Regular Income Tax

NORTHERN CPA REVIEW

4th Floor Pelizloy Centrum, Lower Session Road, Baguio City

REX B. BANGGAWAN, CPA, MBA

TAXATION

REGULAR INCOME TAXATION: ITEMS OF GROSS INCOME

Regular Income Tax applies to all other items of gross income that are not
subjected to final tax or capital gains tax on certain passive income. Most of these
items of gross income are derived in the regular conduct of business, trade,
profession or employment.
Nature of Regular Income Tax
1. It applies on net income (taxable income). Taxable income means the pertinent
items of gross income subject to regular tax less the deductions and/or personal
and additional exemptions, if any, authorized for such types of income under the
NIRC or other special laws.
2. Reported quarterly with an annual consolidated return rather than on a per
transaction basis.
1.

Regular Income Tax has two forms:

Progressive Income Tax
This is applicable to individuals and estates and trusts.
Over

10,000.0
0

But Not
Over
P
5%
10,000.00
30,000.00 P500 plus 10% of excess
over

30,000.0
0
70,000.0
0
140,000.
00
250,000.
00
500,000.
00

70,000.00 P2,500 plus 15% of excess

over
140,000.00 P8,500 plus 20% of excess
over
250,000.00 P22,500 plus 25% of excess
over
500,000.00 P50,000 plus 30% of excess
over
Infinite
P125,000 plus 32% of
excess over

P0.00

2.

P
10,000.0
0
30,000.0
0
70,000.0
0
140,000.
00
250,000.
00
500,000.
00

Corporate Income Tax

This is applicable to corporations and business partnership.
Effectivity
Prior to 1998
January 1, 1998
January 1, 1999
January 1, 2000
November 1, 2005
January 1, 2010

Corpor
ate Tax
Rate
35%
34%
33%
32%
35%
30%

Whereas the following entities may be covered by regular income tax rules, they
are not taxable as a separate entity but are treated as an extension of the
personality of the individuals composing/owning them:
1.
General Professional Partnership
2.
Co-ownership
3.
Tax exempt estates and trusts
4.
Exempt Joint Ventures or Consortium those that are:

a.
b.
-

Formed for the purpose of undertaking construction projects,

Petroleum, coal, geothermal and other energy operations
in pursuant to an operating consortium agreement under a service contract with
the government.
GROSS INCOME
Gross income includes gains, profits, and income derived from whatever sources,
whether legal or illegal not covered by either final taxation or capital gains
taxation.

1.

2.
3.

4.

5.
6.

EXCLUSIONS FROM GROSS INCOME:

Proceed of a Life Insurance policy - received, whether in lump sum or
otherwise, by the heirs or beneficiary upon the death of the insured is tax exempt.
However, if the proceed are retained by the insurer under an agreement to pay
interest, the interest is included in gross income.
Amount received by the insured as a return of premium under a life
insurance, endowment, or annuity contracts paid during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract.
Gifts, Bequests, and Devises or Descent the value of property acquired by
way of these are taxable under Donors Taxation. However, incomes from such
property, as well as, gift, bequest, devise, or descent of income from any property,
in case of transfer of a divided interest, are included in gross income.
Compensation for injuries and sickness amounts received under Accident or
Health Insurance or under Workmens Compensation Acts, as compensation for
personal injuries plus the amount of damages received whether by suit or
agreement on account of such injuries or sickness.
Income exempt under treaty income of any kind to the extent required by any
treaty obligation binding upon the Government of the Philippines.
Retirement Benefits, Pensions, Gratuities, etc.
Retirement benefit under RA 7641
Requisites of exemption:
a.
The employer maintains a reasonable private benefit plan.
b.
The retiring official or employee has been in the services of the same
employer for at least ten (10) years.
c.
The retiring employee is at least fifty (50) years of age at the time of
retirement.
d.
This is the first time availment of the exemption.

