d. Gross Income vs. Net Income vs. Taxable Income

Inclusions

Gross income encompasses all income earned from whatever source, including, among others, the following:

• Compensation for personal services rendered, regardless of the form of payment, such as salaries, wages, fees, commissions, and similar remunerations;
• Gross income realized from engaging in a trade, business, or the practice of a profession;
• Gains arising from transactions involving property;
• Interest income;
• Rental income;
• Royalties;
• Dividends;
• Annuities;
• Prizes and winnings;
• Pensions; and
• A partner’s distributive share in the net profits of a general professional partnership (in contrast, a distributive share received from a taxable or ordinary partnership is treated as a dividend, as the partnership itself has already been assessed ordinary corporate income tax).

Taxability of Selected Transactions:

• Damages restoring taxpayer to previous status: Damages received on account of personal injuries or sickness are excluded from gross income under Sec. 32(B)(4) of RA 8424. A property-damage recovery is a return of capital only to the extent of the taxpayer’s basis; any gain is determined under Sec. 40 of RA 8424 (Raytheon Production Corp. v. Commissioner, 144 F.2d 110 (1st Cir. 1944))¹.
• Damages replacing lost profit or income: Amounts recovered representing lost earnings or profits are taxable.
• Recovery of previously deducted items: Amounts recovered that previously produced a tax deduction under the tax benefit rule are taxable.
• Debt cancellation (debtor remains insolvent): Where the debtor is insolvent both prior to and following the forgiveness of debt, the cancellation is not taxable because there is no resulting economic gain or accretion to net worth.
• Debt cancellation (debtor becomes solvent): When the discharge of debt makes an insolvent taxpayer solvent, the cancellation is taxable to the extent of the economic benefit and increase in net worth.
• Debt cancellation of a stockholder: The forgiveness of a shareholder’s indebtedness by a corporation is taxable as a dividend.
• Debt cancellation for services: Forgiveness of a liability in exchange for services performed constitutes taxable compensation.
• Gratuitous debt cancellation: Forgiveness granted gratuitously and without any consideration is subject to donor’s tax.
• Income from unlawful operations: Gains realized from an illegal business are taxable.
• Recovery of lost earnings: Compensation for unrealized earnings is taxable.

Where real property is transferred to compensate for services rendered, such as attorney’s fees, the fair market value of the land must be recognized as gross income of the recipient in the taxable year it was received under Sec. 32(A)(1) of RA 8424 (BIR Ruling, Sec. 017²).

Gross Income vs. Net Income vs. Taxable Income

Gross Income is described as income from whatever source, including compensation for services; the conduct of trade or business or the exercise of profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partner's distributive share in the net income of a general professional partnership. (NIRC, Sec. 32(A)³ as cited in CIR v. PAL, Inc., G.R. No. 180066, February 22, 2017⁴)

Net Income means gross income less statutory deductions. It is referred to as “Taxable Income” under the NIRC

Taxable Income means the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. (Sec. 31)⁵

Concept of Return of Capital

Sale of inventory of goods by manufacturers and dealers of properties – The portion of the receipt representing the cost of goods manufactured and sold (manufacturers) and cost of sales (dealers) are deducted from the gross sales.

Sale of stock in trade by a real estate dealer and dealer in securities – For sales of real property held as inventory or securities held for sale by a dealer, the specifically identifiable cost of the property or securities sold is deducted from sales proceeds in determining gross income.

Sale of services – Generally, the return of capital is not allowed to be deducted from the gross sales. Service receipts are not necessarily gross income; determine gross income under the applicable income-tax rules, taking account of the costs of services where required.

Concept of Gross income for MCIT purposes

For corporations involved in

• sale of goods- Gross sales less sales returns, discounts, allowances, and cost of goods sold
• sale of service- Gross receipts less sales returns, allowances, discounts, and cost of services.

Cost of goods sold shall mean all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

Cost of services shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients.

Contents of the Corporate Income Tax Return

• Corporate profile and information;
• Gross sales, receipts or income from services rendered, or conduct of trade or business, except income subject to final tax as provided under this Code;
• Allowable deductions under this Code;
• Taxable income as defined in Section 31 of this Code⁶; and
• Income tax due and payable.

Provided, That the foregoing provisions shall not affect the implementation of Republic Act No. 10708⁷, or TIMTA.