Module No.

5
Individual Taxpayer – Part 1

They say there are two (2) things that constant in our lives. First is “CHANGE”, no
matter what we plan our lives there will always be something that will change our
perspective, our outlook in life. Second is Taxes, we cannot escape paying taxes. From
birth to death we will be subject to tax.

At the end of this module, you are expected to:

3. learn who are the individual taxpayer,
4. the taxes of an individual taxpayer.

Individual taxpayers are natural persons that are subjected to taxes. They are
classified as Resident Citizen, Non Resident Citizen, Resident Alien and Non-Resident
Alien.
The Resident Citizen is a Filipino citizen, residing in the Philippines or who stayed
permanently in the Philippines or if stayed outside the Philippines for less than 183 days
during the taxable year. The Resident Citizen may be further categorize as employed
(compensation income earner) and self-employed.

The Resident Citizen is taxable for all income derived from sources within and
outside the Philippines. He is subjected to Capital gain tax; final tax on certain passive
income and graduated income tax.

So what is capital gain tax? Capital gain tax may either be Capital Gain Tax on
Shares of Stocks or Capital Gain tax on Sale of Real Property.

Capital Gain on Shares of Stock is a final tax of 15% on the net capital gain of the
direct sale to buyer of shares of stocks of a domestic corporation not listed and traded in a
local stock exchange and held as capital asset.

Formula: Selling Price P XXX

Less: Acquisition Cost XX
Net Capital Gain XX
Multiply by 15%
Capital gain tax P X

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 \

Capital Gain Tax on Sale of Real Property is a final tax of 6% on the gross selling
price, or current fair market value at the time of sale of the Property located in the Philippines
and held as capital asset.

Formula: Selling Price, FMV (Whichever is higher) P XXX

Multiply by 6%
Capital gain tax P XX

Individual taxpayer may earned Passive income from allowing other to use his rights
and merely waits for the income, or from game of chance or investment. The said passive
income is subjected to final tax if earned in the Philippines otherwise subjected to normal
graduated income tax.

 Final Tax of 10% for Royalty from books, literary works and musical
compositions and Dividends from a domestic corporation, or from a joint
company, insurance or mutual funds company;
 20% final tax on Prizes exceeding P10,000 & other winnings (including
Philippine Charity Sweepstakes and lotto winnings) and Interest income from
Philippine currency bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements(except from
long term deposits or investments evidenced by certificates prescribed by BSP;
and;

 Final tax of 15% on Interest on foreign currency bank deposits.

Individual taxpayers derived income from compensation; business and profession are
subjected to graduated income tax. It may also include Sale or exchange or property which is
not subject to capital gain tax; and Incidental sources, such as interest or dividend which is
not subject to final tax.

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 Individual taxpayer who derived income from employment through compensation is
subjected to withholding tax by his employer.
Compensation income means all remuneration for services performed by an employee for
his employer under employee-employer relationship. It includes salaries, wages, emoluments
and honoraria, allowances, commissions (e.g., transportation, representation, entertainment and
the like); fees including director‟s fee, if the director is the same time an employee of the
employer/corporation; taxable bonuses and fringe benefits, taxable pensions and retirement pay.
(Definition by Revenue Regulations)

Employees receiving compensation may either be minimum wage earner or not. A

minimum wage earner (MWE) is a worker in the private sector who is paid with statutory
minimum wage rate or an employee in a public sector with compensation income of not more
than the statutory minimum wage rate in the non-agricultural sector where the worker-employee
is assigned. Such statutory minimum wage rate is exempted from income tax. Likewise, the
exemption covers the holiday pay, night shift differential pay, and hazard pay. (Definition by
Revenue Regulation)

For the employment income of employee who is not a minimum wage earner, the
employer must deduct certain amount of income tax and remit such amount to the Bureau of
Internal Revenue. At the end of the year, a computation by the employee in his income tax
return to be filed for the year will show Income tax for the year minus the withheld during the
year and must be equal to Income tax still due or refundable.

If the income tax computed of the employee receiving compensation income at the end
of the year equals to the tax withheld, the employed taxpayer need not file an income tax return.

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Capital Gain Tax on Shares of Stocks

1. The taxpayer is a resident, citizen of the Philippines.

Selling price, at fair market value, on a direct sale to buyer,
of shares of stock of a domestic corporation held as capital asset P 750,000
Cost of the shares of stock 600,000
What is the capital gain tax?

Answer:
Selling Price P 750,000
Cost of Shares 600,000
Net of Capital Gain 50,000
Multiply by 15%
Capital Gain Tax P 7,500

2. The taxpayer is a resident, citizen of the Philippines.

Selling price, at fair market value, on a direct sale to buyer,
of shares of stock of a domestic corporation held as capital asset P 500,000
Cost of the shares of stock 600,000
What is the capital gain tax?

Answer: Zero (negative capital gain)

3. The taxpayer is a resident, citizen of the Philippines.

Selling price, at fair market value, on a direct sale to buyer,
of shares of stock of a domestic corporation held as capital asset P 800,000
Expenses of sale 35,000
Purchase price of shares of stock 600,000
Expenses on the acquisition of shares 25,000
What is the capital gain tax?

Answer
Selling Price P 800,000
Less: Expenses 35,000 765,000
Cost of Shares 600,000
Add: Expenses 25,000 625,000
Net of Capital Gain 140,000
Multiply by 15%
Capital Gain Tax P 21,000

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 Capital Gain Tax on Sale of Real Property

1. The taxpayer is a resident, citizen of the Philippines. Selling price,

at fair market value, of land and building in the Philippines,
held as capital asset P 5,000,000
Cost of land and building 3,000,000
What is the capital gain tax?

Answer:

Selling Price, at FMV P 5,000,000

Multiply by 6%
Capital Gain Tax P 300,000

2. The taxpayer is a resident, citizen of the Philippines. Selling price,

of land and building in the Philippines, held as capital asset P 6,000,000
Fair market value at the time of sale 7,000,000
Cost of land and building 4,000,000
What is the capital gain tax?

Answer:

Fair market value P 7,000,000

Multiply by 6%
Capital Gain Tax P 420,000

Final Tax on Passive Income

1. Proceeds from copyright royalty P 20,000

What is the final tax?
Answer: P 2,000 (20,000 x 10%)

2. Interest income in local currency bank deposit, net of tax P 16,000

What is final tax?
Answer: P 4,000 (16,000/ 80%)

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Income Tax on employment income

1. Mr. Yan is a minimum wage earner, with the following data in a year:
Salaries P 220,000
Mandatory deductions (SSS, etc) 5,000
What is the income tax for the year?

Answer: Zero , minimum wage earner is not taxable

2. Mr. Zeus is not a minimum wage earner, with the following data in a year:
Salaries P 600,000
Mandatory deductions (SSS, etc) 10,000
Income tax withheld on the compensation 20,000
Income tax still due, or refundable end of the year?

Answer:

Salaries P 600,000
Less: Mandatory deduction 10,000
Taxable Income 590,000

Taxable Income P 590,000

Income Tax: On 250,000 - Exempt
340,000 x 20% = P 68,000
Less: Income tax withheld 20,000
Income tax still due P 48,000

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 Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 6
Individual Taxpayer – Part 1

1. Gonzales, a resident citizen of the Philippines sold his shares of stocks amounting to
P600,000 in a domestic corporation to a direct buyer that cost him P450,000. How
much is the net capital gain and what is the capital gain tax?

2. Felici, a resident citizen of the Philippines sold his shares of stocks amounting to
P750,000 in a domestic corporation to a direct buyer that cost him P1,000,000.
Compute for the capital gain tax?

3. Real property in Baguio costing P5,000,000 was sold by Dominguez, a resident

citizen of the Philippines for P6,000,000. The said real property has a fair market
value of P7,500,000 at the time of sale. What is the capital gain tax on sale of real
property?

4. Bianca sold her property in Malaysia to Ibrahim for P8,000,000. The property cost
her P5,000,000 five years ago. What is the capital gain tax?

5. At the end of 1st quarter of the year, Mr. Henry received his royalty from the books
he published amounting to P120, 0000 net of tax. What is the final tax on the royalty
he received?

6. Bob is a minimum wage earner, during the year his income includes:
Salaries P 240,000
Mandatory deductions (SSS, etc) 7,000
He join contest and won (net of tax) 36,000
Compute for the tax expense for the year.

7. Cattie is a minimum wage earner, during the year his income includes:
Salaries P 200,000
Mandatory deductions (SSS, etc) 5,000
She won PCSO winnings (gross) 2,000,000
Compute for the tax expense for the year.

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 Module No.6
Individual Taxpayer – Part 2

Aside from capital gain tax, final tax on certain passive income and income tax on
employment income; individual is also subjected to graduated income tax using the tax table
if the individual is employed or practicing profession and/or running own business.

At the end of this module, you are expected to:

1. gain more knowledge in computing tax using tax table;

With the implementation of R.A 10963 or Tax Reform for Acceleration and Inclusion
(TRAIN) Law in 2018, Tax on income from Self-employment or Practice of Profession of a
resident citizen of the Philippines whose gross sales/receipts did not exceed P3, 000,000 or
VAT threshold, the taxpayer has the option to:

 Pay a flat rate of 8% Income Tax base on Gross sales/ receipts and other non-
operating income in excess of P250,000, in lieu of graduated Income Tax rate. In
addition, the business pays the Percentage tax (3%)

 Pay percentage tax (3%) and Regular income tax rate using graduated tax table.

The 8% Income tax shall not apply to any business subject to any of the “Other
Percentage Taxes” (business taxes) under Title V of the Tax code.

On the other hand, if the gross sales/ receipts plus non-operating income of self –
employed or professional exceeds P3,000,000, the taxpayer has NO option. The 8% tax shall
not be applicable. The income subject to tax shall be computed by deducting costs and
expenses from gross income or gross receipts or by deducting from the gross income or
gross receipts the Optional Standard Deduction. (Optional Standard Deduction will be
discuss fully in lesson)

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 1. Mr. Masipag is not subject to the value –added tax, but subject to the 3% percentage tax
on sales in the Tax code. If he had in a year data as follows:
Gross sales P 2,500,000
Non-operating income 200,000
Costs and expenses 1,000,000
The computation for the income tax shall be:

Option 1. 8% income tax,

Gross sales P 2,500,000

Add: Non-operating income 200,000
Total 2,700,000
Less: A deduction of 250,000
Equals: Income subject to tax 2,450,000
Income Tax at 8% P 196,000

In addition, there shall be a business tax at 3% of gross sales or P 75,000.

Option 2. For graduated income tax on income after deductions for costs and expenses,
or after deducting the Optional Standard Deduction (OSD).

Option 2 with Costs & Expenses

\
Gross sales P 2,500,000
Add: Non-operating income 200,000
Total 2,700,000
Less: A deduction of 1,000,000
Equals: Income subject to tax 1,700,000

Tax at graduated rates

Taxable income P 1,700,000

Income tax on 800,000 P 130, 000
Excess 900,000 @ 30% 270,000
Income tax P 400,000

In addition, there shall be a business tax at 3% of gross sales or P 75,000.

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 Option 2 with Optional Standard Deduction

Gross sales P 2,500,000

Add: Non-operating income 200,000
Total 2,700,000
Less: OSD (2,500,000x40%) 1,000,000
Equals: Income subject to tax 1,700,000

Tax at graduated rates

Taxable income P 1,700,000

Income tax on 800,000 P 130, 000
Excess 900,000 @ 30% 270,000
Income tax P 400,000

In addition, there shall be a business tax at 3% of gross sales or P 75,000.

Individual taxpayer may also be a mixed income earner meaning aside from earning
compensation, the taxpayer has income from business or practice of profession.

The following rules should be observed.

1. If the gross sales sales/receipts and non-operating income from business or profession
do not exceed P3,000,000, the formula are:

a. The compensation income shall be subject to the graduated rates P XXX

b. The income from business or profession shall be taxed, as follows:
Gross sales/ receipts P XXX
Add: Non-operating income XXX
There is no deduction of P250,000 -
Equals: Taxable Income XXX
Income Tax at 8% XX
c. Total income tax due P XXX

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 OR, alternatively,

a. The compensation income shall be subject to the graduated rates P XXX

b. The income from business or profession shall be taxed, as follows:
Gross sales/ receipts P XXX
Add: Non-operating income XXX
Less: Costs, expenses and losses, or OSD of
gross sales/receipts XXX
Equals: Taxable Income XXX
Income Tax at graduated rates XX
c. Total income tax due P XXX

2. If the gross sales/receipts and non-operating income from business or profession

exceeds P3,000,000, the formula is:

d. The compensation income shall be subject to the

graduated rates P XXX
e. The income from business or profession shall be taxed,
as follows:
Gross sales/ receipts P XXX
Add: Non-operating income XXX
Total P XXX
Less: Costs, expenses and losses, or OSD of
gross sales/receipts XXX
Equals: Taxable Income XXX
Income Tax at graduated rates XX
Total income tax due P XXX

 On the 8% income tax of a mixed compensation income earner, the

P250,000 deductions from business income is not available since it is already
used in the graduated income tax.

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 For the year 2019, Miss Masigasig had:

Compensation income (including 13th month pay and other benefits of

of P 100,000, but net of SSS, Philhealth & Pag ibig) P 1,400,000

On her laundry business:

Gross sales 2,300,000
Non-operating income 200,000
Costs of sales 1,000,000
Operating expenses 600,000

Compute for the income tax due with the following option.

I. If Miss Masigasig opted to pay the 8% income tax

II. If Miss Masigasig opted to pay the graduated tax after deduction for costs and
expenses
III. If Miss Masigasig opted to pay the graduated tax after availing Optional Standard
Deduction.

SOLUTION:

I. If Miss Masigasig opted to pay the 8% income tax, the computation shall be:

Compensation Income P 1,400,000

Less: 13th month pay and other exempt
benefits 90,000
Taxable Compensation Income 1,310,000
Income tax at graduated rates P 283,000

On the income from business:

Gross sales P 2,300,000

Add: Non –operating income 200,000
Taxable income 2,500,000
Income tax @ 8% 200,000
Total income tax due P 483,000

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 II. If Miss Masigasig opted to pay the graduated tax after deduction for costs and expenses

Compensation Income P 1,400,000

Less: 13th month pay and other exempt
benefits 90,000
Taxable Compensation Income 1,310,000
Income tax at graduated rates P 283,000

On the income from business:

Gross sales P 2,300,000
Less: Cost of sales 1,000,000
Gross Income 1,300,000
Less: Operating Expenses 600,000
Net Income from operations P 700,000
Add: Non –operating income 200,000
Taxable income 900,000
Income tax @ graduated rates 160,000
Total income tax due P 443,000

In addition, percentage tax of 3% of P2,300,000 or P 69,000 shall be paid.

III. Miss Masigasig opted to pay the graduated tax after deduction using Optional Standard
Deduction, the computation shall be:

Compensation Income P 1,400,000

Less: 13th month pay and other exempt
benefits 90,000
Taxable Compensation Income 1,310,000
Income tax at graduated rates P 283,000

On the income from business:

Gross sales P 2,300,000
Less: Optional Standard Deduction 920,000
Net Income from operations P 1,380,000
Add: Non –operating income 200,000
Taxable income 1,580,000
Income tax @ graduated rates 364,000
Total income tax due P 647,000

In addition, percentage tax of 3% of P2,300,000 or P 69,000 shall be paid.

