Income Tax Flashcards
Income Tax
a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits and the like
______ tax on actual or presumed income (gross or net) of taxpayers
a direct
purpose of income tax
- to provide large amounts of revenue to the government
- to offset regressive sales & consumption taxes
- To mitigate the evils arising from the inequality in the distribution of income & wealth which are considered deterrents to social progress, by a progressive scheme of taxation
Global Tax System
a tax system that generally treats all categories of taxable income of a taxpayer as the same
different sources of income
wages, business income, investments, capital gain, bank desposits
Schedular Tax System
income tax treatment varies and is made to depend on the kind or category of the taxable income of the taxpayer
semi-schedular tax system
All compensation income, business or professional income, capital gains, passive income, and other income NOT SUBJECT to final taces are grouped together to arrive at a gross income
Most incomes, like salaries, business income, capital gains, and passive income, are aggregated to determine gross income. Allowable deductions are subtracted to determine taxable income taxed at graduated rates.
Which tax system is used in the Philippines?
The semi-schedular system aims to balance flexibility for most taxpayers with more tailored schedules for specific income types
What are the broad classification of income for income tax purposes?
Compensation Income
Business Income/Income from practice of profession
Capital Gains
Passive Income
Compensation Income
Earnings from an employer-employee relationship, including salaries, fees commissions, taxable bonuses and allowances
Business income/Income from practice of Profession
income derived from manufacturing, merchandising, services other than professional services, and other forms of trade not excluded or exempt from income tax
Passive Income
Earnings from sources in which the taxpayer is NOT ACTIVELY INVOLVED
the taxpayer merely waits for the amount to come in
Examples of Passive Income
- profits from the sale of real properties or shares of stock
- interest earned on bank deposits
- interest and dividends earned on investments
- Annuities (income streams for retirees)
- Pensions
- Rents
- Royalties
- Prizes and winnings
Features of Philippine Income Tax
- Direct Tax
- Progressive
- Comprehensive (covers all kinds of income)
- Semi-schedular
Requisites for the taxability of income
- There is income, gain, or profit (Existence of Income Test)
- The income, gain, or profit is ACTUALLY received, accrued, or realized during the taxable year
- The income, gain, or profit is NOT EXEMPT from income tax
What is the one exception to the taxability of income?
Sale of real property located in the Philippines. classified as a CAPITAL ASSET, subject to a 6% CAPITAL GAINS TAX based on the selling price or FMV of the real property, whichever is higher
Items that are NOT taxable income
- Capital
- Condonation of debt
- Security Deposits
- Advance payments
- income held in trust for another
- Unrealized gain
Criteria for imposing income tax on individuals
- Citizenship or nationality Principle
- Residence or Domicile Principle
- Source Principle
Citizenship/Nationality Principle
A citizen of the Philippines is subject to income tax on his income within and outside the Philippines if he resides within AND only income within the Philippines if he is a NON-RESIDENT
Residence or Domicile Principle
A resident alien is liable to pay Philippine Income Tax on his income from sources within the Philippines
Source Principle
A non-resident alien is subject to Philippine income tax because he derives income from sources WITHIN the Philippines (even if he has not set foot in the Philippines)
Classification of individual taxpayers
- Resident Citizen
- Non-resident citizen
- Resident alien
- Non-resident Alien
NRA not actually engaged in trade or business can be
CAN BE classified as engaged in trade or business if they have stayed in the Philippines for more than 180 days computed in an aggregate basis.
What is the significance of the distinction of NRA ETB?
NRA ETB are subject to the SCHEDULAR RATE while NRA NETB are taxed using the final tax rate of 25% on their gross income
Requisites for taxability for services
- Personal services actually rendered
- Payment is for such services rendered
- Payment is reasonable
- Not excluded by law
How about the taxability of the payment for the services of an independent contractor?
Payment to an independent contractor for their services is considered gross business/professional not, NOT compensation income
Are deductions allowed in arriving at taxable income for compensation income?
No. Deductions are not allowed for compensation income because wages reported on a W-2 form are considered fully taxable with no deductions permitted in determining tax liability.
This is to account for payroll taxes already withheld on the full wage amount.
Professional Income
Fees received by a professional from the practice of his profession, provided there is no employer-employee relationship between them and their clients (independent contractor)
Capital Gains
Gains arising from the exchange of capital assets (land, home, not used for business)
Kinds of allowable deductions from GROSS income
- Charitable and other contributions
- Research and development
- Ordinary and necessary expenses
- Depreciation
- Depletion
- Bad Debts
- Interest Expense
- Taxes
- Losses
- Salaries and wages
- Representation expense
What is an Optional Standard Deduction?
A fix percentage of deduction which is allowed to certain taxpayers without regard to any expenditure in lieu of itemized deductions.
What is the fixed percentage of deduction for OSD
40% of the gross sales or receipts (for a qualified individual) or 40% of the gross income of a qualified corporation
What are the advantages of OSD?
OSD requires no proof of expense incurred because the allowable deduction is a percentage not exceeding 40%
What are exclusions from Gross income?
Income received or earned but not treated as part of gross income for purposes of computing the taxpayers taxable income due to the following reasons:
- Expressly exempted by the law or constitution
- subject to another internal revenue tax (Real Property Tax)
- It does not qualify as income
Examples of what does not qualify as income
- Gifts
- Life insurance proceeds
- Amount received by the insured as return of premium
- Retirement benefits, pensions, and gratuities
- Income exempt under treaty
- Compensation for injury or sickness
- 13th month pay
- GSIS, SSS, and Philhealth contribution
- Prizes and awards
Income Tax Computation using itemized deductions
Gross Sales/Receipts
LESS: Sales Returns/Discounts
= Net Sales
LESS: COGS
= Gross Profit/Income
LESS: Opex
= Net Income before Tax (Basis for RCIT/Taxable Income)
LESS: Income Tax
=Net income AFter Tax
Income Tax Computation using OSD for Individual
Gross Sales/Receipts
LESS: 40% of Gross Sales/Gross Receipts
=Taxable Income
Income Tax Computing using OSD for Corporation
Gross Sales/Receipts
LESS: 40% of Gross Income (Net Sales/COGS)
=Taxable Income
