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: which is subject to the allowance for
1. The informer must not be an internal revenue depreciation; or
official or employee, or other public official or 4. Real property used in trade or business of the
employee, or his relative within the 6th degree of taxpayer.
consanguinity.
2. He voluntarily gives definite and sworn information Persons Liable and Transactions Covered
not yet in the possession of the BIR. Individual taxpayers, estates and trusts
3. The information must lead to the discovery of fraud Sale or exchange or other disposition of real
and thereby result in the recovery of revenues, property considered as capital assets.
surcharges and fees, and/or the conviction of the The said sale shall include "pacto de retro sale"
guilty party, and/or imposition of any fine or penalty. 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 --------------------------------- Fringe Benefits Not Subject to FBT
Proceeds of Sale 1. Fringe benefits required by the nature of or
necessary to the trade, business or profession of
Unutilized Portion employer.
CGT payable = Total CGT x ----------------------------------- 2. Fringe benefits for the convenience or advantage of
Proceeds of Sale employer.
3. Fringe benefits authorized and exempted from
Formula to Determine Basis or Cost of New Principal income tax under the Tax Code or under any special
Residence law, such as the 13th month Pay and Other Benefits
with the ceiling of P90,000.
In case of Partial Utilization of Proceeds 4. Contributions of the employer for the benefit of the
Utilized Portion employee to retirement, insurance and
New Basis or Cost = Old Basis x ----------------------------- hospitalization benefit plans.
Proceeds of Sale 5. Benefits given to the rank-and-file Employees,
whether granted under a collective bargaining
In case of Full Utilization agreement or not.
New Basis or Cost = Old Basis 6. De minimis benefits

In case of Actual Cost of New Principal Residence Managerial Employees

exceeds Proceeds of Sale of Old Principal Residence Those who are vested with powers or prerogatives to lay
New Basis or Cost = Old Basis + Excess of Actual Cost down and execute managerial policies and/or to hire,
of New Principal Residence over Proceeds of Sale of Old transfer, suspend, lay-off, recall, discharge, assign or
Principal Residence discipline employees.

Sale of Real Property to Government Supervisory Employees

Tax to be imposed is either (a) the income tax for Those who, in the interest of the employer, effectively
individual citizens or residents or (b) the final tax on the recommend such managerial actions if the exercise of
presumed capital gains from sale of property at six such authority is not routinary or clerical in nature but
percent (6%), at the option of the taxpayer-seller, if: requires the use of independent judgment.
a. The seller is an individual, and
b. The buyer is the government, any of its Rank-and-File Employees
political subdivisions or GOCC Those holding neither managerial nor supervisory
positions. Fringe benefits received are not subject to
fringe benefit tax but to personal income tax.
FRINGE BENEFIT TAX (FBT)
Tax Rates and Divisors to Determine the Grossed-
A final withholding tax imposed upon the grossed-up Up Monetary Value of the Benefit
monetary value of the fringe benefit furnished, granted
or paid by the employer to a managerial or supervisory Tax
Classification of Employee Divisor
employee. Rate
1. RC, NRC, RA and NRAETB 35% 65%
Fringe Benefit
Any good, service, or other benefit furnished or granted 2. NRANETB 25% 75%
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: Grossed-Up Monetary Value of the Benefit
1. Housing Represents the whole amount of income realized by the
2. Expense Account employee which includes:
3. Vehicle of any kind 1. The net amount of money or net monetary value of
4. Household personnel, such as maid, driver and property which has been received, and
others 2. The amount of fringe benefit tax thereon otherwise
5. Interest on loan at less than market rate to the due from the employee but paid by the employer for
extent of the difference between the market rate and and in behalf of his employee.
actual rate granted.
6. Membership fees, dues and other expenses borne Guideline for Valuation of Fringe Benefits
by the employer for the employee in social and 1. Money – value is the amount granted or paid for
athletic clubs and similar organizations 2. Property with Ownership Transferred – value is
7. Expenses for foreign travel equal to the fair market value of the property
8. Holiday and vacation expenses 3. Property without Transfer of Ownership – value is
9. Educational assistance to the employee or his equal to the depreciation value of the property.
dependents; and
10. Life or health insurance and other non-lire insurance De Minimis Benefits
premiums or similar amounts on excess of what the These are benefits of relatively small value and are
law allows. offered or furnished by the employer merely as a means
of promoting the health, goodwill, contentment of
Person Liable efficiency of employees
The employer as a withholding agent of the tax, whether
such employer is an individual, professional partnership De Minimis Benefits under Current BIR Regulations
or a corporation, regardless of whether the corporation 1. Monetized unused vacation leave credits private
is taxable or not, or the government and its employees not exceeding (10) days during the year
instrumentalities. 2. Monetized value of vacation and sick leave credits
paid to government officials and employees
Tax Treatment of Fringe Benefit and FBT 3. Medical cash allowance to dependents of
The amount of taxable fringe benefit and the fringe employees not exceeding P1,500.00 per employee
benefits tax shall constitute allowable deductions from per semester or P250 per month
gross income of the employer.

