Cia15 Study Guide 4 Bac 103 Taxation Income Taxation Sfernando

FM-AA-CIA-15 Rev.
0 10-July-2020
Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_
STUDY GUIDE FOR MODULE NO. _4_
 Module 4: Tax Schemes, Periods, and Methods and Rep
MODULE OVERVIEW
 Income taxation schemes

 Classification of gross income
 Accounting period
 Short accounting period
 Accounting methods
 The self-assessment method
 The withholding system
 Information returns
 Mode of filing income tax returns
 Taxpayer mandated to use the eFPS
 Payment of taxes
 Penalties for filing of returns and late payment of tax
MODULE LEARNING OBJECTIVES
At the end of this module, you should be able to demonstrate mastery of the following:
d. types of tax
returns, their Demonstrate mastery of the following:
deadline and place
of filling a. types of taxation schemes and their scope
b. concept of accounting period and its types
c. concept of accounting methods and their accounting process LEARNING
CONTENTS (title of the subsection)
INCOME TAXATION SCHEMES

There are three income taxation schemes under the NIRC:
a. Final income taxation
b. Capital gains taxation
c. Regular income taxation
An item of gross income is taxable in any of these tax schemes.
Item of gross Income
Taxable to any one of
Final income Capital Gains Regular Income

Taxation Taxation Taxation
Mutually exclusive coverage
PANGASINAN STATE UNIVERSITY 1

FM-AA-CIA-15 Rev. 0 10-July-2020
The tax schemes are mutually exclusive. An item of gross income that is subject to tax in one
scheme will not be taxed by the other schemes. Similarly, items of income that are exempted in
one schemes are not taxable by the other schemes.
CLASSIFICATION OF ITEMS OF GROSS INCOME

Because of the different tax schemes, Items of gross income can be classified as follows:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
FINAL INCOME TAXATION

Final Income taxation is characterized by final taxes where taxes are withheld or deducted at
source. They taxpayer receives income net of tax. The payor of the income remits the tax to the
government. Final taxation is applicable only to certain passive income. Not all passive income
is subject to final tax.
Passive income vs. active Income

Passive incomes are earned with very minimal or even without active involvement of the
taxpayer in the earning process.
Example of passive income:

1. Interest income from banks
2. Dividends from domestic corporation
3. Royalties
Active or regular income arises from transactions requiring a considerable degree of effort or
undertaking from the taxpayers. It is the direct opposite of passive income.
Examples of active income:

1. Compensation income
2. Business income
3. Professional income
Final income taxation will be discussed in detail in chapter 5.
CAPITAL GAINS TAXATION

A capital gains tax is imposed the capital gain in the sale, exchange and other disposition of
certain capital assets. Also, not all capital gains are subject to capital gains tax. Most of them are
subject to regular income tax.
Capital assets vs. ordinary assets

Capital assets include all other assets other than ordinary assets. Ordinary assets are assets
directly used in the business, trade or professional of the tax payer such as inventory, supplies
and items of property, plant and equipment.
Capital gains vs. ordinary gains

Capital gains arise from the sale, exchange and other disposition of capital assets Ordinary
gains arise from the sale, exchange and other disposition of ordinary assets.
The NIRC identifies capital gains tax as a final tax but they are not actually final tax similar to
those imposed under final income taxation. The taxpayer still files a capital gains tax. Capital
gains taxation applies only to two types of capital assets domestic stocks and real property.
Capital gains taxation will be discussed in detail in Chapter 6.
REGULAR INCOME TAXATION

The regular income taxation is general rule in income taxation and covers of other income such
as:
1. Active income
2. Gains from dealings in properties
a. Dealings in ordinary assets
b. Dealings in other capital assets not subject to capital gains tax
3. Other income, active or passive, not subject to final tax
Items of gross income from these sources are measured using an accounting method,
accumulate over an accounting period. And reported through an income tax return.
ACCOUNTING PERIOD
Accounting period is the length of time over which income is measured and 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
Calendar year
The calendar accounting period starts from January 1 and ends December 31. This accounting
period is available to both corporate taxpayer and individual taxpayers.
Under the NIRC, the calendar year shall be used when the:
1. Taxpayer’s annual accounting period is other than a fiscal year
2. Taxpayer has no annual accounting period
3. Taxpayer does not keep books
4. Taxpayer is an individual
Fiscal year
A fiscal accounting period is any 12 – month’s period that ends on any day other than
December 31. The fiscal accounting period is available only to corporate income taxpayers and
is not allowed to individual income taxpayers.
Deadline of Filling the Income Tax Return

Under the NIRC, the return is due for filling on the fifteenth day of the fourth month following
the close of taxable year of the taxpayer. The regular tax due is payable upon filling of the
income tax return.
Illustration: Due date of the annual income return

1. Taxpayers under the calendar year must file their annual income tax return for the
current period not later than April 15 of the following year.
2. A corporate taxpayer with fiscal year ending June 30, 2014 must file is annual income
tax return not later than October 15, 2014.
INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business – The accounting period covers the date of the start of the
business until the designated year-end of the business.
Illustration
Palawan Inc. started business operation on June 30, 2014 and opted to use the calendar year
accounting period.
Palawan should file first income tax return covering June 30 to December 31, 2014 for the year
2014. The return must be filed on or before April 15, 2015.
2. Dissolution of business – The accounting period covers the start of the current year to
the date of dissolution of the business.
Illustration
Tawi-tawi Inc. is on the fiscal year accounting period ending every March 31; it ceased
business operation on August 15, 2014.
Tawi-tawi should file its last income tax return covering April 1 to August 15, 2014.
Under the old NIRC, dissolving corporation shall file their return within 30 days from the
cessation of activities or 30 days from the approval of merger by the Securities and Exchange
Commission in the case of merger, (BPI vs. CIR 1444653, August 28, 2011). Hence, the return
shall be filed on or before September 15, 2014.
For individuals, the return shall be due on or before April 15, 2015. There is a requirement for
early filling under the NIRC.
1. Change of accounting period by corporate taxpayers – The accounting period covers

the start of the previous accounting period up to designated year-end of the new
accounting period. Note that BIR approval is required for changing an accounting period
.It is not automatic.
Illustration 1
Effective February, 2014, Sulu Corporation change its calendar accounting period to a fiscal
year ending every June 30.
Sulu Corporation shall file an adjustment return covering the income from January 1 to June
30, 2014 on or before October 15, 2014.

Illustration 2
Effective August 2014, Zamboanga Company change its fiscal year accounting period ending
every June 30 to the calendar year.
Zamboanga Company should file an adjustment return covering July 1 to December 31, 2014
on or before April 15, 2015.
2. Death of the taxpayer – The accounting period covers the start of the calendar year
until the death of the taxpayer.
Illustration
Mr. Jacob died on November 2, 2014.
The heirs of Mr. Jacob or his estate administrators or execute shall file his last income tax
return covering his income from January 1 to November 2, 2014. There is no requirement for
early filling case of death of taxpayer. Hence, he income tax
Return shall be file on or before the usual deadline, April 15, 2015.
3. Termination of the accounting period of the taxpayer by the commissioner of

Internal Revenue – The accounting period covers the start of the current year until the
date of the termination of the accounting period.
Illustration
The accounting period of taxpayer under the calendar year basis was terminated by the CIR on
August 1, 2014.
The taxpayer must file an income tax return covering January 1 to August 2, 2014. The income
tax return and the tax shall be due and payable immediately.
To learn more, read Banggawan (2017) on pages 98-102.
LEARNING ACTIVITY 1
REFLECTION ON LEARNING
 Differentiate between Fiscal period vs Accounting period
 Deadline of submission
LEARNING CONTENTS (title of the subsection)
ACCOUNTING METHODS
Accounting methods are accounting techniques used to measure income.
Types of Accounting Methods

1. The general methods
a. Accrual basis
b. Cash basis

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
Under the accrual basis of accounting income is recognize when earned regardless of
when received. Expense is recognizing when incurred regardless of when paid.
Income is said to have accrued when the right to receive is 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
recognizing when paid.
Tax and accounting concepts of accrual basis and cash basis distinguished
The financial accounting concepts of accrual basis are similar to their tax counterparts,
except only for the following tax rules:
1. Advance 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 advanced income in
the period earned will expose the government to risk of non-collection.
2. Prepaid expense is non-deductible

Prepaid expenses are advance payment for expense of future taxable periods. These are
not deductible against gross income in the year paid. They are deducted against income in
the future period they expire or are used in the business, trade or profession of the
taxpayer.
Normally, the expensing of prepayments does not properly reflect the important of the
taxpayer. It also contradicts the Lifeblood Doctrine as is effective defers the recognition of
income.
1. Special tax accounting requirements must be followed.

There are cases where the tax law itself provides for a specific accounting treatment of
an income or expense. The specified method must be observed even if it departs from
the basis regularly employed by the taxpayer keeping his books.
The tax accrual basis income is determined as follows:
Cash income P xxx,xxx

Accrued (uncollected) income xxx,xxx
Advanced income xxx,xxx
Gross income P xxx,xxx
The tax cash basis income is determined as follows:

Cash expense P xxx,xxx

Accrued (uncollected) income xxx,xxx
Amortization of payments and
Depreciation of capital expenditures xxx,xxx
Deductions xxx,xxx
The tax cash basis expense is determined as follows:

Cash income P xxx,xxx
Advanced income xxx,xxx
The tax cash income expense is determined as follows:

Cash expenses P xxx,xxx
Amortization of prepayments and
Deprecation of capital expenditures xxx,xxx
Deduction P xxx,xxx
Illustration
A taxpayer providing service reported the following in 2015 and 2016:
2015 2016
Collection from services rendered P 500,000 P 800,000
Accrued income from accrued income service rendered 500,000 400,000
Collection from accrued income of 2015 - 470,000
Collection for services not yet rendered 300,000 200,000
Payment of expenses of current period 400,000 600,000
Accrued expenses 100,000 150,000
Payment of accrued expenses of 2015 - 100,000
Payment for expenses of the following year 200,000 300,000
Tax Accrual Basis
2015 2016
Cash income P 500,000 P 800,000
Accrued income 500,000 400,000
Collection for future services – advances 300,000 200,000
Total gross income P 1,300,000 P 1,400,000
Less: Deductions
Cash expenses P 400,000 P 600,000
Accrued expense 100,000 150,000
Amortization of 2015 prepaid expense - 200,000
Total deductions P 500,000 P 950,000
Net income P 800,000 P 450,000
Points to consider in converting GAAP Accrual Basis to Tax Accrual Basis

1. In accounting accrual basis, income is recognized when earned even if not yet received.
Advanced income is inherently not included in net income. For purposes of taxation,
advanced income is taxable. Hence, it must be added to accrual basis gross income.

2. In accounting expense is recognized when accrued even if not yet paid. Prepaid
expenses are inherently not deducted. Hence, no adjustment for prepayments is
necessary under accrual basis.
Tax Cash Basis
2015 2016
Collection from services rendered P 500,000 P *1,270,000
Collection for future services – advances 300,000 200,000
Total gross income P 800,000 P 1,470,000
Less: Deduction
Payments of expenses P 400,000 P **700,000
Amortization of 2015 prepayments - 200,000
Total deduction P 400,000 P 900,000
Net income P 400,000 P 570,000
Note: P800, 000 + P470, 000 = P1, 270,000*; P600, 000 + P100, 000 = P700, 000**
Points to consider in converting GAAP cash basis to Tax cash basis

1. Under the accounting cash basis, income is recognized when received not when it is
earned. Advanced income is inherently recognized as income. Hence, no adjustment
is necessary on income.
2. Under accounting cash basis, expense is deducted when paid including prepaid
expenses. Hence, deducted prepaid expenses must be reversed for purpose of
taxation.
Seller of goods
The gross income of taxpayers selling goods is determined as follows:
Sales P xxx,xxx
Less: Cost of goods sold xxx,xxx
The cost of sales is computed using the inventory method:

Beginning inventory P xxx,xxx
Add: Purchases xxx,xxx
Total goods available for sale P xxx,xxx
Less: Ending inventory xxx,xxx
Cost of goods sold P xxx,xxx
The expensing of the purchase cost of goods does not properly and fairly refers the income of
the taxpayer particularly when there are significant fluctuations for inventory levels between
accounting periods. This could expose the taxpayer to risk BIR assessment. The use of accrual
method is suggested but of course subjects is a practical and cost consideration.
Hybrid basis
The hybrid basis is any combination of accrual basis, cash basis and or other methods of
accounting. It is used when the taxpayer has several business which employ different
accounting methods.

Illustration
Mr. Roxas has two proprietorship businesses: a service business which uses cash basis and a
trading business which uses accrual basis.
The gross income as determined by cash basis in the service business and the gross income as
determined by the accrual basis in the trading business are simply combined. There is no
requirement to measure the income of different business under a single accounting method.
Sale of goods with extended payment terms

The sale of goods with extended payment terms may be reported using the accrual basis,
installment method, or deferred payment method.
Installment method
Under the installment method, gross income is recognized and reported is proportion to the
collection from the installment sales.
Installment method is available to the following taxpayers:

1. Dealers of personal property on the sale of properties they regularly sell
2. Dealers of real properties, only if their initial payment does not exceed 25% of the
selling price
3. Casual sale of non-dealer in property, real or personal, when their selling price exceeds
P1,000 and their initial payments does not exceed 25% of the selling price
Initial Payment
Initial payment means total payments by the buyer, in cash or property, in the taxable year the
sale was made. The term “initial payment” is broader than down payment. It also includes the
installment payments in the year of sale.
Selling price
Selling price means the entire amount for which the buyer is obligated to the seller. It is
computed as follow:
Cash received and/or receivable P xxx,xxx

Fair market value of property receive our receivable xxx,xxx
Mortgage or any indebtedness assumed by the buyer xxx,xxx
Selling price P xxx,xxx
Contract price
The contract price is the amount receivable in the cash or other property from the buyer. It is
usually the selling price in the agreement whereby the debtor assumes indebtedness on the
property.
Comprehensive Illustration
Canlubang Company, a car dealer, sold a machine with a tax basis of P1, 200, 000 on
installment on January 3, 2016. Canlubang received a P200, 000 cash down payment and a P1,

800,000 promissory note for the balance payable in six installments of P300, 000 every July 3
and January 3 thereafter .
The selling price and gross profit on the sale is computed as follows:
Cash down payment P 200,000

Notes receivables 1,800,000
Selling price P 2,000,000
Less: Tax basis of machine sold ( 1,200,000)
Gross profit P 800,000
Accrual basis
Under the accrual basis, the entire P800, 000 gross profits shall be reported as gross income in
2016 the year of sale.
Installment basis
Canlubang cannot readily use the installment method because it is a dealer of cars rather than
a dealer of machineries. The sale of properties of which the seller is not a dealer is referred to
as a “casual sale “Hence, the ratio of initial payment shall be tested first.
The initial payment of Canlubang can be computed as follows:
Cash down payment (January 3, 2016) P 200,000

First installment (July 3, 2016) 300,000
Initial payment P 500,000
Ratio of initial payment (P500, 000/ P2,000,000) 25%
Canlubang can use the installment method. The contract price or the amount due to be
determined next. Since there is no mortgage assumed by the buyer, the selling gross is the
contract price.
The gross profit will be reported in gross income throughout the installment period of the
formula: (Collection/ Contract price) x Gross profit
Canlubang shall recognize the following gross income:
At the date sale: (P200K/2M x P800, 000) P 80,000

Upon every installment: (P30K/P2M x P800, 000) P 120,000
If Canlubang is dealer is in machinery, it can avail of the installment method even if the ratio of
its initial payment over selling price exceed 25% so long as the selling price on the installment
sale exceed P 1,000
With independence assumed by the buyer

The application of the installment method will slightly vary when the basis assumes
indebtedness on the property sold.

In this case, selling price is no longer the contract price. The contract price of the residual
amount after deducting the mortgage from the selling price. Thus

Less: Mortgage assumed by buyer P xxx,xxx
Contract price P xxx,xxx
Illustration
On January 3, 2016, Tagaytay Inc., a real property dealer, sold a lot costing P1, 400,000 for P2,
000,000. The lot was encumbered by a P1, 000,000 mortgage which assumed by the buyer. The
buyer paid P200, 000 every July 3 and January 3 thereafter.
The gross profit can be computed as follows:
Less: Tax basis of lot sold 1,400,000

Note that dealers of real properties are subject to limitation on the use of installment method.
The ratio of initial payment shall be determined first.
January 3, 2016 cash downpayment P 200,000

June 3, 2016 installment 200,000
Ratio of initial payment (P400, 000/P2, 000,000) 20%

Tagaytay is qualified to use the installment method. The contract price should be determined
next.

Less: Mortgage assumed by buyer 1,000,000
Contract price P 1,000,000
Alternatively, the contract price can be compute directly as follows:
Cash down payment P 200,000

Collectable balance (P200, 000 x 4 installments) 800,000
Contract price P 1,000,000
Tagaytay shall recognize the following gross income:
At the date of sale: (P200K/P1M x P600, 000) P 120,000

Upon every installment: (P200K/P1M x P600, 000) P 120,000
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 down payment 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.
The contract price shall be computed as follows:

Less: Mortgage assumed by buyer xxx,xxx
Cash collectable P xxx,xxx
Add: Excess indebtedness- constructive receipt xxx,xxx
Contract price P xxx,xxx
The initial payment shall be computed as follows:
Down payment P xxx,xxx

Installments in the year of sale xxx,xxx
Excess of mortgage over tax basis xxx,xxx
Initial payment P xxx,xxx
Illustration
On July 1, 2016, a taxpayer made a casual sale of property with a tax basis P1, 300,000 for P2,
000, 000. The property was subject to a P1, 500,000 mortgages which was agreed to be
assumed by the buyer. The buyer paid a P100, 000 down payments with the balance due in two
installment of P200, 000 on December 31, 2016 and July 1, 2017.
The gross profit on the sale is determined as follows:

Less: Tax basis of property sold 1,300,000
The initial payment shall be determined first:
Down payment P 100,000

December 31, 2016 installment 200,000
Excess mortgage (P1, 500,000 – P1, 300,000) 200,000
Ratio of initial payment (P500K/P2, 000,000) 25%
The contract price shall be computed as:

Less: Mortgage assumed by buyer 1,500,000
Cash collectible P 500,000
Excess mortgage (P1, 500,000 – P1, 300,000) 200,000
Contract price P 700,000

Note that the gross profit on the sale in the same as the contract price. Hence, as collection
from the contract including the contract including the excess mortgage shall be
recognizes as gross income upon collection.
Canlubang shall recognize the following gross income:
At the date of sale (P200K down + P100K excess) P 300,000

Upon receipt of first installment – 12/31/2016 200,000
Upon receipt of second installment – 7/1/2017 200,000
Total gross profit on the contract P 700,000
Deferred payment method

The deferred payment method is a variant of the accrual basis and is used to reporting income
when a non-interest bearing note is received as consideration for a sale.
Under the deferred payment method, the gross income is computed based on the present value
(discounted value) of a note from the contract. The discount interest on the note is amortize
(i.e., spread) as interest income over the installment term.
Illustration
On December 31, 2015, a taxpayer sold an office building costing P1, 400,000 for P2, 000,000.
The buyer made P1, 000,000 down payments and the balanced, evidenced by a note, is due in 2
annual installments of P500, 000 every December 31 starting December 31, 2016.
Note that installments method cannot be allowed since the ratio of initial payment is already
50% (P1, 000,000/P2, 000,000).
Assume the note is non-interest bearing but can be discounted at a local bank forP900, 000.
Under the deferred payment method, the reportable gross income for each
Year shall be:
2015 2016
2017
Cash down payment P 1,000,000
Present value of the note 900,000
Less: Tax basis of the property 1,400,000
Gross income P 500,000
Interest income (P1, 000,000 – P900, 000) P 50,000 p

50,000
Note:
1. The difference between the face value and the present value of the note, known as
discount, will 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 every collection on the balance of
the note as follow: P500,000 installments/P1,000,000 total note balance x P100,000
discount

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.
The percentage of Completion Method for Construction Contracts

Under the percentage of completion method, the estimated gross income from construction is
reported base on the percentage of completion of the construction project.
There are several methods of estimating project completion in practice, but the output method
based on engineering survey is prescribed by the NIRC.
Illustration
In 2015 Cagayan Construction Company accept a P5, 000,000 fixed price construction
construct. The following shows the details of its construction activities.
2015 2016
Construction expense P 3,000,000 P 1,200,000
Engineer’s estimate of completion 70% 100%
The reportable gross income on construction will simply be composed as following:
2015 2016
Construct price P 5,000,000 P 5,000,000
Multiply by % of completion 70% 100%
Construction revenue P 3,500,000 P 5,000,000
Less: Construction revenue in prior year - 3,500,000
Construction revenue this year P 3,500,000 P 1,500,000
Less: Expense during the year 3,000,000 1,200,000
Construction gross income P 500,000 P 300,000
Income from Leasehold Improvement

Leasehold improvements are tangible improvements made by the lessee to the property of the
lessor. Improvements will benefit the lessor when their useful life extends beyond the lease
term. This benefit is referred to as income from leasehold improvement.
Under Revenue Regulations No. 2, the income from leasehold Improvements can be reported
using either of the method at the option of the taxpayer.
1. Outright method
The lessor may report as income fair market value such buildings improvements subject
to the lease at the time when such buildings improvements are completed.
2. Spread-out method
The lessor may spread over the life of the lease the estimated depreciated value of such
building or Improvements at the termination of the lease of report as income for each
year of the lease an aliquot part thereof.
The depreciated value of the leasehold improvements is computed as:
Cost of improvements x Excess useful life over lease term

Useful life of the improvement

Illustration
Om January 1, 2016, Anderson leased a vacant lot to Greg under a 20 – year lease contract.
Greg immediately constructed a building on the lot at a total cost of P4, 500,000. The building
has useful life of 30 years.
Outright method
Under the plain wordings of Section 49 of Revenue Regulation No. 2, Anderson shall recognize
the entire P4, 500,000 fair values of the improvements as a gross income upon completion of
the improvement in 2016. This is not income in its totality, but this is the amount referred to
by the regulation.
Spread-out method
The depreciated value of the property at the termination of the lease is the value of the year of
usage of the lessor. This can be computed by splitting the value of the improvement as follows:
Years of
User usage Allocation Cost
- Lessee 20 20/30 x P4,500,000 P 3,000,000
- Lessor 10 10/30 x P4,500,000 1,500,000
Total 30 P 4,500,000
The P1, 500,000 depreciated value of the improvement at the termination of the lessee is an
income from leasehold improvement by the lessor.
Note to Readers
It should be pointed out that this rule exists only in the regulation and is absent in the NIRC.
Some taxpayers are questioning its validity out lack of legal basis. However, it is fairly
proper to consider the depreciated value of the improvement that remains to the lessor
upon termination of the lease as income because it is an actual benefit to the lessor. These
are, in effect, additional rental consideration in kind.
However, the treatment specified by the outright method is perceived as unjust and
abusive, and is an improper introduction of legislation.
The depreciated value of the improvement as the termination of the lease should be the
proper value to be recognized as gross income under the outright method. This view is
supported by the outright method could not have been an option if the outright method
intended to tax the entire fair value of the improvement considering the huge disproportion
in the reportable gross income in the two options.
The outright method as mandated by the regulation will best apply in cases where leases
pay the lessor rentals in the form of leasehold improvements or when leasehold
improvements made by lessees are treated as reduction to cash rentals.
In such cases, the fair value of the leasehold upon completion to unquestionably income to
the lessor for taxation purposes.
Farming income

Farming income is commonly recognized using the cash basis or accrual basis cash.
However, long 0 –term crops or those that take more than one year to harvest may be
accounted for under the crop year basis.
Crop year basis

Under the crop year basis, farming income is recognized as the difference between the
proceeds of harvest and expenses of the particular crop harvested. The expenses of each
crop are accumulated and deducted upon the harvest of the crop.
Illustration
Juan de la Cruz, a farmer, plants a certain crop that takes more than a year to harvest. Juan
had the following data on his farming operation:
2015 2016 2017
Proceeds of harvest P - p 750,000 P 1,000,000
st
1 cropping expenses 400,000 200,000 -
2nd cropping expense - 500,000 300,000
The reportable farming income using crop year method would be:
2015 2016 2017
Proceeds of harvest - P 750,000 P 1,000,000
Less: Cropping expenses
Incurred last year 400,000 500,000
Incurred this year 200,000 300,000
Farming gross income P 150,000 P 200,000
Crop your basis in an accounting method and is not an accounting period.
Use of different accounting method

Taxpayers with more than one type of business using different accounting methods can
consolidate the income reported using the different methods. There is no need to restate
the income to a common accounting method. However, the methods applied to each
business should be applied consistently from period to period.
Change in Accounting Methods and Accounting Periods

Under the NIRC, the change in accounting methods by any taxpayer and the change in
accounting period by corporate taxpayers require prior BIR notice.
LEARNING ACTIVITY 2
Illustrate in your simplest but concise form of understanding
To learn more, read Banggawan (2017) on pages 102-114
LEARNING CONTENTS (title of the subsection)

INCOME TAX REPORTING

THE SELF-ASSESTMENT METHOD
To preparing their tax return, taxpayer declares their income and expenses, and personally
determined the tax due thereon. The government relies on the good faith of taxpayers in
the preparation of their tax returns but employs detective techniques to ascertain non-
compliance or under-compliance.
Types of income tax-related returns filed to the government

1. Income tax returns
2. Withholding tax returns
3. Information returns
Types of income tax return

1. Capital gains tax return
2. Regular income tax return
THE WITHHOLDING SYSTEM

Aside from the income tax return, the government also requires taxpayer to withhold (i.e.
deduct) taxes on their income payments (i.e. expense). These withheld taxes are called
“withholding tax “. This is not tax to the taxpayer but to the recipient of the income payment.
The taxpayer must deduct the withholding tax on his income payments, file a withholding tax
return, and remit the withheld tax to the government.
Non-compliance to the withholding tax rules shall expose the taxpayer to penalties and fine
aside from the disallowance of the expense as deduction against income.
Types of withholding tax

a. Final withholding tax
b. Creditable withholding tax
Final withholding taxes are full taxes upon the income of the recipient. The recipient will not
pay the tax income subjected to final withholding taxes. Creditable withholding taxes are
advance taxes. The recipient of the income payments must report the income in his income tax
return and claim the creditable withholding against his tax due.
INFORMATION RETURN
Certain taxpayers are also required to file information to the government. These information
returns do not involve any payment or withholding of tax but are essential to the government
in its tax mapping efforts and in its evaluating of
INCOME TAX REPORTING

THE SELF-ASSESTMENT METHOD
To preparing their tax return, taxpayer declares their income and expenses, and personally
determined the tax due thereon. The government relies on the good faith of taxpayers in

the preparation of their tax returns but employs detective techniques to ascertain non-
compliance or under-compliance.
Types of income tax-related returns filed to the government

4. Income tax returns
5. Withholding tax returns
6. Information returns
Types of income tax return

3. Capital gains tax return
4. Regular income tax return
THE WITHHOLDING SYSTEM

Aside from the income tax return, the government also requires taxpayer to withhold (i.e.
deduct) taxes on their income payments (i.e. expense). These withheld taxes are called
“withholding tax “. This is not tax to the taxpayer but to the recipient of the income payment.
The taxpayer must deduct the withholding tax on his income payments, file a withholding tax
return, and remit the withheld tax to the government.
Non-compliance to the withholding tax rules shall expose the taxpayer to penalties and fine
aside from the disallowance of the expense as deduction against income.
Types of withholding tax

c. Final withholding tax
d. Creditable withholding tax
Final withholding taxes are full taxes upon the income of the recipient. The recipient will not
pay the tax income subjected to final withholding taxes. Creditable withholding taxes are
advance taxes. The recipient of the income payments must report the income in his income tax
return and claim the creditable withholding against his tax due.
INFORMATION RETURN
Certain taxpayers are also required to file information to the government. These information
returns do not involve any payment or withholding of tax but are essential to the government
in its tax mapping efforts and in its evaluating of tax compliance. Non-filling of required
information returns are also subjected to penalties, fines and or imprisonment
MODE OF FILING INCOME TAX RETURNS
1. Manual filling system

The traditional manual system of filling income tax return is by paper documents where
taxpayers fill up BIR forms to report income, expense, or any declaration requires to the filled
with the BIR.
Under the NIRC, the tax return shall be filed to the following as descending order of priority,
within the revenue district office where the taxpayer is registered or required to register:
1. An authorized agent bank

2. Revenue collection Office

3. Duly authorize city or municipal treasurer
2. e-BIR forms
The BIR introduced the e-BIR Forms which come with an offline and online version. Taxpayers
fill up their income tax returns in electronic spreadsheet without the need of writing on paper
returns. The system ensures completeness of data on the return and is capable of online
submission. If there are no penalties that require BIR assessment, taxpayer, would have to
print a hard copy of filled tax returns and proceed directly to the bank for payment.
3. Electronic Filling and Payment System(eFPS)

The eFPS is a paperless tax filling system developed and maintained by the BIR taxpayers file
tax returns including attachment in electronic format and pay the tax through the Internet.
Taxpayers mandated to use the eFPS

1. Large taxpayer duly notified by the BIR
2. Top 20,000 private corporations duly notified by the BIR
3. Top 5,000 individual taxpayers duly notified by the BIR
4. Taxpayers who wish to enter into contracts with government offices
5. Corporation with paid-up capital of 10,000,000
6. PEZA-registered entities and those located within Special Economic Zones
7. Government office, in so far as remittance of withheld VAT and business are concerned
8. Taxpayers included in the Taxpayer Account Management Program(TAMP)
9. Accredited importers, including prospective importers to secure the importers
Clearance Certificate (ICC) and Custom brokers Clearance Certificate (BCC)
In case of unavailability of the eFPS during maintenance or instances of technical errors, eFPS
enrolled taxpayers may file manually.
Grouping of Taxpayers under EFPS

1. Group A
a. Banking institutions
b. Insurance and pension funding
c. Non-bank financial intermediation
d. Activities auxiliary to financial intermediation
e. Construction
f. Water transport
g. Hotels and Restaurant
h. Land transport
2. Group B
a. Manufacture and repair of furniture
b. Manufacture of basic metal
c. Manufacture of chemical, and chemical products
d. Manufacture of coke, refined petroleum, and fuel products
e. Manufactures of electrical machinery, and apparatus NEC
f. Manufacture of fabricated metal products
g. Manufacture of foods, products, and beverages
h. Manufactures of machineries, and equipment NEC
i. Manufacture of medical, precision, and optical instruments

j. Manufacture of motor vehicle, trailers and semi-trailers

k. Manufacture of office, accounting, and computing machineries
l. Manufacturing of other non-metallic mineral products
m. Manufacture of other transport equipment
n. Manufacture of other wearing apparel
o. Manufacture of papers, and paper products
p. Manufacture of radio, TV, and communication equipment, and apparatus
q. Manufacture of rubber and plastic products
r. Manufacture of textiles
s. Manufacture of tobacco product
t. Manufacture of wood and wood products
u. Manufacturing N.E.C.
v. Metallic ore mining
w. Non-metallic mining and quarrying
3. Group C
a. Retail sale
b. Wholesale trade and commission trade
c. Sale, maintenance, repair of motor vehicle, and sale of automotive fuel
d. Collection, purification, and distribution of water
e. Computer and related activities
f. Real estate activities
4. Group D
a. Air transport
b. Electricity, gas, steam, and hot water supply
c. Postal and telecommunications
d. Publishing printing and production of recorded media
e. Recreational, cultural, and sporting activities
f. Recycling
g. Renting out of goods and equipment
h. Supporting and auxiliary transport activities
5. Group E
a. Activities of membership organization inc.
b. Health and Social work
c. Private education service
d. Public administration and defense compulsory social security
e. Public education service
f. Research and development
g. Agriculture, hunting and forestry
h. Farming and animals
i. Fishing
j. Other service activities
k. Miscellaneous business activities
l. Unclassified activities
PAYMENT OF INCOME ACTIVITIES

The capital gains tax and regular income tax are paid as the taxpayer files to return, installment
payment of income tax is allowed on certain condition

Taxpayers under EFPS system shall e-pay their tax online through internet banking service.
The amount of the taxpayer will be auto-debited for the amount of taxes to be paid.
BASIC COMPARISON OF FILLING AND PAYMENT SYSTEM

Manual e-BIR Forms eFPS
Data entry Manual Electronic Electronic
Filling/submission Manual Electronic Electronic
Tax payment Manual manual Electronic
PENALTIES FOR LATE FILLING OR PAYMENT OF TAX

The late filling and payment of taxes is subject to the following additional charges.
1. Surcharge
a. 25% of the tax for failure to file or pay deficiency tax on the non-filing
b. 50 % for willful neglect to file and pay taxes
The non-filling is considered ‘willful neglect ‘if the BIR discovered the non-filling first. This is
the case when taxpayer receives a notice from the BIR return. If the taxpayer filed a return
before the recipient of such notice the service considered simple neglect subject to the 25%
surcharge.
2. Interest – 20% per annum considering the following period factor:

Delay Period factor
For every day of delay Number of days/365 days
For every month of delay* Number of months/12
For every year of delay 1
Note:
a. The period factor shall be multiplied by 20% interest rate to get interest factor which
will be multiplied to the tax due to compute the interest period.
b. A 30-day period in a month is considered 1 month (i.e. March 1 to March 31). But the 1-
day excess on 31-day month is ignored. Hence, March 15 to April 15 is still 1 month
even if March has 31 days.
These rules were deducted after careful examination of the illustrative guidelines on interest
penalty calculation under RR12-99.
Illustration 1
The tax return of the taxpayer was due on April 15, 2017 but was filled on June 30, 2017. The
tax due per return of the taxpayer amount to P100, 000.
April 15, 2017 to June 15, 2017 is 2 months; June 15 to June 30 is 30 days.
Hence, the period factor shall be [2/12 +15/365] or 0.2077626. The interest factor shall be
0.2077626 x 20% or 0.04155252. The interest penalty shall be computed as P100, 000 x
0.04155252 = P4, 155, 25.
This may be computed directly as 2077626 x 20% x P100, 000.

Illustration 2
A taxpayer with a tax due of P100, 000 late filed on July 31, 2017. The deadline of the return
was on April 15, 2016.
April 15, 2016 to April 15, 2017 is 1 year. April 15, 2017 to July 5, 2017 is 3 months. July 15 to
July 31 is 15 days.
Hence, the period factor shall be ( 1 + 3/12 + 16/365) or 1.293856 x P100,000. The interest
penalty shall be P25, 876.
3. Compromise penalty –
Compromise penalty is an amount paid in lieu of criminal prosecution over a tax violation.
The schedules of compromise penalty related to income taxes are included in Appendix 4 for
year reference.
INTEGRATIVE ILLUSTRATION
An individual taxpayer filed his 2014 income tax return with a computed tax due to P100, 000
on July 15, 2015. A total of P20, 000. Withholding taxes was deducted by the various income
payors from his gross income.
The total if the amount of tax unpaid amount to be
paid by the Exceeds But not exceeds Compromise is taxpayer
including … … penalties shall be:
.. .. …..
Tax due 10,000 20,000 5,000
20,000 50,000 10,000 P
50,000 100,000 15,000 100,000
Less: Tax 100,000 500,000 20,000 credits
(withholding taxes) 20,000
Net tax due P 80,000
===========
Net tax due P 80,000
Plus: penalties
Surcharge (P80, 000 x 25%) 20,000
Interest (P80, 000 x 20% x 3/12) 4,000
Compromise penalty* 15,000
Total tax due P 199,000
Note:
1. The deadline of the 2014 income tax return is April 15, 2015. April 15, 2015 to July 15,
2015 is a 3-months delay.
2. Interest is computed from the net amount of tax due before the 25% surcharge.
3. The compromise penalty is taken from the table of compromise penalties of failure to
the line and or pay internal revenue tax at the time or times required by law, as
follows*

You may check the schedule of compromise penalty for late payment of income tax in Appendix
4 for your reference.
PENALTIES FOR NON-FILING OR LATE FILING OF INFORMATION RETURN
For each failure to file a separate information returns, statement or list, or keep any record, or
supply any information required by the commissioner on the date prescribe thereof, unless it is
shown that such failure is due to reasonable cause not to willful neglect, shall be subject to a
penalty off P1,000 for each such failure. Provided that the amount imposed for all such failure
during a calendar year shall not exceed P25, 000.00
To learn more about this topic, read Banggawan (2017) on pages 118-120
LEARNING ACTIVITY 3
Reflection on Learning:
Tax compliance problem
1. A tax payer was 6 month and 12 days late in filing his income tax return. If he has
P40,000 net tax due, compute the penalties in the form of interest
a. P4, 263 c. P4,267
b. P4, 211 d. P5,329
2. What is the total surcharge penalty?

a. P0 c. P10,000
b. 8,000 d. P20,000
3. If he is to pay compromise penalty how much will it be and how much will the total tax
due including all penalties and interest charges.?
SUMMARY
REFERENCES
1.Rex Banggawan , Income Taxation, Real Excellence Publishing 2017 pp 98-120.

Cia15 Study Guide 4 Bac 103 Taxation Income Taxation Sfernando

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cia15 Study Guide 4 Bac 103 Taxation Income Taxation Sfernando

Uploaded by

Copyright:

Available Formats

FM-AA-CIA-15 Rev.

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

STUDY GUIDE FOR MODULE NO. _4_

 Module 4: Tax Schemes, Periods, and Methods and Rep

 Income taxation schemes

 Penalties for filing of returns and late payment of tax

MODULE LEARNING OBJECTIVES

INCOME TAXATION SCHEMES

An item of gross income is taxable in any of these tax schemes.

Item of gross Income

Taxable to any one of

Final income Capital Gains Regular Income

PANGASINAN STATE UNIVERSITY 1

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

CLASSIFICATION OF ITEMS OF GROSS INCOME

FINAL INCOME TAXATION

Passive income vs. active Income

Example of passive income:

Examples of active income:

Final income taxation will be discussed in detail in chapter 5.

CAPITAL GAINS TAXATION

Capital assets vs. ordinary assets

Capital gains vs. ordinary gains

PANGASINAN STATE UNIVERSITY 2

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

Capital gains taxation will be discussed in detail in Chapter 6.

REGULAR INCOME TAXATION

Types of Accounting Periods

Deadline of Filling the Income Tax Return

PANGASINAN STATE UNIVERSITY 3

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

Illustration: Due date of the annual income return

INSTANCES OF SHORT ACCOUNTING PERIOD

1. Change of accounting period by corporate taxpayers – The accounting period covers

PANGASINAN STATE UNIVERSITY 4

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

3. Termination of the accounting period of the taxpayer by the commissioner of

To learn more, read Banggawan (2017) on pages 98-102.

LEARNING CONTENTS (title of the subsection)

Types of Accounting Methods

PANGASINAN STATE UNIVERSITY 5

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

2. Installment and deferred payment method

General Methods for Income from sale of goods or service

2. Prepaid expense is non-deductible

1. Special tax accounting requirements must be followed.

The tax accrual basis income is determined as follows:

Cash income P xxx,xxx

The tax cash basis income is determined as follows:

PANGASINAN STATE UNIVERSITY 6

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

Cash expense P xxx,xxx

The tax cash basis expense is determined as follows:

The tax cash income expense is determined as follows:

Tax Accrual Basis

Points to consider in converting GAAP Accrual Basis to Tax Accrual Basis

PANGASINAN STATE UNIVERSITY 7

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

Tax Cash Basis

Points to consider in converting GAAP cash basis to Tax cash basis

The cost of sales is computed using the inventory method:

PANGASINAN STATE UNIVERSITY 8

Study Guide in BAC 103 TAXATION: Income Taxation Module No._1_

Sale of goods with extended payment terms