TAX-801, 901, 902 (Sources of Income & Gross Income)

ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 48  October 2024 CPA Licensure Examination

TAX-801
TAXATION Prepared by: Asser S. Tamayo
For #TeamTax: TAMAYO  CAIGA  GARCIA  LIM  MANUEL TAGLE
SOURCES of INCOME
1. Classification of Income as to Sources
a. Income purely within
b. Income purely without
c. Income partly within and partly without
2. Determination of Income as to Sources

ITEMS OF INCOME TEST OF SOURCE OF INCOME
a. Interest Residence of the debtor
b. Dividends
1) From domestic corporation Income within
2) From foreign corporation Income within unless less than 50% of the gross income of
such foreign corporation for the 3-year preceding the
declaration of such dividends or for such part of such period as
the corporation has been in existence was derived from sources
within the Philippines as determined under the provision of this
Section, but only in an amount which bears the same ratio to
such dividends as the gross income of the corporation for such
period derived form sources within the Philippines bears to its
gross income from all sources. [Sec. 42(2)(b)], NIRC
c. Income from services Place of performance
d. Rent Location of property
e. Royalties Place of use of intangibles
f. Gain on sale of real property Location of property
g. Gain on sale of personal property
purchased in one country and sold in
another Place of sale
h. Gain on sale of domestic shares Income within
3. Deductions of Taxpayers Whose Taxable Income Is From Philippine Sources Only

Gross income within xxx
Less: Expenses, interest, losses and other deductions properly allocated to income within xxx
Ratable portion of unallocated expenses, interest, etc.
(Philippine Gross Income/Total gross income x Unallocated expenses) xxx xxx
Net income xxx
4. Exercise
A corporation has the following income and expenses for the current year:
Gross income, Philippines P1,600,000
Gross income, USA 400,000
Business expenses, Philippines 500,000
Business expenses, USA 200,000
Unallocated business expenses 150,000
Interest expense, USA 50,000
Interest expense, Philippines 100,000
Unallocated interest expense 80,000
Total assets excluding the land 50,000,000
Compute the tax due and payable assuming the above corporation:
a. Resident foreign corporation.
b. Nonresident foreign corporation.
c. Domestic corporation.
5. Income partly from sources within and partly from sources without
a. Examples a. Income from transportation and other services rendered partly within and partly
without the Philippines.
b. Income from the sale of personal property produced in whole or in part by the
taxpayer within and sold without the Philippines.
c. Income from sale of personal property produced, in whole or in part by the taxpayer
without and sold within the Philippines.
b. Computation of Taxable income x Value of property, within_________

income within when 2 Value of property, within and without xxx
independent factory Add:
or production price Taxable income x Gross sales, within_____
has not been 2 Gross sales, within and without xxx
established Income within xxx
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
SOURCES OF INCOME TAX-801
6. Exercises
a. A corporation manufactures goods in the Philippines, which are sold exclusively in foreign countries.
The following data are taken from the records of the corporation:
Gross sales, without P 5,000,000
Gross income from sales, without 3,000,000
Operating expenses 2,100,000
Value of properties, Philippines 300,000
Value of properties, without 600,000
Determine the taxable income within and without.
b. An individual taxpayer has the following data on income and expenses in 2022:
1) Gross business income, Philippines P220,000
2) Rent on building, Philippines, net of 5% withholding tax 95,000
3) Rent on commercial building, USA 90,000
4) Interest income, debtor resides in Hongkong 30,000
5) Dividends from Ford Motors, foreign company, declared in 2022 60,000
Note: Gross income of Ford Motors follows:
Within Without
2019 P300,000 P500,000
2020 400,000 100,000
2021 500,000 200,000
2022 350,000 150,000
6) Royalties received from Ford Motors for use of patents in USA 30,000
7) Dividend from Walmart Corp., USA, declared in 2022 80,000
Note: Gross income of Walmart for the preceding 2 years prior to declaration of
dividend follow:
Within Without
2020 P400,000 P600,000
2021 200,000 400,000
8) Gain on sale, Philippines, land located in Japan 350,000
9) Gain on sale, Philippines, car purchased in Japan 40,000
10) Expenses:
a) Business expenses, Philippines 100,000
b) Depreciation building in Philippines 20,000
c) Depreciation building in USA 10,000
d) Expenses, sale of car in the Philippines 10,000
e) Expenses, sale of land in the Philippines 50,000
f) Unallocated expenses 60,000
REQ: a. Classify income into income within and income without.

b. Determine the taxable income/subject to final withholding tax assuming the individual taxpayer
is:
1) NRA- ETB, single, (his country allows P40,000 personal exemption to single Filipinos not
residing in his country.)
2) NRA-NETB, head of family.
3) Resident, married with two qualified dependent children.
END
THOT: “God gave each one of us talents, it is up to us whether to bury them or to enrich them.” -
Tamthewise

