Franchise Business Tax Smarts – Tax Breaks

Paying taxes has become so ingrained in our business dealings that we often take it as a necessary evil. But there is good news – under the law, there are actually tax breaks that you can take advantage of so that you can hang on to more of your profits.

To know more about franchises and taxes on franchises visit Franchise Philippines.

What are tax breaks?

Tax breaks are exemptions extended to a group of taxpayers. There are several tax breaks under the 2005 Tax code, according to Atty. Vic C. Mamalateo, a former official of the Bureau of Internal Revenue. He adds that some of these tax breaks are available only to individuals, while other tax breaks are available to all taxpayers, including business partnerships and corporations.

There are basically two ways to maximize what is provided to us by the law. These are:

A. Have your income exempted from taxation.

There are three ways in which you can avail of tax breaks in this manner, and these are:

  1. For individuals. Generally, the gross interest earned from money deposited in banks are subject to 20% withholding tax, but gross interest earned from long-term deposits ( meaning five years or more ) are exempt from income tax. So consult your bank manager about the various investment options available to you.
  2. Profits that are business incurred from the payment of debt through bonds, with a maturity of more that five years by any taxpayer, a tax-exempt.
  3. Profits made by the business from investments in a mutual fund company are not taxable.

B. Have your expenses deducted from your taxable income

There are also three ways in which you can avail of tax breaks in this manner:

  1. For sole proprietors. “An individual doing business as a single proprietorship would pay a lower income tax on a net income before personal and additional exemptions, compared to a corporation with the same amount of gross income and expenses, “says Atty. Mamalateo. Individual enrepreneurs are entitled to the following exemptions according to the National Internal Revenue Code (NIRC):

    a. single – P20,000 exemption from the gross income for the year
    b. Head ofFamily – P25,000 exemption from the gross income for the year
    c. Married – P32,000 exemption from the gross income for the year
    d. For each dependent child (under 21 years old) – P8,000 exemption

    * Note that the maximum allowable number of dependent children to qualify for this exemption is four, or a total additional personal exemption of P32,000 from the gross income for the year.

  2. Retirement benefits are counted as an expense, and an employer’s contribution to the employee’s retirement fund are deductible from the gross income of the business.
  3. Net losses in the business for a taxable year can be a deduction from future business income. This claim will expire after three years.
  4. Tax breaks are also offered to Barangay Micro Business Enterprises (BMBE), which was created to encourage barangay-based businesses. Income from the operation of a BMBE is tax-exempt. A business can avail of the tax break offered by the BMBE by registering as one provided that:

    a. The business activities (production, manufacturing, trading, and services) are baranga-based and micro-business in nature and scope, and
    b. The business’ total assets, excluding the land on which the business office, plant and equipment stand, do not exceed three million pesos (P3,000,000).

    Busineses considered as barangay-based must meet the following qualifications:

    a. Majority of the employees live in the municipality where the business is located
    b. Activities in the business uses a skill or raw materials unique to the area
    c. The business operation is confined within the municipality or LGU where the business is located.