In a few months from now, we will be filing our annual income tax return for the calendar year 2011. In the Philippines, income tax returns for the taxable calendar year are to be filed on or before the 15th of April. Since April 15, 2012 will fall on Sunday, we can assume that the deadline may be moved to the next working day. However, as we read the word “deadline”, it is not advisable to wait for it and commit procrastination. Instead, we should prepare as early as we can to avoid inconvenient scenarios, such as rushing to the BIR or banks on the last day of filing, failure to file on due date, inability to file accurate declaration, and the worst… prompting the BIR to consider your business for examination and paying penalties. Thus, we should make sure to make our accurate income tax return ready for filing and payment this tax season. To guide you on your preparation, here are some tips for making your income tax return this coming tax season.
1. Reconcile all your tax declarations with the BIR for the tax period. You can prepare a tax reconciliation summary of all the BIR returns you have filed to ensure that your financial statements and income tax return is tallied to your previous declarations. This is very important to avoid deficiencies that may prompt BIR to issue a Letter of Authority (LA) to conduct audit or investigation. Make sure that the following are reconciled:
– Sales/Revenues declared in the VAT Returns (if VAT Registered) to your Sales/Revenues reported in the income statement and in the Income Tax Return.
– Purchases declared in the VAT Return to your Purchases reported in the income statement and in the income tax return.
– Sales/Revenues declared in the Monthly Percentage Returns tax (if Non-VAT registered) to your Sales/Revenues reported in the income statement and in the Income Tax Return.
– Bases on the tax withheld (e.g., compensation, advertising, professional fee, and rental expenses) to your expenses reported in the income statement and income tax return.
– Amount of inventory declared in the inventory list submitted to BIR for merchandising companies.
You can also expand your summary depending on your taxability. You can use software like Microsoft Excel to facilitate your work. Making a reconciliation summary will help you prepare a more accurate income tax declaration. It will also help you in tracking your other tax declarations, aside from income tax.
2. Make sure to gather all the documentary requirements or attachments required in filing your income tax, such as your Certificate of Creditable Tax Withheld at Source (BIR Form 2307) if your clients withheld income from you and Certificate of Compensation Payment (BIR Form 2316) if you’re also earning compensation income aside from business income.
3. Assess your receivables. Bad debts expenses are only deductible when actually ascertained to be worthless and charged off within the taxable year. Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. In other words, you can’t claim bad debts as deductions to your taxable income if they are not actually written off. Thus, if you have doubtful accounts to be written off, you should make all your efforts to determine if they are already actually worthless or still recoverable.
4. Check the limit of your entertainment, amusement and recreation expenses. There is a limit in claiming expenses on Entertainment, Amusement and Recreation (EAR). EAR expenses are limited to 0.5% of net sales for sellers of goods or 1% of net revenue for seller/provider of services. For sellers of both goods or properties and services an apportionment formula is used in determining the ceiling on such expenses. If you have spent a lot in entertainment for the calendar year, it should be trimmed to what is only allowed, as stated above. The money you spent on partying beyond the limit should not be claimed as deductible expenses.
5. Decide whether you will use Optional Standard Deduction or Itemized Deductions as your allowable deduction from gross income. Both individual taxpayers and corporations have the option to claim optional standard deductions (OSD) in lieu of itemized deductions. For individual taxpayers, a maximum of 40% of their gross sales or gross receipts shall be allowed as deduction instead of the itemized deduction. For corporations, OSD is equivalent to 40% of gross income. Once the option to use OSD is made, it shall be irrevocable for the taxable year for which the option was made. On the other hand, itemized deductions are deductions from gross income, which include all ordinary and necessary trade and business expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade and business. To learn more about deductions and exemptions to taxable income, please read our article “What are the deductions and exemptions to income tax?”
6. If you’re filing as an individual taxpayer, that is, you own single proprietorship business/s, remember that your 1st quarter income tax for 2012 is also due on April 15, the same with your 2011 annual income due. Thus, it would be advisable to pay attention to those two BIR returns as early as you can. This should remind all taxpayers to avoid cramming on the due date.
7. Update all your records, such as your cash on hand, cash in bank, accounts receivables, accounts payables, loans and other accounts. Cash count, inventory count and property count should be performed at the end of the reporting period (e.g., December 31, 2011). It’s also better if you can send confirmations or request of balances of your accounts to third parties earlier, such as bank deposit certificates and loan balances from your banks.
8. In hiring the services of an external auditor, make sure to conduct due diligence in confirming the personal identification and professional qualifications of the practitioner who will be engaged as external auditor. Companies should require the practitioner to present a copy of his/her professional license from the Professional Regulation Commission (PRC) and the Certificate of Accreditation issued to him by the Board of Accountancy (BOA) as sole practitioner, or to the auditing firm in case the practitioner is a partner of that firm to verify his authenticity.
For companies covered by the SEC (Securities and Exchange Commission) guidelines on accreditation of external auditor, the company should, prior to the engagement of the external auditor, require the presentation of the SEC Certificate of Accreditation issued to the practitioner and his/her auditing firm, if applicable. The authenticity of the certificate should also be verified against the list of accredited auditors and firms posted in the SEC website or through telephone inquiry. Other types of companies may also be required to be audited by external auditors who are accredited with other agencies. For example, banks and financing companies may be required to be audited by auditors who are accredited with the BSP (Bangko Sentral ng Pilipinas).
Make sure to find your external auditors earlier and never when the deadline is already near. Remember that the audit process takes a lot of time.
9. If your business is a corporation, check out the deadlines for filing your Financial Statements with the SEC. The commission had already issued SEC Memo No. 6, Series of 2011 on August 15, 2011 the 2012 Schedule of Filing of Annual Financial Statements for the year ending December 31, 2011. SEC Circular 6 covers the schedule of filing in 2012 of all public and nonpublic entities including branch offices, representative offices, regional headquarters and regional operating headquarters. Below is the schedule of filing based on the entities’ last numerical digit of their SEC registration or license number:
Filing Period Last Digit of SEC Registration No.
April 16 to 20 “1” and “2”
April 23 to 27 “3” and “4”
April 30 to May 4 “5” and “6”
May 7 to 11 “7” and “8”
May 14 to 18 “9” and “0”
10. Take note that personal, living or family expenses are not deductible to your taxable income. As a general rule, expenses can only be claimed if they are paid or incurred as part of the profession, trade or business operations of the taxpayer. Hence, personal expenses, living or family expenses are not deductible. This also means that you should check on your records to determine if your expenses comply with this.
11. Check your substantiation requirements. Remember that no expenses shall be allowed unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (a) the amount of the expense being deducted, and (b) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. With this, you should ensure that your records and reports, such as interim financial statements, books of accounts and source documents are organized and updated to help you verify your accounts.
12. Be updated with the current BIR, SEC, BSP and other government agency regulations that are applicable to your business.
Do have any other tips for preparing our income tax return? For more discussions, you may visit and join our Business Forum to ask questions and start a thread about this article.