TAX - CHAPTER 4

INCOME TAXATION SCHEMES

(under the NIRC)
An item of gross income is taxable in any of these tax schemes:
1. FIT
2. CGT
3. RIT

NOTE: Tax schemes are mutually exclusive. If taxable sa isa, hindi na mata-tax sa iba. If exempted sa isa, exempted sa
lahat.

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

ACCOUNTING PERIOD
- The length of time over which income is measured and reported.

Period - In taxation, it is simply the coverage of your income tax return.

Types of Accounting Periods

1. Regular accounting period - 12 months
a. Calendar year
b. Fiscal year
2. Short accounting period - >12 months

Calendar year
➢ AKA calendar acctg period
➢ Jan 1 - Dec 31
➢ 12 months in length
➢ Available to both corporate and individual taxpayers

Under the NIRC, the calendar year shall be used when the:
1. Taxpayer's annual acctg period is other than a fiscal year na dapat ≤12 months.
2. Taxpayer has no annual acctg period na >12 months.
3. Taxpayer does not keep books
4. Taxpayer is an individual (not allowed to use fiscal year)

Fiscal year
● AKA fiscal acctg period
● Any 12-month period (ex: June 30 - July 1)
● Available to corporate taxpayers only
 ● Not allowed to individual taxpayers

Deadline of filing the Income Tax Return

● due for filing on the 15th day of the 4th month after the close of the taxable year of the taxpayer.
● The regular tax due is payable upon filing the ITR
Reg. Acctg period Beginning Ending DDL of ITR

Calendar year 01/01/23 12/31/23 04/15/24

Fiscal year 07/01/23 06/30/24 10/15/24

INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business
● ITR Coverage: start of the business until designated year-end.
● Deadline of ITR:
- CY - April 15
- FY - 4 months and 15 day after designated year-end
2. Dissolution of business
● ITR Coverage: beginning of the accounting period to the date of dissolution.
● If CY – Jan. 1 beg of the acctg period
● If FY – Ending May 31, the beg of the acctg period is June 1
● Under old NIRC, the ddl of ITR is 30 days after the approval of merger by the SEC in the case of merger. If
the date of dissolution is Aug. 15, then the return shall be filed on or before Sept. 15

Note: For individuals, the return shall be filed on or before April 15. There is no requirement for early filing under
the NIRC.

● Deadline of ITR:
- CY - April 15
- FY - 4 months and 15 day after designated year-end

3. Change of accounting period by corporate taxpayers

● ITR Coverage: start of the prev acctg period up to the designated year-end of the new acctg period.

Note: BIR approval is required in changing an accounting period. It is not automatic.

● Deadline of ITR:
- If FY to CY - April 15
- If CY to FY - 4 months and 15 day after designated year-end

4. Death of the [individual] taxpayer

● ITR Coverage: start of the calendar year until the death of the taxpayer.
● Allowed to use calendar year only.
● Start of the calendar year is always January 1

Note: There is no requirement for early filing in case of death of taxpayers. Hence, the ITR shall be filed on or
before the usual deadline, April 15.
- It is mandatory for the accounting period of the taxpayer to be terminated exactly at the date of death.
 5. Termination of the acctg period of the taxpayer by the CIR
● ITR Coverage: start of the current year until the date of the termination
● ITR and the tax shall be due and payable immediately.
- Hindi na gagamitin yung 15th day of the 4th month ff the end of the acctg period

ACCOUNTING METHODS
- Techniques used to measure income

Types of Accounting Methods

1. The general methods for sale of goods or services
a. Accrual basis
b. Cash basis
2. Sale of goods with extended payment terms
a. Accrual basis
b. Installment method
c. deferred payment method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis
6. Hybrid basis

Accrual basis
- Income is recognized when earned regardless of when received. Expense is recognized when incurred regardless
of when paid.

Cash basis
- Income is recognized when received and expense is recognized when paid.
Tax and accounting concepts of accrual basis and cash basis distinguished

TAX CONCEPTS TAX RULES

Advanced income is taxable In pursuant to the
upon receipt lifeblood doctrine and the
ability to pay theory.
Applicable on the sale of
services not on goods.
Prepaid expense is Not deductible against
non-deductible gross income in the year
paid.
Deducted against income
in the future period they
expire or used in the
business, trade or
profession of the taxpayer
Special tax acctg Where tax law itself
requirement must be provides for a specific
followed acctg treatment of an
income or expense.
The specific method must
be observed even if it
departs from the basis
regularly employed by the
taxpayer in keeping her
books.

Seller of goods
Note: The use of accrual method is suggested but of course subject to practical and cost considerations.

Hybrid basis
- Any combination of accrual basis, cash basis, and / or other methods of accounting.
- Used when the taxpayer has several businesses which employ different accounting methods.

Note: the gross income determine by each acctg method are simply combined. There is no requirement to
measure the income of different businesses under a single acctg method.

Installment method
- Gross income is recognized and reported in proportion to the collection from the installment sales.
- Available to the following taxpayers:
1. Dealers of personal property or movable property on the sale of properties they regularly sell.
- Can use installment method even if the initial payment ratio exceeds 25% so long as the
selling price on the installment sale exceeds ₱1,000.

2. Dealers of real properties, only if their initial payment does not exceed 25% of the selling price
- Initial payment ratio = initial payment ÷ selling price = ≥25% ✔

3. Casual sale of non-dealers in property whether real or personal, when their selling price exceeds
₱1,000 and their initial payment does not exceed 25% of the selling price.

If nag exceed ng 25%, use deferred payment method

Comprehensive Illustration on Casual sale

Step 1 : Selling price
- The entire amount for which the buyer is obligated to the seller.
- Don't compute if given na

Step 2: Gross profit

- SP less tax basis of property sold or yung original cost niya

Note: IF ACCRUAL BASIS WILL USE, The entire gross profit shall be reported as gross income in 2021, the year of sale.

Step 3: Initial payment ratio (to know if pwedeng gamitin yung installment method)
- Initial payment ÷ Selling price
- Total payments by the buyer, in cash or property, in the taxable year the sale was made.
- Includes installment payments in the year of sale

Note: Casual sale yung problem so dapat hindi mag exceed ng 25% ang IP sa SP para magamit yung Installment method.

* We can use installment method!

Step 4: Contract price

- The amount receivable in cash or other property from the buyer.
- Usually the selling price in the absence of an agreement whereby debtor assumes Indebtedness on the property.
- SP less mortgage or Indebtedness assumed by the buyer

Step 5: Gross income

- (Collection ÷ Contract price) x Gross profit
- "Gross income is recognized and reported in proportion to the collection from the installment sales"

Note: If walang indebtedness assumed by the buyer, means walang contract price. Kapag walang contract price, Selling
price yung gagamitin
Comprehensive Illustration of real property dealer with indebtedness assumed by the buyer

Step 1 : Selling price

- The entire amount for which the buyer is obligated to the seller.
- Don't compute if given na – ₱2,000,000

Step 2: Gross profit

- SP less tax basis of property sold or yung original cost niya

Note: IF ACCRUAL BASIS WILL USE, The entire gross profit shall be reported as gross income in 2021, the year of sale.

Step 3: Initial payment ratio (to know if pwedeng gamitin yung installment method)
- Initial payment ÷ Selling price
- Total payments by the buyer, in cash or property, in the taxable year the sale was made.
- Includes installment payments in the year of sale

* We can use installment method!

Step 4: Contract price

- The amount receivable in cash or other property from the buyer.
- Usually the selling price in the absence of an agreement whereby debtor assumes Indebtedness on the property.
- SP less mortgage or Indebtedness assumed by the buyer
- Can be computed: Cash downpayment plus collectible balance
Alternatively,

Step 5: Gross income

- (Collection ÷ Contract price) x Gross profit
- "Gross income is recognized and reported in proportion to the collection from the installment sales"

INDEBTEDNESS ASSUMED EXCEEDS TAX BASIS OF PROPERTY SOLD

- If mas malaki pa yung indebtedness na inassume ni buyer kaysa sa original cost nung property
- The excess is an indirect receipt realized by the seller.
- This is an indirect downpayment which must be added as part of the contract price and the initial payment.

Note: under this condition, all collection from the contract including the excess mortgage is a collection of
income.

Step 1: Selling price - given na

Step 2: Gross profit
Step 3: Initial payment ratio
Step 4: Contract price

Gross profit is equal to the contract price. Hence, any collection from the contract including the excess mortgage shall be
recognized as gross income upon collection.
- Means, kapag may collection na natanggap, recognized as gross income na. No need to compute using the
formula: (Collection ÷ Contract price) x Gross profit

Step 5: Gross income

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
- The discount interest is amortized or spread as interest income over the installment term.

Assume that the PV of the note is 900k

Step 1: Initial payment ratio

Cash downpayment 1,000,000
Selling price 2,000,000
Ratio 50% cannot use Installment method

Note that the 2 annual installments of 500k will start sa 2022 pa kaya hindi kasama sa initial payment.

Step 2: Gross income

- The gross Income is computed based on the present value or discounted value of a note

Not
anymore a gross profit (SP - Tax basis of property as long as cash downpayment+ PV of note yung SP)

Step 3: Interest income

Amortization of interest income = (Gross income ÷ note balance) x discount

(500k ÷ 1M) x 100k = P50, 000 annual interest income over the installment term.

Note balance 1,000,000 or the face value

PV (900,000)
Discount 100,000

In the case of interest-bearing notes, the use of deferred payment method will bear the same result as the accrual basis of
accounting.
- Note: IF ACCRUAL BASIS WILL USE, The entire gross profit (equal to SP less Tax basis of property) shall be reported
as gross income in the year of sale.