12

Fundamentals of
Accountancy, Business
and Management 2
Quarter 2 – Module 3
Income and Business
Taxation
Fundamentals of Accountancy, Business and Management 2 –
12
Alternative Delivery Mode
Quarter 2 – Module 3: Income and Business Taxation

First Edition, 2020

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Published by the Department of Education

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Undersecretary: Diosdado M. San Antonio

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Writers: Ma. Fe E. Galia EdD

Editors: Rosalinda G. Butcon
Management Team: Bianito A. Dagatan EdD, CESO V
Schools Division Superintendent

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EPS, Mathematics

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EPS, LRMDS

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Learning Competencies:
Defines income and business taxation and its principles and processes.
(ABM_FABM12-IIh-j-15)

At the end of the lesson, you are expected to:

 identify the different sources of income;
 describe compensation and business income; and
 define income and business taxation and its principles and processes.

Lesson 1: Sources of Income

What is it

Compensation Income Business Income Passive Income Capital Gain

Salaries Income From Interest Sale of Capital
Wages Trading Income Assets (Not
Holiday Pay Income from Royalties an
Sick Leave Pay Merchandising Dividends Inventory/ not
Vacation Leave Pay Income from Prizes used in
Per Diem Manufacturing Winnings business)
Honorarium Professional Sale of Real
Night Shift Differential Income Property
Hazard Pay Income from (Capital Asset)
Commission Farming Sale of Shares of
Allowances Rent Income Stock (sold
Tips Income from outside stock
Bonus Construction exchange)
13th Month Pay Contract
Retirement Pay
Terminal Pay
Pension

List of sources of gross income: (NIRC 1997 Chapter 6 Section 32 A)

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; (Note: subject to 6% capital gains
tax for individuals and for corporation if land and building is not used in
business)
4. Interests; (Note: generally subject to 20% final withholding tax)
5. Rents;
6. Royalties; (Note: generally subject to 20% final withholding tax,10% if from
books and literary works)
7. Dividends; (Note: generally subject to 10% final withholding tax for
individuals, tax exempt for corporation)
8. Annuities;
9. Prizes and winnings; (Note: generally subject to 20% final withholding tax,
except those that are tax exempt based on specific criteria in the law)
10.Pensions; and
11.Partner's distributive share from the net income of the general professional
partnership.
 What’s More

Directions: Match COLUMN A with COLUMN B. Write the letter of the correct
answer in your answer sheet
COLUMN A COLUMN B
1. Salaries a. Capital Gain
2. Income from construction contracts b. Compensation Income
3. Dividends c. Passive Income
4. Sale of capital assets d. Business Income

Lesson 2: Compensation and Business

Income
What is it

Compensation Income

1. Employed individuals that earn compensation income pay their income taxes
monthly. Employers withhold the income tax of their employees from their
monthly gross income and remit these sums to the BIR.

2. Philippine individual income tax is progressive. The tax rate increases as the
tax base increases which means that tax payers with more capacity to pay
will pay more taxes.

3. All individual taxpayers are granted a personal exemption of P 50,000.

Additional exemptions of ₱ 25,000 are given for each qualified dependent but
only up to four dependents. For husband and wives with children, only one
spouse can claim the additional exemption. The husband is deemed head of
the family and will claim the deduction unless he explicitly waves his right in
favor of his wife.

4. Withholding income tax for employees:

- Employers are required by law to withhold income tax dues from their
employees’ salary.
- It is implemented because employees might not have sufficient cash to pay
for
their income tax dues if aggregated to a one time annual payment.
- The withholding tax deduction is computed based on the employee’s gross
compensation (net of mandatory contributions to SSS or GSIS, Philhealth
and
Pag-ibig Fund), tax status, timing of compensation payments and using the
published BIR withholding tax table.

5. Income tax is computed at the end of the year based on all compensation
income derived during the year.
- Taxable income is computed after deducting personal and additional
exemptions.
- Applicable tax rate is applied on the taxable income to get the tax due.
- The total income tax withheld by the employer is deducted from the tax due
to
 get remaining tax liability by the employee.

6. Taxpayers who derive their income solely from compensation are required to
file BIR Form 1700 as their income tax returns. However, to give relief to
these taxpayers, the employee may2present BIR Form 2316 as their income
tax return. BIR Form 2316 is a statement issued by the employer and signed
by the employee but not filed with the BIR. This is referred to as substituted
filing.

Business Income

1. The tax payments of a business organized as a sole proprietorship are made

in the name of its owner. The owner is considered an individual taxpayer who
derived income from business. He is required to file BIR Form 1701.

2. Businesses may settle their income tax liabilities and submit their income tax
returns (tax form) to the government three months and fifteen days from the
close of the year. For a business that follows a calendar year, the date of
settlement is April 15.
- Some businesses pay income tax on a quarterly basis based on their
quarter-end income. Quarterly payments are due sixty days following the
close of the first three quarters of the year
- When the tax due is in excess of ₱ 2,000, the individual taxpayer may elect
to pay the tax in two equal installments. The first installment shall be paid at
the time the return is filed and the second installment is paid on or before
July 15 following the close of the calendar year

3. Two Approaches for the Computation of Income Tax for the Business:
a. Itemized deduction.
Use the itemized expenses in the income statement. The business
should have a complete set of accounting books and supporting
receipts for the deductions that were itemized on the tax form.
b. Optional standard deduction scheme.
Deductions are up to a maximum of 40% of “gross receipts”. “Gross
receipts” is equal to net sales plus other taxable income. This means
that the business taxable income is equivalent to 60% of gross
receipts.

4. “Mixed Income Earner” is a compensation-earner who at the same time is

engaged in business or practice of profession. A taxpayer deriving mixed
income will also use BIR Form 1701.

What’s More

Directions: Fill in the blanks with the correct answer provided below. Use the
answer sheet provided.

ITEMIZED DEDUCTION OPTIONAL STANDARD DEDUCTION SCHEME

MIXED INCOME EARNER BUSINESS INCOME
______1. The business should have a complete set of accounting books and
supporting receipts for the deductions that were itemized on the tax form.
______2. Deductions are up to a maximum of 40% of “gross receipts”.
______3. It is a compensation-earner who at the same time is engaged in business or
practice of profession.
______4. The tax payments of a business organized as a sole proprietorship are
made in the name of its owner.

Lesson 3: Income and Business

3 Taxation

What is it
The form of business you operate determines what taxes you must pay
and how you pay them.

The following are the types of Income taxes.

1. Final withholding tax

- is a kind of withholding tax which is prescribed on certain income
payments and is not creditable against the income tax due of the payee
on other income subject to regular rates of tax for the taxable year.
- Income Tax withheld constitutes the full and final payment of the Income
Tax due from the payee on the particular income subjected to final
withholding tax.

2. Creditable withholding tax

- is similar with final withholding tax in the sense that the payer also
withholds an amount of the payee’s income and pays this to the
government.
- However, this amount withheld is usually just an estimate – the payee is
still required to file an income tax return to report the income and to pay
the difference between the tax withheld and the real amount due on the
income.

3. Annual income tax

- Paid quarterly using BIR form 1702Q and 1702, this is the tax paid on your
net earnings.
- For corporations, note that beginning on the fourth taxable year
immediately following the year in which a corporation commenced
operations, there is a minimum two percent tax on gross income.

The following are the types of business taxes:

1. Value-added tax
- Paid monthly using BIR form 2550M this is the tax charged on the
difference between your acquisition cost (including direct material
expenses) and your selling price.
- The key point here is that the basis will be only on the “value” you added
to your product cost. If you have a large profit margin, you will be paying
more value added tax even if you do not earn any net profit.
 - Companies whose projected sales are expected to be below a certain
amount are exempted from paying value added tax, but they are still
required to pay percentage tax on their sales.
- There are also certain transactions that are Vat -exempt or vat zero-rated.

2. Percentage tax
- Paid monthly using BIR form 2551M, this is the tax you pay if you are not
4
a VAT registered company.
- The amount payable is computed as a percentage of your sales.
- Normally this tax is paid at an authorized bank within the area covered by
the BIR revenue district office (RDO).

3. Excise Tax
- A tax on the production, sale or consumption of a commodity in a country

What’s More

Directions: Identify the BIR Forms used on the different types of taxes listed below.
Write only the letter of the correct answer in the sheet provided.
A. BIR form 2551M B. BIR form 2550M C. BIR form 1702Q D. BIR form 1702
1. Annual income tax (Quarterly)
2. Annual income tax (Annually
3. Percentage tax
4. Value-added tax

Assessment

Directions: Write the letter of the correct answer in the answer sheet provided
below:
1-5. Identify whether the sources of income mentioned below belongs to:
A. Business Income B. Capital Gain C. Compensation Income D. Passive Income
1. Income from Farming
2. Royalties
3. Holiday Pay
4. Sale of Real Property
5. Allowances
6. It is when the tax payments of a business organized as a sole proprietorship are
made in the name of its owner.
A. Itemized Deduction B. Optional Standard Deduction Scheme
C. Mixed Income Earner D. Business Income
7. It is when deductions are up to a maximum of 40% of “gross receipts”.
A. Itemized Deduction B. Optional Standard Deduction Scheme
C. Mixed Income Earner D. Business Income
8. If the amount payable is computed as a percentage of your sales, the tax is
______.
A. Annual Income Tax B. Excise Tax C. Percentage Tax D.Value-Added
Tax
9. The basis for computing tax is only on the “value” you added to your product
cost.
A. Annual Income Tax B. Excise Tax C. Percentage Tax D.Value-Added
Tax
10. In this type of tax, the corporations at the beginning on the fourth taxable year
following the year of its operations, is charge a minimum two percent tax on gross
income.
A. Annual Income Tax B. Final Tax C. Percentage Tax D.Value-Added Tax

Answer Sheet
FABM
5 2

Name: __________________________________________________________
Grade & Section: ________________ Score: _______

Quarter 2 – Module 3

Lesson 1 Lesson 3
What’s More What’s More
1. 1.
2. 2.
3. 3.
4. 4.

Lesson 2
What’s More
1.
2.
3.
4.

Assessment
1. 6.
2. 7.
3. 8.
4. 9.
5. 10
 Answer Key

Quarter 2 -6Module 3

Lesson 1 Lesson 3

What’s More What’s More

1. b 1. D
2. d 2. C
3. c 3. A
4. a 4. B

Lesson 2

What’s More

1. ITEMIZED DEDUCTION
2. OPTIONAL STANDARD DEDUCTION SCHEME
3. MIXED INCOME EARNER
4. BUSINESS INCOME

Assessment
1. A 6. A
2. D 7. D
3. C 8. C
4. B 9. D
5. C 10. A

References

Teaching Guide for Senior High School FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS, AND MANAGEMENT 2.

Florecer L Ong, et. al 2017. Fundamentals Of Accountancy, Business, And

Management 2 For Senior High School. Quezon City. C & E PUBLISHING, INC.