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Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________
Week No. 7
Individual Taxpayer – Part 2

Solve the following problem

1. It was anticipated that the gross sales for the year of Mr. San Jose in his business
subject to the 3% business tax will not exceed P3,000,000. His gross sales is
P2,500,000 while his costs and expenses with supporting vouchers is P1,200,000.
Compute for:
a. The 8% income tax
b. The graduated income tax

2. Ms. Babblie is an employee with gross compensation income of P500,000, she also
operate her own business with gross sales of P2,900,000 and non- operating income
of P50,000. She also incurred costs and expenses of P1,450,000. How much is the
income tax at graduated rates if she is availing:
a. Itemized Deductions
b. Optional Standard Deduction

3. The gross sales for the year 2019 of Mr. Santiago is P2,000,000 with supporting
vouchers for his expenses is P1,000,000. Compute for the income tax if:
a. Mr. Santiago elected Itemized deduction
b. Mr. Santiago elected the Optional Standard Deduction

4. Mr. Zandro operates business with gross receipts of P4,000,000 and non-operating
income of P500,000. His expenses is amounting to P1,050,000. What will be the
income tax with :
a. Income tax using graduated rates with itemized deduction
b. Income tax with Optional standard deduction
5. Mrs Ante is an employee with gross compensation income of P600,000. Her husband
is in business with gross sales of P4,800,000 and non-operating income of P200,000.
Mr. Ante costs and expenses amounting to P2,000,000. How much is the income tax
of Mr. and Mrs. Ante if availing:
a. Itemized deduction
b. Optional Standard Deduction.

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 Module No.7
Corporation as a Taxpayer

Aside from capital gain tax, final tax on certain passive income and income tax on employment
income; individual is also subjected to graduated income tax using the tax table if the
individual is employed or practicing profession and/or running own business.

At the end of this module, you are expected to:

1. gain more knowledge in computing tax using tax table;

Corporation is an artificial being created by operation of law, having the rights of

succession and the powers, attributes, and properties expressly authorized by law or incident to
its existence.

In taxation, Corporation has a wider scope for it includes:

 partnerships no matter how created or organized but does not include general
professional partnership
 joint-stock companies,
 joint accounts
 associations, or insurance companies
but it does not includes joint venture or consortium formed for the purpose of
undertaking construction projects or joint venture engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract with the government.

Corporation maybe classified into domestic, resident foreign or non-resident foreign

corporation.

Domestic Corporations are entities organized and constituted under Corporation code of
the Philippines and subjected to Capital gain tax; Final Tax on Passive Income, Normal Tax,
Minimum Corporate Income Tax (MCIT) and Improperly accumulated earnings tax. Capital
gain tax and Final tax were discussed in individual taxpayer.

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 Foreign Corporation is a corporation created or organized under foreign laws. It may
be Resident foreign corporation that engaged business in the Philippines or Non-resident
foreign corporation that not engaged business in the Philippines.

Corporation Income Within Income Outside Tax Base

Domestic Taxable Taxable Taxable Income

Corporation
Resident Foreign Taxable Non taxable Taxable Income
Corporation
Non-resident Taxable Non Taxable Gross Income
Foreign
Corporation

From Year 2009, the income tax rate for corporation is 30% of taxable income for
Domestic & Resident foreign Corporation while 30% of Gross income for Non-resident
Foreign Corporation.

Formula: (Domestic and Resident Foreign Corporation)

Gross Income (excluding capital gains & passive income) P XXX

Less: Itemized Deductions for expenses and
losses OR Optional Standard Deduction of
40% of gross income XX
Equals: Taxable Income P XXX
Multiply by 30%
Income tax P XXX

Formula: (Non- Resident Foreign Corporation)

Gross Income (including capital gains & passive income) P XXX

Multiply by 30%
Income tax P XXX

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 .

Sunshine Corporation had the following data in 2019:

Gross Receipts, Philippines P 6,000,000

Gross income, USA 5,000,000
Expenses, Philippines 3,000,000
Expenses, USA 3,000,000
Interest from time deposit 100,000
Interest on money market placement, net of tax 210,000

Compute for the income tax due and final taxes paid if Sunshine Corporation is

a. Domestic Corporation
b. Resident Foreign Corporation
c. Non-resident Foreign Corporation

Solution:

a. Domestic Corporation

Gross Receipts, Philippines P 6,000,000

Expenses, Philippines 3,000,000 P 3,000,000

Gross Income, USA 5,000,000

Expenses, USA 3,000,000 2,000,000
Taxable Income 5,000,000
Multiply by 30%
Income tax due P 1,500,000

Final tax from time deposit (100,000 x 20%) P 20,000

Final tax from interest in money market
Interest in money market ( P 210,000/80% =
262,500 x 20%) 52,500
P 75,500

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 .

b. Resident foreign Corporation

Gross Receipts, Philippines P 6,000,000

Expenses, Philippines 3,000,000
Taxable income P 3,000,000

Multiply by 30%
Income tax due P 900,000

Final tax from time deposit (100,000 x 20%) P 20,000

Final tax from interest in money market
Interest in money market (P 210,000/80% =
262,500 x 20%) 52,500
P 75,500

c. Non-Resident foreign Corporation

Gross Receipts, Philippines P 6,000,000

Interest from time deposit 100,000
Interest from money market (210,000/70%) 300,000
Taxable income 6,400,000
Multiply by 30%
Income tax due P 1,920,000

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 Minimum Corporate Income Tax

On the fourth year of operation, pursuant to Section 27 (E) and Section 28 (A2) of the
NIRC, domestic and resident foreign corporations shall be taxed with 2% based on the gross
income and not on taxable income after operating expenses; and if the corporation incurred a net
loss or zero taxable income, or normal tax is lesser than minimum income tax.

The minimum corporate income tax is to be paid only if upon the computation of the
normal corporate tax, it turns out to be lower than the 2% of the gross income or MCIT per
taxable quarter basis and covered by corporation‟s quarterly adjustment income tax return.

Any excess of the minimum corporate income tax (MCIT) over the normal tax shall be
carried forward and credited against the normal income tax for three immediately succeeding
taxable years.

If the corporation regardless of years of operations sustained losses on account of

prolonged labor dispute and forced majeure, the Secretary of Finance is authorized to suspend
the imposition of the minimum corporate income tax.

The following Special Corporations are exempted in the imposition of Minimum

Corporate Income Tax.

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 .

Champion Corporation has been operating since January 2015. Data pertinent to its
operations covering 2017 to 2019 are as follows:

Compute for appropriate income tax for each taxable year.

Note: The minimum corporate income tax for 2017 is not applicable because the company
has not yet reached its fourth year.

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 Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 8
Corporate Taxpayer
Problem Solving

1. In the second taxable year of operation, XRU Corporation had P4,000,000 gross profit
from sales while business expenses were P3,000,000. Disregarding the quarterly income
tax considerations, what is the income tax for the year?

2. In 2013, Matador Corporation, a domestic corporation started its meat processing

company. On its seventh year of operation, the company had Gross revenue of
P15,000,000, direct cost of sales of P10,000,000 while incurred other operating
expenses of P1,500,000. What is the income tax for the year after disregarding the
quarterly income tax payment?

3. The following were computed income taxes (MCIT for minimum corporate income tax
and NT for normal tax of Akina Corporation, a domestic corporation:

MCIT NT
Seventh year Php 70,000 Php 20,000
Eight year 10,000 30,000
Ninth year 40,000 15,000
Tenth year 2,000 5,000
Eleventh year 45,000 80,000

Compute for the income tax for each 7th, 8th, 9th, 10th and11th year.

4. On the 5th year of operation of Heart Corporation, had the following cumulative data as
at the end of each first three quarters and end of its fourth taxable year:
1st 2nd 3rd Year
Gross profit from sales 5,000,000 7,000,000 8,500,000 9,900,000
Operating expenses 2,000,000 2,800,000 3,400,000 3,960,000
Compute for the income tax due (refundable or creditable) at the end of 1st, 2nd, 3rd
quarter and the year-end tax.

40
 Module 8
Tax on Partnership

Partnership is defined as a contract whereby two or more persons bind themselves

to contribute money, property or industry for common fund with the intention of dividing
the profits among themselves.
At the end of this module, you are expected to:
1. gain knowledge about taxing a partnership;

In taxation, there are two category of partnership. They are: General professional
partnership and general co-partnership.