TAX-901
GROSS INCOME - INCLUSIONS

1. Taxable income
Taxable income defined The term ‘taxable income’ means the pertinent items of gross income specified in the Code,
less deductions, if any, authorized for such types of income by the Code or other special
laws.
Corporation Gross income Pxxx
Less: Deductions xxx
Taxable income Pxxx
Individual Gross income Pxxx
Less: Deductions xxx
Taxable income Pxxx
Note: Basic personal exemption and additional exemptions are no longer allowed to be deducted
from the gross income of an individual taxpayer starting January 1, 2018.
2. Meaning of income
a. Broad sense Income means all wealth, which flows into the taxpayer’s hands other than as a mere return of
capital.
b. Judicial definition Income is the gain derived from labor, or from capital, or from both labor and capital, including
the gain derived from the sale or exchange of capital asset.
c. Requisites of a a. There must be gain;
taxable income b. The gain must be realized or received;
c. The gain must not be excluded by law from taxation.
3. Gross income defined

Gross income [Sec. 32 Except when otherwise provided, gross income means all income from whatever source,
(A)] including (but not limited to the following items):
a. Compensation 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 a
profession;
c. Gains derived from dealings in property;
d. Interests;
e. Rents;
f. Royalties;
g. Dividends
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner’s distributive share from the net income of the general professional partnership.
4. Income distinguished from other terms

a. From capital Capital is the fund or property existing at one distinct time, while income denotes a flow of
wealth during a definite period.
b. From receipts Receipts have reference to all wealth that flows into the taxpayer, which includes returns of
capital. Receipts are broader in scope than income.
c. From revenue 1) Revenue, as applied to taxation, refers to all the funds or income derived by the government,
whether from tax or any other source while income, for tax purposes, is employed in its “natural
and obvious sense” to mean money or gain received, coming to a person (natural or juridical)
during a given period of time.
2) Revenue is to the government while income is to a person (natural or juridical).
5. Items of gross income explained

a. Compensation for personal services
1) Gross compensation Gross compensation income means all remuneration for services performed by an employee
income defined for his employer, whether paid in cash or in kind, unless specifically excluded under the Tax
Code (e.g., salaries, wages, emoluments, honoraria, bonuses, allowances, director’s fees).
2) Director’s fee Director’s fee is part of the gross compensation income if the director is at the same time
an employee of the employer/corporation. If the director is not an employee, the director’s
fee is subject to 10% creditable withholding tax if the current year’s gross income is
P720,000 and below (15% if current year’s gross income exceeds P720,000.)
3) Compensation in the In the absence of employer-employee relationship, compensation for personal services shall be
absence of employer- considered as gross professional fee (e.g., audit fee received by CPA from his client, lawyer’s
employee relationship fee.)
4) Examples of All kinds of compensation for services rendered constitute gross income. They include:
compensation for a) salaries, wages and fees;
services rendered b) commissions paid to salesmen;

GROSS INCOME - INCLUSIONS TAX-901
c) compensation for services on the basis of a percentage of profits;
d) commissions on insurance premiums;
e) tips;
f) pensions or retiring allowances paid by private persons or by the government (except
pension exempt from tax); and
g) marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other
contributions received by a clergyman, evangelist, or religious worker for services
rendered.
5) Forms of Forms of compensation Taxable amount
compensation a) Payments made in cash The full amount received
b) Services paid for with something The fair market value (FMV) of the thing taken in
other than money (in kind) payment
c) Services rendered at a stipulated In the absence of evidence to the contrary, the
price stipulated price shall be presumed to be the fair
market value (FMV)
d) Equity grant once exercised or Taxable compensation
availed by grantee-employee
6) Examples of Payments in kind Taxable Amount
payments in kind a) Compensation paid to an employee Fair market value of the stock at the time the
of a corporation in its stock services are rendered
b) Promissory note and other evidence a) Promissory note is not interest bearing
of indebtedness in payment of Year received - Fair discounted value
services, and not merely as security Year collected- Face value less fair discounted
for such payment value
b) Promissory note is interest bearing
Year received - Face value
Year collected - Maturity value less face value
b. Gross income derived from the conduct of trade or business, or the exercise of profession
Format of computation Gross sales/receipts xxx
Less: Sales returns and allowances xxx
Sales discount xxx xxx
Net sales/receipts xxx
Less: Cost of sales/services xxx
Gross income from operation xxx
Add: Other income xxx
Total gross income xxx
c. Gains derived from dealings in property
1) Property acquired by Selling price xxx
purchase on or after Less: Cost xxx
March 1, 1913. Gain xxx
inheritance Less: FMV, date of inheritance xxx
Gain xxx
gift Less: Value in the hands of the donor xxx
Gain xxx
d. Interest income
1) Included in interest Interest includes such interest arising from indebtedness, whether business or non-business.
income Unless exempted by law, interests received by a taxpayer, whether or not usurious, are taxable.
2) Subject to final tax Interest income from Philippine sources subject to final tax (not included in the taxable net
income subject to tax rates in general)
a) Interest from any currency bank deposit
b) Yield or any other monetary benefit from deposit substitute
c) Interest on government debt instrument and securities (regardless number of lenders)
d) Yield or any other monetary benefit from trust funds and similar arrangements
e) Interest income received from a depository bank under expanded foreign currency deposit
system
f) Interest income from long-term deposit or investment evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas if pre-terminated before fifth year or received by individual
issued by financial institution other than a bank
3) Subject to tax rates in a) Interest income from foreign sources
general b) Interest income from debt instrument not within the coverage of deposit substitute
c) Interest from long-term deposit or investment received by domestic and resident foreign
corporation
3) Exempt from Interest income from Philippine sources exempt from tax:
income tax a) Interest income received from a depository bank under expanded foreign currency deposit
system by non-residents (individuals or corporations)
b) Interest income from long-term deposit or investments evidenced by certificates prescribed
by Bangko Sentral ng Pilipinas (issued by banks to individuals in P10,000 denomination)

d. Rent income
1) Rental income of the a) Amount paid for the use or lease or enjoyment of property
lessor b) Additional amount paid, directly or indirectly, by the lessee in consideration for the lease
2) Rental income of Payment of lessee in lieu of other rental an amount equivalent to a certain rate of dividend
corporation from leased on the lessor’s capital stock or interest on the lessor’s outstanding indebtedness, together
property with taxes, insurance or other fixed charges, notwithstanding the fact that the dividends and
interests are paid by the lessee directly to the shareholders and bondholders of the lessor.
The fact that a corporation has conveyed or let its property and has parted with its
management and control or has ceased to engage in the business for which it was originally
organized, will not relieve it from liability to the tax.
3) Tax treatment of When buildings are erected or improvements made by a lessee in pursuance of an
leasehold improvements agreement with the lessor, and such buildings or improvements are not subject to removal
made by the lessee by the lessee, the lessor may at his option report the income therefrom upon either of the
following cases:
a) Outright method. – The lessor may report as income at the time when such buildings
or improvements are completed the fair market value of such buildings or
improvements subject to the lease.
b) Spread-out method. – The lessor may spread over the life of the lease the estimated
depreciated value of such building or improvement at the termination of the lease and
report as income for each tear of the lease an aliquot part thereof.
Cost of leasehold improvement xxx
Less: Accumulated depreciation (remaining term of lease) xxx
Book value, end of lease xxx
Annual income
Book value, end of lease/Remaining term of lease xxx
In a particular case, it was held that if improvements are in lieu of rent, the value thereof is
income to the landlord only in the year of termination of the lease.
4) Computation of income FMV of improvement when lessor took possession xxx
resulting from premature Less: Amount already reported as income xxx
termination of lease Income, year of termination xxx
5) Computation of loss due Amount already reported as income xxx

to destruction of Less: Insurance recovery xxx
leasehold improvement Salvage value xxx xxx
before the term of the Loss xxx
lease expires
6) Prepaid or advance rental Prepaid or advance rental shall only be considered as rental income of the lessor once the
advance rental is utilized by the lessee. It will only be treated as security deposit which is
not considered as income.
The entire amount of advance rental is considered as taxable income to the lessor in the year
received, if so received under a claim of right and without restriction as to its use, and
regardless of method of accounting employed.
Advance payment representing loan to the lessor is not taxable unless applied to unpaid rent.
Advance payment representing security deposit is not taxable unless violation in the lease
contract arises. Security deposit applied to the rental of the terminal month or period of
contract must be recognized as income at the time it is applied.
7) Income from long-term Taxable for the period in which the income is determined, such determination depending
contract upon the nature and terms of particular contract.
Income is reported upon the basis of percentage of completion method accompanied by

certificate of architects or engineers showing the percentage of completion during the taxable
year of the entire work performed under the contract.
f. Royalties
1. Subject to final tax When a person pays royalty to another for the use of its intellectual property such as
copyright, patents, trademarks, such royalty is a passive income of the owner thereof
subject to final withholding tax (if from Philippine sources).
2. Subject to tax rates in Royalties from foreign sources are subject to the normal individual or corporate income tax.
general
Any gain derived from sale of “royalty” considered a valuable property developed and sold
on a regular basis for a consideration is treated as an active business income subject to the
normal income tax. It is a special form of rental income for the use of intangible property.

g. Dividend income (including shares in the net income of certain entities)
1) Difference between direct A direct dividend is one where the paying corporation acknowledges that the distribution is
and indirect dividends a dividend payment.
An indirect dividend is a distribution of profits disguised as payment of services, properties,
etc.
2) Dividends/shares a) Cash and/or property dividends actually or constructively received by individuals from
in net income subject to domestic corporation or from a joint stock company, insurance or mutual fund company
final tax and regional operating headquarters of multinationals;
b) Inter-corporate dividends received from domestic corporation by non-resident foreign
corporations;
c) Share of an individual in the distributable net income after tax of a partnership (other
than a general professional partnership) of which he is a partner;
d) Share of an individual in the net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which he is a member or co-
venturer.
3) Dividends/shares in net a) Dividends from foreign corporations
income subject to tax b) Share in the net income of a general professional partnership
rates in general
4) Dividends that are a) Inter-corporate dividends received from domestic corporation by other domestic
exempt from tax corporation and resident foreign corporation.
b) For foreign source dividends, these will be exempt from Income Tax upon the effectivity of the
CREATE, subject to certain conditions
h. Annuities
1) Meaning of annuity An annuity is a specified income payable at stated intervals for a fixed or a contingent
period, often for the recipient’s life, in consideration of a stipulated premium paid either in
prior installment payments or in a single payment.
2) Non-taxable annuity Annuity representing return of premium
3) Taxable annuity Excess of the amount returned as premium
i. Prizes and winnings
1) Subject to tax a) Prizes and winnings from foreign sources received by individuals and corporations
rates in general b) Prizes and winnings from Philippine sources received by corporations
c) Prizes from Philippines sources received by individuals amounting to P10,000 or less.
2) Subject to final tax a) Prizes received by individuals from Philippine sources [except prizes amounting to
P10,000 or less which shall be subject to tax under Sec. 24 (A)]
b) Other winnings of individuals from Philippine sources (except Philippine Charity
Sweepstakes and Lotto winnings amounting to P10,000 or less which shall be exempt)
3) Exempt/excluded a) Philippine Charity Sweepstakes and Lotto winnings amounting to P10,000 or less;
from gross income b) Prizes and awards made primarily in recognition of achievements in the following fields:
1) Religious; 3) Scientific; 5) Artistic; 7) Civic.
2) Charitable; 4) Educational; 6) Literary;
Conditions for the exemption of prizes and awards:
a. The recipient was selected without any action on his part to enter the contest or
proceedings; and
b. The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
c) All prizes and awards granted to athletes to local and international sports competitions
and tournaments whether held in the Philippines or abroad and sanctioned by their
national sports association.
j. Pensions (see exclusions from gross income)
k. Partner’s distributive share from the net income of the general professional partnership [Subject to Section 24 (A)]
l. Income from whatever source
1) Examples of income from 1) Gains arising from expropriation of property;
whatever source 2) Gambling gains;
3) Income from illegal business or from embezzlement;
4) Damage recovery (compensation for damages);
5) Forgiveness of debt;
6) Bad debt recovery;
7) Tax refunds; and
8) Prizes and awards.

2) Damage recovery 1) Recovery of lost profit is taxable.
2) Recovery of lost capital is not taxable.
3) Forgiveness of debt 1) If debtor rendered service in favor of the creditor forgiveness of debt results in a taxable
income to the debtor.
2) If the debtor did not render service in favor of the creditor forgiveness of debt results in
a taxable indirect gift.
3) If the debtor is a stockholder of a corporation forgiveness of debt by the creditor-
corporation results in dividend distribution.
4) Bad debt recovery 1) Bad debt recovery is generally taxable.
2) Tax benefit rule: If in the year the bad debt was written off there was a reduction of
taxable income, bad debt recovery shall constitute a taxable income.
5) Tax refunds 1) If the refunded tax is a deductible tax, the tax refund is taxable.
2) If the refunded tax is not a deductible tax, the tax refund is not taxable.
Examples of non-deductible taxes:
1) Philippine income tax;
2) Transfer taxes (estate tax and donor’s tax);
3) Special assessment;
4) Foreign income tax claimed as tax credit;
5) Value-Added Tax (VAT);
6) Stock transactions tax.
6. Integrative case: The following are the revenue items of a domestic corporation with P80,000,000 total assets for
the year 2022:
Sales P 1,000,000
Cost of sales 500,000
Gain from sale of an office equipment 20,0000
Gain from sale of land not used in business (selling price, P852,500) 100,000
Gain from sale of building used in business (selling price, P900,000) 100,000
Gain from sale of listed shares of stock directly to the buyer not through the local stock
exchange (par value P500,000) 50,000
Gain from sale of shares of stock through the local stock exchange (selling price, P200,000, par value,
10,000
P100,000)
Interest income from bank deposit, Philippines 40,000
Yield from debt instrument not within the coverage of deposit substitute, Philippines (issue price,
80,000
P800,000)
Yield from deposit substitute, Philippines 80,000
Interest income received from depository bank under EFCDS, Philippines 60,000
Interest income from bank deposit, USA 400,000
Interest from long-term deposit, Philippines 30,000
Rent income (with unearned rent income of P400,000 which is part of the advance rents for
three (3) years), Philippines 200,000
Royalties, Philippines 70,000
Royalties, USA 300,000
Property dividend income from domestic corporation 150,000
Cash dividend income from a foreign corporation 350,000
Stock dividend income from a domestic corporation 100,000
Prizes and winnings, Philippines 400,000
Refund of Philippine percentage tax 100,000
Refund of Philippine value-added tax 100,000
Bad debt recovery 50,000
Question 1 – How much was total exempted/excluded income?

2 – How much was the total final withholding taxes on passive income?
3 – How much was the total capital gains tax?
4 – How much was the total documentary stamp taxes?
5 – How much was the total gross income subject to the 20% corporate income tax?
6 – How much was the total final withholding taxes on passive income and the capital gains tax if the
corporation is a resident foreign corporation?
7 - How much was the total final withholding taxes on passive income and the capital gains tax if the
corporation is a non-resident foreign corporation?
Solutions
Question 1 – Total exempted/excluded income
Gain from sale of shares of stock through the stock exchange (selling price, P200,000) P 10,000
Property dividend income from domestic corporation 150,000
Stock dividend income from domestic corporation 100,000
Refund of Philippine value-added tax 100,000
Total P 360,000

Question 2 – Total final withholding taxes on passive income
Interest income from bank deposit, Philippines (40,000 x 20%) P 8,000
Yield from deposit substitute, Philippines (80,000 x 20%) 16,000
Interest income received from depository bank under EFCDS, Philippines (60,000 x 15%) 9,000
Royalties, Philippines (70,000 x 20%) 14,000
Total final withholding taxes P47,000
Question 3 – Total capital gains tax

