Introduction to

Gross Income
 What is income for
taxation purposes?
Under the NIRC, the term taxable income refers
to certain items of gross income less deductions
allowable
by law.
 Elements of Gross Income
• Return on Capital

• Realized benefit

• Not exempted by law, contract or treaty

Andrew received a total sum of P42,000 from his
employer consisting of the following:
 P5,000 reimbursements for employer’s expenses paid by Andrew
 P15,000 payment of Andrew’s computer purchased by the employer
 P22,000 monthly salary

Andrew’s computer set cost him P12,000. Compute

the total return on capital which can be subjected to
income tax.
 Taxpayers

Individual Corporations
 Individua
l

Estates
Citizen Alien and
Trusts
 Citizen

Non-
Resident
resident
General Classification Rule
• The intention of the taxpayer regarding
the nature of his stay within or outside the
Philippines shall determine his
appropriate residency classification
General Classification Rule
• In default of documentary proof, the
length of stay of the taxpayer is
considered.
 Alien

Non-
Resident
resident

Not
Engaged in
engaged in
business
business
 Ms. Glaiza Somberano
• Mother is a US citizen
• Father is a Filipino citizen
• Born at the United States
• Working as an actress under Star Cinema
• Resides at Quezon City since 15 years old,
she is now 18
 Mr. Mark Suckerberg
• Born to foreign individual parents
• Stayed in the Philippines for 150
days during the taxable year
• Earning business income in the
Philippines
 Corporations

Domestic Foreign

Resident Non-resident
Illustration:
In 2019, Mr. Sinu Swerte, resident alien, received a
P400,000 dividend income from Mapagbigay Inc.
Compute the situs with respect the dividend
assuming the company is a resident corporation
under the following assumptions:
a. Ratio is 90%
b. Ratio is 70%
c. Ratio is 30%
Income Situs Rules
• Dividend Income
o Resident Foreign Corporation –
Predominance test: Ratio of the Philippine gross income over the world
gross income of the RFC in the three-year period preceding the year of
dividend
Income Situs Rules
• Dividend Income
o Resident Foreign Corporation
• Income within if 85% or more of the gross income for the preceding
three years prior to declaration of dividend is derived from Philippine
sources
• Income party within and party without if ration is between 50% to
below 85%. (Philippine Gross Income/Total Gross Income) x Dividend
= Income Within
• Income purely without if ratio is less than 50%
 Taxable on income earned
Individual taxpayers Within Without
RC p p
NRC p x
RA p x
NRA p x
Corporate taxpayers
DC p p
RFC p x
NRFC p x
Income Tax Schemes, Accounting
Period, Accounting Methods and
Reporting
 Income Tax Schemes

Income
Taxation

Regular Capital
Final Tax
Tax Gains Tax
Accounting Period
• It is the length of time over which income is measured reported.
Accounting Period
• Regular accounting period – 12 months length
o Calendar – this accounting period is available to both corporate and individual
taxpayers.
Accounting Period
• Regular accounting period – 12 months length
o Calendar – this accounting period is available to both corporate and individual
taxpayers.
• Under the NIRC, the calendar year shall be used when the:
o Taxpayer’s annual accounting period is other than a fiscal year
o Taxpayer has no annual accounting period
o Taxpayer does not keep books
o Taxpayer is an individual
Accounting Period
• Regular accounting period – 12 months length
o Fiscal – the accounting period is available only to corporate income taxpayers and
is not allowed to individual income taxpayers
Accounting Period
• Regular accounting period – 12 months length
o Deadline of Filing the Income Tax Return – the return is due for filing on the
fifteenth day of the fourth month following the close of the taxable year of the
taxpayer. The regular tax due is payable upon filing of the income tax return
Accounting Period
• Short accounting period – less then 12 months
o Newly commenced business – the accounting period covers the
date of the start of the business until the designated year-end of the
business.
Accounting Period
• Short accounting period – less then 12 months
o Newly commenced business – the accounting period covers the
date of the start of the business until the designated year-end of the
business.
Illustrative Example: Tom Holland started business operation on
July 5, 2018 and opted to use the calendar accounting period. What
shall be the coverage of his 2018 return and when is the deadline?
Accounting Period
• Short accounting period – less then 12 months
o Dissolution of business – the accounting period covers the start of
the current year to the date of dissolution. Accordingly, dissolving
corporations must file their return within 30 days from the
cessation of activities.
Accounting Period
• Short accounting period – less then 12 months
o Dissolution of business – the accounting period covers the start of
the current year to the date of dissolution. Accordingly, dissolving
corporations must file their return within 30 days from the
cessation of activities.
Illustrative Example: Pinaasa Inc. is on the fiscal accounting period
ending every March 31. It ceased business operation on August 31,
2019. What shall be the coverage of his latest return and when is
the deadline?
Accounting Period
• Short accounting period – less then 12 months
o Change of accounting period by corporate taxpayers – the
accounting period covers the start of the previous accounting
period to the designated year-end of the new accounting period.
Note that BIR approval is required in changing an accounting
period.
Accounting Period
• Short accounting period – less then 12 months
o Change of accounting period by corporate taxpayers – the
accounting period covers the start of the previous accounting
period to the designated year-end of the new accounting period.
Note that BIR approval is required in changing an accounting
period.
Illustrative Example: Effective February, 2019, Ini Wan Company
changed its calendar accounting period to a fiscal year ending May
31. What shall be the coverage of his 2019 return and when is the
deadline?
Accounting Period
• Short accounting period – less then 12 months
o Change of accounting period by corporate taxpayers – the
accounting period covers the start of the previous accounting
period to the designated year-end of the new accounting period.
Note that BIR approval is required in changing an accounting
period.
Illustrative Example: Effective February, 2019, Ini Wan Company
changed its fiscal accounting period ending May 31 to calendar
year. What shall be the coverage of his latest return and when is the
deadline?
Accounting Period
• Short accounting period – less then 12 months
o Death of a taxpayers – the accounting period covers the start of
the calendar year until the death of the taxpayer. However there is
no requirement for early filing in case of death of taxpayers.
Accounting Period
• Short accounting period – less then 12 months
o Death of a taxpayers – the accounting period covers the start of
the calendar year until the death of the taxpayer. However there is
no requirement for early filing in case of death of taxpayers.
Illustrative Example: Ms. Pina Asa died of waiting for the right
person to come on February 14, 2019. What shall be the coverage
of her latest return and when is the deadline?
Accounting Methods
• Accounting techniques used to measure income
Accounting Methods
• Types of Accounting Methods
o General Method
• Accrual and cash basis
1. Advanced income is taxable upon receipt (Such rule shall be
applicable to the sale of services)
2. Prepaid expense is non-deductible
3. Special tax accounting requirement
Santiago, Inc. has the following receipts during 2019:
From service billings to clients 400,000
Advances from clients 100,000
Total cash collection 500,000
The advances refer to services which will be rendered
next year. Total uncollected billing increased from
P100,000 on December 31, 2018 to P156,000 on
December 31, 2019.

