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Tax Rules on Corporations

Summary of Tax Rules on Corporations

Kinds Domestic Resident Non-Resident

Definition Created under Philippine Foreign corporation Foreign corporation


laws engaged in business in the not engaged in
Philippines. business but is
deriving income in
the Philippines.

Capital Gain Same as the Uniform Rules Only on (a) Sale of shares Only on (a) Sale of
Tax of Individuals ( a and b) of domestic stock shares of stock
except on sale of real
properties which include
sale of real properties
located abroad

Passive Interest under the FCDU – Interest under the FCDU –


Income – 7.5% 7.5%
Final Tax

Interest on any currency Interest on any currency Interest on foreign


bank deposit, yield or bank deposit, yield or loans – 20%
benefit from deposit benefit from deposit
substitute, trust fund, or substitute, trust fund or
royalty – 20% royalty – 20%

Dividend from domestic Dividend from domestic Dividend from


corporation ( Intercompany corporation domestic corporation
dividends) – exempt ( intercompany dividends) ( under certain
– exempt conditions) – 15%

Other Net taxable income from all Net taxable income from Gross income from
income sources within and without all sources within the sources within the
the Phils. – NT 30% Phils. – NT 30% Phils. - Final tax of
30%

But, beginning with the 4th Same as domestic


year from the start of

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operations, whichever is corporations
higher:

NORMAL TAX – 30%

Minimum Corporate
Income tax – on Gross
Income – 2%.

In lieu of the above,


beginning with the year
2000:

Gross Income Tax (GIT) on


GIT Gross Income from all
sources within the Phils. –
15%

Special Taxpayer Tax Base Rate


Corporations

Proprietary educational Taxable income from all 10%


institution and non-profit sources
hospital

Resident international Gross Philippine Billings 2½%


carrier

Non-resident owner or Gross rentals, lease and 4½%


lessor of vessel charter fess from the
Philippines

Non-resident Gross income from the 25 %


cinematographic film Philippines
owner, lessor or distributor

Non-resident lessor of Gross rentals, charges and 7½%


aircraft, machinery and other fees from Philippine
other equipment sources

Regional operating Philippine taxable income 10%


headquarters of

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multinational corporations

Problems:

1. A domestic corporation had the following data in its second year of operations:
a. Capital gain on sale of land in Thailand, on a selling
price at fair market value of P5,000,000 P2,000,000

b. Capital loss on sale of land and building in the Phils


on a selling price of P6,000,000 400,000

c. Capital gain on direct sale to buyer of shares of stock


of a domestic corporation 200,000

d. Gross profit from sales 3,000,000


e. Interest on bank deposits 150,000
f. Expenses of operations 1,000,000

Compute for the following:

Capital gain taxes?

Final tax on passive income?

Year-end tax?

Total income tax expense for the year?

2. A domestic corporation had, in its fourth taxable year the following data:
Gross profit from sales P5,000,000

Expenses of operations 3,000,000

(Disregard quarterly income tax payments)

Minimum corporate income tax?

Normal income tax?

Income tax of the year?

3. A domestic corporation had the following data in its fifth year of operations:
Gross profit from sales P3,000,000

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Interest income from notes receivable 100,000

Expenses of operations 2,100,000

(Disregard quarterly income tax payments)

Minimum corporate income tax?

Normal income tax?

Income tax expense for the year?

4. In the sixth year of operations, a domestic corporation, a service provider, had the following
data:
Gross revenue P7,000,000

Cost and expenses:

Direct cost of services 4,000,000

Other operating expenses 1,000,000

(Disregard quarterly income tax payments)

Minimum corporate income tax?

Normal tax?

Income tax expense for the year?

Excess MCIT carry-forward – it is an excess of MCIT over its estimated normal tax, and it is usually carried
forward on the next three (3) consecutive years against normal tax.

Example:

Year MCIT NT Income tax Taken from Remarks

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4 90,000 50,000 90,000 Excess MCIT
of 40,000

5 60,000 40,000 60,000 Excess MCIT


of 20,000

6 20,000 30,000 0 30,000 is Balance of


taken from 10,000 from
excess MCIT Year 4
in Year 4

7 50,000 40,000 50,000 Excess MCIT


of 10,000

8 30,000 70,000 40,000 30,000 is Year 4 excess


taken from of 10,000 has
Year 5 already been
(20,000) and forfeited.
Year 7
(10,000)

Problem:

1. The following were computed income taxes (MCIT and NT) of a domestic corporation:

Year MCIT NT

7 70,000 20,000

8 10,000 30,000

9 40,000 15,000

10 2,000 5,000

11 45,000 80,000

(Disregard quarterly income tax payments)

Required: Income tax at the end of each year?

