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LEARNING OUTCOMES
At the end of this module, you are expected to:
Pre-Activity
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?
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.
Gross Income xx
Allowable Deductions (xx)
Taxable Income xx
Tax Due xx
Tax Credits (xx)
Tax Payable/(Overpayment) 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
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 2: 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.]
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.
Looking at the structure of the items in the form, it can be presented in the form below to illustrate
it in practical sense.
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
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
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 xx
Cost of 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 xx
Tax Credits (xx)
Tax Payable/(Overpayment) xx
Illustration 7.4
Assume Chutimon from Illustration 7.2 is a corporate taxpayer and ignore the figures related
to the 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.
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.
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
SPECIAL TAXPAYERS
The following are considerations for other taxpayers as discussed from the Module No. 3.
Estates
In addition to expenses as allowable deductions, distributions to heirs out of the income of the
estate can be deducted from the gross income of the estate. The amount deducted on the part of
the estate will be taxable to the heir. Note that distribution of the corpus (principal) is not
deductible.
Illustration 7.7
Michaelo Johnson died on December 30, 2018 when its estate was valued at P30,000,000. The
estate earned P3,500,000 gross income during 2020. Expenses totalled P1,000,000. The heirs
received half of the estate’s net income and P5,000,000 out of the corpus.
Trusts
The same rule on deduction is applicable to trusts. However, if several trusts account are made
by a common grantor to a common beneficiary, the accounts are consolidated and any
discrepancy on the consolidated tax due is allocated to the accounts pro-rata on the amount of
taxable income.
Illustration 7.8
Mr. Mapagbigay, assigned Mr. Alaga (Trust A) as the fiduciary of a trust account with Mr.
Salamat as the beneficiary. Mr. Mapagbigay also assigned Mr. Tiwala (Trust T) as fiduciary to
another trust accounts with the same beneficiary. Data on the two trust accounts are as follows:
Fiduciary Trust A Trust T
Gross Income 800,000 2,700,000
Expenses 200,000 1,000,000
Income Distribution to Mr. Salamat 100,000 200,000
Once a partnership, joint venture or co-ownership is not exempt, it will be taxable in the same
manner as a corporation.
GLOBALIZATION RULE
The income of mixed income earner from both sources is simply globalized or totaled. A negative
net income or net loss when deductions exceeds gross income from business or profession shall
not be offset against taxable compensation income because deductions are expenses of business
or profession and are properly deductible only against gross income thereto whereas no expense
is deductible against taxable compensation income.
Illustration 7.9
Consider the following taxpayers.
Item Andy Barry Cherry Danny
Compensation Income 300,000 - 300,000 300,000
Non-Taxable Compensation 30,000 - 30,000 30,000
Gross Business Income - 400,000 400,000 200,000
Allowable Deductions - 250,000 250,000 250,000
Other Income 20,000 20,000 20,000 20,000
The P30,000 net business loss of Danny shall not be deducted against the taxable compensation income
but may be carried over as NOLCO for the three succeeding years.
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.
References:
Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing.
Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply.
Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc.
Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc.
Self-Check!
Basing on your readings, answer the following questions.
1. What are the characteristics of the regular income tax?
2. What are the main components of the regular income tax model?
3. What are the relevant returns for regular income tax?
4. What are the features of the 8% optional income tax?
5. What does the globalization rule prohibit?
6. How are centavo amounts considered in filling out income tax returns?
7. What are the required attachments to the annual ITR?
______2. The distinction between operating and non-operating income is not required in the
ITR of
a. Self-employed individuals in business
b. Mixed income earners
c. Self-employed professionals
d. Purely employed individuals
______6. Which form is applicable to corporate taxpayers whose income are subject to
different rates?
a. 1702RT b. 1702MX c. 1702EX d. 1702A
Problem 7.1 REGULAR INCOME TAX MODEL
Lina Vaughn has a merchandising business. The Gross Income, net of creditable withholding
taxes of P20,000, of the business totaled P860,000. Total expenses incurred by the business
totaled P420,000 (P100,000 cannot be allowed for deduction). She also received a prize from a
competition in the amount of P50,000.
Fill out the table below.
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 -
Tax payments are made within deadlines and tax withheld on compensation totaled P47,500
during the year.
..
Fill out the table below to support amounts on income tax returns filed.
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