items of passive income are subject

Chapter 4: Income tax schemes, to final tax.

accounting periods, and Reporting
Passive income is money from activities
Three income taxation schemes under where you(Taxpayers) have no active or
NIRC: direct involvement.
Examples:
1. Final Income Taxation  Earning interest on savings
2. Capital Gains Taxation  Rewards on a credit card
3. Regular Income Taxation  Getting cash back
 Purchasing dividend paying stocks
“ Item of gross income is taxable in any of
these tax schemes” Active income is income received from a
job or business venture that
Mutually exclusive coverage you(Taxpayers) actively participated in.
 An item of gross income that is Examples:
subject to tax in one scheme will not  Wages or Salaries
be taxed by other schemes  Tips
(Bawal na i-tax sa ibang schemes ang  Bonuses
item of GI na subject of tax ng isang  Commissions
schemes)
 Items of incomes that are exempted 2. Capital Gains Taxation - levied on
in one scheme are not taxable by earnings made from the sale of assets like
other schemes stocks or real estate.
(Kapag na-exempt na ung item of GI  Capital Assets - assets NOT USED in
sa isang scheme hindi na siya taxable business, trade or profession. Capital
sa ibang schemes) assets are significant pieces of property
such as homes, cars, investment
CLASSIFICATION OF ITEMS OF GROSS properties, stocks, bonds, and even
INCOME collectibles or art.
Gross Income subject to:  Ordinary Assets - assets USED in the
1. Final Tax business trade or profession such as
2. Capital Gains Tax inventory, supplies or PPE.
3. Regular Tax  NIRC indentifies capital gains tax as a
final tax but they are hybrid forms of final
1. Final Income Taxation - has been levied taxes since it also employs self-
on certain income that can not be assessment method.
deducted from the tax payable (not  Capital Gains Taxation applies only to
credited) at the end of the period two types of capitlal assets : domestic
because the tax obligation has been stocks and real property.
completed at the time of the tax cuts.
 Final Withholding tax system 3. Regular Income Taxation - the general
 Applicable only on certain passive rule in income taxation and covers all
income listed by the law. NOT ALL other income such as
1. Active Income
2. Other Income; INSTANCES OF SHORT ACCOUNTING
a) Gains from dealings in PERIOD
properties, not subject to capital
gains tax 1. Newly commenced business -
b) Other passive income not subject accounting period covers the date of the
to final tax start of the business until the designated
 Use of the self-assessment method year-end of the busness.
2. Dissolution of business - acc. period
Accounting period - length of time over covers the start of the current year to the
which income is measured and reported. date of dissolution of the business.
any time frame used for financial  Under old NIRC, dissolving
reporting. corp. Shall file their return within
30 days from the cessation of
Types of Accounting Period: activities
1. Regular accounting Period - 12 months  Or 30 days from the approval
lagi of merger by the SEC in the case
a) Calendar - Jan 1 - Dec 31, of merger.
available to both corporate and * for ind. the return shall be due on or
individual taxpayers. before Apr. 15 xxxx . There is no
UNDER NIRC, CALENDAR YR. SHALL requirement for early filling under NIRC
BE USED WHEN THE TAXPAYER’S 3. Change of accounting period by
; annual accounting period is longer corporate taxpayers - acc. period covers
that 12 months. the start of the previous acc period up to
; no annual acc. Period less than 12 the designated yr-end of the new acc.
months period. BIR approval is required in
; does not keep books changing an acc period. It is NOT
; individuals AUTOMATIC.
b) Fiscal - any period that ends on 4. Death of the taxpayer - acc. Period
any day other than Dec 31. covers the start of the calendar year unil
April 15 - Deadline of filing the income the death of the taxpayer.
tax return. Regular tax due is payable 5. Termination of the acc period of the
upon filing of the income tax return. taxpayer by the CIR - acc period covers
the start of the current year until the date
Due date of the annual income return of termination of the acc period.
1. Taxpayers under calendar yr. must file
the annual income tax return for the Accounting Methods - acc techniques
current period not later than April 15 of used to measure income.
the ff. Year Types of acc methods:
2. Corporate tax payer with fiscal year 1. The general Methods
ending June 30,2021 must file its annual a) Accrual Basis
income tax return not later than Oct. 15, b) Cash Basis
2021. 2. Installment and deferred payment
method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis

General Methods for income from sale of

goods or service

1. Accrual Basis - recognizes business

revenue and matching expenses when
they are generated—not when money
actually changes hands. This means
companies record revenue when it is
earned, not when the company collects
the money.
2. Cash basis - an accounting method that
recognizes income and expenses only
when cash is exchanged.