GROSS INCOME

BROAD CLASSIFICATIONS OF TAXABLE

COMPOSITION NOTABLE THINGS REMARKS
INCOME
1. Gross compensation income a. Basic salary or wage Back wages are subject to income tax.

b. Honoraria

c. Fixed or variable allowances

Allowances in addition to regular
compensation are subject to withholding tax.

Advances and reimbursements necessary in The excess of actual expenses over advances
the performance of duties are not subject to are taxable income if not returned.
withholding tax if they are ordinary and
necessary expenses and are properly
accounted for or liquidated.

Transportation and cell phone allowances of Transportation: Php 1,500 for R&F
call center employees are not taxable. employees, Php 3,000 for supervisory
employees

Cell phone: Php 1,200 for supervisory They should be on call 24/7. Bawal
employees maubusan ng load ang mga boss.

d. Commission

e. Fees
Marriage fees, baptismal offerings, sums paid
for conducting masses for the dead, and the
like are subject to tax.

f. Tips and gratuities

Employee is selfish taxable Selfish because he did not account for it. So, be generous.
Employee is generous not taxable Generous because it is in a common jar and
distributed equally.

g. Hazard or emergency pay

h. Retirement pay
Generally, it is taxable.

Exception:
- GSIS and SSS retirement pays Hinulugan ko nang matagal. Pinaghirapan ko
`to, tapos babawasan nyo pa?
- Retirement pay due to old age, employed for The law does not require that the 10-year Ive worked too hard for many years under
10 years, at 50 years of age, availed of for the service should be uninterrupted. your company, then you have the nerve to
first time (i.e., not availed of for the same or tax my retirement pay? This should be a
another employer) giveaway!

i. Separation pay
Voluntary separation taxable Iniwan mo ako Magtiis ka ngayon.
Involuntary separation not taxable

j. Pension

k. Vacation and sick leave Availed of as salary taxable

(PVT) Monetized unutilized 10 credits or ???
less: NOT ???
(GOV) Monetized, regardless of credits: NOT

l. 13th month pay and other benefits 13th month pay, bonuses, and other
If within Php 30,000 not taxable benefits, where other benefits include the
Excess over Php 30,000 taxable excess of actual de minimis benefits over
the prescribed ceilings

m. Fringe benefits and de minimis Fringe benefits are additions to basic

Fringe benefits taxable salaries.
De minimis not taxable De minimis are of small values, so why tax
them?

n. Overtime pay
Overtime pay is taxable.

o. Profit sharing

p. Awards for special services Funny. I helped prevent theft or robbery

Such as suggestions to employer resulting in and I am still taxed? What the heck?
the prevention of theft or robbery.

q. Beneficial payments

r. Shares of stock received as compensation Time of rendering the service

FMV of shares at the time the service is
rendered

s. Employee stock option

- As compensation income: market price is Date of grant
greater than option price, difference is MP OP = Compensation Income
income at the date of grant

MPdate of sale MPdate of grant = Capital gain

 - As capital gain: market price at the date of MPdos MPdog = Capital gain
sale minus market price at the date of grant,
capital gain

t. Cancellation of debt
- No consideration: gift, not income
- Corporation/stockholder: dividend income Amount of debt cancelled
- Performance of services: amount of debt
cancelled
It is like an additional benefit to the salary of
u. Insurance premiums as compensation the employee. Thus, it is an income.
If beneficiary is employee, and paid by
employer, it is part of employees income.
Amount of tax paid
v. Income tax paid as compensation
Paid by the employer on behalf of the
employee, the basis is the amount of tax paid.

w. Living quarters and meals

In addition to cash salary part of income Convenience of the employer doctrine
For employers convenience not part of
income

x. Casual labor Example: florist hired A to fix her houses

Not in the course of employers trade not pipe
compensation
In the course of employers trade Example: florist hired B to fix flower shops
compensation pipe
Performed for a corporation compensation

r. Other forms of compensation

2. Gross business/professional income

3. Gains from dealings in property
4. Interests Interest income from long-term deposits or If there is premature termination before the Mas maaga ang premature termination, mas
investments are not taxable. 5th year, a tax shall be imposed on the entire Malaki ang tax. Talk about inconvenience.
income.
- 5% final tax: 4 to 5 years
- 12% final tax: 3 to 4 years
- 20% final tax: less than 3 years
5. Rents If the advanced payment is a prepaid rental
received without restriction as to its use, the
entire amount is taxable in the year it was
received.

If the advanced payment is a security deposit

with restriction as to its use, the entire amount
is not part of taxable income.
 If the advanced payment is a loan deposit,
option money, or security deposit for the
lessees faithful compliance, the entire amount
is not part of taxable income. It becomes an
income of the lessor when the lessee has
become unfaithful to the contract.
6. Royalties Royalties on books, literary works, and Royalties received by resident citizens from
musical composition are subject to 10% final sources outside the Philippines and by
tax. domestic corporations are subject to normal
tax.
Royalties from natural resources or products
such as coal, gas, oil, copper, silver, gold, and
the like are subject to 20% final tax.
7. Dividends Cash dividend amount of money received

Property dividend FMV of property received Time of declaration

at the time of declaration

Stock dividend There is a change in the proportionate share

If it is a pure stock dividend, it is not subject to of the stockholders because an option to
tax. receive cash or property dividends in lieu of
If the stock dividend causes a change in the stock dividends has been exercised.
proportionate share of the stockholders, it is
taxable. Otherwise, it is not subject to tax.
Time of issuance
Scrip dividend FMV of the promissory notes
at the time of issuance

Indirect dividend
Only the excess amount is taxable since
Liquidating dividend the excess amount of liquidating dividends per se are return of
liquidating dividends over the cost of shares investment. Thus, if there is excess, it is
surrendered is taxable considered income.

8. Annuities Annuity representing interest taxable
Annuity as a return of premium not taxable
9. Prizes and winnings Prizes
a. Php 0 to Php 10,000 normal tax
b. Php 10,001 and above 20% final tax
Return of premiums are just like return of
capital. You have no income, so there is
nothing to tax. That is why interest is taxed,
because it is income.
10,001 to infinity

Winnings
Regardless of the amount, they are subject to
20% final tax.
10. Pensions
11. Partners share in a partnership
12. Bad debt recovery Only taxable to the extent of the tax benefit in
the year it was written off
13. Tax refund or credit If the tax paid is deducted, it is taxed.
If the tax paid is not deducted, it is not taxed.
14. Damages recovery Damages for loss of profit or income taxable
Damages for property, injury to person, or
loss of life not taxable
15. Income from whatever source Even income derived from illegal sources are
taxable, hence, from whatever source.
However, in the case of embezzlement, no
income tax will be imposed if the embezzler
paid the embezzled fund.
16. Income from leasehold improvements Reported as income using either:
a. Outright method recognize as income
when the improvement is completed at its
FMV
b. Spread-out method the estimated book
value of the LHI at the end of the lease
income is spread over the term of the lease
EXCLUSIONS FROM GROSS INCOME
NONTAXABLE COMPENSATION INCOME
1. Compensation income + H2ON of a minimum wage earner who has no other reportable
income
2. Compensation/business income earned outside PH by OFWs, NRC, RA, and FC
3. 13th month pay, bonuses, and other benefits amounting Php 30,000 or less
4. De minimis benefits within the prescribed ceilings
Actually ascertained to be worthless and
uncollectible, and actually written off
Refunds from these taxes are not taxable:
- Donors tax
- Income tax
- VAT, claimed as input tax
- Estate tax
- Stock transaction tax
Mnemonic: DIVES
The bad guy is obligated to return the
income, still.
Estimated BV of the LHI at the end of the
contract
Remaining term of the lease
Estimated BV = Cost minus accumulated
depn
RATIONALE/NOTES
Other benefits = Other benefits + ( De minimisactual De minimisceiling)
Tax benefit rule/doctrine of equitable
benefit
Tax benefit rule/doctrine of equitable
benefit
Double burden! Namatayan, nasaktan, at
nasugatan na nga, babawasan pa ang
tanging kabayaran at pag-asa para
bumangon ulit?
The nature of embezzlement is that funds
are taken without consent, but there is an
obligation to repay. Legally, obligation once
fulfilled is extinguished. If the embezzler
fulfills that obligation, his supposedly
income tax will be extinguished as well.
At the end of the lease since in most
cases, leasehold improvements become the
property of the lessor at the end of the
lease
 5. Compensation received under employers convenience rule ???
6. Proceeds of life insurance policies paid to the heirs upon the death of the insured
7. Amounts received through accident/health insurance
8. Amounts received under the Workmens Compensation Act
9. Damages received on account of personal injuries or sickness
10. Retirement benefits under R.A. 7641 and from reasonable private plans of private firms
11. Amounts received by an employee or his heirs due to involuntary separation from his
employer
12. Benefits, pensions, and the like received from foreign government agencies and
institutions
13. Benefits, pensions, and the like from SSS and GSIS, including maternity benefits
14. GSIS, SSS, PhilHealth, and Pag-IBIG contributions
15. Union dues of individuals
16. Amounts in dollars received by aliens from International Rice Research Institute and Ford
Foundation
17. Allowances paid to military personnel
18. Casual employment not in the course of trade/business of employer
NONTAXABLE OTHER RECEIPTS RATIONALE/NOTES
1. Amounts received by the insured as a return of premiums paid
2. Value of property received by gift, bequest, devise, or descent Subject to estate tax or donors tax, but not income tax
3. Income of the Government of the Philippines The government cannot tax itself.
4. Benefits paid under U.S.A laws administered by the United States Veterans Administration
5. Income from investments in the Philippines in domestic securities by foreign governments
6. Interest on deposits in banks in the Philippines by foreign governments
7. Income accruing to the Government of the Philippines or to any political subdivision The government cannot tax itself.
thereof The participant did not volunteer to join the tournament. He was especially picked.
8. Prizes and awards where the recipient has been chosen to enter and the winning is
unconditional
9. Prizes and awards granted to athletes
10. Gains from the sale/exchange/retirement of bonds and the like with a maturity of more
than 5 years
11. Interest on long-term deposits/investments in banks with a maturity of more than 5 years
12. Interest received under the expanded foreign currency deposit system
13. Interest on the price of land covered by CARP
14. Gains upon redemption of shares of stock of a mutual fund company
15. Intercorporate dividend
16. Lotto winnings from PCSO
17. Income earned outside the Philippines

DE MINIMIS BENEFITS
This list of de minimis benefits is exhaustive. Meaning to say, benefits granted to employees which are not in this list cannot qualify as de minimis benefits.

DE MINIMIS ITEM PRESCRIBED CEILING RATIONALE/NOTES

 1. Monetized unutilized 10 vacation leave credits or less (private 10 credits per employee per year
employees) n/a
2. Monetized vacation leave credits, regardless of number (public Php 750 per employee per semester; or
employees) Php 125 per employee per month
3. Medical cash allowance to dependents Php 10,000 per employee per year

4. Actual medical assistance Php 1,500 per employee per month; or

One 50-kg rice not exceeding Php 1,500 per month
5. Rice subsidy Php 5,000 per employee per year Recall lessons in Government Accounting.
Php 300 per employee per month
6. Uniforms and clothing allowance Php 10,000 It should be a personal property since cash is expendable.
7. Laundry allowance Php 5,000 per employee per year
8. Employees achievement awards (personal property, not cash) 25% of the basic minimum wage (25% x Php 317) Basic minimum wage excludes COLA. (???)
9. Christmas and major anniversary celebration gifts Php 10,000 per employee per years
10. Daily meal allowance for overtime work, night shifts, and graveyard
shifts
11. Productivity incentive schemes & collective bargaining agreements
benefits

FRINGE BENEFITS
The tax base of fringe benefits is based on the grossed-up monetary value (GMV) of fringe benefits furnished, granted, or paid by the employer to the employees, except rank and file
employees. In other words, only those fringe benefits received by supervisory/managerial employees are subject to fringe benefit tax. The fringe benefit tax is 32% of the GMV.

