You don’t always get to choose between things when it comes to taxation, so make the right choice – 8% or regular income tax?
8% income tax rate
Before making a choice, let’s review the options provided by Revenue Regulations No. 8-2018 pursuant to the provisions of RA 10963 or TRAIN. Below are helpful illustrations:
So generally, individuals with business and/or professional income P3M and below (VAT threshold) have the option to avail of the regular income tax (graduated rates) or the 8% income tax on gross sales/receipts in excess of P250,000 instead of the regular income tax. Individuals who opt for the flat 8% are not subject to percentage tax as well, and are no longer required to attach financial statements to the annual income tax return.
(Gross Sales – P250,000) x 8% = Income Tax Due
No graduated income tax rates. No percentage tax. No financial statement required.
Saves us time, effort, and could be some money too!
The option to be taxed at 8% income tax rate is not available to:
- Purely compensation income earners;
- VAT-registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income;
- Non-VAT taxpayers whose gross sales/receipts an other non-operating income exceeded the P3M VAT threshold;
- Taxpayers who are subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those under Section 116 of the same title;
- Partners of General Professional Partnership (GPP) since their distributive share from the GPP is already net of costs and expenses; and
- Individual enjoying income tax exemption such as those registered under the Barangay Micro Business Enterprises (BMBEs) etc. since taxpayers are not allowed to avail of doable or multiple tax exemptions under different laws unless specifically provided by law
Your deciding factor
Saving up some peso is of course not always the case for the flat 8% option!
The simple and straightforward computation of the 8% income tax rate is very interesting, yet the convenience of this option will, at a certain point, come with a price and it all boils down to your business expenses.
8% income tax rate begins to be less appealing when it becomes more costly than the regular tax rate. Regular income tax allows you to deduct expenses and therefore gives you a leeway to lessen our income tax due – more expenses, less tax due. This does not happen with the flat 8% income tax rate since it is computed based on the gross sales/receipts.
When using the 8% income tax rate gives you more tax due than when using the regular income tax rate, you would want to choose the latter.
The key is to estimate your business expenses and decide if 8% income tax rate makes the better option for the taxable year.
Once you are decided, you have to signify your intention to elect the 8% income tax rate in the 1st Quarterly Percentage and/or Income Tax Return, or on the initial quarter return of the taxable year after the commencement of your new business/practice of profession.
Note though that you shall automatically be subject to the regular income tax rates, even if the flat 8% income tax rate option is initially selected, when your gross sales/receipts and other non-operating income exceeded the 3M during the taxable year.
References: Revenue Regulations 8-2018 | “Keeping up with TRAIN” – NavarroAmper & Co. – DTTL Training Material