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Realization of Income

REALIZATION OF INCOME When is income is taxable? The following are important considerations to discover whether or not there is income for tax purposes: 1. Existence of income 2. Realization of income 3. Recognition of income 4. Methods of accounting EXISTENCE OF INCOME A primary consideration in income taxation is that there must be income before there could be income taxation. (Domondon, 2013) RECEIPTS NOT CONSIDERED AS INCOME a. Advance Payments or Deposits for Payments; Advances are not revenue of the period in which they are received but as revenue of the period or periods in which they are earned. b. Property received as compensation but subject to forfeiture; c. Assessments for additional Corporate Contributions; d. Increments resulting from revaluation of property; Until the revalued property is disposed of there is no income realized. e. Parent’s share in the accumulated and current equity on subsidiaries’ net earnings prior to distribution; f. Money earmarked for some other persons not included in gross income; g. Money or property borrowed; Borrowed money has to be repaid by the debtor. On the other hand, the creditor does not receive any income upon payment because it is merely a return of capital. h. Increase in net worth resulting from adjusting entries (Domondon, 2013) Page 46 | UST 2017 REALIZATION OF INCOME Under the realization principle, revenue is generally recognized when both of the following conditions are met: a) The earning process is complete or virtually complete b) An exchange has taken place (Manila Mandarin Hotels, Inc. v. CIR, CTA Case No. 5046, March 24, 1997). NOTE: Mere increase in the value of property is not considered as income since it is an unrealized increase in capital. Increase in the Net Worth of the Taxpayer The increase in the net worth of a taxpayer is taxable if it is the result of the receipt by him of unreported or unexplainable tax income. However, if they are merely shown as correction of errors in its entries in its books relating to its indebtedness to certain creditor which had been erroneously overstated or listed as outstanding when they had in fact be duly paid, they are not taxable. NOTE: If and when there are substantial limitations or conditions under which payment is to be made, such does not constitute constructively realized. RECOGNITION OF INCOME When income considered received for Philippines income tax purposes: a. If actually or physically received by taxpayer; or b. If constructively received by taxpayer Page 46 | UST 2017 METHODS OF ACCOUNTING Accounting methods for tax purposes comprise a set of rules for determining how to report income and deductions. General Rule: the law does not provide for a specific method of accounting to be employed by the taxpayer. The law only authorizes the CIR to employ particular method of accounting of income where: a. The taxpayer does not employ a method for computing income, or b. The taxpayer’s method for accounting does not clearly refect the income (Domondon, 205, citing Sec. 43 of NIRC)

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144 views

Realization of Income

REALIZATION OF INCOME When is income is taxable? The following are important considerations to discover whether or not there is income for tax purposes: 1. Existence of income 2. Realization of income 3. Recognition of income 4. Methods of accounting EXISTENCE OF INCOME A primary consideration in income taxation is that there must be income before there could be income taxation. (Domondon, 2013) RECEIPTS NOT CONSIDERED AS INCOME a. Advance Payments or Deposits for Payments; Advances are not revenue of the period in which they are received but as revenue of the period or periods in which they are earned. b. Property received as compensation but subject to forfeiture; c. Assessments for additional Corporate Contributions; d. Increments resulting from revaluation of property; Until the revalued property is disposed of there is no income realized. e. Parent’s share in the accumulated and current equity on subsidiaries’ net earnings prior to distribution; f. Money earmarked for some other persons not included in gross income; g. Money or property borrowed; Borrowed money has to be repaid by the debtor. On the other hand, the creditor does not receive any income upon payment because it is merely a return of capital. h. Increase in net worth resulting from adjusting entries (Domondon, 2013) Page 46 | UST 2017 REALIZATION OF INCOME Under the realization principle, revenue is generally recognized when both of the following conditions are met: a) The earning process is complete or virtually complete b) An exchange has taken place (Manila Mandarin Hotels, Inc. v. CIR, CTA Case No. 5046, March 24, 1997). NOTE: Mere increase in the value of property is not considered as income since it is an unrealized increase in capital. Increase in the Net Worth of the Taxpayer The increase in the net worth of a taxpayer is taxable if it is the result of the receipt by him of unreported or unexplainable tax income. However, if they are merely shown as correction of errors in its entries in its books relating to its indebtedness to certain creditor which had been erroneously overstated or listed as outstanding when they had in fact be duly paid, they are not taxable. NOTE: If and when there are substantial limitations or conditions under which payment is to be made, such does not constitute constructively realized. RECOGNITION OF INCOME When income considered received for Philippines income tax purposes: a. If actually or physically received by taxpayer; or b. If constructively received by taxpayer Page 46 | UST 2017 METHODS OF ACCOUNTING Accounting methods for tax purposes comprise a set of rules for determining how to report income and deductions. General Rule: the law does not provide for a specific method of accounting to be employed by the taxpayer. The law only authorizes the CIR to employ particular method of accounting of income where: a. The taxpayer does not employ a method for computing income, or b. The taxpayer’s method for accounting does not clearly refect the income (Domondon, 205, citing Sec. 43 of NIRC)

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REALIZATION OF INCOME

b. Property received as
compensation but subject to
forfeiture;

c. Assessments for additional


Corporate Contributions;
When is income is taxable?
d. Increments resulting from
The following are important
revaluation of property;
considerations to discover whether
or not there is income for tax Until the revalued property is
purposes: disposed of there is no
income realized.
1. Existence of income
e. Parent’s share in the
2. Realization of income
accumulated and current equity
3. Recognition of income on subsidiaries’ net earnings prior
to distribution;
4. Methods of accounting
f. Money earmarked for some
other persons not included in
EXISTENCE OF INCOME gross income;

A primary consideration in g. Money or property borrowed;


income taxation is that there
Borrowed money has to be
must be income before there
repaid by the debtor. On the
could be income taxation.
other hand, the creditor does
(Domondon, 2013)
not receive any income upon
RECEIPTS NOT CONSIDERED AS payment because it is
INCOME merely a return of capital.

a. Advance Payments or Deposits h. Increase in net worth resulting


for Payments; from adjusting entries (Domondon,
2013)
Advances are not revenue of
the period in which they are
received but as revenue of
the period or periods in
which they are earned.
NOTE: Mere increase in the value
of property is not considered as
income since it is an unrealized
increase in capital.

Increase in the Net Worth of the


Taxpayer

The increase in the net worth of a


taxpayer is taxable if it is the
result of the receipt by him of
unreported or unexplainable tax
income. However, if they are
merely shown as correction of
errors in its entries in its books
relating to its indebtedness to
certain creditor which had been
erroneously overstated or listed as
outstanding when they had in fact
be duly paid, they are not taxable.

NOTE: If and when there are


Page 46 | UST 2017
substantial limitations or
conditions under which payment is
to be made, such does not
REALIZATION OF INCOME constitute constructively realized.
Under the realization principle,
revenue is generally recognized
when both of the following RECOGNITION OF INCOME
conditions are met:
When income considered received
a) The earning process is for Philippines income tax
complete or virtually complete purposes:

b) An exchange has taken place a. If actually or physically


(Manila Mandarin Hotels, Inc. v. received by taxpayer; or
CIR, CTA Case No. 5046, March 24,
b. If constructively
1997).
received by taxpayer
a. The taxpayer does not
employ a method for
computing income, or

b. The taxpayer’s method for


accounting does not clearly
refect the income
(Domondon, 205, citing Sec.
43 of NIRC)

Page 46 | UST 2017

METHODS OF ACCOUNTING

Accounting methods for tax


purposes comprise a set of
rules for determining how
to report income and
deductions.

General Rule: the law does not


provide for a specific method of
accounting to be employed by the
taxpayer.

The law only authorizes the CIR to


employ particular method of
accounting of income where:

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