Income Tax Computation for Business/Profession

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Questions and Answers

What is the next step in calculating Taxable Income – Business after Gross Income from Operations?

Less: Deductions (correct)

Less: Cost of Sales/Services

Less: Sales Returns, Allowances and Discounts

Add: Other Non-Operating Income

What is the tax rate for taxable income over P8,000,000 effective January 1, 2023 and onwards?

32% of the excess over P8,000,000

25% of the excess over P8,000,000

35% of the excess over P8,000,000 (correct)

30% of the excess over P8,000,000

What is included in the calculation of Gross Taxable Compensation?

Only business income

Only compensation income

Both business and compensation income (correct)

None of the above

What is the purpose of the Optional Standard Deduction?

To simplify the calculation of deductions Signup and view all the answers

What is the next step in calculating Total Taxable Income?

Add: Gross Taxable Compensation Signup and view all the answers

What is the tax rate for taxable income over P2,000,000 but not over P8,000,000 effective January 1, 2023 and onwards?

30% of the excess over P2,000,000 Signup and view all the answers

What is subtracted from Gross Income from Operations to get Net Income from Operations?

Deductions Signup and view all the answers

What is the tax rate for taxable income over P400,000 but not over P800,000 effective January 1, 2023 and onwards?

15% of the excess over P400,000 Signup and view all the answers

What is the total taxable income in the given scenario?

P3,600,000 Signup and view all the answers

If the individual opted to be taxed at 8% income tax rate, what would be his income tax due?

P586,500 Signup and view all the answers

What is the gross income from practice of profession?

P1,500,000 Signup and view all the answers

What is the characteristic of passive income?

Income earned without material or substantial participation of income earner Signup and view all the answers

What is the purpose of final tax on passive income?

To constitute a full and final payment of the income tax due from the payee Signup and view all the answers

Who is primarily liable for the payment of final tax on passive income?

Withholding agent Signup and view all the answers

What is the normal income tax on compensation income?

P402,500 Signup and view all the answers

What is the formula to calculate the Exempt CGT in case of Partial Utilization of the Proceeds of Sale?

Total CGT x (Utilized Portion / Proceeds of Sale) Signup and view all the answers

What is the basis or cost of the new principal residence in case of full utilization of the proceeds of sale?

Old Cost/Basis Signup and view all the answers

What is the tax treatment for the sale of real property to the government?

Both (a) and (b) at the option of the taxpayer-seller Signup and view all the answers

What is the tax base for calculating the capital gains tax payable in Scenario 1?

Selling Price of Old PR - Cost of Old PR Signup and view all the answers

What is the fringe benefit tax (FBT) imposed on?

The grossed-up monetary value of the fringe benefit furnished, granted or paid Signup and view all the answers

What is the adjusted cost or basis of the new principal residence in Scenario 1?

P4,166,667 Signup and view all the answers

What is the condition for the tax exemption of the capital gains tax payable in Scenario 2?

The seller is an individual and the buyer is the government Signup and view all the answers

What is the CGT payable in Scenario 3?

P600,000 Signup and view all the answers

What is the formula to calculate the CGT payable in case of Partial Utilization of the Proceeds of Sale?

Total CGT x (Unutilized Portion / Proceeds of Sale) Signup and view all the answers

What is the adjusted cost or basis of the new principal residence in case of actual cost of new principal residence exceeding the proceeds of sale of the old principal residence?

Old Cost/Basis + Excess of Actual Cost of New Principal Residence over Proceeds of Sale of Old Principal Residence Signup and view all the answers

Study Notes

Income Tax Computation for Business/Practice of Profession

Sales/Revenues/Receipts/Fees minus Sales Returns, Allowances, and Discounts gives Net Sales/Revenues/Receipts/Fees
Net Sales/Revenues/Receipts/Fees minus Cost of Sales/Services (if applicable) gives Gross Income from Operations
Gross Income from Operations minus Deductions (Itemized or Optional Standard) gives Net Income from Operations
Add Other Non-Operating Income to Net Income from Operations to get Taxable Income – Business

Normal/Personal Income Tax (Using Graduated or Progressive Rates)

Taxable income is classified into different brackets with corresponding tax rates
For mixed income earners, Gross Taxable Compensation plus Taxable Income – Business gives Total Taxable Income
Apply Progressive Tax Rates to Total Taxable Income to get Income Tax Due
Subtract Tax Credits (CWT) / Quarterly Payments from Income Tax Due to get Income Tax Payable

Income Tax Schedules (Effective January 1, 2018 until December 31, 2022)

Taxable income of P250,000 or less is taxed at 0%
Taxable income over P250,000 but not over P400,000 is taxed at 20% of the excess over P250,000
Taxable income over P400,000 but not over P800,000 is taxed at P30,000 plus 25% of the excess over P400,000
Taxable income over P800,000 but not over P2,000,000 is taxed at P130,000 plus 30% of the excess over P800,000
Taxable income over P2,000,000 but not over P8,000,000 is taxed at P490,000 plus 32% of the excess over P2,000,000
Taxable income over P8,000,000 is taxed at P2,410,000 plus 35% of the excess over P8,000,000

Income Tax Schedules (Effective January 1, 2023 and onwards)

Taxable income of P250,000 or less is taxed at 0%
Taxable income over P250,000 but not over P400,000 is taxed at 15% of the excess over P250,000
Taxable income over P400,000 but not over P800,000 is taxed at P22,500 plus 20% of the excess over P400,000
Taxable income over P800,000 but not over P2,000,000 is taxed at P102,500 plus 25% of the excess over P800,000
Taxable income over P2,000,000 but not over P8,000,000 is taxed at P402,500 plus 30% of the excess over P2,000,000
Taxable income over P8,000,000 is taxed at P2,202,500 plus 35% of the excess over P8,000,000

Individuals Required to Use Progressive Income Tax Rates

Taxable Compensation Income plus Taxable Income from Practice of Profession and Non-Operating Income gives Total Taxable Income
Apply Progressive Tax Rates to Total Taxable Income to get Income Tax Due

Capital Gains Tax (CGT)

Formula to determine Basis or Cost of New Principal Residence:
- In case of Partial Utilization of Proceeds: Old Cost/Basis x (Utilized Portion / Proceeds of Sale)
- In case of Full Utilization: Old Cost/Basis
- In case of Actual Cost of New Principal Residence exceeds Proceeds of Sale of Old Principal Residence: Old Cost/Basis + Excess of Actual Cost of New Principal Residence over Proceeds of Sale of Old Principal Residence
Formula to Determine CGT Payable:
- Entire CGT x (Unutilized Portion / Proceeds of Sale)

Final Income Tax on Passive Income

Passive Income is subject to final tax
Income earned without material or substantial participation of income earner is considered Passive Income
General Principles Governing Final Tax on Passive Income:
- It is a full and final payment of income tax
- Income subjected to final tax is no longer subject to normal or regular income tax
- Liability for payment of tax rests primarily on the payor as withholding agent

Fringe Benefit Tax (FBT)

Final withholding tax imposed on the grossed-up monetary value of fringe benefits furnished by the employer to managerial or supervisory employees

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Description

Learn how to compute income tax for businesses and professionals, including calculating net sales, gross income, and taxable income.