INCOME TAXATION A.

From Employment
Gross Compensation Income
OF INDIVIDUALS Less: Non-Taxable/Exempt Compensation
Gross Taxable Compensation Income

B. From Business/Practice of Profession

MODULE 5 Sales/Revenues/Receipts/Fees
Less: Sales Returns, Allowances and Discounts
Net Sales/Revenues/Receipts/Fees
TYPES OF INCOME TAXES Less: Cost of Sales/Services (applicable only if
FOR INDIVIDUAL TAXPAYERS availing of Itemized Deductions)
1. Normal Income Tax Gross Income from Operations
2. Optional 8% Income tax Less: Deductions
3. Final Tax on Passive Income Itemized Deductions /
4. Capital Gains Tax Optional Standard Deduction (40% of Net
5. Fringe Benefit Tax Sales/Revenues/Receipts/Fees
Net Income
Add: Other Non-Operating Income
NORMAL/REGULAR INCOME TAX Taxable Income – Business

Formula Gross Taxable Compensation (A)

For Compensation Income Earners/Employed Taxable Income – Business (B)
Individuals: Total Taxable Income
• Individuals whose source of income is purely Apply: Progressive Tax Rates
derived from an employer-employee relationship
Income Tax Due
Less: Tax Credits (Creditable Withholding
Gross Compensation Income
Taxes)/Payments
Less: Non-Taxable/Exempt Compensation
Income Tax Payable
Gross Taxable Compensation Income
Add: Other Taxable Non-Business/Professional Income
Tax Schedule
Total Taxable Income Effective January 1, 2018 until December 31, 2022
Apply: Progressive Tax Rates Net income Tax
Income Tax Due
Less: Tax Credits (Creditable Witholding
Taxes)/Payments Not over P250,000 0%
Income Tax Payable Over P250,000 but not 20% of the excess over
over P400,000 P250,000
Over P400,000 but not P30,000 + 25% of the
For Self-Employed Individuals over P800,000 excess over P400,000
• Sole proprietor or an independent contractor who
Over P800,000 but not P130,000 + 30% of the
reports income earned from self-employment.
over P2,000,000 excess over P800,000
• They control who they work for, how the work is
Over P2,000,000 but P490,000 + 32% of the
done and when it is done.
not over P8,000,000 excess over
• They include those under a contract of service or
P2,000,000
job order, and professionals whose income is
P2,410,000 + 35% of
derived purely from the practice of profession and
Over P8,000,000 the excess over
not under employer-employee relationship.
P8,000,000
Sales/Revenues/Receipts/Fees
Less: Sales Returns, Allowances and Discounts Effective January 1, 2023 and onwards
Net income Tax
Net Sales/Revenues/Receipts/Fees
Less: Cost of Sales/Services (applicable only if
availing of Itemized Deductions)
Not over P250,000 0%
Gross Income from Operations
Less: Deductions Over P250,000 but not 15% of the excess over
Itemized Deductions / over P400,000 P250,000
Optional Standard Deduction (40% of Net Over P400,000 but not P22,500 + 20% of the
Sales/Revenues/Receipts/Fees over P800,000 excess over P400,000
Net Income Over P800,000 but not P102,500 + 25% of the
over P2,000,000 excess over P800,000
Add: Other Non-Operating Income
Over P2,000,000 but P402,500 + 30% of the
Taxable Income not over P8,000,000 excess over
Apply: Progressive Tax Rates P2,000,000
Income Tax Due P2,202,500 + 35% of
Less: Tax Credits (Creditable Withholding Over P8,000,000 the excess over
Taxes)/Payments P8,000,000
Income Tax Payable
Individuals Required to Use Progressive Income Tax
For Mixed Income Earners: Rates
• Individuals earning compensation income from 1. Employees
employment and income from business, practice 2. VAT Self-employed individuals, including
of profession and/or other sources aside from professionals
employment. 3. VAT mixed income earners

