BASICS ON TAXPAYERS ENGAGE IN BUSINESS

The tax formula of taxpayers engage in business shall be:Gross Income XXXXXXXLESS: Allowable Deductions for Business Expenses(OR Optional Standard Deductions) XXXXXXXNet Taxable Income XXXXXXX

For INDIVIDUAL TAXPAYERS, also allowed to be deducted are the following:a. Personal Exemptions (basic and additional);b. Special Deduction (PPHHI)

The rate of Income Tax shall be that coming from the Graduated Income Tax Table with rates from 5% to 32% (the same tax table for CIEs).

For CORPORTE or NON-INDIVIDUAL TAXPAYERS, the rate shall be 30% subject to the rules on Minimum Corporate Income Tax.

OPTIONAL STANDARD DEDUCTION—For INDIVIDUAL TAXPAYERS who are engage in business, in lieu of Costs and Business Expenses, at the option of the taxpayer, it may claim instead a rate of 40% of the Gross Revenue/Receipts. Claiming optional deduction still allows a claim for Personal Exemption and Special Deduction for PPHHI (but no longer for COSTS of sales or services).

For NON-INDIVIDUALS, in lieu of Business Expenses, at the option of the taxpayer, it may claim instead a rate of 40% of Gross Income. (COSTS of Sales or Services are allowed that is why the basis of the 40% is Gross Income).

ITEMIZED DEDUCTIONS of ALLOWABLE DEDUCTIONS FOR BUSINESS EXPENSES—Expenses in general shall be allowed if possessed of the following:

a. Ordinary and necessary to the business of the taxpayer;b. Substantiated by evidence (not necessarily official receipts);c. Subject to the rules as set-forth by existing rules (usually limitations and

technical qualifications);d. Must have been paid or incurred during the taxable year;e. If subject to the rules on withholding (whether final or creditable), the

amount of tax should have been withheld and remitted to the BIR.

The following are Business Expenses which are subject to limitations and special provisions set-forth under existing rules:

1. Salaries and allowances;2. Interest;3. Taxes;4. Losses;5. Bad debts;

6. Representation and entertainment;7. Donations and contributions;8. Pension Trusts;9. Depreciation; 10. Research and development;11. And others as the CIR sees fit and issues Revenue Regulations

GROSS INCOME—It should be noted that the format computation started out with Gross Income and not Gross Revenue/Sales/Receipts. In this regard, it should be pointed out that what is being taxed is indeed only the INCOME taxpayer less allowed deductions all in relation to the business.

However, Gross Income shall be understood to include OTHER TAXABLE INCOME from whatever source. In this sense, Gross Income shall be as follows:

For TRADING CONCERNS: Gross Sales XXXXX Less Returns and Discounts XXXXX Net Sales XXXXX Less Cost of Sales XXXXX Gross Profit XXXXX Add Other Taxable Income XXXXX Gross Income XXXXX

For SERVICE PROVIDERS: Gross Revenue XXXXX Less Discounts XXXXX Net Revenue XXXXX Less Direct Costs of Services XXXXX Gross Profit XXXXX Add Other Taxable Income XXXXX Gross Income XXXXX

For MANUFACTURING CONCERNS: Gross Sales XXXXX Less Returns and Discounts XXXXX Net Sales XXXXX Less Manufacturing Costs XXXXX Gross Profit XXXXX Add Other Taxable Income XXXXX Gross Income XXXXX

Other Taxable Income usually refers to results of transactions other than the normal business activities or even those not related to the business of the taxpayer. The most common would be CAPITAL ASSET TRANSACTIONS that result into capital gains and losses.

As a rule, CAPITAL GAINS (which are not subject to Capital Gains Tax) are taxable income and form part of Gross Income. On the other hand, CAPITAL LOSSES are allowed not as a deduction but as a reduction of CAPITAL GAINS. In other words, CAPITAL LOSSES are allowed only to the extent of CAPITAL GAINS.

There are rules on the recognition of CAPITAL GAINS AND LOSSES depending on the taxpayer whether INDIVIDUALS or NON-INDIVIDUALS (see discussions on these rules).