Fundamentals of

Accounting, Business
and Management 2
Quarter 2 – Module 3:
Income and Business Taxation
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 Fundamentals of
Accounting, Business
and Management 2
Quarter 2 – Module 3:
Income and Business Taxation
Introductory Message
For the facilitator:

Welcome to the Fundamentals of Accounting, Business and Management 2 – Grade

12 Alternative Delivery Mode (ADM) Module on the Income and Business Taxation!

This module was collaboratively designed, developed, and reviewed by educators

both from public and private institutions to assist the teacher or facilitator in
helping the learners meet the standards set by the K to 12 Curriculum while
overcoming their personal, social, and economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration
their needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of
the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to
manage their own learning. Furthermore, you are expected to encourage and assist
the learners as they do the tasks included in the module.

2
For the learner:

Welcome to the Fundamentals of Accounting, Business and Management 2 – Grade

12 Alternative Delivery Mode (ADM) Module on the Income and Business Taxation!

The hand is one of the most symbolized part of the human body. It is often used to
depict skill, action and purpose. Through our hands we may learn, create and
accomplish. Hence, the hand in this learning resource signifies that you as a
learner is capable and empowered to successfully achieve the relevant
competencies and skills at your own pace and time. Your academic success lies in
your own hands!

This module was designed to provide you with fun and meaningful opportunities for
guided and independent learning at your own pace and time. You will be enabled to
process the contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in the module.

What I Know This part includes an activity that aims to check

what you already know about the lesson to take. If you get all the
answers correct (100%), you may decide to skip this module.

What’s In This is a brief drill or review to help you link the current
lesson with the previous one.
What’s New In this portion, the new lesson will be introduced to you
in various ways such as a
story, a song, a poem, a problem opener, an
activity or a situation.

What is It This section provides a brief discussion of the lesson.

This aims to help you discover and understand new concepts and
skills.

What’s More This comprises activities for independent practice to

solidify your understanding and skills of the topic. You may check the
answers to the exercises using the Answer Key at the end of the module.

What I Have Learned This includes questions or

blank sentence/paragraph to be filled in to process
what you learned from the lesson.
What I Can Do This section provides an activity which will help you
transfer your new knowledge or skill into real life situations or
concerns.

Assessment This is a task which aims to evaluate your level of

mastery in achieving the learning competency.

3
 Additional Activities In this portion, another activity will be given to
you to enrich your knowledge or skill of the
lesson learned. This also tends retention of
learned concepts.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in developing

this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of
the module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.

We hope that through this material, you will experience meaningful learning
and gain deep understanding of the relevant competencies. You can do it!

What I Need to Know

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From the last module, we have understood the bank reconciling items. These items
are important in preparing for bank reconciliation statement.

At the end of the lessons, you should be able to:

1. Define income and business taxation and its principles and processes.
(ABM_FABM12-IIh-j-15)

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 What I Know

Select the letter of the best answer.

1. It is a kind of income received by the employees working in different

companies. It is often in the form of salaries, bonuses, and allowances.
a. Police power
b. Passive income
c. Compensation income
d. Gross income

2. A classification of individual who is a Filipino citizen and lives or resides in

the Philippines.
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Non-resident alien

3. It is the income generated by the entrepreneur or by professionals.

a. Compensation income
b. Business income
c. Passive income
d. All of the above

4. TRAIN Law is a comprehensive tax reform program signed by Pres. Rodrigo

R. Duterte on December 19, 2017. What does TRAIN means?
a. Tax Reform for Acceleration and Inclusion
b. Tax Related Accounts and Inclusion
c. Tax Refund Activity of Individual
d. Tax Reform for Allowed Individual

5. Which is an allowable deduction to the gross income of an individual?

a. SSS
b. PhilHealth
c. Pag-IBIG
d. All of the above

Lesson Income and Business

Taxation

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 1
Income is one way a person strives to have because he/she must live with every
day’s expenditure, too. To cope, one must be employed and/or engage in business
to gain income. Just as that of the government, to improve the economy, it needs
funds to finance infrastructures, social developments, and maintenance of public
security. These government funds come from the collection of taxes from its
citizens.

Just like that of an employee being paid by the employer for its job performance,
citizens pay taxes to government and the government provides services in return.
Government, for example, collects taxes on employees to cover their health
insurances, retirement pays and social security, and on business in exchange for
excellent infrastructures and economic security.

But collecting from its citizens cannot be as easy as demanding a portion from their
hard-earned money and expect to be given. This is the reason there is an
established law to regulate the collection of taxes and that taxes will be put to its
purpose.

Business Taxation
Business taxation is the process of collecting taxes from the activities of a business
organization. Examples are value-added tax (VAT), corporate tax, and income tax.
For this module, the lesson will focus on income tax.
Income Taxation
Income Tax is a tax on a person's income, emoluments, profits arising from
property, practice of a profession, conduct of a trade or business or on the
pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as
amended, less the deductions if any, authorized for such types of income, by the
Tax Code, as amended, or other special laws (Bureau of Internal Revenue n.d.).

Requisites of Income to be Taxable (Ong and Gomendoza 2017)

1. There must be a gain. – It is a profit received after rendering a service or
selling goods or for as long as the profit/s arose from a transaction whether
for monetary or in kind. Advance payments are not considered income
unless the good or service has received.

2. The gain must be realized or received. – The gain does not have to be
received. Realized gain happens when a seller fulfills a transaction and is
expecting payment from the buyer.
Example: A piece of land is sold, and the buyer will pay on a future date.

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 Received gain happens when the buyer pays for a transaction.
Example: A piece of land is sold, and the buyer pays the full amount.

3. The gain must not be excluded by law from taxation. – there is income which
are excluded from being taxed. These are enumerated in Sec. 32B of the
National Internal Revenue Code. Some examples are life insurance proceeds,
prizes and awards in sports competition (for national or international
athletes) and 13th month pay and other benefits not exceeding P90,000
(National Internal Revenue Code (As Amended by RA 10963) n.d.). Unless the
gains received or realized do not belong to the list under Sec 32B, these
gains are taxable.

The two classifications of income taxpayers are individuals and corporations.

Corporations are juridical persons which also possesses rights and responsibilities
as that of an individual person. Their taxes are imposed on the net income of the
business.

Individuals, in a conceptual definition in taxation, are persons who gain income

from one to all the following sources:

a. Compensation Income
Income received from working as an employee in different companies. This
comes in the form of salaries and wages, bonuses, and allowances.

b. Business Income
Income generated from the conduct of business or profession like lawyers,
doctors, and accountant.

c. Passive Income
Income generated from investments by the individual like interest income in
bank accounts, time deposits, royalties from patents or compositions, cash
prizes, lotto winnings and dividends.

What’s In

Individuals are classified as:

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 Classification of Individuals Characteristics

Filipino citizen who lives/resides in the

RESIDENT CITIZEN (RC)
Philippines.

Filipino citizen but does not reside in the

NON-RESIDENT CITIZEN (NRC) Philippines.
Ex. OFWs

A citizen of another foreign country but

resides in the Philippines during the
RESIDENT ALIEN (RA) taxable year.
Ex. An American who lives in the
Philippines, but still an American citizen.

A citizen of another foreign country and

does not reside in the Philippines.
NON-RESIDENT ALIEN (NRA)
Ex. A foreign tourist who stays in the
Philippines for a week of vacation.

Non-resident Alien:
1. Engage in Trade or Business
(NRA-ETB)
2. Not Engage in Trade or Business
(NRA-NETB)
- NRA-ETB: Resides in the Philippines for
more than 180 days
- NRA-NETB: Resides in the Philippines for
less than 180 days

Activity: Identify whether the following individuals are resident citizen (RC),
nonresident citizen (NRC), resident alien (RA), non-resident alien-engage in trade
(NRAETB) or non-resident alien-not engage in trade (NRA-NETB). The taxable
calendar year is December 2020.

1. Ryan Bang is a Korean who is a TV Actor in the Philippines since 2010.

2. Armando, a Filipino citizen, who works at Bataan Refinery Corporation as a

welder from January 2020 to June 2020.

3. David, an American hair stylist, conducted a 1-day income-generating

seminar for Filipino hair stylist in Balanga, Bataan.

4. Nikita, a Filipino and a renowned chef in Singapore and resides there for a
decade now.

5. Lee Ji-Eun, a Korean singer-songwriter performed a 2-day concert in the

Philippines.

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6. Vico Sotto, a Pasig City Mayor, travelled to other provinces to benchmark
best practices of frontliners against COVID-19.

7. Lucas, a French national, who stayed for a corporate project in Bataan from
February to October 2020.

8. Alex, a Filipino, travels abroad for a two-month training.

9. Ben, a Japanese national, stayed in the Philippines from January to March

2020.

10.Sally, a Filipino who works for an Indian company in the Philippines.

Notes to the Teacher

Explore more of taxation by visiting www.bir.gov.ph and click the
quick links such as Tax Code, EServices, withholding tax
calculator and many more.

10
 What’s New

RA 10963: TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN LAW)

On December 19, 2017, President Rodrigo R. Duterte sign a law for Comprehensive
Tax Reform Program, also known as the Tax Reform for Acceleration and Inclusion
(TRAIN) as Republic Act (RA) No. 10963. It amended the National Internal Revenue
Code of 1997 which aims to simplify and make a fair and efficient tax system in the
Philippines (National Tax Research Center 2018).

For income taxation, let us compare the old tax code from TRAIN Tax table effective
January 1, 2018 to December 31, 2022.

(Up: Old tax table | Down: TRAIN Law. Source: (National Tax Research Center 2018))

The tax percentage levied on taxable income on compensation or business income

are presented in the table.
Here are some key impact points of TRAIN Law on income and business taxation.

Comparison of Old Tax Code and Tax Code as amended by RA 10963.

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 Old Tax Code RA 10963 (TRAIN)

Consists of 7 brackets (P10,000 Consist of 6 brackets

– P500,000) (P250,000 – P8,000,000)

P250,000 and below of annual income is

P10,000 income is imposed of 5% tax.
tax exempt

Highest tax is imposed with P125,000 + Highest tax imposed is P2.410,000 +

32% of excess of P500,000 35% in excess of P8,000,000

Bonus and other benefits of P82,000 and Bonus and other benefits of P90,000 and
above are taxable above are taxable

Lotto winnings above P10,000 imposed

Lotto winnings are tax exempt.
of 20% final tax.

Fringe benefits (company retirement Fringe benefits (company retirement

plan, health insurance, etc.) was plan, health insurance, etc.) is imposed
imposed of P32% tax. of P35% tax

P50,000 personal exemptions and

The provision for personal and additional
additional exemption of P25,000 per
exemptions are removed because it is
dependent child (maximum of 4 children
integrated in the P250,000 tax
or P100,000) is deducted on the taxable
exemption.
income.

Allowable Deductions
Deductions are amounts that reduces the gross income to arrive at a taxable
income.
The following are the allowable deductions in gross income:
On purely compensation income:

1. Premium payments on health and hospitalization insurance (ex. SSS/GSIS,

Pagibig, PhilHealth and other company-initiated health plans).

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On business or professional income:

1. Regular expenses by the business

2. Interest expense
3. Taxes
4. Losses
5. Bad debts
6. Depreciation expense
7. Charitable contributions
8. Research and development
9. Premium payment on health insurance.

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 What is It

TRAIN Law is said to have helped many minimum wage earners whose annual
income does not excess P250,000, as they are all tax exempted. It gives employees
more take-home pay from their gross income.
Let us examine:
Below is tax due computation for both old and new tax code.

Scenario Old Tax Code RA. 10963 (TRAIN)

Annual income (a+c)
P260,000
Less: Annual income (a+c)
a. An employee with Non-taxable income (b+c) P260,000
monthly salary of Less:
(34,400)
= P20,000 Non-taxable income (b+c)
Personal exemption
(34,400)
(50,000)
b. Monthly Personal exemption
Additional exemption
contributions: N/A
(25,000)
SSS P800 Additional exemption
Equals:
PhilHealth 300 Taxable income N/A Equals:
Pag-IBIG 100 P150,600 Taxable income
P1,200 P225,600
Refer to tax table:
c. Bonus for the year = =P22,500 + 25% in excess of Refer to tax table:
P20,000 P140,000 =P250,000 below is 0%
No of dependent = 1 child = 22500 +
(25%(150,600140,000) Tax due = P0
=22500 + 2650
Tax due = P25,150

Scenario Old Tax Code RA. 10963 (TRAIN)

Refer to table:
=P125,000 + 32% in excess of
P500,000
a. A business with net = 125000 +
income before tax of (32%(8,000,000500,000)
P8,000,000 =125,000 + 2,400,000
Tax due = P2,525,000
Refer to table:
=P490,000 +32% of excess of
P2,000,000
= P490,000 +32% (8M-2M)
= P490,000 +1,920,000
Tax due = P2,410,000
The business saves
P115,000 on tax dues.

