Chapter 7 - Introduction to Regular Income Tax r 7 - Introduction to Regular Income Tax

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j, Non-taxable compensation are items of compensation that are excluded against
gross income.
Discussion Questions .
1. Discuss the scope of the regular income tax especially on passive income ,,, rrueor False2 ...
capital gains. . T 1_ The tax due of corporations Is determined by multiplying their total gross income
2. Enumerate the characteristics of the regular income tax. by25%.
3. What are exclusion in gross income? T The taxable compensation Income Is computed as gross compensation less the
4. Distinguish allowable deductions from personal exemption. z. non-taxable compensation income.
S. Demonstrate the computation of the gross mcome from employment and the
gross income from business or exercise of a profession.
F 3. The deadline of filing the corporate quarterly income tax return is the same with
the deadline of the quarterly income tax return of individuals.
6. How is cost of goods sold determined? F 4, Business expenses can be deducted against all types of gross income subject to
7. What are included in cost or services? regular tax.
8. What composes the compensation income of a rank and file employee and a T s. No deduction shall be allowed against taxable income.
managerial and supervisory employee? F 6. Only corporations may incur deductions against gross income.
9. How does the tax presentation of the composition of gross income In the In T 7. The gross income from business is measured as sales or gross receipts less cost of
return differ between individuals and corporate taxpayers? sales or cost of services.
10. Distinguish "other taxable income from operations" from non-operating Income. T a. The tax due of individuals is determined by means of a schedules of tax rates.
11. Distinguish revenue from sales, fees, and receipt.
T 9. The deadline of the annual income tax return of corporations using the calendar
12. Discuss how the taxable income or the following is determined: year is similar to the deadline fixed for individual taxpayers.
a. Corporate taxpayer
b. Purely compensation earner
T 10. Every individual taxpayer is exempt from income tax on compensation up to
P25O,OOO annually but the same exemption does not apply to business Income.
c. Purely business or professional income earner
d. Mixed income earner Multiple Choice - Theory: Part 1
13. Discuss the treatment of net loss from business or exercise of profession. 1. Which is not generally subject to regular income tax?
14. What are the deadlines of the quarterly regular income tax for individuals and D a. Compensation income c.Professional income
corporations?
b. Business income d. Passive income
+ h

True or False 1 '4

F 1. The P250,000 income tax exemption for Individuals Is designed to be In lieu or C

2. The general rule in income taxation is
a. final income taxation. c.regular income taxation.
their personal and business expenses.
T 2. There are two types or I • , b. capital gains taxation. d. fringe benefit taxation.
· regular income tax: proportional income tax Iof
F corporations and progressive income tax for individuals 3. Active income is subject to
F 43. NRA-NETBs and NRFCs a I b" . .
re a so su Ject to regular income tax.
A a. regular tax. c. final tax.
F · All taxpayers are subject to final tax. b. capital gains tax. d. any of these
S. Taxable income is synonymous to net income
T 6. Fo~_all taxpay_ers, taxable income means the pertinent items of gross income not 4. Question 3 and 4 are based on the following:
T D
».%""t';;;;· gyacisaioaiiaaacarons A. Regular tax B. Final tax C. Capital gains tax

F 8.· Je
Employed taxpayers can
to regular income tax.
clai1 ions
Which of the foregoing are passive incomes subject to?
against their compen .. . m expenses from their employment as deduct! a. A only c. Both A and B
T 9
.
1Saton income,
Items of gross income subject fin ed ill
b. B only d. Either A or B
gross income subject to F2'',_ 9 inal tax and capital gains tax are exclude
egular income tax.
CS. Which of the foregoing are capital gains subject to?
a. A only c.Either A or C
b. C only d. Both A and C
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 Chapter 7 - Introduction to Regular Income Tax er 7 • Introduction to Regular Income Tax
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6. The net amount of regular Income subject to regular tax Is called
A a. taxable income. c.net mcome. g. Which of the following individual taxpayers is not subject to tax on taxable
income:
b. compensation income. d. gross income. C Non-resident citizen c. NRA-NETB

7. What are allowable deductions against gross income? ~: Resident alien d. Non-resident alien engaged in business
A a. Business expenses c. Personal expenses by the taxpayer
b. Family support d. Expenses of employment l6. Which of the following corporate taxpayers Is not subject to tax on taxable
Income?
8. Deductions are allowed to C a. Domestic corporation c. Non-resident foreign corporation
D a. employed taxpayers. c. corporate taxpayers only. b. Business partnership d. Resident foreign corporation
b. individual taxpayers only. d. taxpayers engaged in business. '
17. Which rs a source of Income subject to regular income tax?
9. Personal expenses are D a. Employment c. Trade or business or exercise of a profession
B a. Non-deductible by employed taxpayers. b. Casual sales transactions d. All of these
b. Non-deductible by any taxpayer.
c. Deductible by employed taxpayers. 18. Which interest income will not be included in the income tax return?
d. Deductible by any individual taxpayers. A a. Interest income from bank deposits
b. Interest income from lending
10. Which is not a feature of the regular income tax? c. Interest income from notes
B a. Net income tax c. Annual tax d. Interest income from employees
b. Final withholding tax d. Creditable withholding tax
19. Which is not subject to final tax? I
11. Which is true with the final withholding tax?
D a. Prizes amounting to P11,000
I1
D a. The taxpayer still needs to file an annual consolidated return. b. Interest income from bank deposits
b. It applies to all items of gross income.
c. Winnings from the Philippines ,
c. It constitutes a partial payment of income tax. I
d. Share in the net income of general professional partnership
d. It applies to certain passive income. '
i:
20. Which of the following is a passive income but is nevertheless subject to regular i
12. Which is not true with the creditable withholding tax? I

B a. Advances to the annual tax due A tax by virtue of exclusion under final income taxation?
b. No need to pay further taxes. a. Prizes amounting to P10,000 c. Merchandising income
c. Need to file annual income tax return b. Service income d. Dividends from domestic corporations
d. Applicable to items of regular income
Multiple Choice - Theory: Part 2
13. Progressive income tax is applicable to 1. Which is an incorrect statement?
B ] "T"·taxpayers. c compensation earners only.
a. Business expenses are deductible by individuals and corporations.
. inaividual taxpayers. d.individuals in business only. C b. Purely employed taxpayers are not allowed deductions from gross income.
c. Personal expenses are deductible by individuals, estates and trusts.
14. Proportional regular income tax Is applicable to d. Deductions are considered in the determination of net income.
A a. corporations only. individ
b. compensation ear {y, ©.Individuals engaged in business.
rners on y. d. both individuals and corporations. C2. The following may be relevant In the determination of taxable Income:
~ Gross income subject to regular tax
, oss income subject to final tax.
, Peductions from gross income
· Exclusion in gross income
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 Chapter 7 - Introduction to Regular Income Tax Chapter 7- Introduction to Regular Income Tax
d Iin the determination of taxable income?
Which is not cons Id ere A dc {j, Who cannot claim deductions?
c. an
a. A and B d.Band D only A a. Employed taxpayers c. Self-employed professionals
b. C and D b. Self-employed taxpayers in business d. B and C
3. Wh.iicl h isacorr!
:. ect statement regarding exclusion in gross income?
· . 12. Who are required to file quarterly declaration of income?
a. They are included in gross income subject to regular income tax.
B b. They are ignored in the determination of gross income. B a. Individuals engaged in business
b. Corporations and individuals engaged in business
c. They are presented in gross income but are presented as deductions. c. Corporations
d. They are subject to final tax. d. All individuals and corporations

4. Which of these types of employees may be subject to final fringe benefit tax? 13. Mr. Peralta wishes to file his 2021 income tax return. To avoid penalty, he must
D a. Managerial employees c. Rank and file employees
b. Supervisory employees d. A and B
B file his return on or before
a. April 15, 2021. c. August 15, 2022.
b. April 15, 2022. d. November 15, 2022.
S. Which is not considered an operating income?
C a. Consignment commission income by a retail store 14. An individual taxpayer must file his income tax return for the third quarter of
b. Fees from the rendering of services D 2021 on or before
c. Interest income from advances to employees a. April 15, 2022. c. November 15, 2022.
d. Sale of scrap b. August 15,2021. d. November 15, 2021.
6. Which is a non-operating income? 15. Talisay Corporation is filing its income tax return for the quarter ending February
A a. Gain on sale of office building c. Gate receipts of cockpits C 28, 2021. The return must be filed on or before
b. Sale of goods by a retail store d. Gate receipts of cinemas a. April 15,2022 c. April 29, 2021
b. August 15, 2021 d. March 29, 2021
7. Which of the following will least likely to be considered an operating income d
C security dealer?
a. Gain on sale of stocks 16. Which of these taxpayers is required to file an income tax return?
b. Gain on sale of bonds
c. Dividend income from domestic corporation D a. An employee covered by the substituted filing system.
d. Interest income from bonds
b. A taxpayer deriving purely passive income subject to final tax.
8. The distinction between operating and non-operating income is not required c. Aliens classified as NRA-NETBs.
D the income tax return of d. A resident citizen who derives his entire income from sources outside the
a. Self-employed individuals in business Philippines.
b. Mixed income earners
c. Self-employed professionals l 7. The taxable income of corporate taxpayers is the
d. Purely employed individuals
A a. net income from business.
b. net income from business less personal exemption.
9. The reporting classification of gross income into operating and non-operati# c. taxable compensation income. .
B unnecessary for d. taxable compensation income plus net income from business.
a. Corporate taxpayers c. Both A and B
b. Individual taxpayers 18. Te taxable income of a pure compensation income earner is the
d. Neither A nor B C a. net income from business less personal exemption. .
10. Which is not part of compensati, + b. taxable compensation income plus net income from business.
B a.
:
Basicpayofrankandfk
Ion income?
,j
b. Fr-- le employees c. taxable compensation income.
· ·rnge benefits of mana • d. net income from business.
c Basic pay of manag,,, '5VU@l and supervisory employees
4. rnge teens sr,," ""gP®risory employees
anc le employees
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 phapter 7 - Introduction to Regular Income Tax
Chapter 7 - Introduction to Regular Income Tax

19. The taxable income of a mixed income earner is the 25. A purely engaged in business individual taxpayer using Itemized shall use
a. BIR Form 1701A c. BIR Form 1700
D a. net income from business less personal exemption. A b. BIR Fonn 1701 d. BIR Form 1702
b. net income from business.
c. taxable compensation income. .
d. taxable compensation income plus net income from business. 26. BIR Form 1701 is not Intended for
a. Estate c. Pure professional income earner under OSD
20. The taxable income of a pure professional income earner is the C b. Trust d. Mixed income earner
A a. net income from business.
b. taxable compensation income. 27. BIRForm 1700 ls Intended for
c. taxable compensation income plus net income from business. C a. Trust c. Pure compensation income earner
d. net income from profession less personal exemption. b. Estate d. Pure business or professional income earner

21. Which of the following statements is incorrect with respect to the determJnati~ 28. Ar employed professional practitioner who is opting to use the 8% optional
D of the taxable income of individual taxpayers with other income? D commuted tax for individual taxpayer shall use which form?
a. The other income of pure compensation earners is simply Included in taall a. Form 1701 c Form 1702-MX
compensation income. b. Form 1700 d. Form 1701A
b. The other income of a professional income earner is included as part of no>
operating income and is included in net income. 29. A corporation
subject to different tax rates shall use
c. The other income of a mixed income earner is also treated as part of not C a. Form 1702-RT c. Form 1702-MX
operating income and is included in net income. b. Form 1702-EX d. Form 1701A
d. The other income Is simply ignored in the computation of taxable income.
30. A non-profit corporation with a taxable income shall use
22. Statement 1: Individuals with higher income are subject to higher tax rates. C c. Form 1702-RT c. Form 1702-MX
A Statement 2: Corporations with higher income are subject to higher tax rates. d. Form 1702-EX d. Form 1701A
Which is correct regarding the regular income tax? 31. A school which is subject to a preferential or special tax rate shall use
a. Statement 1 only c. Both statements 1 and 2 C a. Form 1702-RT c Form 1702-MX
b. Statement Z only d. Neither statement 1 nor 2 b. Form 1702-EX d. Form 1701A
23. Which is incorrect in the determination of the taxable income of individ# 32. A corporation that is subject only to a 25% or 20% income tax rate shall use
B taxpayers? A a. Form 1702-RT c. Form 1702-MX
a. In the income tax return, there is no instance where the taxable compensab b. Form 1702-EX d. Form 1701A
income of taxpayers could become negative
b. The
A net operating loss is·1eductit
d d 'bl le against
. · 33. A general professional partnership shall use which tax form?
taxable compensation income.
c. P e taxable compensation income is added to the net income from business. B a. Form 1702-RT c. Form 1702-MX
d. ds
Personal exemption Is no Ionger d teductible :
against compensation inco!l je.
b. Form 1702-EX d. Form 1701A
24. Statement 1: Corporation th ·t
A due. · ns Wit the same net Income may not have the same 34. A one-person corporation shall use which tax form?
Statement 2: Individuals with th dlJI. A a. Form 1702-RT c. Form 1702-MX
. e same net Income may not have the same ta} b. Form 1701 d. Form 1701A
Which statement is Incorrect .
a. Statement1 regarding the regular income tax?
Multiple Choice - Problems1
b. Statement 2 C. Both statements 1 and 2 In 2024, Ms. Maya earned P450,000 compensation income but incurred P120,000
d. None
net loss in her business.

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. Regular Income Tax
Chapter 7 - Introduction to (e Cha ter 7. Introduction to Regular Income Tax

A What is her taxable income assuming she incurred personal exper,, Compute the taxable income.
P100,000? a. P473,000 c. P 428,000
a. P 450,000 c. p 330,000 b. P 465,000 d. P 420,000
b. P 550,000
d. p 570,000
9, Mr. Jordan, with a P750,000 personal expenses, had the following data in 2023:
D Mrs. Sipalay had a gross taxable compensation income of P400,000. She;
red an additional P2,000 by investing her money in time deposits plus Pg,y A Philippines Abroad (4M-2M)+(6M-3.6M
interest income from lending money to a friend. Compute her taxable income. Gross income from sales P 4,000,000 P 6,000,000
a. P303,000 c. P300,000 Interest income on deposits 40,000 80,000
+80K)
b. P302,000 d. P403,000 Less: Deductions 2,000,000 3,600,000
C 3. Ms. Santander had a business net income of P300,000. She also earned PS» Compute the taxable income if Mr. Jordan is a resident citizen.
commission from selling cellular cards and P12,000 lividends from a domes± a. p 4,480,000 c. P 2,040,000
corporation. Compute her taxable income. b. P 4,520,000 d. P 2,000,000
a. P300,000 c. P305,000
10. In the immediately preceding problem, compute the taxable income if Mr. Jordan
b. P312,000 d. P317,000
D is a non-resident citizen.
4M-2M
a. P 4,520,000 c. P 2,040,000
4. Mr. Cabilao earned total gross receipts of P800,000 and paid P300,000 n
C b. P 4,480,000 d. P 2,000,000
expenses in his accounting practice. During the same year, he also earned a toti
of P60,000 net gain from the sale of domestic stocks directly to a buyer. He a Muldple Choices - Problems 2
disposed a vacant lot at a net gain of P140,000. What is the taxable income orN:.
Cabilao? 1. Mr. Santos derived the following income in 2024:
a. P 400,000 c. P 500,000 A
b. P 460,000 Business income P 200,000
d. P 600,000
Compensation income 300,000
Interest income from 5/6 lending to clients 100,000
5. Mr. Jagna earned a gross compensation income of P200,000, exclusive of P20,00
Interest income from bank deposits 20,000
C non-taxable compensation income, and gross business income of P500,000 belt
Royalty income 100,000
expenses of P200,000. He also earned book royalties of Pl0,000 and P8,0
Capital gain on sale of personal car 20,000
interest income from clients' promissory notes. Mr. Jagna has personal expen
Capital gain on the sale of stocks directly to a buyer 40,000
of P170,000 during the year. What is Mr. Jagna's taxable compensation income?
a. P30,000 c. P 200,000 Ordinary gain on sale of old office furniture 10,000
b. p 180,000 d. p 220,000 Dividend income 50,000

Compute the total passive income subject to final tax. 20K+100K+50K

6. What is Mr. Jagna's net income from business?
B a. P 300,000 c. p
a. P170,000 c. P270,000
310 000 500K-200K+8K b. P1,370,000 d. Pl,470,000
b. P308,000 d. P 518,000
2
· Compute the total income subject to regular tax.
200K+300K+100K
7. What is Mr. Jagna's the taxable income? B +20K+10K
A a. P508,000 " a. P1,730,000 c. Pl,470,000
b. P450,000 C. P558,000 b. P630,000 d. PS30,000
' d. P468,000 3
8. Mr. Bangal earned a c . . . e fro' · Compute the capital gain subject to capital gains tax.
B 6
C business of P3006,, ',"Pensation income of P120,000 and net inc0",» a. P70,000 c. P60,000
and P4s.ooo royak ,,"? "red Pg.ooo prizes irom a dancing co"?_,"k b. P40,000 d.PO
personal expenses. ·'n is musical composition. Mr. Bangal has

120K+300K+8K
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Chapter 7 - Introduction to Regular Income Tax chapter 8 - Regular Income Tax: Exclusion from Gross Income

oratfon had the following Income in 2024:

4. Panay, Inc.. a Iarge co rp • CHAPTER 8
(10M-8.7M)
B Philippines Abroad REGULAR INCOME TAX:
P10,000,000 P12,000,000 +(12M-9.8M+
Rent income
Dividend - domestic 50,000 200K) EXCLUSIONS FROM GROSS INCOME
80,000 200,000
Royalties
Business expenses 8,700,000 9,800,000 Chapter Overview and Objectives
Compute the taxable income if Panay, Inc. was a domestic corporation. -············· ··--------------------------------------------------
This chapter discusses the items of income that are excluded from gross income,
a. P3,500,000 c. P1,380,000
b. P3,700,000 d. P1,300,000 hence not subject to income tax under the NIRC. It also includes discussions of
other exempt income under special laws, treaties, or contracts.
s. Compute the income tax due in the immediately preceding problem.
B a. P1,149,000 c.P1,110,000 (3.7MX25%) After this chapter, readers must be able to demonstrate:
b. P925,000 d. P381,000 1. Mastery of the list of exclusions from gross income
2. Comprehension of exclusion conditions or limitations of certain items of
6. Compute the taxable income assuming Panay Corporation was a resident foreig income
D corporation. 10M-8.7M 3. Knowledge of the list of entities exempt under the NI RC and special laws
a. P3,700,000 c. P1,380,000
b. P3,500,000 d. P1,300,000
EXCLUSIONS FROM GROSS INCOME
7. Compute the income tax due in the immediately preceding problem.
A a. P325,000 Exclusions from gross income are income which will not be subject to income tax.
c.P1,149,000
b. P1,110,000 d. P381,000 1.3MX25% They are not included in gross income subject to regular tax. capital gains tax, or
final tax.

8. Compute the total tax if Panay, Inc. was a non-resident foreign corpora@it Under Sec. 32(8) of the NIRC, the following items shall not be included in gross
D Assume that the tax sparing is not applicable to Cavite. income and shall be exempt from taxation:
a. P3,015,000
b. P3,039,000
c. P 3,000,000
d. P 2,532,500 (10M+50K+80K)X25%FIT A. Proceeds of life insurance policy
B. Amount received by the insured as a return of premium
C. Gift, bequest, devise, or descent
'
I
1,:

D. Compensation for injuries or sickness

E. Income exempt under treaty
F. Retirement benefits, pensions, gratuities, etc.
G. Miscellaneous items
1. Income in the Philippines of foreign government or foreign government-
owned and controlled corporations
Z. Income of the government and its political subdivisions
3. Prizes and awards in recognition of religious, charitable, scientific,
educational artistic literary, or civic achievements
4. Prizes and awards in athletic sports competitions
5 cotnutons to sis, sss, Piieatu, Pas-1BG. and """""", poeyay
6. Employer's contributions to Personal Equity Retiremen
7. t ibutions
PERA investment income and PEI RA d.listrl ·

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