Lesson 3: Taxable Income of Individuals - PDF

Lesson 3: Taxable Income of Individuals: Gross Income or Net Income Learning Objectives: 1. To identify the tax rules on individual income taxpayers according to the classification of taxpayers and classification of income according to taxability. 2. To compute the basic income t...

Lesson 3: Taxable Income of Individuals: Gross Income or Net Income Learning Objectives: 1. To identify the tax rules on individual income taxpayers according to the classification of taxpayers and classification of income according to taxability. 2. To compute the basic income tax due. Classification of individual taxpayers: Ordinary: 1. CLASSIFICATION OF INDIVIDUALS 1. Resident Citizens – A citizen of the Philippines residing therein. Under Sec. 1, Art. IV of the 1987 Constitution, the following are citizens of the Philippines. (1) Those who are citizens of the Philippines at the time of the adoption of this Constitution; (2) Those whose fathers or mothers are citizens of the Philippines; (3) Those born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship upon reaching the age of majority; and (4) Those who are naturalized in accordance with law. 2. Non-resident citizen a. A citizen of the Philippines whose physical presence abroad is with a definite intention to reside therein – to the satisfaction of the Commissioner of Internal Revenue. b. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. A good example would be Overseas Contract Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit. For purposes of income tax, a seaman is considered an OCW. c. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. “Most of the time” meaning at least 183 days. (Sec. 2 of RR No. 1-79) d. A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (Sec. 22[E] of the Tax Code) So, if the taxpayer, who is previously considered a non-resident citizen arrived in the Philippines on July 1, 2018 with the intention of residing permanently in the Philippines, shall be considered a non-r resident citizen for his income from January 1 to June 30, 2018 (prior to his date of arrival) and a resident citizen for the rest of the year. 3. Resident Alien a. An alien who lives in the Philippines with no definite intention as to his stay (floating intention); b. One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes his home temporarily in the Philippines; c. An alien who has acquired residence in the Philippines and retains his status as such until he abandons the same and actually departs from the Philippines. 4. Non-resident alien (NRA) a. An alien who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished. b. One who may either be a: i. NRA engaged in trade or business (NRAETB) in the Philippines or ii. NRA not engaged in trade or business (NRANETB) in the Philippines. An NRA who shall come to the Philippines and stay for an aggregate of more than 180 days shall be deemed a NRAETB. Classification of Income according to Taxability 1. Income Items subject to Basic Income Tax- graduated and 8% option 2. Income Items subject to Final Income Tax 3. Exempt Income  Summarized rules on Individual Income Taxation per TRAIN Law Tax Base Tax Source Tax Rate 1. Resident Citizen (RC) -Basic Income Tax (BIT) Taxable Net Income (Gross Income – World 0%-35% Allowed Deductions) -------------------------- ------------ --------------- Gross Income World 8% -Final Income Tax (FIT) Taxable Gross Income Philippines Single rates -Exempt Income - - - 2. Resident Alien (RA), Non Resident Citizen (NRC) and Non Resident Alien Engaged in Business in the Philippines (NRAEBP) -Basic Income Tax (BIT) Taxable Net Income (Gross Income – Philippines 0%-35% Allowed Deductions) -------------------------- ------------- ------------ Taxable Gross Income Philippines or 8% -Final Income Tax (FIT) Taxable Gross Income Philippines Single rates -Exempt Income - - - 3. Non Resident Alien Not Engaged in Business in the Philippines (NRANEBP) * -Basic Income Tax (BIT) Taxable Gross Income Philippines 25% -Final Income Tax (FIT) Taxable Gross Income Philippines Single rates -Exempt Income - - - *Non-resident aliens NOT engaged in trade or business: Except for sale of capital assets (shares of stock and real property) covered by Sec. 24 (C) and (D) of the Tax Code, the entire income received from all sources within the Philippines by every non-resident alien NOT engaged in trade or business within the Philippines such as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits and income, and capital gains – the applicable tax rate is 25% (Sec. 25[B]  APPLICATION: a. Compute the Basic Income Tax A. RC B. RA, NRC, C. Given -all amounts are assumed only NRAEBP NRANEBP (Olivia Rodrigo) Gross Income Philippines P1,000,000 1,000,000 1,000,000 1,000,000 Gross Income Abroad 1,000,000 1,000,000 x X Income Subject to Final Tax 10,000 x x X Exempt Income 50,000 x x X Gross Income 2,000,000 1,000,000 1,000,000 Allowed Deduction Philippines P400,000 400,000 400,000 X Allowed Deduction Abroad 300,000 300,000 x X Non-deductible Business Expenses P20,000 x x X Total Allowed Deduction 700,000 400,000 X Taxable Net Income (graduated rates) 1,300,000 600,000 1,000,000 Basic Income Tax Due- Graduated Tax Rates 227,500 62,500 N/A Basic Income Tax Due-optional 8% Tax Rate OR 140,000 60,000 N/A Basic Income Tax Due- 25% Not applicable NOT 250,000 APPLICABLE 1,300,000 2,000,000 600,000 1,000,000 -800,000 -250,000 -400,000 -250,000 500,000 1,750,000 200,000 750,000 x 25% x 8% x 20% X 8% 125,000 140,000 40,000 60,000 +102,500 +22,500 227,500 62,500 Sources of Income Subject to regular/basic income tax rate (Graduated tax) 1. Compensation Income 2. Business or Professional Income 3. Mixed Income ------Compensation and Business or Professional Income For Compensation Income Earner: (Graduated Tax Rates only) Gross Compensation Income P1,000,000 Less: Non Taxable Compensation 90,000 Taxable Compensation Income P910,000 Add: Non Trade, Business, Professional Income, if any 10,000 Taxable Compensation Income P920,000 Basic Income Tax Due P132,500* *P920,000-800,000= 120,000 x 0.25=30,000 + 102,500=P132,500 Compensation Income----all remuneration received for services performed by an employee for his employer under an employee-employer relationship. (Section 2.78.1 (A) of RR No. 2- 98) It includes salaries, wages, emoluments and honoraria, allowances, commissions (e.g., transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Sec. 33 of the NIRC; taxable pensions and retirement pay; and other income of a similar nature. For Business or Professional Income Earner: Business or Professional Income – income earned by an individual from his sole proprietorship business, from the practice of profession, or share in the income of a general professional partnership subject to Income Tax and Expanded Withholding Tax, whenever applicable. “Professional” is a person the activities formally certified by a professional body 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 CPAs, Lawyers, Doctors, etc. It likewise includes a person who engages in some art or sport for money, as a means of livelihood, rather than as a hobby, such as athletes, artists, bookkeeping agents, and other recipients of professional, promotional or talent fees. (RR No. 8-2018) Income owned in common with the spouse: if there is a disposal of an asset which is conjugally owned by the spouses, the gain therefrom shall be divided equally to both the husband and the wife. Same is true with expenses incurred conjugally, which are deductible, and it is not determinable who among the spouses actually incurred the same, they shall share in such deduction equally. Note that there are no other rules applicable to spouses with regards income tax, since they compute for their own income tax liabilities; however, spouses can opt to report their income separately but in ONE tax return, which provides for separate columns and sections for the spouse. In fact, it is encouraged by the BIR that spouses file their income together in one return. Self -employed individuals is either subject to any of the following business tax: 1. Percentage Tax- Regular(Section 109 of NIRC) 2. Percentage Tax- Like Common Carrier, Franchise grantees of radio/ tv, water,Gas, Bank, insurance 3. Value-added Tax- 12% (Annual Gross Income Threshold is exceeding 3 million & mandatory subject to VAT) Who are qualified to avail 8% Income Tax Rate? (ALL) 1. Must be either a single proprietor, professional or mixed INDIVIDUAL income earner, 2. Annual gross receipt does not exceed 3 Million pesos, 3. Registered and subject to REGULAR percentage tax and 4. Have expressed the intention of availing the 8% option in its 1st Quarter filing of Percentage tax return and/or Quarterly income tax return OR using BIR Form 1905 to update the registration (for Existing taxpayers), BIR Form 1901 OR initial filing of quarterly percentage tax and/or quarterly income tax return (for New Taxpayers) Who are not qualified to avail the 8% option? 1. Corporation owning a business 2. Purely Compensation income earners 3. VAT registered taxpayers, regardless of the amount of gross sales/receipts and other non- operating income. 4. Exempted from VAT but exceeded the 3 million pesos VAT threshold 5. Taxpayers who are subject to percentage taxes other than the 3% OPT under Sec. 116 (e.g., those subject to common carrier’s tax, amusement tax, gross receipts tax, etc.) 6. Partners of General Professional Partnership as to their share in the net income thereof (note, however, that they can still claim the 8% flat rate of income tax as to their own business income, provided the gross sales/receipts thereof do not exceed P3,000,000). This is because their share is already net of applicable costs and expenses; and 7. Individuals enjoying income tax exemption such as those registered under the Barangay Micro Business Enterprises (BMBEs), etc., since taxpayers are not allowed to avail of double or multiple tax exemptions under different laws unless specifically provided by law. (Q&A 16, RMC No. 50-2018)  Self-employed Exceeding 3 3 Million 3 Million and 3 Million and below and Individuals Million and and below below and Subject to Regular Percentage Subject to VAT and Subject Subject to Tax to VAT OTHER Percentage Tax Business Income 5,000,000 2,500,000 2,500,000 2,500,000 2,500,000 Add: Other Income 50,000 50,000 50,000 50,000 50,000 Gross Income 5,050,000 2,550,000 2,550,000 2,550,000 2,550,000 Less: Allowed -2,000,000 -1,000,000 -1,000,000 -1,000,000 - Deduction Taxable Net Income 3,050,000 1,550,000 1,550,000 1,550,000 2,550,000 Basic Income Tax Due P717,500* P290,000 ** P290,000 ** P290,000 ** P184,000 *** opted 8% income tax rate *(3,050,000-2,000,000) x 0.30= 315,000 + 402,500= P717,500 ** (1,550,000- 800,000) x 0.25= 187,500 + 102,500= P290,000 *** (2,550,000-250,000) x 8%= P184,000  For Mixed Income Earner Mixed Income Earners (from compensation and income from business or practice of profession) can be taxable as follows: a. COMPENSATION INCOME - is ALWAYS subject to the graduated rights. b. INCOME FROM BUSINESS/PRACTICE OF PROFESSION: i. If the taxpayer’s gross sales/receipts, together with other non-operating income, do not exceed P3,000,000: either a) 8% income tax rate without the first P250,000 exempt (since this will be considered in the application of the graduated rates for income from compensation); or b) Graduated rates ii. If the taxpayer’s gross sales/receipts, together with other non-operating income, exceeds P3,000,000 – graduated rates. Exceeding 3 Million 3 Million 3 Million and below and 3 Million and below and below Subject to Regular and Subject and and Percentage Tax to VAT Subject to Subject to VAT OTHER Percentage Tax Gross Compensation Income P1,000,000 P1,000,000 P1,000,000 P1,000,000 P1,000,000 Less: Non Taxable Compensation 80,000 80,000 80,000 80,000 80,000 Taxable Compensation Income P920,000 P920,000 P920,000 P920,000 P920,000 Add: Non Trade, Business, Professional 10,000 10,000 10,000 10,000 10,000 Income, if any Taxable Compensation Income (A) P930,000 P930,000 P930,000 P930,000 P930,000 Business Income 5,000,000 2,500,000 2,500,000 2,500,000 2,500,000 Add: Other Income 50,000 50,000 50,000 50,000 50,000 Gross Business Income 5,050,000 2,550,000 2,550,000 2,550,000 2,550,000 Less: Allowed Deduction -2,000,000 -1,000,000 -1,000,000 -1,000,000 - Taxable Net Income (B) 3,050,000 1,550,00 1,550,000 1,550,000 2,550,000 Total Taxable Net Income (A + B) P3,980,000 