General professional partnership is formed for the sole purpose of exercising their
common profession of which no part of income is derived from engaging in any trade or
business. Three elements of general professional partnership are; a.) Partners have a
common profession; b.) Purpose is to practice of common profession; and c.) No part of
the net income in engaging in any trade or business.

The general professional partnership is not subject to income tax but the partners
are taxable on their share in net income.

General Co- Partnership is a partnership wherein part or all of its income is

derived from the conduct of trade or business. For taxation purposes, it is considered as
a corporation and therefore liable to corporate tax of 30%. It is also subject to MCIT in
the same manner as a corporation.

Joint venture that is always associated as partnership because of its commonality

of interest. Its characteristics as a mutual right of control and mode by which profits or
losses are shared. The obvious difference is its business activity that is organized or
established only for a temporary or short period of time and usually it is dissolved once
their business objective is accomplished.

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 .

1. XY general professional partnership of Xane and Yale both CPA has a gross
income of P400,000. Using the optional standard deduction, show the taxable
income of Partner Xane assuming he has own gross income of P1,600,000 and
operating expenses of P800,000.

Answer:
Gross Income P 4,000,000
Less: OSD (40% of gross income) 1,600,000
Distributable net income (not subject to income tax) P 2,400,000

For Partner Xane

Share in Partnership distributable net income at

(1/2 of P2,400,000) P 1,200,000
Own gross income P 1,600,000
Less: expenses 800,000 800,000
Taxable income P 2,000,000

 Since the partnership availed of the Optional Standard Deduction, the partner
must take the Itemized Deductions.

2. Stop Corp. and Go Corp. form a joint venture to construct a building with
contract price excluding VAT amounting to P50,000,000. Total construction costs
amounted to P40,000,000. Stop and Go agreed to share any income or losses
equally.
Compute the related taxes of the joint venture.

Answer:

Contract price P 50,000,000

Less: Construction cost 40,000,000
Gross Income P 10,000,000
Less: OSD (10,000,000 x 40%) 4,000,000
Net Income of joint venture P 6,000,000
Multiplied by corporate tax rate 30%
Income tax due P 1,800,000

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Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 9
Tax on Partnership
Problem Solving

1. Abbie and Belle both young lawyer formed the A & B Partnership with the agreement
of sharing income and loss equally. For the taxable year 2019, the following data were
gathered.

A & B Partnership Abbie Belle

Gross Income P 5,000,000 P 2,500,000 P 2,000,000
Expenses 3,500,000 1,500,000 1,000,000

1.1 If the partnership availed the Optional Standard Deduction:

What is the income tax of A & B Partnership?
Compute for the taxable income of Abbie and Belle respectively.

1.2 If the partnership availed the Itemized Deduction:

What is the income tax of A & B Partnership?
Compute for the taxable income of Abbie and Belle respectively.

2. C & D Partnership is a general co – partnership engaging in selling of automobile parts.

Partners agree to divide the profit and loss equally. The partnership and partners had the
following data in a year.

C & D Partnership Caloy Daboy

Gross Income P 2,000,000 P 700,000 P 800,000
Expenses 1,000,000 320,000 410,000

What is the income tax of the partnership if choosing the Itemized deduction?
Compute for the net income of Caloy if choosing Itemized deduction.
Compute for the net income of Daboy if choosing Optional Standard Deduction.

43
 MODULE 9
GROSS INCOME

On what is received, there must be gain, and only to the extent of the gain, is there
income.
At the end of this module, you are expected to:
1. learn the concept of gross income

According to revenue regulations, for income tax purposes, income may be defined
as the gain derived from capital, from labor, or from both, provided it be understood to
include profit or gain through a sale or conversion of an asset.
For example the interest incomes from bank deposits are consider income because it
represents a gain derived from capital. On the other hand the salaries represent income
derived from labor.

Gross income as defined in Sec. 39, Rev. Regs. No. 2 of National Internal Revenue
Code means all income derived during the taxable year by a taxpayer from whatever
source, whether legal or illegal, including but not limited to the following items:
 Compensation for services in whatever form paid, including, but limited to, fees,
salaries and wages, commissions and similar items;
 Gross income derived from the conduct of trade or business or the exercise of a
profession;
 Gains derived from dealings in property;
 Interests;
 Rents;
 Royalties;
 Dividends;
 Annuities;
 Prices and winnings;
 Pensions; and
 Partner‟s distributable share from the net income of the general professional
partnership.
You might wondering for the inclusion in the gross income of distributable share of
the net income of a general professional partnership where in fact it is net already
on the part of the partnership it is because the share is still gross income on the part
of the partners.

44
 An income received by taxpayer may satisfy the concept of income, but there may be a
provision of law that exempts it from the income tax. These incomes are „exclusion from gross
income” as provided under section 32 (B) of the National Internal Revenue Code.

a. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of
the insured, whether in a single sum or otherwise, but if such amounts are held by the
insurer under an agreement to pay interest thereon, the interest payment shall be included
in the gross income;
b. The amount received by the insured as a return of the premiums paid by him under life
insurance;
c. Property acquired through donation or inheritance, provide the income from such property
will be included in gross income;
d. Amounts received through accident or health insurance, or under Workmen‟s
Compensation Acts;
e. Income of any kind to the extend required by any treaty obligation binding upon the
Government of the Philippines;
f. Separation pay received by an employee from service of employer because of death,
sickness or other physical disability or for any cause beyond the control of the said
employee.
g. Social security benefits, retirement gratuities, pensions and other similar benefits;
h. Payment of benefits due or to become due under United States Veterans Administrator;
i. SSS benefits;
j. GSIS benefits;
k. Income derived from investment in the Philippines in loans, stocks, bonds or other
domestic securities by foreign government;
l. Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic‟ literary, or civic achievement, but only if (1) the recipient was
selected without any action on his part to enter the contest or proceedings; and (2) the
recipient is not required to render substantial future services as a condition to receiving
such prize or award;
m. Prizes and awards granted to athletes in local and international sports competition and
sanctions by their national sports associations;
n. 13th month and other benefits not exceeding P90,000;
o. GSIS, SSSS, Philhealth and Pag ibig contributions and union dues of individuals
p. Gains realized from sale or exchange or retirement of bond or other certificate of
indebtedness with a maturity of more than five (5) years;
q. Gains realized by the investor upon redemption of shares of stock of a mutual fund
company;

45
 r. Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate:
1. In accordance with reasonable private benefit plan maintained by the
employer;
2. The plan is funded;
3. The retiring official or employee has been in the service of the same employer
for at least ten (10) years;
4. The employee is not less than fifty years (50) years of age at the time of
retirement; and
5. The employee can receive the benefit of exclusion only once.

Campaign contributions are not included in the taxable income of the candidate to
whom they are given provided the candidate file with the Commission on Elections a
Statement of Expenditures however the unutilized campaign contributions or if the
Statement of Expenditures is not filed, the same will be subject to income tax.

46
 .

1. Mr. Santiago took a life insurance policy amounting to P1,000,000 which is to

receive after thirty years. He outlived the policy and personally received the life
insurance cash surrender value after paying the annual premiums of P10,000 per
year which he paid for thirty years. Is the P1,000,000 life insurance proceeds
taxable?
Answer:
The amount in excess of life insurance premium paid which was received by Mr.
Santiago is taxable because it represents a gain as be outlived his life insurance. If
in case Mr. Santiago dies and his beneficiaries received the proceeds of life
insurance, the entire amount of life insurance proceeds is exempted from income
tax.

2. Ms. Jessica Sojo was chosen as one of the Ten Outstanding Young Men in the
Philippines (TOYM). For this she received P100,000 without future services as a
condition to with the prize.
Is P100,000 excluded from gross income?
Answer:
Yes the entire amount is excluded from the determination of gross income.

3. Mr. Andres, a supervisor in Mining Company, was accidentally bumped by a

URC Taxi. The court decided that URC would pay Mr. Andres the following
damages which URC paid for a certain period of time.
Moral damages P100,000
Exemplary damages 50,000
Damages of loss of earning capacity 200,000
Actual liquidated damages 50,000
Compensation for unrealized earnings 30,000
Total P 430,000
How much is taxable and nontaxable income?
Answer:
Only the compensation of P30,000 for unrealized earnings is taxable, the
P400,000 is thus nontaxable.

47
 Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 11
Gross Income
Problem Solving

1. Mr. Ernest Paco received the following:

Return of his life insurance premium paid within 25 years with P2,000,000
annual premium of P15,000
Proceeds of his mother‟s life insurance paid within 30 years with 1,000,000
annual premium of P5,000
Cash gift from his missionary friend 50,000
House and lot inherited from his mother 3,000,000
Rent income from house and lot inherited 100,000
Required:
a. Amount to be excluded from gross income.
b. Amount to be included as gross income.

2. Miss Aura served as a nurse for Atty. Lauro for thirty years. Since she has been
serving for a long period of time, the judge included in his last will and testament an
amount of P1,500,000 as payment for her service.
Is the transfer excluded from income taxation if received by Miss Aura upon the
death of Atty. Lauro?

3. On January 1, 2020, Marthina received a building property from her parents as

inheritance with fair market value of P10,000,000. This property was acquired for
P8,000,000 five years ago by his parents. The monthly rental income of the property
is P100,000 with an average monthly expense of P20,000.
What is Marthina‟s income subject to income tax fot the year 2020?
4. Catriona Gray received cash amounting to P2,000,000 plus a house and lot
amounting P3,000,000 for winning as Miss Universe.
How much is tax-exempt from the awards of Miss Gray?
5. During the year, a resident citizen received by the following among others:
Last pay upon resignation from his 1st employment P 100,000
Separation pay due to closure of his 2nd employer 70,000
Retirement pay received from SSS as member 150,000
How much is the reportable income from the data above?

48
 Module No. 10
Income from Services & other Sources

Amounts received for services rendered, such as salaries, wages, commissions

and professional fees, ae taxable income to the recipient.
At the end of this module, you are expected to:
1. learn different sources of income that would be taxable

Compensation

Compensation refers to the remuneration for the services performed by an

employee under an employer – employee relationship. An employer – employee
exists if and when Employer has the right to control and direct the employee, not only
as to the results to accomplished by the work but also to the details and means by
which the result are accomplished; The employer has the right to hire, suspend,
reassign or terminate the services of the employee; also has the right to set the time
when and place where the work is to be done.

When compensation is received in money, the measure of income is the

amount of money received. When compensation is received other than in money, the
fair market value of the thing taken in payment is the measure of income.

If the services were rendered at a specify price, in the absence of proof to the
contrary, such price shall be presumed to be the measure of income.

For example, under the employee contract, Mr Angelo was to render personal
services to Mr Bare, for a price of P80,000. After the services were rendered, Mr
Bare could not pay in money. Mr Bare paid in property with a fair market value of
P100,000. The income of Mr Angelo is P100,000 disregarding the stipulated price of
P80,000.

Promissory notes or other evidences of indebtedness received in payment of

services, and not merely as security for such payment, constitute income in the
amount of their fair market value.

49
 Income from Business and practice of Profession

In business such as merchandising and manufacturing, gross income means

total sales less cost of goods sold plus any incidental and other sources while income
from the practice of profession primarily comes from endeavour requiring specialized
training in the field of learning or science engaged in as a means of livelihood or
profit of an individual.

Rental Income

It refers to earnings derived from leasing real estate as well as personal

property. Rental income includes not only the regular payment but also the obligations
assumed to be paid by the lessee such as interest, taxes and insurance premium.

Passive Income (discussed in the Individual taxpayer).

Other sources of Income

Earning that categorized as other sources of income because generally these

earnings are incidental earnings or not usual source of income.

1. Bad debt recovery - amount of receivable that are being ascertained

worthless and written off during previous year but recovered the succeeding
year and the taxability of the recovered amount will extent only to the tax
benefit in the year the account is written off.
2. Tax refund or credit – subject to the tax benefit rule that states the refund
would be subject to tax if such tax was previously deducted from gross
income resulting in the reduction of reported taxable income.
3. Annuities – refers to installment payment received for life insurance sold by
insurance companies. The annuity payments represent a part taxable and not
taxable.
4. Income from whatever source – inclusion of all income not expressly
exempted within the class of taxable income under the laws irrespective of
the voluntary or involuntary action of the taxpayer, whether derived from
legal or illegal source of income.
Legal source - Employees bonus and commission
Illegal sources – Gambling, Kidnapping, Extortion, Smuggling and
Embezzlement

50
 .

1. Gabriel operates a sari sari store, the initial operation provided the following
data for the current year:
Sales P 2,400,000
Merchandise inventory, end 200,000
Sales Return and allowances 100,000
Purchases 1,500,000
Sales discount 300,000
Gain from sale of scrap materials 50,000
Compute for the gross income.

Answer:
Sales, net of discount & allowance Php 2,000,000.00

Less: Cost of sales (1,500,000-200,000) 1,300,000.00

Gross profit from sales Php 700,000.00

Add: Gain from sale of scrap 50,000.00

Gross Income Php 750,000.00

2. Miracle Property leases its lot to Rose for a term of 3 years with an annual
rental of P 100,000. As of January of the first year, Rose completed the
construction of an improvement on the lot with value of P1,000,000 with an
estimated useful life of 5 years.
The leasehold contract stipulates that after the lease term, the improvement
will belong to Miracle Property.
What will be the lease income to be reported in the year when the
improvement was completed?

Answer:

Value of Improvement Php 1,000,000.00

Add: Annual rental per agreement 100,000.00

Gross Income Php 1,100,000.00

51
 Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 12
Income from Services & Other Sources
Problem Solving

1.
Miss Tali No, reported the following income in the taxable year 2019
Salary for the year 584,000.00
13th month pay 50,000.00
Honorarium as speaker 20,000.00
Commisions 50,000.00
Availed as vacation leave pay (included in the salary) 15,000.00
Cost of Living allowance 12,000.00
Interest Income from time deposit in Metrobank 6,000.00
Miss No retired at the age of forty-five as of December 31, 2019, receiving retirement pay of
P 1,000,000. What is the gross taxable compensation income for 2019?

2. The Builders leases a portion of its commercial space to Maria Go with agreement
that Miss Go should be responsible to pay the following:
 Advanced rental of P100,000
 Monthly rental of P25,000
 Annual insurance premium of P5,000
 Annual interest expenses of P3,000; and
 Real estate tax, P2,000
What is the rental income of The Builders?

3. Miss Manda Rambong, a treasurer of Golden Corporation, spent P1,000,000 of

the Company funds for her personal use. Subsequently the auditor of Golden
Corporation found out the embezzlement. Is Miss Rambong liable for income
taxes pertaining to the P1,000,000 of Golden Corporation?
4. Mr. Malapit received P 100,000 as annuity of life insurance from Insurance
Company consisting of the following:
Return of Premium P 90,000
Interest at 10% 10,000
Total annuity P100,000
What is the reportable income?

52
 Module No. 11
Fringe Benefits Tax

To motivate and keep high quality people, .employers compensates employees

with fringe benefits.
At the end of this module, you are expected to:
1. learn the difference between the fringe benefit subject to tax and not.
2. gain knowledge about the minimis benefits

According to Section 33 (B) of the NIRC, Fringe benefits are goods, service or
other benefits furnished or granted in cash or in kind provided by employer to their
employees such as but not limited to the following:
a. Housing
b. Expense account
c. Vehicle of any kind
d. Household personnel, such as maid or driver
e. Interest on loan at less than market rate
f. Membership fees, dues and other expenses borne by the employer
g. Expenses for foreign travel
h. Holiday and vacation expenses
i. Educational assistance to the employee of his dependent and
j. Life or health insurance and other non-life insurance premiums.