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 4

4. Rice subsidy of P2,000.00 or 1 sack of 50kg. rice employee relationship, unless specifically
per month amounting to not more than P2,000:00 excluded by the Tax Code.
5. Uniform and clothing allowance not exceeding
P6,000 per annum - The name by which the remuneration for
6. Actual yearly medical benefits not exceeding services is designated is immaterial.
P10,000 per annum
7. Laundry allowance not exceeding P300 per month; - E.g. salaries, wages, emoluments and
honoraria, allowances, commissions, fees
8. Employees achievement awards e. g. for length of
including director’s fees, if the director is, at the
service or safety achievement, which must be in the
same time, an employee, taxable bonuses and
form of a tangible personal property other than cash
fringe benefits (except those subject to fringe
or gift certificate, with an annual monetary value of
benefit tax, taxable pensions and retirement
not exceeding P10,000 received by the employee
pay, and other income of a similar nature.
under an established written plan which does not
discriminate in favor paid employees
Compensation Income Earners
9. Gifts given during Christmas and major anniversary - Individuals whose source of income is purely
celebrations not exceeding P5,000 per employee
derived from employer-employee relationship.
per annum
10. Daily meal allowance for overtime work not Employee
exceeding 25% of the basic minimum wage. - An individual performing services under an
11. Benefits received by an employee by virtue of a employee relationship.
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the Employer
total annual monetary value received from both - Any person for whom an individual performs or
CBA and productivity incentive schemes combined performed any service, of whatever nature,
do not exceed P10,000 per employee per taxable under employer-employee relationship.
year.
Employer – Employer Relationship
Tax Treatment of Excess of the Above Amount over - Exists when a person for whom services were
the Ceiling for De Minimis Benefits performed (employer) has the right to control
The excess shall form part of “Other Benefits” and direct an individual who performs the
under “13th Month Pay and Other Benefit” subject to services (employee), not only as to the result of
P90,000 ceiling or limit. If the excess is within the ceiling the work to be accomplished but as to the
or limit, the same shall not be subjected tax; otherwise, details, methods and means by which it is
it is subject to either FBT (managerial or supervisory accomplished.
employees) or personal income tax (rank-and-file)
employees.) - An employee is subject to the control of the
employer not only as to what shall be done, but
Deadline of Quarterly Remittance of FBT how it shall be done.
On or before the last day of the month following the
calendar quarter in which the fringe benefits were
granted GROSS INCOME FROM BUSINESS OR PRACTICE
OF PROFESSION

Formula:
MODULE 6 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 INCOME
Gross Sales
Gross Income - Total sales transactions net of VAT, applicable
All income derived from whatever source, including but during the period, without any other deduction.
not limited to the following:
a. Compensation - Net of sales returns and allowances and
b. Gross income from profession, trade or business discounts
c. Gains form dealings in property
d. Interests Gross receipts
e. Rents - Total amount or its equivalent representing the
f. Royalties contract price, compensation, service fee,
g. Dividends rental or royalty, including the amount charged
h. Annuities for the materials supplied with the services, and
i. Prizes and winnings deposits and advance payments actually and
j. Pensions constructively received during the taxable
k. Partner’s share in the net income of the general period for the services performed or to be
professional partnership performed for another person, EXCEPT
returnable security deposits.
Requisites of Taxable Income - Net of VAT, if any.
1. There must be a gain or profit.
2. The gain must be realized or received. Costs
3. The gain must not be excluded by law or treaty from For Trading or Manufacturing Concern
taxation. Cost of Sales
• Invoice cost of the goods sold
• import duties;
COMPENSATION INCOME • freight in transporting the goods to the place
- All remuneration for services performed by an where the goods are actually sold
employee for his employer under an employer- • insurance while the goods are in transit

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 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 Example: If corporation forgives the
As arises from indebtedness – compensation for the use indebtedness of the stockholder, it has the
of money or forbearance for its use. effect of payment of dividend to the extent
of the amount of debt.
Unless exempted by law, interests received by a
taxpayer, whether or not usurious, are taxable which
may be: ANNUITIES
• Final Tax – e.g. interest derived from Peso • Amounts received yearly or at other regular
bank deposits (WITHIN); interest derived intervals for a certain or uncertain period, as for
from FC bank deposit (WITHIN) years or life as in life insurance or in perpetuity
• Ordinary or Regular Income Tax – other as in the case of an endowment fund.
interests received by the taxpayer.

PRIZES AND WINNINGS

RENT
It is consideration for the use of property paid by the Tax Treat of Prizes (There is effort involved.)
lessee to the lessor under a lease contract. It is taxable Individuals
income on the part of the lessor. • Up to P10,000 (WITHIN) – Ordinary or Regular
1. Advance or prepaid rentals are taxable in full in Income Tax
the year of receipt. • More than P10,000 (WITHIN) – 20% Final Tax
2. Security deposits received to ensure faithful • Regardless of amount (WITHOUT) – Ordinary
performance of contractual obligations of the or Regular Income Tax if RC
lessee are not considered income on the part
of lessor, but if applied to rent, the same will be Tax Treatment of Winnings (By Chance)
taxable. Individuals
3. Expenses shouldered by lessee for lessor like • Regardless of amount (WITHIN) – 20% Final
taxes and insurance premiums constitute Tax
income taxable to the lessor. • Regardless of amount (WITHOUT) – Ordinary
or Regular Income Tax if RC

ROYALTIES PCSO Sweepstakes and Lotto Winnings

Payment for the use of property (intangible personal • Up to P10,000 – Tax-Exempt
property) belonging to another. • More than P10,000 – Final Tax

Include earnings from copyrights, trademarks, and

patents Exclusions from Gross Income

Tax Treatment of Royalties Items that are not included in the determination of gross
• Active Income income either because:
Ordinary or Regular Income Tax 1. they represent return of capital or are not income,
• Passive Income gain or profit.
a. Final Tax – Within 2. they are subject to another kind of internal revenue
b. Ordinary or Regular Income Tax – Without tax.
for Resident Citizens 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.
DIVIDENDS
Any distribution made by a stock corporation out of its Exclusions under the Tax Code
earnings or profits and payable to its shareholders, 1. Proceeds of life Insurance
whether in money or in other property. 2. Return of insurance premium
3. Gift, bequest or devise
Taxable dividends 4. Compensation for personal injuries or sickness,
1. Cash dividend – paid to shareholders in cash whether by suit or agreement
2. Property dividend – paid in property of the 5. Income exempt under Treaty
corporation and taxable to the extent of the 6. Retirement Benefits, Pension, Gratuities, etc.
fair market value of the property at the time a. Those derived under R.A. 7641
of distribution. b. Those received by officials and employees of
3. Stock dividend – paid in stock of the corporation private employers in accordance with a
issuing it and taxable if it results in changes reasonable private benefit plan
in the proportionate interest of the Conditions:
stockholder. i. in the service of the same employer for at
4. Liquidating dividend – involves the distribution of least 10 years;
assets by a corporation to its stockholders ii. at least 50 years old at the time of
in complete liquidation or dissolution. The retirement;
difference between the sum of the cash iii. must be availed of only once
and the fair market value of the property iv. plan must be approved by the BIR
received and the cost of investment in
shares is represents capital gain or loss c. Separation pay because of death, sickness, or
from investment, which is subject to other physical disability or for any cause
regular income tax. If the investor is an beyond the control of the official or employee
individual, the rule on holding period shall (like installation of labor-saving devices,
apply. retrenchment, redundancy or cessation of
5. Scrip dividend – issued in the form of promissory business.)
note and taxable to the extent of its fair
market value. The phrase “for any cause beyond the control
6. Indirect dividend – payments or rights received by of said official or employee” – connotes
the taxpayer which are really dividends.