Compute total income subject to income tax using

accrual basis
Accounting Methods
• Types of Accounting Methods
o Installment method
• Under this method, gross income is recognized and reported in
proportion to the collection from the installment sales.
Accounting Methods
• Types of Accounting Methods
o Installment method
• It shall only be available to the following:
o Dealers of personal property on the sale of properties they
regularly sell
o Dealers of real properties, only if their initial payment does
not exceed 25% of the selling price
o Casual sale of non-dealers in property when their selling price
exceeds P1,000 and their initial payment does not exceed
25% of the selling price
Merville is a dealer in real properties. Merville requires
20% down payment, and the balance is payable over 26
monthly installments starting on the last day of the
month following the month of sale. Merville sold
properties in 2021 and 2022 with terms as follows:
• House and Lot No. 1 was sold for P1,350,000 on
November 11, 2021
• House and Lot No. 2 was sold for P1,800,000 on July
5, 2022
Both properties were sold at a gross profit rate of 25%
based on cost. Compute gross income subject to income
tax in 2021 and 2022, respectively.
Accounting Methods
• Types of Accounting Methods
o Outright method
• Applicable under lease agreements where lessee makes
tangible improvements on the leased property.
• The lessor may report as income the fair market value of such
building improvements subject to the lease at the time when
such building improvements are completed.
Accounting Methods
• Types of Accounting Methods
o Spread-out method (Also applicable leasehold improvements)
• The lessor may spread over the life of the lease the estimated
depreciated value of such buildings or improvements at the
termination of the lease and report income for each year of the
lease an aliquot part thereof.
Accounting Methods
• Types of Accounting Methods
o Spread-out method (Also applicable leasehold improvements)
• Depreciated value
= Cost of improvement x Excess useful life over
lease term /Useful life of the improvement
Oliver entered into a 40-year lease contract with Bernas.
Per agreement, Oliver will construct a building on the
lot and operate the same for 40 years. Ownership of the
building will transfer to Bernas upon the termination of
the lease. The lease will not commence until the
building is completed. Oliver completed the building at
a total cost of P40,000,000 on January 1, 2022. The
building is expected to be used over 50 years.

Compute Bernas income from the leasehold

improvement to be reported in 2022 using spread-out
method and in 2023 using outright method.
Accounting Methods
• Types of Accounting Methods
o Deferred payment method
o Percentage of completion method
o Crop year basis
Tax Reporting
• Types of Returns to the Government
1. Income tax returns – provides details of the taxpayer’s income,
expense, tax due and tax paid, tax credit and tax still due the
government
2. Withholding tax returns- provides reports of income payments
subjected to withholding tax by the taxpayer-withholding agent
3. Information returns – do not involve any payment or withholding
of tax but are essential to the government in its tax mapping
efforts and its evaluation of tax compliance
Tax Reporting
• Mode of Filing Income Tax Returns
1. Manual filing system – the traditional manual system of filing
income tax return is by paper document where taxpayers fill up
BR forms to report income, expenses or any declaration required
to be filed with the BIR.
a. Authorized agent bank
b. Revenue collection officer
c. Duly authorized city or municipal treasurer
Tax Reporting
• Mode of Filing Income Tax Returns
2. e-BIR Forms – Taxpayers fill up their income tax returns in
electronic spreadsheets without the need for writing on paper
returns.
Tax Reporting
• Mode of Filing Income Tax Returns
3. Electronic Filing and Payment System (eFPS) – a paperless tax
filing system developed and maintained by the BIR. Taxpayer
file tax returns including attachments in electronic format and
pay the tax through the Internet
Payment of Income Tax
• The general rule is pay as you file.
• The eFPS filers shall pay electronically online through
banking service.