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 TAXATION: ITEMS OF GROSS GROSS INCOME Regular Income Tax Tax alies to all other items o! gross income that are not su"#ected to $nal tax or caital gains tax on certain assi%e income& 'ost o! these items o! gross income are deri%ed in the regular conduct o! "usiness, trade, ro!ession or emloyment& Nature of Regular Income Tax (& It alies on net n et income )taxa"le income*& +Taxa"le income means the ertinent items o! gross income su"#ect to regular tax less the deductions and-or ersonal and additional exemtions, i! any, any, authorized !or such tyes o! income under the .IRC or other secial laws& /& Reorted 0uarterly with an annual consolidated return rather than on a er transaction "asis& Regular Income Tax has two forms: ! "rogress#$e Income Tax This is alica"le to indi%iduals and estates and trusts& O$er "&!&& &'&&&!& & (&'&&&!& & )&'&&&!& & *&'&&&! && +,&'&&&! && ,&&'&&&! && +!
%ut Not O$er P 23 (1,111&11 1,1 1,111& 11&11 P211 P211 lus lus (13 (13 o! exce exces ss o%er 51,1 51,111 11&1 &11 1 (41, (41,11 111& 1&11 11 /21, /21,11 111& 1&11 11 211, 211,11 111& 1&11 11 In-n#te
" &'&&&!& & P/,2 P/,211 11 lus lus (23 o! exce excess ss (&'&&&!& o%er & P6,2 P6,211 11 lus lus /13 /13 o! exces excess s )&'&&&!& o%er & P//, P//,21 211 1 lus lus /23 o! exce excess ss *&'&&&! o%er && P21, P21,11 111 1 lus lus 13 o! exce excess ss +,&'&&&! o%er && "+,'&&& .lus (+/ of ,&&'&&&! excess o$er &&
Cor.orate Income Tax This is alica"le to cororations and "usiness artnershi&
E0ect#$#t1 "r#or to 223 4anuar1 ' 223 4anuar1 ' 222 4anuar1 ' +&&& No$em5er ' +&&, 4anuar1 ' +&&
Cor.or ate Tax Rate 23 43 3 /3 (,/ 13
7hereas the !ollowing entities may "e co%ered "y regular income tax rules, they are not taxa"le as a searate entity "ut are treated as an extension o! the ersonality o! the indi%iduals comosing-owning them8 9eneral Pro!essional Partnershi Partnershi 1. Co:ownershi 2. Tax exemt estates and trusts 3. ;xemt those that are8 4.
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Formed !or the urose o! underta?ing construction ro#ects, Petroleum, coal, geothermal and other energy oerations in ursuant to an oerating consortium agreement under a ser%ice contract with the go%ernment& GRO66 INCOME 9ross income includes gains, ro$ts, and income deri%ed !rom whate%er sources, whether legal or illegal not co%ered "y either $nal taxation or caital gains taxation&
EXCLU6ION6 7ROM GRO66 INCOME: ! "rocee8 of a L#fe Insurance .ol#c1 : recei%ed, whether in lum sum or otherwise, "y the heirs or "ene$ciary uon the death o! the insured is tax exemt& @owe%er, i! the roceed are retained "y the insurer under an agreement to ay interest, the interest is included in gross income& +! Amount rece#$e8 51 the #nsure8 as a return of .rem#um under a li!e insurance, endowment, or annuity contracts aid during the term or at the maturity o! the term mentioned in the contract or uon surrender o! the contract& (! G#fts' %e9uests' an8 e$#ses or escent > the %alue o! roerty ac0uired "y way o! these are taxa"le under Aonors Taxation& @owe%er, 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& *! Com.ensat#on for #n;ur#es an8 s#c amounts recei%ed under ccident or @ealth Insurance or under 7or?mens Comensation cts, as comensation !or ersonal in#uries lus the amount o! damages recei%ed whether "y suit or agreement on account o! such in#uries or sic?ness& ,! Income exem.t un8er treat1 > income o! any ?ind to the extent re0uired "y any treaty o"ligation "inding uon the 9o%ernment o! the Philiines& =! Ret#rement %ene-ts' "ens#ons' Gratu#t#es' etc! Retirement beneft under RA 7641 Re0uisites o! exemtion8 The emloyer maintains a reasona"le ri%ate "ene$t lan& a. The retiring oDicial or emloyee has "een in the ser%ices o! the same b. emloyer !or at least ten )(1* years& The retiring emloyee is at least $!ty )21* years o! age at the time o! c. retirement& This is the $rst time a%ailment o! the exemtion& d. Reasona"le ri%ate "ene$t lan reasona"le ri%ate "ene$t lan is a ension, gratuity, stoc? "onus or ro$t: sharing lan maintained by the employer for the benet of its employees co%ered )lan mem"ers*, wherein contri"utions are made "y the emloyer, emloyees or "oth, for the purpose of distributing the corpus (principal) or earnings thus accumulated to lan mem"ersE ro%ided that in no time shall any art o! the corus or income o! the !und "e used !or, or di%erted to, any urose other than the exclusi%e "ene$t o! said lan mem"ers& )! 6e.arat#on or Termination Re0uisite o! exemtion8 Aue to sic?ness, death or other hysical disa"ilityE a. ny cause "eyond the control o! the emloyee or oDicial )i&e&8 redundancy b. and closure o! "usiness* 3! Ret#rement Gratuities, Soia! Seurit" #enefts and Ot$er simi!ar benefts %rom %orei&n &o'ernment a&enies and ot$er institutions, private or public, "y resident or non:resident citizens or aliens who come to settle ermanently in the Philiines 2! Un#te8 States (eterans Administrations ) administered benefts under the laws o! the nited States recei%ed "y any personresiding in the Philiines &! SSS benefts under R 6/6/ recei%ed or en#oyed ! G6I6 benefts under R 6/G( and including retirement gratuity recei%ed "y go%ernment oDicials and emloyees +! In$estment Inome in t$e *$i!i++ines in !oans, stos, bonds, or ot$er domesti seurities, or %orm interest on de+osits in bans in t$e *$i!i++ines b"Foreign go%ernments a. Financing institutions owned, controlled, or en#oying re$nancing !rom b. !oreign go%ernment
International or regional $nancial institutions esta"lished "y !oreign go%ernments (! Income o% t$e &o'ernment and its +o!itia! subdi'isions !rom any u"lic utility or a. exercise o! essential go%ernment !unction b. *! "r#>es and A.ards in reo&nition o% re!i&ious, $aritab!e, sientif, eduationa!, artisti, !iterar", or i'i a$ie'ements "ut only i!8 the reciient was selected without any action on his art to enter the contest a. or roceedingE and the reciient is not re0uired to render su"stantial !uture ser%ices as a b. condition to recei%ing the rize or award ,! "r#>es and A.ards in S+orts Com+etitions &ranted to at$!etesin local or international cometitions and tournaments a. whether held in the Philiines or a"roadE and b. sanctioned "y their national sorts associations c. =! (th Mont$ *a" and Ot$er #enefts (Examples: productivity incentives, Christmas bonus, etc) > provided not to exceed the */0,000 ei!in&& ny amount in excess is included in gross income& This P1,111 ceiling is ad#usta"le "y re%enue regulation in ?eeing with the eDects o! inHation on the cost o! li%ing& c.
e m#n#m#s %ene-ts These are !ringe "ene$ts to emloyees su"#ect to limits 'onetized unused $ acation lea%e credits > not to exceed (1 days during the 1. year 'edical cash allowance to deendents o! emloyees > not exceeding P521 2. er emloyee er semester, or P(21 er month Rice su"sidy > P(,211 or ( sac? 21:?g rice er month amounting to not more 3. than P(,211& ni!orm and clothing allowance > not exceeding P4,111 er annum 4. ctual 'edical Cash Bene$t > not exceeding P(1,111 er annum 5. Laundry allowance > not exceeding P11 er month 6. ;mloyee achie%ement award )length o! ser%ice, sa!ety achie%ement* > must 7. "e in the !orm o! tangi"le ersonal roerty other than cash or gi!t certi$cate with annual monetary %alue not to exceed P(1,111 recei%ed "y an emloyee under an esta"lished written lan which does not discriminate in !a%or o! highly aid emloyees 9i!ts gi%en during Christmas and ma#or anni%ersary cele"rations not 8. exceeding P2,111 er emloyee er annum Flowers, !ruits and "oo?s or similar items gi%en to emloyees under certain 9. circumstances )i&e&8 on account o! marriage, illness, "irth o! "a"y, etc&* Aaily meal allowance for overtime wor! not exceeding /23 o! the "asic 10. minimum wage .ote to candidates8 The excess o! these de minimis "ene$ts o%er their maximum limits are included with the (thmonth or (4 th month ay, "onuses, and other "ene$ts& The totality o! the "ene$ts is comared with the P1,111 limit& )! Contr#5ut#ons %or GSIS, SSS, Mediare, *a&)Ibi& and nion 2ues : these are deducted !rom the rele%ant income to which they relateE !or examle, they are netted with the comensation income o! emloyees 3! Gains %rom Sa!e o% bonds, debentures or ot$er ertifate o% indebtedness .it$ a maturit" o% more t$an 3 "ears 2! Gains real#>e8 %rom redem+tion o% s$ares in mutua! %undb" t$e in'estor .ote to candidates8 (& ;xclusion is diDerent with deductions& 7hen an item o! income is exemted under the a"o%e aragrah, or under secial laws, it is deducted !rom gross income i! it was initially included therein& It is not shown as a deduction !rom gross income rather it is +excluded in gross income amounts& /& Interest !rom go%ernment securities are already excluded !rom the list o! exemtions
6OURCE6 O7 GRO66 INCOME: A! Com.ensat#on for ser$#ces in whate%er !orm aid, including "ut not limited to !ees, salaries, wages, commissions, and similar items
i! recei%ed in romissory notes, the taxa"le ortion at the time o! receit is the !air
%alue o! the note )i&e&8 its discounted %alue*E The interest ortion will "e recognized as income o%er the related eriod Fringe "ene$ts are not comensation& Please re!er to your handouts on "ringe #enets $axation& %! Tra8e' %us#ness or Exerc#se of a "rofess#on C! Ga#ns 8er#$e8 from 8eal#ngs #n .ro.ert1 (%lease read separate handout) ! Interests > these re!ers to interest other than those su"#ect to $nal taxes, excet8 (& Interest income under the land re!orm earned "y the landowner to which the tenant:urchaser ays him /& Imuted interest E! Rents 6.ec#al cons#8erat#ons: (& "ligations o! the lessor that are assumed "y the lessee is additional rental consideration& /& d%ance rentals8 a* I! unrestricted, the entire amount is income at the time o! receit& "* I! it constitutes a loan > not rent income& c* s security deosit to guarantee ayment or rent > income only when the e%ent or condition which ma?es it the roerty o! the lessor occurs )i&e&8 when there is de!ault* d* I! it is to "e alied at the termination o! the lease, it is income at the time o! receit e* Im.ro$ements made "y the lessee on the roerty > to "e recognized as income "y the lessor in two ways8 Outri&$t met$od > the !air %alue o! the roerty that will remain and "e turn:o%er to the lessor uon termination o! the lease )the real "oo? %alue o! the roerty at termination, i&e&8 not the lessees "oo? %alue* is recognized as income at the oint o! comletion o! the imro%ement NOT the !air mar?et %alue o! the imro%ement uon comletion& ).ote8 lthough the latter is the wordings o! the law, aarently, the whole !air %alue is, "y common sense, not income&* S+read)out met$od > recognize the "oo? %alue o! the roerty at the termination o! the lease as income o%er the eriod o! the related lease 7! Ro1alt#es G! #$#8en8s Ai%idends are su"#ect to regular income tax when it is declared "y !oreign cororations& Ai%idends can either "e8 Cash di%idend Proerty di%idend > when taxa"le, taxa"le at the !air mar?et %alue o! the roerty recei%ed as di%idend& .ote roerty di%idend includes stoc? o! another cororation declared "y the distri"uting cororation& Stoc? di%idend > generally not taxa"le excet when the declaration con!ers to the reciient a diDerent interest or right a!ter the declaration& 7hen taxa"le, the measure o! taxa"le amount is the !air mar?et %alue o! the stoc? di%idend recei%ed& Li0uidating di%idends This is considered an exchange or sale o! roerty& 9ain or loss is !ully taxa"le or deducti"le& Ai%idends recei%ed !rom resident cororations are su"#ect to the &ominance $est& ?! I! 4! !
Annu#t#es "r#>es an8 w#nn#ngs "ens#ons@ and "artnerBs 8#str#5uta5le professional partnership
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OT?ER 6OURCE6 O7 GRO66 INCOME: A! 7arm#ng Taxation o! !arming gross income re0uires classi$cation o! the !ollowing8 (& Li%estoc? and !arm roducts raised and sold ' the sell#ng .r#ce o! the li%estoc? or !arm roducts is considered gross income& /& Li%estoc? and !arm +ur$ased and sold > only the accounting gross income )sales less cost o! sales* is included in gross income Taxation Rules8
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Taxayer may !ollow accrual or cash "asis in accounting !or in%entories& ;xenses in raising the li%estoc? and !arm roducts are deductions !rom the comuted gross income& & The +roeeds o% ro+ insuraneor !i'esto insurane constitute gross income "ecause it reresents reco%ery o! lost ro$ts rather than lost caital& %! Tax %ene-ts 7hen a taxayer gains an ad%antage "y an income tax deduction claimed in the ast "ut were su"se0uently reco%ered, the tax "ene$t should "e included in income in the year reco%ered as item o! gross income& ;xamles8 #ad debt reo'er" 1. 9eneral Rule8 The reco%ery o! "ad de"ts re%iously written oD constitute a receit o! taxa"le income Ta5 re%und 2. 9eneral Rule8 Re!und o! taxes that entered the determination o! taxa"le income should "e re%erted "ac? to gross income&
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@ence, re!unds o! the !ollowing taxes that will not enter the determination o! taxa"le income will not "e included in gross income8 Philiine income tax, excet the !ringe "ene$t tax ;state or donors tax Secial assessment Income tax aid or incurred to a !oreign country, i! the taxayer claimed a credit !or such tax in the year it was aid or incurred& Stoc? transaction tax Note: the a"o%e items are not deducti"le against gross income in any case hence they could not gi%e rise to a tax "ene$t to the taxayer& namortied ost o% +ro+ert" abandoned and .ritten o but .as subse8uent!" re)entered into use 9eneral Rule8 The cost re%iously exensed should "e re%erted "ac? into gross income in the year extraction oeration is resumed& 3.
Exce.t#on to Reco$er#es of Losses an8 Ex.enses: Ta5 #eneft Ru!e 7hen the write:oD or tax exense is did not cause a reduction in the income tax lia"ility in the eriod it is claimed, the reco%ery or re!und is exemt "ecause o! a"sence o! tax "ene$t& C! Cane!!ation o% indebtedness in consideration of service > treated as comensation income a. as an act of gratuity > not an income "ut a gi!t taxa"le under Aonors b. Taxation as capital transaction such as forfeiting the right to receive dividend in c. exchange of the debt > treated as di%idends and is su"#ect to di%idend taxation rules ! 2ama&e reo'er" Compensatory &amages : this constitute return o! caital and hence, not a. taxa"le& For examle8 moral damages from personal action such as li"el, slanderE and "reach o! romise to marry& ecovered &amages > this constitute taxa"le income since they are b. reco%eries o! lost ro$t& For examle8 damages reco%ered !rom atent in!ringement suit
