Ccraper4~ Income Tax Schemes, AecoUTD Penods, Methods, ang rman CHAPTER 4 INCOME TAX SCHEMES, ACCOUNTING PERIODS ACCOUNTING METHODS, AND. REPORTING mi Saarinen ae aerate cored ANON dg pastry ofthe following: a emes and their scope seh and its types ‘and their accounting procedures line and place of filin Concept of account d_ Types of tax returns, their deat INCOME TAXATION SCHEMES There are three income taxation schemes under the NIRC: ‘a. Final income taxation Capital gains taxation Regular income taxation an item of gross income ts taxable in any of these tax schemes. tem of gross income Taxable to any one of J | Capital Gains Regular Income Taxation Taxation Mutually exclusive coverage ‘The tax schemes are mutually exclusive. An item of gross income tax in one scheme will not be taxed by the other schemes. Si income that are exempted in ore scheme are nat taxable by the other schemes. Final Income Taxation 100 Readers ave advised to master the coverage of bork final imc papier 4~ Income Tax Schemes, Accounting Periods, Methods, and RepOUn? CLASSIFICATION OF ITEMS OF GROSS INCOME Secause ofthe different tax schemes, stems of gross income cam be classified as follows: 1. Gross income subject to final tax 2 Grass income subject to capital gains tax J Gross income subject to regular tax come fax and cope ane tar A thorough understanding ofthese exceponl tx tremens 6 7 sential to vour master of Income Taxation FINAL INCOME TAXATION Fi income taxation 1s characterzed by final taxes wherein full taxes, are Fitnheld by the income payor at source. The recipient income taxpayer receives syor 1s the one required by law to remit the tax tO ‘the eeciprent income taxpayer does not need to file fe withheld tax constitutes the full tax due and are ts This system of taxation is referred to asthe final the government. Consequent income tax returns because therefore deemed final payment withholding tax system. plicable only on certain passive income listed by the law. Not | taxation is ap} fi income is subject to final tax. all items pa Passive income vs. active income Pasowe incomes are earned with very minimal oreven without active nvolverent of the taxpayer in the earning process. Examples of passive income: 1. Interest income from banks 2. Dividends fram domestic corporations 3. Royalties “Active or regular income arises from transacuons requiring a considerable degree AMaffort or undertaking from the taxpayer. It 1s the direct opposite of passive Examples of active income: 1. Compen 2 Business| 3, Professional income Final income taxation wll be discussed in detail in Chapter 5. 101» nce Taxsstees, cruting Peness. MNeds and Ray . owe " pt et " apt sss ae assets nsdn business 286 6 PFOFHON. Capa pital gas are subject f capital gains tax: Most of them arg big to regular income ax ns tax as a final tax but they are hybrid fom, A alse employs self-assessment method. The taxpayer sq is Ss ee ad pu the ne eran pps only 0 Yes of capa asses domest get ‘The NIRC identifies capital ga apial gains tation willbe discussed in detail in Chapter 6. REGULAR INCOME TAXATION ‘The regulor income taxis the general rule in income taxation and covers ato has: ns from dealings in properties, not subject to capital gains tax . Other passive income not subject to final tax Items of gross income from these sources are valued or measured using ay accounting method, accumulated aver an accounting period, and reported tothe {government through an income tax return. Regular income taxation makes use of ‘the seassessment method. ACCOUNTING PERIOD ‘Accounting period is the length of time over which income is measured and reported ‘counting Periods ‘accounting period ~12 months in length 2. Shore accounting period less than 12 months 102 chapter 4~ Income Tax Schemes, Accounting Periods, Methods, and Reporting calendar year sae atendar accounting period starts from January 1 and ends December 31. This Teounting period is available to both corporate taxpayers and individual taxpayers. tinder the NIRC the calendar year shall bused when the: pm taxpayer’ annual accounting period is other than a fiscal year (Le. longer than 42 months in length) 2, taxpayer has no annval accounting period (ie. ess than 12 months in length) J taxpayer does not keep books 4. taxpayer isan individual Fiscal year ‘Afiscal accounting period is any 12-month period that ends on any day other than. December 31. The fiscal accounting period is available only to corporate income taxpayers and isnot allowed to individual sncome taxpayers, Deadline of Filing the Income Tax Return Under the NIRC, the return 1s due for filing on the fifteenth day of the fourth the taxable year of the taxpayer. The regular tax due {s payable upon filing ofthe income tax return. Ilustration: Due date of he annual income return 1. Taxpayers under the calendar year the current period not 2. A corporate taxpayer with fiscal year ending June 30, 2019 must file its 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 ofthe business until the designated year-end of the business. ‘Mlustration Palawan Inc. started business operation on june 30, 2019 and opted to use the calendar year accounting period, Polawan should file its first income tax return covering June 30 to December 31, 2019 fr the year 2019,The return must be fled on or before April 15, 2020, 2. Dissolution of business ~ The accounting period covers the start of the current year tothe date of dissolution of the business. Mlustration ‘Tawi-tawi Inc. is on the fiscal year accounting period ending every March 31. 