Chapt a Heated Income Tax Schemes, ‘come Tax Schemes, Accounting Periods, Meth 8, A sand R ing eport unting Periods, Methods, and Repo, Accounting Pe Reporting CHAPTER 4 ION OF ITEMS OF GROSS INCOME INCOME TAX SCHEMES, ACCOUNTING PERIODS, different tax schemes, items of gross income can be classified as COUNTING METHODS, AND REPORTING be subject 0a tax ‘subject to capital gatas tax Subject to regular tax Chapter Overview and Objectives ‘This chapter provides an overview of the income tax schemes under the Nic After this chapter, readers are expected to gain familiarization and demon, mastery of the following: a. Types of taxation schemes and their scope b. Concept of accounting period and its types ©. Concept of accounting methods and their accounting procedures ypes of tax returns, their deadline and place of filing 0 ouree The recipient income taxpayer receives INCOME TAXATION SCHEMES - The payor is the one required by law to.remit the tax to There are three income taxation schemes under the NIRC: ——.. does not need to file ‘because the withheld.tax constitutes the full tax due and.are ‘a. Final income taxation pion “" = x due and. are 'b. Capital gains taxation is eam system of taxation is referred to as the fi ¢. Regular income taxation 4s applicable only.on.certain passive income listed by.the-law. Not passive income are subject to final tax. An item of gross income is taxable in any of these tax schemes. 'vs. active income Item of gross income are earned with very minimal or even without active involvement inthe earning process. SOS ‘Taxable to any one of Final Income Capital Gains Regular Income income arises from transactions requiring a considerable degree Taxation Taxation Taxation staking from the taxpayer. It is the direct opposite of passive Mutually exclusive coverage ‘The tax schemes are mutually exclusive. An item of gross income that is subjes¥] tax in one scheme will not be taxed by the other schemes. Similarly, items income that are exempted in one scheme are not taxable by the other schemes \come taxation will be discussed in detail in Chapter 5. acd 100~ Income T; &% Schemes, Accounting Periods CaPrrat g, ‘Al Capital gains ne TAXATION Methods. end Repo», Capital a SSets a are the oppositeg of vt Latused in business, trade oF profession. Capita trade or profession nina assets. Ordinary assets are assets used in bus, ‘lon such as inventory, supplies or property, plant and auipmen Also, not all ca pital a to regular ing cPal ins are subject to capital gains tax, Mostof them ae sy, me tax, ee NIRC identifies capital gains tax as a final tax but they are bybrid form, final taxes since it also employs self-assessment method. The taxpayer sti , capital gains tax returns to report the gain and pay the tax to the govern, le Capital gains taxation applies only to two types of capital assets: domestic st and real property. cg Capital gains taxation will be discussed in detail in Chapter 6. REGULAR INCOME TAXATION ‘The regular income tax is the general rule in income taxation and covers al oj income such 1. Active income 2. Other income 2. Gains from dealings in properties, not subject to cap b. Other passive income not subject to final tax ital gains tax Items of gross income from these sources are valued or measured using q accounting method, accumulated over an accounting period, and reported tot government through an income tax return. Regular income taxation makes used the self-assessment method. ACCOUNTING PERIOD ‘Accounting period is the length of time over which income is measured au reported. ‘Types of Accounting Periods 1. Regular accounting period - 12 months in length a. Calendar b. Fiscal 2 Short accounting period - less than 12 months ee Income Tax Scheme; : Accounting Periods, Methods, and Reporting m January 1 and ends December 31. This corporate taxpayers and individual the calendar year: annual account ‘in length) no annual : mot Keep book nS Peviod (eles than 12 months n Tength) an individual shall be used when the: 'Ng Period is other than a fiscal year (Le. longer than period ts any 12-month period that ends on any day other than ‘The fiscal accounting period is available only to corporate income ;not allowed to individual income