INCOME TAXATION

RECONCILIATION OF FINANCIAL INCOME AND TAXABLE INCOME

GAAP/PFRS NET INCOME xx
Concepts of Income xx(xx)
Concepts of Deduction xx(xx)
Income subject to Tax xx
Income subject to Final Tax (xx)
Income subject to CGT (xx)
TAXABLE INCOME xx

Mid-Term Exam Coverage:

The Concepts of Income
A. The Gross Income Test
GROSS INCOME is any inflow of wealth to the taxpayer from whatever source that increases net worth
Elements of a Gross Income
1. It is return on capital – increases net worth
2. It is a realized benefit
 there must be an exchange transaction
 the transaction involves another entity
 it increases the net worth of the recipient
3. It is not exempted by law, contract, or treaty
GROSS INCOME TEST
Mr. Ocampo lists the following inflows as possible items of gross income:
Compensation income 200,000 onerous - exchange
Winings from gambling 100,000 realized
Increase in value of investments 50,000 no party
Appreciation in the value of land owned 300,000 inv olv ed
Debt cancelled by creditors in consideration for 150,000 onerous - exchange
services he rendered
Debt cancelled by his creditor out of affection 250,000 donation
Loan received from a bank 400,000 offset effect of net worth
How much is the gross income?
How much is the gross income? [200k+100k+150k = 450k]
Kinds of Taxpayers
Taxability of income earned from
Philippines Abroad
A. Individuals
Resident Citizen  
Non-resident Citizen 
Resident Alien 
Non-resident Alien
Engaged in trade or business 
Not engaged in trade or business  (FIT)
Taxable Estates 
Taxable Trusts 
B. Corporations
Domestic Corporation  
Foreign Corporation
Resident FC 
Non-resident FC 

Residency Rules:
1. The intention of the taxpayer of his stay within or outside the Philippines shall determine his appropriate
residency classification
2. Length of stay
a) Citizens staying abroad for a period at least 183 days becomes a non-resident citizen.
 b) Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable year becomes
resident alien.
c) Aliens who stayed in the Philippines for not more than 1 year but more than 180 days are deemed non-
resident alien engaged in trade or business
d) Aliens who stayed in the Philippines for not more than 180 days are non-resident aliend not engaged
in trade or business.

B. Situs and Extent of Taxation

Types of Income Place of Taxation
1. Interest income debtor’s residence
2. Royalties where the intangibles is employed
3. Rent income location of the property
4. Service income place where the service is rendered
5. Gain on sale of properties
real property location of the property
personal properties:
domestic stocks always w/n the Philippines
other personal properties where the property is sold
6. Dividend income from
Domestic Corporation earned within Philippines
Foreign Corporation
Resident FC subject to predominance test
Non-resident FC earned abroad

SITUS OF INCOME
A taxpayer had the following income:
Interest income from deposits in a foreign bank 300,000
Interest from domestic bonds 50,000
Royalties from books published in the Philippines 100,000
Rent income from properties abroad, lease contract 150,000
is executed in the Philippines
Professional fees for services rendered in the Philippines 400,000
to non-resident clients paid in US Dollars
Applying the situs rules, what income is earned within and outside?
Within Without TOTAL
Interest income from deposits in a foreign bank 300,000 300,000
Interest from domestic bonds 50,000 50,000
Royalties from books published in the Philippines 100,000 100,000
Rent income from properties abroad 150,000 150,000
Professional fees for services rendered in the Philippines 400,000 400,000
TOTAL 550,000 450,000 1,000,000

PRE-DOMINANCE TEST
In 2021, Barbie received a P400,000 dividend income from Rich Corporation. The corporation
had the following gross income in 2018 through 2020:
2018 2019 2020 TOTAL
Philippines 100,000 200,000 300,000 600,000
Abroad 200,000 100,000 100,000 400,000
TOTAL 300,000 300,000 400,000 1,000,000
How much is the dividend income earned within the Philippines under the following instances:
a. If Rich Corporation is a domestic corporation
b. If Rich Corporation is a non-resident foreign corporation
c. If Rich Corporation is a resident foreign corporation

a. If Rich Corporation is a domestic corporation

The entire P400,000 is earned within the Philippines

b. If Rich Corporation is a non-resident foreign corporation

The entire P400,000 is earned abroad

c. If Rich Corporation is a resident foreign corporation

G.I ratio = 600/1000 = 60%
Earned within Philippines [400k x 60%] 240,000
Earned abroad [400k x 40%] 160,000
*Supposed that the ratio is only 49%, the entire P400,000 is deemed earned abroad.
C. Accounting Methods
Income Taxation Schemes under NIRC
 These tax schemes are mutually exclusive. Meaning, an item of gross income subjected any one of the
schemes will not be taxed by the other schemes. Likewise, if an item of gross income is exempted in one
scheme, are not taxed by the other schemes.
1. Final income taxation – G.I subject to final tax
 Applies only to certain passive income listed by law. Not all passive income are subject to final tax.
 Passive incomes are those earned with very minimal or even without active involvement of the
taxpayer in the earning process
 Examples: interest income from banks, dividend income from domestic corporations, royalties

2. Capital gains taxation – G.I subject to capital gains tax

 This is imposed on the gain realized on the sale, exchange and other dispositions of a certain capital
assets.
 Capital Assets are assets not used in business, trade or profession. Not all capital gains are subject to
capital gains tax.
 Only applies to (1) sale or disposition of domestic stocks directly to a buyer, and (2) sale of real
properties classified as capital assets

3. Regular income taxation – G.I subject to regular tax

 Covers all types of active income and other income not subjected to final tax and gains from dealings
of properties not subjected to capital gains tax.

Accounting Periods
Individual Corporations
a. Regular accounting period (12 months)
Calendar  
Fiscal 
b. Short accounting period (less than 12 months)  

Short accounting period may arise in the following instances:

a) newly commenced business d) change of accounting period by corporation
b) dissolution of business e) termination of an accounting period by the CIR
c) death of a taxpayer

Accounting Methods
a) Accrual and cash basis
 Advanced income is taxable upon receipt – applies to sale of services only, not on goods
 Prepaid expenses is non-deductible

b) Installment and deferred payment method

 Gross income is recognized and reported in proportion to the collection from the installment sales
 This is available to the following taxpayers:
 dealers of personal property on the sale of properties they regularly sell
 dealers of real properties, only if their initial payment does not exceed 25% of the selling price
 casual sale of non-dealers in property, real or personal, when their selling price exceeds P1,000
and their initial payment does not exceed 25% of the selling price
Wherein,
INITIAL PAYMENT means total payments made by the buyer, in cash or property, in the year of sale.
SELLING PRICE means the entire amount for which the buyer is obligated to pay
CONTRACT PRICE is usually the selling price in the absence of an agreement whereby the debtor
assumes indebtedness on the property
INSTALLMENT METHOD
Roxas Company, a car dealer, sold a machine with a tax basis of P1.2M on installment
in January 3, 2022. Roxas received a P200,000 cash downpayment and a P1.8M promissory
note for the balance payable in six months of P300,000 every July 3 and January 3 thereafter.
Compute for the taxable income.

Under casual sales, because Roxas is not a dealer of machinery

Selling price [200k+1.8M] 2,000,000
Less: tax basis of machine sold 1,200,000
Gross profit 800,000

Initial payment [200k+300k] 500,000

Gross income ratio [500k/2M] 25%

Gross income using the installment basis: (Collection/Contract Price) x Gross Profit
At the date of sale [200k/2Mx800k] 80,000
Upon every installment [300k/2Mx800k] 120,000

If Roxas is a dealer or machinery, it can avail of the installment method regardless of G.I ratio
so long as the selling price on the installment sale exceeds P1,000.

In January 3, 2021, Tagaytay Inc., a real property dealer, sold a lot costing P1.4M for P2M. The lot
was encumbered by a P1M mortgage which was assumed by the buyer. The buyer paid P200,000
downpayment. The balance is due over four installments of P200,000 every July 3 and January 3.
Compute for the taxable income for the year 2021.
Selling price 2,000,000 Contract price [2M-1M] 1,000,000
Less: tax basis of lot sold 1,400,000 Or alternatively computed as:
Gross profit 600,000 Downpayment 200,000
Installment [200kx4] 800,000
Initial payment [200k+200k] 400,000 Total 1,000,000
Gross income ratio 20%

Gross income using the installment basis: (Collection/Contract Price) x Gross Profit
At the date of sale [200k/1Mx600k] 120,000
Upon every installment [200k/1Mx600k] 120,000

c) Percentage of completion
 The estimated gross income from construction is reported based on the percentage of completion of
the construction project
 Output method based on engineering survey is prescribed by the NIRC

d) Outright and spread-out method

Leasehold improvements are tangible improvements made by the lessee to the property of the lessor.
Improvements will benefit the lessor when their useful life extends beyond the lease term.
Income from leasehold improvement can be reported either
a) Outright method – recognize in full the fair value of such building or improvements at the time it
is completed
b) Spread-out method – report as income the estimated depreciated value of the building or
improvement at the termination of the lease, spread-out over the lease term
LEASEHOLD IMPROVEMENTS
In January 1, 2021, Ivan leased a vacant lot to Greg under a 20-year lease contract. Greg immediately
constructed a building on the lot at a total cost of P4.5M. The building has a useful life of 30 years.
Compute for the leasehold improvement income under the following method:
a. Outright Method
b. Spread-out Method

a. Outright Method
--> Ivan shall recognize the entire P4.5M as gross income upon the completion of the improvement

b. Spread-out Method
The depreciated value of the property at the termination of the lease becomes the value of the
years of usage of the lessor.

used by the lessee - 20 yrs used by the lessor - 10 yrs

0 10 20 30
(end of lease term) (useful life)
Cost allocation:
Lessee [20/30 x P4.5M] 3,000,000
Lessor [10/30 x P4.5M] 1,500,000 depreciated v alue of the improv ement at the termination
Total 4,500,000 of the lease becomes income by the lessor spread-out ov er
the lease term.
Therefore, annual leasehold income over the lease term is P75,000 [1.5M/20 years]
D. Accounting for Gains and Losses
Taxpayer’s properties can be:
a) Ordinary Assets – assets used in business
 Ordinary gains – arises from sale, exchange and disposition of ordinary sales
 Subject to regular income tax
 Ordinary gain is an item of gross income, ordinary loss is deduction of gross income
b) Capital Assets – any other assets other than ordinary assets
 Capital gains – arises from sale, exchange and disposition of capital assets
 Generally subject to regular income tax except for capital gains subject to CGT
 Capital gains other than subjected to CGT is an item of gross income, for capital loss it is simply ignored.
However, it can be recovered or deducted up to the extent of actual capital gain
 Net capital loss is subjected to holding period

MidTerm Exam Coverage:

Income Subject to Final Tax (Passive Income)
Features of Final Income Taxation:
 Tax withheld is FINAL. No more tax return required on the part of the payee
 Withheld at source by the payor
 Territorial imposition. Applies to passive income earned in the Philippines only.
 Imposed on certain passive income and persons not engaged in business in the Phils,

A. Interest Income from bank deposits

interest income or yield from local currency bank deposits, including deposit substitutes, trust funds, and
similar arrangements
Individual Corporate
Local currency (₱) short term – less than 5 years 20% 20%
long term – 5 years or more exempt* RIT
* If a long term deposit is pre-terminated:
Placement period is less than 3 years 20%
3 years to less than 4 years 12%
4 years to less than 5 years 5%
Examples of long term deposits: investment certificates, time deposits, trust funds – these are
prescribed by the BSP and issued by banks only.

Note that NRFC is generally subject to 25% final tax.

Foreign currency ($) residents – 15%,

(FCDU, eFCDS) non-residents – exempt
 If a bank account is jointly in the name of a resident and non-resident taxpayer, 50% of the interest
shall be exempted while the other 50% shall be subjected to the 15% final tax

Example 1: A taxpayer earned the following interest income from various time deposits:
6-month time deposit P8,000
2-year time deposit 12,000
5-year time deposit 40,000
Required: Compute the final tax if the taxpayer is an individual and if a corporation.
Solution: Individual Corporation
6-month time deposit P8,000 1,600 1,600
2-year time deposit 12,000 2,400 2,400
5-year time deposit 40,000 exempt RIT
Final tax withheld 4,000 4,000

Example 2: A resident taxpayer received P16,000 interest income from a bank. Determine the final tax withheld
at source
P16,000 /80% P20,000
Final tax withheld [20k x 20%] P4,000
 Example 3: Mr. Jose, OFW deposited all his savings under the FCDU of a domestic bank. During the month, the
savings deposit account earned $1,000 interest or P41,500. Compute the final tax under the following
instances:
a) Mr. Jose deposited his savings through the account of his resident wife. [41,500 x 15% = 6,225]
b) Mr. Jose deposited his savings through a joint account with his resident wife. [6,225x50%=3,112.5]
c) Mr. Jose deposited his savings through his own account. [exempt]

Interest income subject to regular tax:

1. lending activities
2. investments in corporate bonds
3. promissory notes
3. foreign sources, whether bank or non-bank
5. penalty for legal delay or default

B. Dividend Income
 these are distribution made by the corporation to its shareholders out of its earnings or profit, whether in
money or in kind

Types of Dividends
a. cash dividend – paid in cash
b. property dividends – paid in non-cash properties including stock dividends or securities of another corp.
c. scrip dividends – paid in notes or evidences of indebtedness of the corp
d. stock dividends – paid in stock of the corp
e. liquidating dividends – distribution of corporate assets not taxable, they are not income for taxation purposes

Source: Recipient
Individual Corp
Domestic corp 10% exempt (to minimize double taxation)
Foreign corp RIT RIT

Special rates for: NRA-ETB (20%), NRA-NETB (25%),

NRFC is not exempt, 25%, but when tax sparing rule applies, 15%
Exempt dividends:
 dividends from cooperatives
 qualified foreign-sourced dividends

Dividends or share in the net income of the following entities is subject to 10% final tax since they are
considered corporations under the NIRC:
 Real estate investment trusts
 business partnership
 taxable associations
 taxable joint ventures
 taxable co-ownerships

