Business Income and Taxable Profit
Updated June 13, 2026
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Definition
Business income is gross revenue earned from conducting trade, business or the practice of a profession, minus allowable business deductions. Individuals pay income tax on it under Section 24 of the National Internal Revenue Code; domestic corporations pay under Section 27.
Business income covers revenue from commercial activity by sole proprietors, partnerships and corporations: selling goods, providing services, practicing a profession or any other activity carried on for profit. Individuals in business are taxed under Section 24 of the Tax Code and domestic corporations under Section 27. The BIR distinguishes business income from compensation income (salaries) and passive income (dividends, interest). The annual return depends on the taxpayer: Form 1701A for individuals earning purely from business or profession who use the 8% rate or the optional standard deduction, Form 1701 for other individuals including mixed income earners, and Form 1702 for corporations and partnerships taxed as corporations. Key characteristics include regular and continuous activity, profit motive, and systematic conduct of operations. Part-time businesses also earn business income subject to tax.
Detailed explanation
Definition
Business income is gross revenue derived from trade, business or the practice of a profession in the Philippines. It includes receipts from the sale of goods, performance of services, rental of property and any other activity carried on for profit. The taxable amount is gross income minus cost of sales and other allowable deductions (NIRC §34).
Scope of Business Income
Business income is earned by sole proprietors, partnerships, corporations and professionals. Individuals in business are taxed at the graduated rates of 0% to 35% under NIRC §24(A)(2), as amended by RA 10963, or may elect 8% if eligible. Domestic corporations pay 25%, or 20% for qualifying small corporations, under NIRC §27(A), as amended by RA 11534.
Calculation of Taxable Business Income
Taxable business income is computed as: Gross Income minus Allowable Deductions = Taxable Income. Allowable deductions under NIRC §34 include ordinary and necessary business expenses (salaries, rent, utilities, cost of sales, professional fees), interest, taxes, losses, bad debts, depreciation and charitable contributions within legal limits. Personal expenses and amounts paid for new buildings or permanent improvements are not deductible as expenses (NIRC §36). The taxpayer must keep books of accounts and supporting documents.
Types of Business Income
Trading Income: Revenue from buying and selling goods. Cost of goods sold is deducted to arrive at gross profit.
Service Income: Revenue from services, including professional services (medical, legal, accounting, consulting). Deductible expenses include office rent and staff salaries (NIRC §34(A)).
Rental Income: Revenue from leasing real or personal property. Deductible expenses include property tax, insurance, maintenance and depreciation (NIRC §34(C), §34(F)).
Manufacturing Income: Revenue from producing goods. Costs include raw materials, labor, factory overhead and depreciation of machinery.
Tax Treatment by Entity Type
Corporations: 25% of taxable income, or 20% where net taxable income is ₱5,000,000 or less and total assets excluding land are ₱100,000,000 or less (NIRC §27(A), as amended by RA 11534). Dividends paid to individual shareholders are subject to a 10% final tax (NIRC §24(B)(2)).
Individual Self-Employed/Professionals: From 2023: 0% on taxable income up to ₱250,000; 15% of the excess over ₱250,000 up to ₱400,000; ₱22,500 plus 20% of the excess over ₱400,000 up to ₱800,000; ₱102,500 plus 25% of the excess over ₱800,000 up to ₱2,000,000; ₱402,500 plus 30% of the excess over ₱2,000,000 up to ₱8,000,000; and ₱2,202,500 plus 35% of the excess over ₱8,000,000 (NIRC §24(A)(2)).
Partnerships: Ordinary business partnerships are taxed as corporations (NIRC §22(B)). A general professional partnership is not subject to income tax; its partners pay tax on their shares in their individual capacities (NIRC §26).
Timing of Income Recognition
Business income is recognized under the cash or accrual method, following the method the taxpayer regularly uses in keeping its books (NIRC §43). Under the cash basis, income is recognized when received; under the accrual basis, when earned, regardless of payment.
Deductions and Allowances
Ordinary and necessary business expenses are deductible. These include:
• Salaries and wages paid to employees (NIRC §34(A))
• Rent for business premises (NIRC §34(A))
• Utilities, supplies and office expenses (NIRC §34(A))
• Depreciation of business assets (NIRC §34(F))
• Interest on business loans (NIRC §34(B))
• Bad debts (NIRC §34(E))
• Professional fees and consulting services (NIRC §34(A))
• Insurance premiums on business property (NIRC §34(A))
Personal, living or family expenses and amounts paid for new buildings or permanent improvements are not deductible as expenses (NIRC §36). Charitable contributions are deductible only within the limits of NIRC §34(H).
Gross Income Threshold and Compliance
Every business must register with the BIR, keep books of accounts and file annual income tax returns. Individuals in business choose between itemized deductions and the optional standard deduction (OSD) of 40% of gross sales or receipts; corporations that elect OSD deduct 40% of gross income (NIRC §34(L)). Individuals with gross sales or receipts of ₱3,000,000 or less who are not VAT-registered may instead elect the 8% income tax rate.
Withholding and Estimated Tax
Some payments to businesses are subject to creditable withholding, such as 5% on rentals of real property used in business and rates set by RR 2-98, as amended, for professional fees and payments by top withholding agents. These are credited against income tax. Individuals file quarterly returns by May 15, August 15 and November 15 (NIRC §74); corporations file quarterly returns within 60 days after each of the first three quarters (NIRC §77).
Why it matters
Business income is the base of tax liability for entrepreneurs, professionals and corporations in the Philippines. How you compute taxable business income, which deductions you claim and which rate option you choose directly affect how much tax you owe. Treating personal expenses as business deductions or keeping poor records can lead to BIR assessments, surcharges and interest. Correct reporting keeps you compliant with NIRC §24 or §27.
How it works
Identify Gross Income
Collect all revenue from business operations (sales, services, rentals, professional fees). Include cash and credit sales, barter transactions, and any other consideration received. Document each source with invoices, receipts, or contracts to substantiate gross income during BIR audit.
Deduct Allowable Business Expenses
Subtract ordinary and necessary business expenses (cost of sales, salaries, rent, utilities, depreciation, interest, professional fees), or take the 40% optional standard deduction instead. Keep invoices and supporting documents. Personal expenses and fines are not deductible, and charitable contributions are deductible only within legal limits. The result is net taxable business income.
Apply Tax Rate and Calculate Liability
Corporations apply 25%, or 20% if net taxable income is ₱5,000,000 or less and total assets excluding land are ₱100,000,000 or less (NIRC §27(A)). Individuals apply the graduated rates of 0% to 35%, or elect 8% of gross sales or receipts if eligible. Subtract quarterly payments and creditable taxes withheld to find the tax still due.
File Annual Return and Pay Tax
Individuals file Form 1701 or 1701A by April 15 of the following year; calendar-year corporations file Form 1702 by April 15. Attach the required financial statements and certificates of tax withheld, and pay any balance when you file to avoid surcharge and interest (NIRC §51, §77).
Examples
Salaried Employee with Side Business
Juan dela Cruz has ₱600,000 of taxable compensation and earns ₱200,000 from freelance consulting with ₱42,000 of expenses (office rent ₱24,000, software ₱12,000, internet ₱6,000). His net business income is ₱158,000. Added to his salary, taxable income is ₱758,000 and tax is ₱22,500 + 20% × ₱358,000 = ₱94,100, so the side business adds ₱31,600 of income tax on top of the ₱62,500 due on salary alone, plus 3% percentage tax of ₱6,000. If he elects 8% on the business part instead, that part costs 8% × ₱200,000 = ₱16,000 in place of both (NIRC §24(A)(2)).
Retail Store Owner
Maria Santos operates a retail store with annual gross sales of ₱1,500,000. Cost of goods sold is ₱900,000. Operating expenses (rent ₱120,000, salaries ₱240,000, utilities ₱36,000) total ₱396,000. Taxable income is ₱204,000, within the ₱250,000 zero bracket, so her income tax is ₱0. As a non-VAT taxpayer she still owes 3% percentage tax on gross sales, or ₱45,000 (NIRC §24(A)(2), §116).
Professional Service Provider (Sole Proprietor)
Dr. Anna Reyes, a physician, earns ₱2,400,000 a year from medical practice. Deductible expenses (clinic rent ₱240,000, staff salaries ₱600,000, medical supplies ₱180,000, depreciation ₱60,000) total ₱1,080,000. Taxable income is ₱1,320,000 and tax is ₱102,500 + 25% × ₱520,000 = ₱232,500, plus 3% percentage tax of ₱72,000. The 8% option would cost 8% × ₱2,150,000 = ₱172,000 in place of both (NIRC §24(A)(2), §34(A)).
Small Corporation
TechStart Inc. reports gross income of ₱5,000,000 and allowable deductions of ₱3,200,000 (salaries, rent, depreciation). Taxable income is ₱1,800,000. With total assets excluding land of ₱100,000,000 or less, it qualifies for the 20% rate: ₱360,000. After ₱90,000 of creditable taxes withheld, ₱270,000 is due (NIRC §27(A), RA 11534).
Rental Income from Real Property
Pedro Gonzales owns a commercial building earning ₱480,000 of rent a year. Deductible expenses (property tax ₱48,000, insurance ₱24,000, maintenance ₱36,000, depreciation ₱40,000) total ₱148,000. Taxable rental income is ₱332,000 and tax is 15% × ₱82,000 = ₱12,300, plus 3% percentage tax on the gross rent, ₱14,400, as a non-VAT taxpayer (NIRC §24(A)(2), §116).