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 1

4. Individuals whose gross sales or receipts, The taxpayer may signify his intention to avail of 8%
regardless of amount are subject to other optional income tax as soon as possible through the
percentage taxes (other than 3% percentage tax filing of any of the following:
on VAT-exempt persons like common carrier’s 1. For New Business Registration
tax and amusement tax) a. Application for Registration
5. Partners in a general professional partnership b. Initial quarterly percentage or income tax
return after commencement of new
business or practice of profession
Rules on Application of Tax Rates 2. For Existing Individual Business Taxpayers
1. Individuals earning purely compensation income a. Application for Registration Information
(employees) – Progressive rates Update
2. Purely self-employed individuals and/or b. 1st Quarterly Percentage Tax Return
professionals whose gross sales or gross receipts c. 1st Quarterly Income Tax Return
and other non-operating income
a. Exceed the VAT Threshold (P3,000,000) – Irrevocability of the 8% Optional Income Tax
Progressive rates Once elected, it will be irrevocable for the entire
b. Do not exceed P3,000,000 – either: taxable year, unless he has exceeded the VAT threshold
i. Progressive rates, or during the year, in which case he shall automatically be
ii. 8% of gross sales or gross receipts and taxed using the progressive tax rates.
other non-operating income in excess of
P250,000 (8% Optional Income Tax) Graduated Rates vs. 8% Income Tax Rate
3. Mixed income earners
a. All Income from Compensation – Graduated 8% Income Tax
Progressive rates Income Tax Rate
b. All Income from Business or Practice of Rate
Profession – Applicability Applicable to all May be availed
If total gross sales or gross receipts and other Individual of by qualified
non-operating income: Taxpayers in self-employed
a. Exceed the VAT Threshold (P3,000,000) – general individuals and
Progressive rates mixed income
b. Do not exceed P3,000,000 – either: earners whose
i. Progressive rates, or gross sales or
ii. 8% of gross sales or gross receipts and receipts and
other non-operating income non-operating
income do not
exceed P3
8% OPTIONAL INCOME TAX million
Tax Base Net Taxable Gross sales or
This is in lieu of graduated income tax rates (progressive Income receipts and
rates) and percentage tax. other non-
operating
Tax Base income
Total gross sales or gross receipts and other non- Deduction Itemized P250,000 from
operating income in excess of P250,000 Deductions or gross only for
OSD self-employed
Gross Sales or Receipts individuals
Total sales or amount of money received, net of Business Tax Percentage Not Subject to
a. Sales, returns and allowances Tax or VAT percentage tax
b. Sales discounts, subject to the following
conditions:
a. Granted at the time of sale FINAL INCOME TAX ON
ii. Expressly indicated in the invoice CERTAIN PASSIVE INCOMES
iii. Amount part of gross sales (See Tax Treatment Table)
iv. Not dependent upon happening of future event
Passive Income
Qualified Taxpayers Income earned without material or substantial
Non-VAT purely self-employed individuals. participation of income earner.
professionals and mixed income earners whose gross
sales or gross receipts and other non-operating income General Principles
did not exceed the VAT threshold of P3,000,000 1. It is constituted as a full and final payment of the
income tax due from the payee on a particular type
Formula: of income subject to final withholding tax.
Sales/Revenues/Receipts/Fees 2. The income subjected to final income tax is no
Less: Sales Returns, Allowances and Discounts longer subject to normal/regular income tax.
Net Sales/Revenues/Receipts/Fees 3. The liability for the payment of the tax rests primarily
Add: Other Non-Operating Income on the payor as withholding agent.
Total 4. The payee is not required to file an income tax
Less: P250,000 if taxpayer is self-employed return for the particular income subjected to FWT. It
is the withholding agent who files the return.
Taxable Income
5. The rate of the final tax is multiplied to the gross
Apply: 8% Income Tax Rate
income.
Income Tax Due
Less: Tax Credits/Payments Informer’s Reward is subject to 10% final tax. The
Income Tax Still Due/Payable reward is equivalent to 10% of the revenues, surcharges
or fees recovered and/or fine or penalty imposed and
When to Avail collected or P1 million per case, whichever is lower.

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 2

Conditions:
1. The informer must not be an internal revenue
official or employee, or other public official or
employee, or his relative within the 6th degree of
consanguinity.
2. He voluntarily gives definite and sworn information
not yet in the possession of the BIR.
3. The information must lead to the discovery of fraud
and thereby result in the recovery of revenues,
surcharges and fees, and/or the conviction of the
guilty party, and/or imposition of any fine or penalty.
which is subject to the allowance for
depreciation; or
4. Real property used in trade or business of the
taxpayer.
Persons Liable and Transactions Covered
Individual taxpayers, estates and trusts
Sale or exchange or other disposition of real
property considered as capital assets.
The said sale shall include "pacto de retro sale"
and other conditional sale.

Location of Real Property

CAPITAL GAINS TAX Within the Philippines
(See Tax Treatment Table)
Exceptions:
A. Shares of Stock Gains derived by dealers in real estate or property used
in business.
The taxation of shares of stock in a domestic corporation
whether or not listed and traded in the stock exchange is Rate and Tax Base
subject to final tax. A final tax of 6% is based on the
a. Gross selling price
Persons Liable b. Fair market value (Assessor)
Individual taxpayers, citizen or alien, resident or non- c. Zonal value (BIR), whichever is the highest
resident, estate and trust.
Exemption from the Capital Gains Tax on Sale or
Capital Gains Tax Disposition of a Principal Residence
Shares of stock not traded through a local stock
exchange – Net capital gains derived during the taxable Principal Residence
year from sale, exchange, or transfer shall be taxed as The dwelling house, including the land on which it is
follows (consolidated for the entire taxable year and on situated, where the husband and wife or an unmarried
a per transaction basis) – individual, whether or not qualified as head of family, and
members of his family reside”. Actual occupancy of such
For RC, NRC, RA, NRA and DC principal residence will not be considered interrupted or
15% (capital gains tax) for RC, NRC, RA, and NRA abandoned by reason of the individual's temporary
absence due to travel or studies or work abroad or such
Per Transaction Basis other similar circumstances. The principal residence
Formula: must be characterized by permanency in that it must be
Selling Price the dwelling house to which, whenever absent, the
Less: Cost individual intends to return.
Capital Gain
Multiplied by 15% CGT Conditions
CGT 1. Seller/owner is a natural person and the subject
property is his principal residence.
Consolidated: (Corporations not qualified)
Formula:
2. The proceeds of the sale shall be fully utilized
Capital gains
for the construction or acquisition of a new
Less: Capital losses
principal residence of the seller. Unutilized
Net capital gains
portion of the proceeds of the sale shall be
15% CGT
subject to the payment of capital gains tax.
Adjusted CGT for the Year
Less: CGT payments 3. Acquisition or construction of new principal
CGT payable (refundable or creditable) residence shall be done within eighteen (18)
months from date of sale.
Stock Transaction Tax (Percentage Tax not Income 4. The historical cost or adjusted basis of the
Tax) property sold shall be carried over to the new
Shares of stock listed through a local stock exchange –
principal residence acquired or constructed. (If
6/10 of 1% of the gross selling price of the stock there is no utilization of the proceeds of the sale
or disposition, in full or in part within the 18-
Exception:
month period, the portion of the gain presumed
Gains derived by dealers in securities – subject to
to have been realized from the sale or
ordinary income.
disposition shall be subject to the 6% CGT.)
B. Real Property 5. The Commissioner of the BIR shall be notified
through a prescribed return within thirty (30)
Real Properties classified as Capital Assets which are days from the date of sale of the intention to
not Ordinary Assets: avail of this tax exemption.
1. Stock in trade of a taxpayer or other real 6. This exemption can be availed of only once
property of a kind which would properly be every ten (10) years.
included in the inventory of the taxpayer if on
hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for Penalty
sale to customers in the ordinary course of his 25% Surcharge and 12% interest computed from the 31st
trade or business; or day after date of sale.
3. Real property used in trade or business (i.e.,
buildings and/or improvements) of a character Formula, in case of Partial Utilization of the
Proceeds of Sale

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 3

 Utilized Portion
Exempt CGT = Total CGT x ---------------------------------
Proceeds of Sale
Unutilized Portion
CGT payable = Total CGT x -----------------------------------
Proceeds of Sale
Formula to Determine Basis or Cost of New Principal
Residence
In case of Partial Utilization of Proceeds
Utilized Portion
New Basis or Cost = Old Basis x -----------------------------
Proceeds of Sale
In case of Full Utilization
New Basis or Cost = Old Basis
In case of Actual Cost of New Principal Residence
exceeds Proceeds of Sale of Old Principal Residence
New Basis or Cost = Old Basis + Excess of Actual Cost
of New Principal Residence over Proceeds of Sale of Old
Principal Residence
Sale of Real Property to Government
Tax to be imposed is either (a) the income tax for
individual citizens or residents or (b) the final tax on the
presumed capital gains from sale of property at six
percent (6%), at the option of the taxpayer-seller, if:
a. The seller is an individual, and
b. The buyer is the government, any of its
political subdivisions or GOCC
FRINGE BENEFIT TAX (FBT)
A final withholding tax imposed upon the grossed-up
monetary value of the fringe benefit furnished, granted
or paid by the employer to a managerial or supervisory
employee.
Fringe Benefit
Any good, service, or other benefit furnished or granted
in cash or in kind by an employer to an individual
employee (except rank and file employees) in addition to
basic salary, such as, but not limited to the following:
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and
others
5. Interest on loan at less than market rate to the
extent of the difference between the market rate and
actual rate granted.
6. Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs and similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-lire insurance
premiums or similar amounts on excess of what the
law allows.
Person Liable
The employer as a withholding agent of the tax, whether
such employer is an individual, professional partnership
or a corporation, regardless of whether the corporation
is taxable or not, or the government and its
instrumentalities.
Tax Treatment of Fringe Benefit and FBT
The amount of taxable fringe benefit and the fringe
benefits tax shall constitute allowable deductions from
gross income of the employer.
CLWTAXN Income Taxation of Individuals (Atty. V. Salud)
Fringe Benefits Not Subject to FBT
1. Fringe benefits required by the nature of or
necessary to the trade, business or profession of
employer.
2. Fringe benefits for the convenience or advantage of
employer.
3. Fringe benefits authorized and exempted from
income tax under the Tax Code or under any special
law, such as the 13th month Pay and Other Benefits
with the ceiling of P90,000.
4. Contributions of the employer for the benefit of the
employee to retirement, insurance and
hospitalization benefit plans.
5. Benefits given to the rank-and-file Employees,
whether granted under a collective bargaining
agreement or not.
6. De minimis benefits
Managerial Employees
Those who are vested with powers or prerogatives to lay
down and execute managerial policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign or
discipline employees.
Supervisory Employees
Those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of
such authority is not routinary or clerical in nature but
requires the use of independent judgment.
Rank-and-File Employees
Those holding neither managerial nor supervisory
positions. Fringe benefits received are not subject to
fringe benefit tax but to personal income tax.
Tax Rates and Divisors to Determine the Grossed-
Up Monetary Value of the Benefit
Tax
Classification of Employee Divisor
Rate
1. RC, NRC, RA and NRAETB 35% 65%
2. NRANETB 25% 75%
Grossed-Up Monetary Value of the Benefit
Represents the whole amount of income realized by the
employee which includes:
1. The net amount of money or net monetary value of
property which has been received, and
2. The amount of fringe benefit tax thereon otherwise
due from the employee but paid by the employer for
and in behalf of his employee.
Guideline for Valuation of Fringe Benefits
1. Money – value is the amount granted or paid for
2. Property with Ownership Transferred – value is
equal to the fair market value of the property
3. Property without Transfer of Ownership – value is
equal to the depreciation value of the property.
De Minimis Benefits
These are benefits of relatively small value and are
offered or furnished by the employer merely as a means
of promoting the health, goodwill, contentment of
efficiency of employees
De Minimis Benefits under Current BIR Regulations
1. Monetized unused vacation leave credits private
employees not exceeding (10) days during the year
2. Monetized value of vacation and sick leave credits
paid to government officials and employees
3. Medical cash allowance to dependents of
employees not exceeding P1,500.00 per employee
per semester or P250 per month
4
4. Rice subsidy of P2,000.00 or 1 sack of 50kg. rice
per month amounting to not more than P2,000:00
5. Uniform and clothing allowance not exceeding
P6,000 per annum
6. Actual yearly medical benefits not exceeding
P10,000 per annum
7. Laundry allowance not exceeding P300 per month;
8. Employees achievement awards e. g. for length of
service or safety achievement, which must be in the
form of a tangible personal property other than cash
or gift certificate, with an annual monetary value of
not exceeding P10,000 received by the employee
under an established written plan which does not
discriminate in favor paid employees
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee
per annum
10. Daily meal allowance for overtime work not
exceeding 25% of the basic minimum wage.
11. Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the
total annual monetary value received from both
CBA and productivity incentive schemes combined
do not exceed P10,000 per employee per taxable
year.
Tax Treatment of Excess of the Above Amount over
the Ceiling for De Minimis Benefits
The excess shall form part of “Other Benefits”
under “13th Month Pay and Other Benefit” subject to
P90,000 ceiling or limit. If the excess is within the ceiling
or limit, the same shall not be subjected tax; otherwise,
it is subject to either FBT (managerial or supervisory
employees) or personal income tax (rank-and-file)
employees.)
Deadline of Quarterly Remittance of FBT
On or before the last day of the month following the
calendar quarter in which the fringe benefits were
granted
MODULE 6
GROSS INCOME
Gross Income
All income derived from whatever source, including but
not limited to the following:
a. Compensation
b. Gross income from profession, trade or business
c. Gains form dealings in property
d. Interests
e. Rents
f. Royalties
g. Dividends
h. Annuities
i. Prizes and winnings
j. Pensions
k. Partner’s share in the net income of the general
professional partnership
Requisites of Taxable Income
1. There must be a gain or profit.
2. The gain must be realized or received.
3. The gain must not be excluded by law or treaty from
taxation.
COMPENSATION INCOME
- All remuneration for services performed by an
employee for his employer under an employer-
CLWTAXN Income Taxation of Individuals (Atty. V. Salud)
employee relationship, unless specifically
excluded by the Tax Code.
- The name by which the remuneration for
services is designated is immaterial.
- E.g. salaries, wages, emoluments and
honoraria, allowances, commissions, fees
including director’s fees, if the director is, at the
same time, an employee, taxable bonuses and
fringe benefits (except those subject to fringe
benefit tax, taxable pensions and retirement
pay, and other income of a similar nature.
Compensation Income Earners
- Individuals whose source of income is purely
derived from employer-employee relationship.
Employee
- An individual performing services under an
employee relationship.
Employer
- Any person for whom an individual performs or
performed any service, of whatever nature,
under employer-employee relationship.
Employer – Employer Relationship
- Exists when a person for whom services were
performed (employer) has the right to control
and direct an individual who performs the
services (employee), not only as to the result of
the work to be accomplished but as to the
details, methods and means by which it is
accomplished.
- An employee is subject to the control of the
employer not only as to what shall be done, but
how it shall be done.
GROSS INCOME FROM BUSINESS OR PRACTICE
OF PROFESSION
Formula:
Gross Sales/Receipts (net of sales returns and
allowances, and discounts)
Less: Cost of Sales/Goods Sold/Services
Gross Income from Business or Practice of Profession
Gross Sales
- Total sales transactions net of VAT, applicable
during the period, without any other deduction.
- Net of sales returns and allowances and
discounts
Gross receipts
- Total amount or its equivalent representing the
contract price, compensation, service fee,
rental or royalty, including the amount charged
for the materials supplied with the services, and
deposits and advance payments actually and
constructively received during the taxable
period for the services performed or to be
performed for another person, EXCEPT
returnable security deposits.
- Net of VAT, if any.
Costs
For Trading or Manufacturing Concern
Cost of Sales
• Invoice cost of the goods sold
• import duties;
• freight in transporting the goods to the place
where the goods are actually sold
• insurance while the goods are in transit
5
For Manufacturing Concern is the sum of money and the fair value of
Cost of Goods Sold/Cost of Goods Manufactured the property received.
and Sold 3. In case of exchange – the selling price is
• All cost incurred in the production of finished the fair market value of the property
goods, such as: received
• raw materials used;
• direct labor; Transfer for Inadequate or Insufficient
• manufacturing overhead; Consideration
• freight cost; If the fair market value of the property sold is higher than
• insurance premiums; the selling price, the excess shall be deemed as a gift
• other costs incurred to bring the raw subject to donor’s tax.
materials to the factory or Exceptions:
warehouse. a. if the property is a real property classified
as capital asset, the sale of which is
For Seller of Services subject to capital gains tax
Cost of Services b. If the sale, exchange or other transfer is
• All direct costs and expenses necessarily made in the ordinary course of business (a
incurred to provide the services required by transaction which is a bona fide, at arm’s
the customers and clients including: length, and free from any donative intent)
1. Salaries and employee benefits of
personnel, consultants and Determination of Cost or Basis
specialists directly rendering the 1. If acquired by purchase – the cost shall be
service the actual purchase price pus all costs of
2. Cost of facilities directly utilized in acquisition, such as commissions,
providing the service. documentary stamp taxes, transfer fees,
etc.
2. By devise, bequest or inheritance – fair
DEALINGS IN PROPERTY market value of the property at the time of
death.
Ordinary and Capital Assets 3. By Gift – the basis shall be the same as it
1. Ordinary assets would be in the hands of the donor or the
a. Stock in trade of the taxpayer or other last preceding owner by whom it was not
properties of a kind which would properly be acquired by gift, except that if such basis is
included in the inventory of the taxpayer greater than the fair market value of the
b. Property held by the taxpayer primarily for sale property at the time of the gift, then for the
to customers in the ordinary course of business purpose of determining the loss, the basis
c. Property used in trade or business and subject shall be such fair market value.
to depreciation
d. Real property used in trade or business. Rules on Recognition of Capital Gains and Losses
Individuals
2. Capital Assets include all property held by the Holding Period
taxpayer whether or not connected in trade or business The percentages of gain or loss to be taken into
but are not ordinary assets. account shall be the following:
a. 100% - if the capital asset has been held for 12 months
Capital Gain or less
Gain derived from sale or exchange of capital asset. b. 50% - if the capital asset has been held for more
than 12 months
Capital Loss Non-deductibility of Net Capital losses
Loss from sale or exchange of capital asset.
Capital losses are allowed only to extent of the capital
Net Capital Gain gains.
The excess of gains from sale or exchanges of capital
assets over losses from such sales or exchanges. Net capital loss is not deductible.
Net Capital Loss Carry –Over
Net Capital Loss
The excess of the losses from sales or exchanges of
Allowed
capital assets over the gains from such sales or
exchanges.
The net capital loss in an amount not in excess of the
taxable income for such year shall be treated in the
Ordinary Gain
succeeding year, but not beyond 12 months, as a
Gain realized from sale or exchange of ordinary asset.
deduction as short-term capital loss at 100% from the
net capital gains
Ordinary Loss
Loss incurred from sale or exchange of ordinary asset.
Sale or Exchange of Capital Assets
Formula of Gain/Loss The following are considered as sale or exchange of
capital assets:
Selling Price 1. Retirement of bonds
Less: Cost 2. Short sales of property
Gain (Loss) 3. Failure to exercise privilege or option to buy or sell
property
Determination of Selling Price 4. Securities becoming worthless
1. Cash Sale – the selling price per Deed of 5. Distribution in liquidation of corporations
Sale Readjustment of interest in a general professional
2. If the total consideration consists partly in partnership.
money and partly in kind – the selling price

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 6

INTEREST
As arises from indebtedness – compensation for the use
of money or forbearance for its use.
Unless exempted by law, interests received by a
taxpayer, whether or not usurious, are taxable which
may be:
• Final Tax – e.g. interest derived from Peso
bank deposits (WITHIN); interest derived
from FC bank deposit (WITHIN)
• Ordinary or Regular Income Tax – other
interests received by the taxpayer.
RENT
It is consideration for the use of property paid by the
lessee to the lessor under a lease contract. It is taxable
income on the part of the lessor.
1. Advance or prepaid rentals are taxable in full in
the year of receipt.
2. Security deposits received to ensure faithful
performance of contractual obligations of the
lessee are not considered income on the part
of lessor, but if applied to rent, the same will be
taxable.
3. Expenses shouldered by lessee for lessor like
taxes and insurance premiums constitute
income taxable to the lessor.
ROYALTIES
Payment for the use of property (intangible personal
property) belonging to another.
Include earnings from copyrights, trademarks, and
patents
Tax Treatment of Royalties
• Active Income
Ordinary or Regular Income Tax
• Passive Income
a. Final Tax – Within
b. Ordinary or Regular Income Tax – Without
for Resident Citizens
DIVIDENDS
Any distribution made by a stock corporation out of its
earnings or profits and payable to its shareholders,
whether in money or in other property.
Taxable dividends
1. Cash dividend – paid to shareholders in cash
2. Property dividend – paid in property of the
corporation and taxable to the extent of the
fair market value of the property at the time
of distribution.
3. Stock dividend – paid in stock of the corporation
issuing it and taxable if it results in changes
in the proportionate interest of the
stockholder.
4. Liquidating dividend – involves the distribution of
assets by a corporation to its stockholders
in complete liquidation or dissolution. The
difference between the sum of the cash
and the fair market value of the property
received and the cost of investment in
shares is represents capital gain or loss
from investment, which is subject to
regular income tax. If the investor is an
individual, the rule on holding period shall
apply.
5. Scrip dividend – issued in the form of promissory
note and taxable to the extent of its fair
market value.
6. Indirect dividend – payments or rights received by
the taxpayer which are really dividends.
CLWTAXN Income Taxation of Individuals (Atty. V. Salud)
Example: If corporation forgives the
indebtedness of the stockholder, it has the
effect of payment of dividend to the extent
of the amount of debt.
ANNUITIES
• Amounts received yearly or at other regular
intervals for a certain or uncertain period, as for
years or life as in life insurance or in perpetuity
as in the case of an endowment fund.
PRIZES AND WINNINGS
Tax Treat of Prizes (There is effort involved.)
Individuals
• Up to P10,000 (WITHIN) – Ordinary or Regular
Income Tax
• More than P10,000 (WITHIN) – 20% Final Tax
• Regardless of amount (WITHOUT) – Ordinary
or Regular Income Tax if RC
Tax Treatment of Winnings (By Chance)
Individuals
• Regardless of amount (WITHIN) – 20% Final
Tax
• Regardless of amount (WITHOUT) – Ordinary
or Regular Income Tax if RC
PCSO Sweepstakes and Lotto Winnings
• Up to P10,000 – Tax-Exempt
• More than P10,000 – Final Tax
Exclusions from Gross Income
Items that are not included in the determination of gross
income either because:
1. they represent return of capital or are not income,
gain or profit.
2. they are subject to another kind of internal revenue
tax.
3. they are income, gain or profit that are expressly
exempt form income tax under the constitution, tax
treaty, Tax Code, or a general or special law.
Exclusions under the Tax Code
1. Proceeds of life Insurance
2. Return of insurance premium
3. Gift, bequest or devise
4. Compensation for personal injuries or sickness,
whether by suit or agreement
5. Income exempt under Treaty
6. Retirement Benefits, Pension, Gratuities, etc.
a. Those derived under R.A. 7641
b. Those received by officials and employees of
private employers in accordance with a
reasonable private benefit plan
Conditions:
i. in the service of the same employer for at
least 10 years;
ii. at least 50 years old at the time of
retirement;
iii. must be availed of only once
iv. plan must be approved by the BIR
c. Separation pay because of death, sickness, or
other physical disability or for any cause
beyond the control of the official or employee
(like installation of labor-saving devices,
retrenchment, redundancy or cessation of
business.)
The phrase “for any cause beyond the control
of said official or employee” – connotes
7
 involuntariness on the part of the official or
employee. Individual Taxpayers who Cannot Avail of
Deductions from Gross Income
d. Social security benefits, retirement gratuities, 1. Citizens, RA and NRAETB earning purely
pensions and other similar benefits received by compensation income
citizens and aliens who come to reside 2. NRANETB
permanently here from foreign sources private
or public; Kinds of Deductions for Regular Taxpayers
e. Benefits due to residents under the laws of the 1. Itemized deductions
U.S. administered by the U.S. Veterans a. ordinary and necessary expenses
Administration b. interests
f. SSS benefits c. taxes
g. GSIS benefits d. losses
e. bad debts
7. Miscellaneous items f. depreciation of property;
a. Passive income derived in the Philippines by g. depletion of oil and gas wells and mines;
foreign governments, financing institutions h. charitable and other contributions;
owned, controlled or enjoying refinancing from i. research and development;
foreign governments, and international or j. pension trust contributions of employees
regional financial institutions established by
foreign governments 2. Optional standard deductions (OSD) –
b. Income derived from any public utility or from 40% of gross sales or receipts if individual
the exercise of any governmental function
c. Prizes and awards made primarily in
recognition of religious, charitable, scientific, ITEMIZED DEDUCTIONS
educational, artistic, literary, or civic
achievement BUSINESS OR PROFESSIONAL EXPENSES
Conditions These are ordinary and necessary expenses paid or
i. The recipient was selected without any incurred during the taxable year in carrying on or which
action on his part; and are directly attributable to the development,
ii. He is not required to render substantial management, operation and/or conduct of the taxpayer’s
future services. trade, business or exercise of profession.
d. Prizes and awards granted to athletes in sports
competitions and sanctioned by their national Ordinary Expenses
sports association These are payments which are normal in relation to the
e. 13th month pay and other benefits up to business of the taxpayer and the surrounding
P90,000.00. circumstances. This does not require that the payments
f. GSIS, SSS, Philhealth, Pag-ibig and union be habitual or normal in the sense that the same
dues of individuals; taxpayer will have to make them often; the payments
g. Gains derived from debt securities with a may be unique or non-recurring to the particular
maturity of more than 5 years; taxpayer affected.
h. Gains from redemption of shares in mutual fund
Necessary Expenses
Exclusions vs. Deduction These are appropriate and helpful in the development of
Exclusions Deductions taxpayer's business.
Flow of wealth which are Amounts which the law
not treated as part of allows to be subtracted Requisites for Deductibility of Business or
gross income because: from gross income in Professional Expenses
(1) exempted by the order to arrive at net 1. Ordinary, necessary and reasonable
fundamental law; (2) income 2. Paid (cash basis) or incurred (accrual) during the
exempted by statute; (3) taxable year
do not come within the 3. Paid or incurred in carrying on any trade or business
definition of income 4. Substantiated by adequate proof
Pertain to the Pertain to the 5. Not contrary to law, moral, public policy or public
computation of taxable computation of the net order
gross income income 6. Corresponding withholding taxes paid or remitted to
Something earned or Something spent or paid the BIR.
received by the taxpayer in earning of gross
which do not form part of income Capital Expenditure
gross income An expenditure that benefits not only the current period
but also future periods. It is not deductible but
depreciable, except, if the taxpayer is a non-profit
DEDUCTIONS proprietary educational institution which may elect either
to deduct the capital expenditure outright or to claim
Items or amounts which the law allows to be deducted deduction by way of depreciation.
from gross income in order to arrive at the taxable
income.
INTEREST
Basic Principles Governing Deductions Payment for the use or forbearance or detention of
a. The taxpayer seeking a deduction must point to money, regardless of the name it is called or
some specific provisions of the statute authorizing denominated. It includes the amount paid for the
the deduction; and borrower's use of, money during the term of the loan, as
b. He must be able to prove that he is entitled to the well as for his detention of money after the due date for
deduction authorized or allowed. Deductions are its repayment.
strictly construed against the taxpayer.
c. He must show that the tax required to be deducted Requisites for Deductibility
and withheld therefrom has been paid to the BIR. 1. There must be an indebtedness.

