lesson 5 - exclusions and deductions of income taxation

8/6/2019 Lesson 5 - Exclusions and Deductions of Income Taxation

1/34

INCOME TAXATION

Exclusion from Income

Deductions from Income


2/34

What is Income Tax?

A tax on income whether gross, grosscompensation or net depending on the class oftaxpayer of the kind of income;

A tax on the yearly profits arising from property,business pursuits, professions, trade, or offices.

A tax on a persons income, wages, salary,commissions, emoluments, profits, and the like, orthe excess thereof over a certain amount.

An excise rather than a property tax.


3/34

Net Income

Net Income for purposes of income means:

In the case of an individual taxpayer now engaged

in business and/or profession, gross income minusallowable deductions;

In the case of corporate taxpayers, gross income

minus allowable deductions.


4/34

Gross Income

Gross income means all income from whatever sourcesincluding but not limited to the following items:

Compensation for services;

Gains derived from dealing in property (real or personal); Income from the conduct of trade or business or the exercise

of a profession;

Interests;

Rent and Royalties;

Dividends; Annuities;

Prices and winnings; and

Income from whatever sources.


5/34

1. Compensation for Services

This item involved income received arising from an

employer-employee relationship. It includes among

others, salaries, wages, commissions, and similar

items as compensation for services rendered.

2. Gains Derived from Dealing in Property

(real orpersonal)

The dealings in property for money through sales,

or for other property through exchange, or a

combination of both, may result in a gain or loss.

The rule is that the entire amount of the gain shall

be taxable, and the entire amount of loss

deductible, as the case may be.


6/34

3. Income f rom the Conduct of Trade or

Business or the Exercise ofa Profession

The income is derived from the use of capital in

conducting a trade or business, while in the latter,

income is derived from the privilege to practice

ones profession.4. Interest

Interest refers to the compensation for the use of

money or forbearance for its use arising from

indebtedness. Interest may refer, also, to interest income from

peso bank deposit which is subject to a final tax.


7/34

5. Rents and Royalties

A rent is a consideration for the use of property, real or

personal, paid by a lessee to a lessor through a contract oflease by which the latter temporarily grants the enjoyment of

certain property to the former who undertake to pay rent or a

price certain therefore, and which contract to last for definite

or indefinite period, but in no case to exceed 99 years.

Royalties on the other hand, are payment for the use ofproperty which included earnings from copy rights,

trademarks, patents and natural resources under lease.

Royalties are subject to final tax as follows:

a) 10% for books, literary works, and musical compositions;and

b) 20% for the use of other properties.


8/34

6. Dividends

Dividends is a corporate profit set aside, declared andordered by the Board of Directors to be paid to thestockholders on demand or at fixed time. It may beclassified into:

Cash dividend it is paid to shareholders and taxable to thesame.

Property dividend it is paid in property of the corporationsuch as bonds, securities or stock investments.

Stock dividend It is paid in stock of the corporationissuing the same and is taxable.

Liquadating dividend It involves the distribution of assetsby a corporation to its stockholders upon the dissolution and

is taxable when gain is realized by the stockholders.

Script dividend it is issued in the form of a promissorynote and is taxable to the extent of its fair market value.

Other dividends indirectly paid.


9/34

7. Annuities

Annuity refers to a fixed sum payable to a personat specified intervals for a specific period of time or

for life. Life annuity provides for payment of income

to annuitant only during his lifetime, even though

death is premature.

Examples of Life Annuity

Maria gave Mario a piece of land subject to a

condition that Mario will provide Maria an annual

pension or income as long as the former lives.

Maria is the giver/annuitant as well as thebeneficiary. Ownership of the piece of land is

immediately transferred to the latter with the

burden of the pension.


10/34

8. Income from Whatever Source

T

he phra

se disclose legisla

tive intent toinclude all other gains, profits and incomederived from legal or illegal source such as:

Gains arising from expropriation of property;

Winnings from gambling;

Income/profit from illegal business; Income from embezzlement;

Compensation for damage if it represents paymentfor a loss of expected profit;

Bad debts previously charged-off but subsequentlyrecovered;

Taxes paid but later refunded; and

Contest awards and prizes received.


11/34

Exclusions from Income Under

the Tax Code Exclusion,Exclusion,as used in income taxation, refers to items

or receipts not included in the determination of the

taxable income because the law or treaty provides that

they except from income tax.

