Ch4 - Income Tax Schemes, Accounting Periods, Accounting Methods, and Reporting

1 Final Income Taxation

2 Capital Gains Taxation

3 Regular Income Taxation

There are three income taxation schemes under the NIRC:

True

True/False

An item of gross income is taxable under any one of the three income taxation schemes

Mutually exclusive

The tax schemes are __________. An item of gross income that is subject to tax in one scheme will not be taxed by the other schemes.

Final income taxation

is characterized by final taxes wherein full taxes are withheld by the income payor at source

False, not all

True/False

All items of passive income are subject to final tax

Passive incomes

are earned with very minimal or even without active involvement of the taxpayer in the earning process

Active or regular income

arises from transactions requiring a considerable degree of effort or undertaking from the taxpayer

True

True/False

Active or regular income is the direct opposite of passive income

Capital gains taxation

is imposed on the gain realized on the sale, exchange and other dispositions of certain capital assets

Capital assets

are assets not used in business, trade or profession

Ordinary assets

are assets used in business, trade or profession such as inventory, supplies or property, plant and equipment

Domestic Stocks and Real Property

Capital gains taxation applies only to two types of capital assets: _______________

Regular income tax

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

Self-assessment method

Regular income taxation makes use of the _______________ method

Accounting period

is the length of time over which income is measured and reported

Regular accounting period

12 months in length

Short accounting period

less than 12 months

Calendar accounting period

starts from January 1 and ends December 31

False, both corporate taxpayers and individual taxpayers

True/False

The calendar accounting period is available to individual taxpayers only.

Fiscal accounting period

is any 12-month period that ends on any day other than December 31

False, only to corporate income taxpayers

True/False

The fiscal accounting period is available only to corporate income taxpayers and individual income taxpayers

Fifteenth day of the fourth month following the close of the taxable year

Deadline for filing of income tax return

True

True/False

The accounting period for a newly commenced business covers the date of the start of the business until the designated year-end of the business

True

True/False

The accounting period for a dissolved business covers the start of the current year to the date of dissolution of the business

True

True/False

The accounting period in case of a change of accounting period by corporate taxpayers covers the start of the previous accounting period up to the designated year-end of the new accounting period.

False, until the death of the taxpayer

True/False

The accounting period in case of the death of the taxpayer covers the start of the calendar year until the end of the year of the taxpayer's death.

True

True/False

The accounting period in case of the termination of the accounting period of the taxpayer by the CIR covers the start of the current year until the date of the termination of the accounting period.

Accounting methods

are accounting techniques used to measure income

Accrual basis of accounting

Under the ___________, income is recognized when earned regardless of when received

The right to receive is established or when an enforceable right to secure payment is created against the counterparty

Income is said to have accrued when ______________

Cash basis of accounting

Under the ______________, income is recognized when received and expense is recognized when paid

Lifeblood doctrine and ability to pay theory

Income received in advance is taxable upon receipt pursuant to the ____________________

False, only on the sale of services and not on goods

True/False

Income received in advance being taxable upon receipt is applicable on the sale of services and goods.

False, not deductible. They are deductible against income in the future period they expire or are used

True/False

Prepaid expenses are deductible against gross income in the year paid.

Hybrid basis

is any combination of accrual basis, cash basis, and/or other methods of accounting.

When the taxpayer has several businesses which employ different accounting methods.

When can the hybrid basis be used?

False, may be reported using the accrual basis, installment method, or deferred payment method

True/False

The sale of goods with extended payment terms may only be reported using the installment method.

Installment method

Under the _________, gross income is recognized and reported in proportion to the collection from the installment sales.

1 Dealers of personal property on the sale of properties they regularly sell

2 Dealers of real property, only if int'l payment does not exceed 25% of selling price

3 Casual sale of non-dealers in property, real or personal, when selling price exceeds 1,000 and int'l payment does not exceed 25% of selling price.

Installment method is available to the following taxpayers: (3)

Initial payment

means the total payments by the buyer, in cash or property, in the taxable year the sale was made.

False, initial payment is broader than downpayment. It also includes the installment payments in the year of sale.

True/False

The term "initial payment" is also known as "down payment"

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

Casual sale

The sale of properties of which the seller is not a dealer is referred to as a ______________

an indirect receipt realized by the seller

When the indebtedness assumed by the buyer exceeds the tax basis of the property sold, the excess is _______________________

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 a consideration in a sale

Present value of a note receivable

Under the deferred payment method, the gross income is computed based on the _______________

True

True/False

The difference between the face value and the present value of the note, known as the discount, will not be recognized in gross income at the date of sale but will be deferred and recognized as interest income.

Percentage of completion method

Under the ____________, the estimated gross income from construction is reported based on the percentage of completion of construction project.

Leasehold improvements

are tangible improvements made by the lessee to the property of the lessor

Income from leasehold improvement

Improvements will benefit the lessor when their useful life extends beyond the lease term. This benefit is referred to as ______________

Outright method

method wherein the lessor reports 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

method wherein 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 thereof.

Perennial crops

crops that yield harvests through years

One-time crops

crops that are harvested once after several years

Crop year basis

Under the ___________, farming income is recognized as the difference between the proceeds of harvest and expenses of the particular crop harvested.

True

True/False

The NIRC allows taxpayers to determine the most appropriate accounting method that apply to themselves. The BIR cannot impose an accounting method to be used.

True

True/False

The change in accounting period requires prior BIR notice.

False, 60 days

True/False

The request for approval of the change in accounting period shall be filed at any time not less than 30 days prior to the beginning of the new accounting period

True

True/False

The certification approving the adoption of a new accounting period must be released within 30 days from the date of receipt of the complete documentary requirements.

Income tax returns

provides details of the taxpayer's income, expense, tax due, tax credit and tax still due from the government.

Withholding tax returns

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

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.

Manual Filing System

filing of income tax return by paper documents where taxpayers fill up BIR forms to report income, expenses, or any declaration required to be filed with the BIR

e-BIR Forms

Taxpayers fill up their income tax returns in electronic spreadsheets without the need of writing on paper returns

Electronic Filing and Payment System (eFPS)

a paperless tax filing system developed and maintained by the BIR

1 Large taxpayers notified by BIR

2 Top 20,000 private corporations notified by BIR

3 Top 5,000 individual taxpayers notified by BIR

4 Taxpayers who wish to enter into contracts with government offices

5 Corporations with paid up capital of 10,000,000

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 TAMP

9 Accredited importers

Taxpayers mandated to use eFPS (9)

True

True/False

In case of unavailability of the eFPS during maintenance or instances of technical errors, eFPS enrolled taxpayers may file manually.

pay as you file

General rule for payment of income taxes

25% of the basic tax

Surcharge for failure to file or pay deficiency tax on time

50% of the basic tax

Surcharge for willful neglect to file and pay taxes

True

True/False

The non-filing is considered "willful neglect" if the BIR discovered the non-filing first.

25% of the basic tax

Penalty for wrong venue filing

50% of the basic tax

Penalty for filing of fraudulent return

True

True/False

The interest shall be double of the legal interest rate for loans or forbearance of any money in the absence of any express stipulation

12% per annum

The interest penalty is ____________ computed on the basic tax over the actual days of delay divided 365 days

Compromise penalty

is an amount paid in lieu of criminal prosecution over a tax violation

1,000 for each failure provided that the amount imposed for all such failure during a calendar year does not exceed 25,000

Penalty for non-filing or late filing of information return