Procedure in Computing Final Income Tax of Persons with Mixed Income

January 5, 2000 BIR RULING NO. 011-00 RR 2-98 000-00 011-2000 Mr . Pepito A . Gonzales 2895 Benita St., Tondo Manila S i r : This refers to your letter dated February 9, 1999 requesting in effect for a ruling on the correct procedure in computing the final income tax of persons with mixed income. You stated in your letter that Republic Act No. 8424, creating the Comprehensive Tax Reform Program, provided and established in Section 24 one and uniform table rates of income tax on taxable income of a Filipino citizen; and that there are two schools of thought in the computation of final income: School 1 : (Based on Separate Computation for Compensation and Business Income) Compensation Income subjected to Withholding Tax in accordance with Section 79 P 120,000.00 Less: Personal Exemption 32,000.00 Taxable Compensation Income P 88,000.00 ========= Tax Due thereon: P70,000.00 P 8,500.00 18,000.00 x 20% 3,600.00 Total Tax due on Compensation P 12,100.00 Less: Withholding Tax per Year End Adjustment 12,100.00 Final Income Tax on Compensation P 0 ========= Taxable Net Income from Business P 36,000.00 Less: Exemption 0 Taxable Net Income from Business P 36,000.00 ========= Tax Due thereon: P10,000.00 P 500.00 26,000.00 x 10% 2,600.00 Total Tax Due on Business Income P 3,100.00 Less: Quarterly Income Tax Payments 1,800.00 Final Income Tax Due on Business Income P 1,300.00 ========= School 2: (Based on Consolidated Taxable Income Compensation) Compensation Income P 120,000.00 Less: Exemption 32,000.00 Taxable Compensation Income P 88,000.00 Add: Taxable Business Net Income 36,000.00 Total Taxable Income P 124,000.00 ========= Tax Due thereon: P70,000.00 P 8,500.00 54,000.00 x 20% 10,800.00 Total Income Tax Due P 19,300.00 Less: Tax Credits/Payments: Withholding Tax on Salary P12,100.00 Quarterly Payments 1,800.00 13,900.00 Final Income Tax Due P5,400.00 ========= In reply, please be informed that Section 2.79.1(A)(9) of Revenue Regulations No. 2-98 implementing Republic Act No. 8424 provides, viz: "(9) Mixed income . An individual receiving a 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." LexLib Accordingly, your second computation ("School 2") which is based on consolidated taxable income compensation is the correct procedure for computing the final tax of a person with mixed income. 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue