REGULAR INCOME TAX

CHARACTERISTICS OF THE REGULAR

INCOME TAX

1. General in coverage- applies to all items of

income except those that are subject to
final tax, capital gains tax, and special tax
regimes.
2. A net income tax – an imposition on
residual profits or gains after deductions for
expenses and personal exemptions
allowable by law.
3. Annual income tax– applies on yearly
profits or gains.
4. Creditable withholding taxes- advanced
taxes that must be deducted against
regular tax due in computing the tax still
due to the government.
5. Progressive or proportional tax- tax on the
taxable income of individuals while it
imposes a flat or proportional tax of 30%
upon the taxable income of corporations.
THE REGULAR INCOME TAX MODEL

Gross income – Inclusions P xxx,xxx

Less: Allowable deductions xxx,xxx
Taxable Income P xxx,xxx

GROSS INCOME consists of the major

topics:

1. Exclusions of gross income- list of income

exempt to regular income tax
2. Inclusions in gross income- list of income
subject to regular income tax
3. Special topics- covers income that are
either exclusion or inclusion depending on
certain circumstances, such as:
a. Fringe benefit
b. Dealings in properties

GROSS INCOME

Gross income constitutes all items of income

that are neither excluded in gross income nor
subjected to final tax or capital gains tax.
EXCLUDED INCOME VS. EXEMPT
INCOME

Excluded income is also exempt income.

Excluded income are those listed by the NIRC
as exempt income from regular tax. The term
exempt income includes all income exempt
from income tax whether final tax, capital
gains tax or regular income tax. Exclusions
from gross income are listed in the NIRC.
Exemption from income may be provided by
the NIRC or special laws.

ALLOWABLE DEDUCTIONS

Allowable deductions, or simply “deductions,”

are expenses of the conduct of business or
exercise of profession. They are commonly
known as business expenses.

For individual taxpayers, there is a need to

note the difference between business
expenses and personal expenses. Personal
expenses or those that an individual spends
that are not connected to furtherance,
maintenance or development of his trade,
business or profession are non-deductible
against gross income.

Individuals that are not engage in business

cannot claim deductions from gross income.
Consequently, individuals are classified as
follows:

1. Pure compensation income earner

2. Pure business or professional income
earner
3. Mixed income earner - an individual
earning both compensation and business
or professional income

NOTE ON PERSONAL EXEMPTION

Previously, the law provides for personal

exemption of income of individual taxpayers.
The amount of personal exemption depends
on the number of dependents who are
supported by the taxpayer. Personal
exemption is in lieu of the personal, living, and
family expenses of an individual taxpayer.
Personal exemption is repealed effective
January 1, 2018.

In an effort the simply the tax system, the

TRAIN law simply exempts P250,000
annual income of the individual income
taxpayer from regular income tax. This
exemption is embedded in the income tax
table for individual taxpayers. As such, there
is no need to separately deduct personal
exemption.

DETERMINATION OF TAXABLE INCOME

The taxable income of individuals taxpayers is

computed using the Classification and
Globalization rule.

Classification Rule

Gross income is first classified into:

 a. Compensation income
b. Business or professional income

COMPENSATION INCOME VS. BUSINESS

INCOME

Compensation income arises from an

employer-employee relationship. This
relationship is characterized by a power to
retrench giving the purchaser of the service a
power to terminate the arrangement when he
is losing in business.

Business income arises from selling of goods

or rendering of services for a profit. In service
arrangements, the purchaser of the service
has no power to retrench, the income realized
thereon is a business income.

TREATMENT OF OTHER INCOME

Income that are neither compensation income

nor business income such as those passive
income are simply classified as "other taxable
income” and are added to gross income from
business and profession.

ALLOWABLE DEDUCTIONS

Business expenses are deducted against

gross income from business or profession. No
deduction is allowed against compensation
income since personal expenses of
individuals for cost of living are deemed to be
included in the P250,000 blanket exemption in
the income tax table.

