FABM2 Q2 M16 Senior High School PDF

FABM2 SENIOR HIGH SCHOOL Self- Learning Module 16...

FABM2 SENIOR HIGH SCHOOL Self- Learning Module 16 Quarter 2 Procedures in the Computation of Gross Taxable Income and Tax Due Part III  RECAP What have you learned in Module 15-Procedure in Computation of Gross Taxable Income and Tax Due Part II? 1. Who are considered self-employed? 2. What accompanies the annual income tax return of a taxpayer with gross sales or gross receipts and other non-operating income of more than the VAT threshold? 3. How much is the current VAT threshold? 4. How much is the tax due of self-employed taxpayer if he/she has a taxable income of P1,689,800.00? 5. How much is the total tax due of a self-employed individual who availed of an 8% income tax rate for the 1st quarter where the taxable amount is P900,000.00? LESSON Module 16 is the last part of the computation of taxable income and tax due which focuses on liabilities of mixed-income earner. What is the difference of the content of Module 14 and 15? Module 14 focuses on the computation of the tax liabilities of the employed individuals while Module 15’s concentration is on the computation of tax liabilities of the self-employed taxpayers. What are the similarities of the three modules in terms of the computation of tax liabilities? The similarities of the three modules in terms of tax computation is the Income Tax Rates under R.R. 8-2018 or the graduated income tax rates. The basis of the content and discussion of this module is R.R. 8-2018. Who are Mixed Income Earners? As defined in R.R. 8-2018, Mixed-Income Earners are individuals earning compensation income from employment, and income from a business, the practice of the profession, and/or other sources aside from employment. Mixed-Income Earners must file annually the BIR Form No. 1701  Figure 1 – Graduated Income Tax Rate As stated in Section 3 of R.R. 8-2018, Individual Citizen and Individual Resident Alien of the Philippines Item D says that Individuals Earning Income Both from Compensation and Self-employment (business or practice of the profession). For mixed income earners, the income tax rates applicable are: 1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; and 2. The income from business or practice of profession shall be subject to the following: a. if the gross sales or receipts and other non-operating income do not exceed the VAT threshold, the individual has the option to be taxed at: a.1 Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended; OR a.2 Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating income instead of the graduated income tax rates and percentage rates under Section 116 of the Tax Code, as amended. b. if the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual shall be subject to the graduated income tax rates prescribed under Section24(A)(2)(a) of the Tax Code, as amended. The provision under Section 24(A)(2)(B) of the Tax Code, as amended, which allows an option of 8% income tax rate on gross sales/receipts and other non- operating income in excess of P250,000.00 is available only to purely self-employed individuals and/or professionals. The P250,000.00 mentioned does not apply to mixed-income earners since it is already incorporated in the first level of the graduated income tax rates applicable to compensation income. Under the said graduated rates, the excess of the P250,000.00 over the actual taxable compensation income is not deductible against the taxable income from the business/practice of the profession under the 8%o income tax rate option.  The total tax due shall be the sum of (1) tax due from compensation, computed using the graduated income tax rates; and (2) tax due from self-employment/practice of the profession, resulting from the multiplication of the 8% income tax rate with the total of the gross sales/receipts and other non-operating income. Mixed-income earner who opted to be taxed under the graduated income tax rates for income from business/practice of the profession shall combine the taxable income from both compensation and business/practice of profession in computing for the total taxable income and consequently, the income tax due. Illustrative Problem No. 1 Ms. Ysabelle, financial supervisor of JAM Corporation received compensation of P1,350,000.00, including 13th-month pay and other benefits of P119,500.00 but net of mandatory contributions. Ms. Ysabelle is the owner of hardware and construction supplies. Her gross sales for 2019 is P2,220,000.00. Her cost of sales and operating expenses are P1,000,900.00 and P500,995.00 and with a non- operating income of P610,000.00. A. Ms. Ysabelle signifies her