MISAMIS ORIENTAL INSTITUTE OF SCIENCE AND TECHNOLOGY

Sta. Cruz, Cogon, Balingasag, Misamis Oriental

COLLEGE OF BUSINESS ADMINISTRATION

INCOME TAXATION

MODULE 3

REGULAR INCOME TAX

CHARACTERISTICS OF REGULAR INCOME TAX

A. General in coverage – The regular income tax applies all items of income except those that
are subject to final tax, capital gains tax, and special tax regimes.

B. Net income taxation- The regular tax is an imposition on residual profits or gains after
deductions for expenses and personal exemption allowable by law.

C. Annual Income tax – The regular income tax applies on yearly profits or gains. The gross
income and expenses of the tax payer are measured using the accounting methods adopted
by the taxpayer and are reported to the government over the accounting period selected by
the tax payer.

D. Creditable withholding tax- Most items of regular income are subject to creditable
withholding tax (CWT) . These creditable withholding taxes are advanced taxes that must be
deducted against regular tax due in computing the tax still due to the government.

E. Progressive or Proportional tax – The NIRC imposes a progressive tax on the taxable
income of individuals while it imposes a flat or proportional tax of 30% upon the taxable
income of corporations. Note that the revision of the corporate income tax in the second
package of the TRAIN LAW proposes 25% corporate income tax.

THE REGULAR INCOME TAX MODEL

Gross Income – Inclusions Php xxx,xxx

Less: Allowable deductions xxx,xxx
Taxable Income Php xxx,xxx
GROSS INCOME - constitutes all items of income that are neither excluded in gross income nor
subjected to final tax or capital gains gains tax.

EXCLUSIONS FROM GROSS INCOME (exempt from taxation)

(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the
death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer
under an agreement to pay interest thereon, the interest payments shall be included in gross income.

(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a
return of premiums paid by him under life insurance, endowment, or annuity contracts, either during
the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

(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.

(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or
under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the
amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness.

(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, etc.-

INCLUSION, meaning they are part of the gross income and are hence taxable:

Under Section 32 (A), Except when otherwise provided in this Title, gross income means all income
derived from WHATEVER SOURCE, including, but not limited to the following items:

(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the general professional partnership.
Thus, the pertinent items of gross income when earned by an RC (within and without), NRC (within), RA
(within), NRAETB (within) shall be reported and shall form part of their income. Please take note that
Tax Code did not distinguish the source of the income. The definition did simply provide for WHATEVER
SOURCE. So this means that the income even proceeding from illegal sources like illegal gambling,
bribes, kickbacks is still taxable and needs to be reported in the Income Tax Return.

EXCLUDED INCOME vs. EXEMPT INCOME

Excluded income is also exempt income. Excluded income are those listed by the NIRC as
exempt income from regular tax. The term exempt income includes all income exempt from
income exempt from income tax whether final tax, capital gains tax or regular income tax.
Exclusions from gross income are listed in the NIRC. Exemption from income may be provided
by the NIRC or special laws.

ALLOWABLE DEDUCTIONS
Allowable deductions, or simply “deductions” are expenses of the conduct of business or
exercise of profession. They are commonly known as business expenses.

For Individual taxpayers, there is a need to note the difference between business expenses and
personal expenses. Personal Expenses or those that an individual spends are not connected to
furtherance, maintenance or development of his trade, business or profession are non-
deductible against gross income.

Individuals that are not engage in business cannot claim deductions from gross income.
Consequently, individuals are classified as follows;

1. Pure compensation income earner

2. Pure business or professional income earner
3. Mixed income earner – an individual earning both compensation and business or
professional income.

NOTE on PERSONAL EXEMPTION

The law provides for personal exemption of income or individual taxpayers. The amount of
personal exemption depends on the number of dependents who are supported by the
taxpayer. Personal exemption is in lieu of personal, living , family expenses of an individual
taxpayer. Personal exemption is repealed effective January 1, 2018.

In an effort the simply tax system, the TRAIN law simply exempts P250,000 annual income of
the individual taxpayers. As such, there is no need to separately deduct personal exemption.
HOW TO DETERMINE TAXABLE INCOME

Taxable Income of Individual Income Taxpayers

The taxable income of individuals taxpayers is computed using the Classification and
Globalization rule.

Classification Rule
Gross Income is classified into:
a. Compensation Income
b. Business or Professional income

Compensation income vs. Business Income

Compensation income arises from an employer-employee relationship. This relationship is
characterized by a power to retrench giving the purchaser of the service to terminate the
arrangement when he is losing in business. Business income arises from selling of goods or
rendering of services for a profit. In service arrangements where the purchaser of the service
has no power to retrench , the income realized thereon is a business income.

Treatment of other Income

Income that are neither compensation income nor business income such as those passive
income are simply classified as “other taxable income” and are added to gross income from
business and profession.

Allowable Deductions
Business expenses are deducted against gross income from Business or profession. No
deduction is allowed against compensation income since personal expenses of individuals for
cost of living are deemed to be included in the P250,000 blanket exemption in the income tax
table.

Other income which is neither compensation nor business or professional income is simply
added to total gross income from business or profession as “ Non-operating income”. If the
taxpayer has no business or professional income, the same shall be added to taxable
compensation as “other income”.

Taxable income of pure compensation income earner

The taxable compensation income of employees is computed as follows:

Gross compensation income P xxx,xxx

Less: Non-taxable compensation xxx,xxx
Taxable compensation income P xxx,xxx

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 of pure business or professional income earner
The taxable compensation income of employees is computed as follows:

Gross Income from business/profession P xxx,xxx

Add: Non-operating income xxx,xxx
Total Gross Income P xxx,xxx
Less: Allowable deductions xxx,xxx
Taxable net income P xxx,xxx

Globalization rule for mixed income earner

The income of mixed income earner from both sources is simply globalized or totaled. A
negative net income or net loss when deductions exceeds gross income from business or
profession shall not be offset against taxable compensation income because deductions are
expenses of business or profession and are properly deductible only against gross income
thereto whereas no expense is deductible against taxable compensation income.

Illustration : Individual Income Taxpayer

Case 1 Case 2 Case 3 Case 4

Compensation P 300,000 P 300,000 P 300,000
Income
Non-taxable 30,000 30,000 30,000
compensation
Gross business P 400,000 400,000 200,000
income
Deductions 250,000 250,000 250,000
Other Income 20,000 20,000 20,000 20,000

Taxable income shall be determined in each of the above case as follows;

Case 1: A compensation earner with other income

Gross compensation income P 300,000

Less: Non-taxable compensation 30,000
Taxable compensation income 270,000
Add: Other gross income 20,000_
Taxable income P 290,000

Case 2 : A business income earner with other income

Gross business income P 400,000

Add: Other gross income 20,000__
Total Gross income 420,000
Less: Allowable deductions 250,000_
Net Income P 170,000