Chapter 7

Income Taxation – Introduction to Regular Income Tax

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I. CHARACTERISTICS OF THE REGULAR INCOME TAX

1. General in coverage
2. A net income tax
3. An annual tax
4. Creditable withholding tax
5. Progressive or proportional tax

II. THE REGULAR INCOME TAX MODEL

Gross income – inclusions xx
Less: Allowable deductions xx
Taxable income xx

III. GROSS INCOME

Gross income consists of the major topics:
A. Exclusions from gross income – income exempt from regular income tax
B. Inclusions in gross income – income subject to regular income tax
C. Special topics – either exclusion or inclusion depending on the circumstance;
i. Fringe benefits
ii. Dealings in properties

 Gross income constitutes all items of income that are neither excluded in gross income nor subjected to final
tax or capital gains tax.
 Excluded income is only exempt from regular income tax but may be subject to other taxes
 Exempt income is exempt from regular income tax, final tax or capital gains tax

IV. ALLOWABLE DEDUCTIONS

 Or simply ‘deductions’, are expenses of the conduct of business or exercise of profession
 Personal expenses are non-deductible
1. Principles of Deductions (Chapter 13)
2. Regular Allowable Itemized Deductions – Chapter 13-A
3. Special Allowable Itemized Deductions & Net Operating Loss Carry Over – Chapter 13-B
4. The Standard Optional Deductions [OSD] – Chapter 13-C

Personal exemption
 This is deducted in lieu of the personal expenses of the taxpayer
 In past laws, the amount of exemption depends on the number of dependents supported by the taxpayer
 Under the TRAIN Law, P250,000 of the annual income of the taxpayer is exempt from tax

V. DETERMINATION OF THE TAXABLE INCOME

Taxable income of Individual Income Taxpayers is computed using;
1. Classification rule
2. Globalization rule

Under classification rule, gross income is first classified into:

A. Compensation income
 Arises from employer-employee relationship
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 7
Income Taxation – Introduction to Regular Income Tax
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B. Business or professional income
 Arises from selling of goods or rendering of services for a profit
Note: Income that are neither compensation income nor business income are simply classified as “other taxable
income” and are added to gross income from business and profession

Computation of taxable income of pure compensation income earner

Gross compensation income xx
Less: Non-taxable compensation xx
Taxable compensation income xx
Note: Non-taxable compensation includes legally mandated salary deductions and items of compensation income that
are exempt by law, contracts or treaties.

Computation of taxable income of pure business or professional income earner

Gross income from business/profession xx
Add: Non-operating (or Other) income xx
Total Gross income xx
Less: Allowable deductions xx
Taxable net income xx

Globalization rule
 Income of mixed income earner from both sources is simply totaled
 Net loss from profession/business income shall not be offset against taxable compensation income

Computation of taxable income of corporate income taxpayers

A. Service Businesses
Revenues or gross receipts xx
Less: Cost of services xx
Gross Income xx
Note: Cost of services pertains to all direct costs of rendering the services such as materials, labor and
overhead costs

B. Merchandising Businesses
Sales xx
Less: Cost of Sales
Beginning inventory xx
Add: Net purchases xx
Freight in xx
Total goods available for sale xx
Less: Ending inventory xx
Cost of goods sold xx
Gross income xx

C. Manufacturing Businesses
Sales xx
Less: Cost of Sales
Raw materials, beginning xx
Add: Raw materials purchases xx
Total raw materials available for use xx
Less: Raw materials ending xx
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 7
Income Taxation – Introduction to Regular Income Tax
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Raw materials used xx
Direct labor xx
Overhead xx
Total manufacturing costs xx
Add: Work in process beginning xx
Total work put in process xx
Less: Work in process ending xx
Cost of goods manufactured xx
Add: Finished goods beginning xx
Total goods available for sale xx
Less: Finished goods ending xx
Cost of goods sold xx
Gross income xx

VI. INCOME TAX REPORTING FORMAT

Reporting Format for Individuals Engaged in Business or Profession
Net sales/Receipts/Revenues/Fees xx
Add: Other taxable income from operation not subject to final tax xx
Total sales/receipts/revenues/fees xx
Less; Cost of sales or services xx
Gross income from business/profession xx
Add: Non-operating income xx
Total Gross income xx
Less: Allowable deductions xx
Net income xx

 Sales/revenues/receipts/fees
 Revenue is the general term which pertains to the gross inflow of benefits from primary operations
of the business
 Sales pertains to revenue from sales, while fees pertain to revenue from services
 Receipts pertain to cash collections from sale of goods or services
 Other taxable income
 Revenues or receipts from incidental or secondary operations aside from the primary operations
 Non-operating income
a. Gains from dealings in properties not subject to capital gains tax
b. Passive income not subject to final tax
c. Casual active income
d. Income distribution from a general professional partnership, taxable trust or estate, or from an
exempt joint venture

Reporting Format for Corporate Taxpayers

Net sales/Revenues/Receipts/Fees xx
Less; Cost of sales or services xx
Gross income from operations xx
Add: Other taxable income not subject to final tax xx
Total Gross income xx
Less: Allowable deductions xx
Net income xx

Types of Regular Income Tax

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 7
Income Taxation – Introduction to Regular Income Tax
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1. Individual income tax
2. Corporate income tax

VII. INDIVIDUAL INCOME TAX

The Income Tax Table for Individual Taxpayers (Year 2018-Year 2022)
Taxable Income per Year Income Tax Rate
P250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over P250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

The Optional 8% Income Tax

 Taxpayer can opt to be taxed at 8% of sales or receipt and other non-operating income
 This is in lieu of;
a. Progressive income tax, computed under individual tax table; and
b. 3% percentage business tax on sales or receipts

VIII. CORPORATE INCOME TAX

 Commonly referred to as regular corporate income tax (RCIT)
 It is a proportional or flat tax rate of 30% on taxable income
Note: Corporate taxpayers are subject to minimum tax, computed as 2% of total gross income subject to regular
tax, this minimum tax is referred to as Minimum Corporate Income Tax (MCIT)

IX. INCOME TAX RETURNS

Tax Return Form Individual Taxpayers

Form 1700 Purely employed taxpayer
Form 1701A Purely in business or profession, using itemized, OSD or opting to the 8% optional
income tax
Form 1701 Mixed income earners

Corporate Income Taxpayers

Form 1702-RT Corporations subject only to the 30% regular income tax
Form 1702-MX Corporations subject to special or a combination of tax rates
Form 1702-EX Corporations that is exempt with no tax due

Rounding rules in the income tax returns

 If the amount of centavos is 49 or less, the centavos are dropped down
 If the amount of centavos is 50 or more, it is rounded up to the next peso

X. FILING OF INCOME TAX RETURN

Deadline of filing the annual income tax return
 On the 15th day of the fourth month following the taxable year of the taxpayer

Deadline of quarterly income tax returns

Taxpayers
Quarterly Income Tax Returns
Individuals Corporations
1st Quarter ITR May 15, same year 60 days end of 1st Qtr
Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 7
Income Taxation – Introduction to Regular Income Tax
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2nd Quarter ITR August 15, same year 60 days end of 2nd Qtr
3rd Quarter ITR November 15, same year 60 days end of 3rd Qtr

Frequency of Reporting Per Taxpayer

Taxpayers Frequency of Reporting
Individuals
Pure compensation income earner Annual
Purely engaged in business or profession Quarterly & Annual
Mixed income earner Quarterly & Annual
Corporations Quarterly & Annual

Substituted filing system for employees

 Applicable only when the employee has no other sources of income
 Relieves the employee from filing annual ITR
 The employer withholds the income tax of the employee’s compensation
 The employer files the withholding tax return for the employee

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA