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3 August 3, 2014

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1. What is the meaning of the term de minimis benefits?

De minimis benefits are facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the employer
merely as means of promoting the health, goodwill, contentment and efficiency of employees.


2. Are corporations allowed to avail of the optional standard deduction? If yes, how much?
YES. Sec. 34 (L), NIRC provides that a corporation subject to tax under Sec. 27(A) and Sec.
28(A)(1), may elect a standard deduction in an amount not exceeding 40% of its gross income
as defined in Sec. 32 of the same Code.

3. Does the principle pre-dominance test apply to hospitals?
YES. Sec. 27(B), NIRC provides that proprietary hospitals which are nonprofit shall pay a tax of
10% on their taxable income. The pre-dominance test is available in this scenario because we
have to determine whether such income is derived from related business to be subjected to
the 10% tax. Otherwise, if income is derived in an unrelated business it shall be subject to the
normal income tax rate of 30%.

4. Are dividends subject to income tax?
Sec. 24(B)(2) imposes a 10% tax on the cash/property dividends actually or constructively
received by an individual. However, stock dividends, under Sec. 73(b), shall not be subject to
tax. Reason for such exemption is for its reinvestment.

5. Are corporations subject to tax on compensation?
No. Compensation Income includes all remuneration for services rendered by an employee for
his employees unless specifically excluded under the NIRC. (Sec. 2.78.1, RR 2-98) Usually, in
ordinary circumstances, corporations are the employers and compensation income is
applicable only to employees.

6. When is an investment considered long term for purposes of income tax exemption?
Under Sec. 24(B)(1), long term investments are exempt from tax if it is retained for a period of
more than five years. If preterminated before the 5
th
year, final tax shall be imposed. The rate
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of which depends on the year it was terminated. Hence, derived from such provision , we can
say that long term investments should be made for more than five years to be exempt.

7. Why are gifts, bequests and devises excluded from gross income?

Gifts, bequests, and devises are excluded from gross income because their consideration is
based on pure liberality and is already subject to donors tax or estate tax as the case maybe.
Moreover, there is no income received.


8. Are retirement benefits subject to income tax?
NO. It is specifically enumerated under Sec. 32(B)(6) that retirement benefits are among those
items that are not to be included in gross income and shall b exempt from taxation.

9. Are termination pays taxable?
NO. Under sec. 32(B)(6)(b), NIRC , termination or separation pay is not taxable irrespective of
the age of the employee, length of service, number of benefits received or the recipient
thereof.

10. What are the methods of income taxation?
The two methods of income taxation are (1) Gross income taxation and (2) Net income
taxation. In gross income taxation, the tax base is the sales or the sales less the cost of sales.
In net income taxation, also known as Normal Income taxation, the tax base is sales minus
deductions.

11. How shall Fringe Benefit tax be computed?
The fringe benefit tax is done by:
a. Evaluating the benefit granted
b. Determining the proportion or percentage of the benefit which is subject to the
fringe benefit tax


12. Are gains from redemption of shares in mutual fund subject to income tax?
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NO because Sec. 33(B)(7)(h) specifically enumerated gains from redemption of shares in
mutual funds as an exclusion from the gross income and shall be exempt from tax.

13. What is the income tax treatment of dividends if the same are paid to a non-resident alien
engaged in trade or business in the Philippines?
Sec. 25 (B), NIRC provides that dividends received from all sources within the Philippines by a
non-resident alien not engaged in trade or business within the Philippines shall be taxed equal
to 25% of such income.

14. What are the conditions for expenses to be deductible from gross income?
The conditions for the deductibility of expenses from gross income are as follows:
a. It is paid or incurred during the taxable year
b. The expense must be substantiated by proof
c. The expense must be incurred in trade or business carried on by the taxpayer
d. The expense must be reasonable
e. The expense must be ordinary or necessary
f. If subject to withholding taxes, proof of payment to BIR
g. Expenses must not be against public policy, public moral or law such as bribes, kickbacks,
for immoral purposes.


15. Can a taxpayer deduct his grocery expenses from his gross income from trade, business or
exercise of profession?

16. What is the extent of tax exemption granted to a general professional partnership?

Sec. 26 provides that general professional partnerships as such shall not be subject to income
tax imposed for partnerships and corporations. Although exempt, GPPs are required to file
information returns for its income for purposes of furnishing information as to the share in
the net income of the partnership which each partner should include in his individual return.


17. Are shares of the individual partners from a general partnership subject to income tax? If yes,
will it not constitute double taxation?
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Partners in a general professional partnership shall be liable for income tax in their separate
and individual capacities (Sec. 32). It shall be included in the computation of its gross income
[Sec. 32(A)(11)]. The share in the partnership income is taxable to the individual partners,
whether or not the share has been distributed because the GPP itself is not taxable. There is
double taxation to speak of in this case because such share / income of the partner as the
subject for income tax is different from that income he earned for the practice of his
profession.

18. What are the acceptable supporting documents for expenses to be deductible from gross
income?


19. Are bad debts actually written off but subsequently recovered subject to income tax?
YES. The Tax Benefit Rule applies in case bad debts written off are subsequently recovered.
The rule states that the taxpayer is obliged to declare as taxable income subsequent recovery
of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the
taxpayer when the bad debts were written off and claimed as deduction from gross income.
[Sec. 34(E)(1)]

20. Are tax refunds subject to income tax?

YES. Taxes allowed under Sec. 34(C)(1), when refunded or credited, shall be included as part of
gross income in the year of receipt to the extent of the income tax benefit of said deduction.


21. What is the income tax treatment of the cancellation of debts by the creditor?

a. When the cancellation of dent is income. If an individual performs services for a creditor,
who in consideration thereof, cancels the debt, it is income realized by the debtor as
compensation for his services.
b. When the cancellation of debt is a gift. If a creditor merely desires to benefit a debtor and
without any consideration therefore cancels the amount of the debt, it is a gift from the
creditor to the debtor and need not be included in the latters income.
c. When cancellation of debt is a capital transaction. If a corporation to which a stockholder
is indebted forgives the debt, the transaction has the effect of payment of a dividend.
(Sec. 50, RR No.2)
d. An insolvent debtor does not realize taxable income from the cancellation or forgiveness.
(CIR vs. Gin Co.)
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e. The insolvent debtor realizes income resulting from the cancellation or forgiveness of
indebtedness when he becomes solvent. (Lakeland Grocery Co. vs. CIR, 36 BTA 289 [1937])


22. May a taxpayer who opted to avail of the optional standard deduction change his mind and
instead, claim for itemized deduction during the same taxable year?

NO. Se. 34(L) provides that election for standard deduction when made in the return shall be
irrevocable for the taxable year for which the return was made.


23. What are the rules for Net Operating Loss to be deductible from the gross income of a taxpayer?
Under Se. 34(D)(3), the net operating loss of the business or enterprise for any taxable year
immediately preceding the current taxable year, which had not been previously offset as a
deduction from gross income shall be carried over as a deduction from gross income for the
next three consecutive years immediately following the year of such loss.
Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax
shall not be allowed as a deduction.
Net operating loss carry-over shall be allowed only if there has been no substantial change in
ownership of the business or enterprise in that (a) not less than 75% in nominal value of
outstanding issued shares, if the business is in the name of a corporation, is held by or on
behalf of the same person; or (b) not less than 75% of the paid up capital of the corporation, if
the business is in the name of a corporation, is held by or on behalf of the same persons.

24. What is passive income?
Passive Income is an income in which the taxpayer merely waits for the amount to come in
without exerting effort to earn it, which includes, but not limited to interest income, royalty
income, dividend income, winnings and prizes.

25. Is withholding tax a tax?
NO, it is not a tax. It is merely a means of collecting taxes in advance payment of tax due.