Income Taxation

INCOME TAXATION
(A). QUESTIONS TO ASK IN INCOME TAXATION:

1. Did you receive anything? ( in cash or in kind/ legal or illegal source) 2. If you did,
is it income? 3. If yes, is it taxable? 4. If it is taxable, how do you determine
taxability and what kind of tax do we impose?
NOTE: In question number 3, taxability of income depends on the KIND OF
TAXPAYER, SOURCE OF INCOME, AND KIND OF INCOME.
(B). WHO ARE THE TAXPAYERS?
(1). INDIVIDUALS
(A). CITIZENS
(I). RESIDENT CITIZENS;
(2). NON-RESIDENT CITIZENS;
(B). ALIENS
(1). RESIDENT ALIENS; (2). NON-RESIDENT ALIENS;

(I). NON-RESIDENT ALIENS
ENGAGED IN T/B;
(II). NON-RESIDENT ALIENS NOT ENGAGED IN T/B NOTE:
ESTATES AND TRUSTS ARE TREATED AS INCOME TAX PAYERS;
(2). CORPORATIONS
(A). DOMESTIC CORPORATIONS;
(B). FOREIGN CORPORATIONS; (I). RESIDENT FOREIGN CORPORATIONS; (2).
NON-RESIDENT FOREIGN CORPORATIONS. NOTE: PARTNERSHIPS ARE TREATED AS
CORPORATE TAXPAYERS WHICH ARE FURTHER CLASSIFIED INTO GENERAL
PROFESSIONAL PARTNERSHIPS (GPP) OR GENERAL CO-PARTNERSHIPS (GCP)
(C). INDIVIDUAL TAXPAYERS:
Resident citizens:
a. Passive income from within the Phils - Final Tax Passive income from outside the
Phils - Net Income Tax (NIT)
b. Dividends: 1. Issued by DC - Final Tax 2. Issued by FC NIT
c. Sale of Shares of Stocks treated as capital assets
N OTE : The shares of stocks contemplated by law are those issued by DC. Shares of
stocks from FC are subject to NIT. 1. Gains from Sale of capital shares of stocks Capital Gains Tax (CGT)(FWT) if not traded thru the local stock exchange. If traded
thru the stock exchange, % tax under Section 127 of the NIRC; 2. Gains from Sale of
ordinary shares of stocks - NIT
Note: In case of sale of shares of stocks in a foreign corporation, all gains are
subject to NIT. In case of sale of shares of stocks in DC and FC loss ( ex: if sold for
insufficient consideration), if untraded thru the local stock exchange, impose
donors or estate tax on the difference bet the FMV and the consideration .
However, if sold thru the local stock exchange, % tax plus donors or estate tax.
(Basis: Section 100 in relation to Section 85 of the tax code)
d. Sale of Real Property 1. If the property is within the Philippines - 6% CGT (FWT) if
it is a capital asset. Otherwise, NIT if it is an ordinary asset. 2. If the property is
outside the Philippines it is always subject to NIT whether ordinary or capital asset.
Exemption from CGT for sale of real property: Requisites [Sec 24 (D)(2), NIRC] :
i. The real property must be the actual principal residence of the taxpayer/seller ii.
Seller must inform the BIR of his intention to avail of the exemption (within 30 days
from sale) iii. Seller must build or purchase another principal residence within 18
months from sale iv. Proceeds from the sale should be used in building/purchasing
new principal residence v. 6% CGT will be applied proportionately to proceeds not
used for new principal residence.
All kinds of taxpayers can avail of the exemption from payment of CGT for sale of
real property , except corporate taxpayers.
Question: Is an alien exempt from the payment of CGT for sale of real property?
Answer:
Resident aliens, under certain circumstances (succession, ownership of
condominium units and former Filipino citizens), are allowed by Phil. laws to own
real property. Apply same rules to NRA engaged in trade/business NRA not
engaged in trade/business - there is a further limitation They must be among those
enumerated in Sec. 25 (c), (d), (e) of the NIRC [Key: MOP]:
a. those employed by Regional Area/Operational Headquarters of Multinational
Companies b. those employed by Offshore Banking Units c. those employed by
Petroleum Service Contractors and Subcontractors Preferential Tax Treatment under
Sec. 25, NIRC:
If the NRAs Filipino counterpart is given the option to be taxed 10% on the gross,
the alien may also be taxed at the same rate. It is not necessary that the Filipino
counterpart should exercise the option. It is enough that there is an option. Note: If
one is taxed on the gross, there are no deductions allowed.
Summary of rules on individual taxpayers:
1. Among all individual taxpayers, only RC is taxed for income within and outside
the Phils. 2. All kinds of taxpayers are similarly taxed for income within EXCEPT: a.
NRA engaged in t/b- 20% Final tax on cash and property dividends b. NRA not
engaged in t/b are taxed on the gross 3. All kinds of individual taxpayers are subject
to CGT on sale of shares of stock 4. All kinds of individual taxpayers may be exempt
from 6% CGT on sale of real property
(D). CORPORATE TAXPAYERS:
Note that MCIT is in lieu of 30% corporate net income tax while IAET is in addition to
all other taxes imposed upon the corporation.
A foreign corporation can NEVER be subjected to CGT on sale of real property

because under the Constitution, they are NEVER allowed to own real property in the
Philippines.
(E). INCLUSIONS, EXCLUSIONS, DEDUCTIONS:
A. Proceeds of Life Insurance Policy: Facts: X is the employee of Y. X insures his own
life and pays premium of P5,000 annually. Beneficiaries are his wife and children (W
& C). Policy states that if X pays premium for the next 20 years, he will get:
Proceeds: P1M; Interest 10: and Return of Premium (ROP)
Tax Effects/Consequence:
1.
Can X deduct premium from computation of gross income?
No. X is a compensation income earner and premium for life insurance is not among
those deductions that a compensation income earner is allowed to make.
2. The policy states that if X survives to be 60 years old, he may receive the
proceeds, interest and ROP. a. If X survives, are the above - enumerated items
considered as income? The proceeds of P1M and the 10% interest are considered
income. ROP, being mere return of capital, is not.
Taxable? Only the 10% interest is taxable since proceeds are among the items of
exclusions in Sec. 32(B), NIRC.
b.
Assuming X di es and the proceeds are received by W & C, will this be considered as
income on their part? Yes, except for the ROP (Reason: If X had lived, he would have
received it as mere return of capital).
Included in the computation of gross income? Only the 10% interest will be
included;
3.
When X dies, will the above - enumerated items be included in the computation of
the gross estate? It depends. There are 2 sets of rules: a. If the beneficiary is the
EXECUTOR/ADMINISTRATOR or the ESTATE, it will be INCLUDED in the computation
of the gross income, whether the assignment of beneficiary is revocable or not. b. If
the beneficiary is anyone other than those in (a): Revocable assignment- include
in the computation of gross estate Irrevocable ass ignment- exclude in the
computation of gross estate A s lo n g a s t h e d e c e d e n t h a s c o n t r ol o v e r
t h e p r o c e e d s , it will b e in clu d e d in t h e computation of the gross estate.
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Facts: X is the employee of Y. Y insured Xs life. Premium paid by Y and he was also
the beneficiary and will receive proceeds: P1M +10% interest +ROP.
1.
Can Y deduct premium payments as business expense? No. This is not a legitimate
business expense. In addition Section 36, provides that premiums on life insurance
taken by the employer insuring the life of his employees wherein directly or
indirectly he is the beneficiary is NOT DEDUCTIBLE.
2.
If X dies and Y gets proceeds, is this income on the part of Y? Yes, except the ROP.
However, only the 10% interest is taxable . ROP and the amount of P1M are the
first 2 items of exclusion under Sec. 32 (B), NIRC.
3.
Are the proceeds included in the computation of Xs gross estate? No. X did not
have any interest over the proceeds. In fact, the only participation of X is his life.
Facts: X is the employee of Y. X took a life insurance but premium payments were
made by Y. Xs wife and children (W & C) were the assigned beneficiaries. Proceeds
are as follows: P1M +10% interest +ROP.
1. Is it income on the part of X? Yes, the premium paid for by employer Y is
considered as income on the part of X.
Is it taxable? If X is:
Managerial/supervisory employee - Fringe benefit tax Rank and file employee Net income tax
2.
Can Y deduct the premium payments from the computation of gross income? No,
unless Y pays for the life insurance of ALL of his employees. If X gets singled out, Y
can never deduct because it is not a necessary business expense.
3. If X dies and the proceeds go to W & C, is this income on the part of W & C? Yes,
except for ROP. However, only the 10% interest is taxable (income tax). Will this be
included in the computation of the gross estate of X? It depends. Apply the rules on
revocable/irrevocable assignment of beneficiaries. NOTE: Proceeds of accident
insurance:
For purposes of income tax, proceeds of accident insurance are not income and not
taxable as they are merely reimbursements for the damage resulting from the
accident. In case of death however and for purposes of estate tax, they are
generally speaking excluded from the computation of the gross estate unless one of
the risks insured against is the death of the insured by accident in which case, the
insurance maybe considered as a life insurance. In this instance also, for purposes
of income tax, they shall still be excluded from the computation of gross income.
B. Gifts, Bequests, and Devises

Income on the part of the recipient donee/heir/recipient but not forming part of the
taxable income as this is an item of exclusion from the gross income of the
donee/heir/recipient. If however, the property received realizes income, then the
income of the property forms part of the gross income of the taxpayer;
C. Damages
Damages - compensation for physical injuries/disability or death for causes beyond
the control of the employer and only those actually resulting therefrom are excluded
from computation of the gross income. Attorneys fees and costs of suit are only
deductible if the amount awarded is equivalent to the actual expense incurred. This
shall not be considered as income and not taxable because it is a mere
reimbursement. Any amount in excess of the actual expense is considered taxable
income. Moral and exemplary damages are taxable.
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D. Retirement Benefits
The Labor Code requires the employer to contribute to a valid retirement fund. The
contribution is deductible since it is necessary in carrying on the trade/business.
If the employee is also allowed to contribute (contributory retirement fund), the
employees contribution is not deductible since it is not among the allowable
deductions for compensation income earners.
If the employee retires and receives retirement benefits: Tax treatment: the
retirement benefits are income but among the items of exclusions listed in Sec.
32(B), NIRC hence, NOT TAXABLE. It is not considered compensation provided that:
1. The employee is at least 50 years old; 2. Employed with the same employer for at
least 10 years; and 3. The fund must be used for the benefit of the employee and no
other purpose.
What if the fund is contributory? If the employee contributes to the fund, only the
interest/profits will be considered as income but excluded from the computation of
gross income therefore, not taxable. His contributions will be considered as mere
return of capital, hence, not income.
Example: The retirement plan provides that if the employee renders x years of
service and he dies, he shall be considered as retired as if he retired alive. The heirs
will receive the retirement benefits. Tax Treatment:
1. Is it income on the part of the heirs? Yes. Is it taxable? No. The benefits are
among the items of exclusions from gross income.
2. Is it part of the employees gross estate? Yes, provided that it will later on be
deducted from the gross estate.
3. Why do we have to add first before we deduct? Gross estate is defined as the
value of ALL the property of the deceased, real or personal, tangible or intangible.
NOTE: Benefits received from SSS, GSIS, Pag-ibig and PhilHealth , US Veterans Act
Not income
Not compensation
Not taxable (The employees contributions are not deductible)

E. Fringe Benefits, De Minimis Benefits, and Compensation for
Managerial/Supervisory/Rank and File/ Minimum Wage Earners (MWEs)
- these are all benefits given by an employer to an employee - the benefits must be
in relation to the employers business - Compensation - All the basic benefits given
by the employer to the employee
Fringe Benefits - Any benefit given to a managerial/supervisory employee above all
benefits given to other employees.
De Minimis Benefits Privileges of small value provided by the employer to an
employee;
DE MINIMIS BENEFITS
(AS AMENDED BY RR 5-2011) MONETIZED UNUSED VL (private sector) 10 DAYS
MONETIZED VL/SL (government) no limit MEDICAL CASH ALLOWANCE TO
DEPENDENTS OF EMPLOYEES NOT EXCEEDING P 750/EMPLOYEE/SEM OR P 125/MO
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RICE SUBSIDY
P 1,500/MO OR ONE SACK OF RICE OF 50KG/MO ( P 1,500.00)
UNIFORM/CLOTHING ALLOWANCE
P 4,000/YEAR (PER RR 8-2012, INCREASED TO P 5,000.00/ANNUM) ACTUAL MEDICAL
ASSISTANCE NOT EXCEEDING P 10,000/YEAR
LAUNDRY ALLOWANCE NOT EXCEEDING P 300/MO
ACHIEVEMENT AWARDS NOT EXCEEDING P 10,000/YEAR GIFTS GIVEN DURING
CHRISTMAS/ANNIVERSARY CELEBRATIONS NOT EXCEEDING P 5,000/EMPLOYEE/YEAR
DAILY MEAL ALLOWANCE FOR OT/NIGHT/GRAVEYARD SHIFT NOT EXCEEDING 25% OF
BASIC MINIMUM NOTE: IF NOT PART OF ABOVE LIST NOT DE MINIMIS, IE,
TAXABLE/SUBJECT TO WT
The amount of de minimis benefits conforming to the ceiling herein prescribed

shall not be considered in determining the P30,000.00 ceiling of other benefits
excluded from gross income under Section 32(b)(7)(e) of the Code. Provided that,
the excess of the de minimis benefits over the irrespective ceilings prescribed
by these regulations shall be considered as part of other benefits and the
employee receiving it will be subject to tax only on the excess over the
P30,000.00 ceiling. Provided, further , that MWEs receiving other benefits
exceeding the P30,000.00 limit shall be taxable on the excess benefits, as well as
on his salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified
as de minimis benefits or fringe benefits, shall constitute as deductible expense
upon such employer. Where compensation is paid in property other than money, the
employer shall make necessary arrangements to ensure that the amount of the tax
required to be withheld is available for payment to the Bureau of Internal Revenue .
Statutory Minimum Wage:
(SMW) shall refer to the rate fixed by the Regional Tripartite Wage and Productivity
Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each
region shall determine the wage rates in the different regions based on established
criteria and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her
entire earnings are not exempt from income tax and, consequently, from
withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business,
or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income
earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
KINDS OF EMPLOYEES
EMPLOYEE BENEFITS
Basic Pay OT/HP/HP/NSD
DMB OTHER BENEFITS

w/in limits excess
w/in 30k limit
excess
M/S C (NIT) exempt transfer to 30k limit
exempt FB
R/F C (NIT) C (NIT) exempt exempt C (NIT)
MWE SMW(Exempt) exempt exempt exempt

not MWE/all income taxable
Specific Rules:
(1). Table is not applied if benefit is furnished for the convenience of the employer
or necessary in trade or business of the employer;
(2). If DMB received exceeds the limits provided by law, the excess shall be treated
as other benefits which if not exceeding the 30k limit shall be exempt from payment
of tax;
(3). If other benefits exceed the 30k limit, the same shall be treated as FB in the
case of a M/S employee and C in the case of a R/F employee. IN the case of an MWE
whose other benefits exceed the 30k limit, he stops being considered as an MWE
and the instead treated as an ordinary R/F employee whose income from
employment shall be subject to tax except the DMB within limits and other benefits
within the 30k limit;
(4). If an MWE has income derived from trade or business or any income other than
SMW, the SMW, OT/HP/HP/NSD, DMB within limits, and other benefits within 30k
limit, shall still be exempt from tax except when his other benefits exceed 30k limit,
in which case, the table for R/F employee shall be applied to him.
N OTE : If the employee is one of the NRAs not engaged in trade/business under
Sec. 25 (c), (d), (e), NIRC, there is no distinction between fringe benefits and
compensation because they are taxed on the gross. If the benefit is either (1)
furnished for the convenience of the employer or (2) necessary to the trade or
business of the employer, it is not income, not compensation, not fringe benefits
and not taxable.
Fringe Benefit Tax is NOT imposed on the following:
1. Rank and file employees they do not receive fringe benefits 2. NRA not engaged
in t/b under Sec 25 (c), (d), (e) NIRC they are taxed on the gross at the rate of
either 25% or 15%. 3. Filipino counterpart of the NRA under Sec 25 NIRC who
chooses to be taxed at the rate of 15% on the gross.
INFORMERS REWARD:
Forms part of the gross income of the taxpayer informant and subject to income tax
TIPS AND GRATUITIES PAID BY CLIENTS and NIGHT SHIFT DIFFERENTIAL:
1. If paid directly by clients to employees, income and subject to tax on the part of
employee but cannot be subjected to withholding tax by the employer; 2. If paid to
the employer by reason of service rendered by employees, income, taxable on the
part of the employee but subject to withholding by the employer; 3. Night shift
differential, income and subject to tax on the part of the employee who is not an
MWE but subjected to withholding tax by the employer;
COMPENSATION FOR DEATH, PHYSICAL INJURIES, PHYSICAL DISABILITY PAID BY
EMPLOYER TO EMPLOYEE OR HIS HEIRS, OR FOR CAUSES BEYOND THE CONTROL OF
EMPLOYEE
1. Not income as mere compensation for the damage or loss of life; 2. Separation
pay for retrenchment, redundancy, or any labor saving device is income but not
subject to tax due to causes beyond control of employee; 3. Backwages in case of
illegal dismissal, income and subject to tax; 4. Separation pay in case of nonreinstatement of employee due to strained relation between employer and
employee after illegal dismissal, income but not taxable; 5. Award of moral,
exemplary and nominal damages in illegal dismissal cases, are income but if strictly
interpreted, should be subject to tax. In liberal interpretation, these are exempt due
to causes beyond control of employee. However, exemptions are strictly construed
against taxpayer claimant;
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DEDUCTIONS FROM GROSS INCOME Deductions (Sec. 34H NIRC)
Take note that Sec. 34 pertains only to items related to the trade/business of the
taxpayer. Requisites of Deductibility of Items under Section 34 of the Tax Code: (1).
Necessary in Trade or Business of the taxpayer; (2). Actually paid or incurred; (3).
Reasonable in amount; and (4). Supported by documents. The following are not
subject to any kind of deduction: 1. Taxpayers or income subject to Gross Income
Tax (GIT) 2. Income subject to Final Withholding Tax
Comparison between OSD in income taxation and SD for estate taxation: Optional
Standard deduction Standard deduction in estate tax OSD is in lieu of other
deductions from gross income. Standard Deduction is in addition to other
deductions from the gross estate 40% of gross income may be deducted Maximum
amount of P 1M may be deducted
SUMMARY OF ALLOWABLE DEDUCTIONS: (1). Individual earning purely
compensation income: personal exemptions (PE), additional exemptions (AE) , and
premium on health and hospitalization insurance (PHHI) (2). Individual engaged in
trade or business: PE, AE, PHHI, plus Itemized deductions under Section 34 OR
Optional Standard deduction (OSD) Note: Individuals who are non-resident aliens
not engaged in trade or business are not allowed deductions as they are subject to
Gross Income Tax. Non-resident aliens engaged in trade or business are allowed
personal exemptions subject to reciprocity rule. All kinds of individual taxpayers are
not allowed to claim for deductions on income which are subject to final withholding
taxes such as passive income, capital gains on sale of shares of stocks and real
property; (3). Corporate taxpayers Itemized deductions under Section 34 OR OSD.
Non-resident foreign corporations which are subject to gross income tax are not
allowed to claim any deduction. Income of all kinds of corporate taxpayers which
are subject to final withholding taxes such as passive income, capital gains on sale
of shares of stocks and real property, are not subject to deductions. DEDUCTIONS:
Section 34, 35, & 36, NIRC
(A). BUSINESS EXPENSES:
1. Illegal expenses are not deductible whether business is legal or illegal; 2.
Legitimate expenses whether business is legal or illegal are deductible; 3. Capital
expenditures are not deductible. 4. Ordinary means commonly incurred, necessary
means appropriate and helpful to the taxpayer or intended to realize profit or to
minimize loss; 5. Rentals on lease of property provided taxpayer does not acquire
interest other than as a mere possessor, thus rentals on lease to own scheme are
not deductible as they are capital expenditures already; 6. Real estate tax on the
property leased and shouldered by the lessee is deductible expense on the part of
the lessee BUT treated as taxable income on the part of the lessor; 7. Cost of
improvements introduced by lessee in an ordinary asset are not deductible expense
on the part of the lessee as these are capital investment on his part but maybe
depreciated by the lessee;
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8. Travel and transportation expenses or expenses while away from home incurred
by employers and given to employees pursuant or trade or business when
necessary and reasonable; 9. advertising expenses designed to stimulate the
current sale of merchandise or use of services are deductible business expenses;
Examples of non-deductible business expenses:
1. compensation to public relations firm for services rendered in carrying on
campaign to sell additional capital stock; 2. expenses relating to recapitalization
and reorganization of corporation; 3. promotion or marketing expenses which are
tantamount to purchase of goodwill; 4. bribes and kickbacks; 5. expenses for major
repairs are not deductible but expenses for minor repairs are deductible; 6. personal
and living expenses of the taxpayer as they are already allowed to claim for
personal and additional exemptions; 7. advertising expenses designed to stimulate
the future sale of merchandise or use of services as these are already considered as
capital outlay;
Tax Benefit Rule: applies to (1). Taxes claimed and allowed as deductions from
gross income when refunded or credited, shall be included as part of gross income
in the year of receipt to the extent of the income tax benefit of said deduction; (2).
Bad debts claimed and allowed as deductions from gross income deducted but
subsequently paid or recovered; (3). Casualty losses deducted as such but later
recovered; (B). Taxes as deduction: ( income and estate tax) Income Tax Estate Tax
Only taxes previously paid may be deducted (unpaid taxes can never be deducted)
Taxes which remain unpaid and accruing until the time of death may be deducted
from the gross estate The taxes must be in connection with taxpayers
trade/business The taxes need not be in connection with decedents trade or
business
. Bad Debts/Interest on Loans: ( income and estate tax) Facts: X borrowed
P100,000 from Y with 10% interest per annum. Total amount due is P110,000. 1. X
paid Y P110 000. Is it income on the part of Y? Only the 10% interest is income and
taxable. Can X deduct the 10% as interest on loan? Yes, provided that the loan was
in relation to Xs trade or business and subject further to the 33% limitation of the
interest earnings of the said debtor; 2. X was not able to pay Y Tax consequence: Y
may declare the P110,000 as bad debt. It will be deductible if: (1) Y is engaged in
trade/business and (2) the amount of bad debt is in relation to his trade or business.
There are no tax consequences on X. NOTE: There can be no deduction if X and Y
are related to each other under Sec. 36(B), NIRC. 3. If X dies before paying his debt
Tax consequences: Y will have to file a claim during settlement of Xs estate. It will
be considered as a claim against the estate (CAE) and the entire amount may be
deducted from the estate whether or not the loan is in connection with Xs trade or
business. If the estate subsequently pays Y, is it income on his part? Only the
interest is income and taxable. What if prior to Xs death, Y claimed the debt as a
deduction (bad debt) and during the settlement of the estate, the court ordered that
Y be paid the amount of the loan + interest? Apply the tax benefit rule.
4. If Y dies before X pays the debt. Tax consequences: a. The estate of Y should
include the debt as part of Ys gross estate (a debt is an intangible personal
property, hence should be included in the gross estate as provided under Section 85
of the NIRC) b. The debt is an allowable deduction from the gross estate of Y as a
claim against an insolvent person (CAIP)
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If the estate of Y is allowed to deduct and X subsequently pays the debt + interest,
the tax benefit rule cannot be applied. The payment will form part of the income of
the estate subject to Net Income Tax. Remember that the estate is considered as a
taxpayer. (D). Casualty Loss: (income and estate tax) The property lost (1) must not
be compensated by insurance and (2) must be lost due to theft, robbery,
embezzlement or other natural calamity . The loss is characterized by suddenness;
LOSSES IN INCOME TAX LOSSES IN ESTATE TAX Property lost must be in relation to
trade/business of taxpayer The property lost may or may not be in relation to trade/
business of deceased The loss must occur during the taxable period The loss may
occur until 6 months after death
NOTE: If the loss of property is previously deducted for income tax purposes, it
cannot be deducted for estate tax purposes. (E). DEPRECIATION
Depreciation is allowed only for taxpayers engaged in trade or business .
Depreciation period for personal properties is five (5) years while the period for real
properties ranges from 15 to 25 years depending on the economic or useful life of
the asset.
Rules:
(1). A taxpayer who is purely earning purely compensation income is not allowed to
claim depreciation as a deduction;
(2). In case a taxpayer purchases an asset used in his trade or business, he is not
entitled to claim the amount as deductible business expense considering that the
same is a capital expenditure, but the taxpayer is allowed to claim depreciation of
the asset as a deduction;
(3). Under a Build Operate Transfer agreement, the builder is allowed to depreciate
the asset until the time of transfer and after transfer, the transferee can also claim
depreciation of the asset based on the FMV of the property at the time of
acquisition;
(4). Under a lease agreement with provision that all permanent improvements shall
accrue to the lessor upon end of lease contract, the lessee who is engaged in t/b
can claim depreciation of the improvements while the lessor can claim depreciation
of the leased property excluding the improvements;
(5). Under a lease to own contract, the lessee who introduces the improvements
shall have the right to claim depreciation of the improvements only while the lessor
claims depreciation of the leased property only. The lessee cannot claim rentals for
the lease as deductible business expenses because he acquires interest other than
as a mere possessor of the property; Upon expiration of the contract, the lessee
owns the property in full and lessor loses all rights over the property;
(F). PREMIUM ON HEALTH AND HOSPITALIZATION INSURANCE (PHHI)
This deduction is allowed to both taxpayers who are engaged in trade or business
and those who are not engaged in trade or business in the amount of P 2,400.00 per
family provide that the gross annual income does not exceed P 250,000.00.
(G). RESEARCH AND DEVELOPMENT Expenses for research and development to be
deductible from the gross income are limited to those which are related to the
trade and business of the taxpayer.
(H). PERSONAL EXEMPTIONS/ADDITIONAL EXEMPTIONS (effective 01 July 2008)
Individual taxpayers regardless of status are entitled to P50,000 personal
exemption. Additional exemption is at P 25,000.00 per child. Dependent pertains to
a child of whatever kind and status, not more than 21 years of age, not married,
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not gainfully employed, chiefly dependent and living with the taxpayer, and
regardless of age, if incapable of self-support by reason of physical or mental defect.
The husband shall be the proper claimant of the additional exemption for qualified
dependent children unless he explicitly waives his right in favor of his wife in the
Application for Registration (BIR Form No. 1902) or in the Certificate of Update of
Exemption and of Employers and Employees Information (BIR Form No. 2305),
whichever is applicable . Provided, however, that where the spouse of the employee
is unemployed or is a non-resident citizen deriving income from foreign sources, the
employed spouse within the Philippines shall be automatically entitled to claim the
additional exemptions for children.
A NRA engaged in t/b in the Philippines is entitled to personal exemption subject to
reciprocity rule.
(I). RECOGNITION OF GAINS/LOSSES IN EXCHANGES OF PROPERTY
RULE:
(1). All gains and losses realized or incurred in exchanges of ordinary and capital
assets are RECOGNIZED; (2). In exchanges of capital assets with gains, the gains
are not immediately included in the gross income but first charged against losses
sustained in exchanges of capital assets. In recognizing the gains/losses, the
taxpayer may apply the concept of holding period ( if held for more than one yearg/l recognized at 50%; if held for less than one year g/l recognized at 50%); The
holding period does not apply to a corporate taxpayer, thus, all gains/losses are
recognized at 100%;
(3). After charging the gains against the losses and the taxpayer realizes Net capital
gains, the same shall be included in the gross income of the taxpayer. After
charging the gains against the losses and the taxpayer realizes net capital loss,
then a taxpayer, other than a corporation, is allowed to carry over the same for
three succeeding years (NCLCO);
(4). In exchanges of ordinary assets with gains, the gains are not immediately
included in the gross income of the taxpayer but first charged against losses
sustained in exchanges of ordinary assets. Holding period does not apply. After
charging the gains versus the losses, if taxpayer realizes net ordinary gains, include
the same in the gross income but if the taxpayer realizes net ordinary losses, no
carry over will be allowed;
(5). Rule Nos. 1 to 4, are not applied in the following instances: (NO GAINS/ NO LOSS
RECOGNIZED)
(a). In case of valid merger and consolidation; (b). In case a stockholder exchanges
property for stocks in a corp wherein he, together with three others, acquires control
over the corporation; . In wash sales of shares of stocks wherein the taxpayer sells
shares of stocks wherein he realized gains, gains are always recognized but in case
of loss sustained and 30 days prior to sale or 30 days after the sale, he acquires
similar shares of stocks as the ones disposed of and for which sustained losses, ALL
LOSSES WILL NOT RECOGNIZED; (d). In sale of shares of stocks (capital in

character), not traded thru local stock exchange, gains are always subject to either
5% or 10% FWT. If traded, gains or loss, the tax is % tax under Section 127 of the
NIRC; (e). In sale of real property located in the Philippines (capital in character),
whether gains or loss, the taxpayer shall be subject to 6% CGT which is in the
nature of FWT.
(H). COMPARISON BETWEEN NET CAPITAL LOSS CARRY OVER
(NCLCO) AND NET OPERATING LOSS CARRY OVER ( NOLCO)
Rules:
(1). NOLCO refers to net operating loss carry over which is applicable only to a
corporate taxpayer. If a corporate taxpayer has more deductions than gross income,
the corporation sustains net operating losses which maybe carried over to the
succeeding year only. Consequently, if during the succeeding year, the taxpayer
realized taxable net income, this maybe reduced by the net operating loss carried
over from the previous year; (2). NCLCO refers to net capital loss carry over which is
applicable only to individual taxpayers. This results from exchanges of capital assets
wherein gains and losses have been recognized such that during the taxable period,
after charging all capital losses from the capital gains, the taxpayer may either
realize net capital gains (included in the gross income therefore taxable) OR net
capital loss ( which maybe carried over for the succeeding 3 years);
(3). NOLCO pertains to expenses and deductions from gross income while NCLCO
pertains to exchanges of capital assets;
Page 63 of 75
(I). COMPARISON OF INCOME TAX, ESTATE TAX AND DONORS TAX IN THE
TREATMENT OF CAPITAL AND ORDINARY ASSETS [Please refer to Secs. 100, 85(B)
and 24(D), NIRC]
Transfers for Insufficient Consideration: Example: X has the following real properties
all valued at P 3M each.
Within the Philippines: House and Lot Parlor
In the United States: Vacation house Parlor Tax consequences if each real
property was sold at P50,000: Sale of House and Lot in Phils. - subject to CGT on
sale of real property (6%) since it is a capital asset and CGT is tax on the presumed
gains realized from the sale Sale of Parlor located in the Phils. - subject to
donors tax or estate tax and not NIT since there is no income derived from the sale
Sale of Vacation house in the US - donors tax or estate tax is imposed on the
difference between the fair market value of P3M and the consideration of P 50,000
Sale of parlor in the US - donors tax or estate tax is imp osed on the difference
between the fair market value of P 3M and the consideration of P 50,000
However, if the seller/taxpayer is an resident alien or a non-reside , the sale of real
property outside the Philippines for insufficient consideration is not subject to NIT
but still subject to donors or estate tax taxable in the case of a resident alien;
Example: X has the following personal properties all valued at P1M each.
Within the Philippines: Car for personal use Car used for the parlor in the Phils.
In the United States: Car for personal use when on vacation abroad Car used for
the parlor in the US
Tax consequence if each was sold at P50,000 - all will be subject to donors tax
When property other than real property provided under Section 24(B) NIRC is
transferred for insufficient consideration, the difference between the consideration
and the fair market value at the time of transfer shall be considered as a donation
subject to donors tax (Section 100) or estate tax (Section 85g). If the seller is a
Non-Resident Alien at the time of transfer for insufficient consideration, only the
property in the Philippines is taxable. All kinds of donors except NRA are taxable for
donations of property within and outside the Philippines. Rules on determining
taxability: INCOME TAX (source of income determines taxability) Taxable Income
RC NRC NA NRA Income within the Phils. Income outside the Phils.
18.
What are general principles of income taxation in the Philippines OR the

situs of income taxation in the Philippines OR the source rule of income taxation as
applied in the Philippines ?
SUGGESTED ANSWER:
a.
A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.
b.
Philippines.
A nonresident citizen is taxable only on income derived from sources within the
c.
An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income from sources within the
Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker.
d.
An alien individual, whether resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines.
e.
A domestic corporation is taxable on all income derived from sources within and
without the Philippines.
f.
A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC
of 1997)
19.
Compensation income is considered as having been earned in the place
where the service was rendered and not considered as sourced from the place of origin of the
money.
20.
Payment for services, other than compensation income, is considered as
having been earned at the place where the activity or service was performed.
21.
A non-resident alien, who has stayed in the Philippines for an aggregate period of
more than 180 days during any calendar year, shall be considered as a non-resident alien doing
business in the Philippines. Consequently, he shall be subject to income tax on his income
derived from sources from within the Philippines. [Sec. 25 (A) (1), NIRC]
He is allowed to avail of the itemized deductions including the personal and additional
exemptions subject to the rule on reciprocity.
22.
What are considered as de minimis benefits not subject to withholding tax

on compensation income of both managerial and rank and file employees ?
SUGGESTED ANSWER:
a.
Monetized unused vacation leave credits of employees not exceeding ten (10)
days during the year;
b.
Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;
c.
Rice subsidy of P1,000.00 or one (1) sack of 50-kg. rice per month amounting to
not more than P1,000.00;
d. Uniforms and clothing allowance not exceeding P3,000.00 per annum;
e. Actual yearly medical benefits not exceeding P10,000.00 per annum;
f.
Laundry allowance not exceeding P300 per month;
g.
Employees achievement awards, e.g. for length of service or safety achievement,
which must be in the form of a tangible persona property other than cash or gift certificate, with an
annual monetary value not exceeding P10,000.00 received by an employee under an established
written plan which does not discriminate in favor of highly paid employees;
h.
Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
i.
Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g. on account of illness, marriage, birth of a baby, etc.; and
j.
Daily meal allowance for overtime work not exceeding twenty five percent (25%) of
the basic minimum wage.
The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be
considered in determining the P30,000 ceiling of other benefits provided under Section 32 (B)(7)
(e) of the Code. However, if the employer pays more than the ceiling prescribed by these
regulations, the excess shall be taxable to the employee receiving the benefits only if such excess
is beyond the P30,000.00 ceiling, provided, further, that any amount given by the employer as
benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall
constitute as deductible expense upon such employer. [Sec. 2.78.1 (A) (3), Rev. Regs. 2-98 as
amended by Rev. Regs. No. 8-2000]
23.
Income subject to final tax refers to an income collected through the
withholding tax system. The payor of the income withholds the tax and remits it to the
government as a final settlement of the income tax as a final settlement of the income tax due on
said income. The recipient is no longer required to include the income subjected to a final tax as
part of his gross income in his income tax return.
24.
Distinguish exclusions from deductions.
SUGGESTED ANSWER:
a.
Exclusions from gross income refer to a flow of wealth to the taxpayer which are
not treated as part of gross income for purposes of computing the taxpayers taxable income, due
to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by
statute; and (3) It does not come within the definition of income (Sec. 61, Rev. Regs. No. 2)
WHILE deductions are the amounts which the law allows to be subtracted from gross income in
order to arrive at net income.
b.
Exclusions pertain to the computation of gross income WHILE deductions pertain
to the computation of net income.
c.
Exclusions are something received or earned by the taxpayer which do not form
part of gross income WHILE deductions are something spent or paid in earning gross income.
An example of an exclusion from gross income are life insurance proceeds, and an example
of a deduction are losses.
25.
What are excluded from gross income ?
SUGGESTED ANSWER:
a.
Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death
of the insured whether in a single sum or otherwise.
b.
Amounts received by the insured as a return of premiums paid by him under life
insurance, endowment or annuity contracts either during the term, or at maturity of the term
mentioned in the contract, or upon surrender of the contract.
c.
Value of property acquired by gift, bequest, devise, or descent.
d. Amounts received, through accident or health insurance or Workmens Compensation

Acts as compensation for personal injuries or sickness, plus the amounts of any damages
received on whether by suit or agreement on account of such injuries or sickness.
e.
Income of any kind to the extent required by any treaty obligation binding upon the
Government of the Philippines.
f.
Retirement benefits received under Republic Act No. 7641. Retirement received
from reasonable private benefit plan after compliance with certain conditions. Amounts received
for beyond control separation. Foreign social security, retirement gratuities, pensions, etc. USVA
benefits, SSS benefits and GSIS benefits.
26.
What are the conditions for excluding retirement benefits from gross
income, hence tax-exempt ?
SUGGESTED ANSWER:
a.
Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance with the
employers reasonable private benefit plan approved by the BIR.
b.
Retiring official or employee
1)
In the service of the same employer for at least ten (10) years;
2)
Not less than fifty (50) years of age at time of retirement;
3)
Availed of the benefit of exclusion only once. [Sec. 32 (B) (6) (a), NIRC of 1997]
The retiring official or employee should not have previously availed of the privilege under the
retirement plan of the same or another employer. [1st par., Sec. 2.78 (B) (1), Rev. Regs. No.
2-98]
27. What kind of separation (retirement) pay is excluded from gross income,
hence tax-exempt ?
SUGGESTED ANSWER:
a.
Any amount received by an official, employee or by his heirs,
b.
From the employer
c.
As a consequence of separation of such official or employee from the service of
the employer because of
1)
Death, sickness or other physical disability; or
2)
For any cause beyond the control of said official or employee [Sec. 32 (B)
(6) (b), NIRC of 1997], such as retrenchment, redundancy and cessation of business. [1 st
par., Sec. 2.78 (B), (1) (b), Rev. Regs. No. 2-98]
28.
What are the Itemized deductions from gross income and who may avail of
them ?
a. Ordinary and necessary trade, business or professional expenses.
b.
The amount of interest paid or incurred within a taxable year on indebtedness in
connection with the taxpayers profession, trade or business.
Resident citizens, resident alien individuals and nonresident alien individuals who are
engaged in trade and business, on their gross incomes other from compensation income are
allowed to deduct these expenses. Domestic corporations, estates and trusts may also deduct
this expense. Nonresident citizens and foreign corporations on their gross incomes from within
may also deduct this expense.
Nonresident alien individuals not engaged in trade or business in the Philippines are not
allowed to deduct this expense.
c. Taxes paid or incurred within the taxable year in connection with the taxpayers
profession.
d.
Ordinary losses, losses from casualty, theft or embezzlement; and net operating
losses.
e.
Bad debts due to the taxpayer, actually ascertained to be worthless and

charged off within the taxable year, connected with profession, trade or business, not sustained
between related parties.
f.
Depreciation or a reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used in trade or business.
g.
Depletion or deduction arising from the exhaustion of a non-replaceable asset,
usually a natural resource.
h.
Charitable and other contributions. Resident citizens, resident alien individuals

and nonresident alien individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations
on their gross incomes from within may also deduct this expense.
i. Research and development expenditures treated as deferred expenses paid or
incurred by the taxpayer in connection with his trade, business or profession, not deducted as
expenses and chargeable to capital account but not chargeable to property of a character which is
subject to depreciation or depletion.
j. Contributions to pension trusts. Resident citizens, resident alien individuals and
nonresident alien individuals who are engaged in trade and business, on their gross incomes
other from compensation income are allowed to deduct these expenses. Domestic corporations,
estates and trusts may also deduct this expense. Nonresident citizens and foreign corporations
on their gross incomes from within may also deduct this expense.
k. Insurance premiums for health and hospitalization. Resident citizens, resident alien
individuals and nonresident alien individuals who are engaged in trade and business, on their
gross incomes other from compensation income are allowed to deduct these expenses.
Nonresident citizens and nonresident alien individual engaged in trade or business in the
Philippine on their gross incomes from within may also deduct these premiums.
allowed to deduct these premiums.
l. Personal and additional exemptions. Resident citizens, and resident alien on their
gross incomes and from compensation income are allowed to deduct these premiums.
Nonresident citizens on their gross incomes from within may also deduct this expense.
Nonresident alien individuals engaged in trade or business in the Philippines are allowed to
deduct these exemptions under reciprocity.
29.
Distinguish ordinary expenses from capital expenditures.
SUGGESTED ANSWER: Ordinary expenses are those which are common to incur in the
trade or business of the taxpayer WHILE capital expenditures are those incurred to improve
assets and benefits for more than one taxable year. Ordinary expenses are usually incurred
during a taxable year and benefits such taxable year. Necessary expenses are those which are
appropriate or helpful to the business.
30.
What are the requisites for the deductibility of business expenses ?
SUGGESTED ANSWER:
expenses:
a.
The following are the requisites for deductibility of business
Compliance with the business test:
1)
Must be ordinary and necessary;
2)
Must be paid or incurred within the taxable
year;
3)
Must be paid or incurred in carrying on a
trade or business.
4)
Must not be bribes, kickbacks or other illegal expenditures
b. Compliance with the substantiation test. Proof by evidence or records of the deductions
allowed by law including compliance with the business test.
31.
What are the requisites for the deductibility of ordinary and necessary trade,
business, or professional expenses, like expenses paid for legal and auditing services ?
SUGGESTED ANSWER:
a.
the expense must be ordinary and necessary;
b.
it must have been paid or incurred during the taxable year dependent upon the
method of accounting upon the basis of which the net income is computed.
c.
it must be supported by receipts, records or other pertinent papers.
(Commissioner of Internal Revenue v, Isabela cultural Corporation, G. R. No. 172231, February
12, 2007)
32.
TMG Corporation is issuing the accrual method of accounting. In

2005 XYZ Law Firm and ABC Auditing Firm rendered various services which were billed by
these firms only during the following year 2006. Since the bills for legal and auditing
services were received only in 2006 and paid in the same year, TMG deducted the same
from its 2006 gross income. The BIR disallowed the deduction ?
Who is correct, TMG or BIR ? Explain.
SUGGESTED ANSWER: The BIR is correct. TMG should have deducted the professional
and legal fees in the year they were incurred in 2005 and not in 2006 because at the time the
services were rendered in 2005, there was already an obligation to pay them. (Commissioner of
Internal Revenue v, Isabela Cultural Corporation, G. R. No. 172231, February 12, 2007)
NOTES AND COMMENTS:
a.
Accounting methods for tax purposes comprise a set of rules for determining
when and how to report income and deductions. (Commissioner of Internal Revenue v, Isabela
cultural Corporation, G. R. No. 172231, February 12, 2007)
The two (2) principal accounting methods for recognition of income are the (a) accrual
method; and the (b) cash method.
b.
Recognition of income and expenses under the accrual method of
accounting. Amounts of income accrue where the right to receive them becomes fixed, where
there is created an enforceable liability. Liabilities, are incurred when fixed and determinable in
nature without regard to indeterminacy merely of time of payment.. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)
The accrual of income and expense is permitted when the all-events test has been met.
(Ibid.)
c.
All-events test. This test requires:
1)
fixing of a right to income or liability to pay; and
2)
the availability of the reasonable accurate determination of such income or liability.
The test does not demand that the amount of such income or liability be known absolutely,
only that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy.
The all-events test is satisfied where computation remains uncertain; if its basis is
unchangeable, the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined
exactly,; it must be determined with reasonable accuracy implies something less than an exact
or completely accurate amount.
The propriety of an accrual must be judged by the fact that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year. Accrual
method of accounting presents largely a question of fact; such that the taxpayer bears the burden
of proof of establishing the accrual of an item of income or deduction. (Commissioner of Internal
Revenue v, Isabela cultural Corporation, G. R. No. 172231, February 12, 2007)
d.
Under the cash method income is to be construed as income for tax purposes
only upon actual receipt of the cash payment. It is also referred to as the cash receipts and
disbursements method because both the receipt and disbursements are considered. Thus,
income is recognized only upon actual receipt of the cash payment but no deductions are allowed
from the cash income unless actually disbursed through an actual payment in cash.
33. The fringe benefits tax is a final withholding tax imposed on the grossed-up monetary
value of fringe benefits furnished, granted or paid by the employer to the employee, except rank
and file employees. [1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
34.
What is meant by fringe benefit for purposes of taxation ?
SUGGESTED ANSWER: For purposes of taxation, fringe benefit means any good, service,
or other benefit furnished or granted in cash or in kind by an employer to an individual employee
(except rank and file employees), such as but not limited to:
a.
Housing;
b.
Expense account;
c.
Vehicle of any kind;
d.
Household personnel, such as maid, driver and others;
e.
Interest on loan at less than market rate to the extent of the difference between the
market rate and actual rate granted;
f.
Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
g.
Expenses for foreign travel;
h.
Holiday and vacation expenses;
i.
Educational assistance to the employee or his dependents; and
j.
Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows. [Sec. 33 (B), NIRC of 1997; 1 st par., Sec. 2.33 (B), Rev. Regs.
No. 3-98]
35.
Fringe benefits that are not subject to the fringe benefits tax:
a.
When the fringe benefit is required by the nature of, or necessary to the trade,
business or profession of the employer; or
b.
When the fringe benefit is for the convenience or advantage of the employer. [Sec.
32(A), NIRC of 1997; 1st par., Sec. 2.33 (A), Rev. Regs. No. 3-98]
c.
Fringe benefits which are authorized and exempted from income tax under the Tax
Code or under any special law;
d.
Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
e.
Benefits given to the rank and file employees, whether granted under a collective
bargaining agreement or not; and
f.
De minimis benefits as defined in the rules and regulations to be promulgated by
the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. [1 st
par., Sec. 32 (C), NIRC of 1997; Sec. 2.33 (C), Rev. Regs. No. 3-98]
36. De minimis benefits are facilities and privileges (such as entertainment,

