Tax 06-REGULAR INCOME TAXATION: ITEMS OF GROSS INCOME

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.

TRAIN LAW Updates

Description NIRC TRAIN
Income Tax Rates for Individuals  Graduated rates from  In general, graduated rates from 20% to 35%
5% to 32%, with 7 (beg. 2023, 15%-35%) with zero rate for first
tiers P250,000 and 5 tiers
 Basis is from P1 to  Basis is from over P250,000 to over P8M
over P500,000
Personal/Additional Exemptions & Available to qualified taxpayers None
Health Insurance
Tax exempt 13th month Maximum of P82,000 Maximum of P90,000
Employees of Preferential rate of 15% Subject to regular income tax rate under Section
RHQ/ROHQ/OBU/Petroleum 24(A)(2)(a) of the Tax Code as amended
Tax on Fringe Benefits given to non- FBT rate: 32% of grossed-up FBT rate: 35% or the applicable tax rate
rank and file employees value

Nature of Regular Income Tax

1. It applies on net income (taxable income). ‘’taxable income means’’ the pertinent items of gross income subject to regular
tax less the deductions and/or personal and additional exemptions, if any, authorized for such types of income under the
NIRC or other special laws.
2. Reported quarterly with an annual consolidated return rather than on a per transaction basis.

Regular Income Tax has two forms:

1. Progressive Income Tax
NIRC
This is applicable to individuals and estates and trusts.
OVER BUT NOT OVER
P0.00 P 10,000.00 5%
10,000.00 30,000.00 P500 plus 10% of excess over P 10,000.00
30,000.00 70,000.00 P2,500 plus 15% of excess over 30,000.00
70,000.00 140,000.00 P8,500 plus 20% of excess over 70,000.00
140,000.00 250,000.00 P22,500 plus 25% of excess over 140,000.00
250,000.00 500,000 P50,000 plus 30% of excess over 250,000.00
500,000.00 Infinite P125,000 plus 32% of excess over 500,000.00
TRAIN LAW
Individuals Earning Purely Compensation shall be taxed based on the graduated income tax rates prescribed
OVER NOT OVER
- 250,000.00 BASIC ADDITIONAL (b) OF OVER
(a) (c)
250,000.00 400,000.00 -   -
400,000.00 800,000.00 - 20% 250,000.00
800,000.00 2,000,000.00 30,000.00 25% 400,000.00
2,000,000.00 8,000,000.00 130,000.00 30% 800,000.00
8,000,000.00 - 490,000.00 32% 2,000,000.00

2. Corporate Income Tax

This is applicable to corporations and business partnership.
Effectively Corporate Rate
Prior to 1998 35%
January 1, 1998 34%
January 1, 1999 33%
January 1, 2000 32%
November 1, 2005 35%
January 1, 2010 30%
Whereas the following entities may be covered by regular income tax rules, they are not taxable as a separate entity but are
treated as an extension of the personality of the individuals composing owning them.
1. General Professional Partnership
2. Co-ownership
3. Tax exempt estates and trusts
4. Exempt Joint Ventures or Consortium— those that are:
a. Formed for the purpose of undertaking construction projects,
b. Petroleum, coal., geothermal and other energy operations
- in pursuant to an operating consortium agreement under a service contract with the government.

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.

EXCLUSION S FROM GROSS I N CO ME

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 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.
Retirement benefit under RA 7641
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 treeing employee is at lost 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.

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 Sores 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 hum
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 resides substantial future services as a condition to receiving the prize or award
13. 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 (Examples: productivity incentives, Christmas homes, etc.) — provided not to
exceed the P30,000 ceiling. Any amount in excess is included in gross income. This P30,000 ceiling is adjustable by
revenue regulation in keeping with the effects of inflation on the cost of living.
De minimis Benefits
1. Monetized unused vacation leave credits of private employees — not exceeding 10 days during the year
2. Monetized unused vacation and sick leave credits paid to government officials and employees
3. Medical cash allowance to dependents of employees — not exceeding P750 per employee per semester, or P125 per
month
4. Rice subsidy — P1,500 or 1 sack of 50-kg rice per month amounting to not more than P1,500.
5. Uniform and clothing allowance — not exceeding P5,000 per annum (RR8-2012)
6. 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 per annum
7. Laundry allowance — not exceeding P300 per month
8. Employee achievement award, e.g. for length of service or safety achievement, which must be in the form of tangible
property other than cash or gift certificates, 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.
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum (i.e.
Christmas gift and anniversary gifts)
10. Daily meal allowance for Overtime work and night or graveyard shift not exceeding 25% of the basic minimum wage
on a per region basis (i.e. overtime meal)

Note to candidates:
The excess of these de minimis benefits over their maximum limits are included with the 13 th month or 14th month pay,
bonuses, and other benefits. The totality of the benefits is compared with the P30,000 limit.

17. contribution for GSIS, SSS, Medicare, Pag-ibig and Union Dues – these are deducted from the relevant income to
which they related; for example, they are netted with the compensation income of the 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.

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 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 compensation. Please refer to your handouts on Fringe Benefits Taxation.
B. Trade, Business or Exercise of a Profession
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 se .se, 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 taxaable 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.

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 from the next income of the general professional partnership.

OTHER SOURCES OF GROSS INCOME:

A. Farming
Taxation of farming gross income requires classification of the following.
1. Livestock and farm gross income 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 had 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 ingross income:
a. Philippine income tax, except the fringe benefit tax
b. Estate or donor's tax
c. Special assessment
d. 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.
e. Stock transaction tax

Note: the above items are not deductible against gross income in any case hence they could not give rise to a
tax benefit to the taxpayer.

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.
Exception to Recoveries of Losses and Expenses: Tax Benefit Rule
When the write-off or tax expense is did not cause a reduction in the income tax liability in the period it is
claimed, the recovery or refund is exempt because of absence of tax

C. Cancellation of indebtedness
a. in consideration of service— treated as compensation income
b.as an act of gratuity — not an income but a gift taxable under Donor's Taxation
c. 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

Sample problems:

1. Mrs. Lucena was insured under an endowment policy with a value of 500,000php. Total premium paid by her
on the policy as 490,000php from which there was a dividend of 40,000php. At the maturity of the policy, Mrs.
Lucena received 500,000php. The income of Mrs. Lucena under the policy is?

2. A taxpayer derived the following income during 2010:

Philippine
  s Abroad
Compensation income, net of P500 SSS,
P250 PhilHealth and P10,000 withholding
tax P200,000  
Rental of house to student boarders 400,000  
Gross profit on sale of Bagoong 300,000 P200,000
Interest income from bank deposit 18,000 27,000
Gain on sale of bonds with 5 year maturity 50,000  
Prizes in a singing competition 80,000 120,000
Interest received from loan to an overseas
contract worker 100,000  
SSS benefits received 20,000  

Required: Compute for the total income to be reported assuming the taxpayer is a

a.) Resident citizen

b.) Non-resident citizen

3. A corporate taxpayer reported the following in its 2018 income statement. Compute the corporation’s taxable
income.
Sales 1,500,000.00
Cost of sales 1,000,000.00
Gross profit 500,000.00
Less: Business expenses 200,000.00
Operating profit 300,000.00
Interest income (16,000 from bank deposit) 25,000.00
Dividend from a domestic corporation 18,000.00
Proceeds of life insurance of Company CEO 1,000,000.00
Awards in recognition of civic achievements 100,000.00
Gain on sale of investment in bonds 15,000.00
Net income 1,458,000.00