Common misconceptions
- Myth: All money received by a business is taxable income.
- Fact: Taxable income is gross income minus allowable deductions such as cost of sales, salaries, rent and depreciation. Personal expenses and amounts paid for new buildings or permanent improvements are not deductible as expenses (NIRC §34, §36).
- Myth: A sole proprietor and a corporation pay the same tax rate on business income.
- Fact: Domestic corporations pay 25% (or 20% for qualifying small corporations); sole proprietors pay graduated rates of 0% to 35%, or 8% if eligible. The entity structure changes the tax (NIRC §24, §27(A), RA 11534).
- Myth: If I don't receive cash, I don't have taxable business income.
- Fact: Under the accrual method, income is recognized when earned, not when cash is received. Credit sales and barter transactions are also income (NIRC §43).
- Myth: I can deduct personal expenses if I use them for business purposes.
- Fact: Personal expenses (home utilities, personal vehicle expenses, meals) are not deductible even if occasionally used for business. Only ordinary and necessary business expenses are deductible (NIRC §36(A)).
Questions people ask
What is the difference between gross income and taxable business income?
Gross income is all revenue from business operations before any deductions. Taxable business income is gross income minus allowable business deductions (COGS, salaries, rent, depreciation, interest, professional fees). For example, if gross sales are ₱1,000,000 and COGS is ₱600,000, gross profit is ₱400,000; after deducting ₱100,000 in operating expenses, taxable income is ₱300,000 (NIRC §34).
What records must I keep to support business income and deductions?
Keep invoices, receipts, bank statements, payroll records, contracts and other supporting documents for all income and deductions, together with your registered books of accounts. Books and records must be kept for 5 years from the day after the filing deadline (NIRC §235, as amended by RA 11976).
If my business operates at a loss, can I deduct it from my other income?
A net operating loss from business can be carried over as a deduction from gross income for the next three consecutive taxable years (NOLCO). It cannot be carried back. NOLCO is not available if you use the optional standard deduction or the 8% rate (NIRC §34(D)(3)).
What is the difference between the cash basis and accrual basis of accounting for business income?
Under the cash basis, income is recognized when received and expenses are deducted when paid. Under the accrual basis, income is recognized when earned and expenses are deducted when incurred, regardless of payment. Taxable income is computed under the method of accounting you regularly use in keeping your books (NIRC §43).
Do I have to pay quarterly estimated income tax if I have business income?
Yes. Individuals with business income file quarterly returns (Form 1701Q) for the first three quarters, due May 15, August 15 and November 15 (NIRC §74). Corporations file Form 1702Q within 60 days after each of the first three quarters (NIRC §77). Late payment draws a 25% surcharge plus 12% interest a year (NIRC §248, §249).
How is business income taxed differently for corporations versus sole proprietors?
Domestic corporations pay 25% of taxable income, or 20% if they meet the small corporation tests. Sole proprietors and self-employed individuals pay the graduated rates of 0% to 35%, or 8% of gross sales or receipts if eligible. Dividends a corporation pays to individual shareholders are subject to a 10% final tax (NIRC §24, §27(A), RA 11534).
Can I claim the optional standard deduction (OSD) instead of itemizing business deductions?
Yes. Self-employed individuals and sole proprietors may deduct a flat 40% of gross sales or receipts instead of itemizing actual deductions. Use whichever gives the lower tax. The election is made in the return and is irrevocable for the taxable year (NIRC §34(L)).
In practice
- Every business must register with the BIR, keep books of accounts and file annual income tax returns; individuals and calendar-year corporations file by April 15 (NIRC §51, §77).
- Individuals with business income file quarterly returns by May 15, August 15 and November 15; late payment draws a 25% surcharge plus 12% annual interest (NIRC §74, §248, §249).
- Certain payments to businesses are subject to creditable withholding, for example 5% on rentals of real property used in business; the payor issues BIR Form 2307 and the payee credits the tax against its income tax (RR 2-98, as amended by RR 11-2018).
- The BIR examines business income tax returns; complete records (invoices, receipts, bank statements, payroll records) support deductions and help avoid deficiency assessments.
- Individuals in business may elect the optional standard deduction (OSD) of 40% of gross sales or receipts instead of itemizing deductions; corporations that elect OSD deduct 40% of gross income (NIRC §34(L)).
Next steps
Learn more
Business Income Tax Calculator
BIR Form 1701A Guide
Quarterly Tax Payment Calculator
Business Expense Deduction Guide
Section 27 Tax Rates
Small Business Tax Options
Professional Income Tax Guide
Corporate Income Tax Calculator
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Sources & References (2)
Primary sources and the laws, regulations, and official issuances this page relies on. Each citation links directly to the issuing authority’s document.
- LawPhil Project (Arellano Law Foundation). “NIRC §24(A)(2), §32 (business/professional income): full text.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 24(A)(2)/32. Accessed .