Regular Income Tax - Gross Income

Page 1 of 9 | TAX Handouts No.
06
INCOME TAXATION
REX B. BANGGAWAN, CPA, MBA
REGULAR INCOME TAX: GROSS INCOME

REX B. BANGGAWAN, CPA MBA
REGULAR INCOME TAXATION

Regular Income Tax applies to all other items of gross income that are not subjected to final tax or capital gains tax on
certain passive income. Most of these items of gross income are derived in the regular conduct of business, trade, profession
or employment.
FEAURES OF THE REGULAR INCOME TAX

1. General coverage
2. Net income tax
3. Annual tax that is paid in quarterly estimated payments
4. Advanced payment through creditable withholding taxes
TYPES OF REGULAR INCOME TAX

1. Progressive Income Tax
This is applicable to individuals, taxable estates and trusts.
Tax rates for Year 2018 to 2022
TAXABLE INCOME PER YEAR INCOME TAX RATE
P250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
2. Corporate Income Tax: 30% on taxable income

This is applicable to corporations, partnership and joint venture.
Taxable income means the pertinent items of gross income subject to regular tax less the deductions and/or exemptions, if
any, authorized for such types of income under the NIRC or other special laws.
GROSS INCOME
Gross income includes gains, profits, and income derived from whatever sources, whether legal or illegal not covered by
either final taxation or capital gains taxation.
REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

www.reocpareview.ph REAL EXCELLENCE ONLINE CPA REVIEW
(074) 665 6774 0916 840 0661 [email protected] MAY 2021 CPA REVIEW SEASON
Page 2 of 9 | TAX Handouts No. 06

EXCLUSIONS FROM GROSS INCOME:

1. Proceed of a Life Insurance policy - received, whether in lump sum or otherwise, by the heirs or beneficiary upon the
death of the insured is tax exempt. However, if the proceed are retained by the insurer under an agreement to pay
interest, the interest is included in gross income.
2. Amount received by the insured as a return of premium under a life insurance, endowment, or annuity contracts
paid during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
3. Gifts, Bequests, and Devises or Descent – the value of property acquired by way of these are taxable under Donor’s
Taxation. However, incomes from such property, as well as, gift, bequest, devise, or descent of income from any
property, in case of transfer of a divided interest, are included in gross income.
4. Compensation for injuries and sickness – amounts received under Accident or Health Insurance or under Workmen’s
Compensation Acts, as compensation for personal injuries plus the amount of damages received whether by suit or
agreement on account of such injuries or sickness.
5. Income exempt under treaty – income of any kind to the extent required by any treaty obligation binding upon the
Government of the Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.
For employers with retirement plans: Retirement benefit under RA 4917
Requisites of exemption:
a. The employer maintains a reasonable private benefit plan.
b. The retiring official or employee has been in the services of the same employer for at least ten (10) years.
c. The retiring employee is at least fifty (50) years of age at the time of retirement.
d. This is the first time availment of the exemption.
Reasonable private benefit plan
A reasonable private benefit plan is a pension, gratuity, stock bonus or profit-sharing plan maintained by the employer for the
benefit of its employees covered (plan members), wherein contributions are made by the employer, employees or both, for
the purpose of distributing the corpus (principal) or earnings thus accumulated to plan members; provided that in no time shall
any part of the corpus or income of the fund be used for, or diverted to, any purpose other than the exclusive benefit of said
plan members.
For employers without retirement plans: Retirement benefit under RA 7641
Requisites of exemption:
1. Retiring employee is at least 60 years old
2. He must have serve the company for at least 5 years
*Private employees retiring between June 5, 2020 to December 31, 2020 are excluded in gross income (Bayanihan to
Heal as One Act)
7. Separation or Termination
Requisite of exemption:
a. Due to sickness, death or other physical disability;
b. Any cause beyond the control of the employee or official (i.e.: redundancy and closure of business)
8. Retirement Gratuities, Social Security Benefits and Other similar benefits from foreign government agencies
and other institutions, private or public, by resident or non-resident citizens or aliens who come to settle permanently
in the Philippines
9. United States Veterans Administrations - administered benefits under the laws of the United States received by
any person residing in the Philippines
10. SSS benefits under RA 8282 received or enjoyed
11. GSIS benefits under RA 8291 and including retirement gratuity received by government officials and employees
12. Investment Income in the Philippines in loans, stocks, bonds, or other domestic securities, or form interest on
deposits in banks in the Philippines by:
a. Foreign governments
b. Financing institutions owned, controlled, or enjoying refinancing from foreign government
c. International or regional financial institutions established by foreign governments


13. Income of the government and its political subdivisions from

a. any public utility or
b. exercise of essential government function
14. Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic, literary, or civic
achievements 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
15. Prizes and Awards in Sports Competitions granted to athletes:
a. in local or international competitions and tournaments
b. whether held in the Philippines or abroad; and
c. sanctioned by their national sports associations
16. 13th Month Pay and Other Benefits – provided not to exceed the P90,000 ceiling (non-adjustable to inflation).
17. Contributions for GSIS, SSS, PhilHealth, HDMF and Union Dues - these are deducted from the relevant income to
which they relate; for example, they are netted with the compensation income of employees
18. Gains from Sale of bonds, debentures or other certificate of indebtedness with a maturity of more than 5 years.
19. Gains realized from redemption of shares in mutual fund by the investor.
20. Certain benefits of minimum wage earners (HHON)
21. Income exempt under special laws or subject to special tax rules
a. Income of BMBE
b. Income on sale of gold to the BSP
c. Income of BOI-registered entities under ITH
Note to candidates:
1. Exclusion is different with deductions. When an item of income is exempted under the above paragraph, or under special
laws, it is deducted from gross income if it was initially included therein. It is not shown as a deduction from gross
income rather it is “excluded” in gross income amounts.
2. Interest income from government securities are already excluded from the list of exemptions
SOURCES OF GROSS INCOME:

A. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions,
and similar items
 if received in promissory notes, the taxable portion at the time of receipt is the fair value of the note (i.e.: its
discounted value); The interest portion will be recognized as income over the related period
 Fringe benefits are not direct item of compensation. Please refer to your handouts on Fringe Benefits Taxation.
B. Trade, Business or Exercise of a Profession, except self-employed and or professionals opting to the 8% commuted
tax under TRAIN law
C. Gains derived from dealings in property (Please read separate handout)
D. Interests – these refers to interest other than those subject to final taxes, except:
1. Interest income under the land reform earned by the landowner to which the tenant-purchaser pays him
2. Imputed interest
E. Rents
Special considerations:
1. Obligations of the lessor that are assumed by the lessee is additional rental consideration.
2. Advance rentals:
a) If unrestricted, the entire amount is income at the time of receipt.
b) If it constitutes a loan – not rent income.
c) As security deposit to guarantee payment or rent – income only when the event or condition which makes it the
property of the lessor occurs (i.e.: when there is default)
d) If it is to be applied at the termination of the lease, it is income at the time of receipt
e) Improvements made by the lessee on the property – to be recognized as income by the lessor in two ways:
 Outright method – the fair value of the property that will remain and be turn-over to the lessor upon
termination of the lease (the real book value of the property at termination, i.e.: not the lessee’s book value)
is recognized as income at the point of completion of the improvement NOT the fair market value of the


improvement upon completion. (Note: Although the latter is the wordings of the law, apparently, the whole
fair value is, by common sense, not income.)
 Spread-out method – recognize the book value of the property at the termination of the lease as income
over the period of the related lease
F. Royalties
G. Dividends
Dividends are subject to regular income tax when it is declared by foreign corporations.
Dividends can either be:
 Cash dividend
 Property dividend – when taxable, taxable at the fair market value of the property received as dividend. Note
property dividend includes stock of another corporation declared by the distributing corporation.
 Stock dividend – generally not taxable except when the declaration confers to the recipient a different interest or
right after the declaration. When taxable, the measure of taxable amount is the fair market value of the stock
dividend received.
 Liquidating dividends
This is considered an exchange or sale of property. Gain or loss is fully taxable or deductible.
Dividends received from resident corporations are subject to the Dominance Test.
H. Annuities
I. Prizes and winnings
J. Pensions; and
K. Partner’s distributable share in the net income of the general professional partnership and exempt joint venture
OTHER SOURCES OF GROSS INCOME:

