gross income, the following are the requisites:
The retiring official or employee is at least 60 years old but not more than 65 years old
Must served the company for at least 5 years

Republic Act No. 4917

In accordance with a reasonable private benefit plan maintained by the employer
The retiring official or employee has been in the service of the same employer for at least ten (10) years
The retiring official or employee is not less than fifty (50) years of age at the time of his retirement
The retirement benefits shall be availed of by an official or employee only once.

The term ‘reasonable private benefit plan’ means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

Separation Pay. Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of

death
sickness or
other physical disability or
for any cause beyond the control of the said official or employee.

Note that backwages as a form of income are subject to income tax except if the employee is a minimum wage earner.

Benefits from a Foreign Government. The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by

resident or
nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.

Benefits administered by United States Veterans Administration. Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.

SSS Benefits. Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.

GSIS Benefits. Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.

Miscellaneous Items

The following are miscellaneous exclusions from gross income.

Income Derived by Foreign Government. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by

foreign governments,
financing institutions owned, controlled, or enjoying refinancing from foreign governments, and
international or regional financial institutions established by foreign governments.

Income Derived by the Government or its Political Subdivisions. Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

Exempt GOCCs. The following GOCCs are exempt from income tax:

Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Local Water District (LWD)

For the list above, there is no requirement that its income must be derived from the exercise of its essential function.

Prizes and Awards in Recognition of Achievements and Sports Competitions

The following Prizes and Awards are exclusions from gross income (miscellaneous) from income taxation if received by individuals (except non-resident aliens not engaged in a trade or business).

Recognition. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements are exclusions from gross income if:

The recipient was selected without any action on his part to enter a contest or proceedings; and
The recipient is not required to render substantial future services as a condition to receiving the prize or award.

Multiple Choice Question

Mr. C made thorough research about COVID. He was then able to create an enhanced version of Vitamin C that could deactivate the COVID-19 virus. Because of his contribution in the field of pandemic control, he was awarded by a non-governmental institution a certificate recognizing his talent and dedication. He was also given P1,000,000 with expectations that he would continue his work. How much is the final tax due?

a. P0

b. P100,000

c. P200,000

d. P300,000

Answer: a. P0

Sports Competitions. Prizes and awards granted to athletes in local and international sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations shall be exempt from income tax.

No Accreditation, No Exclusion

Multiple Choice Question

For example, Freya is a resident citizen. She won a gold medal in London 2020 Olympics 400 meters category. If the Philippine government granted P1,000,000 as prize money for his achievement, how much is subject to income tax?

a. P0

b. P1,000,000

c. P500,000

d. P250,000

Answer: a. P0

The entire price of P1,000,000 is excluded from gross income.

13th Month Pay and Other Benefits. Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Ninety thousand pesos (₱90,000) which shall cover:

Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;
Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;
Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13,1986; and
Other benefits such as productivity incentives and Christmas bonus."

For example, BBB received the following benefits for the taxable year 2020:

13th month pay, P100,000
Performance bonus, 20,000
Christmas bonus, 10,000
14th month pay, 5,000
Loyalty bonus, 5,000

How much of the foregoing is subject to income tax?

Answer:

GSIS, SSS, Medicare and Other Contributions. GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.

Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. Gains realized from the same or exchange or retirement of bonds, debentures or other certificates of indebtedness with a maturity of more than five (5) years.

Interest Income ≠ Gain; gain does not include interest

Gains, Section 32(B)(7)(g), refers to

Gain realized from the trading of the bonds before the maturity date
Gain realized by the last holder of the bonds when the bonds are redeemed at maturity

Gains from Redemption of Shares in Mutual Fund. Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.

Income Derived from the Sale of Gold Pursuant to Republic Act No. 7076. Income derived from the following transactions pursuant to Republic Act No. 7076, otherwise known as the “People‘s Small-scale Mining Act of 1991”:

The sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale miners, as defined under Republic Act No. 7076, and accredited traders; and
The sale of gold by registered small-scale miners to accredited traders for eventual sale to the Bangko Sentral ng Pilipinas.”

Exclusions Under Special Laws

R.A. 6657 (Comprehensive Agrarian Reform Package Law), provides that gain arising from the transfer of agricultural property covered by the law shall be exempt from capital gains tax.

R.A. 6938 (Cooperative Code of the Philippines), as amended by R.A. 9520, provides that cooperatives transacting business with both members and non-members shall not be subject to tax on their transactions with members for a period of ten years from the date of registration. In relation to this, the transactions of members with the cooperative shall not be subject to any taxes and fees, including but not limited to final taxes on members' deposits.

RA 7916, PEZA Law, providing income tax holidays on PEZA registered enterprise for six or four years form the date of commercial operation subject to the classification whether the activities are pioneer or non-pioneer

R.A. 7459, Inventors and Invention Incentives Act of the Philippines.

R.A. 9904, Magna Carta for Homeowners and Homeowners’ Association. Associations are exempt from income tax, VAT, and percentage tax derived from the association dues and rentals of its properties subject to the conditions under Sec. 18 of RA 9903

RA 10022, amending Section 35 of Migrant Workers Act of 1995, provides that all migrant workers shall be exempt from the payment of travel tax and airport fee upon proper showing of proof of entitlement issued by POEA.

RA 7279, Urban Development Housing Act of 1992, providing the NHA is exempt from all fees and charges of any kind, whether local or national.

Under R.A. 9178 (Barangay Micro Business Enterprises Act of 2002), BMBEs shall be exempt from income tax for income arising from the operation of the enterprise.

BMBE refers to any business entity or enterprise engaged in the production, processing or manufacturing of products or commodifies including agro-processing, trading and services, whose total assets including those arising from loans but exclusive of the land on which the particular business entity’s office, plant and equipment are situated, shall not be more than P3,000,000. BMBEs shall be

Exempt from tax for income arising from the operations of the enterprise
Exempt from the coverage of the Minimum Wage Law, provided, that all employees covered shall be entitled to the same benefits given to any regular employee such as social security and healthcare benefits
LGUs are encourage either to reduce the amount of local taxes, fees, and charges imposed or to exempt BMEs from local taxes, fees, and charges

Exclusions, Deductions, Tax Credit

Note that Exclusions are different from deductions and tax credits.

The exclusion of income should not be confused with the reduction of gross income by the application of allowable deductions. While exclusions are simply not taken into account in determining gross income, deductions are subtracted from gross income to arrive at net income.

Exclusions are something received or earned by the taxpayer which do not form part of gross income while deductions are something spent or paid in earning gross income.

Exclusions pertain to the computation of gross income while tax credit refers to amounts subtracted from the computed tax in order to arrive at taxes payable.

Tax Credit	Tax Deductions
Taxes are deductible from the Philippine Income Tax Itself	Taxes are deductible from gross income in computing the taxable income
Reduces Philippine income tax liability	Reduces taxable income upon which the tax liability is calculated
Only foreign income taxes may be claimed as credits against Philippine income tax.	Deductible taxes (e.g. business tax, excise tax)