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Income Tax (RECITATION FORMAT) > Ch. 4 Income Tax Schemes, Accounting Periods, Methods, and Reporting > Flashcards

Ch. 4 Income Tax Schemes, Accounting Periods, Methods, and Reporting Flashcards

1
Q

Enumerate the three income taxation schemes under the NIRC

A
  1. Final gross income
  2. Capital gains taxation
  3. Regular income taxation
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2
Q

What does Mutually exclusive coverage mean?

A

It states that taxes are mutually exclusive. An item of gross income that is subject to one tax scheme will not be taxed by the other schemes. Similarly, items of income that are exempted in one scheme are not taxable by the other schemes. (Isa lang ang pwedeng gamitin na tax scheme sa isang item)

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3
Q

Enumerate the three classification of gross income

A
  1. Gross income subject to tax
  2. Gross income subject to capital gains tax
  3. Gross income subject to regular tax
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4
Q

What is Final Income Taxation?

A

It is characterized by final taxes wherein full taxes are withheld by the income payor at source. The recipient income taxpayer receives the income net (deducted) of taxes.

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5
Q

Who must remit in Final Income Taxation?

A

The payor is the one required by law to remit the taxes to the government. The recipient income taxpayer does not need to file income tax returns because the withheld tax constitutes the full tax due and are therefore deemed final payments.

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6
Q

What is Passive Income?

A

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

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7
Q

Give at least one example of Passive Income

A
  1. Interest Income from banks
  2. Dividends from domestic corporation
  3. Royalties
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8
Q

What is Active Income?

A

Active or Regular Income arises from transaction requiring requiring a considerable degree of effort or undertaking from the taxpayer. It is the direct opposite of positive income.

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9
Q

Give at least one example of active income

A
  1. Compensation income
  2. Business income
  3. Professional income
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10
Q

What is Capital Gains Tax?

A

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

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11
Q

What are capital assets?

A

Capital assets are not used in business, trade, or profession. Capital assets are the opposites of ordinary assets.

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12
Q

What are ordinary assets?

A

Ordinary assets are assets used in business, trade, or profession such as inventory, supplies, or PPE. They are not subject to capital gains tax.

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13
Q

Enumerate the two types of capital assets that Capital Gains Tax applies to

A
  1. Domestic stocks
  2. Real property
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14
Q

What are two types of income that is covered by Regular Income Tax

A
  1. Active Income
  2. Other Income
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15
Q

Where is an item of gross income from regular income tax reported?

A

Income tax return

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16
Q

What system of taxation is used by the Regular Income Tax?

A

Self-assessment (Voluntary) Method

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17
Q

Explain the concept of Accounting Periods

A

It is the length of time which income is measured and reported.

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18
Q

How long is a regular accounting period?

A

12 months

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19
Q

How long is a short accounting period?

A

less than 12 months

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20
Q

What are the two types of a regular accounting period?

A

Calendar and Fiscal

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21
Q

Explain the calendar year accounting period

A

It starts from January 1 and December 31. It is available to both corporate taxpayers and individual taxpayers.

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22
Q

Enumerate the instances in the NIRC that requires an entity to use the Calendar Year

A
  1. Taxpayer’s annual accounting period is other than a fiscal year (such as when longer than 12 months in length)
  2. Taxpayer has no annual accounting period (less than 12 months in length)
  3. Taxpayer does not keep books
  4. Taxpayer is an individual
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23
Q

Explain the fiscal year accounting period

A

Any 12-month period that ends on any day other than December 31. It is available only to corporate income taxpayers and not available to individual taxpayers.

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24
Q

When is the deadline of filing the Income Tax Return?

A

Under the NIRC, it is due for filing on the fifteenth day of the fourth month following the close of taxable year of the taxpayer. The regular tax due is payable upon filing of the income tax return.

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25
Q

Enumerate the 5 instances of a Short Accounting Period

A
  1. Newly commenced business
  2. Dissolution of business
  3. Change of accounting period by corporate taxpayers
  4. Death of the taxpayer
  5. Termination of the accounting period of the taxpayer by the Commissioner.
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26
Q

Enumerate the five types of accounting methods used to measure income

A
  1. The general methods
  2. Installment and deferred payment method
  3. Percentage of completion method
  4. Outright and spread-out method
  5. Crop year basis
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27
Q

Enumerate the 2 general methods for income from sale of goods or services

A
  1. Accrual basis
  2. Cash basis
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28
Q

What is the Accrual Basis?

A

Income is recognized when earned regardless of when it is received while expenses are recognized when incurred regardless of when it is paid.

29
Q

What is the Cash Basis?

A

Income is recognized when received and expenses are recognized when paid

30
Q

Enumerate the three tax and accounting concepts that differentiate accrual and cash basis.

A
  1. Advanced income is taxable upon receipt.
  2. Prepaid expenses is non-deductible
  3. Special tax accounting requirement must be followed.
31
Q

Explain the concept “Advanced income is taxable upon receipt”

A

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. This rule is applicable on the sale of services not on goods.

32
Q

Explain the concept “Prepaid expenses is non-deductible”

A

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 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.

33
Q

Explain the concept of “Special tax accounting treatments must be followed”

A

There are cases where the tax law itself provides for 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 keeping his books.

34
Q

What is the accounting period of a newly commenced business?

A

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

35
Q

What is the accounting period of a Dissolution of a business?

A

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

36
Q

What is the accounting period of a Change of accounting period by corporate taxpayers?

A

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.

37
Q

What is the accounting period of a Death of the taxpayer?

A

The accounting period covers the start of the calendar year until the death of the taxpayer.

38
Q

What is the accounting period of Termination of the accounting period of the taxpayer by the Commissioner?

A

The accounting period covers the start of the current year until the date of the termination of the accounting period.

39
Q

What is the hybrid basis?

A

The hybrid combination is any combination of accrual basis, cash basis, and/or other methods of accounting. It is used when the taxpayer has several businesses that employ various accounting methods.

40
Q

What is the installment method?

A

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

41
Q

Explain initial payment

A

Initial payment means total payments by the buyer, in cash or property, in the taxable year the sale was made. The term “initial payment” is broader than downpayment. It also includes the installment payments in the year of sale (Bale lahat ng nasa 1st year ng pagbabayad).

42
Q

Explain Selling Price

A

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

43
Q

Explain Contract Price

A

The contract price is the amount receivable in cash or property from the buyer. It is usually the selling price in the absence of an agreement whereby the debtor assumes indebtedness on the property.

44
Q

What is the deferred payment method?

A

It 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. Under it, the 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 as interest income over the term.

45
Q

What is the Percentage of Completion Method for Construction Contracts Method?

A

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

46
Q

What are leasehold improvements?

A

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

47
Q

Explain Income from Leasehold Improvement

A

Improvements will benefit the lessor when their useful life extends beyond the lease term. This benefit is referred to as income from leasehold improvement

48
Q

Explain the Outright Method

A

The lessor may report as income the fair market value of such building improvements subject to the lease at the time when such building improvements are completed.

48
Q

Enumerate the two methods that Income from Leasehold Improvement can be reported

A
  1. Outright Method
  2. Spread-out Method
49
Q

Explain the spread-out method

A

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 (aliquot = a portion of a larger whole).

49
Q

Explain the crop year basis

A

Under this method, 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.

50
Q

Enumerate the two instances where CIR may only prescribe an accounting method

A
  1. The taxpayer did not use an accounting method
  2. The accounting method selected does not clearly reflect the income of the taxpayer.
51
Q

Enumerate the documentations required for a grant of a change in accounting period from the BIR

A
  1. A letter of request addressed to the RDO having jurisdiction over the place of business of the taxpayer showing:
    a. The original and the proposed accounting period
    b. The reason for desiring to change the accounting period
  2. Certified true copy of the SEC approved amended bylaws showing change in accounting period.
  3. Sworn statement of “non-forum shopping” stating that such request has not been previously acted upon by the BIR National Office
  4. Duly filed up BIR Form 1905
  5. A sworn undertaking by an officer of the taxpayer to file a separate final or adjustment return for the period between the close of the original accounting period and the date designated as the close of the new accounting period.
52
Q

Enumerate the three types of tax returns to the government

A
  1. Income tax returns
  2. Withholding tax returns
  3. Information returns
53
Q

What are Income Tax Returns?

A

They provide details of the taxpayer’s income, expense, tax due, tax credit, and tax still due to the government.

54
Q

What are Withholding Tax Returns?

A

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

55
Q

What are Information Returns?

A

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.

56
Q

Enumerate the three modes of filing income tax returns

A
  1. Manual Filing System
  2. e-BIR Forms
  3. Electronic Filing and Payment System (eFPS)
57
Q

Explain e-BIR Forms System

A

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.

57
Q

Electronic Filing and Payment System (eFPS)

A

It 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.

58
Q

Explain the Manual Filing System

A

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 other returns to be filed with the BIR.

59
Q

Enumerate the required persons that a income tax return must be filed to

A
  1. An authorized agent bank (AAB)
  2. Revenue Collection Officer
  3. Duly authorized city or municipal treasurer, if there is no BIR office in the locality
60
Q

Explain the payment of income taxes

A

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.

61
Q

Enumerate the three penalties for late filing or payment of tax

A
  1. Surcharge
  2. Interest
  3. Compromise penalty
62
Q

What are the penalties for a Surcharge?

A

a. 25% of the basic tax for failure to file or pay deficiency tax on time (simple neglect)
b. 50% for willful neglect to file and pay taxes (non-filing = willful neglect if the BIR discovered it first)

63
Q

What are the penalties related to Interest?

A

The interest shall be double of the legal interest rate for loans or forbearance of any money in the absence of any express stipulation. The legal interest is 6%, therefore the penalty would be 12% per annum computed on the basic tax over the actual days of delay divided by 365 days.

64
Q

What are compromise penalties?

A

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

65
Q

What is the penalty for non-filing or late filing of an information return

A

For each failure to file a separate information return, statement or list, or keep any record, or supply any information required by the Code of Commissioner on the date prescribed therefor, unless that 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).

Income Tax (RECITATION FORMAT) (7 decks)

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