Reasonable private benefit plan

A reasonable private benefit plan is a pension, gratuity, stock bonus or profitsharing plan maintained by the employer for the benefit of its employees covered
(plan members), wherein contributions are made by the employer, employees or
both, for the purpose of distributing the corpus (principal) or earnings thus
accumulated to plan members; provided that in no time shall any part of the
corpus or income of the fund be used for, or diverted to, any purpose other than
the exclusive benefit of said plan members.
7. Separation or Termination
Requisite of exemption:
a.
Due to sickness, death or other physical disability;
b.
Any cause beyond the control of the employee or official (i.e.: redundancy
and closure of business)
8. Retirement Gratuities, Social Security Benefits and Other similar benefits
from foreign government agencies and other institutions, private or
public, by resident or non-resident citizens or aliens who come to settle
permanently in the Philippines
9. United States Veterans Administrations - administered benefits under the
laws of the United States received by any personresiding in the Philippines
10. SSS benefits under RA 8282 received or enjoyed
11. GSIS benefits under RA 8291 and including retirement gratuity received by
government officials and employees
12. Investment Income in the Philippines in loans, stocks, bonds, or other
domestic securities, or form interest on deposits in banks in the
Philippines by:
a.
Foreign governments
b.
Financing institutions owned, controlled, or enjoying refinancing from
foreign government

c.
International or regional financial institutions established by foreign
governments
13. Income of the government and its political subdivisions 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 but only 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
15. Prizes and Awards in Sports Competitions granted to athletes:
a.
in local or international competitions and tournaments
b.
whether held in the Philippines or abroad; and
c.
sanctioned by their national sports associations
16. 13th Month Pay and Other Benefits (Examples: productivity incentives,
Christmas bonus, etc.) provided not to exceed theP30,000 ceiling. Any amount
in excess is included in gross income. This P30,000 ceiling is adjustable by revenue
regulation in keeping with the effects of inflation on the cost of living.
De minimis Benefits
These are fringe benefits to employees subject to limits
1.
Monetized unused vacation leave credits not to exceed 10 days during the
year
2.
Medical cash allowance to dependents of employees not exceeding P750
per employee per semester, or P150 per month
3.
Rice subsidy P1,500 or 1 sack 50-kg rice per month amounting to not more
than P1,500.
4.
Uniform and clothing allowance not exceeding P4,000 per annum
5.
Actual Medical Cash Benefit not exceeding P10,000 per annum
6.
Laundry allowance not exceeding P300 per month
7.
Employee achievement award (length of service, safety achievement) must
be in the form of tangible personal property other than cash or gift certificate with
annual monetary value not to exceed P10,000 received by an employee under an
established written plan which does not discriminate in favor of highly paid
employees
8.
Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum
9.
Flowers, fruits and books or similar items given to employees under certain
circumstances (i.e.: on account of marriage, illness, birth of baby, etc.)
10.
Daily meal allowance for overtime work not exceeding 25% of the basic
minimum wage
Note to candidates:
The excess of these de minimis benefits over their maximum limits are included
with the 13thmonth or 14th month pay, bonuses, and other benefits. The totality of
the benefits is compared with the P30,000 limit.
17. Contributions for GSIS, SSS, Medicare, Pag-Ibig and Union Dues - these
are deducted from the relevant income to which they relate; for example, they are
netted with the compensation income of employees
18. Gains from Sale of bonds, debentures or other certificate of indebtedness
with a maturity of more than 5 years.
19. Gains realized from redemption of shares in mutual fundby the investor.
Note to candidates:
Exclusion is different with deductions. When an item of income is exempted under
the above paragraph, or under special laws, it is deducted from gross income if it
was initially included therein. It is not shown as a deduction from gross income
rather it is excluded in gross income amounts.
2. Interest from government securities are already excluded from the list of
exemptions
1.

