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Lesson 2: Income Tax Schemes, Accounting Periods, Methods and Reporting

This document discusses Philippine income tax schemes, accounting periods, methods, and reporting. It covers the main types of income tax schemes - final income taxation, capital gains taxation, and regular income taxation. It also discusses accounting periods, tax accounting methods like accrual and cash basis, installment sales reporting, and tax return filing requirements and penalties.

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CJ Granada
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227 views28 pages

Lesson 2: Income Tax Schemes, Accounting Periods, Methods and Reporting

This document discusses Philippine income tax schemes, accounting periods, methods, and reporting. It covers the main types of income tax schemes - final income taxation, capital gains taxation, and regular income taxation. It also discusses accounting periods, tax accounting methods like accrual and cash basis, installment sales reporting, and tax return filing requirements and penalties.

Uploaded by

CJ Granada
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LESSON 2

INCOME TAX SCHEMES, ACCOUNTING


PERIODS, METHODS AND REPORTING
INCOME TAXATION SCHEMES
1. Final income taxation
2. Capital gains taxation
3. Regular income taxation
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
FINAL INCOME TAXATION

- Characterized by final taxes wherein full taxes are withheld by


income tax payor at source
- Payor is the one required by law to remit the tax to the
government
- It is applied only on certain passive income listed by the law
PASSIVE INCOME vs ACTIVE INCOME

Passive income 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 corporation
3. Royalties
PASSIVE INCOME vs ACTIVE INCOME

Active or regular income arises from transactions requiring


considerable degree of effort or undertaking from the taxpayer

Examples

1. Compensation Income
2. Business income
3. Professional Income
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 - assets not used in business, trade or profession

Ordinary assets - assets used in business, trade, or profession


such as inventory, supplies or property, plant and equipment
REGULAR INCOME TAXATION

- It is the general rule in income taxation and covers all other


income such as
1. Active income
2. Other income
a. Gains from dealings in properties not subject to capital
gains tax
b. Other passive income not subject to final tax
REGULAR INCOME TAXATION

- It is the general rule in income taxation and covers all other


income such as
1. Active income
2. Other income
a. Gains from dealings in properties not subject to capital
gains tax
b. Other passive income not subject to final tax
ACCOUNTING PERIOD
-length of time over which income is measured and reported

Type of Accounting Period


1. Regular accounting period - 12 months in length
a. Calendar
b. Fiscal

2. Short accounting period - less than 12 months


INSTANCES OF SHORT ACCOUNTING PERIOD
1. Newly commenced business - the accounting period covers the date of
the start of business until the designated year-end of the business
2. Dissolution of business - the accounting period covers the start of the
current year to the date of dissolution of the business
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
4. Death of the taxpayer
5. Termination of the accounting period of the taxpayer by the
Commissioner of the Internal Revenue - the accounting period covers the
start of the current year until the date of the termination of the accounting
period
TYPES OF ACCOUNTING METHODS
1. The general methods
a. Accrual basis
b. Cash basis

2. Installment and deferred payment methods

3. Percentage of completion method

4. Outright and spread-out method

5. Crop year basis


TAX ACCOUNTING CONCEPTS OF ACCRUAL
BASIS AND CASH BASIS DISTINGUISHED

1. Advance income is taxable upon receipt


2. Prepaid expense is non-deductible
3. Special tax accounting requirement must be
followed
TAX ACCRUAL BASIS
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. Income is inherently not included in net income. For purposes
of taxation, advanced income is taxable. Hence it must be added to accrual
basis gross income.
2. In accounting, expense is recognized when accrued even if not yet paid.
Prepaid expenses are inherently not deducted. Hence, no adjustments for
prepayments is necessary under accrual basis.
TAX CASH BASIS
Points to consider in converting GAAP accrual basis
to Tax cash basis
1. Under the cash basis, income is recognized when received not when
it is earned. Advance income is inherently recognized as income.
Hence, no adjustment is necessary on income.
2. Under accounting cash basis, expense is deducted when paid
including prepaid expenses. Hence, the deducted prepaid expense
must be reversed for purposes of taxation.
SELLER OF GOODS (FRAMEWORK)
Installment Method
Installment method is available to the following taxpayer:

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 exceed P 1,000 and their initial payment does not exceed
25% of the selling price.
FORMAT TO BE USED FOR COMPUTATION
Initial payment - total payment by the buyer, in cash or property, in the taxable year

Downpayment
xxxx
Installment payment within the taxable year
xxxx
Initial payment
xxxx

Selling price - entire amount for which the buyer is obligation to the seller
FORMAT TO BE USED FOR COMPUTATION

Selling price
xxxx
Less: Mortgage assumed by the buyer
xxxx
Contract price
xxxx
or
Cash Downpayment
xxxx
Installment Method: With indebtedness assumed by the
buyer
Installment Method: With indebtedness assumed by the
buyer exceeds tax basis of property sold
TAX REPORTING
Types of Returns to the Government
1. Income tax returns - provides details of the taxpayers
income, expense, tax due, tax credit and tax still due to
the governments
2. Withholding tax returns - provides reports of income
payments subjected to withholding tax by the taxpayer-
withholding agent
3. Information returns
MODE OF FILING INCOME TAX RETURNS
1. Manual Filing System
2. e-BIR Forms
3. Electronic filing and payment system (eFPS)
TAXPAYERS MANDATED TO USE THE eFPS
BASIC COMPARISON OF FILING AND PAYMENT
SYSTEMS
PENALTIES FOR LATE FILING OR PAYMENT OF
TAX
1. Surcharge
a. 25% of the basis tax for failure to file or pay the deficiency tax on time
b. 50% for willful neglect to file and pay taxes
2. Interest

12% per annum effective Jan 2, 2018

20% per annum until Dec 31, 2017

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