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How to Compute the Income Tax Due under the TRAIN Law?

With the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Law, personal income taxation has never been the same as before. The personal income tax of self-employed individuals or those engaged in business and/or those in the practice of their professions are those that are highly affected by the passage of the TRAIN Law early in January of 2018.

The TRAIN Law or Republic Act No. 10693 (RA 10963) amends certain provisions of Republic Act No. 8424  (RA 8424  or The National Internal Revenue Code of 1997, as amended). The TRAIN Law is the first package of the tax reform efforts of the government. The second package is the amendment of the corporate income tax law and the rationalization of fiscal incentives which is now the proposed Trabaho Bill. However, this is still in the process of deliberations in Congress and the Senate. The government is currently working on the tax reforms which are to be passed in tranches or packages. So, we will be expecting to hear another package of the tax reforms in the upcoming months.

The TRAIN Law was signed into law on December 19, 2017 by President Rodrigo Roa Duterte which took effect on January 1, 2018 following its publication in the Official Gazette last December 27, 2017.

There are about nine (9) key amendments on the TRAIN Law that affects the following issues and tax types:
1.) Individual Income Tax
2.) Final Income Tax
3.) Estate Tax
4.) Donor’s Tax
5.) Value Added Tax
6.) Documentary Stamp Tax
7.) Some administrative provisions
8.) Penalties
9.) Excise Tax on:
- Automobiles
- Petroleum products
- Sweetened beverages
- Mineral products
- Cosmetic procedures (non-essential services)
The goal of the first package of the tax reform or the TRAIN Law is to create a simpler, fair, and more efficient system, where the rich will have a bigger contribution and the poor will benefit more from the government’s programs and services.


One of the goal of the TRAIN Law is the lowering of the personal income tax. As a result, the bracket for the graduated income tax rates were amended in two schedules: the first one effective January 1, 2018 up to December 31, 2022, and the other one  effective January 1, 2023 onwards.


The rate for the first P250,000.00 of the taxable income is 0%. This is not an "exempt" rate. This means that taxpayers whose taxable income is P250,000.00 and below are still required to file income tax returns without payment of tax due. Filing of tax return is necessary as this is the reporting of the taxable results of the business operation to the BIR. The income tax rates in excess of the P250,000.00 were deliberately reduced starting the year 2013 (see above table). It is quite to note that the personal and additional exemptions under the old NIRC are removed.

Under the TRAIN Law, purely self-employed  and/or professionals whose gross sales or receipts and other non-operational income during the year do not exceed the new VAT threshold of P3,000,000.00 has the option to choose between two income tax rates in the computation of their income tax dues:

1.) 8% income tax on gross sales or gross receipts in excess of P250,000.00 in lieu of the graduated income tax rates (as above) and the other percentage tax; or

2.) Income tax based on the graduated income tax rates for individuals (as above)

For individuals earning purely compensation income, the income tax due is based solely on the graduated income tax rates for individuals.

For mixed income earners (earning both compensation income and income from business or practice of profession) their income taxes shall be:

1.) For income from compensation – tax due from compensation income shall be based solely on graduated income tax rates for individuals, and

2.) For income from business or practice of profession:
 **** If gross sales/receipts do not exceed the VAT threshold of P3,000,000.00 – option to choose between (a) 8% income tax on gross sales/receipts and other non-operating income, or (b) graduated income tax rates for individuals on taxable income

**** If gross sales/receipts and other non-operating income exceeds the VAT threshold of P3,000,000.00 – solely graduated income tax rates for individuals

Let's have some illustrations to make things clear:

ILLUSTRATION A. Jimmy operates a small convenience store while having practiced as a bookkeeper offering accounting services to his clients. In 2018, his gross receipts from his store amounted to P650,000.00 while earning P450,000.00 from his accounting services. He opted to be taxed at 8% income tax rate in his initial income tax return.  Compute the income tax due.

Analysis: Jimmy is a self-employed individual earning purely from business. Under the TRAIN Law, he has the option to be taxed under the 8% income tax rate or the graduated tax rates. He opted the 8% income tax rate. Furthermore, his gross receipts for the year did not exceed the P3,000,000.00 VAT threshold.

Solution:

(1) Income Tax Due:
Gross Sales from Convenience Store
Gross Sales from Accounting Services
Gross Sales/Receipts
Less: Amount allowed as deduction
Taxable Income 

Income Tax Due: 8% of P850,000.00
P650,000.00
450,000.00
1,100,000.00
(250,000.00)
P850,000.00

P68,000.00

(2) Percentage Tax Due:
Percentage Tax Due = P0.00

Jimmy is not liable for any percentage tax because he opted the 8% income tax rate.


ILLUSTRATION B. Mikko is an accountant of a private company and earns P550,000.0 in 2018. At the same time, he has registered a business under his name that earns him P250,000.00 in 2018. He opted to be taxed at 8% income tax rate for his business. Compute the income tax due.

Analysis: Mikko is a mixed income earner. He earns compensation income and at the same income from business. Under the TRAIN Law, the tax due on compensation income is computed using the graduated income tax rate. While the tax due on income from business is computed using the 8% income tax rate because he opted to do so.

Solution:

(1) Income Tax Due:

On income from compensation:
 Total taxable compensation income  - P550,000.00
  Income tax due (based on the table):
 ----- On P400,000.00  -  P30,000.00
 ----- On P150,000.00 x 20% = P30,000.00
 ----- Total income tax due on compensation = P30,000.00 + 30,000.00 = P60,000.00

On income from business:
 Total business income - P250,000.00
 Less: Amount allowed as deduction - P0.00 (cannot claim the P250,000.00 deduction because it was already applied in the taxable compensation income under the graduated income tax rate)
 Total taxable business income - P250,000.00
 Income tax due (8%):
 ----- P250,000.00 x 8% =  P20,000.00

Therefore, Mikko's total income tax due  in 2018 is the sum of tax due from compensation and tax due from business income that would amount to P80,000.00 in total.

(2) Percentage Tax Due:
Percentage Tax Due = P0.00

Mikko is not liable for any percentage tax on his business income because he opted the 8% income tax rate.


ILLUSTRATION C. Shirley is a sales clerk in a certain mall. She earns P210,000.00 in 2018. Compute the income tax due.

Analysis: Shirley is earning purely compensation income. Therefore, under the TRAIN Law, her income tax is computed using the graduated income tax rate without any option whatsoever.

Solution:

(1) Income Tax Due:
 Using the graduated income tax table, the income tax rate for P210,000.00 is 0%. Therefore, Shirley's income tax due for 2018 is P0.00. She is still required to file the income tax return.

(2) Percentage Tax Due:
No percentage tax is required for Shirley's income because percentage tax is a business tax and is not imposed on income from compensation.


ILLUSTRATION D. Marco started a shoe business last year. At the end 2018, he earned a taxable income of P350,000.00 in total. He did not opted the 8% income tax rate. Compute the taxes due.

Analysis: Marco is earning purely from business, so he has the option to choose between the 8% and the graduated income tax rates. However, he failed to signify his option. Therefore, his income tax due is computed based on the graduated income tax rates by default.

Solution:

(1) Income Tax Due:
Using the graduated income tax table, the income tax rate for the first P250,000.00 is 0%. The excess is subject to 20% income tax rate. Therefore, Marco's income tax due is P20,000.00 or (P350,000.00 - 250,000.00) x 20%.

(2) Percentage Tax Due:
Marco is now subject to the 3% percentage tax on his gross receipts. The illustration above assumes that Marco did not incur any operating expenses and the gross receipts amounted to P350,000.00. Therefore the percentage tax due is P10,500.00 or (P350,000.00 x 3%).

In the illustration above, the total tax due to be paid by Marco is the sum of the income tax and percentage tax due amounting to P30,500.00 in total.


Additional information:

The deadlines for the filing and payment of the income tax due are the following:

First Quarter (BIR Form 1701Q) - May 15 within the taxable year
Second Quarter (BIR Form 1701Q) - August 15 within the taxable year
Third Quarter (BIR Form 1701Q) - November 15 within the taxable year
Annual Income Tax Return (BIR Form 1701/A) - April 15 following the close of the taxable year

The new deadline of payment of second installment is October 15 following the close of the taxable year. For more information, please visit the BIR website: www.bir.gov.ph

Disclaimer : Opinions expressed in this article are that of the author and information provided are for general conceptual guidance for public information only and are not substitute for advice from qualified professional or an expert opinion. Contact support@cpadavao.com for more information and/or if you want to avail professional services from a qualified professional. This site accepts and publishes contributions from accountants and business professionals, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general. Please email your articles to publisher@cpadavao.com together with your bio and affiliations for publication in this website.


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About Vincent Perdiguez

The above article was shared by Vincent on this website. He is currently working as a government employee. He is an accountant by profession and his field of interest is audit and taxation. He is writing about business and he loves sharing his knowledge. He is also a practicing Christian and loves to talk about the Bible. He is an active promoter of the 1611 King James Bible. You can reach him through email at cpadavao@gmail.com or through mobile number +63-916-276-4585. You can also post your comments or suggestions about the subject below. Thank you for subscribing to us!
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