REGULAR INCOME TAX: GROSS INCOME

Formula of Taxable Net Income

Business/Professional Income	xx
Cost of Sales/Service	(xx)
Gross Income	xx
Other Income	xx
Deductions	(xx)
Taxable Net Income	xx

These are exempt income under RIT

Exclusion

What type of tax system will apply to Fringe Benefits if recipients are:

• Managerial/Supervisor

• Rank and File employee

• Managerial/Supervisor - FIT

• Rank and File employee - RIT

What type of tax system will apply to Dealings in Properties if the asset sold are:

• Real Property (Capital Asset) and/or Domestic Stocks sold directly to buyer

• Ordinary Asset and/or Capital Asset (Personal Property)

• Real Property (Capital Asset) and/or Domestic Stocks sold directly to buyer - CGT

• Ordinary Asset and/or Capital Asset (Personal Property) - RIT

Inclusion/Sources of Gross Income:

"Can The Great Investor Really Ride A Donkey And Paint Purple Pictures Proudly?" (CTGIRRaDAPPPp)

1. Compensation for Services

2. Trade, Business, or Exercise of a Profession (except self-employed and or professional opting to the 8% tax)

3. Gains derived from dealings in property

4. Interest (other than those subjected to FIT)

5. Rents (outright or spread-out)

6. Royalties (active)

7. Dividends (foreign)

8. Annuities

9. Prizes and Winnings (other than those subjected to FIT)

10. Pensions (generally); and

11. Partner’s distributable shares in the net income of the GPP and exempt joint venture

Requisites of exemption of pension:

• For employers with retirement plans:

• For employers without retirement plans:

• For employers with retirement plans:

  1. The employer maintains a reasonable private benefit plan (BIR registered)

  2. The retiring official or employee has been in the services of the same employer for at least (10) years.

  3. The retiring employee is at least 50 years of age at the time of retirement

  4. This is the first time availment of the exemption

• For employers without retirement plans:

  1. Retiring employee is at least 60 years old

  2. He must have serve the company for at least 5 years

Private employees retiring between __________________________ are excluded in gross income (Bayanihan to Heal as One Act)

June 5, 2020 to December 31, 2020

Other Sources of Gross Income:

1. Farming

2. Tax Benefits (deduction in gross income subsequently recovered)

3. Unamortized cost of property abandoned and written off but was subsequently re-entered into use

4. Cancellation of indebtedness

5. Damage recovery

Taxation of farming gross income requires classification of the following:

• Livestock and farm products raised and sold -

• Livestock and farm purchased and sold -

• Livestock and farm products raised and sold - the selling price of the livestock or farm products is considered gross income.

• Livestock and farm purchased and sold - only the accounting gross income (sales less cost of sales) is included in gross income

Taxation Rules in Farming:

1. Taxpayer may follow accrual or cash basis in accounting for inventories

2. Expenses in raising the livestock and farm products are deductions from the computed gross income

3. The proceeds of crop insurance or livestock insurance constitute gross income because it represents recovery of lost profits rather than lost capital

The recovery of a bad debts previously written off constitute a receipt of taxable income (T/F)

True

Treatment of Cancellation of Indebtedness under:

a. in consideration of service -

b. with no consideration -

c. by a corporation in favor of a shareholder -

d. as capital transaction such as forfeiting the right to receive dividend in exchange of the debt -

a. in consideration of service - treated as compensation income

b. with no consideration - not an income but a gift taxable under Donor’s Tax

c. by a corporation in favor of a shareholder - treated as declaration of dividend subject to final tax

d. as capital transaction such as forfeiting the right to receive dividend in exchange of the debt - treated as dividends and is subject to dividend taxation rules

Treatment of Damage Recovery if:

a. Compensatory Damages -

b. Recovered Damages -

a. Compensatory Damages - not taxable (return of capital)

b. Recovered Damages - taxable (return on capital)

Features of the Regular Income Tax

1. General Coverage (if hindi FIT or CGT, lahat pupunta sa RIT)

2. Net Income Tax

3. Annual tax is paid in quarterly estimated payments (45 days; 60 days after quarter)

4. Advance payment through creditable withholding taxes

Exclusions from Gross Income:

"Lucky People Gift Clean Treaty, Retire Safely Using Foreign Investments and 2 Benefits” (LPGCIRSUFIA2B)

"Go Pinoy Athletes! 13 Contributions Gave Great Hope Instantly."

1. Proceeds of a Life Insurance Policy

2. Amount received by the insured as a return of premium

3. Gifts, Bequests, and Devises or Descent - taxable under Donor’s Taxation. However income from such properties are included in gross income

4. Compensation for injuries and sickness

5. Income exempt under treaty

6. Retirement Benefits, Pension, Gratuities, etc.

7. Separation or Termination

8. United States Veterans Administration

9. Retirement Gratuities, Social Security Benefits and Other similar benefits from foreign government agencies and other institutions

10. Investment Income in the Philippines of foreign government

11. SSS benefits

12. GSIS benefits

13. Income of the government and its political subdivision from (a) any public utility; or (b) exercise of essential government function

14. Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements

15. Prizes and Awards in Sports Competition granted to athletes:

16. 13th Month Pay and Other Benefits (not exceeding 90K)

17. Contribution for GSIS, SSS, PhilHealth, HDMF, and Union Dues

18. Gains from Sale of bonds, debentures, or other certificate of indebtedness with maturity of more than 5 yeas.

19. Gains realized from redemption of shares in mutual fund by investor

20. Certain benefits of minimum wage earners (HHON)

21. Income exempt under special laws or subject to special tax rules (Income of BMBE, sale of gold to BSP, BOI-registered entities under ITH)

