GRADE

12

ACCOUNTING 2
Work Sheet (Q2, Wk5)

Income & Business Taxation

Most Essential Learning Competency:

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;
4. Distinguish individual from business taxation; and
5. Explain the procedure in the computation of gross taxable income and tax
due.

GOVERNMENT PROPERTY
NOT FOR SALE
 Activities

Activity 1.1
Title of Activity: Compute the correct taxable compensation/
business income

Objective:
1. Solve exercises and problems requiring computation of the correct taxable
compensation/business income.
2. Reflect the importance of paying the correct income/business tax to the
government.
Procedure:
A. Read and analyze carefully the following statement, compute the correct taxable
compensation/business income.
B. Use the old taxation table.

1. Jacqueline Cruz generated annual compensation income of ₽455,000, net

statutory payments. Tax exempt 13 th month pay and other bonuses -
₽30,000. Determine the tax due of Jacqueline Cruz based on her following
tax status:
a. Jacqueline is single with no dependent.
b. Jacqueline is single with one qualified dependent.
c. Jacqueline is married with one qualified dependent.
d. Jacqueline is married with three qualified dependents.
e. Jacqueline is married with five dependents.

2. Jack Cruz is a project consultant. Total project fees earned during the year
amounted to ₽853,000. Jack opted to use the optional standard deduction of
40%. Determine the tax due of Jack Cruz based on his following possible tax
status:
a. Jack is single with no dependent.
b. Jack is married with one qualified dependent.
c. Jack is married with three qualified dependents.

Critical Thinking Questions:

1. How do you compare the tax of a mix earner to a pure businessman?

________________________________________________________
2. Why is it that the tax to be paid by single are higher compared to taxpayers with
qualified dependents?

REMEMBE
• Governing
R tax
law in the
Philippines is the National Internal Revenue Code of
1997. The Bureau of Internal Revenue (BIR) is the
primary implementing agency of this law.
• Taxation is the process by which the government collects
revenue in order to pay for its expenses.
• Income Tax as the tax of the net income or the entire
income realized in one taxable year.
Source: Internet

• Who are required to pay income tax in the Philippines? (Sec. 23 of the
NIR Code of 1997)
o A citizen of the Philippines, living in the Philippines, is taxable on all
income earned inside and outside the Philippines;
o A non-resident citizen is taxable only on income earned in the Philippines;
o An OFW is taxable only on income earned in the Philippines;
o A foreigner living in the Philippines is taxable only on income earned in the
Philippines;
o A domestic corporation is taxable on all income derived from sources
inside and outside the Philippines; and
o A foreign corporation is taxable only on income derived inside the
Philippines;

• List of Sources of Gross Income: (NIRC 1997, Chapt. 6, Sec. 32A

o Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items;
o Gross income derived from the conduct of trade or business or the
exercise of a profession;
o Gains derived from dealings in property, (note: subject to 6% capital
gains tax for individuals and for corporation if land & building is not used in
business)
o Interests (Note: generally subject to 20% final withholding tax);
o Rents;
o Royalties (Note: generally subject to 20% final withholding tax, 10% if from
books & literary works);
o Interests; (Note: generally subject to 20% final withholding tax);
o Dividends; (Note: generally subject to 10% final withholding tax for
individuals, tax exempt for corporation);
o Annuities;
o Prizes & winnings; (Note: generally subject to 20% final withholding tax for
individuals, except those that are tax exempt based on criteria in the law);
o Pensions; and
o Partners distributive share from the net income of the general professional
partnership

• Employed individuals that earn

compensation income pay their income
taxes monthly. Employers withhold the
income tax of their employees from their
monthly income and remit these sums to
the BIR.
 • Philippine individual income tax is progressive. The tax rate increases as the
base increases w/c means the tax payers with more capacity to pay will pay
more taxes.

• Withholding tax for employees:

o Employers are required by law to withhold income tax dues from their
employees’ salary.
o It is implemented because employees might not have sufficient cash to pay for
their income tax dues if aggregated to a one-time annual payment.
o The withholding tax deduction is computed based on the employees’ gross
compensation (net mandatory contributions to SSS or GSIS, Philhealth & Pag-
Ibig Fund), tax status, timing of compensation payments and using the
published BIR withholding tax table.

