Chapter 5

Items and Concept of Income

 Definition of Income
• Income means all wealth which flows into the
taxpayer other than a mere return of capital
• For tax purposes income is defined as the
amount of money coming to a person or
corporation within a specified time whether
as payment for services, interest
 Income Tax
• Referred to as tax on all yearly profits arising
from property, professions, trades or offices or
as a tax on a person’s income, emoluments
profits and the like
 Classification of Income Taxpayers
• Individual
• Corporation
• Estate
• Trust
 Gross income means all income from whatever source,
including (but not limited) to the following items

A. Compensation income for services in whatever

form paid, including but not limited to fees,
salaries, wages, commissions and similar items
B. Gross income derived from the conduct of trade
or business or the exercise of profession
C. Gains derived from dealings in property
D. Interest
E. Rents
F. Royalties
G. Dividends
H. Annuities
I. Prizes and winnings
J. Pensions
K . Partner’s distributive share from net income
of the general professional partnership
• Income from illegal activities such as extortion
illegal gambling, bribery, graft and corruption,
kidnapping, racketeering, drug peddling etc
fall within the ambit of “income from
whatever source derived” subject to income
tax
A.
Forms of Compensation Taxable Amount

Payment made in The full amount

cash received
Service paid for with The fair market value (FMV) of
the thing taken in payment
something other than
money (in kind)
Service rendered at a In the absence of evidence to
the contrary, the stipulated
stipulated price price shall be presumed to be
the fair market value (FMV)
 Examples of payments in kind
Payment in Kind Taxable Amount
• Compensation paid to an • Fair market value of the stock at
the time of service rendered by
employee of a corporation employee
in its stock
• Promissory note is not interest
• Promissory note and other bearing
evidence of indebtedness in – Year received –Fair discounted
payment of services, and value
– Year collected – Face value less fair
not merely as security for discounted value
such payment • Promissory note is interest
bearing
– year received –face value
– Year collected –maturity vlue less
face value
 Example
• 100 shares of stock as a compensation of
service rendered on October 31, 2018. The
market value of the shares of stock at the time
when service was rendered was P100 per
share, but 120 per share when the shares
were received on November 30, 2018.What
amount of the gross taxable compensation
income?
 Example
• In 2018, B received from his employer a promissory
note with a face value of P50,000 for services
rendered. The note will mature in 2019. However it
can be sold to a bank at a discount of 25%. The
employer paid the promissory note in 2019. How
much taxable income is to be declared by B on the
promissory note in 2018 and 2019?
• Using the same data above, except that 50% of the
face value of the note payable in 2019 while the
remaining 50% is payable in 2020. How much
income is taxable to B in 2018,2019 & 2020?
 Example
• In 2016, Alonte received from his employer a
promissory note with a face value of P50,000
for services rendered . The note will mature in
2017. However it can be sold to a financing
institution at a discount of 25%. The employer
paid the promissory note in 2017
• How much taxable income is to be declared by
Alonte on the promissory note in 2017?
 B. Gross income from conduct or Trade or
Business or the exercise of a profession
• Gross Sales/ Receipts ---------------------------xxx
Less: Sales Returns and allowances-xxx
Sales Discount --------------------xxx (xxx)
Net Sales/Receipts------------------------------ xxx
Less: Cost of Sales/ Service------------------- xxx
Gross income from Operation--------------- xxx
Add: Other Income----------------------------- xxx
Gross Income-------------------------------------xxx
 Example
• Professional Fee, accounting services------P1m
• Salaries of Accounting Staff------------------300k
• Salaries of Office Assistant-------------------120k
• Accounting Supplies----------------------------20k
• General Supplie----------------------------------10k

• Compute for the reportable gross income

 E. Rents
• Leasehold improvement is a source of
additional income to the lessor if it shall
become his upon the expiration of the lease
contract
 Recognition of Income from Leasehold Improvements

lessor may report as income, at the time when such buildings

LumpSum OR Outright Method or improvements are completed, the fair market value (FMV)
of such uildings or improvements subject to lease

Annual or Spread out method

Computation of Annual Income Cost of Leasehold Improvement---------------------xx
Less: Accu Dep------------------------------------------xx
Book Value end of lease-------------------------------xx

Annual Income
Book Value end of lease----------------------------------xx
remaining term of lease----------------------------------xx

Computation of income resulting

from premature termination of
lease Book Value upon termination---------------------------xx
Less:Amount already reported--------------------------xx
Income, year of termination-----------------------------xx
 Example
• Artemio leased a 216 square meter of idel land to Leizzie
College of Business (LCB), a proprietary educational institution
for a period of twenty (20) years effective January 1, 2016, at a
monthly rental of P5,000. The lease contract provides that
Leizzie College of Business (LCB) will erect a building thereon to
be used as classroom, which it did on the lot of Artemio. The
agreement provides also that the building shall become the
property of the lessor at the end of the lese. The building was
completed on June 30, 2018 at a cost of P1,800,0000. The
estimated life of the leasehold improvement is thirty (30) years
• If was further agreed that effective 2016 Leizzie college of
Business (LCB) will pay the real estate tax on the land assessed
at P3,000 annually. On January 2, 2016, LCB paid Artemio
P120,000 consisting of rental covering the two year period from
2016 to 2017
 Question
• The rent income to be reported by Artemio in 2016
• The rent income to be reported by Artemio in 2018
using outright method
• The rent income to be reported by Artemio in 2018
using spread out method
• The deductible expenses of Leizzie Business College in
2019
• The income to be reported by Artemio in 2019
• Suppose the lease contract was terminated on April 1,
2022 due to the fault of the lessee, the income to be
reported by Artemio under spread out method on
2022
 Example
• Bryant leased a land to Joe for a period of years
starting Janaury 1, 2016 at a monthly rental of
P2,000. Observing the provisions of the
contract, Joe constructed a building which shall
become the property of Bryant at the expiration
of the lease. The construction was completed
on December 30, 2016 at a cost of P1,000,000
with an estimated life of 20 years
• How much income is to be reported by Bryant
in 2016 under outright method
• How much income is to be reported by Bryant
in 2017 under spread out method
• Supposed on February 1, 2020 the building
was destroyed by fire, how much loss did
Bryant incur?
G. Dividend Income
 Example
• A domestic corporation received P500,000
cash dividend from foreign corporation the
earnings of which are 70% earned in the
Philippines. The taxable dividend income of
the domestic corporation is?
I. Income from whatever source
 Example
• Mr. X received a letter from Mr. Y, his brother
to withdraw $1,000 from the PNB. The teller
of PNB, however, issued $ 10,000 to Mr. X in
which the latter took the entire money and
spent the $ 9,000 immediately. Assuming that
the exchange rate is P50 per $1, how much is
the reportable income received by error of Mr.
X?
• F received the following amount in relation to damage
recoveries
– Loss of Property------------------------P500,000
– Unfair Competition----------------------400,000
– Physical Injuries--------------------------300,000
– Loss earnings------------------------------100,000
– Moral damages for breach of contract---150,000
– Exemplary damages for breach of contact----50,000
– Hospital expenses---------------------------50,000
– Interest on damages------------------------10,000
• C is indebted to D. Due to his inability to pay
the debt, he was asked to clean the piggeryof
the latter for three months. Thereafter, D gave
him P5,000 cash and condoned the debt
amounting to P10,000. How much income
should be declared by C?
The taxable amount on the recovery of
bad debt previously deducted is
2017 Case 1 Case 2 Case 3 Case 4

Net income before

write-off of bad debt 70,000.00 70,000.00 70,000.00 70,000.00
Less:Bad Debt
Written Off 40,000.00 60,000.00 550,000.00 85,000.00
Net Income after bad
debt 30,000.00 10,000.00 15,000.00 (15,000.00)

Amount recovered in
2018 40,000.00 20,000.00 40,000.00 85,000.00
• The taxes paid and tax refunds by Connie in
2017 and 2018, respectively, are itemized
below
2017 2018
Tax Payment Tax Refund
Philippine Income Tax 13,000.00 3,000.00
Special Assessment 20,000.00 6,000.00
Value-added tax 135,000.00 -
Donors's Tax 10,000.00 600.00
Amusement Tax 80,000.00 80,000.00
Local Business Tax 40,000.00 8,500.00
Stock Transaction Tax 15,000.00 -
• How much income should be declared by
Connie if her gross income before deduction
of taxes in 2017 is P90,000?
• For Tax purposes, how much income should
be declared by Connie on the Tax refund?