Introduction to Regular

Income Taxation
Short Quiz
JC Wu, a CPA, had an accounting office. For the year 2019, he had the following information:

Billing for services Rendered and out of pocket cost P 4,500,000

Salaries of Audit Staff 1,400,000
Salaries of Administrative staff 200,000
Transportation expenses 12,000
Supplies used on various engagement 250,000
Supplies used for party thrown in clients office 120,000
Supplies and General utilities 180,000
Depreciation of office equipment 80,000
Depreciation of laptop 50,000
Insurance Expense on office properties 25,000
Rent Expense Allocable to workspace 450,000
Rent Expense Allocable to administrative work 123,000
Bad debts Expense 87,000
Sample Problem - Services
JC Wu, a CPA, had an accounting office. For the year 2019, he had the following
information:

Salaries of Audit Staff 1,400,000

Transportation expenses 12,000
Supplies used on various engagement 250,000
Depreciation of laptop 50,000
Rent Expense Allocable to workspace 450,000
Total P2,162,000
RIT Model
GROSS INCOME P XX.XX
LESS: ALLOWABLE DEDUCTIONS P(XX.XX)
TAXABLE INCOME P XX.XX
Less:TAX RATE X%

Net INCOME P XX.XX

CHARACTERISITCS OF RIT
1. GENERAL IN COVERAGE
Income tax applies to all types income except those subject to final tax,
capital gains tax and special tax regimes. (even illegally earned income
is subject to taxation e.g. winnings from gambling)
2. A NET INCOME TAX –
it is the imposition on the residual profits or gains made after deducting
expenses.
3. AN ANNUAL TAX
It is taxed annually on the person and applies on profits or gains made.
4. CREDITABLE WITHHOLDING TAX
Most income is subject to creditable withholding tax (CWT),
which is withheld at source by the payor (customer) to be paid to
the BIR. It is an advance tax deductible against annual income tax
Final Withholding Tax Vs
Creditable Withholding Tax
Similarities

1. In both cases, the income payor withholds a fraction of the

income and remits the same to the government through the
Bureau of Internal Revenue (BIR).

2. By collecting both at the time of payment, it helps

minimize collection issues of the government, and cash flow
problems to the taxpayers.
Differences
Final Withholding Creditable
Tax Withholding Tax
Income Tax Withheld FULL PARTIAL
COVERAGE CERTAIN PASSIVE CERTAIN PASSIVE,
INCOME AND ACTIVE INCOME
Who Remits the Tax Income Payor (e.g. Income payor for the
Bank for interest) CWT,
Taxpayers pay the
balance
Necessity of an No Yes
annual ITR
Sample Problem

Pedro Velazquez has a building with 10 units available for rent.

During the year, rental income amounted to P12,324,000.00,
creditable withholding tax amounted to P616,200.00. Income tax
due amounted to P3,923,400.00.

How much should Pedro pay in income taxes?

Answer

Pedro Velazquez has a building with 10 units available for

rent. During the year, rental income amounted to
P12,324,000.00, creditable withholding tax amounted to
P616,200.00. Income tax due amounted to P3,923,400.00.

How much should Pedro pay in income taxes?

12,324,000 – 8,000,000 = 4,324,000 *.35 = 1,513,400 +2,410,000 = 3,923,400

3,923,400-616,200= 3,307,200
Gross Income

Gross Income constitutes all income items of

income that are neither excluded nor subject
to Final tax or capital gains tax.

To be Discussed Further in the Succeeding Chapters.

Allowable Deductions

Deductions, are expenses in the conduct of business or exercise of

profession.
Deductions claimed may be itemized or opt to claim optional standard
deduction.

Itemized
Taxpayer must support every item of deduction through official receipts.

Optional Standard Deduction (OSD)

A percentage of gross sales, receipts or gross income.
Income subject to Regular Income Tax

1. Compensation Income
2. Business or professional income
3. Other income – non business income and non
compensation income such as
a. Gains from dealings in properties
b. Other income passive or active, not subject to final tax
Income subject to Regular Income Tax

Employment Business or Others Total

Income Professional
Gross Income P XX.XX P XX.XX P XX.XX P XX.XX

Less:

Deductions (XX.XX) (XX.XX)

Personal
Deductions

Taxable P XX.XX P XX.XX P XX.XX P XX.XX

Income
Compensation Income
Compensation income comprises of all renumeration
earned in a employer-employee relationships, such
as regular pay of employee, and other incentives.

