INTRODUCTION TO

REGULAR INCOME TAX

 The Regular Income Tax Model

Gross Income P xxx,xxx

Less: Allowable deductions xxx,xxx
Taxable Income P xxx,xxx
Characteristics of Regular Income Tax

General coverage-
The regular income tax applies to all items of income except
those that are subject to final tax, capital gains and special tax
regimes.

Net income taxation-

The regular tax is an imposition on residual profits or gains after
deductions for expenses and personal exceptions allowable by
law.
 Characteristics of Regular Income Tax

Annual tax-
The regular income tax applies on yearly profits or gains the gross
income and expenses of the tax payer are measured using the
accounting adopted by the taxpayer and are reported to the
government over the accounting period selected by the taxpayer.

1. Creditable withholding taxes-

Most items of regular income are subject to creditable withholding
tax (CWT). The CWT is withheld at source by customers or clients
but is not a final tax. It is an advance tax deductible against the
annual income tax due of the taxpayer.

See page 216 for the similarities and differences of final withholding tax and creditable withholding tax.
 Gross Income
For purposes of the regular income tax, gross income constitutes all items of
income that are neither excluded in gross income nor subjected to final tax or
capital gains tax,

1. Exclusions from Gross Income

These pertain to items of income that are excluded, hence, exempt from
income taxation.

2. Excluded income vs exempt income

Excluded income is also exempt income. Both are not included in gross
income but differ only as to source. Excluded income traces their origin from
the NIRC but exempt income trace their origin from either the NIRC or
special laws.
 Allowable deductions
Allowable deductions or simply “deductions”, are expenses in the conduct of
business or exercise of profession. Deductions can be claimed itemized
wherein the taxpayer support every item of deduction or standardized
through the Optional Standard Deductions wherein the deduction is simply
presumed as a percentage of gross sales, gross receipts or gross income

1. Personal Exemptions
Ideally, income taxation should not only apply to the basic subsistence and
support of individual taxpayers because imposing tax on these would be
tantamount to killing the goose that lays the golden egg. The amount
exempted by law in lieu of the personal, living and family expenses of an
individual taxpayer is referred to as personal exemption.

See pages 217-218 for the difference between allowable deduction and personal exemption.
 Allowable deductions
Allowable deductions or simply “deductions”, are expenses in the conduct of
business or exercise of profession. Deductions can be claimed itemized
wherein the taxpayer support every item of deduction or standardized
through the Optional Standard Deductions wherein the deduction is simply
presumed as a percentage of gross sales, gross receipts or gross income

1. Personal Exemptions
Ideally, income taxation should not only apply to the basic subsistence and
support of individual taxpayers because imposing tax on these would be
tantamount to killing the goose that lays the golden egg. The amount
exempted by law in lieu of the personal, living and family expenses of an
individual taxpayer is referred to as personal exemption.

See pages 217-218 for the difference between allowable deduction and personal exemption.
 Types of Gross Income Subject to
Regular Income Tax

The Regular Tax Model in Expanded Form

Employment Business or Others Total
Profession
Gross Income XXX XXX XXX

Less:
[
Deductions (XXX)

Taxable income XXX + XXX + XXX = XXX

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Types of Gross Income Subject to

Regular Income Tax

Compensation Income
In taxation, the term “compensation income” generally comprises all
remunerations under an employer-employee relationship such as the
regular pay of employees every payroll period and other benefits or
incentives other than the basic pay which are commonly know as
fringe benefits.

See page 218 for the classification of employee remunerations.

1. Compensation income is subject to regular income tax the fringe

benefits of rank and file employees are included as part of
compensation income are subject to regular income tax while the
fringe benefits of managerial or supervisory employees are excluded in
compensation income and are subject to a special final tax called,
fringe benefit tax.
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Types of Gross Income Subject to

Regular Income Tax

Tax Reporting of Compensation Income

Gross compensation income P xxx,xxx

Less: Non taxable compensation xxx,xxx
Net taxable compensation income P xxx,xxx

Non taxable compensation includes items of compensation

income that are exempted by law, contracts or treaty from income
taxation
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Types of Gross Income Subject to

Regular Income Tax

Business Income
Business income arises from habitual engagement in any
commercial activity involving regular sales of goods or services
by an individual or a corporation. The income form business,
legal or illegal registered or unregistered is taxable.
The business gross income from the sale of goods is computed as:
Sales P xxx,xxx
Less: Cost of goods sold (Cost of sales) xxx,xxx
Gross income P xxx,xxx

Cost of sales pertains to the acquisition cost of the goods sold or

the manufacturing costs of the goods sold.
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Types of Gross Income Subject to

Regular Income Tax

Business Income
Cost of sales of a trading business – the cost of goods sold may be
determined by the specific identification using perpetual inventory system
with the aid of Point-of-sale (POS) machines or by the periodic inventory
system using the following formula:

Beginning inventory P xxx,xxx

Purchases, net of returns and allowances xxx,xxx
Freight-in xxx,xxx
Total goods available for sale P xxx,xxx
Less: Ending inventory xxx,xxx
Cost of goods sold P xxx,xxx

Cost of sales of a manufacturing business – the cost of goods sold of a

manufacturing business is computed almost the same way with those of trading
business.
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Types of Gross Income Subject to

Regular Income Tax

Professional Income
The gross income from exercise of a profession or business gross
income form the sales of services is measured as:

Revenues or gross receipts P xxx,xxx

Less: Cost of services xxx,xxx
Gross income P xxx,xxx
• Service providers using the accrual basis shall report their revenues while those using the
cash basis shall report their gross receipt or collection.

Cost of services pertains to all direct cost of rendering the services such as
cost of labor, materials and overhead. The cost of services should be
distinguished with the costs of administration and marketing of the
business. These two are separately presented under the deduction
category “Regular allowable itemized deductions”
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Tax Reporting of Business or Professional Income

Tax Reporting by Individual Taxpayers

Net Sales/Revenues/Receipts/Fees P xxx,xxx
Add: Other taxable income from operation not subject to final tax xxx,xxx
Total Sales/Revenues/Receipts/Fees P xxx,xxx
Less: Cost of sales or services xxx,xxx
Gross income from business/profession P xxx,xxx
Add: Non-operation income xxx,xxx
Total gross income P xxx,xxx
Less: Allowable deductions xxx,xxx
Net Income P xxx,xxx

Revenue is a general term which pertains to the gross inflow of benefits arising from
the primary operations of the business.
Sales pertains to revenue from the sale of goods.
Fees pertains to revenue from the sale of service
Receipts pertain to cash collection from the sale of goods or services
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Tax Reporting of Business or Professional Income

Tax Reporting by Individual Taxpayers

Revenues is a gross concept pertaining to the total return in a
transaction which includes the return of the capital and return on the
capital.
Gross income is a net concept pertaining to the return on capital in a
transaction. Gross income is net of the cost of sales or cost of
services.

Other taxable income from operations includes revenues or receipts

from incidental or secondary operations aside from the primary
operations.

See pages 222-223 for examples of other taxable income from operations.
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Tax Reporting of Business or Professional Income

Tax Reporting by Individual Taxpayers

Non-operating income- includes all other items of gross income, such
as:
1. Gains from dealings in properties
Gains are net of the cost of the property sold. They are gross income
items rather than revenue. Hence they are excluded under the
“Sales/Revenues/Receipts/Fees” of individual taxpayers and are
included under “Non-operating income”.
Dealing in properties pertain to the sale, exchange and other
disposition of properties by the taxpayer.
2. Income distribution from a general professional partnership,
taxable trust or estate or from an exempt joint venture
Income distributions from these entities are not revenue but items of
gross income, hence, included as part of the non-operating income of
individuals.
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Tax Reporting of Business or Professional Income

Tax Reporting by Individual Taxpayers

Non-operating income- includes all other items of gross income, such as:
3. Casual active income
This includes active income from isolated or one-time transactions such
as causal carpentry income of a person not engaged in carpentry
business. Any expense on casual transactions is set-off with the casual
income. The net gain or income is a non-operating income
4. Passive income not subject to final tax
This includes passive income not connected with the business of the
taxpayer and is not subjected to final tax such as interest on advances to
employees and dividends from foreign corporations. Similar to casual
income, these do not arise from the regular business operations, hence,
classified as non-operating income.
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Tax Reporting of Business or Professional Income

Tax Reporting by Corporate Taxpayers

Net Sales/Revenues/Receipts/Fees P xxx,xxx
Less: Cost of sales or services xxx,xxx
Gross income from operation P xxx,xxx
Add: Other taxable income not subject to final tax xxx,xxx
Total gross income P xxx,xxx
Less: Allowable deductions xxx,xxx
Net Income P xxx,xxx
Note: For corporate taxpayers, revenues or receipts from secondary or incidental operations will be
included under the classification “Sales/Revenues/Receipts/Fee”.

Other taxable income not subject to final tax-

This category includes other items of gross income whether or not arising from
the operations of the corporation such as gains from dealings in properties,
income distribution from an exempt joint venture and other passive income
subject to final tax.
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Determination of Taxable Income

The taxable income shall be computed upon the basis of the taxpayer’s annual
accounting period in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer, but if no such method of accounting has been so
employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income.

