Republic of the Philippines
North Eastern Mindanao State University
3rd Handout in TAXATION (BAC 3)
INTRODUCTION TO INCOME TAXATION
What is Income Tax?
A direct tax imposed on financial income (profit, salary, rent, etc.) generated
within a taxable period (usually annually).
Legal Basis
Individuals - NIRC Section 24(A) – Graduated tax rates (0% to 35%).
Corporations - NIRC Section 27 – 20% for domestic, 25% for foreign (under
CREATE Act).
Special Cases are the following:
Self-Employed/Professionals: 8% optional tax (if gross sales ≤ ₱3M).
Capital Gains Tax (CGT): 6% on real property, 15% on stocks.
Gross Income vs. Taxable Income
Gross Income (NIRC Sec. 32) - All earnings from any source (whether legal or
illegal, cash or in-kind).
Inclusions:
Salaries, wages, bonuses
Business income
Rental income
Prizes, royalties, dividends
Exclusions (Non-Taxable):
13th Month Pay & Benefits (up to ₱90,000 under TRAIN Law).
Retirement Benefits (if compliant with BIR rules).
Life Insurance Proceeds.
Taxable Income Formula
Taxable Income = Gross Income – (Deductions + Exemptions)
Example:
Gross Income (Freelancer): ₱500,000
Less: Deductions (Optional 40% OSD): ₱200,000
Taxable Income: ₱300,000
Ways to compute Taxable Income
1. Optional Standard Deduction (OSD) Method - A flat 40% deduction from gross
income (business/professional income only).
Poblacion, Lianga, Surigao del Sur 8307
+63 999 663 4946
www.nemsu.edu.ph
Legal Basis: NIRC Sec. 34 (L), as amended by TRAIN Law
Who can use: Self-employed, professionals, mixed-income earners
Key Features:
✅ No receipts needed – Simplifies record-keeping.
✅ Capped at 40% – Regardless of actual expenses.
✅ Cannot combine with Itemized – Must choose one.
Example:
Gross Freelance Income: ₱250,000
OSD (40%): ₱100,000
Taxable Freelance Income: ₱150,000
2. Itemized Deduction Method - Deduct actual business expenses with receipts.
Legal Basis: NIRC Sec. 34(A-J)
Common Deductible Expenses:
Rent, utilities, supplies
Salaries of employees
Depreciation of assets
Key Features:
✅ Potential for higher deductions – If expenses exceed 40% of income.
❌ Requires receipts – BIR may audit supporting documents.
Example:
Gross Freelance Income: ₱250,000
Actual Expenses: ₱80,000 (with receipts)
Taxable Freelance Income: ₱170,000
Comparison: OSD vs. Itemized
Factor OSD (40%) Itemized Deductions
Freelance Income ₱250,000 ₱250,000
Deduction ₱100,000 (auto 40%) ₱80,000 (actual)
Taxable Income ₱150,000 ₱170,000
Low expenses/no High expenses (with
Best For
receipts proofs)
Poblacion, Lianga, Surigao del Sur 8307
+63 999 663 4946
www.nemsu.edu.ph
Cash Basis Method - Income is recognized when received (common for
individuals & small businesses.
Example:
A freelance graphic designer bills a client ₱20,000 in December 2024 but gets
paid in January 2025. Taxable in 2025 (when cash is received).
Accrual Basis Method - Income is recognized when earned (required for
corporations & large businesses).
Example:
A company delivers goods worth ₱100,000 in December 2024 but receives
payment in March 2025. Taxable in 2024 (when obligation arises).
Special Cases (When is Income Taxable?)
Income Type Taxable When? Example
Upon receipt (withheld
Salaries Monthly paycheck
via BIR Form 2316)
Upon invoicing (accrual)
Business Income Sales of a sari-sari store
or payment (cash)
When due or received Apartment rent paid in
Rental Income
(whichever comes first) advance
Over ₱10,000 (TRAIN Lottery winnings of
Prizes & Winnings
Law) ₱50,000
Over ₱250,000 (Donor’s Inheritance from a
Gifts
Tax applies) relative
Special Cases (When is Income Taxable?)