Gain from sale of land not used in business (852,500 x 6%) P51,150
Gain from sale of shares of stock directly to the buyer (50,000 x 15%) 7,500
Total capital gains tax P58,650
Question 4 – Total documentary stamp taxes

Sale of land not used in business (1,000 P 15
(851,500/1,000 = 851.5 or 852 x P15) 12,780 P 12,795
Sale of building used in business (900,000 x 1.5%) 13,500
Sale of listed shares of stock directly to the buyer not through the local stock exchange
(P500,000/200 x P1.50) 3,750
Sale of shares of stock through the local stock exchange (P100,000/200 x P1.50) 750
Debt instrument (P800,000/200 x P1.50) 6,000
Total P36,795
Question 5 – Total gross income subject to 20% corporate income tax

Sales P1,000,000
Less: Cost of sales 500,000
Gross income 500,000
Other income
Gain from sale of an office equipment 20,000
Gain from sale of building used in business 100,000
Yield from debt instrument not within the coverage of deposit substitute, Philippines 80,000
Interest income from bank deposit, USA 400,000
Interest from long-term deposit, Philippines 30,000
Advance rent for three (3) years, Philippines 600,000
Royalties, USA 300,000
Cash dividend received from a foreign corporation 350,000
Prizes and winnings, Philippines 400,000
Refund of Philippine percentage tax 100,000
Bad debt recovery 50,000
Total gross income P2,930,000
Question 6 – Total final withholding taxes on passive income (resident foreign corporation)
Interest income from bank deposit, Philippines (40,000 x 20%) P 8,000
Interest income received from depository bank under EFCDS, Philippines (60,000 x 15%) 9,000
Final withholding taxes on passive income P47,000
Gain from sale of shares of stock directly to the buyer (50,000 x 15%) P 7,500
Total P54,500
Question 7 – Total final withholding taxes on passive income (non-resident foreign corporation)
Interest income from bank deposit, Philippines (40,000 x 25%) P10,000
Interest income received from depository bank under EFCDS, Philippines Exempt
Property dividend received from domestic corporation (150,000 x 15%) 22,500
Final withholding taxes on passive income P70,000
Gain from sale of shares of stock directly to the buyer (50,000 x 15%) P 7,500
Total P77,500
- END -
THOT: “Contentment diminishes one’s desire for endless longing for more material possessions.” - Tamthewise

TAX-902
GROSS INCOME – EXCLUSIONS

1. Exclusions defined: The term “exclusions” refers to items that are not included in the determination of gross income
either because:
a) they represent return of capital or are not income, gain or profit; or
b) they are subject to another kind of internal revenue tax; or
c) they are income, gain, or profit that are expressly exempt from income tax under the constitution, tax treaty, Tax
Code, or general or special law.
2. Sec.32 (B) Exclusions from Gross Income – The following items shall not be included in gross income and shall be
exempt from taxation:
a. Exclusions from gross income 1) Proceeds of life insurance;
2) Amount received by insured as returns of premium;
3) Gifts, bequests and devises;
4) Compensation for injuries or sickness;
5) Income exempt under treaty;
6) Retirement benefits, pensions, gratuities, etc.;
7) Miscellaneous items.
a) Income derived by foreign government;
b) Income derived by the government or its political subdivision;
c) Prizes and awards;
d) Prizes and awards in sports competition;
e) 13th month pay and other benefits;
f) GSIS, SSS, Philhealth and other contributions;
g) Gains from the sale of bonds, debenture or other certificate of indebtedness
with maturity of more than 5 years;
h) Gains from redemption of shares in mutual fund.
b. Used to be excluded but now 1) Interest on government securities (now subject to 20% final tax)
subject to final tax 2) Income derived as informer’s reward to persons instrumental in the discovery
of violations of the NIRC and in the discovery and seizure of smuggled goods
(now subject to 10% final tax based on 10% of the revenues, surcharges or
fees recovered and/or fine or penalty imposed or P1,000,000 per case
whichever is lower.)
3. Exclusions from Gross Income Explained
a. Life Insurance
Life insurance The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but if such amounts
are held by the insurer under an agreement to pay interest thereon, the interest
payments shall be included in gross income.
b. Amount received by insured as return of premium

Return of premium The amount received by the insured, as a return of premiums paid by him under
life insurance, endowment, or annuity contracts, either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract.
If the amounts, when added to amounts received before the taxable year under
such contract, exceed the aggregate premium paid, whether or not paid during
the taxable year, then the excess shall be included in gross income
In the case of a transfer for a valuable consideration by assignment or otherwise,

of a life insurance, endowment or annuity contract or any interest therein, only
the actual value of such consideration and the amount of the premiums and the
sums subsequently paid by the transferee are exempt from taxation.
Participating dividends are not income to the insured. They are treated as return
of capital.
Exercise: (CPA Exam) Mr. J. Cruz insured his life with his estate as beneficiary. In 2018, after Mr. Cruz had paid P65,000 in
premiums, he assigned the policy to Mr. S. Santos for P60,000, and Mr. Santos collected the total proceeds of P200,000.
Mr. Santos, after the assignment, and before Mr. Cruz’s death, paid total premiums of P80,000.
Compute for the: a) exempted amount;

b) the taxable amount.

