FUNDAMENTALS OF ACCOUNTING BUSINESS AND MANAGEMENT (ABM) 2 QUARTER 2 WEEK 5

CHAPTER VIII
INCOME AND BUSINESS TAXATION
Learning Competencies
 Define income and Business Taxation and its principle and processes (ABM-FABM12-llh-j-15)
 Explain the procedure in the computation of gross taxable income and tax due (ABM-FABM12-llj-17)
 Explain the principles and purposes of taxation (ABM-FABM12-llh-j-19)

PRINCIPLES OF TAXATION

 Governing tax law in the Philippines is the National Internal Revenue Code of 1997. The Bureau of Internal Revenue (BIR) is the
primary implementing agency of this law.
 Taxation is the process by which the government collects revenue in order to pay for its expenses.
 Income tax is defined as the tax on the net income or the entire income realized in one taxable year.

Purpose of Taxation

 To provide funds or property with which to promote the general welfare of its citizens and to enable it to finance its multifarious
activities.
 To reduce inequalities in wealth and income by imposing progressively higher taxes.
 To prevent inflation by increasing taxes or ward off depression by decreasing taxes.

Who are required to pay income tax in the Philippines? (Section 23 of the National Internal Revenue Code [NIRC] of 1997)

- A citizen of the Philippines, living in the Philippines, is taxable on all income earned inside and outside the Philippines;
- A non-resident citizen is taxable only on income earned in the Philippines;
- An OFW is taxable only on income earned in the Philippines.
- A foreigner living in the Philippines is taxable only on income earned in the Philippines.
- A domestic corporation is taxable on all income derived from sources inside and outside the Philippines; and
- A foreign corporation is taxable only on the income derived inside the Philippines.

II. LIST OF SOURCES OF GROSS INCOME: (NIRC 1997 CHAPTER 6 SECTION 32 A)

• Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar
items;
• Gross income derived from the conduct of trade or business or the exercise of a profession;
• Gains derived from dealings in property; (Note: subject to 6% capital gains tax for individuals and for corporation if land and
building is not used in business)
• Interests; (Note: generally subject to 20% final withholding tax)
• Rents;
• Royalties; (Note: generally subject to 20% final withholding tax, 10% if from books and literary works)
• Dividends; (Note: generally subject to 10% final withholding tax for individuals, tax exempt for corporation)
• Annuities;
• Prizes and winnings; (Note: generally subject to 20% final withholding tax, except those that are tax exempt based on specific
criteria in the law)
• Pensions; and
• Partner's distributive share from the net income of the general professional partnership.

III. COMPENSATION INCOME

• Employed individuals that earn compensation income pay their income taxes monthly.
Employers withhold the income tax of their employees from their monthly gross income and remit these sums to the BIR.
• Philippine individual income tax is progressive.
The tax rate increases as the tax base increases which means that tax payers with more capacity to pay will pay more taxes.
• Withholding income tax for employees:
- Employers are required by law to withhold income tax dues from their employees’ salary.
- It is implemented because employees might not have sufficient cash to pay for their income tax dues if aggregated to a one-time
annual payment.

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 - The withholding tax deduction is computed based on the employee’s gross compensation (net of mandatory contributions to SSS
or GSIS, Phil health and Pag-ibig Fund), tax status, timing of compensation payments and using the published BIR withholding tax
table.
• Income tax is computed at the end of the year based on all compensation income derived during the year.
- Taxable income is computed after deducting personal and additional exemptions. (Old Law)
- Applicable tax rate is applied on the taxable income to get the tax due.
- The total income tax withheld by the employer is deducted from the tax due to get remaining tax liability by the employee.

• Taxpayers who derive their income solely from compensation are required to file BIR Form 1700 as their income tax returns . However, to
give relief to these taxpayers, the employee may present BIR Form 2316 as their income tax return. BIR Form 2316 is a statement issued by
the employer and signed by the employee but not filed with the BIR. This is referred to as substituted filing. IV

IV. BUSINESS INCOME

• The tax payments of a business organized as a sole proprietorship are made in the name of its owner.
The owner is considered an individual taxpayer who derived income from business. He is required to file BIR Form 1701.
• Businesses may settle their income tax liabilities and submit their income tax returns (tax form) to the government three months and
fifteen days from the close of the year. For a business that follows a calendar year, the date of settlement is April 15.
- Some businesses pay income tax on a quarterly basis based on their quarter-end income. Quarterly payments are due sixty days
following the close of the first three quarters of the year.
- When the tax due is in excess of ₱ 2,000, the individual taxpayer may elect to pay the tax in two equal instalments. The first
instalment shall be paid at the time the return is filed and the second instalment is paid on or before July 15 following the close of
the calendar year.

