BIR Ruling [DA-005-05]

January 11, 2005 BIR RULING [DA-005-05] 24; RR 2-98; No. 011-2000; 057-2001 Wilfredo V. Macanan 1466 Leon Guinto St. Ermita, Manila S i r : This refers to your letter dated February 27, 2004 requesting for clarification on the proper computation of taxable income of an individual with mixed income. It is represented that your taxable compensation income for the year 2003 as company president of Metatronic Trading Ventures Corporation amounted to P763,500.00 of which you paid an amount of P209,320.00 in the form of withheld income tax; that your Hermetic Water Refilling Station, a single proprietorship, registered a net loss for the year 2003; and that your hermetic Herbal Products and General Merchandise, also a single proprietorship, likewise registered a net loss for the year 2003. In reply, please be informed that Section 2.79.1 (A) (9) of Revenue Regulations (RR) No. 2-98, as amended, implementing Republic Act No. 8425 provides, viz: "(9) Mixed income an individual receiving combination of compensation and business/professional income shall first deduct the allowable personal and additional exemptions from compensation income only the excess therefrom can be deducted, from business or professional income. In the case of husband and wife, the husband shall be the proper claimant of the exemptions unless he waives it in favor of his wife." TCaEAD The phrase "shall first deduct the allowable personal and additional exemptions from compensation income and only the excess therefrom can be deducted, from business or professional income" presupposes that after deducting the personal and additional exemptions from the gross compensation income, the gross income from business or profession must be added to the resulting difference. After which, the excess deduction (i.e. personal and additional exemptions, and premium paid on health and or hospitalization insurance not to exceed P2,400 per year, provided the family's gross income does not exceed P250,000 for the taxable year) can be deducted from the gross income from business or profession. (BIR Ruling No. 057-2001 dated December 19, 2001) Such being the case, it can be clearly inferred from the provision of Section 2.79.1 (A) (9) of the RR No. 2-98, as amended, that in cases where a person receives mixed income, the consolidated approach in the computation of his taxable income must be adopted. This position is being supported by BIR Form used for the said purpose, that is, BIR Form No. 1701, pertinent portions of which are as follows: PART II Computation of Tax 26 Gross Taxable Compensation Income 26A 26B 27 Less: Deductions Premium paid on health and/or 27A 27B hospitalization insurance not to exceed P2,400 per year Personal and Additional Exemptions 27C 27D Total Deductions 27E 27F (Sum of 27A & 27C/27B & 27D) 28 Taxable compensation income/ (excess of 28AA 28B Deductions over Taxable compensation Income) (26A less 27E/26B less 27F) 29 Sales/Receipt/Revenue/Fees (Schedule 2) 29A 29B 30 Less: Cost of Sales/Services 30A 30B (Schedule 3/4) 31 Gross Taxable Business/Profession 31A 31B Income (29A less 30A/29B less 30B) 32 Add: Other Taxable Income 32A 32B (Schedule 5) aDcHIC 33 Total (Sum of 31A & 32A/31B & 32B) 33A 33B 34 Less: Allowable Deductions Optional Standard Deductions (Sch. 6) or 34A 34B Itemized Deductions (Sch. 7) 35 Net Income (33A less 34A/33B less 34B 35A 35B 36 Less: Excess of Deductions over taxable 36A 36B Compensation Income (from item 28A/28B) or the total deductions under line 27E/27F, if there is no compensation income) 37 Taxable Business Income 37A 37B (35A less 36A/35B less 36B) 38 Total Taxable Income (Sum of Items 28A 38A 38B & 37A/28B & 37B if line 28 results to taxable income, otherwise, 37A/37B) 39 Tax Due 39A 39B [Aggregate Tax Due (Suns of Items 39A & 39B)] 39C xxx xxx xxx" Accordingly, the correct procedure for computing the taxable income of a person with mixed income is the consolidated approach. However, the tax rates for computing the taxable compensation and business income shall be that which is in accordance with the schedule as provided for under Section 24 (A) (1) (c) of the Tax Code of 1997 except that the latter shall be subject to allowable deductions under Section 34 of the same Code. (BIR Ruling No. 011-2000 dated January 5, 2000) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group