Professional Documents
Culture Documents
Taxation applies to all persons, properties or rights (national coverage). Eminent domain applies only to a
particular owner of property.
In taxation, there is payment of taxes to the government by the taxpayer. In eminent domain, there is the
taking of property by the government.
In taxation, the taxpayer is presumed to receive benefits from the government directly or indirectly. In
eminent domain, the owner of the property receives a fair and just compensation from the government.
Taxation distinguished from police power:
Concept of police power
it is the right of the state to enact laws in relation to properties or persons as may promote public health,
public morals, public safety and the general welfare of the people.
The purpose of taxation is to raise revenues. The purpose of police power is for regulation.
In taxation, there is no limit on the amount of tax to be imposed. In police power, the license fee is just
enough to implement the regulation.
Classification of taxes
a. As to subject matter:
1. Personal or capitation or poll tax or cedula fixed amount on all persons who are residents
within a specific territory.
2. Property tax tax assessed on all properties located within the jurisdiction of the taxing
authority, in proportion to its value or in some method of apportionment.
3. Excise tax a tax which is not covered under personal or property.
b. As to who bears the burden
1. Direct tax The one who pays shoulders the tax.
2. Indirect tax The one who pays shifted the burden of the tax to someone else.
c. As to determination of amount:
1. Specific tax a tax which imposes a specific amount per head or number, or some standard of
weight or measurement.
2. Ad valorem tax a tax based on the value of the article subject to tax. It is a certain
percentage of the invoices or appraised value of the article or product subject to tax.
d. As to purpose:
1. General tax tax levied to raise revenues for the government.
2. Special tax tax levied for special purpose.
e. As to scope
1. National tax tax levied by the national government.
2. Local tax tax levied by the local government.
f. As to proportionality
1. Progressive or graduated increase in the tax rate is proportional to the increase in tax base.
Ex. Income tax, estate tax, and gift tax.
2. Regressive increase in the tax rate is not proportional to the increase in tax base. We do not
use this kind of taxation.
3. Proportional fixed percentage of amount of the base (e.g. value of the property, or gross
receipts) Ex. Value added tax (VAT), real property taxes.
2
Situs of taxation it is the place of taxation. It is the channel wherein the state can collect or levy a
subject being taxed if he has a situs under its jurisdiction.
1.
2.
3.
4.
5.
What is a tax?
What is the scope of taxation? Discuss.
Enumerate the constitutional and inherent limitations of taxation. Discuss.
What are the classification of taxes?
Describe some doctrines that is generally accepted in taxation. Explain.
Differentiate tax with the following:
a. Toll
b. Penalty
4
c.
d.
e.
f.
g.
Special assessment
License fee
Debt
Revenue; and
Customs duties
Exercise: True of False. Write in the space provided before each number the word
True if the statement is correct and the word False if the statement is incorrect.
____________ 1. No person shall be imprisoned for non-payment of income tax.
____________2. Taxation is unlimited and therefore it has no limitation.
____________3. The power of eminent domain interferes to the right of the person to
privacy.
____________4. Tax laws may be affected prospectively and retroactively.
____________5. Shifting is the method of improving the process of production,
turning out his unit of product at a lower cost.
____________ 6. Value added tax is an example of excise tax.
____________7. Regressive income tax means increase in the tax rate is not
proportional to the increase in tax base.
____________8. Progressive or graduated tax means a fixed percentage of the income
tax base.
____________9. The power to tax is exercised only by the executive branch of the
government.
____________ 10. The Constitution totally disallows double taxation.
subsequently it undertook several revisions since our liberation from different generations of government
until it became what it is now.
Bureau of Internal Revenue (BIR)
One form of taxation is tax on income. Income tax is defined as a tax on income, whether gross or net (27
Am. Jur., 308). Income taxation in the Philippines is mostly covered under a law known as the National
Internal Revenue Code. Aside from that, it also includes special laws, revenue regulations and circulars,
rulings of the BIR, opinions of the Secretary of Justice, decisions of the Supreme Court and the lower
courts. The implementing agency is the Bureau of Internal Revenue under the Department of Finance.
Powers and duties of the BIR
1.
2.
a.
b.
c.
d.
e.
f.
g.
h.
1.)
2.)
Income means all profits, gains which flow into the taxpayer during a specific period of time, but not
the return on capital. It also includes gains from the sale of capital assets.
Requisites for income to be taxed:
1. There must be a gain or profit.
2. The gain must be realized or received.
3. The gain must be excluded by law or international treaty.
Types of income
There are three (3) types of income of the taxpayers subject to tax:
1. Capital gains subject to capital gains tax
2. Passive income subject to final tax
3. Other income subject to tax depending upon the classification of taxpayers.
Classification of taxpayers
1.
2.
3.
4.
5.
6.
7.
Individual taxpayers
Corporations
Special corporations
General Professional Partnerships and not
Estate and trust
Co-ownership
Joint ventures not covered under the definition of a corporation
b. Accrual basis Within a specific period of time, income earned is recognized as income even
when it is not yet received and expenses incurred are recognized as expenses even if it is not yet
paid.
c. Hybrid method is a combination of both the cash basis and accrual basis.
2. Crop year basis expenses in the production of crops are deducted in the year the gross income
from the crop has been realized. It is applicable only to farmers producing crops. It may take
more than a year. ( from the time of planting to the time of sale of the produce)
3. Installment and deferred payment sales It discusses various methods of acceptable reporting of
gross income.
4. Long term contracts means building, installing or contracting contracts covering a period in
excess of one year. A person whose gross income is derived from long term contracts shall
report his income on the basis of percentage of completion.
The computation must be supported by certifications from a reliable architect and engineering
consultants showing the percentage of completion during the taxable year of work done under the
contract.
5. Leasehold improvements sometimes the lessee make permanent improvements on the property
leased, under an agreement that upon the expiration of the lease contract, the improvement will be
for the lessor. It therefore behooves that the lessor must recognize income from the
improvements.
1. Income from leasehold improvements shall be reported at the time the
buildings or improvements are completed.
2. Income from leasehold improvements shall be divided over the life of the
lease
Forms of compensation
1. Money
2. In kind such as stocks, bonds, or other forms of property. Fair market value
3. The value of quarters or meals so furnished should be added to remuneration.
Compensation with exemptions:
9
1. De minimis benefits are not considered as compensation such facilities or privileges are
relatively of small value and are given to employees to promote their health, goodwill,
contentment, and efficiency.
a. Monetized unused vacation leave credits of employees not exceeding 10 days during the year.
b. Medical cash allowance to dependents of employees not exceeding P750 per employee per
semester or P125 per month.
c. Rice subsidy of P1,500 or one (1) sack of 50-kg rice per month amounting to not more than
P1,500.
d. Uniforms and clothing allowance not exceeding P4,000 per annum.
e. Actual yearly medical benefits not exceeding P10,000 per annum.
f. Laundry allowance not exceeding P300 per month.
g. Employee achievement awards, e.g. for length of service or safety achievement, with an
annual monetary value of P10,000, under an established written plan, which does not
discriminate highly paid employees.
h. Gift given during Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum.
i. Flowers, fruits, books or similar items given to employees under special circumstances, e.g.
on account of illness, marriage, birthday, birth of a baby, etc.
j. Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage.
The excess from the above ceiling prescribed, shall be considered as part of other benefits, which are
taxable to the employee receiving the benefits, if such excess is beyond the P82,000 ceiling.
2. Fringe Benefits is an employee benefit supplementing a money wage or salary. It maybe in the
form of food, service, or other benefit furnished or granted in cash or in kind. A salary or wage
given to an employee cannot be reduced, while a fringe benefit maybe discontinued or reduced.
It is not a part of the basic pay to compute for OT pay, separation pay, etc. as a basis.
a. Basic rules on fringe benefit and fringe benefit tax.
1.) Fringe benefit given to a rank and file employee (whether under a collective bargaining
agreement or not) is not subject to the fringe benefit tax.
2.) Fringe benefit given to a supervisory or managerial employee is subject to the fringe
benefit tax.
3.) De minimis benefits, whether given to rank and file employee or to a supervisory or
managerial employee is not subject to the fringe benefit tax.
Examples of fringe benefits given to a supervisory or managerial employees subject to
fringe benefit tax:
Housing, expense accounts, vehicle of any kind, housing personnel such as maid, driver
and others, interest on loan at less than market rate to the extent of difference between the
market rate and actual; membership fees, dues and other expenses in social and athletic
clubs or other similar organizations; expenses for foreign travel; holiday and vacation
expenses, educational assistance to the employee or his dependents; life or health
insurance and other non-life insurance premiums or similar amounts in excess of what the
law allows.
4.) Exemptions from tax are as follows:
10
a. Benefit required by the nature of, or necessary to the trade, business or profession of the
employer.
b. Benefit for the convenience or advantage of the employer (convenience of the employer
rule)
c. Benefit which is authorized and exempted from tax under special law.
d. Contribution by the employer for the benefit of the employee to retirement, insurance,
and hospitalization benefit plans.
e. De minimis benefits.
5.) Computation of fringe benefit tax:
1. Determine the grossed-up monetary value of the fringe benefit. This is the monetary
value of the benefit divided by sixty-eight percent (68%);
2. Compute the fringe benefit tax by multiplying the grossed-up monetary value of the
fringe benefit by thirty two percent (32%).
The fringe benefit tax is a final tax that should be withheld by the employer and paid on
or before the tenth day of the month following the calendar quarter in which the fringe
benefit was granted.
Exclusions from gross income:
A. Direct exclusions under NIRC
1. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured.
2. The amount received by the insured as a return of premium paid by him under life insurance,
endowment or annuity contract.
3. The value of the property acquired by gift, bequest, devise or descent.
4. Amount received through accident or health insurance, or under Workmens Compensation
Act as compensation for personal injuries or sickness.
5. Income of any kind to the extent required by any treaty binding upon GOP.
6. Payment of benefit due to any person residing in the Phils under US laws administered by US
Veterans Administration.
7. Interest derived from investment in the Philippines by foreign governments or institutions.
8. Income derived from any public utility or from the exercise of any essential government
functions accruing to GOP or to any political subdivision.
9. Prizes or awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement.
10. Prizes or awards granted to athletes in local or international sports competition sanctioned by
their national sports associations.
11. Gains realized from the sale or exchange or retirement of bonds, debentures, or other
certificate of indebtedness with a maturity of more than 5 years.
12. Gains realized by the investor upon redemption of shares of stock of a mutual fund company.
B. Exemptions which have special significance to an employee or wage earner:
1. GSIS, SSS, Philhealth and Pagibig contributions and union dues of individuals.
2. Gross benefits received by officials and employees of public or private entities, as thirteenth
month pay and other benefits, but the total exclusion shall not exceed Eighty two thousand
pesos (P82,000). Example: Productivity incentive pay, and Christmas bonus.
11
Illustrative Problem
Installment method of
reporting income
On Nov 5 2009, Mr. B
sold a piece of land held
as ordinary asset on
12
Installment method of
reporting capital gain
On Jun 1 2009, Mr. P
sold bonds held as
capital assets on
Step 1
Step 2 Initial
payments must not
exceed 25% of the
selling price
Determination of capital
gain tax:
SP
2,000,000
FMV
1,800,000
CGT
120,000
Determination of initial
payments:
IP in 2009 500,000
(not exceeding 25% of
SP)
Step 3. If there is no
mortgage, the contract
price is the selling price
Step 4. Computation
Determination of
installment payments on
the tax:
Jan 2, 2009
P120.000/P2,000,000 x
500,000 = P30,000
January 28, 2010
P120,000/P2,000,000 x
P1,000,000 = P60,000
July 2, 2010
P120,000/P2,000,000 x
P500,000 = P30,000
13
Determination of capital
gain to be reported:
2009:
P100,000/P200,000 x
P50,000 = P25,000
50% thereof P12,500
P100,000/P200,000 x
P150,000 = P75,000
50% thereof P37,500
Not applicable
In 2008:
Collected P1,000,000
FMV of note:
P2,000,000 X 85%
P1,700,000
Total amt P2,700,000
In 2009:
Collected P1,000,000
Less: Income prev.
reported:
85% x P1M 850,000
Income
150,000
In 2010:
Collected P1,000,000
Less: Income prev.
Reported:
85% x P1M 850,000
Income
150,000
14
P3,000,000
2,000,000
P1,000,000
2012:
Contract price P10,000,000
(80% of P10,000,000)
Less: Cost to date:
2011
2012
Balance
Less: Income reported in 2011
Income for the year
P8,000,000
P2,000,000
4,000,000
2013:
Contract price P10,000,000
(100% of P10,000,000)
Less: Cost to date
2011
2012
2013
Balance
Less: Income already reported:
2011
2012
6,000,000
P 2,000,000
1,000,000
P 1,000,000
P10,000,000
P2,000,000
4,000,000
1,000,000
P1,000,000
1,000,000
15
7,000,000
P 3,000,000
2,000,000
P 1,000,000
Non-resident
Citizen
Resident
Alien
Non-resident
Alien engaged
in business
Non-resident
Alien not
engaged in
business
Natural-born
Stay in for
more than a
year
Stay in for
less than 180
days
a. Sale of
shares of
stock
Uniform
rules
Uniform
rules
Uniform
rules
Uniform rules
Uniform
rules
b. Sale of
real property
Uniform
rules
Uniform
rules
Uniform
rules
Uniform rules
Uniform
rules
Who are
they?
Capital Gains
16
Passive
income
c. Interest on
FCDU
7.5%
exempt
7.5%
exempt
d. Interest on
any currency
bank deposit,
yield or
benefits
derived from
deposit
substitute.
20%
20%
20%
e. Royalty on
books,
literary &
musical
compositions
10%
10%
10%
10%
f. Royalty
other than
(e), Prize >
P10,000,
other
winnings
except lotto
and PCSO
20%
20%
20%
20%
f. Dividends
10%
10%
10%
20%
g. Interest on
deposit for 5
years or more
Exempt
exempt
Exempt
exempt
Within and
without the
Philippines
Within the
Philippines
Within the
Philippines
Within the
Philippines
5%-32%
5%-32%
5-32%
Other
Income
h. Taxable
income
5%-32%
Other rules in
Final tax
17
i. Gross
income from
within the
Philippines
Cinematographi
c films and
similar works
only
25%
Uniform rule
Uniform rule
Uniform rule
Uniform rule or
that allowed by
the country of
his origin
whichever is
lower
None
Capital Assets are assets not used in business. It is the opposite of Ordinary assets.
18
Capital gain Selling price Cost. Selling Price is the amount paid on the sale, either in cash or in kind.
The selling price or the fair market value, whichever is higher, is reduced by the expenses of the sale.
Cost is the purchase price increased by the expenses of the purchase.
Real property is land, building or anything attached to the soil with permanence.
Problems:
1. The taxpayer is Mr. A, a citizen of the Philippines, residing in the Philippines, directly
sold shares of stock of a domestic corporation to a buyer at a selling price of P750,000.
Expenses of sale is P50,000. Purchase price of the shares sold is P400,000. Expenses on
the acquisition of shares is P25,000. Compute for the capital gains tax.
2. The taxpayer is a citizen of the Philippines, residing in the Phils. Shares of a resident
corporation held as capital assets were sold in the Philippines directly to a buyer.
Selling price of shares
P600,000
Cost of shares
P300,000
3. The taxpayer is a citizen of the Philippines, residing in the Phils. Shares of stock of a
domestic corporation held as capital assets were sold thru the Philippine Stock Exchange.
Selling price, net of stock brokers commission
P500,000
P150,000
P600,000
P700,000
P200,000
19
P5,000,000
P5,500,000
P3,000,000
P4,000,000
150,000
1,500,000
100,000
7. The taxpayer is a citizen of the Philippines, residing in the Philippines. Land in Malaysia,
held as capital asset, were sold to a buyer in the Philippines:
Selling Price
P2,000,000
Cost
P1,000,000
20
1. Passive incomes are income received by the taxpayer even without doing anything. So it
comes to the taxpayer without any effort at all.
2. Final tax is the tax that is withheld at source, and the amount received by the taxpayer is net
of the tax. The payor remits the tax to the BIR.
Terms used in Passive Incomes
FCDU it is a unit of bank, whether local or foreign, authorized by the Banko Sentral Ng Pilipinas to
engage in foreign currency denominated transactions. These transactions include accepting foreign
currency deposits and granting of foreign loans to domestic borrowers.
Deposit substitute it is a means of borrowing money from the public other than by way of deposits with
banks through the issuance of debt instruments. e.g. Treasury notes of BSP. The yield is subject to final
tax.
Trust fund example is when a bank pools together the small amounts entrusted to it by clients for
investment in safe and high-yielding securities. The yield and additional yield is subject to final tax.
Prize is the result of an effort (e.g. prize in beauty contest). A winning is the result of a transaction where
the outcome depends upon chance (e.g. betting).
Problems:
1. The taxpayer is a resident citizen of the Philippines with the following data in a calendar
year:
Net income from business
P4,000,000
30,000
80,000
90,000
100,000
50,000
30,000
200,000
Problems:
1. Mr. Armand Gutierrez, a citizen and resident of the Philippines, was an employee who
had the following data in a calendar year:
Basic salary
P100,000
Hazard pay
12,000
Overtime pay
70,000
22
5,000
Holiday pay
3,000
How much was the income tax at the end of the year?
2. Mr. Juan de la Cruz is a resident citizen. He is employed and had the following data in a
taxable year:
Salaries before payroll deductions
P400,000
Allowances
50,000
Payroll deductions:
SSS contributions
5,500
Philhealth contributions
2,900
Pag-ibig contributions
1,800
2,000
30,000
3. Mr. Conrado Reyes, a resident citizen of the Philippines, an employee, had no child at the
beginning of the year. A child was born within the year. He had the following data for the
year:
Salary, net of exclusions for SSS, etc.
P300,000
30,000
Christmas bonus
30,000
20,000
52,000.
Was an income tax return required to be filed at the end of the year?
23
Gross income
Less: Deductions for expenses and losses and personal exemptions
Equals : Taxable income
Problems:
1. Mr. Ed Go is a citizen of the Philippines. Mr. Go and wife had the following
income and expenses data in one year as follows:
Mr.
Gross income
Expenses
Mrs.
P600,000
P800,000
200,000
400,000
Separate computations of the income tax of Mr. & Mrs Go for the year?
Income tax to be paid by Mr. and Mrs Go as reflected in one income tax
return? (No quarterly income tax were paid)
2. Mr. and Mrs. Reyes are citizens of the Philippines with three
dependent children. They had the following data on net
income for a year (disregard consideration of quarterly
income tax):
Net income of Mr. Reyes
Net income of Mrs Reyes
24
P650,000
450,000
Problems:
1. Mr. Edgardo Roque is a resident citizen of the Philippines with income from
business. Mrs. Roque is a citizen of the Philippines who is employed. They
have two (2) qualified dependent children. They had the following data on
income for a year as follows:
Mr.
Gross income
Expenses
Mrs.
P800,000
400,000
P300,000
25
Personal exemptions
1. Definition they are reasonable amounts allowed by law to an individual
taxpayer, supposed to be to provide for personal, living and family
expenses.
2. Present Personal Exemptions:
a. Basic personal exemption:
For the taxpayer
P50,000
b. Additional exemption:
For each qualified dependent child
(not exceeding four)
P25,000
Husband and wife, both income earners, accomplish one income tax return only.
Each spouse shall be entitled to basic personal exemption.
Premiums on health and/or hospitalization insurance (PHHI)
26
For individuals, premiums paid during the taxable year for health and/or
hospitalization insurance taken out by him on himself, including his family shall be
allowed deduction under the following conditions:
1. That the family had a total income of not more than two hundred fifty
thousand pesos (P250,000) for the taxable year.
2. In case of married persons, only spouse claiming the additional
exemptions for dependents shall be entitled to deduction.
a. The deduction shall not exceed two thousand four hundred pesos
(P2,400) for the family, or two hundred pesos (P200) a month.
Family means nuclear family total family.
Total family income includes primary income and other income received by all
members of the family, i.e. father, mother, unmarried children living together, or a
single parent with children.
Problems:
1. How much is the basic personal exemption, and the additional exemptions, if
any, in each of the following cases?
a. The taxpayer, a citizen of the Philippines, is single, with an illegitimate child,
two years old.
b. The taxpayer, a citizen of the Philippines, is single, with a brother, 25 years
old, who is mentally ill.
c. The taxpayers are husband and wife, citizens of the Philippines, both with
compensation income, with six qualified dependent children.
d. The taxpayer, citizen of the Philippines, was single at the beginning of the
year. Within the year the taxpayer got married and had a legitimate child.
e. The taxpayer, citizen of the Philippines, was married at the beginning of the
year. Within the year he died.
f. The taxpayer, citizen of the Philippines, was married with a dependent child
at the beginning of the year. On July 1 of the year the child celebrated his
twenty-first birthday.
g. The taxpayer, a citizen of the Philippines was married with a qualified
dependent child at the beginning of the year. Within the year the child got
married.
h. The taxpayer, a citizen of the Philippines, was married with a qualified
dependent child at the beginning of the year. Within the year the child
became gainfully employed.
i. The taxpayer, citizen of the Philippines was married with a child 24 years old.
Within the ear the child became insane.
27
j.
5%
Over 500,000
Problems:
1. Mr. Gomez, is a citizen and resident of the Philippines. The following data
were his business data in each of the quarters of a year:
First quarter
P230,000
Second quarter
310,000
Third quarter
294,000
Fourth quarter
325,000
How much was the income tax due at the end of each of the first ,second,
and third quarters of the year?
How much was the income tax due at the end of the year?
29
Kinds
Domestic
Resident
Non-Resident
Definition
Created under
Philippine laws
Foreign corporation
engaged in business
in the Philippines.
Foreign
corporation not
engaged in
business but is
deriving income
in the Philippines.
Capital
Gain Tax
Passive
Income
Final Tax
Interest on any
currency bank
deposit, yield or
benefit from deposit
substitute, trust fund,
or royalty 20%
Interest on any
currency bank
deposit, yield or
benefit from deposit
substitute, trust fund
or royalty 20%
30
Interest on
foreign loans
20%
Other
income
Dividend from
domestic corporation
( Intercompany
dividends) exempt
Dividend from
domestic corporation
( intercompany
dividends) exempt
Dividend from
domestic
corporation
( under certain
conditions) 15%
Gross income
from sources
within the Phils. Final tax of 30%
Same as domestic
corporations
Taxpayer
Tax Base
Rate
Proprietary
educational institution
and non-profit
hospital
10%
31
Resident international
carrier
Gross Philippine
Billings
2%
Non-resident owner or
lessor of vessel
4%
Non-resident
cinematographic film
owner, lessor or
distributor
25 %
Non-resident lessor of
aircraft, machinery
and other equipment
Gross rentals,
charges and other
fees from Philippine
sources
7%
Regional operating
headquarters of
multinational
corporations
Philippine taxable
income
10%
Problems:
400,000
200,000
3,000,000
150,000
1,000,000
32
2. A domestic corporation had, in its fourth taxable year the following data:
Gross profit from sales
P5,000,000
Expenses of operations
3,000,000
3. A domestic corporation had the following data in its fifth year of operations:
Gross profit from sales
P3,000,000
Interest income from notes receivable
Expenses of operations
100,000
2,100,000
4,000,000
1,000,000
Excess MCIT carry-forward it is an excess of MCIT over its estimated normal tax,
and it is usually carried forward on the next three (3) consecutive years against
normal tax.
Example:
Year
MCIT
NT
Income tax
Taken from
90,000
50,000
90,000
Excess
MCIT of
40,000
60,000
40,000
60,000
Excess
MCIT of
20,000
20,000
30,000
50,000
40,000
50,000
30,000
70,000
40,000
30,000 is
taken from
excess
MCIT in
Year 4
Remarks
Balance of
10,000
from Year 4
Excess
MCIT of
10,000
30,000 is
taken from
Year 5
(20,000)
and Year 7
(10,000)
Year 4
excess of
10,000 has
already
been
forfeited.
Problem:
1. The following were computed income taxes (MCIT and NT) of a domestic
corporation:
34
Year
MCIT
NT
70,000
20,000
10,000
30,000
40,000
15,000
10
2,000
5,000
11
45,000
80,000
2. A domestic corporation had the following data at the end of each of the first
three quarters, and end, of its fifth year of operations:
First
Second
Third
Year
Gross profit
fro
400,000
600,000
700,000
900,000
160,000
400,000
520,000
580,000
m sales
Operating
expenses
Income tax due at the end of each of the first three quarters, and due at refundable
at the end of the year.
500,000
Dividend
from a
domestic
corporation
20,000
350,000
800,000
20,000
35
900,000
Interest on
bank deposit
Operating
expenses
450,000
4,000
8,000
12,000
340,000
810,000
450,000
Income tax due at the end of each of the first three (3) quarters, and due or
refundable at the end of the year?
4. A foreign corporation is doing business in the Philippines through its branch in
the Philippines. Philippine operations in its fifth year in the Philippines had the
following data:
Gross income from operations of the year
Interest on Philippine currency bank deposit
Operating expenses of the year
Remittance of profits to John Company, its Mother
Company abroad (net of remittance tax)
How much is the minimum corporate income tax?
How much is the aggregate income taxes of the year?
P8,000,000
100,000
4,000,000
425,000
36
Items
Income tax
37
Illustration:
Partnership
Partner I
Partner J
Gross income
Expenses of the operations
Quarterly income tax paid
Income is to be shared equally
Solution:
Gross income
Less: Expenses
Net income
Income tax at 30%
Less: Quarterly income tax
paid
Income tax still due
Distributive income:
Net income
Income tax
Distributive income
Gross income share in the
partnership income (1/2)
Final tax at 10%
Gross income own
Total
Less: Expenses own
Personal exemption
Taxable income
Income tax (graduated rates)
Less: Withholding income tax
by the partnership (10%)
Less: Quarterly income tax
paid
Income tax still due
600,000
200,000
80,000
30,000
90,000
20,000
600,000
200,000
400,000
0
400,000
0
400,000
400,000
120,000
280,000
200,000
80,000
280,000
30,000
50,000
200,000
37,500
20,000
17,500
200,000
90,000
290,000
20,000
50,000
220,000
42,500
20,000
140,000
140,000
14,000
400,000
400,000
250,000
50,000
100,000
14,500
14,000
520,000
520,000
300,000
50,000
170,000
30,000
12,000
25,000
2,500
5,000
22,500
Taxable Estate
Taxable Trust
38
Taxable Income
Tax exemption
Tax rates
Illustration: The estate administrator and the heirs as income taxpayers. Mr. Reyes died leaving a net
estate of P3,000,000. The heir of the estate is Mr. Cruz.
Gross income of the estate
Expenses of the estate
Withholding income tax (5%)
Amount given to Mr. Cruz
P300,000
50,000
15,000
50,000
P100,000
50,000
10,000
7,500
Gross income
Additions/Deductions
Expenses
Income distribution
Net income
Less: Exemption
Taxable income
Income tax (graduated
rates)
Less: Withholding income
tax on rent
Income tax still due
Estate
P300,000
(50,000)
(50,000)
200,000
(20,000)
180,000
32,500
(10,000)
50,000
90,000
(50,000)
40,000
4,000
(15,000)
(7,500)
17,500
(3,500)
income tax paid of p2,500. It was provided in the trust documents that P10,000 of
each years net income shall be used for the payment of premium of life insurance
of the grantor. For the year it distributed P40,000 out of the years income to the
beneficiary. Shown below is the computation of the income tax of the trust.
Gross income
Less: Deductions for:
Expenses
Distribution to heir
Distribution to grantor
Exemption
Total deductions
Taxable income
Income tax
Less: quarterly payments
Income tax still due
P490,000
(350,000)
(40,000)
(10,000)
(20,000)
(420,000)
70,000
8,500
2,500
6,000
Problem Solving:
1. PJ & Co is a general professional partnership, with Partners Pedro and Juan
sharing equally in the partnership net income or net loss. In a calendar year,
the partnership and the partners had the following income tax data:
PJ & Co:
Gross income
Expenses of operations
Partner Pedro:
Gross income
Expenses related to the gross income
P1,000,000
400,000
600,000
300,000
Partner Juan:
Gross income
Expenses related to the gross income
700,000
450,000
40
P1,200,000
500,000
900,000
460,000
500.000
600,000
Partner Dan:
P6,000,000
5,800,000
300,000
0
P500,000
40,000
Joint Venture
Corporation
Except joint
ventures
mentioned as not
a corporation.
Subject to income
tax, but the
distributable
income is exempt
3. Applicati
on
Solution:
A. Joint Venture Not a Corporation
Gross Income
Less: Expenses
Taxable income
Distributable
income
Share in the joint
venture
Own gross
income
Total
Less: Own
expenses
Joint Venture
40,000,000
20,000,000
20,000,000
20,000,000
A Co
B Co
10,000,000
10,000,000
700,000
10,700,000
250,000
43
800,000
10,800,000
300,000
Taxable income
Income tax as
corporation (30%)
Less: Quarterly
income tax paid
Income tax still
due
10,450,000
3,135,000
10,500,000
3,150,000
125,000
160,000
3,010,000
2,990,000
Joint Venture
3,000,000
1,500,000
1,500,000
450,000
300,000
X Co
Y Co
525,000
525,000
Exempt
(Intercompany
dividend)
Exempt
(Intercompany
dividend)
150,000
1,500,000
450,000
1,050,000
2. Co-ownership
It is an instance or a situation when more than one person are the owners or heirs
of one property and that they decided to settle the inheritance through amicable
settlements among themselves. During the period of settlement, the property is
administered by the appointed administrator among the heirs or all of the heirs for
whatever has been agreed upon by all of the parties. So it is like a case of an estate
not under administration by a third party, just like an extrajudicial settlement.
Ex: Donation of property to two or more beneficiaries
Rules:
Co-ownership
44
Not a co-ownership
Provision of law
1. Exempt from
income tax.
2. Limited to the
preservation of
property and
collection of
income therefrom
Problem: Messrs ANDY and BERT inherited from their father a piece of land with an
apartment thereon. The estate is not under administration. The property had a net
income of P200,000.
Solution:
Coownership
200,000
Net
income
Income
tax as a
corporatio
n
Amount
for
distributio
n
Share in
the coownership
Final tax
at 10%
Add: Own
business
income
Total
Less:
Personal
exemption
s
Taxable
income
Not a Coownership
200,000
60,000
200,000
ANDY
100,000
BERT
100,000
140,000
ANDY
70,000
BERT
70,000
7,000
7,000
200,000
180,000
200,000
180,000
300,000
50,000
280,000
50,000
200,000
50,000
180,000
50,000
250,000
230,000
150,000
130,000
Problems:
1. Mr. Ramon died leaving a net estate of P15,000,000. The estate is not under
administration. In a year , the estate had a net income of P2,000,000 without
any distribution of property or income to the heirs. The heirs are Mr. Chit and
45
Mr. George, both without any income from other sources. From any taxable
gross income, each claims a deduction equal to forty percent (40%) of such
gross income. Income taxes were withheld when proper.
What is the income tax due from the estate?
What is the income tax of each of the heirs?
2. Messrs Ric and Rod allocated between themselves, at one-half each, a piece
of land that they inherited from their father. Seeing the potential of the
property on earning income, they contributed P2,000,000 each to build a
high-rise building to be rented out to the tenants. In a taxable year, the
property had the following data:
Rent income, net of a 5% withholding income tax
Expenses on the property
P9,500,000
4,000,000
How much is the income tax due from each of the owner?
3. High Co and Low Co are in construction business. They formed a joint venture
to build a high-rise condominium building for an owner of land contributing
labor and capital, with an agreement to share equally in the net income or
net loss from the project. IN the year that the building was started and
completed, the construction project occasioned to High Co and Low Co the
following:
Gross income
Expenses of operations
Interest expense paid to banks
P4,000,000
1,200,000
100,000
Joint venture
20,000,000
9,000,000
Jake Co
8,000,000
4,000,000
Kay Co
5,000,000
2,000,000
46
P250,000
20,000
12,000
10,000
24,000
30,000
250,0000
47
Dividend income
Gain on sale of ordinary asset
Loss on sale of ordinary asset
Ordinary net income
Gain on sale of capital asset held for
6 mos
100% thereof
Loss on capital asset held for 14
mos
50% thereof
Net capital gain
Total
Less: Basic personal exemption
Taxable income
30,000
20,000
24,000
(4,000)
276,000
12,000
12,000
10,000
5,000
7,000
283,000
50,000
233,000
Example 2:
Mr. No, a citizen of the Philippines, had the following data for 2012 and 2013:
Net income from business
Interest from notes receivables
Capital gain on assets:
Personal computer held for 8 months
Appliances, held for 2 years
Capital loss on redemption bonds, held for 4 years
2012
90,000
2,000
2013
78,000
4,000
30,000
40,000
70,000
2012
90,000
2,000
92,000
2013
78,000
4,000
82,000
30,000
20,000
35,000
(5,000)
(5,000)
48
50,000
15,000
97,000
50,000
42,000
47,000
Example 3: Mr. OBrien, a citizen of the Philippines, had the following data for 2012
and 2013:
2012
2013
Net income from business
80,000
90,000
Interest from notes receivable
4,000
2,000
Capital gain on shares of foreign corporation held for 3
50,000
years
Capital gain on appliances held for 8 months
70,000
Capital loss on bonds, held for 5 months
120,000
How much is the taxable income for 2012 and 2013?
Solution:
Net income from business
Interest income
Ordinary net income
Capital gain (50%)
Capital gain (100%)
Capital loss (100%)
Net capital loss
Net capital loss carry-over
from 2012
Net capital gain
Total
Less: Basic personal
exemptions
Taxable income
2012
80,000
4,000
84,000
2013
90,000
2,000
92,000
25,000
70,000
120,000
(95,000)
(34,000)
50,000
36,000
128,000
50,000
34,000
78,000
Problem solving:
1. The taxpayer is a corporation:
Gross income from business
Business expenses
Gain on sale of capital asset held for 8 mos
Loss on sale of capital asset held for 4 years
How much is the taxable income?
P6,000,000
2,000,000
100,000
150,000
P1,000,000
600,000
300,000
60,000
2012
2,000,000
49
2013
3,000,000
business
Expenses of the business
Capital gain on assets:
Held for two (2) years
Held for six (6) months
Capital loss on assets:
Held for two (2)
months
Held for two (2) years
1,800,000
1,600,000
400,000
400,000
450,000
100,000
Chapter 11- Income from business, dividends, interest, rent and services
50
Gross Income = Total Sales Cost of goods sold + any income from incidental and
outside sources. This any income could be dividend income, interest income, or gain
on sale of assets not subjected to a final tax or capital gains tax.
Cash dividend when taxable , the measure of money received is the basis.
In property dividend, the basis of taxable income is the fair market value of
the property received.
Stock dividend:
Under the NIRC the stock dividend may or may not be taxable. A stock dividend is
taxable if it gives the shareholder an interest different from that which his former
stock represented.
Proportionate interest of shareholders before and after a stock dividend
51
Before
Dividends:
Shares
A
B
C
D
E
100
100
100
100
100
500
Before
Dividends:
% of
ownership
20
20
20
20
20
100
Stock
Dividend:
10%
After
Dividends:
Shares
10
10
10
10
10
50
110
110
110
110
110
550
Stock
Dividend:
10%
After
Dividends:
Shares
10
110
100
110
100
110
530
After
dividend: %
of
ownership
20
20
20
20
20
100
Before
Dividends:
Shares
A
B
C
D
E
100
100
100
100
100
500
Before
Dividends:
% of
ownership
20
20
20
20
20
100
10
10
30
After
dividend: %
of
ownership
20.76
18.88
20.76
18.88
20.74
100
Taxable/ non-taxable stock dividend determined by the classes of stock issued and
outstanding at the time of dividend:
Stock issued and
outstanding
Common
Common
Common and preferred
Common and preferred
Stock dividend
Taxable/Not taxable?
Common
Preferred
Common
Preferred
Not taxable
Not taxable
Taxable
Taxable
Ex. Mr. ALBA, a resident citizen of the Philippines., acquired shares of stock of BOSS
Com., a resident foreign corporation and sold some of such shares directly to a
buyer. The shares of stock of BOSS Com. that are issued and outstanding are
common shares only. Transactions were:
52
February
14, 2012
June 5,
2012
November
2, 2012
Shares
before
Dividend
100 shares
Total Cost
Shares After
Dividend
Per Share
P13,200
110 shares
P120
60 shares
P8,250
66 shares
P125
20 shares
P2,640
22 shares
P120
P
53
880
Solution:
Date
March 5, 2012
July 7, 2013
October 2, 2013
No. of shares
200 shares
100 shares
300 shares
50 shares
350 shares
70 shares
Cost/share
P100
P130
P110
P96
P108
54
Total Cost
P20,000
P13,000
P33,000
P4,800
P37,800
0
420 shares
P90
P37,800
Problem example:
Mr. ERNIE, a resident citizen of the Philippines acquired on June 2, 2011 100
common shares of stock at P150 per share, of FOX Co., a resident corporation. Mr.
ERNIE received a one hundred percent stock dividend in preferred. At the time of
the receipt of dividend, the fair market value of the shares were: Common, P200 per
share, and preferred, P50 per share. On Feb 14, 2013, ten common shares were sold
at P220 per share, and ten preferred shares were sold at P55 per share.
New cost per share after receipt of the stock dividend, of common shares? Of
preferred shares?
Capital gain or loss to consider in year-end taxable income?
Solution:
Acquisition cost (P150 x 100 shares)
P15,000
Fair market value at the time of dividend, common (P200x100 shares)
P20,000
Fair market value at the time of dividend, preferred (P50 x 100 shares)
P 5,000
Total
Adjusted cost
To common
P25,000
Per class
P12,000
Per share
P120
55
(P20,000/P25,000 x
P15,000)
To preferred
(P5,000/P25,000 x
P15,000)
P3,000
P30
Common
P2,200
Preferred
Sale of:
Selling price
Common (P220 x 10
shares)
Preferred (P55 x 10
shares)
Less: Cost
Common (P120 x 10
shares)
Preferred P30 x 10 shares)
Gain on sale
50% of the capital gain
P550
P1,200
P300
P250
P125
P1,000
P500
P 2,200
56
Interest income
As a general rule interest income is subject to income tax.
Rent
The consideration paid by the lessee to the lessor for the use of the property of the
latter is a taxable income.
Included:
The payment of obligations of the lessor to the third parties (e.g. loans, interest,
taxes, insurance premiums, etc.) should be considered as additional rent income.
Advance rentals:
1
2
3
If the advance rental is in the nature of prepaid rent, received by the lessor
under a claim of right and without restrictions as to use, the entire amount is
taxable at the time it was received.
If the amount received is a loan, there is no income upon its receipt by the
lessor.
If the amount received is in the nature of security deposit for the faithful
compliance by the lessee of the tems of the contract, there is no income to
the lessor.
57
2.
3.
4.
5.
b. For livestock and farm products raised and sold, the measure of
gross income si the selling price.
Expenses of raising livestock and farm products are deductions from gross
income.
Proceeds of crop or livestock insurance constitute gross income;
A farmer on the accrual method of accounting considers inventories at the
beginning and at end of the taxable year. An increase in inventory is reflected
in increased gross income, while a decrease in inventory is reflected in a
decreased gross income.
Loss from the sale of livestock and farm products does not go into the
computation of gross income of a farmer in the cash method of accounting.
For a farmer in the accrual method of accounting such loss is an item in the
computation of gross income.
ILLUSTRATIVE PROBLEMS:
Problem 1.
Sales of livestock and farm products raised
Sales of livestock and farm products purchased
200,000
Sale of old farm tractor
Expenses of raising livestock and farm products
300,000
Cost of livestock and farm products purchased and sold
120,000
Book value of farm tractor sold
Increase in inventory (beginning-P6,000; ending-P10,000)
Gross income from farming, if cash method of accounting?
Gross income from farming, if accrual method of accounting?
P800,000
50,000
20,000
4,000
Solution:
1. Cash method of accounting
Sales of livestock and farm products raised
P800,000
P200,000
120,000
P 50,000
20,000
58
80,000
30,000
P910,000
10,000
P800,000
200,000
P120,000
Inventory beginning
6,000
Total deductions
(126,000)
P 50,000
20,000
30,000
P914,000
Or
Gross income, cash method
P910,000
4,000
P914,000
Problem 2
Sales of livestock and farm products raised
P900,000
5,000
3,000
Solution:
1. Cash method of accounting
Sales of livestock and farm products raised
P900,000
P300,000
350,000
Loss
(P 50,000)
5,000
P905,000
2,000
P900,000
300,000
P350,000
Inventory, beginning
5,000
(355,000)
5,000
P852,000
Or
Gross income, cash method
P905,000
P 3,000
50,000
P852,000
60
A Co
500,000
200,000
300,000
B Co
400,000
460,000
(60,000)
C Co
500,000
495,000
5,000
2,000
298,000
2,000
(62,000)
6,000
(1,000)
2,000
2,000
2,000
None
6,000
5,000
298,000
2,000
0
0
0
5,000
300,000
5,000
Problem 1:
Bad debts recovery
P10,000
P10,000
Problem 2:
Taxable income, 2009 before write off of bad debts
P100,000
15,000
15,000
61
P15,000
Problem 3:
Net loss 2009 before written off of bad debts
P50,000
10,000
10,000
Problem 4:
Taxable income, 2009, before written off of bad debts
P20,000
Write off for bad debt, 2009
25,000
25,000
Problem 5:
Taxable income, 2009, before write off for bad debt
P20,000
25,000
12,000
TAX REFUND
62
CANCELLATION OF DEBT
1. It may amount to payment of income for services rendered and payment of
indebtedness and therefore an income in that amount is realized by the
debtor.
2. It may amount to a gift. It need not be included in the debtors income.
3. It may amount to a capital transaction which is a return of capital.
Problem:
Mr. A had an indebtedness of P100,000 to C Co:
How much is the gross income of Mr. A if:
The indebtedness was cancelled because Mr. A rendered services to C Co, worth
P100,000?
The indebtedness was cancelled because Mr. A rendered services to C Co., worth
P80,000, with the balance still to be paid by Mr. A?
The indebtedness was cancelled without Mr. A doing anything the cancellation being
merely an act of liberality of C Co.?
Mr. A is a stockholder of C Co. and the indebtedness was cancelled without Mr. A
doing anything, the cancellation being merely an act of liberality of C Co.?
Solution:
If Mr. A rendered services (income from personal services)
63
P100,000
P0
COMPENSATORY DAMAGES
1. If it constitutes returns of capital, it is not taxable. E. g. Moral damages for
personal actions, such as alienation of affection, the slander or breach of
promise to marry.
2. If it is recovery of lost profits, it is taxable. E. g. damages recovered in patent
infringement.
Problem:
For patent infringement
P500,000
50,000
400,000
For libel
100,000
60,000
Solution:
Damage for patent infringement
P500,000
P400,000
P900,000
PRIZE OR AWARD
Prize or award received is generally taxable. (gains derived from labor)
Exemption:
64
Problem:
Prizes won in an essay contest
50,000
500,000
10,000
Solution:
Prize won in an essay contest (gain derived from labor) but with final tax
P50,000
65
Deductions it is defined as the amounts allowed by law to reduce the gross income
to taxable income.
The OSD is a deduction from gross income allowed to be taken in lieu of the
itemized deduction. It can be claimed by any type of taxpayer who are exclusively
enumerated below. Excluded also are those taxpayers who are receiving
compensation income.
Who can claim OSD?
Individual taxpayer
Gross income from self employment
1. A resident citizen
2. A non-resident citizen
3. A resident alien
Gross sales
66
Corporation
1,200,000
Sales
returns
Sales
discounts
Net sales
Less: Cost
of sales
Inventory,
beg
Purchases
Purchase
returns
Purchase
discounts
Total
Freight in
Goods
available for
sale
Inventory,
end
Gross profit
from sales
Less: OSD
1,200,000 x
40%
545,000 x
40%
Balance
Less:
Personal
exemption
Taxable
income
100,000
50,000
150,000
150,000
1,050,000
1,050,000
505,000
505,000
545,000
545,000
30,000
500,000
20,000
10,000
30,000
470,000
500,000
15,000
515,000
10,000
480,000
218,000
65,000
50,000
327,000
0
15,000
327,000
B. Service Business
Gross revenues
Less: Direct cost of
services
Rentals
Depreciation
Medical supplies
Electricity water, and
light
Individual
980,000
120,000
20,000
50,000
150,000
67
Corporatiom
980,000
180,000
520,000
520,000
460,000
460,000
392,000
50,000
184,000
0
18,000
276,000
Reminder: A taxpayer that claimed the OSD is not required to submit with the
Income Tax Return any financial statement, but the taxpayer should keep records
pertaining to gross income.
Itemized Deductions are expenses and losses related to trade or business. They
areL
a. Interest
b. Taxes
c. Losses
d. Bad debts
e. Depreciation
f. Depletion
g. Pension trust
h. Charitable and other contributions
i. Research and development
j. Expenses in general
Interest
it must be paid or accrued on the taxpayers indebtedness. Indebtedness is a sum
of money owned by one person who is unconditionally bound to pay, and interest is
the amount paid for the use of money.
68
P 5,000
10,000
P5,000
1, 320
P13,680
Example:
A company borrowed P10,000,000 from a bank to construct a building to be used in
business. Interest on it was deducted in advance by the bank and the amount
released to A company was P8,000,000. The transaction will result in>
Alternative 1.
Cost of the building subject to depreciation
P8,000,000
Prepaid interest
2,000,000
Or
69
Alternative 2:
Cost of the building subject to depreciation
P10,000,000
Problem:
A Company is under accrual method of accounting. In in 2010:
Cost of the building constructed
P5,000,000
20 years
Interet on bank loan for the next 5 year, used to finance construction
Of building
1,000,000
Solution:
a. If interest is claimed as deduction:
Interest expense in 2010 and each of the next four years (P1,000,000/5)
P200,000
Depreciation per year (P5,000,000/20 years)
250,000
Total deductions in 2009 and each of the next 4 years
P450,000
Deduction beginning the sixth year
P250,000
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TAXES
Taxes paid or accrued in connection with the business are deductible from gross
income except:
1.
2.
3.
4.
5.
6.
Problem:
Philippine income tax
P100,000
Real estate tax
32,000
Donors tax
10,000
Special assessment
2,000
Value Added Tax
15,000
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Solution:
Fringe benefit taxes
P32,000
Real estate tax
10,000
Basic and additional community tax
1,700
Percentage taxes
6,000
P49,900
LOSSES
Losses are those actually sustained during the taxable year and not compensated
by insurance or other form of indemnity.
Requirements:
1. Incurred here in the Philippines.
2. Incurred in trade, business or profession.
3. Of property connected in the proceeding business, the loss was due to fire,
storm, shipwreck, or other casualty, or from robbery theft or embezzlement.
4. The taxpayer must submit a declaration of loss, which must not less thatn 30
days nor more than 90 days from the date of the discovery of the casualty. Or
robbery or theft or embezzlement; within 45 days from the discovery of the
loss.
Measure of loss:
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1. The compensation that reduces the loss may be insurance or any other form
of indemnity.
2. In case of partial loss of property used in trade or business or in the practice
of profession, the measure of loss is the Cost to restore the property back to
its normal operating condition or Book value, whichever is lower, reduced by
insurance recovery or any form of indemnity.
Problem 1:
Total loss of an asset used in business in a casualty:
Cost of the asset
P2,000,000
Accumulated depreciation
P1,100,000
Insurance recovery
400,000
Deductible loss?
Solution:
Cost of the asset
P2,000,000
1,100,000
Book value
900,000
400,000
Deductible loss
500,000
Problem 2:
Partial loss on properties used in business
2
Asset 1
P200,000
P100,000
120,000
180,000
80,000
Asset
30,000
Solution:
Asset 1
Asset 2
P200,000
P100,000
P120,000
P180,000
Whichever is lower
P120,000
P100,000
80,000
30,000
P 40,000
P70,000
2006
500,000
2007
600,000
2008
700,000
2009
500,000
2010
800,000
900,000
500,000
750,000
420,000
450,000
100,000
80,000
350,000
100,000
80,000
(400,000)
(50,000)
50,000
300,000
The unused net operating loss of P220,000 of the year 2006 could not be carried
over beyond 2009. The net operating loss of 2008 could be carried ov
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Problem 1:
The taxpayer had the following journal entry in the books of accounts:
Bad debts
50,000
Accounts receivable
50,000
Solution:
Deduction for bad debts
P50,000
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Problem 2:
A Co., had a receivable of P500,000 from B Co. The indebtedness of B Co. was
secured by a mortgage on the property of B Co. When B Co. could not pay, A Co.,
foreclosed the on the mortgage and the property was awarded to A Co., (highest
bidder) at public auction for P400,000. The balance cannot be collected anymore.
How much is the deduction for bad debts of A Co?
Solution: P0.
Problem 3:
In 2010, A Co. sold the property for P450,000.
How much is the deduction for bad debts of A company?
Solution:
Basis of the receivable uncollected
P500,000
450,000
Deduction in 2010
P 50,000
DEPRECIATION
A REASONABLE ALLOWANCE for exhaustion, wear and tear (including allowance for
obsolescence) of property used in trade or business.
Depreciable assets
1. Tangible assets
2. Intangible assets (amortization)
Methods of depreciation
1. Straight line method
2. Declining balance method
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Problem:
a. H co acquired a machine at a cost of P380,000. Scrap value was placed at P0,
and the useful life was estimated at 25 years. Depreciation was computed on
the straight line method. The annual depreciation would have been computed
as follows:
Cost
P380,000
Depreciable base
P380,000
P 15,200
b. If in the preceding example on H Co., after depreciating the asset for twenty
years, it was determined that the life of the asset was not five years but ten
years?
Remaining depreciable cost (P380,000-P304,000)
P76,000
New annual depreciation charge (P76,000/10 years)
7,600
DEPLETION
The natural resources are called wasting assets. As the physical units
representing such resources are extracted and sold such assets move towards
exhaustion.
Example:
Land containing natural resources was purchased for P100,900,000. It was
estimated that the land after exploration of its natural resource, wii have a value
of P900,000. It was estimated that the natural resources supply was 5,000,000
tons. If withdrawal of resource from the land in 2009 was 500,000 tons, how
much was the deduction for the year?
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P100,900,000
P100,000,000
P20
P
PENSION TRUSTS
Past service costs- Past services that requires lump sum payment to the pension
fund.
Present service costs for each year after the pension plan was set-up, there
should be a payment to the fund for pension for the services rendered during the
year by the employees.
This deduction for pension payments applies only to a pension plan that is
funded.
Problem:
A pension fund was set up in 2000 for retiring employees. In setting up the fund,
P1,000,000 was deposited as seed money for past service cost. Annual or
present service cost is P50,000, beginning 2000.
Deduction in 2000?
Deduction in 2008?
Deduction in 2012?
Solution:
Deduction in 2000:
1/10 of P1,000,000, on past service cost
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P100,000
50,000
Total
P150,000
Deduction in 2008
P150,000
P 50,000
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Problem:
N Co had a gross income from business of P1,000,000 and business expenses of
P400,000. It made during the year a contribution that is fully deductible of P10,000
and contribution subject to limitation of P50,000. The deduction for contribution is
P40,000 and the taxable income for the year is P560,000.
Solution:
Gross income from business
P1,000,000
400,000
600,000
P10,000
To M Association
40,000
Total of actual
P50,000
5% of P600,000
P30,000
30,000
Taxable income
P570,0000
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EXPENSES IN GENERAL
Two kinds of business expenditures; the revenue expenditures and capital
expenditures. A revenue expenditures benefits only one period abd it is a deduction
from gross income in the year paid and incurred.
A capital expenditure, usually incurred in the acquisition, betterment or permanent
improvement of an assets benefits more than one accounting period, and it is not
deductible from gross income in the year paid.
An expense must satisfy the following conditions in order to be deductible from
gross income:
a. It must be ordinary and necessary;
b. It must be paid or incurred within the taxable year;
c. It must be in carrying on or directly attributable to, the development,
management. Operations, and/or conduct in the trade or business, or the
practice of a profession.
d. It must be substantiated by official receipts (OR) and other adequate records.
An expense is considered ordinary, if it is normal in relation to the taxpayers
business and the surrounding circumstances. The expense need not be recurring.
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P50,000
10,000
P600,000
10,000
20,000
Total
P630,000
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Repairs:
Given the following accounting entries:
Entry No. 1 :
Repairs
Cash
P100,000
P100,000
Entry No. 2 :
Accumulated depreciation
Cash
P1,000,000
P1,000,000
Explanation:
Entry No 1. Records an expenditure which is deductible from gross income. This is
just a minor repair that keeps an asset in its regular operating condition.
Entry No. 2. Records an expenditure that is not deductible form gross income. The
entry represents a major or extraordinary repair, that does not add value to the
asset but prolongs its useful life.
Cost of materials and supplies:
Physical inventories to these items must be taken. The expense deductible to this
item must be computed as follows:
Inventories, beginning
Add: Purchases of materials and supplies during the year
Total
Less: Inventories, ending
P300,000
600,000
P900,000
100,000
The deduction should not exceed one half percent (1/2%) of net sales (in the case of
sale of goods) and one percent (1%) of net revenues (sale of services).
Any expenses incurred that is contrary to law, morals, public policy or public order
will not be allowed as deduction from gross income.
Expenses of private educational institutions:
An expenditure for expansion of school facilities is a capital expenditure, However,
the school may treat the expenditures in two alternative ways:
1. Deduct the expenditure from its gross income in the year in which it was
made; or
2. Capitalize the expenditure, and calim deduction by way of depreciation.
Illustrative example:
A private educational institution had a gross income of P50,000,000 and expenses
of P30,000,000 before considering an expenditure of P4,000,000 for a building to
separately house one of its colleges. The building has a useful life of 25 years.
Taxable income under alternative treatments for the expenditures?
Solution:
a. When claimed as an outright deduction:
Gross income
Less: Expenses
Net income before expenditure on building
20,000,000
P50,000,000
30,000,000
P16,000,000
P19,840,000
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b.
c.
d.
e.
f.
Financial statements
Statement of Net Worth of Operations
Balance Sheet and Income Statement
87
Under the pay-as-you-file system, the income tax shown on the return shall be
paid at the time the return is filed. If the taxpayer is other than a corporation and
the income tax on the annual return exceeds P2,000, such tax may be paid in two
equal installments, as follows:
First installment
- at the time the return is filed.
Second installment - on or before July 15
Any creditable withholding tax will be credited against the tax due, or in the first
installment of the tax due.
Return on creditable withholding tax
a. Withholding tax on compensation income
1. Monthly return within 10 days after the close of the month.
2. Annual return on or before January 31 of the succeeding year.
b. Expanded withholding tax
1. Monthly return within 10 days after the close of the month.
2. Annual return on or before March 1 of the succeeding year.
The foreign income tax should be understood as tax proper only without the
interest, surcharge, or penalty incident to delinquency on the payment of tax.
Who may claim tax credit?
a. Resident citizens of the Philippines;
b. Domestic corporations
How is tax credit computed?
Illustration: B Co, a domestic corporation had a taxable income from within the
Philippines of P300,000 and from Foreign country Z of P100,000. An income tax of
P40,000 was paid to country Z. If B Co chose to take a tax credit for the income tax
paid to country Z, the Philippine income tax due after tax credit would have been
computed as follows:
Taxable income before tax credit, Country Z
Taxable income before tax credit, Philippines
88
P100,000
300,000
P400,000
P120,000
P30,000
P40,000
30,000
P 90,000
While the income tax of the foreign country could be taken as a tax credit, the
taxpayer has the option of taking the tax as a deduction from its gross income.
Taxable income before foreign income tax:
Country Z
Philippines
Total
Less: Deductions for income tax, Country Z
Taxable income
Income tax at 30%
P100,000
P300,000
P400,000
40,000
P360,000
P108,000
2. Accounting basis
From the accounting equation: Asset minus Liabilities equals Networth, a
years increase in networth of an individual is attributed to income.
From this income is determined the taxable income by adding non-deductible
expenses/losses and deducting non-taxable income/receipts and personal
exemptions. The taxable income so computed is compared with the taxable
income reflected in the income tax return to discover the under declaration of
taxable income and the computation of deficiency income tax.
PENALTIES
Only civil liabilities will be discussed.
a. Surcharge
b. Interest
Surcharge - a surcharge of 25% of the tax due will be imposed on the
following cases:
1. Failure to file the return and pay the tax due on time.
2. Unless otherwise authorized by the Commissioner, filing a return with an
internal revenue officer other than those with whom the return is required
to be filed.
3. Failure to pay the deficiency tax within the time prescribed for payment in
the notice and demand.
4. Failure to pay the full or part of the amount of tax shown an any return
required to be filed of the full amount of tax due, on or before the date
prescribed for the payment.
A surcharge of 50% , of the deficiency tax, in case there is a deliberate and willful
neglect to file the return or when a false or fraudulent return is willfully made.
A substantial underdeclaration of taxable sales, receipts or income, or substantial
overstatement of deductions, will constitute prima facie evidence of false or
fraudulent return. What is substantial?
a. The failure to report sales, receipts or income in amount exceeding 30% of
that declared per return.
b. A claim of deductions in amount exceeding 30% of actual deductions.
Interest
a. In general, there will be assessed and collected on any amount unpaid
amount of tax, interest at the rate of 20% per annum or such higher rate as
may be prescribed by rules and regulations, from the date prescribed for
payment until the amount is fully paid.
b. Deficiency interest. Any deficiency in the tax due will be subject to interest at
the rate of 20% per annum, which interest shall be assessed and collected
from the date prescribed until the full payment thereof.
c. Delinquency interest;
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End.
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