medical services, or so-called courtesy discounts on purchases), furnished or offered by an
employer to his employees. They are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities are offered or furnished by the employer merely
as a means of promoting the health, goodwill, contentment, or efficiency of his employees. [Sec.
2.78,1 (A) (3), Rev. Regs. 2-98 as amended by Rev. Regs. No. 8-2000]
37.
Preferred shares are considered capital regardless of the conditions under

which such shares are issued and dividends or interests paid thereon are not allowed as
deductions from the gross income of corporations. (Revenue Memorandum Circular No. 1771)
38. Bad debts are those which result from the worthlessness or uncollectibility, in whole or
in part, of amounts due the taxpayer by others, arising from money lent or from uncollectible
amounts of income from goods sold or services rendered. (Sec. 2.a, Rev. Regs. 5-99)
39.
Who are related parties ?
SUGGESTED ANSWER: The following are related parties:

a.
Members of the same family. The family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal
descendants;
b.
An individual and a corporation more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by or for such individual;
c.
Two corporations more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for the same individual;
d.
A grantor and a fiduciary of any trust; or
e.
The fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust; or
f.
A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]
40.
What are the requisites for valid deduction of bad debts from gross income ?
SUGGESTED ANSWER:
a. There must be an existing indebtedness due to the taxpayer which must be valid and
legally demandable;
b. The same must be connected with the taxpayers trade, business or practice of
profession;
c. The same must not be sustained in a transaction entered into between related parties;
d. The same must be actually charged off the books of accounts of the taxpayer as of the
end of the taxable year; and
e. The debt must be actually ascertained to be worthless and uncollectible during the
taxable year;
f. The debts are uncollectible despite diligent effort exerted by the taxpayer. [Sec. 34 (E)
(1), NIRC of 1997; Sec. 3, Rev. Regs. No. 5-99 reiterated in Rev. Regs. No. 25-2002; Philippine
Refining Corporation v. Court of Appeals, et al., 256 SCRA 667]
g. Must have been reported as receivables in the income tax return of the current or prior
years. (Sec. 103, Rev. Regs. No. 2)
:
41.
What is the tax benefit rule ?
SUGGESTED ANSWER: The tax benefit rule posits that the recovery of bad debts
previously allowed as deduction in the preceding year or years shall be included as part of the
taxpayers gross income in the year of such recovery to the extent of the income tax benefit of
said deduction.
42.
If in the year the taxpayer claimed deduction of bad debts written-off, he realized a
reduction of the income tax due from him on account of the said deduction, his subsequent
recovery thereof from his debtor shall be treated as a receipt of realized taxable income. (Sec. 4,
Rev. Regs. 5-99)
43.
If the said taxpayer did not benefit from the deduction of the said bad debt writtenoff because it did not result to any reduction of his income tax in the year of such deduction (i.e.
where the result of his business operation was a net loss even without deduction of the bad debts
written-off), then his subsequent recovery thereof shall be treated as a mere recovery or a return
of capital, hence, not treated as receipt of realized taxable income. (Sec. 4, Rev. Regs. 5-99)
44.
Depreciation is the gradual diminution in the useful value of tangible property
resulting from ordinary wear and tear and from normal obsolescence. The term is also applied to
amortization of the value of intangible assets the use of which in the trade or business is definitely
limited in duration.
45.
The methods of depreciation are the following:
a.
Straight line method;
b.
Declining balance method;
c.
Sum of years digits method; and
d.
Any other method prescribed by the Secretary of Finance upon the
recommendation of the Commissioner of Internal Revenue:
1)
Apportionment to units of production;
2)
Hours of productive use;
3)
Revaluation method; and
4)
Sinking fund method.
46.
What are personal and additional exemptions ?
SUGGESTED ANSWER: These are the theoretical persona, living and family expenses of
an individual allowed to be deducted from the gross or net income of an individual taxpayer.
These are arbitrary amounts which have been calculated by our lawmakers to be roughly
equivalent to the minimum of subsistence, taking into account the personal status and additional
qualified dependents of the taxpayer. They are fixed amounts in the sense that the amounts have
been predetermined by our lawmakers and until our lawmakers make new adjustments on these
personal exemptions, the amounts allowed to be deducted by a taxpayer are fixed as
predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No.

159991, November 16, 2006 citing Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil.
414, 418 (1918)]
47.
Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real properties
considered as ordinary assets. (Sec. 2.a, Rev. Regs. No. 7-2003)
The term capital assets means property held by the taxpayer (whether or not connected
with his trade or business), BUT DOES NOT INCLUDE:
a. Stock in trade of the taxpayer, or
b. Other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or
c. Property held by the taxpayer primarily for sale to customers in the ordinary course of
his trade or business, or
d. Property used in the trade or business, of a character which is subject to the allowance for
depreciation; or real property used in the trade or business of the taxpayer. [Sec. 39 (A) (1), NIRC
of 1997, capitalized words, numbering and arrangement supplied; Sec. 2.a, Rev. Regs. No. 72003]
47-A.
Examples of capital assets:
a. Stock and securities held by taxpayers other than dealers in securities;

b. Jewelry not used for trade and business;
c. Residential houses and lands owned and used as such;
d. Automobiles not used in trade and business;
e. Paintings, sculptures, stamp collections, objects of arts which are not used in trade or
business;
f. Inherited large tracts of agricultural land which were subdivided pursuant to the
government mandate under land reform, then sold to tenants. (Roxas v. Court of Tax Appeals,
etc. L-25043, April 26, 1968)
g. Real property used by an exempt corporation in its exempt operations, such as a
corporation included in the enumeration of Section 30 of the Code, shall not be considered used
for business purposes, and therefore considered as capital asset. (last sentence, 3 rd par., Sec.
3.b, Rev. Regs. No. 7-2003)
h. Real property, whether single detached, townhouse, or condominium unit, not used in
trade or business as evidenced by a certification from the Barangay Chairman or from the head of
administration, in case of condominium unit, townhouse or apartment, and as validated from the
existing available records of the Bureau of Internal Revenue, owned by an individual engaged in
business, shall be treated as capital asset. (last par., Sec. 3.b., Rev. Regs. No. 7-2003)
48. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of a taxpayer if on hand at the close of the taxable year; or
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business; or
c. Real property used in trade or business (i.e. buildings and/or improvements), of a
character which is subject to the allowance for depreciation; or
d. Real property used in trade or business of the taxpayer. (Sec. 2. b, Rev. Regs. No. 72003)
49..
Examples of ordinary assets hence not capital assets:
a.
The machinery and equipment of a manufacturing concern subject to depreciation;
b. The tractors, trailers and trucks of a hauling company;

c. The condominium building owned by a realty company the units of which are for rent or
for sale;
d.
factory;
The wood, paint, varnish, nails, glue, etc. which are the raw materials of a furniture
e.
Inherited parcels of land of substantial areas located in the heart of Metro Manila,
which were subdivided into smaller lots then sold on installment basis after introducing
comparatively valuable improvements not for the purpose of simply liquidating the estate but to
make them more saleable ; the employment of an attorney-in-fact for the purpose of developing,
managing, administering and selling the lots; sales made with frequency and continuity; annual
sales income from the sales was considerable; and the heir was not a stranger to the real estate
business. (Tuazon, Jr. v. Lingad, 58 SCRA 170)
f. Inherited agricultural property improved by introduction of good roads, concrete gutters,
drainage and lighting systems converts the property to an ordinary asset. The property forms part
of the stock in trade of the owner, hence an ordinary asset. This is so, as the owner is now
engaged in the business of subdividing real estate. (Calasanz v. Commissioner of Internal
Revenue, 144 SCRA at p. 672)
50.
Tax treatment of real properties that have been transferred. Real properties
classified as capital or ordinary asset in the hands of the seller/transferor may change their
character in the hands of the buyer/transferee. The classification of such property in the hands of
the buyer/transferee shall be determined in accordance with the following rules:
a. Real property transferred through succession or donation to the heir or donee who is
not engaged in the real estate business with respect to the real property inherited or donated, and
who does not subsequently use such property in trade or business, shall be considered as a
capital asset in the hands of the heir or donee.
b. Real property received as dividend by stockholders who are not engaged in the real
estate business and who not subsequently use such real property in trade or business shall be
treated as capital assets in the hands of the recipient even if the corporation which declared the
real property dividend is engaged in real estate business.
c. The real property received in an exchange shall be treated as ordinary asset in the
hands of the transferee in the case of a tax-free exchange by taxpayer not engaged in real estate
business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not
engaged in real estate business, will use in business the property received in the exchange. (Sec.
3.f., Rev. Regs. No. 7-2003)
51. The tax is imposed upon capital gains presumed to have been realized from
the sale, exchange, or other disposition of real property located in the Philippines,
classified as capital assets. [Sec. 24 (D) (1`), NIRC of 1997] Revenue Regulations No. 72003 has defined real property as having the same meaning attributed to that term under Article
415 of Republic Act No. 386, otherwise known as the Civil Code of the Philippines. (Sec. 2.c,
Rev. Regs. No. 7-2003)
52.
Transactions covered by the presumed capital gains tax on real property:
a. sale,
b. exchange,
c. or other disposition, including pacto de retro sales and other forms of conditional sales.
[Sec. 24 (D) (1), NIRC of 1997, numbering and arrangement supplied]
d. Sale, exchange, or other disposition includes taking by the government through
condemnation proceedings. (Gutierrez v. Court of Tax Appeals, et al., 101 Phil. 713; Gonzales v.
Court of Tax Appeals, et al., 121 Phil. 861)
53. In case the mortgagor exercises his right of redemption within one (1) year from
the issuance of the certificate of sale, in a foreclosure of mortgage sale of real property, no capital
gains tax shall be imposed because no capital gains has been derived by the mortgagor and no
sale or transfer of real property was realized. [Sec. 3 (1), Rev. Regs. No. 4-99]
54. In case of non-redemption of the property sold upon a foreclosure of mortgage sale,
the presumed capital gains tax shall be imposed, based on the bid price of the highest bidder but
only upon the expiration of the one year period of redemption provided for under Sec. 6 of Act No.
3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of
the said one-year redemption period. [Sec. 3 (2), Rev. Regs. No. 4-99]
55. The basis for the final presumed capital gains tax of six per cent (6%) is
whichever is the higher of the
a. gross selling price, or
b. the current fair market value as determined below:
1) the fair market value or real properties located in each zone or area as
determined by the Commissioner of Internal Revenue after consultation with competent
appraisers both from the private and public sectors; or
2) the fair market value as shown in the schedule of values of the Provincial and
City Assessors. [Sec. 24 (D) (1) in relation to Sec. 6 (E), both of the NIRC of 1997]
It does not matter whether there was an actual gain or loss because the tax is a
presumed capital gains tax. It is the transaction that is taxed not the gain.
56. Holding period not applied to the taxation of the presumed capital gains derived from
the sale of real property considered as capital assets.
57. The tax liability, of individual taxpayers (not corporate), if any, on gains from
sales or other dispositions of real property, classified as capital assets, to the government
or any of its political subdivisions or agencies or to government owned or controlled corporations
shall be determined, at the option of the taxpayer, by including the proceeds as part of gross
income to be subjected to the allowable deductions and/or personal and additional exemptions,
then to the schedular tax [Sec. 24 (D) (1), in relation to Sec. 24 (A) (1), both of the NIRC of 1997]
or the final presumed capital gains tax of six percent (6%). [Sec. 24 (D) (1) in relation to Sec. 6
(E), both of the NIRC of 1997]
58. The seller of the real property, classified as a capital asset, pays the presumed
capital gains tax whether:
a. an individual [Sec. 24 (D) (1), NIRC of 1997];
1) Citizen, whether resident or not [Ibid.];
2) Resident alien [Ibid.];
3) Nonresident alien engaged in trade or business in the Philippines [Sec. 25 (A)
(3) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
4) Nonresident alien not engaged in trade or business in the Philippines [Sec. 25
(B) in relation to Sec. 24 (D) (1), both of the NIRC of 1997];
b. an estate or trust (Ibid.);

c. a domestic corporation. [Sec. 27 (D) (5), NIRC of 1997]
59. Excepted from the payment of the presumed capital gains tax are those
presumed to have been realized from the disposition by natural persons of their principal
place of residence
a.
residence;
b.
the proceeds of which is fully utilized in acquiring or constructing a new principal

within eighteen (18) calendar months from the date of sale or disposition
c.
the BIR Commissioner shall have been duly notified by the taxpayer within thirty
(30) days from the date of sale or disposition through a prescribed return of his intention to avail of
the tax exemption; and
d.
the said tax exemption can only be availed of once every ten (10) years. [Sec. 24
(D) (2), NIRC of 1997]
60.
A final withholding tax (FWT) of 20% on passive income is collected from the
interest income of banks. It likewise has to pay a 5% gross receipts tax (GRT) on gross
receipts which includes their passive income. XYZ Bank now claims that the GRT should
be computed after deducting the 20% passive income tax on the ground that the monies or
receipts that do not redound to the benefit of the taxpayer are not part of its gross receipts.
To impose the GRT without deducting the 20% would be double taxation. It also contends
that since the 20% was withheld at source and is paid directly to the government, then the
bank has not received the same. Thus, it should not be included in the gross receipts
subject to tax.
Resolve the issue of whether the 20% FWT on the banks passive income form part of
the taxable gross receipts for the purpose of computing the 5% GRT.
SUGGESTED ANSWER: No. The word gross must be used in its plain and ordinary
meaning. It is defined as whole, entire, total, without deduction. Thus, the 20% should not be
deducted for purposes of computing the 5% gross receipts tax.
Receipt may either be actual or constructive. There is prior to the withholding a constructive
receipt of the interest, otherwise there would be no interest from where the 20% tax may be
withheld from.
There is no double taxation because there are two kinds of taxes, the 20% FWT which is
an income tax and the 5% GRT which is a percentage tax. (Commissioner of Internal Revenue v.
Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and companion case)
NOTES AND COMMENTS:
a.
Commissioner of Internal Revenue v. Manila Jockey Club, 108 Phil. 821
(1960) is different from Commissioner of Internal Revenue v. Citytrust Investment Phils.,
Inc., G. R. No. 139786, September 27, 2006 and companion case. Manila Jockey Club paid
amusement taxes on its commission in the total amount of bets called wager funds and did not
include the 5% of the fund which went to the Board on Races and to the owners of horses and
jockeys. The Supreme Court rules that the gross receipts of Manila Jockey Club should not
include the 5% because although delivered to the Club, such money has been especially
earmarked by law or regulation for other persons.
Manila Jockey does not apply because what happened there was earmarking and not
withholding. Earmarking is not the same as withholding. Amounts earmarked do not form part of
gross receipts because these are by law or regulation reserved for some person other than the
taxpayer, although delivered or received. On the contrary, amounts withheld form part of gross
receipts because there are in constructive possession and not subject to any reservation, the
withholding agent being merely a conduit in the collection process. (Commissioner of Internal
Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006 and
companion case)
b.
There are distinctions between the 20% FWT on interest income and the 5%
GRT on banks. Since the two are different there is no double taxation.
1)
FWT is an income tax under Title II of the Code (Tax on Income) while GRT is a
percentage tax under Title V of the Tax Code.
2)
Percentage tax is a national tax measured by a certain percentage of the gross
selling price or gross value in money of goods sold, bartered or imported; or of the gross
receipts or earnings derived by any person engaged in the sale of services while an income
tax is a national tax imposed on the net or gross income realized in a taxable year.
3)
Income tax is subject to withholding while percentage is not. (Commissioner of
Internal Revenue v. Citytrust Investment Phils., Inc., G. R. No. 139786, September 27, 2006
and companion case)
61.
MBC was incorporated in 1961 and engaged in commercial banking
operations since 1987. On May 22, 1987, it ceased operations that year by reason of
insolvency and its assets and liabilities were placed under the charge of a governmentappointed receiver. On June 23, 1999, the BSP authorized MBC to operate as a thrift bank.
In 2000, It filed its tax return for the year 1999 paying the amount of P33 million
computed in accordance with the minimum corporate income tax (MCIT). It sought the
BIRs ruling on whether it is entitled to the four (4) year grace period for paying on the
basis of MCIT reckoned from 1999. BIR then ruled that cessation of business activities as
a result of being placed under involuntary receivership may be an economic reason for
suspending the imposition of the MCIT.
As a result of the ruling MBC filed an application for refund of the P33 million. Due to
the BIRs inaction, MBC filed a petition for review with the CTA.
The CTA denied the petition on the ground that MBC is not a newly organized
corporation. In a volte facie the BIR now maintains that MBC should pay the MCIT
beginning January 1, 1998 as it did not close its business operations in 1987 but merely
suspended the same. Even if placed under receivership, the corporate existence was
never affected. Thus, it falls under the category of an existing corporation recommencing
its banking operations.
Should the refund be granted ?
SUGGESTED ANSWER: Yes. The MCIT shall be imposed beginning in the fourth taxable
year immediately following the year in which the corporation commenced its business operations.
[Sec. 27 (E) (1), NIRC of 1997]
The date of commencement of operations of a thrift bank is the date it was registered with
the SEC or the date when the Certificate of Authority to Operate was issued to it by the Monetary
Board, whichever comes later. (Sec. 6, Rev. Regs. No. 4-95)
Clearly then. MBC is entitled to the grace period of four years from June 23, 1999 when it
was authorized by the BSP to operate as a thrift bank before the MCIT should be applied to it.
(Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118, August 26,
2006)
NOTES AND COMMENTS:
a.
The MCIT and when should be imposed and the four (4) year grace period.
A minimum corporate income tax of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum corporate income tax is greater than the
tax computed under Subsection (A) of this section for the taxable year. [Sec. 27 (E) (1), NIRC of
1997]
b.
Period when a corporation becomes subject to the MCIT. (5) Specific rules for
determining the period when a corporation becomes subject to the MCIT (minimum corporate
income tax) For purposes of the MCIT, the taxable year in which business operations commenced shall
be the year in which the domestic corporation registered with the Bureau of Internal Revenue
(BIR).
Firms which were registered with BIR in 1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998. x x x (Rev. Regs. No. 9-98)
Manila Banking Corporation v. Commissioner of Internal Revenue, G. R. No. 168118,
August 26, 2006 did not apply Rev. Regs. No. 9-98 because Rev. Regs. No. 4-95 specifically
refers to thrift banks.)
c.
Purpose of the four (4) year grace period. The intent of Congress relative to the
MCIT is to grant a four (43) year suspension of tax payment to newly organized corporations.
Corporations still starting their business operations have to stabilize their venture in order to obtain
a stronghold in the industry. It does not come as a surprise then when many companies reported
losses in their initial years of operations.
Thus, in order to allow new corporations to grow and develop at the initial stages of their
operations, the lawmaking body saw the need to provide a grace period of four years from their
registration before they pay their minimum corporate income tax. (Manila Banking Corporation v.
Commissioner of Internal Revenue, G. R. No. 168118, August 26, 2006)
1. CGT/DST for sale thru public auction

For sales of real property through public auction, the basis for computing the
capital gains taX. (CGT) and documentary stamp tax (DST) shall be the
consideration (bid price of the highest bidder) or the fair market value (FMV) or the
zonal value, whichever is higher. However, when one of the contracting parties is
the Government, the DST is computed based on the actual consideration.
Being a disposition of real property, a sale effected through public auction is subject
to CGT and DST. In case of a foreclosure sale, there will only be one taxable transfer,
i.e., from the owner to the highest bidder in a public auction.
Page 25 of 75
2. Sale of properties under CMP
Sale of properties under the Community Mortgage Program (CMP) of RA No. 7279 or
the Urban Development and Housing Act are exempt from CGT, but are subject to
DST.
3. IAET
For purposes of the tax on improperly accumulated earnings (IAET), in determining
whether a domestic corporation is a closely-held or a publicly-held corporation, the
ownership thereof is ultimately traced to the individual stockholders of the parent
company.
4. Gifts in favor of educational/charitable/religious, etc. institutions
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or
philanthropic organization or research institution are exempt from donors tax,
subject to the condition that not more than 30% of the gifts shall be used by the
donee for administrative purposes. Conveyances of realty not in connection with a
sale to trustees or other persons without consideration are not subject to DST under
Section 196 of the Tax Code, but only to the DST of P15 imposed under Section 188
of the same Code. Donations by a VAT-registered person of ordinary assets are
subject to VAT, the same being considered a transaction deemed sale. If the same
property acquired by donation is subsequently conveyed by way of sale or
exchange, the sale will be subject to corporate income tax, and consequently, to
withholding tax. On the other hand, if the same property is subsequently donated to
a non-exempt donee, the donation shall be subject to donors tax.
5. Reconveyance of land titles
Reconveyance of land titles by virtue of the rescission of a contract of sale is not
subject to capital gains tax (CGT) and DST. The DST previously paid upon execution
of a Deed of Absolute Sale cannot be refunded by reason of the rescission of the

contract of sale.
6. Accounting Records/Documents (RR 17-2013)
a. General Rule: Intact accounting records/documents/ books of accounts including
subsidiary books: within three (3) years from last entry in each book;
b. If taxpayer is under investigation due to fraud, falsity of return, non-filing: intact
accounting records/documents more than three (3) years from last entry;
c. If there is agreement between taxpayer and BIR to assess beyond three (3) year
period: more than three years and within the agreed period
7. ELECTION CANDIDATES (MC 15-2013)
Duties of Election Candidates: 1. Issue and keep receipts for each contribution; 2.
Keep detailed record of contributions/expenditures; 3. Preserve records three years
after election for presentation to COMELEC; 4. Secure registration and TIN from BIR
including as withholding agent; 5. All candidates are required to update BIR
registration; 6. Registration of candidates ends thirty (30) days from election;
Political parties registration subsists;
8. May 13, 2013 Midterm Elections (MC 48-2013)
INCOME TAX:
1.Campaign contributions: excluded from GI of candidate; given not for personal
expenditure/enrichment but for campaign purposes; Exempt from IT provided
utilized to
Page 26 of 75
cover a candidate's expenditures for campaign;
2. Unutilized/excess campaign funds: subject to income tax, included in the taxable
income as stated in his/her ITR filed for the subject taxable year.
3. Failure of candidate (winning or losing) to file with COMELEC the appropriate
Statement of Expenditures: precluded from claiming expenditures as deductions
from his/her campaign contributions and entire amount of contributions directly
subject to income tax.
CWT
1. 5% withholding tax on income payments made by political parties and candidates
for purchase of goods and services as campaign expenditures intended as campaign
contributions;
2. Withholding agent files, on or before March 1, 2014:
a. Annual Information Return of Creditable Taxes Withheld (Expanded)/Income
Payments Exempt from Withholding Tax (BIR Form No. 1604E); b. Statement of
Contributions and Expenditures duly stamped Received by the Commission on
Elections (COMELEC); c. For those withholding agents for a limited time during the
election period only, due date: August 12, 2013. d. Expenses from which 5% CWT
was not deducted, remitted or reported: subject to income tax;

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Income Taxation

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INCOME TAXATION

(A). QUESTIONS TO ASK IN INCOME TAXATION:

(2). NON-RESIDENT CITIZENS;

(1). RESIDENT ALIENS; (2). NON-RESIDENT ALIENS;

A foreign corporation can NEVER be subjected to CGT on sale of real property

B. Gifts, Bequests, and Devises

Not taxable (The employees contributions are not deductible)

The amount of de minimis benefits conforming to the ceiling herein prescribed

DMB OTHER BENEFITS

MWE SMW(Exempt) exempt exempt exempt

LOSSES WILL NOT RECOGNIZED; (d). In sale of shares of stocks (capital in

What are general principles of income taxation in the Philippines OR the

What are considered as de minimis benefits not subject to withholding tax

Laundry allowance not exceeding P300 per month;

Distinguish exclusions from deductions.

What are excluded from gross income ?

Value of property acquired by gift, bequest, devise, or descent.

d. Amounts received, through accident or health insurance or Workmens Compensation

Retiring official or employee

Not less than fifty (50) years of age at time of retirement;

Any amount received by an official, employee or by his heirs,

From the employer

Death, sickness or other physical disability; or

Bad debts due to the taxpayer, actually ascertained to be worthless and

Charitable and other contributions. Resident citizens, resident alien individuals

Distinguish ordinary expenses from capital expenditures.

What are the requisites for the deductibility of business expenses ?

The following are the requisites for deductibility of business

Compliance with the business test:

Must be ordinary and necessary;

Must be paid or incurred within the taxable

Must be paid or incurred in carrying on a

Must not be bribes, kickbacks or other illegal expenditures

the expense must be ordinary and necessary;

TMG Corporation is issuing the accrual method of accounting. In

All-events test. This test requires:

fixing of a right to income or liability to pay; and

the availability of the reasonable accurate determination of such income or liability.

What is meant by fringe benefit for purposes of taxation ?

Vehicle of any kind;

Household personnel, such as maid, driver and others;

Expenses for foreign travel;

Holiday and vacation expenses;

Educational assistance to the employee or his dependents; and

36. De minimis benefits are facilities and privileges (such as entertainment,

Preferred shares are considered capital regardless of the conditions under

Who are related parties ?

SUGGESTED ANSWER: The following are related parties:

A grantor and a fiduciary of any trust; or

A fiduciary of a trust and a beneficiary of such. [Sec. 36 (B), NIRC of 1997]

What is the tax benefit rule ?

The methods of depreciation are the following:

Straight line method;

Declining balance method;

Sum of years digits method; and

Apportionment to units of production;

Hours of productive use;

Revaluation method; and

Sinking fund method.

What are personal and additional exemptions ?

predetermined by Congress. [Pansacola v. Commissioner of Internal Revenue, G. R. No.

Examples of capital assets:

a. Stock and securities held by taxpayers other than dealers in securities;

Examples of ordinary assets hence not capital assets: