INCOME SUBJECT TO REGULAR TAXATION.

These are income that is not subject to Final Taxa4on and Capital Gain Tax.

Characteris;cs of Regular Income Taxa;on

1. General in Coverage – this applies to all items of taxable income except those that are
subject to final tax, capital gain tax, and special tax regime.
2. Net Income Taxa4on – the regular tax is an imposi4on on residual profits or gains aDer
deduc4on for expenses of business or prac4ce of profession.
3. Annual Income Tax – the regular income tax applies on yearly profits or gains. The gross
income and expenses are measured using the accoun4ng methods adopted by the
taxpayer and are reported to the government over the accoun4ng period selected by the
taxpayer.
4. Creditable Withholding Taxes – Most items of regular income are subject to CWT. This
CWTs are advanced taxes that must be deducted against regular tax due in compu4ng the
tax that is s4ll due to the government.
5. Progressive or Propor4onal Tax – the NIRC imposes a progressive tax on taxable income
of individuals while it imposes a flat or propor4onal tax of 25% upon the taxable income
of corpora4on.

Income Tax Model

Gross Income (Inclusions) - P xx,xxx

Less: Allowable Deduc4ons xx,xxx
Taxable Income xx,xxx

Gross Income cons+tutes all item of income that are neither excluded in gross income nor
subjected to final tax or capital gain tax.

Exclusion from Gross Income – These pertains to items of income that are excluded; hence,
exempt from regular income tax.

Allowable Deduc;on

Allowable Deduc4ons are expenses of the conduct of business or exercise of profession. They
are commonly known as business expenses.

For individual taxpayers, there is a need to note the difference between business expenses and
personal expenses. Personal expenses are those expenses that are not connected to furtherance,
maintenance or development of his trade, business or profession which are not deduc4ble to the
gross income. These expenses are primarily family or living expenses of a person.
Individuals that are not engaged in business cannot claim deduc4ons from gross income.
Consequently, individuals are classified as follows: (1) pure compensa4on income earner; (2) Pure
business or professional income earner; (3) mixed income earner.

Op;onal Standard Deduc;on (OSD)

The OSD is in lieu of the allowable itemized deduc4on. Under the OSD, the deduc4on of the
taxpayer is simply presumed as a percentage of gross sales or receipt for individual, which is 40%.
In other words, instead of enumera4ng all the expenses to be deducted, you will just mul4ply
40% from your Gross Sales. The result will be your expenses.

Example:

Sales 1,000,0000
Mul4ply by OSD Rate: 40%
Op4onal Standard Deduc4on 400,000

How to compute for the Total Taxable Income:

Sales 1,000,000
Less: Cost of Sales 0 [Note if using OSD, there will be ZERO Cost of Sales]
Gross Margin 1,000,000
Less: OSD (40% of Sales) 400,000
Add: Other Income (if available) 0
Total Taxable Income 600,000

Determina;on of Taxable Income

Classifica;on Rule
Gross Income is first classified into:
a. Compensa4on Income
b. Business or Professional Income

Compensa+on Income arises from an employer-employee rela+onship. This rela+onship is

characterized by a power to retrench giving the employer the power to terminate the
employment when he is losing in business.

Business Income arises from selling goods or services for a profit.

Allowable Deduc;on
 Business Expenses are deducted against gross income from business or profession. No
deduc4on is allowed against compensa4on income. Expenses related to the employment of
individual taxpayers are deemed personal expenses.

Treatment of Other Income

Other income which is neither compensa4on income nor business income or professional
income is simply added to net income from business or profession as “non-opera+onal income”.
If the taxpayer has no business or professional income, this can be added to taxable compensa4on
income as “other income”.

Taxable Income of Pure Compensa;on Income Earner

Gross Compensa;on Income

Less: Non-taxable/exempt compensa4on
Taxable Compensa;on Income

Non-taxable compensa+on income includes legally mandated salary deduc+on and items
of compensa+on income that are exempted by law, contracts, or treaty from income taxa+on.

Taxable Income of Pure Business or Professional Income Earner

Gross Income from Business/Profession**

Less: Allowable deduc4ons
Net income (net loss)
Add non-opera4ng income
Taxable Net Income
How are we going to arrive at the GROSS INCOME

Revenue/Sales/Fees
Less: Cost of Services/Sales*
Gross Income (Loss) from opera4ons
Less: Allowable Deduc4ons
Net Income
Add: Non-opera4ng Income
Taxable Net Income

*The formula to compute for the cost of sales:

Beginning Inventory P xxxx

Add: Purchases xxxx
Total Available Inventory xxxx
Less: Ending Inventory (xxx)
Cost of Sales xxx
 Cost of Services pertains to all direct cost of rendering the services such as cost of labor,
materials, and overhead costs. The cost of services should be dis+nguished from other
indirect costs such as the general admin expenses, marke+ng expenses of the business as
these are presented under “Allowable Deduc+ons”.

