Business Income and Taxable Profit

Definition

Business income is all gross revenue derived from the conduct of trade, business, or professional practice in the Philippines. Under the National Internal Revenue Code (NIRC §27), business income includes receipts from the sale of goods, performance of services, rental of property, and any other activity undertaken for profit. The taxable amount is calculated by deducting allowable business expenses, cost of goods sold, and other statutory deductions from gross income (NIRC §34).

Scope of Business Income

Business income encompasses sole proprietorships, partnerships, corporations, and professional practices. It applies to residents and non-residents earning income from Philippine sources. Under the TRAIN Law (RA 10963) and subsequent amendments, business income is subject to corporate income tax (CIT) for corporations at a flat 25% rate, or individual income tax (PIT) for self-employed persons and professionals at progressive rates ranging from 5% to 35% (NIRC §27(A)–(D), as amended by RA 11534).

Calculation of Taxable Business Income

Taxable business income is computed as: Gross Income − Allowable Deductions = Taxable Income. Gross income includes all receipts from business operations. Allowable deductions under NIRC §34 include ordinary and necessary business expenses (salaries, rent, utilities, depreciation, cost of goods sold, interest on business loans, and professional fees). Personal expenses, capital expenditures, and non-deductible items (fines, penalties, donations) are excluded. The taxpayer must maintain books of accounts and supporting documentation to substantiate deductions (BIR Memorandum Circular 2-2018).

Types of Business Income

Trading Income: Revenue from buying and selling goods. Cost of goods sold (COGS) is deducted to arrive at gross profit (NIRC §34(A)).

Service Income: Revenue from professional services (medical, legal, accounting, consulting). Deductible expenses include office rent, staff salaries, and professional development (NIRC §34(B)).

Rental Income: Revenue from leasing real or personal property. Deductible expenses include property tax, insurance, maintenance, and depreciation (NIRC §34(C)).

Manufacturing Income: Revenue from producing goods. Deductions include raw materials, labor, factory overhead, and depreciation of machinery (NIRC §34(D)).

Tax Treatment by Entity Type

Corporations: Subject to a flat 25% corporate income tax rate on taxable income (NIRC §27(A), as amended by RA 11534). Dividends distributed to shareholders are subject to a 10% final withholding tax (NIRC §24(B)).

Individual Self-Employed/Professionals: Subject to progressive income tax rates: 5% on the first ₱250,000; 10% on ₱250,001–₱400,000; 15% on ₱400,001–₱800,000; 20% on ₱800,001–₱2,000,000; 25% on ₱2,000,001–₱8,000,000; 30% on ₱8,000,001–₱20,000,000; and 35% above ₱20,000,000 (NIRC §27(B), as amended by RA 11534).

Partnerships: Taxed as a pass-through entity. The partnership itself does not pay income tax; instead, each partner reports their share of partnership income on their individual return (NIRC §27(D)).

Timing of Income Recognition

Business income is recognized under either the cash basis or accrual basis of accounting, depending on the taxpayer's election and compliance with BIR requirements. Under the cash basis, income is recognized when received; under the accrual basis, income is recognized when earned, regardless of payment (NIRC §34(Q), BIR Memorandum Circular 2-2018). Most businesses with annual gross receipts exceeding ₱1,000,000 must use the accrual method.

Deductions and Allowances

Ordinary and necessary business expenses are fully deductible. These include:

• Salaries and wages paid to employees (NIRC §34(A))

• Rent for business premises (NIRC §34(A))

• Utilities, supplies, and office expenses (NIRC §34(A))

• Depreciation of business assets (NIRC §34(F))

• Interest on business loans (NIRC §34(A))

• Bad debts (NIRC §34(A))

• Professional fees and consulting services (NIRC §34(A))

• Insurance premiums (NIRC §34(A))

Non-deductible items include personal expenses, capital expenditures, fines and penalties, donations, and losses from wagering (NIRC §36).

Gross Income Threshold and Compliance

Businesses with annual gross receipts or gross income exceeding ₱1,000,000 must register with the BIR, maintain books of accounts, and file annual income tax returns (NIRC §28(A)). Businesses below this threshold may use the simplified income tax system (SITS) or the optional standard deduction (OSD) of 40% of gross income, whichever is more favorable (BIR Revenue Memorandum Order 15-2018).

Withholding and Estimated Tax

Business income is subject to withholding taxes on certain payments: 5% on purchases of goods and services from suppliers, 1% on purchases of raw materials, and 2% on lease payments (NIRC §57–59). Corporations and self-employed individuals with estimated annual income tax liability exceeding ₱10,000 must pay quarterly estimated income tax installments (NIRC §57(A)).