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 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 The excess of allowable deductions over gross income
incurred upon such indebtedness. of the business for any taxable year, which had not been
3. The indebtedness must be that of the taxpayer. previously offset as deduction from gross income.
4. The indebtedness must be connected with the
trade, business or profession of the taxpayer. May be carried over up to 3 consecutive years
5. The interest expense must have been paid or immediately following the loss (or 5 years for taxable
incurred during the taxable year. years 2020 and 2021)
6. The interest must be legally due.
7. The interest must have been stipulated in writing.
8. The interest arrangement must not be between BAD DEBTS
related taxpayers.
9. In case of interest incurred to acquire property used Debts resulting from the worthlessness or
in trade, business or exercise of profession, the uncollectibility, in whole or in part, of amounts due the
same, was not treated as a capital expenditure. taxpayer by others, arising from money lent or from
10. The allowable deduction has been reduced by 33% uncollectible amounts of income from goods sold or
of the interest income subject to final tax. services rendered.

Reduction of Interest Expense Requisites for Deductibility

Allowable deduction for interest expense is reduced by 1. Debt must be valid and legally demandable
33% of the interest income subject to final tax (20% 2. Connected with the taxpayer's trade, business or
interest derived from peso bank deposit and 15% practice of profession
interest derived from foreign currency bank deposit). 3. Must not between related parties
4. Taxpayer must be using accrual basis of
Optional Treatment of Interest Expense accounting
At the option of the taxpayer, interest incurred to acquire 5. Actually ascertained to be worthless and
property used in trade or business may be allowed as a uncollectible as of the end of the taxable year.
deduction or treated as capital expenditure. 6. Actually charged off in the books of accounts of the
taxpayer as of the end of the taxable year

TAXES
Taxes proper. No deductions are allowed for: DEPRECIATION
a. interest (deductible as interest and not tax) It is the gradual diminution in the service or useful value
b. surcharge of tangible property due from exhaustion, wear and tear
c. penalties or fines and normal obsolescence. The term also applies to
amortization of intangible assets, the use of which in
Requisites for Deductibility trade or business i s of limited duration.
1. Imposed upon the taxpayer for which he is directly
liable Requisites for Deductibility
2. In connection with taxpayer’s business or 1. Reasonable.
profession 2. For property use or employment in trade or
3. Paid or incurred during the taxable year. business
3. Charged off within the taxable year.
Non-Deductible Taxes
1. Income tax Methods of Depreciation
2. Estate and donor’s tax The term "reasonable allowance" shall include, but not
3. Special assessments limited to, an allowance computed in accordance, with
4. Excess electric consumption tax the regulations prescribed by the Department of
5. Foreign income tax, war profits and excess profits Finance, under any of the following methods.
tax, if the taxpayer treated them as tax credit 1. Straight-line method
6. Final income taxes (capital gains taxes and final 2. Declining-balance method
taxes on passive income) 3. Sum of the years-digit method
7. Value-added tax (sales or revenues are shown net 4. Any other method which may be prescribed by the
of VAT) Department of Finance upon recommendation of
8. Taxes not related to one’s business or profession the Commissioner of Internal Revenue.
(stock transaction tax)

OPTIONAL STANDARD DEDUCTIONS

LOSSES
Deduction which an individual taxpayer may elect in an
Casualty Loss amount not exceeding 40% of the gross sales or gross
Arises from fires, storms, shipwreck or other casualties, receipts in lieu of itemized deductions.
or from robbery, theft, or embezzlement.
Qualified Taxpayers
Requisites for Deductibility 1. Individual taxpayers, except employees and
1. Actually sustained during the taxable year non-resident aliens
2. Connected with the trade, business or profession 40% of gross sales (accrual basis of
3. Evidenced by a close and completed transaction accounting) or gross receipts (cash basis)
4. Not compensated for by insurance or other form of
indemnity Implications of OSD
5. Not claimed as a deduction for estate tax purposes 1. The taxpayer must signify his intention to avail
6. Notice of loss must be filed with the Bureau of of OSD when he files his 1st quarterly income
Internal Revenue within 45 days from the date of tax return.
discovery of the casualty or robbery, theft or 2. Once election has been made, it shall be
embezzlement. irrevocable for the taxable year in which the
return is made.
Net operating loss carry-over (NOLCO)

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 9

3. An individual who claimed OSD is no longer Individual Taxpayers Not Required to File Income
required to submit, together with his annual Tax Return
income tax return, his financial statements. 1. Individuals not engaged in trade or business
4. An individual shall keep records pertaining to whose taxable income does not exceed
his gross sales or receipts. P250,000.
2. Individuals qualified under substituted filing of
income tax return
NON-DEDUCTIBLE EXPENSES Conditions:
• Individuals earn purely compensation
1. Personal, living or family expenses. income
2. Amount paid out for new buildings or for permanent • Compensation income must be derived
improvements, or betterment made to increase the from sources within the Philippines
value of any property or estate. • Income tax on compensation income has
3. Amount expended in restoring property or in making already been correctly withheld by the
good the exhaustion thereof for which an allowance employer
has been made. 3. Taxpayers whose income had already been
4. Premiums paid on any life insurance policy covering subjected to final tax
the life of any officer or employee, or of any person • Individuals whose income consists
financially interested in any trade or business solely of royalties, prizes, interests
carried on by the taxpayer, individual or corporate, from bank deposit, dividends, etc.
when the taxpayer is directly or indirectly a • Non-resident alien not engaged in
beneficiary under such policy. trade or business
5. Losses from sales or exchanges of property 4. Individuals who are exempt from income tax
between related taxpayers. like minimum wage earners

Transactions Between Related Parties

1. Between members of the family; BIR Reportorial Requirements and
“Family” includes only the brothers, sisters Tax Deadlines (Tax Returns)
(whether by the whole or half blood), spouse,
ancestors, and lineal descendants of the Self-Employed and Mixed Income Earner
taxpayer. › BIR FORM 0605 – Registration Fee
2. Except in the case of distributions in liquidation: › Upon registration and every year
a. between an individual and a corporation more thereafter on or before January 31
than 50% in value of the outstanding stock of › BIR FORM 1701 – Annual Income Tax Return
which is owned, directly or indirectly, by or for for Self-Employed Individuals and Mixed
such individual. Income Earners
b. between two corporations more than 50% in › BIR FORM 1701A – Annual Income Tax Return
value of the outstanding stock of each of which for Self-Employed Individuals using 8% income
is owned, directly or indirectly, by or for the tax rate or availing of OSD
same individual, if either one of such › On or before April 15 of the
corporations, with respect to the taxable year of following year
the corporation preceding the date of the sale › BIR FORM 1701Q – Quarterly Income Tax
of exchange was a personal holding company Return for Self-Employed Individuals and
or a foreign personal holding company. Mixed Income Earners (with respect to
3. Between the grantor and a fiduciary of any trust. Business or Professional Income)
4. Between the fiduciary of a trust and the fiduciary of › On or before May 15 – 1st Quarter
another trust if the same person is a grantor with › On or before August 15 – 2nd
respect to each trust. Quarter
5. Between a fiduciary of a trust and a beneficiary of › On or before November 15 – 3rd
such trust. Quarter

Employees
TAX RETURN › BIR FORM 1700 – Annual Income Tax Return
• Sworn statement or declaration executed in for Employed Individuals
accordance with law on a required form › On or before April 15 of the following
wherein the taxpayer states the facts as to the year
nature and extent of tax liability for a taxable Except if the employee is qualified under
year including the computation of the tax due. Substituted Filing of Tax Return. Conditions:
a. One employer in the Philippines for
Income Tax Return the calendar year
• Statement or declaration of what is reported is b. The income tax due is equal to income
the income of the taxpayer and the allowable tax withheld.
deductions for the taxable year.
Maximum Number of Pages
Individual Taxpayers Required to File Income Tax Four
Return
1. Resident citizen, regardless of source Contents:
2. Non-resident citizen, on his income from a. Taxpayer’s profile and information
sources within the Philippines b. Gross sales, receipts or income from services
3. Resident alien, on his income from sources rendered, conduct of trade or business, except
within the Philippines income subject to final tax
4. Non-resident alien engaged in trade or c. Allowable deductions
business, on his income from sources within d. Taxable income
the Philippines e. Income tax due and payable
5. Estate and Trust

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 10

Payment Deadlines in case Annual Income Tax Due tax withheld and the tax
of an Individual is in Excess of P2,000 due on the income.
1st Installment – Day when the Annual Income Tax 3. The income recipient is 3. The payee is not
Return is Filed still required to file an required to file an income
2nd Installment – October 15 income tax return. tax return for the
particular income
Keeping, Maintaining and Registration of Books of
Accounts Timing of Withholding
Retention Period The obligation of the payor to deduct and
• 10 years reckoned from the day following the withhold the tax arises at the time income is paid or
deadline in filing a return, or if filed after payable, or accrued or recorded as an expense or asset,
deadline, from the date of the filing of the whichever is applicable, in the payor’s books, whichever
return. comes first.
• Within first 5 years, the taxpayer shall retain
hardcopies. Consequence of Failure to Withhold
• After 5 years, the taxpayer may retain only an The withholding tax agent is liable for
electronic copy of the books of accounts, deficiency withholding tax plus penalties; and If paid, he
subsidiary books and other accounting is now allowed to claim deductions from gross income
records. even when payment is made at the time of audit
investigation or reinvestigation/reconsideration
Mandatory Submission of Audited Financial
Statements Examples of Income Payments Subject to Creditable
Self-employed and mixed income earners whose annual Withholding Tax Expanded
gross sales or receipts amounted to more than P3 1. Upon the following values of real property,
millions and did not avail of the optional standard where the seller is habitually engage in the real estate
deduction. business
With a selling price of P500,000.00 or less
1.5%
WITHHOLDING TAX SYSTEM With a selling price of more than P500,000.00
but not more than P2,000,000.00 3.0%
It is a procedure of collecting income tax sanctioned by With a selling price of more than P2,000,000.00
tax laws. 5.0%
Where the seller/transferor is not habitually engaged in
3 Primary Reasons: the real estate business
1. To provide the taxpayer a convenient manner to meet 6.0%
his probable income tax liability. 2. Income payments to individual professionals
2. To ensure the collection of tax. if current year’s income payments do not
3. To improve the government cash flow. exceed P3,000,000 – 5%
if income payments exceed P3,000,000 or
Forms of Withholding Taxes taxpayer is VAT-registered – 10%
1. CREDITABLE WITHHOLDING TAX 3. Rentals – 5%
4. Income payments to partners of GPP
A. Withholding Tax on Compensation is the tax withheld if current year’s income payments do not
from income payments to individuals arising from an exceed P720,000 - 10% or
employer-employee relationship. if income payments exceed P720,000 – 15%
5. Income distribution to beneficiaries of the
BIR Form 2316 (Certificate of Compensation Payment / estate or trust – 15%
Tax Withheld For Compensation Payment With or
Without Tax Withheld) Withholding Tax Deadlines

B. Expanded Withholding Tax is a kind of withholding tax Withholding Tax on Compensation

which is prescribed on certain income payments and is › BIR FORM 1601C – Monthly Remittance
creditable against the income tax due of the payee for Return of Income Taxes Withheld on
the taxable quarter/year in which the particular income Compensation
was earned. On or before 10th day following the close of the
taxable month, except for December, which is
BIR Form 2307 (Certificate of Creditable Tax Withheld at on or before January 15 of the following year
Source)
Expanded Withholding Tax
› BIR FORM 0619 – Monthly Remittance Return
2. FINAL WITHHOLDING TAXES On or before 10th day following the close of the
Withholding tax on income subject to final tax taxable month, for the 1st 2 months
BIR Form 2306 (Certificate of Final Income Tax › BIR FORM 1601EQ – Quarterly Remittance
Withheld) On or before the last day of the month following
the close of the taxable quarter
Distinctions between CWT and FWT
CWT FWT Withholding Tax Remittance on Onerous Transfer of
1. Taxes withheld on 1. The amount of income Real Property
certain income payments tax withheld is › BIR FORM 1606 – Monthly Remittance Return
are intended to equal or constituted as a full and for Onerous Transfer of Real Property
at least approximate the final payment of the On or before 10th day following the close of the
tax due of the payee on income tax due from the taxable month, except for December, which is
said income payee on said income. on or before January 15 of the following year
2. Payee of income is 2. The liability for
required to report the payment of the tax rests Annual Information Returns
income and/or pay the primarily on the payor as
difference between the a withholding agent.

CLWTAXN Income Taxation of Individuals (Atty. V. Salud) 11

 › 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