BUSINESS INCOME

Purely Taxable
The phrase “doing business” means some “trade or Mixed Taxable
business Inc.
commercial activity + regularly engaged in as a means of Business Inc.
livelihood or with a view of profit.

“Commencement of Business” – in the case of pursuit of

business or practice of profession, it shall be reckoned from
the day when the first sale transaction occurred or within
thirty (30) calendar days from the issuance of Mayor’s
Permit/Professional Tax Receipt (PTR) by LGU, or
Certificate of Registration issued by the Securities and
Exchange Commission (SEC), whichever comes earlier.

Businesses in the Philippines may be able to register

for VAT or OPT (Other Percentage Tax).
Both are types of business-related taxes incurred on
the sale of services or sale of goods.

Gross Receipts Gross Sales

SEE NEW RULES PER RA 11976

Both are Reportable under Accrual Basis
Commercial or Sales invoice is issued .
BUSINESS INCOME EXEMPT from Philippine Income Tax:

 Marginal Income Earners, MIEs are those whose

businesses have earnings, gross sales, or receipts
that do not exceed PHP100,000 within a 12-
month period. This is less than employees’
earning minimum wage, and the amount of
PHP100,000 is gross of the cost of sales or
services. (Still required to file ITR 1701)

 Income from Sale of Gold to BSP (Licensed Small

Scale Miner, BSP accredited Trader of Gold)
 All accredited Barangay Micro Business Enterprises
(RA 9178) shall be exempted from income tax for
income arising from the operation of BSME. Returnable Income:
 Returnable Business
 Income of general professional partnership (Still
Income xx xx
required to file ITR 1702)
 Other Returnable
BUSINESS INCOME EXEMPT from Philippine Income Tax: Income:
 Income of business registered (RBEs) under the
• Passive income xx
Omnibus Investment Code of the Philippines. earned outside
• Returnable xx
 Income derived from main purpose of creation of the
Capital gains
Non-stock, Non- Profit Organization
Less:
 Income(surplus) of Cooperative registered with CDA Standard, OSD xx xx
(with Certificate of Tax Exemption) Itemized Deduction
 Income Exempt under Treaty. - any treaty obligation
Net Taxable Income xx xx
binding upon the Government of the Philippines.
 Income Derived by the Government or its Political BUSINESS INCOME
Subdivisions from the exercise of any essential
governmental function SEC. 4. For purposes of these Regulations, “Gross Income”
shall mean the gross sales less sales returns, discounts and
 Income derived by foreign government in the allowances and cost of goods sold.
Philippines
SALES (RA 11976) = Sales from transfer of goods or from
transfer of services in the course of business.
“Gross sales” shall include only sales contributory to income if any income cannot be definitely attributed to or
taxable under Sec. 27(A) of the Code. “Cost of goods sold” shall identified. exclusively earned or realized by either of the
include the purchase price or cost to produce the merchandise spouses, the same shall be divided equally between the spouses
and all expenses directly incurred in bringing them to their for the purpose of determining their respective taxable income.
present location and use. SECTION 11. INSTALLMENT PAYMENT OF INDIVIDUAL INCOME
TAX.
For trading or merchandising concern, “cost of goods sold”
means the invoice cost of goods sold, plus import duties, freight WHEN the tax due is in excess of Two thousand pesos
in transporting the goods to the place where the goods are (P2,000.00), the individual may elect to pay the tax in two (2)
actually sold, including insurance while the goods are in transit. equal installments, in which case, the first installment shall be
paid at the time the annual income tax return is filed and the
For manufacturing concern, “cost of goods sold” means all second installment paid on or before October 15 Following the
costs incurred in the production of the finished goods such as close of the calendar year..
raw materials used, direct labor and manufacturing overhead, If any installment is not paid on or before the date fixed for its
freight cost, insurance premiums and other costs incurred to payment, the wholeamount of the unpaid tax becomes due and
bring the raw materials to the factory or warehouse. The term payable, together with the delinquency penalties to be
may be used interchangeably with “cost of goods manufactured reckoned on the original date when the tax is required to be
and sold”. paid.

MANNERS of Reporting business income: (E) Return of Parent to Include Income of Children. –
a) In general, accrual basis Gross Business Income = Net Sales The income of unmarried minors derived from properly
(Cash and Credit sales) – Cost of Sales received from a living parent shall be included in the return of
the parent, except
OTHER METHODS of Reporting Gross Business Income
(1) when the donor's tax has been paid on such
Section 48. Accounting for Long-term Contract - shall report property, or
such income upon the basis of percentage of completion.
(2) when the transfer of such property is exempt
The return should be accompanied by a return certificate of from donor's tax.
architects or engineers showing the percentage of completion Section 52. Corporation Returns.
during the taxable year of the entire work performed under
(2) Except foreign corporations not engaged in trade or
contract.
business in the Philippines, shall render, in duplicate, a
Section 49. Installment Basis. true and accurate quarterly income tax return and
A) Personal property, a person who regularly sells or final or adjustment return in accordance with the
otherwise disposes of personal property on the provisions of Chapter XII of this Title. The return shall
installment plan may return as income therefrom in be filed by the president, vice-president or other
any taxable year that proportion of the installment principal officer, and shall be sworn to by such officer
payments actually received in that year, which the and by the treasurer or assistant treasurer.
gross profit realized or to be realized when payment is MANNER OF REPORTING BUSINESS INCOME
completed, bears to the total contract price. ILLUSTRATIVE CASES:LONG TERM CONSTRUCTION CONTRACT
B) B) Real Property (ordinary asset), sale with initial
Contract Price P100,000,000
payment not exceeding 25% of selling price. Year 1 accomplishment. 40%, Cost P25,000,000
C) (C) Sales of Real Property Considered as Capital Reportable income for year 1;
Asset by Individuals. - An individual who sells or P100,000,000 x 40% = P40,000,000
disposes of real property, considered as capital Cost = 25,000,000
asset, and is otherwise qualified to report the gain Reportable Income, year 1 = P15,000,000
therefrom under Subsection (B) may pay the capital
At end of year 2, 100% completed and accumulated cost
gains tax in installments under rules and regulations P60,000,000
to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner. Reportable income for year ;
P100,000,000 x 100% = P100,000,000
BUSINESS INCOME of Husband and Wife Cost 60,000,000
Section 51(D) Husband and Wife. - Married individuals, Total Income P 40,000,000
whether citizens, resident or nonresident aliens, who do not Reported in year 1 15,000,000
derive income purely from compensation, shall file a return for Reportable Income in year P 25,000,000
the taxable year to include the income of both spouses, but Section 49. Installment Basis. –
where it is impracticable for the spouses to file one return, A) Personal property, a person who regularly sells or
each spouse may file a separate return of income but the otherwise disposes of personal property on the
returns so filed shall be consolidated by the Bureau for instalment plan may return as income therefrom in
purposes of verification for the taxable year. any taxable year that proportion of the installment
Husband and wife shall compute their individual income tax payments actually received in that year, which the
separately based on their respective taxable income. gross profit realized or to be realized when payment is
completed, bears to the total contract price.

X item (personal property)sold in year 1, payable on installment

 individual taxpayers who opted for Optional Standard
Reportable income in year 1 when total collections for year
Deduction (OSD).
for X item sold is P250,000. Filing date:
Total Gross business Income of item X sold, P200,000
Proportion of year 1 collection to total This form is filed on or before April 15 of each year covering
selling price, 250,000/500,000 = 50% income for the preceding taxable year
Reportable Income in year 1 P 100,000
BIR Form No. 1702-AIF
Account Information Form (AIF) For Corporations and
Section 49. Installment Basis Partnerships in General
B) Real Property (ordinary asset), sale with initial payment not Description:
exceeding 25% of selling price. A revised form designed in line with the BIR Integrated
Tax System (ITS) to be used as attachment to BIR Form No.
Realtor sold in year one residential lot for P 5,000,000, on 1702 and to be accomplished by corporations and partnerships
installment payment, with 40% down payment upon signing of which contains the taxpayer's business profile information and
sale contract, balance payable in two equal installment other relevant data to be lifted from the Audited Financial
payments payable in year 2 and 3. The cost of sale is Statements.
Filing date:
P3,000,000.
Filed together with the Annual Income Tax Return - on
The reportable gross business income in year 1 is, P 5,000,000 or before the 15th day of the fourth (4th) month following the
– 3,000,000 = P2,000,000 close of the calendar or fiscal year, as the case may be.

The P2,000,000 income is not allowed to be spread over the ALLOWABLE DEDUCTION from Business Income
remaining term of the credit term because the initial payment
In the first Quarter Return of Individual / Corporation, the
is 40%, more than 25% threshold .
method of deduction to be used for the taxable year must
REQUIRED FILING AND REPORTING DATE of Business already be indicated in 1701Q1 or 1702Q1 of the individual,
Income corporation respectively.
Methods of DEDUCTION from Business Income:
SOLE PROPRIETORSHIP BUSINESS, Estate and Trust:
a. Optional Standard deduction
BIR Form 1701Q - Quarterly Income Tax Return For Individuals,
Estates and Trusts b. Itemized method of deduction
Deadlines
*May 15 of the current taxable year– for the first quarter
*August 15 of the current taxable year – for the second quarter RA 9504
*November 15 of the current taxable year – for the third Optional Standard Deduction. — In lieu of the deductions
quarter
allowed under the preceding Subsections,
BIR Form 1701 - Annual Income Tax Return for self-employed A) an individual subject to tax under Section 24 1701
Individuals, Estates and Trusts ITR, other than a nonresident alien, may elect a
Deadline, On or before the 15th day of April of each year standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as
JURIDICAL PERSON ( Corporation, partnership, associations) the case may be.
BIR Form No. 1702Q Quarterly Income Tax Return for The OSD will be in lieu of cost of sales/services,
Corporations, Partnerships and Other Non-Individual administrative and other non-operating expenses.
Provided, That an individual who is entitled to and claimed
Filing Date The corporate quarterly income tax return shall be for the optional standard deduction shall not be required to
filed with or without payment within sixty (60) days following submit with his tax return such financial statements otherwise
the close of each of the first three (3) quarters of the taxable required under this Code.
year whether calendar or fiscal year. B) In the case of a corporation subject to tax under
BIR Form 1702 - Annual Income Tax Return (For Corporations Sections 27(A) and 28(A)(1) 1702 ITR, it may elect a
and Partnerships) standard deduction in an amount not exceeding forty
Deadline, On or before the 15th day of the fourth month percent (40%) of its gross income as defined in Section
32 of this Code.
following the close of the taxpayer’s taxable year
The OSD will just be in lieu of administrative and other non-
operating expenses.
ANNUAL INFORMATION FORM Unless the taxpayer signifies in his return his intention to
elect the optional standard deduction, he shall be considered as
BIR Form No. 1701-AIF
having availed himself of the deductions allowed in the
Account Information Form (AIF) for Self-employed
preceding Subsections. Such election when made in the return
Individuals, Estates and Trusts (engaged in trade and business)
shall be irrevocable for the taxable year for which the return is
Description:
made:
A revised form designed in line with the BIR Integrated
• A General Professional Partnership (GPP) may avail of
Tax System (ITS) to be used as attachment to BIR Form No.
the OSD only once, either by the GPP or the partners
1701 and to be accomplished by self-employed individuals,
comprising the partnership
estates and trusts engaged in trade and business, which shall
contain the taxpayer's business profile information and other
relevant data to be lifted from the Audited Financial
COMPARATIVE APPLICATION of 40% OSD
Statements. BIR Form 1701 AIF is not, however, required for
Individual Corporation
1701
1702
Sales . . . . . . . . . . . . . 10,000,00 10,000,000
 iii. Taxes which are ordinary and necessary in the conduct of
business and yet not allowed as items of deductions from
business income
 Philippine income tax
 Foreign income tax, if already claimed as tax credit
- In the case of a foreign corporation, deductions
for taxes are allowed only if they are connected
Itemized Deductions : with income from sources within the Philippines.
Requisites to be deductible:  Transfer taxes
 Necessary  Percentage tax on stock transactions
 Ordinary  Surcharges (penalties for tax violation)
 Incurred during the taxable year NOTE that: At the option of the resident citizen or Domestic
 Withheld with required w/tax (repealed RA 11976) Corporation, income tax to foreign country is treated as an item
 Not against moral of deduction or tax credit.

The following are among the item of expenses: iv. Pension plan expense
 Expenses Regardless if it is defined contribution or defined benefit plan,
 Interest if it is approved by BIR, the deductible expenses is the lower of
 Taxes the actuarial valuation or actual contribution, the excess of
 Losses actual contribution over the actuarial valuation is to be
 Bad Debts amortized over a period of 10 years,
 Depreciation if the plan is approved by the BIR
 Depletion of Oil and Gas Wells and Mines
If not approved by the BIR, the deductible expense is the
 Charitable Contributions and Other Contributions-
amount of actual retirement payment to the employees.
Research and Development
v. Bad debts expense
 Pension Trusts*
Allowable amount the receivable is actually written off during
ITEM OF EXPENSES, the allowable amount is subject to limit
the taxable period due to
1. Representation Expense
 insolvency of the debtor
½% of Sales of goods or 1% of Sales of servcies, versus
 death of the debtor
Actual whichever is lower.
 disappearance of the debtor
If both types of revenue are earned, the rule of
apportionment shall be applied to the actual amount of vi. Contributions or donations to accredited institutions?

representation expense to arrive at an amount which Deductible in full amount

should be compared to the allowed %.  Donation to government for priority projects
 Donations to international organization, where the
Revenue for the taxable year:
Sales of goods P15,000,000 Philippine government is a member
Sales of Services P10,000,000  Donations to accredited NGO’s, not more than 30%
Actual entertainment expense incurred P 200,000 should be used for administrative purposes
Deductible amount is subject to limit:
ALLOCATION, based on Revenue
Sales of goods Sales of services Total  10% of the taxable business income (ITR 1701) of the
120,000 80,000 P200,000 single proprietor after itemized deductions but before
Limits: ½ % of Sales of
contribution or actual contribution whichever is
goods and 1% of sales of lower.
services 75,000 100,000  5% of the taxable business income (ITR 1702) of the
Corporation after itemized deductions but before
ii. Interest expense as item of deduction?
Allowable Amounts 75,000 80,000 P155,000 contribution or actual contribution whichever is lower
- Interest expense directly connected to the conduct of Depreciation
business
Depreciation is generally computed on a straight-line basis,
- (shall be reduced by twenty (20%) of the interest although there are a variety of acceptable depreciation
income subjected to final tax that is earned the same methods.
taxable year) Gain on the sale of depreciated property is taxable as ordinary
- Under CREATE Law, effective April 11, 2021, the income.
arbitrage interest is reduced from 33% to 20%.
Properties used in petroleum operations may be depreciated
- In the case of corporations, since the income tax over a period of ten years using the straight-line or declining-
rates changed effective July 1, 2020, it follows that the balance method, at the option of the service contractor.
deduction from the interest expense of 20% shall be
Depletion cost is available as follows:
effective also on the said date.
- The 20% arbitrage interest is Derived as (25% - 20%)
25%
-For oil and gas wells, depletion of intangible asset is based on following the year of such loss, (except losses during the period
actual reduction in flow and production ascertained, not by when the taxpayer was tax-exempt)
flush flow, but by the settled production or regular flow. Under Republic Act No. 11494 or the Bayanihan to Recover as
For mines, depletion is allowable up to an amount not to One Act, net operating loss for the taxable year 2020 and 2021
exceed the market value, as used for purposes of imposing the may be carried over for the next five consecutive taxable years
mining ad valorem taxes, of the products mined and sold during following such loss.
the year. For mines, other than oil and gas wells, a net operating loss
calculated without the benefit of incentives provided for under
For non producing mines, Intangible exploration/development
EO No. 226, or the Omnibus Investments Code of 1987, as
incurred at its option could be declared as outright expense not
amended, incurred in any of the first ten years of operation
to exceed 25% of the net mining income.
may be carried over as a deduction from taxable income for the
Intangible Research and Development cost, at the option of next five years immediately following the year of such loss.
the taxpayer can be
CAPITAL LOSS
a. Claimed as outright expense when incurred
Capital losses arise from the sales or exchange of capital assets.
b. As Deferred expense to be amortized over a
Capital assets refer to property held by the taxpayer but not
period of 60 months from the month the
used in trade or business.
initial benefit from it is realized.
Goodwill Capital Assets Transactions:

Amortization of goodwill is not deductible for tax  Subject to capital gain tax
purposes.  Exempt from Capital gain tax
 Returnable in 1701 or 1702 ITR
LOSSES:
• Ordinary Loss For individual taxpayers , the capital loss shall be recognized in
• Casualty Loss full if the capital assets have been held for not more than 12
• Net Operating Loss (NOLCO) months and shall be recognized in 50% if such assets are held
for more than 12 months.
• Capital Loss
 Loss on wash sales For both corporations and individuals, however, capital loss to
be deducted shall be limited to the extent of the capital gains
To qualify, the loss must not be compensated by insurance
from such sales or exchanges.
and it must be sustained during the taxable year.
RETURNABLE CAPITAL ASSETS TRANSACTIONS:
ORDINARY LOSS
 For Both 1701 and 1702 ITR:
Ordinary loss pertains to a loss incurred in trade, profession, or
• Capital loss is deductible only up to the extent
business.
of capital gain
Generally, ordinary losses are deductible from gross income if • Net capital gain is added to ordinary business
the losses are actually sustained during the taxable year when income
the loss is claimed, and such losses must not be compensated
• Ordinary loss is deductible from net capital
for by insurance.
gain
CASUALTY LOSS  For 1701 ITR only:
Under Revenue Regulations (RR) No. 12-77, the term “casualty” Holding period
is the complete or partial destruction of property resulting • the capital loss shall be recognized in
from an identifiable event of a sudden, unexpected, or unusual full if the capital assets have been
nature. It denotes an accident or some sudden invasion by a held for not more
hostile agency and excludes progressive deterioration through than 12 months and shall be recognized in 50% if such
steadily operating cause. assets are held for more than 12 months.
The Tax Code allows for casualty losses arising from damage to Net Capital Loss Carry over
or loss of property used in business as deductions from gross • Net capital loss is carried over to the
income, provided that a sworn declaration of loss shall be filed next year
within 45 days after the date of the event and proof of the • Net capital loss carry over should not
elements of the losses claimed. exceed the ordinary income in the
PARTIAL Loss, The deductible loss is the lower of the year incurred
replacement cost required and the net book value of damaged
portion whichever is lower. INVESTMENT IN EQUITY SECURITIES
NET OPERATING LOSS CARRYOVER (NOLCO)
SALE INSIDE STOCK EXCHANGE
Net operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable year. For the sale of stock traded in the stock exchange, a stock
transaction tax of 0.6% on the gross selling price shall be
NOLCO shall be carried over as a deduction from gross income imposed.
for the next three consecutive taxable years immediately
Even if the sale results in a loss, such a loss is not deductible for
tax purposes.

SALE OUTSIDE STOCK EXCHANGE

For investments in shares in a domestic corporation that is not

traded on the stock market, on the other hand, any gain or loss
on such a sale is considered capital gain or loss.

• The resulting net capital gains shall be subject to 15

percent capital gains tax.

• If the sale results in a capital loss, such a loss shall be

deductible only to the extent of capital gains from the
same type of transaction during the same period.

• The wash-sale rule states that, if an investment is sold

at a loss and then repurchased within 30 days, the
initial loss cannot be claimed for tax purposes,
however if that transaction resulted to capital gain,
the gain is taxable.

• Liquidating Dividend

• If a corporation is forced to close and is liquidated, and

the corporation distributes all its assets to its
stockholders, any gain derived or any loss sustained
by the stockholder from its receipt of liquidating
dividends shall be treated as taxable income or
deductible loss, as the case may be.

• The capital gain or loss derived from such a

transaction shall be subject to regular income tax
rates for individual taxpayers or to the corporate
income tax rate for corporations.