SOURCES OF GROSS INCOME:

A. Compensation for services in whatever form paid, including but not limited to
fees, salaries, wages, commissions, and similar items

 if received in promissory notes, the taxable portion at the time of receipt is the fair
value of the note (i.e.: its discounted value); The interest portion will be recognized
as income over the related period
Fringe benefits are not compensation. Please refer to your handouts on Fringe
Benefits Taxation.
B. Trade, Business or Exercise of a Profession
C. Gains derived from dealings in property (Please read separate handout)
D. Interests these refers to interest other than those subject to final taxes, except:
1. Interest income under the land reform earned by the landowner to which the
tenant-purchaser pays him
2. Imputed interest
E. Rents
Special considerations:
1. Obligations of the lessor that are assumed by the lessee is additional rental
consideration.
2. Advance rentals:
a) If unrestricted, the entire amount is income at the time of receipt.
b) If it constitutes a loan not rent income.
c) As security deposit to guarantee payment or rent income only when the event or
condition which makes it the property of the lessor occurs (i.e.: when there is
default)
d) If it is to be applied at the termination of the lease, it is income at the time of
receipt
e) Improvements made by the lessee on the property to be recognized as income
by the lessor in two ways:
Outright method the fair value of the property that will remain and be turn-over
to the lessor upon termination of the lease (the real book value of the property at
termination, i.e.: not the lessees book value) is recognized as income at the point
of completion of the improvement NOT the fair market value of the improvement
upon completion. (Note: Although the latter is the wordings of the law, apparently,
the whole fair value is, by common sense, not income.)
Spread-out method recognize the book value of the property at the termination
of the lease as income over the period of the related lease
F. Royalties
G. Dividends
Dividends are subject to regular income tax when it is declared by foreign
corporations.
Dividends can either be:
Cash dividend
Property dividend when taxable, taxable at the fair market value of the property
received as dividend. Note property dividend includes stock of another corporation
declared by the distributing corporation.
Stock dividend generally not taxable except when the declaration confers to the
recipient a different interest or right after the declaration. When taxable, the
measure of taxable amount is the fair market value of the stock dividend received.
Liquidating dividends
This is considered an exchange or sale of property. Gain or loss is fully taxable or
deductible.
Dividends received from resident corporations are subject to the Dominance Test.
H.
I.
J.
K.

Annuities
Prizes and winnings
Pensions; and
Partners distributable
professional partnership

share

from

the

net

income

of

the general

OTHER SOURCES OF GROSS INCOME:

A. Farming
Taxation of farming gross income requires classification of the following:
1. Livestock and farm products raised and sold the selling price of the livestock
or farm products is considered gross income.
2. Livestock and farm purchased and sold only the accounting gross income (sales
less cost of sales) is included in gross income
Taxation Rules:

1.
2.

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

Expenses in raising the livestock and farm products are deductions from the
computed gross income.
3. The proceeds of crop insuranceor livestock insurance constitute gross
income because it represents recovery of lost profits rather than lost capital.
B. Tax Benefits
When a taxpayer gains an advantage by an income tax deduction claimed in the
past but were subsequently recovered, the tax benefit should be included in
income in the year recovered as item of gross income.
Examples:
1.
Bad debt recovery
General Rule: The recovery of bad debts previously written off constitute a receipt
of taxable income
2.
Tax refund
General Rule: Refund of taxes that entered the determination of taxable income
should be reverted back to gross income.

a.
b.
c.
d.
e.

Hence, refunds of the following taxes that will not enter the determination of
taxable income will not be included in gross income:
Philippine income tax, except the fringe benefit tax
Estate or donors tax
Special assessment
Income tax paid or incurred to a foreign country, if the taxpayer claimed a credit
for such tax in the year it was paid or incurred.
Stock transaction tax
Note: the above items are not deductible against gross income in any case hence
they could not give rise to a tax benefit to the taxpayer.
3.
Unamortized cost of property abandoned and written off but was
subsequently re-entered into use
General Rule: The cost previously expensed should be reverted back into gross
income in the year extraction operation is resumed.
Exception to Recoveries of Losses and Expenses: Tax Benefit Rule
When the write-off or tax expense is did not cause a reduction in the income tax
liability in the period it is claimed, the recovery or refund is exempt because of
absence of tax benefit.

C. Cancellation of indebtedness
a.
in consideration of service treated as compensation income
b.
as an act of gratuity not an income but a gift taxable under Donors
Taxation
c.
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
D. Damage recovery
a.
Compensatory Damages - this constitute return of capital and hence, not
taxable. For example: moral damages from personal action such as libel, slander;
and breach of promise to marry.
b.
Recovered Damages this constitute taxable income since they are
recoveries of lost profit. For example: damages recovered from patent
infringement suit