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2. A domestic corporation had the following data at the end of each of the first three quarters, and
end, of its fifth year of operations:
First Second Third Year

Gross profit fro 400,000 600,000 700,000 900,000

m sales

Operating 160,000 400,000 520,000 580,000


expenses

Income tax due at the end of each of the first three quarters, and due at refundable at the end of the
year.

3. A domestic corporation had the following data on transactions in each of the quarters of a
taxable year:
First Second Third Fourth

Gross profit from 500,000 350,000 800,000 900,000


sales

Dividend from a 20,000 20,000


domestic
corporation

Interest on bank 4,000 8,000 12,000


deposit

Operating 450,000 340,000 810,000 450,000


expenses

Income tax due at the end of each of the first three (3) quarters, and due or refundable at the end of the
year?

4. A foreign corporation is doing business in the Philippines through its branch in the Philippines.
Philippine operations in its fifth year in the Philippines had the following data:

Gross income from operations of the year P8,000,000


Interest on Philippine currency bank deposit 100,000
Operating expenses of the year 4,000,000
Remittance of profits to John Company, its Mother
Company abroad (net of remittance tax) 425,000
How much is the minimum corporate income tax?

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How much is the aggregate income taxes of the year?

5. A foreign corporation not licensed to do business in the Philippines derived an income


ofP4,000,000 from a incidental transaction in the Philippines, on which the total of related
expenses was P300,000. How much is the income tax to be paid in the Philippines.

6. The domestic corporation is a private educational institution in its fifth year of operations, with
the following data on income and expenses for the year:
Gross income from tuition fees P5,000,000
Gross income from miscellaneous fees 600,000
Gross income from rentals, net of a 5% creditable withholding tax 190,000
Interest on bank deposits, net of withholding final tax 48,000
Operating expenses 4,000,000
How much is the MCIT?
How much is the income tax at the end of the year?

Partnership, Estate and Trust

Two kinds of partnership for income tax purposes:

a. General professional partnerships; and


b. Other partnership

A general professional partnership is formed purely for the purpose of practicing the same profession and
there will be no other business except for that purpose.

Ex. Cesar and Jose are both lawyers. They can form a partnership to practice law. But they cannot use the
same business for other purpose.

A. Rules on general professional partnership and those that are not.

Items General Professional Partnership Not a general professional


partnership
Income tax Not subject to income tax Subject to the rules on tax for
corporations
Liability for income tax Liable only in their separate or Both the partnership and the
individual capacities partners
Computation for the distributive Based on the net income of the Based on the net income after tax
share of the partners partnership of the partnership
Share in the partnership Each partner shall report as gross The share of a partner in the
income his distributive share in partnership’s distributive net
the partnership income subject to income of a year, even if not
a 10% withholding tax, if the actually received, will be
income is P720,000 and below. considered actually received on

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But if it exceeds P720,000 it will the same year the net income is
be 15%. determined subject to 10% final
tax.

Illustration: General professional partnership Not a general professional


partnership
Assume the following: Partnershi Partner I Partner J Partnershi Partner Partner
p p K L
Gross income 600,000 80,000 90,000 1,000,000 400,000 520,00
0
Expenses of the operations 200,000 30,000 20,000 600,000 250,000 300,00
0
Quarterly income tax paid 100,000 12,000
25,000
Income is to be shared equally
Solution:
Gross income 600,000 1,000,000
Less: Expenses 200,000 600,000
Net income 400,000 400,000
Income tax at 30% 0 120,000
Less: Quarterly income tax 100,000
paid
Income tax still due 20,000
Distributive income:
Net income 400,000 400,000
Income tax 0 120,000
Distributive income 400,000 280,000
Gross income – share in the 200,000 200,000 140,000 140,00
partnership income (1/2) 0
Final tax at 10% 14,000
14,000
Gross income – own 80,000 90,000 400,000 520,00
0
Total 280,000 290,000 400,000 520,00
0
Less: Expenses - own 30,000 20,000 250,000 300,00
0
Personal exemption 50,000 50,000 50,000
50,000
Taxable income 200,000 220,000 100,000 170,00
0
Income tax (graduated rates) 37,500 42,500 14,500
30,000
Less: Withholding income tax 20,000 20,000
by the partnership (10%)
Less: Quarterly income tax 12,000
paid 25,000
Income tax still due 17,500 22,500 2,500

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5,000

B. Tax Formula for Taxable Estate and Taxable Trust

Items Taxable Estate Taxable Trust


Taxable Income Taxable income is the same as The same as taxable estate and in
individual except that a special addition a special deduction for
deduction for any amount of any amount of the income
income paid, credited or applied for the benefit of the
distributed to the heirs grantor.
Tax exemption P20,000 P20,000
Tax rates Graduated rates for individuals. Graduated rates for individuals.
Creditable withholding tax on the Creditable withholding tax on
heir – 15%, the beneficiary – 15%.
Income tax returns (ITR) Shall be filed if the gross income Same as taxable estate and tax is
is P20,000 or more and the tax paid by the fiduciary.
paid by the executor or
administrator.

Illustration: The estate administrator and the heirs as income taxpayers. Mr. Reyes died leaving a net
estate of P3,000,000. The heir of the estate is Mr. Cruz.

Gross income of the estate P300,000


Expenses of the estate 50,000
Withholding income tax (5%) 15,000
Amount given to Mr. Cruz 50,000

Data for Mr. Cruz:


From the properties (called corpus) P100,000
From the current year’s income 50,000
Expenses 10,000
Income tax withheld from Mr. Cruz 7,500

Estate Beneficiary – Mr. Cruz


Gross income P300,000 P50,000
Additions/Deductions
Expenses (50,000) (10,000)
Income distribution (50,000) 50,000
Net income 200,000 90,000
Less: Exemption (20,000) (50,000)
Taxable income 180,000 40,000
Income tax (graduated rates) 32,500 4,000
Less: Withholding income tax on (15,000) (7,500)
rent
Income tax still due 17,500 (3,500)

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Illustration if we include the trust:

Assuming a taxable trust administered in the Philippines, had gross income from the property held in
trust of P490,000 and expenses of P350,000. There was a quarterly income tax paid of p2,500. It was
provided in the trust documents that P10,000 of each year’s net income shall be used for the payment of
premium of life insurance of the grantor. For the year it distributed P40,000 out of the year’s income to
the beneficiary. Shown below is the computation of the income tax of the trust.

Gross income P490,000


Less: Deductions for:
Expenses (350,000)
Distribution to heir (40,000)
Distribution to grantor (10,000)
Exemption (20,000)
Total deductions (420,000)
Taxable income 70,000
Income tax 8,500
Less: quarterly payments 2,500
Income tax still due 6,000

Problem Solving:

1. PJ & Co is a general professional partnership, with Partners Pedro and Juan sharing equally in the
partnership net income or net loss. In a calendar year, the partnership and the partners had the
following income tax data:

PJ & Co:
Gross income P1,000,000
Expenses of operations 400,000

Partner Pedro:
Gross income 600,000
Expenses related to the gross income 300,000

Partner Juan:
Gross income 700,000
Expenses related to the gross income 450,000

(Any distribution made to the partners was subjected to a creditable withholding income tax.)

How much is the income tax of all the taxpayers?

2. RD & Co is a general professional partnership. Its partners, Mr. Ric and Mr. Dan share equally in
the partnership net income or net loss. The partnership and the partners had the following
information:

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RD & Co:
Gross income P1,200,000
Expenses of operations 500,000

Advances made by the partners form partnership income:


Partner Ric 200,000
Partner Dan 100,000

Partner Ric:
Gross income (not including amounts received
from RD & Co) 900,000
Expenses related to the gross income 460,000

Partner Dan:
Gross income (not including amounts received
from RD & Co) 500.000
Expenses related to the gross income 600,000

(Any distributable net income to the partners was subjected to a creditable withholding income
tax)

How much is the income tax of all the taxpayer?

