CHAPTER 3 CONCEPT OF INCOME
NET WORTH METHODNet worth, endingxxxLess: Net worth,
beginningxxxIncrease (decrease) in net worthxxxAdd: Nondeductible
itemsxxxLess: Nontaxable itemsxxxLess: Personal exemptions (for
individuals)xxxNet taxable incomexxx50,000 the basic personal
exemption of an individual taxpayer25,000 per qualified children,
maximum of 4 children (maximum of 100,000) additional exemption of
an individual taxpayer
NONTAXABLE VERSUS TAXABLE INCOMETaxable income gross income
minus statutory deductionsNontaxable income not included in gross
income and taxable income
CHARACTERISTICS OF TAXABLE INCOME1. There must be gain or
profit.2. The gain must be realized or received.3. The gain must
not be exempted by law from taxation.
An income derived from illegal activities is taxable, if
uncovered by the BIR.A mere increase in the value of property is
not income but merely an unrealized increase.Constructive receipt
of income is sufficient for realization.
CLASSIFICATIONS OF INCOME1. Compensation income2.
Profession/Business income3. Passive income4. Capital gaina.
Capital assets soldb. Real properties soldc. Share of stocks
outside the LSE sold
Every quarter Income Tax ReturnFinal quarter Annual Income Tax
ReturnPrinciple of administrative feasibility dates for paying
taxes are fixed by law
ACCOUNTING PERIODS AND METHODS1. Regular accounting period2.
Method given by the BIR commissioner3. Calendar year method4.
Accrued income up to the date of death
SPECIAL METHODS1. Installment method2. Deferred payment3.
Long-term construction contract4. Farming
WHEN TO USE INSTALLMENT METHOD1. Personal propertya. Ordinary
assetb. Capital asseti. Selling price more than 1,000ii. Initial
payment does not exceed 25% of the selling price; if it exceeds,
use cash sales methodiii. Not part of inventoryiv. Within one year,
100%; more than one year, only 50%2. Real propertya. Realty
(inventory)i. 30% for corporate taxpayerii. 5% to 32% for
individual taxpayeriii. Should follow the 25% ruleb. Real property
considered as capital asseti. 6% capital gains tax based on SP or
zonal value, whichever is higherii. Should follow the 25% rule
DEFERRED PAYMENT METHODNoninterest bearing notes should be
discounted.
LONG-TERM CONSTRUCTION CONTRACTS1. Completed contract methoda.
Within one year2. Percentage of completionContract
pricexxxPercentage of completionxxxValue of contract earnedxxxLess:
Costs incurred to datexxxGross income to datexxxLess: Prior years
gross incomexxxAnnual realized revenuexxx
CHAPTER 4 GROSS INCOME
GROSS COMPENSATION INCOMEIn general, every form of compensation
is taxable regardless.
Classifications of gross compensation income1. Basic salary or
wage2. Honoraria3. Fixed or variable allowancesa. Expenses are not
taxable if liquidated and the excess is returned to the employer4.
Commission5. Feesa. Legal fees by a union are compensationb.
Consideration received by religious works are compensation6. Tips
and gratuitiesa. Accounted for not taxable incomeb. Not accounted
for taxable income7. Hazard or emergency pay8. Retirement paya. SSS
or GSIS not taxableb. Old age, 10 years, 50 years, first time not
taxable9. Separation paya. Voluntary taxableb. Involuntary not
taxable10. Pension11. Vacation and sick leavea. If availed of
taxableb. Monetized and unutilized not taxable12. Thirteenth month
pay and other benefitsa. In excess of 30,000 or 82,000 taxable 13.
Fringe benefits and de minimis14. Overtime pay15. Profit sharing16.
Awards for special services17. Beneficial payments18. Other forms
of compensation
SHARE OF STOCKFair value of the share of stock at the time the
service is rendered
EMPLOYEE STOCK OPTIONCompensation income MP > OP at the date
of grantCapital gain MP at the date of sale minus MP at the date of
grant
CANCELLATION OF DEBTCorporation forgives as if dividend
incomeCreditor, no consideration just a giftCreditor, with
consideration only up to the extent of the cancelled debt
INSURANCE PREMIUMSBeneficiary is employees family taxable,
deductibleBeneficiary is employer not taxable, not deductible
CONVENIENCE OF THE EMPLOYERS RULELiving quarters ordinarily
taxableMeal subsidy ordinarily taxable
FINAL TAX (capital gains tax & passive income tax):a.
Interest incomeb. Royaltiesc. Prizes and winningsd. Dividendse.
Gains from dealings in property
NORMAL TAX a. Compensation for servicesb. General business or
professional incomec. Rentsd. Annuitiese. Pensionsf. Income from
farmingg. Share from the net income of GPP
