INDIVIDUAL TAXPAYER KINDS OF INCOME

RESIDENT CITIZEN 1. Compensation Income

 Those citizen of the Philippines at the time of the adoption of the  Income from services as a result of employer-employee
Constitution. relationship.
 Those parents are citizens of the Philippines.  If taxable, subject to graduated income tax.
 Those born before January 17, 1973.
 Those naturalized in accordance with the law.
2. Self-Employment / Professional Income

 Income from sole proprietorship business or practice of profession

NONRESIDENT CITIZEN
(not under employer-employee relationship).
 Physical presence abroad with definite intention to reside therein.  Subject either to
 Works and derives income abroad and requires him to be physically a) 8% option if annual gross sales/receipts do not exceed 3M
present abroad most of the time (outside PH not less than 183 and not VAT registered, or
days). b) Graduated rates
 Reside abroad as an immigrant or for employment on a permanent
basis.
 NRC who arrives to reside permanently in the Philippines. 3. Passive Income – income generated without any active conduct; subject
to final withholding tax (hindi na dinideclare ulit ng taxpayer sa form 1701
kasi the amount remitted is regarded as full and final payment’ pag
OVERSEAS CONTRACT WORKER dineclare ulit edi dodoble).

RESIDENT ALIEN

 NOT A RESIDENT
 Alien actually present in PH who is not mere a transient or
sojourner.
 Has definite purpose that requires and extended stay.
 Has no definite intention as to his stay.

NONRESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS

NONRESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS

 2. Sales of real property classified as capital asset located in PH  6%
based on GSP or current FMV, whichever is higher regardless of
whether the transaction resulted to a gain or loss

CGT from Sale of Shares of Stock NOT traded in the stock exchange  15%

Tax base: Net capital gains realized

IMPORTANT: To be subjected to CGT, shares of stock should be classified as

capital asset

METHODS ALLOWED IN COMPUTING INCOME TAX

CAPITAL GAINS TAX (CGT)

TRANSACTION SUBJECT TO CGT

1. Sales of shares classified as capital asset of a closely held DC not

through LSE in which seller should not be a dealer in securities  8% INCOME TAX OPTION
15%; if disposition of shares resulted to loss, no CGT
If sold by dealer in securities  Basic Income Tax 1. Only allowed for Individual Tax Payer
2. THE 8% OPTION IS APPLICABLE ONLY ON THE SELF-EMPLOYMENT
INCOME and is disallowed on compensation and passive income.
 3. Annual gross sales/receipts including non-operating income (capital
gain on sale of asset) must not exceed 3M.
4. Not VAT registered
5. Nature of business is subject to 1% non-VAT (3% prior to CREATE
Law) under Sec. 116 and NOT OPT.
6. Kapag pinili ay 8% ay exempt sa pagbabayad ng 1% business tax.
7. Not entitled to claim deduction but entitled to 250,000 exemption
before i-multiply ng 8% ang GS/GR.
8. If mixed income earner, the 250,000 exemption is only allowed to
be deducted on the taxable compensation income.

BIR FORM THAT MAY BE USE IN FILING ITR

1. 1701Q – Quarterly Income Tax Return for Individuals, estates and

trusts- self-employment income.
2. 1701 – filed by individuals who are engaged in trade/business or the
practice of profession including those with mixed income (i.e.,
those engaged in the trade/business or profession who are also PROBLEMS:
earning compensation income) 1. Individual taxpayer is self-employed. Gross sales- 1.8M; Gross
3. 1701A – Annual Income Tax Return for individuals earning income Receipts- 500,000; Cost of Sales/Service- 630,000
purely from business/profession.
a) Those under graduated income tax rates with OSD as a
mode of deduction (if taxpayer chose itemized deduction,
1701), OR
b) Those who opted to avail of the 8% flat income tax rate
4. 1700- filed by individuals who are purely compensation income
earner but disqualified to avail of the substituted filing

Individual taxpayer is
self-employed. Gross
sales- 2.0M; Gross
Receipts- 400,000; Cost
of 5. Marites is a professional who is engaged in the practice of her
profession. Her total gross receipts amounted to P4,250,000 for
Sales/Services- 1,300,000 taxable year 2022. Her record cost of service and operating
expenses were P2,150,000 and P1,000,000, respectively.
2. Individual taxpayer is self-employed. Gross sales- 2.0M; Gross a) How much is the income tax due on Marites?
Receipts- 400,000; Cost of Sales/Services- 1,300,000 b) What business Tax is due? Subject to Value-added tax because
it exceeds the 3M threshold

3. Individual taxpayer is self-employed. Gross sales- 3,250,000; Gross

Receipts- 1,200,000 net of VAT. How much is the total income and
6. In 2022, Mama San owns Oishi Videoke Bar with gross receipts of
business taxes?
2,500,000. Her cost of services and operating expenses are
P1,000,000 and 600,000, respectively, and with non-operating
income of P100,000. How much is the income tax due (a) and
business tax due (b) on Mama San?

4. Ka Wani is a government employee. He is not engaged in business

nor has any other source of income other than his employment.
During the year, Ka Wani earned a total taxable compensation
income of P900,000. The income tax due on the 2022 and 2023
income are…

Noted that graduated income tax table on 2023 will be different from the 7. In 2021, Dean Medel, professor of accounting in one university,
current tax table. earned an annual compensation of P900,000, inclusive of 13th
month pay and other benefits in the amount of 120,000 but net of
mandatory contributions to SSS, PhilHealth and Pag-Ibig of P8,000.
 Aside from employment income, he practices his profession as a
CPA, with gross receipts of P2,200,000. His cost of services and
other operating expenses amounted to 600,000 and 250,000,
respectively, and with non-operating income of 100,000. Compute
for the income tax due if he opted to be taxed at 8%.

8. In 2021, Dean Medel, professor of accounting in one university,

earned an annual compensation of P900,000, inclusive of 13th
month pay and other benefits in the amount of 120,000 but net of
mandatory contributions to SSS, PhilHealth and Pag-Ibig.

Aside from employment income, he practices his profession as a CPA,

with gross receipts of P2,200,000. His cost of services and other
operating expenses amounted to 600,000 and 250,000, respectively,
and with non-operating income of 100,000. Compute for total income
tax due (1) if he opted to be taxed at graduated rates & business tax on
profession.

INCOME TAX CORPORATION

CORPORATIONS

 “Artificial being created by operation of law, having the right of

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

INCLUDE
 1. One Person Corporation (OPC)

- corporation w/ a single stockholder provided that only a

NATURAL person, trust or an estate may form OPC

2. Partnerships, no matter how created or organized;

3. Joint stock companies

- Group of individuals, acting jointly, establish and operate

business enterprise under an artificial name, with an invested
capital divided into transferrable shares, an elected BOD and
other corporate characteristics, but operating without formal
government authority

4. Joint accounts (cuentas en participacion)

- Constituted when 1 interest himself in the business of another

by contributing capital and sharing P/L in proportion agreed
upon.

- Not subject to any formality; oral or in writing

- All organizations with substantially salient features of a

corporation to be taxable as a corporation

5. Associations; or TAX BASE AND TAX RATES

6. Insurance companies

EXCLUDE

1. GPP
2. A joint venture or consortium formed for the purposed of
undertaking;
a. Construction projects; or
b. Engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under service contract with the government.
 1. Beginning on the 4th taxable year immediately following the taxable
year in which such corporations commenced its business operations

Example:
Business commenced operations/registered with BIR in 2021
2022 1st
2023 2nd
2024 3rd
2025 4th- start MCIT

2. Rate: 1% of gross income

Sales
MCIT Less: Cost of Sales
Add: Other non-operating income subject to BIT
 The lowest amount on income tax that a DC or RFC may be held
liable over a certain period

- Compare MCIT and RCIT EVERY QUARTER

Section 27(E)(1) and Section 28(2) [for DCS and RFCS, respectively), as
amended, under CREATE Law, provide:

A Minimum Corporate Income Tax MCIT of two percent (2%) of the

gross income as of the end of the taxable year is imposed upon any RELIEF FROM MCIT
domestic corporations and resident foreign corporations beginning on the
4th taxable year immediately following the taxable year in which such The Secretary of Finance is hereby authorized to suspend MCIT imposition
corporation commenced its business operations, when the MCIT is greater on any corporation which suffers losses on account of:
than RCIT, Provided: That effective July 1, 2020 until June 30, 2023, the rate 1. Prolonged labor dispute
shall be one percent (1%).
- Losses arising from a strike staged by employees lasting more than
6 months within the taxable period and has resulted to temporary
MCIT SHALL IMPOSED WHENEVER shutdown of business operations

1. Corporations has zero taxable income 2. Force majeure

2. Corporations has negative taxable income - an irresistible force as by “Act of God” like lightning, earthquake,
3. Whenever MCIT is greater than RCIT storm, flood and the like; includes armed conflicts like war or
insurgency

IMPOSITION 3. Legitimate business reverses

 - Substantial losses due to fire, robbery, theft, embezzlement, or for a. Interest on PHP bank deposit
other economic reasons as determined by Secretary of Finance b. Yield for any other monetary benefit from deposit substitutes
c. Yield from trust funds similar arrangements
d. Royalties
2. Subject to 15% tax rate
GROSS INCOME
a. Interest income from depository bank under expanded foreign
Includes other items of gross income realized or earned currency deposit system
by taxpayer during the taxable period which are subjected b. Net Capital Gains realized from sale, barter or exchange or
to RCIT other disposition of shares of stock of a DC not traded in LSE
3. Subject to 10% tax rate
Excludes income exempt from income tax and subject to FWT a. Interest income from foreign currency loans granted by such
depository banks under said expanded FCD system to residents
other than offshore banking units in the PH or other depository
banks under the expanded system
CARRY FORWARD OF EXCESS OF MCIT
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS
Any excess of MCIT over RCIT shall be carried forward and credited against
RCIT for 3 immediately succeeding taxable years All corporations, agencies or instrumentalities owned or controlled by the
Government shall be taxable like “ordinary corporations”.

