I. ACCOUNTING PERIODS
A. General rule (Sec. 43)
Taxable income is computed upon the basis of taxpayer’s annual accounting period (fiscal or
calendar year) in accordance with the method of accounting employed.
• If no method of accounting employed or method does not clearly reflect the income, computation shall be made in accordance w/ such method as the opinion of the Commissioner clearly reflects the income.
•
Taxable income is computedbased on calendar year if:
1. accounting period is other than a fiscal year
2. taxpayer has no accounting period
3. taxpayer does not keep books
4. taxpayer is an individual
•
Fiscal year: accounting period of12 months ending on the last day of any month other than December
•
Calendar year: accounting period from January 1 to December 31B. Periods in which items of gross income included (Sec. 44)
• Amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, any such amounts are to be properly accounted for in a different period under methods of accounting permitted
• In case of death of taxpayer: include for the taxable year in which falls the date of his death, all amounts which accrued up to the date of his death; if not otherwise properly includible in respect of such period or a prior period
C. Period for which deduction and credits taken (Sec. 45)
• Deductions provided in this Title shall be taken for the taxable year in which ‘paid or incurred, dependent upon the method of accounting upon the basis of which the net income is computed, unless, in order to
reflect the income, deductions should be taken as of a different period.
• In case of death of taxpayer: deductions allowed for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.
D. Change of accounting period (Sec.46)
• Kinds of changes:
- from fiscal year to calendar year
- from calendar year to fiscal year
- from one fiscal year to another
• Effect of change: Net income, shall, with the approval of the Commissioner, be computed on the basis of the new accounting period, subject to Sec. 47.
E. Final or adjustment returns for a period of less than 12 months
(1) Returns for short period resulting from change of accounting period
• taxpayer is other than an individual
• with the approval of the Commissioner
• If change is from fiscal year to calendar year:
- separate final or adjustment return be made for the period between the close of the last fiscal year for which return was made and the following December 31
• If change is from calendar year to fiscal year:
- separate final or adjustment return be made for the period between the close of the last calendar for which return was made and the date designated as the close of the fiscal year
• If change is from one fiscal year to another:
- separate final or adjustment return be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year (2) Income computed on basis of
short period
• In what cases?
a. Where a separate final or adjustment return is made on account of a change in accounting period
b. In all other cases where a separate final or
adjustment return is require or permitted by R&R prescribed by Sec. of Finance. upon
recommendation of Commissioner
• Both shall be made for a fractional part of a year.
• Then income is computed on the basis of the short period for which separate final or adjustment return is made.
II.
METHODSOFACCOUNTINGA. Cash method
Recognition of income and expense dependent on inflow or outflow of cash.
1. Accrual method
Method under which income, gains and profits are included in gross income when earned whether received or not, and expenses are allowed as deductions when incurred: although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income
• Examples
:
1. interest or rent income earned but not yet received
2. rent expense accrued but not yet paid
3. wages due to workers but remaining unpaid
2. Accounting for
long-term contracts
•
Long-term contracts: building, installation or construction contracts covering a period in excess of 1 yr•
Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion• The return is accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under the contract
• Deductions from gross income: all expenditures made during the taxable year on account of the contract: account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied.
• Amended return may be permitted /required by the Commissioner: if upon completion of contract, taxable income has not been clearly reflected for any year(s).
3. Installment
basis
(1) Sales of dealers in personal property
Under rules and regulations prescribed by the Sec. of Finance, a person who regularly sells or otherwise disposes of personal property on the installment plan may return
as income there from in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the contract price. Example: Sale in 2000 Contract price (CP) (installments receivable) P200, 000 Cost 150,000 Gross profit (GP) 50,000 Installments payable in 2 equal annual installments
GP/CP ratio
= 50,000/200,000 = 25% Collections in 2000=P100,000 Income for 2000
= P100,000 x 25% = P25,000
(2)
Sales of realty and casual sales of Personalty• In cases of:
a. casual sale or other casual disposition of personal property
(other than
inventory on hand of the taxpayer at the close of the taxable year) for a price > P1,000, or
b. sale or other disposition of real property, if in either case the initial payments do not exceed 25% of the selling price
•
How may income be returned: same as in sales of dealer in personal property above•
Initial payments:payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which
the sale or other disposition is made.
(3) Sales of real
property considered as capital asset by individuals
• Individual who sells of disposes of real property, considered as capital asset and is otherwise qualified to report the gain under (2) above may pay the capital gains tax in installments under rules and regulations to be promulgated by the Sec. of Finance.
(4) Change from accrual to installment basis
• taxpayer must be entitled to benefits under (1) hereof sales of dealers in personal property
• in computing income for the year of change or any subsequent year:
amounts actually
received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.
4. Allocation of
income and deductions
• Applicable to: cases of 2 or more organizations, trades or businesses (incorporated and organized within the Philippines) owned or
controlled directly
/indirectly by the same interest
• Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment
or allocation is necessary in order to prevent evasion of taxes or to clearly reflect the income of any such organization, trade or business.