Please enable JavaScript.

Coggle requires JavaScript to display documents.

Tax - Week 5 - Types of Income - Coggle Diagram

- - - - E. Business Income/Income from Exercise of Profession
        
        F. Other Items of Gross Income
        
        F1. Interest Income - Included in the computation of gross income.An earning derived from depositing or lending of money, goods or credits [Valencia and Roxas] Income earnings from use of money.
        
        Withholding Tax (RR 10-98) - Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%.
        
        Joint Bank Account - If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of 7.5%.
        
        Exclusions (NIRC 32B7a) - Exempt from taxation. Not part of gross income. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.
        
        Categories -
        
        Interest income derived from government debt instruments and securities
        
        Interest income derived from Long-Term Deposits or Investment Certificates
        
        Interest income derived from currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements derived from sources within the Philippines
        
        Interest income derived from a depository bank under the Expanded Foreign Currency Deposit System
        
        Interest income derived from offshore banking units
        
        GR: Interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise are included in the gross income (Sec. 37, NIRC)
        
        XPCNS:
        2a. Income derived by foreign government (based on international comity) - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by:
        2a. foreign governments,
        2a. financing institutions owned, controlled, or enjoying refinancing from foreign governments
        2a. international or regional financial institutions established by foreign governments. This is because these are considered as dividends
        2b. Interest on Government Securities are excluded and exempt from taxation (Sec. 29(b)(4), NIRC)
        
        Imputed Interest - Does not exist in the code. Imputed interest is the interest that is estimated to be collected by the lender, regardless of what the lender actually receives. Tax collection agencies use imputed interest to collect tax revenue on below-market loans and zero-coupon bonds. It is also called a pure discount bond or deep discount bond..
        
        Furthermore, CIR has no authority to impute theoretical interests on transactions and assess deficiency taxes from them under Sec. 43 (Sec. 50) and Sec. 179 or RR No. 2 in the absence of a clear factual basis.
        
        Characterization of Transaction - Interest income can become capital investment if stockholder extends money to corporation, then income is dividends.
        
        Inter-Company Loan - Check the personality of the creditor vis-a-vis the borrower. If related, then may be considered as interest due to character of capital investment.
        
        1 more item...
        
        Note source of the interest income. This changes the form of taxation.
        
        F2. Rentals/Leases - Generally, rental income part of gross income. Rentals for business purpose may be made as tax deductions.
        
        Improvements - If lessee builds improvements on land not subject to removal by the lessee, lessor must report the improvements as income.
        
        Corporate Income from Leased Property - Debt of lessor, taxes, insurance, other fixed charges, are considered as rental payments and returned tot he lessor corporation as income.
        
        When the deposit was resorted due to the refusal to accept the rentals (thus, not being the fault of the tenants), then the entity (lessor) is deemed to have constructively received the rentals.
        
        Refers to earnings derived from leasing real estate as well as personal property. Aside from the regular amount of payment for using the property, it also includes all other obligations assumed to be paid by the lessee to the third party in behalf of the lessor (e.g., interest, taxes, loans, insurance premiums, etc.)
        
        Lease To Own - Not rent, but may be considered as:
        
        Gross income derived from the conduct of trade or business or the exercise of a profession - In effect, selling property on an installment basis.
        
        F3. Royalties - Includes rentals or royalties from the following enumeration:
        
        Enumeration -
        
        The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
        
        The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
        
        The supply of scientific, technical, industrial or commercial knowledge or information;
        
        The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);
        
        The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;
        
        Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and
        
        The use of or the right to use:
        7a. Motion picture films;
        7b. Films or video tapes for use in connection with television; and
        7c. Tapes for use in connection with radio broadcasting.
        
        Subject Matter - Intangible Properties. Here, characterization depends on who owns the intangible property rights.
        
        F4. Dividends - as any distribution made by a corporation to its shareholders out of its earnings or profits, whether in money or in other property.
        
        When taxable -
        
        Liquidating Dividends - Taxable income. Distribution of all property/assets in a liquidation or dissolution. Treated as a sale of shares of stock. that can result in gains or losses.
        
        Cash/Property Dividend - Subject to income tax. Valued at the amount of money received by the stockholders.
        
        Stock Dividends - Generally exempt from income tax. . A stock dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.
        
        GR: Dividends are included in the gross income of the stockholder
        
        XP: Unless they are exempt from tax or subject to final ax at preferential rate under the Tax Code.
        
        Taxation of Stock Dividends -
        
        CANCELLATION /DISTRIBUTION- a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits (Sec. 73(B), NIRC); or
        
        OPTION - Where there is an option that some stockholders could take cash or property dividends instead of stock dividends; some stockholders exercised the option to take cash of property dividends; and the exercise of option resulted in a change of the stockholders’ proportionate share in the outstanding share of the corporation.
        
        F6. Annuities and Insurance Proceeds - installment payments received for life insurance sold by insurance companies. periodic instalment payments of income or pension by insurance companies during the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of capital paid by him.
        
        Parts of Annuity -
        
        Representing interest - taxable income
        
        Return on premium - not taxable because it is considered as return on capital
        
        Proceeds from Life Insurance - Generally, excluded from the gross income of the beneficiary.
        
        XCPN When Included from the Gross Income of the Beneficiary -
        
        If the proceeds went to a transferee for a valuable consideration
        
        If such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments received by the insured shall be included in gross income
        
        Return of Premiums -
        
        GR - contract is a return of capital and not income. Refers to the Cash Surrender Value of the contract.
        
        XCPN - Amounts receive exceed the aggregate premiums or considerations paid. Here, excess shall be included in the gross income.
        
        Sickness Compensation - These are excluded from gross income Amounts received through:
        
        Accident or health insurance or
        
        Under workmen’s compensation acts, as compensation for personal injuries or sickness,
        
        Plus the amount of any damages received, whether by suit or agreement, on account of such injuries or sickness
        
        1 more item...
        
        F7. Prizes and Winnings/Awards/Rewards - a reward for a contest or a competition. It represents remuneration for an effort reflecting one’s superiority. These are generally taxable, being derived from labor.
        
        XCPN -
        
        Those made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements. Excluded if:
        1a. The recipient was selected without any action on his part to enter a contest or proceedings; and
        1b. The recipient is not required to render substantial future services as a condition to receiving the prize or award.
        
        Those granted to athletes in local and international sports competitions and tournaments, sanctioned by their national associations shall be EXEMPT from income tax.
        
        PCSO Lotto Winnings are EXEMPT from income tax.
        
        Miss Universe - Taxable
        
        TOYM
        
        Nobel Prize
        
        Hidielyn Diaz Issue -
        
        Prizes, Awards & Winnings - Generally same lang. Just take note of what are exempted.
        
        Prizes & Awards given to entities recognized with no need for application or subsequent service.
        
        Sports Related Competition - Any awards given are considered exclusion if amateur (sanctioned by the National Sports Association)
        
        PCSO & Lotto - Specific exempt if less than P10,000
        3a. Above P10,000 - Passive Income (20%)
        3b. P10,000 or less - regular income (graduated rate)
        
        1 more item...
        
        F8. Other Types of income
        
        Found Treasure
        
        Tax Refund
        
        Recovery of Bad Debt - Debts resulting from the worthlessness or uncollectibility, in whole or in part, of amounts due the taxpayer actually ascertained to be worthless and the corresponding receivable should have been written off or charged off within the taxable year. A debt is worthless when after taking reasonable steps to collect it, there is no likelihood of recovery at any time in the future.
        
        2 more items...
        
        Taxes previously claimed and allowed as deductions, but subsequently refunded or granted as tax credit pursuant to Section 295 of the Tax Code, should be declared as part of the gross income of the taxpayer in the year of receipt of the refund or tax credit.
        
        1 more item...
        
        What is the rule regarding discovery of hidden treasure?
        
        General Rule: If the finder is the owner of the land, building, or other property where it is found, the entire hidden treasure belongs to him.
        
        Exception: If the finder is not the owner or is a stranger (includes the lessee or usufructuary), he is entitled to ½ thereof. (Art 566, NCC)
        
        Partner’s Distributive Share of the Gross Income of General Professional Partnerships - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.
        
        Distributive share - the net income of the partnership shall be computed in the same manner as a corporation.
        
        General Partnership - Partnership of persons who earn profit out of the partnership, but not the exercise of the profession of the partners, then GPP.
        
        Dividends - Final taxation
        
        Distributive Share - Regular Taxation, cannot make use of 8%
        
        Exclusions under Special Laws
        
        AFP Exemptions (RA 9040) - These are exempt from any form of tax.
        
        Benefits received from and enjoyed under the Armed Forces of the Philippines Retirement and Separation Benefits System (AFP-RSBS) in accordance with the provisions of Presidential Decree No. 361, as amended by Presidential Decree No. 1909
        
        death and disability benefits enjoyed by AFP personnel as provided by law
        
        Exemption from Gross Income -
        
        Longevity pay;
        
        Mandatory allowances -
        2a. Cost of Living Allowance;
        2b. Personnel Economic Relief Allowance;
        2c. Hazardous Allowance;
        
        Collateral Pay,
        3a. Specialist Pay;
        3b. Combat Pay;
        3c, Flying Pay;
        3d. Air Mechanic's Pay;
        3d. Sea Duty Pay;
        3d. Hazardous Duty Pay;
        3d. Instructor's Duty Pay;
        3d. Parachutist's Pay;
        3d. Hardship Pay;
        
        Collateral Allowances, -
        4a. Special Clothing Allowance;
        4a. Cold Winter's Clothing Allowance and Cold Weather Clothing Maintenance Allowance;
        4a. Winter Clothing Allowance;
        4a. Initial Enlistment and Reenlistment Allowance; and
        4a. Laundry Allowance.
        
        Passive Income - An income in which the taxpayer merely waits for the amount to come in. Examples are royalty, interest, prizes, and winnings. Here, final tax under Sec. 24(b) is imposed.
        
        Passive Income can become active income depending on the activity.
        
        E1. In General
        
        E2. Exclusions
        
        Income Exempt Under a Treaty - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
        
        Income Derived by Governmental/Political Subdivision from Exercise of Essential Government Function - From any public utility or from the exercise of any governmental function accruing to the government. Income must accrue to the government. If it is retained by the public utility, then taxable.
        
        Definitions -
        
        Profession is primarily any endeavor or work requiring specialized training in the field of learning, art, or science engaged in as a means of livelihood or profit of an individual or group of individuals.
        
        Income earned from the practice of profession provided there is no employer-employee relationship between him and his clients. Examples are net income from business and gain from the sale of assets used in trade or business.
        
        Gross Income (NIRC 32a) - Gross income covers business income.
        
        Gross Income from Business (NIRC 43) - In manufacturing, merchandising, or mining business,
        
        gross income is [Total sales - cost of goods + income from investments, incidental, or outside operations/sources]
        
        No subtraction for depreciation/depletion, selling expenses/losses/items not ordinarily used in computing the cost of goods sold.
        
        Long Term Contracts (NIRC 44) - building, installation, or construction contracts covering a period in excess of one year. Here, gross income derived from such contracts reported upon the basis of completion. But, may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income
        
        Exclusivity - Mere exclusivity in employment does not render income into compensation income.
        
        Computation of Gross Income -
        
        Services - (Gross sales - less receipts)
        
        Goods - (Gross sales - Costs of goods sold)
      - D1. In General
        
        D2. Treatment of Sale of Exchange of Ordinary Asset - The gain is subject to regular income tax.
        
        Treatment of Sale of Exchange of Capital Assets which are not Real Property or Shares of Stock - Capital assets do not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
        
        Treatment of Sale or Exchange of Shares of Stock Held as Capital
        Asset - (a) "Stock Classified as Capital Assets" means all stocks and securities held by taxpayers other than dealers in securities.
        
        Treatment of Sale or Exchange of Real Property Held as Capital Asset
        
        Presumed Gain: In the sale of real property located in the Philippines, classified as capital asset, the tax base is the gross selling price or fair market value, whichever is higher.
        
        The law presumes that the seller makes a gain from such sale. Thus, whether or not the seller makes a profit from the sale of real property, he has to pay 6% capital gains tax.
        
        2 more items...
        
