5 - Business Income

Saint Ferdinand College
College of Business Education

Taxation
INCOME
Gross Income – Means all income derived from whatever source including the following:
 Compensation income (handout 1 – midterms)
 Income derived from the condtuct of trade or business or the exercise of profession
 Gains derived from dealings in properties
 Interests
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partners distributive share from the net income of general professional partnership
Income From The Conduct of Trade or Business or the Exercise of Profession

 This includes income from any trade or business, legal or illegal, and whether registered or unregistered.
Gross income from business or profession is determined as follows:

Sales/Revenues/Receipts/Fees xxxxx
Less: Cost of sales/services xxxxx
Gross income from operations xxxxx
The following business income shall not be included in gross income subject to regular income tax:
1. Business income exempt from income tax
a. Gross income from a Barangay Micro-Business Enterprise
b. Gross income from enterprises enjoying tax holiday incentives under the CREATE law which have not yet
graduated to their income tax holiday incentives
2. Business Income subject to special tax
a. Philippine Economic Zone Authority (PEZA)-registered enterprises subject to 5% gross income tax
b. Tourism Infrastructure and Enterprise Zone Authority (TIEZA)-registered enterprises subject to 5% gross
income tax
c. Income of self-employed and/or individuals who opted to be taxed under the 8% income tax
3. Business income subject to final tax when not subjected to the final tax by the payor
a. Subcontractors of petroleum service contractors subject to 8% final tax
b. Business income of foreign currency deposit units (FCDU) and expanded FCDUs (eFCDUs) from Philippine
subject to 10% final tax
Gains from dealings in properties

 The gains or losses in dealing in ordinary assets are subject to regular income tax.
 Dealings in capital assets other than domestic stocks and real properties are also subject to regular income tax
Interest Income
 Interest income other than those subject to final tax is included as part of the gross income subject to the regular
income tax. (interest income on bank deposits in the Philippines is subject to final tax of 20%)
 A taxable interest income must have been actually paid out of an agreement to pay interest.
Examples of interest Income
 interest income from lending activities to individuals and corporations by banks, finance companies, and
other lenders
 interest income from corporate bonds and promissory notes
 interest income from bank deposits abroad
Illustration:
1. On January 1 of the current taxable year. Mr. Bong Gha lends P50,000 to his officemate with interest of 12% per
annum payable within 6 months. How much interest income is to be reported as part of the gross income of Mr.
Bong Gha? Ans: P3,000.
2. Mr. DC had the following data during the current taxable year:
Interest Income on savings account in the Philippines P80,000
Interest income from loan P3,000,000
Interest income from notes rediscounting P400,000
How much interest income is to be reported as part of gross income of Mr. DC? Ans: P3,400,000
Rent Income
 Rent income arises from leasing properties of any kind. It is subject to regular income tax
 The amount of taxable rent income shall be the sum of the following:
1. Current rent or lease payment
2. Advance rent payment or security deposit without restriction
3. Payment of the lessee to third parties like interest, taxes, and loan insurance premium in behalf of the lessor
4. Uncollected rent income earned already (accruals) at the end of the period
5. Income from leasehold improvements
Illustration: Mr. Dormie Toryo leases two doors of her three-storey commercial building to Ms. Magren Tha on January 1
of the current taxable year. The lessee, as agreed, shall make the following payments:
 Monthly Rental of P30,000
 Security deposit of P60,000 for 2 months
 Real estate tax, P3,000
 Annual premium of fire insurance, P7,000
Required: Determine the gross rent income if:
1. Advance rent with restriction. Ans: 370,000
2. Advance rent without restriction. Ans: 430,000
Royalties
 Royalties earned from sources within the Philippines are subject to final income tax except when they are active
by nature, they will be subjected to the regular income tax.
 active royalty income and royalties earned from sources outside the Philippines are subject to regular income
tax.
Illustration:
1. Robotic Technology is a distributor of a computer program and earns royalties from its licensed users. Computer
programs are specifically tailored to each client and regular continuing maintenance services are provided.
During the year, client users remitted a total of P500,000 royalty payments. How much is the royalty income
subject to regular income tax? Ans: 500,000
2. Mang Donald has the following royalties:
Royalties from mining properties in the Philippines P550,000
Royalties from books published in the Philippines P200,000
Royalties from books published abroad P300,000
Royalties from franchise exercised abroad P400,000
How much is the royalty income subject to regular income tax? Ans: 700,000

5 - Business Income

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Saint Ferdinand College

College of Business Education

Income From The Conduct of Trade or Business or the Exercise of Profession

Gross income from business or profession is determined as follows:

Gains from dealings in properties

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