INCOME TAX SCHEMES,
ACCOUNTING PERIODS,
ACCOUNTING METHODS, AND
REPORTING
Compiled by:
MAY ANNE C. CALUBAYAN, CPA, MBA
INCOME TAXATION SCHEMES
There are three income taxation schemes
under NIRC:
a. Final income taxation
b. Capital gains taxation
c. Regular income taxation
Classification on Items of Gross Income
Items of gross income can be classified
as follows:
1. Gross income subject to final tax
2. Gross income subject to capital gain
tax
3. Gross income subject to regular tax
FINAL INCOME TAXATION
Final income taxation is characterized by
final taxes where taxes are withheld or
deducted at source. Final taxation is
applicable only to certain passive
income. Not all passive income is
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.
Examples:
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 understanding from the
taxpayer,
Examples:
1. Compensation income
2. Business income
3. Professional income
Capital Gains Taxation
A Capital gain tax is imposed on the
capital gain on the sale, exchange and
other disposition of certain capital
assets. Not all capital gains are subject
to capital gains tax. Most of them are
subject to regular income tax.
Capital Assets vs Ordinary Assets
Capital assets include all other assets other
than ordinary assets.
Ordinary Assets are assets directly used in the
business, trade or profession of the taxpayer
such as inventory, supplies and items of
property, plant and equipment.
Capital Gains vs Ordinary Gains
Capital gains arise from the sale, exchange
and other disposition of capital assets.
Ordinary gains arise from the sale, exchange
and other disposition of ordinary assets.
REGULAR INCOME TAXATION
The regular income taxation is the
general rule in income taxation and covers
all other income such as:
1. Active income
2. Gains from dealings in properties
a.
b.
Dealings in ordinary assets
Dealings in other capital asset not subject to
capital gains tax
3. Other income, active or passive, not subject
to final tax.
ACCOUNTING PERIOD
Accounting period is the length of time over
which income is measured and reported.
Types of Accounting Periods
1. Regular accounting period-12 months
length
a)
b)
Calendar (starts from January 1 and ends
December 31.)
Fiscal (any 12 month period that ends on any
day other than December 31.)
2. Short accounting period-less than 12
months
Deadline of Filing the Income Tax Returns
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.
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,
2014 and opted to use the calendar year accounting
period.
Palawan should files its first income tax return
covering June 30 to December 31, 2014 for the year
2014. The return must be filed on or before April
15, 2015.
Instances of Short Accounting Period
2. Dissolution of business – The accounting period
covers the start of the current year to the date of
dissolution of the business.
Instances of Short Accounting Period
3. Change of accounting period by corporate
taxpayers. The accounting period covers the start of the
previous accounting period up to the designated year-end
of the new accounting period.
Instances of Short Accounting Period
4. Death of the taxpayer. The accounting period
covers the start of the calendar year until the death of
the taxpayer.
Instances of Short Accounting Period
5. Termination of the accounting period of the
taxpayer by the Commissioner of Internal Revenue.
The accounting period covers the start of the current year
until the date of the termination of the accounting period.
ACCOUNTING METHODS
Accounting methods are accounting techniques
used to measure income.
Types of Accounting Methods:
1. The general methods
a)
b)
2.
3.
4.
5.
Accrual basis
Cash basis
Installment and deferred payment method
Percentage of completion method
Outright and spread-out method
Crop-year basis
Distinction between Accrual
Basis and Cash Basis
Distinction between Accrual
Basis and Cash Basis
Tax Accrual Basis
Tax Cash Basis Expense
Hybrid Basis
Hybrid basis is any combination of accrual
basis, cash basis and or other methods of
accounting.
Sale of Goods with Extended
Payment Terms
The sale of goods with extended terms may be reported
using the accrual basis, installment method, or deferred
payment method.
Installment Method
Under the installment method, gross income is recognized and
reported in proportion to the collection from the installment
sales.
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 does not exceed 25% of the selling price.
Terms related to installment
method:
Initial Payment – means total payment by
the buyer or property, in the taxable year the
sale was made. The term “initial payment”
is broader than downpayment.
Selling Price – means the entire amount for
which the buyer is obligated to the seller.
Contract Price – is the amount receivable
in cash or other property from the buyer.
With indebtedness assumed by
the buyer
Indebtedness assumed exceeds
tax basis of property sold
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 over the installment term.
The Percentage of Completion Method
for Construction Contracts
Under the percentage of completion method,
the estimated gross income from
construction is reported based on the
percentage of completion of 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.
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 improvement.
Income from Leasehold Improvement
Under Revenue Regulation No. 2, it can be reported
using either of the following method at the option of
the taxpayer:
1. Outright method
2. Spread-out method
Farming Income
Farming income is commonly recognized using
the cash basis or accrual basis. However, long
term crops or those that take more than one year
to harvest may be accounted for under 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.
Crop Year Basis
This method is employed by farmers whose crops shall
be harvested for more than a year from the time of
planting.
Crop Year Basis
INCOME TAX REPORTING
The Self-Assessment Method
In preparing their tax return, taxpayers declare their
income and expenses, and personally determine the
tax due thereon.
Types of Income-tax related returns filed to the
government:
1. Income tax returns
2. Withholding tax returns
3. Information returns
Types of income tax return
1. Capital gains tax return
2. Regular income tax return
The Withholding System
Where to File Income Tax Return
Taxpayers Mandated to use the
eFPS
Penalties for Late Filing or
Payment of Tax
12% per annum
Delay
Period Factor
For every day of delay
Number of days/365 days
For every month of delay*
Number of months/12
For every year of delay
1
Compromise Penalty
Compromise penalty is an amount paid in lieu
of criminal prosecution over a tax violation.
Penalties for Non-filing or late
filing of information return