Requisites of exemption of Separation or Termination:

1. Due to sickness, death, or other physical disability;

2. Any causes beyond the control of the employee or official (i.e.: redundancy and closure of business)

Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements are excluded in Gross Income if:

a. the recipient was selected without any action on his part to enter the contest or proceeding; and

b. the recipient is not required to render substantial future services as a condition to receiving the prize or award

Contributions to PERA accounts are not exclusions in gross income (T/F)

True

Income Exempted from Minimum Wage Earners:

HHON

• Basic Pay

• Holiday Pay

• Hazard Pay

• Overtime Pay

• Night Shift Differential Pay

Compute for the TNI of Minimum Wage Earners if:

• Basic Pay - 100K

• Holiday Pay - 2K

• Hazard Pay - 15K

• Overtime Pay - 150K

• Night Shift Differential - 3K

• Commission - 30K

Gross Compensation Income (100 + 2 + 15 + 150 + 3 + 30)	300K
Less: Exempted Compensation Income (100 + 2 + 15 + 150 + 3)	(270K)
Taxable Compensation Income	30K

Compute for the Professional Income if the taxpayer received 102K net of CWT

102K ÷ (100% + 12% - 10%) = 100K

Professional Fees	100K	100%
Output VAT (12% x 100K)	12K	12%
CWT (10% x 100K)	(10K)	(10%)
Cash Received	102K	102%

Compute for the Rental Income if the taxpayer received 120K net of CWT

120K ÷ (100% + 12% - 5%) = 112,150

Professional Fees	112,150	100%
Output VAT (12% x 100K)	13,458	12%
CWT (10% x 100K)	(5,608)	(5%)
Cash Received	120,000	107%

Formula for Taxable Compensation Income

Gross Compensation	xx
Mandatory Deductions	(xx)
Exempt Benefits	(xx)
Taxable Compensation Income	xx

Compute for the Taxable Income if:

• Taxable Compensation Income - 100K

• Taxable Net Income - (20k)

Taxable Compensation Income	100K
Taxable Net Income	(20K)
Taxable Income	100K

Cannot offset; (20K) NOLCO - 3 years

BIR Form for Pure Compensation Income

1700

BIR Form for Purely Engaged in Business/Profession, those opted to 8%, and/or OSD

1701A

BIR Form for Mixed Income Earner, Estate, or Trust

1701

	Annual Return	Quarterly
Form	1700 1701 1701A
Deadline

	Annual Return	Quarterly
Form	1700 1701 1701A	- 1701Q 1701Q
Deadline	15th day of the 4th Month after the end of December 31	MANA (45 days End of Quater)

Taxable or Not Taxable:

• Cost of Living Allowance

Taxable (if private; if government = not)

Taxable or Not Taxable:

• Proceeds of life insurance policy, revocable designation of beneficiary

Not Taxable (regardless of revocability)

Taxable or Not Taxable:

• Pension, in general

Taxable (unless proven otherwise)

Taxable or Not Taxable:

• Income of PAGCOR, a GOCC

Taxable (GOCC exemption= SSS, GSIS, PhilHealth, Local Water District)

Taxable or Not Taxable:

• Interest Income

Taxable (presumption is not from deposit since most of the interest came from other sources)

Mr. Pacquiao, a national athlete, received the following during the year:

Ramon Magsaysay Award	50,000
Athlete of the year award	100,000
Prize - SM Raffle	10,000
Prize for winning the gold Olympic Medal	500,000
Car from Nissan as a gift	1,200,000
Winnings - Philippine Sweepstake	150,000
Casino winning, net of 200,000 losses	300,000
Winnings, from horse race	100,000

Determine the total exclusions in gross income

Ramon Magsaysay Award	50,000
Athlete of the year award	100,000
Prize - SM Raffle (winnings) - FIT	10,000
Prize for winning the gold Olympic Medal	500,000
Car from Nissan as a gift	1,200,000
Winnings - Philippine Sweepstake - FIT	150,000
Casino winning, net of 200,000 losses - FIT	300,000
Total	2,310,000

BT, Inc. received the following refunds during the taxable year:

Licensing Fee	200K
Registration fees of delivery trucks	40K
Donor’s tax	50K
Real estate tax	30K
Community tax	10K
Special assessment tax	20K
Corporate income tax	300K
Foreign income tax previously claimed as tax credit	50K
Foreign income tax previously claimed as deduction	100K
Value-added tax	150K

Compute the taxable tax benefit

Licensing Fee	200K
Registration fees of delivery trucks	40K
Real estate tax	30K
Community tax	10K
Foreign income tax previously claimed as deduction	100K
Total	380K

Only those deduction (expenses) deducted to Gross Income can be subjected to Tax Benefit.

Mabaca Corporation, a taxpayer under accrual basis, had the following write-off and recoveries of receivables:

	2019	2020
Net Income before write-off	400K	900K
(Bad debts write-off)	(650K)	400K

Determine of the following:

1. Taxable recovery in 2020 based on the given facts

2. Taxable recovery in 2020 assuming Mabaca is a BOI registered enterprise enjoying ITH in 2019

3. Answer No. 1 and No. 2 assuming Mabaca is under the cash basis

1. 400K

2. 0

3. 1. 400K; 2. 400K