Hand outs on Income taxation
Characteristics of regular income tax
1. General in coverage
- Applies to all items of income except those that are subject to final tax, capital gains tax and
special tax regimes.
2. A net income tax
- Is an imposition on residual profits or gains after deductions for expenses and personal
exemptions allowable by law.
3. An annual tax
- Applies on yearly profits or gains
4. Creditable withholding taxes
- Are advanced taxes that must be deducted against regular tax due in computing the tax still
due to the government.
5. Progressive or proportional tax
6. – progressive tax on taxable income of individuals and a flat or proportional tax on taxable
income of corporations
Regular Income tax model
Gross income-inclusions P xxx
Less: allowable deductions xxx
Taxable income Pxxx
Gross income- constitute all items of income that are neither excluded in gross income nor subjected to
final tax or capital gains tax.
Exclusions from gross income- these pertains to items of income that are excluded, hence exempt from
regular income tax.
Allowable deductions - are expenses of the conduct of business or exercise of profession. Commonly
known as business expenses.
Personal expenses - are those that an individual spends that are not connected to furtherance,
maintenance or development of his trade, business or profession are non-deductible
against gross income.
Note: Individuals that are not engage in business cannot claim deductions from gross income
Classification of individuals:
1. Pure compensation earner
2. Pure business or professional income earner
3. Mixed income earner- an individual earning both compensation and business or professional
income.
Note: Personal exemption is repealed effective January 1,2018 . TRAIN law simply exempts P250,000
annual income of individual income taxpayer from regular tax.
Determination of taxable income is computed using:
1. Classification rule
a. Compensation income- arises from an employer-employee relationship.
b. Business or professional income- arises from selling of goods or rendering of services for
profit.
2. Globalization Rule- for mixed income earner
Other income- income that are neither compensation nor business income such as passive income are
added to gross income from business or profession.
Allowable deductions- business expenses deducted from business income or profession. No deduction
is allowed on compensation income since expenses for cost of living are deemed included in the
P250, 000 blanket exemption in income tax table.
Taxable income-pure compensation income earner
Gross compensation income Pxxx
Less : non-taxable compensation xxx
Taxable compensation income Pxxx
Non-taxable compensation- includes legally mandated salary deductions and items of compensation
income that are exempted by law, contracts, or treaty from income taxation.
Taxable income- pure business or professional income earner
Gross income from business /profession Pxxx
Add : non-operating income xxx
Total gross income Pxxx
Less: allowable deductions xxx
Taxable net income Pxxx
Illustration: Individual Income taxpayer
Case 1 Case 2 Case 3 Case 4
Compensation Income P300,000 P300,000 P300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P 400,000 400,000 200,000
Business expenses 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000
In each of the above case, determine the taxable income
Case 1: a compensation earner with other income
Gross compensation income P 300,000
Less non-taxable income 30,000
Taxable compensation income 270,000
Less allowable deductions 20,000
Net income P290,000
Case2: a business income earner with other income
Gross business income P 400,000
Add : other income 20,000
Taxable compensation income 420,000
Less allowable deductions 250,000
Net income P170,000
Case2: a mixed income earner with other income
Gross compensation income c P300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P270,000
Gross business income P 400,000
Add : other income 20,000
Taxable compensation income 420,000
Less allowable deductions 250,000
Taxable Net income 170,000
Taxable income P 440,000
Case 4: mixed income earner – with net loss on business or profession
Gross compensation income c P300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P270,000
Gross business income P 200,000
Add : other income 20,000
Taxable compensation income 220,000
Less allowable deductions 250,000
Net loss (30,000 )
Taxable income P 270,000
Determination of taxable income of corporate income taxpayer
- Taxable income of corporations is computed in the same manner as pure business or
professional income earners.
