You have various options as an individual when choosing the tax types you will use to comply with income tax filing. You can choose to be under 8% Gross Income Tax, and you may also use 40% optional standard deduction or use your actual expenses or the so-called itemized deductions. Let’s take a closer look on each of these options:
I. Use of 8% Gross Income Tax (GIT)
Under the TRAIN Law, self-employed individuals and professionals have the option to be subjected to 8% income tax based on gross sales/receipts and other non-operating income. The 8% gross income tax is applicable for individuals who are registered as Non-VAT (Gross Income/Receipts do not exceed P3 million).
Let’s take a look at the tax savings of using 8% if you are an individual with gross business income of P600,000 during the year:
Your tax due is lower if you use 8% gross income tax. Under 8% gross income tax, you are not required to pay the 3% percentage tax anymore.
*Optional Standard Deduction is explained in no 2.
II. Use of 40% Optional Standard Deduction (OSD)
If you are a VAT registered individual or if you have not elected to use the 8% gross income tax, then you may choose an OSD of 40% of gross sales/receipts as a deduction to your income/receipts. OSD is beneficial if you have minimal expenses (e.g., rent, salaries, advertising, etc.) since you can deduct the whole 40% to your gross income without keeping any supporting ORs, Invoices, or documents to prove such claim/deduction.
Let’s take a look at the tax savings if you have P5 million in sales for 2019:
There are tax savings of P560k by using 40% OSD. You might be asking, what if you have expenses such as rent, utilities, etc.? If this is the case, then you can weigh if the total expenses will be more than 40% of your sales so you can elect to use these expenses or the so-called itemized deduction (explained in no. 3) instead of 40% OSD.
III. Use of Itemized Deductions
Itemized deductions are based on actual expenses incurred by the business, whether paid by cash or credit. As initially mentioned, if you have significant expenses such as rent, salaries, advertising, etc., then you may elect to use and deduct these itemized deductions from your sales so your taxable income will be lower. You need to properly keep your official receipts, invoices, and related supporting documents and ensure that related withholding taxes are paid to claim and deduct these expenses.
You must plan early the tax options that you will use. Because once you have chosen the tax option when you file your first quarter income tax return, it is irrevocable for the whole year.
If you have questions, feel free to get in touch with us at www.cgsinghcpas.com, (02) 7218 0486, 0917 865 9144 or by filling up the contact form below.
Disclaimer: The contents of this article may become outdated because of changes in the rules and regulations. It does not substitute the need for professional advice.
