Just yesterday, millions of registered Filipino voters headed to their respective precincts to exercise their rights to suffrage. Leading up to Election Day, Filipinos were bombarded with countless campaign advertisements — from catchy jingles and sponsored social media posts to political rallies and public debates — all in the hope that candidates could influence and win the people’s vote. Now, candidates and voters alike are in limbo, hoping and praying that the election odds are in their favor.
For taxpayers, the election is not over yet. Other than voting during yesterday’s midterm elections, taxpayers have another selection to make, this time in their first quarter income tax returns (ITR). For individual taxpayers who are required to file ITRs, the deadline for their first quarter ITR for 2019 is tomorrow, May 15; for corporate taxpayers, the deadline is May 30.
For individual taxpayers, certain sole proprietors engaged in business or those practicing their profession have to decide on the income tax regime they will adopt.
Specifically, they have to choose whether they will apply an 8% or a 0 to 35% graduated income tax rate. In addition, such individual taxpayers also have the option to choose how to deduct against their gross receipts/sales: itemized deduction or optional standard deduction (OSD).
8% PREFERENTIAL OR 0 TO 35% GRADUATED
The 8% tax option is applicable to qualified individuals whose gross receipts or gross sales and other non-operating income for the taxable year do not exceed P3,000,000. When the individual opts for the 8% tax, it will be a straightforward computation of their gross sales or receipts, less a P250,000 exemption, then multiplied by the 8% income tax rate. If the taxpayer opts for the 0 to 35% graduated income tax rates, on the other hand, they can subtract the allowable deductions against their gross receipts or gross sales to arrive at their net taxable income.
ITEMIZED DEDUCTION OR 40% OSD
Individual taxpayers also have the power to choose the manner of deduction taken to arrive at their net taxable income. Itemized deduction allows the taxpayer to deduct their business-related expenses, such as salaries, rentals, and depreciation expenses, among others. Note that the conditions of deductibility under the tax rules apply to such expenses. By choosing itemized deduction, there could be instances where the bottom line result is a net loss, rather than a net income.
OSD, on the other hand, is equivalent to 40% of the taxpayer’s gross sales or gross receipts. As its name suggests, the OSD is a fixed percentage of the taxpayer’s income. Under this method, there will always be a net taxable income, since only 40% is being deducted against the taxpayer’s income.
Corporate taxpayers can choose whether to adopt the itemized deduction or the OSD methods.
Under the itemized deduction method, corporate taxpayers will be allowed to deduct actual corporate business expenses; likewise, the conditions for deductibility apply to each type of expense. In contrast, the OSD is computed in an amount not exceeding 40% of the corporate taxpayer’s gross income, as defined by the tax rules. For comparison, while the OSD for individuals is based on their gross sales or receipts, the OSD for corporations is based on gross income.
IRREVOCABILITY OF THE ELECTION
The choice of tax regime (whether 8% or graduated income tax rates for individuals) or the option of method of deduction (whether itemized deduction or OSD) is irrevocable for the applicable taxable year. Once the selection is made, it cannot be changed by any future amendment of the ITR.
For individual income taxpayers, what tax rate then should a home-based online consultant choose to compute their income taxes for the year? Should they make the same decision as a financial adviser regularly earning commissions? What about a businessman who owns and operates a gas station or a hardware store? Should they take same option as a practicing doctor or lawyer? The individual’s projected income for 2019 must be considered.
Similarly, for corporate taxpayers, budgeted or forecast income statements for the year are prepared. These budgets and forecasts should be carefully studied to determine whether itemized deduction or OSD would be more advantageous. A corporation with an expected low profit margin or incurring losses would more likely opt for itemized deduction; while companies with a high profit margin could consider OSD.
These are just general reminders on the taxpayer’s election for the first quarter ITR. The details can be carefully read in Revenue Regulations No. 16-2008, 08-2018, and other related issuances. Additionally, taxpayers need to make a cautious analysis of their financial figures or projections and other circumstances.
So, the May 13 elections have ended, and it can be surmised that Filipino voters thought matters through before casting their ballots. In the same vein, it is obviously fitting that taxpayers make the same responsible evaluation when it comes to their choices related to filing their first quarter ITR. Remember, your choices in the first quarter ITR are irrevocable for this year.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Mica Dyan T. Borja is a senior from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
As published in BusinessWorld, dated 14 May 2019