Notes on Income Taxation
Atty Mervin Jay R. Fernando
Chapter 7 Introduction to Regular Income Taxation
Chapter 9: Inclusions in Gross Income
Chapter 8 Regular Income Tax: Exclusions from Gross Income
Chapter 10 Compensation Income
Chapter 13 Principles of Deductions
Chapter 13-A Regular Allowable Itemized Deductions
Chapter 13-B Special Allowable Itemized Deductions ONLY (Do not include NOLCO)
Chapter 13-C Optional Standard Deduction
Chapter 11 Fringe Benefit Tax
Chapter 14 – Regular Income Taxation Individuals
Special Items of Taxation
Chapter 5 Final Income Taxation
Chapter 12 Dealings in Properties
Chapter 6 Capital Gains Tax
Regular Income Taxation (Chapter 7)
Regular income taxation covers tax imposed on profits or gains after deductions and exemptions, as allowed by law.
Apart from the deduction and exemptions, there may be some income which have already been taxed which may form
part of Withheld Taxes, and must necessarily be deducted against the regular tax due.
Gross income
- includes all the items of income that are neither excluded nor subject to final tax
Non-Operating Income
1. Gains from dealings in properties
2. Income distribution from GPP, taxable trust or estate, or from an exempt joint venture
3. Casual active income
4. Passive income not subject to final taxation
Regular Income Tax Model
Gross Income – Inclusions and non-exempt income P xxx.xxx
Less : Deductions (xxx,xxx)
Taxable Income (Loss) ` P xxx,xxx or (xxx,xxx)
Generally, if the income is positive, this means that there was excess profits after the deductions. On the other hand,
if the income is negative, this means that there was loss.
Kinds of Income Taxpayer
1. Purely Compensation Income Earner (Chapter 10)
- Compensation income means that the taxpayer is engaged as an employee by an employer or several employers or
what is called employer-employee relationship.
Purely Compensation Income Tax Model
Gross Compensation Income P xxx.xxx
Less: Non-taxable compensation (xxx,xxx)
Taxable Compensation Income ` P xxx,xxx
Gross Compensation Income
All income derived from employer-employee relationship/s.
Non-taxable Compensation
Includes deductions and non-taxable items as provided by laws.
1. Mandatory Deductions – these are deductions covering the contributions for SSS, PHIC, HDMF and union dues.
2. Exempt Benefits – these are deductions based on the NIRC and other pertinent laws
a. Remunerations received as an incident of employment
b. De minimis benefits
c. 13th month pay and other benefits not exceeding Php. 90,000.00
d. Certain MWE benefits
2. Purely Business Income Earner
- Business income is a result of trading or sale of goods. In determining business income, particularly for those selling
or manufacturing goods, there needs to be a computation of Gross Income based on the cost of the goods sold or cost
of sales of goods purchased or manufactured.
Cost of Sales
- Generally used for businesses engaged in trade of goods. This measures the cost of the acquisition of the goods
traded or sold by the business.
Cost of Goods Sold
- Generally used for businesses engaged in the manufacture of goods. This measures the cost of the goods
manufactured for the purpose of trading or sale by the business.
Gross Income Computation
Sales P xxx.xxx
Less: Cost of Goods Sold / Cost of Sales (xxx,xxx)
Total Gross Income xxx,xxx
Business Income Tax Model
Gross Business Income P xxx.xxx
Add: Non-operating Income xxx,xxx
Total Gross Income xxx,xxx
Less: Allowable Deductions (xxx,xxx)
Taxable Business/Professional Income ` P xxx,xxx
3. Professional Income Earner
Revenue from rendering of services constitutes that taxable income for professional income earners. Just like purely
business income earners, there is a cost to the rendering of service, this is called cost of service.
Cost of Service
These are costs directly attributable to the performance or rendering of the service particularly the cost of labor,
materials, supplies, and other reasonable overhead costs.
Revenue/Service Income P xxx.xxx
Less: Cost of Services (xxx,xxx)
Total Gross Income xxx,xxx
Gross Professional Income P xxx.xxx
Add: Non-operating Income xxx,xxx
Total Gross Income xxx,xxx
Less: Allowable Deductions (xxx,xxx)
Taxable Professional Income ` P xxx,xxx
4. Mixed income earner
If a taxpayer is engaged in employment and in business or profession, then such person needs to pay taxes for all
income generated from all these sources of income. Thus, the methods of computation as mentioned in the preceding
section shall be followed in order to come up with the taxable income of a mixed income earner.
Inclusions in Gross Income (Chapter 9)
Items of Gross Income Subject to Regular Income Tax
1. Compensation for services in whatever form paid
2. Gross income from the conduct of trade, business or execise of a profession
3. Gains derived from the dealings in properties
4. Interest
5. Rent
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income of a General Professional Partnership
Exclusions from Gross Income (Chapter 8)
Excluded income – certain items are listed under the National Internal Revenue Code (NIRC) which are excluded from
the computation of Gross Income. These exclusions are found under Sec 32 (B) of the NIRC and other pertinent laws:
1. Proceeds of life insurance policy
2. Amount received by the insured as a return of premium
3. Gift, bequest, devise, or descent
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Income in the Philippines of foreign government or foreign government-owned and controlled corporations
8. Income of the government and its political subdivisions
9. Prizes and awards in recognition of religious, charitable, scientific, educational, artisitic, literary, or civic
achievements
10. Prizes and awards in athletic sports competition
11. Contributions to GSIS, SSS, Philhealth, PAGIBIG, and union dues
12. Contributions to Personal Equity Retirement Account (PERA)
13. PERA investment income and PERA distributions
14. 13th month pay and other benefits not exceeding Php. 90,000.00
15. Gains from sale of bonds, debentures, or certificates of indebtedness with maturity of more than 5 years
16. Gains from redemption of shares in mutual fund
17. Income derived from the sale of gold pursuant to RA 7076 or the Peoples Small-Scale Mining Act of 1991
18. Minimum wage benefits
19. COVID 19 Benefits under Bayanihan to Heal as One Act
20. Limited Retirement Benefit exemption under RA 11494
21. Income of Barangay Micro-Business enterprises Act (RA 9178)
22. Income of Cooperatives (RA 9520)
23. Income of non-stiock, non-profit entities
24. Income of qualified employee trust funds
25. Business or professional income of self employed and/or professionals who opted for the 8% income tax
Exempt income – these are items exempted by law from the different kinds of taxes (Final tax, capital gains or regular
tax)
Deductions from Gross Income (Chapter 13, 13A, 13B, and 13C)
Deductions are business expenses that are subtracted from the items of income of a taxpayer as they are directly
attributable to the business of the taxpayer.
Business Expense
These are costs related to the trade, business or exercise of profession.
Personal Expense
These are costs or expenses related to the personal upkeep and maintenance of the taxpayer or his/her family
Regular Allowable Itemized Deductions
These are deductions allowed by law despite not having direct connection with the activity of selling goods or
rendering services.
1. Interest Expense
2. Taxes
3. Losses
4. Bad Debts
5. Depreciation
6. Depletion
7. Charitable and other contributions
8. Contributions to pension and trust
9. Research and development cost
10. Other ordinary and necessary trade, business, or professional expenses
Special Allowable Itemized Deductions
These are other items of deductions which are not in their nature considered as actual expenses but are allowed by
laws to be deducted from income. These are commonly a form of incentive for participation or in compliance with
Optional Standard Deductions (OSD)
As an alternative to the itemized deductions, a taxpayer may opt to compute the standard deduction amounting to
40% of total sales/revenues/receipts/fees. This means that the OSD shall be computed based on Gross Income
before any deductions.
Personal Exemptions
- Prior to January 1, 2018, there was such a thing as personal exemptions. These were itemized deductions from gross
income taking into consideration the number of children or dependents of the taxpayer. However, upon amendment
of the law, the fixed amount of Php. 250,000.00 is now the maximum personal exemption.
Tax Forms
1. Form 1700 – Purely Compensations income Earners
2. Form 2316 – These are forms used for substituted filing by an employer for their employees. These forms are also
provided to a taxpayer who may file their 1700, if they have several employers or 1701 if they have mixed income.
3. Form 1701 – This form is used for mixed income earners. This shows data from the form 2316 as tax withheld by
employers which can be credited to other taxes due.
