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Chapter 4 Taxable Income

Taxation = Gross income


LESS:
Deductions and/or
Personal Exemptions
Additional Exemptions
Taxable income
Sec. 31 - taxable income means the pertinent items of gross income specified in this
Code, less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income by this Code or other special laws.
Another way of computing:
Net worth method - determining real assets
- deducting the liabilities from the total assets to arrive at the net worth.
Sec. 36 net income means the gross income less statutory deductions
*taxable income is synonymous with the computation of net income, net income taxation
sets in.
FACTORS AFFECTING INCOME TAX
1.
2.
3.
4.
5.
6.

Persons (individual, corporation, estate, trust)


Sources of income (with our without)
Imposable tax ( NIT, FIT, GIT)
Inclusions
Exclusions
Exemptions

KINDS OF INCOME TAX


1.
2.
3.
4.
5.
6.

NIT
FIT
GIT
MCIT
IAET
OGIT

Taxpayer:
1. RC, RA, NRC,
NRAETB
2. NRANETB
3. DC & RFC
4. NRFC
1.
2.
3.
4.

The
The
The
The

NIT

FIT

GIT

ANNUAL ACCOUNTING PERIOD


The ff. are mandated to use calendar
year:

taxpayers annual accounting period is other than a fiscal year.


taxpayer has no annual accounting period.
taxpayer does not keep books.
taxpayer is an individual.

In case of corporations, it can either be calendar year or fiscal year


Fiscal year begins in any day of the month and ends on the 12 th month after.
Calendar year begins on January 1 and end on December 31.
*A taxpayer, other than an individual may change its accounting period subject to the ff.
requirements (Sec.47):
1. Taxpayer must not be an individual.
2. The change must be:
a. From fiscal to calendar
b. From calendar to fiscal

c. From one fiscal year to another


3. w/ approval of Commissioner
4. the net income shall be computed on the basis of such new accounting
period.

GROSS INCOME
All income derived from whatever source, including but not limited to the ff items:
1. Compensation for services in whatever form paid including but not limited to
fees, salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10.Pensions;
11.Partners distributive share of the net income of the general professional
partnership.
Taxpayer
1. RC
2. RA. NRC,
NRAETB, NRANETB
3. DC
4. RC, NRFC

Items on Gross Income


Within
Without

ACCOUNTING METHODS
1. Cash basis income is recognized upon actual receipt of cash and it is an expense
when there is actual payment in cash.
2. Accrual basis income is recognized when earned and it is an expense the
moment it is incurred.
Sec. 44 amount of all items of gross income shall be included in the gross income for
the taxable year in which received by the taxpayer.
Exceptions: Sec. 50 (interlocking director) two or more organization owned and
controlled by the same interests. the Commissioner is authorized to distribute,
apportion, or allocate gross income or deductions between or among such
organization, trade, or business, if he determined it necessary to prevent tax evasion or
to clearly reflect the income of any suh organization, trade, or business.
A.
1.
2.
3.

Determination of amount and recognition of gain or loss (sec.40)


Gross receipts less basis or adjusted basis = gain or loss
If GR > AB = gain
If GR < AB = loss

B. Basis for determining gain or loss from sale or disposition of property


1. The cost thereof in the case of property acquired on or after March 1, 1913, if
such property was acquired by purchase. ACQUISITION COST
2. The fair market price or value (FVM) as of the date of acquisition, if the same
was acquired by inheritance. FMV
3. The price when it was in the hands of the donor or the last preceding owner
by whom it was not acquired by gift. Except if the basis is greater than the FMV of
the property at the time of the gift then, FMV shall be the basis ACQUISITION
COST, FMV
4. The amount paid by the transferee of such property if the property was
acquired for less that an adequate consideration in money. AMOUNT PAID

C. Exchange of property entire amount of the gain or loss shall be recognized


No gain or loss shall be recognized if in pursuance of a plan of merger or
consolidation:
TRANSFEROR
1. Corporation
2. Shareholder
3. Security holder
4. Not exceeding 4

EXCHANGE
Property for stock
Stock for stock
Security for stock or
securities
Property for stock

Securities bonds and debentures, not notes of whatever class or duration.


D. Exchange not solely in kind
1. Not only stock or securities but also money and/or property gain if any but not
loss shall be recognized
2. Not only stock but also money and/or property:
In pursuance to plan of merger or consolidation no gain shall be recognized
Not in pursuance gain but not loss is recognized