Tax Schemes, Accounting Periods, Methods and Reporting

Income Tax Schemes

a. Final Income taxation (Final Withholding Tax System)

b. Capital gains taxation
c. Regular income taxation

Classification of items of Gross Income

a. Subject to final tax

b. Subject to capital gains tax
c. Subject to regular tax

Accounting Period

1. Regular – 12 months in length

- Calendar – available to both corporate and individual taxpayers.
- Fiscal – available only to corporate income taxpayers.
2. Short – less than 12 months
a. Newly commenced business
b. Dissolution of business
c. Change of period by corporate taxpayers
d. Death of the taxpayer
e. Termination of the accounting period of the taxpayer by the Commissioner of the
Internal Revenue

 Deadline foe the filing of ITR is April 15 th following the close of the taxable year of the taxpayer.

Accounting Methods

1. General Methods
a. Accrual basis – accrued when right to receive is established.
b. Cash basis – recognized when received or paid.

Tax and accounting concepts of AB and CB distinguished

i. Advance income is taxable upon receipt.

ii. Prepaid expense is non-deductible.
iii. Special tax accounting requirement must be followed.
 2. Installment and deferred payment method

Installment -- reported in proportion to the collection from the installment sales.

- Available to the following taxpayers:

o Dealers of personal property (properties they sell)
o Dealers of real properties (IP does not exceed 25% of SP)
o Casual sale of non-dealers (SP exceed 1000; IP does not exceed 25% of SP)
- Initial payment – total payments by the buyer in the taxable year sale was made.
- Selling price – entire amount buyer is obligated to the seller.
- Contract price – amount receivable in cash/property from the buyer.
o Usually, the selling price in the absence of an agreement whereby debtor assumes
indebtedness on the property.
 Contract price = selling price – mortgage
 Indebtedness exceeds tax basis of property sold – indirect downpayment added
as part of contract price
o All collection from the contract including excess mortgage is a collection of income
(gross income upon collection).
o Gross profit = contract price

Deferred payment – variant of accrual basis

- Reporting income when a non-interest bearing note is received

- Gross income is based on PV (discounted value) of a note receivable.
o Discounted interest is amortized as interest income over the installment term
o It will bear the same results as the accrual basis.

3. Percentage of completion method for construction contracts

Income from Leasehold Improvement – tangible improvement made by lessee to the property of the
lessor.

- Improvements benefit the lessor when its useful life extends beyond the lease term.

4. Outright and Spread-out method (method to report leasehold improvement)

a. Outright – fair market value of buildings or improvements as gross income upon
completion of the improvement
b. Spread-out – spread over the life of the lease the estimated depreciated value of the
property at the termination of the lease, it is the value of the years of usage of the
lessor.

5. Crop year basis

- Agricultural or Farming Income – cash or accrual basis
- Perennial crops – yield harvests through years; capitalized and amortized over the expected
years of harvest
 - One-time crops – harvested once after several years
o Crop year basis = proceeds of harvest – expenses of the particular crop harvested
 Expenses of each crop are accumulated and deducted upon the harvest of the
crop.
 An accounting method and not an accounting period.

Tax Reporting

Types of Returns to the Government

1. Income tax returns (taxpayer’s income, expense, tax due, tax credit, tax still due to the
government)
2. Withholding tax returns (reports of income payments subjected to withholding tax)
3. Information returns (do not involve any payment or withholding of tax; essential to tax mapping
efforts and evaluation of tax compliance)

Mode of Filing ITR

1. Manual Filing
2. E-BIR Forms
3. Electronic Filing and Payment System

 General rule: “pay as you file”

o Applicable to capital gains tax and regular income ta
o Installment payment of income tax, allowed on certain conditions

Penalties for Late Filing

1. Surcharge
a. 25% - taxpayer unang nakapansin and filed a return before the notice
b. 50% - BIR nakapansin ng late filing and naglabas ng notice to taxpayer
2. Interest – double of legal interest rate
- 12% per annum effective Jan. 1, 2018
- Actual days divided by 365 days or 366 (leap year)
3. Compromise penalty – paid in lieu of criminal prosecution