CHAPTER 4

INCOME TAX SCHEMES,

ACCOUNTING PERIODS,
ACCOUNTING METHODS,
AND REPORTING

DONNA MAE N. PINAT,CPA

2

INCOME TAXATION SCHEMES

3

FINAL INCOME TAXATION

▸ Full taxes are withheld by the income payor at source

▸ Recipient income taxpayer receives the income net of
taxes
▸ Payor is the one required by law to remit the tax to
the government
▸ Recipient income taxpayer does not need to file
income tax returns
▸ FINAL WITHHOLDING TAX SYSTEM
4

PASSIVE INCOME VS. ACTIVE INCOME

PASSIVE INCOME ACTIVE INCOME

- Earned with very minimal or even without - Arises from transactions requiring a
active involvement of the taxpayer in the considerable degree of effort or
earning process undertaking from the taxpayer
- Direct opposite of passive income

Examples: Examples:
- Interest income from banks - Compensation income
- Dividends from domestic corporations - Business income
- Royalties - Professional income
5

CAPITAL GAINS TAXATION

▸ Imposed on the gain realized on the sale, exchange

and other dispositions of certain capital assets
▸ Not all capital gains are subject to capital gains tax,
most of them are subject to regular income tax
▸ Identified as a final tax
▸ Applies only to two types of capital assets
DOMESTIC STOCKS AND REAL PROPERTY
6

CAPITAL ASSETS

▸ assets not used in business, trade or professions

▸ Opposite of ordinary assets which are assets
used in business, trade or profession such as
inventory, supplies or PPE
7

REGULAR INCOME TAXATION

▸ The general rule in income taxation and covers all

other income such as:
a. Active income
b. Other income
- gains from dealings in properties, not subject to CGT
- other passive income not subject to final tax
*Items of gross income from these sources are valued or measured
using an accounting method, accumulated over an accounting period,
and reported to the government through an INCOME TAX RETURN (ITR).
8

ACCOUNTING
PERIOD
9

ACCOUNTING PERIOD

▸ Length of time over which income is measured and

reported
Types of Accounting Periods:
1. Regular accounting period – 12-months in length
a. Calendar
b. Fiscal
2. Short accounting period – less than 12 months
10

CALENDAR YEAR

▸ Starts from January 1 and ends December 31

▸ Available to both corporate and individual taxpayers
Under 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
11

FISCAL YEAR

▸ Any 12-month period that ends on any day other than

December 31.
▸ Available only to corporate and not allowed to
individual taxpayers
Examples:
1. June 1 – May 30
2. September 1 – August 30
12

DEADLINE OF FILING THE INCOME TAX RETURN

▸ 15th day of the fourth month following the close of

the taxable year of the taxpayer

Example:
1. Taxpayers under the calendar year must file their annual
income tax return for the current period not later than April
15 of the following year.
2. A corporate taxpayer with fiscal year ending June 30, 2019
must file its annual income tax return not later than October
15, 2019.
13

INSTANCES OF SHORT ACCOUNTING PERIOD

1. Newly commenced business – 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, 2019 and
opted to use the calendar year accounting period.
Palawan should file its first income tax return covering June 30 to December 31,
2019 for the year 2019. The return must be filed on or before April 15, 2020.
14

INSTANCES OF SHORT ACCOUNTING PERIOD

2. Dissolution of business – accounting period covers the start of

the current year to the date of dissolution of the business.
Illustration:
Tawi-tawi Inc. is on the fiscal year accounting period ending
every March 31. It ceased business operation on August 15,
2019.
Tawi-tawi should file its last income tax return covering April 1 to August 15, 2019.
The return shall be files on or before September15, 2019.
*Under the old NIRC, dissolving corporations shall file their return within 30 days
from the cessation of activities or 30 days from the approval of merger by the SEC.
Hence, the return shall be filed on or before September 15, 2019.
For individuals, the return shall be due on or before April 15, 2020
15

INSTANCES OF SHORT ACCOUNTING PERIOD

3. Change of accounting period by corporate taxpayers–

accounting period covers the start of the previous accounting period
up to the designated year-end of the new accounting period
Illustrations:
Effective February 2019, Sulu Corporation changed its calendar accounting
period to a fiscal year ending every June 30.
Sulu Corporation shall file an adjustment return covering the income from January
1 to June 30, 2019 on or before October 15, 2019.
Effective August 2019, Zamboanga Company changed its fiscal year accounting
period ending every June 30 to the calendar year.
Zamboanga Company should file an adjustment return covering July 1 to December
31, 2019 on or before April 15, 2020
16

INSTANCES OF SHORT ACCOUNTING PERIOD

4. Death of the taxpayer– accounting period covers the start of the

calendar year until the death of the taxpayer
Illustrations:
Mr. Jacob died on November 2, 2019.
The heirs of Mr. Jacob or his estate administrators or executors shall file his last
income tax return covering his income from January 1 to November 2, 2019. There
is no requirement for early filing in case of death of taxpayers. Hence, the income
tax return shall be filed on or before the usual deadline, April 15, 2020.
17

INSTANCES OF SHORT ACCOUNTING PERIOD

4. Termination of the accounting period of the taxpayer by the

CIR– accounting period covers the start of the current year until the
date of the termination of the accounting period
Illustrations:
The accounting period of a taxpayer under the calendar year basis was
terminated by the CIR on August 2, 2019.
The taxpayer must file an income tax return covering January 1 to August 2, 2019.
The income tax return and the tax shall be due and payable immediately.
18

ACCOUNTING
METHODS
19

TYPES OF ACCOUNTING METHODS

1. The general methods

a. Accrual basis
b. Cash basis
2. Installment and deferred payment method
3. Percentage of Completion method
4. Outright and spread-out method
5. Crop year basis
20

THE GENERAL METHODS

ACCRUAL BASIS CASH BASIS
- Income is recognized when earned - Income is recognized when received and
regardless of when received expense is recognized when paid
ACCRUAL BASIS INCOME CASH BASIS INCOME
Cash income xx Cash income xx
Accrued (uncollected) income xx Advanced income xx
Advanced income xx Gross income xx
Gross income xx

ACCRUAL BASIS EXPENSE CASH BASIS EXPENSE

Cash expenses xx Cash expenses xx
Accrued (unpaid) expense xx Amortization of prepayments & xx
depreciation of capital expenditures
Amortization of prepayments & depreciation xx
of capital expenditures Deductions xx
Deductions xx
21

THE GENERAL METHODS

The financial accounting concept of accrual basis and cash basis are similar to their tax
counterparts, except only for the following tax rules:
1. Advanced income is taxable upon receipt – applicable on the sale of services not on goods
2. Prepaid expenses is not deductible
3. Special tax accounting requirement must be followed.
22

ILLUSTRATION
23

SELLER OF GOODS

Sales xx
Less: COGS xx
Gross Income xx

COST OF SALES
Beginning inventory
Add: Purchases xx
Total goods available for xx
sale
Less: Ending inventory
Cost of Goods Sold xx
24

INSTALLMENT METHOD

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.
25

INSTALLMENT METHOD

Initial payment – total payments by the buyer, in cash or property, in the taxable year the sale was
made; includes more than the downpayment as it includes the installment payments in the year of
sale.
Selling price – entire amount for which the buyer is obligated to the seller
Cash received and/or receivable xx
Fair market value of property received or receivable xx
Mortgage or any indebtedness assumed by the xx
buyer
Selling price xx

Contract price – amount of receivable in cash or other property from the buyer; usually the selling
price in the absence of an agreement whereby the debtor assumes indebtedness on the property
26

ILLUSTRATION
Canlubang Company, a car dealer, sold a machine with a tax basis of P1,200,000 on installment on
January 3, 2020. Canlubang received a P200,000 cash downpayment and a P1,800,000 promissory
note for the balance payable in six installments of P300,000 every July 3 and January 3 thereafter.
Cash downpayment P200,000
At the date of sale:
Notes receivables 1,800,000
Selling Price P2,000,000
800,000 x 200,000/2,000,000 = P80,000

Less: Tax basis of machine sold (1,200,000)

Gross Profit P800,000 Upon every installment:
800,000 x 300,000/2,000,000 = P120,000
Can Canlubang use installment method?
Initial payments:
Cash downpayment P200,000
First installment 300,000
Total 500,000
Ratio of initial payment (500,000/2,000,000 = 25%
27

ILLUSTRATION (with excess mortgage)

On July 1, 2020, a taxpayer made a casual sale of 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 down payment with the balance in two installments of
P200,000 December 31, 2020 and July 1, 2021.
Contract price:
Selling price P2,000,000
Selling price P2,000,000
Less: Tax basis of machine sold (1,300,000)
Less: Mortgage assumed by the buyer 1,500,000
Gross Profit P700,000
Cash collectible P500,000
Initial payments: Add: Excess mortgage (1.5M-1.3M) 200,000
Cash downpayment P100,000 Contract price P700,000
First installment (12/31/2020) 200,000 Canlubang shall recognize the following gross income:
Excess mortgage (1.5M-1.3M) 200,000 At the date of sale: (100K down + 200K excess) = P300,000
Total 500,000 Upon receipt of first installment – 12/31/20 = 200,000
Ratio of initial payment (500,000/2,000,000 = 25% Upon receipt of 2nds installment – 7/1/20 = 200,000
700,000
28

DEFERRED PAYMENT METHOD

- Used in reporting income when a non-interest bearing note is received as consideration in a sale
- 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 income over the
installment term
29

ILLUSTRATION
On December 31, 2019, a taxpayer sold an office building costing P1,400,000 for P2,000,000. The
buyer made P1,000,000 downpayment and the balance, evidenced by a note, is due in 2 annual
installments of P500,000 every December 31 starting December 31, 2020.
*Installment method cannot be allowed since the ratio of initial payment is already 50% (1M/2M)
Assume the note is interest-bearing but can be discounted at a local bank for P900,000. The
reportable gross income for each year shall be:
2019 2020 2021
Cash downpayment P1,000,000
PV of the note 900,000
Selling price P1,900,000
Less: Tax basis of the property 1,400,000
Gross income P500,000
Interest Income (1M-900K) = P100,000 (discount) P50,000 P50,000
(100k x 500k/1M) (100k x 500k/1M)
30

PERCENTAGE OF COMPLETION METHOD

- Estimated gross income from construction is reported based on the percentage of completion of the
construction project
To illustrate:
In 2019, Cagayan Construction Company accepted a P5,000,000 fixed-price construction contract. The following
shows the details of its construction activities:
2019 2020
Construction expenses P3,000,000 P1,200,000
Engr’s estimate of completion 70% 100%

2019 2020
Contract price P5,000,000 P5,000,000
Multiply by: % of completion 70% 100%
Construction revenue P3,500,000 P5,000,000
Less: Construction revenue in prior year 3,500,000
Construction revenue this year P3,500,000 P1,500,000
Less: Expense during the year 3,000,000 1,200,000
Construction gross income P500,000 P300,000
31

INCOME FROM LEASEHOLD IMPROVEMENT

a. Outright Method – lessor may report as income the FMV of such building improvement subject to the lease at the
time when such building improvements are completed.

b. Spread-out Method – 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.
𝑒𝑥𝑐𝑒𝑠𝑠 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑣𝑒𝑟 𝑙𝑒𝑎𝑠𝑒 𝑡𝑒𝑟𝑚
Depreciated value of the leasehold improvement = = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 𝑥 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡
32

INCOME FROM LEASEHOLD IMPROVEMENT

a. Outright Method – lessor may report as income the FMV of such building improvement subject to the lease at the
time when such building improvements are completed.

b. Spread-out Method – 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.
𝑒𝑥𝑐𝑒𝑠𝑠 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑣𝑒𝑟 𝑙𝑒𝑎𝑠𝑒 𝑡𝑒𝑟𝑚
Depreciated value of the leasehold improvement = = 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡 𝑥 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑖𝑚𝑝𝑟𝑜𝑣𝑒𝑚𝑒𝑛𝑡
33

ILLUSTRATION

On January 1, 2020, 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. The building has a useful life of 30 years.
Outright method
Anderson shall recognize the entire P4,500,000 fair value of the improvement as gross income upon
completion of the improvement in 2020.
However, the treatment specified by the outright method is perceived as unjust and abusive, and is an
improper introduction to legislation. The depreciated value (4,500,000 x 10/30 = 1500,000) of the
improvement at the termination of the lease should be the proper value to be recognized as gross income
under the outright method.

Spread-out method
Depreciated value: 4,500,000 x 10/30 = 1500,000
Anderson shall spread the P1,500,000 income over 20 period or recognize an annual income of P75,000
from the leasehold improvement from Year 2020 through Year 2039.
34

CROP YEAR BASIS

- Used for one-time crops (those that are harvested once after several years)
- 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.
To illustrate: Juan de la Cruz, a farmer, plants a certain crop The reportable farming income using crop year
that takes more than a year to harvest. Juan had the following method would be:
data on his farming operations:

2019 2020 2021 2019 2020 2021

Proceeds of harvest P- P750,000 P1,000,000 Proceeds of harvest P- P750,000 P1,000,000
1st cropping expenses 400,000 200,000 Less: Cropping - 200,000
expenses
2nd cropping expenses - 500,000 300,000
Incurred last year 400,000 500,000
Incurred this year 200,000 300,000
Farming gross - P150,000 P200,000
income
35

TAX
REPORTING
36

TYPES OF RETURNS TO THE GOVERNMENT

1. Income Tax Returns – provides details of the taxpayer’s

income, expense, tax due, tax credit and tax still due to 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
37

MODE OF FILING INCOME TAX RETURNS

1. Manual Filing System – traditional system where taxpayers

fill up BIR forms to report income, expenses, or any
declaration required to be filed with the BIR
2. E-BIR Forms – taxpayers fill up their income tax returns in
electronic spreadsheets without the need of writing on paper
returns; the system ensures completeness of data on the
return and is capable of online submission
3. Electronic Filing and Payment System (eFPS) – 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
38

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
taxes 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 Customs Brokers Clearance
Certificate (BCC)
39

GROUPINGS OF TAXPAYERS UNDER EFPS

40

PAYMENT OF INCOME TAXES

▸ GENERAL RULE: “Pay as you file.”

MANUAL e-BIR Forms eFPS

Data entry Manual Electronic Electronic
Filing/Submission Manual Electronic Electronic
Tax Payment Manual Manual Electronic
41

PENALTIES FOR LATE FILING OR PAYMENT OF TAX

▸ SURCHARGE
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
▸ INTEREST
- 12% per annum effective January 1, 2018
- 20% per annum until December 31, 2017
- Interest period shall be computed based on actual days divided by
365 days
▸ COMPROMISE PENALTY
- Amount paid in lieu of criminal prosecution over a tax violation
42

To illustrate:

The tax return of the taxpayer was due on April 15, 2019 but was filed on
August 3, 2019. The tax due per return of the taxpayer amounts to
P100,000.
Period Days

April (30-15) 15
May 31
June 30
July 31
August 3
Total days 110

Interest penalty shall be computed as P100,000 x .12 x 110/365 =

3,616.44
43

To illustrate: Interest in transition years

An individual taxpayer has a tax due of P40,000 for taxable year 2016
due on April 15, 2017. The taxpayer settled his tax on February 10, 2018.

The interest in 2017 shall be computed using the old 20% interest
penalty rate while the interest in 2018 shall be computed using the 12%
interest penalty rate.

2017Interest (P40,000 x 20% x 260/365) = P5,698.63

2018 Interest (P40,000 x 12% x 41/365) = P 539.18
P6,237.81
44
PENALTIES FOR NON-FILING OR LATE FILING OF
INFORMATION RETURN

1,000 for each failure to file a separate information

return provided that the amount imposed for all
such failure during a calendar year shall not exceed
P25,000.