Income from freelancing has to be reported under the head “Profits and Gains from Business or Profession”.
With effect from financial year 2020-21, individuals can opt for alternate concessional tax rate (CTR) regime.
Due to unmatched flexibility, even traditional jobholders are now seen freelancing on the side in all industries—including sales, education, delivery, IT, and data processing. Pertinently, the supplemental income earned through independent work has to be offered to tax under the Income Tax Act.
Tax on income from freelancing
Income from freelancing has to be reported under the head “Profits and Gains from Business or Profession”. Although the tax rate at which a freelancer’s income is assessed is no different than that applicable to a salaried individual, the “standard deduction” allowed from salary income cannot be claimed on income from freelancing.
Nevertheless, a multitude of expenses actually incurred in a fiscal year in relation to the work undertaken can be claimed as deduction while computing taxable income. For instance, rent paid in respect of a property used for carrying out work, depreciation on eligible capital assets, expenses incurred towards office supplies, monthly telephone bills, internet bills, conveyance expenses, etc., can be claimed as deduction. When incurrence of such expenses is for professional and personal purposes both, only a proportionate amount attributable to professional use can be claimed.
Individuals deriving income from business or profession are required to furnish the return of income in ITR 3. Accordingly, the same form shall be applicable to freelancers earning income from independent work, except when the option of presumptive taxation is chosen.
Taxability on presumptive basis
Generally, all persons engaged in business or profession including consultancy or freelancing are obligated to maintain regular books of accounts and get them audited in order to correctly ascertain taxable income. However, to accord relief to small individual taxpayers from the strenuous task of maintaining books, specified professionals are allowed taxation on presumptive basis wherein taxable income is deemed to be 50% of gross receipts. If the scheme is adopted, no additional deductions in respect of any expenses are allowed as deduction.
Freelancers can opt for the scheme if their gross receipts do not exceed Rs 50 lakh. Adoption of presumptive taxation scheme entails payment of the entire amount of advance tax on or before the 15th of March of the financial year, failing which interest under Section 234C is imposed. The form for furnishing return of income under this scheme is ITR-4.
Opting for concessional tax regime
With effect from financial year 2020-21, individuals can opt for alternate concessional tax rate (CTR) regime wherein income can be offered to tax at lower slab rate provided certain stipulated deductions, exemptions, brought forward losses and unabsorbed depreciation are forgone. It is optional for taxpayers to exercise this option in every assessment year.
However, taxpayers having business or professional income cannot choose between the two tax regimes in every financial year. He will have only one opportunity to do so. Once this option of switching back is exercised, then the individual cannot choose the new tax regime in any of the future financial years. Consequently, a freelancer shall also have only one opportunity to switch-over, post which he will have to continue paying taxes under the chosen regime until freelancing work ceases to be undertaken.
The writer is director, Nangia Andersen LLP. With inputs from Vasudha Arora.
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Typically, a corporation is created for profit. This is why one of the most overlooked taxes of corporations is the Minimum Corporate Income Tax (MCIT) because there are only a few instances where a corporation earns so little that they are not subject to the normal income tax rates.
In actuality, most corporations may be subjected to either one of the following income taxes, namely, Regular Corporate Income Tax (RCIT) or Minimum Corporate Income Tax (MCIT).
Table of Contents
What is the Minimum Corporate Income Tax (MCIT)?
- RCIT is lower than MCIT and;
- The corporation is in its 4th year of operations following the year of the start of the business.
Basically, the tax code allows the government to tax most domestic and resident foreign corporations whether or not they earn taxable income.
When can a Corporation be subject to MCIT?
A corporation may be subject to MCIT if the RCIT is lower than the computed MCIT.
How do I compute for MCIT?
The MCIT is 2% of Gross Income, which is Net Sales or Revenue (Gross sales or revenue less discounts, returns or allowances) less Cost of Sales or Services;
Cost of Sales or Services is directly incurred in bringing about the revenue or sales.
For a trading or merchandising concern, ‘cost of goods sold’ shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, ‘cost of goods manufactured and sold’ shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
Note, however, that specific industries have different components of the Cost of Sales or Services, as provided under RMC No. 4-2003.
XYZ is a domestic corporation in its 10th year of business. The following is the company’s income statement for the current taxable year:
Based on the above, the RCIT shall be 1,500,000 (5,000,000*0.3) while the MCIT shall be 1,600,000 (80,000,000*.02).
Therefore, the company shall pay the higher income tax which is the MCIT amounting to 1,600,000 for the current taxable year.
When does a corporation start to be covered by MCIT?
A company is liable for MCIT starting the 4th year immediately following the year in which it commenced its operations.
Meaning, if the Company started operating in 2016 (regardless of the month), it will be liable for MCIT, provided it is higher than RCIT, starting 2020, which is the 4th year from 2017 (the year following the year in which it commenced operations).
The MCIT does not apply to non-resident foreign corporations. However, resident Foreign Corporations are also liable for MCIT under Sec. 28(A)(2) of the Tax Code.
When to pay MCIT?
The tax due shall be equivalent to the MCIT whenever it is higher than RCIT. Accordingly, its computation is done quarterly, same as RCIT, on a cumulative basis (i.e., the income from and expenses from the first quarter are included in the preparation of the 2nd quarter return and so on).
Thus, if in a taxable quarter, the MCIT is higher than the RCIT, the former shall be the amount due for payment, less any available tax credits.
Carry-forward Provision of MCIT.
In the period it is to be credited, the RCIT should be higher than the MCIT. Thus, if in the three succeeding taxable years, the MCIT is higher than the RCIT, the excess MCIT carry-over would expire and would no longer be creditable beyond that period.
Accounting entry: the accounting entry for excess MCIT carry-over would be:
Debit: Provision for income tax/Income Tax Expense
Debit: Deferred Charge – MCIT/MCIT Carry-over
Credit: Income Tax Payable/Cash
The provision for income tax or the income tax expense would be equivalent to the normal tax (RCIT), while the Income Tax Payable/Cash would be equivalent to the MCIT. The difference is treated as an asset that may be creditable against the RCIT in the succeeding 3 years where RCIT is higher.
Suspension of MCIT.
- Prolonged labor disputes: losses arising from a strike staged by the employees which lasted more than 6 months within a taxable period and which has caused the temporary shutdown of business operations;
- Because of force majeure: means a cause due to irresistible force by “act of God” like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war or insurgency.
- Legitimate business reverses: include substantial losses due to fire, robbery, theft or embezzlement, or other economic reasons as determined by the Secretary of Finance.
Which corporations are not subject to MCIT?
About the Author.
Miguel Dar is a CPA and an experienced tax consultant who specializes in tax audits. He provides tax advice to various start-up enterprises and clarified tax concerns of individual taxpayers. This includes assisting clients in registering their businesses, tax and bookkeeping training for start-up businesses, settling open cases, tax planning for future tax compliance and answering tax-related inquiries. Connect with him on Linkedin.
- National Internal Revenue Code (1997), Sec. 27(A)
- National Internal Revenue Code (1997), Sec. 27[E]
- National Internal Revenue Code (1997), Sec. 27[E]
- The Real Estate Investment Trust (REIT) Act of 2009, Section 1, Rule 10
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This article was co-authored by Alan Mehdiani, CPA. Alan Mehdiani is a certified public accountant and the CEO of Mehdiani Financial Management, based in the Los Angeles, California metro area. With over 15 years of experience in financial and wealth management, Alan has experience in accounting and taxation, business formation, financial planning and investments, and real estate and business sales. Alan holds a BA in Business Economics and Accounting from the University of California, Los Angeles.
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A financial report, or financial statement, consists of a balance sheet, an income statement, a statement of retained earnings, and a statement of cash flows. These 4 documents together communicate a company’s performance over a period of time.  X Expert Source
Alan Mehdiani, CPA
Certified Public Accountant Expert Interview. 9 July 2020. Private companies may need to distribute quarterly or annual financial reports to banks or lenders. Publicly-traded corporations in the US are required to submit audited financial reports to the Securities and Exchange Commission (SEC). If you’re a small business owner, you may choose to prepare your own financial reports. However, if your business is large or complex, you’d likely be better off to hire an accountant.  X Research source