INCOME TAXATION BUREAU OF INTERNAL REVENUE Revenue Region No. 19, Davao City INCOME TAXATION

The wisest mind has something yet to learn.        - George Santayana

Topics: Income Taxation Minimum Corporate Income Tax Improperly Accumulated Earnings Tax Bad Debts Interest Expense Entertainment, Amusement and Recreational Expenses

Income Tax Return Defined: It is a sworn instrument in which the taxpayer discloses the nature and content of his tax liability by formally making a report of his income and allowable deductions for the taxable year in the prescribed form.

Classes of Income Tax Return: Individual income tax returns; Corporate income tax returns; Income tax return of general professional partnerships; and Fiduciary income tax returns

Gross Income means: Income derived from all sources, including, but not limited to the following items: Compensation Gross income derived from business or the exercise of profession Gains derived from dealing in property Partner’s distributive share of the gross income of GPP

Gross Income (continued….) Interest Annuities Rents Prizes and winnings Royalties Pensions Dividends

Net Income Means the realized gross profit after deducting all the deductions allowed by law or statutes.

Net Income Sales P x x x Less Cost of Sales x x x Gross Profit P x x x Less Business Expenses x x x Net Income P x x x

Taxable Income Is the income subject to tax less the deductions, if any, authorized by such type of income. In short, this term refers to the “tax base”.

Taxable Income: Self-Employed Individuals Sales P x x x Less Cost of Sales x x x Gross Profit P x x x Less Business Expenses x x x Net Income P x x x* Less Personal Exemption and Additional Exemption x x x Taxable Income P x x x *taxable income for juridical entities

Taxable Income For individuals/estates/trusts, it is the income after deducting exemptions, personal and/or additional, and certain allowable deductions from the net income . For corporations and other juridical entities, taxable income would mean the net income.

Exclusion from Gross Income Proceeds of life insurance Returns of premium received by the insured Gifts, bequests and devises Compensation for injuries/sickness Income exempt from treaty Retirement benefits, pensions, gratuities

Exclusion from Gross Income Income derived by Foreign Governments Income derived by government/its political subdivisions Prizes/Awards - recognition: religious, charitable, scientific, educational, artistic, literary and civic achievements Prizes/Awards -sports competition

Exclusion from Gross Income 13th month pay/other benefits, limited to a maximum P30,000 each calendar year GSIS, SSS, Philhealth, HDMF, Union Dues Gains from: Sale of Bonds, Certificate of Indebtedness with maturity of more than 5 yrs. Redemption of shares - mutual fund Winnings from PCSO/Lotto

Business Expenses: To be deductible, business expense must: constitute ordinary and necessary expense; to be paid or incurred during the taxable year in carrying on or directly attributable to operation and/or conduct of trade, business, or profession; be reasonable in amount; be sustained by adequate proof; not be against law or public policy

Allowable Deductions (A) Expenses - All ordinary/necessary expenses paid or incurred during the taxable year and directly related to pursuit of business/trade/profession. (1) Salaries, wages, grossed-up monetary value of fringe benefits by having the final tax imposed thereon duly paid;

Allowable Deductions (2) Travel expenses here and abroad (3) Business rental (lessee has no or not taking title, or has no equity over the rented property) (4) Entertainment, amusement, recreation expenses (not contrary to law, morals, public policy / order) (RR 20-2002)

Allowable Deductions (B) Interest reduced by certain proportions of interest income subject to final tax of 38% (RR 13-2000)

Allowable Deductions (C) Taxes, except the following (1) Income Tax (2) Income tax imposed by any foreign country; (3) Estate and Donor’s taxes; and (4) Taxes assessed against local benefits of a kind which increased the value of assessed property

Allowable Deductions (D) Losses, in general (1) Sustained during the taxable year without any form of indemnification (a) if incurred in trade, business, profession; and (b) of property connected with trade, business Except: those losses claimed as a deduction for estate tax purposes

Allowable Deduction (2) Incurred by a non-resident alien individual or foreign corporation sustained during the year, in the conduct of business, trade or profession w/o any form of indemnification (3) Net Operating Loss Carry Over (NOLCO)

Allowable Deduction (4) Capital losses, in relation to Sec. 39 (a) Sale/exchange of capital assets; & (b) Securities becoming worthless Wash sales of stocks/securities, in relation to Sec. 38 (6) Wagering Losses (7) Abandonment losses, on petroleum operating & producing well

Allowable Deductions (E) Bad Debts - RR 5-99 and RR 25-2002 (1) Debts due to taxpayer ascertained worthless; and (2) Securities becoming worthless

Allowable Deductions (F) Depreciation Use of Certain methods and rates: (a) straight-line; (b) declining-balance (c) sum-of-the-years digit; and (d) other methods prescribed by the Secretary of Finance

Allowable Deductions (G) Depletion (H) Charitable/Other Contributions (1) Subject to limitation (a) for individual - 10% (b) for corp. - 5%

Allowable Deductions (2) Deductible in full a) To Government under the annual priority plan b) To certain foreign institution or international organizations; c) Donations to accredited NGOs

Allowable Deductions (I) Research and Development (1) Deducted in full amount as an expense for the period; or (2) Amortized over a period of not more than 60 months in which taxpayer realized benefits from such expenditures

Allowable Deduction (J) Pension Trusts (K) Additional Requirements for Deductibility of certain payments

Allowable Deduction (L) Optional Standard Deduction Old Law: - 10% of gross income RA 9504 (RR 16-2008): Individual - 40% of Gross Sales/Gross Receipts Corporation - 40% of Gross Income

Allowable Deduction (M) Premiums payments of Health/Hospitalization Insurance of an Individual Taxpayer - P2,400 or P200/mo. Per family whose gross annual income does not exceed P250,000 for the taxable period.

PERSONAL & ADDITIONAL EXEMPTION Old Law RA 9504 % OF INCREASE SINGLE 20,000 50,000 150% HEAD OF FAMILY 25,000 100% MARRIED 32,000 33% FOR EACH QUALIFIED DEPENDENT CHILD 8,000 300%

PERSONAL AND ADDITIONAL EXEMPTION 2007 Single 20,000 Head of the Family 25,000 Married 32,000 Qualified dependent child 8,000 2008 Single 35,000 Family 37,500 Married 41,000 child 16,500 2009 Single 50,000 Family 50,000 Married 50,000 child 25,000

Non-Deductible Items (A) In general: (1) Personal, living or family expenses; (2) Amount paid to increase value of any property or estate; (3) Amount extended in restoring property where an allowance is or has been made

Non-Deductible Items (4) Premiums in life insurance policy covering the life of officer or employee of the taxpayer where the latter is the beneficiary. (B) Losses from sales or exchanges of property.

General Principles of Taxation A citizen of the Phils. residing therein is taxable on all income derived from sources within and without the Phils. A non-resident citizen is taxable only on income derived from sources within the Phils.

General Principles of Taxation An individual citizen of the Phils. who is working and deriving income from abroad as an OCW is taxable only on income from sources within the Phils. An alien individual, whether a resident or not of the Phils., is taxable only on income derived from sources within the Phils.

General Principles of Taxation A domestic corp. is taxable on all income derived from sources within and without the Phils., A foreign corporation, whether engaged or not in trade or business in the Phils. is taxable only on income derived from sources within the Phils.

Where to file It shall be filed with the AAB, or the Collection Agent, or duly authorized treasurer of the city or municipality having jurisdiction over the principal office / residence or place where the books of accounts are kept.

When to file For Individual / Estate/ Trust First Quarter - April 15 of the current year Second Quarter - Aug. 15 Third Quarter - Nov. 15 Annual Return - April 15 of the ff. year

When to file For Corporation/Partnership Quarterly Income Tax Return 60 days after the close of the taxable quarter Annual Income Tax Return 15th day of the 4th month following the close of the taxpayer’s taxable year.

Topics: Income Taxation Minimum Corporate Income Tax Improperly Accumulated Earnings Tax Bad Debts Interest Expense Entertainment, Amusement and Recreational Expenses

Knowledge is proud that she knows so much; Wisdom is humble that she knows no more.        - Cowper

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