2021 RCIT 100 However, the following shall be exempt:

MCIT 150 1. Government Service and Insurance System (GSIS)
Excess 50  can be credited against RCIT due from 2022-2024 2. Social Security System (SSS)
(excess MCIT cannot be forwarded to another MCIT) 3. Home Development Mutual Fund (HDMF aka Pag-ibig)
4. Philippine Health Insurance Corporation (PHIC)
5. Local Water Districts (RA 10026)

NOTE:
 PCSO is taxable beginning Jan. 01, 2018 (TRAIN Law)
 HDMF or Pag-ibig is exempt only upon the effectivity of CREATE
Law (April 11, 2021)

EXEMPT CORPORATIONS

1. Labor, agricultural or horticultural organization not organized

principally for profit;
2. Mutual savings bank not having a capital stock represented by
Note: Compare MCIT and RCIT every quarter shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
PASSIVE INCOME WITHIN of DC and RFC are subject to FWT: 3. A beneficiary society, order or association, operating for the
1. Subject to 20% tax rate exclusive benefit of the members such as a fraternal organization
 operating under the lodge system, or a mutual aid association or a
non-stock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to
the members of such society, order, or association, or nonstock
corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit
of its members;
5. Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;
6. Business league, chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures
to the benefit of any private stockholder or individual;
7. Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
8. A nonstock and nonprofit educational institution;
9. Government educational institution;
10. Farmers’ or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organization of a purely local character,
the income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its
expenses; and
11. Farmers’, fruit growers’, or like association organized and operated
as a sales agent for the purpose of marketing the products of its
members and turning back to them the proceeds of sales, less the
necessary selling expenses on the basis of quantity of produce
finished by them.
EDUCATIONAL INSTITUTIONS
1. Government- non taxable
2. Non-stock, non-profit- non taxable
3. Proprietary- taxable @ 1% until June 2023

PROPRIETARY EDUCATIONAL INSTITUTIONS (PEI)

(Rev Regu 14-2021)

Proprietary educational institutions refer to any private schools,
maintained and administered by private individuals or groups, with an
issued permit to operate from DepEd, CHED, or TESDA, as the case maybe,
under existing laws and regulations.

Non-profit means no net income or asset accrues to or benefits any

member or specific person, with all the net income or assets devoted to the
institutions' purposes and all activities conducted not for profit.

INCOME TAX: GROSS INCOME

Gross income- all income derived from whatever source (even if incomes is
from illegal activity)

TAX INFORMER’S REWARD

 10% of the fine imposed & collected VS 1M, whichever is lower
 Subject to 10% FWT under Sec 282 of NIRC

SITUS OF TAXABLE INCOME EXCLUSIONS FROM GROSS INCOME

1. Life Insurance- proceeds paid to beneficiary upon DEATH OF THE

INSURED except when
a. The policy is solid or assigned in which case the proceeds, less
capital invested by the assignee/claimant shall be taxable
TAXABILITY OF DIVIDENDS b. The proceeds upon the death are by the insurer under an
agreement to pay thereon, the interest payment shall be
included in gross income
e.g., Lump-sum- 300,000 or with interest- 330,000 (300,000 is
not taxable but the interest 30,000 is taxable)

IF THE POLICY MATURES WITHOUT THE INSURED DYING, TAXABLE. If the

insurer dies before the policy matures, it is not taxable, except when (1)
policy is sold or assigned or there is (2) interest on proceeds

STOCK DIVIDENDS

GR: Not taxable, unless:

1. The recipient is other than a stockholder

2. A change in shareholder’s equity results by virtue of the stock

dividends issuance

2. Amount received by insured as return of premium- paid by him

under life insurance endowment or annuity contracts, either during
 the term or at the maturity of the terms mentioned in the
contractor or upon surrender of the contract BEYOND CONTROL TEST- if the cause of separation from
employment is beyond the control of the employee, then the
separation pay is not subject to income tax.

3. Gifts (Donor’s Tax), bequest and devises (Estate Tax)

- The value of property acquired by gift, bequest, devise, or descent:
Provided, however, that income from such property, as well as gift,
bequest, devise or descent income from any property, in case of
transfers of divided interest, shall be included in gross income.
7. Benefits received from SSS and GSIS
8. Income derived by the government or its political subdivision
- Income derived from any public utility or from the exercise of any
4. Compensation for injuries or sickness essential governmental function accruing to the Government of the
- amounts receive, through Accident or Health insurance or under Philippines or to any political subdivision thereof.
Workmen’s Compensation Acts, as a compensation for personal 9. Prizes and awards
injuries or sickness, plus the amounts of any damages received, Prizes and awards made primarily in recognition of religious,
whether by suit or agreement, on account of such injuries or charitable, scientific, educational, artistic, literacy or civic
sickness. achievement, but only if:
i. The recipient was selected without any action on his part to
enter the contest or proceeding; and
ii. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
5. 10. Prizes and awards in sports competition
Retirement benefits, pension, gratuities, etc. - All prizes and awards granted to athletes in local and international
- received under RA 7641 and those received by officials and competitions and tournaments whether held in the Philippines or
employees of private firms, individual or corporate, in accordance abroad and sanctioned by their national sports associations.
with a reasonable private benefit plan maintained by the employer,
if:
a. The retiring official or employee has been in the service of the
same employer for at least ten (10) years
b. Not less than fifty (50) years of age at the time of his retirement.
c. The benefits shall be availed of by an official or employee once 11. 13th month pay and other benefits
6. Separation pay - Gross benefits received by officials and employees of public and
- Any amount received by an official or employee or by heirs from private entities not exceeding 90,000.
the employer as a consequence of separation of such official or 12. GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of
employee from the service of the employer because of death, individuals.
sickness or other physical disability or for any cause beyond control
of the said official or employee
 12. Benefits received by an employee by virtue of a Collective
Bargaining Agreement (CBA) and productivity incentives schemes
provided that the total annual monetary value received from both
CBA and productivity incentives schemes combined, do not exceed
P10,000 per employee per taxable year

All other benefits given by employers which are not included in the
above enumeration shall not be considered as "de minimis benefits”, and
hence, shall be subject to income tax as well as withholding tax on
compensation.
DE MINIMIS BENEFITS
De minimis benefits in general are limited to facilities or privileges Employer gives benefit beyond the ceiling- The amount of de minim
furnish or offered by an employer to his employees that are of relatively benefits conforming to the ceilings herein prescribed shall not be
small val and are offered or furnished by the employer merely as a means of considered in determining the P90,000 of other benefits. However, if the
promoting the health, goodwill, contentment, or efficiency of his employer pays more than the ceiling, the excess shall be taxable to the
employees, such as the following: employee if such excess is beyond P90,000.
1. Monetized unused vacation leave credits of private employees not
exceeding 10 days during the year,
2. Monetized value of leave credits paid to government officials and
employees;
3. Medical cash allowance to dependents of employees not exceeding
P1,500 per semester or P250 per month;
4. Rice subsidy of P2,000 or one sack of 50 kg. rice per month
amounting to not more than P2,000,
5. Uniforms and clothing allowance not exceeding P6,000 per annum;
6. Actual yearly medical benefits not exceeding P10,000 per annum;
7. Laundry allowance of P300 per month;
8. Employees achievement awards, e.g. for length of service or safety
achievements which must be in the form of a tangible property
other than cash or gift certificate with an annual monetary value not
exceeding P10,000 received by an employee under an established INCOME TAX: DEALINGS IN PROPERTIES
written plan which does not discriminate in favor of highly paid
employees; Capital Assets- properties not used in business operation
9. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum, OA 1. Office equipment
10. Flowers, fruits, books or similar items given to employees under CA 2. House appliance
special circumstances, e.g. on account of illness, marriage, birth of a CA 3. Air conditioner in a bedroom of a house
baby, etc.; OA 4. Aircon in motel
11. Daily meal allowance for overtime work not exceeding 25% of the CA 5. Accounts receivable
basic minimum wage.
SUMMARY OF RULES ON SALES/EXCHANGE OF CAPITAL ASSETS

RULES ON CAPITAL ASSET (PERSONAL PROPERTY)

A. INDIVIDUAL TAXPAYER
a. Capital loses are deductible only from the capital gains
b. There is holding period; there is carry over
 More than 12 months- long term
 Not more than 12 months- short term
c. Carry over is good only for one year
d. The amount of carry-over should not exceed the net income in SALES OF SHARES OF STOCK
the year in which capital loss was sustained 1. Listed and traded-
 Subject to: Stock Transaction Tax (business tax)
 Tax base: Gross selling price
 Tax rate: 6/10 of 1% of GSP or (.006)
2. Not listed and traded (over the counter/directly to buyer)
 Subject to: CGT (Income Tax)
B. CORPORATION  Tax base: Net Capital Gain (SP- Cost and other expenses
a. Capital loses are deductible only from the capital gains connected to the sales)
b. No holding period and no carry over  Tax rate: 15% whether seller is individual or corporation

Selling Price xx
Cost (xx)
Net Capital Gain xx
Rate 15%
CGT xx
 O 9. Real properties forming part of the inventory of a real estate
dealer which are foreclosed.

CAPITAL ASSET is a property which is not being used in business operation.

(e.g. residential house)

RULES. A sale or exchange of real property-capital asset is subject to –

1. Capital gains tax of 6% (payable within 30 days from date of
notarization. Use BIR Form No. 1706), and
2. Documentary stamp tax of P15 for every P1,000 (payable not later
than the 5th day of the succeeding month when the transaction was
perfected. Use BIR Form No. 2000-OT)

TAX BASE:

COVERED TRANSACTIONS
PRINCIPAL RESIDENCE - dwelling house, including the land on which it
Sale, exchange or other disposition of real property located in t Philippines, situated, where the husband and wife, or an unmarried individual, whether
including pacto de retro sales and other forms or conditional sales or not qualified as head of family, and members of his family reside.

IDENTIFY whether capital asset or ordinary asset. Sale of principal residence is exempt from capital gain tax if the proceeds of
sale shall be utilized in acquiring a new residence within 18 calendar months
O 1. A property purchased for future use in the business, this purpose from the date of sale. However, although tax exempt, the 6% shall be
is later thwarted by circumstances beyond the taxpayer's control. deposited in interest bearing account under an Escrow Agreement.
O 2. A building used in business and becomes fully depreciated.
C 3. A townhouse owned by an individual engaged in business. ESCROW- a third party temporarily holds money or property until a
O 4. Real property primarily for sale owned by a taxpayer who condition has been met
changed its real estate business to a non-real estate business.
O 5. Real properties owned by taxpayers originally registered to be Indicate whether subject to CGT or not:
engaged in real estate business but failed to subsequently operate.
C 6. Real properties formerly being used in the business of a taxpayer
not engaged in real estate business but subsequently abandoned
and became idle.
C 7. Real property transferred through succession or donation to the
heir or donee who does not subsequently use it in trade or business.
C 8. Real property received as dividend from a real estate corporation
by stockholders who are not engaged in real estate business and
who do not subsequently use such real property in trade or
business.
 Withholding agent/buyer shall remit the amount withheld (use BIR Form
No. 1606) on or before the 10th day following the end of the month in
which the transaction occurred.

The seller/transferor shall be considered as habitually engaged in re estate

business if:

1. He/it is registered with the Department of Human Settlements and

Urban Development (DHSUD); or
2. He/it consummated at least six taxable real estate transactions
during the preceding year, regardless of amount.

Notwithstanding the foregoing, banks shall not be considered as habitually

engaged in the real estate business.

REAL PROPERTY ORDINARY ASSET

RULE: A creditable withholding tax based on the gross selling price/to

amount of consideration or the fair market value, whichever is higher,
paid to the seller/owner for the sale, transfer or exchange of real
property shall be imposed upon the withholding agent/buyer, in accordance
with the following schedule: DEDUCTIONS FROM GROSS INCOME

ITEMIZED DEDUCTIONS- consider all items of deduction

1. Expenses in General
2. Interest expense
3. Taxes expense
4. Losses
 5. Bad debts
6. Depreciation The following are deductible:
7. Depletion
8. Research & development a. A reasonable allowance for salaries, wages and other forms of
9. Contribution to pension trust compensation for personal services actually rendered, including the
10. Charitable and other contributions grossed-up monetary value of fringe benefit furnished or granted by
the employer to the employees: Provided, that the fringe benefit
OPTIONAL STANDARD DEDUCTION- can be claimed at the option of the tax imposed has been paid;
taxpayer b. A reasonable allowance for travel expense, here and abroad, while
away from home;
1. Corporation- 40% of gross income 1. Not taxable income on employee if he did not personally benefit
from it
2. Deductible expense on the part of the employer if the requisites
for deductibility are complied with
c. A reasonable allowance for rentals and/or other payments which
2. Individual- 40% of gross sales/receipts  no more deduction of are required as a condition for the continued use or possession, for
COGS/services purpose of the trade, business or profession, of property to which
a. Taxpayer shall be considered as having availed itself of the the taxpayer has not taken or is not taking title or in which he has
itemized deduction unless it signified in his return the intention no equity other than that of a lessee, user or possessor;
to elect OSD d. A reasonable allowance for entertainment, amusement and
b. Such election when made in the return shall be irrevocable for recreation expenses during the taxable year, that are directly
the taxable year for which the return is made. connected to or in furtherance of the development, management
c. An individual who is entitled to and claimed for the OSD shall and operation of the trade, business or profession of the taxpayer,
not be required to submit with his tax return such financial not to exceed the ceiling of ½% of net sales or 1% revenue.
statements
d. The General Professional Partnership and the partners
comprising such partnership may avail of optional standard
deduction only once, either by the general professional
partnership or the partners comprising the partnership.

ITEMIZED DEDUCTION

1. EXPENSES IN GENERAL
Requisites for Deductibility
a. Ordinary and necessary (ordinary- common or usual, 2. INTEREST EXPENSE
necessary- helpful or appropriate) Requisites for Deductibility
b. Paid or incurred during the taxable hear a. There must be an indebtedness
c. Supported by proof (Substantiation Rule) b. The indebtedness must be that of the taxpayer
d. Connected with trade, profession or business (except c. Indebtedness is connected with the taxpayer’s trade,
charitable contribution) business or profession
e. Not against law or public policy d. There is legal liability to pay interest
 e. Interest must be paid or incurred during the taxable year, Taxed as deduction means “tax proper” only. It does not include
f. Debtor and Creditor are not related taxpayers (not surcharges, penalties, or fines incident to delinquency.
members of a family)
Non-deductible taxes
a) PH income tax
b) Foreign income tax if claimed as tax credit
c) Estate and donor’s taxes
d) Special assessments
e) VAT

At the option of the taxpayer, interest incurred to acquire property used in

trade business or exercise of a profession may be allowed as:
a. Deduction, or
b. Treaded as capital expenditure
Taxpayer’s interest expense shall be reduced by an amount equal to 20% of
interest income subjected to final tax.

3. TAXES EXPENSE
Requisites for Deductibility
a) Interest must be paid or incurred during the taxable year
b) Must be paid or incurred in connection with taxpayer’s
trade, profession or business
 If an old building is demolished to construct a new one, the book value of
the building demolished plus demolition costs are deductible as losses.

4. LOSSES
Requisites for Deductibility
a. Must be actually sustained during the taxable year
b. Must not be compensated by insurance or other forms of The excess of allowable deduction over gross income of the
indemnity business on the taxable year (net operating loss) can be carried over as
c. Must be incurred in trade, profession or business deduction from gross income of the 3 succeeding years.
d. Must arise from fire, storms, shipwreck, or other casualties,
or from robbery, theft or embezzlement Operating losses incurred in 2020 & 2021 shall be allowed as carry-
e. It must not have been claimed as a deduction for estate tax over and deducted from gross income in the next 5 consecutive taxable
purposes in the estate tax return. years.
f. In case of casualty loss, it must be filed within 45 days after
the occurrence of such event

If a taxpayer purchased the land and building without intending to use the
building, the value of old building razed plus other costs are added to the
cost of the land.

5. BAD DEBTS
 Requisites for Deductibility
a. There must be a valid and subsisting debt 7. DEPLETION
b. Must be ascertained to be worthless and uncollectible The general conditions and rules on its deductibility are the
during the taxable year following:
c. It must be charged off during the taxable year 1. The method allowed under the rules and regulations prescribed
d. The debt must be connected with the trade, profession or by the Secretary of Finance is cost depletion method;
business of the taxpayer 2. This method can be availed of by oil and gas wells and mines;
e. It must not be sustained in a transaction entered into 3. The basis of cost depletion is the capital invested in the mine
between members of the same family or related taxpayers which is the accumulated exploration and development
expenses;
Recovery of bad debts previously allowed as deduction in the preceding 4. When the allowance shall equal the capital invested, no further
years shall be included as part of the gross income in the year of recovery to allowance shall be granted.
the extent of the income tax benefit of said deduction. 5. In the case of resident foreign corporations, allowance for
depletion shall be authorized only in respect to oil and gas wells
and mines located in the Philippines.

8. RESEARCH AND DEVELOPMENT

A taxpayer may treat research or development
expenditures which are paid or incurred by him during the taxable
year in connection with his trade, business or profession as ordinary
and necessary expenses which are not chargeable to capital
account. The expenditures so treated shall be allowed as deduction
during the taxable year when paid or incurred.

Amortization of Certain Research and Development Expenditures

At the election of the taxpayer and in accordance with the rules and
6. DEPRECIATION regulations to be prescribed by the Secretary of Finance, upon
The requisites for deductibility of depreciation are the following: recommendation of the Commissioner, the following research and
1. The allowance for depreciation must be reasonable for the development expenditures may be treated as deferred expenses:
exhaustion wear and tear (including reasonable allowance for a. Paid or incurred by the taxpayer in connection with his trade,
obsolescence); business or profession;
2. The asset must be used in the trade or business; b. Not treated as expenses under paragraph (1) hereof, and
3. Statement on the allowance must be attached to the return. c. Chargeable to capital account but not chargeable to property of a
character which is subject to depreciation or depletion.
The following are the methods of depreciation allowed:
1. Straight-line method, In computing taxable income, such deferred expenses shall be allowed
2. Declining balance method; as deduction ratably distributed over a period of not less than sixty (60)
3. Sum-of-years-digit method; and months as may be elected by the taxpayer (beginning with the month in
4. Any other method which may be prescribed by the Secretary of which the taxpayer first realizes benefits from such expenditures).
Finance upon the recommendation of the Commissioner of
Internal Revenue
The deductibility of research and development expenditures shall not apply
to:
1. Expenditures for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research
and development of a character which is subject to depreciation
and depletion, and
2. Expenditures paid or incurred for the purpose of ascertaining the
existence, location, extent, or quality of any deposit of ore or other
mineral, including oil or gas.

9. PENSION TRUSTS
Requisites for deductibility are the following:
1. The employer must have established a pension or retirement
plan.
2. The pension plan must be reasonable.
3. It must be funded by the employer.
ESTATE TAXATION
4. The amount contributed by the employer must no longer be
subject to his control.
First Question: Is the decedent married? If yes, what is their property
relations?
10. CHARITABLE AND OTHER CONTRIBUTIONS
The requisites for deductibility:
COMPUTATION OF ESTATE TAX
1. The contribution or gift must be actually paid;
2. It must be given to the organization specified by law;
 If decedent died married
3. It must be within the taxable year;
4. The net income of the institution must not inure to the benefit
of private individual or stockholder. Any
5. The taxpayer claiming the deduction must be engaged in trade,
profession or business

The following donations are deductible:

a) Donations to the government
b) Donations to certain foreign institutions or international
organizations.
c) Donations to accredited nongovernment organizations

COMPUTATION OF GROSS ESTATE

 Valuation of Property: @ FAIR MARKET VALUE
 GR: If real property, whichever is HIGHER between Zonal Value (BIR) - Gross Estate include even the share of the surviving
vs. Assessor's Value (FMV identified in the Tax Declaration) Spouse; therefore, exclusive property of
decedent + entire conjugal property
EXC. If Building (whether commercial or residential, EXCEPT - Net Taxable Estate deduct the share of surviving spouse in the
condominium unit and condominium parking space)- no zonal value common property
so only basis is the assessor's value in the Tax Declaration. Zonal
Value refers to land and condominium units. 2. Assets owned by the decedent during his lifetime but were no longer
owned by him at the time of his death, because these properties have been
If real property is situated in a: transferred during his lifetime by way of taxable transfer as follows:
a. Municipality - Provincial Assessor a. Transfer in contemplation of death
b. City - City Assessor b. Revocable Transfers
c. Property passing under the general power of appointment
 Valuation of Stocks LISTED & TRADED in the stock exchange: @ d. Transfer for insufficient consideration under any of the following:
Market Value d.1. in contemplation of death
d.2. revocable transfer
Market Value is based on the mean, which is equal to the average. d.3. General power of appointment

Use the highest and lowest price of the day when the decedent died,
if no record on the exact date of death, use the nearest date

PROCEEDS OF LIFE INSURANCE

A person takes out a life insurance policy on his own life and appoints
somebody as a beneficiary. Proceeds shall be part of gross estate if:

1. Beneficiary is either the estate (ang appointed beneficiary ay siya

rin), executor, or administrator; or

Executor person appointed by the testator in the will

to carry out the provisions in the will
 Valuation of Stocks NOT LISTED & TRADED in the stock exchange
FMV Administrator person appointed by the court
Common Shares - Book Value
Preferred Shares - Par Value 2. Appointment if beneficiary is revocable (pwedeng palitan)
If policy is silent as to whether appointment is revocable or
PROPERTIES INCLUDED IN THE ESTATE irrevocable, presumed to be REVOCABLE
1. Properties that are still owned by the decedent at the time of a. If the premiums (binabayaran sa insurance) were paid out
his death, to the extent of his equity or interest in such of exclusive property of decedent, the proceeds shall be
property, whether as exclusive or a joint owner classified as exclusive property

COMPUTATION OF
 b. If the premiums were paid out of common property of c. Other regimes
spouses, the proceeds shall be classified as common
property
c. if paid partly exclusive and partly common, proceeds shall PROPERTY REGIME OF UNIONS WITHOUT MARRIAGE
be in like proportion exclusive in part and common property
in part  Wages and Salaries- owned by them in equal shares and properties
acquired by the both of them through their work or industry shall
be governed by the rules on co-ownership
 In the absence of proof to the contrary  common share;
equal
 If the other partner did not participate in the acquisition of
property, he/she shall be presumed to have jointly
Insurance: 2 conditions must be complied for the exception contributed if the former's efforts consisted in the care and
1. beneficiary is irrevocable maintenance of the family and household
2. beneficiary appointed must not be the estate, executor, or
administrator

WHEN ARE SPOUSES GOVERNED BY THE CONJUGAL PARTNERSHIP OF

GAINS?

1. When the parties agreed on conjugal partnership in the prenuptial

agreement (should be executed in writing and duly notarized)
2. When the spouses were married before August 3, 1988 and there
was no pre-nuptial settlement

CONJUGAL PROPERTIES
What if the decedent is separated but there is no legal separation
1. Those acquired by onerous title during the marriage at the
(separated in fact but not in law)? Still with property relations
expense of the common fund, whether the acquisition be for the
RULES ON PROPERTY OWNERSHIP partnership, or for only one of the spouses (e.g., acquired through
1. Unmarried No property relations purchase)
2. With live-in partner or void 2. Those obtained from the labor, industry, work or profession of
Marriage (e.g., same sex marriage) Co-ownership either or both the spouses (income earned during the marriage 
3. Validly married a. Absolute Community of conjugal)
Property 3. The fruits, natural, industrial or civil, due or received during the
b. Conjugal Partnership of marriage from the common property, as well as the net fruits from
Gains (CPG) the exclusive property of each spouse
 4. The share of either spouses in the hidden treasure which the law
awards to the finder or owner of the property where the treasure is
found.
5. Those acquired through occupation such as fishing or hunting
6. Livestock existing upon the dissolution of the partnership in excess
of the number of each kind brought to the marriage by either
spouse

7. Those which are acquired by chance, such as winnings from

gambling or betting. However, losses therefrom shall be borne
exclusively by loser-spouse. CONJUGAL PARTNERSHIP OF GAINS

GR All property acquired during the marriage, whether the acquisition

Won  Conjugal
appears to have been made, contracted or registered in the name
Lost  exclusive loss of loser-spouse
of one or both spouses, is presumed to be conjugal.

EXC contrary is proved

OWNERSHIP OF IMPROVEMENTS

 Ownership of improvements, whether for utility or adornment,

The following are NOT CONJUGAL because they shall be the EXCLUSIVE
made on the separate property of spouses at the expense of the
PROPERTY of each spouse:
partnership or though the acts or efforts of either or both spouses
1. That which is brought to the marriage as his or her own
shall pertain to the conjugal partnership, or to the original owner-
2. That which each acquires during the marriage by gratuitous title
spouse, subject to the following rules:
3. That which is acquired by right of redemption, by barter or by
exchange with property belonging to only one of the spouses;
4. That which is purchased with exclusive money of the wife or
husband

RULE: Properties acquired by gratuitous title, whether before or during the

marriage, shall be exclusive property of the grantor or heir, however, the
income earned during the marriage by such will be conjugal property.
Problem H married to W in 1985 and died May 10, 2000. The following are
the properties of the spouses at the time of his death:
- Beach resort, P20,000,000 ESTATE TAX
- Income from resort, P1,200,000 Taxability of estate
- 1,200 common shares of ABC Corp. (book value, P120 per share; par If the decedent was a:
value, P100 per share) 1. Resident or citizen (resident citizen or resident alien or non-resident
- Dividends from common share. P40,000 citizen)- all properties situated within and without the PH
- 3 units of sand & gravel trucks brought into marriage by H (Value - 2. Nonresident alien- all properties situated within the PH. If there is
P150,000 per unit) reciprocity, the intangible properties are not taxable (so only real
- 2 units of truck purchased out of income of the other 3 units. Value property within and tangible personal properties within)
per unit - P600,000 Jewelries inherited by W from her mother INTANGIBLE PERSONAL PROPERTIES WITHIN
during the marriage, P2 million. 1. Franchise, shares, obligations or bonds issued by DC
- Residential house and lot, inherited by H from parents in 1983, 2. Shares, obligations or bonds issued by FC
P4,000,000 GR: Intangible without
- YSL handbag, donated to W by her parents, P1,700,000, EXC.
- Proceeds of irrevocable life insurance policy, payable to the estate a. If at least 85% of such business is located in PH; or
of H, P400,000. b. Even if less than 85% if the corporation has acquired
- Other business of spouses, P30,000,000. business situs in PH

QUESTIONS:
1. If there was no pre-nuptial agreement, what regime governed the
properties of H and W? Conjugal Partnership of Gains
2. How much is the gross estate on the estate of H?
 C. The transmission from the first heir, legatee or donee in favor of
another beneficiary, in accordance with the desire of the
COMPUTE gross estate if decedent was a:
predecessor
1. Resident or citizen: 16,650,000
2. Nonresident alien: 11,600,000
3. Nonresident alien with reciprocity: 7,200,000

EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS

Refers to transfer mortis causa- not subject to estate tax, therefore
excluded in gross estate

The following shall NOT BE TAXED:

A. The merger or usufruct in the owner of the naked title
COMMON REQUISITES
1. 2 transfer of property/ies
2. The 1st transfer is testamentary (with will or testament left by the 1st
transferor) and taxable
3. 2nd transfer is tax exempt

B. The transmission or delivery of the inheritance or legacy by the

fiduciary heir or legatee to the fideicommissary Why is the 2nd transfer not subject to estate tax?
Because if ever there is a transfer of property from Heir 1 to Heir 2, the will
of the decedent is still being followed not the will of the 1st Heir who dies
subsequently, that’s why it is required that the 1st transfer must be ABSOLUTE COMMUNITY OF PROPERTY REGIME
testamentary in nature.

D. All bequests, devises, legacies or transfers to social welfare, cultural

and charitable institutions, no part of the net income of which
inures to the benefit of any individual: Provided, however, that not
more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for
administration purposes

WHAT CONSTITUTES COMMUNITY PROPERTY

Unless otherwise provided in this chapter or in the marriage settlements,
the community property consists of:
1. All the property owned by the spouses at the time of celebrations of PROBLEM
marriage or H married to W in 2000 without any pre-nuptial agreement, died May 10,
2. Acquired thereafter 2020. The following are the properties of the spouses at the time of his
Property acquired during the marriage is PRESUMED to belong to the death:
community, unless it is proved that it is one of those excluded therefrom.  Beach resort (zonal value - P20 M; assessor's value - P12 M)
 Income from the resort, P 1,200,000
EXCLUDED FROM THE COMMUNITY PROPERTY
1. Property acquired DURING THE MARRIAGE by gratuitous title by
either spouse, and the fruits as well as the income thereof, if any,
unless it is expressly provided by the donor, testator or grantor that
they shall form part of the community property.
2. Property for personal and exclusive use of either spouse. However,
jewelry shall form part of the community property** clarify 55:00
mark on CTT Season 1 Ep 2.
3. Property acquired before the marriage by either spouse who has
legitimate descendants by a former marriage, and the fruits, as
well as the income, if any, of such