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Presented by:
LILYBETH A. GANER, CPA, MBA
Revenue Officer
RR-19, Davao City
Business Income
Any income not related to an employeremployee relationship
Generally taxable on the net income
Includes gains, profits and income in
whatever form derived from any source,
legal or illegal, such as
Gross income
All income from whatever source
derived, including but not limited to
the following items:
Compensation for services, including
fees, commissions and similar items
Gross income derived from business or
exercise of profession
Gains from dealings in property
Interest
Rents
3
Royalties
Dividends
Annuities
Prizes and winnings
Pensions
Partners distributive share in the net
income of general professional
partnership
Net Income
The realized gross profit after deducting all the
deductions allowed by law, statutes or generally
accepted accounting principles.
Exclusions
The total benefits which is not included in the
computation of gross income for the purpose of
determining taxable income.
Deductions
Items or amounts which the law allows to be
deducted from gross income to arrive at the taxable
income.
5
Allowable Deductions
There shall be allowed as deduction
from gross income, other than
compensation income, expenses
incurred in the conduct of trade or
business to arrive at the net income.
At the taxpayers option, deductions
for expenses may either be
Itemized deduction
Optional Standard Deduction (OSD)
40%
6
Itemized Deduction
1. Ordinary and necessary trade,
business or professional expenses
2. Interest
3. Taxes
8
Interest
There must be a valid and existing
indebtedness;
The indebtedness must be that of the
taxpayer;
The interest must be legally due and stipulated
in writing;
The interest expense must be paid or incurred
during the taxable year;
The indebtedness must be connected with the
taxpayer's trade, business or exercise of
profession;
12
Interest
The interest payment arrangement must not
be between related taxpayers.
The interest is not expressly disallowed by
law to be deducted from the taxpayers
gross income (e.g., interest on indebtedness
to finance petroleum operations); and
The amount of interest deducted from gross
income does not exceed the limit set forth in
the law.
13
Interest
Limitation
The amount of interest expense paid or incurred
from an existing indebtedness shall be reduced by an
amount equivalent the following percentages of the
interest income earned during the year which had
been subjected to final withholding tax
Jan. 1998
Jan. 1999
Jan. 2000
Nov 2005
Jan. 2009
41%
39%
38%
42%
33%
Interest
EXCEPTIONS
Deductible in full from gross income
Interest on unpaid taxes interest paid or incurred on all unpaid
business-related taxes shall be deductible in full
Not deductible from gross income
a. Interest incurred on indebtedness of taxpayer using cash basis,
where the interest is paid in advance thru discount or otherwise
i. Allowed as a deduction in the year the indebtedness was paid
ii. If amortized amount corresponding to the principal
amortized shall be allowed as deduction during the year
15
Interest
Interest
RELATED PARTY TRANSACTIONS
[Sec. 36(B)]
17
Taxes
All business related taxes
Non-deductible taxes
Income tax paid in the Phils.
Income tax imposed by authority of foreign
country tax credit with limitation
Estate and donors taxes
Tax assessment which increases the value of the
property assessed
Electric energy consumption tax under B.P. 36
VAT
Tax credits
Taxes paid in foreign countries subject to
limitation
18
Taxes
Interest or surcharge imposed on taxes are not
deductible as taxes, but as an item of interest.
Only the person upon whom taxes are imposed
may claim them as deduction, except: (1) Taxes
upon an individual upon his interest as
shareholder of corporation which are paid by
corporation without reimbursement; and (2)
Corporate bonds or other obligations containing
a tax-free covenant clause, the corporation
paying the tax or any part of it for someone else
(Sec. 80, RR 2).
19
Taxes
Refund of tax payment
Taxes refunded shall be included in the
year of receipt to the extent of the income
tax benefit of such deduction (tax benefit
rule)
20
Taxes
Disclosure requirement on taxes
(Notes to FS) RR 15-2010
The notes of f/s shall include info on
taxes, duties and license fees paid or
accrued during the taxable year
The amount of VAT Output tax and the
account title and amount/s upon which the
same was based,
21
Losses
Requisites for deductibility
Incurred in trade, business or profession
Not compensated by insurance or other form of
indemnity
In case of property, for losses arising from fire,
storm, shipwreck, other casualty, robbery, theft,
embezzlement, the property must be used in
trade, business or profession and reported
within forty-five (45) days from date of
occurrence of such loss.
Not claimed as deduction for estate tax purposes
22
23
Bad Debts
Requisites for valid deduction
There must be an existing indebtedness due to
the taxpayer
It must be valid and legally demandable
It must be connected with the taxpayers trade,
business or practice of profession
It must not be sustained in a transaction entered
into between related parties
It must be actually charged off from the books of
accounts as of the end of the taxable year
It must be ascertained to be worthless and
uncollectible as of the end of the year
24
Depreciation
A reasonable allowance/reduction in service
value for the exhaustion, wear and tear of
property used in trade, business or practice
of profession.
Methods of depreciation
Depreciation
Requirements for deductibility
The allowance for depreciation must be
reasonable;
It must be for property arising out of its
use in the trade or business, or out of its
not being used temporarily during the year;
and
It must be charged off during the taxable
year from the taxpayers books of
accounts.
26
Corporate donor
deducting donations
Actual contribution/donation
WHICHEVER IS LOWER
28
31
32
33
OR
WHICHEVER IS LOWER
34
x Actual expense
Note:
In no case shall the total EAR exceed the maximum percentage
ceiling
35
Illustration:
ERA Corporation is engaged in the sale of goods and
services with net sales/net revenue of P200,000 and
P100,000 respectively. The actual EAR for the year 2010
totaled P3,000
Computation:
*Apportionment formula
Sale of goods (P200,000/P300,000) x P3,000 = P2,000
Sale of service (P100,000/300,000) x P3,000 = P1,000
**Maximum percentage ceiling
Sale of goods P200,000 x 0.50% = P1,000
Sale of service P100,000 x 1%
= P1,000
36
Computation:
Net sales/
net revenue
EAR expense
based on
apportionment
formula*
Maximum
percentage
ceiling of
EAR**
Allowable
amount to
be claimed
as EAR (w/c
ever is
lower)
Sale of
goods
P200,000
P2,000
P1,000
P1,000
Sale of
services
P100,000
P1,000
P1,000
P1,000
Total
P300,000
P3,000
P2,000
P2,000
38
Cost of
sales/services
Corporation
40% of gross
sales/revenues
Excluding
passive income
subject to final
withholding tax
40% Gross
income
Excluding
passive income
subject to final
withholding tax
Not allowed to
deduct
COS/services
Allowed to
deduct
COS/services
40
Illustration 1
Mr. Era , a retailer of goods uses the accrual method of
accounting in reporting his income and expenses. For
the year 2010, the following are his recorded income
and expenses
Gross sales
Jan-June
July-Sept
Oct-Dec
P1,000,000
700,000
900,000
Cost of
sales
P600,000
200,000
400,000
Operating
exp
P50,000
100,000
Computation 1
a) Allowable deductions
Jan. June
Gross sales
P1,000,000
Less: Cost of sales
-0Gross sales/income
P 1,000,000
X OSD rate
40%
OSD
P 400,000
======
July Sept
P700,000
-0P700,000
40%
Oct - Dec
P900,000
-0
P900,000
40%
P280,000
=======
P360,000
=======
P2,600,000
1,040,000
1,560,000
========
47
Illustration 2
GSV Corporation, a retailer of goods, uses the accrual
method in declaring its income and expenses. For the
calendar year 2010, the following are the records of its
income and expenses:
Gross sales
Jan-June
July-Sept
Oct-Dec
P1,000,000
700,000
900,000
Cost of
sales
P700,000
300,000
600,000
Operating
exp
P100,000
200,000
100,000
Computation 2
a) Allowable deduction
Jan June
Gross sales
P1,000,000
Less Cost of sales
700,000
Gross income
300,000
X OSD rate
40%
OSD/Operating expenses P120,000
Add: Cost of sales
700,000
July Sept
P700,000
300,000
P400,000
40%
P160,000
200,000
Oct Dec
P900,000
600,000
P300,000
40%
P120,000
100,000
Total deductions
P360,000
=======
P220,000
=======
b) Net income
Gross sale
Cost of sales
Gross income
OSD (40%)
Net income
P820,000
=======
P2,600,000
1,600,000
1,000,000
400,000
P 600,000
=======
49
50
Taxation of
Marginal Income Earners
(RR 11-00)
Taxation of
Marginal Income Earners
(RR 11-00)
53
Corporate Taxpayer
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What is a corporation?
Corporation is an artificial being created by law, having
the rights of succession and the powers, attributes and
properties authorized by law or incident to its existence.
For taxation purposes, corporation shall include
Partnerships
Joint-stock companies
Joint accounts
Associations
Insurance companies
55
56
(MCIT)
RR No. 9-98, as amended by RR no. 12-07
57
Gross income
Include all items of gross income enumerated under Section
32(A) of the Tax Code, as amended, except income exempt from
income tax and income subject to final. withholding tax.
60
Illustration
1,000,000.00
25,000.00
500,000.00
475,000.00
100,000.00
575,000.00
========
61
62
63
Suspension of MCIT
65
Suspension of MCIT
Required documentation
Submission of proof by the corporation
Duly verified by the CIRs duly authorized
representative
66
IMPROPERLY ACCUMULATED
EARNINGS TAX
(IAET)
67
CONCEPT OF IAET
Taxpayer is a corporation
Improper accumulation of taxable income beyond
the reasonable needs of the business
Non-distribution of earnings/profits to stockholders
The purpose of accumulation is to avoid the
payment of the income tax
Imposition of tax equivalent to 10% of the
improperly accumulated taxable income
The tax imposed is in the nature of penalty to a
corporation for improper accumulation of earnings
beyond the reasonable needs of the business
68
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IMPOSITION OF IAET
Tax rate
10%
Corporations liable
Closely-held domestic
corporations
Deadline
75
Closely-held corporations:
are corporations at least 50% in value
of the outstanding capital stock or at
least 50% of the total combined
voting power of all classes of stocks
entitled to vote is owned directly or
indirectly by or for not more than 20
individuals
76
P xxx
Pxxx
xxx
xxx
xxx
xxx
xxx
xxx
P xxx
xxx
xxx
xxx
Pxxx
===
77
Payment of IAET
Dividend must be declared and paid not later
than one year following the close of the taxable
year
Otherwise, IAET should be paid within 15 days
thereafter
Once the profit has been subjected to IAET, the same shall no
longer be subjected to IAET in later years, even if not declared as
dividend.
Profits subjected to IAET, when finally declared as dividends, shall
be nevertheless be subject to 10% final withholding tax
78
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1702
Form Name
Annual Income
Tax Return
(For
Corporations,
Partnerships and
Other Nonindividual
Taxpayers)
On or before
April 15
No. of
Copies
3 copies
On or before the
15th day of the
4th month
following the
close of the
fiscal year
80
Form
No.
Form Name
1702Q
60 days
following the
close of the first
3 taxable
quarters
3 copies
1704
Improperly
On or before the
Accumulated Earnings 15th day of the
Tax Return
following year
following the
taxable year
3 copies
81
NOTE:
Installment Payments
Applicable to individual taxpayer
only and NOT TO CORPORATION
next
82
Revised Forms
BIR Form 1700 ( Purely Compensation
Income )
BIR Form 1701 (Self-Employed
Individual,
Estate and
Trust)
BIR Form 1702 ( Corporations,
Partnership and Other Non- Individual
Taxpayer
Effectivity
-Income tax filing covering and starting with calendar
year
2011, due for filing on or before April 15. 2012
- Juridical entities on FY basis are to use
starting with those FY ending January 31, 2012
Features
To be read by an optical character reader
Use Nov. 2011 version
Box Type
Shading
All information must be written in capital
letters
Orientation is landscape (horizontal)
e-mail address of taxpayer
features
Field No. 47 for filers new address
With supplemental information
(optional)
Schedule of gross income subjected to
final tax
Schedule of gross income/receipts exempt
from income tax
88