INCOME AND BUSINESS TAXATION

Objectives:
1. Define income and business taxation and its
principles and processes.
2. Explain the principles and purposes of taxation
3. Prepare the list of sources of gross income from
compensation and gross income from business, and
the corresponding personal and additional
deductions.
 MOTIVATION
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 PRINCIPLES OF TAXATION
All earnings citizens of the
Philippines, whether from
compensation or business, are
required to pay taxes. Taxes are
revenue of the government that funds
government expenditures and programs.
 PRINCIPLES OF TAXATION
✔ National Internal Revenue Code of 1997 -
Governing tax law in the Philippines

✔ Bureau of Internal Revenue (BIR) - is the

primary implementing agency of NIRC.
 TAXATION
is the process by which the
government collects revenue in
order to pay for its expenses.

INCOME TAX
is defined as the tax on the net
income or the entire income realized
in one taxable year.
Who are required to pay income tax in the
Philippines? Sec. 23 of the NIRC of 1997
❖ A citizen of the Philippines, living
in the Philippines, is taxable on all
income earned inside and outside
the Philippines;
❖ A non-resident citizen is taxable
only on income earned in the
Philippines;
Who are required to pay income tax in the
Philippines? Sec. 23 of the NIRC of 1997
❖ An OFW is taxable only on
income earned in the
Philippines;
❖ A foreigner living in the
Philippines is taxable only on
income earned in the
Philippines;
Who are required to pay income tax in the
Philippines? Sec. 23 of the NIRC of 1997
❖ A domestic corporation is
taxable on all income derived from
sources inside and outside the
Philippines;
❖ A foreign corporation is taxable
only on the income derived inside
the Philippines;
 SOURCES OF GROSS INCOME
(NIRC 1997 Chapter 6 Section 32 A)
❑ Compensation for services in
whatever form paid, including, but
not limited to fees, salaries, wages,
commissions, and similar items;
❑ Gross income derived from the
conduct of trade or business or the
exercise of a profession;
 SOURCES OF GROSS INCOME
(NIRC 1997 Chapter 6 Section 32 A)
❑ Gains derived from dealings in
property; (subject to 6% capital
gains tax for individuals and for
corporation if land and building is
not used in business) ;
❑ Interests; (subject to 20% final
withholding tax)
 SOURCES OF GROSS INCOME
(NIRC 1997 Chapter 6 Section 32 A)
❑ Rents;
❑ Royalties; (subject to 20% final
withholding tax,10% if from books
and literary works)

❑ Annuities;
 SOURCES OF GROSS INCOME
(NIRC 1997 Chapter 6 Section 32 A)
❑ Dividends; (subject to 10% final
withholding tax for individuals, tax
exempt for corporation)
❑ Prizes and winnings; (subject to 20%
final withholding tax, except those that
are tax exempt based on specific
criteria in the law)
 SOURCES OF GROSS INCOME
(NIRC 1997 Chapter 6 Section 32 A)
❑ Pensions; and

❑ Partner's distributive share from the

net income of the general
professional partnership.
 COMPENSATION INCOME
Employed individuals that earn
compensation income pay their
income taxes monthly.
Philippine individual income tax is
progressive. The tax rate increases
as the tax base increases.
 COMPENSATION INCOME
✔ 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
 COMPENSATION INCOME
Withholding income tax for employees:

Employers are required by law to

withhold income tax dues from their
employees’ salary
 COMPENSATION INCOME
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
 TAXABLE INCOME & TAX DUE
Compensation Income:
Gross Compensation Income from present employer (salary & other xxx
bonuses)
Less: Statutory Contributions (SSS or GSIS, Philhealth, and Pag-IBIG xxx
Fund)
Gross compensation, net of statutory payments xxx
Less: 13th month pay and other bonuses that are exempted from xxx
income tax
Net taxable compensation income xxx
 COMPENSATION INCOME
Income tax is computed at the end of the year
based on all compensation income derived
during the year:
Taxable income is equal to final taxable
compensation income.
Applicable tax rate is applied on the taxable
income to get the tax due.
 COMPENSATION INCOME
Income tax is computed at the end of the year
based on all compensation income derived
during the year:
The total income tax withheld by the
employer is deducted from the tax due to
get remaining tax liability by the employee
 COMPENSATION INCOME
❑ Taxpayers who derive their income
solely from compensation are
required to file BIR Form 1700 as
their income tax returns.
❑ the employee may present BIR
Form 2316 as their income tax
return
 COMPENSATION INCOME
❑ Non Taxable Income Philippines
According to Republic Act No.10653,
th
13 month pay, productivity
incentives, Christmas bonus and
other benefits shall not be included in
gross income and shall be exempt
from taxation. The total exclusion
shall not exceed ninety thousand
TAX TABLE
 Example
An employees salary per month is P40,000. Assuming that he is married with
two qualified dependents, his withholding income tax is computed as follows:

Monthly Gross Pay P40,000

Multiply by number of months in a year x 12
Annual Gross Pay Subjects to tax P480,000

Estimated annual income tax per individual income tax rate

Basic tax – First P400,000 P30,000
Additional tax – 25% of the excess over P400,000 20,000
Estimated Annual Income tax P50,000
Divided by number of months in a year 12
Approximate monthly withholding tax P4,166.67
 BUSINESS INCOME
The tax payments of a
business organized as a sole
proprietorship are made in the
name of its owner
He is required to file BIR Form
1701
 BUSINESS INCOME
✔ Filing of Income Tax Returns for Business or
Practice of Profession:
First Quarter return On/before May 15 of the CY
Second Quarter return On/before Aug.15 of the CY
Third Quarter return On/before Nov.15 of the CY
Final or Annual Return On/before May 15 of the
succeeding year
 3. SSS, GSIS, Medicare, HDMF and other contributions
4.
5.
Allowable
Commissions
Outside services
Deductions & Business Expenses
6. Advertising
7. Rental
8. Insurance
9. Royalties
10. Repairs & Maintenance
11. Representation & Entertainment
12. Transportation & Travel
13. Fuels & Oil
14. Communication, Light & Water
15. Supplies
16. Interest
17. Taxes and Licenses
18. Losses
19. Bad Debts
20. Depreciation
21. Amotization of Intangible
 TAXABLE INCOME & TAX DUE
Business Income:
Total revenues (Sales,Receipts, Revenues Professional Fee, xxx
etc)
Less: Total expenses (Cost of Goods Sold, Operating xxx
Expenses)
Gross Taxable Business/Professional Income xxx
Add: Other Taxable Income xxx
Total xxx
Less: Allowable Deductions xxx
Taxable Business Income xxx
 BUSINESS INCOME
Two approaches for the
computation of income tax for the
business:
1. Itemized deduction
2.Optional standard
deduction scheme
 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.
OPTIONAL STANDARD DEDUCTION
❑ 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.
OPTIONAL STANDARD DEDUCTION
❑ Illustration 1
Ms. Pakipot is a prominent independent
contractor who offers architectural and
engineering services. Since RSV’s career
flourished, her total gross receipts amounted to
P4,250,000 for taxable year 2020. Her recorded
cost of service and operating expenses were
P2,150,000 and P1,000,000, respectively. She
opted to avail of the 40% OSD.
OPTIONAL STANDARD DEDUCTION
❑ OSD will be computed as follows:
Gross receipts P4,250,000
Multiply by OSD rates 40%
Deductible OSD P1,700,000

Gross receipts P4,250,000

Less: OSD 1,700,000
Net taxable income P2,550,000

Income tax due:

On P2,000,000 P490,000
On excess(P2,550,000-2,000,000)x32% 176,000
Tax Due P666,000
 TAXABILITY OF SELF-EMPLOYED INDIVIDUALS EARNING INCOME
PURELY FROM SELF-EMPLOYMENT OR PRACTIVE OF PROFESSION

“Individuals earning income purely from self-employment and/or practice of

profession whose gross sales/receipts and other non-operating income does
not exceed the value added tax (VAT) threshold as provided under Section 109
(BB) of the Tax Code, as amended, shall have the option to avail of:
1. The graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended;
OR
2. An eight percent (8%) tax on gross sales or receipts and other non-operating
income in excess of two hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Section 24(A) and the percentage tax under
Sections 116 all under the Tax Code, as amended.
 TAXABILITY OF SELF-EMPLOYED INDIVIDUALS EARNING INCOME
PURELY FROM SELF-EMPLOYMENT OR PRACTIVE OF PROFESSION

A taxpayer who signifies intention to avail of the 8%

income tax rate option, and is conclusively qualified for
said option at the end of the taxable year [annual gross
sales/receipts and other non-operating income did not
exceed the VAT threshold (P3,000,000)] shall compute
the final annual income tax due based on the actual
annual gross sales/receipts and other non-operating
income.
 TAXABILITY OF SELF-EMPLOYED INDIVIDUALS EARNING INCOME
PURELY FROM SELF-EMPLOYMENT OR PRACTIVE OF PROFESSION

A taxpayer shall automatically be subject to the graduated rates

under Section 24(A)(2)(a) of the Tax Code, as amended, even if
the flat 8% income tax rate option is initially selected, when
taxpayer’s gross sales/receipts and other non-operating income
exceeded the VAT threshold during the taxable year. In such
case, his income tax shall be computed under the graduated
income tax rates and shall be allowed a tax credit for the
previous quarter/s income tax payment/s under the 8% income
tax rate option.
 ILLUSTRATION
Ms.Virusa operates a convenience store while she
offers bookkeeping services to her clients. In 2019,
her gross sales amounted to P1,000,000.00. In
addition to her receipts from bookkeeping services
of P500,000.00. She already signified her intention
st
to be taxed at 8% income tax rate in her 1 quarter
return.
ILLUSTRATION
 ILLUSTRATION
Ms. Virusa, failed to signify her intention to be
taxed at 8% income tax rate on gross sales in her
initial Quarterly Income Tax Return, and she
incurred cost of sales and operating expenses
amounting to P700,000 and P300,000, respectively,
or a total of P1,000,000, the income tax shall be
computed as follows:
ILLUSTRATION
 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.
 MIXED INCOME EARNER
For mixed income earners, the income
tax rates:
1. The compensation income shall be
subject to the tax rates prescribed
under Section 24(A)(2)(a) of the Tax
Code, as amended; and
 MIXED INCOME EARNER
For mixed income earners, the income tax rates:
2. The income from business or practice of profession shall be subject
to the following:
a. If the gross sales/receipts and other non-operating income do not
exceed the VAT threshold, the individual has the option to be taxed at:
a.1 Graduated income tax rates prescribed under Section 24(A)(2)(a)
of the Tax Code, as amended; OR
a.2 Eight percent (8%) income tax rate based on gross sales/receipts
and other non-operating income in lieu of the graduated income tax
rates and percentage tax under Section 116 of the Tax Code, as
amended.
 MIXED INCOME EARNER
For mixed income earners, the income tax
rates:
b. If the gross sales/receipts and other
non-operating income exceeds the VAT
threshold, the individual shall be subject to the
graduated income tax rates prescribed under
Section 24(A)(2)(a) of the Tax Code, as
 MIXED INCOME EARNER

Self-Employed and Professional Taxpayer (SEPs) who are also earning

compensation income shall be subject to:
• On Compensation Income - graduated income tax (IT) schedule
• On Income from Business or Practice of Profession -
-If Gross Sales and/or Gross Receipts and other Non-Operating
Income do not exceed P3,000,000 - either 8% fixed tax or
graduated IT schedule.
-If Gross Sales and/or Gross Receipts and other Non-Operating
Income exceed P3,000,000 – graduated IT schedule.
 MIXED INCOME EARNER
✔ Taxable Income Computation:
Taxable Compensation Income Pxxx

Sales/Receipts/Revenues/Fees Pxxx
Less:Cost of Sales/Services xxx
Gross Taxable Business/Professional Income Pxxx
Add: Other Taxable Income xxx
Total Pxxx
Less:Allowable Deductions xxx
Taxable Business Income Pxxx

Total Taxable Income(TCI+TBI) Pxxx

TAX TABLE
 MIXED INCOME EARNER
✔ Illustration:
Mr. Corona Prince, a Financial comptroller of COVI Company,
earned annual compensation in 2019 of P1,500,000.00
th
inclusive of 13 month and other benefits in the amount of
P120,000.00 but net of mandatory contributions to SSS and
Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His cost of
sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of
P100,000.00.
 MIXED INCOME EARNER

a. His tax due for 2019 shall be computed as

follows if he opted to be taxed at eight percent
(8%) income tax rate on his gross sales for his
income from business:
MIXED INCOME EARNER
 MIXED INCOME EARNER

b. His tax due for 2019 shall be computed as

follows if he did not opt for the eight percent
(8%) income tax based on gross sales/receipts
and other non-operating income
MIXED INCOME EARNER
 INDIVIDUALS NOT REQUIRED TO FILE
INCOME TAX RETURN

a. An individual earning purely compensation

income whose taxable income does not
exceed Two Hundred Fifty Thousand Pesos
(P250,000).
 INDIVIDUALS NOT REQUIRED TO FILE
INCOME TAX RETURN

b. An individual whose income tax has been

correctly withheld by his employer.
c. An individual whose sole income has been
subjected to final withholding tax; and
d. A minimum wage earner
 EXAMPLE

Yassi De Coco generated annual compensation income

of P615,000. Statutory payments are as follows: SSS – P
6,975.60; Philhealth - P 5,250; Pag-ibig Contribution – P
1,200. Total: P 13,425.60 Tax exempt 13th month pay
and other bonuses – P 50,000. (Note: Maximum tax
exempt 13th month and other bonuses is P 82,000 per
Revenue Regulation 3-2015)
 BUSINESS INCOME

James Blue is the owner-manager of JBA

Trading Company. Total Sales generated during
the year amounted to P 1,230,000. Cost of
goods sold is P 492,000 and total operating
expenses is P 184,500. The company opted for
itemized deduction.
 MIXED INCOME
Lucky My, a married man with two qualified dependents,
generated income from the following sources:
Compensation income:
a. Annual compensation income generated was P 555,000.
b. Statutory payments are as follows: SSS – P 6,975.60;
Philhealth - P 5,250; Pag-ibig Contribution – P 1,200.
Total: P 13,425.60
c. Tax exempt 13th month pay and other bonuses –
P60,000.
d. Employer withheld P 89,471.16
 MIXED INCOME

Professional income:
a. Consultancy services earned P 1,230,000.
Clients withheld P 61,500 and provided
creditable income tax withheld tax return.
b. He has no record of the receipts of his
expenses. He opted for standardized
deductions.
 PRACTICE
Mr. Covidio, a citizen and resident of the Philippines
married to Mrs. Covidio had the following data for
2020:
 PRACTICE

Compute the following assuming the couple decided

to use the graduated tax rate:
1. Taxable Income of Mr. Covidio
2. Taxable Income of Mrs. Covidio
3. Income tax still due (refundable) of Mr. Covidio
4. Income tax still due (refundable) of Mrs. Covidio
 MIXED INCOME EARNER
✔ Illustration:
Mr. Corona Prince, a Financial comptroller of COVI Company,
earned annual compensation in 2019 of P1,500,000.00
th
inclusive of 13 month and other benefits in the amount of
P120,000.00 but net of mandatory contributions to SSS and
Philhealth. Aside from employment income, he owns a
convenience store, with gross sales of P2,400,000. His cost of
sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of
P100,000.00.
 PRACTICE

On Feb. 2020, taxpayer tendered his resignation to

concentrate on his business. His total compensation
income amounted to P150,000, inclusive of benefits
of P20,000. His business operations for taxable year
2020 remains the same. He opted for the eight
percent(8%) income tax rate. Compute for the total
income tax due.
Thank You!