1¢ ceased business operation on August 15, 2019. 103,chapter 4—Income Tax Schemes, Acoouning Periods. Methods, ang og ’ Toowstulfie xtc tx return coven AP Aus ys» should fe etvng corporation shal ile ther return wig 203 Under the ald NIRC. gs or 30 days from the approval omen ne, not aetCommission in the case of merger. (6py ie by Secures and Enea ence the return eal be Bed on O btore Sl he return shal be due on or before AP! 1S,2020, They, arly fling under the NIRC. any 2. change of ecvantng parody comarte OXRDETS- THe doe + Grange OF ne star ofthe previous accounting Period Up to the des» kn aa cy istration t Marat arary, 2019, ult Corporation changed is calendar scan erin asa year ending ever ne 20 ty Sale Corporation shal fie on adjust reture covering he Income from en telune 32019 nor efor ctber 15, 2019. ay usravon2 ecve August 2019, Zamboanga Company changed its fscal year accouny period ending every he 30 to the calendar Yer Zamboanga Company shuld lean adjustment return covering July 1 t» 51 261 no before pr 15,2020 Decent Death of the taxpayer - The accounting period covers the start of te calendar year until the death ofthe taxpayer. Atustration Mr. jacob died on November 2,2019. The hews of Mr Jacob or his estate administrators or executors shal file his lat income tox return covering his income from January 1 to November 2, 2018. Theres ‘0 requirement for early filing incase of death of taxpayers. Hence, the income at return shall be filed on or before the usual deadline, April 15,2020. Ic must be noted that cut-off of income must be made at date point of deat because properties such as income accruing before death are part of the estate d the decedent in E while those income accruing after death are net part thereof. Hence, ry for the accounting period ofthe taxpayer tobe terminated exactly at the date of death. eps = 104 Cchopter 4= Hote that Jear-end apply only for purposes of Aandate to extend the accounting per ‘Termination of the accounting period of the taxpayer by the Commissioner of inter year unt tntustratio jeome Tax Schemes, Accounting Periods, Methods, and Reporting Jrement of the old law to presume that the the deceased taxpayer 1 Revenue ~ The accounting period covers the start of the current the date ofthe termination ofthe accounting period. ‘The accounting period of a taxpayer under the calendar year basis was terminated by the CIR on August 2, 2018. ‘The taxpayer must file an income tax return covering January 1 to August 2, 2019. ‘The income tax return and the tox shall be due and payoble Immediately ACCOUNTING METHODS ‘Accounting methods are accounting techniques used to measure income. ‘Types of Accounting Methods L 2 3. 4 5. ods b. Cash basis tage of completion method ‘Outright and spread-out method Crop year basis General Methods for income from sale of goods or service 4 Accrual basis, Under the accrual basis of accounting, income is recognized when earned regardless of when received. Expense is recognized 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 Cash basis Under the cash basis of accounting, income is recognized when received and ‘expense is recognized when paid. Tax and accounting concepts of accrual basis and cash basis distinguished The financial accounting concept of accrual basis and cash basis are similar to their tax counterparts, except only for the following tax rules: 105,esta int MeN Bd Repay upon ree oon receipt in pursy; ce is a ry. The subsequen AML ty ty for expenses of future es come nthe Year py 4 ‘they expire or are "My axpayer. eth doesnot properly reflect thei, e Lfeblood Doctrine as it street ment must befollowed. mete self provides fOr a Specific acco pense Te ied method must be abat™® reguarly employed by the taxpaye™! Payer ig PK 2000 eae 0 Grssincome Poeun ets acre bassegeses determined as fllows: P oxsee ou — seu Eon Pox — no Pits P soxxee bay tlc >payments and depreciation of capital expenditures Dedactons st copier 4~Income Tax Schemes, Accounting Periods, Methods, and Repoting ee roviding services reported the following in 2019 and 2020: ‘otal gross income ess: Deductions 2019 _ _z020__ 500000 F 500,000 300,000 500000 P ¢00,000 500,000 400,000, 00.000 __zo.09 4,300,000 P 1.400,000 Cash expenses. P 400,000 P 600,000 ‘Acerved expense 100.000 150,000 ‘pmortization of 2019 prepaid expense 00.000 ‘Total deductions BSo0909 P—9s0.000 Net income Netincome “500.000 P1,270.000 ses advances __3g0.000 __200.009 Bgoo900 Fi470.000 P 400.000 P +700,000) Less: Cost of Gross income "48504 The cost of sates, ‘5 computed usin Beginni nthe im ing inventory. Wwentory method! Proce ee Foot toa Pon feeds does not propery and tay cee then there ate sigoficant Murra ‘riods. This could expos tax ao payerton Method is suggested but of course bear [22 800d avattabe forsale 35: Ending inventory, Cost of goods sold The expensing ofthe Income of thon inventory levels becwten ata ang BIR assessment. The use af the soe Practical and cost considerate Hybrid basis Teegiabrid basis ts any combination of accrual bast, cash basis and oF otter methods of accounting Its used when the taxpayer has Sea employ different accounting methods. = “a Purchase cost of ‘payer particularly lustration Roxas has two proprietorship businesses: a service business which uses cash hag and a trading business wh ch uses accrual bass The gross mcome as determined by cash basis in the service business and the gros income as determined by the accrual hos 'n the trading business are amply conto There is no requirement to measure the income of different businesses under « thok ‘accounting method. Sale of goods with extended payment terms The sale of goods with extended payment terms may be reported using the acral basis, mstallment method, or deferred payment method 108 ‘and Reporting yted 10 crater seus recogpined and =P" tl method, gross inom es. yn from the inst ee axayerss ary sel ono tab operties they BNE 8 594 of rein 343 pert ee ea pra ee ental hte sin bet ten reverts: sy, rea oF personel WME RES, Sr ehe SIE ames en ae 3, casual Seeds P1000 an rey, the prehonaer that ide. The term sak des the installment payment iso includes t tothe for which the buyer is obligated mare ‘means the entire amount for 8 Pat a OWS Pp exon ved and dor receivable pee cst ewe ark value ol wed by the buyer ss pe ess asst Horeuge or 307 2a selina pice scr property from the contract price w sash or cther property fro! St prce the amount ee nov: prapey oe Te one daly the sling pice nthe absence of am 2 eeytor assumes indebtedness on the property ee cones with a tax basis of P1,200,000 a8 bang received 2 P200,000 cash downpayment tor the balance payable in six installments ofxSehemes, Accounting Periods, MONO, And Roper, ‘Chapter 4 — Income T 799,000 58 Pot aD reported ayy or the amount due thay re buyer, the selling prey asthe contrac pee wll be reported in gross income throughout the installment periog| BE eaten Eoneract pie)» Grose profi » 280.000 2_120.000 can avail ofthe installment method even ifthe price exceeds 25% so long as the selling price With indebtedness assumed by the buyer ‘The application of the installment method will slightly vary when the buyer assumes indebtedness on the property sold. Less: Mortgage assumed by buyer Contract price 0 Cchapter 4~ Income Tax Schemes, Accounting Periods, Methods, and Reporting real property deal cumbered by 3 PI lot costing P1,400,000 3,000 mortgage which was buyer. The buyer paid 200.000 downpayment. The balance is due Iments of P200,000 every July 3 and January 3 thereafter. “The gross profit can be computed as follows: Selling price Less: Tax bass of lot sold Gross profit P 2,000,000 1.800.000 E_soo.on9 Note that dealers of real properties are subject to limitation on the use of installment method. The rat ‘payment shall be determined frst. January 3,2020 eash downpayment June 3, 2020 installment Initial payment Ratio of initial payment (P400,000/"2,000,000) P 200,000 200.000 Bso.000 —2u ‘Togaytay is qualified to use the installment method. The contract price should be determined next. Selling price Less: Mortgage assumed by buyer Contract price P 2,000,000 1.090.090 BLogo.009 ‘Alternatively, the contract price can be computed directly as follows: Cash downpayment 200000 Collectible balance (P200,000 x 4 installments) 200.000 Contract price EAoogoog ‘Tagaytay shall recognize the following gross income: P200K/PLM x P600,000) Indebtedness assumed exceeds tax basis of property sold When the indebtedness assumed by the buyer exceeds the tax bi including the excess mortgage isa col ‘The contract price shall be computed as follows: marex, Acting Peed, MEO, 29d Rep, 14 =Income Tax S2he chapter 4 ~ Income Tax Schemes, Accounting Periods, Methods, and Reporting P00 KKK SE met ae _ ee ive receipt 200K annexe we yment shall be. computed as follows: * == Deferred payment method = erat ea asale ferred payment method, the computed based on the from the contract. The interest income over the Mustration fn December 2,000,000 oe 7 hod cannot be allowed since th ment method cannot be allowed since the ratio of inital payment bzanace ady 50% (P1,000,000/P2,000.000). ia rest bearing but can be discounted at a local bank for P 100,000 7900,000. Under the deferred payment method, the reportable gross income for each ponteo year shal be _— 200000 Cash de P 1,000,000 lownpayment 000, Inia payment Esono0e jentvalueofthe note _ 900,000 of nti payment(PS00K/P2,00.000 price F 900,000 fat af int payment (P500%/1 —2it I ctteepropees) Cee tract price shall be computed as: income Bsa saponin Interest income(P',000,000-P900000) sa.00 B_sa.oge ssumed by buyer 1.500.000 Note: So0.000 aluc andthe present valu ofthe not, known a discount Ss seo <¥560000) Sore income at the date of sale but wil be deferred and Contra pee E2on000 " aed as interest ncome upon ever, collection on the balance of the Note thatthe gross profit on the sale is the same as the contract price. Hence, any "ws 7500.000 nstaliment/P1.000.000 tts ove balance x PL00.000 discount collection from the contract including the excess mortgage shall be recognized 0 _gross income upon collection sme result as the accrual basis of accounting, a 33chapter 4 = Income Tax Soheres, Ascounting Periods, Methods, ang Jetion Method for Construction Contracts Under deuon reported based on the percentage Of Completion o mois. Company accepted a P5,000,000 ‘onstruction : tn 2019, Camman. ¢ 1gshows the details of ts construction acne Pa activities. 201g 2020 P 3,000,000 1,200,000 100% ‘onstrution contract. The followin Construction expenses Engineer's estimate of completion “The reportable grossincome on construction wll simply be computed as follows 70% erat 00 P80 i F .000.0 100,600 Contract price wobec Fsec0oo0 Multiply by % of completion 70% 36 Construction revenue P'3500,000 5.000.000 Less: Construction revenue in por year “3500000 Construction revenue this year P 3500000? 1.500000 Less Expense during he year 3900000 __1200,009 Construction gross income E_s00.000 B_300.009 Income from Leasehold Improvement Leasehold improvements are tangible improvements made by the lessee tothe property ofthe lessor. Improvements will benefit the lessor when their usefulie textends beyond the lease term This benefttis referred to as income from leasehad improvement Under Revenve Regulations No. c, the income from leasehold improvement cane reported using either ofthe following method at the option of the taxpayer: 1. Outright method ‘The lessor may report as income the fair market value of such buildings a improvements subject to the lease at the time when such bi improvements are completed. Spreod-out method ‘The lessor may spread over the life of the lease the estimated depreciated value of such buildings or in mn of the lease and Feport as income for each year of the lease an aliquot part thereof. 14 chapter 4 Income Tax Schemes, Accounting Periods, Methods, and Reporting “The depreciated value of the leasehold improvement is computed as: Cost of improvement x Excess usefuliie over lease term Useful life of the improvement ustration fon January 1. 4500,000.7 ‘duerght method Under the plain wordings of Section 49 of Revenue Regulations No. 2, Anderson shall ire P4.500.000 fair value of the improvement as gross income upon the amount referred to by the regulation Spread-out method ‘The depreciated vi __User___usage__Allocation cost bessee 20 20/30x 4500000 P 3,000,000 * urssor 19 10/30x4500000 __1's00.000 Total =a Easououn ‘The P1,500,000 depreciated value. ent atthe termination ofthe lease {san income from leasehold impros Under the spread-out method, Anderson shal spread the P1,500,000 income over 20 periods or recognize an annual income of P75,000 from the leasehold improvement from Year 2020 through Year 2039 Note to Readers It should be pointed out that this rule exists only the NIRC. Some taxpayers are questioning its v basis. However improvement the lessor up the lessor. These a 1m effect, additional rental The depreciated value of the improvement at the termination of the lease should be ‘the proper value to be recognized as gross income under the outright method. a5,ne Tax oneres. Accountg PevOds, MNOS, and cot 5. Por chapter 4~ In “tis view is supported bythe ao eh = earn io he huge dsproporwem 18 the reportable Broas ies N inthe wo options andaed by te reglation Wil est apply i cag als in the form of leasehold in such cass, unquestionably income 0 the Agriculsaral or Farming neoroe ro acommonty measured using the cask ASI OF Arua bag b. Short-term crops ustration Northern Bar had he following details ofits agricultural activity during the year (000,000 on credit compared last year 7,000,000 6.800.000 1,200,000, ‘Administrative and selling expenses Northern Barn stall compute ts net income using either method as follows: ‘Accrual method Cash basis sie 12,000,000 13,000,000 Direc farm costs 600.000 _ 6.800000 Gross prof rom opera P s20n900 5.200.000 Less aministranve and 2000 on Necincome Esooooo — F-40000 ‘The accounting for Song-term crops depends on the harvesting frequency: 2. Perennial crops ~ those that yield harvests through years 1. One-time crops those that are harvested once ater several years The farm development costs of perent id banana are harvest. The harvests are accounted for using cash basis or ac crops are accounted for using the crop year basis. n6 ccropter 4 lncome Tax Schemes, Accounting Periods, Methods, and Reporting a the proceeds of harvest and expenses of the particular crop harvested. The Me enses ofeach cop are accumulated and deducted upon the harvest ofthe OP iustration fun de la Cruz, 2 farmer, plants a certain crap that takes more than a year to harvest Jian had the fllowing data on his farming operations: 2m 2020 _ _2021__ proceeds of harvest P > P 750,000 Pi,000,000 Je cropping expenses 400,000 200,000 - 500,000 300,000 2s cropping expenses - “the reportable farming income using crop year method would be: proceeds of harvest 202 _2020__ _2021__ > P 750000 1,000,000 Less: Cropping expenses Incurred last year Incurred this year Farming gross income 400.000 500.000 (Crop year basis isan accounting method and is not an accounting period. Use of different accounting methods ‘Taxpayers with more than one type of business using different accounting methods can consolidate the income reported using is no need to restate the income to a common account methods applied to each business should be applied ct ifferent methods. There yethod. However, the tently from period to period. CChange 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 ‘TAX REPORTING Types of Returns to the Government Income tax returns ~ provides details of the taxpayer's income, expense, tax due and tax due, tax credit and tax still due the government . Withholding tax returns ~ provides reports of income payments subjected to withholding tax by the taxpayer-withbolding agent Information returns u7—, Tecounng noes MeN, 2d Repos chapter “a-income Tax Severe’ returns. Informatio fax but are essent: evaluation of tax com; Fey ee ce veal 12% TRUS, O° in rng a ncn wen WN a a nig panes mr tag ncn ETI sl ye tax return 1s by pay Ter ga i tg pert income, EXPERSES, OF any deca’ eat pO ve ae etiedwanite BI inder the NIRC, the income = or ‘of priority, within the etum shall be fled to the followin, revenue district office where thet 2 Revenue 2 Reem poneed oy or maninpaleeasrer.f here smo BIR offen yy J ith an fine or one versio, Ta Stearn spreadsheets without the ned emansres completeness of ata onthe ea, rear no penalties fill up their income tax returns ‘writing on papers returns The syst ind is capable of onfine submission “esessments, taxpayers would have £0 and proceed directly to the bank for payment. 13, Electronic ilng and Payment System (eFPS) ‘The eFPS iz a paperless tax fling system developed and maintained by the Bt ‘Taxpayers Mle tax ret ing attachments in electronic format and pay the tax through the Inceret 2 Top 20000 private corpo 3. Top 5,000 individual tax 4. Taxpayers who wash te ts with government offices 5. Corporations with pac-up capital of P10,000,000 6. PedA-regstered entities and those located within Special Economic Zones a8 acta 4~Income Tax Schemes, Accounting Peds, Methods, and Reports 1. Government offices, in 30 far as remitance of witheld VAT and business ‘Account Management Program (TAMP) spective importers required to secure the fheporters Clearance Certificate (ICC) and Custom brokers Clearance Cerificate (BCC) vy of the eFPS during maintenance or instances of technical taxpayers may fle manually Grouping of Taxpayers under EFPS 1. Group Banking instations f Hotes andresturanss J Landeranspore Manufacture ol papers, and paper products Manufacture of rai, TV and communication equipment and apparatus Manutature of woed and wood products Manutacucing NEC 1. Wholesale trade and commission trade ns.Periods, Methods, chapter 4 come Tax Schemes, ACzoUn hoy nace ep nv an i of HOMEY fe fecwon puri on of water § SAS etn sn dott © Semper and elated aces : Suet a Pa ana € Posaland telecom ion of rcorded media rub tual and sparing aces {oes tremberhp ceanetiont oval wok acaonal eres ao ens company sc 6 ther sere acvines Miscellaneous business aces netaniied ats »AYMENT OF INCOME TAXES ‘Tae peneal rules ‘pay as you file” The capital gains tax and regular come are aid asthe taxpayer files bis return. Installment payment of income tari allowed on certain conditions. ‘Taxpayers under the EFPS system shall e-pay their tax online through ite banking service. The account of the taxpayer wil be auto-debited forthe amour oftaes to be paid BASIC COMPARISON OF FILING AND PAYMENT SYSTEMS [Manual [Dataenty [Manual ing/ Submission | Manual [axpayment [Manual PENALTIES FOR LATE FILING OR PAYMENT OF TAX The late filing and payment of taxes is subject to the following additional charges 120 chapter 4~ Income Tax Schemes, Accountng Periods, Methods, and Reporting lure to fle or pay deficiency tax on time le and pay taxes * Fmoney in the absence of any express stiptlation ‘ince the legal interest is currently set a 6%, the interest penalty is therefore 12% per annum effective January 1, 2018. Note that NIRC imposed an interest penalty of 20% per annum until December 31, 2017. Under the new rules established by RR21-2018, the interest period shall be ‘computed based on actual days divided 365 days. The addinonal day in February during a leap year wi ‘The yearly-monthly-daily counting method established in prior regul already abandoned. ‘have 30 days except the f Tanuary March ay, july, August, October December Febru that 31-day and 30-day months are sequence is reset m August. Also put except on aleap year. How to identify aleap year? ‘Ayear divisible by 4 witha whole number quotient without a decimal isa leap year. Years 2016, 2020, 2024, 2028 and so on are leap years, Leap years have 29 days in February hence the actual number of days ina leap year is 366 not the usual 365. This is due tothe fact that our planet revolves around the sun in 365 days. Hence, there is an extra one complete day in every four calendar years. 1-2018, the new day counting system tax assessments effective ¢ appied even if the tax assessment a2——— caper 4 ~ Income Tax Schemes, AccOUnND Periods, Methods, and r, me ir was due on April 15, 201) ld be counted a5 follows: Mlustration ‘The number of days Wo he mers peat sl be computed 25 100000 126 100/365 « 32674, year iaseation2 a oe ls withing tx return and seo ws gereon on Apr 30,2019 The ape Sreuron taper vrounber days wold be counted 8108 aaa re Tt nse ap 3202 e bad Fy socio 0 soa 7 ‘The interest penalty shall be computed as P 50,000 x 12% x 443/365 = P7.28219 owe thot the interest prtod passes chrough February of leap year 2020. Itustration 3: Incerest in transition years indual taxpayer has a tax due of P40,000 for taxable year 2016 due on Ap 2. The taxpayer settled his taxon February 10, 2018, ‘The interest in 2017 sh ll be computed using the old 20% interest penalty re in 2018 shall be computed using the 12% interest penalty rate Aprit 16 2017 to December 31, 207 is 2¢0 days. January 1, 2018 to February 10. 2018 is 41 days. Hence, the interest shall by computed as follows: 2017 interest (P40,000 x 20% x 260/365) P 5,699.63 2018 anterest (P0,000 x 12% x 41/365) 539.18 Interest penalty E6230) 122 100,000 on ‘Tora tax due ‘chapter 4~ Income Tax Schemes, Accounting Penods, Methods, and Reporting Compromise penalty * Compromise penalty 's an amount paid sn hew of criminal prosecution over ules of compromise penalty related to come taxes are ncuded in 4 for your reference. = as uded 2 computed tax due of holding taxes was, deducted by 3 “The total amount be pad by the taxpayer including penalties shall be P 100,000 20.000 ? 80,000 20000 2393 Compromise penalty* 15.000 boa f the 2018 sncome tax return is April 15, 2019. April 15. 2019 to Tay 15, iy period. ompated om the netamount oft du olor the 25% surcharge. Inposiion {rom the rable of compromise penalies for failure to Ble lows! anf pa Tara | tecntence | congronie | + 20a | # soosi! rin] o00 | "100000 15000 00000 | ____ 500.000, zn000 | You may check the schedule of compromise penalty for late payment of income taxin Appendix 4 for your reference, PENALTIES FOR NON-FILING OR LATE FILING OF INFORMATION RETURN For each failure to file a separate information return, statement or list, or keep any record, or supply any information required by the Code or by the Commissioner fon the date prescribe therefor, unless it is shown that such failure 1s due to reasona tul 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 P25,000.00 123counting Pood, Methods, cape 4 reo Tax Seems = ont ren SS cannot 8 Hea ature of fxs? compare ther with ew ethods in reporting INCOME? Brey ean gy ieee What ae the speo Enumerate the inst |Whatare the ax ac What are the two PES . ning rome. re tage pre 2. Tere are tree Pes or util inclusive in coverage Risener rn em $ Slew era ahr tao ‘ ; : ere are oly two types of lipases of taxation, & wre tned to incade all other assets other than capital as, cameo Re sr accounting periods are calendar and | fiscal. te re At 1 te ny ndar year. ric sag he acon ped when ere hg a ein tpn eer sr cing pe ot ent epee sal be eran Dat ee ets we incon amon sewonng eth ly be less thant, repayments are not-deductble in the current accounting period. 3. Prepayments are deductibie but in the future period they expire or are co Inthe busines or aio the taxpayer. amma. = 4. The use of different methods for different businesses of the same taxpayet see businesses of the taxpayer 124 ‘4 Income Tax Schemes, Accounting Periods, Methods, and Reporting chapter ments in the year of sale ‘method. wd, gross Income is reported based oF 1 price. upon termination of the lease constitutes proper me tax return for each income tax scheme. large, are encouraged to file their income tax return ipervision of the BIR Large Taxpayer Service. ‘of taxis subject to penalties such as surcharges, computed on the basic tax only excluding the under eFPS, ing though e-BIK forms makes use of manual payment. -data entry and fling. re: BIR system dowatime. 2. Which isa correct staternent regarding incon’ eaxes? income subjected to final tax can sil be subject to regular tax. ‘ome exempted from final ax is nevertheless taxable to regular ‘ome subjected to capitat gains tax may be subject to regular ie exempted from tax 1 likewise exempt from capital gains 25ere taxserenes pecan PTGH® MENS. ATE REzenn, aig 4 Ia Tox Scams, Accounting Pood, Mathes, nd Reprtng Inco Ta es when casi #5 OP A888 says, 5 ggome is reported by reference tothe extent of project completion In ~ a, Deferred payment method he chapter a. None ofthese 44, Which statement is correct? capa asset means wr Dealers of real properties can use the installment method without imitation * real operties used in business b of personal properties can use the installment method without 2 ret eopeoes ted DST eal propertes not ard sed in Business © 5 of properties can use the installment method if Initial payment Lay propery rear personal. nor wsed in exceeds 25% ofthe sling pice. 4. Dealers of properties can se the installment method only i inital payment ‘6 Which snot an item of passive neo? st income does not exceed 25% of the selling price. were ee ee i ican ruitbt on lomaseri + ae a, Outright method ¢. Spread-out method 1. ihich ofthe following accounting methods is most consistent with the Lfeby Cash basis 4 Percentage of completion method se Cp yearmethod «Installment method 26, Statement I: The excess of morgage assumed by the buyer over the basis ofthe & Gachbans a1 Accrval method Properties sold isthe amount ofthe gain onthe sae Statement 2: Any collection from an installment contract where the mortgage These ar accountng techniques or convetions used to measure income exceeds the txtbasis ofthe properties recebved consuutes collection of income 2 fecmnting methods c Accrual basis GAScs enest2 ad? b. Accounting periods Cash basis: a Statement 1 only: ¢. Both statements are true. 9, These are diate and equaltime periods over which incomes measured b Statement 2 only d. Nether statement str. 2 Aecuningeethods crop year basis B Aecounang periods Cash basis 17. Which s correct regarding the cop year method? a. Crop year method ian accounting peri. 10. come is rcogized when received rather than when earned Crop year method recognizes faring income when the next planting season 2 Gashbais, Accrual Bais commenced. & Insalment bass Deferred payment basis €. Crop ear method matches cropping expenses with the income upon harvest. 4. Crop year methed recognizes cropping expenses when incurred and harvest ‘11, Income «5 recognized when earned regardless of when received income when realized. : meee an : 2 cahbass staliment method t pmltais A peremage ofteraliion 58 whichis an nrc ate rpg te of cuning pen? 4. Individuals can either choose the calendar year or seal year accounting 12. Initial payment means period. Bee oc eee peer ne 2 Dawnpaymes 8 Thereular accounting period for any taxpayer is 12 months. Individual taxpayers are not allowed to report income using Aseal accounting lection within the year the installment sale was made. ments, exusie of downpayment, within. the yar Of thin one year from the date the installment sale was malt Period, 4 Corporations may opt to use either calendar or fiscal accounting period, ps 27‘Chapter 4~ Income Tax Schemes, 19, Under which ofthe 20, Which is net a special feature ofr pocounng Pees, Methods. 2nd Reportng ing period not arise? following will short accounting Ps fod by a corporate taxpayer Change of acco Period by an individu taxpayer Change of accounting perio eDeath ofataxpayer Dissolution and liquidation ofa business Jor come taxation? sul payment of Income tax 2 Use of aecountng na nal whaling Sx source 1b Use of accounting periods Multiple Cholce - Problem 4-1: Accounting period |. An individual income taxpayer shal leis or her income fx eTUEN OM OF bean, 3 eeenemce fen 27 2 ES stoves acne hua 1 207 oben 1 essen tno p20 Dene e following fiscal year: 201 January 1 to December 31, 2016 ‘Acorporation reporting on a fiscal year ending every March 31 shal Income tax return not later thar ‘a April 15,2017, ¢ 2017. b fune 15,2017, «Apri 15,2018. 9. Metersbonwe Corporation started business on April 5, 2016 and opted to repo income tax on a fiscal year ending every October 31. Metersbonwe's frst incon ‘chapter 4 - Income Tax Schemes, Accounting Penods, Methods, and Reporting 4. April, 2016 to April S, 2017 seneco Corpor & business due to: Shall cover reports on a calendar year. On August 15, 2016, rent losses. Beneco Corporation's last incoi 7. Effective March 1, 2017, Jonah, Inc. changed Ks calendar year to a fiscal year ending every June 20. An adjustment return shall be filed covering the period a March {to june 30, 2017, b lanuary January 1to March During 2017, Klein Corporation changed its accounting period to the calendar year. The adjustment return shall be cA .fuly 15, 2028, ly 2, 2016, Rofelson Company changed its fiscal year ending every 9 anatl l year ending every August 31, An adjustment return ig the period 2.2016. 6. Ay ‘to July 4, 2016. to August 31,2016. 4. July 3to August 31, 2036. Effective May 15, 2017, Tabuk. Inc chang iscal year ending every April 30 to Filed covering the period a May Ito December b. January 15 to December 31,2017, © January 1 to Apnl 30,2017, 4. April 30 to December 31, 2017. Multiple Choice - Problems 4-2: Tax schemes and accounting methods 1. Astercor, Inc. reported the durieg the year: + P400,000 proceeds of life insurance of an officer where Antercor is the interest + P300,000 increase in value of investment in stocks Compute the gross income under cash basis. a P800,000 €.P1,200000 >. 1,000,000 4.P1,400,000 129‘Chapter 4 ~ Income Tax Schemes, Accountng Periods, Methods, and Reportng zi Compute the grose income unde ome under acerusl basis. a PH00,000 «-P1,200,000 b. P1,000.000 4 P1,490,000 lowing data for 2019: (200,000 in ash, 2020 was rece subiease contract. mail + 40,000 total interest income from customers Promissory note eared, 30,000 of this was collected © Unreutized foreign exchange gains from foreign currency receivables totaieg 60,000. Using cash basis, compute the total income subject to income tax. a 990,000 ¢ P750,000 b. P960,000 4,690,000 income subject to income tax. Using accrual basis, compute the ror 2. P1,060,004 «, P960,000 b. 1,060,000 4,970,000 Santiago, Inc. has the following receipts during 2018: From service billings to clients 400,000 ‘Advances from 300.009 Esuo.0ug Total cash ‘The P100,000 advances refer to services which will be rendered next yea. Tot ig increased from P100,000 on December 31, 2017 to P150,000 uncollected ‘on December 31. 2018. Compute the gross income using cash basis. a 100,000) €.P500,000 b. P450.000 .P550,000 Compute the gross income using accrval basis. ‘a P400.000 ‘P500.000 b. P450,000 1,550,009 sold its parking lot for P2,400,000 payable on installment. THe sao estously acquired fr P1500,000 The buyer has on ovtstanding eps balance of P1,800,000 as of December 31.2019, Bright's year-end. 130 ‘ac income Tax Schemes, Accounting Penods, Methods, and Reporing ccnapter 1's gross income in 2019 using the installment method. ompute cong ot P5000 2 Oe 12500 ch arying amount (x basis) of site Corporation sold afr P1000, 00 rena PISDA00 ntl pou tempat the ros PR tbe so"yea000 : 3 Pi20000 vr s a dester of euskal appliances He reported the flowing In 2029 and 2020: ayment of payments were received as of December 31, reported for the year 2019. 0 2019 2020 Installment sales 300.000 800,000 Cost of installment sales 250.000 440,000 Collections 300.000 600,000 Lance's 2020 collection is inclusive of P100,000 accounts from 2019. Using the in taxin 2020. a. P360,000 320,000 Using the accrual basis of accounting, compute Lancelat’s gross income subject to 's gross income subject to income yent method, compute Lancel {income tax in 2020, 2 P360,000 275,000 . P320,000 4.P250,000 Merville 15 dealer in reat properues. Mer wires 20% downpayment, and the last day of the \ce is payable over 36 monthly inst sold properties ia 2019 and 2020 h following the month of sale. Merv ferms a + House and Lot No. 1 was sold for P1,350,000 on November 11.2019. ‘+ House and Lot No. 2 was sold for P1,s00,000 on July 5, 2020. fe of 40% based on the se Both properties were sold at a gross profit Compute Merville's grass income subject to mm tax in 2019 and 2020, ¢ P540,000: P720.0.2 13 14. 15, 16. (Chapter 4 Income Tax Schemes, Accounting Pans, Methods, ang Reporting 152020, Me. Marangley, dete of a, po a) which costs P809.000 for 000, July 1.2020 - as down payment e Monthly instalment thereafter Mr. Marangtey ‘method for him 100,009 0,600 I choose whichever favourable permissible income reporting How much gross income is to be reported in 2020? a 400,000 667 b. P250,000 219 tn the immediately preceding prob 1g Mr M ng problem, assuming Mr: Marangley i nota ‘ar. how much gross incame sto be reported in 2020? ielest How much gross income isto be reported a P400,000 PA b. P250.000 4.108.219 Luccio accepted a P1,000.000 construction contract in early 2020. As of December 31, Lucci incurred total construction costs of P600,000 and estimates additions 200000 to bring the project to completion. Per independent. appra ng 18 a ts OH stage of cony the Compute Luccio’s 2020 construction ig the percentage of completion method. © P160.000 <4. P500,000 ts and reports income by the percentage of started a 2000000 construction contract. Deta ‘onstruction follow: 2020 200000 800,000 800.000 250.000 20% 20% and 2020, 400.000 Bb. P200.000- 400.000. P400,000: P560,000 ‘Oliver entered into a 40-year lease cont act with Berna. Per agreement. Oliver wil ing on Herna’s lat and operate tho same for 40 years. Owners ‘Horna upon the termination of the lease, The lest pleted the bul rs expected 12 used over 50 years, 4 Income Tax Schemes. Accounting Penods, Methods, and Reporting « P8,000,000 4.P32,000,000 1m the immediately preceding problem, assume thatthe building was completed arene i re pz what isthe income ving ouraght method Fp4.000,000 ¢, P32,000,000 3 Pe000.000 440,000,000 ¢ from Raf, Ine. in a non-renewable 10-year lease «©. P30,000 4.P20.000 1. b P180,000 20. Pedro, a farm term erops. The + Sales of rops harvests ses the crap-year method in reporting his invome from long: data are retevant tu rs taming operations in 2020) 900.000 branches for firewood, P50,000 Pedro uses the crop year method in epoting crop income, Compute Fee's otal Income subject to tax. 3 P240,000 b P340.000 ©. P540,000 P5000 Multiple Choice - Problem 4-3: Tax co P2867 dP 4296 133Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting . What is the total surcharge penalty? ; a 20 c.P 10,000 b. P8,000 dP 20,000 file his 2016 income tax return 1 A taxpayer received a notice from the BIR to 1 3 ‘aie aa January 15, 2018, The tax due per his return is P100,000. What is the total surcharge penalty? a PO ©.P.25,000 > 20,000 4.P50,000 4. Whatis his total interest penalty? a P6500 cP 14,740 b. P7,900 4. P15,068 5. Compute the compromise penalty a P 10,000 <.P20,000 b. P1500 4.P 30,000 6. Mani Pakyaw failed to pay file his income tax return for the year 2019 which should have been filed on or before April 15, 2020. The BIR sent him a notice to file his return and pay his tax on or before July 18, 2020. Mani Pakyaw filed a return showing a basic tax due of P1,000,000. Comy ute the total interest penalty, a P3536 ©.P 38,555 b. P37,644 4.P 39,863 7. Mr. Pakyaw must pay a surcharge of a PO ¢.P 500,000 b. P250,000 4.P 1,000,000 5 Rich Goma Corporation failed to file its income tax return for the fiscal year casei gitst 31,2015. On june 62020, it fled an income teererus vane eee ‘axstll due and payable forthe ical year amounting to PSO0 Oe Compute the interest penalty tobe imposed a P 29,603 cpasars 7 MERI b. P28438 4.P 46,207 9% Compute the total tax as i simp ha sein aid excluding compromise penalty. b P653436 4. P 660,873 134