Other income which is neither compensation

nor business or professional income is simply
added to total gross income from business or
profession as “non- operating income." If the
taxpayer has no business or professional
income, the same shall be added to taxable
compensation income as "other income."

TAXABLE INCOME OF PURE

COMPENSATION INCOME EARNER
 The taxable compensation income of
employees is computed as follows:

Gross compensation income ₱xxx,xxx

Less: Non-taxable compensation xxx,xxx
Taxable Compensation Income ₱xxx,xxx

TAXABLE INCOME OF PURE BUSINESS

OR PROFESSIONAL INCOME EARNER

The taxable net income of businessmen or

professionals is computed as follows:

Gross Income from business/profession ₱xxx,xxx

Add: Non-operating income xxx,xxx
Total Gross Income ₱xxx,xxx
Less: Allowable deduction xxx,xxx
Taxable Net Income ₱xxx,xxx

GLOBALIZATION RULE FOR MIXED

INCOME EARNER

The income of mixed income earner from both

sources is simply globalized or totaled.
 A negative net income or net loss when
deductions exceed gross income from
business or profession shall not be offset
against taxable compensation income
because deductions are expenses of business
or profession and are properly deductible only
against gross income thereto whereas no
expense is deductible against taxable
compensation income.

Illustration: Individual Income Taxpayer

Type of Income Case 1 Case 2 Case 3 Case 4

Compensation income 300,000 300,000 300,000
Non-taxable
30,000 30,000 30,000
compensation
Gross business income 400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other Income 20,000 20,000 20,000 20,000
DETERMINATION OF TAXABLE INCOME
OF CORPORATE INCOME TAXPAYERS

The taxable income of corporations is

computed in the same manner as pure
business or professional income earner.

ACCOUNTING METHOD AND

ACCOUNTING PERIOD

The taxable income shall be computed upon

the basis of the taxpayers annual accounting
period in accordance with the method of
accounting regularly employed in keeping the
books of such taxpayer; however, if no such
method of accounting has been so employed,
or if the method employed does not clearly
reflect the income, the computation shall be
made in accordance with such method that in
the opinion of the Commissioner, clearly
reflects the income.
 Shall compute taxable
Taxpayers using
income using
GAAP cash basis on Tax cash basis on a
a calendar year calendar year
GAAP cash basis on Tax cash basis on a
a fiscal year fiscal year
GAAP accrual basis Tax accrual basis on a
on a calendar year calendar year
GAAP accrual basis Tax accrual basis on a
on a fiscal year fiscal year

DETERMINATION OF GROSS INCOME

FROM BUSINESS OR PROFESSION

Business selling goods

The gross income from business on the
sales of goods is computed as:

Sales ₱xxx,xxx
Less: COGS xxx,xxx
 GROSS INCOME ₱xxx,xxx

Cost of sales (COGS) pertains to the

acquisition cost of the goods sold for
merchandising or the manufacturing cost of
the goods sold in the case of manufacturing.

COST OF SALE OF A TRADING

BUSINESS

The COGS may be determined by the specific

identification using perpetual inventory system
with the aid of point-of-sale machines or by the
periodic inventory system using the following
formula:

Beginning inventory ₱xxx,xxx

Purchases, net of returns and xxx,xxx
allowances
Freight- in xx,xxx
Total goods available for sale ₱xxx,xxx
 Less: Ending inventory xxx,xxx
Cost of goods sold ₱xxx,xxx

COST OF SALES OF A MANUFACTURING

BUSINESS

The cost of goods sold of a manufacturing

business is computed in almost the same way
with those of a trading business.

Illustration: A taxpayer had the following data

during the year

Gross sales ₱4,000,000

Sales discounts 100,000
Sales return 200,000
Beginning inventory 600,000

Purchases 2,500,000

Purchase returns and allowances 150,000

Freight-in 200,000
 Ending inventory 800,000

BUSINESS SELLING SERVICES

The gross income from sales of services or

exercise of a profession is measured as
follows:

Revenues or gross receipts ₱xxx,xxx

Less: Cost of services xxx,xxx
Gross income ₱xxx,xxx

Service providers using the accrual basis shall

report their revenues while those using the
cash basis shall report their gross receipts or
collections.

COST OF SERVICES

Cost of services pertains to all direct cost of

rendering the services such as cost of labor,
materials, and overhead costs. The cost of
services should be distinguished from the
indirect costs such as general administration
and marketing expenses of the business.

These two are separately presented under the

deduction category "regular allowable
itemized deductions".
Illustration: A practicing auditor had the
following income and expenses during the
year:

Billing for services rendered

₱4,500,000
and out-of-pocket costs
Salaries of audit staff 1,400,000
Salaries of administrative
200,000
employees
Transportation expenses to
12,000
and from clients
Supplies used in various
250,000
engagements
Supplies and general utilities 120,000
 Depreciations of office
80,000
equipment
Depreciation of laptops
50,000
issued to audit staff
Insurance expense on office
20,000
properties
Rent expenses allocable to
400,000
workspaces
Rent expenses allocable to
50,000
administrative offices
Bad debt expense on non-
100,000
paying clients

INCOME TAX REPORTING FORMAT

Reporting Format for Individuals Engaged in

Business or Profession
Net Sales/Revenues/Receipts/Fees ₱xxx,xxx
Add: Other taxable income from operation
xxx,xxx
not subject to final tax
Total sales/revenues/receipts/fees ₱xxx,xxx
Less: Cost of sales or services xxx,xxx
Gross Income from business/profession ₱xxx,xxx
Add: Non-operating income xxx,xxx
Total Gross Income ₱xxx,xxx
Less: Allowable deductions xxx,xxx
Net Income ₱xxx,xxx

SALES, REVENUES, RECEIPTS, AND

FEES DISTINGUISHED

Revenue is a general term which

pertains to the gross inflow of benefits (return)
arising from the primary operations of the
business. Sales pertains revenue from the
sale of goods while "fees pertains to revenue
from the sale service. Receipts pertains to
cash collection from the sale of goods or
services.

The terms sales or fees or simply

revenue are commonly used to denote the
income of taxpayers using the accrual basis
while the term receipts is used to denote the
income of taxpayers using the cash basis.
REVENUE VS. GROSS INCOME

Revenue is a gross concept pertaining to the

total return in a transaction which includes the
return of capital and the return on capital.
Gross income is a net concept pertaining to
the return on capital in a transaction. Gross
income is net of the cost of sales or cost of
services.

OTHER TAXABLE INCOME FROM

OPERATIONS

Other taxable income from operations

includes revenues or receipts from incidental
or secondary operations aside from the
primary operations.

NON-OPERATING INCOME

Non- operating income includes all other items

of gross income such as:

1. Gains from dealings in properties

Being net of costs, these are gross income

items rather than revenue. They are not part
of "Sale/Revenues/Receipts/Fees" but of non-
operating income individual taxpayers.
Dealings in properties pertain to the sale,
exchange and other disposition of properties
by the taxpayer.

2. Income distribution from a general

professional partnership, taxable
trust or estate, or from an exempt joint
venture.
Income distributions from these entities are
not revenue, but items of gross income,
hence, included as part of the non-operating
income of individuals.

3. Casual active income

This includes active income from isolated or

one-time transactions such as casual
carpentry income of a person not engaged in
carpentry business. Any expense on casual
transactions is set off with the casual income.
The net gain or income is a non-operating
income.

4. Passive income not subject to final

tax

This includes passive income not connected

with the business of the taxpayer and is not
subjected to final tax such as interest on
advances to employees and dividends from
foreign corporations. Similar to casual income,
these do not arise from the regular business
operations, hence, classified as non-operating
income.

REPORTING FORMAT FOR CORPORATE

TAXPAYERS

Net Sales/Revenues/
₱xxx,xxx
Receipts/Fees
Less: Cost of sales or services xxx,xxx
Gross income from operations ₱xxx,xxx
Add: other taxable income not
xxx,xxx
subject to final tax
Total gross income ₱xxx,xxx
Less: Allowable deductions xxx,xxx
Net Income ₱xxx,xxx
OTHER TAXABLE INCOME NOT SUBJECT
TO FINAL TAX

This category includes other items of gross

income whether or not arising from the
operations of the corporation such as gains
from dealings in properties, income
distributions from an exempt joint venture and
other passive income not subject to final tax.

SEPARATE BOOKKEEPING FOR

BUSINESS AND PROFESSIONAL
PRACTICE

Individual taxpayers engaged in business or

exercise of a profession must maintain a
separate record of their transactions from
business or professional transactions. The
personal transactions of the individual
taxpayer must not be mixed with the
transactions of the business or professional
practice.
This is important in the tax treatment of
expenses. The personal expense of the
taxpayer cannot be deducted against the
gross income of the business. The allowable
personal exemption fixed by law for individual
taxpayers is in lieu of all the actual personal,
family and cost of living expenses of the
taxpayer.

TYPES OF REGULAR INCOME TAX

1. Individual income tax- It is determined by

reference to a tax table of progressive tax
rates.
2. Corporate income tax- commonly referred to
as the regular corporate income tax (RCIT)

THE INCOME TAX TABLE FOR

INDIVIDUAL TAXPAYERS (YEAR 2018-
2022)

Annual Taxable
Income Tax Rate
Income
₱250,000 and below 0%
 Above ₱250,000 to 20% of the excess over
₱400,000 ₱250,000
Above ₱400,000 to ₱30,000+25% of the
₱800,000 excess over ₱400,000
Above ₱800,000 to ₱130,000+30% of the
₱2,000,000 excess over ₱800,000
Above ₱2,000,000 to ₱490,000+32% of the
₱8,000,0000 excess over ₱2,000,000
₱2,410,000+35% of the
Above ₱8,000,000
excess over ₱8,000,000

SCOPE OF THE PROGRESSIVE TAX

The progressive tax covers all individuals

including taxable estates and trusts except
NRA-NETB which is subject to 25% final tax
on gross income.

THE OPTIONAL 8% INCOME TAX

The TRAIN law introduced an optional income

tax for self-employed and or professionals
(SEP) wherein they 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:

a. Progressive income tax, computed under

individual tax table; and
b. 3% percentage business tax on sales or
receipts

The 8% income tax is a form of a bundled tax

which enables one-time compliance for two
taxes which would otherwise require separate
filing and payments.

CORPORATE INCOME TAX

The corporate income tax, commonly referred

to as the regular corporate income tax (RCIT),
is a proportional or flat tax at a rate of 30% on
taxable income. The RCIT applies to any
corporation other than those:
a. Subject to final ax such as non-resident
foreign corporation and FCDU interest
income not subjected to final tax
b. Special corporations or those subject to
preferential (ie lower) tax rates or special
regimes
c. Exempt corporations

THE MINIMUM CORPORATE INCOME TAX

(MCIT)

The Minimum Corporate Income Tax (MCIT)

Corporate taxpayers are subject to a minimum
tax, computed as 2% of total gross income
subject to regular tax. Even if corporations are
losing in business, they are subject to the
minimum tax.

SPECIAL CORPORATIONS

Special corporations are those enjoying lower

tax rates but not 0%, such as such as private
schools, non-profit hospitals and PEZA or
TIEZA-registered enterprises.

EXEMPT CORPORATIONS

Exempt corporations are those enjoying 0%

tax rate with no tax dues such as government
agencies, non-profit organizations with no
taxable income, cooperatives, and those
registered with the Board of Investments (BOI)
enjoying income tax holiday or ITH.

INCOME TAX RETURNS

Tax Return INDIVIDUAL

Form TAXPAYERS

Purely employed
Form 1700
taxpayer
 Purely in business or
profession, using
Form 1701A itemized, OSD or opting
to the 8% optional
income tax
Mixed income earners,
Form 1701
Estates and Trusts
Tax Return CORPORATE
Form TAXPAYERS
Corporations subject only
Form 1702-RT to the 30% regular
income tax
Corporations subject to
Form 1702-MX special or a combination
of tax rates
Corporations that is
Form 1702-EX
exempt with no tax due

DEADLINE OF FILING THE ÍNCOME TAX

RETURN
The annual income tax return is due for filing
on the 15th day of the fourth month following
the taxable year of the taxpayer. The income
tax due shall be paid upon filing.

ROUNDING RULES IN THE INCOME TAX

RETURNS

The requirement for entering centavos in

the latest version of the income tax return
(June 2013 version) has been eliminated. If
the amount of centavos is 49 or less, the
centavos are dropped down. If the amount is
50 centavos or more, it is rounded up to the
next peso.

Hence, an amount for ₱100.49 shall be

entered in the income tax return as ₱100. An
amount of ₱100.50 shall be rounded to ₱101.

REQUIRED ATTACHMENT IN THE

ANNUAL INCOME TAX RETURN
1. Certificate of Independent CPA if annual
sales, earnings, receipts or output exceed
₱3,000,000
2. Supplemental form for taxpayers with
multiple activities per tax regime
3. Account information form and financial
statements (FS) showing:
a. Sales/receipts/fees
b. Cost of sales/services
c. Non-operating and other taxable income
d. Itemized deductions (if taxpayer did not
avail of OSD)
e. Taxes and licenses
f. Other information prescribed to be
disclosed in the FS
4. Statement of management responsibility
(SMR)
5. Certificate of income payments not
subjected to Withholding Tax (BIR Form
2304)
6. Certificate of creditable withheld at source
(BIR Form 2307)
7. Duly approved Tax debit memo, if
applicable
 8. Proof of prior year's excess credits, if
applicable
9. Proof of foreign tax credits, if applicable
10. For amended return. proof of tax payment
and the return previously filed
11. Certificate of tax treaty relief/ Entitlement
issued by the concerned Investment
Promotion Agency (IPA)

QUARTERLY FILING OF INCOME TAX

RETURN

Corporations and individuals engaged in

business and those engaged in the practice of
a profession are required to file three quarterly
returns aside from the annual consolidated
income tax return.

Individual taxpayers engaged in

business or practice of profession shall file
their quarterly income tax returns using BIR
Form 1701Q. Corporations shall file their
quarterly income tax returns using BIR Form
1702Q.
 Taxpayers make estimated quarterly tax
payments. These quarterly tax payments are
claimed as tax credit (deductions) to the
annual consolidated income tax due of the
taxpayer.

DEADLINE OF QUARTERLY INCOME TAX

RETURNS

Quarterly Taxpayers
Income Tax
Returns Individuals Corporations
1st Quarter May 15, same 60 days end of
ITR year 1st Quarter
2ND Quarter August 15, 60 days end of
ITR same year 2nd Quarter
3rd Quarter November 15, 60 days end of
ITR same year 3rd Quarter
 Frequency
Taxpayer of Tax
Reporting
Individuals:
Pure compensation income earner Annual
Purely engaged in business or
profession
Quarterly
Mixed income earner & Annual
Corporations

THE SUBSTITUTED FILING SYSTEM FOR

EMPLOYEES

Pure compensation income earners may be

relieved from the obligation to file their annual
income tax return if they have no taxable
income from other sources other from their
lone employer. The employee may avail of the
substituted filing system wherein the employer
shall withhold the income tax of the
employee’s compensation.

If the employer correctly withheld the tax due

of the employee through the withholding tax
on compensation, the employee need not file
his Form 1700 anymore since there would be
no residual tax due or tax refundable. The
Form 1700 is required if the employee has
other taxable income or has more than one
employer, either concurrent or successive,
during the year.