Maximizing 1701Q Deductions: Train Law Application For Maximum Benefits

The BIR Form 1701Q is a quarterly income tax return for individuals, estates, and trusts, including those with mixed income. It is used by the Philippines' Bureau of Internal Revenue (BIR) to record an individual's income tax liability each quarter. The form must be filed on or before the 45th day following the close of each of the first three quarters of the taxable year. Late filing can result in penalties, including a 25% surcharge, a 20% interest per annum, and a compromise penalty.

To fill up the 1701Q form, you will need to provide your basic details such as your taxpayer identification number (TIN), RDO code, registered name, and main line of business. You will also need to calculate your total tax payable for the quarter by subtracting allowable deductions and personal exemptions from your gross income and applying the relevant tax rate. You can choose between the graduated income tax rate or the flat rate of 8%.

The TRAIN Law, or the Tax Reform for Acceleration and Inclusion, has introduced some changes to the tax rules and sample computations for self-employed individuals and professionals. Under the TRAIN Law, individuals earning less than ₱250,000 annually are exempt from paying income tax returns. For those earning above this amount, the TRAIN Law gives two options for filing and computing taxes: the 3% percentage + income tax (using the graduated income tax table) or the new 8% Gross Receipt Tax.

Who needs to file 1701Q?

The BIR Form 1701Q, or the Quarterly Income Tax Return, must be filed by taxpayers who earn an income within the Philippines. This includes self-employed professionals and business owners, who need to fill out the form every three months, or every quarter.

• Self-employed: This includes freelancers, who are highly skilled in writing, design, IT, VA, etc. They offer their services to clients on a project-by-project basis and are not bound by a long-term contract.
• Professionals: PRC-licensed professionals like doctors, lawyers, and accountants are considered under this category.
• Estates and Trusts: If you have any income-generating assets entrusted to you, you are also required to file the 1701Q form.
• Resident citizens: Those engaged in trade, business, or the practice of a profession within or outside the Philippines.
• Resident aliens, non-resident citizens, and non-resident aliens: Those engaged in trade, business, or the practice of a profession within the Philippines.
• Estates and trusts: Those engaged in trade or business.
• Mixed-income earners: Employees with other sources of income, such as business income, self-employment, freelancing, or professional practice, must file the 1701Q form for those additional incomes.

How to fill out Part I of 1701Q

Part I of the 1701Q form requires you to provide your basic details. Here is a step-by-step guide on how to fill out this section:

• Taxpayer's Details: Include your Taxpayer Identification Number (TIN), RDO Code, registered name, and main line of business.
• Contact Information: Provide your telephone number, registered address, and email address.
• Filing Status: Indicate whether you are filing for the first, second, or third quarter of the tax year.

It is important to ensure that all the information provided in Part I is accurate and up-to-date. This section serves as an important background for the rest of the form and will be used by the Bureau of Internal Revenue (BIR) to process your tax return.

Additional Information on Filling Out 1701Q

• Deadlines: The 1701Q form should be filed on or before the 45th day following the close of each of the first three quarters of the taxable year. For the first quarter, the deadline is May 15; for the second quarter, it is August 15; and for the third quarter, it is November 15.
• Late Filing Penalties: Late filing can result in penalties, including a 25% surcharge, a 20% interest per annum, and a compromise penalty. If you neglect to pay your tax due, there is an additional 50% penalty on your tax due.
• Tax Computation: Your tax payable is calculated by taking your gross income, subtracting your allowable deductions and personal exemptions, and applying the appropriate tax rate. You can use offline or electronic filing, which automatically calculates your tax due.
• Online Filing: You can file the 1701Q form online using the BIR's Electronic Filing and Payment System (eFPS) or Electronic Bureau of Internal Revenue Forms (eBIRForms).
• Amendments: If you make a mistake on the form and notice it after submission, you must file an amended return. Depending on the nature of the error, you may be subject to penalties.
• Lowering Your Tax Liability: You can reduce your tax liability by accurately reporting your income and taking advantage of all allowable deductions and exemptions. Consulting a tax professional can help you understand these better.

How to calculate your total tax payable in Part II of 1701Q

Step 1: Compute your taxable income

Your taxable income is your gross income less any allowable deductions and personal exemptions. Gross income includes all sources of income, such as sales revenue, service fees, etc. Allowable deductions can be itemized deductions or standard deductions of 40% based on gross sales or receipts. You can claim personal exemptions as provided by law, such as the basic personal exemption of PHP 250,000 for individuals.

Step 2: Apply the relevant tax rate to your taxable income

The tax rate you apply depends on whether you choose the graduated income tax rate or the flat rate of 8%. The graduated income tax rates are as follows:

• Over PHP 250,000 but not over PHP 400,000: 15% of the excess over PHP 250,000
• Over PHP 400,000 but not over PHP 800,000: PHP 22,500 + 20% of the excess over PHP 400,000
• Over PHP 800,000 but not over PHP 2,000,000: PHP 130,000 + 25% of the excess over PHP 800,000
• Over PHP 2,000,000 but not over PHP 8,000,000: PHP 490,000 + 30% of the excess over PHP 2,000,000
• Over PHP 8,000,000: PHP 2,410,000 + 35% of the excess over PHP 8,000,000

The flat rate of 8% is applied to your gross income above PHP 250,000.

Step 3: Subtract any creditable tax withheld and tax paid in previous quarters

If any tax has been withheld at source, subtract that amount from your tax due. Also, subtract any tax paid in previous quarters to arrive at your tax payable or overpayment.

Example 1: Using the Graduated Income Tax Rate

Maria is a self-employed professional with gross sales of PHP 800,000 for the year.

• Taxable income = Gross sales – Personal exemption of PHP 250,000 = PHP 550,000
• Tax due = PHP 22,500 (fixed amount for income over PHP 400,000) + 25% of the excess over PHP 400,000 = PHP 30,000 (20% of PHP 150,000) = PHP 52,500

Example 2: Using the Flat Rate of 8%

Maria decides to use the 8% income tax rate option.

• Taxable income = Gross sales – Personal exemption of PHP 250,000 = PHP 550,000
• Tax due = 8% of taxable income = 8% of PHP 550,000 = PHP 44,000

What are Schedules 1, 2, and 3, and how do you fill them out?

Schedule I

This schedule is for those who chose the graduated income tax rate and are VAT individual taxpayers.

• Item 36: Input your sales net of discounts, returns, and allowances for the applicable quarter.
• Item 37: Input your cost of sales for the applicable quarter. This is only applicable to those who chose the itemized deduction.
• Item 38: This is automatically computed based on the difference between items 36 and 37.
• Item 39: Input your other allowed expenses or deductions for the applicable quarter. This is only applicable to those who chose the itemized deduction.
• Item 40: This is automatically computed based on 40% of item 36 (sales net).
• Item 41: This is automatically computed based on the difference between items 38 and 39 if itemized deduction or the difference between items 38 and 40 if OSD.
• Item 42: Pertaining to the taxable income of any previous quarter filed during the taxable year. For example, if you are currently filing for the second quarter, add the taxable income from the first quarter.
• Items 43 to 44: Input as applicable; otherwise, leave blank.
• Item 45: Refers to the total taxable income as of a given quarter.
• Item 46: Income tax due is automatically computed based on the graduated income tax bracket.

Schedule II

This schedule is for those who chose the 8% flat income tax rate and are non-VAT individual taxpayers.

• Item 47: Input your sales net of discounts, returns, and allowances for the applicable quarter.
• Item 48: Input as applicable; otherwise, leave blank.
• Item 49: This is automatically computed by adding items 47 and 48.
• Item 50: Pertaining to the taxable income of any previous quarter filed during the taxable year. For example, if you are currently filing the second quarter, add the taxable income from the first quarter.
• Item 51: Refers to the total taxable income as of a given quarter.
• Item 52: Input PHP 250,000 if you are purely engaged in business, self-employment, or the practice of profession. If you are a mixed-income (with employment) earner, leave it blank.
• Item 53: Refers to the net taxable income after deducting items 51 and 52.
• Item 54: Income tax due is automatically computed based on item 53 multiplied by 8%.

Schedule III – Tax Credits/Payments

• Item 55: Refers to any excess tax credits from the previous year's annual income tax return filing.
• Item 56: Refers to BIR Form 1701Q paid during the taxable year, if any.
• Item 57: Refers to BIR Form 2307 received from the customer and used as tax credits in the current year's previous quarters filing of BIR Form 1701Q, if any.
• Item 58: Refers to BIR Form 2307 received from the customer and used as tax credit in this quarter's filing, if any.
• Items 59 to 61: In general, leave blank unless applicable.
• Item 62: Refers to the total of all tax credits from items 55 to 61.
• Item 63: Refers to the total income tax payable after deducting all the tax credits, if any.

What are the deadlines for filing 1701Q, and what are the penalties for late filing?

The deadline for filing the 1701Q BIR Form is on or before the 45th day following the close of each of the first three quarters of the taxable year. The first quarter is due on or before May 15, the second quarter is on or before August 15, and the third quarter is on or before November 15.

Late filing can result in penalties, including a 25% surcharge, a 20% interest per annum, and a compromise penalty. If you neglect your tax due, there is an additional 50% penalty on top of your tax due. The BIR has a table for penalties with no tax due depending on gross sales/receipts.

Frequently asked questions