Questions and Answers
What is the definition of income?
Wealth inflow to taxpayer, excluding return of capital.
Which of the following is NOT a source of income?
Income is taxable only if it is legally obtained.
False
What is the taxable value of cash received as income?
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What is the fair market value (FMV) of property?
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If you perform a service and receive 100 shares worth PHP 500 each, your taxable income is ___ PHP.
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What is the taxable income for non-interest-bearing promissory notes?
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Interest-bearing promissory notes are taxed at their face value.
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Match the following forms of income with their taxable value:
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Study Notes
Definition of Income
- Income represents wealth inflow to the taxpayer, excluding return of capital.
- A comprehensive definition is essential; distinguishes between "income/profit" and "return of capital."
- Analogy: "Fruit vs. Tree" – income (fruit) derives from capital (tree).
- Includes profits from labor, capital, asset sales, and more.
- Legal status of income does not impact taxability; income is taxable regardless of legality.
Tests for Determining Income
- Accession to Wealth: Wealth increases post-transaction.
- Realization: Income is taxable only when it is officially realized (closed transaction).
- Control: Full dominion over the money or rights signifies income.
Examples of Income Items
- Compensation: Wages and salaries earned from employment.
- Business Profits: Earnings from sale of goods or services.
- Professional Fees: Revenue from professional services rendered.
- Interest: Earnings generated from loans.
- Other Income: Gains from illegal activities, sale of fixed assets, rental income, dividends.
Valuation of Income
- Valuation methods vary based on the form of income received.
- Cash Received: Taxable income is the exact amount of cash received.
Valuation Scenarios
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Fair Market Value (FMV) of Property: Taxable income is determined by property FMV at the time received.
- Example: Land worth PHP 1,000,000 received as payment results in a taxable income of PHP 1,000,000.
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FMV of Shares: Taxable income from shares equals FMV on the date of receipt.
- Example: 100 shares at PHP 500 each results in taxable income of PHP 50,000.
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FMV of Services Rendered: If no written agreement on payment exists, market rate for similar services applies.
- Example: Freelance service valued at PHP 10,000 treated as taxable income.
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FMV of Services Received as Payment: Services received are valued for tax at their FMV.
- Example: Accounting services received valued at PHP 15,000 considered taxable income.
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FMV of Promissory Notes:
- Interest-Bearing Notes: Face value counts as income.
- Non-Interest-Bearing Notes: Taxable income is based on discounted value.
- Example: PHP 100,000 note with 5% interest counts as PHP 100,000 income; a non-interest note may be valued at PHP 85,000.
Key Points to Remember
- Income is typically valued at FMV, ensuring taxation on economic benefits.
- Cash equivalency principle applies to various income forms (cash, property, services, notes).
- Valuation methods promote fairness and consistency in income taxation.
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Description
This quiz covers the fundamentals of income taxation, focusing on the definition and implications of income. Learn about the essential distinctions between different types of income, including the 'fruit vs tree' analogy. Prepare to delve into concepts crucial for understanding taxation.