Taxpayer using Shall compute taxable income using
GAAP cash basis on a calendar year Tax cash basis on a calendar year
GAAP cash basis on a fiscal year Tax cash basis on a fiscal year
GAAP accrual basis on a calendar year Tax accrual basis on a calendar year
GAAP accrual basis on a fiscal year Tax accrual basis on a fiscal year
Determination of gross income from business or profession
Business selling goods
Sales Pxxx
Less: cost of Goods Sold (cost of Sales) xxx
Gross income Pxxx
Cost of sales- pertains to acquisition cost of goods sold for merchandising or the manufacturing cost in
the case of manufacturing
Cost of sale of a trading business
Beginning inventory Pxxx
Add: Purchases net of returns and allowances P xxx
Freight in xxx xxx
Total available for sale Pxxx
Less: ending inventory xxx
Cost of goods sold Pxxx
Illustration
A taxpayer had the following data for the year:
Gross sales P 4,000,000
Sales discounts 100,000
Sales return 200,000
Beginning inventory 600,000
Purchases 2,500,000
Purchase returns and allowances 150,000
Freight in 200,000
Ending inventory 800,000
Cost of sales shall be computed as follows:
Beginning inventory P 600,000
Add :net purchases (2.5M-P150K) 2,350,000
Freight in 200,000
Total goods available for sale P3,150,000
Less ending inventory 800,000
Cost of sales P2,350,000
The business gross income shall be computed as follows:
Sales (P4M-P100K- P200K) P 3,700,000
Less cost of sales 2,350,000
Gross income P1,350,000
Business selling services
Revenues or gross receipts P xxx
Less :cost of services xxx
Gross income Pxxx
Note: service providers using the accrual basis shall report their revenues while those using the cash
basis shall report their gross receipts or collections.
Cost of services- pertains to all direct cost of rendering the services such as cost of labor, materials and
overhead costs.
Illustration
A practicing auditor had the following income and expenses during the year:
Billing for services rendered P4,500,000
Salaries of audit staff 1,400,000
Salaries of administrative employees 200,000
Transportation expenses to and from clients 12,000
Supplies used in various engagements 250,000
Supplies and general utilities 120,000
Depreciation of office equipment 80,000
Depreciation of laptops issued to audit staff 50,000
Insurance expense of office properties 20,000
Rent expenses allocable to workspaces 400,000
Rent expense allocable to administrative offices 50,000
Bad debt expense on non-paying clients 100,000
Cost of services shall include only those directly incurred or related gross revenue from the rendition of
services:
Salaries of audit staff P1,400,000
Transportation expense to and from clients 12,000
Rental expense on staff workplace 400,000
Supplies used in various engagements 250,000
Depreciation of laptops 50,000
Total cost of services P 2,112,000
Gross income shall be computed as follows:
Revenue P 4,500,000
Less cost of services 2,112,000
Gross income P2,388,000
Reporting format for individuals engaged in business or profession
Net sales/revenues/gross receipts/fees P xxx
Add: other taxable income from operation not subject to final tax xxx
Total sales/revenues/receipt/fees P xxx
Less cost of sales or services xxx
Gross income from business or profession P xxx
Add non-operating income xxx
Total gross income P xxx
Less allowable deductions xxx
Net income P xxx
Revenues - is a general term which pertains to the gross inflow of benefits arising from primary
operations of the business.
Sales - pertains to revenue from the sale of goods commonly used to denote the income
Fees - pertains to revenue from sale of service of taxpayer using the accrual basis
while receipts used to denote income of
taxpayers using the cash basis.
Other taxable income from operations includes revenues or receipts from incidental or secondary
operations aside from primary operations.
1. A school has tuition fess as primary revenue, but its income from its bookstore , canteen or
student dormitories constitute other operating revenues.
2. Manufacturing firm has its gross income from the sale of finished goods as its primary revenue,
but its income from the scrap sales constitute other operating revenues.
3. A private hospital has patient service fee as its primary revenue, but have room rental and sale
of medicines as its other operating income.
4. A dormitory has boarding fees as its primary revenue, but may have laundry fees and canteen
income as other operating revenues.
5. A retail store has its sales of merchandise as its primary revenue, but may earn consignment
commission income as other operating revenues.
6. A bus transport company has the receipt from passengers and baggage as primary revenue , but
may earn income from bus-stop restaurants and wash rooms as other operating revenues.
Non-operating income – includes all other items of gross income such as:
1. Gains from dealings in properties- pertains to sale, exchange and other disposition of properties
by taxpayer
2. Income distribution from a general professional partnership, taxable trust or estate, or from an
exempt joint venture.
3. Casual active income- income from isolated or one-time transactions such as casual carpentry
income of person not engaged in carpentry business.
4. Passive income not subject to final tax
Illustration
Sales, net of return and discounts P 4,000,000
Cost of sales 1,800,000
Dividend income net of final tax 36,000
Business expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap metals 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks directly to a buyer 10,000
Business income of the individual to be presented in the income tax return
Net sales/revenues/receipts/fees P4,000,000
Add: other taxable income from operations-scrap sales 200,000
Total sales/revenues/receipt/fees P 4,200,000
Less cost of sales or services 1,800,000
Gross income from business /profession P 2,400,000
Add: non-operating income
Gain on sale of equipment P100,000
Interest income on employee advances 45,000 145,000
Total gross income P 2,545,000
Less :Allowable deductions( business expenses) 1,600,000
Net income P 945,000
Types of regular income tax
1. Individual income tax
2. Corporate income tax
Income tax table for Individual Taxpayers (2018- 2022)
Taxable income per year Income tax rate
P250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over P250,000
Above 400,000 but not over 800,000 P30,000 + 25% of the excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P 2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
Illustration 1 : Income tax computation
A resident citizen has a compensation income of P1,250,000 within the Philippines and P150,000 from
abroad.