3. FE & Co is a general partnership in trade, with partners Fred and Erap sharing equally in the net
profit or net loss. The partnership and the partners had the following information:
FE & Co Fred Erap
Gross income P2,000,000 P700,000 P800,000
Expenses 1,000,000 320,000 410,000
How much is the income tax of the partnership?
How much is the income taxes of the partners?
4. MG & Co is a trading company, a partnership with Messrs. Mike and Glorio sharing equally in the
partnership net income or net loss. Data for the year 2013 (fourth year of operations) follow:

Gross income P6,000,000


Expenses 5,800,000
Advances from year’s net income:
To Mike 300,000
To Glorio 0

How much is the income tax of the partnership, if any?


What are the income taxes of the partners?

5. Mr. Rosales died leaving a net estate of P10,000,000. He had two (2) children, Messrs. Ron and
Job. The estate is under administration. Data are as follow:
Estate Ron Job
Gross income P900,000 P400,000 P360,000

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Expenses 200,000 100,000 120,000
Distribution of income:
To Ron 50,000
To Job 100,000

Income taxes were withheld when proper:


How much is the income tax of the estate?
How much is the income tax still due from each of the heirs?

6. Under the terms of a trust, Mr. Kent, the fiduciary, must accumulate the income of the trust and
turn over such income to the beneficiary, Mr. Larry, when Mr. Larry shall have finished a college
degree, but to make a distribution or application of such income, if Mr. Larry shall need the
money to finish his college course. In a taxable year the trust had the following information:

Gross income P500,000


Distribution of income to beneficiary 40,000

On any taxable gross income, deduction is taken at forty percent (40%) of such gross income.
Income taxes were withheld when proper. The income tax still due from any party to the trust
relationship?

7. Mr. V created 2 trusts (No1 and No2) in favor of Mr. T. No1 and No2 had a net income from their
respective properties of P400,000 and P700,000, after a distribution of income by each of
P40,000 to Mr. T. There were withholding taxes , when required.
Income tax shown on the income tax return of No1 and No2?
Income tax still due from No1 and No2?
Income tax still due from Mr. T if he claims a deduction equal to 40% of any taxable gross
income?

TAX ON JOINT VENTURES AND CO-OWNERSHIP

1. Joint Ventures

Joint Venture – Not a Corporation Joint Venture –


Corporation
1. Provision of a. Joint ventures for the purpose of Except joint ventures
law based on undertaking construction projects mentioned as not a
the meaning b. Joint ventures for engaging in corporation.
of a petroleum, coal, geothermal and
corporation other energy operations pursuant to
in taxation an operating or consortium
agreement under a service contract
with government.
2. Income These joint ventures are not subject to Subject to income tax,

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taxation income tax, but each member of the joint but the distributable
venture shall be taxable on the share of income is exempt from
income distributed by the joint venture. income tax under the
provision of
intercompany
dividend.
3. Application A Co and B Co both in construction business X Co and Y Co, are
formed a joint venture to build condo both freight and
projects with an agreed sharing of income brokerage companies.
to be divided equally. They formed a joint
Joint A Co B Co venture, contributing
Venture their resources
Gross 40,000,00 700,00 800,00 agreeing to divide the
income 0 0 0 income equally:
Expense 20,000,00 250,00 300,00 Joint
s 0 0 0 Venture
Quarterl 125,00 160,00 Gross 3,000,00
y 0 0 income 0
income Expense 1,500,00
paid s 0
Quaterl 300,000
y
income
tax

Solution:

A. Joint Venture – Not a Corporation

Joint Venture A Co B Co
Gross Income 40,000,000
Less: Expenses 20,000,000
Taxable income 20,000,000
Distributable income 20,000,000
Share in the joint 10,000,000 10,000,000
venture
Own gross income 700,000 800,000
Total 10,700,000 10,800,000
Less: Own expenses 250,000 300,000
Taxable income 10,450,000 10,500,000
Income tax as 3,135,000 3,150,000
corporation (30%)
Less: Quarterly 125,000 160,000
income tax paid
Income tax still due 3,010,000 2,990,000

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B. Joint Venture – as a Corporation

Joint VEnture X Co Y Co
Gross income 3,000,000
Less: Expenses 1,500,000
Taxable income 1,500,000
Income tax (30%) 450,000
Less: Quarterly 300,000
income tax paid
Income tax still due 150,000

Taxable income 1,500,000


Less: Income tax paid 450,000
Net income after 1,050,000
income tax
(distributable income)
Share in the joint 525,000 525,000
venture net income
Income tax Exempt Exempt
(Intercompany (Intercompany
dividend) dividend)

2. Co-ownership

It is an instance or a situation when more than one person are the owners or heirs of one property and
that they decided to settle the inheritance through amicable settlements among themselves. During the
period of settlement, the property is administered by the appointed administrator among the heirs or all
of the heirs for whatever has been agreed upon by all of the parties. So it is like a case of an estate not
under administration by a third party, just like an extrajudicial settlement.

Ex: Donation of property to two or more beneficiaries

Rules:
Co-ownership Not a co-ownership
Provision of law 1. Exempt from income If the undivided income were
tax. invested by the co-owners in
2. Limited to the other income-producing
preservation of activities or properties it
property and collection becomes a partnership
of income therefrom subject to tax like a
corporation.

Problem: Messrs ANDY and BERT inherited from their father a piece of land with an apartment thereon.
The estate is not under administration. The property had a net income of P200,000.

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Solution:

Co- Not a Co-


ownership ownership
Net income 200,000 200,000
Income tax 60,000
as a
corporation
Amount for 200,000 140,000
distribution
ANDY BERT ANDY BERT
Share in the 100,000 100,000 70,000 70,000
co-
ownership
Final tax at 7,000 7,000
10%
Add: Own 200,000 180,000 200,000 180,000
business
income
Total 300,000 280,000 200,000 180,000
Less: 50,000 50,000 50,000 50,000
Personal
exemptions
Taxable 250,000 230,000 150,000 130,000
income

Problems:

1. Mr. Ramon died leaving a net estate of P15,000,000. The estate is not under administration. In a
year , the estate had a net income of P2,000,000 without any distribution of property or income
to the heirs. The heirs are Mr. Chit and Mr. George, both without any income from other sources.
From any taxable gross income, each claims a deduction equal to forty percent (40%) of such
gross income. Income taxes were withheld when proper.

What is the income tax due from the estate?


What is the income tax of each of the heirs?

2. Messrs Ric and Rod allocated between themselves, at one-half each, a piece of land that they
inherited from their father. Seeing the potential of the property on earning income, they
contributed P2,000,000 each to build a high-rise building to be rented out to the tenants. In a
taxable year, the property had the following data:

Rent ncome, net of a 5% withholding income tax P9,500,000


Expenses on the property 4,000,000

How much is the income tax due from each of the owner?

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3. High Co and Low Co are in construction business. They formed a joint venture to build a high-rise
condominium building for an owner of land contributing labor and capital, with an agreement to
share equally in the net income or net loss from the project. IN the year that the building was
started and completed, the construction project occasioned to High Co and Low Co the
following:

Gross income P4,000,000


Expenses of operations 1,200,000
Interest expense paid to banks 100,000

How much is the income tax of the joint venture?


How much is the income tax of High Co and Low Co?

4. Jake Co and Kay Co are both operating bus companies. They formed a joint venture, pooing their
resources on a project of transporting people and cargo from Manila to any parts of the
Philippines. They agreed participation in the net income or net loss of the joint venture equally
every end of the year. The joint venture and the members had the following data:

Joint venture Jake Co Kay Co


Gross income 20,000,000 8,000,000 5,000,000
Expenses 9,000,000 4,000,000 2,000,000

How much is the income tax of the joint venture?


How much is the income tax of the members of the joint venture?

GROSS INCOME – CAPITAL GAINS AND LOSSES

Capital assets are those assets not used in business.

Else, it is an ordinary assets. Four categories of ordinary assets are:

a. Stock in trade or other property of a kind, which can be included in the Inventory of the
taxpayer at the end of the taxable year.
b. Property held by the taxpayer in the ordinary course of business or trade.
c. Property used I trade or business subject to allowance for wear and tear.
d. Real property used in trade or business.

Rules on capital and losses


a. The transaction on the capital asset should be a sale or exchange.
b. With the transaction being a sale or exchange, if the taxpayer is:
Corporation An individual, estate or trust
The capital gain or loss should always be The capital gain or loss should be considered at:
considered at 100% regardless of the length of the 1. 100%, if the asset was held for not more
holding period of the asset than 12 months

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2. 50%, if the asset was held for more than
12 months.
Capital losses are deductible only to the extent of Capital losses are deductible only to the extent of
capital gains capital gains.
Net capital loss carry-over is not available Net capital loss carry-over is available.

