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Tax
Tax
Gross income- constitute all items of income that are neither excluded in gross income nor subjected to
final tax or capital gains tax.
Exclusions from gross income- these pertains to items of income that are excluded, hence exempt from
regular income tax.
Allowable deductions - are expenses of the conduct of business or exercise of profession. Commonly
known as business expenses.
Personal expenses - are 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.
Note: Individuals that are not engage in business cannot claim deductions from gross income
Classification of individuals:
1. Pure compensation earner
2. Pure business or professional income earner
3. Mixed income earner- an individual earning both compensation and business or professional
income.
Note: Personal exemption is repealed effective January 1,2018 . TRAIN law simply exempts P250,000
annual income of individual income taxpayer from regular tax.
Other income- income that are neither compensation nor business income such as passive income are
added to gross income from business or profession.
Allowable deductions- business expenses deducted from business income or profession. No deduction
is allowed on compensation income since expenses for cost of living are deemed included in the
P250, 000 blanket exemption in income tax table.
Taxable income-pure compensation income earner
Gross compensation income Pxxx
Less : non-taxable compensation xxx
Taxable compensation income Pxxx
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- pure business or professional income earner
Gross income from business /profession Pxxx
Add : non-operating income xxx
Total gross income Pxxx
Less: allowable deductions xxx
Taxable net income Pxxx
Illustration: Individual Income taxpayer
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 P 400,000 400,000 200,000
Business expenses 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000
Note: 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- pertains to all direct cost of rendering the services such as cost of labor, materials and
overhead costs.
Illustration
A practicing auditor had the following income and expenses during the year:
Billing for services rendered P4,500,000
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 and general utilities 120,000
Depreciation of office equipment 80,000
Depreciation of laptops issued to audit staff 50,000
Insurance expense of office properties 20,000
Rent expenses allocable to workspaces 400,000
Rent expense allocable to administrative offices 50,000
Bad debt expense on non-paying clients 100,000
Cost of services shall include only those directly incurred or related gross revenue from the rendition of
services:
Salaries of audit staff P1,400,000
Transportation expense to and from clients 12,000
Rental expense on staff workplace 400,000
Supplies used in various engagements 250,000
Depreciation of laptops 50,000
Total cost of services P 2,112,000
Revenues - is a general term which pertains to the gross inflow of benefits arising from primary
operations of the business.
Sales - pertains to revenue from the sale of goods commonly used to denote the income
Fees - pertains to revenue from sale of service of taxpayer using the accrual basis
while receipts used to denote income of
taxpayers using the cash basis.
Other taxable income from operations includes revenues or receipts from incidental or secondary
operations aside from primary operations.
1. A school has tuition fess as primary revenue, but its income from its bookstore , canteen or
student dormitories constitute other operating revenues.
2. Manufacturing firm has its gross income from the sale of finished goods as its primary revenue,
but its income from the scrap sales constitute other operating revenues.
3. A private hospital has patient service fee as its primary revenue, but have room rental and sale
of medicines as its other operating income.
4. A dormitory has boarding fees as its primary revenue, but may have laundry fees and canteen
income as other operating revenues.
5. A retail store has its sales of merchandise as its primary revenue, but may earn consignment
commission income as other operating revenues.
6. A bus transport company has the receipt from passengers and baggage as primary revenue , but
may earn income from bus-stop restaurants and wash rooms as other operating revenues.
Non-operating income – includes all other items of gross income such as:
1. Gains from dealings in properties- pertains to sale, exchange and other disposition of properties
by taxpayer
2. Income distribution from a general professional partnership, taxable trust or estate, or from an
exempt joint venture.
3. Casual active income- income from isolated or one-time transactions such as casual carpentry
income of person not engaged in carpentry business.
4. Passive income not subject to final tax
Illustration
Sales, net of return and discounts P 4,000,000
Cost of sales 1,800,000
Dividend income net of final tax 36,000
Business expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap metals 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks directly to a buyer 10,000
ACTIVITIES:
Activity 1 : Read and understand the content of the hand out provided through GC.
Activity 1 : Download BIR form and accomplish the BIR form.
Log in to www.bir.gov.ph and download BIR forms 1700, 1701 & 1701A.
Instruction:
a. Use BIR form 1700 for case 1 (use your name and related information as
taxpayer)
b. Use BIR form 1701A for case 2
c. Submit the accomplished form through GC(AEC 209(Income taxation)).
ASSESSMENT:
A. Alternate response. Write true if the statement is correct and false if otherwise.
1. All taxpayers are subject to final tax.
2. Employed taxpayers can claim expenses from their employment as deductions against their
compensation.
3. The P250,000 income tax exemption for individuals is designed to be lieu of their personal
and business expenses.
4. All taxpayers are subject to regular tax.
5. Non-taxable compensation are items of compensation that are excluded against gross
income.
B. Problem Solving
Mr Good Man owns a night club and videoke bar, with gross sales/ receipts of
P2,500,000.His cost of sales and operating expenses are P1,000,000 and P600,000
respectively, and with non-operating income of P100,000. How much is the income tax due?
ASSIGNMENT:
Research on the exclusions and inclusions from gross income subject to regular income tax