CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING
INCOME TAXATION SCHEMES
1. Final income taxation – characterized by
final tax wherein full taxes are withheld by
the income payor at source.
 Referred to as “the final withholding tax
system”
 Applicable only on certain passive
income.
 Passive income – earned with very
minimal or even without active
involvement of the taxpayer in the
earning process
 Interest income from banks
 Dividends from domestic
corporation
 Royalties
 Active/Regular income – transactions
requiring a considerable degree of
effort or undertaking from the taxpayer.
 Compensation income
 Business income
 Professional income
2. Capital gains taxation – imposed on the
gain realized on the sake, exchange and
other dispositions of certain capital assets.
 Capital assets – not used in business,
trade or profession.
 Ordinary assets – assets used in
business, trade or profession.
 Hybrid form of final taxes since it is also
employs self-assessment method.
 Applies only to two types of capital
assets: domestic stocks and real
property.
3. Regular income taxation – general rule in
income taxation and covers all other
income such as:
 Active income
 Other income
 Gains from dealings in properties,
not subject to capital gains tax
 Other passive income not subject to
final tax
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 Makes use of the “self-assessment
method”.
CLASSIFICATION OF ITEMS OF GROSS INCOME
1. Subject to final tax
2. Subject to capital tax gains
3. Subject to regular tax
ACCOUNTING PERIOD – length of time which
income is measured and reported.
1. Regular accounting period – 12 months
a. Calendar – starts from January 1 ends in
December 31.
 Used when:
 Taxpayer’s annual accounting
period is other than a fiscal year
 Taxpayer has no annual
accounting period
 Taxpayer does not keep books
 Taxpayer is an individual
b. Fiscal – any 12-month period that
ends on any day other than
December 31.
 Available only to corporate
income taxpayers and is not
allowed to individual income
taxpayers.
DUEDATE OF FILING THE INCOME TAX RETURN
 Due for filing on the 15th day of the
fourth month following the close of the
taxable year.
 The regular tax due is payable upon
filing of the income tax return.
 CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING

DUE DATE OF THE ANNUAL INCOME TAX 1. THE GENERAL METHODS

1. Taxpayers under the calendar year must  Accrual basis – income is recognized
file their annual ITR for the current when earned regardless of when
period later than April 15 of the received and expense is recognized
following year. when incurred regardless of when paid.
2. Corporate taxpayer with fiscal year  Cash basis – income is recognized
ending June 30, 2019 must file its when received and expensed is
annual income tax return not later than recognized when paid.
October 15, 2019.
TAX RULES FOR ACCRUAL AND CASH BASIS
2. Short accounting period – less than 12 1. Advance income is taxable upon
months receipt.
a. Newly commenced business – covers  Applicable on the sale of service not
the date of the start of the business on goods.
until the designated year-end of the 2. Prepaid expense is non-deductible.
business. 3. Special tax accounting requirement
must be followed.
b. Dissolution of business – covers the
start of the current year to the date of TAX ACCRUAL BASIS INCOME
the dissolution of the business. Cash income xxx,xxx
Accrued (uncollected) xxx,xxx
c. Change of accounting period by income
corporate taxpayers – covers the start Advanced income xxx,xxx
of the previous accounting period up to Gross income xxx,xxx
the designated year-end of the new
accounting period. TAX ACCRUAL BASIS EXPENSE
 BIR approval is required. Cash expense xxx,xxx
Accrued (unpaid) expense xxx,xxx
d. Death of the taxpayer – covers the Amortization of prepayments and
start of the calendar year until the xxx,xxx
depreciation of capital expenditures
death of the taxpayer. Deductions xxx,xxx
 It is mandatory for the accounting
period of the taxpayer to be TAX CASH BASIS INCOME
terminated exactly at the date of Cash income xxx,xxx
death. Advanced xxx,xxx
income
e. Termination of the accounting period Gross income xxx,xxx
of the taxpayer by the Commissioner
on Internal Revenue – covers the start TAX CASH BASIS EXPENSE
of the current year until the date of the Cash expense xxx,xxx
termination of the accounting period. Amortization of prepayments and
 The ITR and the tax shall be due and xxx,xxx
depreciation of capital expenditures
payable immediately. Deductions xxx,xxx

ACCOUNTING METHODS – accounting 2. Installment and deferred payment method

techniques used to measure income.  Installment method

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 CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING

 Dealers of personal property on the

sale of properties they regularly sell RATIO OF INITIAL PAYMENT
 Dealers of real properties, only if (Initial payment / Selling price)
their initial payment does not
exceed 25% of the selling price
 Casual sale of non-dealers in WITH INDEBTEDNESS ASSUMED EXCEEDS
property, real or personal, when TAX BASIS OF PROPERTY SOLD
their selling price exceeds P1,000 Selling price xxx,xxx
and their initial payment does not Less: mortgage assumed by buyer xxx,xxx
exceed 25% of the selling price. Cash collectible xxx,xxx
Add: Excess indebtedness –
 Initial payment – total payments by the xxx,xxx
constructive receipt
buyer including the installment Contract price xxx,xxx
payments in the year of sale.
COMPUTATION OF INITIAL PAYMENT
 Selling price – the entire amount of Down payment xxx,xxx
which the buyer is obligated to the Installment in the year of sale xxx,xxx
seller. Excess of mortgage over tax basis xxx,xxx
Initial payment xxx,xxx
Cash received and/or receivable xxx,xxx
FMV of property received or receivable xxx,xxx  Any collection from the contract
Mortgage or any indebtedness including the excess mortgage shall be
xxx,xxx
assumed by the buyer recognized as gross income upon
Selling price xxx,xxx collection.

 Contract price – amount receivable  Deferred method – variant of the

from the buyer usually the selling price. accrual basis and is used in reporting
income when a non-interest bearing
Selling price xxx,xxx note is received as consideration in a
Less: Tax basis (Cost) xxx,xxx sale.
Gross profit xxx,xxx  The gross income is computed
based on the present value of a
DURING INSTALLMENT PERIOD note receivable from the contract.
(Collection / Contract price) * Gross Profit  The discounted interest on the note
= Gross Income is amortized as interest income
over the installment term
WITH INDEBTEDNESS ASSUMED BY THE BUYER
Selling price xxx,xxx 3. Percentage of completion method – the
Less: mortgage assume by buyer xxx,xxx estimated gross income from construction
Contract price xxx,xxx is reported based on the percentage of
completion of the construction project.
OR
Contract price xxx,xxx
WITH INDEBTEDNESS ASSUMED BY THE BUYER Multiply by: % of completion xxx,xxx
Cash down payment xxx,xxx Construction revenue xxx,xxx
Collectible balance xxx,xxx Less: construction revenue in prior
Contract price xxx,xxx xxx,xxx
years (if none, that’s okay)

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INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING
Construction revenue this year
Less: expense during the year
Construction gross income
LEASEHOLD IMPROVEMENT – tangible
improvements made by the lessee to the
property of the lessor.
 Income from leasehold improvements
4. Outright and spread-out method
 Outright method – the lessor may
report as income the FMV of such
building or improvements subject to the
lease at the time when such buildings or
improvements are completed.
 Spread-out method – the lessor may
spread over the life of the lease the
estimated depreciated value of such
buildings or improvements at the
termination of the lease and report as
income for each year of the lease an
aliquot part thereof.
DEPRECIATED VALUE OF THE LEASEHOLD IMPROVEMENT
Cost of Excess useful life over lease term
x Useful life of the improvement
improvement
 The depreciated value of the
improvement at the termination of the
lease should be the proper value to be
recognized as gross income under the
outright method.
AGRICULTURAL FARMING INCOME –
commonly measured using cash basis or accrual
basis
a. Animal husbandry
b. Short-term crops
COMPUTATION OF NET INCOME
Sales xxx,xxx
Less: Direct farm costs xxx,xxx
Gross profit from operations xxx,xxx
Less: administrative and selling expenses
Net income
CHAPTER 4
xxx,xxx ACCOUNTING FOR LONG-TERM CROPS
xxx,xxx DEPENDS ON THE HARVESTING FREQUENCY:
xxx,xxx 1. Perennial crops – yield harvests
through years
 Capitalized and amortized over the
expected years of harvest.
2. One-time crops – harvested once after
several years
 Accounted for using the crop year
basis.
5. Crop year basis – farming income is
recognized as the difference between the
proceeds of the harvest and expenses of
the particular crop harvested.
 Accounting method and is not an
accounting period.
TAX REPORTING
TYPES OF RETURNS TO THE GOVERNMENT
1. Income tax returns – provides details of
the taxpayer’s income, expense, tax due
and tax due, tax credit and tax still due
the government.
2. Withholding tax returns – provides
reports of income payments subjected
to withholding tax by the taxpayer-
withholding agent.
3. Information 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 the 3 returns is
subjected to penalties, fines, and or
imprisonment.
MODE OF FILING INCOME TAX RETURNS
1. Manual Filing System – traditional
manual system by paper documents
xxx,xxx
where taxpayers fill up BIR forms and is
xxx,xxx required to register:
1. An authorized agent
2. Revenue collection officer
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 CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING

3. Duly authorized city or municipal d. Activities auxiliary to financial

treasurer, if there is no BIR office in intermediation
the locality. e. Construction
f. Water transport
2. e-BIR Forms – introduced with an g. Hotels and restaurants
offline or online version where h. Land transport
taxpayers fill up their ITR in electronic
spreadsheets and is capable of online 2. Group B
submission. a. Manufacture and repair of furniture
 If there are no penalties that b. Manufacture of basic metals
requires assessments, print a hard c. Manufacture of chemicals, and
copy and proceed directly to the chemical products
bank for payment. d. Manufacture of coke, refined
petroleum, and fuel products
3. Electronic Filing and Payment System e. Manufacture of electrical machinery
(eFPS) – paperless tax filing system and apparatus NEC
developed and maintain by the BIR. f. Manufacture of fabricated metal
 Attachments in electronic format products
and pay the tax through the g. Manufacture of foods, products and
Internet. beverages
h. Manufacture of machineries and
TAXPAYERS MANDATED TO USE THE eFPS equipment NEC
1. Large taxpayers i. Manufacture of medical, precision, and
2. Top 20,000 private corporations optical instruments
3. Top 5,000 individual taxpayers j. Manufacture of motor vehicles, trailers
4. Taxpayers who wish to enter into and semi-trailers
contract with government offices k. Manufacture of office, accounting and
5. Corporations with paid-up capital of computing machineries
P10,000,000 l. Manufacture of other non-metallic
6. PEZA-registered entities and those mineral products
located within Special Economic Zones m. Manufacture of other transport
7. Government offices, in so far as equipment
remittance of withheld VAT and n. Manufacture of other wearing apparel
business tax are concerned o. Manufacture of papers, and paper
8. Taxpayers included in the Taxpayer products
Account Management Program (TAMP) p. Manufacture of radio, TV and
9. Accredited importers, including communication equipment and
prospective importers to secure the apparatus
Importers Clearance Certificate (ICC) q. Manufacture of rubber and plastic
and Custom Brokers Clearance products
Certificate (BCC) r. Manufacture of textiles
s. Manufacture of tobacco products
GROUPING OF TAXPAYERS UNDER EFPS t. Manufacture of wood and wood
1. Group A products
a. Banking institutions u. Manufacturing N.E.C
b. Insurance and pension funding v. Metallic ore mining
c. Non-bank financial intermediation w. Non-metallic mining and quarrying

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 CHAPTER 4
INCOME TAX SCHEMES, ACCOUNTING PERIODS, ACCOUNTING METHODS, AND REPORTING

3. Group C PENALTIES FOR LATE FILING OR PAYMENT OF

a. Retail sale TAX
b. Wholesale trade and commission trade 1. Surcharge
c. Sale, maintenance, repair off motor a. 25% of the basic tax for failure to
vehicle, and sale of automotive fuel file or pay deficiency tax on time.
d. Collection, purification and distribution b. 50% for willful neglect to file and
of water pay taxes
e. Computer and related activities
f. Real estate activities 2. Interest – double of the legal interest
rate for loans or forbearance of any
4. Group D money in the absence of any express
a. Air transport stipulation.
b. Electricity, gas, steam and hot water  Legal interest is currently
supply 6%*2=12% per annum effective
c. Postal and telecommunications January 1, 2018.
d. Publishing, printing, and reproduction  NIRC imposed an interest penalty of
of recorded media 20% per annum until December 31,
e. Recreational, cultural and sporting 2017.
activities
f. Recycling  The interest period shall be computed
g. Renting out of goods and equipment based on actual days divided 365 days.
h. Supporting and auxiliary transport
activities 3. Compromise penalty – amount paid in
lieu of criminal prosecution over a tax
5. Group E violation.
a. Activities of membership organization
Inc. PENALTIES FOR NON-FILING OR LATE FILING OF
b. Health and social work INFORMATION RETURN
c. Private educational services  Failure is due to reasonable cause not
d. Public administration and defense willful neglect shall be subject to a
compulsory social security penalty of P1,000 for each failure
e. Public educational services provided that the amount imposed for
f. Research and development all such failure during a calendar year
g. Agriculture, hunting and forestry shall not exceed P25,000.
h. Farming of animals
i. Fishing
j. Other service activities
k. Miscellaneous business activities
l. Unclassified activities

BASIC COMPARISON OF FILING AND PAYMENT

SYSTEMS

Manual e-BIR eFPS

Data entry Manual Electronic Electronic
Filing/Submission Manual Electronic Electronic
Tax payment Manual Manual Electronic

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