        Foreclosure Sale of Real property - Schedular capital gains tax of 5%, based on the selling price or market value, whichever is higher. applies not only to ordinary sale transaction but also to pacto de retro sales and other forms of conditional sales, which necessarily includes mortgage foreclosure sales (judicial and extra-judicial foreclosure sales
        
        1 more item...
        
        Computation of Gross Income -
        
        Services - (Gross sales - less receipts)
        
        Goods - (Gross sales - Costs of goods sold)
        
        Initial Public offerings - every sale, barter, exchange or other disposition through IPO of shares of stock in closely held corporations shall no longer be subject to the tax imposed under Section 127(B) upon the effectivity of RA No. 11494.
        
        Capital Gains tax on real property/shares of stock classified as real property.
        
        "Shares of Stock" shall include shares of stock of a corporation; warrants and/or options to purchase shares of stock; as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs); and mutual fund certificates.
        
        Sale of Stocks -
        
        Capital Assets - Exposed to capital gains tax.
        
        Ordinary Assets - If sold through the stock exchange, all stocks are treated as ordinary assets (here considered as stock transaction tax).
        
        Sales of Stock at the PSE have no income tax imposed. The Stock transaction tax takes its place.
        
        Non-Recognition of Gain/Loss - No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization SOLELY for stock or securities in another corporation that is a party to the reorganization
        
        Exchanges not Solely in Kind -
        
        Gains only, and not the loss will be recognized.
        
        In an amount not in excess of the sum of the money and fair market value of such other property received.
        
        IF, the property received has the effect of a distribution of a taxable dividend, then taxed as a dividend to the shareholder.
        
        Taxed as dividend an amount of the gain recognized NOT IN EXCESS of his proportionate share of the undistributed earnings and profits of the corporation. Remainder after this amount is capital gains.
        
        Effect on Transferor Corporation - If transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then no gain tot he corporation shall be recogizned from the exchange. UNLESS it receives such other property/money and does not distribute it. Gain here recognized, but not the loss, in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed.
        
        General Rule - upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized.
        
        Exception - No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the reorganization. A reorganization is defined as:
        
        MERGER/CONSOLIDATION - A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or
        
        CORPORATE ACQUISITION - The acquisition by one corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation whether or not such acquiring corporation had control immediately before the acquisition; or
        
        ACQUISITION - by one corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another corporation. In determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the others shall be disregarded; or
        
        RECAPITALIZATION - A recapitalization, which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both; or
        
        REINCORPORATION - , which shall mean the formation of the same corporate business with the same assets and the same stockholders surviving under a new charter. property is transferred to a corporation by a person, alone or together with others, not exceeding four (4 ) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.
        
        Sale or exchanges of property used for business for shares of stock covered under this Subsection shall not be subject to value-added tax.
        
        Reincorporation in Excess of (5) Persons - Here, transaction if exceeding five persons means that tax free exchange inapplicable.
        
        Tax Treatment of Sale Exchange of Capital Assets which are not Real Property or Shares of Stock (ex: jewelry, painting, family cars
        
        Holding Period Rule - Sale of property by non-corporate taxpayer where:
        
        been held for not more than 12 months, the gain is taxed in full.
        
        If held for more than 12 months, only 50 percent of the gain is subject to tax.
        
        As to Length -
        
        Long-term capital gain: Capital asset is held for more than twelve months before it is sold. Only 50% of the gain is recognized.
        
        Short-term capital gain: Capital asset is held for 12 months or less, 100% of the gain is subject to tax.
        
        Corporate Exception - If the taxpayer is a corporation, 100% of the gain is recognized regardless of the holding period.
        
        Capital Loss Carry over - Can only be offesetted against capital gains.
        
        1 more item...
        
        Purpose - Holding Period is to prevent regularity. If more than one year, sale is not considered as sale in the regular course of business.
        
        Capital Gains and Losses (NIRC 39) - ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include:
        
        Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
        
        Property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.
        
        Amount Realized - Sum received + fair market value of the property (other than the money.
        
        Gains from Property - Excess of the amount realized over the basis for determining gain.
        
        Loss from Property - Excess of the basis or adjusted basis for determining loss over the amount realized.
        
        Treatment of Real Property as a Capital or Ordinary Asset (RR 07-03)
        
        Taxpayers Engaged in the Real Estate Business -
        
        Real Estate Dealer - All real properties are ordinary assets.
        
        Real Estate Developer - Ordinary assets if, primarily for sale or for lease or would be included in the inventory. So long as used in the trade or business.
        
        Real Estate Lessor - Ordinary Assets If for lease/rent, or used/being used in the trade or business.
        
        Habitually Engaged in Business - Habitually engaged if HLURB registetered as developer or dealer. Ordinary asset if in the usual course of trade or business.
        
        1 more item...
        
        Taxpayers not Engaged in Real Estate - Considered as ordinary assets if used, or have been previously used in the trade or business of the taxpayer.
        
        1 more item...
        
        Capital Gains - Excess of gains - losses
        
        Ordinary Gains - what you sold it for - cost of production
        
        1 more item...
        
        Basis for Determining Gain or Loss from Sale or Disposition of Property (NIRC 40)
        
        COST - The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or
        
        FAIR MARKET PRICE - or value as of the date of acquisition, if the same was acquired by inheritance; or
        
        ACQUIRED BY GIFT - Basis is cost in the hands of last person who did not acquire it by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or
        
        LESS CONSIDERATION - If the property was acquired for less than an adequate consideration in money or money's worth, the basis of such property is the amount paid by the transferee for the property; or
        
        The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized under paragraph (C)(2) of this Section. (Gain, but no recognition of game, as a tax free-exchange)
        
        Secondary Transfer - Taxation on tax-free exchange imposes tax at the secondary transfer. Situations contemplated here are transfer of assets to oneself.
        
        Exchange of Property - The entire amount of the gain or loss is recognized.
        
        Exception - No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the reorganization.
        
        Definitions (RR 20-20)
        
        "Stock Classified as Capital Assets" means all stocks and securities held by taxpayers other than dealers in securities.
        
        "Net Capital Gain" means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.
        
        "Net Capital Loss" means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.
        
        Fair Market Value (RR-20) -
        
        Common shares of stock, the book value based on the latest available financial statements duly certified by an independent public accountant prior to the date of sale, but not earlier than the immediately preceding taxable year, shall be considered as the prima facie fair market value.
        
        Preferred shares of stock, the liquidation value, which is equal to the redemption price of the preferred shares as of balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears, shall be considered as fair market value.
        
        In case there are both common and preferred shares, the book value per common share is computed by deducting the liquidation value of the preferred shares from the total equity of the corporation and dividing the result by the number of outstanding common shares as of balance sheet date nearest to the transaction date.
        
        Abandonment Rule - If the ordinary property is abandoned for (2) years for general businesses, then may be converted into capital assets.
        
        Exception - No abandonment/idle rule in properties used for real estate business.
        
        Ordinary Assets - Assets used in the ordinary course of business/trade
        
        STOCK - In trade of the taxpayer/ other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
        
        PROPERTY/SALE - held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
        
        PROPERTY/BUSINESS - used in the trade or business of a character which is subject to the allowance for depreciation
        
        REAL PROPERTY - used in the trade or business of the taxpayer, including property held for rent.
        
        Capital Assets - Non ordinary asset.
        
        Relevance to Taxation
        
        Capital Assets - If the asset involved is a capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income.
        
        Ordinary Assets - The entire amount is included in the gross income. and the entire amount of the loss shall be deductible from gross income. [Sec 34(D)].
        
        net capital gain is included sa income, pag loss eh di loss
    - - C2. Exclusions
        
        Terminal leave or commutation of leave credits (CIR v. CA) - is applied for by an officer or employee who retires, resigns or is separated from the service through no fault of his own. Government policy to encourage the accumulation of unused leaves. It is not part of the gross salary/income of a government employee, but is instead a retirement benefit.
        
        Employee Pension
  - - - B3. Exclusions - Benefits, but excluded from taxation.
        
        Compensation for Injuries or Sickness (Sec. 32(B)(4) - Amounts received, through Accident or Health Insurance or under Workmen’s Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.
        
        13th Month Pay and Other benefits (NIRC Sec. 32(B)(7)(e)) - Subject to the condition that the total exclusion must not exceed P90,000
        
        Bayanihan Recover as One Act -
        
        Retirement Benefits -
        
        COVID-19 Special Risk Allowance
        
        Actual Hazard Duty Pay
        
        Death of Health Workers
        
        Income Exempt Under Treaty (32b5) - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
        
        Pensions/Retirement Benefits/Separation Pay
        
        1 more item...
        
        Enumeration - Covers the following:
        
        Benefits received by officials and employees of the national and local government pursuant to Republic Act No.6686;
        
        Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;
        
        Benefits received by officials and employees not covered by Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
        
        Other benefits such as productivity incentives and Christmas bonus.
        
        Loss of Income - Amounts paid for loss of income counts as compensation, as still acquired by reason of employment.
        
        Here, up to P90k exclusive of the de minimis benefits.
      - Incentives - : In general, any incentives given to employees shall form part of the compensation subject to income tax, unless specifically exempted under a special law or incentives are in the nature of the previously enumerated “de minimis” benefits.
        
        Tips and gratuities - Paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding.
        
        De Minimis Benefits - facilities and privileges furnished or offered by an employer to his employees that are relatively small value and are offered or furnished by the employer merely as means of promoting health, goodwill, contentment, and efficiency of his employees
        
        VACATION LEAVE - Monetized unused vacation leave credits of PRIVATE employees not exceeding ten (10) days during the year. Note that the monetization of unused VL credits in excess of 10 days and monetization of SL even if not exceeding 10 days are subject to tax; [RR No. 5-2011]
        
        VACATION LEAVE; GOVT - Monetized value of vacation and sick leave credits paid to GOVERNMENT officials and employees. Note that there is no limit as to the number of credits; [RR No. 5- 2011]
        
        MEDICAL CASH ALLOWANCE - Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month; [RR No. 11-2018]
        
        RICE SUBSIDY- of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more than P2,000; [RR No. 11-2018]
        
        Uniform and Clothing allowance - not exceeding P6,000 per annum; [RR No. 11- 2018]
        
        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 P10,000.00 per annum; [RR No. 5-2011]
        
        Laundry allowance - not exceeding P300 per month; [RR No. 5-2011]
        
        Employees achievement awards - e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, 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; [RR No. 5-2011]
        
        GIFTS - given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum; [RR No. 5-2011]
        
        DAILY MEAL - allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a per region basis; [RR No. 3-98]
        
        CBA BENEFITS - received by an employee by virtue of a collective bargaining agreement (CBA) and productivity incentive schemes provided that the total monetary value received from both CBA and productivity incentive schemes combined do not exceed P10,000.00 per employee per taxable year. [RR No 1-2015]
        
        This is excluded, regardless if received by rank and file or managerial.
        
        Private Leave Credits - If beyond (10) leave credits no longer considered as de minimis, elevated to benefits, subject to the P90k rule.
        
        Vacation and sick leave allowances. - Amounts of "vacation allowances or sick leave credits" .which are paid to. an employee constitute compensation. Thus, the salary of an employee on vacation or on sick leave, which are paid notwithstanding his absence from work, constitutes compensation. However, the monetized value of unutilized vacation leave credits of ten (10) days or less which were paid to the employee during the year are not subject to income tax and to the withholding tax.
        
        If Governmental Leave credits, no (10) leave credits rule.
        
        Non-Taxable Fringe Benefits (NIRC 32) -
        
        AUTHORIZED - Fringe benefits which are authorized and exempted from tax under special laws;
        
        PLANS - Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;
        
        RANK AND FILE - Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and
        
        De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
      - Definition - Fringe benefit means any goods, services, or other benefit furnished or granted in cash or in kind, in addition to basic salaries, to an individual employee, except a rank and file employee [RR No. 03-98, Sec 2.23b]
        
        Includes, but not limited to:
        
        Housing
        
        Expense Account
        
        Vehicle of any kind
        
        Household personnel, such as maid, driver and others
        
        Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted.
        5.Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations
        6.Expenses for foreign travel
        
        Holiday and vacation expenses
        
        Educational assistance to the employee or his dependents; and
        
        Life or health insurance in excess of what the law allows
        
        Qualifications - Generally, everything is grossed up to the employer. Subject to the following qualifications.
        
        Lease/Assignment of residential property (RR) - Only 50% of benefit to the employee.
        
        Vehicle - Qualified by the type of benefits available to the employees. If vehicle is bought by the company and under the name of the employee, entire portion under FBT.
        2a. Fleet of Vehicles - 50% only to FBT
        2b. Aircraft/Yacht - Exempt from FBT, subject to depreciation;.
        
        Non-taxable housing fringe benefit:
        
        Housing privilege of the Armed Forces of the Philippines (AFP) officials – i.e. those of the Philippine Army, Philippine Navy, or Philippine Air Force
        
        A housing unit, which is situated inside or adjacent to the premises of a business or factory – maximum of 50 meters from perimeter of the business premises
        
        Temporary housing for an employee who stays in housing unit for three months or less
        
        Taxation Form - Via gross up monetary value.
        
        P100k rental paid - Benefit paid
        
        P50k - Actual monetary value
        
        Gross Up Monetary Value - (50,000/.65)= 76, 900
        
        76,900 x 35%= 26 000 (FBT)
        
        GMUV - Divide by 0.65
      - Effect of Benefits -
        
        Rank-and-File - Subjected to withholding tax on compensation.
        
        Managerial - Subjected to Fringe Benefit Tax
      - Distinguished from Compensation - Benefits are non-recurring.
    - - Exceptions -
        
        GOVERNMENT;foreign - For services by a citizen or resident of the Philippines for a foreign government or an int’l organization. [Sec. 78(A), NIRC]
        
        AGRICULTURAL - labor paid entirely in products of the farm where the labor is performed
        
        DOMESTIC - service in a private home
        
        CASUAL labor not in the course of the employer's trade or business
        
        Domestic Services - services of a household nature performed by an employee in or about the private home of the person whom he is employe
        
        Reimbursement/Liquidation/Support - if the amount is reimbursable by the company, it is not classified as compensation. Flow of money, not flow of wealth.
        
        Constructive Receipt of Compensation (ING Bank v. CIR) - Constructive receipt of compensation i.e., so long as the amount is earmarked for deposit, then subject to taxation. Once there is accrual of the amount, there must be taxation.
        
        Exceptions to Compensation -
        
        Convenience of the Employer
        
        Reimbursement/Liquidation/Support
        
        Inclusion -
        
        Salaries and Wages
        
        Honoraria and Emoluments
        
        Allowances (e.g., transportation, representation, entertainment)
        
        Commissions
        
        Fees (including directors’ fees, if the director is, at the same time, an employee of the payor-corporation)
        
        Tips - or gratuities paid directly to an employee by a customer of the employer which are not accounted for by the employee to the employer are considered as taxable income but not subject to withholding.
        
        Taxable Bonuses
        
        Fringe benefits except those subject to Fringe Benefit Tax (FBT) under Section 33 of the Tax Code
        
        Taxable pensions and retirement pay (e.g., retirement benefits earned without meeting the conditions for exemption thereof, such as retirement of less than 50 years of age.)
        
        Service Charge - Still compensation, but subject to withholding. Withholding is a collection mechanism, where employer withholds x amount at the source.
        
        Director's Fees (MC 34-2008) - compensation whenever it is established that the director and the corporation has an employer-employee relationship. There can be directors without E-E, such as in cases where directors only participate via the board.
        
        If not, then SEP.
        
        RR 5-2021 AND RMC 62-2021
      - Forms of Compensation -
        
        Cash - If compensation is paid in cash, the full amount received is the measure of the income subject to tax.
        
        Non-Cash - If services are paid for in a medium other than money (e.g., shares of stock, bonds, and other forms of property), the fair market value (FMV) of the thing taken in payment is the amount to be included as compensation subject to tax. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the FMV of the remuneration received.
        
        RMC 88 Realization of Stocks - If the shares of stock were given at below book value (regular value). is the difference of the book value (BV)/ fair market value (FMV) of the shares, whichever is higher, at the time of exercise of the stock option and the price fixed on the grant date. The option has value only if, at the time of the exercise, the stock is worth more than the price fixed on the grant date.
        
        Payment in Properties (Henderson v. Collector) - The reasonable amount they would have spent for house rentals and utilities such as light, water, telephone, etc. should be the amount subject to tax, and the excess considered as expenses of the corporation.
        
        Convenience of the Employer [Collector v. Henderson] - Those benefits which do not redound to the benefit of the employee, or are retained by him are not included in the computation of gross income. If no convenience to the employer, then compensation.
        
        Effect - In these cases, characterized as expenses for the company, not compensation to the employee.
        
        Ma'am liked citing this
    - - Facilities/Privileges (Henderson v. Collector) - If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employee’s work or position, the value of that privilege need not be included as compensation [Henderson v. Collector, G.R. No. L-12954 (1961
      - Minimum Wage - So long as classified as minimum wage board via a minimum wage rate, regardless of the tax bracket under Sec. 24, they are still exempt.
- - - - iii. From Sources Within the Philippines (NIRC 42)`
        
        iv. From Sources Without the Philippines
        
        v. Partly Within/Without the Philippines
        
        How Computed - Taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance
        
        Manufacturing - Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.
        
        Trading - Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold:
        
        General Rule - Items of gross income which are not allocated exclusively to sources from within or without the Philippines shall be treated as derived from sources partly within and partly without.
        
        Exception - The source of income is unmistakably from a source within or without.
        
        Interests
        
        Dividends
        
        Compensation for labor and personal services performed outside Philippines
        
        Rental and royalties from property located outside Philippines or for any interest in such property;
        
        For the use of patents, copyrights, etc. outside Philippines
        
        Gains, profits, income from sale of real property located outside Philippines
        
        Relevant for aliens. If resident, collate into tax base regardless, but if alien, then situs rule applies.
        
        Dividends (NIRC 42) - Received from a Foreign corporation - company registered outside the Philippines
        
        GR - For foreign corporations in PH, that’s still considered income → provided that at least 50% of their declared dividends for the last three years came from sources within the Philippines.
        
        XCPN - If less than 50% → Partly within, partly without
        
        Rental and royalties
        
        Rental - tangible property
        
        Royalty - Intangible property
        
        Real property - Includes NCC definition of immovable properties
      - Real Property - if within the Philippines, then situs is Philippines.
        
        Personal Property - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. (Partly within/Partly without)
        
        Source of Income (CIR v. BOAC) - The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. The test of taxability is the "source" and the source of an income is that activity which produced the income.
        
        Residence of the Obligor (NDC v. CIR) - The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income.
        
        Taxation on Insurance (Manila v. Yatco) - The Philippines has the power to impose the tax upon the insured, regardless of whether the contract is executed in a foreign country and with a foreign corporation. This is because the insured and the risk insured against is in the Philippines. Certain incidents of the contract are to be attended to in the Philippines, such as, payment of dividends when received in cash, sending of an unjuster into the Philippines in case of dispute, or making proof of loss.
  - - - Exclusions from Gross Income - Income that is exempt from taxation under this Title:
        
        Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.
        
        Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
        
        Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent:
        
        Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.
        
        Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.
        
        Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
        
        7. Miscellaneous Items -
        7a. Income Derived by Foreign Government
        7b. Income Derived by the Government or its Political Subdivisions
        7c. Prizes and Awards religious, charitable, scientific, educational, artistic, literary, or civic achievement
        7d. Prizes and Awards in sports Competition
        7e. 13th Month Pay and Other Benefits
        7f. GSIS, SSS, Medicare and Other Contributions
        7g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
        
        Retirement Benefits, Pensions, Gratuities, etc. - Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer:
        
        (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee.
        
        (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.
        
        (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.
        
        (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.
        
        (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.
        
        How Taxed - Check if covered employees.
        
        GR - Taxable.
        
        XCPN - Excluded from gross income if it meets the following requisites
        
        Service - AGGREGATE years of service of at-least 10 years.
        
        Age - AT LEAST (50) years of age.
        
        Frequency - The benefit must be availed ONLY once.
      - Inclusions - all income derived from whatever source, including but not limited to:
        
        Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
        
        Gross income derived from the conduct of trade or business or the exercise of a profession;
        
        Gains derived from dealings in property;
        
        Interests;
        
        Rents;
        
        Royalties;
        
        Dividends;
        
        Annuities;
        
        Prizes and winnings;
        
        Pensions; and
        
        Partner's distributive share from the net income of the general professional partnership.