CHAPTER 04: Income Tax Schemes, Accounting Periods, Accounting Methods and Reporting

INCOME TAXATION SCHEMES  capital gains tax

 imposed on the gain realized on the
1. Final income taxation
sale, exchange and other dispositions of
2. Capital gains taxation
certain capital assets
3. Regular income taxation
 capital assets
Mutually Exclusive Coverage  assets not used in business, trade or
profession
 An item of gross income subject to tax in  ordinary assets
one scheme will not be taxed by other  assets used in business trade or
schemes profession
 Items of income exempt in one scheme are
not taxable by other schemes NOTE: Most of capital gains are subject to
regular income tax.
CLASSIFICATION OF ITEMS OF GROSS
INCOME  CGT: hybrid of final withholding tax system
and self-assessment method
1. Gross income subject to final tax  Capital gains taxation applies only to two
2. Gross income subject to capital gains types of capital assets: domestic stocks
tax and real property.
3. Gross income subject to regular tax
REGULAR INCOME TAXATION
FINAL INCOME TAXATION
1. Active income
 Final Withholding Tax System 2. Other income
 full taxes withheld by the income payor a. Gains from dealings in properties, not
at source subject to capital gains tax
 recipient receives income net of taxes b. Other passive income not subject to
 payor remits the tax to the government final tax
 recipient does not need to file income  regular income taxation: self-assessment
tax returns method
 withheld tax constitutes the full tax due
and is considered final payment ACCOUNTING PERIOD - the length of time
 Applicability over which income is measured and reported
 applies only to certain passive income
Types of Accounting Periods
listed by law
 NOT ALL passive income items are 1. Regular accounting period - 12 months in
subject to final tax length
Passive Income vs. Active Income a. Calendar
b. Fiscal
 Passive income
 earned with very minimal or even 2. Short accounting period - less than 12
WITHOUT ACTIVE INVOLVEMENT of months
the taxpayer in the earning process.
Calendar year
 Active or regular income
 arises from transactions requiring a  starts from January 1 and ends December
CONSIDERABLE DEGREE OF 31
EFFORT or undertaking from the  available to both corporate taxpayers and
taxpayer individual taxpayers.
Under the NIRC, the calendar year shall be
used when the:

CAPITAL GAINS TAXATION

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 1. taxpayer's annual accounting period is ACCOUNTING METHODS - accounting
other than a fiscal year (i.e. longer than techniques used to measure income
12 months in length)
Types of Accounting Methods
2. taxpayer has no annual accounting
period (i.e. less than 12 months in 1. The general methods
length) a. Accrual basis
3. taxpayer does not keep books b. Cash basis
4. taxpayer is an individual 2. Installment and deferred payment method
3. Percentage of completion method
Fiscal year
4. Outright and spread-out method
 any 12-month period that ends on any day 5. Crop year basis
other than December 31
General Methods for Income from Sale of
 available only to corporate income
Goods or Service
taxpayers
1. Accrual basis
Deadline of Filing the Income Tax Return
 Accrued Income
 Filing Deadline
o income accrued when the right to
 return is due on the fifteenth day of the
fourth month following the close of the receive is established
taxable year o enforceable right to secure payment is
 Tax Payment created against the counterparty
 regular tax due is payable upon filing of 2. Cash basis
the income tax return
Tax and Accounting Concepts of Accrual
INSTANCES OF SHORT ACCOUNTING Basis and Cash Basis Distinguished
PERIOD
The financial accounting concept of accrual
1. Newly Commenced Business basis and cash basis are similar to their tax
 accounting period covers from start of counterparts, EXCEPT only for the following tax
business to designated year-end rules:
2. Dissolution of Business
 accounting period covers from start of  Advanced income is taxable upon
current year to date of dissolution receipt.
3. Change of Accounting Period by  pursuant to Lifeblood Doctrine and
Corporate Taxpayers Ability to Pay Theory
 accounting period covers from start of  this rule is applicable ONLY on the sale
previous period to designated year-end of services not on goods
of new period  Prepaid expense is non-deductible.
 requires BIR approval, not automatic  deducted against income in the future
4. Death of the Taxpayer period they expire or use
 accounting period covers from start of  Special tax accounting requirement must
calendar year to date of death be followed provided by some laws.
 no requirement for early filing in case of
3. Hybrid Basis
death of taxpayers
 the filing of income tax return is due on  any combination of accrual basis, cash
or before the usual deadline, April 15 basis, and/or other methods of accounting
5. Termination of Accounting Period by  used when the taxpayer has several
Commissioner of Internal Revenue businesses which employ different
 accounting period covers from start of accounting methods
current year to date of termination
 the income tax return and the tax shall
be due and payable IMMEDIATELY Sale of Goods with Extended Payment
Terms
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 May be reported using: Initial payment Pxx
1. accrual basis Ratio of Initial Payment
2. installment method
3. deferred payment method Initial payment
Selling price
1. Installment method STEP 5: Determine the contract price.

