Concept of Income

Concept of Income v2

Income

• all wealth flows into a taxpayer's hand other than as a mere return of capital

• all earnings derived from service rendered (labor), from capital (business or investment) or both including gain derived from sale or exchange of personal or real property either ordinary or capital asset

Taxable Income

• Amount of income upon which the tax rate prescribed by law is applied to obtain the amount of income tax payable

Non-Taxable Income

• It should be excluded by law or treaty from taxation

• Income is received but not required to be included in the determination of taxable income neither shall it be included as part of the gross income

Characteristics of Taxable Income

• There must be a gain or profit

• The gain must be realized or received

• The gain must not be excluded by law or treaty from taxation

Classification of Income

• Compensation Income -gain derived from labor especially employment such as salaries and commissions

• Profession or Business Income - value derived from an exercise of profession, business or utilization of capital including profit or gain derived from sale or conversion of assets

• Passive Income - income which the taxpayer merely waits for the amount to come in (e.g. royalty, interest, prizes, winnings)

• Capital gain - income derived from the sale of assets not used in trade or business (e.g. sale of family home, sale of jewelry)

Forms of Income

• Cash - money or money substitutes received as compensation or earnings derived from labor, practice of profession and conduct of business (e.g. bills and coins in circulation and legal tender; bank drafts, money order and treasury warrants)

• Property - income denotes the earned right of ownership over a tangible or intangible thing as a result of labor, business or practice of a profession (e.g. real estate; stocks, bonds)

• Service - income based on performance received in payment for the work previously rendered by one person to another

Sources of Income - place wherein the income is earned (situs of taxation)

• Within the Philippines

• Without the Philippines

• Partly within and partly without the Philippines

Income within - subject to Philippine tax

• Compensation for labor or services

• Interest on bonds, notes, deposits

• Dividends declared by domestic corporations

• Rentals and royalties from property

• Gains, profits and income from sale of real and /or personal properties

Income without - income derived from foreign countries. It is not subject to Philippine tax unless taxpayer is a resident Filipino citizen or domestic corporation.

• Compensation for labor or services rendered by overseas contract workers (OFWs)

• Interest on bonds, notes, deposits

• Dividends declared by non-resident foreign corporation

• Rentals and royalties from property

• Gains, profits and income from sale of real or personal property

Income partly within and partly without - Only income within is taxable in the Philippines, except if the taxpayer is a resident Filipino citizen or a domestic corporation whose income within and without are generally subject to tax. It includes gains, profits and income from:

• Transportation or other services rendered

• Sale of personal property produced within and sold outside or vice versa (import and export)

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Income Taxpayer

• Individuals

• Corporations

• General Partnerships

• Estate and Trust

Gross Income - all income from whatever source , including but not limited to:

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

• Conduct of trade or business or exercise of profession

• Gains from dealings in property - income derived from sale or exchange of assets

• Interests - earning derived from depositing or lending money, goods or credits

• Rental Income - earnings derived from leasing real estate or personal property

• Royalties - compensation or portion of proceeds paid to the owner of a right

• Dividend (Cash. Property or Stock) Income - earnings derived from distribution made by a corporation out of its earnings or profits and payable to stockholders

Gross Income - cont...

• Annuities -represents installment payments for life insurance sold by insurance companies. If part of annuity payment represents as interests, then it's taxable income. If annuity is a return of premium, it's not taxable

• Prizes and winnings - Taxable at 20% final tax rate

• Pension - allowance paid regularly to a person on his retirement or to his dependents on his death, in consideration of past services, meritorious work, age, loss or injury

• Partner's distributive share from the net income of general professional partnerships

• Illegal Income - taxable

• Bad Debts - (a) valid and existing debt; (b) debt ascertained to be worthless and uncollected during the taxable year; (c) debt must be charged off during the taxable year; (d) debt must arise from business or trade of a taxpayer

• Tax Refund/Credit - GR: refunds from taxes paid are taxable. Tax refund or credit shall be included as part of gross income in the taxable year of receipt to the extent of the income tax of said deduction

Gross Compensation Income

• Any remuneration received as a result of rendering personal services. It is obtained from ER-EE relationship.

Classification of Gross Compensation Income

• Basic salary (earnings received periodically for a regular work other than manual labor) or wage (earnings received usually according to specified intervals of work by hour, day, week)

• Honoraria - payments given in recognition for services performed for which established practice discourages charging a fixed fee

• Fixed or variable allowance - COLA, transportation, representation, clothing

• Commission - percentage of total sales or on certain quota of sales volume attained as part of incentive (e.g. sales commission)

• Fees - received by employee for the services rendered to the employer including director's fee of the company

• Hazard or emergency pay - due to exposure to danger or harm while working

• Retirement pay - lump sum payment reserved by an employee who has served a company for a considerable length of time and decides to withdraw from work into privacy

Classification of Gross Compensation Income: Retirement pay (cont...) - requisites:

• Retirement program is approved by BIR Commissioner

• Its implementation must be fair and equitable for the benefit of all employees

• Retiree should have been 50 years old

• It should have been availed for the first time

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Classification of Gross Compensation Income: Separation pay - not taxable if involuntary:

• death

• sickness

• disability

• reorganization of company / merger

• Company at the brink of bankruptcy

Classification of Gross Compensation Income (cont...)

• VL (more than 10) and SL - taxable

• 13th Month Pay - if Php90k or less, non-taxable

• OT - taxable

• Profit-sharing

• Awards for special services

Compensation received other than cash

• Property - FMV

• Shares of stocks - FMV

• Services - FMV

• Cancellation of debt

• Insurance premium paid by the employer on life insurance coverage of the employee wherein the beneficiary is the employee's family constitute taxable income. Basis of the tax is the amount of premium paid

• Living quarters and meals taxable - Exception: if for the exclusive benefit of the employer; if furnished on employer's business premises; employee accepts the lodging as a condition of his employment in order to perform his duties properly

Gross Income from Business and Profession

• Business - any commercial activity engaged in as a means of livelihood or profit of an individual or group of individuals

• Profession - any endeavor or work requiring specialized training in the field of learning, art or science engaged in as a means of livelihood or profit of an individual or group of individuals

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Gains derived from dealings in property

• Taxable gain or deductible loss

• Difference between the amount of value received by the taxpayer over the determined value of the property he has disposed of arising from sale and/or exchange of assets

• Determination of cost of the property given: (a) if the property was acquired by purchase on or after March 1, 1913, the basis is the acquisition cost; (b) if the property was acquired through inheritance, the basis is the FMV at the date of acquisition; (c) If the property was acquired as a gift, the basis is the same as it would be in the hands of the donor or FMV at the time when the gift was made, whichever is higher; (d) if the property is acquired for less than full and adequate consideration, the basis is the amount paid by the transferee for the property

Assets

• Ordinary asset - assets that are held primarily for sale to customers in the ordinary course of trade or business

• Capital asset - all assets held by the taxpayer whether or nor connected in the trade or business excluding ordinary assets (e.g. stocks or securities held by taxpayers other than dealers in securities, interest in partnership and joint ventures, franchise rights, goodwill and residential lots)

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Gain and Loss

• Ordinary gain - gain derived from the sale or exchange of ordinary assets including gains from performance of services and business

• Ordinary Loss - excess of expenses and losses over the income of the taxpayer derived from sale or exchange of ordinary assets

• Capital gain - excess of value received over the determined cost from sale or exchange of a capital asset

• Capital Loss - excess of the gains over the losses on sales or exchanges of capital assets

• Net Capital Gain - excess of the gain over the losses on sales or exchanges of capital assets

• Net Capital Loss - excess of the losses over the gains on sales or exchanges of capital assets