P2,480,000 P2,480,000 P2,480,000 P3,480,000 Basic Income Tax Due P996,500 * P546,500 P546,500 P546,500 P339,000 ** ** ** *** *(3,980,000-2,000,000) x 0.30=594,000 +402,500= P996,500 **(2,480,000-2,000,000) x 0.30= 144,000 + 402,500= P546,500 ***For compensation income- P930,000= (930,000-800,000) x0.25=32,500+ 102,5000=P135,000 For business income= P2,550,000 x 8%= P204,000 135,000 + 204,000= P339,000  ASSIGNMENT # 3 A. Answers only 1. What are the business tax a self employed individuals are liable to file and pay? 2. Why does non-resident alien not engaged in business in the Philippines not subject to graduated tax rates or 8%? 3. Can a compensation income taxpayer opt to use 8% preferential income tax rate? Why or why not? 4. When shall a taxpayer has to signify his /her intention to avail the 8% preferential income tax rate? 5. What are the classification of income according to taxability? 6. What are rule of income taxation for mixed income earners? 7. Who are qualified to avail the optional 8% income tax rate? 8. Who are not qualified to avail the optional 8% income tax rate? 9. What is the vat annual income threshold? 10. Who are considered Citizen of the Philippines? B. Compute the Basic Income Tax due of each taxpayer:(Solution* and answer) *for your solution to be considered 100% correct, computational presentation must be with support computations needed, correct arithmetic, complete data and in good form 1. Mrs. ZZZ is a Filipino residing in Cebu. For the year 2023, she earned P9,000,000 business income and incurred P5,000,000 business expenses (10% of which is non deductible for income tax purposes). She also gained P10,000 income subject to final tax. Compute her 2023 Philippine basic income tax due. 2. A Finnish national, residing in AAA Condominium in Pasig City since year 2020, reported the following: P2,000,000 business income from the Philippines, P500,000 business income from Indonesia, P200,000, business income from Finland and incurred P800,000 business expenses from the Philippines, P350,000 business expenses from Indonesia and P39,000 Businesse expenses from Finland. She also gained P10,000 income subject to final tax. Compute his 2023 Philippine basic income tax due. 3. Using number 2, assuming the taxpayer is a Non-resident alien not engaged in business in the Philippines, compute his 2023 Philippine Basic Income Tax Due. 4. AAA is an employee of BBB Corporation and received an annual basic compensation income of P1,200,000 for the year 2023, Compute the Basic Income tax due of AAA for the year 2023. 5. CCC is a Filipino CPA and owner of DDD Accounting Services. DDD Accounting Services is a VAT registed company. During the year, he reported an annual business income Philippines of P2,000,000, Business Income Abroad of P500,000 and allowed deduction Philippines, P400,000 Allowed deduction Abroad of P100,000 and non deductible business expenses Philippines of P60,000. Compute the basic income. 6. EEE is a Filipino CPA. She is an employee of ZZZ Corporation and owner of YYY Accounting Services. Her annual Gross Compensation income in ZZZ Corporation is P900,000, including a P100,000 non taxable compensation income. YYY Accounting Services is a VAT registed company. During the year, he reported an annual business income Philippines of P4,000,000, Business Income Abroad of P1,000,000 and allowed deduction Philippines, P1,000,000 Allowed deduction Abroad of P500,000 and non deductible business expenses Philippines of P150,000. Compute the basic income tax due. 7. FFF is a Filipino CPA. She is an employee of XXX Corporation and owner of WWW Accounting Services. Her annual Gross Compensation income in XXX Corporation is P900,000, including a P100,000 non taxable compensation income. WWW Accounting Services is a non- VAT registed company and express her intention to use 8% optional income tax rate. During the year, he reported an annual business income Philippines of P1,800,000, Business Income Abroad of P900,000 and allowed deduction Philippines, P800,000 Allowed deduction Abroad of P500,000 and non deductible business expenses Philippines of P150,000. Compute the basic income tax due.