Example: Bayog Company, a domestic corporation, declared a total of P1M dividends in March 2021. Recipients
are the following:
Resident aliens and citizens 500,000
NRAs engaged in TB 100,000
NRAs not engaged in TB 50,000
Non-resident corporation 100,000
Total dividends 750,000
Required: Total final tax to be withheld.
Resident aliens and citizens 500,000 x 10% 50,000
NRAs engaged in TB 100,000 x 20% 20,000
NRAs not engaged in TB 50,000 x 25% 12,500
Non-resident corporation 100,000 x 25% 25,000
Total tax withheld 107,500
C. Royalties
 these are income received from licensing agreements to use the right of a certain technology or
trademark

w/ active involvement – subject to RIT

w/o active involvement: Individual Corp NRA-ETB,NETB,NRFC
books, literary works, and musical compositions 10% 20%
cinematography films, and others 20% 20% 25%
pertain to printed literatures. E-books are subject to 20% final tax

D. Prizes – element of effort

Exempt prizes
 prizes received by a recipient without any effort on his part to join a contest
Examples: Nobel Prize Award, Ramon Magsaysay Award
 prizes from sports competition that are sanctioned by their respective accredited national sports
organizations
Example: Phils. Olympic Committee

Other forms of prizes other than an award or sports related prizes:

Individual Corp
Prizes exceeding P10,000 20% RIT
Prizes not exceeding P10,000 RIT RIT

E. Winnings – element of chances

Individual Corp.
PCSO winnings not exceeding P10,000 Exempt Exempt
PCSO winnings exceeding P10,000 20% 20%
Other winnings, in general 20% RIT
 PCSO winnings of NRA-NETBs and NRFC, regardless of the amount, are subject to 25% final tax
 PCSO winnings shall be applied on a per ticket basis

F. Informant’s Reward
cash reward given to any person instrumental in the discovery of violations of the NIRC or discovery and
seizure of smuggled goods.
 10% final tax of whichever is the lower of the following per case:
10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected or P1,000,000

Final Withholding Tax Reporting

Monthly Filing:
 BIR Form 0619-F [Monthly Remittance Return of Final Income Taxes Withheld] – shall be filed by the agent
or payor for the first two months of the quarter
 Deadline: Shall be filed and paid on or before the 10th day of the month following the month in which
withholding was made

Quarterly Filing:
 BIR Form 1601-FQ [Quarterly Remittance Return of Final Income Taxes Withheld]
 Deadline: Shall be files and paid on or before the last day of the month following the month after each
quarter
Income Subject to Capital Gains Tax
A. Sale of domestic stocks directly to a buyer – 15%
Selling price xx
Less: Cost xx
Net Gain xx
x CGT Rate 15%
CGT xx

Selling price means:

 cash sale – total consideration received per deed of sale
 if partly paid in money and partly in property – sum of money and fair value of the property received
 exchanges – fair value of the property received

Cost or tax basis of stocks

 if acquired by purchase – cost of the property acquired
 by devise, bequest, or inheritance – fair value of the time of death of the decedent
 by gift – fair market value at the time of gift or cost of the donor, whichever is lower
 inadequate consideration – amount paid by the transferee for the property
 under tax-free exchanges – substituted basis of the stocks

Cost of stocks also includes selling expenses, like commission expense and documentary stamp tax if
assumed by the seller. Documentary stamp tax is computed as:
a. for par value shares - P1.50 for every P200
b. no par value shares or stated value per shares – 25% of DST paid on the original issuance

Nature of 15% CGT

1. It is a universal tax – applies to all taxpayers disposing stocks classified as capital assets regardless of classification
of the taxpayer
By situs, the gain on sale of domestic stocks is within, even if the sale is executed outside the Philippines.
2. It is an annual tax – imposed on the annual net gain on the sale of domestic stocks directly to a buyer

Tax compliance:
1. Transactional capital gains tax – BIR Form 1707, within 30 days after each sale, exchange, and other disposition
2. Annual capital gains tax – BIR Form 1707A, on or before 15th day of the fourth month following the close of the
taxable year of the taxpayer (Individual/calendar period: April 15, fiscal period: varies)

B. Gains arising from sale of capital assets

- these are gains arising from sale, exchange, and other disposition of real property capital assets in the Philippines
subject to 6% of the GSP or FMV, whichever is higher.
Under NIRC, the FMV of real property is whichever is higher of the Zonal Value prescribed by CIR and the
Assessed Value by the Office of the Assessor.

Nature of 6% CGT
1. It is presumptive capital gain – the tax applies even if the sale resulted to a loss. Gain is always presumed to exist.
2. It does not consider the involuntariness of the sale – ex: foreclosure sales, dispositions by judicial order
3. It is a final tax – tax shall be withheld by the buyer against the selling price of the seller and remit the same to
the government

Alternative taxation – applies only to individual seller, and the buyer is the government, its instrumentalities or
agencies.
 an individual seller of real property capital assets has the option to be taxes at either:
a. 6% CGT or
b. regular IT
Exempt from the 6% CGT
1. Sale of land under the Comprehensive Agrarian Reform Program
2. Sale of socialized housing units by the National Housing Authority
3. Sale, exchange, and other disposition of a principal residence
RESIDENCE is the house and lot w/c is the primary domicile of the taxpayer. For taxpayers with multiple
residences, it is deemed the one that is shown in his latest tax declaration.
Requirements for the exemption:
1. The seller must be a citizen or resident alien
2. The sale involves the principal residence of the seller-taxpayer
3. The proceeds of the sale is fully utilized in acquiring a new principal residence
4. The BIR is notified by the taxpayer of his intention to avail the tax exemption within 30 days of the sale
5. The reacquisition of the new residence must be within 18 months from the date of sale
6. The capital gain is held in escrow in favor of the government – released only to the taxpayer if
exemption qualifies
7. The exemption can only be availed once in every 10 years
*Sale of the principal residence must precede the acquisition of the new principal residence

Basis of the new residence:

A. Proceeds fully utilized
Cost of the old residence xx
Add: Additional costs [actual costs – proceeds] xx
Basis of the new residence xx

B. Proceeds partially utilized – proportionate

Utilized proceeds x cost of the old residence
Total proceeds

- the unutilized proceeds is taxable

Tax compliance:
BIR Form 1706, within 30 days after each sale, exchange, and other disposition

Documentary stamp tax: P15 for every P1,000 on the GSP or FMV whichever is higher

Pre-Final Exam Coverage:

Regular Income Tax: The Gross Income
Characteristics of the Regular Income Tax
1. General in coverage – applies to all items of taxable income except those that are subject to final tax, capital
gains tax , and special tax regimes
2. Net income tax – imposed on residual profits or gains after deductions for expenses and personal
exemptions allowed by law
3. Annual income tax – applies to yearly profits or gains measured using the accounting methods adopted by
the taxpayer
4. Creditable withholding taxes – these advanced taxes are deductible against the regular tax due in
computing tax still due
5. Progressive or proportional tax – for individual tax due is based on tax table, while for corporations a flat
rate of 25% is used

Gross Income xx [exclusions – exempt items, inclusions – subject to]

Less: Allowable deductions xx [business expenses, regular and special deductions, 40% OSD]
Taxable Income xx

Gross income is classified into:

a. Compensation income – arises from an employer-employee relationships
b. Business or professional income – arises from selling goods or rendering services for a profit
c. Other income – income that are neither compensation income nor business income
A. Exclusions from Gross Income
 these are income which will not be subject to income tax and shall be exempt from taxation (Sec 32B) of
NIRC

1. Proceeds of life insurance policy – proceeds of life insurance paid to the heirs or beneficiaries upon
death of the insured. It is a return of capital.