Net capital loss carry-over. If any taxpayer, except corporation will sustain in any taxable year a net
capital loss, such loss, in an amount not in excess of net income of such year, shall be treated as a loss in
the succeeding year from a sale or exchange of a capital asset held for not more than 12 months.

Example 1: Mr. Mar, a citizen of the Philippines, had the following income and losses for the calendar
year2011:

Net income from business P250,000


Gain on sale of ordinary asset 20,000
Gain on sale of capital asset held for six months 12,000
Loss on sale of capital asset held for fourteen months 10,000
Loss on sale of ordinary asset 24,000
Dividend from a resident corporation 30,000

How much is the taxable income for 2013?

Solution:

Net income from business 250,0000


Dividend income 30,000
Gain on sale of ordinary asset 20,000
Loss on sale of ordinary asset 24,000 (4,000)
Ordinary net income 276,000
Gain on sale of capital asset held for 6 mos 12,000
100% thereof 12,000
Loss on capital asset held for 14 mos 10,000
50% thereof 5,000
Net capital gain 7,000
Total 283,000
Less: Basic personal exemption 50,000
Taxable income 233,000

Example 2:

Mr. No, a citizen of the Philippines, had the following data for 2012 and 2013:

2012 2013
Net income from business 90,000 78,000
Interest from notes receivables 2,000 4,000

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Capital gain on assets:
Personal computer held for 8 months 30,000
Appliances, held for 2 years 40,000
Capital loss on redemption bonds, held for 4 years 70,000

How much is the taxable income for 2012 and 2013?

Solution:

2012 2013
Net income from business 90,000 78,000
Interest income 2,000 4,000
Ordinary net income 92,000 82,000
Capital gain (100%) 30,000
Capital gain (50%) 20,000
Capital loss (50%) 35,000
Net capital loss (5,000)
Net capital loss carry-over from (5,000)
2102
Net capital gain 15,000
Total 97,000
Less: Basic personal exemptions 50,000 50,000
Taxable income 42,000 47,000

Example 3: Mr. O’Brien, a citizen of the Philippines, had the following data for 2012 and 2013:
2012 2013
Net income from business 80,000 90,000
Interest from notes receivable 4,000 2,000
Capital gain on shares of foreign corporation held for 3 years 50,000
Capital gain on appliances held for 8 months 70,000
Capital loss on bonds, held for 5 months 120,000

How much is the taxable income for 2012 and 2013?

Solution:

2012 2013
Net income from business 80,000 90,000
Interest income 4,000 2,000
Ordinary net income 84,000 92,000
Capital gain (50%) 25,000
Capital gain (100%) 70,000
Capital loss (100%) 120,000
Net capital loss (95,000)

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Net capital loss carry-over from 2012 (34,000)
Net capital gain 36,000
Total 128,000
Less: Basic personal exemptions 50,000 50,000
Taxable income 34,000 78,000

Problem solving:
1. The taxpayer is a corporation:
Gross income from business P6,000,000
Business expenses 2,000,000
Gain on sale of capital asset held for 8 mos 100,000
Loss on sale of capital asset held for 4 years 150,000
How much is the taxable income?

2. The taxpayer is an individual:


Gross income from the practice of profession P1,000,000
Expenses on the practice of profession 600,000
Gain on the sale of capital asset held for three (3) years 300,000
Loss on sale of capital asset held for nine (9) months 60,000
How much is the taxable income?

3. Taxpayer is a taxable estate:


2012 2013
Gross income from business 2,000,000 3,000,000
Expenses of the business 1,800,000 1,600,000
Capital gain on assets:
Held for two (2) years 400,000
Held for six (6) months 400,000
Capital loss on assets:
Held for two (2) months 450,000
Held for two (2) years 100,000

How much is the taxable income for 2012 and 2013?

4. Taxpayer is an individual:
Year 2012:
Net capital loss of P200,000 when the net taxable income was P150,000.
Year 2013:
Gross income from rent P4,000,000
Expenses of the rent 3,200,000
Capital gain on asset held for two(2) years 400,000
Capital loss on asset held for five (5) months 100,000

How much is the taxable income for 2013?

