Income Tax
Definition of Terms
• Gross income - constitutes all items of income that are
neither excluded in gross income nor subjected to final
tax or capital gains tax.
• Exclusions from Gross Income - pertains to items that are
excluded; hence exempt from regular income tax. They
are specifically listed by the NIRC as exempt income from
RIT.
• Exempt Income - all exempt income from income tax
whether final tax, capital gains tax or regular income tax.
They may be provided by the NIRC or special laws.
Definition of Terms
• Allowable Deductions - expenses of the conduct of business or
exercise of profession. Commonly known as business expenses.
• Personal expenses - those an individual spends that are not
connected to the business, therefore, non-deductible.
• Compensation income - income from employer-employee
relationship
• Business income - income from selling of goods and services
• Other income or other taxable income - income that are neither
compensation income nor business income such as passive
income. “added to the gross income”
Illustration
Compensation Income
Non-taxable compensation
Gross business income
Deductions
Other Income
Case 1
₱ 300,000.00
30,000.00
20,000.00
Case 2
Case 3
Case 4
₱ 300,000.00 ₱ 300,000.00
30,000.00
30,000.00
400,000.00
400,000.00
200,000.00
250,000.00
250,000.00
250,000.00
20,000.00
20,000.00
20,000.00
Case1: Acompensation earner with other income
Gross Compensation Income
Less: Non-taxable Compensation
Taxable Compensation Income
Add: Other Gross Income
Taxable Income
300,000.00
30,000.00
270,000.00
20,000.00
290,000.00
Illustration
Compensation Income
Non-taxable compensation
Gross business income
Deductions
Other Income
Case 1
₱ 300,000.00
30,000.00
20,000.00
Case 2
Case 3
Case 4
₱ 300,000.00 ₱ 300,000.00
30,000.00
30,000.00
400,000.00
400,000.00
200,000.00
250,000.00
250,000.00
250,000.00
20,000.00
20,000.00
20,000.00
Case 2: A business income earner with other income
Gross business income
Add: Other gross income
Total gross income
Less: Allowable deductions
Net income
400,000.00
20,000.00
420,000.00
250,000.00
170,000.00
Illustration
Compensation Income
Non-taxable compensation
Gross business income
Deductions
Other Income
Case 1
₱ 300,000.00
30,000.00
20,000.00
Case 2
Case 3
Case 4
₱ 300,000.00 ₱ 300,000.00
30,000.00
30,000.00
400,000.00
400,000.00
200,000.00
250,000.00
250,000.00
250,000.00
20,000.00
20,000.00
20,000.00
Case 3: A mixed income earner with other income
Gross Compensation Income
300,000.00
Less: Non-taxable Compensation
30,000.00
Taxable Compensation Income
270,000.00
Gross business income
Add: Other Gross Income
Total gross income
Less: Deductions
Taxable net income
Taxable Income
170,000.00
440,000.00
400,000.00
20,000.00
420,000.00
250,000.00
Illustration
Compensation Income
Non-taxable compensation
Gross business income
Deductions
Other Income
Case 1
₱ 300,000.00
30,000.00
20,000.00
Case 2
Case 3
Case 4
₱ 300,000.00 ₱ 300,000.00
30,000.00
30,000.00
400,000.00
400,000.00
200,000.00
250,000.00
250,000.00
250,000.00
20,000.00
20,000.00
20,000.00
Case 4: A mixed income earner with net loss on business/profession
Gross Compensation Income
300,000.00
Less: Non-taxable Compensation
30,000.00
Taxable Compensation Income
270,000.00
Gross business income
Add: Other Gross Income
Total gross income
Less: Deductions
Net loss
Taxable Income
200,000.00
20,000.00
220,000.00
250,000.00
(30,000.00)
270,000.00
Note: A net loss may be carried over as deduction against the
net income of the succeeding three years. (NOLCO)
Income Tax Due Computation
Income Tax Due Computation
Case 1
Taxable Income
Lower limit
Excess at 20%
Income Tax Due
290,000.00
250,000.00
20,000.00
4,000.00
4,000.00
Income Tax Due Computation
Case 2
Taxable Income
170,000.00
None
Income Tax Due Computation
Case 3
Taxable Income
Lower limit
Excess at 25%
Income Tax Due
440,000.00
400,000.00
40,000.00
30,000.00
10,000.00
40,000.00
Income Tax Due Computation
Case 4
Taxable Income
Lower limit
Excess at 20%
Income Tax Due
270,000.00
250,000.00
20,000.00
4,000.00
4,000.00
Exercise
• Compute for the
income tax due if
the taxable
income is:
1. P 988,000
2. P 5,745,900
3. P 10,300,500
4. P 608,000
5. P 251,000
Assignment
1.
2.
3.
4.
What are the different income tax returns (BIR Forms)?
When is the deadline of filing the income tax return?
What are the rounding rules in the income tax returns?
When is the deadline of the quarterly income tax returns
for individuals?
5. What is the substituted filing system for employees?
Illustration
An individual taxpayer who is using accrual basis in his
manufacturing business reported the following results of
operations in the preceding year:
Sales, net of returns and discounts
Cost of Sales
Dividend income, net of final tax
Business Expenses
Gain on sale of old equipment
Sale of scrap metals
Interest income on employee advances
Gain on sale of domestick stocks directly to a buyer
P
4,000,000
1,800,000
36,000
1,600,000
100,000
200,000
45,000
10,000
Net Sales
Add: Other Taxable Income from operations - Scrap Sales
Total Sales
Less: Cost of Sales
Gross Income from Business/Profession
Add: Non-operating income
Gain on sales of equipment
100,000.00
Interest income on employee advances
45,000.00
Total Gross Income
Less: Allowable deductions (Business Expenses)
Net Income
4,000,000.00
200,000.00
4,200,000.00
1,800,000.00
2,400,000.00
145,000.00
2,545,000.00
1,600,000.00
945,000.00
Income Tax Due (using the graduated income tax rate)
Net Income
For the First P800,000
Excess of P800,000 @ 30%
Income Tax Due
945,000.00
800,000.00
145,000.00
Tax due is
130,000.00
43,500.00
173,500.00
The Optional 8% Income Tax
• Self-employed and professionals (SEP) can opt to be
taxed at 8% of sales or receipt and other non-operating
income.
• The 8% income tax shall be in lieu of the:
– Progressive income tax, computed under the individual tax
table; and
– 3% percentage business tax on sales or receipts
• The 8% income tax is a form or a bundled tax which
enables one-time compliance for two taxes which would
otherwise require separate filing and payment.
Net Sales
Add: Other Taxable Income from operations - Scrap Sales
Gross Income from Business/Profession
Add: Non-operating income
Gain on sales of equipment
100,000.00
Interest income on employee advances
45,000.00
Total
Less: Annual Exempt Income
Net Total
Multiply by: Optional income tax rate
8% Income Tax
4,000,000.00
200,000.00
4,200,000.00
145,000.00
4,345,000.00
250,000.00
4,095,000.00
8%
327,600.00
Assuming the taxpayer is a corporation
Net Sales
Add: Other Taxable Income from operations - Scrap Sales
Total Sales
Less: Cost of Sales
Gross Income from Business/Profession
Add: Non-operating income
Gain on sales of equipment
100,000.00
Interest income on employee advances
45,000.00
Total Gross Income
Less: Allowable deductions (Business Expenses)
Net Income
4,000,000.00
200,000.00
4,200,000.00
1,800,000.00
2,400,000.00
145,000.00
2,545,000.00
1,600,000.00
945,000.00
Assuming the taxpayer is a corporation
Income Tax Due (using the graduated income tax rate)
Net Income
Tax Rate
Income Tax Due
945,000.00
30%
283,500.00
Practice
An individual taxpayer who is using accrual basis in his
manufacturing business reported the following results of operations
in the preceding year:
Sales, net of returns and discounts
Cost of Sales
Royalties, net of final tax
Business Expenses
Gain on sale of old equipment
Interest income on employee advances
P
3,000,000
2,100,000
36,000
1,900,000
100,000
65,000
Compute for the taxable income and the income tax due using the
graduated rates.