Taxation: Income Tax for Individuals and Corporations
Framework
Know the constitutional and statutory basis of taxation and the classification of taxes. For income tax, establish the taxpayer's classification, the source of income, and the applicable gross income tax or net income tax regime.
Individuals
Apply the graduated rates to taxable income after allowable deductions and personal and additional exemptions where the law provides them. Know the rules for compensation income, business income, passive income subject to final tax, and capital gains. Distinguish final tax from creditable withholding tax. Understand the 8 percent preferential tax option for self-employed and mixed-income individuals and its election requirements, and remember that certain passive incomes remain subject to final tax regardless.
Corporations
Distinguish domestic corporations, resident foreign corporations, and nonresident foreign corporations. Apply the regular corporate income tax and the minimum corporate income tax, which applies when it exceeds the regular tax beginning on the fourth taxable year. Know the rules for dividends received, capital gains on shares not traded on an exchange, and the improperly accumulated earnings tax.
Traps
- Applying personal exemptions to a purely business-income individual without checking the election.
- Forgetting that final taxes are not creditable against income tax due.
- Confusing the MCIT with a tax credit rather than a minimum floor.
- Mixing the tax base for capital gains on real property versus ordinary income.
Worked example
A self-employed individual elects the 8 percent option on gross sales of 1,000,000 with no other income. Tax = 8 percent x (1,000,000 - 250,000) = 60,000, subject to the graduated-rate alternative being higher.