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. Loans

Note :
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