CHAPTER 4 :

INCOME TAX SCHEMES,

ACCOUNTING PERIODS,
ACCOUNTING METHODS, AND
REPORTING
ANNOTATED BY PRECIOUS
ACCOUNTING
PERIOD Iswhich
the length of time over
income is measured and
reported
REGULAR ACCOUNTING
PERIOD -12 months in length
A. Calendar– Jan to Dec (taxpayers and Corp)
B. Fiscal – any month basta 12 months
AVAILABLE ONLY FOR CORPORATION
-Deadline: 15th day of the fourth month following the
close of the taxable year of the taxpayer
Calendar year must be used when:
- Taxpayers annual accounting period is other than a
fiscal year
- Taxpayer has no annual accounting period
- Taxpayer does not keep books
- Taxpayer is an individual
SHORT ACCOUNTING PERIOD
-less than 12 months
1. Newly Commenced Business- the accounting period
covers the date of the start of the business until the
designated year end of the business
2. Dissolution of Business- accounting period covers the
start of the current year to the date of dissolution of
the business
3. Changes of Accounting Period by Corporate
Taxpayers- accounting period covers the start of the
previous accounting period upto designated year-end
of the new accounting period
4. Death of the Taxpayer- accounting period covers the
start of the calendar year until the death of the
taxpayer
5. Termination of the accounting period of the taxpayer
by the Commissioner of Internal Revenue- accounting
period covers the start of the current year until the
date of termination of the accounting period
1. 15th day of the 4th month
Example : Calendary year Ending Dec then add 4 months April 15 is the deadline of Income Tax Return
Fiscal Year starts at May 1, 2020 and ends at April 30, 2021 then add 4months so August 15,2021 is deadline

UNDER INSTALLMENT METHOD

You can declare your income or tax (capital gains) in installment basis

Installment method on income is available to taxpayers who are

- Dealers of personal property which are immovable properties
- Dealer of real properties wherein initial payment does not exceed 25% of the selling price
- Initial payment – binayad sa 1st year which includes the Down payment and installment payments for the first year
- Casual sale means it is not your business to sell personal or real properties. Selling price must exceed 1000 and the initial
payment must not exceed 25% of the selling price

Initial Payment includes

- Downpayment
- Installment payment ng 1st year
- Excess mortgage over cost ( liability attached to the real property since naka-sangla) (Mortgage value > cost)
- Example : Selling Price – 10 M Cost = 6M Mortgage = 7M The excess mortgage over cost is 1M since (7M-6M)
Selling Price includes cash, properties in Fair Market Value, Mortgage assumed by the buyer
Contract Price = Selling Price – Mortgage + Excess Mortgage over cost
ACCOUNTING Financial accounting concept of accrual basis and

METHODS used
-Accounting techniques
to measure
income
1.
GENERAL METHOD
A. Accrual Basis- income is
recognized when earned
regardless of when
received. Expenses is
recognized when incurred 2.
-
regardless of when paid
B. Cash Basis income is 3.
recognized when received
and expense is recognized
when paid
cash basis are similar to their tax counterparts,
except only for the following tax rules:
ADVANCED INCOME or Unearned Revenue IS TAXABLE UPON
RECEIPT ; cash basis so if naka receive ka ng 30k wherein
10k palang na-render mong service tas 20k ung unearned,
record mo lahat kasama pati ung unearned portion equals
30k taxable
PREPAID EXPENSE IS NON-DEDUCTIBLE; accrual basis
example: 20k binayad mong rent in advance pero 10k rent
this month, 10k ulet next month
SPECIAL TAX ACCOUNTING REQUIREMENT MUST BE
FOLLOWED
 ACCOUNTING
METHODS A. Initial Payment- total payments by
the buyer, in cash or property, in the
taxable year the sale was made
INSTALLMENT METHOD
-gross income is recognized and
reported in proportion to the B. Selling Price- entire amount for which
collection from the installment the buyer is obligated to the seller
sales
Installment method is available to the following C. Contract Price- amount receivable in
taxpayers:
a. Dealers of personal property on the sale of
cash or other property from the buyer.
properties they regularly sell It is usually the selling price in the
b. Dealers of Real Properties, only if their initial absence of an agreement whereby the
payment does not exceed 25% of the selling price debtor assumes indebtedness on the
c. Casual Sale of non-dealers in property, real or
personal, when their selling price exceeds P1000 property
and their initial payment does not exceed 25% of
the selling price
1. A sold his ring, a capital asset, on February 14, 2020. The ring was acquired at a cost of
P60,000. The terms of payment:
2. Down payment, February 14, 2020 P25,000
3. Installment payment, February 14, 2021 25,000
4. Installment payment, February 14, 2022 50,000
5. Installment payment, February 14, 2023 20,000
6. Total P120,000
7. The taxable gain to be reported by A in 2020 is

8. *capital asset – assets not used in the business such as personal assets (phone, toothbrush)

Sales 120,000

Less : Cost / Expense 60,000

NET INCOME 60,000

Initial Payment (2020)
Down payment Feb 14,2020 25,000

Check the percentage of initial payment if it does not exceed 25%

FORMULA :Initial Payment / Selling Price or Sales
25,000 / 120,000 = 21% which means it can acquire an installment basis since it is less than 25%

Check for the Contract Price

FORMULA : Selling Price – Mortgage + Excess Mortgage over cost
120,000 – 0 + 0 = 120,000 Contract Price which is equal to the Selling Price/Sales.
• If there is no mortgage, the Selling Price is always equal to the Contract Price

Compute for the Installment of Income

FORMULA : Net Income x ( Initial Payment / Contract Price)
60,000 x (25,000/ 120,000) = 12,500 Installment Income for Year 2020

Compute for the Installment income for the next years

Year 2020 – 2023 = mabu-buo ung 60,000 na Income
Year 2021 = Income x ( 2021 initial payment / Contract Price )
60,000 x ( 25,000 / 120,000 ) = 12,500 for Year 2021
Year 2022 = Income x ( 2022 initial payments / Contract Price )
60,000 x ( 50,000 / 120,000 ) = 25,000 for Year 2022
1. EXAMPLE WITH MORTGAGE
2. A sold his ring, a capital asset, on February 14, 2020. The ring was acquired at a cost of
P60,000. The terms of payment:
3. Down payment, February 14, 2020 P25,000
4. Installment payment, February 14, 2021 25,000
5. Installment payment, February 14, 2022 50,000
6. Mortgage assumed by the buyer 20,000
7. Total P120,000
8. The taxable gain to be reported by A in 2020 is

Selling Price 120,000

9. Less : Cost - 60,000
10. Net Income = 60,000

11. * No mortgage over cost since the Mortgage 20,000 is LESS than the cost of the ring which is 60,000
12. * Mortgage assumed by the buyer > Cost of Asset = Mortgage over asset
Initial Payment (2020)
25,000

Check the percentage of initial payment if it does not exceed 25%

FORMULA :Initial Payment / Selling Price or Sales
25,000/ 120,000 = 21% which means it can acquire an installment basis since it is less than 25%

Check for the Contract Price

FORMULA : Selling Price – Mortgage + Excess Mortgage over cost
120,000 – 20,000 + 0 (NONE) = 100,000 Contract Price

Declaration of Income for 2020

FORMULA : Net Income x ( Initial Payment / Contract Price)
60,000 x (25,000 / 100,000 ) = 15,000 Installment Income for 2020

Year 2021 : 60,000 x (25,000 / 100,000 ) = 15,000 installment income for 2021
Year 2022 : 60,000 x ( 50,000 / 100,000 ) = 30,000 installment income for 2022
1. EXAMPLE WITH MORTGAGE + MORTGAGE OVER COST
2. A sold his ring, a capital asset, on February 14, 2020. The ring was acquired at a cost of
P60,000. The terms of payment:
3. Down payment, February 14, 2020 P15,000
4. Installment payment, February 14, 2021 15,000
5. Installment payment, February 14, 2022 30,000
6. Mortgage assumed by the buyer 70,000
7. Total P130,000
8. The taxable gain to be reported by A in 2020 is

9. Selling Price/ Sales 130,000

10. Less : Cost 60,000
11. Net Income 70,000
Initial Payment for 2020
Down Payment 15,000
Add : Mortgage over cost ( 70,000-60,000) 10,000.
INITIAL PAYMENT 25,000

*Mortgage over cost = Mortgage assumed by buyer – Cost of Asset

Check the percentage of initial payment if it does not exceed 25%

FORMULA :Initial Payment / Selling Price or Sales
25,000 / 130,000 = 19% so installment paden since less than 25%

Check for the Contract Price

FORMULA : Selling Price – Mortgage + Excess Mortgage over cost
130,000 – 70,000 + 10, 000 = 70,000 Contract Price

Declaration of Income for 2020

FORMULA : Net Income x ( Initial Payment / Contract Price)
70,000 x (25,000 / 70,000) = 25,000 Year 2020

Year 2021 : 70,000 x (15,000 / 70,000 ) = 15,000 Year 2021

Year 2021 : 70,000 x (30,000 / 70,000 ) = 30,000 Year 2022
ACCOUNTING
METHODS
DEFERRED PAYMENT METHOD
-a variant of the accrual basis and is used
in reporting income when a non-interest
bearing note is received as consideration
in a sale. Under the deferred payment
method, the gross income is computed
based on present value of a note
receivable from the contract. The discount
on the note is amortized as interest
income over the installment term.
PERCENTAGE OF COMPLETION
METHOD FOR CONSTRUCTION
CONTRACTS
-the estimated gross income from
construction is reported based on the
percentage of completion of construction
project
There are several methods of estimating
project completion in practice, but the
output method based on engineering
survey is prescribed by NIRC
Deferred Payment Method
- Did not meet the standards for Installment Method so need magbayad agad
- Involves a non-interest bearing note na aalisin naten

TO REMOVE THE INTEREST :

Selling Price = Downpayment + Present Value of the Promissory Note (Note x Present Value Factor)
Net Income = Selling Price – Cost

Percentage of Completion Method for Construction Contracts

- Estimate how much of the project is already done
1. DEFFERED PAYMENT METHOD PROBLEM 1
2. On December 1, 2019, a real estate dealer sold a residential land for 6M (cost is
3.6M) receiving 2M as down payment and a promissory note for the 4M balance
payable at P400,000 a month beginning January 1, 2020. The promissory note has
fair market value equal to 75% of its face value, if the income is to be reported
under the deferred payment method, the income in 2019 is

Selling Price = Downpayment + Present Value of the Promissory Note

= 2,000,000 + Present Value of 4M Note ( 4M x 75%)
= 2,000,000 + 3,000,000
Selling Price = 5,000,000
Less : Cost = 3,600,000
Net Income = 1,400,000
1. Construction:
Contract Price: 10,000,000

Percentage of Completion
2019- 30%
2020- 70%
2021- 100%

Expenses
2019- 1,400,000
2020- 2,200,000
2021- 1,100,000
SOLUTION NEXT SLIDE
 2019 2020 2021

Contract Price 10,000,000 10,000,000 10,000,000

Multiply by: Percentage of x 30 % X 70% X 100%

completion ( % )

Construction Revenue = 3,000,000 = 7 ,000,000 10,000,000

Less: Construction ( 0) ( 3,000,000 ) (7,000,000)

revenue in prior year
Construction revenue = 3, 000,000 = 4,000,000 = 3,000,000
this year
Less: Expense during ( 1, 400, 000) ( 2, 200,000) (1,100,000)
the year
Construction Gross = 1, 600,000 INCOME = 1,800,000 INCOME = 1,900,000 INCOME
Income 2019 2020 2021
ACCOUNTING
METHODS
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.
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

OUTRIGHT METHOD

SPREAD-OUT METHOD
LEASEHOLD IMPROVEMENT
Lessee – nagrerenta/nagbabayad (Rent Expense) Lessor– ung may ari ng building (Rent Income)

EXAMPLE SCENARIO :
Lessee has a lease term of 7 years
Leasehold Improvement worth 10 million with a useful life of 10 years
Rent expense of 100,000 per year

OUTRIGHT METHOD
- The income is the whole “leasehold improvement” so the 10M

SPREAD OUT METHOD

Distribute the amount of leasehold between the lessee and lessor

- Lessee can only use it for 7 years (based on lease term)

- Useful Life of the Leasehold Improvement 10 years
• The last 3 years will be to the Lessor since 10 useful years minus 7 lease term of years

INCOME OF LESSOR FROM LEASEHOLD IMPROVEMENT WILL BE :

Lessor ( 10M x (3 years/ 10 years) ) 3, 000, 000 / 7 years = 428,571 as Income (Leasehold Improvement)
How much is the total income of lessor ?
428,571 + 100,000 (Rent Income) = 528 ,571 Total Income of Lessor
EXPENSE (Point Of View of Lessee)
Expense 10,000,000 / 7 years = 1,428,571 expense from Leasehold Improvement
How much is the total Expense of Lessee? = 1,428,571 + 100,000 (rent expense) = 1, 528,571 Total Expense of Lessee

ANOTHER SCENARIO
Lessee has a lease term of 8 years. At the start of the 3rd year, lessee made a Leasehold Improvement which cost 5,000,000 and
has 10 years useful life. Lessee also pays a 100,000 Rent Expense per year

OUTRIGHT METHOD
= 5,000,000 is the whole income from the leasehold

SPREAD OUT METHOD

10 years useful Life – 6 years (8 years lease pero 3rd year ka nagpagawa) = 4 years natira kay Lessor
Lessor’s Portion : 5,000,000 x ( 4/ 10 years) = 2,000,000
2,000,000 / 6 years usage by Lessee = 333,333 Income of Lessor From Leasehold Improvement
How much is the Total Income? 333,333 Income + 100,000 Rent Income = 433,333 Total Income of Lessor

EXPENSE (Point Of View of Lessee)

5,000,000 / 6 years = 833,333 Expense from Leasehold Improve
How much is the total Expense of Lessee? 833,333 + 100,000 = 933,000 Total Expense of Lessee

*Always consider when did the Leasehold Improvement START, not just the lease term
CROP YEAR BASIS
SCENARIO :
EXPENSES YEAR 1 YEAR 2 YEAR 3
Year 1 – Corn (SOLD 40K) 10,000 10,000 10,000
Year 2 – Rice ( SOLD 60K) 20,000
Year 2 – Sugarcane (SOLD 50K) 15,000 15,000

*Corn and Rice are sold/harvested on Year 2 while sugarcane is sold/harvested on 3rd year
Year 1 = No Income or Expense since wala pang na-harvest kahit na sa Year 1 ka nagtanim ng corn
Year 2 = CORN : Selling Price 40,000
Less : Expense. 20,000. (10K + 10K)
Net Income 20,000
Year 2 = RICE : Selling Price 60,000
Less : Expense. 20,000
Net Income 40,000
YEAR 2 TOTAL NET INCOME : 20k + 40k = 60,000

YEAR 3 = SUGARCANE : Selling Price 50,000

Less : Expenses. 30, 000. ( 15k + 15K)
RD
NET INCOME FOR 3 YEAR 20,000
MODE OF MANUAL FILING
SYSTEM
FILING Manual Filing and Payment

INCOME E-BIR FORMS

Online Filing but ELECTRONIC FILING &
TAX
pay on banks
PAYMENT SYSTEM
(EFPS)
RETURNS Filing and payment online
PENALTIES FOR LATE FILING OR PAYMENT OF TAX
SURCHARGE – violation of wrong venue
A. 25% OF THE BASIC TAX FOR FAILURE TO FILE OR PAY DEFICIENCY TAX ON TIME ( late
filing without notice of BIR; wrong venue of payment)
B. 50% FOR WILLFUL NEGLECT TO FILE AND PAY TAXES (fraud if 30% of your Income is
understated or overstated expense; LATE filing and BIR gave u a notice )
*the non-filing is considered “willful neglect” if the BIR discovered the non-filing first. If the taxpayer filed a
return before the receipt of such notice, the same is considered simple neglect subject to the 25% surcharge
INTEREST
DOUBLE OF THE LEGAL INTEREST RATE FOR LOANS OR FORBEARANCE OF ANY MONEY IN
THE ABSENCE OF ANY EXPRESS STIPULATION (12%)

COMPROMISE PENALTY
COMPROMISE PENALTY IS AN AMOUNT PAID IN LIEU OF CRIMINAL PROSECUTION OVER A
TAX VIOLATION
PENALTIES FOR LATE FILING SCENARIOS :
The income tax return for the calendar year 2018 was due for filing on april 15, 2019, but the taxpayer voluntarily filed
his tax return without notice from the BIR, only on july 15, 2019. The tax due per return amounts to P100,000. The total
amount due on july 15, 2019 (excluding compromise penalty) is

Surcharge : 25% x 100,000 = 25,000 NO NOTICE YET FROM BIR

Interest : 100,000 x 12% x 3/12 months = 3 ,000 Interest since (April 15 to July 15)
Compromise Penalty : 15,000 according to the book
Tax Due : 100,000
Total Penalty to be Paid = 143,000

if the income tax return is filed on time but through an internal revenue officer other than with whom the return is
required to be filed. The total amount due is

WRONG VENUE SO SURCHARGE ONLY (25%)

Surcharge : 25% x 100,000 = 25,000
Tax Due : 100,000
Total Penalty to be paid = 125,000
The taxpayer did not file his income tax return for the calendar year 2018. He was notified by the BIR of his failure to file
the tax return, for which reason he filed his tax return and paid the tax only after said notice on October 15, 2020. The
tax due per return is P100,000. The amount due is
*Surcharge of 50% since he was notified by the BIR
Surcharge: 50% x 100,000 = 50,000
Interest : 100,000 x 12% x 18/12 = 18,000 (April 15,2019 deadline to October 15, 2020 Payment is 1 year 6 months)
Compromise Penalty : 15,000 according to Book
Tax Due : 100,000
Total Tax to be paid due to penalty = 183,000

Taxpayer filed on time his income tax return for calendar 2018 and paid P100,000 on April 15, 2019. Upon pre-audit of his return, it was
disclosed that he erroneously computed the tax due. The correct amount of tax due is P 120,000. The taxpayer is assessed for deficiency
income tax in a letter of demand and assessment notice issued on June 15, 2020 calling for payment on or before July 15, 2020. The amount
still due on July 15, 2020 is
Nagfile on time kaso kulang ng 20k ung finile niya
20,000/ 120,000 = 16% NO FRAUD since hindi umabot ng 30%

Surcharge : 25 % x 20,000 = 5,000

Interest : 12% x 20,000 x 15/12 = 3,000 (Deadline April 15,2019 to July 15 , 2020 Payement)
Compromise Penalty : 5,000 ( 20,000 ung kulang na tax)
Tax Due : 20,000
Total Tax to be paid due to penalty = 33,000
 ITEMS OF GROSS
INCOME

TAXABLE TO ANY ONE

OF

FINAL INCOME CAPITAL GAINS REGULAR INCOME

TAXATION TAXATION TAXATION

MUTUALLY EXCLUSIVE COVERAGE

 INCOME TAXATION SCHEMES

FINAL INCOME TAXATION- is characterized by final taxes wherein full taxes

are withheld by the income payor at source. The recipient income taxpayer
receives the income net of taxes. The payor is the one required by law to
remit the tax to the Government. Applicable only on certain passive income
listed by the law.

CAPITAL GAINS TAXATION- is imposed on the gain realized on the sale,

exchange and other dispositions of certain capital assets

REGULAR INCOME TAXATION-is the general rule in income taxation and

covers all other income.