GROSS INCOME

3. Those exempted by the Constitution, statues or

All wealth which flows into the taxpayer other than a treaty or contract with taxpayers
mere return of capital and includes gains Examples:
a. Receipt of non-profit institutions from their main
Why is income taxed? activities
Income is the best measure of a taxpayer's ability to b. Contributions to GSIS, SSS, PhilHealth, Pag-Ibig and
pay C. Retirement and separation benefits under certain
circumstances
Basic Definitions: D. Tax holiday for entities registered pursuant to the
Gross Income - refers to what is income for taxation Omnibus Investment Code
purposes e. Income of foreign government or corporations
Taxable Income - as the pertinent items of gross owned or controlled by them
income that are subject to tax after allowable
deductions Taxation of Gross Income under the NIRC:
Tax Base - the value of a certain goods, or property for A. Passive Income Tax
taxation purposes
1. Capital gains tax - few final tax is imposed on certain
Characteristics of Gross Income: gains on dealings on properties
1. Return on capital and resulted increased Examples include final tax on:
networth at the moment of its generation a. Final tax on net gain on sale of domestic stocks
2. Realized benefit by the taxpayer (realization directly to buyer (withheld at source)
means actual or constructive receipt of in cash) b. Final tax on gains on sale of real property
Example of constructive receipts of income: located in the Philippines classified as capital
1. credit to an account own by the taxpayer asset
2. declaration of a share of the profits of a general
professional partnership 2.Other withheld final tax - these are groups of passive
3. offsetting debt with right to received dividends income that are subject to withholding by the income
4. cancellation of debt in payment of service payor.
3. Not exempted by law, contract, treaty or the Examples include final tax on:
Constitution a. Interest on deposits with banks
b. Winnings
Which do not constitute gross income? c. Prizes
1. Receipts representing returns of capital d. Royalties
Examples: e. Dividends received from domestic corporation
a. Proceeds of life insurance policy (upon death of the
insured) B. Regular (Active) Income Tax - applies to all items of
b. Proceeds received by the insured (still living) gross income that are generated by the taxpayer in the
representing return of premium ordinary course of business or to those items of passive
income that are not covered by final taxes.
2.Unrealized income
Examples: Regular income tax is either:
a. Appreciation of value of properties 1.Progressive tax (0-32% schedular rates) - applicable
b. Unrealized gains on investments to individual and taxable trusts and estates
2.Final tax (35%) - applicable to corporations
Examples active income
1.Compensation income
2.Professional income
3.Business income
 CHARACTERISTICS OF GROSS INCOME

A. RETURN ON CAPITAL
WITH INFINITE VALUE - RETURN OF CAPITAL
Cannot be measured financially. Any consideration received for their loss or impairment is NOT TAXABLE.
1. LIFE
EXEMPTION:
 Return OF Capital; not taxable  Return ON Capital; Taxable

- Life can be compensated: Life insurance – all A. If policy is out league – (buhay pa at the end of
proceeds the term, so hindi nareceive proceeds)
- If the beneficiary is a family member or  may cash surrender value
employer – recovery of future loss. Money received > payment
- Blood money – A died in accident against B. B = Excess  Return ON Capital; taxable
paid the family.
B. Assignment - A insured (alive), paying policy.
Example: After 10 payments total of 50,000, A sell it to B
Employer can insure their employees for 60,000.
Employer has Scientist. The profitability of the
business is dependent upon the technical 10,000 Excess or Gain  Return ON Capital;
ability of the scientist. Kapag nawala scientist, taxable
delikado. So, you need to insure the scientist. If
may proceeds, not taxable. B continue to pay the insurance and paid
another 50,000. A died. B received 1M
proceeds.
Excess  Return ON Capital; taxable – because
there is no loss of life to the assignee, B.

C. Interest on life insurance - A insured, paying

policy. After 10 payments total of 50,000. A
died. The insurance company cannot give the
proceeds yet and asked the family members to
pay the interest first and payment of proceeds
will be delayed.
Interest  Return ON Capital; taxable

2. HEALTH
1. Accident – A had an accident against B. A is asking B to pay for reimbursement of:

Hospital bills 300,000 -  Return OF Capital; not taxable  Recovery of loss capital
Atty’s Fee 100,000  Return OF Capital; not taxable  Recovery of loss capital**
Lost Salaries 800,000  Return ON Capital; taxable  Recovery of loss profit*
Pain & suffering 500,000  Return OF Capital; not taxable (Health)

*Recovery of Loss Profit – INCOME; TAXABLE

Proceeds of:
1. Crop or Livestock Insurance – piggery is insured or plants.

Example: A has 1-hectare eggplant plantation. He expects to harvest worth 20M. Because he is afraid na
magkatulo yung mga eggplant, A went to Philippine Crop Insurance Corporation and insured his plantation. One
morning, A saw his eggplant plantation have tulo. All crops are destroyed, so A files reimbursement on PCIC. PCIC
paid 20M.
As good as sold  Return ON Capital; taxable
2. Damages Under Patent (& copyright) Infringement Suit

Example: A invented a formulation for Burger Buns. A has a revenue of 1M weekly. B, the seller, saw how A do the
Burger Buns. Later on, B open her own Monay House. A had a decrease of 500,000 revenue weekly due to high
demand on B’s Monay House. A files to court.
Suffering for 2 months - 500,000 x 4 = 2M

As good as sold  Return ON Capital; taxable

3. Guarantee Income Payments

Example: A invited B to form a business about parlor. B resisted because he doesn’t have sufficient knowledge
about parlor. But A guarantees B that B’s profit will not be less than 500,000. They share capitalization ratio of
50:50. On the first month, the business had a net income of 800,00. They should divide it as 400,000 each but it is
not enough for the promise of A to B. A will make up for the 100,000 guaranties to B.

100,000 guarantee income payments  Return ON Capital; taxable

**Recovery of Loss Capital – NOT TAXABLE

3. REPUTATION
1. Breach of promise to marry -
Damages  Return OF Capital; not taxable

2. Alienation of affection – napunta sa iba yung pagmamahal nung asawa HAHAHA.

A is married to B. A caught B cheating with C. A can enforce it and ask B for damages.
Damages  Return OF Capital; not taxable

WITH FINITE VALUE – RETURN ON CAPITAL

 B. REALIZED BENEFIT
- Increased in Net Worth (A – L = NW)
- Needs to be “realized” based on the principle of Ability to Pay
REQUISITES:
1. Exchange – there is sale or barter (as good as realization of money)

Example:
1. Pig – cost 20,000
Nanganak 4 piglets – 3,000 each = 12,000
Total value of Biological Assets 32,000
 Not realized; not taxable, there is still no exchange

2. 4 Piglets were sold in exchange of carabao worth 18,000.

 Realized; there is an exchange.

2. Other parties – juridical persons, natural persons. ( sole proprietorship, branch)

Example:
- Mr. RB has Sole Prop 1 and Sole Prop 2 nagbentahan.
 Not realized; not taxable because both are own by Mr. RB. No other parties involved.

- Corporation – Home office sell goods  Branch

 Not realized; not taxable because HO and branch are not juridical persons – taxable to the same
corporation

- Parent company  subsidiary company; upstream sale; Parent company  subsidiary company;
downstream sale
 Realized because both are juridical, separate entity

 Net worth Realized

Donation  
Inheritance  
Gain on Sale   THIS IS THE ONLY TAXABLE
Holding gains (Inv Asset)  
Loans  

C. NOT EXEMPTED BY LAW, TREATY, CONSTITUTION AND CONTRACTS

A. IDENTIFICATION OF GROSS INCOME [REO – DRILL]

Check items of gross income and X if not

 1. Compensation for injuries sustained HEALTH; Recovery of Loss Capital; Not taxable
 2. Income from donated property Donated Prop is not taxable, but the income from that is taxable
 3. PCSO or Lotto winnings  Exchange
 4. Gain on sale of inheritance Inheritance is not taxable; the gain from it is taxable
 5. Increase in fair value of equity securities Not yet realized
 6. Moral damages HEALTH; Pain and sufferings; Not taxable
 7. Interest from moral damages Moral damages not taxable; the interest from it is taxable
 8. Income of the government GR: Government is not taxable
 9. Winnings from gambling  Exchange
 10. Cancelation of debt out of gratuity  Donation
 11. Benefits from SSS or GSIS Realized but exempted by law
 12. Income of non-profit institution from their properties NP is not taxable; their income from act & prop are
 13. Income of employee trust funds Exemption
 14. Income of foreign government GOCCs Exemption
 15. Accrued professional fees of a cash basis taxpayer Not yet realized
 16. Collection of service fees receivables by an accrual basis taxpayer Not yet realized
 17. Increase in Peso value of forex receivables by an accrual basis taxpayer Not yet converted
 18. Salaries of minimum wage earners Realized but exempted