Use of Consolidated Approach in Computation of Taxable Income in Case of Receipt of Mixed Income

December 19, 2001 BIR RULING NO. 057-01 RR 2-98 011-2000 Mr. Pepito A. Gonzales Blk. 2, Lot 26 Melon Drive SM Homes Novaliches Camarin Road, Caloocan City S i r : This refers to your letter dated February 5, 2000 requesting for a reconsideration of BIR Ruling No. 011-2000 dated January 5, 2000, the dispositive portion of which reads as follows: "In reply, please be informed that Section 2.79.1 (A)(9) of Revenue Regula tions No. 2-9 8 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 and 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." (Emphasis ours) 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. . ." (Emphasis ours) It is your contention that there is no clear-cut statement or phrase that implies or suggests that compensation income must be consolidated or mixed with business/professional income in computing taxable income of individual with mixed income. You further stated that the provision in Section 27.9.1 (A)(9) of Revenue Regulations No. 2-98 intends to separate the compensation income from professional or business income in the computation of individual income tax. In reply, please be informed that 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. Such being the case, it can be clearly inferred from the provision of Section 2.79.1 (A)(9) of the Revenue Regulations No. 2-98 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 the 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 28A 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 31 B Income (29A less 30A/29B less 30B) 32 Add: Other Taxable Income 32A 32B (Schedule 5) 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 (Sum of Items 39A & 39B)] 39C xxx xxx xxx" In view of the foregoing, this Office maintains its position enunciated in BIR Ruling No. 011-2000 dated January 5, 2000. This serves as the final decision of this Office on the matter. Very truly yours, (SGD.) REN G. BAEZ Commissioner of Internal Revenue