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Define Gross Income Includes all income from whatever source but not limited to the following items: a. Compensation for services b. Gross income from trade, business or exercise of profession c. Gains from dealings in property d. Interests e. Rents f. Royalties g. Dividends h. Annuities i. Prizes and winnings j. Pensions k. Partners distributive share from the net income of general professional partnership 2. Define Gross Compensation Income Any remuneration for rendering personal services Obtained from an employer-employee relationship Every compensation income is taxable o Exceptions: Overtime pay Night shift differential pay Hazard pay Minimum wage earners (no other reportable income) 3. When is an employer-employee relationship exists? Person for whom services are rendered has the right to control and direct the individual who performs services 4. Enumerate and describe the classifications of gross compensation income a. Basic Salary or Wage Salary- earnings received periodically Wages- earnings received to specified intervals of work Backwages- subject to income and withholding tax b. Honoraria In recognition of performed services that discourages charging fixed fee c. Fixed or variable allowances Allowances received by a public and private officer or employee, in addition to the regular compensation fixed for his position or office d. Commission Percentage on total sales as part of incentive e. Fees Received by an employee for the services rendered Legal fees paid by a union behalf of its president constitute compensation f. Tips and gratuities Taxable when only declared; not subject to withholding tax g. Hazard or emergency pay Additional payment due to workers exposure to danger while working

h. Retirement pay Refers to a lump sum payment received by an employee who served a company in a considerable period of time Taxable in general (exceptions #5) i. Separation pay Taxable if voluntarily availed Not taxable if involuntarily availed a. Death b. Sickness c. Disability d. Reorganization or merger e. Brink of bankruptcy (In order of satisfying indebtedness: BIR, employee, creditors) j. Pension Stated allowance paid regularly to a person on his retirement k. Vacation or sick leave (#7) l. Thirteenth month pay and other benefits Not taxable if the total amount received is P30,000 or less; otherwise taxable m. Fringe benefits and de minimis Fringe benefits- any good, service or other benefit furnished or granted by an employer De minimis- privileges of relatively small values given by employer to employee Not subject to income tax and withholding tax n. Overtime pay Back pay and overtime pay constitute compensation o. Profit sharing Proportionate share in the profits of the business received by the employee in addition to his wages p. Awards for special services Amount received as an award for special service of employee or suggestions to employer in preventing from theft or robbery q. Beneficial payments Employer pays the income tax owed by the employee r. Other forms of compensation Compensation can be paid in kind but taxes are generally paid in money 5. State the rules when a retirement pay would not be subject to income tax? a. SSS or GSIS retirement pays b. Retirement approved by the BIR Commissioner c. Reasonable retirement benefit plan d. Retiree employed for 10 yrs in the company e. 50 yrs old at the time of retirement f. 1st time to avail 6. When is separation pay taxable? When separation pay is voluntarily availed

7. State the rules regarding the tax liability and exemption of the vacation and sick leave earned? Taxable o If paid or availed of as salary of an employee who is on vacation or on sick leave notwithstanding his absence from work Non-taxable o Monetized value of unutilized vacation leave credits of 10 days or less which were paid to private employees o Monetized value of vacation and sick leave credits paid to government officials and employees 8. What is an employee stock option? Privilege granted to some key employees of a corporation to avail of the corporations share of stock in the future for a certain price Compensation income: if market price > option price, the difference is the compensation income at date of grant Capital gain: the excess of the market price at the date of sale over the market price at the date of grant when stocks are sold 9. State the rules of the tax treatment for cancellation of indebtedness If creditor merely desires to benefit a debtor and without any consideration cancels the debt, the amount of the canceled debt is a gift, not an income of debtor If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend income to debtor If a debtor performs services for a creditor who cancels the debt, the debtor realizes income for his services to the extent of the amount of debt cancelled 10. What is the tax treatment if the beneficiary of the insurance premium paid is the employer? Employee Employer Taxable compensation of the employee? Yes No Deductible operating expense of the employer? Yes No 11. Explain the tax exemption under the principle of convenience of the employers rule. Allowances in kind given to the employee and for the performance of his duties is not taxable (eg. Food and lodging benefit by a maid) 12. State the rules for tax exemption of remuneration for casual labor Not considered as compensation: if remuneration for casual labor is not in the course of an employers business Considered as compensation: if remuneration for casual labor rendered in the course of the employers business and performed for a corporation 13. Enumerate and explain the classification of gross income from business a. Manufacturing b. Merchandising or Trading c. Servicing d. Farming e. Long-term contract

Subtractions should not be made for depreciation, depletion, selling expenses or loss of for items not ordinarily used in computing for cost of goods sold

14. State the formula to compute the following: a. Cost of Goods Manufactured and Sold Sales Less: Sales returns and allowances Net Sales Less: Cost of goods manufactured and sold: Raw materials used: Raw materials, beg Raw materials purchases Raw materials insurance Freight-in Purchase discounts Raw materials, end Direct Labor Manufacturing Overhead Gross income b. Cost of Goods Sold Sales Less: Sales returns and allowances Sales discount Net Sales Less: Cost of goods sold: Inventory, beg Purchases Freight-in Insurance for goods in transit Purchase returns Purchase discounts Inventory, end Gross Income c. Cost of Service Service Revenue Less: Service discounts Net revenue Less: Cost of services Salaries Benefits of personnel directly rendering the service Cost of facilities (Depreciation, rental of equipment and cost of supplies) Interest expense (In case of banks) Gross Income

15. When should an advanced rental received be regarded as reportable income? 16. What are the two methods of reporting income from leasehold improvements on properties of the lessor? State their respective formula. 17. What are the rules for tax treatment of reported income from leasehold improvement in the event of a pre-termination of lease contract? 18. What is a passive income? If the taxpayer merely waits for the income to be realized Examples: a. Deposit substitutes and trust fund b. Interest income c. Royalty income d. Dividend income e. Prizes and winnings 19. Enumerate and explain the tax treatment for the classification of interest income Tax Exempt Subject to final Subject to normal tax withholding tax Cooperatives Financial companies Principal business activity BSP prescribed (more Not BSP prescribed form Incidental interest than 5 yrs) investments earnings not subjected to final withholding tax Expanded foreign Expanded foreign currency deposit system currency deposit system Derived from lending earned by nonresidents earned by residents money, goods or credits from one person to A tenant who paid another without any interest to a landowner withholding tax made on the price of land Interest income earned in under a tenant purchaser agreement, CARP the normal conduct of the business- included part of income reported in ITR 20. Enumerate the different forms of dividend that a domestic corporation could declare, and what are the corresponding tax liabilities of the recipients See page 220 21. What are the different forms of dividends and how are they valued for tax purposes a. Cash dividend Valued and taxable to the extent of amount of money received by the stockholder b. Property dividend Valued and taxable to the extent of fair market value of the property received at the time of declaration c. Stock dividend Pure stock dividends are not subject to tax as they simply involve a transfer of retained earnings to the paid- in capital account Exemptions: o Options and if shareholders exercise to take cash or property dividends

o Exercise of option resulted in a change of the stockholders proportionate share in the outstanding share of the corporation d. Scrip dividend Taxable to the extent of its fair market value and in the year when the warrant is issued e. Indirect dividend Those other dividends representing payments or rights received by the taxpayer, which are really dividends f. Liquidating dividend The excess amount of liquidating dividends over cost of shares surrendered is taxable 22. Distinguish prizes from winnings Prize Reward for a contest or a competition Subject to final tax of 20% except when prize is 10k or less which is subjected to normal tax Winnings Reward for an event that depends on chance Subject to final tax of 20% regardless of amount 23. When is a bad debt recovery taxable? Doctrine of equitable benefit: amount recovered is only taxable to the extent of the tax benefit in the year account was written off 24. Enumerate the tax refunds that are not taxable a. Estate or donors tax b. Philippine income tax c. Stock transaction tax d. VAT, claimed as input tax 25. Explain the principle of tax benefit rule in determining tax refunds or bad debts recovery as taxable income. Refund of tax would only be subjected to tax is such tax was previously deducted from gross income resulting in the reduction of reported taxable income Tax paid deductible = refund is taxable Tax paid not deductible = refund not taxable 26. Is income illegally obtained taxable? Illegal income is taxable Included in the wrongdoers gross income even though he is obligated to return it when discovered Income not realized is not taxable, even though its absence is due to an illegal act