INCOME TAX

Presented by:

LILYBETH A. GANER, CPA, MBA

Revenue Officer
RR-19, Davao City

1
Business Income
 Any income not related to an employer-
employee relationship
 Generally taxable on the net income
 Includes gains, profits and income in
whatever form derived from any source,
legal or illegal, such as –
 Exercise of profession or vocation
 Trade, business or commerce
 Dealings in property
 Fruits of the ownership or use of property
 Interest, rent, dividends, securities
 Other transactions of the business for gain or
profit
2
Gross income
 All income from whatever source
derived, including but not limited to
the following items:
 Compensation for services, including
fees, commissions and similar items
 Gross income derived from business or
exercise of profession
 Gains from dealings in property
 Interest
 Rents
3
Gross income (cont.)
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partner’s distributive share in the net
income of general professional
partnership

4
Net Income
 The realized gross profit after deducting all the
deductions allowed by law, statutes or generally
accepted accounting principles.

Exclusions
 The total benefits which is not included in the
computation of gross income for the purpose of
determining taxable income.

Deductions
 Items or amounts which the law allows to be
deducted from gross income to arrive at the taxable
income.
5
Allowable Deductions
 There shall be allowed as deduction
from gross income, other than
compensation income, expenses
incurred in the conduct of trade or
business to arrive at the net income.
 At the taxpayers option, deductions
for expenses may either be—
 Itemized deduction
 Optional Standard Deduction (OSD) –
40%
6
Requisites for Deductibility of Expenses
 Ordinary and necessary
 Paid or incurred within the taxable year
 Incurred in the conduct of trade or business
 Not contrary to law, morals, public policy or
public order
 Substantiated by sufficient proof
 Subjected to withholding tax, if applicable

7
Itemized Deduction
1. Ordinary and necessary trade,
business or professional expenses
 Salaries & wages
 Travel expenses
 Rental expenses
 Entertainment, amusement and
recreation expenses
2. Interest
3. Taxes

8
Itemized Deduction (cont.)
4. Losses
 Net Operating Loss Carry Over (NOLCO)
 Capital losses
 Losses from wash sales of stocks or
securities
 Wagering losses
 Abandonment losses

9
Itemized Deduction (cont.)
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and
mines
8. Charitable and other contributions
9. Research and development
10.Pension trusts

10
Interest
 There must be a valid and existing
indebtedness;
 The indebtedness must be that of the
taxpayer;
 The interest must be legally due and stipulated
in writing;
 The interest expense must be paid or incurred
during the taxable year;
 The indebtedness must be connected with the
taxpayer's trade, business or exercise of
profession;

12
Interest
 The interest payment arrangement must not
be between related taxpayers.
 The interest is not expressly disallowed by
law to be deducted from the taxpayer’s
gross income (e.g., interest on indebtedness
to finance petroleum operations); and
 The amount of interest deducted from gross
income does not exceed the limit set forth in
the law.

13
Interest
 Limitation
The amount of interest expense paid or incurred
from an existing indebtedness shall be reduced by an
amount equivalent the following percentages of the
interest income earned during the year which had
been subjected to final withholding tax
Jan. 1998 - 41%
Applies regardless of the date the
Jan. 1999 - 39% interest bearing loan and the date
Jan. 2000 - 38% when the investment was made for
as long as, during the taxable year
Nov 2005 - 42% there is an interest expense
Jan. 2009 - 33% incurred and an interest income
earned.
14
Interest
EXCEPTIONS
• Deductible in full from gross income

Interest on unpaid taxes – interest paid or incurred on all unpaid

business-related taxes shall be deductible in full

• Not deductible from gross income

a. Interest incurred on indebtedness of taxpayer using cash basis,

where the interest is paid in advance thru discount or otherwise
i. Allowed as a deduction in the year the indebtedness was paid
ii. If amortized – amount corresponding to the principal
amortized shall be allowed as deduction during the year
15
Interest
• Not deductible from gross income

b. Interest payments between related parties as

specified in Sec. 36(B) of the Tax Code

c. Interest expense paid or incurred by Service

Contractor engaged in the discovery or production
of indigenous petroleum in the Phil.

d. Interest incurred on capital expenditures (optional)