2. Amount received by the insured as a return of premium – return of premiums paid under life insurance,
endowment, annuity contracts, or any insurance contracts is a return on capital, hence excluded from
gross income.

Example: Alberto is insured in a P1,000,000 life insurance policy with annual premium payments of
P20,000 for 10 years. If Alberto outlives the policy after the 10th year, he will be paid a P500,000
maturity value.
 If Alberto died on the 8th year of coverage and his heirs collected the P1,000,000 proceeds, the
entire proceeds is not taxable
 If Alberto outlived the policy and collected the maturity value of P500,000
Total proceeds P500,000
Return of capital – premium [20k x 10] 200,000
Return on capital (item of gross income) 300,000
 If after six years of paying, Alberto assigns the policy to Gino who paid him P130,000. Gino
continued the premium payments for two more years after which Alberto died. Gino collected
the P1,000,000 insurance proceeds.
Alberto Gino
Sale proceeds P130,000 Insurance proceeds P1,000,000
Return of capital [20k x 6] 120,000 Return of capital [130k +20k x 2] 170,000
Return on capital 10,000 Return on capital 830,000
 If Alberto is insured by his employer corporation with the employer as the beneficiary,
subsequently he died, the corporation collected the P1,000,000 life insurance proceeds, the
same is not taxable

3. Gifts, bequests, and devises or descent –

Example: Carlo received a restaurant business as a gift on April 1, 2021. On that date, the restaurant
had a total properties amounting to P400,000 including P50,000 cash income earned since January1,
2021. The restaurant posted an additional P150,000 cash income from April 1 to December 31, 2021
P400,000 – is a gratuity subject to transfer tax
P50,000 – is a donated income and shall be included in the gross income of the donor
P150,000 – income of the donated property after donation is an item of gross income of the donee

4. Compensation for injuries and sickness – compensation for personal injuries or sickness, plus amounts
of any damages received, whether by suit or agreement, on account of such injuries or sickness

Example: Mr. Eviv was hit by a jeepney. He paid P100,000 for the hospitalization expenses. He sued
the jeepney driver and was awarded by the court a total indemnity of P340,000 divided as follows:
P200,000 indemnity for his pain, anguish and sufferings, P40,000 for his lost salaries, and P100,000 as
reimbursement for his hospital bills.
P200,000 indemnity and P100,000 reimbursement – are non-taxable returns of capital (capital
item with infinite value)
P40,000 reimbursement for lost salary – is a recovery of lost profit, a gross income item

5. Income exempt from treaties – income items excluded by international agreement (exemption doctrine
of international comity)

6. Retirement benefits, pensions, gratuities and other benefits –

  Retirement benefits under RA 7641 (Retirement Law) and those received by officials and
employees of private firms in accordance with a reasonable private benefit plan maintained
by the employer
Requisites for the exemption: (1-10-50-rpbp)
1. First time to avail the retirement benefit exemption
2. The retiring official or employee has been in the services of the same employer for at
least 10 years – cumulative years of employment with the same employer
3. The retiring employee is at least 50 years of age at the time of retirement
4. The employer maintained a reasonable private benefit plan registered with the BIR
held under the management of a trustee.
 Retirement benefits under RA 7641 (Retirement Law) and those received by officials and
employees of private firms in accordance in the absence of a retirement plan including
disapproved RPBP
Requisites for the exemption:
1. The retiring employee is at least 60 years old
2. He must have served the employer for at least 5 years
 Separation or Termination benefits
Requisites for the exemption:
1. Must be due to job-threatening sickness, deaths, or other physical disability; and
2. The same must be due to any cause beyond the control of the employee or official
such as redundancy, retrenchment, business closure, employee lay-off (separation
must not be of employee’s own making)
 SSS benefits, retirement gratuities, and other similar benefits from foreign government agencies
and other private or public institutions

Example: John was an OFW employed in USA. John retired and returned permanently to settle
in the Philippines. He is paid $2,000 monthly pension and $800 monthly benefit from the US
Social Security benefit.
 both the pension and the social security benefits are exempt (these benefits were
earned abroad when the taxpayer was a non-resident. Following the situs rule, foreign
income of NRC is not taxable)
 United States Veterans Administration (USVA) administered benefits – benefits for the Filipino
veterans who fought under the American flag in WWII
 SSS benefits under RA 8282 (SSS Law) and GSIS benefits under RA 8291 including gratuity
received by government officials and employees
7. Other items
 income derived on investments in the Philippines in loans, stocks, bonds, or other domestic
securities, or from interest on deposits in banks in the Philippines by financing institutions
owned and operated by a foreign government (doctrine of international comity)
 income derived by the government and its political subdivisions from any public utility or
exercise of essential government function
public service function – exempt
proprietary or commercial in nature – taxable (GOCCs are generally taxable as regular
corporations
 prizes and wards made primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievements – without any action on his part to enter the contest, or
not require to render substantial future services as a condition to receive the prize or award
Exempt prizes: Nobel Prize Award, Gawad ng Sining Award, CNN Hero of the Year
 prizes and wards in sports competition granted to athletes in local or international
competitions and tournaments, whether held in the Philippines or abroad, and sanctioned by
their national sports associations.
 contributions for GSIS, SSS, Philhealth, Pag-ibig and Union dues of individuals – employee’s
share
 contributions to Personal Equity Retirement Account (PERA) including investment income
earned and or distributions – contributor’s voluntary retirement account
  13th month pay and other benefits received by officials and employees of public or private
entities not exceeding P90,000
 gains from sale of bonds, debentures, or other certificate of indebtedness with a maturity of
more than 5 years
 gains realized from redemption of shares in a mutual fund company by the investor
 income derived from the sale of gold pursuant to RA 7076 or the People’s Small-Scale Mining
Act
exempt
exempt
Registered SSMs Registered Gold Traders BSP
exempt (buyers) Black market
taxable

taxable
B. Inclusions from Gross Income
 is a catch-all for all income derived from whatever sources that are
(a) not subject to final tax, capital gains tax, and special tax regimes; and
(b) not excluded or exempted by law, treaty, or contract from taxation

These items are subject to regular tax including but is not limited to:
1. Compensation paid for services in whatever form
2. Gross income from the conduct of business, trade, or exercise of profession
Sales/Revenues/Receipts/Fees xxx
Less: Cost of Sales xxx
Gross Income from Operations xxx
These business income are not included in gross income subject to regular income tax:
 Barangay Micro-Business Enterprise
 Enterprises enjoying tax holiday incentives under CREATE law
 Enterprises subject to special tax rates:
1. Philippine Economic Zone Authority registered enterprises – subject to 5% gross income tax
2. Tourism Infrastructure and Enterprise Zone Authority registered enterprises – subject to 5%
gross income tax
3. Self-employed individuals who opted to be taxes under the 8% income tax
3. Gains derived from dealings in properties – capital assets other than domestic stocks and real properties
4. Interests income – other than passive interest income subject to final tax
Examples: interest income from lending activities, from corporate bonds and promissory notes and from
bank deposits earned abroad
5. Rents – arises from leasing properties of any kind
6. Royalties – active royalty income earned within and outside the Philippines
7. Dividends – cash, property and script dividends declared by foreign corporations
8. Annuities – excess annuity payments received by the recipient over premium paid
9. Prizes and winnings-

Prizes: Within Abroad

P10,000 and below RIT RIT
more than P10,000 FIT RIT

Winnings:
PCSO, exceeding P10,000 FIT N/A
PCSO, not exceeding P10,000 exempt N/A
Winnings from other sources FIT RIT

10. Pensions – pensions and retirement benefits that fail to meet the exclusion criteria
11. Partner’s distributive share from the net income of a GPP, exempt joint ventures and exempt co-ownership
– the partners are the ones subject to regular tax on their share in the net income of the GPP (GPPs are
exempt from income tax as they are viewed as a pass- through entities)
 12. Income distributions from taxable estates of trust – received by an heir or beneficiary provided that such
income must not have been subjected to final tax or capital gains tax
13. Farming income – farming operations can be classified as:
 Raise and sell operation – the proceeds on the sales of livestock or farm products is part of gross
income
 Purchase and sell operation – the gross profit (sales less COGS) is included in the gross income
14. Recoveries of past deductions – subsequent recovery of past deductions from gross income by the taxpayer
Examples:
a) recovery of previously claimed bad debt expense
b) refund of local tax expense

A taxpayer incurred P60,000 bad debt expense in 2019 out of which P35,000 was recovered in 2021

Net income before bad debt expense 100,000 80,000 120,000

Bad debt expense (60,000) - -
Bad debt recovery 35,000
Net income 40,000 80,000 155,000

15. Reimbursement of expenses

16. Cancellation of indebtedness –
a) Inconsideration of service or goods – treated as income
b) As an act of gratuity – treated as a gift, not an income
c) As capital transaction such as forfeiting the right to receive dividends in exchange of the debt –
treated as dividend income
C. Compensation income
employee-
employer income tax
relationship
SERVICE
contract for
business and
provision of
income tax
service
Types of Employees
A. As to Function
1. Managerial employees – those who are given powers or prerogatives
2. Supervisory employees – recommend managerial actions
3. Rank and file employees – neither managerial nor supervisory functions
B. As to Taxability
1. Minimum wage earners – receives minimum wage and are exempt from income tax on compensation
2. Regular employees – subject to the regular progressive income tax

Gross Compensation Income xx [includes all remunerations received under employee-employer relationship]
Less: Mandatory deductions xx [contributions to GSIS, SSS, Philhealth, HDMF and union dues]
Exempt benefits* xx
Taxable Compensation Income xx

a. Regular compensation income – fixed remunerations such as basic salary, fixed allowances (COLA)
b. Supplementary compensation – performance based remunerations (holiday day, overtime pay,
hazard pay, night shit differential, commissions)
c. 13th month pay and other benefits Christmas bonus, cash gifts other than Christmas bonus,
additional compensation allowance for government personnel, 14th-15th month pay, and other fringe
benefits of rank and file employees

*Exempt benefits:
1. De minimis benefits
2. 13th month pay and other benefits not exceeding P90,000
3. Certain benefits of minimum wage earners
 4. Benefits necessary to the trade, business, or conduct of profession of the employer (necessity of the
employer rule)
Example: transportation allowance, representation or entertainment expenses incurred in the
performance of their official duties
5. Benefits for the convenience or advantage of the employer (convenience of the employer rule)
Example: mobile phone, travel allowance, housing privilege, car incentives
6. Benefits excluded and/or exempted under NIRC and special laws

DE MINIMIS BENEFITS
1. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year
2. Monetized unused vacation and sick leave credits paid to government officials and employees

PRIVATE GOVERNMENT
EMPLOYEE EMPLOYEE
Vacation Leave Up to 10 days All are exempt
Sick Leave taxable All are exempt

3. Medical cash allowance to dependents of employees not exceeding P1,500 per employee per
semester, or P250 per month
4. Rice subsidy not exceeding P2,000 or 1 sack of 50-kilo rice per month amounting to not more than
P2,000
5. Uniform and clothing allowance not exceeding P6,000 per annum
6. Actual medical assistance not exceeding P10,000 per annum
7. Laundry allowance not exceeding P300 per month
8. Employee achievement award which must be in the form of tangible property other than cash or gift
certificates, with annual monetary value not exceeding P10,000
9. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee
per annum
10. Daily meal allowance for overtime work and night or graveyard shift not exceeding 25% of the basic
minimum wage on a per region basis
11. Combined benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentives schemes which do not exceed P10,000 per employee per taxable year. If the
combined amount exceeds P10,000, the entire amount is taxable as other benefits.

Excess de minimis benefits are taxable

Other benefits of relatively small value that are not included in the list of de minimis benefits are taxable

rank and file: part of 13th month pay and other benefits
managerial and supervisory: fringe benefits

BENEFITS

De Minimis
13th month pay
Taxable Fringe Benefits
and Other
Benefits (regardless of
Benefits
rank)

up to P90,000
Managerial or In excess of the In excess of
Rank and File Within the limit (regardless of
Supervisory limit P90,000
rank)

Subject to income Subject to Fringe Managerial Or

Exempt Rank and File
tax Benefit Tax Supervisory
 The Withholding Tax on Compensation
 it is a method of collecting the income tax at source upon receipt of the income. It applies to all
employed individuals whether citizens or aliens, and the employer is constituted as the withholding agent

Filing and Remittance –

 Employers shall file the BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld on
Compensation) on or before the 10th day of the following month the taxes are withhold. For the month
of December, deadline is on or before January 15 of the succeeding year
 Employers are also required to file BIR Form 1604-CF (Annual Information Return of Income Taxes
Withheld on Compensation and Final Withholding Taxes) on or before January 31 of the following
calendar year.
 Employers shall furnish each employee-taxpayer a copy of BIR Form 2316 (Certificate of Compensation
Payment or Income Tax Withheld) on or before January 31 of the succeeding year

Substituted Filing of Tax Return – the employer files the income tax return of the employee if:
a. The employee is purely earns compensation income
b. The employee has single employer in a calendar period
c. The amount of tax is correctly withheld by the employer

Integrated Illustration:
A private employee derived the following remunerations and benefits in 2021:

Basic compensations, net of P32,000 SSS, PHIC, HDMF,

and union dues and P35,000 withholding tax P533,000 [regular income]
Overtime pay 21,000 [supplemental income]
Vacation expenses of the employee paid by employer 24,000 [13th month and other benefits]
Cost of Living Allowances 12,000 [regular income]
Pre-computed daily transport allowance 16,000 [exempt income – other benefits]
Rice subsidy (12 sacks, P2,600 each) 31,200 [di minimis benefits, part of 13th month pay and other benefits]
13th month pay 50,000 [13th month and other benefits]
Monetized unused leave credit [10VL, 8SL] 18,000 [di minimis benefits, part of 13th month pay and other benefits]
Uniform allowance 9,000 [di minimis benefits, part of 13th month pay and other benefits]
Total Compensation Income 714,200

If the employee is a rank and file:

Regular income [533,000+32k+35k+12k] 612,000
Supplemental income 21,000
13th month pay and other benefits 148,200
Gross Compensation Income [714,200 +32k +35k] 781,200
Less: Mandatory deductions 32,000
*De minimis benefits [24k+10K+6k] 40,000
**13th month pay and other benefits up to 90k 90,000
Exempt benefits [necessary of employer rule] 16,000 178,000
Taxable Compensation Income 603,200

Income Tax due (see tax table 2018-2022] 80,800

Less: Creditable Withholding Tax 35,000
Income Tax Payable 45,800

*De minimis benefits Actual Limit Excess

Rice subsidy 31,200 24,000 7,200
Monetized leave credit
VL 10,000 10,000 0
SL 8,000 8,000
Uniform allowance 9,000 6,000 3,000
TOTAL 58,200 40,000 18,200  added to 13th month pay and other benefits
 **13th month pay and other benefits
Vacation expenses of the employee paid by employer 24,000
13th month pay 50,000
Excess de minimis benefits 18,200
Total 92,200
Allowable deduction 90,000
Taxable de minimis benefits 2,200

If the employee is a manager or supervisor:

Gross Compensation income 781,200
Less: Fringe benefit tax subject to final tax [18,200 + 24k] 42,200
Taxable Compensation Income 739,000
Less: Mandatory deductions 32,000
**13th month pay and other benefits up to 90k 90,000
Exempt benefits [necessary of employer rule] 16,000 138,000
Net Taxable Compensation Income 601,000

Income Tax due (see tax table 2018-2022] 80,250

Less: Creditable Withholding Tax 35,000
Income Tax Payable 45,250

*Di minimis benefits Actual Limit Excess

Rice subsidy 31,200 24,000 7,200
Monetized leave credit
VL 10,000 10,000 0
SL 8,000 8,000
Uniform allowance 9,000 6,000 3,000
TOTAL 58,200 40,000 18,200  fringe benefit

**13th month pay and other benefits

13th month pay 50,000
De minimis benefits 40,000
Total 90,000

MINIMUM WAGE EARNERS

 they are exempt from income tax on the following:
1. Basic minimum wage
2. Other benefits (HHON) – holiday pay, hazard pay, overtime pay, night shift differential
 these shall be presented as exempt benefits under non-taxable compensation income and shall not be subject
to withholding tax

C. Fringe Benefits
 these are all other benefits or incentives of employees other than the basic pay. It may be in the form of goods,
services, or other benefits furnished by the employer to the employees.
Examples:
a) housing benefits
b) vehicles of any kind
c) household personnel (maid, driver, or others)
d) expense for foreign travel
e) holiday and vacation expenses
f) educational assistance to employee or his dependents
g) life or health insurance and other non-life insurance premiums

 these benefits are excluded from compensation income but is subjected to fringe benefit tax
Characteristics of Fringe Benefit Tax
1. Final tax – withheld by the employer at source
2. Imposed upon fringe benefits of managerial or supervisory employees – it applies to the realized benefit of the
managerial or supervisory employee even if the employer is a sole proprietor, corporation, government, taxable or
exempt
3. Paid by the employer – to be remitted by the employer to the government
4. Grossed-up tax – the monetary value is grossed up by the complement percentage of the applicable fringe
benefit tax rate before the fringe benefit tax rate is applied
5. Due quarterly – due for remittance quarterly based on accounting period selected by the employer

Tax Treatments of Fringe Benefits

 Fringe benefits that are fixed every payroll – regular compensation (fixed transpo allowance)
 Fringe benefits that are variable and performance bases – supplemental compensation (commission)
 Fringe benefits in the forms of incentives – 13th month pay and other benefits
 Fringe benefits furnished for the employer’s convenience or necessity – exempt from income tax

D. Dealings in Properties
 involves the sale, exchanges, and other disposition of properties such as ordinary assets and capital assets other
than sale of domestic stocks and real properties

Selling price xx (sum of money received, or FV of non-cash properties received)

Less: Tax basis or adjusted basis of the assets disposed xx (cost, carrying amount, or depreciated cost of the asset)
Gain or loss xx

Tax treatments:
ORDINARY GAINS – separate item of gross income – taxable in full
ORNINARY LOSSES – are item of deductions from gross income – deductible in full

CAPITAL GAINS – item of gross income – taxable net of capital gain

CAPITAL LOSSES – are deductible only up to the extent of capital gains
A net capital gain is an item of gross income. A net capital loss is not an item of deduction against
gross income.

For individual taxpayers – holding period applies

a. not more than one year (short-term holding period) – 100% of the capital gain or loss is
recognized
b. more than one year (long-term holding period) – 50% of the capital gain or loss is recognized

For corporate taxpayers – regardless of the holding period, 100% of the capital gains or capital loss is
recognized

Effects of Situs:
 If the taxpayer is taxable on world income, the rules of dealings in properties applies to all properties
regardless of location.
 If the taxpayer is taxable only on the Philippine income, the rules of dealings in properties apply only to
properties located in the Philippines.
 Integrated Illustration No. 2
Rafael, widowed with 2 dependent children has the following income for the year ended December 31, 2021:
Salary, Philippines, net of deductions 550,000
Salary, USA 500,000
Rental income, net of 5% withholding tax 95,000
Domestic sales 1,000,000
Cost of sales, PH 350,000
Gross business income, USA 400,000
Business expenses, PH 800,000
Business expenses, USA 150,000
Payroll deduction, PH
Creditable withholding tax 100,000
SSS/PHIC/HDMF/Union dues 40,000
Interest income from bank deposits – local, gross of FWT 100,000
Proceeds from life insurance of the deceased wife of Rafael 500,000
Requirements:
1. How much is the total amount to be included in the gross income if Rafael is a (a) resident citizen and (b)
non-resident citizen?
2. How much is the total income not subject to tax?
3. How much is the total income not subject to regular income tax?
4. How much is the net taxable income if Rafael is a (a) resident citizen and (b) non-resident citizen?
5. How much is the regular income tax due if Rafael is (a) resident citizen, and (b) non-resident citizen?
6. How much is the regular income tax payable if Rafael is a (a) resident citizen, and (b) non-resident citizen?
PH USA World
Compensation income, gross 690,000 500,000 1,190,000
Rental income, gross 100,000 100,000
Sales 1,000,000 400,000 1,400,000
Cost of Sales - 350,000 - 350,000
Gross income - RC 1,440,000 900,000 2,340,000 (1a)
Gross income - NRC 1,440,000 (1b)
Less:
Less: Mandatory deductions 40,000 40,000
Less: Business expenses 800,000 150,000 950,000
Net Taxable Income - RC 600,000 750,000 1,350,000 (4a)
Net Taxable Income - NRC 600,000 (4b)

RC NRC
Net Taxable Income 1,350,000 600,000
Income tax Due 295,000 80,000 (5)
Less: Withholding Tax 105,000 105,000
Income Tax Payable (Tax Credit) 190,000 - 25,000 (6)

Tax Due:
*130,000 + [30% of 550,000] 295,000
*30,000 + [25% of 200,000] 80,000
Tax Credits:
Rental [100k - 95k] 5,000
Compensation 100,000
TOTAL 105,000

Exempt item of gross income:

