Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
Income taxation: Concept of income & taxable income
Learning Objectives:
At the end of this modules, students must be able to:
a. Compute for gross income;
b. Determine allowable deductions;
c. Determine de minis benefits; and
d. Compute for taxable income;
CONCEPT OF INCOME
In accounting, Income is defined as any increase in the capital other than the initial or additional
investments made by the owners. They are gains resulting from the operations of the business. As a rule,
income is recognized and recorded when earned. This is in consonance with the Accrual Basis of
Accounting.
In taxation, the criteria of what a taxable income is different from what accrual basis of
accounting provides. Thus, an income is taxable only when such gain is received or realized. In
taxation, therefore, the rule used in determining income is the cash basis of accounting- gains take the
form of an actual receipt of cash. An exception to this rule is provided under certain provisions in the
National Internal Revenue Code (NIRC) which provides for a constructive receipt of income.
Section 32 (A) of the NIRC defines “gross income” as all income derived from whatever source,
including but not limited to the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gross income derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and Winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership.
All the incomes above-listed are the possible subjects of income taxation both for individuals and
corporations. It is equally important also to determine certain items which are excluded from the
computation of gross income. These items were expressly excluded under Section 32 (B) of the NIRC,
to wit:
1. Proceeds of life insurance, except interests thereon;
2. Amount received by insured as return of premium;
3. Gifts, bequest, and devices;
4. Compensation for injuries or sickness;
5. Income exempt under international laws or treaties;
6. Retirement Benefits, Pensions, Gratuities, etc.; and
7. Miscellaneous items.
From the enumeration, only certain items from numbers 6 & 7 will be illustrated in the discussions for
this topic. All other items will be discussed in your law and accounting subjects in college. In particular,
the following shall be excluded from gross income:
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 1 of 7
Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
1. Benefits received from or enjoyed under Social Security System- SSS Contribution;
2. Medicare and HDMF- PhilHealth and Pag-Ibig Contributions;
3. 13th month pay not exceeding Php 90,000;
4. For private employees, productivity incentives and Christmas bonus.
In addition to those provided under Section 32 (B), the Section 33 (C) (3), and (4) as defined
under Revenue Regulations No. 11-2018 provides for the following items to be excluded from gross
income.
5. Fringe Benefits given to rank-and-file employees (Sec. 33 (C)(3)); and
6. De minimis benefits (RR No, 11-2018):
a. Monetized unused vacation leave credits of private employees not exceeding (10) days
during the year;
b. Monetized value of vacation and sick leave credits paid to government official and
employees;
c. Medical cash allowance to dependents of employees, not exceeding ₱1,500 per employee
per semester of ₱250 per month;
d. Rice subsidy of ₱2,000 or 1 sack of 50 kg rice per month amounting to not more than ₱2,000;
e. Uniform and clothing allowance not exceeding ₱6,000 per annum;
f. Actual medical assistance not exceeding ₱10,000 per annum;
g. Laundry allowance not exceeding ₱300 per month;
h. Employees achievement awards in the form of tangible personal property (e.g. cash), with
an annual monetary value not exceeding ₱10,000;
i. Christmas gifts not exceeding ₱5,000 per employee per annum;
j. Daily meal allowance for overtime work and night shift not exceeding 25% of the basic
minimum wage per region;
k. Benefits under the CBA and productivity incentive schemes, with combined value not
exceeding ₱10,000 per employee per taxable year.
Fringe Benefits
Fringe benefits refer to any good, service, or other benefits furnished or granted in cash or in kind
by the employer to an employee. Only fringe benefits to rank-and-file employees are excluded from
taxation if such fringe benefits inured to the benefit of the business or the employer. The fringe benefits
given to managerial employees are taxed at a final tax rate of 35% after computing for the grossed-
up monetary value of 65% of the fringe benefit.
NOTE: Memorizing the items included and/or excluded from gross income would make the
computation for the taxable income easier.
Taxable Income
Section 31 of the NIRC defines “taxable income” as the pertinent items of gross income specified
under Section 32, less the deductions, if any, authorized for such types of income by NIRC or other
special laws.
Allowable Deductions
A. For individual taxpayers earning compensation income. No deductions were allowed under
Section 31.
B. For business income, the following are the allowable deductions (itemized deductions):
1. Ordinary and Necessary Trade, Business or Professional Expenses;
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 2 of 7
Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
➢ Salaries expense;
➢ Reasonable allowance for travel expenses;
➢ Reasonable allowance for rentals; and
➢ Reasonable allowance for entertainment, amusement, and recreation expenses during
the taxable year;
2. Interest Expense;
3. Taxes and licenses;
4. Losses;
5. Bad debts;
6. Depreciation;
7. Depletion (for entities owning depleting assets such as mines or quarrying sites or oil and gas
wells);
8. Charitable and other contributions;
9. Research and Development Expenditures; and
10. Pension trusts.
Itemized Deductions vs Optional Standard Deductions
The items enumerated under Section 31 of the NIRC shall form part of the Itemized Deductions
of the business. If the itemized deductions cannot be substantiated, businesses can apply an Optional
Standard Deduction (OSD) in lieu of the allowable itemized deductions. For individual taxpayers
earning business income, an OSD of 40% of the Gross Sales/ Receipt is allowed. For Corporations, an
OSD of 40% of the Gross Income/ Gross Profit is allowed.
From the foregoing discussions, the following are the preliminary considerations in determining
the value of the taxable income:
1. Inclusions to gross income;
2. Exclusions from gross income; and
3. Allowable deductions.
Illustration 1. Purely Compensation Income; Individual taxpayer
Uncle Rogers is an employee of WERKWERKWERK Inc. He works as an accounting clerk in the
Finance Department of the Corporation. During the taxable year, the following items appear in his
employee records:
Salary (35,100/ month for 12 mos.) ₱ 421,200
Overtime and Holiday Pay 8,000
Mandatory Contributions:
SSS Contribution (800 x 12 mos.) 9,600
PhilHealth Contribution (495 x 12) 5,940
Pag-IBIG Contribution (100 x12) 1,200
13th Month Pay 35,100
Rice allowance (3,000 x 12) 36,000
15-day monetized unused vacation leave 17,550
Clothing Allowance 15,000
Christmas Bonus 30,500
Laundry Allowance 6,000
Uncle Roger’s taxable Income is computed as follows:
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 3 of 7
Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
Basic Salary ₱ 421,200
Overtime and Holiday Pay 8,000
Excess from P 90,000 Threshold
90,000 Threshold2 ₱ 90,000
Less: 13th Month Pay 35,100
Christmas Bonus 30,500
Monetized unused vacation leave (17,550-(1,170 x 10)) 2 5,850
Clothing Allowance (15,000 – 6,000) 9,000
Rice Allowance (36,000 – 24,000) 12,000
Laundry Allowance (6,000 – 3,600) 2,400 4,850
Gross Compensation Income (GCI) ₱ 434,050
Less: Mandatory Contributions
SSS Contribution ₱ 9,600
PhilHealth Contribution 5,940
Pag-IBIG Contribution 1,200 16,740
Taxable Income ₱ 434,050
1. The amount of 13th month pay and other benefits shall be absorbed by the ₱90,000 non-taxable
threshold. In case the threshold is not totally used, the excess of the de minimis benefits from
their prescribed ceilings shall be absorbed by the ₱90,000 threshold. Any amount in excess of
the 90,000 threshold shall become part of the taxable compensation income.
2. The amount in excess of the prescribed ceiling of a de minimis benefit shall be absorbed by the
₱90,000 threshold. For the monetized unused vacation leave, the ceiling for the non-taxable
amount shall only be for the 10-day unmonetized leave. Since the total amount received is good
for 15 days, the 5-day excess shall be absorbed by the ₱90,000 threshold.
Illustration 2. Purely Business Income; Individual taxpayer
Uncle Rogers owns Uncle’s RTW, a business engaged in buying and selling ready-to-wear
clothes. The following information were generated during the taxable year 2019:
Sales ₱ 2,510,000
Cost of Goods Sold 1,115,000
Salaries Expense 540,000
Depreciation Expense 220,000
Rent Expense 120,000
Interest Expense 75,000
Utilities Expense 30,000
Bad Debts Expense 20,000
Communication Expense 15,000
A. When Itemized Deductions are applied:
Sales ₱ 2,510,000
Less: Cost of Goods Sold 1,115,000
Gross Profit ₱ 1,395,000
Less: Allowable Itemized Deductions
Salaries Expense ₱ 540,000
Depreciation Expense 220,000
Rent Expense 120,000
Interest Expense 75,000
Utilities Expense 30,000
Bad Debts Expense 20,000
Communication Expense 15,000 1,020,000
Taxable Income ₱ 375,000
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 4 of 7
Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
B. When Optional Standard Deduction is applied:
Sales ₱ 2,510,000
Less: Sales Returns, Allowance, & Discounts 0
Gross Sales ₱ 2,510,000
Less: OSD (40% x 2,510,000) 1,004,000
Taxable Income ₱ 1,506,000
Illustration 3. Business Income; Corporation
Uncle Inc. is a merchandising business engaged in buying and selling automobile parts and
accessories. During the current taxable year 2019, the following information were produced:
Sales ₱ 3,120,000
Gross Profit Rate 51.7628%
Salaries Expense 620,000
Depreciation Expense 320,000
Rent Expense 230,000
Interest Expense 100,000
Utilities Expense 40,000
Bad Debts Expense 25,000
Communication Expense 20,000
A. When Itemized Deductions are applied:
Sales ₱ 3,120,000
Less: Cost of Goods Sold (3,120,000 x 48.23717 %) 1,505,000
Gross Profit (Gross Business Income-GBI) ₱ 1,615,000
Less: Allowable Itemized Deductions
Salaries Expense ₱ 620,000
Depreciation Expense 320,000
Rent Expense 230,000
Interest Expense 100,000
Utilities Expense 40,000
Bad Debts Expense 25,000
Communication Expense 20,000 1,355,000
Taxable Income ₱ 375,000
B. When Optional Standard Deduction is applied:
Sales ₱ 3,120,000
Less: Cost of Goods Sold 1,505,000
Gross Profit (Gross Business Income-GBI) ₱ 1,615,000
Less: OSD (40% x 1,615,000) 646,000
Taxable Income ₱ 969,000
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 5 of 7
Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
Illustration 4. Compensation and Business Income; Individual Taxpayer (Mixed Income)
Auntie Mo is employed as a 1st year-resident doctor of a private hospital. She earns
compensation from rendering her services as a medical practitioner. She also owns a mini grocery
store; which business is registered with the DTI under her name as the sole proprietor. The following are
information pertinent in determining her tax liability:
Salary (₱65,000/ month for 12 mos.) ₱ 780,000
Mandatory Contributions:
SSS Contribution (800 x 12 mos.) 9,600
PhilHealth Contribution (550 x 12) 6,600
Pag-IBIG Contribution (100 x12) 1,200
13 Month Pay
th 65,000
12-day monetized unused vacation leave @ 2,170 daily wage 26,040
Clothing Allowance 20,000
Christmas Bonus 40,500
Laundry Allowance 10,000
Sales 620,000
Gross Profit Rate 40%
Salaries Expense 90,000
Rent Expense 44,000
Communication Expense 13,900
Utilities Expense 8,000
The taxable income of Auntie Mo is computed as follows:
Basic Salary ₱ 780,000
Excess from ₱90,000 Threshold
₱90,000 Threshold2 ₱ 90,000
Less: 13th Month Pay 65,000
Christmas Bonus 40,500
Monetized unused vacation leave (2,170 x 2) 4,340
Clothing Allowance (20,000 – 6,000) 14,000
Laundry Allowance (10,000 – 3,600) 6,400 40,240
Gross Compensation Income (GCI) ₱ 820,240
Less: Mandatory Contributions
SSS Contribution ₱ 9,600
PhilHealth Contribution 6,600
Pag-IBIG Contribution 1,200 17,400
Taxable Compensation Income (TCI) ₱ 434,050
Gross Sales ₱ 620,000
Less: Cost of Goods Sold (60% x 620,000) 372,000
Gross Profit (Gross Business Income-GBI) ₱ 248,000
Less: Allowable Itemized Deductions
Salaries Expense ₱ 90,000
Rent Expense 44,000
Communication expense 13,900
Utilities Expense 8,000 155,900
Taxable Business Income (TBI) ₱ 92,100
Total Taxable Income (₱434,050 + ₱92,100) ₱ 526,150
Note: The taxable Business Income may also be computed by applying optional standard deduction
in lieu of the allowable itemized deductions in case the business will not be able to substantiate its
expenses through genuine source documents.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 6 of 7
Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 2
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section:
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 8- FABM 2 Subject Teacher:
References
Revenue Regulations 11-2018
RA No. 8424, National Internal Revenue Code of the Philippines, as amended by RA No. 10963, Tax
Reform for Acceleration and Inclusion Law
Valencia, E, & Roxas, G. (2014). Income Taxation. Baguio City: Valencia Educational Supply.
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT - 2 Page 7 of 7
