Exemptions on Taxable Income of Individual Tax Payer

The following exemptions are allowed by law (R.A. 9504 effective July 6, 2008) to be deducted from net income:

Basic Personal Exemption - per taxpayer :  P50,000.00

Additional Exemption for each qualified dependent child (maximum of 4) :  P25,000.00

When is Business Tax Payable

The Business Tax either the Percentage Tax or Value Added Tax is payable on or before the 20th of the following month.

Income Tax

Definition:

An Income Tax is imposed based on the net income of the business.

A Net Income is determined by deducting the Cost of Sales or Services and Allowable Operating Expenses from Gross Sales or Gross Receipts of the business during a taxable period.


Illustrative Formula:

Gross Sales / Gross Receipts
Less: Cost of Sales / Cost of Services
Equals: Gross Margin or Gross Income
Less: Operating Expenses (Allowable)
Equals: Net Income

Net Income
Multiply by: tax rate
Equals: Income Tax
Less: Quarterly Income Tax Paid
Equals: Income Tax still due and payable

Percentage Tax

Definition:

Percentage Tax is the tax imposed on the gross receipts of non-vat registered business owner and is usually subject to 3% tax rate. 

VAT or Value Added Tax

Definition:

A VAT business transaction is subject to 12% tax rate.

Output VAT vs Input VAT

Output VAT is the 12% tax from the VATable sales or gross receipts of the VAT Registered business owner.

Input VAT  is the 12% tax from the VATable purchases, disbursements or expenses made by the business owner.

The Input VAT is deducted from the Output VAT to get the net VAT payable.

Illustrative Formula:

Output VAT
Less: Input VAT
Equals Net VAT Payable 

Business Taxes

Definition:

It is the tax that are imposed on the gross receipts or sales in the ordinary course of business transactions during a taxable period.


Classification:

1. VAT or Value Added Tax
2. Percentage Tax 

Accounting for Taxes

For Philippine Taxation, Taxes that must be complied with by business owners are classified as follows:

1.  Business Taxes
2. Income Taxes

Tax Accounting and Tax Accountants

Tax Accounting is one of the specialized fields in Accountancy.

It typically involves the preparation of various tax returns and tax planning essential to minimize the effects of taxes on the firm.

Tax Accountants are thus specialists in both tax compliance and tax planning.

For tax compliance and tax planning services, please contact :

Linkage of Tax Laws and Accounting Principles Requirements

Taxation laws are oftentimes in conflict with reporting in accounting. There are temporary and permanent differences between tax reporting and financial reporting which results to discrepancy in the amount of financial accounting income and taxable income.

For example, the gain on life insurance and unrealized gain on trading securities are included in financial accounting reporting but not included in tax reporting because such items are exempt from taxation under tax laws.

Another example, some expenses like allowance provision for uncollectible accounts, product warranty and representation expenses are limited or not allowed in the preparation of income tax returns but are recognized in the preparation of financial statements.

Another important matter to consider is the historical development in 1994, the Committee on Accounting Procedure issued A.R.B. No. 23 stating that the amount of income tax expense for the year shown in the income statement many not be the amount currently payable for income taxes.

Therefore, when preparing ITRs, the tax laws must be observed while when preparing reports for financial accounting purposes, applicable accounting and reporting standards must be applied.

Consequently, preparers of financial reports usually make a reconciliation of tax and accounting reports.