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THE 8% INCOME TAX OPTIONThe TRAIN LAW introduced a new tax scheme for individual taxpayers – the 8% optional income tax. The option to be t6axed at 8% must be indicated in the first quarter income tax return or in the first quarter percentage tax return. When made, the option shall be irrevocable fo...

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THE 8% INCOME TAX OPTION The TRAIN LAW introduced a new tax scheme for individual taxpayers – the 8% optional income tax. The option to be t6axed at 8% must be indicated in the first quarter income tax return or in the first quarter percentage tax return. When made, the option shall be irrevocable for the calendar year. Nature: 1. A bundled tax – it is in lieu of: a. Regular income tax, determined through the income tax table b. 3% general percentage tax 2. An annual option It is valid for so long as the taxpayer remained as a non-VAT taxpayer during the year. It will be invalidated in favor of the regular income tax once the taxpayer becomes a VAT taxpayer during the year. 3. Paid quarterly and annually Scope: a. Pure business or professional income earners b. Mixed income earners Business Tax: A Basic Overview Aside from income tax, individuals engaged in business or exercise of a profession are also required to pay a business tax which is either a 3% percentage tax or a 12% VAT. Covered businesses: Only vatable businesses who are below the P 3,000,000 annual VAT threshold and did not register as VAT taxpayer can opt to be taxed under the 8% income tax. Thus, the option is not available to: 1. VAT-registered business taxpayers 2. VAT-exempt business taxpayers such as: a. Exempt businesses b. Businesses specifically subject to other percentage taxes 3. Individuals receiving income not subject to business tax, such as: a. Partners receiving share in net income of a general professional partnership b. Co-owners receiving share of income in co-owned properties c. Venturers receiving share in net income of an exempt joint venture d. Heirs or beneficiaries of trust receiving income distribution from estates or trusts Tax basis: The 8% optional income tax shall be based upon the gross sales or gross receipt of the individual taxpayer that is subject to 3% percentage tax. Other income subject to regular tax are added to the basis. Pure business or professional income earner The use of the 8% income tax option would effectively deny the individual taxpayer of his P 250,000 annual income tax exemption, the same being embedded in the regular tax table. Due to this, the 8% income tax shall be computed from the basis net of P 250,000.

Illustration Assume a taxpayer who is purely engaged in business had sales of P 2,000,000. P 100,000 other income subject to regular tax and expenses of P 840,000. The 8% income tax option would be computed as: Gross sales or gross receipts Add: Other taxable income subject to regular tax Total Less: Annual exempt income Net total Multiply by: Optional income tax rate 8% income tax

P 2,000,000 100,000 P 2,100,000 (250,000) P 1,850,000 8% P 148,000

Mixed income earner Compensation income is not subject to business tax. Hence, it cannot be subjected to the 8% income tax. Due to this, the income tax due from compensation shall be separately determined using the income tax table while the 8% income tax form the business or profession shall be separately computed. Since the use of the income tax table in computing the tax due from compensation effectively allowed the taxpayer claim of P 250,000 annual income exemption as embedded in the tax table, there will be no more P 250,000 deduction allowable against the basis of the 8% income tax. Furthermore, if the amount of compensation income does not exceed P 250,000, the unutilized deduction cannot be deducted against business income since the TRAIN law did not contemplate a deduction cross-over. Illustration 1 A mixed income earner realized P 920,000 from compensation, P 2,000,000 in sales, P 100,000 other income subject to regular tax and incurred P 480,000 in expenses. The income tax due under the 8% income tax option shall be computed as: Income Tax due Taxable compensation income P 920,000 Less: Lower tax bracket in tax table 800,000 P 130,000 Residual income P 120,000 Multiply by: Incremental tax rate 30% 36,000 Income tax due on compensation income P 166,000 Gross sales or gross receipts Add: Other income subject to regular tax Total Multiply by: Optional income tax rate Income tax due

P 2,000,000 100,000 P 2,100,000 8%

168,000 P 334,000

Illustration 2 A mixed income earner realized P 2,000,000 in sales, P 100,000 in other income subject to regular tax and earned P 150,000 compensation from part-time employment. Income Tax due Taxable net income P 150,000 Less: Lower tax bracket in tax table 250,000 P0 Residual income (100,000) Multiply by: Incremental tax rate Income tax due on compensation income P0 Gross sales or gross receipts Add: Other income subject to regular tax Total Multiply by: Optional income tax rate Income tax due

P 2,000,000 100,000 P 2,100,000 8%

168,000 P 168,000...