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 8

2. There should be an interest expense paid or
incurred upon such indebtedness.
3. The indebtedness must be that of the taxpayer.
4. The indebtedness must be connected with the
trade, business or profession of the taxpayer.
5. The interest expense must have been paid or
incurred during the taxable year.
6. The interest must be legally due.
7. The interest must have been stipulated in writing.
8. The interest arrangement must not be between
related taxpayers.
9. In case of interest incurred to acquire property used
in trade, business or exercise of profession, the
same, was not treated as a capital expenditure.
10. The allowable deduction has been reduced by 33%
of the interest income subject to final tax.
Reduction of Interest Expense
Allowable deduction for interest expense is reduced by
33% of the interest income subject to final tax (20%
interest derived from peso bank deposit and 15%
interest derived from foreign currency bank deposit).
Optional Treatment of Interest Expense
At the option of the taxpayer, interest incurred to acquire
property used in trade or business may be allowed as a
deduction or treated as capital expenditure.
TAXES
Taxes proper. No deductions are allowed for:
a. interest (deductible as interest and not tax)
b. surcharge
c. penalties or fines
Requisites for Deductibility
1. Imposed upon the taxpayer for which he is directly
liable
2. In connection with taxpayer’s business or
profession
3. Paid or incurred during the taxable year.
Non-Deductible Taxes
1. Income tax
2. Estate and donor’s tax
3. Special assessments
4. Excess electric consumption tax
5. Foreign income tax, war profits and excess profits
tax, if the taxpayer treated them as tax credit
6. Final income taxes (capital gains taxes and final
taxes on passive income)
7. Value-added tax (sales or revenues are shown net
of VAT)
8. Taxes not related to one’s business or profession
(stock transaction tax)
LOSSES
Casualty Loss
Arises from fires, storms, shipwreck or other casualties,
or from robbery, theft, or embezzlement.
Requisites for Deductibility
1. Actually sustained during the taxable year
2. Connected with the trade, business or profession
3. Evidenced by a close and completed transaction
4. Not compensated for by insurance or other form of
indemnity
5. Not claimed as a deduction for estate tax purposes
6. Notice of loss must be filed with the Bureau of
Internal Revenue within 45 days from the date of
discovery of the casualty or robbery, theft or
embezzlement.
Net operating loss carry-over (NOLCO)
CLWTAXN Income Taxation of Individuals (Atty. V. Salud)
The excess of allowable deductions over gross income
of the business for any taxable year, which had not been
previously offset as deduction from gross income.
May be carried over up to 3 consecutive years
immediately following the loss (or 5 years for taxable
years 2020 and 2021)
BAD DEBTS
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due the
taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or
services rendered.
Requisites for Deductibility
1. Debt must be valid and legally demandable
2. Connected with the taxpayer's trade, business or
practice of profession
3. Must not between related parties
4. Taxpayer must be using accrual basis of
accounting
5. Actually ascertained to be worthless and
uncollectible as of the end of the taxable year.
6. Actually charged off in the books of accounts of the
taxpayer as of the end of the taxable year
DEPRECIATION
It is the gradual diminution in the service or useful value
of tangible property due from exhaustion, wear and tear
and normal obsolescence. The term also applies to
amortization of intangible assets, the use of which in
trade or business i s of limited duration.
Requisites for Deductibility
1. Reasonable.
2. For property use or employment in trade or
business
3. Charged off within the taxable year.
Methods of Depreciation
The term "reasonable allowance" shall include, but not
limited to, an allowance computed in accordance, with
the regulations prescribed by the Department of
Finance, under any of the following methods.
1. Straight-line method
2. Declining-balance method
3. Sum of the years-digit method
4. Any other method which may be prescribed by the
Department of Finance upon recommendation of
the Commissioner of Internal Revenue.
OPTIONAL STANDARD DEDUCTIONS
Deduction which an individual taxpayer may elect in an
amount not exceeding 40% of the gross sales or gross
receipts in lieu of itemized deductions.
Qualified Taxpayers
1. Individual taxpayers, except employees and
non-resident aliens
40% of gross sales (accrual basis of
accounting) or gross receipts (cash basis)
Implications of OSD
1. The taxpayer must signify his intention to avail
of OSD when he files his 1st quarterly income
tax return.
2. Once election has been made, it shall be
irrevocable for the taxable year in which the
return is made.
9
3. An individual who claimed OSD is no longer
required to submit, together with his annual
income tax return, his financial statements.
4. An individual shall keep records pertaining to
his gross sales or receipts.
NON-DEDUCTIBLE EXPENSES
1. Personal, living or family expenses.
2. Amount paid out for new buildings or for permanent
improvements, or betterment made to increase the
value of any property or estate.
3. Amount expended in restoring property or in making
good the exhaustion thereof for which an allowance
has been made.
4. Premiums paid on any life insurance policy covering
the life of any officer or employee, or of any person
financially interested in any trade or business
carried on by the taxpayer, individual or corporate,
when the taxpayer is directly or indirectly a
beneficiary under such policy.
5. Losses from sales or exchanges of property
between related taxpayers.
Transactions Between Related Parties
1. Between members of the family;
“Family” includes only the brothers, sisters
(whether by the whole or half blood), spouse,
ancestors, and lineal descendants of the
taxpayer.
2. Except in the case of distributions in liquidation:
a. between an individual and a corporation more
than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for
such individual.
b. between two corporations more than 50% in
value of the outstanding stock of each of which
is owned, directly or indirectly, by or for the
same individual, if either one of such
corporations, with respect to the taxable year of
the corporation preceding the date of the sale
of exchange was a personal holding company
or a foreign personal holding company.
3. Between the grantor and a fiduciary of any trust.
4. Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trust.
5. Between a fiduciary of a trust and a beneficiary of
such trust.
TAX RETURN
• Sworn statement or declaration executed in
accordance with law on a required form
wherein the taxpayer states the facts as to the
nature and extent of tax liability for a taxable
year including the computation of the tax due.
Income Tax Return
• Statement or declaration of what is reported is
the income of the taxpayer and the allowable
deductions for the taxable year.
Individual Taxpayers Required to File Income Tax
Return
1. Resident citizen, regardless of source
2. Non-resident citizen, on his income from
sources within the Philippines
3. Resident alien, on his income from sources
within the Philippines
4. Non-resident alien engaged in trade or
business, on his income from sources within
