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FABM2 Q2 MOD3 Income and Business Taxation 1
FABM2 Q2 MOD3 Income and Business Taxation 1
Accounting, Business
and Management 2
Quarter 2 – Module 3:
Income and Business Taxation
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From the last module, we have understood the bank reconciling items. These items
are important in preparing for bank reconciliation statement.
1. Define income and business taxation and its principles and processes.
(ABM_FABM12-IIh-j-15)
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What I Know
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Income is one way a person strives to have because he/she must live with every
day’s expenditure, too. To cope, one must be employed and/or engage in business
to gain income. Just as that of the government, to improve the economy, it needs
funds to finance infrastructures, social developments, and maintenance of public
security. These government funds come from the collection of taxes from its
citizens.
Just like that of an employee being paid by the employer for its job performance,
citizens pay taxes to government and the government provides services in return.
Government, for example, collects taxes on employees to cover their health
insurances, retirement pays and social security, and on business in exchange for
excellent infrastructures and economic security.
But collecting from its citizens cannot be as easy as demanding a portion from their
hard-earned money and expect to be given. This is the reason there is an
established law to regulate the collection of taxes and that taxes will be put to its
purpose.
Business Taxation
Business taxation is the process of collecting taxes from the activities of a business
organization. Examples are value-added tax (VAT), corporate tax, and income tax.
For this module, the lesson will focus on income tax.
Income Taxation
Income Tax is a tax on a person's income, emoluments, profits arising from
property, practice of a profession, conduct of a trade or business or on the
pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as
amended, less the deductions if any, authorized for such types of income, by the
Tax Code, as amended, or other special laws (Bureau of Internal Revenue n.d.).
2. The gain must be realized or received. – The gain does not have to be
received. Realized gain happens when a seller fulfills a transaction and is
expecting payment from the buyer.
Example: A piece of land is sold, and the buyer will pay on a future date.
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Received gain happens when the buyer pays for a transaction.
Example: A piece of land is sold, and the buyer pays the full amount.
3. The gain must not be excluded by law from taxation. – there is income which
are excluded from being taxed. These are enumerated in Sec. 32B of the
National Internal Revenue Code. Some examples are life insurance proceeds,
prizes and awards in sports competition (for national or international
athletes) and 13th month pay and other benefits not exceeding P90,000
(National Internal Revenue Code (As Amended by RA 10963) n.d.). Unless the
gains received or realized do not belong to the list under Sec 32B, these
gains are taxable.
Corporations are juridical persons which also possesses rights and responsibilities
as that of an individual person. Their taxes are imposed on the net income of the
business.
a. Compensation Income
Income received from working as an employee in different companies. This
comes in the form of salaries and wages, bonuses, and allowances.
b. Business Income
Income generated from the conduct of business or profession like lawyers,
doctors, and accountant.
c. Passive Income
Income generated from investments by the individual like interest income in
bank accounts, time deposits, royalties from patents or compositions, cash
prizes, lotto winnings and dividends.
What’s In
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Classification of Individuals Characteristics
Non-resident Alien:
1. Engage in Trade or Business - NRA-ETB: Resides in the Philippines for
(NRA-ETB) more than 180 days
2. Not Engage in Trade or Business - NRA-NETB: Resides in the Philippines for
(NRA-NETB) less than 180 days
Activity: Identify whether the following individuals are resident citizen (RC),
nonresident citizen (NRC), resident alien (RA), non-resident alien-engage in trade
(NRAETB) or non-resident alien-not engage in trade (NRA-NETB). The taxable
calendar year is December 2020.
4. Nikita, a Filipino and a renowned chef in Singapore and resides there for a
decade now.
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6. Vico Sotto, a Pasig City Mayor, travelled to other provinces to benchmark
best practices of frontliners against COVID-19.
7. Lucas, a French national, who stayed for a corporate project in Bataan from
February to October 2020.
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What’s New
For income taxation, let us compare the old tax code from TRAIN Tax table effective
January 1, 2018 to December 31, 2022.
(Up: Old tax table | Down: TRAIN Law. Source: (National Tax Research Center 2018))
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Old Tax Code RA 10963 (TRAIN)
Bonus and other benefits of P82,000 and Bonus and other benefits of P90,000 and
above are taxable above are taxable
Allowable Deductions
Deductions are amounts that reduces the gross income to arrive at a taxable
income.
The following are the allowable deductions in gross income:
On purely compensation income:
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On business or professional income:
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What is It
TRAIN Law is said to have helped many minimum wage earners whose annual
income does not excess P250,000, as they are all tax exempted. It gives employees
more take-home pay from their gross income.
Let us examine:
Below is tax due computation for both old and new tax code.
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As previously discussed, there are different classification of individuals in income
taxation. An individual can have one, both or all of compensation, business income
and/or passive income. These incomes can take part of the taxable income
depending on their classification. Everyone is different in the treatment of taxable
income. Summary of Tax base and Tax rate
Let us examine:
An individual has the following sources of income:
The following sources of income that are taxed differently for everyone.
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Compensation income – Philippines
Compensation income – Singapore
Business income – Philippines
Business income – Japan
RESIDENT CITIZEN (RC)
LESS:
Allowable deductions – Philippines
Business expenses – Philippines
Business expenses – Japan
The sum of all sources of income is called GROSS INCOME. The gross income less
the allowable deductions and the respective expenses from the sources is called
TAXABLE INCOME.
What’s More
Activity 1:
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Compute for the tax due of the following individuals using the RA 10963 tax table.
Show computations.
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NON-RESIDENT CITIZEN (NRC)
NON-RESIDENT ALIEN
ENGAGED IN
TRADE/BUSINESS (NRA-ETB)
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___________________________________________________________________________
What I Can Do
Pay slip is a document issued to employees where it states the basic salary,
monthly deductions, and taxes during the month.
Paste here.
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Guide questions:
Assessment
A. True or False: Read the statement and write your First Name if the
statement is true and Last Name is the statement is false.
B. Identification
Write RC for resident citizen, NRC for non-resident citizen, RA for resident
alien, NRA-ETB for non-resident alien engaged in trade or business or
NRANETB for non-resident alien not engaged in trade or business.
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2. A Filipino resides in Canada for work.
3. A Japanese citizen stays in the Philippines to manage a car
manufacturing firm.
4. Lee Seung Gi performs a 1-day concert in the Philippines.
Compute for the tax due of the following individuals using the RA 10963 tax
table. Show computations.
8. NON-RESIDENT CITIZEN
(NRC)
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Additional Activities
Compute for the tax due of the following individuals using the RA 10963 tax table.
Show computations.
Answer Key
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References
Beticon, Josefina L, James Christopher D Domingo, and Fermin ANtonio D. Yabut.
2016. Fundamentals of Accounting , Business and Management 2 (Teacher's
Manual). Vibal Group, Inc.
n.d. Bureau of Internal Revenue. Accessed October 10, 2020.
https://www.bir.gov.ph/index.php/tax-information/income-tax.html.
n.d. National Internal Revenue Code (As Amended by RA 10963). Accessed 10 12,
2020. https://www.bir.gov.ph/index.php/tax-code.html.
National Tax Research Center. 2018. Tax Changes You Need To Know. March.
Accessed October 9, 2020.
https://www.ntrc.gov.ph/images/Publications/train/tax-changes-you-
needto-know.pdf.
Ong, Flocer Lao, and Janelle Gomendoza. 2017. Fundamentals of Accounting,
Business and Management 2 for Senior High School. C & E Publishing, Inc.
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