INCOME TAX SCHEMES AND ACCOUNTING

PERIOD

Group 1
INCOME TAX SCHEMES

There are three income taxation schemes under the NIRC.

A. Final Income Taxation

B. Capital Gains Taxation
C. Regular Income Taxation
 Item of gross income

Taxable to any one of

Final Income Taxation Capital Gains Taxation Regular Income Taxation

Mutually exclusive coverage

Classification of Items of Gross Income

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 are withheld by the income payor at
source.

Income tax payer - recieves the income net of taxes and does not need to file income tax
return
Payor- the one who si required by law to remit tax to the government.

This system of taxation is referred to as the final withholding tax system.

PASSIVE INCOME VS. ACTIVE INCOME

◼ Passive incomes are earned with very minimal ◼ Active or Regular income arises from
or even without active involvement of the transactions requiring a considerable degree of
taxpayer in the earning process. effort or undertaking from the taxpayer.

◼ Examples of Passive Income ◼ Examples of Active Income

◼ 1. Interest income from banks ◼ 1. Compensation income
◼ 2.Dividends from domestic corporation ◼ 2.Business income
◼ 3.Royalties ◼ 3.Professional income
CAPITAL GAINS TAXATION

Capital Gains tax Capital Asset

◼ Imposed on the gain realized on the
sale,exchange and other disposition of certain
capital assets.
◼ Assets that are not used in business.
Ordinary Asset
Assets used in business tradeor professionmsuch
as inventory,supplies or property,plants and
equipment .
REGULAR INCOME TAXATION

It's the general rule in income taxation and covers all other income such as
◼ 1. Active income
◼ 2. Other income
◼ a. Gains from dealings in properties,not subject to capital gains tax
◼ b. Other passive income not subject to final tax
ACCOUNTING PERIOD

Accounting period is the length of time over which income is measured and reported.

Types of Accounting Period

1. Regular accounting period - 12 months in length'
a. Calendar
b. Fiscal

2. Short accounting period - less than 12 months

 Calendar year Fiscal year
The calendar accounting period starts from January 1
and ends December 31. A fiscal accounting period is any 12-
month period that ends on any day other
Under the NIRC, the calendar year shall be used when that December 31. It is only available A
that: corporate income taxpayers and is not
1. taxpayer's annual accounting period is other than a allowed to individual income taxpayers.
fiscal year
2. taxpayer has no annual accounting period
3. taxpayer does not keep books
4. taxpayer is an individual
 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 the 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 the fiscal year ending June 30,2019 must file annual income
tax return not later than October 15,2019.
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 30,2019 and opted to use
the calendar year accounting period.
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 15,2019.
 3.CHANGE OF ACCOUNTING PERIOD BY CORPORATE TAXPAYER

The accounting period covers the start of the previous accounting period up to
the designated year-end of the new accounting period.

Illustration :
Effective February 2019,Sulu Corporation changed its calendar
accounting period to a fiscal year endung every June 30.
 4.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 2,2019
5.TERMINATION OF THE ACCOUNTING PERIOD OF THE
TAXPAYER BY THE COMMISIONER

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 a taxpayer under the calendar year basis was
terminated by the CIR on August 2,2019
INTRODUCTION TO REGULAR
INCOME TAX
ARDO,HERSHEY KATE ACERA,ANGELICA AQUINO,JHONAS
CHARACTERISTICS OF REGULAR INCOME TAX

1. It is general in coverage
2. It is a net income
3. it is an annual income tax
4. it is a creditable withholding tax
5. It is a progressive or proportional tax
THE REGULAR INCOME TAX MODEL

GROSS INCOME - INCLUSIONS P XXX,XXX

LESS: ALLOWABLE XXX,XXX
DEDUCTIONS _________________

TAXABLE INCOME P XXX,XXX

GROSS INCOME

Gross income consists of the major topics:

◼1. Exclusions of gross income
◼2. Inclusions of gross income
◼3. Special topics
GROSS INCOME

◼these are all of the items of income that are neither

excluded in gross income
EXCLUSIONS FROM GROSS INCOME

◼items exempted by law from regular income tax

EXCLUDED INCOME VS. EXEMPT INCOME

EXCLUDED INCOME EXEMPT INCOME

LISTED IN NIRC AS EXEMPT FROM INCLUDES ALL INCOME THAT IS
REGULAR INCOME TAX EXEMPT FROM INCOME TAX
ALLOWABLE DEDUCTIONS

◼Covers expenses in the conduct of business or exercise of profession

◼For individual taxpayers, there is a need to note the difference between
business and personal expenses.
◼Personal expenses are those not connected in the furtherance or
maintenance of trade, business or profession and are not deductible from
gross income.
THESE INDIVIDUALS ARE CLASSIFIED AS FOLLOWS:

◼1. Pure compensation income earner

◼2. Pure business or professional income earner
◼3. mixed income earner – both earning compensation and business or
professional income.
 
DETERMINATION OF TAXABLE INCOME

◼The taxable income of individual taxpayers is computed using the

classification and globalization rule
A. CLASSIFICATION RULE

Gross income is classified into:

◼a. Compensation income - arises from an employer-employee relationship
characterized by the power of an employer to control the means and
methods used by an employee to achieve the work required
◼b. Business or professional income – arises from selling of goods or
rendering of services for a profit.
TREATMENT OF OTHER INCOME

◼Income that are neither compensation income nor business income are
classified as “other taxable income” and are added to gross income from
business and profession.
 
TAXABLE INCOME OF PURE COMPENSATION INCOME EARNER

◼It is computed as follows:

GROSS COMPENSATION INCOME P XXX,XXX
LESS: NON-TAXABLE COMPENSATION XXX,XXX
______________
TAXABLE COMPENSATION INCOME P XXX,XXX
NON-TAXABLE COMPENSATION

◼those that are exempted by law, contracts, or treaty from income

taxation.
NON-OPERATING INCOME

◼ those “other income” which is neither compensation nor business

 
TAXABLE INCOME OF PURE BUSINESS OR PROFESSIONAL INCOME EARNER

◼ It is computed as follows:
GROSS INCOME FROM P XXX,XXX
BUSINESS/PROFESSION
ADD: NON-OPERATING INCOME XXX,XXX
___________
TOTAL GROSS INCOME P XXX,XXX
LESS: ALLOWABLE DEDUCTIONS XXX,XXX
___________
TAXABLE NET INCOME P XXX,XXX
B. GLOBALIZATION RULE FOR MIXED INCOME EARNER

◼the income of mixed income earner from both sources is simply

globalized.
◼a negative net income or net loss when deductions exceeds gross income
from business or profession shall not be offset against taxable
compensation income because deductions are deductible only against
gross income.
 
DETERMINATION OF TAXABLE INCOME OF CORPORATE INCOME TAXPAYERS

◼In case of corporations, it is computed in the same manner as pure

business or professional income earner
 
ACCOUNTING METHOD AND ACCOUNTING PERIOD

◼ The taxable income shall be computed upon the basis of taxpayer’s annual
accounting period in accordance with the method of accounting regularly
employed.
◼ However, if no such method has been so employed, or if it does not clearly
reflect the income, the computation shall be made in accordance with such
method that in the opinion of the Commissioner clearly reflects the income
◼ The accounting method is either cash basis or accrual basis.
◼ Accounting period is either calendar year or fiscal year.
DETERMINATION OF GROSS INCOME FROM BUSINESS OR
PROFESSION

◼ The gross income from business on the sale of goods is computed as:

SALES P XXX,XXX
LESS: COST OF GOODS SOLD (COST OF XXX,XXX
SALES) ____________
GROSS INCOME P XXX,XXX
◼ Cost of sales – It is the acquisition cost of the goods sold for merchandising or manufacturing cost of
the goods.
◼ Cost of sale of a trading business - The cost of goods sold may be determined by the specific
identification using perpetual inventory system with the aid of point-of-sale machines or by the
periodic inventory system using the following formula:
BEGINNING INVENTORY P XXX,XXX
PURCHASES, NET OF RETURNS AND XXX,XXX
ALLOWANCES
FREIGHT-IN XX,XXX
_____________
TOTAL GOODS AVAILABLE FOR SALE P XXX,XXX
LESS: ENDING INVENTORY XXX,XXX
_____________
◼Perpetual system - the cost of goods sold is determined
through bar codes of the goods sold or by stock cards indicating
the costs of the goods sold.
◼Periodic system – the cost of goods sold is established by
counting the inventories
◼Cost of sales of a manufacturing business- Computed in
almost the same way with those of a trading business.
BUSINESS SELLING SERVICES

◼ Gross income from sales of services or exercise of a profession is measured as

follows:

REVENUES OR GROSS RECEIPTS P XXX,XXX

LESS: COST OF SERVICES XXX,XXX

___________
GROSS INCOME P XXX,XXX
COST OF SERVICES

◼This pertains to all direct cost of rendering the services such as cost of
labor, materials, and overhead costs.
 INCOME TAX REPORTING FORMAT
◼ REPORTING FORMAT FOR INDIVIDUALS ENGAGED IN BUSINESS OR PROFESSION
NET SALES/REVENUES/RECEIPT/FEES P XXX,XXX

ADD: OTHER TAXABLE INCOME FROM OPERATION XXX,XXX

NOT SUBJECT TO FINAL TAX ___________

TOTAL SALES/REVENUES/RECEIPTS/FEES P XXX,XXX

LESS: COST OF SALES OR SERVICES XXX,XXX

___________

GROSS INCOME FROM BUSINESS/PROFESSION P XXX,XXX

ADD: NON-OPERATING INCOME XXX,XXX

___________

TOTAL GROSS INCOME P XXX,XXX

LESS: ALLOWABLE DEDUCTIONS XXX,XXX

___________

NET INCOME P XXX,XXX

◼Revenue – general term which pertains to the gross inflow of benefits
arising from the primary operations of the business.
◼Sales – pertains to the revenue from the sale of goods.
◼Fees - pertains to the revenue from the sale of services.
◼Receipts – pertains to cash collection from the sale of goods or services.
REVENUE VS. GROSS INCOME

◼Revenue is a gross concept pertaining to the total return in a transaction

which includes the return of capital and the return on capital.
◼Gross income pertains to the return on capital in a transaction.
◼ Other taxable income from operations - Includes revenues or receipts from
incidental or secondary operations.
NON-OPERATING INCOME

Includes all other items of gross income such as:

1. Gains from dealings in properties – pertains to the sale, exchange and other disposition
of properties by the taxpayer.
◼ 2. Income distribution from general professional partnership, taxable trust or estate,
or from an exempt joint venture 
◼ 3. Casual active income - includes active income from isolated or one-time transactions.
◼ 4. Passive income not subject to final tax - includes passive income not connected with
the business of the taxpayer and is not subjected to final tax such as interest on advances
to employees and dividends from foreign corporations.
REPORTING FORMAT FOR CORPORATE TAXPAYERS

NET SALES/REVENUES/RECEIPTS/FEES P XXX,XXX

LESS: COST OF SALES OR SERVICES XXX,XXX
____________
GROSS IINCOME FROM OPERATIONS P XXX,XXX
ADD: OTHER TAXABLE INCOME NOT SUBJECT XXX,XXX
TO FINAL TAX ____________
TOTAL GROSS INCOME P XXX,XXX
LESS: ALLOWABLE DEDUCTIONS XXX,XXX
____________
NET INCOME P XXX,XXX
 
OTHER TAXABLE INCOME NOT SUBJECT TO FINAL TAX

◼Includes other items of gross income whether or not arising from the
operations of the corporation such as gains from dealings in properties,
income distribution from an exempt joint venture and other passive
income not subject to final tax.
SEPARATE BOOKKEEPING FOR BUSINESS AND PROFESSIONAL
PRACTICE

◼Individual taxpayers engaged in business or in the exercise of profession

must maintain a separate record of their transactions from their personal
transactions.
◼This is important in the tax treatment of expenses.
 
TYPES OF REGULAR INCOME TAX

1. Individual income tax – determined by reference to a tax table of progressive tax rates.
THE INCOME TAX TABLE FOR INDIVIDUAL TAXPAYERS (YEAR 2018 – YEAR 2022)

TAXABLE INCOME PER YEAR INCOME TAX RATE

P 250,000 AND BELOW
ABOVE P 250,000 TO P 400,000
ABOVE P 400,000 TO P 800,000
ABOVE P 800,000 TO P 2,000,000
ABOVE P 2,000,000 TO P 8,000,000
0%
20% OF THE EXCESS OVER P 250,000
P 30,000 + 25% OF THE EXCESS OVER P 400,000
P 130,000 + 30% OF THE EXCESS OVER P
800,000
P 490,000 + 32% OF THE EXCESS OVER P
2,000,000
 
THE OPTIONAL 8% INCOME TAX

◼ Introduced by TRAIN law

◼ For self-employed and/or professionals where they can choose to be taxed at 8% of
sales or receipt and other non-operating income than to be taxed at 20-35% graduated
income tax and 3% percentage business tax on sales or receipts.
2. CORPORATE INCOME TAX

◼ flat rate of 30%

◼ it does not apply to the following:
◼ a. Subject to final tax (non-resident foreign corporation and FCDU interest income
not subjected to final tax
◼ b. Special corporations or those subject to preferential tax rates
◼ c. Exempt corporations
 
MINIMUM CORPORATE INCOME

◼ Computed 2% of total gross income

◼ This is used when corporations are losing in business
◼ Corporation should pay MCIT if regular income tax is lower than the MCIT.
Otherwise, it does not pay MCIT.
Special corporations
◼ Those enjoying lower tax rates but not 0%
◼ Examples: private schools, non-profit hospitals, PEZA registered enterprises

Exempt corporations
◼ Those enjoying 0% tax rate with no tax dues
◼ Examples: government agencies, non-profit organizations, cooperatives
INCOME TAX RETURNS

◼ Individual Income tax returns

TAX RETURN FORM INDIVIDUAL TAXPAYERS

FORM 1700 PURELY EMPLOYED TAXPAYER

FORM 1701A PURELY IN BUSINESS OR PROFESSION, USING

ITEMIZED, OSD OR OPTING TO THE 8% OPTIONAL
INCOME TAX

FORM 1701 MIXED INCOME EARNERS, ESTATES AND TRUSTS

CORPORATE INCOME TAXPAYERS

FORM 1702-RT CORPORATIONS SUBJECT ONLY TO THE 30#

REGULAR INCOME TAX

FORM 1702-MX CORPORATIONS SUBJECT TO SPECIAL OF A

COMBINATION OF TAX RATES

FORM 1702-EX CORPORATIONS THAT IS EXEMPT WITH NO TAX DUE

Rules:
◼ a. Exempt corporations are required to report their results of operations
through BIR form 1702-EX even if they do not have taxable income. The
rationale behind this rule is to assist the BIR in monitoring compliance of
exempt corporations with their withholding tax obligations and to
identify income earned by third parties.
◼ b. Exempt corporations with gross income subject to the regular corporate
income tax or special rate shall file BIR Form 1702-MX.
Deadline of filing the income tax return
◼ 15th day of the fourth month following the taxable year of the taxpayer.

Rounding rules in the income tax returns

◼ If the amount of centavos is 49 or less, the centavos are dropped down. If 50 or
more, it is rounded up to the next peso.
◼ P100.49 = P100
◼ P100.50 – P101
REQUIRED ATTACHMENT IN THE ANNUAL INCOME TAX RETURN

1. CERTIFICATE OF INDEPENDENT CPA – If annual sales, earnings, receipts or output

exceed P 3,000,000
2. SUPPLEMENTAL FORM FOR TAXPAYERS WITH MULTIPLE ACTIVITIES PER
TAX REGIME
3. ACCOUNT INFORMATION FORM AND FINANCIAL STATEMENTS SHOWING:
a. Sales/receipts/fees
b. Cost of sales/services
c. Non-operating and other taxable income
d. Itemized deductions (if taxpayer did not avail of OSD)
e. Taxes and licenses
f. Other information prescribed to be disclosed in the FS
REQUIRED ATTACHMENT IN THE ANNUAL INCOME TAX RETURN

4. STATEMENT OF MANAGEMENT RESPONSIBILITY (SMR)

5. CERTIFICATE OF INCOME PAYMENTS NOT SUBJECTED TO WITHHOLDING TAX (BIR
FORM 2304)
6. CERTIFICATE OF CREDITABLE WITHHELD AT SOURCE (BIR FORM 2307)
7. DULY APPROVED TAX DEBIT MEMO, IF APPLICABLE
8. PROOF OF PRIOR YEAR’S EXCESS CREDITS, IF APPLICABLE
9. PROOF OF FOREIGN TAX CREDITS, IF APPLICABLE
10. FOR AMENDED RETURN, PROOF OF TAX PAYMENT AND THE RETURN PREVIOUSLY
FILED
11. CERTIFICATE OF TAX TREATY RELIEF/ENTITLEMENT ISSUED BY THE CONCERNED
INVESTMENT PROMOTION AGENCY (IPA)
QUARTERLY FILING OF INCOME TAX RETURN

◼Corporations and individuals engaged in business and those engaged in

the practice of a profession are required to file three quarterly returns
aside from the annual consolidated income tax return.
◼ Forms required to be submitted
◼ BIR Form 1701Q – Individual taxpayers engaged in business or practice of
profession
◼ BIR 1702Q - Corporations
 
DEADLINE OF QUARTERLY INCOME TAX RETURNS

QUARTERLY INCOME TAXPAYERS

TAX RETURNS INDIVIDUALS CORPORATIONS
1ST QUARTER ITR MAY 15, same year 60 days end of 1st
Quarter
2ND QUARTER ITR AUGUST 15, same year 60 days end of 2nd
Quarter
3RD QUARTER ITR NOVEMBER 15, same 60 days end of 3rd
year Quarter
FREQUENCY OF REPORTING PER TAXPAYER TYPE

Annual – only pure compensation income earner

Quarterly & Annual

◼ 1. Purely engaged in business of profession
◼ 2. Mixed income earner
◼ 3. Corporations
SUBSTITUTED FILING

◼ Applies only to pure compensation earners

◼ They may be relieved from the obligation to file their annual income tax
return if they have no taxable income from other source other than from their
lone employer.
◼ The employer shall withhold the income tax of the employee’s compensation.
◼ But if the employee has other taxable income or has more than one employer,
either concurrent or successive, during the year, they are required to submit
the Form 1700.
REPORT BY: ACERA, ANGELICA
AQUINO,JHONAS
ARDO,HERSHEY KATE

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