Inclusions From Gross Income

Question 1

What are the inclusions in gross income

Answer 1

1. Compensation income
2. Business income
3. Gains derived from dealings in properties
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of general professional partnership

Question 2

Compensation income

Answer 2

• Pertains to the types of employee benefits that are subject to regular tax.
• The fringe benefits of managerial or supervisory employees are not considered compensation income and are subject to final tax

Question 3

Business Income

Answer 3

• included income from any trade or business, legal, or illegal and whether registered or unregistered.
• Sales - Cost of sales

Question 5

The following business income shall not be included in gross income subject to regular income tax:

Answer 5

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

Question 6

Examples of Business income exempt from income tax

Answer 6

1. Barangay Micro-Business Enterprise (BMBE)
2. Enterprises enjoying tax holiday incentives under the CREATE LAW which have not yet graduated to their income tax holiday incentives.

Question 7

Examples of income tax subject to special tax

Answer 7

1. Philippine Economic Zone Authority (PEZA) subject to 5%.
2. Tourism Infrastructure and Enterprise Zone Authority (TIEZA) subject to 5% gross income tax
3. Income of self-employed and or individuals (SE/P) who opted to be taxed under 8% income tax.

Question 8

Examples of business income subject to final tax

Answer 8

1. Subcontractors of petroleum service contractors subject to 8% final tax
2. Foreign currency deposits and expanded Foreign currency deposits from PH residents subject to 10% final tax.

Question 9

Gains from Dealings in Properties

Answer 9

• Gains or losses in dealing in ordinary assets are subject to regular income tax.
• Dealings in capital assets other than domestic stocks and real properties are also subject to regular income tax.
• Ordinary gains are included as items of gross income
• Ordinary losses are items of deductions against gross income.
• The net capital gain from other capital assets after deducting capital losses is also included as an item of gross income.
• A net capital loss is not an item of deduction against gross income.

Question 10

Interest Income

Answer 10

• Refers to interest income other than passive interest income subject to final tax.
• A taxable interest income must have been actually paid out of an agreement to pay interest. It cannot be imputed.

Question 11

Examples of interest income subject to income tax

Answer 11

1. from lending activities to individuals and corporations by banks
2. from corporate bonds and promissory notes
3. from bank deposits abroad.

Question 12

Exempt interest income

Answer 12

1. earned by landowners in disposing their lands to their tenants pursuant to the Comprehensive Agrarian Reform Law.
2. Imputed interest income

Question 13

Rent

Answer 13

• Arises from leasing properties of any kind.
• It is a passive income but is not subject to final tax under the NIRC; hence subject to regular income tax.

Question 14

Royalties

Answer 14

• Royalties earned from sources within the Philippines are generally subject to final income tax except when they are active by nature.
• Active royalty income and royalties earned from sources outside the Philippines are subject to regular income tax

Question 15

Special Considerations on rent

Answer 15

1. Obligations of the lessor that are assumed by the lessee are additional rental income to the lessor.
2. Advance rentals are:
   a. Item of gross income upon receipt if:
   - unrestrictied
   - restricted to be applied in future years or upon the termination of the lease.

   b. Not an item of gross income if:
         - it constitutes a loan
         - it is a security deposit to guarantee payment or rent subject to contingency which may or may not happen.

3. Leashold improvements made by the lesse on the leased property are recognized by the lessor as income using the spread-out method or outright method.

Question 17

Dividends

Answer 17

• Pertain to foreign-sourced dividends or those declared by foreign corporations.
• Those declared by domestic corporations are subject to the rules of final tax.
• Foreign sourced dividends are generally subject to regular tax subject to the pre-dominance tests.
• Cash, Property, and Script dividends from foreign corporation are generally items of gross income subject to regular income tax.

Question 18

Stock Dividend

Answer 18

• stock dividends are exempt from income tax, but when the declaration confers to the recipient a different interest or right after the stock dividend declaration or when stocks dividends are subsequentlly redeemed such that it amounts to payment of cash dividend, the fair market value of the stock dividends received is TAXABLE.

Question 19

Liquidating Dividends

Answer 19

• Not an income.
• Are considered an amount in exchange for the investment of the investor and are subject to the rules of dealing in properties.

Question 20

Exemption of foreign-sourced dividends received by domestic corporations

Answer 20

Dividends from foreign corporations are generally subject to regular tax. They may be exempted from RIT under the following conditions:

1. If the ratio in the predominance test is less than 50%
   - the domestic corporation directly owns atleast 20% in value of the outstanding shares of the NRFC
   - the shareholdings in the NRFC must have been held uninterruptedly for a minimum of 2 years at the time of dividend distribution or throughout the entire existence of the NRFC if its operational for less than 2 years.
   - the foreign-sourced dividend must be reinvested within the next taxable year in business operations; working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries. infrastructure projects
2. If the ratio in the predominance test is at least 50%
   - shall be exempt from income tax even if the above-mentioned conditions are not met.

Question 21

Annuities

Answer 21

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

Question 22

Prizes and winnings

Answer 22

• Prizes and winnings that are exempted from final tax are not items of gross income subject to regular tax

Question 23

exempt prizes and winnings

Answer 23

1. Prizes received without effort to join a contest
2. Prizes in athletic competitions sanctioned by their respective national sports association
3. Winnings from PCSO games, not exceeding 10,000