Income Tax Schemes, Accounting Periods, Methods, and Reporting

Income Tax Schemes,
Accounting Periods,
Methods, and
Reporting
Accounting
Period
ACCOUNTING PERIOD
• length of time over which income is measured and reported.
Types of Accounting Period
1. REGULAR ACCOUNTING PERIOD
- 12 months in length
a. Calendar Year- This accounting period starts from January 1 to
December 31.
b. Fiscal Year- a 12 month period that ends on any day other that
December 31.
2. SHORT ACCOUNTING PERIOD

- less than 12 months
Deadline for Filing the Income Tax
Return
The return is due for filing on the fifteenth
day of the fourth month following the close of
the taxable year of the taxpayer
Instances of Short Accounting Period
1. NEWLY COMMENCED BUSINESS
- Covers the date of the start of business until the designated year-
end of the business.
2. DISSOLUTION OF BUSINESS
- Covers the start of the current year to the date of dissolution of
the business.
3. 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.
**BIR approval is required in changing an accounting period. It is
not automatic. **
4. DEATH OF THE TAXPAYER

Covers the start of the calendar year until the death of the
taxpayer.
5. TERMINATION OF THE ACCOUNTING
PERIOD OF THE TAXPAYER BY THE
COMMISSIONER OF INTERNAL REVENUE
Covers the start of the current year until the date of the
termination of the accounting period.
Accounting
Methods
General Methods
- Accrual Basis
- Cash Basis
- Hybrid Basis
TAX AND ACCOUNTING CONCEPTS OF ACCRUAL
BASIS AND CASH BASIS DISTINGUISHED
- Advanced income is taxable upon receipt

- Prepaid expense is non deductible
- Special tax accounting requirement must be followed
Accrual Basis Accounting Taxation
Income is recognized when Advanced income is taxable.
earned even if not yet received. Hence, it must be added to
Advanced income is inherently accrual basis gross income.
not included in net income. The subsequent taxation of
Income
advanced income in the period
earned will expose the
government to risk of non-
collection.
Expense is recognized when accrued even if not yet paid.
Expense Prepaid expenses are inherently not deducted. Hence, no
adjustment for prepayments is necessary under accrual basis.
Cash Basis Accounting Taxation
Income is recognized when received not when it is earned.
Income Advanced income is inherently recognized as income. Hence, no
adjustment is necessary on income.
Expense is deducted when Prepaid expenses are not
paid including prepaid deductible against gross
expenses. income in the current year.
They are deducted against
Expense
income in the future period
they expire or are used in the
business, trade or profession
of the taxpayer.
Sale of Goods with Extended
Payment Terms
- Installment Method
- Accrual Basis
- Deferred payment method
INSTALLMENT 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.
Initial payment
- total payments by buyer, in cash or property, in the taxable

year the sale was made.
 Selling price
- The entire amount for which the buyer is obligated to the

seller.
 Contract price
- Amount receivable in cash or other property from the buyer.

ACCRUAL ACCOUNTING
Income is recognized when earned regardless

of when received.
Expenses is recognized when incurred
regardless of when paid.
DEFERRED PAYMENT METHOD
• A loan arrangement in which the borrower is allowed to start

making payments at some specified time in the future.
• Under this method, gross income is computed based on the

present value (discounted value) of a note receivable from the
contract. Discount interest is amortized as interest income over
the installment term.
Reporting
Income Tax Reporting
The Philippines follows the “self-assessment method” wherein
taxpayers determine their gross income, prepare their income tax returns
and pay the tax accordingly. The return filed is presumed correct unless
proven otherwise by the government. However, in cases of failure to file a
return, the Commissioner of Internal Revenue shall file a return from best
available information and such return thus filed is presumed correct. The
taxpayer has the burden of proof in this case. The same rule applies when
tax authorities has reasons to believed that the tax return of the taxpayer is
grossly misstated.
Types of income tax-related returns
INCOME TAX RETURN

Income tax return is required for items of gross income that are
subject to:
 Regular Income Tax (quarterly and annual consolidated return)
 Capital Gains Tax (per transaction and an annual consolidated
return)
WITHHOLDING TAX RETURN
Under withholding tax system, the withholding tax are not tax to
the taxpayer but to the recipient of the income payments. The taxpayer
must deduct the withholding tax on his income payments, file a
withholding tax return, and remit the withheld tax to the government.
Types of withholding tax:
 Final Withholding Tax- full tax upon the income of the recipient.
The recipient will not pay additional taxes upon the income
subjected to final withholding taxes.
 Creditable Withholding Tax- advance tax. The recipient of the
income payments must report the income in his income tax return
and claim the creditable withholding tax withheld as tax credit
against his tax due.
INFORMATION RETURN
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-filling of required
information return are also subject to penalties, fines, and or
imprisonment
Mode of Filing Income Tax Returns
MANUAL FILING SYSTEM
The traditional manual system of filling income tax return is by
paper document 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 descending order of priority, within the revenue district office
where the taxpayer is registered or required to register:
1. An authorized agent bank
2. Revenue Collection Officer
3. Duly authorized city or Municipal treasurer
e-BIR FORMS
The BIR introduced the e-BIR Forms which come with an offline
and online versions. Taxpayers fil 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
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 internet.
Taxpayers mandated to use the eFPS
Grouping of taxpayers under eFPS.
BASIC COMPARISON OF FILING AND PAYMENT
SYSTEMS
Manual e-BIR Forms eFPS
Data Entry Manual Electronic Electronic
Filing/Submission Manual Electronic Electronic
Tax Payment Manual Manual Electronic

Penalties for late filing or payment
SUBCHARGE
 25% of the basic tax for failure to file or pay deficiency tax on time
 50% for willful neglect (non-filling) to file and pay taxes.
INTEREST
• 20% per annum considering the following period factor:
Delay Period Factor
For every day of delay Number of days/365 days
For every month of delay Number of months/12
For every year of delay 1
• Period factor shall be multiplied by 20% to get interest factor which

will be multiplied to the tax due to compute the interest penalty
• 30-day period in a month is considered 1 month, but the 1-day
excess on 31-day month is ignored.
COMPROMISE PENALTY
It is an amount paid by one who willfully fails to pay such tax,
make return, keep record, or supply correct and accurate information, or
withhold or remit taxes withheld, or refund excess taxes withheld on
compensation, at the time or times required by law or rules and
regulations.

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Income Tax Schemes,

2. SHORT ACCOUNTING PERIOD

4. DEATH OF THE TAXPAYER

- Advanced income is taxable upon receipt

 Installment method is available to the following taxpayers.

1. Dealers of personal property on the sale of properties

- total payments by buyer, in cash or property, in the taxable

- The entire amount for which the buyer is obligated to the

- Amount receivable in cash or other property from the buyer.

Income is recognized when earned regardless

• A loan arrangement in which the borrower is allowed to start

• Under this method, gross income is computed based on the

INCOME TAX RETURN

Manual e-BIR Forms eFPS

Data Entry Manual Electronic Electronic

Filing/Submission Manual Electronic Electronic

Tax Payment Manual Manual Electronic

Delay Period Factor

For every day of delay Number of days/365 days

For every month of delay Number of months/12

For every year of delay 1

• Period factor shall be multiplied by 20% to get interest factor which

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