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As previously discussed, there are different classification of individuals in income
taxation. An individual can have one, both or all of compensation, business income
and/or passive income. These incomes can take part of the taxable income
depending on their classification. Everyone is different in the treatment of taxable
income. Summary of Tax base and Tax rate

Classification of Individuals Taxable Income

Income earned within and outside the

RESIDENT CITIZEN (RC)
PH

NON-RESIDENT CITIZEN (NRC) Income generated within the PH.

RESIDENT ALIEN (RA) Income generated within the PH.

NON-RESIDENT ALIEN ENGAGED IN

Income generated within the PH.
TRADE/BUSINESS (NRA-ETB)

NON-RESIDENT ALIEN NOT

Gross income generated within the PH is
ENGAGED IN TRADE/BUSINESS
taxed 25% Final Tax
(NRA-NETB)

Let us examine:
An individual has the following sources of income:

a. Compensation income – Philippines

b. Compensation income – Singapore
c. Business income – Philippines
d. Business income – Japan
e. Allowable deductions – Philippines
f. Business expenses – Philippines
g. Business expenses – Japan

The following sources of income that are taxed differently for everyone.

Application of Summary of Tax base and Tax rate

Classification of Individuals Taxable Income

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 Compensation income – Philippines
Compensation income – Singapore
Business income – Philippines
Business income – Japan
RESIDENT CITIZEN (RC)
LESS:
Allowable deductions – Philippines
Business expenses – Philippines
Business expenses – Japan

Compensation income – Philippines

Business income – Philippines
NON-RESIDENT CITIZEN (NRC) LESS:
Allowable deductions – Philippines
Business expenses – Philippines

Compensation income – Philippines

Business income – Philippines
RESIDENT ALIEN (RA) LESS:
Allowable deductions – Philippines
Business expenses – Philippines

Compensation income – Philippines

NON-RESIDENT ALIEN Business income – Philippines
ENGAGED IN LESS:
TRADE/BUSINESS (NRA-ETB) Allowable deductions – Philippines
Business expenses – Philippines

NON-RESIDENT ALIEN NOT

Compensation income – Philippines
ENGAGED IN
Business income – Philippines
TRADE/BUSINESS (NRA-NETB)

The sum of all sources of income is called GROSS INCOME. The gross income less
the allowable deductions and the respective expenses from the sources is called
TAXABLE INCOME.

What’s More

Activity 1:

16
Compute for the tax due of the following individuals using the RA 10963 tax table.
Show computations.

1. An employee with monthly salary of P25,000, monthly allowable deductions

of P1,300, bonus of P25,000 for the year.

2. A business has net income before tax of P2,410,000.

3. An employee with annual salary of P500,000, annual allowable deductions of

P28,000 and bonus of P100,000 for the year.

4. A business has net income before tax of P790,000.

Activity 2: Identify the income and expenses to be recognized in the taxable

income of the following individual.

An individual has the following sources of income:

a. Compensation income – Philippines

b. Compensation income – Britain
c. Business income – USA
d. Allowable deductions – Philippines
e. Business expenses – USA

Classification of Individuals Taxable Income

RESIDENT CITIZEN (RC)

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 NON-RESIDENT CITIZEN (NRC)

RESIDENT ALIEN (RA)

NON-RESIDENT ALIEN
ENGAGED IN
TRADE/BUSINESS (NRA-ETB)

NON-RESIDENT ALIEN NOT

ENGAGED IN
TRADE/BUSINESS (NRA-NETB)

What I Have Learned

Discuss the following concepts.

1. What is business taxation?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

2. What is income taxation?

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

3. Why is taxation important?

___________________________________________________________________________
___________________________________________________________________________

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 ___________________________________________________________________________

4. Explain the differences of the old and new tax code.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. Give one example for each classification of individuals.

___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

What I Can Do

Pay slip is a document issued to employees where it states the basic salary,
monthly deductions, and taxes during the month.

Photocopy a pay slip and paste on the space provided.

Paste here.

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Guide questions:

1. How much is the basic salary?

2. How much are the mandatory deductions such as SSS/GSIS, Philhealth,
Pagibig?
3. Is there tax deducted? If yes, how much?