• Two approaches for the computation of income tax for the business:
- Itemized deduction. Use the itemized expenses in the income statement. The business should have a complete set of accounting
books and supporting receipts for the deductions that were itemized on the tax form.

- Optional standard deduction scheme. Deductions are up to a maximum of 40% of “gross receipts”. “Gross receipts” is equal to net
sales plus other taxable income. This means that the business taxable income is equivalent to 60% of gross receipts.

• “Mixed Income Earner” is a compensation-earner who at the same time is engaged in business or practice of profession. A taxpayer
deriving mixed income will also use BIR Form 1701.

Business Income:
Total revenues: (Sales, Professional Fee, etc.) xxx
Less: Total expenses (Cost of Goods Sold, Operating Expenses) xxx
Taxable income from business xxx

Example:
Juan Dela Cruz is the owner-manager of JDC Trading Company. Total Sales generated during the year amounted to P 1,230,000. Cost of goods
sold is P 492,000 and total operating expenses is P 184,500. The company opted for itemized deduction.
Sales P 1,230,000
Less: Cost of goods sold 492,000
Gross profit 738,000
Less: Operating expenses 184,500
Taxable income from business or profession P 553,500

FEATURES OF THE TRAIN LAW

PERSONAL INCOME TAX

 Starting January 1, 2018, compensation income earners, self-employed and professional taxpayers (SEPs) whose annual taxable
incomes are Php250,000 or less are exempt from the personal income tax (PIT).
 The 13th month pay and other benefits amounting to Php 90,000 are likewise tax-exempt.

The tax rates are as follows:

Tax schedule effective January 1, 2018 until December 31, 2022

AMOUNT RATES
Not Over Php250,000 0%
Over P250,000 but not over P400,000 20% of the Excess Over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% of the Excess over P400,000
Over P800,000 but not over P2,000,000 P130,000 +30% of the Excess over P800,000

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 Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the Excess over P2,000,000
Over P8,000,000 P2,410,000 +35% of the Excess over P8,000,000

Tax schedule effective January 1, 2023 and onwards:

AMOUNT RATES
Not Over Php250,000 0%
Over Php250,000 but not over Php400,000 15% of the Excess Over Php250,000
Over Php400,000 but not over Php800,000 Php22,500 + 20% of the Excess over Php400,000
Over Php800,000 but not over Php2,000,000 Php102,500 +25% of the Excess over Php800,000
Over Php2,000,000 but not over Php8,000,000 Php402,500 + 30% of the Excess over Php2,000,000
Over Php8,000,000 Php2,202,500 +35% of the Excess over Php8,000,000

SEPs who are also earning compensation income shall be subject to:

 On Compensation Income - graduated income tax (IT) schedule

 On Income from Business or Practice of Profession
 If Gross Sales and/or Gross Receipts and other Non-Operating Income do not exceed Php3,000,000 - either 8% fixed tax or graduated IT
schedule.
 If Gross Sales and/or Gross Receipts and other Non-Operating Income exceed Php3,000,000 – graduated IT schedule.

EXAMPLES
1.For a CALL CENTER AGENT who receives a monthly salary of P21,000 with mandatory annual deductions of P 15,166.00 consisting of SSS, Phil
health, and Pag-ibig contributions, the income tax is computed as:

A. Annual Basic Salary Php 252,000.00

B. 13th Month Pay and Other Benefits 21,000.00
C. Mandatory Contributions 15,166.00

Computation of Income Tax

Annual Gross Income (A+B) Php 273,000.00
Deductions and Exemptions (B+C) 36,166.00
Net Taxable Income Php 236,834.00

Income Tax Rate: Not over P250,000 = 0%

TAX DUE = Php 0.00

2. For a public-school Teacher (SG14, Step1) who receives a monthly salary of Php26,494.00 with annual mandatory deductions of Php
34,185.00 consisting of GSIS, Phil health, and Pag-ibig contributions, the income tax is computed as:

A. Annual Basic Salary Php 317,928.00

B. 13th Month Pay and Other Benefits 26,494.00
C. Mandatory Contributions 34,185.00

Computation of Income Tax

Annual Gross Income (A+B) Php 344,422.00
Deductions and Exemptions (B+C) 60,679.00
Net Taxable Income Php 283,743.00

Income Tax Rate: Not over Php 250,000 = 0%

Over Php 250,000 – P400,000 = 20% of Excess over Php250,000

TAX DUE: Php 250,000.00 = Php 0.00

Php 33,743.00 x 20% = Php 6,748.60

3. Business income (Sole Proprietor)

Sales P 1,230,000
Less: Cost of goods sold 492,000
Gross profit 738,000
Less: Operating expenses 184,500
Taxable income from business or profession P 553,500

Income Tax Rate: Over P400,000 but not over P800,000 P30,000 + 25% of the Excess over P400,000

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 TAX DUE: Php 400,000.00 = Php 30,000.00
Php 153,500 x 25% = Php 38,375.00
Php 68,375.00
TAX ON PASSIVE INCOME TAX
 Interest on FCDU deposits  15%
 Sale of Unlisted shares  15%
 Sale of Listed shares  0.6 of 1%
 Pre-terminated long-term time deposits  20%

FRINGE BENEFITS
A final tax of 35% is imposed on the grossed up monetary value of fringe benefits granted to the employee (except rank and file employees) by
the employer, whether an individual or a corporation. Such tax is payable by the employer.

OPTIONAL STANDARD DEDUCTION (OSD)

A general professional partnership and the partners comprising such partnership may avail of the OSD only once, either by the general
professional partnership or the partners.

FILING OF INCOME TAX RETURNS (ITR) AND PAYMENT OF TAXES

 An individual whose taxable income does not exceed Php250,000 is not required to file an income tax return.
 The ITR shall be composed of a maximum of four (4) pages in paper or electronic form.
 Substituted filing of ITR by employees receiving purely compensation income by, their respective employers will be evidenced by
the Certificate of Withholding filed and duly stamped “received” by the BIR.
 The rate of withholding of tax at source shall not be less than 1% but not more than 15% of the income payment beginning January
1, 2019.

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References: Fundamentals of ABM 2 by Dani Rose C. Salazar; Fundamental of Accounting by Rafael M. Lopez Jr, DepEd Teacher’s Guide.

LEARNING ACTIVITY # 5

Directions:
TRUE OR FALSE: Read each sentence carefully and determine whether the statement is True or False. Write your answers in the space
provided before the number.

__________1. A non-resident citizen of the Philippines is taxable with the income outside the Philippines.
__________2. A resident-citizen of the Philippines is taxable with the income within and outside the Philippines.
__________3. A citizen of the Philippines is allowed a basic personal exemption of ₱50,000 under the new law (Train Law).
__________4. If the taxpayer’s sales or gross receipts amounted to 2,000,000, the 8% fixed tax can be applied.
__________5. Employers cannot withhold income tax dues form their employees’ salaries unless the employee told them to do so.
__________6. Compensation income includes salaries and other bonuses.
__________7. A sole proprietorship business taxpayment is made in the name of the owner.
__________8. Itemized deduction are deductions which is 40% of the gross receipts.
__________9. 13th month pay tax exemption is up to 90,000 under train law.
__________10. An individual who is tax exempt is not required to file an income tax return.
__________11. Philippine tax system is progressive.
__________12. Personal and additional exemption are repealed under the new tax law.
__________13. Statutory contributions include GSIS, Phil health, and PAGIBIG.
__________14. The Train Law implementation had just started January 1, 2019.
__________15. The primary purpose of taxation is to provide funds which to promote the general welfare of its citizens and to enable it to
finance its multifarious activities.

II. Show pictures of the benefits of taxation in your community.

LEARNING ACTIVITY # 6

Problem 1

A citizen and resident of the Philippines with 2 qualified dependents had the following data on compensation income:

Annual salaries ₱ 260,000

13th month pay 20,000
Christmas bonus 20,000
Mandatory deduction:
SSS premiums ₱ 3,000
PhilHealth 1,200
PAGIBIG 4,000

Compute the tax due using the new Income Tax Table (train law) 2022

Problem 2

Mr. Z’s business reported sales of ₱2,780,000, cost of sales of ₱1,500,000 and operating expenses of ₱110,000 for the year. Compute the tax
due using new Income Tax Table (Train Law) 2022.

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