Regular Income Tax: Inclusion in Gross Income

• Compensation Income


  It pertains to the types of employee benefits that are subject to regular income tax.
• The fringe benefits of managerial or supervisory employees are not considered compensation income and are subject to final tax.
• Gross income from the conduct of trade, business, or exercise of a profession includes income from any trade or business, legal or illegal, and whether registered or unregistered.
• The following business income shall not be included in gross income subject to regular income tax:

  1. Business income exempt from income tax;
  2. Business income subject to special tax; and
  3. Business income subject to final tax.
• The gains or losses in dealing in ordinary assets are subject to regular income tax.
• Dealing in capital assets other than domestic stocks and real properties are also subject to regular income tax.
• Ordinary gains are included as items of gross income.
• Ordinary losses are items of deductions against gross income.
• The net capital gain from other capital assets after deducting capital losses is also included as an item of gross income.
• A net capital loss is not an item of deduction against gros income.
• A taxable interest income must have been actually paid out of an agreement to pay interest; hence, it cannot be imputed.
• Rent income arises from leasing properties of any kind. It is a passive income but is not subject to final tax under the NIRC; hence, it is subject to regular income tax.
• Obligations of the lessor that are assumed by the lessee are additional rental income to the lessor.
• Advance rentals are item of gross income upon receipt if:

  1. Unrestricted or
  2. Restricted to be applied in future years or upon the termination of the lease.
• Advance rentals are not an item of gross income if:

  1. It constitutes a loan;
  2. It is a security deposit to guarantee payment or rent subject to contingency which may or may not happen.
• Leasehold improvements made by the lessee in the leased property are recognized by the lessor as income using the spread-out method or outright.
• Royalties earned from sources within the Philippines are generally subject to final income tax except when they are active by nature.
• Active royalty income and royalties earned from outside the Philippines are subject to regular income tax.
• Cash, property, and script dividends from foreign corporations are generally items of gross income subject to regular income tax.
• Stock dividends are exempt from income tax.
• When the declaration confers to the recipient a different interest or right after the stock dividend declaration or when stock dividends are subsequently redeemed such that it amounts to payment of cash dividends, the fair market value of the stock dividends received is taxable.
• Liquidating dividend is not income. It is considered an amount in exchange for the investment of the investor and is subject to the rules of dealings in properties.
• Under the CREATE law, inter-corporate dividends received by domestic corporations from foreign corporations are generally subject to regular income tax.
• If the ratio in the predominance test is less than 50%, the foreign-sourced dividends shall be exempt if the following conditions concur:

  1. The domestic corporation directly owns at least 20% in value of the outstanding shares of the NRFC;
  2. The shareholdings in the NRFC must have been held uninterruptedly for a minimum of 2 years at the time of dividend distribution or through the entire existence of the NRFC if it is operational for less than 2 years.
  3. The foreign-sourced dividend received or remitted must be reinvested within the next taxable year in business operations, namely: