GROSS INCOME HANDOUT

LEARNING OBJECTIVES:
Taxable and non-taxable:
1. Inclusion and exclusion in the gross income of Compensation
2. Inclusion and exclusion in the gross income of Business income
3. Inclusion and exclusion in the gross income of Dealings in Property
4. Inclusion and exclusion in the gross income of Interest
5. Inclusion and exclusion in the gross income of Royalties
6. Inclusion and exclusion in the gross income of Dividends
7. Inclusion and exclusion in the gross income of Rent
8. Inclusion and exclusion in the gross income of Prize, Winnings and Awards
9. Inclusion and exclusion in the gross income of Annuities
10. Inclusion and exclusion in the gross income of Distributive share of GPP
11. Inclusion and exclusion in the gross income of Bad Debt Recovery
12. Inclusion and exclusion in the gross income of Unutilize Campaign Donation
13. Inclusion and exclusion in the gross income of Refunded Tax
14. Inclusion and exclusion in the gross income of Forgiveness of Debt
15. Inclusion and exclusion in the gross income of Illegal Source
16. Inclusion and exclusion in the gross income of Proceeds from Life Insurance
17. Inclusion and exclusion in the gross income of Amount Received by Insured
18. Inclusion and exclusion in the gross income of Retirement Benefit or Pensions
19. Inclusion and exclusion in the gross income of Separation Pay
20. Inclusion and exclusion in the gross income of Other Retirement Plan
21. Inclusion and exclusion in the gross income of Recovery of Damages
22. Inclusion and exclusion in the gross income of Income under Tax Treaties
23. Inclusion and exclusion in the gross income of Government income
24. Inclusion and exclusion in the gross income of Gain on Sale of Bonds
25. Inclusion and exclusion in the gross income of Redemption of Share in Mutual Funds
26. Inclusion and exclusion in the gross income of Gifts, Bequest, and Device
27. Inclusion and exclusion in the gross income of PERA

GROSS INCOME:
The total income of a taxpayer subject to tax. It includes the gains, profits, and income derived from whatever
source, whether legal or illegal. It does not include income excluded by law, or which are exempt from income
tax.

Gross income means all income derived from whatever source, including (but not limited to) the following items:

INCLUSIONS:

1. COMPENSATION FOR SERVICE

Compensation for services, of whatever kind and in whatever form paid, forms part of gross income. The
name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments
and honoraria, allowances, commission, transportation, representation, entertainment allowances, fees,
including director’s fee, if the director is, at the same time, an employee of the employer/corporation.

Regular compensation (basic salaries, fixed allowances) P XX

Add: Additional or supplemental compensation (overtime, hazard pay) XX
Add: 13th month and other benefit (excess of P90,000) XX
Add: Fringe benefit XX
Compensation included in the gross income P XX

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 Tips and gratuities – Tips or gratuities paid directly to an employee (by a customer of the employer) which
are not accounted for by the employee to the employer are considered taxable income, but not subject to
withholding tax.

The following compensation are not subject to regular tax:

a. Statutory minimum wage and additional compensation (overtime, holiday, hazard, night shift differential)
of a minimum wage earner.
b. 13th month and other benefit
c. De minimis benefits
d. Mandatory contributions (SSS, PHIC, Pag-ibig, Union dues)
e. Benefits necessary to the trade, business, or conduct of profession of the employer

2. GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE OR BUSINESS OR EXERCISE OF

PROFESSION
In general, “gross income” means total sales less Cost of goods sold or cost of service, plus any income
from investments and from any incidental or outside operations or sources.

Net sales P XX
Less: Cost of goods sold ( XX)
Gross profit from sale P XX
Add: Other income
Passive income not subjected to final tax P XX
Gains from sale of asset XX XX
Gross income P XX

3. GAINS DERIVED FROM DEALINGS IN PROPERTY

Sale of 3 types of property which may give rise to taxable income:
a. Ordinary asset – 100% of the gain or loss shall be recognized in the ITR.
b. Capital asset (shares and real property) – subject to final taxes (capital gains tax)
c. Other capital assets – holding period of the asset shall be taken into consideration if the seller is an
individual and only the net capital gain shall be included in the ITR.

4. INTEREST INCOME
Interest income, as a rule, is taxable income included in the ITR. Exceptions:
a. Interest income from bank deposits or deposit substitutes in the Philippines subject to final tax (passive
income).
b. Interest income which are exempt from tax:
- Interest income from long-term deposit or investment in the form of savings, trust funds, deposit
substitutes, investment management accounts.
- Interest income earned from passive investment foreign governments, financing institutions owned
by foreign governments, and international financial institutions established by foreign governments.

