Chapter 9
Income Taxation – Regular Income Tax: Inclusions in Gross Income
_________________________________________________________________________________________________________________
I. ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX
Gross income includes, but is not limited to, the following items;
1. Compensations for services in whatever form paid
Pertains only to employee benefits subject to regular tax
Fringe benefits of managerial/supervisory employees are subject to final tax
2. Gross income from the conduct of trade, business or exercise of a profession
Includes income from any trade or business
Whether legal or illegal, registered or unregistered
Except:
a. Gross income from a BMBE
b. Gross income from enterprises enjoying tax holiday incentives under EO 226
c. Gross income of PEZA-registered enterprises (subject to 5% gross income tax)
d. Gross income of TIEZA-registered enterprises (subject to 5% gross income tax)
e. Income of individuals who opted for 8% income tax
3. Gains derived from dealings in properties
Gains in dealings in ordinary assets are subject to regular income tax
Gains in dealings in capital assets other than domestic stocks sold directly to buyer and real
properties are subject to regular income tax
Ordinary gains are included as items of gross income
Ordinary losses are items of deductions against gross income
4. Interest
Pertains to interest income other than passive interest income subject to final tax
A taxable interest income must have been actually paid
Examples;
a. Interest from lending activities
b. Interest income from bonds and promissory notes
c. Interest income from bank deposits abroad
Exemptions;
a. Imputed interest income (opportunity cost of money)
5. Rents
A passive income but not subject to final tax
Advance rentals generally form part of gross income
Leasehold improvements made by the lessee on the leased property are recognized by the lessor as
income
6. Royalties
Royalties earned from sources within the Philippines are generally subject to final tax
Active royalties and royalties earned from sources outside the Philippines are subject to regular
income tax
7. Dividends
Dividends declared by domestic corporations are subject to final tax
Dividends declared by foreign corporations are subject to regular income tax
8. Annuities
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 9
Income Taxation – Regular Income Tax: Inclusions in Gross Income
_________________________________________________________________________________________________________________
The excess of annuity payments received over premium paid is taxable income
E.g. the excess amount (over premium paid) received by the insured
9. Prizes and winnings
PCSO and lotto winnings are either subject to final tax or tax exempt
Prizes won from sources outside the Philippines are subject to regular tax
Prizes won from sources within the Philippines is subject to;
a. Regular income tax, if P10,000 or below
b. Final tax, if more than P10,000
10. Pensions
Pertains to pensions and retirement benefits that fail to meet the exclusion criteria
11. Partner’s distributive share from the net income of general professional partnership
II. GENERAL CRITERIA FOR ITEMS OF GROSS INCOME
1. Not subject to final tax, capital gains tax and special tax regime; and
2. Not excluded or exempted by law, treaty or contract from taxation
III. OTHER SOURCES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX
1. Income distributions from taxable estates or trusts
Any income distribution received by an heir or beneficiary from a taxable estate or trust shall be
included in his gross income subject to regular tax,
Provided, such income must not have been subjected to final tax or CGT
2. Recovery of past deductions
The recovery creates tax benefit to the taxpayer
Benefits the taxpayer through reduction of taxable income in the year of deduction
Recovery of previously claimed bad debt expense
Refund of local tax expense
Refund of foreign tax previously claimed as deduction
Interest expense which were subsequently condoned by the lender
Note: Tax refunds are not taxable
3. Reimbursement of expenses
Expenses already deducted from gross income but were later on reimbursed
4. Cancellation of indebtedness for a consideration
If in consideration of goods or services – treated as income
If as an act of gratuity – treated as gift, not as income
If as capital transaction such as forfeiting the right to receive dividends in exchange of the debt –
treated as dividend income
5. Farm income
IV. SPECIAL CONSIDERATIONS IN REPORTING GROSS INCOME
1. Accounting methods
2. Situs rules
3. Effect of value added tax
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 9
Income Taxation – Regular Income Tax: Inclusions in Gross Income
_________________________________________________________________________________________________________________
4. Creditable withholding tax
5. Power of the CIR to redistribute income and expenses
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA