Ch. 7 Intro to Regular Income Tax Flashcards
What are the characteristics of Regular Income Tax?
- General in Coverage
- A net income tax
- An annual tax
- Creditable Withholding Tax
- Progressive or Proportional Tax
Describe what general in coverage mean?
The regular income tax applies to all items of taxable income excepts those that are subject to final tax, capital gains tax, and special tax regimes.
Explain Net Income Taxation
The regular tax is an imposition on residual profits or gains after deduction for expenses of business or practice of profession
Explain annual income tax of RIT
The regular income tax applies on yearly profits or gains. The gross income and expenses of the taxpayer are measured using the accounting methods adopted by the taxpayer and are reported to the government over the accounting period selected by the taxpayer.
Explain creditable withholding taxes of RIT
Most items of regular income are subject to creditable withholding tax (CWT). These creditable withholding taxes are advanced taxes that must be deducted against regular tax due in computing the tax still dur to the government.
Explain progressive or proportional taxation of RIT
The NIRC imposes a progressive tax on the taxable income of individuals while imposes a flat or proportional tax of 25% upon the taxable income of corporation.
Constitutes all items of income that are neither excluded in gross income nor subjected to final tax or capital gains tax.
Gross income
These pertain to items of income that are excluded; hence, exempt from regular income tax.
Exclusions from gross income
Differentiate excluded income to exempt income
Excluded income is also exempt income. Excluded income are those listed by the NIRC as exempt income from regular tax. The term exempt income includes all income exempt from income tax whether final tax, capital gains tax or regular income tax.
Exclusions from gross income are listed by the? While exemption from income may be provided by?
Exclusions are listed in the NIRC: Exemptions may be provided by the NIRC or special laws
Explain allowable deductions
Allowable deductions or simply deductions are expenses of the conduct of business or exercise of profession. They are commonly known as business expenses.
The taxable income of individual taxpayers is computed using the
Classification and Globalization Rule
Explain Classification Rule
Gross Income is first classified into:
a. Compensation income
b. Business or professional income
Differentiate compensation and business income
Compensation income arises from an employer-employee relationship. This relationship is characterized by a power to retrench giving the purchaser of the service to terminate the agreement when he is losing in business. Business income arises from selling of goods or rendering of services for a profit. In service arrangements where the purchaser of the service has no power to retrench the income realized thereon is a business income.
Explain 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.
What is the treatment for other income?
Other income which is neither compensation nor business or professional income is simply added to the 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 as “other income”
Explain the globalization rule for mixed income earner?
The income of mixed income earner from both sources is simply globalized or totaled. A negative net income or net loss when deductions exceed gross income from business or professional shall not be offset against taxable compensation income because deductions are expenses of business or profession and are properly deductible inly against gross income thereto, whereas no expense is deductible against taxable compensation income.
Taxpayers using GAAP (cash/accrual) basis on a (calendar/fiscal) year shall compute taxable income using?
Tax (cash/accrual) basis on (calendar/fiscal) year, basically the same as what is used on the GAAP
Enumerate non-operating income
Non-operating income includes all other items of gross income such as:
1. Gains from dealings in properties
2. Income distribution from a general professional partnership, taxable trust or estate, or from an exempt joint venture
3. Casual active income
4. Passive income not subject to final tax
What are the types of regular income tax
- Individual income tax
- Corporate income tax
Explain Individual Income Tax
The individual income tax or progressive income tax is determined by reference to a tax table of progressive tax rates
What is the scope of the progressive tax?
The progressive tax covers all individuals including taxable estates and trusts except NRA-NETB which is subject to 25% final tax on gross income
Explain the Optional 8% Income Tax
The TRAIN law introduced an optional income tax for self-employed and/or professionals (SEP) wherein they can opt to be taxed at 8% of their sales or receipt and other non-operating income
The 8% income tax shall be in lieu of the
a. Progressive income tax, computed under individual tax table and;
b. 3% percentage business tax on sales or receipts
The 8% income tax is a form of
bundled tax which enables one-time compliance for two taxes which would otherwise require separate filing and payments
Explain the Corporate Income Tax
The corporate income tax, commonly refereed to as the regular corporate income tax (RCIT), is generally a proportional or flat tax at a rate of 25% on taxable income for domestic or foreign corporation
When is the 20% lower proportional tax for corporations apply?
A lower 20% proportional tax on taxable income is imposed on domestic micro-, small-, and medium-sized enterprises (MSMEs) with not more than P100 million assets, excluding land, and not more than P5 million taxable income
The RCIT applies to any corporation other than those:
- Subject to final tax such as NRFCs and FCDU interest income not subjected to final tax
- Special corporations or those subject to preferential (i.e. lower) tax rates or special regimes
- Exempt corporations
The Minimum Corporate Income Tax (MCIT)
Corporate taxpayers are normally subject to a minimum tax, computed as 2% of total gross income subject to regular tax. This minimum tax is temporarily reduced to 1% this pandemic from July 1, 2020 to June 30, 2023. Even if corporations are losing in business, they are subject to the minimum tax.
Explain tax on special corporations
Special corporations are those enjoying lower tax rates but not 0%, such as private schools, non-profit hospitals and PEZA or TIEZA-registered enterprises.
Explain tax on exempt corporations
Exempt corporations are those enjoying 0% tax rate with no tax dues such as government agencies, non-profit organization with no taxable income, cooperatives, and those registered with the Board of Investments (BOI) enjoying tax holiday or ITH
Form 1700 is submitted by
Purely employed taxpayer
Form 1701A is submitted by
Purely in business or profession using OSD or opting to the 8% optional income tax
Form 1701 is submitted by
Mixed income earners, estates and trusts
Form 1702-RT is submitted by
Corporations subject only to the 25% RIT
Form 1702-MX is submitted by
Corporations subject to a special rate or a combination of tax rates
Form 1702-EX is submitted by
Exempt corporations with no tax due
Do exempt corporations need to submit income tax returns?
Yes, exempt corporations are required to report their results of operations through BIR Form 1702-EX even if they do not have taxable income. They are mandated to itemize their deductions in their income tax return. The rule is apparently intended to assist the BIR in monitoring compliance of exempt corporations with their withholding tax obligations and to provide for a mechanism to identify income earned by third parties
Exempt corporations with gross income subject to the regular corporate income tax or special rate shall file?
BIR Form 1702-MX
Deadline of filing the income tax return
The annual income tax return is due for filing on the 15th day of the fourth month following the taxable year of the taxpayer. The income tax due shall be paid upon filing
Rounding rules in the income tax returns
The requirement for entering centavos in the latest version of the income tax return (June 2013 version) has been eliminated. If the amount of centavos is 49 or less, the centavos dropped down. If the amount is 50 centavos or more, it is rounded up to the next peso
Who are required to file three quarterly returns aside from the annual consolidated income tax return?
Corporations and individuals engaged in business and those engaged in profession are required to file three quarterly returns aside from the annual consolidated income tax return
Who will submit QITR using BIR Form 1701Q?
Individual taxpayers engaged in business or practice of profession
Who will submit QITR using BIR Form 1702Q?
Corporations
Taxpayers make estimated quarterly tax payments. These quarterly tax payments are claimed as?
Tax credit (deductions) to the annual consolidated income tax due of the taxpayer
Determination of Tax due under interim change in corporate tax rate
Under section 27 of the NIRC, as amended, the taxable income of corporations adopting the fiscal year accounting period shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period. This is the pro-rata method.
How is tax due determined under interim change in corporate tax rate when a company uses a calendar year
The NIRC did not specify a method. In practice, however, the BIR has been consistent in using the pro-rata method in implementing corporate tax rate transitions for any corporate taxpayer without regard as to whether they are reporting under a calendar or a fiscal accounting period
When is the deadline of filing of QITR for 1st QTR for individuals?
May 15, same year (45 days)
When is the deadline of filing of QITR for 2nd QTR for individuals?
August 15, same year (45 days)
When is the deadline of filing of QITR for 3rd QTR for individuals?
November 15, same year (45 days)
When is the deadline of filing of QITR for corporations
60 days after the end of that quarter
Employees shall not be required to file an annual income tax return if:
- They are receiving pure compensation from a single employer
- They have no other taxable income from other sources
- The employer correctly withheld the tax on compensation income