Who is Taxable? (Detailed Classifications)
1. Individuals
Taxpayer Type Tax Rule Example
Taxed on worldwide OFW with PH & foreign
Resident Citizen
income income
Taxed only on PH Filipino working abroad
Non-Resident Citizen
income permanently
Taxed on PH income Foreigner working in PH
Resident Alien
only for >1 year
Taxed only on PH Tourist earning from PH
Non-Resident Alien
income (higher rates) business
2. Corporations
Taxpayer Type Tax Rule Example
20% on global income
Domestic Corp. Jollibee, SM
(CREATE Law)
Foreign Corp. 25% on PH income only Google Philippines
PEZA(Philippine
Economic Zone 5% Special Tax Rate Texas Instruments PH
Authority) Registered
Poblacion, Lianga, Surigao del Sur 8307
+63 999 663 4946
www.nemsu.edu.ph
Who is Exempt?
Individuals:
Minimum Wage Earners (RA 9504).
Senior Citizens (on retirement benefits).
Businesses:
Barangay Micro-Businesses (BMBEs) (RA 9178).
Cooperatives (if registered with CDA).
Practical Applications (Exercises & Case Studies)
Exercise 1: Compute Taxable Income
Maria is a shop owner with:
Gross Sales: ₱2,500,000
Deductions (Receipts): ₱1,000,000
13th Month Pay: ₱80,000
Question: What is her taxable income?
Solution:
Gross Income: ₱2,500,000
Less: Deductions: ₱1,000,000
Less: Exempt 13th Month Pay: ₱80,000 (below ₱90,000)
Taxable Income: ₱1,420,000
Exercise 2: Who Should Pay Tax?
Case A: A freelance writer earning ₱30,000/month - Taxable (Self-Employed – file
BIR Form 1701A)
Case B: A foreign investor earning dividends from PH stocks. - Taxable (15% Final
Tax on Dividends)
Case C: A public school teacher with a ₱25,000 salary. - Taxable but may qualify
for subsistence allowance exemption.
Recent Updates & Compliance Reminders
Ease of Paying Taxes Act (2024):
Staggered deadlines for small businesses.
Reduced penalties for late filing.
BIR’s Digital Transformation:
Mandatory eFPS/eBIRForms for professionals earning >₱3M/year.
Pending Reforms:
Proposed increase in personal exemptions (under Senate Bill 2145).
Poblacion, Lianga, Surigao del Sur 8307
+63 999 663 4946
www.nemsu.edu.ph
COMPREHENSIVE CASE STUDY: INCOME TAXATION IN THE PHILIPPINES
"The Taxing Dilemma of a Young Professional: A Case Study on Income
Recognition and Compliance"
Case Background
Maria Santos, a 30-year-old resident citizen of Quezon City, has the following
income sources in 2024:
Primary Employment:
Senior Accountant at ABC Corporation
Annual Gross Compensation: ₱600,000
Withholding Tax (BIR Form 2316): ₱60,000
Freelance Work:
Online tutoring services
Annual Gross Receipts: ₱250,000
Expenses (receipts available): ₱80,000
Passive Income:
Bank Interest Income: ₱15,000
Dividends from Domestic Corporation: ₱25,000
Other Income:
Prize from writing contest: ₱30,000
Cash gift from parents (wedding gift): ₱500,000
Case Study Questions
Part 1: Income Classification (20 points)
1. Identify which of Maria's income sources are:
a) Taxable
b) Exempt
c) Subject to final tax
d) Subject to donor's tax
2. Explain the tax treatment of her ₱500,000 cash gift from parents.
Part 2: Tax Computation (40 points)
3. Compute Maria's total gross income.
4. Calculate her taxable income using:
a) Optional Standard Deduction (OSD) method
b) Itemized Deduction method
5. Determine which deduction method is more advantageous.
6. Compute her total income tax due using the 2024 graduated rates.
Part 3: Compliance Requirements (20 points)
7. What BIR forms must Maria file?
8. What are the deadlines for each form?
9. If Maria fails to file her taxes on time, what penalties might she face?
Poblacion, Lianga, Surigao del Sur 8307
+63 999 663 4946
www.nemsu.edu.ph
