STATEMENT OF THE PROBLEM

INPUT VAT FROM INVENTORIABLE PERSONAL EXPENSES AND

SHARED PURCHASES TO BE CLAIM BY THE BUSINESS

INTRODUCTION

Sales Tax, also known as Value Added Tax (VAT), is applied on

most goods and services. It is a form of indirect tax borne by the

ultimate customer. Businesses making sales to a customer collects the

sales tax from the customer on behalf of the tax authorities. The

business is therefore acting as an agent of government as a collector

of sales tax.

A business itself also pays tax in respect of the purchases of

goods and services from other suppliers. However, the business would

be able to recover the tax paid on such purchases from the tax

authorities. What the company finally pays or receives is the difference

between sales tax it collected from customers (output tax) and sales

tax it paid on purchases (input tax). If the output tax exceeds the

input tax, the business will pay the difference to tax authorities.

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Conversely, if input tax exceeds the output tax, then it may recover

the difference from tax authorities. The settlement of sales tax is

processed by the submission of periodic tax returns by the business.

All suppliers in a supply chain will be able to pass on any tax

paid on to its customer (as long as it is a registered supplier with tax

authorities) until the product or service is purchased by the final

customer. Such customers cannot recover the input tax they pay on

their purchase and are therefore the ultimate payers of sales tax.

Businesses are also final consumers in respect of certain goods and

services that they consume.

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BACKGROUND

Established in 2011, Ignacio Rebecca General Merchant (IRGM /

“the business”) is a school and office supplies, and party needs store

strategically located at Calixto Zaldivar St., Business Park, San Jose de

Buenavista, Antique.

The primary purpose of the institution of the business is to cater

the increasing demand in affordable school supplies and party needs in

San Jose de Buenavista and to participate in the bidding of office

supplies on Local Government Units and Government Agencies.

IRGM is a sole proprietorship owned by Evelyn M. Limiac and

managed by Marites A. Magrare.

The business started as a Non-VAT entity, paying 3% of sales for

income tax. Later in the year 2017, because of the increasing

government transactions, the sales of IRGM exceeded the Php

1,919,500 threshold of sales required for Non-VAT entities. To comply

for the requirements of Bureau of Internal Revenue, the accountant of

IRGM suggested to convert the business to VAT registered entity.

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Meaning, it will pay 12% output VAT on sales, to be offset by 12%

input VAT on purchases/expenses.

Since IRGM is a retail store, most of its purchases are related to

inventories for sale. Because of the large volume of purchase of

inventories, the business had higher input VAT compared to output

VAT in the first few months of the year.

In the latter part of the year, the manager noticed that the sales

are increasing, most especially government related sales. Therefore,

output VAT are becoming higher.

Because of that, the manager asked for advice from the nephew

of the proprietor of the business, who happened to be a Certified

Public Accountant and former Audit Associate from an established

audit firm in the country, and have experiences on external audit of

big companies.

The nephew of the owner suggested to ask for VAT Official

Receipts on all purchases of the business. The VAT in the Official

Receipts will be used as source of input VAT of the business. To make

sure that input VAT is always higher against output VAT, he also

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suggested to the manager and to the owner of the business to ask for

VAT Official Receipts even on the purchases of inventoriable personal

goods. The official receipts should be named to the business, Ignacio

Rebecca General Merchant.

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REVIEW OF RELATED LITERATURE

Sole Proprietorship

Definition: A business that legally has no separate existence

from its owner. Income and losses are taxed on the individual's

personal income tax return.

Because a sole proprietorship is indistinguishable from its owner,

sole proprietorship taxation is quite simple. The income earned by a

sole proprietorship is income earned by its owner. A sole proprietor

reports the sole proprietorship income and/or losses and expenses by

filling out and filing a Schedule C, along with the standard Form 1040.

Your profits and losses are first recorded on a tax form called Schedule

C, which is filed along with your 1040. Then the "bottom-line amount"

from Schedule C is transferred to your personal tax return. This aspect

is attractive because business losses you suffer may offset income

earned from other sources.

As a sole proprietor, you must also file a Schedule SE with Form

1040. You use Schedule SE to calculate how much self-employment

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tax you owe. You need not pay unemployment tax on yourself,

although you must pay unemployment tax on any employees of the

business. Of course, you won't enjoy unemployment benefits should

the business suffer.

Sole proprietors are personally liable for all debts of a sole

proprietorship business. Let's examine this more closely because the

potential liability can be alarming. Assume that a sole proprietor

borrows money to operate but the business loses its major customer,

goes out of business, and is unable to repay the loan. The sole

proprietor is liable for the amount of the loan, which can potentially

consume all her personal assets.

Article lifted from:

https://www.entrepreneur.com/encyclopedia/sole-proprietorship

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ANALYSIS AND RECOMMENDATIONS

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