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INCOME TAX

INCOME TAX. Presented by: Beverlie C. Montebon, CPA, MBA Revenue Officer III RDO 113-West Davao City. What is INCOME TAX?. Tax imposed on all yearly profits arising from property, professions, trades or offices or as a tax on person ’ s income, emoluments, profits and the like.

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INCOME TAX

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  1. INCOME TAX Presented by: Beverlie C. Montebon, CPA, MBA Revenue Officer III RDO 113-West Davao City

  2. What is INCOME TAX? • Tax imposed on all yearly profits arising from property, professions, trades or offices or as a tax on person’s income, emoluments, profits and the like. • It is regarded as an excise tax and not a tax on persons, property, funds or profits. It is a tax on the right to earn.

  3. Taxpayers Subject to Tax • Natural Persons • Resident Citizens • Non-resident Citizens • Resident Aliens • Non-resident Aliens a. Engaged in Trade or Business b. Not engaged in Trade or Business • Artificial Persons • Taxable Estate • Taxable Trust

  4. Taxpayers Subject to Tax • Juridical persons • Corporations • Domestic • Foreign • Resident • Non-Resident • Partnerships • General Partnerships • GPP • General Co-Ownership

  5. What is INCOME? • An amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment • All wealth which flows into the taxpayer other than as a mere return of capital • Any wealth flowing to the taxpayer through his employment of labor and/or capital

  6. Classification of Income • As to taxability • Taxable • Non-taxable (exempt) • As to source of income • Income from compensation • Income from engaging in trade or business or practice of profession • Capital Gain • Passive investment • Other sources

  7. Taxable income • Gross income less the deductions and/or personal and additional exemptions, if any.

  8. 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

  9. Gross income (cont.) • Royalties • Dividends • Annuities • Prizes and winnings • Pensions • Partner’s distributive share in the net income of general professional partnership

  10. Exclusions from Gross Income • Proceeds of life insurance paid to the heirs or beneficiaries upon the death of the insured • Amount received by the insured as a return of premium • Gifts, bequests or devices • Compensation for injuries or sickness • Income exempt under treaty

  11. Exclusions from Gross Income • Retirement benefits, pensions, gratuities, etc. • Retirement benefits received under RA 7641 • Separation pay • Retirement, pension and other similar benefits received from foreign government agencies or institutions • Benefits received from the US Veterans Administration • Benefits received from the SSS • Benefits received from the GSIS

  12. Exclusions from Gross Income • Miscellaneous items • Income derived by foreign government • Income derived by the government or any of its political subdivisions • Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements • Prizes and awards to athletes in sports competition sanctioned by their national sports associations

  13. Exclusions from Gross Income • SMW received by MWE • 13th month pay and other benefits not exceeding P30,000 • GSIS, SSS, Medicare and other contributions of individuals • Gains from the sale of bonds, debentures or other certificate of indebtedness with a maturity of more than 5 years • Gains from redemption of shares in mutual funds

  14. Allowable Deductions • 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%

  15. Requisites for Deductibility of Expenses • Ordinary and necessary • Paid or incurred within the taxable year • Incurred in the conduct of trade or business • Not contrary to law, morals, public policy or public order • Substantiated by sufficient proof • Subjected to withholding tax, if applicable

  16. Itemized Deduction • Ordinary and necessary trade, business or professional expenses • Salaries & wages • Travel expenses • Rental expenses • Entertainment, amusement and recreation expenses • Interest • Taxes

  17. Itemized Deduction (cont.) • Losses • Net Operating Loss Carry Over (NOLCO) • Capital losses • Losses from wash sales of stocks or securities • Wagering losses • Abandonment losses

  18. Itemized Deduction (cont.) • Bad debts • Depreciation • Depletion of oil and gas wells and mines • Charitable and other contributions • Research and development • Pension trusts

  19. 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 - 41% Jan. 1999 - 39% Jan. 2000 - 38% Nov 2005 - 42% Jan. 2009 - 33% Applies regardless of the date the interest bearing loan and the date when the investment was made for as long as, during the taxable year there is an interest expense incurred and an interest income earned.

  20. 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

  21. Interest • Not deductible from gross income • b. Interest payments between related parties as • specified in Sec. 36(B) of the Tax Code • c. Interest expense paid or incurred by Service Contractor engaged in the discovery or production of indigenous petroleum in the Phil. • d. Interest incurred on capital expenditures (optional) • Interest expense • Capital expenditure

  22. 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)

  23. Illustration

  24. Taxes • Disclosure requirement on taxes (Notes to FS) RR 15-2010

  25. 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

  26. Net Operating Loss Carry-over (NOLCO) RR 14-2001 • Net operating loss - means the excess of allowable deduction over gross income of the business in a taxable year; • Deductible for the next 3 consecutive years; • Taxpayer is not exempt from income tax; • No substantial change in the ownership; • Not assignable or transferable • Taxpayer claiming OSD is not entitled • Corporation paying under MCIT is not entitled • “First-in, first-out” basis • Proper disclosure in the ITR and Notes to FS

  27. Bad Debts • Tax Benefit Rule • At the time of recovery • TP benefited from Bad debts recovered the deduction shall be included as part of the gross income to the extent of the income tax benefit of such deduction • TP did not benefit Recovery shall be treated • from the deduction as a mere recovery or return of capital and not treated as receipt or realized taxable income

  28. ILLUSTRATION

  29. 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 • Straight line method • Declining balance method • Sum of the year’s digit method • Any other method which may be prescribed

  30. 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 taxpayer’s books of accounts.

  31. Depreciation (RR 12-2012) • Deductibility of Depreciation Expense • Relating to purchase of passenger vehicles of all types (land, water or air) used in business • No depreciation expense shall be allowed unless duly substantiated with sufficient evidence, such as ORs or other adequate records

  32. Depreciation (RR 12-2012) • Information needed: • Specific Motor Vehicle Identification Number, Chassis Number, or Other Registrable Identification Numbers of the Vehicle • Total price of the vehicle • The direct connection or relation of the vehicle to the development, operation, and/or conduct of the trade/business or profession of the taxpayer

  33. Depreciation (RR 12-2012) • Only one vehicle for land transport is allowed for use of an official or employee, the value of which should not exceed P2.4M • No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the above threshold amount, unless the taxpayer’s main line

  34. Depreciation (RR 12-2012) of business is transport operations or lease of transportation equipment and the vehicles purchased are used in said operations • All maintenance expenses on account of non-depreciable vehicles for taxation purposes are disallowed in its entirely

  35. Depreciation (RR 12-2012) • The input taxes on the purchase of non-depreciable vehicles and all input taxes on maintenance expenses incurred thereon are likewise disallowed for taxation purposes

  36. Charitable and other Contributions • Donations with limited deductibility • For the use of government exclusively for public purpose • To accredited domestic corporation or association organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes • For the rehabilitation of veterans • For social welfare institutions • To non-government organization

  37. Charitable and other Contributions • Individual donor - 10% of net income before deducting donations • Corporate donor - 5% of net income before deducting donations OR Actual contribution/donation WHICHEVER IS LOWER

  38. Charitable and other Contributions • Donations deductible in full • Donations to the government exclusively to finance or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture and in economic development according to the National Priority Plan determined by NEDA. • Donations to foreign institution or international organizations • Donations to accredited non-government organizations

  39. Entertainment, Amusement & Recreational (EAR) Expenses • Imposition of Ceiling [Sec. 34(A)(1)(a)(iv) of NIRC) & RR 10-2001] Actual entertainment, amusement and recreation expense OR .5% of net sales for sellers of goods and properties 1% of net revenues for sellers of services WHICHEVER IS LOWER

  40. TAXPAYER ENGAGED IN BOTH SALE OF GOODS AND SERVICES Allowable EAR expense shall be determined based on apportionment formula – Percentage of net sales/net revenue to the total net sales/net revenue multiplied by the actual EAR expense Net sales/net revenue x Actual expense Total net sales/revenue Note: In no case shall the total EAR exceed the maximum percentage ceiling

  41. Optional Standard Deduction In lieu of the itemized deductions enumerated under Sec. 34(A) to (J) and (M) and Sec. 37 of the Tax Code and other special laws (if applicable) .

  42. Optional Standard Deduction • Individuals • Resident citizen • Non-resident citizen • Resident Alien • Taxable estates and trusts • Corporations (subject to normal income tax rate) • Domestic corporation • Resident foreign corporation

  43. Optional Standard Deduction

  44. Optional Standard Deduction • Rules for GPP (RR 2-2010) • The type of deduction chosen by the GPP must be the same type of deduction that can be availed of by the partners.

  45. Optional Standard Deduction • Disclosure of election to use the OSD (RMC 16-2010) • Check the appropriate box in the ITR for the first quarter or initial return filed during the year • Failure to indicate -- considered as having availed of the itemized deduction. • Must be consistently applied for all the succeeding quarterly returns and in the final ITR for the taxable year.

  46. Optional Standard Deduction • Implication of OSD • Option is irrevocable for the taxable year for which the return is made. • Any subsequent amendment of ITR filed for the first/initial quarter shall not affect the irrevocable character of the election to avail of the OSD or itemized deduction. • Individual claiming the OSD is not required to submit financial statements but shall keep records of his gross sales/receipts

  47. Personal and Additional Exemption • Personal exemption • P50,000 - Single, married or head of the family • Additional exemption • P25,000 - for every qualified dependent child (maximum of 4)

  48. Premium Payments on Health and Hospitalization Insurance • Premium not to exceed P2,400 per annum per family • Applicable to taxpayer whose family income is P250,000 or less • Deduction to be claimed by the spouse claiming the additional exemption for dependents • Deduction is applied at year-end adjustment or at termination of employment before year-end

  49. Non-deductible items • Personal, living or family expenses; • Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate. This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations, which are deductible under Subsection (G)(1) of Section 34 of this Code. • Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made;

  50. Non-deductible items • Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy • Losses from sales or exchanges of property between related parties

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