Taxation Reviewer PDF

***GROSS INCOME AND DEDUCTION*** **Definition**: All income from any source unless specifically exempt by law, showing the broad scope of taxable income. - **Employer-Employee Relationship**: Exists when employer has control over both work results and how work is performed, defining when...

***GROSS INCOME AND DEDUCTION*** **Definition**: All income from any source unless specifically exempt by law, showing the broad scope of taxable income. - **Employer-Employee Relationship**: Exists when employer has control over both work results and how work is performed, defining when compensation becomes taxable. ***Types of Income*** - **Compensation Income**: Any payment for personal services in an employer-employee relationship, forming the basic taxable income source. - **Business Income**: Earnings from commercial activities for profit, covering manufacturing, trading, and services. - **Professional Income**: Revenue from specialized services requiring training or expertise like doctors, lawyers, and CPAs. - **Passive Income**: Money earned without active involvement (e.g., interest, dividends), subject to final tax. ***Important Exemptions*** - **Minimum Wage Earners**: Their compensation, including overtime and hazard pay, is non-taxable if they have no other income. - **13th Month Pay**: Non-taxable up to ₱90,000 under TRAIN Law, providing tax relief for employees. - **De Minimis Benefits**: Small-value benefits from employers are not subject to tax, reducing employee tax burden. ***Key Compensations*** - **Basic Salary/Wages**: Regular periodic payments for work, forming the core of taxable income. - **Allowances**: Additional payments like COLA are generally taxable unless specifically exempted. - **Retirement Pay**: Tax-exempt only if recipient is 50+ years old with 10+ years' service and BIR-approved plan. - **Separation Pay**: Only non-taxable if involuntary (death, sickness, company reorganization). ***Business Income Calculations*** - **Manufacturing/Trading**: Gross income = Sales - Returns - Discounts - Cost of Goods Sold + Other Income - **Service Business**: Gross income = Receipts - Returns - Allowances - Discounts - **Rental Income**: Includes both rent payments and lessee-assumed obligations of lessor ***Property Income*** - **Gains**: Taxable when sale/exchange value exceeds property\'s determined value - **Rental Income**: Calculated on gross receipts basis including all related payments ***Cost of Sales Components*** - **Manufacturing**: All direct costs to produce goods - **Trading**: Purchase cost plus direct expenses - **Service**: Direct costs of providing service ***Passive Income Types*** - **Interest**: Earnings from deposits and investments - **Royalties**: Payments for using intellectual property - **Dividends**: Share of corporate profits - **Prizes/Winnings**: Random earnings from contests or games ***Important Calculations broo*** - **For Manufacturing/Trading**: - Gross Income = Gross Sales - (Returns + Discounts + Allowances + Cost of Goods Sold) + Other Income - **For Services**: - Gross Income = Gross Receipts - (Returns + Allowances + Discounts) ***DEDUCTIONS-FROM-GROSS-INCOME*** - Nature **of Deductions**: Deductions are specific business expenses and losses allowed by law to reduce taxable income. These deductions are strictly construed and require legal provisions to be applicable. - Proof **Requirement**: Taxpayers must prove entitlement to deductions with supporting documents, unless exempted by law. Accurate records are essential for deductions. ***Classification of Deductions:*** - **Optional Standard Deduction (OSD)**: Can be 40% of gross sales for individuals and gross income for corporations. Simplifies the process by avoiding detailed itemization. - **Regular Allowable Itemized Deduction**: Includes specified business expenses that are proven and documented. - **Special Allowable Itemized Deduction**: Specific legal provisions may apply. - General **Rule on Election of Deduction Type**: If a taxpayer does not choose OSD in their return, itemized deductions are assumed. Declaration is crucial in tax returns. - Income **Types for Itemized Deductions**: - Applies to business/professional income from various entities (resident citizens, non-resident citizens, corporations). - Requires documentation and verification for claims. Extensive eligibility but must be proven. - Regular **Itemized Deductions Composition** Includes categories like business expenses, interest, taxes, losses, bad debts, depreciation, contributions, R&D, and pension trust Diverse range of deductible items covering multiple aspects of business operations. 1. **Charitable contributions** 2. *Research and development* 3. [Pension trust] ***Critical Points to Remember*** - Deductions are strictly interpreted against taxpayer - Supporting documentation is crucial - Must be specifically allowed by law - Not based on general equitable principles - Proper record-keeping is essential