What is an income for tax purposes?

Income refers to all wealth which flows to the taxpayer other than a mere return of capital. It is a flow wealth that goes into the taxpayer within a specified time, arising from the use of capital, use of labor through either physical and/or intellectual faculties, or from other sources where after the transaction, the taxpayers becomes more wealthier than before the transaction. In general, the question is: Did the taxpayer become wealthier after the transaction or event? Let us take up the following to emphasize the point:

a. In the sale of goods purchased at P100 for P150, P50 is the increase of wealth.
b. In rendering a legal opinion for a fee of P5,000, the whole amount is an increase of wealth.
c. An increase in the value of an owned land of P100,000 (revaluation increment), there is yet no flow of wealth until the same is sold.
d. In the receipt of stock dividend, there is yet no increase of wealth until the same are sold.
e. Decrease of anticipated liability in the future because of a decrease of currency valuation contracted to be settler is not yet a flow of wealth until actually settled at such lower amount.

Actual collection may not be necessary in some cases for as long as the right thereto has already accrued and is entitle to collect at some point in time in the future. In accounting parlance, accrual accounting dictates that there is an income when the earning process is already complete. To illustrate, the sale of goods is already taxable at the point of sale even when the proceeds is not yet collected. Rendering of a service for a fee is already taxable after the services are rendered despite the fact that there is no collection yet. The reason is that the seller of goods or the person who rendered the service is already entitled the right to collect.

There is income when there is a flow of wealth. Even income from illegal activities, being a flow of wealth, is also an income. Even a liability that is condoned by the creditor in favor of the debtor may constitute an income. Differentiated from capital, capital is a fund while income is a flow from the use of such fund. Capital is wealth, while income is the service or the return from the use of such wealth. Property or fund is the tree, while income is the fruit. Labor is a tree and income the fruit.

For income tax purposes, taxability income has the following requisites:
a. there must be an income, gain or or profit
b. the income, gain or profit must have been received OR realized during the taxable year
c. the income gain or profit is not exempt from income tax

For tax purposes, tax on income will be affected by many factors such as the nature of income, classification of taxpayer, source of income, and other factors.

Tags: accrual basis, flow of wealth, income, taxable income