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LEARNING OUTCOMES
At the end of this module, you are expected to:

1. Differentiate the three income tax schemes;

2. Determine what accounting periods to use for tax reporting;
3. Apply the different accounting methods in tax reporting; and
4. Define the types of returns for filing and payment of income taxes.

Pre-Activity
Try to answer the following questions.
1. Will a taxable income always be reported in an income tax return?
2. Is the monthly compensation income received passive or active income?
3. Do you think a business is allowed to file an annual income tax return which covers
less than a year of operations?
4. How do you think taxes are reported through filing?
5. How do you think taxes are paid?
6. Is it possible that late filing and payment of taxes may double or triple the amount
originally due?

INCOME TAXATION SCHEMES

By virtue of the Ability to Pay Theory, the government should tax its subjects based on their
ability to pay, one basis of which is the income earned. Now that you have identified what
constitutes an item of gross income from the previous module, you are now to determine how
they are taxed in different schemes depending on the nature of said income.
Based on the illustration above, income may be taxed under the three different schemes, namely,
Final Income Taxation, Capital Gains Taxation or Regular Income Taxation. This three income tax
schemes will be discussed thoroughly on the next modules.

Mutually Exclusive Coverage

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

Final Income Taxation

Final Income Taxation is characterized by final taxes where taxes are withheld or deducted at
source. The taxpayer receives the income, net of tax. The payor of income remits the tax to the
government. Final taxation is applicable only on 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 and are generally irregular in timing and amount, whilst, active
income arises from transactions requiring a considerable degree of effort or undertaking from
the taxpayer.

Capital Gains Taxation

A capital gains tax is imposed on the capital gain on the sale, exchange and other disposition of
certain capital assets.

Capital Assets vs. Ordinary Assets

Ordinary assets are assets directly used in the business, trade or profession of the taxpayer such
as inventory, supply and items of property, plant and equipment. Capital assets include all
other assets other than ordinary assets.
Capital Gains vs. Ordinary Gains
Capital gains arise from the sale and other disposition of capital assets. Ordinary gains arise
from the sale and other disposition of ordinary assets.

Regular Income Taxation

The regular income taxation is the general scheme and is the catch basin for all other incomes not
subject to the other tax schemes. Items of gross income from these sources are measured using an
accounting method, accumulated over an accounting period, and reported through an income
tax return.

ACCOUNTING PERIODS
Accounting period is the length of time over which income is measured and reported.

Regular Accounting Period

This composes of 12 months in length.

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

2. taxpayer has no annual accounting period
3. taxpayer does not keep books
4. taxpayer is an individual or cooperative

Fiscal year
A fiscal accounting period is any 12-month period that ends on any day other December 31. The
fiscal accounting period is available only to corporate taxpayers and is not allowed for individual
income taxpayers.

Short Accounting Period

This composes of less than 12 months.

Newly commenced business

The accounting period covers the date start of the business until the designated year-end of the
business.

Dissolution of business
The accounting period covers the start of the current year to the date of dissolution of the
business.

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. Note that BIR approval is required in changing an
accounting period. It is not automatic
Death of the taxpayer
The accounting period covers the start of the calendar year until the death of the taxpayer.

Termination of the accounting period of the taxpayer by the CIR

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.

Accrual Basis
Under the accrual basis of accounting, income is recognized when earned regardless of when
received. Expense is recognized when incurred regardless of when paid. 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.

Cash Basis
Under the cash basis of accounting, income is recognized when received and expense is
recognized when paid.

Reconciling the Difference

The financial accounting concept of accrual basis and cash basis are similar to their tax
counterparts, except only for the following tax rules:

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 advanced income in the period earned will
expose the government to risk of non-collection.

Prepaid expense is non-deductible.

Prepaid expenses are advanced payment for expenses of future taxable periods. These are not
deductible against gross income in the year paid. They are deducted against income in the future
period they expire or are used in the business, trade or profession of the taxpayer.

Normally, the expensing of prepayments does not properly reflect the income of the taxpayer. It
also contradicts the Lifeblood Doctrine as it effectively defers the recognition of income.

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.
Refer to the table below to distinguish the two general accounting methods for a service taxpayer.

Line Item Tax Accrual Basis Tax Cash Basis

Cash Income Add Add
Accrued Income Add Ignore
Advanced Income Add Add
Gross Income xxx xxx
Cash Expenses Deduct Deduct
Accrued Expenses Deduct Ignore
Amortization of Prepayments Deduct Deduct
Depreciation Deduct Deduct
Net Income xxx xxx

Illustration 4.1.
A service-type business reports the following for the year 2019 and 2020: [Refer to the answer on
the right portion]
Actual Tax Accrual Basis Tax Cash Basis
Item
2019 2020 2019 2020 2019 2020
Collection for Services 50,000 80,000 50,000 80,000 50,000 80,000
Rendered
Accrued Income from 50,000 40,000 50,000 40,000 - -
Service Rendered
Collection of Accrued 30,000 45,000 - - 30,000 45,000
Income from Previous
Year
Collections for Service 30,000 20,000 30,000 20,000 20,000 20,000
not yet Rendered
Gross Income - - 130,000 140,000 100,000 145,000
Payment of Current 40,000 60,000 40,000 60,000 40,000 60,000
Year’s Expenses
Accrued Expenses 10,000 15,000 10,000 15,000 - -
Payment of Previous 5,000 10,000 - - 5,000 10,000
Year’s Expenses
Prepayment for Next 20,000 30,000 - 20,000 - 20,000
Year’s Expenses
Net Income - - 90,000 45,000 55,000 55,000
The same can be applied to sellers of goods. The computation of COGS will be the same as what
you have used in your Intermediate Accounting and Cost Accounting classes.

Instalment 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 does not exceed 25% of the selling price.

Steps for Instalment Method

Step 1: Evaluate the seller.
Check which item from the three above the sale is similar to. If it is similar to the first item,
proceed directly to Step 6.

Step 2: Compute for the Selling Price

The selling price is the entire amount for which the buyer is obligated to the seller.

Total Cash Consideration xx

FV of Non-Cash Consideration xx
Mortgage/Indebtedness assumed by the Buyer xx
Selling Price xx
If the item is the last one and the selling price is less than P1,000, you may not use the instalment
method.

Step 3: Check if the Mortgage/Indebtedness assumed exceeds the tax basis of the asset.
If there is no indebtedness assumed, skip this step. If the indebtedness exceeds the tax basis of
the asset, add the excess to Step 4.

Step 4: Compute for the Initial Payment

This includes all payments, be it in cash or property, made by the buyer at the year of sale.

Downpayment xx
Instalment made on the same year xx
Excess mortgage/indebtedness (from Step 3) xx
Initial Payment xx
This is to reiterate that it should be at the same year of sale and not within a year after the sale.

Step 5: Compute for the IP/SP Ratio

This is to check whether the use of instalment method is allowed for the second and third item.
If the ratio exceeds 25%, the instalment method is not allowed.

Step 6: Compute for the Contract Price

The contract price is the amount receivable in cash or property from a buyer.

Selling Price xx
Mortgage/Indebtedness assumed by the buyer (xx)
Excess mortgage/indebtedness (from Step 3) xx
Contract Price xx

Step 7: Compute for the Gross Profit

This involves computing for the total gross profit from the sale.

Selling Price xx
Tax Basis of the Asset (xx)
Gross Profit xx

Step 8: Compute for the Gross Income for each collection

To compute for the gross income for each collection, use the formula below.

Gross Profit xx
Multiply by: Collection xx
Divide by: Contract Price xx
Gross Income xx

Illustration 4.2.
On June 19, 2019, a dealer made a sale of real property with a tax basis of P1,300,000 for
P2,000,000. The property was subject to a P1,500,000 mortgage which was agreed to be assumed
by the buyer. The buyer paid a P100,000 downpayment with the balance due in two instalments
of P200,000 on December 31, 2019 and July 1, 2020.

Step 1: The sale is made by a dealer of real property

Step 2: The selling price is P2,000,000.
Step 3: The mortgage exceeds the tax basis by P200,000.
Step 4: The initial payment of P500,000 consists of the P200,000 excess mortgage, P100,000
downpayment and P200,000 first instalment.
Step 5: The IP/SP Ratio is exactly 25%, thus, the instalment method can be used.
Step 6: The contract price of P700,000 can be obtained by deducting the mortgage assumed of P1,500,000
from and adding the excess mortgage of P200,000 to the selling price.
 Step 7: The gross profit of P700,000 can be obtained by deducting the tax basis of P1,300,000 to the
selling price.
Step 8: Using the formula, the gross income will be recognized for tax purposes in this pattern.
At the date of sale (downpayment and excess mortgage) 300,000
December 31, 2019 200,000
July 1, 2020 200,000

Deferred Payment Method

This 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.

This will not be thoroughly discussed in this module since it is similar to the accounting you have
learned in your Intermediate Accounting classes.

Percentage of Completion Method

This method is more likely to be used by construction companies or those whose earning process
takes more than a year. IN this 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 NIRC.

Illustration 4.3.
On March 16, 2018, Takder Constructions accepted a P5,000,000 fixed-price construction
contract. It incurred construction expenses of P2,800,000 and P1,500,000 for 2018 and 2019,
respectively. The project was 65% completed by yearend 2018 and was fully completed by 2019.

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

Year 2018 2019
Contract Price 5,000,000 5,000,000
Percentage of Completion 65% 100%
Cumulative Construction Revenue 3,250,000 5,000,000
Construction Revenue from Prior Years - 3,250,000
Construction Revenue for Current Year 3,250,000 1,750,000
Construction Expenses for Current Year 2,800,000 1,500,000
Construction Gross Income 450,000 250,000
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 improvement.

Under Revenue Regulations No, 2, the income from leasehold improvement can be reported
using either of the two following methods at the option of the taxpayer.

Outright Method
The lessor may report as income the fair market value of such buildings 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. The depreciated value of the leasehold improvement is computed as
follows.

Cost of Improvement xx
Multiply by: Remaining Useful Life after Lease Term xx
Divide by: Useful Life of the Improvement xx
Depreciated Value xx

It should be pointed out that this rule exists only in the regulation and is absent in the NIRC.
Some taxpayers are questioning its validity pointing out lack of legal basis. However, it is fairly
proper to consider the depreciated value of the improvement that remains to the lessor upon
termination of the lease as income because it is an actual benefit to the lessor. These are, in effect,
additional rental consideration in kind.

However, the treatment specified by the outright method is perceived as unjust and abusive, and
is an improper introduction of legislation. 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. This view is supported by the fact that the spread-out method could 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 in 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.
 Illustration 4.4.
On January 1, 2018, Anderson 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 and was finished on
December 30, 2019. The building has useful life of 30 years.

Under the plain wordings of Section 49 of Revenue Regulations No. 2, Anderson shall recognize the
entire P4,500,000 fair value of the improvement as gross income upon completion of the improvement
in 2018. This is not income in its totality, but this is the amount referred to by the regulation.

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.
Cost of Improvement 4,500,000
Multiply by: Remaining Useful Life after Lease Term 12
Divide by: Useful Life of the Improvement 30
Depreciated Value 1,800,000
Divide by: Remaining Lease Term 18
Annual Income from Leasehold Improvement 100,000
The computed depreciated value of the improvement will be recognized as income by the lessor for the
remaining 18 years of the lease term.

Crop Year Basis

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. 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. No illustration will be given for this as
the matching principle is just followed in using this accounting method. The cropping expenses
are deducted to the related revenues derived from the same crop year, regardless of when this
expense is incurred, and the revenue earned.

INCOME TAX REPORTING

Type of Returns to the Government
Income Tax Returns
These provide details of the taxpayer’s income, expense, tax due, tax credit and tax still due. This
is more likely applicable for the self-assessment method.
Deadline of Income Tax Returns for Full Accounting Period
For income tax returns of income subject to regular income taxation, the following are the
deadlines for filing and payment.

Period of the
For Individuals in Business For Corporations
Taxable Year
May 15 of the taxable year using
First Quarter
1701Q
Sixty (60) days following the close
August 15 of the taxable year using
Second Quarter of each of the first three (3) quarters
1701Q
of the taxable year using 1702Q
November 15 of the taxable year
Third Quarter
using 1701Q
15th day of the 4th month following
April 15 of the succeeding year
Whole close of the taxpayer's taxable year
using 1701 or 1701A
normally using 1702RT

Deadline of Income Tax Returns for Short Accounting Period

Filing of ITRs with a short accounting period has the same deadline for annualized returns for
full accounting periods above.

Frequency of Reporting
Taxpayer Frequency
Individual – Pure Compensation
Annual
Income Earned
Individual – Purely Engaged in
Quarterly and Annually
Business or Profession
Individual – Mixed Income Earner Quarterly and Annually
Corporations Quarterly and Annually

Substituted Filing System for Employees

Pure compensation income earners may be relieved from the obligation to file their annual
income tax return if they have no taxable income from other sources other from their lone
employer. The employee may avail of the substituted filing system wherein the employer shall
withhold the income tax of the employee's compensation.

If the employer correctly withheld the tax due of the employee through the withholding tax on
compensation, the employee need not file his Form 1700 anymore since there would be no
residual tax due or tax refundable, The Form 1700 is required if the employee has other taxable
income or has more than one employer, either concurrent or successive, during the year.

Filing for Married Individuals

Married individuals shall file a return for the taxable year to include the income of both spouses,
computing separately their individual income tax based on their respective total taxable income.
Where it is impracticable for the spouses to file one return, each spouse may file a separate return
of income. If any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally between the spouses
for the purpose of determining their respective taxable incomes.

Withholding Tax Returns

These provide reports of income payments subjected to withholding tax by the taxpayer-
withholding agent.

These returns will also be further discussed in Module 16.

Information Returns
Certain taxpayers are also required to file information returns to the government. These
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. Non-filing of
required information returns are also subject to penalties, fines, and or imprisonment.

Modes of Filing Income Tax Returns

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

eBIR Forms
The BIR introduced the eBIR 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 payment.
Electronic Filing and Payment System (eFPS)
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.

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 P10,000,000
6. PEZA-registered entities and those located within Special Economic Zones
7. Government offices, in so far as remittance of withheld VAT and business tax are
concerned
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)

Grouping of Taxpayers under eFPS

Certain taxpayers are grouped together depending on their industry. Taxpayers in each group
who use the eFPS are given additional days to file their returns after the regular deadline for
manual filing.
Payment of Income Taxes
The general rule is "pay as you file". The capital gains tax and regular income tax are paid as the
taxpayer files his return. Installment payment of income tax is allowed on certain conditions.
Taxpayers under the EFPS system shall e-pay their tax online through internet banking service.
The account of the taxpayer will be auto-debited for the amount of taxes to be paid.

Basic Comparison
Activity Manual eBIR eFPS
Data Entry Manual Electronic Electronic
Filing/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.

Surcharge
The surcharge penalty to be paid is either of the following:

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. If the taxpayer filed a return
before the receipt of such notice, the same is considered simple neglect subject to the 25%
surcharge.

Interest
The taxpayer must pay an additional 12% per annum interest on the basic tax due starting from
the date of the deadline of filing the return. The actual days will be considered in computing the
period factor.

It should be noted that the TRAIN Law states that the interest penalty shall be twice the legal rate
prescribed by the Bangko Sentral ng Pilipinas which is currently at 6%. The 12% interest rate
prescribed by the TRAIN Law has no retrospective effect on late filings of returns with deadlines
before 2018, thus, the 20% interest is still applicable by the time the interest accrues up to
December 31, 2017.
Compromise
Compromise penalty is paid in lieu of criminal prosecution over a tax violation. For the full
information on the amounts of this penalty, click the link on the following text: Revised Schedule
of Compromise Penalty

Illustration 4.5.
Due to the limited workforce and cash resources, E-Gull Company was not able to file and pay
its 2019 Income Tax Return by the last day of filing on June 15, 2020. The same problem was
only brought up by September 10, 2021 by which the company was only able to finally pay on
September 29, 2021. Their income tax due for 2019 is P250,000.

The following should be paid on September 29, 2021:

Basic tax Due 250,000
Surcharge (250,000 x 25%) 62,500
Interest (250,000 x 12% x 471/365) 38,712
Compromise Penalty (based on Annex A of RMO 7-2015) 20,000
Total Payment 371,212

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 P1,000 for each such failure. Provided that the amount imposed for all
such failure during a calendar year shall not exceed P25,000.00.

References:
Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing.
Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply.
Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc.
Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc.
Self-Check!
Basing on your readings, answer the following questions.
1. What are the three income tax schemes employed in the Philippines? What does
mutual exclusivity mean for the three?
2. What are the accounting periods use in ta reporting?
3. How is the application of accounting methods different from each other?
4. Explain the methods of reporting for income tax.
5. What are the penalties to be paid for late and non-filing of returns?

Exercise 4.1 TRUE OR FALSE

Determine whether the following statements are true or false.
___________1. The use of different methods for different businesses of the same taxpayer is
permitted by law.
___________2. When using the percentage of completion method, the gross income to be
reported for income tax purposes is the computed amount of construction
revenue earned during the year.
___________3. Payments made covering future expenses are deductible on the year of
outflow.
___________4. The 25% ratio rule must be satisfied in order for a dealer of personal property
to use the instalment method.
___________5. Withheld taxes on income payments are creditable against the income tax due
of the payee.
___________6. Only corporate taxpayers may use the fiscal accounting year.
___________7. The interest on unpaid taxes is computed based on the basic tax due and
surcharge penalty.
___________8. The crop year basis is an accounting period.
___________9. The accounting period of a deceased taxpayer shall be terminated on
December 31 of the year of his/her death.
___________10. The excess mortgage is considered as a payment on the date of sale when
using the instalment method.

Exercise 4.2 IDENTIFICATION

Identify the terminologies best described by the following statements.
___________1. The tax scheme for most passive income
___________2. The online filing and payment of taxes in the Philippines
___________3. This is the sum of all considerations receivable by the seller in an instalment
sale
___________4. This is the sum of all considerations receivable by the seller on the year of sale
in an instalment sale
___________5. A full accounting period not ending with December 31

Exercise 4.3 MULTIPLE CHOICE

Choose the best answer from the choices provided.
______1. 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 of a business
e. None of the above

______2. Which is a capital asset?

a. Fixtures used to display merchandise
b. An undeveloped land owned held for capital appreciation
c. Jewelries owned by a pawnshop business
d. Building used for administrative operations

______3. Which of the following is not required to be paid in case of late filing?
a. Basic Tax Due
b. Surcharge
c. Compromise
d. Interest
e. All are required

______4. Which of the following sale can directly use the instalment method without any
other requisites to follow?
a. Sale of personal property by a dealer
b. Sale of real property by a dealer
c. Sale of personal property by a non-dealer
d. Sale of real property by a non-dealer
Exercise 4.4 ACCOUNTING PERIOD
Determine whether the following needs to file for a regular or short accounting period. Write R if its
regular and S if it is short under the Period Column. Also determine the start and end of the period to be
used on the ITR and deadline for filing and payment. Indicate the code of the form to be used. If the
statement is silent, assume the events occur in 2020 and the reportable period is for a whole accounting
period, be it regular or short.
Taxpayer Period Start End Form Deadline
1. The second quarter return of a
corporation whose fiscal year ends
on April 30

2. The third quarter return of item

number 1

3. The third quarter return of an

individual business owner

4. A corporation whose fiscal year

ends on September 30 switches to
use the calendar year

5. The annual ITR of a corporation

whose fiscal year ends June 30

6. The annual ITR of a self-employed

individual

7. A corporation registered with the

BIR on April 6 which it opted to
use a fiscal year ending October 31
8. A self-employed individual
registered with the BIR on
October 15

9. A taxpayer dies on July 10

10. A corporate taxpayer with a fiscal

year ending March 31 was
dissolved on November 1
Problem 4.1 ACCRUAL AND CASH BASIS
Bacar Company has the following receipts during 2019:
 P400,000 service billings to clients
 P100,000 advances from clients for services to be rendered next year
Total uncollected billing increase from P100,000 on December 31, 2018 to P150,000 on December
31, 2019.

It also had the following disbursements on the same year.

 P120,000 for current year’s expenses
 P50,000 for prepayments on future expenses
The accrued expenses account increased by P20,000 during the year. Depreciation totaled
P60,000. The credit side of the prepaid expense account included a P25,000 amount of
prepayments incurred during the year.

Complete the table below.

Item Tax Accrual Basis Tax Cash Basis
Gross Income
Allowable Deductions
Net Income
1

Problem 4.2 PERCENTAGE OF COMPLETION METHOD

On February 1, 2020, Tibker Constructions accepted a P20,000,000 construction contract which
it finished on September 16, 2023. The engineers’ estimate of completion as of yearends are as
follows: 35% on 2020, 55% on 2021 and 80% on 2022. Construction expenses for each year are
as follows: P4,500,000 on 2020, P1,500,000 on 2021, P3,000,000 on 2022 and P1,000,000 on 2023.

Compute for the gross income for each year.

1

Problem 4.3 PENALTIES

A capital gains tax return with a basic tax due of P24,000 had a deadline for filing on March 31,
2017. Due to lack of funds by the seller, the return was only filed on February 18, 2019.

Compute for the total amount due exclusive of compromise penalty.

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Case Study 4.1 TAX STALLING VIA INSTALMENT METHOD
Paz Encioso, a dealer of real properties, uses the instalment method in accounting for its
instalment sales using appropriate accounting standards. During the year, the assigned
revenue officer informed him that it cannot be used for one sale transaction he entered into
since the initial payments exceeded the 25% ratio relative to its selling price.

Paz questions why the method is disallowed for this transaction as he has always been using
said method for tax purposes. He also assails that he cannot yet fully pay the related income
tax on the gross income since he is yet to receive most of the instalments in the coming years.

Feeling fed up with the continuous rants of the mad Paz Encioso, the revenue officer just
answered that Paz should research the term “Lifeblood Doctrine” on Google.
Whose contention is tenable?

Case Study 4.2 PICKING ON PENALTIES

The former accountant of Ragsak Company resigned on April 10 without informing anyone
that she did not file for the company’s income tax return for the previous year. Dina Natuto,
the chief financial officer just found out this problem by a notice given by BIR and rushed to
file and pay their income tax due despite months being past the deadline. When she looked at
the penalty portion of the ITR, she found out that they were charge a 50% surcharge instead of
the 25% rate and high amounts of interest and compromise penalty.

Due to the cash restrictions of the company, Dina argues that she did not know of the unfiled
ITR and she acted in good faith upon knowing such that she rushed immediately to settle it,
proving that there were no acts of willful neglect. She also argues that there should be no
compromise penalty since this for the criminal prosecution and that the Constitution sets a non-
imprisonment provision limiting the State’s power of taxation. Lastly, she argues that there
should be no interest to be paid on late filing for the same reason that the government does not
pay interest on excess taxes paid to them, also considering that applications for refund takes
longer to be approved in practice.
Will Dina be the hero of the company on this problem?