Income and Business

Taxation
 Learning Objectives
1. define income and business taxation, its principles and
purposes;
2. distinguish individual from business taxation
3. list sources of gross income and personal and additional
deductions;
4. explain the procedure in the computation of taxable
income and tax due;
5. compute tax due; and
6. prepare BIR forms for individual income tax.
taxation
is the inherent power of the state to demand
contributions for public purpose or purposes.

taxes
are the enforced proportional contributions from
persons and property levied by the lawmaking body of
the state by virtue of its sovereignty for the support of
the government and all public needs.
 Importance of taxes
It is important to pay the right amount of taxes at the right
time. The government needs taxes to finance its functions.
Tax consciousness should be a major concern of every
business person. Even when accountants are available for
consultation, it is important that a taxpayer knows the
basics of taxation.
The following are the essential characteristics of taxes:
1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportional in character.
4. It is levied on persons or property.
5. It is levied by the state that has jurisdiction over the person or
property.
6. It is levied by the lawmaking body of the ștate.
7. It is levied for public purpose or purposes.
8. It is commonly required to be paid at regular periods or intervals.
 Local and national taxes
License and Permit Fees
Taxes are different from licenses or permit fees. The license fee or permit
fee and the mayor's permit have the same functions. These are the
following:
1. It is a legal compensation or reward of an officer for specific services.
2. It is imposed for regulation.
3. It involves police power.
4. It is limited to the necessary expenses of inspection and regulation.
5. It is imposed on the right to exercise a privilege.
 Local and national taxes
Local Taxes
The local governments impose these taxes. They may
impose penalties like auction or sale of real property with
delinquent real estate tax. Often, we would read multipage
newspaper advertisement for auction of tax-delinquent
real estate property. Some local governments offer
discounts for advance payment of real estate tax.
 Local and national taxes
National Internal Revenue Taxes
The following are national internal revenue taxes that individuals
and non-individual taxpayers have to pay:
1. Income tax
2. Value-added tax (VAT)
3. Percentage taxes
4. Other taxes that may be imposed by law and collected by the
Bureau of Internal Revenue (BIR)
 Local and national taxes
Other National Internal Revenue Taxes
1. Estate tax
The estate pays the estate tax and the estate is a separate and distinct
taxpayer. The term person means individual, trust, estate or corporation.
2. Donor's tax
The donor pays the tax and it arises only if the taxpayer makes a
donation.

3. Excise tax
This is paid by the taxpaver if the transaction involves excisable articles
(manufacturing or production of alcohol, cigarettes, and the like).
 Local and national taxes
Other National Internal Revenue Taxes
4. Documentary stamp tax
This is payable only on certain transactions or documents.
Periodic tax filing and/or payment requirements on businesses include
the following:
a. Quarterly income tax
b. Annual income tax
c. Monthly value-added tax
 Local and national taxes
Other National Internal Revenue Taxes
d. Quarterly value-added tax
e. Monthly withholding tax
f. Annual information return for income payments not subjected to
withholding tax
i. Alphalist of payees
ii. Alphalist of employees
ii. Alphalist of those not subjected to withholding taxes
 General professional partnerships

are partnerships formed by persons for the sole purpose of

exercising their common profession. No part of the income
is derived from engaging in any trade or business.
A general professional partnership (GPP) as such shall not
be subjected to income tax. A GPP deemed as corporation
is taxed like a corporation.
 Taxable Income
The National Internal Revenue Code provides the following:
Sec. 31 Taxable Income Defined. The term taxable income
refers to the pertinent items of gross income specified in this
Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this
Code or other special laws.
 Taxable Income
Sec. 32 Gross Income. Except when otherwise provided in this Title,
gross income refers to all income derived from whatever source,
including (but not limited to) the following items:
1. compensation for services in whatever form paid, including, but
not limited to fees, salaries, wages, commissions, and similar items
2. gross income derived from the conduct of trade, business, or the
exercise of a profession
3. gains derived from dealings in property
4. interest
5. rents

Fundamentals of Accounting 2 Chapter 6: INCOME AND BUSINESS

 Taxable Income
6. royalties
7. dividends
8. annuities
9. prizes and winnings
10. pensions
11. partner's distributive share from the net income of the
general professional partnership

Fundamentals of Accounting 2 Chapter 6: INCOME AND BUSINESS

Input tax
means the value-added tax due from or paid by a VAT-registered
person in the course of his trade or business on importation of goods
or local purchase of goods or service, including lease or use of
property, from a VAT-registered person.

Output Tax
means the value-added tax due on the sale or lease of taxable goods
or properties or services by any VAT-registered entity.
 Excess Output Tax or Excess Input Tax

If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input
tax exceeds the output tax, the taxpayer has three options:
1. Carry over the excess to the succeeding period.
2. Obtain a refund.
3. Apply for a tax credit certificate (assuming all input taxes are
creditable to the output tax).
 Value-Added Tax (VAT) Worksheet

One major accounting task in the accounting for business taxes is the
accumulation of VAT on sales (output tax) and the VAT on purchases
(input tax). The VAT columnar book accumulates the input tax on
purchases of goods or services from VAT registered sellers. The goods
and services may include the following:
Office Supplies
Insurance
Restaurant bills
Cable bills
Rent
Meralco
Water bills
Cell phone bills
Gasoline
Whenever a bill is received and paid, make sure the pertinent
information is recorded, so that at end of month, all VAT (billed and/or
paid for), is added together. The total VAT less input VAT is the VAT
payable.
Percentage taxes are taxes measured in percentage of gross-selling
price or gross value in money goods sold, bartered, exchanged in the
sale of services. Percentage taxes are privileged taxes. Percentage
taxes and value-added tax are imposed on the privilege to sell
commodities or services. Certain non-vatable sales or receipts are
subject to the 3% percentage tax. Assume that the gross sales receipts
of Dr. Manuel Santos is P100,000. The percentage tax at 3% is P3,000.
Electronic Filing and Payment System (EFPS) is a system of
enrolment where a taxpayer files electronically and the bank pays
for the tax by simply debiting the cash deposits of the depositor.
Non-EFPS are manual filers
 BIR Registrations and Permits
1. Tax Identification Number (TIN) is a registration requirement.
2. Evidences of income of businesses and professionals are to be
registered with the BIR. These are the official receipts and sales
invoices. If the taxpayer is engaged in the sale of goods, he/she is
to issue sales invoice. If he/she is engaged in sale of service, he/she
issues official receipts.
3. Books of accounts, journals, and ledgers are to be stamped by BIR
prior to use and kept for a period of time as required by BIR.