• Income tax is computed at the end of the year based on all compensation income
derived during the year.
o Taxable income is computed after deducting personal and additional
exemptions.
o Applicable tax rate is applied on the taxable income to get the tax due.
o The total income tax withheld by the employer is deducted from the tax due to
get remaining tax liability by the employee.

• Taxpayers who derive their income solely from compensation are required to file
BIR Form 1700 as their income tax returns. However, to give relief to these
taxpayers, the employee may present BIR Form 2136 as their income tax return.
o BIR Form 2136 is a statement issued by the employer and signed by the
employee but not filed with the BIR. This is referred to as substituted filing.

• Two Approaches for the Computation of Income Tax for Business:

1. Itemized Deduction – use the itemized expenses in the Income Statement.
o The business should have a complete set of accounting books and
supporting receipts for the deductions that were itemized on the tax form.

2. Optimized Standard Deduction Scheme – deductions are up to a maximum

of 40% of “gross receipts”.
o 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.

• “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.
 Tax Rate Table Before the TRAIN Law (Tax Reform for Acceleration &
Inclusion)
Source: Internet

• Computation:
1. Compensation Income:

Gross Compensation (salary & other bonuses)

Less: Statutory contributions (SSS/GSIS, PhilHealth & Pag-Ibig)
= Gross Compensation, net of statutory payments
Less: 13th Mo. Pay & other bonuses that are exempted from income tax
= Gross Taxable compensation income
Less: Personal (P50,000 per tax payer) & adt’l. deductions (P25,000) per qualified
dependent, max. of 4)________________________________________
= Net taxable compensation income

Example:

Juan Dela Cruz generated annual compensation income of P615,000. Statutory

payments are as follows:

SSS - ₽6,975.60
PhilHealth - 5,250.00
Pag-Ibig - 1,200.00
Total = ₽13,425.60

Tax exempt 13th month pay and other bonuses - ₽50,000 (Note: Maximum tax
exempt 13th month & other bonuses is P82,000 per Revenue Regulation 3-2015).
 Gross Compensation (salary & other bonuses) ₽615,000.00
Less: Statutory contributions (SSS/GSIS, PhilHealth & Pag-Ibig) 13,425.60
Less: Tax Exempt 13th month bonus 50,000
Gross Taxable Compensation Income ₽551,574.40

Scenario 1: Juan Dela Cruz is single with no qualified dependent.

Gross Taxable Compensation Income ₽551,574.40

Less: Personal Deduction 50,000
Net Taxable Compensation Income ₽501,574.40

₽50,000 + 30% of the excess over ₽250,000

= ₽50,000+30% (₽501,574,40 - ₽250,000) = ₽125,472.32
251,574.40
x0.30
75,472.32

Note: This is not the tax payable by the individual. Compare this w/ the amount that
the employer withheld. Any difference is the tax liability payable on April 15.
Generally, if the employer correctly withheld during the year and there are no
changes in the tax status and tax base during the year, the amount withheld will be
equal to the tax due. However, there will be a difference if there are changes in the
taxability of the tax payer (single or married, changes in number of qualified
dependents) and change in tax base (ex. Increase in salary)

Scenario 2: Juan Dela Cruz is married with 3 qualified dependents.

Gross Taxable Compensation Income ₽551,574.40

Less: Personal Deduction 50,000
Less: Additional Deduction (₽25,000x3) 75,000
Net Taxable Compensation Income ₽426,574.40

₽50,000 + 30% of the excess over ₽250,000

= ₽50,000+30% (₽426,574,40 - ₽250,000) = ₽102,972.32
176,574.40
x0.30
52,972.32

o What if the employer withheld a total of P100,000? Then on April 15, of the
subsequent year, the employee will pay an additional P2,972.32. But this does
not happen often. Normally, the employers compute for the annual tax due based
on the actual gross compensation income at the end of the year. Any additional
tax payment may be deducted from the December compensation.
2. Business Income:
Total Revenues (Sales, Professional Fee, etc.)
Less: Total expenses (Cost of Goods Sold, Operating Expenses)
= Taxable Income from Business_______________________________________
Less: Personal (P50,000 per tax payer) & addt’l. deductions per qualified dependent,
max. of 4)_________________________________________________
= Net Taxable Income

Example:

Juan Dela Cruz is the owner-manager of JDC Trading Company. Total Sales
generated during the year amounted to ₽1,230,000. Cost of Goods Sold is ₽492,000
and total Operating Expenses is ₽148,500. The company opted for itemized
deduction.

Sales ₽1,230,000
Less: Cost of Goods Sold 492,000
Gross Profit 738,000
Less: Operating Expenses 184,500
Net Taxable Compensation Income ₽553,500

Scenario 1: Juan Dela Cruz is single with no qualified dependent.

Gross Taxable Compensation Income ₽0

Less: Personal Deduction 50,000
Net Taxable Compensation Income (50,000)
Taxable Income from Business or Profession 553,500
Total Taxable Income ₽503,500

₽125,000 + 32% of the excess over ₽500,000

₽125,000 + 32% (₽503,500 – 500,000) = ₽126,120
3,500 x 0.32 = 1,120+125,000

o Is this the amount payable to the BIR on April 15?

Not exactly. If during the year, some of JDC’s issued creditable income tax
withheld (meaning the clients remitted the withheld amount to the BIR), then
the amount withheld maybe deducted from P126,120. Creditable tax withheld
is basically prepaid income tax.
o The remaining liability (after deducting creditable tax withheld), if greater than
P2,000, may be paid in installment – half on April 15 and the other half on July
15.
Scenario 2: Juan Dela Cruz is single with 1 qualified dependent; JDC received
creditable income tax withheld from its customers at P27,665.

Gross Taxable Compensation Income ₽0

Less: Personal Deduction 50,000
Less: Additional Deduction 25,000
Net Taxable Compensation Income (75,000)
Taxable Income from Business 553,500
NetTaxable Income ₽478,500

₽50,000 + 30% of the excess over ₽250,000

₽50,000 + 30% (₽478,500 - ₽250,000) = ₽118,550
228,500 x 0.30 = 68,550 + 50,000

₽118,550 - ₽27,655 = ₽90,895

(Note: Liability to BIR. If paid in installment, Juan Dela Cruz will pay
₽45,447.50 each on April 15 & July 15).

3. Mixed Income – taxpayer earns both compensation and business income

Example:
Juan Dela Cruz a married man w/ two qualified dependents, generated income
from the following sources:

Compensation Income:
a. Annual compensation income generated was P555,000
b. Statutory payments: SSS – P6,975.60, PhilHealth – P5,250, Pag-Ibig –
P1,200 = P13,425.60
c. Tax exempt: 13th mo. pay & other bonuses – P60,000
d. Employer withheld P89,471.16

Professional Income:
a. Consultancy services earned – P1,230,000. Clients withheld P61,500 and
provided creditable income tax return.
b. He has no record of the receipts of his expenses. He opted for standardized
deductions

Compensation Income:

Gross Compensation (salary & other bonuses) ₽555,000.00

Less: Statutory Contributions (SSS, PhilHealth &Pag-Ibig) 13,425.60
Less: Tax exempt – 13th mo. bonus 60,000
Gross Taxable Compensation Income 481,574.40
Less: Personal Deduction 50,000.00
Less: Additional Deduction (₽25,000x2) 50,000.00
NetTaxable Compensation Income ₽381,574.4
0
Business Income:

Revenue from Consultancy Services ₽1,230,000

Less: 40% Standard Deduction 492,000
Taxable Income from Business or ₽738,000
Profession

Combined:

Taxable Income from Business or Profession ₽738,000

NetTaxable Compensation Income 381,574.40
Total Taxable Income ₽1,119,574.4
0

From tax table, tax due for ₽1,119,574.40 is computed as follows:

₽125,000 + 32% of the excess over ₽500,000
₽125,000 + 32% (₽1,119,574.40 - ₽500,000) = ₽323,263.81

