When it comes to filing your income tax return as a business owner, you may find yourself faced with a choice between two confusing options. Check out the Graduated Income Tax Rate with OSD (optional standard deduction) versus the 8% Income Tax Rate. While the process of filing taxes may seem daunting, it presents an opportunity for you to strategize. You can make the most optimal choice that saves you money through legal means known as tax avoidance. Let’s take a closer look at the two options available to you:
Graduated Income Tax Rate with OSD
This option is widely used by individual taxpayers and follows a progressive income tax structure. The tax rates increase as the taxable amount increases, allowing for a more tailored approach to tax calculation. Under the OSD, taxpayers have a choice to deduct either 40% of their total sales or income as business expenses. There’s no need to go through the hassle of listing individual deductions. You can think of this as a shortcut to figuring out how much of your income is subject to taxes. Thinking of this option? Here are a few key points to remember:
- You don’t have to provide evidence or receipts for the 40% business expense deduction. However, it’s still wise to keep records of your actual business expenses, just in case the BIR conducts an audit. It’s always better to be prepared!
- Say goodbye to submitting lengthy Account Information Returns (AIF) or audited financial statements. Less paperwork means less bookkeeping and accounting stress and more time for you to focus on your business.
- The OSD is especially beneficial for businesses with minimal expenses. Why, you ask? Well, they get to deduct a higher percentage (40% of Gross Income or Gross Sales) compared to their actual expenses. Cha-ching! That means potentially bigger savings in your pocket.
- A little cautionary tale: The remaining 60% of your Gross Income or Gross Sales is automatically subject to taxes, regardless of whether your business made a profit or not during the taxable year. So, if your expenses end up exceeding your revenue, you’ll be saddled with more taxes. So keep a close eye on your numbers and make sure your expenses don’t go wild!
Who can avail of the 8% income tax rate?
- Individuals earning purely from business or professional income (e.g., practitioners, freelancers, etc.)
- Individuals earning from self-employment and compensation (mixed-income earners)
Exempt individuals from the 8% income tax rate include partnerships, cooperatives, corporations, GPP partners, individuals earning purely from compensation, taxpayers who are VAT registered, and taxpayers subject to other special percentage taxes for business purposes.
To avail yourself of the 8% income tax rate, it’s crucial to express your intention to file for this option before the first quarter of filing your ITR. Failure to do so will result in being automatically considered as someone availing of the graduated income tax rates.
What is the better option for you?
Determining which option is better depends on your specific income and expense flow. It may also depend on other factors, such as the nature of your business, deductible expenses, and long-term financial goals. While the 8% income tax rate option is generally regarded as favorable, there may be instances where the graduated income tax rate proves more advantageous in terms of potential savings. Embracing the opportunity to make the most of your tax filing process to optimize your financial outcomes.
By choosing the best tax option, you can potentially unlock significant benefits. The Graduated Income Tax Rate with OSD allows for a more nuanced approach, enabling you to leverage tax brackets that align with your income levels. On the other hand, the 8% Income Tax Rate offers simplicity and predictability, ensuring a fixed tax liability regardless of fluctuations in your income.
To gain clarity, seeking advice from a certified public accountant is highly recommended. Our accounting team can guide you through the process and help you understand each option, ensuring you choose the most suitable approach. With the right strategies and expert advice, you can navigate the tax landscape with confidence and enjoy the benefits of smart tax planning.