Overview
This lecture covers the classification and tax treatment of ordinary and capital assets, focusing on how to calculate and apply withholding taxes on the sale or disposition of ordinary assets.
Classification of Assets
- Ordinary assets include inventory, personal property used in business (and depreciated), real property held for sale to customers, and real property used in business.
- Capital assets are all properties not classified as ordinary assets, such as personal residences, family cars, receivables, and investment properties.
Ordinary vs. Capital Assets: Examples
- Goods for sale, raw materials, office computers, and warehouses used in business are ordinary assets.
- Personal vehicles, family homes, investment properties, and home appliances are capital assets.
Importance of Classification
- Ordinary gains/losses are taxed differently than capital gains/losses.
- Ordinary gains are added to gross income and taxed at normal income tax rates; ordinary losses are deducted.
Tax Treatment for Ordinary Assets
- Gains or losses from the sale of ordinary assets are included in gross income for tax computation.
- Sale of personal property as inventory or used in business is added or deducted from gross income depending on gain or loss.
Withholding Tax on Sale of Real Property (Ordinary Asset)
- Real property classified as inventory is generally subject to creditable withholding tax (CWT).
- Exemptions: Seller registered with HLURB and price ≤ ₱180,000 (Metro Manila) or ₱150,000 (other areas); registered with BOI/PEZA; or seller is GSIS, SSS, PhilHealth, or PCSO.
- CWT rates: 1.5% (≤ ₱500,000), 3% (₱500,000–₂M), 5% (> ₱2M).
- Real property used in business but not inventory: subject to 6% CWT regardless of price.
Computation Example
- Gains/losses from sale of ordinary assets (inventory or business-use property) are calculated and added/deducted to/from gross income.
- Withholding taxes are creditable, meaning they reduce the income tax payable.
Key Terms & Definitions
- Ordinary Asset — Assets held for sale in business, used in business, or subject to depreciation.
- Capital Asset — Assets not classified as ordinary, typically for personal or investment use.
- Creditable Withholding Tax (CWT) — Tax withheld at sale by the buyer and credited against the seller’s income tax.
- Gross Income — Total income before deducting expenses and losses.
- HLURB — Housing and Land Use Regulatory Board.
- BOI — Board of Investments.
- PEZA — Philippine Economic Zone Authority.
Action Items / Next Steps
- Review the next lecture on capital gains, capital assets, and their tax treatment.
- Practice classifying assets and computing gains/losses and CWT for different sale scenarios.
- Complete any assigned readings on the National Internal Revenue Code sections relevant to asset classification and tax.