Income Tax

Question 1

Income Tax

Answer 1

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

Question 2

______ tax on actual or presumed income (gross or net) of taxpayers

Answer 2

a direct

Question 3

purpose of income tax

Answer 3

1. to provide large amounts of revenue to the government
2. to offset regressive sales & consumption taxes
3. 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

Question 4

Global Tax System

Answer 4

a tax system that generally treats all categories of taxable income of a taxpayer as the same

Question 5

different sources of income

Answer 5

wages, business income, investments, capital gain, bank desposits

Question 6

Schedular Tax System

Answer 6

income tax treatment varies and is made to depend on the kind or category of the taxable income of the taxpayer

Question 7

semi-schedular tax system

Answer 7

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.

Question 8

Which tax system is used in the Philippines?

Answer 8

The semi-schedular system aims to balance flexibility for most taxpayers with more tailored schedules for specific income types

Question 9

What are the broad classification of income for income tax purposes?

Answer 9

Compensation Income
Business Income/Income from practice of profession
Capital Gains
Passive Income

Question 10

Compensation Income

Answer 10

Earnings from an employer-employee relationship, including salaries, fees commissions, taxable bonuses and allowances

Question 11

Business income/Income from practice of Profession

Answer 11

income derived from manufacturing, merchandising, services other than professional services, and other forms of trade not excluded or exempt from income tax

Question 12

Passive Income

Answer 12

Earnings from sources in which the taxpayer is NOT ACTIVELY INVOLVED

the taxpayer merely waits for the amount to come in

Question 13

Examples of Passive Income

Answer 13

1. profits from the sale of real properties or shares of stock
2. interest earned on bank deposits
3. interest and dividends earned on investments
4. Annuities (income streams for retirees)
5. Pensions
6. Rents
7. Royalties
8. Prizes and winnings

Question 14

Features of Philippine Income Tax

Answer 14

1. Direct Tax
2. Progressive
3. Comprehensive (covers all kinds of income)
4. Semi-schedular

Question 15

Requisites for the taxability of income

Answer 15

1. There is income, gain, or profit (Existence of Income Test)
2. The income, gain, or profit is ACTUALLY received, accrued, or realized during the taxable year
3. The income, gain, or profit is NOT EXEMPT from income tax

Question 16

What is the one exception to the taxability of income?

Answer 16

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

Question 17

Items that are NOT taxable income

Answer 17

1. Capital
2. Condonation of debt
3. Security Deposits
4. Advance payments
5. income held in trust for another
6. Unrealized gain

Question 18

Criteria for imposing income tax on individuals

Answer 18

1. Citizenship or nationality Principle
2. Residence or Domicile Principle
3. Source Principle

Question 19

Citizenship/Nationality Principle

Answer 19

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

Question 20

Residence or Domicile Principle

Answer 20

A resident alien is liable to pay Philippine Income Tax on his income from sources within the Philippines

Question 21

Source Principle

Answer 21

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)

Question 22

Classification of individual taxpayers

Answer 22

1. Resident Citizen
2. Non-resident citizen
3. Resident alien
4. Non-resident Alien

Question 23

NRA not actually engaged in trade or business can be

Answer 23

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.

Question 24

What is the significance of the distinction of NRA ETB?

Answer 24

NRA ETB are subject to the SCHEDULAR RATE while NRA NETB are taxed using the final tax rate of 25% on their gross income

Question 25

Requisites for taxability for services

Answer 25

1. Personal services actually rendered 2. Payment is for such services rendered 3. Payment is reasonable 4. Not excluded by law

Question 26

How about the taxability of the payment for the services of an independent contractor?

Answer 26

Payment to an independent contractor for their services is considered gross business/professional not, NOT compensation income

Question 27

Are deductions allowed in arriving at taxable income for compensation income?

Answer 27

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.

Question 28

Professional Income

Answer 28

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)

Question 29

Capital Gains

Answer 29

Gains arising from the exchange of capital assets (land, home, not used for business)

Question 30

Kinds of allowable deductions from GROSS income

Answer 30

1. Charitable and other contributions 2. Research and development 3. Ordinary and necessary expenses 4. Depreciation 5. Depletion 6. Bad Debts 7. Interest Expense 8. Taxes 9. Losses 10. Salaries and wages 11. Representation expense

Question 31

What is an Optional Standard Deduction?

Answer 31

A fix percentage of deduction which is allowed to certain taxpayers without regard to any expenditure in lieu of itemized deductions.

Question 32

What is the fixed percentage of deduction for OSD

Answer 32

40% of the gross sales or receipts (for a qualified individual) or 40% of the gross income of a qualified corporation

Question 33

What are the advantages of OSD?

Answer 33

OSD requires no proof of expense incurred because the allowable deduction is a percentage not exceeding 40%

Question 34

What are exclusions from Gross income?

Answer 34

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: 1. Expressly exempted by the law or constitution 2. subject to another internal revenue tax (Real Property Tax) 3. It does not qualify as income

Question 35

Examples of what does not qualify as income

Answer 35

1. Gifts 2. Life insurance proceeds 3. Amount received by the insured as return of premium 4. Retirement benefits, pensions, and gratuities 5. Income exempt under treaty 6. Compensation for injury or sickness 7. 13th month pay 8. GSIS, SSS, and Philhealth contribution 9. Prizes and awards

Question 36

Income Tax Computation using itemized deductions

Answer 36

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

Question 37

Income Tax Computation using OSD for Individual

Answer 37

Gross Sales/Receipts LESS: 40% of Gross Sales/Gross Receipts =Taxable Income

Question 38

Income Tax Computing using OSD for Corporation

Answer 38

Gross Sales/Receipts LESS: 40% of Gross Income (Net Sales/COGS) =Taxable Income