Valuation of fringe benefits

1. Granted in money or directly paid for by the employer amount granted or paid for
2. Property other than money, ownership is transferred FMV of the property
3. Property other than money, ownership is not transferred depreciated value of the property

Kinds of fringe benefits subject to fringe benefit tax

1. Housing fringe benefits

Lease Residential property Use of employees MV = 50% x rental payments

Assignment Residential property Use of employees MV = [5% x (FMV or ZV, whichever is higher) x 50%]
Purchase (installment basis) Residential property Use of employees MV = 5% x AC x 50%
Purchase Residential property Ownership is transferred to employees MV = FMV or ZV, whichever is higher

Note: Under the assignment of residential property, if the cost (or book value) is lesser than its fair market value, the excess amount should be amortized throughout the
remaining estimated useful life of the residential property.

2. Motor vehicle

Purchase Motor vehicle In the name of employee MV = AC

Cash given Motor vehicle Ownership is in the name of employee MV = Cash received
Purchase (installment basis) Motor vehicle Ownership is in the name of employee MV = AC divided by 5
 Employer shoulders portion of the price
Employer owns and maintains a fleet
Employer leases and maintains a fleet
Motor vehicle Ownership is in the name of employee MV = Amount shouldered by employer
No ownership is transferred since the employer already owns the
Motor vehicle MV = (AC divided by 5) x 50%
property. However, it is for the use of the business and the employees.
No ownership is transferred since the employer already owns the
Motor vehicle MV = 50% x rental payments
property. However, it is for the use of the business and the employees.

3. Yacht

The value is based on the depreciation of the yacht at an estimated useful life of 20 years. So, yacht divided by 20 years times 32% equals FBT. Sosyal kasi ang yate.

4. Personal expenses not related to business and paid for by the employer
5. Household personnel expenses paid for by the employer
6. Interest on loan at less than market rate

Conditions: The interest is below 12%, the interest rate in regulation nowadays.

The value is the interest foregone (if free of interest) or the difference of interests (if below 12%).

7. Membership fees, dues, and other expenses

8. Foreign travel

Lodging expenses in excess of $300 per day are subject to FBT.

30% of the cost of a first-class airplane ticket is subject to FBT.

Travel expenses without documentation, notwithstanding the prescribed ceilings.

9. Holiday and vacation expenses

10. Education assistance

a. Educational assistance to the employee himself borne by the employer

b. Educational assistance to the dependents of the employee borne by the employer

11. Insurance benefits

The following are not subject to fringe benefit tax:

Housing fringe benefits 1. Housing privilege of AFP officials

2. Housing units situated inside/adjacent to the premises of a factory or business, located
within a maximum distance of 50 meters from the perimeter of the said premises
3. Temporary housing for employees staying for 3 months or less
Motor vehicle Aircrafts, including helicopters, owned and maintained by the employer
Travel expenses 1. Inland travel expenses, including food, beverages, and transportation
2. Lodging expenses within $300 per day
3. Economy and business class tickets
4. Foreign travel expenses for the purpose of attending business meetings or conventions
5. Travel expenses within the prescribed ceilings with documentary evidence
Educational assistance 1. Education of the employee is directly connected with the employers trade, business, or
profession
 2. The employee is contractually l=obligated to remain in the employ of the employer
3. The assistance was provided through a competitive scheme (i.e., not given freely).
Insurance 1. SSS and GSIS contributions
2. Group insurance