taxpayers. jthe Income Tax Return R ‘3 return is due for fling onthe fiteenth day of the fourth fe close of the taxable year of the r. The regular tax due fling ofthe incometaxretur : Due date of the annual income return ayers under the calendar year must file their annual income tax return for ‘current period not later than April 15 ofthe following year. 2. Acorporate taxpayer with fiscal year ending june 30, 2021 must file its annual income tax return not later than October 15, 2021, INSTANCES OF SHORT ACCOUNTING PERIOD 4. Newly commenced business ~ The accounting period covers the date of the start of the business until the designated year-end of the business. Mlustration Palawan Inc. started business operation on J calendar year accounting period. Palawan should file its first income tax return covering June 30 to December 31, 2021 for the year 2021.The return must be fled on or before April 15, 2022. rs the start of the. dead. june 30, 2021 and opted to use the 2. Dissolution of business - The accounting period cove current year to the date of dissolution ofthe business. 5. 47¥\!_ efor Mustration Tawi-tawi Inc, is on ceased business operation on Augu the fiscal year accounting period ending every March 31. It} st 15, 2021. 103Income T; ax Schemes, Accounting Periods, Methods, and Redon Tawi-taw) Shout ld fle ts ast income tax return covering Apri tt August 15, 2 2a) Under the old NI i from the conse dissolving corporations shall le their return within Securities on on of activities or 30 days from the approval of merger, 144653, August 26 gage, Commission in the case of merger: (BPI vs. c/? * 2011). Hence, the return shall be filed om oF before Sep N a For individuals, the the return shall be due on or before April 15, 2022. Thy Tequlrement for early filing under the NIRC. oa change, Of accounting period by corporate taxpayers ~ The accouy Perlod covers the start of the previous accounting period up to the design, Year-end of the new accounting period, Note that BIR approval is require changing an accounting period. It is not automatic. 4 Mlustration 1 Effective February, 2023, Sulu Corporation changed Its calendar accor Period toa fiscal year ending every June 30. Sulu Corporation shalt ite an adjustment return covering the income from Janay ‘0 June 30, 2023 on or before October 15, 2023. Mlustration 2 Effective August 2023, Zamboanga Company changed its fiscal year accouniy period ending very june 30 to the calendar year. Zamboanga Company should fle an adjustment return covering July 1 to Decniy “31,2023 on or before April 15,2024 Death of the taxpayer - The accounting period covers the start of ty calendar year until the death of the taxpayer. Mlustration ‘Mr. Regonald died on November 2, 2023. The heirs of Mr. Regonald or his estate administrators or executors shall ile hl income tax retura covering his income from January 1 to November 2, 2023. The no requirement for early filing in case of death of taxpayers. Hence, the income return shall be filed on or before the usual deadline, April 15, 2024. It must be noted that cut-off of income must be made at date point of de because properties such as income accruing before death are part of the esate the decedent in Estate Taxation while those income accruing after death aren! art thereof. Hence, its mandatory for the accounting period of the taxpayer 0 terminated exactly at the date of death, 104 ater 4~ Income Tax Schemes, Accounting Periods, Methods. and Reporting a r missioner mination of the accounting period of the by the Com! yrnal Revenue - The accounting Prod covers the ‘start of the current ate? F of reat the date ofthe termination ofthe accounting period. ation : aus (counting period ofa taxpayer under the calendar year basis was terminate ine taxpayer must file an income tax return covering January 1 to August 2, 2024 The ge trea an the to shal be eon pale mediately. INTING METHODS cco ‘methods are accounting techniques used to measure income. \ sypes of Accounting Methods ’rhe general methods * 4, Accrual basis b. Cash basis >. scallment and deferred payment method Percentage of completion method Outright and spread-out method Crop year basis General Methods for income from sale of goods or service . Accrual basis + (Inder the accrual basis of accounting, income is recognized when earned regardless of when received. Expense is recognized when incurred regardless of when paid. Income is said to have accrued when the right to receive fs established or when an enforceable right to secure payment is created against the counterparty. 2, Cash basis Under the cash basis of accounting, income is recognized when received and expense is recognized when paid. ‘Tax and accounting concepts of accrual basis and cash basis distinguished ‘The financial accounting concept of accrual basis and cash basis are similar to their tax counterparts, except only for the following tax rules: 1. Advanced income is taxable upon receipt. Income received in advance is taxable upon receipt in pursuant to the Lifeblood Doctrine and the Ability to Pay Theory. The subsequent taxation of 105~Incom: Income Tax Schemes, Accounting Periods, Methods. and Reporting le Tax ‘Schemes, Accounting Periods, advanced i nonatced income Methods, and Repo, jon a in the peri rer providing services reported the following in 2023 and 2024: Collection. This rule ‘appl earned will expose the government to i, MaxPay ervices 2023. ——2024__ 2. Prepatd: cable on the sale of HOE OF Bods jons from services rendered P 500,000 P 800,000 expense is non-deductible. collector come from services rendered 500,000 400,000 a. 8 accrued income of 202 © Frop00 ‘Auection from ices notyet rendered 300,000 200,000 are dedu i, collection Fe gpenses of eurrent period 400000 600,000 the pet 2st income in the fate period they EDIE oF are yt of = on eed Normatin3o: trade or profession of the taxpayer: jecrace OF accrued expenses of 2021 = 100,000 OF ally, the expensing of prepayments does not properly reflect the inc, payment © mexpenses ofthe following year 200,000 300,000 Gefen, qaxPaver. It also contradicts the Lifeblood Doctrine as it etc payment lefers the recognition of income. ‘Tax Accrual Basis 3 Special tax accounting requirement must be followed. ee There are cases where the tax law itself provides fur ai specif accouny cash income ane ee poneo treatment of an income or expense. The specified method must be obse ‘peerued income , 7 ¥ even if it departs from the basis regularly employed by the taxpayer ¢gjlecton for future services advances 300000 200.000 keeping his books. ‘Total gross income en x Less: Deductions 0 ‘The tax accrual basis income is determined as follows: ve expenses P 400,000 P 600,00 Cash income Po xxx 700K ‘Accrued cores ny ae 100,000 ph onan Accrued (uncollected) income FORAY, ‘amortization of prepaid expense __- Advanced income aos ‘Total deductions P_300,000 P__950,000 Gross income 2 ox Netincome B_g00.000 P_450,000 0 averting GAAP Accrual Basis to Tax Accrual Basis The ort dae epee adh fat cme nm A A a yok ened Cash expenses ret 1 Ruvanced income Is inherently not included in net income. For purposes of taxation, Accrued (unpaid) expense bagiacist advanced income is taxable. Hence, it must be added to accrual basis gross income. ue Amortization of prepayments and 2, In accounting, expense is recognized when accrued even if not yet paid: Prepaid expenses depreciation of capital expenditures ore ‘are inherently not deducted. Hence, no adjustment for prepayments is necessary un¢ Deductions Pac ‘eccrual basis: ‘The tax cash basis income is determined as follows: ‘Tax Cash Basis Cash income P souxxx — — tas Advanced income ee Collection from services rendered P 500,000 P*1,270, Gross income 2am Collection for future services - advances __300,000 __200.000 is Total gross income P_800,000 P 1.470.000 ‘The tax cash basis expense is determined as follows: ee eee ene Pon sacx Payments of expenses P 400,000 P *700,000 Amortization of prepayments and Amortization of 2023 prepayments = —— 200.000 depreciation of capital expenditures soto Total deductions P__400,000 P_900,000 Deductions Px Net income P_400,000 P__570,000 Note: P800,000 + P470,000 = P1,270,000*; P600,000 + P100,000 = P700,000"* iil 107Income Tax Schemes, Accounting Periods, Methods, and Repo, Points toc '0 consider J, Unde rn convert th Ing GAAP fn a natttP BSG bass ncome respi wen ree 98 when i anced Income is income erently recognized as eam Henes no austen nce 2 Under accounting cash jarting cash basis, expense ts deducted when paid Including prepaid om Hence, the e the deducted prepaid expenses must be reversed for purposes of tation, Sellers of goods e ‘ross income of taxpayers selling goods is determined as follows: Sales Penn C35: Cost of goods sold ak income 2a The cost of sales is computed using the inventory method: Beginning inventory P xxxs00 Add: Purchases <—inauas Total goods available for sale Po mcxxex Less: Ending inventory ——m 2s Cost of goods sold ‘The expensing of the purchase cost of goods does not properly and fairly refec ome Tax Schemes, Accounting Periods, Methods, and Reporti"é pstallment method, gross income is recognized and reported in : fe collection from the installment sales. 4 ethod is available to the foll od is available to the following taxpayers: of personal property on the sale of properties they regularly sell eal properties, only if thelr initial payment does not exceed 25% OF price je of non-dealers in property, real or personal, when their selling ds P1,000 and their intial payment does not exceed 25% of the means total payments by the buyer, in cash or property, in the r the sale was made. The term “initial payment” is broader than 0 includes the installment payments in the year of sale. ‘the entire amount for which the buyer is obligated to the das follows: P xxGoc 30630 income of the taxpayer particularly when there are significant fluctuations , inventory levels between accounting periods. This could expose the taxpayer tori (Bo _sacKou BIR assessment. The use of the accrual method is suggested but of course subject practical and cost considerations. Hybrid basis bination of accrual basis, cash basis, and/or ot The hybrid basis is any c methods of accounting, It isused when the taxpayer has several businesses wha employ different accounting methods. Mlustration Mr. Roxas has two proprietorship businesses: a service business which uses cash bi and a trading business which uses accrual basis. The gross income as determined by cash basis in the service business and the gra} income as determined by the accrual basis in the trading business are simply combi There is no requirement to measure the income of different businesses under a si accounting method. Sale of goods with extended payment terms ‘The sale of goods with extended payment terms may be reported using the acc basis, installment method, or deferred payment method. 108 ct price tract price is the amount receivable in cash or other property from the It is usually the selling price in the absence of an agreement whereby the assumes indebtedness on the property. hensive Hlustration ay Company, a car dealer, sold a machine with a tax basis of P1,200,000 on nt on January 3, 2023 Malaybay received a P200,000 cash downpayment and (000 promissory note for the balance payable in six installments of P300,000 ly 3 and January 3 thereafter. rice and gross profit on the sale is computed as follows P 200,000 1.800.000 P 2,000,000 (_2.200.000) P_800,000, 108Chapter 4 ~ Income Ta; XS hemes, Accounting Periods, Methods, and Repon, sccm basis Inder the accrual t basis, Income in 2023, the year of qt magaliment basis : ‘alaybs r rather thas nck etd use the installment method because it © a dealer dealer is refered ge ntchineries. The sal of properties of which the seller tested first. te as a “casual sale” Hence, the ratio of intial payment shy 800,000 gross profit shall be reported a, The initial payment of Malaybay can be computed as foo Cash downpayment (January 3, 2023) P 200,000 First instalment uly, 2029), 500.000 Initial payment ae Ratio of inittal payment (P500,000/P2,000,000) ‘Malaybay can use the installment method. The contract price or the amount due be determined next. Since there is no mortgage assumed by the buyer, the selling pj, is the contract price. ‘The gross profit will be reported in gross income throughout the installment perio the formula: (Collection/Contract price) x Gross profit Malaybay shall recognize the following gross income: ‘At the date of sale: (P200K/P2M x P800,000) B#0.000 Upon every installment: (P300K/P2M x P800,000) B120.000 If Malaybay is a dealer in machinery, it can avail of the installment method even if ratio of its initial payment over selling price exceeds 25% so long as the selling pe on the installment sale exceeds P1,000. With indebtedness assumed by the buyer The application of the installment method will slightly vary when the bye| assumes indebtedness on the property sold. In this case, the selling price is no longer the contract price. The contract pric] the residual amount after deducting the mortgage from the selling price. This, Selling price Less: Mortgage assumed by buyer Contract price yer 4 - Income Tax Schemes, Accounting Periods, Methods. and Reporting on ion smusteatty 3, 2023, Tagaytay, Inc. areal property dealer, sold alot costing P1.400.000 429'000.000. The lot was encumbered by a Pi,000,000 mortgage which se oped by the buyer. The buyer pald P200,000 downpayment. The balance is 50 Four installments of P200,000 every July 3 and January 3 thereafter. can be computed as follows: ne gross profit P 2,000,000 —1.400.000 B_00,000 te that dealers of real properties are subject to limitation on the use of installment Nott od The ratio of inital payment shall be determined first ary 3, 2023 cash downpayment P 200,000 Jains” 2023 installment “200.000 fritial payment E4o0.000 —20% patio of initial payment (P400,000/P2,000,000) ‘tagaytay is qualified to use the installment method. The contract price should be determined next. selling price P 2,000,000 Less: Mortgage assumed by buyer _11000.000 21,000,000 Contract price ‘Alternatively, the contract price can be computed directly as follows: cash downpayment P 200,000 Collectible balance (P200,000 x 4 installments) 800.000 Contract price B-1900,000 ‘Tagaytay shall recognize the following gross income: Atthe date of sale: (P200K/P1M x P600,000) Upon every installment: (P200K/P1M x P600,000) B_120,000 P120,000 Indebtedness assumed exceeds tax basis of property sold When the Indebtedness assumed by the buyer exceeds the tax basis of the property sold, the excess is an indirect receipt realized by the seller. This is an indirect downpayment which must be added as part of the contract price and the initial payment. Note also that under this condition, all collection from the contract including the excess mortgage is a collection of income,Chapter 4 - | = Income : ‘come Tax Schemes, Accounting Periods, Methods. and Repo, ‘The '¢ contract price shall be computed as follows: Selling price n Pp exe ae Mortgage assumed by buyer eet ash collectible Pee ene Excess indebtedness - constructive receipt — od ‘ontract price Pa The initial payment shall be computed as follows: Downpayment cee Installment in the year of sale ae Excess of mortgage over tax basis Pome Initial payment Illustration On July 1, 2023, a taxpayer made @ 1,300,000 for P2,002,000. The property ‘was agreed to be assumed by the buyer. ‘with the balance due in two installments of P200,000 on 41,2024, casual sale of property with @ tax basis y was subject to a P1,500,000 mortgage wig “The buyer paid 2 P100,000 down pay December. 31,2023 andy Je is determined as follows: ‘The gross profit on the sal P 2,000,000 Selling price Less: Tax basis of property sold 2.300.000 Gross profit 2_200,000 ‘The initial payment shall be determined first: peer saccaee P 100,000 December 31, 2023 insallment 200,000 Excess mortgage (P1,560,000 ~ P1, 200,000) 200,000 Initial payment P_500,000 Ratio of initial payment (PSOOK/P2,000,000) — 25h ‘The contract price shall be computed as: Selling price P 2,000,000 Less: Mortgage assumed ay buyer —1:500,000 Cash collectible P 500,000 Excess mortgage (P1,500,000 ~ P1,300,000) 200.000 Contract price ‘E_z00.000 Note that the gross profit on the sale is the same as the contract price. Hence, ay collection from the contract including the excess mortgage shall be recognised ® {gross income upon collection. 112 yeome Tax Schemes, Accounting Periods, Methods, and Reporting le (P200K down + PLOOK exces $00,000 cond istaliment- 7/1/2024 200.000 ‘on the contract 2_z09.000 jent method payment method Is a variant of the accrual basis and is used | ‘income When a non-interest bearing note is received as consideration in der the defeared payment method, the gross income is computed based on the resent value (discounted value) of a note receivable from the contract. ‘The Fiscount interest on the note is amortized (Le, spread) as interest income over the {pstallment C277. justration Mer 3 17,000,000, The ote, is due in december 31, 2024 e that the installment method cannot be allowed since the ratio of initial payment ready 50% (P1,000,000/P2,000,000). ‘Assume the note is non-interest bearing but: ‘900,000. Under the deferred payment method, 1, 2023, a taxpayer sold an office building costing P1,400,000 for buyer made P1,000,000 downpayment and the balance, evidenced by 2 annual installments of P500,000 every December 31 starting Not isal an be discounted at a local bank for the reportable gross income for each year shall be: ash downpayment P 1,000,000 Present value ofthe note _900,000 Selling price P 1,300,000 Less: Tax basis of the property __1.400,000 Gross income P500.000 250,000 P_50,000 Interest income (P 1,000,000 - P900,000) Note: 1. The difference between the face value and the present value of the note, known as discount, wil not be recognized in gross income at the date of sale but will be deferred and recognized as interest income. 2. The discount is amortized as interest income upon ever note as follows: P500,000 installment/P1,000,000 total note balance x P100,00 In the case of interest-bearing notes, the use of the deferred payment method will bear the same result as the accrual basis of accounting. 113 ry collection on the balance of the 0 discountome Tex Schemes, Accounting Pesiods, Methods, end Reporting Chapter 4 — 'ncome Tax Schemes, Accounting Periods, Methods, and fy, Giated value of the leasehold improvement is computed as? provement x Useful life of the improvement i _rcentage of Completion Method for Construction Contracts ler the percentage of completion method, the estimated BTSs incom, Construction is reported based on the percentage of Completion oy Construction project i 2023, Ivan leased a vacant fo contract. pletion in practice, BR nceructen to Greg under a 20-year lease ot ba el ‘ucted a building on the lot a ‘ol ,000. The sd by the NIRC. "tt Hite oF 30 ae cing On the lt ata total cost of 4,500,000. There are several methods of estimating project Com ‘output method based on engineering survey is prescribe Mlustration 000, pany accepted @ P5,000,000 firey lin wordings of Section 49 of Revenue Regulations No. 2, Ivan shall In 2023, Cagayan De Oro Construction Com! by 4 ‘of its construct ,fonstruction contract. The following shows the details of its 10M Activities entire P4,500,000 fair value of the improvement as gross income upon 2024 f the improvement in 2023. Conceptually, this is not income in its totality P 1,200,000 ‘amount referred to by the regulation, re (000,000 Construction expenses Ea Oki 100% gis Engineer's estimate of completion i be computed as fol d value of the property at the termination of the lease is the value of the ‘The reportable gross income on construction will simply lows. of the lessor. This can be computed by splitting the value of the 5,000,000 P 5,000,000 ntas follows: Contract price : Multiply by: ofcompetion Famoo00 7 5000,000 Less: Construction revenue in prior ear > pooen 20/30 x400000 P 3,000,000 Construction revenue this year 7500; 500, xP4500,000 _ 4.500.000 Less Expense during the year sannono 1200000 ia Construction gross income 2500.00 : 0,000 depreciated value of the improvement at the termination of the lease me from leasehold improvement ofthe lessor. Income from Leasehold Improvement Leasehold improvements are tangible improvements made by the lessee to read-out method, Greg shall spread the P1,500,000 income over 20 property of the lessor. Improvements will benefit the lessor when their usefi ‘an annual income of P75,000 (ie. P1.5M/20) from the leasehold extends beyond the lease term. This benefit is referred to as income from leas Year 2023 through Year 2042. improvement. Under Revenue Regulations No. 2, the income from leasehold improvement ca reported using either of the following method at the option of the taxpayer: improper introduction of legislation. Moreover, it has no sense after 1. Outright method The lessor may report 2s income the fair market value of such building income from the leasehold improvement will be claimed by the lessor improvements subject to the lease at the time when such building tion expense throughout the remaining life of the improvement. In overnment is taking advanced tax money which it will later return improvements are completed. —— ix deduction or tax shield to the taxpayer. Spread-out method ‘The lessor may spread over the life of the leasé the estimated dep administrators would still implement this rule, declaring the value of the value of such buildings or improvements at the termination of the les snt.as income may be perceived by taxpayers as unjust and abusive as it feport as income for each year of the lease an aliquot part thereof. ily cause cash flow problems. This is unnecessarily strangling the of leasehold improvement is an old regulation and is absent in the ‘code. As such, its legitimacy is questioned for lack of legal basis and is 115 114Chapter 4 — Income Tax ichemes, Accounti pene Tex Scheme ounting Periods, Methods. end Re, ‘, Accounting Periods, Methods, and Reporting goose that lay depreciated sarees Bolden egg. It would be more logical and acceptabie ™ OF the improvement at the termination of the lease 8 farmer, plans a crain cop that kas more than a year to harvest: at data on his farming operations: ? income under th 1e outright method. ing Note that re pt _ 20s _ _ 202s _ ‘Bardless cf whether the Cf ement or the di rae a inp decd eee tor aS rE Tat eifect to the tax revenue the government would be the samme excep a E 40000" 200000 00, ire changes in the income tax rates during the life of the improvement ~ 800800 300,000 Agricultural or Farming Income rming income using Farming income is commonly measured using the cash basis or accrual basis, ‘crop year method would be: as in the following: . 2023 24 _2025 : a. Animal husbandry = P 750900 1,000,000 b. Short-term crops 400000 500,000 Mlustration : = 2aaono Northern Barn had the following details of its agricultural activity during the yea, E-1so000 eT 200,000 Total sales of fattened pigs, P1,000,000 on credit P 12,000,000 E Increase in fair value of pig herd compared last year 2,700,000 Siege ounting method and isnot an accounting period. Total costs of farm feed and supplies bought 7,900,000 ‘accounting methods Total costs of farm feeds and supplies us 800. h more than one type of busines i siness using different accounting ‘Administrative and selling expenses 1,200,000 ‘consolidate the income reported using the different methods. There Northern Barn shall compute its net income using either method as follows: ‘to restate the income to a common accounting method. However, the d to each business should be applied consistently from period to Salts 12,000,000 P 11,000,000 Direct farm costs 6800000 = _6:800.00 ‘an Accounting Method Goss profit rom person P 5,200,000 5.200000 taxpayers to determine the most appropriate accounting method Less: administrative andsling expenses 1.200.000 y to themselves. The BIR cannot impose an accounting method to be 25000000 — 24,000,000 CIR may only prescribe an accounting method ‘The accounting for long-term crops depends on the harvesting frequency: did not use an accounting method, or a. Perennial crops - those that yield harvests through years method selected dues not clearly reflect the income of the b. One-time crops those that are harvested once after several years The initial farm development costs of perennial crops like mangoes, mangos) ing Period coconut and banana are capitalized and amortized over the expected year accounting period requires prior BIB notice. The following harvest. The harvests are accounted for using cash basis or accrual basis. One‘ are required: 2 crops are accounted for using the crop year basis. request addressed to the RDO having jurisdiction over the place of ifthe taxpayer showing: ginal and the proposed new accounting period nn for desiring to change the accounting period ‘copy of the SEC approved amended by-laws showing change in lod Crop year basis Under the crop year basis, farming income is recognized as the difference b the proceeds of harvest and expenses of the particular crop harvested. expenses of each crop are accumulated and deducted upon the harvest ofthe 116 17