Note: Interest income on government securities is subject to final tax on passive income as such securities
are considered deposit substitutes.

5. ROYALTIES
Derived from sources within the Philippines are subject to a final tax of 20%, except royalties on books, other
literary works, and musical composition which shall be subject to a final tax of 10% for individuals. Royalties

Received by resident citizen and domestic corporation from sources without the Philippines shall be included
in the ITR. Royalties considered as active income is subject to basic income and included in the gross
income.

6. DIVIDENDS
Dividends subject to final tax: Cash or property dividends received by individuals and NRFCs from domestic
corporations. Dividends included in gross income in the ITR:
• Generally, cash and/or property dividends received by a resident citizen or domestic corporation
from a foreign corporation.

• Liquidating dividends – Represents distribution of all the property or assets of a corporation in

complete liquidation or dissolution. The difference between the cost or other basis of the stock and
the amount received in liquidation of the stock is a capital gain or capital loss. Where property is
distributed in liquidation, the amount received is the fair market value of such property.

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 Liquidating dividends P XX
Less: Cost of stock investment ( XX)
Capital gain (capital loss) P XX

If the shareholder is a corporation, the capital gain is taxable in full. If the shareholder is an individual
and the stock were held for more than 12 months, the capital gain is taxable only to the extent of 50%
thereof.

Dividends not subject to income tax

1. Intercorporate dividends from a domestic corporation to another domestic corporation or a RFC.
2. Generally, stock dividends.

7. RENT INCOME
Rent paid by the lessee for the use or lease of property is taxable income to the lessor when received.
Rent income includes the following:
a. Cash, at the stipulated price (a.k.a. periodic rentals)
b. Obligations of the lessor to third persons paid or assumed by the lessee in consideration of the contract
of lease. An example is the real estate tax on the property leased assumed by the lessee.
c. Advance payment which must be prepaid rentals.
d. Leasehold improvement – The contract of lease may provide that the lessee may make permanent
improvements on the leased property and said improvements will belong to the lessor upon termination
of the lease. The lessor, in such case, may, at his option, report income under any of the following
methods:
• Outright method – lessor reports an income the fair market value (also equal to cost) of the
improvement in the year of completion.
• Spread-out method – the lessor shall spread over the remaining term of the lease the
estimated carrying amount or book value (depreciated value) of such building or
improvement at the termination of the lease, and report as income for each remaining term
of the lease an aliquot part thereof.

Cost of leasehold improvement P XX

Less: Accumulated depreciation (annual dep. times age at termination) ( XX)
Estimated carrying amount at termination P XX
Divide: Remaining lease term (Lease term less years lapse before improve.) ( XX)
Additional gross income from leasehold P XX

The following are excluded from gross income with respect to rent:
• a loan to the lessor, or
• option money for the property, or
• security deposit for the faithful performance of the lessee’s obligation

8. PRIZE and WINNINGS

Included in Gross Income Excluded in Gross Income
Prizes Prizes
- Prizes amounting to P10,000 - Prizes over P10,000 and winnings derived
- Prizes received by domestic within and within the Philippines
without the Philippines - Prizes received by NRA not engaged in
- Prizes received by resident foreign business and trade and by NRFRC within the
corporation (RFC) within the Philippines Philippines.
- Prizes and winnings received by resident
Sports Prizes
citizens from sources without the Philippines
- Prizes from sports competition sanction by
Philippine sports association (e.g., Asian
games, SEA games)
Awards
That does not met all of the criteria Awards
All of the following are criteria for the prizes and
awards to be exempted from income tax:
• It is given in recognition of religious, charitable,
scientific, educational, artistic, literary or civic
achievements.
• The recipient of the awards or prize is not
required to render substantial future services
as a condition in receiving the prize or awards.
• The recipient of the awards was selected
without any action on his part to enter the
contest or proceeding.

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9. ANNUITIES AND LIFE INSURANCE
a. Annuities – paid under an annuity contract in excess of the consideration paid are includible in gross
income.

b. Life insurance policies – Where insured outlives the term of the policy, amounts received by an insured
in excess of the premium paid are included in gross income.

10. PARTNER’S DISTRIBUTIVE SHARE FROM THE NET INCOME

A Partnership is defined as “a contract whereby two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of diving the profits among themselves”.

Kinds of Partnership for Tax Purposes:

a. General Partnership (Commercial Partnership, Partnership in trade or business) – for income taxation
purposes, are considered as corporations and are therefore taxed as such. Consequently, partners are
considered shareholders, and therefore, profits distributed to them are considered as dividends subject
to final withholding tax.

b. General Professional Partnership (GPP) – A partnership formed by persons for the purpose of exercising
their common profession, no part of income of which is derived from engaging in trade or business. A
GPP is not subject to income tax. However, a GPP is required to file income tax return for the purpose
of furnishing information as to the share of each partners in the net income of the partnership which each
partner shall include in his individual income tax return.

11. RECOVERY OF BAD DEBT

The “Tax Benefit Rule” is the doctrine observed in the Philippines in bad debt recoveries.

Rules on bad debt recovery:

Included in Gross Income Excluded in Gross Income
Taxable – if the deduction of the bad debt in prior Not taxable – if the deduction of the bad debt did
year resulted in an income tax benefit to the not result in an income tax benefit to the taxpayer
taxpayer, the bad debt recovered is taxable (i.e., where the result of the business operation
income in the year of recovery. was a net loss even without the bad debt
deduction), the bad debt recovered is not taxable
Income from bad debt recovery – the recovered income but is treated as a mere recovery or return
amount of the previously deducted bad debt of capital
which resulted in an income tax benefit.

12. UNUTILIZED / EXCESS CAMPAIGN FUNDS

That is, campaign contribution net of the candidate’s campaign expenditures, shall be considered as subject
to income tax. As such, the same must be included in the candidate’s gross income as stated in his Income
Tax Return for the subject taxable year.

Campaign donation received P XX

Less: Campaign expenditures ( XX)
Unutilized or excess fund P XX

Any candidate who fails to file with the COMELEC the appropriate Statement of Expenditures required under
the Omnibus Election Code, shall be automatically precluded from claiming such expenditures as deduction
from his campaign contributions.

13. REFUND OF DEDUCTIBLE TAX

The tax benefit doctrine also applies with respect to refund or credit taxes which were claimed and deducted
in a previous year.

Included in Gross Income Excluded in Gross Income

If the tax paid is a deductible tax. The refund or If the tax paid is not a deductible tax. The refund
credit thereof is taxable in the year of receipt or credit thereof is not taxable
Example: Example:
- Other percentage tax except stock - Income tax
transaction tax - Donor’s
- Estate tax
- VAT
- Stock transaction tax
- Special assessment

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14. FORGIVENESS OF INDEBTEDNESS

Included in Gross Income Excluded in Gross Income

When a creditor cancels a debt as part of a Taxed as dividends:
business transaction, or in consideration of Where the debtor is a stockholder of the
personal services of the debtor, the condoned corporation which condoned the debt, the
debt is taxable income to the debtor. condonation is considered an indirect payment
dividend.

Subject to donor’s tax:

If the creditor merely desires to benefit a debtor,
and without any consideration therefor cancels the
debt, the amount of the debt is a gift from the
creditor to the debtor.

15. INCOME FROM ILLEGAL SOURCES

All unlawful gains are taxable and includible in the ITR. However, actual repayment of such illegal gains will
give rise to a deductible.

EXCLUSIONS:

1. PROCEEDS FROM LIFE INSURANCE UPON DEATH

The proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured shall be
exempt from the income tax. The proceeds of life insurance are treated more as an indemnity for the life list
instead of as again, profit, or income

Note: Interest payments made by the insurer constitutes income to the recipient.

Included in Gross Income Excluded in Gross Income

Proceeds from life insurance less premiums paid if All the proceeds from life insurance upon death of
the insured is still alive. the insured.

2. AMOUNT RECEIVED BY INSURED AS RETURN OF PREPIUM

The amount received by the insured, as a return of premiums paid by him under life insurance, endowment,
or annuity contracts, either during the term, or at the maturity of the term mentioned in the contract, or upon
surrender of the contract.

Notes:
a. The excess of the proceeds received over the premiums paid is included in the gross income.
b. Participating dividends distributed to life insurance policy holders are actually a return of overpaid
premiums. They are therefore excluded from gross income of the insured.

3. RETIREMENT BENEFITS, PENSIONS

As a general rule, retirement benefits or pensions are all taxable. As exceptions, the following benefits and
payments are exempt from income tax:

Pensions that met all the following requisites:

a. There must be a reasonable private benefit plan maintained by the employer.
b. The retiring official or employee has been in the service of the same employer for at least 10 years.
c. The retiring official or employee is not less than 50 years of age at the time of his retirement.
d. The benefits of exemption granted shall be availed of by an official or employee only once.

