Course Code and Title: BACR 5 – INCOME TAXATION

Lesson Number : 7

Topic : Introduction to Regular Income Tax

Instructor : Prof. Rosario A. Calamba, CPA, MBM, Phd Cand.

_________________________________________________________

LEARNING OBJECTIVES

At the end of this lesson, the student should be able to:

1. Describe the characteristics of regular income tax;

2. Illustrate the regular income tax model and its components;

3. Identify the relevant returns for regular income tax;

4. Differentiate computation of taxable income for special taxpayers;

5. Explain the effects of choosing the 8% income tax;

6. Compute the income tax due;

7. Explain the globalization rule for mixed income earners;

8. Apply the rules on rounding in accomplishing returns; and

9. Identify the required attachments for each return.

 PRE-ASSESSMENT
Try to answer the following questions.
1. What is usually needed for reference in a progressive tax?
2. Do you think income from illegal activities, in theory, should be taxed?
3. How do you think is the income tax due computed?
4. What are the differences of a traditional Income Statement to that of the Income Tax
Return?
5. Do you think the rules on rounding off from your basic Mathematics classes apply in
tax reporting?
6. Which would you prefer between ease in tax computations or lower income tax due?

LESSON PRESENTATION

REGULAR INCOME TAX

As discussed in the previous modules, the income tax scheme of regular income taxation is a
catch basin for all those items of income which are not specifically within the scopes of final
income taxation and capital gains taxation.

CHARACTERISTICS
The following are the characteristics of this income tax scheme.

General Coverage
The regular income tax applies to all items of income except those that are subject to final tax,
capital gains tax, and special tax regimes.

Net Income taxation

The regular tax is an imposition on residual profits or gains after deductions for expenses and
personal exemptions allowable by law.

Annual Income Tax

The regular income tax applies on yearly profits or gains. The gross income and expenses of the
taxpayer are measured using the accounting methods adopted by the taxpayer and are
reported to the government over the accounting period selected by the taxpayer.

Creditable Withholding Taxes

Most items of regular income are subject to creditable withholding tax (CWT). These creditable
withholding taxes are advanced taxes that must be deducted against regular tax due in
computing the tax still due to the government.
Progressive or Proportional Tax
The NIRC imposes a progressive tax on the taxable income of individuals while it imposes a
flat or proportional tax of 30% upon the taxable income of corporations. Note that the revision
of the corporate income tax in the second package of the TRAIN Law proposes a 25% corporate
income tax.

REGULAR INCOME TAX MODEL

The formula below illustrates the bird’s eye view of the regular income tax scheme.

Gross Income Allowable xx

Deductions (xx)
Taxable Income xx

Tax Due Tax Credits xx

Tax Payable/(Overpayment) (xx)
xx

It is to be noted that extensive discussions of each item in the model will be included in the
succeeding modules.

Gross Income
The gross income consists of all other items of income not taxed under the Final Taxation and
Capital Gains Taxation and other special tax regimes. Some items of income, however, are
excluded or exempted by law, treaty or contract from taxation. Normal items of gross income
are as follows:

1. Compensation Income
2. Business/Professional Income
3. Capital Gains

Excluded Income vs. Exempt Income vs. Deductions

Excluded income is also exempt income. Excluded income are those listed by the NIRC as
exempt 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. Both excluded and exempt income are not included in the amount of
reportable gross income in the income tax return. The amount of deductions is initially
included in the amount of gross income but is separately presented as deduction against
gross income.
Allowable Deductions
Allowable deductions, or simply “deductions,” are expenses in the conduct of business or
exercise of profession. It should be noted that only business expenses are allowed for
deductions, considering limits and caps given by law.

Taxable Income
This is the basis of the income tax due.

Tax Due
The progressive tax table below shall be used for individual taxpayers and the 30% income tax
rate for corporate taxpayers. In computing the tax due for individuals, the taxable income is
located on the applicable bracket of the income tax table to know the basic tax and the
additional tax rate.

Taxable Income
Basic Tax Additional Tax
Over But Not Over
0 250,000 - -
250,000 400,000 - 20% of excess over 250,000
400,000 800,000 30,000 25% of excess over 400,000
800,000 2,000,000 130,000 30% of excess over 800,000
2,000,000 8,000,000 490,000 32% of excess over 2,000,000
8,000,000 - 2,410,000 35% of excess over 8,000,000

Tax Credits
Tax credits are subtracted not from taxable income, but directly from a person’s tax liability;
they therefore reduce taxes peso for peso. As a result, credits have the same value for everyone
who can claim their full value. As one of the characteristics of regular taxation, it is subject to
creditable withholding taxes. As such, any withheld taxes from payors of income may be used
as tax credits to be deducted to the Tax Due. Tax credits usually arise from creditable
withholding taxes.