Assessment

A. True or False: Read the statement and write your First Name if the
statement is true and Last Name is the statement is false.

1. Business taxation is the process of collecting taxes from activities of a

business organization.
2. The old tax code gives P50,000 personal exemptions and additional
exemption of P25,000 per dependent child (maximum of 4 children or
P100,000) is deducted on the taxable income.
3. Corporations are juridical persons which also possesses rights and
responsibilities as that of an individual person.
4. Compensation income is income generated from the conduct of business
or profession like lawyers, doctors, and accountant.
5. Deductions are amounts that increase the gross income to arrive at a
taxable income.
6. P250,000 and below of annual income is tax exempt under TRAIN Law.
7. A citizen of another foreign country but resides in the Philippines during
the taxable year is a resident citizen.
8. A business that has net income before tax of P250,000 is tax exempted.
9. A resident citizen that monthly income of P250,000 is tax exempted.
10.A non-resident alien does not engage in trade or business is imposed of
25% final tax on net income.

B. Identification

Write RC for resident citizen, NRC for non-resident citizen, RA for resident
alien, NRA-ETB for non-resident alien engaged in trade or business or
NRANETB for non-resident alien not engaged in trade or business.

1. Michael Cinco is a famous fashion designer in Dubai. He stays three

months in Dubai during a show.

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 2. A Filipino resides in Canada for work.
3. A Japanese citizen stays in the Philippines to manage a car
manufacturing firm.
4. Lee Seung Gi performs a 1-day concert in the Philippines.

Compute for the tax due of the following individuals using the RA 10963 tax
table. Show computations.

5. An employee with monthly salary of P50,000, monthly allowable

deductions of P2,300, annual bonus of P50,000.
6. A business has net income before tax of P5,910,000.
Identify the income and expenses to be recognized in the taxable income of
the following individual.

An individual has the following sources of income:

a. Compensation income – Ilocos
b. Compensation income – Manila
c. Compensation income - Korea
d. Business income – Laguna
e. Business income - USA
f. Allowable deductions – Ilocos
g. Allowable deductions – Manila
h. Allowable deductions – Korea
i. Business expense - Laguna
j. Business expenses – USA

Answer in this format:

Classification of Individuals Taxable Income

7. RESIDENT CITIZEN (RC)

8. NON-RESIDENT CITIZEN
(NRC)

9. RESIDENT ALIEN (RA)

10. NON-RESIDENT ALIEN

ENGAGED IN
TRADE/BUSINESS (NRA-ETB)

11. NON-RESIDENT ALIEN NOT

ENGAGED IN
TRADE/BUSINESS (NRA-NETB)

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Additional Activities

Compute for the tax due of the following individuals using the RA 10963 tax table.
Show computations.

1. An employee with monthly salary of P65,000, monthly allowable deduction of

P4,300, bonus of P40,000 for the year.

2. A business has net income before tax of P310,000.

3. An employee with annual salary of P1,000,000, annual total contributions of

P48,000 and bonus of P200,000 for the year.

4. A business has net income before tax of P999,000.

5. An employee with annual salary of P150,000, annual total contributions of

P1,000 and bonus of P12,000 for the year.

Answer Key

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References
Beticon, Josefina L, James Christopher D Domingo, and Fermin ANtonio D. Yabut.
2016. Fundamentals of Accounting , Business and Management 2 (Teacher's
Manual). Vibal Group, Inc.
n.d. Bureau of Internal Revenue. Accessed October 10, 2020.
https://www.bir.gov.ph/index.php/tax-information/income-tax.html.
n.d. National Internal Revenue Code (As Amended by RA 10963). Accessed 10 12,
2020. https://www.bir.gov.ph/index.php/tax-code.html.

National Tax Research Center. 2018. Tax Changes You Need To Know. March.
Accessed October 9, 2020.
https://www.ntrc.gov.ph/images/Publications/train/tax-changes-you-
needto-know.pdf.
Ong, Flocer Lao, and Janelle Gomendoza. 2017. Fundamentals of Accounting,
Business and Management 2 for Senior High School. C & E Publishing, Inc.

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For inquiries or feedback, please write or call:

Department of Education – Region III,

Schools Division of Bataan - Curriculum Implementation Division
Learning Resources Management and Development Section (LRMDS)

Provincial Capitol Compound, Balanga City, Bataan

Telefax: (047) 237-2102

Email Address:
bataan@deped.gov.ph