Income Tax Scheme, Accounting

Period, Accounting methods and

reporting
Sonny C. Urfano, CPA, MBA
 ITEMS OF GROSS INCOME

Taxable to any one of

Final Income Capital Gains Regular Income

Taxation Taxation Taxation
 Final Income
Taxation

Final income taxation is characterized by final taxes wherein full

taxes are withheld by the income payor at source.

The payor is the one required by law to remit the tax to the
government.

PASSIVE INCOME VS. ACTIVE INCOME

Passive income are earned with very minimal or even without

active involvement of the taxpayer in the earning process.

Active or regular income arises from transaction requiring

considerable degree of efforts or undertaking from taxpayer. It is
direct opposite of passive income
Capital Gains
Taxation

Capital gains is imposed on the gain realized on the sale,

exchange and other disposition of certain capital assets.

Capital Assets are assets not used in business, trade of

profession.

Not all capital assets are subject to capital gains tax.

Regular Income
Taxation

The regular income tax is the general rule in income

taxation and covers all other income such as

• Active Income
• Other Income
• Gains not subject to capital gains tax
• Passive income not subject to final tax
ACCOUNTING PERIOD

Types of Accounting Period

• Regular accounting period
• Calendar
• Fiscal
• Short accounting period

Calendar year – The accounting period starts from January 1

and end December 31. This accounting period is available to
both corporation and individual taxpayers.

Fiscal year- is any 12 month period that ends on any day

other than December 31. Fiscal year isa only available to
corporate taxpayers.
ACCOUNTING PERIOD

Types of Accounting Period

• Regular accounting period
• Calendar
• Fiscal
• Short accounting period

Instances of SHORT ACCOUNTING PERIOD

1. Newly commenced business

2. Dissolution of business
3. Change of accounting period by corporate taxpayer
4. Death of the taxpayer
5. Termination of the accounting period of the taxpayer by
the Commissioner of Internal Revenue
Deadline of Filing the
Income Tax Return

Under NIRC, the return is due

for filing on the 15th 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.
Types of Accounting Methods

1. The general methods

1. Accrual basis
2. Cash basis
2. Installment and deferred payment
method
3. Percentage of completion method
4. Outright and spread-out method
5. Crop year basis
ACCRUAL BASIS

• Income is recognized when earned regardless of when

received.
• Expenses is recognized when incurred regardless of when
paid

CASH BASIS
• Income is recognized when received.
• Expenses is recognized when paid

Tax and accounting concepts of accrual basis and cash basis

distinguish

1. Advance income is taxable upon receipt

2. Prepaid expense is not deductible
3. Special tax accounting requirement must be followed
The tax accrual basis income is determine as follows:
Cash income XXXX
Accrued (uncollected income) XXXX
Advance income XXXX
Gross Income XXXX

The tax accrual basis expense is determine as follows:

Cash expense XXXX
Accrued (unpaid) expense XXXX
Amortization of prepayments
depreciation and amortization XXXX
Deduction XXXX

The tax cash basis income is determine as follows:

Cash Income XXXX
Advance income XXXX
Gross Income XXXX

The tax cash basis expense is determine as follows:

Cash expense XXXX

Amortization of prepayments
depreciation and amortization XXXX
Deduction XXXX
Seller of Goods

The gross income of taxpayers selling goods is determine as follows:

Sales XXXX
Less: Cost of Sales XXXX
Gross Income XXXX

The Cost of Sales is computed using inventory method

Beginning Inventory XXXX

Add: Purchases XXXX
Total goods available for sale XXXX
Less: Ending Inventory XXXX
Cost of Goods Sold XXXX
HYBRID METHOD

• A hybrid basis is any combination of accrual basis, cash basis and/or

other method of accounting. It is used when the taxpayer has several
businesses which employ different accounting method

SALE OF GOODS WITH EXTENDED PAYMENT TERMS

• The sale of goods with extended payment terms may be reported
using the accrual basis, installment method, or deferred payment
method

INSTALLMENT METHOD
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 their initial payment does not exceed
25% of the selling price.
3. Casual sale of non-dealers in property, real or personal, when their
selling price exceeds P1,000 and their initial payment doe not exceed
25% of the selling price
INSTALLMENT METHOD

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 downpayment. It also includes the installment 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 XXXX

FMV of property received or receivable XXXX
Mortgage or any indebtedness assumed
by the buyer XXXX
Selling Price XXXX

Contract Price
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.
INSTALLMENT METHOD

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 downpayment. It also includes the installment 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 XXXX

FMV of property received or receivable XXXX
Mortgage or any indebtedness assumed
by the buyer XXXX
Selling Price XXXX

Contract Price
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.
With indebtedness assumed by the buyer
The application of the installment method will slightly vary when the buyer
assumes indebtedness on the property sold.

In this case, the selling price is no longer the contract price

Selling price XXXX

Less: Mortgage assumed by buyer XXXX
Contract price XXXX
Indebtedness assumed exceeds tax basis of property sold

When the indebtedness assumed by the buyer exceeds the tax basis of the
property sold, 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 also that under this condition, all collection from
the contract including the excess mortgage is a collection of income.

GROSS PROFIT:
Selling Price XXXX
Less: Mortgage assumed by the buyer XXXX
Cash collectible XXXX
Add: Excess indebtedness-constructively received XXXX
Contract Price XXXX

INITIAL PAYMENT:
Downpayment XXXX
Installment in the year of sale XXXX
Excess of mortgage over tax basis XXXX
Initial Payment XXXX
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 as interest income over the installment term
The Percentage of Completion Method for construction Contract

• Under the percentage of completion method, the estimated

gross income from construction project is reported based on
the percentage of completion on the construction project.

• There are several methods of estimating project completion in

practice, but the output method based on engineering survey is
prescribed by the NIRC
Agricultural or Farming Income

• Farming income is commonly measured using the cash or

accrual basis, such as in the following
• Animal husbandry
• Short-term crops

• Crop year basis

• Under the crop year basis, farming income is recognized
as the difference between the proceeds of the harvest and
expense of the particular crop harvested. The expenses
of each crop are accumulated and deducted upon the
harvest of the crop.
USE OF DIFFERENT ACCOUNTING METHODS

Taxpayers with more than one type of business using

different accounting method can consolidate the
income reported using different methods. There is no
need to restate the income to a common accounting
method. However, the methods applied to each
business should be applied consistently from period to
period
SELECTION OF ACCOUNTING METHODS

The NIRC allows taxpayers to determine the most

appropriate accounting method that apply to
themselves. The BIR cannot impose an accounting
method to be used. The CIR may only prescribed an
accounting method if;
• The taxpayer did not use an accounting method
• The accounting method selected does not clearly
reflect the income of the taxpayer
CHANGE IN ACCOUNTING PERIOD
The following documentation are required:
1. A letter request address to RDO having jurisdiction over the
place of business of the taxpayer
• The original and the proposed new accounting period.
• The reason for desiring to change the accounting period
2. Certify true copy of the SEC approved amended by-law showing
changes in accounting period
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 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 original accounting period and the date designated
as the close of the new accounting period.

The request for the approval of the change shall be filed at any time
not less than 60 days prior to the beginning of the new accounting
period. The certification must be released within 30 days from date
of receipt of the completed documents.
TAX REPORTING
Types of Returns to the Government
XXxxXXxXXxxXXxx

Income Tax Return Withholding Tax Information Return

Return
TAX REPORTING
Mode of Filing Income Tax Return
Manual Filing System

The traditional manual system of filing income tax return

Under NIRC, the income tax return shall be filed to the following in
descending order or priority
• An authorized agent banks
• Revenue collection officer
• Duly authorized municipal treasurer, if there is no BIR office in the
locality
TAX REPORTING
Mode of Filing Income Tax Return

E-BIR FORMS

Taxpayers fill up the income tax returns in electronic spreadsheets

without the need of writing on paper return

ELECTRONIC FILING AND PAYMENT SYSTEM

The EFPS is a paperless tax filing system developed and

maintained by the BIR taxpayers file return including attachments in
electronic format
TAX REPORTING
PAYMENT OF INCOME TAX (pay as you file)

MANUAL EBIR EFPS

Data Entry Manual Electronic Electronic
Filing/Submission Manual Electronic Electronic
Payment Manual Manual Electronic
PAYMENT FOR LATE FILING AND PAYMENT
1. SURCHARGE
• 25% - of the basic tax for failure to file or pay
deficiency tax on time
• 50% for willful neglect to file and pay tax
• Willful neglect if the BIR discover the non-
filing first.
• 50% for filing of fraudulent return

2. INTEREST
• The interest shall be double of the legal interest
rate for loans or forbearance of any money in the
absence of any express stipulation.

3. COMPROMISE PENALTY
• Is an amount paid in lieu of criminal prosecution
over tax violation.
PANALTIES FOR NON-FILING OF INFORMATION
RETURN
• 1,000 for each failure, provided that the amount for all
such failure during the calendar year shall not exceed
25,000
THANK YOU
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