For income taxation, fringe benefits may be classified as follows:

1. Fringe benefit to rank and file employees are taxable as compensation income
subject to normal tax except
a. De minimis benefits, and
b. Benefits provided for the convenience of the employer.
2. Fringe benefit to managerial employees are taxable with final fringe benefit
tax of 32%, except
a. De minimis benefits, and
b. Benefits provided for the convenience of the employer.
3. Allowance which are fixed in amounts and are regularly received by the
employee as part of his monthly compensation income shall not be treated as
taxable fringe benefit but as compensation income.

53
 Fringe benefit tax is a final tax on the employee‟s income to be withheld by the
employer and remittance of the withholding should be made on a quarterly basis. The
tax should be based on the grossed up monetary value which can be determined by
dividing the monetary value of the fringe benefit by 68% effective January 1, 2000.

Fringe Benefits not subject to Fringe benefit tax:

1. Fringe benefits which are authorized and exempted from income tax under
the Code or under any special law;
2. Contributions of the employer for the benefit of the employee for retirement,
insurance and hospitalization benefit plans;
3. Benefits given to the rank-and –file, whether granted under a collective
bargaining agreement or not;
4. If the grant of fringe benefits to the employee is required by the nature of, or
necessary to the trade, business or profession of the employer; or
5. If the grant of the fringe benefit is for the convenience of the employer
6. De minimis benefits as defined in the Regulations

De minimis benefits are relatively small values provided by the employers

on top of the basic compensation intended for the general welfare of the
employees. The amount of de minimis is a deductible salaries expenses on the
part of the employer and not taxable on the part of employees.
1. Monetized unused vacation leave credits of private employees not exceeding
10 days during the year;
2. Monetized value of vacation and sick leave credits paid to government
official and employees;
3. Medical cash allowance to dependents of employees not exceeding P1,500
per semester or P250 per month (as amended by RR 11-2018);
4. Rice subsidy of P2,000 or one sack of rice 50 kls per month amounting to not
more than P2,000 (as amended by RR 11 – 2018)
5. Uniform and clothing allowance not exceeding P6,000 per annum;
6. Actual medical assistance, e.g. medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity assistance,
and routine consultation, not exceeding P10,000 per annum;
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards with an annual monetary value not
exceeding P10,000

54
9. Gifts made during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
10. Daily meal allowance for overtime work and night graveyard shift not exceeding
twenty-five percent of the basic minimum wages on a per region basis.
11. Benefits received by an employee by virtue of a collective bargaining agreement
(CBA) and productivity incentive schemes provided that the total monetary value
received from both CBA and productivity incentive schemes combined do not
exceed P10,000 per employee per taxable year.

.
1. During the taxable year, Elvira an employee of Philips Corporation, received a total
salary of P180,000. In addition, she received cash fringe benefits amounting to
P136,000 for personal expenses during the year.
a. Assuming that Elvira is a rank and file employee of the company, how much of
her fringe benefits would be subject to fringe benefit tax?
b. Assume that Elvira is a manager of the company. How much is the related final
tax on her fringe benefits?

Answer:
a. The fringe benefit received by Elvira shall not be subject to fringe benefit tax
because she is rank and file, the benefits shall be included in the determination
of her gross compensation income subject to tabular normal tax.
b. The related final tax on the fringe benefits would be

Value received as fringe benefit Php 136,000.00

Divided by GMV rate 68%

Gross up monetray vaue Php 200,000.00

Multiply by FBT rate 32%

Fringe benefit tax Php 64,000.00

55
 2. The cash payment by the employer representing reimbursement of the personal
expenses of a managerial employee is P170,000.
Required:
a. Taxable amount of fringe benefits
b. Fringe benefit tax
c. Deductible fringe benefit expenses of the employer
Answer:
a. Taxable amount of fringe benefits

Cash payment or monetary value of fringe benefits Php 170,000.00

Divided by GMV rate 68%

Taxable amount of fringe benefits Php 250,000.00

b. Fringe benefit tax

Taxable amount of fringe benefits Php 250,000.00

Multiply by FBT rate 32%

Fringe benefit tax Php 80,000.00

c. The deductible fringe benefit expenses of the employer is

Cash payment of personal expenses Php 170,000.00

Fringe benefit tax 80,000.00

Deductible fringe benefit expenses Php 250,000.00

3. Mr. Antonio is a regular faculty member of Western University. The school

provides free tuition fees for the children of its employees. Are the tuition fees
subject to fringe benefit tax?
Answer:
No. However, it is subject to withholding tax for compensation income under
Section 79 of NIRC.

56
Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 13
Fringe Benefits
Problem Solving
1. Miss Andrea received the following compensation and benefits during the year:

Total basic salary Php 480,000.00

13th month pay 20,000.00

Rice Subsidy (P2,000 per month) - de minimis 24,000.00

How much is the taxable and nontaxable compensation of Miss Andrea?

2. Xmen Company remitted to BIR P80,000 pertaining to amount withheld from the
cash benefit granted to its managerial employee.
Required:
a. How much is the monetary value of fringe benefits paid to managerial
employee?
b. How much is the grossed – up monetary value of fringe benefits?
c. How much is the income tax expenses deductible from the business income of
the employer for the particular payment?

3. A managerial employee was given by his employer all paid up vacation expenses
amounting to P408,000 plus salary of P34,000.
How much is the fringe benefit expenses of the employer?

4. Cypress Corporation paid P136,000 cash fringe benefit for year 2019 representing
80% of the car incentive for its area manager Cypress remitted the related final tax
of the said cash fringe benefit. How much is to be claimed as business deduction
from business income?

5. After passing the scholarship examination, Anya received P92500 as educational

from GEV Foundation wherein his father works as the VP for Finance.
How much is the fringe benefit tax?

57
 Module No. 12
Deductions from Gross Income

Deductions or allowable deductions are business expenses and losses incurred

which allows to reduce gross business income to arrive at net income subject to tax.
At the end of this module, you are expected to:
1. learn the different deductions to arrive at the taxable income

In the Philippines, a taxpayer is being subjected to income tax because it earned

something but before earning, business expenses are necessary to earn such revenue.
The allowable deductions from gross income become a tool to equitably measure the
taxpayer net income from its business undertakings.

Deductions are not presumed but allowable only by reason of specific

provisions of law and not under any general equitable or constitutional concept.
Therefore deductions are strictly construed against the taxpayer. The taxpayer claiming
deduction must be able to prove his entitlement and the he has the burden of justifying
the allowance of any deduction.

Requisites of allowable deduction

 The expenses must be both ordinary and necessary;
 The expenses must be paid or incurred during the taxable year;
 The expenses must be paid or incurred during taxable year in connection with
trade or business;
 The expenses must be substantiated with sufficient, competent, evidential
matter;
 The expenses must be reasonable and not contrary to law.

Items not deductible from gross income

 Any amount paid out for new buildings or for permanent improvements, made
to increase the value of any property or estate
 Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made
 Premiums paid on any life insurance policy covering the life of an officer or
employee, or of any person financially interested in any trade or business
carried on by the taxpayer is directly or indirectly the beneficiary under suc
policy.

58
 Deduction from gross income can be classified as Itemized deductions and
optional standard deduction

Itemized deductions are business expenses available to both the natural and
juridical persons that are engaged in business. The most common examples of
business expenses are operating expenses, such as
1. General and administrative expenses;
2. Selling expenses; and
3. Other operating expenses

Optional Standard deduction allows not only individual taxpayer under RA

9504 but also corporation.
In lieu of itemized deduction, the OSD may be deducted from gross income if
the taxpayer is

1. An individual other than non- resident alien, the OSD is 40% of his gross sales
or gross receipts
2. A corporation, the OSD is 40% of its gross income.

The used of OSD by the taxpayer should be signified in income tax return
otherwise the taxpayer is availing itemized deduction. And once elected, such election
of deduction to use is irrevocable for the taxable year in which return is made.

An individual who is entitled and claimed for the OSD shall not be required to
submit with his tax return the supporting financial statements.

Itemized or business expenses include ordinary and necessary expenses paid or

incurred during taxable year in carrying on or which are directly attributable to the
development, management or conduct of business or practice of profession. Examples
of business expenses are:

Salaries – which included wages and other form of compensation for personal
service actually rendered, including the gross-up monetary value of fringe benefit
furnished by employer to employee. As a rule, salary expenses are allowed as
deduction from business income only if the corresponding withholding tax has been
deducted and remitted to the BIR.

59
 Materials and Supplies – are deductible as expense when consumed or used in
the business operation during taxable year. The cost of materials shall be form part of
the cost of the product.

Travelling expenses – incurred within and outside the country while away from
home in the pursuit of trade, business or profession.

Rent expenses – incurred for the continued use or possession of property to

which the taxpayer has not taken title to other than that of a lessee, user or possessor.

Representation expenses – are entertainment, amusement and recreation

expenses incurred or paid during the year which are directly connected to the
operation of business. The representation expenses are subject to ceiling as provided
by the Secretary of Finance and they are follows:
1. ½ of net sales for taxpayer engaged in sale of goods or properties;
2. 1% of net revenue for taxpayers engaged in sale of services.

Interest expenses – cost of money incurred within a taxable year on

indebtedness in connection with business. The following are requisites for interest
expense to be allowed as deductions:
1. There must be an indebtedness stipulated in writing;
2. The indebtedness must be that of the taxpayer in connection with trade,
business or profession;
3. The interest must have been paid or accrued during the taxable year; and
4. The interest payment must not be in favor of a relative.

Taxes – allowed deduction when paid or incurred within the year in connection
with trade or business. Documentary stamp taxes, occupational taxes, privilege and
license taxes, excise taxes, import duties, local business taxes, automobile registration
taxes, community taxes and municipal taxes are allowed as deduction in conduct of
business.
Bad debts – claims that become worthless or uncollectible arising from goods
sold or services rendered. To be deductible, the claim must be ascertained worthless
and the corresponding receivables have been written off within the taxable year.
Depreciation – reasonable allowance to reduce the useful value of the tangible
fixed assets resulting from wear and tear and normal obsolescence is allowed as a
deduction from gross income to enable taxpayers to recover the acquisition cost of the
property used in the conduct of business.
Charitable and Other Contributions – the law allows some contribution or gifts
given within the taxable year as deduction from gross income.

60
1. In year 2019, Yacko Company incurred and paid salary expenses of its
employees amounting to P2,850,000. The company does not withhold and remit
income taxes on the said salary payments. Can the company claimed salary
expenses as deduction from gross income?
Answer:
No. Yacko Company cannot deduct salary expense from its gross income for the
year 2019.

2. Aura reported the following travelling expenses:

Business seminars (registration fees, P10,000) P 25,000
Meals and lodging on business seminars 10,000
Visiting friends 5,000
How much is the deductible travelling expenses?
Answer:
Business seminars (registration fees, P10,000) P 25,000
Meals and lodging on business seminars 10,000
Travelling expenses P 35,000

3. Mr. Sotto, the manager of Green Corporation with total sales of P10,000,000 in
2019 incurred total entertainment and recreation expenses amounting to P60,000
with adequate receipts. The said expenses incurred to conduct a special meeting
with major client at Manila Hotel. What is the allowable representation expense
to be deducted in gross income?
Answer:
Total net sales during the year P10,000,000
Multiplied by limit percentage .005
Deductible representation expense P 50,000

4. Santan Furnitures sold its dining set on installment for P100,000 with the
following terms: 50% down payment; the remaining balance is payable in five
annual installment. The cash price of the dining set sold at P70,000. Assuming
that the remaining balance becomes uncollectible and was written off, what is the
amount of bad debts that can be deducted from gross income?
Answer:
Cash price of the dining set P 70,000
Less; Down payment received 50,000
Deductible bad debts expense P 20,000

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 Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________

Week No. 15
Deduction from gross income
Problem Solving
1. Santos Company paid P 1,500,000 salaries net of P 55,000withholding tax.
How much is the deductible business expenses from business income?

2. Mr. Alfonso provides the following data:

Gross receipts from profession P 1,000,000
Rent Income 450,000
Interest income from BPI 40,000
Dividend income from Globe Telecom 10,000
Operating expenses without receipt 50,000
Compensation income 350,000
How much is the optional standard deduction?

3. Compute for the itemized allowable deduction for the following data:
Sales P 20,000,000
Cost of Sales 16,000,000
Operating expenses, inclusive of representation expenses 2,000,000
amounting to P 300,000 with proper documentations

4. Chubby Company reports its income on accrual basis. At the end of the year,
the total rent expenses paid P150,000, inclusive of P10,000 rent last year and
P 20,000 for the next year‟s first two months. How much is the deductible
rent expense?
5. On January 1, 2018, Love Company lease a portion of commercial lot for 10
years for a monthly rent of P10,000. The lessee constructed a building
improvement amounting to P 2,300,000 which was completed on July 1,
2018. The building has an estimated life of 20 years. The building
improvement was eventually used in the business on October 1, 2018. What is
the depreciation expense of Love Company?

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 Module No. 13
Taxable Income and Income Tax

As a future accountant and tax practitioner, one important point that we have to
remember is that tax does not always follows accounting.
At the end of this module, you are expected to:
2. learn the net income per book versus taxable income

The net income per books is not necessarily the taxable income because the net
income per books is determined by applying the rules in accounting while taxable
income is determined by applying the rules on income tax in the National Internal
Revenue Code thus there are reconciling items to be considered:
 Items of revenues per books which are not taxable income;
 Items of taxable income which are not revenues in the books of accounts;
 Items of expenses per books which are not deductions from gross income ;
 Items of expenditures which are deductions from gross incomes but which
are not treated as expenses, or from which expenses are recognized
differently in the books of accounts.
The NIRC recognizes accounting rules however the Code in certain cases may
have different but definite rules. The income tax rules involved are:
1. Interest income on bank deposits is subject to final tax. Interest is not
included in taxable income and the final tax is not deductible from gross
income;
2. Capital gain tax on sale of shares of sock of domestic corporation is
subject to 15% capital gain tax while capital gain tax on sale of real
property is subject to 6% whether there is gain or loss;
3. Damages recovery that represents a recovery of lost profits is taxable;
4. Bad debts is deducted when the receivable is actually written off;
5. Contributions deductible must not exceed ten percent (10%) in the case of
individual and five percent (5%) in the case of corporation, of his taxable
income from business or practice of profession;
6. Income tax is not deductible from gross income;
7. Representation and entertainment is deductible with limitations;

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 1. Mr. Angelo is in trading business. He had the following cumulative data at the end
of:
1st Q 2nd Q 3rd Q Year

Sales 600,000.00 1,300,000.00 2,100,000.00 3,000,000.00

Interest Income 20,000.00 40,000.00 60,000.00 80,000.00

Gain on sale of
asset 33,334.00 33,334.00 33,334.00 33,334.00

Cost of sales 240,000.00 520,000.00 840,000.00 1,200,000.00

Taxes 32,000.00 40,000.00 57,000.00 81,000.00

Bad debts 120,000.00

Depreciation 9,000.00 18,000.00 27,000.00 36,000.00

Losses 100,000.00 100,000.00 100,000.00

Miscellaneous 90,000.00 200,000.00 320,000.00 450,000.00

Contributions 60,000.00 120,000.00

Interest expense 1,400.00 2,800.00 4,200.00 5,600.00

Additional information:
a. Interest income was from bank deposits.
b. Gain on sale of asset was from a direct a sale to buyer of shares of stock of a
domestic corporation not listed and traded in a local stock exchange.
c. Taxes included in the capital gain tax on sale in (2) and a final tax on (1).
d. Bade debts expense in the books of accounts was the provision for the year.
The write off for the year for actual uncollectible accounts was P40,000 in the
third quarter.
e. Inventory lost during the second quarter had a cost of P300,000. The insurance
company paid P200,000 under the property insurance.
f. Contributions in the third and fourth quarters were to churches and accredited
charitable institutions.
The taxable income and income tax in the quarterly and year-end returns.
The graduated tax was availed instead of the 8% tax.