GROSS INCOME - EXCLUSIONS TAX-902
c. Gifts, bequests and devises
Gifts, bequests and devices The value of property acquired by gift, bequest, devise, or descent.
Gifts, bequests and devises are subject to transfer taxes (estate tax or donor’s
tax.)
Income from such property, as well as gift, bequest, devise or descent of income
from any property, in cases of transfers of divided interest, shall be included in
gross income
Alimony or an allowance based on a separation agreement is not taxable income.
d. Compensation for injuries or sickness

Compensation for injuries or Amounts received, through Accident or Health Insurance or under Workmen's
sickness Compensation Acts, as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of
such injuries or sickness.
Recoveries of damages, representing compensation for personal injuries arising

from libel, defamation, slander, breach of promise to marry, alienation of
affection are not subject to income tax and shall not be included in gross
income.
e. Income exempt under treaty

1) Income exempt under treaty Income of any kind to the extent required by any treaty obligation binding upon
the Government of the Philippines
Examples of income exempt under treaty:

1) Salaries of officials of the United Nations assigned in the Philippines if paid by
the United Nations and certified by the Secretary General of the United
Nations;
2) Salaries, allowances, fees, or wages received by citizens of the United States
of America working in consular offices in the Philippines are exempt from all
taxes;
3) Salaries of diplomatic officials and agents.
As a general rule, the provisions of the Philippine Tax Code (domestic law) shall
apply on the income, gain or profit of any person liable to income tax.
In case of conflict between the provisions of a tax treaty and domestic law, the
provisions of the tax treaty generally prevail over the provisions of the domestic
law.
Where the rate of tax imposed under the domestic law is lower than the rate
imposed under the tax treaty, the lower tax rate under the domestic law shall
prevail.
f. Retirement benefits
1) Retirement benefits received a) Retirement benefits received under Republic Act No. 7641 and those received
under R.A No. 7641 and those by officials and employees of private firms, whether individual or corporate, in
received by officials and accordance with a reasonable private benefit plan maintained by the employer.
employees of private firms with b) The retiring official or employee has been in the service of the same employer
reasonable private pension plan for at least ten (10) years and is not less than fifty (50) years of age at the
time of his retirement.
c) The benefits granted shall be availed of by an official or employee only once.
D) The term 'reasonable private benefit plan' means:
(1) a pension, gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or employees,
(2) wherein contributions are made by such employer for the officials or
employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and
(3) wherein it is provided in said plan that at no time shall any part of the
corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.
2) Retirement benefits under R.A. In order to avail of the exemption of the retirement benefits under R.A. 7641
7641 from private employers from private employers without any retirement plans, the retiring employee has
without any retirement plans served at least five (5) years and is not less than sixty (60) years of age but not
more than sixty-five (65) declared as the compulsory retirement age, among
other conditions.

3) Any amount received by Any amount received by an official or employee or by his heirs from the employer
an official or employee as a consequence of separation of such official or employee from the service of
as a consequence of the employer because of death, sickness or other physical disability or for any
separation cause beyond the control of the said official or employee.
The disease or illness should be of type which would affect the performance of
duties and endanger the life of the employee if he/she continues working. (RMO
No. 25-91)
4) Social security benefits, The provisions of any existing law to the contrary notwithstanding, social security
retirement gratuities, pensions benefits, retirement gratuities, pensions and other similar benefits received by
and other similar benefits resident or nonresident citizens of the Philippines or aliens who come to reside
received from foreign permanently in the Philippines from foreign government agencies and other
government agencies and other institutions, private or public.
institutions, private or public
5) United States Veterans Payments of benefits due or to become due to any person residing in the
Administration benefits Philippines under the laws of the United States administered by the United States
Veterans Administration.
6) Social Security System (SSS) Benefits received from or enjoyed under the Social Security System (SSS)
benefits
7) Government Service Insurance Benefits received from the GSIS including retirement gratuity received by
System (GSIS) benefits government officials and employees.
g. Miscellaneous items
Income derived by Foreign Income derived from investments in the Philippines in loans, stocks, bonds or other
Governments domestic securities, or from interest on deposits in banks in the Philippines by:
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying refinancing from foreign
governments, and
(iii) international or regional financial institutions established by foreign governments.
Income Derived by the Income derived from any public utility or from the exercise of any essential governmental
Government or its Political function accruing to the Government of the Philippines or to any political subdivision
Subdivisions thereof.
Prizes and awards Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the contest or
proceeding; and
(ii) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
Prizes and Awards in All prizes and awards granted to athletes in local and international sports competitions and
Sports Competition tournaments whether held in the Philippines or abroad and sanctioned by their national
sports associations.
13th month and other Thirteenth month pay equivalent to the mandatory one (1) month basic salary of official
benefits and employees of the government (whether national or local), including government-
owned or controlled corporations, and/or private offices received after the twelfth month
pay
Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in
cash or in kind, and other benefits of similar nature actually received by officials and
employees of both government and private offices, including the Additional Compensation
Allowance (ACA) granted and paid to all officials and employees of the National Government
Agencies (NGAs) including State Universities and Colleges (SUCs), Government-Owned
and/or Controlled Corporations (GOCCs), Government Financial Institutions (GFIs) and
Local Government Units (LGUs).
The above stated exclusions shall cover benefits paid or accrued during the year,
provided that the total amount shall not exceed ninety thousand pesos (₱ 90,000),
The exclusion shall not apply to other compensation received by an employee under an
employer-employee relationship such as basic salary and other allowances.
The exclusion from gross income is not applicable to self-employed individuals and income
generated from business. (R.A. 10653 as implemented under RR 3-2015 dated March 9,
2015)
GSIS, SSS, Medicare GSIS, SSS, Philhealth, Pag-ibig contributions and union dues of individuals
(Philhealth) and other
contributions Any contribution in excess of the mandatory GSIS, SSS, Philhealth and Pag-IBIG or Home
Development Mutual Fund contributions are not excludible from gross income of the
individual taxpayer and, therefore, are subject to income tax and the consequently, to
withholding tax (RMC No. 27-2011).

Gains from the Sale of Gains realized from the sale or exchange or retirement of bonds, debentures or other
Bonds, Debentures or certificate of indebtedness with a maturity of more than five (5) years.
Other Certificate of
Indebtedness
Gains from Redemption of Gains realized by the investor upon redemption of shares of stock in a mutual fund
Shares in Mutual Fund company.
Note: Mutual fund company is an open-end and close-end investment company.

6) Exercises
a. Compute the tax-exempt and the taxable benefits: A rank and file employee of a GOCC received the following benefits
from his employer:
13th month pay P40,000
14th month pay 40,000
Christmas bonus 22,000
Loyalty award 15,000
Additional Compensation Allowance (ACA) 20,000
Total 13th month and other benefits P137,000
b. The following were received by a resident citizen employee, married, and with four (4) qualified dependent children for
the year 2021:
Salary, net of P20,000 withholding tax; P6,000 SSS contribution
(mandatory SSS contribution is P3,000); P2,000 union dues P600,000
How much was the taxable compensation income?
c. Based on the following current year data compute the tax-exempt 13th month and other benefits and contributions of an
employee:
Salary, gross of withholding tax P 480,000
Allowance 20,000
Thirteenth month pay 40,000
Christmas bonus 40,000
Reimbursement for transportation expenses 5,000
Payroll deductions:
SSS contributions (mandatory contribution is P4,000) 6,000
Philhealth contributions (mandatory contribution is P3,000) 5,000
Pag-IBIG contributions (mandatory contribution is P2,400) 3,400
Charitable contributions by the employee to the employer’s outreach program 5,000
Loan payment 20,000
h. Other tax-exempt items
1) Compensation income including holiday pay, overtime pay, night shift differential pay, and hazard pay earned by minimum
wage earner, who has no other reportable income
2) Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the International Rice Research Institute
and the Ford Foundation
3) Allowances paid to military personnel
4) Compensation for casual employment like house helper/maid, not connected in the conduct of business of the employer
5) Interest on the price of land covered by Comprehensive Agrarian Reform Program (CARP)
6) Compensation of Statutory Minimum Wage Earner
7) Income generated from commercial sale of the invention for 10-year period which starts from the date of the first
commercial sale
8) Income of registered Barangay Micro Business Enterprise (BMBE) (total assets not more than P3,000,000 exclusive of the
land on which the particular business entity’s office, plant and equipment are situated)
9) Income of duly registered cooperatives dealing/transacting business with members only
i. Income of registered Barangay Micro Business Enterprise (BMBE)

Definition BMBE refers to any business entity or enterprise engaged in the production, processing or manufacturing of
products or commodities, including agro-processing, trading and services, whose total assets including those
arising from loans but exclusive of the land on which the particular business entity's office, plant and
equipment are situated, shall not be more than Three Million Pesos (P3,000,000.00).
Place of The Office of the Treasurer of each city or municipality shall register BMBEs and issue a Certificate of
registration Authority (CA) to enable the BMBE to avail of incentives under the Act.
Only one Certificate of Authority shall be issued for each BMBE and only by the Office of the Treasurer of the
city or municipality that has jurisdiction over the principal place of business of BMBE. (Section 3, IRR of
BMBE)
Who are Any person, natural or juridical, such as partnership, corporation, association and cooperative, having the
eligible to qualifications and none of the disqualifications shall be eligible to register as BMBEs. (Sec. 4, IRR of BMBE as
register amended)
“Services" shall exclude those rendered by any one, who is duly licensed by the government after having
passed a government licensure examination, in connection with the exercise of one's profession. (Section 2,
IRR of BMBE)

Incentives 1) Exemption from income tax for income arising from the operations of the enterprise.
and benefits 2) Reduction of or exemption from local taxes, fees and charges
granted to 3) Exemption from the coverage of the Minimum Wage Law
BMBEs 4) Availment of credit services from government financing institutions
5) Availment of technology transfer, production, management training programs and marketing assistance
from government entities
6) Availment of Development Fund from GOCCs
7) Access to Trade and Investment Promotion
8) Access to One-Stop Business Registration Center
j. Integrative Cases
1. A resident citizen, widower, with a dependent minor brother, had the following data on income and expenses for 2018:
Gross sales P1,500,000
Cost of sales 1,000,000
Business expenses 200,000
Interest from savings deposit, BPI-Makati, Philippines 50,000
Prize in a literary contest he joined 100,000
Prize received for achievement in literature (did not join the contest) 10,000
Gain from sale of bonds (maturity is 6 years) 5,000
Separation pay from his former job (resigned) 250,000
Cash he inherited from his uncle 300,000
Proceeds of his wife’s life insurance (irrevocable beneficiary) 1,000,000
Amount received as return of premium (premium paid, P150,000) 200,000
Tax Informer’s Reward 500,000
Philippine Charity Sweepstakes winnings 10,000
Interest income from Government bonds 20,000
Winnings from illegal gambling 10,000
Question 1 - How much was the total amount of excluded or exempted income?
2 - How much was the total final tax from certain income?
3 – The taxpayer failed to indicate in his first quarter return the option to be taxed at 8%:
a) How much was the income tax due if he uses itemized deductions?
b) How much was the percentage tax, if any?
4 – The taxpayer indicated in his first quarter return that he was opting for the 8% income tax rate.
a) How much was the income tax due?
b) How much was the percentage tax, if any?
5 – The taxpayer opted for the optional standard deduction (OSD).
a) Can he avail of the 8% income tax rate?
b) How much was the income tax due?
c) How much is the percentage tax, if any?
2. A resident citizen, 50 years old, married, with three (3) qualified dependent children asks you to assist him in
computing his taxable net income for the year 2021. He presented to you his Statement of Income and Expenses for the
year ended 2021.
Gross professional income (subjected to 15% withholding tax) P10,000,000

Less: Cost of services 3,500,000
Gross income 6,500,000
Less: Professional expenses 3,000,000
Operating income 3,500,000
Add: Non-operating income
Retirement benefits received from his previous employer 250,000
Lump sum benefits received from SSS 200,000
Prize in a sports tournament sponsored by a group of businessmen
promoting health products 50,000
Yield from short-term bonds 20,000
Interest on long term deposits with maturity period of 5 years 30,000
Philippine Lotto winnings 500,000
Share in the net income of a business partnership 100,000 1,150,000
Net income P4,650,000
REQ: a. Compute the following:

1)Total amount excluded or exempted from income tax
2) Total final withholding taxes
b. Prepare reconciliation of net income per books against taxable income
Answers:
1)Total amount excluded or exempted from income tax
Retirement benefits received from his previous employer that maintained P 250,000
Total P 480,000

2) Total final withholding taxes
Prize in a sports tournament sponsored by a group of businessmen promoting health products (50,000 x 20%) P10,000
Yield from short-term bonds (20,000 x 20%) 4,000
Philippine Lotto winnings (500,000 x 20%) 100,000
Share in the net income of a business partnership (100,000 x 10%) 10,000
Total P124,000
b. Prepare reconciliation of net income per books against taxable income

Net income per books P4,650,000
Add: Non-Deductible Expenses/Taxable Other Income -
Total 4,650,000
Less: A) Non-Taxable Income and Income Subject to Final Tax
Retirement benefits received from his previous employer that maintained 250,000
Prize in a sports tournament sponsored by a group of businessmen promoting health products 50,000
Yield from short-term bonds 20,000
Philippine Lotto winnings 500,000
Share in net income of business partnership 100,000
B) Special/Other Allowable Deductions
Total 1,150,000
Net Taxable Income (Loss) P3,500,000
Alternative computation
Gross professional income (subjected to 15% withholding tax) P10,000,000
Less: Cost of services 3,500,000
Gross income 6,500,000
Less: Professional expenses 3,000,000
Operating income 3,500,000
Add: Non-operating income -
Taxable income P3,500,000
END
THOT: “We find meaning when we serve other people and think less of ourselves.” - Tamthewise

TAX-801, 901, 902 (Sources of Income & Gross Income)

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TAX-801, 901, 902 (Sources of Income & Gross Income)

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 48  October 2024 CPA Licensure Examination

2. Determination of Income as to Sources

3. Deductions of Taxpayers Whose Taxable Income Is From Philippine Sources Only

b. Computation of Taxable income x Value of property, within_________

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Determine the taxable income within and without.

REQ: a. Classify income into income within and income without.

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GROSS INCOME - INCLUSIONS

3. Gross income defined

4. Income distinguished from other terms

5. Items of gross income explained

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5) Computation of loss due Amount already reported as income xxx

Income is reported upon the basis of percentage of completion method accompanied by

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Page 4 of 6 0915-2303213  [email protected]

Question 1 – How much was total exempted/excluded income?

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Question 3 – Total capital gains tax

Question 4 – Total documentary stamp taxes

Question 5 – Total gross income subject to 20% corporate income tax

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GROSS INCOME – EXCLUSIONS

3. Exclusions from Gross Income Explained

b. Amount received by insured as return of premium

In the case of a transfer for a valuable consideration by assignment or otherwise,

Compute for the: a) exempted amount;

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Alimony or an allowance based on a separation agreement is not taxable income.

d. Compensation for injuries or sickness

Recoveries of damages, representing compensation for personal injuries arising

e. Income exempt under treaty

Examples of income exempt under treaty:

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Note: Mutual fund company is an open-end and close-end investment company.

i. Income of registered Barangay Micro Business Enterprise (BMBE)

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Gross professional income (subjected to 15% withholding tax) P10,000,000

REQ: a. Compute the following:

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b. Prepare reconciliation of net income per books against taxable income

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