Tax Due ₽323,263.81

Less: Income Tax Withheld by Employer 89,471.16
Less: Creditable Income Tax Withheld by Clients 61,500.00
Net Tax Payable ₽172,292.65
 Checking your Understanding
Critical Thinking Questions
1. How come that taxpayers although with dependents still pay higher taxes like
single taxpayers without qualified dependents?
______________________________________________________________
________________________________________

2. Why is there a separate tax computation for tax payers with mix income?
___________________________________________________

3. How important is tax for every country?

_________________________________________________________________
_____________________________________
4. In this current situation of pandemic or any economic crisis that affects many
businesses and wage earners, do you think that the BIR should give tax amnesty
or considerations considering the needed government budget to fight and
eradicate the virus and help the people and economy?
_________________________________________________________________
_____________________________________

Evaluation
Directions: Write the letter of the correct answer/give the correct answer in a
separate paper.
1. This is the earned compensation of every worker which are taxable.
A. Gross salary C. Profit
B. Income D. Taxable gross

2. It is derived from the conduct of trade or business or the exercise of

profession
A. Gains B. Gross Income C. Prizes & Winnings D. Royalties

For Questions 3-6: Based from the prepared sources of Gross Income from compensation
and Gross Income for business as presented below, answer the following questions as to:
A. Estate Tax C. Royalties
B. Income Tax D. Value-added Tax

3. Generally subject to 20% final withholding tax, 10% if from books and literary
works.

4. BIR’s collection of payment for owned lots, buildings or house & lot properties.

5. BIR’s collection of payment for every goods/services sold.

6. It is computed at the end of the year based on all compensation income

derived during the year.

7. This is the taxable income for workers earning not over P10,000.
A. 2% B. 3% C. 4% D. 5%

8. It is the process by which the government collects revenue in order to pay for
its expenses.
A. BIR Collection C. Taxation
B. Income Tax D. Taxes

9. These are revenue of the government that funds government expenditures

and programs
A. BIR Collection C. Taxation
B. Income Tax D. Taxes

10. It is defined as the tax on the net income or the entire income realized in one
taxable year.
A. BIR Collection C. Taxation
B. Income Tax D. Taxes
11. It is use as 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.
12. BIR Form to be used by taxpayers who derive their income solely from
compensation.

13. SSS/GSIS, PhilHealth & Pag-Ibig are called __.

14. Amount granted as personal exemption to all individual taxpayers.

15. Amount of tax exemption for every qualified dependent.

Answer Card
Evaluation
1.
2.
3.
4.
5.
References
Books:
Fundamentals of Accountancy, Business & Management 2 (Teachers Guide)

Internet:
Taxation - https://www.google.com/search?
q=taxation&tbm=isch&ved=2ahUKEwiL4rDw_ObuAhVQMN4KHVbCDkwQ2-
cCegQIABAA&oq=taxation&gs_lcp=CgNpbWcQAzIHCAAQsQMQQzIECAAQQzICCAAyBAgAEEMyBAgA
EEMyBAgAEEMyBAgAEEMyBAgAEEMyBAgAEEMyBAgAEENQ64kBWOmSAWCJlQFoAHAAeACAAYsBiA
HOBJIBAzEuNJgBAKABAaoBC2d3cy13aXotaW1nwAEB&sclient=img&ei=RtUnYIunA9Dg-
AbWhLvgBA&bih=608&biw=1346#imgrc=H8_fIBWL6ac9wM
Purpose of Taxation - https://www.google.com/search?
q=purpose+of+taxation+philippines&tbm=isch&ved=2ahUKEwiFn4f6_ObuAhWGC94KHYv0CV0Q2-
cCegQIABAA&oq=purpose+of+taxation&gs_lcp=CgNpbWcQARgBMgIIADICCAAyAggAMgYIABAFEB4y
BggAEAUQHjIGCAAQBRAeMgYIABAFEB4yBggAEAUQHjIGCAAQBRAeMgYIABAFEB46BggAEAcQHjoICA
AQCBAHEB46CAgAEAcQBRAeUNr1BFjgggVgrZgFaABwAHgAgAG2AYgBmAqSAQQxLjEwmAEAoAEBqg
ELZ3dzLXdpei1pbWfAAQE&sclient=img&ei=WtUnYIWKFYaX-
AaL6afoBQ&bih=608&biw=1346#imgrc=JWLZ8DJc5U8qgM
Principles of Taxation (Image) - https://www.google.com/search?
q=principles+of+taxation+philippines&tbm=isch&ved=2ahUKEwjo0tfb_ebuAhUJvZQKHdlkA70Q2-
cCegQIABAA&oq=principles+of+taxation+phil&gs_lcp=CgNpbWcQARgAMgIIADoGCAAQBRAeOgYIAB
AIEB5QzPACWKOwA2DGwQNoAHAAeACAAeABiAGZEJIBBjUuMTIuMZgBAKABAaoBC2d3cy13aXotaW
1nwAEB&sclient=img&ei=J9YnYKijBYn60gTZyY3oCw&bih=608&biw=1346#imgrc=HJluoHviTplGQM
Old Tax Rate Table - https://www.google.com/search?
q=tax+rate+philippines&tbm=isch&ved=2ahUKEwjSrtf3_ebuAhUI7ZQKHReLCi0Q2-
cCegQIABAA&oq=tax+rate+philippines&gs_lcp=CgNpbWcQAzICCAAyAggAMgIIADIGCAAQBxAeMggIA
BAHEAUQHjIICAAQBxAFEB4yCAgAEAcQBRAeMggIABAHEAUQHjIGCAAQBRAeMgYIABAFEB46BwgAEL
EDEEM6BQgAELEDOgQIABBDOggIABCxAxCDAVD4swNY5cEDYNLEA2gAcAB4AIAB2AGIAZEJkgEFMC44
LjGYAQCgAQGqAQtnd3Mtd2l6LWltZ8ABAQ&sclient=img&ei=YdYnYJL6MIja0wSXlqroAg&bih=608&bi
w=1346#imgrc=yQq6e_a6cRv10M&imgdii=PmjljaXXqIXXtM
Tax Rate Table under TRAIN Law - https://www.google.com/search?
q=tax+rate+philippines&tbm=isch&ved=2ahUKEwjSrtf3_ebuAhUI7ZQKHReLCi0Q2-
cCegQIABAA&oq=tax+rate+philippines&gs_lcp=CgNpbWcQAzICCAAyAggAMgIIADIGCAAQBxAeMggIA
BAHEAUQHjIICAAQBxAFEB4yCAgAEAcQBRAeMggIABAHEAUQHjIGCAAQBRAeMgYIABAFEB46BwgAEL
EDEEM6BQgAELEDOgQIABBDOggIABCxAxCDAVD4swNY5cEDYNLEA2gAcAB4AIAB2AGIAZEJkgEFMC44
LjGYAQCgAQGqAQtnd3Mtd2l6LWltZ8ABAQ&sclient=img&ei=YdYnYJL6MIja0wSXlqroAg&bih=608&bi
w=1346#imgrc=AD_bWuxhZ4tRjM
Train Law (Image) - https://www.google.com/search?
q=train+law+philippines&tbm=isch&ved=2ahUKEwj8uPWT_ubuAhUJ7ZQKHdikDoQQ2-
cCegQIABAA&oq=train+law+philippines&gs_lcp=CgNpbWcQAzICCAAyAggAMgIIADICCAAyAggAMgIIA
DICCAAyBggAEAcQHjIGCAAQBxAeMggIABAHEAUQHjoHCAAQsQMQQzoECAAQQzoFCAAQsQNQg4YK
WLyUCmDWogpoAHAAeACAAe8BiAH3CZIBBTAuOS4xmAEAoAEBqgELZ3dzLXdpei1pbWfAAQE&sclien
t=img&ei=ndYnYLx2idrTBNjJuqAI&bih=608&biw=1346#imgrc=AuQfz0kFCK5dgM

Written by:
EVELYN S. PLAZA, San Juan City Academic Senior High School

For questions or comments, write or call:

Department of Education
Schools Division Office – San Juan City
Pinaglabanan St., San Juan City, Philippines 1500
Telefax: (632) 8451-2699; (632) 8251-2383
Email Address: depedsanjuanrecords@gmail.com