the Philippines
5. Estate and Trust
CLWTAXN Income Taxation of Individuals (Atty. V. Salud)
Individual Taxpayers Not Required to File Income
Tax Return
1. Individuals not engaged in trade or business
whose taxable income does not exceed
P250,000.
2. Individuals qualified under substituted filing of
income tax return
Conditions:
• Individuals earn purely compensation
income
• Compensation income must be derived
from sources within the Philippines
• Income tax on compensation income has
already been correctly withheld by the
employer
3. Taxpayers whose income had already been
subjected to final tax
• Individuals whose income consists
solely of royalties, prizes, interests
from bank deposit, dividends, etc.
• Non-resident alien not engaged in
trade or business
4. Individuals who are exempt from income tax
like minimum wage earners
BIR Reportorial Requirements and
Tax Deadlines (Tax Returns)
Self-Employed and Mixed Income Earner
› BIR FORM 0605 – Registration Fee
› Upon registration and every year
thereafter on or before January 31
› BIR FORM 1701 – Annual Income Tax Return
for Self-Employed Individuals and Mixed
Income Earners
› BIR FORM 1701A – Annual Income Tax Return
for Self-Employed Individuals using 8% income
tax rate or availing of OSD
› On or before April 15 of the
following year
› BIR FORM 1701Q – Quarterly Income Tax
Return for Self-Employed Individuals and
Mixed Income Earners (with respect to
Business or Professional Income)
› On or before May 15 – 1st Quarter
› On or before August 15 – 2nd
Quarter
› On or before November 15 – 3rd
Quarter
Employees
› BIR FORM 1700 – Annual Income Tax Return
for Employed Individuals
› On or before April 15 of the following
year
Except if the employee is qualified under
Substituted Filing of Tax Return. Conditions:
a. One employer in the Philippines for
the calendar year
b. The income tax due is equal to income
tax withheld.
Maximum Number of Pages
Four
Contents:
a. Taxpayer’s profile and information
b. Gross sales, receipts or income from services
rendered, conduct of trade or business, except
income subject to final tax
c. Allowable deductions
d. Taxable income
e. Income tax due and payable
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Payment Deadlines in case Annual Income Tax Due
of an Individual is in Excess of P2,000
1st Installment – Day when the Annual Income Tax
Return is Filed
2nd Installment – October 15
Keeping, Maintaining and Registration of Books of
Accounts
Retention Period
• 10 years reckoned from the day following the
deadline in filing a return, or if filed after
deadline, from the date of the filing of the
return.
• Within first 5 years, the taxpayer shall retain
hardcopies.
• After 5 years, the taxpayer may retain only an
electronic copy of the books of accounts,
subsidiary books and other accounting
records.
Mandatory Submission of Audited Financial
Statements
Self-employed and mixed income earners whose annual
gross sales or receipts amounted to more than P3
millions and did not avail of the optional standard
deduction.
WITHHOLDING TAX SYSTEM
It is a procedure of collecting income tax sanctioned by
tax laws.
3 Primary Reasons:
1. To provide the taxpayer a convenient manner to meet
his probable income tax liability.
2. To ensure the collection of tax.
3. To improve the government cash flow.
Forms of Withholding Taxes
1. CREDITABLE WITHHOLDING TAX
A. Withholding Tax on Compensation is the tax withheld
from income payments to individuals arising from an
employer-employee relationship.
BIR Form 2316 (Certificate of Compensation Payment /
Tax Withheld For Compensation Payment With or
Without Tax Withheld)
B. Expanded Withholding Tax is a kind of withholding tax
which is prescribed on certain income payments and is
creditable against the income tax due of the payee for
the taxable quarter/year in which the particular income
was earned.
BIR Form 2307 (Certificate of Creditable Tax Withheld at
Source)
2. FINAL WITHHOLDING TAXES
Withholding tax on income subject to final tax
BIR Form 2306 (Certificate of Final Income Tax
Withheld)
Distinctions between CWT and FWT
CWT FWT
1. Taxes withheld on 1. The amount of income
certain income payments tax withheld is
are intended to equal or constituted as a full and
at least approximate the final payment of the
tax due of the payee on income tax due from the
said income payee on said income.
2. Payee of income is 2. The liability for
required to report the payment of the tax rests
income and/or pay the primarily on the payor as
difference between the a withholding agent.
CLWTAXN Income Taxation of Individuals (Atty. V. Salud)
tax withheld and the tax
due on the income.
3. The income recipient is 3. The payee is not
still required to file an required to file an income
income tax return. tax return for the
particular income
Timing of Withholding
The obligation of the payor to deduct and
withhold the tax arises at the time income is paid or
payable, or accrued or recorded as an expense or asset,
whichever is applicable, in the payor’s books, whichever
comes first.
Consequence of Failure to Withhold
The withholding tax agent is liable for
deficiency withholding tax plus penalties; and If paid, he
is now allowed to claim deductions from gross income
even when payment is made at the time of audit
investigation or reinvestigation/reconsideration
Examples of Income Payments Subject to Creditable
Withholding Tax Expanded
1. Upon the following values of real property,
where the seller is habitually engage in the real estate
business
With a selling price of P500,000.00 or less
1.5%
With a selling price of more than P500,000.00
but not more than P2,000,000.00 3.0%
With a selling price of more than P2,000,000.00
5.0%
Where the seller/transferor is not habitually engaged in
the real estate business
6.0%
2. Income payments to individual professionals
if current year’s income payments do not
exceed P3,000,000 – 5%
if income payments exceed P3,000,000 or
taxpayer is VAT-registered – 10%
3. Rentals – 5%
4. Income payments to partners of GPP
if current year’s income payments do not
exceed P720,000 - 10% or
if income payments exceed P720,000 – 15%
5. Income distribution to beneficiaries of the
estate or trust – 15%
Withholding Tax Deadlines
Withholding Tax on Compensation
› BIR FORM 1601C – Monthly Remittance
Return of Income Taxes Withheld on
Compensation
On or before 10th day following the close of the
taxable month, except for December, which is
on or before January 15 of the following year
Expanded Withholding Tax
› BIR FORM 0619 – Monthly Remittance Return
On or before 10th day following the close of the
taxable month, for the 1st 2 months
› BIR FORM 1601EQ – Quarterly Remittance
On or before the last day of the month following
the close of the taxable quarter
Withholding Tax Remittance on Onerous Transfer of
Real Property
› BIR FORM 1606 – Monthly Remittance Return
for Onerous Transfer of Real Property
On or before 10th day following the close of the
taxable month, except for December, which is
on or before January 15 of the following year
Annual Information Returns
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 › BIR FORM 1604C/F – Annual Information
Return of Income Tax Withheld on
Compensation
On or before January 31 of the following year
› BIR FORM 1604E – Annual Information Return
of Creditable Income Tax Withheld
On or before March 1 of the following year

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 12