Tax Payable/(Overpayment)
This is the net amount of the tax liability to the BIR. If the tax credits exceed the tax due, the
overpayment may be refunded or used as tax credits in the succeeding periods.
 Illustration 7.1
Tim Maray has a total income of P1,240,000 during the taxable year. Of the said amount,
P110,000 were subject to final tax and P80,000 were subject to capital gains tax. Of the
remaining amount, P50,000 are considered exempt. He also incurred P520,000 worth of
expenses but P40,000 was not allowed for deduction. Several of the income were subjected to
creditable withholding taxes which reduced the receipts of income to P1,229,000.

Following the regular income tax model, the taxable income would be:
Gross Income (1,240,000 – 110,000 – 80,000 – 50,000) 1,000,000
Less: Allowable Deductions (520,000 – 40,000) 480,000
Taxable Income 520,000

Scenario 1: Tim Maray is an individual

The tax payable, basing on the third bracket of the progressive tax table, would be:
Basic Tax 30,000
Additional Tax (25% x 120,000) 30,000
Tax Due 60,000
Less: Tax Credits (1,240,000 – 1,229,000) 11,000
Tax Payable 49,000

Scenario 1: Tim Maray is a corporation

The tax payable would be:
Taxable Income 520,000
Tax Rate 30%
Tax Due 156,000
Less: Tax Credits 11,000
Tax Payable 145,000

REGULAR INCOME TAX RETURNS

The following are the required returns for taxpayers. [You may click the form codes for links on
the full pdf of the return.]

Form Code Type of Taxpayer

1700 Purely Employed Individuals
Individuals purely in Business, using Itemized Deduction, OSD or opting to
1701A
the 8% Optional Income Tax
1701 Mixed Income Earning Individuals, Estates and Trusts
 1702RT Corporations subject only to the 30% Regular Income Tax
1702MX Corporations subject to Special or a combination of tax rates
1702EX Corporations that are exempt with no tax due

It should be noted that exempt corporations are required to report their results of operations
through BIR Form 1702-EX even if they do not have taxable income. They are mandated to
itemize their deductions in their income tax return. The rule is apparently intended to assist the
BIR in monitoring compliance of exempt corporation with their withholding tax obligations and
to provide for a mechanism to identify income earned by third parties.

Exempt corporations with gross income subject to the regular corporate income tax or special
rate shall file BIR Form 1702-MX.

Individual ITR Line Items

Let us take a look at Form 1701 to further evaluate the regular income tax model for individuals.
You are encouraged to familiarize yourself with the structure of the income tax return to
facilitate understanding in the succeeding modules.

Taxable Compensation Income
Gross Income/(Loss) from
Operation
Allowable Deductions
Net Income/(Loss) from
Operations
Other Non-Operating Income
Taxable Business Income
Total Taxable Income
Tax Payable/(Overpayment)
The taxable compensation income only comprises of the
gross compensation income and the exempt portion. These
two are netted. Information on this portion normally comes
from the accomplished BIR Form 2316 by the employer
which will be further discussed in Module 10.
This portion follows that of the traditional format of the
Gross Profit computation in the Income Statement.
There are different types of deductions which the taxpayer
can avail.
This is the difference of the gross income from operations
and allowable deductions.
These are separated since some rules (e.g. OSD) are not
applicable to revenues from non-business endeavors.
This is the sum of all taxable non-compensation income.
This will now be the basis of the income tax due of the
individual taxpayer.
This is similar to the tax model. Tax credits will be
extensively discussed in Module 16.

Looking at the structure of the items in the form, it can be presented in the form below to
illustrate it in practical sense.

Taxable Compensation Income

Gross Compensation Income xx
Exempt/Non-Taxable Compensation Income (xx) xx
Taxable Business Income
Net Sales/Revenues/Receipts/Fees xx
Cost of Sales/Services (xx)
Gross Income/(Loss) from Operations xx
Allowable Deductions (xx)
Net Income/(Loss) from Operations xx
Other Non-Operating Income xx xx
Total Taxable Income xx
 Tax Due Tax Credits xx
Tax Payable/(Overpayment) (xx)
xx

For purely self-employed individuals, the portion for compensation income is ignored.
Same is true for purely employed individuals on the portion for business income.
Illustration 7.2
Chutimon, an individual taxpayer, reported the following for the taxable year.
Gross compensation of P140,000, P20,000 of which was exempt.
Winnings from PCSO Lotto, P60,000.
Capital gain of jewelries sold, P50,000.
Gross income from merchandising business, P470,000.
Expenses of the merchandising business, P210,000, P25,000 of which are non- deductible.
Prior year’s excess credits, P10,000.