• Interest expense
• Capital expenditure

16
Interest
RELATED PARTY TRANSACTIONS
[Sec. 36(B)]

• Between members of the same family

• Between a corporation and an individual who owns more
than
50% of the outstanding stock of the former
• Between 2 corporations more than 50% of the outstanding
stock were owned by the same individual
• Between grantor and fiduciary of any trust
• Between 2 fiduciaries of trust if the same person is the
grantor of each trust
• Between fiduciary and beneficiary of the same trust 17
Taxes
 All business related taxes
 Non-deductible taxes
 Income tax paid in the Phils.
 Income tax imposed by authority of foreign
country – tax credit with limitation
 Estate and donor’s taxes
 Tax assessment which increases the value of the
property assessed
 Electric energy consumption tax under B.P. 36
 VAT
 Tax credits
 Taxes paid in foreign countries subject to
limitation
18
Taxes
 Interest or surcharge imposed on taxes are not
deductible as taxes, but as an item of interest.

 Only the person upon whom taxes are imposed

may claim them as deduction, except: (1) Taxes
upon an individual upon his interest as
shareholder of corporation which are paid by
corporation without reimbursement; and (2)
Corporate bonds or other obligations containing
a tax-free covenant clause, the corporation
paying the tax or any part of it for someone else
(Sec. 80, RR 2).

19
Taxes
 Refund of tax payment
 Taxes refunded shall be included in the
year of receipt to the extent of the income
tax benefit of such deduction (tax benefit
rule)

20
Taxes
Disclosure requirement on taxes
(Notes to FS) RR 15-2010
 The notes of f/s shall include info on
taxes, duties and license fees paid or
accrued during the taxable year
The amount of VAT Output tax and the
account title and amount/s upon which the
same was based,

21
Losses
 Requisites for deductibility
 Incurred in trade, business or profession
 Not compensated by insurance or other form of
indemnity
 In case of property, for losses arising from fire,
storm, shipwreck, other casualty, robbery, theft,
embezzlement, the property must be used in
trade, business or profession and reported
within forty-five (45) days from date of
occurrence of such loss.
 Not claimed as deduction for estate tax purposes

22
Net Operating Loss Carry-over
(NOLCO) RR 14-2001

 Net operating loss - means the

excess of allowable deduction over gross
income of the business in a taxable year

23
Bad Debts
 Requisites for valid deduction
 There must be an existing indebtedness due to
the taxpayer
 It must be valid and legally demandable
 It must be connected with the taxpayer’s trade,
business or practice of profession
 It must not be sustained in a transaction entered
into between related parties
 It must be actually charged off from the books of
accounts as of the end of the taxable year
 It must be ascertained to be worthless and
uncollectible as of the end of the year
24
Depreciation
 A reasonable allowance/reduction in service
value for the exhaustion, wear and tear of
property used in trade, business or practice
of profession.

 Methods of depreciation
 Straight line method
 Declining balance method
 Sum of the year’s digit method
 Any other method which may be prescribed
25
Depreciation
Requirements for deductibility
 The allowance for depreciation must be
reasonable;
 It must be for property arising out of its
use in the trade or business, or out of its
not being used temporarily during the year;
and
 It must be charged off during the taxable
year from the taxpayer’s books of accounts.

26
Charitable and other Contributions
 Donations with limited deductibility
 For the use of government exclusively for public
purpose
 To accredited domestic corporation or
association organized and operated exclusively
for religious, charitable, scientific, youth and
sports development, cultural or educational
purposes
 For the rehabilitation of veterans
 For social welfare institutions
 To non-government organization

27
Charitable and other Contributions
 Rate of deduction

 Individual donor - 10% of net income

before deducting
donations

 Corporate donor - 5% of net income before

deducting donations

OR

Actual contribution/donation

WHICHEVER IS LOWER
28
Charitable and other Contributions
 Donations deductible in full
 Donations to the government exclusively to
finance or to be used in undertaking priority
activities in education, health, youth and sports
development, human settlements, science and
culture and in economic development according
to the National Priority Plan determined by
NEDA.
 Donations to foreign institution or international
organizations
 Donations to accredited non-government
organizations

29
Entertainment, Amusement &
Recreational (EAR) Expenses
 Includes representation expense and/or
depreciation or rental expense relating to
entertainment facilities.
 Representation expense shall refer to
expenses incurred in entertaining,
providing amusement and recreation to, or
meeting with guest or guests at dining
place, place of amusement, country club,
theater, concert, play, sporting event and
similar events or places.

30
Entertainment, Amusement &
Recreational (EAR) Expenses
 Expenses NOT considered EAR
 Expenses treated as compensation or fringe benefits
 Expense for charitable or fund raising events
 Expense for bonafide business meeting of stockholders,
partners or directors
 Expenses for attending or sponsoring employee to a
business league or professional organization meeting
 Expenses for events organized for promotion marketing
and advertising including concerts, conferences, seminars,
workshops, convention, and other similar event.
 Other expense of similar nature

31
Entertainment, Amusement &
Recreational (EAR) Expenses
 The taxpayer should maintain receipts and
adequate records that indicate the
 The amount of expense
 Date and place of expense
 Purpose of expense
 Professional or business relationship of
expense
 Name of person and company entertained
with contact details

32
 Entertainment, Amusement &
Recreational (EAR) Expenses
 Requirements for deductibility
 Paid or incurred during the taxable year
 Business connected
 Not contrary to law, morals, good customs, public policy or public order
 Does not constitute a bribe, kickback or other similar payment
 Duly substantiated by adequate proof
 Subjected to withholding tax, if applicable

33
 Entertainment, Amusement &
Recreational (EAR) Expenses
 Imposition of Ceiling [Sec. 34(A)(1)(a)(iv) of NIRC) & RR 10-2001]

Actual entertainment, amusement and recreation expense

OR

 .5% of net sales for sellers of goods and properties

 1% of net revenues for sellers of services

WHICHEVER IS LOWER

34
TAXPAYER ENGAGED IN BOTH
SALE OF GOODS AND SERVICES

Allowable EAR expense shall be determined based on

apportionment formula –

Percentage of net sales/net revenue to the total net sales/net

revenue multiplied by the actual EAR expense

Net sales/net revenue x Actual expense

Total net sales/revenue

Note:
In no case shall the total EAR exceed the maximum percentage
ceiling 35
Illustration:
ERA Corporation is engaged in the sale of goods and
services with net sales/net revenue of P200,000 and
P100,000 respectively. The actual EAR for the year 2010
totaled P3,000

Computation:
*Apportionment formula
Sale of goods (P200,000/P300,000) x P3,000 = P2,000
Sale of service (P100,000/300,000) x P3,000 = P1,000

**Maximum percentage ceiling

Sale of goods P200,000 x 0.50% = P1,000
Sale of service P100,000 x 1% = P1,000
36
Computation:

Allowable
EAR expense Maximum amount to
based on percentage be claimed
apportionment ceiling of as EAR (w/c
Net sales/ ever is
net revenue formula* EAR**
lower)
Sale of P200,000 P2,000 P1,000 P1,000
goods
Sale of P100,000 P1,000 P1,000 P1,000
services
Total P300,000 P3,000 P2,000 P2,000

ERA Corporation can only claim a total of P2,000 as EAR

37
Optional Standard Deduction

In lieu of the itemized deductions enumerated under

Sec. 34(A) to (J) and (M) and Sec. 37 of the Tax
Code and other special laws (if applicable) .

38
Optional Standard Deduction
 Individuals
 Resident citizen
 Non-resident citizen
 Resident Alien
 Taxable estates and trusts

 Corporations (subject to normal income tax rate)

 Domestic corporation
 Resident foreign corporation

39
Optional Standard Deduction
Individual Corporation
Rate 40% of gross 40% Gross
sales/revenues income
Tax Base Excluding Excluding
passive income passive income
subject to final subject to final
withholding tax withholding tax

Cost of Not allowed to Allowed to

sales/services deduct deduct
COS/services COS/services
40
Optional Standard Deduction
 Disclosure of election to use the OSD
(RMC 16-2010)
 Taxpayers availing of the OSD are
required to check the appropriate box in
the ITR for the first quarter of the
taxable year 2009.
 Failure to indicate the election to avail of
the OSD shall be considered as having
availed of the itemized deduction.

43
Optional Standard Deduction
 Disclosure of election to use the OSD
(RMC 16-2010)
 The same type of deduction must be
consistently applied for all the
succeeding quarterly returns and in the
final ITR for the taxable year.
 New registrants shall disclose their
election to avail OSD in their initial
quarterly ITR.

44
Optional Standard Deduction
 Implication of OSD
 Option is irrevocable for the taxable year
for which the return is made.
 Any subsequent amendment of ITR filed for
the first/initial quarter shall not affect the
irrevocable character of the election to avail
of the OSD or itemized deduction.
 Individual claiming the OSD is not required
to submit financial statements but shall
keep records of his gross sales/receipts

45
Illustration 1
Mr. Era , a retailer of goods uses the accrual method of
accounting in reporting his income and expenses. For
the year 2010, the following are his recorded income
and expenses
Cost of Operating
Gross sales sales exp
Jan-June P1,000,000 P600,000
July-Sept 700,000 200,000 P50,000
Oct-Dec 900,000 400,000 100,000

Mr. Era uses the OSD as indicated on his 1st quarter

ITR. Compute for the allowable deductions for each of
the quarters of 2010 and the net income for the
taxable year.
46
Computation 1

a) Allowable deductions
Jan. – June July – Sept Oct - Dec
Gross sales P1,000,000 P700,000 P900,000
Less: Cost of sales -0- -0- -0–
Gross sales/income P 1,000,000 P700,000 P900,000
X OSD rate 40% 40% 40%

OSD P 400,000 P280,000 P360,000

====== ======= =======

b) Net income for 2010

Gross sales (Jan – Dec) P2,600,000

OSD (40%) 1,040,000
Net income 1,560,000
========
47
Illustration 2
GSV Corporation, a retailer of goods, uses the accrual
method in declaring its income and expenses. For the
calendar year 2010, the following are the records of its
income and expenses:

Cost of Operating
Gross sales sales exp
Jan-June P1,000,000 P700,000 P100,000
July-Sept 700,000 300,000 200,000
Oct-Dec 900,000 600,000 100,000

GSV Corp. uses the OSD. Compute for the quarterly

allowable deductions (cost and expenses) and the net
income for 2010.

48
 Computation 2

a) Allowable deduction
Jan – June July – Sept Oct – Dec
Gross sales P1,000,000 P700,000 P900,000
Less Cost of sales 700,000 300,000 600,000
Gross income 300,000 P400,000 P300,000
X OSD rate 40% 40% 40%
OSD/Operating expenses P120,000 P160,000 P120,000
Add: Cost of sales 700,000 200,000 100,000

Total deductions P820,000 P360,000 P220,000

======= ======= =======
b) Net income
Gross sale P2,600,000
Cost of sales 1,600,000
Gross income 1,000,000
OSD (40%) 400,000

Net income P 600,000

=======

49
Taxation of Mixed Income
 It follows the compartmentalized approach
for returnable income.
 Personal exemptions are first deducted
from compensation income.
 Excess of PE over compensation income are
deductible from net income from business.
 Separate computation of income tax
liability for husband and wife.
 Only one spouse will claim additional
personal exemption.

50
50
Taxation of Mixed Income
 Taxable compensation income is added to
taxable income from business and the
aggregate taxable income is subjected to
the graduated tax rates.
 Loss from business can not be offset
against compensation income but can be
carried over as NOLCO.
 One consolidated income tax return for
husband and wife.
 Pay-as-you-file, but installment is allowed if
tax due exceeds P2,000 [Sec. 56(A)(2)].
51
Taxation of
Marginal Income Earners (RR 11-00)

 Individuals not deriving compensation income

 Self-employed
 Deriving gross sales/receipts not exceeding
P100,000 during any 12-month period
 Principally earning for subsistence or livelihood
 Exempt from VAT and any percentage tax
 Not required to pay the registration fee
 Required to register as taxpayer
 Exempt from the invoicing requirements

52
Taxation of
Marginal Income Earners (RR 11-00)

 Exempt from maintaining books of accounts

 Required to file the Annual Income Tax Return
(Form 1700) but not required to attach
Financial Statements or Account Information
Form to the filed ITR
 May or may not be liable to tax

53
Income Tax Computation

Corporate Taxpayer

54
What is a corporation?
Corporation – is an artificial being created by law, having
the rights of succession and the powers, attributes and
properties authorized by law or incident to its existence.

For taxation purposes, corporation shall include –

 Partnerships

 Joint-stock companies

 Joint accounts

 Associations

 Insurance companies
55
A corporation does not include –

•General Professional Partnership

•Joint venture or consortium formed for the

purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under a
service contract with the government

56
MINIMUM CORPORATE INCOME TAX
(MCIT)
RR No. 9-98, as amended by RR no. 12-07

57
Sec. 27(E) and 28 (A)(2) of the NIRC
Imposed on:

Domestic & Resident Foreign

2% on Gross Income

if: - in the 4th year of operation

- net loss/zero taxable income/
MCIT is greater than NCIT

58
Gross income
Include all items of gross income enumerated under Section
32(A) of the Tax Code, as amended, except income exempt from
income tax and income subject to final. withholding tax.

For Sale of goods

Gross sales – (cost of goods sold + sales returns +
discounts+ allowances)
“Gross sales”
Include only sales contributory to income taxable under Sec.
27(A) of the Code.

“Cost of goods sold”

Include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.

59
For sale of services

Gross revenue – (cost of services/direct cost + sales

returns + discounts + allowances)

“Gross Revenues”
Include income from sale of services, likewise, taxable
under Sec. 27(A)

“Cost of services or Direct cost of Services”

Include all business expenses directly incurred or related
to the gross revenue from rendition of services.

60
Illustration

Gross sales/ revenues 1,000,000.00

Less: Sales Ret., Disc & Allow. 25,000.00
Cost of Goods Sold/ services 500,000.00

Gross Income from operation 475,000.00

Add: Other Income not subject to
Final Tax or Capital Gains Tax 100,000.00
Total Gross Income subject to MCIT 575,000.00
========
61
Carry forward of Excess MCIT

• Excess of MCIT over normal income tax shall be

carried forward on an annual basis and credited
against the normal income tax for the 3 immediately
succeeding taxable years.

• Excess MCIT can only be credited against the

income tax due if the normal income tax is higher
than the MCIT

62
 Carry forward of Excess MCIT

• Excess MCIT which has not or cannot be so

credited against the normal income tax due
for the 3-year period shall lose its credibility.

• Excess MCIT cannot be claimed as a credit

against the MCIT itself or against any other
losses

63
Carry forward of Excess MCIT

• The final comparison between the normal

income tax payable and the MCIT shall be
made at the end of the taxable year.

• The payable or excess payment in the

Annual Income Tax Return shall be
computed taking into consideration income
tax payment made at the time of filing of
quarterly income tax returns whether this be
MCIT or normal income tax

64
Suspension of MCIT
• Instances when MCIT may be suspended
Substantial losses on account of –
 Prolonged labor dispute
 Force majeure
 Legitimate business reverses

• Who may suspend

 Secretary of Finance upon
recommendation of the CIR

65
Suspension of MCIT

• Required documentation
 Submission of proof by the corporation
 Duly verified by the CIR’s duly authorized
representative

66
 IMPROPERLY ACCUMULATED
EARNINGS TAX (IAET)
RA 8424/ RR No. 2-2001/RMC 35-2011

67
CONCEPT OF IAET
• Taxpayer is a corporation
• Improper accumulation of taxable income beyond
the reasonable needs of the business
• Non-distribution of earnings/profits to
stockholders
• The purpose of accumulation is to avoid the
payment of the income tax
• Imposition of tax equivalent to 10% of the
improperly accumulated taxable income
• The tax imposed is in the nature of penalty to a
corporation for improper accumulation of earnings
beyond the reasonable needs of the business
68
EVIDENCE OF PURPOSE TO AVOID
THE TAX

• The corporation is a mere holding or

investment company

• Earnings or profits are permitted to

accumulate beyond the reasonable
needs of the business

69
Reasonable vs. Unreasonable Accumulation

 Reasonable Needs of Business:

 Immediate needs of business, including
reasonably anticipated needs (Immediacy
Test)

 Unreasonable Accumulation
 Not necessary for the purpose of the
business considering all circumstances of
the case

70
Reasonable Needs of Business
 100% of the paid up capital or the amount
contributed to the corporation representing
the par value of the shares of stock, hence,
any excess capital over & above the par shall
be excluded (RMC 35-2011).

71
Reasonable Needs of Business
 Earnings Reserved
 for definite corporate expansion projects
 for building, plant or equipment acquisition
 for compliance with loan covenant or pre-
existing obligation established under a
legitimate business agreement.
 Required by law to be retained or with legal
prohibition
 In case of foreign corporation subsidiaries,
intended for investments within the
Philippines
72
Unreasonable accumulation of Profits

 Investment of substantial earnings and

profits of the corporation in unrelated
business or in stock or securities of
unrelated business;
 Investment in bonds and other long term
securities; and
 Accumulation of earnings in excess of
100% of paid-up capital or contribution
representing the par value of the shares
of stock.

73
Corporation Exempt from IAET
 Banks and non-bank financial intermediaries
 Insurance companies
 Publicly held corporations
 Taxable partnerships
 GPP
 Non-taxable joint ventures
 Firms registered under RA 7916, 7227, and other
special ecozones

74
IMPOSITION OF IAET

Tax rate 10%

Corporations liable Closely-held domestic

corporations

Deadline 15th day after the

end of he year following the
close of the taxable year

75
Closely-held corporations:

 are corporations at least 50% in value

of the outstanding capital stock or at
least 50% of the total combined
voting power of all classes of stocks
entitled to vote is owned directly or
indirectly by or for not more than 20
individuals

76
TAX BASE OF IAET
(Improperly Accumulated Taxable Income)

Taxable income P xxx

Add:
(a)Income subject to final tax Pxxx
(b)NOLCO xxx
(c)Income exempt from tax xxx
(d)Income excluded from gross income xxx xxx
Total P xxx
Less: Income tax paid for the year xxx
Div. actually or const. paid/issued xxx xxx
Total xxx
Less : Amount that can be retained xxx

IATI Pxxx
===
77
Payment of IAET
 Dividend must be declared and paid not later
than one year following the close of the taxable
year

 Otherwise, IAET should be paid within 15 days

thereafter
Once the profit has been subjected to IAET, the same shall no
longer be subjected to IAET in later years, even if not declared as
dividend.

Profits subjected to IAET, when finally declared as dividends, shall

be nevertheless be subject to 10% final withholding tax

78
Income Tax Forms and
Due Dates

79
Income Tax Forms

Form Form Name Deadline for Filing No. of

No. Copies
1702 Annual Income Tax On or before April 3 copies
Return 15
(For Corporations,
Partnerships and On or before the 15th
Other Non-individual day of the 4th month
Taxpayers) following the close
of the fiscal year

80
 Form Form Name Deadline for Filing No. of Copies
No.

1702Q Quarterly Income Tax 60 days 3 copies

Return following the
(For Corporations, close of the first
Partnerships and Other 3 taxable
Non-individual quarters
Taxpayers)
1704 Improperly On or before the 3 copies
Accumulated Earnings 15th day of the
Tax Return following year
following the
taxable year

81
NOTE:

Installment Payments
•Applicable to individual taxpayer
only and NOT TO CORPORATION

next
82
New Income Tax Forms

Presented by:

LILYBETH A. GANER
Revenue Officer
ASSESSMENT DIVISION
RR 19-DAVAO CITY
Revised Forms
 BIR Form 1700 ( Purely Compensation
Income )
 BIR Form 1701 (Self-Employed
Individual, Estate and
Trust)
 BIR Form 1702 ( Corporations,
Partnership and Other Non- Individual
Taxpayer
 Effectivity
-Income tax filing covering and starting with calendar
year
2011, due for filing on or before April 15. 2012

- Juridical entities on FY basis are to use

starting with those FY ending January 31, 2012
Features
 To be read by an optical character reader
 Use Nov. 2011 version
 Box Type
 Shading
 All information must be written in capital
letters
 Orientation is landscape (horizontal)
 e-mail address of taxpayer
features
 Field No. 47 – for filer’s new address
 With supplemental information
(optional)
 Schedule of gross income subjected to
final tax

 Schedule of gross income/receipts exempt

from income tax
“ Knowing is not enough; we must apply.
Willing is not enough; we must do.”
Johann Wolfgang von Goethe

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