03 Concept+of+Income+ (Midterm)
03 Concept+of+Income+ (Midterm)
03 Concept+of+Income+ (Midterm)
Income
Income means all wealth which flows into the taxpayer
other than a mere return of capital. It includes the
forms of income specifically described as gains derived
from the sale or other disposition of capital.
For tax purposes, income is defined as the amount of
Definition of money coming to a person or corporation within a
specified time whether as payment for services,
income interest, or profits from investment. It includes
earnings lawfully or unlawfully acquired, without
consensual recognition, express or implied, of an
obligation to repay and without restriction as to their
disposition.
Gross income is income reduced by exclusions
Taxable income refers to the pertinent items of gross
Definition of income specified in the Code, less deductions, if any,
income authorized for such types of income by the Code or
other special laws.
Income tax is referred to as tax on all yearly profits
arising from property, professions, trades or offices, or
as a tax on a person’s income, emoluments, profits and
the like.
Definition of Our income tax is classified as:
income tax a. A national tax
b. An excise tax
c. A direct tax
d. A general tax
Individuals Natural persons (Filipino citizens or
not, resident or non-resident of the
Philippines)
Corporation Partnership, joint- stock companies, joint
accounts, or insurance companies except
general professional partnerships and a
joint venture formed for the purpose of
undertaking construction projects or
of income Estate
contract with government.
All property, rights and obligations of a
taxpayers person which are not extinguished by his
death and also those which have accrued
since the opening of succession.
Trust Arrangement created by will under which
property is passed to another for
conservation or investment with the
income therefrom and ultimately the
corpus to be distributed in accordance
with the directions of the creator as
expressed in the governing instrument.
Gross income means all income derived from whatever source
including but not limited to the following items:
1. Compensation to services in whatever form paid (fees, salaries,
wages, commissions and similar items
2. Gross income derived from the conduct of trade or business or
exercise of profession.
3. Gains derived from dealings in property.
General 4. Interests
definition of 5. Rents
6. Royalties
Gross Income 7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions; and
11. Partner’s distributive share from the net income of the general
professional partnership.
Compensation may be paid in money or some medium
other than money like stocks, bonds or other forms of
property.
If payment is made in cash, the whole amount is taxable.
However, the withholding tax required by law to be
deducted by the employer from the compensation of an
employee, is considered as part of the compensation
income subject to tax.
Compensatio If the compensation is paid in kind, the ff. rules shall apply:
n paid in kind a. If services are paid for in a medium other than money, the
fair market value of the thing taken in payment is the
amount included as compensation income.
b. If the services are rendered at a stipulated price, such
price will be presumed to be the fair market value.
c. If the corporation transfers to its employees its own stock
as remuneration for services rendered, the amount of
such is the fair market value of the stock at the time the
services were rendered.
Compensatio Promissory notes received in payment of services
n paid in constitute income to the extent of their fair market
value at the time of receipt. If subject to the
promissory discounting of notes, the fair market value is the
note discounted value.
Illustration:
In 2016, Samar received from Balay a promissory note with a face
Compensatio value of P100,000 for services rendered. The note will mature after
one year. At the time of receipt in 2016 the note was sold to a bank
n paid in at a discount of 18%. Balay paid the note upon maturity in 2017.
deducted Tax benefit arises when the taxpayer realized a tax deduction of
the income tax due on account of said bad debt deduction from
gross income.
Interest on the amount recovered is a taxable income and is not
covered by the tax benefit rule.
Illustration:
Indicate the amount of taxable income or deductible loss in each of the following
independent cases:
2017 Case 1 Case 2 Case 3
Income/loss before write-off 60,000 -30,000 60,000
Less: Bad debt written off 10,000 10,000 100,000
Net income/loss after bad debt 50,000 -40,000 -40,000
Recovery of 2018
Refund of Bart Company purchased from Grace Gasoline Station 100,000 liters
of aviation fuel from January to December 2017. such product is
indirect tax subject to excise tax (an indirect tax) which is added to the price it
paid to the gasoline station.
If Bart Company is exempt from excise tax, who is entitled to claim
refund on the excise taxes erroneously paid to the government –
Bart Company or Grace Gasoline Station?
Answer:
In the refund of indirect taxes, the statutory taxpayer (Grace
Company) is the proper party who can claim the refund.
Refund of In indirect taxation, the purchaser and end consumer ultimately
indirect tax bears the tax burden, but this does not transform his status into a
statutory taxpayer.
Bart Company should invoke its tax exemption to Grace Gasoline
Station before buying the aviation fuel.
A lease contract is a consensual, bilateral, onerous and
commutative contract by which one person binds himself to grant
temporarily the use of a thing or the rendering of some service to
another who undertakes to pay some rent, compensation, or
price.
When the lessee makes useful improvement to the leased
premises, such as the construction of fence or building, the ff.
Leasehold rules shall apply if such improvements are relinquished to the
lessor without demanding reimbursement of its value:
Improvement 1. The consideration for the use of property paid by the lessee is
taxable income to the lessor.
s 2. Taxes paid by the lessee on behalf of the lessor for a business
property are additional rent and constitutes income taxable to
the lessor.
3. When the lessee makes improvements on leased premises and
said improvements will belong to the lessor upon the
termination of the lease, the lessor may at his option report
income as follows:
a. Outright method – report as income the fair market value of the
improvements in the year of completion;
b. Spread-out method – spread over the remaining term of the
lease the book value of such improvements at the termination
of the lease computed as follows:
Cost of leasehold improvements xx
Leasehold Less: Accumulated depreciation xx
Improvement Book value, end of lease
Divide by remainign term of the lease
xx
xx
s Annual income xx
4. Deduction of lessee
The lessee may claim depreciation of the improvements over the
remaining term of the lease or the life of the improvements,
whichever is shorter.
Leasehold 5. Premature termination of lease – income to be reported by the
Improvement lessor shall be computed as follows:
Rent 360,000
Tax 10,000
Depreciation-leasehold improvement
(2,800,000/17.5) x 6/12 80,000
450,000
Leasehold 3. Income of lessor Tony for the year 2021.
Improvement Cost 2,800,000
s Less: Depreciation for 2.5 yrs. (2,800,000/25) x 2.5 280,000
Book value upon termination 2,520,000
Less: Income already reported
2018 24,000
2019 (840,000/17.5) 48,000
2020 (840,000/17.5) 48,000 120,000
2,400,000
Leasehold 4. Income of lessor in 2018 using Outright Method
Improvement
Rent (30,000 x 12) 360,000
s Tax 10,000
Leasehold improvement 2,800,000
3,170,000
Gross income
from Gross income means the total sales, less the cost of goods sold
manufacturin plus any income from investments and from incidental or outside
operations or sources.
g, In determining the gross income, subtraction should not be made
merchandisin fro depreciation, depletion, selling expenses or losses or for items
not ordinarily used in computing the cost of goods sold.
g or mining
business
Illustration:
Gibsons Company is a merchandising business. It is engaged in the
Gross income business of selling school and office supplies, novelties and gift
items. The summary of its income and expenses during the year are
from as follows:
business How much is the gross income and the taxable income of Gibsons
Company?
Gross income Answer:
from Sales
Less: Sales returns and allowances
850,000
35,000
Ending inventory:
Gross income Farm products 20,000
Livestock 34,000
from farming Sale of products raised in the farm 450,000
Sale of livestock 325,000
Gain on sale of farm equipment 40,000
Rent income of farm equipment 7,000
How much is the gross income of Bukirin if he is using:
a. Cash method
b. Accrual method
a. Taxpayer is using cash method of accounting:
Ending inventory:
Farm products 20,000
Livestock 34,000 54,000
Gross income Sale of farm products
Sale of livestock
450,000
325,000
from farming Total 829,000
Less: Beginning inventory
Farm products 30,000
Livestock 25,000 55,000
774,000
Add: Other inome
Gain on sale of farm equipment 40,000
Rent income of farm equipment 7,000 47,000
Gross income 821,000
For income tax purposes, the term “dividends” means any
distribution whether in money or in kind made by a corporation to
its stockholders out of its earnings or profits and payable to its
stockholders.
The more common form are:
1. Cash dividend – paid in cash; income is measured by the
amount of cash received.
Receipts of 2. Stock dividend – distribution by a corporation to its
shareholders of the corporation’s own stock. A stock dividend
dividends representing the transfer of surplus to capital account shall not
be subject to tax unless;
a. These shares are later redeemed for a consideration by the
corporation or otherwise conveyed by the stockholder to the
extent of such consideration;
b. The recipient is other than a stockholder; or
c. A change in the stockholders equity results by virtue of the
stock dividend issuance.
When a stockholder receives a stock dividend w/c is a taxable
income, the measure of income is the fair market value of the
stocks received.