The tax payable would be computed as follows:

Taxable Compensation Income

Gross Compensation Income 140,000
Exempt/Non-Taxable Compensation Income 20,000 120,000
Taxable Business Income
Gross Income/(Loss) from Operations 470,000
Allowable Deductions 185.000
Net Income/(Loss) from Operations 285,000
Other Non-Operating Income 50,000 335,000
Total Taxable Income 455,000

Tax Due 43,750

Tax Credits 10,000
Tax Payable/(Overpayment) 33,750

Quarterly Return
Let us take a look at the 1701Q to differentiate it with the annual ITR.
The quarterly return is mostly similar to that of the annual return. The difference is that the
amounts for the computation of the net income/(loss) from operations only include those
arising from the period the return covers.

The quarterly return is cumulative in amount. This means that it computes the income tax due
based on the cumulative taxable income as of the close of the taxable quarter. This is why it
adds the reported taxable income from the previous quarterly returns filed during the year.

Also take note that only the business income is included in the quarterly returns. The taxable
compensation income is only reported in the annual income tax return.
 Illustration 7.3
Pat, a mixed income earner, reports the following for each quarter of 2020.
Item First Second Third Fourth
Taxable Compensation 90,000 90,000 90,000 90,000
Gross Income from Business 240,000 160,000 180,000 380,000
Allowable Deductions 90,000 80,000 80,000 120,000
Non-Operating Income 10,000 15,000 40,000 10,000
The only sources of tax credit are the timely tax payments made every quarter and the
income tax withheld from compensation amounting to P22,000.

The income tax returns to be filed would carry the following amounts:
Item Q1 Q2 Q3 Annual
Gross Income from Business 240,000 160,000 180,000 960,000
Allowable Deductions 90,000 80,000 80,000 370,000
Net Income from Operations 150,000 80,000 100,000 590,000
Taxable Income from Previous Quarter/s - 160,000 255,000 -
Non-Operating Income 10,000 15,000 40,000 75,000
Total Taxable Business Income to Date 160,000 255,000 395,000 665,000
Taxable Compensation Income - - - 360,000
Total Taxable Income 160,000 255,000 395,000 1,025,000
Tax Due - 1,000 29,000 197,500
Tax Credits - - 1,000 51,000
Tax Payable - 1,000 28,000 146,500

Corporate ITR Line Items

Let us also take a look on a portion of the 1702RT to illustrate the same for corporate taxpayers.
Gross Income from Operation
Other Taxable Income
Total Taxable Income
This is mostly similar with that of individuals.
Other taxable income not subjected to final tax is directly
added to the gross income from operations, not unlike for
individuals where it is only added after the allowable
deductions are deducted.
This is the total gross taxable income.
 Allowable Deductions Similar to that of individuals, it is to be further discussed in
Modules 13-15.
Net Taxable Income/(Loss) This is the basis of the income tax due.
Tax Payable/(Overpayment) This is similar to that of individuals.

Looking at the structure of the items in the form, it can be presented in the form below to
illustrate it in practical sense.

Net Sales/Receipts/Revenues/Fees Cost of xx

Sales/Services (xx)
Gross Income from Operation xx
Other Taxable Income Not Subjected to Final Tax xx
Total Taxable Income xx
Allowable Deductions (xx)
Net Taxable Income/(Loss) xx

Tax Due Tax Credits xx

Tax Payable/(Overpayment) (xx)
xx

Illustration 7.4
Assume Chutimon from Illustration 7.2 is a corporate taxpayer and ignore the figures related to the
compensation income.

The tax payable would be computed as follows:

Gross Income from Operation 470,000
Other Taxable Income Not Subjected to Final Tax 110,000
Total Taxable Income 580,000
Allowable Deductions 185,000
Net Taxable Income/(Loss) 395,000
Regular Corporate Tax Rate 30%
Tax Due 118,500
Tax Credits 10,000
Tax Payable/(Overpayment) 108,500
Quarterly Return
The difference of the quarterly and annual ITR for corporations is similar to that of individuals,
except that there is no compensation income.

8% OPTIONAL TAX
Individual taxpayers have the option of availing the 8% optional tax as provided by RA 10963.
It should be noted that the taxpayer should signify that it chooses this option on the first
quarterly income tax return and/or quarterly percentage tax return for every year. Such
election shall be irrevocable and no amendment of option shall be made for the said taxable
year.

Purely Self-Employed Individuals

The taxpayer may opt to be taxed under the two schemes, provided that his gross sales/receipts
and other non-operating income do not exceed the P3,000,000 VAT threshold:

1. 8% of gross sales/receipts and other non-operating income in excess of P250,000 in

lieu of graduated rates and percentage tax; or
2. Graduated rates

Below is the portion of 1701A that should be filled out.

Mixed-Income Earners
If the individual taxpayer earns compensation income aside from its exercise of profession,
trade or business, he shall have no choice but to be taxed at the graduated rates on its
compensation income. Its business income, however, may be opt to be taxes at the following
schemes, provided that his gross sales/receipts and other non-operating income do not exceed
the P3,000,000 VAT threshold:

1. 8% of gross sales/receipts and other non-operating income in lieu of graduated

rates and percentage tax; or
2. Graduated rates

It should be noted that the P250,000 exemption is not deducted on the tax base for the 8%
preferential tax since it is already availed on the tax on compensation income using the
graduated rates.

Below is the portion of 1701 that should be filled out.

Illustration 7.5
Chanon, a non-VAT individual taxpayer, reported the following for the year.
 Gross sales of P1,800,000
 Cost of sales of P860,000
 Allowable deductions of P220,000

Scenario 1: Chanon chooses the 8% optional rate

Gross Sales 1,800,000
Exemption Threshold 250,000
Basis for 8% 1,550,000
Optional Rate 8%
Income Tax Due 124,000

Scenario 2: Chanon chooses the graduated rates

Gross Sales 1,800,000
Cost of Sales 860,000
Gross Income 940,000
Allowable Deduction 220,000
Taxable Income 720,000
Income Tax Due (based on Progressive Tax Table) 110,000
Percentage Tax Due (1,800,000 x 3%) 54,000
Total Tax Due 164,000

Scenario 3: Chanon has taxable compensation of P420,000 and chooses the 8% optional rate
Gross Sales 1,800,000
Optional Rate 8%
Income Tax Due on Business Income 144,000
Income Tax Due on Compensation Income (based on PTT) 35,000
Total Income Tax Due 179,000

Scenario 4: Chanon has taxable compensation of P420,000 and chooses the graduated rates
Taxable Business Income 720,000
Taxable Compensation Income 420,000
Total Taxable Income 1,140,000
Income Tax Due (based on PTT) 232,000
Percentage Tax Due (1,800,000 x 3%) 54,000
Total Tax Due 286,000
Breach of the VAT Threshold
Even if the flat 8% income tax rate option is initially selected, the taxpayer shall automatically
be subject to the graduated rates of tax when his gross sales/receipts and other non-operating
income exceeded the P3,000,000 during the taxable year. In such case, his income tax shall be
computed under the graduated income tax rates and shall be allowed a tax credit for the
previous quarter/s’ income tax payment/s under the 8% income tax rate option.

Illustration 7.6
The following are the income of Jackie, a self-employed individual, for the first two quarters of the
taxable year. It signified the use of 8% optional rate on the first quarter return.
Item First Quarter Second Quarter
Gross Sales 800,000 2,500,000
Cost of Sales 400,000 1,200,000
Allowable Deductions 250,000 750,000

The tax due and payable for the first quarter is P64,000 computed by P800,000 x 8%.
Jackie exceeded the VAT threshold in the second quarter, therefore, he is not eligible for the 8%
optional rate. His tax payable for the second quarter is:
Total Gross Sales 3,300,000
Total Cost of Sales 1,600,000
Total Gross Income 1,700,000
Total Allowable Deductions 1,000,000
Total Taxable Income as of end of Q2 700,000

Tax Due based on PTT 105,000

Tax Credits 64,000
Tax Payable 41,000
Other Corporate Taxpayers
Refer to the summary below as to the taxability of partnerships, co-ownership and joint
ventures.

Rules Partnership Joint Venture Co-Ownership

General Rule Taxable Taxable Exempt
Exception Exempt: Exempt: Taxable:
if it is a general if formed for the if income from the co-
professional partnership purpose of undertaking owned property is
construction projects or reinvested to other
engaging in petroleum, income-producing
coal, geothermal, and properties or ventures
other energy operations
pursuant to an
operating consortium
agreement under a
service contract with the
government

Once a partnership, joint venture or co-ownership is not exempt, it will be taxable in the same
manner as a corporation.

ROUNDING RULES
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 P100.49 shall be entered in the income tax return as P100. An
amount of P100.50 shall be rounded to P101.

ACTIVITY/EVALUATION
Problem 7.1 REGULAR INCOME TAX MODEL
TRUE OR FALSE
Lina Vaughn has a merchandising business. The Gross Income, net of creditable withholding taxes of
Determine whether the following statements are true or false.
P20,000, of the business totaled P860,000. Total expenses incurred by the business totaled P420,000
1. Items
(P100,000 cannot be of non-operating
allowed income
for deduction). earned
She by self-employed
also received individuals
a prize from are in the
a competition
amount of P50,000. added at the net income from operations.
2. The use of the progressive tax table indicates that there is no tax on the first
Fill out the table below.
P250,000 of the taxable income, 20% on the next P150,000, 25% on the next
P400,000, 30% on the next P1,200,000, 32% on the next P6,000,000 and 35%
on succeeding amounts.
3. The progressive tax table is applied to all individuals including non-resident
aliens not engaged in trade or business.
4. The corporate income tax rate is an ad valorem tax.
…
5. A certificate of independent CPA is required as attachment if annual receipts
exceed P3,000,000.
6. Income tax returns are required to be filed by taxpayers who are engaged in
Problem 7.2 REGULAR INCOME TAX FOR INDIVIDUALS
business.
John Camuna, a mixed income earner, obtained the following for the quarters of 2020.
7. Exempt corporations are still required to file income tax returns despite
absence of a tax liability.
8. All purely employed individuals are required to file BIR Form 1700.
9. When a mixed income earner chooses the 8% optional income tax, the taxable
compensation income is taxed using the progressive tax table.
10. When an individual taxpayer chooses the 8% optional income tax, the
P250,000 threshold is always deducted to the net sales/receipts to serve as
the basis for the income tax due.
Tax payments11.
areThere
made is no need
within to payand
deadlines thetax
percentage taxcompensation
withheld on if the taxpayer optsP47,500
totaled to be taxed
during
the year. at the 8% optional rate.
12. The choice of availing the 8% income tax should be signified on the
Fill out the table below to support amounts on income tax returns filed.
first quarter returns.
 Items Lina is an Individual Lina is a Corporation
Gross Income
Allowable Deductions
Taxable Income
Tax Due
Tax Credits
Tax Payable

Items Q1 Q2 Q3 Q4
Taxable Compensation 110,000 110,000 110,000 140,000
Net Sales 410,000 470,000 510,000 750,000
Cost of Sales 240,000 280,000 310,000 400,000
Allowable Deductions 110,000 140,000 150,000 180,000
Passive Royalties 20,000 20,000 25,000 16,000
Winnings 50,000 - - -
Capital Gains under RIT - 15,000 45,000 -

Items Q1 Q2 Q3 Annual
Gross Income from Business
Allowable Deductions
Net Income from Operations
Taxable Income from Previous Quarters
Non-Operating Income
Total Taxable Business Income to Date
Taxable Compensation Income
Total Taxable Income
Tax Due
Tax Credits
Tax Payable
Problem 7.3 REGULAR INCOME TAX FOR CORPORATIONS
Assume the same facts from Problem 7.2, except that John Camuna is a corporation and that there
were no compensation income and the related tax withheld.

Fill out the table below to support amounts on income tax returns filed.
Items Q1 Q2 Q3 Annual
Gross Income from Operation
Non-Operating Income
Total Gross Income
Allowable Deductions
Taxable Income for this Quarter
Taxable Income from Previous Quarter/s
Total Taxable Income
Tax Due
Tax Credits
Tax Payable

Problem 7.4 8% OPTIONAL RATE

Teeradon, a mixed income earner, reported a taxable compensation income of P400,000. His taxable
business income is P800,000. The cost of services and allowable deductions from the business are
P1,000,000 and P500,000, respectively.

Answer the following independent questions.

How much is the tax due if Teeradon chooses to be taxed at 8%?
How much is the total tax due if Teeradon chooses to be taxed at graduated rates?
Ignore the compensation income. How much is the tax due if Teeradon chooses to be taxed at 8%?
Ignore the compensation income. How much is the total tax due if Teeradon chooses to be taxed at
graduated rates?
REFERENCES:

 Income Taxation with Special Topics and Properly Filled BIR Forms, 2020
Edition - Enrico D. Tabag, CPA, MBA & Earl Jimson R. Garcia, CPA, MBA

 Reviewer in Taxation Updated TRAIN-Book 1 2018 Edition- Asser S.

Tamayo, CPA, MBA

 Income Taxation-Laws, Principles and Applications- Rex B. Banggawan,

CPA, MBA

 National Internal Revenue Code of 1997

 Bureau of Internal Revenue Regulations

 Bureau of Internal Revenue Memorandum Circulars

 Supreme Court Jurisprudence on Tax Cases