Chapter 7: Introduction To Regular Income Tax

CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX
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
 General Coverage
The regular income tax applies to all items of income except those that are subject to
final tax, capital gains tax, and special tax regimes.
 Net Income Taxation
The regular tax is an imposition on residual profits or gains after deductions for
expenses and personal exemptions allowable by law.
 Annual Income Tax
The regular income tax applies on yearly profits or gains. The gross income and
expenses of the taxpayer are measured using the accounting methods adopted by the
taxpayers and are reported to the government the accounting period selected by the
taxpayer.
 Creditable withholding taxes
Most items of regular income are subject to creditable withholding tax (CWT), these
creditable withholding taxes are advanced taxes that must be deducted against regular
tax due in computing the tax still due to the government.
 Progressive or proportional tax
Th
e NIRC impose a progressive tax on the taxable income of individuals while it imposes a
flat or proportional tax of 25% upon the taxable income of corporations
Gross income consists of the major topics:

1. Exclusions of gross income – list of income exempt to regular income tax
2. Inclusions in gross income – list of income subject to regular income tax
3. Special topics – covers income that are either exclusion or inclusion depending
on certain circumstances, such as:
a. Fringe benefits
b. Dealings in properties
Gross Income
Gross income constitutes all items of income that are neither excluded in gross
income nor subjected to final tax or capital gains tax. The items of gross income subject
to the regular income tax will be extensively discussed in Chapter 9.
Exclusions from Gross Income
These pertain to items of income that are excluded; hence, exempt from regular
income tax.
Excluded Income Vs. exempt income

Excluded income is also exempt income. Excluded income are those listed by
the NIRC as exempt income from regular tax. The term exempt income includes all
income exempt from income tax whether final tax, capital gains tax or regular income
tax. Exclusions from gross income are lister in the NIRC. Exemption from income may
be provided by the NIRC or special laws.
Globalization rule for mixed income earner

The income of mixed income earner from both sources is simply globlalize or totaled. A
negative net income or net loss when deductions exceed gross income from business
or profession shall not be offset against taxable compensation income because
deductions are expenses of business or profession and are properly deductible only
against gross income thereto, whereas no expense is deductible against taxable
compensation income.
Determination of Taxable Income of Corporate Income Taxpayers

The taxable income of corporations is computed in the same manner as pure business
or professional income earner.
Accounting Method and Accounting Period

The taxable income shall be computed upon the basis of the taxpayer’s annual
accounting period in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer; however, if no such method of accounting has
been so employed, or if the method employed does not clearly reflect the income, the
computation shall be made in accordance with such method that in the opinion of the
Commissioner, clearly reflects the income.
Taxpayers using Shall compute taxable income using

GAAP cash basis on a calendar year Tax cash basis on a calendar year
GAAP cash basis on a fiscal year Tax cash basis on a fiscal year
GAAP accrual basis on a calendar year Tax accrual basis on a calendar year
GAAP accrual basis on a fiscal year Tax accrual basis on a fiscal year
Cost of Sales
Cost of sales pertains to the acquisition cost of the goods sold for merchandising or the
manufacturing cost of the goods sold in the case of manufacturing.
Under the perpetuall system, the cost of goods sold is determined through the codes of
the goods sold or by stock cards indicating the costs of the goods sold. Under the
periodic system, the cost of goods sold is established by counting the inventories. The
cost of missing items at every reporting date is considered sold. For purposes of
costing, the freight cost of the goods purchased are allocated to all units purchased.
Cost of sales of a manufacturing business

The cost of goods sold of a manufacturing business is computed in almost the same
way with those of a trading business.
Cost of Service
Cost of service pertains to all direct cost of rendering the services such as cost of labor,
materials, and overhead costs. The cost of services should be distinguished from the
indirect costs such as general administration and marketing expenses of the business
Separate bookkeeping for business and professional practice

Individual taxpayers engaged in business or exercise of a profession must maintain a
separate record of their transactions from business or professional transactions. The
personal transactions of the individual taxpayer must not be missed with the
transactions of the business or professional practice.
This is important in the tax treatment of expenses. The personal expense of the
taxpayer cannot be deducted against the gross income of the business. The allowable
personal exemption fixed by law for individual taxpayers is in the lieu of the actual
personal, family and cost of living expenses of the taxpayer.
TYPES OF REGULAR INCOME TAX

1. Individual Income Tax
2. Corporate Income Tax
Individual Income Tax

The individual income tax or progressive income tax is determined by reference as a tax
table of progressive tax rules.
The income tax table for individual taxpayers (Year 2018 – Year 2022)
TAXABLE INCOME PER YEAR INCOME TAX RATE
P 250,000 and below 0%
Above 250,000 to 400,000 20% of the excess over 250,000
Above 400,000 to 800,000 30,000 + 25% of the excess over 400,000
Above 800,000 to 2,000,000 130,000 + 30% of the excess over
800,000
Above 2,000,000 to 8,000,000 490,000 + 32% of the excess over
2,000,000
Above 8,000,000 2,410,000 + 35% of the excess over
8,000,000
Scope of the progressive tax

The progressive tax covers all individual including taxable estates and trusts except
NRA-NETB which is subject to 25% final tax on gross income.
The Optional 8% Income Tax
The TRAIN law introduced an optional income tax for self-employed and/or
professionals (SEP) wherein they can opt out to be taxed at 8% of sales or receipt and
other non-operating income.
The 8% income tax shall be in lieu of the:

a. Progressive income tax, computed under individuals tax table; and
b. 3% percentage business tax on sales or receipts
The 8% income tax is a form of bundled tax which enables one-time compliance for two
taxes which would otherwise require separate filing and payments.
CORPORATE INCOME TAX

The corporate income tax, commonly referred to as the regular corporate income tax
(RCIT), is a generally a proportional or flat tax at a rate of 25% on taxable income for
domestic or foreign corporation.
However, a lower 20% proportional tax on taxable income is imposed on domestic

micro-small, and medium-sized enterprises (MSMEs) with not more than 100 million
assets, excluding land and not more than 5 million taxable income.
The RCIT applies to any corporation other than those:

a. Subject to final tax such as non-resident foreign corporation and interest income
not subjected to final tax
b. Special corporations or those subject to preferential (i.e. lower) tax rates or
special regimes
c. Exempt corporations
The Minimum Corporate Income-Tax (MCIT)
Corporate taxpayers are normally subject to a minimum tax, computed as 2% of total
gross income subject to regular tax. This minimum tax is temporarily reduced to 1% this
pandemic from July 1, 2020 to June 30, 202. Even if corporations are losing in
business, they are subject to the minimum tax.
Special Corporations
Special corporations are those enjoying lower tax rates but not 0%, such as private
schools, non-profit hospitals and PEZA or TIEZA-registered enterprises.
Exempt Corporations
Exempt corporations are those enjoying 0% tax rate with no tax dues such as
government agencies, non-profit organizations with no taxable income. Cooperatives,
and those registered with the Board of Investments (BOI) enjoying income tax holiday or
ITH
INCOME TAX RETURNS

Tax Return Form Individual Taxpayers
Form 1700 Purely employed taxpayers
Form 1701A Purely in business of profession, using
itemized, OSD or opting to the 8%
optional income tax
Form 1701 Mixed income earners, estates and
trusts
Corporate income taxpayers
Form 1702-RT Corporations subject only to the 25%
regular income tax
Form 1702-MX Corporations subject to special of a
combination of tax rates
Form 1702-EX Corporations that is exempt with no tax
due

Chapter 7: Introduction To Regular Income Tax

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CHAPTER 7: INTRODUCTION TO REGULAR INCOME TAX

CHARACTERISTICS OF THE REGULAR INCOME TAX

Gross income consists of the major topics:

Excluded Income Vs. exempt income

Globalization rule for mixed income earner

Determination of Taxable Income of Corporate Income Taxpayers

Accounting Method and Accounting Period

Taxpayers using Shall compute taxable income using

Cost of sales of a manufacturing business

Separate bookkeeping for business and professional practice

TYPES OF REGULAR INCOME TAX

Individual Income Tax

Scope of the progressive tax

The 8% income tax shall be in lieu of the:

CORPORATE INCOME TAX

However, a lower 20% proportional tax on taxable income is imposed on domestic

The RCIT applies to any corporation other than those:

INCOME TAX RETURNS

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