BAC303: Taxation
Introduction to Regular Income Tax
CHARACTERISTICS OF THE REGULAR INCOME TAX
1. General in coverage
2. Net income taxation
3. Annual income tax
4. Creditable withholding tax
5. Progressive or proportional tax
THE REGULAR INCOME TAX MODEL
Gross income – inclusions P xxx,xxx
Less: Allowable deductions xxx,xxx
Taxable Income P xxx,xxx
TAXABLE INCOME of INDIVIDUAL INCOME TAXPAYERS
Classification Rule
Gross income is first classified into:
a. Compensation income
b. Business or professional income
Allowable deductions
Business expenses are deducted against gross income from business or profession. No deduction is
allowed against compensation income. Expenses related to the employment of individual taxpayers are
deemed personal expenses.
Treatment of other income
Other income which is neither compensation nor business or professional income is simply added to net
income from business or profession as “non-operating income”. If the taxpayer has no business or
professional income, the same is simply added to taxable compensation income as “other income”.
Illustration: Individual income taxpayer
Case 1 Case 2 Case 3 Case 4
Compensation income P 300,000 P 300,000 P 300,000
Non-taxable compensation 30,000 30,000 30,000
Gross business income P 400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,000 20,000 20,000
Required: Compute the taxable income for each case.
TAXABLE INCOME of CORPORATE INCOME TAXPAYERS
The taxable income of corporations is computed in the same manner as pure business or professional
income earner.
Determination of Gross Income from Business or Profession
A. Business selling goods
The gross income from business on the sale of goods is computed as:
Sales/revenue/receipts/fees P xxx,xxx
Less: Cost of goods sold (cost of sales) xxx,xxx
Gross income from operations P xxx,xxx
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.
Illustration
A taxpayer had the following data during the year:
Gross sales P 400,000
Sales discounts 100,000
Sales return 200,000
Beginning inventory 600,000
Purchases 2,500,000
Purchase returns and allowances 150,000
Freight-in 200,000
Ending inventory 800,000
Required: Compute for the cost of sales and gross income.
B. Business selling services
The gross income from sale of services or exercise of profession is measured as:
Revenue or gross receipts P xxx,xxx
Les: Cost of services xxx,xxx
Gross income P xxx,xxx
Cost of services pertains to all direct costs of rendering the services such as cost of labor, materials,
and overhead costs. The costs of services should be distinguished from the indirect costs such as
general administration and marketing expenses of the business.
Illustration
A practicing auditor had the following had the following income and expenses during the year:
Billing for services rendered P 4,500,000
Salaries of audit staff 1,400,000
Salaries of administrative employees 200,000
Transportation expenses to and from clients 12,000
Supplies used in various engagements 250,000
Supplies and general utilities 120,000
Depreciation of office equipment 80,000
Depreciation of laptops issued to audit staff 50,000
Required: Compute for cost of services and gross income.