Baguio City National High School

Senior High School

Tax on Income from

Business and Profession
ACTIVI
in TY Fundamentals of
Accountancy and
SHEET Business Management
2
Quarter 2 ● Week 6

DENVER G. ALIWANA

NAME:__________________________________ GRADE AND SECTION: ____________

TEACHER: _______________________________ SCORE: _______________________
 TAX ON INCOME FROM BUSINESS/ PROFESSION

Learning Objectives

Hello learner! This material is intended to guide you towards understanding the concept of tax
on income from business and practice of profession, as well as the skills necessary in computing the
proper amount of tax due.
While going through this material, you are expected to:
1) explain the procedure in computing gross taxable income from business/profession;
2) explain the procedure in computing tax due, and
3) compute for taxable income and tax due.

Introduction

You have learned from the previous module the procedure in computing the taxable income
and tax due on compensation income. This module will now focus on the procedures of computing
the taxable income and tax due on the second form of income - that which is derived from business
or practice of profession.

Your understanding of the Income Statement of a sole proprietorship business will be very
useful in this module as the net income that the business generates in one accounting period is also
the taxable income for the sole proprietor or the professional. Recall the formula in computing net
income:
Total Revenues – Total Expenses = Net Income

Both compensation income and income derived from business/profession are subject to
graduated income tax rate. Thus, the tax table provided by the Bureau of Internal Revenue (BIR)
which you have learned in the previous module will also be used in this module.

Who is a self-employed individual and professional?

According to the Bureau of Internal Revenue (BIR), a self-employed individual “is a sole
proprietor or an independent contractor who reports income earned from self-employment. He
controls who he works for, how the work is done and when it is done. It includes those hired under a
contract of service or job order, and professionals whose income is derived purely from the practice
of profession and not under an employer - employee relationship.”

A professional is a person formally certified by a professional body belonging to a specific

profession by virtue of having completed a required examination or course of studies and/or practice,
whose competence can usually be measured against an established set of standards such as
doctors, dentists, certified public accountants, and others. It also refers to a person who engages in
some art or sport for money, as a means of livelihood, rather than as a hobby. This includes writers,
athletes, and others. Freelancers and home-based service providers also fall under professionals.

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Activity 1: Who are they?

Direction: List down at least five people you know who derive their income from self-employment or
practice of profession. Identify their business venture or profession if you can. Remember, a
professional who works for an employer does not belong to this list.

Self-employed Professionals
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

Business and Profession

Business is an activity of that involves rendering of services, purchasing and selling of goods,
and manufacturing and selling of goods with the intention of making profit.
Profession is an occupation requiring intellectual skill, (e.g. doctor, lawyer, teacher, etc.) or a
special skill ( e.g. painter, singer etc.)

Taxable Income
The taxable income is similar to the net income presented in the Income Statement of the
business. Remember that there is a slight difference in the components of the Income Statement
between and among the three types of businesses – service, merchandising and manufacturing. For
taxation purposes, the gross revenue for a service business will also be referred to as gross receipts.
Here is a sample computation of taxable income for a merchandising business.

Gross Receipts/ Sales P 500,000

Less: Sales Returns, Discounts and Allowances 20,000
Net Sales P 480,000
Less: Cost of Sales 100,000
Gross Income P 380,000
Less: Allowable Deductions 150,000
Taxable Income P 230,000

The gross income of a service business is equivalent to its gross receipts when there are no
cost of services.

Allowable Deductions
A taxpayer engaged in business or in the practice of profession shall choose either the
optional or itemized deduction. The default choice is itemized deduction. This is irrevocable for the
taxable year covered.

a. Itemized Deductions
These are the allowed deductions from gross income which include all the ordinary
and necessary expenses paid or incurred during the taxable year in carrying on or which are
directly attributable to, the development, management, operation and/or conduct of the trade,

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 business or exercise of a profession including a reasonable allowance for salaries, travel,
rental and entertainment expenses.
According to the Bureau of Internal Revenue (BIR), itemized deductions include the
following:
o Expenses (ordinary and necessary)
o Interest
o Taxes
o Losses
o Bad Debts
o Depreciation
o Depletion of Oil and Gas Wells and Mines
o Charitable Contributions and Other Contributions
o Research and Development

b. Optional Standard Deduction (OSD)

A maximum of 40% of the gross sales or gross receipts shall be allowed as deduction
in lieu of the itemized deduction. This type of deduction shall not be allowed for non-resident
aliens engaged in trade or business.

Tax Due
Tax due is determined using the Graduated Income Tax Rates provided under the BIR tax
table. This is the same rates used for compensation income.

Bureau of Internal Revenue

ANNUAL TAX TABLE
Effective Date January 1, 2018 to December 31, 2022 
Not over P250,000 0%
P0 + 20% of the excess over
Over P250,000 but not over P400,000
P250,000
P30,000 + 25% of the excess over
Over P400,000 but not over P800,000
P400,000
P130,000 + 30% of the excess over
Over P800,000 but not over P2,000,000
P800,000
P490,000 + 32% of the excess over
Over P2,000,000 but not over P8,000,000
P2,000,000
P2,410,000 + 35% of the excess over
Over P8,000,000
P8,000,000

Illustrative Exercise:

Problem: Mr. X is a fruit and vegetable vendor. For the taxable year 2020, his bookkeeper reported
the following:

Gross Sales P 1,200,000

Sales Discounts and Allowances 100,000
Cost of Sales 500,000
Expenses 300,000

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Questions: How much is the taxable income and tax due if Mr. X opted for (a) itemized deductions;
and (b) OSD?
a. Itemized deductions

Gross Sales P 1,200,000

Less: Sales Discounts and Allowances 100,000
Net Sales 1,100,000
Less: Cost of Sales 500,000
Gross Income 600,000
Less: Expenses 300,000
Taxable Income P 300,000

Tax on P250,000 P -
Add: Tax on Excess [(300,000 – 250,000) x 20%] 10,000
Tax Due P 10,000

b. OSD

Gross Sales P 1,200,000

Less: OSD (40% x P1,200,000) 480,000
Taxable Income P 720,000

Tax on P400,000 P 30,000

Add: Tax on Excess [(720,000 – 400,000) x 25%] 80,000
Tax Due P 110,000

8% Flat Rate
To simplify the process, BIR allows a taxpayer to use a flat rate of eight percent (8%) tax on
gross sales/receipts and other nonoperating income in excess of two hundred fifty thousand pesos
(P250,000.00) in lieu of the graduated income tax rates.
This is available to self-employed individuals (sole proprietors and professionals) whose
annual gross receipts or gross sales and other non-operating income do not exceed the three million
pesos (P3,000,000).
To illustrate, we use the example given above. What if Mr. X availed of the 8% tax rate? His
taxable income and tax due is computed as follows:

Gross Sales P 1,200,000

Less: Amount allowed as deductions (fixed) 250,000
Taxable Income P 950,000
Multiply: 8% flat rate 0.08
Tax Due P 76,000

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Activity 2: Arranging the Steps

Directions: Arrange the steps in computing for the taxable income in the two options of determining
allowable deductions under the graduated tax rates. Write the letter of the answer on the blanks
provided. Some steps may apply to both or either of the two options. The first one has been done for
you.
A. Compute for the 40% of gross sales/receipts
B. Compute for Net Sales
C. Compute for Gross Income
D. Determine the gross receipts or gross sales
E. Determine the Expenses and other allowable deductions
F. Compute for taxable income
G. Determine sales discounts, returns and allowances
H. Determine Cost of Sales

a. Itemized Deductions b. Optional Standard Deductions

Steps Steps
1. D 1.
2. 2.
3. 3.
4.
5.
6.
7.

Activity 3: Finding the missing values

Directions: Supply the missing amounts in the computation of taxable income and tax due in the two
options under graduated tax rates and in the 8% flat rate.

a. Itemized Deductions

Gross Sales P 800,000

Less: Sales Discounts and Allowances 50,000
Net Sales (a)
Less: Cost of Sales 200,000
Gross Income (b)
Less: Expenses 150,000
Taxable Income (c)

Tax on ________________ (d)

Add: Tax on Excess (e)
Tax Due (f)

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 b. OSD
Gross Sales P 800,000
Less: OSD (g)
Taxable Income (h)

Tax on ________________ (i)

Add: Tax on Excess (j)
Tax Due (k)

c. 8% flat rate

Gross Sales P 800,000

Less: Amount allowed as deductions (fixed) (l)
Taxable Income (m)
Multiply: 8% flat rate 0.08
Tax Due (n)

Activity 4: Solving the Tax Problem

Directions: Read and solve the problem by answering the questions.

Problem: Mr. Y is a taxi operator. In his books of accounts for the year 2020, his total gross receipts
amounted to P 950,000 while his total itemized expenses is P400,000.

Questions:
1. How much is the taxable income and tax due using itemized deductions?

Tax on
Add: Tax on Excess
Tax Due

2. How much is the taxable income and tax due using optional standard deductions?

Tax on
Add: Tax on Excess
Tax Due

3. Which option resulted to lower tax due? _______________________

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Activity 5: Multiple-Choice

Direction: Choose the letter of the correct answer. Write your answers on the spaces provided
before each number.

_____ 1. Who is a sole-proprietor engaged in a trade/business or a professional who derives

income from the practice of profession other than under an employer-employee
relationship?
A. Contractor
B. Employee
C. Self-employed
D. Trustee
_____ 2. What is the range of the graduated income tax rates under Philippine tax laws?
A. 0% - 35%
B. 0% - 40%
C. 3% - 30%
D. 3% - 35%
_____ 3. What are deducted from Gross Sales to arrive at Gross Income?
A. Cost of Sales and Sales Discounts
B. Net Purchases and Sales Discounts
C. Purchase Discounts and Net Purchases
D. Purchase Discounts and Cost of Sales
_____ 4. What deduction option is automatically applied to a taxpayer who did not choose any
deduction method?
A. Fixed amount
B. Itemized deduction
C. Optional Standard Deduction
D. Zero deduction
_____ 5. What type of tax rates applies to a taxpayer who used either itemized deductions or
optional standard deductions?
A. Flat rates
B. Graduated rates
C. Progressive rates
D. Regressive rates
_____ 6. How much is the optional standard deduction?
A. 8% of Gross Receipts/Sales
B. 8% of Net Sales/Sales
C. 40% of Gross Receipts/Sales
D. 40% of Net Sales/Sales
_____ 7. Which of these is NOT an allowable deduction under itemized deductions option?
A. Bribes
B. Depreciation
C. Interests
D. Taxes
_____ 8. Which of these uses the same tax rates as that of income from business/ profession?
A. Compensation income
B. Donors tax
C. Estates and Trusts
D. Passive income

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_____ 9. A taxpayer may opt for the flat rate in lieu of the graduated tax rates. How much is the
flat rate?
A. 5%
B. 6%
C. 7%
D. 8%
_____ 10. How much is the maximum amount of gross sales/receipts a taxpayer must have to
avail of the flat rate?
A. P1,500,000
B. P2,000,000
C. P2,500,000
D. P3,000,000
_____ 11. A taxpayer availing of the flat rate is entitled to a fixed amount of allowable
deductions from gross receipts. How much is the allowable deductions?
A. P100,000
B. P250,000
C. P300,000
D. P500,00
_____ 12. For the taxable year, a taxpayer engaged in the practice of profession reported gross
receipts of P1,500,000 and operating expenses of P600,000. How much is taxable
income using itemized deductions?
A. P600,000
B. P800,000
C. P900,000
D. P1,250,000

_____ 13. For the taxable year, a taxpayer engaged in business reported gross sales of
P2,700,000, gross income of P1,800,000 and operating expenses of P900,000. How
much is taxable income using optional standard deductions?
A. P1,080,000
B. P1,200,000
C. P1,600,000
D. P1,620,000
_____ 14. A taxpayer engaged in the practice of profession reported an annual gross receipt of
P800,000 and operating expenses of P200,000. How much is taxable income should
he opt for the flat rate?
A. P600,000
B. P500,000
C. P550,000
D. P480,000
_____ 15. The annual gross receipts of a sole proprietor is P2,500,000 and itemized expenses
of P1,000,000. Which option under the graduated rates allows him to pay a lower
amount of tax due?
A. Itemized deductions
B. Optional Standard Deductions
C. Both options have the same amount of tax due
D. Tax due cannot be determined from data given

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Activity 6: To tax or not to tax?

Directions: Read the short article then answer the question that follow.

The Bureau of Internal Revenue issued Revenue Memorandum Circular No. 60-2020 (RMC
No. 60-2020) dated June 1, 2020 entitled Obligations of Persons Conducting Business Transactions
through Any Forms of Electronic Media, and Notice to Unregistered Businesses.
The circular reminds all persons doing business and earning income in any manner or form
specifically those using digital or online platforms to register with the BIR and pay the corresponding
taxes.
Does this mean that when I sell an item online, I should register with BIR and pay taxes, if
any? It depends on the intent. If you sell online for purposes of generating profit, then you are an
individual earning business income. Hence, the answer is yes. But if you sell your pre-loved shoes for
purposes of decluttering your room, the answer is no.
Similarly, those selling intermittently, on an irregular basis or selling homemade stuff as a
hobby during a certain period (e.g. Christmas), are understood as not yet in business. Thus, they are
not required to register.

Question: What advise should you give to an unregistered online seller?

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