BASICS ON TAXPAYERS ENGAGE IN BUSINESS

The tax formula of taxpayers engage in business shall be:

XXXXXX
Gross Income
X
LESS: Allowable Deductions for Business
Expenses
XXXXXX
(OR Optional Standard Deductions)
X
XXXXXX
Net Taxable Income
X
For INDIVIDUAL TAXPAYERS, also allowed to be deducted are the
following:
a. Personal Exemptions (basic and additional);
b. Special Deduction (PPHHI)
The rate of Income Tax shall be that coming from the Graduated
Income Tax Table with rates from 5% to 32% (the same tax table for
CIEs).
For CORPORTE or NON-INDIVIDUAL TAXPAYERS, the rate shall be 30%
subject to the rules on Minimum Corporate Income Tax.
OPTIONAL STANDARD DEDUCTION
For INDIVIDUAL TAXPAYERS who are engage in business, in lieu of Costs
and Business Expenses, at the option of the taxpayer, it may claim
instead a rate of 40% of the Gross Revenue/Receipts. Claiming
optional deduction still allows a claim for Personal Exemption and
Special Deduction for PPHHI (but no longer for COSTS of sales or
services).
For NON-INDIVIDUALS, in lieu of Business Expenses, at the option of
the taxpayer, it may claim instead a rate of 40% of Gross Income.
(COSTS of Sales or Services are allowed that is why the basis of the
40% is Gross Income).
ITEMIZED DEDUCTIONS of ALLOWABLE DEDUCTIONS FOR
BUSINESS EXPENSES
Expenses in general shall be allowed if possessed of the following:
a. Ordinary and necessary to the business of the taxpayer;
b. Substantiated by evidence (not necessarily official receipts);
c. Subject to the rules as set-forth by existing rules (usually
limitations and technical qualifications);
d. Must have been paid or incurred during the taxable year;

e. If subject to the rules on withholding (whether final or

creditable), the amount of tax should have been withheld and
remitted to the BIR.
The following are Business Expenses which are subject to limitations
and special provisions set-forth under existing rules:
1. Salaries and allowances;
2. Interest;
3. Taxes;
4. Losses;
5. Bad debts;
6. Representation and entertainment;
7. Donations and contributions;
8. Pension Trusts;
9. Depreciation;
10.
Research and development;
11.
And others as the CIR sees fit and issues Revenue
Regulations
GROSS INCOME
It should be noted that the format computation started out with Gross
Income and not Gross Revenue/Sales/Receipts. In this regard, it should
be pointed out that what is being taxed is indeed only the INCOME
taxpayer less allowed deductions all in relation to the business.
However, Gross Income shall be understood to include OTHER TAXABLE
INCOME from whatever source. In this sense, Gross Income shall be as
follows:
For TRADING CONCERNS:
Gross Sales
Less Returns and Discounts
Net Sales
Less Cost of Sales
Gross Profit
Add Other Taxable Income
Gross Income

XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX

For SERVICE PROVIDERS:

Gross Revenue
Less Discounts
Net Revenue
Less Direct Costs of Services
Gross Profit

XXXXX
XXXXX
XXXXX
XXXXX
XXXXX

Add Other Taxable Income

Gross Income
For MANUFACTURING CONCERNS:
Gross Sales
Less Returns and Discounts
Net Sales
Less Manufacturing Costs
Gross Profit
Add Other Taxable Income
Gross Income

XXXXX
XXXXX

XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX

Other Taxable Income usually refers to results of transactions other

than the normal business activities or even those not related to the
business of the taxpayer. The most common would be CAPITAL ASSET
TRANSACTIONS that result into capital gains and losses.
As a rule, CAPITAL GAINS (which are not subject to Capital Gains Tax)
are taxable income and form part of Gross Income. On the other hand,
CAPITAL LOSSES are allowed not as a deduction but as a reduction of
CAPITAL GAINS. In other words, CAPITAL LOSSES are allowed only to
the extent of CAPITAL GAINS.
There are rules on the recognition of CAPITAL GAINS AND LOSSES
depending on the taxpayer whether INDIVIDUALS or NON-INDIVIDUALS
(see discussions on these rules).