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.
Victorino Q. Abrugar is a marketing strategist and business consultant from Tacloban City, Philippines. Vic has been in the online marketing industry for more than 7 years, practicing problogging, web development, content marketing, SEO, social media marketing, and consulting.
sample scenario: i am an individual with a business. can my AUDITED FS be under the ACCRUAL method while my ITR is based on the CASH method?
Audited FS are generally prepared under accrual basis in accordance with Phil Accounting Standards. Some of our specific tax laws require some of our specific accounts to be in cash basis. This discrepancy is reconciled in your Notes to Financial Statements and in the back page of your income tax return.
does it mean yes? example: in our audited FS (prepared under accrual basis), we already ACCRUED rent and bonuses for the year 2011. amounts are only estimates. since these are estimates only, we have not paid the withholding taxes. but under the tax code, we should already withhold and pay the corresponding taxes upon recognition of the expense (accrual) OR payment of the expense, whichever comes first. to avoid being penalized by BIR for already deducting the expenses but not paying the corresponding withholding taxes, we just don’t include the rent and bonuses expenses in the ITR. lumalabas, parang cash basis yun ITR.
Hi Lea,
As a rule, it is anaccrual for income tax purposes but certain items are required to be under cash basislike rental. Withholding tax on expenses adopt a different rule and is independent from income tax. You are requred to withhold uponpayment or accrual, whichever comes earlier.
We do offer seminars on these confusing rules for proper application to avoid penalties. Please visit us at our website for schedules and programs.
Thanks
this might help us: Philstar.com/article.aspx?articleid=496914
here’s an excerpt: The most common reason for disallowance is non-withholding. The first thing that the BIR would do is to compare expenses claimed in the ITR against the expenses that were subjected to withholding tax per withholding tax returns. If the expenses claimed in the ITR is greater than withholding tax returns (which is usually the case), the BIR will disallow as expenses the noted discrepancies.
income tax and withholding tax are connected/dependent on each other.
Hello Sir Vic,
BIR replaced their form 1702, they released another version of it in their website. Is it still allowed to use the old version of 1702 for the taxable year 2011?
Anne, For calendar year 2011 ITR and fiscal years ending within 2012, the new ITR must be used. We have a scheduled workshop on how to fil out the new forms this February 24 you migt be willing to attend. Please visit us at our website. Thanks
I like reading your articles. Keep up! =)
Hi Vic,
I find your articles very useful and informative. I often come back to read and remember them more. Thanks a lot!
I am a freelancer and have started paying taxes starting June last year, self-employed.
I wonder if I still have to fill-out that blue book “Simplified Set of Bookkeeping Records” even if I had chosen “optional standard deduction” on my 2nd and 3rd Quarterly Income Tax returns? I understand that the AIF form is not already needed on the Annual Income Tax return.
Thanks Gem. Yes, you must still fill out your books of accounts. Your book should only be placed where your business is registered. The Optional Standard Deduction, will only exempt you from attaching AIF or FS, but not the recording of your books. Besides, your book is not submitted along with your returns. They are only submitted when there are examination or when required by the BIR.
Hi Mr. Vic,
Your articles are really helpful. They’re even easier to understand than BIR’s website 🙂
I just have some questions, so I hope you have the time to read this.
We’re a very small VAT-registered business that deals with customized plastic items. After being non-operational for several years, we fixed all our permits and paid all penalties and taxes due two years ago (we didn’t officially close the business, hence the PENALTIES). Last year, we learned that we should be paying VAT because we’re registered as a VAT payer (no idea how that came about as when the business was first registered, there was no VAT yet), but we do not pass the VAT to our customer so our price does not include VAT. Instead, the customer pays withholding tax (they deduct it automatically from our selling price). Although our gross sales do not reach the required amount for BIR to require us to pay VAT (the annual is less than 300k), BIR still requires us to pay VAT. We asked BIR last year to switch us to non-VAT and passed all the necessary supporting documents, but for some reason, it hasn’t been approved yet.
Now, my questions are:
1. Are we being doubly taxed? Can we refund one of these taxes (withholding or VAT, or–hopefully–both?)?
2. If our application to switch to non-VAT does not get approved, how will we go about charging our customer with VAT? We’re actually afraid of charging them with VAT as they might switch to another seller, and I’m not even sure if they’re VAT exempt. They’re a dealer of imported heavy equipment and power systems, and they’re our only customer for now.
3. Considering our situation, how do we present the VAT in the annual income statement? How about in the ITR? Do we have to put VAT in there too?
Please help! Thank you very much and God bless you! And if my questions have already been answered somewhere in your website, I apologize in advance.
Cole
1. If your customers are withholding business tax (VAT) on your income, you can ask them certificate of withholding tax… so that you can claim the amount withheld against your VAT payable. In that way, you will not be double taxed. Those certificates are attached in your VAT returns.
2. If you’ll not get approved as a nonVAT, you have no choice but to shoulder the VAT or charge it to your customers, regardless if they are VAT or NonVAT. If your customers are VAT taxpayers, they can claim that as input tax. If they are nonVAT, it will reflect as their additional cost or expenses which they can claim against their taxable income.
3. VAT is not considered as allowable deductible expenses, so it is usually not presented in your income statement. However, if you have unpaid VAT. It will be shown as VAT payable in your balance sheet.
Hi Sir Vic!
Please help!
We don’t have a taxable income (net loss) but in the previous quarter we had to pay income tax (because we had income). Are we entitled to apply for tax refund/credits? If yes, can we deduct it from the tax payable in the quarterly ITR as soon as it gets approved, or can we only present it in the annual ITR next year?
Can we also apply for tax refund/credit for excess VAT paid due to the erroneous entries made in the 2550M forms that we filed? (We just learned that we haven’t been deducting input tax from the output tax due every month.) If yes, where should we place it in 2550M? There’s VAT refund/TCC claimed in the form but from what I understand, whatever amount you place there is deductible from the allowable input tax, which doesn’t make sense if I want to lessen the output tax due since I have excess VAT paid in the previous months.
Thank you so so much for your help and this wonderful website! I hope my questions hasn’t been asked yet. Thank you!!!
Hi Lar,
I see you are serious with the tax issues. On income tax, yes they are deductible as a tax credits for the quarterly payments as carry-over without need of an application for refund or tax credit certificate. Operatkng loss is also deductible within thenext three year from year of loss.
On VAT, erroneous payment isrefundable iffiled within two years from payment. I do not suggest that because the process and time lag may do in your favor. Instead I suggest you look at the option of amending the return and claim overpayment as carry-over so youcould make use outrigt in thenext month or quarter.
We do offer tax seminars and trainings as an advocacy to helpe educate entrepreneurs like youfor minimal fees. Please visit us at our website.
Thanks
Wow, thank you so much Ms. Belle! I should have attended one of your seminars instead of wasting days researching and learning the ropes by myself. I’ll be sure to sign up for it one of these days. Again, many thanks! ^_^
We would be glad to have you in one of our seminars Lar. God Bless!
Hi Sir!
Good afternoon. I do have a concern regarding Annual ITR for an International Carrier, I wonder if we still need to attach audited FS or cpa certification. Our income tax is based on gross receipts from export billings taxed at 2.5% right? Do we still have to submit FS or not? or a simple attachment will do? Thank you so much for your time and will be looking forward for your response.
Thanks,
Lhen
Hi Lhen,
Yes, i believe they are still required to file.
Thanks
Hi Belle,
Thank you for your kind reply. Yes, we are required to file, but the question is… what are the attachments needed? Do we still need to submit FS or CPA certification in support with our filing or a simple attachment like how we arrived at the computation of our income tax will do?
Thank you so much.. 🙂
Lhen
Hi sir,
I am an avid reader. I have a problem. I accepted a part-time bookkeeper job earlier this February in a newly established firm. I found out that the firm only got the BIR issued receipt on November 29, 2011. Will the annual income tax return form 1702 show all income and expenses from January to November 2011 or only the December 2011 income that has documentary support which is the newly approved BIR receipts? The company filed no taxes withheld on its monthly creditable income tax return from January to November 2011. There are no income source document for the January to November 2011 and the company is still organizing. Only expenses like rent and salaries paid are available.
I would really appreciate your reply. Thank you in advance.
Good day sir, I have a limited partnership which closed last year. Our papers were updated and filed non-operating for BIR. We are a small biz earning less than 100k. We plan to reopen next year.Our accountant is asking us to pay P6000 for “preparation of income tax certificate and auditing” on Monday. Can you explain what this payment is for? I was thinking we shouldnt pay for auditing because we are currently closed. Thanks in advance.
Hi Sir Vic,
Good Evening!
According to BIR rules for percentage taxes relating to domestic carriers that are nonvat registered, the tax to be paid is equivalent to 3% of the quarterly gross receipts. Furthermore, there is a monthly filing under 2550m. What would be the appropriate annual return to be used for this, 1701? If so, the 3% percentage tax was not yet final since the net income will be subject to basic income tax?
Please help to shed some light regarding my query. Thank you! 🙂
Regards,
Chris
Hi Sir,
Greetings.
Ever since we started to have our business way back 90’s we don’t pay taxes. We don’t even file for an ITR. Now I advised my wife to register her business with the BIR. Will we get penalty for the 3 years that the business was registered with the DTI? Another is that somebody’s going to do all the work in getting the registration but she’s charging us 5t including the filling of the itr and fs from last year. Hope you can help us. Thank you.
good afternoon! Hi i am freelancing this month and came across two articles about allowable deductions. My question is are de minimis not subject to income tax? Because i read in one article it’s part of gross income thus taxable. and in one article it’s not. now i’m confused. Please help. thank you.
Hi Sir Vic,
May I ask about preparation of itr for a peza registered corporation. What is the difference in peza registered itr and non peza registered itr? Thank you.