The law specifically excludes certain items from gross

income. Item excluded from gross income are generally

non-taxable. They are not included in the income taxreturn unless information regarding them is specifically

called for.


12/34

Exclusions from Income Underthe

Tax CodeThe following items are expressly excluded from

gross compensation income and gross income

under the Tax code, to wit:

Proceeds of life insurance; Amount received by the insured as return of

premium;

Gifts, bequests and devices;

Compensation for injuries or sickness;

Income exempt under treaty;

Retirement benefits, pensions, gratuities;

Income and gains subject to final tax; and

Miscellaneous items such as:


13/34


14/34

Tax Exemption of Statutory Minimum Wage Earner(MWE)Tax Exemption of Statutory Minimum Wage Earner(MWE)

Statutory Minimum Wage (SMW) shall refer to the rate fixed by the Regional

Tripartite Wage and Productivity Board (RTWPB), as defined by the Bureau

of Labor and Employment Statistics (BLES) and the Department of Laborand Employment (DOLE). The RTWPB of each region shall determine the

wage rates in the different regions based on the established criteria and

shall be the basis of exemption from the income tax.

Under the new RA 9504, the compensation income of MWEs who work in

the private sector or public sector and being paid the Statutory Minimum

Wage (SMW) as fixed by RTWPB/National Wages and ProductivityCommission (NWPC), applicable to the place where he/she assigned is

exempt from income and not be subject to withholding tax.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned

by the aforementioned MWEs shall be covered by income tax exemption.

However, an employee who receives additional compensation such as

commissions, honoraria, fringe benefits, benefits in excess of the allowablestatutory amount of P30,000 taxable allowances and taxable income other

than the SMW, holiday pay, overtime pay, night shift differential pay and

hazard pay shall enjoy the privilege of being a MWE and, therefore,

his/her entire earnings are no longer exempt from income tax.


15/34

Illustrations:Illustrations:

Mr Joseph Tayo (single) is a factory worker receiving a minimum wage of P382.00 a

day in the National Capital Region (NCR). During the month, he received P9,932

minimum wage, P1,000 hazard pay, P5,000.00 overtime pay and P2,000.00 nightshift differential.

How much is the amount of non-taxable income and taxable income of Mr. Tayo

during the month (before personal exemption)? \

The non-taxable and taxable income of Mr. Tayo during the month would be:

Non-Taxable Taxable

Minimum wage P9,932.00 P 0

Overtime Pay 5,000.00 - 0

Night Shift Differential 2,000.00 - 0-

Hazard Pay 1,000.00 - 0-

Net Income Before Personal Exemption P 17,932.00P 17,932.00 PP -- 00 --

Note:Note: Since Mr. Tayo is a MWE and has no other income, other than those subjects to final

tax, all of his income earned is non-taxable and consequently not subject to withholding

tax.


16/34

Illustration:Illustration:MWE with Taxable Additional CompensationMWE with Taxable Additional Compensation

Miss Josephine Tayo (single) is sales worker receiving a minimum wage of

P382.00 a day in the National Capital Region (NCR). During the month, he

received P9,932 minimum wage, P5,000.00 overtime pay, P2,000.00,

P2,000.00 transportation allowance and P6,000.00 sales commission.

How much is the amount of non-taxable income and taxable income of Miss

Tayo during the month (before personal exemption)?

Non- Taxable Taxable IncomeMinimum wage P - 0 - P 9,932.00

Sales Commission - 0 - 6,000.00

Overtime Pay - 0 - 5,000.00

Transportation Allowance - 0 - 2,000.00

Compensation Income Before Personal PP 00-- P 22,932.00P 22,932.00

Exemption

Note: The entire earnings of Miss Tayo shall no longer enjoy tax exemption because

she received additional compensation other than the SMW, hazard pay, night

differential pay, overtime pay and holiday pay.


17/34

RATIONALE FOR THE

EXCLUSIONS Proceeds ofLife Insurance

Reasons: Such proceeds are considered more as indemnityrather than as gain and profits. The contract of insurance is a

contract of indemnity which is a contract between twoparties whereby the one undertakes and agrees to

protect/indemnify the other against loss or damage arising

from some contemplated act on the part of indemnitor, or

from some responsibility assumed by the indemnitee, or from

the claim or demand of a third person, that is, to make goodto him such pecuniary damages as he may suffer.


18/34

Amounts Received by Insured as Return of

Premium.

Reasons: The return of premiums is equivalent to a return ofcapital.

Example: K. Cabansag got a life insurance policy for P150,000from Standard Insurance Corporation. Under the policy,

Standard Insurance will pay K. Cabansag the amount ofP150,000 after the tenth year of the policy and, in case she

dies before, said date, her beneficiaries shall receive the

same. K. Cabansag outlived the tenth year and received

P150,000 from Standard Insurance Corp. The total

premiums paid were only P130,000. The amount of P20,000

out of the P150,000 received is taxable, while the P130,000

paid is not becauuse it only represents a return of premiums

paid.


19/34

|Gifts, Bequests, and Devises The value of property acquired by gift, bequest, devise or descent

shall be excluded from gross income, provided that income fromsuch property shall be included in gross income.

GiftsGifts refers to any property legally and validly transferred from one person to

another for free.

BequestBequest refers to personal property transferred from one person to another by

will.

DeviseDevise is a real property transferred from one person to another by will.

The following rules are applicable in determining the taxability of

gist, bequest and devise: They are subject to transfer tax if received without any consideration or compensation

given; otherwise, they are subject to income tax.

The value of the property acquired through donation or legal succession is exempt

from income taxation, but the income derived from such property is included forincome tax purposes.

Allowance received based on a separation agreement is not taxable income for it

represents support of family.

Amount of the principal paid under a marriage settlement is not taxable income.

Amount received by virtue of settlement of will litigation is not taxable income.


20/34

Gifts, bequests and devises

Reasons: Such transfer of gifts, bequests and devises is subject to donors orestate tax.

Exception: Gift, bequests and devises or descent of income from any property,

in case of transfer of divided interest are included in gross income.

Illustration:

G. Dacumos, inherited a house and lot valued at P800,000. See rented the

house and leases a portion of his lot deriving a yearly income of P100,000.

The P800,000 is not subject to income tax, while annual income of P100,000

from rental and lease forms or is included in his gross income subject to

income tax.

Kris received P1,000,000.00 as a gift from Mayor Tsong Go. Since there is an

increase in her wealth, she contemplates to include the P1,000,000.00 aspart of her gross income subject to tax. Is Kris correct?

No, Kris should not include the P1,000,000.00 as part of her gross income

for income tax purposes. The P1,000,000.00 is a gift, and therefore exempt

from income tax. However, the P1,000,000.00 is subject to donors tax to be

paid by Mayor TsongGo.


21/34

1313thth Month Pay, Bonuses, and OtherBenefitsMonth Pay, Bonuses, and OtherBenefits 13th Month pay, bonuses and other benefits not exceeding P30,000.00 are

tax exempt.

Illustration: Mr. Roy Mondia, a mechanical engineer, receives a basic salary of P25,000.00 per month. He

received the following during the year:

Basic Salary P P300,000.00

13th Month Pay 25,000.00

Productivity Bonus 10,000.00

Clothing Allowance de minimis 5,000.00

The gross income of Mondia can be shown as follows:Non-Taxable Taxable

Basic Salary P 300,000.00

13th Month Pay & Other Benefits P 30,000.00

Taxable Productivity Bonus 5,000.00

Clothing Allowance - de minimis ceiling 4,000.00

Clothing Allowance excess amount 1,000.00

TOTAL P 34,000.00 P 306,000.00

Note:

1. Only P5,000.00 of the productivity bonus is allowed to be part of nontaxable other benefits to meet theP30,000.00 nontaxable ceiling of13th month pay and other benefits.

2. The clothing allowance classified as de minimis is not taxable to the extent of P4,000.00. Any excessamount can be used as nontaxable other benefits if the 13th month pay and other benefits do not yet

reach the P30,000.00 ceiling; otherwise, the excess becomes taxable.


22/34

Compensation for Injuries or Sickness

Reason: Amounts Received are in the nature of compensation,being payment for injuries sustained or sickness incurred,

and which add nothing to the individual.

Income Exempt under Treaty

Reason: Such exclusion proceeds from international comitywhich implies recognition that one sovereignty allow within

its territory to the legislative, executive or judicial acts of an

other sovereignty, having due regard to right of its own

citizens as well as to international duty and convenience. In

relation to taxation, comity implies the grant of privilege to

officials and employees doing diplomatic and consularservices within the Philippines and whose incomes are

exempt from taxation out of defense, good will and mutual

respect among nations.