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Income from business, dividends, interest, rent and services

Gross Income = Total Sales – Cost of goods sold + any income from incidental and outside sources. This
any income could be dividend income, interest income, or gain on sale of assets not subjected to a final
tax or capital gains tax.

Dividends – represents a distribution of profits.

Direct dividends – is one where the paying corporation declares that the distribution is a dividend
payment. Normally, it is embodied in a resolution by the Board of Directors.

Indirect dividends – is a distribution of profits in the form of payment of services, properties , etc.

Examples of Indirect dividends:

1. Payment to a stockholder on property purchased from him in excess of the FMV of the property.
The excess is an indirect dividend.
2. On payment to a stockholder for services rendered to the corporation at an amount in excess of
reasonable compensation for the services.
3. On cancellation of indebtedness of the stockholder to the corporation.
4. Payment to the stockholder for transportation expenses, representation, and etc.

Dividend is exempt from income tax if:

1. Received by a domestic or resident corporation.


2. Stock dividend

Dividend is subject to final tax if:

1. Received by an individual from a domestic corporation.


2. Received by a non-resident corporation from a domestic corporation.

Cash and property dividend:

1. Cash dividend when taxable , the measure of money received is the basis.
2. In property dividend, the basis of taxable income is the fair market value of the property
received.

Stock dividend:

Under the NIRC the stock dividend may or may not be taxable. A stock dividend is taxable if it gives the
shareholder an interest different from that which his former stock represented.

Proportionate interest of shareholders before and after a stock dividend

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Case A. Stock dividend is not taxable

Stockholder Before Before Stock After After dividend:


Dividends: Dividends: % Dividend: 10% Dividends: % of
Shares of ownership Shares ownership
A 100 20 10 110 20
B 100 20 10 110 20
C 100 20 10 110 20
D 100 20 10 110 20
E 100 20 10 110 20
500 100 50 550 100

Case B. Stock dividend is taxable

Stockholder Before Before Stock After After dividend:


Dividends: Dividends: % Dividend: 10% Dividends: % of
Shares of ownership Shares ownership
A 100 20 10 110 20.76
B 100 20 100 18.88
C 100 20 10 110 20.76
D 100 20 100 18.88
E 100 20 10 110 20.74
500 100 30 530 100

Taxable/ non-taxable stock dividend determined by the classes of stock issued and outstanding at the
time of dividend:

Stock issued and outstanding Stock dividend Taxable/Not taxable?


Common Common Not taxable
Common Preferred Not taxable
Common and preferred Common Taxable
Common and preferred Preferred Taxable

Liquidating dividend – When a corporation distributes all of its assets in complete dissolution and
liquidation, there is no dividend income to the shareholder receiving a liquidating dividend. There is
instead a sale or exchange of property. Any gain or loss sustained by the shareholder, whether individual
or corporate, is taxable income or deductible loss.

For example: Mr. FOE, a resident citizen of the Philippines. On April 5, 2008, he purchased 200 shares of
stock of GAGA Corporation, a resident corporation with stock issued and outstanding of common only,
for P22,000. On October 2, 2010, Mr. FOE received a 10% stock dividend. On Nov 2, 2010, GAGA
Company was dissolved and Mr. FOE receiving a liquidating dividend of P90 per share.

Capital gain or loss to consider in computing taxable income at the end of the year?

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Solution:

Liquidating dividend received P90 x 220 shares P19,800

Basis of the shares to Mr. FOE P22,000

Capital loss P 2,200

50% of the capital loss P 1,100

Interest income

As a general rule interest income is subject to income tax.

Rent

The consideration paid by the lessee to the lessor for the use of the property of the latter is a taxable
income.

Included:

The payment of obligations of the lessor to the third parties (e.g. loans, interest, taxes, insurance
premiums, etc.) should be considered as additional rent income.

Advance rentals:

1. If the advance rental is in the nature of prepaid rent, received by the lessor under a claim of right
and without restrictions as to use, the entire amount is taxable at the time it was received.
2. If the amount received is a loan, there is no income upon its receipt by the lessor.
3. If the amount received is in the nature of security deposit for the faithful compliance by the
lessee of the tems of the contract, there is no income to the lessor.

LAST TOPIC – TAX REMEDIES.

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