BULLET NOTES ON GROSS INCOME

 Gross Income is a gain. It is a gain derived from:

o Capital; or
o Labor; or
o Capital and labor, combined or
o Sale or conversion of asset.

Examples:
 Interest received is income because it is gain derived from capital. Salary is income
because it is gain derived from labor. The amount received by a building contractor
is income because it is gain derived from his capital invested, or labor employed, or
both, on the contract.
 On a selling price of P150,000 received on an asset with a cost of P100,000, the
income is only the gain of P50,000. The P100,000 is a return of capital.

Gross Income
Gross income xx
Less: Deductions (xx)
Taxable Income xx

 Gross Compensation Income

o Gross compensation income is income arising from an employer-employee
relationship. Examples are salaries, bonuses and benefits.

Formula:
Regular salaries xx
Add: Overtime Pay xx
Total xx
Less: Exclusions
SSS contributions (xx)
Philhealth contributions (xx)
Pagibig contributions (xx)
Labor union dues (xx)
Taxable Gross compensation income xx

 Gross Profit from Sales

o Formula in Trading concern:
Sales xx
Less: Cost of sales (xx)
Inventory of goods to be sold and on hand, beginning of period xx
Add: Purchases xx
Goods available for sale during the period xx
Less: Inventory of goods to be sold and still on hand, end of
(xx)
period
Gross profit from sales (gross income) xx

 Formula in Manufacturing concern:

Sales xx
Less: Cost of goods sold (xx)
Gross Profit from sales (Gross income) xx

o Cost of goods manufactured

Goods newly put in process during the period (materials, labor,
xx
overhead)
Add: Inventory of work already in process, beginning of period xx
Total costs of goods in process during the period xx
Less: Inventory of work in process, end of the period (xx)
Cost of goods manufactured (finished) during the period xx
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

o Cost of goods sold

Inventory of finished goods, beginning of the period xx
Add: Cost of goods manufactured during the period xx
Goods available for sale during the period xx
Less: Inventory of finished goods, end of the period (xx)
Cost of goods sold xx

 Formula in Service concern:

Gross revenues or receipts xx
Less: Direct costs of the services (xx)
Gross income xx

Note: Direct costs of service are those related directly to rendering services, such
as salaries of personnel rendering the services and cost of materials and supplies
used.

o Interest Income
 Interest income, when not subject to final tax, is reported in the income
tax return. An example of this is interest on trade notes receivable.

o Dividend Income
 Dividend income may be in cash, property or stock. Cash on property
dividend, when not subject to final tax, is included in the income tax
return.
 The measure of income on a taxable property dividend is the fair market
value of the property received as dividend.
 As a general rule, a stock dividend is not taxable because it does
not result in a change in the proportionate interests of the
shareholders in the net assets of the corporation (i.e., when there
was only one class of stock issued and outstanding at the time of
the dividend).
 It is taxable if the payment results in a change in the
proportionate interests of the shareholders in the net assets of
the corporation (i.e., when there were two or more classes of
stock issued and outstanding at the time of the dividend.
 An optional stock dividend (stockholder may choose between
receiving cash or stock) is always taxable because the transaction
will be as if the stockholder to be paid in cash, then used the cash
to buy shares of stock.

Summary of Taxation on Dividends

Kind of Dividend Taxable? Measure of income
Cash dividend Yes Amount of money received
Property dividend Yes Fair market value of property received
Stock dividend No None (with exception)
Optional stock dividend Yes Fair market value of shares received

o Prizes and Awards

 Prizes and awards resulting from exerted efforts are taxable, unless
covered by the rules on exclusions from gross income.

o Income from bad debt recovery and tax refund

 As a general rule, there is income on bad debt recovery and tax refund
 This rule, however, is subject to qualification under the “tax benefit
rule”
 Bad debt recovery
o General rule: Recovery of accounts receivable previously
written off from the books as uncollectible, is taxable
income.
o Tax Benefit Rule: If in the year of write off for uncollectible
account there was a reduction of the taxable income, the
bad debt recovery will be taxable income.
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

 Tax Refund
o General rule: If the tax when paid was allowable as a
deduction from gross income, the refund will constitute
taxable income.
o Tax Benefit Rule: If in the year of tax payment there was a
reduction of a taxable income, the tax refund will be taxable
income.

o Cancellation of Debt
The cancellation or forgiveness of indebtedness may have any of three
possible consequences:
 It may amount to a payment of income. For example, an individual
performs services to a creditor, and in consideration thereof, the creditor
cancels the debt, income in that amount is realized by the debtor as
compensation for personal services. The law will consider the
cancellation as involving two transactions: (1) The creditor
compensated the debtor for the service rendered: (2) The debtor paid
his indebtedness out of the compensation he received.
 It may amount to a gift. If a creditor wishes merely to benefit the
debtor, and without any consideration for it, cancels, the debt, the
amount of the debt is a gift to the debtor, and need not be included in
the latter’s report of income.
 It may amount to a capital transaction. If a corporation to which a
stockholder is indebted forgives the debt, the transaction has the effect
of a payment of a dividend. The dividend may be subject to the regular
tax or to a final tax or exempt from tax.
o Damage Recovery
 Compensatory damages, as constituting returns of capital, are no
taxable. Thus, amounts received as moral damages for personal actions,
such as for alienation of affection, libel, slander and breach of promise to
marry, are not taxable.
 Recovered damages representing recoveries of lost profits, are taxable,
just as profits are taxable in the regular course of business.

Gross income from Long-term Contracts

 The term “long-term contracts” means building, installation or construction
contracts covering a period in excess of one year.
 A person whose gross income is derived in whole or in part from long-term contracts
will report income from such contracts upon the basis of percentage of completion.
 The formula under the percentage of completion method of recognizing income is, in
effect, recognizing only the portion earned during the year from the whole contract
price.

CAPITAL GAINS

General Formula:
 Selling Price – Cost of Property = Gain or Loss
o Where, Selling Price equals to the total consideration received or Fair Market
Value or the property in case disposed through exchange.
o Where, Cost is equal to:
 The acquisition cost if purchased or acquired on or after March 1,
1913.
 If acquired through inheritance, the cost is equal to the FMV on the
date of transfer.
 If acquired through donation or gift, the cost is the same as if it would
be in the hands of the donor or the last preceding owner by whom it
was not acquired by gift, except if such basis is greater than the FMV
at the time of gift, then for purposes of determining the loss, the basis
shall be such FMV.
 If acquired by less than full and adequate consideration, the basis is
the money or money’s worth paid.
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

Properties are classified into:

Ordinary Assets Capital Assets
Inventories, stocks in trade Other than those enumerated as ordinary assets.
held by dealers, other property or
in kind included in inventory of All properties not used in business.
the taxpayer (e.g. work in
process inventory and finished Investment whether or not connected with taxpayers
goods inventory, stocks). trade are capital assets (e.g. investment in equity
securities and investment in subsidiary).
Property held for sale to
customers in the ordinary course Residential house and lot.
of business (real estate
developer). Family car.

Properties used in business Receivables arising from sale of inventory.

which is subject to
depreciation or amortization
(factory, office building, patents).

Real property used in business

(land which the factory stands).

Subject to CGT Subject to Normal Tax

Other than those listed as
Sale of stocks not
Major Capital Assets (stocks
listed and not traded
not traded and listed, and real
in local stock
NOTE: properties subject to 6% CGT),
exchange (15% capital
all other capital gains are
gains).
Gains and losses derived from subject to normal tax (added in
sale or exchange of these the gross income).
properties are ordinary gains Sale of real capital
and losses which are included properties NOT used
Holding period is applicable
in determining ordinary income in business (6% CGT
only to individual taxpayers.
subject to tax. based on FMV or SP,
whichever is higher).
Gains/Losses shall be part of No holding period
gross income of such seller (as since the capital gains No holding period for
other income) subject to Normal tax is a final tax on corporations.
Tax. the date of sale.
Gains or losses are no Gains are reportable in full
longer reportable subject to holding period
since the sale was clause.
already subjected to Losses are reportable only to the
final CGT. extent of capital gains.
Examples of ordinary assets are:
 Inventory of goods for sale.
 Real estate for sale by a real estate dealer.
 Machinery (“tangible asset” subject to depreciation – [expiration of cost[).
 Patents (“intangible asset” subject to amortization – [expiration of cost[).

Examples of capital assets are:

 Stocks and bonds held as investment.
 Real property held as investment or residence.
 Car for personal use.
 Jewelry for personal use.

NOTE:
 All ordinary gains are added to the gross income and all ordinary losses are
deducted from the gross income, ordinary gains and/or capital gains.
 However, capital losses are only deducted from capital gains. no capital losses
exceeding capital gains may be deducted from ordinary gains nor gross income.
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

Selling price
 Means net selling price:
 (SP or FMV) – Expenses of sale or exchange

Holding Period
 Applicable only to individual Corporate taxpayers are not subject to holding period.
 Capital assets held for not exceeding 12 months, the taxable gain or deductible loss
is 50% of such gain or loss.
 Capital assets held for more than 12 months, capital gains taxable in full, however,
in case of capital loss deductible in full, but limited only to the extent of capital
gains.
 In case of net capital loss, such loss shall be carried over to the succeeding year.

Net Capital Loss Carry-Over (NCLCO)

 The net capital loss of one year may be carried over to the succeeding year, but not
exceeding the taxable income of the year when such net capital loss was sustained.
 Corporate taxpayers are not subject to holding period, thus cannot carry-over its
net capital loss.

INSTALLMENT REPORTING
 When a deferred payment is of sale of an ordinary asset, or of a capital asset which is
not subject to capital gain tax, the gross profit or gain from the sale may be reported
on the installment method, if such sale is by
o One who is a dealer in personal property regularly selling on installments; or
o One who makes a casual sale or disposition of personal property (other than
inventory) for a selling price in excess of one thousand pesos (P1,000.00) and
with initial payments not exceeding 25% of the selling price; or
o One who makes a sale of real property, with initial payments not exceeding
25% of the selling price.

With Mortgage With Mortgage

Without Mortgage
but no Excess over the cost in excess over the cost
IP = DP + Payments received IP = DP + Payments received IP = DP + Payments received
this year this year this year

plus Excess of Mortgage

over the Cost
IP ÷ SP = 25% or less IP ÷ SP = 25% or less IP ÷ SP = 25% or less
(allowed for Installment (allowed for Installment (allowed for Installment
Reporting) Reporting) Reporting)
GP ÷ CP x total collections = GP ÷ CP x total collections = GP ÷ CP x total collections =
Income Realized Income Realized Income Realized

IP = Initial payments, In this case, the contract In this case, the contract
payments of the buyer to price is equal to selling price is equal to the selling
seller, whatever form (cash, price minus mortgage price minus mortgage
properties, cancellation of assumed by the buyer. assumed by the buyer plus
indebtedness, etc.) which is excess of mortgage over
received during the year. It is cost.
not similar to down
payment.
DP= Downpayment

SP= Selling price

GP= Gross Profit

CP= Contract Price

In this case, the selling price
is the contract price.
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

Capital gain tax exemption: Requirements

 The capital asset sold was a principal residence.
 The taxpayer is a citizen of the Philippines or resident alien.
 The proceeds of the sale was invested in acquiring a new principal residence.
 Notice to make such utilization was given to the BIR within 30 days from the date
of sale.
 Utilization of the proceeds of the sale was made within eighteen (18) months from
the date of sale.
 A cash deposit is made with an accredited bank for an amount equal to the capital
gain tax, and answerable for the capital gain tax should the conditions for the
exemption be not satisfied.
 The exemption shall be availed of once only every ten years.
o If the entire proceeds of the sale is invested, the entire capital gain is
exempt. The cost basis of the new principal residence will be the basis of the
old residence.
o If only a portion of the proceeds of the sale is invested in the new residence,

Exemption on Capital gain tax:

Proceeds of the sale not invested
÷
Entire proceeds of the sale
x
What should have been the tax (CGT)

Basis of the new principal Residence:

Proceeds of the sale invested
÷
Entire proceeds of the sale
x
Basis of the old Residence

 If the amount invested is in excess of the proceeds of the sale, the capital gain is
exempt and the basis for the new principal residence is equal to the basis of the old
residence plus the additional investment ( New Residence = Old residence +
additional capital investment)

Capital Gain Tax on Shares of Stock:

 The taxpayer may be a resident citizen or a domestic corporation.
 The shares of stock are those of a domestic corporation not listed and traded in a
local stock exchange.
 The shares of stock were held as capital assets (investments)
 The sale resulted in a gain. If there is a loss, there is no tax.
 On each transaction:
o The tax is on the gain at 15%
 At the end of the year, there will be a consolidating computation:
o All capital gains (less) all the capital losses on the shares during the year
(equals) a net capital gain or a net capital loss for the year.
o On a net capital gain, the tax is 15%;
o From the computation in (b), deduct the aggregate capital gain taxes paid
within the year on a per transaction basis;
o There will be a capital gain tax refundable.
o The capital gain or loss is not included in the computation for the quarterly
and year-end income tax.
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

Capital Gain Tax on Shares of Stock and on Real Property:

Capital gain tax on shares of stock Capital gain tax on real property
On a per transaction basis On a per transaction basis:

 The tax applies if the sale resulted in a  The tax applies of the sale resulted in a
gain gain;

 The tax does not apply if the sale  The tax applies even if the sale resulted
resulted in a loss in a loss

 The tax on the capital gain at 15%  The tax is on the selling price, or the fair
market value at the time of sale,
whichever is higher, 6%.
Year-end procedure: Year-end procedure:

All the transactions of the year are None

consolidated.

 Net capital gain or net capital loss is

arrived at:

On the net capital gain of the year, the tax is

15%.

 The tax in (1)

Less: Capital gain taxes paid within the year

Capital gain tax still due (or refundable)

The capital gain will not be included in the The capital gain will not be included in the
quarterly and year end computation of quarterly and year-end computation of
income tax. income tax.
Filing of return and payment of tax: Filing of return and payment of tax:

On a per transaction with a gain: Within 30 The tax is withheld by the buyer.
days from the date of sale;

On the year-end consolidation: On or before

the 15th day of the fourth month following
the close of the taxable year.
Merger and Consolidation
 Merger or consolidation of a corporation involves an exchange of properties.
 Merger or consolidation includes not only the formal merger or consolidation, but
also the acquisition by a corporation of all or substantially all of the properties of
another corporation.

No Cash/Property is received:
Fair market value of share received xx
Less: Cost of shares surrendered or Cost of securities surrendered (xx)
Indicated gain or loss xx

 Gain (the gain is not recognized – not taxable), or Loss (the loss is not recognized –
not deductible).

Cash/Property is received:
Fair market value of share received xx
Add: Cash/property received xx
Total incoming value xx
Less: Cost of shares surrendered or Cost of securities surrendered
(xx)
(Total outgoing value)
Indicated gain or loss xx
TAXATION BULLET NOTES – GROSS INCOME Compiled by Vhin

 Gain, if any is recognized, but not exceeding the sum of money and fair market
value of the shares, securities received.
 Loss (the loss is not recognized - not deductible)

Cost of shares surrendered by the shareholder xx

Less: Cash and/or property received in the merger xx
Add: Gain recognize to the shareholder on the merger (xx)
Basis of the shares or securities received on the merger xx

Transfer to Controlled Corporation:

Basis of property transferred xx
Less: Cash and fair market value of property received (xx)
Balance xx
Add: Gain recognized xx
Basis of the shares received xx

The gain to recognize must not exceed the sum of money and fair market value of market of
the property received.

ACCOUNTING PERIODS AND METHODS

 Fiscal year versus calendar year

o Fiscal year – accounting period of 12 months ending on the last day of any
month other than December.
o Calendar year – accounting period of 12 months which starts on the 1st day of
January and ends on the last day of December.
 Taxable income shall be computed on the basis of calendar year if:
o Annual accounting period is other than fiscal year; or
o Taxpayer has no annual accounting period; or
o He does not keep books, or
o Taxpayer is an individual.
 Accounting Methods – a rule that is used to determine the year in which income are
reported and expenses are deducted for tax purposes.
o Cash basis (cash receipts and disbursements method) – taxpayer is required to
report income for the tax year in which payments are actually or
constructively received while expense are deducted in the year it is paid.
o Accrual method – income is reported in the year earned while expenses are
deducted in the year incurred.

o Constructive receipt of income – taxpayers are required to report taxable

income though no cash is actually received, it includes the following:
 Interest credited to a bank savings deposit.
 Matured bond interest coupons which have not been redeemed.
 Salary available to an employee who does not accept payment.
 Share of partners in the profits of general professional partnership.
o Percentage of completion method – Taxpayer reports a percentage of gross
income from a long-term contract based on the portion of work that has been
completed.
o Completed contract method – income from contract is reported in the taxable
year in which contract is completed. In long term contracts, percentage of
completion is used instead of completed contract method.
o Installment method – gross income is reported partially in each taxable year in
proportion to collections made in such period as it bears to the total contract
price.