Professional Documents
Culture Documents
b) SALE OF MERCHANDISE
Receipt of payment:
representing Cost of Sales mere return of
capital
representing the profit (mark-up) - return on
capital
When is income taxable?
Elements of Taxable Income:
1. There is income, gain or profit (existence of
income);
2. The income, gain, or profit is not exempt or
excluded from income tax; and
3. The income, gain or profit is received or
realized during the taxable year (realization
of income).
When is income considered
received for income tax purposes?
1. If actually or physically received by
the taxpayer (actual receipt); or
2. If constructively received by the
taxpayer (constructive receipt)
Principle of Constructive Receipt
for Tax Purposes
Income which is credited to the account of or
set apart for a taxpayer and which may be
drawn upon by him at any time is subject to tax
for the year during which they are so credited or
set apart, although not then actually reduced
to possession. (refer to Sec. 52, RR No. 2-40)
When is income realized?
Conditions:
1. The earning process is complete
or virtually complete; and
2. An exchange has taken place
1989 Bar Question:
In 2000, ABC Corporation had a capital stock of 1,000
shares without par value. At the time of its incorporation,
the value of each no-par value share was P10. In 2011, due
to its profitable operations, the corporation earned a
surplus of P200,000.00. The Corporations Board of
Directors increased the stated value of each share by
P190, making each share worth P200. The BIR, for income
tax purposes assessed each stockholder for the P190
increase. Is the BIR correct?
Answer:
No. The stockholders have not physically or
constructively received any income subject to tax. There
was no change in the proportion of their ownership in
the corporation considering that the shares of stock are
without par value. Furthermore, there was no realization
of the income through the change in stated value. When
the stockholder disposes of the shares, then the same
would be subject to capital gains taxes.
Tests for Income Determination:
1. Realization/ Severance Test
There is no taxable income until there is a
separation from capital of something of
exchangeable value.
Income is not deemed realized until the
fruit has been plucked from the tree.
(Eisner v. Macomber, 252 US 426)
Tests for Income Determination:
2. Claim of Right Doctrine
a taxable gain is conditioned upon the
presence of a claim of right to the
alleged gain and the absence of definite
unconditional obligation to return or
repay. (Doctrine of Ownership,
Command, or Control)
Tests for Income Determination:
3. All Events Test
for income or expense to accrue, this
test requires the fixing of a right to
income or liability to pay, and the
availability of the reasonable accurate
determination of such income or
liability. (CIR v. Isabela Cultural Corp., G.R. No.
172231, February 12, 2007)
Taxable Periods:
1. Calendar Period or CalendarYear
an accounting period which starts from January 1 and
ends on December 31.
2. Fiscal Period or FiscalYear
an accounting period of 12 months ending on the last
day of any month other than December 31.
3. Short Period
an accounting period wherein income shall be
computed on the basis of a period less than 12
months..
What is the general rule in
computing the taxpayers taxable
income?
The taxable income shall be
computed upon the basis of the
taxpayers annual accounting period,
that is, fiscal year or calendar year, as
the case may be.
Can an individual taxpayer compute
his income on the basis of fiscal year?
No. Individual taxpayers cannot use
the fiscal period. They are required to
use the calendar year (RR 2-40). This
would include Estates and Trusts and
General Professional Partnerships.
Is a corporation required to use only
the calendar year?
No. Corporations may, with the
approval of the CIR, file their returns
and compute their income on the basis
of a fiscal year (see Section 43, Tax
Code).
When is taxable income computed
on the basis of calendar year?
1. Taxpayers accounting period is other than fiscal
year
2. Taxpayer has no annual accounting period
3. Taxpayer does not keep books
4. Taxpayer is an individual
5. Taxpayer is a general professional partnership
6. Taxpayer is an estate or a trust
When is taxable income computed
on the basis of a short period?
1. Taxpayer, other than an individual, changes his
accounting period from fiscal to calendar year or from
calendar year to fiscal year or from one fiscal year to
another (Section 46, Tax Code)
2. Taxpayer dies
3. Corporation is newly-organized
4. Corporation is dissolved
5. Tax period is terminated by the CIR by authority of law
(Section 6 (D), Tax Code
METHODS OF ACCOUNTING
Accounting Method Recognition of Income and Expense
CASH METHOD All items of income received during the year shall be
accounted for in such taxable year
Only expenses actually paid shall be claimed as
deductions during the year
Dependent on inflow or outflow of cash
Gains and profits are included in gross income when
earned whether received or not,
Expenses are allowed as deductions in the period
ACCRUAL METHOD they are incurred, although not yet paid.
It is the right to receive and not the actual receipt
that determines the inclusion of the amount in the
gross income
METHODS OF ACCOUNTING
Installment Method
appropriate when collections of the proceeds of
sales and incomes extend over relatively long
periods of time and there is strong possibility
that full collection will not be paid
1. Interests;
2. Cash and/or property dividends;
3. Royalties; and
4. Prizes and awards.
What is meant by income subject to final
tax? (2001 Bar)
Income subject to final tax refers to income wherein the tax
due is fully collected through the withholding tax system.
The payor of the income withholds the tax and remits it to
the government as a final settlement of the income tax due
on said income.
The recipient is no longer required to include the item of
income subjected to final tax as part of his gross income in
his income tax return.
Interest income
It is the amount of compensation paid for the
use of money or forbearance from such use.
1. Interest on currency bank deposits, yield or
other monetary benefits from deposit
substitutes, trust funds & similar arrangements.
Answer:
Their respective shares in the net income of P100, 000.
To A: 70%of P100, 000= P70, 000
To B, 30% of P100, 000 = P30, 000
Question No. 4:
How much should the partners report in their individual
ITR assuming A received P5,000 and B P5,000 as partial
distribution of their shares in the net income of the
partnership of P100, 000?
Answer:
The answer is the same in 3rd because the partners in a
general professional partnership are required to declare
in their ITR their respective shares whether distributed
or not in the net income of the partnership.