Mandatory deductions 40,000
Life insurance proceeds 500,000
Total exempt income 540,000 (2)
Interest income from bank deposits 100,000
Total income not subject to RIT 640,000 (3)
Integrated Illustration No. 3
Albus, a resident citizen had the following for the taxable year ended December 31, 2022

Sales, PH 1,000,000
Cost of sales 250,000
Illegal gambling gains, PH 650,000
Losses from illegal gambling, PH (50,000)
Prizes, PH 8,000
Lotto winnings, USA in pesos 500,000
Prizes, USA 200,000
Dividend income from domestic corporation 50,000
Dividend income from resident foreign corporation 100,000
(75% of its income came from the Philippines)
Royalties, Japan 200,000
Royalties, PH 70,000
Business expenses, PH 500,000

Requirements:
1. How much is the total amount to be included in the gross income subject to regular income tax?
2. How much is the total income not subject to tax?
3. How much is the total income subject to final income tax?
4. How much is the net taxable income of Albus subject to regular income tax?
5. Assume, Albus is a non-resident citizen, answer Q1-Q4.
6. How much would be the tax due of Albus if he is a resident citizen and non-resident citizen respectively?
PH Abroad World
Sales 1,000,000 1,000,000
Cost of Sales - 250,000 - 250,000
Gross Profit 750,000 - 750,000
Other Income:
Illegal gains, net 600,000 600,000
Prizes 8,000 200,000 208,000
Lotto winnings 500,000 500,000
Lotto winnings -
Dividends from RFC 75,000 25,000 100,000
Royalties 200,000 200,000
Gross income - RC 1,433,000 925,000 2,358,000 (1a)
Gross income - NRC 1,433,000 (1b)
Less:
Less: Business expenses 500,000 500,000
Net Taxable Income - RC 933,000 925,000 1,858,000 (4a)
Net Taxable Income - NRC 933,000 (4b)

RC NRC
Net Taxable Income 1,858,000 933,000
Income tax Due 447,400 169,900 (5)
Less: Withholding Tax - -
Income Tax Payable (Tax Credit) 447,400 169,900 (6)

Tax Due:
*130,000 + [30% of 1,058,000] 447,400
*130,000 + [30% of 133,000] 169,900
Exempt item of gross income: - (2)
Income subject to FIT:
Dividend income from domestic corp 50,000
Royalties, PH 70,000
120,000 (3)
Deductions from Gross Income
A. Principles of Deductions
1) Expenses must be legitimate, ordinary, actual and necessary (LOAN)
Characteristics of a legitimate business expense:
a) It is incurred in and for the current taxable period
b) It is not a capital expenditure
c) It pertains to the business or profession of the taxpayer
d) It is not contrary to law, public policy or morals
e) It is adequately substantiated with receipts or other documents

 It is ordinary when it is normal in relation to the business operation

 It is actual if it is paid or resulted to an incurrence of an obligation to the taxpayer
 It is necessary if reasonable and essential to the development, management, operation, or conduct of
trade or business
2) Matching Principle – only expenses of generating income subject to regular tax is deductible
3) Related Party Rule
 gains between related party transactions – taxable
 losses between related party transactions – not deductible
 relevant in the claim of losses, bad debts, and interest expenses – not deductible
4) Withholding Rule – no withholding, no deduction

Classification of Deductions
1) Cost of Sales or Cost of Services – deducted outright against sales, revenues, receipts or fees of
individual taxpayers
2) Regular allowable itemized deductions – pertains to all necessary and ordinary expenses paid or
incurred during the taxable year
3) Special allowable itemized deductions – additional deductions as provided under NIRC or special laws:
actual compliance expense and deduction incentives
4) Net Operating Loss Carry Over (NOLCO) – pertains to the excess of expense deduction over gross
income during a taxable year which is allowed by the law to be deducted against the net income of the
following three years

Modes of Deductions
1) Itemized Deductions – taxpayers list every item of business expense
2) Optional Standard Deductions
 Individual – 40% of Gross Sales/Receipts
 Corporation – 40% of Gross Income after COGS

B. Regular Itemized Deduction Limits

1) Interest Expense – shall be reduced by an amount equal to 20% or 33% of the interest income subject to
final tax
Arbitrage Limit
January 1, 2009 33%
January 1, 2021 20%

 applies to individual taxpayers regardless of the level of income

 does not apply to MSME domestic corporation qualified to the 20% CIT

2) Taxes
 National taxes (PDIVES) – not deductible except DST, FBT and OPT
 Local taxes – deductible except sales tax and special assessment
 Foreign income tax – it can be deductible if not claimed as tax credit
 VAT – not deductible
 Surcharges or penalties on delinquent taxes – not deductible
3) Losses – actually sustained during the taxable year and not compensated by insurance or other indemnity,
to be reported to the BIR within 45 days
 ordinary loss – fully deductible
 capital loss – only to the extent of capital gains

4) Bad Debts – actually ascertained to be worthless and were charged off within the taxable year
5) Depreciations and Depletions – reasonable allowance for the wear and tear of property used in the trade
or business
6) Charitable and other contributions – contributions or gifts made to the government or non-government
organizations
 Fully deductible donations – donations to priority activities of government, donations to foreign
government under treaties, and donations to accredited domestic NGO
 Partially deductible donations – donations to non-priority government activities, and donations to non-
accredited NGOs
 Donations amounting to more than P50,000 – notify the BIR (Notice of Donation) and secure certificate
of donation

Limits of deductions:
 individual – 10% of net income before contributions
 corporation – 5% of net income before contributions

Deductible: Actual contribution or actual contribution subject to limits, whichever is LOWER

7) Contributions to pension and trusts
a) Defined benefit plan – the employer guarantees the amount of benefits to the employees
 current service cost – pension expense for the services rendered by the employee during the
year. Fully deductible expense.
 past service cost – pension expense for the services rendered by employees before the
establishment of the pension fund. This is amortized over a period of 10 years starting from
the year in which the contribution was made.
b) Defined contribution plan – the employer is merely obligated to make certain amounts of contributions
to the pension fund on a regular basis
 amount of contributions – deductible entirely
8) Research and development costs
 R&D costs related to capital accounts such as property used in business – capitalized as part of the cost
of the property and deducted through depreciation expense
 R&D costs not related to capital accounts are treated as
 Outright expense
 Deferred expense amortized over a period not less than 60 months

9) Other ordinary and necessary trade, business, or professional expenses (other expenses in general) – as
long as these are substantiated with official receipts or other pertinent records
 Entertainment, Amusement, and Recreation Expense
Allowable deductions:
Sales of goods or properties – 0.5% of net sales [Gross sales less Sales Returns, Allowances and
Discounts] vs. actual EAR, whichever is lower
Sales of services – 1% of net revenues [Gross revenue less discounts] vs. actual EAR, whichever is
lower
Both sales of goods and services:
Sales of goods:
Net Sales
x Actual EAR
Total Net Sales and Net Revenue