intention to be taxed at an 8% income tax rate on her gross sales from the income of her business. How much are the liabilities of Ms. Ysabelle? a. How much is the Taxable Compensation and Taxable Business Income? b. How much is the Tax Due on Compensation and Tax Due on Business? c. Total Income Tax Due on Compensation and Business? The table shows the computation of Ms. Ysabelle’s Taxable Compensation, Taxable Business Income, Tax Due on Compensation, Tax Due on Business, and Total Tax Due on Compensation and Business. Total Compensation Income P 1,350,000.00 Less: Non-Taxable 13th month pay and other benefits (max) 90,000.00 Taxable Compensation Income P 1,260,000.00 A. Tax Due on Compensation On P800,000.00 P 130,000.00 On excess (P1,260,000.00 - P800,000.00) x 30% 138,000.00 Tax Due on Compensation P 268,000.00 B. Tax Due on Business Gross Sales P 2,220,000.00 Add: Non-Operating Income 610,000.00 Taxable Business Income 2,830,000.00 Multiplied by Income Tax Rate 8% 0.08 Tax Due on Business 226,400.00 Total Income Tax Due on Compensation and Business P 494,400.00  Observed that the total benefits (13th-month pay and other benefits) of Ms. Ysabelle is P119,500.00 but only P90,000.00 is indicated in the computation of total taxable income, because according to R.A. No. 10963 (TRAIN Law). The amount of tax-exempt benefits ceiling (13th-month pay and other benefits) was increased from P82,000.00 to P90,000.00, the maximum amount. Remember that according to R.R. 8-2018: 1. The option of an 8% income tax rate is only applicable to taxpayers whose income is from business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code, as amended. 2. The P250,000.00 deduction is allowed under the law for taxpayer’s income is from self-employment or practicing of the profession, and it does not apply to mixed-income earners under the 8% income tax rate. 3. The P250,000.00 is already included in the first level of the graduated income tax rates applicable to compensation income. B. In this case, Ms. Ysabelle did not apply for an 8% income tax based on gross sales/receipts and other non-operating income. Total Compensation Income P 1,350,000.00 Less: Non-Taxable 13th month pay and other benefits (max) 90,000.00 Taxable Compensation Income P 1,260,000.00 Add: Taxable Income in Business Gross Sales P 2,220,000.00 Less: Cost of Sales 1,000,900.00 Gross Income 1,219,100.00 Less: Operating Expenses 500,995.00 Net Income from Operation 718,105.00 Add: Non-Operating Expenses 610,000.00 1,328,105.00 Total Taxable Income 2,588,105.00 On P2,000,000.00 490,000.00 On excess (P2,588,105.00 - P2,000,000.00) x 32% 188,193.60 Total Income Tax Due P 678,193.60 Remember that according to the R.R. 8-2018: 1. The taxable income from compensation and business of the taxpayer must be combined to compute the income tax due in case the taxpayer chose to be subject under the graduated income tax rates. 2. The taxpayer is liable to pay the percentage tax of 3% of his or her gross sales, which is 3% of P2,220,000.00.  *According to National Internal Revenue Code of 1997 Sec. 116 Tax on Persons Exempt from Value-Added Tax (VAT) states that any person whose sales or receipts are exempt under Section 109-Exempt Transactions (V) of this Code (NIRC1997) from the payment of VAT and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of this gross quarterly sales or receipts: Provided that cooperatives shall be exempted from the 3% gross receipts tax herein imposed. Illustrative Problem No. 2 Mr. Manolo Matoto, a supervisor in one of the airlines, earned P1,399,000.00 of the previous year inclusive of 13th-month pay and other benefits which amounted to P135,500.00. Mr. Matoto owns a farm where he had the gross sales of P3,700,000.00. His cost of sales is P1,290,000.00 and operating expense of P650,000.00, and non-operating expenses of P120,000.00. How much is the tax due of Mr. Matoto? Total Compensation Income P 1,399,000.00 Less: Non-Taxable Income (13th-month pay and other benefits) 90,000.00 Taxable Compensation Income 1,309,000.00 Add: Taxable Income from Business Gross Sales P 3,700,000.00 Less: Cost of Sales 1,290,000.00 Gross Income 2,410,000.00 Less: Operating Expenses 650,000.00 Net Income from Operation 1,760,000.00 Add: Non-Operating Income 120,000.00 1,880,000.00 Total Taxable Income 3,189,000.00 On P2,000,000.00 490,000.00 On excess = (P3,189,000.00 - P2,000,000.00) x 32% 380,480.00 Total Tax Due P 870,480.00 The gross sale of Mr. Matoto was more than P3,000,000.00 of which he has no option to avail of the 8% income tax rate. However, his business is not subject to business tax because the nature of his business transactions is VAT exempt.