Transcript
RECTO, GAYLE ANGELI M. | Transcript of the Lectures of Atty. Lumbera | INCOME TAX
Income Tax – Atty. Rizalina Lumbera
Sources of Tax:
NIRC
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Customs
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LGC
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Rules and Regulations
RMCs, RMOs, Rulings of BIR
and Tariff Code
Rulings of BOC
Ordinances of LGUs
Rulings of Sanggunian
Kinds:
Real Estate
Local Property Tax
How to summarize tax:
What are the kinds of Taxes per Classification of Tax?
What are the remedies available to the TP and the
government per kind of Tax?
All general principles are applicable to all kinds of tax
(constitutional and inherent limitations, etc)
How these 3 sources are correlated to each other
NIRC
Rules on Exemptions
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Charitable institutions (Consti)
Article VI Section 28 (3) Charitable
institutions, churches and parsonages or
convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands,
buildings, and improvements, actually,
directly, and exclusively used for
religious, charitable, or educational
purposes shall be exempt from taxation.
EXAMPLE: A parcel of land is owned by a
charitable institution as home for senior
citizens. Building 1 (for males), 2 (for
females), kitchen (a portion was rented
out to Jollibbee, KFC, Mang Inasal),
recreation area, office. How do you know
that the institution is charitable? Look at
SEC docs.
According to Consti, we are talking
about real property tax.
Is the charitable institution subject to
RPT? NO EXCEPT the portion rented out
to Jollibbee, KFC, Mang Inasal. Another
basis for the exemption is LGC
The latter also realizes income from
deposits and sales of sweets made by
the elderly (P100K). Is the Php 100K
income? YES because income is
anything that flows into the wealth of a
TP other than return of capital. Is it
taxable? NO. Section 30 of NIRC. Do
not use as basis the Consti
Section 30. Exemptions from
Tax on Corporations. - The
following organizations shall
not be taxed under this Title in
respect to income received by
them as such (meaning, if
the income is acquired out of
the purposes under the bylaws, the income is exempt):
(E) 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 inures to the benefit of
any member, organizer,
officer or any specific person;
What about the rentals from KFC (Php
200K)? It is income. It is TAXABLE.
Section 30 last paragraph.
Notwithstanding the
provisions in the preceding
paragraphs, the income of
whatever kind and character
of the foregoing organizations
from any of their properties,
real or personal, or from any
of their activities conducted
for profit regardless of the
disposition made of such
income, shall be subject to
tax imposed under this Code.
Consti DOES NOT provide that
income from real property is
likewise exempt
Hence, the rental income is
TAXABLE. It is income from
real property therefore it is
not exempt.
The Php100K and Php 200K were both
deposited in a bank. It earned 10%
interest income (Php30K). It is income
and is SUBJECT to tax. (Section 30 last
par.)
Mr. X gave Php 500K to the charitable
institution. It is INCOME. It is NOT
TAXABLE. Section 32(B)(3)
(B) Exclusions from Gross
Income. - The following items
shall not be included in gross
income and shall be exempt
from taxation under this title:
(3) Gifts, Bequests, and
Devises. _ 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 of income from any
property, in cases of transfers
of divided interest, shall be
included in gross income.
From the point of view of X, it is
EXEMPT from DONOR’S TAX/ ESTATE
TAX. Section 87 and 101
(D) All bequests, devises,
legacies or transfers to social
welfare, cultural and
charitable institutions, no part
of the net income of which
insures 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.
(3) Gifts in favor of an
educational and/or charitable,
religious, cultural or social
welfare corporation,
institution, accredited
nongovernment organization,
trust or philanthrophic
organization or research
institution or organization:
Provided, however, That not
more than thirty percent
(30%) of said gifts shall be
used by such donee for
administration purposes. For
the purpose of the exemption,
a 'non-profit educational
and/or charitable corporation,
institution, accredited
nongovernment organization,
trust or philanthrophic
organization and/or research
institution or organization' is a
school, college or university
and/or charitable corporation,
RECTO, GAYLE ANGELI M. | Transcript of the Lectures of Atty. Lumbera | INCOME TAX
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accredited nongovernment
organization, trust or
philanthrophic organization
and/or research institution or
organization, incorporated as
a nonstock entity, paying no
dividends, governed by
trustees who receive no
compensation, and devoting
all its income, whether
students' fees or gifts,
donation, subsidies or other
forms of philanthrophy, to the
accomplishment and
promotion of the purposes
enumerated in its Articles of
Incorporation.
X gives Php 500K to the charitable
institution. Can he claim it as a
deduction from his gross income? If X is
an individual and is a purely
compensation earner, he CANNOT
claim it as a deduction because of
Section 35. But if X were a corporation
or an individual earning business
income, it/he may claim as deduction
BUT NOT entirely (Section 34-H)
Religious institutions
Non-stock non-profit educational institutions
Government educational institutions
Proprietary educational institutions
Hospitals
GOCCs
CAPITAL ASSETS
Losses those which are directly chargeable to gross
income pertain only to casualty losses
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When is there gain? When is there loss?
Anything that you receive is part of your
gross income when you do manual labor.
But what about when you are
transacting over property? Gains and
losses are material if you are
dealing with assets. If you are dealing
with revenues (either from manual labor
or from any human participation to
generate the profits), there are no gains
or losses. If the asset is merely held, it
will just remain as listed in the books (if
its value increases or decreases, there is
no effect as regards tax liabilities).
Hence, even if you have many cars but
you’re a purely compensation earner,
such cars will have no effect on your
taxes.
But when you sell your house, you may
realize gains or losses. If there is
income, the tax due is tax on sale of real
property.
When you sell your car at a loss, that’s a
different thing. There is a loss when
the value of the property at the
time of the transaction exceeds the
gross selling price.
EXAMPLE: X is a purely
compensation income earner.
She has a watch that she
bought at Php50K 5 years
ago. She sells it now for Php
25K. The present value is
Php15K.
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Is there income?
YES. Php 10K.
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May the holding
period apply? NO.
Because X is not
engaged in trade
or business?
What then is the tax
base? Php 15K. It
forms part of the
gross income of X.
What if it is sold at Php 10K? X
lost Php5K.
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Will the Php5K be
treated as a
deduction? NO.
There is no effect
as far as tax
liability is
concerned
because the
watch was never
used in trade or
business and X’s
income is purely
compensation
income.
But when you acquired a gain,
government taxes it because
“gains derived from the sale
of whatever property is
taxable, without distinction as
to whether the property sold
is capital or ordinary”
When you talk about assets, you do not
automatically say that gains are taxable and
losses are deductible.
The RULE is: you recognize gains and
losses (Sections 39-43)
Recognize how do you do it?
Determine what kind of asset
(whether capital or ordinary)
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If you’re a purely
compensation
income earner all
assets are capital
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If you’re engaged in
a business:
You may
have both
capital
and
ordinary
or
All your
assets are
ordinary
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If you’re engaged in
T/B the assets
that will matter to
you (for taxation
purposes) are
those, even if
capital, are related
to the T/B (although
not necessarily
used in T/B)
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Purely compensation
income earner
Business income earner
Sold a watch with gain of
Php10K
sari sari store (income of
Php1M) and parlor (income
of
sold an electric fan with gain
of Php35K
Sold house with gain of
Php500K
sold an electric fan with loss
of Php20K
Sold house with loss of
Php700K
DEDUCTION: it is not in the
nature of casualty loss; it is
merely recognized
Sold car with gain of Php
100K
sold a tricycle used in the
sari sari store with gain of
Php100K/ loss of Php 80K
Sold car with loss of Php
80K
GROSS INCOME: is the
Php100k and the Php 35K
income added to the gross
income? NO. it is merely
recognized
Salaries and wages: Php 2M
RECTO, GAYLE ANGELI M. | Transcript of the Lectures of Atty. Lumbera | INCOME TAX
Sold furniture with gain of
Php 20K
Sold furniture with loss of
Php 30K
GROSS INCOME
inclusions: salaries of
Php2M, sale of car of
Php 100K, sale of
furniture of Php 20K
Sale of watch - taxed with
finality
Sale of house - final
withholding of 6%
You have to list the assets.
If your buy equipment worth
Php1M, you cannot claim
deduction because it is a
capital expenditure. But you
can claim depreciation (5
years). If you buy it in 2010
and by 2015, there is 0 book
value, when you compute
your taxes, you may claim
depreciation every year.
That is the allowable
deduction.
BUT this has no effect on the
gross income because you
do not include it in the gross
income the value of the
property
but on the expense side,
you may claim depreciation
expense; and this will have
the effect of reducing your
net taxable income because
this reduces your gross
income
DEDUCTION: only
Php50K (do not include
the losses obtained in
the sale of house and
car)
You do not create a list of
assets
Holding on to an asset does not have a direct effect to the
gross income. The only materiality of holding on to this asset
is the depreciation which is an allowable deduction from
gross income
In 2012, the sound system bought in 2010 by AUSL
was banned because it is dangerous to health. What
happens?
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The asset is converted from ordinary to capital
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As distinguished from the same sound system
used in the house, the latter is not converted to
capital asset
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Because it is no longer ordinary, can you still
claim depreciation?
No. Because it is no longer used in trade
or business
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AUSL then purchased the recommended
sound system in 2013 worth Php5M.
Depreciated in 5 years. In 2016, it has book
value of 0.
It doesn’t mean that the sound system
is no longer usable. There is still
beneficial use. But this is not what we
consider for taxation purposes.
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Someone buys the old sound system for
Php300K. It’s book value then was Php200K.
Realized gains. But do not add to the
gross income. (CAPITAL GAINS)
No tax yet.
You don’t add immediately the capital gains to your gross
income. Neither do you deduct immediately the capital
losses from your gross income. You recognize them first.
Next, you determine our NET CAPITAL GAINS by deducting
your capital losses from your capital gains.
The NET capital gains are the ones added to your gross
income for taxation purposes.
What if the capital loss (Php 100K) exceeds the
capital gain (Php30K)?
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Capital loss of Php100K vs. Capital gain of Php30K
is Php70K of net capital loss.
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Do you claim this as a deduction against the gross
income? NO. Because you have already been
benefited when the losses were deducted
from the gains and that is already a
deduction.
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The losses in Section 34 are NOT an allowable
deduction.
Net Capital Loss Carry Over
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Only for the individual TP
What is the effect for the succeeding year?
Only up to the extent of the loss.
No prohibition as to the number of years.
Limitations:
It can only be carried over to
the succeeding year to allow
you to recover from the
loss
It should not be in excess of
the loss for the succeeding
year.
Holding Period
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Only for the individual TP
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Period that you held on to the asset
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Recognize the gain or loss based on the holding
period
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If the holding period is not more than 12 months
then recognize the gains/losses at 100%
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If more than 12 months 50%
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EXAMPLE: Sound system bought in 2010 and
sold in 2014 (Php200K book value; sold at
Php300K). The asset was held for more than
12 months. Capital gain is Php100K.
Instead of recognizing 100K as capital
gain, it should only be 50K.
Steps in determining TAX IMPLICATIONS of CAPITAL
GAINS/LOSSES
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Determine the kind of asset
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Determine the book value and the selling price
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From there, you will be able to determine whether
there is capital gain or capital loss
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Apply the holding period rule
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If there is a net capital gain this is taxable
already
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If there is a net capital loss you may carry it
over to the succeeding years
NB: If you sell capital asset at a loss and it is not real
property located in PH, there is a corresponding tax. All the
privileges are not applicable. Section 100.
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EXAMPLE: X sold his sound system and realized a
capital loss of 100K. Section 100 applies.
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Section 100. Transfer for Less Than Adequate and
full Consideration. - Where property, other than
real property referred to in Section 24(D), is
transferred for less than an adequate and full
consideration in money or money's worth, then
the amount by which the fair market value of
the property exceeded the value of the
consideration shall, for the purpose of the tax
imposed by this Chapter, be deemed a gift, and
shall be included in computing the amount of gifts
made during the calendar year.
Hence this is subject to donor’s tax
Instances when you do not apply the steps mentioned
above in determining the tax implications:
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When what is sold is real property located in PH
because this is automatically subject to 6% capital
gains tax (of the FMV or GSP whichever is higher)
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Capital gains on sale of shares of stocks not traded
thru the local stock exchange, shares of stocks in a
domestic corporation sold not thru the local stock
exchange rate of 5% if not exceeding 100K or
10% of excess of 100K
Shares of stocks traded in the stock
exchange percentage tax of ½ of 1%
of the gross selling price
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When property is exchanged for property, shares
are exchanged for shares, property are exchanged
for stocks, stocks are exchanged for property,
pursuant to a valid merger or consolidation
(Section 40) no gain or no loss is recognized;
A Corp merged with B Corp and formed
AB Corp. A has a car worth Php1M. B has
a painting worth 2M. A contributes the
car to AB. AB, in return, issues stocks in
favor of A worth 700K only. A incurred a
loss of 300K. B, who contributes the
painting, was issued shares of stocks
worth 3M. B had a gain of 1M. The law
says that this gain and this loss will not
be recognized.
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LOSS: is the loss of Php20K
or Php80K claimed as
allowable deduction against
the gross income? NO. it is
merely recognized
RECTO, GAYLE ANGELI M. | Transcript of the Lectures of Atty. Lumbera | INCOME TAX
Rationale: whatever gain or loss incurred
will be leveled up by the merger or
consolidation
When an individual acquires shares of stocks in a
corporation by exchanging property therefor and
he, together with others not exceeding 4, acquires
control over this corporation, obtains any gain or
loss in acquiring the same, he will NOT be affected
no gain or no loss is recognized;
There is nothing in the law that states
that this is tax exempt. Non-taxability is
really just a consequence of nonrecognition.
Wash sales This is limited to shares of stocks
EXAMPLE: you have shares of stocks
worth 5M and sold it for 3M. You
sustained a loss of 2M. If 30 days prior
to the sale or after the sale, you
acquired similar shares of stocks as the
ones sold and for which you sustained a
loss, do not recognize the loss
What happens in wash sales if you have
gains? Say you sold it at 6M. Therefore
you have gains of 1M. Same scenario.
You recognize the gains.
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ORDINARY ASSETS
Just like revenues and expenses, these are computed within
the same year.
In 2014, X has a sound system with book value of 400K,
which she uses in her business. Y bought for 700K. Ordinary
gain is 300K
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You don’t apply the holding period in
ordinary assets.
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You don’t add this immediately to your gross
income. You only recognize
In 2014, X has a TV set worth 400K which she uses in her
business. Y bought it for 200K. Ordinary loss is 200K
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No holding period, inapplicable. Do not deduct this
from the gross income
At the end of the year, you have 100K ordinary gains.
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What will you do with this? THIS IS TAXABLE
already.
If at the end of the year, you incurred ordinary loss of 100K.
What do you do? This is not deductible from the
gross income. There is no such thing as net
ORDINARY loss carry over
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The NOLCO is net operating loss carry over.
Why is there a carry-over in cases of losses of capital
asset but none in ordinary asset? When an asset is used
or T/B, it should generate income for the T/B.
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Ordinary assets (or those that are used in trade or
business) the assumption is that they generate
income for the T/B
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Since capital assets no longer generate income,
the government gives an additional privilege to
the loss of the same
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Net Capital Loss Carry Over vs. Net Operating Loss Carry Over
NOLCO when the operating loss, represented by
deductions, are more than your gross income
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In determining the operating loss, direct costs
are considered
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EXAMPLE: Business is tapsilogan. Sold tapsilog
worth Php200K, this is the gross revenues from
sales. This is not the gross income for tax
purposes. Charge first your direct costs or costs of
sale (like raw materials, transportation expenses
etc.). You will then arrive at your net income prior
to tax.
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NOLCO happens when your deductions or
expenses are more than your gross income
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It relates to expenses
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Applicable only to corporate TPs
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The loss may be carried over for the succeeding 3
years
NCLCO refers to losses sustained in exchange of property
or transactions over properties or assets
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Applicable to individual TPs
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Carried over only to the succeeding year
SUMMARY OF INCOME TAX
Husband and wife joint filing
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Separate computation in one return
ITRs are verified
Source of income matters in determining tax liability