If any of the above requirements are not met, the retirement benefit is taxable after deducting the
contributions made by the employee incase the plan is contributory:

Retirement pay P XX
Less: Contribution made by the employee ( XX)
Taxable retirement pay P XX

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4. SEPERATION PAY
Any amounts received by an official or employee, or by his heirs, from the employer as a consequence of
separation of such official or employee from the service due to:
a. Sickness
b. Death
c. Other physical disability
d. For any cause beyond the control of the said official (e.g., retrenchment, redundancy, closure of
business)

Note: Separation pay due to the abovementioned causes are exempt from income tax regardless of age or
length of service of employee.

The exemption does not cover salaries, 13th month pay and other benefit in excess of P90,000, and other
payments which are properly taxable to the employee.

5. OTHER RETIREMENT BENEFIT AND PENSION

Benefits received by resident or non-resident citizens of the Philippines, or aliens who come to reside in the
Philippines, from foreign agencies and other institutions private or public.

a. Benefits administered by the United States Veteran Administration

b. Benefits received from Social Security System (SSS) in accordance with Republic Act 8282
c. Benefits received from GSIS under Republic Act 8291
d. Maternity benefits advanced by the employer

6. RECOVERY OF DAMAGES
Recoveries that are to compensate for damages to property, injury to person or loss of life are not taxable.

Included in Gross Income Excluded in Gross Income

a. Damages for lost profit a. Damages to compensate for damage or
b. Interest on damages injury to the person or his property
b. Damage for lost capital
c. Moral damages
d. Exemplary damage
e. Punitive damage

7. INCOME EXEMPT UNDER TREATIES

Income of any kind, to the extent required by any treaty obligation or international agreement to be exempt
from taxation by the Republic of the Philippines.

8. GOVERNMENT INCOME
a. Income derived by foreign government, financing institutions owned or controlled by foreign government,
and international or regional financial institutions established by foreign governments from investments
or deposits in the Philippines.
b. Income derived by the Philippine Government or its Political Subdivisions from the exercise of any
governmental functions.

Included in Gross Income of Government Excluded in Gross Income

Income not related to their function (e.g., rental of Collection from their Governmental Functions
properties or parking lots)

9. GAINS FROM THE SALE, EXCHANGE OR RETIREMENT OF BONDS WITH A MATURITY OF MORE
THAN 5 YEARS

Included in Gross Income o Excluded in Gross Income

Interest earned Gain on sale or retirement

10. GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUNDS

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11. PERA (Personal Equity and Retirement Account)

Refers to the voluntary retirement account of an individual (called contributor) established from his own
Qualified PERA Contributions and/or Qualified Employer Contributions, for the purpose of being invested
solely in qualified or eligible PERA investment products.

Included in Gross Income

Early Withdrawals from a Personal Equity and Retirement Account (PERA) which do not qualify for
exclusion from taxable gross income.

Excluded in Gross Income

a. Employer’s contribution
b. Investment income of a contributor, requirements:
- Approved by regulatory authority
- That non-income taxes, if applicable, relating to the investment income, shall be imposed
c. Qualified PERA distributions, requirements:
- Contributions for at least five years
- Contributor reaches the age of 55
- Upon death of the contributor
d. Early withdrawals, selected circumstances:
- Suspension or revocation of the accreditation of Administrator.
- For payment of accident or illness-related.
- Contributor rendered permanently and totally disabled

12. GIFTS, BEQUESTS, AND DEVICES

The value of property acquired by gifts, bequest, device or descent are exempt from income taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such property shall be
subject to income tax.

13. INCOME FROM DEVELOPMENT OF SOCIALIZED HOUSING SITE

The private section (contractors) shall be exempt from payment of project-related income taxes (including
CGT) on a per project basis on income realized from the development of socialized housing sites

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DISCUSSION:

Compensation:
1. Which of the following compensation will be subject to graduated rates?
A. Basic salary of an employee
B. Basic salary of an employee who is a minimum wage earner.
C. 13th month pay and other benefits not exceeding P90,000.
D. Fringe benefits received by supervisory or managerial employee

2. Statement 1: Representation and transportation allowance given regularly on a monthly basis are not taxable
fringe benefits but taxable as compensation income subject to basic tax under Sec. 24(A) of the tax code.

Statement 2: Expenses in connection with attending business meeting or convention in the Philippines such
as food, beverages and transportation are nontaxable benefits of the employee.

A. Only statement 1 is correct C. Both statements are correct

B. Only statement 2 is correct D. Both statements are incorrect

3. Pedro is a regular college professor of University of the East. All tenured instructors and professors of the
university regularly receive a fixed daily meal allowance of P250 per day for a total twenty-six (26) working
days per month. The meal allowance is:
A. Exempt from basic income tax
B. Subject to fringe benefit tax if the recipient is a rank-and-file employee
C. Subject to fringe benefit tax if the recipient is a managerial employee
D. Subject to graduated income tax rate

4. Which of the following statements regarding 13th month pay is correct?

A. 13th month pay and other received by officials and employees of public and private entities are exempt
from income tax and creditable withholding tax on compensation, provided that the total exclusions shall
not exceed P90,000.
B. The excess of de minimis benefits over the ceiling would from part of an individual’s gross income only
if the total excess benefits including bonuses exceeds P90,000 and would be subject to income tax and
applicable final withholding taxes.
C. Statements “A” and “B” are correct
D. Neither statements are correct

5. Which of the following items that reduces salaries of employees is not an exclusion from gross income?
A. GSIS/SSS contributions
B. Pag-ibig contribution
C. Labor union dues
D. None of the choices

6. Abby, a resident alien, single had the following during the year:

Salaries (net of payroll deductions) P 200,000

Payroll deduction:
Withholding tax on salary P 16,500
Contribution SSS, PHIC, Pag-ibig, union dues 16,000
Advances/Loans 30,000
Allowances 25,000
13th month pay 26,000
Christmas cash gift 10,000
14th month pay 26,000
Bank interest income, net of 20% final withholding tax 1,400
Compute the compensation income to be reported in the annual income tax return.
A. 271,500 C. 333,000
B. 300,000 D. 255,000

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7. Yunik, resident citizen, single had the following during the year 2021:

Gross compensation income P 480,000

Deductions from compensation income:
SSS contribution 3,600
Pag-ibig contribution 1,200
Philhealth contribution 1,800
Union dues 2,400
13th month pay 45,000
Christmas cash gift 10,000
Mid-year bonus 45,000
Interest on bank deposit (net of 20% final tax) 16,000
Interest on foreign currency deposit (net of 15% final tax) 10,000
How much is the income of Yunik subject to regular income tax?
A. 476,000 C. 471,000
B. 466,000 D. 481,000

Business Income:
8. Which of the following statements is incorrect?
A. Income from business is never subject to final withholding tax
B. Income from exercise of profession may be exempt from income tax
C. Income from business may be subject to capital gains tax
D. Income from exercise of profession may be subject to income tax

9. The Bid Bird Security Agency (BBSA) received P3,000,000 from its client. P2,400,000 of this was designated
for salaries of guards assigned in various client establishments. How much will be included in the gross
income of BBSA?
A. 600,000 C. 3,000,000
B. 2,400,000 D. 0

Dealings of Property:
10. Which of the following dealings in property is subject to basic income tax?
A. Sale of ordinary assets
B. Sale of real property located in the Philippines, by an individual, classified as capital asset
C. Sale of shares in a domestic corporation sold outside the local stock exchange
D. All of the choices

Interest:
11. Interest income from peso loans granted by banks is:
A. Subject to 25% regular income tax
B. Subject to 10% final tax
C. Subject to 20% final tax
D. Exempt from tax

Royalty:
12. Royalties considered as active income is subject to:
A. Basic income tax
B. 10% final tax
C. 20% final tax
D. Exempt from income tax

Dividends:
13. If a corporation distributes its asset to its stockholders upon dissolution, this kind of corporate distribution
will result in:
A. Stock dividends C. Cash dividend
B. Property dividend D. Liquidating dividend

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14. Hyun Bin, a nonresident Korean stockholder, received a dividend income of P300,000 in 2021 from Super
Corporation, a foreign corporation doing business in the Philippines. The gross income of the foreign
corporation from within and without the Philippines were as follows:

Philippines P 42,000,000
Abroad 38,000,000
Total P 80,000,000

The amount of income included in the gross income of Hyun Bin is:
A. 300,000 C. 157,500
B. 331,579 D. 0

15. Assuming Super is a domestic corporation, the amount of income subject to tax of Hyun Bin should be:
A. 300,000 C. 157,500
B. 331,579 D. 0

16. A cash dividend of P100,000 received by a taxpayer in 2021 from a foreign corporation whose income from
Philippine sources is 40% of its total income is:

Statement 1: Partly taxable if he is a resident citizen

Statement 2: Party taxable if he is a non-resident alien

A. Statement 1 and 2 are false

B. Statement 1 is true but statement 2 is false
C. Statement 1 is false but statement 2 is true
D. Statement 1 and 2 are true

Rent:
17. One of the following income shall be returned in the year received even if the accounting method used by
the taxpayer is accrual basis:
A. Interest earned on bank deposit
B. Share in the net income of general partnership
C. Stock dividend
D. Rentals

18. Which payment made by the lessee under such terms of the lease contract should be considered as
additional rent income of the lessor?
I – If a lessee paid directly to the government the real estate tax on the property of the lessor.
II – If the amount received by the lessor is in the nature of a security deposit for the faithful compliance
by the lessee of the term of the contract
III – if the amount received by the lessor is in nature of a loan extended by the lessee to the lessor.

A. Only I
B. Only I and III
C. Only II and III
D. I, II and III

19. Advance rentals in the nature of prepaid rental, received by the lessor under a claim or right, and without
restriction as to use is
A. Taxable income of the lessor in the year received if he is on the cash method of accounting
B. Taxable income of the lessor in the year received if he is on the accrual method of accounting
C. Taxable income of the lessor in the year received whether he is on the cash or accrual method of
accounting.
D. Taxable income of the lessor up to the amount earned in the year the rental is received.

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20. On July 1, 2021, Ms. Britney leased her vacant lot for a period of 12 years to Ms. Lesly at an annual rate of
P2,400,000. It was also agreed that Ms. Britney will pay the following:
• P4,800,000 representing rental payment for two years. Subsequent rental payments will be made
every July 1 of the applicable year.
• Security deposit of P2,400,000.
• Annual real property tax of P30,000.

The lease contract provides, among others that the lessee will construct a 5-storey building for parking
purposes at a cost of P36,000,000. Ownership of the building shall belong to the lessor upon the expiration
or termination of the lease contract.

The building was completed on July 1, 2023 with an estimated useful life of 15 years. Mr. Britney report total
income from the lease for 2021 at:
A. 2,430,000 C. 4,830,000
B. 1,200,000 D. 2,640,000

21. Assuming Ms. Britney will use outright method in recognizing income from leasehold improvements, how
much is the total income from lease for year 2023?
A. 3,030,000 C. 38,430,000
B. 3,630,000 D. 2,400,000

22. Assuming Ms. Britney will use spread-out method in recognizing income from leasehold improvements, how
much is the total income from lease for year 2023?
A. 3,030,000 C. 38,430,000
B. 3,630,000 D. 2,400,000

23. Assuming that due to the fault of the lessee, the lease contract was terminated on January 1, 2025, how
much income is to be reported by the lessor in 2025?
A. 32,400,000 C. 34,830,000
B. 30,600,000 D. 33,030,000

Prizes, Winnings and Awards:

24. Jay, a member of the Philippine boxing team received the following during the taxable year:

Prizes for winnings gold in the Asian games P 600,000

Winnings from Philippine lotto 400,000
Cash gifts from SM Foundation 100,000

The amount not subject to income tax is

A. 1,000,000 C. 700,000
B. 710,000 D. 600,000

25. Prizes and awards received shall be exempt from income tax when the following conditions are met, except:
A. It is given in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievements.
B. The recipient of the awards or prize is not required to render substantial future services as a condition in
receiving the prize or awards.
C. The recipient of the awards was selected without any action on his part to enter the contest or
proceeding.
D. None of the above

Annuity:
26. Annuity payments received by a taxpayer represents a part which is taxable and not taxable. Which of the
following statement is correct?
A. If annuity received represents interest, it is a taxable income.
B. If annuity received represents return of premium, it is not a taxable income
C. Both statements are correct
D. Both statements are not correct

27. Mr. Santiago purchased a life annuity for P100,000 which will pay him P10,000 a year. The life expectancy
of Mr. Santiago is 12 years. How much should Mr. Santiago include in his gross income?
A. 100,000 C. 20,000
B. 10,000 D. 120,000

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Partner’s share in GPP:
28. ABC is a general partnership in trade and in its fifth year of operations. During the current taxable year, it
had a gross profit from sales and business expenses of P2,000,000 and P1,000,000, respectively. A, B, and
C share equally in the profits and losses of the partnership. The income tax due of the partnership is
A. 250,000 C. 300,000
B. 200,000 D. 0

29. Ramos, Toribio Partnership is a general professional partnership, with Ramos and Toribio, participating
equally in the income and expenses. The following are the data for the partnership and the partners in 2021:

Partnership Ramos Toribio

Gross income P 600,000 P 150,000 P 200,000
Expenses 350,000 70,000 120,000

The gross income of Ramos from the partnership is

A. 300,000 C. 640,000
B. 125,000 D. 0

30. The taxable income of Ramos

A. 80,000 C. 155,000
B. 205,000 D. 0

Recovery of Write-off:
31. The following data were provided to you by Talon Flames Company for the current year:

Amount 2020 Income (Loss) Amount recovered

written off before write off In 2021
Case 1 P 50,000 P 350,000 P 20,000
Case 2 10,000 ( 50,000) 10,000
Case 3 30,000 20,000 30,000
The income from bad debt recovery during 2021 is:
Case 1 Case 2 Case 3
A. 20,000 10,000 30,000
B. 20,000 0 30,000
C. 20,000 0 20,000
D. 20,000 10,000 20,000

Refunded Taxes:
32. Which of the following is not a taxable income?
a. Bad debt previously written off (with tax benefit) and recovered subsequently.
b. Tax expense previously disallowed as deduction from taxable income, fully refunded subsequently.
c. Income from gambling
d. Income from usurious financing

33. The following are not taxable, except

A. Refund of fringe benefit tax
B. Refund of income tax
C. Refund of estate or donor’s tax
D. Refund of special assessment

34. Which of the following tax refunds is taxable?

A. Percentage tax on person’s exempt from VAT
B. Estate or donor’s tax
C. Stock transaction tax
D. VAT

Forgiveness of Debt:
35. The individual performs services for a creditor who in consideration thereof cancels the debt, the cancellation
of indebtedness mat amount to:
A. To a gift
B. To a capital contribution
C. To a donation inter vivos
D. To a payment of income

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36. At the testimonial dinner for new CPAs, Christian, a reviewer was requested to sing the theme song of the
movie “Ghost”. Pauline, a new CPA, was so delighted that she felt she was falling in love with Christian so
she decided to cancel Christian’s indebtedness to her. As a result,
A. Christian realized a taxable income as compensation for service
B. If Christian accepts the cancellation, he will pay donor’s tax
C. Christian received a gift from Pauline and therefore is not part of his taxable income
D. The amount of indebtedness canceled is partly taxable, partly exempt

Income from Illegal Source:

37. For income tax purposes, gains derived from the following transactions shall be recognized:
A. Transaction between related taxpayers
B. Illegal transactions
C. Both “A” and “B”
D. Neither “A” nor “B”

Life Insurance:
38. Corazon insured her life with Malayan Insurance company. Under the contract, she will pay a monthly
premium of P2,000 for 10 years. In case of death before the 10th year, her beneficiary will receive an
indemnification in the amount of P150,000. If she is still living on the 10th year, she will receive P500,000. If
Corazon dies on the 5th year, her beneficiary will report an income of
A. 500,000 C. 260,000
B. 150,000 D. 0

39. Suppose Corazon dies on the 5th year and her beneficiary was offered to received P150,000 in cash or to
receive it in installment of P20,000 for 10 monthly installment payment and the beneficiary chose the 2nd
option, she will report an income of:
A. 500,000 C. 50,000
B. 150,000 D. 0

Return of Premium:
40. If Corazon survives the policy and is able to receive the P500,000, she will report an income of
A. 500,000 C. 150,000
B. 260,000 D. 0

41. Proceeds of insurance taken by a corporation on the life of an executive to indemnify the latter’s beneficiaries
against the loss in case of his death is
A. Exempt from income tax
B. Part of taxable income
C. Subject to final tax
D. Partly exempt, partly taxable

Retirement and Pensions:

42. If an employee retires and decided to receive this retirement benefits in the form of pension, what is the tax
treatment of such?
A. Subject to graduated income tax rate
B. Exempt from income tax
C. Either “A” or “B”
D. Neither “A” nor “B”

43. Mr. Hen retired from his job after 25 years of service. He joined the company at the age of 23 and was
promoted from an accounting clerk to VP Finance. She was paid P2,000,000 total retirement pay from the
employer’s contributory pension plan which was duly registered with the BIR. Out of the total proceeds, Ms.
Hen contributed P600,000. This was Ms. Hen’s first retirement from employment. Compute the inclusion in
gross income:
A. 2,000,000 C. 600,000
B. 1,400,000 D. 0

44. Assuming Mr. Hen transferred to another company and was retired after 15 years of service. The second
employer paid P1,500,000 out of its non-contributory pension fund as retirement pay to Mr. Hen. The
pension fund was also duty registered with the BIR. Is the second retirement pay exempt from income tax?
a. No, because this is the second time Mr. Hen retired from employment
b. Yes, because Mr. Hen is already a senior citizen
c. Yes, because this is the first time Mr. Hen qualifies for retirement pay exemption

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 d. No, because an employee must work under one employer until retirement to qualify for retirement
exemption.

