I was asked by a friend on how to file taxes on her new income property, an apartment in a lively college area. It made me think about the merits of graduated income tax rates versus the new 8% tax on gross sales/receipts that was introduced by TRAIN Law (R.A. 10963) in 2018. I was curious as to which of them was more tax-efficient, so I ran the numbers.
In Form 1701Q in eBIRForms, you can select between using the graduated rates[1] and the 8% tax on gross sales/receipts.[2] Selecting graduated rates gives you an option to select your mode of expense deduction, between itemized deduction and optional standard deduction (OSD);[3] the latter allows you to consider 40% of your gross sales/receipts as your expense. For income property, OSD is ideal as the operating expenses are generally borne by the tenant and the 40% allowable deduction is thus likely to exceed the owner’s actual itemized expenses.
The 8% tax on gross sales/receipts is available for individuals whose annual gross sales/receipts from their business or profession does not exceed PHP 3 million (purely self-employed individuals and/or professionals are given an allowable deduction of up to PHP 250,000 per year that can be availed of via Line 52 of Form 1701Q). Meanwhile, for the graduated rates, an additional percentage tax of 3% of gross sales/receipts will still apply.[4]
Taking all of the foregoing into consideration, if you are a mixed-income earner, the graduated rates at OSD is more tax-efficient than 8% on gross receipts up to a certain point, the threshold appearing to be PHP 821,429. When your annual gross sales/receipts begin to exceed the threshold, the 8% becomes the more tax-efficient option. When annual gross sales/receipts begin to exceed PHP 3 million, you will have no choice but to revert to the graduated system.
Meanwhile, if you are a purely self-employed individual and/or professional, there are two thresholds at which the 8% is the more tax-efficient option for you: 1) at an annual gross receipt of PHP 250,000 and below (income tax is zero and percentage tax is inapplicable) and 2) at an annual gross receipt from PHP 821,429 to PHP 3 million, similar to the mixed-income earner.
18 January 2024
[1] National Internal Revenue Code Sec. 24(A)(2)(a) as amended by RA 10963
[2] National Internal Revenue Code Sec. 24(A)(2)(b), added by RA 10963
[3] National Internal Revenue Code Sec. 34(L)
[4] National Internal Revenue Code Sec. 116 as amended by RA 10963