Module No.

6 – Introduction to Regular Income Tax

Learning Outcome/s:
To have overview of the regular income taxation

Core Values/Biblical Principles:

“I sought the Lord, and he answered me and delivered me from all my fears.” – Psalm 34:4 (ESV)

Introduction:
Regular income tax is the broadest type of income tax. It is imposable on all items of income not
subjected to final tax, capital gains tax, and special tax regimes.

Body:
The regular income tax model:
Gross income Php xxx
Less: Allowable deductions xxx
Taxable income Php xxx

Characteristics of the Regular Income Tax:

1. General in coverage – applies to all items of income except those that are subject to final tax,
capital gains tax and special tax regimes
2. A net income tax – imposed on residual profits or gains after deductions for expenses allowable
by law
3. Annual tax
4. Creditable withholding tax – advanced tax deductible against the annual income tax due of the
taxpayer

Gross income – constitutes all items of income that are neither excluded in gross income nor subjected
to final tax or capital gains tax.

Allowable deductions – expenses in the conduct of business or exercise of profession. Deductions can
be claimed itemized wherein the taxpayer supports every item of deduction or standardized through the
Optional Standard Deductions (OSD) wherein the deduction is simply presumed as a percentage of gross
sales, gross receipts, or gross income.

Types of Gross Income Subject to Regular Income Tax

1. Compensation income – remunerations under an employer-employee relationship, such as the
regular pay of employees every payroll period and other benefits or incentives (fringe benefits).

Rank and file employees Managerial or supervisory employees

Regular pay Compensation income Compensation income
Fringe benefits Compensation income Fringe benefit

Compensation income is presented in the ITR as follows:

Gross compensation income Php xxx
Less: Non-taxable compensation xxx
Taxable compensation income Php xxx

2. Business or professional income

Business income – arises from habitual engagement in any commercial activity involving regular
sales of goods or services by an individual or a corporation.

Business gross income is computed as follows:

Sales Php xxx
Less: Cost of goods sold (cost of sales) xxx
 Gross income Php xxx

Cost of sales – pertains to the acquisition cost of the goods sold or the manufacturing cost of the
goods sold.

Professional income – income from the exercise of a profession

Professional gross income is computed as follows:

Revenues or gross receipts Php xxx
Less: Cost of services xxx
Gross income Php xxx

Cost of services – pertains to all direct cost of rendering the services such as cost of labor,
materials, and overhead costs.

3. Other income – non-business income and non-compensation income such as:

a. Gains from dealing in properties
b. Other active or passive income not subject to final tax

Tax Reporting by Individual Taxpayers

Net sales/revenues/receipts/fees Php xxx
Add: Other taxable income from operation not subject to final tax xxx
Total sales/revenues/receipts/fees Php xxx
Less: Cost of sales or services xxx
Gross income from business/profession Php xxx
Add: Non-operating income xxx
Total gross income Php xxx
Less: Allowable deductions xxx
Net income Php xxx

Other taxable income from operation – includes revenues or receipts from incidental or secondary
operations aside from the primary operations.

Illustration
An individual taxpayer with a manufacturing business reported the following results of operations:
Sales, net of returns and discounts Php 4,000,000
Cost of sales 1,800,000
Dividends income, net of final tax 36,000
Business expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap material 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks directly to a buyer 10,000

The income shall be presented in the income tax return as follows:

Net sales/revenues/receipts/fees Php 4,000,000
Add: Other taxable income from operation – scrap sales 200,000
Total sales/revenues/receipts/fees Php 4,200,000
Less: Cost of sales or services 1,800,000
Gross income from business/profession Php 2,400,000
Add: Non-operating income (sale of equipment and advances) 145,000
Total gross income Php 2,545,000
Less: Allowable deductions 1,600,000
Net income Php 945,000

Tax Reporting by Corporate Taxpayers

 Net sales/revenues/receipts/fees Php xxx
Less: Cost of sales or services xxx
Gross income from operations Php xxx
Add: Other taxable income not subject to final tax xxx
Total gross income Php xxx
Less: Allowable deductions xxx
Net income Php xxx

