564 3 INCOME TAXATION Problem 9-29. Adjustment of Losses X Co, constructed a building at a cost of P10,000,000 with an estimated useful life of 30 years. After five years, subsequent additions and improvements which were properly capitalized amounted to 500,000. ‘The building was insured for P6,000,000 against fire at the:time it was totally destroyed by fire at year 8. ‘The claim for fire loss was settled with the insurance company paying 5,800,000 with an agreement that any materials that may be salvaged from the fire shall be taken by the owner of the building. Proceeds from ‘sale of salvaged materials amounted to P300,000. ‘Required: Compute the loss deductible by X Co Problem 9-30 Varlous Losses ‘Mr, Saboy incurred the following losses related to his construction ‘business: ‘Loss on unrealized earnings 'P500,000 Casualty losses 250,000 Abandoned equipment due to technological problem 150,000, ‘Accumulated depreciation of abandoned equipment 120,000 ‘Compensatory liquidated damages 100,000 Embezsled funds by the cashier 70,000 Book value of partially damaged machine 50,000 Replacement cost of damaged portion of machine 40,000 Loss on sale of capital assets 30,000 ‘The casualty losses was reported to the BIR within 45 days and compensated by insurance amounting tb 300,000. Required: Compute the total amount of deductible losses, Chapter 10 BASIC INCOME TAX PATTERNS INCOME TAX SYSTEM ‘The Philippines ‘uecs several. types. of ireame tax system. ‘Taxpayers with different types of income are required to adopt the following types of tax system: 1. Global income tax system; 2. Gross income tax system; and 8. Schedular tax system, |din, Rox taw and Jurisprudence 110) Global Incorne Tax System ‘This income tax system 18 a combination of grosp compensation income and/or net income from: business, trade or profession to arrive at the total (global) income subject to tabular tax rates, =: 2A} MIRC) In other words, global tax system employs the grouping of similar incomes from all sources and subjecting them to a single tax rate ‘or progressive gratiuated rates. recoried Spesch of omar BIR Conmissioner Renedlanes ot Bogie Country Clb, July 15, 2008) . Examples of globalized income are the following: 1. Compensation income; 2._ Net income from business, trade or profession; 3. Passive income (not subjected to final tax); and 4, Capital gains (not subjected to capital gains tax). Gross Income Tax System ss _ Under this tax system, the taxpayer's income tax is fixed or computed based on the gross income, The usual allowable Géductions are completely disregarded in computing this incomece INCOME TAXATION Examples of income under gross income tax system are the following income taxes: Fringe benefit tax; Passive income subject to final tax; Capital gains tax on real property (capital esset); and ‘Minimum corporate income tax (MCT1). PERE ‘Schedular Tax System Since income taxes are cither computed based on global tax system or gross income tax system, their filing and payment should be accompanied with separate BIR form as required per category of income. Examples, of incomé tax under schedular tax system are the following: 1, Annual income tex return (for global incoine tax); and 2, Capital gains tax return (for sale of real property classified as capital asset, and sale of shares of stocks not traded in the ‘stock market) BASIC SUMMARY OF PHILIPPINE INCOME TAX Groups and Sources of Income Taxpayer “in the Philippines, income taxpayers are classified as follows: A. Individuals ° 1. Citizen B a. Resident Citizen (taxable within and outside) b. Nonresident citizen (taxable within) (2. Alien fa. Resident alien (taxable within) b. Nonresident alien, doing business in the Philippines (taxable within) Nonresident alien, not Philippines (taxable within) B. Corporations and Partnerships 1, Domestic cogporation (taxable within and outside) 2. Resident fo ration (t le within) 3. Nonresident foreign ebrporation (tAkable within) C. Estates and Trusts (taxable aa individual taxpayer) e doing business in the Chapter 10 Basic Income Tax Patterns 567. ‘Summary of Groups of Income ‘The groups of income may be summarized as follows: Jngome from Trading Income from Merchandising Income fom Manofactut Profesional income come fom Farming Rettinease | Income from Sale of shares of Conetraction mee Contract | (gold ontide stock ec) Interest Income Sale of Capital “Avecta (Wot an inventory/ Royalties ot used in Dusiness) Wases Holiday pay Sick leave pay ‘Vacation leave pay Dividends Honorarim Sale of Real Property | (capital ascen Prizes Winnings Deductions from Business Income 1. Itemized allowable deductions (business expenses) or 2.. OSD - 40% of gross sales o1 i indivi I If sales or gross receipts for individuals and 40% of gross income for corporations ‘Personal Exemptions & Based on R.A. 9504, the personal exemptions of i pee iptions. of individual 1. Basic exemption of P50,000 for each individual taxpayer (whether single, niarried or head of family) oo In case of married individual, ont i 1 tual, only the spouse deriving gross income see to avail personal exemption. ae 2. Additional of P25,000 for each d mai pied n dependent child, maximurp of The additional exemption shall be claimed only by one of the \ spouses in case of married individu568 INCOME TAXATION Collection Points of Income Tax ‘The collection point of income tax may be summarized as follows: (Collected before the | Passve income within: fncomeis | Sale ofreal property received by | * (capital set) camer) | Sale of share of stocks | eokt outside sto orchangs) Quarterly income tax Manufacturing, Servicing, Y Farming, Leasing and ‘Compensation ineame Business income Gain on other eapital assets Passive income comned outside ‘Annual income tax, reduced by creditable withholding tax ‘Creditable withholding tax refers to the income tax withheld by the ‘employer before the earner receives the net proceed of hie income, ‘The amount withheld represents an estimated portion of the total incoine tax for the year. This tax is called “creditable” because it deductible from the total actual income tax due computed at the of the taxable year. Final withholding tax is also an income tax withheld from the ineome before the earner receives the net proceeds of his incon This tax is called “final” because it is not allowed as deduction fr the total actual income tax due at the end of the year. Quarterly income tax is paid quarterly by those who axe business/self-employed. This income tax is also a creditable t the end of the year. Annual income taxes are normal taxes that are usually 30% { corporations and 5 to 32% for individual taxpayers. These taxes: paid at the end of the taxable year and usually reduced by | creditable taxes. ‘Minimum corporate income tax (MCIT) is an income tax based on the gross income of corporation that still incurs fast reports minimal income tax even after the 3% year ol bu operation, The MCIT is observed starting from the 4" year business. Chapter 10 Basic Income Tax Patterns 508 Capital gain tax is generally an income tax on sale of real property (BIR Form 1706) and shares of stocks classified as capital assets (BIR Form 1707). BASIC MATRIX OF INCOME TAXATION ‘BUSINESS EXPENSES Within and outa 2. Business income Pass income outside 1 Capital pia not subject, fofnal fr 3: Capital pli Site of real exate Sale of ohares of tock 1, Basive income fe onsesident cltson Residext Alen | Within only T. Compensation | + Copital gun not subject to alton pace mee oe Sea aeS tae + Pasive income otaide 4 capil gain not rablst [2 Capital gain | "Sate crea! Estate510 INCOME TAXATION Illustration ~ 1 ‘The income statement of a taxpayer is as follows: 1in Outside Business income 100,000 Business expenses 40,000 Passive Income ¥ '5,000 ‘Capital gain 10,000 Capital loss 5,000, Required: Compute the taxable income and the applicable tax assuming that the taxpayer is 1. A single individual: ‘a. Resident citizen ‘ b. Alien . 2. Accorporation: a. Domestic i b. Foreign Comparative computation of taxable income and applicable tax: eaident Domestic Foreign en Allen Comporatien _Sonparaten Business income ‘900 PGO,000 P20,000 . —P100,000 Passive income outside 000 $000 = Business expenses (000, (40,000). 90,000) 40,000) Capital gan 16,000 26,000 Capital oss » tsm0 — 151000 SePRtniness tome © 71404000 ~ 60,000 ~ 140,000; Ferspoel exemption 50.000) (80,0001 Pere eermmdts 22000 Bigo00 Fao EAL Resident Domestic Gis len Corpmrtion Corsation Passive income within subject to final tex peooo es.0uo | (BS.000. Tilustration - 2 ‘Assume the following data: Business income ‘Business expenses ‘The pro-forma computation would be: itn | ‘Resident Resident’ Domestic ender Alen | Foregn | Gere Co 2 oe REEL FSBSR sone Sere eee, fefooeoa, oxnoon 000,000) 4.700.000, Netincone $e Poona — F1oeec00 F300,000 Exemption Figobeo woo Notinbielscome F-asn,000 F9sg000 £,000.000 P.900-000 ee Sues Taber aoe a MT Chapter 10 Basic income Tax Pattems om ‘Summary Application ‘COMPARISON OF INDIVIDUAL AND ESTATE/TRUST TAXPAYERS. omizod deductions or 40% OSD based on [FOE sles or gross calls Basie =P 50,000 ‘datonal = P25,000| Sich cil ms 4) raxeate a | ‘ive bcome und in cle th acu od henge eed teberscuaedh aera eum oer ones ‘Summary Application COMPARISON OF CORPORATION AND PARTNERSHIP TAXPAYERS emizad deductions oF 40% OSD based on Gi ese acme earned thin i alee with sl tc at sore, nd ah anger od {be lncded nthe onal tt tino ar ot porponeesr INCOME TAXATION Ingome Tax Return and Filing ‘A. Individual, employed, not doing business Chapter 10 Basic Income Tax Patterns 873 ‘Tax dus per normal (tabular) tax rate P 50,000 Less: Tax credit - withholding tax pet BIR Form 2316: ‘i Employer A P 5,975 Ian individual ts employed with only one employer during the Employer B 29.625 __38,000 taxable year, the corresponding withholding tax every month Income tax sill due F4s.000 for the whole year will be accurately deducted. ©. Individual, employed and doing business Employer will furnish the employee with form 2316 which will serve the same purpose as that of BIR Form 1700 (Tax Return for Employed, not doing business) Under this case, the taxpayer's income tax return should be reported in BIR Form 17010 for the first three (3) quarters and BIR Form 1701 for the anmial income tax return. BIR Form 2316 is a sworn declaration of the employer of the tompensation payment to an employee (with or without tax withheld) and the amount of creditable tax withheld. Mlustration B. Individual, employed, with several employers during the year, not doing business Under this case, the individual taxpayer is required to. ‘accomplish form 1700 afid attach to it the form 2316 furnished by his employeis, ‘Mr. Manuel Layco is married with one (1) qualified dependent child, For his compensation, he was furnished with BIR Form 2316 which contains the following: ‘Taxable compensation P325,000 Income tax withheld = 50,000 Layco's business #1 paid were as follows \come, expenses and quarterly incomé tax ‘lustration For year 200A earnings, his employers furnished Mr. Jun. Fuentes with the following BIR Form 2316: BIRF-2316 BIR F.2316 sr Business income (cumulative) 120,000 Itemized allowable deductions __90,000 Taxable income 230,000 Nontaxgble compensation: SEmeloecA EmploverB 138 Month pay P 3,500 P16,000_ rns th P 2,500 85, PAGYBIG, Union Dues 31000 18,000 i ‘Taxable compensation: 4 Less: Payment previous quarters __- Q - ‘Basic salary 30,000 135,000 Income tex payments - 2500 ‘Allowances 5.000 25,000 ‘Commission 4,000 15,000 Suppose that in the fourth quarter the business reported the Hasard pay . 00. oe ing for of 0} ‘Total income tax withheld as head of family 5,375 29,625 Eras oka seme yout of Ob rena 8 oa Business income 600,000 In addition, he earned a net income of PS0,000 during the Itemized allowable deductions --350,000 ‘year from his small sari-sari store. Net income . 250,000 ‘Mr. Fuentes’ income tax return .shauld” be reported in BIR In this case, Mr. Layco should report his income tax return Form 1700 which basically would indicate the following: s (BIR Form 1701) as follows Gross taxable compensation income Gross taxable comperisation income P 325,000 Other taxable income Less: Personal exemptions: Total ‘Basic - married P 50,000 Jess: Personal exemption Additional exemption (P25,000 x | child) 25,000) Taxable income ‘Taxable compensation income74 INCOME TAXATION ‘Add: Net taxable business income: Business income 600,000 ‘Less: Itemized deductions 350,000 __ 250,000 Total taxable income 500,000 Income tax due P 125,000 Less: Tax credits: Withholding tax BIR Forms 2316 P 50,000 : Quarterly tax payments 22,500 ___72,500 Income tax still due E_§2'500 “Tote: BIR Form 1701 is also applicable for income taxes of Estates and D. Corporation and Partnerships Juridical persons “engaged in business are required to accomplish BIR Form 1702Q for the-first three quarters, and form 1702'for annul tax return, Mlustration MT Co., @ domestic corporation, reported the following tax Payments for the first to the third quarters of the taxable year: ae OE ca Second Thies 2,000,000 P4,600,000 7,500,000 1.500.000 _3'500;000 Es00.009 P1100.000 Income tax P 175,000 P 352,000 P_ 630,000 Less: Payment previous quarters =O. 175,000 __3521000 Income tax payments, E1700) Eazz000 F-27809 For the fourth quarter, the company reported the following: Business income (cumulative) Itemized allowable deductions Taxable income Business income for the quarter 3,000,000 Itemized allowable deductions 2'500,000 Capital gains "100,000 Passive income earned outside the Philippines 50,000 Income tax withheld per BIR Form 2007 farnished by credit card company 20,000 Its BIR Form 1702 shouild show the following: ; Gross income from operation P10,500,000 | ‘Add: Non-operating income (P100,000 + P50,000) Total gross income 10,650,000 ‘ess: Itemized deductions — 8.200.000 Chapter 10 Basie Income Tax Patterns: 515. ‘Net taxable income P 2,450,000 ‘Multiplied by corporate normal tax rate 30% Tax due _ BP 735,000 Less: Tax credits: i ‘BIR Form 2307 P 20,000 BIR Form 17020 (tet tied quarers) _ 630,000 {650,000 Income tax'still due ; E85,000 E. Onerous Transfer of Real Property Considered as Capital "Asset . Under this case, the tax is 6% based on the selling price o. zonal value, whichever is higher. Accordingly, the actual gain or loss on the sale of real property classified as capital ~sset is not considered in the calculation of the capital gains tax. Tilustration Assume that an individual taxpayer sold its land held as investment for 5,000,000, which was acquired for 3,000,000 two (2) years ago. The zonal value at the date of sale was P6,000,000. ‘The seller should report the sale in BIR Form 1706. The report is basically computed as follows: ‘Tex base 6,610,000 Multiplied by tax rate pee Capital gains tax : E_360,000 Note: The tax basg is the higher becween the selling price and the zonal Value, The sale is assumed to result to a capital gun and subject to tax Fegarileso of the actual gain or loss. F. Onerous Transfer of Shares of Stock not Traded through Local Stock Market ‘The capital gains is, subject to @ 5% final tax if the amount is within the P100,000 threshold. The capital gains in excess of the first P100,000 is subject to a final tax of 10% Tlustration A taxpayer: sold its 100,000 common. shares of a domesir corporatiott for P15 per share. These were acquired al P is per shure 6 inorfths ago. Each share has P12 par value > term is 20¥Mown payment and the balance is payable in the (2) equal mégithly installments. NyAe INCOME TAXATION. ‘Under this cage, the taxpayer should report the sale in the BIR Form 1707. i If the taxpayer elects to pay his tax on installment, it is basically reported a's follows: Capital gains (P15 ~ P10) x 100,000 shares 500,000 “Tax on first P100,000 x 5% P 5,000 “Tax on excess, P400,000 x 10% 49,000 ‘Total capital gains tax Eras.o00 P First installment payment: t {45,000 x 20%) 22,000 Second installment payment: 18,000 pal (P45,000 x 40% Principal ( ) 600 18,600 Interest (R36,000 x 20% x 1/12) ‘Third installment payment: Principal (P45,000 x 40%) Interest (P18,000 x 20% x 1/12) Notes eT return shoul be fled within 20 days from réseipt of down payment ‘and 30 days following each installment payment. (2 Form No. 1707, 2, The installment payments shall be subject to 20% interest per annum. based on the outstanding balance: (0R Form No. 1707) P18,000 2300, BR aOo Chapter 10 — REVIEW QUESTIONS 1, Differentiate the three income'tax patterns. 5 2, Bmumerate the sources and taxabilty ofthe income of the diferent 3, Give at least 4 examples pf compensation income, business income, passive income and capital gain. Differentiate the two kinds of deductions from business income. Hew much is the personal exemption for an individual taxpayer who Ea) married, (0) Read of family, and (c) single. How much is the ‘meximim amount of additional exemptions? me 6._ Explain the nature of the following kinds of income taxes: ‘Creditable withholding tax _ Final withholding tax, ‘Quarterly incomie tax’, ‘Annual income tax Minimum corporate income tax Capital gain tax eae ge Chapter 40 Basic Ir ome Tax Patterns 877 ‘Score: Problem 10-1 True or False Write ‘Truc ify the statement is correct or i Ww t or False if the statement is Passive income within by a resident citizen is allowed to oes allowed to be reduced 2. Reporting compensation and busi come in ¢ yusiness income in ene tax return using the same tax rate is an example of global tax aystem 3. Allowing personal exemption as reduction to t fas reduction to taxable compensat ‘income io an example of global income tax system, pn 4. Resident aiiens are taxable for their incor i outside the Philippines, ie Per ee 5. There io net capital gain ifthe bidinary gain exceeds ordinary loss 6. Only resident citizen could opt for 40% OSD. 7. A singe individual, fly suppor : 775,00 seta penohaleenntons © mune leet oan 8 A maid indivdual with 5 dependent c 100,000 total personal exmplen nuaren Ou lai only AA self-employed taxpayer is ployed taxpayer is required to file his quarterly income tax 10. A general professional partnership is taxe : Pe d in the same manner as 11. A passive income camed outside the Phil ; outside the Philippines by « nonresiden alien is subject to annual income tax ip the Philpoine - 12. Both creditable and final withholding taxes are withheld at sotirce. 18, The excess of personal exempti e i ‘exemption over compensation income canno reduce the net operating income from businees, : 14, In general, passive i 4, Tn general, passive income within is subject to final tax 15. The annual income taxes i siioldieg ingame ‘axes ste usually increased by creditable to. The optional standard deduction can be deducted from the quarterly