9. Allowable deductions from income of individual taxpayers.

-The deductions allowed shall depend on the nature of income earned by the taxpayer.

a. Compensation income and passive income – no deductions allowed

 What is Compensation income and passive income?
-Compensation is an income or a monetary payment to a certain individual in exchange to
their services. On the other hand, Passive income is an earning that does not require too
much effort.
b. Business/Professional – either itemized or OSD
 What is Itemized Deduction or OSD?
- An itemized deduction is an expense that can be subtracted from adjusted gross income
(AGI) to reduce your taxable income. OSD stands for Optional Standard Deductions.

10. Optional standard deductions (OSD) In lieu of itemized deductions, an individual taxpayer (EXCEPT
NRA) may elect OSD in an amount not more to 40% of his gross receipts or gross sales. However
following conditions must be satisfied:
1. That he signified his intention to elect standard deduction for his 1st quarter or the initial
quarter of the taxable year after the commencement of a new business/practice or profession. Once
selection is made, it must be consistently applied to all succeeding quarterly returns.

11. Individual earning income from self-employment or practice of profession Individual earning income
from self-employment or practice of profession whose gross sales/receipts and other non-operating
income does not exceed P3M shall have the option to avail:
 The graduated tax table
- What is a tax table?
o Tax table is a chart that displays the amount of tax due based on income
received. 
 An 8% on gross sales/receipts and other non-operating income in excess of P 250,000.00
in lieu of the graduated income tax rates and the percentage tax 3% (non-VAT)

12. The 8% income tax on gross sales or receipts

-An individual taxpayer who settles and chooses this option is no longer a subject to the business tax of
3% for non-VAT. However, even if their annual gross sales/receipt does not exceed the threshold of
P3,000,000.00, the taxpayer cannot avail of the 8% tax if:

 His business and/or profession is VAT registered

- When a taxpayer is VAT registered, in general, it is subject to 12% tax rate on its gross
sales or receipts.
 He is liable to Other percentage tax which is not 3% Non-VAT (e.g amusement tax,
common carrier’s tax and franchise tax)
-What is a percentage tax?
Percentage tax is a business tax imposed on persons, entities, or transactions  specified
under Sections 116 to 127 of the National Internal Revenue Code of 1997 (also known as
Tax Code), as amended, and as required under special laws.
  He is a partner of GPP by virtue of their distributive share from GPP which is already net
of cost and expenses.
-GPP (General Professional Partnerships)

Unless there is an intention on the part of the taxpayer to avail the 8% rate on the first quarter of
Percentage and/or ITR or on the initial quarter return of the taxable year after the commencement of the
new business/practice or profession, the taxpayer shall be considered as having availed the graduated
rates of tax.

Multiple Choice

1. It is an income or monetary payment to a certain individual in exchange to their services.

a. Compensation Income
b. Passive Income
c. Income Tax
2. It is an Income or earning that does not require too much effort.
a. Percentage Income
b. Passive Income
c. Compensation Income
3. What does OSD stands for?
a. Official Standard Deductions
b. Optional Standard Deductions
c. Organized Standard Deductions
4. A business tax imposed on persons, entities, or transactions specified under Sections 116 to 127
of the National Internal Revenue Code of 1997 (also known as Tax Code), as amended, and as
required under special laws.
a. Passive Income
b. Income Tax
c. Percentage Tax
5. An 8% on gross sales/receipts and other non-operating income in excess of __________in lieu of
the graduated income tax rates and the percentage tax 3% (non-VAT)
a. P250,000.00
b. P25,000.00
c. P2,500,000.00

True or False

TRUE 1. The deductions allowed shall depend on the nature of income earned by the taxpayer.

FALSE 2. In OSD, an individual taxpayer may elect OSD in an amount not more to 40% of his gross
receipts or gross sales except BIR. (NRA)

FALSE 3. A Purely Self-Employed and/or Professionals with Gross sales/receipts of above P3,000,000.00
can avail the Regular income tax or 8% tax on gross sales/receipts and other operating income in excess
of P 250,000.00 IN LIEU of the graduated tax.

TRUE 4. When a taxpayer is VAT registered, in general, it is subject to 12% tax rate on its gross sales or
receipts.

TRUE 5. Tax table is a chart that displays the amount of tax due based on income received.