From sales to taxable income
Kuting Kitchen sold ₱1.2 million this quarter, but income tax isn't charged on all of it. Walk it down, line by line, to the ₱162,000 that is taxed.
← 6.11 Late, wrong or missedIs all of it taxed?
Kuting Kitchen sold ₱1,200,000 from July to September 2026, before VAT (value-added tax). Carla's first worry: is income tax charged on all of that?
No. Income tax is charged on profit. The rule in one line: sales − cost of sales − expenses = net taxable income. Let's walk it down, one line at a time.
Start from sales, before VAT
The starting point is gross sales before VAT: ₱1,200,000. The ₱144,000 of output VAT on top was never the shop's income; it belongs to BIR and goes on the 2550Q (Lesson 4).
It's also not your payouts. Shopee, Lazada and TikTok pay you after taking fees; the fees come off below, as an expense.
Less: cost of sales
The cat food and treats Kuting Kitchen sold this quarter cost it ₱600,000, before VAT. That's the cost of sales: what the goods you sold cost you, not everything you bought.
Sales minus cost of sales is gross income: ₱600,000.
Less: marketplace fees
Commissions, transaction and service fees for the quarter: ₱180,000 before VAT. The VAT on them was claimed as input VAT on the 2550Q, so it doesn't come off again here.
Less: rent, the full amount
Rent is ₱30,000 a month: ₱90,000 for the quarter. Carla pays the landlord ₱28,500 a month and sends the other ₱1,500 to BIR as expanded withholding (Lesson 5).
The expense is still the full ₱90,000, not the ₱85,500 the landlord received.
Less: salaries
Jun and Mae earn ₱18,000 a month each: ₱108,000 of gross pay for the quarter. The expense is their full pay, before anything deducted from their payslips.
Less: ads, and what's left
Ads on the marketplaces and social media: ₱60,000.
What's left is net taxable income: ₱162,000. That, not ₱1.2 million, is what the income tax is worked out on. Lesson 7.4 takes it to the 1702Q.
What doesn't come off
None of these is on the chart, and the ₱162,000 doesn't change:
| Output VAT, ₱144,000 | BIR's money, paid on the 2550Q |
|---|---|
| ₱6,000 withheld by the marketplaces | Income tax already paid for you: it comes off the tax, not the income (Lesson 7.4) |
| Personal spending | Not a business expense, whichever account paid it |
| No invoice or receipt | BIR can disallow it |
Every expense needs a proper invoice or receipt. No receipt, no deduction.
Itemized, or a flat 40%
What we just did is itemized deductions: list each expense, keep the proof. The other way is the optional standard deduction (OSD): a flat 40% in place of listing expenses. For a company, the 1702Q puts it at 40% of gross income.
| Itemized | 40% OSD | |
|---|---|---|
| Comes off | Each expense, with proof | 40% of gross income |
| Kuting Kitchen | ₱438,000 | ₱240,000 |
| Taxable | ₱162,000 | ₱360,000 |
Kuting Kitchen's real expenses are bigger, so itemized wins. Sole proprietors on graduated rates have an OSD too; ask your accountant how it's computed for you.
Pop Quiz: deduct it or not?
Carla's bookkeeper asks about four items. Which come off sales on the way to taxable income?
₱2,000 Shopee withheld from this month's payouts.
It's income tax paid in advance, backed by Shopee's 2307. It comes off the tax due, not the income.
Lazada's ₱15,000 commission, with Lazada's invoice.
A business expense with proof: it comes off, before VAT.
Carla's family groceries, paid from the shop's GCash.
Personal spending isn't a business expense, whichever account paid it.
₱8,000 of packaging from a seller who gave no receipt.
Without an invoice or receipt, BIR can disallow it. Ask for one every time.
General information for learning, not tax advice. Kuting Kitchen and its numbers are fictional. Which expenses are deductible, and the deduction method that suits you, depend on your records: check with your accountant or RDO.
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