Taxable compensation income P1,400,000
Tax due:
On P800,000 P130,000
Over 800,000 is P600,000 x 30% 180,000
Total income tax due P310,000
Illustration 2:Income tax computation
A resident alien has a net business income of P2,200,000 in the Philippines and P1,250,000 from abroad.
Taxable income P 2,200,000
Tax due:
On 2,000,000 P490,000
Excess of 2,000,000 is 200,000x 32% 64,000
Total income tax due P 554,000
Optional 8% income tax
The TRAIN has introduced an optional income tax for self employed and or professionals of 8%
of sales or receipt and other non-operating income.
The 8% income tax shall be in lieu of the :
a. Progressive income tax computed under individual tax table
b. 3% percentage business tax on sales or receipts.
Corporate Income Tax
- Commonly referred to as the regular corporate income tax, is a proportional or flat tax at a
rate of 30% on taxable income, applies to any corporation other than those:
a. Subject to final tax such as non-resident foreign corporation and FSDU interest interest
income not subject to final ta
b. Special corporations or those subject to preferential tax rate or special regimes
c. Exempt corporations
Illustration
A corporation has net income of P1,200,000 in the Philippines and P800,000 from abroad.
a. Assume the corporation is a domestic corporation, the income tax due shall be computed as
follows:
Taxable income (world) P2,000,000
Multiply by tax rate 30%
Income tax due P 600,000
b. Assuming corporation is a resident foreign corporation, the income tax due is computed as
follows:
Taxable income (Philippines) P1,200,00
Multiply by tax rate 30%
Income tax due P360,000
The minimum corporate income tax (MCIT)
Corporate tax payers are subject to a minimum tax, computed as 2% of total gross income
subject to regular tax.
Special Corporations
- Are those enjoying lower tax rates but not 0%, such as private schools, non-profit hospitals
and PEZA or TIEZA- registered enterprises.
Exempt Corporations
- Are those enjoying 0% tax rate with no tax dues such as government agencies, non-profit
organizations with no taxable income, cooperatives, and those registered with the board of
investments (BOI) enjoying income tax holiday.
Deadline of filing the income tax return
- Annual income tax return is due for filling on the 15 th day of the fourth month following the
taxable year of the taxpayer.
Rounding rules in the income tax return
- If the amount of centavos is 49 or less the centavos are dropped down. If the amount is 50
centavos or more, it is rounded up to the next peso.
Frequency of reporting per taxpayer type
taxpayer Frequency of tax reporting
Individuals annual
Pure compensation income earner Quarterly and annual
Purely engaged in business or profession Quarterly and annual
Mixed income earner Quarterly and annual
corporations Quarterly and annual
Substituted filing system for employees
Pure compensation income earners may be relieved from obligation to file their annual income
tax return if they have no taxable income from other sources other than their lone employer.
ACTIVITIES:
Activity 1 : Read and understand the content of the hand out provided through GC.
Activity 1 : Download BIR form and accomplish the BIR form.
Log in to www.bir.gov.ph and download BIR forms 1700, 1701 & 1701A.
Instruction:
a. Use BIR form 1700 for case 1 (use your name and related information as
taxpayer)
b. Use BIR form 1701A for case 2
c. Submit the accomplished form through GC(AEC 209(Income taxation)).
ASSESSMENT:
A. Alternate response. Write true if the statement is correct and false if otherwise.
1. All taxpayers are subject to final tax.
2. Employed taxpayers can claim expenses from their employment as deductions against their
compensation.
3. The P250,000 income tax exemption for individuals is designed to be lieu of their personal
and business expenses.
4. All taxpayers are subject to regular tax.
5. Non-taxable compensation are items of compensation that are excluded against gross
income.
B. Problem Solving
Mr Good Man owns a night club and videoke bar, with gross sales/ receipts of
P2,500,000.His cost of sales and operating expenses are P1,000,000 and P600,000
respectively, and with non-operating income of P100,000. How much is the income tax due?
ASSIGNMENT:
Research on the exclusions and inclusions from gross income subject to regular income tax