 Gross income is recognized and reported in Contract price - the amount receivable in cash
proportion to the collection from the or other property from the buyer
installment sales.
Selling price Pxx
STEP 1: Determine if the transaction can Less: Mortgage assumed by the (xx)
use installment method. BUYER
Cash collectible xx
Installment method is available to the following Add: Excess indebtedness – xx
taxpayers: constructive receipt
Contract price Pxx
1. Dealers of personal property on the sale
of properties they regularly sell
2. Dealers of real properties, only if their STEP 6: The gross profit will be reported in
initial payment does not exceed 25% of gross income throughout the installment
the selling price period by:
3. Casual sale of non-dealers in property,
real or personal, when their selling price Collection
x Gross profit
Contract price
exceeds P1,000 and their initial
Accrual basis
payment does not exceed 25% of the
selling price Under the accrual basis, the entire gross profit
shall be reported as gross income in the year of
STEP 2: Determine the selling price.
sale.
Selling price - the entire amount for which the
Indebtedness Assumed Exceeds Tax Basis
buyer is obligated to the seller
of Property Sold
Cash received and/or receivable Pxx
 When buyer's assumed indebtedness
FMV of the property received or xx
receivable exceeds tax basis of property sold, excess
Mortgage or any indebtedness xx is an indirect receipt for the seller.
assumed by the buyer  Indirect down payment must be added to
Selling price Pxx contract price and initial payment.
STEP 3: Determine the gross profit/income.  All collection from the contract, including
excess mortgage, is a collection of income.
Selling price Pxx
Less: Tax basis of the asset sold (xx) 2. Deferred Payment Method
Gross profit Pxx
 Deferred payment method is a variant of
NOTE: Tax basis refers to the cost of the asset
the accrual basis used for non-interest
sold.
bearing notes received as consideration in a
STEP 4: Determine the ratio of initial sale.
payment if it will not exceed 25% of the  Gross income computed based on present
selling price. value (discounted value) of a note
receivable from the contract.
Initial payment – total payments by the buyer,  Discount interest on the note is amortized
in cash or property, in the taxable year the sale as interest income over the installment term.
was made (including installment payments)
Cash down payment Pxx
Down payment Pxx PV of the note xx
Installments in the year of sale xx Selling price xx
Excess of mortgage over tax basis xx Less: Tax basis of the property (xx)
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 Gross income Pxx  report aliquot part (amortized income
 Gross income is recognized at the date per year) as income each year of
of sale. lease

Face amount of the note Pxx Depreciated Value of the Leasehold

Less: Present value of the note xx Improvement
Discount Pxx
Excess useful life over
 Discount will be deferred and
lease term Cost of
recognized as interest income. x
Useful life of the improvement
Installment improvement
Interest
Total note x Discount =
income
balance
Agricultural or Farming Income
Farming income is commonly measured using
NOTE: In the case of interest-bearing notes,
the cash basis or accrual basis, such as in the
the use of the deferred payment method will
following:
bear the same result as the accrual basis of
accounting. a. Animal husbandry
b. Short-term crops
The Percentage of Completion Method for
Construction Contracts Sales Pxx
Less: Direct farm costs (xx)
 The estimated gross income from Gross profit from operations Pxx
construction is reported based on the Less: Administrative and selling (xx)
percentage of completion of the expenses
construction project. Net income Pxx
 Output method based on engineering The accounting for long-term crops
survey is prescribed by the NIRC. depends on the harvesting frequency
Contract price Pxx a. Perennial crops – those that yield
Multiply by: % of completion xx harvests through years; cash basis OR
Construction revenue Pxx accrual basis
Less: Constructive revenue in prior year (xx) o Initial farm development costs are
Construction revenue this year Pxx capitalized.
Less: Expense during the year (xx) b. One-time crops – those that are
Construction gross income Pxx harvested once after several years; crop
Income from Leasehold Improvements year basis
 Leasehold Improvements Crop year basis
 tangible improvements made by lessee
to lessor's property  farming income is the difference between
 benefits lessor if useful life extends the proceeds of harvest and expenses of
beyond lease term the particular crop harvested
 benefit: income from leasehold  the expenses of each crop are
improvements accumulated and deducted upon the
 Reporting Methods harvest of the crop
1. Outright Method  an accounting method, not an accounting
 report fair market value of period
improvements as income when
completed

2. Spread-out Method
 spread estimated depreciated value Use of Different Accounting Methods
of improvements over lease life

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 Taxpayers with multiple businesses using 1. Manual Filing System
different accounting methods can
Under the NIRC, the income tax return shall be
consolidate income reported from each
filed to the following, in descending order of
method.
priority, within the revenue district office where
 No need to restate income to a common
the taxpayer is registered or required to
accounting method.
register:
 Methods applied to each business should
be used consistently from period to period. 1. An authorized agent bank (AAB)
2. Revenue Collection Officer
Selection of Accounting Method
3. Duly authorized city or municipal
The NIRC allows taxpayers to determine the treasurer, if there is no BIR office in the
most appropriate accounting method that apply locality
to themselves. The BIR CANNOT impose an
2. e-BIR Forms
accounting method to be used. The CIR may
only prescribe an accounting method if:  If there are no penalties requiring BIR
assessments, taxpayers print a hard copy of
a. The taxpayer did not use an accounting
the filled tax returns.
method, OR
 Taxpayers proceed directly to the bank for
b. The accounting method selected does
payment.
not clearly reflect the income of the
taxpayer. 3. Electronic Filing and Payment System
(eFPS)
Change in Accounting Period
Taxpayers Mandated to Use the eFPS
 Change in accounting period requires prior
BIR notice. 1. Large taxpayers duly notified by the BIR
 Request for approval must be filed at least 2. Top 20,000 private corporations duly
60 days before the new accounting period notified by the BIR
begins. 3. Top 5,000 individual taxpayers duly
 Certification approving the new accounting notified by the BIR
period must be released within 30 days of 4. Taxpayers who wish to enter into
receiving complete documentary contracts with government offices
requirements. 5. Corporations with paid-up capital of
P10,000,000
TAX REPORTING
6. PEZA-registered entities and those
Types of Returns to the Government located within Special Economic Zones
7. Government offices, in so far as
1. Income tax returns – provide details of the
remittance of withheld VAT and
taxpayer's income, expense, tax due, tax credit
business tax are concerned
and tax still due the government.
8. Taxpayers included in the Taxpayer
2. Withholding tax returns – provide reports of Account Management Program (TAMP)
income payments subjected to withholding tax 9. Accredited importers, including
by the taxpayer-withholding agent. prospective importers required to secure
the Importers Clearance Certificate
3. Information returns – no payment required (ICC) and Custom brokers Clearance
but important in tax mapping and evaluation of Certificate (BCC)
tax compliance
In case of unavailability of the eFPS
NOTE: Non-filing of any return is subject to during maintenance or instances of technical
penalties, fines, and or imprisonment. errors, eFPS enrolled taxpayers may file
manually.

MODE OF FILING INCOME TAX RETURNS PAYMENT OF INCOME TAXES

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 capital gains tax and regular income tax  Failure to file a separate information return,
– “pay as you file” statement, list, or keep records is subject to
 Installment payment of income tax is a penalty of P1,000 for each failure.
allowed on certain conditions.  The penalty applies unless the failure is due
to reasonable cause, not willful neglect.
BASIC COMPARISON OF FILING AND
 Total penalties for all failures during a
PAYMENT SYSTEMS
calendar year shall not exceed P25,000.
Manual e-BIR eFPS
Forms
Data entry Manual Electronic Electronic
Filing/ Manual Electronic Electronic
Submission
Tax Payment Manual Manual Electronic

PENALTIES FOR LATE FILING OR

PAYMENT OF TAX
1. Surcharge
a. 25% of the basic tax
o simple neglect – when the taxpayer
filed a return before receipt of BIR
notice
b. 50% of the basic tax
o willful neglect – when the taxpayer
received a BIR notice before the
actual filing
2. Interest
 double of the legal interest rate for loans OR
forbearance of any money in the absence of
any express stipulation
 current legal interest – 6%
Actual days of 12% of the
delay x net tax = Interest
365 days due

NOTE: 365 days will still be used as

denominator in the formula if the problem is
related to leap year.
3. Compromise penalty – an amount paid in
lieu of criminal prosecution over a tax violation
NOTE: If the taxpayer paid his tax due on time
but in wrong place or RDO,
Tax still due (a) Pxx
Add: Wrong penalty venue (a x 25%) xx
Total amount due Pxx

PENALTIES FOR NON-FILING OR LATE

FILING OF INFORMATION RETURN

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