A. Farming
Taxation of farming gross income requires classification of the following:
1. Livestock and farm products raised and sold – the selling price of the livestock or farm products is considered
gross income.
2. Livestock and farm purchased and sold – only the accounting gross income (sales less cost of sales) is included
in gross income
Taxation Rules:
1. Taxpayer may follow accrual or cash basis in accounting for inventories.
2. Expenses in raising the livestock and farm products are deductions from the computed gross income.
3. The proceeds of crop insurance or livestock insurance constitute gross income because it represents recovery
of lost profits rather than lost capital.
B. Tax Benefits
When a taxpayer gains an advantage by an income tax deduction claimed in the past but were subsequently recovered,
the tax benefit should be included in income in the year recovered as item of gross income.
Examples:
1. Bad debt recovery
General Rule: The recovery of bad debts previously written off constitute a receipt of taxable income
2. Tax refund
General Rule: Refund of taxes that entered the determination of taxable income should be reverted back to gross
income. Hence, refunds of the following taxes that will not enter the determination of taxable income will not be
included in gross income:
a. Estate or donor’s tax d. Philippine income tax, except the fringe benefit tax
b. Stock transaction tax e. Special assessment
c. Income tax paid or incurred to a foreign country, if the taxpayer claimed a credit for such tax in the year it was
paid or incurred.
3. Unamortized cost of property abandoned and written off but was subsequently re-entered into use
General Rule: The cost previously expensed should be reverted back into gross income in the year extraction
operation is resumed.


Requisites in the taxability of expense recoveries

1. The expense is claimed as deduction against gross income in previous year/s.
2. The expense resulted in tax benefit to the taxpayer
C. Cancellation of indebtedness
a. in consideration of service – treated as compensation income
b. with no consideration – not an income but a gift taxable under Donor’s Taxation
c. by a corporation in favor of a shareholder - treated as declaration of dividend subject to final tax
d. as capital transaction such as forfeiting the right to receive dividend in exchange of the debt – treated as dividends
and is subject to dividend taxation rules
D. Damage recovery
a. Compensatory Damages - this constitute return of capital and hence, not taxable. For example: moral damages
from personal action such as libel, slander; and breach of promise to marry.
b. Recovered Damages – this constitute taxable income since they are recoveries of lost profit. For example: damages
recovered from patent infringement suit
ILLUSTRATION: EXCLUSIONS IN GROSS INCOME

1. Check the items of income that are taxable.
a) Novel prize received for achievement civic achievements.
b) Prizes and awards in sports competition, not sanctioned by their respective national association accredited by POSC.
c) World Bank’s income earned in the Philippines.
d) Cost of Living Allowance.
e) Union due Contribution.
f) Proceeds of from life insurance policy, revocable designation of beneficiary.
g) Pensions, in general.
h) Income of PAGCOR, a GOCC.
i) Income of government from holders of public utility franchise.
j) Interest income.
k) Board of director’s fee.
l) Mandatory retirement pay
m) Professional athlete’s salary.
n) Winnings from Philippine Sweepstakes or Lotto.
o) Income derived from smuggling.
p) Interest received from life insurance’s annuity.
q) Hazard pay received by MWE.
r) Gains from redemption of shares in mutual fund.
s) Magsaysay awards.
t) GSIS Retirement benefits.
u) Cash surrender value received from insurance in excess of premium paid.
v) Proceeds from life insurance of a deceased employee received by the employer.
w) Dividend income derived in the Philippines by the Taiwan Government.
x) Gains from the sale of bond with a maturity of three years.
y) Cancellation of debt in lieu to services rendered.
z) Share in net income of unincorporated partnership or joint venture
aa) Share in net income of associate or subsidiary
2. Mr. A donated his business to his son B in the middle of the year. The business has a net worth of P2,000,000 at the
start of the year. It earned P300,000 in during first half of the year and P200,000 for the rest of the year.


Required: Determine the following

a. Reportable income of Mr. A and his Son B
b. Net taxable gift of A
3. Mr. Pacquiao, a national athlete, received the following during the year:
Ramon Magsaysay award P 50,000

Athlete of the year award 100,000
Prize – SM Raffle 10,000
Prize for winning the gold Olympic medal 500,000
Car from Nissan as a gift 1,200,000
Winnings – Philippine Sweepstake 150,000
Casino winning, net of 200,000 losses 300,000
Winnings, from horse race 100,000
Required: Determine the total exclusions in gross income.
4. Mr. De Silva had the following income during the year:
Returns from life insurance (P40K annual premium for 15 years) P 800,000
Proceeds of father’s life insurance (P 600,000 premium paid) 1,000,000
Rent income from house worth P1M he inherited 400,000
Proceeds of redemption of mutual funds held 2 years (10,000 units bought at P10/unit) 140,000
Proceeds on sales of 10-year bonds bought P1M inclusive of P40,000 accrued interest 1,100,000
Interest on government securities 40,000
Damages awarded by the court (40% for unrealized profits) 500,000
Prize for winning 2019 Mr. Olympia in Las Vegas, Nevada, USA 20,000,000

a. Total exclusions in gross income
b. Total inclusions in gross income
5. Mrs. Calderon retired from ABS Corp. effective at the end of 2019. She received the following form ABS Corp:
Compensation, net of P50,000 withholding tax, P50,000 SSS, P20,000 PHilhealth

P20,000 HDMF and P10,000 union dues P 1,050,000
Year-end fair value of ABS stocks acquired under ESOP 1,200,000
13th month pay 100,000
Retirement benefit 8,000,000
De minimis benefits 20,000
The employee’s required contributions for SSS, PhilHealth and HDMF were P10,000, P8,000 and P7,000, respectively.
The employee stock options plan requires at least 15-year residency. Mrs. Calderon exercised the stock option during
the year by purchasing P1,000,000 worth of stocks for P600,000.

a. Total inclusion in gross income
b. Total exclusion in gross income
6. BT, Inc. received the following refunds during the taxable year:


Licensing fee P 200,000

Registration fees of delivery trucks 40,000
Donor’s tax 50,000
Real estate tax 30,000
Community tax 10,000
Special assessment 20,000
Corporate income tax 300,000
Foreign income tax previously claimed as tax credit 50,000
Foreign income tax previously claimed as deduction 100,000
Value-added tax 150,000
Required: Compute the taxable tax benefit.
7. An individual taxpayer received the following income in 2019:

Philippines Abroad
Compensation income, net of P2,500 SSS, P2,100 PhilHealth,
P1,800 HDMF and 5% withholding tax P 190,000
Business profit on sale of Bagoong 300,000 P 200,000
Dividend from domestic corporation 40,000 -
Dividend from foreign corporation - 30,000
Interest income from bank deposit 18,000 40,000
Winnings from raffle 10,000 20,000
Gain on sale of bonds with 5 year maturity 50,000 -
Prizes in a singing competition 80,000 100,000
Interest income from loans to OFWs 80,000 -
SSS benefits received 20,000 -
Required:
1) Compute the total income to be reported assuming the taxpayer is a resident citizen.
2) Compute the total income to be reported assuming the taxpayer is a non-resident citizen.
8. Cavite, Inc. had the following income in 2019:

Philippines Abroad
Rent income P 10,000,000 P 12,000,000
Dividend – domestic 50,000 -
Royalties 80,000 200,000
Prizes 20,000 30,000
Business expenses 8,700,000 9,800,000
Required: Compute the taxable income if the taxpayer is
1. a domestic corporation
2. a resident foreign corporation.
3. a non-resident foreign corporation.
9. Jeff disclosed the following income in 2019:

Dividends from domestic corporation P 200,000
Dividends from a resident corporation (85% of income in the 3 prior years is 100,000
from the Philippines)
Rent income, net of 5% withholding tax 237,500
Dollar interest income from Bank of Tokyo, Japan (peso equivalent) 120,000
Dollar interest income under the Expanded Foreign Currency Deposit System 80,000


Compensation, net of 15% withholding tax, P2,000 SSS, P1,500 PhilHealth, 170,000
P1,000 Pag-Ibig and P500 union dues
Professional fees, net of 10% withholding tax 90,000
Required:
Assuming Jeff is a
Determine the following: Resident citizen Non-resident citizen Resident alien
Reportable income
Final tax
10. Mabaca Corporation, a taxpayer under accrual basis, had the following write-off and recoveries of receivables:
2019 2020
Net income before write-off P 400,000 P 900,000
(Bad debts write-off) / Recovery 650,000 400,000

1. Taxable recovery in 2020 based on the given facts
2. Taxable recovery in 2020 assuming Mabaca is a BOI registered enterprise enjoying ITH in 2019
3. Answer No. 1 and No. 2 assuming Mabaca is under the cash basis
11. During the period, Mr. X earned P800,000 compensation income. Mrs. X also earned P1,200,000 from her professional
practice. The spouses also rented a portion of their residential house which earned them P400,000. They also have a
savings bank account which earned P24,000 in interest.
Required: Determine the reportable income of the spouses.
12. A certain taxpayer had the following income during the year:
1. Dividends from domestic corporations:

- B Corp, 40% of income earned in the Philippines in the last 3 prior years 100,000
2. Dividends from a foreign corporations
- Z Corp, 50% of income earned in the Philippines in the last 3 prior years 200,000
3. Interest on long-term deposits
- from domestic banks 150,000
- from foreign banks abroad 100,000
4. Interest on long-term foreign currency deposits
- From domestic banks 120,000
- From foreign banks abroad 180,000
5. Prizes on a web design competition
- Held in the Philippines 15,000
- Held abroad 7,000
6. Lotto winnings
- Philippine Charity Sweepstakes Office 500,000
- US Super Lotto 1,000,000
7. Profits from merchandising
- Philippine outlets trading breads (20% from export sales) 600,000
- Foreign outlets trading machineries (10% exported to Philippine residents) 400,000
8. Gain on sale of domestic stocks


- To Philippine buyers 300,000

- To foreign buyers 200,000
9. Gain on sale of a vacant and unused condominium unit
- Located in the Philippines to non-resident Filipino buyer (cost = P400,000) 500,000
- Located abroad to Philippine buyers (cost = 1,500,000) 400,000
10. Gain on sale of a commercial building
- Located in the Philippines to non-resident buyers (cost = 600,000) 600,000
- Located abroad to Philippine resident buyers (cost = 700,000) 300,000
Required: Compute the following requirements assuming the taxpayer is a:

Non-resident Domestic Resident foreign
Resident citizen citizen corporation corporation
a. Final tax
b. Capital gains tax
c. Taxable income
---- END OF HANDOUTS ----


Regular Income Tax - Gross Income

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Page 1 of 9 | TAX Handouts No.

REGULAR INCOME TAX: GROSS INCOME

REGULAR INCOME TAXATION

FEAURES OF THE REGULAR INCOME TAX

TYPES OF REGULAR INCOME TAX

P250,000 and below 0%

Above P250,000 to P400,000 20% of the excess over P250,000

Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000

Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000

Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000

Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

2. Corporate Income Tax: 30% on taxable income

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

EXCLUSIONS FROM GROSS INCOME:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

13. Income of the government and its political subdivisions from

SOURCES OF GROSS INCOME:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

OTHER SOURCES OF GROSS INCOME:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

Requisites in the taxability of expense recoveries

ILLUSTRATION: EXCLUSIONS IN GROSS INCOME

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

Required: Determine the following

Ramon Magsaysay award P 50,000

Required: Determine the total exclusions in gross income.

4. Mr. De Silva had the following income during the year:

Required: Determine the following

Compensation, net of P50,000 withholding tax, P50,000 SSS, P20,000 PHilhealth

Required: Determine the following

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

Licensing fee P 200,000

Required: Compute the taxable tax benefit.

7. An individual taxpayer received the following income in 2019:

8. Cavite, Inc. had the following income in 2019:

9. Jeff disclosed the following income in 2019:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

Required: Determine the following

Required: Determine the reportable income of the spouses.

1. Dividends from domestic corporations:

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

REX B. BANGGAWAN, CPA MBA

- To Philippine buyers 300,000

Required: Compute the following requirements assuming the taxpayer is a:

---- END OF HANDOUTS ----

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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