Gross Income: Regular Tax

• Items of gross income are broadly categorized into income subject to final tax, capital gains tax, and regular tax
• Gross income items subject to final and capital gains taxes are discussed in Chapters 5 and 6 respectively.
• Chapter focuses on gross income items subject to regular tax.

Items of Gross Income Subject to Regular Tax

• Compensation for services
• Income from trade, business, or profession
• Gains from property dealings
• Interest
• Rents
• Royalties
• Dividends
• Annuities
• Prizes and winnings
• Pensions
• Partner's share in a general professional partnership's net income

Compensation for Services

• "Compensation income" refers to employee benefits subject to regular tax
• Fringe benefits for managerial or supervisory employees are subject to final tax

Gross Income from Trade, Business, or Profession

• Includes income from any trade/business, whether legal/illegal, registered/unregistered.
• Gross income calculation: Sales/Revenues/Receipts/Fees less Cost of sales or services equals Gross income from operations.
• Specific business incomes are excluded from regular income tax:
  • Income exempt from income tax:
    • Income from a Barangay Micro-Business Enterprise (BMBE) under RA 9178
    • Income from enterprises with CREATE law tax holiday incentives
  • Income subject to special tax, such as:
    • Income from PEZA-registered enterprises
    • Income from TIEZA-registered enterprises
    • Income of self-employed individuals taxed under the 8% income tax
  • Income subject to final tax when the payor does not subject it to final tax:
    • Income of subcontractors of petroleum service contractors
    • Business income of foreign currency deposit units (FCDUs) from Philippine residents
• Taxpayers with multiple business income types should report regular income under the "Regular" column.

Gains from Dealings in Properties

• Gains/losses from ordinary assets are subject to regular income tax.
• Dealings in capital assets (excluding domestic stocks and real properties) are also subject to regular income tax.
• Ordinary gains: Gross income items
• Ordinary losses: Deduction items
• Net capital gain (after deducting capital losses): Gross income item
• Net capital loss: Not a deduction item.
• Measurement and recognition of gains from property dealings are in Chapter 12.

Interest Income

• Refers to interest income not subject to final tax.
• Taxable interest income must be contractually agreed upon and actually paid, not imputed.
• Examples of interest income subject to regular income tax:
  • Lending activities to individuals by banks or finance companies
  • Corporation bonds and promissory notes
  • Bank deposits abroad
• Exemptions for regular income taxation:
  • Interest income earned by landowners disposing of land to tenants under the Comprehensive Agrarian Reform Law
  • Imputed interest income (opportunity cost of money)

Rents

• Rent income from leasing any properties
• It's passive income, not subject to final tax under the NIRC, and thus subject to regular income tax.
• Special Considerations:
  • Lessor's obligations assumed by the lessee: Additional rental income to the lessor
  • Advance rentals:
    • Gross income upon receipt if unrestricted or restricted for future use, or lease termination
    • Not gross income if it is a loan or a security deposit
• Leasehold improvements: Lessor recognizes income using the spread-out or outright method

Royalties

• Royalties from sources within the Philippines are generally subject to final income tax unless active
• Royalties from foreign sources are subject to regular income tax.
• Robotic Technology Designed earns royalties from licensed users and maintenance services.
• All P500,000 is subject to regular income tax as it is active income.
• Mang Donald earns royalties from mining properties and books in the Philippines, which are subject to final tax, and from books and franchise abroad, which aggregating P700,000 are subject to regular income tax.

Dividends

• Dividends from foreign sources or declared by foreign corporations.
• Rules for dividends declared by domestic corporations are in Chapter 5.
• Foreign-sourced dividends are generally subject to regular tax, subject to pre-dominance tests in Chapter 3.
• Cash, property, and script dividends from foreign corporations: Gross income items subject to regular income tax
• Stock dividends are tax-exempt unless the declaration alters interests/rights or if redeemed as cash dividends
• The fair market value of the stock dividend received is taxable if it amounts to the payment of cash dividend
• Liquidating dividends is not income.
• Liquidating dividends are considered an amount for the investment and are subject to property rules in Chapter 12.

Rules for Prizes and Winnings

• Prizes and winnings exempt from final tax are not items of gross income subject to regular income tax
• Individual Taxpayers:

• Corporate Taxpayers

• The City of Baguio held its Panagbenga flower festival.
• Mr. Sebastien won P500,000, subject to 20% final tax
• John Hay Corporation won P600,000, and the prize is included in regular income tax

Pensions

• Relates to pensions/retirement benefits not meeting exclusion criteria and are subject to regular tax

Taxable Partnership and Joint Venture

• Taxable partnerships/joint ventures/co-ownerships are taxed as corporations.
• Distributive share in the net income is taxable

• Share in the net income of non-taxable entities is subject to regular income tax for the recipient partner, venturer, or co-owner.

Partner’s Distributed Share

• General professional partnership (GPP) is not subject to income tax (i.e., final tax, capital gains tax or regular income tax).
• Partners pay regular tax on their share of GPP net income, including items usually exempt from final tax or capital gains tax.
• Set and Siegfried share profits 60:40 in general professional partnership.
• Their distributed income calculated

• The partners include their respective shares in their gross income subject to regular income tax.

General gross income criteria

• According to the NIRC, items of gross income are:
  • not subject to final tax, capital gains tax, and special tax regime;
  • not excluded or exempted by law, treaty, or contract from taxation.

Additional Sources of gross income subject to regular tax

Other potential sources include:

• Income distributed from taxable estates or trusts
• Income share of other pass through entities
• Farming income
• Recovery of past deduction
• Reimbursement of expenses
• Cancellation of indebtedness for a consideration

Income from Estates and Trusts

• Income received from taxable estates or trusts, provided that the income hasn't already been previously taxed.
• Roman receives income from his father's estate.
• The distributed income results

• Roman includes P70,000 regular income but not P22,500 as it was subjected to final tax
• The trust reports the amounts as deductions against gross income
• Horace receives distribution from irrecoverable trust.
• His income as beneficiary calculated

• Horace reports P12,000 of rental income while the net gain on sales of stocks is subject to capital gains.

Farming Income

• Farming operations can be classified as:
  • Raise and sell operation: Livestock or farm product sales are subject to regular income tax and animal raising expenses are presented as deductions
  • Purchase and sell operation: The gross profit from the sale (sale less cost of purchase) is subjected to gross income

Recoveries of past deductions

• Deductions from gross income may be recovered later, and should be analyzed if tax benefit was the result
• Examples:
  • Recovery of previously claimed bad debt expenses
  • Refund of local/foreign tax expense previously claimed as deduction
  • Recommissioning of abandoned petroleum service contracts or mining tenements
  • Release of reserve funds of insurance companies
  • Interest expense which are subsequently condoned by the lender.

Recoveries rules

• Tax benefit: Reduction of income in the year of the deduction or through carry-over of operating loss
• Deduction that created tax benefit to the taxpayer must be reverted back to gross income in the year of recovery so that the government will recover the tax lost from the deduction
• Where a taxpayer previously benefited from a deduction, that recovery must be included back into gross income so that the government will recover the tax that was lost.
• If future recovery is known, the 2022 net income should have been: Net Income before interest expense less interest expense paid known, which escapes taxation 2022.

Illustration 1: Income With year of deduction

• A taxpayer incurred P60,000 bad debt expense in 2023 out of which P35,000 was recovered in 2025
• Taxable income in 2025 shall be P155,000

Illustration 2: Income with expired NOLCO

Suppose a taxpayer deducted a P500 interest expense in 2017 but failed to pay the same due to financial difficulty. The lender condoned the interest in 2021.

• The interest expense saved the 2017 Pl00 pre-tax income and the 2019 P8O net income from taxation.

Other Income Types

• Refund of non-deductible expenses: Not taxable
  • Philippine income tax.
  • Estate or donor's tax
  • Income tax paid to a foreign country, if claimed as credit.
  • Stock transaction tax and Special assessment
• Reimbursements of Expense: Additional income to the taxpayer
  • A lessee pays the lessor's ownership costs (e.g., property tax), or a client covering the out-of-pocket expenses of practitioner.

Cancellation of Indebtedness

• Under certain circumstances, cancellation of debt may lead to taxable income:
  • In consideration of goods or services; treated as income
  • As capital transaction, such as forfeiting the right to receive dividends in exchange of the debt- treated as dividend income
• In circumstances where cancellation debt is an act of gratuity, it is treated as a gift and is not taxable income

Special considerations with reporting revenue

• Considerations for reporting gross income include accounting methods, situs rules, VAT, withholding tax, and the power of the Commissioner of Internal Revenue (CIR) on income and expense distribution.
  • Accounting Method: Taxpayers can report the amount of gross income or revenue using various accounting methods
  • Situs rules- Philippine Income/ Global Income
  • KJ Lending, a finance corporation, lends to foreign/ domestic clients and deposits into foreign/ domestic deposits