Lecture 5
Compensation Income Gross income from business Gains from dealings in property Interest Rents Royalties Dividends Annuities Prizes and Winnings Pensions Partner’s distributive share from the net
income of general professional partnership
Sales Less : Sales Discount Sales Return and Allowances Net Sales Less : Cost of Sales Gross Income from Sales Add : Other Income Gross Income from Business
Types of Property◦ Ordinary Assets◦ Capital Assets
Ordinary Assets◦ 1. Stock in trade which would be properly
included in an inventory of the taxpayer at the end of the year.
◦ 2. Property held by the taxpayer primarily for sale◦ 3. property used in trade or business subject to
depreciation.◦ 4. real property used on trade or business.
Selling price Less : Cost Gain or Loss Capital gain or capital loss Ordinary gain or ordinary loss Capital gain less capital loss = net capital
gain/loss Ordinary gain less ordinary loss = Net
ordinary gain/loss Capital gain less ordinary loss = Net Capital
gain or Net ordinary loss
Sources of Interest Income 1. Bank deposits 2. LoansNote : 1.only interest income from loans will be
included in the computation of gross income
2. Interest income from bank deposits is subject to final tax
If received :◦ 1. by members from a duly-registered
cooperative.◦ 2. by investor from BSP prescribed form of
investment maturing more than 5 years.◦ 3. by non-resident citizen/alien from expanded
foreign currency deposit system.◦ 4. by the landlord from a tenant who paid the
price of land under the tenant-purchaser agreement under CARP.
Advance Rent◦ Included in the computation of the taxable gross
income Rent Deposits
◦ Not included as gross income because it’s not an income on the part of the taxpayer but merely a form of security or assurance to be returned to the lessee
Cost of Improvements◦ To be added as rent income if shouldered by the
lessee◦ If shouldered by the lessor the amount is an
expense on the part of the lessor
On books, literary works and musical composition◦ From sources within the Philippines subject to
10% final tax◦ From sources outside the Philippines to be added
as part of the taxable gross income On other sources
◦ From sources within the Philippines subject to 20% final tax
◦ From sources outside the Philippines to be added as part of the taxable gross income
Tax exempt if:◦ 1. Received from a domestic corporation by:
A. Another domestic corporation. B. Resident foreign corporation.
◦ 2. received from a cooperative.◦ 3. pure stock dividend.◦ 4. Pure Liquidating dividends (return of capital)
Subject to final tax if received from a Domestic Corporation by a:◦ 1. a citizen or resident alien = 10% final tax◦ 2. non-resident alien doing business in the
Philippines = 20% final tax◦ 3. non-resident alien not doing business in the
Philippines – 25% final tax◦ 4.non-resident foreign corporation – 20% final tax
with reciprocity and 35% if without reciprocity
Subject to normal tax if:◦ 1. Not included as tax-exempt dividends.◦ 2. Not subject to final tax.◦ 3. Distributive shares of partner in professional
partnership.
Prizes are subject to final tax of 20% if exceeding P10,000. If not exceeding P10,000 it is subject to normal tax.
Winnings are subject to final tax of 20% regardless of amount. But if received outside the Philippines, it is subject to normal tax.
Winnings from Philippine Lotto and PCSO are tax exempt.
Rules:◦ 1. There must be a valid and existing debt.◦ 2. The debt must be actually ascertained to be
worthless and uncollectible during the taxable year.◦ 3. The debt must be charged off during the taxable
year.◦ 4. The debt must arise from the business or trade
of the taxpayer.
Note: the amount recovered is only taxable to the extent of tax benefit in the year the account was written off.
The following tax refund are not taxable:◦ 1. Philippine income tax, except the fringe
benefits tax◦ 2. Estate or donor’s tax◦ 3. Special assessment ◦ 4. income tax of a foreign country.◦ 5. stock transaction tax.
If the annuity is a return of premium paid by the taxpayer, the annuity is not taxable.
If the annuity represents interest, it is taxable.
Types:◦ 1. Compensatory Damages – representing returns
of capital are NOT taxable including amount received as moral damages for personal action.
◦ 2. Recovered damages – representing recoveries of lost profits are taxable.
If payment of income – taxable income If a form of gift – not subject to income tax
but subject to donor’s tax.
Income from illegal sources including◦ - gambling◦ - kidnapping◦ - extortion◦ - smuggling◦ -embezzlement