Illustration
Assume that the taxpayer in the previous illustration is a corporation.
Net sales/revenues/receipts/fees Php 4,200,000
Less: Cost of sales or services 1,800,000
Gross income from operations Php 2,400,000
Add: Other taxable income not subject to final tax 145,000
Total gross income Php 2,545,000
Less: Allowable deductions 1,600,000
Net income Php 945,000

Types of Regular Income Tax

1. Individual income tax – or progressive income tax; covers all individuals including taxable
estates and trusts except those subject to final income tax (e.g., NRA-NETB)

Income tax table for individuals (until 2022):

Amount of Net Taxable Income Rate
Over But Not Over
- P250,000 0%
P250,000 P400,000 20% of the excess over P250,000
P400,000 P800,000 P30,000 + 25% of the excess over P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over P2,000,000
P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

Illustration
A resident citizen has a compensation income of Php 300,000 within the Philippines and Php
200,000 from abroad.

Tax Due
Taxable compensation income Php 500,000
Less: Lower bracket 400,000 Php 30,000
Excess Php 100,000
Multiply: Tax rate 25% 25,000
Total tax due Php 55,000

Income tax table for individuals (2023 onwards):

Amount of Net Taxable Income Rate
Over But Not Over
- P250,000 0%
P250,000 P400,000 15% of the excess over P250,000
P400,000 P800,000 P22,500 + 20% of the excess over P400,000
P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000
P2,000,000 P8,000,000 P402,500 + 30% of the excess over P2,000,000
P8,000,000 P2,202,500 + 35% of the excess over P8,000,000

2. Corporate income tax – or regular corporate income tax (RCIT); proportional or flat tax at a rate
of 30% on taxable income; applies to any corporation other than:
a. Subject to final tax such as NRFC and FCDU interest income subject to final tax
 b. Special corporations or those subject to special tax regimes such as PEZA and TIEZA-
registered entities
c. Exempt corporations on their exempt income

Changes under CREATE Law:

a. Domestic Corporation
 Income tax rate of 25% effective July 1, 2020.
 Provided, that corporations with net taxable income not exceeding 5,000,000 and with
total assets not exceeding 100,000,000 excluding land shall be taxed at 20%.

b. Foreign corporations
 Income tax rate of 25% effective July 1, 2020.
 Nonresident foreign corporations
 Effective January 1, 2021 shall pay a tax equal to 25% of the gross income.
 Intercorporate dividends – effective July 1, 2020, the credit against the tax due shall
be equivalent to the difference between regular income tax (25%) and 15% tax on
dividends [25% - 15% = 10%]. (Before, 30% - 15% = 15% tax credit)

Other notes:
 The personal expenses of the taxpayer cannot be deducted against the gross income of the
business.
 Self-employed individuals, estates and trusts and mixed income earners shall file BIR Form 1701.
 Net operating loss on business or professional practice is allowed to be carried over as an item
of deduction (Net Operating Loss Carry-Over / NOLCO) against any net income in the succeeding
three years.
 Corporations shall file their annual income tax return using:
a. BIR Form No. 1702-RT for corporations subject only to regular income tax
b. BIR Form No. 1702-EX for exempt corporations with no other taxable income
c. BIR Form No. 1702-MX for corporations with income subject to multiple income tax rates or
with income subject to special or preferential rate
 Annual income tax return is due for filing and payment on the 15th day of the fourth month
following the taxable year of the taxpayer.
 Taxpayers engaged in business and in the practice of profession are required to file three
quarterly returns aside from the annual consolidated income tax return.
 Quarterly income tax returns for those engaged in business or practice of profession:
a. BIR Form No. 1701Q for individual taxpayers
b. BIR Form No. 1702Q for corporate taxpayers
 Deadline of QITRs:
a. May 15, August 15, and November 15 of the same year – for individuals
b. 60 days following the end of the quarter – for corporations

Summary:
Regular income tax is imposed on all items of income not subjected to final tax and capital gains tax.
Non-filing and payment of the same shall result to penalties (e.g., surcharge, interest, and compromise
penalties).

References:
Income Taxation, Rex Banggawan 2019 Edition