Compensation Income – generally subject to RIT

1. Regular Pay
2. Other Benefits and bonuses, both monetary and non-
monetary
3. 13th month and de minimis benefits granted
4. Fringed benefit – subject to fringed benefit tax (FBT)
Compensation Income
Compensation income comprises of all renumeration earned in a
employer-employee relationships

Employer-Employee Relation
RR No. 2-98, as amended, provides that there is a relationship the
following 4-fold test must happen:
a) the selection and engagement of the employee;
b) the payment of wages;
c) the power of dismissal; and
d) the employer’s power to control the employee on the means and
methods by which the work is accomplished.
Classification of employee remuneration

Rank and File Managerial or

Employees Supervisory
employees
Regular Pay Compensation Compensation
Income Income

Fringed Benefits Compensation Fringed Benefit

Income
Tax Reporting on Compensation Income

Gross Compensation Income P XX.XX

Less: Non-taxable Compensation (XX.XX)
Gross Taxable compensation Income P XX.XX
Less: Personal Exemption* -
Net Taxable Compensation Income P XX.XX

Personal Exemption removed under R.A. 10963 (TRAIN Act)

Business Income

Income that arises from the habitual, engagement in

any commercial activity involving regular sales of
goods or services by an individual or a corporation

Sales P XX.XX
Cost of goods sold (Cost of sales) (XX.XX)
Gross Income P XX.XX
Cost of Sales/Cost of Goods Sold

1. Cost of Sales – acquisition cost of goods sold

2. Cost of Goods sold
Beg. Inventory P XX.XX
Purchases, net of returns and allowance XX.XX
Freight In XX.XX
Total Goods Available for Sales P XX.XX
Less: Ending Inventory (XX.XX)
Cost of Goods Sold P XX.XX
Sample Problem
Salva, had the following information for 2019:

Gross Sales 4,850,000.00

Sales Returns and Allowance 350,000.00
Purchase Discounts 128,000.00
Beginning Inventory 2,852,000.00
Purchases 1,063,500.00
Purchase Returns 74,800.00
Freight In 146,300.00
Freight Out 101,000.00
Ending Inventory 1,897,000.00
Sample Problem – Cost of Goods Sold

Salva, had the following information for 2019:

Amount
Beg. Inventory P 2,852,000
Net Purchases 860,700
Freight In 146,300
Total Goods Available for P 3,859,000
Sales
Ending Inventory (1,897,000)
Cost of Goods Sold P 1,962,000
Professional Income

 Income received from the exercise of profession (CPA,

Lawyer, Doctor, Engineer, etc.)

Revenues or Gross Receipts P XX.XX

Less: Cost of Services (XX.XX)
Gross Income P XX.XX
Cost of Services

Pertains to all direct cost of rendering the services such as

cost of labor, materials and overhead cost.

Cost of Services should be distinguished with cost of

administration and marketing of business. Those are
presented separately under the deduction category “Regular
Allowable itemized deductions”.
Sample Problem - Services
JC Wu, a CPA, had an accounting office. For the year 2019, he had the following information:

Billing for services Rendered and out of pocket cost P 4,500,000

Salaries of Audit Staff 1,400,000
Salaries of Administrative staff 200,000
Transportation expenses 12,000
Supplies used on various engagement 250,000
Supplies used for party thrown in clients office 120,000
Supplies and General utilities 180,000
Depreciation of office equipment 80,000
Depreciation of laptop 50,000
Insurance Expense on office properties 25,000
Rent Expense Allocable to workspace 450,000
Rent Expense Allocable to administrative work 123,000
Bad debts Expense 87,000
Sample Problem - Services
JC Wu, a CPA, had an accounting office. For the year 2019, he had the following
information:

Salaries of Audit Staff 1,400,000

Transportation expenses 12,000
Supplies used on various engagement 250,000
Depreciation of laptop 50,000
Rent Expense Allocable to workspace 450,000
Total P2,162,000
Tax Reporting of Business or Professional
Net Sales/Revenues/Receipts/Fees P XX.XX
Add: Other Taxable income from operation not subject to FT XX.XX
Total Sales/Revenues/Receipts/Fees P XX.XX
Less: Cost of Sales/Services (XX.XX)
Gross Income from Business/Profession P XX.XX
Add: Non-Operating Income XX.XX
Total Gross Income P XX.XX
Less: Allowable Deduction (XX.XX)
Net Income P XX.XX
Sales, revenues, receipts and fees
distinguished
Revenue – a general term which pertain to a gross inflow of
benefits arising from operations

Sales – revenue from the sale of goods

Fees – Revenue from sale of services

Receipt – cash collection from the sale of goods or services.

Revenue Vs. Gross Income

Revenue is a gross concept pertaining to the TOTAL RETURN

in a transaction

Gross Income is a net concept pertaining to the return on

capital in a transaction.
Other Taxable Income from Operations

Includes revenues or receipts from incidental or secondary

operations aside from the primary source.

Examples
1. A school, has tuition fees as the primary source of income, while income from
its rental to food stall and bookshops are consider other operating revenues.
2. A manufacturing firm has gross income from the sale of its finished goods as it
primary source of revenue but its income from scrap sales constitutes other
operating income.
Non-Operating Income

Income from all others items of gross income, such as

a. Gains from dealings in properties

b. Income distribution from a general professional
partnership
c. Casual active income
d. Passive income not subject to final tax
Sample Problem – Non-Operating Income
Daisy Syete, owned a manufacturing business, and reported the following results
of operations during the taxable year:

Sales, net of returns and discounts P 4,000,000

Cost of sales 1,800,000
Dividend income, net of final tax 36,000
Business Expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap metal 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks 10,000
Sample Problem – Non-Operating Income
Daisy Syete, owned a manufacturing business, and reported the following results of
operations during the taxable year:

Net Sales P 4,000,000

Add: Other Taxable Income 200,000
Total Sales P 4,200,000
Less: Cost of Sales 1,800,000
Gross Income from Business/Profession P 2,400,000
Add: Non-operating income
Gain on sale of equipment 100,000
interest income on employee advances 45,000
Total Gross Income P 2,545,000
Less: Allowable Deductions 1,600,000
Net Income P 945,000
Reporting by Corporate Taxpayer

Net Sales/Revenues/Receipts/Fees P XX.XX

Less: Cost of Sales/Services (XX.XX)
Gross Income from Operations P XX.XX
Add: Add: Other Taxable income from operation not subject to FT XX.XX
Total Gross Income P XX.XX
Less: Allowable Deduction (XX.XX)
Net Income P XX.XX
Separate Bookkeeping between Business
and professional practice
Individuals engaged in business or exercise of profession
must maintain a separate record of their transactions from
business or professional transactions.

Personal transactions must NOT mix with transactions from

business or professional.

This is for the tax treatment of expense.

Taxable Income of Corporate Taxpayers

Net Income is equal to Taxable income,

as corporations cannot claim personal
exemptions.
Taxable Income of Individual Taxpayer

1. Pure compensation income earner

2. Pure business income earner
3. Mixed income earner
Pure compensation income earner

Taxable income is computed as

Gross Taxable Compensation Income PXX.XX
Less: Personal Exemption (XX.XX)
Taxable Compensation Income PXX.XX
Add: Other Income XX.XX
Taxable Income PXX.XX
Pure business income earner

Net income from business or profession PXX.XX

Less: Personal Exemptions XX.XX
Taxable Business Income PXX.XX
Mixed income earner

Taxable Compensation Income PXX.XX

Net Income from Business or profession XX.XX
Total Taxable Income PXX.XX
Rounding of Centavos

Per Revenue Regulation 2-2014, Centavos are rounded off as follows

.49 centavos or less = the centavo is DROPPED

.50 centavos or more = the centavo is ROUNDED TO THE NEAREST PESO.

Example
P 100.49 = P100.00

P 100.50 = P101.00
Deadline of Filing the Income Tax
Return
The Annual Income Tax Return shall be filed and is due on the 15 th day of the
fourth month following the taxable year of the taxpayer.

Three (3) months and fifteen (15) days

Quarterly Filing of Income Tax Return

Individuals and Corporations engaged in trade or business, or the practice of
profession are required to file three quarterly income tax return aside from an
annual income tax return.
Individuals – 1701Qv2018
Corporations – 1702Qv2018
Deadline of Filing the Income Tax
Return
Quarterly Filing of Income Tax Return

Taxpayer

Individual Corporation
1st Quarter ITR MAY 15 60 DAYS AFTER END OF
THE QUARTER
2nd Quarter ITR AUG 15 60 DAYS AFTER END OF
THE QUARTER
3RD Quarter ITR NOV 15 60 DAYS AFTER END OF
THE QUARTER
Sample Problem - Corporation
 Henrick Corporation,uses the fiscal year and operates between June
1- May 30.

 When should Henrick file their 1st, 2nd, 3rd, and annual income tax
return?

1st Quarter ITR –

2nd Quarter ITR –
3rd Quarter ITR –
Annual ITR -
Sample Problem - Corporation
 Henrick Corporation,uses the fiscal year and operates
between June 1- May 30.

 When should Henrick file their 1st, 2nd, 3rd, and annual income
tax return?

1st Quarter ITR – October 30 (60 days)

2nd Quarter ITR – January 29 (60 days)
3rd Quarter ITR – April 29 (60 days)
Annual ITR – September 15 (3 months and 15 days)
QUESTIONS?