Separation Pay:
45. Which is not an acceptable grounds for exemption of termination pay
A. Mass employee lay-off
B. Closure of employer’s business
C. Grave misconduct and neglect of duty
D. Retrenchment of employer’s business

46. One of the following compensation income of an individual taxpayer is not an exclusions from gross income:
A. Monetize vacation leaves not exceeding 10 days a year.
B. Separation pay of an employee who resigned from his employment.
C. Retirement benefits of an employee who has worked for an employer for at least 10 years, who at the
time of retirement is not less than 50 years of age, and who avails of the retirement for the first time.
D. All of these.

Recovery from Injuries

47. Which of the following is a taxable income?
A. Income from qualified pension plan
B. Compensation for personal injuries
C. Moral damages
D. Interest on moral damages

48. The following are examples of nontaxable compensation for injuries, except:
A. Actual damages for injuries suffered
B. Compensatory damages for unrealized profit
C. Moral damages for grief, anxiety and physical sufferings
D. Exemplary damages

49. Marlon was hit by a car driven by Jay causing severe injuries to Marlon. It was found out during trial that the
driver was drunk at the time of the incident. After trial, the court awarded the following:
- P1,500,000 actual damages for hospitalization
- P300,000 exemplary damages
- P500,000 for loss of income
- P100,000 moral damages

Marlon also received a cash gift of P100,000 from Jay. The taxable income received by Marlon is
A. P2,400,000 C. P1,500,000
B. P1,900,000 D. P 500,000

Gift, bequest, devices:

50. Which of the following is taxable?
A. Property acquired through donation
B. Inherited properties
C. Income from letter “A” and “B”
D. None of the choices

51. Pedro, single received the following during the taxable year:

Proceeds of his life insurance paid at an annual premium of P15,000 within 25 years P 2,000,000
Proceeds of his mother’s life insurance paid at annual premium of P10,000 in 20 years 1,000,000
House and lot inherited from his mother 4,000,000
Rent income from inhered properties 200,000
For income tax purposes, how much of the above items must be included in his gross income?
A. 7,200,000 C. 200,000
B. 1,200,000 D. 1,825,000

Income under Tax Treaty:

52. If a particular transaction is subject to income tax under the Tax Code but there is a treaty provision that it
is exempt, which will prevail?
A. Tax code
B. Tax treaty
C. Tax code and tax treaty
D. None of the choices

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Income derived by Government:
53. The Professional Regulations Commission collected a total sum of P100,000,000 from professional license
fees. It also collected P5,000,000 from rentals of government properties. What is the total exclusion in gross
income?
A. 0 C. 100,000,000
B. 5,000,000 D. 105,000,000

54. Which of the following is taxable?

A. Income derived by a political subdivision of the Philippine government performing essential
governmental function.
B. Income derived by foreign government in the Philippines.
C. Both “A” and “B”
D. Neither “A” nor “B”

Gains From The Sale, Exchange Or Retirement Of Bonds With A Maturity Of More Than 5 Years:
55. In order for gains realized from the sale or exchange or retirement of bonds, debentures or other certificate
of indebtedness be exempt from income taxation, what is the prescribed length of its maturity?
A. 5 years or more
B. 5 years or less
C. More than 5 years
D. Exactly 5 years

Gains from Redemption of Share in Mutual Fund:

56. Gains realized by the investor upon redemption of shares of stock in a mutual fund company is:
A. Exempt
B. Subject to final withholding tax
C. Subject to basic tax
D. Subject to capital gains tax

57. Ms. Karen invested in the mutual fund and savings deposit of BCC Bank. She acquired a 100,000
participation shares when the net asset value per unit of the fund was P98.00. She pulled out her investment
when the net asset value per unit was P101.00. Ms. Karen also had P100,000 accrued interest in her savings
deposit. Which statement is incorrect?
A. The P300,000 gain is an exclusion is gross income
B. The P100,000 interest income is an exclusion in gross income subject to regular tax
C. The P100,000 interest income is an inclusion in gross income subject to final tax
D. The P100,000 interest income is an inclusion in gross income subject to final tax but the P300,000 is an
inclusion in gross income subject to regular tax

PERA:
58. RA 9505, otherwise known as PERA Act of 2008, is
A. Personal equity and retirement account
B. Personal exemption and reciprocity action
C. Personal exemption and retirement account
D. Personal equity and reciprocity action

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