Taxable Income of Corporate Taxpayers-

The taxable income of corporate taxpayers is simply the net income from
business because corporations cannot claim personal exemptions.
Taxable Income of Individual Taxpayers-
The computation of the taxable income of an individual taxpayer depends on
whether he or she is a:
1. Pure compensation income earner
2. Pure business income or pure professional income earner
3. Mixed income earner
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Determination of Taxable Income

Taxable Income of Individual Taxpayers

1. Pure compensation income earner-
The taxable income of a pure compensation income earner is
computed as:
Gross taxable compensation income P xxx,xxx
Less: Mandatory Deduction xxx,xxx
Taxable compensation income P xxx,xxx

Individuals deriving pure compensation income from one employer

and without other income outside his employment may avail of the
substituted filing system where the employer withholds the total
income tax on compensation of the employee income.
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Determination of Taxable Income

Taxable Income of Individual Taxpayers

Treatment of Other Income of a Pure compensation income
earner-
The other income is simply added to the taxable
compensation income:
Gross taxable compensation income P xxx,xxx
Less: Mandatory Deduction xxx,xxx
Taxable compensation income P xxx,xxx
Add: Other Income xxx,xxx
Taxable Income P xxx,xxx

Note: Employed individuals with other income outside employment are required
to file the annual income tax return for pure compensation earner. (BIR
Form 1700)
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Determination of Taxable Income

Taxable Income of Individual Taxpayers

2. Pure business income or pure professional income earner
The taxable income of a Pure business income or pure
professional income earner is the net income from business or
profession less the personal exemption:

Net income from business or profession P xxx,xxx

Less: Allowed Deduction (ID/OSD) xxx,xxx
Taxable Business Income P xxx,xxx

Note: Self-employed individuals, estates and trusts, and

mixed income earners shall file BIR 1701A.
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Determination of Taxable Income

Taxable Income of Individual Taxpayers

3. Mixed income earner
The taxable income of an individual taxpayers deriving
income from both employment and self-employment in business or
exercise of a profession shall be determined as:

Taxable compensation income P xxx,xxx

Net income from business or profession xxx,xxx
Total Taxable Income P xxx,xxx

Note: Self-employed individuals, estates and trusts, and mixed income earners shall file BIR 1701.
 xxx

Determination of Taxable Income

Taxable Income of Individual Taxpayers

3. Mixed income earner (cont’d)
The taxable income of an individual taxpayers deriving income from both
employment and self-employment in business or exercise of a profession shall be
determined as:

Taxable compensation income P xxx,xxx

Net income from business or profession xxx,xxx
Total Taxable Income P xxx,xxx

Note: Self-employed individuals, estates and trusts, and mixed income earners shall file BIR 1701.

Negative taxable compensation income is deductible to net business or professional income.

Net operating loss on business or professional practice is not deductible against taxable compensation
income.
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Types of Regular Income Tax

Individual Income Tax

The individual income tax or progressive income tax is determined in
reference to a tax table of progressive tax rates.

Scope of the progressive tax

The progressive tax covers all individuals, including taxable estates and
trusts, except those subject to final tax.
1. NRA-NETB- subject to 25% final tax on gross income
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Types of Regular Income Tax

Corporate Income Tax

The corporate income tax, commonly referred to as the regular corporate
income tax (RCIT), is a proportional or flat tax rate of 30% on taxable
income. The RCIT applies to any corporations other than those:
a. Subject to final tax, such as non-resident foreign corporation and
FCDU interest income not subjected to final tax.
b. Special corporations or those subject to special tax regimes, such as
PEZA and TIEZA-registered enterprises.
c. Exempt corporations on their exempt income.
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Types of Regular Income Tax

Corporate Income Tax (cont’d)

Special Corporations- These are corporations that are subject to a

preferential rate not less than 30% regular corporate income tax
or are subject to special tax rules.

Exempt Corporations- It should be noted that exempt corporations are

required to report their results on operations through BIR Form
1702-Ex even if they do not have taxable income. They are
mandated to use the itemized deductions in their income tax
return. The rule is apparently intended to assist the BIR in
monitoring compliance to the creditable withholding tax by
exempt corporations.
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Rules in Rounding of Centavos in the Income Tax Return

The requirement for entering centavos in the latest version of the

income tax return has been eliminated.

If the amount of centavos is 49 or less the centavos are dropped down,

If the amount is 50 centavos or more, it is rounded up to the next peso.

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Deadline of Filing the Income Tax Return

The annual income tax return is due for filing on the 15th day of the
fourth month following the taxable year of the taxpayer.

The income tax due shall be paid upon filing.

End of Chapter