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 Solution:

1st Q 2nd Q 3rd Q Year

Sales 600,000.00 1,300,000.00 2,100,000.00 3,000,000.00

Less: Cost sales 240,000.00 520,000.00 840,000.00 1,200,000.00

Gross Profit from sales 360,000.00 780,000.00 1,260,000.00 1,800,000.00

Taxes (Schedule 1) 23,000.00 27,000.00 40,000.00 60,000.00

Interest expense 1,400.00 2,800.00 4,200.00 5,600.00

Bad debts (Schedule 2) 40,000.00 40,000.00

Losses (Schedule 3) 100,000.00 100,000.00 100,000.00

Depreciation 9,000.00 18,000.00 27,000.00 36,000.00

Miscellaneous 90,000.00 200,000.00 320,000.00 450,000.00

Total, before contributions 123,400.00 347,800.00 531,200.00 691,600.00

Net Income before contribution 236,600.00 432,200.00 728,800.00 1,108,400.00

Less: Contributions (Schedule 4) 60,000.00 110,840.00

Taxable income 236,600.00 432,200.00 668,800.00 997,560.00

Income tax at graduated rates 36,440.00 97,200.00 187,268.00

Less: Income tax paid:
First Quarter - - -

Second Quarter (36,440.00) (36,440.00)

Third Quarter (60,760.00)

Due 36,440.00 60,760.00 90,068.00

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 Solution:
Schedule 1. Taxes
1st Q 2nd Q 3rd Q Year

Per books 32,000.00 40,000.00 57,000.00 81,000.00

Less:

Capital gain tax at 15% (5,000.00) (5,000.00) (5,000.00) (5,000.00)

Final tax on interest on bank deposit at
20% (4,000.00) (8,000.00) (12,000.00) (16,000.00)

Deduction on Taxes 23,000.00 27,000.00 40,000.00 60,000.00

Schedule 2. Bad debts

Per books, the write off P 40,000

Schedule 3. Loss
Actual loss P 300,000
Less: insurance recovery 200,000
Deduction P 100,000

Schedule 4. Contributions
2nd
1st Q Q 3rd Q Year
Contributions to churches and charitable institutions
were

Actual 60,000.00 120,000.00

10% of P 728,800 72,880.00 -

10% of P 1,108,400 - - - 110,840.00

Allowed deduction - - 60,000.00 110,840.00

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Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________
Week No. 16
Taxable income and Income Tax

Problem Solving
1. Asus Co. a domestic corporation in its 6th year of operations had the following data
1st Q 2nd Q 3rd Q Year

Net Sales 900,000.00 1,900,000.00 3,900,000.00 4,800,000.00

Dividend Income 100,000.00 320,000.00 420,000.00

Gain on sale of assets 1,000,000.00 1,000,000.00 1,000,000.00 1,200,000.00

Other income 200,000.00 200,000.00

Cost of goods manufactured and sold 360,000.00 750,000.00 1,280,000.00 1,920,000.00

Fringe benefits expenses 462,400.00

Taxes 100,000.00 200,000.00 300,000.00 875,600.00

Entertainment expenses 50,000.00

Contributions 10,000.00 50,000.00 60,000.00 70,000.00

Miscellaneous expenses 200,000.00 500,000.00 900,000.00 1,100,000.00

Loss on sale of assets 50,000.00 50,000.00 150,000.00

Additional Information
1. Dividend were from

Resident corporations 100,000.00 200,000.00 300,000.00

Domestic corporations 120,000.00 120,000.00

Total 100,000.00 320,000.00 420,000.00

2. Sales of capital assets were:

Gain on bonds of domestic corp. 200,000.00

Gain sale of land with capital gain tax of P240,000 1,000,000.00 1,000,000.00 1,000,000.00 1,000,000.00

Total 1,000,000.00 1,000,000.00 1,000,000.00 1,200,000.00

Loss on shares of resident corporations. 50,000.00 50,000.00 150,000.00

3. Other income was damage recovery from a

unfair competition 200,000.00 200,000.00

4. Taxes were:

Final tax on passive income 10,000.00

Capital gain tax on land in the Philippines sold

at P4,000,000 240,000.00

Others 100,000.00 200,000.00 300,000.00 617,600.00

Interest for late payment 10,000.00

Surcharges 8,000.00

Total 100,000.00 200,000.00 300,000.00 885,600.00

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 Module No. 14
Filing of Return and Payment of Tax

It ber is that tax does not always follows accounting.

At the end of this module, you are expected to:
1. learn the net income per book versus taxable income

The income tax return is a document that formally makes the taxpayer report his
gross income and deductions to the Commission of Internal Revenue. Income tax
return is usually prepared by the taxpayer himself and made to believe to be prima
facie good and sufficient for legal purposes. Basically individual taxpayer and
corporation are required to file income tax return.
But there are instances that filing income tax return is not required and these are
following:
1. Individual who is exempt from income tax;
2. Individual whose sole income has been subjected to final withholding income
tax;
3. Individual whose compensation income does not exceed the statutory minimum
wage as fixed by the Department of Labor and Employment (DOLE);
4. Individual, with respect to pure compensation income derived from within the
Philippines, qualified under Revenue Regulations 3-2002 for “Substituted Filing
of Income Tax return by Employees Receiving Purely Compensation Income;
5. An individual who has taxable income not exceeding P250,000.

The substituted Filing of Income Tax Returns:

a. The income must be purely compensation income within the Phils during the
year;
b. There was one employer only in the Philippines;
c. The correct income tax was withheld on the income;
d. The employer filed BIR Form 1604CF with BIR;
e. The employer issued BIR Form 2316 to the employee with the signature of the
employer and the employee.

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 When the tax in the final return of an individual is at 8%, the Financial
Statement (FS) are not required to be attached to be filed with the final income tax
return.
When the graduated income tax return rates of an individual are applied, the
annual income tax return shall be accompanied by audited financial statements.
The final tax return of a corporation must be accompanied by audited financial
statements.

“Pay-as-you-file system”.

Under the pay-as-you-file system, the income tax shown on the return shall be
paid at the time the return is filed.

When the tax due is in excess of two thousand pesos, the taxpayer other than a
corporation may elect to pay the tax in two equal instalment, in which case, the first
instalment shall be paid at the time the return is filed and the second instalment on or
before October 15 following the close of the calendar year. If ay instalment is not
paid on or before the date fixed for is payment, the whole amount of the tax unpaid
becomes due and payable together with delinquency penalties.

Any creditable withholding tax shall be credited against the tax due or the first
instalment of the tax, if the taxpayer desires to pay in instalment.

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 Name: _____________________________________________ Rating: ________________
Year and Section:_____________ Professor / Instructor:__________________________
Due of Submission: _____________________________
Week No. 1 7
Filing of Income
Filing Tax Return
of Return and and Payment
Payment of Tax

1. Cumulative data of individual at the end of each quarter

Name: Juan Reyes,
Address: Masinop, Poblacion Bulacan
Birthday : Oct 15, 1985
Prepare: BIR form 1701 using 8% tax rate

1st Q 2nd Q 3rd Q YEAR

Gross Sales P 800,000 P 1,500,000 P2,100,000 P 2,950,000

Costs and 380,000 700,000 920,000 1,400,000

Expenses

2. Cumulative data of Axis Corporation at the end of each quarter.

Prepare BIR form 1702 with the following independent assumption:
The income tax shall be computed –
a. The choice is the itemized Deductions for costs and expenses
b. The choice is the Optional Standard Deduction

1st Q 2nd Q 3rd Q YEAR

Gross Sales P 3,500,000 P 5,500,000 P8,100,000 P 9,900,000

Costs and 1,320,000 2, 700,000 3,400,000 4,160,000

Expenses

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