Individual Taxpayers can either used Graduated IT Rate or 8% Tax. In order to use the 8% tax,
the individual must be apply with the BIR.

Example of Using Graduated Income Tax Rate

Taxable Income Per Year Income Tax Rate

P 250,000 and below 0%
Above P 250,000 to P 400,000 15% of the excess over P 250,000
Above P 400,000 to P 800,000 P 22,500 + 20% of the excess over P 400,000
Above P 800,000 to P 2,000,000 P 102,500 + 25% of the excess over P 800,000
Above P 2,000,000 to P 8,000,000 P 402,500 + 30% of the excess over P 2,000,000
Above P 8,000,000 P 2,205,500 + 35% of the excess over P 8,000,000

Scenario:

APT APT is a resident ci4zen which has a compensa4on income of P 1,250,000 within the
Philippines and P 150,000 abroad. Compute for the tax due.

Taxable Income: P 1,400,000 [1,250,000 + 150,000]

Less: Lower Limit of the income bracket 800,000
Excess 600,000
Mul4ply by the tax rate 25%
Income Tax 150,000
Add: Fixed Tax Payable per Bracket 102,500
Total Income Tax Due 252,500

Example on how to compute for the total tax due using 8%

APT APT is a resident ci4zen which has a compensa4on income of P 1,250,000 within the
Philippines and P 150,000 abroad. Compute for the tax due.

Taxable Income: P 1,400,000

Less: (250,000, for 8% tax this is a fixed annual deduc4on) 250,000
Total Taxable Income 1,150,000
Mul4ply by 8% 8%
Tax Due 92,000
EXCLUSION FROM GROSS INCOME

Exclusions from Gross Income are income or inflow of cash which are not subject to
income tax. They are not included in gross income subject to regular tax, capital gain tax or final
tax.

Under Sec.32 (B) of the NIRC, the following items shall not be included in gross income
and shall be exempt from taxa4on:

A. Proceeds of Life Insurance

The proceeds of life insurance policies paid to the heirs or beneficiaries upon DEATH of
the insured. However, if such amounts are held by the insurer under the agreement to pay
interest thereon, the interest payments shall be included as part of the Gross Income.

Life is regarded as a capital item with infinite value. Hence, the proceeds of life insurance
is a return of capital.

B. Amounts received by the insured as a return of premium

The amount received by the insured as a return of premium paid by him under the life
insurance, either during the maturity or during the term of the contract.

C. GiD, bequest, devise, or descent

The value of property acquired by giD, bequest, devise, or descent: Provided, however,
that income from such property as well as giD, bequest, devise, or descent of income from
any property, in cases of transfer of divided interest shall be included in gross income.

Example: Fyang received a laundry business as a giD on April 1, 2024. On that date, the
value of the value of the said laundry business is P400,000 including P50,000 cash income
earned since Jan. 1, 2024. From April 1 to December 31, 2024, the laundry business has
an addi4onal income of P150,000. The 400K is subject to transfer taxes. The only amount
that is included in the Gross Income is 150,000 which was earned aDer the perfec4on of
the dona4on.

D. Compensa4on for injuries or sickness

Amounts received through accident or health insurance as compensa4on for personal
injuries or sickness, plus amounts of any damages received, whether by suit or agreement,
on account of such injuries or sickness.

E. Income exempt under treaty

Income items that are excluded by interna4onal agreement to which the Philippine
government is a signatory are excluded from income tax. It must be recalled that treaty
agreements override provisions of our revenue tax laws in case of conflict under the
exemp4on doctrine of interna4onal comity.
F. Re4rement benefits, pensions, gratui4es, etc.
This are re4rement benefits received under SSS, Pag-ibig, GSIS etc.

G. Other items

1. Prizes and Awards made primarily in recogni4on of Religious, Charitable, Scien4fic,

Educa4onal, Ar4s4c, Literary or Civic achievements but only if:
(i) The recipient was selected without any ac4on in his part to enter the
contest or proceeding; and,
(ii) The recipient is not required to render substan4al future services as a
condi4on to receiving the prize or award.

If the recipient exerted effort for the grant of the prize such as joining a contest or
is required to render service for its grant, the prize would be construed as received
in an exchange, hence, taxable as income.

Examples of exempt prizes (Nobel Prize Award, Gawad ng Sining Award, CNN Hero
of the Year, Most Outstanding Ci4zen

2. Prizes and Awards in Sports Compe44ons granted to athletes:

(i) In local or interna4onal compe44ons and tournaments
(ii) Whether held in the Philippines or Abroad
(iii) Sanc4oned by their na4onal sports associa4ons.

3. Contribu4ons for GSIS, SSS, PhilHealth, Pag-Ibig and Union Dues of Individuals
These pertains to to the employee share in the premium contribu4ons to GSIS, SSS,
PhilHealth, Pag-Ibig and union dues. The por4on of the salary thus contributed is
exempt from income tax.

Under RMC No. 21-2011, the exclusion pertains only to the mandatory or compulsory
monthly contribu4ons. Voluntary contribu4ons to Pag-Ibig, GSIS or SSS in excess of
the mandatory monthly contribu4ons are taxable.

4. Employer’s Contribu4ons to Personal Equity Re4rement Account (PERA).

PERA is a contributor’s voluntary re4rement account established from qualified
contribu4ons of the contributor and or his employer for the sole purpose of being
invested in qualified PERA investment products.

5. 13 month Pay and Other Benefits received by the officials and employees of public or
private en44es not exceeding Php 90,000.
DEDUCTION FROM GROSS INCOME

Deduc4ons from Gross Income pertain to business expenses incurred by a taxpayer

engaged in business or engaged in the prac4ce of profession.

Business Expenses
Business expenses are costs of doing trade, business or prac4ce of profession such as
employee salaries, office u4li4es, supplies, rent, taxes, losses, bad debts, deprecia4on on
proper4es, research and development expenses and others.

Examples: Salaries and wages, u4li4es, selling expense, rent, taxes and du4es.

Personal Expenses
Personal expenses include the living and family expenses of individual taxpayers such as
family food, personal recrea4on and transporta4on, medica4on, home rentals and u4li4es,
tui4on fees of dependents and other expenses.

Business Capital Expenditures

Expenses that benefit future accoun4ng periods. These are ini4ally recorded as assets
upon acquisi4on then later deducted against future gross income when used in trade, business
or profession of the taxpayer. The advance deduc4on of capital expenditure is not warranted as
its contradicted the Lifeblood Doctrine.

Examples:
1. Laundry Machine 65,000 (10 years) Salvage Value of 15K
How to compute for Deprecia4on Expense for the equipment used in Business

Cost of Machine 65,000

Less: Salvage Value* (15,000)
Depreciable Cost of the Machine 50,000
Divide by the number of months 120 [ 12 months x 10 years]
Monthly Deprecia4on Expense 416.67

If the machine was bought January 1 , your deprecia4on expenses is P 5,000 (12 * 416.67)
If the machine was bought February 1, your deprecia4on expenses is P 4,583.37 (11*
416.67).

This Deprecia;on Expense is an addi4onal expenses to be reported as part of your

allowable deduc4on. But if you are using the op4onal standard deduc4on, no need to add.
 2. Prepaid Expense – This are advance payments made during the taxable year. Note that
only expenses used/consumed should be added as an allowable deduc4on.

Example:
On January 1, Mr. A made an advance payment for the rent for 24 months. Under the
books of Mr. A, the account 4tle used is Prepaid Rents amoun4ng to 24,000. How much
will be the rental expenses at the end of the taxable year, Dec. 31.

Advance Payment 24,000

Divide Number of Months 24 (Advance payment for 24 months)
Monthly Rental 1,000

On Dec. 31, the prepaid expense is 12,000 (12 months x 1,000). However, if the advance
payment was made on July 1, the prepaid expense will only be amoun4ng to 6,000 (6
months * 1,000).

This Prepaid Expense is an addi4onal expenses to be reported as part of your allowable

deduc4on. But if you are using the op4onal standard deduc4on, no need to add.

3. Inventory – Costs are deducted when sold or used in the Business. The below is an
example on how to compute for “Cost of Sale or Cost of Good Sold”

Beg Inventory 50,000

Add: Purchases 20,000
Less:Purchase Returns (10,000)
Total Goods Available for Sales 60,000
Less: Ending Inventory ( 5,000)
Cost of Sale 55,000

Note when deduc4ng Business Expenses:

1. Expenses must be Legi4mate, ordinary, actual, and necessary (LOAN)
Necessary – an expenses is necessary if reasonable and essen4al to the development,
management, opera4on or conduct of trade of business or exercise of profession.

Ordinary – when its normal in rela4on to the business of the taxpayer and surrounding
circumstances. An expense is ordinary if its normally incurred by other taxpayers under
the same line of business.

2. Only business expenses which contribute to or are incurred in connec4on with the
genera4on of income, gain, or profits subject to regular income tax are deduc4ble.
COMPENSATION INCOME

EMPLOYER: Refers to any person for whom an individual performs any service of whatever nature
as employee of such person.

EMPLOYEE: Refers to any individual who is a recipient of wages and includes officer, employee,
or elected official of the Government of the Philippines or any poli4cal subdivisions, agency or
instrumentality thereof. The term also includes an officer of a corpora4on.

Types of Employees as to Func;on

1. Managerial Employees – Those who are given powers or preroga4ves to lay-off and
execute managerial policies and/to hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees.
2. Supervisory – Those who effec4vely recommend such managerial ac4ons if the exercise
of such authority is not merely rou4nary or clerical in nature but requires the use of
independent judgment.
3. Rank and File Employees – neither managerial nor supervisory.

(i) Minimum Wage Earner – employees who are recipients of minimum wage.
They are exempt from IT on their compensa4on.
Basis Pay, Holiday Pay, Hazard Pay, Over4me Pay, NSD.

(ii) Regular Employees – Employees who are subject to the regular progressive
income tax.

Tax Model on Compensa;on Income

Gross Compensa;on Income

Less: Non-taxable Compensa;on Income
Taxable Compensa;on Income

Non-Taxable Compensa;on Income

1. Mandatory Deduc4ons – Statutory Deduc4ons (SSS, PAG-IBIG, PHILHEALTH, GSIS,

UNION DUES).
2. Exempt Benefits
a. Remunera4on Received as incident of employment – Re4rement benefits
b. 13 month pay and other benefits
c. De Minimis Benefits
d. Certain Minimum Wage Earners Benefits.

De Minimis Benefits this are privileges given by the employer such as entertainment,
medical services, and other benefits that are rela4vely small value merely as means of
promo4ng the health, goodwill, contentment or efficiency of his employees.
However, RR 5-2011 and RR 11-2018 restrict the term de minimis benefits to the
following:
1. Mone4zed unused VL of private employees not exceeding 10 days during the year.
2. Mone4zed unused VL and SL paid to government employees and officials.
3. Medical Cash Allowances to dependents of employees not exceeding P1,500 per
employee per semester, or P 250 per month; P 3,000 per year.
4. Rice Subsidy not exceeding P 2,000 per month or 1 sack of rice amoun4ng to not more
than P2,000.
5. Uniform and Clothing not exceeding P6,000 per year.
6. Actual Medical Assistance not exceeding 10,000 per year
7. Laundry Allowance not exceeding P 300 per month or P 3,600 per year.
8. Employee Achievement Award – service awardee etc, must be in a form of TANGIBLE
PROPERTY OTHER THAN CASH OR GC, with an annual monetary value not exceeding P
10,000 per year.
9. GiDs during Christmas and anniversary , not exceeding P 5,000 per employee per
annum.
10. Daily Meal allowances for over4me and night or GY shiD, 25% of the basic minimum
wage.
11. Benefits received by an EE by virtue of CBA – not exceeding P 10,000 per taxable year.

For Rank and File – taxable de minimis benefits is treated as other compensa;on income
“ 13 month pay and other benefits”

Example:

Fyang, a private employee who has a daily rate of P600, receives the following:

Mone;zed unused VL 9 days

Mone;zed unused SL 9 days
Medical Asssitance P 7,000
Rice Subsidy (P2,500 per month) P 30,000
Clothing Allowance P 9,000
Laundry Allowance P 6,000

In addi;on, she was also an awardee in the company. Her employer granted a cash of P
25,000 as a loyalty awardee. In addi;on, she also receives P 10,000 as Christmas Gig
from her employer. A free meal was also provided amoun;ng to P 15,000. Compute for
the Total Taxable De minimis Benefits “Other Benefits”

Actual Limit Excess

Mone;zed VL (9 x 600) P 5,400 P 6,000
Mone;zed SL (9x 600) P 5,400 P 5,400
Medical Assistance P 7,000 P 10,000
Rice Subsidy P 30,000 P 24,000 P 6,000
Clothing P 9,000 P 6,000 P 3,000
Laundry Allowance P 6,000 P 3,600 P 2,400
Loyalty Service Award P 25,000 P 25,000
Christmas Gig P10,000 P 5,000 P5,000
Meals P 15,000 P15,000
61,800

13th Month = P 20,000 + 61, 800 = 81,800

13th Month = P 50,000 + 40,000 = 21,800 (Taxable as other Compensa;on Income)
13 Month = P 90,000 = 61,800