Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

CHAPTER4
INCOME TAX SCHEMES, ACCOUNTING PERIODS,
ACCOUNTING METHODS, AND REPORTING
Chapter Overview cµid Objectives
----------------------------------------------------------------------------------------------------- ...
This chapter provides an overview of the income tax schemes under the NIRC.

After this chapter, readers are expected to gain familiarization and demonstrate
mastery of the following:
a. Types of taxation schemes and their scope
b. Concept of accounting period and its types
c. Concept of accounting methods and their accounting procedures
d. Types of tax returns, their deadline and place of filing

INCOME TAXATION SCHEMES

There are three income taxation schemes under the NIRC:
a. Final income taxation
b. Capital gains taxation
c. Regular income taxation

An item of gross income is taxable in any of these tax schemes.

Item of gross income

Taxable to any one of

', H H

Final Income Capital Gains Regular Income

Taxation Taxation Taxation

Mutually exclusive coverage

The tax schemes are mutually exclusive. An item of gross income that is subject t~
tax in one scheme will not be taxed by the other schemes. Similarly, items 0
income that are exempted in one scheme are not taxable by the other schemes.

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

CLASSIFICATION OF ITEMS OF GROSS INCOME

Because of the different tax schemes, items of gross income can be classified as
follows:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
C
U: Readers are advised to master the coverage of both final income tax and capital
gains tax. A thorough understanding of these exceptional tax treatments is very
essential to your mastery of Income Taxation.

FINAL INCOME TAXATION

Final income taxation is characterized by final taxes wherein full taxes are
withheld by the income payor at source. The recipient income taxpayer receives
the income net of taxes. The payor is the one required by law to remit the ~ to
the government. Consequently, the recipient income taxpayer does not need to file
income tax returns because the withheld tax constitutes the full tax due and are
therefore deemed final payments. This system of taxation is referred to as the final
withholding tax system.
Final taxation is applicable only on certain passive income listed by the law. Not
all items of passive income are subject to final tax.
Passive income vs. active income
Passive incomes are earned with very minimal or even without active involvement
of the taxpayer in the earning process. 1 .,. / r • • • ,

Examples of passive income:

1. Interest income from banks
2. Dividends from domestic corporations
3. Royalties
Active or regular income arises from transactions requiring a considerable degree
of effort or undertaking from the taxpayer. It is the direct opposite of passive
I
income. (\ / n ( I
Examples of active income: { it I ·
1. Compensation income
2. Business income
3. Professional income
Final income taxation will be discussed in detail in Chapter 5.
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Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

CAPITAL GAINS TAXATION

Capital gains tax is imposed on the gain realized on the sale, exchange and Other
dispositions of certain capital assets.

Capital assets are assets not used in business, trade or profession. Capital asset
are the opposites of ordinary assets. Ordinary assets are assets used in businesss
trade or profession such as inventory, supplies or property, plant and equipment,'

Also, not all capital gains are subject to capital gains tax. Most of them are subject
to regular income tax. I

The NIRC identifies capital gains tax as a final tax but they are hybrid forms of
final taxes since it also employs self-assessment method. The taxpayer still files
capital gains tax returns to report the gain and pay the tax to the government.
Capital gains taxation applies only to two types of capital assets: domestic stocks
and real property. I
Capital gains taxation will be discussed in detail in Chapter 6.

REGULAR INCOME TAXATION

The regular income tax is the general rule in income taxation and covers all other 1
income such as:
1. Active income
2. Other income
a. Gains from_ de~lings in properties, not subject to capital gains tax
b. Other passive mcome not subject to final tax

;~ms 0 ~ gross income from these sources are valued or measured using an !
counting method, accumulated over an accounting period and reported to the J

gthovern/u:ment th rough an income tax return. Regular income t~ation makes use of
e se'J-assessment method.

ACCOUNTING PERIOD
Accounting period is the length of time over wh1'ch . d
reported. mcome is measured an

Types of Accounting Periods

1. Regular accounting period - 12 months in length
a. Calendar
b. Fiscal
2. Short accounting period_ less tha 12
n months

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

Calendar year
The calendar accounting period starts from January 1 and ends December 31. This
accounting period is available to both corporate taxpayers and individual
taxpayers.

Under the NIRC, the calendar year shall be used when the:
1. taxpayer's annual accounting period is other than a fiscal year (i.e. longer than
12 months in length)
2. taxpayer has no annual accounting period tLe. less than 12 months in length)
3. taxpayer does not keep books
4. taxpayer is an individual . l .
t•
'

Fiscal year
A fiscal accounting period is any 12-month period that ends on any day other than
December 31. The fiscal accounting period is ~~~~,l!_l!_~i ·
taxpayers and is not allowed to individual income taxpayers.
Deadline of Filing the Income Tax Return
Under the NIRC, the return is due for filing 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 filing 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 fiscal year ending June 30, 2021 must file its annual
income tax return not later than October 15_, 2021.

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, 2021 and opted to use the
calendar year accounting period.
Palawan should ft.le its first Income tax return cov~ri119 June 3Q to December 31,
2021 for the year 2021, The return must b•flled on ar be/Qre April 15, 2022.
2. Dissolution of buslne,s - The accountlng period covers the start of the
current year to the date of dissolution of the bus.iness.
Illustration
Tawi-tawi Inc. is on the fiscal year accounting period ending every March 31. It
ceased business operation on August 15, 2021.

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting
I
Tawi-tawi should file its last income tax return covering April 1 to August S, 2021.
Under the old NIRC, dissolving corporations shall file their return within 30 day ·
from the cessation of activities or 30 days from the approval of Jherger by th s 1
Securities and Exchange Commission in the case of merger. fBPI vs. CIR, G;
144653, August 28, 2011). Hence, the return shall be filed on or before Septernber
15,2021. I

For individuals, the return shall be due on or -~efore April 15, 2022. There is no
requirement for early filing under the NIRC.

3. Change of accounting period b?' corporate_ taxpafers :.. The accounting

period covers the start of the previous accounting period up to the designated
year-end of the new acco.unting period. Note.that BIR appreval is required in
changing an accounting period~.It is not automatic.
,. • J •

Illustration 1
.Effective February, 2 0 21, Sulu Corporation changed its. ,,calendar accounting
period to a fiscal year ending every June 30.
Sulu CtJrporation shall file an adjustmefft return covering the income from January 1
to June 30, 2021 on or before October, 15, 2021. , ·
Illustration 2
Effective August 2021, Zamboanga Company changed its fiscal year accounting
period ending every June 30 to the calendar year.
Zamboanga Company should file an adjustment return covering July 1 to December ;
31, 2021 on or before April 15, 2022.

4. Death of the taxpayer - The accounting period covers the start of the
calendar year until the death of the taxpayer.
Illustration
Mr. Regonald died on November 2, 2021.
The heirs of Mr. Regonald or his estate adm/ni tratar: or e}(ecutors, s~qllfl{e his la~t
income tax return covering his income from January 1 to November 2,.2021. There 15
no requirement for early filing in case of death of taxpayers. Hence, the income tax
return shall be flied on or before the usual deadlin~ April 1 2022. A ·

It must be noted that cu~•off of income mu t be Jnade at date point of dea th

because properties such as income accruing before death are part of the estate of
the decedent in Estate Taxation while those income accruing after death are not
part thereof. Hence, it is mandatory for the accounting period of the taxpayer to be
terminated exactly at the date of death.

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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

5. Termination of the accounting period of the taxpayer by the Commissioner

of Internal Revenue - The accounting period covers the ·s tart 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, 2021. ,

The taxpayer must file an income tax return covering January 1 to August 2, 2021.
The income tax return and the tax shall be due and payable immediately.

ACCOUNTING METHODS
Accounting methods are accounting techniques used to measure income.
Types of Accounting Methods ) .
1. The general methods
a. Accrual basis
b. Cash basis
2. Installment and deferred payment method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis

General Methods for income from sale of goods or service

1. Accrual basis
Under the accrual basis of accounting, income is ~
of when receive . Ex ense is reco ize when ~~
..,;,_-id

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.

2. Cash basis
Under the cash basis of accounting, income is and

Tax and accounting concepts of accrual.basis and cash basis distinguished

The financial accounting concept of accrual bijsis and cash basis are similar to
Jr
their tax counterparts, except only for the following tax rules:
1. Advanced income is taxable upon receipt
Income received in advance is taxable upon receipt in pursuant to the
Lifeblood Doctrine and the Ability to Pay Theory. The subsequent taxation of

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Chapter 4 - Income Tax Schemes, Accounting Period s, Methods, and Reporting

advanced income in the period earned will expose the government to risk
nonacollection. This rule is applicable on the sale of~_.....not on goods. of
2. Prepaid expense is non-deductible.
Prepaid expenses are advanced payment for expenses of future taXabl
periods. These are not deductible against gross income in the year paid. The;
are deducted against income in the future period they expire or are used in
the business, trade or profession of the taxpayer.
Normally, the _Mtrm_~!!!....--~
........11~m_r reflect the income
of the taxpayer. l t a so cont a 1cts the Life Doctrine as it effectively
defers the recognition of income.
3. Special tax accounting requirement must be followed.
There are cases where the tax law itself provides for a specific accounting
treatment of an income or expense. The specified method must be observed
even if it departs from the basis regularly employed by the taxpayer in
keeping his books.
The tax accrual basis income is deteimined as follows: .
Cash income p xxx,xxx
Accrued (uncollected) income xxx,xxx
Advanced income XXXJOOC
Gross income p XXX,XXX
I

The tax accrual basis expense is determined as follows:

Cash expenses .P xxx,xxx
Accrued ( unpaid) expense xxx,xxx ~
Amortization of prepayments and
depreciation of capital expenditures X1CXJOOC
Deductions p xxx,;xxx
The tax cash basis income is determined as follows:
Cash income p xxx..xxx
Advanced income xxx.xxx
Gross income ' I p xx1,xxx
The tax cash basis expense is determined as follows:
Cash expenses p xxx,xxx
Amortization of prepayments and
depreciation of capital expenditures
Deductions xxx.xxx
p xxx.xxx

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 Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

Illustration
A taxpayer providing servi•c es reported the following in 2021 and 2022:
2021 2022
Collections from services rendered p 500,000 P 800,000
Accrued income from services rendered 500,000 400,000
Collection from accrued income of 2021 470,000
Collection for services not yet rendered 300,000 200,000
Payment of expenses of current period 400,000 600,000
Accrued expenses 100,000 150,000
Payment of accrued expenses of 2021 100,000
Payment for expenses of the following year 200,000 300,000

Tax Accrual Basis

2021 2022
Cash income P 500,000 P 800,000
Accrued income 500,000 400,000
Collection for future services - advances 300,000
Total gross income P 1,300,000 p 1
Less: Deductions
Cash expenses p 400,000 P 600,000
Accrued expense 100,000 150,000
Amortization of 2021 prepaid expense 200,000
Total deductions
Net income
Points to consider in converting GAAP Accrual Basis to Tax Accrual Basis
1. In accounting accrual basis, income is recognized when earned even if not yet received.
Advanced income is inherentl not included in net income. .
aa
ancecl inceme is taxa6le. Hence, it must be ed to
2. n accounting, expense is recognize wnen accrued even 1 not yet pa1 . repai expenses
are inherently not deducted. Hence, no adjustment for prepayments is necessary under
accrual basis.

Tax Cash Basis

2021 2022
Collection from services rendered P 500,000 P*l,270,000
Collection for future services - advances
Total gross income
Less: Deductions
Payments of expenses P 400,00() P **700,000
Amortization of 2021 prepayments 200,000
Total deductions
Net income
Note: PB00,000 + P470,000 = Pl,270,000*; P600,000 + Pl00,000 ::: P700,000"

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 Chapter 4 _ Income Tax Schemes, Accounting Periods, Methods, and Reporting

Points to consider In converting GAAP cash basis to Tax cash basl~

1. . cash basis, income is recognized
Un der t he accounting . d" not when It I earn ed.
when received
. . •
Ad vance d mcome ,s m er h ently recognized as mcome. Hence, no a 1ustment is neces an.
·, on
income. is deducted w hen pat"d me
· Ju d'mg prepa1'd expens
2. Und er accoun ti. ng cas h basi·s, expense
· f · •
Hence, the deducted prepaid expenses must be reversed for purposes o taxation.

Sellers of goods . . .
The gross income of taxpayers sel1ing goods 1s determmed as foJlows.

Sales p xxx,xxx
Less: Cost of goods sold xxx,xxx
Gross income p xxx.xxx
The cost of sales is computed using the inventory method:

Beginning inventory p xxx,xxx

Add: Purchases xxx.xxx
Total goods available for sale p xxx,xxx
Less:Endinginventory xxx.xxx
Cost of goods sold p xxx,xxx

The expensing of the purchase cost of goods does not properly and fairly reflect the
income of the taxpayer particularly when there are significant fluctuations in
inventory levels between accounting periods. This could expose the taxpayer to risk of
BIR assessment. The use of the accrual method is suggested but of course subject to
practical and cost considerations.

Hybrid basis
The hybrid basis is any combination of accrual basis, cash basis, and/ or other
methods of accounting. It is used when the taxpayer has several businesses which
employ different accounting methods.
mustration
Mr. Roxas has two proprietorship businesses: a service bu ine whi h uses cash basis
and a trading business which uses accrual basis.

~he gross income. as determined by cash ba I in the ervi e bu iness and the gross
mcome_as det:erm_med by the accrual basi in the trodin9 bu iness are simply combined.
There 1s. nQ reqwrement to measure the income of different bu inesses under a single
accoun,tmg method.

Sale of goods wtdJ extended payment terms

The sale of goods wjth ext d d J:
b . . taJI en e payn1 . nt tern1 may be reported using the accrua
as1s, ms ment method, or defi rr d p y111ent m thod.

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Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

Installment method
Under the installment

Installment method is available to the following taxpayers:

1. Dealers of personal property on the sale of properties they regularly sell
2. Dealers of real properties, only if thei =a't:"l~_,~. .,~•~~ oes not excee of
the selling price
3. Casual sale of non-dealers in property, real or personal, when their selling
ll__l and their initial payment does not exceed 25% of the
price ,mad_~'f_(l_.t_
selling pnce

Initial payment
Initial payment means total payments by the buyer, in cash or property, in the
taxable year the sale was made. The term "initial payment" is broader than
down payment. It also includes the installment payments in the year of sale.

Selling price
Selling price means the entire amount for which the buyer is obligated to the
seller. It is computed as follows:

Cash received and/ or receivable p xxx,xxx

Fair market value of property received or receivable xxx,xxx-e~+.rro\.+ed "10r4t...
Mortgage or any indebtedness assumed by the buyer XXX.XXX OfC.O'Y\~•c O\S.Se-\
Selling price p xxx,xxx
' ..... ~ .., ) ~
'
Contract price ., JI l / t '_ - 1' '-_
The contract price is the amount receivable in cash or other property from the
buyer. It is usually the selling price in the absence of an agreement whereby the
debtor assumes indebtedness on the property.

Comprehensive Illustration
Malaybay Company, a car dealer, sold a machine with a tax basis of Pl,200,000 on
installment on January 3, 2021 Malaybay received a P200,000 cash downpayment and
a Pl,800,000 promissory note for the balance payable in six installments of P300,000
every July 3 and January 3 thereafter.
The selling price and gross profit on the sale is computed as follows:
P 200,000
Cash downpayment
1,800,000
Notes receivables P 2,000,000
Selling price
Less: Tax basis of machine sold ( 1,200,000)
P 800,000
Gross profit

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 Accounting Periods, Methods, and Reporting
Ch apter 4- Income Tax Scheme s,

Accrual basis . th entire P800 000 gross pro fi1t s ha II be reporte d as gross
Un d er the accrual bas1s, e '
income in 2021, the year of sale.
Installment basis . .
Mal b not readily use the installment method because 1t 1s a dealer of cars
rath~ :;aandealer of machineries. The sale of properties of which the seller Is not a
dealer is referred to as a "casual sale." Hence, the ratio of initial payment shall be
tested first.

The initial payment of Malaybay can be computed as follows:

Cash downpayment (January 3, 2021) P 200,000
First installment (July 3, 2021) 300,000
Initial payment P 500,000
Ratio of initial payment (PSOO,OOO/P2,000,000) 25%
Malaybay can use the installment method. The contract price or the amount due shall
be determined next. ince tliere is no mortgage assumed by the , the selling price
is liirtillRl''IICtlJri .

The gross profit will be reported in gross income throughout the installment period by
the formula: (Collection/Contract price) x Gross profit

Malaybay shall recognize the following gross income:

At the date of sale: (P200K/P2M x PB00,000) P 80,000

Upon every installment: (P300K/P2M x PB00,000) P 120,000
If Malaybay is a dealer in machinery, it can avail of the installment method even if the
ratio of its initial payment over selling price exceeds 25% so long as the selling price
on the installment sale exceeds Pl,000.

With indebtedness assumed by the buyer

The application of the installment method will slightly vary when the buyer
assumes indebtedness on the property sold.
( (O d 1,t-\O f\ Of OWi ~ l'lv(J~

In this case, the selling price is no longer the contract price. The contract price is
the residual amount after deducting the mortgage from the selling price. Thus,

Selling price p xxx,xxx

Less: Mortgage assumed by buyer xxx,xxx
Contract price p xxx.xxx

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 Chapter 4 - Income Tax Sche A .
me s, ccounting Periods, Methods, and Reporting

Illustration
on January 3, 2021, Tagaytay Inc 1
fi P2 000 000 The I t ' ·,area property dealer, sold a lot costing Pl,400,000
0 :um;d b; th~ bu .er.0 Th;as encum_bered by a Pl,000,000 mortgage whic? was
as fi . t 11 ~ _ f p buyer paid P200,000 down payment. The balance 1s due
over our ms a men 5 c 200,000 every July 3 and January 3 thereafter.

The gross profit tan be computed as follows:

Selling price P 2,000,000

Less: Tax basis of lot sold
1,400.000
Gross profit
P 600.000
Note that dealers of re~l properties are subject t~ limitation on the use of installment
method. The ratio of initial payment shall be determined first
January 3, 2021 cash downpayment P 200,000
July 3, 2021 installment 1 • , ;,f• ' r. · ·, · 1"' 200.000 ·
Initial paymen~ . . J /' 1• , ,._ '. _, ~,. ,. , _ 'P 400,000
• · , · •• · , 1 • ,.1
Ratio of initial payment (P~Qo·,ooq/P2,000,00.0) .. 20%

Tagaytay is qualified to use the installment method. The contract price should be
determined next. 1 •. , . :. , ; · · , t'J" - ~

Selling price · P 2,000,000 :

Less: Mortgage assumed by buyer I 1•. -. 1.000.000
Contract price P 1,000.000

Alternatively, the contract price can be ·computed directly as follows:

Cash downpayment P 200.000
Collectible balance (P200,000 x 4 installments) 800.000
Contract price · P 1,000.000

Tagaytay shall r~cognize the following ~ro~s incom :

p 120,000
At the date of sale: (P200K/P1M x P600,000)
Upon every installment: (P200K/P1M x P600,000) p 120,00Q p .

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Chapter 4 - Income Tax Schemes, Accounting P riods, Methods, and Reporting

The contract price shall be computed as follow :

p xxx,xxx
Selling price
Less: Mortgage assumed by buyer xxx.xxx
p
Cash collectible
Add: Excess indebtedness - constructive receipt
Contract price
The Initial payment shalJ be computed as follows:
Down payment p xxx,xxx
Installment in the year of sale xxx,xxx
Excess of mortgage over tax basis xxx.xxx
Initial payment p xxx,xxx

Illustration
On July 1, 2021, a taxpayer made a casual sale of property with a tax basis of
Pl,300,000 for P2,000,000. The property was subject to a Pl,500,000 mortgage which
was agreed to be assumed by the buyer. The buyer paid a Pl00,000 down payment
with the balance due in two installments of P200,000 on December 31, 2021 and July
1, 2022.

The gross profit on the sale is determined as follows:

Selling price P 2,000,000
Less: Tax basis of property sold 1,300.000
Gross profit P 700.000
The initial payment shall be determined first:
Down payment P 100,000
December 31, 2021 installment 200,000
Excess mortgage (Pl,500,000 - Pl,300,000)
· Initial payment
Ratio of Initial payment (PS00K/P2,000,000) 25°/n
The contract price shall be computed as:
Selling price P 2,000,000
Less: Mortgage assumed by buyer 1.soo.000
Cash collectible P 500,000
Exce mortgage (Pl,500,000 - Pl,300,000) 200.000
Contract price
P 700,000

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Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

Canlubang shall recognize the following gross income:

IO t... J]JO
At the date of sale (P20 K down+ Pl00 excess) P 300,000
Upon receipt of first instaHment-12/31/2021 200,000
Upon receipt of second installment - 7/1/2022 200,000
Total gross profit on the contract P 700.000
Deferred payment method
The deferred payment method is 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.
Under the deferred payment method, the gross income is computed based on the
present value (discounted value) of a note receivable from the contract. The
discount interest on the note is amortized (i.e., spread) as interest income over the
installment term.
Illustration
On December 31, 2021, a taxpayer old an office building costing Pl,400,000 for
P2,000,000. The buyer made Pl,000,000 downpayment and the balance, evidenced by
a note, is due in 2 annual ·install ments of PS00,000 every Oecember 31 starting
December 31, 2022.
Note that the installment method cannot be allowed since the ratio of Initial payment
is already 50% (P1,000,000/P2,000,000).
Assume the note is non-interest bearing but can be discounted at a local bank for
P900,000. Under the deferred payment method, the reportable gross income for each
year shall be:
2021 2022 2023
Cash downpayment P 1,000,000
Present value of the note 900,000
Selling price P 1,900,000
Less: Tax basis of the property 1,400,000
s
Gross income P 500,000
Interest income (Pl,000,000 - P900,000) P 50,000 P 50.000
Note:
1. The difference between the face value and the present value of the note, known as discount,
will not be recognized in gross income at the date of sale but will be deferred and
recognized as interest income.
2. The discount is amortized as interest income upon every collection on the balance of the
-note as follows: PS00,000 installment/Pl,000,000 total note balance x Pl00,000 discount

In the case of interest-bearing notes, the use of the deferred payment method will
bear the same result as the accrual basis of accounting.
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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

The Percentage of Completion MethQd for Construction Contracts

Under the percentage of completion method, the estimated gross income fro
construction is reported based on the percentage of completion of
construction project. e
t;
~
There are several methods of estimating project completion in practice, but th ~
output method based on engineering survey is prescribed by the NIRC. e ~
~
Illustration I
In 2021, Cagayan De Oro Construction Company accepted a PS,000,000 fixed-price ~
construction contract. The following shows the details of its construction activities:
2021 2022
Construction expenses P 3,000,000 P 1,200,000
Engineer's estimate of completion 70% 100%

The reportable gross income on construction will simply be computed as follows:

2021 2022
Contract price P 5,000,000 P 5,000,000
Multiply by:% of completion 70% 100%
Construction revenue P 3,500,000 P 5,000,000
Less: Construction revenue in prior year _ _ __ 3,500,000
Construction revenue this year P 3,500,000 P 1,500,000
Less: Expense during the year · 3,000,000 1,200.000
Construction gross income P 500,000 P 300,000

Income from Leasehold Improvement

Leasehold improvements are tangible improvements made by the lessee to the
property of the lessor. Improvements will benefit the lessor when their useful life
extends beyond the lease term. This benefit is referred to as income from leasehold
improvemen.t.
Under Revenue Regulations No. 2, the income from leasehold improvement can be
reported using either of the following method at the option of the taxpayer:
1. Outright method
The lessor may report as income the fair market value of such buildings or
i.mprovemen~ subject to the )eftse at the time when such buildings or
improvements are completed.
2. Spread•out method 1

The lessor may spread over the life of the lease the estilnated depreciated
value of such buil d ings or improvements at the termination of the lease and
report as income for each year of the lease an aliquot part thereof.

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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 useful life over lease term
Useful life of the improvement
Illustration
on January 1, 2021, Ivan leased a vacant lot to Greg under a 20-year lease contract
Greg immediately constructed a building on the lot at a total cost of P4,500,000. The
building has useful life of 30 years.

Outright method
Under the plain wordings of Section 49 of Revenue Regulations No. 2, Ivan shaJI
recognize the entire P4,S00,000 fair value of the improvem.e nt as gross income upon
completion of the improvement in 2021. This is not income in its totality, but this is
the amount referred to by the regulation.

Spread-out method
The depreciated value of the property at the termination of the lease is the value of the
years of usage of the lessor. This can be computed by splitting the value of the
improvement as follows:

Years of
User usage Allocation Cost
- Lessee 20 20/30 x P4,S00,000 P 3,000,000
- Lessor --1.Q 10/30 x P4,S00,000 1,500,000
Total _JD P 4.500.000

The Pl,500,000 depreciated value of the improvement at th

is an income from leasehold improvement by the lessor.

Under the spread-out method, Anderson shall spre d th Pt,s........",.,..,,.,

Periods or recognize an annual income of P75,000 from th p vement
from Year 2021 through Year 2040.

Not,e t.o Readers

It should be pointed out that this rule 1t ftd i · absent in
the .NIRC. Some taxpayers are questionin . Ii ut lack of legal
~asis. However, it is fairly proper t n id th ......,........,. i ted value of the
•·rnprovement that remains to the le s r up n t rmin ,ti n if the lease as income
because it is an actual ben fit to th l r. h r , in effect additional rental
consideration in kind.
However, the treatment specified by th outright method is perceived as unjust
and abusive, and is an improper introdu tion of legislation.

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Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

The depreciated value of the improvement at the termination of the lease should b
the proper value to be recognized as gross income under the outright method. e

This view is supported by the fact that the spread-out metho~ coul~ not have been ,
an option if the outright method intended to tax the entire fair value of the ,
improvement considering the huge disproportion in the reportable gross income'
under the two options.
The outright method as mandated by the regulation will best apply in cases where
lessees pay the lessor rentals in the form of leasehold improvements or when
leasehold improvements made by lessees are treated as reductions to cash rentals. 1

In such cases, the fair value of the leasehold improvements upon completion is 1

unquestionably income to the lessor for taxation purposes.

Agricultural or Farming Income

Farming income is commonly measured using the cash basis or accrual basis, such
as in the following:
a. Animal husbandry
b. Short-term crops
Illustration
Northern Barn had the following details of its agricultural activity during the year:

Total sales of fattened pigs, Pl,000,000 on credit P 12,000,000

Increase in fair value of pig herd compared last year 2,700,000
Total costs of farm feeds and supplies bought 7,000,000
Total costs of farm feeds and supplies used 6,800,000
Administrative and selling expenses 1,200,000

Northern Barn shall compute its net income using either method as follows:
Accrual method Cashbasi£
Sales P 12,000,000 P 11,000,000
Direct farm costs 6,800,00Q 6,800.000
Gross profit from operations P 5,200,000 P- s,200,000
Less: administrative and selling expenses 1,200,000 1,200.000
Net income P 5.000,000 P 4.ooo,CW
The accou~ting for long-term crops depends on tbe harvesti~g frequency:
a. Peren?,a/ crops - those that yield harvests through years
b. One-time crops - those that are harvested once after several years
The initial farm developm t f . e11i
coconut and banana en _co~ts o perennial crops like mangoes, mangoste ol
are capitahzed and amorttzed over the expected years

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Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

harvest The harvests are accounted for using cash basis or accrual basis. One-time
crops are accounted for using the crop year basis.

Crop year basis

Under the crop year basis, farming income is recognized as the difference between
the proceeds of harvest and expenses of the particular crop harvested. The
expenses of each crop are accumulated and deducted upon the harvest of the crop.
Illustration
John de la Cruz, a farmer, plants a certain crop that takes more than a year to harvest
Juan had the following data on his farming operations:

2021 2022 2023

Proceeds of harvest p - P 750,000 Pl,000,000
1st cropping expenses 400,000 200,000
2nd cropping expenses 500,000 300,000

The reportable farming income using crop year method would be:

2021 2022 2023

Proceeds of harvest - p 750,000 Pl,000,000
Less: Cropping expenses
Incurred last year 400,000 500,000
Incurred this year 200.000 300.0Qil
Farming gross income e 150,QQQ e 200,QQO
Crop year basis is an 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 the different methods. There
is no need to restate the income to a common accounting m th .. Ho e r, the
methods applied to each business should be applied con i t ntly from period to
period.

Change in Accounting Period

The change in accounting period requires prior BIR notice. The following
documentations are required:
1. A letter of request addressed to th ROO h vin jurisdiction over the place of
business of the taxpayer showing:
a. The original and the proposed new accounting period
b, The reason for desiring to change the accounting period
2. Certified true copy of the SEC approved amended by-laws showing change in
accounting period
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Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

3. Sworn statement of "non-forum shopping" stating that such request has not
been previously acted upon by the BIR National Office
4. Duly filed up BIR Form 1905
5. A sworn undertaking by an officer of the taxpayer to file a separate final or
adjustment return for the period between the close of the ori_ginal a~counting
period and the date designated as the close of the new accounting period

The request for approval of the change in accounting period shall be filed at any
time not less than 60 days prior to the beginning of the new accounting period
The certification approving the adoption of a new accounting period must be
released within 30 days from the date of receipt of the complete documentary
requirements.

TAX REPORTING
Types of Returns to the Government
1. Income tax returns - provide details of the taxpayer's income, expense, tax
due, tax credit and tax still due the government.
2. Withholding tax returns - provide reports of income payments subjected to
withholding tax by the taxpayer-withholding agent.
3. Information returns
Information Returns
Certain taxpayers are also required to file information returns. Informatio
returns do not involve any payment or withholding of tax but are essential to the
government in its tax mapping efforts and in its evaluation of tax compliance.
The non-filing of income tax returns, withholding tax returns, or information
returns is subject to penalties, fines, and or imprisonment.

MODE OF FILING INCOME TAX RETURNS

1. Manual Filing System
The traditional manual system of filing income tax return is by paper documents
where taxpayers fill up BIR forms to report income. expenses, or any declaration
required to be filed with the BIR.
Under the NIRC, the income tax return shall be filed to the following, in
descending order of priority, within the revenue district office where the taxpayer
is registered or required to register:
1. An authorized agent bank (AAB)
2. Revenue Collection Officer
3. Duly authorized city or municipal treasurer, if there is no BIR office in the
locality
118 a
 Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

2. e-BIR Forms
The BIR introduced the e-BIR Forms with an offline or online version. Taxpayers
fill up their income tax returns in electronic spreadsheets without the need of
writing on papers returns. The system ensures completeness,of data on the return
and is capable of online submission. If there are no penalties that require BIR
assessments, taxpayers would have to print a hard copy of the filled tax returns
and proceed directly to the bank for • paytn~ht.
\ J
., , f

3. Electronic Filing and Payment Syst~m ( eFl>S}

The eFPS is a paperless tax filing system developed and maintained by the BIR.
Taxpayers file tax returns including attachments in electronic format and pay the
tax through the Internet.
I• I

Taxpayers mandated to use the eFPS

1. Large taxpayers duly notified by the BIR
2. Top 20,000 private corporations duly notified by the BIR
3. Top 5,000 individual taxpayers duly notified by- the BIR
4. Taxpayers who wish to enter into contracts with government offices
5. Corporations with paid-up capital of Pl0,000,000
6. PEZA-registered entities and those l9cated within Special Economic Zones
7. Government offices, in so far as re~it:tan'ce of withheld VAT and business tax
are concerned . -1 :- •.

8. Taxpayers included in the Taxpayer Account Management Program (TAMP)

9. Accredited importers, including prospective importers required to secure the
Importers Clearance Certificate (ICC) and Custom brokers Clearance
Certificate (BCC) ·, ,
'I '

In case of unavailability of the eFPS during maintenance or instances of technical

errors, eFPS enrolled taxpayers may file manually.

Grouping of Taxpayers under EFPS

1. Group A ', , i

a. Banking institutions
b. Insurance and pension funding
c. Non-bank financial intermediation
d. Activities auxiliary to financial intermediation
e. Construction
f. Water transport
g. Hotels and restaurants
h. Land transport
2· GroupB
a. Manufacture and repair of furniture
h. Manufacture of basic metals
c. Manufacture of chemicals, and chemical products
d. Manufacture of coke, refined petroleum, and fuel products
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 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

e. Manufacture of electrical machinery, and apparatus NEC

f. Manufacture of fabricated metal products
g. Manufacture of foods, products, and beverages
h. Manufacture of machineries, and equipment NEC
i. Manufacture of medical, precision, and ot,tlcal instruments
j. Manufacture of motor vehicles, trailers and semi-trailers
k. Manufacture of office, accounting, and computing machineries
I. Manufacture of other non-metallic mineral products
m. Manufacture of other transport equipment
n. Manufacture of other wearing apparel
o. Manufacture of papers, and paper products
p. Manufacture of radio, TV, and communication equipment, and apparatus
q. Manufacture of rubber and plastic products
r. Manufacture of textiles
s. Manufacture of tobacco products
t Manufacture of wood and wood products
u. Manufacturing N.E.C.
v. Metallic ore mining
w. Non-metallic mining and quarrying
3. Group C
a. Retail sale
b. Wholesale trade and commission trade
c. Sale, maintenance, repair of motor vehicle, and sale of automotive fuel
d. Collection, purification, and distribution of water
e. Computer and related activities
f. Real estate activities
4. GroupD
a Air transport
b. Electricity, gas, steam, and hot water supply
c. Postal and telecommunications
d. Publish~ng, printing, and reproduction of recorded media
e. Recreational, cultural, and sporting activities
f. Recycling
g. Renting out of goods and equipment
h. Supporting and auxiliary transport activities
5. GroupE
a. Activities of membership organizations Inc
b. Health and social work '
c. Private educational services
d. Public administration and defense compulsory social •,
. d . security
e. Pu bl 1c e ucat1ona 1serv1ces
f. Research and development
g. Agriculture, hunting, and forestry
h. Farming of animals
i. Fishing
j. Other service activities
k. Miscellaneous business activities
I. Unclassified activities
120

j
 Chapter 4 - Income Tax Schemes .
' Accounting Periods, Methods, and Reporting

PAYMENT OF INCOME TAXES

The general rule is "pay as you Iii ,, Th . .
are paid as the taxpayer files h' e · e capital gams tax and regular income tax
. is return Install t • .
aIJowed on certam conditions. · men payment of mcome tax 1s

Taxpayers under the eFPS system sh 11 .

banking service. The account f th a e-pay _th e1r tax online through internet
of taxes to be paid. 0 e taxpayer will be auto-debited for the amo.unt

BASIC COMPARISON OF FILING AND PAYMENT SYSTEMS

.
Manual e-BIRFonns eFPS
Data entrv Manual Electronic Electronic
Filimr/Submission Manual Electronic Electronic
Tax payment Manual Manual Electronic

PENALTIES FOR LATE FILING OR PAYMENT OF TAX

The late filing and payment of taxes is subject to the following additional charges:
1. Surcharge -
a. 25% of the basic tax for failure to file or pay deficiency tax on time
b. 50% for willful neglect to file and pay taxes
The non-filing is considered 'willful neglect if the BIR discovered the non-filing
first This is the case when the taxpayer received a notice from the BIR to file
return prior to his actual filing. If the taxpayer filed a return before the receipt of
such notice, the same is considered simple neglect subject to the 25% surcharge.
2. Interest - Double of the legal interest rate for loans or forbearance of any
money in the absence of any express stipulation

Since the legal interest is currently set at 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 additional day in
February during a leap year ~ill be counted. The yearly-monthly-daily
counting method established in prwr regulations is already abandoned.

A month normally has 30 days except the following:

31-da months anuar, March Ma , ul , Au ust October, December
28 or 29-da month Februa
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Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

The best way to put this in mind is that 31-day and 30-day months
alternating from January to July, but the sequence is reset in August Also are.
in mind that February is a 28-day month, except on a leap year. Put

How to identify a leap year?

A year divisible by 4 with a whole number quotient without a decimal is a leap
year. Years 2016, 2020, 2024, 2028 and so on are leap years. Leap years hav
29 days in February hence the actual number of days in a leap year is 366 n;
the usual 365. This is due to the fact that our planet revQlves around the sun in
365 ¼ days. Hence, there is an extra one complete day in every four calendar
years.

Under the illustrative guidelines in RR21-2018, the new day counting system
for the interest penalty will be implemented for tax assessments effective
January 1, 2018. This means it will be applied even if the tax assessment
pertains to 2017 and prior years.

Illustration 1: Basic procedure

The tax return of the taxpayer was due on April 15, 2021 but was filed on August
3, 2021. The tax due per return of the taxpayer amounts to Pl00,0 00.
The number of days would be counted as follows:

Period Days
April (30 - 15) 15
May 31
June 30
July 31
August 3
Total days 110
The interest penalty shall be computed as P 100,000 1 96 x 110/ 65 = PJ,616·44

Illustration 2: Interest in a leap year

f:~
·Jed tll
A taX ayer-withholding agent fail ed to fil e his with~olding tax return and filed
. pth PS0 000 withholding tax ther on on April 0, 2019. Th taxpay
remit e ,
the return on July 16, 2020.
f days would be co unted a fo llows:
The num b ero

per!od 2019 to April 30, 2020

April 30,
May 2020
June 2020
July 2020 122
Total days
 Chapter 4- ,Income Tax Schemes, Accounting Periods, Methods, and Reporting

The interest penalty shall be computed asp 50,000 x 12.% x 443/365 = P7,282.19.

Illustration 3: Interest in transition years

An individual taxpayer has a tax due of P40,000 ~ r taxable year 2016 du~ on April
15, 2017. The taxpayer settled his tax on February 10, 2018.

The interest in 2017 shall be cotnputed using the old 20% interest penalty rate
while the interest in 2018 shall be computed using the 12% interest penalty rate.

April 16, 2017 to December 31, 207 is 260 day~. Jahuary 1, 2018 to February 10,
2018 is 41 days. Hence, the interest shall be computed as follows:

2017 interest (P40,000 x 20% x 260/365) P 5,698.63

2018 interest (P40,000 x 12% x 41/365) 539.18
Interest penalty P 6,237,81

3. Compromise penalty -
Compromise penalty is an amount paid in lieu of criminal prosecution over a
tax violation.
The schedules of compromise penalty related to income taxes are included in
Appendix 4 for your reference.

INTEGRATIVE ILLUSTRATION
An individual taxpayer filed his 2020 income tax return with a computed tax due of
Pl00,000 on July 15, 2021. A total of P20,000 creditable withholding taxes was
deducted by various income payors from his gross income.

The total amount to be paid by the taxpayer including penalties shall be:

Tax due p 100,000

Less: Tax credits ( creditable withholding taxes) 2Q.QQQ
Net tax due p 80,000
Plus: Penalties
Surcharge (PS0,000 x 25%) 20,000
Interest (PS0,000 x 12% x 91/365) 2,393
Compromise penalty* 15.0QQ
Total tax due e 112.323
Note:
1. The deadline of the 2020 income tax return is April 15, 2021. April -15, 2021 to July 15,
2021 is a 91-day period.
2· Interest is computed from the net amount of tax due before the 25% surcharge. Imposition
of interest upon the surcharge is illegal.
3· The compromise penalty is taken from the table of compromise penalties for failure to file
and or pay internal revenue tax at the time or times required by law, as follows:
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Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

1/the am0unt of tax unpaid

Exceeds But not exceed Compromise Is
... ... ...
p p 50,000 p 10,000
20,000
50,000 100,000 15,000
100,000 500,000 20,000

You may check the schedule of compromise penalty for late payment of income
tax in 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
on the date prescribe therefor, unless it is shown that such failure is due to
reasonable cause not to willful neglect, shall be subject to a penalty off Pl,000 for
each such failure. Provided that the amount imposed for all such failure during a
calendar year shall not exceed P25,000.
 Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

CHAPTER 4: SELF-TEST EXERCISES

Discussion Question·s
1. What are the three income taxation schemes? Briefly discuss the scope of each.
2. Discuss the nature of final income taxation.
3. What are ordinary assets? Compare them with capital assets.
4. What capital gains are subject to capital gains taxation?
5. What are the special features of regular income taxation"?
6. Enumerate the instances wherein short accounting period will ·arise.
7. What are the tax accounting methods irt reporting income? Briefly explain each.
8. What are the two types of income tax return?

True or False 1 1 '

1. An ordinary asset is defined to include all other assets other than capital assets.
2. Both active income and passive income do not require direct participation of the
taxpayer in earning the income.
3. There are three types of gross income for taxation purposes.
4. The three tax schemes are mutually inclusive in coverage.
5. Regular income tax generally covers active income and capital gains.
6. Final tax generally covers passive income.
7. Capital gains arise from the sale, exchange, and other disposition of any assets.
8. There are only two types of assets for purposes of taxation.
9. The technique used to measure income is referred to as an accounting method.
The length of time over which income is reported is referred to as an accounting
period.
10. Regular accounting periods are calendar and fiscal.
11. Individuals file their income tax returns on or before April 15 of the following
calendar year.
12. All taxpayers can change their accounting period when there is a change in the
nature of their business, but the BIR must be notified in all cases.
13. The first accounting period of a starting business will more likely be less than 12
months.
14. The accounting period of a deceased taxpayer shall be terminated on December
31 in the year of death.
15. Accrual basis and cash basis are the most common accounting methods used in
practice.

True or False 2
1. The withheld taxes on the income payments made by the taxpayers are tax credit
agaf nst thef r income tax due.
2. Advanced income is an item of gross income for accrual basis taxpayers.
3. GeneraJJy, prepayments are non-deductible in the current accounting period.

125
 ome Tax Schemes Accounting Periods, Methods, and Reporting
Chapter 4 - InC '

_ Prepayments are deductible but in the future period they expire or are consullleu
4
in the business or trade of the taxpayer.
s. The use of different methods for different businesses of the same taxpayer Is
permitted by law.
6. Initial payment includes downpayment and installments in the year of sale.
7. Contract price is synonymous with selling price.
8. The crop year method is an accounting method.
9. Under the percentage of completion method, gross income is reported based on
the cash collections from the contract price.
10. The depreciated value of the property upon termination of the lease constitutes
income to the lessee.
11. There are three types of income tax return for each income tax scheme.
12. All taxpayers, small or large, are encouraged to file their income tax return
through the EFPS system of the BIR.
13. Large taxpayers are under the supervision of the BIR Large Taxpayer Service.
14. Non-filing and/or non-payment of tax is subject to penalties such as surcharges,
interest, compromise, and imprisonment.
15. The interest on unpaid taxes is computed on the basic tax only excluding the
surcharge.
16. Only large taxpayers shall file under eFPS.
17. Both manual filing and filing though e-BIR forms makes use of manual payment
18. eFPS is fully electronic tax compliance. ,
19. e-BIR forms makes use of electronic data entry and filing.
20. eFPS filers may file manually when there is a BIR system downtime.

Multiple Choice - Theory: General concepts

1. Which of the following accounting methods is most consistent with the lifeblOO
doctrine? ·
a Crop year method c. Installment method
b. Cash basis d. Accrual method
2. Which is not a scheme in taxing income?
a Ordinary gain taxation c. Capital gains t xation
b. Regular income taxation d. Final incom taxati n
3. Which is a correct statement regarding in om t x s.
a. An i_tem of i.ncome subjected to final t x n still b ubj ct to regular tax.
b. An item of mcome exempt d from final t x i n v rth less tax hie to regolaf
tax. ·
c. ~n item of income subject d to c pit 1 g ins t x m y be subject to regular
income tax.
ct Anta item of income exempted from t x is likewise exempt from capital g i~
x and regular income tax.

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Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

4. Which is not a feature of final tax?

a. Covers certain passive income
b. Covers all capital gains
c. Withholding at source
d. None of these

s. Which of the following properties when classified as capiµl asset is subject to

capital gains tax?
a. Domestic stocks sold directly to buyer
b. Real property
c. Both a orb
d. None of these

6. Capital asset means

a. real properties used in business.
b. personal properties used in business.
c. real properties not used in business.
d. any property, real or personal, not used in business.

7. Which is not an item of passive income?

a. Royalties c. Deposit interest income
b. Prizes d. Professional income

8. These are accounting techniques or conventions used to measure income

a. Accounting methods c. Accrual basis
b. Accounting periods d. Cash basis

9. These are distinct and equal time periods over which income is measured
a. Accounting methods c. Crop year basis
b. Accounting periods d. Cash basis

10. Income js recognized when received rather than when rned

a. Cash basis c. Accrual basis
b. Installment basis d. Deferred payment basi

l 1. Income is recognized when earned regardless of when received

a. Cash basis · c. Installment method
b. Accrual basis d. Perc«mtage of compl tlon
12 - Which statement is correct7
a. Dealers of real properties can use the installment method without limitation.
b. Dealers of personal properties can use the installment method without
limitation.
c. Non-dealers of properties can use the installment method if initial payment
exceeds 25% of the selling price. ·

127
 r
Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

d. Dealers of properties can use the installment method only if initial paYnl
does not exceed 25% of the selling price. ent

13. Initial payment means

a. Downpayment.
b. Total collection within the year the installment sale was made.
c. Installment payments, exclusive of downpayment, within the year the
installment sale was made.
d. Total collections within one year from the date the installment sale was made.
14. Income is reported by reference to the extent of project completion in
a. Deferred payment method
b. Installment method
c. Percentage of completion method
d. Completed contract method

15. Leasehold income is recognized over the lease term in

a. Outright method c. Spread-out method
b. Cash basis d. Percentage of completion method

16. Statement 1: The excess of mortgage assumed by the buyer over the basis of the
properties sold is the amount of the gain on the sale.
Statement 2: Any collection from an installment contract where the mortgage
exceeds the tax basis of the properties received constitutes collection of income.
Which statement is true?
a Statement 1 only c. Both statements are true.
b. Statement 2 only d. Neither statement is true.

17. Which is correct regarding the crop year method?

a. Crop year method is an accounting period.
b. Crop year method recognizes farming income when the next planting season
commenced.
c. Crop year method matches cropping expenses with the inrome upon h rvest.
d. Crop year method recognizes cropping expense _ when incurred and harve5t
income when realized.
18. Which is not a special feature of regular income taxation?
a. Use of accounting methods c. Annual payment of income tax
b. Use of accounting periods d. Final withholding ta t ource

19. Which is an incorrect statement regarding th use of ounting period? ·og

a. Individuals can either choose the calendar y ar or fiscal year accountt
period.
b. The regular accounting period for any taxpayer is 12 months.
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 Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

c. Individual taxpayers are not allowed to report income using fiscal accounting
period.
d. Corporations may opt to use either calendar or fiscal accounting period.

20. Under which of the following will short accounting period not arise?
a. Change of accounting period by a corporate taxpayer
b. Change of accounting period by an individual taxpayer
c. Death of a taxpayer
d. Dissolution and liquidation of a business

Multiple Choice - Problem 4-1: Accounting period

1. A corporation reporting on a fiscal year ending every March 31 shall file its
2021income tax return not later than
a. April 15, 2021. c. July 15, 2021.
b. June 15, 2021. d. April 15, 2022. ,, '

2. An individual income taxpayer shall file his or her income tax return on or before
the
a. 15 th day of the fourth month of the same calendar year.
b. 15 th day of the fourth month of the following calendar year.
c. 15 th day of the fourth month of the same fiscal year.
d. 15 th day of the fourth month of the following fiscal year.

3. Anderson died on March 31, 2021. Which is a correct statement?

a Anderson's 2021 income tax return shall cover January 1, 2020 to December
31, 2021.
b. Anderson's 2021 income tax return shall cover January 1,, 2021 to December
31, 2021.
c. Anderson's 2021 income tax return shall cover January 1.. 2021 to March 31,
2021.
d. Anderson's 2021 income tax: return shall cover April 1 2021 to December 3·1,
2021.

4. Mrs. Julian started business on July 15, 2021. What should be the coverage of her
2021 income tax return?
a. January 1 to July 15, 2021
b. July 15, 2021 to December 31, 2021
c. July 16, 2021 to July 15, 2021
d. January 1 to December 31, 2021
5· ~etersbonwe Corporation started business on April 5, 2021 and opted to report
Income tax on a fiscal year ending every October 31. Metersbonwe's first income
tax return shall cover
a. April 6, 2021 to October 31, 2021
b. April 5, 2021 to October 31, 2021

129
 c. April 5, 2021 to December 31, 2021
d. April 5, 2021 to April 5, 2022
6. Maitun1 Corporation reports on a calendar year. On August 15, 2021, it stopped
business due to persistent losses. Maitum Corporation's last income tax return
shall cover
a. January 1 to December 31, 2021
b. January 1 to August 15, 2021
c. August 15, 2020 to August 15, 2021
d. August 15 to December 31, 2021

7. Effective May 15, 2022, Tabuk, Inc. changed its fiscal year ending every April 30 to
the calendar year. An adjustment return shall be filed covering the period
a. May 1 to December 31, 2022. ·
b. January 15 to December 31, 2022.
c. January 1 to April 30, 2022.
d. April 30 to December 31, 2022.
8. Effective March 1, 2021, Caraga, Inc. changed its calendar year to a fiscal year
ending every June 30. An adjustment return shall be filed covering the period
a. March 1 to June 30, 2021.
b. January 1 to June 30, 2021.
c. January 1 to March 1, 2021.
d. January 1 to December 31, 2021.
9. During 2021, Ozamis Corporation changed its accounting period to the calendar
year. The adjustment return shall be filed on or before.
a. April 15, 2021. c. April 15, 2022.
b. July 15, 2021. d. July 15, 2022.
10. Effective July 2, 2022, Parang Company changed its fiscal year ending every March
31 to another fiscal year ending every August 31. An adjustment return shall be
filed covering the period
a April 1 to July 2, 2022. c. April 1 to August 31, 2022.
b. April 1 to July 1, 2022. d. July 3 to August 31, 2022.

Multiple Choice - Problems 4-2: Tax schemes and uccounting methods

1. Berlin Corp. reported the following data for 2021:
• Total net sales made to customers were P2,000,000 in cash.
• Goods purchased for sale totaled Pl,200,000 in cash. Beginning and ending
inventory of goods for sale, respectively, were P200,000 and P300,000.
• 1-year advanced rent of P30,000 to apply for 2022 was received froJJl 3
sublease contract.
• P40,000 total interest income from customers promissory note earned·
P30,000 of this was collected.
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 h pt r 4 - In m Tax Schemes, Accounting P riods, M th d , nd R p rtin

• Unrealized foreign exchange gains from foreign curr ncy r c lvabl otal
P60,000.

Using cash basis, compute the total income subject to lncom t x.

a. P990,000 c. P750,000
b. P960,000 d. P690,000

2. Using accrual basis, compute the total income subject to income tax.
a. Pl,060,000 c. P960,000
b. Pl,000,000 d. P970,000

. Pagadian, Inc. reported the following during the year:

• P400,000 proceeds of life insurance of an officer where Pagadlan I th
beneficiary (P600,000 still uncollected.)
• PS00,000 interest income, exclusive of P200,000 uncollected and accrued
interest
• P300,000 increase in value of investment in stocks

Compute the gross income under cash basis.

a. P 800,000 c. Pl,200,000
b. Pl,000,000 d. Pl,400,000

4. Compute the gross income under accrual basis.

a. PS00,000 c. Pl,200,000
b. Pl,000,000 d. Pl,400,000

5. Dapitan, Inc. has the following receipts during 2021:

From service billings to clients P 400,000

Advances from clients 100,000
Total cash collection P 500.000
The Pl00,000 advances refer to services which will be rendered ne t ye r. Total
uncollected billing increased from Pl00,000 on December 31, 20 0 to PlS0,000
on December 31, 2021.

Compute the gross income using cash basis,

a P400,000 c. PS00,000
b. P450,000 d. PSS0,000
6· Compute the gross income using accrual basis.
a. P400,000 c. PS00,000
b. P450,000 d. PSS0,000

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 Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

7. In 2021, Malita Inc. sold_ its parking lot for P2,400,000 payable on instal!ment, The
lot was previously acqmred for Pl,500,000. The buyer has an outstanding unp
balance of Pl,800,000 as of December 31, 2021, Malita's year-end. aid

Compute Malita's gross income in 2021 using the installment method.

a. P900,000 c. P225,000
b. P675,000 d. P112,500

8. Exquisite Corporation sold its old warehouse with carrying amount (tax basts) of
P600,000 for Pl,000,000. A downpayment of 15% was collected on July 1, 2021.
Additional PlS0,000 installment payments were received as of December 31
2021. . '
Compute the gross profit to be reported for the year 2021.
a. P60,000 c. P400,000
b. P120,000 d. P450,000

9. Carl Gabriel is a dealer of household appliances. He reported the follo~ing in

2021and 2022:
2021 2022
Installment sales P 500,000 P 800,000
Cost of installment sales 250,000 440,000
Collections 300,000 600,000
Carl Gabriel's 2022 collection is inclusive of Pl00,000 accounts from 2021.

Using the installment method, compute Carl Gabriel's gross income subject to
income tax in 2022.
a. P360,000 c. P250,000
b. P320,000 d. P275,000

10. Using the accrual basis of accounting, compute Lancelot's gross income subject to
income tax in 2022.
a. P360,000 c. P275,000
b. P320,000 d. P250,000

11. Merville is a dealer in real properties. Merville requires 20% downpayment, and
the balance is payable over 36 monthly installment starting on the last day of th;
month following the month of sale. Merville sold properties in 2021 and 2oz
with terms as follows:
• House and Lot No. 1 was sold for Pl,350,000 on November 11, 2021.
• House and Lot No. 2 was sold for Pl,800,000 on July 5, 2022.
Both properties were sold at a gross profit rate of 40% based on the selling price, 1

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 Chapter 4- Income Tax Schemes, Accounting Periods, Methods, and Reporting

Compute Merville's gross income subject to income tax in 2021 and 2022,
respectively.
a. P120,000; P368,000 c. P540,000; P720,000
b. P120,000; P864,000 d. P540,000; P864,000
12. In 2022, Mr. Francis, a dealer of car, disposed a brand new sports utility vehicle
(SUV) which costs PB00,000 for Pt,200,000, under the following terms:
July 1, 2022 - as down payment P 100,000
Monthly installment thereafter 50,000
Mr. Francis will choose whichever favorable permissible income reporting
method for him.
How much gross income is to be reported in 2022?
a. P 400,000 c. Pl 16,667
b. P 250,000 d. Pl 08,219

13. In the immediately preceding problem, assuming Mr. Francis is not a dealer of car,
how much gross income is to be reported in 2022?
How much gross income is to be reported in 2022?
a. P 400,000 c. P116,667
b. P 250,000 d. P108,219

14. Luccio Karl accepted a Pl,000,000 construction contract in early 2021. As of

December 31, Luccio Karl incurred total construction costs of P600,000 and
estimates additional P200,000 to bring the project to completion. Per independent
appraisal, the building is at its 80% stage of completion. Compute tuccio Karrs
2021 construction income using the percentage of completion metho ·
a P40,000 c. P160,000
b. P200,000 d. P400,000
•
lS. Talomo, Inc. constructs residential properties for clients and reports income by
the percentage of completion method. In 2021, Talomo. Inc. started P .oo~ooo
constructiQn contract. Detail~ of his 2021 and 202a construction follow:
2021 . ~o~a
Annual construction costs P 200,000 P 800,000
Estimated cost to finish 800,000 250,000
Extent of completion 20% 80%
Compute the construction income in 2021 and 2022.
a. P200,000; P560,000 c. P400,000; P400,000
b. P200,000; P400,000 d. P400,000; P560,000

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Chapter 4 _ Income Tax Schemes, Accounting Periods, Methods, and Reporting

16• 01·Iver entere d m

• t o a 40 -year lease contract with Bernas. Per agreement' 0li'ver
will construct a building on Bernas lot and operate the same ~or _40 Years.
ow h' of the building will transfer to Bernas upon the termination of th
ners
lease. The•P lease will not commence untI·1 t h e b m'Id'Ing Is· compete
I d. Olivere j
completed the building ,at a total cost of P40,000,000 on January 1, 2022. The
building is expetted to be used over 50 years. ,
. ' . !
Compute Bernas income from the leasehold improvement to be reported in 202 2 ·
using the spread-out method. 1
• •

a. P 200,000 c. PS,000,000
b. P4,000,000 d. P3,2,000,000

17. In the immediately preceding problem, assume that the building was completed
on July 1, 2022, what is the income using outright method.
a. P 4,000,000 c. P32,000,000
b. P 8,000,000 d. P40,000,000

18. Len leases an office space from Rafi, Inc. in a non-renewable 10-year lease
contract. Just after the second year of the lease, Tomas renovated the premises
and made improvements at a cost of Pl,20_0,000. These improvements are
expected to last for 12 years. Compute Rafi's annual income from the leasehold
improvement using the spread-out method.
a. PS0,000 c. P30,000
b. P37,S00 d. P20,000
19. Jamie started raising swine for sale by purchasing 5 gilts and a boar at a total
purchase price of PS0,000 on January 2020. As of December 31, 2022, Hassan'
herd grew to 15 guilts, 2 boars and 20 piglets. The total herd has a fair value of
Pl 96,000 when sold as is. During the year, Hassan earned P180,000 from selling
piglets. How much should Hassan report as farming income in 2022?
a. P326,000 c. P 146,000
b. P180,000 d. P 130,000 •

20. Peter, a farmer, uses the crop-year method in reporting his income from long· '
term crops. The following data are relevant to his farming operations in Z021:
• Sales of crops harvested, P900,000
• Expenses on harvested crops, P400,000
• Expenses on maturing crops, P200,000
• Expenses on newly planted crops, Pl00,000
• Sales of tree branches for firewood, PS0,000
:eter us.esb~he crop year methoct in reporting crop income Compute Peter's total ,
mcome su Ject to tax. · ,
a. P240,000 c. P540,000 /
b. P340,000 d. PSS0,000

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Chapter 4 - Income Tax Schemes, Accounting Periods, Methods, and Reporting

Multiple Choice - Problem 4-3: Tax compliance

1. A taxpayer filed his income tax return in October 28, 2022. The deadline for the
return was ~pril 15, 2022. If he has P40,000 net tax due, compute the penalties in
the form of interest.
a. P 2,578 c. P 2,867 ·
b. P 2,611 . d. P 4,296
2. What is the total surcharge penalty?
a. p 0 C. p 10,000
b. P 8,000 d. P 20,000

3. A taxpayer received a notice from the BIR to file his 2020 income tax return not
later than January 15, 2022. The tax due per his return is Pl00,000. What is the
total surcharge penalty?
a. P 0 C. p 25,000
b. P 20,000 d. P 50,000
4. What is his total interest penalty?
a. p 6,500 C. P 9,041
b. P 7,900 d. PlS,068
5. Compute the compromise penalty
a. p 10,000 C. p 20,000
b. P 15,000 d. P 30,000

6. Mani Pokyaw failed to pay file his income tax return for the year 2021 which
should have been filed on or before April 15, 2022. The BIR sent him a notice to
file his return and pay his tax on or before July 18, 2022. Mani Pakyaw filed a
return showing a basic tax due of Pl,000,000. Compute the total interest penalty.
a P 30,904 c. P 38,555
b. P 37,644 d. P 39,863
7. Mr. Pokyaw must pay a surcharge of
a. PO c. P 500,000
b. P 250,000 d. P 1,000,000
8· Maco Corporation failed to file its income tax return for the fiscal year ending
August 31, 2021. on June 6, 2022, it filed an income tax return with a basic tax still
due and payable for the fiscal year amounting to PS00,000. Compute the interest
Penalty to be imposed by the BIR.
a. P 28,603 c. P 45,873
b. P 28,438 d. P 46,207
9· Compute the total tax assessment to be paid, excluding compromise penalty.
a. P 653,603 c. P 689,275
b. P 653,438 d. P 660,873

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