Bachelor of Science in Accountancy

INTRODUCTION TO
REGULAR INCOME TAX
CHARACTERISTICS OF THE REGULAR
INCOME TAX
1. General in coverage
2. Net income taxation
3. An annual tax
4. Creditable withholding tax
5. Progressive or proportional tax
CHARACTERISTICS OF THE REGULAR
INCOME TAX
Individual – Schedular Tax Table

Corporation – 25% flat rate or proportional rate

THE REGULAR INCOME TAX MODEL

Gross income – inclusions xxx

Less: Allowable deductions (xxx)
Taxable income xxx

Gross income consists of the major topics:

1. Exclusion 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 exclusions or inclusion
depending on certain circumstances, such as:
a. Fringe benefits
b. Dealings in properties
THE REGULAR INCOME TAX MODEL

Gross income – inclusions xxx

Less: Allowable deductions xxx
Taxable income xxx

Allowable deductions are expenses on the conduct of business or exercise of

profession. They are commonly known as business expenses.

For individuals, personal expenses are non-deductible against gross income.

DETERMINATION
OF TAXABLE
INCOME
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
The taxable income of individual taxpayers is computed using the
CLASSIFICATION and GLOBALIZATION RULE.

A. Classification Rule
Gross income is first classified into:
a. Compensation income
b. Business or professional income
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
A. CLASSIFICATION RULE

• Allowable Deductions
Business expenses are deducted against gross income from business
or profession. No deduction is allowed against compensation income.
Expenses related to the employment of individual taxpayers are
deemed personal expenses.

• Treatment of other income

Other income which is neither compensation nor business or
professional income is simply added to net income from business or
profession as “non-operating income” or “other income”.
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
Taxable income of PURE COMPENSATION INCOME EARNER

Gross compensation income xxx

Less: Non-taxable/exempt compensation (xxx)
Taxable compensation income xxx

Non-taxable compensation includes legally mandated salary

deductions and items of compensation income that are exempted by
law, contracts or treaty from income taxation.
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
Taxable income of PURE BUSINESS OR PROFESSIONAL INCOME EARNER

Gross income from business/profession xxx

Less: Allowable deductions xxx
Net income (net loss) xxx
Add: Non-operating income xxx
Taxable net income xxx
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
The taxable income of individual taxpayers is computed using the
CLASSIFICATION and GLOBALIZATION RULE.

B. Globalization Rule
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.
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
Case 1 Case 2 Case 3 Case 4
Compensation income P300,000 P300,000 P300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000

Case 1: A compensation earner with other income

Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income 270,000
Add: Other income 20,000
Taxable income 290,000
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
Case 1 Case 2 Case 3 Case 4
Compensation income P300,000 P300,000 P300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000

Case 2: A business income earner with other income

Gross business income P 400,000
Less: Allowable deductions 250,000
Net income 150,000
Add: Other income 20,000
Taxable net income 290,000
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
Case 1 Case 2 Case 3 Case 4
Compensation income P300,000 P300,000 P300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000

Case 3: A mixed income earner with other income

Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P 270,000

Gross business income P 400,000

Less: Deductions 250,000
Net income 150,000
Other income 20,000
Taxable income – business 170,000
Taxable income 440,000
TAXABLE INCOME OF INDIVIDUAL
INCOME TAXPAYERS
Case 1 Case 2 Case 3 Case 4
Compensation income P300,000 P300,000 P300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000

Case 4: A mixed income earner – with net loss on business or profession

Gross compensation income P 300,000
Less: Non-taxable compensation 30,000
Taxable compensation income P 270,000

Gross business income P 200,000

Less: Deductions 250,000
Net income (Net loss) (50,000)
Other income 20,000
Taxable income – business (P 30,000)
Taxable income P 270,000
TAXABLE INCOME OF CORPORATE
INCOME TAXPAYERS
Determination of Gross Income from Business or Profession

Business selling goods:

Sales/Revenue/Receipts/Fees xxx
Less: Cost of goods sold (cost of sales) (xxx)
Gross income from operations xxx

Beginning inventory xxx

Purchases, net of returns and allowances xxx
Freight-in xxx
Total goods available for sale xxx
Less: Ending inventory xxx
Cost of goods sold xxx
TAXABLE INCOME OF CORPORATE
INCOME TAXPAYERS
ILLUSTRATION:

A taxpayer had the following data during the year:

Gross sales P 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
TAXABLE INCOME OF CORPORATE
INCOME TAXPAYERS
Determination of Gross Income from Business or Profession

Business selling services:

Revenues or gross receipts xxx

Less: Cost of services (xxx)
Gross income xxx
TAXABLE INCOME OF CORPORATE
INCOME TAXPAYERS
ILLUSTRATION:
A practicing auditor had the following income and expenses during the year:

Billing for services rendered and out-of-pocket costs P 4,500,000

Salaries of audit staff 1,400,000
Salaries of administrative employees 200,000
Transportation expenses to and from clients 12,000
Supplies used in various engagements 250,000
Supplies used and general utilities 120,000
Depreciation of office equipment 80,000
Depreciation of laptops issued to audit staff 50,000
Insurance expense on office properties 20,000
Rent expenses allocable to workspaces 400,000
Rent expenses allocable to administrative offices 50,000
Bad debt expense on non-paying clients 100,000
INCOME TAX
REPORTING
FORMAT
INCOME TAX REPORTING FORMAT
Report Format for Individuals Engaged in Business or Profession

Sales/Revenues/Receipts/Fees xxx
Less: Sales Returns, allowances and discounts xxx
Net sales/Revenues/Receipts/Fees xxx
Less: Cost of sales or services xxx
Gross income (loss) from operations xxx
Less: Allowable deductions xxx
Net income xxx
Add: Non-operating income xxx
Taxable net income xxx
NON-OPERATING INCOME
Non-operating income includes all other items of gross income such as:

1. Gains from dealings in properties

Dealings in properties pertain to the sale, exchange and other disposition of
properties by the taxpayer that are not covered by the capital gains tax.

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.

4. Passive income not subject to final tax

INCOME TAX REPORTING FORMAT
Report Format for Corporate Taxpayers

Sales/Revenues/Receipts/Fees xxx
Less: Sales Returns, allowances and discounts xxx
Net sales/Revenues/Receipts/Fees xxx
Less: Cost of sales or services xxx
Gross income (loss) from operations xxx
Add: Other taxable income not subject to FWT xxx
Total taxable income xxx
Less: Allowable deductions xxx
Net taxable income xxx
NON-OPERATING INCOME
The difference in tax return format between individuals and corporations is due
to the Optional Standard Deduction (OSD).

Basis of Optional Standard Deduction:

INDIVIDUALS ----------→ Net revenues or receipts from operations

CORPORATIONS -------→ Total taxable income

TYPES OF REGULAR
INCOME TAX
1. Individual Income Tax
2. Corporate Income Tax
INDIVIDUAL INCOME TAX
The Income Tax Table for Individual Taxpayers (Year 2023 onwards)

Taxable Income per Year Income Tax Rate

P250,000 and below 0%
Above P250,000 to P400,000 15% of the excess over 250,000
Above P400,000 to P800,000 P22,500 + 20% of the excess over P400,000
Above P800,000 to P2,000,000 P102,500 + 25% of the excess over P800,000
Above P2,000,000 to P8,000,000 P402,500 + 30% of the excess over P2,000,000
Above P8,000,000 P2,202,500 + 35% of the excess over P8,000,000

The progressive tax covers all individuals including taxable estates and trusts except NRA-
NETB which is subject to 25% final tax on gross income.
INDIVIDUAL INCOME TAX
Illustration 1:

A resident citizen has a compensation income of P1,250,000 within the Philippines

and P150,000 from abroad. How much is the income tax due?
Answer: P252,500

Illustration 2:

A resident alien has a business net income of P2,200,000 in the Philippines and
P1,250,000 from abroad.

Answer: P462,500
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 bundled tax which enables one-time compliance
for two taxes which would otherwise require separate filing and payments.
CORPORATE INCOME TAX
Domestic or foreign corporation = 25% Regular Corporate Income Tax

However, a lower 20% proportional tax on taxable income is imposed on

domestic micro-, small-, and medium-sized enterprises (MSMEs) with not more
than P100 million assets, excluding land, and not more than P5 million taxable
income.
CORPORATE INCOME TAX
Domestic or foreign corporation = 25% Regular Corporate Income Tax

However, a lower 20% proportional tax on taxable income is imposed on

domestic micro-, small-, and medium-sized enterprises (MSMEs) with:

1. Not more than P100 million assets, excluding land; and

2. not more than P5 million taxable income.
CORPORATE INCOME TAX
Illustration:

A corporation has a net income of P1,200,000 in the Philippines and P800,000

from abroad.

1. Assuming the corporation is a large domestic corporation, the income tax due
shall be?
2. Assuming the corporation is a domestic MSME, the income tax due shall be?
3. Assuming the corporation is a resident foreign corporation, the income tax
due shall be?
MINIMUM CORPORATE INCOME TAX (MCIT)
Corporate taxpayers are normally subject to a minimum tax, computed as 2% of
total gross income subject to regular tax.

This minimum tax is temporarily reduced to 1% this pandemic from July 1, 2020 to
June 30, 2023.

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
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.
THANK YOU!