Sales of services:
Net Revenue
x Actual EAR
Total Net Sales and Net Revenue
C. Special Allowable Deductions and Incentives
 these are deductions which may or may not partake the nature of an expense, but are allowed by the NIRC
of by special laws as deductions.
Special Allowable Deductions – with cash outflows
a) Income distribution from a taxable estate or trust
b) transfer of reserve fund and payments to policies and annuity contracts of insurance companies
c) Dividend distribution of a Real Estate Investment Trust under RA 9856
d) Transfer of reserve funds of taxable cooperatives
e) Discounts to senior citizens under RA 9257
f) Discounts to persons with disability under RA 9442
g) Additional expenses on apprenticeship agreement

Deductions incentives – without cash outflows

a) Additional claimable compensation expense for SC employees – 15% of the total amount of salaries
and wages paid to the SC
b) Additional claimable compensation expense for PWD employees – 25% of the total amount of salaries
and wages paid to the SC
c) Cost of facilities improvement for disabled persons – 50% of the direct costs of the improvements of
modifications
d) Additional training expense under the jewelry industry development act – 50% of the training
expenses wherein the training scheme is approved by TESDA
e) Additional contribution expense for the “Adopt-A-School Program” – 50% of the contributions made
f) Additional deductions on complying with the rooming-in and breast feeding practices – 100% of the
actual amount incurred
g) Free legal assistance providing pro-bono legal services – unbilled amount or 10% of gross income
derived from the actual performance of the legal profession, whichever is lower
h) Productivity Incentive bonus expense – 50% of the total productivity bonus given to employees

D. NOLCO
Net Operating Loss – excess of allowable deductions over the gross income from business or exercise of
profession during a taxable year

Net Operating Loss Carry Over – amount of net operating loss that is allowed by law to be carried over as a
deduction against available net income in the following three years. The CREATE LAW allowed NOLCO incurred
during taxable years 2020 and 2021 to be carried over a period of 5 years.
It is intended to allow the taxpayer to recoup his losses before taxation go full swing

Rules in Carry-over of NOLCO

1. NOLCO is claimable in a FIFO fashion
2. NOLCO can be claimed only up to the extent of the business net income in the next three years. Prior year
NOLCO cannot be deducted against a subsequent year net operating loss
3. Any NOLCO which remains unused at the end of the three-year prescriptive period will expire.

E. Optional Standard Deduction

 this is in lieu of the itemized deductions including NOLCO. The allowable deduction of the taxpayer is simply
presumed as a percentage of gross sales or receipts
 the option to claim OSD must be signified in the first quarter of income tax return and shall be irrevocable
during the taxable year
 taxpayers who opted to claim OSD are not required to submit their FS
 Individual – 40% of Gross Sales/Receipts (Net Sales per accounting view)

Sales/Revenues/Receipts/Fees xx
Less: Sales Returns, allowances and discounts xx
Net sales/revenues/receipts/Fees xx
Multiply by: ODS percentage 40%
Optional Standard Deduction xx
  Corporation – 40% of Gross Income after COGS

Net Sales/Revenues/Receipts/Fees xx
Less: Cost of sales or services xx
Gross income from operations xx
Add: Other taxable income not subject to final tax xx
Total Gross Income xx
Multiply by: ODS percentage 40%
Optional Standard Deduction xx

 Not allowed to use OSD:

NRA-ETB special rate taxpayers
Exempt taxpayers mixed rate

Comprehensive Problem 1:
The following information relates to Grindel Corporation, a domestic corporation, operating for more than 5 years,
with assets amounting to P150M excluding land. Applicable corporate income tax rate is 25%. The corporation is
also subject to Minimum Corporate Income Tax (MCIT) equivalent to 1% of gross income.
2022 2023
Gross Sales 3,300,000 4,340,000
Cost of Sales 2,400,000 1,070,000
Dividends from FC 140,000 -
Dividends from DC 50,000 10,000
Interest income on notes receivables 28,000 16,400
Interest income from bank deposits - local 100,000 60,000
Capital gain - 13,000
Capital loss 20,000 -
Interest expense 150,000 180,000
Tax expense 63,000 106,079
Bad debts written off 34,680 -
Bad debts recovery from 2021 - 22,000
Pension expense 45,000 68,000
Discounts to SC - 25% 155,000 150,000
Other special deductions under NIRC 17,500 23,500
Salary of PWD workers 75,000 95,000
Productivity incentives 120,000 130,500
Other business expenses 775,000 1,025,000

Taxes paid:
License tax 8,000 9,640
Documentary stamp tax 7,650 8,567
Capital gains tax 12,344 11,780
Special Assessment 15,000 33,570
Municipal tax 20,006 42,522

Pension expense:
Current service cost 30,000 50,000
Past service cost 15,000 18,000

Requirements:
1. Determine the deductible interest expense in 2022 and 2023.
2. Determine the deductible pension expense in 2022 and 2023.
3. Determine the deductible tax expense in 2022 and 2023.
 4. How much is the Regular deductions in 2022 and 2023?
5. How much is the Special deductions in 2022 and 2023?
6. How much is the net operating income (loss) in 2022?
7. How much is the net operating loss carry over (if any) in 2022?
8. How much is the income tax liability in 2022 and 2023?
9. If the corporation opts to use OSD for the year 2023, how much is the income tax liability?

2022 2023
Gross sales 3,300,000 4,340,000
Cost of sales - 2,400,000 - 1,070,000
Gross Profit 900,000 3,270,000
Other items of Gross Income
Dividends from FC 140,000
Interest income - notes receivable 28,000 16,400
Capital gain 13,000
Bad debts recovery 22,000
Total Gross Income 1,068,000 3,321,400
2022 2023
Less:
Interest expense 150,000 180,000
Regular Allowable Ordinary Deductions Final tax on interest income - 20,000 - 12,000
Interest expense 130,000 168,000 Allowable interest expense 130,000 168,000
Tax expense 35,656 60,729
Bad debts written-off 34,680 - License tax 8,000 9,640
Pension expense 31,500 53,300 Documentary stamp tax 7,650 8,567
Municipal tax 20,006 42,522
Salary of PWD workers 75,000 95,000
Allowable tax expense 35,656 60,729
Productivity incentives 120,000 130,500
Other deductions 775,000 1,025,000 Current service cost 30,000 50,000
Total RAID 1,201,836 1,532,529 Past service cost
Special Allowable Ordinary Deductions 2022 [15,000/10 years] 1,500 1,500
Discounts to SC 124,000 120,000 2023 [18,000/10 years] 1,800
Additional salary expense for PWD workers 18,750 23,750 Allowable pension expense 31,500 53,300
Additional productivity incentives 60,000 65,250
Other special deductions 17,500 23,500
Total SAID 220,250 232,500
Total Deductions 1,422,086 1,765,029
Net taxable income (loss) - 2022 - 354,086 1,556,371
NOLCO 2022 - NOL before deduction incentives - 275,336
Net taxable income (loss) - 2023 1,281,035

Regular Corporate Income Tax - 25% - 320,259

Minimum Corporate Income Tax - 1% 10,680 33,214

If the corporation opted for OSD

Gross Income 1,068,000 3,321,400
Less: 40% OSD - 427,200 - 1,328,560
Net taxable income 640,800 1,992,840

Regular Corporate Income Tax - 25% 160,200 498,210

Minimum Corporate Income Tax - 1% 10,680 33,214
Final Exam Coverage:
Regular Income Tax: Computation
A. Individuals
B. Corporations
C. Special Corporations
D. Tax Filing and Reporting