INCOME AND
BUSINESS
TAXATION
MICHAEL A. ALONZO, LPT
SHS TEACHER II
OBJECTIVES (MELC)
define income and business taxation and its
principles and processes
explain the procedure in the computation of gross
taxable income and tax due
explain the principles and purposes of taxation
Tax, in simple words, is the compulsory
contribution that people pay to the government,
which is used to pay for expenses.
THREE INHERENT POWERS OF THE
GOVERNMENT
1. Eminent domain - the power of the government takes over
privately owned land, matters relating to the payment of just
compensation being used for public considerations.
2. Police power - the power of the government to make policies
that encourage the public ’s health, morality, protection, and the
well-being of the people.
3. Taxation - the ability of the government to collect taxes which
is used to fund the various projects needed by the people. The
process by which our government, through our lawmakers,
raises income to pay its necessary expenses. Reasonable
distribution of income (for example, higher tax payments are
imposed towards those who generate much)
THE BASIC PRINCIPLES OF A SOUND TAX
SYSTEM
“Why do we pay taxes? What is the point of taxation? We will
be able to answer these questions by explaining the principles
and purposes of taxation.
A. Fiscal adequacy - revenues should be adequate to sustain
government spending.
B. Theoretical justice – taxes are fair and reasonable to the
capabilities of the taxpayer to pay.
C. Administrative feasibility - tax legislation is enforced
efficiently and effectively, preventing future complications
and uncertainty on the aspect of tax-paying citizens.
“WHY DO WE PAY FOR TAXES? BECAUSE OF
THESE PURPOSES:
A. provides funds to support the government to
improve people's general welfare.
B. Managing inflation (e.g., government to lessen
the impact of upcoming rising prices.)
C. Helping to reduce the negative impacts (e.g.,
tobacco is taxed to prohibit smoking, imported
goods are taxed to secure domestic
manufacturers
WHAT IS INCOME TAXATION?
INCOME TAXES is the imposition of taxes on
the income of individuals derived from
compensation, business trade, self-employed, or
practice of a profession or from property less
deductions authorized by the law. The term "gross
income" refers to the taxpayer's income for
taxation purposes.
As discussed previously, Gross income refers to all
income derived from whatever source. What are
those sources? Along with this topic, the different
sources of Gross income will be explained.
First, COMPENSATION INCOME, which your
parents, relatives, or friends received by being an
employee working for different companies. Aside
from salaries and wages, gross compensation income
may also be in the form of any of the following:
DE MINIMIS BENEFITS - THE FOLLOWING CONSIDERED
"DE MINIMIS" BENEFITS:
DE MINIMIS BENEFITS
are benefits of relatively small values provided by
the employers to the employee on top of the basic
compensation intended for the general welfare of
the employees.
Being of relatively small values, the same is not
being considered as a taxable compensation.
WHAT HAVE I LEARNED SO FAR?
Define tax
Explain the rationale of taxation
Discuss the principles of taxation
A. Fiscal adequacy
B. Theoretical justice
C. Administrative feasibility
STEPS IN DETERMINING THE TAX ON 13TH-MONTH PAY
AND OTHER BENEFITS:
Step 1: Determine the excess of each "de minimis" benefit
received by the employee over the prescribed limits stated
above.
Step 2: Add the excess "de minimis" benefits to the 13th-
month pay and Other Benefits received by the employee.
Step 3: Compare the amount determined in Step 2 with the
P90,000 limit. If the amount is less than P90,000, it is not
taxable, and if it exceeds P90,000, the excess taxable.
AFTER CITING ALL THE DIFFERENT FORMS OF
COMPENSATION INCOME, WE WILL NOW DEDUCT
CONTRIBUTIONS THAT SHOULD NOT BE A PART OF THE
GROSS COMPENSATION INCOME. SHOWN BELOW IS THE
TABLE OF ALLOWABLE DEDUCTIONS:
THE SECOND TYPE OF GROSS INCOME, BUSINESS INCOME.
IT IS AN INCOME GENERATED BY AN ENTREPRENEUR OR
BY DIFFERENT PROFESSIONALS LIKE LAWYERS, DOCTORS,
AND ACCOUNTANTS (PROFESSIONAL INCOME). THEY DO
NOT WORK AS EMPLOYEES OF OTHER PEOPLE; THEY WERE
SO-CALLED SELF-EMPLOYED INDIVIDUALS. SELF-
EMPLOYED INDIVIDUALS WHO DERIVED THEIR INCOME
PURELY FROM BUSINESS ARE CHARGED WITH TAX, WHICH
IS SUMMARIZED FOR YOU BELOW.
GROSS BUSINESS INCOME IS COMPUTED AS FOLLOWS:
Sales
Less: Sales Return,
allowances and discounts
INVESTMENTS MADE BY AN INDIVIDUAL (SUCH AS INTEREST
INCOME, ROYALTY INCOME PRIZES AND WINNINGS, AND CASH OR
PROPERTY DIVIDEND INCOME). IT WILL NOT BE SUBJECTED TO THE
SCHEDULAR RATE ANYMORE BUT TO SPECIFIC FINAL TAX RATES
THAT SHOULD BE REMEMBERED. A SUMMARY TABLE IS PROVIDED
FOR YOU, SHOWING HOW A PASSIVE INCOME BEING TAXED.
DISTINCTION BETWEEN INDIVIDUAL AND BUSINESS
TAXATION
Individual taxation – direct taxes on persons who are
intended or bound by law to pay taxes. Ex.
Community tax, income tax, real estate tax, and
donor’s tax.
Business Taxation – imposition of taxes such as VAT,
percentage tax and excise tax on business.
COMPUTATION OF GROSS
INCOME, TAXABLE INCOME AND
TAX DUE
TYPES OF REGULAR INCOME TAX
Corporate income tax is commonly referred to as the
regular corporate income tax (RCIT) is at a flat rate of
30%.
BELOW IS AN ILLUSTRATIVE EXAMPLES ON COMPUTATION
OF TAXABLE INCOME AND TAX DUE OF INDIVIDUAL TAX
PAYER
