How to Reduce Your Taxes Legally if You Own a Business

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The taxpayer may choose one of the following to lower their tax dues: 

1. Apply for BMBE Exemption1.

If you earn more than Php 250,000 per year, after all the deductions and you also have an employee, we recommend that you apply for a BMBE Certificate with the DTI. This will allow your business to be exempt from income tax and enjoy government benefits as long as: 

  • Your total assets are less than Php 3,000,000 at any given time;
  • You do not create a branch outside your barangay without express permission from LGU; and
  • Your business still qualifies as micro-business in nature and scope. 

To illustrate: 

Let’s say you are a sole proprietor that sold Php 2,000,000 worth of clothes over the Internet.

The cost of all sold clothes is Php 1,500,000. You spent 50,000 pesos on transportation and commission expenses. You have a taxable income of Php 450,000. The following are your tax dues:

Sole Proprietor
Graduated Income Tax                           42,500
Percentage Tax*                           60,000
Local Business Tax*                           10,000
Total Tax                         112,500

If you are qualified for BMBE, you are exempted from paying the Php 42,500 graduated income tax. As a result, your total tax due is reduced to Php 70,000. 

 

2. Exploit the 8% preferential tax rate for self-employed individuals.

The 8% preferential rate is a tax in lieu of income tax and business taxes. The tax shall be based on the gross sales in excess of Php 250,000 if you are earning purely from your businesses. This is available for sole proprietorships whose gross sales are less than Php 3,000,000 annually. 

To illustrate: 

Example 1:

Let’s say you are a sole proprietor that sold Php 2,000,000 worth of clothes over the internet. The cost of all sold clothes is Php 1,500,000. You spent Php 50,000 on transportation and commission expenses. You have a taxable income of Php 450,000. The following are your tax dues:

Sole Proprietor
Graduated Income Tax                         140,000
Local Business Tax*                         40,000
Total Tax                         180,000

Example 2:

Your business is providing tech support to foreign corporations. You earn Php 2,400,000 annually. As a service provider, you do not claim any expenses. 

In this example, your taxable income is Php 2,400,000 and your tax due is Php 220,000 computed as follows:

Sole Proprietor
Graduated Income Tax                         172,000
Local Business Tax*                         48,000
Total Tax                       220,000

If you did not use the 8% rate, the tax due shall be Php 738,000 computed as follows: 

Sole Proprietor
Graduated Income Tax                         618,000
Other Percentage Tax    72,000
Local Business Tax*                         48,000
Total Tax                       738,000

Based on the above examples, we can conclude that the 8% preferential rate is better for businesses that have little or no costs/expenses, such as freelance service providers. 

Go back to the main article: How to Register a Business in the Philippines: The Ultimate Guide

 

About the Author.

 Miguel Dar is a CPA and an experienced tax adviser specializing in tax audits. He gives tax advice to different start-ups and clarifies tax concerns of individual taxpayers. This includes helping clients register their businesses, training in tax and bookkeeping for start-up businesses, settling open cases, tax planning for future tax compliance, and responding to tax-related inquiries.

 

References.

  1. RA 9178 or Barangay Micro Business Enterprises (BMBEs) Act of 2002, Section 7