Module No.

16 – Regular Income Tax: Individuals Part 2

Coverage:
1. 8% Optional Income Tax for individuals
2. Income Tax on Other Taxable Entities
3. Administrative Provisions

Body:
OPTIONAL INCOME TAX/ 8% PREFERENTIAL INCOME TAX RATE
- The TRAIN law introduced a new tax scheme for individual taxpayers - the 8% optional income tax.
- The option to be taxed at 8% must be indicated in the first quarter income tax return or in the first quarter
percentage tax return. When made, the option shall be irrevocable for the calendar year.

Nature:
1. A bundled tax - it is in lieu of
a. Regular income tax, determined through the income tax table
b. 3% general percentage tax
2. An annual option - it is valid for as long as the taxpayer remained as a non-VAT taxpayer during the
year. It will be invalidated in favor of the regular income tax once the taxpayer becomes a VAT
taxpayer during the year.
3. Paid quarterly and annually

Scope:
1. Pure business or professional income earners
2. Mixed income earners

Business Tax: A Basic Overview

Aside from income tax, individuals engaged in business or exercise of a profession are also required to pay a
business tax which is either a 3% percentage tax or a 12% value added tax (VAT).

Types of business taxpayers:

1. Exempt businesses - not subject to VAT or percentage tax
Examples: Businesses selling agricultural products in original state, Agricultural contract growers, Book
publishers or bookstores

2. Business specifically subject to other percentage taxes - not subject to VAT but subject to percentage
tax of various rates
Examples: Common carriers by land, such as taxi, jeepney, bus and car for hire, Operators of cockpits,
cabarets, clubs, jai-alai or horse race track

3. Vatable businesses - other businesses

Vatable businesses either pay:
a. 12% value added tax - if their annual sales exceed P3,000,000 or when they registered as VAT
taxpayers.
b. 3% general percentage tax - if their annual sales do not exceed the P3,000,000 and did not opt to
voluntary register as VAT taxpayers.

Normally, businesses or professional practitioners start small as non-VAT taxpayers. As their business or practice
gains traction and reaches the P3M VAT threshold, they are mandatorily required to register as VAT taxpayers.

Covered businesses:
Only vatable businesses who are below the P3M annual VAT threshold and did not register as VAT taxpayer can
opt to be taxed under the 8% income tax.

Thus, the option is not available to:

1. VAT-registered business taxpayers
2. VAT-exempt business taxpayers such as:
o Exempt businesses
o Businesses specifically subject to other percentage taxes
3. Individuals receiving income not subject to business tax, such as:
o Partners receiving share in net income of a general professional partnership.
o Co-owners receiving share of income in co-owned properties.
o Venturers receiving share in net income of an exempt joint venture.
o Heirs or beneficiaries of trust receiving income distribution from estates or trusts

Tax Obligations of Individuals Non-VAT taxpayers

Regular tax option 8% Income Tax option
Regular income tax - 3 quarterly income tax (1701Q)
- 3 quarterly income tax (1701Q)
- 1 annual income tax (1701/1701A)
- 1 annual income tax (1701/1701A)
Percentage tax (business tax) - 4 quarterly OPT (2551Q)
Note: VAT-registered taxpayers pay VAT and regular income tax.

Tax basis:
The 8% optional income tax shall be based upon the gross sales or gross receipt of the individual taxpayer that
is subject to 3% percentage tax. Other income subject to regular tax are added to the basis.

Pure business or Professional income earner

For pure business or professional income earners, the use of the 8% income tax would effectively deny the
individual taxpayer of his P250,000 annual income exemption, the same being embedded in the regular tax table.
Due to this, the 8% income tax shall be computed from the basis net of P250,000.

Illustration 1 – pure business/professional income earner

Assume a taxpayer who is purely engaged in business had sales of P2,000,000, net of P50,000 sales discounts,
P100,000 other income subject to regular tax and expenses of P840,000

8% Optional Income Tax Regular Income Tax

Net Sales 2,000,000 Net Sales 2,000,000
Add: Other non-operating income 100,000 Less: Allowable deductions (840,000)
Total Taxable Income 2,100,000 Net income from operations 1,160,000
Less: Annual exempt income (250,000) Add: Other non-operating income 100,000
Net Total 1,850,000 Taxable Income 1,260,000
Optional Income tax rate 8% Income Tax Due 217,500
Tax Due (income and business tax) 148,000
Business tax due (2,000,000 x 3%) 60,000
Total Tax Due 277,500

Illustration 2 – pure business/professional income earner

A taxpayer realized P2,600,000 in sales and P64,000 in other income subject to regular tax. Additionally, he
incurred P1,800,000 in business expenses.

8% Optional Income Tax Regular Income Tax

Net Sales 2,600,000 Net Sales 2,600,000
Add: Other non-operating income 640,000 Less: Allowable deductions (1,800,000)
Total Taxable Income 2,664,000 Net income from operations 800,000
Less: Annual exempt income (250,000) Add: Other non-operating income 64,000
Net Total 2,414,000 Taxable Income 864,000
Optional Income tax rate 8% Income Tax Due 118,500
Tax Due (income and business tax) 193,120
Business tax due (2,600,000 x 3%) 78,000
Total Tax Due 196,500

Note: The income tax due for both illustrations are computed using the graduated income tax table, which states that for
incomes above P800,000 to P2,000,000, the tax is calculated as P102,500 plus 25% of the excess over P800,000.
Mixed income earner
Compensation income is not subject to business tax. Hence, it cannot be subjected to the 8% income tax. Due to
this, the income tax due from compensation shall be separately determined using the income tax table while the
8% income tax from the business or profession shall be separately computed. For this purpose, the classification
rule as discussed in prior chapters must be observed.

Since the use of the income tax table in computing the tax due from compensation effectively allowed the
taxpayer claim of P250,000 annual income exemption as embedded in the tax table, there will be no more
P250,000 deduction allowable against the basis of the 8% income tax. Furthermore, if the amount of
compensation income does not exceed P250,000, the unutilized deduction cannot be deducted against business
income since the TRAIN law did not contemplate a deduction cross-over.

Illustration 1 – Mixed income earner

A mixed income earner realized P920,000 from compensation, P2,000,000 in sales, P100,000 other income
subject to regular tax and incurred P1,480,000 in expenses.

The income tax due under the 8% income tax option shall be computed as:
Income Tax due
Taxable compensation income 920,000
Less: lower bracket in tax table (800,000) 102,500
Residual income 120,000
Multiply by: Incremental tax rate 25% 30,000
Tax due – compensation income 132,500

Gross sales 2,000,000

Add: other non-operating income 100,000
Total 2,100,000
Multiply by: Optional income tax rate 8%
Tax due – business income 168,000 168,000

Total Tax Due 300,500

The income tax due under Regular income tax shall be computed as:
Taxable income – compensation 920,000

Net Sales 2,000,000 Income Tax due

Less: Allowable deductions (1,480,000) Taxable income 1,540,000
Net income from operations 520,000 Less: Lower bracket (800,000) 102,500
Add: Other non-operating inc. 100,000 Residual income 740,000
Taxable Income – business 620,000 620,000 Multiply: Incremental tax % 25% 185,000
Total Taxable Income 1,540,000 287,500
Income tax due 287,500

Business tax due (2,000,000 x 3%) 60,000

Total Tax Due 347,500

Illustration 2 – Mixed income earner

A mixed income earner realized P2,600,000 in sales, P64,000 in other income subject to regular tax and earned
P150,000 compensation from part-time employment. Additionally, he incurred P1,800,000 business expenses.

The income tax due under the 8% income tax option shall be computed as:
Income Tax due
Taxable compensation income 150,000
Less: lower bracket in tax table (250,000) 0
Excess (100,000)
Tax due- compensation income 0
 Gross sales 2,600,000
Add: other non-operating income 64,000
Total 2,664,000
Multiply by: Optional income tax rate 8%
Tax due – business income 213,120 213,120

Total Tax Due 213,120

Note: the P100,000 excess of P250,000 over the compensation income cannot be deducted against the basis of the 8%. No
deduction cross-over is allowed.

The income tax due under Regular income tax shall be computed as:
Taxable income – compensation 150,000

Net Sales 2,600,000 Income Tax due

Less: Allowable deductions (1,800,000) Taxable income 1,014,000
Net income from operations 800,000 Less: Lower bracket (800,000) 102,500
Add: Other non-operating inc. 64,000 Residual income 214,000
Taxable Income – business Multiply: Incremental tax 25% 53,500
864,000 864,000
%
Total Taxable Income 1,014,000 156,000
Income tax due 156,000

Business tax due (2,600,000 x 3%) 78,000

Total Tax Due 234,000

TAXABLE ESTATES AND TRUSTS

Taxable Estates
- An estate is an income taxpayer if under judicial settlement or administration.
- An estate under extra-judicial settlement is not a taxpayer. The income of the estate under extra-judicial
settlement is taxable to the heirs.

Taxable Trusts
- A revocable trust is not a taxpayer and is treated as a pass-through entity whose income is taxable to the
grantor-trustor.
- An irrevocable trust is a separate and distinct taxable entity (BIR Ruling 003-05, July 22, 2005). A taxable
trust is treated as an individual taxpayer.

Income taxable to an estate or trust under the NIRC

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests and income accumulated or held for future distribution under the terms of the will
or trust.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries and income collected
by a guardian of an infant which is to be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of administration or settlement of
the estate.
4. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated.

Taxable income of the deceased taxpayers

In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period
in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly
includible in respect of such period or a prior period. (Sec. 44, NIRC).
Illustration: Taxable income of the deceased taxpayers
Miss X died on July 15, 2023. Her estate underwent judicial settlement. She had the following income in 2023:
Compensation income 320,000
Rental income 960,000
Total 1,280,000

The decedent leases a property which earns P80,000 monthly rental.

The accounting period of the decedent shall be terminated at the date of death. Since the estate is under judicial
administration, the estate of the decedent shall be registered as an individual taxpayer.

Thus, the following income shall be reported to the income tax return of the:
Decedent Estate of the Decedent
Compensation income 320,000 -
Rental income (P80,000 x 6.5 months) 520,000 -
Rental income (P80,000 x 5.5 months) 440,000
Taxable income 840,000 440,000
Note:
1. January 1 to July 15, 2023, is 6.5 months while July 16 to December 31 is 5.5 months.
2. Cut-off of income at the date of death is necessary not only for proper accounting of income taxes but also for estate
taxes. In estate taxation, income accruing before death are part of gross estate while those accruing after that are
excluded.

If the estate of the decedent is administered extra-judicially, her heirs will report their share in the P440,000 net
rentals in their individual tax returns.

Illustration 2: Estate
The estate of Mr. Barbel has P850,000 gross income before business expenses of P200,000. The estate
administrator distributed P300,000 to the heirs in accordance with the will of Mr. Barbel.

The taxable income of the estate will be computed as follows:

Gross income 850,000
Less:
- Ordinary allowable deductions 200,000
- Special allowable deductions (income distribution to heirs) 300,000 (500,000)
Taxable net income 350,000
Note: It must be recalled that income distribution from the estate is a special deduction against the gross income of the
estate. The heirs shall include the P300,000 income distribution in their taxable income.

Illustration 3: Trust
Mr. Batman designated irrevocable trust a property in favor of Robin and appointed Superman as trustee. The
property earned P720,000 income before expenses of P200,000 and trust fees of P50,000. In accordance with
the trust indenture, Superman distributed P100,000 to Robin.

The taxable income of the trust shall be computed as follows:

Gross income 720,000
Less:
- Ordinary allowable deductions 250,000
- Special allowable deductions (income distribution to beneficiaries) 100,000 (350,000)
Taxable net income 370,000
Return of Married Taxpayers
- Married individuals shall file a return for the taxable year to include the income of both spouses,
computing separately their individual income tax based on their respective total taxable income.
- Where it is impracticable for the spouses to file one return, each spouse may file a separate return of
income.
- If any income cannot be definitely attributed to or identified as income exclusively earned or realized by
either of the spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable incomes.

ADMINISTRATIVE PROVISIONS

Filing of Returns for Individuals

For Pure business/professional income earner/mixed income earner:

Quarterly Tax Returns Form to be use Deadline
st
1 Quarter ITR BIR Form 1701Q May 15 of the same calendar year
2nd Quarter ITR BIR Form 1701Q August 15 of the same calendar year
rd
3 Quarter ITR BIR Form 1701Q November 15 of the same calendar year
Annual ITR BIR Form 1701A April 15, next year

For individuals earning purely compensation income

Form to be use Deadline Who should prepare?
Annual Tax Return BIR Form 1700 April 15, next year Employee
Substituted filing of ITR BIR Form 2316 February 28, next year Employer

When And Where to File and Pay Tax

For Electronic Filing and Payment System (FPS) taxpayers

- The return shall be e-filed and the tax e-paid on or before the 15th day of April of each year covering the
income for the preceding year using the eFPs facilities through the BIR website.

For Non-Electronic Filing and Payment System (non-e FPS) taxpayers

The return shall be filed and the tax paid on or before the 15th day of April of each year covering the income for
the preceding year with:
a. Any authorized agent banks (AAB located within the jurisdiction of the Revenue District Officer (RDO)
where the taxpayer is registered.
b. Revenue Collection Officer (RCO) under the jurisdiction of the RDO where the taxpayer is registered, if
there is no AAB.

In case of "no payment returns," the same shall be filed with the RDO where the taxpayer is registered or has his
legal residence or place of business in the Philippines or with the concerned RCO under the same RDO.

A "No payment return" pertains to tax returns without tax payable such as those with negative or zero taxable
income, those with exempt or no operation during the period, those with tax creditable or refundable, or those
with balance payable only on the second installment.

For non-resident taxpayers

In case the taxpayer has no legal residence or place of business in the Philippines, the return shall be filed with
the Office of the Commissioner or Revenue District Office No. 39, South Quezon City.
Installment Payment of the Regular Income Tax
- When the tax due is in excess of P2,000, individual taxpayers (except corporations) may elect to pay the
tax in two equal installments:
1. The first installment shall be paid at the time the return is filed.
2. The second installment is due on or before October 15 following the close of the calendar
year.
- If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax
unpaid becomes due and payable together with the delinquency penalties.

Who Shall File the Income Tax Return?

1. A resident citizen engaged in trade, business, or practice of profession within and without the Philippines.
2. A resident alien, non-resident citizen, or non-resident alien individual engaged in trade, business, or
practice of profession within the Philippines.
3. A trustee of a trust, guardian of a minor, executor/administrator of an estate, or any person acting in any
fiduciary capacity for any person where such trust, estate, minor, or person is engaged in trade or business.
4. An individual engaged in trade or business or in the exercise of their profession and receiving compensation
income as well.

Who Are Not Required to File Income Tax Return?

1. Minimum wage earners
2. An individual whose gross income does not exceed P250,000.
3. An individual whose compensation income derived from one employer does not exceed P60,000 and the
income tax on which has been correctly withheld.
4. Individuals whose income has been subjected to final withholding tax such as in the case of non-resident
aliens not engaged in trade or business.
5. Pure compensation earners qualified under the substituted filing system

Amendment of Income Tax Return

The amounts indicated by the taxpayer in the income tax return are his assertions. The same is deemed
final unless amended by the taxpayer.
Within three years from the required date of filing of the return, the taxpayer can amend the same so
long as no Letter of Authority for investigation is issued by the BIR for the examination of his tax return.
Amended returns shall not be subject to surcharges for late filing or late payment but shall be imposed
the interest penalties.

Reference:
Income Taxation, Rex Banggawan 2023 Edition