23/34

Retirement Benefit, Pensions, Gratuitous andOther Similar Benefits

Reason: These benefits are bounty given by employer inconsideration or in recognition, appreciation of andgratuitousness for exemplary services of the retiree andpensioner.

Income Derived by Government or Its PoliticalSubdivisions

Reason: The exclusion is based in the principle that thegovernment does not ordinarily tax itself.

Exception: Section 27C of the National Internal Revenue Coderequires all government-owned and controlled corporations,agencies or instrumentalities except the GSIS, SSS,Philippine Health Insurance Corporation, PCSO and PAGCORto pay their income taxes.


24/34

Other Exclusions from Income Under

Special LawsThe following items are excluded from income under

special laws, to wit:

Income ofCooperative marketing associations under

Act No. 3425

Prizes received by winners in horse race, charity

sweepstakes from the PCSO under RA No. 1169.

Backpay benefits under R.A. No. 314

Supplemental allowance per diem benefits and the like

received by officers and employees from Foreign Servicein consideration of their service, except their basic

salaries under R.A. No. 708.


25/34

Salaries and stipends in dollars received by the non-

Filipino citizens serving on the technical staff of theInternational Rice research Institute and Ford

Foundation grants by reason of service given in the

institution under R.A. No. 2702 and R.A. No. 3528.

Salaries and stipends in dollars received by non-Filipino

citizens rendering service in the Agriculture Departmentof the Southeast Asian Fisheries Development Center in

the Philippines under Presidential Decree No. 292, and

also those in service in the Population Council of New

York under Presidential Decree No. 246.

Income from bonds and the other instruments for salein the international market under Presidential Decree

No. 81;


26/34

Income from bonds and the other instruments of

indebtedness which the Export Processing Zone

Authority (EPZA) is authorized to issue underPresidential Decree No. 66; and

Income derived from the installment sales of houses to

low income group in housing projects of domestic

corporations, partnership or landowners or income

derived from rentals thereof under P.D. No. 745 asamended by P.D. No. 1217; and

Income of Senior Citizen not exceeding P60,000 is

except from tax under R.A. 7482


27/34

The Sources of Income

They are as follows:

Income from within the Philippine such as:

a. Interest on bonds/notes

b. Dividends

c. Compensation for Labor or Services

d. Rentals and Royalties from Property

e. Gains, profits and income from sale of realproperty as well as from personal property.

Income from without (outside) the Philippines such as:

a. Interest

b. Dividendsc. Compensation for labor or services;

d. Rentals or Royalties

e. Gains, profits and income from sale of personal as wellas real property.


28/34

Income from sources partly within and party from

without of the Philippines, such as:

a. Gains, Profits, andIncome from

1. Transportation or other service rendered partly

within and partly outside.

2. The sale of personal property produced within

and sold outside, or vice versa


29/34

Deductions from Income

Deductions are items or amounts allowed by law tobe deducted from gross income of an individual or

juridical person in order to arrive at a taxableincome.

Deductions are classified into: Deductions from compensation income of

individual taxpayers;

Deductions from business and/or professional ofincome of individual taxpayers;

Deductions from Corporate Income; and

Special deductions


30/34

A. Deductions from Compensation Income

includes:

Personal Exemptions:

a. P50,000 for single person including a marriedperson judicially decreed as legally separatedfrom his or her spouse with no qualified

dependents;b. P50,000 for each married person; and

c. P50,000 for head of family

Additional Exemptions:

a. P25,000 for each child not to exceed four Premium payments if applicable; or

Optional Standard Deductions (OSD) of 10%.


31/34


32/34

Basic Personal ExemptionBasic Personal Exemption

For purposes of determining the tax in accordance

with the graduated tax schedule for individuals in

Section 24A, there shall be allowed a basic

personal exemption as follows:For single individual or married individual judicially decreed as

legally separated with no qualified dependent- P50,000.00

For Head of Family P50,000.00

For each married individual P

50

,000

.00


33/34

B. Deductions from Businessand/or

Professional Income which include:

Personal and Additional Exemptions;

Itemized deductions; or

The Optional Standard Deductions (OSD) of 10% of

his gross income.


34/34

C. Deductions from Corporate Income

which include:

The itemized deductions enumerated in Sec. 34 of

the Tax Code;

D. Special Deductions in Addition to theItemized deductions allowable to

corporations, and which may be availed

of by:

Insurance Companies Estates and Trusts

Private educational institutions

lesson 5 - exclusions and deductions of income taxation

Documents